NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
BorgWarner Inc. (together with it Consolidated Subsidiaries, the “Company”) is a Delaware corporation incorporated in 1987. We are a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles. Our products help improve vehicle performance, propulsion efficiency, stability and air quality. We manufacture and sell these products 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 OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications). We also manufacture and sell our products to certain Tier One vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers in Europe, the Americas and Asia and is an original equipment supplier to every major automotive OEM in the world. The Company's products fall into two reporting segments: Engine and Drivetrain.
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NOTE 1
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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The following paragraphs briefly describe the Company's significant accounting policies.
Basis of presentation
Certain prior period amounts have been reclassified to conform to current period presentation.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the accompanying notes, as well as the amounts of revenues and expenses reported during the periods covered by these financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of consolidation
The Consolidated Financial Statements include all majority-owned subsidiaries with a controlling financial interest. All inter-company accounts and transactions have been eliminated in consolidation. Investments in
20%
to
50%
owned affiliates are accounted for under the equity method when the Company does not have a controlling financial interest.
Revenue recognition
The Company recognizes revenue when performance obligations under the terms of a contract are satisfied, which generally occurs with the transfer of control of our products. Although the Company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the life of the arrangements, and a contract does not exist for purposes of applying ASC 606 until volumes are contractually known. For most of our products, transfer of control occurs upon shipment or delivery, however, a limited number of our customer arrangements for our highly customized products with no alternative use provide us with the right to payment during the production process. As a result, for these limited arrangements, revenue is recognized as goods are produced and control transfers to the customer. Revenue is measured at the amount of consideration we expect to receive in exchange for transferring the good.
The Company continually seeks business development opportunities and at times provides customer incentives for new program awards. Customer incentive payments are capitalized when the payments are incremental and incurred only if the new business is obtained and these amounts are expected to be recovered from the customer over the term of the new business arrangement. The Company recognizes a reduction to revenue as products that the upfront payments are related to are transferred to the customer, based on the total amount of products expected to be sold over the term of the arrangement (generally 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to 7 years). The Company evaluates the amounts capitalized each period end for recoverability and expenses any amounts that are no longer expected to be recovered over the term of the business arrangement.
Cost of sales
The Company includes materials, direct labor and manufacturing overhead within cost of sales. Manufacturing overhead is comprised of indirect materials, indirect labor, factory operating costs and other such costs associated with manufacturing products for sale.
Cash
Cash is valued at fair market value. It is the Company's policy to classify all highly liquid investments with original maturities of three months or less as cash. Cash is maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal risk.
Receivables, net
Accounts receivable are stated at cost less an allowance for bad debts. An allowance for doubtful accounts is recorded when it is probable amounts will not be collected based on specific identification of customer circumstances or age of the receivable.
Refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements for more information.
Inventories, net
Cost of certain U.S. inventories is determined using the last-in, first-out (“LIFO”) method at the lower of cost or market, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or average-cost methods at the lower of cost or net realizable value. Inventory held by U.S. operations using the LIFO method was
$137.9 million
and
$147.4 million
at December 31, 2018 and 2017, respectively. Such inventories, if valued at current cost instead of LIFO, would have been greater by
$16.7 million
and
$13.1 million
at December 31, 2018 and 2017, respectively.
Refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements of this report for more information.
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 has title to the assets 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.
Refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements for more information.
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. 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.
Assets and liabilities held for sale
The Company classifies assets and liabilities (disposal groups) to be sold as held for sale in the period in which all of the following criteria are met: management, having the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such disposal groups; an active program to locate a buyer and other actions required to complete the plan to sell the disposal group have been initiated; the sale of the disposal group is probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond the Company's control extend the period of time required to sell the disposal group beyond one year; the disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
The Company initially measures a disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less any costs to sell, each reporting period it remains classified as held for sale and reports any subsequent changes as an adjustment to the carrying value of the disposal group, as long as the new carrying value does not exceed the carrying value of the disposal group at the time it was initially classified as held for sale.
Upon determining that a disposal group meets the criteria to be classified as held for sale, the Company reports the assets and liabilities of the disposal group, if material, in the line items assets held for sale and liabilities held for sale in the Consolidated Balance Sheets. Additionally, depreciation is not recorded during the period in which the long-lived assets, included in the disposal group, are classified as held for sale.
Goodwill and other indefinite-lived intangible assets
During the fourth quarter of each year, the Company qualitatively assesses its goodwill assigned to each of its reporting units. This qualitative assessment evaluates various events and circumstances, such as macro economic conditions, industry and market conditions, cost factors, relevant events and financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-than-not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the carrying value, or upon consideration of other factors, including recent acquisition, restructuring or divestiture activity, the Company performs a quantitative, "step one," goodwill impairment analysis.
In addition, the Company may test goodwill in between annual test dates if an event occurs or circumstances change that could more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Similar to goodwill, the Company can elect to perform the impairment test for indefinite-lived intangibles other than goodwill (primarily trade names) using a qualitative analysis, considering similar factors as outlined in the goodwill discussion in order to determine if it is more-likely-than-not that the fair value of the trade names is less than the respective carrying values. If the Company elects to perform or is required to perform a quantitative analysis, the test consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. We estimate the fair value of indefinite-lived intangibles using the relief-from-royalty method, which we believe is an appropriate and widely used valuation technique for such assets. The fair value derived from the relief-from-royalty method is measured as the discounted cash flow savings realized from owning such trade names and not being required to pay a royalty for their use.
Refer to Note 7, "Goodwill and Other Intangibles," to the Consolidated Financial Statements for more information.
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.
Refer to Note 8, "Product Warranty," to the Consolidated Financial Statements for more information.
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.
Asbestos
Like many other industrial companies that have historically operated in the United States, the Company, or parties that the Company is obligated to indemnify, continues to be named as one of many defendants in asbestos-related personal injury actions. With the assistance of a third party actuary, the Company estimates the liability and corresponding insurance recovery for pending and future claims not yet asserted through December 31, 2064 with a runoff through 2074 and defense costs. This estimate is based on the Company's historical claim experience and estimates of the number and resolution cost of potential future claims that may be filed based on anticipated levels of unique plaintiff asbestos-related claims in the U.S. tort system against all defendants. This estimate is not discounted to present value. The Company currently believes that December 31, 2074 is a reasonable assumption as to the last date on which it is likely to have resolved all asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood of incidence of asbestos-related disease in the U.S. population generally. The Company assesses the sufficiency of its estimated liability for pending and future claims not yet asserted and defense costs on an ongoing basis by evaluating actual experience regarding claims filed, settled and dismissed, and amounts paid in claim resolution costs. In addition to claims experience, the Company considers additional quantitative and qualitative factors such as changes in legislation, the legal environment, and the Company's defense strategy. The Company continues to have additional excess insurance coverage available for potential future asbestos-related claims. In connection with the Company’s ongoing review of its asbestos-related claims, the Company also reviewed the amount of its potential insurance coverage for such claims, taking into account the remaining limits of such coverage, the number
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and amount of claims on our insurance from co-insured parties, ongoing litigation against the Company’s insurance carriers, potential remaining recoveries from insolvent insurance carriers, the impact of previous insurance settlements, and coverage available from solvent insurance carriers not party to the coverage litigation.
Refer to Note 15, "Contingencies," to the Consolidated Financial Statements for more information.
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.
Refer to Note 15, "Contingencies," to the Consolidated Financial Statements for more information.
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.
Refer to Note 11, "Financial Instruments," to the Consolidated Financial Statements for more information.
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.
Refer to Note 14, "Accumulated Other Comprehensive Income," to the Consolidated Financial Statements for more information.
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.
Refer to Note 12, "Retirement Benefit Plans," to the Consolidated Financial Statements for more information.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restructuring
Restructuring costs may occur when the Company takes action to exit or significantly curtail a part of its operations or implements a reorganization that affects the nature and focus of operations. A restructuring charge can consist of severance costs associated with reductions to the workforce, costs to terminate an operating lease or contract, professional fees and other costs incurred related to the implementation of restructuring activities.
Refer to Note 16, "Restructuring," to the Consolidated Financial Statements for more information.
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.
Refer to Note 5, "Income Taxes," to the Consolidated Financial Statements for more information.
New Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2018-15,
"Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)."
It requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance (Subtopic 350-40). This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-14,
"Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)."
The new standard (i) requires the removal of disclosures that are no longer considered cost beneficial; (ii) clarifies specific requirements of certain disclosures; (iii) adds new disclosure requirements, including the weighted average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and reasons for significant gains and losses related to changes in the benefit obligation. This guidance is effective for annual periods beginning after December 15, 2020 and early adoption is permitted. The Company is currently assessing the guidance and will include enhanced disclosures in the consolidated financial statements upon adoption.
In August 2018, the FASB issued ASU No. 2018-13,
"Fair Value Measurement (Topic 820)
." It removes disclosure requirements on fair value measurements including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. It also amends and clarifies certain disclosures and adds new disclosure requirements including the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This guidance is effective for interim and annual periods beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until the effective date. The Company is currently assessing the guidance and does not expect this guidance to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-07,
"Compensation - Stock Compensation (Topic 718)."
It expands the scope of the employee share-based payments guidance, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. This guidance is effective for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect this guidance to have any impact on its Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In February 2018, the FASB issued ASU No. 2018-02,
"Income Statement - Reporting Comprehensive Income (Topic 220)."
It allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 ("the Tax Act"). This guidance is effective for interim and annual periods beginning after December 15, 2018, but early adoption is permitted. The Company early adopted this guidance in the fourth quarter of 2018 and recorded a transition adjustment as of January 1, 2018, which increased retained earnings and decreased accumulated other comprehensive income by
$14.0 million
on its consolidated balance sheet.
In August 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-12,
"Derivatives and Hedging (Topic 815)."
It expands and refines hedge accounting for both nonfinancial and financial risk components and reduces complexity in fair value hedges of interest rate risk. It eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessment requirements and modifies the accounting for components excluded from assessment of hedge effectiveness. In addition, the new guidance requires expanded disclosures as it pertains to the effect of hedging on individual income statement lines, including the effects of components excluded from the assessment of effectiveness. The guidance is effective prospectively for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company adopted this guidance during the first quarter of 2018 and the impact on the consolidated financial statements was not material. Refer to Note 11, "Financial Instruments," to the Consolidated Financial Statements for more information.
In March 2017, the FASB issued ASU No. 2017-07,
"Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost."
It requires disaggregating the service cost component from the other components of net benefit cost, provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization when applicable. This guidance is effective for interim and annual periods beginning after December 15, 2017.
During the first quarter of 2018, the Company retrospectively adopted the presentation of service cost separate from the other components of net benefit costs. As a result, Cost of sales of
$4.5 million
and
$4.4 million
and Selling, general and administrative expenses of
$0.6 million
and
$0.5 million
for the year ended December 31, 2017 and 2016, respectively, have been reclassified to Other postretirement income as a separate line item in the Condensed Consolidated Statements of Operations.
In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-01,
"Clarifying the Definition of a Business."
It revises the definition of a business and provides a framework to evaluate when an input and a substantive process are present in an acquisition to be considered a business. This guidance is effective for annual periods beginning after December 15, 2017. The Company adopted this guidance in the first quarter of 2018 and there was no impact to the consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18,
"Restricted Cash."
It requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted this guidance in the first quarter of 2018 and there was no impact to the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
"Classification of Certain Cash Receipts and Cash Payments."
It provides guidance on eight specific cash flow issues with the objective of reducing the existing diversity in practice in how they are classified in the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted this guidance in the first quarter of 2018 and there was no impact to the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2016, the FASB issued ASU No. 2016-13,
"Financial Instruments - Credit Losses (Topic 326)."
It replaces the current incurred loss impairment method with a new method that reflects expected credit losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
"Leases (Topic 842)."
Under this guidance, lessees will be required to recognize a right-of-use asset and a lease liability for leases with a term more than 12 months, including operating leases defined under previous GAAP. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company has elected not to restate comparative periods upon adoption, but record a cumulative-effect adjustment to the opening balance of retained earnings at January 1, 2019. As permitted under the standard, the Company will elect the package of practical expedients, which does not require the Company to reassess whether existing contracts contain leases, classification of leases identified, nor classification and treatment of initial direct costs capitalized under ASC 840. The Company will also elect the practical expedients to combine the lease and non-lease components. The Company will not elect the practical expedient to apply hindsight as part of the leases evaluation. Additionally, the Company will elect the practical expedient under ASU No. 2018-01, which allows an entity to not reassess whether any existing land easements are or contain leases.
The Company has performed an assessment, which included evaluating all forms of leasing arrangements. The majority of the Company’s global lease portfolio represents leases of real estate, such as manufacturing facilities, warehouses, and office buildings, while the remainder represents leases of personal property, such as vehicle leases, manufacturing and IT equipment. Based on the results of the assessment, the Company has refined its internal policy to include criteria for evaluating the impact of the new standard and related controls to support the requirements of this new standard. The Company is currently implementing system solutions as part of the adoption process. The Company is in the process of finalizing its assessment of the impact upon adoption and estimates that the adoption of this guidance will result in the addition of right-of-use assets and corresponding lease obligations to the consolidated balance sheet between
$100 million
-
$120 million
. The adoption will not have a material impact to the consolidated statements of operations or cash flows.
In January 2016, the FASB issued ASU No. 2016-01,
"Recognition and Measurement of Financial Assets and Financial Liabilities."
It requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. It also requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. This guidance is effective for interim and fiscal years beginning after December 15, 2017. The Company adopted this guidance in the first quarter of 2018 with no impact to the consolidated financial statements and elected the measurement alternative for equity investments without readily determinable fair values.
In May 2014, the FASB amended the Accounting Standards Codification to add Topic 606 and issued ASU 2014-09,
"Revenue from Contracts with Customers,"
outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and superseding the then applicable revenue recognition guidance. The new guidance requires new disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted this new standard and all the related amendments (“new revenue standard”) effective January 1, 2018 and applied it to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in effect for those periods. We expect the impact of adoption of the new standard to be immaterial to our sales and net income on an ongoing basis.
Revenue is recognized when performance obligations under the terms of a contract are satisfied, which generally occurs with the transfer of control of our products. For most of our products, transfer of control occurs upon shipment or delivery, however, a limited number of our customer arrangements for our highly customized products with no alternative use provide us with the right to payment during the production process. As a result, for these limited arrangements, under the new revenue standard, revenue is recognized as goods are produced and control transfers to the customer. The Company recorded a transition adjustment as of January 1, 2018, which increased retained earnings by
$2.0 million
related to these arrangements.
The Company also has a limited number of arrangements with customers where the price paid by the customer is dependent on the volume of product purchased over the term of the arrangement. Under the new revenue standard, the Company estimates the volumes to be sold over the term of the arrangement and recognizes revenue based on the estimated amount of consideration to be received from these arrangements. The Company recorded a transition adjustment, which decreased the opening balance of retained earnings by
$0.1 million
related to these arrangements.
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of new revenue standard was as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Balance at December 31, 2017
|
|
Adjustments due to ASC 606
|
|
Balance at January 1, 2018
|
Inventories, net
|
|
$
|
766.3
|
|
|
$
|
(7.4
|
)
|
|
$
|
758.9
|
|
Prepayments and other current assets (including contract assets)
|
|
$
|
145.4
|
|
|
$
|
9.4
|
|
|
$
|
154.8
|
|
Accounts payable and other accrued expenses (including contract liabilities)
|
|
$
|
2,270.3
|
|
|
$
|
0.1
|
|
|
$
|
2,270.4
|
|
Retained earnings
|
|
$
|
4,531.0
|
|
|
$
|
1.9
|
|
|
$
|
4,532.9
|
|
The impact from adopting the new revenue standard as compared to the previous revenue guidance is immaterial to our Consolidated Statements of Operations and Consolidated Balance Sheets for the year ended December 31, 2018.
NOTE 2 REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company adopted the new accounting standard ASC 606, Revenue from Contracts with Customers and all the related amendments to all contracts using the modified retrospective method effective January 1, 2018. The Company manufactures and sells products, primarily to OEMs of light vehicles, and to a lesser extent, to other OEMs of commercial vehicles, off-highway vehicles, certain Tier One vehicle systems suppliers and into the aftermarket. Although the Company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the life of the arrangements, and a contract does not exist for purposes of applying ASC 606 until volumes are contractually known. Revenue is recognized when performance obligations under the terms of a contract are satisfied, which generally occurs with the transfer of control of our products. For most of our products, transfer of control occurs upon shipment or delivery, however, a limited number of our customer arrangements for our highly customized products with no alternative use provide us with the right to payment during the production process. As a result, for these limited arrangements, revenue is recognized as goods are produced and control transfers to the customer using the input cost-to-cost method. The Company recorded a contract asset of
$11.4 million
and
$9.4 million
at December 31, 2018 and January 1, 2018 for these arrangements. These amounts are reflected in Prepayments and other current assets in our consolidated balance sheet.
Revenue is measured at the amount of consideration we expect to receive in exchange for transferring the goods. The Company has a limited number of arrangements with customers where the price paid by the customer is dependent on the volume of product purchased over the term of the arrangement. In other limited arrangements, the Company will provide a rebate to customers based on the volume of products
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
purchased during the course of the arrangement. The Company estimates the volumes to be sold over the term of the arrangement and recognizes revenue based on the estimated amount of consideration to be received from these arrangements. As a result of these arrangements, the Company recognized a liability of
$5.8 million
and
$18.4 million
at December 31, 2018 and December 31, 2017. These amounts are reflected in Accounts payable and accrued expenses in our consolidated balance sheet.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range
from 30 to 90 days
. We have evaluated the terms of our arrangements and determined that they do not contain significant financing components. The Company provides warranties on some of its products. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 8, "Product Warranty," to the Consolidated Financial Statements for more information. Shipping and handling fees billed to customers are included in sales, while costs of shipping and handling are included in cost of sales. The Company has elected to apply the accounting policy election available under ASC 606 and accounts for shipping and handling activities as a fulfillment cost.
In limited instances, certain customers have provided payments in advance of receiving related products, typically at the onset of an arrangement prior to the beginning of production. These contract liabilities are reflected as Accounts payable and accrued expenses and Other non-current liabilities in our consolidated balance sheet and were
$13.4 million
and
$17.3 million
at December 31, 2018 and
$12.1 million
and
$21.9 million
at December 31, 2017, respectively. These amounts are reflected as revenue over the term of the arrangement (typically
3
to
7
years) as the underlying products are shipped.
The Company continually seeks business development opportunities and at times provides customer incentives for new program awards. The Company evaluates the underlying economics of each amount of consideration payable to a customer to determine the proper accounting by understanding the reasons for the payment, the rights and obligations resulting from the payment, the nature of the promise in the contract, and other relevant facts and circumstances. When the Company determines that the payments are incremental and incurred only if the new business is obtained and expects to recover these amounts from the customer over the term of the new business arrangement, the Company capitalizes these amounts. The Company recognizes a reduction to revenue as products that the upfront payments are related to are transferred to the customer, based on the total amount of products expected to be sold over the term of the arrangement (generally
3
to
7
years). The Company evaluates the amounts capitalized each period end for recoverability and expenses any amounts that are no longer expected to be recovered over the term of the business arrangement. The Company had
$29.4 million
and
$18.2 million
recorded in Prepayments and other current assets, and
$187.4 million
and
$180.4 million
recorded in Other non-current assets in the consolidated balance sheet at December 31, 2018 and December 31, 2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table represents a disaggregation of revenue from contracts with customers by segment and region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2018
|
(In millions)
|
|
Engine
|
|
Drivetrain
|
|
Total
|
North America
|
|
$
|
1,573.3
|
|
|
$
|
1,798.6
|
|
|
$
|
3,371.9
|
|
Europe
|
|
3,074.1
|
|
|
947.8
|
|
|
4,021.9
|
|
Asia
|
|
1,620.8
|
|
|
1,361.9
|
|
|
2,982.7
|
|
Other
|
|
121.7
|
|
|
31.4
|
|
|
153.1
|
|
Total
|
|
$
|
6,389.9
|
|
|
$
|
4,139.7
|
|
|
$
|
10,529.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2017
|
(In millions)
|
|
Engine
|
|
Drivetrain
|
|
Total
|
North America
|
|
$
|
1,509.0
|
|
|
$
|
1,691.2
|
|
|
$
|
3,200.2
|
|
Europe
|
|
2,783.1
|
|
|
952.4
|
|
|
3,735.5
|
|
Asia
|
|
1,614.5
|
|
|
1,116.0
|
|
|
2,730.5
|
|
Other
|
|
102.4
|
|
|
30.7
|
|
|
133.1
|
|
Total
|
|
$
|
6,009.0
|
|
|
$
|
3,790.3
|
|
|
$
|
9,799.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2016
|
(In millions)
|
|
Engine
|
|
Drivetrain
|
|
Total
|
North America
|
|
$
|
1,299.3
|
|
|
$
|
1,745.0
|
|
|
$
|
3,044.3
|
|
Europe
|
|
2,622.0
|
|
|
848.1
|
|
|
3,470.1
|
|
Asia
|
|
1,551.3
|
|
|
909.4
|
|
|
2,460.7
|
|
Other
|
|
74.7
|
|
|
21.2
|
|
|
95.9
|
|
Total
|
|
$
|
5,547.3
|
|
|
$
|
3,523.7
|
|
|
$
|
9,071.0
|
|
NOTE 3 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. 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)
|
2018
|
|
2017
|
|
2016
|
Gross R&D expenditures
|
$
|
511.7
|
|
|
$
|
473.1
|
|
|
$
|
417.8
|
|
Customer reimbursements
|
(71.6
|
)
|
|
(65.6
|
)
|
|
(74.6
|
)
|
Net R&D expenditures
|
$
|
440.1
|
|
|
$
|
407.5
|
|
|
$
|
343.2
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net R&D expenditures as a percentage of net sales were
4.2%
,
4.2%
and
3.8%
for the years ended December 31, 2018, 2017 and 2016, respectively. None of the Company's R&D related contracts exceeded
5%
of net R&D expenditures in any of the years presented.
NOTE 4 OTHER EXPENSE, NET
Items included in other expense, net consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
|
2016
|
Restructuring expense
|
$
|
67.1
|
|
|
$
|
58.5
|
|
|
$
|
26.9
|
|
Asset impairment and loss on divestiture
|
25.6
|
|
|
71.0
|
|
|
127.1
|
|
Asbestos-related adjustments
|
22.8
|
|
|
—
|
|
|
(48.6
|
)
|
Gain on sale of building
|
(19.4
|
)
|
|
—
|
|
|
—
|
|
Merger, acquisition and divestiture expense
|
5.8
|
|
|
10.0
|
|
|
23.7
|
|
Lease termination settlement
|
—
|
|
|
5.3
|
|
|
—
|
|
Intangible asset impairment
|
—
|
|
|
—
|
|
|
12.6
|
|
Gain on commercial settlement
|
(4.0
|
)
|
|
—
|
|
|
—
|
|
Other income
|
(4.1
|
)
|
|
(0.3
|
)
|
|
(4.2
|
)
|
Other expense, net
|
$
|
93.8
|
|
|
$
|
144.5
|
|
|
$
|
137.5
|
|
During the years ended December 31, 2018, 2017 and 2016, the Company recorded restructuring expense of
$67.1 million
,
$58.5 million
and
$26.9 million
, respectively, primarily related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Refer to Note 16, "Restructuring," to the Consolidated Financial Statements for more information.
In the third quarter of 2017, the Company started exploring strategic options for the non-core emission product lines. In the fourth quarter of 2017, the Company launched an active program to locate a buyer for the non-core pipe and thermostat product lines and initiated all other actions required to complete the plan to sell the non-core product lines. The Company determined that the assets and liabilities of the pipes and thermostat product lines met the held for sale criteria as of December 31, 2017. As a result, the Company recorded an asset impairment expense of
$71.0 million
in the fourth quarter of 2017 to adjust the net book value of this business to its fair value less cost to sell. In December 2018, the Company reached an agreement to sell its thermostat product lines for approximately
$28 million
subject to customary adjustment. Completion of the sale is expected in the first quarter of 2019, subject to satisfaction of customary closing conditions. As a result, the Company recorded an additional asset impairment expense of
$25.6 million
in the year ended December 31, 2018 to adjust the net book value of this business to fair value less costs to sell. Refer to Note 20, "Assets and Liabilities Held for Sale," to the Consolidated Financial Statements for more information.
During the year ended December 31, 2018, the Company recorded asbestos-related adjustments resulting in an increase to Other Expense of
$22.8 million
. This increase was the result of actuarial valuation changes of
$22.8 million
associated with the Company's estimate of liabilities for asbestos-related claims asserted but not yet resolved and potential claims not yet asserted. During the year ended December 31, 2016, the Company recorded asbestos-related adjustments resulting in a net decrease to Other Expense of
$48.6 million
. This net decrease was comprised of actuarial valuation changes of
$45.5 million
associated with the Company's estimate of liabilities for asbestos-related claims asserted but not yet resolved and potential claims not yet asserted and a gain of
$6.1 million
from cash received from insolvent insurance carriers, offset by related consulting fees. Refer to Note 15, "Contingencies," to the Consolidated Financial Statements for more information.
In October 2016, the Company entered into a definitive agreement to sell the light vehicle aftermarket business associated with Remy. This transaction closed in the fourth quarter of 2016 and the Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recorded a loss on divestiture of
$127.1 million
in the year ended December 31, 2016. Refer to Note 19, "Recent Transactions," to the Consolidated Financial Statements for more information.
During the fourth quarter of 2018, the Company recorded a gain of
$19.4 million
related to the sale of a building at a manufacturing facility located in Europe.
During the years ended December 31, 2018, 2017 and 2016, the Company recorded
$5.8 million
,
$10.0 million
and
$23.7 million
of merger, acquisition and divestiture expenses. The merger, acquisition and divestiture expense in the year ended December 31, 2018 primarily related to professional fees associated with divestiture activities for the non-core pipe and thermostat product lines. Refer to Note 20, "Assets and Liabilities Held For Sale," to the Consolidated Financial Statements for more information. The merger and acquisition expense in the years ended December 31, 2017 and 2016 primarily related to the acquisition of Sevcon and Remy, respectively. Refer to Note 19, "Recent Transactions," to the Consolidated Financial Statements for more information.
During the first quarter of 2017, the Company recorded a loss of
$5.3 million
related to the termination of a long term property lease for a manufacturing facility located in Europe.
During the fourth quarter of 2016, the Company recorded an intangible asset impairment loss of
$12.6 million
related to Engine segment Etatech’s ECCOS intellectual technology. The ECCOS intellectual technology impairment was due to the discontinuance of interest from potential customers during the fourth quarter of 2016 that significantly lowered the commercial feasibility of the product line.
During the year ended December 31, 2018, the Company recorded a gain of approximately
$4.0 million
related to the settlement of a commercial contract for an entity acquired in the 2015 Remy acquisition.
Earnings before income taxes and the provision for income taxes are presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
|
2016
|
Earnings before income taxes:
|
|
|
|
|
|
U.S.
|
$
|
220.0
|
|
|
$
|
203.0
|
|
|
$
|
27.5
|
|
Non-U.S.
|
975.9
|
|
|
860.6
|
|
|
915.2
|
|
Total
|
$
|
1,195.9
|
|
|
$
|
1,063.6
|
|
|
$
|
942.7
|
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$
|
17.1
|
|
|
$
|
36.4
|
|
|
$
|
37.4
|
|
State
|
5.4
|
|
|
4.6
|
|
|
6.1
|
|
Foreign
|
258.8
|
|
|
247.4
|
|
|
251.7
|
|
Total current
|
281.3
|
|
|
288.4
|
|
|
295.2
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(39.6
|
)
|
|
323.7
|
|
|
23.5
|
|
State
|
(8.5
|
)
|
|
2.1
|
|
|
(0.8
|
)
|
Foreign
|
(21.9
|
)
|
|
(33.9
|
)
|
|
(11.9
|
)
|
Total deferred
|
(70.0
|
)
|
|
291.9
|
|
|
10.8
|
|
Total provision for income taxes
|
$
|
211.3
|
|
|
$
|
580.3
|
|
|
$
|
306.0
|
|
The provision for income taxes resulted in an effective tax rate of
17.7%
,
54.6%
and
32.5%
for the years ended December 31, 2018, 2017 and 2016, respectively. An analysis of the differences between the effective
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
tax rate and the U.S. statutory rate for the years ended December 31, 2018, 2017 and 2016 is presented below.
On December 22, 2017, the Tax Act was enacted into law, which significantly changed existing U.S. tax law and included many provisions applicable to the Company, such as reducing the U.S. federal statutory tax rate, imposing a one-time transition tax on deemed repatriation of deferred foreign income, and adopting a territorial tax system. The Tax Act reduced the U.S. federal statutory tax rate from
35%
to
21%
effective January 1, 2018. The Tax Act also includes a provision to tax Global Intangible Low-Taxed Income (“GILTI”) of foreign subsidiaries, a special tax deduction for Foreign-Derived Intangible Income (“FDII”), and a Base Erosion Anti-Abuse (“BEAT”) tax measure that may tax certain payments between a U.S. corporation and its subsidiaries. These additional provisions of the Tax Act were effective beginning January 1, 2018.
In accordance with guidance provided by Staff Accounting Bulletin No 118 (SAB 118), as of December 31, 2017, we had not completed our accounting for the tax effects of the Tax Act and had recorded provisional estimates for significant items including the following: (i) the effects on our existing deferred balances, including executive compensation, (ii) the one-time transition tax, and (iii) our indefinite reinvestment assertion. The measurement period begins in the reporting period that includes the Tax Act’s enactment date and ends when the additional information is obtained, prepared, or analyzed to complete the accounting requirements under ASC Topic 740. The measurement period should not extend beyond one year from the enactment date. In light of the treatment of foreign earnings under the Tax Act, we reconsidered our indefinite reinvestment position and concluded we would no longer assert indefinite reinvestment with respect to our foreign unremitted earnings as of December 31, 2017. We recognized income tax expense of
$273.5 million
for the year ended December 31, 2017 for the significant items we could reasonably estimate associated with the Tax Act. This amount was comprised of (i) a revaluation of our U.S. deferred tax assets and liabilities at December 31, 2017, resulting in a tax charge of
$74.7 million
, including
$11.0 million
for executive compensation (ii) a one-time transition tax resulting in a tax charge of
$104.7 million
and (iii) a tax charge of
$94.1 million
for additional provisional deferred tax liabilities with respect to the expected future remittance of foreign earnings.
For the year ended December 31, 2018, the Company completed its accounting for the tax effects of the Tax Act. The final SAB 118 adjustments resulted in: (i) an increase in the Company's existing deferred tax asset balances of
$12.9 million
, including
$8.7 million
for executive compensation (ii) a tax charge of
$7.6 million
for the one-time transition tax, and (iii) a decrease in the deferred tax liability associated with our indefinite reinvestment assertion of
$7.3 million
. The total impact to tax expense from these adjustments was a net tax benefit of
$12.6 million
. Compared to the year ended December 31, 2017, this additional tax benefit from the final adjustments was a result of further analysis performed by the Company and the issuance of additional regulatory guidance.
We have made an accounting policy election to treat the future tax impacts of the GILTI provisions of the Tax Act as a period cost to the extent applicable.
In January 2019, the U.S. Department of the Treasury and the Internal Revenue Service issued final Section 965 regulations subsequent to the reporting period which provide additional guidance related to the calculation of the one-time transition tax. The tax effect of this subsequent event will be recorded in 2019 is not material.
As discussed above, in light of the treatment of foreign earnings under the Tax Act, we reconsidered our indefinite reinvestment position with respect to our foreign unremitted earnings in 2017 and we are no longer asserting indefinite reinvestment with respect to our foreign unremitted earnings. The Company has recorded a deferred tax liability of
$57.4 million
with respect to our foreign unremitted earnings at December 31, 2018. With respect to certain book versus tax basis differences not represented by undistributed earnings of approximately
$300 million
as of December 31, 2018, the Company continues to assert indefinite reinvestment of these basis differences. These basis differences would become taxable upon the sale or
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
liquidation of the foreign subsidiaries. The Company's best estimate of the unrecognized deferred tax liability on these basis differences is approximately
$30 million
as of December 31, 2018.
The following table provides a reconciliation of tax expense based on the U.S. statutory tax rate to final tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
|
2016
|
Income taxes at U.S. statutory rate of 21% (35% for 2016 and 2017)
|
$
|
251.2
|
|
|
$
|
372.3
|
|
|
$
|
330.0
|
|
Increases (decreases) resulting from:
|
|
|
|
|
|
|
|
|
State taxes, net of federal benefit
|
5.6
|
|
|
2.3
|
|
|
1.8
|
|
U.S. tax on non-U.S. earnings
|
36.5
|
|
|
170.6
|
|
|
32.2
|
|
Affiliates' earnings
|
(10.3
|
)
|
|
(17.9
|
)
|
|
(15.0
|
)
|
Foreign rate differentials
|
27.5
|
|
|
(100.2
|
)
|
|
(93.3
|
)
|
Tax holidays
|
(28.0
|
)
|
|
(31.0
|
)
|
|
(25.5
|
)
|
Net tax on remittance of foreign earnings
|
(21.5
|
)
|
|
80.3
|
|
|
21.8
|
|
Tax credits
|
(26.0
|
)
|
|
(24.2
|
)
|
|
(3.2
|
)
|
Reserve adjustments, settlements and claims
|
32.5
|
|
|
8.0
|
|
|
11.6
|
|
Valuation allowance adjustments
|
(10.6
|
)
|
|
12.2
|
|
|
(2.7
|
)
|
Non-deductible transaction costs
|
2.6
|
|
|
10.9
|
|
|
8.3
|
|
Changes in accounting methods and filing positions
|
(29.8
|
)
|
|
(1.9
|
)
|
|
0.3
|
|
Impact of transactions
|
(0.1
|
)
|
|
4.0
|
|
|
16.3
|
|
Other foreign taxes
|
8.4
|
|
|
8.1
|
|
|
12.9
|
|
Revaluation of U.S. deferred taxes
|
(4.2
|
)
|
|
63.7
|
|
|
—
|
|
Impact of FDII
|
(15.3
|
)
|
|
—
|
|
|
—
|
|
Other
|
(7.2
|
)
|
|
23.1
|
|
|
10.5
|
|
Provision for income taxes, as reported
|
$
|
211.3
|
|
|
$
|
580.3
|
|
|
$
|
306.0
|
|
The change in the effective tax rate for 2018, as compared to 2017, was primarily due to items related to the Tax Act. The Tax Act includes a reduction in the US income tax rate from
35%
to
21%
, as of January 1, 2018. Tax expense includes a provision for GILTI of
$28.9 million
, net of foreign tax credits and a tax benefit for FDII of
$15.3 million
that was not applicable in 2017. The one-time transition tax that resulted in a tax charge of
$104.7 million
in 2017 was not applicable in 2018. There was also a tax charge of
$74.7 million
related to a revaluation of U.S. deferred tax assets and liabilities, including
$11.0 million
for executive compensation in 2017 and the initial tax charge of
$94.1 million
related to the Company’s change in indefinite reinvestment assertion with respect to the expected future remittance of undistributed foreign earnings in 2017.
The Company's provision for income taxes for the year ended December 31, 2018, includes reductions of income tax expense of
$15.0 million
related to restructuring expense,
$0.3 million
related to merger, acquisition and divestiture expense,
$5.5 million
related to the asbestos-related adjustments, and
$7.7 million
related to asset impairment expense, offset by increases to tax expense of
$0.9 million
and
$5.8 million
related to a gain on commercial settlement and a gain on the sale of a building, respectively, discussed in Note 4, "Other Expense, Net," to the Consolidated Financial Statements. The provision for income taxes also includes reductions of income tax expense of
$12.6 million
related to final adjustments made to measurement period provisional estimates associated with the Tax Act,
$22.0 million
related to a decrease in our deferred tax liability due to a tax benefit for certain foreign tax credits now available due to actions the Company took during the year,
$9.1 million
related to valuation allowance releases,
$2.8 million
related to tax reserve adjustments, and
$29.8 million
related to changes in accounting methods and tax filing positions for prior years primarily related to the Tax Act.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company's provision for income taxes for the year ended December 31, 2017, includes reductions of income tax expense of
$10.1 million
,
$1.0 million
,
$18.2 million
and
$3.8 million
related to the restructuring expense, merger and acquisition expense, asset impairment expense and other one-time adjustments, respectively, discussed in Note 4, "Other Expense, Net," to the Consolidated Financial Statements.
The Company's provision for income taxes for the year ended December 31, 2016, includes reductions of income tax expense of
$22.7 million
,
$8.6 million
,
$6.0 million
and
$4.4 million
associated with a loss on divestiture, other one-time adjustments, restructuring expense and intangible asset impairment loss, respectively, discussed in Note 4, "Other Expense," to the Consolidated Financial Statements. The provision also includes additional tax expenses of
$17.5 million
associated with asbestos-related adjustments and
$2.2 million
associated with a gain on the release of certain Remy light vehicle aftermarket liabilities due to the expiration of a customer contract.
A roll forward of the Company's total gross unrecognized tax benefits for the years ended December 31, 2018 and 2017, respectively, is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2018
|
|
2017
|
|
2016
|
Balance, January 1
|
$
|
92.0
|
|
|
$
|
91.1
|
|
|
$
|
127.3
|
|
Additions based on tax positions related to current year
|
24.1
|
|
|
16.8
|
|
|
16.1
|
|
Additions/(reductions) for tax positions of prior years
|
17.7
|
|
|
(2.4
|
)
|
|
1.6
|
|
Reductions for closure of tax audits and settlements
|
(7.7
|
)
|
|
(19.9
|
)
|
|
(45.7
|
)
|
Reductions for lapse in statute of limitations
|
—
|
|
|
(0.8
|
)
|
|
(5.0
|
)
|
Translation adjustment
|
(5.7
|
)
|
|
7.2
|
|
|
(3.2
|
)
|
Balance, December 31
|
$
|
120.4
|
|
|
$
|
92.0
|
|
|
$
|
91.1
|
|
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. The amount recognized in income tax expense for 2018 and 2017 is
$10.4 million
and
$6.4 million
, respectively. The Company has an accrual of approximately
$31.5 million
and
$22.6 million
for the payment of interest and penalties at December 31, 2018 and 2017, respectively. As of December 31, 2018, approximately
$111.6 million
represents the amount that, if recognized, would
affect the Company's effective income tax rate in future periods. This amount includes a decrease in U.S. federal income taxes which would occur upon recognition of the state tax benefits and U.S. foreign tax credits included therein. The Company estimates that payments of approximately
$9.7 million
will be made in the next
12
months for assessed tax liabilities from certain taxing jurisdictions and has reclassified this amount to current in the balance sheet as shown in Note 6, "Balance Sheet Information," to the Consolidated Financial Statements.
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
|
|
2014 and prior
|
|
Japan
|
|
2015 and prior
|
China
|
|
2012 and prior
|
|
Mexico
|
|
2012 and prior
|
France
|
|
2015 and prior
|
|
Poland
|
|
2013 and prior
|
Germany
|
|
2011 and prior
|
|
South Korea
|
|
2012 and prior
|
Hungary
|
|
2013 and prior
|
|
|
|
|
In the U.S.
,
certain tax attributes created in years prior to 2015 were subsequently utilized. Even though the U.S. federal statute of limitations has expired for years prior to 2015, the years in which these tax attributes were created could still be subject to examination, limited to only the examination of the creation of the tax attribute
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of deferred tax assets and liabilities as of December 31, 2018 and 2017 consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
|
Employee compensation
|
23.9
|
|
|
26.4
|
|
Other comprehensive loss
|
63.9
|
|
|
54.5
|
|
Research and development capitalization
|
91.8
|
|
|
76.4
|
|
Net operating loss and capital loss carryforwards
|
83.8
|
|
|
74.6
|
|
Pension and other postretirement benefits
|
18.8
|
|
|
19.1
|
|
Asbestos-related
|
172.7
|
|
|
167.1
|
|
Other
|
155.2
|
|
|
146.6
|
|
Total deferred tax assets
|
$
|
610.1
|
|
|
$
|
564.7
|
|
Valuation allowance
|
(86.3
|
)
|
|
(95.9
|
)
|
Net deferred tax asset
|
$
|
523.8
|
|
|
$
|
468.8
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Goodwill and intangible assets
|
(183.3
|
)
|
|
(193.9
|
)
|
Fixed assets
|
(117.5
|
)
|
|
(104.6
|
)
|
Unremitted foreign earnings
|
(57.4
|
)
|
|
(98.5
|
)
|
Other
|
(19.2
|
)
|
|
(12.0
|
)
|
Total deferred tax liabilities
|
$
|
(377.4
|
)
|
|
$
|
(409.0
|
)
|
Net deferred taxes
|
$
|
146.4
|
|
|
$
|
59.8
|
|
At December 31, 2018, certain non-U.S. subsidiaries have net operating loss carryforwards totaling
$222.7 million
available to offset future taxable income. Of the total
$222.7 million
,
$155.1 million
expire at various dates from 2019 through 2038 and the remaining
$67.6 million
have no expiration date. The Company has a valuation allowance recorded against
$143.3 million
of the
$222.7 million
of non-U.S. net operating loss carryforwards. Certain U.S. subsidiaries have state net operating loss carryforwards totaling
$824.9 million
which are partially offset by a valuation allowance of
$756.8 million
. The state net operating loss carryforwards expire at various dates from 2019 to 2038. Certain U.S. subsidiaries also have state tax credit carryforwards of
$19.8 million
which are partially offset by a valuation allowance of
$17.9 million
. Certain non-U.S. subsidiaries located in China had tax exemptions or tax holidays, which reduced local tax expense approximately
$28.0 million
and
$31.0 million
in 2018 and 2017, respectively. The tax holidays for these subsidiaries are issued in
three
year terms with expirations for certain subsidiaries ranging from 2018 to 2020. The Company is in the process of renewing the tax holidays for certain subsidiaries that expired as of December 31, 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 6
|
BALANCE SHEET INFORMATION
|
Detailed balance sheet data is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
Receivables, net:
|
|
|
|
|
|
Customers
|
$
|
1,727.7
|
|
|
$
|
1,735.7
|
|
Indirect taxes
|
114.1
|
|
|
152.1
|
|
Other
|
152.2
|
|
|
136.8
|
|
Gross receivables
|
1,994.0
|
|
|
2,024.6
|
|
Bad debt allowance (a)
|
(6.6
|
)
|
|
(5.7
|
)
|
Total receivables, net
|
$
|
1,987.4
|
|
|
$
|
2,018.9
|
|
Inventories, net:
|
|
|
|
|
|
Raw material and supplies
|
$
|
485.0
|
|
|
$
|
469.7
|
|
Work in progress
|
113.6
|
|
|
126.7
|
|
Finished goods
|
198.9
|
|
|
183.0
|
|
FIFO inventories
|
797.5
|
|
|
779.4
|
|
LIFO reserve
|
(16.7
|
)
|
|
(13.1
|
)
|
Total inventories, net
|
$
|
780.8
|
|
|
$
|
766.3
|
|
Prepayments and other current assets:
|
|
|
|
|
|
Prepaid tooling
|
$
|
82.9
|
|
|
$
|
81.9
|
|
Prepaid taxes
|
84.4
|
|
|
5.3
|
|
Other
|
82.7
|
|
|
58.2
|
|
Total prepayments and other current assets
|
$
|
250.0
|
|
|
$
|
145.4
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
Land and land use rights
|
$
|
107.9
|
|
|
$
|
115.7
|
|
Buildings
|
762.6
|
|
|
783.5
|
|
Machinery and equipment
|
2,851.2
|
|
|
2,734.4
|
|
Capital leases
|
2.6
|
|
|
1.5
|
|
Construction in progress
|
425.8
|
|
|
410.5
|
|
Property, plant and equipment, gross
|
4,150.1
|
|
|
4,045.6
|
|
Accumulated depreciation
|
(1,473.5
|
)
|
|
(1,391.7
|
)
|
Property, plant & equipment, net, excluding tooling
|
2,676.6
|
|
|
2,653.9
|
|
Tooling, net of amortization
|
227.2
|
|
|
209.9
|
|
Property, plant & equipment, net
|
$
|
2,903.8
|
|
|
$
|
2,863.8
|
|
Investments and other long-term receivables:
|
|
|
|
|
|
Investment in equity affiliates
|
$
|
243.5
|
|
|
$
|
239.6
|
|
Other long-term asbestos-related insurance receivables
|
303.3
|
|
|
258.7
|
|
Other long-term receivables
|
44.9
|
|
|
49.1
|
|
Total investments and other long-term receivables
|
$
|
591.7
|
|
|
$
|
547.4
|
|
Other non-current assets:
|
|
|
|
|
|
Deferred income taxes
|
$
|
197.7
|
|
|
$
|
121.2
|
|
Deferred asbestos-related insurance asset
|
83.1
|
|
|
127.7
|
|
Other
|
221.5
|
|
|
209.8
|
|
Total other non-current assets
|
$
|
502.3
|
|
|
$
|
458.7
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
Accounts payable and accrued expenses:
|
|
|
|
|
|
Trade payables
|
$
|
1,485.4
|
|
|
$
|
1,545.6
|
|
Payroll and employee related
|
232.6
|
|
|
239.7
|
|
Indirect taxes
|
72.9
|
|
|
111.0
|
|
Product warranties
|
56.2
|
|
|
69.0
|
|
Customer related
|
49.2
|
|
|
75.7
|
|
Asbestos-related liability
|
50.0
|
|
|
52.5
|
|
Severance
|
25.0
|
|
|
5.8
|
|
Interest
|
19.1
|
|
|
22.9
|
|
Dividends payable to noncontrolling shareholders
|
17.2
|
|
|
17.7
|
|
Retirement related
|
15.9
|
|
|
17.2
|
|
Insurance
|
11.7
|
|
|
10.1
|
|
Derivatives
|
1.8
|
|
|
5.0
|
|
Other
|
107.3
|
|
|
98.1
|
|
Total accounts payable and accrued expenses
|
$
|
2,144.3
|
|
|
$
|
2,270.3
|
|
Other non-current liabilities:
|
|
|
|
|
|
Deferred income taxes
|
$
|
51.4
|
|
|
$
|
61.4
|
|
Product warranties
|
47.0
|
|
|
42.5
|
|
Other
|
258.9
|
|
|
251.6
|
|
Total other non-current liabilities
|
$
|
357.3
|
|
|
$
|
355.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Bad debt allowance:
|
2018
|
|
2017
|
|
2016
|
Beginning balance, January 1
|
$
|
(5.7
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
(1.9
|
)
|
Provision
|
(5.3
|
)
|
|
(2.7
|
)
|
|
(3.2
|
)
|
Write-offs
|
4.2
|
|
|
0.1
|
|
|
0.2
|
|
Business divestiture
|
—
|
|
|
—
|
|
|
2.0
|
|
Translation adjustment and other
|
0.2
|
|
|
(0.2
|
)
|
|
—
|
|
Ending balance, December 31
|
$
|
(6.6
|
)
|
|
$
|
(5.7
|
)
|
|
$
|
(2.9
|
)
|
As of December 31, 2018 and December 31, 2017, accounts payable of
$103.7 million
and
$106.5 million
, respectively, were related to property, plant and equipment purchases.
Interest costs capitalized for the years ended December 31, 2018, 2017 and 2016 were
$22.3 million
,
$19.7 million
and
$14.1 million
, respectively.
NSK-Warner KK ("NSK-Warner")
The Company has two equity method investments, the largest is a
50%
interest in NSK-Warner, a joint venture based in Japan that manufactures automatic transmission components. The Company's share of the earnings reported by NSK-Warner is accounted for using the equity method of accounting. NSK-Warner is the joint venture partner with a
40%
interest in the Drivetrain Segment's South Korean subsidiary, BorgWarner Transmission Systems Korea Ltd. Dividends from NSK-Warner were
$40.5 million
,
$20.2 million
and
$34.3 million
in calendar years ended December 31, 2018, 2017 and 2016, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NSK-Warner has a fiscal year-end of March 31. The Company's equity in the earnings of NSK-Warner consists of the 12 months ended November 30. Following is summarized financial data for NSK-Warner, translated using the ending or periodic rates, as of and for the years ended November 30, 2018, 2017 and 2016 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
(millions of dollars)
|
|
|
2018
|
|
2017
|
Balance sheets:
|
|
|
|
|
|
|
|
Cash and securities
|
|
|
$
|
116.6
|
|
|
$
|
104.6
|
|
Current assets, including cash and securities
|
|
|
316.9
|
|
|
289.2
|
|
Non-current assets
|
|
|
283.3
|
|
|
231.9
|
|
Current liabilities
|
|
|
215.3
|
|
|
154.9
|
|
Non-current liabilities
|
|
|
88.9
|
|
|
68.1
|
|
Total equity
|
|
|
296.0
|
|
|
298.1
|
|
|
|
|
|
|
|
|
Year Ended November 30,
|
(millions of dollars)
|
2018
|
|
2017
|
|
2016
|
Statements of operations:
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
731.8
|
|
|
$
|
669.6
|
|
|
$
|
601.8
|
|
Gross profit
|
152.3
|
|
|
149.2
|
|
|
134.1
|
|
Net earnings
|
86.4
|
|
|
85.2
|
|
|
71.7
|
|
Purchases by the Company from NSK-Warner were
$9.7 million
,
$12.3 million
and
$23.9 million
for the years ended December 31, 2018, 2017 and 2016, respectively.
|
|
NOTE 7
|
GOODWILL AND OTHER INTANGIBLES
|
During the fourth quarter of each year, the Company qualitatively assesses its goodwill assigned to each of its reporting units. This qualitative assessment evaluates various events and circumstances, such as macro economic conditions, industry and market conditions, cost factors, relevant events and financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-than-not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the carrying value, or upon consideration of other factors, including recent acquisition, restructuring or divestiture activity, the Company performs a quantitative, "step one," goodwill impairment analysis.
In addition, the Company may test goodwill in between annual test dates if an event occurs or circumstances change that could more-likely-than-not reduce the fair value of a reporting unit below its carrying value.
During the fourth quarter of 2018, the Company performed an analysis on each reporting unit. For the reporting unit with restructuring activities, the Company performed a quantitative, "step one," goodwill impairment analysis, which requires the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates and growth rates. The basis of this goodwill impairment analysis is the Company's annual budget and long-range plan (“LRP”). The annual budget and LRP includes a five-year projection of future cash flows based on actual new products and customer commitments and assumes the last year of the LRP data is a fair indication of the future performance. Because the LRP is estimated over a significant future period of time, those estimates and assumptions are subject to a high degree of uncertainty. Further, the market valuation models and other financial ratios used by the Company require certain assumptions and estimates regarding the applicability of those models to the Company's facts and circumstances.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company believes the assumptions and estimates used to determine the estimated fair value are reasonable. Different assumptions could materially affect the estimated fair value. The primary assumptions affecting the Company's December 31, 2018 goodwill quantitative, "step one," impairment review are as follows:
|
|
•
|
Discount rate:
the Company used a
10.9%
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.
|
|
|
•
|
Revenue growth rate:
the Company used a global automotive market industry growth rate forecast adjusted to estimate its own market participation for product lines.
|
I
n addition to the above primary assumptions, the Company notes the following risks to volume and operating income assumptions that could have an impact on the discounted cash flow models:
|
|
•
|
The automotive industry is cyclical and the Company's results of operations would be adversely affected by industry downturns.
|
|
|
•
|
The Company is dependent on market segments that use our key products and would be affected by decreasing demand in those segments.
|
|
|
•
|
The Company is subject to risks related to international operations.
|
Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter of 2018 indicated the Company's goodwill assigned to the reporting unit with restructuring activity that was quantitatively assessed was not impaired and contained a fair value substantially higher than the reporting unit's carrying value. Additionally, for the reporting unit quantitatively assessed, sensitivity analyses were completed indicating that a
one
percent increase in the discount rate, a
one
percent decrease in the operating margin, or a
one
percent decrease in the revenue growth rate assumptions would not result in the carrying value exceeding the fair value.
The changes in the carrying amount of goodwill for the years ended December 31, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
(millions of dollars)
|
Engine
|
|
Drivetrain
|
|
Engine
|
|
Drivetrain
|
Gross goodwill balance, January 1
|
$
|
1,359.6
|
|
|
$
|
1,024.2
|
|
|
$
|
1,324.0
|
|
|
$
|
880.2
|
|
Accumulated impairment losses, January 1
|
(501.8
|
)
|
|
(0.2
|
)
|
|
(501.8
|
)
|
|
(0.2
|
)
|
Net goodwill balance, January 1
|
$
|
857.8
|
|
|
$
|
1,024.0
|
|
|
$
|
822.2
|
|
|
$
|
880.0
|
|
Goodwill during the year:
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions*
|
—
|
|
|
1.7
|
|
|
—
|
|
|
125.8
|
|
Held for sale
|
—
|
|
|
—
|
|
|
(7.3
|
)
|
|
—
|
|
Translation adjustment and other
|
(16.5
|
)
|
|
(13.6
|
)
|
|
42.9
|
|
|
18.2
|
|
Ending balance, December 31
|
$
|
841.3
|
|
|
$
|
1,012.1
|
|
|
$
|
857.8
|
|
|
$
|
1,024.0
|
|
________________
|
|
*
|
Acquisitions relate to the Company's 2017 purchase of Sevcon.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s other intangible assets, primarily from acquisitions, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
(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
|
$
|
151.9
|
|
|
$
|
60.7
|
|
|
$
|
91.2
|
|
|
$
|
157.7
|
|
|
$
|
52.9
|
|
|
$
|
104.8
|
|
Customer relationships
|
489.7
|
|
|
201.2
|
|
|
288.5
|
|
|
507.6
|
|
|
181.0
|
|
|
326.6
|
|
Miscellaneous
|
8.3
|
|
|
3.9
|
|
|
4.4
|
|
|
8.7
|
|
|
3.2
|
|
|
5.5
|
|
Total amortized intangible assets
|
649.9
|
|
|
265.8
|
|
|
384.1
|
|
|
674.0
|
|
|
237.1
|
|
|
436.9
|
|
Unamortized trade names
|
55.4
|
|
|
—
|
|
|
55.4
|
|
|
55.8
|
|
|
—
|
|
|
55.8
|
|
Total other intangible assets
|
$
|
705.3
|
|
|
$
|
265.8
|
|
|
$
|
439.5
|
|
|
$
|
729.8
|
|
|
$
|
237.1
|
|
|
$
|
492.7
|
|
Amortization of other intangible assets was
$40.1 million
,
$40.0 million
and
$40.4 million
for the years ended December 31, 2018, 2017 and 2016, respectively. The estimated useful lives of the Company's amortized intangible assets range from
three
to
20
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:
$38.8 million
in 2019,
$38.5 million
in 2020,
$38.0 million
in 2021,
$36.8 million
in 2022 and
$31.0 million
in 2023.
A roll forward of the gross carrying amounts of the Company's other intangible assets is presented below:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2018
|
|
2017
|
Beginning balance, January 1
|
$
|
729.8
|
|
|
$
|
649.6
|
|
Acquisitions*
|
—
|
|
|
72.6
|
|
Held for sale
|
—
|
|
|
(32.7
|
)
|
Translation adjustment
|
(24.5
|
)
|
|
40.3
|
|
Ending balance, December 31
|
$
|
705.3
|
|
|
$
|
729.8
|
|
________________
|
|
*
|
Acquisitions primarily relate to the Company's 2017 purchase of Sevcon.
|
A roll forward of the accumulated amortization associated with the Company's other intangible assets is presented below:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2018
|
|
2017
|
Beginning balance, January 1
|
$
|
237.1
|
|
|
$
|
186.1
|
|
Amortization
|
40.1
|
|
|
40.0
|
|
Held for sale
|
—
|
|
|
(11.6
|
)
|
Translation adjustment
|
(11.4
|
)
|
|
22.6
|
|
Ending balance, December 31
|
$
|
265.8
|
|
|
$
|
237.1
|
|
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, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2018
|
|
2017
|
Beginning balance, January 1
|
$
|
111.5
|
|
|
$
|
95.3
|
|
Provisions
|
69.0
|
|
|
73.1
|
|
Acquisitions
|
0.2
|
|
|
1.0
|
|
Held for sale
|
—
|
|
|
(3.6
|
)
|
Payments
|
(73.4
|
)
|
|
(60.6
|
)
|
Translation adjustment
|
(4.1
|
)
|
|
6.3
|
|
Ending balance, December 31
|
$
|
103.2
|
|
|
$
|
111.5
|
|
Acquisition activity in 2018 and 2017 of
$0.2 million
and
$1.0 million
relates to the warranty liability associated with the Company's purchase of Sevcon.
The product warranty liability is classified in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
Accounts payable and accrued expenses
|
$
|
56.2
|
|
|
$
|
69.0
|
|
Other non-current liabilities
|
47.0
|
|
|
42.5
|
|
Total product warranty liability
|
$
|
103.2
|
|
|
$
|
111.5
|
|
|
|
NOTE 9
|
NOTES PAYABLE AND LONG-TERM DEBT
|
As of December 31, 2018 and 2017, the Company had short-term and long-term debt outstanding as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
Short-term debt
|
|
|
|
Short-term borrowings
|
$
|
32.8
|
|
|
$
|
68.8
|
|
|
|
|
|
Long-term debt
|
|
|
|
8.00% Senior notes due 10/01/19 ($134 million par value)
|
135.4
|
|
|
137.4
|
|
4.625% Senior notes due 09/15/20 ($250 million par value)
|
250.9
|
|
|
251.4
|
|
1.80% Senior notes due 11/7/22 (€500 million par value)
|
570.0
|
|
|
595.7
|
|
3.375% Senior notes due 03/15/25 ($500 million par value)
|
496.6
|
|
|
496.1
|
|
7.125% Senior notes due 02/15/29 ($121 million par value)
|
119.1
|
|
|
118.9
|
|
4.375% Senior notes due 03/15/45 ($500 million par value)
|
493.7
|
|
|
493.5
|
|
Term loan facilities and other
|
14.8
|
|
|
26.5
|
|
Total long-term debt
|
$
|
2,080.5
|
|
|
$
|
2,119.5
|
|
Less: current portion
|
139.8
|
|
|
15.8
|
|
Long-term debt, net of current portion
|
$
|
1,940.7
|
|
|
$
|
2,103.7
|
|
In July 2016, the Company terminated interest rate swaps which had the effect of converting
$384.0 million
of fixed rate notes to variable rates. The gain on the termination is being amortized into interest expense over the remaining terms of the notes. The value related to these swap terminations as of December 31, 2018 was
$1.9 million
and
$0.4 million
on the
4.625%
and
8.00%
notes, respectively, as an increase to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the notes. The value of these interest rate swaps as of December 31, 2017 was
$2.9 million
and
$0.8 million
on the
4.625%
and
8.00%
notes, respectively, as a decrease to the notes.
The Company terminated fixed to floating interest rate swaps in 2009. The gain on the termination is being amortized into interest expense over the remaining term of the note. The value related to this swap termination at December 31, 2018 was
$1.2 million
on the
8.00%
note as an increase to the note. The value related to these swap terminations at December 31, 2017 was
$2.7 million
on the
8.00%
note as an increase to the note.
The weighted average interest rate on short-term borrowings outstanding as of December 31, 2018 and 2017 was
4.3%
and
3.1%
, respectively. The weighted average interest rate on all borrowings outstanding, including the effects of outstanding swaps, as of December 31, 2018 and 2017 was
3.4%
and
3.8%
, respectively.
Annual principal payments required as of December 31, 2018 are as follows :
|
|
|
|
|
(millions of dollars)
|
|
2019
|
$
|
172.6
|
|
2020
|
257.3
|
|
2021
|
1.3
|
|
2022
|
573.7
|
|
2023
|
0.1
|
|
After 2023
|
1,120.7
|
|
Total payments
|
$
|
2,125.7
|
|
Less: unamortized discounts
|
12.4
|
|
Total
|
$
|
2,113.3
|
|
The Company's long-term debt includes various covenants, none of which are expected to restrict future operations.
The Company has a
$1.2 billion
multi-currency revolving credit facility, which includes a feature that allows the Company's borrowings to be increased to
$1.5 billion
.
The facility provides for borrowings through June 29, 2022
.
The Company has one key financial covenant as part of the credit agreement which is a debt to EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") ratio. The Company was in compliance with the financial covenant at December 31, 2018. At December 31, 2018 and December 31, 2017, the Company had no outstanding borrowings under this facility.
The Company's commercial paper program allows the Company to issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding of
$1.2 billion
. Under this program, the Company may issue notes from time to time and will use the proceeds for general corporate purposes. The Company had no outstanding borrowings under this program as of December 31, 2018 and December 31, 2017.
The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed
$1.2 billion
.
As of December 31, 2018 and 2017, the estimated fair values of the Company's senior unsecured notes totaled
$2,058.1 million
and
$2,209.1 million
, respectively. The estimated fair values were
$7.6 million
less than carrying value at December 31, 2018 and
$116.1 million
higher than their carrying value at December 31, 2017. Fair market values of the senior unsecured notes are developed using observable values for similar debt instruments, which are considered Level 2 inputs as defined by ASC Topic 820. The carrying values of the Company's multi-currency revolving credit facility and commercial paper program approximates
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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
$42.7 million
and
$31.4 million
at December 31, 2018 and 2017, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.
NOTE 10 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, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
|
Balance at December 31, 2018
|
|
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
|
$
|
3.0
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
—
|
|
|
A
|
Other long-term receivables (insurance settlement agreement note receivable)
|
$
|
34.0
|
|
|
$
|
—
|
|
|
$
|
34.0
|
|
|
$
|
—
|
|
|
C
|
Net investment hedge contracts
|
$
|
11.9
|
|
|
$
|
—
|
|
|
$
|
11.9
|
|
|
$
|
—
|
|
|
A
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
|
$
|
—
|
|
|
A
|
Commodity contracts
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
|
|
(millions of dollars)
|
Balance at December 31, 2017
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
1.7
|
|
|
$
|
—
|
|
|
$
|
1.7
|
|
|
$
|
—
|
|
|
A
|
Other long-term receivables (insurance settlement agreement note receivable)
|
$
|
42.9
|
|
|
$
|
—
|
|
|
$
|
42.9
|
|
|
$
|
—
|
|
|
C
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
5.0
|
|
|
$
|
—
|
|
|
$
|
5.0
|
|
|
$
|
—
|
|
|
A
|
The following tables classify the Company's defined benefit plan assets measured at fair value on a recurring basis as of December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
(millions of dollars)
|
Balance at December 31, 2018
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
|
Assets measured at NAV (a)
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
122.1
|
|
|
$
|
1.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
A
|
|
120.9
|
|
Equity securities
|
71.0
|
|
|
11.1
|
|
|
—
|
|
|
—
|
|
|
A
|
|
59.9
|
|
Real estate and other
|
22.7
|
|
|
17.8
|
|
|
0.2
|
|
|
—
|
|
|
A
|
|
4.7
|
|
|
$
|
215.8
|
|
|
$
|
30.1
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
|
|
$
|
185.5
|
|
Non-U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
239.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
A
|
|
239.4
|
|
Equity securities
|
162.7
|
|
|
92.9
|
|
|
—
|
|
|
—
|
|
|
A
|
|
69.8
|
|
Real estate and other
|
36.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
A
|
|
36.4
|
|
|
$
|
438.5
|
|
|
$
|
92.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
345.6
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of fair value measurements
|
(millions of dollars)
|
Balance at December 31, 2017
|
|
Quoted prices in active markets for identical items
(Level 1)
|
|
Significant other observable inputs
(Level 2)
|
|
Significant unobservable inputs
(Level 3)
|
|
Valuation technique
|
|
Assets measured at NAV (a)
|
U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
127.1
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
A
|
|
125.8
|
|
Equity securities
|
86.7
|
|
|
13.5
|
|
|
—
|
|
|
—
|
|
|
A
|
|
73.2
|
|
Real estate and other
|
26.3
|
|
|
19.9
|
|
|
0.4
|
|
|
—
|
|
|
A
|
|
6.0
|
|
|
$
|
240.1
|
|
|
$
|
34.7
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
|
|
$
|
205.0
|
|
Non-U.S. Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
$
|
212.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
A
|
|
212.4
|
|
Equity securities
|
233.9
|
|
|
105.4
|
|
|
—
|
|
|
—
|
|
|
A
|
|
128.5
|
|
Real estate and other
|
37.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
A
|
|
37.1
|
|
|
$
|
483.4
|
|
|
$
|
105.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
378.0
|
|
________________
|
|
(a)
|
Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. These amounts represent investments in commingled and managed funds which have underlying assets in fixed income securities, equity securities, and other assets.
|
Refer to
Note 12, "Retirement Benefit Plans," 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 11
|
FINANCIAL INSTRUMENTS
|
The Company’s financial instruments include cash and marketable securities. Due to the short-term nature of these instruments, their book value approximates their fair value. The Company’s financial instruments may include long-term debt, interest rate and cross-currency swaps, commodity derivative contracts and foreign currency derivative contracts. All derivative contracts are placed with counterparties that have an S&P, or equivalent, investment grade credit rating at the time of the contracts’ placement. At December 31, 2018 and 2017, the Company had no derivative contracts that contained credit risk related contingent features.
The Company uses certain commodity derivative contracts to protect against commodity price changes related to forecasted raw material and component purchases. The Company primarily utilizes forward and option contracts, which are designated as cash flow hedges. At December 31, 2018, the following commodity derivative contracts were outstanding. At December 31, 2017, there were no commodity derivative contracts outstanding.
|
|
|
|
|
|
|
|
|
|
|
Commodity derivative contracts
|
|
|
Volume hedged
|
|
|
|
|
Commodity
|
|
December 31, 2018
|
|
Units of measure
|
|
Duration
|
Copper
|
|
256.7
|
|
|
Metric Tons
|
|
Dec - 19
|
The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to optimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). At December 31, 2018 and December 31, 2017, the Company had no outstanding interest rate swaps.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company uses foreign currency forward and option contracts to protect against exchange rate movements for forecasted cash flows, including capital expenditures, purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. In addition, the Company uses foreign currency forward contracts to hedge exposure associated with our net investment in certain foreign operations (net investment hedges). The Company has also designated its Euro denominated debt as a net investment hedge of the Company's investment in a European subsidiary. Foreign currency derivative contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for the operating units’ local currency. At December 31, 2018 and December 31, 2017, the following foreign currency derivative contracts were outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivatives (in millions)
|
Functional currency
|
|
Traded currency
|
|
Notional in traded currency
December 31, 2018
|
|
Notional in traded currency
December 31, 2017
|
|
Ending Duration
|
Brazilian real
|
|
Euro
|
|
3.6
|
|
|
1.1
|
|
|
Jun - 19
|
Brazilian real
|
|
US dollar
|
|
5.3
|
|
|
—
|
|
|
Jun - 19
|
Chinese renminbi
|
|
Euro
|
|
—
|
|
|
18.6
|
|
|
Jun - 18
|
Chinese renminbi
|
|
US dollar
|
|
—
|
|
|
36.0
|
|
|
Sep - 18
|
Euro
|
|
British pound
|
|
7.0
|
|
|
3.9
|
|
|
Oct - 19
|
Euro
|
|
Chinese renminbi
|
|
—
|
|
|
85.0
|
|
|
Dec - 18
|
Euro
|
|
Japanese yen
|
|
—
|
|
|
1,311.3
|
|
|
Dec - 18
|
Euro
|
|
Swedish krona
|
|
539.6
|
|
|
267.4
|
|
|
Jun - 19
|
Euro
|
|
US dollar
|
|
18.9
|
|
|
56.5
|
|
|
Dec - 19
|
Japanese yen
|
|
Chinese renminbi
|
|
88.8
|
|
|
—
|
|
|
Dec - 19
|
Japanese yen
|
|
Korean won
|
|
5,785.2
|
|
|
—
|
|
|
Dec - 19
|
Japanese yen
|
|
US dollar
|
|
2.8
|
|
|
—
|
|
|
Dec - 19
|
Korean won
|
|
Euro
|
|
6.4
|
|
|
3.1
|
|
|
Dec - 19
|
Korean won
|
|
Japanese yen
|
|
266.4
|
|
|
619.0
|
|
|
Dec - 19
|
Korean won
|
|
US dollar
|
|
7.1
|
|
|
11.2
|
|
|
Dec - 19
|
Swedish krona
|
|
Euro
|
|
56.0
|
|
|
109.7
|
|
|
Jan - 20
|
US dollar
|
|
Euro
|
|
—
|
|
|
42.0
|
|
|
Dec - 18
|
US dollar
|
|
Mexican peso
|
|
574.5
|
|
|
—
|
|
|
Dec - 19
|
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, 2018, the following cross-currency swap contracts were outstanding. At December 31, 2017, there were no cross-currency swap derivative contracts outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
Cross-Currency Swaps
|
(in millions)
|
Notional
in USD
|
|
Notional
in Local Currency
|
|
Duration
|
Fixed $ to fixed €
|
$
|
250.0
|
|
|
€
|
206.2
|
|
|
Sep - 20
|
Fixed $ to fixed ¥
|
$
|
100.0
|
|
|
¥
|
10,977.5
|
|
|
Feb - 23
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2018 and 2017, the following amounts were recorded in the Consolidated Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Assets
|
|
Liabilities
|
Derivatives designated as hedging instruments Under Topic 815:
|
|
Location
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Location
|
|
December 31, 2018
|
|
December 31, 2017
|
Foreign currency
|
|
Prepayments and other current assets
|
|
$
|
1.9
|
|
|
$
|
0.9
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1.6
|
|
|
$
|
3.9
|
|
|
|
Other non-current assets
|
|
$
|
—
|
|
|
$
|
0.8
|
|
|
Other non-current liabilities
|
|
$
|
0.1
|
|
|
$
|
—
|
|
Commodity
|
|
Prepayments and other current assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accounts payable and accrued expenses
|
|
$
|
0.2
|
|
|
$
|
—
|
|
Net investment hedges
|
|
Prepayments and other current assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Accounts payable and accrued expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Other non-current assets
|
|
$
|
11.9
|
|
|
$
|
—
|
|
|
Other non-current liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
Prepayments and other current assets
|
|
$
|
1.1
|
|
|
$
|
—
|
|
|
Accounts payable and accrued expenses
|
|
$
|
—
|
|
|
$
|
1.1
|
|
Effectiveness for cash flow hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of effectiveness are deferred into accumulated other comprehensive income (loss) ("AOCI") and reclassified into income as the underlying operating transactions are recognized. These realized gains or losses offset the hedged transaction and are recorded on the same line in the statement of operations. The initial value of any component excluded from the assessment of effectiveness will be recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in fair value of the excluded component and amounts recognized in income under that systematic and rational method will be recognized in AOCI.
Effectiveness for net investment hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of effectiveness are deferred into foreign currency translation adjustments and only released when the subsidiary being hedged is sold or substantially liquidated. The initial value of any component excluded from the assessment of effectiveness will be recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in fair value of the excluded component and amounts recognized in income under that systematic and rational method will be recognized in AOCI.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 2018 market rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Deferred gain (loss) in AOCI at
|
|
Gain (loss) expected to be reclassified to income in one year or less
|
Contract Type
|
|
December 31, 2018
|
|
December 31, 2017
|
|
Foreign currency
|
|
$
|
0.1
|
|
|
$
|
(2.3
|
)
|
|
$
|
—
|
|
Commodity
|
|
(0.2
|
)
|
|
—
|
|
|
(0.2
|
)
|
Net investment hedges:
|
|
—
|
|
|
|
|
|
Foreign currency
|
|
4.5
|
|
|
2.9
|
|
|
—
|
|
Cross-currency swaps
|
|
11.9
|
|
|
—
|
|
|
—
|
|
Foreign currency denominated debt
|
|
(30.4
|
)
|
|
(57.1
|
)
|
|
—
|
|
Total
|
|
$
|
(14.1
|
)
|
|
$
|
(56.5
|
)
|
|
$
|
(0.2
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
|
Other comprehensive income
|
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded
|
|
$
|
10,529.6
|
|
|
$
|
8,300.2
|
|
|
$
|
945.7
|
|
|
$
|
(170.1
|
)
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.3
|
)
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
(2.3
|
)
|
|
$
|
(1.1
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Commodity
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.4
|
)
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2017
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
|
Other comprehensive income
|
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded
|
|
$
|
9,799.3
|
|
|
$
|
7,683.7
|
|
|
$
|
899.1
|
|
|
$
|
232.1
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4.7
|
)
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
3.4
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Commodity
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
(in millions)
|
|
Net sales
|
|
Cost of sales
|
|
Selling, general and administrative expenses
|
|
Other comprehensive income
|
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded
|
|
$
|
9,071.0
|
|
|
$
|
7,142.3
|
|
|
$
|
818.0
|
|
|
$
|
(111.9
|
)
|
|
|
|
|
|
|
|
|
|
Gain (loss) on cash flow hedging relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7.0
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
(0.1
|
)
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Commodity
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in other comprehensive income
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
Gain (loss) reclassified from AOCI to income
|
|
$
|
—
|
|
|
$
|
(1.4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Gain (loss) reclassified from AOCI to income as a result that a forecasted transaction is no longer probable of occurring
|
|
$
|
—
|
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no gains and (losses) recorded in income related to components excluded from the assessment of effectiveness for derivative instruments designated as cash flow hedges.
Gains and (losses) on derivative instruments designated as net investment hedges were recognized in other comprehensive income during the periods presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Year Ended December 31,
|
Net investment hedges
|
|
2018
|
|
2017
|
|
2016
|
Foreign currency
|
|
$
|
1.6
|
|
|
$
|
(7.9
|
)
|
|
$
|
0.4
|
|
Cross-currency swaps
|
|
$
|
11.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign currency denominated debt
|
|
$
|
26.7
|
|
|
$
|
(83.7
|
)
|
|
$
|
16.8
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivatives designated as net investment hedge instruments as defined by ASC Topic 815 held during the period resulted in the following gains and (losses) recorded in Interest expense and finance charges on components excluded from the assessment of effectiveness:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Year Ended December 31,
|
Net investment hedges
|
|
2018
|
|
2017
|
|
2016
|
Foreign currency
|
|
$
|
0.6
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
Cross-currency swaps
|
|
$
|
8.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no gains and (losses) recorded in income related to components excluded from the assessment of effectiveness for foreign currency denominated debt designated as net investment hedges. There were no gains and losses reclassified from AOCI for net investment hedges during the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
|
2018
|
|
2017
|
|
2016
|
Contract Type
|
|
Location
|
|
Gain (loss) on swaps
|
|
Gain (loss) on borrowings
|
|
Gain (loss) on swaps
|
|
Gain (loss) on borrowings
|
|
Gain (loss) on swaps
|
|
Gain (loss) on borrowings
|
Interest rate swap
|
|
Interest expense and finance charges
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8.5
|
|
|
$
|
(8.5
|
)
|
Derivatives not designated as hedging instruments are used to hedge remeasurement exposures of monetary assets and liabilities denominated in currencies other than the operating units' functional currency. The gains and (losses) recorded in income from derivative instruments not designated as hedging instruments were immaterial for the periods presented.
|
|
NOTE 12
|
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
$34.9 million
,
$33.5 million
and
$28.3 million
in the years ended December 31, 2018, 2017 and 2016, 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 benefits, are unfunded plans. Our U.S. and U.K. defined benefit plans are frozen and no additional service cost is being accrued. All pension and other postretirement employee benefit plans in the U.S. have been closed to new employees. The measurement date for all plans is December 31.
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)
|
2018
|
|
2017
|
|
2016
|
Defined contribution expense
|
$
|
34.9
|
|
|
$
|
33.5
|
|
|
$
|
28.3
|
|
Defined benefit pension expense
|
8.5
|
|
|
12.5
|
|
|
10.1
|
|
Other postretirement employee benefit expense
|
0.1
|
|
|
0.5
|
|
|
1.4
|
|
Total
|
$
|
43.5
|
|
|
$
|
46.5
|
|
|
$
|
39.8
|
|
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
|
|
2018
|
|
2017
|
|
Year Ended December 31,
|
(millions of dollars)
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2018
|
|
2017
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, January 1
|
$
|
283.3
|
|
|
$
|
628.8
|
|
|
$
|
282.5
|
|
|
$
|
528.2
|
|
|
$
|
107.0
|
|
|
$
|
119.9
|
|
Service cost
|
—
|
|
|
17.9
|
|
|
—
|
|
|
18.0
|
|
|
0.1
|
|
|
0.1
|
|
Interest cost
|
8.5
|
|
|
12.0
|
|
|
8.9
|
|
|
11.0
|
|
|
2.9
|
|
|
3.2
|
|
Plan participants’ contributions
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Plan amendments
|
—
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
Settlement and curtailment
|
—
|
|
|
(4.3
|
)
|
|
—
|
|
|
(3.7
|
)
|
|
—
|
|
|
—
|
|
Actuarial (gain) loss
|
(18.2
|
)
|
|
4.9
|
|
|
8.7
|
|
|
(7.8
|
)
|
|
(6.7
|
)
|
|
2.2
|
|
Currency translation
|
—
|
|
|
(29.4
|
)
|
|
—
|
|
|
63.4
|
|
|
—
|
|
|
—
|
|
Acquisition
|
—
|
|
|
—
|
|
|
4.0
|
|
|
37.0
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(20.7
|
)
|
|
(19.6
|
)
|
|
(20.8
|
)
|
|
(17.6
|
)
|
|
(16.8
|
)
|
|
(17.7
|
)
|
Projected benefit obligation, December 31
|
$
|
252.9
|
|
|
$
|
612.3
|
|
|
$
|
283.3
|
|
|
$
|
628.8
|
|
|
$
|
86.5
|
|
|
$
|
107.0
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, January 1
|
$
|
240.1
|
|
|
$
|
483.4
|
|
|
$
|
229.5
|
|
|
$
|
393.8
|
|
|
|
|
|
|
|
Actual return on plan assets
|
(10.7
|
)
|
|
(18.1
|
)
|
|
23.5
|
|
|
30.7
|
|
|
|
|
|
|
|
Employer contribution
|
7.0
|
|
|
18.8
|
|
|
4.0
|
|
|
14.3
|
|
|
|
|
|
|
|
Plan participants’ contribution
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
|
|
|
|
|
Settlements
|
—
|
|
|
(4.3
|
)
|
|
—
|
|
|
(3.6
|
)
|
|
|
|
|
|
|
Currency translation
|
—
|
|
|
(22.0
|
)
|
|
—
|
|
|
46.8
|
|
|
|
|
|
|
|
Acquisition
|
—
|
|
|
—
|
|
|
3.8
|
|
|
18.1
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
|
|
|
|
Benefits paid
|
(20.6
|
)
|
|
(19.6
|
)
|
|
(20.7
|
)
|
|
(17.6
|
)
|
|
|
|
|
|
|
Fair value of plan assets, December 31
|
$
|
215.8
|
|
|
$
|
438.5
|
|
|
$
|
240.1
|
|
|
$
|
483.4
|
|
|
|
|
|
Funded status
|
$
|
(37.1
|
)
|
|
$
|
(173.8
|
)
|
|
$
|
(43.2
|
)
|
|
$
|
(145.4
|
)
|
|
$
|
(86.5
|
)
|
|
$
|
(107.0
|
)
|
Amounts in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
$
|
—
|
|
|
$
|
16.7
|
|
|
$
|
—
|
|
|
$
|
23.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(0.5
|
)
|
|
(4.4
|
)
|
|
(0.1
|
)
|
|
(3.9
|
)
|
|
(11.0
|
)
|
|
(13.2
|
)
|
Non-current liabilities
|
(36.6
|
)
|
|
(186.1
|
)
|
|
(43.1
|
)
|
|
(164.7
|
)
|
|
(75.5
|
)
|
|
(93.8
|
)
|
Net amount
|
$
|
(37.1
|
)
|
|
$
|
(173.8
|
)
|
|
$
|
(43.2
|
)
|
|
$
|
(145.4
|
)
|
|
$
|
(86.5
|
)
|
|
$
|
(107.0
|
)
|
Amounts in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
$
|
113.1
|
|
|
$
|
193.0
|
|
|
$
|
111.0
|
|
|
$
|
159.0
|
|
|
$
|
13.2
|
|
|
$
|
20.8
|
|
Net prior service (credit) cost
|
(5.8
|
)
|
|
2.2
|
|
|
(6.6
|
)
|
|
0.8
|
|
|
(11.8
|
)
|
|
(15.8
|
)
|
Net amount*
|
$
|
107.3
|
|
|
$
|
195.2
|
|
|
$
|
104.4
|
|
|
$
|
159.8
|
|
|
$
|
1.4
|
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accumulated benefit obligation for all plans
|
$
|
252.9
|
|
|
$
|
583.3
|
|
|
$
|
283.3
|
|
|
$
|
602.0
|
|
|
|
|
|
|
|
________________
|
|
*
|
AOCI shown above does not include our equity investee, NSK-Warner. NSK-Warner had an AOCI loss of
$9.2 million
and
$9.7 million
at December 31, 2018 and 2017, 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)
|
2018
|
|
2017
|
Accumulated benefit obligation
|
$
|
(649.9
|
)
|
|
$
|
(681.2
|
)
|
Plan assets
|
449.9
|
|
|
494.8
|
|
Deficiency
|
$
|
(200.0
|
)
|
|
$
|
(186.4
|
)
|
Pension deficiency by country:
|
|
|
|
|
|
United States
|
$
|
(37.1
|
)
|
|
$
|
(43.2
|
)
|
Germany
|
(95.4
|
)
|
|
(75.7
|
)
|
Other
|
(67.5
|
)
|
|
(67.5
|
)
|
Total pension deficiency
|
$
|
(200.0
|
)
|
|
$
|
(186.4
|
)
|
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
|
|
2018
|
|
2017
|
|
U.S. Plans:
|
|
|
|
|
|
|
|
Real estate and other
|
11
|
%
|
|
11
|
%
|
|
0% - 15%
|
Fixed income securities
|
56
|
%
|
|
53
|
%
|
|
45% - 65%
|
Equity securities
|
33
|
%
|
|
36
|
%
|
|
25% - 45%
|
|
100
|
%
|
|
100
|
%
|
|
|
Non-U.S. Plans:
|
|
|
|
|
|
|
|
Real estate and other
|
8
|
%
|
|
8
|
%
|
|
0% - 10%
|
Fixed income securities
|
55
|
%
|
|
44
|
%
|
|
43% - 65%
|
Equity securities
|
37
|
%
|
|
48
|
%
|
|
30% - 56%
|
|
100
|
%
|
|
100
|
%
|
|
|
The Company's investment strategy is to maintain actual asset weightings within a preset range of target allocations. The Company believes these ranges represent an appropriate risk profile for the planned benefit payments of the plans based on the timing of the estimated benefit payments. In each asset category, separate portfolios are maintained for additional diversification. Investment managers are retained in each asset category to manage each portfolio against its benchmark. Each investment manager has appropriate investment guidelines. In addition, the entire portfolio is evaluated against a relevant peer group. The defined benefit pension plans did not hold any Company securities as investments as of December 31, 2018 and 2017. A portion of pension assets is invested in common and commingled trusts.
The Company expects to contribute a total of
$15 million
to
$25 million
into its defined benefit pension plans during 2019. Of the
$15 million
to
$25 million
in projected 2019 contributions,
$4.0 million
are contractually obligated, while any remaining payments would be discretionary.
Refer to Note 10, "Fair Value Measurements," to the Consolidated Financial Statements for more detail surrounding the fair value of each major category of plan assets, as well as the inputs and valuation techniques used to develop the fair value measurements of the plans' assets at December 31, 2018 and 2017.
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,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Year Ended December 31,
|
(millions of dollars)
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
US
|
|
Non-US
|
|
2018
|
|
2017
|
|
2016
|
Service cost
|
$
|
—
|
|
|
$
|
17.9
|
|
|
$
|
—
|
|
|
$
|
18.0
|
|
|
$
|
—
|
|
|
$
|
16.2
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Interest cost
|
8.5
|
|
|
12.0
|
|
|
8.9
|
|
|
11.0
|
|
|
9.6
|
|
|
12.5
|
|
|
2.9
|
|
|
3.2
|
|
|
4.0
|
|
Expected return on plan assets
|
(13.6
|
)
|
|
(27.0
|
)
|
|
(13.2
|
)
|
|
(23.8
|
)
|
|
(15.0
|
)
|
|
(24.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements, curtailments and other
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of unrecognized prior service (credit) cost
|
(0.8
|
)
|
|
0.1
|
|
|
(0.8
|
)
|
|
—
|
|
|
(0.8
|
)
|
|
0.6
|
|
|
(4.1
|
)
|
|
(4.1
|
)
|
|
(4.9
|
)
|
Amortization of unrecognized loss
|
4.2
|
|
|
6.9
|
|
|
4.2
|
|
|
7.9
|
|
|
5.1
|
|
|
6.2
|
|
|
1.2
|
|
|
1.3
|
|
|
2.1
|
|
Net periodic (income) cost
|
$
|
(1.7
|
)
|
|
$
|
10.2
|
|
|
$
|
(0.9
|
)
|
|
$
|
13.4
|
|
|
$
|
(1.1
|
)
|
|
$
|
11.2
|
|
|
$
|
0.1
|
|
|
$
|
0.5
|
|
|
$
|
1.4
|
|
The components of net periodic benefit cost other than the service cost component are included in Other postretirement income in the Condensed Consolidated Statements of Operations.
The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is
$14.1 million
. The estimated net loss and prior service credit for the other postretirement employee benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are
$0.6 million
and
$3.6 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, 2018 and 2017 were as follows:
|
|
|
|
|
|
December 31,
|
(percent)
|
2018
|
|
2017
|
U.S. pension plans:
|
|
|
|
Discount rate
|
4.24
|
|
3.55
|
Rate of compensation increase
|
N/A
|
|
N/A
|
U.S. other postretirement employee benefit plans:
|
|
|
|
Discount rate
|
4.05
|
|
3.32
|
Rate of compensation increase
|
N/A
|
|
N/A
|
Non-U.S. pension plans:
|
|
|
|
Discount rate
|
2.28
|
|
2.25
|
Rate of compensation increase
|
2.99
|
|
2.98
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company's weighted-average assumptions used to determine the net periodic benefit cost/(income) for its defined benefit pension and other postretirement employee benefit plans for the years ended December 31, 2018 and 2017 were as follows:
|
|
|
|
|
|
Year Ended December 31,
|
(percent)
|
2018
|
|
2017
|
U.S. pension plans:
|
|
|
|
Discount rate - service cost
|
3.55
|
|
3.94
|
Effective interest rate on benefit obligation
|
3.13
|
|
3.26
|
Expected long-term rate of return on assets
|
6.00
|
|
6.01
|
Average rate of increase in compensation
|
N/A
|
|
N/A
|
U.S. other postretirement plans:
|
|
|
|
Discount rate - service cost
|
2.65
|
|
2.68
|
Effective interest rate on benefit obligation
|
2.86
|
|
2.85
|
Expected long-term rate of return on assets
|
N/A
|
|
N/A
|
Average rate of increase in compensation
|
N/A
|
|
N/A
|
Non-U.S. pension plans:
|
|
|
|
Discount rate - service cost
|
2.71
|
|
2.55
|
Effective interest rate on benefit obligation
|
1.98
|
|
1.96
|
Expected long-term rate of return on assets
|
5.73
|
|
5.68
|
Average rate of increase in compensation
|
2.98
|
|
3.00
|
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. In determining the discount rate, the Company utilizes a full yield approach in the estimation of service and interest components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
The Company determines its expected return on plan asset assumptions by evaluating estimates of future market returns and the plans' asset allocation. The Company also considers the impact of active management of the plans' invested assets.
The estimated future benefit payments for the pension and other postretirement employee benefits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other postretirement employee benefits
|
(millions of dollars)
|
|
|
|
|
|
Year
|
|
U.S.
|
|
Non-U.S.
|
|
2019
|
|
$
|
22.5
|
|
|
$
|
19.6
|
|
|
$
|
11.0
|
|
2020
|
|
19.8
|
|
|
21.7
|
|
|
10.3
|
|
2021
|
|
18.9
|
|
|
21.9
|
|
|
9.5
|
|
2022
|
|
18.3
|
|
|
22.6
|
|
|
9.1
|
|
2023
|
|
17.8
|
|
|
23.8
|
|
|
8.0
|
|
2024-2028
|
|
84.2
|
|
|
134.0
|
|
|
28.9
|
|
The weighted-average rate of increase in the per capita cost of covered health care benefits is projected to be
6.50%
in 2019 for pre-65 and post-65 participants, decreasing to
5.0%
by the year 2025. A one-percentage point change in the assumed health care cost trend would have the following effects:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
One Percentage Point
|
(millions of dollars)
|
Increase
|
|
Decrease
|
Effect on other postretirement employee benefit obligation
|
$
|
5.5
|
|
|
$
|
(4.9
|
)
|
Effect on total service and interest cost components
|
$
|
0.2
|
|
|
$
|
(0.2
|
)
|
|
|
NOTE 13
|
STOCK-BASED COMPENSATION
|
The Company has granted restricted common stock and restricted stock units (collectively, "restricted stock") and performance share units as long-term incentive awards to employees and non-employee directors under the BorgWarner Inc. 2014 Stock Incentive Plan, as amended ("2014 Plan") and the BorgWarner Inc. 2018 Stock Incentive Plan ("2018 Plan"). The Company's Board of Directors adopted the 2018 Plan as a replacement to the 2014 Plan in February 2018, and the Company's stockholders approved the 2018 Plan at the annual meeting of stockholders on April 25, 2018. After stockholders approved the 2018 Plan, the Company could no longer make grants under the 2014 Plan. The shares that were available for issuance under the 2014 Plan were cancelled upon approval of the 2018 Plan. The 2018 Plan authorizes the issuance of a total of
7 million
shares, of which approximately
6.9 million
shares were available for future issuance as of December 31, 2018.
Stock Options
A summary of the plans’ shares under option at December 31, 2018, 2017 and 2016 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, 2016
|
1,267
|
|
|
$
|
16.59
|
|
|
0.9
|
|
$
|
33.7
|
|
Exercised
|
(794
|
)
|
|
$
|
16.07
|
|
|
|
|
$
|
14.4
|
|
Outstanding at December 31, 2016
|
473
|
|
|
$
|
17.47
|
|
|
0.1
|
|
$
|
10.4
|
|
Exercised
|
(473
|
)
|
|
$
|
17.47
|
|
|
|
|
$
|
10.4
|
|
Outstanding at December 31, 2017
|
—
|
|
|
$
|
—
|
|
|
0.0
|
|
$
|
—
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
Outstanding at December 31, 2018
|
—
|
|
|
$
|
—
|
|
|
0.0
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2018
|
—
|
|
|
$
|
—
|
|
|
0.0
|
|
$
|
—
|
|
Proceeds from stock option exercises for the years ended December 31, 2018, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
|
2016
|
Proceeds from stock options exercised — gross
|
$
|
—
|
|
|
$
|
8.3
|
|
|
$
|
12.7
|
|
Tax benefit
|
—
|
|
|
8.2
|
|
|
0.3
|
|
Proceeds from stock options exercised, net of tax
|
$
|
—
|
|
|
$
|
16.5
|
|
|
$
|
13.0
|
|
Restricted Stock
The value of restricted stock is determined by the market value of the Company’s common stock at the date of grant. In 2018, restricted stock in the amount of
717,833
shares and
19,656
shares was granted to employees and non-employee directors, respectively. The value of the awards is recognized as compensation expense ratably over the restriction periods. As of December 31, 2018, there was
$29.3 million
of unrecognized compensation expense that will be recognized over a weighted average period of approximately
2 years
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted stock compensation expense recorded in the Consolidated Statements of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars, except per share data)
|
2018
|
|
2017
|
|
2016
|
Restricted stock compensation expense
|
$
|
25.9
|
|
|
$
|
27.0
|
|
|
$
|
26.7
|
|
Restricted stock compensation expense, net of tax
|
$
|
19.7
|
|
|
$
|
19.7
|
|
|
$
|
19.5
|
|
A summary of the status of the Company’s nonvested restricted stock for employees and non-employee directors at December 31, 2018, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
Shares subject to restriction
(thousands)
|
|
Weighted average grant date fair value
|
Nonvested at January 1, 2016
|
1,326
|
|
|
$
|
53.18
|
|
Granted
|
724
|
|
|
$
|
30.07
|
|
Vested
|
(551
|
)
|
|
$
|
47.55
|
|
Forfeited
|
(70
|
)
|
|
$
|
43.05
|
|
Nonvested at December 31, 2016
|
1,429
|
|
|
$
|
44.12
|
|
Granted
|
804
|
|
|
$
|
40.10
|
|
Vested
|
(521
|
)
|
|
$
|
56.53
|
|
Forfeited
|
(119
|
)
|
|
$
|
38.97
|
|
Nonvested at December 31, 2017
|
1,593
|
|
|
$
|
38.86
|
|
Granted
|
737
|
|
|
$
|
51.70
|
|
Vested
|
(556
|
)
|
|
$
|
42.25
|
|
Forfeited
|
(258
|
)
|
|
$
|
44.51
|
|
Nonvested at December 31, 2018
|
1,516
|
|
|
$
|
42.97
|
|
Total Shareholder Return Performance Share Units
The 2014 and 2018 Plans provide for awarding of performance shares to members of senior management at the end of successive three-year periods based on the Company's performance in terms of total shareholder return relative to a peer group of automotive companies. Based on the Company’s relative ranking within the performance peer group, it is possible for none of the awards to vest or for a range up to the
200%
of the target shares to vest.
The Company recognizes compensation expense relating to its performance share plans ratably over the performance period regardless of whether the market conditions are expected to be achieved. Compensation expense associated with the performance share plans is calculated using a lattice model (Monte Carlo simulation). The amounts expensed under the plan and the common stock issuances for the
three
-year measurement periods ended December 31, 2018, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars, except share data)
|
2018
|
|
2017
|
|
2016
|
Expense
|
$
|
9.0
|
|
|
$
|
9.9
|
|
|
$
|
9.6
|
|
Number of shares
|
—
|
|
|
—
|
|
|
—
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company's nonvested total shareholder return performance share units at December 31, 2018, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
Number of shares
(thousands)
|
|
Weighted average grant date fair value
|
Nonvested at January 1, 2016
|
475
|
|
|
$
|
56.55
|
|
Granted
|
171
|
|
|
$
|
16.61
|
|
Forfeited
|
(236
|
)
|
|
$
|
49.37
|
|
Nonvested at December 31, 2016
|
410
|
|
|
$
|
43.99
|
|
Granted
|
201
|
|
|
$
|
45.57
|
|
Forfeited
|
(256
|
)
|
|
$
|
61.40
|
|
Nonvested at December 31, 2017
|
355
|
|
|
$
|
32.35
|
|
Granted
|
287
|
|
|
$
|
68.38
|
|
Forfeited
|
(345
|
)
|
|
$
|
38.26
|
|
Nonvested at December 31, 2018
|
297
|
|
|
$
|
60.35
|
|
As of December 31, 2018, there was
$7.5 million
of unrecognized compensation expense that will be recognized over a weighted average period of approximately
1.4
years.
Relative Revenue Growth Performance Share Units
In the second quarter of 2016, the Company started a new performance share program to reward members of senior management based on the Company's performance in terms of revenue growth relative to the vehicle market over
three
-year performance periods. The value of this performance share award is determined by the market value of the Company’s common stock at the date of grant. The Company recognizes compensation expense relating to its performance share plans over the performance period based on the number of shares expected to vest at the end of each reporting period. The actual performance of the Company is evaluated quarterly, and the expense is adjusted according to the new projections. The amounts expensed under the plan and common stock issuance for the year ended December 31, 2018, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(millions of dollars, except share data)
|
2018
|
|
2017
|
|
2016
|
Expense
|
$
|
18.0
|
|
|
$
|
15.9
|
|
|
$
|
7.1
|
|
Number of shares
|
249,000
|
|
|
126,000
|
|
|
—
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the status of the Company’s nonvested relative revenue growth performance shares at December 31, 2018, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
Number of shares
(thousands)
|
|
Weighted average grant date fair value
|
Nonvested at January 1, 2016
|
—
|
|
|
$
|
—
|
|
Granted
|
485
|
|
|
$
|
38.62
|
|
Vested
|
(126
|
)
|
|
$
|
38.62
|
|
Forfeited
|
(39
|
)
|
|
$
|
38.62
|
|
Nonvested at December 31, 2016
|
320
|
|
|
$
|
38.62
|
|
Granted
|
198
|
|
|
$
|
40.08
|
|
Vested
|
(156
|
)
|
|
$
|
38.62
|
|
Forfeited
|
(7
|
)
|
|
$
|
39.20
|
|
Nonvested at December 31, 2017
|
355
|
|
|
$
|
39.42
|
|
Granted
|
287
|
|
|
$
|
50.82
|
|
Vested
|
(166
|
)
|
|
$
|
38.62
|
|
Forfeited
|
(179
|
)
|
|
$
|
45.82
|
|
Nonvested at December 31, 2018
|
297
|
|
|
$
|
47.03
|
|
Based on the Company’s relative revenue growth in excess of the industry vehicle production, it is possible for none of the awards to vest or for a range up to the
200%
of the target shares to vest. As of December 31, 2018, there was
$8.6 million
of unrecognized compensation expense that will be recognized over a weighted average period of approximately
1.4
years. The unrecognized amount of compensation expense is based on projected performance as of December 31, 2018.
In 2018, the Company modified the vesting provisions of restricted stock and performance share unit grants made to retiring executive officers to allow certain of the outstanding awards, that otherwise would have been forfeited, to vest upon retirement. This resulted in net restricted stock and performance share unit compensation expense of
$8.3 million
in the year ended December 31, 2018. Additional incremental compensation expense of
$4.0 million
related to these modified awards will be recognized ratably through February 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 14 ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table summarizes the activity within accumulated other comprehensive loss during the years ended December 31, 2018, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
|
Foreign currency translation adjustments
|
|
Hedge instruments
|
|
Defined benefit postretirement plans
|
|
Other
|
|
Total
|
Beginning Balance, January 1, 2016
|
|
$
|
(421.2
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
(189.9
|
)
|
|
$
|
2.9
|
|
|
$
|
(610.2
|
)
|
Comprehensive (loss) income before reclassifications
|
|
(109.1
|
)
|
|
8.0
|
|
|
(11.4
|
)
|
|
(1.6
|
)
|
|
(114.1
|
)
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
—
|
|
|
(0.7
|
)
|
|
(2.6
|
)
|
|
—
|
|
|
(3.3
|
)
|
Reclassification from accumulated other comprehensive (loss) income
|
|
—
|
|
|
0.1
|
|
|
8.3
|
|
|
—
|
|
|
8.4
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
(0.4
|
)
|
|
(2.5
|
)
|
|
—
|
|
|
(2.9
|
)
|
Ending Balance December 31, 2016
|
|
$
|
(530.3
|
)
|
|
$
|
5.0
|
|
|
$
|
(198.1
|
)
|
|
$
|
1.3
|
|
|
$
|
(722.1
|
)
|
Comprehensive (loss) income before reclassifications
|
|
236.5
|
|
|
(4.5
|
)
|
|
(5.0
|
)
|
|
1.4
|
|
|
228.4
|
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
—
|
|
|
1.0
|
|
|
(0.5
|
)
|
|
—
|
|
|
0.5
|
|
Reclassification from accumulated other comprehensive (loss) income
|
|
—
|
|
|
(3.8
|
)
|
|
8.5
|
|
|
—
|
|
|
4.7
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
1.0
|
|
|
(2.5
|
)
|
|
—
|
|
|
(1.5
|
)
|
Ending Balance December 31, 2017
|
|
$
|
(293.8
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(197.6
|
)
|
|
$
|
2.7
|
|
|
$
|
(490.0
|
)
|
Adoption of Accounting Standard
|
|
—
|
|
|
—
|
|
|
(14.0
|
)
|
|
—
|
|
|
(14.0
|
)
|
Comprehensive (loss) income before reclassifications
|
|
(152.8
|
)
|
|
(1.7
|
)
|
|
(41.9
|
)
|
|
(1.1
|
)
|
|
(197.5
|
)
|
Income taxes associated with comprehensive (loss) income before reclassifications
|
|
5.2
|
|
|
0.2
|
|
|
13.5
|
|
|
—
|
|
|
18.9
|
|
Reclassification from accumulated other comprehensive (loss) income
|
|
—
|
|
|
3.9
|
|
|
7.5
|
|
|
—
|
|
|
11.4
|
|
Income taxes reclassified into net earnings
|
|
—
|
|
|
(0.8
|
)
|
|
(2.1
|
)
|
|
—
|
|
|
(2.9
|
)
|
Ending Balance December 31, 2018
|
|
$
|
(441.4
|
)
|
|
$
|
0.3
|
|
|
$
|
(234.6
|
)
|
|
$
|
1.6
|
|
|
$
|
(674.1
|
)
|
In the normal course of business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company will ultimately be successful in any of these commercial and legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that an adverse outcome in any of these commercial and legal claims, actions and complaints will have a material adverse effect on the Company's results of operations, financial position or cash flows, although it could be material to the results of operations in a particular quarter.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state laws. The PRPs may currently be liable for the cost of clean-up and other remedial activities at
28
such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
The Company has an accrual for environmental liabilities of
$9.0 million
and
$8.3 million
as of December 31, 2018 and December 31, 2017, respectively. This accrual is 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).
Asbestos-related Liability
Like many other industrial companies that have historically operated in the United States, the Company, or parties that the Company is obligated to indemnify, continues to be named as one of many defendants in asbestos-related personal injury actions. The Company vigorously defends against these claims, and has been successful in obtaining the dismissal of the majority of the claims asserted against it without any payment. Due to the nature of the fibers used in certain types of automotive products, the encapsulation of the asbestos, and the manner of the products’ use, the Company believes that these products were and are highly unlikely to cause harm. Furthermore, the useful life of nearly all of these products expired many years ago. The Company likewise expects that no payment will be made by the Company or its insurance carriers in the vast majority of current and future asbestos-related claims.
The Company’s asbestos-related claims activity for the year ended December 31, 2018 and 2017 is as follows:
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Beginning claims January 1
|
9,225
|
|
|
9,385
|
|
New claims received
|
1,932
|
|
|
2,116
|
|
Dismissed claims
|
(2,189
|
)
|
|
(1,866
|
)
|
Settled claims
|
(370
|
)
|
|
(410
|
)
|
Ending claims December 31
|
8,598
|
|
|
9,225
|
|
Through December 31, 2018 and December 31, 2017, the Company incurred
$574.4 million
and
$528.7 million
, respectively, in asbestos-related claim resolution costs (including settlement payments and judgments) and associated defense costs. During 2018 and 2017, the Company paid
$46.0 million
and
$51.7 million
, respectively, in asbestos-related claim resolution costs and associated defense costs. These gross payments are before tax benefits and any insurance receipts. Asbestos-related claim resolution costs and associated defense costs are reflected in the Company's operating cash flows and will continue to be in the future.
The Company reviews, on an ongoing basis, its own experience in handling asbestos-related claims and trends affecting asbestos-related claims in the U.S. tort system generally, for the purposes of assessing the value of pending asbestos-related claims and the number and value of those that may be asserted in the future, as well as potential recoveries from the Company’s insurance carriers with respect to such claims and defense costs.
As part of its review and assessment of asbestos-related claims, the Company utilizes a third party actuary to further assist in the analysis of potential future asbestos-related claim resolution costs and associated defense costs. The actuary’s work utilizes data and analysis resulting from the Company’s claim review process, including input from national coordinating counsel and local counsel, and includes the development of an estimate of the potential value of asbestos-related claims asserted but not yet resolved
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
as well as the number and potential value of asbestos-related claims not yet asserted. In developing the estimate of liability for potential future claims, the actuary projects a potential number of future claims based on the Company’s historical claim filings and patterns and compares that to anticipated levels of unique plaintiff asbestos-related claims asserted in the U.S. tort system against all defendants. The actuary also utilizes assumptions based on the Company’s historical proportion of claims resolved without payment, historical claim resolution costs for those claims that result in a payment, and historical defense costs. The liabilities are then estimated by multiplying the pending and projected future claim filings by projected payments rates and average claim resolution amounts and then adding an estimate for defense costs.
The Company determined based on the factors described above, including the analysis and input of the actuary, that its best estimate of the aggregate liability both for asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet asserted, including estimated defense costs, was
$805.3 million
and
$828.2 million
as of December 31, 2018 and December 31, 2017, respectively. This liability reflects the actuarial central estimate, which is intended to represent an expected value of the most probable outcome. As of December 31, 2018 and 2017, the Company estimates that its aggregate liability for such claims, including defense costs, is as follows:
|
|
|
|
|
|
|
|
|
(millions of dollars)
|
2018
|
|
2017
|
Beginning asbestos liability as of January 1
|
$
|
828.2
|
|
|
$
|
879.3
|
|
Actuarial revaluation
|
22.8
|
|
|
—
|
|
Claim resolution costs and defense related costs
|
(45.7
|
)
|
|
(51.1
|
)
|
Ending asbestos liability as of December 31
|
$
|
805.3
|
|
|
$
|
828.2
|
|
The Company's estimate is not discounted to present value and includes an estimate of liability for potential future claims not yet asserted through December 31, 2064 with a runoff through 2074. The Company currently believes that December 31, 2074 is a reasonable assumption as to the last date on which it is likely to have resolved all asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood of incidence of asbestos-related disease in the U.S. population generally.
During the year ended December 31, 2018, the Company recorded an increase to its asbestos-related liabilities of $22.8 million as a result of actuarial valuation changes. This increase was the result of higher future defense costs resulting from recent trends in the ratio of defense costs to claim resolution costs. During the year ended December 31, 2017, the Company with the assistance of counsel and its third party actuary reviewed the Company's claims experience against external data sources and concluded no actuarial valuation adjustment to the liability in 2017 was necessary. During the year ended December 31, 2016, the Company recorded a decrease to its asbestos-related liabilities of
$45.5 million
as a result of actuarial valuation changes. This decrease was the result of lower future claim resolution costs resulting from changes in the Company's defense strategy in recent years and docket control measures which were implemented in a significant jurisdiction in 2016.
The Company’s estimate of the claim resolution costs and associated defense costs for asbestos-related claims asserted but not yet resolved and potential claims not yet asserted is its reasonable best estimate of such costs. Such estimate is subject to numerous uncertainties. These include future legislative or judicial changes affecting the U.S. tort system, bankruptcy proceedings involving one or more co-defendants, the impact and timing of payments from bankruptcy trusts that currently exist and those that may exist in the future, disease emergence and associated claim filings, the impact of future settlements or significant judgments, changes in the medical condition of claimants, changes in the treatment of asbestos-related disease, and any changes in settlement or defense strategies. The balances recorded for asbestos-related claims are based on the best available information and assumptions that the Company believes are reasonable, including as to the number of future claims that may be asserted, the percentage of claims that may result in a payment, the average cost to resolve such claims, and potential defense costs. The Company has concluded that it is reasonably possible that it may incur additional losses through 2074 for asbestos-related claims, in addition to amounts recorded, of up to approximately
$100.0 million
as of December 31,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2018 and 2017. The various assumptions utilized in arriving at the Company’s estimate may also change over time, and the Company’s actual liability for asbestos-related claims asserted but not yet resolved and those not yet asserted may be higher or lower than the Company’s estimate as a result of such changes.
The Company has certain insurance coverage applicable to asbestos-related claims including primary insurance and excess insurance coverage. Prior to June 2004, the claim resolution costs and defense costs associated with all asbestos-related claims were paid by the Company's primary layer insurance carriers under a series of interim funding arrangements. In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion of their policy limits. A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies against the Company and certain of its historical general liability insurance carriers. The Cook County court has issued a number of interim rulings and discovery is continuing in this proceeding. The Company is vigorously pursuing the litigation against all insurance carriers that continue to be parties to it, which currently includes excess insurance carriers, as well as pursuing settlement discussions with its insurance carriers where appropriate. The Company has entered into settlement agreements with certain of its insurance carriers, resolving such insurance carriers’ coverage disputes through the insurance carriers’ agreement to pay specified amounts to the Company, either immediately or over a specified period. Through December 31, 2018 and December 31, 2017, the Company received
$271.1 million
and
$270.0 million
, respectively, in cash and notes from insurance carriers on account of asbestos-related claim resolution costs and associated defense costs.
As of December 31, 2018 and December 31, 2017, the Company estimates that it has
$386.4 million
in aggregate insurance coverage available with respect to asbestos-related claims, and their associated defense costs. The Company has recorded this insurance coverage as a long-term receivable for asbestos-related claim resolution costs and associated defense costs that have been incurred, less cash and notes received, and remaining limits as a deferred insurance asset with respect to liabilities recorded for potential future costs for asbestos-related claims. The Company has determined the amount of that estimate by taking into account the remaining limits of the insurance coverage, the number and amount of potential claims from co-insured parties, potential remaining recoveries from insolvent insurance carriers, the impact of previous insurance settlements, and coverage available from solvent insurance carriers not party to the coverage litigation. The Company’s estimated remaining insurance coverage relating to asbestos-related claims and their associated defense costs is the subject of disputes with its insurance carriers, substantially all of which are being adjudicated in the Cook County insurance litigation. The Company believes that its insurance receivable is probable of collection notwithstanding those disputes based on, among other things, the arguments made by the insurance carriers in the Cook County litigation and evaluation of those arguments by the Company and its counsel, the case law applicable to the issues in dispute, the rulings to date by the Cook County court, the absence of any credible evidence alleged by the insurance carriers that they are not liable to indemnify the Company, and the fact that the Company has recovered a substantial portion of its insurance coverage,
$271.1 million
through December 31, 2018, from its insurance carriers under similar policies. However, the resolution of the insurance coverage disputes, and the number and amount of claims on our insurance from co-insured parties, may increase or decrease the amount of such insurance coverage available to the Company as compared to the Company’s estimate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amounts recorded in the Condensed Consolidated Balance Sheets respecting asbestos-related claims are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
Assets:
|
|
|
|
|
|
Other long-term asbestos-related insurance receivables
|
$
|
303.3
|
|
|
$
|
258.7
|
|
Deferred asbestos-related insurance asset
|
83.1
|
|
|
127.7
|
|
Total insurance assets
|
$
|
386.4
|
|
|
$
|
386.4
|
|
Liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
50.0
|
|
|
$
|
52.5
|
|
Other non-current liabilities
|
755.3
|
|
|
775.7
|
|
Total accrued liabilities
|
$
|
805.3
|
|
|
$
|
828.2
|
|
On July 31, 2018, the Division of Enforcement of the SEC informed the Company that it is conducting an investigation related to the Company's accounting for asbestos-related claims not yet asserted. The Company is fully cooperating with the SEC in connection with its investigation.
NOTE 16 RESTRUCTURING
In 2017, the Company initiated actions within its emissions business in the Engine segment designed to improve future profitability and competitiveness and started exploring strategic options for the non-core emission product lines. As a result, the Company recorded restructuring expense of
$48.2 million
within its emissions business in the year ended December 31, 2017, primarily related to professional fees and negotiated commercial costs associated with business divestiture and manufacturing footprint rationalization activities. As a continuation of these actions, the Company recorded restructuring expense of
$53.5 million
in the year ended December 31, 2018, primarily related to employee termination benefits and professional fees. The largest portion of this was a voluntary termination program in the European emissions business where approximately
140
employees accepted the termination packages. As a result, the Company recorded approximately
$28.4 million
of employee severance expense during the year ended December 31, 2018. In addition, the Company recorded
$6.0 million
employee termination benefits in other locations in the Engine segment in the year ended December 31, 2018.
Additionally, the Company recorded restructuring expense of
$10.3 million
in the year ended December 31, 2018 in the Drivetrain segment primarily related to manufacturing footprint rationalization activities.
The Company will continue to explore improving the future profitability and competitiveness of its Engine and Drivetrain business. These actions may result in the recognition of additional restructuring charges that could be material.
On September 27, 2017, the Company acquired
100%
of the equity interests of Sevcon. In connection with this transaction, the Company recorded restructuring expense of
$6.8 million
during the year ended December 31, 2017, primarily related to contractually required severance associated with Sevcon executive officers and other employee termination benefits.
In the fourth quarter of 2013, the Company initiated actions primarily in the Drivetrain segment designed to improve future profitability and competitiveness. As a continuation of these actions, the Company finalized severance agreements with
three
labor unions at separate facilities in Western Europe for approximately
450
employees. The Company recorded restructuring expense related to these facilities of
$8.2 million
in the year ended December 31, 2016. Included in this restructuring expense are employee termination benefits of
$3.0 million
and other expense of
$5.2 million
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the second quarter of 2014, the Company initiated actions to improve the future profitability and competitiveness of Gustav Wahler GmbH u. Co. KG and its general partner ("Wahler"). The Company recorded restructuring expense related to Wahler of
$9.6 million
in the year ended December 31, 2016. This restructuring expense was primarily related to employee termination benefits.
In the fourth quarter of 2015, the Company acquired
100%
of the equity interests in Remy and initiated actions to improve future profitability and competitiveness. The Company recorded restructuring expense of
$6.1 million
in the year ended December 31, 2016. Included in this restructuring expense was
$3.1 million
in the year ended December 31, 2016 related to winding down certain operations in North America. Additionally, the Company recorded employee termination benefits of
$2.0 million
in the year ended December 31, 2016 primarily related to contractually required severance associated with Remy executive officers and other employee termination benefits in Mexico.
Estimates of restructuring expense are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established accruals.
The following table displays a rollforward of the severance accruals recorded within the Company's Consolidated Balance Sheet and the related cash flow activity for the years ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Accruals
|
(millions of dollars)
|
|
Drivetrain
|
|
Engine
|
|
Total
|
Balance at January 1, 2017
|
|
$
|
3.7
|
|
|
$
|
2.7
|
|
|
$
|
6.4
|
|
Provision
|
|
4.7
|
|
|
1.4
|
|
|
6.1
|
|
Cash payments
|
|
(4.6
|
)
|
|
(2.9
|
)
|
|
(7.5
|
)
|
Translation adjustment
|
|
0.3
|
|
|
0.1
|
|
|
0.4
|
|
Balance at December 31, 2017
|
|
4.1
|
|
|
1.3
|
|
|
5.4
|
|
Provision
|
|
7.1
|
|
|
34.4
|
|
|
41.5
|
|
Cash payments
|
|
(7.3
|
)
|
|
(14.5
|
)
|
|
(21.8
|
)
|
Translation adjustment
|
|
—
|
|
|
(0.4
|
)
|
|
(0.4
|
)
|
Balance at December 31, 2018
|
|
$
|
3.9
|
|
|
$
|
20.8
|
|
|
$
|
24.7
|
|
|
|
NOTE 17
|
LEASES AND COMMITMENTS
|
Certain assets are leased under long-term operating leases including rent for facilities. 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
$42.0 million
,
$39.6 million
and
$38.2 million
in the years ended December 31, 2018, 2017 and 2016, respectively. The Company does not have any material capital leases.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Future minimum operating lease payments at December 31, 2018 were as follows:
|
|
|
|
|
(millions of dollars)
|
|
2019
|
$
|
24.3
|
|
2020
|
20.6
|
|
2021
|
15.5
|
|
2022
|
12.6
|
|
2023
|
10.4
|
|
After 2023
|
37.9
|
|
Total minimum lease payments
|
$
|
121.3
|
|
|
|
NOTE 18
|
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, and compensation cost for future service that the Company has not yet recognized. Options are only dilutive when the average market price of the underlying common stock exceeds the exercise price of the options. The dilutive effects of performance-based stock awards described in Note 13, "Stock-Based Compensation," to the Consolidated Financial Statements are included in the computation of diluted earnings per share at the level the related performance criteria are met through the respective balance sheet date.
The 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 share and per share amounts)
|
2018
|
|
2017
|
|
2016
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
930.7
|
|
|
$
|
439.9
|
|
|
$
|
595.0
|
|
Weighted average shares of common stock outstanding
|
208.197
|
|
|
210.429
|
|
|
214.374
|
|
Basic earnings per share of common stock
|
$
|
4.47
|
|
|
$
|
2.09
|
|
|
$
|
2.78
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
930.7
|
|
|
$
|
439.9
|
|
|
$
|
595.0
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding
|
208.197
|
|
|
210.429
|
|
|
214.374
|
|
Effect of stock-based compensation
|
1.299
|
|
|
1.119
|
|
|
0.954
|
|
Weighted average shares of common stock outstanding including dilutive shares
|
209.496
|
|
|
211.548
|
|
|
215.328
|
|
Diluted earnings per share of common stock
|
$
|
4.44
|
|
|
$
|
2.08
|
|
|
$
|
2.76
|
|
|
|
|
|
|
|
Antidilutive stock-based awards excluded from the calculation of diluted earnings per share
|
0.139
|
|
|
—
|
|
|
—
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 19
|
RECENT TRANSACTIONS
|
Sevcon, Inc.
On
September 27, 2017
, the Company acquired
100%
of the equity interests in Sevcon for cash of
$185.7 million
. This amount includes
$26.6 million
paid to settle outstanding debt and
$5.1 million
paid for Sevcon stock-based awards attributable to pre-combination services.
Sevcon is a global provider of electrification technologies, serving customers in the U.S., U.K., France, Germany, Italy, China and the Asia Pacific region. Sevcon products complement BorgWarner’s power electronics capabilities utilized to provide electrified propulsion solutions. Sevcon's operating results and assets are reported within the Company's Drivetrain reporting segment.
The following table summarizes the aggregated fair value of the assets acquired and liabilities assumed on September 27, 2017, the date of acquisition:
|
|
|
|
|
|
(millions of dollars)
|
|
|
Receivables, net
|
|
$
|
15.9
|
|
Inventories, net
|
|
16.7
|
|
Other current assets
|
|
2.8
|
|
Property, plant and equipment, net
|
|
7.3
|
|
Goodwill
|
|
127.6
|
|
Other intangible assets
|
|
70.7
|
|
Deferred tax liabilities
|
|
(9.2
|
)
|
Income taxes payable
|
|
(0.7
|
)
|
Other assets and liabilities
|
|
(2.9
|
)
|
Accounts payable and accrued expenses
|
|
(24.5
|
)
|
Total consideration, net of cash acquired
|
|
203.7
|
|
|
|
|
Less: Assumed retirement-related liabilities
|
|
18.0
|
|
Cash paid, net of cash acquired
|
|
$
|
185.7
|
|
In connection with the acquisition, the Company capitalized
$17.7 million
for customer relationships,
$48.8 million
for developed technology and
$4.2 million
for the Sevcon trade name. These intangible assets, excluding the indefinite-lived trade name, will be amortized over a period of
7
to
20
years. Various valuation techniques were used to determine the fair value of the intangible assets, with the primary techniques being forms of the income approach, specifically, the relief-from-royalty and excess earnings valuation methods, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these valuation approaches, the Company is required to make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future cash flows and marketplace data. Due to the nature of the transaction, goodwill is not deductible for tax purposes.
In the third quarter of 2018, the Company finalized all purchase accounting adjustments related to the acquisition and recorded fair value adjustments based on new information obtained during the measurement period primarily related to intangible assets. These adjustments have resulted in a decrease in goodwill of
$6.0 million
from the Company's initial estimate.
Due to its insignificant size relative to the Company, supplemental pro forma financial information of the combined entity for the current and prior reporting period is not provided.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Divgi-Warner Private Limited
In August 2016, the Company sold its
60%
ownership interest in Divgi-Warner Private Limited ("Divgi-Warner") to the joint venture partner. This former joint venture was formed in 1995 to develop and manufacture transfer cases and synchronizer rings in India. As a result of the sale, the Company received cash proceeds of approximately
$5.4 million
, net of capital gains tax and cash divested, which is classified as an investing activity within the Condensed Consolidated Statement of Cash Flows. Furthermore, the Company wrote off noncontrolling interest of
$4.8 million
as result of the sale and recognized a negligible gain in the year ended December 31, 2016.
Remy International, Inc.
On November 10, 2015, the Company acquired
100%
of the equity interests in Remy for
$29.50
per share in cash. The Company also settled approximately
$361.0 million
of outstanding debt. Remy was a global market leading producer of rotating electrical components that had key technologies and operations in
10
countries. The cash paid, net of cash acquired, was
$1,187.0 million
.
In October 2016, the Company entered into a definitive agreement to sell the light vehicle aftermarket business associated with the Company’s acquisition of Remy for approximately
$80 million
in cash. The Remy light vehicle aftermarket business sells remanufactured and new starters, alternators and multi-line products to aftermarket customers, mainly retailers in North America, and warehouse distributors in North America, South America and Europe. The sale of this business allowed the Company to focus on the rapidly developing original equipment manufacturer powertrain electrification trend. During the third quarter of 2016, the Company determined that assets and liabilities subject to the Remy light vehicle aftermarket business sale met the held for sale criteria and recorded an asset impairment expense of
$106.5 million
to adjust the net book value of this business to its fair value. During the fourth quarter of 2016, upon the closing of the transaction, the Company recorded an additional loss of
$20.6 million
related to the finalization of the sale proceeds, changes in working capital from the amounts originally estimated and costs associated with the winding down of an aftermarket related product line, resulting in a total loss on divestiture of
$127.1 million
in the year ended December 31, 2016. As a result of this transaction, total assets of
$284.1 million
including
$94.7 million
of inventory and
$72.6 million
of accounts receivable and total liabilities of
$93.2 million
were removed from the Company’s consolidated balance sheet.
|
|
NOTE 20
|
ASSETS AND LIABILITIES HELD FOR SALE
|
In 2017, the Company started exploring strategic options for non-core emission product lines in the Engine segment and launched an active program to locate a buyer and initiated all other actions required to complete the plan to sell and exit the non-core pipe and thermostat product lines. The Company determined that the assets and liabilities of the non-core emission product lines met the held for sale criteria as of December 31, 2017. The fair value of the assets and liabilities, less costs to sell, was determined to be less than the carrying value, therefore, the Company recorded an asset impairment expense of
$71.0 million
in Other expense, net to adjust the net book value of this business to its fair value less cost to sell in the year ended December 31, 2017. During 2018, the Company continued its marketing efforts with interested parties and engaged in active discussions with these parties. In December 2018, after finalizing negotiations regarding various aspects of the sale, the Company entered into a definitive agreement to sell its thermostat product lines for approximately
$28 million
subject to customary adjustments. Completion of the sale is expected in the first quarter of 2019, subject to satisfaction of customary closing conditions. The fair value of the assets and liabilities based on anticipated proceeds upon sale, less costs to sell of
$3.5 million
, was determined to be less than the carrying value, therefore, the Company recorded an additional asset impairment expense of
$25.6 million
in the year ended December 31,2018 in Other expense, net to adjust the net book value of this business to its fair value less cost to sell. As of December 31, 2018 and December 31, 2017, assets of
$47.0 million
and
$67.3 million
, including allocated goodwill of
$7.0 million
and
$7.3 million
, and liabilities of
$23.1 million
and
$29.5 million
, respectively, were reclassified as held for sale on
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Consolidated Balance Sheets. The business did not meet the criteria to be classified as a discontinued operation.
The assets and liabilities classified as held for sale are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
(millions of dollars)
|
2018
|
|
2017
|
Receivables, net
|
$
|
14.8
|
|
|
$
|
21.0
|
|
Inventories, net
|
41.6
|
|
|
30.4
|
|
Prepayments and other current assets
|
11.9
|
|
|
10.3
|
|
Property, plant and equipment, net
|
44.9
|
|
|
47.7
|
|
Goodwill
|
7.0
|
|
|
7.3
|
|
Other intangible assets, net
|
20.2
|
|
|
21.1
|
|
Other assets
|
0.1
|
|
|
0.5
|
|
Impairment of carrying value
|
(93.5
|
)
|
|
(71.0
|
)
|
Total assets held for sale
|
$
|
47.0
|
|
|
$
|
67.3
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
18.3
|
|
|
$
|
24.6
|
|
Other liabilities
|
4.8
|
|
|
4.9
|
|
Total liabilities held for sale
|
$
|
23.1
|
|
|
$
|
29.5
|
|
|
|
NOTE 21
|
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.
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|
2018 Segment information
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|
|
Net sales
|
|
Year-end assets
|
|
Depreciation/ amortization
|
|
Long-lived asset expenditures (a)
|
(millions of dollars)
|
Customers
|
|
Inter-segment
|
|
Net
|
|
|
|
Engine
|
$
|
6,389.9
|
|
|
$
|
57.5
|
|
|
$
|
6,447.4
|
|
|
$
|
4,730.7
|
|
|
$
|
225.7
|
|
|
$
|
278.1
|
|
Drivetrain
|
4,139.7
|
|
|
(0.3
|
)
|
|
4,139.4
|
|
|
3,919.9
|
|
|
175.6
|
|
|
254.4
|
|
Inter-segment eliminations
|
—
|
|
|
(57.2
|
)
|
|
(57.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
10,529.6
|
|
|
—
|
|
|
10,529.6
|
|
|
8,650.6
|
|
|
401.3
|
|
|
532.5
|
|
Corporate (b)
|
—
|
|
|
—
|
|
|
—
|
|
|
1,444.7
|
|
|
30.0
|
|
|
14.1
|
|
Consolidated
|
$
|
10,529.6
|
|
|
$
|
—
|
|
|
$
|
10,529.6
|
|
|
$
|
10,095.3
|
|
|
$
|
431.3
|
|
|
$
|
546.6
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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2017 Segment information
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Net sales
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Year-end assets
|
|
Depreciation/ amortization
|
|
Long-lived asset expenditures (a)
|
(millions of dollars)
|
Customers
|
|
Inter-segment
|
|
Net
|
|
|
|
Engine
|
$
|
6,009.0
|
|
|
$
|
52.5
|
|
|
$
|
6,061.5
|
|
|
$
|
4,732.9
|
|
|
$
|
218.8
|
|
|
$
|
305.5
|
|
Drivetrain
|
3,790.3
|
|
|
—
|
|
|
3,790.3
|
|
|
3,903.8
|
|
|
160.9
|
|
|
241.6
|
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Inter-segment eliminations
|
—
|
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|
(52.5
|
)
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|
(52.5
|
)
|
|
—
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|
|
—
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|
|
—
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Total
|
9,799.3
|
|
|
—
|
|
|
9,799.3
|
|
|
8,636.7
|
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|
379.7
|
|
|
547.1
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Corporate (b)
|
—
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|
|
—
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|
|
—
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|
|
1,150.9
|
|
|
28.1
|
|
|
12.9
|
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Consolidated
|
$
|
9,799.3
|
|
|
$
|
—
|
|
|
$
|
9,799.3
|
|
|
$
|
9,787.6
|
|
|
$
|
407.8
|
|
|
$
|
560.0
|
|
|
|
|
|
|
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2016 Segment information
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Net sales
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Year-end assets
|
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Depreciation/ amortization
|
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Long-lived asset
expenditures (a)
|
(millions of dollars)
|
Customers
|
|
Inter-segment
|
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Net
|
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|
|
Engine
|
$
|
5,547.3
|
|
|
$
|
42.8
|
|
|
$
|
5,590.1
|
|
|
$
|
4,134.6
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$
|
211.9
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$
|
298.7
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|
Drivetrain
|
3,523.7
|
|
|
—
|
|
|
3,523.7
|
|
|
3,212.4
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|
|
154.5
|
|
|
182.8
|
|
Inter-segment eliminations
|
—
|
|
|
(42.8
|
)
|
|
(42.8
|
)
|
|
—
|
|
|
—
|
|
|
—
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Total
|
9,071.0
|
|
|
—
|
|
|
9,071.0
|
|
|
7,347.0
|
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|
366.4
|
|
|
481.5
|
|
Corporate (b)
|
—
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|
|
—
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|
|
—
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|
|
1,487.7
|
|
|
25.0
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|
|
19.1
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Consolidated
|
$
|
9,071.0
|
|
|
$
|
—
|
|
|
$
|
9,071.0
|
|
|
$
|
8,834.7
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$
|
391.4
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$
|
500.6
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_______________
(a) Long-lived asset expenditures include capital expenditures and tooling outlays.
(b) Corporate assets include investments and other long-term receivables and deferred income taxes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Adjusted earnings before interest, income taxes and noncontrolling interest ("Adjusted EBIT")
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Year Ended December 31,
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(millions of dollars)
|
2018
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|
2017
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2016
|
Engine
|
$
|
1,039.9
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$
|
992.1
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|
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$
|
943.9
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Drivetrain
|
475.4
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|
448.3
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|
363.0
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Adjusted EBIT
|
1,515.3
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|
1,440.4
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|
1,306.9
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Restructuring expense
|
67.1
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|
58.5
|
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|
26.9
|
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Asset impairment and loss on divestiture
|
25.6
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|
71.0
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|
127.1
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Asbestos-related adjustments
|
22.8
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|
—
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(48.6
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)
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Gain on sale of building
|
(19.4
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)
|
|
—
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—
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Other postretirement income
|
(9.4
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)
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(5.1
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)
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(4.9
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)
|
Officer stock awards modification
|
8.3
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|
—
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|
|
—
|
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Merger, acquisition and divestiture expense
|
5.8
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|
|
10.0
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|
|
23.7
|
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Lease termination settlement
|
—
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|
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5.3
|
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|
—
|
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Intangible asset impairment
|
—
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|
—
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|
|
12.6
|
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Contract expiration gain
|
—
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|
|
—
|
|
|
(6.2
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)
|
Other (income) expense, net
|
(3.3
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)
|
|
2.1
|
|
|
—
|
|
Corporate, including equity in affiliates' earnings and stock-based compensation
|
169.6
|
|
|
170.3
|
|
|
155.3
|
|
Interest income
|
(6.4
|
)
|
|
(5.8
|
)
|
|
(6.3
|
)
|
Interest expense and finance charges
|
58.7
|
|
|
70.5
|
|
|
84.6
|
|
Earnings before income taxes and noncontrolling interest
|
1,195.9
|
|
|
1,063.6
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|
|
942.7
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Provision for income taxes
|
211.3
|
|
|
580.3
|
|
|
306.0
|
|
Net earnings
|
984.6
|
|
|
483.3
|
|
|
636.7
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
53.9
|
|
|
43.4
|
|
|
41.7
|
|
Net earnings attributable to BorgWarner Inc.
|
$
|
930.7
|
|
|
$
|
439.9
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|
|
$
|
595.0
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographic Information
During the year ended December 31, 2018, approximately
77%
of the Company's consolidated net sales were outside the United States ("U.S."), attributing sales to the location of production rather than the location of the customer. Outside the U.S., only Germany, China, South Korea, Mexico and Hungary exceeded
5%
of consolidated net sales during the year ended December 31, 2018. Also, the Company's
50%
equity investment in NSK-Warner (refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements for more information) of
$184.1 million
,
$185.1 million
and
$172.9 million
at December 31, 2018, 2017 and 2016, respectively, is excluded from the definition of long-lived assets, as are goodwill and certain other non-current assets.
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|
|
Net sales
|
|
Long-lived assets
|
(millions of dollars)
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
United States
|
$
|
2,393.5
|
|
|
$
|
2,280.0
|
|
|
$
|
2,236.0
|
|
|
$
|
728.9
|
|
|
$
|
719.3
|
|
|
$
|
799.3
|
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
1,665.1
|
|
|
1,652.6
|
|
|
1,735.1
|
|
|
371.1
|
|
|
413.4
|
|
|
370.3
|
|
Hungary
|
687.3
|
|
|
655.7
|
|
|
541.1
|
|
|
153.0
|
|
|
147.5
|
|
|
122.2
|
|
Other Europe
|
1,669.5
|
|
|
1,427.2
|
|
|
1,193.9
|
|
|
452.5
|
|
|
426.1
|
|
|
337.7
|
|
Total Europe
|
4,021.9
|
|
|
3,735.5
|
|
|
3,470.1
|
|
|
976.6
|
|
|
987.0
|
|
|
830.2
|
|
China
|
1,801.1
|
|
|
1,560.1
|
|
|
1,218.0
|
|
|
589.3
|
|
|
554.8
|
|
|
384.6
|
|
South Korea
|
858.8
|
|
|
877.6
|
|
|
948.2
|
|
|
235.1
|
|
|
244.2
|
|
|
208.0
|
|
Mexico
|
978.4
|
|
|
920.2
|
|
|
805.6
|
|
|
223.1
|
|
|
201.2
|
|
|
136.2
|
|
Other foreign
|
475.9
|
|
|
425.9
|
|
|
393.1
|
|
|
150.8
|
|
|
157.3
|
|
|
143.5
|
|
Total
|
$
|
10,529.6
|
|
|
$
|
9,799.3
|
|
|
$
|
9,071.0
|
|
|
$
|
2,903.8
|
|
|
$
|
2,863.8
|
|
|
$
|
2,501.8
|
|
Sales to Major Customers
Consolidated net sales to Ford (including its subsidiaries) were approximately
14%
,
15%
, and
15%
for the years ended December 31, 2018, 2017 and 2016, respectively; and to Volkswagen (including its subsidiaries) were approximately
12%
,
13%
and
13%
for the years ended December 31, 2018, 2017 and 2016, respectively. Both of the Company's reporting segments had significant sales to Volkswagen and Ford in 2018, 2017 and 2016. 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
27%
,
28%
and
28%
of total net sales for the years ended December 31, 2018, 2017 and 2016, respectively. The Company currently supplies light vehicle turbochargers to many OEMs including BMW, Daimler, Fiat Chrysler Automobiles, Ford, General Motors, Great Wall, Hyundai, Renault, Volkswagen and Volvo. No other single product line accounted for more than
10%
of consolidated net sales in any of the years presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 22 INTERIM FINANCIAL INFORMATION (Unaudited)
The following table presents summary quarterly financial data:
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions of dollars, except per share amounts)
|
2018
|
|
2017
|
Quarter ended
|
Mar-31
|
|
Jun-30
|
|
Sep-30
|
|
Dec-31
|
|
Year
|
|
Mar-31
|
|
Jun-30
|
|
Sep-30
|
|
Dec-31
|
|
Year
|
Net sales
|
$
|
2,784.3
|
|
|
$
|
2,694.0
|
|
|
$
|
2,478.5
|
|
|
$
|
2,572.8
|
|
|
$
|
10,529.6
|
|
|
$
|
2,407.0
|
|
|
$
|
2,389.7
|
|
|
$
|
2,416.2
|
|
|
$
|
2,586.4
|
|
|
$
|
9,799.3
|
|
Cost of sales
|
2,192.5
|
|
|
2,114.8
|
|
|
1,962.9
|
|
|
2,030.0
|
|
|
8,300.2
|
|
|
1,890.7
|
|
|
1,876.8
|
|
|
1,894.6
|
|
|
2,021.6
|
|
|
7,683.7
|
|
Gross profit
|
591.8
|
|
|
579.2
|
|
|
515.6
|
|
|
542.8
|
|
|
2,229.4
|
|
|
516.3
|
|
|
512.9
|
|
|
521.6
|
|
|
564.8
|
|
|
2,115.6
|
|
Selling, general and administrative expenses
|
253.4
|
|
|
236.0
|
|
|
230.5
|
|
|
225.8
|
|
|
945.7
|
|
|
219.0
|
|
|
215.1
|
|
|
225.0
|
|
|
240.0
|
|
|
899.1
|
|
Other expense (income), net
|
4.9
|
|
|
30.4
|
|
|
7.1
|
|
|
51.4
|
|
|
93.8
|
|
|
5.8
|
|
|
(0.3
|
)
|
|
22.0
|
|
|
117.0
|
|
|
144.5
|
|
Operating income
|
333.5
|
|
|
312.8
|
|
|
278.0
|
|
|
265.6
|
|
|
1,189.9
|
|
|
291.5
|
|
|
298.1
|
|
|
274.6
|
|
|
207.8
|
|
|
1,072.0
|
|
Equity in affiliates’ earnings, net of tax
|
(10.2
|
)
|
|
(13.0
|
)
|
|
(15.2
|
)
|
|
(10.5
|
)
|
|
(48.9
|
)
|
|
(9.7
|
)
|
|
(14.4
|
)
|
|
(14.4
|
)
|
|
(12.7
|
)
|
|
(51.2
|
)
|
Interest income
|
(1.5
|
)
|
|
(1.4
|
)
|
|
(1.5
|
)
|
|
(2.0
|
)
|
|
(6.4
|
)
|
|
(1.5
|
)
|
|
(1.4
|
)
|
|
(1.3
|
)
|
|
(1.6
|
)
|
|
(5.8
|
)
|
Interest expense and finance charges
|
16.1
|
|
|
14.9
|
|
|
14.4
|
|
|
13.3
|
|
|
58.7
|
|
|
18.0
|
|
|
18.0
|
|
|
17.6
|
|
|
16.9
|
|
|
70.5
|
|
Other postretirement income
|
(2.6
|
)
|
|
(2.4
|
)
|
|
(2.4
|
)
|
|
(2.0
|
)
|
|
(9.4
|
)
|
|
(1.2
|
)
|
|
(1.4
|
)
|
|
(1.3
|
)
|
|
(1.2
|
)
|
|
(5.1
|
)
|
Earnings before income taxes and noncontrolling interest
|
331.7
|
|
|
314.7
|
|
|
282.7
|
|
|
266.8
|
|
|
1,195.9
|
|
|
285.9
|
|
|
297.3
|
|
|
274.0
|
|
|
206.4
|
|
|
1,063.6
|
|
Provision for income taxes
|
94.9
|
|
|
30.4
|
|
|
66.8
|
|
|
19.2
|
|
|
211.3
|
|
|
86.3
|
|
|
76.2
|
|
|
79.4
|
|
|
338.4
|
|
|
580.3
|
|
Net earnings (loss)
|
236.8
|
|
|
284.3
|
|
|
215.9
|
|
|
247.6
|
|
|
984.6
|
|
|
199.6
|
|
|
221.1
|
|
|
194.6
|
|
|
(132.0
|
)
|
|
483.3
|
|
Net earnings attributable to the noncontrolling interest, net of tax
|
11.7
|
|
|
12.5
|
|
|
12.1
|
|
|
17.6
|
|
|
53.9
|
|
|
10.4
|
|
|
9.1
|
|
|
9.7
|
|
|
14.2
|
|
|
43.4
|
|
Net earnings (loss) attributable to BorgWarner Inc. (a)
|
$
|
225.1
|
|
|
$
|
271.8
|
|
|
$
|
203.8
|
|
|
$
|
230.0
|
|
|
$
|
930.7
|
|
|
$
|
189.2
|
|
|
$
|
212.0
|
|
|
$
|
184.9
|
|
|
$
|
(146.2
|
)
|
|
$
|
439.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share — basic
|
$
|
1.07
|
|
|
$
|
1.30
|
|
|
$
|
0.98
|
|
|
$
|
1.11
|
|
|
$
|
4.47
|
|
|
$
|
0.89
|
|
|
$
|
1.01
|
|
|
$
|
0.88
|
|
|
$
|
(0.70
|
)
|
|
$
|
2.09
|
|
Earnings per share — diluted
|
$
|
1.07
|
|
|
$
|
1.30
|
|
|
$
|
0.98
|
|
|
$
|
1.10
|
|
|
$
|
4.44
|
|
|
$
|
0.89
|
|
|
$
|
1.00
|
|
|
$
|
0.88
|
|
|
$
|
(0.70
|
)
|
|
$
|
2.08
|
|
_______________
(a) The Company's results were impacted by the following:
|
|
•
|
Quarter ended December 31, 2018:
The Company recorded an asset impairment expense of
$25.6 million
to adjust the net book value of the pipe and thermostat product lines to fair value. The Company recorded asbestos-related adjustments resulting in a net increase to Other Expense of
$22.8 million
. The Company recorded restructuring expense of
$22.7 million
primarily related to the Engine and Drivetrain segment actions designed to improve future profitability and competitiveness. The Company recorded a gain of
$19.4 million
related to the sale of a building at a manufacturing facility located in Europe. The Company also recorded merger and acquisition expense of
$1.0 million
primarily related to professional fees associated with divestiture activities for the non-core pipes and thermostat product line. The Company recorded reductions of income tax expense of
$5.5 million
related to restructuring expense,
$0.1 million
related to merger, acquisition and divestiture expense,
$5.5 million
related to asbestos-related adjustments,
$7.7 million
related to asset impairment expense,
$0.4 million
related to a decrease in our deferred tax liability due to the Company's ability to record a tax benefit for certain foreign tax credits available due to actions the Company took during the year,
$9.1 million
related to valuation allowance releases,
$2.8 million
related to tax reserve adjustments, and
$18.5 million
related to changes in accounting methods and tax filing positions for prior years primarily related to the Tax Act. Additionally, the Company recorded income tax expense of
$5.8 million
related to a gain on the sale of a building,
$7.4 million
related to adjustments to measurement period provisional estimates associated with the Tax Act and
$0.4 million
related to other expense.
|
|
|
•
|
Quarter ended September 30, 2018:
The Company recorded restructuring expense of
$5.7 million
primarily related to the actions within its Engine segment designed to improve future profitability and competitiveness. The Company also recorded merger and acquisition expense of
$1.6 million
primarily related to professional fees associated with divestiture activities for the non-core pipes and thermostat product line. The Company recorded reductions of income tax expense of
$1.3 million
related to restructuring expense,
$0.4 million
related to other expense,
$6.6 million
related to adjustments to measurement period provisional estimates associated with the Tax Act,
$0.5 million
related to a decrease in our deferred tax liability due to the Company's ability to record a tax benefit for certain foreign tax credits available due to actions the Company took during the year, and
$1.8 million
related to other one-time tax adjustments, primarily due to changes in tax filing positions. Additionally, the Company recorded income tax expense of
$0.1 million
related to merger, acquisition and divestiture expense.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
•
|
Quarter ended June 30, 2018:
The Company recorded restructuring expense of
$31.2 million
primarily related to the initiation of actions within its emissions business in the Engine segment designed to improve future profitability and competitiveness. The Company also recorded merger and acquisition expense of
$1.0 million
primarily related to professional fees associated with divestiture activities for the non-core pipes and thermostat product line. The Company recorded reductions of income tax expenses of
$7.6 million
associated with restructuring expense,
$13.4 million
related to adjustments to measurement period provisional estimates associated with the Tax Act,
$21.1 million
related to a decrease in our deferred tax liability due to the Company's ability to record a tax benefit for certain foreign tax credits available due to actions the Company took in the second quarter, and
$9.9 million
related to other one-time tax adjustments.
|
|
|
•
|
Quarter ended March 31, 2018:
The Company recorded restructuring expense of
$7.5 million
primarily related to Engine and Drivetrain segment actions designed to improve future profitability and competitiveness. The Company recorded a gain of approximately
$4.0 million
related to the settlement of a commercial contract for an entity acquired in the 2015 Remy acquisition. The Company also recorded merger and acquisition expense of
$2.2 million
primarily related to professional fees associated with divestiture activities for the non-core pipe product line. The Company recorded income tax expenses of
$0.9 million
and
$0.4 million
related to a commercial settlement gain and other one-time tax adjustments, and reductions of income tax expense of
$0.6 million
and
$0.3 million
which are associated with restructuring expense, and merger and acquisition expense.
|
|
|
•
|
Quarter ended December 31, 2017:
The Company recorded an asset impairment expense of
$71.0 million
to adjust the net book value of the pipe and thermostat product lines to fair value. Additionally, the Company recorded restructuring expense of
$45.2 million
related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The Company also recorded merger and acquisition expense of
$3.6 million
. The Company recorded reduction of income tax expenses of
$8.9 million
,
$0.7 million
and
$18.2 million
related to the restructuring expense, merger and acquisition expense and asset impairment expense. The Company also recorded a tax expense of
$7.9 million
related to other one-time tax adjustments. Additionally, the Company recorded a tax expense of
$273.5 million
for the change in the tax law related to tax effects of the Tax Act.
|
|
|
•
|
Quarter ended September 30, 2017:
The Company recorded restructuring expense of
$13.3 million
primarily related to the initiation of actions within its emissions business in the Engine segment designed to improve future profitability and competitiveness. The Company also recorded merger and acquisition expense of
$6.4 million
primarily related to the Sevcon transaction. The Company recorded reduction of income tax expenses of
$1.2 million
related to restructuring expense,
$0.3 million
merger and acquisition and
$5.1 million
related to other one-time tax adjustments.
|
|
|
•
|
Quarter ended June 30, 2017:
The Company recorded a reduction of income tax expense of
$3.2 million
related to one-time tax adjustments, primarily resulting from tax audit settlements.
|
|
|
•
|
Quarter ended March 31, 2017:
The Company recorded lease termination settlement of
$5.3 million
related to the termination of a long-term property lease in Europe. The Company recorded a tax expense of
$3.4 million
related to one-time tax adjustments.
|