NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2021 AND 2020 AND FOR THE YEAR ENDED DECEMBER 31, 2021
__________________________________________________________________________________
1.DESCRIPTION OF PLAN
The following description of the BorgWarner Inc. Retirement Savings Plan (the “Plan”) provides only general information. Participants should refer to the Plan document for a more complete description of the Plan’s provisions.
General - The Plan was established on January 27, 1993 as a defined contribution plan under Section 401(a) of the Internal Revenue Code (“IRC”), designed to provide eligible employees of BorgWarner Inc. (the “Company”) with systematic savings and tax advantaged long-term savings for retirement.
The Company is the sponsor of the Plan and has assigned the Employee Benefits Committee (the “Committee”) to oversee the Plan.
The Company appointed Vanguard Group, Inc. and Vanguard Fiduciary Trust Company (the “Trustee”) to perform the administrative, investment managing, recordkeeping, and trustee services for the Plan.
The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
Delphi Technologies Plan Merger - On October 1, 2020, the Company completed its acquisition of 100% of the outstanding ordinary shares of Delphi Technologies PLC (“Delphi Technologies”). The Company became the sponsor of the Delphi Technologies Salaried Retirement Savings Program (“Delphi Technologies Savings Plan”), effective October 1, 2020.
On December 31, 2020, the Delphi Technologies Savings Plan was amended to merge into the Plan and provided that the assets attributable to the Delphi Technologies Savings Plan be transferred and merged with those of the Plan effective as of December 31, 2020. Assets totaling $372 million were transferred into the Plan, of which $296 million of cash-in-transit was recorded as Due from Delphi Technologies Salaried Retirement Savings Program in the Statement of Net Assets Available for Benefits as of December 31, 2020. On the merger date, each of the Delphi Technologies Savings Plan’s participants had an accrued benefit in the Plan that was no less than their accrued benefit under the Delphi Technologies Savings Plan immediately prior to the merger. Effective January 1, 2021, the Plan was amended to incorporate certain provisions of the Delphi Technologies Savings Plan.
Eligibility - Non-union employees of the Company, and employees of its divisions, subsidiaries, or affiliates that have adopted the Plan, subject to the consent of the Committee, are immediately eligible to make employee contributions as of their date of hire and receive a Company matching contribution as of the deferral date. Additionally, employees are eligible for Company Retirement Account contributions after 60 days of employment with the Company.
Hourly employees at the Ithaca, New York facilities (“Ithaca”) covered by the collective bargaining agreement between the Company and the International Brotherhood of Teamsters Local 317 become eligible in the Plan upon completion of 60 days of employment and are eligible for Company matching contributions as of the deferral date. Additionally, Ithaca hourly employees are eligible for Company Retirement Account contributions after six months of employment.
Participants’ Accounts - Individual accounts are maintained for each Plan participant. Each participant's account is credited with the participant's contributions and rollovers, the Company's contributions, an allocation of Plan earnings, and charged with withdrawals and an allocation of Plan expenses and losses. Allocations are based on participant earnings or account balances. The benefit to which a participant is entitled is the benefit that can be provided from the participant's vested account, including:
Company Retirement Account - The Company makes contributions as a percentage of a participant's compensation, based on years of vested service and age, to this account on behalf of each eligible participant. The first 3% of this compensation is characterized as a non-elective safe harbor contribution, except for Ithaca hourly employees.
For Ithaca hourly employees, the Company contributes an amount to this account for each hour worked or for which employees receive holiday, vacation, jury duty, bereavement, or bonus pay based on years of service, and range from $0.63 per hour to $1.04 per hour for the year ended December 31, 2021. No employee contributions are made to this account.
Savings Account - Participants may voluntarily contribute from 1% to 70% of their eligible compensation to this account on a pre-tax, Roth after-tax or traditional after-tax basis, subject to IRC limitations. New employees, excluding Ithaca hourly employees, are automatically enrolled at 6% pre-tax upon completing 60 days of service, unless they elect not to participate or they elect a different percentage rate. Additionally, non-highly compensated participant contributions automatically increase by 2% each year thereafter to a maximum of 15%, unless the participant chooses to opt out. Highly compensated employee company retirement contributions are capped at 9% of the participating compensation limit for each plan year. For Ithaca hourly employees, the pre-tax contribution rate will increase by 1% as of the first payroll date following each September 1st, to a maximum of 10% of their compensation, unless the participant chooses to opt out.
Participants who have attained age 50 before the end of the plan year are eligible to make catch-up contributions. These contributions are also subject to annual IRC limitations. Participants may also contribute amounts representing distributions from other qualified defined benefit or defined contribution plans. The Company makes contributions before-tax and/or Roth after-tax contributions dollar for dollar, up to 3% of the participant’s eligible compensation. The Company matching contributions become 100% vested after an employee has completed three years of service.
Retiree Health Account - Participants may voluntarily contribute from 1% to 3% of their compensation to this account. The Company makes contributions equal to 100% of participants’ contributions to this account, limited to $500 per year. No after-tax contributions are allowed. Similarly, the Company provides a Retiree Health Account for Ithaca hourly employees, after the collective bargaining agreement’s applicable waiting periods.
Investment Options - Participants elect to invest their account balances into various investment options offered by the Plan, including collective trust funds, mutual funds, money market funds, and BorgWarner Inc. common stock.
In addition, to the extent they were invested as of December 31, 2020, former participants of the Delphi Technologies Savings Plan could invest in a self-directed brokerage account option. The self-directed brokerage account option was closed by the Plan on June 30, 2021. Any securities held within the brokerage accounts were auto-liquidated on July 1, 2021 and the proceeds were invested in the appropriate Vanguard Target Retirement Trust II fund based on the participants age with the target date closest to the year they turn age 65.
Voting Rights - Each participant who has an interest in the BorgWarner Company Stock Fund is entitled to exercise voting rights attributable to the shares allocated to his or her stock fund account and is notified by the Trustee, as defined by the Plan, prior to the time that such rights are to be exercised. If the Trustee does not receive timely instructions, the Trustee itself or by proxy shall vote all such shares in the same ratio as the shares with respect to which instructions were received from participants.
Vesting - Participant’s are immediately vested in their contributions and the non-elective safe harbor Company contributions plus actual earnings thereon. Vesting in all other Company contributions occurs after three years of service commencing at the date of hire; or permanent disability, death, or attaining age 65 provided the participant is employed by the Company on that date.
Payment of Benefits - On termination of service due to death, disability, or retirement, depending on the type of distribution, a participant may elect to receive a lump-sum payment, periodic installments or partial payments. There are also minimum distributions that are required under the IRC after a participant reaches a certain age.
Participants may request an in-service withdrawal or a hardship withdrawal under the following circumstances:
In-service Withdrawal - for non-hardship withdrawals, a participant under the age of 59 ½ can request a withdrawal of all or a portion of the participant’s after-tax employee contributions, rollovers, and pre-1988 Company matching contributions (including earnings). A participant under the age of 59 ½ is not limited to a number of in-service non-hardship withdrawals in any calendar year. A participant who attained age 59 ½ may request a withdrawal of all or any portion of their vested balance and are not limited to a number of in-service non-hardship withdrawals in any calendar year.
Hardship Withdrawal - a participant who has not attained age 59 ½ may request a hardship withdrawal from all employee-contributed balances, including rollovers and pre-1988 Company matching contributions. A participant may not make more than a total of two hardship withdrawals in any calendar year. Due to a Plan amendment effective January 1, 2019, a participant's payroll deduction that was previously suspended due to a hardship withdrawal have been reinstated.
These withdrawals may be subject to a 10% federal income tax penalty, and participants or beneficiaries failing to receive a minimum distribution during a calendar year are subject to an additional tax equal to 50% of the difference between the minimum distribution and the amount the recipient actually received. Each withdrawal shall be made ratably from the investment funds in which the applicable account is invested.
In response to the COVID-19 pandemic (“COVID-19”), on March 27, 2020, the U.S. Federal Government enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Plan adopted certain provisions of the CARES Act that provided temporary relief for eligible plan participants, such as, penalty-free distributions of up to $100,000 on or before December 31, 2020 for qualifying COVID-19 related reasons and permitted a waiver on required minimum distributions in 2020.
Notes Receivable from Participants - Participants may borrow a minimum of $500 and a maximum of the lesser of (a) 50% of the vested balance or (b) $50,000 reduced by the highest outstanding loan balance in the last 12 months. Available sources from which the participant may borrow include employee-contributed balances within the Savings Account and Retiree Health Account, and any qualified non-elective contributions.
Notes receivable terms generally range from six months to six years, with interest charged at the rate established by the Trustee for similar loans on the origination date. A loan administrative fee is
deducted from the participant’s loan proceeds. Interest rates on loans outstanding as of December 31, 2021 and 2020 ranged from 3.25% to 9.25%. Notes receivable from participants are secured by the remaining balance in the participants' accounts and are reported based on net realizable value. Principal and interest are paid ratably through payroll deductions.
The Plan adopted certain provisions of the CARES Act, for the year ended December 31, 2020, which increased the maximum amount of plan loans to $100,000 or 100% of the participant’s account balance and allowed loan repayments to be suspended for up to one year without causing the loan to become delinquent and go into default.
Plan Termination - Although the Company has expressed no intent to discontinue the Plan, it has the right to do so at any time, subject to provisions set forth in ERISA. In the event of termination, the interests of affected participants shall become fully vested. The Plan assets then remaining shall be used to pay administrative expenses and benefits equal to the balance in participant accounts.
Forfeited Accounts - As of December 31, 2021 and 2020, there was $154,220 and $91,740 of forfeited nonvested balance, respectively. During the year ended December 31, 2021, Company contributions were reduced by approximately $730,000 from forfeited nonvested accounts.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The financial statements of the Plan are prepared under the accrual method of accounting and in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Investment Valuation - Investments are recorded at fair value based upon the last traded or current bid prices in active markets. Where there are no readily available last traded or current bid prices, fair value estimation procedures used in determining asset values might cause differences from the values that would exist in a ready market due to the potential subjectivity in the estimates.
Income Recognition - Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) includes the Plan’s gains and losses on investments purchased and sold as well as held during the year.
Notes Receivable from Participants - Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent participant loans are reclassified as distributions based upon the terms of the Plan document. No allowance for credit losses has been recorded as of December 31, 2021 and 2020.
Use of Estimates - The preparation of financial statements in conformity with GAAP requires Plan management to make estimates and assumptions that affect the reported amounts of net assets available for benefits and the reported amounts of changes in net assets available for benefits. Actual results could differ from those estimates.
Risks and Uncertainties - The Plan utilizes various investment instruments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the financial statements.
In March 2020, the COVID-19 outbreak was declared a global pandemic. The COVID-19 pandemic adversely affected global economic growth, investment fund prices and common stock share prices. It
is possible the COVID-19 pandemic could result in adverse impacts in the future. Plan management cannot reasonably estimate the full impact the COVID-19 pandemic could have on the Plan.
Administrative Expenses - Transfer taxes and brokerage expenses attributable to the Plan assets are charged to the applicable fund as a reduction of the return on that fund. Any other expenses incurred with respect to Plan administration are charged to participant accounts, where applicable, or are paid in such manner as the Company determines, and is in accordance with the Plan documents.
Payment of Benefits - Benefits are recorded when paid.
3.RELATED PARTY AND PARTIES-IN-INTEREST TRANSACTIONS
The Plan invests in BorgWarner Inc. common stock and makes loans to participants, which are permitted party-in-interest transactions. Certain investments are shares of mutual funds and other investments managed by an affiliate of the Trustee and, therefore, these transactions qualify as party-in-interest transactions. Fees paid by the Plan to the Trustee for Plan operations amounted to approximately $917,000 for the year ended December 31, 2021, and are included in administrative expenses. Fees paid by the Plan to the Trustee for investment management services were included as a reduction of return earned on each fund.
The Plan held approximately 1,864,664 and 2,215,405 shares of BorgWarner Inc. common stock of the Company at December 31, 2021 and 2020, respectively. These shares had a fair value of approximately $84 million and $86 million at December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, the Plan recorded approximately $15 million of net appreciation in fair value and $1 million of dividend income related to the shares of BorgWarner Inc. common stock.
The costs and expenses incurred by the Trustee under the Plan and the fee charged by the Trustee are charged to the Plan. The Company has the right to be reimbursed each year from the Plan for the cost to the Company of bank fees and auditing fees.
4.TAX STATUS
The Plan obtained a favorable determination letter, dated January 24, 2018, in which the Internal Revenue Service (“IRS”) stated the Plan complied with applicable requirements of the IRC. The Plan has been amended since the last amendment covered by that letter; however, the fiduciaries believe that the Plan continues to be designed and operated in accordance with the applicable provisions of the IRC. The fiduciaries of the Plan believe that the Plan and related trust continue to be tax-exempt. Therefore, no provision for income taxes has been included in the Plan's financial statements.
GAAP requires Plan management to evaluate tax positions taken by the Plan and recognize a tax liability or asset if the Plan has taken an uncertain position that more likely than not would not be sustained upon examination by the IRS. Plan management has not calculated a provision for income taxes for the Plan as of December 31, 2021 and 2020 and there are no uncertain positions taken or expected to be taken that would require recognition of a liability or asset or disclosure in the financial statements. The Plan is subject to audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
5.FAIR VALUE MEASUREMENTS
Accounting Standards Codification (“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.
Plan assets are measured at fair value using the market approach, which uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Following is a description of the valuation methodologies used for assets measured at fair value.
Collective Trust Funds - The Collective Trust Funds are valued at net asset value (“NAV”) of units held in the collective trust, which is used as a practical expedient to estimate fair value as of December 31, 2021 and 2020. The fair values of these investments are determined by reference to the respective funds’ underlying assets.
BorgWarner Inc. Common Stock Fund - The BorgWarner Inc. common stock fund is valued at the closing price reported on the New York Stock Exchange Composite Listing.
Mutual Funds - The Mutual Funds are investment vehicles stated at fair value based on quoted market prices. Mutual funds held by the Plan are open-end mutual funds that are registered with the U.S. Securities and Exchange Commission. These funds are required to publish their daily NAV and to transact at that price. The Mutual Funds held by the Plan are deemed to be actively traded.
Money Market Fund - The Money Market Fund invests in high-quality short-term securities and is considered an open-end mutual fund that is registered with the U.S. Securities and Exchange Commission. In accordance with Rule 2a-7 under the 1940 Act, the fund is valued at amortized cost method, which approximates fair value. This method of valuation is designed to enable the fund to price its shares at $1.00 per share, although the fund's share price may deviate from $1.00 per share.
Self-Directed Brokerage Accounts -The Self-Directed Brokerage Accounts primarily consist of equities, mutual funds, and exchange-traded funds. Equities are valued at the closing price reported in the active market in which the individual securities are traded. Mutual funds and exchange-traded funds are valued at quoted market prices.
The preceding methods described may produce a fair value calculation that may not be indicative of the net realizable value or reflective of future fair values. Furthermore, although the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following tables classify the Plan investments measured at fair value by level within the fair value hierarchy as of December 31, 2021 and 2020, respectively: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Basis of Fair Value Measurements |
| (in thousands) | | Balance at December 31, 2021 | | Quote Prices in Active Market for Identical Items
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
| BorgWarner Inc. Common Stock Fund | | $ | 84,041 | | | $ | 84,041 | | | $ | — | | | $ | — | |
| Mutual Funds | | 225,906 | | | 225,906 | | | — | | | — | |
| Money Market Fund | | 1,316 | | | — | | | 1,316 | | | — | |
| Total Investments in the Fair Value Hierarchy | | 311,263 | | | 309,947 | | | 1,316 | | | — | |
Investments Measured at NAV(a) | | 1,617,757 | | | — | | | — | | | — | |
| Total Investments at Fair Value | | $ | 1,929,020 | | | $ | 309,947 | | | $ | 1,316 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Basis of Fair Value Measurements |
| (in thousands) | | Balance at December 31, 2020 | | Quote Prices in Active Market for Identical Items
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
| BorgWarner Inc. Common Stock Fund | | $ | 85,603 | | | $ | 85,603 | | | $ | — | | | $ | — | |
| Mutual Funds | | 178,016 | | | 178,016 | | | — | | | — | |
| Money Market Fund | | 665 | | | — | | | 665 | | | — | |
| Self-Directed Brokerage Account | | 40,411 | | | 40,411 | | | | | |
| Total Investments in the Fair Value Hierarchy | | 304,695 | | | 304,030 | | | 665 | | | — | |
Investments Measured at NAV(a) | | 1,153,559 | | | — | | | — | | | — | |
| Total Investments at Fair Value | | $ | 1,458,254 | | | $ | 304,030 | | | $ | 665 | | | $ | — | |
(a) Assets measured at NAV and therefore excluded from the fair value hierarchy.
The following table summarizes investments measured at fair value using the NAV per share practical expedient as of December 31, 2021 and 2020. There are no participant redemption restrictions for these investments. Were the Plan to initiate a full redemption of the collective trust funds, the investment adviser reserves the right to temporarily delay withdrawal from the trust in order to ensure the securities liquidations will be carried out in an orderly business manner.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value at December 31, | | | | | | |
| (in thousands) | | 2021 | | 2020 | | Unfunded Commitments | | Redemption Frequency | | Redemption Notice Period |
| Collective trusts: | | | | | | | | | | |
| Artisan Partners Global Opportunities Trust; Tier 1 | | $ | 30,567 | | | $ | 19,817 | | | None | | Daily | | 30 days |
| Fidelity Managed Income Portfolio II | | — | | | 32,229 | | | None | | Daily | | 12 months |
| Northern Trust Collective TIPS Index Fund Non Lending; Tier Two | | 19,446 | | | 12,967 | | | None | | Daily | | 30 days |
| Northern Trust Collective Aggregate Bond Index Fund; Non Lending Tier Two | | 90,997 | | | 84,651 | | | None | | Daily | | 30 days |
| Northern Trust Collective S&P 500 Index Fund; DC Non Lending Tier Three | | 418,983 | | | 320,950 | | | None | | Daily | | 30 days |
| Northern Trust Collective Russell 2000 Index Fund; DC Non Lending Tier Three | | 66,078 | | | 51,351 | | | None | | Daily | | 30 days |
| Vanguard Retirement Savings Trust III | | 148,585 | | | 123,834 | | | None | | Daily | | 12 months |
| Vanguard Target Retirement 2015 Trust I | | 21,576 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2015 Trust II | | — | | | 16,801 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2020 Trust I | | 73,131 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2020 Trust II | | — | | | 55,287 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2025 Trust I | | 152,521 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2025 Trust II | | — | | | 74,037 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2030 Trust I | | 190,303 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2030 Trust II | | — | | | 90,190 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2035 Trust I | | 113,363 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2035 Trust II | | — | | | 70,080 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2040 Trust I | | 96,838 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2040 Trust II | | — | | | 65,027 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2045 Trust I | | 62,057 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2045 Trust II | | — | | | 46,043 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2050 Trust I | | 50,675 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2050 Trust II | | — | | | 34,763 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2055 Trust I | | 39,912 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2055 Trust II | | — | | | 24,089 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2060 Trust I | | 18,536 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2060 Trust II | | — | | | 8,945 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2065 Trust I | | 3,378 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement 2065 Trust II | | — | | | 1,705 | | | None | | Daily | | 30 days |
| Vanguard Target Retirement Income Trust I | | 20,811 | | | — | | | None | | Daily | | 30 days |
| Vanguard Target Retirement Income Trust II | | — | | | 20,793 | | | None | | Daily | | 30 days |
| | $ | 1,617,757 | | | $ | 1,153,559 | | | | | | | |
| | | | | | | | | | |
6. SUBSEQUENT EVENTS
The Plan has evaluated subsequent events through June 21, 2022, the date the financial statements were issued and determined that no subsequent events have occurred requiring adjustments to the financial statements or disclosures.
SUPPLEMENTAL SCHEDULE