Company Quick10K Filing
Quick10K
BorgWarner
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$38.58 207 $8,000
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-04-30 Quarter: 2015-04-30
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-25 Earnings, Exhibits
8-K 2019-07-25 Regulation FD, Exhibits
8-K 2019-04-25 Shareholder Vote, Regulation FD, Exhibits
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-04-17 Officers
8-K 2019-03-19 Officers, Regulation FD, Exhibits
8-K 2019-02-14 Regulation FD, Exhibits
8-K 2019-02-14 Regulation FD, Exhibits
8-K 2019-02-14 Earnings, Exhibits
8-K 2019-02-08 Officers
8-K 2018-11-07 Regulation FD, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-10-16 Officers, Regulation FD, Exhibits
8-K 2018-09-18 Regulation FD, Exhibits
8-K 2018-08-16 Officers, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-07-25 Officers, Regulation FD, Exhibits
8-K 2018-06-12 Amendment
8-K 2018-06-06 Officers
8-K 2018-05-09 Officers
8-K 2018-04-26 Officers
8-K 2018-01-16 Regulation FD, Exhibits
STWD Starwood Property Trust 6,270
BSM Black Stone Minerals 3,660
MSBI Midland States Bancorp 626
RCUS Arcus Biosciences 490
GIG Gigcapital 190
FORK Fuling Global 32
TYHT Shineco 25
CHEK Check-Cap 20
SRMC Sierra Monitor 0
NSM Nationstar 0
BWA 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-10.1 a2019063010qexhibit101.htm
EX-10.2 a2019063010qexhibit102.htm
EX-10.3 a2019063010qexhibit103.htm
EX-10.4 a2019063010qexhibit104.htm
EX-10.5 a2019060310qexhibit105.htm
EX-31.1 a2019063010qexhibit311.htm
EX-31.2 a2019063010qexhibit312.htm
EX-32.1 a2019063010qexhibit321.htm

BorgWarner Earnings 2019-06-30

BWA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission file number: 1-12162
BORGWARNER INC.
________________________________________________
(Exact name of registrant as specified in its charter)
Delaware
 
13-3404508
State or other jurisdiction of
 
(I.R.S. Employer
Incorporation or organization
 
Identification No.)
 
 
 
 
 
3850 Hamlin Road,
Auburn Hills,
Michigan
 
48326
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (248754-9200
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
BWA
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   No
As of July 19, 2019, the registrant had 206,514,592 shares of voting common stock outstanding.




BORGWARNER INC.
FORM 10-Q
THREE AND SIX MONTHS ENDED JUNE 30, 2019
INDEX
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




CAUTIONARY STATEMENTS FOR FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) (including Management's Discussion and Analysis of Financial Condition and Results of Operations) may constitute forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act (the “Act”) that are based on management's current outlook, expectations, estimates and projections. Words such as "anticipates," "believes," "continues," "could," "designed," "effect," "estimates," "evaluates," "expects," "forecasts," "goal," "initiative," "intends," "outlook," "plans," "potential," "project," "pursue," "seek," "should," "target," "when," "would," and variations of such words and similar expressions are intended to identify such forward-looking statements. Further, all statements, other than statements of historical fact contained or incorporated by reference in this Form 10-Q, that we expect or anticipate will or may occur in the future regarding our financial position, business strategy and measures to implement that strategy, including changes to operations, competitive strengths, goals, expansion and growth of our business and operations, plans, references to future success and other such matters, are forward-looking statements. Accounting estimates, such as those described under the heading "Critical Accounting Policies" in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018 (“Form 10-K”), are inherently forward-looking. All forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. Forward-looking statements are not guarantees of performance and the Company's actual results may differ materially from those expressed, projected, or implied in or by the forward-looking statements.

You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Forward-looking statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. These risks and uncertainties, among others, include: our dependence on automotive and truck production, both of which are highly cyclical; our reliance on major OEM customers; commodities availability and pricing; supply disruptions; fluctuations in interest rates and foreign currency exchange rates; availability of credit; our dependence on key management; our dependence on information systems; the uncertainty of the global economic environment; the outcome of existing or any future legal proceedings, including litigation with respect to various claims; future changes in laws and regulations in the countries in which we operate; and the other risks noted in reports that we file with the Securities and Exchange Commission, including Item 1A, "Risk Factors" in our most recently-filed Form 10-K. We do not undertake any obligation to update or announce publicly any updates to or revisions to any of the forward-looking statements in this Form 10-Q to reflect any change in our expectations or any change in events, conditions, circumstances, or assumptions underlying the statements.

This section and the discussions contained in Item 1A, "Risk Factors," and in Item 7, subheading "Critical Accounting Policies" in our most recently-filed Form 10-K are intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Act. This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties, including without limitation those not currently known to us or that we currently believe are immaterial, also may impair our business, operations, liquidity, financial condition and prospects.




Use of Non-GAAP Financial Measures

In addition to results presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), this report includes non-GAAP financial measures. The Company believes these non-GAAP financial measures provide additional information that is useful to investors in understanding the underlying performance and trends of the Company. Readers should be aware that non-GAAP financial measures have inherent limitations and should be cautious with respect to the use of such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools, together with GAAP measures, to assist in the evaluation of our operating performance or financial condition. We ensure that these measures are calculated using the appropriate GAAP components in their entirety and that they are computed in a manner intended to facilitate consistent period-to-period comparisons. The Company's method of calculating these non-GAAP measures may differ from methods used by other companies. These non-GAAP measures should not be considered in isolation or as a substitute for those financial measures prepared in accordance with GAAP. Where non-GAAP financial measures are used, the most directly comparable GAAP or regulatory financial measure, as well as the reconciliation to the most directly comparable GAAP financial measure, can be found in this report.





PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions)
June 30,
2019
 
December 31,
2018
ASSETS

 

Cash
$
710

 
$
739

Receivables, net
2,063

 
1,988

Inventories, net
817

 
781

Prepayments and other current assets
259

 
250

Assets held for sale

 
47

Total current assets
3,849

 
3,805




 


Property, plant and equipment, net
2,891

 
2,904

Investments and other long-term receivables
690

 
592

Goodwill
1,845

 
1,853

Other intangible assets, net
421

 
439

Other non-current assets
535

 
502

Total assets
$
10,231

 
$
10,095




 


LIABILITIES AND EQUITY


 


Notes payable and other short-term debt
$
171

 
$
173

Accounts payable and accrued expenses
2,089

 
2,144

Income taxes payable
53

 
59

Liabilities held for sale

 
23

Total current liabilities
2,313

 
2,399




 


Long-term debt
1,929

 
1,941

 
 
 
 
Other non-current liabilities:
 
 
 
Asbestos-related liabilities
734

 
755

Retirement-related liabilities
283

 
298

Other
470

 
357

Total other non-current liabilities
1,487

 
1,410




 


Common stock
3

 
3

Capital in excess of par value
1,116

 
1,146

Retained earnings
5,598

 
5,336

Accumulated other comprehensive loss
(670
)
 
(674
)
Common stock held in treasury
(1,653
)
 
(1,585
)
Total BorgWarner Inc. stockholders’ equity
4,394

 
4,226

Noncontrolling interest
108

 
119

Total equity
4,502

 
4,345

Total liabilities and equity
$
10,231

 
$
10,095


See accompanying Notes to Condensed Consolidated Financial Statements.

1



BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
Three Months Ended
June 30,
 
 Six Months Ended
June 30,
(in millions, except per share amounts)
2019
 
2018
 
2019
 
2018
Net sales
$
2,551

 
$
2,694

 
$
5,117

 
$
5,478

Cost of sales
2,038

 
2,114

 
4,085

 
4,307

Gross profit
513

 
580

 
1,032

 
1,171


 
 
 
 
 
 


Selling, general and administrative expenses
212

 
237

 
438

 
490

Other expense, net
16

 
30

 
45

 
35

Operating income
285

 
313

 
549

 
646


 
 
 
 
 
 


Equity in affiliates’ earnings, net of tax
(9
)
 
(13
)
 
(18
)
 
(23
)
Interest income
(2
)
 
(1
)
 
(5
)
 
(3
)
Interest expense
14

 
15

 
28

 
31

Other postretirement expense (income)
27

 
(2
)
 
27

 
(5
)
Earnings before income taxes and noncontrolling interest
255

 
314

 
517

 
646


 
 
 
 
 
 


Provision for income taxes
73

 
30

 
164

 
125

Net earnings
182

 
284

 
353

 
521

Net earnings attributable to the noncontrolling interest, net of tax
10

 
12

 
21

 
24

Net earnings attributable to BorgWarner Inc. 
$
172

 
$
272

 
$
332

 
$
497

 
 
 
 
 
 
 
 
Earnings per share — basic
$
0.84

 
$
1.30

 
$
1.61

 
$
2.38

 
 
 
 
 
 
 
 
Earnings per share — diluted
$
0.83


$
1.30


$
1.60

 
$
2.36

 
 
 
 
 
 
 
 
Weighted average shares outstanding (millions):
 
 
 
 
 
 
 
Basic
205.7

 
208.6

 
206.1

 
209.0

Diluted
206.8


209.9


207.0

 
210.3


See accompanying Notes to Condensed Consolidated Financial Statements.

2



BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
2019
 
2018
 
2019
 
2018
Net earnings attributable to BorgWarner Inc. 
$
172

 
$
272

 
$
332

 
$
497

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments*
(13
)
 
(146
)
 
(22
)
 
(81
)
Hedge instruments*
(1
)
 
1

 
(1
)
 
(2
)
Defined benefit retirement plans*
19

 
7

 
27

 
5

Total other comprehensive income (loss) attributable to BorgWarner Inc.
5

 
(138
)
 
4

 
(78
)
 
 
 
 
 
 
 
 
Comprehensive income attributable to BorgWarner Inc.*
177

 
134

 
336

 
419

 
 
 
 
 
 
 
 
Net earnings attributable to noncontrolling interest, net of tax
10

 
12

 
21

 
24

Other comprehensive loss attributable to the noncontrolling interest*
(3
)
 
(6
)
 
(2
)
 
(4
)
Comprehensive income
$
184

 
$
140

 
$
355

 
$
439

____________________________________
*
Net of income taxes.

See accompanying Notes to Condensed Consolidated Financial Statements.


3



BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Six Months Ended
June 30,
(in millions)
2019
 
2018
OPERATING
 
 
 
Net earnings
$
353

 
$
521

Adjustments to reconcile net earnings to net cash flows from operations:
 
 
 
Depreciation and amortization
214

 
218

Stock-based compensation expense
17

 
22

Restructuring expense, net of cash paid
12

 
31

Pension settlement loss
26

 

Deferred income tax provision (benefit)
35

 
(34
)
Tax reform adjustments to provision for income taxes
16

 

Equity in affiliates’ earnings, net of dividends received, and other
(4
)
 
(27
)
Net earnings adjusted for non-cash charges to operations
669

 
731

Changes in assets and liabilities:


 
 

Receivables
(90
)
 
(159
)
Inventories
(40
)
 
(62
)
Prepayments and other current assets
(22
)
 
(34
)
Accounts payable and accrued expenses
(48
)
 
(106
)
Prepaid taxes and Income taxes payable
6

 
(53
)
Other assets and liabilities
(8
)
 
(12
)
Net cash provided by operating activities
467

 
305




 


INVESTING


 
 

Capital expenditures, including tooling outlays
(244
)
 
(269
)
Payments for business acquired
(10
)
 

Proceeds from sale of business, net of cash divested
24

 

Payments for investments in equity securities
(48
)
 
(3
)
Proceeds from asset disposals and other
1

 
5

Net cash used in investing activities
(277
)
 
(267
)



 


FINANCING


 
 

Net increase in notes payable

 
1

Additions to long-term debt, net of debt issuance costs
30

 
19

Repayments of long-term debt, including current portion
(39
)
 
(14
)
Payments for purchase of treasury stock
(100
)
 
(110
)
Payments for stock-based compensation items
(15
)
 
(15
)
Dividends paid to BorgWarner stockholders
(70
)
 
(71
)
Dividends paid to noncontrolling stockholders
(24
)
 
(25
)
Net cash used in financing activities
(218
)
 
(215
)
Effect of exchange rate changes on cash
(1
)
 
(6
)
Net decrease in cash
(29
)
 
(183
)
Cash and restricted cash at beginning of year
739

 
545

Cash and restricted cash at end of period
$
710

 
$
362


 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 

Cash paid during the period for:
 
 
 

Interest
$
33

 
$
39

Income taxes, net of refunds
$
89

 
$
186

See accompanying Notes to Condensed Consolidated Financial Statements.

4



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

(1)      Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair statement of results have been included. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The balance sheet as of December 31, 2018 was derived from the audited financial statements as of that date. For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

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

(2) New Accounting Pronouncements

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "Leases (Topic 842)." Under this guidance, a lease is a contract, or part of a contract, that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Lessees are required to recognize a right-of-use asset and a lease liability for leases with a term more than 12 months, including operating leases defined under previous GAAP. This guidance was effective for interim and annual reporting periods beginning after December 15, 2018.

The Company adopted Accounting Standards Codification ("ASC") 842 as of January 1, 2019, using the optional transition method provided in ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements." Under this method, the Company recorded an adjustment as of the effective date and did not include any retrospective adjustments to comparative periods to reflect the adoption of ASC 842. In addition, the Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, does not require the Company to reassess whether existing contracts contain leases, classification of leases identified, nor classification and treatment of initial direct costs capitalized under ASC 840. The Company also elected the practical expedients to combine the lease and non-lease components. The Company did not elect the practical expedient to apply hindsight as part of the leases evaluation. Additionally, the Company elected the practical expedient under ASU No. 2018-01, "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842", which allows an entity to not reassess whether any existing land easements are or contain leases.

The majority of the Company’s global lease portfolio represents leases of real estate, such as manufacturing facilities, warehouses, and office buildings, while the remainder represents leases of

5



personal property, such as vehicle leases, manufacturing and IT equipment. The Company determines whether a contract is or contains a lease at contract inception. The majority of the Company's lease arrangements are comprised of fixed payments and a limited number of these arrangements include a variable payment component based on certain index fluctuations.

Adoption of ASC 842 resulted in the recording of lease right-of-use assets ("lease assets") and lease liabilities of approximately $104 million and $103 million, respectively, as of January 1, 2019. The adoption did not impact consolidated net earnings and had no impact on cash flows.

The changes made to our Consolidated Balance Sheet as of January 1, 2019 for the adoption of ASC 842 were as follows:
(in millions)
Balance at December 31, 2018
 
Adjustments due to ASC 842
 
Balance at January 1, 2019
Other non-current assets
$
502

 
$
104

 
$
606

Accounts payable and accrued expenses
$
2,144

 
$
23

 
$
2,167

Other non-current liabilities
$
357

 
$
80

 
$
437



In February 2018, the FASB issued ASU No. 2018-07, "Compensation - Stock Compensation (Topic 718)." It expands the scope of the employee share-based payments guidance, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. This guidance is effective for interim and annual periods beginning after December 15, 2018. The Company adopted this guidance as of January 1, 2019 and there was no impact to the consolidated financial statements.

Accounting Standards Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)." It requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance (Subtopic 350-40). This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of this guidance on its consolidated financial statements.

In August 2018, the FASB issued Accounting Standards Update ("ASU") No. 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)." The new standard (i) requires the removal of disclosures that are no longer considered cost beneficial; (ii) clarifies specific requirements of certain disclosures; and (iii) adds new disclosure requirements, including the weighted average interest crediting rates for cash balance plans and other plans with promised interest crediting rates, and reasons for significant gains and losses related to changes in the benefit obligation. This guidance is effective for annual periods beginning after December 15, 2020 and early adoption is permitted. The Company is currently assessing the guidance and will include enhanced disclosures in the consolidated financial statements upon adoption.

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

6



after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until the effective date. The Company is currently assessing the guidance and does not expect this guidance to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)." It replaces the current incurred loss impairment method with a new method that reflects expected credit losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

(3) Revenue from Contracts with Customers

The Company manufactures and sells products, primarily to OEMs of light vehicles and, to a lesser extent, to other OEMs of commercial vehicles, off-highway vehicles, certain tier one vehicle systems suppliers and into the aftermarket. Although the Company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the life of the arrangements, and a contract does not exist for purposes of applying ASC 606, "Revenue from Contracts with Customers", until volumes are contractually known. Revenue is recognized when performance obligations under the terms of a contract are satisfied, which generally occurs with the transfer of control of the Company's products. For most of the Company's products, transfer of control occurs upon shipment or delivery; however, a limited number of the Company's customer arrangements for highly customized products with no alternative use provide the Company with the right to payment during the production process. As a result, for these limited arrangements, revenue is recognized as goods are produced and control transfers to the customer using the input cost-to-cost method. The Company recorded a contract asset of $10 million and $11 million at June 30, 2019 and December 31, 2018, respectively, for these arrangements. These amounts are reflected in Prepayments and other current assets in the Condensed Consolidated Balance Sheet.
Revenue is measured at the amount of consideration the Company expects to receive in exchange for transferring the goods. The Company has a limited number of arrangements with customers where the price paid by the customer is dependent on the volume of product purchased over the term of the arrangement. In other limited arrangements, the Company will provide a rebate to customers based on the volume of products purchased during the course of the arrangement. The Company estimates the volumes to be sold over the term of the arrangement and recognizes revenue based on the estimated amount of consideration to be received from these arrangements. As a result of these arrangements, the Company recognized a liability of $3 million and $6 million at June 30, 2019 and December 31, 2018. These amounts are reflected in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheet.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90 days. The Company has evaluated the terms of its arrangements and determined that they do not contain significant financing components. The Company provides warranties on some of its products. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 9, "Product Warranty," to the Condensed Consolidated Financial Statements for more information. Shipping and handling fees billed to customers are included in sales, while costs of shipping and handling are included in cost of sales. The Company has elected to apply the accounting policy election available under ASC 606 and accounts for shipping and handling activities as a fulfillment cost.
In limited instances, certain customers have provided payments in advance of receiving related products, typically at the onset of an arrangement prior to the beginning of production. These contract liabilities are reflected as Accounts payable and accrued expenses and Other non-current liabilities in the

7



Condensed Consolidated Balance Sheet and were $11 million and $16 million at June 30, 2019 and $13 million and $17 million at December 31, 2018, respectively. These amounts are reflected as revenue over the term of the arrangement (typically 3 to 7 years) as the underlying products are shipped.
The Company continually seeks business development opportunities and at times provides customer incentives for new program awards. The Company evaluates the underlying economics of each amount of consideration payable to a customer to determine the proper accounting by understanding the reasons for the payment, the rights and obligations resulting from the payment, the nature of the promise in the contract, and other relevant facts and circumstances. When the Company determines that the payments are incremental and incurred only if the new business is obtained and expects to recover these amounts from the customer over the term of the new business arrangement, the Company capitalizes these amounts. The Company recognizes a reduction to revenue, when the products that the upfront payments are related to, are transferred to the customer based on the total amount of products expected to be sold over the term of the arrangement (generally 3 to 7 years). The Company evaluates the amounts capitalized each period end for recoverability and expenses any amounts that are no longer expected to be recovered over the term of the business arrangement. The Company had $28 million and $29 million recorded in Prepayments and other current assets in the Condensed Consolidated Balance Sheet at June 30, 2019 and December 31, 2018, respectively. The Company had $187 million recorded in Other non-current assets in the Condensed Consolidated Balance Sheet at June 30, 2019 and December 31, 2018.
The Company's business is comprised of two reporting segments: Engine and Drivetrain. Refer to Note 21, "Reporting Segments," to the Condensed Consolidated Financial Statements for more information. The following table represents a disaggregation of revenue from contracts with customers by segment and region:
 
 
Three months ended June 30, 2019
 
Three months ended June 30, 2018
(In millions)
 
Engine
 
Drivetrain
 
Total
 
Engine
 
Drivetrain
 
Total
North America
 
$
407

 
$
461

 
$
868

 
$
392

 
$
441

 
$
833

Europe
 
760

 
211

 
971

 
807

 
248

 
1,055

Asia
 
356

 
317

 
673

 
430

 
337

 
767

Other
 
30

 
9

 
39

 
31

 
8

 
39

Total
 
$
1,553

 
$
998

 
$
2,551

 
$
1,660

 
$
1,034

 
$
2,694


 
 
Six months ended June 30, 2019
 
Six months ended June 30, 2018
(In millions)
 
Engine
 
Drivetrain
 
Total
 
Engine
 
Drivetrain
 
Total
North America
 
$
819


$
906


$
1,725

 
$
794

 
$
889

 
$
1,683

Europe
 
1,561


438


1,999

 
1,653

 
539

 
2,192

Asia
 
696


620


1,316

 
852

 
674

 
1,526

Other
 
61


16


77

 
62

 
15

 
77

Total
 
$
3,137


$
1,980


$
5,117

 
$
3,361

 
$
2,117

 
$
5,478




(4) Research and Development Expenditures

The Company's net Research & Development ("R&D") expenditures are included in selling, general and administrative expenses of the Condensed Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are

8



satisfied in accordance with the contract. Financial risks and rewards transfer upon shipment, acceptance of a prototype component by the customer or upon completion of the performance obligation, as stated in the respective customer agreement.

The following table presents the Company’s gross and net expenditures on R&D activities:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
2019
 
2018
 
2019
 
2018
Gross R&D expenditures
$
128

 
$
134

 
$
249

 
$
264

Customer reimbursements
(15
)
 
(22
)
 
(32
)
 
(35
)
Net R&D expenditures
$
113

 
$
112

 
$
217

 
$
229



The Company has contracts with several customers at the Company's various R&D locations. None of the Company's R&D-related customer reimbursement contracts exceeded 5% of net R&D expenditures in any of the periods presented.

(5) Other Expense, net

Items included in other expense, net consist of:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(in millions)
2019
 
2018
 
2019
 
2018
Restructuring expense
$
13

 
$
31

 
$
27

 
$
39

Merger, acquisition and divestiture expense
5

 
1

 
6

 
3

Other expense (income)
(2
)
 
(2
)
 
12

 
(7
)
Other expense, net
$
16

 
$
30

 
$
45

 
$
35



During the three and six months ended June 30, 2019, the Company recorded restructuring expense of $13 million and $27 million, respectively. During the three and six months ended June 30, 2018, the Company recorded restructuring expense of $31 million and $39 million, respectively. This restructuring expense primarily relates to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Refer to Note 19, "Restructuring," to the Condensed Consolidated Financial Statements for more information.

During the three and six months ended June 30, 2019, the Company recorded expenses related to the Company's review of strategic acquisition targets, including the 20% equity interest in Romeo Power Technology, of $5 million and $6 million, respectively. During the three and six months ended June 30, 2018, the Company recorded expenses of $1 million and $3 million, respectively, primarily related to professional fees associated with divestiture activities for the non-core pipe and thermostat product lines. Refer to Note 23, "Assets and Liabilities Held For Sale," to the Condensed Consolidated Financial Statements for more information.

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

During the first six months of 2018, the Company recorded a gain of approximately $4 million related to the settlement of a commercial contract for an entity acquired in the 2015 Remy acquisition.


9


(6) Income Taxes

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

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

The Company's effective tax rate for the six months ended June 30, 2018 was 19.4%. This rate includes income tax expense of $1 million related to a commercial settlement gain, and reductions of income tax expense of $8 million related to restructuring expense, $13 million related to adjustments to measurement period provisional estimates associated with the Tax Cuts and Jobs Act of 2017, $21 million related to an increase to our deferred tax asset due to the Company's ability to record a tax benefit for certain foreign tax credits now available due to actions the Company took in the second quarter, and $10 million for other one-time tax adjustments.

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

(7) Inventories, net

Certain U.S. inventories are measured by the last-in, first-out (“LIFO”) method at the lower of cost or market, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or average-cost methods at the lower of cost and net realizable value. Inventories consisted of the following:
 
June 30,
 
December 31,
(in millions)
2019
 
2018
Raw material and supplies
$
520

 
$
485

Work in progress
117

 
114

Finished goods
198

 
199

FIFO inventories
835

 
798

LIFO reserve
(18
)
 
(17
)
Inventories, net
$
817

 
$
781




10



(8) Property, Plant and Equipment, net
 
June 30,
 
December 31,
(in millions)
2019
 
2018
Land, land use rights and buildings
$
870

 
$
871

Machinery and equipment
2,959

 
2,851

Finance lease assets
2

 
2

Construction in progress
350

 
426

Total property, plant and equipment, gross
4,181

 
4,150

Less: accumulated depreciation
(1,519
)
 
(1,473
)
Property, plant and equipment, net, excluding tooling
2,662

 
2,677

Tooling, net of amortization
229

 
227

Property, plant and equipment, net
$
2,891

 
$
2,904



As of June 30, 2019 and December 31, 2018, accounts payable of $61 million and $104 million, respectively, were related to property, plant and equipment purchases.

Interest costs capitalized for the six months ended June 30, 2019 and 2018 were $9 million and $11 million, respectively.

(9) Product Warranty

The Company provides warranties on some, but not all, of its products. The warranty terms are typically from one to three years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the accrual.

The following table summarizes the activity in the product warranty accrual accounts:
(in millions)
2019
 
2018
Beginning balance, January 1
$
103

 
$
112

Provisions for current period sales
27

 
26

Adjustments of prior estimates
7

 
9

Payments
(30
)
 
(30
)
Translation adjustment and other
(1
)
 
(2
)
Ending balance, June 30
$
106

 
$
115



The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:
 
June 30,
 
December 31,
(in millions)
2019
 
2018
Accounts payable and accrued expenses
$
59

 
$
56

Other non-current liabilities
47

 
47

Total product warranty liability
$
106

 
$
103




11



(10) Notes Payable and Long-Term Debt

As of June 30, 2019 and December 31, 2018, the Company had short-term and long-term debt outstanding as follows:
 
June 30,
 
December 31,
(in millions)
2019
 
2018
Short-term debt


 


Short-term borrowings
$
31

 
$
33




 


Long-term debt


 


8.00% Senior notes due 10/01/19 ($134 million par value)
134

 
135

4.625% Senior notes due 09/15/20 ($250 million par value)
251

 
251

1.80% Senior notes due 11/7/22 (€500 million par value)
565

 
570

3.375% Senior notes due 03/15/25 ($500 million par value)
497

 
497

7.125% Senior notes due 02/15/29 ($121 million par value)
119

 
119

4.375% Senior notes due 03/15/45 ($500 million par value)
494

 
494

Term loan facilities and other
9

 
15

Total long-term debt
2,069

 
2,081

Less: current portion
140

 
140

Long-term debt, net of current portion
$
1,929

 
$
1,941



In July 2016, the Company terminated interest rate swaps which had the effect of converting $384 million of fixed rate notes to variable rates. The gain on the termination was recorded as an increase to the notes and is being amortized as a reduction to interest expense over the remaining terms of the notes. The unamortized gain related to these swap terminations was $1 million and $2 million as of June 30, 2019 and December 31, 2018, respectively, on the 4.625% notes.

The weighted average interest rate on short-term borrowings outstanding as of June 30, 2019 and December 31, 2018 was 3.4% and 4.3%, respectively. The weighted average interest rate on all borrowings outstanding, including the effects of outstanding swaps, as of June 30, 2019 and December 31, 2018 was 3.4%.

The Company has a $1.2 billion multi-currency revolving credit facility, which includes a feature that allows the Company's facility to be increased to $1.5 billion with approval of the bank group. The facility provides for borrowings through June 29, 2022. The Company has one key financial covenant as part of the credit agreement which is a debt to Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA ") ratio. The Company was in compliance with the financial covenant at June 30, 2019. At June 30, 2019 and December 31, 2018, the Company had no outstanding borrowings under this facility.

The Company's commercial paper program allows the Company to issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding of $1.2 billion. Under this program, the Company may issue notes from time to time and use the proceeds for general corporate purposes. The Company had no outstanding borrowings under this program as of June 30, 2019 and December 31, 2018.

The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed $1.2 billion.

As of June 30, 2019 and December 31, 2018, the estimated fair values of the Company’s senior unsecured notes totaled $2,142 million and $2,058 million, respectively. The estimated fair values were $82 million more than their carrying value at June 30, 2019 and $8 million less than their carrying value

12



at December 31, 2018. Fair market values of the senior unsecured notes are developed using observable values for similar debt instruments, which are considered Level 2 inputs as defined by ASC 820. The carrying values of the Company's multi-currency revolving credit facility and commercial paper program approximates fair value. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.

The Company had outstanding letters of credit of $38 million and $43 million at June 30, 2019 and December 31, 2018, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.

(11) Fair Value Measurements

ASC 820 emphasizes that fair value is a market-based measurement, not an entity specific measurement. Therefore, a fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:

Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC 820:

A.
Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
B.
Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).
C.
Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).


13



The following tables classify assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018:
 
 
 
Basis of fair value measurements
 
 
(in millions)
Balance at
June 30, 2019
 
Quoted prices in active markets for identical items
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Valuation technique
Assets:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
3

 
$

 
$
3

 
$

 
A
Other long-term receivables (insurance settlement agreement note receivable)
$
35

 
$

 
$
35

 
$

 
C
Net investment hedge contracts
$
17

 
$

 
$
17

 
$

 
A
Liabilities:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
4

 
$

 
$
4

 
$

 
A
 
 
 
Basis of fair value measurements
 
 
(in millions)
Balance at
December 31, 2018
 
Quoted prices in active markets for identical items
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Valuation
technique
Assets:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
3

 
$

 
$
3

 
$

 
A
Other long-term receivables (insurance settlement agreement note receivable)
$
34

 
$

 
$
34

 
$

 
C
Net investment hedge contracts
$
12


$


$
12


$


A
Liabilities: