NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles. Our products help improve vehicle performance, propulsion efficiency, stability and air quality. These products are manufactured and sold worldwide, primarily to original equipment manufacturers (“OEMs”) of light vehicles (passenger cars, sport-utility vehicles ("SUVs"), vans and light trucks). The Company's products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications). We also manufacture and sell our products to certain Tier One vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers in Europe, the Americas and Asia and is an original equipment supplier to every major automotive OEM in the world. The Company's products fall into two reporting segments: Engine and Drivetrain.
|
|
NOTE 1
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The following paragraphs briefly describe the Company's significant accounting policies.
Basis of presentation
In the first quarter of 2016, the Company retrospectively adopted Accounting Standard Update ("ASU") No. 2015-03, "
Simplifying the Presentation of Debt Issuance Costs,
" which resulted in the reduction of assets and liabilities by approximately
$16 million
in the Company's Condensed Consolidated Balance Sheet as of December 31, 2015. Certain prior period amounts have been reclassified to conform to current period presentation.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the accompanying notes, as well as, the amounts of revenues and expenses reported during the periods covered by these financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of consolidation
The Consolidated Financial Statements include all majority-owned subsidiaries with a controlling financial interest. All inter-company accounts and transactions have been eliminated in consolidation. Investments in
20%
to
50%
owned affiliates are accounted for under the equity method when the Company does not have a controlling financial interest.
Revenue recognition
The Company recognizes revenue when 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.
Cost of sales
The Company includes materials, direct labor and manufacturing overhead within cost of sales. Manufacturing overhead is comprised of indirect materials, indirect labor, factory operating costs and other such costs associated with manufacturing products for sale.
Cash
Cash is valued at fair market value. It is the Company's policy to classify all highly liquid investments with original maturities of three months or less as cash. Cash is maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal risk.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted cash
Restricted cash as of December 31, 2015 related to amounts deposited with the paying agent to settle shares of Remy International Inc. ("Remy") stock in connection with the acquisition of Remy on November 10, 2015, that was not paid to the shareholders until the first half of 2016.
Receivables, net
The Company factors certain receivables through third party financial institutions without recourse. These are treated as a sale. The transactions are accounted for as a reduction in accounts receivable as the agreements transfer effective control over and risk related to the receivables to the buyers. The Company does not service any domestic accounts after the factoring has occurred. The Company does not have any servicing assets or liabilities.
See the Balance Sheet Information footnote to the Consolidated Financial Statements for more information on receivables, net.
Inventories, net
Inventories are valued at the lower of cost or market. Cost of certain U.S. inventories is determined using the last-in, first-out (“LIFO”) method, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or average-cost methods. Inventory held by U.S. operations using the LIFO method was
$131.4 million
and
$122.2 million
at December 31, 2016 and 2015, respectively. Such inventories, if valued at current cost instead of LIFO, would have been greater by
$15.2 million
and
$14.2 million
at December 31, 2016 and 2015, respectively.
See the Balance Sheet Information footnote to the Consolidated Financial Statements for more information on inventories, net.
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 and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets, typically
three
to
five
years. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has a contractual guarantee for lump sum reimbursement from the customer are capitalized in prepayments and other current assets.
Property, plant and equipment, net
Property, plant and equipment is valued at cost less accumulated depreciation. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation is generally computed on a straight-line basis over the estimated useful lives of the assets. Useful lives for buildings range from
15
to
40
years and useful lives for machinery and equipment range from
three
to
12
years. For income tax purposes, accelerated methods of depreciation are generally used.
See the Balance Sheet Information footnote to the Consolidated Financial Statements for more information on property, plant and equipment, net.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impairment of long-lived assets, including definite-lived intangible assets
The Company reviews the carrying value of its long-lived assets, whether held for use or disposal, including other amortizing intangible assets, when events and circumstances warrant such a review under Accounting Standards Codification ("ASC") Topic 360. In assessing long-lived assets for an impairment loss, assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In assessing long-lived assets for impairment, management generally considers individual facilities the lowest level for which identifiable cash flows are largely independent. A recoverability review is performed using the undiscounted cash flows if there is a triggering event. If the undiscounted cash flow test for recoverability identifies a possible impairment, management will perform a fair value analysis. Management determines fair value under ASC Topic 820 using the appropriate valuation technique of market, income or cost approach. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
Management believes that the estimates of future cash flows and fair value assumptions are reasonable; however, changes in assumptions underlying these estimates could affect the valuations. 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; (ii) undiscounted future cash flows generated by the asset; and (iii) fair valuation of the asset.
Goodwill and other indefinite-lived intangible assets
During the fourth quarter of each year, the Company qualitatively assesses its goodwill and indefinite-lived intangible assets assigned to each of its reporting units. This qualitative assessment evaluates various events and circumstances, such as macro economic conditions, industry and market conditions, cost factors, relevant events and financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-than-not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the carrying value, or upon consideration of other factors, including recent acquisition or divestiture activity, the Company performs a quantitative, "step one," goodwill impairment analysis.
In addition, the Company may test goodwill in between annual test dates if an event occurs or circumstances change that could more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
See the Goodwill and Other Intangibles footnote to the Consolidated Financial Statements for more information on goodwill and other indefinite-lived intangible assets.
Product warranties
The Company provides warranties on some, but not all, of its products. The warranty terms are typically from
one
to
three
years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual. The product warranty accrual is allocated to current and non-current liabilities in the Consolidated Balance Sheets.
See the Product Warranty footnote 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consistent and appropriate methods, however, changes to its assumptions could materially affect the recorded accrued liabilities for loss or asset valuation allowances.
Asbestos
The Company and certain of its subsidiaries along with numerous other companies are named as defendants in personal injury lawsuits based on alleged exposure to asbestos-containing materials. With the assistance of third party consultants, the Company estimates the liability and corresponding insurance recovery for pending and future claims not yet asserted through December 31, 2059 with a runoff through 2067 and defense costs. This estimate is based on the Company's historical claim experience and estimates of the number and resolution cost of potential future claims that may be filed based on anticipated levels of unique plaintiff asbestos-related claims in the U.S. tort system against all defendants. This estimate is not discounted to present value. The Company currently believes that December 31, 2067 is a reasonable assumption as to the last date on which it is likely to have resolved all asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood of incidence of asbestos-related disease in the U.S. population generally. The Company assesses the sufficiency of its estimated liability for pending and future claims and defense costs on an ongoing basis by evaluating actual experience regarding claims filed, settled and dismissed, and amounts paid in settlements. In addition to claims and settlement experience, the Company considers additional quantitative and qualitative factors such as changes in legislation, the legal environment, and the Company's defense strategy. The Company continues to have additional excess insurance coverage available for potential future asbestos-related claims. In connection with the Company’s ongoing review of its asbestos-related claims, the Company also reviewed the amount of its potential insurance coverage for such claims, taking into account the remaining limits of such coverage, the number and amount of claims on our insurance from co-insured parties, ongoing litigation against the Company’s insurers, potential remaining recoveries from insolvent insurers, the impact of previous insurance settlements, and coverage available from solvent insurers not party to the coverage litigation.
See the Contingencies footnote to the Consolidated Financial Statements for more information regarding management's judgments applied in the recognition and measurement of asbestos-related assets and liabilities.
Environmental contingencies
The Company accounts for environmental costs in accordance with ASC Topic 450. Costs related to environmental assessments and remediation efforts at operating facilities are accrued when it is probable that a liability has been incurred and the amount of that liability can be reasonably estimated. Estimated costs are recorded at undiscounted amounts, based on experience and assessments and are regularly evaluated. The liabilities are recorded in accounts payable and accrued expenses and other non-current liabilities in the Company's Consolidated Balance Sheets.
See the Contingencies footnote to the Consolidated Financial Statements for more information regarding environmental contingencies.
Derivative financial instruments
The Company recognizes that certain normal business transactions generate risk. Examples of risks include exposure to exchange rate risk related to transactions denominated in currencies other than the functional currency, changes in commodity costs and interest rates. It is the objective and responsibility of the Company to assess the impact of these transaction risks and offer protection from selected risks through various methods, including financial derivatives. Virtually all derivative instruments held by the Company are designated as hedges, have high correlation with the underlying exposure and are highly effective in offsetting underlying price movements. Accordingly, gains and losses from changes in qualifying hedge fair values are matched with the underlying transactions. All hedge instruments are carried at their fair value based on quoted market prices for contracts with similar maturities. The Company does not engage in any derivative transactions for purposes other than hedging specific risks.
See the Financial Instruments footnote to the Consolidated Financial Statements for more information on derivative financial instruments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Foreign currency
The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for each period for revenues, expenses and capital expenditures. The local currency is the functional currency for substantially all of the Company's foreign subsidiaries. Translation adjustments for foreign subsidiaries are recorded as a component of accumulated other comprehensive income (loss) in equity. The Company recognizes transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency in earnings as incurred.
See the Accumulated Other Comprehensive Loss footnote to the Consolidated Financial Statements for more information on accumulated other comprehensive loss.
Pensions and other postretirement employee defined benefits
The Company's defined benefit pension and other postretirement employee benefit plans are accounted for in accordance with ASC Topic 715. Disability, early retirement and other postretirement employee benefits are accounted for in accordance with ASC Topic 712.
Pensions and other postretirement employee benefit costs and related liabilities and assets are dependent upon assumptions used in calculating such amounts. These assumptions include discount rates, expected returns on plan assets, health care cost trends, compensation and other factors. In accordance with GAAP, actual results that differ from the assumptions used are accumulated and amortized over future periods, and accordingly, generally affect recognized expense in future periods.
See the Retirement Benefit Plans footnote to the Consolidated Financial Statements for more information regarding the Company's pension and other postretirement employee defined benefit plans.
Income taxes
In accordance with ASC Topic 740, the Company's income tax expense is calculated based on expected income and statutory tax rates in the various jurisdictions in which the Company operates and requires the use of management's estimates and judgments.
See the Income Taxes footnote to the Consolidated Financial Statements for more information regarding income taxes.
New Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-04,
"Simplifying the Test for Goodwill Impairment."
It eliminates Step 2 from the goodwill impairment test and an entity should recognize an impairment charge for the amount by which the carrying amount of goodwill exceeds the reporting unit's fair value, not to exceed the carrying amount of goodwill. This guidance is effective for annual and any interim impairment tests in fiscal years beginning after December 15, 2019. The Company does not expect this guidance to have any impact on its Consolidated Financial Statements.
In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-01,
"Clarifying the Definition of a Business."
It revises the definition of a business and provides a framework to evaluate when an input and a substantive process are present in an acquisition to be considered a business. This guidance is effective for annual periods beginning after December 15, 2017. The Company does not expect this guidance to have any impact on its Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18,
"Restricted Cash."
It requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 15, 2017. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15,
"Classification of Certain Cash Receipts and Cash Payments."
It provides guidance on eight specific cash flow issues with the objective of reducing the existing diversity in practice in how they are classified in the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09,
"Improvements to Employee Share-Based Payment Accounting."
Under this guidance, the areas of simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, impact on earnings per share and classification on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016 and the Company will adopt this guidance in the first quarter of 2017. Upon the adoption of the guidance, all of the tax effects of share-based payments will be recorded in the income statement. The impact to the Consolidated Financial Statements will be dependent upon the underlying vesting or exercise activity and related future stock prices. The Company is currently evaluating the other impacts this guidance will have on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02,
"Leases (Topic 842)."
Under this guidance, lessees will be required to recognize a right-of-use asset and a lease liability for all operating leases defined under previous GAAP. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact this guidance will have on its Consolidated Financial Statements.
In September 2015, the FASB issued ASU No. 2015-16,
"Simplifying the Accounting for Measurement-Period Adjustments."
Under this guidance, an acquirer is required to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company adopted this guidance in the first quarter of 2016 and recorded fair value adjustments related to the Remy acquisition based on new information obtained during the measurement period primarily related to warranty, inventory, and deferred taxes. These adjustments have resulted in a decrease in goodwill of $12.1 million from the Company's initial estimate recorded in 2016.
In August 2015, the FASB issued ASU No. 2015-15,
"Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements."
Under this guidance, debt issuance costs associated with line-of-credit arrangements would be deferred as an asset and amortized ratably over the term, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015 and the Company adopted this guidance in the first quarter of 2016 with no impact on the Company's Consolidated Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11,
"Simplifying the Measurement of Inventory."
Under this guidance, inventory should be measured at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.
In May 2015, the FASB issued ASU No. 2015-07,
"Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)."
Under this guidance, investments measured at net asset value, as a practical expedient for fair value, are excluded from the fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015 and the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company adopted this guidance in the first quarter of 2016. The pension asset disclosure has been updated retrospectively to reflect this guidance and there is no impact on the Company's Consolidated Financial Statements.
In May 2014, the FASB amended the Accounting Standards Codification to add Topic 606,
"Revenue from Contracts with Customers,"
outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseding most current revenue recognition guidance. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company anticipates changes to the revenue recognition of pre-production activities such as customer owned tooling and engineering design & development recoveries, including the potential recording of these items as revenue. Further, the Company is currently analyzing the impact of the new guidance on its contracts and customer arrangements that include various pricing structures and cancellation clauses, which could impact the timing of revenue recognition. The Company expects to adopt this guidance effective January 1, 2018 utilizing the Modified Retrospective approach and is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
NOTE 2 RESEARCH AND DEVELOPMENT COSTS
The Company's net Research & Development ("R&D") expenditures are included in selling, general and administrative expenses of the Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
|
2014
|
Gross R&D expenditures
|
$
|
417.8
|
|
|
$
|
386.2
|
|
|
$
|
392.8
|
|
Customer reimbursements
|
(74.6
|
)
|
|
(78.8
|
)
|
|
(56.6
|
)
|
Net R&D expenditures
|
$
|
343.2
|
|
|
$
|
307.4
|
|
|
$
|
336.2
|
|
Net R&D expenditures as a percentage of net sales were
3.8%
,
3.8%
and
4.0%
for the years ended December 31, 2016, 2015 and 2014, respectively. The Company has contracts with several customers at the Company's various R&D locations. No such contract exceeded
5%
of net R&D expenditures in any of the years presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 OTHER EXPENSE, NET
Items included in other expense, net consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
|
2014
|
Asbestos-related charge
|
$
|
703.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loss on divestiture
|
127.1
|
|
|
—
|
|
|
—
|
|
Restructuring expense
|
26.9
|
|
|
65.7
|
|
|
90.8
|
|
Merger and acquisition expense
|
23.7
|
|
|
21.8
|
|
|
—
|
|
Intangible asset impairment
|
12.6
|
|
|
—
|
|
|
10.3
|
|
Pension settlement loss
|
—
|
|
|
25.7
|
|
|
3.1
|
|
Gain on previously held equity interest
|
—
|
|
|
(10.8
|
)
|
|
—
|
|
Other
|
(4.2
|
)
|
|
(1.0
|
)
|
|
(10.4
|
)
|
Other expense, net
|
$
|
889.7
|
|
|
$
|
101.4
|
|
|
$
|
93.8
|
|
In the fourth quarter of 2016, the Company determined that its best estimate of the aggregate liability both for asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet asserted, including an estimate for defense costs, is
$879.3 million
as of December 31, 2016. The Company recorded a charge of
$703.6 million
before tax (
$440.6 million
after tax) in Other Expense, representing the difference in the total liability from what was previously accrued, consulting fees, less available insurance coverage. See the Contingencies footnote to the Consolidated Financial Statements for further discussion.
During the fourth quarter of 2015, the Company acquired
100%
of the equity interests in Remy. During the year ended December 31, 2016 and 2015, the Company incurred
$23.7 million
and
$21.8 million
of transition and realignment expenses and other professional fees associated with this transaction. Additionally, in October 2016, the Company entered into a definitive agreement to sell the light vehicle aftermarket business associated with Remy. This transaction closed in the fourth quarter of 2016 and the Company recorded loss on divestiture of
$127.1 million
in the year ended December 31, 2016. See the Recent Transactions footnote to the Consolidated Financial Statements for further discussion of this transaction.
During the years ended December 31, 2016, 2015 and 2014, the Company recorded restructuring expense of
$26.9 million
,
$65.7 million
and
$90.8 million
, respectively, primarily related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The restructuring expense also includes amounts related to a global realignment plan intended to enhance treasury management flexibility. See the Restructuring footnote to the Consolidated Financial Statements for further discussion of these expenses.
During the fourth quarter of 2016 and 2014, respectively, the Company recorded an intangible asset impairment loss of
$12.6 million
related to Engine segment Etatech’s ECCOS intellectual technology and
$10.3 million
related to Engine segment unamortized trade names. The ECCOS intellectual technology impairment is due to the discontinuance of interest from potential customers during the fourth quarter of 2016 that significantly lowered the commercial feasibility of the product line.
During the fourth quarter of 2015, the Company settled approximately
$48 million
of its projected benefit obligation by transferring approximately
$48 million
in plan assets through a lump-sum pension de-risking disbursement made to an insurance company. This agreement unconditionally and irrevocably guarantees all future payments to certain participants that were receiving payments from the U.S. pension plan. The insurance company assumes all investment risk associated with the assets that were delivered as part of this transaction. As a result, the Company recorded a non-cash settlement loss of
$25.7 million
related to the accelerated recognition of unamortized losses
. Additionally, during
the third quarter of 2014, the Company discharged certain U.S. pension plan obligations by making lump-sum payments to former employees of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Company. As a result of this action, the Company recorded a settlement loss of
$3.1 million
in the U.S. pension plan.
During the first quarter of 2015, the Company completed the purchase of the remaining
51%
of BERU Diesel Start Systems Pvt. Ltd. ("BERU Diesel") by acquiring the shares of its former joint venture partner. As a result of this transaction, the Company recorded a
$10.8 million
gain on the previously held equity interest in this joint venture. See the Recent Transactions footnote to the Consolidated Financial Statements for further discussion of this acquisition.
Earnings before income taxes and the provision for income taxes are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
|
2014
|
Earnings before income taxes:
|
|
|
|
|
|
U.S.
|
$
|
(724.7
|
)
|
|
$
|
125.6
|
|
|
$
|
218.8
|
|
Non-U.S.
|
915.2
|
|
|
801.2
|
|
|
761.3
|
|
Total
|
$
|
190.5
|
|
|
$
|
926.8
|
|
|
$
|
980.1
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
37.4
|
|
|
$
|
32.5
|
|
|
$
|
25.7
|
|
State
|
6.1
|
|
|
(4.3
|
)
|
|
3.9
|
|
Foreign
|
251.7
|
|
|
228.3
|
|
|
220.8
|
|
Total current
|
295.2
|
|
|
256.5
|
|
|
250.4
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(239.8
|
)
|
|
31.8
|
|
|
66.2
|
|
State
|
(13.2
|
)
|
|
2.6
|
|
|
(1.2
|
)
|
Foreign
|
(11.9
|
)
|
|
(10.5
|
)
|
|
(22.8
|
)
|
Total deferred
|
(264.9
|
)
|
|
23.9
|
|
|
42.2
|
|
Total provision for income taxes
|
$
|
30.3
|
|
|
$
|
280.4
|
|
|
$
|
292.6
|
|
The provision for income taxes resulted in an effective tax rate of
15.9%
,
30.3%
and
29.9%
for the years ended December 31, 2016, 2015 and 2014, respectively. An analysis of the differences between the effective tax rate and the U.S. statutory rate for the years ended December 31, 2016, 2015 and 2014 is presented below.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
|
2014
|
Income taxes at U.S. statutory rate of 35%
|
$
|
66.7
|
|
|
$
|
324.4
|
|
|
$
|
343.0
|
|
Increases (decreases) resulting from:
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
(10.6
|
)
|
|
8.2
|
|
|
2.6
|
|
U.S. tax on non-U.S. earnings
|
40.7
|
|
|
31.5
|
|
|
18.8
|
|
Affiliates' earnings
|
(15.0
|
)
|
|
(14.0
|
)
|
|
(16.2
|
)
|
Foreign rate differentials
|
(93.3
|
)
|
|
(92.6
|
)
|
|
(84.1
|
)
|
Tax holidays
|
(25.5
|
)
|
|
(21.2
|
)
|
|
(23.6
|
)
|
Withholding taxes
|
13.3
|
|
|
7.8
|
|
|
10.6
|
|
Tax credits
|
(3.2
|
)
|
|
(3.2
|
)
|
|
(3.9
|
)
|
Reserve adjustments, settlements and claims
|
11.6
|
|
|
19.4
|
|
|
41.0
|
|
Valuation allowance adjustments
|
(2.7
|
)
|
|
8.3
|
|
|
5.5
|
|
Non-deductible transaction costs
|
8.3
|
|
|
8.1
|
|
|
5.4
|
|
Provision to return and other one-time tax adjustments
|
0.3
|
|
|
(5.1
|
)
|
|
(8.8
|
)
|
Impact of transactions
|
16.3
|
|
|
11.6
|
|
|
—
|
|
Currency
|
10.0
|
|
|
0.1
|
|
|
(0.2
|
)
|
Other foreign taxes
|
12.9
|
|
|
9.0
|
|
|
7.4
|
|
Partnership income
|
3.4
|
|
|
3.1
|
|
|
(0.3
|
)
|
Other
|
(2.9
|
)
|
|
(15.0
|
)
|
|
(4.6
|
)
|
Provision for income taxes, as reported
|
$
|
30.3
|
|
|
$
|
280.4
|
|
|
$
|
292.6
|
|
The Company's provision for income taxes for the year ended December 31, 2016, includes tax benefits of
$263.0 million
,
$22.7 million
,
$8.6 million
,
$6.0 million
and
$4.4 million
associated with an asbestos-related charge, loss on divestiture, other one-time adjustments, restructuring expense and intangible asset impairment loss, respectively, discussed in the Other Expense, Net footnote. Additionally, this rate includes a tax expense of
$2.2 million
related to a gain associated with the release of certain Remy light vehicle aftermarket liabilities due to the expiration of a customer contract.
The Company's provision for income taxes for the year ended December 31, 2015, includes tax benefits of
$9.0 million
,
$3.8 million
and
$3.7 million
related to the pension settlement loss, merger and acquisition expense and restructuring expense, respectively, discussed in the Other Expense, Net footnote. Additionally, this rate includes a tax benefit of
$9.9 million
primarily related to foreign tax incentives and tax settlements.
The Company's provision for income taxes for the year ended December 31, 2014, includes tax benefits of
$15.3 million
,
$0.4 million
and
$1.1 million
related to restructuring expense, intangible asset impairment losses and the pension settlement loss, respectively, discussed in the Other Expense, Net footnote.
A roll forward of the Company's total gross unrecognized tax benefits for the years ended December 31, 2016 and 2015, respectively, is presented below. Of the total
$88.6 million
of unrecognized tax benefits as of December 31, 2016, approximately
$69.9 million
of the 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 and U.S. foreign tax credits included therein.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2016
|
|
2015
|
Balance, January 1
|
$
|
127.3
|
|
|
$
|
60.4
|
|
Additions based on tax positions related to current year
|
16.1
|
|
|
20.7
|
|
Additions for tax positions of prior years
|
1.6
|
|
|
6.7
|
|
Additions from acquisitions
|
—
|
|
|
53.4
|
|
Reductions for closure of tax audits and settlements
|
(45.7
|
)
|
|
(10.4
|
)
|
Reductions for lapse in statute of limitations
|
(5.0
|
)
|
|
(0.3
|
)
|
Translation adjustment
|
(3.2
|
)
|
|
(3.2
|
)
|
Balance, December 31
|
$
|
91.1
|
|
|
$
|
127.3
|
|
Remy applied for a bilateral Advance Pricing Agreement ("APA") between the U.S. Internal Revenue Service and South Korea National Tax Service covering the tax years 2007 through 2014. At December 31, 2015, the Company recorded an uncertain tax benefit and related U.S. foreign tax credits of approximately
$44.0 million
. In the second quarter of 2016, the Company received the signed APA from the tax authorities and reclassified the related uncertain tax benefit to a current tax payable, which the Company paid in the third quarter of 2016.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The amount recognized in income tax expense for 2016 and 2015 is
$3.2 million
and
$2.3 million
, respectively. The Company has an accrual of approximately
$16.0 million
and
$12.8 million
for the payment of interest and penalties at December 31, 2016 and 2015, respectively. The Company estimates that payments of approximately
$15.5 million
will be made in the next 12 months for assessed tax liabilities from certain taxing jurisdictions and has reclassified this amount to current in the balance sheet as shown in the Balance Sheet Information footnote. Other possible changes within the next 12 months cannot be reasonably estimated at this time.
The Company and/or one of its subsidiaries files income tax returns in the U.S. federal, various state jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have more than one taxpayer. The Company is no longer subject to income tax examinations by tax authorities in its major tax jurisdictions as follows:
|
|
|
|
|
|
|
|
Tax jurisdiction
|
|
Years no longer subject to audit
|
|
Tax jurisdiction
|
|
Years no longer subject to audit
|
U.S. Federal
|
|
2012 and prior
|
|
Japan
|
|
2015 and prior
|
China
|
|
2010 and prior
|
|
Mexico
|
|
2010 and prior
|
France
|
|
2013 and prior
|
|
Poland
|
|
2011 and prior
|
Germany
|
|
2007 and prior
|
|
South Korea
|
|
2010 and prior
|
Hungary
|
|
2008 and prior
|
|
|
|
|
In the U.S.
,
certain tax attributes created in years prior to 2012 were subsequently utilized. Even though the U.S. federal statute of limitations has expired for years prior to 2012, the years in which these tax attributes were created could still be subject to examination, limited to only the examination of the creation of the tax attribute
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The gross components of deferred tax assets and liabilities as of December 31, 2016 and 2015 consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
|
Foreign tax credits
|
$
|
139.5
|
|
|
$
|
142.6
|
|
Employee compensation
|
41.3
|
|
|
34.6
|
|
Other comprehensive loss
|
66.3
|
|
|
79.7
|
|
Research and development capitalization
|
145.1
|
|
|
100.4
|
|
Net operating loss and capital loss carryforwards
|
71.5
|
|
|
81.8
|
|
Pension and other postretirement benefits
|
38.8
|
|
|
41.1
|
|
Asbestos-related
|
263.0
|
|
|
—
|
|
Other
|
128.9
|
|
|
125.3
|
|
Total deferred tax assets
|
$
|
894.4
|
|
|
$
|
605.5
|
|
Valuation allowance
|
(71.2
|
)
|
|
(71.0
|
)
|
Net deferred tax asset
|
$
|
823.2
|
|
|
$
|
534.5
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Goodwill and intangible assets
|
(251.3
|
)
|
|
(259.2
|
)
|
Fixed assets
|
(147.1
|
)
|
|
(115.5
|
)
|
Other
|
(55.0
|
)
|
|
(66.4
|
)
|
Total deferred tax liabilities
|
$
|
(453.4
|
)
|
|
$
|
(441.1
|
)
|
Net deferred taxes
|
$
|
369.8
|
|
|
$
|
93.4
|
|
At December 31, 2016, certain non-U.S. subsidiaries have net operating loss carryforwards totaling
$134.7 million
available to offset future taxable income. Of the total
$134.7 million
,
$96.6 million
expire at various dates from 2017 through 2036 and the remaining
$38.1 million
have no expiration date. The Company has a valuation allowance recorded against
$72.9 million
of the
$134.7 million
of non-U.S. net operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling
$817.8 million
which are partially offset by a valuation allowance of
$632.3 million
. The state net operating loss carryforwards expire at various dates from 2017 to 2037. Certain U.S. subsidiaries also have state tax credit carryforwards of
$14.8 million
which are fully offset by a valuation allowance of
$14.8 million
. Certain non-U.S. subsidiaries located in China, Korea and Poland had tax exemptions or tax holidays, which reduced tax expense approximately
$25.5 million
and
$21.2 million
in 2016 and 2015, respectively. The U.S. has foreign tax credit carryforwards of
$139.5 million
, which expire at various dates from 2018 through 2025.
The Company is not required to provide U.S. federal or state income taxes on cumulative undistributed earnings of foreign subsidiaries when such earnings are considered permanently reinvested. The Company's policy is to evaluate this assertion on a quarterly basis. At December 31, 2016, the Company's deferred tax liability associated with unremitted foreign earnings was
$38.5 million
.
In connection with the acquisition of Remy in 2015, management executed a legal restructuring plan to align the Remy and BorgWarner non-US businesses. This transaction resulted in a taxable gain in the U.S., which was partially offset by Remy tax attributes including a net operating loss carryforward of
$68.4 million
, foreign tax credits of
$93.6 million
, and research and development credits of
$6.9 million
. The net impact of this transaction with the filing of Remy’s final 2015 U.S. consolidated federal tax return resulted in a foreign tax credit carryforward of
$47.0 million
. The net U.S. cash tax liability resulting from the transaction was
$8.4 million
.
The Company has not recorded deferred income taxes on the difference between the book and tax basis of investments in foreign subsidiaries or foreign equity affiliates totaling approximately
$3.9 billion
in
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2016, as these amounts are essentially permanent in nature. The difference will become taxable upon repatriation of assets, sale or liquidation of the investment. Due to fluctuation in tax laws around the world and fluctuations in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on this difference because the actual tax liability, if any, is dependent on circumstances existing when the repatriation occurs.
|
|
NOTE 5
|
BALANCE SHEET INFORMATION
|
Detailed balance sheet data is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
Receivables, net:
|
|
|
|
|
|
Customers
|
$
|
1,448.3
|
|
|
$
|
1,423.6
|
|
Other
|
243.9
|
|
|
243.3
|
|
Gross receivables
|
1,692.2
|
|
|
1,666.9
|
|
Bad debt allowance(a)
|
(2.9
|
)
|
|
(1.9
|
)
|
Total receivables, net
|
$
|
1,689.3
|
|
|
$
|
1,665.0
|
|
Inventories, net:
|
|
|
|
|
|
Raw material and supplies
|
$
|
378.6
|
|
|
$
|
412.9
|
|
Work in progress
|
102.9
|
|
|
102.5
|
|
Finished goods
|
174.9
|
|
|
222.4
|
|
FIFO inventories
|
656.4
|
|
|
737.8
|
|
LIFO reserve
|
(15.2
|
)
|
|
(14.2
|
)
|
Total inventories, net
|
$
|
641.2
|
|
|
$
|
723.6
|
|
Prepayments and other current assets:
|
|
|
|
|
|
Prepaid tooling
|
$
|
77.5
|
|
|
$
|
98.5
|
|
Prepaid taxes
|
8.0
|
|
|
11.9
|
|
Restricted cash
|
—
|
|
|
12.3
|
|
Other
|
51.9
|
|
|
46.2
|
|
Total prepayments and other current assets
|
$
|
137.4
|
|
|
$
|
168.9
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
Land and land use rights
|
$
|
111.0
|
|
|
$
|
118.2
|
|
Buildings
|
670.6
|
|
|
661.7
|
|
Machinery and equipment
|
2,371.2
|
|
|
2,154.3
|
|
Capital leases
|
3.9
|
|
|
7.2
|
|
Construction in progress
|
338.2
|
|
|
386.4
|
|
Property, plant and equipment, gross
|
3,494.9
|
|
|
3,327.8
|
|
Accumulated depreciation
|
(1,137.5
|
)
|
|
(1,036.8
|
)
|
Property, plant & equipment, net, excluding tooling
|
2,357.4
|
|
|
2,291.0
|
|
Tooling, net of amortization
|
144.4
|
|
|
157.1
|
|
Property, plant & equipment, net
|
$
|
2,501.8
|
|
|
$
|
2,448.1
|
|
Investments and other long-term receivables:
|
|
|
|
|
|
Investment in equity affiliates
|
$
|
218.9
|
|
|
$
|
200.1
|
|
Other long-term receivables
|
283.3
|
|
|
260.8
|
|
Total investments and other long-term receivables
|
$
|
502.2
|
|
|
$
|
460.9
|
|
Other non-current assets:
|
|
|
|
|
|
Deferred income taxes
|
$
|
424.0
|
|
|
$
|
213.5
|
|
Asbestos insurance asset
|
178.7
|
|
|
108.5
|
|
Other
|
150.7
|
|
|
158.0
|
|
Total other non-current assets
|
$
|
753.4
|
|
|
$
|
480.0
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
Accounts payable and accrued expenses:
|
|
|
|
|
|
Trade payables
|
$
|
1,323.3
|
|
|
$
|
1,225.6
|
|
Payroll and employee related
|
206.4
|
|
|
201.1
|
|
Product warranties
|
63.9
|
|
|
70.6
|
|
Customer related
|
52.8
|
|
|
55.7
|
|
Asbestos-related liability
|
51.7
|
|
|
47.7
|
|
Interest
|
22.9
|
|
|
20.4
|
|
Retirement related
|
18.1
|
|
|
20.1
|
|
Dividends payable to noncontrolling shareholders
|
15.7
|
|
|
20.0
|
|
Unrecognized tax benefits
|
15.5
|
|
|
45.5
|
|
Insurance
|
7.8
|
|
|
—
|
|
Severance
|
6.4
|
|
|
29.4
|
|
Derivatives
|
1.2
|
|
|
19.1
|
|
Other
|
61.6
|
|
|
111.2
|
|
Total accounts payable and accrued expenses
|
$
|
1,847.3
|
|
|
$
|
1,866.4
|
|
Other non-current liabilities:
|
|
|
|
|
|
Deferred income taxes
|
$
|
54.2
|
|
|
$
|
120.1
|
|
Deferred revenue
|
33.5
|
|
|
36.6
|
|
Product warranties
|
31.4
|
|
|
37.3
|
|
Other
|
156.6
|
|
|
160.4
|
|
Total other non-current liabilities
|
$
|
275.7
|
|
|
$
|
354.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Bad debt allowance:
|
2016
|
|
2015
|
|
2014
|
Beginning balance, January 1
|
$
|
(1.9
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(2.1
|
)
|
Provision
|
(3.2
|
)
|
|
(0.5
|
)
|
|
(0.6
|
)
|
Write-offs
|
0.2
|
|
|
0.7
|
|
|
0.3
|
|
Business divestiture
|
2.0
|
|
|
—
|
|
|
—
|
|
Translation adjustment and other
|
—
|
|
|
0.2
|
|
|
0.1
|
|
Ending balance, December 31
|
$
|
(2.9
|
)
|
|
$
|
(1.9
|
)
|
|
$
|
(2.3
|
)
|
As of December 31, 2016 and December 31, 2015, accounts payable of
$85.3 million
and
$76.9 million
, respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the years ended December 31, 2016, 2015 and 2014 were
$14.1 million
,
$16.5 million
and
$13.5 million
, respectively.
NSK-Warner KK ("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 reported by NSK-Warner is accounted for using the equity method of accounting. NSK-Warner is the joint venture partner with a
40%
interest in the Drivetrain Segment's South Korean subsidiary, BorgWarner Transmission Systems Korea Ltd. Dividends from NSK-Warner were
$34.3 million
,
$18.0 million
and
$45.1 million
in calendar years ended December 31, 2016, 2015 and 2014, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NSK-Warner has a fiscal year-end of March 31. The Company's equity in the earnings of NSK-Warner consists of the 12 months ended November 30. Following is summarized financial data for NSK-Warner, translated using the ending or periodic rates, as of and for the years ended November 30, 2016, 2015 and 2014 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
(millions of dollars)
|
|
|
2016
|
|
2015
|
Balance sheets:
|
|
|
|
|
|
|
|
Cash and securities
|
|
|
$
|
98.6
|
|
|
$
|
74.9
|
|
Current assets, including cash and securities
|
|
|
256.3
|
|
|
231.9
|
|
Non-current assets
|
|
|
194.5
|
|
|
167.5
|
|
Current liabilities
|
|
|
122.6
|
|
|
119.1
|
|
Non-current liabilities
|
|
|
48.2
|
|
|
39.3
|
|
Total equity
|
|
|
280.0
|
|
|
241.0
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
(millions of dollars)
|
2016
|
|
2015
|
|
2014
|
Statements of operations:
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
601.8
|
|
|
$
|
519.0
|
|
|
$
|
546.4
|
|
Gross profit
|
134.1
|
|
|
118.6
|
|
|
124.5
|
|
Net earnings
|
71.7
|
|
|
73.3
|
|
|
80.3
|
|
NSK-Warner had no debt outstanding as of November 30, 2016 and 2015. Purchases by the Company from NSK-Warner were
$23.9 million
,
$23.0 million
and
$21.3 million
for the years ended December 31, 2016, 2015 and 2014, respectively.
|
|
NOTE 6
|
GOODWILL AND OTHER INTANGIBLES
|
During the fourth quarter of each year, the Company qualitatively assesses its goodwill and indefinite-lived intangible assets assigned to each of its reporting units. This qualitative assessment evaluates various events and circumstances, such as macro economic conditions, industry and market conditions, cost factors, relevant events and financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-than-not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the carrying value, or upon consideration of other factors, including recent acquisition or divestiture activity, the Company performs a quantitative, "step one," goodwill impairment analysis.
In addition, the Company may test goodwill in between annual test dates if an event occurs or circumstances change that could more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
During the fourth quarter of 2016, the Company performed a qualitative analysis on each reporting unit, except for the reporting unit with recent acquisition and divestiture activities, and determined it was more-likely-than-not the fair value exceeded the carrying value of these reporting units. For the reporting unit with acquisition and divestiture activities, the Company performed a quantitative, "step one," goodwill impairment analysis, which requires the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The basis of this goodwill impairment analysis is the Company's annual budget and long-range plan (“LRP”). The annual budget and LRP includes a five year projection of future cash flows based on actual new products and customer commitments and assumes the last year of the LRP data is a fair indication of the future performance. Because the LRP is estimated over a significant future period of time, those estimates and assumptions are subject to a high degree of uncertainty. Further, the market valuation models and other financial ratios used by the Company require
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
certain assumptions and estimates regarding the applicability of those models to the Company's facts and circumstances.
The Company believes the assumptions and estimates used to determine the estimated fair value are reasonable. Different assumptions could materially affect the estimated fair value. The primary assumptions affecting the Company's December 31, 2016 goodwill quantitative, "step one," 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 used historical and expected operating income margins, which may vary based on the projections of the reporting unit being evaluated.
|
I
n addition to the above primary assumptions, the Company notes the following risks to volume and operating income assumptions that could have an impact on the discounted cash flow models:
|
|
•
|
The automotive industry is cyclical and the Company's results of operations would be adversely affected by industry downturns.
|
|
|
•
|
The Company is dependent on market segments that use our key products and would be affected by decreasing demand in those segments.
|
|
|
•
|
The Company is subject to risks related to international operations.
|
Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter of 2016 indicated the Company's goodwill assigned to the reporting unit that was quantitatively assessed was not impaired and contained a fair value substantially higher than the reporting unit's carrying value. Additionally, sensitivity analyses were completed indicating a
one
percent increase in the discount rate or a
one
percent decrease in the operating margin assumptions would not result in the carrying value exceeding the fair value of the reporting unit quantitatively assessed.
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
(millions of dollars)
|
Engine
|
|
Drivetrain
|
|
Engine
|
|
Drivetrain
|
Gross goodwill balance, January 1
|
$
|
1,338.2
|
|
|
$
|
921.5
|
|
|
$
|
1,362.0
|
|
|
$
|
345.7
|
|
Accumulated impairment losses, January 1
|
(501.8
|
)
|
|
(0.2
|
)
|
|
(501.8
|
)
|
|
(0.2
|
)
|
Net goodwill balance, January 1
|
$
|
836.4
|
|
|
$
|
921.3
|
|
|
$
|
860.2
|
|
|
$
|
345.5
|
|
Goodwill during the year:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions*
|
—
|
|
|
(12.1
|
)
|
|
11.6
|
|
|
584.7
|
|
Divestitures**
|
—
|
|
|
(24.2
|
)
|
|
—
|
|
|
—
|
|
Translation adjustment and other
|
(14.2
|
)
|
|
(5.0
|
)
|
|
(35.4
|
)
|
|
(8.9
|
)
|
Ending balance, December 31
|
$
|
822.2
|
|
|
$
|
880.0
|
|
|
$
|
836.4
|
|
|
$
|
921.3
|
|
________________
|
|
*
|
Acquisitions relate to the Company's 2015 purchases of Remy and BERU Diesel and fair value adjustments in 2016 based on new information obtained during the measurement period for Remy acquisition.
|
** Divestitures relate to the Company's 2016 disposition of Remy light vehicle aftermarket business and Divgi-Warner Private Limited.
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s other intangible assets, primarily from acquisitions, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
(millions of dollars)
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
carrying
amount
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
carrying
amount
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patented and unpatented technology
|
$
|
108.1
|
|
|
$
|
41.5
|
|
|
$
|
66.6
|
|
|
$
|
128.7
|
|
|
$
|
42.4
|
|
|
$
|
86.3
|
|
Customer relationships
|
481.4
|
|
|
141.2
|
|
|
340.2
|
|
|
490.3
|
|
|
116.1
|
|
|
374.2
|
|
Miscellaneous
|
5.3
|
|
|
3.4
|
|
|
1.9
|
|
|
5.6
|
|
|
3.0
|
|
|
2.6
|
|
Total amortized intangible assets
|
594.8
|
|
|
186.1
|
|
|
408.7
|
|
|
624.6
|
|
|
161.5
|
|
|
463.1
|
|
In-process R&D
|
3.8
|
|
|
—
|
|
|
3.8
|
|
|
14.6
|
|
|
—
|
|
|
14.6
|
|
Unamortized trade names
|
51.0
|
|
|
—
|
|
|
51.0
|
|
|
66.1
|
|
|
—
|
|
|
66.1
|
|
Total other intangible assets
|
$
|
649.6
|
|
|
$
|
186.1
|
|
|
$
|
463.5
|
|
|
$
|
705.3
|
|
|
$
|
161.5
|
|
|
$
|
543.8
|
|
Amortization of other intangible assets was
$40.4 million
,
$19.2 million
and
$27.2 million
for the years ended December 31, 2016, 2015 and 2014, respectively. The estimated useful lives of the Company's amortized intangible assets range from
three
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 amortization expense, primarily for acquired intangible assets, is as follows:
$36.9 million
in 2017,
$35.7 million
in 2018,
$35.2 million
in 2019,
$34.8 million
in 2020 and
$34.8 million
in 2021.
A roll forward of the gross carrying amounts of the Company's other intangible assets is presented below:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2016
|
|
2015
|
Beginning balance, January 1
|
$
|
705.3
|
|
|
$
|
307.8
|
|
Acquisitions*
|
—
|
|
|
423.8
|
|
Impairment**
|
(23.9
|
)
|
|
—
|
|
Divestitures***
|
(19.9
|
)
|
|
—
|
|
Translation adjustment
|
(11.9
|
)
|
|
(26.3
|
)
|
Ending balance, December 31
|
$
|
649.6
|
|
|
$
|
705.3
|
|
________________
|
|
*
|
Acquisitions relate to the Company's 2015 purchases of Remy and BERU Diesel.
|
** Relates to the impairment of the Company's Etatech ECCOS intellectual technology in 2016.
*** Divestiture relates to the Company's sale of Remy light vehicle aftermarket business in 2016.
A roll forward of the accumulated amortization associated with the Company's other intangible assets is presented below:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2016
|
|
2015
|
Beginning balance, January 1
|
$
|
161.5
|
|
|
$
|
156.7
|
|
Amortization
|
40.4
|
|
|
19.2
|
|
Impairment
|
(8.2
|
)
|
|
—
|
|
Divestitures
|
(0.3
|
)
|
|
—
|
|
Translation adjustment
|
(7.3
|
)
|
|
(14.4
|
)
|
Ending balance, December 31
|
$
|
186.1
|
|
|
$
|
161.5
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the carrying amount of the Company’s total product warranty liability for the years ended December 31, 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2016
|
|
2015
|
Beginning balance, January 1
|
$
|
107.9
|
|
|
$
|
132.0
|
|
Provisions
|
62.2
|
|
|
28.6
|
|
Acquisitions
|
6.9
|
|
|
12.3
|
|
Dispositions
|
(9.1
|
)
|
|
—
|
|
Payments
|
(70.1
|
)
|
|
(54.7
|
)
|
Translation adjustment
|
(2.5
|
)
|
|
(10.3
|
)
|
Ending balance, December 31
|
$
|
95.3
|
|
|
$
|
107.9
|
|
Acquisition activity in 2016 of
$6.9 million
relates to the Company's accrual for product issues that pre-dated the Company's 2015 acquisition of Remy. Disposition activity in 2016 of
$9.1 million
relates to the sale of the Remy light vehicle aftermarket business.
Acquisitions activity in 2015 of
$12.3 million
, relates to
$29.4 million
in warranty liability associated with the Company's purchase of Remy, partially offset by
$17.1 million
related to a significant settled warranty claim associated with a product issue that pre-dated the Company's 2014 acquisition of Gustav Wahler GmbH u. Co. KG and its general partner ("Wahler"). Including the impact of the reversal of a corresponding receivable, the Wahler settlement had an immaterial impact on the Consolidated Balance Sheet at December 31, 2015 and Consolidated Statement of Operations for the year ended December 31, 2015.
The Company’s warranty provision as a percentage of net sales has increased from
0.4%
as of December 31, 2015 to
0.7%
as of December 31, 2016. This change is primarily related to the Company’s fourth quarter 2015 acquisition of Remy. Furthermore, the Company's 2016 provision includes a
$5.2 million
warranty reversal related to the expiration of a Remy light vehicle aftermarket customer contract.
The product warranty liability is classified in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
Accounts payable and accrued expenses
|
$
|
63.9
|
|
|
$
|
70.6
|
|
Other non-current liabilities
|
31.4
|
|
|
37.3
|
|
Total product warranty liability
|
$
|
95.3
|
|
|
$
|
107.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 8
|
NOTES PAYABLE AND LONG-TERM DEBT
|
As of December 31, 2016 and 2015, the Company had short-term and long-term debt outstanding as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
Short-term debt
|
|
|
|
Short-term borrowings
|
$
|
156.5
|
|
|
$
|
280.7
|
|
|
|
|
|
Long-term debt
|
|
|
|
5.75% Senior notes due 11/01/16 ($150 million par value)
|
$
|
—
|
|
|
$
|
152.2
|
|
8.00% Senior notes due 10/01/19 ($134 million par value)
|
139.1
|
|
|
138.5
|
|
4.625% Senior notes due 09/15/20 ($250 million par value)
|
251.9
|
|
|
245.6
|
|
1.80% Senior notes due 11/7/22 (€500 million par value)
|
520.7
|
|
|
536.8
|
|
3.375% Senior notes due 03/15/25 ($500 million par value)
|
495.6
|
|
|
495.1
|
|
7.125% Senior notes due 02/15/29 ($121 million par value)
|
118.8
|
|
|
118.7
|
|
4.375% Senior notes due 03/15/45 ($500 million par value)
|
493.3
|
|
|
493.0
|
|
Term loan facilities and other
|
43.6
|
|
|
89.7
|
|
Total long-term debt
|
$
|
2,063.0
|
|
|
$
|
2,269.6
|
|
Less: current portion
|
19.4
|
|
|
160.7
|
|
Long-term debt, net of current portion
|
$
|
2,043.6
|
|
|
$
|
2,108.9
|
|
In July 2016, the Company terminated interest rate swaps which had the effect of converting
$384 million
of fixed rate notes to variable rates. The gain on the termination is being amortized into interest expense over the remaining terms of the notes. The value related to these swap terminations as of December 31, 2016 was
$3.9 million
and
$1.3 million
on the
4.625%
and
8.00%
notes, respectively, as an increase to the notes. The value of these interest rate swaps as of December 31, 2015 was
$1.9 million
and
$0.8 million
on the
4.625%
and
8.00%
notes, respectively, as a decrease to the notes.
The Company terminated fixed to floating interest rate swaps in 2009. The gain on the termination is being amortized into interest expense over the remaining term of the note. The value related to this swap termination at December 31, 2016 was
$4.1 million
on the
8.00%
note as an increase to the note. The value related to these swap terminations at December 31, 2015 was
$2.4 million
and
$5.5 million
on the
5.75%
and
8.00%
notes, respectively, as an increase to the notes.
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2016 and 2015 was
2.3%
and
1.3%
, respectively. The weighted average interest rate on all borrowings outstanding, including the effects of outstanding swaps, as of December 31, 2016 and 2015 was
3.8%
and
3.6%
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Annual principal payments required as of December 31, 2016 are as follows :
|
|
|
|
|
(millions of dollars)
|
|
2017
|
$
|
175.9
|
|
2018
|
17.1
|
|
2019
|
136.1
|
|
2020
|
252.1
|
|
2021
|
2.1
|
|
After 2021
|
1,647.4
|
|
Total payments
|
$
|
2,230.7
|
|
Less: unamortized discounts
|
11.2
|
|
Total
|
$
|
2,219.5
|
|
The Company's long-term debt includes various covenants, none of which are expected to restrict future operations.
The Company has a
$1 billion
multi-currency revolving credit facility which includes a feature that allows the Company's borrowings to be increased to
$1.25 billion
.
The facility provides for borrowings through June 30, 2019. The Company has one key financial covenant as part of the credit agreement which is a debt to EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") ratio.
The Company was in compliance with the financial covenant at December 31, 2016 and expects to remain compliant in future periods. At December 31, 2016 and December 31, 2015, the Company had no outstanding borrowings under this facility.
The Company's commercial paper program allows the Company to issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding of
$1 billion
.
Under this program, the Company may issue notes from time to time and will use the proceeds for general corporate purposes.
At December 31, 2016 and 2015, the Company had outstanding borrowings of
$50.8 million
and
$215.0 million
, respectively,
under this program, which is classified in the Consolidated Balance Sheets in Notes payable and other short-term debt.
The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed
$1 billion
.
As of December 31, 2016 and 2015, the estimated fair values of the Company's senior unsecured notes totaled
$2,081.4 million
and
$2,197.6 million
, respectively. The estimated fair values were
$62.0 million
and
$17.7 million
higher than their carrying value at December 31, 2016 and 2015, 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 approximates fair value. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.
The Company had outstanding letters of credit of
$32.3 million
and
$29.3 million
at December 31, 2016 and 2015, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 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).
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables classify assets and liabilities measured at fair value on a recurring basis as of December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
|
Balance at December 31, 2016
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
(millions of dollars)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
A
|
Foreign currency contracts
|
$
|
7.2
|
|
|
$
|
—
|
|
|
$
|
7.2
|
|
|
$
|
—
|
|
|
A
|
Other long-term receivables (insurance settlement agreement note receivable)
|
$
|
71.5
|
|
|
$
|
—
|
|
|
$
|
71.5
|
|
|
$
|
—
|
|
|
C
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
(millions of dollars)
|
Balance at December 31, 2015
|
|
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
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
2.7
|
|
|
$
|
—
|
|
|
A
|
Other long-term receivables (insurance settlement agreement note receivable)
|
$
|
81.2
|
|
|
$
|
—
|
|
|
$
|
81.2
|
|
|
$
|
—
|
|
|
C
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
8.7
|
|
|
$
|
—
|
|
|
$
|
8.7
|
|
|
$
|
—
|
|
|
A
|
Commodity contracts
|
$
|
10.4
|
|
|
$
|
—
|
|
|
$
|
10.4
|
|
|
$
|
—
|
|
|
A
|
Interest rate swap contracts
|
$
|
2.7
|
|
|
$
|
—
|
|
|
$
|
2.7
|
|
|
$
|
—
|
|
|
A
|
The following tables classify the Company's defined benefit plan assets measured at fair value on a recurring basis as of December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
(millions of dollars)
|
Balance at December 31, 2016
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
|
Assets measured at NAV (a)
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
113.8
|
|
|
$
|
15.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
A
|
|
98.5
|
|
Equity securities
|
94.2
|
|
|
37.2
|
|
|
—
|
|
|
—
|
|
|
A
|
|
57.0
|
|
Real estate and other
|
21.5
|
|
|
13.1
|
|
|
0.5
|
|
|
—
|
|
|
A
|
|
7.9
|
|
|
$
|
229.5
|
|
|
$
|
65.6
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
|
|
$
|
163.4
|
|
Non-U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
183.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
A
|
|
183.4
|
|
Equity securities
|
190.8
|
|
|
87.1
|
|
|
—
|
|
|
—
|
|
|
A
|
|
103.7
|
|
Real estate and other
|
19.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
A
|
|
19.6
|
|
|
$
|
393.8
|
|
|
$
|
87.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
306.7
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
(millions of dollars)
|
Balance at December 31, 2015
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
|
Assets measured at NAV (a)
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
117.4
|
|
|
$
|
14.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
A
|
|
103.1
|
|
Equity securities
|
94.2
|
|
|
36.9
|
|
|
—
|
|
|
—
|
|
|
A
|
|
57.3
|
|
Real estate and other
|
24.2
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
A
|
|
23.7
|
|
|
$
|
235.8
|
|
|
$
|
51.2
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
|
|
$
|
184.1
|
|
Non-U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
181.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
A
|
|
181.0
|
|
Equity securities
|
194.7
|
|
|
82.9
|
|
|
—
|
|
|
—
|
|
|
A
|
|
111.8
|
|
Real estate and other
|
19.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
A
|
|
19.4
|
|
|
$
|
395.1
|
|
|
$
|
82.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
312.2
|
|
________________
|
|
(a)
|
Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. These amounts represent investments in commingled and managed funds which have underlying assets in fixed income securities, equity securities, and other assets.
|
Refer to the Retirement Benefit Plans footnote to the Consolidated Financial Statements for more detail surrounding the defined plan’s asset investment policies and strategies, target allocation percentages and expected return on plan asset assumptions.
|
|
NOTE 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 may 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 December 31, 2016 and 2015, the Company had no derivative contracts that contained credit risk related contingent features.
The Company uses certain commodity derivative contracts to protect against commodity price changes related to forecasted raw material and supplies purchases. The Company primarily utilizes forward and option contracts, which are designated as cash flow hedges. At December 31, 2016 and 2015, the following commodity derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts
|
Commodity
|
Volume hedged December 31, 2016
|
|
Volume hedged December 31, 2015
|
|
Units of measure
|
|
Duration
|
Copper
|
213.8
|
|
|
6,273.2
|
|
|
Metric Tons
|
|
Dec -17
|
The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to optimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). In July 2016, the Company terminated the following interest swaps which were outstanding at December 31, 2015.
|
|
|
|
|
|
|
|
|
|
Interest rate swap contracts
|
(in millions)
|
Hedge Type
|
|
Notional Amount
|
|
Duration
|
Fixed to floating
|
Fair value
|
|
$
|
250.0
|
|
|
Sept - 20
|
Fixed to floating
|
Fair value
|
|
$
|
134.0
|
|
|
Oct - 19
|
The Company uses foreign currency forward and option contracts to protect against exchange rate movements for forecasted cash flows, including capital expenditures, purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. In addition, the Company uses foreign currency forward contracts to hedge exposure associated with our net investment in certain foreign operations (net investment hedges). The Company has also designated its Euro denominated debt as a net investment hedge of the Company's investment in a European subsidiary. Foreign currency derivative contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for the operating units’ local currency. At December 31, 2016 and December 31, 2015, the following foreign currency derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (in millions)
|
Functional currency
|
|
Traded currency
|
|
Notional in traded currency
December 31, 2016
|
|
Notional in traded currency
December 31, 2015
|
|
Duration
|
Chinese renminbi
|
|
Euro
|
|
—
|
|
|
30.5
|
|
|
Dec - 16
|
Chinese renminbi
|
|
US dollar
|
|
33.5
|
|
|
13.8
|
|
|
Dec - 17
|
Euro
|
|
British pound
|
|
4.2
|
|
|
—
|
|
|
Dec - 17
|
Euro
|
|
Hungarian forint
|
|
—
|
|
|
3,434.5
|
|
|
Dec - 16
|
Euro
|
|
Japanese yen
|
|
1,004.8
|
|
|
487.1
|
|
|
Dec - 17
|
Euro
|
|
Polish zloty
|
|
18.8
|
|
|
—
|
|
|
Dec - 17
|
Euro
|
|
US dollar
|
|
35.3
|
|
|
30.1
|
|
|
Dec - 17
|
Japanese yen
|
|
Chinese renminbi
|
|
68.7
|
|
|
92.6
|
|
|
Dec - 17
|
Japanese yen
|
|
Korean won
|
|
5,689.2
|
|
|
5,998.9
|
|
|
Dec - 17
|
Japanese yen
|
|
US dollar
|
|
2.0
|
|
|
3.0
|
|
|
Dec - 17
|
Korean won
|
|
Euro
|
|
—
|
|
|
2.5
|
|
|
Dec - 16
|
Korean won
|
|
Japanese yen
|
|
539.9
|
|
|
—
|
|
|
Dec - 17
|
Korean won
|
|
US dollar
|
|
14.2
|
|
|
77.9
|
|
|
Dec - 17
|
Mexican peso
|
|
US dollar
|
|
10.5
|
|
|
—
|
|
|
Dec - 17
|
Swedish krona
|
|
Euro
|
|
48.2
|
|
|
—
|
|
|
Dec - 17
|
US dollar
|
|
Mexican peso
|
|
—
|
|
|
469.0
|
|
|
Sept - 16
|
At December 31, 2016 and 2015, the following amounts were recorded in the Consolidated Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
(millions of dollars)
|
Location
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Location
|
|
December 31, 2016
|
|
December 31, 2015
|
Foreign currency
|
Prepayments and other current assets
|
|
$
|
7.2
|
|
|
$
|
2.7
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1.1
|
|
|
$
|
8.7
|
|
Commodity
|
Prepayments and other current assets
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
Accounts payable and accrued expenses
|
|
$
|
—
|
|
|
$
|
10.4
|
|
Interest rate swaps
|
Other non-current assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other non-current liabilities
|
|
$
|
—
|
|
|
$
|
2.7
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 December 31, 2016 market rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gain (loss) in AOCI at
|
|
Gain (loss) expected to be reclassified to income in one year or less
|
(millions of dollars)
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Foreign currency
|
|
$
|
5.6
|
|
|
$
|
(0.1
|
)
|
|
$
|
5.6
|
|
Commodity
|
|
(0.1
|
)
|
|
(2.1
|
)
|
|
(0.1
|
)
|
Net investment hedges
|
|
12.6
|
|
|
12.2
|
|
|
—
|
|
Foreign currency denominated debt
|
|
16.9
|
|
|
$
|
0.1
|
|
|
—
|
|
Total
|
|
$
|
35.0
|
|
|
$
|
10.1
|
|
|
$
|
5.5
|
|
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)
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
|
Location
|
|
2016
|
|
2015
|
|
Location
|
|
2016
|
|
2015
|
Foreign currency
|
|
Sales
|
|
$
|
(0.1
|
)
|
|
$
|
(1.4
|
)
|
|
SG&A expense
|
|
$
|
0.3
|
|
|
$
|
(0.5
|
)
|
Foreign currency
|
|
Cost of goods sold
|
|
$
|
1.4
|
|
|
$
|
7.2
|
|
|
SG&A expense
|
|
$
|
—
|
|
|
$
|
0.2
|
|
Commodity
|
|
Cost of goods sold
|
|
$
|
(1.4
|
)
|
|
$
|
(0.1
|
)
|
|
Cost of goods sold
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
Cross-currency swap
|
|
Interest
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
Interest expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
(millions of dollars)
|
|
|
|
Gain (loss) on swaps
|
|
Gain (loss) on borrowings
|
Income Statement Classification
|
|
|
|
Interest expense and finance charges
|
|
|
|
$
|
8.5
|
|
|
$
|
(8.5
|
)
|
At December 31, 2016, derivative instruments that were not designated as 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
$28.3 million
,
$28.0 million
and
$27.6 million
in the years ended December 31, 2016, 2015 and 2014, respectively.
The Company has a number of defined benefit pension plans and other postretirement employee benefit plans covering eligible salaried and hourly employees and their dependents. The defined pension benefits provided are primarily based on (i) years of service and (ii) average compensation or a monthly retirement
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
benefit amount. The Company provides defined benefit pension plans in France, Germany, Ireland, Italy, Japan, Mexico, Monaco, South Korea, Sweden, U.K. and the U.S. The other postretirement employee benefit plans, which provide medical benefits, are unfunded plans. All pension and other postretirement employee benefit plans in the U.S. have been closed to new employees. The measurement date for all plans is December 31.
During the fourth quarter of 2015, the Company settled approximately
$48 million
of its projected benefit obligation by transferring approximately
$48 million
in plan assets through a lump-sum pension de-risking disbursement made to an insurance company. This agreement unconditionally and irrevocably guarantees all future payments to certain participants that were receiving payments from the U.S. pension plan. The insurance company assumes all investment risk associated with the assets that were delivered as part of this transaction. As a result, the Company recorded a non-cash settlement loss of
$25.7 million
related to the accelerated recognition of unamortized losses
.
During
the third quarter of 2014, the Company discharged certain U.S. pension plan obligations by making lump-sum payments to former employees of the Company. As a result of this action, the Company recorded a settlement loss of
$3.1 million
in the U.S. pension plan.
The following table summarizes the expenses for the Company's defined contribution and defined benefit pension plans and the other postretirement defined employee benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
|
2014
|
Defined contribution expense
|
$
|
28.3
|
|
|
$
|
28.0
|
|
|
$
|
27.6
|
|
Defined benefit pension expense
|
10.1
|
|
|
35.5
|
|
|
18.6
|
|
Other postretirement employee benefit expense
|
1.4
|
|
|
3.3
|
|
|
3.3
|
|
Total
|
$
|
39.8
|
|
|
$
|
66.8
|
|
|
$
|
49.5
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following provides a roll forward of the plans’ benefit obligations, plan assets, funded status and recognition in the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement
|
|
Year Ended December 31,
|
|
employee benefits
|
|
2016
|
|
2015
|
|
Year Ended December 31,
|
(millions of dollars)
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2016
|
|
2015
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, January 1
|
$
|
300.7
|
|
|
$
|
508.5
|
|
|
$
|
306.2
|
|
|
$
|
527.8
|
|
|
$
|
145.3
|
|
|
$
|
169.7
|
|
Service cost
|
—
|
|
|
16.2
|
|
|
—
|
|
|
14.9
|
|
|
0.2
|
|
|
0.2
|
|
Interest cost
|
9.6
|
|
|
12.5
|
|
|
11.2
|
|
|
14.1
|
|
|
4.0
|
|
|
5.7
|
|
Plan participants’ contributions
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Plan amendments
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlement and curtailment
|
—
|
|
|
(1.3
|
)
|
|
(48.1
|
)
|
|
(4.7
|
)
|
|
—
|
|
|
—
|
|
Actuarial (gain) loss
|
(5.7
|
)
|
|
70.2
|
|
|
(12.1
|
)
|
|
(9.0
|
)
|
|
(14.4
|
)
|
|
(16.8
|
)
|
Currency translation
|
—
|
|
|
(45.3
|
)
|
|
—
|
|
|
(42.9
|
)
|
|
—
|
|
|
—
|
|
(Divestiture) Acquisition
|
—
|
|
|
(12.8
|
)
|
|
68.1
|
|
|
23.9
|
|
|
—
|
|
|
1.7
|
|
Benefits paid
|
(22.1
|
)
|
|
(20.4
|
)
|
|
(24.6
|
)
|
|
(15.9
|
)
|
|
(15.2
|
)
|
|
(15.2
|
)
|
Projected benefit obligation, December 31
|
$
|
282.5
|
|
|
$
|
528.2
|
|
|
$
|
300.7
|
|
|
$
|
508.5
|
|
|
$
|
119.9
|
|
|
$
|
145.3
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, January 1
|
$
|
235.8
|
|
|
$
|
395.1
|
|
|
$
|
265.6
|
|
|
$
|
395.6
|
|
|
|
|
|
|
|
Actual return on plan assets
|
12.7
|
|
|
54.0
|
|
|
(0.6
|
)
|
|
10.3
|
|
|
|
|
|
|
|
Employer contribution
|
2.7
|
|
|
17.0
|
|
|
—
|
|
|
19.3
|
|
|
|
|
|
|
|
Plan participants’ contribution
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.3
|
|
|
|
|
|
|
|
Settlements
|
—
|
|
|
(1.3
|
)
|
|
(48.1
|
)
|
|
(2.5
|
)
|
|
|
|
|
|
|
Currency translation
|
—
|
|
|
(40.8
|
)
|
|
—
|
|
|
(30.8
|
)
|
|
|
|
|
|
|
(Divestiture) Acquisition
|
—
|
|
|
(10.2
|
)
|
|
43.5
|
|
|
18.8
|
|
|
|
|
|
|
|
Benefits paid
|
(21.7
|
)
|
|
(20.4
|
)
|
|
(24.6
|
)
|
|
(15.9
|
)
|
|
|
|
|
|
|
Fair value of plan assets, December 31
|
$
|
229.5
|
|
|
$
|
393.8
|
|
|
$
|
235.8
|
|
|
$
|
395.1
|
|
|
|
|
|
Funded status
|
$
|
(53.0
|
)
|
|
$
|
(134.4
|
)
|
|
$
|
(64.9
|
)
|
|
$
|
(113.4
|
)
|
|
$
|
(119.9
|
)
|
|
$
|
(145.3
|
)
|
Amounts in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
$
|
—
|
|
|
$
|
4.9
|
|
|
$
|
—
|
|
|
$
|
9.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(0.1
|
)
|
|
(3.5
|
)
|
|
(0.3
|
)
|
|
(3.0
|
)
|
|
(14.5
|
)
|
|
(16.8
|
)
|
Non-current liabilities
|
(52.9
|
)
|
|
(135.8
|
)
|
|
(64.6
|
)
|
|
(119.8
|
)
|
|
(105.4
|
)
|
|
(128.5
|
)
|
Net amount
|
$
|
(53.0
|
)
|
|
$
|
(134.4
|
)
|
|
$
|
(64.9
|
)
|
|
$
|
(113.4
|
)
|
|
$
|
(119.9
|
)
|
|
$
|
(145.3
|
)
|
Amounts in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
116.9
|
|
|
$
|
163.7
|
|
|
$
|
125.4
|
|
|
$
|
144.2
|
|
|
$
|
19.9
|
|
|
$
|
36.5
|
|
Net prior service (credit) cost
|
(7.4
|
)
|
|
0.8
|
|
|
(8.2
|
)
|
|
0.7
|
|
|
(19.2
|
)
|
|
(24.0
|
)
|
Net amount*
|
$
|
109.5
|
|
|
$
|
164.5
|
|
|
$
|
117.2
|
|
|
$
|
144.9
|
|
|
$
|
0.7
|
|
|
$
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated benefit obligation for all plans
|
$
|
282.5
|
|
|
$
|
505.5
|
|
|
$
|
300.7
|
|
|
$
|
486.2
|
|
|
|
|
|
|
|
________________
|
|
*
|
AOCI shown above does not include our equity investee, NSK-Warner. NSK-Warner had an AOCI loss of
$10.8 million
and
$7.1 million
at December 31, 2016 and 2015, respectively.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The funded status of pension plans with accumulated benefit obligations in excess of plan assets at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
Accumulated benefit obligation
|
$
|
(594.0
|
)
|
|
$
|
(597.6
|
)
|
Plan assets
|
423.3
|
|
|
431.0
|
|
Deficiency
|
$
|
(170.7
|
)
|
|
$
|
(166.6
|
)
|
Pension deficiency by country:
|
|
|
|
|
|
United States
|
$
|
(53.0
|
)
|
|
$
|
(64.9
|
)
|
Germany
|
(77.5
|
)
|
|
(64.3
|
)
|
Other
|
(40.2
|
)
|
|
(37.4
|
)
|
Total pension deficiency
|
$
|
(170.7
|
)
|
|
$
|
(166.6
|
)
|
The weighted average asset allocations of the Company’s funded pension plans and target allocations by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Target Allocation
|
|
2016
|
|
2015
|
|
U.S. Plans:
|
|
|
|
|
|
|
|
Real estate and other
|
9
|
%
|
|
12
|
%
|
|
0% - 14%
|
Fixed income securities
|
50
|
%
|
|
53
|
%
|
|
41% - 61%
|
Equity securities
|
41
|
%
|
|
35
|
%
|
|
30% - 50%
|
|
100
|
%
|
|
100
|
%
|
|
|
Non-U.S. Plans:
|
|
|
|
|
|
|
|
Real estate and other
|
5
|
%
|
|
5
|
%
|
|
0% - 6%
|
Fixed income securities
|
47
|
%
|
|
46
|
%
|
|
43% - 53%
|
Equity securities
|
48
|
%
|
|
49
|
%
|
|
46% - 56%
|
|
100
|
%
|
|
100
|
%
|
|
|
The Company's investment strategy is to maintain actual asset weightings within a preset range of target allocations. The Company believes these ranges represent an appropriate risk profile for the planned benefit payments of the plans based on the timing of the estimated benefit payments. In each asset category, separate portfolios are maintained for additional diversification. Investment managers are retained in each asset category to manage each portfolio against its benchmark. Each investment manager has appropriate investment guidelines. In addition, the entire portfolio is evaluated against a relevant peer group. The defined benefit pension plans did not hold any Company securities as investments as of December 31, 2016 and 2015. A portion of pension assets is invested in common and commingled trusts.
In December 2014, the Company made a discretionary contribution of
$30.2 million
to its German pension plans.
The Company expects to contribute a total of
$15 million
to
$25 million
into its defined benefit pension plans during 2017. Of the
$15 million
to
$25 million
in projected 2017 contributions,
$3.2 million
are contractually obligated, while any remaining payments would be discretionary.
Refer to the Fair Value Measurements footnote to the Consolidated Financial Statements for more detail surrounding the fair value of each major category of plan assets as well as the inputs and valuation techniques used to develop the fair value measurements of the plans' assets at December 31, 2016 and 2015.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See the table below for a breakout of net periodic benefit cost between U.S. and non-U.S. pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement employee benefits
|
|
Year Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
|
Year Ended December 31,
|
(millions of dollars)
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
$
|
—
|
|
|
$
|
16.2
|
|
|
$
|
—
|
|
|
$
|
14.9
|
|
|
$
|
—
|
|
|
$
|
12.8
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
Interest cost
|
9.6
|
|
|
12.5
|
|
|
11.2
|
|
|
14.1
|
|
|
12.1
|
|
|
18.1
|
|
|
4.0
|
|
|
5.7
|
|
|
6.7
|
|
Expected return on plan assets
|
(15.0
|
)
|
|
(24.3
|
)
|
|
(17.0
|
)
|
|
(24.8
|
)
|
|
(17.6
|
)
|
|
(21.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements, curtailments and other
|
—
|
|
|
—
|
|
|
25.7
|
|
|
(0.8
|
)
|
|
3.1
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service (credit) cost
|
(0.8
|
)
|
|
0.6
|
|
|
(0.8
|
)
|
|
0.1
|
|
|
(0.8
|
)
|
|
—
|
|
|
(4.9
|
)
|
|
(5.7
|
)
|
|
(6.4
|
)
|
Amortization of unrecognized loss
|
5.1
|
|
|
6.2
|
|
|
6.3
|
|
|
6.6
|
|
|
6.5
|
|
|
4.8
|
|
|
2.1
|
|
|
3.1
|
|
|
2.7
|
|
Net periodic (income) cost
|
$
|
(1.1
|
)
|
|
$
|
11.2
|
|
|
$
|
25.4
|
|
|
$
|
10.1
|
|
|
$
|
3.3
|
|
|
$
|
15.3
|
|
|
$
|
1.4
|
|
|
$
|
3.3
|
|
|
$
|
3.3
|
|
The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is
$11.6 million
. The estimated net loss and prior service credit for the other postretirement employee benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are
$1.3 million
and
$4.1 million
, respectively.
The Company's weighted-average assumptions used to determine the benefit obligations for its defined benefit pension and other postretirement employee benefit plans as of December 31, 2016 and 2015 were as follows:
|
|
|
|
|
|
December 31,
|
(percent)
|
2016
|
|
2015
|
U.S. pension plans:
|
|
|
|
Discount rate
|
3.94
|
|
4.15
|
Rate of compensation increase
|
N/A
|
|
N/A
|
U.S. other postretirement employee benefit plans:
|
|
|
|
Discount rate
|
3.61
|
|
3.84
|
Rate of compensation increase
|
N/A
|
|
N/A
|
Non-U.S. pension plans:
|
|
|
|
Discount rate
|
2.25
|
|
2.99
|
Rate of compensation increase
|
3.00
|
|
3.01
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s weighted-average assumptions used to determine the net periodic benefit cost for its defined benefit pension and other postretirement employee benefit plans for the years ended December 31, 2016, 2015 and 2014 were as follows:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(percent)
|
2016
|
|
2015
|
|
2014
|
U.S. pension plans:
|
|
|
|
|
|
Discount rate
|
4.15
|
|
3.89
|
|
4.41
|
Rate of compensation increase
|
N/A
|
|
N/A
|
|
N/A
|
Expected return on plan assets
|
6.70
|
|
6.71
|
|
6.75
|
U.S. other postretirement plans:
|
|
|
|
|
|
Discount rate
|
3.84
|
|
3.50
|
|
4.00
|
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
|
2.99
|
|
2.84
|
|
3.90
|
Rate of compensation increase
|
3.01
|
|
2.84
|
|
2.77
|
Expected return on plan assets
|
6.41
|
|
6.53
|
|
6.24
|
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 Company determines its expected return on plan asset assumptions by evaluating estimates of future market returns and the plans' asset allocation. The Company also considers the impact of active management of the plans' invested assets.
The estimated future benefit payments for the pension and other postretirement employee benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement employee benefits
|
(millions of dollars)
|
|
|
|
|
|
Year
|
|
U.S.
|
|
Non-U.S.
|
|
2017
|
|
$
|
22.8
|
|
|
$
|
17.7
|
|
|
$
|
14.8
|
|
2018
|
|
19.8
|
|
|
18.7
|
|
|
13.7
|
|
2019
|
|
19.7
|
|
|
17.3
|
|
|
12.6
|
|
2020
|
|
19.6
|
|
|
19.1
|
|
|
12.1
|
|
2021
|
|
19.3
|
|
|
19.5
|
|
|
11.0
|
|
2022-2026
|
|
89.8
|
|
|
110.7
|
|
|
39.6
|
|
The weighted-average rate of increase in the per capita cost of covered health care benefits is projected to be
6.79%
in 2017 for pre-65 and post-65 participants, decreasing to
5.0%
by the year 2022. 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 postretirement employee benefit obligation
|
$
|
7.9
|
|
|
$
|
(7.0
|
)
|
Effect on total service and interest cost components
|
$
|
0.3
|
|
|
$
|
(0.3
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 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 generally 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 first anniversary date of the grant. In February 2014, the Company's Board of Directors replaced the expired 2004 Plan by adopting the BorgWarner Inc. 2014 Stock Incentive Plan ("2014 Plan"). On April 30, 2014, the Company's stockholders approved the 2014 Plan. Under the 2014 Plan, approximately
8 million
shares are authorized for grant, of which approximately
5.7 million
shares are available for future issuance as of December 31, 2016.
Stock Options
A summary of the plans’ shares under option at December 31, 2016, 2015 and 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (thousands)
|
|
Weighted average exercise price
|
|
Weighted average remaining contractual life
(in years)
|
|
Aggregate intrinsic value
(in millions)
|
Outstanding at January 1, 2014
|
1,997
|
|
|
$
|
15.82
|
|
|
2.6
|
|
$
|
80.0
|
|
Exercised
|
(283
|
)
|
|
$
|
14.04
|
|
|
|
|
$
|
13.8
|
|
Outstanding at December 31, 2014
|
1,714
|
|
|
$
|
16.11
|
|
|
1.7
|
|
$
|
66.5
|
|
Exercised
|
(440
|
)
|
|
$
|
14.76
|
|
|
|
|
$
|
19.2
|
|
Forfeited
|
(7
|
)
|
|
$
|
14.52
|
|
|
|
|
|
Outstanding at December 31, 2015
|
1,267
|
|
|
$
|
16.59
|
|
|
0.9
|
|
$
|
33.7
|
|
Exercised
|
(794
|
)
|
|
$
|
16.07
|
|
|
|
|
$
|
14.4
|
|
Outstanding at December 31, 2016
|
473
|
|
|
$
|
17.47
|
|
|
0.1
|
|
$
|
10.4
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2016
|
473
|
|
|
$
|
17.47
|
|
|
0.1
|
|
$
|
10.4
|
|
Proceeds from stock option exercises for the years ended December 31, 2016, 2015 and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
|
2014
|
Proceeds from stock options exercised — gross
|
$
|
12.7
|
|
|
$
|
6.5
|
|
|
$
|
4.0
|
|
Tax benefit
|
0.3
|
|
|
10.3
|
|
|
12.9
|
|
Proceeds from stock options exercised, net of tax
|
$
|
13.0
|
|
|
$
|
16.8
|
|
|
$
|
16.9
|
|
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 2016, restricted stock in the amount of
698,788
shares and
25,048
shares was granted to employees and non-employee directors, respectively. The value of the awards is recognized as compensation expense ratably over the restriction periods. As of December 31, 2016, there was
$25.6 million
of unrecognized compensation expense that will be recognized over a weighted average period of approximately
2 years
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted stock compensation expense recorded in the Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars, except per share data)
|
2016
|
|
2015
|
|
2014
|
Restricted stock compensation expense
|
$
|
26.7
|
|
|
$
|
28.0
|
|
|
$
|
20.7
|
|
Restricted stock compensation expense, net of tax
|
$
|
19.5
|
|
|
$
|
20.4
|
|
|
$
|
15.1
|
|
A summary of the status of the Company’s nonvested restricted stock for employees and non-employee directors at December 31, 2016, 2015 and 2014 is as follows:
|
|
|
|
|
|
|
|
|
Shares subject to restriction
(thousands)
|
|
Weighted average price
|
Nonvested at January 1, 2014
|
1,411
|
|
|
$
|
37.86
|
|
Granted
|
447
|
|
|
$
|
54.36
|
|
Vested
|
(530
|
)
|
|
$
|
37.42
|
|
Forfeited
|
(62
|
)
|
|
$
|
41.14
|
|
Nonvested at December 31, 2014
|
1,266
|
|
|
$
|
43.57
|
|
Granted
|
687
|
|
|
$
|
58.45
|
|
Vested
|
(588
|
)
|
|
$
|
39.14
|
|
Forfeited
|
(39
|
)
|
|
$
|
50.85
|
|
Nonvested at December 31, 2015
|
1,326
|
|
|
$
|
53.18
|
|
Granted
|
724
|
|
|
$
|
30.07
|
|
Vested
|
(551
|
)
|
|
$
|
47.55
|
|
Forfeited
|
(70
|
)
|
|
$
|
43.05
|
|
Nonvested at December 31, 2016
|
1,429
|
|
|
$
|
44.12
|
|
Total Shareholder Return Performance Share Plans
The 2004 and 2014 Plans provide for awarding of performance shares to members of senior management at the end of successive three-year periods based on the Company's performance in terms of total shareholder relative to a peer group of automotive companies.
The Company recognizes compensation expense relating to its performance share plans ratably over the performance period. Compensation expense associated with the performance share plans is calculated using a lattice model (Monte Carlo simulation). The amounts expensed under the plan and the common stock issuances for the three-year measurement periods ended December 31, 2016, 2015 and 2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars, except share data)
|
2016
|
|
2015
|
|
2014
|
Expense
|
$
|
9.6
|
|
|
$
|
12.2
|
|
|
$
|
11.4
|
|
Number of shares
|
—
|
|
|
—
|
|
|
—
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Relative Revenue Growth Performance Share Plans
In the second quarter of 2016, the Company started a new performance share program to reward members of senior management based on the Company's performance in terms of revenue growth relative to the vehicle market over three-year performance periods. The value of this performance share is determined by the market value of the Company’s common stock at the date of grant. The Company recognizes compensation expense relating to its performance share plans over the performance period based on the number of shares expected to vest at the end of each reporting period. Total compensation expense was
$7.1 million
for the year ended December 31, 2016 with approximately
115,000
shares to be paid out in February 2017.
NOTE 13 ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the activity within accumulated other comprehensive loss during the years ended December 31, 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
Beginning Balance, January 1, 2014
|
|
$
|
181.1
|
|
|
$
|
(16.0
|
)
|
|
$
|
(181.5
|
)
|
|
$
|
2.4
|
|
|
$
|
(14.0
|
)
|
Comprehensive (loss) income before reclassifications
|
|
(341.8
|
)
|
|
26.7
|
|
|
(73.8
|
)
|
|
0.3
|
|
|
(388.6
|
)
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
—
|
|
|
(9.6
|
)
|
|
23.3
|
|
|
—
|
|
|
13.7
|
|
Reclassification from accumulated other comprehensive (loss) income
|
|
—
|
|
|
0.6
|
|
|
6.8
|
|
|
—
|
|
|
7.4
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
—
|
|
|
(2.1
|
)
|
|
—
|
|
|
(2.1
|
)
|
Ending Balance December 31, 2014
|
|
$
|
(160.7
|
)
|
|
$
|
1.7
|
|
|
$
|
(227.3
|
)
|
|
$
|
2.7
|
|
|
$
|
(383.6
|
)
|
Comprehensive (loss) income before reclassifications
|
|
(260.5
|
)
|
|
2.6
|
|
|
44.9
|
|
|
0.2
|
|
|
(212.8
|
)
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
—
|
|
|
(1.6
|
)
|
|
(14.3
|
)
|
|
—
|
|
|
(15.9
|
)
|
Reclassification from accumulated other comprehensive (loss) income
|
|
—
|
|
|
(6.1
|
)
|
|
9.6
|
|
|
—
|
|
|
3.5
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
1.4
|
|
|
(2.8
|
)
|
|
—
|
|
|
(1.4
|
)
|
Ending Balance December 31, 2015
|
|
$
|
(421.2
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
(189.9
|
)
|
|
$
|
2.9
|
|
|
$
|
(610.2
|
)
|
Comprehensive (loss) income before reclassifications
|
|
(109.1
|
)
|
|
8.0
|
|
|
(11.4
|
)
|
|
(1.6
|
)
|
|
(114.1
|
)
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
—
|
|
|
(0.7
|
)
|
|
(2.6
|
)
|
|
—
|
|
|
(3.3
|
)
|
Reclassification from accumulated other comprehensive (loss) income
|
|
—
|
|
|
0.1
|
|
|
8.3
|
|
|
—
|
|
|
8.4
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
(0.4
|
)
|
|
(2.5
|
)
|
|
—
|
|
|
(2.9
|
)
|
Ending Balance December 31, 2016
|
|
$
|
(530.3
|
)
|
|
$
|
5.0
|
|
|
$
|
(198.1
|
)
|
|
$
|
1.3
|
|
|
$
|
(722.1
|
)
|
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 asbestos 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 continued. On December 5, 2016, the Court granted the Company’s Motion for Summary Judgment and ordered dismissal of the retirees’ Complaint with prejudice. No appeal was filed on behalf of the retirees and the time to file an appeal has expired.
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
$6.3 million
and
$5.4 million
at December 31, 2016 and at December 31, 2015, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 (the “Indemnity Action”) and a related lawsuit. On September 28, 2015, the parties entered into a confidential settlement agreement that, among other things, released and terminated all of BorgWarner’s indemnity obligations. Pursuant to the settlement agreement, the parties voluntarily dismissed the Indemnity Action on September 29, 2015 and the related lawsuit was dismissed on October 13, 2015. The Company continues to pursue insurance coverage actions for reimbursement of amounts it spent under the indemnity. The Company may in the future become subject to further legal proceedings.
Asbestos-related Liability
Like many other industrial companies that have historically operated in the United States, the Company, or parties that the Company is obligated to indemnify, continues to be named as one of many defendants in asbestos-related personal injury actions. We believe that the Company’s involvement is limited because these claims generally relate to a few types of automotive products that were manufactured over
30
years ago and contained encapsulated asbestos. The nature of the fibers, the encapsulation of the asbestos, and the manner of the products’ use all lead the Company to believe that these products were and are highly unlikely to cause harm. Furthermore, the useful life of nearly all of these products expired many years ago.
As of December 31, 2016 and 2015, the Company had approximately
9,400
and
10,100
pending asbestos-related claims, respectively. The decrease in the number of pending claims is primarily a result of the Company’s continued efforts to obtain dismissal of dormant claims. It is probable that additional asbestos-related claims will be asserted against the Company in the future. The Company vigorously defends against these claims, and has been successful in obtaining the dismissal of the majority of the claims asserted against it without any payment. The Company likewise expects that the vast majority of the pending asbestos-related claims in which it has been named (or has an obligation to indemnify a party which has been named), and asbestos-related claims that may be asserted in the future, will result in no payment being made by the Company or its insurers.
In 2016, of the approximately
2,800
claims resolved,
352
(
13%
) resulted in payment being made to a claimant by or on behalf of the Company. In 2015, of the approximately
5,300
claims resolved,
349
(
7%
) resulted in payment being made to a claimant by or on behalf of the Company. The comparatively large number of claims resolved in 2015 reflected the Company’s efforts to dismiss large numbers of inactive or otherwise unmeritorious claims in order to be better positioned to evaluate remaining and future claims, while the smaller number of total claims resolved in 2016 reflects in part the outcome of those efforts.
Through December 31, 2016 and 2015, the Company had accrued and paid
$477.7 million
and
$432.7 million
in indemnity (including settlement payments) and defense costs in connection with asbestos-related claims, respectively.
During 2016 and 2015, the Company had paid indemnity and related defense costs totaling
$45.3 million
and
$54.7 million
, respectively. These gross payments are before tax benefits and any insurance receipts. Indemnity and defense costs are incorporated into the Company's operating cash flows and will continue to be in the future.
The Company reviews, on an ongoing basis, its own experience in handling asbestos-related claims and trends affecting asbestos-related claims in the U.S. tort system generally, for the purposes of assessing the value of pending asbestos-related claims and the number and value of those that may be asserted in the future, as well as potential recoveries from the Company’s insurers with respect to such claims and defense costs. As of December 31, 2015, the Company also recorded an estimated liability of
$108.5 million
for asbestos-related claims asserted but not yet resolved and their associated defense costs. The Company further stated that, as of that date, its ultimate liability could not be reasonably estimated in excess of the amounts it had then accrued for claims that had been resolved and the estimated liability for claims asserted but not yet resolved and their associated defense costs. The inability to arrive at a reasonable estimate of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the liability for potential asbestos-related claims that may be asserted in the future was based on, among other factors, the volatility in the number and type of asbestos claims that may be asserted, changes in asbestos-related litigation in the United States, the significant number of co-defendants that have filed for bankruptcy, the magnitude and timing of co-defendant bankruptcy trust payments, the inherent uncertainty of future disease incidence and claiming patterns against the Company, and the impact of tort reform legislation that may be enacted at the state or federal levels.
The Company has continued efforts to evaluate these factors and, if possible, arrive at a reasonable estimate of the number and value of potential future asbestos-related claims. In recent years, there have been more observable trends in the Company’s claims data that would indicate that claiming patterns against the Company have stabilized. Concurrently, in recent years, the Company has made enhancements to the management and analysis of asbestos-related claims, including specifically: the engagement of new National Coordinating Counsel with significant asbestos litigation experience and a global presence, the engagement of several new local counsel panels; outsourcing administration and claims handling to a third party; implementing various improvements in the processing of asbestos-related claims so as to allow the Company’s management to have greater real-time insight into the handling of individual asbestos-related claims; and increasing audits and compliance reviews of counsel handling asbestos-related claims. This process has as of the end of 2016 resulted in improvements in both the quantity and the quality of the information available to the Company’s management respecting individual asbestos-related claims and their handling and disposition. This process has also resulted, in the Company’s view, in an increased ability to reasonably forecast the aggregate number of potential future asbestos-related claims that may be asserted against the Company.
The Company has further engaged in a sustained effort to obtain the dismissal of thousands of dormant asbestos-related product liability claims, which has resulted in a reduction in the number of its pending claims by
48 percent
over the past few years. Legislative and judicial developments affecting the U.S. tort system generally, including medical criteria legislation, procedural reforms, and docket control measures relating to so-called unimpaired claims, have also stabilized certain aspects of the Company’s defense efforts respecting asbestos-related claims and allowed the Company greater insight into the number and value of potential future claims in recent years.
As part of its review and assessment of asbestos-related claims, the Company hired a third party consultant in the third quarter of 2016 to further assist in the analysis of potential future asbestos-related claims. The consultant’s work utilized the updated data and analysis resulting from the Company’s claim review process and included the development of an estimate of the potential value of asbestos-related claims asserted but not yet resolved as well as the number and potential value of asbestos-related claims not yet asserted. The Company determined based on the factors described above, including the analysis and input of the consultant, that its best estimate of the aggregate liability both for asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet asserted, including an estimate for defense costs, is
$879.3 million
as of December 31, 2016. This liability reflects the actuarial central estimate, which is intended to represent an expected value of the most probable outcome. This estimate is not discounted to present value and includes an estimate of liability for potential future claims not yet asserted through December 31, 2059 with a runoff through 2067. The Company currently believes that December 31, 2067 is a reasonable assumption as to the last date on which it is likely to have resolved all asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood of incidence of asbestos-related disease in the U.S. population generally.
In developing the estimate of liability for potential future claims, the third-party consultant projected a potential number of future claims based on the Company’s historical claim filings and patterns and compared that to anticipated levels of unique plaintiff asbestos-related claims asserted in the U.S. tort system against all defendants. The consultant also utilized assumptions based on the Company’s historical proportion of claims resolved without payment, historical settlement costs for those claims that result in a payment, and historical defense costs. The liabilities were then estimated by multiplying the pending and projected future
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
claim filings by projected payments rates and average settlement amounts and then adding an estimate for defense costs.
The Company’s estimate of the indemnity and defense costs for asbestos-related claims asserted but not yet resolved and potential claims not yet asserted is its best estimate of such costs. That estimate is subject to numerous uncertainties. These include future legislative or judicial changes affecting the U.S. tort system, bankruptcy proceedings involving one or more co-defendants, the impact and timing of payments from bankruptcy trusts that presently exist and those that may exist in the future, disease emergence and associated claim filings, the impact of future settlements or significant judgments, changes in the medical condition of claimants, changes in the treatment of asbestos-related disease, and any changes in settlement or defense strategies. The amount recorded at December 31, 2016 for asbestos-related claims is based on currently available information and assumptions that the Company believes are reasonable. Any amounts that are reasonably possible of occurring in excess of amounts recorded are believed to not be significant. The various assumptions utilized in arriving at the Company’s estimate the number of future claims that may be asserted, the percentage of claims that may result in a payment, the average cost to resolve such claims, and potential defense costs - may also change over time, and the Company’s actual liability for asbestos-related claims asserted but not yet resolved and those not yet asserted may be higher or lower than the estimate provided herein as a result of such changes.
The Company has certain insurance coverage applicable to asbestos-related claims. Prior to June 2004, the settlement and defense costs associated with all asbestos-related claims were paid by the Company's primary layer insurance carriers under a series of interim funding arrangements. In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion of their policy limits. A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies against the Company and certain of its historical general liability insurers. The Cook County court has issued a number of interim rulings and discovery is continuing in this proceeding. The Company is vigorously pursuing the litigation against all carriers that are parties to it, as well as pursuing settlement discussions with its carriers where appropriate. The Company has entered into settlement agreements with certain of its insurance carriers, resolving such insurance carriers’ coverage disputes through the carriers’ agreement to pay specified amounts to the Company, either immediately or over a specified period.
Through December 31, 2016 and 2015, the Company had received
$270.0 million
and
$263.9 million
in cash and notes from insurers, respectively, on account of indemnity and defense costs respecting asbestos-related claims. The Company additionally recorded assets as of December 31, 2015 in the amount of (i)
$168.8 million
, representing the difference between the
$432.7 million
in defense and indemnity costs paid by the Company as of December 31, 2015 for asbestos-related claims and the
$263.9 million
received from insurers prior to that date, and (ii)
$108.5 million
, representing the then-estimated amount of asbestos-related claims asserted but not yet resolved for which the Company believes it has insurance coverage. In each case, such amounts were expected to be fully recovered.
The Company continues to have additional excess insurance coverage available for potential future asbestos-related claims. In connection with the Company’s ongoing review of its asbestos-related claims, the Company also reviewed the amount of its potential insurance coverage for such claims, taking into account the remaining limits of such coverage, the number and amount of claims on our insurance from co-insured parties, ongoing litigation against the Company’s insurers described above, potential remaining recoveries from insolvent insurers, the impact of previous insurance settlements, and coverage available from solvent insurers not party to the coverage litigation. Based on that review, the Company estimates as of December 31, 2016 that it has
$386.4 million
in aggregate insurance coverage available with respect to asbestos-related claims already satisfied by the Company but not yet reimbursed by the insurers, asbestos-related claims asserted but not yet resolved, and asbestos-related claims not yet asserted, in each case together with their associated defense costs. In each case, such amounts are expected to be fully recovered. However, the resolution of the insurance coverage litigation, and the number and amount of claims on our
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
insurance from co-insured parties, may increase or decrease the amount of insurance coverage available to us for asbestos-related claims from the estimates discussed above.
As a result of all of the foregoing estimates of asbestos-related liabilities and related insurance assets, the Company in the fourth quarter of 2016 recorded a charge of
$703.6 million
before tax, or
$440.6 million
after tax, resulting from the difference in the total liability from what was previously accrued, consulting fees, less available insurance coverage.
The amounts recorded in the Consolidated Balance Sheets respecting asbestos-related claims are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
Assets:
|
|
|
|
|
|
Non-current assets
|
$
|
386.4
|
|
|
$
|
277.3
|
|
Total insurance assets
|
$
|
386.4
|
|
|
$
|
277.3
|
|
Liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
51.7
|
|
|
$
|
47.7
|
|
Other non-current liabilities
|
827.6
|
|
|
60.8
|
|
Total accrued liabilities
|
$
|
879.3
|
|
|
$
|
108.5
|
|
NOTE 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
three
labor unions at separate facilities in Western Europe for approximately
450
employees. The Company recorded restructuring expense related to these facilities of
$8.2 million
,
$28.0 million
and
$61.8 million
in the years ended December 31, 2016, 2015 and 2014, respectively. Included in this restructuring expense are employee termination benefits of
$3.0 million
,
$20.1 million
and
$50.6 million
, respectively, and other expense of
$5.2 million
,
$7.9 million
and
$11.2 million
, respectively.
In the second quarter of 2014, the Company initiated actions to improve the future profitability and competitiveness of Gustav Wahler GmbH u. Co. KG and its general partner ("Wahler"). The Company recorded restructuring expense related to Wahler of
$9.6 million
,
$11.6 million
and
$6.5 million
in the years ended December 31, 2016, 2015 and 2014, respectively. These restructuring expenses are primarily related to employee termination benefits. These termination benefits relate to approximately
70
employees in Germany and Brazil in 2015 and
95
employees in Germany, Brazil, China and the U.S. in 2014.
The Company recorded restructuring expense of
$12.5 million
and
$12.0 million
in the years ended December 31, 2015 and 2014, respectively, related to a global realignment plan intended to enhance treasury management flexibility by creating a legal entity structure that better aligns with the Company's business strategy.
In the fourth quarter of 2015, the Company acquired
100%
of the equity interests in Remy and initiated actions to improve future profitability and competitiveness. The Company recorded restructuring expense of
$6.1 million
and
$10.1 million
in the years ended December 31, 2016 and 2015, respectively. Included in this restructuring expense is
$3.1 million
in the year ended December 31, 2016 related to winding down certain operations in North America. Additionally, the Company recorded employee termination benefits of
$2.0 million
and
$10.1 million
in the years ended December 31, 2016 and 2015, respectively, primarily related to contractually required severance associated with Remy executive officers and other employee termination benefits in Mexico. Cash payments for these restructuring activities are expected to be complete by the end of 2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimates of restructuring expense are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established accruals.
The following table displays a rollforward of the severance accruals recorded within the Company's Consolidated Balance Sheet and the related cash flow activity for the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Accruals
|
(millions of dollars)
|
|
Drivetrain
|
|
Engine
|
|
Total
|
Balance at January 1, 2015
|
|
$
|
41.9
|
|
|
$
|
2.0
|
|
|
$
|
43.9
|
|
Acquisition*
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
Provision
|
|
32.6
|
|
|
11.3
|
|
|
43.9
|
|
Cash payments
|
|
(46.0
|
)
|
|
(9.0
|
)
|
|
(55.0
|
)
|
Translation adjustment
|
|
(3.6
|
)
|
|
(0.2
|
)
|
|
(3.8
|
)
|
Balance at December 31, 2015
|
|
25.3
|
|
|
4.1
|
|
|
29.4
|
|
Provision
|
|
5.0
|
|
|
5.6
|
|
|
10.6
|
|
Cash payments
|
|
(26.9
|
)
|
|
(6.9
|
)
|
|
(33.8
|
)
|
Translation adjustment
|
|
0.3
|
|
|
(0.1
|
)
|
|
0.2
|
|
Balance at December 31, 2016
|
|
$
|
3.7
|
|
|
$
|
2.7
|
|
|
$
|
6.4
|
|
____________________________________
* Acquisition relates to the Company's 2015 purchase of Remy.
|
|
NOTE 16
|
LEASES AND COMMITMENTS
|
Certain assets are leased under long-term operating leases, including rent for facilities 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
$38.2 million
,
$31.9 million
and
$33.9 million
in the years ended December 31, 2016, 2015 and 2014, respectively. The Company does not have any material capital leases.
Future minimum operating lease payments at December 31, 2016 were as follows:
|
|
|
|
|
(millions of dollars)
|
|
2017
|
$
|
24.1
|
|
2018
|
8.0
|
|
2019
|
6.4
|
|
2020
|
6.5
|
|
2021
|
6.3
|
|
After 2021
|
3.8
|
|
Total minimum lease payments
|
$
|
55.1
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 17
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions except per share amounts)
|
2016
|
|
2015
|
|
2014
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
118.5
|
|
|
$
|
609.7
|
|
|
$
|
655.8
|
|
Weighted average shares of common stock outstanding
|
214.374
|
|
|
224.414
|
|
|
227.150
|
|
Basic earnings per share of common stock
|
$
|
0.55
|
|
|
$
|
2.72
|
|
|
$
|
2.89
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
118.5
|
|
|
$
|
609.7
|
|
|
$
|
655.8
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
214.374
|
|
|
224.414
|
|
|
227.150
|
|
Effect of stock-based compensation
|
0.954
|
|
|
1.234
|
|
|
1.774
|
|
Weighted average shares of common stock outstanding including dilutive shares
|
215.328
|
|
|
225.648
|
|
|
228.924
|
|
Diluted earnings per share of common stock
|
$
|
0.55
|
|
|
$
|
2.70
|
|
|
$
|
2.86
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 18
|
RECENT TRANSACTIONS
|
Divgi-Warner Private Limited.
In August 2016, the Company sold its
60%
ownership interest in Divgi-Warner Private Limited ("Divgi-Warner") to the joint venture partner. This former joint venture was formed in 1995 to develop and manufacture transfer cases and synchronizer rings in India. As a result of the sale, the Company received cash proceeds of approximately
$5.4 million
, net of capital gains tax and cash divested, which is classified as an investing activity within the Condensed Consolidated Statement of Cash Flows. Furthermore, the Company wrote off noncontrolling interest of
$4.8 million
as result of the sale and recognized a negligible gain in the year ended December 31, 2016.
Remy International, Inc.
On November 10, 2015, the Company acquired
100%
of the equity interests in Remy for
$29.50
per share in cash. The Company also settled approximately
$361 million
of outstanding debt. Remy was a global market leading producer of rotating electrical components that had key technologies and operations in
10
countries. The cash paid, net of cash acquired, was
$1,187.0 million
.
The Remy acquisition is expected to strengthen the Company's position in the rapidly developing powertrain electrification trend, with a complementary combination of technologies and global operations.
The operating results and assets are reported within the Company's Drivetrain reporting segment as of the date of the acquisition. Remy's results from the date of acquisition through December 31, 2015 were insignificant to the Company's Consolidated Statement of Operations. The Company paid
$1,187.0 million
, which is recorded as an investing activity in the Company's Consolidated Statement of Cash Flows. Additionally, the Company assumed retirement-related liabilities of
$31.1 million
and assumed debt of
$10.9 million
, which are reflected in the supplemental cash flow information on the Company's Consolidated Statement of Cash Flows.
The following table summarizes the aggregated estimated fair value of the assets acquired and liabilities assumed on November 10, 2015, the date of acquisition:
|
|
|
|
|
|
(millions of dollars)
|
|
|
Receivables, net
|
|
$
|
222.8
|
|
Inventories, net
|
|
195.3
|
|
Property, plant and equipment, net
|
|
196.6
|
|
Goodwill
|
|
572.6
|
|
Other intangible assets
|
|
412.6
|
|
Other assets and liabilities
|
|
(207.8
|
)
|
Accounts payable and accrued expenses
|
|
(163.1
|
)
|
Total consideration, net of cash acquired
|
|
1,229.0
|
|
|
|
|
Less: Assumed retirement-related liabilities
|
|
31.1
|
|
Less: Assumed debt
|
|
10.9
|
|
Cash paid, net of cash acquired
|
|
$
|
1,187.0
|
|
In connection with the acquisition, the Company capitalized
$303.3 million
for customer relationships,
$46.4 million
for developed technology,
$59.0 million
for the Delco Remy, Remy and Maval trade names,
$3.8 million
for in-process R&D and
$0.1 million
for leasehold interests. These intangible assets, excluding the indefinite-lived trade names, will be amortized over a period of
5
to
15
years. Various valuation techniques were used to determine the fair value of the intangible assets, with the primary techniques being forms of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the income approach, specifically, the relief-from-royalty and excess earnings valuation methods, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, the Company is required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. Due to the nature of the transaction, goodwill is not deductible for tax purposes.
In the fourth quarter of 2016, the Company finalized all purchase accounting adjustments related to the Remy acquisition. The Company has recorded fair value adjustments based on new information obtained during the measurement period primarily related to warranty, inventory, and deferred taxes. These adjustments have resulted in a decrease in goodwill of
$12.1 million
from the Company's initial estimate.
In October 2016, the Company entered into a definitive agreement to sell the light vehicle aftermarket business associated with the Company’s acquisition of Remy for approximately
$80 million
in cash, subject to customary adjustment. The Remy light vehicle aftermarket business sells remanufactured and new starters, alternators and multi-line products to aftermarket customers, mainly retailers in North America, and warehouse distributors in North America, South America and Europe. The sale of this business allows the Company to focus on the rapidly developing original equipment manufacturer powertrain electrification trend. During the third quarter of 2016, the Company determined that assets and liabilities subject to the Remy light vehicle aftermarket business sale met the held for sale criteria and recorded an asset impairment expense of
$106.5 million
to adjust the net book value of this business to its fair value. During the fourth quarter of 2016, upon the closing of the transaction, the Company recorded an additional loss of
$20.6 million
related to the finalization of the sale proceeds, changes in working capital from the amounts originally estimated and costs associated with the winding down of an aftermarket related product line, resulting in a total loss on divestiture of
$127.1 million
in the year ended December 31, 2016. As a result of this transaction, total assets of
$284.1 million
including
$94.7 million
of inventory and
$72.6 million
of accounts receivable and total liabilities of
$93.2 million
were removed from the Company’s consolidated balance sheet. The loss on divestiture is subject to final working capital adjustments, which is expected to be completed in the first quarter of 2017.
Supplemental Pro Forma Data (Unaudited)
The following supplemental pro forma information for the years ended December 31, 2015 and 2014 is based on the assumption that the acquisition of Remy occurred on January 1, 2014.
|
|
|
|
|
|
|
|
|
(millions of dollars, except per share amounts)
|
2015
|
|
2014
|
Net sales
|
$
|
8,977.7
|
|
|
$
|
9,487.4
|
|
Net earnings
|
$
|
652.0
|
|
|
$
|
653.9
|
|
|
|
|
|
Earnings per share:
|
|
|
|
Basic
|
$
|
2.91
|
|
|
$
|
2.88
|
|
Diluted
|
$
|
2.89
|
|
|
$
|
2.86
|
|
The 2014 pro forma results include after-tax adjustments of
$23.2 million
of investment banker and other fees and accelerated stock compensation incurred by the Company and Remy related to the acquisition;
$12.2 million
net decrease in expense related to fair value adjustments; and
$3.0 million
net decrease in interest expense.
These pro forma results of operations have been prepared for comparative purposes only, and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
BERU Diesel Start Systems Pvt. Ltd.
In January 2015, the Company completed the purchase of the remaining
51%
of BERU Diesel by acquiring the shares of its former joint venture partner. The former joint venture was formed in 1996 to develop and manufacture glow plugs in India. After this transaction, the Company owns
100%
of the entity. The cash paid, net of cash acquired, was
$12.6 million
(
783.1 million
Indian rupees).
The operating results are reported within the Company's Engine reporting segment. The Company paid
$12.6 million
, which is recorded as an investing activity in the Company's Consolidated Statement of Cash Flows. As a result of this transaction, the Company recorded a
$10.8 million
gain on the previously held equity interest in this joint venture. Additionally, the Company acquired assets of
$16.0 million
, including
$11.2 million
in definite-lived intangible assets, and assumed liabilities of
$4.6 million
. The Company also recorded
$13.9 million
of goodwill, which is expected to be non-deductible for tax purposes.
Gustav Wahler GmbH u. Co KG
On February 28, 2014, the Company acquired
100%
of the equity interests in Wahler. Wahler was a producer of exhaust gas recirculation ("EGR") valves, EGR tubes and thermostats, and had operations in Germany, Brazil, the U.S., China and Slovakia. The cash paid, net of cash acquired was
$110.5 million
(
80.1 million
Euro).
The Wahler acquisition strengthens the Company's strategic position as a producer of complete EGR systems and creates 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 Company paid
$110.5 million
, which is recorded as an investing activity in the Company's Consolidated Statement of Cash Flows. Additionally, the Company assumed retirement-related liabilities of
$3.2 million
and assumed debt of
$40.3 million
, which are reflected in the supplemental cash flow information on the Company's 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
|
|
46.8
|
|
Property, plant and equipment, net
|
|
55.3
|
|
Goodwill
|
|
74.6
|
|
Other intangible assets
|
|
42.7
|
|
Other assets and liabilities
|
|
(47.4
|
)
|
Accounts payable and accrued expenses
|
|
(70.4
|
)
|
Total consideration, net of cash acquired
|
|
154.0
|
|
Less: Assumed retirement-related liabilities
|
|
3.2
|
|
Less: Assumed debt
|
|
40.3
|
|
Cash paid, net of cash acquired
|
|
$
|
110.5
|
|
In connection with the acquisition, the Company capitalized
$24.9 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. These intangible assets will be amortized over a period of
5
to
15
years. The income approach was used to determine the fair value of all intangible assets. Additionally,
$56.9 million
in goodwill is non-deductible for tax purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
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. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Segment information
|
|
|
|
|
|
|
|
|
Net sales
|
|
Year-end assets
|
|
Depreciation/ amortization
|
|
Long-lived asset expenditures (b)
|
(millions of dollars)
|
Customers
|
|
Inter-segment
|
|
Net
|
|
|
|
Engine
|
$
|
5,547.3
|
|
|
$
|
42.8
|
|
|
$
|
5,590.1
|
|
|
$
|
4,134.6
|
|
|
$
|
211.9
|
|
|
$
|
298.7
|
|
Drivetrain
|
3,523.7
|
|
|
—
|
|
|
3,523.7
|
|
|
3,212.4
|
|
|
154.5
|
|
|
182.8
|
|
Inter-segment eliminations
|
—
|
|
|
(42.8
|
)
|
|
(42.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
9,071.0
|
|
|
—
|
|
|
9,071.0
|
|
|
7,347.0
|
|
|
366.4
|
|
|
481.5
|
|
Corporate (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,487.7
|
|
|
25.0
|
|
|
19.1
|
|
Consolidated
|
$
|
9,071.0
|
|
|
$
|
—
|
|
|
$
|
9,071.0
|
|
|
$
|
8,834.7
|
|
|
$
|
391.4
|
|
|
$
|
500.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Segment information
|
|
|
|
|
|
|
|
|
Net sales
|
|
Year-end assets
|
|
Depreciation/ amortization
|
|
Long-lived asset expenditures (b)
|
(millions of dollars)
|
Customers
|
|
Inter-segment
|
|
Net
|
|
|
|
Engine
|
$
|
5,466.5
|
|
|
$
|
33.5
|
|
|
$
|
5,500.0
|
|
|
$
|
4,017.8
|
|
|
$
|
200.2
|
|
|
$
|
332.4
|
|
Drivetrain
|
2,556.7
|
|
|
—
|
|
|
2,556.7
|
|
|
3,685.1
|
|
|
97.0
|
|
|
221.8
|
|
Inter-segment eliminations
|
—
|
|
|
(33.5
|
)
|
|
(33.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
8,023.2
|
|
|
—
|
|
|
8,023.2
|
|
|
7,702.9
|
|
|
297.2
|
|
|
554.2
|
|
Corporate (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,122.8
|
|
|
23.0
|
|
|
23.1
|
|
Consolidated
|
$
|
8,023.2
|
|
|
$
|
—
|
|
|
$
|
8,023.2
|
|
|
$
|
8,825.7
|
|
|
$
|
320.2
|
|
|
$
|
577.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 Segment information
|
|
|
|
|
|
|
|
|
Net sales
|
|
Year-end assets
|
|
Depreciation/ amortization
|
|
Long-lived asset
expenditures (b)
|
(millions of dollars)
|
Customers
|
|
Inter-segment
|
|
Net
|
|
|
|
Engine
|
$
|
5,673.7
|
|
|
$
|
32.2
|
|
|
$
|
5,705.9
|
|
|
$
|
3,936.2
|
|
|
$
|
215.3
|
|
|
$
|
349.8
|
|
Drivetrain
|
2,631.4
|
|
|
—
|
|
|
2,631.4
|
|
|
1,783.5
|
|
|
92.8
|
|
|
189.2
|
|
Inter-segment eliminations
|
—
|
|
|
(32.2
|
)
|
|
(32.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
8,305.1
|
|
|
—
|
|
|
8,305.1
|
|
|
5,719.7
|
|
|
308.1
|
|
|
539.0
|
|
Corporate (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,505.5
|
|
|
22.3
|
|
|
24.0
|
|
Consolidated
|
$
|
8,305.1
|
|
|
$
|
—
|
|
|
$
|
8,305.1
|
|
|
$
|
7,225.2
|
|
|
$
|
330.4
|
|
|
$
|
563.0
|
|
_______________
(a) Corporate assets include investments and other long-term receivables and deferred income taxes.
(b) Long-lived asset expenditures include capital expenditures and tooling outlays.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Adjusted earnings before interest, income taxes and noncontrolling interest ("Adjusted EBIT")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2016
|
|
2015
|
|
2014
|
Engine
|
$
|
934.1
|
|
|
$
|
900.7
|
|
|
$
|
924.0
|
|
Drivetrain
|
354.5
|
|
|
294.6
|
|
|
303.3
|
|
Adjusted EBIT
|
1,288.6
|
|
|
1,195.3
|
|
|
1,227.3
|
|
Asbestos-related charge
|
703.6
|
|
|
—
|
|
|
—
|
|
Loss on divestiture
|
127.1
|
|
|
—
|
|
|
—
|
|
Restructuring expense
|
26.9
|
|
|
65.7
|
|
|
90.8
|
|
Merger and acquisition expense
|
23.7
|
|
|
21.8
|
|
|
—
|
|
Intangible asset impairment
|
12.6
|
|
|
—
|
|
|
10.3
|
|
Contract expiration gain
|
(6.2
|
)
|
|
—
|
|
|
—
|
|
Pension settlement loss
|
—
|
|
|
25.7
|
|
|
3.1
|
|
Gain on previously held equity interest
|
—
|
|
|
(10.8
|
)
|
|
—
|
|
Corporate, including equity in affiliates' earnings and stock-based compensation
|
132.1
|
|
|
113.2
|
|
|
112.1
|
|
Interest income
|
(6.3
|
)
|
|
(7.5
|
)
|
|
(5.5
|
)
|
Interest expense and finance charges
|
84.6
|
|
|
60.4
|
|
|
36.4
|
|
Earnings before income taxes and noncontrolling interest
|
190.5
|
|
|
926.8
|
|
|
980.1
|
|
Provision for income taxes
|
30.3
|
|
|
280.4
|
|
|
292.6
|
|
Net earnings
|
160.2
|
|
|
646.4
|
|
|
687.5
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
41.7
|
|
|
36.7
|
|
|
31.7
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
118.5
|
|
|
$
|
609.7
|
|
|
$
|
655.8
|
|
Geographic Information
Outside the U.S., only Germany, China, South Korea, Mexico and Hungary exceeded
5%
of consolidated net sales during the year ended December 31, 2016, attributing sales to the location of production rather than the location of the customer. Also, the Company's
50%
equity investment in NSK-Warner (see the Balance Sheet Information footnote to the Consolidated Financial Statements) of
$172.9 million
,
$158.7 million
and
$143.8 million
at December 31, 2016, 2015 and 2014, respectively, is excluded from the definition of long-lived assets, as are goodwill and certain other non-current assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
Long-lived assets
|
(millions of dollars)
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
2,236.0
|
|
|
$
|
1,985.1
|
|
|
$
|
2,008.1
|
|
|
$
|
799.3
|
|
|
$
|
800.5
|
|
|
$
|
586.2
|
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
1,735.1
|
|
|
1,857.1
|
|
|
2,145.6
|
|
|
370.3
|
|
|
380.9
|
|
|
413.6
|
|
Hungary
|
541.1
|
|
|
500.5
|
|
|
518.1
|
|
|
122.2
|
|
|
112.4
|
|
|
73.2
|
|
France
|
305.2
|
|
|
339.2
|
|
|
405.2
|
|
|
39.5
|
|
|
41.4
|
|
|
42.5
|
|
Other Europe
|
888.7
|
|
|
921.8
|
|
|
1,097.3
|
|
|
298.2
|
|
|
276.6
|
|
|
258.8
|
|
Total Europe
|
3,470.1
|
|
|
3,618.6
|
|
|
4,166.2
|
|
|
830.2
|
|
|
811.3
|
|
|
788.1
|
|
China
|
1,218.0
|
|
|
1,009.0
|
|
|
885.1
|
|
|
384.6
|
|
|
355.8
|
|
|
299.9
|
|
South Korea
|
948.2
|
|
|
741.7
|
|
|
623.0
|
|
|
208.0
|
|
|
218.6
|
|
|
185.9
|
|
Mexico
|
805.6
|
|
|
312.7
|
|
|
201.4
|
|
|
136.2
|
|
|
132.8
|
|
|
96.6
|
|
Other foreign
|
393.1
|
|
|
356.1
|
|
|
421.3
|
|
|
143.5
|
|
|
129.1
|
|
|
137.2
|
|
Total
|
$
|
9,071.0
|
|
|
$
|
8,023.2
|
|
|
$
|
8,305.1
|
|
|
$
|
2,501.8
|
|
|
$
|
2,448.1
|
|
|
$
|
2,093.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sales to Major Customers
Consolidated net sales to Ford (including its subsidiaries) were approximately
15%
,
15%
, and
13%
for the years ended December 31, 2016, 2015 and 2014, respectively; and to Volkswagen (including its subsidiaries) were approximately
13%
,
15%
and
17%
for the years ended December 31, 2016, 2015 and 2014, respectively. Both of the Company's reporting segments had significant sales to Volkswagen and Ford in 2016, 2015 and 2014. Such sales consisted of a variety of products to a variety of customer locations and regions. No other single customer accounted for more than
10%
of consolidated net sales in any of the years presented.
Sales by Product Line
Sales of turbochargers for light vehicles represented approximately
28%
,
31%
and
28%
of total net sales for the years ended December 31, 2016, 2015 and 2014, respectively. The Company currently supplies light vehicle turbochargers to many OEMs including BMW, Daimler, Fiat Chrysler Automobiles, Ford, General Motors, Great Wall, Hyundai, Renault, Volkswagen and Volvo. No other single product line accounted for more than
10%
of consolidated net sales in any of the years presented.
Interim Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars, except per share amounts)
|
2016
|
|
2015
|
Quarter ended
|
Mar-31
|
|
Jun-30
|
|
Sep-30
|
|
Dec-31
|
|
Year
|
|
Mar-31
|
|
Jun-30
|
|
Sep-30
|
|
Dec-31
|
|
Year
|
Net sales
|
$
|
2,268.6
|
|
|
$
|
2,329.2
|
|
|
$
|
2,214.2
|
|
|
$
|
2,259.0
|
|
|
$
|
9,071.0
|
|
|
$
|
1,984.2
|
|
|
$
|
2,031.9
|
|
|
$
|
1,884.0
|
|
|
$
|
2,123.1
|
|
|
$
|
8,023.2
|
|
Cost of sales
|
1,804.3
|
|
|
1,832.5
|
|
|
1,743.1
|
|
|
1,758.0
|
|
|
7,137.9
|
|
|
1,555.2
|
|
|
1,602.9
|
|
|
1,485.8
|
|
|
1,676.2
|
|
|
6,320.1
|
|
Gross profit
|
464.3
|
|
|
496.7
|
|
|
471.1
|
|
|
501.0
|
|
|
1,933.1
|
|
|
429.0
|
|
|
429.0
|
|
|
398.2
|
|
|
446.9
|
|
|
1,703.1
|
|
Selling, general and administrative expenses
|
188.4
|
|
|
202.3
|
|
|
209.7
|
|
|
217.1
|
|
|
817.5
|
|
|
168.2
|
|
|
167.4
|
|
|
148.0
|
|
|
178.4
|
|
|
662.0
|
|
Other expense, net
|
11.7
|
|
|
25.0
|
|
|
111.1
|
|
|
741.9
|
|
|
889.7
|
|
|
1.2
|
|
|
19.1
|
|
|
13.1
|
|
|
68.0
|
|
|
101.4
|
|
Operating income (loss)
|
264.2
|
|
|
269.4
|
|
|
150.3
|
|
|
(458.0
|
)
|
|
225.9
|
|
|
259.6
|
|
|
242.5
|
|
|
237.1
|
|
|
200.5
|
|
|
939.7
|
|
Equity in affiliates’ earnings, net of tax
|
(9.1
|
)
|
|
(10.1
|
)
|
|
(12.4
|
)
|
|
(11.3
|
)
|
|
(42.9
|
)
|
|
(8.5
|
)
|
|
(11.1
|
)
|
|
(8.7
|
)
|
|
(11.7
|
)
|
|
(40.0
|
)
|
Interest income
|
(1.6
|
)
|
|
(1.5
|
)
|
|
(1.6
|
)
|
|
(1.6
|
)
|
|
(6.3
|
)
|
|
(1.7
|
)
|
|
(1.6
|
)
|
|
(2.0
|
)
|
|
(2.2
|
)
|
|
(7.5
|
)
|
Interest expense and finance charges
|
21.3
|
|
|
21.4
|
|
|
22.4
|
|
|
19.5
|
|
|
84.6
|
|
|
10.0
|
|
|
17.6
|
|
|
15.0
|
|
|
17.8
|
|
|
60.4
|
|
Earnings (loss) before income taxes and noncontrolling interest
|
253.6
|
|
|
259.6
|
|
|
141.9
|
|
|
(464.6
|
)
|
|
190.5
|
|
|
259.8
|
|
|
237.6
|
|
|
232.8
|
|
|
196.6
|
|
|
926.8
|
|
Provision (benefit) for income taxes
|
80.4
|
|
|
84.2
|
|
|
48.8
|
|
|
(183.1
|
)
|
|
30.3
|
|
|
72.1
|
|
|
80.2
|
|
|
66.9
|
|
|
61.2
|
|
|
280.4
|
|
Net earnings (loss)
|
173.2
|
|
|
175.4
|
|
|
93.1
|
|
|
(281.5
|
)
|
|
160.2
|
|
|
187.7
|
|
|
157.4
|
|
|
165.9
|
|
|
135.4
|
|
|
646.4
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
9.1
|
|
|
11.0
|
|
|
9.8
|
|
|
11.8
|
|
|
41.7
|
|
|
8.8
|
|
|
9.3
|
|
|
8.5
|
|
|
10.1
|
|
|
36.7
|
|
Net earnings (loss) attributable to BorgWarner Inc. (a)
|
$
|
164.1
|
|
|
$
|
164.4
|
|
|
$
|
83.3
|
|
|
$
|
(293.3
|
)
|
|
$
|
118.5
|
|
|
$
|
178.9
|
|
|
$
|
148.1
|
|
|
$
|
157.4
|
|
|
$
|
125.3
|
|
|
$
|
609.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — basic
|
$
|
0.75
|
|
|
$
|
0.76
|
|
|
$
|
0.39
|
|
|
$
|
(1.39
|
)
|
|
$
|
0.55
|
|
|
$
|
0.79
|
|
|
$
|
0.66
|
|
|
$
|
0.70
|
|
|
$
|
0.57
|
|
|
$
|
2.72
|
|
Earnings per share — diluted
|
$
|
0.75
|
|
|
$
|
0.76
|
|
|
$
|
0.39
|
|
|
$
|
(1.39
|
)
|
|
$
|
0.55
|
|
|
$
|
0.79
|
|
|
$
|
0.65
|
|
|
$
|
0.70
|
|
|
$
|
0.56
|
|
|
$
|
2.70
|
|
_______________
(a) The Company's results were impacted by the following:
|
|
•
|
Quarter ended December 31, 2016:
The Company recorded an asbestos-related charge of
$703.6 million
representing the difference in the total liability from what was previously accrued, consulting fees, less available insurance coverage, and an intangible asset impairment loss of
$12.6 million
related to the Engine segment Etatech’s ECCOS intellectual technology. Additionally, the Company recorded an incremental loss on divestiture of
$20.6 million
related to the sale of Remy light vehicle aftermarket business. The Company also recorded merger and acquisition expense of
$4.8 million
primarily related to the Remy transaction. The Company recorded tax benefits of
$263.0 million
related to asbestos-related charge,
$4.4 million
related to intangible asset loss, and
$4.9 million
related to other one-time tax adjustments. The Company also recorded a tax expense of
$4.9 million
related to the sale of the Remy light vehicle aftermarket business and the reversal of the associated deferred tax balances.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
•
|
Quarter ended September 30, 2016:
The Company recorded an asset impairment expense of
$106.5 million
to adjust the net book value of the Remy light vehicle aftermarket business to fair value, based on the anticipated sale price. Additionally, the Company recorded restructuring expense of
$1.3 million
related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The Company also recorded merger and acquisition expense of
$5.9 million
primarily related to the Remy transaction. The Company recorded tax benefits of
$27.6 million
related to asset impairment expense,
$2.4 million
related to other one-time tax adjustments,
$0.5 million
related to restructuring expense, and
$0.4 million
related to a gain associated with the release of certain Remy light vehicle aftermarket liabilities due to the expiration of a customer contract.
|
|
|
•
|
Quarter ended June 30, 2016:
The Company recorded restructuring expense of
$19.2 million
related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The Company also recorded merger and acquisition expense of
$7.2 million
primarily related to the Remy transaction. The Company recorded tax benefits of
$4.4 million
related to restructuring expense and
$0.3 million
related to other one-time tax adjustments, as well as a tax expense of
$2.6 million
related to a gain associated with the release of certain Remy light vehicle aftermarket liabilities due to the expiration of a customer contract.
|
|
|
•
|
Quarter ended March 31, 2016:
The Company recorded restructuring expense of
$6.4 million
related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The Company also recorded merger and acquisition expense of
$5.8 million
primarily related to the Remy transaction. The Company recorded tax benefits of
$1.0 million
related to restructuring expense and
$1.0 million
related to other one-time tax adjustments.
|
|
|
•
|
Quarter ended December 31, 2015:
The Company recorded restructuring expense of
$24.4 million
related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The Company also incurred a non-cash settlement loss of
$25.7 million
related to a lump-sum pension de-risking disbursement made to an insurance company to unconditionally and irrevocably guarantee all future payments to certain participants that were receiving payments from the U.S. pension plan. Furthermore, the Company recorded merger and acquisition expense of
$17.9 million
primarily related to the Remy transaction. The Company recorded tax benefits of
$9.0 million
related to the pension settlement loss,
$7.7 million
primarily related to foreign tax incentives and tax settlements,
$3.8 million
related to merger and acquisition expense, partially offset by a tax expense of
$0.4 million
related to restructuring expense.
|
|
|
•
|
Quarter ended September 30, 2015:
The Company recorded restructuring expense of
$6.3 million
related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Additionally, the Company recorded
$3.0 million
of restructuring expense related to a global realignment plan intended to enhance treasury management flexibility by creating a legal entity structure that better aligns with the Company's business strategy. The Company also recorded merger and acquisition expense of
$3.9 million
primarily related to the Remy transaction. The Company recorded tax benefits of
$4.5 million
related to a global realignment plan,
$0.7 million
related to restructuring expense and
$0.4 million
primarily related to foreign tax incentives.
|
|
|
•
|
Quarter ended June 30, 2015:
The Company recorded restructuring expense of
$10.5 million
related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Additionally, the Company recorded
$9.4 million
of restructuring expense related to a global realignment plan intended to enhance treasury management flexibility by creating a legal entity structure that better aligns with the Company's business strategy. The Company recorded tax expense of
$10.3 million
related to a global realignment plan, partially offset by tax benefits of
$3.9 million
related to tax settlements,
$2.2 million
related to restructuring expense and
$1.3 million
primarily related to foreign tax incentives.
|
|
|
•
|
Quarter ended March 31, 2015:
The Company recorded restructuring expense of
$9.4 million
related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Additionally, the Company recorded
$2.7 million
of restructuring expense related to a global realignment plan intended to enhance treasury management flexibility by creating a legal entity structure that better aligns with the Company's business strategy. The Company also recorded a
$10.8 million
gain on the previously held equity interest in BERU Diesel as a result of purchasing the remaining
51%
of this joint venture. The Company recorded tax benefits of
$2.4 million
primarily related to foreign tax incentives and
$1.2 million
related to restructuring expense.
|