BORGWARNER INC
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
þ
Annual
Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31,
2010
OR
o
Transition
Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period
from
to
Commission File Number: 1-12162
BORGWARNER INC.
(Exact name of registrant as
specified in its charter)
| Delaware | 13-3404508 | |
|
State or other jurisdiction of
Incorporation or organization |
(I.R.S. Employer Identification No.) |
3850 Hamlin Road,
Auburn Hills, Michigan 48326
(Address of principal executive
offices) (Zip Code)
Registrant’s telephone
number, including area code:
(248) 754-9200
Securities registered pursuant to
Section 12(b) of the Act:
|
Name of each exchange on
|
||
| Title of each class | which registered | |
|
Common Stock, par value $0.01 per share
|
New York Stock Exchange |
Securities registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes
o
No
þ
The aggregate market value of the voting common stock of the
registrant held by stockholders (not including voting common
stock held by directors and executive officers of the
registrant) on June 30, 2010 (the last business day of the
most recently completed second fiscal quarter) was approximately
$4.3 billion.
As of February 4, 2011, the registrant had 111,738,557
shares of voting common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by
reference into the Part of the
Form 10-K
indicated.
|
Part of Form 10-K
|
||
|
into which
|
||
| Document | incorporated | |
|
Portions of the BorgWarner Inc. Proxy Statement for the 2011
Annual Meeting of Stockholders
|
Part III |
BORGWARNER
INC.
Form 10-K
YEAR ENDED
DECEMBER 31, 2010
INDEX
2
Table of Contents
CAUTIONARY
STATEMENTS FOR FORWARD-LOOKING INFORMATION
Statements contained in this
Form 10-K
(including Management’s Discussion and Analysis of
Financial Condition and Results of Operations) may contain
forward-looking statements as contemplated by the 1995 Private
Securities Litigation Reform Act (the “Act”) that are
based on management’s current outlook, expectations,
estimates and projections. Words such as
“anticipates,” “believes,”
“continues,” “could,” “designed,”
“effect,” “estimates,”
“evaluates,” “expects,”
“forecasts,” “goal,” “initiative,”
“intends,” “outlook,” “plans,”
“potential,” “project,” “pursue,”
“seek,” “should,” “target,”
“when,” “would,” variations of such words
and similar expressions are intended to identify such
forward-looking statements. All statements, other than
statements of historical fact contained or incorporated by
reference in this
Form 10-K,
that we expect or anticipate will or may occur in the future
regarding our financial position, business strategy and measures
to implement that strategy, including changes to operations,
competitive strengths, goals, expansion and growth of our
business and operations, plans, references to future success and
other such matters, are forward-looking statements. Accounting
estimates, such as those described under the heading
“Critical Accounting Policies” in Item 7 of this
Annual Report on
Form 10-K,
are inherently forward-looking. These statements are based on
assumptions and analyses made by us in light of our experience
and our perception of historical trends, current conditions and
expected future developments, as well as other factors we
believe are appropriate in the circumstances.
You should not place undue reliance on these forward-looking
statements, which speak only as of the date of this Annual
Report. Forward-looking statements are subject to risks and
uncertainties, many of which are difficult to predict and
generally beyond our control, that could cause actual results to
differ materially from those expressed, projected or implied in
or by the forward-looking statements. Such risks and
uncertainties include: fluctuations in domestic or foreign
vehicle production, the continued use by original equipment
manufacturers of outside suppliers, fluctuations in demand for
vehicles containing our products, changes in general economic
conditions, as well as the other risks noted under Item 1A,
“Risk Factors” and in other reports that we file with
the Securities and Exchange Commission. We do not undertake any
obligation to update or announce publicly any updates to or
revision to any of the forward-looking statements in this
Form 10-K
to reflect any change in our expectations or any change in
events, conditions, circumstances, or assumptions underlying the
statements.
This section and the discussions contained in Item 1A,
“Risk Factors,” and in Item 7, subheading
“Critical Accounting Policies” in this report, are
intended to provide meaningful cautionary statements for
purposes of the safe harbor provisions of the Act. This should
not be construed as a complete list of all of the economic,
competitive, governmental, technological and other factors that
could adversely affect our expected consolidated financial
position, results of operations or liquidity. Additional risks
and uncertainties not currently known to us or that we currently
believe are immaterial also may impair our business, operations,
liquidity, financial condition and prospects.
3
Table of Contents
| Item 1. | Business |
BorgWarner Inc. and Consolidated Subsidiaries (the
“Company”) is a Delaware corporation that was
incorporated in 1987. We are a leading, global supplier of
highly engineered automotive systems and components, primarily
for powertrain applications. Our products help improve vehicle
performance, fuel efficiency, stability and air quality. These
products are manufactured and sold worldwide, primarily to
original equipment manufacturers (“OEMs”) of
light-vehicles (passenger cars, sport-utility vehicles, vans and
light-trucks). The Company’s products are also sold to
other OEMs of commercial trucks, buses and agricultural and
off-highway vehicles. We also manufacture and sell our products
to certain Tier One vehicle systems suppliers and into the
aftermarket for light and commercial vehicles. The Company
operates manufacturing facilities serving customers in the
Americas, Europe and Asia, and is an original equipment supplier
to every major automotive OEM in the world.
Financial
Information About Reporting Segments
Refer to Note 19, “Reporting Segments and Related
Information” of the Notes to the Consolidated Financial
Statements in Item 8 of this report for financial
information about business segments.
Narrative
Description of Reporting Segments
The Company reports its results under two reporting segments:
Engine and Drivetrain. Net revenues by segment for the three
years ended December 31, 2010, 2009 and 2008 are as follows
:
| Year Ended December 31, | ||||||||||||||
| Net Sales | 2010 | 2009 | 2008 | |||||||||||
| (Millions of dollars) | ||||||||||||||
|
Engine
|
$ | 4,060.8 | $ | 2,883.2 | $ | 3,861.5 | ||||||||
|
Drivetrain
|
1,611.4 | 1,093.5 | 1,426.4 | |||||||||||
|
Inter-segment eliminations
|
(19.4 | ) | (14.9 | ) | (24.0 | ) | ||||||||
|
Net sales
|
$ | 5,652.8 | $ | 3,961.8 | $ | 5,263.9 | ||||||||
The sales information presented above excludes the sales by the
Company’s unconsolidated joint ventures (See “Joint
Ventures” section). Such unconsolidated sales totaled
approximately $779 million in 2010, $599 million in
2009 and $792 million in 2008.
Engine
The Engine Group develops and manufactures products to manage
engines for fuel efficiency, reduced emissions, and enhanced
performance. Concern about fuel prices and availability, and the
need to lower
CO
2
emissions are driving demand for the Company’s products in
smaller, more efficient gasoline and diesel engines and
alternative powertrains. Engine Group products currently fall
into the following major categories: turbochargers, timing
devices and chain products, emissions systems, thermal systems,
diesel cold start and gasoline ignition technology and cabin
heaters.
The Engine Group provides turbochargers for light-vehicle,
commercial-vehicle and off-road applications for diesel and
gasoline engine manufacturers in Europe, North America, South
America and Asia. The Engine Group has greatly benefited from
the growth in turbocharger demand in Europe. This growth is
linked to increasing demand for diesel engines in light
vehicles, which typically use turbochargers, and for
turbocharged gasoline engines. Benefits of turbochargers in both
light-vehicle and commercial-vehicle applications include
increased power for a given engine size, improved fuel economy
and significantly reduced emissions.
Sales of turbochargers for light-vehicles represented
approximately 26%, 27%, and 24% of the Company’s total
revenues for 2010, 2009 and 2008, respectively. The Company
currently supplies light-
4
Table of Contents
vehicle turbochargers to many OEMs including Volkswagen,
Renault, PSA, Daimler, Hyundai, Fiat, BMW, Ford and General
Motors. The Company also supplies commercial-vehicle
turbochargers to Caterpillar, John Deere, Daimler,
Navistar, Deutz and MAN.
The Company’s newest technologies are its regulated
two-stage turbocharging system known as
R2S
®
,
variable turbine geometry (“VTG”) turbochargers and
turbochargers for gasoline direct injected engines. In 2008, the
Company announced the start of production of its award winning
R2S technology for Daimler’s four-cylinder diesel engine
range. The Company also began shipping VTG turbochargers for
VW’s common-rail engine range and announced the launch of a
VTG turbocharger for use with low-pressure exhaust gas
recirculation to reduce emissions on VW’s Jetta Clean
Diesel TDI. In 2010, the Company began shipping turbochargers
for Ford’s 3.5 liter V6 direct-injected gasoline EcoBoost
engine for rear-wheel drive cars and trucks. Ford selected
BorgWarner’s leading gasoline turbocharger technology for
their new four-cylinder EcoBoost engine, which made its global
debut in 2010.
The Engine Group also designs and manufactures products to
control emissions and improve fuel economy. These products
include electric air pumps, turbo actuators that use integrated
electronics to precisely control turbocharger speed and pressure
ratio, and exhaust gas recirculation coolers, tubes and valves
for gasoline and diesel applications.
The Engine Group’s chain and chain systems products include
timing chain and timing drive systems, variable cam timing
(“VCT”) systems, crankshaft and camshaft sprockets,
tensioners, guides and snubbers, HY-VO
®
front-wheel drive (“FWD”) transmission chain and
four-wheel drive (“4WD”) chain, and MORSE GEMINI
®
chain systems for light-vehicle and commercial-vehicle
applications.
The Company’s timing chain systems are used on Ford’s
family of engines, including the Duratec, Modular and in-line
four-cylinder engines, as well as on a number of Chrysler’s
engines, including its 3.7 liter and 4.7 liter engines, the
four-cylinder World Engine and the new 3.6 liter Pentastar
engine. In addition, the Company provides timing systems to a
number of Asian OEMs, including Honda, Nissan, and Hyundai, and
to several European OEMs. The Company believes that it is the
world’s leading manufacturer of timing chain systems.
The Engine Group’s newest technology is its VCT with mid
position lock, which allows a greater range of camshaft
positioning thereby enabling greater control over airflow and
the opportunity to improve fuel economy, function and efficiency
compared with conventional VCT systems. BorgWarner is currently
working with five OEMs to implement the technology.
The Company believes it is the world’s leading manufacturer
of chain for FWD transmissions and 4WD transfer cases. HY-VO
chain is used to transfer power from the engine to the
drivetrain. The chain in a transfer case distributes power
between a vehicle’s front and rear output shafts which, in
turn, provide torque to the front and rear wheels. The
Company’s MORSE GEMINI transmission chain system emits
significantly less chain pitch frequency noise than conventional
transmission chain systems.
The Company also believes it is a leading global provider of
engine thermal solutions for truck, agricultural and off-highway
applications. The group designs, manufactures and markets
viscous fan drives that control fans to sense and respond to
multiple cooling requirements. The Engine Group also
manufactures and markets polymer fans for engine cooling
systems. The Company’s thermal products provide improved
vehicle fuel economy and reduced engine emissions while
minimizing parasitic horsepower loss. The Company has been
awarded the “standard position” (the OEM-designated
preferred supplier of component systems available to the
end-customer) at the major global heavy truck producers.
In 2005, the Company acquired approximately 69.4% of the
outstanding shares of BERU Aktiengesellschaft
(“BERU”), headquartered in Ludwigsburg, Germany.
Through a series of transactions and legal actions, the Company
became the only shareholder of BERU effective September 30,
2009. That company’s corporate form and name was changed to
BorgWarner BERU Systems GmbH (“BERU Systems”) in late
2009.
5
Table of Contents
BERU System’s operating results are included within the
Company’s Engine Group segment. BERU Systems is a leading
global automotive supplier of diesel cold start technology (glow
plugs and instant starting systems). In 2008, BERU launched its
new Pressure Sensor Glow Plug with which the combustion process
of a diesel engine is monitored and enhanced, allowing the
lowest
CO
2
and
NO
x
emissions possible. It also designs and manufactures gasoline
ignition technology (spark plugs and ignition coils); and
electronic control units and sensor technology (tire pressure
sensors, diesel cabin heaters and selected sensors).
On June 2, 2009, the Company announced the purchase of
advanced gasoline ignition technology and related intellectual
property from Florida-based Etatech, Inc. The high-frequency
ignition technology enables high-performing, lean burning
engines to significantly improve fuel economy and reduce
emissions compared with conventional combustion technologies.
On April 10, 2010, the Company acquired 100% of Dytech ENSA
S.L. (“Dytech”), headquartered in Vigo, Spain. Dytech
is a leading producer of exhaust gas recirculation (EGR)
coolers, EGR tubes, and integrated EGR modules including valves
for automotive and commercial vehicle applications, both on- and
off-road.
In anticipation of market growth expected for its electric cabin
heaters, the Company completed the acquisition of
BERU-Eichenauer GmbH by acquiring the shares of its former joint
venture partner, Eichenauer Heizelemente GmbH & Co.
KG. The former 50/50 joint venture was formed in 2000 to develop
and manufacture electric cabin heaters. The acquisition formally
took effect on May 1, 2010.
Drivetrain
The Drivetrain Group leverages the Company’s expertise in
clutching and control systems to enable efficient transmission
of engine torque through the vehicle drivetrain and management
of torque distribution to the driven wheels. The Company’s
technology can improve fuel efficiency and help reduce emissions
in all types of powertrains. The Drivetrain Group’s major
products are transmission components and systems, and all-wheel
drive (“AWD”) torque management systems.
The Drivetrain Group designs and manufactures automatic
transmission components and modules and is a supplier to
virtually every major automatic transmission manufacturer in the
world for both conventional automatic, new dual-clutch
transmissions (“DCT”) and automated manual
transmissions.
Friction and mechanical products include dual clutch modules,
friction clutch modules, friction plates, transmission bands,
torque converter clutches, one-way clutches and torsional
vibration dampers. Controls products feature electro-hydraulic
solenoids for standard and high pressure hydraulic systems,
transmission solenoid modules and dual clutch control modules.
The Company’s 50%-owned joint venture in Japan, NSK-Warner
Kabushiki Kaisha (“NSK-Warner”), is a leading producer
of friction plates and one-way clutches in Japan. NSK-Warner is
also the joint venture partner with a 40% interest in the
Drivetrain Group’s Korean subsidiary, BorgWarner
Transmission Systems Korea, Inc.
The Company has led the globalization of today’s DCT
technology for over ten years. Following the development of its
DCT technology in the 1990s, the Company established its
industry-leading position in Europe in 2003 with the production
launch of its award-winning
DualTronic
®
innovations with VW/Audi. In 2007, the Company launched its
first dual-clutch technology application in a Japanese
transmission with Nissan.
The Company has announced DCT programs with customers that
include VW, Audi, SAIC and Nissan, in addition to Getrag DCT
programs with BMW, Ford and other global automakers. Also, the
Company is working on several other DCT programs with OEMs
around the world. BorgWarner DualTronic technology enables a
conventional, manual gearbox to function as a fully automatic
transmission by eliminating the interruption in power flow that
occurs when a single clutch manual transmission shifts gears.
The result is a smooth shifting automatic transmission with the
fuel efficiency and great driving experience of a manual gearbox.
6
Table of Contents
On November 18, 2008, we entered into a joint venture
agreement with China Automobile Development United Investment
Company, a company owned by leading Chinese automakers, to
produce various dual clutch transmission modules. The joint
venture’s operations will be located in Dalian, China and
production is scheduled to begin in 2011. The Company owns 66%
of the joint venture.
In conventional automatic transmissions, there has been a global
market trend from four and five speeds to six, seven, and even
eight speed transmissions. Transmissions with more speeds
improve fuel economy and vehicle performance and offer growth
opportunities.
The Drivetrain Group’s torque management products include
rear-wheel drive (“RWD”)/AWD transfer case systems,
FWD/AWD electromagnetic coupling systems and advanced products.
The Company’s focus is on electronically controlled
(active) torque management devices and systems for their vehicle
dynamics, fuel economy and stability benefits.
Transfer cases are installed primarily on light-trucks,
sport-utility vehicles (“SUV“s), rear-wheel drive
based cross-over utility vehicles (“CUV“s) and
passenger cars. A transfer case attaches to the transmission and
distributes torque to the front and rear axles improving vehicle
traction and stability in dynamic driving conditions.
The Company is involved in the FWD/AWD market with
electromagnetic couplings that use electronically controlled
clutches to distribute power to the rear wheels instantly as
traction is required. The
NexTrac
®
AWD device is our latest product innovation that produces
outstanding stability and traction while promoting better fuel
economy. The NexTrac AWD device launched in 2008 on the Hyundai
Santa Fe, Tucson and KIA Sportage.
With the trend toward vehicle electrification gaining momentum,
the Company is also applying its years of expertise to deliver
robust and highly efficient single and multiple speed electric
gear reduction solutions for hybrids and electric vehicles.
Currently, we supply our
eGearDrive
(tm)
single-speed gearbox to the Ford Transit Connect Electric. We
are actively engaged with traditional and non-traditional OEMs
on a number of other transmission programs for plug-in hybrid
and electric vehicles.
On January 31, 2011, the Company acquired the Traction
Systems division of Haldex Group, a leading provider of
innovative all-wheel drive (AWD) products for the global vehicle
industry headquartered in Stockholm, Sweden. The purchase price
was approximately $205 million (1.425 billion Swedish
Krona). The operating results will be reported within the
Company’s Drivetrain reporting segment from the date of
acquisition.
This acquisition is expected to accelerate BorgWarner’s
growth in the global AWD market as it continues to shift toward
front-wheel drive (FWD) based vehicles. The acquisition will add
industry leading FWD/AWD technologies, with a strong European
customer base, to BorgWarner’s existing portfolio of front
and rear-wheel drive based products. This enables BorgWarner to
provide global customers a broader range of all-wheel drive
solutions to meet their vehicle needs.
Joint
Ventures
As of December 31, 2010, the Company had 11 joint ventures
in which it had a less-than-100% ownership interest. Results
from the eight ventures in which the Company is the majority
owner are consolidated as part of the Company’s results.
Results from the three ventures in which the Company’s
effective ownership interest is 50% or less, were reported by
the Company using the equity method of accounting.
7
Table of Contents
Management of the unconsolidated joint ventures is shared with
the Company’s respective joint venture partners. Certain
information concerning the Company’s joint ventures is set
forth below:
|
Percentage
|
||||||||||||||||||
|
Owned by
|
Location
|
Fiscal 2010
|
||||||||||||||||
|
Year
|
the
|
of
|
Sales (Millions
|
|||||||||||||||
| Joint Venture | Products | Organized | Company (a) | Operation | Joint Venture Partner | of Dollars) (b) | ||||||||||||
|
Unconsolidated:
|
||||||||||||||||||
|
NSK-Warner K.K.
|
Transmission components | 1964 | 50 | % | Japan/China | NSK Ltd. | $ | 634.7 | ||||||||||
|
Turbo Energy Limited(c)
|
Turbochargers | 1987 | 32.6 | % | India | Sundaram Finance Limited; | $ | 137.9 | ||||||||||
| Brakes India Limited | ||||||||||||||||||
|
BERU Diesel Start Systems Pvt. Ltd.
|
Glow Plugs | 1996 | 49 | % | India | Jayant Dave | $ | 6.3 | ||||||||||
|
Consolidated:
|
||||||||||||||||||
|
BorgWarner Transmission Systems Korea, Inc.
|
Transmission components | 1987 | 60 | %(d) | Korea | NSK-Warner K.K. | $ | 148.1 | ||||||||||
|
Divgi-Warner Pvt. Ltd.
|
Transfer cases and
automatic locking hubs |
1995 | 60 | % | India | Divgi Metalwares, Ltd. | $ | 20.8 | ||||||||||
|
Borg-Warner Shenglong (Ningbo) Co. Ltd.
|
Fans and fan drives | 1999 | 70 | % | China | Ningbo Shenglong Group Co., Ltd. | $ | 49.7 | ||||||||||
|
BorgWarner TorqTransfer Systems Beijing Co. Ltd.
|
Transfer cases | 2000 | 80 | % | China | Beijing Automotive Industry Corporation | $ | 63.6 | ||||||||||
|
SeohanWarner Turbo Systems Ltd.
|
Turbochargers | 2003 | 71 | % | Korea | Korea Flange Company | $ | 90.0 | ||||||||||
|
BorgWarner United Transmission Systems Co. Ltd.
|
Transmission components | 2009 | 66 | % | China |
China Automobile Development
United Investment Co., Ltd. |
$ | — | ||||||||||
|
BERU Korea Co. Ltd.
|
Ignition coils and pumps | 2001 | 51 | % | Korea | Mr. K.B. Mo and Mr. D.H. Kim | $ | 45.6 | ||||||||||
|
BorgWarner-Vikas Emissions Systems India Private Limited
|
EGR coolers | 2007 | 60 | % | India | Kenmore Vikas Pvt. Ltd. and Man Mohak Fin. Invest Pvt. Ltd. | $ | 5.1 | ||||||||||
| (a) | In the second quarter of 2008, the Company and BERU completed a Domination and Profit Transfer Agreement (“DPTA”), giving BorgWarner full control of BERU. For the joint ventures in which BERU Systems is a party, the percentage of ownership for each joint venture reflects BERU System’s ownership percentage. | |
| (b) | All sales figures are for the year ended December 31, 2010, except NSK-Warner and Turbo Energy Limited. NSK-Warner’s sales are reported for the 12 months ended November 30, 2010. Turbo Energy Limited’s sales are reported for the 12 months ended September 30, 2010. | |
| (c) | The Company made purchases from Turbo Energy Limited totaling $22.9 million, $24.2 million and $25.4 million for the years ended December 31, 2010, 2009, and 2008, respectively. | |
| (d) | BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner Transmission Systems Korea, Inc. This gives the Company an additional indirect effective ownership percentage of 20%. This results in a total effective ownership interest of 80%. |
Financial
Information About Geographic Areas
Refer to Note 19, “Reporting Segments and Related
Information” of the Notes to the Consolidated Financial
Statements in Item 8 of this report for financial
information about geographic areas.
Approximately 74% of the Company’s consolidated sales for
2010 were outside the United States, including exports. However,
a portion of such sales were to OEMs headquartered outside the
United States that produce vehicles that are, in turn, exported
to the United States.
Customers
Approximately 77% of the Company’s total sales in 2010 were
for light-vehicle applications; 16% of the Company’s sales
were to a diversified group of commercial truck, bus,
construction and agricultural vehicle manufacturers; and the
remaining 7% to distributors of aftermarket replacement parts.
8
Table of Contents
For the most recent three-year period, the Company’s
worldwide sales to the following customers (including their
subsidiaries) were approximately as follows:
| Customer | 2010 | 2009 | 2008 | |||||||||
|
Volkswagen
|
19 | % | 22 | % | 19 | % | ||||||
|
Ford
|
11 | % | 12 | % | 9 | % | ||||||
No other single customer accounted for more than 10% of our
consolidated sales in any year of the periods presented.
The Company’s automotive products are generally sold
directly to OEMs substantially pursuant to negotiated annual
contracts, long-term supply agreements or terms and conditions
as may be modified by the parties. Deliveries are subject to
periodic authorizations based upon the production schedules of
the OEMs. The Company typically ships its products directly from
its plants to the OEMs.
Sales and
Marketing
Each of the Company’s business units within its two
reporting segments has its own sales function. Account
executives for each of our business units are assigned to serve
specific OEM customers for one or more of a business unit’s
products. Our account executives spend the majority of their
time in direct contact with OEM purchasing and engineering
employees and are responsible for servicing existing business
and for identifying and obtaining new business. Because of their
close relationship with OEMs, account executives are able to
identify and meet customers’ needs based upon their
knowledge of our products design and manufacturing capabilities.
Upon securing a new order, account executives participate in
product launch team activities and serve as a key interface with
the customers.
In addition, the sales and marketing employees of our Engine
segment and Drivetrain segment often work together to explore
cross-development opportunities for the business units. The
development of
DualTronic
®
,
the Company’s wet-clutch and control-system technology for
a new-concept automated transmission, is an example of a
successful collaboration.
Seasonality
The Company’s business is moderately seasonal because the
Company’s largest North American customers typically halt
vehicle production for approximately two weeks in July and one
week in December. Customers in Europe and Asia typically shut
down vehicle production during portions of July or August and
one week in the fourth quarter. Accordingly, the Company’s
third and fourth quarters may reflect those practices.
Research and
Development
The Company conducts advanced engine and drivetrain research at
the reporting segment level. This advanced engineering function
looks to leverage know-how and expertise across product lines to
create new engine and drivetrain systems and modules that can be
commercialized. A venture capital fund that was created by the
Company as seed money for new innovation and collaboration
across businesses is managed by this function.
In addition, each of the Company’s business units within
its two reporting segments has its own research and development
(“R&D”) organization. The Company has
approximately 700 employees, including engineers, mechanics
and technicians, engaged in R&D activities at facilities
worldwide. The Company also operates testing facilities such as
prototype, measurement and calibration, life cycle testing and
dynamometer laboratories.
By working closely with the OEMs and anticipating their future
product needs, the Company’s R&D personnel conceive,
design, develop and manufacture new proprietary automotive
components and systems. R&D personnel also work to improve
current products and production processes. The Company believes
its commitment to R&D will allow it to obtain new orders
from its OEM customers.
9
Table of Contents
The following table presents the Company’s gross and net
expenditures on R&D activities:
| Year Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Millions of dollars) | ||||||||||||
|
Gross R&D expenditures
|
$ | 233.2 | $ | 219.0 | $ | 273.4 | ||||||
|
Customer reimbursements
|
(48.2 | ) | (63.8 | ) | (67.7 | ) | ||||||
|
Net R&D expenditures
|
$ | 185.0 | $ | 155.2 | $ | 205.7 | ||||||
The Company’s net R&D expenditures are included in the
selling, general, and administrative expenses of the
Consolidated Statements of Operations. Net R&D expenditures
as a percentage of net sales were 3.3% in 2010 and 3.9% in both
2009 and 2008. Customer reimbursements are netted against gross
R&D expenditures upon billing of services performed. The
Company has contracts with several customers at the
Company’s various R&D locations. No such contract
exceeded $6.0 million in any of the years presented.
Patents and
Licenses
The Company has approximately 4,000 active domestic and foreign
patents and patent applications pending or under preparation,
and receives royalties from licensing patent rights to others.
While it considers its patents on the whole to be important, the
Company does not consider any single patent, any group of
related patents or any single license essential to its
operations in the aggregate or to the operations of any of the
Company’s business groups individually. The expiration of
the patents individually and in the aggregate is not expected to
have a material effect on the Company’s financial position
or future operating results. The Company owns numerous
trademarks, some of which are valuable, but none of which are
essential to its business in the aggregate.
The Company owns the “BorgWarner” and
“Borg-Warner Automotive” trade names and housemarks,
and variations thereof, which are material to the Company’s
business.
Competition
The Company’s operating segments compete worldwide with a
number of other manufacturers and distributors which produce and
sell similar products. Many of these competitors are larger and
have greater resources than the Company. Technological
innovation, application engineering development, quality, price,
delivery and program launch support are the primary elements of
competition.
The Company’s major competitors by product type follow:
| Product Type: Engine | Name of Competitor | |||||
|
Turbochargers:
|
Holset (Cummins Inc.)
Honeywell IHI Mitsubishi Heavy Industries (MHI) |
|||||
|
Timing devices and chains:
|
Denso
Iwis Schaeffler Group Tsubaki Group |
|||||
|
Emissions systems:
|
Behr
Pierburg Valeo |
|||||
|
Thermal systems:
|
Behr
Horton/Sachs Usui |
|||||
|
Diesel cold start, gasoline ignition technology and cabin
heaters:
|
Bosch
NGK |
|||||
10
Table of Contents
| Product Type: Drivetrain | Name of Competitor | |||||
|
Torque transfer:
|
GKN Driveline
JTEKT Magna Powertrain |
|||||
|
Transmission:
|
Bosch
Denso Dynax Schaeffler Group |
|||||
In addition, a number of the Company’s major OEM customers
manufacture, for their own use and for others, products which
compete with the Company’s products. Other current OEM
customers could elect to manufacture products to meet their own
requirements or to compete with the Company. There can be no
assurance that the Company’s business will not be adversely
affected by increased competition in the markets in which it
operates.
For many of its products, the Company’s competitors include
suppliers in parts of the world that enjoy economic advantages
such as lower labor costs, lower health care costs and, in some
cases, export subsidies
and/or
raw
materials subsidies. Also, see Item 1A. Risk Factors.
Workforce
As of December 31, 2010, the Company and its consolidated
subsidiaries had a salaried and hourly workforce of
approximately 17,500 (as compared with approximately 12,500 at
December 31, 2009), of which approximately 5,000 were in
the U.S. Approximately 23% of the Company’s
U.S. workforce is unionized. The hourly workforces at
certain of our international facilities are also unionized. The
Company believes its present relations with our workforce to be
satisfactory.
Our only domestic collective bargaining agreement is for our
Ithaca and Cortland, New York facilities. This agreement expires
in September 2012.
Raw
Materials
The Company uses a variety of raw materials in the production of
its automotive products including steel, aluminum, copper,
plastic resins, and certain alloy elements. Manufacturing
operations for each of the Company’s operating segments are
dependent upon natural gas, fuel oil, and electricity.
Due to a global economic recovery in 2010, commodity prices
increased after dropping sharply in 2009. The 2009 decline in
commodity prices was due to falling global demand and oversupply.
As developed economies continue to recover and auto production
accelerates, certain commodities may experience temporary
shortages and inflated prices until production volumes again
reach equilibrium with market demands. The Company uses a
variety of tactics in order to limit the impact of supply
shortages and inflationary pressures.
The Company’s global procurement organization works to
accelerate cost reductions, purchases from lower cost regions,
supplier rationalization, risk mitigation efforts, and
collaborative buying activities. In addition, the Company uses
long-term contracts, cost sharing arrangements, design changes,
customer buy programs, and limited financial instruments to help
control costs. The Company intends to use similar measures in
2011 and beyond. Refer to Note 10, “Financial
Instruments” of the Notes to the Consolidated Financial
Statements in Item 8 of this report for information related
to the Company’s hedging activities.
For 2011, the Company believes that its supplies of raw
materials and energy are adequate and available from multiple
sources to support its manufacturing requirements.
11
Table of Contents
Available
Information
Through its Internet website (www.borgwarner.com), the Company
makes available, free of charge, its Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
all amendments to those reports, and other filings with the
Securities and Exchange Commission, as soon as reasonably
practicable after they are filed or furnished. The Company also
makes the following documents available on its Internet website:
the Audit Committee Charter; the Compensation Committee Charter;
the Corporate Governance Committee Charter; the Company’s
Corporate Governance Guidelines; the Company’s Code of
Ethical Conduct; and the Company’s Code of Ethics for CEO
and Senior Financial Officers. You may also obtain a copy of any
of the foregoing documents, free of charge, if you submit a
written request to Investor Relations, 3850 Hamlin Road, Auburn
Hills, Michigan 48326.
Executive
Officers of the Registrant
Set forth below are the names, ages, positions and certain other
information concerning the executive officers of the Company as
of February 10, 2011.
| Name | Age | Position With Company | ||||
|
Timothy M. Manganello
|
60 | Chairman and Chief Executive Officer | ||||
|
Robin J. Adams
|
57 | Executive Vice President, Chief Financial Officer and Chief Administrative Officer | ||||
|
John Sanderson
|
58 | Executive Vice President | ||||
|
Roger J. Wood
|
48 | Executive Vice President | ||||
|
Jan Bertsch
|
54 | Vice President and Treasurer | ||||
|
Daniel CasaSanta
|
56 | Vice President | ||||
|
John J. Gasparovic
|
53 | Vice President, General Counsel & Secretary | ||||
|
Ronald T. Hundzinski
|
52 | Vice President and Controller | ||||
|
Janice K. McAdams
|
52 | Vice President, Human Resources | ||||
|
James R. Verrier
|
48 | Vice President | ||||
|
Thomas Waldhier
|
48 | Vice President | ||||
Mr. Manganello has been Chairman of the Board since June
2003 and Chief Executive Officer of the Company since February
2003. Mr. Manganello is also a director of Bemis Company,
Inc. and Zep Inc. and he serves as the Board Chairman of Federal
Reserve Bank of Chicago, Detroit branch.
Mr. Adams has been Executive Vice President, Chief
Financial Officer and Chief Administrative Officer since April
2004. Mr. Adams serves as a member of BorgWarner’s
Board of Directors. Mr. Adams also is a director of
Carlisle Companies Inc.
Mr. Sanderson has been Executive Vice President of the
Company and Group President and General Manager of the
Drivetrain Group since January 2010. From February 2009 until
December 2009 he was Vice President of the Company and President
and General Manager of BorgWarner Transmission Systems Inc. From
October 1999 until June 2008 he was Chief Executive Officer,
Americas of Siemens VDO.
Mr. Wood has been Executive Vice President of the Company
since May 2009 and Group President of the Engine Group since
January 2010. He was President of BorgWarner Turbo Systems Inc.
and BorgWarner Emissions Systems Inc. from August 2005 through
December 2009.
Ms. Bertsch has been Vice President and Treasurer of the
Company since November 30, 2009. From July 2008 through
November 2009 she was Senior Vice President, Treasurer, and
Chief Information Officer for Chrysler Group, LLC and Chrysler
LLC. From May 2006 through June 2008 she was Vice President and
Chief Information Officer of Daimler Chrysler’s Chrysler
Group and Mercedes Benz NAFTA organizations and Chrysler LLC.
From July 2001 through April 2006 she was Vice President, Global
Sales and Marketing Finance for Chrysler LLC.
Mr. CasaSanta has been Vice President of the Company and
President and General Manager of BorgWarner Thermal Systems Inc.
(“Thermal Systems”) since January 2010. He was General
Manager of Thermal Systems from June 2009 through December 2009.
He was President and General Manager of
12
Table of Contents
BorgWarner TorqTransfer Systems Inc. (“TTS”) from June
2008 until June 2009. He was Vice President and General Manager
of Thermal Systems from January 2003 until June 2008.
Mr. Gasparovic has been Vice President, General Counsel and
Secretary of the Company since January 2007. He was Senior Vice
President and General Counsel of Federal-Mogul Corporation from
February 2005 until December 2006.
Mr. Hundzinski has been Vice President and Controller of
the Company since April 2010. He was Vice President of Finance
of BorgWarner Turbo Systems from June 2005 to April 2010.
Ms. McAdams has been Vice President, Human Resources since
March 2010. She was Director of Compensation and Benefits from
May 2005 to March 2010. She was Vice President of Human
Resources at Metaldyne from January 2004 until December 2004.
Mr. Verrier has been Vice President of the Company and
President and General Manager of BorgWarner Morse TEC Inc.
(“Morse TEC”) since January 2010. He was Vice
President and General Manager, Passenger Car of BorgWarner Turbo
Systems Inc. from January 2006 through December 2009. He was
Vice President and General Manager of BorgWarner Turbo Europe
from November 2004 until January 2006.
Mr. Waldhier has been Vice President of the Company since
November 2008 and President and General Manager of BorgWarner
BERU and Emissions Systems since January 2010. He was Chief
Executive Officer of BERU from October 2007 through December
2009 when it ceased to be a publicly held German company. He was
Executive Vice President and Chief Operating Officer of SAS
Automotive from April 2004 until October 2007.
| Item 1A. | Risk Factors |
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently
deem immaterial also may impact our business operations. If any
of the following risks occur, our business including its
financial performance, financial condition, operating results
and cash flows could be materially adversely affected.
Our industry
is cyclical and our results of operations will be adversely
affected by industry downturns.
Automotive and truck production and sales are cyclical and
sensitive to general economic conditions and other factors
including interest rates, consumer credit, and consumer spending
and preferences. Economic declines that result in significant
reduction in automotive or truck production would have a
material adverse effect on our sales to original equipment
manufacturers.
We continue to take steps to realign and resize our production
capacity and cost structure to meet current and projected
operational and market requirements. Significant declines in the
automotive industry and financial declines and restructurings by
our significant customers may make it necessary to take
restructuring actions and charges.
We are
dependent on market segments that use our key products.
Decreased demand in those segments could adversely affect our
business.
Some of our products, in particular turbochargers, are currently
used primarily in diesel passenger cars and commercial vehicles.
Any significant reduction in production in these market segments
or loss of business in these market segments could have a
material adverse effect on our sales to original equipment
manufacturers.
We face strong
competition.
We compete worldwide with a number of other manufacturers and
distributors that produce and sell products similar to ours.
Price, quality, delivery, technological innovation, application
engineering development and program launch support are the
primary elements of competition. Our competitors include
vertically
13
Table of Contents
integrated units of our major original equipment manufacturer
customers, as well as a large number of independent domestic and
international suppliers. We are not as large as a number of
these companies and do not have as many financial or other
resources. The competitive environment has changed dramatically
over the past few years as our traditional U.S. original
equipment manufacturer customers, faced with intense
international competition, have expanded their worldwide
sourcing of components. As a result, we have experienced
competition from suppliers in other parts of the world that
enjoy economic advantages, such as lower labor costs, lower
health care costs and, in some cases, export or raw materials
subsidies. Increased competition could adversely affect our
businesses.
We are under
substantial pressure from original equipment manufacturers to
reduce the prices of our products.
There is substantial and continuing pressure on original
equipment manufacturers to reduce costs, including costs of
products we supply. Although original equipment manufacturers
have indicated that they will continue to rely on outside
suppliers, a number of our major original equipment manufacturer
customers manufacture products for their own uses that directly
compete with our products. These original equipment
manufacturers could elect to manufacture such products for their
own uses in place of the products we currently supply. We
believe that our ability to develop proprietary new products and
to control our costs will allow us to remain competitive.
However, we cannot assure you that we will be able to improve or
maintain our gross margins on product sales to original
equipment manufacturers or that the trend by original equipment
manufacturers towards outsourcing will continue.
Annual price reductions to original equipment manufacturer
customers appear to have become a permanent feature of our
business environment. To maintain our profit margins, we seek
price reductions from our suppliers, improve production
processes to increase manufacturing efficiency, update product
designs to reduce costs and develop new products, the benefits
of which support stable or increased prices. Our ability to pass
through increased raw material costs to our original equipment
manufacturer customers is limited, with cost recovery often less
than 100% and often on a delayed basis. We cannot assure you
that we will be able to reduce costs in an amount equal to
annual price reductions, increases in raw material costs, and
increases in employee wages and benefits.
We are
sensitive to the effects of our major customers’ labor
relations.
All three of our primary North American customers, Ford,
Chrysler and General Motors, have major union contracts with the
United Automobile, Aerospace and Agricultural Implement Workers
of America. Because of domestic original equipment
manufacturers’ dependence on a single union, we are
affected by labor difficulties and work stoppages at original
equipment manufacturers’ facilities. Similarly, a majority
of our global customers’ operations outside of North
America are also represented by various unions. Any extended
work stoppage could have an adverse effect on our business.
Part of our
labor force is unionized which could subject us to work
stoppages.
As of December 31, 2010, approximately 23% of our
U.S. workforce was unionized. Our only domestic collective
bargaining agreement is for our Ithaca and Cortland, New York
facilities. This agreement expires in September 2012. The hourly
employees at certain of our international facilities are also
unionized. While we believe that our relations with our
employees are satisfactory, a prolonged dispute with our
employees could have an adverse effect on our business.
We are subject
to extensive environmental regulations.
Our operations are subject to laws governing, among other
things, emissions to air, discharges to waters and the
generation, handling, storage, transportation, treatment and
disposal of waste and other materials. We believe that our
business, operations and activities have been and are being
operated in compliance in all material respects with applicable
environmental, health and safety laws. However, the operation of
automotive parts manufacturing plants entails risks in these
areas, and we cannot assure you that we will not incur
14
Table of Contents
material costs or liabilities as a result. Furthermore, through
various acquisitions over the years, we have acquired a number
of manufacturing facilities, and we cannot assure you that we
will not incur material costs and liabilities relating to
activities that predate our ownership. In addition, potentially
significant expenditures could be required in order to comply
with evolving environmental, health and safety laws that may be
adopted in the future.
We have
contingent liabilities related to environmental, product
warranties, regulatory matters, litigation and other
claims.
We and certain of our current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been
identified by the United States Environmental Protection Agency
and certain state environmental agencies and private parties as
potentially responsible parties at various hazardous waste
disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act and equivalent state laws. As a
result, as of December 31, 2010, we may be liable for the
cost of
clean-up
and
other remedial activities at 38 of these sites.
We work with outside experts to determine a range of potential
liability for environmental sites. The ranges for each
individual site are then aggregated into a loss range for the
total accrued liability. Management’s estimate of the loss
range for environmental liability, including conditional asset
retirement obligations, for 2010 is between approximately
$27 million and $42 million. We record an accrual at
the most probable amount within the range unless one cannot be
determined; in which case we record the accrual at the low end
of the range. Based on information available to us, we have
established an accrual in our financial statements for indicated
environmental liabilities of $29.2 million, which includes
our conditional asset retirement obligation under ASC Topic 410
of $1.2 million at December 31, 2010. We currently
expect the substantial portion of this amount to be expended
over the next three to five years.
We provide warranties to our customers for some of our products.
Under these warranties, we may be required to bear costs and
expenses for the repair or replacement of these products. We
cannot assure you that costs and expenses associated with these
product warranties will not be material, or that those costs
will not exceed any amounts accrued for such warranties in our
financial statement. Based upon information available to us, we
have established an accrual in our financial statements for
product warranties of $66.8 million at December 31,
2010.
We are also party to, or have an obligation to defend a party
to, various legal proceedings, including those described in
Note 14 to the Notes to the Consolidated Financial
Statements in the Company’s Annual Report on
Form 10-K.
We are currently, and may in the future become, subject to legal
proceedings and commercial or contractual disputes. These claims
typically arise in the normal course of business and may
include, but not be limited to, commercial or contractual
disputes with our suppliers, intellectual property matters and
employment claims. There is a possibility that such claims may
have an adverse impact on our business that is greater than we
anticipate.
Our growth
strategy may prove unsuccessful.
We have a stated goal of increasing revenues and operating
income at a rate greater than global vehicle production by
increasing content per vehicle with innovative new components
and through select acquisitions. We may not meet our goal
because of any of the following: (a) the failure to develop
new products which will be purchased by our customers;
(b) technology changes rendering our products obsolete;
(c) a reversal of the trend of supplying systems (which
allows us to increase content per vehicle)
instead of components; and (d) the failure to
find suitable acquisition targets or the failure to integrate
operations of acquired businesses quickly and cost effectively.
We are subject
to risks related to our international operations.
We have manufacturing and technical facilities in many regions
and countries, including North America, Europe, China, India,
South Korea, Japan, and Brazil and sell our products worldwide.
For 2010,
15
Table of Contents
approximately 74% of our sales were outside North America.
Consequently, our results could be affected by changes in trade,
monetary and fiscal policies, trade restrictions or
prohibitions, import or other charges or taxes, and fluctuations
in foreign currency exchange rates, limitations on the
repatriation of funds, changing economic conditions, social
unrest, political instability and disputes, and international
terrorism. Compliance with multiple and potentially conflicting
laws and regulations of various countries is burdensome and
expensive. See Note 19, “Reporting Segments and
Related Information” to Consolidated Financial Statements
in the Company’s Annual Report on
Form 10-K,
regarding the size of our international operations.
We may not
realize sales represented by awarded business.
We base our growth projections, in part, on commitments made by
our customers. These commitments generally renew yearly during a
program life cycle. If actual production orders from our
customers do not approximate such commitments, it could
adversely affect our business.
We are
impacted by the rising cost of providing pension and other post
employment benefits.
The automotive industry, like other industries, continues to be
impacted by the rising cost of providing pension and other post
employment benefits. To partially address this impact, we
continue to make adjustments to certain retiree medical and
pension plans. See Note 11, “Retirement Benefit
Plans” to the Consolidated Financial Statements in the
Company’s Annual Report on
Form 10-K.
Certain
defined benefit pension plans we sponsor are currently
underfunded.
We sponsor certain defined benefit pension plans worldwide that
are underfunded and will require cash payments. Additionally, if
the performance of the assets in our pension plans does not meet
our expectations, or if other actuarial assumptions are
modified, our required contributions may be higher than we
expect. See Note 11, “Retirement Benefit Plans”
to the Consolidated Financial Statements in the Company’s
Annual Report on
Form 10-K.
Negative or
unexpected tax consequences could adversely affect our
business.
Adverse changes in the underlying profitability and financial
outlook of our operations in several jurisdictions could lead to
changes in our valuation allowances against deferred tax assets
and other tax accruals that could adversely affect our financial
performance.
Additionally, we are subject to tax audits by governmental
authorities in the U.S. and numerous
non-U.S. jurisdictions.
Because the results of tax audits are inherently uncertain,
negative or unexpected results from one or more such tax audits
could adversely affect our business.
We rely on
sales to major customers.
We rely on sales to original equipment manufacturers around the
world. Supply to several of these customers requires significant
investment by the Company in working capital, plant and
equipment. Some of our customers are rated by the credit rating
agencies as below investment grade. The loss of sales to a major
customer, due to any of a variety of factors including
non-renewal of purchase orders, the customer’s financial
hardship or other unforeseen reasons, could adversely affect our
business.
Furthermore, some of our sales are concentrated. Our worldwide
sales in 2010 to Volkswagen and Ford constituted approximately
19% and 11%, respectively, of our 2010 consolidated sales.
Suppliers’
economic distress could result in the disruption of our
operations and could adversely affect our
business.
Rapidly changing industry conditions such as volatile production
volumes; credit tightness; changes in foreign currencies; raw
material, commodity, transportation, and energy price
escalation; drastic changes in consumer preferences; and others
could adversely affect our supply chain, and sometimes with
little advanced notice. These conditions could also result in
increased commercial disputes and supply
16
Table of Contents
interruption risks. In certain instances, it would be difficult
and expensive for us to change suppliers that are critical to
our business. On occasion, we must provide financial support to
distressed suppliers or take other measures to protect our
supply lines. While we have taken definite actions to mitigate
these factors, we cannot predict with certainty the potential
adverse effects these costs might have on our business.
We continue to
face highly volatile commodity costs used in the production of
our products.
The Company uses a variety of commodities (including steel,
nickel, copper, aluminum, plastic resins, other raw materials
and energy) and materials purchased in various forms such as
castings, powder metal, forgings, stampings, and bar stock.
Increasing commodity costs will have an impact on our results.
We have sought to alleviate the impact of increasing costs by
including a material pass-through provision in our customer
contracts wherever possible or by selectively hedging certain
commodity exposures. Customers frequently challenge these
contractual provisions and rarely pay the full cost of any
materials increases. The discontinuation of ability to
pass-through or hedge increasing commodity costs would adversely
affect our business.
From time to time, commodity prices may also fall rapidly. When
this happens, suppliers may withdraw capacity from the market
until prices improve which may cause periodic supply
interruptions. The same may be true of our transportation
carriers and energy providers.
We could be
adversely affected by supply shortages of components from our
suppliers.
In an effort to manage and reduce the cost of purchased goods
and services, we have been rationalizing our supply base. As a
result, we are dependent on fewer sources of supply for certain
components used in the manufacture of our products. The Company
selects suppliers based on total value (including total landed
price, quality, delivery, and technology), taking into
consideration their production capacities and financial
condition. We expect that they will deliver to our stated
written expectations.
However, there can be no assurance that capacity limitations,
labor unrest, weather emergencies, commercial disputes,
government actions, riots, wars, sabotage, non-conforming parts,
acts of terrorism, “Acts of God”, or other problems
experienced by our suppliers will not result in occasional
shortages or delays in their supply of components to us. If we
were to experience a significant or prolonged shortage of
critical components from any of our suppliers and could not
procure the components from other sources, we would be unable to
meet the production schedules for some of our key products and
could miss customer delivery expectations. This would adversely
affect our customer relations and business.
A downgrade in
the ratings of our debt could restrict our ability to access the
debt capital markets.
Changes in the ratings that rating agencies assign to our debt
may ultimately impact our access to the debt capital markets and
the costs we incur to borrow funds. If ratings for our debt fall
below investment grade, our access to the debt capital markets
could become restricted.
Additionally, our revolving credit agreement includes an
increase in interest rates if the ratings for our debt are
downgraded. The interest costs on our revolving credit agreement
are based on a rating grid agreed to in our credit agreement.
Further, an increase in the level of our indebtedness and
related interest costs may increase our vulnerability to adverse
general economic and industry conditions and may affect our
ability to obtain additional financing.
Conditions in
the automotive industry may adversely affect our
business.
Our financial performance depends on conditions in the global
automotive industry. Original equipment manufacturers have
experienced difficulties from a weakened economy and tightened
credit markets. If our customers reduce their orders to us, it
would adversely affect our results of operations. A prolonged
downturn in the automotive industry or a significant product mix
shift due to consumer demand could require us to shut down
plants or incur impairment charges. Continued uncertainty
relating to the financial condition of automakers may adversely
affect our business.
17
Table of Contents
We are subject
to possible insolvency of financial
counterparties.
The Company engages in numerous financial transactions and
contracts including insurance policies, letters of credit,
credit line agreements, financial derivatives, and investment
management agreements involving various counterparties. The
Company is subject to the risk that one or more of these
counterparties may become insolvent and therefore be unable to
discharge its obligations under such contracts.
We are subject
to possible insolvency of outsourced service
providers.
The Company relies on third party service providers for
administration of workers’ compensation claims, health care
benefits, pension benefits, stockholder and bondholder
registration and similar services. These service providers
contribute to the efficient conduct of the Company’s
business. Insolvency of one or more of these service providers
could adversely affect our business.
Our business
success depends on attracting and retaining qualified
personnel.
Our ability to sustain and grow our business requires us to
hire, retain and develop a highly skilled and diverse management
team and workforce worldwide. Any unplanned turnover or
inability to attract and retain key employees in numbers
sufficient for our needs could adversely affect our business.
We are subject
to business continuity risks associated with increasing
centralization of our information technology
systems.
To improve efficiency and reduce costs, we have regionally
centralized the information systems that support our business
processes such as invoicing, payroll and general management
operations. If the centralized systems are disrupted or
disabled, key business processes could be interrupted, which
could adversely affect our business.
A variety of
other factors could adversely affect our business.
Any of the following could materially and adversely affect our
business: the loss of or changes in supply contracts or sourcing
strategies of our major customers or suppliers;
start — up expenses associated with new vehicle
programs or delays or cancellation of such programs,
underutilization of our manufacturing facilities, which can be
dependent on a single product line or customer; inability to
recover engineering and tooling costs; market and financial
consequences of recalls that may be required on products we
supplied; delays or difficulties in new product development; the
possible introduction of similar or superior technologies by
others; and global excess capacity and vehicle platform
proliferation.
| Item 1B. | Unresolved Staff Comments |
The Company has received no written comments regarding its
periodic or current reports from the staff of the Securities and
Exchange Commission that were issued 180 days or more
preceding the end of its 2010 fiscal year that remain unresolved.
18
Table of Contents
| Item 2. | Properties |
As of December 31, 2010, the Company had 57 manufacturing,
assembly, and technical locations worldwide. In addition to its
14 U.S. locations, the Company has nine locations in
Germany; six locations in Korea; five locations in India; four
locations in China; three locations in Japan and Mexico; two
locations in United Kingdom, France and Spain and one location
in each of Brazil, Hungary, Ireland, Italy, Monaco, Poland and
Portugal. The Company also has several sales offices, warehouses
and technical centers. The Company’s worldwide headquarters
are located in a leased facility in Auburn Hills, Michigan. In
general, the Company believes its facilities to be suitable and
adequate to meet its current and reasonably anticipated needs.
The following is additional information concerning the principal
manufacturing, assembly, and technical facilities operated by
the Company, its subsidiaries, and affiliates.(a)
ENGINE
| Americas: | Europe: | Asia: | ||
|
Asheville, North Carolina
|
Arcore, Italy | Aoyama, Japan | ||
|
Auburn Hills, Michigan
|
Bradford, England | Changwon, South Korea(b) | ||
|
Cadillac, Michigan
|
Bretten, Germany | Chennai, India | ||
|
Campinas, Brazil
|
Chazelles, France | Chungju-City, South Korea | ||
|
Cortland, New York
|
Diss, England | Faridabad, India | ||
|
Dixon, Illinois
|
Kirchheimbolanden, Germany | Kakkalur, India | ||
|
El Salto Jalisco, Mexico
|
Ludwigsburg, Germany | Nabari City, Japan | ||
|
Fletcher, North Carolina
|
Markdorf, Germany | Ningbo, China(b) | ||
|
Ithaca, New York
|
Muggendorf, Germany | Pyongtaek, South Korea(b) | ||
|
Juitepec Morelos, Mexico(b)
|
Neuhaus, Germany | |||
|
Marshall, Michigan
|
Oroszlany, Hungary | |||
|
Ramos, Mexico
|
Rzeszow, Poland | |||
| Tralee, Ireland | ||||
| Valenca, Portugal (b) | ||||
| Vigo, Spain | ||||
| Vitoria, Spain |
DRIVETRAIN
| Americas: | Europe: | Asia: | ||
|
Addison, Illinois(b)
|
Arnstadt, Germany | Beijing, China(b) | ||
|
Auburn Hills, Michigan
|
Heidelberg, Germany | Eumsung, South Korea | ||
|
Bellwood, Illinois
|
Ketsch, Germany | Fukuroi City, Japan | ||
|
Frankfort, Illinois
|
Monte Carlo, Monaco | Ochang, South Korea(b) | ||
|
Livonia, Michigan
|
Tulle, France | Pune, India | ||
|
Longview, Texas(b)
|
Shanghai, China(b) | |||
|
Ramos, Mexico
|
Sirsi, India | |||
|
Seneca, South Carolina
|
||||
|
Water Valley, Mississippi
|
| (a) | The table excludes joint ventures owned less than 50% and administrative offices. | |
| (b) | Indicates leased land rights or a leased facility. |
19
Table of Contents
| Item 3. | Legal Proceedings |
The Company is subject to a number of claims and judicial and
administrative proceedings (some of which involve substantial
amounts) arising out of the Company’s business or relating
to matters for which the Company may have a contractual
indemnity obligation. Refer to Note 14,
“Contingencies” of the Notes to the Consolidated
Financial Statements in Item 8 of this report for a
discussion of environmental, asbestos and other litigation.
In January 2006, BorgWarner Diversified Transmission Products
Inc (“DTP”), a subsidiary of the Company, filed a
declaratory judgment action in United States District Court,
Southern District of Indiana (Indianapolis Division) against the
United Automobile, Aerospace, and Agricultural Implements
Workers of America (“UAW”) Local No. 287 and
Gerald Poor, individually and as the representative of a
defendant class. DTP sought the Court’s affirmation that
DTP did not violate the Labor-Management Relations Act or the
Employee Retirement Income Security Act (ERISA) by unilaterally
amending certain medical plans effective April 1, 2006 and
October 1, 2006, prior to the expiration of the
then-current collective bargaining agreements. On
September 10, 2008, the Court found that DTP’s
reservation of the right to make such amendments reducing the
level of benefits provided to retirees was limited by its
collectively bargained health insurance agreement with the UAW,
which did not expire until April 24, 2009. Thus, the
amendments were considered untimely. In 2008 the Company
recorded a charge of $4.0 million as a result of the
Court’s decision.
DTP filed a declaratory judgment action in the United States
District Court, Southern District of Indiana (Indianapolis
Division) against the UAW Local No. 287 and Jim Barrett and
others, individually and as representatives of a defendant
class, on February 26, 2009 again seeking the Court’s
affirmation that DTP will not violate the Labor —
Management Relations Act or ERISA by modifying the level of
benefits provided retirees to make them comparable to other
Company retiree benefit plans after April 24, 2009. Certain
retirees, on behalf of themselves and others, filed a
mirror-image action in the United States District Court, Eastern
District of Michigan (Southern Division) on March 11, 2009,
for which a class has been certified. During the last quarter of
2009 the action pending in Indiana was dismissed, while the
action in Michigan is continuing and in the discovery phase. The
Company is vigorously defending against the suit. This
contingency is subject to many uncertainties, therefore based on
the information available to date, the Company cannot estimate
the amount or the range of potential loss, if any.
Environmental,
Conditional Asset Retirement Obligations and Product
Liability
Refer to Note 14, “Contingencies” in the Notes to
the Consolidated Financial Statements in the Company’s
Annual Report on
Form 10-K.
| Item 4. | (Removed and Reserved by the SEC) |
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company’s Common Stock is listed for trading on the New
York Stock Exchange under the symbol BWA. As of February 4,
2011, there were 2,511 holders of record of Common Stock.
Cash dividends declared and paid per share, adjusted for stock
splits in 2007, were as follows:
| 2010 | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||
|
Dividend Amount
|
— | $ | 0.12 | $ | 0.44 | $ | 0.34 | $ | 0.32 | $ | 0.28 | |||||||||||||
On March 5, 2009, the Company announced the suspension of
the Company’s quarterly dividend of $0.12 per share until
global economic conditions improve. The dividend policy is
subject to review and change at the discretion of the Board of
Directors.
20
Table of Contents
High and low sales prices (as reported on the New York Stock
Exchange composite tape) for the Common Stock for each quarter
in 2009 and 2010 were:
| Quarter Ended | High | Low | ||||||||||
|
March 31, 2009
|
$ | 25.65 | $ | 14.62 | ||||||||
|
June 30, 2009
|
$ | 36.78 | $ | 19.40 | ||||||||
|
September 30, 2009
|
$ | 36.07 | $ | 28.42 | ||||||||
|
December 31, 2009
|
$ | 34.73 | $ | 27.62 | ||||||||
|
March 31, 2010
|
$ | 39.21 | $ | 33.43 | ||||||||
|
June 30, 2010
|
$ | 44.55 | $ | 33.93 | ||||||||
|
September 30, 2010
|
$ | 53.42 | $ | 35.68 | ||||||||
|
December 31, 2010
|
$ | 73.43 | $ | 51.06 | ||||||||
The line graph below compares the cumulative total shareholder
return on our Common Stock with the cumulative total return of
companies on the Standard & Poor’s
(S&P’s) 500 Stock Index, companies within
BorgWarner’s peer group, and companies within Standard
Industrial Code (“SIC”) 3714 — Motor Vehicle
Parts.
COMPARISON OF 5
YEAR CUMULATIVE TOTAL RETURN*
Among BorgWarner Inc., the S&P 500 Index,
SIC 3714 Motor Vehicle Parts and a Peer Group
Among BorgWarner Inc., the S&P 500 Index,
SIC 3714 Motor Vehicle Parts and a Peer Group
*$100 invested on 12/31/05 in stock or index, including
reinvestment of dividends.
Fiscal year ending December 31.
Fiscal year ending December 31.
Copyright
©
2011 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
BWA, S&P 500 and Peer Group data gleaned from Capital IQ;
SIC Code Index gleaned from Research Data Group
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||||||||||
|
BorgWarner Inc.(1)
|
100.00 | 98.41 | 162.78 | 74.12 | 113.86 | 248.00 | ||||||||||||||||||||||||
|
S&P 500(2)
|
100.00 | 115.80 | 122.16 | 76.96 | 97.33 | 111.99 | ||||||||||||||||||||||||
|
SIC Code Index(3)
|
100.00 | 117.13 | 145.32 | 72.35 | 108.22 | 169.08 | ||||||||||||||||||||||||
|
Peer Group(4)
|
100.00 | 114.27 | 121.81 | 49.96 | 91.74 | 154.87 | ||||||||||||||||||||||||
| (1) | BorgWarner Inc. | |
| (2) | S&P 500 — Standard & Poor’s 500 Total Return Index | |
| (3) | Standard Industrial Code (“SIC”) 3714-Motor Vehicle Parts | |
| (4) | Peer Group Companies — Consists of the following companies: American Axle & Manufacturing Holdings, Inc., Arvin Meritor Inc., Autoliv Inc., Gentex Corp., Johnson Controls Inc., Lear Corporation (pre-2009 bankruptcy), Magna International, Inc., Modine Manufacturing Co., Tenneco Automotive, Inc., TRW Automotive Holdings Corp. and Visteon Corporation (pre-2009 bankruptcy) |
21
Table of Contents
Repurchase of
Equity Securities
The Company’s Board of Directors authorized the purchase of
up to 14.8 million shares of the Company’s common
stock. As of December 31, 2010, the Company had repurchased
12,563,528 shares.
All shares purchased under this authorization have been and will
continue to be repurchased in the open market at prevailing
prices and at times and in amounts to be determined by
management as market conditions and the Company’s capital
position warrant. The Company may use
Rule 10b5-1
plans to facilitate share repurchase. Repurchased shares will be
deemed treasury shares and may subsequently be reissued for
general corporate purposes.
The following table provides information about Company purchases
of its equity securities that are registered pursuant to
Section 12 of the Exchange Act during the quarter ended
December 31, 2010, at a total cost of $132.2 million:
ISSUER
REPURCHASES OF EQUITY SECURITIES
|
Total Number
|
||||||||||||||||||||
|
of Shares
|
||||||||||||||||||||
|
Total
|
Purchased as
|
Maximum
|
||||||||||||||||||
|
Number of
|
Average
|
Part of Publicly
|
Number of
|
|||||||||||||||||
|
Shares
|
Price Paid
|
Announced
|
Shares that May
|
|||||||||||||||||
| Period | Purchased | per Share | Plans or Programs | Yet be Purchased | ||||||||||||||||
|
Month Ended October 31, 2010
|
214,300 | 53.85 | 214,300 | 4,143,872 | ||||||||||||||||
|
Month Ended November 30, 2010
|
1,032,400 | 58.92 | 1,032,400 | 3,111,472 | ||||||||||||||||
|
Month Ended December 31, 2010
|
875,000 | 68.40 | 875,000 | 2,236,472 | ||||||||||||||||
|
Total
|
2,121,700 | $ | 62.32 | 2,121,700 | 2,236,472 | |||||||||||||||
NOTE: All purchases were made on the open market.
Equity
Compensation Plan Information
As of December 31, 2010, the number of stock options and
restricted common stock outstanding under our equity
compensation plans, the weighted average exercise price of
outstanding options and restricted common stock, and the number
of securities remaining available for issuance were as follows:
|
Number of Securities
|
||||||||||||
|
Number of Securities
|
Remaining Available
|
|||||||||||
|
to be Issued Upon
|
Weighted-Average
|
for Future Issuance
|
||||||||||
|
Exercise of
|
Exercise Price of
|
Under Equity
|
||||||||||
|
Outstanding Options,
|
Outstanding Options,
|
Compensation Plans
|
||||||||||
|
Restricted Common Stock
|
Restricted Common Stock
|
(excluding securities
|
||||||||||
|
Warrants and Rights
|
Warrants and Rights
|
Reflected in column (a))
|
||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
|
Equity compensation plans approved by security holders
|
5,123,804 | $ | 29.34 | 2,234,723 | ||||||||
|
Equity compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
5,123,804 | $ | 29.34 | 2,234,723 | ||||||||
22
Table of Contents
| Item 6. | Selected Financial Data |
millions of dollars, except share and per share data
For the Year Ended December 31,
For the Year Ended December 31,
| Statement of Operations Data | 2010* | 2009 | 2008** | 2007 | 2006*** | |||||||||||||||
|
Net sales
|
$ | 5,652.8 | $ | 3,961.8 | $ | 5,263.9 | $ | 5,328.6 | $ | 4,585.4 | ||||||||||
|
Cost of sales
|
4,559.5 | 3,401.0 | 4,425.4 | 4,378.7 | 3,735.5 | |||||||||||||||
|
Gross profit
|
1,093.3 | 560.8 | 838.5 | 949.9 | 849.9 | |||||||||||||||
|
Selling, general and administrative expenses
|
566.6 | 459.8 | 542.9 | 531.9 | 498.1 | |||||||||||||||
|
Restructuring expense
|
— | 50.3 | 127.5 | — | 84.7 | |||||||||||||||
|
Goodwill impairment charge
|
— | — | 156.8 | — | — | |||||||||||||||
|
Other (income) expense
|
22.4 | (0.1 | ) | 4.0 | (0.1 | ) | (4.3 | ) | ||||||||||||
|
Operating income
|
504.3 | 50.8 | 7.3 | 418.1 | 271.4 | |||||||||||||||
|
Equity in affiliates’ earnings, net of tax
|
(39.6 | ) | (21.8 | ) | (38.4 | ) | (40.3 | ) | (35.9 | ) | ||||||||||
|
Interest income
|
(2.8 | ) | (2.5 | ) | (7.1 | ) | (6.7 | ) | (3.2 | ) | ||||||||||
|
Interest expense and finance charges
|
68.8 | 57.2 | 38.8 | 34.7 | 40.2 | |||||||||||||||
|
Earnings before income taxes and noncontrolling interest
|
477.9 | 17.9 | 14.0 | 430.4 | 270.3 | |||||||||||||||
|
Provision (benefit) for income taxes
|
81.7 | (18.5 | ) | 33.3 | 113.9 | 32.4 | ||||||||||||||
|
Net earnings (loss)
|
396.2 | 36.4 | (19.3 | ) | 316.5 | 237.9 | ||||||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
18.8 | 9.4 | 16.3 | 28.0 | 26.3 | |||||||||||||||
|
Net earnings (loss) attributable to BorgWarner Inc.
|
$ | 377.4 | $ | 27.0 | $ | (35.6 | ) | $ | 288.5 | $ | 211.6 | |||||||||
|
Earnings (loss) per share — basic
|
$ | 3.31 | $ | 0.23 | $ | (0.31 | ) | $ | 2.49 | $ | 1.84 | |||||||||
|
Average shares outstanding (thousands) — basic
|
114,155 | 116,522 | 116,007 | 116,002 | 114,806 | |||||||||||||||
|
Earnings (loss) per share — diluted
|
$ | 3.07 | $ | 0.23 | $ | (0.31 | ) | $ | 2.45 | $ | 1.83 | |||||||||
|
Average shares outstanding (thousands) — diluted
|
129,575 | 116,939 | 116,007 | 117,840 | 115,942 | |||||||||||||||
|
Cash dividend declared and paid per share
|
$ | 0.00 | $ | 0.12 | $ | 0.44 | $ | 0.34 | $ | 0.32 | ||||||||||
|
Balance Sheet Data
|
||||||||||||||||||||
|
Cash
|
$ | 449.9 | $ | 357.4 | $ | 103.4 | $ | 188.5 | $ | 123.3 | ||||||||||
|
Total assets
|
5,555.0 | 4,811.4 | 4,644.0 | 4,958.5 | 4,584.0 | |||||||||||||||
|
Total debt
|
1,180.4 | 842.3 | 780.3 | 636.3 | 721.1 | |||||||||||||||
| * | The Company’s diluted earnings per share for the year ended December 31, 2010 includes the impact of the Company’s 3.50% convertible notes and associated warrants. | |
| ** | The Company had a loss for the year ended December 31, 2008. 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. | |
| *** | On November 14, 2007, the Company’s Board of Directors approved a two-for-one stock split effected in the form of a stock dividend on its common stock. To implement this stock split, shares of common stock were issued on December 17, 2007 to stockholders of record as of the close of business on December 6, 2007. All prior year share and per share amounts disclosed in this document have been restated to reflect the two-for-one stock split. |
23
Table of Contents
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the
“Company”) is a leading global supplier of highly
engineered systems and components primarily for powertrain
applications. Our products help improve vehicle performance,
fuel efficiency, air quality and vehicle stability. They are
manufactured and sold worldwide, primarily to original equipment
manufacturers (“OEMs”) of light vehicles (i.e.
passenger cars, sport-utility vehicles (“SUVs”),
cross-over vehicles, vans and light trucks). Our products are
also manufactured and sold to OEMs of commercial trucks, buses
and agricultural and off-highway vehicles. We also manufacture
for and sell our products to certain Tier One vehicle
systems suppliers and into the aftermarket for light and
commercial vehicles. We operate manufacturing facilities serving
customers in the Americas, Europe and Asia, and are an original
equipment supplier to every major automaker in the world.
The Company’s products fall into two reporting segments:
Engine and Drivetrain. The Engine segment’s products
include turbochargers, timing chain systems, air management,
emissions systems, thermal systems, as well as diesel and gas
ignition systems. The Drivetrain segment’s products include
all-wheel drive transfer cases, torque management systems, and
components and systems for automated transmissions.
RESULTS OF
OPERATIONS
Overview
A summary of our operating results for the years ended
December 31, 2010, 2009 and 2008 is as follows:
|
(millions of dollars, except per share data)
|
||||||||||||||
| Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||
|
Net sales
|
$ | 5,652.8 | $ | 3,961.8 | $ | 5,263.9 | ||||||||
|
Cost of sales
|
4,559.5 | 3,401.0 | 4,425.4 | |||||||||||
|
Gross profit
|
1,093.3 | 560.8 | 838.5 | |||||||||||
|
Selling, general and administrative expenses
|
566.6 | 459.8 | 542.9 | |||||||||||
|
Restructuring expense
|
— | 50.3 | 127.5 | |||||||||||
|
Goodwill impairment charge
|
— | — | 156.8 | |||||||||||
|
Other (income) expense
|
22.4 | (0.1 | ) | 4.0 | ||||||||||
|
Operating income
|
504.3 | 50.8 | 7.3 | |||||||||||
|
Equity in affiliates’ earnings, net of tax
|
(39.6 | ) | (21.8 | ) | (38.4 | ) | ||||||||
|
Interest income
|
(2.8 | ) | (2.5 | ) | (7.1 | ) | ||||||||
|
Interest expense and finance charges
|
68.8 | 57.2 | 38.8 | |||||||||||
|
Earnings before income taxes and noncontrolling interest
|
477.9 | 17.9 | 14.0 | |||||||||||
|
Provision (benefit) for income taxes
|
81.7 | (18.5 | ) | 33.3 | ||||||||||
|
Net earnings (loss)
|
396.2 | 36.4 | (19.3 | ) | ||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
18.8 | 9.4 | 16.3 | |||||||||||
|
Net earnings (loss) attributable to BorgWarner Inc.
|
$ | 377.4 | $ | 27.0 | $ | (35.6 | ) | |||||||
|
Earnings (loss) per share — diluted
|
$ | 3.07 | $ | 0.23 | $ | (0.31 | ) | |||||||
24
Table of Contents
A summary of major factors impacting the Company’s net
earnings for the year ended December 31, 2010 in comparison
to 2009 and 2008 is as follows:
| • | Global financial market and economic recovery in 2010 significantly impacted consumer demand for light vehicles and positively increased our sales and operating margins. | |
| • | Global financial market and economic crisis in the second half of 2008 and full year of 2009 significantly impacted consumer demand for light vehicles and negatively impacted our sales. | |
| • | Continued benefits from our cost reduction programs, including containment of raw material and energy cost increases, and health care cost inflation in 2010, 2009, and 2008. | |
| • | A $28.0 million charge in 2010 for alleged personal injury relating to environmental contamination. | |
| • | The reversal of a valuation allowance on U.S. based foreign tax credit carryforwards in 2010 of $21.2 million. | |
| • | An $8.0 million gain in 2010 on the acquisition of BERU-Eichenauer GmbH related to adjusting the Company’s fifty percent investment to fair value under ASC Topic 805. | |
| • | Adjustments to tax accounts in 2010, 2009 and 2008 upon conclusion of certain tax audits and changes in circumstances, including changes in tax laws. | |
| • | Restructuring expenses in the third and fourth quarters of 2008 and second quarter of 2009 to adjust headcount and capacity levels, in North America, Europe and Asia. | |
| • | $27.9 million net pre-tax gain in 2009 related to retiree obligations resulting from the closure of the Muncie, Indiana, Drivetrain facility. | |
| • | The establishment of a valuation allowance for foreign tax credit carryforwards in 2009 and 2008 of $7.7 million and $13.5 million, respectively. | |
| • | $4.8 million charge in 2009 upon the adoption of ASC Topic 805, Business Combinations. | |
| • | $3.0 million net loss in 2009 from interest rate derivative agreements. | |
| • | An €111.5 million $(156.8 million) impairment charge in 2008 to adjust BERU’s goodwill to its estimated fair value. | |
| • | An approximate $23.5 million warranty-related charge in 2008 associated with a company’s transmission product sold in Europe, limited to mid-2007 through May 2008 production. | |
| • | The write-offs of the excess purchase price allocated to in-process research and development (“IPR&D”), order backlog and beginning inventory related to the 2007 acquisition of approximately 12.8% of BERU stock and the 2008 completion of a Domination and Profit Transfer Agreement (“DPTA”) between the Company and BERU. | |
| • | Recognition in 2008 of a $4.0 million charge related to an untimely change in the level of medical benefits provided to DTP. |
25
Table of Contents
The Company’s earnings (loss) per diluted share were $3.07,
$0.23 and $(0.31) for the years ended December 31, 2010,
2009 and 2008, respectively. The Company believes the following
table is useful in highlighting non-recurring or non-comparable
items that impacted its earnings per diluted share:
| Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||
|
Non-recurring or non-comparable items:
|
||||||||||||||
|
Environmental litigation settlement
|
$ | (0.14 | ) | $ | — | $ | — | |||||||
|
Medicare Part D tax law change
|
(0.02 | ) | — | — | ||||||||||
|
Reversal of foreign tax credit valuation allowance
|
0.17 | — | — | |||||||||||
|
BERU-Eichenauer equity investment gain
|
0.04 | — | — | |||||||||||
|
Restructuring expense
|
— | (0.29 | ) | (0.72 | ) | |||||||||
|
Interest rate derivative agreements
|
— | (0.03 | ) | — | ||||||||||
|
Topic 805 adoption
|
— | (0.03 | ) | — | ||||||||||
|
Goodwill impairment charge
|
— | — | (1.35 | ) | ||||||||||
|
Transmission product related warranty charge
|
— | — | (0.14 | ) | ||||||||||
|
Tax valuation allowance
|
— | — | (0.12 | ) | ||||||||||
|
Write-off of the excess purchase price allocated to IPR&D,
order backlog and beginning inventory associated with
acquisitions
|
— | — | (0.04 | ) | ||||||||||
|
Retiree healthcare litigation outcome
|
— | — | (0.03 | ) | ||||||||||
|
Change in retiree obligation related to Muncie closure
|
— | 0.15 | — | |||||||||||
|
Adjustments to tax accounts
|
— | 0.03 | 0.02 | |||||||||||
|
Total impact to earnings per share — diluted:
|
$ | 0.05 | $ | (0.17 | ) | $ | (2.38 | ) | ||||||
The Company’s effective tax rate, after giving tax effect
to the non-recurring or non-comparable items shown above, was
21.7%, (12.0)%, and 23.0% for 2010, 2009, and 2008, respectively.
Net
Sales
The table below summarizes the overall worldwide light vehicle
production percentage changes for 2010 and 2009:
Worldwide
Light Vehicle Year Over Year Increase (Decrease) in
Production
| 2010 | 2009 | |||||||
|
North America*
|
38.8 | % | (32.4 | )% | ||||
|
Europe*
|
13.7 | % | (20.5 | )% | ||||
|
Asia*
|
26.5 | % | (2.1 | )% | ||||
|
Total Worldwide*
|
23.5 | % | (13.7 | )% | ||||
|
BorgWarner year over year net sales change
|
42.7 | % | (24.7 | )% | ||||
|
BorgWarner year over year net sales change excluding currency
|
45.0 | % | (21.5 | )% | ||||
| * | Data provided by CSM Worldwide. |
Our net sales increase in 2010 of 42.7% was better than the
estimated worldwide market production increase of 23.5%. Our net
sales decrease in 2009 of 24.7% was worse than the estimated
worldwide market production decrease of 13.7%. The effect of
changing currency rates had a negative impact on the
Company’s net sales and net earnings in 2010 and in 2009.
The effect of
non-U.S. currencies,
primarily the Euro, decreased net sales by approximately
$90 million in 2010. Non-US currencies had a negligible
impact on the Company’s net earnings in 2010. In 2009,
non-U.S. currencies,
primarily the Euro, decreased net sales by approximately
$169 million and reduced the Company’s net earnings by
approximately $4 million.
26
Table of Contents
The year over year increase in net sales, excluding the
unfavorable impact of currency, was 45% in 2010. The year over
year decrease in net sales, excluding the unfavorable impact of
currency, was 21.5% in 2009.
Consolidated net sales to a single customer (including their
subsidiaries), which exceeded 10% of our total sales, were to
Volkswagen of approximately 19%, 22%, and 19%; and to Ford of
approximately 11%, 12%, and 9% for the years ended
December 31, 2010, 2009 and 2008, respectively. Both of our
reporting segments had significant sales to the customers listed
above. Such sales consisted of a variety of products to a
variety of customer locations and regions. No other single
customer accounted for more than 10% of consolidated sales in
any year of the periods presented.
Outlook
Our overall outlook for 2011 is positive. The Company expects
global production volumes to be higher in 2011 compared with
2010. Furthermore, we expect that higher adoption rates of
BorgWarner products around the world will result in sales growth
for the Company above global production growth in 2011.
The Company maintains a positive long-term outlook for its
global business and is committed to new product development and
strategic capital investments to enhance its product leadership
strategy. The trends that are driving our long-term growth are
expected to continue, including the growth of direct injection
diesel and gasoline engines worldwide, the increased adoption of
automated transmissions in Europe and Asia-Pacific, and the move
to variable cam and chain engine timing systems in both Europe
and Asia-Pacific.
Results By
Reporting Segment
The Company’s business is comprised of two reporting
segments: Engine and Drivetrain. These segments are strategic
business groups, which are managed separately as each represents
a specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the
projected after-tax return on invested capital
(“ROIC”) of its business initiatives. The ROIC is
comprised of projected 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
profit or loss (“Adjusted EBIT”) compared to the
projected average capital investment required.
Adjusted EBIT is the measure of segment profit 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 present net sales and Segment Adjusted EBIT
for the years 2010, 2009 and 2008:
Net
Sales
|
(millions of dollars)
|
||||||||||||||
| Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||
|
Engine
|
$ | 4,060.8 | $ | 2,883.2 | $ | 3,861.5 | ||||||||
|
Drivetrain
|
1,611.4 | 1,093.5 | 1,426.4 | |||||||||||
|
Inter-segment eliminations
|
(19.4 | ) | (14.9 | ) | (24.0 | ) | ||||||||
|
Net sales
|
$ | 5,652.8 | $ | 3,961.8 | $ | 5,263.9 | ||||||||
27
Table of Contents
Adjusted Earnings
(Loss) Before Interest, Income Taxes and Noncontrolling Interest
(“Adjusted EBIT”)
|
(millions of dollars)
|
||||||||||||||
| Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||
|
Engine
|
$ | 537.9 | $ | 219.8 | $ | 394.9 | ||||||||
|
Drivetrain
|
137.0 | (13.5 | ) | (4.9 | ) | |||||||||
|
Adjusted EBIT
|
674.9 | 206.3 | 390.0 | |||||||||||
|
Muncie closure retiree obligation net gain
|
— | (27.9 | ) | — | ||||||||||
|
Environmental litigation settlement
|
28.0 | — | — | |||||||||||
|
BERU-Eichenauer equity investment gain
|
(8.0 | ) | — | — | ||||||||||
|
Corporate, including equity in affiliates’ earnings and
stock-based compensation
|
111.0 | 111.3 | 60.0 | |||||||||||
|
Restructuring expense
|
— | 50.3 | 127.5 | |||||||||||
|
Goodwill impairment charge
|
— | — | 156.8 | |||||||||||
|
Interest income
|
(2.8 | ) | (2.5 | ) | (7.1 | ) | ||||||||
|
Interest expense and finance charges
|
68.8 | 57.2 | 38.8 | |||||||||||
|
Earnings before income taxes and noncontrolling interest
|
477.9 | 17.9 | 14.0 | |||||||||||
|
Provision (benefit) for income taxes
|
81.7 | (18.5 | ) | 33.3 | ||||||||||
|
Net earnings (loss)
|
396.2 | 36.4 | (19.3 | ) | ||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
18.8 | 9.4 | 16.3 | |||||||||||
|
Net earnings (loss) attributable to BorgWarner Inc.
|
$ | 377.4 | $ | 27.0 | $ | (35.6 | ) | |||||||
The
Engine
segment 2010 net sales increased
$1,177.6 million, or 40.8%, and segment EBIT increased
$318.1 million, or 144.7%, from the year ended
December 31, 2009. Excluding the impact of weaker foreign
currencies, primarily the Euro, sales increased approximately
44%. The sales increase was primarily driven by strong global
growth in all major product groups as well as the second quarter
2010 acquisition of Dytech ENSA SL. The Segment EBIT margin was
13.2% in 2010, up from 7.6% in 2009, due to a significant
increase in customer production schedules in the U.S. and
European market and continued cost management.
The Engine segment 2009 net sales were down 25.3% from
2008, with a 44.3% decrease in Segment EBIT over the same
period. The Engine segment decrease was primarily driven by
reduced global vehicle production and depressed demand for
engine products. The Segment EBIT margin was 7.6% in 2009, down
from 10.2% in 2008, due to the significant reduction in customer
production schedules in the U.S. and European markets.
The
Drivetrain
segment 2010 net sales increased
$517.9 million, or 47.4%, and segment EBIT increased
$150.5 million from the year ended December 31, 2009.
Excluding the impact of weaker foreign currencies, primarily the
Euro, sales increased approximately 49%. The sales increase was
primarily driven by strong growth of transmission components and
torque management devices in Europe, Asia and the
U.S. Segment EBIT margin was 8.5% in 2010, up from (1.2)%
in 2009, primarily due to higher global production of light
trucks and sport-utility vehicles equipped with its torque
transfer products and continued cost management.
The Drivetrain segment 2009 net sales decreased 23.3% from
2008 with a 175.5% decrease in Segment EBIT over the same
period. The group was negatively impacted by lower global
production of light trucks and SUVs equipped with its torque
transfer products and lower sales of its traditional
transmission products. Segment EBIT margin was (1.2)% in 2009,
down from (0.3)% in the prior year, primarily due to lower
global production of light trucks and sport-utility vehicles
equipped with its torque transfer products.
28
Table of Contents
Corporate
represents corporate headquarters’
expenses, expenses not directly attributable to the individual
segments, expenses associated with divested operations and
equity in affiliates’ earnings. This net expense was
$111.0 million in 2010, $111.3 million in 2009 and
$60.0 million in 2008. The increase in Corporate expenses
in 2009 from 2008 is primarily related to a decline in affiliate
earnings, an increase in pension and other postemployment
expenses and an increase in performance related compensation.
Other Factors
Affecting Results of Operations
The following table details our results of operations as a
percentage of sales:
| Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||
|
Net sales
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost of sales
|
80.7 | 85.8 | 84.1 | |||||||||||
|
Gross profit
|
19.3 | 14.2 | 15.9 | |||||||||||
|
Selling, general and administrative expenses
|
10.0 | 11.6 | 10.3 | |||||||||||
|
Restructuring expense
|
— | 1.3 | 2.4 | |||||||||||
|
Goodwill impairment charge
|
— | — | 3.0 | |||||||||||
|
Other (income) expense
|
0.4 | — | — | |||||||||||
|
Operating income
|
8.9 | 1.3 | 0.2 | |||||||||||
|
Equity in affiliates’ earnings, net of tax
|
(0.7 | ) | (0.6 | ) | (0.7 | ) | ||||||||
|
Interest income
|
— | — | (0.1 | ) | ||||||||||
|
Interest expense and finance charges
|
1.2 | 1.4 | 0.7 | |||||||||||
|
Earnings before income taxes and noncontrolling interest
|
8.4 | 0.5 | 0.3 | |||||||||||
|
Provision (benefit) for income taxes
|
1.4 | (0.4 | ) | 0.7 | ||||||||||
|
Net earnings (loss)
|
7.0 | 0.9 | (0.4 | ) | ||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
0.3 | 0.2 | 0.3 | |||||||||||
|
Net earnings (loss) attributable to BorgWarner Inc.
|
6.7 | % | 0.7 | % | (0.7 | )% | ||||||||
Gross profit
as a percentage of net sales was 19.3%,
14.2% and 15.9% in 2010, 2009 and 2008, respectively. The gross
margin percentage increase is primarily due to higher sales in
2010 and successful cost reduction actions taken in 2009 and
2008, offset by higher raw material costs. Cost reduction
actions taken in 2009 and 2008 to reduce our cost structure
included headcount reductions, global pay cuts, selected plant
shutdowns and reduced work weeks outside of the U.S.
Selling, general and administrative
expenses
(“SG&A”) as a percentage of net sales were 10.0%,
11.6% and 10.3% in 2010, 2009 and 2008 respectively. 2010
SG&A expenses increased $106.8 million or 23.2%
compared to 2009. The 2010 decrease in SG&A as a percentage
of net sales was primarily due to a significant year over year
increase in sales, offset by an increase in performance related
compensation.
Research and development (“R&D”) is a major
component of our SG&A expenses. R&D spending, net of
customer reimbursements, was $185.0 million or 3.3% of
sales in 2010, compared to $155.2 million, or 3.9% of sales
in 2009, and $205.7 million, or 3.9% of sales in 2008. We
currently intend to continue to increase our spending in
R&D, although the growth rate in the future may not
necessarily match the rate of our sales growth. We also intend
to continue to invest in a number of cross-business R&D
programs, as well as a number of other key programs, all of
which are necessary for short and long-term growth. Our current
long-term expectation for R&D spending is approximately
4.0% of sales. We intend to maintain our commitment to R&D
spending while continuing to focus on controlling other
SG&A costs.
Restructuring expense
of $50.3 million in 2009 and
$127.5 million in 2008 was in response to declines in
global customer production levels, customer restructurings and a
subsequent evaluation of our headcount levels in North America,
Europe and Asia and our long-term capacity needs.
29
Table of Contents
On July 31, 2008, the Company announced a restructuring of
its operations to align ongoing operations with a continuing,
fundamental market shift in the auto industry. As a continuation
of the Company’s third quarter restructuring, on
December 11, 2008, the Company announced plans for
additional restructuring actions. As a result of these third and
fourth quarter 2008 restructuring actions, the Company had
reduced its North American workforce by approximately
2,400 people, or 33%; its European workforce by
approximately 1,600 people, or 18%; and its Asian workforce
by approximately 400 people, or 17%. The restructuring
expense recognized for employee termination benefits was
$54.6 million. In addition to employee termination costs,
the Company recorded $72.9 million of asset impairment
charges related to the North American and European
restructuring. The combined 2008 restructuring expenses of
$127.5 million are broken out by segment as follows: Engine
$85.3 million, Drivetrain $40.9 million and Corporate
$1.3 million.
In the second quarter of 2009, the Company took additional
restructuring actions. The Company reduced its North American
workforce by approximately 550 people, or 12%; its European
workforce by approximately 150 people, or 2%; and its Asian
workforce by approximately 60 people, or 3% in the second
quarter. The net restructuring expense recognized in the second
quarter was $9.0 million for employee termination benefits.
In addition to employee termination costs, the Company recorded
$36.3 million of asset impairment and $5.0 million of
other charges in the second quarter of 2009 related to the North
American and European restructuring. The combined 2009
restructuring expenses of $50.3 million are broken out by
segment as follows: Engine $27.2 million, Drivetrain
$19.7 million and Corporate $3.4 million.
Included in the second quarter of 2009 asset impairment charge
is $22.3 million related to one of the Company’s
European locations. During the second quarter of 2009
circumstances caused the Company to evaluate the long range
outlook of the facility using an undiscounted and discounted
cash flow model, both of which indicated that assets were
impaired. The Company then used a replacement cost technique to
determine the fair value of the assets at the facility. This
reduction of asset value was included in the Engine segment.
Refer to Note 17, “Restructuring” of the Notes to
the Consolidated Financial Statements in Item 8 of this
report for further discussion.
Equity in affiliates’ earnings, net of tax
was
$39.6 million, $21.8 million and $38.4 million in
2010, 2009 and 2008, respectively. This line item is primarily
driven by the results of our 50% owned Japanese joint venture,
NSK-Warner, and our 32.6% owned Indian joint venture, Turbo
Energy Limited (“TEL”). The significant increase in
equity in affiliates’ earnings in 2010 is primarily due to
higher vehicle production in Asia. For more discussion of
NSK-Warner, see Note 5 of the Consolidated Financial
Statements.
Interest expense and finance charges
were
$68.8 million, $57.2 million and $38.8 million in
2010, 2009 and 2008, respectively. The increase in 2010 over
2009 and 2009 over 2008 was primarily due to accretion of the
discounted carrying value of our $373.8 million convertible
senior notes and higher debt levels.
The provision for income taxes
The provision for income
taxes resulted in an effective tax rate for 2010 of 17.1%
compared with rates of (103.4)% in 2009 and 237.9% in 2008. The
2010 tax rate differs from the U.S. statutory rate
primarily due to foreign rates, which differ from those in the
U.S., the realization of certain business tax credits including
foreign tax credits and favorable permanent differences between
book and tax treatment for items, including equity in
affiliates’ earnings. Excluding the impacts of the reversal
of the valuation allowance on U.S. based foreign tax
credits, the change in tax treatment for Medicare Part D
subsidies, the BERU-Eichenauer equity investment gain and the
Company’s environmental litigation settlement, the
Company’s annual effective tax rate associated with
on-going business operations was 21.7%.
The effective tax rate of (103.4%) for 2009 differs from the
U.S. statutory rate primarily due a reduction in
U.S. income; foreign rates, which differ from those in the
U.S.; the realization of certain business tax credits including
R&D and U.S. based foreign tax credits; and favorable
permanent differences between book and tax treatment for items,
including equity in affiliates’ earnings.
Noncontrolling interest, net of tax
of $18.8 million
increased by $9.4 million from 2009 and $2.5 million
from 2008. The increase between 2010 and 2009 is primarily
related to higher sales and earnings by the Company’s joint
ventures. The increase between 2010 and 2008 is primarily
related to higher sales by the Company’s joint ventures,
offset by the Company’s increased ownership to 100% of BERU.
30
Table of Contents
LIQUIDITY AND
CAPITAL RESOURCES
Capitalization
| (millions of dollars) | 2010 | 2009 | % Change | |||||||||||
|
Notes payable and other short-term debt
|
$ | 128.5 | $ | 69.1 | ||||||||||
|
Long-term debt
|
1,051.9 | 773.2 | ||||||||||||
|
Total debt
|
1,180.4 | 842.3 | 40.1 | % | ||||||||||
|
Total equity
|
2,309.8 | 2,222.7 | 3.9 | % | ||||||||||
|
Total capitalization
|
$ | 3,490.2 | $ | 3,065.0 | 13.9 | % | ||||||||
|
Total debt to capital ratio
|
33.8 | % | 27.5 | % | ||||||||||
| The $338.1 million increase in debt primarily relates to the January 1, 2010 adoption of ASC Topic 860, which required the Company to reflect its receivable securitization facility in its financial statements, as well as the Company’s September 16, 2010 issuance of $250 million in 4.625% senior notes. The impact of the adoption of ASC Topic 860 is an increase in receivables, net of $80 million and an increase in notes payable and other short-term debt of $80 million in the Company’s 2010 Consolidated Balance Sheet. The Company’s debt to capital increase also relates to the Company’s second quarter 2010 $147.6 million acquisition of Dytech as well as the repurchasing of 7,066,100 shares of common stock for $325.7 million. |
Total equity increased by $87.1 million in 2010 as follows:
| (millions of dollars) | ||||||
|
Balance, January 1, 2010
|
$ | 2,222.7 | ||||
|
Net earnings
|
377.4 | |||||
|
Stock compensation
|
66.3 | |||||
|
Reissuance of treasury stock
|
34.1 | |||||
|
Defined benefit post employment plans
|
7.8 | |||||
|
Purchases of treasury stock
|
(325.7 | ) | ||||
|
Currency translation and hedged instruments, net
|
(77.1 | ) | ||||
|
All other, net
|
4.3 | |||||
|
Balance, December 31, 2010
|
$ | 2,309.8 | ||||
The currency translation component of other comprehensive income
decreased in 2010 primarily due to the weakening of the Euro and
British Pound in relation to the U.S. Dollar.
Operating
Activities
Net cash provided by operating activities was
$538.9 million, $351.0 million and $400.8 million
in 2010, 2009 and 2008, respectively. The $187.9 million
increase in 2010 from 2009 primarily reflects higher earnings,
offset by higher working capital needs as compared to 2009. The
$538.9 million of net cash provided by operating activities
in 2010 consists of net earnings of $396.2 million,
increased for non-cash charges of $249.5 million and a
$106.8 million decrease in net operating assets and
liabilities. Non-cash charges are primarily comprised of
$252.9 million in depreciation and amortization.
The $49.8 million decrease in 2009 from 2008 was primarily
due to lower operational earnings, somewhat offset by lower
working capital needs.
Inventory increased in 2010 by $79.0 million excluding the
impact of currency due to higher business levels in all regions
of the world. Inventory management continues to remain an area
of focus for the Company as sales volumes continue to stabilize.
31
Table of Contents
Investing
Activities
Net cash used in investing activities was $429.5 million,
$154.8 million and $343.9 million in 2010, 2009 and
2008, respectively. This increase is primarily due to the
$147.6 million acquisition of Dytech, the $9.6 million
acquisition of the Company’s
50
/
50
BERU-Eichenauer joint venture, and the final $7.5 million
payment for the June 2009 purchase of Etatech, Inc. Capital
expenditures, including tooling outlays (“capital
spending”) of $276.6 million in 2010, or 4.9% of
sales, increased $104.6 million over the 2009 level of
$172.0 million, or 4.3% of sales. Selective capital
spending remains an area of focus for us, both in order to
support our book of new business and for cost reduction and
other purposes. Heading into 2011, we plan to continue to spend
capital to support the launch of our new applications and for
cost reductions and productivity improvement projects.
Financing
Activities and Liquidity
Liquidity:
The Company had $449.9 million of cash on
hand at December 31, 2010. On March 31, 2010, the
Company replaced its $250 million multi-currency revolving
credit facility with a new $550 million multi-currency
revolving credit facility, which includes a feature that allows
the Company to increase its borrowings to $600 million. The
new facility provides for borrowings through March 31,
2013, and is guaranteed by the Company’s domestic
subsidiaries. The Company has three key financial covenants as
part of the credit agreement. These covenants are a net worth
test, a debt compared to EBITDA (“Earnings Before Interest,
Taxes, Depreciation and Amortization”) test, and an
interest coverage test. The Company was in compliance with all
covenants at December 31, 2010 and expects to remain
compliant in future periods. At December 31, 2010 and
December 31, 2009 there were no outstanding borrowings
under these facilities. In addition to the credit facility, as
of December 31, 2010, the Company had approximately
$126 million available under a universal shelf registration
statement on file with the Securities and Exchange Commission
(“SEC”) under which a variety of debt and equity
instruments could be issued. The Company’s Board of
Directors has authorized the filing of a new universal shelf
registration with the SEC.
From a credit quality perspective, the Company has a credit
rating of BBB from both Standard & Poor’s and
Fitch Ratings and Baa3 from Moody’s (on September 2,
2010 the Company received its first credit rating from Fitch
Ratings). On October 27, 2010, Moody’s upgraded the
Company’s credit rating from Ba1 to Baa3. The current
outlook from Standard & Poor’s, Moody’s and
Fitch Ratings is stable. None of the Company’s debt
agreements require accelerated repayment in the event of a
downgrade in credit ratings.
On April 24, 2009 the Company’s $50 million
accounts receivable securitization facility matured and was
repaid. On December 21, 2009 the Company entered into a new
$50 million accounts receivable securitization facility.
On September 8, 2010 the Company amended the
December 21, 2009 Receivable Purchase Agreement, which
increased the accounts receivable securitization facility from
$50 million to $80 million. This facility matures on
December 21, 2012.
32
Table of Contents
The Company’s significant contractual obligation payments
at December 31, 2010 are as follows:
| (millions of dollars) | Total | 2011 | 2012-2013 | 2014-2015 | After 2015 | |||||||||||||||
|
Other post employment benefits excluding pensions(a)
|
$ | 401.0 | $ | 27.1 | $ | 52.1 | $ | 48.5 | $ | 273.3 | ||||||||||
|
Defined benefit pension plans(b)
|
129.9 | 23.2 | 43.8 | 15.8 | 47.1 | |||||||||||||||
|
Notes payable and long-term debt
|
1,210.2 | 128.5 | 389.1 | 10.2 | 682.4 | |||||||||||||||
|
Projected interest payments(c)
|
436.9 | 74.9 | 85.3 | 72.8 | 203.9 | |||||||||||||||
|
Non-cancelable operating leases
|
43.0 | 9.3 | 14.3 | 11.4 | 8.0 | |||||||||||||||
|
Capital spending obligations
|
28.9 | 28.9 | — | — | — | |||||||||||||||
|
Inventory purchase obligations
|
76.9 | 40.1 | 25.3 | 11.5 | — | |||||||||||||||
|
Income tax payments(d)
|
134.2 | 134.2 | — | — | — | |||||||||||||||
|
Environmental(e)
|
29.2 | 21.0 | 2.6 | 0.8 | 4.8 | |||||||||||||||
|
Total
|
$ | 2,490.2 | $ | 487.2 | $ | 612.5 | $ | 171.0 | $ | 1,219.5 | ||||||||||
| (a) | Other post employment benefits excluding pensions include anticipated future payments to cover retiree medical and life insurance benefits. See Note 11 to the Consolidated Financial Statements for disclosures related to the Company’s pension and other post employment benefits. | |
| (b) | Since the timing and amount of payments for funded defined benefit pension plans are usually not certain for future years such potential payments are not shown in this table, except for the Company’s proposed settlement agreement with the Pension Benefit Guaranty Corporation to make payments of $15 million per year in 2011, 2012 and 2013. Amount contained in “After 2015” column are for unfunded plans and includes estimated payments through 2020. See Note 11 to the Consolidated Financial Statements for disclosures related to the Company’s pension and other post employment benefits. | |
| (c) | Projection is based upon actual fixed rates where appropriate, and a projected floating rate for the variable rate portion of the total debt portfolio. The floating rate projection is based upon current market conditions and rounded to the nearest 50th basis point (0.50%), which is 4.5% for this purpose. Projection is also based upon debt being redeemed upon maturity. | |
| (d) | See Note 4 to the Consolidated Financial Statements for disclosures related to the Company’s income taxes. | |
| (e) | See Note 14 to the Consolidated Financial Statements for disclosures related to the Company’s environmental liability. |
We believe that the combination of cash from operations, cash
balances, available credit facilities and our shelf registration
capacity will be sufficient to satisfy our cash needs for our
current level of operations and our planned operations for the
foreseeable future. We will continue to balance our needs for
internal growth, external growth, debt reduction and cash
conservation.
Financing Activities:
Net debt increases, excluding the
impact of currency translation, were $256.3 million,
$102.4 million and $107.5 million in 2010, 2009 and
2008, respectively. The change is mostly due to the
Company’s September 16, 2010 issuance of
$250 million in 4.625% senior notes, offset by the
repurchasing of approximately 7.1 million shares of its
common stock in 2010. Proceeds from stock options exercised, net
of tax benefit were $67.1 million, $8.7 million and
$17.1 million in 2010, 2009 and 2008, respectively. The
Company paid dividends to BorgWarner stockholders of
$13.8 million and $51.1 million in 2009 and 2008,
respectively. The Company had treasury stock purchases of
$331.2 million in 2010, of which $325.7 million has
been paid for as of December 31, 2010. The Company had
treasury stock purchases of $55.9 million in 2008.
The Company purchased approximately 0.4 million and
1.34 million BERU shares in 2009 and 2008, respectively.
The cost for these shares was $46.6 million and
$136.8 million for 2009 and 2008, respectively and has been
reflected as “payments for noncontrolling interest
acquired” in the Financing section of the Consolidated
Statements of Cash Flows. See Note 18, “Recent
Transactions” for further information.
33
Table of Contents
Off Balance
Sheet Arrangements
The Company securitizes certain receivables through third party
financial institutions without recourse. The amount can vary
each month based on the amount of underlying receivables. The
Company continues to administer the collection of these
receivables on behalf of the third party.
On April 24, 2009 the Company’s $50 million
accounts receivable securitization facility matured and was
repaid. On December 21, 2009 the Company entered into a new
$50 million accounts receivable securitization facility.
The Company was required to adopt amended ASC Topic 860,
“Accounting for Transfer of Financial Assets”
,
on January 1, 2010. This adoption required the Company to
reflect its receivable securitization facility in its financial
statements in the current year of change. Accounting rules prior
to January 1, 2010 allowed qualifying special-purpose
entities off-balance sheet treatment. The impact of this
adoption was an increase in receivables, net of $80 million
and an increase in notes payable and other short-term debt of
$80 million in the Company’s December 31, 2010
Consolidated Balance Sheet.
On September 8, 2010 the Company amended the
December 21, 2009 Receivable Purchase Agreement, which
increased the accounts receivable securitization facility from
$50 million to $80 million. This facility matures on
December 21, 2012. Both the maturity and repayment; as well
as the subsequent renewal of our accounts receivable
securitization facility are reflected as Financing activities in
the Consolidated Statements of Cash Flows.
The Company has certain leases that are recorded as operating
leases. Types of operating leases include leases on the
headquarters facility, an airplane, vehicles, and certain office
equipment. The total expected future cash outlays for all lease
obligations at the end of 2010 is $43.0 million. See
Note 15 to the Consolidated Financial Statements for more
information on operating leases, including future minimum
payments.
Pension and
Other Post Employment Benefits
The Company’s policy is to fund its defined benefit pension
plans in accordance with applicable government regulations and
to make additional contributions when appropriate. At
December 31, 2010, all legal funding requirements had been
met. The Company contributed $25.1 million,
$39.3 million and $13.3 million to its defined benefit
pension plans in 2010, 2009 and 2008, respectively. The Company
expects to contribute a total of $30 million to
$40 million in 2011. $23.2 million of the
$30 million to $40 million in 2011 contributions are
contractually obligated, as shown in the table above, while the
remaining payments are discretionary.
The funded status of all pension plans was a net unfunded
position of $(210.4) million and $(229.9) million at
the end of 2010 and 2009, respectively. Of these amounts,
$(128.0) million and $(131.1) at the end of 2010 and 2009,
respectively, were related to plans in Germany, where there is
not a tax deduction allowed under the applicable regulations to
fund the plans; hence the common practice is that they are
unfunded plans.
Other post employment benefits primarily consist of post
employment health care benefits for certain employees and
retirees of the Company’s U.S. operations. The Company
funds these benefits as retiree claims are incurred. Other post
employment benefits had an unfunded status of
$(261.9) million at the end of 2010 and
$(278.5) million at the end of 2009.
The Company believes it will be able to fund the requirements of
these plans through cash generated from operations or other
available sources of financing for the foreseeable future.
See Note 11 to the Consolidated Financial Statements for
more information regarding costs and assumptions for employee
retirement benefits.
34
Table of Contents
OTHER
MATTERS
Contingencies
In the normal course of business the Company and its
subsidiaries are parties to various commercial and legal claims,
actions and complaints, including matters involving warranty
claims, intellectual property claims, general liability and
various other risks. See Notes 7 and 14 to the Consolidated
Financial Statements. It is not possible to predict with
certainty whether or not the Company and its subsidiaries will
ultimately be successful in any of these commercial and legal
matters or, if not, what the impact might be. The Company’s
environmental and product liability contingencies are discussed
separately below. The Company’s management does not expect
that the results 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.
Litigation
In January 2006, DTP, a subsidiary of the Company, filed a
declaratory judgment action in United States District Court,
Southern District of Indiana (Indianapolis Division) against the
United Automobile, Aerospace, and Agricultural Implements
Workers of America (“UAW”) Local No. 287 and
Gerald Poor, individually and as the representative of a
defendant class. DTP sought the Court’s affirmation that
DTP did not violate the Labor-Management Relations Act or the
Employee Retirement Income Security Act (ERISA) by unilaterally
amending certain medical plans effective April 1, 2006 and
October 1, 2006, prior to the expiration of the
then-current collective bargaining agreements. On
September 10, 2008, the Court found that DTP’s
reservation of the right to make such amendments reducing the
level of benefits provided to retirees was limited by its
collectively bargained health insurance agreement with the UAW,
which did not expire until April 24, 2009. Thus, the
amendments were untimely. In 2008 the Company recorded a charge
of $4.0 million as a result of the Court’s decision.
DTP filed a declaratory judgment action in the United States
District Court, Southern District of Indiana (Indianapolis
Division) against the UAW Local No. 287 and Jim Barrett and
others, individually and as representatives of a defendant
class, on February 26, 2009 again seeking the Court’s
affirmation that DTP will not violate the Labor —
Management Relations Act or ERISA by modifying the level of
benefits provided retirees to make them comparable to other
Company retiree benefit plans after April 24, 2009. Certain
retirees, on behalf of themselves and others, filed a
mirror-image action in the United States District Court, Eastern
District of Michigan (Southern Division) on March 11, 2009,
for which a class has been certified. During the last quarter of
2009 the action pending in Indiana was dismissed, while the
action in Michigan is continuing and in the discovery phase. The
Company is vigorously defending against the suit. This
contingency is subject to many uncertainties, therefore based on
the information available to date, the Company cannot estimate
the amount or the range of potential loss, if any.
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 38 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.
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,
35
Table of Contents
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;
remediation alternatives; and estimated legal fees), the Company
has an accrual for indicated environmental liabilities with a
balance at December 31, 2010 of $28.0 million. The
Company has accrued amounts that do not exceed $3.0 million
related to any individual site except for the Crystal Springs
site discussed below, and we do not believe that the costs
related to any of these sites will have a material adverse
effect on the Company’s results of operations, cash flows
or financial condition. The Company expects to pay out
substantially all of the amounts accrued for environmental
liability over the next three to five years.
In connection with the sale of Kuhlman Electric Corporation, the
Company agreed to indemnify the buyer and Kuhlman Electric for
certain environmental liabilities, then unknown to the Company,
relating to certain operations of Kuhlman Electric that pre-date
the Company’s 1999 acquisition of Kuhlman Electric. During
2000, Kuhlman Electric notified the Company that it discovered
potential environmental contamination at its Crystal Springs,
Mississippi plant while undertaking an expansion of the plant.
The Company is continuing to work with the Mississippi
Department of Environmental Quality and Kuhlman Electric to
investigate and remediate to the extent necessary, historical
contamination at the plant and surrounding area. Kuhlman
Electric and others, including the Company, were sued in
numerous related lawsuits, in which multiple claimants alleged
personal injury and property damage relating to the alleged
environmental contamination. In 2005, the Company and other
defendants entered into settlements that resolved approximately
99% of those claims and the remainder of them have since been
dismissed.
In 2007 and 2008, four additional lawsuits were filed against
Kuhlman Electric and others, including the Company, on behalf of
approximately 340 plaintiffs, alleging personal injury relating
to the alleged environmental contamination. One of the lawsuits,
involving a single plaintiff, was dismissed by the trial court
in April 2010 and the plaintiff’s appeal of that decision
was dismissed by the appellate court in August 2010. The Company
entered into a settlement in July 2010 regarding the personal
injury claims of the plaintiffs in the other three lawsuits and
those of approximately 2,700 unfiled claimants represented by
those plaintiffs’ attorneys. In exchange for, among other
things, the dismissal with prejudice of these lawsuits and the
release of claims by the unfiled claimants, the Company agreed
to pay up to $28 million in settlement funds, which was
expensed in the second quarter of 2010. In November 2010 the
Company paid $13.9 million related to this settlement. The
remaining payment of approximately $14 million is expected
to be paid in February 2011.
Conditional
Asset Retirement Obligations
In March 2005, ASC Topic 410, Accounting for Conditional Asset
Retirement Obligations, which requires the Company to recognize
legal obligations to perform asset retirements in which the
timing
and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. Certain
government regulations require the removal and disposal of
asbestos from an existing facility at the time the facility
undergoes major renovations or is demolished. The liability
exists because the facility will not last forever, but it is
conditional on future renovations (even if there are no
immediate plans to remove the materials, which pose no health or
safety hazard in their current condition). Similarly, government
regulations require the removal or closure of underground
storage tanks and above ground storage tanks when their use
ceases, the disposal of polychlorinated biphenyl transformers
and capacitors when their use ceases, and the disposal of used
furnace bricks and liners, and lead-based paint in conjunction
with facility renovations or demolition. The Company currently
has 45 manufacturing locations that have been identified as
containing these items. The fair value to remove and dispose of
this material has been estimated and recorded at
$1.2 million as of December 31, 2010 and
$1.3 million at December 31, 2009.
Product
Liability
Like many other industrial companies who have historically
operated in the U.S., the Company (or parties the Company is
obligated to indemnify) continues to be named as one of many
defendants in asbestos-related personal injury actions. We
believe that the Company’s involvement is limited because,
in general, these claims relate to a few types of automotive
friction products that were manufactured many years ago and
contained encapsulated asbestos. The nature of the fibers, the
encapsulation and the manner of use lead the
36
Table of Contents
Company to believe that these products are highly unlikely to
cause harm. As of December 31, 2010 and December 31,
2009 the Company had approximately 17,000 and 23,000 pending
asbestos-related product liability claims, respectively. Of the
17,000 outstanding claims at December 31, 2010,
approximately 8,000 were pending in just three jurisdictions,
where significant tort and judicial reform activities are
underway.
The Company’s policy is to vigorously defend against these
lawsuits and the Company has been successful in obtaining
dismissal of many claims without any payment. The Company
expects that the vast majority of the pending asbestos-related
product liability claims where it is a defendant (or has an
obligation to indemnify a defendant) will result in no payment
being made by the Company or its insurers. In 2010, of the
approximately 7,700 claims resolved, 245 (3.2%) resulted in any
payment being made to a claimant by or on behalf of the Company.
In the full year of 2009, of the approximately 5,300 claims
resolved, only 223 (4.2%) resulted in any payment being made to
a claimant by or on behalf of the Company.
Prior to June 2004, the settlement and defense costs associated
with all claims were covered by the Company’s primary layer
insurance coverage, and these carriers administered, defended,
settled and paid all claims under a funding arrangement. In
addition to the primary insurance available for asbestos-related
claims, the Company has substantial additional layers of
insurance available for potential future asbestos-related
product claims. As such, the Company continues to believe that
its coverage is sufficient to meet foreseeable liabilities.
In June 2004, primary layer insurance carriers notified the
Company of the alleged exhaustion of their policy limits. This
led the Company to access the next available layer of insurance
coverage. Since June 2004, secondary layer insurers have been
responsible for asbestos-related litigation defense and
settlement expenses pursuant to a funding arrangement.
A declaratory judgment action was filed in January 2004 in the
Circuit Court of Cook County, Illinois by Continental Casualty
Company and related companies (“CNA”) against the
Company and certain of its other historical general liability
insurers. CNA provided the Company with both primary and
additional layer insurance, and, in conjunction with other
insurers, is currently defending and indemnifying the Company in
its pending asbestos-related product liability claims. The
lawsuit seeks to determine the extent of insurance coverage
available to the Company including whether the available limits
exhaust on a “per occurrence” or an
“aggregate” basis, and to determine how the applicable
coverage responsibilities should be apportioned. On
August 15, 2005, the Court issued an interim order
regarding the apportionment matter. The interim order has the
effect of making insurers responsible for all defense and
settlement costs pro rata to
time-on-the-risk,
with the pro-ration method to hold the insured harmless for
periods of bankrupt or unavailable coverage. Appeals of the
interim order were denied. However, the issue is reserved for
appellate review at the end of the action.
Although it is impossible to predict the outcome of pending or
future claims or the impact of tort reform legislation that may
be enacted at the State or Federal levels, due to the
encapsulated nature of the products, the Company’s
experiences in vigorously defending and resolving claims in the
past, and the Company’s significant insurance coverage with
solvent carriers as of the date of this filing, management does
not believe that asbestos-related product liability claims are
likely to have a material adverse effect on the Company’s
results of operations, cash flows or financial condition.
To date, the Company has paid and accrued $153.1 million in
defense and indemnity in advance of insurers’
reimbursement, which includes the $40.7 million referred to
below, and has received $32.5 million in cash from
insurers. The net outstanding balance of $120.6 million is
expected to be fully recovered, of which approximately
$43 million is expected to be recovered within one year.
Timing of the recovery is dependent on final resolution of the
declaratory judgment action referred to above. At
December 31, 2009, insurers owed $58.6 million in
association with these claims.
On April 5, 2010 the Superior Court of New Jersey Appellate
Division affirmed a lower court judgment in an asbestos-related
action against the Company and others. The Company filed its
Notice of Petition to the Supreme Court of New Jersey in late
April, seeking to appeal the decisions of the lower courts. On
July 8, 2010 the Supreme Court of New Jersey denied the
Company’s Notice of Petition appealing the decision of the
lower courts. The total claim of $40.7 million was paid by
the Company in July 2010.
37
Table of Contents
In addition to the $120.6 million net outstanding balance
relating to past settlements and defense costs, the Company has
estimated a liability of $50.6 million for claims asserted,
but not yet resolved and their related defense costs at
December 31, 2010. The Company also has a related asset of
$50.6 million to recognize proceeds from the insurance
carriers. Insurance carrier reimbursement of 100% is expected
based on the Company’s experience, its insurance contracts
and decisions received to date in the declaratory judgment
action referred to below. At December 31, 2009, the
comparable value of the insurance asset and accrued liability
was $49.9 million.
The amounts recorded in the Consolidated Balance Sheets related
to the estimated future settlement of existing claims are as
follows:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Assets:
|
||||||||||
|
Prepayments and other current assets
|
$ | 25.8 | $ | 24.9 | ||||||
|
Other non-current assets
|
24.8 | 25.0 | ||||||||
|
Total insurance assets
|
$ | 50.6 | $ | 49.9 | ||||||
|
Liabilities:
|
||||||||||
|
Accounts payable and accrued expenses
|
$ | 25.8 | $ | 24.9 | ||||||
|
Other non-current liabilities
|
24.8 | 25.0 | ||||||||
|
Total accrued liability
|
$ | 50.6 | $ | 49.9 | ||||||
The Company cannot reasonably estimate possible losses, if any,
in excess of those for which it has accrued, because it cannot
predict how many additional claims may be brought against the
Company (or parties the Company has an obligation to indemnify)
in the future, the allegations in such claims, the possible
outcomes, or the impact of tort reform legislation that may be
enacted at the State or Federal levels.
CRITICAL
ACCOUNTING POLICIES
The consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United
States (“GAAP”). In preparing these financial
statements, management has made its best estimates and judgments
of certain amounts included in the financial statements, giving
due consideration to materiality. Critical accounting policies
are those that are most important to the portrayal of the
Company’s financial condition and results of operations.
These policies require management’s most difficult,
subjective or complex judgments in the preparation of the
financial statements and accompanying notes. Management makes
estimates and assumptions about the effect of matters that are
inherently uncertain, relating to the reporting of assets,
liabilities, revenues, expenses and the disclosure of contingent
assets and liabilities. Our most critical accounting policies
are discussed below.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (“GAAP”) requires management to make estimates
and assumptions. These estimates and assumptions affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Depreciation
The automotive industry experienced unprecedented declines in
production in the fourth quarter of 2008 and projected continued
declines for the full year of 2009. According to Accounting
Standards Codification (“ASC”) 250, future
depreciation expense should be revised due to a change in the
estimated future benefits inherent in an asset, the pattern of
consumption of those benefits, or the information available to
the entity about those benefits. As a result of the 2008 and
2009 unprecedented declines in production activity, the
38
Table of Contents
Company determined that its usage pattern for certain assets had
changed significantly and revised the useful lives of certain
equipment starting in 2009. This adjustment was considered to be
a change in an accounting estimate.
The impact to the Company in 2010 and 2009 were as follows
(unaudited):
| 2010 | ||||||||||||||||||||||
| (millions of dollars) | Q1 | Q2 | Q3 | Q4 | Full Year | |||||||||||||||||
|
Operating income increase
|
$ | 4.8 | $ | 4.7 | $ | 4.6 | $ | 4.7 | $ | 18.8 | ||||||||||||
|
Net earnings increase attributable to BorgWarner Inc.
|
3.7 | 3.6 | 3.6 | 3.6 | 14.5 | |||||||||||||||||
|
Earnings per share increase — Basic
|
$ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.13 | ||||||||||||
|
Earnings per share increase — Diluted
|
$ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.11 | ||||||||||||
| 2009 | ||||||||||||||||||||||
| (millions of dollars) | Q1 | Q2 | Q3 | Q4 | Full Year | |||||||||||||||||
|
Operating income increase
|
$ | 4.6 | $ | 4.6 | $ | 4.6 | $ | 4.6 | $ | 18.4 | ||||||||||||
|
Net earnings increase attributable to BorgWarner Inc.
|
3.5 | 3.5 | 3.5 | 3.5 | 14.0 | |||||||||||||||||
|
Earnings per share increase — Basic
|
$ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.12 | ||||||||||||
|
Earnings per share increase — Diluted
|
$ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.12 | ||||||||||||
Revenue
Recognition
The Company recognizes revenue when title and risk of loss pass
to the customer, which is usually upon shipment of product.
Although the Company may enter into long-term supply agreements
with its major customers, each shipment of goods is treated as a
separate sale and the prices are not fixed over the life of the
agreements.
Impairment of
Long-Lived Assets
In accordance with ASC Topic 360, the Company periodically
reviews the carrying value of its long-lived assets, whether
held for use or disposal, including other intangible assets,
when events and circumstances warrant such a review. Such events
and circumstances include, but are not limited to, a significant
decrease in market volumes, or project life, or a loss of a
major customer application (i.e., a “triggering
event”). The Company’s impairment review is performed
at each manufacturing, assembly, and technical site using data
that is the basis for the Company’s annual budget (or
forecast on an interim basis) and long-range plan
(“LRP”). The annual budget and LRP include a five year
projection of future cash flows based on actual new products and
customer commitments. If a triggering event has occurred, the
assets are identified by the operating location and management
as potentially impaired and a recoverability review is performed
by management. The review will determine if a current or future
alternative use exists for additional customer applications or
if redeployment of the assets to any of the Company’s other
operating sites around the world is justified. The
recoverability test compares projected undiscounted future cash
flows to the carrying value of a product line or a specific
customer application or asset grouping, as applicable.
If the undiscounted cash flow test for recoverability identifies
a possible impairment, management will perform a fair value
analysis. Management determines fair value under ASC Topic 820
using the appropriate valuation technique of market, income or
cost approach. Management believes that the estimates and
assumptions are reasonable however, changes in assumptions with
respect to future volumes, program project life or future asset
use, in addition to future cash flows underlying these estimates
could affect the Company’s fair value evaluations.
Due to the sudden decline in the global automotive markets in
2008 and 2009, the Company reviewed the carrying value of its
long-lived assets. As a result of these reviews, the Company
recognized $36.3 million and $72.9 million in
impairment of long-lived assets (i.e., plant and equipment) as
part of restructuring
39
Table of Contents
expenses in 2009 and 2008, respectively. The 2009 and 2008
impairment charges are broken out by segment as follows:
| (millions of dollars) | 2009 | 2008 | ||||||||
|
Drivetrain Group
|
$ | 13.7 | $ | 22.1 | ||||||
|
Engine Group
|
22.6 | 50.8 | ||||||||
|
Total
|
$ | 36.3 | $ | 72.9 | ||||||
See Note 17, “Restructuring” and Note 9
“Fair Value Measurements”, to the Consolidated
Financial Statements for more information regarding the
Company’s 2009 and 2008 impairment of long-lived assets and
a discussion of market-based measurements.
Goodwill
The Company annually reviews its goodwill for impairment in the
fourth quarter of each year for all of its reporting units, or
more often when events and circumstances warrant such a review.
The Company’s goodwill impairment review, under ASC Topic
350, requires the Company to make significant assumptions and
estimates about the extent and timing of future cash flows,
discount rates and growth rates. The basis of our goodwill
impairment analysis is the Company’s annual budget and
long-range plan (“LRP”). The annual budget and LRP
include a five year projection of future cash flows based on
actual new products and customer commitments. As part of the
projection, we assumed the last year of the LRP data is a fair
indication of the future performance, including fundamental
industry growth for the business beyond the five year period
into perpetuity. As the LRP is estimated over a significant
future period of time, those estimates and assumptions are
subject to a high degree of uncertainty. We also utilize market
valuation models and other financial ratios, which require us to
make certain assumptions and estimates regarding the
applicability of those models to our assets and businesses. We
believe that the assumptions and estimates used to determine the
estimated fair values of each of our reporting units are
reasonable. Different assumptions could materially affect the
estimated fair value. The primary assumptions affecting the
Company’s December 31, 2010 goodwill impairment review
are as follows:
| • | Discount Rate: The Company used a 10% weighted average cost of capital (“WACC”) as the discount rate for future cash flows. The WACC is intended to represent a rate of return that would be expected by a market participant. | |
| • | Operating Income Margin: The Company utilized historical and expected operating income margins, which varied based on the projections of each reporting unit being evaluated. |
In addition to the above significant assumptions, the Company
notes the following risk to volume assumptions that could have
an impact on the discounted cash flow model:
| • | Our industry is cyclical and our results of operations will be adversely affected by industry downturns. | |
| • | We are dependent on market segments that use our key products and would be affected by decreasing demand in those segments. | |
| • | We are subject to risks related to our international operations. |
While the Company believes that these assumptions are
appropriate, significant changes in these assumptions may
materially affect the Company’s analysis related to one of
its reporting units in the Engine operating segment, whose
estimated fair value is 112% of its carrying value.
Based on our sensitivity analysis, a 1% increase in the discount
rate or a 1% decrease in the operating margin assumptions would
result in the carrying value exceeding the estimated fair value
of one reporting unit tested within the Engine operating
segment. This would require further evaluation of the reporting
unit’s
40
Table of Contents
goodwill, under a step two impairment test. The following table
illustrates the sensitivity to the estimated fair value of that
reporting unit.
|
2010
|
||||||
| millions of dollars | Impact | |||||
|
1 percentage point increase in discount rate
|
$ | 15.5 | ||||
|
1 percentage point decrease in operating margin
|
$ | 11.7 | ||||
In 2008 the company recorded impairment charges totaling
€111.5 ($156.8) million to adjust BERU’s goodwill
to its estimated fair value. The impairment charge is
attributable to a decrease in the operating unit’s
estimated fair value based primarily upon the effect of the
decline in European market conditions on current and projected
operating results. The impairment charge was also impacted by
the recognition of additional goodwill in the second quarter of
2008, which was based on the court determined buy out value of
€71.32 per share related to the Domination and Profit
Transfer Agreement. Any differences in future results compared
to management’s estimates could result in fair values
different from estimated fair values, which could materially
impact the Company’s future results of operations and
financial condition.
See Note 18, “Recent Transactions”, for further
discussion on the BERU Domination and Profit Transfer Agreement.
The impairment tests completed in the fourth quarter of 2010 and
2009 indicated no impairment for either year, and estimated fair
value to be approximately 360% and 220% for the Company’s
carrying value in 2010 and 2009, respectively.
See Note 6 to the Consolidated Financial Statements for
more information regarding goodwill.
Environmental
Accrual
We work with outside experts to determine a range of potential
liability for environmental sites. The ranges for each
individual site are then aggregated into a loss range for the
total accrued liability. Management’s estimate of the loss
range for environmental liability, including conditional asset
retirement obligations, for 2010 is between approximately
$26 million and $40 million. We record an accrual at
the most probable amount within the range unless one cannot be
determined; in which case we record the accrual at the low end
of the range. At the end of 2010, our total accrued
environmental liability was $29.2 million, which includes
our conditional asset retirement obligation under ASC Topic 410
of $1.2 million.
See Note 14 to the Consolidated Financial Statements for
more information regarding environmental accrual.
Product
Warranty
The Company provides warranties on some 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. Our warranty provision over the last three years, and
as a percentage of net sales, has trended as follows:
| (millions of dollars) | 2010 | 2009 | 2008 | |||||||||||
|
Net Sales
|
$ | 5,652.8 | $ | 3,961.8 | $ | 5,263.9 | ||||||||
|
Warranty Provision
|
$ | 39.3 | $ | 46.0 | $ | 66.1 | ||||||||
|
Warranty Provision as a Percentage of Net Sales
|
0.70% | 1.2% | 1.3% | |||||||||||
41
Table of Contents
The following table illustrates the sensitivity of a
25 basis point change (as a percentage of sales) in the
assumed warranty trend on the Company’s accrued warranty
liability:
| (Income)/Expense | ||||||||||||||
| (millions of dollars) | 2010 | 2009 | 2008 | |||||||||||
|
25 basis point decrease
|
$ | (14.1 | ) | $ | (9.9 | ) | $ | (13.2 | ) | |||||
|
25 basis point increase
|
$ | 14.1 | $ | 9.9 | $ | 13.2 | ||||||||
At the end of 2010, our total accrued warranty liability was
$66.8 million. The accrual is represented as
$37.0 million in current liabilities and $29.8 million
in non-current liabilities on our balance sheet.
See Note 7 to the Consolidated Financial Statements for
more information regarding product warranty.
Other Loss
Accruals and Valuation Allowances
The Company has numerous other loss exposures, such as customer
claims, workers’ compensation claims, litigation, and
recoverability of assets. Establishing loss accruals or
valuation allowances for these matters requires the use of
estimates and judgment in regard to the risk exposure and
ultimate realization. We estimate losses under the programs
using consistent and appropriate methods; however, changes to
our assumptions could materially affect our recorded accrued
liabilities for loss or asset valuation allowances.
Pension and Other
Post Employment Defined Benefits
The Company provides post employment defined benefits to a
number of its current and former employees. Costs associated
with post employment defined benefits include pension and post
employment health care expenses for employees, retirees and
surviving spouses and dependents.
Using appropriate actuarial methods and assumptions, the
Company’s defined benefit pension and non-pension
postretirement employee benefit plans are accounted for in
accordance with ASC Topic 715. Disability, early retirement and
other postretirement employee benefits are accounted for in
accordance with ASC Topic 712.
The determination of the Company’s obligation and expense
for its pension and other postretirement employee benefits, such
as retiree health care, is dependent on certain assumptions used
by actuaries in calculating such amounts. Certain of the more
important assumptions are described in Note 11
“Retirement Benefit Plans” to the Company’s
consolidated financial statements included in Item 8
“Financial Statements and Supplementary Data” of this
Annual Report on
Form 10-K
and include the discount rate, expected long-term rate of return
on plan assets, rates of increase in compensation and health
care costs, retirement rates, mortality rates and other factors.
The effects of any modification to those assumptions are either
recognized immediately or amortized over future periods in
accordance with GAAP.
In accordance with GAAP, actual results that differ from
assumptions used are accumulated and generally amortized over
future periods. The primary assumptions affecting the
Company’s accounting for employee benefits under ASC Topics
712 and 715 as of December 31, 2010 are as follows:
| • | Expected long-term rate of return on plan assets: The expected long-term rate of return is used in the calculation of net periodic benefit cost. The required use of the expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. Over time, however, the expected long-term rate of return on plan assets is designed to approximate actual earned long-term returns. The expected long-term rate of return for pension assets has been determined based on various inputs. These inputs include historical returns for the different asset classes held by the Company’s trusts and its asset allocation, as well as inputs from internal and external sources regarding expected capital market return, inflation and other variables. The Company also considers the impact of active management of the plans’ invested assets. In determining its pension expense for 2010, the Company used long-term rates of return on plan assets ranging from 2.00% to 9.25% outside of the U.S. and 7.50% in the U.S. |
42
Table of Contents
Actual return on U.S. pension assets for 2010, 2009 and
2008 were 14.6%, 25.3% and (25.7%), respectively, compared to
the expected rate of return assumption of 7.50% in 2010 and 2009
and 8.75% for 2008.
Actual return on U.K. pension assets for 2010, 2009 and 2008
were 13.3%, 15.1% and (18.7%), respectively, compared to the
expected rate of return assumption of 7.50% in 2010 and 2009 and
7.25% for 2008.
| • | Discount rate: The discount rate is used to calculate pension and postretirement employee benefit obligations (“OPEB”). The discount rate assumption is based on a constant effective yield from matching projected plan cash flows to high quality (Aa) bond yields of corresponding maturities as of the measurement date. The Company used discount rates ranging from 1.75% to 7.75% to determine its pension and other benefit obligations as of December 31, 2010, including weighted average discount rates of 5.17% for U.S. pension plans, 5.37% for non-U.S. pension plans, and 4.75% for U.S. other post employment health care plans. The U.S. discount rate reflects the fact that our U.S. pension plan has been closed for new participants since 1989 (1999 for our U.S. health care plan), and with the closing of our Muncie facility in 2009, there will be negligible service cost going forward. | |
| • | Health care cost trend: For postretirement employee health care plan accounting, the Company reviews external data and Company specific historical trends for health care cost to determine the health care cost trend rate assumptions. In determining the projected benefit obligation for postretirement employee health care plans as of December 31, 2010, the Company used health care cost trend rates of 7.40%, declining to an ultimate trend rate of 5% by the year 2019. |
While the Company believes that these assumptions are
appropriate, significant differences in actual experience or
significant changes in these assumptions may materially affect
the Company’s pension and other postretirement employee
benefit obligations and its future expense.
The following table illustrates the sensitivity to a change in
certain assumptions for Company sponsored U.S. and
non-U.S. pension
plans on its 2011 pre-tax pension expense:
|
Impact on
|
Impact on
|
|||||||||
|
U.S. 2011
|
Non-U.S. 2011
|
|||||||||
|
Pre-Tax Pension
|
Pre-Tax Pension
|
|||||||||
| (millions of dollars) | (Expense)/Income | (Expense)/Income | ||||||||
|
1 percentage point decrease in discount rate
|
— | * | $ | (3.2 | ) | |||||
|
1 percentage point increase in discount rate
|
— | * | $ | 3.2 | ||||||
|
1 percentage point decrease in expected return on assets
|
$ | (2.2 | ) | $ | (1.5 | ) | ||||
|
1 percentage point increase in expected return on assets
|
$ | 2.2 | $ | 1.5 | ||||||
| * | Impact of 1 percentage point increase or decrease in the discount rate will have a negligible impact on the Company’s 2011 pre-tax pension expense. |
The following table illustrates the sensitivity to a change in
the discount rate assumption related to the Company’s
U.S. OPEB interest expense:
|
Impact on 2011
|
||||||
|
Pre-Tax OPEB
|
||||||
|
Interest
|
||||||
| (millions of dollars) | (Expense)/Income | |||||
|
1 percentage point decrease in discount rate
|
$ | (1.6 | ) | |||
|
1 percentage point increase in discount rate
|
$ | 1.6 | ||||
The sensitivity to a change in the discount rate assumption
related to the Company’s total 2011 U.S. OPEB expense
is expected to be negligible, as any increase in interest
expense will be offset by net actuarial gains.
43
Table of Contents
The following table illustrates the sensitivity to a
one-percentage point change in the assumed health care cost
trend related to the Company’s OPEB obligation and service
and interest cost:
| One Percentage Point | ||||||||||
| (millions of dollars) | Increase | Decrease | ||||||||
|
Effect on other post employment benefit obligation
|
$ | 18.0 | $ | (16.0 | ) | |||||
|
Effect on total service and interest cost components
|
$ | 0.9 | $ | (0.8 | ) | |||||
See Note 11 to the Consolidated Financial Statements for
more information regarding the Company’s retirement benefit
plans.
Income
Taxes
The Company accounts for income taxes in accordance with ASC
Topic 740. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. In 2008 and
2009, the Company recorded a valuation allowance that primarily
represented foreign net operating losses and U.S. based
foreign tax credits for which utilization was uncertain. In
2010, the Company recorded a reversal of the Company’s
$21.2 million valuation allowance on U.S. based foreign tax
credit carryforwards.
Management judgment is required in determining the
Company’s provision for income taxes, deferred tax assets
and liabilities and the valuation allowance recorded against the
Company’s net deferred tax assets. In calculating the
provision for income taxes on an interim basis, the Company uses
an estimate of the annual effective tax rate based upon the
facts and circumstances known at each interim period. In
determining the need for a valuation allowance, the historical
and projected financial performance of the operation recording
the net deferred tax asset is considered along with any other
pertinent information. Since future financial results may differ
from previous estimates, periodic adjustments to the
Company’s valuation allowance may be necessary.
The Company is subject to income taxes in the U.S. at the
federal and state level and numerous
non-U.S. jurisdictions.
Significant judgment is required in determining our worldwide
provision for income taxes and recording the related assets and
liabilities. In the ordinary course of our business, there are
many transactions and calculations where the ultimate tax
determination is less than certain. Accruals for income tax
contingencies are provided for in accordance with the
requirements of ASC Topic 605. The Company’s
U.S. federal and certain state income tax returns and
certain
non-U.S. income
tax returns are currently under various stages of audit by
applicable tax authorities. Although the outcome of ongoing tax
audits is always uncertain, management believes that it has
appropriate support for the positions taken on its tax returns
and that its annual tax provisions included amounts sufficient
to pay assessments, if any, which may be proposed by the taxing
authorities. At December 31, 2010, the Company has recorded
a liability for its best estimate of the more likely than not
loss on certain of its tax positions, which is included in other
non-current liabilities. Nonetheless, the amounts ultimately
paid, if any, upon resolution of the issues raised by the taxing
authorities may differ materially from the amounts accrued for
each year.
See Note 4 to the Consolidated Financial Statements for
more information regarding income taxes.
New Accounting
Pronouncements
In September 2006, the FASB ASC amended Topic 820,
Fair Value
Measurements and Disclosures
. ASC Topic 820 defines fair
value, establishes a framework for measuring fair value in GAAP
and expands disclosures about fair value measurements. On
January 1, 2009, the Company fully adopted as required, ASC
Topic 820. See Note 9 to the Consolidated Financial
Statements for more information regarding the implementation of
ASC Topic 820.
44
Table of Contents
In February 2007, the FASB ASC amended Topic 825,
Financial
Instruments
. ASC Topic 825 allows entities to irrevocably
elect to recognize most financial assets and financial
liabilities at fair value on an
instrument-by-instrument
basis. The stated objective of ASC Topic 825 is to improve
financial reporting by giving entities the opportunity to elect
to measure certain financial assets and liabilities at fair
value in order to mitigate earnings volatility caused when
related assets and liabilities are measured differently. ASC
Topic 825 was effective for the Company beginning with its
quarter ending March 31, 2008. The Company chose to not
make the election to adopt.
In December 2007, the FASB ASC amended Topic 805,
Business
Combinations
. ASC Topic 805 establishes principles and
requirements for recognizing identifiable assets acquired,
liabilities assumed, noncontrolling interest in the acquiree,
goodwill acquired in the combination or the gain from a bargain
purchase, and disclosure requirements. Under this revised
statement, all costs incurred to effect an acquisition are
recognized separately from the acquisition. Also, restructuring
costs that are expected but the acquirer is not obligated to
incur are recognized separately from the acquisition. On
January 1, 2009, the Company adopted ASC Topic 805. In the
first quarter of 2009, the Company expensed $4.8 million
related to on-going acquisition related activity.
In December 2007, the FASB ASC amended Topic 810,
Consolidation
. For consolidated subsidiaries that are
less than wholly owned, the third party holdings of equity
interests are referred to as noncontrolling interests. The
portion of net income (loss) attributable to noncontrolling
interests for such subsidiaries is presented as net income
(loss) applicable to noncontrolling interest on the consolidated
statement of operation, and the portion of stockholders’
equity of such subsidiaries is presented as noncontrolling
interest on the consolidated balance sheet. Effective
January 1, 2009, the Company adopted ASC Topic 810.
The adoption of ASC Topic 810 did not have a material impact on
the Company’s financial condition, results of operations or
cash flows. However, it did impact the presentation and
disclosure of noncontrolling (minority) interests in our
consolidated financial statements and notes to the consolidated
financial statements. As a result of the retrospective
presentation and disclosure requirements of ASC Topic 810, the
Company was required to reflect the change in presentation and
disclosure for the period ending March 31, 2009 and all
periods presented in future filings.
The principal effect on the prior year balance sheets related to
the adoption of ASC Topic 810 is summarized as follows:
|
(millions of dollars)
|
||||||
| Balance Sheet | December 31, 2008 | |||||
|
Total equity, as previously reported
|
$ | 2,006.0 | ||||
|
Increase for Topic 810 reclass of noncontrolling interest
|
31.5 | |||||
|
Total equity, as adjusted
|
$ | 2,037.5 | ||||
The principal effect on the prior year statement of operations
related to the adoption of ASC Topic 810 is summarized as
follows:
|
(millions of dollars)
|
Year Ended
|
|||||
| Consolidated Statement of Operations | December 31, 2008 | |||||
|
Net loss, as previously reported
|
$ | (35.6 | ) | |||
|
Topic 810 reclass of noncontrolling interest
|
(16.3 | ) | ||||
|
Net loss, as adjusted
|
$ | (19.3 | ) | |||
|
Less: Net earnings attributable to noncontrolling interest
|
16.3 | |||||
|
Net loss attributable to BorgWarner Inc.
|
$ | (35.6 | ) | |||
45
Table of Contents
The principal effect on the prior year statement of cash flows
related to the adoption of ASC Topic 810 is summarized as
follows:
|
(millions of dollars)
|
Year Ended
|
|||||
| Statement of Cash Flows | December 31, 2008 | |||||
|
Net loss, as previously reported
|
$ | (35.6 | ) | |||
|
Topic 810 reclass of noncontrolling interest
|
(16.3 | ) | ||||
|
Net loss, as adjusted
|
$ | (19.3 | ) | |||
|
(millions of dollars)
|
Year Ended
|
|||||
| Statement of Cash Flows | December 31, 2008 | |||||
|
Equity in affiliates’ earnings, net of dividends received,
minority interest and other, as previously reported
|
$ | 28.3 | ||||
|
Less: Topic 810 reclass of noncontrolling interest
|
(16.3 | ) | ||||
|
Equity in affiliates’ earnings, net of dividends received
and other
|
$ | 12.0 | ||||
The principal effect on the prior year comprehensive income
related to the adoption of ASC Topic 810 is summarized as
follows:
| (millions of dollars) | December 31, 2008 | |||||
|
Net foreign currency translation and hedge instruments
adjustment, as previously reported
|
$ | (136.9 | ) | |||
|
Topic 810 reclass of noncontrolling interest
|
(10.8 | ) | ||||
|
Net foreign currency translation and hedge instruments
adjustment, as adjusted
|
$ | (126.1 | ) | |||
Due to the adoption of ASC Topic 810, the Company revised the
presentation of cash payments related to the acquisition of
noncontrolling (minority) interests from the Investing to the
Financing section of the Company’s Consolidated Statement
of Cash Flows. The principal effect on the prior year cash flows
related to the adoption of ASC Topic 810 is summarized as
follows:
|
(millions of dollars)
|
Year Ended
|
|||||
| Statement of Cash Flows | December 31, 2008 | |||||
|
Payments for businesses acquired, net of cash acquired, as
previously reported
|
$ | (141.2 | ) | |||
|
Less: Topic 805 reclass of noncontrolling interest
|
141.2 | |||||
|
Payments for businesses acquired, net of cash acquired
|
$ | — | ||||
|
(millions of dollars)
|
Year Ended
|
|||||
| Statement of Cash Flows | December 31, 2008 | |||||
|
Net cash used in investing activities, as previously reported
|
$ | (485.1 | ) | |||
|
Less: Topic 805 reclass of noncontrolling interest
|
141.2 | |||||
|
Net cash used in investing activities
|
$ | (343.9 | ) | |||
|
(millions of dollars)
|
Year Ended
|
|||||
| Statement of Cash Flows | December 31, 2008 | |||||
|
Net cash provided by financing activities, as previously reported
|
$ | 5.1 | ||||
|
Less: Topic 805 reclass of noncontrolling interest
|
(141.2 | ) | ||||
|
Net cash used in financing activities
|
$ | (136.1 | ) | |||
46
Table of Contents
In March 2008, the FASB ASC amended Topic 815,
Derivatives
and Hedging
. ASC Topic 815 requires entities to provide
enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items
are accounted for under ASC Topic 815 and its related
interpretations, and how derivative instruments and related
hedged items affect an entity’s financial position,
financial performance, and cash flows. On January 1, 2009,
the Company adopted ASC Topic 815. See Note 10 to the
Consolidated Financial Statements for more information regarding
the implementation of ASC Topic 815.
In May 2008, the FASB ASC amended Topic 470,
Debt
. Under
ASC Topic 470, an entity must separately account for the
liability and equity components of the convertible debt
instruments that may be settled entirely or partially in cash
upon conversion in a manner that reflects the issuer’s
interest cost. ASC Topic 470 is effective for fiscal years
beginning after December 15, 2008, and for interim periods
within those fiscal years, with retrospective application
required. As a result of our adoption of ASC Topic 470 for
fiscal 2009 and the Company’s April 9, 2009 issuance
of $373.8 million convertible senior notes due
April 15, 2012, we recorded the equity and liability
components of the notes on our December 31, 2009
Consolidated Balance Sheet. Additionally, ASC Topic 470 requires
us to accrete the discounted carrying value of the convertible
notes to their face value over the term of the notes. The
Company’s interest expense associated with this
amortization is based on the effective interest rate of the
convertible senior notes of 9.365%. See Note 8 to the
Consolidated Financial Statements for more information.
In December 2008, the FASB ASC amended Topic 715,
Compensation — Retirement Benefits
. ASC Topic
715 requires entities to provide enhanced disclosures about how
investment allocation decisions are made, the major categories
of plan assets, the inputs and valuation techniques used to
measure fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in
plan assets for the period, and significant concentrations of
risk within plan assets. See Note 9 and Note 11 to the
Consolidated Financial Statements for more information regarding
the implementation of ASC Topic 715.
In June 2009, the FASB ASC amended Topic 860,
“Accounting for Transfer of Financial Assets”
.
ASC Topic 860 removes the concept of a qualifying
special-purpose entity and removes the exception from applying
ASC Topic 810, Consolidation of Variable Interest Entities, to
qualifying special-purpose entities. This Statement modifies the
financial- components approach used in ASC Topic 860 and limits
the circumstances in which a financial asset, or portion of a
financial asset, should be derecognized. Additionally, enhanced
disclosures are required to provide financial statement users
with greater transparency about transfers of financial assets
and a transferor’s continuing involvement with transferred
financial assets. On January 1, 2010, the Company elected
to prospectively adopt ASC Topic 860. The impact of this
adoption is an increase in receivables, net of $80 million
and an increase in notes payable and other short-term debt of
$80 million in the Company’s December 31, 2010
Consolidated Balance Sheet. See Note 1 to the Consolidated
Financial Statements for more information on the implementation
of ASC Topic 860.
In June 2009, the FASB amended ASC Topic 810,
“
Consolidation”
. ASC Topic 810 requires an
ongoing reassessment of whether an enterprise is the primary
beneficiary of a variable interest entity. Additionally, ASC
Topic 810 requires enhanced disclosures that will provide users
of financial statements with more transparent information about
an enterprise’s involvement in variable interest entities.
On January 1, 2010, the Company adopted ASC Topic 810. The
adoption of this guidance did not have a material impact on the
Company’s financial statements.
In June 2009, the FASB ASC amended Topic 105, “
Generally
Accepted Accounting Principles”
. This ASC Topic
instituted a major change in the way accounting standards are
organized. The accounting standards Codification became the
single official source of authoritative, nongovernmental GAAP.
As of September 30, 2009 only one level of authoritative
GAAP exists, other than guidance issued by the SEC. All other
literature is non-authoritative. The Company adopted the
Codification in the third quarter of 2009. The adoption of the
Codification had no impact on the Company’s consolidated
financial position, results of operations or cash flows.
47
Table of Contents
QUALITATIVE AND
QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company’s primary market risks include fluctuations in
interest rates and foreign currency exchange rates. We are also
affected by changes in the prices of commodities used or
consumed in our manufacturing operations. Some of our commodity
purchase price risk is covered by supply agreements with
customers and suppliers. Other commodity purchase price risk is
addressed by hedging strategies, which include forward
contracts. The Company enters into derivative instruments only
with high credit quality counterparties and diversifies its
positions across such counterparties in order to reduce its
exposure to credit losses. We do not engage in any derivative
instruments for purposes other than hedging specific operating
risks.
We have established policies and procedures to manage
sensitivity to interest rate, foreign currency exchange rate and
commodity purchase price risk, which include monitoring the
level of exposure to each market risk. For quantitative
disclosures about market risk, please refer to Note 10,
“Financial Instruments” of the Notes to the
Consolidated Financial Statements in Item 8 of this report
with respect to interest rate risk and foreign currency exchange
risk.
Interest Rate
Risk
Interest rate risk is the risk that we will incur economic
losses due to adverse changes in interest rates. The Company
manages its interest rate risk by balancing its exposure to
fixed and variable rates while attempting to minimize 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 the end of 2010, the amount of
debt with fixed interest rates was 69.5% of total debt,
including the impact of the interest rate swaps. Our earnings
exposure related to adverse movements in interest rates is
primarily derived from outstanding floating rate debt
instruments that are indexed to floating money market rates. A
10% increase or decrease in the average cost of our variable
rate debt would result in a change in pre-tax interest expense
of approximately $1.6 million in 2010, and
$1.5 million in 2009.
We also measure interest rate risk by estimating the net amount
by which the fair value of all of our interest rate sensitive
assets and liabilities would be impacted by selected
hypothetical changes in market interest rates. Fair value is
estimated using a discounted cash flow analysis. Assuming a
hypothetical instantaneous 10% change in interest rates as of
December 31, 2010, the net fair value of these instruments
would increase by approximately $28.0 million if interest
rates decreased and would decrease by approximately
$26.0 million if interest rates increased. Our interest
rate sensitivity analysis assumes a constant shift in interest
rate yield curves. The model, therefore, does not reflect the
potential impact of changes in the relationship between
short-term and long-term interest rates. Interest rate
sensitivity at December 31, 2009, measured in a similar
manner, was slightly more than at December 31, 2010.
Foreign Currency
Exchange Rate Risk
Foreign currency risk is the risk that we will incur economic
losses due to adverse changes in foreign currency exchange
rates. Currently, our most significant currency exposures relate
to the British Pound, the Euro, the Hungarian Forint, the
Japanese Yen, and the South Korean Won. We mitigate our foreign
currency exchange rate risk principally by establishing local
production facilities and related supply chain participants in
the markets we serve, by invoicing customers in the same
currency as the source of the products and by funding some of
our investments in foreign markets through local currency loans
and cross currency swaps. Such
non-U.S. Dollar
debt was $299.0 million as of December 31, 2010 and
$303.1 million as of December 31, 2009. We also
monitor our foreign currency exposure in each country and
implement strategies to respond to changing economic and
political environments. In addition, the Company periodically
enters into forward currency contracts in order to reduce
exposure to exchange rate risk related to transactions
denominated in currencies other than the functional currency. As
of December 31, 2010, the Company was holding foreign
exchange derivatives with positive and negative fair market
values of $2.7 million and
48
Table of Contents
$(6.4) million, respectively, of which $2.6 million in
gains and $(3.3) million in losses mature in less than one
year. As of December 31, 2010, $(0.1) million in
losses did not qualify for deferral.
Commodity Price
Risk
Commodity price risk is the possibility that we will incur
economic losses due to adverse changes in the cost of raw
materials used in the production of our products. Commodity
forward and option contracts are executed to offset our exposure
to the potential change in prices mainly for various non-ferrous
metals and natural gas consumption used in the manufacturing of
vehicle components. As of December 31, 2010, the Company
had forward and option commodity contracts with a total notional
value of $1.2 million.
Disclosure
Regarding Forward-Looking Statements
The matters discussed in this Item 7 include
forward-looking statements. See “Forward-Looking
Statements” at the beginning of this Annual Report on
Form 10-K.
49
Table of Contents
REPORT OF
MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
The information in this report is the responsibility of
management. BorgWarner Inc. and Consolidated Subsidiaries (the
“Company”) has in place reporting guidelines and
policies designed to ensure that the statements and other
information contained in this report present a fair and accurate
financial picture of the Company. In fulfilling this management
responsibility, we make informed judgments and estimates
conforming with accounting principles generally accepted in the
United States of America.
The accompanying Consolidated Financial Statements have been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm.
The management of the Company is responsible for establishing
and maintaining adequate internal control over financial
reporting.
The Company’s internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles in the United States of
America. The internal control process includes those policies
and procedures that:
| • | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; | |
| • | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and | |
| • | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Any system of internal control, no matter how well designed, has
inherent limitations. Therefore, even those systems determined
to be effective may not prevent or detect misstatements and can
provide only reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
The Company’s management assessed the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2010. In making this assessment, the
Company’s management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) in
Internal Control — Integrated
Framework
.
Based on management’s assessment and those criteria, we
believe that, as of December 31, 2010, the Company’s
internal control over financial reporting is effective.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, has audited the Company’s consolidated
financial statements and the effectiveness of internal controls
over financial reporting as of December 31, 2010 as stated
in their report.
The Company’s Audit Committee, composed entirely of
directors of the Company who are not employees, meets
periodically with the Company’s management and independent
registered public accounting firm to review financial results
and procedures, internal financial controls and internal and
external audit plans and recommendations. In carrying out these
responsibilities, the Audit Committee and the independent
registered public accounting firm have unrestricted access to
each other with or without the presence of management
representatives.
/s/ Timothy
M. Manganello
Chairman and Chief Executive Officer
/s/ Robin
J. Adams
Executive Vice President,
Chief Financial Officer & Chief Administrative Officer
February 10, 2011
50
Table of Contents
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
For qualitative information regarding market risk, please refer
to the discussion in Item 7 of this report under the
caption “Qualitative and Quantitative Disclosure about
Market Risk.”
Refer to Note 10, “Financial Instruments” of the
Notes to the Consolidated Financial Statements in Item 8 of
this report for information with respect to interest rate risk
and foreign currency exchange risk. Information with respect to
the levels of indebtedness subject to interest rate fluctuation
is contained in Note 8, “Notes Payable and Long-Term
Debt” to the Consolidated Financial Statements in
Item 8. Information with respect to the Company’s
level of business outside the United States which is subject to
foreign currency exchange rate market risk is contained in
Note 19, “Reporting Segments and Related
Information” of the Notes to the Consolidated Financial
Statements in Item 8.
| Item 8. | Financial Statements and Supplementary Data |
51
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BorgWarner Inc.:
Auburn Hills, Michigan
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of BorgWarner Inc. and Consolidated
Subsidiaries at December 31, 2010 and December 31,
2009, and the results of their operations and their cash flows
for each of the two years in the period ended December 31,
2010 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010,
based on criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express opinions
on these financial statements and on the Company’s internal
control over financial reporting based on our integrated audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
We also have audited the adjustments to the 2008 financial
statements to retrospectively apply the change in accounting
related to the adoption of ASC 810 Noncontrolling Interests
in Consolidated Financial Statements an amendment of ARB
No. 51 (formerly FAS 160), as described in
Note 1. In our opinion, such adjustments are appropriate
and have been properly applied. We were not engaged to audit,
review, or apply any procedures to the 2008 financial statements
of the Company other than with respect to the adjustments and,
accordingly, we do not express an opinion or any other form of
assurance on the 2008 financial statements taken as a whole.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Detroit, MI
February 10, 2011
52
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of BorgWarner Inc.
Auburn Hills, Michigan
We have audited, before the effects of the adjustments to
retrospectively apply the change in accounting discussed in
Note 1 to the consolidated financial statements of
BorgWarner Inc. and Consolidated Subsidiaries (the
“Company”), the consolidated statements of operations,
stockholders’ equity and comprehensive income and cash
flows for the year ended December 31, 2008 (the 2008
consolidated financial statements before the effects of the
adjustments discussed in Note 1 to the consolidated
financial statements are not presented herein). These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 2008 consolidated financial statements,
before the effects of the adjustments to retrospectively apply
the change in accounting discussed in Note 1 to the
consolidated financial statements, present fairly, in all
material respects, the results of the operations and cash flows
of BorgWarner Inc. and Consolidated Subsidiaries for the year
ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to
the adjustments to retrospectively apply the change in
accounting discussed in Note 1 to the consolidated
financial statements and, accordingly, we do not express an
opinion or any other form of assurance about whether such
retrospective adjustments are appropriate and have been properly
applied. Those retrospective adjustments were audited by other
auditors.
/s/
DELOITTE &
TOUCHE LLP
Detroit, Michigan
February 12, 2009
53
Table of Contents
BORGWARNER INC.
AND CONSOLIDATED SUBSIDIARIES
|
(millions of dollars, except share and per share amounts)
|
||||||||||||||
| For the Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||
|
Net sales
|
$ | 5,652.8 | $ | 3,961.8 | $ | 5,263.9 | ||||||||
|
Cost of sales
|
4,559.5 | 3,401.0 | 4,425.4 | |||||||||||
|
Gross profit
|
1,093.3 | 560.8 | 838.5 | |||||||||||
|
Selling, general and administrative expenses
|
566.6 | 459.8 | 542.9 | |||||||||||
|
Restructuring expense
|
— | 50.3 | 127.5 | |||||||||||
|
Goodwill impairment charge
|
— | — | 156.8 | |||||||||||
|
Other (income) expense
|
22.4 | (0.1 | ) | 4.0 | ||||||||||
|
Operating income
|
504.3 | 50.8 | 7.3 | |||||||||||
|
Equity in affiliates’ earnings, net of tax
|
(39.6 | ) | (21.8 | ) | (38.4 | ) | ||||||||
|
Interest income
|
(2.8 | ) | (2.5 | ) | (7.1 | ) | ||||||||
|
Interest expense and finance charges
|
68.8 | 57.2 | 38.8 | |||||||||||
|
Earnings before income taxes and noncontrolling interest
|
477.9 | 17.9 | 14.0 | |||||||||||
|
Provision (benefit) for income taxes
|
81.7 | (18.5 | ) | 33.3 | ||||||||||
|
Net earnings (loss)
|
396.2 | 36.4 | (19.3 | ) | ||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
18.8 | 9.4 | 16.3 | |||||||||||
|
Net earnings (loss) attributable to BorgWarner Inc.
|
$ | 377.4 | $ | 27.0 | $ | (35.6 | ) | |||||||
|
Earnings (loss) per share — basic
|
$ | 3.31 | $ | 0.23 | $ | (0.31 | )** | |||||||
|
Earnings (loss) per share — diluted
|
$ | 3.07 | * | $ | 0.23 | $ | (0.31 | )** | ||||||
|
Average shares outstanding (thousands):
|
||||||||||||||
|
Basic
|
114,155 | 116,522 | 116,007 | |||||||||||
|
Diluted
|
129,575 | 116,939 | 116,007 | |||||||||||
| * | The Company’s diluted earnings per share for the year ended December 31, 2010 includes the impact of the Company’s 3.50% convertible notes and associated warrants. Refer to Note 16, “Earnings (Loss) Per Share”, for further information on our diluted earnings calculation. | |
| ** | The Company had a loss for the year ended December 31, 2008. 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. |
See Accompanying Notes to Consolidated Financial Statements.
54
Table of Contents
BORGWARNER INC.
AND CONSOLIDATED SUBSIDIAIRIES
|
(millions of dollars)
|
||||||||||
| December 31, | 2010 | 2009 | ||||||||
|
ASSETS
|
||||||||||
|
Cash
|
$ | 449.9 | $ | 357.4 | ||||||
|
Receivables, net
|
1,023.9 | 732.0 | ||||||||
|
Inventories, net
|
430.6 | 314.3 | ||||||||
|
Deferred income taxes
|
75.8 | 60.2 | ||||||||
|
Prepayments and other current assets
|
79.7 | 87.9 | ||||||||
|
Total current assets
|
2,059.9 | 1,551.8 | ||||||||
|
Property, plant and equipment, net
|
1,542.6 | 1,490.3 | ||||||||
|
Investments and advances
|
307.9 | 257.4 | ||||||||
|
Goodwill
|
1,113.5 | 1,061.4 | ||||||||
|
Other non-current assets
|
531.1 | 450.5 | ||||||||
|
Total assets
|
$ | 5,555.0 | $ | 4,811.4 | ||||||
| LIABILITIES AND EQUITY | ||||||||||
|
Notes payable and other short-term debt
|
$ | 128.5 | $ | 69.1 | ||||||
|
Accounts payable and accrued expenses
|
1,224.1 | 977.1 | ||||||||
|
Income taxes payable
|
39.7 | — | ||||||||
|
Total current liabilities
|
1,392.3 | 1,046.2 | ||||||||
|
Long-term debt
|
1,051.9 | 773.2 | ||||||||
|
Other non-current liabilities:
|
||||||||||
|
Retirement-related liabilities
|
438.1 | 473.7 | ||||||||
|
Other
|
362.9 | 295.6 | ||||||||
|
Total other non-current liabilities
|
$ | 801.0 | 769.3 | |||||||
|
Capital stock:
|
||||||||||
|
Preferred stock, $0.01 par value; authorized shares:
5,000,000; none issued
|
— | — | ||||||||
|
Common stock, $0.01 par value; authorized shares:
150,000,000; issued shares: 2010, 120,086,206 and 2009,
118,336,410; outstanding shares: 2010, 112,316,444 and 2009,
116,837,555
|
1.2 | 1.2 | ||||||||
|
Non-voting common stock, $0.01 par value; authorized
shares: 25,000,000; none issued and outstanding
|
— | — | ||||||||
|
Capital in excess of par value
|
1,100.4 | 1,034.1 | ||||||||
|
Retained earnings
|
1,560.2 | 1,193.4 | ||||||||
|
Accumulated other comprehensive income (loss)
|
(53.7 | ) | 14.5 | |||||||
|
Common stock held in treasury, at cost: 7,769,762 shares in
2010 and
|
||||||||||
|
1,498,855 shares in 2009
|
(349.5 | ) | (57.9 | ) | ||||||
|
Total BorgWarner Inc. stockholders’ equity
|
2,258.6 | 2,185.3 | ||||||||
|
Noncontrolling interest
|
51.2 | 37.4 | ||||||||
|
Total equity
|
2,309.8 | 2,222.7 | ||||||||
|
Total liabilities and equity
|
$ | 5,555.0 | $ | 4,811.4 | ||||||
See Accompanying Notes to Consolidated Financial Statements.
55
Table of Contents
BORGWARNER INC.
AND CONSOLIDATED SUBSIDIAIRIES
|
(millions of dollars)
|
||||||||||||||
| For the Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||
|
OPERATING
|
||||||||||||||
|
Net earnings (loss)
|
$ | 396.2 | $ | 36.4 | $ | (19.3 | ) | |||||||
|
Adjustments to reconcile net earnings (loss) to net cash flows
from operations:
|
||||||||||||||
|
Non-cash charges (credits) to operations:
|
||||||||||||||
|
Depreciation and tooling amortization
|
224.5 | 234.6 | 259.7 | |||||||||||
|
Amortization of intangible assets and other
|
28.4 | 26.3 | 27.1 | |||||||||||
|
Environmental litigation settlement, net of cash paid
|
14.0 | — | — | |||||||||||
|
Restructuring expense, net of cash paid
|
— | 38.4 | 115.9 | |||||||||||
|
Goodwill impairment charge
|
— | — | 156.8 | |||||||||||
|
Stock based compensation expense
|
22.8 | 22.0 | 21.2 | |||||||||||
|
Deferred income tax benefit
|
(52.2 | ) | (57.7 | ) | (78.3 | ) | ||||||||
|
Bond amortization
|
18.3 | 12.7 | — | |||||||||||
|
BERU-Eichenauer equity investment gain
|
(8.0 | ) | — | — | ||||||||||
|
Equity in affiliates’ earnings, net of dividends received,
and other
|
1.7 | 21.3 | 12.0 | |||||||||||
|
Net earnings (loss) adjusted for non-cash charges to operations
|
645.7 | 334.0 | 495.1 | |||||||||||
|
Changes in assets and liabilities:
|
||||||||||||||
|
Receivables
|
(239.0 | ) | (106.6 | ) | 163.9 | |||||||||
|
Inventories
|
(79.0 | ) | 143.0 | (26.3 | ) | |||||||||
|
Prepayments and other current assets
|
0.6 | 1.2 | 16.0 | |||||||||||
|
Accounts payable and accrued expenses
|
169.4 | 98.9 | (195.6 | ) | ||||||||||
|
Income taxes payable
|
37.3 | (6.9 | ) | (23.0 | ) | |||||||||
|
Other non-current assets and liabilities
|
3.9 | (112.6 | ) | (29.3 | ) | |||||||||
|
Net cash provided by operating activities
|
538.9 | 351.0 | 400.8 | |||||||||||
|
INVESTING
|
||||||||||||||
|
Capital expenditures, including tooling outlays
|
(276.6 | ) | (172.0 | ) | (369.7 | ) | ||||||||
|
Net proceeds from asset disposals
|
6.8 | 23.1 | 5.7 | |||||||||||
|
Payments for businesses acquired, net of cash acquired
|
(164.7 | ) | (7.5 | ) | — | |||||||||
|
Net proceeds from sale of business
|
5.0 | 1.6 | 5.5 | |||||||||||
|
Proceeds from sales of marketable securities
|
— | — | 14.6 | |||||||||||
|
Net cash used in investing activities
|
(429.5 | ) | (154.8 | ) | (343.9 | ) | ||||||||
|
FINANCING
|
||||||||||||||
|
Net increase (decrease) in notes payable
|
(29.8 | ) | (114.7 | ) | 114.8 | |||||||||
|
Additions to long-term debt, net of debt issuance costs
|
372.2 | 381.6 | — | |||||||||||
|
Repayments of long-term debt, including current portion
|
(116.1 | ) | (164.5 | ) | (7.3 | ) | ||||||||
|
Payments for noncontrolling interest acquired
|
— | (48.5 | ) | (141.2 | ) | |||||||||
|
Payment for purchase of bond hedge
|
— | (56.4 | ) | — | ||||||||||
|
Proceeds from warrant issuance
|
— | 31.2 | — | |||||||||||
|
Reduction in accounts receivable securitization facility
|
— | (50.0 | ) | — | ||||||||||
|
Proceeds from accounts receivable securitization facility
|
30.0 | 50.0 | — | |||||||||||
|
Payments for purchase of treasury stock
|
(325.7 | ) | — | (55.9 | ) | |||||||||
|
Proceeds from interest rate swap termination
|
— | 30.0 | — | |||||||||||
|
Proceeds from stock options exercised, including the tax benefit
|
67.1 | 8.7 | 17.1 | |||||||||||
|
Dividends paid to BorgWarner stockholders
|
— | (13.8 | ) | (51.1 | ) | |||||||||
|
Dividends paid to noncontrolling stockholders
|
(10.9 | ) | (8.8 | ) | (12.5 | ) | ||||||||
|
Net cash provided by (used in) financing activities
|
(13.2 | ) | 44.8 | (136.1 | ) | |||||||||
|
Effect of exchange rate changes on cash
|
(3.7 | ) | 13.0 | (5.9 | ) | |||||||||
|
Net increase (decrease) in cash
|
92.5 | 254.0 | (85.1 | ) | ||||||||||
|
Cash at beginning of year
|
357.4 | 103.4 | 188.5 | |||||||||||
|
Cash at end of year
|
$ | 449.9 | $ | 357.4 | $ | 103.4 | ||||||||
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
||||||||||||||
|
Net cash paid during the year for:
|
||||||||||||||
|
Interest
|
$ | 53.4 | $ | 68.8 | $ | 44.4 | ||||||||
|
Income taxes
|
83.1 | 60.3 | 122.0 | |||||||||||
|
Non-cash investing transactions:
|
||||||||||||||
|
Domination and Profit Transfer Agreement
|
— | — | 44.0 | |||||||||||
|
Non-cash financing transactions:
|
||||||||||||||
|
Stock performance plans
|
3.8 | 6.0 | 5.0 | |||||||||||
|
Restricted common stock for employees
|
18.1 | 14.1 | 9.0 | |||||||||||
|
Restricted common stock for non-employee directors
|
0.8 | 0.7 | 0.7 | |||||||||||
See Accompanying Notes to Consolidated Financial Statements.
56
Table of Contents
BORGWARNER INC.
AND CONSOLIDATED SUBSIDIAIRIES
CONSOLIDATED
STATEMENTS OF EQUITY AND
COMPREHENSIVE
INCOME (LOSS)
| (millions of dollars) | ||||||||||||||||||||||||||||||||||||
| Number of shares | BorgWarner Inc. Stockholders’ equity | |||||||||||||||||||||||||||||||||||
|
Accumulated
|
Equity
|
|||||||||||||||||||||||||||||||||||
|
Issued
|
Common
|
Issued
|
Capital in
|
Other
|
Attributable to
|
|||||||||||||||||||||||||||||||
|
Common
|
Stock in
|
Common
|
Excess of
|
Treasury
|
Retained
|
Comprehensive
|
Noncontrolling
|
Comprehensive
|
||||||||||||||||||||||||||||
| Stock | Treasury | Stock | par Value | Stock | Earnings | Income (Loss) | Interests | Income (Loss) | ||||||||||||||||||||||||||||
|
Balance, January 1, 2008
|
117,206,709 | (1,078,137 | ) | $ | 1.2 | $ | 943.4 | $ | (46.5 | ) | $ | 1,295.9 | $ | 127.1 | $ | 117.9 | ||||||||||||||||||||
|
Dividends declared
|
— | — | — | — | — | (51.1 | ) | — | (12.5 | ) | — | |||||||||||||||||||||||||
|
Stock option expense
|
— | — | — | 12.2 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Stock incentive plans
|
— | 375,075 | — | 10.8 | 15.0 | (8.7 | ) | — | — | — | ||||||||||||||||||||||||||
|
Executive stock plan
|
197,052 | — | — | 1.5 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Net issuance of restricted stock,less amortization
|
295,781 | — | — | 9.7 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Purchases of treasury stock
|
— | (1,464,108 | ) | — | — | (55.9 | ) | — | — | — | — | |||||||||||||||||||||||||
|
Net earnings (loss)
|
— | — | — | — | — | (19.3 | ) | — | 16.2 | $ | (19.3 | ) | ||||||||||||||||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
— | — | — | — | — | (16.3 | ) | — | — | (16.3 | ) | |||||||||||||||||||||||||
|
Defined benefit post employment plans, net of tax
|
— | — | — | — | — | — | (74.7 | ) | — | (74.7 | ) | |||||||||||||||||||||||||
|
Net unrealized loss on
available-for-sale
securities
|
— | — | — | — | — | — | (1.4 | ) | — | (1.4 | ) | |||||||||||||||||||||||||
|
Currency translation and hedge instruments, net
|
— | — | — | — | — | — | (126.1 | ) | (0.5 | ) | (126.1 | ) | ||||||||||||||||||||||||
|
Comprehensive loss attributable to the noncontrolling interest
|
— | — | — | — | — | — | (10.8 | ) | — | (10.8 | ) | |||||||||||||||||||||||||
|
Purchase of subsidiary shares from noncontrolling interest
|
— | — | — | — | — | — | — | (1.9 | ) | — | ||||||||||||||||||||||||||
|
Domination and Profit Transfer
|
||||||||||||||||||||||||||||||||||||
|
Agreement (See Note 18)
|
— | — | — | — | — | — | — | (87.7 | ) | — | ||||||||||||||||||||||||||
|
Balance, December 31, 2008
|
117,699,542 | (2,167,170 | ) | $ | 1.2 | $ | 977.6 | $ | (87.4 | ) | $ | 1,200.5 | $ | (85.9 | ) | $ | 31.5 | $ | (248.6 | ) | ||||||||||||||||
|
Dividends declared
|
— | — | — | — | — | (13.8 | ) | — | (8.8 | ) | — | |||||||||||||||||||||||||
|
Stock option expense
|
— | — | — | 7.2 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Stock incentive plans
|
— | 380,499 | — | (0.7 | ) | 16.2 | (7.0 | ) | — | — | — | |||||||||||||||||||||||||
|
Executive stock plan
|
— | 287,816 | — | 6.0 | 13.3 | (13.3 | ) | — | — | — | ||||||||||||||||||||||||||
|
Net issuance of restricted stock, less amortization
|
636,868 | — | — | 14.8 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Convertible bond issuance
|
— | — | — | 34.7 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Convertible bond — Hedge
|
— | — | — | (36.7 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
|
Convertible bond — Warrant
|
— | — | — | 31.2 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Net earnings
|
— | — | — | — | — | 36.4 | — | 9.4 | $ | 36.4 | ||||||||||||||||||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
— | — | — | — | — | (9.4 | ) | — | — | (9.4 | ) | |||||||||||||||||||||||||
|
Defined benefit post employment plans, net of tax
|
— | — | — | — | — | — | (3.4 | ) | — | (3.4 | ) | |||||||||||||||||||||||||
|
Currency translation and hedge instruments, net
|
— | — | — | — | — | — | 99.9 | 1.9 | 99.9 | |||||||||||||||||||||||||||
|
Comprehensive income attributable to the noncontrolling interest
|
— | — | — | — | — | — | 3.9 | — | 3.9 | |||||||||||||||||||||||||||
|
Dalian joint venture
|
— | — | — | — | — | — | — | 3.4 | — | |||||||||||||||||||||||||||
|
Balance, December 31, 2009
|
118,336,410 | (1,498,855 | ) | $ | 1.2 | $ | 1,034.1 | $ | (57.9 | ) | $ | 1,193.4 | $ | 14.5 | $ | 37.4 | $ | 127.4 | ||||||||||||||||||
|
Dividends declared
|
— | — | — | — | — | — | — | (9.5 | ) | — | ||||||||||||||||||||||||||
|
Stock option expense
|
— | — | — | 0.1 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Stock incentive plans
|
— | 525,297 | — | 43.5 | 22.6 | (10.6 | ) | — | — | — | ||||||||||||||||||||||||||
|
Executive stock plan
|
— | 269,896 | — | 3.8 | 11.5 | — | — | — | — | |||||||||||||||||||||||||||
|
Net issuance of restricted stock, less amortization
|
1,749,796 | — | — | 18.9 | — | — | — | — | — | |||||||||||||||||||||||||||
|
Purchases of treasury stock
|
— | (7,066,100 | ) | — | — | (325.7 | ) | — | — | — | ||||||||||||||||||||||||||
|
Net earnings
|
— | — | — | — | — | 396.2 | — | 18.8 | $ | 396.2 | ||||||||||||||||||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
— | — | — | — | — | (18.8 | ) | — | — | (18.8 | ) | |||||||||||||||||||||||||
|
Defined benefit post employment plans, net of tax
|
— | — | — | — | — | — | 7.8 | — | 7.8 | |||||||||||||||||||||||||||
|
Net unrealized gain on
available-for-sale
securities
|
— | — | — | — | — | — | 1.2 | — | 1.2 | |||||||||||||||||||||||||||
|
Currency translation and hedge instruments, net of tax
|
— | — | — | — | — | — | (77.1 | ) | 2.5 | (77.1 | ) | |||||||||||||||||||||||||
|
Comprehensive loss attributable to the noncontrolling interest
|
— | — | — | — | — | — | (0.1 | ) | — | (0.1 | ) | |||||||||||||||||||||||||
|
Dytech ENSA S.L. acquisition
|
— | — | — | — | — | — | — | 2.0 | — | |||||||||||||||||||||||||||
|
Balance, December 31, 2010
|
120,086,206 | (7,769,762 | ) | $ | 1.2 | $ | 1,100.4 | $ | (349.5 | ) | $ | 1,560.2 | $ | (53.7 | ) | $ | 51.2 | $ | 309.2 | |||||||||||||||||
See Accompanying Notes to Consolidated Financial Statements.
57
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the
“Company”) is a leading global supplier of highly
engineered systems and components primarily for powertrain
applications. These products are manufactured and sold
worldwide, primarily to original equipment manufacturers of
passenger cars, sport-utility vehicles, crossover vehicles,
trucks, commercial transportation products and industrial
equipment and to certain Tier One vehicle systems
suppliers. The Company’s products fall into two reporting
segments: Engine and Drivetrain.
| NOTE 1 | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The following paragraphs briefly describe the Company’s
significant accounting policies.
Basis of presentation
The Company’s presentation of
the Consolidated Balance Sheets, Consolidated Statements of
Operations, Consolidated Statements of Equity and Comprehensive
Income (Loss), and Reporting Segments and Related Information
Note have been adjusted to conform with the requirements of
Accounting Standards Codification (“ASC”) Topic 810,
Noncontrolling Interest in Consolidated Financial Statements and
ASC Topic 805, Business Combinations. Refer to New Accounting
Pronouncements for further information regarding these
reclassifications.
Use of estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States of America (“GAAP”) requires
management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentrations of risk
Cash is maintained with several
financial institutions. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand and are maintained with
financial institutions of reputable credit and therefore bear
minimal risk.
The Company performs ongoing credit evaluations of its suppliers
and customers and, with the exception of certain financing
transactions, does not require collateral from its customers.
The Company’s customers are primarily original equipment
manufacturers (“OEMs”) of light-vehicles (passenger
cars, sport-utility vehicles, crossover vehicles, vans and
light-trucks). The Company’s products are also sold to
other OEMs of commercial trucks, buses and agricultural and
off-highway vehicles. The Company also manufactures and sells
products to certain Tier One vehicle systems suppliers and
into the aftermarket for light and commercial vehicles.
Some automotive parts suppliers continue to experience commodity
cost pressures and the effects of industry overcapacity. These
factors have increased pressure on the industry’s supply
base, as suppliers cope with higher commodity costs, lower
production volumes and other challenges. The Company receives
certain of its raw materials from sole suppliers or a limited
number of suppliers. The inability of a supplier to fulfill
supply requirements of the Company could materially affect
future operating results.
Principles of consolidation
The Consolidated Financial
Statements include all majority- owned subsidiaries with a
controlling financial interest. All inter-company accounts and
transactions have been eliminated in consolidation. Investments
in 20% to 50% owned affiliates are accounted for under the
equity method when the Company does not have a controlling
financial interest.
Revenue recognition
The Company recognizes revenue when
title and risk of loss pass to the customer, which is usually
upon shipment of product. Although the Company may enter into
long-term supply agreements with its major customers, each
shipment of goods is treated as a separate sale and the prices
are not fixed over the life of the agreements.
58
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cash
Cash is valued at fair market value. It is the
Company’s policy to classify all highly liquid investments
with original maturities of three months or less as cash.
Accounts receivable
The Company securitizes certain
receivables through third party financial institutions without
recourse. The amount can vary each month based on the amount of
underlying receivables. The Company continues to administer the
collection of these receivables on behalf of the third party.
On April 24, 2009 the Company’s $50 million
accounts receivable securitization facility matured and was
repaid. On December 21, 2009 the Company entered into a new
$50 million accounts receivable securitization facility.
On September 8, 2010 the Company amended the
December 21, 2009 Receivable Purchase Agreement, which
increased the accounts receivable securitization facility from
$50 million to $80 million. This facility matures on
December 21, 2012.
The Company was required to adopt amended ASC Topic 860,
“Accounting for Transfer of Financial Assets”
,
on January 1, 2010. This adoption required the Company to
reflect its receivable securitization facility in its financial
statements in the current year of change. Accounting rules prior
to January 1, 2010 allowed qualifying special-purpose
entities off-balance sheet treatment. The impact of this
adoption was an increase in receivables, net of $80 million
and an increase in notes payable and other short-term debt of
$80 million in the Company’s December 31, 2010
Consolidated Balance Sheet.
During the years ended December 31, 2010 and 2009, total
cash proceeds from sales of accounts receivable were
approximately $720 million and $250 million,
respectively. The Company paid servicing fees related to these
receivables for the year ended December 31, 2010, 2009 and
2008 of $1.2 million, $0.4 million, and
$1.9 million, respectively. These amounts are recorded in
interest expense and finance charges in the Consolidated
Statements of Operations.
Inventories
Inventories are valued at the lower of cost
or market. Cost of U.S. inventories is determined by the
last-in,
first-out (“LIFO”) method, while the foreign
operations use the
first-in,
first-out (“FIFO”) or average-cost methods. Inventory
held by U.S. operations was $100.1 million and
$81.2 million at December 31, 2010 and 2009,
respectively. Such inventories, if valued at current cost
instead of LIFO, would have been greater by $13.2 million
in 2010 and $11.6 million in 2009.
See Note 5 to the Consolidated Financial Statements for
more information on inventories.
Pre-production costs related to long-term supply arrangements
Engineering, research and development, and other design and
development costs for products sold on long-term supply
arrangements are expensed as incurred unless the Company has a
contractual guarantee for reimbursement from the customer. Costs
for molds, dies and other tools used to make products sold on
long-term supply arrangements for which the Company either has
title to the assets or has the non-cancelable right to use the
assets during the term of the supply arrangement are capitalized
in property, plant and equipment. Capitalized items specifically
designed for a supply arrangement are amortized to cost of sales
over the shorter of the term of the arrangement or over the
estimated useful lives of the assets, typically 3 to
5 years. Costs for molds, dies and other tools used to make
products sold on long-term supply arrangements for which the
Company has a contractual guarantee for lump sum reimbursement
from the customer are capitalized in prepayments and other
current assets.
Property, plant and equipment and depreciation
Property,
plant and equipment are valued at cost less accumulated
depreciation. Expenditures for maintenance, repairs and renewals
of relatively minor items are generally charged to expense as
incurred. Renewals of significant items are capitalized.
Depreciation is computed generally on a straight-line basis over
the estimated useful lives of the assets. Useful lives for
buildings range from 15 to 40 years and useful lives for
machinery and equipment range from 3 to 12 years. For
income tax purposes, accelerated methods of depreciation are
generally used. The Company’s property, plant and equipment
are all held for use at December 31, 2010 and 2009.
59
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
See Note 5 to the Consolidated Financial Statements for
more information on property, plant and equipment and
depreciation.
Impairment of long-lived assets
The Company reviews the
carrying value of its long-lived assets, whether held for use or
disposal, including other amortizing intangible assets, when
events and circumstances warrant such a review under ASC Topic
360. A recoverability review is performed using the undiscounted
cash flows if there is a triggering event. If the undiscounted
cash flow test for recoverability identifies a possible
impairment, management will perform a fair value analysis.
Management determines fair value under ASC Topic 820 using the
appropriate valuation technique of market, income or cost
approach. If the carrying value of a long-lived asset is
considered impaired, an impairment charge is recorded for the
amount by which the carrying value of the long-lived asset
exceeds its fair value.
Management believes that the estimates of future cash flows and
fair value assumptions are reasonable; however, changes in
assumptions underlying these estimates could affect the
evaluations. Long-lived assets held for sale are recorded at the
lower of their carrying amount or fair value less cost to sell.
Significant judgments and estimates used by management when
evaluating long-lived assets for impairment include: (i) an
assessment as to whether an adverse event or circumstance has
triggered the need for an impairment review; and
(ii) undiscounted future cash flows generated by the asset
(iii) fair valuation of the asset.
See Note 17, “Restructuring” and Note 9
“Fair Value Measurements”, to the Consolidated
Financial Statements for more information regarding the
Company’s impairment of long-lived assets and a discussion
of market-based measurements.
Goodwill and other indefinite-lived intangible assets
Under ASC Topic 350, goodwill and other indefinite-lived
intangibles are not amortized; however, they must be tested for
impairment at least annually or upon a triggering event. In the
fourth quarter of each year, or when events and circumstances
warrant such a review, the Company reviews the goodwill of all
of its reporting units for impairment. The Company’s
goodwill impairment review, under ASC Topic 350, requires the
Company to make significant assumptions and estimates about the
extent and timing of future cash flows, discount rates and
growth rates. The fair value of the Company’s reporting
units used in the determination of goodwill impairment is
computed using the expected present value of associated future
cash flows. The cash flows are estimated over a significant
future period of time, which makes those estimates and
assumptions subject to an even higher degree of uncertainty. The
Company also utilizes market valuation models and other
financial ratios, which require the Company to make certain
assumptions and estimates regarding the applicability of those
models to its assets and businesses. The Company believes that
the assumptions and estimates used to determine the estimated
fair values of each of its reporting units are reasonable. The
Company recognized goodwill impairment of $156.8 million in
the Engine segment in 2008.
A considerable amount of management judgment and assumptions are
required in performing the impairment tests. While no impairment
existed at December 31, 2010, different assumptions and
estimates could materially change the estimated fair values and
therefore, change impairment charges.
See Note 6 to the Consolidated Financial Statements for
more information on goodwill and other indefinite-lived
intangible assets.
Product warranty
The Company provides warranties on some
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 accrual is represented
in both current and non-current liabilities on the balance sheet.
60
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
See Note 7 to the Consolidated Financial Statements for
more information on product warranties.
Other loss accruals and valuation allowances
The Company
has numerous other loss exposures, such as customer claims,
workers’ compensation claims, litigation, and
recoverability of assets. Establishing loss accruals or
valuation allowances for these matters requires the use of
estimates and judgment in regard to the risk exposure and
ultimate realization. The Company estimates losses under the
programs using consistent and appropriate methods; however,
changes to its assumptions could materially affect its recorded
accrued liabilities for loss or asset valuation allowances.
Derivative financial instruments
The Company recognizes
that certain normal business transactions generate risk.
Examples of risks include exposure to exchange rate risk related
to transactions denominated in currencies other than the
functional currency, changes in cost of major raw materials and
supplies, and changes in interest rates. It is the objective and
responsibility of the Company to assess the impact of these
transaction risks, and offer protection from selected risks
through various methods including financial derivatives.
Virtually all derivative instruments held by the Company are
designated as hedges, have high correlation with the underlying
exposure and are highly effective in offsetting underlying price
movements. Accordingly, gains and losses from changes in
qualifying hedge fair values are matched with the underlying
transactions. All hedge instruments are carried at their fair
value based on quoted market prices for contracts with similar
maturities. The Company does not engage in any derivative
transactions for purposes other than hedging specific risks.
See Note 10 to the Consolidated Financial Statements for
more information on derivative financial instruments.
Foreign currency
The financial statements of foreign
subsidiaries are translated to U.S. Dollars using the
period-end exchange rate for assets and liabilities and an
average exchange rate for each period for revenues, expenses,
and capital expenditures. The local currency is the functional
currency for substantially all the Company’s foreign
subsidiaries. Translation adjustments for foreign subsidiaries
are recorded as a component of accumulated other comprehensive
income (loss) in stockholders’ equity. The Company
recognizes transaction gains and losses arising from
fluctuations in currency exchange rates on transactions
denominated in currencies other than the functional currency in
earnings as incurred, except for those transactions which hedge
purchase commitments and for those intercompany balances which
are designated as long-term investments.
See Note 13 to the Consolidated Financial Statements for
more information on other comprehensive income (loss).
Environmental Contingencies
The Company accounts for
environmental costs in accordance with ASC Topic 450. Costs
related to environmental assessments and remediation efforts at
operating facilities are accrued when it is probable that a
liability has been incurred and the amount of that liability can
be reasonably estimated. Estimated costs are recorded at
undiscounted amounts, based on experience and assessments and
are regularly evaluated. The liabilities are recorded in other
current liabilities and other long-term liabilities in the
Company’s consolidated balance sheets.
See Note 14 to the Consolidated Financial Statements for
more information regarding environmental contingencies.
Pensions and Other Postretirement Employee Defined Benefits
The Company’s defined benefit pension and other
postretirement employee benefit plans are accounted for in
accordance with ASC Topic 715. Disability, early retirement and
other postretirement employee benefits are accounted for in
accordance with ASC Topic 712.
Pensions and other postretirement employee benefit costs and
related liabilities and assets are dependent upon assumptions
used in calculating such amounts. These assumptions include
discount rates, expected returns on plan assets, health care
cost trends, compensation and other factors. In
61
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
accordance with GAAP, actual results that differ from the
assumptions used are accumulated and amortized over future
periods, and accordingly, generally affect recognized expense in
future periods.
See Note 11 to the Consolidated Financial Statements for
more information regarding the Company’s retirement benefit
plans.
Income Taxes
The Company accounts for income tax expense
based on expected income and statutory tax rates in the various
jurisdictions in which we operate. Judgment is required in
determining our income tax expense. We establish accruals under
ASC Topic 740. For uncertain tax positions, the ASC Topic 740
approach is based on a two-step benefit recognition model. In
the first step, ASC Topic 740 requires that a position taken or
expected to be taken in a tax return be recognized in the
financial statements when it is more likely than not, based on
the technical merits and without consideration of detection
risk, that the position will be sustained on audit, including
resolution of related appeals or litigation processes, if any.
The second step is to measure the appropriate amount of the
benefit to recognize. The amount of benefit to recognize is
measured as the largest amount of the tax benefit that is
greater than 50 percent likely to ultimately be realized
upon settlement. The tax position must be derecognized when it
is no longer more likely than not to be sustained. The
interpretation also provides guidance on recognition and
classification of related penalties and interest, classification
of liabilities, and disclosures of unrecognized tax benefits.
The Company’s effective tax rate includes the impact of
accrual provisions and changes to accruals that we consider
appropriate, as well as interest and penalties. A period of time
may elapse before a particular matter, for which we have or have
not established an accrual is audited and finally resolved.
While it is often difficult to predict the final outcome or the
timing of resolution of any particular tax matter, we believe
that our accruals are appropriate under GAAP. Favorable or
unfavorable adjustments of an accrual for any particular issue
would be recognized as an increase or decrease to our income tax
expense in the period of a change in facts and circumstances.
Tax laws require items to be included in the tax return at
different times than the items are reflected in the financial
statements. As a result, the income tax expense reflected in our
financial statements is different than the liability reported in
our tax return. Some of the differences are permanent in nature,
however, there are many differences that are temporary
differences, such as depreciation expense. Deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The Company records a valuation allowance to reduce
deferred tax assets when it is more likely than not that such
assets may not be realized. This assessment requires significant
judgment, and must be done on a
jurisdiction-by-jurisdiction
basis. In determining the need for a valuation allowance, all
available positive and negative evidence, including historical
and projected financial performance, is considered along with
any other pertinent information.
See Note 4 to the Consolidated Financial Statements for
more information regarding income taxes.
New Accounting
Pronouncements
In September 2006, the FASB ASC amended Topic 820,
Fair Value
Measurements and Disclosures
. ASC Topic 820 defines fair
value, establishes a framework for measuring fair value in GAAP
and expands disclosures about fair value measurements. On
January 1, 2009, the Company fully adopted as required, ASC
Topic 820. See Note 9 to the Consolidated Financial
Statements for more information regarding the implementation of
ASC Topic 820.
In February 2007, the FASB ASC amended Topic 825,
Financial
Instruments
. ASC Topic 825 allows entities to irrevocably
elect to recognize most financial assets and financial
liabilities at fair value on an
instrument-by-instrument
basis. The stated objective of ASC Topic 825 is to improve
financial reporting by
62
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
giving entities the opportunity to elect to measure certain
financial assets and liabilities at fair value in order to
mitigate earnings volatility caused when related assets and
liabilities are measured differently. ASC Topic 825 was
effective for the Company beginning with its quarter ending
March 31, 2008. The Company chose to not make the election
to adopt.
In December 2007, the FASB ASC amended Topic 805,
Business
Combinations
. ASC Topic 805 establishes principles and
requirements for recognizing identifiable assets acquired,
liabilities assumed, noncontrolling interest in the acquiree,
goodwill acquired in the combination or the gain from a bargain
purchase, and disclosure requirements. Under this revised
statement, all costs incurred to effect an acquisition are
recognized separately from the acquisition. Also, restructuring
costs that are expected but the acquirer is not obligated to
incur are recognized separately from the acquisition. On
January 1, 2009, the Company adopted ASC Topic 805. In the
first quarter of 2009, the Company expensed $4.8 million
related to on-going acquisition related activity.
In December 2007, the FASB ASC amended Topic 810,
Consolidation
. For consolidated subsidiaries that are
less than wholly owned, the third party holdings of equity
interests are referred to as noncontrolling interests. The
portion of net income (loss) attributable to noncontrolling
interests for such subsidiaries is presented as net income
(loss) applicable to noncontrolling interest on the consolidated
statement of operation, and the portion of stockholders’
equity of such subsidiaries is presented as noncontrolling
interest on the consolidated balance sheet. Effective
January 1, 2009, the Company adopted ASC Topic 810.
The adoption of ASC Topic 810 did not have a material impact on
the Company’s financial condition, results of operations or
cash flows. However, it did impact the presentation and
disclosure of noncontrolling (minority) interests in our
consolidated financial statements and notes to the consolidated
financial statements. As a result of the retrospective
presentation and disclosure requirements of ASC Topic 810, the
Company was required to reflect the change in presentation and
disclosure for the period ending March 31, 2009 and all
periods presented in future filings.
The principal effect on the prior year balance sheets related to
the adoption of ASC Topic 810 is summarized as follows:
|
(millions of dollars)
|
December 31,
|
|||||
| Balance Sheet | 2008 | |||||
|
Total equity, as previously reported
|
$ | 2,006.0 | ||||
|
Increase for Topic 810 reclass of noncontrolling interest
|
31.5 | |||||
|
Total equity, as adjusted
|
$ | 2,037.5 | ||||
The principal effect on the prior year statement of operations
related to the adoption of ASC Topic 810 is summarized as
follows:
|
Year Ended
|
||||||
|
(millions of dollars)
|
December 31,
|
|||||
| Consolidated Statement of Operations | 2008 | |||||
|
Net loss, as previously reported
|
$ | (35.6 | ) | |||
|
Topic 810 reclass of noncontrolling interest
|
(16.3 | ) | ||||
|
Net loss, as adjusted
|
$ | (19.3 | ) | |||
|
Less: Net earnings attributable to noncontrolling interest
|
16.3 | |||||
|
Net loss attributable to BorgWarner Inc.
|
$ | (35.6 | ) | |||
63
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The principal effect on the prior year statement of cash flows
related to the adoption of ASC Topic 810 is summarized as
follows:
|
Year Ended
|
||||||
|
(millions of dollars)
|
December 31,
|
|||||
| Statement of Cash Flows | 2008 | |||||
|
Net loss, as previously reported
|
$ | (35.6 | ) | |||
|
Topic 810 reclass of noncontrolling interest
|
(16.3 | ) | ||||
|
Net loss, as adjusted
|
$ | (19.3 | ) | |||
|
Year Ended
|
||||||
|
(millions of dollars)
|
December 31,
|
|||||
| Statement of Cash Flows | 2008 | |||||
|
Equity in affiliates’ earnings, net of dividends received,
minority interest and other, as previously reported
|
$ | 28.3 | ||||
|
Less: Topic 810 reclass of noncontrolling interest
|
(16.3 | ) | ||||
|
Equity in affiliates’ earnings, net of dividends received
and other
|
$ | 12.0 | ||||
The principal effect on the prior year comprehensive income
related to the adoption of ASC Topic 810 is summarized as
follows:
|
December 31,
|
||||
| (millions of dollars) | 2008 | |||
|
Net foreign currency translation and hedge instruments
adjustment, as previously reported
|
$ | (136.9 | ) | |
|
Topic 810 reclass of noncontrolling interest
|
(10.8 | ) | ||
|
Net foreign currency translation and hedge instruments
adjustment, as adjusted
|
$ | (126.1 | ) | |
Due to the adoption of ASC Topic 810, the Company revised the
presentation of cash payments related to the acquisition of
noncontrolling (minority) interests from the Investing to the
Financing section of the Company’s Consolidated Statement
of Cash Flows. The principal effect on the prior year cash flows
related to the adoption of ASC Topic 810 is summarized as
follows:
|
Year Ended
|
||||||
|
(millions of dollars)
|
December 31,
|
|||||
| Statement of Cash Flows | 2008 | |||||
|
Payments for businesses acquired, net of cash acquired, as
previously reported
|
$ | (141.2 | ) | |||
|
Less: Topic 805 reclass of noncontrolling interest
|
141.2 | |||||
|
Payments for businesses acquired, net of cash acquired
|
$ | — | ||||
|
Year Ended
|
||||||
|
(millions of dollars)
|
December 31,
|
|||||
| Statement of Cash Flows | 2008 | |||||
|
Net cash used in investing activities, as previously reported
|
$ | (485.1 | ) | |||
|
Less: Topic 805 reclass of noncontrolling interest
|
141.2 | |||||
|
Net cash used in investing activities
|
$ | (343.9 | ) | |||
64
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Year Ended
|
||||||
|
(millions of dollars)
|
December 31,
|
|||||
| Statement of Cash Flows | 2008 | |||||
|
Net cash provided by financing activities, as previously reported
|
$ | 5.1 | ||||
|
Less: Topic 805 reclass of noncontrolling interest
|
(141.2 | ) | ||||
|
Net cash used in financing activities
|
$ | (136.1 | ) | |||
In March 2008, the FASB ASC amended Topic 815,
Derivatives
and Hedging
. ASC Topic 815 requires entities to provide
enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items
are accounted for under ASC Topic 815 and its related
interpretations, and how derivative instruments and related
hedged items affect an entity’s financial position,
financial performance, and cash flows. On January 1, 2009,
the Company adopted ASC Topic 815. See Note 10 to the
Consolidated Financial Statements for more information regarding
the implementation of ASC Topic 815.
In May 2008, the FASB ASC amended Topic 470,
Debt
. Under
ASC Topic 470, an entity must separately account for the
liability and equity components of the convertible debt
instruments that may be settled entirely or partially in cash
upon conversion in a manner that reflects the issuer’s
interest cost. ASC Topic 470 is effective for fiscal years
beginning after December 15, 2008, and for interim periods
within those fiscal years, with retrospective application
required. As a result of our adoption of ASC Topic 470 for
fiscal 2009 and the Company’s April 9, 2009 issuance
of $373.8 million convertible senior notes due
April 15, 2012, we recorded the equity and liability
components of the notes on our December 31, 2009
Consolidated Balance Sheet. Additionally, ASC Topic 470 requires
us to accrete the discounted carrying value of the convertible
notes to their face value over the term of the notes. The
Company’s interest expense associated with this
amortization is based on the effective interest rate of the
convertible senior notes of 9.365%. See Note 8 to the
Consolidated Financial Statements for more information regarding
the implementation of ASC Topic 470.
In December 2008, the FASB ASC amended Topic 715,
Compensation — Retirement Benefits
. ASC Topic
715 requires entities to provide enhanced disclosures about how
investment allocation decisions are made, the major categories
of plan assets, the inputs and valuation techniques used to
measure fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in
plan assets for the period, and significant concentrations of
risk within plan assets. See Note 9 and Note 11 to the
Consolidated Financial Statements for more information regarding
the implementation of ASC Topic 715.
In June 2009, the FASB ASC amended Topic 860,
“Accounting for Transfer of Financial Assets”
.
ASC Topic 860 removes the concept of a qualifying
special-purpose entity and removes the exception from applying
ASC Topic 810, Consolidation of Variable Interest Entities, to
qualifying special-purpose entities. This Statement modifies the
financial-components approach used in ASC Topic 860 and limits
the circumstances in which a financial asset, or portion of a
financial asset, should be derecognized. Additionally, enhanced
disclosures are required to provide financial statement users
with greater transparency about transfers of financial assets
and a transferor’s continuing involvement with transferred
financial assets. On January 1, 2010, the Company elected
to prospectively adopt ASC Topic 860. The impact of this
adoption is an increase in receivables, net of $80 million
and an increase in notes payable and other short-term debt of
$80 million in the Company’s December 31, 2010
Consolidated Balance Sheet. See Note 1 to the Consolidated
Financial Statements for more information on the implementation
of ASC Topic 860.
In June 2009, the FASB amended ASC Topic 810,
“
Consolidation”
. ASC Topic 810 requires an
ongoing reassessment of whether an enterprise is the primary
beneficiary of a variable interest entity. Additionally, ASC
Topic 810 requires enhanced disclosures that will provide users
of financial statements with more transparent information about
an enterprise’s involvement in variable interest entities.
On January 1, 2010, the Company adopted ASC Topic 810. The
adoption of this guidance did not have a material impact on the
Company’s financial statements.
65
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In June 2009, the FASB ASC amended Topic 105, “
Generally
Accepted Accounting Principles”
. This ASC Topic
instituted a major change in the way accounting standards are
organized. The accounting standards Codification became the
single official source of authoritative, nongovernmental GAAP.
As of September 30, 2009 only one level of authoritative
GAAP exists, other than guidance issued by the SEC. All other
literature is non-authoritative. The Company adopted the
Codification in the third quarter of 2009. The adoption of the
Codification had no impact on the Company’s consolidated
financial position, results of operations or cash flows.
| NOTE 2 | RESEARCH AND DEVELOPMENT COSTS |
The following table presents the Company’s gross and net
expenditures on research and development (“R&D”)
activities:
|
(millions of dollars)
|
||||||||||||||
| Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||
|
Gross R&D expenditures
|
$ | 233.2 | $ | 219.0 | $ | 273.4 | ||||||||
|
Customer reimbursements
|
(48.2 | ) | (63.8 | ) | (67.7 | ) | ||||||||
|
Net R&D expenditures
|
$ | 185.0 | $ | 155.2 | $ | 205.7 | ||||||||
The Company’s net R&D expenditures are included in the
selling, general, and administrative expenses of the
Consolidated Statements of Operations. Net R&D expenditures
as a percentage of net sales were 3.3% in 2010 and 3.9% in 2009
and 2008. Customer reimbursements are netted against gross
R&D expenditures upon billing of services performed. The
Company has contracts with several customers at the
Company’s various R&D locations. No such contract
exceeded $6.0 million in any of the years presented.
| NOTE 3 | OTHER EXPENSE (INCOME) |
Items included in other expense (income) consist of:
|
(millions of dollars)
|
||||||||||||||
| Year Ended December 31, | 2010 | 2009 | 2008 | |||||||||||
|
Environmental litigation settlement
|
$ | 28.0 | $ | — | $ | — | ||||||||
|
BERU-Eichenauer equity investment gain
|
(8.0 | ) | — | — | ||||||||||
|
Loss on the sale of a product line
|
1.5 | — | 2.2 | |||||||||||
|
Net loss (gain) on asset disposals
|
1.8 | (0.1 | ) | 2.0 | ||||||||||
|
Other
|
(0.9 | ) | — | (0.2 | ) | |||||||||
|
Total other expense (income)
|
$ | 22.4 | $ | (0.1 | ) | $ | 4.0 | |||||||
See Notes 14 and 18 to the Consolidated Financial
Statements for more information regarding the Company’s
second quarter 2010 environmental litigation settlement and
BERU-Eichenauer equity investment gain.
66
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| NOTE 4 | INCOME TAXES |
Earnings before income taxes and the provision for income taxes
are presented in the following table.
|
(millions of dollars)
|
2010 | 2009 | 2008 | |||||||||||||||||||||||||||||||||||
| Year Ended December 31, | U.S. | Non-U.S. | Total | U.S. | Non-U.S. | Total | U.S. | Non-U.S. | Total | |||||||||||||||||||||||||||||
|
Earnings (loss) before taxes
|
$ | (26.7 | ) | $ | 504.6 | $ | 477.9 | $ | (138.5 | ) | $ | 156.4 | $ | 17.9 | $ | (123.8 | ) | $ | 137.8 | $ | 14.0 | |||||||||||||||||
|
Provision for income taxes:
|
||||||||||||||||||||||||||||||||||||||
|
Current:
|
||||||||||||||||||||||||||||||||||||||
|
Federal/foreign
|
14.0 | 117.7 | 131.7 | (2.7 | ) | 42.7 | 40.0 | 7.7 | 99.5 | 107.2 | ||||||||||||||||||||||||||||
|
State
|
2.2 | — | 2.2 | 1.5 | — | 1.5 | 1.0 | — | 1.0 | |||||||||||||||||||||||||||||
|
Total current
|
16.2 | 117.7 | 133.9 | (1.2 | ) | 42.7 | 41.5 | 8.7 | 99.5 | 108.2 | ||||||||||||||||||||||||||||
|
Deferred
|
(48.9 | ) | (3.3 | ) | (52.2 | ) | (51.6 | ) | (8.4 | ) | (60.0 | ) | (44.7 | ) | (30.2 | ) | (74.9 | ) | ||||||||||||||||||||
|
Total provision for income taxes
|
$ | (32.7 | ) | $ | 114.4 | $ | 81.7 | $ | (52.8 | ) | $ | 34.3 | $ | (18.5 | ) | $ | (36.0 | ) | $ | 69.3 | $ | 33.3 | ||||||||||||||||
|
Effective tax rate
|
(122.5 | )% | 22.7 | % | 17.1 | % | (38.1 | )% | 21.9 | % | (103.4 | )% | (29.1 | )% | 50.3 | % | 237.9 | % | ||||||||||||||||||||
The provision for income taxes resulted in an effective tax rate
for 2010 of 17.1% compared with rates of (103.4)% in 2009 and
237.9% in 2008.
In the first quarter of 2010, the Patient Protection and
Affordable Care Act (PPACA) was signed into law. In addition,
the Health Care and Education Reconciliation Act of 2010
(“the Reconciliation Act”) was also passed, amending
certain portions of the PPACA. The PPACA contains a provision
eliminating tax deductibility of retiree health care costs to
the extent of federal subsidies received by plan sponsors who
provide retiree prescription drug benefits equivalent to
Medicare Part D coverage. However, based upon the changes
made in the Reconciliation Act, the tax benefit related to the
Medicare Part D subsidies will be extended until
December 31, 2012. For all tax years ending after
December 31, 2012 there will no longer be a tax benefit for
the Medicare Part D subsidies. Therefore, the impact to the
Company for the loss of this future tax benefit (after
December 31, 2012) was an additional tax expense of
approximately $2.9 million in 2010.
The provision for income taxes for the year ended
December 31, 2010 included a favorable impact of
$21.2 million from the reversal of the Company’s
valuation allowance on U.S. based foreign tax credit
carryforwards. The improving financial performance of the
Company’s U.S. operations has resulted in greater
certainty that the Company will be able to fully utilize
existing foreign tax credit carryforwards.
The Company’s annual effective tax rate for 2010 is 17.1%
which includes the impact of the reversal of the Company’s
valuation allowance on U.S. based foreign tax credit
carryforwards, the change in tax legislation related to Medicare
Part D subsidies, the additional tax expense associated
with the BERU-Eichenauer equity investment gain and the tax
benefit associated with the Company’s environmental
litigation settlement. This rate differs from the
U.S. statutory rate primarily due to foreign rates, which
differ from those in the U.S., the realization of certain
business tax credits including foreign tax credits and favorable
permanent differences between book and tax treatment for items,
including equity in affiliates’ earnings.
67
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Following is a rollforward of the Company’s total gross
unrecognized tax benefits for the
year-to-date
periods ended December 31, 2010 and 2009, respectively. Of
the total $27.6 million of unrecognized tax benefits as of
December 31, 2010, approximately $22.8 million of this
total represents the amount that, if recognized, would affect
the Company’s effective income tax rate in future periods.
This amount differs from the gross unrecognized tax benefits
presented in the table due to the decrease in the
U.S. federal income taxes which would occur upon
recognition of the state tax benefits included therein.
| millions of dollars | 2010 | 2009 | ||||||||
|
Balance, January 1
|
$ | 34.8 | $ | 61.1 | ||||||
|
Additions based on tax positions related to current year
|
1.1 | 16.4 | ||||||||
|
Additions (Reductions) for tax positions of prior years
|
0.3 | (16.5 | ) | |||||||
|
Reductions for lapse in statute of limitations
|
(1.3 | ) | (17.0 | ) | ||||||
|
Settlements
|
(6.6 | ) | (9.9 | ) | ||||||
|
Translation adjustment
|
(0.7 | ) | 0.7 | |||||||
|
Balance, December 31
|
$ | 27.6 | $ | 34.8 | ||||||
In 2010 the Company closed / settled certain open
years for foreign jurisdictions that resulted in cash payments
of $6.6 million. Possible changes related to other
examinations cannot be reasonably estimated at this time.
The Company recognizes interest and penalties related to
unrecognized tax benefits in income tax expense. The Company had
accrued approximately $11.4 million for the payment of
interest and penalties at December 31, 2010. The Company
had approximately $11.6 million for the payment of interest
and penalties accrued at December 31, 2009.
The Company and/or one of its subsidiaries files income tax
returns in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. The Company is no longer
subject to income tax examinations by tax authorities in its
major tax jurisdictions as follows:
|
Years No Longer
|
||||
| Tax Jurisdiction | Subject to Audit | |||
|
U.S. Federal
|
2006 and prior | |||
|
Brazil
|
2003 and prior | |||
|
France
|
2006 and prior | |||
|
Germany
|
2003 and prior | |||
|
Hungary
|
2007 and prior | |||
|
Italy
|
2005 and prior | |||
|
Japan
|
2008 and prior | |||
|
South Korea
|
2005 and prior | |||
|
United Kingdom
|
2008 and prior | |||
In certain tax jurisdictions the Company may have more than one
taxpayer. The table above reflects the status of the significant
taxpayers in each major tax jurisdiction. In Germany the open
tax years for the Company’s BERU subsidiary are from 2002
and forward.
68
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The analysis of the variance of income taxes as reported from
income taxes computed at the U.S. statutory rate for
consolidated operations is as follows:
| (millions of dollars) | 2010 | 2009 | 2008 | |||||||||||
|
Income taxes at U.S. statutory rate of 35%
|
$ | 167.3 | $ | 6.2 | $ | 4.9 | ||||||||
|
Increases (decreases) resulting from:
|
||||||||||||||
|
Income from
non-U.S.
sources including withholding taxes
|
(55.8 | ) | (17.1 | ) | (26.5 | ) | ||||||||
|
State taxes, net of federal benefit
|
1.4 | 4.7 | 0.9 | |||||||||||
|
Business tax credits
|
0.2 | (1.9 | ) | (9.8 | ) | |||||||||
|
Affiliates’ earnings
|
(13.8 | ) | (7.5 | ) | (13.2 | ) | ||||||||
|
Accrual adjustment and settlement of prior year tax matters
|
0.4 | (6.3 | ) | 6.0 | ||||||||||
|
Medicare prescription drug benefit
|
2.9 | 1.7 | 1.1 | |||||||||||
|
Goodwill impairment
|
— | — | 54.9 | |||||||||||
|
Restructuring
|
— | — | 0.6 | |||||||||||
|
Valuation allowance
|
(21.2 | ) | 7.7 | 13.1 | ||||||||||
|
Non-temporary differences and other
|
0.3 | (6.0 | ) | 1.3 | ||||||||||
|
Provision for income taxes as reported
|
$ | 81.7 | $ | (18.5 | ) | $ | 33.3 | |||||||
During 2010, certain countries enacted changes to their
respective statutory income tax rate which are effective
starting in 2011. In the UK, the statutory income tax rate was
reduced 1% from 28% to 27%. In Hungary, the statutory income tax
rate was reduced 9% from 19% to 10% beginning in tax year 2013.
69
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Following are the gross components of deferred tax assets and
liabilities as of December 31, 2010 and 2009:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Current deferred tax assets:
|
||||||||||
|
Employee related
|
$ | 26.2 | $ | 23.9 | ||||||
|
Net operating loss carryforwards
|
9.8 | 4.7 | ||||||||
|
Inventory
|
8.6 | 9.3 | ||||||||
|
Warranties
|
6.3 | 4.5 | ||||||||
|
Litigation & environmental
|
5.8 | 6.9 | ||||||||
|
Customer claims
|
2.0 | 2.9 | ||||||||
|
Derivatives
|
1.2 | 1.9 | ||||||||
|
Other
|
6.8 | 6.4 | ||||||||
|
Total current deferred tax assets
|
$ | 66.7 | $ | 60.5 | ||||||
|
Current deferred tax liabilities:
|
||||||||||
|
Derivatives
|
$ | — | $ | (1.0 | ) | |||||
|
Other
|
(7.6 | ) | (3.8 | ) | ||||||
|
Total current deferred tax liabilities
|
$ | (7.6 | ) | $ | (4.8 | ) | ||||
|
Non-current deferred tax assets:
|
||||||||||
|
Foreign tax credits
|
$ | 183.4 | $ | 138.3 | ||||||
|
Other comprehensive income
|
98.0 | 103.7 | ||||||||
|
Research and Development Capitalization
|
49.3 | — | ||||||||
|
Pension and other post employment benefits
|
44.6 | 52.5 | ||||||||
|
Employee related
|
20.0 | 13.4 | ||||||||
|
Net operating loss carryforwards
|
15.0 | 87.5 | ||||||||
|
Research and development credits
|
6.3 | 5.9 | ||||||||
|
Warranties
|
4.4 | 4.5 | ||||||||
|
Litigation and environmental
|
2.6 | 2.5 | ||||||||
|
Capital loss carryforwards
|
— | 3.5 | ||||||||
|
Other
|
8.1 | 4.1 | ||||||||
|
Total non-current deferred tax assets
|
$ | 431.7 | $ | 415.9 | ||||||
|
Non-current deferred tax liabilities:
|
||||||||||
|
Goodwill & intangibles
|
$ | (130.3 | ) | $ | (103.5 | ) | ||||
|
Fixed assets
|
(84.8 | ) | (101.7 | ) | ||||||
|
Dividends accrued
|
(2.8 | ) | — | |||||||
|
Other comprehensive income
|
(3.0 | ) | (3.5 | ) | ||||||
|
Lease obligation — production equipment
|
— | (1.9 | ) | |||||||
|
Other
|
(7.7 | ) | (4.5 | ) | ||||||
|
Total non-current deferred tax liabilities
|
$ | (228.6 | ) | $ | (215.1 | ) | ||||
|
Total deferred tax items
|
$ | 262.2 | $ | 256.5 | ||||||
|
Valuation allowances
|
(13.0 | ) | (43.8 | ) | ||||||
|
Net deferred tax asset
|
$ | 249.2 | $ | 212.7 | ||||||
70
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Foreign tax credit and net operating loss carryforwards are
shown gross with the corresponding valuation allowances located
at the end of the table.
The deferred tax assets and liabilities recognized in the
Company’s Consolidated Balance Sheets are as follows:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Deferred income taxes — current assets
|
$ | 75.8 | $ | 60.2 | ||||||
|
Deferred income taxes — current liabilities
|
(18.4 | ) | (4.8 | ) | ||||||
|
Other non-current assets
|
305.5 | 247.1 | ||||||||
|
Other non-current liabilities
|
(113.7 | ) | (89.8 | ) | ||||||
|
Net deferred tax asset (current and non-current)
|
$ | 249.2 | $ | 212.7 | ||||||
The other non-current assets and liabilities have been netted
within their respective taxing jurisdictions due to
consolidation (primarily U.S. and Germany).
The deferred income taxes — current assets are
primarily comprised of amounts from the U.S., France, Italy,
Japan, Spain and the U.K. The deferred income taxes —
current liabilities are primarily comprised of amounts from
Germany. The other non-current assets are primarily comprised of
amounts from the U.S.. The other non-current liabilities are
primarily comprised of amounts from France, Germany, Italy,
Spain and the U.K.
At December 31, 2010, the Company has a U.S. net
operating loss carryforward of $1.6 million that is
available to offset future taxable income. This loss
carryforward expires in 2030. Certain
non-U.S. subsidiaries
have net operating loss carryforwards totaling
$69.5 million that are available to offset future taxable
income. Carryforwards of $29.7 million expire at various
dates from 2011 through 2019 and the balance has no expiration
date. A valuation allowance of $6.5 million has been
recorded for the tax effect on $26.3 million of the loss
carryforwards. Certain U.S. subsidiaries have state net
operating loss carryforwards totaling $510.3 million which
are completely offset by a valuation allowance due to risk of
realization. Certain
non-U.S. subsidiaries
located in China, Korea and Poland have tax exemptions or tax
holidays. The cumulative impact of these tax exemptions or tax
holidays was a reduction of tax expense of approximately
$17.0 million in 2010.
No deferred income taxes have been provided on the excess of the
amount for financial reporting over the tax basis of investments
in foreign subsidiaries or foreign equity affiliates totaling
$1,574.6 million in 2010, as these amounts are essentially
permanent in nature. The excess amount will become taxable upon
repatriation of assets, sale, or liquidation of the investment.
It is not practicable to determine the unrecognized deferred tax
liability on the excess amount because the actual tax liability
on the excess amount, if any, is dependent on circumstances
existing when remittance occurs.
71
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| NOTE 5 | BALANCE SHEET INFORMATION |
Detailed balance sheet data are as follows:
|
(millions of dollars)
|
||||||||||
| December 31, | 2010 | 2009 | ||||||||
|
Receivables:
|
||||||||||
|
Customers
|
$ | 859.5 | $ | 634.5 | ||||||
|
Other
|
168.4 | 101.8 | ||||||||
|
Gross receivables
|
1,027.9 | 736.3 | ||||||||
|
Bad debt allowance(a)
|
(4.0 | ) | (4.3 | ) | ||||||
|
Net receivables
|
$ | 1,023.9 | $ | 732.0 | ||||||
|
Inventories:
|
||||||||||
|
Raw material and supplies
|
$ | 244.0 | $ | 187.3 | ||||||
|
Work in progress
|
88.1 | 69.8 | ||||||||
|
Finished goods
|
111.7 | 68.8 | ||||||||
|
FIFO inventories
|
443.8 | 325.9 | ||||||||
|
LIFO reserve
|
(13.2 | ) | (11.6 | ) | ||||||
|
Net inventories
|
$ | 430.6 | $ | 314.3 | ||||||
|
Other current assets:
|
||||||||||
|
Prepaid tooling
|
$ | 21.8 | $ | 25.6 | ||||||
|
Product liability insurance asset
|
25.8 | 24.9 | ||||||||
|
Derivatives
|
2.7 | 12.0 | ||||||||
|
Prepaid tax
|
5.8 | 2.2 | ||||||||
|
Other
|
23.6 | 23.2 | ||||||||
|
Total other current assets
|
$ | 79.7 | $ | 87.9 | ||||||
|
Property, plant and equipment:
|
||||||||||
|
Land
|
$ | 67.9 | $ | 56.3 | ||||||
|
Buildings
|
601.4 | 570.0 | ||||||||
|
Machinery and equipment
|
1,961.2 | 1,866.5 | ||||||||
|
Capital leases
|
2.3 | 2.4 | ||||||||
|
Construction in progress
|
128.2 | 126.4 | ||||||||
|
Total property, plant and equipment
|
2,761.0 | 2,621.6 | ||||||||
|
Accumulated depreciation
|
(1,308.0 | ) | (1,211.6 | ) | ||||||
| 1,453.0 | 1,410.0 | |||||||||
|
Tooling, net of amortization
|
89.6 | 80.3 | ||||||||
|
Property, plant & equipment, net
|
$ | 1,542.6 | $ | 1,490.3 | ||||||
|
Investments and advances:
|
||||||||||
|
Investment in equity affiliates
|
$ | 205.2 | $ | 194.8 | ||||||
|
Other investments and advances
|
102.7 | 62.6 | ||||||||
|
Total investments and advances
|
$ | 307.9 | $ | 257.4 | ||||||
|
Other non-current assets:
|
||||||||||
|
Product liability insurance asset
|
$ | 24.8 | $ | 25.0 | ||||||
|
Deferred income taxes
|
305.5 | 247.1 | ||||||||
|
Other intangible assets
|
168.8 | 148.6 | ||||||||
|
Other
|
32.0 | 29.8 | ||||||||
|
Total other non-current assets
|
$ | 531.1 | $ | 450.5 | ||||||
72
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
(millions of dollars)
|
||||||||||
| December 31, | 2010 | 2009 | ||||||||
|
Accounts payable and accrued expenses:
|
||||||||||
|
Trade payables
|
$ | 737.7 | $ | 539.2 | ||||||
|
Trade payables for capital expenditures
|
28.9 | 28.6 | ||||||||
|
Payroll and employee related
|
190.2 | 136.7 | ||||||||
|
Retirement related
|
34.7 | 34.8 | ||||||||
|
Product warranties
|
37.0 | 32.5 | ||||||||
|
Customer related
|
32.5 | 31.4 | ||||||||
|
Product liability
|
25.8 | 24.9 | ||||||||
|
Severance
|
4.6 | 17.5 | ||||||||
|
Insurance
|
11.9 | 16.2 | ||||||||
|
Derivatives
|
3.3 | 14.6 | ||||||||
|
Environmental
|
21.0 | 12.2 | ||||||||
|
Interest
|
14.3 | 11.2 | ||||||||
|
Legal and professional fees
|
8.6 | 9.1 | ||||||||
|
Dividends payable to non-controlling shareholders
|
4.2 | 5.4 | ||||||||
|
Current deferred income taxes
|
18.4 | 4.8 | ||||||||
|
Other
|
51.0 | 58.0 | ||||||||
|
Total accounts payable and accrued expenses
|
$ | 1,224.1 | $ | 977.1 | ||||||
|
Other non-current liabilities:
|
||||||||||
|
Deferred income taxes
|
$ | 113.7 | $ | 89.8 | ||||||
|
Cross currency swaps and derivatives
|
78.8 | 54.2 | ||||||||
|
Product warranties
|
29.8 | 29.2 | ||||||||
|
Product liability accrual
|
24.8 | 25.0 | ||||||||
|
Deferred revenue
|
23.4 | 22.7 | ||||||||
|
Environmental
|
8.2 | 10.1 | ||||||||
|
Other
|
84.2 | 64.6 | ||||||||
|
Total other non-current liabilities
|
$ | 362.9 | $ | 295.6 | ||||||
| (a) | Bad debt allowance: |
| 2010 | 2009 | 2008 | ||||||||||
|
Beginning balance
|
$ | (4.3 | ) | $ | (5.7 | ) | $ | (5.2 | ) | |||
|
Provision
|
(1.1 | ) | 0.1 | (2.4 | ) | |||||||
|
Write-offs
|
2.5 | 1.4 | 1.6 | |||||||||
|
Translation adjustment and other
|
(1.1 | ) | (0.1 | ) | 0.3 | |||||||
|
Ending balance
|
$ | (4.0 | ) | $ | (4.3 | ) | $ | (5.7 | ) | |||
Interest costs capitalized during 2010 and 2009 were
$11.2 million, respectively. As of December 31, 2010
and December 31, 2009, accounts payable of
$28.9 million and $28.6 million, respectively, were
related to property, plant and equipment purchases. As of
December 31, 2010 and December 31, 2009, specific
assets of $3.4 million and $3.7 million, respectively,
were pledged as collateral under certain of the Company’s
long-term debt agreements.
As a result of the impairment charges recorded in the third and
fourth quarters of 2008, depreciation expense for the year ended
December 31, 2010 and 2009 was reduced by approximately
$9 million and $11 million, respectively.
73
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The automotive industry experienced unprecedented declines in
production in the fourth quarter of 2008 and projected continued
declines for the full year of 2009. According to Accounting
Standards Codification (“ASC”) 250, future
depreciation expense should be revised due to a change in the
estimated future benefits inherent in an asset, the pattern of
consumption of those benefits, or the information available to
the entity about those benefits. As a result of the 2008 and
2009 unprecedented declines in production activity, the Company
determined that its usage pattern for certain assets had changed
significantly and revised the useful lives of certain equipment
starting in 2009. This adjustment was considered to be a change
in an accounting estimate.
The impact to the Company in 2010 and 2009 were as follows
(unaudited):
| 2010 | ||||||||||||||||||||||
| (millions of dollars) | Q1 | Q2 | Q3 | Q4 | Full Year | |||||||||||||||||
|
Operating income increase
|
$ | 4.8 | $ | 4.7 | $ | 4.6 | $ | 4.7 | $ | 18.8 | ||||||||||||
|
Net earnings increase attributable to BorgWarner Inc.
|
3.7 | 3.6 | 3.6 | 3.6 | 14.5 | |||||||||||||||||
|
Earnings per share increase — Basic
|
$ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.13 | ||||||||||||
|
Earnings per share increase — Diluted
|
$ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.11 | ||||||||||||
| 2009 | ||||||||||||||||||||||
| (millions of dollars) | Q1 | Q2 | Q3 | Q4 | Full Year | |||||||||||||||||
|
Operating income increase
|
$ | 4.6 | $ | 4.6 | $ | 4.6 | $ | 4.6 | $ | 18.4 | ||||||||||||
|
Net earnings increase attributable to BorgWarner Inc.
|
3.5 | 3.5 | 3.5 | 3.5 | 14.0 | |||||||||||||||||
|
Earnings per share increase — Basic
|
$ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.12 | ||||||||||||
|
Earnings per share increase — Diluted
|
$ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.03 | $ | 0.12 | ||||||||||||
NSK-Warner
The Company has a 50% interest in NSK-Warner, a joint venture
based in Japan that manufactures automatic transmission
components. The Company’s share of the earnings or losses
reported by NSK-Warner is accounted for using the equity method
of accounting. NSK-Warner has a fiscal year-end of
March 31. The Company’s equity in the earnings of
NSK-Warner consists of the 12 months ended November 30 so
as to reflect earnings on as current a basis as is reasonably
feasible. NSK-Warner is the joint venture partner with a 40%
interest in the Drivetrain Group’s South Korean subsidiary,
BorgWarner Transmission Systems Korea Inc. Dividends received
from NSK-Warner were $35.5 million, $48.0 million and
$40.8 million in calendar year 2010, 2009 and 2008,
respectively.
Following are summarized financial data for NSK-Warner,
translated using the ending or periodic rates as of and for the
years ended November 30, 2010, 2009 and 2008 (unaudited):
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Balance sheets:
|
||||||||||
|
Cash and securities
|
$ | 109.1 | $ | 83.0 | ||||||
|
Current assets
|
310.2 | 279.1 | ||||||||
|
Non-current assets
|
174.9 | 182.6 | ||||||||
|
Current liabilities
|
151.4 | 137.9 | ||||||||
|
Non-current liabilities
|
41.9 | 45.0 | ||||||||
|
Total equity
|
291.8 | 278.8 | ||||||||
74
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 2010 | 2009 | 2008 | ||||||||||
|
Statements of operations:
|
||||||||||||
|
Net sales
|
$ | 634.7 | $ | 494.5 | $ | 637.9 | ||||||
|
Gross profit
|
131.9 | 89.2 | 140.0 | |||||||||
|
Net income
|
68.3 | 35.8 | 67.6 | |||||||||
There was no debt outstanding as of November 30, 2010 and
2009. Purchases from NSK-Warner for the years ended
December 31, 2010, 2009 and 2008 were $14.6 million,
$16.5 million and $25.4 million, respectively.
| NOTE 6 | GOODWILL AND OTHER INTANGIBLES |
The Company annually reviews its goodwill for impairment in the
fourth quarter of each year for all of its reporting units, or
more often when events and circumstances warrant such a review.
The Company’s goodwill impairment review, under ASC Topic
350, requires the Company to make significant assumptions and
estimates about the extent and timing of future cash flows,
discount rates and growth rates. The basis of our goodwill
impairment analysis is the Company’s annual budget and
long-range plan (“LRP”). The annual budget and LRP
include a five year projection of future cash flows based on
actual new products and customer commitments. As part of the
projection, we assumed the last year of the LRP data is a fair
indication of the future performance, including fundamental
industry growth for the business beyond the five year period
into perpetuity. As the LRP is estimated over a significant
future period of time, those estimates and assumptions are
subject to a high degree of uncertainty. We also utilize market
valuation models and other financial ratios, which require us to
make certain assumptions and estimates regarding the
applicability of those models to our assets and businesses. We
believe that the assumptions and estimates used to determine the
estimated fair values of each of our reporting units are
reasonable. Different assumptions could materially affect the
estimated fair value. The primary assumptions affecting the
Company’s December 31, 2010 goodwill impairment review
are as follows:
| • | Discount Rate: The Company used a 10% weighted average cost of capital (“WACC”) as the discount rate for future cash flows. The WACC is intended to represent a rate of return that would be expected by a market participant. | |
| • | Operating Income Margin: The Company utilized historical and expected operating income margins, which varied based on the projections of each reporting unit being evaluated. |
In addition to the above significant assumptions, the Company
notes the following risk to volume assumptions that could have
an impact on the discounted cash flow model:
| • | Our industry is cyclical and our results of operations will be adversely affected by industry downturns. | |
| • | We are dependent on market segments that use our key products and would be affected by decreasing demand in those segments. | |
| • | We are subject to risks related to our international operations. |
Using the assumptions outlined above, the impairment testing
conducted in the fourth quarter of 2010 indicated that goodwill
was not impaired in any reporting unit tested.
The estimated fair value of one reporting unit tested within the
Engine operating segment was 112% of its carrying value. Based
on our sensitivity analysis, a 1% increase in the discount rate
or a 1% decrease in the operating margin assumptions would
result in the carrying value exceeding the estimated fair value,
which would require further evaluation of the reporting
unit’s goodwill. This reporting unit had approximately
$165 million of goodwill at December 31, 2010.
75
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In 2008 the Company recorded impairment charges totaling
€111.5 ($156.8) million to adjust BERU’s goodwill
to its estimated fair value. The impairment charge is
attributable to a decrease in the operating unit’s
estimated fair value based primarily upon the effect of the
decline in European market conditions on current and projected
operating results. The impairment charge was also impacted by
the recognition of additional goodwill in the second quarter of
2008, which was based on the court determined buy out value of
€71.32 per share related to the Domination and Profit
Transfer Agreement. Any differences in future results compared
to management’s estimates could result in fair values
different from estimated fair values, which could materially
impact the Company’s future results of operations and
financial condition.
See Note 18, “Recent Transactions”, for further
discussion on the BERU Domination and Profit Transfer Agreement.
The changes in the carrying amount of goodwill for the year
ended December 31, 2010 and 2009 are as follows:
| Engine | Drivetrain | Engine | Drivetrain | |||||||||||||||
| (millions of dollars) | 2010 | 2009 | ||||||||||||||||
|
Gross goodwill balance as of January 1
|
$ | 1,297.8 | $ | 265.6 | $ | 1,289.6 | $ | 264.8 | ||||||||||
|
Accumulated impairment losses
|
(501.8 | ) | (0.2 | ) | (501.8 | ) | (0.2 | ) | ||||||||||
|
Net goodwill balance as of January 1
|
$ | 796.0 | $ | 265.4 | $ | 787.8 | $ | 264.6 | ||||||||||
|
Goodwill during the year:
|
||||||||||||||||||
|
Acquired
|
74.1 | — | — | |||||||||||||||
|
Divested
|
(1.4 | ) | — | (1.1 | ) | — | ||||||||||||
|
Translation adjustment
|
(18.6 | ) | (2.0 | ) | 9.3 | 0.8 | ||||||||||||
|
Balance as of December 31
|
$ | 850.1 | $ | 263.4 | $ | 796.0 | $ | 265.4 | ||||||||||
The Company’s other intangible assets, primarily from
acquisitions consist of the following:
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||||||
|
Carrying
|
Accumulated
|
Carrying
|
Carrying
|
Accumulated
|
Carrying
|
|||||||||||||||||||||
| (millions of dollars) | Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||
|
Amortized intangible assets
|
||||||||||||||||||||||||||
|
Patented technology
|
$ | 47.0 | $ | 13.8 | $ | 33.2 | $ | 32.8 | $ | 11.6 | $ | 21.2 | ||||||||||||||
|
Unpatented technology
|
22.4 | 4.2 | 18.2 | 6.7 | 3.2 | 3.5 | ||||||||||||||||||||
|
Customer relationships
|
127.3 | 57.5 | 69.8 | 119.1 | 46.2 | 72.9 | ||||||||||||||||||||
|
Distribution network
|
50.8 | 50.8 | — | 54.4 | 43.6 | 10.8 | ||||||||||||||||||||
|
Miscellaneous
|
14.7 | 11.9 | 2.8 | 14.7 | 11.9 | 2.8 | ||||||||||||||||||||
|
Total amortized intangible assets
|
262.2 | 138.2 | 124.0 | 227.7 | 116.5 | 111.2 | ||||||||||||||||||||
|
In-process R&D
|
13.1 | — | 13.1 | 13.1 | — | 13.1 | ||||||||||||||||||||
|
Unamortized trade names
|
31.7 | — | 31.7 | 24.3 | — | 24.3 | ||||||||||||||||||||
|
Total intangible assets
|
$ | 307.0 | $ | 138.2 | $ | 168.8 | $ | 265.1 | $ | 116.5 | $ | 148.6 | ||||||||||||||
Amortization of other intangible assets was $28.4 million,
$26.3 million and $27.1 million in 2010, 2009 and
2008, respectively. The amortization totals include
non-recurring charges directly attributable to acquisitions, as
described in Note 18, “Recent Transactions”. The
estimated useful lives of the Company’s amortized
intangible assets range from 3 to 15 years. The Company
utilizes the straight line method of amortization, recognized
over the estimated useful lives of the assets. The estimated
future annual
76
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amortization expense, primarily for acquired intangible assets,
is as follows: $20.5 million in 2011, $20.5 million in
2012, $20.5 million in 2013, $15.2 million in 2014 and
$10.0 million in 2015.
A roll-forward of the gross carrying amounts for the years ended
December 31, 2010 and 2009 is presented below:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Beginning balance
|
$ | 265.1 | $ | 231.2 | ||||||
|
Acquisitions
|
55.0 | 27.7 | ||||||||
|
Translation adjustment
|
(13.1 | ) | 6.2 | |||||||
|
Ending balance
|
$ | 307.0 | $ | 265.1 | ||||||
A roll-forward of accumulated amortization for the years ended
December 31, 2010 and 2009 is presented below:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Beginning balance
|
$ | 116.5 | $ | 82.8 | ||||||
|
Provisions
|
28.4 | 26.3 | ||||||||
|
Non-recurring charges (write-offs)
|
— | 4.6 | ||||||||
|
Translation adjustment
|
(6.7 | ) | 2.8 | |||||||
|
Ending balance
|
$ | 138.2 | $ | 116.5 | ||||||
On June 2, 2009, the Company announced the purchase of
advanced gasoline ignition technology and related intellectual
property from Florida-based Etatech, Inc. In connection with ASC
amended Topic 805,
Business Combinations,
the Company
capitalized $13.1 million of in-process R&D. The
Company intends to commercialize a high-frequency ignition
system based on Etatech technology in the next five years.
Amortization of the $13.1 million of in-process R&D
will coincide with the commercial application of the technology.
On April 10, 2010, the Company acquired 100% of Dytech ENSA
S.L. (“Dytech”), headquartered in Vigo, Spain. In
connection with this acquisition, the Company capitalized
$15.6 million for customer relationships,
$15.7 million for unpatented technology, $9.0 million
for trade names and $0.3 million in other miscellaneous
intangible assets. Customer relationships, unpatented technology
and miscellaneous intangible assets will be amortized over 8, 15
and 3 year useful life, respectively. Trade names will not
be amortized.
On May 1 2010, the Company completed the acquisition of
BERU-Eichenauer GmbH by acquiring the shares of its former joint
venture partner, Eichenauer Heizelemente GmbH & Co.
KG. In connection with this acquisition, the Company capitalized
$14.4 million in intangible assets related to adjusting the
Company’s fifty percent investment to fair value under ASC
Topic 805.
77
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| NOTE 7 | PRODUCT WARRANTY |
The changes in the carrying amount of the Company’s total
product warranty liability for the years ended December 31,
2010 and 2009 were as follows:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Beginning balance
|
$ | 61.7 | $ | 82.1 | ||||||
|
Acquisition
|
3.0 | — | ||||||||
|
Provisions
|
39.3 | 46.0 | ||||||||
|
Payments
|
(35.5 | ) | (68.3 | ) | ||||||
|
Translation adjustment
|
(1.7 | ) | 1.9 | |||||||
|
Ending balance
|
$ | 66.8 | $ | 61.7 | ||||||
The product warranty liability is classified in the consolidated
balance sheets as follows:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Accounts payable and accrued expenses
|
$ | 37.0 | $ | 32.5 | ||||||
|
Other non-current liabilities
|
29.8 | 29.2 | ||||||||
|
Total product warranty liability
|
$ | 66.8 | $ | 61.7 | ||||||
| NOTE 8 |
|
Following is a summary of notes payable and long-term debt,
including the current portion. The weighted average interest
rate on all borrowings outstanding as of December 31, 2010
and 2009 was 6.4% and 6.9%, respectively.
As of December 31, 2010 and 2009 the Company had notes
payable and long-term debt outstanding as follows:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Short-term debt
|
||||||||||
|
Short-term borrowings
|
$ | 42.4 | $ | 64.0 | ||||||
|
Receivables securitization(a)
|
80.0 | — | ||||||||
|
Total short-term debt
|
$ | 122.4 | $ | 64.0 | ||||||
|
Long-term debt
|
||||||||||
|
3.5% Convertible notes due 4/15/12
|
$ | 348.5 | $ | 330.2 | ||||||
|
5.75% Senior notes due 11/01/16 ($150 million par
value)(b)
|
149.4 | 149.3 | ||||||||
|
8.00% Senior notes due 10/01/19 ($134 million par
value)(b)
|
133.9 | 133.9 | ||||||||
|
4.625% Senior notes due 09/15/20 ($250 million par
value)
|
247.5 | — | ||||||||
|
7.125% Senior notes due 02/15/29 ($121 million par
value)
|
119.3 | 119.3 | ||||||||
|
Term loan facilities & other
|
31.6 | 14.2 | ||||||||
|
Impact of derivates on debt(b)
|
27.8 | 31.4 | ||||||||
|
Total long-term debt
|
$ | 1,058.0 | $ | 778.3 | ||||||
|
Less: current portion
|
6.1 | 5.1 | ||||||||
|
Long-term debt, net of current portion
|
$ | 1,051.9 | $ | 773.2 | ||||||
| (a) | On January 1, 2010, the Company adopted ASC Topic 860. The impact of this adoption is an increase in receivables, net of $80 million and an increase in notes payable and other short-term debt of $80 million in |
78
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| the Company’s December 31, 2010 Consolidated Balance Sheet. See Note 1 in the Consolidated Financial Statements for more information regarding the Company’s first quarter 2010 adoption of ASC Topic 860. | ||
| (b) | In 2006, the Company entered into several interest rate swaps that had the effect of converting $325.0 million of fixed rate notes to variable rates. In the first quarter of 2009, $100 million in interest rate swaps related to the Company’s 2009 fixed rate debt matured, and the Company terminated $150 million in interest rate swap agreements related to the Company’s 2016 fixed rate debt and $75 million of interest rate swap agreements related to the Company’s 2019 fixed rate debt. As a result of the first quarter 2009 swap terminations, a $34.5 million gain remained in debt and is being amortized over the remaining lives of the respective 2016 and 2019 debt. As of December 31, 2010 and 2009, the unamortized portion was $27.8 million and $31.4 million, respectively. |
Annual principal payments required as of December 31, 2010
are as follows (in millions of dollars):
|
2011
|
$ | 128.5 | ||
|
2012
|
384.1 | |||
|
2013
|
5.0 | |||
|
2014
|
0.2 | |||
|
2015
|
10.0 | |||
|
After 2015
|
682.4 | |||
|
Total Payments
|
$ | 1,210.2 | ||
|
Less: Convertible Note Accretion
|
(25.3 | ) | ||
|
Less: Unamortized Discounts
|
(4.5 | ) | ||
|
Total
|
$ | 1,180.4 | ||
The Company’s long-term debt includes various financial
covenants, none of which are expected to restrict future
operations.
On March 31, 2010, the Company replaced its
$250 million multi-currency revolving credit facility with
a new $550 million multi-currency revolving credit
facility, which includes a feature that allows the Company to
increase its borrowings to $600 million. The new facility
provides for borrowings through March 31, 2013, and is
guaranteed by the Company’s domestic subsidiaries. The
Company has three key financial covenants as part of the credit
agreement. These covenants are a net worth test, a debt compared
to EBITDA (“Earnings Before Interest, Taxes, Depreciation
and Amortization”) test, and an interest coverage test. The
Company was in compliance with all covenants at
December 31, 2010 and expects to remain compliant in future
periods. At December 31, 2010 and December 31, 2009
there were no outstanding borrowings under these facilities.
On September 16, 2010, the Company issued $250 million
in 4.625% senior notes due 2020. Interest is payable
semi-annually on March 15 and September 15 of each year,
beginning on March 15, 2011. The senior notes were issued
under the Company’s $750 million universal shelf
registration filed with the Securities and Exchange Commission,
leaving approximately $126 million available as of
December 31, 2010.
On April 9, 2009, the Company issued $373.8 million in
convertible senior notes due April 15, 2012. Under ASC
Topic 470,
“Accounting for Convertible Debt Instruments
That May be Settled in Cash Upon Conversion (Including Partial
Cash Settlement)”
, the Company must account for the
convertible senior notes by bifurcating the instruments between
their liability and equity components. The value of the debt
component is based on the fair value of issuing a similar
nonconvertible debt security. The equity component of the
convertible debt security is calculated by deducting the value
of the liability from the proceeds received at issuance. The
Company’s December 31, 2010 Consolidated Balance Sheet
includes debt of $348.5 million and capital in excess of
par of $36.5 million. Additionally, ASC Topic 470 requires
the Company to accrete the
79
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
discounted carrying value of the convertible notes to their face
value over the term of the notes. The Company’s interest
expense associated with this amortization is based on the
effective interest rate of the convertible senior notes of
9.365%. The total interest expense related to the convertible
notes in the Company’s Consolidated Statement of Operations
for the year ended December 31, 2010 and 2009 was as
follows:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Interest expense
|
$ | 31.3 | $ | 22.2 | ||||||
|
Non-cash portion
|
$ | 18.3 | $ | 12.7 | ||||||
The notes will pay interest semi-annually of $6.5 million,
which is at a coupon rate of 3.50% per year.
Holders of the notes may convert their notes at their option at
any time prior to the close of business on the second scheduled
trading day immediately preceding the maturity date of the
notes, in multiples of $1,000 principal amount. The initial
conversion rate for the notes is 30.4706 shares of the
Company’s common stock per $1,000 principal amount of notes
(representing an initial conversion price of approximately
$32.82 per share of common stock). The conversion price
represents a conversion premium of 27.50% over the last reported
sale price of the Company’s common stock on the New York
Stock Exchange on April 6, 2009, of $25.74 per share. Since
the Company’s stock price was above the convertible senior
notes conversion price of $32.82 as of December 31, 2010,
the if-converted value was approximately $450.2 million and
$4.6 million higher than the face value of the convertible
senior notes at December 31, 2010 and December 31,
2009, respectively. In conjunction with the note offering, the
Company entered into a bond hedge overlay at a net pre-tax cost
of $25.2 million, effectively raising the conversion
premium to 50.0%, or approximately $38.61 per share. Upon
conversion, the Company will pay or deliver cash, shares of our
common stock or a combination thereof at our election. The
convertible senior notes were issued under the Company’s
$750 million universal shelf registration filed with the
Securities and Exchange Commission (“SEC”).
As of December 31, 2010 and 2009, the estimated fair values
of the Company’s senior unsecured notes totaled
$1,482.3 million and $776.0 million, respectively. The
estimated fair values were $483.7 million higher and
$43.3 million higher at December 31, 2010 and 2009,
respectively than their carrying values. Fair market values are
developed by the use of estimates obtained from brokers and
other appropriate valuation techniques based on information
available as of quarter-end and year-end. 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 at
December 31, 2010 and 2009 of $26.5 million and
$15.2 million, respectively. The letters of credit
typically act as a guarantee of payment to certain third parties
in accordance with specified terms and conditions.
| NOTE 9 | FAIR VALUE MEASUREMENTS |
On January 1, 2009, the Company fully adopted as required,
ASC Topic 820 — “Fair Value Measurements”
which expands the disclosure of fair value measurements and its
impact on the Company’s financial statements.
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 in active markets; | |
| Level 2: | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
80
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 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 or liabilities. | |
| 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 table classifies the assets and liabilities
measured at fair value on a recurring basis as of
December 31, 2010:
| Basis of Fair Value Measurements | ||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||
|
Prices in
|
Significant
|
|||||||||||||||||||
|
Active
|
Other
|
Significant
|
||||||||||||||||||
|
Balance at
|
Markets for
|
Observable
|
Unobservable
|
|||||||||||||||||
|
December 31,
|
Identical
|
Inputs
|
Inputs
|
Valuation
|
||||||||||||||||
| (millions of dollars) | 2010 | (Level 1) | (Level 2) | (Level 3) | Technique | |||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Foreign exchange contracts
|
$ | 2.7 | $ | — | $ | 2.7 | $ | — | A | |||||||||||
| $ | 2.7 | $ | — | $ | 2.7 | $ | — | |||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Foreign exchange contracts
|
$ | 6.4 | $ | — | $ | 6.4 | $ | — | A | |||||||||||
|
Net investment hedge contracts
|
75.7 | — | 75.7 | — | A | |||||||||||||||
| $ | 82.1 | $ | — | $ | 82.1 | $ | — | |||||||||||||
The following table classifies the assets and liabilities
measured at fair value on a recurring and non-recurring basis as
of December 31, 2009:
| Basis of Fair Value Measurements | ||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||
|
Prices in
|
Significant
|
|||||||||||||||||||
|
Active
|
Other
|
Significant
|
||||||||||||||||||
|
Balance at
|
Markets for
|
Observable
|
Unobservable
|
|||||||||||||||||
|
December 31,
|
Identical
|
Inputs
|
Inputs
|
Valuation
|
||||||||||||||||
| (millions of dollars) | 2009 | (Level 1) | (Level 2) | (Level 3) | Technique | |||||||||||||||
|
Assets:
|
||||||||||||||||||||
|
Engine segment fixed assets
|
$ | — | $ | — | $ | — | $ | — | B | |||||||||||
|
Commodity contracts
|
8.4 | — | 8.4 | — | A | |||||||||||||||
|
Foreign exchange contracts
|
3.8 | — | 3.8 | — | A | |||||||||||||||
| $ | 12.2 | $ | — | $ | 12.2 | $ | — | |||||||||||||
|
Liabilities:
|
||||||||||||||||||||
|
Commodity contracts
|
$ | 0.1 | $ | — | $ | 0.1 | $ | — | A | |||||||||||
|
Foreign exchange contracts
|
17.5 | — | 17.5 | — | A | |||||||||||||||
|
Net investment hedge contracts
|
51.2 | — | 51.2 | — | A | |||||||||||||||
| $ | 68.8 | $ | — | $ | 68.8 | $ | — | |||||||||||||
81
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The change in the fair value of the Company’s net fixed
assets impaired in the second quarter of 2009 was as follows:
|
Fair Value
|
||||||||
|
Measurements
|
||||||||
|
Using Significant
|
||||||||
|
Unobservable Inputs
|
||||||||
| (millions of dollars) | (Level 3) | |||||||
|
Net book value prior to impairment
|
$ | 22.3 | ||||||
|
Fixed asset impairment charge
|
(22.3 | ) | ||||||
|
Net book value after impairment charge
|
$ | — | ||||||
Refer to Note 17, “Restructuring” of the Notes to
the Consolidated Financial Statements for further discussion of
this impairment charge.
Refer to Note 1, “Summary of Significant Accounting
Policies” and Note 10, “Financial
Instruments”, for more detail surrounding the
Company’s valuation methodology, inputs used, and fair
value adjustment recorded.
The following tables classify the Company’s defined benefit
plan assets measured at fair value on a recurring and
non-recurring basis as of December 31, 2010:
| Basis of Fair Value Measurements | ||||||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||||||
|
Prices in
|
Significant
|
|||||||||||||||||||||||
|
Active
|
Other
|
Significant
|
||||||||||||||||||||||
|
Balance at
|
Markets for
|
Observable
|
Unobservable
|
|||||||||||||||||||||
|
December 31,
|
Identical
|
Inputs
|
Inputs
|
Valuation
|
||||||||||||||||||||
| (millions of dollars) | 2010 | (Level 1) | (Level 2) | (Level 3) | Technique | |||||||||||||||||||
|
U.S. Plans:
|
||||||||||||||||||||||||
|
Fixed income securities
|
$ | 113.7 | $ | — | $ | 113.7 | $ | — | A | |||||||||||||||
|
Equity securities
|
140.5 | 48.5 | 92.0 | — | A | |||||||||||||||||||
|
Cash, real estate and other
|
33.0 | — | 33.0 | — | A | |||||||||||||||||||
| $ | 287.2 | $ | 48.5 | $ | 238.7 | $ | — | |||||||||||||||||
|
Non-U.S.
Plans:
|
||||||||||||||||||||||||
|
Fixed income securities
|
$ | 59.6 | $ | — | $ | 59.6 | $ | — | A | |||||||||||||||
|
Equity securities
|
88.4 | — | 88.4 | — | A | |||||||||||||||||||
|
Cash, real estate and other
|
6.6 | — | 6.6 | — | A | |||||||||||||||||||
| $ | 154.6 | $ | — | $ | 154.6 | $ | — | |||||||||||||||||
82
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following tables classify the Company’s defined benefit
plan assets measured at fair value on a recurring and
non-recurring basis as of December 31, 2009:
| Basis of Fair Value Measurements | ||||||||||||||||||||||||
|
Quoted
|
||||||||||||||||||||||||
|
Prices in
|
Significant
|
|||||||||||||||||||||||
|
Active
|
Other
|
Significant
|
||||||||||||||||||||||
|
Balance at
|
Markets for
|
Observable
|
Unobservable
|
|||||||||||||||||||||
|
December 31,
|
Identical
|
Inputs
|
Inputs
|
Valuation
|
||||||||||||||||||||
| (millions of dollars) | 2009 | (Level 1) | (Level 2) | (Level 3) | Technique | |||||||||||||||||||
|
U.S. Plans:
|
||||||||||||||||||||||||
|
Fixed income securities
|
$ | 122.0 | $ | — | $ | 122.0 | $ | — | A | |||||||||||||||
|
Equity securities
|
124.3 | 43.3 | 81.0 | — | A | |||||||||||||||||||
|
Cash, real estate and other
|
22.8 | — | 22.8 | — | A | |||||||||||||||||||
| $ | 269.1 | $ | 43.3 | $ | 225.8 | $ | — | |||||||||||||||||
|
Non-U.S.
Plans:
|
||||||||||||||||||||||||
|
Fixed income securities
|
$ | 42.1 | $ | — | $ | 42.1 | $ | — | A | |||||||||||||||
|
Equity securities
|
72.7 | — | 72.7 | — | A | |||||||||||||||||||
|
Cash, real estate and other
|
29.2 | — | 29.2 | — | A | |||||||||||||||||||
| $ | 144.0 | $ | — | $ | 144.0 | $ | — | |||||||||||||||||
Refer to Note 11, “Retirement Benefit Plans”, for
more detail surrounding the plan’s asset investment
policies and strategies, target allocation percentages, and
expected return on plan asset assumptions.
| NOTE 10 | FINANCIAL INSTRUMENTS |
On January 1, 2009, the Company adopted as required, ASC
Topic 815, “Disclosures about Derivative Instruments and
Hedging Activities” which expands the disclosure of
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 also include long-term
debt, interest rate and currency swaps, commodity forward
contracts, and foreign currency forward contracts. All
derivative contracts are placed with counterparties that have an
S&P, or equivalent, investment grade credit rating at the
time of the contracts’ placement. At December 31, 2010
and 2009 the Company had no derivative contracts that contained
credit risk related contingent features.
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). Fair values
of cross currency swaps are based on observable inputs, such as
interest rate, yield curves, credit risks, currency exchange
rates and other external valuation methodology (Level 2
inputs under ASC Topic 820).
At December 31, 2010 and 2009 the following cross-currency
swaps were outstanding:
| Cross-Currency Swaps | ||||||||||||||||
|
Notional
|
Notional
|
|||||||||||||||
| (millions of dollars) | in USD | in Local Currency | Duration | |||||||||||||
|
Floating $ to Floating €
|
$ | 75.0 | € | 58.5 | Oct - 19 | |||||||||||
|
Floating $ to Floating ¥
|
$ | 150.0 | ¥ 17,581.5 | Nov - 16 | ||||||||||||
The Company uses certain commodity derivative instruments to
protect against commodity price changes related to forecasted
raw material and supplies purchases. The Company primarily
utilizes forward and option contracts, which are designated as
cash flow hedges.
83
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
At December 31, 2010 and 2009 the following commodity
derivative contracts were outstanding:
| Commodity Hedges | ||||||||||||||||||||
|
Volume
|
||||||||||||||||||||
|
Hedged
|
Volume
|
|||||||||||||||||||
|
December 31,
|
Hedged
|
Units of
|
||||||||||||||||||
| Commodity | 2010 | December 31, 2009 | Measure | Duration | ||||||||||||||||
|
Nickel
|
— | 780 | Metric Tons | Dec - 10 | ||||||||||||||||
|
Copper
|
— | 759 | Metric Tons | Dec - 10 | ||||||||||||||||
|
Aluminum
|
— | 330 | Metric Tons | Dec - 10 | ||||||||||||||||
|
Natural Gas
|
258,900 | 392,396 | MMBtu | Dec - 11 | ||||||||||||||||
The Company uses foreign exchange forward and option contracts
to protect against exchange rate movements for forecasted cash
flows for purchases, operating expenses or sales transactions
designated in currencies other than the functional currency of
the operating unit. Foreign currency contracts require the
Company, at a future date, to either buy or sell foreign
currency in exchange for the operating units’ local
currency.
At December 31, 2010 and 2009 the following foreign
exchange derivative contracts were outstanding:
| Currency Hedges (millions) | ||||||||||||||
|
Notional in
|
Notional in
|
|||||||||||||
|
Functional
|
Traded
|
Traded Currency
|
Traded Currency
|
|||||||||||
| Currency | Currency | December 31, 2010 | December 31, 2009 | Duration | ||||||||||
|
British Pound
|
Euro | 107.3 | 84.3 | Dec - 13 | ||||||||||
|
Euro
|
Hungarian Forint | — | 2,562.6 | Dec - 10 | ||||||||||
|
Euro
|
British Pound | — | 10.5 | Jan - 10 | ||||||||||
|
Euro
|
US Dollar | 20.2 | 0.4 | Dec - 11 | ||||||||||
|
Euro
|
Japanese Yen | — | 16.7 | Mar - 10 | ||||||||||
|
Indian Rupee
|
US Dollar | 1.9 | 7.4 | Dec - 11 | ||||||||||
|
Korean Won
|
Euro | 45.7 | 62.3 | Dec - 12 | ||||||||||
|
Mexican Peso
|
Euro | 13.5 | — | Mar - 11 | ||||||||||
|
US Dollar
|
Indian Rupee | 141.5 | 372.9 | Dec - 11 | ||||||||||
|
US Dollar
|
Euro | 1.7 | — | Mar - 11 | ||||||||||
In 2006, the Company entered into a series of interest rate
swaps designated as fair value hedges of a portion of its senior
notes. In the first quarter of 2009 the company terminated
interest rate swaps designated as fair value hedges of debt.
Therefore, the basis adjustments of $34.5 million present
at the termination of the hedging relationship are being
amortized over the remaining life of the respective debt
maturing in 2016 and 2019. The $30.0 million cash received
related to the termination of these interest rate swaps is
included in the Financing section of the Statement of Cash
Flows. The Company recognized $5.7 million in interest
expense in the first quarter of 2009 as a result of the early
termination. As of December 31, 2010 and 2009, there were
no outstanding fixed to floating interest rate swap agreements.
84
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
At December 31, 2010 and 2009 the following amounts were
recorded in the Company’s balance sheet as being payable to
or receivable from counterparties. The fair value of foreign
exchange and commodity forward option contracts are based on
Level 2 inputs under ASC Topic 820, as observed on
recognized exchanges.
|
(millions of dollars)
|
||||||||||||||||||||
|
Derivatives designated as
|
Assets | Liabilities | ||||||||||||||||||
|
hedging instruments
|
December 31,
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||
| under Topic 815 | Location | 2010 | 2009 | Location | 2010 | 2009 | ||||||||||||||
|
Foreign Exchange Contracts
|
Prepayments and Other Current Assets | $ | 2.7 | $ | 3.6 | Accounts Payable and Accrued Expenses | $ | 3.3 | $ | 14.5 | ||||||||||
| Other Non-Current Assets | — | 0.2 | Other Non-Current Liabilities | 3.1 | 3.0 | |||||||||||||||
|
Commodity Contracts
|
Prepayments and Other Current Assets | — | 8.4 | Accounts Payable and Accrued Expenses | — | 0.1 | ||||||||||||||
|
Net Investment Hedges
|
Other Non-Current Assets | — | — | Other Non-Current Liabilities | 75.7 | 51.2 | ||||||||||||||
Effectiveness for cash flow, fair value and net investment
hedges is assessed at the inception of the hedging relationship
and quarterly, thereafter. To the extent that derivative
instruments are deemed to be effective as defined by ASC Topic
815, gains and losses arising from these contracts are deferred
in other comprehensive income or loss (OCI). Such gains and
losses will be reclassified into income as the underlying
operating transactions are realized. Gains and losses not
qualifying for deferral treatment have been credited/charged to
income as they are recognized.
The table below shows deferred gains and losses at the end of
the period reported in OCI and amounts expected to be
reclassified to income or loss within the next twelve months.
The OCI gain or loss expected to be reclassified to income or
loss in one year or less assumes no change in the current
relationship of the hedged item at December 31, 2010 market
rates.
|
Gain (Loss) Expected to
|
||||||||||||
|
(millions of dollars)
|
Balance in OCI at |
be Reclassified to Income
|
||||||||||
| Contract Type | December 31, 2010 | December 31, 2009 | in One Year or Less | |||||||||
|
Foreign Exchange
|
$ | (3.7 | ) | $ | (11.4 | ) | $ | (0.6 | ) | |||
|
Commodity
|
1.6 | 7.3 | 1.6 | |||||||||
|
Net Investment Hedges
|
(69.3 | ) | (47.2 | ) | — | |||||||
|
Total
|
$ | (71.4 | ) | $ | (51.3 | ) | $ | 1.0 | ||||
Net investment hedges are derivative contracts entered into to
hedge against changes in exchange rates that affect the overall
value of net investments in foreign entities. Gains and losses
on net investment hedges are recorded in other comprehensive
income or loss and are used to offset equivalent gains or losses
in the value of net investments that are recorded in translation
gains and losses which is also a component of other
comprehensive income or loss.
Derivatives
Designated as Net Investment Hedges under Topic
815
|
Gain (Loss) Reclassified
|
Gain (Loss)
|
|||||||||||||||||||||||
|
from OCI to Income
|
Recognized in Income
|
|||||||||||||||||||||||
| (Effective Portion) | (Ineffective Portion) | |||||||||||||||||||||||
|
(millions of dollars)
|
Year Ended | Year Ended | ||||||||||||||||||||||
| Contract Type | Location | December 31, 2010 | December 31, 2009 | Location | December 31, 2010 | December 31, 2009 | ||||||||||||||||||
|
Cross-Currency Swap
|
Interest Expense | $ | — | $ | — | Interest Expense | $ | (2.5 | ) | $ | 1.1 | |||||||||||||
Cash Flow hedges held during the period resulted in the
following gains and losses recorded in income. The effective
portion of gains or losses exactly offset gains or losses in the
underlying transaction that they were designated to hedge, and
are recorded on the same line in the income statement.
Ineffectiveness resulting from imperfect matches between changes
in value of hedge contracts and changes in value of the
underlying transaction are immediately recognized in income.
85
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Derivatives
Designated as Cash Flow Hedging Instruments under Topic
815
|
Gain (Loss) Reclassified
|
Gain (Loss)
|
|||||||||||||||||||||
|
from OCI to Income
|
Recognized in Income
|
|||||||||||||||||||||
| (Effective Portion) | (Ineffective Portion) | |||||||||||||||||||||
| Year Ended | Year Ended | |||||||||||||||||||||
| (millions of dollars) |
December 31,
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||||
| Contract Type | Location | 2010 | 2009 | Location | 2010 | 2009 | ||||||||||||||||
|
Foreign Exchange
|
Sales | $ | (0.2 | ) | $ | (14.4 | ) | SG&A Expense | $ | 0.9 | $ | (4.5 | ) | |||||||||
|
Foreign Exchange
|
Cost of Goods Sold | (1.2 | ) | 5.2 | SG&A Expense | — | 0.6 | |||||||||||||||
|
Foreign Exchange
|
SG&A Expense | (0.6 | ) | (0.7 | ) | SG&A Expense | — | — | ||||||||||||||
|
Commodity
|
Cost of Goods Sold | 8.2 | (7.2 | ) | Cost of Goods Sold | (0.2 | ) | 0.3 | ||||||||||||||
At December 31, 2010 derivative instruments that are
designated as fair value hedging instruments as defined by ASC
Topic 815 were immaterial.
| NOTE 11 | RETIREMENT BENEFIT PLANS |
The Company sponsors various defined contribution savings plans
primarily in the U.S. that allow employees to contribute a
portion of their pre-tax
and/or
after-tax income in accordance with plan specified guidelines.
Under specified conditions, the Company will make contributions
to the plans
and/or
match
a percentage of the employee contributions up to certain limits.
Total expense related to the defined contribution plans was
$19.2 million, $16.6 million and $22.1 million in
2010, 2009 and 2008, respectively.
The Company has a number of defined benefit pension plans and
other post employment benefit plans covering eligible salaried
and hourly employees and their dependents. The defined pension
benefits provided are primarily based on (i) years of
service and (ii) average compensation or a monthly
retirement benefit amount. The Company provides defined benefit
pension plans in the U.S., U.K., Germany, Japan, South Korea,
Italy, France, Ireland, Monaco and Mexico. The other post
employment benefit plans, which provide medical and life
insurance benefits, are unfunded plans. All pension and other
post employment benefit plans in the U.S. have been closed
to new employees since 1999. The measurement date for all plans
is December 31.
In September 2008 and 2007, the Company made changes to its
U.S. retiree medical program that impact certain union and
non-union active employees with a future retiree benefit and
current retirees participating in a health care plan. The effect
of the changes to both groups is that most members will pay a
higher percentage of the annual premium for Company-sponsored
retiree medical coverage between retirement and age 65, and
neither group will receive Company-sponsored Medicare health
plan coverage once entitled to Medicare. Instead, certain active
employees received a lump sum credit into a non-contributory
cash balance pension plan earning interest each year. Current
retirees receive an annual per member allowance toward the
purchase of individual Medicare health plan coverage and for
reimbursement of healthcare
out-of-pocket
expenses.
On February 26, 2009, the Company’s subsidiary,
BorgWarner Diversified Transmission Products Inc.
(“DTP”), entered into a Plant Shutdown Agreement with
the United Auto Workers (“UAW”) for its Muncie,
Indiana automotive component plant (the “Muncie
Plant”). Management subsequently wound-down production
activity at the plant, with operations effectively ceased as of
March 31, 2009. As a result of the closure of the Muncie
Plant, the Company recorded a curtailment gain of
$41.9 million in the other post employment benefit plan in
the first quarter of 2009.
The Plant Shutdown Agreement with the UAW for the Muncie Plant
also included a settlement of a portion of the UAW retiree
health care obligation, resulting in the remeasurement of the
retiree medical plan. The financial impact of this settlement
resulted in expense recognition of $14.0 million, a
$47.2 million reduction to retirement-related liabilities,
a $27.2 million increase in accumulated other comprehensive
income and a $34.0 million increase in accounts payable and
accrued expenses in the first quarter of 2009. The
$34.0 million in accounts payable and accrued expenses was
paid in monthly installments, which began in May 2009 and
concluded in April 2010.
86
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The combined pre-tax impact of these actions was a net gain of
$27.9 million, comprised of a $41.9 million
curtailment gain and $14.0 million settlement loss in the
first quarter of 2009.
In April 2009, the Company made changes to certain Muncie
retirees medical program. The effect of the changes to this
group is that members will pay a higher percentage of the annual
premium for Company-sponsored retiree medical coverage from
retirement to age 65, and the group will not receive
Company-sponsored Medicare Supplemental coverage once entitled
to Medicare. Consistent with the majority of other
U.S. BorgWarner retiree medical plans, retirees will
receive an annual per member allowance toward the purchase of
individual Medicare health plan coverage and for reimbursement
of healthcare
out-of-pocket
expenses. The financial impact of this change was a
$22.2 million reduction to retirement-related liabilities
and a $22.2 million increase in accumulated other
comprehensive income.
In June 2009, the Company announced its plan to freeze its
defined benefit plan at its Bradford plant in the United Kingdom
in consultation with affected employees and their
representatives. The effect of this change was that participants
in the Bradford defined benefit plan ceased to accrue defined
benefits after October 31, 2009. Future pension benefits
will be earned within an existing defined contribution plan
going forward. The financial impact of this change was a
$3.7 million reduction to retirement-related liabilities, a
$3.5 million increase in accumulated other comprehensive
income and $0.2 million in income recognition in the second
quarter of 2009.
On March 24, 2010, the Company finalized its settlement
agreement regarding the closure of the Muncie Plant with the
Pension Benefit Guaranty Corporation in which the Company will
make certain payments directly to the Muncie Plant’s
defined benefit pension plan (the “Plan”). On
December 23, 2009 the Company made an initial cash
contribution of $23 million for the 2009 Plan year,
consistent with the settlement agreement. Also under the
settlement agreement for each of the Plan years beginning in
2011, 2012, and 2013, the Company will make a cash contribution
to the Plan in the amount of $15 million, unless this
contribution exceeds the maximum amounts deductible under the
applicable U.S. tax regulations. The Company provided
$35 million in the form of a surety bond and will waive a
credit balance valued at $8 million in 2014.
The following table summarizes the expenses for the
Company’s defined contribution and defined benefit pension
plans and the other post employment defined benefit plans.
| millions of dollars | 2010 | 2009 | 2008 | |||||||||||
|
Defined contribution expense
|
$ | 19.2 | $ | 16.6 | $ | 22.1 | ||||||||
|
Defined benefit pension expense
|
19.8 | 33.1 | 19.2 | |||||||||||
|
Other post employment benefit expense
|
17.5 | (48.4 | ) | 1.3 | ||||||||||
|
Total
|
$ | 56.5 | $ | 1.3 | $ | 42.6 | ||||||||
87
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following provides a rollforward of the plans’ benefit
obligations, plan assets, funded status and recognition in the
Consolidated Balance Sheets.
| Pension Benefits |
Other Post
|
|||||||||||||||||||||||||
| 2010 | 2009 | Employment Benefits | ||||||||||||||||||||||||
| millions of dollars | US | Non-US | US | Non-US | 2010 | 2009 | ||||||||||||||||||||
|
Change in projected benefit obligation:
|
||||||||||||||||||||||||||
|
Projected benefit obligation at beginning of year
|
$ | 316.5 | $ | 326.5 | $ | 317.9 | $ | 280.4 | $ | 278.5 | $ | 328.5 | ||||||||||||||
|
Service cost
|
— | 7.4 | 0.3 | 9.9 | 0.8 | 0.8 | ||||||||||||||||||||
|
Interest cost
|
17.5 | 17.6 | 20.7 | 16.5 | 14.5 | 18.6 | ||||||||||||||||||||
|
Plan participants’ contributions
|
— | 0.6 | — | 0.1 | — | — | ||||||||||||||||||||
|
Plan amendments
|
— | 1.2 | (13.5 | ) | — | — | (22.2 | ) | ||||||||||||||||||
|
Curtailment/settlement gain
|
— | — | — | (4.3 | ) | — | (30.9 | ) | ||||||||||||||||||
|
Actuarial (gain) loss
|
19.2 | (0.4 | ) | 24.9 | 19.2 | (7.2 | ) | 11.7 | ||||||||||||||||||
|
Currency translation
|
— | (12.2 | ) | — | 17.2 | — | — | |||||||||||||||||||
|
Other
|
1.1 | — | — | 3.4 | — | — | ||||||||||||||||||||
|
Benefits paid
|
(28.1 | ) | (14.7 | ) | (33.8 | ) | (15.9 | ) | (24.7 | ) | (28.0 | ) | ||||||||||||||
|
Projected benefit obligation at end of year
|
$ | 326.2 | $ | 326.0 | $ | 316.5 | $ | 326.5 | $ | 261.9 | $ | 278.5 | ||||||||||||||
|
Change in plan assets:
|
||||||||||||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 269.1 | $ | 144.0 | $ | 230.8 | $ | 114.0 | ||||||||||||||||||
|
Actual return on plan assets
|
35.6 | 14.2 | 49.1 | 18.0 | ||||||||||||||||||||||
|
Employer contribution
|
10.6 | 14.5 | 23.0 | 16.3 | ||||||||||||||||||||||
|
Plan participants’ contribution
|
— | 0.5 | — | 0.1 | ||||||||||||||||||||||
|
Currency translation
|
— | (3.9 | ) | — | 11.6 | |||||||||||||||||||||
|
Other
|
— | — | — | (0.1 | ) | |||||||||||||||||||||
|
Benefits paid
|
(28.1 | ) | (14.7 | ) | (33.8 | ) | (15.9 | ) | ||||||||||||||||||
|
Fair value of plan assets at end of year
|
$ | 287.2 | $ | 154.6 | $ | 269.1 | $ | 144.0 | ||||||||||||||||||
|
Funded status
|
$ | (39.0 | ) | $ | (171.4 | ) | $ | (47.4 | ) | $ | (182.5 | ) | $ | (261.9 | ) | $ | (278.5 | ) | ||||||||
|
Amounts recognized in the Consolidated Balance Sheets consist
of:
|
||||||||||||||||||||||||||
|
Non-current assets
|
$ | — | $ | 0.5 | $ | — | $ | 0.1 | $ | — | $ | — | ||||||||||||||
|
Current liabilities
|
(0.1 | ) | (8.1 | ) | — | (6.2 | ) | (26.5 | ) | (28.6 | ) | |||||||||||||||
|
Non-current liabilities
|
(38.9 | ) | (163.8 | ) | (47.4 | ) | (176.4 | ) | (235.4 | ) | (249.9 | ) | ||||||||||||||
|
Net amount recognized
|
$ | (39.0 | ) | $ | (171.4 | ) | $ | (47.4 | ) | $ | (182.5 | ) | $ | (261.9 | ) | $ | (278.5 | ) | ||||||||
|
Amounts recognized in accumulated other comprehensive loss
consist of:
|
||||||||||||||||||||||||||
|
Net actuarial loss
|
$ | 145.7 | $ | 37.4 | $ | 147.9 | $ | 44.2 | $ | 120.0 | $ | 136.3 | ||||||||||||||
|
Net prior service cost (credit)
|
(12.1 | ) | 1.4 | (12.8 | ) | 0.2 | (59.5 | ) | (66.4 | ) | ||||||||||||||||
|
Net amount recognized*
|
$ | 133.6 | $ | 38.8 | $ | 135.1 | $ | 44.4 | $ | 60.5 | $ | 69.9 | ||||||||||||||
|
Total accumulated benefit obligation for all plans
|
$ | 326.2 | $ | 316.8 | $ | 316.5 | $ | 317.1 | ||||||||||||||||||
| * | Accumulated other comprehensive loss (“OCI”) shown above does not include our equity investee, NSK-Warner. NSK-Warner had an OCI loss of $6.1 million in 2010 and $9.4 million in 2009. |
88
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The funded status of pension plans included above with
accumulated benefit obligations in excess of plan assets at
December 31 is as follows:
| (millions of dollars) | 2010 | 2009 | ||||||
|
Accumulated benefit obligation
|
$ | (634.9 | ) | $ | (630.5 | ) | ||
|
Plan assets
|
432.2 | 409.1 | ||||||
|
Deficiency
|
$ | (202.7 | ) | $ | (221.4 | ) | ||
|
Pension deficiency by country:
|
||||||||
|
United States
|
$ | (39.0 | ) | $ | (47.4 | ) | ||
|
United Kingdom
|
(7.5 | ) | (19.1 | ) | ||||
|
Germany
|
(128.0 | ) | (131.1 | ) | ||||
|
Other
|
(28.2 | ) | (23.8 | ) | ||||
|
Total pension deficiency
|
$ | (202.7 | ) | $ | (221.4 | ) | ||
The weighted average asset allocations of the Company’s
funded pension plans at December 31, 2010 and 2009, and
target allocations by asset category are as follows:
|
Target
|
||||||||||||
| 2010 | 2009 | Allocation | ||||||||||
|
U.S. Plans:
|
||||||||||||
|
Cash, real estate and other
|
11 | % | 9 | % | 5-15 | % | ||||||
|
Fixed income securities
|
40 | % | 45 | % | 35-55 | % | ||||||
|
Equity securities
|
49 | % | 46 | % | 35-55 | % | ||||||
| 100 | % | 100 | % | |||||||||
|
Non-U.S.
Plans:
|
||||||||||||
|
Cash, real estate and other
|
9 | % | 10 | % | 7-11 | % | ||||||
|
Fixed income securities
|
36 | % | 31 | % | 31-37 | % | ||||||
|
Equity securities
|
55 | % | 59 | % | 54-60 | % | ||||||
| 100 | % | 100 | % | |||||||||
The Company’s investment strategy is to maintain actual
asset weightings within a preset range of target allocations.
The Company believes these ranges represent an appropriate risk
profile for the planned benefit payments of the plans based on
the timing of the estimated benefit payments. Within each asset
category, separate portfolios are maintained for additional
diversification. Investment managers are retained within each
asset category to manage each portfolio against its benchmark.
Each investment manager has appropriate investment guidelines.
In addition, the entire portfolio is evaluated against a
relevant peer group. The defined benefit pension plans did not
hold any Company securities as investments as of
December 31, 2010 and 2009. A portion of pension assets are
invested in common and comingled trusts.
The Company expects to contribute a total of $30 million to
$40 million into its defined benefit pension plans during
2011, including $15 million related to the Company’s
settlement agreement with the PBGC discussed above.
$23.2 million of the $30 million to $40 million
in 2011 contributions are contractually obligated, while the
remaining payments are discretionary.
Refer to Note 9, “Fair Value Measurements”, for
more detail surrounding the fair value of each major category of
plan assets as well as the inputs and valuation techniques used
to develop the fair value measurements of the plan’s assets
at December 31, 2010 and 2009.
89
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
See the table below for a breakout between U.S. and
non-U.S. pension
plans:
| Pension Benefits |
Other Post
|
|||||||||||||||||||||||||||||||||||
|
(millions of dollars)
|
2010 | 2009 | 2008 | Employment Benefits | ||||||||||||||||||||||||||||||||
| For the Year Ended December 31, | US | Non-US | US | Non-US | US | Non-US | 2010 | 2009 | 2008 | |||||||||||||||||||||||||||
|
Components of net periodic benefit cost:
|
||||||||||||||||||||||||||||||||||||
|
Service cost
|
$ | — | $ | 7.4 | $ | 0.3 | $ | 9.9 | $ | 2.0 | $ | 10.4 | $ | 0.8 | $ | 0.8 | $ | 2.2 | ||||||||||||||||||
|
Interest cost
|
17.5 | 17.6 | 20.7 | 16.5 | 20.9 | 17.3 | 14.5 | 18.6 | 22.7 | |||||||||||||||||||||||||||
|
Expected return on plan assets
|
(19.7 | ) | (9.7 | ) | (16.2 | ) | (9.6 | ) | (28.2 | ) | (13.1 | ) | — | — | — | |||||||||||||||||||||
|
Settlements, curtailments and other
|
— | — | 3.3 | 0.6 | 7.5 | — | — | (61.9 | )* | (8.7 | ) | |||||||||||||||||||||||||
|
Amortization of unrecognized prior service benefit
|
(0.7 | ) | — | (0.5 | ) | — | — | — | (6.9 | ) | (13.2 | ) | (25.0 | ) | ||||||||||||||||||||||
|
Amortization of unrecognized loss
|
6.6 | 0.8 | 7.3 | 0.8 | 2.3 | 0.1 | 9.1 | 7.3 | 10.1 | |||||||||||||||||||||||||||
|
Net periodic benefit cost (benefit)
|
$ | 3.7 | $ | 16.1 | $ | 14.9 | $ | 18.2 | $ | 4.5 | $ | 14.7 | $ | 17.5 | $ | (48.4 | ) | $ | 1.3 | |||||||||||||||||
| * | Note: In the year ended December 31, 2009, the other post employment benefits settlement/curtailment of $61.9 million, in the table above, was offset by a $34.0 million cost to settle, resulting in a net pre-tax gain of $27.9 million. Excluding the $61.9 million settlement/curtailment gain, the Company’s 2009 other post employment benefit expense was $13.5 million. |
The estimated net loss for the defined benefit pension plans
that will be amortized from accumulated other comprehensive
income (loss) into net periodic benefit cost over the next
fiscal year is $7.2 million. The estimated net loss and
prior service credit for the other post employment plans that
will be amortized from accumulated other comprehensive income
(loss) into net periodic benefit cost over the next fiscal year
are $8.0 million and $(6.9) million, respectively.
The Company’s weighted-average assumptions used to
determine the benefit obligations for its defined benefit
pension and other post employment plans as of December 31,
2010 and 2009 were as follows:
| percent | 2010 | 2009 | ||||||||||
|
U.S. pension plans:
|
||||||||||||
|
Discount rate
|
5.17 | 5.75 | ||||||||||
|
Rate of compensation increase
|
3.50 | 3.50 | ||||||||||
|
U.S. other post employment plans:
|
||||||||||||
|
Discount rate
|
4.75 | 5.50 | ||||||||||
|
Rate of compensation increase
|
N/A | N/A | ||||||||||
|
Non-U.S.
pension plans:
|
||||||||||||
|
Discount rate
|
5.37 | 5.43 | ||||||||||
|
Rate of compensation increase
|
2.80 | 2.57 | ||||||||||
90
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s weighted-average assumptions used to
determine the net periodic benefit cost (benefit) for its
defined benefit pension and other post employment benefit plans
for the three years ended December 31, 2010 were as follows:
| percent | 2010 | 2009 | 2008 | |||||||||||
|
U.S. pension plans
|
||||||||||||||
|
Discount rate
|
5.75 | 7.09 | 6.50 | |||||||||||
|
Rate of compensation increase
|
3.50 | 3.50 | 3.50 | |||||||||||
|
Expected return on plan assets
|
7.50 | 7.50 | 8.75 | |||||||||||
|
U.S. other post employment plans
|
||||||||||||||
|
Discount rate
|
5.50 | 7.00 | 6.50 | |||||||||||
|
Rate of compensation increase
|
N/A | N/A | N/A | |||||||||||
|
Expected return on plan assets
|
N/A | N/A | N/A | |||||||||||
|
Non-U.S.
pension plans
|
||||||||||||||
|
Discount rate
|
5.47 | 5.72 | 5.42 | |||||||||||
|
Rate of compensation increase
|
2.75 | 2.77 | 3.10 | |||||||||||
|
Expected return on plan assets
|
7.12 | 7.10 | 7.05 | |||||||||||
The Company’s approach to establishing the discount rate is
based upon the market yields of high-quality corporate bonds,
with appropriate consideration of each plan’s defined
benefit payment terms and duration of the liabilities. The
discount rate assumption is typically rounded up or down to the
nearest 25 basis points for each plan.
The Company determines its expected return on plan asset
assumptions by evaluating estimates of future market returns and
the plans’ asset allocation. The Company also considers the
impact of active management of the plans’ invested assets.
The Company’s expected return on assets assumption reflects
the asset allocation of each plan. The Company’s assumed
long-term rate of return on assets for its U.S. pension
plans was 7.50% for 2010 and 2009 and 8.75% for 2008. The
Company’s assumed long-term rate of return on assets for
its U.K. pension plan was 7.50% for 2010 and 2009 and 7.25% for
2008.
The estimated future benefit payments for the pension and other
post employment benefits are as follows:
| Pension Benefits | Other Post Employment Benefits | |||||||||||||||||
|
W/o Medicare
|
With Medicare
|
|||||||||||||||||
|
millions of dollars
|
Part D
|
|
||||||||||||||||
| Year | U.S. | Non-U.S. | Reimbursements | Reimbursements | ||||||||||||||
|
2011
|
$ | 27.1 | $ | 15.4 | $ | 28.0 | $ | 27.1 | ||||||||||
|
2012
|
26.5 | 14.3 | 27.4 | 26.6 | ||||||||||||||
|
2013
|
26.2 | 15.3 | 26.4 | 25.5 | ||||||||||||||
|
2014
|
25.2 | 16.9 | 25.5 | 24.7 | ||||||||||||||
|
2015
|
24.4 | 17.1 | 24.6 | 23.8 | ||||||||||||||
|
2016-2020
|
114.1 | 96.5 | 109.7 | 106.4 | ||||||||||||||
The weighted-average rate of increase in the per capita cost of
covered health care benefits is projected to be 7.40% in 2011
for pre-65 and post-65 participants, decreasing to 5% by the
year 2019. A one-percentage point change in the assumed health
care cost trend would have the following effects:
| One Percentage Point | ||||||||||
| millions of dollars | Increase | Decrease | ||||||||
|
Effect on other post employment benefit obligation
|
$ | 18.0 | $ | (16.0 | ) | |||||
|
Effect on total service and interest cost components
|
$ | 0.9 | $ | (0.8 | ) | |||||
91
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| NOTE 12 | STOCK INCENTIVE PLANS |
Under the Company’s 1993 Stock Incentive Plan (“1993
Plan”), the Company granted options to purchase shares of
the Company’s common stock at the fair market value on the
date of grant. The options vest over periods up to three years
and have a term of ten years from date of grant. As of
December 31, 2003, there were no options available for
future grants under the 1993 Plan. The 1993 Plan expired at the
end of 2003 and was replaced by the Company’s 2004 Stock
Incentive Plan, which was amended at the Company’s 2009
Annual Stockholders Meeting, among other things, to increase the
number of shares available for issuance under the Plan. Under
the BorgWarner Inc. Amended and Restated 2004 Stock Incentive
Plan (“2004 Stock Incentive Plan”), the number of
shares authorized for grant was 12,500,000, of which
approximately 2,200,000 shares are available for future
issuance. As of December 31, 2010, there were a total of
3,253,181 outstanding options under the 1993 and 2004 Stock
Incentive Plans.
Stock Options
Stock option compensation expense reduced
earnings before income taxes and noncontrolling interest and net
earnings for the years ended December 31, 2010, 2009 and
2008 by:
|
Year Ended
|
||||||||||||
| December 31, | ||||||||||||
| (millions), except per share data | 2010 | 2009 | 2008 | |||||||||
|
Earnings before income taxes and noncontrolling interest
|
$ | 0.1 | $ | 6.6 | $ | 12.2 | ||||||
|
Net earnings
|
$ | — | $ | 5.1 | $ | 9.1 | ||||||
|
Per share — basic
|
$ | — | $ | 0.04 | $ | 0.08 | ||||||
|
Per share — diluted
|
$ | — | $ | 0.04 | $ | 0.08 | ||||||
A summary of the plans’ shares under option at
December 31, 2010, 2009 and 2008 is as follows:
|
Weighted
|
||||||||||||||||
|
Weighted
|
Average
|
Aggregate
|
||||||||||||||
|
Average
|
Remaining
|
Intrinsic
|
||||||||||||||
|
Shares
|
Exercise
|
Contractual
|
Value
|
|||||||||||||
| (thousands) | Price | Life (in years) | (In millions) | |||||||||||||
|
Outstanding at January 1, 2008
|
6,331 | $ | 27.75 | 7.7 | $ | 130.8 | ||||||||||
|
Exercised
|
(366 | ) | 23.82 | $ | 8.3 | |||||||||||
|
Forfeited
|
(167 | ) | 32.58 | |||||||||||||
|
Outstanding at December 31, 2008
|
5,798 | $ | 27.86 | 6.7 | $ | 6.0 | ||||||||||
|
Exercised
|
(381 | ) | $ | 23.89 | $ | 3.4 | ||||||||||
|
Forfeited
|
(240 | ) | $ | 32.16 | ||||||||||||
|
Outstanding at December 31, 2009
|
5,177 | $ | 27.98 | 5.8 | $ | 29.7 | ||||||||||
|
Exercised
|
(1,888 | ) | $ | 26.73 | $ | 50.3 | ||||||||||
|
Forfeited
|
(36 | ) | $ | 33.95 | ||||||||||||
|
Outstanding at December 31, 2010
|
3,253 | $ | 28.64 | 4.9 | $ | 142.2 | ||||||||||
|
Options exercisable at December 31, 2010
|
3,253 | $ | 28.64 | 4.9 | $ | 142.2 | ||||||||||
92
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2010:
| Options Outstanding | ||||||||||||||||||||||
|
Weighted-Average
|
Options Exercisable | |||||||||||||||||||||
|
Number
|
Remaining
|
Number
|
||||||||||||||||||||
|
Outstanding
|
Contractual
|
Weighted-Average
|
Exercisable
|
Weighted-Average
|
||||||||||||||||||
| Range of Exercise Prices | (Thousands) | Life (Years) | Exercise Price | (Thousands) | Exercise Price | |||||||||||||||||
|
$12.07 - 16.52
|
319 | 0.2 | $ | 14.27 | 319 | $ | 14.27 | |||||||||||||||
|
$22.15 - 34.95
|
2,934 | 4.7 | $ | 30.21 | 2,934 | $ | 30.21 | |||||||||||||||
| 3,253 | 4.9 | $ | 28.64 | 3,253 | $ | 28.64 | ||||||||||||||||
Proceeds from stock option exercises for 2010, 2009 and 2008
were as follows:
|
Year Ended
|
||||||||||||||
| December 31, | ||||||||||||||
| (millions of dollars) | 2010 | 2009 | 2008 | |||||||||||
|
Proceeds from stock options — gross
|
$ | 55.4 | $ | 9.4 | $ | 14.1 | ||||||||
|
Tax benefit (loss)
|
11.7 | (0.7 | ) | 3.0 | ||||||||||
|
Proceeds from stock options — net
|
$ | 67.1 | $ | 8.7 | $ | 17.1 | ||||||||
Restricted Stock
At its November 2007 meeting, our
Compensation Committee decided that restricted common stock and
stock units would be awarded in place of stock options for
long-term incentive award grants to employees. These restricted
shares and units for employees vest fifty percent after two
years and the remainder after three years from the date of
grant. The Company also grants restricted common stock to its
non-employee directors. For non-employee directors restricted
shares generally vest ratably on the anniversary of the date of
the grant over a period of three years. The market value of the
Company’s restricted common stock and stock units at the
date of grant determines the value of the restricted common
stock. In February 2010, 570,954 restricted shares and units
were granted to employees under the 2004 Stock Incentive Plan.
In April 2010, 19,440 restricted shares were granted to
non-employee directors under the 2004 Stock Incentive Plan. The
value of the awards is recorded as unearned compensation within
capital in excess of par value in stockholders’ equity, and
is amortized as compensation expense over the restriction
periods.
Restricted stock compensation expense reduced earnings before
income taxes and noncontrolling interest and net earnings for
the years ended December 31, 2010, 2009 and 2008 by:
|
Year Ended
|
||||||||||||||
| December 31, | ||||||||||||||
| (millions), except per share data | 2010 | 2009 | 2008 | |||||||||||
|
Earnings before income taxes and noncontrolling interest
|
$ | 18.9 | $ | 14.8 | $ | 9.6 | ||||||||
|
Net earnings
|
$ | 14.7 | $ | 11.4 | $ | 7.2 | ||||||||
|
Per share — basic
|
$ | 0.13 | $ | 0.10 | $ | 0.06 | ||||||||
|
Per share — diluted
|
$ | 0.11 | $ | 0.10 | $ | 0.06 | ||||||||
93
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the status of the Company’s nonvested
restricted stock for employees and non-employee directors at
December 31, 2010, 2009 and 2008 follows:
|
Shares
|
||||||||
|
Subject to
|
Weighted
|
|||||||
|
Restriction
|
Average
|
|||||||
| (Thousands) | Price | |||||||
|
Nonvested at January 1, 2008
|
280.9 | $ | 42.90 | |||||
|
Granted
|
412.4 | 46.43 | ||||||
|
Vested
|
(14.6 | ) | 30.14 | |||||
|
Forfeited
|
(17.2 | ) | 46.41 | |||||
|
Nonvested at December 31, 2008
|
661.5 | $ | 45.29 | |||||
|
Granted
|
1,044.0 | 20.61 | ||||||
|
Vested
|
(23.5 | ) | 51.03 | |||||
|
Forfeited
|
(134.9 | ) | 29.79 | |||||
|
Nonvested at December 31, 2009
|
1,547.1 | $ | 29.90 | |||||
|
Granted
|
603.0 | 36.16 | ||||||
|
Vested
|
(188.4 | ) | 44.80 | |||||
|
Forfeited
|
(91.1 | ) | 27.10 | |||||
|
Nonvested at December 31, 2010
|
1,870.6 | $ | 30.55 | |||||
Performance Share Plans
The 2004 Stock Incentive Plan
provides for awarding of performance shares to members of senior
management at the end of successive three-year periods based on
the Company’s performance in terms of total shareholder
return relative to a peer group of automotive companies. Awards
earned are generally payable 40% in cash and 60% in the
Company’s common stock.
The Company recognizes compensation expense for the 40% cash
component and 60% stock component ratably over the performance
period. Compensation expense for the 60% stock component is
based on the performance shares fair value at the date of grant.
This fair value is calculated using a lattice model (Monte Carlo
simulation). The compensation expense for the 40% cash component
is based on quarterly marking to market the cash liability. The
amounts expensed under the plan and the share issuances for the
three-year measurement periods ended December 31, 2010,
2009 and 2008 were as follows:
| 2010 | 2009 | 2008 | ||||||||||
|
Expense (millions of dollars)
|
$ | 23.9 | $ | 10.7 | $ | 4.3 | ||||||
|
Number of shares*
|
104,205 | 269,896 | 287,816 | |||||||||
| * | Shares are issued in February of the following year. |
94
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| NOTE 13 | OTHER COMPREHENSIVE INCOME (LOSS) |
The components of accumulated other comprehensive income (loss),
net of tax, in the Consolidated Balance Sheets are as follows:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Foreign currency translation adjustments
|
$ | 147.1 | $ | 210.6 | ||||||
|
Market value of hedge instruments
|
(44.8 | ) | (31.2 | ) | ||||||
|
Defined benefit post employment plans
|
(158.1 | ) | (165.9 | ) | ||||||
|
Unrealized gain on
available-for-sale
securities
|
1.2 | — | ||||||||
|
Comprehensive loss attributable to the noncontrolling interest
|
0.9 | 1.0 | ||||||||
|
Accumulated other comprehensive income (loss)
|
$ | (53.7 | ) | $ | 14.5 | |||||
The amounts presented as changes in accumulated other
comprehensive income (loss), net of related taxes, are added to
(deducted from) net earnings (loss) resulting in comprehensive
income (loss). The following table summarizes the components of
comprehensive income (loss) on an after-tax basis for the year
ended December 31, 2010, 2009 and 2008.
| (millions of dollars) | 2010 | 2009 | 2008 | |||||||||||
|
Foreign currency translation adjustments
|
$ | (63.5 | ) | $ | 54.8 | $ | (88.6 | ) | ||||||
|
Market value change of hedge instruments
|
(20.5 | ) | 63.3 | (56.8 | ) | |||||||||
|
Income taxes
|
6.9 | (18.2 | ) | 19.3 | ||||||||||
|
Net foreign currency translation and hedge instruments adjustment
|
(77.1 | ) | 99.9 | (126.1 | ) | |||||||||
|
Unrealized gain (loss) on
available-for-sale
securities
|
1.2 | — | (1.4 | ) | ||||||||||
|
Defined benefit post employment plans
|
23.9 | (13.1 | ) | (104.5 | ) | |||||||||
|
Income taxes
|
(16.1 | ) | 9.7 | 29.8 | ||||||||||
|
Net defined benefit post employment plans
|
7.8 | (3.4 | ) | (74.7 | ) | |||||||||
|
Change in accumulated other comprehensive income (loss)
|
(68.1 | ) | 96.5 | (202.2 | ) | |||||||||
|
Net earnings (loss) attributable to BorgWarner Inc.
|
377.4 | 27.0 | (35.6 | ) | ||||||||||
|
Comprehensive income (loss)
|
309.3 | 123.5 | (237.8 | ) | ||||||||||
|
Comprehensive income (loss) attributable to noncontrolling
interest*
|
(0.1 | ) | 3.9 | (10.8 | ) | |||||||||
|
Comprehensive income (loss) attributable to BorgWarner Inc.
|
$ | 309.2 | $ | 127.4 | $ | (248.6 | ) | |||||||
| * | Refer to Note 1, “Summary of Significant Accounting Policies” for implementation of ASC Topic 810. |
| NOTE 14 | CONTINGENCIES |
In the normal course of business the Company and its
subsidiaries are parties 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 and its subsidiaries will
ultimately be successful in any of these commercial and legal
matters or, if not, what the impact might be. The Company’s
environmental and product liability contingencies are discussed
separately below. The Company’s management does not expect
that the results 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.
95
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Litigation
In January 2006, DTP, a subsidiary of the Company, filed a
declaratory judgment action in United States District Court,
Southern District of Indiana (Indianapolis Division) against the
United Automobile, Aerospace, and Agricultural Implements
Workers of America (“UAW”) Local No. 287 and
Gerald Poor, individually and as the representative of a
defendant class. DTP sought the Court’s affirmation that
DTP did not violate the Labor-Management Relations Act or the
Employee Retirement Income Security Act (ERISA) by unilaterally
amending certain medical plans effective April 1, 2006 and
October 1, 2006, prior to the expiration of the
then-current collective bargaining agreements. On
September 10, 2008, the Court found that DTP’s
reservation of the right to make such amendments reducing the
level of benefits provided to retirees was limited by its
collectively bargained health insurance agreement with the UAW,
which did not expire until April 24, 2009. Thus, the
amendments were untimely. In 2008 the Company recorded a charge
of $4.0 million as a result of the Court’s decision.
DTP filed a declaratory judgment action in the United States
District Court, Southern District of Indiana (Indianapolis
Division) against the UAW Local No. 287 and Jim Barrett and
others, individually and as representatives of a defendant
class, on February 26, 2009 again seeking the Court’s
affirmation that DTP will not violate the Labor —
Management Relations Act or ERISA by modifying the level of
benefits provided retirees to make them comparable to other
Company retiree benefit plans after April 24, 2009. Certain
retirees, on behalf of themselves and others, filed a
mirror-image action in the United States District Court, Eastern
District of Michigan (Southern Division) on March 11, 2009,
for which a class has been certified. During the last quarter of
2009 the action pending in Indiana was dismissed, while the
action in Michigan is continuing and in the discovery phase. The
Company is vigorously defending against the suit. This
contingency is subject to many uncertainties, therefore based on
the information available to date, the Company cannot estimate
the amount or the range of potential loss, if any.
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 38 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.
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;
remediation alternatives; and estimated legal fees), the Company
has an accrual for indicated environmental liabilities with a
balance at December 31, 2010 of $28.0 million. The
Company has accrued amounts that do not exceed $3.0 million
related to any individual site except for the Crystal Springs
site discussed below, and we do not believe that the costs
related to any of these sites will have a material adverse
effect on the Company’s results of operations, cash flows
or financial condition. The Company expects to pay out
substantially all of the amounts accrued for environmental
liability over the next three to five years.
In connection with the sale of Kuhlman Electric Corporation, the
Company agreed to indemnify the buyer and Kuhlman Electric for
certain environmental liabilities, then unknown to the Company,
relating to certain
96
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
operations of Kuhlman Electric that pre-date the Company’s
1999 acquisition of Kuhlman Electric. During 2000, Kuhlman
Electric notified the Company that it discovered potential
environmental contamination at its Crystal Springs, Mississippi
plant while undertaking an expansion of the plant. The Company
is continuing to work with the Mississippi Department of
Environmental Quality and Kuhlman Electric to investigate and
remediate to the extent necessary, historical contamination at
the plant and surrounding area. Kuhlman Electric and others,
including the Company, were sued in numerous related lawsuits,
in which multiple claimants alleged personal injury and property
damage relating to the alleged environmental contamination. In
2005, the Company and other defendants entered into settlements
that resolved approximately 99% of those claims and the
remainder of them have since been dismissed.
In 2007 and 2008, four additional lawsuits were filed against
Kuhlman Electric and others, including the Company, on behalf of
approximately 340 plaintiffs, alleging personal injury relating
to the alleged environmental contamination. One of the lawsuits,
involving a single plaintiff, was dismissed by the trial court
in April 2010 and the plaintiff’s appeal of that
decision was dismissed by the appellate court in August 2010.
The Company entered into a settlement in July 2010 regarding the
personal injury claims of the plaintiffs in the other three
lawsuits and those of approximately 2,700 unfiled claimants
represented by those plaintiffs’ attorneys. In exchange
for, among other things, the dismissal with prejudice of these
lawsuits and the release of claims by the unfiled claimants, the
Company agreed to pay up to $28 million in settlement
funds, which was expensed in the second quarter of 2010. In
November 2010 the Company paid $13.9 million related to
this settlement. The remaining payment of approximately
$14 million is expected to be paid in February 2011.
Conditional Asset
Retirement Obligations
In March 2005, ASC Topic 410, Accounting for Conditional Asset
Retirement Obligations, which requires the Company to recognize
legal obligations to perform asset retirements in which the
timing
and/or
method of settlement are conditional on a future event that may
or may not be within the control of the entity. Certain
government regulations require the removal and disposal of
asbestos from an existing facility at the time the facility
undergoes major renovations or is demolished. The liability
exists because the facility will not last forever, but it is
conditional on future renovations (even if there are no
immediate plans to remove the materials, which pose no health or
safety hazard in their current condition). Similarly, government
regulations require the removal or closure of underground
storage tanks and above ground storage tanks when their use
ceases, the disposal of polychlorinated biphenyl transformers
and capacitors when their use ceases, and the disposal of used
furnace bricks and liners, and lead-based paint in conjunction
with facility renovations or demolition. The Company currently
has 45 manufacturing locations that have been identified as
containing these items. The fair value to remove and dispose of
this material has been estimated and recorded at
$1.2 million as of December 31, 2010 and
$1.3 million at December 31, 2009.
Product
Liability
Like many other industrial companies who have historically
operated in the U.S., the Company (or parties the Company is
obligated to indemnify) continues to be named as one of many
defendants in asbestos-related personal injury actions. We
believe that the Company’s involvement is limited because,
in general, these claims relate to a few types of automotive
friction products that were manufactured many years ago and
contained encapsulated asbestos. The nature of the fibers, the
encapsulation and the manner of use lead the Company to believe
that these products are highly unlikely to cause harm. As of
December 31, 2010 and December 31, 2009 the Company
had approximately 17,000 and 23,000 pending asbestos-related
product liability claims, respectively. Of the 17,000
outstanding claims at December 31, 2010, approximately
8,000 were pending in just three jurisdictions, where
significant tort and judicial reform activities are underway.
The Company’s policy is to vigorously defend against these
lawsuits and the Company has been successful in obtaining
dismissal of many claims without any payment. The Company
expects that the vast majority of the pending asbestos-related
product liability claims where it is a defendant (or has an
obligation to indemnify a defendant) will result in no payment
being made by the Company or its insurers. In 2010, of the
97
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
approximately 7,700 claims resolved, 245 (3.2%) resulted in any
payment being made to a claimant by or on behalf of the Company.
In the full year of 2009, of the approximately 5,300 claims
resolved, only 223 (4.2%) resulted in any payment being made to
a claimant by or on behalf of the Company.
Prior to June 2004, the settlement and defense costs associated
with all claims were covered by the Company’s primary layer
insurance coverage, and these carriers administered, defended,
settled and paid all claims under a funding arrangement. In
addition to the primary insurance available for asbestos-related
claims, the Company has substantial additional layers of
insurance available for potential future asbestos-related
product claims. As such, the Company continues to believe that
its coverage is sufficient to meet foreseeable liabilities.
In June 2004, primary layer insurance carriers notified the
Company of the alleged exhaustion of their policy limits. This
led the Company to access the next available layer of insurance
coverage. Since June 2004, secondary layer insurers have been
responsible for asbestos-related litigation defense and
settlement expenses pursuant to a funding arrangement.
A declaratory judgment action was filed in January 2004 in the
Circuit Court of Cook County, Illinois by Continental Casualty
Company and related companies (“CNA”) against the
Company and certain of its other historical general liability
insurers. CNA provided the Company with both primary and
additional layer insurance, and, in conjunction with other
insurers, is currently defending and indemnifying the Company in
its pending asbestos-related product liability claims. The
lawsuit seeks to determine the extent of insurance coverage
available to the Company including whether the available limits
exhaust on a “per occurrence” or an
“aggregate” basis, and to determine how the applicable
coverage responsibilities should be apportioned. On
August 15, 2005, the Court issued an interim order
regarding the apportionment matter. The interim order has the
effect of making insurers responsible for all defense and
settlement costs pro rata to
time-on-the-risk,
with the pro-ration method to hold the insured harmless for
periods of bankrupt or unavailable coverage. Appeals of the
interim order were denied. However, the issue is reserved for
appellate review at the end of the action.
Although it is impossible to predict the outcome of pending or
future claims or the impact of tort reform legislation that may
be enacted at the State or Federal levels, due to the
encapsulated nature of the products, the Company’s
experiences in vigorously defending and resolving claims in the
past, and the Company’s significant insurance coverage with
solvent carriers as of the date of this filing, management does
not believe that asbestos-related product liability claims are
likely to have a material adverse effect on the Company’s
results of operations, cash flows or financial condition.
To date, the Company has paid and accrued $153.1 million in
defense and indemnity in advance of insurers’
reimbursement, which includes the $40.7 million referred to
below, and has received $32.5 million in cash from
insurers. The net outstanding balance of $120.6 million is
expected to be fully recovered, of which approximately
$43 million is expected to be recovered within one year.
Timing of the recovery is dependent on final resolution of the
declaratory judgment action referred to above. At
December 31, 2009, insurers owed $58.6 million in
association with these claims.
On April 5, 2010 the Superior Court of New Jersey Appellate
Division affirmed a lower court judgment in an asbestos-related
action against the Company and others. The Company filed its
Notice of Petition to the Supreme Court of New Jersey in late
April, seeking to appeal the decisions of the lower courts. On
July 8, 2010 the Supreme Court of New Jersey denied the
Company’s Notice of Petition appealing the decision of the
lower courts. The total claim of $40.7 million was paid by
the Company in July 2010.
In addition to the $120.6 million net outstanding balance
relating to past settlements and defense costs, the Company has
estimated a liability of $50.6 million for claims asserted,
but not yet resolved and their related defense costs at
December 31, 2010. The Company also has a related asset of
$50.6 million to recognize proceeds from the insurance
carriers. Insurance carrier reimbursement of 100% is expected
based on the Company’s experience, its insurance contracts
and decisions received to date in the declaratory
98
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
judgment action referred to below. At December 31, 2009,
the comparable value of the insurance asset and accrued
liability was $49.9 million.
The amounts recorded in the Consolidated Balance Sheets related
to the estimated future settlement of existing claims are as
follows:
| (millions of dollars) | 2010 | 2009 | ||||||||
|
Assets:
|
||||||||||
|
Prepayments and other current assets
|
$ | 25.8 | $ | 24.9 | ||||||
|
Other non-current assets
|
24.8 | 25.0 | ||||||||
|
Total insurance assets
|
$ | 50.6 | $ | 49.9 | ||||||
|
Liabilities:
|
||||||||||
|
Accounts payable and accrued expenses
|
$ | 25.8 | $ | 24.9 | ||||||
|
Other non-current liabilities
|
24.8 | 25.0 | ||||||||
|
Total accrued liability
|
$ | 50.6 | $ | 49.9 | ||||||
The Company cannot reasonably estimate possible losses, if any,
in excess of those for which it has accrued, because it cannot
predict how many additional claims may be brought against the
Company (or parties the Company has an obligation to indemnify)
in the future, the allegations in such claims, the possible
outcomes, or the impact of tort reform legislation that may be
enacted at the State or Federal levels.
| NOTE 15 | LEASES AND COMMITMENTS |
Certain assets are leased under long-term operating leases.
These include rent for the corporate headquarters and one
airplane. Most leases contain renewal options for various
periods. Leases generally require the Company to pay for
insurance, taxes and maintenance of the leased property. The
Company leases other equipment such as vehicles and certain
office equipment under short-term leases. Total rent expense was
$25.6 million in 2010, $28.5 million in 2009, and
$31.5 million in 2008. The Company does not have any
material capital leases.
On September 30, 2010 the Company paid $6.0 million
for certain machinery and equipment it had previously leased.
The Company’s $6.0 million payment has been recorded
as a capital expenditure in the investing activity section of
the Company’s Consolidated Statement of Cash Flows for the
year ended December 31, 2010.
Future minimum operating lease payments at December 31,
2010 were as follows:
| (millions of dollars) | ||||||
|
2011
|
$ | 9.3 | ||||
|
2012
|
7.6 | |||||
|
2013
|
6.7 | |||||
|
2014
|
5.9 | |||||
|
2015
|
5.5 | |||||
|
After 2015
|
8.0 | |||||
|
Total minimum lease payments
|
$ | 43.0 | ||||
| NOTE 16 | EARNINGS (LOSS) PER SHARE |
The Company presents both basic and diluted earnings per share
of common stock (“EPS”) amounts. Basic EPS is
calculated by dividing net earnings (loss) attributable to
BorgWarner Inc. by the weighted average shares of common stock
outstanding during the reporting period. Diluted EPS is
calculated by
99
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
dividing net earnings (loss) attributable to BorgWarner Inc. by
the weighted average shares of common stock and common
equivalent stock outstanding during the reporting period. The
dilutive impact of stock based compensation is calculated using
the treasury stock method. The treasury stock method assumes
that the Company uses the proceeds from the exercise of awards
to repurchase common stock at the average market pricing during
the period. The assumed proceeds under the treasury stock method
include the purchase price that the grantee will pay in the
future, compensation cost for future service that the Company
has not yet recognized and any windfall tax benefits that would
be credited to capital in excess of par value when the award
generates a tax deduction. If there would be a shortfall
resulting in a charge to capital in excess of par value, such an
amount would be a reduction in proceeds.
Options are only dilutive when the average market price of the
underlying common stock exceeds the exercise price of the
options because it is unlikely they would be exercised if the
exercise price were higher than the market price.
For the year ended December 31, 2008, the impact of the
approximately 1.578 million options and restricted stock in
the table below were excluded from the calculation of fully
diluted earnings as this would have reduced the Company’s
loss per share. For the year-ended December 31, 2009, there
were approximately 2.711 million options where the exercise
price exceeded the market price. For the year-ended
December 31, 2010, the market price exceeded the exercise
price for all outstanding options.
The potential common shares associated with the Company’s
3.50% convertible notes due April 15, 2012 are reflected in
diluted earnings per share in 2010 using the
“if-converted” method. Under this method, if dilutive,
the common stock is assumed issued as of the beginning of the
reporting period and included in calculating diluted earnings
per share of common stock. In addition, if dilutive, interest
expense, net of tax, related to the convertible notes is added
back to the numerator in calculating diluted earnings per share
of common stock.
Separately and concurrently with the issuance of the
Company’s 3.50% convertible notes, the Company entered into
a bond hedge overlay, including warrants and options. If the
Company’s weighted-average share price exceeds $38.61 per
share for any period presented, the warrants will be dilutive to
the Company’s earnings. If the Company’s weighted
average share price exceeds $32.82 for any period presented the
offsetting bond hedge will be anti-dilutive.
For the year ended December 31, 2009, the
11.389 million share impact of the Company’s
convertible bond was not included in the calculation of fully
diluted earnings because using the if-converted method would
increase earnings per share. At December 31, 2009, the
common stock share price was less than the warrant exercise
price of $38.62. Therefore, no value was assigned as
anti-dilutive in the table below.
100
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table reconciles the numerators and denominators
used to calculate basic and diluted earnings (loss) per share of
common stock
| (millions of dollars, except per share amounts) | 2010 | 2009 | 2008* | |||||||||||
|
Basic earnings (loss) per share:
|
||||||||||||||
|
Net earnings (loss) attributable to BorgWarner Inc.
|
$ | 377.4 | $ | 27.0 | $ | (35.6 | ) | |||||||
|
Weighted average shares of common stock outstanding
|
114.155 | 116.522 | 116.007 | |||||||||||
|
Basic earnings (loss) per share of common stock
|
$ | 3.31 | $ | 0.23 | $ | (0.31 | ) | |||||||
|
Diluted earnings (loss) per share:
|
||||||||||||||
|
Net earnings (loss) attributable to BorgWarner Inc.
|
$ | 377.4 | $ | 27.0 | $ | (35.6 | ) | |||||||
|
Adjustment for net interest expense on convertible notes
|
20.4 | — | — | |||||||||||
|
Diluted net earnings (loss) attributable to BorgWarner Inc.
|
$ | 397.8 | $ | 27.0 | $ | (35.6 | ) | |||||||
|
Weighted average shares of common stock outstanding
|
114.155 | 116.522 | 116.007 | |||||||||||
|
Effect of 3.50% convertible notes
|
11.389 | — | — | |||||||||||
|
Effect of warrant
|
1.464 | — | — | |||||||||||
|
Effect of stock-based compensation
|
2.567 | 0.417 | — | |||||||||||
|
Total dilutive effect on weighted average shares of common stock
outstanding
|
15.420 | 0.417 | — | |||||||||||
|
Weighted average shares of common stock outstanding including
dilutive shares
|
129.575 | 116.939 | 116.007 | |||||||||||
|
Diluted earnings (loss) per share of common stock
|
$ | 3.07 | $ | 0.23 | $ | (0.31 | ) | |||||||
|
Total anti-dilutive shares
|
||||||||||||||
|
3.50% convertible notes
|
— | 11.389 | — | |||||||||||
|
Bond hedge
|
2.836 | 0.034 | — | |||||||||||
|
Stock-based compensation
|
— | 2.711 | 1.578 | |||||||||||
|
Total anti-dilutive shares
|
2.836 | 14.134 | 1.578 | |||||||||||
| * | The Company had a loss for the year ended December 31, 2008. 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. |
| NOTE 17 | RESTRUCTURING |
On July 31, 2008, the Company announced a restructuring of
its operations to align ongoing operations with a continuing,
fundamental market shift in the auto industry. As a continuation
of the Company’s third quarter restructuring, on
December 11, 2008, the Company announced plans for
additional restructuring actions. As a result of these third and
fourth quarter 2008 restructuring actions, the Company had
reduced its North American workforce by approximately
2,400 people, or 33%; its European workforce by
approximately 1,600 people, or 18%; and its Asian workforce
by approximately 400 people, or 17%. The restructuring
expense recognized for employee termination benefits was
$54.6 million. In addition to employee termination costs,
the Company recorded $72.9 million of asset impairment
charges related to the North American and European
restructuring. The combined restructuring expenses of
$127.5 million are broken out by segment
101
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
as follows: Engine $85.3 million, Drivetrain
$40.9 million and Corporate $1.3 million for the year
ended December 31, 2008.
In the second quarter of 2009, the Company took additional
restructuring actions. The Company reduced its North American
workforce by approximately 550 people, or 12%; its European
workforce by approximately 150 people, or 2%; and its Asian
workforce by approximately 60 people, or 3% in the second
quarter. The net restructuring expense recognized in the second
quarter was $9.0 million for employee termination benefits.
In addition to employee termination costs, the Company recorded
$36.3 million of asset impairment and $5.0 million of
other charges in the second quarter of 2009 related to the North
American and European restructuring. The combined 2009
restructuring expenses of $50.3 million are broken out by
segment as follows: Engine $27.2 million, Drivetrain
$19.7 million and Corporate $3.4 million for the year
ended December 31, 2009.
Included in the second quarter of 2009 asset impairment charge
is $22.3 million related to one of the Company’s
European locations. During the second quarter of 2009
circumstances caused the Company to evaluate the long range
outlook of the facility using an undiscounted and discounted
cash flow model, both of which indicated that assets were
impaired. The Company then used a replacement cost technique to
determine the fair value of the assets at the facility. This
reduction of asset value was included in the Engine segment.
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 reserves.
The following table displays a roll forward of the employee
related restructuring and other accruals recorded within the
Company’s Consolidated Balance Sheet and the related cash
flow activity:
| Employee Related and Other Costs | ||||||||||||||||||
| (millions of dollars) | Drivetrain | Engine | Corporate | Total | ||||||||||||||
|
Balance at January 1, 2008
|
$ | 9.1 | — | — | $ | 9.1 | ||||||||||||
|
Provision
|
18.8 | 34.5 | 1.3 | 54.6 | ||||||||||||||
|
Cash Payments
|
(6.0 | ) | (4.5 | ) | (0.6 | ) | (11.1 | ) | ||||||||||
|
Translation Adjustment
|
(0.9 | ) | (0.7 | ) | — | (1.6 | ) | |||||||||||
|
Balance at December 31, 2008
|
$ | 21.0 | $ | 29.3 | $ | 0.7 | $ | 51.0 | ||||||||||
|
Provision
|
6.0 | 4.6 | 3.4 | 14.0 | ||||||||||||||
|
Cash Payments
|
(22.8 | ) | (23.4 | ) | (2.0 | ) | (48.2 | ) | ||||||||||
|
Translation Adjustment
|
0.3 | 0.4 | — | 0.7 | ||||||||||||||
|
Balance at December 31, 2009
|
$ | 4.5 | $ | 10.9 | $ | 2.1 | $ | 17.5 | ||||||||||
|
Cash Payments
|
(3.6 | ) | (6.4 | ) | (2.1 | ) | (12.1 | ) | ||||||||||
|
Translation Adjustment
|
(0.1 | ) | (0.7 | ) | — | (0.8 | ) | |||||||||||
|
Balance at December 31, 2010
|
$ | 0.8 | $ | 3.8 | $ | — | $ | 4.6 | ||||||||||
| NOTE 18 | RECENT TRANSACTIONS |
Traction
Systems division of Haldex Group
On January 31, 2011, the Company acquired the Traction
Systems division of Haldex Group, a leading provider of
innovative all-wheel drive (AWD) products for the global vehicle
industry headquartered in Stockholm, Sweden. The purchase price
was approximately $205 million (1.425 billion Swedish
Krona).
102
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The operating results will be reported within the Company’s
Drivetrain reporting segment from the date of acquisition.
This acquisition is expected to accelerate BorgWarner’s
growth in the global AWD market as it continues to shift toward
front-wheel drive (FWD) based vehicles. The acquisition will add
industry leading FWD/AWD technologies, with a strong European
customer base, to BorgWarner’s existing portfolio of front
and rear-wheel drive based products. This enables BorgWarner to
provide global customers a broader range of all-wheel drive
solutions to meet their vehicle needs.
BERU-Eichenauer
GmbH
In anticipation of market growth expected for its electric cabin
heaters, the Company completed the acquisition of
BERU-Eichenauer GmbH by acquiring the shares of its former joint
venture partner, Eichenauer Heizelemente GmbH & Co.
KG. The former
50
/
50
joint venture was formed in 2000 to develop and manufacture
electric cabin heaters. The acquisition formally took effect on
May 1, 2010.
The pre-tax impact of this acquisition was an increase in
intangible and other assets of $17.6 million related to
adjusting the Company’s fifty percent investment to fair
value under ASC Topic 805, a gain of $8.0 million and a
decrease in cash of $9.6 million. The Company’s
$9.6 million payment has been recorded as an investing
activity in the Company’s December 31, 2010
Consolidated Statement of Cash Flows.
Dytech ENSA
S.L.
On April 10, 2010, the Company acquired 100% of Dytech ENSA
S.L. (“Dytech”), headquartered in Vigo, Spain. The
gross cost of this acquisition is $147.7 million, or
$147.6 million, net of cash and cash equivalents. Dytech is
a leading producer of exhaust gas recirculation (EGR) coolers,
EGR tubes, and integrated EGR modules including valves for
automotive and commercial vehicle applications, both on- and
off-road. This acquisition enhances the Company’s emissions
products offering and system/module expertise, further
differentiating BorgWarner as a leader in highly engineered
automotive systems. In addition, Dytech’s geographic
footprint and customer base complements and strengthens the
Company’s market presence with global automakers. The
operating results of Dytech are reported within the
Company’s Engine reporting segment from the date of
acquisition. The Company’s $147.6 million payment has
been recorded as an investing activity in the Company’s
December 31, 2010 Consolidated Statement of Cash Flows.
The following table summarizes the aggregate estimated fair
values of the assets acquired and liabilities assumed on
April 10, 2010, the date of acquisition.
| (millions of dollars) | ||||||
|
Receivables, net
|
$ | 54.3 | ||||
|
Inventories, net
|
44.7 | |||||
|
Property, plant and equipment, net
|
45.0 | |||||
|
Goodwill
|
74.1 | |||||
|
Other intangible assets, net of tax
|
31.1 | |||||
|
Accounts payable and accrued expenses
|
(81.5 | ) | ||||
|
Other assets and liabilities, net
|
(9.3 | ) | ||||
|
Assumed debt
|
(10.8 | ) | ||||
|
Net cash consideration
|
$ | 147.6 | ||||
Etatech, Inc.
Technology
On June 2, 2009, the Company announced the purchase of
advanced gasoline ignition technology and related intellectual
property from Florida-based Etatech, Inc. The high-frequency
ignition technology enables
103
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
high-performing, lean burning engines to significantly improve
fuel economy and reduce emissions compared with conventional
combustion technologies. Amortization expense for the year ended
December 31, 2009 was approximately $1.3 million. For
the year ended December 31, 2009, a $7.5 million
payment for Etatech, Inc. has been reflected as an investing
activity in the Consolidated Statement of Cash Flows.
In May 2010, the Company made the final payment regarding the
June 2009 purchase of Etatech, Inc. The $7.5 million
payment has been reflected as an investing activity in the
Company’s December 31, 2010 Consolidated Statement of
Cash Flows.
BERU
The Company acquired approximately 82.2% of the outstanding
shares of BERU Aktiengesellschaft (“BERU”),
headquartered in Ludwigsburg, Germany prior to 2008.
In the second quarter of 2008, the Company and BERU completed a
Domination and Profit Transfer Agreement (“DPTA”),
giving BorgWarner full control of BERU. Under this agreement
BERU is obligated to transfer 100% of its annual profits or
losses to the Company. Upon request of BERU noncontrolling
shareholders, the Company is obligated to purchase their shares
for a cash payment of €71.32 per share. Those BERU
noncontrolling shareholders who did not sell their shares are
entitled to receive an annual compensatory payment (perpetual
dividend) of €4.23 (net) per share. The DPTA is a binding
agreement. However, certain noncontrolling shareholders of BERU
initiated an appraisal proceeding in the German court system
that challenged the valuation of the €71.32 purchase price
and €4.23 annual compensatory payment (perpetual dividend).
On January 7, 2009 the Company informed BERU of its
intention to purchase the remaining outstanding shares at that
time of approximately 4%, using the required German legal
process referred to as a “squeeze-out” to gain 100%
ownership. This process included an affirmative vote of BERU
shareholders at its May 20, 2009 annual shareholder
meeting. The registration of the “squeeze-out” was
challenged by certain noncontrolling shareholders of BERU with
the commercial register in June 2009. The
“squeeze-out” share price passed by the BERU
shareholders in May 2009 was €73.39. The increase in price
per share of €2.07 resulting from the “squeeze
out” was reflected as an increase to the Company’s
total DPTA obligation.
On September 18, 2009 the noncontrolling shareholders of
BERU who had challenged the “squeeze-out” resolution
dropped their complaint. The elimination of all actions against
the resolution allowed BERU to register the
“squeeze-out” with the commercial register. The
“squeeze-out” became effective on, September 30,
2009, making the Company the only shareholder of BERU. On
October 2, 2009, BERU was delisted as a public company in
Germany. In October 2009, the Company paid €22.9
($33.5) million for the approximately 311,000 outstanding
shares of BERU. Certain noncontrolling shareholders have
challenged the “squeeze out” share price of
€73.39. A hearing date for this action has been scheduled
for April 2011.
As a result of the tendering of shares, the Company owned 100%
of all BERU’s outstanding shares at December 31, 2009.
The tendering of approximately 4.4% of BERU shares, at a cost of
$46.6 million, has been reflected as a Financing activity
in the Consolidated Statements of Cash Flows for the year ended
December 31, 2009. Additionally, on May 22, 2009, the
Company paid the annual perpetual dividend of $1.9 million,
which is also reflected as a Financing activity in the
Consolidated Statement of Cash Flows for the year ended
December 31, 2009.
104
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The table below summarizes activity related to the
Company’s DPTA obligation as of December 31, 2009 as
follows:
| (millions of dollars) | ||||||
|
Domination and Profit Transfer Agreement Obligation at
December 31, 2008
|
$ | 44.0 | ||||
|
Shares Purchased During the Year Ended December 31,
2009
|
(46.6 | ) | ||||
|
Share Resolution to €73.39 per Share
|
0.9 | |||||
|
Translation Adjustment
|
1.7 | |||||
|
Domination and Profit Transfer Agreement Obligation at
December 31, 2009
|
$ | — | ||||
The table below summarizes the net cash paid related to the
Company’s step acquisition of BERU as follows (in millions
of dollars):
|
Percentage
|
Amount
|
|||||||||
| Year | Acquired | Paid | ||||||||
|
2005
|
69.4 | % | $ | 477.2 | (a) | |||||
|
2007
|
12.8 | % | 138.8 | (b) | ||||||
|
2008
|
13.4 | % | 136.8 | (b) | ||||||
|
2009
|
4.4 | % | 46.6 | (b) | ||||||
|
Total
|
100.0 | % | $ | 799.4 | ||||||
| (a) | The Company’s payment of $477.2 million has been reflected as an Investing activity in the Consolidated Statements of Cash Flows for the year ended December 31, 2005. | |
| (b) | The Company’s payments of $46.6 million, $136.8 million and $138.8 million have been reflected as a Financing activity in the Consolidated Statements of Cash Flows for the year ended December 31, 2009, 2008 and 2007, respectively. |
See Note 6, “Goodwill and Other Intangible
Assets”, for further discussion on BERU’s goodwill
impairment charge recorded in 2008.
Other
In the third quarter of 2008, the Company purchased the
remaining 26% interest in its joint venture located in India,
BorgWarner Morse TEC Murugappa Pvt. Ltd, for $4.4 million.
In the third quarter of 2008, BERU divested its 50% interest in
Impco BERU Technologies B.V. (located in the Netherlands) for
$5.5 million, which approximated its carrying value.
On November 18, 2008, the Company entered into a joint
venture agreement with China Automobile Development United
Investment Company, a company owned by leading Chinese
automakers, to produce various dual clutch transmission modules.
The joint venture’s operations will be located in Dalian,
China and production is scheduled to begin in 2011. BorgWarner
owns 66% of the joint venture.
| NOTE 19 | REPORTING SEGMENTS AND RELATED INFORMATION |
The Company’s business is comprised of two reporting
segments: Engine and Drivetrain. These segments are strategic
business groups, which are managed separately as each represents
a specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the
projected after-tax return on invested capital
(“ROIC”) of its business initiatives. The ROIC is
comprised of projected earnings before interest, income taxes
and noncontrolling interest (“EBIT”) adjusted for
restructuring, goodwill impairment
105
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
charges, affiliates’ earnings and other items not
reflective of on-going operating profit or loss (“Adjusted
EBIT”) compared to the projected average capital investment
required.
Adjusted EBIT is the measure of segment profit 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 |
Long-lived
|
|||||||||||||||||||||||||
|
Inter-
|
Year-End
|
Depr./
|
Asset
|
|||||||||||||||||||||||
| (millions of dollars) | Customers | Segment | Net | Assets | Amort. | Expenditures (b) | ||||||||||||||||||||
|
2010 Segment Information
|
||||||||||||||||||||||||||
|
Engine
|
$ | 4,041.4 | $ | 19.4 | $ | 4,060.8 | $ | 3,277.7 | $ | 184.4 | $ | 181.3 | ||||||||||||||
|
Drivetrain
|
1,611.4 | — | 1,611.4 | 1,230.5 | 63.6 | 83.5 | ||||||||||||||||||||
|
Inter-segment eliminations
|
— | (19.4 | ) | (19.4 | ) | — | — | — | ||||||||||||||||||
|
Total
|
5,652.8 | — | 5,652.8 | 4,508.2 | 248.0 | 264.8 | ||||||||||||||||||||
|
Corporate(a)
|
— | — | — | 1,046.8 | 4.9 | 11.8 | ||||||||||||||||||||
|
Consolidated
|
$ | 5,652.8 | $ | — | $ | 5,652.8 | $ | 5,555.0 | (a) | $ | 252.9 | $ | 276.6 | |||||||||||||
| Net Sales |
Long-lived
|
|||||||||||||||||||||||||
|
Inter-
|
Year-End
|
Depr./
|
Asset
|
|||||||||||||||||||||||
| (millions of dollars) | Customers | Segment | Net | Assets | Amort. | Expenditures (b) | ||||||||||||||||||||
|
2009 Segment Information
|
||||||||||||||||||||||||||
|
Engine
|
$ | 2,868.3 | $ | 14.9 | $ | 2,883.2 | $ | 2,812.8 | $ | 188.7 | $ | 115.6 | ||||||||||||||
|
Drivetrain
|
1,093.5 | — | 1,093.5 | 1,104.1 | 65.9 | 44.6 | ||||||||||||||||||||
|
Inter-segment eliminations
|
— | (14.9 | ) | (14.9 | ) | — | — | — | ||||||||||||||||||
|
Total
|
3,961.8 | — | 3,961.8 | 3,916.9 | 254.6 | 160.2 | ||||||||||||||||||||
|
Corporate(a)
|
— | — | — | 894.5 | 6.3 | 11.8 | ||||||||||||||||||||
|
Consolidated
|
$ | 3,961.8 | $ | — | $ | 3,961.8 | $ | 4,811.4 | (a) | $ | 260.9 | $ | 172.0 | |||||||||||||
| Net Sales |
Long-lived
|
|||||||||||||||||||||||||
|
Inter-
|
Year-End
|
Depr./
|
Asset
|
|||||||||||||||||||||||
| (millions of dollars) | Customers | Segment | Net | Assets | Amort. | Expenditures (b) | ||||||||||||||||||||
|
2008 Segment Information
|
||||||||||||||||||||||||||
|
Engine
|
$ | 3,837.5 | $ | 24.0 | $ | 3,861.5 | $ | 3,065.3 | $ | 199.4 | $ | 231.0 | ||||||||||||||
|
Drivetrain
|
1,426.4 | — | 1,426.4 | 1,211.8 | 78.6 | 112.2 | ||||||||||||||||||||
|
Inter-segment eliminations
|
— | (24.0 | ) | (24.0 | ) | — | — | — | ||||||||||||||||||
|
Total
|
5,263.9 | — | 5,263.9 | 4,277.1 | 278.0 | 343.2 | ||||||||||||||||||||
|
Corporate(a)
|
— | — | — | 366.9 | 8.8 | 26.5 | ||||||||||||||||||||
|
Consolidated
|
$ | 5,263.9 | $ | — | $ | 5,263.9 | $ | 4,644.0 | (a) | $ | 286.8 | $ | 369.7 | |||||||||||||
| (a) | Corporate assets include cash, equity in affiliates’, investments and advances and deferred income taxes. The December 31, 2009 and 2008 assets are net of trade receivables securitized and sold to third parties. | |
| (b) | Long-lived asset expenditures include capital expenditures and tooling outlays. |
106
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Adjusted Earnings
(Loss) Before Interest, Income Taxes and Noncontrolling Interest
(Adjusted “EBIT”)
| (millions of dollars) | 2010 | 2009 | 2008 | |||||||||||
|
Engine
|
$ | 537.9 | $ | 219.8 | $ | 394.9 | ||||||||
|
Drivetrain
|
137.0 | (13.5 | ) | (4.9 | ) | |||||||||
|
Adjusted EBIT
|
674.9 | 206.3 | 390.0 | |||||||||||
|
Muncie closure retiree obligation net gain
|
— | (27.9 | ) | — | ||||||||||
|
Environmental litigation settlement
|
28.0 | — | — | |||||||||||
|
BERU-Eichenauer equity investment gain
|
(8.0 | ) | — | — | ||||||||||
|
Corporate, including equity in affiliates’ earnings and
stock-based compensation
|
111.0 | 111.3 | 60.0 | |||||||||||
|
Restructuring expense
|
— | 50.3 | 127.5 | |||||||||||
|
Goodwill impairment charge
|
— | — | 156.8 | |||||||||||
|
Interest income
|
(2.8 | ) | (2.5 | ) | (7.1 | ) | ||||||||
|
Interest expense and finance charges
|
68.8 | 57.2 | 38.8 | |||||||||||
|
Earnings before income taxes and noncontrolling interest
|
477.9 | 17.9 | 14.0 | |||||||||||
|
Provision (benefit) for income taxes
|
81.7 | (18.5 | ) | 33.3 | ||||||||||
|
Net earnings (loss)
|
396.2 | 36.4 | (19.3 | ) | ||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
18.8 | 9.4 | 16.3 | |||||||||||
|
Net earnings (loss) attributable to BorgWarner Inc.
|
$ | 377.4 | $ | 27.0 | $ | (35.6 | ) | |||||||
Geographic
Information
Outside the U.S., only China, Germany, France, Hungary and South
Korea, exceeded 5% of consolidated net sales in 2010,
attributing sales to the sources of the product rather than the
location of the customer. Also, the Company’s 50% equity
investment in NSK-Warner (see Note 5) amounting to
$180.3 million, $174.0 million and $192.5 million
at December 31, 2010, 2009 and 2008, respectively, are
excluded from the definition of long-lived assets, as are
goodwill and certain other non-current assets.
| Net sales | Long-Lived Assets | |||||||||||||||||||||||||
| (millions of dollars) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||||
|
United States
|
$ | 1,451.1 | $ | 1,090.4 | $ | 1,499.6 | $ | 466.6 | $ | 469.4 | $ | 529.3 | ||||||||||||||
|
Europe:
|
||||||||||||||||||||||||||
|
Germany
|
1,839.9 | 1,419.9 | 1,948.4 | 447.5 | 500.0 | 546.7 | ||||||||||||||||||||
|
Hungary
|
418.3 | 292.4 | 398.2 | 53.0 | 58.4 | 55.7 | ||||||||||||||||||||
|
France
|
318.7 | 229.5 | 244.3 | 63.0 | 72.9 | 84.2 | ||||||||||||||||||||
|
Other Europe
|
546.1 | 282.9 | 431.8 | 173.7 | 138.1 | 142.9 | ||||||||||||||||||||
|
Total Europe
|
3,123.0 | 2,224.7 | 3,022.7 | 737.2 | 769.4 | 829.5 | ||||||||||||||||||||
|
South Korea
|
358.0 | 212.4 | 251.8 | 94.8 | 69.1 | 63.1 | ||||||||||||||||||||
|
China
|
330.6 | 184.1 | 131.1 | 104.9 | 66.1 | 55.1 | ||||||||||||||||||||
|
Other foreign
|
390.1 | 250.2 | 358.7 | 139.1 | 116.3 | 109.2 | ||||||||||||||||||||
|
Total
|
$ | 5,652.8 | $ | 3,961.8 | $ | 5,263.9 | $ | 1,542.6 | $ | 1,490.3 | $ | 1,586.2 | ||||||||||||||
107
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Sales to Major
Customers
Consolidated net sales to a single customer (including their
subsidiaries), which exceeded 10% of our total sales, were to
Volkswagen of approximately 19%, 22%, and 19%; and to Ford of
approximately 11%, 12%, and 9% for the years ended
December 31, 2010, 2009 and 2008, respectively. Both of the
Company’s reporting segments had significant sales to
Volkswagen and Ford in 2010, 2009 and 2008. Accounts receivable
from these customers at December 31, 2010 comprised
approximately 17% ($178.0 million) of total accounts
receivable. Such sales consisted of a variety of products to a
variety of customer locations and regions. No other single
customer accounted for more than 10% of consolidated sales in
any year of the periods presented.
Sales by Product
Line
Sales of turbochargers for light-vehicles represented
approximately 26%, 27%, and 24% of the Company’s total
revenues for 2010, 2009 and 2008, respectively. The Company
currently supplies light-vehicle turbochargers to many OEMs
including Volkswagen, Renault, PSA, Daimler, Hyundai, Fiat, BMW,
Ford and General Motors.
No other single product line accounted for more than 10% of
consolidated sales in any year of the periods presented.
Interim Financial
Information (Unaudited)
(millions of dollars, except per share amounts)
| 2010 | 2009 | |||||||||||||||||||||||||||||||||||||||||
| Quarter Ended | Mar-31 | Jun-30 | Sep-30 | Dec-31 | Year | Mar-31 | Jun-30 | Sep-30 | Dec-31 | Year | ||||||||||||||||||||||||||||||||
|
Net sales
|
$ | 1,286.8 | $ | 1,421.7 | $ | 1,410.9 | $ | 1,533.4 | $ | 5,652.8 | $ | 819.5 | $ | 916.2 | $ | 1,027.8 | $ | 1,198.3 | $ | 3,961.8 | ||||||||||||||||||||||
|
Cost of sales
|
1,048.3 | 1,146.3 | 1,137.6 | 1,227.3 | 4,559.5 | 739.9 | 800.0 | 876.0 | 985.1 | 3,401.0 | ||||||||||||||||||||||||||||||||
|
Gross profit
|
238.5 | 275.4 | 273.3 | 306.1 | 1,093.3 | 79.6 | 116.2 | 151.8 | 213.2 | 560.8 | ||||||||||||||||||||||||||||||||
|
Selling, general and administrative expenses
|
130.3 | 137.8 | 150.2 | 148.3 | 566.6 | 74.1 | 115.4 | 125.9 | 144.4 | 459.8 | ||||||||||||||||||||||||||||||||
|
Restructuring expense
|
— | — | — | — | — | — | 50.3 | — | — | 50.3 | ||||||||||||||||||||||||||||||||
|
Other (income) expense
|
1.6 | 20.3 | 0.1 | 0.4 | 22.4 | — | — | (1.6 | ) | 1.5 | (0.1 | ) | ||||||||||||||||||||||||||||||
|
Operating income (loss)
|
106.6 | 117.3 | 123.0 | 157.4 | 504.3 | 5.5 | (49.5 | ) | 27.5 | 67.3 | 50.8 | |||||||||||||||||||||||||||||||
|
Equity in affiliates’ earnings, net of tax
|
(9.3 | ) | (10.0 | ) | (10.5 | ) | (9.8 | ) | (39.6 | ) | (0.2 | ) | (4.8 | ) | (6.5 | ) | (10.3 | ) | (21.8 | ) | ||||||||||||||||||||||
|
Interest income
|
(0.6 | ) | (0.6 | ) | (0.6 | ) | (1.0 | ) | (2.8 | ) | (0.5 | ) | (0.7 | ) | (0.5 | ) | (0.8 | ) | (2.5 | ) | ||||||||||||||||||||||
|
Interest expense and finance charges
|
14.2 | 14.2 | 18.4 | 22.0 | 68.8 | 19.1 | 9.0 | 13.0 | 16.1 | 57.2 | ||||||||||||||||||||||||||||||||
|
Earnings (loss) before income taxes and noncontrolling interest
|
102.3 | 113.7 | 115.7 | 146.2 | 477.9 | (12.9 | ) | (53.0 | ) | 21.5 | 62.3 | 17.9 | ||||||||||||||||||||||||||||||
|
Provision (benefit) for income taxes
|
20.9 | 26.0 | 4.2 | 30.6 | 81.7 | (6.6 | ) | (19.1 | ) | 1.5 | 5.7 | (18.5 | ) | |||||||||||||||||||||||||||||
|
Net earnings (loss)
|
81.4 | 87.7 | 111.5 | 115.6 | 396.2 | (6.3 | ) | (33.9 | ) | 20.0 | 56.6 | 36.4 | ||||||||||||||||||||||||||||||
|
Net earnings attributable to the noncontrolling interest, net of
tax
|
5.2 | 4.9 | 4.8 | 3.9 | 18.8 | 0.7 | 2.0 | 2.8 | 3.9 | 9.4 | ||||||||||||||||||||||||||||||||
|
Net earnings (loss) attributable of BorgWarner Inc.
|
76.2 | (1) | 82.8 | (2) | 106.7 | (3) | $ | 111.7 | $ | 377.4 | $ | (7.0 | )(4) | $ | (35.9 | )(5) | $ | 17.2 | $ | 52.7 | (6) | $ | 27.0 | |||||||||||||||||||
|
Earnings (loss) per share — basic
|
$ | 0.65 | $ | 0.72 | $ | 0.95 | $ | 1.00 | $ | 3.31 | $ | (0.06 | )* | $ | (0.31 | )* | $ | 0.15 | $ | 0.45 | $ | 0.23 | ||||||||||||||||||||
|
Earnings (loss) per share — diluted
|
$ | 0.63 | ** | $ | 0.68 | ** | $ | 0.87 | ** | $ | 0.89 | ** | $ | 3.07 | ** | $ | (0.06 | )* | $ | (0.31 | )* | $ | 0.15 | $ | 0.45 | $ | 0.23 | |||||||||||||||
108
Table of Contents
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| * | The Company had a loss for the quarters ended March 31, 2009 and June 30, 2009. As a result, diluted loss per share is the same as basic loss per share in each period, as any dilutive securities would reduce the loss per share. |
| ** | The Company’s diluted earnings per share for each quarter in 2010 and the year ended December 31, 2010 includes the impact of the Company’s 3.50% convertible notes and associated warrants. Refer to Note 16, “Earnings (Loss) Per Share”, for further information on our diluted earnings calculation. |
| (1) | The Company’s first quarter 2010 results were impacted by the following: |
| • | $2.5 million Medicare Part D tax adjustment |
| (2) | The Company’s second quarter 2010 results were impacted by the following: |
| • | $8.0 million BERU-Eichenauer Equity investment gain. | |
| • | $28.0 million Environmental litigation settlement. |
| (3) | The Company’s third quarter 2010 results were impacted by the following: |
| • | $21.2 million foreign tax credit valuation allowance reversal. |
| (4) | The Company’s first quarter 2009 results were impacted by the following: |
| • | $4.8 million charge related to the adoption of Topic 805. | |
| • | $27.9 million net gain related to retiree obligations resulting from the closure of the Muncie, Indiana, Drivetrain facility. | |
| • | $11.4 million net loss from interest rate derivative agreements. |
| (5) | The Company’s second quarter 2009 results were impacted by the following: |
| • | $50.3 million of restructuring expenses, including $9.0 million for employee termination benefits, $36.3 million of asset impairment and $5.0 million of other charges. | |
| • | $6.6 million net gain from interest rate derivative agreement. |
| (6) | The Company’s fourth quarter 2009 results were impacted by the following: |
| • | $3.1 million tax benefit related to an ASC Topic 740 adjustment. |
109
Table of Contents
| Item 9A. | Controls and Procedures |
Disclosure
Controls and Procedures
A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of
a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered
relative to costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if
any, within the company have been detected. Because of the
inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be
detected. However, our disclosure controls and procedures are
designed to provide reasonable assurance of achieving their
objectives.
The Company has adopted and maintains disclosure controls and
procedures that are designed to provide reasonable assurance
that information required to be disclosed in the reports filed
or submitted under the Exchange Act, such as this
Form 10-K,
is collected, recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the
Securities and Exchange Commission. The Company’s
disclosure controls and procedures are also designed to ensure
that such information is accumulated and communicated to
management to allow timely decisions regarding required
disclosure. As required under Exchange Act
Rule 13a-15,
the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, has conducted an evaluation
of the effectiveness of disclosure controls and procedures as of
the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures
are effective.
Management’s
Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as defined in Exchange Act
Rule 13a-15(f).
Management conducted an assessment of the Company’s
internal control over financial reporting based on the framework
and criteria established by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control — Integrated Framework. Based on the
assessment, management concluded that, as of December 31,
2010, the Company’s internal control over financial
reporting is effective based on those criteria.
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, has audited the Company’s consolidated
financial statements and the effectiveness of internal controls
over financial reporting as of December 31, 2010 as stated
in their report included herein.
Changes in
Internal Control
There have been no changes in internal controls over the
financial reporting that occurred during the most recent fiscal
quarter that have materially affected, or are reasonably likely
to materially affect our internal controls over financial
reporting.
110
Table of Contents
| Item 9B. | Other Information |
Not applicable.
| Item 10. | Directors, Executive Officers and Corporate Governance |
Information with respect to directors, executive officers and
corporate governance that appears in the Company’s proxy
statement for its 2011 Annual Meeting of Stockholders under the
captions “Election of Directors,” “Information on
Nominees for Directors and Continuing Directors,”
“Board of Directors and Its Committees,”
“Section 16(a) Beneficial Ownership Reporting
Compliance,” “Code of Ethics,” and
“Compensation Committee Report” is incorporated herein
by this reference and made a part of this report.
| Item 11. | Executive Compensation |
Information with respect to director and executive compensation
that appears in the Company’s proxy statement for its 2011
Annual Meeting of Stockholders under the captions “Director
Compensation,” “Compensation Committee Interlocks and
Insider Participation,” “Executive Compensation,”
“Compensation Discussion and Analysis,”
“Restricted Stock,” “Long Term Incentives,”
and “Change of Control Employment Agreements” is
incorporated herein by this reference and made a part of this
report.
| Item 12. | Security Ownership and Certain Beneficial Owners and Management and Related Stockholders Matters |
Information with respect to security ownership and certain
beneficial owners and management and related stockholders
matters that appears in the Company’s proxy statement for
its 2011 Annual Meeting of Stockholders under the caption
“Security Ownership of Certain Beneficial Owners and
Management” is incorporated herein by this reference and
made a part of this report.
For information regarding the Company’s equity compensation
plans that have been approved by its stockholders and its equity
compensation plans that have not been approved by its
stockholders, see Item 5 “Market for the
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities” in this Annual
Report on
Form 10-K.
| Item 13. | Certain Relationships and Related Transactions and Director Independence |
Information with respect to certain relationships and related
transactions and director independence that appears in the
Company’s proxy statement for its 2011 Annual Meeting of
Stockholders under the caption “Board of Directors and Its
Committees” is incorporated herein by this reference and
made a part of this report.
| Item 14. | Principal Accountant Fees and Services |
Information with respect to principal accountant fees and
services that appears in the Company’s proxy statement for
its 2011 Annual Meeting of Stockholders under the caption
“Independent Registered Public Accounting Firm Fees and
Services” is incorporated herein by this reference and made
a part of this report.
| Item 15. | Exhibits and Financial Statement Schedules |
111
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BORGWARNER INC.
| By: |
/s/
Timothy
M. Manganello
|
Timothy M. Manganello
Chairman and Chief Executive Officer
Date: February 10, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
the 10 th day of February, 2011.
| Signature | Title | |||
|
/s/
Timothy
M. Manganello
|
Chairman and Chief Executive Officer
(Principal Executive Officer) and Director |
|||
|
/s/
Robin
J. Adams
|
Executive Vice President, Chief Financial
Officer and Chief Administrative Officer (Principal Financial Officer) and Director |
|||
|
/s/
Ronald
T. Hundzinski
|
Vice President and Controller
(Principal Accounting Officer) |
|||
|
/s/
Phyllis
O. Bonanno
|
Director | |||
|
/s/
David
T. Brown
|
Director | |||
|
/s/
Jan
Carlson
|
Director | |||
|
/s/
Dennis
C. Cuneo
|
Director | |||
|
/s/
Jere
A. Drummond
|
Director | |||
|
/s/
John
R. McKernan
|
Director | |||
|
/s/
Alexis
P. Michas
|
Director | |||
|
/s/
Ernest
J. Novak, Jr.
|
Director | |||
|
/s/
Richard
O. Schaum
|
Director | |||
|
/s/
Thomas
T. Stallkamp
|
Director | |||
Table of Contents
EXHIBIT INDEX
|
Exhibit
|
||||
| Number | Description | |||
| 3 | .1/4.1 | Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit No. 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008). | ||
| 3 | .2/4.2 | Amended and Restated By-Laws of registrant (incorporated by reference to Exhibit 3.2/4.2 to the Company’s Registration Statement on Form S-3 (no. 333-163928). | ||
| 3 | .3 | Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 1999). | ||
| 3 | .4 | Certificate of Ownership and Merger Merging BorgWarner Inc. into Borg-Warner Automotive, Inc. (incorporated by reference to Exhibit 99.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). | ||
| 4 | .3 | Indenture, dated as of February 15, 1999 between Borg-Warner Automotive, Inc. and The First National Bank of Chicago (incorporated by reference to Exhibit No. 4.1 to Amendment No. 1 to Registration Statement No. 333-66879). | ||
| 4 | .4 | Indenture, dated as of September 23, 1999 between Borg-Warner Automotive, Inc. and Chase Manhattan Trust Company, National Association, as trustee, (incorporated by reference to Exhibit No. 4.1 to the Company’s Current Report on Form 8-K filed September 16, 2010). | ||
| 4 | .5 | Form of First Supplemental Indenture between the registrant and The Bank of New York Trust Company, N.A., as the indenture trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 30, 2006). | ||
| 4 | .6 | Second Supplemental Indenture dated April 9, 2009 between the registrant and The Bank of New York Mellon Trust Company, N.A., as the indenture trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 9, 2009). | ||
| 4 | .7 | Third Supplemental Indenture dated as of September 16, 2010 between the registrant and The Bank of New York Mellon Trust Company, N.A., as the indenture trustee (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed September 16, 2010). | ||
| 10 | .1 | Form of Convertible Note Hedge confirmation between BorgWarner Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 9, 2009). | ||
| 10 | .2 | Form of Warrant confirmation between BorgWarner Inc. and Bank of America, N.A. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 9, 2009). | ||
| 10 | .3 | Form of Convertible Note Hedge confirmation between BorgWarner Inc. and Morgan Stanley & Co. International Plc (represented by Morgan Stanley & Co. Incorporated, as its agent) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed April 9, 2009). | ||
| 10 | .4 | Form of Warrant confirmation between BorgWarner Inc. and Morgan Stanley & Co. International Plc (represented by Morgan Stanley & Co. Incorporated, as its agent) (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed April 9, 2009). | ||
| 10 | .5 | Credit Agreement dated as of March 31, 2010, among BorgWarner Inc., as borrower, the Administrative Agent named therein, the Co-Syndication Agents named therein, the Documentation Agent named therein and the Lenders that are parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 6, 2010). | ||
| 10 | .6 | Form of Subsidiary Guaranty (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 6, 2010). | ||
A-1
Table of Contents
|
Exhibit
|
||||
| Number | Description | |||
| 10 | .7 | Receivables Sale Agreement dated as of December 21, 2009 among BorgWarner Emissions Systems Inc., BorgWarner Morse TEC Inc., BorgWarner Powdered Metals Inc., BorgWarner Thermal Systems Inc., BorgWarner TorqTransfer Systems Inc., BorgWarner Transmission Systems Inc., BorgWarner Turbo Systems Inc., and BWA Receivables Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 28, 2009). | ||
| 10 | .8 | Receivables Purchase Agreement dated as of December 21, 2009 among BWA Receivables Corporation, as seller, BorgWarner Inc., as the collection agent, the purchasers from time to time party thereto, and Wachovia Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed December 28, 2009). | ||
| 10 | .9 | Amendment No. 1 to Receivables Purchase Agreement dated as of September 8, 2010, among BWA Receivables Corporation, as seller, BorgWarner Inc., as the collection agent, and Wells Fargo Bank, N.A. (successor by merger to Wachovia Bank, National Association), as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report Form 8-K filed October 27, 2010). | ||
| †10 | .10 | BorgWarner Inc. 1993 Stock Incentive Plan, as amended (incorporated by reference to Exhibit No. 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). | ||
| †10 | .11 | BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009). | ||
| †10 | .12 | First Amendment to the BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan (as amended and restated effective April 29, 2009) (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed November 13, 2009). | ||
| †10 | .13 | Form of BorgWarner Inc. 2004 Stock Incentive Plan Performance Share Award Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed February 7, 2005). | ||
| †10 | .14 | Form of BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan Performance Units Award Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed March 31, 2009). | ||
| †10 | .15 | Form of BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan Restricted Stock Agreement for Employees (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed February 12, 2008). | ||
| †10 | .16 | Form of First Amendment to Restricted Stock Agreement (incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed November 13, 2009). | ||
| †10 | .17 | Form of BorgWarner Inc. 2004 Stock Incentive Plan Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit No. 99.1 to the Company’s Current Report on Form 8-K filed July 27, 2005). | ||
| †10 | .18 | Borg-Warner Automotive, Inc. Executive Stock Performance Plan, Revised and Re-approved February 2, 2000 (incorporated by reference to Appendix B of the Company’s Proxy Statement dated March 22, 2000 for its 2000 Annual Meeting of Stockholders). | ||
| †10 | .19 | BorgWarner Inc. 2005 Executive Incentive Plan (as amended and restated) (incorporated by reference to Exhibit No. 10.19 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). | ||
| †10 | .20 | Borg-Warner Automotive, Inc. Management Incentive Bonus Plan dated January 1, 1994 (as amended and restated) (incorporated by reference to Exhibit No. 10.11 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). | ||
| †10 | .21 | Borg-Warner Automotive, Inc. Retirement Savings Excess Benefit Plan dated January 27, 1993 (as amended and restated) (incorporated by reference to Exhibit No. 10.12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). | ||
A-2
Table of Contents
|
Exhibit
|
||||
| Number | Description | |||
| †10 | .22 | Borg-Warner Automotive, Inc. Retirement Savings Plan dated January 27, 1993 as amended and restated (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1995). | ||
| †10 | .23 | BorgWarner Inc. Board of Directors Deferred Compensation Plan dated April 18, 1995 (as amended and restated) (incorporated by reference to Exhibit No. 10.14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). | ||
| †10 | .24 | First Amendment dated as of November 22, 2010 to BorgWarner Inc. Board of Directors Deferred Compensation Plan as filed herewith.* | ||
| †10 | .25 | Form of Amended and Restated Change of Control Employment Agreement for Executive Officers (incorporated by reference to Exhibit No. 10.15 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). | ||
| †10 | .26 | Form of Amended and Restated Change of Control Employment Agreement for Executive Officers (incorporated by reference to Exhibit No. 99.1 to the Company’s Current Report on Form 8-K filed November 13, 2009). | ||
| †10 | .27 | BorgWarner Inc. 2004 Deferred Compensation Plan (as amended and restated) (incorporated by reference to Exhibit No. 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). | ||
| 10 | .28 | Distribution and Indemnity Agreement dated January 27, 1993 between Borg-Warner Automotive, Inc. and Borg-Warner Security Corporation (incorporated by reference to Exhibit No. 10.2 to the Company’s Registration Statement on Form S-3 (no. 33-64934)). | ||
| 10 | .29 | Tax Sharing Agreement dated January 27, 1993 between Borg-Warner Automotive, Inc. and Borg-Warner Security Corporation (incorporated by reference to Exhibit No. 10.3 to the Company’s Registration Statement on Form S-3 (no. 33-64934)). | ||
| 10 | .30 | Assignment of Trademarks and License Agreement (incorporated by reference to Exhibit No. 10.0 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). | ||
| 10 | .31 | Amendment to Assignment of Trademarks and License Agreement (incorporated by reference to Exhibit No. 10.23 of the Company’s Form 10-K for the year ended December 31, 1998). | ||
| 10 | .32 | Domination and Profit Transfer Agreement dated March 7, 2008 between BorgWarner Germany GmbH and BERU AG (incorporated by reference to Exhibit 10.1 to the quarterly report filed on Form 10-Q for the quarter ended June 30, 2008). | ||
| 21 | .1 | Subsidiaries of the Company.* | ||
| 23 | .1 | Independent Registered Public Accounting Firm’s Consent.* | ||
| 31 | .1 | Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.* | ||
| 31 | .2 | Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.* | ||
| 32 | .1 | Section 1350 Certifications.* | ||
| * | Filed herewith. | |
| † | Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 14(c). |
A-3
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved By The Sec)Part IIItem 5. Market For The Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataNote 1 Summary Of Significant Accounting PoliciesNote 2 Research and Development CostsNote 3 Other Expense (income)Note 4 Income TaxesNote 5 Balance Sheet InformationNote 6 Goodwill and Other IntangiblesNote 7 Product WarrantyNote 8 Notes Payable and Long-term DebtNote 9 Fair Value MeasurementsNote 10 Financial InstrumentsNote 11 Retirement Benefit PlansPart DNote 12 Stock Incentive PlansNote 13 Other Comprehensive Income (loss)Note 14 ContingenciesNote 15 Leases and CommitmentsNote 16 Earnings (loss) Per ShareNote 17 RestructuringNote 18 Recent TransactionsNote 19 Reporting Segments and Related InformationItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership and Certain Beneficial Owners and Management and Related Stockholders MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules