UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
For the fiscal year ended December 31, 2019
OR
For the transition period from to
Commission File Number: 1-12162
(Exact name of registrant as specified in its charter)
State or other jurisdiction of Incorporation or organization | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248 ) 754-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Securities registered Pursuant to Section 12(g) of the Act: None
_________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-TT (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K
Yes ☐ No ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ☐ | ||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The aggregate market value of the voting common stock of the registrant held by stockholders (not including voting common stock held by directors and executive officers of the registrant) on June 28, 2019 (the last business day of the most recently completed second fiscal quarter) was approximately $8.6 billion.
As of February 7, 2020, the registrant had 206,409,586 shares of voting common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated.
Document | Part of Form 10-K into which incorporated |
Portions of the BorgWarner Inc. Proxy Statement for the 2019 Annual Meeting of Stockholders | Part III |
BORGWARNER INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2019
INDEX
Page No. | ||
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CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Statements contained in this Annual Report on Form 10-K ("Form 10-K") (including Management's Discussion and Analysis of Financial Condition and Results of Operations) may contain forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act (the “Act”) that are based on management's current outlook, expectations, estimates and projections. Words such as "anticipates," "believes," "continues," "could," "designed," "effect," "estimates," "evaluates," "expects," "forecasts," "goal," "initiative," "intends," "outlook," "plans," "potential," "project," "pursue," "seek," "should," "target," "when," "would," and variations of such words and similar expressions are intended to identify such forward-looking statements. Further, all statements, other than statements of historical fact contained or incorporated by reference in this Form 10-K, that we expect or anticipate will or may occur in the future regarding our financial position, business strategy and measures to implement that strategy, including changes to operations, competitive strengths, goals, expansion and growth of our business and operations, plans, references to future success and other such matters, are forward-looking statements. Accounting estimates, such as those described under the heading "Critical Accounting Policies" in Item 7 of this Annual Report on Form 10-K, are inherently forward-looking. All forward looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. Forward-looking statements are not guarantees of performance and the Company's actual results may differ materially from those expressed, projected or implied in or by the forward-looking statements.
You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. Forward-looking statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. These risks and uncertainties, among others, include: our dependence on automotive and truck production, both of which are highly cyclical; our reliance on major OEM customers; commodities availability and pricing; supply disruptions; fluctuations in interest rates and foreign currency exchange rates; availability of credit; our dependence on key management; our dependence on information systems; the uncertainty of the global economic environment; the outcome of existing or any future legal proceedings, including litigation with respect to various claims; future changes in laws and regulations, including, by way of example, tariffs, in the countries in which we operate; and the other risks noted under Item 1A, “Risk Factors,” and in other reports that we file with the Securities and Exchange Commission. We do not undertake any obligation to update or announce publicly any updates to or revisions to any of the forward-looking statements in this Form 10-K to reflect any change in our expectations or any change in events, conditions, circumstances, or assumptions underlying the statements.
This section and the discussions contained in Item 1A, "Risk Factors," and in Item 7, subheading "Critical Accounting Policies" in this report, are intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Act. This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties, including without limitation those not currently known to us or that we currently believe are immaterial, also may impair our business, operations, liquidity, financial condition and prospects.
Use of Non-GAAP Financial Measures
In addition to results presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), this report includes non-GAAP financial measures. The Company believes these non-GAAP financial measures provide additional information that is useful to investors in
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understanding the underlying performance and trends of the Company. Readers should be aware that non-GAAP financial measures have inherent limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. We calculate these measures using the appropriate GAAP components in their entirety and compute them in a manner intended to facilitate consistent period-to-period comparisons. The Company's method of calculating these non-GAAP measures may differ from methods used by other companies. These non-GAAP measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP. Where non-GAAP financial measures are used, the most directly comparable GAAP financial measure, as well as the reconciliation to the most directly comparable GAAP financial measure, can be found in this report.
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PART I
ITEM 1. BUSINESS
BorgWarner Inc. (together with it Consolidated Subsidiaries, the “Company” or "BorgWarner") is a Delaware corporation incorporated in 1987. We are a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles. Our products help improve vehicle performance, propulsion efficiency, stability and air quality. We manufacture and sell these products worldwide, primarily to original equipment manufacturers (“OEMs”) of light vehicles (passenger cars, sport-utility vehicles ("SUVs"), vans and light trucks). The Company's products are also sold to OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications). We also manufacture and sell our products to certain Tier One vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers in Europe, the Americas and Asia and is an original equipment supplier to every major automotive OEM in the world.
Proposed Acquisition of Delphi Technologies PLC
On January 28, 2020, the Company entered into a definitive agreement to acquire Delphi Technologies PLC (“Delphi Technologies”) in an all-stock transaction valued at approximately $3.3 billion, based on the closing price of BorgWarner stock on January 27, 2020. Refer to Note 23, “Subsequent Event,” to the Consolidated Financial Statements in Item 8 of this report for more information. The Company believes this acquisition will increase our power electronics products, capabilities and scale, creating a leader in electrified propulsion systems that is well positioned to take advantage of future propulsion migration, enhance our combustion, commercial vehicle and aftermarket businesses and maintain flexibility across combustion, hybrid and electric propulsion, consistent with our evolution towards the propulsion market of the future.
Financial Information About Reporting Segments
Refer to Note 21, “Reporting Segments and Related Information,” to the Consolidated Financial Statements in Item 8 of this report for financial information about the Company's reporting segments.
Narrative Description of Reporting Segments
The Company reports its results under two reporting segments: Engine and Drivetrain. Net sales by reporting segment for the years ended December 31, 2019, 2018 and 2017 are as follows:
Year Ended December 31, | |||||||||||
(in millions) | 2019 | 2018 | 2017 | ||||||||
Engine | $ | 6,214 | $ | 6,447 | $ | 6,062 | |||||
Drivetrain | 4,015 | 4,140 | 3,790 | ||||||||
Inter-segment eliminations | (61 | ) | (57 | ) | (53 | ) | |||||
Net sales | $ | 10,168 | $ | 10,530 | $ | 9,799 | |||||
The sales information presented above does not include the sales by the Company's unconsolidated joint ventures (see sub-heading “Joint Ventures”). Such unconsolidated sales totaled approximately $827 million, $947 million, and $844 million for the years ended December 31, 2019, 2018 and 2017, respectively.
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Engine
The Engine Segment develops and manufactures products to improve fuel economy, reduce emissions and enhance performance. Increasingly stringent regulations of, and consumer demand for, better fuel economy and emissions performance are driving demand for the Engine Segment's products in combustion, hybrid and electric propulsion systems. The Engine Segment's technologies include: turbochargers, eBoosters, timing systems, emissions systems, thermal systems, gasoline ignition technology, cabin heaters, battery heaters and battery charging.
Turbochargers provide several benefits including increased power for a given engine size, improved fuel economy and reduced emissions. The Engine Segment has benefited from the growth in turbocharger demand around the world for both combustion and hybrid propulsion systems. The Engine Segment provides turbochargers for light, commercial and off-highway applications for combustion and hybrid vehicles in Europe, the Americas and Asia. The Engine Segment also designs and manufactures turbocharger actuators using integrated electronics to precisely control turbocharger speed and pressure ratio.
Sales of turbochargers for light vehicles represented approximately 28%, 27% and 28% of total net sales for the years ended December 31, 2019, 2018 and 2017, respectively. The Engine Segment currently supplies turbochargers to many OEMs including BMW, Daimler, Fiat Chrysler Automobiles ("FCA"), Ford, General Motors, Hyundai, Jaguar Land Rover, Renault, Volkswagen and Volvo. The Engine Segment also supplies turbochargers to several commercial vehicle and off-highway OEMs including Caterpillar, Daimler, Deutz, John Deere, MAN, Navistar International and Weichai.
The Engine Segment's timing systems enable precise control of air and exhaust flow through the engine, improving fuel economy and emissions. The Engine Segment's timing systems products include timing chain, variable cam timing (“VCT”), crankshaft and camshaft sprockets, tensioners, guides and snubbers, HY-VO® front-wheel drive (“FWD”) transmission chain, four-wheel drive (“4WD”) chain for light vehicles and hybrid power transmission chain. The Engine Segment is a leading manufacturer of timing systems for OEMs around the world.
The Engine Segment's engine timing technology includes VCT with mid-position lock, which allows a greater range of camshaft positioning thereby enabling better control over airflow and the opportunity to improve fuel economy, reduce emissions and improve engine performance compared with conventional VCT systems.
The Engine Segment's emissions systems products improve emissions performance and fuel economy. Products include electric air pumps and exhaust gas recirculation ("EGR") modules, EGR coolers, EGR valves, glow plugs and instant starting systems for combustion, both gasoline and diesel propulsion systems, and hybrid vehicles.
The Engine Segment's thermal systems products are designed to optimize temperatures in propulsion systems and vehicle cabins. Products include viscous fan drives that sense and respond to multiple cooling requirements, polymer fans, coolant pumps, cabin heaters, battery heaters and battery charging.
In 2017, the Company started exploring strategic options for its non-core emission product lines in the Engine segment and launched an active program to locate a buyer and initiated other actions required to complete the plan to sell and exit the non-core pipes and thermostat product lines. In December 2018, the Company reached an agreement to sell its thermostat product lines, and the sale was closed on April 1, 2019. Additionally, during the year, the Company entered into agreements to transition its pipes product lines to multiple buyers. During the year, the assets and liabilities were
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removed from the Consolidated Balance Sheet. Refer to Note 20, “Assets and Liabilities Held for Sale,” to the Consolidated Financial Statements in Item 8 of this report for more information.
Drivetrain
The Drivetrain Segment develops and manufactures products to improve fuel economy, reduce emissions and enhance performance in combustion, hybrid and electric vehicles. The Drivetrain Segment’s technologies include: rotating electrical components, power electronics, clutching systems, control modules and all-wheel drive systems. The core design features of its rotating electrical components portfolio meet the demands of increasing vehicle electrification, improved fuel efficiency, reduced weight, and lowered electrical and mechanical noise. The Drivetrain Segment's mechanical products include friction, controls products for automatic transmissions and torque management products for All-Wheel Drive ("AWD") vehicles, and its rotating electrical components include starter motors, alternators and electric motors for hybrid and electric vehicles.
Friction and mechanical products for automatic transmissions include dual clutch modules, friction clutch modules, friction and separator plates, transmission bands, torque converter clutches, one-way clutches and torsional vibration dampers. Controls products for automatic transmissions feature electro-hydraulic solenoids for standard and high pressure hydraulic systems, transmission solenoid modules and dual clutch control modules. The Company's 50%-owned joint venture in Japan, NSK-Warner KK ("NSK-Warner"), is a leading producer of friction plates and one-way clutches in Japan and China.
The Drivetrain Segment has led the globalization of today's dual clutch transmission ("DCT") technology for over 15 years. BorgWarner's award-winning DualTronic® technology enables a conventional, manual gearbox to function as a fully automatic transmission by eliminating the interruption in power flow that occurs when shifting a single clutch manual transmission. The result is a smooth shifting automatic transmission with the fuel efficiency and driving experience of a manual gearbox.
The Drivetrain Segment's torque management products include rear-wheel drive (“RWD”)-AWD transfer case systems, FWD-AWD coupling systems and cross-axle coupling systems. The Drivetrain Segment's focus is on developing electronically-controlled torque management devices and systems that will benefit fuel economy and vehicle dynamics.
Transfer cases are installed on RWD-based light trucks, SUVs, cross-over utility vehicles, and passenger cars. A transfer case attaches to the transmission and distributes torque to the front and rear axles improving vehicle traction and stability in dynamic driving conditions. There are many variants of the Drivetrain Segment's transfer case technology in the market today, including Torque On-Demand (TOD®), chain-driven, gear-driven, Pre-Emptive, Part-Time, 1-speed and 2-speed transfer cases. The Drivetrain Segment's transfer cases are featured on Ford and Ram light-duty and heavy-duty trucks.
The Drivetrain Segment is involved in the AWD market for FWD-based vehicles with couplings that use electronically-controlled clutches to distribute power to the rear wheels as traction is required. The Drivetrain Segment's latest coupling innovation, the Centrifugal Electro-Hydraulic (“CEH”) Actuator, used to engage the clutches in the coupling, produces outstanding vehicle stability and traction while promoting better fuel economy with reduced weight. The CEH Actuator is found in the AWD couplings featured in several current FWD-AWD vehicles.
In 2015, the Company acquired Remy International, Inc. (“Remy”), a global market leader in the design, manufacture, remanufacture and distribution of rotating electrical components for light and commercial vehicles, OEMs and the aftermarket. Remy's principal products include starter motors, alternators and electric motors. The Company’s starter motors and alternators are used in gasoline, diesel, natural gas and alternative fuel engines for light vehicle, commercial vehicle, and off-highway applications. The product technology continues to evolve to meet the demands of increasing vehicle
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electrical loads, improved fuel efficiency, reduced weight and lowered electrical and mechanical noise. The Company’s electric motors are used in both light and commercial vehicles including off-highway applications. These include both pure electric applications as well as hybrid applications, where the electric motors are combined with traditional gasoline or diesel propulsion systems.
The Company sells new starters, alternators and hybrid electric motors to OEMs globally for factory installation on new vehicles, and remanufactured and new starters and alternators to heavy duty aftermarket customers outside of Europe and to OEMs for original equipment service. As a leading remanufacturer, BorgWarner obtains used starters and alternators, commonly referred to as cores, then disassembles, cleans, combines them with new subcomponents and reassembles them into saleable, finished products, which are tested to meet OEM requirements.
In 2017, the Company acquired Sevcon, Inc. ("Sevcon"), a global provider of electrification technologies, serving customers in the U.S., U.K., France, Germany, Italy, China and the Asia Pacific region. Principal products include motor controllers, battery chargers, and uninterrupted power source systems for electric and hybrid vehicles, industrial, medical and telecom applications. These products complement BorgWarner’s power electronics capabilities utilized to provide electrified propulsion solutions.
Joint Ventures
As of December 31, 2019, the Company had eight joint ventures in which it had a less-than-100% ownership interest. Results from the six joint ventures in which the Company is the majority owner are consolidated as part of the Company's results. Results from the two joint ventures in which the Company's effective ownership interest is 50% or less, were reported by the Company using the equity method of accounting. In 2019, the Company and Romeo Systems, Inc. formed a new joint venture, BorgWarner Romeo Power LLC (the "Romeo JV"), in which the Company owns a 60% interest. The Romeo JV focuses on producing battery module and pack technology.
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Management of the unconsolidated joint ventures is shared with the Company's respective joint venture partners. Certain information concerning the Company's joint ventures is set forth below:
Joint venture | Products | Year organized | Percentage owned by the Company | Location of operation | Joint venture partner | Fiscal 2019 net sales (in millions) (a) | |||||||||
Unconsolidated: | |||||||||||||||
NSK-Warner | Transmission components | 1964 | 50 | % | Japan/China | NSK Ltd. | $ | 610 | |||||||
Turbo Energy Private Limited (b) | Turbochargers | 1987 | 32.6 | % | India | Sundaram Finance Limited; Brakes India Limited | $ | 217 | |||||||
Consolidated: | |||||||||||||||
BorgWarner Transmission Systems Korea Ltd. (c) | Transmission components | 1987 | 60 | % | Korea | NSK-Warner | $ | 238 | |||||||
Borg-Warner Shenglong (Ningbo) Co. Ltd. | Fans and fan drives | 1999 | 70 | % | China | Ningbo Shenglong Automotive Powertrain Systems Co., Ltd. | $ | 79 | |||||||
BorgWarner TorqTransfer Systems Beijing Co. Ltd. | Transfer cases | 2000 | 80 | % | China | Beijing Hainachuan Automotive Parts Holding Co., Ltd. | $ | 243 | |||||||
SeohanWarner Turbo Systems Ltd. | Turbochargers | 2003 | 71 | % | Korea | Korea Flange Company | $ | 199 | |||||||
BorgWarner United Transmission Systems Co. Ltd. | Transmission components | 2009 | 66 | % | China | China Automobile Development United Investment Co., Ltd. | $ | 361 | |||||||
BorgWarner Romeo Power LLC | Battery module and pack technology | 2019 | 60 | % | US | Romeo Systems, Inc. | $ | — | |||||||
________________
(a) | All sales figures are for the year ended December 31, 2019, except NSK-Warner and Turbo Energy Private Limited. NSK-Warner’s sales are reported for the 12 months ended November 30, 2019. Turbo Energy Private Limited’s sales are reported for the 12 months ended September 30, 2019. |
(b) | The Company made purchases from Turbo Energy Private Limited totaling $45 million, $42 million and $32 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company made purchases from NSK-Warner totaling $6 million, $10 million and $12 million for the years ended December 31, 2019, 2018 and 2017, respectively. |
(c) | BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner Transmission Systems Korea Ltd. This gives the Company an additional indirect effective ownership percentage of 20%, resulting in a total effective ownership interest of 80%. |
Financial Information About Geographic Areas
Refer to Note 21, “Reporting Segments and Related Information,” to the Consolidated Financial Statements in Item 8 of this report for financial information about geographic areas.
Product Lines and Customers
During the year ended December 31, 2019, approximately 83% of the Company's net sales were for light-vehicle applications; approximately 9% were for commercial vehicle applications; approximately 4% were for off-highway vehicle applications; and approximately 4% were to distributors of aftermarket replacement parts.
The Company’s worldwide net sales to the following customers (including their subsidiaries) were approximately as follows:
Year Ended December 31, | ||||||||
Customer | 2019 | 2018 | 2017 | |||||
Ford | 15 | % | 14 | % | 15 | % | ||
Volkswagen | 11 | % | 12 | % | 13 | % | ||
No other single customer accounted for more than 10% of our consolidated net sales in any of the years presented.
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The Company's automotive products are generally sold directly to OEMs, substantially pursuant to negotiated annual contracts, long-term supply agreements or terms and conditions as may be modified by the parties. Deliveries are subject to periodic authorizations based upon OEM production schedules. The Company typically ships its products directly from its plants to the OEMs.
Sales and Marketing
Each of the Company's businesses within its two reporting segments has its own sales function. Account executives for each of our businesses are assigned to serve specific customers for one or more businesses' products. Our account executives spend the majority of their time in direct contact with customers' purchasing and engineering employees and are responsible for servicing existing business and for identifying and obtaining new business. Because of their close relationship with customers, account executives are able to identify and meet customers' needs based upon their knowledge of our products' design and manufacturing capabilities. Upon securing a new order, account executives participate in product launch team activities and serve as a key interface with customers. In addition, sales and marketing employees of our Engine and Drivetrain reporting segments often work together to explore cross-development opportunities where appropriate.
Seasonality
Our operations are directly related to the automotive industry. Consequently, our Engine and Drivetrain segments may experience seasonal fluctuations to the extent automotive vehicle production slows, such as in the summer months when many customer plants typically close for model year changeovers or vacations. Historically, model changeovers or vacations have generally resulted in lower sales volume in the Company's third quarter.
Research and Development
The Company conducts advanced Engine and Drivetrain research. This advanced engineering function seeks to leverage know-how and expertise across product lines to create new Engine and Drivetrain systems and modules that can be commercialized. This function oversees the Company's investments in certain venture capital funds that provide seed money for start-up businesses developing new technologies pertinent to the automotive industry and the Company's propulsion strategies.
In addition, each of the Company's businesses within its two reporting segments has its own research and development (“R&D”) organization, including engineers and technicians, engaged in R&D activities at facilities worldwide. The Company also operates testing facilities such as prototype, measurement and calibration, life cycle testing and dynamometer laboratories.
By working closely with OEMs and anticipating their future product needs, the Company's R&D personnel conceive, design, develop and manufacture new proprietary automotive components and systems. R&D personnel also work to improve current products and production processes. The Company believes its commitment to R&D will allow it to continue to obtain new orders from its OEM customers.
The Company's net R&D expenditures are included in selling, general and administrative expenses of the Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract. Financial risks and rewards transfer upon shipment, acceptance of a prototype component by the customer or upon completion of the performance obligation as stated in the respective customer agreement.
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Year Ended December 31, | |||||||||||
(in millions) | 2019 | 2018 | 2017 | ||||||||
Gross R&D expenditures | $ | 498 | $ | 512 | $ | 473 | |||||
Customer reimbursements | (85 | ) | (72 | ) | (65 | ) | |||||
Net R&D expenditures | $ | 413 | $ | 440 | $ | 408 | |||||
Net R&D expenditures as a percentage of net sales were 4.1%, 4.2% and 4.2% for the years ended December 31, 2019, 2018 and 2017, respectively. None of the Company's R&D related contracts exceeded 5% of net R&D expenditures in any of the years presented.
Intellectual Property
The Company has approximately 6,430 active domestic and foreign patents and patent applications pending or under preparation and receives royalties from licensing patent rights to others. While it considers its patents on the whole to be important, the Company does not consider any single patent, any group of related patents or any single license essential to its operations in the aggregate or to the operations of any of the Company's business groups individually. The expiration of the patents individually and in the aggregate is not expected to have a material effect on the Company's financial position or future operating results. The Company owns numerous trademarks, some of which are valuable, but none of which are essential to its business in the aggregate.
The Company owns the “BorgWarner” trade name and numerous BORGWARNER trademarks, including without limitation "BORGWARNER" and "BORGWARNER and Bug Design", which are material to the Company's business.
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Competition
The Company's reporting segments compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. Many of these competitors are larger and have greater resources than the Company. Technological innovation, application engineering development, quality, price, delivery and program launch support are the primary methods of competition.
The Company’s major non-OEM competitors by product type follow:
Product Type: Engine | Names of Competitors | |||
Turbochargers: | Cummins Turbo Technology | IHI | ||
Garrett Motion, Inc. | Mitsubishi Heavy Industries (MHI) | |||
BMTS Technology | Vitesco Technologies | |||
Emissions systems: | Mahle | T.RAD | ||
Denso | Pierburg | |||
Bosch | NGK | |||
Eldor | Eberspaecher | |||
Timing systems: | Denso | Schaeffler Group | ||
Iwis | Tsubaki Group | |||
Delphi Technologies | ||||
Thermal systems: | Horton | Usui | ||
Mahle | Xuelong | |||
Product Type: Drivetrain | Names of Competitors | |||
Torque management systems: | GKN Driveline | JTEKT | ||
Magna Powertrain | ||||
Rotating electrical components: | Denso | Valeo | ||
SEG Automotive | Vitesco Technologies | |||
Mitsubishi Electric | Bosch | |||
Transmission systems: | Bosch | FCC | ||
Dynax | Schaeffler Group | |||
Valeo | Denso | |||
In addition, a number of the Company's major OEM customers manufacture, for their own use and for others, products that compete with the Company's products. Other current OEM customers could elect to manufacture products to meet their own requirements or to compete with the Company. There is no assurance that the Company's business will not be adversely affected by increased competition in the markets in which it operates.
For many of its products, the Company's competitors include suppliers in parts of the world that enjoy economic advantages such as lower labor costs, lower health care costs, lower tax rates and, in some cases, export subsidies and/or raw materials subsidies. Also, see Item 1A, "Risk Factors."
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Workforce
As of December 31, 2019, the Company had a salaried and hourly workforce of approximately 29,000 (as compared with approximately 30,000 at December 31, 2018), of which approximately 6,800 were in the U.S. Approximately 13% of the Company's U.S. workforce is unionized. The workforces at certain international facilities are also unionized. The Company believes the present relations with our workforce to be satisfactory.
We have one domestic collective bargaining agreement which is for one facility in New York, which expires in September 2020.
Raw Materials
The Company uses a variety of raw materials in the production of its products including aluminum, copper, nickel, plastic resins, steel and certain alloy elements. Manufacturing operations for each of the Company's operating segments are dependent upon natural gas, fuel oil and electricity.
The Company uses a variety of tactics to limit the impact of supply shortages and inflationary pressures. The Company's global procurement organization works to accelerate cost reductions, purchases from lower cost regions, optimize the supply base, mitigate risk and collaborate on its buying activities. In addition, the Company uses long-term contracts, cost sharing arrangements, design changes, customer buy programs and limited financial instruments to help control costs. The Company intends to use similar measures in 2020 and beyond. Refer to Note 11, “Financial Instruments,” to the Consolidated Financial Statements in Item 8 of this report for information related to the Company's hedging activities.
For 2020, the Company believes that its supplies of raw materials are adequate and available from multiple sources to support its manufacturing requirements.
Available Information
Through its Internet website (www.borgwarner.com), the Company makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission as soon as reasonably practicable after they are filed or furnished. The Company also makes the following documents available on its Internet website: the Audit Committee Charter; the Compensation Committee Charter; the Corporate Governance Committee Charter; the Company's Corporate Governance Guidelines; the Company's Code of Ethical Conduct; and the Company's Code of Ethics for CEO and Senior Financial Officers. You may also obtain a copy of any of the foregoing documents, free of charge, if you submit a written request to Investor Relations, 3850 Hamlin Road, Auburn Hills, Michigan 48326. The public may read and copy materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC, 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
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Information About Executive Officers of the Company
Set forth below are the names, ages, positions and certain other information concerning the executive officers of the Company as of February 13, 2020.
Name | Age | Position with the Company | ||
Frederic B. Lissalde | 52 | President and Chief Executive Officer | ||
Kevin A. Nowlan | 48 | Executive Vice President, Chief Financial Officer | ||
Tonit M. Calaway | 51 | Executive Vice President, Chief Legal Officer and Secretary | ||
Felecia Pryor | 45 | Executive Vice President, Chief Human Resources Officer | ||
Craig D. Aaron | 42 | Vice President and Treasurer | ||
Stefan Demmerle | 55 | Vice President | ||
Brady D. Ericson | 48 | Vice President | ||
Joseph F. Fadool | 53 | Vice President | ||
Thomas J. McGill | 53 | Vice President and Controller | ||
Volker Weng | 49 | Vice President | ||
Hakan Yilmaz | 41 | Vice President, Chief Technology Officer | ||
Mr. Lissalde has been President and Chief Executive Officer of the Company since August 2018. He was Executive Vice President and Chief Operating Officer of the Company from January 2018 to July 2018. From May 2013 to December 2017, he was Vice President of the Company and President and General Manager of BorgWarner Turbo Systems LLC, a subsidiary.
Mr. Nowlan has been Executive Vice President and Chief Financial Officer since April 2019. He was Senior Vice President, President, Trailer, Components and Chief Financial Officer of Meritor, Inc., a commercial truck and industrial supplier, from March 2018 to March 2019. He was Senior Vice President and Chief Financial Officer of Meritor, Inc. from May 2013 to March 2018.
Ms. Calaway has been Executive Vice President and Chief Legal Officer and Secretary since August 2018. She was Chief Human Resources Officer of the Company from August 2016 to August 2018. She was Vice President of Human Resources of Harley-Davidson Inc., a motorcycle manufacturer, and President of The Harley-Davidson Foundation from February 2010 to July 2016. Since October 2019, Ms. Calaway has served as a member of the Board of Directors of Astronics Corporation, an aerospace and defense company.
Ms. Pryor has been Executive Vice President and Chief Human Resources Officer since April 2019. She was Vice President of Human Resources of BorgWarner Ithaca LLC (d/b/a BorgWarner Morse Systems), a subsidiary, from October 2018 to March 2019. She was Global Human Resources Director - Global Personnel, Organization & Planning for Ford Motor Company, an automotive manufacturer, from January 2018 to October 2018. She was Vice President of Human Resources for Ford Motor Company - ASEAN Markets from August 2016 to January 2018. She was HR Director for Ford’s Research & Engineer Center located in Nanjing, China from August 2014 to August 2016.
Mr. Aaron has been Vice President and Treasurer since March 2019. He was Vice President of Finance of BorgWarner Ithaca LLC (d/b/a BorgWarner Morse Systems), a subsidiary, from December 2016 to February 2019. He was Director, Financial Reporting from August 2012 to November 2016.
Dr. Demmerle has been Vice President of the Company and President and General Manager of BorgWarner PDS (USA) Inc. (formerly known as BorgWarner TorqTransfer Systems Inc.), a subsidiary, since September 2012 and President and General Manager of BorgWarner PDS (Indiana) Inc. (formerly known as Remy International, Inc.), a subsidiary, since December 2015.
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Mr. Ericson has been Vice President of the Company and President and General Manager of BorgWarner Ithaca LLC (d/b/a BorgWarner Morse Systems), a subsidiary, since June 2019. He was the Executive Vice President and Chief Strategy Officer of the Company from January 2017 until June 2019. He was Vice President of the Company and President and General Manager of BorgWarner Emissions Systems LLC, a subsidiary, from March 2014 until December 2016, during which time BorgWarner BERU Systems GmbH was combined with BorgWarner Emissions Systems Inc.
Mr. Fadool has been Vice President of the Company and President and General Manager of BorgWarner Emissions Systems LLC, BorgWarner Thermal Systems Inc. and Turbo Systems LLC, subsidiaries of the Company, since October 2019. He was Vice President of the Company and President and General Manager of Turbo Systems LLC, a subsidiary, from May 2019 to October 2019. He was Vice President of the Company and President and General Manager of BorgWarner Emissions Systems LLC and BorgWarner Thermal Systems Inc., both subsidiaries, from January 2017 to May 2019. He was Vice President of the Company and President and General Manager of BorgWarner Ithaca LLC (d/b/a BorgWarner Morse Systems), a subsidiary, from July 2015 until December 2016. From May 2012 to July 2015, he was the Vice President of the Company and President and General Manager of BorgWarner Morse TEC Inc., a subsidiary.
Mr. McGill has been Vice President and Controller since April 2019. He was Vice President and Interim Chief Financial Officer from January 2019 to April 2019. Additionally, he was the Treasurer of the Company from May 2012 to March 2019.
Dr. Weng has been Vice President of the Company and President and General Manager of BorgWarner Transmission Systems LLC since October 2019. He was President and General Manager for BorgWarner Emissions Systems LLC and BorgWarner Thermal Systems Inc., both subsidiaries, from May 2019 to September 2019. He was Vice President and General Manager, Europe for BorgWarner Emissions Systems LLC and BorgWarner Thermal Systems Inc., both subsidiaries, from April 2017 to April 2019. He was Vice President and General Manager, Asia for Turbo Systems Systems LLC, a subsidiary, from July 2015 to April 2017. He was General Manager, China for Turbo Systems LLC, a subsidiary, from January 2013 to July 2015.
Mr. Yilmaz has been Vice President and Chief Technology Officer since January 2018. He was Vice President, Global Head of Powertrain Systems and Advanced Engineering for Robert Bosch, a global supplier of technology and services, from May 2016 to December 2017. He was Vice President, Business Strategy and Strategic Marketing for Robert Bosch from January 2015 to April 2016. He was Vice President of Global Program Management and Engineering, for Robert Bosch from January 2013 to December 2014.
Item 1A. Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impact our business operations. If any of the following risks occur, our business including its financial performance, financial condition, operating results and cash flows could be adversely affected.
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Risks related to our industry
Conditions in the automotive industry may adversely affect our business.
Our financial performance depends on conditions in the global automotive industry. Automotive and truck production and sales are cyclical and sensitive to general economic conditions and other factors including interest rates, consumer credit, and consumer spending and preferences. Economic declines that result in significant reduction in automotive or truck production would have an adverse effect on our sales to OEMs.
We face strong competition.
We compete worldwide with a number of other manufacturers and distributors that produce and sell products similar to ours. Price, quality, delivery, technological innovation, engineering development and program launch support are the primary elements of competition. Our competitors include vertically integrated units of our major OEM customers, as well as a large number of independent domestic and international suppliers. A number of our competitors are larger than we are, and some competitors have greater financial and other resources than we do. Although OEMs have indicated that they will continue to rely on outside suppliers, a number of our major OEM customers manufacture products for their own uses that directly compete with our products. These OEMs could elect to manufacture such products for their own uses in place of the products we currently supply. Our traditional OEM customers, faced with intense international competition, have continued to expand their worldwide sourcing of components. As a result, we have experienced competition from suppliers in other parts of the world that enjoy economic advantages, such as lower labor costs, lower health care costs, lower tax rates and, in some cases, export or raw materials subsidies. Increased competition could adversely affect our business. In addition, any of our competitors may foresee the course of market development more accurately than we do, develop products that are superior to our products, produce similar products at a cost that is lower than our cost, or adapt more quickly than we do to new technologies or evolving customer requirements. As a result, our products may not be able to compete successfully with our competitors' products, and we may not be able to meet the growing demands of customers. These trends may adversely affect our sales as well as the profit margins on our products.
If we do not respond appropriately, the evolution of the automotive industry could adversely affect our business.
The automotive industry is increasingly focused on the development of hybrid and electric vehicles and of advanced driver assistance technologies, with the goal of developing and introducing a commercially-viable, fully-automated driving experience. There has also been an increase in consumer preferences for mobility on demand services, such as car and ride sharing, as opposed to automobile ownership, which may result in a long-term reduction in the number of vehicles per capita. In addition, some industry participants are exploring transportation through alternatives to automobiles. These evolving areas have also attracted increased competition from entrants outside the traditional automotive industry. If we do not continue to innovate and develop, or acquire new and compelling products that capitalize upon new technologies in response to OEM and consumer preferences, this could have an adverse impact on our results of operations.
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The increased adoption of gasoline and hybrid propulsion systems in Western Europe may materially reduce the demand for our current products.
The industry mix shift away from diesel propulsion systems in Western Europe has resulted and is expected to result in lower demand for current diesel components. This shift is expected to drive further increased demand for gasoline and hybrid propulsion systems. Although we have developed and are currently in production with products for gasoline and hybrid propulsion systems and industry penetration rates for these products are expected to increase over the next several years, due to the high current penetration rates of our key technologies on diesel propulsion systems, this industry mix shift could adversely impact our near-term results of operations, financial condition, and cash flows.
Risks related to our business
We are under substantial pressure from OEMs to reduce the prices of our products.
There is substantial and continuing pressure on OEMs to reduce costs, including costs of products we supply. OEM customers expect annual price reductions in our business. To maintain our profit margins, we seek price reductions from our suppliers, improved production processes to increase manufacturing efficiency, and streamlined product designs to reduce costs, and we attempt to develop new products, the benefits of which support stable or increased prices. Our ability to pass through increased raw material costs to our OEM customers is limited, with cost recovery often less than 100% and often on a delayed basis. Inability to reduce costs in an amount equal to annual price reductions, increases in raw material costs, and increases in employee wages and benefits could have an adverse effect on our business.
We continue to face volatile costs of commodities used in the production of our products.
The Company uses a variety of commodities (including aluminum, copper, nickel, plastic resins, steel, other raw materials and energy) and materials purchased in various forms such as castings, powder metal, forgings, stampings and bar stock. Increasing commodity costs will have an impact on our results. We have sought to alleviate the impact of increasing costs by including a material pass-through provision in our customer contracts wherever possible and by selectively hedging certain commodity exposures. Customers frequently challenge these contractual provisions and rarely pay the full cost of any increases in the cost of materials. The discontinuation or lessening of our ability to pass through or hedge increasing commodity costs could adversely affect our business.
From time to time, commodity prices may also fall rapidly. If this happens, suppliers may withdraw capacity from the market until prices improve which may cause periodic supply interruptions. The same may be true of our transportation carriers and energy providers. If these supply interruptions occur, it could adversely affect our business.
Changes in U.S. administrative policy, including changes to existing trade agreements and any resulting changes in international trade relations, may have an adverse effect on us.
The United States has implemented tariffs on imported steel and aluminum. The United States has also implemented tariffs on items imported by us from China or other countries and may implement tariffs on additional products and export controls on additional items. The impact of these tariffs has increased the cost of raw materials and components we purchase and additional tariffs would likely result in additional increases. The imposition of tariffs by the United States has resulted in retaliatory tariffs from a number of countries, including China, which increase the cost of products we sell. A continuing trade war could have a negative impact on the global market and a more significant adverse effect on our business. The potential imposition of additional tariffs on Chinese imports and imports of automobiles, including
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cars, SUVs, vans and light trucks, and automotive parts could increase our costs and could result in lowering our gross margin on products sold.
We use important intellectual property in our business. If we are unable to protect our intellectual property or if a third party makes assertions against us or our customers relating to intellectual property rights, our business could be adversely affected.
We own important intellectual property, including patents, trademarks, copyrights, and trade secrets, and are involved in numerous licensing arrangements. Our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design around the patents we own or license. Further, as we expand our operations in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite efforts we undertake to protect them. Our inability to protect or enforce our intellectual property rights or claims that we are infringing intellectual property rights of others could adversely affect our business and our competitive position.
We are subject to business continuity risks associated with increasing centralization of our information technology (IT) systems.
To improve efficiency and reduce costs, we have regionally centralized the information systems that support our business processes such as invoicing, payroll, and general management operations. If the centralized systems are disrupted or disabled, key business processes could be interrupted, which could adversely affect our business.
A failure of or disruption in our information technology infrastructure, including a disruption related to cybersecurity, could adversely impact our business and operations.
We rely on the capacity, reliability and security of our IT systems and infrastructure. IT systems are vulnerable to disruptions, including those resulting from natural disasters, cyber attacks or failures in third-party-provided services. Disruptions and attacks on our IT systems pose a risk to the security of our systems and our ability to protect our networks and the confidentiality, availability and integrity of information and data and that of third parties, including our employees. Some cyber attacks depend on human error or manipulation, including phishing attacks or schemes that use social engineering to gain access to systems or carry out disbursement of funds or other frauds, which raise the risks from such events and the costs associated with protecting against such attacks. Although we have implemented security policies, processes, and layers of defense designed to help identify and protect against intentional and unintentional misappropriation or corruption of our systems and information, and disruptions of our operations, we have been, and likely will continue to be, subjected to such attacks or disruptions. Future attacks or disruptions could potentially lead to the inappropriate disclosure of confidential information, including our intellectual property, improper use of our systems and networks, access to and manipulation and destruction of Company or third party data, production downtimes, lost revenues, inappropriate disbursement of funds and both internal and external supply shortages. In addition, we may be required to incur significant costs to protect against damage caused by such attacks or disruptions in the future. These consequences could cause significant damage to our reputation, affect our relationships with our customers and suppliers, lead to claims against the Company and ultimately adversely affect our business.
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Our business success depends on attracting and retaining qualified personnel.
Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and diverse management team and workforce worldwide. In particular, any unplanned turnover or inability to attract and retain key employees and employees with technical and software capabilities in numbers sufficient for our needs could adversely affect our business.
Our profitability and results of operations may be adversely affected by program launch difficulties.
The launch of new business is a complex process, the success of which depends on a wide range of factors, including the production readiness of our manufacturing facilities and manufacturing processes and those of our suppliers, as well as factors related to tooling, equipment, employees, initial product quality and other factors. Our failure to successfully launch new business, or our inability to accurately estimate the cost to design, develop and launch new business, could have an adverse effect on our profitability and results of operations.
To the extent we are not able to successfully launch new business, vehicle production at our customers could be significantly delayed or shut down. Such situations could result in significant financial penalties to us or a diversion of personnel and financial resources to improving launches rather than investment in continuous process improvement or other growth initiatives, and could result in our customers shifting work away from us to a competitor, all of which could result in loss of revenue, or loss of market share and could have an adverse effect on our profitability and cash flows.
Part of our workforce is unionized which could subject us to work stoppages.
As of December 31, 2019, approximately 13% of our U.S. workforce was unionized. We have a domestic collective bargaining agreement for one facility in New York, which expires in September 2020. The workforce at certain of our international facilities is also unionized. A prolonged dispute with our employees could have an adverse effect on our business.
Work stoppages, production shutdowns and similar events could significantly disrupt our business.
Because the automotive industry relies heavily on just-in-time delivery of components during the assembly and manufacture of vehicles, a work stoppage or production shutdown at one or more of our manufacturing and assembly facilities could have adverse effects on our business. Similarly, if one or more of our customers were to experience a work stoppage or production shutdown, that customer would likely halt or limit purchases of our products, which could result in the shutdown of the related manufacturing facilities. A significant disruption in the supply of a key component due to a work stoppage or production shutdown at one of our suppliers or any other supplier could have the same consequences and, accordingly, have an adverse effect on our financial results.
Changes in interest rates and asset returns could increase our pension funding obligations and reduce our profitability.
We have unfunded obligations under certain of our defined benefit pension and other postretirement benefit plans. The valuation of our future payment obligations under the plans and the related plan assets is subject to significant adverse changes if the credit and capital markets cause interest rates and projected rates of return to decline. Such declines could also require us to make significant additional contributions to our pension plans in the future. Additionally, a material deterioration in the funded status of the plans could significantly increase our pension expenses and reduce profitability in the future.
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We also sponsor post-employment medical benefit plans in the U.S. that are unfunded. If medical costs continue to increase or actuarial assumptions are modified, this could have an adverse effect on our business.
We are subject to extensive environmental regulations.
Our operations are subject to laws governing, among other things, emissions to air, discharges to waters, and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. The operation of automotive parts manufacturing plants entails risks in these areas, and we cannot assure that we will not incur material costs or liabilities as a result. Through various acquisitions over the years, we have acquired a number of manufacturing facilities, and we cannot assure that we will not incur material costs and liabilities relating to activities that predate our ownership. In addition, potentially significant expenditures could be required to comply with evolving interpretations of existing environmental, health and safety laws and regulations or any new such laws and regulations (including concerns about global climate change and its impact) that may be adopted in the future. Costs associated with failure to comply with such laws and regulations could have an adverse effect on our business.
We have liabilities related to environmental, product warranties, litigation and other claims.
We and certain of our 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 at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act and equivalent state laws, and, as such, may be liable for the cost of clean-up and other remedial activities at such sites. While responsibility for clean-up and other remedial activities at such sites is typically shared among potentially responsible parties based on an allocation formula, we could have greater liability under applicable statutes. Refer to Note 15, "Contingencies," to the Consolidated Financial Statements in item 8 of this report for further discussion.
We provide product warranties to our customers for some of our products. Under these product warranties, we may be required to bear costs and expenses for the repair or replacement of these products. As suppliers become more integrally involved in the vehicle design process and assume more of the vehicle assembly functions, auto manufacturers are increasingly looking to their suppliers for contribution when faced with recalls and product warranty claims. A recall claim brought against us, or a product warranty claim brought against us, could adversely impact our results of operations. In addition, a recall claim could require us to review our entire product portfolio to assess whether similar issues are present in other product lines, which could result in significant disruption to our business and could have an adverse impact on our results of operations. We cannot assure that costs and expenses associated with these product warranties will not be material or that those costs will not exceed any amounts accrued for such product warranties in our financial statements.
We are currently, and may in the future become, subject to legal proceedings and commercial or contractual disputes. These claims typically arise in the normal course of business and may include, but not be limited to, commercial or contractual disputes with our customers and suppliers, intellectual property matters, personal injury, product liability, environmental and employment claims. There is a possibility that such claims may have an adverse impact on our business that is greater than we anticipate. While the Company maintains insurance for certain risks, the amount of insurance may not be adequate to cover all insured claims and liabilities. The incurring of significant liabilities for which there is no, or insufficient, insurance coverage could adversely affect our business.
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Compliance with and changes in laws could be costly and could affect operating results.
We have operations in multiple countries that can be impacted by expected and unexpected changes in the legal and business environments in which we operate. Compliance-related issues in certain countries associated with laws such as the Foreign Corrupt Practices Act and other anti-corruption laws could adversely affect our business. We have internal policies and procedures relating to compliance with such laws; however, there is a risk that such policies and procedures will not always protect us from the improper acts of employees, agents, business partners, joint venture partners, or representatives, particularly in the case of recently-acquired operations that may not have significant training in applicable compliance policies and procedures. Violations of these laws, which are complex, may result in criminal penalties, sanctions and/or fines that could have an adverse effect on our business, financial condition, and results of operations and reputation.
Changes that could impact the legal environment include new legislation, new regulations, new policies, investigations and legal proceedings, and new interpretations of existing legal rules and regulations, in particular, changes in import and export control laws or exchange control laws, additional restrictions on doing business in countries subject to sanctions, and changes in laws in countries where we operate or intend to operate.
Changes in tax laws or tax rates taken by taxing authorities and tax audits could adversely affect our business.
Changes in tax laws or tax rates, the resolution of tax assessments or audits by various tax authorities, and the inability to fully utilize our tax loss carryforwards and tax credits could adversely affect our operating results. In addition, we may periodically restructure our legal entity organization.
If taxing authorities were to disagree with our tax positions in connection with any such restructurings, our effective tax rate could be materially affected. Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. We have received tax assessments from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. These audits may result in assessment of additional taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Resolution of any tax matters involves uncertainties, and there are no assurances that the outcomes will be favorable.
Our growth strategy may prove unsuccessful.
We have a stated goal of increasing sales and operating income at a rate greater than growth, if any, in global vehicle production by increasing content per vehicle with innovative new components and through select acquisitions.
We may not meet our goal due to many factors, including any of the risks identified in the paragraph that follows, failure to develop new products that our customers will purchase, technology changes that could render our products obsolete, and a reversal of the trend of supplying systems (which allows us to increase content per vehicle) instead of components, among other things.
We expect to continue to pursue business ventures, acquisitions, and strategic alliances that leverage our technology capabilities, enhance our customer base, geographic representation, and scale to complement our current businesses, and we regularly evaluate potential growth opportunities, some of which could be material. While we believe that such transactions are an integral part of our long-term strategy, there are risks and uncertainties related to these activities. Assessing a potential growth opportunity involves extensive due diligence. However, the amount of information we can obtain about a potential growth opportunity can be limited, and we can give no assurance that past or future business
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ventures, acquisitions, and strategic alliances will positively affect our financial performance or will perform as planned. We may not be able to successfully assimilate or integrate companies that we have acquired or acquire in the future, including their personnel, financial systems, distribution, operations and general operating procedures. The integration of companies that we have acquired or will acquire in the future may be more difficult, time consuming or costly than expected. Revenues following the acquisition of a company may be lower than expected, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, or suppliers) may be greater than expected, and we may not be able to retain key employees at the acquired company. We may also encounter challenges in achieving appropriate internal control over financial reporting in connection with the integration of an acquired company. If we fail to assimilate or integrate acquired companies successfully, our business, reputation and operating results could be adversely affected. Likewise, our failure to integrate and manage acquired companies or realize certain synergies successfully may lead to future impairment of any associated goodwill and intangible asset balances. Failure to execute our growth strategy could adversely affect our business.
Our proposed acquisition of Delphi Technologies is subject to conditions, as well as other uncertainties, and there can be no assurances as to whether or when it may be completed. Failure to complete the proposed transaction could adversely affect our business.
The completion of our proposed acquisition of Delphi Technologies is subject to a number of conditions, including, among other things, the approval by Delphi Technologies stockholders and the receipt of certain regulatory approvals, which make the completion and timing of the completion of the proposed transaction uncertain. If the proposed transaction is not completed, our business may be adversely affected and, without realizing any of the benefits of having completed the proposed transaction, we will be subject to a number of risks, including the following:
•a potential decline to the market price of our common stock;
• | an inability to find another acquisition, with comparable electronic components, systems and technical capabilities; |
• | a loss of time and resources that our management redirected to matters relating to the proposed transaction that could otherwise have been devoted to pursuing other beneficial opportunities; and |
• | potential negative reactions from the financial markets or from our customers, suppliers, or employees. |
In addition, we could be subject to litigation related to any failure to complete the proposed transaction. The materialization of any of these risks could adversely impact our ongoing businesses. Similarly, delays in the completion of the proposed transaction could, among other things, result in additional transaction costs, loss of revenue or personnel, or other negative effects associated with uncertainty about completion of the proposed transaction.
We are subject to risks related to our international operations.
We have manufacturing and technical facilities in many regions including Europe, Asia, and the Americas. For 2019, approximately 77% of our consolidated net sales were outside the U.S. Consequently, our results could be affected by changes in trade, monetary and fiscal policies, trade restrictions or prohibitions, import or other charges or taxes, fluctuations in foreign currency exchange rates, limitations on the repatriation of funds, changing economic conditions, unreliable intellectual property protection and legal systems, insufficient infrastructures, social unrest, political instability and disputes, international terrorism and other factors that may be discrete to a particular country or geography. Compliance with multiple and potentially conflicting laws and regulations of various countries is challenging, burdensome and expensive.
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The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for each period for revenues, expenses and capital expenditures. The local currency is typically the functional currency for the Company's foreign subsidiaries. Significant foreign currency fluctuations and the associated translation of those foreign currencies could adversely affect our business. Additionally, significant changes in currency exchange rates, particularly the Euro, Korean Won and Chinese Renminbi, could cause fluctuations in the reported results of our businesses’ operations that could negatively affect our results of operations.
Because we are a U.S. holding company, one significant source of our funds is distributions from our non-U.S. subsidiaries. Certain countries in which we operate have adopted or could institute currency exchange controls that limit or prohibit our local subsidiaries' ability to convert local currency into U.S. dollars or to make payments outside the country. This could subject us to the risks of local currency devaluation and business disruption.
Our business in China is subject to aggressive competition and is sensitive to economic, political, and market conditions.
Maintaining a strong position in the Chinese market is a key component of our global growth strategy. The automotive supply market in China is highly competitive, with competition from many of the largest global manufacturers and numerous smaller domestic manufacturers. As the Chinese market evolves, we anticipate that market participants will act aggressively to increase or maintain their market share. Increased competition may result in price reductions, reduced margins and our inability to gain or hold market share. In addition, our business in China is sensitive to economic, political, social and market conditions that drive sales volumes in China. In fact, recently, economic growth has slowed in China. If we are unable to maintain our position in the Chinese market or if vehicle sales in China decrease, our business and financial results could be adversely affected.
A downgrade in the ratings of our debt could restrict our ability to access the debt capital markets.
Changes in the ratings that rating agencies assign to our debt may ultimately impact our access to the debt capital markets and the costs we incur to borrow funds. If ratings for our debt fall below investment grade, our access to the debt capital markets could become restricted and our cost of borrowing or the interest rate for any subsequently issued debt would likely increase.
Our revolving credit agreement includes an increase in interest rates if the ratings for our debt are downgraded. The interest costs on our revolving credit agreement are based on a rating grid agreed to in our credit agreement. Further, an increase in the level of our indebtedness and related interest costs may increase our vulnerability to adverse general economic and industry conditions and may affect our ability to obtain additional financing.
We could incur additional restructuring charges as we continue to execute actions in an effort to improve future profitability and competitiveness and to optimize our product portfolio and may not achieve the anticipated savings and benefits from these actions.
We have initiated and may continue to initiate restructuring actions designed to improve the competitiveness of our business and sustain our margin profile, optimize our product portfolio or create an optimal legal entity structure. We may not realize anticipated savings or benefits from past or future actions in full or in part or within the time periods we expect. We are also subject to the risks of labor unrest, negative publicity and business disruption in connection with our actions. Failure to realize anticipated savings or benefits from our actions could have an adverse effect on our business.
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Risks related to our customers
We rely on sales to major customers.
We rely on sales to OEMs around the world of varying credit quality and manufacturing demands. Supply to several of these customers requires significant investment by the Company. We base our growth projections, in part, on commitments made by our customers. These commitments generally renew yearly during a program life cycle. Among other things, the level of production orders we receive is dependent on the ability of our OEM customers to design and sell products that consumers desire to purchase. If actual production orders from our customers do not approximate such commitments due to a variety of factors including non-renewal of purchase orders, a customer's financial hardship or other unforeseen reasons, it could adversely affect our business.
Some of our sales are concentrated. Our worldwide sales in 2019 to Ford and Volkswagen constituted approximately 15% and 11% of our 2019 consolidated net sales, respectively.
We are sensitive to the effects of our major customers’ labor relations.
All three of our primary North American customers, Ford, Fiat Chrysler Automobiles, and General Motors, have major union contracts with the United Automobile, Aerospace and Agricultural Implement Workers of America. Because of domestic OEMs' dependence on a single union, we are affected by labor difficulties and work stoppages at OEMs' facilities. Similarly, a majority of our global customers' operations outside of North America are also represented by various unions. Any extended work stoppage at one or more of our customers could have an adverse effect on our business.
Risks related to our suppliers
We could be adversely affected by supply shortages of components from our suppliers.
In an effort to manage and reduce the cost of purchased goods and services, we have been rationalizing our supply base. As a result, we are dependent on fewer sources of supply for certain components used in the manufacture of our products. We select suppliers based on total value (including total landed price, quality, delivery, and technology), taking into consideration their production capacities and financial condition. We expect that they will deliver to our stated written expectations.
However, there can be no assurance that capacity limitations, industry shortages, labor or social unrest, weather emergencies, commercial disputes, government actions, riots, wars, sabotage, cyber attacks, non-conforming parts, acts of terrorism, “Acts of God," or other problems that our suppliers experience will not result in occasional shortages or delays in their supply of components to us. If we were to experience a significant or prolonged shortage of critical components from any of our suppliers and could not procure the components from other sources, we would be unable to meet the production schedules for some of our key products and could miss customer delivery expectations. In addition, with fewer sources of supply for certain components, each supplier may perceive that it has greater leverage and, therefore, some ability to seek higher prices from us at a time that we face substantial pressure from OEMs to reduce the prices of our products. This could adversely affect our customer relations and business.
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Suppliers’ economic distress could result in the disruption of our operations and could adversely affect our business.
Rapidly changing industry conditions such as volatile production volumes; our need to seek price reductions from our suppliers as a result of the substantial pressure we face from OEMs to reduce the prices of our products; credit tightness; changes in foreign currencies; raw material, commodity, tariffs, transportation, and energy price escalation; drastic changes in consumer preferences; and other factors could adversely affect our supply chain, and sometimes with little advance notice. These conditions could also result in increased commercial disputes and supply interruption risks. In certain instances, it would be difficult and expensive for us to change suppliers that are critical to our business. On occasion, we must provide financial support to distressed suppliers or take other measures to protect our supply lines. We cannot predict with certainty the potential adverse effects these costs might have on our business.
We are subject to possible insolvency of financial counterparties.
We engage in numerous financial transactions and contracts including insurance policies, letters of credit, credit line agreements, financial derivatives, and investment management agreements involving various counterparties. We are subject to the risk that one or more of these counterparties may become insolvent and therefore be unable to meet its obligations under such contracts.
Other risks
A variety of other factors could adversely affect our business.
Any of the following could materially and adversely affect our business: the loss of or changes in supply contracts or sourcing strategies of our major customers or suppliers; start-up expenses associated with new vehicle programs or delays or cancellation of such programs; low levels of utilization of our manufacturing facilities, which can be dependent on a single product line or customer; inability to recover engineering and tooling costs; market and financial consequences of recalls that may be required on products we supplied; delays or difficulties in new product development; the possible introduction of similar or superior technologies by others; global excess capacity and vehicle platform proliferation; and the impact of fire, flood, or other natural disasters including pandemics and quarantines.
Item 1B. | Unresolved Staff Comments |
The Company has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 2019 fiscal year that remain unresolved.
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Item 2. | Properties |
As of December 31, 2019, the Company had 67 manufacturing, assembly, and technical locations worldwide. The Company's worldwide headquarters are located in a leased facility in Auburn Hills, Michigan. In general, the Company believes its facilities to be suitable and adequate to meet its current and reasonably anticipated needs.
The following is additional information concerning principal manufacturing, assembly, and technical facilities operated by the Company, its subsidiaries, and affiliates.
ENGINE(a)
Americas | Europe | Asia | ||
Asheville, North Carolina | Arcore, Italy | Aoyama, Japan | ||
Auburn Hills, Michigan (d) | Bradford, England (UK) | Chennai, India (b) | ||
Cadillac, Michigan | Kirchheimbolanden, Germany | Chungju-City, South Korea | ||
Dixon, Illinois | Ludwigsburg, Germany | Taicang, China (b) | ||
El Salto Jalisco, Mexico | Lugo, Italy (b) | Kakkalur, India | ||
Fletcher, North Carolina | Markdorf, Germany | Manesar, India | ||
Itatiba, Brazil | Muggendorf, Germany | Nabari City, Japan | ||
Ithaca, New York | Oberboihingen, Germany | Ningbo, China (b) (e) | ||
Marshall, Michigan | Oroszlany, Hungary (d) | Pune, India | ||
Ramos, Mexico | Rzeszow, Poland (d) | Pyongtaek, South Korea (b) (c) | ||
Tralee, Ireland | Rayong, Thailand (d) | |||
Viana de Castelo, Portugal | ||||
Vigo, Spain | ||||
DRIVETRAIN(a)
Americas | Europe | Asia | ||
Anderson, Indiana (b) | Arnstadt, Germany | Beijing, China (b) | ||
Bellwood, Illinois | Gateshead, England (UK) | Dae-Gu, South Korea (b) | ||
Brusque, Brazil (b) | Heidelberg, Germany | Dalian, China (b) | ||
Frankfort, Illinois | Ketsch, Germany | Eumsung, South Korea | ||
Irapuato, Mexico | Landskrona, Sweden (b) | Fukuroi City, Japan | ||
Laredo, Texas (b) | Tulle, France | Changnyeong, South Korea | ||
Livonia, Michigan | Wrexham, Wales (UK) | Ochang, South Korea (b) | ||
Melrose Park, Illinois (b) | Shanghai, China (b) | |||
Noblesville, Indiana (b) | Tianjin, China (b) | |||
San Luis Potosi, Mexico (b) | Wuhan, China (b) | |||
Seneca, South Carolina | ||||
Water Valley, Mississippi | ||||
Waterloo, Ontario, Canada | ||||
________________
(a) | The table excludes joint ventures owned less than 50% and administrative offices. |
(b) | Indicates leased land rights or a leased facility. |
(c) | City has 2 locations: a wholly owned subsidiary and a joint venture. |
(d) | Location serves both segments. |
(e) | City has 3 locations: 2 wholly owned subsidiaries and a joint venture |
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Item 3. | Legal Proceedings |
The Company is subject to a number of claims and judicial and administrative proceedings (some of which involve substantial amounts) arising out of the Company’s business or relating to matters for which the Company may have a contractual indemnity obligation. See Note 15, "Contingencies," to the Consolidated Financial Statements in Item 8 of this report for a discussion of environmental, product liability and other litigation, which is incorporated herein by reference.
On July 31, 2018, the Division of Enforcement of the SEC informed the Company that it is conducting an investigation related to the Company's accounting for asbestos-related claims not yet asserted. The Company is fully cooperating with the SEC in connection with its investigation.
Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The Company's common stock is listed for trading on the New York Stock Exchange under the symbol BWA. As of February 7, 2020, there were 1,549 holders of record of Common Stock.
While the Company currently expects that quarterly cash dividends will continue to be paid in the future at levels comparable to recent historical levels, the dividend policy is subject to review and change at the discretion of the Board of Directors.
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The line graph below compares the cumulative total shareholder return on our Common Stock with the cumulative total return of companies on the Standard & Poor's (S&P's) 500 Stock Index, and companies within Standard Industrial Code (“SIC”) 3714 - Motor Vehicle Parts.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among BorgWarner Inc., the S&P 500 Index, and SIC 374 Motor Vehicle Parts
___________
*$100 invested on 12/31/2014 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2020 S&P, a division of S&P Global. All rights reserved.
BWA and S&P 500 data are from Capital IQ; SIC Code Index data is from Research Data Group
December 31, | ||||||||||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||
BorgWarner Inc.(1) | $ | 100.00 | $ | 79.48 | $ | 73.65 | $ | 96.64 | $ | 66.71 | $ | 84.83 | ||||||
S&P 500(2) | 100.00 | 101.38 | 113.51 | 138.29 | 132.23 | 173.86 | ||||||||||||
SIC Code Index(3) | 100.00 | 102.17 | 116.88 | 155.78 | 128.11 | 173.86 | ||||||||||||
________________
(1)BorgWarner Inc.
(2)S&P 500 — Standard & Poor’s 500 Total Return Index
(3)Standard Industrial Code (“SIC”) 3714-Motor Vehicle Parts
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Purchase of Equity Securities
On November 13, 2019, the Company's Board of Directors increased the cumulative authorization for the purchase of the Company's common stock up to 89.6 million shares in the aggregate. As of December 31, 2019, the Company had repurchased 75.4 million shares in the aggregate under the common stock repurchase program. All shares purchased under this authorization have been and will continue to be repurchased in the open market at prevailing prices and at times and in amounts to be determined by management as market conditions and the Company's capital position warrant. The Company may use Rule 10b5-1 and 10b-18 plans to facilitate share repurchases. Repurchased shares will be deemed common stock held in treasury and may subsequently be reissued.
Employee transactions include restricted stock withheld to offset statutory minimum tax withholding that occurs upon vesting of restricted stock. The BorgWarner Inc. 2014 Stock Incentive Plan, as amended and the BorgWarner Inc. 2018 Stock Incentive Plan provide that the withholding obligations be settled by the Company retaining stock that is part of the award. Withheld shares will be deemed common stock held in treasury and may subsequently be reissued for general corporate purposes.
The following table provides information about the Company's purchases of its equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") during the quarter ended December 31, 2019:
Issuer Purchases of Equity Securities | |||||||||||||
Period | Total number of shares purchased | Average price per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | |||||||||
Month Ended October 31, 2019 | |||||||||||||
Common Stock Repurchase Program | — | $ | — | — | 4,241,311 | ||||||||
Employee transactions | 4,858 | $ | 40.31 | — | |||||||||
Month Ended November 30, 2019 | |||||||||||||
Common Stock Repurchase Program | — | $ | — | — | 14,241,311 | ||||||||
Employee transactions | 623 | $ | 37.59 | — | |||||||||
Month Ended December 31, 2019 | |||||||||||||
Common Stock Repurchase Program | — | $ | — | — | 14,241,311 | ||||||||
Employee transactions | — | $ | — | — | |||||||||
Equity Compensation Plan Information
As of December 31, 2019, the number of shares of options, restricted common stock, warrants and rights outstanding under our equity compensation plans, the weighted average exercise price of outstanding options, restricted common stock, warrants and rights and the number of securities remaining available for issuance were as follows:
Number of securities to be issued upon exercise of outstanding options, restricted common stock, warrants and rights | Weighted average exercise price of outstanding options, restricted common stock, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||
Plan category | (a) | (b) | (c) | ||||||
Equity compensation plans approved by security holders | 1,663,812 | $ | 44.26 | 5,984,977 | |||||
Equity compensation plans not approved by security holders | — | $ | — | — | |||||
Total | 1,663,812 | 44.26 | 5,984,977 | ||||||
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Item 6. | Selected Financial Data |
Year Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Operating results | ||||||||||||||||||||
Net sales | $ | 10,168 | $ | 10,530 | $ | 9,799 | $ | 9,071 | $ | 8,023 | ||||||||||
Operating income (a) | $ | 1,303 | $ | 1,190 | $ | 1,072 | $ | 973 | $ | 888 | ||||||||||
Net earnings attributable to BorgWarner Inc.(a) | $ | 746 | $ | 931 | $ | 440 | $ | 595 | $ | 577 | ||||||||||
Earnings per share — basic | $ | 3.63 | $ | 4.47 | $ | 2.09 | $ | 2.78 | $ | 2.57 | ||||||||||
Earnings per share — diluted | $ | 3.61 | $ | 4.44 | $ | 2.08 | $ | 2.76 | $ | 2.56 | ||||||||||
Net R&D expenditures | $ | 413 | $ | 440 | $ | 408 | $ | 343 | $ | 307 | ||||||||||
Capital expenditures, including tooling outlays | $ | 481 | $ | 546 | $ | 560 | $ | 501 | $ | 577 | ||||||||||
Depreciation and amortization | $ | 439 | $ | 431 | $ | 408 | $ | 391 | $ | 320 | ||||||||||
Number of employees | 29,000 | 30,000 | 29,000 | 27,000 | 30,000 | |||||||||||||||
Financial position | ||||||||||||||||||||
Cash and cash equivalents | $ | 832 | $ | 739 | $ | 545 | $ | 444 | $ | 578 | ||||||||||
Total assets | $ | 9,702 | $ | 10,095 | $ | 9,788 | $ | 8,835 | $ | 9,211 | ||||||||||
Total debt | $ | 1,960 | $ | 2,114 | $ | 2,188 | $ | 2,220 | $ | 2,550 | ||||||||||
Common share information | ||||||||||||||||||||
Cash dividend declared and paid per share | $ | 0.68 | $ | 0.68 | $ | 0.59 | $ | 0.53 | $ | 0.52 | ||||||||||
Weighted average shares outstanding | ||||||||||||||||||||
Basic | 205.7 | 208.2 | 210.4 | 214.4 | 224.4 | |||||||||||||||
Diluted | 206.8 | 209.5 | 211.5 | 215.3 | 225.6 | |||||||||||||||
________________
(a) | Refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for discussion of non-comparable items impacting the years ended December 31, 2019 and 2018. |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles. Our products help improve vehicle performance, propulsion efficiency, stability and air quality. These products are manufactured and sold worldwide, primarily to original equipment manufacturers (“OEMs”) of light vehicles (passenger cars, sport-utility vehicles ("SUVs"), vans and light trucks). The Company's products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications). We also manufacture and sell our products to certain Tier One vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers in Europe, the Americas and Asia and is an original equipment supplier to every major automotive OEM in the world.
The Company's products fall into two reporting segments: Engine and Drivetrain. The Engine segment's products include turbochargers, timing systems, emissions systems and thermal systems. The Drivetrain segment's products include transmission systems, torque transfer systems and rotating electrical components.
Proposed Acquisition of Delphi Technologies PLC
On January 28, 2020, the Company entered into a definitive agreement to acquire Delphi Technologies PLC (“Delphi Technologies”) in an all-stock transaction valued at approximately $3.3 billion, based on the closing price of BorgWarner stock on January 27, 2020. Refer to Note 23, “Subsequent Event,” to the Consolidated Financial Statements in Item 8 of this report for more information. The Company expects to pay fees, costs and expenses associated with the transaction with available cash. The following discussion and analysis of financial condition and results of operations does not address matters associated with the anticipated acquisition.
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RESULTS OF OPERATIONS
A detailed comparison of the Company’s 2017 operating results to its 2018 operating results can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2018 Annual Report on Form 10-K filed February 19, 2019.
A summary of our operating results for the years ended December 31, 2019 and 2018 is as follows:
Year Ended December 31, | |||||||
(in millions, except per share data) | 2019 | 2018 | |||||
Net sales | $ | 10,168 | $ | 10,530 | |||
Cost of sales | 8,067 | 8,300 | |||||
Gross profit | 2,101 | 2,230 | |||||
Selling, general and administrative expenses | 873 | 946 | |||||
Other (income) expense, net | (75 | ) | 94 | ||||
Operating income | 1,303 | 1,190 | |||||
Equity in affiliates’ earnings, net of tax | (32 | ) | (49 | ) | |||
Interest income | (12 | ) | (6 | ) | |||
Interest expense | 55 | 59 | |||||
Other postretirement expense (income) | 27 | (10 | ) | ||||
Earnings before income taxes and noncontrolling interest | 1,265 | 1,196 | |||||
Provision for income taxes | 468 | 211 | |||||
Net earnings | 797 | 985 | |||||
Net earnings attributable to the noncontrolling interest, net of tax | 51 | 54 | |||||
Net earnings attributable to BorgWarner Inc. | $ | 746 | $ | 931 | |||
Earnings per share — diluted | $ | 3.61 | $ | 4.44 | |||
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Non-comparable items impacting the Company's earnings per diluted share and net earnings
The Company's earnings per diluted share were $3.61 and $4.44 for the years ended December 31, 2019 and 2018, respectively. The non-comparable items presented below are calculated after tax using the corresponding effective tax rate and the weighted average number of diluted shares for each of the years then ended. The Company believes the following table is useful in highlighting non-comparable items that impacted its earnings per diluted share:
Year Ended December 31, | |||||||
Non-comparable items: | 2019 | 2018 | |||||
Restructuring expense | $ | (0.26 | ) | $ | (0.24 | ) | |
Pension settlement loss | (0.10 | ) | — | ||||
Unfavorable arbitration loss | (0.07 | ) | — | ||||
Merger, acquisition and divestiture expense | (0.05 | ) | (0.03 | ) | |||
Asset impairment and loss on divestiture | (0.03 | ) | (0.09 | ) | |||
Officer stock awards modification | (0.01 | ) | (0.04 | ) | |||
Gain on derecognition of subsidiary | 0.02 | — | |||||
Asbestos-related adjustments | — | (0.08 | ) | ||||
Gain on sale of building | — | 0.07 | |||||
Gain on commercial settlement | — | 0.01 | |||||
Tax reform adjustments | — | 0.06 | |||||
Tax adjustments | (0.02 | ) | 0.30 | ||||
Total impact of non-comparable items per share — diluted: | $ | (0.52 | ) | $ | (0.04 | ) | |
A summary of non-comparable items impacting the Company’s net earnings for the years ended December 31, 2019 and 2018 is as follows:
Year ended December 31, 2019:
• | The Company recorded restructuring expense of $72 million primarily related to actions to reduce structural costs. Refer to Note 16, "Restructuring," to the Consolidated Financial Statements in Item 8 of this report for more information. Over the course of the next few years, the Company plans to take additional actions to reduce existing structural costs. These actions are expected to result in primarily cash restructuring costs in the $275 million to $300 million range through the end of 2023. The resulting annual cost savings are expected to be in the range of approximately $90 million to $100 million by 2023. The Company plans to utilize these savings to sustain the Company’s strong operating margin profile and long-term cost competitiveness. |
• | During the year ended December 31, 2019, the Company settled approximately $50 million of its U.S. pension projected benefit obligation by liquidating approximately $50 million in plan assets through a lump-sum pension de-risking disbursement made to an insurance company. Pursuant to this agreement, the insurance company unconditionally and irrevocably guarantees all future payments to certain participants that were receiving payments from the U.S. pension plan. The insurance company assumes all investment risk associated with the assets that were delivered as part of this transaction. Additionally, during 2019, the Company discharged certain U.S. pension plan obligations by making lump-sum payments of $15 million to former employees of the Company. As a result, the Company settled $65 million of projected pension obligation by liquidating an equivalent amount of pension plan assets and recorded a non-cash settlement loss of $27 million related to the accelerated recognition of unamortized losses. |
• | During the year ended December 31, 2019, the Company recorded $14 million of expenses related to the receipt of a final unfavorable arbitration decision associated with the resolution of a matter related to a previous acquisition. |
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• | During the year ended December 31, 2019, the Company recorded $11 million of expenses, primarily professional fees, related to the Company's strategic acquisition and divestiture activities, including the transfer of Morse TEC, the anticipated acquisition of Delphi Technologies, and the 20% equity interest in Romeo Systems, Inc. and the divestiture activities for the non-core pipes and thermostat product lines. |
• | During the year ended December 31, 2019, the Company recorded an additional loss on sale of $7 million to account for the cash proceeds and finalization of the purchase price adjustments related to the sale of the non-core pipes and thermostat product lines. Refer to Note 20, "Assets and Liabilities Held for Sale," to the Consolidated Financial Statements in Item 8 of this report for more information. |
• | During the year ended December 31, 2019, the Company recorded a pre-tax gain on the derecognition of BorgWarner Morse TEC LLC ("Morse TEC") of $177 million and removed the asbestos obligations and related insurance assets from the Consolidated Balance Sheet. In addition, the Company recorded tax expense as a result of the reversal of the previously recorded deferred tax assets related to the asbestos liabilities of $173 million, resulting in an after-tax gain of $4 million. Refer to Note 19, "Recent Transactions," to the Consolidated Financial Statements in Item 8 of this report for more information. |
• | The Company's provision for income taxes for the year ended December 31, 2019, includes reductions to tax expense of $19 million related to restructuring and merger, acquisition and divestiture expense and $6 million related to pension settlement loss. This rate also includes increases to tax expense of $22 million due to the U.S. Department of the Treasury’s issuance of the final regulations in the first quarter of 2019 related to the calculation of the one-time transition tax partially offset by reductions to tax expense of $11 million for a global realignment plan and $8 million related to other one-time adjustments. |
Year ended December 31, 2018:
• | The Company recorded restructuring expense of $67 million related to Engine and Drivetrain segment actions designed to improve future profitability and competitiveness, primarily related to employee termination benefits, professional fees, and manufacturing footprint rationalization activities. |
• | During the year ended December 31, 2018, the Company recorded an asset impairment expense of $26 million to adjust the net book value of the pipes and thermostat product lines to fair value less costs to sell. Additionally, the Company recorded $6 million of merger, acquisition and divestiture expense primarily related to professional fees associated with divestiture activities for the non-core pipes and thermostat product lines. Refer to Note 20, "Assets and Liabilities Held for Sale," to the Consolidated Financial Statements in Item 8 of this report for more information. |
• | The Company recorded net restricted stock and performance share unit compensation expense of $8 million in the year ended December 31, 2018 as the Company modified the vesting provisions of restricted stock and performance share unit grants made to retiring executive officers to allow certain of the outstanding awards, that otherwise would have been forfeited, to vest upon retirement. Refer to Note 13, "Stock-Based Compensation," to the Consolidated Financial Statements in Item 8 of this report for more information. |
• | During the year ended December 31, 2018, the Company recorded asbestos-related adjustments resulting in an increase to Other Expense of $23 million. This increase was the result of actuarial valuation changes of $23 million associated with the Company's estimate of liabilities for asbestos-related claims asserted but not yet resolved and potential claims not yet asserted. Refer to Note 15, "Contingencies," to the Consolidated Financial Statements in Item 8 of this report for more information. |
• | During the fourth quarter of 2018, the Company recorded a gain of $19 million related to the sale of a building at a manufacturing facility located in Europe. |
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• | During the year ended December 31, 2018, the Company recorded a gain of approximately $4 million related to the settlement of a commercial contract for an entity acquired in the 2015 Remy acquisition. |
• | The Company's provision for income taxes for the year ended December 31, 2018 includes reductions of income tax expense of $15 million related to restructuring expense, $6 million related to the asbestos-related adjustments, and $8 million related to asset impairment expense, offset by increases to tax expense of $1 million and $6 million related to a gain on commercial settlement and a gain on the sale of a building, respectively, discussed in Note 4, "Other Expense, Net," to the Consolidated Financial Statements. The provision for income taxes also includes reductions of income tax expense of $13 million related to final adjustments made to measurement period provisional estimates associated with the Tax Cuts and Jobs Act (the "Tax Act"), $22 million related to a decrease in our deferred tax liability due to a tax benefit for certain foreign tax credits now available due to actions the Company took during the year, $9 million related to valuation allowance releases, $3 million related to tax reserve adjustments, and $30 million related to changes in accounting methods and tax filing positions for prior years primarily related to the Tax Act. Refer to Note 5, "Income Taxes," to the Consolidated Financial Statements in Item 8 of this report for more information. |
Net Sales
Net sales for the year ended December 31, 2019 totaled $10,168 million, a 3.4% decrease from the year ended December 31, 2018. Excluding the impact of weaker foreign currencies and the net impact of acquisitions and divestitures, net sales increased 0.7%.
The following table details our results of operations as a percentage of net sales:
Year Ended December 31, | |||||
(percentage of net sales) | 2019 | 2018 | |||
Net sales | 100.0 | % | 100.0 | % | |
Cost of sales | 79.3 | 78.8 | |||
Gross profit | 20.7 | 21.2 | |||
Selling, general and administrative expenses | 8.6 | 9.0 | |||
Other (income) expense, net | (0.7 | ) | 0.9 | ||
Operating income | 12.8 | 11.3 | |||
Equity in affiliates’ earnings, net of tax | (0.3 | ) | (0.5 | ) | |
Interest income | (0.1 | ) | (0.1 | ) | |