BORGWARNER INC. INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the "Company" or "BorgWarner") is a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles.BorgWarner's products help improve vehicle performance, propulsion efficiency, stability and air quality. These products are manufactured and sold worldwide, primarily to original equipment manufacturers ("OEMs") of light vehicles (passenger cars, sport-utility vehicles ("SUVs"), vans and light trucks). The Company's products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications). The Company also manufactures and sells its products to certain tier one vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers inEurope , theAmericas andAsia and is an original equipment supplier to nearly every major automotive OEM in the world.
Charging Forward - Electrification Portfolio Strategy
In 2021, the Company announced its strategy to aggressively grow its
electrification portfolio over time through organic investments and
technology-focused acquisitions, most recently through the 2021 acquisition of
AKASOL AG ("AKASOL") as well as the 2020 purchase of Delphi Technologies PLC
("Delphi Technologies"). The Company believes it is well positioned for the
industry's anticipated migration to electric vehicles. Additionally, the Company
announced a plan to dispose of certain internal combustion assets, targeting
dispositions of assets generating approximately $1 billion in annual revenue in
the succeeding 12 to 18 months and approximately $3 to $4 billion in annual
revenue by 2025. The Company is targeting its revenue from products for pure
electric vehicles to be over 25% of its total revenue by 2025 and approximately
45% of its total revenue by 2030.
Acquisition of AKASOL AG
OnJune 4, 2021 , a wholly-owned subsidiary of the Company,ABBA BidCo AG ("ABBA BidCo"), completed its voluntary public takeover offer for shares of AKASOL, resulting in ownership of 89% of AKASOL's outstanding shares. The Company paid approximately €648 million ($788 million ) to settle the offer from current cash balances, which included proceeds received from its public offering of 1.00% Senior Notes due 2031 completed onMay 19, 2021 . Following the settlement of the offer, AKASOL became a consolidated majority-owned subsidiary of the Company. The Company also consolidated approximately €64 million ($77 million ) of gross debt of AKASOL. Subsequent to the completion of the voluntary public takeover offer, the Company purchased additional shares of AKASOL for €28 million ($33 million ) increasing its ownership to 93% as ofDecember 31, 2021 . The acquisition further strengthensBorgWarner's commercial vehicle and industrial electrification capabilities, which positions the Company to capitalize on what it believes to be a fast-growing battery module and pack market. OnAugust 2, 2021 , the Company initiated a merger squeeze out process under German law for the purpose of acquiring 100% of AKASOL. OnDecember 17, 2021 , the shareholders of AKASOL voted to mandatorily transfer to ABBA BidCo. AG, a wholly owned indirect subsidiary of the Company, each issued and outstanding share of AKASOL held by shareholders that did not tender their shares in the Company's previously completed exchange offer for AKASOL shares (the "Squeeze Out"). In exchange for the AKASOL shares transferred in the Squeeze Out, the Company will pay appropriate cash compensation, in the amount of €119.16 per share. OnFebruary 10, 2022 , the Company completed the registration of the Squeeze Out resulting in 100% ownership. The Company expects to settle the Squeeze Out with AKASOL minority shareholders in the first quarter of 2022. Refer to Note 2, "Acquisitions and Dispositions," to the Consolidated Financial Statements in Item 8 of this report for more information. 34 -------------------------------------------------------------------------------- Table of Contents Acquisition ofDelphi Technologies PLC OnOctober 1, 2020 , the Company completed its acquisition of 100% of the outstanding ordinary shares of Delphi Technologies from its shareholders pursuant to the terms of the Transaction Agreement, datedJanuary 28, 2020 , as amended onMay 6, 2020 , by and between the Company and Delphi Technologies. The acquisition has strengthened the Company's electronics and power electronics products, strengthened its capabilities and scale, enhanced key combustion, commercial vehicle and aftermarket product offerings, and positioned the Company for greater growth as electrified propulsion systems gain momentum. Refer to Note 2, "Acquisitions and Dispositions," to the Consolidated Financial Statements in Item 8 of this report for more information. Results of operations for AKASOL and Delphi Technologies are included in the Company's financial information following their respective dates of acquisition.
COVID-19 Pandemic and Other Supply Disruptions
Throughout 2020, COVID-19 materially impacted the Company's business and results of operations. Following the declaration of COVID-19 as a global pandemic onMarch 11, 2020 , government authorities around the world began to impose shelter-in-place orders and other restrictions. As a result, many OEMs began suspending manufacturing operations, particularly inNorth America andEurope . This led to various temporary closures of, or reduced operations at, the Company's manufacturing facilities, late in the first quarter of 2020 and throughout the second quarter of 2020. During the second half of 2020, as global management of COVID-19 evolved and government restrictions were removed or lessened, production levels improved, and substantially all of the Company's production facilities resumed closer to normal operations by the end of the third quarter of 2020. During 2021, trailing impacts of the shutdowns and production declines related, in part, to COVID-19 created supply constraints of certain components, particularly semiconductor chips. These supply constraints have had, and are expected to continue to have, significant impacts on global industry production levels. In addition, it is possible a resurgence of COVID-19 could result in adverse impacts in the future. Management cannot reasonably estimate the full impact the ongoing supply constraints or the COVID-19 pandemic could have on the Company's financial condition, results of operations or cash flows in the future.
Bond Offering
OnMay 19, 2021 , in anticipation of the acquisition of AKASOL and to refinance the Company's €500 million 1.8% senior notes due inNovember 2022 , the Company issued €1.0 billion in 1.0% senior notes dueMay 2031 . Interest is payable annually in arrears onMay 19 of each year. These senior notes are not guaranteed by any of the Company's subsidiaries. OnJune 18, 2021 , the Company repaid its €500 million 1.8% senior notes dueNovember 2022 and incurred a loss on debt extinguishment of$20 million , which is reflected in Interest expense, net in the Consolidated Statement of Operations. 35 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
A detailed comparison of the Company's 2019 operating results to its 2020
operating results can be found in the Management's Discussion and Analysis of
Financial Condition and Results of Operations section in the Company's 2020
Annual Report on Form 10-K filed
The following table presents a summary of the Company's operating results:
Year Ended December 31,
(in millions, except per share data) 2021 2020
Net sales % of net sales % of net sales
Air Management $ 7,298 49.2 % $ 5,678 55.9 %
e-Propulsion & Drivetrain 5,378 36.2 3,989 39.2
Fuel Injection 1,826 12.3 479 4.7
Aftermarket 853 5.8 194 1.9
Inter-segment eliminations (517) (3.5) (175) (1.7)
Total net sales 14,838 100.0 10,165 100.0
Cost of sales 11,983 80.8 8,255 81.2
Gross profit 2,855 19.2 1,910 18.8
Selling, general and administrative expenses -
R&D, net 707 4.8 476 4.7
Selling, general and administrative expenses -
Other 753 5.1 475 4.7
Restructuring expense 163 1.1 203 2.0
Other operating expense, net 81 0.5 138 1.4
Operating income 1,151 7.8 618 6.1
Equity in affiliates' earnings, net of tax (48) (0.3) (18) (0.2)
Unrealized loss (gain) on equity securities 362 2.4 (382) (3.8)
Interest expense, net 93 0.6 61 0.6
Other postretirement income (45) (0.3) (7) (0.1)
Earnings before income taxes and noncontrolling
interest 789 5.3 964 9.5
Provision for income taxes 150 1.0 397 3.9
Net earnings 639 4.3 567 5.6
Net earnings attributable to the noncontrolling
interest, net of tax 102 0.7 67 0.7
Net earnings attributable to BorgWarner Inc. $ 537 3.6 % $ 500 4.9 %
Earnings per share - diluted $ 2.24 $ 2.34
Net sales for the year ended December 31, 2021 totaled $14,838 million , an
increase of 46% from the year ended December 31, 2020 . During the year ended
December 31, 2021 , the net impact of acquisitions, primarily related to legacy
Delphi Technologies, increased revenues by $3,328 million from the year ended
December 31, 2020 . Stronger foreign currencies, primarily the Euro, Chinese
Renminbi and Korean Won, increased net sales by approximately $270 million . The
net increase excluding these items was primarily due to increased demand for the
Company's products. In addition, net sales were favorably impacted by the
recovery of global markets from the negative effects of COVID-19 on 2020
production. However, this recovery was largely offset by supply constraints
related to certain components, particularly semiconductor chips, that negatively
impacted global automotive production in 2021.
Cost of sales as a percentage of net sales was 80.8% and 81.2% in the years
ended December 31, 2021 and 2020, respectively. During the year ended December
31, 2021 , acquisitions, primarily related to legacy Delphi Technologies,
increased cost of sales. The Company's material cost of sales was approximately
54% and 57% of net sales in the years ended December 31, 2021 and 2020,
respectively. The decrease in material cost as a percentage of sales reflects
the lower material costs associated with the legacy Delphi Technologies
business. Gross profit and gross margin were $2,855 million and 19.2%,
respectively during the year ended December 31, 2021 compared to $1,910 million
and 18.8%,
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respectively, during the year ended December 31, 2020 . The increase in gross
margin in 2021 compared to 2020 was primarily due to the impact of increased
sales, partially offset by a higher warranty provision due to an unfavorable
customer warranty settlement in December 2021 and increases in commodity and
other costs.
Selling, general and administrative expenses ("SG&A") were $1,460 million and
$951 million , or 9.8% and 9.4% of net sales, for the years ended December 31,
2021 and 2020, respectively. The increase in SG&A was primarily related to the
acquisition of Delphi Technologies, increased investments in research and
development and the reinstated costs related to specific cost reduction actions
taken in response to COVID-19 during 2020.
Research and development ("R&D") costs, net of customer reimbursements, were
$707 million , or 4.8% of net sales, in the year ended December 31, 2021 ,
compared to $476 million , or 4.7% of net sales, in the year ended December 31,
2020 . The increase of R&D costs, net of customer reimbursements, in the year
ended December 31, 2021 , compared with the year ended December 31, 2020 , was
primarily due to the acquisition of Delphi Technologies, which increased R&D
costs by approximately $200 million during the year ended December 31, 2021 , as
well as higher investment to support the continued development of the Company's
electrification portfolio. The Company will continue to invest in R&D programs,
which are necessary to support short- and long-term growth. The Company's
current long-term expectation for R&D spending is in the range of 5.0% to 5.5%
of net sales.
Restructuring expense was $163 million and $203 million for the years ended
December 31, 2021 and 2020, respectively, primarily related to employee benefit
costs. Refer to Note 4 "Restructuring" to
the Consolidated Financial Statements in Item 8 of this report for more
information.
In February 2020 , the Company announced a restructuring plan to address existing
structural costs. During the years ended December 31, 2021 and 2020, the Company
recorded $103 million and $148 million of restructuring expense related to this
plan, respectively. Cumulatively, the Company has incurred $251 million of
restructuring charges related to this plan. These actions are expected to result
in a total of $300 million of restructuring costs through 2022. The resulting
annual gross savings are expected to be $90 million to $100 million and will be
utilized to sustain overall operating margin profile and cost competitiveness.
Nearly all of the restructuring charges are expected to be cash expenditures.
In 2019, legacy Delphi Technologies announced a restructuring plan to reshape
and realign its global technical center footprint and reduce salaried and
contract staff. The Company continued actions under this program
post-acquisition and has recorded cumulative charges of $62 million since
October 1, 2020 . This includes approximately $60 million in restructuring
charges during the year ended December 31, 2021 , primarily for the statutory
minimum benefits and incremental one-time termination benefits negotiated with
local labor authorities. The majority of these actions under this program have
been completed.
Additionally, the Company recorded approximately $54 million in restructuring
during the three months ended December 31, 2020 , for acquisition-related
restructuring charges. In conjunction with the Delphi Technologies acquisition,
there were contractually required severance and post-combination stock-based
compensation cash payments to legacy Delphi Technologies executive officers and
other employee termination benefits.
Other operating expense, net was
For the years ended
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During the year ended December 31, 2021 , the Company recorded pre-tax losses of
$22 million on the sale of its Water Valley, Mississippi facility and $7 million
in connection with the sale of an e-Propulsion & Drivetrain technical center in
Europe .
During the year ended December 31, 2021 , the Company recorded an impairment
charge of $14 million to reduce its carrying value of an indefinite-lived trade
name to the fair value. During the year ended December 31, 2020 , the Company
recorded asset impairment costs of $9 million in the Air Management segment and
$8 million in the e-Propulsion & Drivetrain segment related to the write downs
of property, plant and equipment associated with the announced closures of two
European facilities. Additionally, as a result of an evaluation of certain
underlying technologies subsequent to the acquisition of Delphi Technologies,
the Company reduced the useful life of certain intangible assets during the
fourth quarter of 2020 as they no longer provided future economic benefit. This
resulted in accelerated amortization expense of $38 million .
Other operating expense, net is primarily comprised of items included within the subtitle "Non-comparable items impacting the Company's earnings per diluted share and net earnings" below.
Equity in affiliates' earnings, net of tax was$48 million and$18 million in the years endedDecember 31, 2021 and 2020, respectively. This line item is driven by the results of the Company's unconsolidated joint ventures. The increase in equity in affiliates' earnings in the year endedDecember 31, 2021 was due to the recovery from negative effects of COVID-19 on 2020 production. Unrealized loss (gain) on equity securities included a loss of$362 million and a gain of$382 million for the years endedDecember 31, 2021 and 2020, respectively. This line item reflects the net unrealized gains or losses recognized primarily related to the Company's investment in Romeo Power, Inc. For further details, see Note 2, "Acquisitions and Dispositions," to the Consolidated Financial Statements in Item 8 of this report. Interest expense, net was$93 million and$61 million in the years endedDecember 31, 2021 and 2020, respectively. The increase in interest expense for the year endedDecember 31, 2021 , compared with the year endedDecember 31, 2020 , was primarily due to the Company's$20 million loss on debt extinguishment related to the early repayment of its €500 million 1.800% senior notes settled onJune 18, 2021 , the Company's issuance of €1 billion 1.000% senior notes inMay 2021 to support the AKASOL acquisition, and the Company's$1.1 billion senior notes issuance inJune 2020 . Other postretirement income was$45 million and$7 million in the years endedDecember 31, 2021 and 2020, respectively. The increase in other postretirement income for the year endedDecember 31, 2021 , compared with the year endedDecember 31, 2020 , was primarily due to the assumption of Delphi Technologies pension plans. Provision for income taxes was$150 million for the year endedDecember 31, 2021 resulting in an effective tax rate of 19%. This compared to$397 million or 41% for the year endedDecember 31, 2020 . In 2021, the Company recognized a$55 million tax benefit related to a reduction in certain unrecognized tax benefits and accrued interest for a matter in which the statute of limitations had lapsed. The Company also recognized a discrete tax benefit of$20 million related to an increase in its deferred tax assets as a result of an increase in theUnited Kingdom ("UK") statutory tax rate from 19% to 25%. Further, a net discrete tax benefit of$36 million was recognized, primarily related to changes to certain withholding rates applied to unremitted earnings.
In 2020, the Company recognized
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remittance of foreign earnings, and certain tax law changes in India effective
in the first quarter of 2020. In addition, the Company recognized incremental
valuation allowances of $53 million in 2020.
For further details, see Note 7, "Income Taxes," to the Consolidated Financial Statements in Item 8 of this report.
Net earnings attributable to the noncontrolling interest, net of tax of$102 million for the year endedDecember 31, 2021 increased by$35 million compared to the year endedDecember 31, 2020 . The increase was due to the recovery from negative effects of COVID-19 on 2020 production and the addition of noncontrolling interests from acquisitions. 39 -------------------------------------------------------------------------------- Table of Contents Non-comparable items impacting the Company's earnings per diluted share and net earnings The Company's earnings per diluted share were$2.24 and$2.34 for the years endedDecember 31, 2021 and 2020, respectively. The non-comparable items presented below are calculated after tax using the corresponding effective tax rate discrete to each item and the weighted average number of diluted shares for each of the years then ended. The Company believes the following table is useful in highlighting non-comparable items that impacted its earnings per diluted share: Year Ended December 31, Non-comparable items: 2021 2020 Restructuring expense$ (0.58) $ (0.86) Customer warranty settlement1 (0.26) - Merger, acquisition and divestiture expense (0.19) (0.38) Loss on sales of businesses (0.13) - Asset impairments and lease modifications (0.05) (0.08) Net gain on insurance recovery for property damage2 0.01 0.04 Unrealized (loss) gain on equity securities (1.15) 1.36 Loss on debt extinguishment (0.06) - Intangible asset accelerated amortization - (0.14) Amortization of inventory fair value adjustment3 - (0.10) Delayed-draw term loan cancellation4 - (0.01) Pension settlement loss5 - (0.02) Tax adjustments6 0.50 (0.23) Total impact of non-comparable items per share - diluted: $
(1.91)
_____________________
1 During the year ended
to fully resolve a warranty claim and the Company recognized cumulative charges in the
amount of
"Contingencies," to the Consolidated Financial Statements in Item 8 of this report for
more information.
2 During the years ended
million and
represents the amounts received for replacement cost in excess of carrying value for
losses sustained from a tornado that damaged the Company's plant in Seneca, South
Carolina.
3 Represents the non-cash charges related to the amortization of the fair value adjustment
of inventories acquired in connection with the acquisition of Delphi Technologies during
the year ended
the Consolidated Financial Statements in Item 8 of this report for more information.
4 Represents loan fees related to term loan cancellation during the year ended
2020. On
that was subsequently cancelled on
the Company's issuance of
5 During the year ended
settlement loss of
6 In 2021, the Company recognized discrete reductions to tax expense of
reductions primarily included a
statute of limitations for a tax matter, a
deferred tax assets associated with an increase in the
tax benefit primarily related to changes to certain withholding rates applied to
unremitted earnings and other tax adjustments. In 2020, the Company recognized an
increase in tax expense of
remittance of foreign earnings, but was partially offset by reductions to tax expense of
Results by Reporting Segment
The Company's business is comprised of four reporting segments: Air Management, e-Propulsion & Drivetrain, Fuel Injection and Aftermarket.
Segment Adjusted EBIT is the measure of segment income or loss used by the
Company. Segment Adjusted EBIT is comprised of earnings before interest, income
taxes and noncontrolling interest ("EBIT") adjusted for restructuring, merger,
acquisition and divestiture expense, impairment charges, affiliates' earnings
and other items not reflective of ongoing operating income or loss. The Company
believes
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Segment Adjusted EBIT is most reflective of the operational profitability or
loss of its reporting segments. Segment Adjusted EBIT excludes certain corporate
costs, which primarily represent headquarters' expenses not directly
attributable to the individual segments. Corporate expenses not allocated to
Segment Adjusted EBIT were $302 million and $192 million for the years ended
December 31, 2021 and 2020, respectively. The increase in corporate expenses in
2021 related to the acquisition of Delphi Technologies in 2020 and reinstated
costs related to specific cost reduction actions taken in response to COVID-19
during 2020.
The following table presents net sales and Segment Adjusted EBIT for the Company's reporting segments:
Year ended December 31, 2021 Year ended December 31, 2020
Segment Segment
(in millions) Net sales Adjusted EBIT % margin Net sales Adjusted EBIT % margin
Air Management $ 7,298 $ 1,070 14.7 % $ 5,678 $ 762 13.4 %
e-Propulsion & Drivetrain 5,378 486 9.0 % 3,989 359 9.0 %
Fuel Injection 1,826 170 9.3 % 479 39 8.1 %
Aftermarket 853 107 12.5 % 194 22 11.3 %
Inter-segment eliminations (517) - (175) -
Totals $ 14,838 $ 1,833 $ 10,165 $ 1,182
The Air Management segment's net sales for the year ended December 31, 2021
increased $1,620 million , or 29%, and Segment Adjusted EBIT increased $308
million , or 40%, from the year ended December 31, 2020 . The net impact of
acquisitions, related to Delphi Technologies and AKASOL, increased Air
Management revenues by $880 million in 2021. Stronger foreign currencies
relative to the U.S. Dollar, primarily the Euro, Chinese Renminbi, and Korean
Won, increased net sales by approximately $154 million from the year ended
December 31, 2020 . The net increase excluding these items was primarily due to
increased demand for the Company's products. In addition, net sales were
favorably impacted by the recovery of global markets from the negative effects
of COVID-19 on 2020 production. However, this recovery was largely offset by
supply constraints related to certain components, particularly semiconductor
chips, that negatively impacted global automotive production in 2021. Segment
Adjusted EBIT margin was 14.7% for the year ended December 31, 2021 , compared to
13.4% in the year ended December 31, 2020 . The Segment Adjusted EBIT margin
increase was primarily due to the impact of higher sales and savings arising
from the Company's restructuring initiatives, partially offset by higher
commodity costs in 2021.
The e-Propulsion & Drivetrain segment's net sales for the year ended
December 31, 2021 increased $1,389 million , or 35%, and Segment Adjusted EBIT
increased $127 million , or 35%, from the year ended December 31, 2020 . The
Delphi Technologies acquisition increased e-Propulsion & Drivetrain revenues by
$779 million in 2021. Stronger foreign currencies relative to the U.S. Dollar,
primarily the Euro, Chinese Renminbi, and Korean Won, increased net sales by
approximately $126 million from the year ended December 31, 2020 . The net
increase excluding these items was primarily due to increased demand for the
Company's products. In addition, net sales were favorably impacted by the
recovery of global markets from the negative effects of COVID-19 on 2020
production. However, this recovery was largely offset by supply constraints
related to certain components, particularly semiconductor chips, that negatively
impacted global automotive production in 2021. Segment Adjusted EBIT margin was
9.0% in the year ended December 31, 2021 and 2020 as the impact of higher sales
was offset by higher commodity costs and increased net R&D investments.
The Fuel Injection segment's net sales and Segment Adjusted EBIT for the year
ended December 31, 2021 were $1,826 million and $170 million , respectively. For
the three months ended December 31, 2020 , net sales and Segment Adjusted EBIT
were $479 million and $39 million , respectively. This was a new reporting
segment following the acquisition of Delphi Technologies on October 1, 2020 .
Segment Adjusted EBIT margin was 9.3% in the year ended December 31, 2021 ,
compared to 8.1% in the three
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months ended December 31, 2020 . The Segment Adjusted EBIT margin increase was
primarily due to cost improvement measures and higher engineering cost
recoveries in 2021.
The Aftermarket segment's net sales and Segment Adjusted EBIT for the year ended
December 31, 2021 were $853 million and $107 million , respectively. For the
three months ended December 31, 2020 , net sales and Segment Adjusted EBIT were
$194 million and $22 million , respectively. This was a new reporting segment
following the acquisition of Delphi Technologies on October 1, 2020 . Segment
Adjusted EBIT margin was 12.5% in the year ended December 31, 2021 , compared to
11.3% in the three months ended December 31, 2020 . The Segment Adjusted EBIT
margin increase was primarily related to increased pricing in 2021.
Outlook
The Company expects global industry production to increase year over year in 2022, as supply of certain components, particularly semiconductor chips, is expected to improve modestly during the year. The Company also expects net new business-related sales growth, due to increased penetration ofBorgWarner products around the world, to drive sales increase in excess of the growth in industry production outlook. As a result, the Company expects increased revenue in 2022, excluding the impact of foreign currencies. The Company expects its results to be impacted by a planned increase in Research & Development ("R&D") expenditures during 2022. This planned R&D increase is to support growth in the Company's electric vehicle-related products and is primarily related to supporting the launch of recently awarded programs. The Company also expects higher commodity cost, particularly related to steel and petroleum-based resin products, and other supplier cost increases to negatively impact its results of operations. These items are expected to be partially mitigated by cost reductions due to the Company's restructuring activities and synergies related to the acquisition of Delphi Technologies. The Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic investments to enhance its product leadership strategy. There are several trends that are driving the Company's long-term growth that management expects to continue, including adoption of product offerings for electrified vehicles and increasingly stringent global emissions standards that support demand for the Company's products driving vehicle efficiency.
LIQUIDITY AND CAPITAL RESOURCES
The Company maintains various liquidity sources including cash and cash equivalents and the unused portion of its multi-currency revolving credit agreement. As ofDecember 31, 2021 , the Company had liquidity of$3,841 million , comprised of cash and cash equivalent balances of$1,841 million and an undrawn revolving credit facility of$2,000 million . The Company was in full compliance with its covenants under the revolving credit facility and had full access to its undrawn revolving credit facility. Debt maturities through the end of 2022 total$66 million . Given the Company's strong liquidity position, management believes that it will have sufficient liquidity and will maintain compliance with all covenants through at least the next 12 months. As ofDecember 31, 2021 , cash balances of$1,361 million were held by the Company's subsidiaries outside ofthe United States . Cash and cash equivalents held by these subsidiaries is used to fund foreign operational activities and future investments, including acquisitions. The majority of cash and cash equivalents held outsidethe United States is available for repatriation. The Company uses itsU.S. liquidity primarily for various corporate purposes, including but not limited to debt service, share repurchases, dividend distributions, acquisitions and other corporate expenses. The Company has a$2.0 billion multi-currency revolving credit facility, which includes a feature that allows the facility to be increased by$1.0 billion with bank group approval. This facility matures inMarch 2025 . The credit facility agreement contains customary events of default and one key financial covenant, 42 -------------------------------------------------------------------------------- Table of Contents which is a debt-to-EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio. The Company was in compliance with the financial covenant atDecember 31, 2021 . AtDecember 31, 2021 and 2020, the Company had no outstanding borrowings under this facility. The Company's commercial paper program allows the Company to issue$2.0 billion of short-term, unsecured commercial paper notes under the limits of its multi-currency revolving credit facility. 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 ofDecember 31, 2021 and 2020.
The total current combined borrowing capacity under the multi-currency revolving
credit facility and commercial paper program cannot exceed
In addition to the credit facility, the Company's universal shelf registration provides the ability to issue various debt and equity instruments subject to market conditions. OnFebruary 12, 2021 ,April 28, 2021 ,July 28, 2021 andNovember 9, 2021 , the Company's Board of Directors declared quarterly cash dividends of$0.17 per share of common stock. These dividends were paid onMarch 16, 2021 ,June 15, 2021 ,September 15, 2021 andDecember 15, 2021 , respectively. During 2020, due to the business disruptions from COVID-19 and uncertainties surrounding the Delphi Technologies acquisition,Standard & Poor's downgraded the Company's rating from BBB+ with a stable outlook to BBB with a negative outlook. Additionally, Moody's and Fitch adjusted their outlooks from stable to negative but maintained the Company's credit ratings at Baa1 and BBB+, respectively. InApril 2021 , Moody's reaffirmed the Company's Baa1 credit rating and adjusted its outlook from negative to stable. InMay 2021 , Fitch Ratings reaffirmed the Company's BBB+ rating and adjusted its outlook from negative to stable. InDecember 2021 ,Standard & Poor's reaffirmed the Company's rating of BBB with a negative outlook. None of the Company's debt agreements require accelerated repayment in the event of a downgrade in credit ratings. 43 --------------------------------------------------------------------------------
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Cash Flows
Operating Activities
Year Ended December 31,
(in millions) 2021 2020
OPERATING
Net earnings $ 639 $ 567
Adjustments to reconcile net earnings to net cash flows from
operations:
Depreciation and tooling amortization 684 479
Intangible asset amortization 88 89
Restructuring expense, net of cash paid 123 135
Stock-based compensation expense 62 41
Loss on sales of businesses 29 -
Loss on debt extinguishment 20 -
Unrealized loss (gain) on equity securities 362 (382)
Deferred income tax (benefit) provision (180) 123
Other non-cash adjustments (22) (5)
Net earnings adjustments to reconcile to net cash flows from operations
1,805 1,047
Retirement plan contributions (30) (182)
Changes in assets and liabilities:
Receivables (59) 27
Inventories (268) (28)
Accounts payable and accrued expenses (134) 186
Other assets and liabilities (8) 134
Net cash provided by operating activities $
1,306
Net cash provided by operating activities was$1,306 million and$1,184 million in the years endedDecember 31, 2021 and 2020, respectively. The increase for the year endedDecember 31, 2021 , compared with the year endedDecember 31, 2020 , was primarily due to higher net earnings adjusted for non-cash charges, partially offset by higher working capital, due to higher inventory levels and lower accounts payable as the current volatile market environment led to unanticipated reductions in customer production. During 2020, there were lower net investments in working capital (excluding working capital acquired in the Delphi Technologies acquisition), partially offset by incremental retirement benefit plan contributions made inDecember 2020 to the Delphi Technologies Pension Scheme in theUnited Kingdom , which is discussed further below. 44 --------------------------------------------------------------------------------
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Investing Activities
Year Ended December 31,
(in millions) 2021 2020
INVESTING
Capital expenditures, including tooling outlays $ (666) $ (441)
Capital expenditures for damage to property, plant and equipment (2) (20)
Insurance proceeds received for damage to property, plant and equipment
5 20
Payments for businesses acquired, net of cash and restricted cash acquired
(759) (449)
Proceeds from sale of businesses, net of cash divested 22 -
Proceeds from settlement of net investment hedges, net 11 10
(Payments for) proceeds from other investing activities (6) 14
Net cash used in investing activities $
(1,395)
Net cash used in investing activities was$1,395 million and$866 million in the years endedDecember 31, 2021 and 2020, respectively. The increase in cash used during the year endedDecember 31, 2021 , compared with the year endedDecember 31, 2020 , was primarily due to cash outflows related to the 2021 acquisition of AKASOL. In addition, in 2021, capital expenditures, including tooling outlays, were higher primarily due to the acquisition of Delphi Technologies. As a percentage of sales, capital expenditures were 4.5% and 4.3% for the years endedDecember 31, 2021 and 2020, respectively. Financing Activities Year Ended December 31, (in millions) 2021 2020 FINANCING Net (decrease) increase in notes payable $ (8)$ 8 Additions to debt 1,286 1,178 Repayments of debt, including current portion (699) (331) Payments for debt issuance costs (11) (10) Payments for purchase of treasury stock - (216) Payments for stock-based compensation items (15) (13) (Purchase of) capital contribution from noncontrolling interest (33) 4 Dividends paid to BorgWarner stockholders (162) (146) Dividends paid to noncontrolling stockholders (72) (37) Net cash provided by financing activities $
286
Net cash provided by financing activities was$286 million and$437 million in the years endedDecember 31, 2021 and 2020, respectively. The decrease in net cash provided by financing activities during the year endedDecember 31, 2021 was primarily related to the Company's repayment of its €500 million 1.800% senior notes dueNovember 2022 , partially offset by no share repurchases 2021. Additionally, net cash provided by financing activities for 2021 included the Company's public offering and issuance of €1.0 billion in 1.000% senior notes dueMay 2031 , a$51 million increase in dividends paid toBorgWarner and noncontrolling stockholders, as compared to 2020, and$33 million paid to acquire additional shares in AKASOL. 45 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The Company's significant cash requirements for contractual obligations as ofDecember 31, 2021 , primarily consist of the principal and interest payments on its notes payable and long-term debt, non-cancelable lease obligations and capital spending obligations. The principal amount of notes payable and long-term debt was$4,277 million as ofDecember 31, 2021 . The projected interest payments on that debt were$1,042 million as ofDecember 31, 2021 . Refer to Note 14, "Notes Payable and Debt," to the Consolidated Financial Statements in Item 8 of this report for more information.
As of
Management believes that the combination of cash from operations, cash balances, available credit facilities, and the universal shelf registration capacity will be sufficient to satisfy the Company's cash needs for its current level of operations and its planned operations for the foreseeable future. Management will continue to balance the Company's needs for organic growth, inorganic growth, debt reduction, cash conservation and return of cash to shareholders.
Pension and Other Postretirement Employee Benefits
The Company's policy is to fund its defined benefit pension plans in accordance with applicable government regulations and to make additional contributions when appropriate. AtDecember 31, 2021 , all legal funding requirements had been met. The Company contributed$24 million ,$174 million and$26 million to its defined benefit pension plans in the years endedDecember 31, 2021 , 2020 and 2019, respectively. OnOctober 1, 2020 , as a result of the acquisition of Delphi Technologies, the Company assumed all of the retirement-related liabilities of Delphi Technologies, the most significant of which was the Delphi Technologies Pension Scheme (the "Scheme") in theUnited Kingdom . OnDecember 12, 2020 , the Company entered into a Heads of Terms Agreement (the "Agreement") with the Trustees of the Scheme related to the future funding of the Scheme. Under the Agreement, the Company eliminated the prior schedule of contributions between Delphi Technologies and the Scheme in exchange for a$137 million (£100 million) one-time contribution into the Scheme Plan byDecember 31, 2020 , which was paid onDecember 15, 2020 . The Agreement also contained other provisions regarding the implementation of a revised asset investment strategy as well as a funding progress test that will be performed every three years to determine if additional contributions need to be made into the Scheme by the Company. At this time, the Company anticipates that no additional contributions will need to be made into the Scheme until 2026 at the earliest. The Company expects to contribute a total of$20 million to$30 million into its defined benefit pension plans during 2022. Of the$20 million to$30 million in projected 2022 contributions,$7 million are contractually obligated, while any remaining payments would be discretionary. The funded status of all pension plans was a net unfunded position of$184 million and$501 million atDecember 31, 2021 and 2020, respectively. The decrease in the net unfunded position was a result of a lower projected benefit obligation which is primarily due to actuarial gains during the period. The main driver of these gains was the increase of 0.53% in the weighted average discount rate for Non-U.S. plans. Of the total net unfunded amounts,$89 million and$139 million atDecember 31, 2021 and 2020, respectively, were related to plans inGermany , where there is no tax deduction allowed under the applicable regulations to fund the plans; hence, the common practice is to make contributions as benefit payments become due. Additionally,$186 million of the net unfunded position atDecember 31, 2020 related to the acquired Delphi Technologies Pension Scheme in theUnited Kingdom , which reflects the impact of the$137 million contribution discussed above. 46 -------------------------------------------------------------------------------- Table of Contents Other postretirement employee benefits primarily consist of postretirement health care benefits for certain employees and retirees of the Company'sU.S. operations. The Company funds these benefits as retiree claims are incurred. Other postretirement employee benefits had an unfunded status of$54 million and$65 million atDecember 31, 2021 and 2020, respectively. The Company believes it will be able to fund the requirements of these plans through cash generated from operations or other available sources of financing for the foreseeable future.
Refer to Note 18, "Retirement Benefit Plans," to the Consolidated Financial Statements in Item 8 of this report for more information regarding costs and assumptions for employee retirement benefits.
OTHER MATTERS
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 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 management does not expect that an adverse outcome in any of these commercial and legal claims, actions and complaints that are currently pending will have a material adverse effect on the Company's results of operations, financial position or cash flows. An adverse outcome could, nonetheless, be material to the results of operations or cash flows. The Company previously disclosed a warranty claim that an OEM customer asserted. The claim was related to certain combustion-related products, and the Company and the customer continued to work through the warranty process in the fourth quarter of 2021. InDecember 2021 , as a result of discussions that occurred in the fourth quarter, the Company (without any admission of liability) and the customer reached an agreement to fully resolve the claim for$130 million , which the Company paid in 2021. For the year endedDecember 31, 2021 , the Company recorded cumulative charges of$124 million in connection with the warranty claim. The Company is pursuing a partial recovery of this claim through its insurance coverage. However, there is no assurance that there will be any recovery.
Environmental
The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by theUnited 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 26 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.
Refer to Note 21, "Contingencies," to the Consolidated Financial Statements in Item 8 of this report for further details and information respecting the Company's environmental liability.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States ("GAAP"). In preparing these
financial statements, management has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. Critical accounting policies are those that are most important
to the portrayal of the Company's financial condition and results of operations.
Some of these policies require management's most difficult, subjective or
complex judgments in the preparation of the financial statements and
accompanying notes. Management makes estimates and assumptions about the effect
of matters that are inherently uncertain, relating to the reporting of assets,
liabilities, revenues, expenses and the disclosure of contingent assets and
liabilities. The Company's most critical accounting policies are discussed
below.
Business combinations The Company allocates the cost of an acquired business to
the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition. The excess value of the cost of an acquired business
over the estimated fair value of the assets acquired and liabilities assumed is
recognized as goodwill. The valuation of the acquired assets and liabilities
will impact the determination of future operating results. The Company uses a
variety of information sources to determine the value of acquired assets and
liabilities, including third-party appraisers for the values and lives of
property, identifiable intangibles and inventories, and actuaries for defined
benefit retirement plans. Goodwill is assigned to reporting units as of the date
of the related acquisition. If goodwill is assigned to more than one reporting
unit, the Company utilizes a method that is consistent with the manner in which
the amount of goodwill in a business combination is determined. Costs related to
the acquisition of a business are expensed as incurred.
Acquired intangible assets include customer relationships, developed technology
and trade names. The Company estimates the fair value of acquired intangible
assets using various valuation techniques. The primary valuation techniques used
include forms of the income approach, specifically the relief-from-royalty and
multi-period excess earnings valuation methods. Under these valuation
approaches, the Company is required to make estimates and assumptions from a
market participant perspective which may include revenue growth rates, estimated
earnings, royalty rates, obsolescence factors, contributory asset charges,
customer attrition and discount rates. Under the multi-period excess earnings
method, value is estimated as the present value of the benefits anticipated from
ownership of the asset, in excess of the returns required on the investment in
contributory assets that are necessary to realize those benefits. The intangible
asset's estimated earnings are determined as the residual earnings after
quantifying estimated earnings from contributory assets.
The Company estimates the fair value of trade names and developed technology
using the relief from royalty method, which calculates the cost savings
associated with owning rather than licensing the assets. Assumed royalty rates
are applied to projected revenue for the remaining useful lives of the assets to
estimate the royalty savings.
While the Company uses its best estimates and assumptions, fair value estimates
are inherently uncertain and subject to refinement. As a result, during the
measurement period, which may be up to one year from the acquisition date, the
Company may record adjustments to the assets acquired and liabilities assumed,
with the corresponding offset to goodwill. Any adjustments required after the
measurement period are recorded in the consolidated statement of earnings.
Future changes in the judgments, assumptions and estimates that are used in
acquisition valuations and intangible asset and goodwill impairment testing,
including discount rates or future operating results and related cash flow
projections, could result in significantly different estimates of the fair
values in the future. An increase in discount rates, a reduction in projected
cash flows or a combination of the two could lead
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to a reduction in the estimated fair values, which may result in impairment
charges that could materially affect the Company's financial statements in any
given year.
Impairment of long-lived assets, including definite-lived intangible assets The
Company reviews the carrying value of its long-lived assets, whether held for
use or disposal, including other amortizing intangible assets, when events and
circumstances warrant such a review under ASC Topic 360. In assessing long-lived
assets for an impairment loss, assets are grouped with other assets and
liabilities at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities. In assessing
long-lived assets for impairment, management generally considers individual
facilities to be the lowest level for which identifiable cash flows are largely
independent. A recoverability review is performed using the undiscounted cash
flows if there is a triggering event. If the undiscounted cash flow test for
recoverability identifies a possible impairment, management will perform a fair
value analysis. Management determines fair value under ASC Topic 820 using the
appropriate valuation technique of market, income or cost approach. If the
carrying value of a long-lived asset is considered impaired, an impairment
charge is recorded for the amount by which the carrying value of the long-lived
asset exceeds its fair value.
Management believes that the estimates of future cash flows and fair value
assumptions are reasonable; however, changes in assumptions underlying these
estimates could affect the valuations. Significant judgments and estimates used
by management when evaluating long-lived assets for impairment include (i) an
assessment as to whether an adverse event or circumstance has triggered the need
for an impairment review; (ii) undiscounted future cash flows generated by the
asset; and (iii) fair valuation of the asset. Events and conditions that could
result in impairment in the value of long-lived assets include changes in the
industries in which the Company operates, particularly the impact of a downturn
in the global economy, as well as competition and advances in technology,
adverse changes in the regulatory environment, or other factors leading to
reduction in expected long-term sales or profitability.
Goodwill and other indefinite-lived intangible assets During the fourth quarter
of each year, the Company qualitatively assesses its goodwill assigned to each
of its reporting units. This qualitative assessment evaluates various events and
circumstances, such as macroeconomic conditions, industry and market conditions,
cost factors, relevant events and financial trends, that may impact a reporting
unit's fair value. Using this qualitative assessment, the Company determines
whether it is more-likely-than-not the reporting unit's fair value exceeds its
carrying value. If it is determined that it is not more-likely-than-not the
reporting unit's fair value exceeds the carrying value, or upon consideration of
other factors, including recent acquisition, restructuring or disposal activity
or to refresh the fair values, the Company performs a quantitative goodwill
impairment analysis. In addition, the Company may test goodwill in between
annual test dates if an event occurs or circumstances change that could
more-likely-than-not reduce the fair value of a reporting unit below its
carrying value.
Similar to goodwill, the Company can elect to perform the impairment test for
indefinite-lived intangibles other than goodwill (primarily trade names) using a
qualitative analysis, considering similar factors as outlined in the goodwill
discussion in order to determine if it is more-likely-than-not that the fair
value of the trade names is less than the respective carrying values. If the
Company elects to perform or is required to perform a quantitative analysis, the
test consists of a comparison of the fair value of the indefinite-lived
intangible asset to the carrying value of the asset as of the impairment testing
date. The Company estimates the fair value of indefinite-lived intangibles using
the relief-from-royalty method, which it believes is an appropriate and widely
used valuation technique for such assets. The fair value derived from the
relief-from-royalty method is measured as the discounted cash flow savings
realized from owning such trade names and not being required to pay a royalty
for their use.
During the fourth quarter of 2021, the Company performed an analysis on each
reporting unit. Given the macroeconomic environment, the Company performed
quantitative goodwill impairment analyses for the majority of reporting units to
refresh their respective fair values. This requires the Company to make
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significant assumptions and estimates about the extent and timing of future cash
flows, discount rates and growth rates. The basis of this goodwill impairment
analysis is the Company's annual budget and long-range plan ("LRP"). The annual
budget and LRP includes a five-year projection of future cash flows based on
actual new products and customer commitments. Because the projections are
estimated over a significant future period of time, those estimates and
assumptions are subject to uncertainty. Further, the market valuation models and
other financial ratios used by the Company require certain assumptions and
estimates regarding the applicability of those models to the Company's facts and
circumstances.
The Company believes the assumptions and estimates used to determine the estimated fair value are reasonable. Different assumptions could materially affect the estimated fair value. The primary assumptions affecting the Company's 2021 goodwill quantitative impairment review are as follows:
•Discount rates: the Company used a range of 12.4% to 13.6% weighted average
cost of capital ("WACC") as the discount rates for future cash flows. The WACC
is intended to represent a rate of return that would be expected by a market
participant.
•Operating income margin: the Company used historical and expected operating
income margins, which may vary based on the projections of the reporting unit
being evaluated.
•Revenue growth rate: the Company used a global automotive market industry growth rate forecast adjusted to estimate its own market participation for product lines.
In addition to the above primary assumptions, the Company notes the following risks to volume and operating income assumptions that could have an impact on the discounted cash flow models: •The automotive industry is cyclical, and the Company's results of operations would be adversely affected by industry downturns. •The automotive industry is evolving, and if the Company does not respond appropriately, its results of operations would be adversely affected. •The Company is dependent on market segments that use its key products and would be affected by decreasing demand in those segments. •The Company is subject to risks related to international operations. Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter of 2021 indicated the Company's goodwill assigned to the respective reporting units was not impaired. Future changes in the judgments, assumptions and estimates from those used in acquisition-related valuations and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. Due to the Company's recent acquisitions, there is less headroom (the difference between the carrying value and the fair value) associated with several of the Company's reporting units. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect the Company's financial statements in any given year.
Refer to Note 12, "
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Product warranties 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. Costs of product
recalls, which may include the cost of the product being replaced as well as the
customer's cost of the recall, including labor to remove and replace the
recalled part, are accrued as part of the Company's warranty accrual at the time
an obligation becomes probable and can be reasonably estimated. Management
believes that the warranty accrual is appropriate; however, actual claims
incurred could differ from the original estimates, requiring adjustments to the
accrual:
Year Ended December 31,
(in millions) 2021 2020
Net sales $ 14,838 $ 10,165
Warranty provision $ 225 $ 105
Warranty provision as a percentage of net sales 1.5 % 1.0 %
The following table illustrates the sensitivity of a 25 basis-point change (as a
percentage of net sales) in the assumed warranty trend on the Company's accrued
warranty liability:
December 31,
(in millions) 2021 2020
25 basis point decrease (income)/expense
AtDecember 31, 2021 , the total accrued warranty liability was$236 million . The accrual is represented as$128 million in current liabilities and$108 million in non-current liabilities on the Consolidated Balance Sheets.
Refer to Note 13, "Product Warranty," to the Consolidated Financial Statements in Item 8 of this report for more information regarding product warranties.
Pension and other postretirement defined benefits The Company provides postretirement defined benefits to a number of its current and former employees. Costs associated with postretirement defined benefits include pension and postretirement health care expenses for employees, retirees and surviving spouses and dependents.
The Company's defined benefit pension and other postretirement plans are
accounted for in accordance with ASC Topic 715. The determination of the
Company's obligation and expense for its pension and other postretirement
employee benefits, such as retiree health care, is dependent on certain
assumptions used by actuaries in calculating such amounts. Certain assumptions,
including the expected long-term rate of return on plan assets, discount rate,
rates of increase in compensation and health care costs trends are described in
Note 18, "Retirement Benefit Plans," to the Consolidated Financial Statements in
Item 8 of this report. The effects of any modification to those assumptions, or
actual results that differ from assumptions used, are either recognized
immediately or amortized over future periods in accordance with GAAP.
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The primary assumptions affecting the Company's accounting for employee benefits
under ASC Topics 712 and 715 as of December 31, 2021 are as follows:
•Expected long-term rate of return on plan assets: The expected long-term rate
of return is used in the calculation of net periodic benefit cost. The required
use of the expected long-term rate of return on plan assets may result in
recognized returns that are greater or less than the actual returns on those
plan assets in any given year. Over time, however, the expected long-term rate
of return on plan assets is designed to approximate actual earned long-term
returns. The expected long-term rate of return for pension assets has been
determined based on various inputs, including historical returns for the
different asset classes held by the Company's trusts and its asset allocation,
as well as inputs from internal and external sources regarding expected capital
market return, inflation and other variables. The Company also considers the
impact of active management of the plans' invested assets. In determining its
pension expense for the year ended December 31, 2021 , the Company used long-term
rates of return on plan assets ranging from 1.5% to 7.7% outside of the U.S. and
5.8% in the U.S. Actual returns on
Actual returns on
Actual returns on German pension assets were 5.4% and 4.3% for the years ended
•Discount rate: The discount rate is used to calculate pension and other
postretirement employee benefit ("OPEB") obligations. In determining the
discount rate, the Company utilizes a full-yield approach in the estimation of
service and interest components by applying the specific spot rates along the
yield curve used in the determination of the benefit obligation to the relevant
projected cash flows. For its significant plans, the Company used discount rates
ranging from 0.91% to 3.50% to determine its pension and other benefit
obligations as of December 31, 2021 , including weighted average discount rates
of 2.73% in the U.S. , 1.97% outside of the U.S. (including 1.91% in the U.K. )
and 2.46% for U.S. other postretirement health care plans. The U.S. and U.K.
discount rates reflect the fact that the U.S. and U.K. pension plans have been
closed for new participants.
•Health care cost trend: For postretirement employee health care plan
accounting, the Company reviews external data and Company-specific historical
trends for health care cost to determine the health care cost trend rate
assumptions. In determining the projected benefit obligation for postretirement
employee health care plans as of December 31, 2021 , the Company used health care
cost trend rates of 6.25%, declining to an ultimate trend rate of 4.75% by the
year 2026.
While the Company believes that these assumptions are appropriate, significant
differences in actual experience or significant changes in these assumptions may
materially affect the Company's pension and OPEB and its future expense.
The sensitivity to a 25 basis-point change in the assumptions for discount rate
and expected return on assets related to 2022 pre-tax pension expense for
Company sponsored
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The following table illustrates the sensitivity to a change in discount rate for
Company sponsored U.S. and non-U.S. pension plans on its pension obligations:
Impact on Non-U.S.
(in millions) Impact on U.S. PBO PBO
25 basis point decrease in discount rate $ 4 $ 102
25 basis point increase in discount rate $ (4) $ (95)
The sensitivity to a 25 basis-point change in the discount rate assumption and
to the assumed health care cost trend related to the Company's OPEB obligation
and service and interest cost is expected to be negligible.
Refer to Note 18, "Retirement Benefit Plans," to the Consolidated Financial Statements in Item 8 of this report for more information regarding the Company's retirement benefit plans.
Restructuring Restructuring costs may occur when the Company takes action to exit or significantly curtail a part of its operations or implements a reorganization that affects the nature and focus of operations. A restructuring charge can consist of severance costs associated with reductions to the workforce, costs to terminate an operating lease or contract, professional fees and other costs incurred related to the implementation of restructuring activities. The Company generally records costs associated with voluntary separations at the time of employee acceptance. Costs for involuntary separation programs are recorded when management has approved the plan for separation, the employees are identified and aware of the benefits they are entitled to and it is unlikely that the plan will change significantly. When a plan of separation requires approval by or consultation with the relevant labor organization or government, the costs are recorded upon agreement. Costs associated with benefits that are contingent on the employee continuing to provide service are accrued over the required service period. Income taxes The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accounting for income taxes is complex, in part because the Company conducts business globally and, therefore, files income tax returns in numerous tax jurisdictions. Management judgment is required in determining the Company's worldwide provision for income taxes and recording the related assets and liabilities, including accruals for unrecognized tax benefits and assessing the need for valuation allowances. In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. In determining the need for a valuation allowance, the historical and projected financial performance of the operation recording the net deferred tax asset is considered along with any other pertinent information. Since future financial results may differ from previous estimates, periodic adjustments to the Company's valuation allowance may be necessary. The Company is subject to income taxes in theU.S. at the federal and state level and numerous non-U.S. jurisdictions. The determination of accruals for unrecognized tax benefits includes the application of complex tax laws in a multitude of jurisdictions across the Company's global operations. Management judgment is required in determining the accruals for unrecognized tax benefits. In the ordinary course of the Company's business, there are many transactions and calculations where the ultimate tax 53 -------------------------------------------------------------------------------- Table of Contents determination is less than certain. Accruals for unrecognized tax benefits are established when, despite the belief that tax positions are supportable, there remain certain positions that do not meet the minimum probability threshold, which is a tax position that is more-likely-than-not to be sustained upon examination by the applicable taxing authority. The Company has certainU.S. state income tax returns and certain non-U.S. income tax returns that are currently under various stages of audit by applicable tax authorities. AtDecember 31, 2021 , the Company had a liability for tax positions the Company estimates are not more-likely-than-not to be sustained based on the technical merits, which is included in Other non-current liabilities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. The Company records valuation allowances to reduce the carrying value of certain deferred tax assets to amounts that it expects are more likely than not to be realized. Existing deferred tax assets, net operating losses, and tax credits by jurisdiction and expectations of the ability to utilize these tax attributes are assessed through a review of past, current and estimated future taxable income and tax planning strategies. Estimates of future taxable income, including income generated from prudent and feasible tax planning strategies resulting from actual or planned business and operational developments, could change in the near term, perhaps materially, which may require the Company to consider any potential impact to the assessment of the recoverability of the related deferred tax asset. Such potential impact could be material to the Company's consolidated financial condition or results of operations for an individual reporting period. The Tax Cuts and Jobs Act of 2017 (the "Tax Act") that was signed into law inDecember 2017 constituted a major change to theU.S. tax system. The impact of the Tax Act on the Company is based on management's current interpretations of the Tax Act, recently issued regulations and related analysis. The Company's tax liability may be materially different based on regulatory developments or enacted changes to theU.S. tax law. In future periods, its effective tax rate could be subject to additional uncertainty as a result of regulatory or legislative developments related toU.S. tax law.
Refer to Note 7, "Income Taxes," to the Consolidated Financial Statements in Item 8 of this report for more information regarding income taxes.
New Accounting Pronouncements
Refer to Note 1, "Summary of Significant Accounting Policies," to the Consolidated Financial Statements in Item 8 of this report for more information regarding new applicable accounting pronouncements.
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