- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 1996
Commission file number: 1-12162
BORG-WARNER AUTOMOTIVE, 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.)
200 South Michigan Avenue, Chicago, Illinois 60604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
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 /x/ NO ----
On July 31, 1996 the registrant had 23,456,574 shares of Common Stock and
122,644 shares of Series I Non-Voting Common Stock outstanding.
- -------------------------------------------------------------------------------
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
SIX MONTHS ENDED JUNE 30, 1996
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Balance Sheets at
June 30, 1996 and December 31, 1995 . . . . . . . 3
Consolidated Statements of Income for the three
months ended June 30, 1996 and 1995 . . . . . . . 4
Consolidated Statements of Income for the six
months ended June 30, 1996 and 1995 . . . . . . . 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and 1995 . . . . . . . 6
Supplemental Notes to the Consolidated
Financial Statements. . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . 11
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . 18
Item 2. Changes in Securities . . . . . . . . . . . . . . 19
Item 3. Defaults Upon Senior Securities . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 19
Item 5. Other Information . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . 20
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
SIX MONTHS ENDED June 30, 1996
PART I.
ITEM 1.
A. Borg-Warner Automotive, Inc. and Consolidated Subsidiaries'
Financial Statements
The financial statements of Borg-Warner Automotive, Inc. and Consolidated
Subsidiaries ("Company") have been prepared in accordance with the
instructions to Form 10-Q under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The statements are unaudited but include all
adjustments, consisting only of recurring items, except as noted, which
the Company considers necessary for a fair presentation of the information
set forth herein. The results of operations for the six months ended June
30, 1996 are not necessarily indicative of the results to be expected for
the entire year. The following financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
<PAGE>
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
<TABLE>
<CAPTION> (Unaudited)
June 30, December 31,
1996 1995
---------- ----------
<S> <C> <C>
A S S E T S
Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 13.6 $ 5.1
Short-term securities . . . . . . . . . . . . . . . . 3.2 7.0
Receivables . . . . . . . . . . . . . . . . . . . . . 134.3 91.4
Inventories . . . . . . . . . . . . . . . . . . . . . 105.1 94.0
Prepayments . . . . . . . . . . . . . . . . . . . . . 11.6 10.0
---------- --------
Total current assets. . . . . . . . . . . . 267.8 207.5
Property, plant, and equipment at cost. . . . . . . . 880.5 927.8
Less accumulated depreciation . . . . . . . . . . . . 341.2 404.8
---------- --------
Net property, plant and equipment . . . . . 539.3 523.0
Investments and advances. . . . . . . . . . . . . . . 134.5 140.0
Goodwill. . . . . . . . . . . . . . . . . . . . . . . 547.6 313.0
Deferred income tax asset . . . . . . . . . . . . . . 40.5 40.8
Other noncurrent assets . . . . . . . . . . . . . . . 120.2 110.9
---------- --------
Total other assets. . . . . . . . . . . . . 842.8 604.7
---------- --------
$1,649.9 $1,335.2
============ ==========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable . . . . . . . . . . . . . . . . . . . . $ 45.4 $ 31.6
Accounts payable and accrued expenses . . . . . . . . 254.7 194.3
Income taxes payable. . . . . . . . . . . . . . . . . 30.4 26.6
---------- --------
Total current liabilities . . . . . . . . . 330.5 252.5
Long-term debt. . . . . . . . . . . . . . . . . . . . 313.0 103.1
Long-term retirement-related liabilities. . . . . . . 334.7 337.4
Other long-term liabilities . . . . . . . . . . . . . 51.8 42.2
---------- --------
Total long-term liabilities . . . . . . . . 386.5 379.6
Capital stock:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued . . . . . . . . -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued and outstanding
shares of 23,450,124 in 1996. . . . . . . . . 0.2 0.2
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; issued shares
of 2,520,000 in 1996 and outstanding shares
of 112,644 in 1996. . . . . . . . . . . . . . -- --
Capital in excess of par value. . . . . . . . . . . . 561.6 560.1
Retained earnings . . . . . . . . . . . . . . . . . . 61.1 34.1
Currency translation adjustment . . . . . . . . . . . 13.7 22.3
Minimum pension liability adjustment. . . . . . . . . (16.7) (16.7)
--------- ---------
Total stockholders' equity. . . . . . . . . 619.9 600.0
--------- ---------
$1,649.9 $1,335.2
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
1996 1995
-------- ---------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . $ 381.8 $ 356.0
Cost of sales . . . . . . . . . . . . . . . . . . . . 297.5 276.9
Depreciation . . . . . . . . . . . . . . . . . . . . . 17.5 18.1
Selling, general and administrative expenses. . . . . . 29.2 26.3
Minority interest . . . . . . . . . . . . . . . . . . . 0.5 0.6
Goodwill amortization . . . . . . . . . . . . . . . . . 2.8 2.3
Equity in affiliate earnings and other income . . . . . (2.8) (5.9)
-------- -------
Earnings before interest and finance
charges and income taxes . . . . . . . . . . 37.1 37.7
Interest expense and finance charges. . . . . . . . . . 3.5 3.6
-------- -------
Earnings before income taxes . . . . . . . . . 33.6 34.1
Provision for income taxes. . . . . . . . . . . . . . . 11.8 13.0
-------- -------
Net earnings. . . . . . . . . . . . . . . $ 21.8 $ 21.1
========= ========
Net earnings per share. . . . . . . . . . . . . . . . . $ 0.93 $ 0.90
========= ========
Average shares outstanding (thousands). . . . . . . . . 23,519 23,496
========= =========
Dividends declared per share. . . . . . . . . . . . . . $ 0.15 $ 0.15
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1996 1995
------ ------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . $ 730.7 $ 683.8
Cost of sales. . . . . . . . . . . . . . . . . . . . . . 575.0 530.0
Depreciation . . . . . . . . . . . . . . . . . . . . . . 35.9 35.3
Selling, general and administrative expenses. . . . . . 60.0 52.7
Minority interest . . . . . . . . . . . . . . . . . . . 1.2 1.0
Goodwill amortization . . . . . . . . . . . . . . . . . 5.4 4.7
Equity in affiliate earnings and other income . . . . . (6.9) (10.1)
------ ------
Earnings before interest and finance
charges and income taxes . . . . . . . . . . 60.1 70.2
Interest expense and finance charges. . . . . . . . . . 7.0 7.1
------- -------
Earnings before income taxes . . . . . . . . . 53.1 63.1
Provision for income taxes. . . . . . . . . . . . . . . 19.0 24.5
------- -------
Net earnings. . . . . . . . . . . . . . . $ 34.1 $ 38.6
========= ==========
Net earnings per share. . . . . . . . . . . . . . . . . $ 1.45 $ 1.65
========= ==========
Average shares outstanding (thousands). . . . . . . . . 23,519 23,461
========= ==========
Dividends declared per share. . . . . . . . . . . . . . $ 0.30 $ 0.30
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------
1996 1995
------- -------
<S> <C> <C>
OPERAING
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . .$ 34.1 $ 38.6
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Non-cash charges (credits) to operations:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 35.9 35.3
Goodwill amortization. . . . . . . . . . . . . . . . . . . . 5.4 4.7
Other, principally equity in affiliate earnings. . . . . . . (7.5) (10.5)
Changes in assets and liabilities:
Increase in receivables . . . . .. . . . . . . . . . . . . . (22.8) (6.5)
Increase in inventories . . . . . . . . . . . . . . . . . (3.9) (5.1)
(Increase)decrease in prepayment . . . . . . . . . . . . . . 7.2 (4.9)
Increase(decrease)in accounts payable and accrued
expenses . . . . . . . . . . . . . . . . . . . . . . 45.8 (32.7)
Increase in income taxes payable . . . . . . . . . . . . . . 3.9 2.1
Net change in other long-term assets and liabilities . . . . (0.4) (7.3)
------- -------
Net cash provided by operating activities. . . . . .. 97.7 13.7
INVESTING
Capital expenditures . . . . . . . . . . . . . . . . . . . . . (32.0) (37.6)
Investment in affiliates . . . . . . . . . . . . . . . . . . . . 0.7 (0.2)
Payments for business acquired . . . . . . . . . . . . . . . . .(287.8) 32.9)
Proceeds from other assets . . . . . . . . . . . . . . . . . . . 5.9 7.3
-------- ------
Net cash used for investing activities . . . . . . . .(313.2) (63.4)
FINANCING
Net increase in notes payable. . . . . . . . . . . . . . . . . . 14.5 3.0
Additions to long-term debt. . . . . . . . . . . . . . . . . . . 246.6 53.2
Reduction in long-term debt . . . . . . . . . . . . . . . . . . (34.9) --
Proceeds from options exercised. . . . . . . . . . . . . . . . . 1.5 1.7
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . (7.1) (6.9)
Reissuance of treasury shares. . . . . . . . . . . . . . . . . . -- 0.6
-------- -----
Net cash provided by (used for) financing activities . . . . . . 220.6 51.6
Effect of exchange rate changes on cash and cash
equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . (0.4) --
-------- ------
Net increase in cash and cash equivalents. . . . . . . . . . . . 4.7 1.9
Cash and cash equivalents at beginning of year . . . . . . . . . 12.1 14.9
-------- ------
Cash and cash equivalents at end of period . . . . . . . . . . .$ 16.8 $ 16.8
====== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid during the period for:
Interest expense . . . . . . . . . . . . . . . . . . . . . . .$ 6.3 $ 7.8
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 15.6 19.8
</TABLE>
See accompanying notes to financial statements
<PAGE>
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
Supplemental Notes to the Consolidated Financial Statements
(Unaudited)
(1) Research and development costs charged to expense for the three and
six months ended June 30, 1996 were $11.6 million and $23.3 million,
respectively. Costs charged to expense for the three and six months
ended June 30, 1995 were $10.3 million and $18.7 million, respectively.
(2) Inventories consisted of the following (millions of dollars):
June 30, December 31,
1996 1995
--------- ------------
Raw materials. . . . . . . . . . . . . . . $ 51.9 $48.6
Work in progress . . . . . . . . . . . . . 38.6 31.6
Finished goods . . . . . . . . . . . . . . 14.6 13.8
--------- ------------
Total inventories. . . . . . . . . . . . $105.1 $94.0
========= ============
(3) The Company has a 50% interest in NSK-Warner K.K. ("NSK-Warner), a
joint venture based in Japan that manufactures friction products. The
Company's share of the earnings or losses reported by NSK-Warner is
accounted for using the equity method of accounting. NSK-Warner has a
fiscal year-end of March 31.
The Company's investment in NSK-Warner was $123.5 million at June
30, 1996 and $128.9 million at December 31, 1995.
Following are summarized financial data for NSK-Warner, translated
using the ending or periodic rates as of and for the six months ended June
30, 1996 and 1995. Balance sheet data is presented as of June 30, 1996
and March 31, 1996 and statement of income data is presented for the
three months ended June 30, 1996 and 1995. The Company's results include
its share of NSK-Warner's results for the three and six months ended May
31, 1996 and 1995.
<PAGE>
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
-------- ---------
(in millions)
<S> <C> <C>
BALANCE SHEET
Current assets . . . . . . . . . . . . . . . . . . .$137.2 $ 156.5
Noncurrent assets. . . . . . . . . . . . . . . . . . 145.5 152.0
Current liabilities (excluding debt) . . . . . . . . 86.4 85.8
Noncurrent liabilities (excluding debt). . . . . . . 11.0 11.1
Total debt . . . . . . . . . . . . . . . . . . . . . 18.6 22.7
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------
1996 1995
-------- ---------
(in millions)
<S> <C> <C>
STATEMENT OF INCOME
Net sales. . . . . . . . . . . . . . . . . . . . . . $ 40.2 $ 47.6
Gross profit . . . . . . . . . . . . . . . . . . . . 10.0 12.9
Net income . . . . . . . . . . . . . . . . . . . . . 3.6 5.1
</TABLE>
(4) The Company's provisions for income taxes for the three and six months
ended June 30, 1996 and 1995 are based upon estimated annual tax rates
for the year applied to federal, state and foreign income. The
effective rate differed from the U.S. statutory rate primarily due to
a) state income taxes as well as b)foreign rates which differ from those
in the U.S. and c) realization of certain business tax credits, including
foreign tax credits and, for 1995, research and development credits.
(5) Following is a summary of notes payable and long-term debt:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------- -----------------
Current Long-Term Current Long-Term
------- -------- ------- --------
(millions of dollars)
<S> <C> <C> <C> <C>
DEBT
Bank borrowings and other . . . . . . . . .$ 25.3 $ 244.7 $ 24.5 $ 19.5
Bank term loans due through 2001(at
an average rate of 5.4%; and 5.2% at
June 1996 and 5.6% at Dec. 1995). . . . . . 20.0 62.6 6.9 77.7
Capital lease liability . . . . . . . . . . 0.1 5.7 0.2 5.9
------- -------- ------- ------
Total notes payable and
long-term debt $ 45.4 $ 313.0 $ 31.6 $ 103.1
======= ======= ======== =======
</TABLE>
At June 30, 1996, the Company utilized $240 million of a $300
million revolving credit facility, which was totally unused at
December 31, 1995. This facility remains fully available through
December 31, 1999.
Borrowings under the credit agreement are guaranteed by certain of
the Company's subsidiaries. The credit agreement contains numerous
financial and operating covenants including, among others, covenants
requiring the Company to maintain certain financial ratios and
restricting its ability to incur additional foreign indebtedness.
Bank term loans totaling $82.6 million have maturities of $20.0
million in 1997, and $30.0 million in 1998, and $6.5 million in 1999,
and $13.1 million in 2000, and $13.0 million in 2001.
(6) The Company and certain of its current and former direct and
indirect corporate predecessors, subsidiaries and divisions have been
identified by the U.S. Environmental Protection Agency and certain
state environmental agencies and private parties as potentially
responsible parties ("PRPs") at 28 hazardous waste disposal sites
under the Comprehensive Environmental Response, Compensation and
Liability Act. ("Superfund") and equivalent state laws and, as such, may
be liable for the cost of cleanup and other remedial activities at these
sites. Responsibility for cleanup and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation
formula. The means of determining allocation among PRPs is generally set
forth in a written agreement entered into by the PRPs at a particular
site. An allocated share assigned to a PRP is often based on the
PRP's volumetric contribution of waste to a site and the characteristics
of the waste material.
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 costs apportioned to them; currently available information
from PRPs and/or federal or state environmental agencies concerning the
scope of contamination and estimated remediation costs; estimated legal
fees and other factors, the Company has established a reserve in its
financial statements for indicated environmental liabilities with a
balance at June 30, 1996 of approximately $11 million. The Company expects
this amount to be expended over the next three to five years.
The Company believes that none of these matters, individually or in
the aggregate, will have a material adverse effect on its financial
position or future operating results, generally either because estimates
of the maximum potential liability at a site are not large or because
liability will be shared with other PRPs, although no assurance can be
given with respect to the ultimate outcome of any such matter.
As of June 30, 1996, the Company had sold $100 million of receivables under
an $100 million Receivables Transfer Agreement for face value without
recourse. The Company had sold receivables under facilities aggregating
$85.6 million at December 31, 1995.
(7) In January 1996, the Company announced that its North American manual
transmission business would be offered for sale and that it had retained
Lehman Brothers to assist in the sale process. This decision resulted
from the recognition that all major North American OEMs have allied
suppliers for their significant rear-wheel drive manual transmission
applications, leaving only one niche open to the Company in North
America. Any gain or loss on the sale is dependent on not only the
purchase price agreed upon by the parties but also an agrement as to
which assets/liabilities will be included in the transaction. Subsequent
to June 30, 1996, the Company received proposals from interested parties.
The Company is currently evaluating the structure of these proposals.
Despite the announcement, the Company plans to continue to implement its
strategy to capitalize on manual transmission opportunities in
developing markets .such as China and India. For the quarter and six
months ended June 30, 1996, this business lost money as a result of
reduced volumes. Sales for the three and six months ended June 30, 1996
were $30.2 million and $58.6 million, respectively as compared with
$48.8 million and $93.5 million for the comparable 1995 periods.
(8) On June 17, 1996, the Company purchased the operations and substantially
all of the operating assets of three of Coltec Industries' automotive OEM
businesses: Holley Automotive, Coltec Automotive and Performance Friction
Products. Under the terms of the agreement, the Company paid $283
million in cash for the businesses. This acquisition was financed
under the Company's revolving credit facility. These businesses
reported combined sales of $255 million in 1995. Results for the period
subsequent to the purchase date, reflecting $9 million in sales, are
included in consolidated results.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Borg-Warner Automotive, Inc. (the "Company") operates as a major
supplier to automotive OEMs in the North American, European and Asian
markets offering a wide variety of engineered components, primarily
related to drivetrain applications such as automatic transmission
components, four-wheel drive transfer cases, automotive chain, engine
timing components and systems, and sensors, valves and other engine and
fuel system control devices. The Company also manufactures manual
transmissions, but recently announced that this business was being
offered for sale.
The following discussion covers the results of operations for the three
and six months ended June 30, 1996 and 1995 and financial condition as
of June 30, 1996 and December 31, 1995.
RESULTS OF OPERATIONS
The Company's products fall into four categories: Powertrain Systems,
Automatic Transmission Systems, Morse TEC (Chain Systems) and Air/Fluid
Systems. Net sales by product grouping for the three and six months
ended June 30, 1996 and 1995 are as follows (in millions of dollars):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
1996 1995 1996 1995
----- ------ ------ ------
<S> <C> <C> <C> <C>
Powertrain Systems $146.8 $151.2 $285.9 $291.6
Automatic Transmission Systems 128.9 120.9 248.2 219.5
Morse TEC 70.7 67.5 136.7 137.9
Air/Fluid Systems 44.6 25.0 78.4 53.0
---- ------ ------ ------
391.0 364.6 749.2 702.0
Intergroup eliminations (9.2) (8.6) (18.5) (18.2)
------ ------ ------ ------
Net sales $381.8 $356.0 $730.7 $683.8
======== ======== ======= =======
</TABLE>
Sales for the quarter ended June 30, 1996 were up 7% from the same
period in the prior year. Each group, except Powertrain Systems,
increased sales. In part, the acquisitions of the Precision Forged
Products Division (PFPD) at the end of April, 1995, the SUM business at
the end of 1995 and the Coltec business in June, 1996 all contributed to
the sales gain. PFPD contributed $6.4 million in sales while SUM and
Coltec contributed $4.8 million and $8.9 million, respectively. Strong
sales of 4WD transfer cases in North America and Asia, new engine timing
systems on many popular Ford vehicles, transmission solenoids in North
America and air control valves in both North America and Europe were
also responsible for the increase in sales for the quarter. The Company
benefited because of its presence on vehicles, such as light trucks,
which have been growing at a rate in excess of the overall market.
Powertrain Systems revenue growth has been offset by an $18.6 million
decrease in sales versus 1995 in the manual transmission business due to
the loss of the General Motors business in the summer of 1995. The
manual transmission business had total sales of $30.2 million for the
quarter ended June 30, 1996 and $48.8 million for the quarter ended June
30, 1995.
Sales increased 7% in the first six months of 1996 to $730.7 million
from $683.8 million in the first six months of 1995. The Automatic
Transmission Systems and Air/Fluid Systems groups both reported
increases in sales; while the Powertrain Systems and Morse TEC groups
reported slightly lower sales results. Powertrain Systems reported a
decrease of 2% or $5.7 million due to the loss of the GM S-Truck manual
transmission business mentioned earlier as well as a decline in sales of
sporty cars which utilize manual transmissions. This decline was
partially offset by volume increases in its domestic transfer case
applications, particularly in the light truck area. Morse TEC sales
declined slightly due to the first quarter declines. The Japanese
market was off and a strike at General Motors in March reduced volume.
Air/Fluid sales increased 78% due to volume increases of various
solenoids and valves particularly in Chrysler applications as well as
$8.6 million and $8.9 million related to the newly acquired SUM business
and Coltec business, respectively. Excluding acquisitions, Air/Fluid
Systems sales increased 15%. Increased sales of 13% at the Automatic
Transmission Systems group were related to volume increases by the
Company's OEM customers as well as increased content in certain
automatic transmissions tempered by the first quarter General Motors
strike.
Adjusted for the non-recurring events, the effect of the manual
transmission business decline and the impact of acquisitions, sales
increased 7.4% against North American production which was down
approximately 2.3%, a European market which was stagnant and a Japanese
market which declined by approximately 3.8%. The increased volume
translated into a gross profit increase of $1.9 million to $155.7
million in the first six months of 1996.
The Company's income taxes are based upon estimated annual tax rates for
the year. In the first six months of 1996, the Company realized certain
tax credits related to its foreign operations. These realized credits
resulted in the effective income tax rate for the first six months of
1996 being lower than the standard federal and state rates. The
effective income tax rate for the second quarter of 1996 exceeded the
U.S. statutory rate due to state income taxes as well as foreign rates
which differ from those in the U.S.
The Company has increased its spending on research and development by
$1.3 million and $4.6 million for the three and six months ended June
30, 1996, respectively, to maintain and expand its technological
expertise in both product and process. As a percentage of sales,
research and development continued at about 3%.
NSK-Warner's earnings for the quarter ended June 30, 1996 declined 54%,
or $2.9 million, from the same period in the prior year. The earnings
decline resulted from decreasing sales volume and weakening of the yen.
The relative strength of the dollar has resulted in lower dollar
earnings for similar earnings levels as measured in yen. For the
Company's six months ended June 30, 1996 and 1995, the Company's portion
of NSK-Warner's earnings were $6.6 million and $10.2 million,
respectively. The earnings decline resulted from the same factors as
noted previously.
Earnings for the quarter ended June 30, 1996 increased slightly
compared to the same period in the prior year. For the quarter ended
June 30, 1996 and 1995, the Company reported net earnings of $21.8
million and $21.1 million, respectively. This was the result of the
gain in gross profit as well as a lower tax rate, offset by the
increases in goodwill amortization, interest brought about by the Coltec
acquisition and lower NSK-Warner earnings.
For the first six months of 1996, the Company reported a decrease in net
earnings of $4.5 million from the 1995 figure of $38.6 million. The
decline can be primarily attributed to the General Motors strike, loss
of manual transmission business and lower earnings from the NSK-Warner
joint venture.
FINANCIAL CONDITION AND LIQUIDITY
The addition of the former Coltec business accounted for the majority of
the changes in the June 30, 1996 consolidated balance sheet as compared
to December 31, 1995. Working capital decreased $17.7 million at June
30, 1996 from December 31, 1995. The majority of the working capital
decrease was related to an increase in accounts payable and accrued
expenses which is primarily related to the Company's efforts to reduce
working capital. The Coltec acquisition accounted for a slight increase
in working capital. Property, plant and equipment at cost and the
related accumulated depreciation declined due to the write-off of fully
depreciated assets acquired in the 1987 leveraged buyout. Investments
and advances declined slightly despite current year earnings because of
dividends and the impact of the change in currency rates on the
Company's Japanese joint venture. Goodwill increased $238.4 million as
a result of the Coltec acquisition.
For the six months ended June 30, 1996, $97.7 million of cash was
provided by operations principally as a result of earnings, non-cash
expenses and a decrease in working capital, consisting primarily of an
increase in accounts payable and accrued expenses, offset by an in
increase accounts receivable. Goodwill amortization increased in the
second quarter of 1996 compared to 1995 as a result of the Coltec
acquisition. Nine days of goodwill amortization related to the Coltec
acquisition were included in the period ending June 30, 1996. A
composite life of 30 years was assumed. Final amortization may differ
depending on the final allocation of the purchase price. Also
contributing to the increased goodwill amortization was the amortization
of goodwill related to the SUM and PFPD acquisitions. Capital spending
was lower in the second quarter of 1996 compared to 1995 as the Company
was involved in a greater number of major projects at the beginning of
1995. The Company anticipates that capital spending for full-year 1996
will be slightly higher than full-year 1995 levels as a result of
increased spending on major projects and the Coltec acquisition.
The acquisition of the operations and substantially all of the operating
assets of three of Coltec Industries' automotive OEM businesses: Holley
Automotive, Coltec Automotive and Performance Friction Products
accounted for an outflow of $287.8 million. The Company paid $283
million in cash for the businesses and assumed certain liabilities for
Coltec. This acquisition was financed by the Company's utilization of
$260 million of the $300 million revolving credit facility and $23
million of borrowings under various money market facilities. Results
for the period subsequent to the purchase date, reflecting $9 million in
sales, are included in consolidated results.
The Company believes that working capital will continue to be reduced
for the remainder of 1996 and that the combination of cash from its
operations and available credit facilities will be sufficient to satisfy
cash needs for the remainder of 1996.
OTHER
In July, 1996, a secondary offering of 3.25 million shares of the
Company's common stock was completed. An additional 487,800 shares of
common stock was sold to the underwriters in August, 1996 upon exercise
of the greenshoe option. The shares sold were owned by certain
affiliates of Merrill Lynch Capital Partners, Inc. ("MLCP") who
participated in the 1987 leverage buyout of Borg-Warner Corporation.
Upon completion of the offerings, certain affiliates of MLCP control
approximately 23% of the voting power of the Company. The Company did
not receive any proceeds from the offering.
On June 17, 1996, the Company purchased the operations and substantially
all of the operating assets of three of Coltec Industries' automotive OEM
businesses: Holley Automotive, Coltec Automotive and Performance
Friction Products. Under the terms of the agreement, the Company paid
$283 million in cash for the businesses. This acquisition was financed
under the Company's revolving credit facility. These businesses reported
combined sales of $255 million in 1995. Results for the period
subsequent to the purchase date, reflecting $9 million in sales, are
included in consolidated results.
In January 1996, the Company announced that its North American manual
transmission business would be offered for sale and that it had retained
Lehman Brothers to assist in the sale process. This decision
resulted from the recognition that all major North American OEMs have
allied suppliers for their significant rear-wheel drive manual
transmission applications, leaving only one niche open to the Company in
North America. The manual transmission business had a nominal
investment at June 30, 1996 of $55 million, including $17 million of
working capital. This amount does not include any retirement related
liabilities. The business lost money in 1995, on an operating basis, as
a result of declining volumes, due both to the loss of the GM truck
business in the third quarter 1995 and lower volume in the Company's only
remaining niche - sporty and performance cars. The sales decline
continued in 1996. For the quarter and the six months ended June 30,
1996, sales were $30.2 million and $58.6 million, respectively, as
compared with $48.8 million and $93.5 million for the comparable 1995
periods. This business lost money on an operating basis for the three
and six months ended June 30, 1996. The swing in operating results for
the manual transmission business resulted in a reduction in earnings of
$.12 per share for the second quarter and $.23 per share year-to-date.
While the sale process is continuing, the Company expects to continue to
report operating losses for such business. Any gain or loss on the sale
is dependent on not only the purchase price agreed upon by the parties
but also an agreement as to which assets/liabilities will be included in
the transaction. The Company is currently evaluating proposals from
interested parties. Despite the announcement, the Company plans to
continue to implement its strategy to capitalize on manual transmission
opportunities in developing markets such as China and India.
As discussed more fully in Note 6 of the Supplemental Notes to the
Consolidated Financial Statements, various claims and suits arising in
the ordinary course of business and seeking money damages have been
filed against the Company. In each of these cases, the Company believes
that it has a defendable position or has made adequate provisions to
protect the Company from material losses. The Company believes that it
has established adequate provisions for litigation liabilities in its
financial statements in accordance with generally accepted accounting
principles. These provisions include both legal fees and possible
outcomes of legal proceedings.
In connection with the Spin-Off, the Company and BW-Security entered
into a Distribution and Indemnity Agreement which provided for, among
other matters, certain cross-indemnities designed principally to place
financial responsibility for the liabilities of businesses conducted by
BW-Security and its subsidiaries with BW-Security and financial
responsibility for liabilities of the Company or related to its
automotive businesses with the Company. The Company has been advised
that BW-Security believes that the Company is responsible for certain
liabilities relating to environmental matters retained by BW-Security at
the time of the Spin-Off. BW-Security has requested indemnification
from the Company for past costs of approximately $1.6 million and for
future costs related to these environmental matters. At the time of the
Spin-Off, BW-Security maintained a letter of credit for approximately $9
million with respect to the principal portion of such environmental
matters. Although there can be no assurance, based upon information
currently available to the Company, the Company does not believe that it
is required to indemnify BW-Security under the Distribution and
Indemnity Agreement with respect to such liabilities. In addition, the
Company does not currently have information sufficient to determine what
its liability would be if it is ultimately determined that it is
required to indemnify BW-Security with respect to such liabilities.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position
or future operating results, although no assurance can be given with
respect to the ultimate outcome of any such proceedings.
In July, the Company declared a $0.15 per share dividend to be paid on
August 15, 1996 to shareholders of record on August 1, 1996.
<PAGE>
PART II
Item 1.LEGAL PROCEEDINGS
The Company is presently, and is from time to time, subject to claims
and suits arising in the ordinary course of its business. In certain
such actions, plaintiffs request punitive or other damages that may not
be covered by insurance. The Company believes that it has established
adequate reserves for litigation liabilities in its financial statements
in accordance with generally accepted accounting principles. These
provisions include both legal fees and possible outcomes of legal
proceedings.
In connection with the Spin-Off, the Company and BW-Security entered
into a Distribution and Indemnity Agreement which provided for, among
other matters, certain cross-indemnities designed principally to place
financial responsibility for the liabilities of businesses conducted by
BW-Security and its subsidiaries with BW-Security and financial
responsibility for liabilities of the Company or related to its
automotive businesses with the Company. The Company has been advised
that BW-Security at the time of the Spin-Off. BW-Security has requested
indemnification from the Company for past costs of approximately $1.6
million and for future costs related to these environmental matters. At
the time of the Spin-Off, BW-Security maintained a letter of credit for
approximately $9 million with respect to the principal portion of such
environmental matters. Although there can be no assurance, based upon
information currently available to the Company, the Company does not
believe that it is required to indemnify BW-Security under the
Distribution and Indemnity Agreement with respect to such liabilities.
In addition, the Company does not currently have information sufficient
to determine what its liability would be if it is ultimately determined
that it is required to indemnify BW-Security with respect to such
liabilities.
Centaur Insurance Company ("Centaur"), Borg-Warner Security's ("BW-Security")
discontinued property and casualty insurance subsidiary, ceased writing insu-
rance in 1984 and has been operating under rehabilitation since September
1987. Rehabilitation is a process supervised by the Illinois Director of
Insurance to attempt to compromise liabilities at an aggregate level that is
not in excess of the subsidiary's assets. In the rehabilitation, Centaur's
assets are currently being used to satisfy claim liabilities under direct
insurance policies written by Centaur. Any remaining assets will be applied to
Centaur's obligations to other insurance companies under reinsurance
contracts. The foregoing has resulted in several lawsuits seeking
substantial dollar amounts being filed against BW-Security, and in some
cases the Company, for recovery of alleged damages from the failure of
Centaur to satisfy its reinsurance obligations. All of these lawsuits,
except one to which the Company is not currently a party, have been
settled. The defense of this litigation is being managed by BW-Security
and the Company is indemnified by BW-Security for any losses or expenses
arising out of the litigation.
It is the opinion of the Company that the various asserted claims and
litigation in which the Company is currently involved will not
materially affect its financial position or future operating results,
although no assurance can be given with respect to the ultimate outcome
for any such claim or litigation.
Item 2. CHANGES IN SECURITIES
Inapplicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable.
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
Item 5. OTHER INFORMATION
Inapplicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Fourth Amendment to Receivables Transfer
Agreement dated as of January 28, 1994
11.0 Computation of earnings
27.0 Financial data schedule
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the period.<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BORG-WARNER AUTOMOTIVE, INC.
(Registrant)
By /s/ William C. Cline
William C. Cline
Vice President and Controller
(Principal Accounting Officer)
Date: August 13, 1996
June 21, 1996
BWA Receivables Corporation
c/o Borg-Warner Automotive, Inc.
200 South Michigan Avenue
Chicago, Illinois 60604
Attention: Vice President and Treasurer
Re: Fourth Amendment to Receivables Transfer Agreement
Dated As Of January 28, 1994 (This "Amendment")
-------------------------------------------------------------------
Ladies and Gentlemen:
Reference is hereby made to that certain Receivables Transfer Agreement (as
heretofore amended, the "Transfer Agreement"), dated as of January 28, 1994,
among the banks which are or may become a party thereto, (the "Banks"), Windmill
Funding Corporation ("Windmill"), ABN AMRO Bank N.V., as provider of the program
letter of credit (the "Program LOC Provider" and, collectively with the Banks
and WINDMILL, the "Transferees"), ABN AMRO Bank N.V., as agent (the "Agent"),
and BWA Receivables Corporation (the "Transferor"). Terms used herein and not
otherwise defined herein which are defined in the Transfer Agreement or the
other Transaction Documents (as defined in the Transfer Agreement) shall have
the same meaning herein as defined therein. The Transferees and the Agent
hereby agree to certain revisions in the Transfer Agreement as set forth herein.
1. Accordingly, subject to the satisfaction of the conditions in Section
3 of this Amendment, the Transfer Agreement, effective as of the date hereof
(the "Effective Date"), is hereby amended as follows:
(a) The amount "Eighty Six Million Dollars ($86,000,000)" in the
definition of "Aggregate Commitment" in Section 1.1 of the Transfer Agreement is
hereby deleted and replaced with the amount "One Hundred Two Million Dollars
($102,000,000)."
(b) The amount "Seventy Seven Million Four Hundred Thousand Dollars
($77,400,000)" in the definition of "Aggregate Bank Commitment" in Section 1.1
of the Transfer Agreement is hereby deleted and replaced with the amount "Ninety
One Million Eight Hundred Thousand Dollars ($91,800,000)."
(c) The amount "Eight Million Six Hundred Thousand Dollars
($8,600,000)" in the definition of "Program LOC Provider Commitment" in Section
1.1 of the Transfer Agreement is hereby deleted and replaced with the amount
"Ten Million Two Hundred Thousand Dollars ($10,200,000)."
<PAGE>
(d) The amount "Fifty Five Million Dollars ($55,000,000)" in clause
(a) of the definition of Approved Obligor Limit in Section 1.1 of the Transfer
Agreement is hereby deleted and replaced with the amount "Sixty Five Million
Dollars ($65,000,000)."
(e) Section 2.13 and Section 7.1(s) of the Transfer Agreement are
both hereby deleted and replaced with the words "(intentionally omitted)", and
all other references in the Transfer Agreement and all other Transaction
Documents to the "Maintenance Account" and funds or other items therein are
hereby deleted. It is the intention of this Amendment that, from and after the
Effective Date, neither the Transferor nor any other Person shall have any
obligation to maintain a Maintenance Account or any funds or other items
therein.
(f) In connection with eliminating the Maintenance Account, Section
5.2 (o) of the Transfer Agreement is hereby revised in its entirety to read as
follows:
(o) New Worth. The Transferor shall, at all times, have a
positive tangible net worth determined in accordance with GAAP.
2. The Transferor represents and warrants to the Agent and to each
Transferee that:
(a) it is in full compliance with all of the material terms,
conditions and all other provisions of this Amendment, the Transfer Agreement
and each of the other Transaction Documents in each case as of the Effective
Date; and
(b) its representations and warranties contained in this Amendment,
the Transfer Agreement and the other Transaction Documents are true and correct
in all material respects, in each case as though made on and as of the Effective
Date, except to the extent such representations and warranties relate solely to
an earlier date (and then as of such earlier date); and
(c) both before and after giving effect to this Amendment, no
Termination Event nor any Potential Termination Event has occurred and is
continuing or would result from the execution and delivery of this Amendment or
any other document arising in connection with or pursuant to this Amendment; and
(d) this Amendment has been fully authorized, executed and delivered
on its behalf, and each of the Transfer Agreement and each of the other
Transaction Documents to which it is a party and this Amendment constitutes its
legal, valid and binding obligation enforceable against it in accordance with
the terms hereof or thereof.
3. Section 1 of this Amendment shall become effective only once all of
the pre-conditions set forth below in this Section 3 have been satisfied:
(a) the Agent has received a written statement from each Rating
Agency stating that the rating of WINDMILL's commercial paper notes will not be
downgraded, withdrawn or suspended as a result hereof; and
(b) the Agent has received confirmation that the Program LOC has been
amended in a manner consistent with this Amendment: and
(c) the Agent has received, in form and substance satisfactory to the
Agent, all documents, certificates and opinions as the Agent may reasonably
request and all other matters incident to the execution hereof are satisfactory
to the Agent.
4. The Transfer Agreement, as amended and supplemented hereby or as
contemplated herein, and all rights and powers created thereby and thereunder or
under the other Transaction Documents and all other documents executed in
connection therewith, are in all respects ratified and confirmed. From and
after the Effective Date, the Transfer Agreement shall be amended and
supplemented as herein provided, and, except as so amended and supplemented, the
Transfer Agreement, each of the other Transaction Documents and all other
documents executed in connection therewith shall remain in full force and
effect.
5. This Amendment may be executed in two or more counterparts, each of
which shall constitute an original but both or all of which, when taken
together, shall constitute but one instrument.
Please signify your agreement and acceptance of the foregoing by executing
this Amendment in the space provided below.
Very truly yours,
ABN AMRO BANK N.V., as the Agent
ROBERT C. SMOLKA
By----------------------------------------------
ROBERT C. SMOLKA
Title-------------------------------------------
Group Vice President
MARY C. CASEY
By----------------------------------------------
MARY C. CASEY
Title-------------------------------------------
Vice President
Accepted and Agreed to:
BWA RECEIVABLES CORPORATION
ROBIN J. ADAMS
By----------------------------------------------
ROBIN J. ADAMS
Title-------------------------------------------
Vice President and Treasurer
Consented and Agreed to:
WINDMILL FUNDING CORPORATION
PAUL E. GIPSON
By-----------------------------------------------
PAUL E. GIPSON
Title--------------------------------------------
Vice President
ABN AMRO BANK N.V., as the Program LOC Provider
ROBERT C. SMOLKA
By-----------------------------------------------
ROBERT C. SMOLKA
Title--------------------------------------------
Group Vice President
MARY C. CASEY
By-----------------------------------------------
MARY C. CASEY
Title--------------------------------------------
Vice President
<PAGE>
ABN AMRO BANK N.V., as the sole Bank
ROBERT C. SMOLKA
By-----------------------------------------------
ROBERT C. SMOLKA
Title--------------------------------------------
Group Vice President
MARY C. CASEY
By-----------------------------------------------
MARY C. CASEY
Title---------------------------------------------
Vice President
EXHIBIT 11
BORG WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(Thousands)
Three Months Ended
June 30,
1996 1995
Average shares outstanding.........23,546 23,253
Stock equivalents.....................264 243
Shares used for computation of
per share earnings (a)..........23,810 23,496
Six Months Ended
June 30,
1996 1995
Average shares outstanding.........23,519 23,208
Stock equivalents.....................254 253
Shares used for computation of
per share earnings (a)..........23,773 23,461
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition as of June 30, 1996
(unaudited) and the Condensed Consolidated Statement of Income for the Three
Months Ended June 30, 1996 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 13,600
<SECURITIES> 3,200
<RECEIVABLES> 134,300
<ALLOWANCES> 0
<INVENTORY> 105,100
<CURRENT-ASSETS> 267,800
<PP&E> 880,500
<DEPRECIATION> 341,200
<TOTAL-ASSETS> 1,649,900
<CURRENT-LIABILITIES> 330,500
<BONDS> 313,000
0
0
<COMMON> 200
<OTHER-SE> 619,900
<TOTAL-LIABILITY-AND-EQUITY> 1,649,900
<SALES> 381,800
<TOTAL-REVENUES> 381,800
<CGS> 297,500
<TOTAL-COSTS> 297,500
<OTHER-EXPENSES> 47,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,500
<INCOME-PRETAX> 33,600
<INCOME-TAX> 11,800
<INCOME-CONTINUING> 21,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,800
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
</TABLE>
