Attached files
file | filename |
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EX-31.1 - EX-31.1 - BORGWARNER INC | c52993exv31w1.htm |
EX-31.2 - EX-31.2 - BORGWARNER INC | c52993exv31w2.htm |
EX-32.1 - EX-32.1 - BORGWARNER INC | c52993exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
(Mark One)
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2009
OR
o | 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) |
Registrants telephone number, including area code: (248) 754-9200
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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large Accelerated Filer þ | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES o NO þ
On September 30, 2009, the registrant had 116,735,103 shares of Common Stock outstanding.
BORGWARNER INC.
FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009
FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009
INDEX
Page No. | ||||||||
Item 1. Financial Statements (Unaudited) |
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6 | ||||||||
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48 | ||||||||
48 | ||||||||
48 | ||||||||
49 | ||||||||
50 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
Table of Contents
PART I. FINANCIAL INFORMATION
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(millions of dollars)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Cash |
$ | 258.8 | $ | 103.4 | ||||
Receivables, net |
779.6 | 607.1 | ||||||
Inventories, net |
314.6 | 451.2 | ||||||
Deferred income taxes |
57.9 | 67.5 | ||||||
Prepayments and other current assets |
94.0 | 79.0 | ||||||
Total current assets |
1,504.9 | 1,308.2 | ||||||
Property, plant and equipment, net |
1,525.0 | 1,586.2 | ||||||
Investments and advances |
247.2 | 266.5 | ||||||
Goodwill |
1,068.6 | 1,052.4 | ||||||
Other non-current assets |
445.5 | 430.7 | ||||||
Total assets |
$ | 4,791.2 | $ | 4,644.0 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Notes payable |
$ | 76.8 | $ | 183.8 | ||||
Current portion of long-term debt |
| 136.9 | ||||||
Accounts payable and accrued expenses |
973.2 | 923.0 | ||||||
Income taxes payable |
4.6 | 6.3 | ||||||
Total current liabilities |
1,054.6 | 1,250.0 | ||||||
Long-term debt |
770.9 | 459.6 | ||||||
Other non-current liabilities: |
||||||||
Retirement-related liabilities |
484.4 | 543.8 | ||||||
Other |
310.6 | 353.1 | ||||||
Total other non-current liabilities |
795.0 | 896.9 | ||||||
Common stock |
1.2 | 1.2 | ||||||
Capital in excess of par value |
1,035.0 | 977.6 | ||||||
Retained earnings |
1,155.9 | 1,200.5 | ||||||
Accumulated other comprehensive income (loss) |
21.5 | (85.9 | ) | |||||
Treasury stock |
(76.4 | ) | (87.4 | ) | ||||
Total BorgWarner Inc. stockholders equity |
2,137.2 | 2,006.0 | ||||||
Noncontrolling interest |
33.5 | 31.5 | ||||||
Total stockholders equity |
2,170.7 | 2,037.5 | ||||||
Total liabilities and stockholders equity |
$ | 4,791.2 | $ | 4,644.0 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
3
Table of Contents
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars, except share and per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
$ | 1,027.8 | $ | 1,316.9 | $ | 2,763.5 | $ | 4,332.4 | ||||||||
Cost of sales |
876.0 | 1,114.6 | 2,415.9 | 3,567.8 | ||||||||||||
Gross profit |
151.8 | 202.3 | 347.6 | 764.6 | ||||||||||||
Selling, general and administrative expenses |
125.9 | 134.8 | 315.4 | 450.4 | ||||||||||||
Restructuring expense |
| 25.0 | 50.3 | 25.0 | ||||||||||||
Goodwill impairment charge |
| 146.8 | | 146.8 | ||||||||||||
Other (income) expense |
(1.6 | ) | (0.4 | ) | (1.6 | ) | 2.8 | |||||||||
Operating income (loss) |
27.5 | (103.9 | ) | (16.5 | ) | 139.6 | ||||||||||
Equity in affiliates earnings, net of tax |
(6.5 | ) | (9.2 | ) | (11.5 | ) | (30.2 | ) | ||||||||
Interest income |
(0.5 | ) | (2.2 | ) | (1.7 | ) | (6.4 | ) | ||||||||
Interest expense and finance charges |
13.0 | 11.2 | 41.1 | 28.5 | ||||||||||||
Earnings (loss) before income taxes and noncontrolling interest |
21.5 | (103.7 | ) | (44.4 | ) | 147.7 | ||||||||||
Provision (benefit) for income taxes |
1.5 | 24.3 | (24.2 | ) | 87.7 | |||||||||||
Net earnings (loss) |
20.0 | (128.0 | ) | (20.2 | ) | 60.0 | ||||||||||
Net earnings attributable to the noncontrolling interest |
2.8 | 2.4 | 5.5 | 14.2 | ||||||||||||
Net earnings (loss) attributable to BorgWarner Inc. |
$ | 17.2 | $ | (130.4 | ) | $ | (25.7 | ) | $ | 45.8 | ||||||
Earnings (loss) per share basic |
$ | 0.15 | $ | (1.12 | )* | $ | (0.22 | )* | $ | 0.39 | ||||||
Earnings (loss) per share diluted |
$ | 0.15 | $ | (1.12 | )* | $ | (0.22 | )* | $ | 0.39 | ||||||
Weighted average shares outstanding (thousands): |
||||||||||||||||
Basic |
116,729 | 115,999 | 116,440 | 116,165 | ||||||||||||
Diluted |
117,495 | 115,999 | * | 116,440 | * | 118,040 | ||||||||||
Dividends declared per share |
$ | | $ | 0.11 | $ | 0.12 | $ | 0.33 | ||||||||
* | The Company had a loss for the quarter ended September 30, 2008 and the nine months ended September 30, 2009. As a result, diluted loss per share is the same as basic, as any dilutive securities would reduce the loss per share. Therefore, diluted shares are equal to basic shares outstanding for the three months ended September 30, 2008 and the nine months ended September 30, 2009. |
See accompanying Notes to Condensed Consolidated Financial Statements
4
Table of Contents
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
OPERATING |
||||||||
Net earnings (loss) |
$ | (20.2 | ) | $ | 60.0 | |||
Adjustments to reconcile net earnings (loss) to net cash flows from operations: |
||||||||
Non-cash charges (credits) to operations: |
||||||||
Depreciation and tooling amortization |
172.9 | 202.3 | ||||||
Amortization of intangible assets and other |
19.1 | 21.1 | ||||||
Restructuring expense, net of cash paid |
39.4 | 17.8 | ||||||
Goodwill impairment charge |
| 146.8 | ||||||
Stock based compensation expense |
17.9 | 12.6 | ||||||
Deferred income tax benefit |
(46.1 | ) | (25.2 | ) | ||||
Convertible bond premium amortization |
8.3 | | ||||||
Equity in affiliates earnings, net of dividends received and other |
18.1 | 2.7 | ||||||
Net earnings adjusted for non-cash charges to operations |
209.4 | 438.1 | ||||||
Changes in assets and liabilities: |
||||||||
Receivables |
(94.3 | ) | (81.0 | ) | ||||
Inventories |
145.9 | (71.3 | ) | |||||
Prepayments and other current assets |
(6.5 | ) | (5.3 | ) | ||||
Accounts payable and accrued expenses |
24.5 | 9.6 | ||||||
Income taxes payable |
(1.3 | ) | 1.7 | |||||
Other non-current assets and liabilities |
(51.4 | ) | (26.7 | ) | ||||
Net cash provided by operating activities |
226.3 | 265.1 | ||||||
INVESTING |
||||||||
Capital expenditures, including tooling outlays |
(127.2 | ) | (265.6 | ) | ||||
Payments for business acquired, net of cash acquired |
(23.0 | ) | (58.8 | ) | ||||
Net proceeds from asset disposals |
20.5 | 4.2 | ||||||
Net proceeds from sale of business |
| 5.5 | ||||||
Proceeds from sales of marketable securities |
| 14.6 | ||||||
Net cash used in investing activities |
(129.7 | ) | (300.1 | ) | ||||
FINANCING |
||||||||
Net increase/(decrease) in notes payable |
(109.3 | ) | 80.7 | |||||
Additions to long-term debt |
381.6 | | ||||||
Repayments of long-term debt, including current portion |
(162.7 | ) | (7.3 | ) | ||||
Payment for purchase of bond hedge |
(56.4 | ) | | |||||
Proceeds from warrant issuance |
31.2 | | ||||||
Reduction in accounts receivable securitization facility |
(50.0 | ) | | |||||
Payment for purchase of treasury stock |
| (48.4 | ) | |||||
Proceeds from interest rate swap termination |
30.0 | | ||||||
Proceeds from stock options exercised, including the tax benefit |
5.8 | 16.2 | ||||||
Dividends paid to BorgWarner stockholders |
(13.8 | ) | (38.3 | ) | ||||
Dividends paid to noncontrolling stockholders |
(8.7 | ) | (12.9 | ) | ||||
Net cash provided by (used in) financing activities |
47.7 | (10.0 | ) | |||||
Effect of exchange rate changes on cash |
11.1 | (7.7 | ) | |||||
Net increase (decrease) in cash |
155.4 | (52.7 | ) | |||||
Cash at beginning of year |
103.4 | 188.5 | ||||||
Cash at end of period |
$ | 258.8 | $ | 135.8 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
Net cash paid during the period for: |
||||||||
Interest |
$ | 50.5 | $ | 33.7 | ||||
Income taxes |
41.1 | 92.1 | ||||||
Non-cash financing transactions: |
||||||||
Stock performance plans |
5.1 | 3.8 |
See accompanying Notes to Condensed Consolidated Financial Statements
5
Table of Contents
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited 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 presentation of
results have been included. Operating results for the three and nine months ended September 30,
2009 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2009. The balance sheet as of December 31, 2008 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 Companys Annual Report on Form 10-K for the year
ended December 31, 2008.
We have reclassified certain 2008 amounts to conform to the presentation of our 2009 Condensed
Consolidated Statement of Operations. The financial statements should be read in conjunction with
the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The
Companys presentation of the Condensed Consolidated Balance Sheets, Condensed Consolidated
Statements of Operations, Reporting Segments Note and Comprehensive Income (Loss) Note have been
adjusted to conform with the requirements of Topic 810, Noncontrolling Interest in Consolidated
Financial Statements. See Note 19 to the Condensed Consolidated Financial Statements for more
information regarding the Companys first quarter 2009 adoption of Topic 810.
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.
(2) Research and Development
The following table presents the Companys gross and net expenditures on research and development
(R&D) activities:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Gross R&D expenditures |
$ | 51.9 | $ | 78.0 | $ | 151.2 | $ | 216.7 | ||||||||
Customer reimbursements |
(10.5 | ) | (27.3 | ) | (41.5 | ) | (50.7 | ) | ||||||||
Net R&D expenditures |
$ | 41.4 | $ | 50.7 | $ | 109.7 | $ | 166.0 | ||||||||
The Companys net R&D expenditures are included in the selling, general and administrative expenses
of the Condensed Consolidated Statements of Operations. Customer reimbursements are netted against gross
R&D expenditures upon billing of services performed. The Company has contracts with several
customers at the Companys various R&D locations. No such contract exceeded $6 million in any of
the periods presented.
6
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(3) Income Taxes
The Companys provision for income taxes is normally based on an estimated tax rate for the year
applied to the year-to-date federal, state and foreign income. However, due to unprecedented
depressed global economic conditions there is significant uncertainty regarding industry production
volumes for the remainder of the year. This precludes us from making a reliable estimate of the
annual effective tax rate for the year. Accordingly, we have made our 2009 income tax provision
pursuant to Financial Accounting Standards Board (FASB) Topic 740, Accounting for Income Taxes in
Interim Periods, which provides that tax (or benefit) in each foreign jurisdiction that is not
subject to a valuation allowance be separately computed as ordinary income/(loss) occurs within the
jurisdiction for the quarter. The actual global effective tax rate for the nine months is
calculated to be a benefit of 54.5%, which resulted in a 7.0% tax rate for the third quarter. This
represents an income tax benefit of ($24.2) million on the loss of ($44.4) million for the first
nine months of 2009. It results in a $1.5 million expense on earnings before income taxes and
noncontrolling interest of $21.5 million for the third quarter of 2009.
As of September 30, 2009, the balance of gross unrecognized tax benefits was reduced to $35.5
million as a result of settled tax audits, closed open years in federal and foreign jurisdictions,
and claims filed against state taxing authorities. Included in the balance at September 30, 2009
was $29.7 million of tax positions that are permanent in nature and, if recognized, would reduce
the global effective tax rate.
During the first quarter of 2008, the Company made a $6.6 million cash payment to the Internal
Revenue Service (IRS) to resolve agreed upon issues of the ongoing IRS examination of the
Companys 2002-2004 tax years. Also, there was a reduction in the first quarter of 2008 of $6.7
million related to the Companys unrecognized tax benefits balance due to settlement of the agreed
upon issues primarily related to the Extraterritorial Income Exclusion for the 2002-2004 tax years.
In the third quarter of 2009 the Company settled disputed issues with IRS appeals related to the
2002-2004 years, settled the 2005-2006 IRS audit, filed claims against state taxing authorities,
and closed open years for foreign jurisdictions that resulted in required cash payments of $21.1
million. Possible changes related to other examinations cannot be reasonably estimated within the
next 12 months.
The Company recognizes interest and penalties related to unrecognized tax benefits in income tax
expense. The Company had accrued approximately $11.4 million for the payment of interest and
penalties at December 31, 2008. The Company had approximately $10.7 million for the payment of
interest and penalties accrued at September 30, 2009.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
and various states and foreign jurisdictions. The Company is no longer subject to income tax
examinations by tax authorities in its major tax jurisdictions as follows:
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Years No Longer | ||
Tax Jurisdiction |
Subject to Audit | |
U.S. Federal |
2006 and prior | |
Brazil |
2003 and prior | |
France |
2006 and prior | |
Germany |
2003 and prior | |
Hungary |
2007 and prior | |
Italy |
2003 and prior | |
Japan |
2006 and prior | |
South Korea |
2004 and prior | |
United Kingdom |
2006 and prior |
In certain tax jurisdictions the Company may have more than one taxpayer. The table above reflects
the status of the major taxpayer in each major tax jurisdiction. In Germany the open tax years for
the Companys BERU subsidiary are from 2002 and forward.
(4) Sales of Receivables
On April 24, 2009 the Companys $50 million receivables securitization facility matured and was not
renewed. The impact of this maturity was an increase in receivables of $50 million and a decrease
in cash of $50 million in the second quarter of 2009. This is reflected as a Financing activity in
the Condensed Consolidated Statements of Cash Flows.
During the nine-month periods ended September 30, 2009 and 2008, total cash proceeds from sales of
accounts receivable were $200 million and $450 million, respectively. The Company paid servicing
fees related to these receivables for the three months ended September 30, 2008 of $0.4 million.
The Company paid servicing fees related to these receivables for the nine months ended September
30, 2009 and 2008 of $0.4 million and $1.4 million, respectively. These amounts are recorded in
interest expense and finance charges in the Condensed Consolidated Statements of Operations.
(5) Inventories
Inventories are valued at the lower of cost or market. The cost of U.S. inventories is determined
by the last-in, first-out (LIFO) method, while the operations outside the U.S. use the first-in,
first-out (FIFO) or average-cost methods. Inventories consisted of the following:
September 30, | December 31, | |||||||
(millions) | 2009 | 2008 | ||||||
Raw material and supplies |
$ | 189.5 | $ | 260.7 | ||||
Work in progress |
71.8 | 95.7 | ||||||
Finished goods |
69.6 | 111.4 | ||||||
FIFO inventories |
330.9 | 467.8 | ||||||
LIFO reserve |
(16.3 | ) | (16.6 | ) | ||||
Inventories, net |
$ | 314.6 | $ | 451.2 | ||||
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(6) Property, Plant & Equipment
September 30, | December 31, | |||||||
(millions) | 2009 | 2008 | ||||||
Land and buildings |
$ | 638.9 | $ | 619.8 | ||||
Machinery and equipment |
1,880.1 | 1,756.1 | ||||||
Capital leases |
2.4 | 1.1 | ||||||
Construction in progress |
131.3 | 160.0 | ||||||
Total property, plant & equipment |
2,652.7 | 2,537.0 | ||||||
Less accumulated depreciation |
(1,212.7 | ) | (1,047.4 | ) | ||||
1,440.0 | 1,489.6 | |||||||
Tooling, net of amortization |
85.0 | 96.6 | ||||||
Property, plant and equipment net |
$ | 1,525.0 | $ | 1,586.2 | ||||
Interest costs capitalized during the nine months ended September 30, 2009 and September 30, 2008
were $8.8 million and $10.2 million, respectively.
As of September 30, 2009 and December 31, 2008, accounts payable of $27.1 million and $43.2
million, respectively, were related to property, plant and equipment purchases.
As of September 30, 2009 and December 31, 2008, specific assets of $3.7 million and $7.4 million,
respectively, were pledged as collateral under certain of the Companys long-term debt agreements.
As a result of the impairment charges recorded in the third and fourth quarters of 2008,
depreciation expense for the three and nine months ended September 30, 2009 was reduced by
approximately $2 million and $8 million, respectively.
During the first quarter of 2009, based on current market conditions and asset utilization rates,
the Company elected to extend the useful lives of certain machinery and equipment. As a result of
this change in estimate, depreciation expense for the three and nine months ended September 30,
2009 was reduced by approximately $5 million and $14 million, respectively.
(7) Product Warranty
The Company provides warranties on some of its products. The warranty terms are typically from one
to three years. Provisions for estimated expenses related to product warranty are made at the time
products are sold. These estimates are established using historical information about the nature,
frequency, and average cost of warranty claims. Management actively studies trends of warranty
claims and takes action to improve product quality and minimize warranty claims. While management
believes that the warranty accrual is appropriate, actual claims incurred could differ from the
original estimates, requiring adjustments to the accrual. The accrual is recorded in both
long-term and short-term liabilities on the balance sheet. The following table summarizes the
activity in the warranty accrual accounts:
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Nine months ended | ||||||||
September 30, | ||||||||
(millions) | 2009 | 2008 | ||||||
Beginning balance |
$ | 82.1 | $ | 70.1 | ||||
Provision |
31.9 | 35.2 | ||||||
Payments |
(51.8 | ) | (32.2 | ) | ||||
Currency translation |
2.6 | (2.7 | ) | |||||
Ending balance |
$ | 64.8 | $ | 70.4 | ||||
The product warranty liability is classified in the consolidated balance sheet as follows:
September 30, | December 31, | |||||||
(millions) | 2009 | 2008 | ||||||
Accounts payable and accrued expenses |
$ | 39.8 | $ | 51.4 | ||||
Other non-current liabilities |
25.0 | 30.7 | ||||||
Total product warranty liability |
$ | 64.8 | $ | 82.1 | ||||
(8) Notes Payable and Long-Term Debt
Following is a summary of notes payable and long-term debt, including the current portion. The
weighted average interest rate on all borrowings outstanding as of September 30, 2009 and December
31, 2008 was 7.0% and 5.0%, respectively.
September 30, 2009 | December 31, 2008 | |||||||||||||||
(millions) | Current | Long-Term | Current | Long-Term | ||||||||||||
Bank borrowings and other |
$ | 34.9 | $ | 1.6 | $ | 130.7 | $ | 1.0 | ||||||||
Term loans due through 2015 (at an average rate of
3.9% in 2009 and 4.9% in 2008) |
41.9 | 8.7 | 53.1 | 12.9 | ||||||||||||
6.50% Senior Notes due 2/17/09, net of unamortized discount (a) |
| | 136.7 | | ||||||||||||
3.50% Convertible Notes due 4/15/12, net of unamortized discount |
| 325.9 | | | ||||||||||||
5.75% Senior Notes due 11/01/16, net of unamortized discount (a) |
| 149.3 | | 149.2 | ||||||||||||
8.00% Senior Notes due 10/01/19, net of unamortized discount (a) |
| 133.9 | | 133.9 | ||||||||||||
7.125% Senior Notes due 02/15/29, net of unamortized discount |
| 119.2 | | 119.2 | ||||||||||||
Carrying amount of notes payable and long-term debt |
76.8 | 738.6 | 320.5 | 416.2 | ||||||||||||
Impact of derivatives on debt (a) |
| 32.3 | 0.2 | 43.4 | ||||||||||||
Total notes payable and long-term debt |
$ | 76.8 | $ | 770.9 | $ | 320.7 | $ | 459.6 | ||||||||
(a) | In 2006, the Company entered into several interest rate swaps that had the effect of converting $325.0 million of fixed rate notes to variable rates. The weighted average effective interest rate of these borrowings, including the effects of outstanding swaps as noted in Note 10 was 5.3% as of December 31, 2008. In the first quarter of 2009, $100 million in interest rate swaps related to the Companys 2009 fixed rate debt matured and the Company terminated $150 million in interest rate swap agreements related to the Companys 2016 fixed rate debt and $75 million of interest rate swap agreements related to the Companys 2019 fixed rate debt. As a result of the first quarter 2009 swap terminations, a $34.5 million gain remained in debt to be amortized over the remaining lives of the respective 2016 and 2019 debt. As of September 30, 2009, the unamortized portion was $32.3 million. |
The Companys multi-currency revolving credit facility provided for borrowings up to $600
million through July 22, 2009. On April 30, 2009, the Company extended its revolving credit
facility for eighteen months, maturing January 22, 2011. The facility was reduced to $250 million
beginning July 23, 2009. The facility is now secured by unperfected pledges of the Companys
equity interests in its subsidiaries and certain assets.
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No secured party is entitled to perfect
its lien on any of the collateral until the long term unsecured senior, non-credit enhanced debt
rating of the Company is less than or equal to BB+ by Standard & Poors and less
than or equal to Ba1 by Moodys. The Companys credit rating as of September 30, 2009
was BBB by Standard & Poors and Ba1 by Moodys. The three key covenants of the credit agreement
are a net worth test, a debt compared to EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) test, and an interest coverage test. The Company was in compliance with all
covenants at September 30, 2009 and expects to remain compliant in future periods. At September
30, 2009 and December 31, 2008 there were no outstanding borrowings under the facility.
The Company had outstanding letters of credit at September 30, 2009 and December 31, 2008 of $15.2
million and $21.4 million, respectively. The letters of credit typically act as a guarantee of
payment to certain third parties in accordance with specified terms and conditions.
The Companys 6.50% Senior Notes of $136.7 million matured on February 17, 2009. On April 9, 2009,
the Company issued $373.8 million in convertible senior notes due April 15, 2012. Under Topic 470,
Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (Including
Partial Cash Settlement), the Company must account for the convertible senior notes by bifurcating
the instrument between their liability and equity components. The value of the debt component is
based on the fair value of issuing a similar nonconvertible debt security. The equity component of
the convertible debt security is calculated by deducting the value of the liability from the
proceeds received at issuance. Therefore, the Companys September 30, 2009 Condensed Consolidated
Balance Sheet includes an increase in debt of $325.9 million and an increase in capital in excess
of par of $36.5 million. Additionally, Topic 470 requires us to accrete the discounted carrying
value of the convertible notes to their face value over the term of the notes. The Companys
interest expense associated with this bond accretion is based on the effective interest rate of the
convertible senior notes of 9.365%. The total interest expense related to the convertible notes in
the Companys Consolidated Statement of Operations for the three and nine months ended September
30, 2009 was $7.1 million and $14.5 million, respectively. The non-cash portion of interest
expense for the convertible notes for the three and nine months ended September 30, 2009 was $4.2
million and $8.4 million, respectively. For the full year of 2009, interest expense related to the
convertible notes will be approximately $22.2 million, of which approximately $12.7 million will be
non-cash. The notes will pay interest semi-annually of $6.5 million, which is at a coupon rate of
3.50% per year, beginning in October of this year.
Holders of the notes may convert their notes at their option at any time prior to the close of
business on the second scheduled trading day immediately preceding the maturity date of the notes,
in multiples of $1,000 principal amount. The initial conversion rate for the notes is 30.4706
shares of the Companys common stock per $1,000 principal amount of notes (representing an initial
conversion price of approximately $32.82 per share of common stock). The conversion price
represents a conversion premium of 27.50% over the last reported sale price of the Companys common
stock on the New York Stock Exchange on April 6, 2009, of $25.74 per share. As of September 30,
2009, the Companys stock price was below the conversion price of $32.82. There was no dilutive
impact to weighted average shares outstanding for the three and nine months ended September 30,
2009 due to the convertible senior notes. In conjunction with the note offering, the Company
entered into a bond hedge overlay at a net pre-tax cost of $25.2 million, effectively raising the
conversion premium to 50.0%, or approximately $38.61 per share. Upon conversion, the Company will
pay or deliver cash, shares of our common stock or a combination thereof at our election. The
convertible senior notes were issued under the Companys $750 million universal shelf registration
filed with the Securities and Exchange Commission, leaving approximately $376 million available as
of September 30, 2009.
As of September 30, 2009 and December 31, 2008, the estimated fair values of the Companys senior
unsecured notes totaled $790.4 million and $532.3 million, respectively. The estimated fair values
were $62.1 million higher at September 30, 2009 and $6.7 million lower at December 31, 2008 than
their respective carrying values. Fair market values are developed by the use of estimates obtained
from brokers
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and other appropriate valuation techniques based on information available as of
quarter-end and year-end. The fair
value estimates do not necessarily reflect the values the Company could realize in the current
markets.
(9) Fair Value Measurements
On January 1, 2009, the Company fully adopted as required, Topic 820 Fair Value Measurements
which expands the disclosure of fair value measurements and its impact on the Companys financial
statements.
Topic 820 emphasizes that fair value is a market-based measurement, not an entity specific
measurement. Therefore, a fair value measurement should be determined based on assumptions that
market participants would use in pricing an asset or liability. As a basis for considering market
participant assumptions in fair value measurements, Topic 820 establishes a fair value hierarchy,
which prioritizes the inputs used in measuring fair values as follows:
Level 1: | Observable inputs such as quoted prices in active markets; |
Level 2: | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and |
Level 3: | Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. |
Assets and liabilities measured at fair value are based on one or more of the following three
valuation techniques noted in Topic 820:
A. | Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. |
B. | Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost). |
C. | Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models). |
The following table classifies the assets and liabilities measured at fair value during the period
ended September 30, 2009:
Basis of Fair Value Measurements | ||||||||||||||||||
Quoted | ||||||||||||||||||
Prices in | Significant | |||||||||||||||||
Active | Other | Significant | ||||||||||||||||
Balance at | Markets for | Observable | Unobservable | |||||||||||||||
September 30, | Identical Items | Inputs | Inputs | Valuation | ||||||||||||||
(millions) | 2009 | (Level 1) | (Level 2) | (Level 3) | Technique | |||||||||||||
Assets: |
||||||||||||||||||
Commodity contracts |
$ | 8.4 | $ | | $ | 8.4 | $ | | A | |||||||||
Foreign exchange contracts |
4.3 | | 4.3 | | A | |||||||||||||
$ | 12.7 | $ | | $ | 12.7 | $ | | |||||||||||
Liabilities: |
||||||||||||||||||
Commodity contracts |
$ | 0.9 | $ | | $ | 0.9 | $ | | A | |||||||||
Foreign exchange contracts |
29.9 | | 29.9 | | A | |||||||||||||
Net investment hedge contracts |
59.5 | | 59.5 | | A | |||||||||||||
$ | 90.3 | $ | | $ | 90.3 | $ | | |||||||||||
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(10) Financial Instruments
On January 1, 2009, the Company adopted as required, Topic 815, Disclosures about Derivative
Instruments and Hedging Activities which expands the disclosure of financial instruments.
The Companys financial instruments include cash, marketable securities, trade receivables, trade
payables, and notes payable. Due to the short-term nature of these instruments, their book value
approximates their fair value. The Companys financial instruments also include long-term debt,
interest rate and currency swaps, commodity forward contracts, and foreign currency forward
contracts. All derivative contracts are placed with counterparties that have an S&P, or
equivalent, investment grade credit rating at the time of the contracts placement. At September
30, 2009 the Company had no derivative contracts that contained credit risk related contingent
features.
The Company selectively uses cross-currency swaps to hedge the foreign currency exposure associated
with our net investment in certain foreign operations (net investment hedges). Fair values of
cross currency swaps are based on observable inputs, such as interest rate, yield curves, credit
risks, currency exchange rates and other external valuation methodology (Level 2 inputs under Topic
820).
The Company uses certain commodity derivative instruments to protect against commodity price
changes related to forecasted raw material and supplies purchases. The primary purpose of our
commodity price hedging activities is to manage the volatility associated with these forecasted
purchases. The Company primarily utilizes forward and option contracts, which are designated as
cash flow hedges. The fair values for certain commodity derivative instruments are based on Level
2 evidence (for example, future prices reported on commodity exchanges) under Topic 820. To the
extent that derivative instruments are deemed to be effective as defined by Topic 815, gains and
losses arising from these contracts are deferred in other comprehensive income or loss. Such gains
and losses will be reclassified into income as the underlying operating transactions are realized.
Gains and losses not qualifying for deferral treatment have been credited/charged to income as they
are recognized.
The Company uses foreign exchange forward and option contracts to protect against exchange rate
movements for forecasted cash flows for purchases, operating expenses or sales transactions
designated in currencies other than the functional currency of the operating unit. Most contracts
mature in less than one year, however, certain long-term commitments are covered by forward
currency arrangements to protect against currency risk through 2011. Foreign currency contracts
require the Company, at a future date, to either buy or sell foreign currency in exchange for the
operating units local currency. To the extent that derivative instruments are deemed to be
effective as defined by Topic 815, gains and losses arising from these contracts are deferred in
other comprehensive income or loss. Such gains and losses will be reclassified into income as the
underlying operating transactions are realized. Gains and losses not qualifying for deferral
treatment have been credited/charged to income as they are recognized. The fair values of foreign
exchange forward and option contracts are based on Level 2 inputs under Topic 820, such as quoted
exchange rates by various exchanges.
In 2006, the Company entered into a series of interest rate swap agreements to effectively convert
a portion of its senior notes from fixed to variable interest rates and were designated as fair
value hedges for the senior notes. In the first quarter of 2009, $100 million of interest rate
swap agreements relating to the 2009 fixed-rate debt matured. Also, in the first quarter of 2009,
the Company terminated $150 million of interest rate swap agreements relating to the 2016 fixed
rate debt and $75 million of interest rate swap agreements relating to the 2019 fixed rate debt.
The early termination of the 2016 and 2019 interest rate swap agreements resulted in a gain of
$34.5 million that will be amortized as a reduction of interest expense over the remaining life of
the respective 2016 and 2019 debt. The Company recognized $5.7 million in interest expense in the
first quarter of 2009 as a result of the early termination. This early termination also
resulted in the Company receiving net cash proceeds of $30.0 million, which is recognized in the
Financing section of the Consolidated Statements of Cash Flows. As of September 30, 2009, there
were no outstanding interest rate swap agreements.
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Effectiveness for cash flow, fair value and net investment hedges is assessed at the inception
of the hedging relationship and quarterly, thereafter. Ineffectiveness is measured quarterly and
results are recognized in earnings.
The Company selectively uses cross-currency swaps to hedge the foreign currency exposure associated
with our net investment in certain foreign operations (net investment hedges). At September 30,
2009 the following cross-currency swaps were outstanding:
Cross-Currency Swaps | ||||||||||||
Notional | Notional | |||||||||||
(millions) | in USD | in Local Currency | Duration | |||||||||
Floating $ to Floating |
$ | 75.0 | 58.5 | Nov - 16 | ||||||||
Floating $ to Floating ¥ |
$ | 150.0 | ¥ | 17,581.5 | Oct - 19 |
At September 30, 2009 the following commodity derivative contracts were outstanding:
Commodity Hedges | ||||||||||||
Volume | Units of | |||||||||||
Commodity |
Hedged | Measure | Duration | |||||||||
Nickel |
1,032 | Metric Tons | Dec - 10 | |||||||||
Copper |
1,097 | Metric Tons | Dec - 10 | |||||||||
Aluminum |
417 | Metric Tons | Dec - 10 | |||||||||
Platinum |
255 | Troy Oz. | Dec - 09 | |||||||||
Natural Gas |
260,507 | MMBtu | Dec - 10 |
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At September 30, 2009 the following foreign exchange derivative contracts were outstanding:
(millions) | Currency Hedges | |||||||||
Functional | Traded | Notional in | ||||||||
Currency | Currency | Traded Currency | Duration | |||||||
Brazilian Real |
US Dollar | 2.3 | Dec - 09 | |||||||
British Pound |
Euro | 105.9 | Dec - 11 | |||||||
Euro |
Hungarian Forint | 3,637.5 | Dec - 10 | |||||||
Euro |
British Pound | 1.1 | Dec - 09 | |||||||
Euro |
US Dollar | 8.0 | Dec - 09 | |||||||
Euro |
Japanese Yen | 739.6 | Dec - 09 | |||||||
Indian Rupee |
US Dollar | 8.9 | Dec - 11 | |||||||
Korean Won |
Euro | 53.6 | Dec - 10 | |||||||
Korean Won |
Japanese Yen | 72.2 | Dec - 09 | |||||||
Mexican Peso |
US Dollar | 1.7 | Dec - 09 | |||||||
US Dollar |
Indian Rupee | 442.1 | Dec - 11 | |||||||
US Dollar |
Euro | 84.0 | Oct - 09 | |||||||
US Dollar |
Japanese Yen | 10.8 | Dec - 09 |
At September 30, 2009 the following amounts were recorded in the Companys balance sheet as being
payable to or receivable from counterparties.
(millions) | ||||||||||||
Derivatives Designated as | ||||||||||||
Hedging Instruments under | Assets | Liabilities | ||||||||||
Topic 820 | Location | 2009 | Location | 2009 | ||||||||
Foreign Exchange Contracts |
Prepayments and Other Current Assets | $ | 4.0 | Accounts Payable and Accrued Expenses | $ | 21.7 | ||||||
Other Non-Current Assets | 0.3 | Other Non-Current Liabilities | 8.2 | |||||||||
Commodity Contracts |
Prepayments and Other Current Assets | 6.7 | Accounts Payable and Accrued Expenses | 0.9 | ||||||||
Other Non-Current Assets | 1.7 | Other Non-Current Liabilities | | |||||||||
Net Investment Hedges |
Prepayments and Other Current Assets | | Accounts Payable and Accrued Expenses | | ||||||||
Other Non-Current Assets | | Other Non-Current Liabilities | 59.5 |
Netted in the $(59.5) million carrying value of the Net Investment Hedges is a $5.8 million
favorable adjustment for non-performance risk in accordance with Topic 820.
The table below shows deferred losses at the end of the period reported in other comprehensive
income (loss) (OCI) and amounts expected to be reclassified to income or loss within the next
twelve months. The loss expected to be reclassified to income or loss in one year or less assumes
no change in the current relationship of the hedged item and September 30, 2009 market rates.
Gain/(Loss) | Gain/(Loss) Expected to | ||||||||
(millions) | in OCI at | be Reclassified to Income | |||||||
Contract Type | September 30, 2009 | in One Year or Less | |||||||
Foreign Exchange |
$(21.2 | ) | $(13.3 | ) | |||||
Commodity |
6.4 | 5.1 | |||||||
Net Investment Hedges |
(56.1 | ) | | ||||||
Total |
$(70.9 | ) | $ (8.2 | ) | |||||
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The following tables represent gains (losses) related to hedge transactions for the three and nine
months ended September 30, 2009.
Cash Flow hedges held during the period resulted in the following gains and losses recorded in
income. The effective portion of gains or losses exactly offset losses or gains in the underlying
transaction that they were designated to hedge, and are recorded on the same line in the income
statement. Ineffectiveness resulting from imperfect matches between changes in value of hedge
contracts and changes in value of the underlying transaction are immediately recognized in
earnings.
Derivatives Designated as Cash Flow Hedging Instruments under Topic 820
Gain/(Loss) Reclassified | Gain/(Loss) | |||||||||||||||||||
from OCI to Income | Recognized in Income | |||||||||||||||||||
(Effective Portion) | (Ineffective Portion) | |||||||||||||||||||
(millions) | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
Contract Type | Location | September 30, 2009 | September 30, 2009 | Location | September 30, 2009 | September 30, 2009 | ||||||||||||||
Foreign Exchange |
Sales | $(3.2 | ) | $(11.3 | ) | SG&A Expense | $(3.4 | ) | $(4.7 | ) | ||||||||||
Foreign Exchange |
Cost of Goods Sold | 1.0 | 4.3 | SG&A Expense | (0.1 | ) | 0.7 | |||||||||||||
Foreign Exchange |
SG&A Expense | 0.2 | (0.7 | ) | SG&A Expense | | | |||||||||||||
Commodity |
Cost of Goods Sold | (0.1 | ) | (7.2 | ) | Cost of Goods Sold | 1.8 | 0.5 |
Net investment hedges are derivative contracts entered into to hedge against changes in exchange
rates that affect the overall value of net investments in foreign entities. Gains and losses on net
investment hedges are recorded in other comprehensive income or loss and are used to offset
equivalent losses or gains in the value of net investments that are recorded in translation gains
and losses which is also a component of other comprehensive income or loss.
Derivatives Designated as Net Investment Hedges under Topic 820
Gain/(Loss) Reclassified | Gain/(Loss) Recognized | |||||||||||||||||||
from OCI to Income | in Income | |||||||||||||||||||
(Effective Portion) | (Ineffective Portion) | |||||||||||||||||||
(millions) | Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
Contract Type | Location | September 30, 2009 | September 30, 2009 | Location | September 30, 2009 | September 30, 2009 | ||||||||||||||
Cross-Currency Swap |
(None) | | | Interest Expense | $0.7 | $1.6 |
The Company may also enter into derivative contracts that are not designated as hedging instruments
as
defined by Topic 815. Undesignated derivative instruments substantially pertain to foreign
exchange contracts that are used to offset the impact of foreign currency denominated assets and
liabilities. The Company does not apply hedge accounting because the gain (loss) on the derivative
contract is generally offset by the Topic 830, Foreign Currency Translation, remeasurement gain
(loss) of the foreign currency asset or liability in the same reporting period.
Derivatives Not Designated as Hedging Instruments under Topic 820
(Loss) Recorded in | ||||||||||
Income on Derivative | ||||||||||
(millions) | Three Months Ended | Nine Months Ended | ||||||||
Contract Type | Location | September 30, 2009 | September 30, 2009 | |||||||
Foreign Exchange |
SG&A Expense | $(1.0) | $(2.8) |
At September 30, 2009 derivative instruments that are designated as fair value hedging instruments
as defined by Topic 815 were immaterial.
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(11) Retirement Benefit Plans
The Company has a number of defined benefit pension plans and other post employment benefit plans
covering eligible salaried and hourly employees and their dependents. The other post employment
benefit plans, which provide medical and life insurance benefits, are unfunded plans. The estimated
contributions to the Companys defined benefit pension plans for 2009 range from $15 to $35
million, of which $10.3 million has been contributed through the first nine months of the year.
On February 26, 2009, the Companys subsidiary, BorgWarner Diversified Transmission Products Inc.
(DTP), entered into a Plant Shutdown Agreement with the United Auto Workers (UAW) for its
Muncie, Indiana automotive component plant (the Muncie Plant). Management subsequently wound-down
production activity at the plant, with operations effectively ceased as of March 31, 2009. As a
result of the closure of the Muncie Plant, the Company recorded a curtailment gain of $41.9 million
in the first quarter of 2009.
The Plant Shutdown Agreement with the UAW for the Muncie Plant also included a settlement of a
portion of the UAW retiree health care obligation, resulting in the remeasurement of the retiree
medical plan. The financial impact of this settlement resulted in expense recognition of $14.0
million, a $47.2 million reduction to retirement-related liabilities, a $27.2 million increase in
accumulated other comprehensive income and a $34.0 million increase in accounts payable and accrued
expenses in the first quarter of 2009. The $34.0 million in accounts payable and accrued expenses
will be paid in monthly installments, which began in May 2009 and will conclude in April 2010.
With the plant closing announcement, the Company has entered into discussions with the Pension
Benefit Guaranty Corporation regarding potential funding of the Muncie Plants defined benefit
pension plan.
The combined pre-tax impact of these actions was a net gain of $27.9 million, comprised of a $41.9
million curtailment gain and $14.0 million settlement loss on the Companys Condensed Consolidated
Statements of Operations as of March 31, 2009.
The weighted average discount rate used to determine the benefit obligation of the Companys
retiree medical plan as of March 31, 2009 was 8.00%. This represents a 100 basis point increase
from the 7.00% weighted average discount rate used at year-end 2008.
In June 2009, the Company announced its plan to freeze its defined benefit plan at its Bradford
plant in the United Kingdom in consultation with affected employees and their representatives. The
effect of this change is expected to be that participants in the Bradford defined benefit plan will
cease to accrue defined benefits after October 31, 2009. Future pension benefits will be earned
within an existing defined contribution plan going forward. The financial impact of this change
was a $3.7 million reduction to retirement-related liabilities, a $3.5 increase in accumulated
other comprehensive income and $0.2 million in income recognition in the second quarter of 2009.
The weighted average discount rate used to determine the benefit obligation of the Companys
Bradford defined benefit plan as of June 30, 2009 was 6.50%. This represents a 25 basis point
increase from the 6.25% weighted average discount rate used at year-end 2008.
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The components of net periodic benefit cost recorded in the Companys Condensed Consolidated
Statements of Operations are as follows:
Other post | ||||||||||||||||||||||||
Pension benefits | employment | |||||||||||||||||||||||
(millions) | 2009 | 2008 | benefits | |||||||||||||||||||||
Three months ended September 30, | US | Non-US | US | Non-US | 2009 | 2008 | ||||||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||||||||||
Service cost |
$ | | $ | 2.5 | $ | 0.5 | $ | 2.3 | $ | 0.2 | $ | 0.5 | ||||||||||||
Interest cost |
5.1 | 4.5 | 5.3 | 4.8 | 4.8 | 5.7 | ||||||||||||||||||
Expected return on plan assets |
(4.1 | ) | (2.5 | ) | (7.1 | ) | (3.4 | ) | | | ||||||||||||||
Settlement/Curtailment |
| | 7.5 | | | (8.7 | ) | |||||||||||||||||
Amortization of unrecognized
prior service benefit |
(0.1 | ) | | | | (1.2 | ) | (6.3 | ) | |||||||||||||||
Amortization of unrecognized loss |
1.8 | 0.2 | 0.6 | 0.1 | 1.5 | 2.5 | ||||||||||||||||||
Net periodic benefit cost (benefit) |
$ | 2.7 | $ | 4.7 | $ | 6.8 | $ | 3.8 | $ | 5.3 | $ | (6.3 | ) | |||||||||||
Other post | ||||||||||||||||||||||||
Pension benefits | employment | |||||||||||||||||||||||
(millions) | 2009 | 2008 | benefits | |||||||||||||||||||||
Nine months ended September 30, | US | Non-US | US | Non-US | 2009 | 2008 | ||||||||||||||||||
Components of net periodic benefit cost: |
||||||||||||||||||||||||
Service cost |
$ | 0.3 | $ | 7.5 | $ | 1.5 | $ | 7.1 | $ | 0.6 | $ | 1.8 | ||||||||||||
Interest cost |
15.6 | 12.6 | 15.5 | 14.4 | 15.1 | 17.3 | ||||||||||||||||||
Expected return on plan assets |
(12.2 | ) | (7.1 | ) | (21.3 | ) | (10.3 | ) | | | ||||||||||||||
Settlement/Curtailment |
| | 7.5 | | (61.9 | )* | (8.7 | ) | ||||||||||||||||
Amortization of unrecognized
prior service benefit |
(0.3 | ) | | | | (10.5 | ) | (17.0 | ) | |||||||||||||||
Amortization of unrecognized loss |
5.5 | 0.7 | 1.6 | 0.1 | 5.8 | 7.9 | ||||||||||||||||||
Net periodic benefit cost (benefit) |
$ | 8.9 | $ | 13.7 | $ | 4.8 | $ | 11.3 | $ | (50.9 | ) | $ | 1.3 | |||||||||||
* | Note: In the nine months ended September 30, 2009 table above, the settlement/curtailment of $61.9 million was offset by the $34.0 million cost to settle, resulting in a net pre-tax gain of $27.9 million. |
(12) Stock-Based Compensation
Under the Companys 1993 Stock Incentive Plan (1993 Plan), the Company granted options to
purchase shares of the Companys common stock at the fair market value on the date of grant. The
options vest over periods up to three years and have a term of ten years from date of grant. As of
December 31, 2003, there were no options available for future grants under the 1993 Plan. The 1993
Plan expired at the end of 2003 and was replaced by the Companys 2004 Stock Incentive Plan, which
was amended at the Companys 2009 Annual Stockholders Meeting, among other things, to increase the
number of shares available for issuance under the Plan. Under the BorgWarner Inc. Amended and
Restated 2004 Stock Incentive Plan (2004 Stock Incentive Plan), the number of shares authorized
for grant was 12,500,000, of which approximately
2,800,000 shares are available for future issuance. As of September 30, 2009, there were a total
of 5,336,632 outstanding options under the 1993 and 2004 Stock Incentive Plans.
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Stock option compensation expense reduced income before income taxes and net earnings for the three
and nine months ended September 30, 2009 and 2008 by:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(millions), except per share data | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Earnings before income taxes and
noncontrolling interest |
$ | 1.4 | $ | 2.6 | $ | 5.5 | $ | 9.7 | ||||||||
Net earnings |
$ | 1.0 | $ | 1.9 | $ | 4.2 | $ | 7.2 | ||||||||
Per share basic |
$ | 0.01 | $ | 0.02 | $ | 0.04 | $ | 0.06 | ||||||||
Per share diluted |
$ | 0.01 | $ | 0.02 | $ | 0.04 | $ | 0.06 |
Total unrecognized compensation cost related to nonvested stock options at September 30, 2009 was
approximately $1.8 million. This cost is expected to be recognized over the next 0.3 years. On a
weighted average basis, this cost is expected to be recognized over 0.2 years.
A summary of the plans shares under option as of and for the nine months ended September 30, 2009
is as follows:
Weighted | ||||||||||||||||
Shares | Weighted | Average | Aggregate | |||||||||||||
Under | Average | Remaining | Intrinsic | |||||||||||||
Option | Exercise | Contractual | Value | |||||||||||||
(thousands) | Price | Life (in years) | (in millions) | |||||||||||||
Outstanding at December 31, 2008 |
5,798 | $ | 27.86 | |||||||||||||
Exercised |
(10 | ) | 13.25 | |||||||||||||
Forfeited |
(195 | ) | 29.63 | |||||||||||||
Outstanding at March 31, 2009 |
5,593 | $ | 27.82 | 6.5 | $ | 4.9 | ||||||||||
Exercised |
(119 | ) | 21.37 | |||||||||||||
Forfeited |
(48 | ) | 31.04 | |||||||||||||
Other |
36 | 25.72 | ||||||||||||||
Outstanding at June 30, 2009 |
5,462 | $ | 27.92 | 6.2 | $ | 35.3 | ||||||||||
Exercised |
(126 | ) | 24.38 | |||||||||||||
Forfeited |
(19 | ) | 33.49 | |||||||||||||
Other |
20 | 28.85 | ||||||||||||||
Outstanding at September 30, 2009 |
5,337 | $ | 27.99 | 6.0 | $ | 19.3 | ||||||||||
Options exercisable at September
30, 2009 |
4,624 | $ | 26.91 | 5.8 | $ | 19.3 | ||||||||||
At its November 2007 meeting, our Compensation Committee decided that restricted common stock would
be awarded in place of stock options for long-term incentive award grants to employees. These
restricted shares for employees vest fifty percent after two years and the remainder after three
years from the date of grant. The Company also grants restricted common stock to its non-employee
directors. For non-employee directors restricted shares vest ratably on the anniversary of the
date of the grant over a period of three years. The market value of the Companys restricted common
stock at the date of grant determines the value of the restricted common stock. In February 2009,
1,000,643 restricted shares were granted to employees under the 2004 Stock Incentive Plan. The
value of the awards is recorded as unearned compensation within capital in excess of par value in
stockholders equity, and is amortized as compensation expense over the restriction periods.
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Restricted stock compensation expense reduced income before income taxes and net earnings for the
three and nine months ended September 30, 2009 and 2008 by:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(millions), except per share data | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Earnings before income taxes and
noncontrolling interest |
$ | 4.1 | $ | 2.6 | $ | 11.8 | $ | 7.2 | ||||||||
Net earnings |
$ | 3.1 | $ | 2.0 | $ | 9.1 | $ | 5.4 | ||||||||
Per share basic |
$ | 0.03 | $ | 0.02 | $ | 0.08 | $ | 0.05 | ||||||||
Per share diluted |
$ | 0.03 | $ | 0.02 | $ | 0.08 | $ | 0.05 |
A summary of the status of the Companys nonvested restricted stock as of and for the nine months
ended September 30, 2009 is as follows:
Shares | ||||||||
Subject to | Weighted | |||||||
Restriction | Average | |||||||
(thousands) | Price | |||||||
Nonvested at December 31, 2008 |
661.5 | $ | 45.29 | |||||
Granted |
1,000.6 | 20.30 | ||||||
Forfeited |
(23.9 | ) | 37.73 | |||||
Nonvested at March 31, 2009 |
1,638.2 | $ | 30.14 | |||||
Granted |
43.3 | $ | 27.78 | |||||
Lapsed |
(8.7 | ) | 58.00 | |||||
Forfeited |
(35.7 | ) | 30.59 | |||||
Nonvested at June 30, 2009 |
1,637.1 | $ | 29.92 | |||||
Lapsed |
(10.7 | ) | $ | 52.32 | ||||
Forfeited |
(46.4 | ) | 26.54 | |||||
Nonvested at September 30, 2009 |
1,580.0 | $ | 29.87 | |||||
Stock based compensation expense affected both operating activities ($17.9 million and $12.6
million) and financing activities ($5.8 million and $16.2 million) of the Condensed Consolidated
Statements of Cash Flows for the nine months ended September 30, 2009 and 2008, respectively.
In calculating earnings or loss per share, earnings or loss are the same for the basic and diluted
calculations. Due to the effects of stock options issued and issuable and restricted shares issued
under the 1993 Plan and 2004 Stock Incentive Plan, shares increased for diluted earnings per share
for the three months ended September 30, 2009 by 766,000. There was no dilutive impact to weighted
average shares outstanding for the three months ended September 30, 2008 due to the Companys net
loss in the third quarter. Shares increased for diluted earnings per share by 1,875,000 for the
nine months ended September 30, 2008, due to the effects of stock options and restricted shares
issued and issuable under the 1993 Plan and 2004 Stock Incentive Plan.
There was no dilutive impact to weighted average shares outstanding for the nine months ended
September 30, 2009 due to the Companys net loss.
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(13) Comprehensive Income (Loss)
The amounts presented as changes in accumulated other comprehensive income or loss, net of related
taxes, are added to net earnings (loss) resulting in comprehensive income or loss. The following
table summarizes the components of comprehensive income or loss on an after-tax basis for the three
and nine month periods ended September 30, 2009 and 2008.
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Foreign currency translation adjustments, net |
$ | 61.1 | $ | (198.9 | ) | $ | 68.9 | $ | (90.0 | ) | ||||||
Market value change in hedge instruments, net |
(10.7 | ) | 15.7 | 37.3 | (5.6 | ) | ||||||||||
Defined benefit post employment plans, net |
| 6.1 | 6.0 | 6.1 | ||||||||||||
Bond hedge on 3.50% convertible notes, net |
| | (36.7 | ) | | |||||||||||
Warrant on 3.50% convertible notes, net |
| | 31.2 | | ||||||||||||
Unrealized gain (loss) on available-for-sale securities, net |
| (0.5 | ) | 0.2 | (0.5 | ) | ||||||||||
Change in accumulated other comprehensive income (loss) |
50.4 | (177.6 | ) | 106.9 | (90.0 | ) | ||||||||||
Net earnings (loss) attributable to BorgWarner Inc. |
17.2 | (130.4 | ) | (25.7 | ) | 45.8 | ||||||||||
Comprehensive income (loss) |
67.6 | (308.0 | ) | 81.2 | (44.2 | ) | ||||||||||
Comprehensive income attributable to the noncontrolling interest |
2.5 | 1.3 | 0.5 | 3.5 | ||||||||||||
Comprehensive income (loss) attributable to BorgWarner Inc. |
$ | 70.1 | $ | (306.7 | ) | $ | 81.7 | $ | (40.7 | ) | ||||||
(14) Contingencies
In the normal course of business the Company and its subsidiaries are parties to various commercial
and legal claims, actions and complaints, including matters involving warranty claims, intellectual
property claims, general liability and various other risks. It is not possible to predict with
certainty whether or not the Company and its subsidiaries will ultimately be successful in any of
these commercial and legal matters or, if not, what the impact might be. The Companys
environmental and product liability contingencies are discussed separately below. The Companys
management does not expect that the results in any of these commercial and legal claims, actions
and complaints will have a material adverse effect on the Companys results of operations,
financial position or cash flows.
Litigation
In January 2006, DTP, a subsidiary of the Company, filed a declaratory judgment action in United
States District Court, Southern District of Indiana (Indianapolis Division) against the United
Automobile, Aerospace, and Agricultural Implements Workers of America (UAW) Local No. 287 and
Gerald Poor, individually and as the representative of a defendant class. DTP sought the Courts
affirmation that DTP did not violate the Labor-Management Relations Act or the Employee Retirement
Income Security Act by unilaterally amending certain medical plans effective April 1, 2006 and
October 1, 2006, prior to the expiration of the then-current collective bargaining agreements. On
September 10, 2008, the Court found that DTPs reservation of the right to make such amendments
reducing the level of benefits provided to retirees was limited by its collectively bargained
health insurance agreement with the UAW, which did not expire until April 24, 2009. Thus, the
amendments were untimely. In 2008 the Company recorded a charge of $4.0 million as a result of the
Courts decision.
DTP filed a declaratory judgment action in the United States District Court, Southern District of
Indiana (Indianapolis Division) against the UAW Local No. 287 and Jim Barrett and others
individually, and as representatives of a defendant class, on February 26, 2009 again seeking the
Courts affirmation that DTP will not violate the Labor Management Relations Act or the
Employment Retirement Income Security Act (ERISA) by modifying the level of
benefits provided
retirees to make them comparable to other Company retiree benefit
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plans after April 24, 2009.
Certain retirees, on behalf of themselves and others, filed a mirror-image action in the United
States District Court, Eastern District of Michigan (Southern Division) on March 11, 2009, for
which a class has been certified. Both actions are pending.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by the United States Environmental Protection
Agency and certain state environmental agencies and private parties as potentially responsible
parties (PRPs) at various hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act (Superfund) and equivalent state laws and, as such, may
presently be liable for the cost of clean-up and other remedial activities at 35 such sites.
Responsibility for clean-up and other remedial activities at a Superfund site is typically shared
among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or in the aggregate, will have a
material adverse effect on its results of operations, financial position, or cash flows.
Generally, this is because either the estimates of the maximum potential liability at a site are
not large or the liability will be shared with other PRPs, although no assurance can be given with
respect to the ultimate outcome of any such matter.
Based on information available to the Company (which in most cases includes: an estimate of
allocation of liability among PRPs; the probability that other PRPs, many of whom are large,
solvent public companies, will fully pay the cost apportioned to them; currently available
information from PRPs and/or federal or state environmental agencies concerning the scope of
contamination and estimated remediation and consulting costs; remediation alternatives; and
estimated legal fees), the Company has established an accrual for indicated environmental
liabilities with a balance at September 30, 2009 of $12 million. The Company has accrued amounts
that do not exceed $4.4 million related to any individual site and we do not believe that the costs
related to any of these sites will have a material adverse effect on the Companys results of
operations, cash flows or financial condition. The Company expects to pay out substantially all of
the amounts accrued for environmental liability over the next three to five years.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the
buyer and Kuhlman Electric for certain environmental liabilities, then unknown to the Company,
relating to certain operations of Kuhlman Electric that pre-date the Companys 1999 acquisition of
Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential
environmental contamination at its Crystal Springs, Mississippi plant while undertaking an
expansion of the plant. The Company is continuing to work with the Mississippi Department of
Environmental Quality and Kuhlman Electric to investigate and remediate to the extent necessary,
historical contamination at the plant and surrounding area. Kuhlman Electric and others, including
the Company, were sued in numerous related lawsuits, in which multiple claimants alleged personal
injury and property damage. In 2005, the Company and other defendants entered into settlements
that resolved approximately 99% of the then known personal injury and property damage claims
relating to the alleged environmental contamination.
Four additional lawsuits were filed against Kuhlman Electric and others, including the Company, in
2007 and 2008 on behalf of approximately 340 plaintiffs, alleging personal injury relating to the
alleged environmental contamination. Given the early stage of the litigation, the Company cannot
make any predictions as to the outcome, but its current intent is to vigorously defend against the
suits.
Conditional Asset Retirement Obligations
In March 2005, Topic 410, Accounting for Conditional Asset Retirement Obligations, which requires
the Company to recognize legal obligations to perform asset retirements in which the timing and/or
method of settlement are conditional on a future event that may or may not be within the control of
the entity.
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Certain government regulations require the removal and disposal of asbestos from an
existing facility at the time the facility undergoes major renovations or is demolished. The
liability exists because the facility will not last forever, but it is conditional on future
renovations (even if there are no immediate plans to remove the materials, which pose no health or
safety hazard in their current condition). Similarly, government regulations require the removal
or closure of underground storage tanks and above ground storage tanks when their use ceases, the
disposal of polychlorinated biphenyl transformers and capacitors when their use ceases, and the
disposal of used furnace bricks and liners, and lead-based paint in conjunction with facility
renovations or demolition. The Company currently has 32 manufacturing locations that have been
identified as containing these items. The fair value to remove and dispose of this material has
been estimated and recorded at $1.7 million as of September 30, 2009 and $1.4 million as of
December 31, 2008.
Product Liability
Like many other industrial companies who have historically operated in the U.S., the Company (or
parties the Company is obligated to indemnify) continues to be named as one of many defendants in
asbestos-related personal injury actions. We believe that the Companys involvement is limited
because, in general, these claims relate to a few types of automotive friction products that were
manufactured many years ago and contained encapsulated asbestos. The nature of the fibers, the
encapsulation and the manner of use lead the Company to believe that these products are highly
unlikely to cause harm. As of September 30, 2009 and December 31, 2008 the Company had
approximately 23,000 and 27,000 pending asbestos-related product liability claims, respectively.
Of the 23,000 outstanding claims at September 30, 2009, approximately 12,000 were pending in just
three jurisdictions, where significant tort and judicial reform activities are underway.
The Companys policy is to aggressively defend against these lawsuits and the Company has been
successful in obtaining dismissal of many claims without any payment. The Company expects that the
vast majority of the pending asbestos-related product liability claims where it is a defendant (or
has an obligation to indemnify a defendant) will result in no payment being made by the Company or
its insurers. In the first nine months of 2009, of the approximately 4,800 claims resolved, only
180 (3.8%) resulted in any payment being made to a claimant by or on behalf of the Company. In
2008, of the approximately 17,500 claims resolved, only 210 (1.2%) resulted in any payment being
made to a claimant by or on behalf of the Company.
Prior to June 2004, the settlement and defense costs associated with all claims were covered by the
Companys primary layer insurance coverage, and these carriers administered, defended, settled and
paid all claims under a funding arrangement. In June 2004, primary layer insurance carriers
notified the Company of the alleged exhaustion of their policy limits. This led the Company to
access the next available layer of insurance coverage. Since June 2004, secondary layer insurers
have paid asbestos-related litigation defense and settlement expenses pursuant to a funding
arrangement. To date, the Company has paid $74.7 million in defense and indemnity in advance of
insurers reimbursement and has received $18.5 million in cash from insurers. The outstanding
balance of $56.2 million is expected to be fully recovered. Timing of the recovery is dependent on
final resolution of the declaratory judgment action referred to below. At December 31, 2008,
insurers owed $35.9 million in association with these claims.
At September 30, 2009, the Company has an estimated liability of $45.9 million for future claims
resolutions, with a related asset of $45.9 million to recognize the insurance proceeds receivable
by the Company for estimated losses related to claims that have yet to be resolved. Insurance
carrier reimbursement of 100% is expected based on the Companys experience, its insurance
contracts and decisions received to date in the declaratory judgment action referred to below. At
December 31, 2008, the comparable value of
the insurance receivable and accrued liability was $34.7 million.
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The amounts recorded in the Consolidated Balance Sheets related to the estimated future settlement
of existing claims are as follows:
September 30, | December 31, | |||||||
(millions) | 2009 | 2008 | ||||||
Assets: |
||||||||
Prepayments and other current assets |
$ | 24.1 | $ | 22.1 | ||||
Other non-current assets |
21.8 | 12.6 | ||||||
Total insurance receivable |
$ | 45.9 | $ | 34.7 | ||||
Liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 24.1 | $ | 22.1 | ||||
Other non-current liabilities |
21.8 | 12.6 | ||||||
Total accrued liability |
$ | 45.9 | $ | 34.7 | ||||
The Company cannot reasonably estimate possible losses, if any, in excess of those for which it has
accrued, because it cannot predict how many additional claims may be brought against the Company
(or parties the Company has an obligation to indemnify) in the future, the allegations in such
claims, the possible outcomes, or the impact of tort reform legislation that may be enacted at the
State or Federal levels.
A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County,
Illinois by Continental Casualty Company and related companies (CNA) against the Company and
certain of its other historical general liability insurers. CNA provided the Company with both
primary and additional layer insurance, and, in conjunction with other insurers, is currently
defending and indemnifying the Company in its pending asbestos-related product liability claims.
The lawsuit seeks to determine the extent of insurance coverage available to the Company including
whether the available limits exhaust on a per occurrence or an aggregate basis, and to
determine how the applicable coverage responsibilities should be apportioned. On August 15, 2005,
the Court issued an interim order regarding the apportionment matter. The interim order has the
effect of making insurers responsible for all defense and settlement costs pro rata to
time-on-the-risk, with the pro-ration method to hold the insured harmless for periods of bankrupt
or unavailable coverage. Appeals of the interim order were denied. However, the issue is reserved
for appellate review at the end of the action. In addition to the primary insurance available for
asbestos-related claims, the Company has substantial additional layers of insurance available for
potential future asbestos-related product claims. As such, the Company continues to believe that
its coverage is sufficient to meet foreseeable liabilities.
Although it is impossible to predict the outcome of pending or future claims or the impact of tort
reform legislation that may be enacted at the State or Federal levels, due to the encapsulated
nature of the products, the Companys experiences in aggressively defending and resolving claims in
the past, and the Companys significant insurance coverage with solvent carriers as of the date of
this filing, management does not believe that asbestos-related product liability claims are likely
to have a material adverse effect on the Companys results of operations, cash flows or financial
condition.
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(15) Leases and Commitments
The Company has guaranteed the residual values of certain leased machinery and
equipment at its facilities. The guarantees extend through the maturity of the underlying
lease, which is in September 2010. As a result of the closing of the Companys
Muncie facility, the Company has accrued $3.7 million as a loss on this guarantee, which
is expected to be paid at the end of October 2009. In the event the Company exercises its
option not to purchase the remaining machinery and equipment, the Company has
guaranteed a residual value of $6.0 million at September 30, 2010.
(16) Restructuring
In the second quarter of 2009, the Company took additional restructuring actions. The Company
reduced its North American workforce by approximately 550 people, or 12%; its European workforce by
approximately 150 people, or 2%; and its Asian workforce by approximately 60 people, or 3% in the
second quarter. The net restructuring expense recognized in the second quarter was $9.0 million
for employee termination benefits. In addition to employee termination costs, the Company recorded
$36.3 million of asset impairment and $5.0 million of other charges in the second quarter of 2009
related to the North American and European restructuring. The combined 2009 restructuring expenses
of $50.3 million are broken out by segment as follows: Engine $27.2 million, Drivetrain $19.7
million and Corporate $3.4 million.
Included in the second quarter of 2009 asset impairment charge is $22.3 million related to one of
the Companys European locations. During the second quarter of 2009 circumstances caused the
Company to evaluate the long range outlook of the facility using an undiscounted and discounted
cash flow model, both of which indicated that assets were impaired. The Company then used an
estimate of cost replacement to determine the fair value of the assets at the facility. This
reduction of asset value was included in the Engine segment.
On July 31, 2008, the Company announced a restructuring of its operations to align ongoing
operations with a continuing, fundamental market shift in the auto industry. As a continuation of
the Companys third quarter restructuring, on December 11, 2008, the Company announced plans for
additional restructuring actions. As a result of these third and fourth quarter 2008 restructuring
actions, the Company has reduced its North American workforce by approximately 2,400 people, or
33%; its European workforce by approximately 1,600 people, or 18%; and its Asian workforce by
approximately 400 people, or 17%. The restructuring expense recognized in 2008 for employee
termination benefits is $54.6 million. In addition to employee termination costs, the Company
recorded $72.9 million of asset impairment charges in 2008 related to the North American and
European restructuring. The combined 2008 restructuring expenses of $127.5 million are broken out
by segment as follows: Engine $85.3 million, Drivetrain $40.9 million and Corporate $1.3 million.
Estimates of restructuring expense are based on information available at the time such charges are
recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual
amounts paid for such activities may differ from amounts initially recorded. Accordingly, the
Company may record revisions of previous estimates by adjusting previously established accruals.
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The following table displays a rollforward of the employee related and other restructuring accruals
recorded within the Companys Consolidated Balance Sheet and the related cash flow activity for the
three and nine months ended September 30, 2009:
Employee Related and Other Costs | ||||||||||||||||
(millions) | Drivetrain | Engine | Corporate | Total | ||||||||||||
Balance at December 31,
2008 |
$ | 21.0 | $ | 29.3 | $ | 0.7 | $ | 51.0 | ||||||||
Cash payments |
(5.6 | ) | (7.9 | ) | (0.4 | ) | (13.9 | ) | ||||||||
Translation adjustment |
(0.3 | ) | (1.0 | ) | | (1.3 | ) | |||||||||
Balance at March 31, 2009 |
$ | 15.1 | $ | 20.4 | $ | 0.3 | $ | 35.8 | ||||||||
Provision |
$ | 6.0 | $ | 4.6 | $ | 3.4 | $ | 14.0 | ||||||||
Cash payments |
(7.0 | ) | (9.9 | ) | (1.4 | ) | (18.3 | ) | ||||||||
Translation adjustment |
0.6 | 1.0 | | 1.6 | ||||||||||||
Balance at June 30, 2009 |
$ | 14.7 | $ | 16.1 | $ | 2.3 | $ | 33.1 | ||||||||
Cash payments |
(7.5 | ) | (4.7 | ) | (0.2 | ) | (12.4 | ) | ||||||||
Translation adjustment |
0.2 | 0.7 | | 0.9 | ||||||||||||
Balance at September 30,
2009 |
$ | 7.4 | $ | 12.1 | $ | 2.1 | $ | 21.6 | ||||||||
The Company made cash payments of $44.6 million during 2009 related to the 2008 and 2009
restructuring actions. Future cash payments for these restructuring activities are expected to be
complete by the middle of 2010.
(17) Reporting Segments
The Companys business is comprised of two reporting segments: Engine and Drivetrain. These
reporting segments are strategic business groups, which are managed separately as each represents a
specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return on
invested capital (ROIC) of its business initiatives. The ROIC is comprised of projected earnings
before interest, income taxes and noncontrolling interest (EBIT) adjusted for income taxes
compared to the projected average capital investment required.
EBIT is considered a non-GAAP financial measure. Generally, a non-GAAP financial measure is a
numerical measure of a companys financial performance, financial position or cash flows that
excludes (or includes) amounts that are included in (or excluded from) the most directly comparable
measure calculated and presented in accordance with GAAP. EBIT is defined as earnings before
interest, income taxes and noncontrolling interest. Earnings is intended to mean net earnings as
presented in the Consolidated Statements of Operations under GAAP.
The Company believes that EBIT is useful to demonstrate the operational profitability of our
segments by excluding interest and income taxes, which are generally accounted for across the
entire Company on a consolidated basis. EBIT is also one of the measures used by the Company to
determine resource allocation
within the Company. Although the Company believes that EBIT enhances understanding of our business
and performance, it should not be considered an alternative to, or more meaningful than, net
earnings or cash flows from operations as determined in accordance with GAAP.
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Table of Contents
The following tables present net sales, segment EBIT and total assets for the Companys reporting
segments.
Net Sales by Reporting Segment
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Engine |
$ | 735.3 | $ | 974.1 | $ | 2,030.2 | $ | 3,181.2 | ||||||||
Drivetrain |
296.8 | 347.2 | 743.8 | 1,171.4 | ||||||||||||
Inter-segment eliminations |
(4.3 | ) | (4.4 | ) | (10.5 | ) | (20.2 | ) | ||||||||
Net sales |
$ | 1,027.8 | $ | 1,316.9 | $ | 2,763.5 | $ | 4,332.4 | ||||||||
Segment Earnings (Loss) Before Interest and Income Taxes
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Engine |
$ | 56.6 | $ | 94.1 | $ | 136.5 | $ | 358.4 | ||||||||
Drivetrain |
7.5 | (2.9 | ) | (34.0 | ) | 37.2 | ||||||||||
Segment earnings before interest and income taxes (Segment EBIT) |
64.1 | 91.2 | 102.5 | 395.6 | ||||||||||||
Muncie closure retiree obligation net gain |
| | 27.9 | | ||||||||||||
Corporate, including equity in affiliates earnings and stock-based compensation |
(30.1 | ) | (14.1 | ) | (85.1 | ) | (54.0 | ) | ||||||||
Consolidated earnings before interest and taxes (EBIT) |
34.0 | 77.1 | 45.3 | 341.6 | ||||||||||||
Restructuring expense |
| 25.0 | 50.3 | 25.0 | ||||||||||||
Goodwill impairment charge |
| 146.8 | | 146.8 | ||||||||||||
Interest income |
(0.5 | ) | (2.2 | ) | (1.7 | ) | (6.4 | ) | ||||||||
Interest expense and finance charges |
13.0 | 11.2 | 41.1 | 28.5 | ||||||||||||
Earnings (loss) before income taxes and noncontrolling interest |
21.5 | (103.7 | ) | (44.4 | ) | 147.7 | ||||||||||
Provision (benefit) for income taxes |
1.5 | 24.3 | (24.2 | ) | 87.7 | |||||||||||
Net earnings (loss) |
20.0 | (128.0 | ) | (20.2 | ) | 60.0 | ||||||||||
Net earnings attributable to the noncontrolling interest |
2.8 | 2.4 | 5.5 | 14.2 | ||||||||||||
Net earnings (loss) attributable to BorgWarner Inc. |
$ | 17.2 | $ | (130.4 | ) | $ | (25.7 | ) | $ | 45.8 | ||||||
Total Assets
September 30, | December 31, | |||||||
(millions) | 2009 | 2008 | ||||||
Engine |
$ | 2,954.6 | $ | 3,065.3 | ||||
Drivetrain |
1,136.7 | 1,211.8 | ||||||
Total |
4,091.3 | 4,277.1 | ||||||
Corporate, including equity in affiliates (a) |
699.9 | 366.9 | ||||||
Total assets |
$ | 4,791.2 | $ | 4,644.0 | ||||
(a) | Corporate assets, including equity in affiliates, are net of trade receivables securitized and sold to third parties, and include cash, deferred income taxes and investments & advances. |
(18) NSK-Warner
The Company has a 50% interest in NSK-Warner, a joint venture based in Japan that manufactures
automatic transmission components. The Companys share of the earnings or losses reported by
NSK-Warner is accounted for using the equity method of accounting. NSK-Warner has a fiscal
year-end of March 31. The Companys equity in the earnings of NSK-Warner consists of the 12 months
ended November 30 so as to reflect earnings on as current a basis as is reasonably feasible.
NSK-Warner is the joint venture partner with a 40% interest in the Drivetrain Groups South Korean
subsidiary, BorgWarner Transmission Systems Korea Inc.
The Company determined that as of September 30, 2009 NSK-Warner met the conditions of significance
under Rule 1-02(w) of Regulation S-X. Rule 10-01(b) (1) of Regulation S-X requires the Company to
disclose summarized income statement information for any unconsolidated investment that has met the
significance test for any interim period.
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Following are summarized financial data for NSK-Warner, translated using the periodic rates as of
the three and nine months ended August 31, 2009 and 2008 (unaudited):
Three Months Ended | Nine Months Ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
(millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Net sales |
$ | 117.9 | $ | 146.3 | $ | 325.6 | $ | 478.1 | ||||||||
Gross profit |
19.3 | 25.6 | 54.1 | 108.3 | ||||||||||||
Net income |
10.2 | 13.5 | 18.5 | 53.3 |
(19) New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Topic 820, Fair
Value Measurements. Topic 820 defines fair value, establishes a framework for measuring fair
value in GAAP and expands disclosures about fair value measurements. On January 1, 2009, the
Company fully adopted as required, Topic 820. See Note 9 to the Consolidated Financial
Statements for more information regarding the implementation of Topic 820.
In December 2007, the FASB issued Topic 805, Business Combinations. Topic 805 establishes
principles and requirements for recognizing identifiable assets acquired, liabilities assumed,
noncontrolling interest in the acquiree, goodwill acquired in the combination or the gain from a
bargain purchase, and disclosure requirements. Under this revised statement, all costs incurred to
effect an acquisition will be recognized separately from the acquisition. Also, restructuring
costs that are expected but the acquirer is not obligated to incur will be recognized separately
from the acquisition. On January 1, 2009, the Company adopted Topic 805. In the first quarter of
2009, the Company expensed $4.8 million related to on-going acquisition related activity.
In December 2007, the FASB issued Topic 810, Noncontrolling Interests in Consolidated
Financial Statements. For consolidated subsidiaries that are less than wholly owned, the third
party holdings of equity interests are referred to as noncontrolling interests. The portion of net
income (loss) attributable to noncontrolling interests for such subsidiaries is presented as net
income (loss) applicable to noncontrolling interest on the consolidated statement of operation, and
the portion of stockholders equity of such
subsidiaries is presented as noncontrolling interest on the consolidated balance sheet. Effective
January 1, 2009, the Company adopted Topic 810.
The adoption of Topic 810 did not have a material impact on the Companys financial condition,
results of operations or cash flows. However, it did impact the presentation and disclosure of
noncontrolling (minority) interests in our consolidated financial statements and notes to the
consolidated financial statements. As a result of the retrospective presentation and disclosure
requirements of Topic 810, the Company was required to reflect the change in presentation and
disclosure for the period ending March 31, 2009 and all periods presented in future filings.
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The principal effect on the prior year balance sheets related to the adoption of Topic 810 is
summarized as follows:
Balance Sheet
(millions) | December 31, 2008 | |||
Total stockholders equity, as previously reported |
$ | 2,006.0 | ||
Increase for Topic 810 reclass of noncontrolling interest |
31.5 | |||
Total stockholders equity, as adjusted |
$ | 2,037.5 | ||
The principal effect on the prior year statement of operations related to the adoption of Topic 810
is summarized as follows:
Consolidated Statement of Operations
Three Months Ended | Nine Months Ended | |||||||
(millions) | September 30, 2008 | September 30, 2008 | ||||||
Net earnings (loss), as previously reported |
$ | (130.4 | ) | $ | 45.8 | |||
Topic 810 reclass of noncontrolling interest |
(2.4 | ) | (14.2 | ) | ||||
Net earnings (loss), as adjusted |
$ | (128.0 | ) | $ | 60.0 | |||
Less: Net earnings attributable to noncontrolling interest |
(2.4 | ) | (14.2 | ) | ||||
Net earnings attributable to BorgWarner Inc. |
$ | (130.4 | ) | $ | 45.8 | |||
The principal effect on the prior year statement of cash flows related to the adoption of Topic 810
is summarized as follows:
Statement of Cash Flows
Nine Months Ended | ||||
(millions) | September 30, 2008 | |||
Net earnings, as previously reported |
$ | 45.8 | ||
Topic 810 reclass of noncontrolling interest |
(14.2 | ) | ||
Net earnings (loss), as adjusted |
$ | 60.0 | ||
Statement of Cash Flows
Nine Months Ended | ||||
(millions) | September 30, 2008 | |||
Equity in affiliates earnings, net of dividends received,
minority interest and other, as previously reported |
$ | 16.9 | ||
Less: Topic 810 reclass of noncontrolling interest |
(14.2 | ) | ||
Equity in affiliates earnings, net of dividends received and other |
$ | 2.7 | ||
The principal effect on the prior year comprehensive income related to the adoption of Topic 810 is
summarized as follows:
Comprehensive Income (Loss)
Three Months Ended | Nine Months Ended | |||||||
(millions) | September 30, 2008 | September 30, 2008 | ||||||
Comprehensive loss, as previously reported |
$ | (306.7 | ) | $ | (40.7 | ) | ||
Topic 810 reclass of noncontrolling interest |
1.3 | 3.5 | ||||||
Comprehensive loss, as adjusted |
$ | (308.0 | ) | $ | (44.2 | ) | ||
Less: Comprehensive income (loss) attributable to noncontrolling interest |
1.3 | 3.5 | ||||||
Comprehensive loss attributable to BorgWarner Inc. |
$ | (306.7 | ) | $ | (40.7 | ) | ||
In March 2008, the FASB issued Topic 815, Disclosures about Derivative Instruments and Hedging
Activities. Topic 815 requires entities to provide enhanced disclosures about how and why an
entity uses derivative instruments, how derivative instruments and related hedged items are
accounted for under Topic 815 and its related interpretations, and how derivative instruments and
related hedged items affect an entitys financial position, financial performance, and cash flows.
On January 1, 2009, the Company adopted Topic
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815. See Note 10 to the Consolidated Financial
Statements for more information regarding the implementation of Topic 815.
In May 2008, the FASB issued Topic 470, Accounting for Convertible Debt Instruments That May be
Settled in Cash Upon Conversion (Including Partial Cash Settlement). Under Topic 470, an entity
must separately account for the liability and equity components of the convertible debt instruments
that may be settled entirely or partially in cash upon conversion in a manner that reflects the
issuers interest cost. Topic 470 is effective for fiscal years beginning after December 15, 2008,
and for interim periods within those fiscal years, with retrospective application required. As a
result of our adoption of Topic 470 for fiscal 2009 and the Companys April 9, 2009 issuance of
$373.8 million convertible senior notes due April 15, 2012, we recorded the equity and liability
components of the notes on our June 30, 2009 Condensed Consolidated Balance Sheet. Additionally,
Topic 470 requires us to accrete the discounted carrying value of the convertible notes to their
face value over the term of the notes. The Companys interest expense associated with this
amortization is based on the effective interest rate of the convertible senior notes of 9.365%.
The total interest expense related to the convertible notes in the Companys Consolidated Statement
of Operations for the three and nine months ended September 30, 2009 was $7.1 million and $14.5
million, respectively. The non-cash portion of interest expense for the convertible notes for the
three and nine months ended September 30, 2009 was $4.2 million and $8.4 million, respectively.
For the full year of 2009, interest expense will be approximately $22.2 million, of which
approximately $12.7 million will be non-cash. See Note 8 to the Condensed Consolidated Financial Statements for more information regarding this
issuance.
In December 2008, the FASB issued Topic 715, Employers Disclosures about Postretirement Benefit
Plan Assets. Topic 715 requires entities to provide enhanced disclosures about how investment
allocation decisions are made, the major categories of plan assets, the inputs and valuation
techniques used to measure fair value of plan assets, the effect of fair value measurements using
significant unobservable inputs on changes in plan assets for the period, and significant
concentrations of risk within plan assets. Topic 715 is effective for the Company beginning with
its year ending December 31, 2009. The Company is currently assessing the potential impacts, if
any, on its consolidated financial statements.
In May 2009, the FASB issued Topic 855, Subsequent Events. Topic 855 requires entities to disclose
the date through which subsequent events have been evaluated, as well as whether that date is the
date the financial statements were issued or the date the financial statements were available to be
issued. The
Company adopted Topic 855 in the second quarter of 2009 and has evaluated all subsequent events
through October 28, 2009 (the date the Companys financial statements are issued).
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for
Transfer of Financial Assets an amendment of Topic 860 (FAS 166). FAS 166 removes the concept
of a qualifying special-purpose entity from Topic 860 and removes the exception from applying Topic
810, Consolidation of Variable Interest Entities, to qualifying special-purpose entities. This
Statement modifies the financial-components approach used in Topic 860 and limits the circumstances
in which a financial asset, or portion of a financial asset, should be derecognized. Additionally,
enhanced disclosures are required to provide financial statement users with greater transparency
about transfers of financial assets and a transferors continuing involvement with transferred
financial assets. FAS 166 is effective for the Company beginning with its quarter ending March 31,
2010. The adoption of FAS 166 is not expected to have a material impact on the Companys
consolidated financial position, results of operations or cash flows.
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In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to
Topic 810 (FAS 167). FAS 167 amends Topic 810 to require ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity. Additionally, FAS 167
requires enhanced disclosures that will provide users of financial statements with more transparent
information about an enterprises involvement in variable interest entities. FAS 167 is effective
for the Company beginning with its quarter ending March 31, 2010. The adoption of FAS 167 is not
expected to have a material impact on the Companys consolidated financial position, results of
operations or cash flows.
In June 2009, the FASB issued Topic 105, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles. This Topic instituted a major change in the
way accounting standards are organized. The accounting standards Codification became the single
official source of authoritative, nongovernmental U.S. generally accepted accounting principles
(GAAP). As of September 30, 2009 only one level of authoritative GAAP exists, other than
guidance issued by the Securities and Exchange Commission. All other literature is
non-authoritative. The Company has adopted the Codification in the third quarter of 2009. The
adoption of the Codification had no impact on the Companys consolidated financial position,
results of operations or cash flows.
This adoption required all issued authoritative literature to be disclosed using Codification
Sections. Authoritative literature has been referenced within our third quarter report on Form
10-Q under these new Codification Sections. New standards not yet codified have been referenced as
issued and will be updated when codified.
(20) Recent Transactions
BERU AG Domination and Profit Transfer Agreement and Squeeze-out of Minority
Shareholders
In the second quarter of 2008, the Company and BERU AG (BERU) completed a Domination and Profit
Transfer Agreement (DPTA), giving BorgWarner full control of BERU. Under this agreement BERU is
obligated to transfer 100% of its annual profits or losses to the Company. Upon request of BERU
minority shareholders, the Company is obligated to purchase their shares for a cash payment of
71.32 per share. Those BERU minority shareholders who did not sell their shares are entitled
to receive an annual compensatory payment (perpetual dividend) of 4.23 (net) per share. The
DPTA is a binding agreement. However, certain minority shareholders of BERU initiated an appraisal
proceeding in the German court system that challenged the valuation of the 71.32 purchase price
and 4.23 annual compensatory payment (perpetual dividend).
On January 7, 2009 the Company informed BERU of its intention to purchase the remaining outstanding
shares at that time of approximately 4%, using the required German legal process referred to as a
squeeze-out to complete the 100% ownership. This process included an affirmative vote of BERU
shareholders at its May 20, 2009 annual shareholder meeting. The registration of the squeeze-out
was challenged by certain minority shareholders of BERU with the commercial register in June 2009.
The squeeze-out share price passed by the BERU shareholders in May 2009 was 73.39. The
increase in price per share of 2.07 resulting from the squeeze out was reflected as an
increase to the Companys total DPTA obligation.
The DPTA obligation as of September 30, 2009 was approximately 22.9 ($33.5) million, and
approximates the cost if all remaining shares were purchased by the Company at 73.39 per share.
As of September 30, 2009, the DPTA obligation is presented in the Condensed Consolidated Balance
Sheet as $33.5 million in current liabilities.
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The table below summarizes activity related to the Companys DPTA obligation as of September 30,
2009 as follows (in millions):
Domination and Profit Transfer Agreement Obligation at December 31, 2008 |
$ | 44.0 | ||
Shares Purchased During the Three Months Ended March 31, 2009 |
(12.2 | ) | ||
Translation Adjustment |
(2.1 | ) | ||
Domination and Profit Transfer Agreement Obligation at March 31, 2009 |
29.7 | |||
Share Resolution to 73.39 per Share |
0.9 | |||
Shares Purchased During the Three Months Ended June 30, 2009 |
(0.7 | ) | ||
Translation Adjustment |
2.3 | |||
Domination and Profit Transfer Agreement Obligation at June 30, 2009 |
32.2 | |||
Shares Purchased During the Three Months Ended September 30, 2009 |
(0.2 | ) | ||
Translation Adjustment |
1.5 | |||
Domination and Profit Transfer Agreement Obligation at September 30, 2009 |
$ | 33.5 | ||
As of September 30, 2009, the portion of the acquisition related to the DPTA represents a non-cash
transaction of 22.9 ($33.5) million.
As a result of the tendering of shares, the Company owned approximately 97% of all BERUs
outstanding shares at September 30, 2009. The tendering of approximately 1.3% of BERU shares, at a
cost of $13.1 million, has been reflected as an Investing activity in the Consolidated Statements
of Cash Flows for the nine months ended September 30, 2009. Additionally, on May 22, 2009 the
Company paid the annual perpetual dividend of $1.9 million, which is also reflected as an Investing
activity in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2009.
On September 18, 2009 the minority shareholders of BERU who had challenged the squeeze-out
resolution dropped their complaint. The elimination of all actions against the resolution allowed
BERU to register the squeeze-out with the commercial register. The squeeze-out became
effective on September 30, 2009, making the Company the only shareholder of BERU. On October 6,
2009 the Company paid 22.9 ($33.5) million for the approximately 311,000 outstanding shares of
BERU. Certain minority shareholders have challenged the squeeze out share price of 73.39. A
hearing date for this action will be set after January 5, 2010.
For a description of our earlier acquisition of BERU, see Note 20 to the Notes to Consolidated
Financial Statements in our most recently filed Annual Report on Form 10-K.
Acquisition of Etatech, Inc. Technology
On June 2, 2009, the Company announced the purchase of advanced gasoline ignition technology and
related intellectual property from Florida-based Etatech, Inc. The high-frequency ignition
technology enables high-performing, lean burning engines to significantly improve fuel economy and
reduce emissions compared with conventional combustion technologies. Amortization expense for the
three and nine months ended September 30, 2009 was approximately $0.6 million and $0.8 million,
respectively.
For the nine months ended September 30, 2009, a $7.5 million payment has been reflected as an
investing activity in the Consolidated Statement of Cash Flows.
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the Company) is a leading global supplier of
highly engineered systems and components primarily for powertrain applications. Our products help
improve vehicle performance, fuel efficiency, air quality and vehicle stability. They are
manufactured and sold worldwide, primarily to original equipment manufacturers (OEMs) of light
vehicles (i.e., passenger cars, sport-utility vehicles (SUVs), cross-over vehicles, vans and
light-trucks). Our products are also manufactured and sold to OEMs of commercial trucks, buses and
agricultural and off-highway vehicles. We also manufacture and sell our products into the
aftermarket for light and commercial vehicles. We operate manufacturing facilities serving
customers in the Americas, Europe and Asia, and are an original equipment supplier to every major
automaker in the world.
The Companys products fall into two reporting segments: Engine and Drivetrain. The Engine
segments products include turbochargers, timing chain systems, air management, emissions systems,
thermal systems, as well as diesel and gas ignition systems. The Drivetrain segments products are
all-wheel drive transfer cases, torque management systems, and components and systems for automated
transmissions.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008
Consolidated net sales for the three months ended September 30, 2009 totaled $1,027.8 million, a
22.0% decrease from the three months ended September 30, 2008. This decrease occurred while
light-vehicle production was down 9% worldwide and down 20% in North America from the previous
years third quarter. Light-vehicle production was flat in Asia-Pacific and decreased 14% in
Europe. The net sales decrease included the effect of weaker foreign currencies, primarily the
Euro, of approximately $50 million. Currency fluctuations impacted all of the Companys product
lines. Without the currency impact, the decrease in global net sales would have been approximately
18%.
Gross profit and gross margin were $151.8 million and 14.8% for the third quarter of 2009 as
compared to $202.3 million and 15.4% for third quarter 2008. The gross margin percentage decrease
was due to sales volume declining faster than our ability to reduce our cost structure. Cost
reduction actions taken in 2009 to reduce our cost structure included headcount reductions, global
pay cuts, selected plant shutdowns and reduced work weeks outside of the U.S.
Third quarter selling, general and administrative (SG&A) costs decreased $8.9 million to $125.9
million from $134.8 million, and increased as a percentage of net sales to 12.2% from 10.2%. R&D
costs, which are included in SG&A expenses, decreased $9.3 million to $41.4 million from $50.7
million as compared to third quarter 2008. As a percentage of sales, R&D costs increased to 4.0%
from 3.8% in the third quarter of 2008. Our continued investment in a number of cross-business R&D
programs, as well as other key programs, is necessary for the Companys short and long-term growth.
Equity in affiliates earnings of $6.5 million decreased $2.7 million as compared with the third
quarter of 2008 primarily due to lower vehicle production in Asia.
Third quarter interest expense and finance charges of $13.0 million increased $1.8 million as
compared with third quarter 2008 primarily due to increased debt levels, offset somewhat by reduced
global interest rates.
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The Companys provision for income taxes is normally based on an estimated tax rate for the year
applied to the year-to-date federal, state and foreign income. However, due to unprecedented
depressed global economic conditions there is significant uncertainty regarding industry production
volumes for the remainder of the year. This precludes us from making a reliable estimate of the
annual effective tax rate for the year. Accordingly, we have made our 2009 income tax provision
pursuant to Financial Accounting Standards Board (FASB) Topic 740, Accounting for Income Taxes in
Interim Periods, which provides that tax (or benefit) in each foreign jurisdiction that is not
subject to a valuation allowance be separately computed as ordinary income/(loss) occurs within the
jurisdiction for the quarter. The actual global effective tax rate for the nine months is
calculated to be a benefit of 54.5%, which resulted in a 7.0% tax rate for the third quarter. This
represents an income tax benefit of ($24.2) million on the loss of ($44.4) million for the first
nine months of 2009. It results in a $1.5 million expense on earnings before income taxes and
noncontrolling interest of $21.5 million for the third quarter of 2009.
The Companys net earnings were $17.2 million for the third quarter, or $0.15 per diluted share, an
increase of $1.27 per diluted share over the previous years third quarter. The Company believes
the following table is useful for comparison with on-going results from prior periods. It details
a number of non-recurring or non-comparable items that impacted earnings or loss per share in 2009
and 2008.
Three Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
GAAP earnings or (loss) per share diluted |
$ | 0.15 | $ | (1.12 | ) | |||
Non-recurring or non-comparable items: |
||||||||
Goodwill impairment charge |
| (1.27 | ) | |||||
Restructuring activities |
| (0.16 | ) | |||||
Tax valuation allowance |
| (0.12 | ) | |||||
DTP retiree healthcare litigation outcome |
| (0.03 | ) | |||||
Total impact of non-recurring or non-comparable items per share
diluted |
$ | | $ | (1.58 | ) | |||
Nine months ended September 30, 2009 vs. Nine months ended September 30, 2008
Consolidated net sales for the nine months ended September 30, 2009 totaled $2,763.5 million, a
36.2% decrease over the nine months ended September 30, 2008. This decrease occurred while
light-vehicle production was down 23% worldwide and down 41% in North America from the previous
years first nine months. Light-vehicle production decreased 13% in Asia-Pacific and 29% in
Europe. The net sales decrease included the effect of weaker foreign currencies, primarily the
Euro, of approximately $232 million. Currency fluctuations impacted all of the Companys product
lines. Without the currency impact, the decrease in global net sales would have been approximately
31%.
Gross profit and gross margin were $347.6 million and 12.6% for the first nine months of 2009 as
compared to $764.6 million and 17.6% for the first nine months of 2008. The gross margin percentage
decrease was due to sales volume declining faster than our ability to reduce our cost structure.
Cost reduction actions taken in 2009 to reduce our cost structure included headcount reductions,
global pay cuts, selected plant shutdowns and reduced work weeks outside of the U.S.
On February 26, 2009, the Companys subsidiary, BorgWarner Diversified Transmission Products Inc.
(DTP), entered into a Plant Shutdown Agreement with the United Auto Workers (UAW) for its
Muncie, Indiana automotive component plant (the Muncie Plant). Management subsequently wound-down
production activity at the plant, with operations effectively ceased as of March 31, 2009. As a
result of the
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closure of the Muncie Plant, the Company recorded a curtailment gain of $41.9 million
in the first quarter of 2009.
The Plant Shutdown Agreement with the UAW for the Muncie Plant also included a settlement of a
portion of the UAW retiree health care obligation, resulting in the remeasurement of the retiree
medical plan. The financial impact of this settlement resulted in expense recognition of $14.0
million, a $47.2 million reduction to retirement-related liabilities, a $27.2 million increase in
accumulated other comprehensive income and a $34.0 million increase in accounts payable and accrued
expenses in the first quarter of 2009. The $34.0 million in accounts payable and accrued expenses
will be paid in monthly installments, which began in May 2009 and will conclude in April 2010.
With the plant closing announcement, the Company has entered into discussions with the Pension
Benefit Guaranty Corporation regarding potential funding of the Muncie Plants defined benefit
pension plan.
The combined pre-tax impact of these actions was a net gain of $27.9 million, comprised of a $41.9
million curtailment gain and $14.0 million settlement loss on the Companys Condensed Consolidated
Statements of Operations as of March 31, 2009.
Selling, general and administrative (SG&A) costs for the first nine months of 2009 decreased $135
million to $315.4 million from $450.4 million, and increased as a percentage of net sales to 11.4%
from 10.4%. The decrease in SG&A was impacted by a $27.9 million aforementioned net gain related
to the Companys Plant Shutdown Agreement with the UAW and subsequent closure of the Muncie Plant.
This gain was partially offset by a $4.8 million expense associated with the adoption of Topic 805.
Without these non-comparable items, SG&A as a percentage of net sales was 12.2%. R&D costs, which
are included in SG&A expenses, decreased $56.3 million to $109.7 million from $166.0 million as
compared to the first nine months of 2008. As a percentage of sales, R&D costs increased to 4.0%
from 3.8% in the first nine months of 2008. Our continued investment in a number of cross-business
R&D programs, as well as other key programs, is necessary for the Companys short and long-term
growth.
In the second quarter of 2009, the Company took additional restructuring actions. The Company
reduced its North American workforce by approximately 550 people, or 12%; its European workforce by
approximately 150 people, or 2%; and its Asian workforce by approximately 60 people, or 3% in the
second quarter. The net restructuring expense recognized in the second quarter was $9.0 million
for employee termination benefits. In addition to employee termination costs, the Company recorded
$36.3 million of asset impairment and $5.0 million of other charges in the second quarter of 2009
related to the North American and European restructuring. The combined 2009 restructuring expenses
of $50.3 million are broken out by segment as follows: Engine $27.2 million, Drivetrain $19.7
million and Corporate $3.4 million.
Included in the second quarter of 2009 asset impairment charge is $22.3 million related to one of
the Companys European locations. During the second quarter of 2009 circumstances caused the
Company to evaluate the long range outlook of the facility using an undiscounted and discounted
cash flow model, both of which indicated that assets were impaired. The Company then used an
estimate of cost replacement to determine the fair value of the assets at the facility. This
reduction of asset value was included in the Engine segment.
Equity in affiliates earnings of $11.5 million decreased $18.7 million as compared to the first
nine months of 2008 primarily due to lower vehicle production in Asia.
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Interest expense and finance charges for the first nine months of 2009 were $41.1 million and
increased $12.6 million as compared with the first nine months of 2008. This increase was
primarily due to increased debt levels and a net $1.8 million non-cash charge related to net hedge
ineffectiveness, offset somewhat by reduced global interest rates.
The Companys provision for income taxes is normally based on an estimated tax rate for the year
applied to the year-to-date federal, state and foreign income. However, due to unprecedented
depressed global economic conditions there is significant uncertainty regarding industry production
volumes for the remainder of the year. This precludes us from making a reliable estimate of the
annual effective tax rate for the year. Accordingly, we have made our 2009 income tax provision
pursuant to Financial Accounting Standards Board (FASB) Topic 740, Accounting for Income Taxes in
Interim Periods, which provides that tax (or benefit) in each foreign jurisdiction that is not
subject to a valuation allowance be separately computed as ordinary income/(loss) occurs within the
jurisdiction for the quarter. The actual global effective tax rate for the nine months is
calculated to be a benefit of 54.5%, which resulted in a 7.0% tax rate for the third quarter. This
represents an income tax benefit of ($24.2) million on the loss of ($44.4) million for the first
nine months of 2009. It results in a $1.5 million expense on earnings before income taxes and
noncontrolling interest of $21.5 million for the third quarter of 2009.
The Companys net loss was $25.7 million for the first nine months of 2009, or $0.22 loss per
diluted share, a decrease of $0.61 per diluted share over the previous years first nine months.
The Company believes the following table is useful for comparison with on-going results from prior
periods. It details a number of non-recurring or non-comparable items that impacted earnings or
loss per share in 2009 and 2008.
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
GAAP earnings or (loss) per share diluted |
$ | (0.22 | ) | $ | 0.39 | |||
Non-recurring or non-comparable items: |
||||||||
Goodwill impairment charge |
| (1.24 | ) | |||||
Restructuring activities |
(0.29 | ) | (0.16 | ) | ||||
Tax valuation allowance |
| (0.11 | ) | |||||
DTP retiree healthcare litigation outcome |
| (0.03 | ) | |||||
Interest rate derivative agreements |
(0.03 | ) | | |||||
Topic 805 adoption |
(0.03 | ) | | |||||
Change in retiree obligation related to
Muncie closure |
0.15 | | ||||||
BERU purchase accounting |
| (0.04 | ) | |||||
Total impact of non-recurring or non-comparable items per share
diluted |
$ | (0.20 | ) | $ | (1.58 | ) | ||
Reporting Segments
The Companys business is comprised of two reporting segments: Engine and Drivetrain. These
reporting segments are strategic business groups, which are managed separately as each represents a
specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return on
invested capital (ROIC) of its business initiatives. The ROIC is comprised of projected earnings
before interest, income taxes and noncontrolling interest (EBIT) adjusted for income taxes
compared to the projected average capital investment required.
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EBIT is considered a non-GAAP financial measure. Generally, a non-GAAP financial measure is a
numerical measure of a companys financial performance, financial position or cash flows that
excludes (or includes) amounts that are included in (or excluded from) the most directly comparable
measure calculated and presented in accordance with GAAP. EBIT is defined as earnings before
interest, income taxes and noncontrolling interest. Earnings is intended to mean net earnings as
presented in the Consolidated Statements of Operations under GAAP.
The Company believes that EBIT is useful to demonstrate the operational profitability of our
segments by excluding interest and income taxes, which are generally accounted for across the
entire Company on a consolidated basis. EBIT is also one of the measures used by the Company to
determine resource allocation within the Company. Although the Company believes that EBIT enhances
understanding of our business and performance, it should not be considered an alternative to, or
more meaningful than, net earnings (loss) or cash flows from operations as determined in accordance
with GAAP.
The following tables present net sales and segment EBIT by reporting segment for the three and nine
months ended September 30, 2009 and 2008.
Net Sales by Reporting Segment
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Engine |
$ | 735.3 | $ | 974.1 | $ | 2,030.2 | $ | 3,181.2 | ||||||||
Drivetrain |
296.8 | 347.2 | 743.8 | 1,171.4 | ||||||||||||
Inter-segment eliminations |
(4.3 | ) | (4.4 | ) | (10.5 | ) | (20.2 | ) | ||||||||
Net sales |
$ | 1,027.8 | $ | 1,316.9 | $ | 2,763.5 | $ | 4,332.4 | ||||||||
Segment Earnings (Loss) Before Interest and Income Taxes
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(millions) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Engine |
$ | 56.6 | $ | 94.1 | $ | 136.5 | $ | 358.4 | ||||||||
Drivetrain |
7.5 | (2.9 | ) | (34.0 | ) | 37.2 | ||||||||||
Segment earnings before interest and income taxes (Segment EBIT) |
64.1 | 91.2 | 102.5 | 395.6 | ||||||||||||
Muncie closure retiree obligation net gain |
| | 27.9 | | ||||||||||||
Corporate, including equity in affiliates earnings and stock-based compensation |
(30.1 | ) | (14.1 | ) | (85.1 | ) | (54.0 | ) | ||||||||
Consolidated earnings before interest and taxes (EBIT) |
34.0 | 77.1 | 45.3 | 341.6 | ||||||||||||
Restructuring expense |
| 25.0 | 50.3 | 25.0 | ||||||||||||
Goodwill impairment charge |
| 146.8 | | 146.8 | ||||||||||||
Interest income |
(0.5 | ) | (2.2 | ) | (1.7 | ) | (6.4 | ) | ||||||||
Interest expense and finance charges |
13.0 | 11.2 | 41.1 | 28.5 | ||||||||||||
Earnings (loss) before income taxes and noncontrolling interest |
21.5 | (103.7 | ) | (44.4 | ) | 147.7 | ||||||||||
Provision (benefit) for income taxes |
1.5 | 24.3 | (24.2 | ) | 87.7 | |||||||||||
Net earnings (loss) |
20.0 | (128.0 | ) | (20.2 | ) | 60.0 | ||||||||||
Net earnings attributable to the noncontrolling interest |
2.8 | 2.4 | 5.5 | 14.2 | ||||||||||||
Net earnings (loss) attributable to BorgWarner Inc. |
$ | 17.2 | $ | (130.4 | ) | $ | (25.7 | ) | $ | 45.8 | ||||||
Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008
The Engine segment net sales decreased $238.8 million, or 24.5%, and segment EBIT decreased $37.5
million, or 39.9%, from third quarter 2008. Excluding the impact of weaker foreign currencies,
primarily the Euro, sales decreased approximately 21%. The sales and EBIT decrease was primarily
driven by reduced global vehicle production that depressed demand for engine products, especially
in Europe.
The Drivetrain segment net sales decreased $50.4 million, or 14.5%, and segment EBIT increased
$10.4 million from third quarter 2008. Excluding the impact of weaker foreign currencies,
primarily the Euro, sales decreased approximately 10%. The sales decrease was driven by lower
global production, primarily in
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Europe, North America and Japan. The EBIT increase was driven by
the Companys 2009 cost reduction actions to reduce our cost structure.
Nine months ended September 30, 2009 vs. Nine months ended September 30, 2008
The Engine segment net sales decreased $1,151 million, or 36.2%, and segment EBIT decreased $221.9
million, or 61.9%, from the first nine months of 2008. Excluding the impact of weaker foreign
currencies, primarily the Euro, sales decreased approximately 31%. The sales and EBIT decrease was
primarily driven by reduced global vehicle production that depressed demand for engine products,
especially in Europe.
The Drivetrain segment net sales decreased $427.6 million, or 36.5%, and segment EBIT decreased
$71.2 million from the first nine months of 2008. Excluding the impact of weaker foreign
currencies, primarily the Euro, sales decreased approximately 32%. The sales and EBIT decrease was
driven by lower global production, primarily in Europe, North America and Japan.
Outlook for the Remainder of 2009
The Company is cautiously optimistic about the remainder of 2009. The Company expects global
production volumes to be incrementally higher in the fourth quarter of 2009 compared with the first
nine months. However, visibility is limited in Europe due to uncertainty surrounding consumer
demand, the impact of expiring government-sponsored incentive programs and other market dynamics.
The impact of non-U.S. currencies is expected to be unfavorable in 2009 versus 2008.
The Company maintains a positive long-term outlook for its global business and is committed to new
product development and strategic capital investments to enhance its product leadership strategy.
The trends that are driving our long-term growth are expected to continue, including the growth of
direct injection diesel and gasoline engines worldwide, the increased adoption of automated
transmissions in Europe and Asia-Pacific, and the move to variable cam and chain engine timing
systems in both Europe and Asia-Pacific. As the recovery from current global economic conditions
occurs, we expect long-term sales and net earnings growth to resume to historical rates.
FINANCIAL CONDITION AND LIQUIDITY
The Company had $258.8 million of cash on hand at September 30, 2009. The Company has a
multi-currency revolving credit facility, which provides for borrowings up to $250 million through
January 22, 2011. The facility is secured by unperfected pledges of the Companys equity interests
in its subsidiaries and
certain assets. No secured party is entitled to perfect its lien on any of the collateral until
the long term unsecured senior, non-credit enhanced debt rating of the Company is less than or
equal to BB+ by Standard & Poors and less than or equal to Ba1 by Moodys. The three
key covenants of the credit agreement are a net worth test, a debt compared to EBITDA (Earnings
Before Interest, Taxes, Depreciation and Amortization) test, and an interest coverage test. The
Company was in compliance with all covenants at September 30, 2009 and expects to be compliant in
future periods. At September 30, 2009 and December 31, 2008 there were no outstanding borrowings
under the facility. In addition to the credit facility, as of September 30, 2009, the Company had
approximately $376 million available under a universal shelf registration statement on file with
the Securities and Exchange Commission under which a variety of debt and equity instruments could
be issued. From a credit quality perspective, the Company has a credit rating of BBB from Standard
& Poors and Ba1 from Moodys. On March 18, 2009, Moodys downgraded the Companys credit rating
from Baa3 to Ba1. The current outlook from Standard & Poors and Moodys is negative. None of the
Companys debt agreements require accelerated repayment in the event of a decrease in credit
ratings.
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On April 24, 2009 the Companys $50 million accounts receivable securitization facility matured and
was not renewed. The impact of this maturity was an increase in receivables of $50 million and a
decrease in cash of $50 million in the second quarter of 2009. This is reflected as a Financing
activity in the Condensed Consolidated Statements of Cash Flows.
During the nine-month periods ended September 30, 2009 and 2008, total cash proceeds from sales of
accounts receivable were $200 million and $450 million, respectively. The Company paid servicing
fees related to these receivables for the three months ended September 30, 2008 of $0.4 million.
The Company paid servicing fees related to these receivables for the nine months ended September
30, 2009 and 2008 of $0.4 million and $1.4 million, respectively. These amounts are recorded in
interest expense and finance charges in the Condensed Consolidated Statements of Operations.
In 2006, the Company entered into a series of interest rate swap agreements to effectively convert
a portion of its senior notes from fixed to variable interest rates and were designated as fair
value hedges for the senior notes. In the first quarter of 2009, $100 million of interest rate
swap agreements relating to the 2009 fixed-rate debt matured. Also, in the first quarter of 2009,
the Company terminated $150 million of interest rate swap agreements relating to the 2016 fixed
rate debt and $75 million of interest rate swap agreements relating to the 2019 fixed rate debt.
The early termination of the 2016 and 2019 interest rate swap agreements resulted in a gain of
$34.5 million that will be amortized as a reduction of interest expense over the remaining life of
the respective 2016 and 2019 debt. The Company recognized $5.7 million in interest expense in the
first quarter of 2009 as a result of the early termination. This early termination also resulted
in the Company receiving net cash proceeds of $30.0 million. As of September 30, 2009, there were
no outstanding interest rate swap agreements.
Net cash provided by operating activities decreased $38.8 million to $226.3 million for the first
nine months of 2009 from $265.1 million in the first nine months of 2008. The decrease reflected
lower earnings, somewhat offset by lower working capital needs in the first nine months of 2009 as
compared to the first nine months of 2008. Capital spending, including tooling outlays, was $127.2
million in the first nine months of 2009, compared with $265.6 million in 2008. Selective capital
spending remains an area of focus for the Company, both in order to support our book of new
business and for cost reductions and productivity improvements. The Company expects to continue to
spend capital to support the launch of our new applications and for cost reductions and
productivity improvement projects, but at levels considerably lower than 2008. The Company expects
that net cash provided by operating activities, after capital expenditures, including tooling
outlays to be positive in 2009.
As of September 30, 2009, debt increased from year-end 2008 by $67.4 million and cash increased by
$155.4
million. Our debt to capital ratio was 28.1% at the end of the third quarter versus 27.7% at the
end of 2008. The debt and debt to capital ratio increase between September 30, 2009 and December
31, 2008 was primarily due to the April 9, 2009 issuance of $373.8 million in convertible senior
notes due April 15, 2012, offset somewhat by the maturity of our $136.7 million, 6.50% senior
notes. The net proceeds from the convertible senior notes issuance were used to repay both short
and long-term bank debt and provide cash for operating needs. The Company paid dividends to its
stockholders of $13.8 million and $38.3 million in the first nine months of 2009 and 2008,
respectively. The Company repurchased 1,148,608 shares of its common stock for $48.4 million in
the first nine months of 2008, while no common shares were repurchased in the first nine months of
2009.
On March 5, 2009, the Company announced the temporary suspension of the Companys quarterly
dividend of $0.12 per share until global economic conditions improve. This action is expected to
save the Company approximately $42 million in cash flow in 2009.
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On April 9, 2009, the Company issued $373.8 million in convertible senior notes due April 15, 2012.
Under Topic 470, Accounting for Convertible Debt Instruments That May be Settled in Cash Upon
Conversion (Including Partial Cash Settlement), the Company must account for the convertible senior
notes by bifurcating the instrument between their liability and equity components. The value of
the debt component is based on the fair value of issuing a similar nonconvertible debt security.
The equity component of the convertible debt security is calculated by deducting the value of the
liability from the proceeds received at issuance. Therefore, the Companys September 30, 2009
Condensed Consolidated Balance Sheet includes an increase in debt of $325.9 million and an increase
in capital in excess of par of $36.5 million. Additionally, Topic 470 requires us to accrete the
discounted carrying value of the convertible notes to their face value over the term of the notes.
The Companys interest expense associated with this bond accretion is based on the effective
interest rate of the convertible senior notes of 9.365%. The total interest expense related to the
convertible notes in the Companys Consolidated Statement of Operations for the three and nine
months ended September 30, 2009 was $7.1 million and $14.5 million, respectively. The non-cash
portion of interest expense for the convertible notes for the three and nine months ended September
30, 2009 was $4.2 million and $8.4 million, respectively. For the full year of 2009, interest
expense related to the convertible notes will be approximately $22.2 million, of which
approximately $12.7 million will be non-cash. The notes will pay interest semi-annually of $6.5
million, which is at a coupon rate of 3.50% per year, beginning in October of this year.
Holders of the notes may convert their notes at their option at any time prior to the close of
business on the second scheduled trading day immediately preceding the maturity date of the notes,
in multiples of $1,000 principal amount. The initial conversion rate for the notes is 30.4706
shares of the Companys common stock per $1,000 principal amount of notes (representing an initial
conversion price of approximately $32.82 per share of common stock). The conversion price
represents a conversion premium of 27.5% over the last reported sale price of the Companys common
stock on the New York Stock Exchange on April 6, 2009, of $25.74 per share. As of September 30,
2009, the Companys stock price was below the conversion price of $32.82. There was no dilutive
impact to weighted average shares outstanding for the three and nine months ended September 30,
2009 due to the convertible senior notes. In conjunction with the note offering, the Company
entered into a bond hedge overlay at a net pre-tax cost of $25.2 million, effectively raising the
conversion premium to 50.0%, or approximately $38.61 per share. Upon conversion, the Company will
pay or deliver cash, shares of our common stock or a combination thereof at our election. The
convertible senior notes were issued under the Companys $750 million universal shelf registration
filed with the Securities and Exchange Commission, leaving approximately $376 million available as
of September 30, 2009.
We believe that the combination of cash from operations, cash balances, available credit
facilities, the April issuance of the convertible senior notes described above, and the remaining
shelf registration capacity will be
sufficient to satisfy our cash needs for our current level of operations and our planned operations
for the foreseeable future. We will continue to balance our needs for internal growth, external
growth, debt reduction and cash conservation.
OTHER MATTERS
In the normal course of business the Company and its subsidiaries are parties to various commercial
and legal claims, actions and complaints, including matters involving warranty claims, intellectual
property claims, general liability and various other risks. It is not possible to predict with
certainty whether or not the Company and its subsidiaries will ultimately be successful in any of
these commercial and legal matters or, if not, what the impact might be. The Companys
environmental and product liability contingencies are discussed separately below. The Companys
management does not expect that the results in any of these commercial and legal claims, actions
and complaints will have a material adverse effect on the Companys results of operations,
financial position or cash flows.
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Litigation
In January 2006, DTP, a subsidiary of the Company, filed a declaratory judgment action in United
States District Court, Southern District of Indiana (Indianapolis Division) against the United
Automobile, Aerospace, and Agricultural Implements Workers of America (UAW) Local No. 287 and
Gerald Poor, individually and as the representative of a defendant class. DTP sought the Courts
affirmation that DTP did not violate the Labor-Management Relations Act or the Employee Retirement
Income Security Act by unilaterally amending certain medical plans effective April 1, 2006 and
October 1, 2006, prior to the expiration of the then-current collective bargaining agreements. On
September 10, 2008, the Court found that DTPs reservation of the right to make such amendments
reducing the level of benefits provided to retirees was limited by its collectively bargained
health insurance agreement with the UAW, which did not expire until April 24, 2009. Thus, the
amendments were untimely. In 2008 the Company recorded a charge of $4.0 million as a result of the
Courts decision.
DTP filed a declaratory judgment action in the United States District Court, Southern District of
Indiana (Indianapolis Division) against the UAW Local No. 287 and Jim Barrett and others
individually, and as representatives of a defendant class, on February 26, 2009 again seeking the
Courts affirmation that DTP will not violate the Labor Management Relations Act or the
Employment Retirement Income Security Act (ERISA) by modifying the level of benefits provided
retirees to make them comparable to other Company retiree benefit plans after April 24, 2009.
Certain retirees, on behalf of themselves and others, filed a mirror-image action in the United
States District Court, Eastern District of Michigan (Southern Division) on March 11, 2009, for
which a class has been certified. Both actions are pending.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors,
subsidiaries and divisions have been identified by the United States Environmental Protection
Agency and certain state environmental agencies and private parties as potentially responsible
parties (PRPs) at various hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act (Superfund) and equivalent state laws and, as such, may
presently be liable for the cost of clean-up and other remedial activities at 35 such sites.
Responsibility for clean-up and other remedial activities at a Superfund site is typically shared
among PRPs based on an allocation formula.
The Company believes that none of these matters, individually or in the aggregate, will have a
material adverse effect on its results of operations, financial position, or cash flows.
Generally, this is because either the estimates of the maximum potential liability at a site are
not large or the liability will be shared with other
PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.
Based on information available to the Company (which in most cases includes: an estimate of
allocation of liability among PRPs; the probability that other PRPs, many of whom are large,
solvent public companies, will fully pay the cost apportioned to them; currently available
information from PRPs and/or federal or state environmental agencies concerning the scope of
contamination and estimated remediation and consulting costs; remediation alternatives; and
estimated legal fees), the Company has established an accrual for indicated environmental
liabilities with a balance at September 30, 2009 of $12 million. The Company has accrued amounts
that do not exceed $4.4 million related to any individual site and we do not believe that the costs
related to any of these sites will have a material adverse effect on the Companys results of
operations, cash flows or financial condition. The Company expects to pay out substantially all of
the amounts accrued for environmental liability over the next three to five years.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the
buyer and Kuhlman Electric for certain environmental liabilities, then unknown to the Company,
relating to certain operations of Kuhlman Electric that pre-date the Companys 1999 acquisition of
Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential
environmental contamination at its Crystal Springs, Mississippi plant while undertaking an
expansion of the plant. The Company is continuing
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to work with the Mississippi Department of
Environmental Quality and Kuhlman Electric to investigate and remediate to the extent necessary,
historical contamination at the plant and surrounding area. Kuhlman Electric and others, including
the Company, were sued in numerous related lawsuits, in which multiple claimants alleged personal
injury and property damage. In 2005, the Company and other defendants entered into settlements
that resolved approximately 99% of the then known personal injury and property damage claims
relating to the alleged environmental contamination.
Four additional lawsuits were filed against Kuhlman Electric and others, including the Company, in
2007 and 2008 on behalf of approximately 340 plaintiffs, alleging personal injury relating to the
alleged environmental contamination. Given the early stage of the litigation, the Company cannot
make any predictions as to the outcome, but its current intent is to vigorously defend against the
suits.
Conditional Asset Retirement Obligations
In March 2005, Topic 410, Accounting for Conditional Asset Retirement Obligations, which requires
the Company to recognize legal obligations to perform asset retirements in which the timing and/or
method of settlement are conditional on a future event that may or may not be within the control of
the entity. Certain government regulations require the removal and disposal of asbestos from an
existing facility at the time the facility undergoes major renovations or is demolished. The
liability exists because the facility will not last forever, but it is conditional on future
renovations (even if there are no immediate plans to remove the materials, which pose no health or
safety hazard in their current condition). Similarly, government regulations require the removal
or closure of underground storage tanks and above ground storage tanks when their use ceases, the
disposal of polychlorinated biphenyl transformers and capacitors when their use ceases, and the
disposal of used furnace bricks and liners, and lead-based paint in conjunction with facility
renovations or demolition. The Company currently has 32 manufacturing locations that have been
identified as containing these items. The fair value to remove and dispose of this material has
been estimated and recorded at $1.7 million as of September 30, 2009 and $1.4 million as of
December 31, 2008.
Product Liability
Like many other industrial companies who have historically operated in the U.S., the Company (or
parties the Company is obligated to indemnify) continues to be named as one of many defendants in
asbestos-related personal injury actions. We believe that the Companys involvement is limited
because, in general, these
claims relate to a few types of automotive friction products that were manufactured many years ago
and contained encapsulated asbestos. The nature of the fibers, the encapsulation and the manner of
use lead the Company to believe that these products are highly unlikely to cause harm. As of
September 30, 2009 and December 31, 2008 the Company had approximately 23,000 and 27,000 pending
asbestos-related product liability claims, respectively. Of the 23,000 outstanding claims at
September 30, 2009, approximately 12,000 were pending in just three jurisdictions, where
significant tort and judicial reform activities are underway.
The Companys policy is to aggressively defend against these lawsuits and the Company has been
successful in obtaining dismissal of many claims without any payment. The Company expects that the
vast majority of the pending asbestos-related product liability claims where it is a defendant (or
has an obligation to indemnify a defendant) will result in no payment being made by the Company or
its insurers. In the first nine months of 2009, of the approximately 4,800 claims resolved, only
180 (3.8%) resulted in any payment being made to a claimant by or on behalf of the Company. In
2008, of the approximately 17,500 claims resolved, only 210 (1.2%) resulted in any payment being
made to a claimant by or on behalf of the Company.
Prior to June 2004, the settlement and defense costs associated with all claims were covered by the
Companys primary layer insurance coverage, and these carriers administered, defended, settled and
paid all
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claims under a funding arrangement. In June 2004, primary layer insurance carriers
notified the Company of the alleged exhaustion of their policy limits. This led the Company to
access the next available layer of insurance coverage. Since June 2004, secondary layer insurers
have paid asbestos-related litigation defense and settlement expenses pursuant to a funding
arrangement. To date, the Company has paid $74.7 million in defense and indemnity in advance of
insurers reimbursement and has received $18.5 million in cash from insurers. The outstanding
balance of $56.2 million is expected to be fully recovered. Timing of the recovery is dependent on
final resolution of the declaratory judgment action referred to below. At December 31, 2008,
insurers owed $35.9 million in association with these claims.
At September 30, 2009, the Company has an estimated liability of $45.9 million for future claims
resolutions, with a related asset of $45.9 million to recognize the insurance proceeds receivable
by the Company for estimated losses related to claims that have yet to be resolved. Insurance
carrier reimbursement of 100% is expected based on the Companys experience, its insurance
contracts and decisions received to date in the declaratory judgment action referred to below. At
December 31, 2008, the comparable value of the insurance receivable and accrued liability was $34.7
million.
The amounts recorded in the Consolidated Balance Sheets related to the estimated future settlement
of existing claims are as follows:
September 30, | December 31, | |||||||
(millions) | 2009 | 2008 | ||||||
Assets: |
||||||||
Prepayments and other current assets |
$ | 24.1 | $ | 22.1 | ||||
Other non-current assets |
21.8 | 12.6 | ||||||
Total insurance receivable |
$ | 45.9 | $ | 34.7 | ||||
Liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 24.1 | $ | 22.1 | ||||
Other non-current liabilities |
21.8 | 12.6 | ||||||
Total accrued liability |
$ | 45.9 | $ | 34.7 | ||||
The Company cannot reasonably estimate possible losses, if any, in excess of those for which it has
accrued, because it cannot predict how many additional claims may be brought against the Company
(or parties the Company has an obligation to indemnify) in the future, the allegations in such
claims, the possible outcomes, or the impact of tort reform legislation that may be enacted at the
State or Federal levels.
A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County,
Illinois by Continental Casualty Company and related companies (CNA) against the Company and
certain of its other historical general liability insurers. CNA provided the Company with both
primary and additional layer insurance, and, in conjunction with other insurers, is currently
defending and indemnifying the Company in its pending asbestos-related product liability claims.
The lawsuit seeks to determine the extent of insurance coverage available to the Company including
whether the available limits exhaust on a per occurrence or an aggregate basis, and to
determine how the applicable coverage responsibilities should be apportioned. On August 15, 2005,
the Court issued an interim order regarding the apportionment matter. The interim order has the
effect of making insurers responsible for all defense and settlement costs pro rata to
time-on-the-risk, with the pro-ration method to hold the insured harmless for periods of bankrupt
or unavailable coverage. Appeals of the interim order were denied. However, the issue is reserved
for appellate review at the end of the action. In addition to the primary insurance available for
asbestos-related claims, the Company has substantial additional layers of insurance available for
potential future asbestos-related product claims. As such, the Company continues to believe that
its coverage is sufficient to meet foreseeable liabilities.
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Although it is impossible to predict the outcome of pending or future claims or the impact of tort
reform legislation that may be enacted at the State or Federal levels, due to the encapsulated
nature of the products, the Companys experiences in aggressively defending and resolving claims in
the past, and the Companys significant insurance coverage with solvent carriers as of the date of
this filing, management does not believe that asbestos-related product liability claims are likely
to have a material adverse effect on the Companys results of operations, cash flows or financial
condition.
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Topic 820, Fair
Value Measurements. Topic 820 defines fair value, establishes a framework for measuring fair
value in GAAP and expands disclosures about fair value measurements. On January 1, 2009, the
Company fully adopted as required, Topic 820. See Note 9 to the Consolidated Financial
Statements for more information regarding the implementation of Topic 820.
In December 2007, the FASB issued Topic 805, Business Combinations. Topic 805 establishes
principles and requirements for recognizing identifiable assets acquired, liabilities assumed,
noncontrolling interest in the acquiree, goodwill acquired in the combination or the gain from a
bargain purchase, and disclosure requirements. Under this revised statement, all costs incurred to
effect an acquisition will be recognized separately from the acquisition. Also, restructuring
costs that are expected but the acquirer is not obligated to incur will be recognized separately
from the acquisition. On January 1, 2009, the Company adopted Topic 805. In the first quarter of
2009, the Company expensed $4.8 million related to on-going acquisition related activity.
In December 2007, the FASB issued Topic 810, Noncontrolling Interests in Consolidated
Financial Statements. For consolidated subsidiaries that are less than wholly owned, the third
party holdings of equity interests are referred to as noncontrolling interests. The portion of net
income (loss) attributable to noncontrolling interests for such subsidiaries is presented as net
income (loss) applicable to noncontrolling interest on the consolidated statement of operation, and
the portion of stockholders equity of such
subsidiaries is presented as noncontrolling interest on the consolidated balance sheet. Effective
January 1, 2009, the Company adopted Topic 810.
The adoption of Topic 810 did not have a material impact on the Companys financial condition,
results of operations or cash flows. However, it did impact the presentation and disclosure of
noncontrolling (minority) interests in our consolidated financial statements and notes to the
consolidated financial statements. As a result of the retrospective presentation and disclosure
requirements of Topic 810, the Company was required to reflect the change in presentation and
disclosure for the period ending March 31, 2009 and all periods presented in future filings.
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The principal effect on the prior year balance sheets related to the adoption of Topic 810 is
summarized as follows:
Balance Sheet
(millions) | December 31, 2008 | |||
Total stockholders equity, as previously reported |
$ | 2,006.0 | ||
Increase for Topic 810 reclass of noncontrolling interest |
31.5 | |||
Total stockholders equity, as adjusted |
$ | 2,037.5 | ||
The principal effect on the prior year statement of operations related to the adoption of Topic 810
is summarized as follows:
Consolidated Statement of Operations
Three Months Ended | Nine Months Ended | |||||||
(millions) | September 30, 2008 | September 30, 2008 | ||||||
Net earnings (loss), as previously reported |
$ | (130.4 | ) | $ | 45.8 | |||
Topic 810 reclass of noncontrolling interest |
(2.4 | ) | (14.2 | ) | ||||
Net earnings (loss), as adjusted |
$ | (128.0 | ) | $ | 60.0 | |||
Less: Net earnings attributable to noncontrolling interest |
(2.4 | ) | (14.2 | ) | ||||
Net earnings attributable to BorgWarner Inc. |
$ | (130.4 | ) | $ | 45.8 | |||
The principal effect on the prior year statement of cash flows related to the adoption of Topic 810
is summarized as follows:
Statement of Cash Flows
Nine Months Ended | ||||
(millions) | September 30, 2008 | |||
Net earnings, as previously reported |
$ | 45.8 | ||
Topic 810 reclass of noncontrolling interest |
(14.2 | ) | ||
Net earnings (loss), as adjusted |
$ | 60.0 | ||
Statement of Cash Flows
Nine Months Ended | ||||
(millions) | September 30, 2008 | |||
Equity in affiliates earnings, net of dividends received,
minority interest and other, as previously reported |
$ | 16.9 | ||
Less: Topic 810 reclass of noncontrolling interest |
(14.2 | ) | ||
Equity in affiliates earnings, net of dividends received and other |
$ | 2.7 | ||
The principal effect on the prior year comprehensive income related to the adoption of Topic 810 is
summarized as follows:
Comprehensive Income (Loss)
Three Months Ended | Nine Months Ended | |||||||
(millions) | September 30, 2008 | September 30, 2008 | ||||||
Comprehensive loss, as previously reported |
$ | (306.7 | ) | $ | (40.7 | ) | ||
Topic 810 reclass of noncontrolling interest |
1.3 | 3.5 | ||||||
Comprehensive loss, as adjusted |
$ | (308.0 | ) | $ | (44.2 | ) | ||
Less: Comprehensive income (loss) attributable to noncontrolling interest |
1.3 | 3.5 | ||||||
Comprehensive loss attributable to BorgWarner Inc. |
$ | (306.7 | ) | $ | (40.7 | ) | ||
In March 2008, the FASB issued Topic 815, Disclosures about Derivative Instruments and Hedging
Activities. Topic 815 requires entities to provide enhanced disclosures about how and why an
entity uses derivative instruments, how derivative instruments and related hedged items are
accounted for under Topic 815 and its related interpretations, and how derivative instruments and
related hedged items affect an entitys financial position, financial performance, and cash flows.
On January 1, 2009, the Company adopted Topic
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815. See Note 10 to the Consolidated Financial
Statements for more information regarding the implementation of Topic 815.
In May 2008, the FASB issued Topic 470, Accounting for Convertible Debt Instruments That May be
Settled in Cash Upon Conversion (Including Partial Cash Settlement). Under Topic 470, an entity
must separately account for the liability and equity components of the convertible debt instruments
that may be settled entirely or partially in cash upon conversion in a manner that reflects the
issuers interest cost. Topic 470 is effective for fiscal years beginning after December 15, 2008,
and for interim periods within those fiscal years, with retrospective application required. As a
result of our adoption of Topic 470 for fiscal 2009 and the Companys April 9, 2009 issuance of
$373.8 million convertible senior notes due April 15, 2012, we recorded the equity and liability
components of the notes on our June 30, 2009 Condensed Consolidated Balance Sheet. Additionally,
Topic 470 requires us to accrete the discounted carrying value of the convertible notes to their
face value over the term of the notes. The Companys interest expense associated with this
amortization is based on the effective interest rate of the convertible senior notes of 9.365%.
The total interest expense related to the convertible notes in the Companys Consolidated Statement
of Operations for the three and nine months ended September 30, 2009 was $7.1 million and $14.5
million, respectively. The non-cash portion of interest expense for the convertible notes for the
three and nine months ended September 30, 2009 was $4.2 million and $8.4 million, respectively.
For the full year of 2009, interest expense will be approximately $22.2 million, of which
approximately $12.7 million will be non-cash. See Note 8 to the Condensed Consolidated Financial Statements for more information regarding this
issuance.
In December 2008, the FASB issued Topic 715, Employers Disclosures about Postretirement Benefit
Plan Assets. Topic 715 requires entities to provide enhanced disclosures about how investment
allocation decisions are made, the major categories of plan assets, the inputs and valuation
techniques used to measure fair value of plan assets, the effect of fair value measurements using
significant unobservable inputs on changes in plan assets for the period, and significant
concentrations of risk within plan assets. Topic 715 is effective for the Company beginning with
its year ending December 31, 2009. The Company is currently assessing the potential impacts, if
any, on its consolidated financial statements.
In May 2009, the FASB issued Topic 855, Subsequent Events. Topic 855 requires entities to disclose
the date through which subsequent events have been evaluated, as well as whether that date is the
date the financial statements were issued or the date the financial statements were available to be
issued. The Company adopted Topic 855 in the second quarter of 2009 and has evaluated all
subsequent events through
October 28, 2009 (the date the Companys financial statements are issued).
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for
Transfer of Financial Assets an amendment of Topic 860 (FAS 166). FAS 166 removes the concept
of a qualifying special-purpose entity from Topic 860 and removes the exception from applying Topic
810, Consolidation of Variable Interest Entities, to qualifying special-purpose entities. This
Statement modifies the financial-components approach used in Topic 860 and limits the circumstances
in which a financial asset, or portion of a financial asset, should be derecognized. Additionally,
enhanced disclosures are required to provide financial statement users with greater transparency
about transfers of financial assets and a transferors continuing involvement with transferred
financial assets. FAS 166 is effective for the Company beginning with its quarter ending March 31,
2010. The adoption of FAS 166 is not expected to have a material impact on the Companys
consolidated financial position, results of operations or cash flows.
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In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to
Topic 810 (FAS 167). FAS 167 amends Topic 810 to require ongoing reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity. Additionally, FAS 167
requires enhanced disclosures that will provide users of financial statements with more transparent
information about an enterprises involvement in variable interest entities. FAS 167 is effective
for the Company beginning with its quarter ending March 31, 2010. The adoption of FAS 167 is not
expected to have a material impact on the Companys consolidated financial position, results of
operations or cash flows.
In June 2009, the FASB issued Topic 105, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles. This Topic instituted a major change in the
way accounting standards are organized. The accounting standards Codification became the single
official source of authoritative, nongovernmental U.S. generally accepted accounting principles
(GAAP). As of September 30, 2009 only one level of authoritative GAAP exists, other than
guidance issued by the Securities and Exchange Commission. All other literature is
non-authoritative. The Company has adopted the Codification in the third quarter of 2009. The
adoption of the Codification had no impact on the Companys consolidated financial position,
results of operations or cash flows.
This adoption required all issued authoritative literature to be disclosed using Codification
Sections. Authoritative literature has been referenced within our third quarter report on Form
10-Q under these new Codification Sections. New standards not yet codified have been referenced as
issued and will be updated when codified.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q (including Managements 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 that are based on managements current outlook,
expectations, estimates and projections. Words such as outlook, expects, anticipates,
intends, plans, believes, estimates, variations of such words and similar expressions are
intended to identify such forward-looking statements. 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. Such risks and uncertainties include: fluctuations in
domestic or foreign vehicle production, the continued use of outside suppliers, fluctuations in
demand for vehicles containing our products, changes in general economic conditions, as well as the
other risks detailed in our filings with the Securities and Exchange Commission, including the Risk
Factors, identified in the Form 10-K for the fiscal year ended December 31, 2008. We do not
undertake any obligation to update any forward-looking statements.
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
There have been no material changes to the information concerning our exposures to market risk as
stated in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
Item 4. | Controls and Procedures |
The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) that are designed to provide reasonable assurance that the information
required to be disclosed in the reports it files with the Securities and Exchange Commission is
collected and then processed, summarized and disclosed within the time periods specified in the
rules of the Securities and Exchange Commission. Under the supervision and with the participation
of the Companys management, including the Companys Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures as of the end of the period covered by this report. Based on such
evaluation, the Companys Chief Executive Officer and Chief Financial Officer have concluded that
these procedures are effective. There have been no changes in internal control over financial
reporting that occurred during the period covered by this report that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. | 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 Companys business or relating to matters for
which the Company may have a contractual indemnity obligation. See Note 14 Contingencies to the
condensed consolidated financial statements for a discussion of environmental, product liability
and other litigation, which is incorporated herein by reference.
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Item 6. | Exhibits |
Exhibit 31.1
|
Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer | |
Exhibit 31.2
|
Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer | |
Exhibit 32.1
|
Section 1350 Certifications | |
Exhibit 101
|
The following materials from BorgWarner Inc.s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
BorgWarner Inc. (Registrant) |
||||
By | /s/ Jeffrey L. Obermayer | |||
(Signature) | ||||
Jeffrey L. Obermayer Vice President and Controller (Principal Accounting Officer) |
||||
Date: October 28, 2009
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