NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair statement of results have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The balance sheet as of December 31, 2017 was derived from the audited financial statements as of that date. For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. As disclosed in the Form 8-K dated June 15, 2018, the Company announced that it would restate its consolidated financial statements for the fiscal years ended December 31, 2016 and 2015 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, due to the Company’s re-evaluation of its accounting in those years for the estimated value of asbestos-related claims that had not yet been asserted and their associated defense costs. The restatement does not affect the current financial results reported on this Quarterly Report on Form 10-Q, nor does it affect the Company’s previously reported results for the fiscal year ended December 31, 2017. For more information concerning the restatement, please see the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission ("SEC") on June 15, 2018.
Certain prior period amounts have been reclassified to conform to current period presentation. During the fourth quarter of 2017, the Company identified a prior period error related to the exclusion of the net earnings attributable to the non-controlling interest in the first three and six months of 2017 Consolidated Statement of Comprehensive Income. The inclusion of this amount increased total Comprehensive Income by
$9.1 million
and
$19.5 million
for the three and six months ended June 30, 2017, respectively.
The Company concluded that the error was not material to the financial statements of any prior annual or interim period and therefore, amendments of previously filed reports are not required. In accordance with ASC Topic 250, "Accounting Changes and Error Corrections," we have corrected the error for all prior periods presented by revising the consolidated financial statements appearing herein. Quarterly periods not presented herein will be revised, as applicable, in future filings. The revision had no impact on the Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Cash Flows.
Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and accompanying notes, as well as, the amounts of revenues and expenses reported during the periods covered by those financial statements and accompanying notes. Actual results could differ from these estimates.
(2) New Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-07,
"Compensation - Stock Compensation (Topic 718)."
It expands the scope of the employee share-based payments guidance, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is
permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02,
"Income Statement - Reporting Comprehensive Income (Topic 220)."
It allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 ("the Tax Act"). In addition, the new guidance requires expanded disclosures including a description of the accounting policy releasing disproportionate income tax effects from accumulated other comprehensive income. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12,
"Derivatives and Hedging (Topic 815)."
It expands and refines hedge accounting for both nonfinancial and financial risk components and reduces complexity in fair value hedges of interest rate risk. It eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessment requirements and modifies the accounting for components excluded from assessment of hedge effectiveness. In addition, the new guidance requires expanded disclosures as it pertains to the effect of hedging on individual income statement lines, including the effects of components excluded from the assessment of effectiveness. The guidance is effective prospectively for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company adopted this guidance during the first quarter of 2018 and the impact on the consolidated financial statements was not material. Refer to the Financial Instruments footnote to the Condensed Consolidated Financial Statements for expanded disclosures.
In March 2017, the FASB issued ASU No. 2017-07,
"Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost."
It requires disaggregating the service cost component from the other components of net benefit cost, provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization when applicable. This guidance is effective for interim and annual periods beginning after December 15, 2017.
During the first quarter of 2018, the Company retrospectively adopted the presentation of service cost separate from the other components of net benefit costs. As a result, Cost of sales of
$1.3 million
and
$2.3 million
and Selling, general and administrative expenses of
$0.1 million
and
$0.3 million
for the three and six months ended June 30, 2017, respectively, have been reclassified to Other postretirement income as a separate line item in the Condensed Consolidated Statements of Operations.
In January 2017, the FASB issued 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 adopted this guidance in the first quarter of 2018 and there is no impact to the 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 December 15, 2017. The Company adopted this guidance in the first quarter of 2018 and there is no impact to the 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. The Company adopted this guidance in the first quarter of 2018 and there is no impact to the consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
"Financial Instruments - Credit Losses (Topic 326)."
It replaces the current incurred loss impairment method with a new method that reflects expected credit losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
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 most leases, including operating leases defined under previous GAAP. Adoption will require a modified retrospective transition with an option to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating all forms of leasing arrangements and determining potential system requirements that will be necessary to implement the new standard. Based on the results of the assessment, the Company will refine its internal policy to include criteria for evaluating the impact of the new standard and also implement appropriate refinements to business processes, systems and controls to support the requirements of this new standard in the second half of 2018. The Company continues to evaluate the impact this guidance will have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01,
"Recognition and Measurement of Financial Assets and Financial Liabilities."
It requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. It also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. This guidance is effective for interim and fiscal years beginning after December 15, 2017. The Company adopted this guidance in the first quarter of 2018 with no impact to the consolidated financial statements and elected the measurement alternative for equity investments without readily determinable fair values.
In May 2014, the FASB amended the Accounting Standards Codification to add Topic 606 and issued ASU 2014-09,
"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 the then applicable revenue recognition guidance. The new guidance requires new disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this new standard and all the related amendments (“new revenue standard”) effective January 1, 2018 and applied it to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. We expect the impact of adoption of the new standard to be immaterial to our sales and net income on an ongoing basis.
Revenue is recognized when performance obligations under the terms of a contract are satisfied, which generally occurs with the transfer of control of our products. For most of our products, transfer of control occurs upon shipment or delivery, however, a limited number of our customer arrangements for our highly customized products with no alternative use provide us with the right to payment during the production process. As a result, for these limited arrangements, under the new revenue standard, revenue is recognized
as goods are produced and control transfers to the customer. The Company recorded a transition adjustment as of January 1, 2018, which increased retained earnings by
$2.0 million
related to these arrangements.
The Company also has a limited number of arrangements with customers where the price paid by the customer is dependent on the volume of product purchased over the term of the arrangement. Under the new revenue standard, the Company estimates the volumes to be sold over the term of the arrangement and recognizes revenue based on the estimated amount of consideration to be received from these arrangements. The Company recorded a transition adjustment, which decreased the opening balance of retained earnings by
$0.1 million
related to these arrangements.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of new revenue standard was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Balance at December 31, 2017
|
|
Adjustments due to ASC 606
|
|
Balance at January 1, 2018
|
Inventories, net
|
|
$
|
766.3
|
|
|
$
|
(7.4
|
)
|
|
$
|
758.9
|
|
Prepayments and other current assets (including contract assets)
|
|
$
|
145.4
|
|
|
$
|
9.4
|
|
|
$
|
154.8
|
|
Accounts payable and other accrued expenses (including contract liabilities)
|
|
$
|
2,270.3
|
|
|
$
|
0.1
|
|
|
$
|
2,270.4
|
|
Retained earnings
|
|
$
|
4,531.0
|
|
|
$
|
1.9
|
|
|
$
|
4,532.9
|
|
The impact from adopting the new revenue standard as compared to the previous revenue guidance is immaterial to our Consolidated Statements of Operations for the three and six months ended June 30, 2018 and Consolidated Balance Sheets as of June 30, 2018.
(3) Revenue from Contracts with Customers
The Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments to all contracts using the modified retrospective method effective January 1, 2018. The Company manufactures and sells products, primarily to OEMs of light vehicles, and, to a lesser extent, to other OEMs of commercial vehicles, off-highway vehicles, certain Tier One vehicle systems suppliers and into the aftermarket. Although the Company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the life of the arrangements, and a contract does not exist for purposes of applying ASC 606 until volumes are contractually known. Revenue is recognized when performance obligations under the terms of a contract are satisfied which generally occurs with the transfer of control of our products. For most of our products, transfer of control occurs upon shipment or delivery, however, a limited number of our customer arrangements for our highly customized products with no alternative use provide us with the right to payment during the production process. As a result, for these limited arrangements, revenue is recognized as goods are produced and control transfers to the customer. The Company recorded a contract asset of
$10.7 million
and
$9.4 million
at June 30, 2018 and January 1, 2018 for these arrangements. These amounts are reflected in Prepayments and other current assets in our consolidated balance sheet.
Revenue is measured at the amount of consideration we expect to receive in exchange for transferring the goods. The Company has a limited number of arrangements with customers where the price paid by the customer is dependent on the volume of product purchased over the term of the arrangement. In other limited arrangements, the Company will provide a rebate to customers based on the volume of products purchased during the course of the arrangement. The Company estimates the volumes to be sold over the term of the arrangement and recognizes revenue based on the estimated amount of consideration to be received from these arrangements. As a result of these arrangements, the Company recognized a liability of
$10.9 million
and
$18.4 million
at June 30, 2018 and December 31, 2017. These amounts are reflected in Accounts payable and accrued expenses in our consolidated balance sheet.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range from
30
to
90
days. We have evaluated the terms of our arrangements and determined that they do not contain significant financing components. The Company provides warranties on some of its products. Provisions for estimated expenses related to product warranty are made at the time products are sold. See the Product Warranty footnote to the Consolidated Financial Statements for more information on product warranties. Shipping and handling fees billed to customers are included in sales, while costs of shipping and handling are included in cost of sales. The Company has elected to apply the accounting policy election available under ASC 606 and accounts for shipping and handling activities as a fulfillment cost.
In limited instances, certain customers have provided payments in advance of receiving related products, typically at the onset of an arrangement prior to the beginning of production. These contract liabilities are reflected as Accounts payable and accrued expenses and Other non-current liabilities in our consolidated balance sheet and were
$11.9 million
and
$19.3 million
at June 30, 2018 and
$12.1 million
and
$21.9 million
at December 31, 2017, respectively. These amounts are reflected as revenue over the term of the arrangement (typically
3
to
7
years) as the underlying products are shipped.
The Company continually seeks business development opportunities and at times provides customer incentives for new program awards. The Company evaluates the underlying economics of each amount of consideration payable to a customer to determine the proper accounting by understanding the reasons for the payment, the rights and obligations resulting from the payment, the nature of the promise in the contract, and other relevant facts and circumstances. When the Company determines that the payments are incremental and incurred only if the new business is obtained and expects to recover these costs from the customer over the term of the new business arrangement, the Company capitalizes these costs. The Company recognizes a reduction to revenue as products that the upfront payments are related to are transferred to the customer based on the total amount of products expected to be sold over the term of the arrangement (generally
3
to
7
years). The Company evaluates the amounts capitalized each period end for recoverability and expenses any amounts that are no longer expected to be recovered over the term of the business arrangement. The Company had
$25.5 million
and
$18.2 million
recorded in Prepayments and other current assets, and
$172.4 million
and
$180.4 million
recorded in Other non-current assets in the consolidated balance sheet at June 30, 2018 and December 31, 2017.
The following table represents a disaggregation of revenue from contracts with customers by segment and region:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
|
Three months ended June 30, 2017
|
(In millions)
|
|
Engine
|
|
Drivetrain
|
|
Total
|
|
Engine
|
|
Drivetrain
|
|
Total
|
North America
|
|
$
|
391.8
|
|
|
$
|
441.4
|
|
|
$
|
833.2
|
|
|
$
|
393.0
|
|
|
$
|
431.8
|
|
|
$
|
824.8
|
|
Europe
|
|
806.6
|
|
|
247.9
|
|
|
1,054.5
|
|
|
685.2
|
|
|
228.9
|
|
|
914.1
|
|
Asia
|
|
430.4
|
|
|
337.1
|
|
|
767.5
|
|
|
365.1
|
|
|
253.0
|
|
|
618.1
|
|
Other
|
|
31.1
|
|
|
7.7
|
|
|
38.8
|
|
|
25.3
|
|
|
7.4
|
|
|
32.7
|
|
Total
|
|
$
|
1,659.9
|
|
|
$
|
1,034.1
|
|
|
$
|
2,694.0
|
|
|
$
|
1,468.6
|
|
|
$
|
921.1
|
|
|
$
|
2,389.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
|
Six months ended June 30, 2017
|
(In millions)
|
|
Engine
|
|
Drivetrain
|
|
Total
|
|
Engine
|
|
Drivetrain
|
|
Total
|
North America
|
|
$
|
793.5
|
|
|
$
|
889.4
|
|
|
$
|
1,682.9
|
|
|
$
|
782.6
|
|
|
$
|
861.1
|
|
|
$
|
1,643.7
|
|
Europe
|
|
1,652.8
|
|
|
539.1
|
|
|
2,191.9
|
|
|
1,364.3
|
|
|
465.8
|
|
|
1,830.1
|
|
Asia
|
|
852.1
|
|
|
673.8
|
|
|
1,525.9
|
|
|
757.0
|
|
|
505.0
|
|
|
1,262.0
|
|
Other
|
|
62.7
|
|
|
14.9
|
|
|
77.6
|
|
|
46.8
|
|
|
14.1
|
|
|
60.9
|
|
Total
|
|
$
|
3,361.1
|
|
|
$
|
2,117.2
|
|
|
$
|
5,478.3
|
|
|
$
|
2,950.7
|
|
|
$
|
1,846.0
|
|
|
$
|
4,796.7
|
|
(4) Research and Development Expenditures
The Company's net Research & Development ("R&D") expenditures are included in selling, general and administrative expenses of the Condensed Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract and accepted by the customer. Financial risks and rewards transfer upon shipment, acceptance of a prototype component by the customer or upon completion of the performance obligation, as stated in the respective customer agreement.
The following table presents the Company’s gross and net expenditures on R&D activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Gross R&D expenditures
|
$
|
134.4
|
|
|
$
|
119.7
|
|
|
$
|
264.1
|
|
|
$
|
231.7
|
|
Customer reimbursements
|
(22.0
|
)
|
|
(14.8
|
)
|
|
(35.0
|
)
|
|
(30.4
|
)
|
Net R&D expenditures
|
$
|
112.4
|
|
|
$
|
104.9
|
|
|
$
|
229.1
|
|
|
$
|
201.3
|
|
The Company has contracts with several customers at the Company's various R&D locations. No such contract exceeded
5%
of annual net R&D expenditures in any of the periods presented.
(5) Other Expense, net
Items included in other expense, net consist of:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Restructuring expense
|
$
|
31.2
|
|
|
$
|
—
|
|
|
$
|
38.7
|
|
|
$
|
—
|
|
Merger, acquisition and divestiture expense
|
1.0
|
|
|
—
|
|
|
3.2
|
|
|
—
|
|
Lease termination settlement
|
—
|
|
|
—
|
|
|
—
|
|
|
5.3
|
|
Other (income) expense
|
(1.8
|
)
|
|
(0.3
|
)
|
|
(6.6
|
)
|
|
0.2
|
|
Other expense (income), net
|
$
|
30.4
|
|
|
$
|
(0.3
|
)
|
|
$
|
35.3
|
|
|
$
|
5.5
|
|
During the three and six months ended June 30, 2018, the Company recorded restructuring expense of
$31.2 million
and
$38.7 million
, respectively. This restructuring expense
primarily relates to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. See the Restructuring footnote to the Condensed Consolidated Financial Statements for further discussion of these expenses.
During the three and six months ended June 30, 2018, the Company recorded
$1.0 million
and
$3.2 million
of merger, acquisition and divestiture expense primarily related to professional fees associated with divestiture activities for the non-core pipe and thermostat product lines, respectively. See the Assets and Liabilities Held for Sale footnote to the Condensed Consolidated Financial Statements for further discussion.
During the first three months of 2018, the Company recorded a gain of approximately
$4.0 million
related to the settlement of a commercial contract for an entity acquired in the 2015 Remy acquisition.
During the first three months of 2017, the Company recorded a loss of
$5.3 million
related to the termination of a long term property lease for a manufacturing facility located in Europe.
(6) Income Taxes
The Company's provision for income taxes is based upon an estimated annual tax rate for the year applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.
At June 30, 2018, the Company's effective tax rate for the first six months was
19.4%
.
This rate includes income tax expenses of
$0.9 million
related to a commercial settlement gain, and reductions of income tax expense of
$8.2 million
related to restructuring expense,
$0.3 million
related to merger and acquisition expense,
$13.4 million
related to adjustments to measurement period provisional estimates associated with the Tax Act,
$21.1 million
related to an increase to our deferred tax asset due to the Company's ability to record a tax benefit for certain foreign tax credits now available due to actions the Company took in the second quarter, and
$9.5 million
for other one-time tax adjustments.
At June 30, 2017, the Company's effective tax rate for the first six months was
27.9%
. This rate includes a reduction of income tax expense of
$6.6 million
related to one-time tax adjustments, primarily resulting from tax audit settlements.
The annual effective tax rates differ from the U.S. statutory rate primarily due to foreign rates which differ from those in the U.S., U.S. taxes on foreign earnings, the realization of certain business tax credits, including foreign tax credits, and favorable permanent differences between book and tax treatment for certain items, including equity in affiliates' earnings.
In accordance with guidance provided by Staff Accounting Bulletin No 118 (SAB 118), we have not completed our accounting for the tax effects of the Tax Act and have recorded provisional estimates for significant items including the following: (i) the effects on our existing deferred balances, (ii) the one-time transition tax, and (iii) our indefinite reinvestment assertion. The measurement period begins in the reporting period that includes the Tax Act’s enactment date and ends when the additional information is obtained, prepared, or analyzed to complete the accounting requirements under ASC Topic 740. The measurement period should not extend beyond one year from the enactment date.
As of June 30, 2018, the Company evaluated the provisional amounts initially recorded for the year ended December 31, 2017 and recorded adjustments based on updates to the Company's assumptions and the application of additional interpretative guidance issued in the second quarter of 2018. These adjustments resulted in (i) an increase in our existing deferred tax asset balances (ii) a net decrease to the one-time transition tax, and (iii) a decrease in the deferred tax liability associated with our indefinite reinvestment assertion totaling a net tax benefit of
$13.4 million
in the second quarter of 2018. The Company will continue to evaluate the provisional amounts recorded for the year ended December 31, 2017 throughout the remainder of the measurement period.
Deferred tax assets, which are reflected in Other non-current assets in our consolidated balance sheet, increased from
$121.2 million
at December 31, 2017 to
$170.5 million
at June 30, 2018, primarily due to the Company’s ability to record a tax benefit for certain foreign tax credits now available in the second quarter of 2018.
We have made an accounting policy election to treat the future tax impacts of the global intangible low tax income (GILTI) provisions of the Tax Act as a period cost to the extent applicable.
(7) Inventories, net
Certain U.S. inventories are measured by the last-in, first-out (“LIFO”) method at the lower of cost or market, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or average-cost methods at the lower of cost and net realizable value. Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(in millions)
|
2018
|
|
2017
|
Raw material and supplies
|
$
|
502.8
|
|
|
$
|
469.7
|
|
Work in progress
|
123.6
|
|
|
126.7
|
|
Finished goods
|
187.5
|
|
|
183.0
|
|
FIFO inventories
|
813.9
|
|
|
779.4
|
|
LIFO reserve
|
(13.7
|
)
|
|
(13.1
|
)
|
Inventories, net
|
$
|
800.2
|
|
|
$
|
766.3
|
|
(8) Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(in millions)
|
2018
|
|
2017
|
Land, land use rights and buildings
|
$
|
892.1
|
|
|
$
|
899.2
|
|
Machinery and equipment
|
2,767.8
|
|
|
2,734.4
|
|
Capital leases
|
1.3
|
|
|
1.5
|
|
Construction in progress
|
362.3
|
|
|
410.5
|
|
Total property, plant and equipment, gross
|
4,023.5
|
|
|
4,045.6
|
|
Less: accumulated depreciation
|
(1,406.9
|
)
|
|
(1,391.7
|
)
|
Property, plant and equipment, net, excluding tooling
|
2,616.6
|
|
|
2,653.9
|
|
Tooling, net of amortization
|
209.1
|
|
|
209.9
|
|
Property, plant and equipment, net
|
$
|
2,825.7
|
|
|
$
|
2,863.8
|
|
As of June 30, 2018 and December 31, 2017, accounts payable of
$62.1 million
and
$106.5 million
, respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the six months ended June 30, 2018 and 2017 were
$11.1 million
and
$9.2 million
, respectively.
(9) Product Warranty
The Company provides warranties on some, but not all, of its products. The warranty terms are typically from one to three years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual.
The following table summarizes the activity in the product warranty accrual accounts:
|
|
|
|
|
|
|
|
|
(in millions)
|
2018
|
|
2017
|
Beginning balance, January 1
|
$
|
111.5
|
|
|
$
|
95.3
|
|
Provisions
|
35.3
|
|
|
43.9
|
|
Acquisition
|
0.2
|
|
|
—
|
|
Payments
|
(29.8
|
)
|
|
(32.2
|
)
|
Translation adjustment
|
(2.5
|
)
|
|
3.9
|
|
Ending balance, June 30
|
$
|
114.7
|
|
|
$
|
110.9
|
|
In the six months ended June 30, 2018, warranty provisions decreased by
$8.6 million
from the same period in 2017 as the result of fewer product defect claims from customers in the Company's Engine segment.
The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(in millions)
|
2018
|
|
2017
|
Accounts payable and accrued expenses
|
$
|
67.9
|
|
|
$
|
69.0
|
|
Other non-current liabilities
|
46.8
|
|
|
42.5
|
|
Total product warranty liability
|
$
|
114.7
|
|
|
$
|
111.5
|
|
(10) Notes Payable and Long-Term Debt
As of June 30, 2018 and December 31, 2017, the Company had short-term and long-term debt outstanding as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(in millions)
|
2018
|
|
2017
|
Short-term debt
|
|
|
|
|
|
Short-term borrowings
|
$
|
67.7
|
|
|
$
|
68.8
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
8.00% Senior notes due 10/01/19 ($134 million par value)
|
136.4
|
|
|
137.4
|
|
4.625% Senior notes due 09/15/20 ($250 million par value)
|
251.2
|
|
|
251.4
|
|
1.80% Senior notes due 11/7/22 (€500 million par value)
|
580.1
|
|
|
595.7
|
|
3.375% Senior notes due 03/15/25 ($500 million par value)
|
496.3
|
|
|
496.1
|
|
7.125% Senior notes due 02/15/29 ($121 million par value)
|
119.0
|
|
|
118.9
|
|
4.375% Senior notes due 03/15/45 ($500 million par value)
|
493.6
|
|
|
493.5
|
|
Term loan facilities and other
|
28.7
|
|
|
26.5
|
|
Total long-term debt
|
2,105.3
|
|
|
2,119.5
|
|
Less: current portion
|
2.8
|
|
|
15.8
|
|
Long-term debt, net of current portion
|
$
|
2,102.5
|
|
|
$
|
2,103.7
|
|
In July 2016, the Company terminated interest rate swaps which had the effect of converting
$384.0 million
of fixed rate notes to variable rates. The gain on the termination was recorded as an increase to the notes and is being amortized as a reduction to interest expense over the remaining terms of the notes. The unamortized gain related to these swap terminations as of June 30, 2018 was
$2.4 million
and
$0.6 million
on the 4.625% and 8.00% notes, respectively. The unamortized gain related to these swap terminations as of December 31, 2017 was
$2.9 million
and
$0.8 million
on the 4.625% and 8.00% notes, respectively.
The Company terminated fixed to floating interest rate swaps in 2009. The gain on the termination was recorded as an increase to the notes and is being amortized as a reduction to interest expense over the remaining term of the notes. The unamortized gain related to this swap termination at June 30, 2018 and December 31, 2017 was
$1.9 million
and
$2.7 million
, respectively, on the 8.00% notes.
The weighted average interest rate on short-term borrowings outstanding as of June 30, 2018 and December 31, 2017 was
3.2%
and
3.1%
, respectively. The weighted average interest rate on all borrowings outstanding, including the effects of outstanding swaps, as of June 30, 2018 and December 31, 2017 was
3.4%
and
3.8%
, respectively.
The Company has a
$1.2 billion
multi-currency revolving credit facility, which includes a feature that allows the Company's borrowings to be increased to
$1.5 billion
. The facility provides for borrowings through June 29, 2022
.
The Company has one key financial covenant as part of the credit agreement which is a debt to EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") ratio. The Company was in compliance with the financial covenant at June 30, 2018. At June 30, 2018 and December 31, 2017, the Company had no outstanding borrowings under this facility.
The Company's commercial paper program allows the Company to issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding of
$1.2 billion
.
Under this program, the Company may issue notes from time to time and will use the proceeds for general corporate purposes.
The Company had no outstanding borrowings under this program as of June 30, 2018 and December 31, 2017.
The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed
$1.2 billion
.
As of June 30, 2018 and December 31, 2017, the estimated fair values of the Company’s senior unsecured notes totaled
$2,153.8 million
and
$2,209.1 million
, respectively. The estimated fair values were
$77.2 million
and
$116.1 million
higher than their carrying value at June 30, 2018 and December 31, 2017, 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
$29.3 million
and
$31.4 million
at June 30, 2018 and December 31, 2017, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.
(11) Fair Value Measurements
ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity specific measurement. Therefore, a fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:
|
|
Level 1:
|
Observable inputs such as quoted prices for identical assets or liabilities in active markets;
|
|
|
Level 2:
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
Level 3:
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC Topic 820:
|
|
A.
|
Market approach:
Prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
|
|
|
B.
|
Cost approach:
Amount that would be required to replace the service capacity of an asset (replacement cost).
|
|
|
C.
|
Income approach:
Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).
|
The following tables classify assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
(in millions)
|
Balance at
June 30, 2018
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
Assets:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
A
|
Net investment hedge contracts
|
$
|
6.6
|
|
|
$
|
—
|
|
|
$
|
6.6
|
|
|
$
|
—
|
|
|
A
|
Other long-term receivables (insurance settlement agreement note receivable)
|
$
|
43.4
|
|
|
$
|
—
|
|
|
$
|
43.4
|
|
|
$
|
—
|
|
|
C
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
A
|
Foreign currency contracts
|
$
|
6.2
|
|
|
$
|
—
|
|
|
$
|
6.2
|
|
|
$
|
—
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
(in millions)
|
Balance at
December 31, 2017
|
|
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
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
|
$
|
—
|
|
|
A
|
Other long-term receivables (insurance settlement agreement note receivable)
|
$
|
42.9
|
|
|
$
|
—
|
|
|
$
|
42.9
|
|
|
$
|
—
|
|
|
C
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
5.0
|
|
|
$
|
—
|
|
|
$
|
5.0
|
|
|
$
|
—
|
|
|
A
|
(12) Financial Instruments
The Company’s financial instruments include cash and marketable securities. Due to the short-term nature of these instruments, their book value approximates their fair value. The Company’s financial instruments may include long-term debt, interest rate and cross-currency swaps, commodity derivative contracts and foreign currency derivative contracts. All derivative contracts are placed with counterparties that have an S&P, or equivalent, investment grade credit rating at the time of the contracts’ placement. At June 30, 2018 and December 31, 2017, the Company had no derivative contracts that contained credit risk related contingent features.
The Company uses certain commodity derivative contracts to protect against commodity price changes related to forecasted raw material and component purchases. The Company primarily utilizes forward and option contracts, which are designated as cash flow hedges. At June 30, 2018, the following commodity derivative contracts were outstanding. At December 31, 2017, there were no commodity derivative contracts outstanding.
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts
|
|
|
Volume hedged
|
|
|
|
|
Commodity
|
|
June 30, 2018
|
|
Units of measure
|
|
Duration
|
Copper
|
|
151.0
|
|
|
Metric Tons
|
|
Dec - 18
|
The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to optimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). At June 30, 2018 and December 31, 2017, the Company had no outstanding interest rate swaps.
The Company uses foreign currency forward and option contracts to protect against exchange rate movements for forecasted cash flows (cash flow hedges), remeasurement exposures that affect earnings (non-designated hedges), and exposures associated with the Company’s net investments in certain foreign operations (net investment hedges). Forecasted cash flows may include capital expenditures, inventory purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. 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 June 30, 2018 and December 31, 2017, the following foreign currency derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (in millions)
|
Functional currency
|
|
Traded currency
|
|
Notional in traded currency
June 30, 2018
|
|
Notional in traded currency
December 31, 2017
|
|
Ending Duration
|
Brazilian real
|
|
Euro
|
|
1.9
|
|
|
1.1
|
|
|
Dec - 18
|
British pound
|
|
Euro
|
|
15.9
|
|
|
—
|
|
|
Dec - 18
|
British pound
|
|
US dollar
|
|
5.8
|
|
|
—
|
|
|
Dec - 18
|
Chinese renminbi
|
|
US dollar
|
|
11.6
|
|
|
36.0
|
|
|
Sep - 18
|
Chinese renminbi
|
|
Euro
|
|
—
|
|
|
18.6
|
|
|
Jun - 18
|
Euro
|
|
Chinese renminbi
|
|
37.0
|
|
|
85.0
|
|
|
Dec - 18
|
Euro
|
|
British pound
|
|
2.0
|
|
|
3.9
|
|
|
Dec - 18
|
Euro
|
|
Japanese yen
|
|
525.3
|
|
|
1,311.3
|
|
|
Dec - 18
|
Euro
|
|
Swedish krona
|
|
267.4
|
|
|
267.4
|
|
|
Jun -19
|
Euro
|
|
US dollar
|
|
24.7
|
|
|
56.5
|
|
|
Mar - 19
|
Japanese yen
|
|
Chinese renminbi
|
|
44.0
|
|
|
—
|
|
|
Dec - 18
|
Japanese yen
|
|
US dollar
|
|
1.4
|
|
|
—
|
|
|
Dec - 18
|
Korean won
|
|
Euro
|
|
0.8
|
|
|
3.1
|
|
|
Dec - 18
|
Korean won
|
|
Japanese yen
|
|
213.5
|
|
|
619.0
|
|
|
Dec - 18
|
Korean won
|
|
US dollar
|
|
29.8
|
|
|
11.2
|
|
|
Dec - 18
|
Swedish krona
|
|
Euro
|
|
83.1
|
|
|
109.7
|
|
|
Jan - 20
|
US dollar
|
|
Euro
|
|
—
|
|
|
42.0
|
|
|
Dec - 18
|
US dollar
|
|
Mexican peso
|
|
264.9
|
|
|
—
|
|
|
Dec - 18
|
The Company selectively uses cross-currency swaps to hedge the foreign currency exposure associated with our net investment in certain foreign operations (net investment hedges). At June 30, 2018, the following cross-currency swap contracts were outstanding. At December 31, 2017, there were no cross-currency swap derivative contracts outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
Cross-Currency Swaps
|
(millions of dollars)
|
Notional
in USD
|
|
Notional
in Local Currency
|
|
Duration
|
Fixed $ to fixed €
|
$
|
250.0
|
|
|
€
|
206.2
|
|
|
Sep - 20
|
Fixed $ to fixed ¥
|
$
|
100.0
|
|
|
¥
|
10,977.5
|
|
|
Feb - 23
|
At June 30, 2018 and December 31, 2017, the following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to or receivable from counterparties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Assets
|
|
Liabilities
|
Derivatives designated as hedging instruments Under Topic 815:
|
|
Location
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Location
|
|
June 30, 2018
|
|
December 31, 2017
|
Foreign currency
|
|
Prepayments and other current assets
|
|
$
|
1.5
|
|
|
$
|
0.9
|
|
|
Accounts payable and accrued expenses
|
|
$
|
4.0
|
|
|
$
|
3.9
|
|
|
|
Other non-current assets
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
Other non-current liabilities
|
|
$
|
1.7
|
|
|
$
|
—
|
|
Commodity
|
|
Prepayments and other current assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accounts payable and accrued expenses
|
|
$
|
0.1
|
|
|
$
|
—
|
|
Net investment hedges
|
|
Other non-current assets
|
|
$
|
6.6
|
|
|
$
|
—
|
|
|
Other non-current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
Prepayments and other current assets
|
|
—
|
|
|
—
|
|
|
Accounts payable and accrued expenses
|
|
0.5
|
|
|
1.1
|
|
Effectiveness for cash flow hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of effectiveness are deferred into accumulated other comprehensive income (loss) ("AOCI") and reclassified into income as the underlying operating transactions are recognized. These realized gains or losses offset the hedged transaction and are recorded on the same line in the statement of operations. The initial value of any component excluded from the assessment of effectiveness will be recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in fair value of the excluded component and amounts recognized in income under that systematic and rational method will be recognized in AOCI.
Effectiveness for net investment hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of effectiveness are deferred into foreign currency translation adjustments and only released when the subsidiary being hedged is sold or substantially liquidated. The initial value of any component excluded from the assessment of effectiveness will be recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in fair value of the excluded component and amounts recognized in income under that systematic and rational method will be recognized in AOCI.
The table below shows deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less. The amount expected to be reclassified to income in one year or less assumes no change in the current relationship of the hedged item at June 30, 2018 market rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Deferred gain (loss) in AOCI at
|
|
Gain (loss) expected to be reclassified to income in one year or less
|
Contract Type
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Foreign currency
|
|
$
|
(4.4
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
(2.6
|
)
|
Commodity
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Net investment hedges:
|
|
|
|
|
|
|
Foreign currency
|
|
2.9
|
|
|
2.9
|
|
|
—
|
|
Cross-currency swaps
|
|
6.6
|
|
|
—
|
|
|
—
|
|
Foreign currency denominated debt
|
|
(41.1
|
)
|
|
(57.1
|
)
|
|
—
|
|
Total
|
|
$
|
(36.1
|
)
|
|
$
|
(56.5
|
)
|
|
$
|
(2.7
|
)
|
The Company recognized a deferred loss of
$0.4 million
and
$5.9 million
in AOCI related to cash flow hedges during the three and six months ended June 30, 2018, respectively. The Company recognized a deferred loss of
$1.4 million
and
$0.9 million
in AOCI related to cash flow hedges during the three and six months ended June 30, 2017, respectively.
The Company recognized a deferred gain of
$45.9 million
and
$22.6 million
in foreign currency translation adjustment related to net investment hedges during the three and six months ended June 30, 2018, respectively. The Company recognized a deferred loss of
$44.9 million
and
$51.7 million
in foreign currency translation adjustment related to net investment hedges during the three and six months ended June 30, 2017, respectively.
Derivative instruments designated as cash flow hedge instruments as defined by ASC Topic 815 held during the period resulted in the following gains and (losses) recorded in income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
Total amounts of income and expense line items presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
|
|
$
|
2,694.0
|
|
|
$
|
2,114.8
|
|
|
$
|
236.0
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
(0.7
|
)
|
|
$
|
(1.5
|
)
|
|
$
|
(0.3
|
)
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Commodity
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
Total amounts of income and expense line items presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
|
|
$
|
5,478.3
|
|
|
$
|
4,307.3
|
|
|
$
|
489.4
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
(0.8
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
(0.3
|
)
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Commodity
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
Total amounts of income and expense line items presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
|
|
$
|
2,389.7
|
|
|
$
|
1,876.8
|
|
|
$
|
215.1
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
0.9
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
|
|
|
|
|
|
Commodity
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
Total amounts of income and expense line items presented in the Consolidated Statements of Operations in which the effects of cash flow hedges are recorded
|
|
$
|
4,796.7
|
|
|
$
|
3,767.5
|
|
|
$
|
434.1
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
2.0
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Commodity
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no gains and (losses) recorded in income related to components excluded from the assessment of effectiveness for derivative instruments designated as cash flow hedges.
Derivatives designated as net investment hedge instruments as defined by ASC Topic 815 held during the period resulted in the following gains and (losses) recorded in income on components excluded from the assessment of effectiveness:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
Three months ended
|
Contract Type
|
|
Location
|
|
June 30, 2018
|
|
June 30, 2017
|
Cross-currency swap
|
|
Interest expense and finance charges
|
|
$
|
2.2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
Six months ended
|
Contract Type
|
|
Location
|
|
June 30, 2018
|
|
June 30, 2017
|
Cross-currency swap
|
|
Interest expense and finance charges
|
|
$
|
3.5
|
|
|
$
|
—
|
|
There were no gains and (losses) recorded in income related to components excluded from the assessment of effectiveness for foreign currency denominated debt designated as net investment hedges. There were no gains and losses reclassified from AOCI for net investment hedges during the periods presented.
Derivatives not designated as hedging instruments are used to hedge remeasurement exposures of monetary assets and liabilities denominated in currencies other than the operating units’ functional currency. These derivatives resulted in the following gains and (losses) recorded in income:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
Three months ended
|
Contract Type
|
|
Location
|
|
June 30, 2018
|
|
June 30, 2017
|
Foreign currency
|
|
Selling, general and administrative expenses
|
|
$
|
2.5
|
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
Six months ended
|
Contract Type
|
|
Location
|
|
June 30, 2018
|
|
June 30, 2017
|
Foreign currency
|
|
Selling, general and administrative expenses
|
|
$
|
(1.2
|
)
|
|
$
|
0.1
|
|
(13) Retirement Benefit Plans
The Company has a number of defined benefit pension plans and other postretirement benefit plans covering eligible salaried and hourly employees and their dependents. The estimated contributions to the Company's defined benefit pension plans for 2018 range from
$15.0 million
to
$25.0 million
, of which
$8.1 million
has been contributed through the first six months of the year. The other postretirement benefit plans, which provide medical and life insurance benefits, are unfunded plans.
The components of net periodic benefit cost recorded in the Condensed Consolidated Statements of Operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement
employee benefits
|
(in millions)
|
|
2018
|
|
2017
|
|
Three Months Ended June 30,
|
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
—
|
|
|
$
|
4.5
|
|
|
$
|
—
|
|
|
$
|
4.5
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Interest cost
|
|
2.2
|
|
|
3.0
|
|
|
2.2
|
|
|
2.6
|
|
|
0.7
|
|
|
0.8
|
|
Expected return on plan assets
|
|
(3.5
|
)
|
|
(6.9
|
)
|
|
(3.2
|
)
|
|
(5.8
|
)
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service credit
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
(1.0
|
)
|
|
(1.0
|
)
|
Amortization of unrecognized loss
|
|
1.1
|
|
|
1.8
|
|
|
1.0
|
|
|
1.9
|
|
|
0.3
|
|
|
0.3
|
|
Net periodic benefit (income) cost
|
|
$
|
(0.4
|
)
|
|
$
|
2.4
|
|
|
$
|
(0.2
|
)
|
|
$
|
3.2
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement
employee benefits
|
(in millions)
|
|
2018
|
|
2017
|
|
Six Months Ended June 30,
|
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
—
|
|
|
$
|
9.1
|
|
|
$
|
—
|
|
|
$
|
8.8
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Interest cost
|
|
4.3
|
|
|
6.1
|
|
|
4.4
|
|
|
5.2
|
|
|
1.4
|
|
|
1.6
|
|
Expected return on plan assets
|
|
(6.9
|
)
|
|
(13.9
|
)
|
|
(6.5
|
)
|
|
(11.4
|
)
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service credit
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(2.0
|
)
|
|
(2.0
|
)
|
Amortization of unrecognized loss
|
|
2.1
|
|
|
3.6
|
|
|
2.1
|
|
|
3.8
|
|
|
0.6
|
|
|
0.6
|
|
Net periodic benefit (income) cost
|
|
$
|
(0.9
|
)
|
|
$
|
4.9
|
|
|
$
|
(0.4
|
)
|
|
$
|
6.4
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
The components of net periodic benefit cost other than the service cost component are included in Other postretirement income in the Condensed Consolidated Statements of Operations.
(14) Stock-Based Compensation
The Company has granted restricted common stock and restricted stock units (collectively, "restricted stock") and performance share units as long-term incentive awards to employees and non-employee directors under the Company's 2014 Stock Incentive Plan ("2014 Plan") and the Company's 2018 Stock Incentive Plan ("2018 Plan"). The Company's Board of Directors adopted the 2018 Plan as a replacement to the 2014 Plan in February 2018, and the Company's stockholders approved the 2018 Plan at the annual meeting of stockholders on April 25, 2018. After stockholders approved the 2018 Plan, the Company could no longer make grants under the 2014 Plan. The shares that were available for issuance under the 2014 Plan were cancelled upon approval of the 2018 Plan. The 2018 Plan authorizes the issuance of a total of
7.0 million
shares, of which approximately
6.9 million
shares were available for future issuance as of June 30, 2018.
Restricted stock
In the first six months of 2018, the Company granted restricted stock relating to
673,961
shares and
19,656
shares to employees and non-employee directors, respectively. Restricted stock granted to employees generally vests
50%
after
two years
and the remainder after
three years
from the date of grant. Restricted stock granted to non-employee directors generally vests on the first anniversary of the date of grant. The Company recognizes the value of the restricted stock, which is equal to the market value of the Company’s common stock on the date of grant, as compensation expense ratably over the restricted stock's vesting period. As of June 30, 2018, the Company had
$46.7 million
of unrecognized compensation expense that will be recognized over a weighted average period of
2.0 years
. The Company recorded restricted stock compensation expense of
$5.4 million
and
$6.7 million
for the three months ended June 30, 2018 and 2017, respectively, and
$11.9 million
and
$13.5 million
for the six months ended June 30, 2018 and 2017, respectively.
A summary of the Company’s nonvested restricted stock for the six months ended June 30, 2018 is as follows:
|
|
|
|
|
|
|
|
|
Shares subject to restriction
(thousands)
|
|
Weighted average grant date fair value
|
Nonvested at December 31, 2017
|
1,593
|
|
|
$
|
38.86
|
|
Granted
|
625
|
|
|
$
|
52.64
|
|
Vested
|
(486
|
)
|
|
$
|
41.05
|
|
Forfeited
|
(7
|
)
|
|
$
|
49.48
|
|
Nonvested at March 31, 2018
|
1,725
|
|
|
$
|
43.26
|
|
Granted
|
68
|
|
|
$
|
50.86
|
|
Vested
|
(68
|
)
|
|
$
|
51.11
|
|
Forfeited
|
(142
|
)
|
|
$
|
45.68
|
|
Nonvested at June 30, 2018
|
1,583
|
|
|
$
|
43.03
|
|
Total Stockholder Return Performance Share Units
The Company grants performance share units to members of senior management that vest at the end of three-year periods based on the Company's total stockholder return relative to a peer group of companies. The Company recorded compensation expense of
$0.5 million
and
$2.3 million
for the three months ended June 30, 2018 and 2017, respectively, and
$2.2 million
and
$5.4 million
for the six months ended June 30, 2018 and 2017, respectively.
Relative Revenue Growth Performance Share Units
The Company also grants performance share units to members of senior management that vest based on the Company's revenue growth relative to the vehicle market over three-year performance periods. The Company's compensation expense was
$1.2 million
and
$2.2 million
for the three months ended June 30, 2018 and 2017, respectively, and
$7.7 million
and
$5.4 million
for the six months ended June 30, 2018 and 2017, respectively.
A summary of the status of the Company’s non-vested relative revenue growth performance share units for the six months ended June 30, 2018 is as follows:
|
|
|
|
|
|
|
|
|
Number of shares (thousands)
|
|
Weighted average grant date fair value
|
Non-vested at December 31, 2017
|
355
|
|
|
$
|
39.42
|
|
Granted
|
175
|
|
|
$
|
52.64
|
|
Non-vested at March 31, 2018
|
530
|
|
|
$
|
43.79
|
|
Granted
|
95
|
|
|
$
|
50.20
|
|
Forfeited
|
(144
|
)
|
|
$
|
45.82
|
|
Non-vested at June 30, 2018
|
481
|
|
|
$
|
44.45
|
|
The restricted stock and performance share unit compensation expense for the three and six months ended June 30, 2018 disclosed above includes a net reduction to expense of
$4.1 million
related to the Company's second quarter of 2018 decision to modify the vesting provisions of existing restricted stock and performance share unit grants made to a retiring executive officer to allow certain of the outstanding awards, that otherwise would have been forfeited, to vest upon retirement. Additional incremental compensation expense of
$15.8 million
related to these modified awards will be recognized ratably through February 2019.
Stockholder's Equity
During the six months ended June 30, 2018, the Company paid cash dividends of
$71.1 million
and repurchased
2,224,503
shares of common stock at a total cost of approximately
$113.5 million
. In connection with the stock based compensation plans above, the Company issued approximately
858,175
shares from treasury stock during the six months ended June 30, 2018. During the six months ended June 30, 2018, the Company declared dividends of
$35.5 million
to noncontrolling interest stockholders, of which
$24.9 million
were paid out.
(15) Accumulated Other Comprehensive Loss
The following tables summarize the activity within accumulated other comprehensive loss during the three and six months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
Beginning balance, March 31, 2018
|
|
$
|
(228.8
|
)
|
|
$
|
(4.6
|
)
|
|
$
|
(199.6
|
)
|
|
$
|
2.7
|
|
|
$
|
(430.3
|
)
|
Comprehensive income (loss) before reclassifications
|
|
(148.4
|
)
|
|
(0.4
|
)
|
|
6.4
|
|
|
—
|
|
|
(142.4
|
)
|
Income taxes associated with comprehensive income (loss) before reclassifications
|
|
2.9
|
|
|
—
|
|
|
(1.4
|
)
|
|
—
|
|
|
1.5
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
2.5
|
|
|
2.0
|
|
|
—
|
|
|
4.5
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
(0.5
|
)
|
|
(0.4
|
)
|
|
—
|
|
|
(0.9
|
)
|
Ending balance, June 30, 2018
|
|
$
|
(374.3
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
(193.0
|
)
|
|
$
|
2.7
|
|
|
$
|
(567.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
Beginning balance, March 31, 2017
|
|
$
|
(481.3
|
)
|
|
$
|
3.8
|
|
|
$
|
(198.0
|
)
|
|
$
|
1.3
|
|
|
$
|
(674.2
|
)
|
Comprehensive income (loss) before reclassifications
|
|
73.4
|
|
|
(1.4
|
)
|
|
(8.7
|
)
|
|
1.2
|
|
|
64.5
|
|
Income taxes associated with comprehensive income (loss) before reclassifications
|
|
—
|
|
|
(0.3
|
)
|
|
2.7
|
|
|
—
|
|
|
2.4
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
(1.5
|
)
|
|
2.0
|
|
|
—
|
|
|
0.5
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
0.9
|
|
|
(0.5
|
)
|
|
—
|
|
|
0.4
|
|
Ending balance, June 30, 2017
|
|
$
|
(407.9
|
)
|
|
$
|
1.5
|
|
|
$
|
(202.5
|
)
|
|
$
|
2.5
|
|
|
$
|
(606.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
Beginning balance, December 31, 2017
|
|
$
|
(293.8
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(197.6
|
)
|
|
$
|
2.7
|
|
|
$
|
(490.0
|
)
|
Comprehensive income (loss) before reclassifications
|
|
(86.7
|
)
|
|
(5.9
|
)
|
|
2.1
|
|
|
—
|
|
|
(90.5
|
)
|
Income taxes associated with comprehensive income (loss) before reclassifications
|
|
6.2
|
|
|
1.3
|
|
|
(0.3
|
)
|
|
—
|
|
|
7.2
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
3.7
|
|
|
3.9
|
|
|
—
|
|
|
7.6
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
(0.8
|
)
|
|
(1.1
|
)
|
|
—
|
|
|
(1.9
|
)
|
Ending balance, June 30, 2018
|
|
$
|
(374.3
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
(193.0
|
)
|
|
$
|
2.7
|
|
|
$
|
(567.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
Beginning balance, December 31, 2016
|
|
$
|
(530.3
|
)
|
|
$
|
5.0
|
|
|
$
|
(198.1
|
)
|
|
$
|
1.3
|
|
|
$
|
(722.1
|
)
|
Comprehensive income (loss) before reclassifications
|
|
122.4
|
|
|
(0.9
|
)
|
|
(11.0
|
)
|
|
1.2
|
|
|
111.7
|
|
Income taxes associated with comprehensive income (loss) before reclassifications
|
|
—
|
|
|
(0.5
|
)
|
|
3.7
|
|
|
—
|
|
|
3.2
|
|
Reclassification from accumulated other comprehensive loss
|
|
—
|
|
|
(3.6
|
)
|
|
4.1
|
|
|
—
|
|
|
0.5
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
1.5
|
|
|
(1.2
|
)
|
|
—
|
|
|
0.3
|
|
Ending balance, June 30, 2017
|
|
$
|
(407.9
|
)
|
|
$
|
1.5
|
|
|
$
|
(202.5
|
)
|
|
$
|
2.5
|
|
|
$
|
(606.4
|
)
|
(16) Contingencies
In the normal course of business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company will ultimately be successful in any of these commercial and legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that an adverse outcome in any of these commercial and legal claims, actions and complaints will have a material adverse effect on the Company's results of operations, financial position or cash flows, although it could be material to the results of operations in a particular quarter.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at
27
such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its results of operations, financial position or cash flows. Generally, this is because either the estimates of the maximum potential liability at a site are not material or the liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.
Based on information available to the Company (which in most cases includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation and consulting costs; and remediation alternatives), the Company has an accrual for indicated environmental liabilities of
$7.0 million
and
$8.3 million
as of June 30, 2018 and December 31, 2017, respectively. The Company expects to pay out substantially all of the amounts accrued for environmental liability over the next five years.
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
thirty 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.
The Company’s asbestos-related claims activity during the six months ended June 30, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Beginning Claims January 1
|
9,225
|
|
|
9,385
|
|
New Claims Received
|
1,020
|
|
|
1,116
|
|
Dismissed Claims
|
(786
|
)
|
|
(965
|
)
|
Settled Claims
|
(189
|
)
|
|
(244
|
)
|
Ending Claims June 30
|
9,270
|
|
|
9,292
|
|
The Company vigorously defends against these claims, and has obtained the dismissal of the majority of the claims asserted against it without any payment. The Company likewise expects that no payment will be made by the Company or its insurers in the vast majority of current and future asbestos-related claims in which it has been or will be named (or has an obligation to indemnify a party which has been or will be named).
Through June 30, 2018 and December 31, 2017, the Company incurred
$556.9 million
and
$528.7 million
, respectively,
in indemnity (including settlement payments) and defense costs in connection with asbestos-related claims. During the six months ended June 30, 2018 and 2017, the Company paid
$28.2 million
and
$26.5 million
, respectively, in indemnity and related defense costs in connection with asbestos-related claims. 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. The Company has accrued estimated amounts in its consolidated financial statements on account of asbestos-related claims that have been asserted but not yet resolved and for claims that have not yet been asserted. The Company's estimate of asbestos-related claims not yet asserted 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. As of June 30, 2018, the Company’s reasonable best estimate of the aggregate liability for both asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet asserted, including estimated defense costs, is as follows:
|
|
|
|
|
|
|
|
|
(in millions)
|
2018
|
|
2017
|
Asbestos Liability beginning balance, January 1
|
$
|
828.2
|
|
|
$
|
879.3
|
|
Indemnity and Defense Related Costs
|
(28.3
|
)
|
|
(26.6
|
)
|
Asbestos Liability ending balance, June 30
|
$
|
799.9
|
|
|
$
|
852.7
|
|
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 reasonable best estimate of such costs. Such estimate is subject to numerous uncertainties. These include future legislative or judicial changes affecting the U.S. tort system, bankruptcy proceedings involving one or more co-defendants, the impact and timing of payments from bankruptcy trusts that 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 balances recorded for asbestos-related claims are based on the best available information and assumptions that the Company believes are reasonable, including as to the
number of future claims that may be asserted, the percentage of claims that may result in a payment, the average cost to resolve such claims, and potential defense costs. The Company has concluded that it is reasonably possible that it may incur additional losses through 2067 for asbestos-related claims, in addition to amounts recorded, of up to approximately
$100.0 million
as of June 30, 2018. The various assumptions utilized in arriving at the Company’s estimate may also change over time, and the Company’s actual liability for asbestos-related claims asserted but not yet resolved and those not yet asserted may be higher or lower than the Company’s estimate as a result of such changes.
On June 15, 2018, the Company announced that it would restate its consolidated financial statements for the fiscal years ended December 31, 2016 and 2015 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, due to the Company’s re-evaluation of its accounting in those years for the estimated value of asbestos-related claims that had not yet been asserted and their associated defense costs. The Company will also make appropriate revisions to the selected financial data for 2014 and 2013 and the quarterly information for 2016 to reflect these changes. The restatement does not affect the current financial results reported on this Quarterly Report on Form 10-Q, nor does it affect the Company’s previously reported results for the fiscal year ended December 31, 2017. The Company is working to prepare restated financial statements for the fiscal years ended December 31, 2016 and 2015, which the Company anticipates filing with the SEC on Form 10-K/A for the year ended December 31, 2017 as soon as practicable. For more information concerning the restatement, please see the Current Report on Form 8-K filed by the Company with the SEC on June 15, 2018.
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 June 30, 2018 and December 31, 2017, the Company received
$270.5 million
and
$270.0 million
, respectively,
in cash and notes from insurers on account of indemnity and defense costs respecting asbestos-related claims.
The Company continues to have additional excess insurance coverage available for potential future asbestos-related claims. As of June 30, 2018 and December 31, 2017, the Company estimates that it has
$386.4 million
in aggregate insurance coverage available with respect to asbestos-related claims, and their associated defense costs, which the Company has recorded as a receivable. The Company has determined the amount of that estimate by taking into account the remaining limits of the insurance coverage, the number and amount of potential claims from co-insured parties, potential remaining recoveries from insolvent insurers, the impact of previous insurance settlements, and coverage available from solvent insurers not party to the coverage litigation. The Company’s remaining estimated insurance coverage relating to asbestos-related claims and their associated defense costs is the subject of disputes with its insurers, substantially all of which are being adjudicated in the Cook County insurance litigation. The Company believes that its insurance receivable is probable of collection notwithstanding those disputes based on, among other things, the arguments made by the insurers in the Cook County litigation and evaluation of those arguments by the Company and its counsel, the case law applicable to the issues in dispute, the rulings to date by the Cook County court, the absence of any credible evidence alleged by the insurers that they are not liable to indemnify the Company, and the fact that the Company has recovered a substantial portion of its insurance coverage,
$270.5 million
, to date from its insurers under similar policies. However, the resolution of the insurance coverage disputes, and the number and amount of claims on our insurance
from co-insured parties, may increase or decrease the amount of such insurance coverage available to the Company as compared to the Company’s estimate.
The amounts recorded in the Condensed Consolidated Balance Sheets respecting asbestos-related claims are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(in millions)
|
2018
|
|
2017
|
Assets:
|
|
|
|
Non-current assets
|
$
|
386.4
|
|
|
$
|
386.4
|
|
Total insurance assets
|
$
|
386.4
|
|
|
$
|
386.4
|
|
Liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
52.0
|
|
|
$
|
52.5
|
|
Other non-current liabilities
|
747.9
|
|
|
775.7
|
|
Total accrued liabilities
|
$
|
799.9
|
|
|
$
|
828.2
|
|
(17) Restructuring
In the third quarter of 2017, the Company initiated actions within its emissions business in the Engine segment designed to improve future profitability and competitiveness and started exploring strategic options for the non-core emission product lines. As a continuation of these actions, the Company recorded restructuring expense of
$28.1 million
and
$32.9 million
during the three and six months ended June 30, 2018, respectively, primarily related to professional fees and employee termination benefits. In the second quarter of 2018, the Company initiated a voluntary termination program in the European emissions business and approximately
140
employees accepted the voluntary termination packages. As a result, the Company recorded approximately
$25.3 million
of employee severance expense during the three months ended June 30, 2018. The Company will continue its plan to improve the future profitability and competitiveness of its remaining European emissions business in the Engine segment. These actions may result in the recognition of additional restructuring charges that could be material.
Additionally, the Company recorded restructuring expense of
$3.2 million
and
$5.5 million
in the three and six months ended June 30, 2018, respectively, in the Drivetrain segment primarily related to manufacturing footprint rationalization activities.
Estimates of restructuring expense are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established accruals.
The following tables display a rollforward of the severance accruals recorded within the Company's Condensed Consolidated Balance Sheet and the related cash flow activity for the three and six months ended June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Accruals
|
(in millions)
|
|
Drivetrain
|
|
Engine
|
|
Total
|
Balance at December 31, 2017
|
|
$
|
4.1
|
|
|
$
|
1.3
|
|
|
$
|
5.4
|
|
Provision
|
|
1.1
|
|
|
0.7
|
|
|
1.8
|
|
Cash payments
|
|
(0.6
|
)
|
|
(1.1
|
)
|
|
(1.7
|
)
|
Translation adjustment
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Balance at March 31, 2018
|
|
$
|
4.7
|
|
|
$
|
0.9
|
|
|
$
|
5.6
|
|
Provision
|
|
1.7
|
|
|
25.4
|
|
|
27.1
|
|
Cash payments
|
|
(1.3
|
)
|
|
(4.8
|
)
|
|
(6.1
|
)
|
Translation adjustment
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
Balance at June 30, 2018
|
|
$
|
5.0
|
|
|
$
|
21.5
|
|
|
$
|
26.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Accruals
|
(in millions)
|
|
Drivetrain
|
|
Engine
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
3.7
|
|
|
$
|
2.7
|
|
|
$
|
6.4
|
|
Cash payments
|
|
(1.6
|
)
|
|
(2.1
|
)
|
|
(3.7
|
)
|
Translation adjustment
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
Balance at March 31, 2017
|
|
$
|
2.1
|
|
|
$
|
0.7
|
|
|
$
|
2.8
|
|
Cash payments
|
|
(0.2
|
)
|
|
(0.4
|
)
|
|
(0.6
|
)
|
Translation adjustment
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Balance at June 30, 2017
|
|
$
|
2.0
|
|
|
$
|
0.3
|
|
|
$
|
2.3
|
|
(18) Earnings Per Share
The Company presents both basic and diluted earnings per share of common stock (“EPS”). Basic EPS is calculated by dividing net earnings attributable to 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 and compensation cost for future service that the Company has not yet recognized. The dilutive effects of performance-based stock awards described in the Stock-Based Compensation footnote are included in the computation of diluted earnings per share at the level the related performance criteria are met through the respective balance sheet date. The total shareholder return performance shares of
174,400
shares granted in 2016 and
174,750
shares granted in 2018 were excluded from the computation of the diluted earnings per share for the three and six months ended June 30, 2018 because the impact of these potential shares would be anti-dilutive to the basic earnings per share.
The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(in millions, except per share amounts)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
271.8
|
|
|
$
|
212.0
|
|
|
$
|
496.9
|
|
|
$
|
401.2
|
|
Weighted average shares of common stock outstanding
|
208.570
|
|
|
210.572
|
|
|
209.023
|
|
|
211.084
|
|
Basic earnings per share of common stock
|
$
|
1.30
|
|
|
$
|
1.01
|
|
|
$
|
2.38
|
|
|
$
|
1.90
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
271.8
|
|
|
$
|
212.0
|
|
|
$
|
496.9
|
|
|
$
|
401.2
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
208.570
|
|
|
210.572
|
|
|
209.023
|
|
|
211.084
|
|
Effect of stock-based compensation
|
1.287
|
|
|
0.906
|
|
|
1.289
|
|
|
0.773
|
|
Weighted average shares of common stock outstanding including dilutive shares
|
209.857
|
|
|
211.478
|
|
|
210.312
|
|
|
211.857
|
|
Diluted earnings per share of common stock
|
$
|
1.30
|
|
|
$
|
1.00
|
|
|
$
|
2.36
|
|
|
$
|
1.89
|
|
(19) Reporting Segments
The Company's business is comprised of
two
reporting segments: Engine and Drivetrain. These segments are strategic business groups, which are managed separately as each represents a specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return on invested capital ("ROIC") of its business initiatives. ROIC is comprised of Adjusted EBIT after deducting notional taxes compared to the projected average capital investment required. Adjusted EBIT is comprised of earnings before interest, income taxes and noncontrolling interest (“EBIT") adjusted for restructuring, goodwill impairment charges, affiliates' earnings and other items not reflective of on-going operating income or loss.
Adjusted EBIT is the measure of segment income or loss used by the Company. The Company believes Adjusted EBIT is most reflective of the operational profitability or loss of our reporting segments. The following tables show segment information and Adjusted EBIT for the Company's reporting segments.
Net Sales by Reporting Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Engine
|
$
|
1,674.3
|
|
|
$
|
1,481.8
|
|
|
$
|
3,390.4
|
|
|
$
|
2,977.2
|
|
Drivetrain
|
1,034.1
|
|
|
921.0
|
|
|
2,117.0
|
|
|
1,845.9
|
|
Inter-segment eliminations
|
(14.4
|
)
|
|
(13.1
|
)
|
|
(29.1
|
)
|
|
(26.4
|
)
|
Net sales
|
$
|
2,694.0
|
|
|
$
|
2,389.7
|
|
|
$
|
5,478.3
|
|
|
$
|
4,796.7
|
|
Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest (“Adjusted EBIT”)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
(in millions)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Engine
|
$
|
278.8
|
|
|
$
|
243.3
|
|
|
$
|
559.0
|
|
|
$
|
489.5
|
|
Drivetrain
|
116.3
|
|
|
109.2
|
|
|
237.3
|
|
|
213.6
|
|
Adjusted EBIT
|
395.1
|
|
|
352.5
|
|
|
796.3
|
|
|
703.1
|
|
Restructuring expense
|
31.2
|
|
|
—
|
|
|
38.7
|
|
|
—
|
|
Merger, acquisition and divestiture expense
|
1.0
|
|
|
—
|
|
|
3.2
|
|
|
—
|
|
Lease termination settlement
|
—
|
|
|
—
|
|
|
—
|
|
|
5.3
|
|
Other income, net
|
—
|
|
|
—
|
|
|
(4.8
|
)
|
|
—
|
|
Other postretirement income
|
(2.4
|
)
|
|
(1.4
|
)
|
|
(5.0
|
)
|
|
(2.6
|
)
|
Corporate, including equity in affiliates' earnings and stock-based compensation
|
37.1
|
|
|
40.0
|
|
|
89.7
|
|
|
84.1
|
|
Interest income
|
(1.4
|
)
|
|
(1.4
|
)
|
|
(2.9
|
)
|
|
(2.9
|
)
|
Interest expense and finance charges
|
14.9
|
|
|
18.0
|
|
|
31.0
|
|
|
36.0
|
|
Earnings before income taxes and noncontrolling interest
|
314.7
|
|
|
297.3
|
|
|
646.4
|
|
|
583.2
|
|
Provision for income taxes
|
30.4
|
|
|
76.2
|
|
|
125.3
|
|
|
162.5
|
|
Net earnings
|
284.3
|
|
|
221.1
|
|
|
521.1
|
|
|
420.7
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
12.5
|
|
|
9.1
|
|
|
24.2
|
|
|
19.5
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
271.8
|
|
|
$
|
212.0
|
|
|
$
|
496.9
|
|
|
$
|
401.2
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(in millions)
|
2018
|
|
2017
|
Engine
|
$
|
4,741.0
|
|
|
$
|
4,732.9
|
|
Drivetrain
|
3,921.6
|
|
|
3,903.8
|
|
Total
|
8,662.6
|
|
|
8,636.7
|
|
Corporate *
|
1,114.6
|
|
|
1,150.9
|
|
Total assets
|
$
|
9,777.2
|
|
|
$
|
9,787.6
|
|
____________________________________
* Corporate assets include investments and other long-term receivables and certain deferred income taxes.
(20) Recent Transactions
On September 27, 2017, the Company acquired
100%
of the equity interests in Sevcon for cash of
$185.7 million
. This amount included
$26.6 million
paid to settle outstanding debt and
$5.1 million
paid for Sevcon stock-based awards attributable to precombination services.
Sevcon is a global player in electrification technologies, serving customers in the U.S., U.K., France, Germany, Italy, China and the Asia Pacific region. Sevcon complements BorgWarner’s power electronics capabilities utilized to provide electrified propulsion solutions. Sevcon's operating results and assets are reported within the Company's Drivetrain reporting segment.
The following table summarizes the aggregated preliminary fair value of the assets acquired and liabilities assumed on September 27, 2017, the date of acquisition:
|
|
|
|
|
|
(millions of dollars)
|
|
|
Receivables, net
|
|
$
|
15.9
|
|
Inventories, net
|
|
18.6
|
|
Other current assets
|
|
2.8
|
|
Property, plant and equipment, net
|
|
7.3
|
|
Goodwill
|
|
126.0
|
|
Other intangible assets
|
|
70.7
|
|
Deferred tax liabilities
|
|
(9.5
|
)
|
Income taxes payable
|
|
(0.7
|
)
|
Other assets and liabilities
|
|
(2.9
|
)
|
Accounts payable and accrued expenses
|
|
(24.5
|
)
|
Total consideration, net of cash acquired
|
|
203.7
|
|
|
|
|
Less: Assumed retirement-related liabilities
|
|
18.0
|
|
Cash paid, net of cash acquired
|
|
$
|
185.7
|
|
In connection with the acquisition, the Company capitalized
$17.7 million
for customer relationships,
$48.8 million
for developed technology and
$4.2 million
for the Sevcon trade name. These intangible assets, excluding the indefinite-lived trade name, will be amortized over a period of
7
to
20
years. Various valuation techniques were used to determine the fair value of the intangible assets, with the primary techniques being forms of the income approach, 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.
The Company is in the process of finalizing all purchase accounting adjustments related to the acquisition. The Company has recorded fair value adjustments based on new information obtained during the measurement period primarily related to intangible assets. As of June 30, 2018, these adjustments have resulted in a decrease in goodwill of
$7.6 million
from the Company's initial estimate. In addition, certain other estimated values for the acquisition, including goodwill, contingencies and deferred taxes are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition.
Due to its insignificant size relative to the Company, supplemental pro forma financial information of the combined entity for the current and prior reporting period is not provided.
(21) Assets and Liabilities Held For Sale
In 2017, the Company started exploring strategic options for non-core emission product lines in the Engine segment and launched an active program to locate a buyer and initiated all other actions required to complete the plan to sell the non-core pipes and thermostat product lines. The Company determined that the assets and liabilities of the pipes and thermostat product lines met the held for sale criteria as of December, 2017. In the first six months of 2018, the Company continued its efforts to locate a buyer for this business. As of June 30, 2018 and December 31, 2017, assets of
$65.5 million
and
$67.3 million
, including allocated goodwill of
$7.1 million
and
$7.3 million
, and liabilities of
$31.3 million
and
$29.5 million
, respectively, were reclassified as held for sale on the Consolidated Balance Sheets. The fair value of the assets and liabilities,
less costs to sell, was determined to be less than the carrying value, therefore, the Company recorded an asset impairment expense of
$71.0 million
in the year ended December 31, 2017 in Other expense, net to adjust the net book value of this business to its fair value less cost to sell. There was no asset impairment expense recorded in the three and six months ended June 30, 2018. The business did not meet the criteria to be classified as a discontinued operation.
The assets and liabilities classified as held for sale are as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
Receivables, net
|
$
|
22.2
|
|
|
$
|
21.0
|
|
Inventories, net
|
25.3
|
|
|
30.4
|
|
Prepayments and other current assets
|
11.4
|
|
|
10.3
|
|
Property, plant and equipment, net
|
47.7
|
|
|
47.7
|
|
Goodwill
|
7.1
|
|
|
7.3
|
|
Other intangible assets, net
|
20.6
|
|
|
21.1
|
|
Other assets
|
0.3
|
|
|
0.5
|
|
Impairment of carrying value
|
(69.1
|
)
|
|
(71.0
|
)
|
Total assets held for sale
|
$
|
65.5
|
|
|
$
|
67.3
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
25.6
|
|
|
$
|
24.6
|
|
Other liabilities
|
5.7
|
|
|
4.9
|
|
Total liabilities held for sale
|
$
|
31.3
|
|
|
$
|
29.5
|
|