NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a leading global supplier of highly engineered automotive systems and components primarily for powertrain applications. Our products help improve vehicle performance, fuel efficiency, stability and air quality. These products are manufactured and sold worldwide, primarily to original equipment manufacturers (“OEMs”) of light vehicles (passenger cars, sport-utility vehicles ("SUVs"), vans and light trucks). The Company's products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications). We also manufacture and sell our products to certain Tier One vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers in the Americas, Europe and Asia and is an original equipment supplier to every major automotive OEM in the world. The Company's products fall into two reporting segments: Engine and Drivetrain.
|
|
NOTE 1
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The following paragraphs briefly describe the Company's significant accounting policies.
Basis of presentation
In 2012, the Company retrospectively adopted the amendment to Accounting Standards Codification ("ASC") Topic 220, "
Comprehensive Income
," which requires companies to separately disclose reclassifications from other comprehensive income into net income on the face of the financial statements. Prior year balances within the Consolidated Statements of Comprehensive Income conform to this requirement. Certain prior period amounts have been reclassified to conform to current period presentation.
On November 13, 2013, the Company's Board of Directors declared a two-for-one stock split effected in the form of a stock dividend on its common stock. To implement this stock split, shares of common stock were issued on December 16, 2013 to stockholders of record as of the close of business on December 2, 2013. All prior year share and per share amounts disclosed in this document have been restated to reflect the two-for-one stock split.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the accompanying notes, as well as, the amounts of revenues and expenses reported during the periods covered by these financial statements and accompanying notes. Actual results could differ from those estimates.
Concentrations of risk
Cash is maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal risk.
The Company performs ongoing credit evaluations of its suppliers and customers and, with the exception of certain financing transactions, does not require collateral from its OEM customers. Some automotive parts suppliers continue to experience commodity cost pressures and the effects of industry overcapacity. These factors have increased pressure on the industry's supply base, as suppliers cope with higher commodity costs, lower production volumes and other challenges. The Company receives certain of its raw materials from sole suppliers or a limited number of suppliers. The inability of a supplier to fulfill supply requirements of the Company could materially affect future operating results.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Principles of consolidation
The Consolidated Financial Statements include all majority-owned subsidiaries with a controlling financial interest. All inter-company accounts and transactions have been eliminated in consolidation. Investments in
20%
to
50%
owned affiliates are accounted for under the equity method when the Company does not have a controlling financial interest.
Revenue recognition
The Company recognizes revenue when title and risk of loss pass to the customer, which is usually upon shipment of product. Although the Company may enter into long-term supply agreements with its major customers, each shipment of goods is treated as a separate sale and the prices are not fixed over the life of the agreements.
Cost of sales
The Company includes materials, direct labor and manufacturing overhead within cost of sales. Manufacturing overhead is comprised of indirect materials, indirect labor, factory operating costs and other such costs associated with manufacturing products for sale.
Cash
Cash is valued at fair market value. It is the Company's policy to classify all highly liquid investments with original maturities of three months or less as cash.
Receivables, net
The Company securitizes certain receivables through third party financial institutions without recourse and continues to administer the collection of these receivables on behalf of the third party. The amount can vary each month based on the amount of underlying receivables. On December 21, 2009, the Company entered into a
$50 million
accounts receivable securitization facility, which was amended on September 8, 2010 to increase the facility to
$80 million
and then again on November 1, 2012 to increase the facility to
$110 million
. The amended facility matures on October 31, 2014.
Inventories, net
Inventories are valued at the lower of cost or market. Cost of U.S. inventories is determined using the last-in, first-out (“LIFO”) method, while the foreign operations use the first-in, first-out (“FIFO”) or average-cost methods. Inventory held by U.S. operations was
$109.3 million
and
$102.1 million
at December 31, 2013 and 2012, respectively. Such inventories, if valued at current cost instead of LIFO, would have been greater by
$16.0 million
at December 31, 2013 and 2012.
See Note 5 to the Consolidated Financial Statements for more information on inventories, net.
Pre-production costs related to long-term supply arrangements
Engineering, research and development and other design and development costs for products sold on long-term supply arrangements are expensed as incurred unless the Company has a contractual guarantee for reimbursement from the customer. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company either has title to the assets or has the non-cancelable right to use the assets during the term of the supply arrangement are capitalized in property, plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets, typically
three
to
five
years. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has a contractual guarantee for lump sum reimbursement from the customer are capitalized in prepayments and other current assets.
Property, plant and equipment, net
Property, plant and equipment is valued at cost less accumulated depreciation. Expenditures for maintenance, repairs and renewals of relatively minor items are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation is generally computed on a straight-line basis over the estimated useful lives of the assets. Useful lives for buildings range from
15
to
40
years and useful lives for machinery and equipment range from
three
to
12
years. For income tax purposes, accelerated methods of depreciation are generally used.
See Note 5 to the Consolidated Financial Statements for more information on property, plant and equipment, net.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impairment of long-lived assets, including definite-lived intangible assets
The Company reviews the carrying value of its long-lived assets, whether held for use or disposal, including other amortizing intangible assets, when events and circumstances warrant such a review under Accounting Standards Codification ("ASC") Topic 360. In assessing long-lived assets for an impairment loss, assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In assessing long-lived assets for impairment, management generally considers individual facilities the lowest level for which identifiable cash flows are largely independent. A recoverability review is performed using the undiscounted cash flows if there is a triggering event. If the undiscounted cash flow test for recoverability identifies a possible impairment, management will perform a fair value analysis. Management determines fair value under ASC Topic 820 using the appropriate valuation technique of market, income or cost approach. If the carrying value of a long-lived asset is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
Management believes that the estimates of future cash flows and fair value assumptions are reasonable; however, changes in assumptions underlying these estimates could affect the valuations. Long-lived assets held for sale are recorded at the lower of their carrying amount or fair value less cost to sell. Significant judgments and estimates used by management when evaluating long-lived assets for impairment include: (i) an assessment as to whether an adverse event or circumstance has triggered the need for an impairment review; (ii) undiscounted future cash flows generated by the asset; and (iii) fair valuation of the asset.
Goodwill and other indefinite-lived intangible assets
During the fourth quarter of each year, the Company qualitatively assesses its goodwill and indefinite-lived intangible assets assigned to each of its reporting units. This qualitative assessment evaluates various events and circumstances, such as macro economic conditions, industry and market conditions, cost factors, relevant events and financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-than not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the carrying value, or upon a triggering event, including recent acquisition or divestiture activity, the Company performs a quantitative, "step one," goodwill impairment analysis.
See Note 6 to the Consolidated Financial Statements for more information on goodwill and other indefinite-lived intangible assets.
Product warranties
The Company provides warranties on some, but not all, of its products. The warranty terms are typically from
one
to
three
years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual. The product warranty accrual is allocated to current and non-current liabilities in the Consolidated Balance Sheets.
See Note 7 to the Consolidated Financial Statements for more information on product warranties.
Other loss accruals and valuation allowances
The Company has numerous other loss exposures, such as customer claims, workers' compensation claims, litigation and recoverability of assets. Establishing loss accruals or valuation allowances for these matters requires the use of estimates and judgment in regard to the risk exposure and ultimate realization. The Company estimates losses under the programs using consistent and appropriate methods, however, changes to its assumptions could materially affect the recorded accrued liabilities for loss or asset valuation allowances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivative financial instruments
The Company recognizes that certain normal business transactions generate risk. Examples of risks include exposure to exchange rate risk related to transactions denominated in currencies other than the functional currency, changes in commodity costs and interest rates. It is the objective and responsibility of the Company to assess the impact of these transaction risks and offer protection from selected risks through various methods, including financial derivatives. Virtually all derivative instruments held by the Company are designated as hedges, have high correlation with the underlying exposure and are highly effective in offsetting underlying price movements. Accordingly, gains and losses from changes in qualifying hedge fair values are matched with the underlying transactions. All hedge instruments are carried at their fair value based on quoted market prices for contracts with similar maturities. The Company does not engage in any derivative transactions for purposes other than hedging specific risks.
See Note 10 to the Consolidated Financial Statements for more information on derivative financial instruments.
Foreign currency
The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for each period for revenues, expenses and capital expenditures. The local currency is the functional currency for substantially all of the Company's foreign subsidiaries. Translation adjustments for foreign subsidiaries are recorded as a component of accumulated other comprehensive income (loss) in equity. The Company recognizes transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency in earnings as incurred.
See Note 13 to the Consolidated Financial Statements for more information on accumulated other comprehensive income (loss).
Environmental contingencies
The Company accounts for environmental costs in accordance with ASC Topic 450. Costs related to environmental assessments and remediation efforts at operating facilities are accrued when it is probable that a liability has been incurred and the amount of that liability can be reasonably estimated. Estimated costs are recorded at undiscounted amounts, based on experience and assessments and are regularly evaluated. The liabilities are recorded in accounts payable and accrued expenses and other non-current liabilities in the Company's Consolidated Balance Sheets.
See Note 14 to the Consolidated Financial Statements for more information regarding environmental contingencies.
Pensions and other postretirement employee defined benefits
The Company's defined benefit pension and other postretirement employee benefit plans are accounted for in accordance with ASC Topic 715. Disability, early retirement and other postretirement employee benefits are accounted for in accordance with ASC Topic 712.
Pensions and other postretirement employee benefit costs and related liabilities and assets are dependent upon assumptions used in calculating such amounts. These assumptions include discount rates, expected returns on plan assets, health care cost trends, compensation and other factors. In accordance with GAAP, actual results that differ from the assumptions used are accumulated and amortized over future periods, and accordingly, generally affect recognized expense in future periods.
See Note 11 to the Consolidated Financial Statements for more information regarding the Company's pension and other postretirement employee defined benefit plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income taxes
In accordance with ASC Topic 740, the Company's income tax expense is calculated based on expected income and statutory tax rates in the various jurisdictions in which the Company operates and requires the use of management's estimates and judgments.
See Note 4 to the Consolidated Financial Statements for more information regarding income taxes.
New Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board amended ASC Topic 740, "Income Taxes," requiring an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. This guidance is effective prospectively for interim and annual periods beginning after December 15, 2013. The Company anticipates the adoption of this guidance will not have a material impact to its Consolidated Financial Statements.
NOTE 2 RESEARCH AND DEVELOPMENT COSTS
The Company's net Research & Development ("R&D") expenditures are included in selling, general and administrative expenses of the Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract and accepted by the customer. Financial risks and rewards transfer upon shipment, acceptance of a prototype component by the customer or upon completion of the performance obligation as stated in the respective customer agreement.
The following table presents the Company’s gross and net expenditures on R&D activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
Gross R&D expenditures
|
$
|
350.4
|
|
|
$
|
309.3
|
|
|
$
|
294.7
|
|
Customer reimbursements
|
(47.2
|
)
|
|
(43.4
|
)
|
|
(51.0
|
)
|
Net R&D expenditures
|
$
|
303.2
|
|
|
$
|
265.9
|
|
|
$
|
243.7
|
|
Net R&D expenditures as a percentage of net sales were
4.1%
,
3.7%
and
3.4%
in the years ended December 31, 2013, 2012 and 2011, respectively. The Company has contracts with several customers at the Company's various R&D locations. No such contract exceeded
5%
of net R&D expenditures in any of the years presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 3 OTHER EXPENSE (INCOME)
The following table presents items included in other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
Restructuring expense
|
$
|
52.3
|
|
|
$
|
27.4
|
|
|
$
|
—
|
|
Program termination agreement
|
11.3
|
|
|
—
|
|
|
—
|
|
Retirement related obligations
|
5.9
|
|
|
17.3
|
|
|
—
|
|
Loss from disposal activities
|
—
|
|
|
39.7
|
|
|
21.5
|
|
Patent infringement settlement, net of legal costs incurred
|
—
|
|
|
—
|
|
|
(29.1
|
)
|
Other
|
(6.9
|
)
|
|
0.3
|
|
|
(0.5
|
)
|
Other expense (income)
|
$
|
62.6
|
|
|
$
|
84.7
|
|
|
$
|
(8.1
|
)
|
During the fourth quarter of 2013, the Company recorded restructuring expense of
$52.3 million
primarily related to the initiation of Drivetrain segment actions designed to improve future profitability and competitiveness. Included in this restructuring expense are asset impairment expenses of
$37.3 million
, employee termination benefits of
$10.4 million
and
$4.6 million
of other expense. Asset impairment charges recorded in 2013 primarily relate to the write-down of machinery and equipment and intangible assets associated with the announced closure of certain European facilities within the Company's Drivetrain segment. The employee termination costs relate to approximately
300
employees primarily in Europe. It is expected the liability for these benefits will be paid out by the middle of 2015.
During the first quarter of 2013, the Company recorded an
$11.3 million
expense related to a program termination agreement, which was paid in the second and third quarters of 2013.
During the fourth quarter of 2012, the Company waived the forfeiture provision associated with future restricted stock grants made to certain retiring Named Executive Officers ("NEOs"). The Company recorded a
$5.9 million
retirement related obligation primarily related to a first quarter 2013 grant of restricted stock awards to these NEOs.
During the fourth quarter of 2012, the Company recorded retirement related obligations of
$17.3 million
comprised of a
$5.7 million
loss resulting from the settlement of a portion of the Muncie Plant's pension obligation and an
$11.6 million
expense associated with the retirement of certain NEOs
. Refer to Notes 11 and 12 to the Consolidated Financial Statements for further information regarding the Muncie Plant's settlement loss and the Company's decision to waive the forfeiture provisions of existing restricted stock and performance share grants made to certain retiring NEOs.
During the second and third quarters of 2012, the Company incurred
$39.7 million
in expense associated with the loss on sale of the spark plug business, primarily related to the to write-down of prior purchase price accounting adjustments included within the disposal group. These purchase price accounting adjustments were originally reported in the Engine segment and related to the BERU acquisition. The Company also recorded restructuring expense of
$27.4 million
in the third quarter of 2012 primarily associated with the disposal and future requirements of BERU's on-going business, which included
$9.0 million
of employee termination benefits,
$6.3 million
of contract cancellation costs and
$12.1 million
of other charges, primarily related to the write-down of certain assets.
On May 16, 2011, BorgWarner and Honeywell settled a lawsuit resolving BorgWarner's patent infringement claims. As a result of the settlement, Honeywell paid
$32.5 million
for a paid up license to use the asserted BorgWarner patents. During 2011, the Company incurred
$3.4 million
in legal costs related to this lawsuit and after deducting these costs, the Company recorded a net gain of
$29.1 million
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See Note 17 to the Consolidated Financial Statements for information regarding the Company's 2011 loss from disposal activities.
Earnings before income taxes and the provision for income taxes are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
Earnings before income taxes:
|
|
|
|
|
|
U.S.
|
$
|
136.2
|
|
|
$
|
132.3
|
|
|
$
|
119.2
|
|
Non-U.S.
|
733.1
|
|
|
628.7
|
|
|
646.7
|
|
Total
|
$
|
869.3
|
|
|
$
|
761.0
|
|
|
$
|
765.9
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
27.7
|
|
|
$
|
59.8
|
|
|
$
|
31.8
|
|
State
|
2.6
|
|
|
3.4
|
|
|
1.7
|
|
Foreign
|
211.1
|
|
|
186.1
|
|
|
162.9
|
|
Total current
|
241.4
|
|
|
249.3
|
|
|
196.4
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(2.3
|
)
|
|
19.6
|
|
|
17.3
|
|
State
|
(7.3
|
)
|
|
(0.1
|
)
|
|
0.1
|
|
Foreign
|
(13.5
|
)
|
|
(30.2
|
)
|
|
(18.5
|
)
|
Total deferred
|
(23.1
|
)
|
|
(10.7
|
)
|
|
(1.1
|
)
|
Total provision for income taxes
|
$
|
218.3
|
|
|
$
|
238.6
|
|
|
$
|
195.3
|
|
The provision for income taxes resulted in an effective tax rate of
25.1%
,
31.4%
and
25.5%
for the years ended December 31, 2013, 2012 and 2011, respectively. An analysis of the differences between the effective tax rate and the U.S. statutory rate for the years ended December 31, 2013, 2012 and 2011 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
Income taxes at U.S. statutory rate of 35%
|
$
|
304.3
|
|
|
$
|
266.4
|
|
|
$
|
268.1
|
|
Increases (decreases) resulting from:
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
2.3
|
|
|
2.2
|
|
|
1.1
|
|
U.S. tax on non-U.S. earnings
|
(2.8
|
)
|
|
22.3
|
|
|
9.4
|
|
Affiliates' earnings
|
(15.6
|
)
|
|
(15.0
|
)
|
|
(13.4
|
)
|
Foreign rate differential
|
(73.4
|
)
|
|
(57.9
|
)
|
|
(60.0
|
)
|
Tax holidays
|
(15.6
|
)
|
|
(27.0
|
)
|
|
(21.3
|
)
|
Withholding taxes
|
15.4
|
|
|
12.3
|
|
|
10.9
|
|
Impairments and write-offs
|
5.2
|
|
|
15.9
|
|
|
6.4
|
|
Tax credits
|
(6.9
|
)
|
|
(2.3
|
)
|
|
(4.0
|
)
|
Reserve adjustments, settlements and claims
|
0.5
|
|
|
12.9
|
|
|
(1.0
|
)
|
Valuation allowance adjustments
|
(1.4
|
)
|
|
9.7
|
|
|
(5.3
|
)
|
Other
|
6.3
|
|
|
(0.9
|
)
|
|
4.4
|
|
Provision for income taxes, as reported
|
$
|
218.3
|
|
|
$
|
238.6
|
|
|
$
|
195.3
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company's provision for income taxes for the year ended December 31, 2013, includes tax benefits of
$7.1 million
,
$3.8 million
and
$2.1 million
related to restructuring expense, program termination agreement and retirement related obligations discussed in Note 3. This rate also includes a net tax benefit of
$11.7 million
, which is comprised of tax benefits of
$6.7 million
related to the extension of the federal research and development credit and other international tax provisions resulting from the retroactive impact of U.S. legislation enacted in January 2013,
$2.2 million
related to 2012 provision to return and other tax adjustments and
$8.0 million
related to the reversal of certain state deferred tax asset valuation allowances, partially offset by a
$5.2 million
tax expense related to comprehensive income and other tax adjustments.
The Company's provision for income taxes for the year ended December 31, 2012 includes a net tax benefit of
$2.0 million
associated with the loss from disposal activities and restructuring expense. The
$2.0 million
net benefit is comprised of a tax benefit of
$7.7 million
associated with restructuring expense, partially offset by tax expense of
$5.7 million
resulting from the sale of the spark plug business. The provision also includes additional tax expense of
$19.8 million
resulting from other tax adjustments. These other tax adjustments include
$5.9 million
of tax expense primarily resulting from the settlement of certain tax audits,
$7.5 million
of tax expense associated with the Company's second quarter 2012 decision to change its cash repatriation assertion for some of its foreign subsidiaries,
$4.7 million
of tax benefit related to certain countries enacting changes to their respective statutory income tax rates and
$11.1 million
of U.S. tax expense to correct the income taxes payable balance. The Company concluded this item was not material to the current or prior period financial statements.
The Company's provision for income taxes for the year ended December 31, 2011 includes
$11.0 million
of tax expense associated with the Company's patent infringement settlement,
$2.7 million
of tax expense associated with the loss from disposal activities and a tax benefit of
$6.2 million
resulting from other tax adjustments. These other tax adjustments related to a change in state corporate income tax legislation as well as an adjustment of the Company's tax accounts as a result of the closure of certain tax audits. During 2011, several countries enacted changes to their respective statutory income tax rates. None of these changes had a material impact on the Company's effective tax rate.
A roll forward of the Company's total gross unrecognized tax benefits for the years ended December 31, 2013 and 2012, respectively, is presented below. Of the total
$22.9 million
of unrecognized tax benefits as of December 31, 2013, approximately
$15.7 million
of the total represents the amount, if recognized, would
affect the Company's effective income tax rate in future periods. This amount differs from the gross unrecognized tax benefits presented in the table due to the decrease in the U.S. federal income taxes which would occur upon recognition of the state tax benefits included therein.
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2013
|
|
2012
|
Balance, January 1
|
$
|
25.8
|
|
|
$
|
26.2
|
|
Additions based on tax positions related to current year
|
1.7
|
|
|
2.0
|
|
Additions for tax positions of prior years
|
12.5
|
|
|
13.4
|
|
Reductions for closure of tax audits and settlements
|
(17.7
|
)
|
|
(14.6
|
)
|
Reductions for lapse in statute of limitations
|
(0.2
|
)
|
|
(1.7
|
)
|
Translation adjustment
|
0.8
|
|
|
0.5
|
|
Balance, December 31
|
$
|
22.9
|
|
|
$
|
25.8
|
|
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The amount recognized in income tax expense for 2013 and 2012 is
$1.0 million
and
$0.5 million
, respectively. The Company has an accrual of approximately
$8.4 million
and
$8.3 million
for the payment of interest and penalties at December 31, 2013 and 2012, respectively. During the year ended December 31, 2013 the Company paid
$14.9 million
for the settlement of audits and resulting amended returns in certain foreign jurisdictions. Possible changes within the next 12 months related to other examinations cannot be reasonably estimated at this time.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company and/or one of its subsidiaries files income tax returns in the U.S. federal, various state jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have more than one taxpayer. The Company is no longer subject to income tax examinations by tax authorities in its major tax jurisdictions as follows:
|
|
|
|
|
|
|
|
Tax jurisdiction
|
|
Years no longer subject to audit
|
|
Tax jurisdiction
|
|
Years no longer subject to audit
|
U.S. Federal
|
|
2010 and prior
|
|
Hungary
|
|
2008 and prior
|
China
|
|
2007 and prior
|
|
Japan
|
|
2011 and prior
|
France
|
|
2007 and prior
|
|
South Korea
|
|
2007 and prior
|
Germany
|
|
2007 and prior
|
|
Sweden
|
|
2007 and prior
|
The gross components of deferred tax assets and liabilities as of December 31, 2013 and 2012 consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
Deferred tax assets:
|
|
|
|
|
|
Foreign tax credits
|
$
|
145.9
|
|
|
$
|
146.0
|
|
Employee compensation
|
40.6
|
|
|
53.1
|
|
Other comprehensive income
|
79.3
|
|
|
113.7
|
|
Research and development capitalization
|
132.4
|
|
|
102.5
|
|
Net operating loss and capital loss carryforwards
|
46.4
|
|
|
44.3
|
|
Pension and other postretirement benefits
|
36.5
|
|
|
37.7
|
|
Other
|
75.8
|
|
|
44.1
|
|
Total deferred tax assets
|
$
|
556.9
|
|
|
$
|
541.4
|
|
Valuation allowance
|
(34.2
|
)
|
|
(35.0
|
)
|
Net deferred tax asset
|
$
|
522.7
|
|
|
$
|
506.4
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Goodwill and intangible assets
|
(139.5
|
)
|
|
(130.9
|
)
|
Fixed assets
|
(105.4
|
)
|
|
(101.9
|
)
|
Other
|
(36.7
|
)
|
|
(25.6
|
)
|
Total deferred tax liabilities
|
$
|
(281.6
|
)
|
|
$
|
(258.4
|
)
|
Net deferred taxes
|
$
|
241.1
|
|
|
$
|
248.0
|
|
At December 31, 2013, certain non-U.S. subsidiaries have net operating loss carryforwards totaling
$58.0 million
available to offset future taxable income. Of the total
$58.0 million
,
$48.4 million
expire at various dates from 2014 through 2033 and the remaining
$9.6 million
have no expiration date. The Company has a valuation allowance of
$1.5 million
recorded on
$4.9 million
of non-U.S. net operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling
$501.4 million
which are partially offset by a valuation allowance of
$300.8 million
. Certain non-U.S. subsidiaries located in China, Korea and Poland had tax exemptions or tax holidays, which reduced tax expense approximately
$15.6 million
and
$26.7 million
in 2013 and 2012, respectively. The tax holiday in Poland expired at the end of 2013. The U.S. has foreign tax credit carryforwards of
$145.9 million
, which expire at various dates from 2017 through 2020.
The Company is not required to provide U.S. federal or state income taxes on cumulative undistributed earnings of foreign subsidiaries when such earnings are considered permanently reinvested. The Company's policy is to evaluate this assertion on a quarterly basis. During the second quarter of 2012, the Company changed the assertion for some of its foreign subsidiaries to provide management additional financial
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
flexibility. At December 31, 2013, the Company's deferred tax liability associated with unremitted foreign earnings was
$18.7 million
.
The Company has not recorded deferred income taxes on the difference between the book and tax basis of investments in foreign subsidiaries or foreign equity affiliates totaling approximately
$2.3 billion
in 2013, as these amounts are essentially permanent in nature. The difference will become taxable upon repatriation of assets, sale or liquidation of the investment. Due to fluctuation in tax laws around the world and fluctuations in foreign exchange rates, it is not practicable to determine the unrecognized deferred tax liability on this difference because the actual tax liability, if any, is dependent on circumstances existing when the repatriation occurs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 5
|
BALANCE SHEET INFORMATION
|
Detailed balance sheet data is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
Receivables, net:
|
|
|
|
|
|
Customers
|
$
|
1,067.5
|
|
|
$
|
1,014.6
|
|
Other
|
183.1
|
|
|
134.8
|
|
Gross receivables
|
1,250.6
|
|
|
1,149.4
|
|
Bad debt allowance(a)
|
(2.1
|
)
|
|
(2.1
|
)
|
Total receivables, net
|
$
|
1,248.5
|
|
|
$
|
1,147.3
|
|
Inventories, net:
|
|
|
|
|
|
Raw material and supplies
|
$
|
279.8
|
|
|
$
|
264.0
|
|
Work in progress
|
78.0
|
|
|
82.0
|
|
Finished goods
|
116.3
|
|
|
117.6
|
|
FIFO inventories
|
474.1
|
|
|
463.6
|
|
LIFO reserve
|
(16.0
|
)
|
|
(16.0
|
)
|
Total inventories, net
|
$
|
458.1
|
|
|
$
|
447.6
|
|
Prepayments and other current assets:
|
|
|
|
|
|
Prepaid tooling
|
$
|
37.1
|
|
|
$
|
39.1
|
|
Prepaid taxes
|
12.3
|
|
|
0.7
|
|
Derivatives
|
3.4
|
|
|
5.7
|
|
Other
|
30.9
|
|
|
22.0
|
|
Total prepayments and other current assets
|
$
|
83.7
|
|
|
$
|
67.5
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
Land and land use rights
|
$
|
87.2
|
|
|
$
|
76.4
|
|
Buildings
|
666.7
|
|
|
640.8
|
|
Machinery and equipment
|
1,897.5
|
|
|
2,282.4
|
|
Capital leases
|
2.4
|
|
|
2.3
|
|
Construction in progress
|
272.3
|
|
|
243.7
|
|
Property, plant and equipment, gross
|
2,926.1
|
|
|
3,245.6
|
|
Accumulated depreciation
|
(1,099.3
|
)
|
|
(1,567.0
|
)
|
Property, plant & equipment, net, excluding tooling
|
1,826.8
|
|
|
1,678.6
|
|
Tooling, net of amortization
|
112.6
|
|
|
109.4
|
|
Property, plant & equipment, net
|
$
|
1,939.4
|
|
|
$
|
1,788.0
|
|
Investments and advances:
|
|
|
|
|
|
Investment in equity affiliates
|
$
|
201.5
|
|
|
$
|
217.7
|
|
Other investments and advances
|
203.6
|
|
|
165.0
|
|
Total investments and advances
|
$
|
405.1
|
|
|
$
|
382.7
|
|
Other non-current assets:
|
|
|
|
|
|
Deferred income taxes
|
$
|
257.6
|
|
|
$
|
244.1
|
|
Other intangible assets
|
169.5
|
|
|
206.3
|
|
Product liability insurance asset
|
96.7
|
|
|
85.6
|
|
Other
|
53.2
|
|
|
39.9
|
|
Total other non-current assets
|
$
|
577.0
|
|
|
$
|
575.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
Accounts payable and accrued expenses:
|
|
|
|
|
|
Trade payables
|
$
|
872.6
|
|
|
$
|
815.4
|
|
Trade payables for capital expenditures
|
62.8
|
|
|
39.8
|
|
Payroll and employee related
|
184.6
|
|
|
180.7
|
|
Customer related
|
49.7
|
|
|
36.3
|
|
Product liability
|
41.1
|
|
|
36.5
|
|
Product warranties
|
38.4
|
|
|
33.1
|
|
Retirement related
|
21.8
|
|
|
27.9
|
|
Dividends payable to noncontrolling shareholders
|
16.7
|
|
|
9.5
|
|
Interest
|
12.0
|
|
|
11.7
|
|
Severance
|
11.3
|
|
|
8.9
|
|
Insurance
|
8.2
|
|
|
9.2
|
|
Legal and professional fees
|
7.8
|
|
|
4.2
|
|
Derivatives
|
7.4
|
|
|
9.8
|
|
Current deferred income taxes
|
3.9
|
|
|
1.4
|
|
Environmental
|
1.1
|
|
|
1.6
|
|
Other
|
44.4
|
|
|
61.2
|
|
Total accounts payable and accrued expenses
|
$
|
1,383.8
|
|
|
$
|
1,287.2
|
|
Other non-current liabilities:
|
|
|
|
|
|
Deferred income taxes
|
$
|
81.3
|
|
|
$
|
89.4
|
|
Product liability
|
55.6
|
|
|
49.1
|
|
Deferred revenue
|
46.2
|
|
|
30.5
|
|
Product warranties
|
34.3
|
|
|
31.8
|
|
Cross-currency swaps and derivatives
|
24.3
|
|
|
58.1
|
|
Environmental
|
2.9
|
|
|
2.3
|
|
Other
|
82.2
|
|
|
56.9
|
|
Total other non-current liabilities
|
$
|
326.8
|
|
|
$
|
318.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Bad debt allowance:
|
2013
|
|
2012
|
|
2011
|
Beginning balance, January 1
|
$
|
(2.1
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
(4.0
|
)
|
Provision
|
(0.3
|
)
|
|
(0.8
|
)
|
|
(1.4
|
)
|
Write-offs
|
0.4
|
|
|
3.0
|
|
|
1.0
|
|
Translation adjustment and other
|
(0.1
|
)
|
|
—
|
|
|
0.1
|
|
Ending balance, December 31
|
$
|
(2.1
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(4.3
|
)
|
As of December 31, 2013 and December 31, 2012, accounts payable of
$62.8 million
and
$39.8 million
, respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the years ended December 31, 2013 and 2012 were
$11.9 million
and
$17.8 million
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NSK-Warner KK ("NSK-Warner")
The Company has a
50%
interest in NSK-Warner, a joint venture based in Japan that manufactures automatic transmission components. The Company's share of the earnings reported by NSK-Warner is accounted for using the equity method of accounting. NSK-Warner is the joint venture partner with a
40%
interest in the Drivetrain Group's South Korean subsidiary, BorgWarner Transmission Systems Korea Inc. Dividends from NSK-Warner were
$31.0 million
,
$28.1 million
and
$33.4 million
in calendar years ended December 31, 2013, 2012 and 2011, respectively.
NSK-Warner has a fiscal year-end of March 31. The Company's equity in the earnings of NSK-Warner consists of the 12 months ended November 30. Following is summarized financial data for NSK-Warner, translated using the ending or periodic rates, as of and for the years ended November 30, 2013, 2012 and 2011 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
|
(millions of dollars)
|
2013
|
|
2012
|
|
|
Balance sheets:
|
|
|
|
|
|
|
|
|
Cash and securities
|
$
|
118.3
|
|
|
$
|
123.3
|
|
|
|
Current assets, including cash and securities
|
313.6
|
|
|
320.0
|
|
|
|
Non-current assets
|
156.1
|
|
|
175.3
|
|
|
|
Current liabilities
|
166.8
|
|
|
147.4
|
|
|
|
Non-current liabilities
|
40.7
|
|
|
50.2
|
|
|
|
Total equity
|
262.2
|
|
|
297.7
|
|
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
Statements of operations:
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
604.0
|
|
|
$
|
696.7
|
|
|
$
|
655.2
|
|
Gross profit
|
126.6
|
|
|
138.2
|
|
|
128.5
|
|
Net earnings
|
68.3
|
|
|
68.5
|
|
|
61.6
|
|
NSK-Warner had no debt outstanding as of November 30, 2013 and 2012. Purchases by the Company from NSK-Warner were
$22.8 million
,
$22.8 million
and
$16.6 million
for the years ended December 31, 2013, 2012 and 2011, respectively.
|
|
NOTE 6
|
GOODWILL AND OTHER INTANGIBLES
|
During the fourth quarter of each year, the Company qualitatively assesses its goodwill and indefinite-lived intangible assets assigned to each of its reporting units. This qualitative assessment evaluates various events and circumstances, such as macro economic conditions, industry and market conditions, cost factors, relevant events and financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-than not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the carrying value, or upon a triggering event, including recent acquisition or divestiture activity, the Company performs a quantitative, "step one," goodwill impairment analysis.
During the fourth quarter of 2013, the Company performed a qualitative analysis on each reporting unit and determined it was more-likely-than-not the fair value exceeded the carrying value of these reporting units. For the reporting unit with recent restructuring activity, the Company performed a quantitative, "step one," goodwill impairment analysis, which requires the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The basis of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
this goodwill impairment analysis is the Company's annual budget and long-range plan (“LRP”). The annual budget and LRP includes a five year projection of future cash flows based on actual new products and customer commitments and assumes the last year of the LRP data is a fair indication of the future performance. Because the LRP is estimated over a significant future period of time, those estimates and assumptions are subject to a high degree of uncertainty. Further, the market valuation models and other financial ratios used by the Company require certain assumptions and estimates regarding the applicability of those models to the Company's facts and circumstances.
The Company believes the assumptions and estimates used to determine its estimated fair value are reasonable. Different assumptions could materially affect the estimated fair value. The primary assumptions affecting the Company's December 31, 2013 goodwill quantitative, "step one," impairment review are as follows:
|
|
•
|
Discount rate
: The Company used a
10%
weighted average cost of capital (“WACC”) as the discount rate for future cash flows. The WACC is intended to represent a rate of return that would be expected by a market participant.
|
|
|
•
|
Operating income margin
: The Company used historical and expected operating income margins, which may vary based on the projections of the reporting unit being evaluated.
|
In addition to the above primary assumptions, the Company notes the following risks to volume and operating income assumptions that could have an impact on the discounted cash flow model:
|
|
•
|
The automotive industry is cyclical and the Company's results of operations would be adversely affected by industry downturns.
|
|
|
•
|
The Company is dependent on market segments that use our key products and would be affected by decreasing demand in those segments.
|
|
|
•
|
The Company is subject to risks related to international operations.
|
Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter of 2013 indicated the Company's goodwill assigned to the reporting unit quantitatively assessed was not impaired. Additionally, a sensitivity analysis was completed indicating a
1%
increase in the discount rate or a
1%
decrease in the operating margin assumptions would not result in the carrying value exceeding the fair value of the reporting unit quantitatively assessed.
The changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
(millions of dollars)
|
Engine
|
|
Drivetrain
|
|
Engine
|
|
Drivetrain
|
Gross goodwill balance, January 1
|
$
|
1,324.1
|
|
|
$
|
359.3
|
|
|
$
|
1,334.7
|
|
|
$
|
353.5
|
|
Accumulated impairment losses, January 1
|
(501.8
|
)
|
|
(0.2
|
)
|
|
(501.8
|
)
|
|
(0.2
|
)
|
Net goodwill balance, January 1
|
$
|
822.3
|
|
|
$
|
359.1
|
|
|
$
|
832.9
|
|
|
$
|
353.3
|
|
Goodwill during the year:
|
|
|
|
|
|
|
|
|
|
|
|
Divestitures*
|
(4.6
|
)
|
|
—
|
|
|
(16.9
|
)
|
|
—
|
|
Translation adjustment and other
|
12.4
|
|
|
7.8
|
|
|
6.3
|
|
|
5.8
|
|
Ending balance, December 31
|
$
|
830.1
|
|
|
$
|
366.9
|
|
|
$
|
822.3
|
|
|
$
|
359.1
|
|
________________
* Goodwill divested relates to the Company's 2012 sale of the spark plug business.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s other intangible assets, primarily from acquisitions, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
December 31, 2012
|
(millions of dollars)
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
carrying
amount
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
carrying
amount
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patented and unpatented technology
|
$
|
85.9
|
|
|
$
|
36.5
|
|
|
$
|
49.4
|
|
|
$
|
80.0
|
|
|
$
|
26.2
|
|
|
$
|
53.8
|
|
Customer relationships
|
201.8
|
|
|
111.4
|
|
|
90.4
|
|
|
216.3
|
|
|
100.0
|
|
|
116.3
|
|
Miscellaneous
|
2.9
|
|
|
2.9
|
|
|
—
|
|
|
2.9
|
|
|
2.9
|
|
|
—
|
|
Total amortized intangible assets
|
290.6
|
|
|
150.8
|
|
|
139.8
|
|
|
299.2
|
|
|
129.1
|
|
|
170.1
|
|
In-process R&D
|
10.8
|
|
|
—
|
|
|
10.8
|
|
|
10.8
|
|
|
—
|
|
|
10.8
|
|
Unamortized trade names
|
18.9
|
|
|
—
|
|
|
18.9
|
|
|
25.4
|
|
|
—
|
|
|
25.4
|
|
Total other intangible assets
|
$
|
320.3
|
|
|
$
|
150.8
|
|
|
$
|
169.5
|
|
|
$
|
335.4
|
|
|
$
|
129.1
|
|
|
$
|
206.3
|
|
Amortization of other intangible assets was
$26.7 million
,
$28.4 million
and
$30.8 million
for the years ended December 31, 2013, 2012 and 2011, respectively. The estimated useful lives of the Company's amortized intangible assets range from
three
to
15
years. The Company utilizes the straight line method of amortization recognized over the estimated useful lives of the assets. The estimated future annual amortization expense, primarily for acquired intangible assets, is as follows:
$25.4 million
in 2014,
$16.4 million
in 2015,
$16.3 million
in 2016,
$14.9 million
in 2017 and
$13.3 million
in 2018.
A roll forward of the gross carrying amounts of the Company's other intangible assets is presented below:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2013
|
|
2012
|
Beginning balance, January 1
|
$
|
335.4
|
|
|
$
|
341.7
|
|
Impairment*
|
(26.4
|
)
|
|
—
|
|
Divestitures**
|
(1.1
|
)
|
|
(15.7
|
)
|
Translation adjustment
|
12.4
|
|
|
9.4
|
|
Ending balance, December 31
|
$
|
320.3
|
|
|
$
|
335.4
|
|
________________
|
|
*
|
Impairment relates to Drivetrain customer relationships and Engine unamortized trade names. The impairment charges are recorded in restructuring expense in Other expense (income).
|
|
|
**
|
Divestitures relate to the Company's 2012 sale of the spark plug business.
|
A roll forward of the accumulated amortization associated with the Company's other intangible assets is presented below:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2013
|
|
2012
|
Beginning balance, January 1
|
$
|
129.1
|
|
|
$
|
98.4
|
|
Amortization
|
26.7
|
|
|
28.4
|
|
Impairment*
|
(13.9
|
)
|
|
—
|
|
Divestitures**
|
(0.4
|
)
|
|
(0.6
|
)
|
Translation adjustment
|
9.3
|
|
|
2.9
|
|
Ending balance, December 31
|
$
|
150.8
|
|
|
$
|
129.1
|
|
________________
|
|
*
|
Impairment relates to Drivetrain customer relationships and Engine unamortized trade names. The impairment charges are recorded in restructuring expense in Other expense (income).
|
** Divestitures relate to the Company's 2012 sale of the spark plug business.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes in the carrying amount of the Company’s total product warranty liability for the years ended December 31, 2013 and 2012 were as follows:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2013
|
|
2012
|
Beginning balance, January 1
|
$
|
64.9
|
|
|
$
|
72.7
|
|
Provisions
|
43.1
|
|
|
33.7
|
|
Payments
|
(36.7
|
)
|
|
(42.8
|
)
|
Translation adjustment
|
1.4
|
|
|
1.3
|
|
Ending balance, December 31
|
$
|
72.7
|
|
|
$
|
64.9
|
|
The product warranty liability is classified in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
Accounts payable and accrued expenses
|
$
|
38.4
|
|
|
$
|
33.1
|
|
Other non-current liabilities
|
34.3
|
|
|
31.8
|
|
Total product warranty liability
|
$
|
72.7
|
|
|
$
|
64.9
|
|
|
|
NOTE 8
|
NOTES PAYABLE AND LONG-TERM DEBT
|
As of December 31, 2013 and 2012, the Company had short-term and long-term debt outstanding as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
Short-term debt
|
|
|
|
Short-term borrowings
|
$
|
84.8
|
|
|
$
|
129.1
|
|
Receivables securitization
|
110.0
|
|
|
110.0
|
|
Total short-term debt
|
$
|
194.8
|
|
|
$
|
239.1
|
|
|
|
|
|
Long-term debt
|
|
|
|
5.75% Senior notes due 11/01/16 ($150 million par value)
|
$
|
149.7
|
|
|
$
|
149.6
|
|
8.00% Senior notes due 10/01/19 ($134 million par value)
|
133.9
|
|
|
133.9
|
|
4.625% Senior notes due 09/15/20 ($250 million par value)
|
248.2
|
|
|
247.9
|
|
7.125% Senior notes due 02/15/29 ($121 million par value)
|
119.4
|
|
|
119.4
|
|
Multi-currency revolving credit facility
|
320.0
|
|
|
140.0
|
|
Term loan facilities and other
|
40.4
|
|
|
17.1
|
|
Unamortized portion of debt derivatives
|
16.2
|
|
|
20.2
|
|
Total long-term debt
|
$
|
1,027.8
|
|
|
$
|
828.1
|
|
Less: current portion
|
6.8
|
|
|
4.3
|
|
Long-term debt, net of current portion
|
$
|
1,021.0
|
|
|
$
|
823.8
|
|
The weighted average interest rate on all borrowings outstanding as of December 31, 2013 and 2012 was
3.7%
and
4.0%
, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Annual principal payments required as of December 31, 2013 are as follows :
|
|
|
|
|
(millions of dollars)
|
|
2014
|
$
|
201.6
|
|
2015
|
25.1
|
|
2016
|
478.5
|
|
2017
|
—
|
|
2018
|
—
|
|
After 2018
|
520.9
|
|
Total payments
|
$
|
1,226.1
|
|
Less: unamortized discounts
|
3.5
|
|
Total
|
$
|
1,222.6
|
|
The Company's long-term debt includes various financial covenants, none of which are expected to restrict future operations.
The Company's multi-currency revolving credit facility includes a feature that allows the Company's borrowings to be increased to
$1 billion
. Utilizing this feature, on April 12, 2013, the Company increased its multi-currency revolving credit facility from
$650 million
to
$750 million
. The credit facility provides for borrowings through June 30, 2016 and is guaranteed by the Company's material domestic subsidiaries. The Company has two key financial covenants, a debt compared to EBITDA (“Earnings Before Interest, Taxes, Depreciation and Amortization”) test and an interest coverage test. The Company was in compliance with all covenants at December 31, 2013 and expects to remain compliant in future periods. At December 31, 2013 and 2012, the Company had outstanding borrowings of
$320.0 million
and
$140.0 million
, respectively, under this facility.
On April 9, 2009, the Company issued
$373.8 million
in convertible senior notes, which were settled in April 2012 by delivering approximately
22.8 million
shares of common stock held in treasury to the note holders. The settlement resulted in a reduction in the current portion of long-term debt of
$373.8 million
, a reduction in common stock held in treasury of
$617.3 million
and a reduction in capital in excess of par value of
$243.5 million
. Prior to the settlement, the Company accreted the discounted carrying value of the convertible notes to their face value over the term of the notes.
The total interest expense related to the convertible senior notes in the Company’s Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
Interest expense
|
$
|
—
|
|
|
$
|
9.0
|
|
|
33.1
|
|
Non-cash portion
|
—
|
|
|
5.3
|
|
|
20.0
|
|
In conjunction with the convertible senior note offering, the Company entered into a bond hedge overlay, including both call options and warrants, at a net pre-tax cost of
$25.2 million
, effectively raising the conversion premium to
50%
, or approximately
$19.31
per share. On April 16, 2012, the Company settled the call option portion of the bond hedge overlay, receiving approximately
13.0 million
shares of its common stock. The settlement resulted in an increase to common stock held in treasury of
$503.9 million
offset by an increase to capital in excess of par value of
$503.9 million
.
During the third and fourth quarters of 2012, the Company settled the warrants included in the bond hedge overlay, delivering approximately
9.8 million
shares of its common stock held in treasury, resulting
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in a decrease to common stock held in treasury of
$338.5 million
offset by a decrease to capital in excess of par value of
$338.5 million
.
As of December 31, 2013 and 2012, the estimated fair values of the Company's senior unsecured notes totaled
$729.7 million
and
$770.3 million
, respectively. The estimated fair values were
$78.5 million
and
$119.5 million
higher than their carrying value at December 31, 2013 and 2012, 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 value of the Company's multi-currency revolving credit facility is equal to its 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
$27.8 million
and
$59.1 million
at December 31, 2013 and 2012, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.
NOTE 9 FAIR VALUE MEASUREMENTS
ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity specific measurement. Therefore, a fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:
|
|
Level 1:
|
Observable inputs such as quoted prices for identical assets or liabilities in active markets;
|
|
|
Level 2:
|
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
Level 3:
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC Topic 820:
|
|
A.
|
Market approach:
Prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
|
|
|
B.
|
Cost approach:
Amount that would be required to replace the service capacity of an asset (replacement cost).
|
|
|
C.
|
Income approach:
Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables classify assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
|
Balance at December 31, 2013
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
(millions of dollars)
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
3.4
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
—
|
|
|
A
|
Other non-current assets (insurance settlement agreement note receivable)
|
$
|
35.6
|
|
|
$
|
—
|
|
|
$
|
35.6
|
|
|
$
|
—
|
|
|
C
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
7.4
|
|
|
$
|
—
|
|
|
$
|
7.4
|
|
|
$
|
—
|
|
|
A
|
Net investment hedge contracts
|
$
|
24.3
|
|
|
$
|
—
|
|
|
$
|
24.3
|
|
|
$
|
—
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
(millions of dollars)
|
Balance at December 31, 2012
|
|
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
|
$
|
5.9
|
|
|
$
|
—
|
|
|
$
|
5.9
|
|
|
$
|
—
|
|
|
A
|
Other non-current assets (insurance settlement agreement note receivable)
|
$
|
41.0
|
|
|
$
|
—
|
|
|
$
|
41.0
|
|
|
$
|
—
|
|
|
C
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
9.8
|
|
|
$
|
—
|
|
|
$
|
9.8
|
|
|
$
|
—
|
|
|
A
|
Net investment hedge contracts
|
$
|
58.1
|
|
|
$
|
—
|
|
|
$
|
58.1
|
|
|
$
|
—
|
|
|
A
|
The following tables classify the Company's defined benefit plan assets measured at fair value on a recurring basis as of December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
(millions of dollars)
|
Balance at December 31, 2013
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
147.2
|
|
|
$
|
—
|
|
|
$
|
147.2
|
|
|
$
|
—
|
|
|
A
|
Equity securities
|
100.9
|
|
|
50.5
|
|
|
50.4
|
|
|
—
|
|
|
A
|
Real estate and other
|
26.0
|
|
|
—
|
|
|
26.0
|
|
|
—
|
|
|
A
|
|
$
|
274.1
|
|
|
$
|
50.5
|
|
|
$
|
223.6
|
|
|
$
|
—
|
|
|
|
Non-U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
143.7
|
|
|
$
|
—
|
|
|
$
|
143.7
|
|
|
$
|
—
|
|
|
A
|
Equity securities
|
188.2
|
|
|
70.5
|
|
|
117.7
|
|
|
—
|
|
|
A
|
Real estate and other
|
13.1
|
|
|
—
|
|
|
13.1
|
|
|
—
|
|
|
A
|
|
$
|
345.0
|
|
|
$
|
70.5
|
|
|
$
|
274.5
|
|
|
$
|
—
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
(millions of dollars)
|
Balance at December 31, 2012
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
157.4
|
|
|
$
|
—
|
|
|
$
|
157.4
|
|
|
$
|
—
|
|
|
A
|
Equity securities
|
100.0
|
|
|
48.9
|
|
|
51.1
|
|
|
—
|
|
|
A
|
Real estate and other
|
25.3
|
|
|
—
|
|
|
25.3
|
|
|
—
|
|
|
A
|
|
$
|
282.7
|
|
|
$
|
48.9
|
|
|
$
|
233.8
|
|
|
$
|
—
|
|
|
|
Non-U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
67.3
|
|
|
$
|
—
|
|
|
$
|
67.3
|
|
|
$
|
—
|
|
|
A
|
Equity securities
|
99.0
|
|
|
—
|
|
|
99.0
|
|
|
—
|
|
|
A
|
Real estate and other
|
11.6
|
|
|
—
|
|
|
11.6
|
|
|
—
|
|
|
A
|
|
$
|
177.9
|
|
|
$
|
—
|
|
|
$
|
177.9
|
|
|
$
|
—
|
|
|
|
Refer to Note 11 to the Consolidated Financial Statements for more detail surrounding the defined plan’s asset investment policies and strategies, target allocation percentages and expected return on plan asset assumptions.
|
|
NOTE 10
|
FINANCIAL INSTRUMENTS
|
The Company’s financial instruments include cash and marketable securities. Due to the short-term nature of these instruments, their book value approximates their fair value. The Company’s financial instruments also include long-term debt, interest rate and cross-currency swaps, commodity derivative contracts and foreign currency derivatives. All derivative contracts are placed with counterparties that have an S&P, or equivalent, investment grade credit rating at the time of the contracts’ placement. At December 31, 2013 and 2012, the Company had no derivative contracts that contained credit risk related contingent features.
The Company selectively uses cross-currency swaps to hedge the foreign currency exposure associated with our net investment in certain foreign operations (net investment hedges). At December 31, 2013 and 2012, the following cross-currency swaps were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Cross-currency swaps
|
(millions of dollars)
|
Notional
in USD
|
|
Notional
in local currency
|
|
Duration
|
Floating $ to Floating €
|
$
|
75.0
|
|
|
€
|
58.5
|
|
|
Oct - 19
|
Floating $ to Floating ¥
|
$
|
150.0
|
|
|
¥
|
17,581.5
|
|
|
Nov - 16
|
The Company uses certain commodity derivative contracts to protect against commodity price changes related to forecasted raw material and supplies purchases. The Company primarily utilizes forward and option contracts, which are designated as cash flow hedges. The Company did not have any commodity derivative contracts outstanding at December 31, 2013 and 2012.
The Company uses foreign currency forward and option contracts to protect against exchange rate movements for forecasted cash flows, including capital expenditures, purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. Foreign currency derivative contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for the operating units’ local currency.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2013 and 2012, the following foreign currency derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (in millions)
|
Functional currency
|
|
Traded currency
|
|
Notional in traded currency
December 31, 2013
|
|
Notional in traded currency
December 31, 2012
|
|
Duration
|
Brazilian real
|
|
US dollar
|
|
19.3
|
|
|
—
|
|
|
Dec - 14
|
British pound
|
|
Euro
|
|
—
|
|
|
28.8
|
|
|
Dec - 13
|
Chinese yuan
|
|
Japanese yen
|
|
215.0
|
|
|
—
|
|
|
Feb - 14
|
Chinese yuan
|
|
US dollar
|
|
12.3
|
|
|
—
|
|
|
Dec - 14
|
Euro
|
|
British pound
|
|
3.0
|
|
|
4.7
|
|
|
Dec - 14
|
Euro
|
|
Hungarian forint
|
|
6,430.5
|
|
|
9,300.0
|
|
|
Dec - 14
|
Euro
|
|
Japanese yen
|
|
5,830.7
|
|
|
6,760.0
|
|
|
Dec - 14
|
Euro
|
|
Korean won
|
|
663.1
|
|
|
—
|
|
|
Jul - 14
|
Euro
|
|
Polish zloty
|
|
96.0
|
|
|
87.4
|
|
|
Dec - 14
|
Euro
|
|
US dollar
|
|
29.4
|
|
|
15.2
|
|
|
Dec - 14
|
Hungarian forint
|
|
Euro
|
|
6.6
|
|
|
—
|
|
|
Dec - 14
|
Japanese yen
|
|
Chinese yuan
|
|
84.0
|
|
|
—
|
|
|
Dec - 14
|
Japanese yen
|
|
Korean Won
|
|
5,715.5
|
|
|
—
|
|
|
Dec - 14
|
Japanese yen
|
|
US dollar
|
|
4.2
|
|
|
9.5
|
|
|
Dec - 14
|
Korean won
|
|
Euro
|
|
23.6
|
|
|
32.4
|
|
|
Dec - 14
|
Korean won
|
|
Japanese yen
|
|
380.5
|
|
|
—
|
|
|
Aug - 14
|
Korean won
|
|
US dollar
|
|
—
|
|
|
17.5
|
|
|
Dec - 13
|
Mexican peso
|
|
US dollar
|
|
—
|
|
|
20.9
|
|
|
Dec - 13
|
Swedish krona
|
|
Euro
|
|
33.7
|
|
|
—
|
|
|
Dec - 14
|
US dollar
|
|
Indian rupee
|
|
—
|
|
|
111.1
|
|
|
Oct - 13
|
US dollar
|
|
Japanese yen
|
|
3,209.3
|
|
|
3,000.0
|
|
|
Sept - 14
|
At December 31, 2013 and 2012, the following amounts were recorded in the Consolidated Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
Liabilities
|
(millions of dollars)
|
Location
|
|
December 31, 2013
|
|
December 31, 2012
|
|
Location
|
|
December 31, 2013
|
|
December 31, 2012
|
Foreign currency
|
Prepayments and other current assets
|
|
$
|
3.4
|
|
|
$
|
5.7
|
|
|
Accounts payable and accrued expenses
|
|
$
|
7.4
|
|
|
$
|
9.8
|
|
|
Other non-current assets
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
Other non-current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
Net investment hedges
|
Other non-current assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other non-current liabilities
|
|
$
|
24.3
|
|
|
$
|
58.1
|
|
Effectiveness for cash flow and net investment hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. To the extent that derivative instruments are deemed to be effective, gains and losses arising from these contracts are deferred into accumulated other comprehensive income (loss) ("AOCI") and reclassified into income as the underlying operating transactions are recognized. These realized gains or losses offset the hedged transaction and are recorded on the same line in the statement of operations. To the extent that derivative instruments are deemed to be ineffective, gains or losses are recognized into income.
The table below shows deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less. The amount expected to be reclassified to income in one year or less assumes no change in the current relationship of the hedged item at December 31, 2013 market rates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred gain (loss) in AOCI at
|
|
Gain (loss) expected to be reclassified to income in one year or less
|
(millions of dollars)
|
|
December 31, 2013
|
|
December 31, 2012
|
|
Foreign currency
|
|
$
|
(3.7
|
)
|
|
$
|
(3.5
|
)
|
|
$
|
(3.7
|
)
|
Net investment hedges
|
|
(22.1
|
)
|
|
(54.5
|
)
|
|
—
|
|
Total
|
|
$
|
(25.8
|
)
|
|
$
|
(58.0
|
)
|
|
$
|
(3.7
|
)
|
Derivative instruments designated as hedging instruments as defined by ASC Topic 815 held during the period resulted in the following gains and losses recorded in income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from AOCI to income
(effective portion)
|
|
|
|
Gain (loss) recognized in income
(ineffective portion)
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
|
Location
|
|
2013
|
|
2012
|
|
Location
|
|
2013
|
|
2012
|
Foreign currency
|
|
Sales
|
|
$
|
1.7
|
|
|
$
|
5.3
|
|
|
SG&A expense
|
|
$
|
0.2
|
|
|
$
|
—
|
|
Foreign currency
|
|
Cost of goods sold
|
|
$
|
(13.9
|
)
|
|
$
|
3.5
|
|
|
SG&A expense
|
|
$
|
(1.5
|
)
|
|
$
|
0.1
|
|
Foreign currency
|
|
SG&A expense
|
|
$
|
(0.4
|
)
|
|
$
|
—
|
|
|
SG&A expense
|
|
$
|
—
|
|
|
$
|
—
|
|
Net investment hedges
|
|
N/A
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
1.3
|
|
|
$
|
2.3
|
|
At December 31, 2013, derivative instruments that were not designated as hedging instruments as defined by ASC Topic 815 were immaterial.
|
|
NOTE 11
|
RETIREMENT BENEFIT PLANS
|
The Company sponsors various defined contribution savings plans, primarily in the U.S., that allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan specified guidelines. Under specified conditions, the Company will make contributions to the plans and/or match a percentage of the employee contributions up to certain limits. Total expense related to the defined contribution plans was
$24.9 million
,
$24.8 million
and
$18.9 million
in the years ended December 31, 2013, 2012 and 2011, respectively.
The Company has a number of defined benefit pension plans and other postretirement employee benefit plans covering eligible salaried and hourly employees and their dependents. The defined pension benefits provided are primarily based on (i) years of service and (ii) average compensation or a monthly retirement benefit amount. The Company provides defined benefit pension plans in France, Germany, Ireland, Italy, Japan, Mexico, Monaco, South Korea, Sweden, U.K. and the U.S. The other postretirement employee benefit plans, which provide medical and life insurance benefits, are unfunded plans. All pension and other postretirement employee benefit plans in the U.S. have been closed to new employees since 1999. The measurement date for all plans is December 31.
On February 26, 2009, the Company's subsidiary BorgWarner Diversified Transmission Products Inc. ("DTP"), entered into a Plant Shutdown Agreement with the United Auto Workers ("UAW") for its Muncie, Indiana automotive component plant (the "Muncie Plant"). Management subsequently wound-down production activity at the plant, with operations effectively ceased as of March 31, 2009. The Plant Shutdown Agreement included terms allowing for lump sum payment of the pension obligation for certain participants if funding of the plan exceeded a defined level. In accordance with these terms, in December 2012, the Company settled a portion of the pension obligation resulting in a non-cash loss of
$5.7 million
, which was recorded in other expense (income) within the Consolidated Statement of Operations.
On March 24, 2010, the Company finalized its settlement agreement regarding the closure of the Muncie Plant with the Pension Benefit Guaranty Corporation ("PBGC") in which the Company agreed to make certain
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
payments directly to the Muncie Plant's defined benefit pension plan (the “Plan”). In accordance with the settlement agreement, the Company made an initial cash contribution of
$23 million
for the 2009 Plan year and a cash contribution of
$15 million
in the year ended December 31, 2011. During the fourth quarter of 2012, the Company received notification from the PBGC that the terms of the settlement have been suspended pending review of the Company's financial strength under the PBGC's revised enforcement policy pilot program announced on November 2, 2012. The evaluation was confirmed in January 2013 and as a result the Company currently does not have any obligations as described in the original agreement.
The following table summarizes the expenses for the Company's defined contribution and defined benefit pension plans and the other postretirement defined employee benefit plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
Defined contribution expense
|
$
|
24.9
|
|
|
$
|
24.8
|
|
|
$
|
18.9
|
|
Defined benefit pension expense
|
24.3
|
|
|
27.3
|
|
|
17.5
|
|
Other postretirement employee benefit expense
|
5.7
|
|
|
11.1
|
|
|
13.5
|
|
Total
|
$
|
54.9
|
|
|
$
|
63.2
|
|
|
$
|
49.9
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following provides a roll forward of the plans’ benefit obligations, plan assets, funded status and recognition in the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement
|
|
Year Ended December 31,
|
|
employee benefits
|
|
2013
|
|
2012
|
|
Year Ended December 31,
|
(millions of dollars)
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2013
|
|
2012
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, January 1
|
$
|
330.1
|
|
|
$
|
447.6
|
|
|
$
|
337.4
|
|
|
$
|
344.3
|
|
|
$
|
220.5
|
|
|
$
|
251.0
|
|
Service cost
|
—
|
|
|
12.4
|
|
|
—
|
|
|
9.1
|
|
|
0.4
|
|
|
0.5
|
|
Interest cost
|
11.6
|
|
|
16.6
|
|
|
14.3
|
|
|
17.2
|
|
|
6.8
|
|
|
10.1
|
|
Plan participants’ contributions
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
Plan amendments
|
—
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.3
|
)
|
Actuarial (gain) loss
|
(18.7
|
)
|
|
11.8
|
|
|
15.5
|
|
|
84.1
|
|
|
(29.7
|
)
|
|
(20.7
|
)
|
Currency translation
|
—
|
|
|
10.6
|
|
|
—
|
|
|
11.3
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
(2.7
|
)
|
|
—
|
|
|
(4.5
|
)
|
|
—
|
|
|
—
|
|
Benefits paid
|
(29.4
|
)
|
|
(14.6
|
)
|
|
(37.1
|
)
|
|
(14.4
|
)
|
|
(20.5
|
)
|
|
(20.1
|
)
|
Projected benefit obligation, December 31
|
$
|
293.6
|
|
|
$
|
482.7
|
|
|
$
|
330.1
|
|
|
$
|
447.6
|
|
|
$
|
177.5
|
|
|
$
|
220.5
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, January 1
|
$
|
282.7
|
|
|
$
|
177.9
|
|
|
$
|
290.4
|
|
|
$
|
154.9
|
|
|
|
|
|
|
|
Actual return on plan assets
|
20.8
|
|
|
23.6
|
|
|
29.4
|
|
|
15.0
|
|
|
|
|
|
|
|
Employer contribution
|
—
|
|
|
150.4
|
|
|
—
|
|
|
18.0
|
|
|
|
|
|
|
|
Plan participants’ contribution
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.5
|
|
|
|
|
|
|
|
Currency translation
|
—
|
|
|
7.7
|
|
|
—
|
|
|
6.0
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(2.1
|
)
|
|
|
|
|
Benefits paid
|
(29.4
|
)
|
|
(14.6
|
)
|
|
(37.1
|
)
|
|
(14.4
|
)
|
|
|
|
|
|
|
Fair value of plan assets, December 31
|
$
|
274.1
|
|
|
$
|
345.0
|
|
|
$
|
282.7
|
|
|
$
|
177.9
|
|
|
|
|
|
Funded status
|
$
|
(19.5
|
)
|
|
$
|
(137.7
|
)
|
|
$
|
(47.4
|
)
|
|
$
|
(269.7
|
)
|
|
$
|
(177.5
|
)
|
|
$
|
(220.5
|
)
|
Amounts in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
$
|
(0.1
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(7.0
|
)
|
|
$
|
(19.1
|
)
|
|
$
|
(20.8
|
)
|
Non-current liabilities
|
(19.4
|
)
|
|
(135.1
|
)
|
|
(47.3
|
)
|
|
(262.7
|
)
|
|
(158.4
|
)
|
|
(199.7
|
)
|
Net amount
|
$
|
(19.5
|
)
|
|
$
|
(137.7
|
)
|
|
$
|
(47.4
|
)
|
|
$
|
(269.7
|
)
|
|
$
|
(177.5
|
)
|
|
$
|
(220.5
|
)
|
Amounts in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
115.0
|
|
|
$
|
130.6
|
|
|
$
|
163.8
|
|
|
$
|
135.1
|
|
|
$
|
44.0
|
|
|
$
|
78.7
|
|
Net prior service cost (credit)
|
9.7
|
|
|
1.1
|
|
|
(10.5
|
)
|
|
0.5
|
|
|
(36.1
|
)
|
|
(42.6
|
)
|
Net amount*
|
$
|
124.7
|
|
|
$
|
131.7
|
|
|
$
|
153.3
|
|
|
$
|
135.6
|
|
|
$
|
7.9
|
|
|
$
|
36.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated benefit obligation for all plans
|
$
|
293.6
|
|
|
$
|
464.8
|
|
|
$
|
330.1
|
|
|
$
|
430.2
|
|
|
|
|
|
|
|
________________
|
|
*
|
AOCI shown above does not include our equity investee, NSK-Warner. NSK-Warner had an AOCI loss of
$4.9 million
and
$7.9 million
at December 31, 2013 and 2012, respectively.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The funded status of pension plans with accumulated benefit obligations in excess of plan assets at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
Accumulated benefit obligation
|
$
|
(752.0
|
)
|
|
$
|
(757.7
|
)
|
Plan assets
|
612.7
|
|
|
458.0
|
|
Deficiency
|
$
|
(139.3
|
)
|
|
$
|
(299.7
|
)
|
Pension deficiency by country:
|
|
|
|
|
|
United States
|
$
|
(19.5
|
)
|
|
$
|
(47.4
|
)
|
United Kingdom
|
(15.3
|
)
|
|
(22.4
|
)
|
Germany
|
(68.6
|
)
|
|
(192.4
|
)
|
Other
|
(35.9
|
)
|
|
(37.5
|
)
|
Total pension deficiency
|
$
|
(139.3
|
)
|
|
$
|
(299.7
|
)
|
The weighted average asset allocations of the Company’s funded pension plans and target allocations by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Target Allocation
|
|
2013
|
|
2012
|
|
U.S. Plans:
|
|
|
|
|
|
|
|
Real estate and other
|
9
|
%
|
|
9
|
%
|
|
5%-15%
|
Fixed income securities
|
54
|
%
|
|
56
|
%
|
|
45%-65%
|
Equity securities
|
37
|
%
|
|
35
|
%
|
|
25%-45%
|
|
100
|
%
|
|
100
|
%
|
|
|
Non-U.S. Plans:
|
|
|
|
|
|
|
|
Real estate and other
|
4
|
%
|
|
6
|
%
|
|
0% - 7%
|
Fixed income securities
|
42
|
%
|
|
38
|
%
|
|
37% - 47%
|
Equity securities
|
54
|
%
|
|
56
|
%
|
|
51% - 61%
|
|
100
|
%
|
|
100
|
%
|
|
|
The Company's investment strategy is to maintain actual asset weightings within a preset range of target allocations. The Company believes these ranges represent an appropriate risk profile for the planned benefit payments of the plans based on the timing of the estimated benefit payments. In each asset category, separate portfolios are maintained for additional diversification. Investment managers are retained in each asset category to manage each portfolio against its benchmark. Each investment manager has appropriate investment guidelines. In addition, the entire portfolio is evaluated against a relevant peer group. The defined benefit pension plans did not hold any Company securities as investments as of December 31, 2013 and 2012. A portion of pension assets is invested in common and comingled trusts.
In December 2013, the Company made a discretionary contribution of
$137.5 million
to its German pension plans. The Company expects to contribute a total of
$15 million
to
$25 million
into its defined benefit pension plans during 2014. Of the
$15 million
to
$25 million
in projected 2014 contributions,
$2.8 million
are contractually obligated, while any remaining payments would be discretionary.
Refer to Note 9, “Fair Value Measurements," for more detail surrounding the fair value of each major category of plan assets as well as the inputs and valuation techniques used to develop the fair value measurements of the plans' assets at December 31, 2013 and 2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
See the table below for a breakout of net periodic benefit cost between U.S. and non-U.S. pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement employee benefits
|
|
Year Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Year Ended December 31,
|
(millions of dollars)
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2013
|
|
2012
|
|
2011
|
Service cost
|
$
|
—
|
|
|
$
|
12.4
|
|
|
$
|
—
|
|
|
$
|
9.1
|
|
|
$
|
—
|
|
|
$
|
9.1
|
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
$
|
0.7
|
|
Interest cost
|
11.6
|
|
|
16.6
|
|
|
14.3
|
|
|
17.2
|
|
|
16.1
|
|
|
17.8
|
|
|
6.8
|
|
|
10.1
|
|
|
11.8
|
|
Expected return on plan assets
|
(18.2
|
)
|
|
(11.0
|
)
|
|
(18.8
|
)
|
|
(9.3
|
)
|
|
(20.8
|
)
|
|
(11.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements, curtailments and other
|
—
|
|
|
0.2
|
|
|
5.7
|
|
|
0.5
|
|
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service benefit
|
(0.8
|
)
|
|
—
|
|
|
(0.7
|
)
|
|
—
|
|
|
(0.7
|
)
|
|
—
|
|
|
(6.4
|
)
|
|
(6.4
|
)
|
|
(6.9
|
)
|
Amortization of unrecognized loss
|
8.2
|
|
|
5.3
|
|
|
8.1
|
|
|
1.2
|
|
|
6.5
|
|
|
0.8
|
|
|
4.9
|
|
|
6.9
|
|
|
7.9
|
|
Net periodic benefit cost
|
$
|
0.8
|
|
|
$
|
23.5
|
|
|
$
|
8.6
|
|
|
$
|
18.7
|
|
|
$
|
1.1
|
|
|
$
|
16.4
|
|
|
$
|
5.7
|
|
|
$
|
11.1
|
|
|
$
|
13.5
|
|
The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is
$11.3 million
. The estimated net loss and prior service credit for the other postretirement plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year are
$2.7 million
and
$(6.4) million
, respectively.
The Company's weighted-average assumptions used to determine the benefit obligations for its defined benefit pension and other postretirement employee benefit plans as of December 31, 2013 and 2012 were as follows:
|
|
|
|
|
|
December 31,
|
(percent)
|
2013
|
|
2012
|
U.S. pension plans:
|
|
|
|
Discount rate
|
4.41
|
|
3.67
|
Rate of compensation increase
|
N/A
|
|
N/A
|
U.S. other postretirement employee benefit plans:
|
|
|
|
Discount rate
|
4.00
|
|
3.25
|
Rate of compensation increase
|
N/A
|
|
N/A
|
Non-U.S. pension plans:
|
|
|
|
Discount rate
|
3.90
|
|
3.86
|
Rate of compensation increase
|
2.77
|
|
2.72
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s weighted-average assumptions used to determine the net periodic benefit cost for its defined benefit pension and other postretirement employee benefit plans for the years ended December 31, 2013, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(percent)
|
2013
|
|
2012
|
|
2011
|
U.S. pension plans:
|
|
|
|
|
|
Discount rate
|
3.67
|
|
4.42
|
|
5.17
|
Rate of compensation increase
|
N/A
|
|
N/A
|
|
N/A
|
Expected return on plan assets
|
6.75
|
|
6.75
|
|
7.50
|
U.S. other postretirement plans:
|
|
|
|
|
|
Discount rate
|
3.25
|
|
4.25
|
|
4.75
|
Rate of compensation increase
|
N/A
|
|
N/A
|
|
N/A
|
Expected return on plan assets
|
N/A
|
|
N/A
|
|
N/A
|
Non-U.S. pension plans:
|
|
|
|
|
|
Discount rate
|
3.86
|
|
5.13
|
|
5.37
|
Rate of compensation increase
|
2.72
|
|
2.78
|
|
2.80
|
Expected return on plan assets
|
6.42
|
|
6.49
|
|
7.07
|
The Company's approach to establishing the discount rate is based upon the market yields of high-quality corporate bonds, with appropriate consideration of each plan's defined benefit payment terms and duration of the liabilities.
The Company determines its expected return on plan asset assumptions by evaluating estimates of future market returns and the plans' asset allocation. The Company also considers the impact of active management of the plans' invested assets.
The estimated future benefit payments for the pension and other postretirement employee benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement employee benefits
|
(millions of dollars)
|
|
|
|
|
|
w/o Medicare Part D reimbursements
|
|
with Medicare Part D reimbursements
|
Year
|
|
U.S.
|
|
Non-U.S.
|
|
|
2014
|
|
$
|
24.0
|
|
|
$
|
17.4
|
|
|
$
|
19.5
|
|
|
$
|
19.5
|
|
2015
|
|
23.1
|
|
|
20.7
|
|
|
18.7
|
|
|
18.7
|
|
2016
|
|
23.0
|
|
|
19.3
|
|
|
17.7
|
|
|
17.7
|
|
2017
|
|
22.2
|
|
|
20.6
|
|
|
17.1
|
|
|
17.1
|
|
2018
|
|
22.4
|
|
|
21.8
|
|
|
16.6
|
|
|
16.6
|
|
2019-2023
|
|
103.2
|
|
|
118.4
|
|
|
65.6
|
|
|
65.6
|
|
The weighted-average rate of increase in the per capita cost of covered health care benefits is projected to be
7.10%
in 2014 for pre-65 and post-65 participants, decreasing to
5.0%
by the year 2019. A one-percentage point change in the assumed health care cost trend would have the following effects:
|
|
|
|
|
|
|
|
|
|
One Percentage Point
|
(millions of dollars)
|
Increase
|
|
Decrease
|
Effect on other postretirement employee benefit obligation
|
$
|
12.6
|
|
|
$
|
(10.9
|
)
|
Effect on total service and interest cost components
|
$
|
0.5
|
|
|
$
|
(0.5
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 12
|
STOCK INCENTIVE PLANS
|
Under the Company's 1993 Stock Incentive Plan (“1993 Plan”), the Company granted options to purchase shares of the Company's common stock at the fair market value on the date of grant. The options vested over periods up to three years and had a term of 10 years from date of grant. As of December 31, 2003, there were no options available for future grants under the 1993 Plan and all options granted under the 1993 Plan were previously exercised, forfeited or expired as of December 31, 2013. The 1993 Plan expired at the end of 2003 and was replaced by the Company's 2004 Stock Incentive Plan. Under this plan,
25.0 million
shares were authorized for grant, of which approximately
3.1 million
shares remained available for future issuance as of December 31, 2013.
Stock Options
A summary of the plans’ shares under option at December 31, 2013, 2012 and 2011 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (thousands)
|
|
Weighted average exercise price
|
|
Weighted average remaining contractual life
(in years)
|
|
Aggregate intrinsic value
(in millions)
|
Outstanding at January 1, 2011
|
6,506
|
|
|
$
|
14.32
|
|
|
4.9
|
|
$
|
142.2
|
|
Exercised
|
(2,066
|
)
|
|
$
|
13.58
|
|
|
|
|
$
|
48.4
|
|
Outstanding at December 31, 2011
|
4,440
|
|
|
$
|
14.68
|
|
|
4.1
|
|
$
|
76.3
|
|
Exercised
|
(1,568
|
)
|
|
$
|
13.43
|
|
|
|
|
$
|
40.1
|
|
Outstanding at December 31, 2012
|
2,872
|
|
|
$
|
15.33
|
|
|
3.4
|
|
$
|
58.8
|
|
Exercised
|
(870
|
)
|
|
$
|
14.17
|
|
|
|
|
$
|
25.5
|
|
Forfeited
|
(5
|
)
|
|
$
|
17.48
|
|
|
|
|
|
|
Outstanding at December 31, 2013
|
1,997
|
|
|
$
|
15.82
|
|
|
2.6
|
|
$
|
80.0
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2013
|
1,997
|
|
|
$
|
15.82
|
|
|
2.6
|
|
$
|
80.0
|
|
Proceeds from stock option exercises for the years ended December 31, 2013, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
Proceeds from stock options exercised — gross
|
$
|
12.3
|
|
|
$
|
20.9
|
|
|
$
|
28.6
|
|
Tax benefit
|
20.7
|
|
|
31.1
|
|
|
24.4
|
|
Proceeds from stock options exercised, net of tax
|
$
|
33.0
|
|
|
$
|
52.0
|
|
|
$
|
53.0
|
|
Restricted Stock
At its November 2007 meeting, the Company's Compensation Committee decided that restricted common stock awards and stock units ("restricted stock") would be awarded in place of stock options for long-term incentive award grants to employees. Restricted stock granted to employees vests 50% after two years and the remainder after three years from the date of grant. Restricted stock granted to non-employee directors generally vests on the anniversary date of the grant.
The value of restricted stock is determined by the market value of the Company’s common stock at the date of grant. In 2013, restricted stock in the amount of
746,394
and
28,280
shares was granted to employees and non-employee directors, respectively, under the 2004 Stock Incentive Plan.The value of the awards is recorded as unearned compensation within capital in excess of par value in equity and is amortized as compensation expense over the restriction periods.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted stock compensation expense recorded in the Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars, except per share data)
|
2013
|
|
2012
|
|
2011
|
Restricted stock compensation expense
|
$
|
25.8
|
|
|
$
|
21.2
|
|
|
$
|
15.1
|
|
Restricted stock compensation expense, net of tax
|
$
|
18.8
|
|
|
$
|
15.5
|
|
|
$
|
11.4
|
|
A summary of the status of the Company’s nonvested restricted stock for employees and non-employee directors at December 31, 2013, 2012 and 2011 is as follows:
|
|
|
|
|
|
|
|
|
Shares subject to restriction
(thousands)
|
|
Weighted average price
|
Nonvested at January 1, 2011
|
3,742
|
|
|
$
|
15.28
|
|
Granted
|
548
|
|
|
$
|
35.29
|
|
Vested
|
(1,218
|
)
|
|
$
|
13.70
|
|
Forfeited
|
(212
|
)
|
|
$
|
19.03
|
|
Nonvested at December 31, 2011
|
2,860
|
|
|
$
|
19.51
|
|
Granted
|
676
|
|
|
$
|
39.21
|
|
Vested
|
(1,350
|
)
|
|
$
|
13.72
|
|
Forfeited
|
(122
|
)
|
|
$
|
27.18
|
|
Nonvested at December 31, 2012
|
2,064
|
|
|
$
|
29.39
|
|
Granted
|
782
|
|
|
$
|
37.82
|
|
Vested
|
(1,322
|
)
|
|
$
|
24.36
|
|
Forfeited
|
(113
|
)
|
|
$
|
36.59
|
|
Nonvested at December 31, 2013
|
1,411
|
|
|
$
|
37.86
|
|
Performance Share Plans
The 2004 Stock Incentive Plan provides for awarding of performance shares to members of senior management at the end of successive three-year periods based on the Company's performance in terms of total shareholder return relative to a peer group of automotive companies. In the first quarter of 2012, the Company modified all outstanding Performance Share Award Agreements to allow for the payment of these awards entirely in the Company's common stock, rather than
40%
in cash and
60%
in the Company's common stock. Using the lattice model (Monte Carlo simulation) at the date of modification, the Company determined the first quarter 2012 compensation expense associated with the modification to be negligible. Within the Consolidated Statement of Cash Flows for the year ended December 31, 2011, the Company's
$19.6 million
of expense associated with the
40%
cash portion of the award was included in the changes in accounts payable and accrued expenses and other non-current assets and liabilities line items.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company recognizes compensation expense relating to its performance share plans ratably over the performance period. Prior to the modification, compensation expense for the
60%
stock component was based on the performance share's fair value at the date of grant using a lattice model (Monte Carlo simulation) and the
40%
cash component was based on quarterly mark to market of the cash liability on a quarterly basis. After the first quarter 2012 modification, 100% of compensation expense associated with the performance share plans is calculated using a lattice model (Monte Carlo simulation). The amounts expensed under the plan and the share issuances for the three-year measurement periods ended December 31, 2013, 2012 and 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars, except share data)
|
2013
|
|
2012
|
|
2011
|
Expense
|
$
|
10.8
|
|
|
$
|
35.5
|
|
|
$
|
26.3
|
|
Number of shares*
|
545,375
|
|
|
1,116,000
|
|
|
1,076,360
|
|
________________
*Shares are issued in February of the following year.
The restricted stock and performance share compensation expense disclosed above includes
$5.5 million
and
$7.0 million
of expense for the years ended December 31, 2013 and 2012, respectively, related to the Company's fourth quarter 2012 decision to waive the forfeiture provisions of existing restricted stock and performance share grants made to certain retiring NEOs. The Company recorded this expense within other expense (income) in the Consolidated Statements of Operations.
NOTE 13 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes the activity within accumulated other comprehensive income (loss) during the years ended December 31, 2013, 2012 and 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
Beginning Balance, January 1, 2011
|
|
$
|
148.0
|
|
|
$
|
(44.8
|
)
|
|
$
|
(158.1
|
)
|
|
$
|
1.2
|
|
|
$
|
(53.7
|
)
|
Comprehensive (loss) income before reclassifications
|
|
(62.2
|
)
|
|
(9.2
|
)
|
|
(47.3
|
)
|
|
(0.1
|
)
|
|
(118.8
|
)
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
—
|
|
|
3.0
|
|
|
13.3
|
|
|
—
|
|
|
16.3
|
|
Reclassification from accumulated other comprehensive (loss) income
|
|
—
|
|
|
1.5
|
|
|
7.6
|
|
|
—
|
|
|
9.1
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
(1.0
|
)
|
|
(2.7
|
)
|
|
—
|
|
|
(3.7
|
)
|
Ending Balance December 31, 2011
|
|
$
|
85.8
|
|
|
$
|
(50.5
|
)
|
|
$
|
(187.2
|
)
|
|
$
|
1.1
|
|
|
$
|
(150.8
|
)
|
Comprehensive (loss) income before reclassifications
|
|
38.2
|
|
|
30.3
|
|
|
(60.8
|
)
|
|
(0.2
|
)
|
|
7.5
|
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
—
|
|
|
(10.4
|
)
|
|
16.2
|
|
|
—
|
|
|
5.8
|
|
Reclassification from accumulated other comprehensive (loss) income
|
|
16.8
|
|
|
(8.8
|
)
|
|
9.1
|
|
|
—
|
|
|
17.1
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
2.2
|
|
|
(3.1
|
)
|
|
—
|
|
|
(0.9
|
)
|
Ending Balance December 31, 2012
|
|
$
|
140.8
|
|
|
$
|
(37.2
|
)
|
|
$
|
(225.8
|
)
|
|
$
|
0.9
|
|
|
$
|
(121.3
|
)
|
Comprehensive (loss) income before reclassifications
|
|
40.3
|
|
|
19.6
|
|
|
52.5
|
|
|
1.5
|
|
|
113.9
|
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
—
|
|
|
(8.1
|
)
|
|
(15.8
|
)
|
|
—
|
|
|
(23.9
|
)
|
Reclassification from accumulated other comprehensive (loss) income
|
|
—
|
|
|
12.6
|
|
|
11.2
|
|
|
—
|
|
|
23.8
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
(2.9
|
)
|
|
(3.6
|
)
|
|
—
|
|
|
(6.5
|
)
|
Ending Balance December 31, 2013
|
|
$
|
181.1
|
|
|
$
|
(16.0
|
)
|
|
$
|
(181.5
|
)
|
|
$
|
2.4
|
|
|
$
|
(14.0
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the normal course of business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company will ultimately be successful in any of these commercial and legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that an adverse outcome in any of these commercial and legal claims, actions and complaints will have a material adverse effect on the Company's results of operations, financial position or cash flows, although it could be material to the results of operations in a particular quarter.
Litigation
In January 2006, BorgWarner Diversified Transmission Products Inc. ("DTP"), a subsidiary of the Company, filed a declaratory judgment action in United States District Court, Southern District of Indiana (Indianapolis Division) against the United Automobile, Aerospace, and Agricultural Implements Workers of America (“UAW”) Local No. 287 and Gerald Poor, individually and as the representative of a defendant class. DTP sought the Court's affirmation that DTP did not violate the Labor-Management Relations Act or the Employee Retirement Income Security Act (ERISA) by unilaterally amending certain medical plans effective April 1, 2006 and October 1, 2006, prior to the expiration of the then-current collective bargaining agreements. On September 10, 2008, the Court found that DTP's reservation of the right to make such amendments reducing the level of benefits provided to retirees was limited by its collectively bargained health insurance agreement with the UAW, which did not expire until April 24, 2009. Thus, the amendments were untimely. In 2008, the Company recorded a charge of
$4.0 million
as a result of the Court's decision.
DTP filed a declaratory judgment action in the United States District Court, Southern District of Indiana (Indianapolis Division) against the UAW Local No. 287 and Jim Barrett and others, individually and as representatives of a defendant class, on February 26, 2009 again seeking the Court's affirmation that DTP did not violate the Labor - Management Relations Act or ERISA by modifying the level of benefits provided retirees to make them comparable to other Company retiree benefit plans after April 24, 2009. Certain retirees, on behalf of themselves and others, filed a mirror-image action in the United States District Court, Eastern District of Michigan (Southern Division) on March 11, 2009, for which a class has been certified. During the last quarter of 2009, the action pending in Indiana was dismissed, while the action in Michigan is continuing. The Company is vigorously defending against the suit. This contingency is subject to many uncertainties, therefore based on the information available to date, the Company cannot reasonably estimate the amount or the range of potential loss, if any. A decision on the merits of the suit could be rendered sometime in 2014.
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
32
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
$4.0 million
and
$3.9 million
at December 31, 2013 and 2012, respectively. The Company expects to pay out substantially all of the amounts accrued for environmental liability over the next five years.
In connection with the sale of Kuhlman Electric Corporation ("Kuhlman Electric"), the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities, then unknown to the Company, relating to certain operations of Kuhlman Electric that pre-date the Company's 1999 acquisition of Kuhlman Electric. In 2007 and 2008, lawsuits were filed against Kuhlman Electric and others, including the Company, on behalf of approximately
340
plaintiffs alleging personal injury relating to alleged environmental contamination at its Crystal Springs, Mississippi plant. The Company entered into a settlement in July 2010 regarding the personal injury claims of the plaintiffs and those of approximately
2,700
unfiled claimants represented by those plaintiffs' attorneys. In exchange for, among other things, the dismissal with prejudice of these lawsuits and the release of claims by the unfiled claimants, the Company agreed to pay up to
$28 million
in settlement funds, which was expensed in the second quarter of 2010. The Company paid
$13.9 million
in November 2010 and made the final payment of
$13.9 million
in February 2011. Litigation concerning indemnification is pending and the Company may in the future become subject to further legal proceedings.
Product Liability
Like many other industrial companies who have historically operated in the U.S., the Company (or parties the Company is obligated to indemnify) continues to be named as one of many defendants in asbestos-related personal injury actions. We believe that the Company's involvement is limited because, in general, these claims relate to a few types of automotive friction products that were manufactured many years ago and contained encapsulated asbestos. The nature of the fibers, the encapsulation and the manner of use lead the Company to believe that these products are highly unlikely to cause harm. As of December 31, 2013 and 2012, the Company had approximately
17,000
and
16,000
pending asbestos-related product liability claims, respectively. Of the approximately
17,000
outstanding claims at December 31, 2013, approximately half were pending in jurisdictions that have undergone significant tort and judicial reform activities subsequent to the filing of these claims.
The Company's policy is to vigorously defend against these lawsuits and the Company has been successful in obtaining dismissal of many claims without any payment. The Company expects that the vast majority of the pending asbestos-related product liability claims where it is a defendant (or has an obligation to indemnify a defendant) will result in no payment being made by the Company or its insurers. In 2013, of the approximately
1,500
claims resolved,
297
(
20%
) resulted in payment being made to a claimant by or on behalf of the Company. In the full year of 2012, of the approximately
2,400
claims resolved,
308
(
13%
) resulted in any payment being made to a claimant by or on behalf of the Company.
Prior to June 2004, the settlement and defense costs associated with all claims were paid by the Company's primary layer insurance carriers under a series of funding arrangements. In addition to the primary insurance available for asbestos-related claims, the Company has substantial excess insurance coverage available for potential future asbestos-related product claims. In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion of their policy limits.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies against the Company and certain of its historical general liability insurers. The court has issued a number of interim rulings and discovery is continuing. The Company has entered into settlement agreements with some of its insurance carriers, resolving their coverage disputes by agreeing to pay specified amounts to the Company. The Company is vigorously pursuing the litigation against the remaining insurers.
In August 2013, the Los Angeles Superior Court entered a jury verdict against the Company in an asbestos-related personal injury action with damages of
$35.0 million
,
$32.5 million
of which was non-compensatory and will not be recoverable through insurance if the verdict is upheld. The Company has appealed the verdict. The Company posted a surety bond of
$55.0 million
related to the appeal. The Company cannot predict the outcome of this pending litigation and therefore cannot reasonably estimate the amount of possible loss, if any, that could result from this action.
Although it is impossible to predict the outcome of pending or future claims or the impact of tort reform legislation that may be enacted at the state or federal levels, due to the encapsulated nature of the products, the Company's experience in vigorously defending and resolving claims in the past, and the Company's significant insurance coverage with solvent carriers as of the date of this filing, management does not believe that asbestos-related product liability claims are likely to have a material adverse effect on the Company's results of operations, financial position or cash flows.
To date, the Company has paid and accrued
$278.4 million
in defense and indemnity in advance of insurers' reimbursement and has received
$124.8 million
in cash and notes from insurers. The net balance of
$153.6 million
, is expected to be fully recovered, of which approximately
$20 million
is expected to be recovered within one year. Timing of recovery is dependent on final resolution of the declaratory judgment action referred to above or additional negotiated settlements. At December 31, 2012, insurers owed
$111.0 million
in association with these claims.
In addition to the
$153.6 million
net balance relating to past settlements and defense costs, the Company has estimated a liability of
$96.7 million
for claims asserted, but not yet resolved and their related defense costs at December 31, 2013. The Company also has a related asset of
$96.7 million
to recognize proceeds from the insurance carriers, which is expected to be fully recovered. Receipt of these proceeds is not expected prior to the resolution of the declaratory judgment action referred to above, which, more-likely-than-not, will occur subsequent to December 31, 2014. At December 31, 2012, the comparable value of the accrued liability and associated insurance asset was
$85.6 million
.
The amounts recorded in the Consolidated Balance Sheets related to the estimated future settlement of existing claims are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
Assets:
|
|
|
|
|
|
Other non-current assets
|
$
|
96.7
|
|
|
$
|
85.6
|
|
Total insurance assets
|
$
|
96.7
|
|
|
$
|
85.6
|
|
Liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
41.1
|
|
|
$
|
36.5
|
|
Other non-current liabilities
|
55.6
|
|
|
49.1
|
|
Total accrued liabilities
|
$
|
96.7
|
|
|
$
|
85.6
|
|
The 2013 increase in the accrued liability and associated insurance asset is primarily due to an expected higher rate of claim settlement based on recent claim activity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company cannot reasonably estimate possible losses, if any, in excess of those for which it has accrued, because it cannot predict how many additional claims may be brought against the Company (or parties the Company has an obligation to indemnify) in the future, the allegations in such claims, the possible outcomes, or the impact of tort reform legislation that may be enacted at the State or Federal levels.
|
|
NOTE 15
|
LEASES AND COMMITMENTS
|
Certain assets are leased under long-term operating leases, including rent for the corporate headquarters and one airplane. Most leases contain renewal options for various periods. Leases generally require the Company to pay for insurance, taxes and maintenance of the leased property. The Company leases other equipment such as vehicles and certain office equipment under short-term leases. Total rent expense was
$32.1 million
,
$31.3 million
and
$30.7 million
in the years ended December 31, 2013, 2012 and 2011, respectively. The Company does not have any material capital leases.
Future minimum operating lease payments at December 31, 2013 were as follows:
|
|
|
|
|
(millions of dollars)
|
|
2014
|
$
|
14.5
|
|
2015
|
12.0
|
|
2016
|
9.9
|
|
2017
|
8.8
|
|
2018
|
6.6
|
|
After 2018
|
3.4
|
|
Total minimum lease payments
|
$
|
55.2
|
|
|
|
NOTE 16
|
EARNINGS PER SHARE
|
The Company presents both basic and diluted earnings per share of common stock (“EPS”) amounts. Basic EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock outstanding during the reporting period. Diluted EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock and common equivalent stock outstanding during the reporting period.
The dilutive impact of stock-based compensation is calculated using the treasury stock method. The treasury stock method assumes that the Company uses the assumed proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future, compensation cost for future service that the Company has not yet recognized and any windfall/(shortfall) tax benefits that would be credited/(debited) to capital in excess of par value when the award generates a tax deduction. Options are only dilutive when the average market price of the underlying common stock exceeds the exercise price of the options.
In April 2012, the Company settled its
3.50%
convertible senior notes. Prior to the settlement, the potential common shares associated with these notes were reflected in diluted EPS using the “if-converted” method. Under this method, if dilutive, the common shares were assumed issued as of the beginning of the reporting period and included in calculating diluted EPS. In addition, if dilutive, interest expense, net of tax, related to the convertible senior notes was added back to the numerator in calculating diluted EPS.
In conjunction with the convertible senior note offering, the Company entered into a bond hedge overlay, including both call options and warrants. On April 16, 2012, the Company settled the call option portion of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the bond hedge overlay, receiving approximately
13.0 million
shares, which reduced the weighted average basic and dilutive shares outstanding. Prior to the settlement, if the Company's weighted average share price exceeded
$16.41
per share, the call options were anti-dilutive. During the third and fourth quarters of 2012, the Company settled the warrant portion of the bond hedge overlay, delivering approximately
9.8 million
shares. Prior to settlement, if the Company's weighted-average share price exceeded
$19.31
per share, the warrants were dilutive to the Company's earnings.
The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions except per share amounts)
|
2013
|
|
2012
|
|
2011
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
624.3
|
|
|
$
|
500.9
|
|
|
$
|
550.1
|
|
Weighted average shares of common stock outstanding
|
228.600
|
|
|
225.304
|
|
|
218.458
|
|
Basic earnings per share of common stock
|
$
|
2.73
|
|
|
$
|
2.22
|
|
|
$
|
2.52
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
624.3
|
|
|
$
|
500.9
|
|
|
$
|
550.1
|
|
Adjusted for net interest expense on convertible notes
|
—
|
|
|
5.8
|
|
|
21.5
|
|
Diluted net earnings attributable to BorgWarner Inc.
|
$
|
624.3
|
|
|
$
|
506.7
|
|
|
$
|
571.6
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
228.600
|
|
|
225.304
|
|
|
218.458
|
|
|
|
|
|
|
|
Effect of 3.50% convertible senior notes
|
—
|
|
|
6.644
|
|
|
22.778
|
|
Effect of warrant
|
—
|
|
|
6.800
|
|
|
10.430
|
|
Effect of stock-based compensation
|
2.737
|
|
|
4.006
|
|
|
5.270
|
|
Total dilutive effect on weighted average shares of common stock outstanding
|
2.737
|
|
|
17.450
|
|
|
38.478
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding including dilutive shares
|
231.337
|
|
|
242.754
|
|
|
256.936
|
|
Diluted earnings per share of common stock
|
$
|
2.70
|
|
|
$
|
2.09
|
|
|
$
|
2.22
|
|
|
|
|
|
|
|
Total anti-dilutive shares:
|
|
|
|
|
|
Call options
|
—
|
|
|
3.878
|
|
|
12.282
|
|
|
|
NOTE 17
|
RECENT TRANSACTIONS
|
Gustav Wahler GmbH u. Co KG
In December 2013, the Company announced that it had signed an agreement to acquire Gustav Wahler GmbH u. Co. KG and its general partner ("Wahler"). The deal is expected to close in the first quarter of 2014 subject to standard regulatory approvals. Wahler is a producer of exhaust gas recirculation ("EGR") valves, EGR tubes and thermostats and has operations in Germany, Brazil, the U.S., China and Slovakia. Wahler's sales for 2013 are expected to be approximately
$350 million
and this acquisition strengthens the Company's strategic position as a producer of complete EGR systems and creates additional market opportunities in both passenger and commercial vehicle applications.
BorgWarner BERU Systems Korea Co., Ltd.
During the third and fourth quarters of 2012, the Company completed the purchase of the remaining
49%
of BorgWarner BERU Systems Korea Co., Ltd. for
$15.0 million
in cash, which has been classified as
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
a financing activity within the Consolidated Statement of Cash Flows. In accordance with ASC Topic 810,"
Consolidation
," the Company reduced its noncontrolling interest balance by
$7.0 million
and reduced capital in excess of par value by
$8.0 million
. As a result of these transactions, the Company now owns
100%
of BorgWarner BERU Systems Korea Co., Ltd.
Spark plug business
During the second and third quarters of 2012, the Company incurred
$39.7 million
in expense associated with the loss on sale of the spark plug business to Federal-Mogul Corporation primarily related to the write-down of prior purchase price accounting adjustments. These purchase price accounting adjustments were originally reported in the Engine segment and related to the BERU acquisition. As a result of the sale, the Company received
$55.2 million
in cash, which is classified as an investing activity within the Consolidated Statement of Cash Flows. The sale will allow the Company to continue to focus on expanding BERU Systems' core products of glow plugs, diesel cold start systems and other gasoline ignition technologies.
Tire pressure monitoring business
During the fourth quarter of 2011, the Company incurred
$21.5 million
in expense associated with the loss on sale of the tire pressure monitoring business, including the write-down of prior purchase price accounting adjustments related to the BERU acquisition, costs related to the divestiture, and a write-down of a portion of the ignitor and electronic business. The Company received
$22.9 million
in cash, classified as an investing activity within the Consolidated Statement of Cash Flows, from the sale of its tire pressure monitoring business to Huf Electronics GmbH. The sale will allow the Company to continue to focus on expanding BERU Systems' core products of glow plugs, diesel cold start systems and other gasoline ignition technologies.
BorgWarner Vikas Emissions Systems India Private Limited
On August 2, 2011, the Company purchased the noncontrolling interest's
40%
share of BorgWarner Vikas Emissions Systems India Private Limited for
$29.4 million
in cash, which has been classified as a financing activity within the Consolidated Statement of Cash Flows. In accordance with ASC Topic 810, the Company reduced its noncontrolling interest balance by
$2.8 million
and reduced capital in excess of par value by
$26.6 million
. As a result of this transaction, the Company owns
100%
of BorgWarner Vikas Emissions Systems India Private Limited.
Traction Systems division of Haldex Group
On January 31, 2011, the Company acquired
100%
of the stock of Haldex Traction Holding AB ("Haldex Traction Systems"). Haldex Traction Systems has operations in Sweden, Hungary and Mexico. The consideration for the acquisition, net of cash acquired, was
$214.9 million
(
1.38 billion
Swedish Krona).
The acquisition has accelerated the Company's growth in the global all-wheel drive ("AWD") market as it continues to shift toward front-wheel drive ("FWD") based vehicles. The acquisition will add industry leading FWD/AWD technologies, with a strong European customer base, to the Company's existing portfolio of front- and rear-wheel drive based products. This enables the Company to provide global customers a broader range of AWD solutions to meet their vehicle needs.
The operating results are reported within the Company's Drivetrain reporting segment as of the date of acquisition. The Company paid
$203.7 million
, which is recorded as an investing activity in the Consolidated Statement of Cash Flows. Additionally, the Company assumed retirement-related liabilities of
$5.3 million
and assumed debt of
$5.9 million
, which are considered non-cash transactions in the Consolidated Statement of Cash Flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 18
|
REPORTING SEGMENTS AND RELATED INFORMATION
|
The Company's business is comprised of two reporting segments: Engine and Drivetrain. These segments are strategic business groups, which are managed separately as each represents a specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return on invested capital ("ROIC") of its business initiatives. ROIC is comprised of Adjusted EBIT after deducting notional taxes compared to the projected average capital investment required. Adjusted EBIT is comprised of earnings before interest, income taxes and noncontrolling interest (“EBIT") adjusted for restructuring, goodwill impairment charges, affiliates' earnings and other items not reflective of on-going operating income or loss.
Adjusted EBIT is the measure of segment income or loss used by the Company. The Company believes Adjusted EBIT is most reflective of the operational profitability or loss of our reporting segments. The following tables show segment information and Adjusted EBIT for the Company's reporting segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Segment information
|
|
|
|
|
|
|
|
|
Net sales
|
|
Year-end assets
|
|
Depreciation/ amortization
|
|
Long-lived asset expenditures (b)
|
(millions of dollars)
|
Customers
|
|
Inter-segment
|
|
Net
|
|
|
|
Engine
|
$
|
4,990.1
|
|
|
$
|
32.0
|
|
|
$
|
5,022.1
|
|
|
$
|
3,519.1
|
|
|
$
|
189.1
|
|
|
$
|
277.5
|
|
Drivetrain
|
2,446.5
|
|
|
—
|
|
|
2,446.5
|
|
|
1,786.6
|
|
|
90.5
|
|
|
122.9
|
|
Inter-segment eliminations
|
—
|
|
|
(32.0
|
)
|
|
(32.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
7,436.6
|
|
|
—
|
|
|
7,436.6
|
|
|
5,305.7
|
|
|
279.6
|
|
|
400.4
|
|
Corporate (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,611.3
|
|
|
19.8
|
|
|
17.4
|
|
Consolidated
|
$
|
7,436.6
|
|
|
$
|
—
|
|
|
$
|
7,436.6
|
|
|
$
|
6,917.0
|
|
|
$
|
299.4
|
|
|
$
|
417.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Segment information
|
|
|
|
|
|
|
|
|
Net sales
|
|
Year-end assets
|
|
Depreciation/ amortization
|
|
Long-lived asset expenditures (b)
|
(millions of dollars)
|
Customers
|
|
Inter-segment
|
|
Net
|
|
|
|
Engine
|
$
|
4,884.5
|
|
|
$
|
28.5
|
|
|
$
|
4,913.0
|
|
|
$
|
3,299.2
|
|
|
$
|
177.8
|
|
|
$
|
269.9
|
|
Drivetrain
|
2,298.7
|
|
|
—
|
|
|
2,298.7
|
|
|
1,652.2
|
|
|
91.3
|
|
|
125.6
|
|
Inter-segment eliminations
|
—
|
|
|
(28.5
|
)
|
|
(28.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
7,183.2
|
|
|
—
|
|
|
7,183.2
|
|
|
4,951.4
|
|
|
269.1
|
|
|
395.5
|
|
Corporate (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,449.4
|
|
|
19.5
|
|
|
11.9
|
|
Consolidated
|
$
|
7,183.2
|
|
|
$
|
—
|
|
|
$
|
7,183.2
|
|
|
$
|
6,400.8
|
|
|
$
|
288.6
|
|
|
$
|
407.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Segment information
|
|
|
|
|
|
|
|
|
Net sales
|
|
Year-end assets
|
|
Depreciation/ amortization
|
|
Long-lived asset
expenditures (b)
|
(millions of dollars)
|
Customers
|
|
Inter-segment
|
|
Net
|
|
|
|
Engine
|
$
|
5,030.2
|
|
|
$
|
20.4
|
|
|
$
|
5,050.6
|
|
|
$
|
3,329.0
|
|
|
$
|
188.6
|
|
|
$
|
264.3
|
|
Drivetrain
|
2,084.5
|
|
|
—
|
|
|
2,084.5
|
|
|
1,562.8
|
|
|
80.0
|
|
|
115.9
|
|
Inter-segment eliminations
|
—
|
|
|
(20.4
|
)
|
|
(20.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
7,114.7
|
|
|
—
|
|
|
7,114.7
|
|
|
4,891.8
|
|
|
268.6
|
|
|
380.2
|
|
Corporate (a)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,066.8
|
|
|
14.4
|
|
|
13.5
|
|
Consolidated
|
$
|
7,114.7
|
|
|
$
|
—
|
|
|
$
|
7,114.7
|
|
|
$
|
5,958.6
|
|
|
$
|
283.0
|
|
|
$
|
393.7
|
|
_______________
(a) Corporate assets include investments and advances and deferred income taxes.
(b) Long-lived asset expenditures include capital expenditures and tooling outlays.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Adjusted earnings before interest, income taxes and noncontrolling interest ("Adjusted EBIT")
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
Engine
|
$
|
826.0
|
|
|
$
|
786.4
|
|
|
$
|
774.3
|
|
Drivetrain
|
252.2
|
|
|
209.1
|
|
|
161.2
|
|
Adjusted EBIT
|
1,078.2
|
|
|
995.5
|
|
|
935.5
|
|
Restructuring expense
|
52.3
|
|
|
27.4
|
|
|
—
|
|
Program termination agreement
|
11.3
|
|
|
—
|
|
|
—
|
|
Retirement related obligations
|
5.9
|
|
|
17.3
|
|
|
—
|
|
Loss from disposal activities
|
—
|
|
|
39.7
|
|
|
21.5
|
|
Patent infringement settlement, net of legal costs incurred
|
—
|
|
|
—
|
|
|
(29.1
|
)
|
Corporate, including equity in affiliates' earnings and stock-based compensation
|
110.0
|
|
|
115.4
|
|
|
107.4
|
|
Interest income
|
(4.8
|
)
|
|
(4.7
|
)
|
|
(4.8
|
)
|
Interest expense and finance charges
|
34.2
|
|
|
39.4
|
|
|
74.6
|
|
Earnings before income taxes and noncontrolling interest
|
869.3
|
|
|
761.0
|
|
|
765.9
|
|
Provision for income taxes
|
218.3
|
|
|
238.6
|
|
|
195.3
|
|
Net earnings
|
651.0
|
|
|
522.4
|
|
|
570.6
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
26.7
|
|
|
21.5
|
|
|
20.5
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
624.3
|
|
|
$
|
500.9
|
|
|
$
|
550.1
|
|
Geographic Information
Outside the U.S., only China, Germany, Hungary and South Korea exceeded
5%
of consolidated net sales during the year ended December 31, 2013, attributing sales to the location of production rather than the location of the customer. Also, the Company's
50%
equity investment in NSK-Warner (see Note 5) of
$168.0 million
,
$184.4 million
and
$189.2 million
at December 31, 2013, 2012 and 2011, respectively, is excluded from the definition of long-lived assets, as are goodwill and certain other non-current assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
Long-lived assets
|
(millions of dollars)
|
2013
|
|
2012
|
|
2011
|
|
2013
|
|
2012
|
|
2011
|
United States
|
$
|
1,939.7
|
|
|
$
|
1,857.2
|
|
|
$
|
1,674.0
|
|
|
$
|
531.7
|
|
|
$
|
508.1
|
|
|
$
|
492.6
|
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
1,760.1
|
|
|
1,871.3
|
|
|
2,200.0
|
|
|
430.0
|
|
|
432.2
|
|
|
420.4
|
|
Hungary
|
451.5
|
|
|
448.9
|
|
|
503.2
|
|
|
66.9
|
|
|
64.3
|
|
|
56.9
|
|
France
|
327.6
|
|
|
335.2
|
|
|
363.0
|
|
|
44.4
|
|
|
45.9
|
|
|
63.2
|
|
Other Europe
|
1,132.5
|
|
|
1,015.1
|
|
|
917.8
|
|
|
257.6
|
|
|
225.8
|
|
|
194.6
|
|
Total Europe
|
3,671.7
|
|
|
3,670.5
|
|
|
3,984.0
|
|
|
798.9
|
|
|
768.2
|
|
|
735.1
|
|
South Korea
|
563.5
|
|
|
505.6
|
|
|
471.7
|
|
|
165.2
|
|
|
140.4
|
|
|
124.5
|
|
China
|
636.3
|
|
|
499.1
|
|
|
416.6
|
|
|
238.5
|
|
|
184.3
|
|
|
148.0
|
|
Other foreign
|
625.4
|
|
|
650.8
|
|
|
568.4
|
|
|
205.1
|
|
|
187.0
|
|
|
164.1
|
|
Total
|
$
|
7,436.6
|
|
|
$
|
7,183.2
|
|
|
$
|
7,114.7
|
|
|
$
|
1,939.4
|
|
|
$
|
1,788.0
|
|
|
$
|
1,664.3
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Sales to Major Customers
Consolidated net sales to Volkswagen (including its subsidiaries) were approximately
16%
,
17%
and
19%
for the years ended December 31, 2013, 2012 and 2011, respectively; and to Ford (including its subsidiaries) were approximately
14%
,
13%
, and
12%
for the years ended December 31, 2013, 2012 and 2011, respectively. Both of the Company's reporting segments had significant sales to Volkswagen and Ford in 2013, 2012 and 2011. Accounts receivable from these customers at December 31, 2013 comprised approximately
24%
(
$248.4 million
) of total accounts receivable. Such sales consisted of a variety of products to a variety of customer locations and regions. No other single customer accounted for more than
10%
of consolidated net sales in any of the years presented.
Sales by Product Line
Sales of turbochargers for light vehicles represented approximately
26%
of total net sales for the years ended December 31, 2013, 2012 and 2011. The Company currently supplies light vehicle turbochargers to many OEMs including BMW, Daimler, Fiat, Ford, General Motors, Hyundai, PSA, Renault and Volkswagen. No other single product line accounted for more than
10%
of consolidated net sales in any of the years presented.
Interim Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars, except per share amounts)
|
2013
|
|
2012
|
Quarter ended
|
Mar-31
|
|
Jun-30
|
|
Sep-30
|
|
Dec-31
|
|
Year
|
|
Mar-31
|
|
Jun-30
|
|
Sep-30
|
|
Dec-31
|
|
Year
|
Net sales
|
$
|
1,851.1
|
|
|
$
|
1,893.9
|
|
|
$
|
1,806.2
|
|
|
$
|
1,885.4
|
|
|
$
|
7,436.6
|
|
|
$
|
1,912.5
|
|
|
$
|
1,856.4
|
|
|
$
|
1,695.2
|
|
|
$
|
1,719.1
|
|
|
$
|
7,183.2
|
|
Cost of sales
|
1,476.4
|
|
|
1,497.3
|
|
|
1,426.6
|
|
|
1,478.8
|
|
|
5,879.1
|
|
|
1,516.7
|
|
|
1,473.2
|
|
|
1,351.5
|
|
|
1,374.9
|
|
|
5,716.3
|
|
Gross profit
|
374.7
|
|
|
396.6
|
|
|
379.6
|
|
|
406.6
|
|
|
1,557.5
|
|
|
395.8
|
|
|
383.2
|
|
|
343.7
|
|
|
344.2
|
|
|
1,466.9
|
|
Selling, general and administrative expenses
|
159.3
|
|
|
155.6
|
|
|
157.7
|
|
|
167.1
|
|
|
639.7
|
|
|
169.0
|
|
|
153.1
|
|
|
151.0
|
|
|
156.2
|
|
|
629.3
|
|
Other expense (income)
|
16.9
|
|
|
(2.4
|
)
|
|
(3.7
|
)
|
|
51.8
|
|
|
62.6
|
|
|
1.1
|
|
|
36.6
|
|
|
29.7
|
|
|
17.3
|
|
|
84.7
|
|
Operating income
|
198.5
|
|
|
243.4
|
|
|
225.6
|
|
|
187.7
|
|
|
855.2
|
|
|
225.7
|
|
|
193.5
|
|
|
163.0
|
|
|
170.7
|
|
|
752.9
|
|
Equity in affiliates’ earnings, net of tax
|
(9.7
|
)
|
|
(11.1
|
)
|
|
(10.4
|
)
|
|
(12.3
|
)
|
|
(43.5
|
)
|
|
(9.2
|
)
|
|
(12.5
|
)
|
|
(11.1
|
)
|
|
(10.0
|
)
|
|
(42.8
|
)
|
Interest income
|
(1.0
|
)
|
|
(1.0
|
)
|
|
(1.3
|
)
|
|
(1.5
|
)
|
|
(4.8
|
)
|
|
(1.4
|
)
|
|
(1.3
|
)
|
|
(1.0
|
)
|
|
(1.0
|
)
|
|
(4.7
|
)
|
Interest expense and finance charges
|
9.7
|
|
|
8.8
|
|
|
8.1
|
|
|
7.6
|
|
|
34.2
|
|
|
15.1
|
|
|
12.6
|
|
|
5.0
|
|
|
6.7
|
|
|
39.4
|
|
Earnings before income taxes and noncontrolling interest
|
199.5
|
|
|
246.7
|
|
|
229.2
|
|
|
193.9
|
|
|
869.3
|
|
|
221.2
|
|
|
194.7
|
|
|
170.1
|
|
|
175.0
|
|
|
761.0
|
|
Provision for income taxes
|
50.9
|
|
|
66.6
|
|
|
56.3
|
|
|
44.5
|
|
|
218.3
|
|
|
57.5
|
|
|
68.5
|
|
|
64.2
|
|
|
48.4
|
|
|
238.6
|
|
Net earnings
|
148.6
|
|
|
180.1
|
|
|
172.9
|
|
|
149.4
|
|
|
651.0
|
|
|
163.7
|
|
|
126.2
|
|
|
105.9
|
|
|
126.6
|
|
|
522.4
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
6.6
|
|
|
6.0
|
|
|
6.1
|
|
|
8.0
|
|
|
26.7
|
|
|
5.7
|
|
|
5.6
|
|
|
4.8
|
|
|
5.4
|
|
|
21.5
|
|
Net earnings attributable to BorgWarner Inc. (a)
|
$
|
142.0
|
|
|
$
|
174.1
|
|
|
$
|
166.8
|
|
|
$
|
141.4
|
|
|
$
|
624.3
|
|
|
$
|
158.0
|
|
|
$
|
120.6
|
|
|
$
|
101.1
|
|
|
$
|
121.2
|
|
|
$
|
500.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — basic
|
$
|
0.62
|
|
|
$
|
0.76
|
|
|
$
|
0.73
|
|
|
$
|
0.62
|
|
|
$
|
2.73
|
|
|
$
|
0.73
|
|
|
$
|
0.54
|
|
|
$
|
0.44
|
|
|
$
|
0.52
|
|
|
$
|
2.22
|
|
Earnings per share — diluted
|
$
|
0.61
|
|
|
$
|
0.75
|
|
|
$
|
0.72
|
|
|
$
|
0.62
|
|
|
$
|
2.70
|
|
|
$
|
0.64
|
|
|
$
|
0.50
|
|
|
$
|
0.43
|
|
|
$
|
0.51
|
|
|
$
|
2.09
|
|
_______________
(a) The Company's results were impacted by the following:
|
|
•
|
Quarter ended December 31, 2013:
The Company incurred restructuring expense of
$52.3 million
, related to the initiation of Drivetrain segment actions designed to improve future profitability and competitiveness. The Company recorded tax benefits of
$7.1 million
in connection with the restructuring expense. Additionally, the Company recorded a net tax benefit of
$4.4 million
related to the reversal of certain state deferred tax asset valuation allowances and other tax adjustments.
|
|
|
•
|
Quarter ended September 30, 2013:
The Company incurred a net tax benefit of
$5.6 million
, which was comprised of tax benefits of
$3.1 million
related to 2012 provision to return adjustments and
$2.5 million
related to the reversal of certain state deferred tax asset valuation allowances.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
•
|
Quarter ended March 31, 2013:
The Company incurred
$11.3 million
of expense related to a program termination agreement. Retirement related obligations expense of
$5.9 million
was primarily related to a first quarter 2013 grant of restricted stock awards to certain retiring NEOs as to which the Company waived the forfeiture provisions. The Company recorded tax benefits of
$3.8 million
and
$2.1 million
related to the program termination agreement and retirement related obligations. Additionally, the Company recorded a net tax benefit of
$1.7 million
, which was comprised of a
$6.6 million
tax benefit related to the extension of the federal research and development credit and other international tax provisions resulting from the retroactive impact of U.S. legislation enacted in January 2013, partially offset by a
$4.9 million
tax expense related to a comprehensive income adjustment.
|
|
|
•
|
Quarter ended December 31, 2012:
Retirement related obligations of
$17.3 million
are comprised of a
$5.7 million
loss resulting from the settlement of a portion of the Muncie Plant's pension obligation and an
$11.6 million
expense associated with the retirement of certain NEOs. These obligations were partially offset by a
$6.1 million
tax benefit. The Company incurred tax expense of
$3.9 million
which included
$11.1 million
of U.S. tax expense to correct the income taxes payable balance, partially offset by tax benefits resulting from changes to the statutory income tax rate in certain countries and the settlement of certain tax audits.
|
|
|
•
|
Quarter ended September 30, 2012:
The Company incurred
$1.8 million
of expense and
$11.2 million
of tax expense associated with the completion of the sale of its spark plug business. The Company also recorded restructuring expense of
$27.4 million
primarily associated with the disposal and future requirements of BERU's on-going business, which was partially offset by a tax benefit of
$7.7 million
. Additionally, the Company incurred tax expense of
$6.9 million
primarily resulting from the settlement of certain tax audits.
|
|
|
•
|
Quarter ended June 30, 2012:
The Company recorded expense of
$37.9 million
primarily due to the write-down of prior purchase price accounting adjustments included within the disposal group as a result of signing a Master Purchase Agreement to sell the spark plug business to Federal-Mogul Corporation, which was partially offset by a tax benefit of
$5.5 million
resulting from the write-down. Additionally, the Company recorded tax expense of
$9.0 million
related to its decision to change its cash repatriation assertion for some of its foreign subsidiaries.
|