NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair statement of results have been included. Certain prior period amounts have been reclassified to conform to the current period presentation. Operating results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The balance sheet as of December 31, 2021 was derived from the audited financial statements as of that date. For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and accompanying notes, as well as the amounts of revenues and expenses reported during the periods covered by those financial statements and accompanying notes. Actual results could differ from these estimates.
COVID-19 Pandemic and Other Supply Disruptions
The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy. Recent COVID-19 outbreaks in certain regions continue to cause intermittent COVID-19-related disruptions in the Company’s supply chain and local manufacturing operations. For a significant portion of the second quarter of 2022, China imposed lock-downs in many cities due to an increase in COVID-19 cases in the region. The Company also continues to face supplier disruptions due to a global semiconductor shortage in the automotive industry.
The Company continues to expect global industry production to modestly increase year over year in 2022. However, various global disruptions, including, but not limited to, input cost inflation, supply chain disruptions and further impacts from Russia’s invasion of Ukraine could impact the Company’s 2022 expectation.
NOTE 2 NEW ACCOUNTING PRONOUNCEMENTS
In November 2021, the FASB issued ASU No. 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.” It is expected to increase transparency in financial reporting by requiring business entities to disclose information about certain types of government assistance they receive. The amendments require the following annual disclosures about transactions with a government: (i) information about the nature of the transactions and the related accounting policy used to account for the transactions; (ii) the line items on the balance sheet and income statement that are affected by the transactions, and the amounts applicable to each financial statement line item; and (iii) significant terms and conditions of the transactions, including commitments and contingencies. This guidance was effective for annual reporting periods beginning after December 15, 2021. The Company adopted this guidance prospectively as of January 1, 2022, and there was no impact on these Condensed Consolidated Financial Statements; however, the Company will include the annual disclosures as required in its Annual Report on Form 10-K for the year ended December 31, 2022.
In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” It requires entities to apply ASC Topic 606, “Revenue from Contracts with Customers,” to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. This guidance is effective for interim and annual reporting periods beginning after December 15, 2022. The Company does not expect this guidance to have a material impact on its Consolidated Financial Statements.
NOTE 3 ACQUISITIONS
In accordance with ASC Topic 805, “Business Combinations,” acquisitions are recorded using the acquisition method of accounting. The Company recognizes and measures the acquisition date fair value of the identifiable assets acquired, liabilities assumed, and any non-controlling interest using a range of methodologies as indicated by generally accepted valuation practices. Various valuation techniques are used to determine the fair value of intangible assets, with the primary techniques being forms of the income approach, specifically the relief-from-royalty and multi-period excess earnings valuation methods. Under these valuation approaches, the Company is required to make estimates and assumptions from a market participant perspective and may include revenue growth rates, estimated earnings, royalty rates, obsolescence factors, contributory asset charges, customer attrition and discount rates.
Hubei Surpass Sun Electric Charging Business
On September 20, 2022, the Company announced that it had entered into an Equity Transfer Agreement under which BorgWarner will acquire the electric vehicle solution, smart grid and smart energy businesses of Hubei Surpass Sun Electric. The transaction has an enterprise value up to ¥410 million ($60 million), of which approximately ¥267 million ($39 million) will be delivered at or soon after closing and up to ¥143 million ($21 million) could be paid in the form of contingent payments over approximately two years following the closing. The acquisition complements the Company’s existing European and North American charging footprint by adding a presence in China. The transaction is subject to satisfaction of customary closing conditions and is expected to close in the first quarter of 2023.
Rhombus Energy Solutions
On July 29, 2022, the Company completed its acquisition of 100% of Rhombus Energy Solutions (“Rhombus”), a provider of charging solutions in the North American market, pursuant to the terms of an Agreement and Plan of Merger (the “Agreement”). The acquisition complements the Company’s existing
European charging footprint to accelerate organic growth and adds North American regional presence to its charging business.
The total consideration was $131 million, all of which was paid at the time of closing. Pursuant to the Agreement, the Company is obligated to remit up to $30 million of earn-out payments, payable in 2025, contingent upon achievement of certain sales dollars, sales volume, and gross margin targets. The Company’s current estimates indicate that the minimum thresholds for these earn-out targets will not be achieved, thus no amount for the earn-out payments has been included in the purchase consideration or in the Company’s Condensed Consolidated Balance Sheet. Additionally, pursuant to the Agreement, the Company is obligated to remit up to $25 million over the next three years in key employee retention related payments, which include certain performance targets. The amounts will be accounted for as post-combination expense.
The purchase price was allocated on a provisional basis as of July 29, 2022. Assets acquired and liabilities assumed were recorded at estimated fair values based on management’s estimates, available information, and supportable assumptions that management considered reasonable. Certain estimated values for the acquisition, including goodwill, tangible and intangible assets and deferred taxes, are not yet finalized, and the provisional purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition. The final valuation of assets acquired and liabilities assumed may be materially different from the estimated values shown below.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of July 29, 2022, the acquisition date:
| | | | | | | | | |
(in millions) | Initial Allocation | | | | |
ASSETS | | | | | |
Current assets | $ | 7 | | | | | |
| | | | | |
| | | | | |
| | | | | |
Goodwill | 104 | | | | | |
Other intangible assets, net | 27 | | | | | |
Other non-current assets | 4 | | | | | |
Total assets acquired | 142 | | | | | |
LIABILITIES | | | | | |
| | | | | |
Current liabilities | 3 | | | | | |
Other non-current liabilities | 8 | | | | | |
Total liabilities assumed | 11 | | | | | |
Net assets acquired | $ | 131 | | | | | |
Any excess of the purchase price over the estimated fair value of net assets was recognized as goodwill. Goodwill of $104 million was recorded within the Company’s Air Management segment. The goodwill consists of the Company’s expected future economic benefits that will be realized from expanding the Company’s electric vehicle portfolio as electric vehicle production continues to increase. The goodwill is not expected to be deductible for tax purposes.
In connection with the acquisition, the Company preliminarily recorded $27 million for intangible assets, primarily for developed technology. As described above, the provisional fair value of intangible assets was valued using the income approach. Management used a third-party valuation firm to assist in the determination of the provisional purchase accounting fair values; however, management ultimately oversees the third-party valuation firm to ensure that the transaction-specific assumptions are appropriate for the Company.
The impact of the Rhombus acquisition on net sales and net earnings was immaterial for the three and nine months ended September 30, 2022. Due to its insignificant size relative to the Company, supplemental pro forma financial information of the combined entity for the current and prior reporting periods is not provided.
Santroll Automotive Components
On March 31, 2022, the Company completed its acquisition of 100% of Santroll Automotive Components (“Santroll”), a carve-out of Santroll Electric Auto’s eMotor business, pursuant to the terms of an Equity Transfer Agreement (“ETA”). The acquisition is expected to strengthen the Company’s vertical integration, scale and portfolio breadth in light vehicle eMotors while allowing for increased speed to market.
The total final consideration was $207 million, which includes final working capital and net debt adjustments of $5 million. The consideration includes approximately ¥1.1 billion ($167 million) of base purchase price and ¥0.25 billion ($40 million) of originally estimated earn-out payments. The Company paid approximately ¥1.0 billion ($157 million) of base purchase price in the nine months ended September 30, 2022. The remaining $10 million of base purchase price is recorded in Other current liabilities in the Company’s Condensed Consolidated Balance Sheet as of September 30, 2022. Pursuant to the ETA, the obligation of the Company to remit up to ¥0.3 billion (approximately $47 million) of earn-out payments is contingent upon achievement of certain sales volume targets and certain estimated future volume targets associated with newly awarded business. As of September 30, 2022, the Company’s estimate of the earn-out payments was approximately $31 million, which is recorded in Other current liabilities in the Company’s Condensed Consolidated Balance Sheet.
The purchase price was allocated on a preliminary basis as of March 31, 2022. Assets acquired and liabilities assumed were recorded at estimated fair values based on management’s estimates, available information, and supportable assumptions that management considered reasonable. Certain estimated values for the acquisition, including goodwill and deferred taxes, are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value at the date of acquisition. The final valuation of assets acquired and liabilities assumed may be materially different from the estimated values shown below.
The following table summarizes the estimated fair values of assets acquired and liabilities assumed as of March 31, 2022, the acquisition date:
| | | | | | | | | | | | | | | | | |
(in millions) | Initial Allocation | | Measurement Period Adjustments | | Revised Allocation |
ASSETS | | | | | |
| | | | | |
Current assets | $ | 8 | | | $ | (3) | | | $ | 5 | |
| | | | | |
| | | | | |
Property, plant and equipment, net | 9 | | | 4 | | | 13 | |
| | | | | |
Goodwill | 132 | | | (5) | | | 127 | |
Other intangible assets, net | 87 | | | — | | | 87 | |
Other non-current assets | — | | | 1 | | | 1 | |
Total assets acquired | 236 | | | (3) | | | 233 | |
LIABILITIES | | | | | |
| | | | | |
Current liabilities | 2 | | | 2 | | | 4 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Other non-current liabilities | 22 | | | — | | | 22 | |
Total liabilities assumed | 24 | | | 2 | | | 26 | |
| | | | | |
Net assets acquired | $ | 212 | | | $ | (5) | | | $ | 207 | |
Any excess of the purchase price over the estimated fair value of net assets was recognized as goodwill. Goodwill of $127 million was recorded within the Company’s e-Propulsion & Drivetrain segment. The goodwill consists of the Company’s expected future economic benefits that will arise from future product sales and the added capabilities from vertical integration of eMotors. The goodwill is not expected to be deductible for tax purposes in China.
The following table summarizes the other intangible assets acquired:
| | | | | | | | | | | |
(in millions) | Estimated Life | | Estimated Fair Value |
Customer relationships | 12 years | | $ | 62 | |
Manufacturing processes (know-how) | 10 years | | 25 | |
Total other intangible assets | | | $ | 87 | |
Goodwill and identifiable intangible assets were valued using the income approach. Management used a third-party valuation firm to assist in the determination of the preliminary purchase accounting fair values; however, management ultimately oversees the third-party valuation firm to ensure that the transaction-specific assumptions are appropriate for the Company.
The impact of the Santroll acquisition on net sales and net earnings was immaterial for the three and nine months ended September 30, 2022. Due to its insignificant size relative to the Company, supplemental pro forma financial information of the combined entity for the current and prior reporting periods is not provided.
AKASOL AG
On June 4, 2021, the Company completed its voluntary public takeover offer for shares of AKASOL AG (“AKASOL”), resulting in ownership of 89% of AKASOL’s outstanding shares. The Company paid approximately €648 million ($788 million) to settle the offer from current cash balances, which included proceeds received from its public offering of 1.00% Senior Notes due 2031 completed on May 19, 2021. Following the settlement of the offer, AKASOL became a consolidated majority-owned subsidiary of the Company. Upon that settlement, the Company also consolidated approximately €64 million ($77 million) of gross debt of AKASOL. Subsequent to the completion of the voluntary public takeover offer, the Company purchased additional shares of AKASOL for €28 million ($33 million) increasing its ownership to 93% as of December 31, 2021.
On August 2, 2021, the Company initiated a merger squeeze-out process under German law for the purpose of acquiring 100% of AKASOL. On December 17, 2021, the shareholders of AKASOL voted to mandatorily transfer to ABBA BidCo. AG, a wholly owned indirect subsidiary of the Company, each issued and outstanding share of AKASOL held by shareholders who did not tender their shares in the Company’s previously completed exchange offer for AKASOL shares (the “Squeeze Out”). In exchange for the AKASOL shares transferred in the Squeeze Out, the Company paid appropriate cash compensation, in the amount of €119.16 per share, which was determined after an assessment by a third-party valuation firm, the adequacy of which was examined by an independent, court-appointed auditor. At December 31, 2021, the noncontrolling interest in AKASOL of approximately €51 million ($58 million) to be acquired through the Squeeze Out was reclassified to Other current liabilities in the Company’s Condensed Consolidated Balance Sheet as it was deemed mandatorily redeemable. No shareholder objections were filed during the statutory contestation period, and on February 10, 2022, the Company completed the registration of the Squeeze Out resulting in 100% ownership. The Company settled the Squeeze Out with AKASOL minority shareholders in the first quarter of 2022.
The acquisition further strengthens BorgWarner’s commercial vehicle and industrial electrification capabilities, which positions the Company to capitalize on what it believes to be a fast-growing battery module and pack market. The Company finalized its valuation of the assets and liabilities of the AKASOL acquisition during the second quarter of 2022.
The following table summarizes the final fair values of assets acquired and liabilities assumed as of the acquisition date and subsequent measurement period adjustments:
| | | | | | | | | | | | | | | | | |
(in millions) | Initial Allocation | | Measurement Period Adjustments | | Final Allocation |
ASSETS | | | | | |
Cash and cash equivalents (including restricted cash of $16 million) | $ | 29 | | | $ | — | | | $ | 29 | |
Receivables, net | 16 | | | — | | | 16 | |
Inventories, net | 42 | | | (2) | | | 40 | |
Prepayments and other current assets | 5 | | | — | | | 5 | |
Property, plant and equipment, net | 106 | | | (3) | | | 103 | |
| | | | | |
Goodwill | 707 | | | (3) | | | 704 | |
Other intangible assets, net | 130 | | | — | | | 130 | |
Other non-current assets | — | | | 7 | | | 7 | |
Total assets acquired | 1,035 | | | (1) | | | 1,034 | |
LIABILITIES | | | | | |
Notes payable and other short-term debt | 8 | | | — | | | 8 | |
Accounts payable | 22 | | | — | | | 22 | |
Other current liabilities | 13 | | | 6 | | | 19 | |
Long-term debt | 69 | | | — | | | 69 | |
| | | | | |
| | | | | |
Other non-current liabilities | 39 | | | (7) | | | 32 | |
Total liabilities assumed | 151 | | | (1) | | | 150 | |
Noncontrolling interest | 96 | | | — | | | 96 | |
Net assets and noncontrolling interest acquired | $ | 788 | | | $ | — | | | $ | 788 | |
Any excess of the purchase price over the estimated fair value of net assets was recognized as goodwill. Goodwill of $704 million, including the impact of measurement period adjustments, was recorded within the Company’s Air Management segment. The goodwill consists of the Company’s expected future economic benefits that will arise from acquiring this business, which is established in making next-generation products for electric vehicles and the potential development and deployment of future technologies, across a global customer base, in this market and across adjacent industries. The goodwill is not deductible for tax purposes.
The following table summarizes the other intangible assets acquired:
| | | | | | | | | | | |
(in millions) | Estimated Life | | Estimated Fair Value |
Amortized intangible assets: | | | |
Developed technology | 5 years | | $ | 70 | |
Customer relationships | 11 years | | 25 | |
Total amortized intangible assets | | | 95 | |
Unamortized trade name | Indefinite | | 35 | |
Total other intangible assets | | | $ | 130 | |
The property, plant and equipment acquired were valued using a combination of cost and market approaches. Goodwill and identifiable intangible assets were valued using the income approach. Noncontrolling interests were valued using a market approach. Management used a third-party valuation firm to assist in the determination of the preliminary purchase accounting fair values; however, management ultimately oversees the third-party valuation firm to ensure that the transaction-specific assumptions are appropriate for the Company.
Due to its insignificant size relative to the Company, supplemental pro forma financial information of the combined entity for the current and prior reporting periods is not provided.
Romeo Power, Inc.
In May 2019, the Company invested $50 million in exchange for a 20% equity interest in Romeo Systems, Inc., now known as Romeo Power, Inc., (“Romeo”) a technology-leading battery module and pack supplier that was then privately held. On December 29, 2020, through the business combination of Romeo Systems, Inc. and special purpose acquisition company RMG Acquisition Corporation, a new entity, Romeo Power, Inc., became a publicly listed company. The Company’s ownership in Romeo was reduced to 14%, and the investment was recorded at fair value on an ongoing basis with changes in fair value being recognized in Unrealized (gain) loss on equity securities in the Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2021, the Company recorded a loss of $61 million and $337 million, respectively, to adjust the carrying value of the Company’s investment to fair value. As of December 31, 2021, the investment’s fair value was $70 million, which was reflected in Investments and long-term receivables in the Company’s Condensed Consolidated Balance Sheet. During the nine months ended September 30, 2022, the Company recorded a loss of $39 million and liquidated its investment in Romeo shares at a fair value of $31 million. As of March 17, 2022, the Company no longer held any investment in Romeo.
In September 2019, the Company and Romeo contributed total equity of $10 million and formed a new joint venture, BorgWarner Romeo Power LLC (“Romeo JV”), in which the Company owned a 60% interest. Romeo JV was a variable interest entity focusing on producing battery module and pack technology. The Company was the primary beneficiary of Romeo JV and had consolidated Romeo JV in its consolidated financial statements. On October 25, 2021, the Company delivered written notice to Romeo that the Company was electing to exercise its right to put its ownership stake in Romeo JV to Romeo. Based on an independent appraisal, the Company’s interest in Romeo JV was valued at $30 million. In February 2022, the Company completed the sale of its 60% interest in Romeo JV for $29 million, the fair value of $30 million reduced by a 5% discount pursuant to the joint venture agreement. The Company recorded a gain of $24 million in Other operating expense, net, which represented the difference between the Company’s book value of its interest in Romeo JV compared to the fair value of consideration received. As a result of the sale, the Company has no further rights in or involvement with Romeo JV.
NOTE 4 REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company manufactures and sells products, primarily to OEMs of light vehicles and, to a lesser extent, to other OEMs of commercial vehicles and off-highway vehicles, to certain Tier One vehicle systems suppliers and into the aftermarket. The Company’s payment terms are based on customary business practices and vary by customer type and products offered. We have evaluated the terms of our arrangements and determined that they do not contain significant financing components.
Generally, revenue is recognized upon shipment or delivery; however, a limited number of the Company’s customer arrangements for its highly customized products with no alternative use provide the Company 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 $18 million and $17 million at September 30, 2022 and December 31, 2021, respectively, for these arrangements. These amounts are reflected in Prepayments and other current assets in the Company’s Condensed Consolidated Balance Sheets.
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 Other current liabilities and Other non-current liabilities in the Condensed Consolidated Balance Sheets and were $18 million and less than $1 million at September 30, 2022 and $21 million and $1 million at December 31, 2021, respectively. These amounts are reflected as revenue over the term of
the arrangement (typically 3 to 7 years) as the underlying products are shipped and represent the Company’s remaining performance obligations as of the end of the period.
The Company continually seeks business development opportunities and at times provides customer incentives for new program awards. 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. As of September 30, 2022 and December 31, 2021, the Company recorded customer incentive payments of $32 million and $36 million, respectively, in Prepayments and other current assets, and $102 million and $137 million, respectively, in Other non-current assets in the Condensed Consolidated Balance Sheets.
The following tables represent a disaggregation of revenue from contracts with customers by reporting segment and region. The balances for the three and nine months ended September 30, 2021 have been recast for inter-segment transitions of certain businesses that were completed during the three months ended June 30, 2022. Refer to Note 22, “Reporting Segments And Related Information,” to the Condensed Consolidated Financial Statements for more information.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
(in millions) | Air Management | | e-Propulsion & Drivetrain | | Fuel Systems | | Aftermarket | | Total |
North America | $ | 541 | | | $ | 474 | | | $ | 120 | | | $ | 179 | | | $ | 1,314 | |
Europe | 770 | | | 226 | | | 219 | | | 101 | | | 1,316 | |
Asia | 519 | | | 627 | | | 172 | | | 17 | | | 1,335 | |
Other | 50 | | | — | | | 17 | | | 28 | | | 95 | |
Total | $ | 1,880 | | | $ | 1,327 | | | $ | 528 | | | $ | 325 | | | $ | 4,060 | |
| | | | | | | | | |
| Three Months Ended September 30, 2021 |
(in millions) | Air Management | | e-Propulsion & Drivetrain | | Fuel Systems | | Aftermarket | | Total |
North America | $ | 403 | | | $ | 388 | | | $ | 70 | | | $ | 164 | | | $ | 1,025 | |
Europe | 631 | | | 183 | | | 217 | | | 114 | | | 1,145 | |
Asia | 474 | | | 524 | | | 153 | | | 16 | | | 1,167 | |
Other | 43 | | | — | | | 16 | | | 20 | | | 79 | |
Total | $ | 1,551 | | | $ | 1,095 | | | $ | 456 | | | $ | 314 | | | $ | 3,416 | |
| | | | | | | | | |
| Nine Months Ended September 30, 2022 |
(in millions) | Air Management | | e-Propulsion & Drivetrain | | Fuel Systems | | Aftermarket | | Total |
North America | $ | 1,515 | | | $ | 1,368 | | | $ | 343 | | | $ | 531 | | | $ | 3,757 | |
Europe | 2,293 | | | 717 | | | 691 | | | 302 | | | 4,003 | |
Asia | 1,486 | | | 1,691 | | | 444 | | | 47 | | | 3,668 | |
Other | 140 | | | — | | | 53 | | | 72 | | | 265 | |
Total | $ | 5,434 | | | $ | 3,776 | | | $ | 1,531 | | | $ | 952 | | | $ | 11,693 | |
| | | | | | | | | |
| Nine Months Ended September 30, 2021 |
(in millions) | Air Management | | e-Propulsion & Drivetrain | | Fuel Systems | | Aftermarket | | Total |
North America | $ | 1,272 | | | $ | 1,208 | | | $ | 201 | | | $ | 483 | | | $ | 3,164 | |
Europe | 2,202 | | | 710 | | | 794 | | | 324 | | | 4,030 | |
Asia | 1,559 | | | 1,710 | | | 455 | | | 46 | | | 3,770 | |
Other | 112 | | | — | | | 48 | | | 59 | | | 219 | |
Total | $ | 5,145 | | | $ | 3,628 | | | $ | 1,498 | | | $ | 912 | | | $ | 11,183 | |
NOTE 5 RESTRUCTURING
The Company’s restructuring activities are undertaken, as necessary, to execute management’s strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Company’s business and to relocate operations to best cost locations.
The Company’s restructuring expenses consist primarily of employee termination benefits (principally severance and/or termination benefits) and other costs, which are primarily professional fees and costs related to facility closures and exits.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
(in millions) | Air Management | | e-Propulsion & Drivetrain | | Fuel Systems | | Corporate | | Total |
Employee termination benefits | $ | 5 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5 | |
Other | — | | | — | | | 3 | | | — | | | 3 | |
Total restructuring expense | $ | 5 | | | $ | — | | | $ | 3 | | | $ | — | | | $ | 8 | |
| | | | | | | | | |
| Three Months Ended September 30, 2021 |
(in millions) | Air Management | | e-Propulsion & Drivetrain | | Fuel Systems | | Corporate | | Total |
Employee termination benefits | $ | 7 | | | $ | 2 | | | $ | 29 | | | $ | — | | | $ | 38 | |
Other | 4 | | | 9 | | | — | | | — | | | 13 | |
Total restructuring expense | $ | 11 | | | $ | 11 | | | $ | 29 | | | $ | — | | | $ | 51 | |
| | | | | | | | | |
| Nine Months Ended September 30, 2022 |
(in millions) | Air Management | | e-Propulsion & Drivetrain | | Fuel Systems | | Corporate | | Total |
Employee termination benefits | $ | 19 | | | $ | 14 | | | $ | 3 | | | $ | (1) | | | $ | 35 | |
Other | — | | | 10 | | | 5 | | | — | | | 15 | |
Total restructuring expense | $ | 19 | | | $ | 24 | | | $ | 8 | | | $ | (1) | | | $ | 50 | |
| | | | | | | | | |
| Nine Months Ended September 30, 2021 |
(in millions) | Air Management | | e-Propulsion & Drivetrain | | Fuel Systems | | Corporate | | Total |
Employee termination benefits | $ | 30 | | | $ | 9 | | | $ | 56 | | | $ | — | | | $ | 95 | |
Other | 10 | | | 35 | | | — | | | 3 | | | 48 | |
Total restructuring expense | $ | 40 | | | $ | 44 | | | $ | 56 | | | $ | 3 | | | $ | 143 | |
The following tables display a rollforward of the restructuring liability recorded within the Company’s Condensed Consolidated Balance Sheets and the related cash flow activity:
| | | | | | | | | | | | | | | | | |
(in millions) | Employee Termination Benefits | | Other | | Total |
Balance at January 1, 2022 | $ | 126 | | | $ | 13 | | | $ | 139 | |
Restructuring expense, net | 35 | | | 15 | | | 50 | |
Cash payments | (75) | | | (21) | | | (96) | |
Foreign currency translation adjustment and other | (17) | | | 2 | | | (15) | |
| | | | | |
Balance at September 30, 2022 | 69 | | | 9 | | | 78 | |
Less: Non-current restructuring liability | 18 | | | 1 | | | 19 | |
Current restructuring liability at September 30, 2022 | $ | 51 | | | $ | 8 | | | $ | 59 | |
| | | | | |
(in millions) | Employee Termination Benefits | | Other | | Total |
Balance at January 1, 2021 | $ | 160 | | | $ | 13 | | | $ | 173 | |
Restructuring expense, net | 95 | | | 48 | | | 143 | |
Cash payments | (107) | | | (52) | | | (159) | |
Foreign currency translation adjustment and other | 2 | | | — | | | 2 | |
Balance at September 30, 2021 | 150 | | | 9 | | | 159 | |
Less: Non-current restructuring liability | 47 | | | 2 | | | 49 | |
Current restructuring liability at September 30, 2021 | $ | 103 | | | $ | 7 | | | $ | 110 | |
During the nine months ended September 30, 2022, the Company recorded $18 million of restructuring costs for individually approved restructuring actions that primarily related to specific reductions in headcount.
2020 Structural Costs Plan In February 2020, the Company announced a $300 million restructuring plan to address existing structural costs. During the three and nine months ended September 30, 2022, the Company recorded $5 million and $28 million of restructuring charges related to this plan, respectively. During the three and nine months ended September 30, 2021, the Company recorded $20 million and $81 million of restructuring charges related to this plan, respectively. Cumulatively, the Company has incurred $279 million of restructuring charges related to this plan. As of September 30, 2022 the plan is substantially complete, with any remaining restructuring costs expected to be incurred by the end of 2022.
2019 Legacy Delphi Technologies Plan In 2019, legacy Delphi Technologies announced a restructuring plan to reshape and realign its global technical center footprint and reduce salaried and contract staff. The Company continued actions under this plan post-acquisition and has recorded cumulative charges of $66 million since October 1, 2020, including approximately $4 million and $62 million in restructuring charges during the nine months ended September 30, 2022, and 2021, respectively. The actions under this plan are substantially complete.
The following provides details of restructuring expense incurred by the Company’s reporting segments during the nine months ended September 30, 2022 and 2021, related to the plans and actions discussed above:
Air Management
2020 Structural Costs Plan
•During the three and nine months ended September 30, 2022, the segment recorded $5 million and $18 million, respectively, of restructuring costs under this plan. This primarily related to $11 million during the nine months ended September 30, 2022 for a voluntary termination program pursuant to which approximately 47 employees accepted termination packages in 2022.
•During the three and nine months ended September 30, 2021, the segment recorded restructuring costs of $10 million and $36 million, respectively, primarily related to severance costs, professional fees and a voluntary termination program to reduce existing structural costs.
2019 Legacy Delphi Technologies Plan
•During the nine months ended September 30, 2021, the segment recorded $4 million of restructuring costs, primarily related to severance costs.
e-Propulsion & Drivetrain
•During the nine months ended September 30, 2022, the segment recorded $14 million of restructuring costs, primarily related to severance costs associated with the announced closure of a technical center in Europe affecting approximately 80 employees.
2020 Structural Costs Plan
•During the nine months ended September 30, 2022, the segment recorded $10 million of restructuring costs primarily related to contractual settlements and professional fees.
•During the three and nine months ended September 30, 2021, the segment recorded $11 million and $44 million, respectively, associated with this plan. These amounts included $7 million and $17 million, respectively, of restructuring costs, primarily related to severance costs, equipment relocation and professional fees to reduce existing structural costs and $4 million and $27 million, respectively, of restructuring costs, primarily related to contractual settlements and professional fees and other costs associated with the announced closure of a facility in Europe.
Fuel Systems
•During the three and nine months ended September 30, 2022, the segment recorded $3 million of restructuring costs, primarily related to equipment relocation and professional fees.
2019 Legacy Delphi Technologies Plan
•During the nine months ended September 30, 2022, the segment recorded $5 million of restructuring costs related to this plan, primarily related to employee severance and equipment moves.
•During the three and nine months ended September 30, 2021, the segment recorded $29 million and $56 million, respectively, of restructuring costs related to this plan. These costs were primarily for the statutory minimum benefits and incremental one-time termination benefits negotiated with local labor authorities.
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 Company continues to evaluate different options across its operations to reduce existing structural costs over the next few years. The Company will recognize restructuring expense associated with any future actions at the time they are approved and become probable or are incurred. Any future actions could result in significant restructuring expense.
NOTE 6 RESEARCH AND DEVELOPMENT COSTS
The Company’s net Research & Development (“R&D”) expenditures are included in Selling, general and administrative expenses of the Condensed Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract. 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 Company has contracts with several customers relating to R&D activities that the Company performs at the Company’s various R&D locations.
The following table presents the Company’s gross and net expenditures on R&D activities:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Gross R&D expenditures | $ | 236 | | | $ | 231 | | | $ | 702 | | | $ | 675 | |
Customer reimbursements | (37) | | | (47) | | | (105) | | | (142) | |
Net R&D expenditures | $ | 199 | | | $ | 184 | | | $ | 597 | | | $ | 533 | |
NOTE 7 OTHER OPERATING EXPENSE, NET
Items included in Other operating expense, net consist of:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Merger, acquisition and divestiture expense, net | $ | 8 | | | $ | 8 | | | $ | 40 | | | $ | 36 | |
| | | | | | | |
Loss (gain) on sale of business | 9 | | | — | | | (15) | | | 7 | |
| | | | | | | |
| | | | | | | |
Other (income) expense, net | (5) | | | (5) | | | 1 | | | (13) | |
Other operating expense, net | $ | 12 | | | $ | 3 | | | $ | 26 | | | $ | 30 | |
Merger, acquisition and divestiture expense, net: During the three and nine months ended September 30, 2022, the Company recorded merger, acquisition and divestiture expense, net of $8 million and $40 million, respectively, primarily related to professional fees associated with specific acquisition and disposition initiatives. During the three and nine months ended September 30, 2021, the Company recorded merger, acquisition and divestiture expense of $8 million and $36 million, respectively. The expense for 2021 primarily related to professional fees for integration and other support associated with the Company’s acquisition of Delphi Technologies and professional fees associated with the acquisition of AKASOL.
Loss (gain) on sale of business: During the three months ended September 30, 2022, the Company revised its estimate of the expected earn-out related to a previous divestiture resulting in a $9 million loss in the period. During the nine months ended September 30, 2022, the Company recorded a $24 million
gain related to the sale of its interest in BorgWarner Romeo Power LLC. Refer to Note 3, “Acquisitions,” to the Condensed Consolidated Financial Statements for more information.
NOTE 8 INCOME TAXES
The Company’s provision for income taxes is based upon an estimated annual tax rate for the year applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.
The Company’s effective tax rate for the three months ended September 30, 2022 and 2021 was 26% and 40%, respectively. During the three-month period ended September 30, 2022, a discrete tax benefit of approximately $1 million was recorded relating to other tax adjustments. During the three-month period ended September 30, 2021, the Company’s effective tax rate was unfavorably impacted by $59 million of restructuring expenses and merger, acquisition and divestiture expenses, some of which were non-deductible for tax purposes. As such, the Company recognized a de minimis tax benefit associated with these expenses in the three months ended September 30, 2021.
The Company’s effective tax rate for the nine months ended September 30, 2022 and 2021 was 25% and 24%, respectively. During the nine-month period ended September 30, 2022, a discrete tax benefit of $9 million was recorded relating to other tax adjustments. During the nine-month period ended September 30, 2021, unrecognized tax benefits and accrued interest were decreased for the lapse of the statute of limitations in a non-US jurisdiction for a tax holiday matter which, net of unrecognized foreign tax credits, resulted in a $55 million tax benefit. Additionally, an increase in the United Kingdom (“UK”) tax rate from 19% to 25% effective April 1, 2023, was enacted in June 2021, resulting in a discrete tax benefit of $20 million as a result of the revaluation of net deferred tax asset balances. Further, the Company’s effective tax rate included a net discrete tax benefit of $33 million primarily related to changes to certain withholding rates applied to unremitted earnings. The effective tax rate was unfavorably impacted by $179 million of restructuring expenses and merger, acquisition and divestiture expenses, some of which were non-deductible for tax purposes. The Company recognized $22 million of tax benefit associated with these expenses in the nine months ended September 30, 2021.
The annual effective tax rates differ from the U.S. statutory rate primarily due to foreign rates which vary from those in the U.S., jurisdictions with pretax losses for which no tax benefit could be realized, U.S. taxes on foreign earnings, the realization of certain business tax credits (including foreign tax credits), and permanent differences between book and tax treatment for certain items (including the Foreign-Derived Intangible Income (“FDII”) deduction and the enhanced deduction of research and development expenses in certain jurisdictions).
NOTE 9 INVENTORIES, NET
A summary of Inventories, net is presented below:
| | | | | | | | | | | |
| September 30, | | December 31, |
(in millions) | 2022 | | 2021 |
Raw material and supplies | $ | 1,159 | | | $ | 1,057 | |
Work in progress | 176 | | | 175 | |
Finished goods | 353 | | | 327 | |
FIFO inventories | 1,688 | | | 1,559 | |
LIFO reserve | (30) | | | (25) | |
Inventories, net | $ | 1,658 | | | $ | 1,534 | |
NOTE 10 OTHER CURRENT AND NON-CURRENT ASSETS
Additional detail related to assets is presented below:
| | | | | | | | | | | |
| September 30, | | December 31, |
(in millions) | 2022 | | 2021 |
Prepayments and other current assets: | | | |
Prepaid tooling | $ | 82 | | | $ | 81 | |
Prepaid taxes | 40 | | | 64 | |
Derivative instruments | 32 | | | 13 | |
Customer incentive payments (Note 4) | 32 | | | 36 | |
Contract assets (Note 4) | 18 | | | 17 | |
Prepaid insurance | 12 | | | 9 | |
Prepaid engineering | 12 | | | 27 | |
Other | 57 | | | 74 | |
Total prepayments and other current assets | $ | 285 | | | $ | 321 | |
| | | |
Investments and long-term receivables: | | | |
Investment in equity affiliates | $ | 266 | | | $ | 298 | |
Long-term receivables | 81 | | | 102 | |
Equity securities (Note 3) | 75 | | | 130 | |
Total investments and long-term receivables | $ | 422 | | | $ | 530 | |
| | | |
Other non-current assets: | | | |
Deferred income taxes | $ | 204 | | | $ | 254 | |
Operating leases | 184 | | | 185 | |
Derivative instruments | 172 | | | 8 | |
Customer incentive payments (Note 4) | 102 | | | 137 | |
Other | 120 | | | 99 | |
Total other non-current assets | $ | 782 | | | $ | 683 | |
NOTE 11 GOODWILL AND OTHER INTANGIBLES
During the fourth quarter of each year, the Company assesses its goodwill and indefinite-lived intangible assets assigned to each of its reporting units. 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. No events or circumstances were noted in the first nine months of 2022 requiring additional assessment or testing. Future changes in the judgments, assumptions and estimates from those used in acquisition-related valuations and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect the Company’s financial statements in any given year.
A summary of the changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Air Management | | e-Propulsion & Drivetrain | | Aftermarket | | Fuel Systems | | Total |
Gross goodwill balance, December 31, 2021 | $ | 2,124 | | | $ | 1,232 | | | $ | 380 | | | $ | 45 | | | $ | 3,781 | |
Accumulated impairment losses, December 31, 2021 | (502) | | | — | | | — | | | — | | | (502) | |
Net goodwill balance, December 31, 2021* | $ | 1,622 | | | $ | 1,232 | | | $ | 380 | | | $ | 45 | | | $ | 3,279 | |
Goodwill during the period: | | | | | | | | | |
Acquisitions | 104 | | | 127 | | | — | | | — | | | 231 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other, primarily translation adjustment | (145) | | | (82) | | | (12) | | | — | | | (239) | |
Ending balance, September 30, 2022 | $ | 1,581 | | | $ | 1,277 | | | $ | 368 | | | $ | 45 | | | $ | 3,271 | |
__________________________________
| | | | | | | | | | | | | | |
* | The December 31, 2021 balances have been recast for inter-segment transitions of certain businesses that were completed during 2022. Refer to Note 22, “Reporting Segments And Related Information” for more information. |
The Company’s other intangible assets, primarily from acquisitions, consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | December 31, 2021 |
(in millions) | Estimated useful lives (years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortized intangible assets: | | | | | | | | | | | | | |
Patented and unpatented technology | 5 - 15 | | $ | 470 | | | $ | 125 | | | $ | 345 | | | $ | 443 | | | $ | 105 | | | $ | 338 | |
Customer relationships | 7 - 15 | | 844 | | | 317 | | | 527 | | | 877 | | | 310 | | | 567 | |
Miscellaneous | 2 - 13 | | 9 | | | 6 | | | 3 | | | 14 | | | 7 | | | 7 | |
Total amortized intangible assets | | | 1,323 | | | 448 | | | 875 | | | 1,334 | | | 422 | | | 912 | |
Unamortized trade names | | | 174 | | | — | | | 174 | | | 179 | | | — | | | 179 | |
Total other intangible assets | | | $ | 1,497 | | | $ | 448 | | | $ | 1,049 | | | $ | 1,513 | | | $ | 422 | | | $ | 1,091 | |
NOTE 12 PRODUCT WARRANTY
The Company provides warranties on some, but not all, of its products. The warranty terms are typically from one to three years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements, as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual. The product warranty accrual is allocated to current and non-current liabilities in the Condensed Consolidated Balance Sheets.
The following table summarizes the activity in the product warranty accrual accounts:
| | | | | | | | | | | |
(in millions) | 2022 | | 2021 |
Beginning balance, January 1 | $ | 236 | | | $ | 253 | |
| | | |
Provisions for current period sales | 71 | | | 69 | |
Adjustments of prior estimates | (4) | | | 17 | |
| | | |
| | | |
Payments | (70) | | | (90) | |
Other, primarily translation adjustment | (24) | | | (2) | |
Ending balance, September 30 | $ | 209 | | | $ | 247 | |
The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:
| | | | | | | | | | | |
| September 30, | | December 31, |
(in millions) | 2022 | | 2021 |
Other current liabilities | $ | 108 | | | $ | 128 | |
Other non-current liabilities | 101 | | | 108 | |
Total product warranty liability | $ | 209 | | | $ | 236 | |
NOTE 13 NOTES PAYABLE AND DEBT
As of September 30, 2022 and December 31, 2021, the Company had debt outstanding as follows:
| | | | | | | | | | | |
| September 30, | | December 31, |
(in millions) | 2022 | | 2021 |
Short-term borrowings | $ | 53 | | | $ | 62 | |
| | | |
Long-term debt | | | |
3.375% Senior notes due 03/15/25 ($500 million par value) | 499 | | | 498 | |
5.000% Senior notes due 10/01/25 ($800 million par value)* | 872 | | | 889 | |
2.650% Senior notes due 07/01/27 ($1,100 million par value) | 1,089 | | | 1,092 | |
7.125% Senior notes due 02/15/29 ($121 million par value) | 120 | | | 119 | |
1.000% Senior Notes due 05/19/31 (€1,000 million par value) | 963 | | | 1,117 | |
4.375% Senior notes due 03/15/45 ($500 million par value) | 495 | | | 494 | |
Term loan facilities, finance leases and other | 45 | | | 56 | |
Total long-term debt | 4,083 | | | 4,265 | |
Less: current portion | 3 | | | 4 | |
Long-term debt, net of current portion | $ | 4,080 | | | $ | 4,261 | |
_____________________________
*Includes the fair value step-up from the Delphi Technologies acquisition, which was based on observable market data and will be amortized as a reduction to interest expense over the remaining life of the instrument using the effective interest method.
The Company may utilize uncommitted lines of credit for short-term working capital requirements. As of September 30, 2022 and December 31, 2021, the Company had $53 million and $62 million, respectively, in borrowings under these facilities, which are classified in Notes payable and other short-term debt on the Condensed Consolidated Balance Sheets.
The following table provides details on Interest expense, net included in the Condensed Consolidated Statements of Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Interest expense | $ | 18 | | | $ | 21 | | | $ | 58 | | | $ | 84 | |
Interest income | (6) | | | (3) | | | (16) | | | (9) | |
Interest expense, net | $ | 12 | | | $ | 18 | | | $ | 42 | | | $ | 75 | |
The Company has a $2.0 billion multi-currency revolving credit facility that includes a feature allowing the Company the ability to increase the facility by $1.0 billion with bank group approval. This facility matures in March 2025. The credit agreement contains customary events of default and one key financial covenant, which is a debt-to-EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio. The Company was in compliance with the financial covenant at September 30, 2022. At September 30, 2022 and December 31, 2021, the Company had no outstanding borrowings under this facility.
The Company’s commercial paper program allows the Company to issue up to $2.0 billion of short-term, unsecured commercial paper notes under the limits of its multi-currency revolving credit facility. Under this program, the Company may issue notes from time to time and use the proceeds for general corporate purposes. The Company had no outstanding borrowings under this program as of September 30, 2022 and December 31, 2021.
The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed $2 billion.
As of September 30, 2022 and December 31, 2021, the estimated fair values of the Company’s senior unsecured notes totaled $3,425 million and $4,421 million, respectively. The estimated fair values were $613 million lower than their carrying value at September 30, 2022 and $212 million higher than their carrying value at December 31, 2021. 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, commercial paper program and other debt facilities approximate 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 $40 million and $35 million at September 30, 2022 and December 31, 2021, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.
NOTE 14 OTHER CURRENT AND NON-CURRENT LIABILITIES
Additional detail related to liabilities is presented in the table below:
| | | | | | | | | | | |
| September 30, | | December 31, |
(in millions) | 2022 | | 2021 |
Other current liabilities: | | | |
Payroll and employee related | $ | 310 | | | $ | 330 | |
Customer related | 221 | | | 220 | |
Product warranties (Note 12) | 108 | | | 128 | |
Income taxes payable | 103 | | | 105 | |
Indirect taxes | 77 | | | 106 | |
Accrued freight | 57 | | | 46 | |
Employee termination benefits (Note 5) | 51 | | | 85 | |
Operating leases | 39 | | | 43 | |
Deferred engineering reimbursements | 32 | | | 44 | |
Earn-out liability (Note 3) | 31 | | | — | |
Dividends payable | 31 | | | 18 | |
Interest | 29 | | | 23 | |
Supplier related | 23 | | | 18 | |
Other non-income taxes | 23 | | | 22 | |
Contract liabilities (Note 4) | 18 | | | 21 | |
Insurance | 18 | | | 19 | |
Retirement related | 14 | | | 16 | |
Mandatorily redeemable noncontrolling interest liability (Note 3) | — | | | 58 | |
Other | 175 | | | 154 | |
Total other current liabilities | $ | 1,360 | | | $ | 1,456 | |
| | | |
Other non-current liabilities: | | | |
Deferred income taxes | $ | 257 | | | $ | 206 | |
Other income tax liabilities | 249 | | | 274 | |
Operating leases | 152 | | | 152 | |
Product warranties (Note 12) | 101 | | | 108 | |
Deferred income | 59 | | | 68 | |
Employee termination benefits (Note 5) | 18 | | | 41 | |
Other | 56 | | | 115 | |
Total other non-current liabilities | $ | 892 | | | $ | 964 | |
NOTE 15 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 for which there is little or no market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC Topic 820:
A.Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
B.Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
C.Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).
The following tables classify assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Basis of fair value measurements | | | | |
(in millions) | Balance at September 30, 2022 | | 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 NAV1 |
Assets: | | | | | | | | | | | |
Receivables | $ | 11 | | | $ | — | | | $ | 2 | | | $ | 9 | | | C | | $ | — | |
Long-term receivables | $ | 15 | | | $ | — | | | $ | 15 | | | $ | — | | | C | | $ | — | |
Investment in equity securities | $ | 29 | | | $ | — | | | $ | — | | | $ | — | | | — | | $ | 29 | |
Foreign currency contracts | $ | 36 | | | $ | — | | | $ | 36 | | | $ | — | | | A | | $ | — | |
Net investment hedge contracts | $ | 167 | | | $ | — | | | $ | 167 | | | $ | — | | | A | | $ | — | |
Liabilities: | | | | | | | | | | | |
Current earn-out liability | $ | 31 | | | $ | — | | | $ | — | | | $ | 31 | | | C | | $ | — | |
Foreign currency contracts | $ | 10 | | | $ | — | | | $ | 10 | | | $ | — | | | A | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Basis of fair value measurements | | | | |
(in millions) | Balance at December 31, 2021 | | 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 NAV1 |
Assets: | | | | | | | | | | | |
Investment in equity securities | $ | 87 | | | $ | 70 | | | $ | — | | | $ | — | | | A | | $ | 17 | |
Long-term receivables | $ | 35 | | | $ | — | | | $ | 17 | | | $ | 18 | | | C | | $ | — | |
Foreign currency contracts | $ | 13 | | | $ | — | | | $ | 13 | | | $ | — | | | A | | $ | — | |
Net investment hedge contracts | $ | 8 | | | $ | — | | | $ | 8 | | | $ | — | | | A | | |
Liabilities: | | | | | | | | | | | |
Foreign currency contracts | $ | 8 | | | $ | — | | | $ | 8 | | | $ | — | | | A | | $ | — | |
Net investment hedge contracts | $ | 54 | | | $ | — | | | $ | 54 | | | $ | — | | | A | | $ | — | |
_____________________________
1 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 that have underlying assets in fixed income securities, equity securities, and other assets and the fair values have been estimated using the net asset value of the Company's ownership interest in partners' capital. The Company’s redemption of its investments with the funds is governed by the partnership agreements and subject to approval from the general partners. With the exception of annual distributions in connection with the Company’s deemed tax liability, distributions from each fund will be received as the underlying investments of the funds are liquidated, the timing of which is unknown.
NOTE 16 FINANCIAL INSTRUMENTS
The Company’s financial instruments include cash and cash equivalents, marketable securities and accounts receivable. Due to the short-term nature of these instruments, their book value approximates their fair value. The Company’s financial instruments may also include long-term debt, investments in equity securities, 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 September 30, 2022 and December 31, 2021, the Company had no derivative contracts that contained credit risk-related contingent features.
The Company, at times, uses certain commodity derivative contracts to protect against commodity price changes related to forecasted raw material and component purchases. At September 30, 2022 and December 31, 2021, the Company had no material commodity derivative contracts.
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, at times, selectively uses interest rate swaps and options to reduce market value risk associated with changes in interest rates (fair value hedges and cash flow hedges). At September 30, 2022 and December 31, 2021, the Company had no outstanding interest rate swaps or options.
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 its net investment in certain foreign operations (net investment hedges). 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 September 30, 2022 and December 31, 2021, the following foreign currency derivative contracts were outstanding and mature through the ending duration noted below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency derivatives (in millions)* |
Functional Currency | | Traded Currency | | Notional in traded currency September 30, 2022 | | Notional in traded currency December 31, 2021 | | Ending Duration |
Brazilian Real | | US Dollar | | 16 | | | 23 | | | Dec - 23 |
British Pound | | Euro | | 10 | | | 42 | | | Oct - 22 |
Chinese Renminbi | | British Pound | | 26 | | | 26 | | | Dec - 23 |
Chinese Renminbi | | Euro | | 34 | | | 26 | | | Dec - 23 |
Chinese Renminbi | | US Dollar | | 198 | | | 185 | | | Dec - 23 |
| | | | | | | | |
Euro | | British Pound | | 44 | | | 6 | | | Dec - 23 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Euro | | Polish Zloty | | 297 | | | 394 | | | Dec - 23 |
| | | | | | | | |
| | | | | | | | |
Euro | | US Dollar | | 88 | | | 86 | | | Dec - 23 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
US Dollar | | British Pound | | 13 | | | 13 | | | Dec - 23 |
| | | | | | | | |
US Dollar | | Euro | | 40 | | | 28 | | | Dec - 22 |
US Dollar | | Korean Won | | 106,091 | | | 49,919 | | | Nov - 23 |
US Dollar | | Mexican Peso | | 2,364 | | | 2,619 | | | Dec - 23 |
US Dollar | | Singapore Dollar | | 5 | | | 27 | | | Dec - 22 |
US Dollar | | Thailand Baht | | 1,790 | | | 1,720 | | | May - 23 |
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*Table above excludes non-significant traded currency pairings with total notional amounts less than $10 million U.S. dollar equivalent as of September 30, 2022 and December 31, 2021. |
The Company selectively uses cross-currency swaps to hedge the foreign currency exposure associated with its net investment in certain foreign operations (net investment hedges). In May 2022, the Company terminated its $100 million cross-currency swap contract originally maturing in February 2023 and executed a $100 million cross-currency swap contract to mature in February 2029, resulting in cash proceeds of $16 million that are expected to remain in accumulated other comprehensive loss until the net investment is sold, completely liquidated or substantially liquidated. At September 30, 2022 and December 31, 2021, the following cross-currency swap contracts were outstanding:
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| Cross-currency swaps |
(in millions) | September 30, 2022 | | December 31, 2021 | | Ending duration |
US dollar to Euro: | | | | | |
Fixed receiving notional | $ | 1,100 | | | $ | 1,100 | | | Jul - 27 |
Fixed paying notional | € | 976 | | | € | 976 | | | Jul - 27 |
US dollar to Euro: | | | | | |
Fixed receiving notional | $ | 500 | | | $ | 500 | | | Mar - 25 |
Fixed paying notional | € | 450 | | | € | 450 | | | Mar - 25 |
US dollar to Japanese yen: | | | | | |
Fixed receiving notional | $ | — | | | $ | 100 | | | Feb - 23 |
Fixed paying notional | ¥ | — | | | ¥ | 10,978 | | | Feb - 23 |
Fixed receiving notional | $ | 100 | | | $ | — | | | Feb - 29 |
Fixed paying notional | ¥ | 12,724 | | | ¥ | — | | | Feb - 29 |
At September 30, 2022 and December 31, 2021, the following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:
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(in millions) | | Assets | | Liabilities |
Derivatives designated as hedging instruments Under 815: | | Location | | September 30, 2022 | | December 31, 2021 | | Location | | September 30, 2022 | | December 31, 2021 |
Foreign currency | | Prepayments and other current assets | | $ | 17 | | | $ | 7 | | | Other current liabilities | | $ | 6 | | | $ | 8 | |
Foreign currency | | Other non-current assets | | $ | 2 | | | $ | — | | | Other non-current liabilities | | $ | 1 | | | $ | — | |
Net investment hedges | | Other non-current assets | | $ | 167 | | | $ | 8 | | | Other non-current liabilities | | $ | — | | | $ | 54 | |
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Derivatives not designated as hedging instruments: | | | | | | | | | | | | |
Foreign currency | | Prepayments and other current assets | | $ | 15 | | | $ | 6 | | | Other current liabilities | | $ | 3 | | | $ | — | |
Foreign currency | | Other non-current assets | | $ | 2 | | | $ | — | | | Other non-current liabilities | | $ | — | | | $ | — | |
Effectiveness for cash flow hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of effectiveness are deferred into accumulated other comprehensive income (loss) (“AOCI”) and reclassified into income as the underlying operating transactions are recognized. These realized gains or losses offset the hedged transaction and are recorded on the same line in the statement of operations. The initial value of any component excluded from the assessment of effectiveness will be recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in fair value of the excluded component and amounts recognized in income under that systematic and rational method will be recognized in AOCI.
Effectiveness for net investment hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of effectiveness are deferred into foreign currency translation adjustments and only released when the subsidiary being hedged is sold or substantially liquidated. The initial value of any component excluded from the assessment of effectiveness will be recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in fair value of the excluded component and amounts recognized in income under that systematic and rational method will be recognized in AOCI.
The table below shows deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less for designated net investment hedges. 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 September 30, 2022 market rates.
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(in millions) | | Deferred gain (loss) in AOCI at | | Gain (loss) expected to be reclassified to income in one year or less |
Contract Type | | September 30, 2022 | | December 31, 2021 | |
Net investment hedges: | | | | | | |
Foreign currency | | $ | (4) | | | $ | (10) | | | $ | — | |
Cross-currency swaps | | 167 | | | (46) | | | — | |
Foreign currency-denominated debt | | 222 | | | 66 | | | — | |
Total | | $ | 385 | | | $ | 10 | | | $ | — | |
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:
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| | Three Months Ended September 30, 2022 |
(in millions) | | Net sales | | Cost of sales | | Selling, general and administrative expenses | | Other comprehensive income (loss) |
Total amounts of earnings and other comprehensive income (loss) line items in which the effects of cash flow hedges are recorded | | $ | 4,060 | | | $ | 3,254 | | | $ | 397 | | | $ | (262) | |
Gain (loss) on cash flow hedging relationships: | | | | | | | | |
Foreign currency: | | | | | | | | |
Gain (loss) recognized in other comprehensive income | | | | | | | | $ | 8 | |
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| | Nine Months Ended September 30, 2022 |
(in millions) | | Net sales | | Cost of sales | | Selling, general and administrative expenses | | Other comprehensive income (loss) |
Total amounts of earnings and other comprehensive income (loss) line items in which the effects of cash flow hedges are recorded | | 11,693 | | | 9,425 | | | 1,179 | | | $ | (527) | |
Gain (loss) on cash flow hedging relationships: | | | | | | | | |
Foreign currency: | | | | | | | | |
Gain (loss) recognized in other comprehensive income | | | | | | | | $ | 12 | |
Gain (loss) reclassified from AOCI to income | | $ | — | | | $ | (1) | | | $ | — | | | |
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| | Three Months Ended September 30, 2021 |
(in millions) | | Net sales | | Cost of sales | | Selling, general and administrative expenses | | Other comprehensive income (loss) |
Total amounts of earnings and other comprehensive income (loss) line items in which the effects of cash flow hedges are recorded | | $ | 3,416 | | | $ | 2,766 | | | $ | 343 | | | $ | (73) | |
Gain (loss) on cash flow hedging relationships: | | | | | | | | |
Foreign currency: | | | | | | | | |
Gain (loss) recognized in other comprehensive income | | | | | | | | $ | (2) | |
Gain (loss) reclassified from AOCI to income | | $ | — | | | $ | (1) | | | $ | — | | | |
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| | Nine Months Ended September 30, 2021 |
(in millions) | | Net sales | | Cost of sales | | Selling, general and administrative expenses | | Other comprehensive income (loss) |
Total amounts of earnings and other comprehensive income (loss) line items in which the effects of cash flow hedges are recorded | | $ | 11,183 | | | $ | 8,953 | | | $ | 1,084 | | | $ | (95) | |
Gain (loss) on cash flow hedging relationships: | | | | | | | | |
Foreign currency: | | | | | | | | |
Gain (loss) recognized in other comprehensive income | | | | | | | | $ | (5) | |
Gain (loss) reclassified from AOCI to income | | $ | — | | | $ | (2) | | | $ | — | | | |
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The gains or losses recorded in income related to components excluded from the assessment of effectiveness for derivative instruments designated as cash flow hedges were immaterial for the periods presented.
Gains and (losses) on derivative instruments designated as net investment hedges were recognized in other comprehensive income (loss) during the periods presented below.
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(in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Net investment hedges | | 2022 | | 2021 | | 2022 | | 2021 |
Foreign currency | | $ | 3 | | | $ | — | | | $ | 6 | | | $ | (6) | |
Cross-currency swaps | | $ | 94 | | | $ | 43 | | | $ | 229 | | | $ | 90 | |
Foreign currency-denominated debt | | $ | 67 | | | $ | 27 | | | $ | 156 | | | $ | 64 | |
Derivatives designated as net investment hedge instruments, as defined by ASC Topic 815, held during the period resulted in the following gains recorded in Interest expense on components excluded from the assessment of effectiveness:
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(in millions) | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Net investment hedges | | 2022 | | 2021 | | 2022 | | 2021 |
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Cross-currency swaps | | $ | 7 | | | $ | 6 | | | $ | 20 | | | $ | 16 | |
There were no gains or losses recorded in income related to components excluded from the assessment of effectiveness for foreign currency-denominated debt designated as net investment hedges. There were no gains and losses reclassified from AOCI for net investment hedges during the periods presented.
Derivatives not designated as hedging instruments are used to hedge remeasurement exposures of monetary assets and liabilities denominated in currencies other than the operating units' functional currency. These derivatives resulted in the following gains recorded in income:
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(in millions) | | | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
Contract Type | | Location | | | 2022 | | 2021 | | 2022 | | 2021 |
Foreign Currency | | Selling, general and administrative expenses | | | $ | 16 | | | $ | 6 | | | $ | 22 | | | $ | 11 | |
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NOTE 17 RETIREMENT BENEFIT PLANS
The Company has a number of defined benefit pension plans and other postemployment benefit plans covering eligible salaried and hourly employees and their dependents. The estimated contributions to the Company's defined benefit pension plans for 2022 range from $20 million to $30 million, of which $18 million has been contributed through the first nine months of the year. The other postemployment benefit plans, which provide medical and life insurance benefits, are funded on a pay-as-you-go basis.
The components of net periodic benefit income recorded in the Condensed Consolidated Statements of Operations are as follows:
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| | Pension benefits | | Other postemployment benefits |
(in millions) | | 2022 | | 2021 | |
Three Months Ended September 30, | | US | | Non-US | | US | | Non-US | | 2022 | | 2021 |
Service cost | | $ | — | | | $ | 5 | | | $ | — | | | $ | 6 | | | $ | — | | | $ | — | |
Interest cost | | 1 | | | 9 | | | 1 | | | 8 | | | 1 | | | — | |
Expected return on plan assets | | (3) | | | (18) | | | (2) | | | (20) | | | — | | | — | |
Amortization of unrecognized prior service credit | | (1) | | | — | | | (1) | | | — | | | (1) | | | (1) | |
Amortization of unrecognized loss | | 2 | | | 2 | | | 2 | | | 3 | | | — | | | — | |
Net periodic benefit income | | $ | (1) | | | $ | (2) | | | $ | — | | | $ | (3) | | | $ | — | | | $ | (1) | |
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| | Pension benefits | | Other postemployment benefits |
(in millions) | | 2022 | | 2021 | |
Nine Months Ended September 30, | | US | | Non-US | | US | | Non-US | | 2022 | | 2021 |
Service cost | | $ | — | | | $ | 15 | | | $ | — | | | $ | 19 | | | $ | — | | | $ | — | |
Interest cost | | 3 | | | 28 | | | 2 | | | 23 | | | 1 | | | — | |
Expected return on plan assets | | (6) | | | (58) | | | (7) | | | (62) | | | — | | | — | |
Amortization of unrecognized prior service credit | | (1) | | | — | | | (1) | | | — | | | (2) | | | (2) | |
Amortization of unrecognized loss | | 3 | | | 6 | | | 3 | | | 10 | | | — | | | 1 | |
Net periodic benefit income | | $ | (1) | | | $ | (9) | | | $ | (3) | | | $ | (10) | | | $ | (1) | | | $ | (1) | |
The components of net periodic benefit income other than the service cost component are included in Other postretirement income in the Condensed Consolidated Statements of Operations.
NOTE 18 STOCKHOLDERS' EQUITY
The changes of the Stockholders’ Equity items during the three and nine months ended September 30, 2022 and 2021, are as follows:
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| BorgWarner Inc. stockholders' equity | | |
(in millions) | Issued common stock | | Capital in excess of par value | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Noncontrolling interests |
Balance, June 30, 2022 | $ | 3 | | | $ | 2,633 | | | $ | (1,936) | | | $ | 7,005 | | | $ | (816) | | | $ | 282 | |
Dividends declared ($0.17 per share*) | — | | | — | | | — | | | (39) | | | — | | | (15) | |
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Net issuance for executive stock plan | — | | | 6 | | | (1) | | | — | | | — | | | — | |
Net issuance of restricted stock | — | | | 11 | | | (2) | | | — | | | — | | | — | |
Purchase of treasury stock | — | | | — | | | (100) | | | — | | | — | | | — | |
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Net earnings | — | | | — | | | — | | | 273 | | | — | | | 19 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (262) | | | (24) | |
Balance, September 30, 2022 | $ | 3 | | | $ | 2,650 | | | $ | (2,039) | | | $ | 7,239 | | | $ | (1,078) | | | $ | 262 | |
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| BorgWarner Inc. stockholders' equity | | |
(in millions) | Issued common stock | | Capital in excess of par value | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Noncontrolling interests |
Balance, June 30, 2021 | $ | 3 | | | $ | 2,602 | | | $ | (1,810) | | | $ | 6,527 | | | $ | (673) | | | $ | 373 | |
Dividends declared ($0.17 per share*) | — | | | — | | | — | | | (41) | | | — | | | (14) | |
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Net issuance for executive stock plan | — | | | 6 | | | — | | | — | | | — | | | — | |
Net issuance of restricted stock | — | | | 9 | | | — | | | — | | | — | | | — | |
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Net earnings | — | | | — | | | — | | | 96 | | | — | | | 21 | |
Other comprehensive income | — | | | — | | | — | | | — | | | (73) | | | (6) | |
Balance, September 30, 2021 | $ | 3 | | | $ | 2,617 | | | $ | (1,810) | | | $ | 6,582 | | | $ | (746) | | | $ | 374 | |
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| BorgWarner Inc. stockholders' equity | | |
(in millions) | Issued common stock | | Capital in excess of par value | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Noncontrolling interests |
Balance, December 31, 2021 | $ | 3 | | | $ | 2,637 | | | $ | (1,812) | | | $ | 6,671 | | | $ | (551) | | | $ | 314 | |
Dividends declared ($0.51 per share*) | — | | | — | | | — | | | (121) | | | — | | | (64) | |
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Net issuance for executive stock plan | — | | | 6 | | | 4 | | | — | | | — | | | — | |
Net issuance of restricted stock | — | | | 6 | | | 9 | | | — | | | — | | | — | |
Purchase of treasury stock | — | | | — | | | (240) | | | — | | | — | | | — | |
Purchase/sale of noncontrolling interest | — | | | 1 | | | — | | | — | | | — | | | (4) | |
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Net earnings | — | | | — | | | — | | | 689 | | | — | | | 58 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (527) | | | (42) | |
Balance, September 30, 2022 | $ | 3 | | | $ | 2,650 | | | $ | (2,039) | | | $ | 7,239 | | | $ | (1,078) | | | $ | 262 | |
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| BorgWarner Inc. stockholders' equity | | |
(in millions) | Issued common stock | | Capital in excess of par value | | Treasury stock | | Retained earnings | | Accumulated other comprehensive income (loss) | | Noncontrolling interests |
Balance, December 31, 2020 | $ | 3 | | | $ | 2,614 | | | $ | (1,834) | | | $ | 6,296 | | | $ | (651) | | | $ | 296 | |
Dividends declared ($0.51 per share*) | — | | | — | | | — | | | (122) | | | — | | | (51) | |
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Net issuance for executive stock plan | — | | | 7 | | | 3 | | | — | | | — | | | — | |
Net issuance of restricted stock | — | | | (4) | | | 21 | | | — | | | — | | | — | |
Purchase of noncontrolling interest | — | | | — | | | — | | | — | | | — | | | (33) | |
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Acquisition of AKASOL | — | | | — | | | — | | | — | | | — | | | 96 | |
Net earnings | — | | | — | | | — | | | 408 | | | — | | | 77 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (95) | | | (11) | |
Balance, September 30, 2021 | $ | 3 | | | $ | 2,617 | | | $ | (1,810) | | | $ | 6,582 | | | $ | (746) | | | $ | 374 | |
__________________________________
* Per share dividends amount declared relate to BorgWarner common stock.
NOTE 19 ACCUMULATED OTHER COMPREHENSIVE LOSS
The following tables summarize the activity within accumulated other comprehensive loss during the three and nine months ended September 30, 2022 and 2021:
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(in millions) | Foreign currency translation adjustments | | Hedge instruments | | Defined benefit retirement plans | | | | Total |
Beginning balance, June 30, 2022 | $ | (703) | | | $ | 5 | | | $ | (118) | | | | | $ | (816) | |
Comprehensive (loss) income before reclassifications | (240) | | | 8 | | | 3 | | | | | (229) | |
Income taxes associated with comprehensive (loss) income before reclassifications | (34) | | | — | | | — | | | | | (34) | |
Reclassification from accumulated other comprehensive loss | — | | | — | | | 2 | | | | | 2 | |
Income taxes reclassified into net earnings | — | | | — | | | (1) | | | | | (1) | |
Ending balance, September 30, 2022 | $ | (977) | | | $ | 13 | | | $ | (114) | | | | | $ | (1,078) | |
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(in millions) | Foreign currency translation adjustments | | Hedge instruments | | Defined benefit retirement plans | | | | Total |
Beginning balance, June 30, 2021 | $ | (351) | | | $ | (2) | | | $ | (320) | | | | | $ | (673) | |
Comprehensive (loss) income before reclassifications | (55) | | | (2) | | | 8 | | | | | (49) | |
Income taxes associated with comprehensive (loss) income before reclassifications | (26) | | | — | | | (1) | | | | | (27) | |
Reclassification from accumulated other comprehensive loss | — | | | 1 | | | 2 | | | | | 3 | |
Income taxes reclassified into net earnings | — | | | — | | | — | | | | | — | |
Ending balance, September 30, 2021 | $ | (432) | | | $ | (3) | | | $ | (311) | | | | | $ | (746) | |
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(in millions) | Foreign currency translation adjustments | | Hedge instruments | | Defined benefit retirement plans | | | | Total |
Beginning balance, December 31, 2021 | $ | (423) | | | $ | — | | | $ | (128) | | | | | $ | (551) | |
Comprehensive (loss) income before reclassifications | (474) | | | 12 | | | 9 | | | | | (453) | |
Income taxes associated with comprehensive (loss) income before reclassifications | (80) | | | — | | | 1 | | | | | (79) | |
Reclassification from accumulated other comprehensive loss | — | | | 1 | | | 6 | | | | | 7 | |
Income taxes reclassified into net earnings | — | | | — | | | (2) | | | | | (2) | |
Ending balance, September 30, 2022 | $ | (977) | | | $ | 13 | | | $ | (114) | | | | | $ | (1,078) | |
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(in millions) | Foreign currency translation adjustments | | Hedge instruments | | Defined benefit retirement plans | | | | Total |
Beginning balance, December 31, 2020 | $ | (321) | | | $ | — | | | $ | (330) | | | | | $ | (651) | |
Comprehensive (loss) income before reclassifications | (68) | | | (5) | | | 11 | | | | | (62) | |
Income taxes associated with comprehensive (loss) income before reclassifications | (43) | | | — | | | — | | | | | (43) | |
Reclassification from accumulated other comprehensive loss | — | | | 2 | | | 10 | | | | | 12 | |
Income taxes reclassified into net earnings | — | | | — | | | (2) | | | | | (2) | |
Ending balance, September 30, 2021 | $ | (432) | | | $ | (3) | | | $ | (311) | | | | | $ | (746) | |
NOTE 20 CONTINGENCIES
In the normal course of business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, general liability and 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 management does not expect that an adverse outcome in any of these commercial and legal claims, actions and complaints that are currently pending will have a material adverse effect on the Company’s results of operations, financial position or cash flows. An adverse outcome could, nonetheless, be material to the results of operations or cash flows.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at 26 such sites as of September 30, 2022 and December 31, 2021. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its results of operations, financial position or cash flows. Generally, this is because either the estimates of the maximum potential liability at a site are not material or the liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.
The Company had an accrual for environmental liabilities of $8 million and $7 million as of September 30, 2022 and December 31, 2021, respectively, included in Other current and Other non-current liabilities in the Condensed Consolidated Balance Sheets. This accrual, which relates to eight of the sites, 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). Clean-up and other remedial activities are complete or nearing completion at the other 18 sites, for which there was no accrual as of September 30, 2022 and December 31, 2021.
NOTE 21 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 stock equivalents outstanding during the reporting period.
The dilutive impact of stock-based compensation is calculated using the treasury stock method. The treasury stock method assumes that the Company uses the assumed proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future and compensation cost for future service that the Company has not yet recognized. The dilutive effects of performance-based stock awards 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. There were 0.9 million and 0.6 million performance share units excluded from the computation of the diluted earnings for the three months ended September 30, 2022 and 2021, respectively. There were 0.9 million and 0.8 million performance share units excluded from the computation of the diluted earnings for the nine months ended September 30, 2022 and 2021, respectively. These units were excluded because the related performance criteria had not been met as of the balance sheet dates.
The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share of common stock:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except per share amounts) | 2022 | | 2021 | | 2022 | | 2021 |
Basic earnings per share: | | | | | | | |
Net earnings attributable to BorgWarner Inc. | $ | 273 | | | $ | 96 | | | $ | 689 | | | $ | 408 | |
Weighted average shares of common stock outstanding | 234.3 | | | 238.2 | | | 236.5 | | | 238.0 | |
Basic earnings per share of common stock | $ | 1.17 | | | $ | 0.40 | | | $ | 2.92 | | | $ | 1.71 | |
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Diluted earnings per share: | | | | | | | |
Net earnings attributable to BorgWarner Inc. | $ | 273 | | | $ | 96 | | | $ | 689 | | | $ | 408 | |
Weighted average shares of common stock outstanding | 234.3 | | | 238.2 | | | 236.5 | | | 238.0 | |
Effect of stock-based compensation | 1.3 | | | 1.6 | | | 1.0 | | | 1.3 | |
Weighted average shares of common stock outstanding including dilutive shares | 235.6 | | | 239.8 | | | 237.5 | | | 239.3 | |
Diluted earnings per share of common stock | $ | 1.16 | | | $ | 0.40 | | | $ | 2.90 | | | $ | 1.70 | |
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NOTE 22 REPORTING SEGMENTS AND RELATED INFORMATION
The Company’s business is aggregated into four reporting segments: Air Management, e-Propulsion & Drivetrain, Fuel Systems (formerly known as Fuel Injection) and Aftermarket. These segments are strategic business groups that are managed separately as each represents a specific grouping of related automotive components and systems.
In the first quarter of 2022, the Company announced that the starter and alternator business, previously reported in its e-Propulsion & Drivetrain segment, would transition to the Aftermarket segment. The Company also announced that the canisters and fuel delivery modules business, previously reported in its Air Management segment, would transition to the Fuel Systems segment. Both of these transitions were completed during the second quarter of 2022. The reporting segment disclosures have been updated accordingly which included recasting prior period information for the new reporting structure.
Additionally, during the first quarter of 2022, the Company updated the definition of its measure of segment income or loss to exclude the impact of intangible asset amortization expense. The Company believes this change improves comparability of ongoing operations given the increasing operating margin impact of intangible asset amortization arising from the Company’s merger and acquisition activity. The prior period information disclosed below has been recast to reflect this change. Further, the Company renamed its measure of segment income or loss from Segment Adjusted EBIT to Segment Adjusted Operating Income.
Segment Adjusted Operating Income is comprised of operating income adjusted for restructuring, merger, acquisition and divestiture expense, intangible asset amortization expense, impairment charges and other items not reflective of ongoing operating income or loss.
Segment Adjusted Operating Income is the measure of segment income or loss used by the Company. The Company believes Segment Adjusted Operating Income is most reflective of the operational profitability or loss of our reporting segments. The following tables show segment information and Segment Adjusted Operating Income for the Company’s reporting segments:
Net Sales by Reporting Segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
(in millions) | Customers | | Inter-segment | | Net | | Customers | | Inter-segment | | Net |
Air Management | $ | 1,880 | | | $ | 28 | | | $ | 1,908 | | | $ | 5,434 | | | $ | 76 | | | $ | 5,510 | |
e-Propulsion & Drivetrain | 1,327 | | | 44 | | | 1,371 | | | 3,776 | | | 141 | | | 3,917 | |
Fuel Systems | 528 | | | 72 | | | 600 | | | 1,531 | | | 176 | | | 1,707 | |
Aftermarket | 325 | | | 2 | | | 327 | | | 952 | | | 8 | | | 960 | |
Inter-segment eliminations | — | | | (146) | | | (146) | | | — | | | (401) | | | (401) | |
Net sales | $ | 4,060 | | | $ | — | | | $ | 4,060 | | | $ | 11,693 | | | $ | — | | | $ | 11,693 | |
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| Three Months Ended September 30, 2021 | | Nine Months Ended September 30, 2021 |
(in millions) | Customers | | Inter-segment | | Net | | Customers | | Inter-segment | | Net |
Air Management | $ | 1,551 | | | $ | 25 | | | $ | 1,576 | | | $ | 5,145 | | | $ | 78 | | | $ | 5,223 | |
e-Propulsion & Drivetrain | 1,095 | | | 39 | | | 1,134 | | | 3,628 | | | 128 | | | 3,756 | |
Fuel Systems | 456 | | | 59 | | | 515 | | | 1,498 | | | 190 | | | 1,688 | |
Aftermarket | 314 | | | 2 | | | 316 | | | 912 | | | 8 | | | 920 | |
Inter-segment eliminations | — | | | (125) | | | (125) | | | — | | | (404) | | | (404) | |
Net sales | $ | 3,416 | | | $ | — | | | $ | 3,416 | | | $ | 11,183 | | | $ | — | | | $ | 11,183 | |
Total Assets by Reporting Segment | | | | | | | | | | | |
(in millions) | September 30, 2022 | | December 31, 2021 |
Air Management | $ | 6,216 | | | $ | 6,229 | |
e-Propulsion & Drivetrain | 5,225 | | | 5,163 | |
Fuel Systems | 2,059 | | | 2,282 | |
Aftermarket | 1,276 | | | 1,179 | |
Total | 14,776 | | | 14,853 | |
Corporate | 1,301 | | | 1,722 | |
Consolidated | $ | 16,077 | | | $ | 16,575 | |
Segment Adjusted Operating Income
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Air Management | $ | 277 | | | $ | 214 | | | $ | 755 | | | $ | 791 | |
e-Propulsion & Drivetrain | 86 | | | 83 | | | 270 | | | 349 | |
Fuel Systems | 83 | | | 50 | | | 193 | | | 159 | |
Aftermarket | 49 | | | 43 | | | 139 | | | 123 | |
Segment Adjusted Operating Income | 495 | | | 390 | | | 1,357 | | | 1,422 | |
Corporate, including stock-based compensation | 57 | | | 54 | | | 182 | | | 201 | |
Intangible asset amortization expense | 24 | | | 25 | | | 74 | | | 65 | |
Restructuring expense (Note 5) | 8 | | | 51 | | | 50 | | | 143 | |
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Merger, acquisition and divestiture expense, net | 8 | | | 8 | | | 40 | | | 36 | |
Other non-comparable items | — | | | (1) | | | 13 | | | (3) | |
Loss (gain) on sale of business | 9 | | | — | | | (15) | | | 7 | |
Equity in affiliates’ earnings, net of tax | (10) | | | (12) | | | (29) | | | (40) | |
Unrealized (gain) loss on equity securities | (1) | | | 61 | | | 27 | | | 337 | |
Interest expense, net | 12 | | | 18 | | | 42 | | | 75 | |
Other postretirement income | (8) | | | (10) | | | (26) | | | (33) | |
Earnings before income taxes and noncontrolling interest | 396 | | | 196 | | | 999 | | | 634 | |
Provision for income taxes | 104 | | | 79 | | | 252 | | | 149 | |
Net earnings | 292 | | | 117 | | | $ | 747 | | | $ | 485 | |
Net earnings attributable to noncontrolling interest, net of tax | 19 | | | 21 | | | 58 | | | 77 | |
Net earnings attributable to BorgWarner Inc. | $ | 273 | | | $ | 96 | | | $ | 689 | | | $ | 408 | |
NOTE 23 OPERATING CASH FLOWS AND OTHER SUPPLEMENTAL FINANCIAL INFORMATION
| | | | | | | | | | | |
| Nine Months Ended September 30, |
(in millions) | 2022 | | 2021 |
OPERATING | | | |
Net earnings | $ | 747 | | | $ | 485 | |
Adjustments to reconcile net earnings to net cash flows from operations: | | | |
Depreciation and tooling amortization | 469 | | | 520 | |
Intangible asset amortization | 74 | | | 65 | |
Restructuring expense, net of cash paid | 41 | | | 118 | |
Stock-based compensation expense | 43 | | | 42 | |
(Gain) loss on sales of businesses | (17) | | | 7 | |
Deferred income tax benefit | (21) | | | (101) | |
Unrealized loss on equity securities | 27 | | | 337 | |
Loss on debt extinguishment | — | | | 20 | |
Gain on insurance recovery received for property damages | — | | | (5) | |
Other non-cash adjustments | (9) | | | (18) | |
Net earnings adjustments to reconcile to net cash flows from operations | 1,354 | | | 1,470 | |
Retirement plan contributions | (18) | | | (15) | |
Changes in assets and liabilities, excluding effects of acquisitions, divestitures and foreign currency translation adjustments: | | | |
Receivables | (726) | | | (45) | |
Inventories | (258) | | | (382) | |
Prepayments and other current assets | 16 | | | (7) | |
Accounts payable and accrued expenses | 288 | | | (231) | |
Prepaid taxes and income taxes payable | 35 | | | 21 | |
Other assets and liabilities | (12) | | | (47) | |
Net cash provided by operating activities | $ | 679 | | | $ | 764 | |
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SUPPLEMENTAL CASH FLOW INFORMATION | | | |
Cash paid during the period for: | | | |
Interest, net | $ | 100 | | | $ | 93 | |
Income taxes, net of refunds | $ | 251 | | | $ | 271 | |
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| Balance as of: |
Non-cash investing transactions: | September 30, 2022 | | December 31, 2021 |
Period end accounts payable related to property, plant and equipment purchases | $ | 120 | | | $ | 142 | |