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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission file number: 1-12162
BORGWARNER INC.
________________________________________________
(Exact name of registrant as specified in its charter)
Delaware 13-3404508
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
  
3850 Hamlin Road,Auburn Hills,Michigan 48326
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248754-9200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareBWANew York Stock Exchange
1.80% Senior Notes due 2022BWA22New York Stock Exchange
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.
Yes  No
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-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller 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
As of July 31, 2020, the registrant had 207,254,182 shares of voting common stock outstanding.



BORGWARNER INC.
FORM 10-Q
THREE AND SIX MONTHS ENDED JUNE 30, 2020
INDEX
 Page No.
 
  
 
  
  
  
  
  
  
  
  
 
  
  
  



CAUTIONARY STATEMENTS FOR FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) (including Management's Discussion and Analysis of Financial Condition and Results of Operations) may constitute 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," "guidance," "initiative," "intends," "may," "outlook," "plans," "potential," "predicts," "project," "pursue," "seek," "should," "target," "when," "will," "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-Q, 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 our Annual Report on Form 10-K for the year ended December 31, 2019 (“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 Form 10-Q. 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: uncertainties regarding the extent and duration of impacts of matters associated with COVID-19/coronavirus ("COVID-19"), including additional production disruptions; the failure to complete our anticipated acquisition of Delphi Technologies PLC (“Delphi Technologies”), as a result of, by way of example, the failure to: satisfy the conditions to the completion of the transaction, obtain the regulatory approvals required for the transaction on the terms expected or on the anticipated schedule or otherwise; our dependence on automotive and truck production, both of which are highly cyclical; our reliance on major original equipment manufacturer ("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, including, by way of example, pandemics and quarantines, noted in reports that we file with the Securities and Exchange Commission, including Item 1A, "Risk Factors" in our most recently-filed Form 10-K as updated by Item 1A of this report. 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-Q 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 our most recently-filed Form 10-K 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 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 ensure that these measures are calculated using the appropriate GAAP components in their entirety and that they are computed 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 or regulatory financial measure, as well as the reconciliation to the most directly comparable GAAP financial measure, can be found in this report.




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions)June 30,
2020
December 31,
2019
ASSETS
Cash and cash equivalents$2,003  $832  
Receivables, net1,535  1,921  
Inventories, net836  807  
Prepayments and other current assets267  276  
Total current assets4,641  3,836  
Property, plant and equipment, net2,781  2,925  
Investments and other long-term receivables315  318  
Goodwill1,830  1,842  
Other intangible assets, net375  402  
Other non-current assets395  379  
Total assets$10,337  $9,702  
LIABILITIES AND EQUITY
Notes payable and other short-term debt$297  $286  
Accounts payable and accrued expenses1,654  1,977  
Income taxes payable19  66  
Total current liabilities1,970  2,329  
Long-term debt2,762  1,674  
Other non-current liabilities:
Retirement-related liabilities299  306  
Other543  549  
Total other non-current liabilities842  855  
Common stock3  3  
Capital in excess of par value1,115  1,145  
Retained earnings5,903  5,942  
Accumulated other comprehensive loss(787) (727) 
Common stock held in treasury, at cost(1,623) (1,657) 
Total BorgWarner Inc. stockholders’ equity4,611  4,706  
Noncontrolling interest152  138  
Total equity4,763  4,844  
Total liabilities and equity$10,337  $9,702  

See accompanying Notes to Condensed Consolidated Financial Statements.
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
June 30,
 Six Months Ended
June 30,
(in millions, except per share amounts)2020 20192020 2019
Net sales$1,426  $2,551  $3,705  $5,117  
Cost of sales1,252  2,038  3,084  4,085  
Gross profit174  513  621  1,032  
Selling, general and administrative expenses184  212  397  438  
Other expense, net68  16  113  45  
Operating (loss) income(78) 285  111  549  
Equity in affiliates’ earnings, net of tax(2) (9) (7) (18) 
Interest income(3) (2) (5) (5) 
Interest expense18  14  30  28  
Other postretirement (income) expense(1) 27  (3) 27  
(Loss) earnings before income taxes and noncontrolling interest
(90) 255  96  517  
(Benefit) provision for income taxes(6) 73  43  164  
Net (loss) earnings(84) 182  53  353  
Net earnings attributable to the noncontrolling interest, net of tax14  10  22  21  
Net (loss) earnings attributable to BorgWarner Inc. $(98) $172  $31  $332  
(Loss) earnings per share — basic$(0.47) $0.84  $0.15  $1.61  
(Loss) earnings per share — diluted$(0.47) $0.83  $0.15  $1.60  
Weighted average shares outstanding:   
Basic206.0  205.7  205.8  206.1  
Diluted206.0  206.8  206.4  207.0  

See accompanying Notes to Condensed Consolidated Financial Statements.
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
Three Months Ended
June 30,
Six Months Ended
June 30,
(in millions)2020201920202019
Net (loss) earnings attributable to BorgWarner Inc. $(98) $172  $31  $332  
Other comprehensive income (loss)
Foreign currency translation adjustments*14  (13) (60) (22) 
Hedge instruments*1  (1) (1) (1) 
Defined benefit postretirement plans*(1) 19  1  27  
Total other comprehensive income (loss) attributable to BorgWarner Inc.14  5  (60) 4  
Comprehensive (loss) income attributable to BorgWarner Inc.*(84) 177  (29) 336  
Net earnings attributable to noncontrolling interest, net of tax14  10  22  21  
Other comprehensive loss attributable to the noncontrolling interest*  (3) (3) (2) 
Comprehensive (loss) income$(70) $184  $(10) $355  
____________________________________
* Net of income taxes.

See accompanying Notes to Condensed Consolidated Financial Statements.

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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
(in millions)20202019
OPERATING
Net earnings$53  $353  
Adjustments to reconcile net earnings to net cash flows from operations: 
Depreciation and amortization224  214  
Restructuring expense, net of cash paid45  12  
Asset impairments26    
Stock-based compensation expense16  17  
Gain on insurance proceeds received for property damage(9)   
Deferred income tax (benefit) provision (24) 35  
Pension settlement loss  26  
Tax reform adjustments to provision for income taxes  16  
Equity in affiliates’ earnings, net of dividends received, and other(8) (4) 
Net earnings adjusted for non-cash charges to operations323  669  
Changes in assets and liabilities: 
Receivables362  (90) 
Inventories(40) (40) 
Prepayments and other current assets(8) (22) 
Accounts payable and accrued expenses(284) (48) 
Prepaid taxes and income taxes payable(23) 6  
Other assets and liabilities(3) (8) 
Net cash provided by operating activities327  467  
INVESTING 
Capital expenditures, including tooling outlays(171) (244) 
Insurance proceeds received for damage to property, plant and equipment22    
Proceeds from settlement of net investment hedges6    
Payments for business acquired, net of cash acquired(2) (10) 
Payments for investments in equity securities(1) (48) 
Proceeds from sale of business, net of cash divested  24  
Proceeds from asset disposals and other, net(1) 1  
Net cash used in investing activities(147) (277) 
FINANCING 
Additions to debt1,143  30  
Payments for debt issuance costs(10)   
Repayments of debt, including current portion(35) (39) 
Payments for purchase of treasury stock  (100) 
Payments for stock-based compensation items(13) (15) 
Dividends paid to BorgWarner stockholders(70) (70) 
Dividends paid to noncontrolling stockholders(16) (24) 
Net cash provided by (used in) financing activities999  (218) 
Effect of exchange rate changes on cash(8) (1) 
Net increase (decrease) in cash and cash equivalents1,171  (29) 
Cash and cash equivalents at beginning of year832  739  
Cash and cash equivalents at end of period$2,003  $710  
SUPPLEMENTAL CASH FLOW INFORMATION 
Cash paid during the period for: 
Interest$29  $33  
Income taxes, net of refunds$83  $89  
See accompanying Notes to Condensed Consolidated Financial Statements.
4


BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(1)   Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair statement of results have been included. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The balance sheet as of December 31, 2019 was derived from the audited financial statements as of that date. For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019.

Certain prior period amounts have been reclassified to conform to current period presentation. Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and accompanying notes, as well as the amounts of revenues and expenses reported during the periods covered by those financial statements and accompanying notes. Actual results could differ from these estimates.

A novel strain of COVID-19/coronavirus ("COVID-19") was first identified in Wuhan, China in December 2019 and subsequently declared a pandemic by the World Health Organization on March 11, 2020. To date, COVID-19 has surfaced in nearly all regions around the world and resulted in travel restrictions, closing of borders and business slowdowns or shutdowns in affected areas. As a result, COVID-19 has impacted the Company's business globally. Many OEMs temporarily suspended certain manufacturing operations, particularly in North America and Europe, due to market conditions and matters associated with COVID-19. Additionally, as a global manufacturer, the Company has responded to shelter-in-place and similar government orders in various locations around the world, including throughout the United States and Europe, which has resulted in the temporary closures of or reduced operations at the Company's manufacturing and assembly facilities.

The Company assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited to, its allowance for credit losses, the carrying value of the Company's goodwill, intangible assets, and other long-lived assets and valuation allowances on deferred tax assets with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of June 30, 2020 and through the date of this report. As a result of these assessments, there were no impairments or material increases in credit allowances or valuation allowances that impacted the Company's Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2020. Although the Company's operations have resumed, partially or in full at its various facilities, the Company's future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Consolidated Financial Statements in future reporting periods.

5


(2) New Accounting Pronouncements

Recently Adopted Accounting Standards

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2020-4, "Reference Rate Reform (Topic 848)." It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These optional expedients and exceptions allow a company to choose not to apply certain modification accounting requirements under GAAP to contracts affected by reference rate reform. A company that makes this election would present and account for a modified contract as a continuation of the existing contract. It also enables a company to continue to apply hedge accounting for hedging relationships in which the critical terms change due to rate reform. This guidance was effective March 12, 2020 and provides relief to contract modifications through December 31, 2022. The Company adopted this guidance on March 12, 2020, and there was no impact to the Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)." It requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance (Subtopic 350-40). This guidance was effective for interim and annual periods beginning after December 15, 2019. The Company adopted this guidance as of January 1, 2020, and the impact on its Condensed Consolidated Financial Statements was immaterial.

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820)." It removes disclosure requirements on fair value measurements including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. It also amends and clarifies certain disclosures and adds new disclosure requirements including the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This guidance was effective for interim and annual periods beginning after December 15, 2019. The Company adopted this guidance as of January 1, 2020, and there was no impact to the Condensed Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)." It replaces the current incurred loss impairment method with a new method that reflects expected credit losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. This guidance was effective for annual periods beginning after December 15, 2019. The Company adopted this guidance as of January 1, 2020, and the impact on its Condensed Consolidated Financial Statements was immaterial.

Accounting Standards Not Yet Adopted

In January 2020, the FASB issued ASU No. 2020-1, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint  Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." It clarifies the interaction among the accounting for equity securities, equity method investments, and certain derivative instruments. Specifically, for the purposes of applying the ASC Topic 321 measurement alternative, a company should consider observable transactions immediately before applying or upon discontinuing the equity method. Additionally, when determining the accounting for certain forward contracts and purchased options entered into to purchase securities, a company should not consider if the underlying securities would be accounted for under the equity method (ASC Topic 323) or fair value option (ASC Topic 825). This guidance is effective for interim and annual periods beginning after
6


December 15, 2020, and early adoption is permitted. The Company is still evaluating the impact of this guidance on its Condensed Consolidated Financial Statements.

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." It removes certain exceptions to the general principles in Accounting Standards Codification ("ASC") Topic 740 and improves consistent application of and simplifies GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. This guidance is effective for interim and annual reporting periods beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance on its Condensed Consolidated Financial Statements.

In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)." It (i) requires the removal of disclosures that are no longer considered cost beneficial; (ii) clarifies specific requirements of certain disclosures; and (iii) adds new disclosure requirements, including the weighted average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and reasons for significant gains and losses related to changes in the benefit obligation. This guidance is effective for annual periods beginning after December 15, 2020, and early adoption is permitted. The Company does not expect this guidance to have a material impact and it will include enhanced disclosures in the Consolidated Financial Statements upon adoption.

(3) Revenue from Contracts with Customers

The Company manufactures and sells products, primarily to OEMs of light vehicles and, to a lesser extent, to other OEMs of commercial vehicles, off-highway vehicles, certain tier one vehicle systems suppliers and into the aftermarket. Although the Company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the life of the arrangements, and a contract does not exist for purposes of applying ASC Topic 606, "Revenue from Contracts with Customers," until volumes are contractually known. Revenue is recognized when performance obligations under the terms of a contract are satisfied, which generally occurs with the transfer of control of the Company's products. For most of the Company's products, transfer of control occurs upon shipment or delivery; however, a limited number of the Company's customer arrangements for highly customized products with no alternative use provide the Company with the right to payment during the production process. As a result, for these limited arrangements, revenue is recognized as goods are produced and control transfers to the customer using the input cost-to-cost method. The Company recorded a contract asset of $8 million and $10 million at June 30, 2020 and December 31, 2019, respectively, for these arrangements. These amounts are reflected in Prepayments and other current assets in the Company's Condensed Consolidated Balance Sheets.
Revenue is measured at the amount of consideration the Company expects to receive in exchange for transferring the goods. The Company has a limited number of arrangements with customers where the price paid by the customer is dependent on the volume of product purchased over the term of the arrangement. In other limited arrangements, the Company will provide a rebate to customers based on the volume of products purchased during the course of the arrangement. The Company estimates the volumes to be sold over the term of the arrangement and recognizes revenue based on the estimated amount of consideration to be received from these arrangements.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90 days. The Company has evaluated the terms of its arrangements and determined that they do not contain significant financing components. The Company provides warranties on some of its products. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 9, "Product Warranty," to the Condensed Consolidated Financial Statements for more information. Shipping and handling fees billed to customers are included in sales, while costs of shipping and handling are included in cost of sales. The Company has elected to apply the
7


accounting policy election available under ASC Topic 606 and accounts for shipping and handling activities as a fulfillment cost.
In limited instances, certain customers have provided payments in advance of receiving related products, typically at the onset of an arrangement prior to the beginning of production. These contract liabilities are reflected as Accounts payable and accrued expenses and Other non-current liabilities in the Condensed Consolidated Balance Sheets and were $12 million and $6 million at June 30, 2020 and $10 million and $12 million at December 31, 2019, respectively. These amounts are reflected as revenue over the term of the arrangement (typically 3 to 7 years) as the underlying products are shipped.
The Company continually seeks business development opportunities and at times provides customer incentives for new program awards. The Company evaluates the underlying economics of each amount of consideration payable to a customer to determine the proper accounting by understanding the reasons for the payment, the rights and obligations resulting from the payment, the nature of the promise in the contract, and other relevant facts and circumstances. When the Company determines that the payments are incremental and incurred only if the new business is obtained and expects to recover these amounts from the customer over the term of the new business arrangement, the Company capitalizes these amounts. The Company recognizes a reduction to revenue, when the products that any such payments are related to, are transferred to the customer based on the total amount of products expected to be sold over the term of the arrangement (generally 3 to 7 years). The Company evaluates the amounts capitalized each period end for recoverability and expenses any amounts that are no longer expected to be recovered over the term of the business arrangement. The Company had $38 million and $37 million recorded in Prepayments and other current assets in the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, respectively. The Company had $171 million and $180 million recorded in Other non-current assets in the Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, respectively.
The Company's business is comprised of two reporting segments: Engine and Drivetrain. Refer to Note 20, "Reporting Segments," to the Condensed Consolidated Financial Statements for more information. The following table represents a disaggregation of revenue from contracts with customers by segment and region:
Three Months Ended June 30,
20202019
(In millions)EngineDrivetrainTotalEngineDrivetrainTotal
North America$167  $190  $357  $407  $461  $868  
Europe338  90  428  760  211  971  
Asia306  324  630  356  317  673  
Other8  3  11  30  9  39  
Total$819  $607  $1,426  $1,553  $998  $2,551  

Six Months Ended June 30,
20202019
(In millions)EngineDrivetrainTotalEngineDrivetrainTotal
North America$554  $613  $1,167  $819  $906  $1,725  
Europe1,049  281  1,330  1,561  438  1,999  
Asia597  566  1,163  696  620  1,316  
Other38  7  45  61  16  77  
Total$2,238  $1,467  $3,705  $3,137  $1,980  $5,117  

8


(4) Research and Development Expenditures

The Company's net Research & Development ("R&D") expenditures are included in Selling, general and administrative expenses of the Condensed Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract. Financial risks and rewards transfer upon shipment, acceptance of a prototype component by the customer or upon completion of the performance obligation, as stated in the respective customer agreement.

The following table presents the Company’s gross and net expenditures on R&D activities:
Three Months Ended June 30,Six Months Ended June 30,
(in millions)2020201920202019
Gross R&D expenditures$103  $128  $221  $249  
Customer reimbursements(15) (15) (24) (32) 
Net R&D expenditures$88  $113  $197  $217  
The Company has contracts with several customers at the Company's various R&D locations. None of the Company's R&D-related customer reimbursements under these contracts exceeded 5% of net R&D expenditures in any of the periods presented.

(5) Other Expense, Net

Items included in Other expense, net consist of:
Three Months Ended June 30,Six Months Ended June 30,
(in millions)2020201920202019
Restructuring expense$37  $13  $52  $27  
Merger, acquisition and divestiture expense21  5  42  6  
Asset impairments17    26    
Net gain on insurance proceeds for property damage(6)   (6)   
Unfavorable arbitration loss      14  
Other income(1) (2) (1) (2) 
Other expense, net$68  $16  $113  $45  

During the three and six months ended June 30, 2020, the Company recorded restructuring expense of $37 million and $52 million, respectively, primarily related to actions to reduce structural costs. During the three and six months ended June 30, 2019, the Company recorded restructuring expense of $13 million and $27 million, respectively. This restructuring expense primarily related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Refer to Note 18, "Restructuring," to the Condensed Consolidated Financial Statements for more information.

During the three and six months ended June 30, 2020, the Company recorded merger, acquisition and divestiture expense of $21 million and $42 million, respectively, primarily related to professional fees associated with the Company's anticipated acquisition of Delphi Technologies PLC ("Delphi Technologies"). During the three and six months ended June 30, 2019, the Company recorded merger, acquisition and divestiture expense of $5 million and $6 million, respectively, primarily related to its review of strategic acquisition targets, including its 20% equity interest in Romeo Systems, Inc. ("Romeo") and divestiture activities for non-core pipe and thermostat product lines.
9



During the three and six months ended June 30, 2020, the Company recorded asset impairment costs of $9 million in the Engine segment and $8 million in the Drivetrain segment, related to the write down of property, plant and equipment associated with the recently announced closures of two European facilities. During the three months ended March 31, 2020, the Company also recorded $9 million of asset impairment cost to record its investment in Romeo at its fair value of $41 million. Refer to Note 21, "Recent Transactions and Events," to the Condensed Consolidated Financial Statements for more information.

During the three and six months ended June 30, 2020, the Company recorded a $6 million net gain from insurance recovery proceeds from damages created by a tornado that struck the Company's facility in Seneca, South Carolina (the "Seneca Plant"). Refer to Note 21, "Recent Transactions and Events," to the Condensed Consolidated Financial Statements for more information.

During the six months ended June 30, 2019, the Company recorded $14 million of expense related to the receipt of a final unfavorable arbitration decision associated with the resolution of a matter related to a previous acquisition.

(6) Income Taxes

The Company's provision for income taxes is based upon an estimated annual tax rate for the year applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.

The Company's effective tax rate for the six months ended June 30, 2020 was 44.6%. This rate was unfavorably impacted by $94 million of restructuring expenses and merger, acquisition and divestiture expenses that were largely non-deductible for tax purposes, resulting in only $9 million of tax benefit being recognized. This rate was further unfavorably impacted by $26 million of asset impairment costs for which no tax benefit was recognized as full valuation allowances were recorded against the corresponding deferred tax assets. The Company also recorded reductions in income tax expense of $10 million for other one-time adjustments primarily related to tax law changes in India that were enacted during the first three months of 2020 and the release of certain unrecognized tax benefits due to the closure of an audit.

The Company's effective tax rate for three months ended June 30, 2020 was 6.0%. The rate includes restructuring expenses, merger, acquisition and divestiture expenses, and asset impairment costs that are largely non-deductible for tax purposes. During the three months ended June 30, 2020, the Company recorded $75 million of such expenses for which only a $5 million tax benefit was recognized.

The Company's effective tax rate for the six months ended June 30, 2019 was 31.7%. This rate includes reductions of income tax expense of $7 million related to restructuring expense, $6 million related to other postretirement expense, and $5 million for other one-time tax adjustments. This rate also includes an increase in income tax expense of $22 million due to the U.S. Department of the Treasury's issuance of the final regulations during the first three months of 2019 related to the calculation of the one-time transition tax associated with the Tax Cuts and Jobs Act of 2017.

The annual effective tax rates differ from the U.S. statutory rate primarily due to foreign rates which differ from those in the U.S., U.S. taxes on foreign earnings, the realization of certain business tax credits, including foreign tax credits, and favorable permanent differences between book and tax treatment for certain items, including equity in affiliates' earnings.

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(7) Inventories, Net

Certain U.S. inventories are measured by the last-in, first-out (“LIFO”) method at the lower of cost or market, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or average-cost methods at the lower of cost and net realizable value. Inventories, net consisted of the following:
June 30,December 31,
(in millions)20202019
Raw material and supplies$554  $502  
Work in progress121  113  
Finished goods175  207  
FIFO inventories850  822  
LIFO reserve(14) (15) 
Inventories, net$836  $807  

(8) Property, Plant and Equipment, Net
June 30,December 31,
(in millions)20202019
Land, land use rights and buildings$863  $860  
Machinery and equipment3,059  2,971  
Construction in progress335  360  
Finance lease assets1  1  
Total property, plant and equipment, gross