NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of results have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The balance sheet as of December 31, 2013 was derived from the audited financial statements as of that date. For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
On November 13, 2013, the Company's Board of Directors declared 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 16, 2013 to stockholders of record as of the close of business on December 2, 2013. All prior year share and per share amounts disclosed in this document have been restated to reflect the two-for-one stock split.
Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and accompanying notes, as well as, the amounts of revenues and expenses reported during the periods covered by those financial statements and accompanying notes. Actual results could differ from these estimates.
(2) Research and Development Expenditures
The Company's net Research & Development ("R&D") expenditures are included in selling, general and administrative expenses of the Condensed Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract and accepted by the customer. Financial risks and rewards transfer upon shipment, acceptance of a prototype component by the customer or upon completion of the performance obligation as stated in the respective customer agreement.
The following table presents the Company’s gross and net expenditures on R&D activities:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(millions of dollars)
|
2014
|
|
2013
|
Gross R&D expenditures
|
$
|
94.5
|
|
|
$
|
82.2
|
|
Customer reimbursements
|
(12.5
|
)
|
|
(10.4
|
)
|
Net R&D expenditures
|
$
|
82.0
|
|
|
$
|
71.8
|
|
The Company has contracts with several customers at the Company's various R&D locations. No such contract exceeded
5%
of annual net R&D expenditures in any of the periods presented.
(3) Other Expense
Items included in other expense consist of:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(millions of dollars)
|
2014
|
|
2013
|
Restructuring expense
|
$
|
39.5
|
|
|
$
|
—
|
|
Program termination agreement
|
—
|
|
|
11.3
|
|
Retirement related obligations
|
—
|
|
|
5.9
|
|
Other income
|
(0.7
|
)
|
|
(0.3
|
)
|
Other expense
|
$
|
38.8
|
|
|
$
|
16.9
|
|
During the first quarter of 2014, the Company recorded restructuring expense of
$39.5 million
primarily related to continued Drivetrain segment actions designed to improve future profitability and competitiveness. See Note 15 for further discussion of these expenses.
In March 2013, the Company recorded an
$11.3 million
expense related to a program termination agreement, which was paid in 2013.
During the fourth quarter of 2012, the Company waived the forfeiture provision associated with future restricted stock grants made to certain retiring Named Executive Officers. The Company recorded a
$5.9 million
retirement related obligation primarily related to a first quarter 2013 grant of restricted stock awards to these Named Executive Officers.
(4) Income Taxes
The Company's provision for income taxes is based upon an estimated annual tax rate for the year applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.
At March 31, 2014, the Company's effective tax rate for the first quarter was
28.9%
, which includes tax benefits of
$8.8 million
related to restructuring expense discussed in the Other Expense footnote.
At March 31, 2013, the Company's effective tax rate for the first quarter was
25.5%
. This rate included tax benefits of
$3.8 million
and
$2.1 million
related to the program termination agreement and retirement related obligations discussed in the Other Expense footnote. This rate also included a net tax benefit of
$1.7 million
, which is comprised of a $
6.6 million
tax benefit related to the extension of the federal research and development credit and other international tax provisions resulting from the retroactive impact of U.S. legislation enacted in January 2013, partially offset by a
$4.9 million
tax expense related to a comprehensive income adjustment.
The annual effective tax rates differ from the U.S. statutory rate primarily due to foreign rates which differ from those in the U.S., the realization of certain business tax credits, including foreign tax credits, and favorable permanent differences between book and tax treatment for certain items, including equity in affiliates' earnings.
(5) Inventories, net
Inventories are valued at the lower of cost or market. The cost of U.S. inventories is determined by the last-in, first-out (“LIFO”) method, while the operations outside the U.S. use the first-in, first-out (“FIFO”) or average-cost methods. Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(millions of dollars)
|
2014
|
|
2013
|
Raw material and supplies
|
$
|
317.1
|
|
|
$
|
279.8
|
|
Work in progress
|
93.4
|
|
|
78.0
|
|
Finished goods
|
123.7
|
|
|
116.3
|
|
FIFO inventories
|
534.2
|
|
|
474.1
|
|
LIFO reserve
|
(17.3
|
)
|
|
(16.0
|
)
|
Inventories, net
|
$
|
516.9
|
|
|
$
|
458.1
|
|
(6) Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(millions of dollars)
|
2014
|
|
2013
|
Land, land use rights and buildings
|
$
|
774.1
|
|
|
$
|
753.9
|
|
Machinery and equipment
|
1,970.6
|
|
|
1,897.5
|
|
Capital leases
|
10.7
|
|
|
2.4
|
|
Construction in progress
|
282.7
|
|
|
272.3
|
|
Total property, plant and equipment, gross
|
3,038.1
|
|
|
2,926.1
|
|
Less: accumulated depreciation
|
(1,134.5
|
)
|
|
(1,099.3
|
)
|
Property, plant and equipment, net, excluding tooling
|
1,903.6
|
|
|
1,826.8
|
|
Tooling, net of amortization
|
124.2
|
|
|
112.6
|
|
Property, plant and equipment, net
|
$
|
2,027.8
|
|
|
$
|
1,939.4
|
|
As of March 31, 2014 and December 31, 2013, accounts payable of
$48.5 million
and
$62.8 million
, respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the three months ended March 31, 2014 and 2013 w
ere
$3.5 million
and
$2.5 million
, respectively.
(7) Product Warranty
The Company provides warranties on some, but not all, of its products. The warranty terms are typically from one to three years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual.
The following table summarizes the activity in the product warranty accrual accounts:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2014
|
|
2013
|
Beginning balance, January 1
|
$
|
72.7
|
|
|
$
|
64.9
|
|
Provisions
|
5.0
|
|
|
11.6
|
|
Acquisition
(a)
|
22.8
|
|
|
—
|
|
Payments
|
(7.3
|
)
|
|
(7.2
|
)
|
Translation adjustment
|
—
|
|
|
(1.3
|
)
|
Ending balance, March 31
|
$
|
93.2
|
|
|
$
|
68.0
|
|
____________________________________
|
|
(a)
|
The Company has recorded a
$12.4 million
insurance receivable related to the
$22.8 million
liability,
which is classified in the Condensed Consolidated Balance Sheet in Investments and Advances.
|
The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(millions of dollars)
|
2014
|
|
2013
|
Accounts payable and accrued expenses
|
$
|
33.2
|
|
|
$
|
38.4
|
|
Other non-current liabilities
|
60.0
|
|
|
34.3
|
|
Total product warranty liability
|
$
|
93.2
|
|
|
$
|
72.7
|
|
(8) Notes Payable and Long-Term Debt
As of March 31, 2014 and December 31, 2013, the Company had short-term and long-term debt outstanding as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
(millions of dollars)
|
2014
|
|
2013
|
Short-term debt
|
|
|
|
|
|
Short-term borrowings
|
$
|
221.6
|
|
|
$
|
84.8
|
|
Receivables securitization
|
110.0
|
|
|
110.0
|
|
Total short-term debt
|
$
|
331.6
|
|
|
$
|
194.8
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
5.75% Senior notes due 11/01/16 ($150 million par value)
|
$
|
149.7
|
|
|
$
|
149.7
|
|
8.00% Senior notes due 10/01/19 ($134 million par value)
|
134.0
|
|
|
133.9
|
|
4.625% Senior notes due 09/15/20 ($250 million par value)
|
248.2
|
|
|
248.2
|
|
7.125% Senior notes due 02/15/29 ($121 million par value)
|
119.4
|
|
|
119.4
|
|
Multi-currency revolving credit facility
|
320.0
|
|
|
320.0
|
|
Term loan facilities and other
|
48.0
|
|
|
40.4
|
|
Unamortized portion of debt derivatives
|
15.2
|
|
|
16.2
|
|
Total long-term debt
|
1,034.5
|
|
|
1,027.8
|
|
Less: current portion
|
6.9
|
|
|
6.8
|
|
Long-term debt, net of current portion
|
$
|
1,027.6
|
|
|
$
|
1,021.0
|
|
The weighted average interest rate on all borrowings outstanding as of March 31, 2014 and December 31, 2013 was
3.4%
and
3.7%
, respectively.
On February 11, 2014, the Company's universal shelf registration expired. The Company filed a new universal shelf registration with the Securities and Exchange Commission on February 28, 2014.
The Company's
$750 million
multi-currency revolving credit facility includes a feature that allows the Company's borrowings to be increased to
$1 billion
. The credit facility provides for borrowings through June 30, 2016 and is guaranteed by the Company's material domestic subsidiaries. The credit facility has two key financial covenants, 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 March 31, 2014 and expects to remain compliant in future periods. At March 31, 2014 and December 31, 2013, the Company had outstanding borrowings of
$320.0 million
under this facility.
On March 12, 2014, the Company entered into a new commercial paper program pursuant to which the Company may issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding of
$1.0 billion
. Under this program, the Company may issue notes from time to time and will use the proceeds for general corporate purposes. At March 31, 2014, the Company had outstanding borrowings of
$100.0 million
under this program, which is classified in the Condensed Consolidated Balance Sheet in Notes Payable and Other Short-Term Debt.
As of March 31, 2014 and December 31, 2013, the estimated fair values of the Company’s senior unsecured notes totaled
$739.7 million
and
$729.7 million
, respectively. The estimated fair values were
$88.4 million
and
$78.5 million
higher than their carrying value at March 31, 2014 and December 31, 2013, respectively. Fair market values of the senior unsecured notes are developed using observable values for similar debt instruments, which are considered Level 2 inputs as defined by ASC Topic 820. The carrying values of the Company's multi-currency revolving credit facility and commercial paper program are equal to their fair values. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.
The Company had outstanding letters of credit of
$27.6 million
and
$27.8 million
at March 31, 2014 and December 31, 2013, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.
(9) Fair Value Measurements
ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity specific measurement. Therefore, a fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:
|
|
Level 1:
|
Observable inputs such as quoted prices for identical assets or liabilities in active markets;
|
|
|
Level 2:
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
Level 3:
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC Topic 820:
|
|
A.
|
Market approach:
Prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
|
|
|
B.
|
Cost approach:
Amount that would be required to replace the service capacity of an asset (replacement cost).
|
|
|
C.
|
Income approach:
Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).
|
The following tables classify assets and liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
(millions of dollars)
|
Balance at
March 31, 2014
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
Assets:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
2.2
|
|
|
$
|
—
|
|
|
$
|
2.2
|
|
|
$
|
—
|
|
|
A
|
Other non-current assets (insurance settlement agreement note receivable)
|
$
|
29.9
|
|
|
$
|
—
|
|
|
$
|
29.9
|
|
|
$
|
—
|
|
|
C
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
4.7
|
|
|
$
|
—
|
|
|
$
|
4.7
|
|
|
$
|
—
|
|
|
A
|
Net investment hedge contracts
|
$
|
23.7
|
|
|
$
|
—
|
|
|
$
|
23.7
|
|
|
$
|
—
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
(millions of dollars)
|
Balance at
December 31, 2013
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation
technique
|
Assets:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
3.4
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
—
|
|
|
A
|
Other non-current assets (insurance settlement agreement note receivable)
|
$
|
35.6
|
|
|
$
|
—
|
|
|
$
|
35.6
|
|
|
$
|
—
|
|
|
C
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
7.4
|
|
|
$
|
—
|
|
|
$
|
7.4
|
|
|
$
|
—
|
|
|
A
|
Net investment hedge contracts
|
$
|
24.3
|
|
|
$
|
—
|
|
|
$
|
24.3
|
|
|
$
|
—
|
|
|
A
|
(10) 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 cross-currency swaps, commodity derivative contracts and foreign currency derivatives. All derivative contracts are placed with counterparties that have an S&P, or equivalent, investment grade credit rating at the time of the contracts’ placement. At March 31, 2014 and December 31, 2013, 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). At March 31, 2014 and December 31, 2013, the following cross-currency swaps were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Cross-currency swaps
|
As of March 31, 2014
|
|
Notional in
USD
|
|
Notional in
local currency
|
|
Duration
|
Floating $ to floating €
|
|
$
|
75.0
|
|
|
€
|
58.5
|
|
|
Oct - 19
|
Floating $ to floating ¥
|
|
$
|
125.0
|
|
|
¥
|
14,651.3
|
|
|
Nov - 16
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Cross-currency swaps
|
As of December 31, 2013
|
|
Notional in
USD
|
|
Notional 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 contracts 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. The Company did not have any commodity derivative contracts outstanding at March 31, 2014 and December 31, 2013.
The Company uses foreign currency forward and option contracts to protect against exchange rate movements for forecasted cash flows, including capital expenditures, purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. Foreign currency derivative contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for the operating units’ local currency.
At March 31, 2014 and December 31, 2013, the following foreign currency derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (in millions)
|
Functional currency
|
|
Traded currency
|
|
Notional in traded currency
March 31, 2014
|
|
Notional in traded currency
December 31, 2013
|
|
Duration
|
Brazilian real
|
|
US dollar
|
|
14.6
|
|
|
19.3
|
|
|
Dec - 14
|
Chinese yuan
|
|
Japanese yen
|
|
—
|
|
|
215.0
|
|
|
Feb - 14
|
Chinese yuan
|
|
US dollar
|
|
9.7
|
|
|
12.3
|
|
|
Dec - 14
|
Euro
|
|
British pound
|
|
2.2
|
|
|
3.0
|
|
|
Dec - 14
|
Euro
|
|
Hungarian forint
|
|
4,763.3
|
|
|
6,430.5
|
|
|
Dec - 14
|
Euro
|
|
Japanese yen
|
|
4,288.9
|
|
|
5,830.7
|
|
|
Dec - 14
|
Euro
|
|
Korean won
|
|
414.5
|
|
|
663.1
|
|
|
Jul - 14
|
Euro
|
|
Polish zloty
|
|
69.2
|
|
|
96.0
|
|
|
Dec - 14
|
Euro
|
|
US dollar
|
|
21.6
|
|
|
29.4
|
|
|
Dec - 14
|
Hungarian forint
|
|
Euro
|
|
4.7
|
|
|
6.6
|
|
|
Dec - 14
|
Japanese yen
|
|
Chinese yuan
|
|
64.1
|
|
|
84.0
|
|
|
Dec - 14
|
Japanese yen
|
|
Korean won
|
|
5,115.6
|
|
|
5,715.5
|
|
|
Dec - 14
|
Japanese yen
|
|
US dollar
|
|
2.7
|
|
|
4.2
|
|
|
Dec - 14
|
Korean won
|
|
Euro
|
|
19.9
|
|
|
23.6
|
|
|
Dec - 14
|
Korean won
|
|
Japanese yen
|
|
224.3
|
|
|
380.5
|
|
|
Aug - 14
|
Korean won
|
|
US dollar
|
|
4.7
|
|
|
—
|
|
|
Dec - 14
|
Mexican peso
|
|
US dollar
|
|
11.4
|
|
|
—
|
|
|
Dec - 14
|
Swedish krona
|
|
Euro
|
|
25.5
|
|
|
33.7
|
|
|
Dec - 14
|
US dollar
|
|
Japanese yen
|
|
3,139.5
|
|
|
3,209.3
|
|
|
Sept - 14
|
At March 31, 2014 and December 31, 2013, the following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
(millions of dollars)
|
|
Location
|
|
March 31, 2014
|
|
December 31, 2013
|
|
Location
|
|
March 31, 2014
|
|
December 31, 2013
|
Foreign currency contracts
|
|
Prepayments and other current assets
|
|
$
|
2.2
|
|
|
$
|
3.4
|
|
|
Accounts payable and accrued expenses
|
|
$
|
4.7
|
|
|
$
|
7.4
|
|
Net investment hedge contracts
|
|
Other non-current assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other non-current liabilities
|
|
$
|
23.7
|
|
|
$
|
24.3
|
|
Effectiveness for cash flow 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, gains and losses arising from these contracts are deferred into accumulated other comprehensive income (loss) ("AOCI") and reclassified into income as the underlying operating transactions are recognized. These realized gains or losses offset the hedged transaction and are recorded on the same line in the statement of operations. To the extent that derivative instruments are deemed to be ineffective, gains or losses are recognized into income.
The table below shows deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less. The amount expected to be reclassified to income in one year or less assumes no change in the current relationship of the hedged item at March 31, 2014 market rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
|
Deferred gain (loss) in AOCI at
|
|
Gain (loss) expected to be reclassified to income in one year or less
|
Contract Type
|
|
March 31, 2014
|
|
December 31, 2013
|
|
Foreign currency
|
|
$
|
(2.4
|
)
|
|
$
|
(3.7
|
)
|
|
$
|
(2.4
|
)
|
Net investment hedges
|
|
(25.9
|
)
|
|
(22.1
|
)
|
|
—
|
|
Total
|
|
$
|
(28.3
|
)
|
|
$
|
(25.8
|
)
|
|
$
|
(2.4
|
)
|
Derivative instruments designated as hedging instruments as defined by ASC Topic 815 held during the period resulted in the following gains and losses recorded in income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified
from AOCI to income
(effective portion)
|
|
|
|
Gain (loss)
recognized in income
(ineffective portion)
|
(millions of dollars)
|
|
|
|
Three Months Ended
|
|
|
|
Three Months Ended
|
Contract Type
|
|
Location
|
|
March 31, 2014
|
|
March 31, 2013
|
|
Location
|
|
March 31, 2014
|
|
March 31, 2013
|
Foreign currency
|
|
Sales
|
|
$
|
0.3
|
|
|
$
|
1.2
|
|
|
SG&A expense
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Foreign currency
|
|
Cost of goods sold
|
|
$
|
(0.8
|
)
|
|
$
|
(1.4
|
)
|
|
SG&A expense
|
|
$
|
0.1
|
|
|
$
|
(0.3
|
)
|
Foreign currency
|
|
SG&A expense
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
SG&A expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Cross-currency swap
|
|
N/A
|
|
|
|
|
|
Interest expense
|
|
$
|
0.7
|
|
|
$
|
(0.7
|
)
|
At March 31, 2014, derivative instruments that were not designated as hedging instruments as defined by ASC Topic 815 were immaterial.
(11) Retirement Benefit Plans
The Company has a number of defined benefit pension plans and other postretirement benefit plans covering eligible salaried and hourly employees and their dependents. The estimated contributions to the Company's defined benefit pension plans for 2014 range from
$15.0 million
to
$25.0 million
, of which
$5.0 million
has been contributed through the first three months of the year. The other postretirement benefit plans, which provide medical and life insurance benefits, are unfunded plans.
The components of net periodic benefit cost recorded in the Condensed Consolidated Statements of Operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other post-
retirement benefits
|
(millions of dollars)
|
|
2014
|
|
2013
|
|
2014
|
|
2013
|
Three Months Ended March 31,
|
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
3.3
|
|
|
$
|
—
|
|
|
$
|
3.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Interest cost
|
|
3.1
|
|
|
4.6
|
|
|
2.9
|
|
|
4.2
|
|
|
1.7
|
|
|
1.7
|
|
Expected return on plan assets
|
|
(4.4
|
)
|
|
(5.4
|
)
|
|
(4.6
|
)
|
|
(2.7
|
)
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service benefit
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(1.6
|
)
|
|
(1.6
|
)
|
Amortization of unrecognized loss
|
|
1.6
|
|
|
1.2
|
|
|
2.1
|
|
|
1.3
|
|
|
0.7
|
|
|
1.2
|
|
Net periodic benefit cost
|
|
$
|
0.1
|
|
|
$
|
3.7
|
|
|
$
|
0.2
|
|
|
$
|
5.9
|
|
|
$
|
0.8
|
|
|
$
|
1.4
|
|
(12) Stock-Based Compensation
Under the Company's 2004 Stock Incentive Plan ("2004 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 vested over periods up to
three years
and have a term of
10 years
from date of grant. At its November 2007 meeting, the Company's Compensation Committee decided that restricted common stock awards and stock units ("restricted stock") would be awarded in place of stock options for long-term incentive award grants to employees. Restricted stock granted to employees vests
50%
after
two years
and the remainder after
three years
from the date of grant. Restricted stock granted to non-employee directors generally vests on the anniversary date of the grant. Under the 2004 Plan,
25.0 million
shares are authorized for grant, of which approximately
2.6 million
shares are available for future issuance as of March 31, 2014. In February 2014, the Company's Board of Directors replaced the expired 2004 Plan by adopting the BorgWarner Inc. 2014 Stock Incentive Plan ("the 2014 Plan"). On April 30, 2014, the Company's stockholders voted and approved the 2014 Plan.
Stock options
A summary of the Company’s stock option activity for the three months ended March 31, 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option
(thousands)
|
|
Weighted average exercise price
|
|
Weighted average remaining contractual life
(in years)
|
|
Aggregate intrinsic value
(in millions)
|
Outstanding and exercisable at December 31, 2013
|
1,997
|
|
|
$
|
15.82
|
|
|
2.6
|
|
$
|
80.0
|
|
Exercised
|
(54
|
)
|
|
$
|
14.41
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2014
|
1,943
|
|
|
$
|
15.86
|
|
|
2.4
|
|
$
|
88.6
|
|
Restricted stock
The value of restricted stock is determined by the market value of the Company’s common stock at the date of grant. In 2014, restricted stock in the amount of
419,926
shares was granted to employees under the 2004 Stock Incentive Plan. The value of the awards is recorded as unearned compensation within capital in excess of par value in equity and is amortized as compensation expense over the restriction periods.
The Company recorded restricted stock compensation expense of
$4.5 million
and
$11.1 million
for the three months ended March 31, 2014 and 2013, respectively.
During the fourth quarter of 2012, the Company waived the forfeiture provision associated with future restricted stock grants made to certain retiring Named Executive Officers. The expense of
$11.1 million
for
the three months ended March 31, 2013 includes
$5.5 million
of expense related to the grant of restricted stock awards to these Named Executive Officers.
A summary of the Company’s nonvested restricted stock for the three months ended March 31, 2014 is as follows:
|
|
|
|
|
|
|
|
|
Shares subject to restriction
(thousands)
|
|
Weighted average price
|
Nonvested at December 31, 2013
|
1,411
|
|
|
$
|
37.86
|
|
Granted
|
420
|
|
|
$
|
53.90
|
|
Vested
|
(498
|
)
|
|
$
|
37.38
|
|
Forfeited
|
(16
|
)
|
|
$
|
39.54
|
|
Nonvested at March 31, 2014
|
1,317
|
|
|
$
|
43.08
|
|
(13) Accumulated Other Comprehensive Income (Loss)
The following table summarizes the activity within accumulated other comprehensive income (loss) during the three months ended March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
Beginning Balance, December 31, 2013
|
|
$
|
181.1
|
|
|
$
|
(16.0
|
)
|
|
$
|
(181.5
|
)
|
|
$
|
2.4
|
|
|
$
|
(14.0
|
)
|
Comprehensive loss before reclassifications
|
|
(2.7
|
)
|
|
(3.4
|
)
|
|
—
|
|
|
—
|
|
|
(6.1
|
)
|
Income taxes associated with comprehensive income (loss) before reclassifications
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
Reclassification from accumulated other comprehensive income
|
|
—
|
|
|
0.9
|
|
|
1.7
|
|
|
—
|
|
|
2.6
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
(0.1
|
)
|
|
(0.5
|
)
|
|
—
|
|
|
(0.6
|
)
|
Ending Balance March 31, 2014
|
|
$
|
178.4
|
|
|
$
|
(17.3
|
)
|
|
$
|
(180.3
|
)
|
|
$
|
2.4
|
|
|
$
|
(16.8
|
)
|
(14) Contingencies
In the normal course of business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company will ultimately be successful in any of these commercial and legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that an adverse outcome in any of these commercial and legal claims, actions and complaints will have a material adverse effect on the Company's results of operations, financial position or cash flows, although it could be material to the results of operations in a particular quarter.
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 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 did 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. 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 reasonably 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
27
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; and remediation alternatives), the Company has an accrual for indicated environmental liabilities of
$7.7 million
and
$4.0 million
at March 31, 2014 and at December 31, 2013, respectively. The Company expects to pay out substantially all of the amounts accrued for environmental liability over the next five years.
In connection with the sale of Kuhlman Electric Corporation (“Kuhlman Electric”), 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. The Company previously settled or obtained dismissals of various lawsuits that were filed against Kuhlman Electric and others, including the Company, on behalf of plaintiffs alleging personal injury relating to alleged environmental contamination at its Crystal Springs, Mississippi plant. The Company filed a lawsuit against Kuhlman Electric and a related entity challenging the validity of the indemnity and the defendants filed counterclaims and a related lawsuit. In addition, two lawsuits by plaintiffs alleging environmental contamination relating to Kuhlman Electric's Crystal Springs plant are still pending and the Company may in the future become subject to further legal proceedings.
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 March 31, 2014 and December 31, 2013, the Company had approximately
17,500
and
17,000
pending asbestos-related product liability claims, respectively. Of the approximately
17,500
outstanding claims at March 31, 2014, approximately half were pending in jurisdictions that have undergone significant tort and judicial reform activities subsequent to the filing of these claims.
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 2014, of the approximately
600
claims resolved,
105
(
18%
) resulted in payment being made to a claimant by or on behalf of the Company. In the full year of 2013, of the approximately
1,500
claims resolved,
297
(
20%
) 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 paid by the Company's primary layer insurance carriers under a series of funding arrangements. In addition to the primary insurance available for asbestos-related claims, the Company has substantial excess insurance coverage available for potential future asbestos-related product claims. In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion of their policy limits.
A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies against the Company and certain of its historical general liability insurers. The court has issued a number of interim rulings and discovery is continuing. The Company has entered into settlement agreements with some of its insurance carriers, resolving their coverage disputes by agreeing to pay specified amounts to the Company. The Company is vigorously pursuing the litigation against the remaining insurers.
In August 2013, the Los Angeles Superior Court entered a jury verdict against the Company in an asbestos-related personal injury action with damages of
$35.0 million
,
$32.5 million
of which was non-compensatory and will not be recoverable through insurance if the verdict is upheld. The Company has appealed this verdict. The Company posted a surety bond of
$55.0 million
related to the appeal. The Company cannot predict the outcome of this pending litigation and therefore cannot reasonably estimate the amount of possible loss, if any, that could result from this 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 experience 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, financial position or cash flows.
To date, the Company has paid and accrued
$294.1 million
in defense and indemnity in advance of insurers' reimbursement and has received
$124.8 million
in cash and notes from insurers. The net balance of
$169.3 million
, is expected to be fully recovered, of which approximately
$20.0 million
is expected to be recovered within one year. Timing of recovery is dependent on final resolution of the declaratory judgment
action referred to above or additional negotiated settlements. At December 31, 2013, insurers owed
$153.6 million
in association with these claims.
In addition to the
$169.3 million
net balance relating to past settlements and defense costs, the Company has estimated a liability of
$107.1 million
for claims asserted, but not yet resolved and their related defense costs at March 31, 2014. The Company also has a related asset of
$107.1 million
to recognize proceeds from the insurance carriers, which is expected to be fully recovered. Receipt of these proceeds is not expected prior to the resolution of the declaratory judgment action referred to above, which, more-likely-than-not, will occur subsequent to March 31, 2015. At December 31, 2013, the comparable value of the accrued liability and associated insurance asset was
$96.7 million
.
The amounts recorded in the Condensed Consolidated Balance Sheets related to the estimated future settlement of existing claims are as follows:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
March 31,
2014
|
|
December 31, 2013
|
Assets:
|
|
|
|
Other non-current assets
|
$
|
107.1
|
|
|
$
|
96.7
|
|
Total insurance assets
|
$
|
107.1
|
|
|
$
|
96.7
|
|
Liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
44.1
|
|
|
$
|
41.1
|
|
Other non-current liabilities
|
63.0
|
|
|
55.6
|
|
Total accrued liabilities
|
$
|
107.1
|
|
|
$
|
96.7
|
|
The 2014 increase in the accrued liability and associated insurance asset is primarily due to an expected higher rate of claim settlement based on recent litigation claim activity.
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.
(15) Restructuring
In the fourth quarter of 2013, the Company initiated actions primarily in the Drivetrain segment designed to improve future profitability and competitiveness. As a continuation of these actions, the Company finalized severance agreements with
two
labor unions at separate facilities in Western Europe for approximately
350
employees. The Company recorded
$39.5 million
of restructuring expense in the first quarter of 2014, primarily related to one of these facilities. Included in this restructuring expense are employee termination benefits of
$32.8 million
and other expense of
$6.7 million
.
The Company expects an additional
$26.0 million
of employee termination benefits to be incurred over the next
two
years as employees render service in accordance with terms of the agreements. Future cash payments for these restructuring activities are expected to be complete by the end of 2015.
Estimates of restructuring expense are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established accruals.
The following table displays a rollforward of the employee related restructuring accruals recorded within the Company's Consolidated Balance Sheet and the related cash flow activity for the three months ended March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Related Costs
|
(millions of dollars)
|
|
Drivetrain
|
|
Engine
|
|
|
Total
|
Balance at December 31, 2013
|
|
$
|
8.4
|
|
|
$
|
2.8
|
|
|
|
$
|
11.2
|
|
Provision
|
|
32.1
|
|
|
0.7
|
|
|
|
32.8
|
|
Cash payments
|
|
(1.2
|
)
|
|
(1.6
|
)
|
|
|
(2.8
|
)
|
Translation adjustment
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Balance at March 31, 2014
|
|
$
|
39.3
|
|
|
$
|
1.9
|
|
|
|
$
|
41.2
|
|
(16) Earnings Per Share
The Company presents both basic and diluted earnings per share of common stock (“EPS”) amounts. Basic EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock outstanding during the reporting period. Diluted EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock and common equivalent stock outstanding during the reporting period.
The dilutive impact of stock-based compensation is calculated using the treasury stock method. The treasury stock method assumes that the Company uses the assumed proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future, compensation cost for future service that the Company has not yet recognized and any windfall/(shortfall) tax benefits that would be credited/(debited) to capital in excess of par value when the award generates a tax deduction. Options are only dilutive when the average market price of the underlying common stock exceeds the exercise price of the options.
The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(in millions, except per share amounts)
|
2014
|
|
2013
|
Basic earnings per share:
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
159.1
|
|
|
$
|
142.0
|
|
Weighted average shares of common stock outstanding
|
227.430
|
|
|
230.372
|
|
Basic earnings per share of common stock
|
$
|
0.70
|
|
|
$
|
0.62
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
159.1
|
|
|
$
|
142.0
|
|
Adjustment for net interest expense on convertible notes
|
—
|
|
|
—
|
|
Diluted net earnings attributable to BorgWarner Inc.
|
$
|
159.1
|
|
|
$
|
142.0
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
227.430
|
|
|
230.372
|
|
|
|
|
|
Effect of 3.50% convertible senior notes
|
—
|
|
|
—
|
|
Effect of warrant
|
—
|
|
|
—
|
|
Effect of stock-based compensation
|
1.897
|
|
|
2.758
|
|
|
|
|
|
Weighted average shares of common stock outstanding including dilutive shares
|
229.327
|
|
|
233.130
|
|
Diluted earnings per share of common stock
|
$
|
0.69
|
|
|
$
|
0.61
|
|
|
|
|
|
Total anti-dilutive shares:
|
|
|
|
Call options
|
—
|
|
|
—
|
|
(17) Reporting Segments
The Company's business is comprised of
two
reporting segments: Engine and Drivetrain. These segments are strategic business groups, which are managed separately as each represents a specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return on invested capital ("ROIC") of its business initiatives. ROIC is comprised of Adjusted EBIT after deducting notional taxes compared to the projected average capital investment required. Adjusted EBIT is comprised of earnings before interest, income taxes and noncontrolling interest (“EBIT") adjusted for restructuring, goodwill impairment charges, affiliates' earnings and other items not reflective of on-going operating income or loss.
Adjusted EBIT is the measure of segment income or loss used by the Company. The Company believes Adjusted EBIT is most reflective of the operational profitability or loss of our reporting segments. The following tables show segment information and Adjusted EBIT for the Company's reporting segments.
Net Sales by Reporting Segment
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(millions of dollars)
|
2014
|
|
2013
|
Engine
|
$
|
1,412.1
|
|
|
$
|
1,257.5
|
|
Drivetrain
|
680.7
|
|
|
601.4
|
|
Inter-segment eliminations
|
(8.7
|
)
|
|
(7.8
|
)
|
Net sales
|
$
|
2,084.1
|
|
|
$
|
1,851.1
|
|
Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest (“Adjusted EBIT”)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(millions of dollars)
|
2014
|
|
2013
|
Engine
|
$
|
231.7
|
|
|
$
|
202.3
|
|
Drivetrain
|
80.5
|
|
|
56.0
|
|
Adjusted EBIT
|
312.2
|
|
|
258.3
|
|
Restructuring expense
|
39.5
|
|
|
—
|
|
Program termination agreement
|
—
|
|
|
11.3
|
|
Retirement related obligations
|
—
|
|
|
5.9
|
|
Corporate, including equity in affiliates' earnings and stock-based compensation
|
30.7
|
|
|
32.9
|
|
Interest income
|
(1.5
|
)
|
|
(1.0
|
)
|
Interest expense and finance charges
|
8.2
|
|
|
9.7
|
|
Earnings before income taxes and noncontrolling interest
|
235.3
|
|
|
199.5
|
|
Provision for income taxes
|
68.1
|
|
|
50.9
|
|
Net earnings
|
167.2
|
|
|
148.6
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
8.1
|
|
|
6.6
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
159.1
|
|
|
$
|
142.0
|
|
Total Assets
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
March 31,
2014
|
|
December 31, 2013
|
Engine
|
$
|
4,002.5
|
|
|
$
|
3,519.1
|
|
Drivetrain
|
1,863.8
|
|
|
1,786.6
|
|
Total
|
5,866.3
|
|
|
5,305.7
|
|
Corporate (a)
|
1,491.5
|
|
|
1,611.3
|
|
Total assets
|
$
|
7,357.8
|
|
|
$
|
6,917.0
|
|
____________________________________
|
|
(a)
|
Corporate assets include investments and advances and deferred income taxes.
|
(18) Recent Transactions
On February 28, 2014, the Company acquired
100%
of the equity interests in Gustav Wahler GmbH u. Co. KG and its general partner ("Wahler"). Wahler is a producer of exhaust gas recirculation ("EGR") valves, EGR tubes and thermostats, and has operations in Germany, Brazil, the U.S., China and Slovakia. The cash paid, net of cash acquired was
$106.4 million
(
77.1 million
Euro).
The Wahler acquisition is expected to strengthen the Company's strategic position as a producer of complete EGR systems and create additional market opportunities in both passenger and commercial vehicle applications.
The operating results and assets are reported within the Company's Engine reporting segment as of the date of the acquisition. The impact of Wahler is not expected to be material to 2014 consolidated revenues and earnings. The Company paid
$106.4 million
, which is recorded as an investing activity in the Company's Condensed Consolidated Statement of Cash Flows. Additionally, the Company assumed retirement-related liabilities of
$3.2 million
and assumed debt of
$33.3 million
, which are reflected in the supplemental cash flow information on the Company's Condensed Consolidated Statement of Cash Flows.
The following table summarizes the aggregated estimated fair value of the assets acquired and liabilities assumed on February 28, 2014, the date of acquisition:
|
|
|
|
|
|
(millions of dollars)
|
|
|
Receivables, net
|
|
$
|
52.4
|
|
Inventories, net
|
|
50.9
|
|
Property, plant and equipment, net
|
|
55.7
|
|
Goodwill
|
|
47.3
|
|
Other intangible assets
|
|
36.6
|
|
Other assets and liabilities
|
|
(28.6
|
)
|
Accounts payable and accrued expenses
|
|
(71.4
|
)
|
Total consideration, net of cash acquired
|
|
142.9
|
|
|
|
|
Less: Assumed retirement-related liabilities
|
|
3.2
|
|
Less: Assumed debt
|
|
33.3
|
|
Cash paid, net of cash acquired
|
|
$
|
106.4
|
|
In connection with the acquisition, the Company capitalized
$18.8 million
for customer relationships,
$10.2 million
for know-how,
$4.1 million
for patented technology and
$3.5 million
for the Wahler trade name. Customer relationships and know-how will be amortized over a period of up to
15
years, patented technology will be amortized over
seven
years and the Wahler trade name will not be amortized as it has an indefinite useful life. The income approach was used to determine the fair value of all intangible assets. Additionally,
$25.4 million
in goodwill is expected to be non-deductible for tax purposes.
The Company is in the process of finalizing all purchase accounting adjustments related to the Wahler acquisition. Subsequent adjustments may be necessary based on the finalization of certain estimates, including any fair value or working capital adjustments.