Document
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, 2016
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)
Registrant’s 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 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
þ
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
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
As of October 21, 2016, the registrant had 212,985,658 shares of voting common stock outstanding.


BORGWARNER INC.
FORM 10-Q
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016
INDEX
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions)
September 30,
2016
 
December 31,
2015
ASSETS

 

Cash
$
518.7

 
$
577.7

Receivables, net
1,764.0

 
1,665.0

Inventories, net
687.2

 
723.6

Prepayments and other current assets
147.5

 
168.9

Assets held for sale
171.8

 
—

Total current assets
3,289.2

 
3,135.2




 


Property, plant and equipment, net
2,518.5

 
2,448.1

Investments and other long-term receivables
512.7

 
460.9

Goodwill
1,730.2

 
1,757.7

Other intangible assets, net
494.7

 
543.8

Other non-current assets
462.0

 
480.0

Total assets
$
9,007.3

 
$
8,825.7




 


LIABILITIES AND EQUITY


 


Notes payable and other short-term debt
$
525.4

 
$
441.4

Accounts payable and accrued expenses
1,763.2

 
1,866.4

Income taxes payable
61.2

 
49.4

Liabilities held for sale
95.3

 
—

Total current liabilities
2,445.1

 
2,357.2




 


Long-term debt
2,089.9

 
2,108.9

 
 
 
 
Other non-current liabilities:


 


Retirement-related liabilities
293.7

 
312.9

Other
387.9

 
415.2

Total other non-current liabilities
681.6

 
728.1




 


Common stock
2.5

 
2.5

Capital in excess of par value
1,092.7

 
1,109.7

Retained earnings
4,538.1

 
4,210.1

Accumulated other comprehensive loss
(571.0
)
 
(610.2
)
Common stock held in treasury
(1,352.4
)
 
(1,158.4
)
Total BorgWarner Inc. stockholders’ equity
3,709.9

 
3,553.7

Noncontrolling interest
80.8

 
77.8

Total equity
3,790.7

 
3,631.5

Total liabilities and equity
$
9,007.3

 
$
8,825.7


See accompanying Notes to Condensed Consolidated Financial Statements.

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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except share and per share amounts)
2016
 
2015
 
2016
 
2015
Net sales
$
2,214.2

 
$
1,884.0

 
$
6,812.0

 
$
5,900.1

Cost of sales
1,743.1

 
1,485.8

 
5,379.9

 
4,643.9

Gross profit
471.1

 
398.2

 
1,432.1

 
1,256.2


 
 
 
 
 
 


Selling, general and administrative expenses
209.7

 
148.0

 
600.4

 
483.6

Other expense, net
111.1

 
13.1

 
147.8

 
33.4

Operating income
150.3

 
237.1

 
683.9

 
739.2


 
 
 
 
 
 


Equity in affiliates’ earnings, net of tax
(12.4
)
 
(8.7
)
 
(31.6
)
 
(28.3
)
Interest income
(1.6
)
 
(2.0
)
 
(4.7
)
 
(5.3
)
Interest expense and finance charges
22.4

 
15.0

 
65.1

 
42.6

Earnings before income taxes and noncontrolling interest
141.9

 
232.8

 
655.1

 
730.2


 
 
 
 
 
 


Provision for income taxes
48.8

 
66.9

 
213.4

 
219.2

Net earnings
93.1

 
165.9

 
441.7

 
511.0

Net earnings attributable to the noncontrolling interest, net of tax
9.8

 
8.5

 
29.9

 
26.6

Net earnings attributable to BorgWarner Inc. 
$
83.3

 
$
157.4

 
$
411.8

 
$
484.4

 
 
 
 
 
 
 
 
Earnings per share — basic
$
0.39

 
$
0.70

 
$
1.91

 
$
2.15

 
 
 
 
 
 
 
 
Earnings per share — diluted
$
0.39


$
0.70


$
1.90

 
$
2.14

 
 
 
 
 
 
 
 
Weighted average shares outstanding (thousands):
 
 
 
 
 
 
 
Basic
212,872

 
224,837

 
215,332

 
225,329

Diluted
213,766


225,991


216,189

 
226,565

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.13

 
$
0.13

 
$
0.39

 
$
0.39


See accompanying Notes to Condensed Consolidated Financial Statements.

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

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2016
 
2015
 
2016
 
2015
Net earnings attributable to BorgWarner Inc. 
$
83.3

 
$
157.4

 
$
411.8

 
$
484.4

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation adjustments
27.9

 
(37.0
)
 
41.8

 
(202.6
)
Hedge instruments*
(2.3
)
 
(3.0
)
 
1.1

 
(1.5
)
Defined benefit postretirement plans*
(2.9
)
 
2.8

 
(2.5
)
 
10.8

Other*
0.1

 
—

 
(1.2
)
 
0.2

Total other comprehensive income (loss) attributable to BorgWarner Inc.
22.8

 
(37.2
)
 
39.2

 
(193.1
)
 
 
 
 
 
 
 
 
Comprehensive income attributable to BorgWarner Inc.
106.1

 
120.2

 
451.0

 
291.3

Comprehensive income (loss) attributable to the noncontrolling interest
2.2

 
(3.8
)
 
2.3

 
(4.4
)
Comprehensive income
$
108.3

 
$
116.4

 
$
453.3

 
$
286.9

____________________________________
*
Net of income taxes.

See accompanying Notes to Condensed Consolidated Financial Statements.


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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine Months Ended
September 30,
(in millions)
2016
 
2015
OPERATING
 
 
 
Net earnings
$
441.7

 
$
511.0

Adjustments to reconcile net earnings to net cash flows from operations:
 
 
 
Asset impairment expense
106.5

 
—

Depreciation and amortization
291.2

 
236.3

Restructuring expense, net of cash paid
12.0

 
19.9

Gain on previously held equity interest
—

 
(10.8
)
Stock-based compensation expense
27.3

 
30.5

Deferred income tax provision
0.7

 
26.8

Equity in affiliates’ earnings, net of dividends received, and other
(22.3
)
 
(8.8
)
Net earnings adjusted for non-cash charges to operations
857.1

 
804.9

Changes in assets and liabilities:


 
 

Receivables
(176.2
)
 
(169.5
)
Inventories
(45.5
)
 
(44.7
)
Prepayments and other current assets
3.9

 
(10.3
)
Accounts payable and accrued expenses
(14.0
)
 
(53.3
)
Income taxes payable
(33.1
)
 
13.9

Other non-current assets and liabilities
0.9

 
(70.8
)
Net cash provided by operating activities
593.1

 
470.2




 


INVESTING


 
 

Capital expenditures, including tooling outlays
(354.8
)
 
(418.8
)
Proceeds from sale of business, net of cash divested
5.4

 
—

Proceeds from asset disposals and other
7.0

 
3.4

Payment for business acquired, net of cash acquired
—

 
(12.6
)
Net cash used in investing activities
(342.4
)
 
(428.0
)



 


FINANCING


 
 

Net increase (decrease) in notes payable
51.6

 
(531.0
)
Additions to long-term debt, net of debt issuance costs
4.6

 
1,027.5

Repayments of long-term debt, including current portion
(16.6
)
 
(22.4
)
Proceeds from interest rate swap termination
8.9

 
—

Payments for purchase of treasury stock
(250.0
)
 
(130.3
)
Proceeds from stock-based compensation items
0.9

 
2.0

Dividends paid to BorgWarner stockholders
(83.8
)
 
(87.9
)
Dividends paid to noncontrolling stockholders
(25.7
)
 
(18.4
)
Net cash (used in) provided by financing activities
(310.1
)
 
239.5

Effect of exchange rate changes on cash
0.4

 
(46.2
)
Net (decrease) increase in cash
(59.0
)
 
235.5

Cash at beginning of year
577.7

 
797.8

Cash at end of period
$
518.7

 
$
1,033.3


 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 

Cash paid during the period for:
 
 
 

Interest
$
73.5

 
$
55.8

Income taxes, net of refunds
$
246.1

 
$
128.0

See accompanying Notes to Condensed Consolidated Financial Statements.

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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 nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The balance sheet as of December 31, 2015 was derived from the audited financial statements as of that date. Certain prior period amounts have been reclassified to conform to current period presentation, including the adoption of Accounting Standard Update ("ASU") No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." The current year adoption of this guidance resulted in the reduction of assets and liabilities by approximately $16 million in the Company's Condensed Consolidated Balance Sheet as of December 31, 2015. 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, 2015.

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 Expenditures

The Company's net Research & Development ("R&D") expenditures are included in selling, general and administrative expenses of the Condensed Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract and accepted by the customer. 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
September 30,
 
Nine Months Ended
September 30,
(in millions)
2016
 
2015
 
2016
 
2015
Gross R&D expenditures
$
106.1

 
$
95.6

 
$
311.1

 
$
282.2

Customer reimbursements
(17.5
)
 
(20.4
)
 
(52.2
)
 
(51.5
)
Net R&D expenditures
$
88.6

 
$
75.2

 
$
258.9

 
$
230.7


The Company has contracts with several customers at the Company's various R&D locations. No such contract exceeded 5% of annual net R&D expenditures in any of the periods presented.


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(3) Other Expense, net

Items included in other expense, net consist of:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions)
2016
 
2015
 
2016
 
2015
Asset impairment expense
$
106.5

 
$
—

 
$
106.5

 
$
—

Restructuring expense
1.3

 
9.3

 
26.9

 
41.3

Merger and acquisition expense
5.9

 
3.9

 
18.9

 
3.9

Gain on previously held equity interest
—


—


—


(10.8
)
Other income
(2.6
)
 
(0.1
)
 
(4.5
)
 
(1.0
)
Other expense, net
$
111.1

 
$
13.1

 
$
147.8

 
$
33.4


During the fourth quarter of 2015, the Company acquired 100% of the equity interests in Remy International, Inc. ("Remy"). During the first nine months of 2016 and 2015, the Company incurred transition and realignment expenses and other professional fees associated with this transaction of $18.9 million and $3.9 million, respectively. Additionally, in October 2016, the Company entered into a definitive agreement to sell the light vehicle aftermarket business associated with Remy. As a result, the Company recorded an asset impairment expense of $106.5 million in the third quarter of 2016 to adjust the net book value of this business to fair value. See the Recent Transactions footnote to the Condensed Consolidated Financial Statements for further discussion of these transactions.

During the first nine months of 2016 and 2015, the Company recorded restructuring expense of $26.9 million and $41.3 million, respectively. This expense relates to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness, as well as a global realignment plan intended to enhance treasury management flexibility. See the Restructuring footnote to the Condensed Consolidated Financial Statements for further discussion of these expenses.

During the first quarter of 2015, the Company completed the purchase of the remaining 51% of BERU Diesel Start Systems Pvt. Ltd. ("BERU Diesel") by acquiring the shares of its former joint venture partner. As a result of this transaction, the Company recorded a $10.8 million gain on the previously held equity interest in this joint venture. See the Recent Transactions footnote to the Condensed Consolidated Financial Statements for further discussion of this acquisition.

(4) 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.

At September 30, 2016, the Company's effective tax rate for the first nine months was 32.6%. This rate includes tax benefits of $27.6 million and $5.9 million related to asset impairment and restructuring expense, respectively as discussed in the Other Expense, net footnote to the Condensed Consolidated Financial Statements, and $3.7 million related to other one-time tax adjustments, as well as a tax expense of $2.2 million related to a gain associated with the release of certain Remy light vehicle aftermarket liabilities due to the expiration of a customer contract.

At September 30, 2015, the Company's effective tax rate for the first nine months was 30.0%. This rate includes tax benefits of $4.1 million related to restructuring expense as discussed in the Other Expense, net footnote to the Condensed Consolidated Financial Statements, $4.1 million primarily related to foreign

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tax incentives and $3.9 million related to tax settlements, partially offset by $5.8 million of tax expense related to a global realignment plan.

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., 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.

Remy applied for a bilateral Advance Pricing Agreement ("APA") between the U.S. Internal Revenue Service and South Korean National Tax Service covering the tax years 2007 through 2014. At December 31, 2015, the Company recorded an uncertain tax benefit and related U.S. foreign tax credits of approximately $44.0 million. In the second quarter of 2016, the Company received the signed APA from the tax authorities and reclassified the related uncertain tax benefit to a current tax payable, which the Company paid in the third quarter of 2016.

(5) Inventories, net

Inventories are valued at the lower of cost or market. The cost of certain U.S. inventories is determined by the last-in, first-out (“LIFO”) method, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or average-cost methods. Inventories consisted of the following:
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Raw material and supplies
$
397.1

 
$
412.9

Work in progress
112.0

 
102.5

Finished goods
191.8

 
222.4

FIFO inventories
700.9

 
737.8

LIFO reserve
(13.7
)
 
(14.2
)
Inventories, net
$
687.2

 
$
723.6


(6) Property, Plant and Equipment, net
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Land, land use rights and buildings
$
807.6

 
$
779.9

Machinery and equipment
2,383.3

 
2,154.3

Capital leases
5.4

 
7.2

Construction in progress
331.0

 
386.4

Total property, plant and equipment, gross
3,527.3

 
3,327.8

Less: accumulated depreciation
(1,159.8
)
 
(1,036.8
)
Property, plant and equipment, net, excluding tooling
2,367.5

 
2,291.0

Tooling, net of amortization
151.0

 
157.1

Property, plant and equipment, net
$
2,518.5

 
$
2,448.1


As of September 30, 2016 and December 31, 2015, accounts payable of $50.5 million and $76.9 million, respectively, were related to property, plant and equipment purchases.

Interest costs capitalized for the nine months ended September 30, 2016 and 2015 were $10.4 million and $12.4 million, respectively.


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(7) 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)
2016
 
2015
Beginning balance, January 1
$
107.9

 
$
132.0

Provisions
47.4

 
14.0

Acquisitions
6.9

 
(17.1
)
Liabilities held for sale
(9.2
)
 
—

Payments
(36.7
)
 
(39.5
)
Translation adjustment
2.1

 
(8.1
)
Ending balance, September 30
$
118.4

 
$
81.3


Acquisition activity in 2016 of $6.9 million relates to the Company's accrual for product issues that pre-dated the Company's 2015 acquisition of Remy.

Acquisition activity in 2015 of $17.1 million relates to the Company's settlement of a significant warranty claim associated with a product issue that pre-dated the Company's 2014 acquisition of Gustav Wahler GmbH u. Co. KG ("Wahler"). Including the impact of the reversal of a corresponding receivable, this settlement had an immaterial impact on the Condensed Consolidated Balance Sheet at September 30, 2015 and Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015.

The Company’s warranty provision as a percentage of net sales has increased from 0.2% as of September 30, 2015 to 0.7% as of September 30, 2016. This change is primarily related to the Company’s fourth quarter 2015 acquisition of Remy. Furthermore, the Company's 2016 provision includes a $5.2 million warranty reversal related to the expiration of a Remy light vehicle aftermarket customer contract.

The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Accounts payable and accrued expenses
$
73.4

 
$
70.6

Other non-current liabilities
45.0

 
37.3

Total product warranty liability
$
118.4

 
$
107.9



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(8) Notes Payable and Long-Term Debt

As of September 30, 2016 and December 31, 2015, the Company had short-term and long-term debt outstanding as follows:
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Short-term debt


 


Short-term borrowings
$
337.4

 
$
280.7




 


Long-term debt


 


5.75% Senior notes due 11/01/16 ($150 million par value)
$
150.2

 
$
152.2

8.00% Senior notes due 10/01/19 ($134 million par value)
139.6

 
138.5

4.625% Senior notes due 09/15/20 ($250 million par value)
252.0

 
245.6

1.80% Senior notes due 11/7/22 (€500 million par value)
556.4

 
536.8

3.375% Senior notes due 03/15/25 ($500 million par value)
495.4

 
495.1

7.125% Senior notes due 02/15/29 ($121 million par value)
118.8

 
118.7

4.375% Senior notes due 03/15/45 ($500 million par value)
493.2

 
493.0

Term loan facilities and other
72.3

 
89.7

Total long-term debt
2,277.9

 
2,269.6

Less: current portion
188.0

 
160.7

Long-term debt, net of current portion
$
2,089.9

 
$
2,108.9


In July 2016, the Company terminated interest rate swaps which had the effect of converting $384.0 million of fixed rate notes to variable rates. The gain on the termination is being amortized into interest expense over the remaining terms of the notes. The value related to these swap terminations as of September 30, 2016 was $4.1 million and $1.4 million on the 4.625% and 8.00% notes, respectively, as an increase to the notes. The value of these interest rate swaps as of December 31, 2015 was $1.9 million and $0.8 million on the 4.625% and 8.00% notes, respectively, as a decrease to the notes.

The Company terminated fixed to floating interest rate swaps in 2009. The gain on the termination is being amortized into interest expense over the remaining term of the notes. The value related to these swap terminations at September 30, 2016 was $0.2 million and $4.5 million on the 5.75% and 8.00% notes, respectively, as an increase to the notes. The value related to these swap terminations at December 31, 2015 was $2.4 million and $5.5 million on the 5.75% and 8.00% notes, respectively, as an increase to the notes.

The weighted average interest rate on short-term borrowings outstanding as of September 30, 2016 and December 31, 2015 was 1.2% and 1.3%, respectively. The weighted average interest rate on all borrowings outstanding, including the effects of outstanding swaps, as of September 30, 2016 and December 31, 2015 was 3.7% and 3.6%, respectively.

The Company has a $1 billion multi-currency revolving credit facility which includes a feature that allows the Company's borrowings to be increased to $1.25 billion. The facility provides for borrowings through June 30, 2019. The Company has one key financial covenant as part of the credit agreement which is a debt to EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") ratio. The Company was in compliance with the financial covenant at September 30, 2016 and expects to remain compliant in future periods. At September 30, 2016 and December 31, 2015, 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 billion. Under this

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program, the Company may issue notes from time to time and will use the proceeds for general corporate purposes. At September 30, 2016 and December 31, 2015, the Company had outstanding borrowings of $270.0 million and $215.0 million, respectively, under this program, which is classified in the Condensed Consolidated Balance Sheets in Notes payable and other short-term debt.

The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed $1 billion.

As of September 30, 2016 and December 31, 2015, the estimated fair values of the Company’s senior unsecured notes totaled $2,365.3 million and $2,197.6 million, respectively. The estimated fair values were $159.7 million and $17.7 million higher than their carrying value at September 30, 2016 and December 31, 2015, respectively. Fair market values of the senior unsecured notes are developed using observable values for similar debt instruments, which are considered Level 2 inputs as defined by ASC Topic 820. The carrying values of the Company's multi-currency revolving credit facility 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 $37.5 million and $29.3 million at September 30, 2016 and December 31, 2015, respectively. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.

(9) Fair Value Measurements

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

Level 1:
Observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2:
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:
Unobservable inputs 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 Topic 820:

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


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The following tables classify assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015:
 
 
 
Basis of fair value measurements
 
 
(in millions)
Balance at
September 30, 2016
 
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
$
3.6

 
$
—

 
$
3.6

 
$
—

 
A
Other long-term receivables (insurance settlement agreement note receivable)
$
82.0

 
$
—

 
$
82.0

 
$
—

 
C
Liabilities:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
4.0

 
$
—

 
$
4.0

 
$
—

 
A
Commodity contracts
$
1.5

 
$
—

 
$
1.5

 
$
—

 
A
 
 
 
Basis of fair value measurements
 
 
(in millions)
Balance at
December 31, 2015
 
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
$
2.7

 
$
—

 
$
2.7

 
$
—

 
A
Other long-term receivables (insurance settlement agreement note receivable)
$
81.2

 
$
—

 
$
81.2

 
$
—

 
C
Liabilities:
 
 
 
 
 
 
 
 
 
Foreign currency contracts
$
8.7

 
$
—

 
$
8.7

 
$
—

 
A
Commodity contracts
$
10.4

 
$
—

 
$
10.4

 
$
—

 
A
Interest rate swap contracts
$
2.7

 
$
—

 
$
2.7

 
$
—

 
A

In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a non-recurring basis. As further described in the Recent Transactions footnote to the Condensed Consolidated Financial Statements, the fair value of the Remy light vehicle aftermarket business, based on the anticipated sale price, was less than the carrying value. As a result, the Company recorded an asset impairment expense of $106.5 million in the three months ended September 30, 2016 to adjust the net book value of this business to its fair value. As the fair value was determined using other observable inputs, the fair value measurement is classified within Level 2 of the hierarchy.

(10) Financial Instruments

The Company’s financial instruments include cash and marketable securities. Due to the short-term nature of these instruments, their book value approximates their fair value. The Company’s financial instruments may include long-term debt, interest rate and cross-currency swaps, commodity derivative contracts and foreign currency derivatives. 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, 2016 and December 31, 2015, the Company had no derivative contracts that contained credit risk related contingent features.


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The Company uses certain commodity derivative contracts to protect against commodity price changes related to forecasted raw material and supplies purchases. The Company primarily utilizes forward and option contracts, which are designated as cash flow hedges. At September 30, 2016 and December 31, 2015, the following commodity derivative contracts were outstanding:
 
Commodity derivative contracts
Commodity
Volume hedged September 30, 2016
 
Volume hedged December 31, 2015
 
Units of measure
 
Duration
Copper
1,495.0

 
6,273.2

 
Metric Tons
 
Dec -16

The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to optimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). In July 2016, the Company terminated the following interest swaps which were outstanding at December 31, 2015.
 
Interest rate swap contracts
(in millions)
Hedge Type
 
Notional Amount
 
Duration
Fixed to floating
Fair value
 
$
250.0

 
Sept - 20
Fixed to floating
Fair value
 
$
134.0

 
Oct - 19

The Company uses foreign currency forward and option contracts to protect against exchange rate movements for forecasted cash flows, including capital expenditures, purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. In addition, the Company uses foreign currency forward contracts to hedge exposure associated with our net investment in certain foreign operations (net investment hedges). Foreign currency derivative contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for the operating units’ local currency. At September 30, 2016 and December 31, 2015, the following foreign currency derivative contracts were outstanding:
Foreign currency derivatives (in millions)
Functional currency
 
Traded currency
 
Notional in traded currency
September 30, 2016
 
Notional in traded currency
December 31, 2015
 
Duration
 
 
 
 
 
 
 
 
 
Chinese renminbi
 
Euro
 
5.8

 
30.5

 
Dec - 16
Chinese renminbi
 
US dollar
 
15.4

 
13.8

 
Jul - 17
Euro
 
British pound
 
1.3

 
—

 
Dec - 16
Euro
 
Hungarian forint
 
—

 
3,434.5

 
Dec - 16
Euro
 
Japanese yen
 
928.3

 
487.1

 
Dec - 16
Euro
 
Polish zloty
 
21.6

 
—

 
Dec - 16
Euro
 
US dollar
 
28.4

 
30.1

 
Dec - 17
Japanese yen
 
Chinese renminbi
 
92.7

 
92.6

 
Dec - 17
Japanese yen
 
Korean won
 
1,222.3

 
5,998.9

 
Dec - 16
Japanese yen
 
US dollar
 
2.7

 
3.0

 
Dec - 17
Korean won
 
Euro
 
4.6

 
2.5

 
Dec - 16
Korean won
 
Japanese yen
 
147.1

 
—

 
Dec - 16
Korean won

US dollar
 
22.3

 
77.9

 
Dec - 17
Swedish krona
 
Euro
 
1.1

 
—

 
Dec - 16
US dollar
 
Mexican peso
 
—

 
469.0

 
Sept - 16


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At September 30, 2016 and December 31, 2015, the following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:
 
 
Assets
 
Liabilities
(in millions)
 
Location
 
September 30,
2016
 
December 31, 2015
 
Location
 
September 30,
2016
 
December 31, 2015
Foreign currency
 
Prepayments and other current assets
 
$
3.6

 
$
2.7

 
Accounts payable and accrued expenses
 
$
3.9

 
$
8.7

 
 
Other non-current assets
 
$
—

 
$
—

 
Other non-current liabilities
 
$
0.1

 
$
—

Commodity
 
Prepayments and other current assets
 
$
—

 
$
—

 
Accounts payable and accrued expenses
 
$
1.5

 
$
10.4

Interest rate swaps
 
Other non-current assets
 
$
—

 
$
—

 
Accounts payable and accrued expenses
 
$
—

 
$
2.7


Effectiveness for cash flow and net investment hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. To the extent that derivative instruments are deemed to be effective, gains and losses arising from these contracts are deferred into accumulated other comprehensive income (loss) ("AOCI") and reclassified into income as the underlying operating transactions are recognized. These realized gains or losses offset the hedged transaction and are recorded on the same line in the statement of operations. To the extent that derivative instruments are deemed to be ineffective, gains or losses are recognized into income.

The table below shows deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less. The amount expected to be reclassified to income in one year or less assumes no change in the current relationship of the hedged item at September 30, 2016 market rates.
(in millions)
 
Deferred gain (loss) in AOCI at
 
Gain (loss) expected to be reclassified to income in one year or less
Contract Type
 
September 30, 2016
 
December 31, 2015
 
Foreign currency
 
$
0.4

 
$
(0.1
)
 
$
0.5

Commodity
 
(0.2
)
 
(2.1
)
 
(0.2
)
Net investment hedges
 
11.7

 
12.2

 
—

Foreign currency denominated debt designated as a net investment hedge
 
19.0

 
0.1

 
—

Total
 
$
30.9

 
$
10.1

 
$
0.3


Derivative instruments designated as hedging instruments as defined by ASC Topic 815 held during the period resulted in the following gains and losses recorded in income:
 
 
 
 
Gain (loss) reclassified
from AOCI to income
(effective portion)
 
 
 
Gain (loss)
recognized in income
(ineffective portion)
(in millions)
 
 
 
Three Months Ended
 
 
 
Three Months Ended
Contract Type
 
Location
 
September 30,
2016
 
September 30,
2015
 
Location
 
September 30,
2016
 
September 30,
2015
Foreign currency
 
Sales
 
$
0.7

 
$
(1.3
)
 
SG&A expense
 
$
—

 
$
—

Foreign currency
 
Cost of goods sold
 
$
(0.4
)
 
$
1.8

 
SG&A expense
 
$
0.1

 
$
—

Commodity
 
Cost of goods sold
 
$
(0.4
)
 
$
(0.1
)
 
Cost of goods sold
 
$
—

 
$
—

Cross-currency swap
 
Interest expense
 
$
—

 
$
0.4

 
Interest expense
 
$
—

 
$
—



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Gain (loss) reclassified
from AOCI to income
(effective portion)
 
 
 
Gain (loss)
recognized in income
(ineffective portion)
(in millions)
 
 
 
Nine Months Ended
 
 
 
Nine Months Ended
Contract Type
 
Location
 
September 30,
2016
 
September 30,
2015
 
Location
 
September 30,
2016
 
September 30,
2015
Foreign currency
 
Sales
 
$
0.9

 
$
(1.6
)
 
SG&A expense
 
$
—

 
$
(0.4
)
Foreign currency
 
Cost of goods sold
 
$
(0.6
)
 
$
5.6

 
SG&A expense
 
$
0.2

 
$
0.1

Commodity
 
Cost of goods sold
 
$
(1.5
)
 
$
(0.1
)
 
Cost of goods sold
 
$
—

 
$
—

Cross-currency swap
 
Interest expense
 
$
—

 
$
0.4

 
Interest expense
 
$
—

 
$
—


(in millions)
 
Three Months Ended
September 30, 2016
 
Nine Months Ended
September 30, 2016
Income Statement Classification
 
Gain (loss) on swaps
 
Gain (loss) on borrowings
 
Gain (loss) on swaps
 
Gain (loss) on borrowings
Interest expense and finance charges
 
$
(2.8
)
 
$
2.8

 
$
8.5

 
$
(8.5
)

At September 30, 2016, derivative instruments that were not designated as hedging instruments as defined by ASC Topic 815 were immaterial.

(11) Retirement Benefit Plans

The Company has a number of defined benefit pension plans and other postretirement benefit plans covering eligible salaried and hourly employees and their dependents. The estimated contributions to the Company's defined benefit pension plans for 2016 range from $15.0 million to $25.0 million, of which $14.0 million has been contributed through the first nine months of the year. The other postretirement benefit plans, which provide medical and life insurance benefits, are unfunded plans.

The components of net periodic benefit cost recorded in the Condensed Consolidated Statements of Operations are as follows:

 
 
Pension benefits
 
Other postretirement
employee benefits
(in millions)
 
2016
 
2015
 
Three Months Ended September 30,
 
US
 
Non-US
 
US
 
Non-US
 
2016
 
2015
Service cost
 
$
—

 
$
4.1

 
$
—

 
$
3.6

 
$
—

 
$
—

Interest cost
 
2.4

 
3.1

 
2.8

 
3.5

 
1.0

 
1.4

Expected return on plan assets
 
(3.7
)
 
(6.1
)
 
(4.3
)
 
(6.1
)
 
—

 
—

Amortization of unrecognized prior service credit
 
(0.2
)
 
—

 
(0.2
)
 
—

 
(1.2
)
 
(1.4
)
Amortization of unrecognized loss
 
1.3

 
1.6

 
1.6

 
1.6

 
0.5

 
0.8

Net periodic benefit (income) cost
 
$
(0.2
)
 
$
2.7

 
$
(0.1
)
 
$
2.6

 
$
0.3

 
$
0.8

 
 
Pension benefits
 
Other postretirement
employee benefits
(in millions)
 
2016
 
2015
 
Nine Months Ended September 30,
 
US
 
Non-US
 
US
 
Non-US
 
2016
 
2015
Service cost
 
$
—

 
$
12.3

 
$
—

 
$
11.0

 
$
0.1

 
$
0.1

Interest cost
 
7.2

 
9.6

 
8.3

 
10.6

 
2.9

 
4.2

Expected return on plan assets
 
(11.2
)
 
(18.7
)
 
(12.9
)
 
(18.5
)
 
—

 
—

Amortization of unrecognized prior service credit
 
(0.6
)
 
—

 
(0.6
)
 
—

 
(3.6
)
 
(4.2
)
Amortization of unrecognized loss
 
3.8

 
4.7

 
4.9

 
5.0

 
1.6

 
2.3

Net periodic benefit (income) cost
 
$
(0.8
)
 
$
7.9

 
$
(0.3
)
 
$
8.1

 
$
1.0

 
$
2.4


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(12) Stock-Based Compensation

Under the Company's 2004 Stock Incentive Plan ("2004 Plan"), the Company granted options to purchase shares of the Company's common stock at the fair market value on the date of grant. The options vested over periods of up to three years and have a term of 10 years from date of grant. At its November 2007 meeting, the Company's Compensation Committee decided that restricted common stock awards and stock units ("restricted stock") would be awarded in place of stock options for long-term incentive award grants to employees. Restricted stock granted to employees primarily vests 50% after two years and the remainder after three years from the date of grant. Restricted stock granted to non-employee directors generally vests on the first anniversary date of the grant. In February 2014, the Company's Board of Directors replaced the expired 2004 Plan by adopting the BorgWarner Inc. 2014 Stock Incentive Plan ("2014 Plan"). On April 30, 2014, the Company's stockholders approved the 2014 Plan. Under the 2014 Plan, 8 million shares are authorized for grant, of which approximately 5.7 million shares are available for future issuance as of September 30, 2016.

Stock options A summary of the Company’s stock option activity for the nine months ended September 30, 2016 is as follows:
 
Shares under option
(thousands)
 
Weighted average exercise price
 
Weighted average remaining contractual life
(in years)
 
Aggregate intrinsic value
(in millions)
Outstanding and exercisable at December 31, 2015
1,267

 
$
16.59

 
0.9
 
$
33.7

Exercised
(165
)
 
$
16.81

 
 
 

Outstanding and exercisable at March 31, 2016
1,102

 
$
16.56

 
0.7
 
$
24.1

Exercised
(224
)
 
$
14.67

 
 
 
 
Outstanding and exercisable at June 30, 2016
878

 
$
17.04

 
0.5
 
$
10.9

Exercised
(230
)
 
$
15.83

 
 
 
 
Outstanding and exercisable at September 30, 2016
648

 
$
17.47

 
0.3
 
$
11.5


Restricted stock The value of restricted stock is determined by the market value of the Company’s common stock at the date of grant. In 2016, restricted stock in the amount of 698,788 shares and 25,048 shares was granted to employees and non-employee directors, respectively. The value of the awards is recognized as compensation expense ratably over the restriction periods. As of September 30, 2016, there was $32.5 million of unrecognized compensation expense that will be recognized over a weighted average period of 1.7 years.

The Company recorded restricted stock compensation expense of $6.8 million and $19.9 million for the three and nine months ended September 30, 2016, respectively, and $6.9 million and $21.1 million for the three and nine months ended September 30, 2015, respectively.


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A summary of the Company’s nonvested restricted stock for the nine months ended September 30, 2016 is as follows:
 
Shares subject to restriction
(thousands)
 
Weighted average price
Nonvested at December 31, 2015
1,326

 
$
53.18

Granted
668

 
$
29.61

Vested
(493
)
 
$
46.06

Forfeited
(19
)
 
$
42.84

Nonvested at March 31, 2016
1,482

 
$
45.03

Granted
25

 
$
38.62

Vested
(55
)
 
$
60.23

Forfeited
(12
)
 
$
47.22

Nonvested at June 30, 2016
1,440

 
$
44.32

Granted
31

 
$
33.19

Vested
(3
)
 
$
60.41

Forfeited
(18
)
 
$
42.46

Nonvested at September 30, 2016
1,450

 
$
44.08


Performance Shares The 2004 and 2014 Plans provide for granting of performance shares to employees. The Company has established a performance share program to reward members of senior management based on the Company's performance in terms of total shareholder return relative to a peer group of automotive companies and revenue growth relative to the vehicle market.
 
The Company recorded performance share compensation expense of $0.2 million and $7.4 million for the three and nine months ended September 30, 2016, respectively, and $2.9 million and $9.4 million for the three and nine months ended September 30, 2015, respectively.


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(13) Accumulated Other Comprehensive Loss

The following tables summarize the activity within accumulated other comprehensive loss during the three and nine months ended September 30, 2016 and 2015:
(in millions)
 
Foreign currency translation adjustments
 
Hedge instruments
 
Defined benefit postretirement plans
 
Other
 
Total
Beginning balance, June 30, 2016
 
$
(407.3
)
 
$
1.4

 
$
(189.5
)
 
$
1.6

 
$
(593.8
)
Comprehensive income (loss) before reclassifications
 
27.9

 
(1.2
)
 
(4.1
)
 
0.1

 
22.7

Income taxes associated with comprehensive income (loss) before reclassifications
 
—

 
(1.4
)
 
(0.4
)
 
—

 
(1.8
)
Reclassification from accumulated other comprehensive loss
 
—

 
0.1

 
2.0

 
—

 
2.1

Income taxes reclassified into net earnings
 
—

 
0.2

 
(0.4
)
 
—

 
(0.2
)
Ending balance, September 30, 2016
 
$
(379.4
)
 
$
(0.9
)
 
$
(192.4
)
 
$
1.7

 
$
(571.0
)
(in millions)
 
Foreign currency translation adjustments
 
Hedge instruments
 
Defined benefit postretirement plans
 
Other
 
Total
Beginning balance, June 30, 2015
 
$
(326.3
)
 
$
3.2

 
$
(219.3
)
 
$
2.9

 
$
(539.5
)
Comprehensive income (loss) before reclassifications
 
(37.0
)
 
(3.8
)
 
1.4

 
—

 
(39.4
)
Income taxes associated with comprehensive income (loss) before reclassifications
 
—

 
1.4

 
(0.2
)
 
—

 
1.2

Reclassification from accumulated other comprehensive loss
 
—

 
(0.8
)
 
2.4

 
—

 
1.6

Income taxes reclassified into net earnings
 
—

 
0.2

 
(0.8
)
 
—

 
(0.6
)
Ending balance, September 30, 2015
 
$
(363.3
)
 
$
0.2

 
$
(216.5
)
 
$
2.9

 
$
(576.7
)
(in millions)
 
Foreign currency translation adjustments
 
Hedge instruments
 
Defined benefit postretirement plans
 
Other
 
Total
Beginning balance, December 31, 2015
 
$
(421.2
)
 
$
(2.0
)
 
$
(189.9
)
 
$
2.9

 
$
(610.2
)
Comprehensive income (loss) before reclassifications
 
41.8

 
0.7

 
(6.1
)
 
(1.2
)
 
35.2

Income taxes associated with comprehensive income (loss) before reclassifications
 
—

 
(1.0
)
 
(0.6
)
 
—

 
(1.6
)
Reclassification from accumulated other comprehensive loss
 
—

 
1.2

 
5.9

 
—

 
7.1

Income taxes reclassified into net earnings
 
—

 
0.2

 
(1.7
)
 
—

 
(1.5
)
Ending balance, September 30, 2016
 
$
(379.4
)
 
$
(0.9
)
 
$
(192.4
)
 
$
1.7

 
$
(571.0
)
(in millions)
 
Foreign currency translation adjustments
 
Hedge instruments
 
Defined benefit postretirement plans
 
Other
 
Total
Beginning balance, December 31, 2014
 
$
(160.7
)
 
$
1.7

 
$
(227.3
)
 
$
2.7

 
$
(383.6
)
Comprehensive income (loss) before reclassifications
 
(202.6
)
 
1.4

 
8.0

 
0.2

 
(193.0
)
Income taxes associated with comprehensive income (loss) before reclassifications
 
—

 
0.1

 
(2.4
)
 
—

 
(2.3
)
Reclassification from accumulated other comprehensive loss
 
—

 
(4.3
)
 
7.4

 
—

 
3.1

Income taxes reclassified into net earnings
 
—

 
1.3

 
(2.2
)
 
—

 
(0.9
)
Ending balance, September 30, 2015
 
$
(363.3
)
 
$
0.2

 
$
(216.5
)
 
$
2.9

 
$
(576.7
)

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(14)  Contingencies

In the normal course of business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, general liability and various other risks. It is not possible to predict with certainty whether or not the Company will ultimately be successful in any of these commercial and legal matters or, if not, what the impact might be. The Company's environmental and product liability contingencies are discussed separately below. The Company's management does not expect that an adverse outcome in any of these commercial and legal claims, actions and complaints will have a material adverse effect on the Company's results of operations, financial position or cash flows, although it could be material to the results of operations in a particular quarter.

Litigation

In January 2006, BorgWarner Diversified Transmission Products Inc. ("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 Court's affirmation that DTP did not violate the Labor-Management Relations Act or the Employee Retirement Income Security Act (ERISA) 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 DTP's 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 Court's 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 Court's affirmation that DTP did not violate the Labor - Management Relations Act or 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. During the last quarter of 2009, the action pending in Indiana was dismissed, while the action in Michigan is continuing. The Company is vigorously defending against the suit.  This contingency is subject to many uncertainties, therefore based on the information available to date, the Company cannot reasonably estimate the amount or the range of potential loss, if any.

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 27 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 material or the liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.


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Based on information available to the Company (which in most cases includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation and consulting costs; and remediation alternatives), the Company has an accrual for indicated environmental liabilities of $4.9 million and $5.4 million at September 30, 2016 and at December 31, 2015, respectively. The Company expects to pay out substantially all of the amounts accrued for environmental liability over the next five years.

The Company previously resolved certain indemnity claims asserted by Kuhlman Electric Corporation (“Kuhlman Electric”), a former indirect subsidiary of the Company, arising from the Company’s 1999 acquisition of Kuhlman Electric’s parent company. The underlying claims against Kuhlman Electric, now resolved, alleged bodily injury and property damage arising from historical operations of Kuhlman Electric’s manufacturing plant in Crystal Springs, Mississippi. As part of the resolution of Kuhlman Electric’s indemnity claims, the Company is now entitled to a share of any insurance proceeds that may be obtained in connection with the underlying claims for which Kuhlman Electric sought indemnity from the Company. The Company and Kuhlman Electric are jointly pursuing insurance proceeds through coverage litigation against numerous insurers, which currently is pending in Mississippi state and federal courts.

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 Company's involvement is limited because, in general, these claims relate to a few types of automotive 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, 2016 and December 31, 2015, the Company had approximately 9,500 and 10,100 pending asbestos-related product liability claims, respectively. The decrease in the pending claims is primarily a result of the Company's continued efforts to obtain dismissal of dormant claims.

The Company's policy is to vigorously defend against these lawsuits and the Company has been successful in obtaining dismissal of many claims without any payment. The nature of the historical product being encapsulated and the lifecycle of the product allow the Company to aggressively defend against these lawsuits. 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 2016, of the approximately 2,200 claims resolved, 256 (12%) resulted in payment being made to a claimant by or on behalf of the Company. In the full year of 2015, of the approximately 5,300 claims resolved, 349 (7%) resulted in 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 paid by the Company's primary layer insurance carriers under a series of interim funding arrangements. In addition to the primary insurance available for asbestos-related claims, the Company has excess insurance coverage available for potential future asbestos-related product claims. In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion of their policy limits.

A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies against the Company and certain of its historical general liability insurers. The court has issued a number of interim rulings and discovery is continuing. The Company has entered into settlement agreements with some of its insurance carriers, resolving their coverage disputes by agreeing to pay specified amounts to the Company. The Company is vigorously pursuing the litigation against the remaining insurers.


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To date, the Company has paid and accrued $424.6 million in defense and indemnity costs in advance of insurers' reimbursement and has received $229.6 million in cash and notes from insurers. The net balance of $195.0 million is expected to be fully recovered. Timing of recovery is dependent on final resolution of the declaratory judgment action referred to above or additional negotiated settlements. At December 31, 2015, insurers owed $163.3 million in association with these claims.

In addition to the $195.0 million net balance relating to past settlements and defense costs, the Company has estimated a liability of $112.4 million for claims asserted, but not yet resolved and their related defense costs at September 30, 2016. The Company also has a related asset of $112.4 million to recognize proceeds from the insurance carriers, which is expected to be fully recovered. Receipt of these proceeds is not expected prior to the resolution of the declaratory judgment action referred to above, which is expected to occur subsequent to September 30, 2017. At December 31, 2015, the comparable value of the accrued liability and associated insurance asset was $108.5 million.

The amounts recorded in the Condensed Consolidated Balance Sheets related to the estimated future settlement of existing claims are as follows:
 
September 30,
 
December 31,
(in millions)
2016
 
2015
Assets:
 
 
 
Other non-current assets
$
112.4

 
$
108.5

Total insurance assets
$
112.4

 
$
108.5

Liabilities:
 
 
 
Accounts payable and accrued expenses
$
49.5

 
$
47.7

Other non-current liabilities
62.9

 
60.8

Total accrued liabilities
$
112.4

 
$
108.5


The Company believes that its ultimate liability (i.e., the total of its indemnity or other claim dispositions plus legal related fees) cannot be reasonably estimated at this time in excess of amounts accrued. The Company's ability to reasonably estimate its liability has been significantly affected by, among other factors, the volatility of asbestos-related litigation in the United States, the significant number of co-defendants that have filed for bankruptcy, the magnitude and timing of co-defendant bankruptcy trust payments, the inherent uncertainty of future disease incidence and claiming patterns against the Company, and the impact of tort reform legislation that may be enacted at the state or federal levels. The Company’s ability to reasonably estimate its liability for asbestos-related claims may also be affected in the future by the new discovery of facts; changes in litigation; the impact of any possible tort reform; changes in assumptions regarding the number and nature of asbestos-related claims, including the total population claiming exposure; the amounts of any judgments over time; and changes in settlement/defense strategies.

The Company reviews, on an ongoing basis, its own experience in handling asbestos-related product liability claims, trends affecting asbestos-related product liability claims in the US tort system, and the status of its insurance coverage for asbestos-related product liability claims. This review is performed for the purposes of assessing the number and value of asbestos-related product liability claims that have been, or may in the future be, asserted against it. The Company is in a continuing process of enhancing the management and analysis of asbestos-related product liability claims. In the last few years, actions taken as part of this process include: the engagement of new National Coordinating Counsel and several new local counsel panels by BorgWarner Morse TEC Inc. (n/k/a BorgWarner Morse TEC LLC) (“Morse TEC”), the entity that is the defendant in the asbestos-related product liability claims litigation; outsourcing administration and claims handling to a third party; implementing various improvements in the processing of asbestos-related product liability claims; and increasing audits and compliance reviews of counsel handling asbestos-related product liability claims against Morse TEC. Morse TEC has further engaged in a sustained effort to obtain the dismissal of thousands of dormant product liability asbestos-related claims, which has resulted in a reduction in the number of its pending claims by 48 percent over the past few years. As part

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of this process, the Company hired a third party consultant to further assist in the analysis of potential future asbestos-related product liability claims against Morse TEC. These internal actions could have an effect on the reporting of Morse TEC’s future asbestos-related assets and liabilities, including whether a reasonable estimate can be made of future asbestos-related product liability claims against Morse TEC.

(15) Restructuring

In the fourth quarter of 2013, the Company initiated actions primarily in the Drivetrain segment designed to improve future profitability and competitiveness. As a continuation of these actions, the Company finalized severance agreements with three labor unions at separate facilities in Western Europe for approximately 450 employees. The Company recorded restructuring expense related to these facilities of $8.2 million for the nine months ended September 30, 2016 and $3.5 million and $18.7 million for the three and nine months ended September 30, 2015, respectively. Included in this restructuring expense are employee termination benefits of $3.0 million for the nine months ended September 30, 2016 and $0.4 million and $13.6 million for the three and nine months ended September 30, 2015, respectively. Additionally, the Company recorded other restructuring expense of $5.2 million for the nine months ended September 30, 2016 and $3.1 million and $5.1 million for the three and nine months ended September 30, 2015, respectively.

In the second quarter of 2014, the Company initiated actions to improve the future profitability and competitiveness of Wahler. The Company recorded restructuring expense related to Wahler of $9.6 million in the nine months ended September 30, 2016 and $2.4 million and $5.0 million in the three and nine months ended September 30, 2015, respectively. Included in this restructuring expense are employee termination benefits of $4.1 million for the nine months ended September 30, 2016 and $2.4 million and $4.5 million in the three and nine months ended September 30, 2015, respectively.

In the fourth quarter of 2015, the Company acquired 100% of the equity interests in Remy and initiated actions to improve future profitability and competitiveness. The Company recorded restructuring expense of $1.3 million and $6.1 million in the three and nine months ended September 30, 2016, respectively. Included in this restructuring expense is $3.1 million in the nine months ended September 30, 2016 related to winding down certain operations in North America. Additionally, the Company recorded employee termination benefits of $0.3 million and $2.0 million in the three and nine months ended September 30, 2016, respectively, primarily related to contractually required severance associated with Remy executive officers and other employee termination benefits in Mexico. Cash payments for these restructuring activities are expected to be complete by the end of 2017.

The Company recorded restructuring expense of $3.0 million and $15.1 million for the three and nine months ended September 30, 2015, respectively, related to a global realignment plan intended to enhance treasury management flexibility by creating a legal entity structure that better aligns with the Company's business strategy.

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 tables display a rollforward of the severance accruals recorded within the Company's Condensed Consolidated Balance Sheet and the related cash flow activity for the three and nine months ended September 30, 2016 and 2015:
 
 
Severance Accruals
(in millions)
 
Drivetrain
 
Engine
 
Total
Balance at December 31, 2015
 
$
25.3

 
$
4.1

 
$
29.4

Provision
 
2.3

 
1.0

 
3.3

Cash payments
 
(17.3
)
 
(2.3
)
 
(19.6
)
Translation adjustment
 
0.7

 
0.2

 
0.9

Balance at March 31, 2016
 
$
11.0

 
$
3.0

 
$
14.0

Provision
 
2.4

 
4.6

 
7.0

Cash payments
 
(5.3
)
 
(2.2
)
 
(7.5
)
Translation adjustment
 
(0.2
)
 
(0.1
)
 
(0.3
)
Balance at June 30, 2016
 
$
7.9

 
$
5.3

 
$
13.2

Provision
 
0.3

 
—

 
0.3

Cash payments
 
(2.7
)
 
(1.3
)
 
(4.0
)
Translation adjustment
 
0.1

 
0.1

 
0.2

Balance at September 30, 2016
 
$
5.6

 
$
4.1

 
$
9.7

 
 
Severance Accruals
(in millions)
 
Drivetrain
 
Engine
 
Total
Balance at December 31, 2014
 
$
41.9

 
$
2.0

 
$
43.9

Provision
 
7.4

 
0.4

 
7.8

Cash payments
 
(10.7
)
 
(0.9
)
 
(11.6
)
Translation adjustment
 
(4.7
)
 
(0.2
)
 
(4.9
)
Balance at March 31, 2015
 
$
33.9

 
$
1.3

 
$
35.2

Provision
 
6.8

 
2.6

 
9.4

Cash payments
 
(25.9
)
 
(1.7
)
 
(27.6
)
Translation adjustment
 
1.3

 
—

 
1.3

Balance at June 30, 2015
 
$
16.1

 
$
2.2

 
$
18.3

Provision
 
0.4

 
2.8

 
3.2

Cash payments
 
(6.1
)
 
(3.5
)
 
(9.6
)
Translation adjustment
 
0.1

 
—

 
0.1

Balance at September 30, 2015
 
$
10.5

 
$
1.5

 
$
12.0


(16) Earnings Per Share

The Company presents both basic and diluted earnings per share of common stock (“EPS”) amounts. Basic EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock outstanding during the reporting period. Diluted EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock and common equivalent stock outstanding during the reporting period.

The dilutive impact of stock-based compensation is calculated using the treasury stock method. The treasury stock method assumes that the Company uses the assumed proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future, compensation cost for future service that the Company has not yet recognized and any windfall/(shortfall) tax benefits that

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would be credited/(debited) to capital in excess of par value when the award generates a tax deduction. Options are only dilutive when the average market price of the underlying common stock exceeds the exercise price of the options.

The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share of common stock:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
(in millions, except per share amounts)
2016
 
2015
 
2016
 
2015
Basic earnings per share:
 
 
 
 
 
 
 
Net earnings attributable to BorgWarner Inc.
$
83.3

 
$
157.4

 
$
411.8

 
$
484.4

Weighted average shares of common stock outstanding
212.872

 
224.837

 
215.332

 
225.329

Basic earnings per share of common stock
$
0.39

 
$
0.70

 
$
1.91

 
$
2.15

 
 
 
 
 
 
 
 
Diluted earnings per share:
 
 
 
 
 
 
 
Net earnings attributable to BorgWarner Inc.
$
83.3

 
$
157.4

 
$
411.8

 
$
484.4

 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding
212.872


224.837


215.332


225.329

Effect of stock-based compensation
0.894

 
1.154

 
0.857

 
1.236

Weighted average shares of common stock outstanding including dilutive shares
213.766


225.991


216.189


226.565

Diluted earnings per share of common stock
$