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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 COMMISSION FILE NUMBER: 1-12162
------------------------
BORG-WARNER AUTOMOTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-3404508
(State of Incorporation) (I.R.S. Employer Identification No.)
</TABLE>
200 South Michigan Avenue
Chicago, Illinois 60604
(312) 322-8500
(Address and telephone number of principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------------
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Common Stock, par value $.01 per share................... New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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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
The aggregate market value of the voting stock of the registrant held by
stockholders (not including voting stock held by directors and executive
officers of the registrant and affiliates of Merrill Lynch & Co., Inc., (the
exclusion of such stock shall not be deemed an admission by the registrant that
such person is an affiliate of the registrant)) on March 15, 1996 was
approximately $456 million. As of March 15, 1996, the registrant had 23,402,987
shares of Common Stock and 122,644 shares of Non-Voting Common Stock
outstanding.
Indicate by check-mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference
into the Part of the Form 10-K indicated.
<TABLE>
<CAPTION>
PART OF FORM
10-K
INTO WHICH
DOCUMENT INCORPORATED
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<S> <C>
Borg-Warner Automotive, Inc. 1995 Annual Report to Stockholders............. Parts II and IV
Borg-Warner Automotive, Inc. Proxy Statement for the 1996 Annual Meeting of
Stockholders.............................................................. Part III
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BORG-WARNER AUTOMOTIVE, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1995
INDEX
<TABLE>
<CAPTION>
ITEM
NUMBER PAGE
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<C> <S> <C>
PART I
1. Business...................................................................... 3
2. Properties.................................................................... 10
3. Legal Proceedings............................................................. 11
4. Submission of Matters to a Vote of Security Holders........................... 11
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters..... 12
6. Selected Financial Data....................................................... 12
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 12
8. Financial Statements and Supplementary Data................................... 12
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................. 12
PART III
10. Directors and Executive Officers of the Registrant............................ 13
11. Executive Compensation........................................................ 13
12. Security Ownership of Certain Beneficial Owners and Management................ 13
13. Certain Relationships and Related Transactions................................ 13
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 13
</TABLE>
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PART I
Borg-Warner Automotive, Inc. (the "Company") was incorporated in Delaware
in 1987 in connection with the acquisition of Borg-Warner Corporation ("Old
Borg-Warner") by an indirect wholly owned subsidiary of Borg-Warner Security
Corporation ("BW-Security"). Until January 1993, the Company was a wholly owned
subsidiary of BW-Security. In January 1993, BW-Security, as part of a
recapitalization, distributed all of the outstanding common stock of the Company
as a dividend to the holders of BW-Security common stock (the "Spin-Off"). In
August 1993, the Company completed an initial public offering of 3,660,300
shares of its Common Stock (the "IPO").
ITEM 1. BUSINESS
The Company develops, manufactures and markets highly engineered components
and systems primarily for automotive powertrain applications. The Company's
products are sold worldwide primarily to Original Equipment Manufacturers
("OEMs") of passenger cars, sport-utility vehicles and light trucks.
Company Business Units
The Company's products fall into four categories: Powertrain Systems,
Automatic Transmission Systems, Morse TEC and Control Systems. Net revenues by
product grouping for the three years ended December 31, 1995, 1994 and 1993, are
as follows (in millions of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Powertrain Systems................................... $ 544.8 $ 529.9 $ 418.4
Automatic Transmission Systems....................... 454.4 378.5 307.6
Morse TEC............................................ 257.6 239.9 202.3
Control Systems...................................... 107.6 97.3 83.7
-------- -------- --------
1,364.4 1,245.6 1,012.0
Interbusiness eliminations........................... (35.3) (22.2) (26.6)
-------- -------- --------
Net sales.......................................... $1,329.1 $1,223.4 $ 985.4
======== ======== ========
</TABLE>
The Company has restated 1993 and 1994 quarterly sales to eliminate
intra-group sales at the group level instead of eliminating all intercompany
sales at the Company-wide level.
The sales information presented above excludes the sales by the Company's
unconsolidated joint ventures. See "Joint Ventures." Such sales totaled
approximately $394 million in 1995, approximately $316 million in 1994 and
approximately $312 million in 1993.
The Company conducts business in one industry segment. See the Consolidated
Statements of Operations and Consolidated Balance Sheets on pages 19 and 20 of
the Company's Annual Report for information concerning the revenues, operating
profit or loss, and identifiable assets attributable to the Company's industry
segment.
Powertrain Systems
The Company manufactures fully assembled transmission systems and
components for automotive applications. Major products include four-wheel drive
("4WD") and all-wheel drive transfer cases and manual transmissions.
Transfer cases are installed on light trucks and sport-utility vehicles. A
transfer case attaches to the transmission and distributes torque to the front
and rear axles for 4WD, improving vehicle control during off-road use and in a
variety of road conditions. Shifting from two-wheel drive to 4WD can be
accomplished mechanically through a lever or electronically through a push
button activated motor.
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The Company has designed and developed an exclusive 4WD
Torque-on-Demand (TM) ("TOD") transfer case system, which allows vehicles to
automatically shift from two-wheel drive to four-wheel drive when electronic
sensors indicate it is necessary. The TOD transfer case is a feature on the
Ford Explorer, the best selling sport-utility vehicle in the United States in
1995.
Sales of 4WD transfer cases represented 30%, 26% and 28% of the Company's
total revenues for 1995, 1994 and 1993, respectively. The Company believes that
it is the world's leading independent manufacturer of 4WD transfer cases,
producing approximately 847,000 transfer cases in 1995. The Company's largest
customer of 4WD transfer cases is Ford Motor Company ("Ford"). The Company
supplies substantially all of the 4WD transfer cases for Ford, including those
installed in the Ford Explorer and the Ford F-150 pick-up truck.
The Company has entered into an agreement with Mercedes-Benz Project, Inc.,
a subsidiary of Mercedes-Benz AG, for the Company to supply transfer cases for a
new 4WD vehicle, which will be produced at Mercedes-Benz's new U.S.
passenger-vehicle manufacturing facility beginning in 1997. Under the five-year
agreement, which has a three-year extension provision, the Company will develop
the technology and supply Mercedes-Benz with new two-speed, electronically
controlled, all-wheel drive transfer cases that are compatible with its
anti-skid braking system. In 1995, the Company purchased a 211,000 sq. ft.
facility in Seneca, South Carolina, to establish the production facility for
manufacture of the Mercedes-Benz transfer case.
The Company also designs and manufactures five and six-speed rear-wheel
drive manual transmissions for passenger cars and light trucks. Sales of manual
transmissions accounted for 11%, 14% and 10% of the Company's total sales in
1995, 1994 and 1993, respectively. The Company believes that it is the leading
independent manufacturer of manual transmissions for cars and light trucks in
North America, producing approximately 257,000 five and six-speed manual
transmissions in 1995. The Company's five-speed manual transmission is used in
high performance cars such as the Ford Mustang, the Chevrolet Camaro and the
Pontiac Firebird, and light trucks such as the Isuzu Rodeo. The Company's
six-speed manual transmission is used in the Dodge Viper, the Camaro Z-28 and
the Firebird Formula and Trans Am. The Company is the sole supplier of manual
transmissions for these cars.
In January 1996, the Company announced its intention to seek a buyer for
its North American manual transmission business due to the decline in demand for
such products in North America and rising in-house supply of manual
transmissions by OEMs. See Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, for a further discussion of this
matter.
The Company signed agreements to establish joint ventures in India and
China in 1995 for the manufacture of 4WD transfer cases and manual
transmissions.
Automatic Transmission Systems
The Company engineers and manufactures systems and components for automatic
transmissions as well as systems combining such components worldwide. Principal
product lines include friction plates, one-way clutches, transmission bands and
torque converters for automatic transmissions.
The Company manufactures over 100 different varieties of friction plates
incorporating asbestos-free, organic friction paper linings. The Company offers
over 20 proprietary friction material formulas, each developed to satisfy
specific customer requirements. The quality of the friction surface results in
high durability, smooth shifting quality, low noise and vibration and minimal
drag. The Company also manufactures over 16 varieties of transmission bands used
in automatic transmissions and over 100 types of one-way clutches for automotive
and aircraft applications. The Company believes that, with the inclusion of one
of its joint ventures, it is the world's leading manufacturer of friction
elements and one-way clutches for automatic transmissions. The Company is an
original equipment supplier to virtually every major automatic transmission
manufacturer in the world.
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The Company is also North America's leading independent supplier of torque
converter assemblies for trucks, buses and heavy-duty off-highway vehicles. A
torque converter is a fluid clutch that transmits power from the engine
crankshaft to the transmission.
In 1995, the Company completed the purchase of the Precision Forged
Products Division ("PFPD") of Federal-Mogul Corporation. PFPD is a manufacturer
of precision forged sintered metallurgy products, including races for one-way
clutches and engine connecting rods which utilize powdered metal technology.
This acquisition will allow the Company to incorporate products of PFPD with
existing products to become a supplier of one-way clutch systems.
Morse TEC
Morse TEC manufactures chain and chain systems, including HY-VO(R)
front-wheel and 4WD chain, timing chain and timing chain systems, crankshaft and
camshaft sprockets, chain tensioners and snubbers.
HY-VO chain is used in front-wheel drive transmissions and for four-wheel
drive transfer case applications. Transmission chain is used to transfer power
from the engine to the transmission. The Company's MORSE GEMINI(TM) Chain
System, which is used on Chrysler's LH models, emits significantly less chain
pitch frequency noise than conventional transmission chain systems. In 1997, GM
will be incorporating this system in its front-wheel drive vehicles. The chain
in a transfer case distributes power between the front and rear output shafts
which, in turn, drives the front and rear wheels. The Company believes it is the
world's leading manufacturer of chain for front-wheel drive transmissions and
four-wheel drive transfer cases. The Company is an original equipment supplier
to every major manufacturer who uses chain for such applications.
The Company manufactures complete engine timing chain systems and accessory
drives, including chain, sprockets, tensioners, snubbers, balance shaft gears
and precision gearing. Timing chain is installed around the crankshaft and
camshaft sprockets. The crankshaft turns and transfers power via the timing
chain to the camshaft. The camshaft, in turn, operates the intake and exhaust
valves in the engine cylinder head. The Company's timing chain system is used on
Ford's new family of overhead cam engines, including the Duratech engine. The
Company recently announced that it will be designing and producing a similar
timing chain system for Chrysler's new overhead cam engines beginning in late
1997. The Company believes that it is the world's leading manufacturer of timing
chain.
Control Systems
Control Systems designs and manufactures sophisticated mechanical,
electromechanical and electronic components and systems used for engine and
emission control, fuel and vapor management, electronically controlled automatic
transmissions and steering and suspension systems. The Company produces a
pressure feedback exhaust gas recirculation valve that provides for emissions
control and improved gas mileage. The Company also produces fuel management
control systems, including roll valves for vapor recovery and vapor management,
canister purge solenoids and complete vapor recovery systems.
In 1995, the Company completed the purchase of Societe de L'Usine de la
Marque ("SUM"), a designer and manufacturer of electromechanical and electronic
automotive components located in Tulle, Cedex, France.
JOINT VENTURES
The Company has eight ventures in which it has a less-than-100% ownership
interest. Results from three of these ventures, in which the Company is the
majority owner, are consolidated as part of the Company's results. The Company's
ownership interest in the remaining five joint ventures ranges from
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20% to 50%. The results of NSK-Warner K.K., Warner-Ishi Corporation, Beijing
Warner Gear Co., Ltd. and Korea Powertrain Ltd. are reported using the equity
method.
In 1995, the Company entered into a joint venture with Divgi Metalwares
Private Ltd. ("Divgi") to produce transfer cases, manual transmissions and
automatic locking hubs in India. The venture, named Divgi-Warner Private Ltd.,
is expected to begin operations in 1996 and is 60% owned by the Company and 40%
owned by Divgi.
In 1995, the Company entered into a joint venture with Shiyan Automotive
Transmission Factory ("Shiyan") to produce manual transmissions in China. The
venture, to be called Huazhong Warner Transmission Company Ltd. is expected to
begin operations in 1997 and is 60% owned by the Company and 40% owned by
Shiyan.
Management of the unconsolidated joint ventures is shared with the
Company's respective joint venture partners. Certain information concerning the
Company's joint ventures is set forth below:
<TABLE>
<CAPTION>
PERCENTAGE FISCAL
OWNED BY LOCATION 1995 SALES
YEAR THE OF JOINT VENTURE ($ IN
JOINT VENTURE PRODUCTS ORGANIZED COMPANY OPERATION PARTNER MILLIONS)
- ------------------------- ----------------------- --------- ---------- --------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Unconsolidated
NSK-Warner K.K......... Friction products 1964 50% Japan Nippon Seiko K.K. $337
Warner-Ishi Turbochargers 1980 50% U.S. Ishikawajima-Harima $ 15
Corporation.......... Heavy Industries
Co., Ltd.
Beijing Warner
Gear Co., Ltd........ Manual transmissions 1992 39% China Beijing Gear Works $ 34
Korea Powertrain, Ltd. Torque converters 1993 20% Korea Pyeong HWA Clutch $ 8
Industries Co.
Ltd.
Warner-Ishi Europe,
S.p.A................ Turbochargers 1995 50% Italy Ishikawajima-Harima N/A
Heavy Industries
Co., Ltd.
Consolidated
Borg-Warner Automotive
Korea, Inc........... Friction products 1987 60% Korea Hyundai Motor $ 25
Company, NSK
Warner K.K.
Divgi-Warner
Private, Ltd......... Transfer cases, manual 1995 60% India Divgi Metalwares N/A
transmissions, and Private, Ltd.
automatic locking hubs
Huazhong Warner
Transmission
Company Ltd.......... Manual transmissions 1995 60% China Shiyan Automotive N/A
Transmission
Factory
</TABLE>
See Note 9 of the Notes to Consolidated Financial Statements on page 28 of
the Company's Annual Report for geographic information.
CUSTOMERS
Approximately 86% of the Company's total sales in 1995 were to automotive
OEMs, with the remaining 14% of the Company's sales to a diversified group of
industrial, construction and agricultural vehicle manufacturers, auto part
manufacturers and to distributors of automotive aftermarket and replacement
parts.
The Company's worldwide sales in 1995 to Ford and General Motors
Corporation constituted approximately 41% and 25%, respectively, of its 1995
consolidated sales. Approximately 26% of consolidated sales for 1995 were
outside the United States, including exports. However, a substantial portion of
such sales were to foreign OEMs of vehicles that are, in turn, exported to the
United States. See Note 9 of the Notes to Consolidated Financial Statements on
page 28 of the Company's Annual Report.
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The Company's automotive products are sold directly to OEMs pursuant to the
terms and conditions of the OEMs' purchase orders, and deliveries are subject to
periodic authorizations based upon the production schedules of the OEMs. The
Company ships its products directly from its plants to the OEMs.
RESEARCH AND DEVELOPMENT
Each of the Company's business groups has its own research and development
organization. Approximately 310 employees, including engineers, mechanics and
technicians, are engaged in research and development activities at Company
facilities worldwide. The Company also operates testing facilities such as
prototype, measurement and calibration, life testing and dynamometer
laboratories.
By working closely with the OEMs and anticipating their future product
needs, the Company's research and development personnel conceive, design,
develop and manufacture new proprietary automotive components and systems.
Research and development personnel also work to improve current products and
production processes. The Company believes its commitment to research and
development will allow it to obtain new orders from its OEM customers.
Consistent with its strategy of developing technologically innovative
products, the Company spent approximately $36.7 million, $33.8 million and $25.2
million in 1995, 1994 and 1993, respectively, on research and development
activities. Not included in the reported research and development activities
were customer-sponsored research and development activities that were
approximately $11.3 million, $11.2 million and $16.1 million in 1995, 1994 and
1993, respectively.
PATENTS AND LICENSES
The Company has approximately 1,900 active domestic and foreign patents and
patent applications, pending or under preparation, and receives royalties from
licensing patent rights to others. While it considers its patents on the whole
to be important, the Company does not consider any single patent, group of
related patents or any single license essential to its operations in the
aggregate. The expiration of the patents individually and in the aggregate is
not expected to have a material effect on the Company's financial position or
future operating results. The Company owns numerous trademarks, some of which
are valuable but none of which are essential to its business in the aggregate.
The "BorgWarner Automotive" trade name, and the housemark adopted in 1984
are material to the Company's business. During 1994, the Company and BW-Security
entered into an Assignment of Trademarks and License Agreement (the "Trademark
Agreement") whereby BW-Security assigned certain trademarks and trade names
(including the "BorgWarner Automotive" trade name) to the Company (which
trademarks and trade names had been previously licensed to the Company) for use
in the automotive field. Pursuant to the Trademark Agreement, the Company agreed
to pay an additional $7.5 million to BW-Security upon the occurrence of certain
events, including a change of control of the Company.
COMPETITION
The Company competes worldwide with a number of other manufacturers and
distributors which produce and sell similar products. Price, quality and
technological innovation are the primary elements of competition. The Company's
competitors include vertically integrated units of the Company's major OEM
customers, as well as a large number of independent domestic and international
suppliers. Many of these companies are larger and have greater resources than
the Company.
A number of the Company's major OEM customers manufacture for their own
use, products which compete with the Company's products. Although these OEM
customers have indicated that they will continue to rely on outside suppliers,
the OEMs could elect to manufacture powertrain components to meet their own
requirements or to compete with the Company. There can be no
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assurance that the Company's business will not be adversely affected by
increased competition in the markets in which it operates.
The competitive environment has changed dramatically over the past few
years as the Company's traditional United States OEM customers, faced with
intense international competition, have expanded their worldwide sourcing of
components with the stated objective of better competing with lower-cost
imports. As a result, the Company has experienced competition from suppliers in
other parts of the world enjoying economic advantages such as lower labor costs,
lower healthcare costs and, in some cases, export subsidies and/or raw materials
subsidies.
BACKLOG
Total backlog at December 31, 1995, was approximately $336.0 million
(compared to $374.2 million at December 31, 1994), all of which is expected to
be filled during 1996.
EMPLOYEES
As of December 31, 1995, the Company and its consolidated subsidiaries had
approximately 8,600 salaried and hourly employees (as compared with 7,800
employees at December 31, 1994), of which approximately 7,100 were U.S.
employees. Approximately 59% of the Company's domestic hourly workers are
unionized. The Company's Muncie, Indiana plant has approximately 1,665 employees
represented by the United Auto Workers union. Approximately 810 hourly employees
at the Company's Ithaca, New York, plant are represented by the International
Association of Machinists. The collective bargaining agreement covering the
Muncie Plant expires in March 1998 and the collective bargaining agreement
covering the Ithaca plant expires in October 1998. The hourly workers at the
Company's European facilities are also unionized. The Company believes its
present relations with employees to be satisfactory.
RAW MATERIALS
The Company believes that its supplies of raw materials for manufacturing
requirements in 1996 are adequate and are available from multiple sources. It is
common, however, for customers to require their prior approval before certain
raw materials or components can be used, thereby reducing sources of supply that
would otherwise be available. Manufacturing operations are dependent upon
natural gas, fuel oil, propane and electricity.
ENVIRONMENTAL REGULATION AND PROCEEDINGS
The Company's operations are subject to federal, state, local and foreign
laws and regulations governing, among other things, emissions to air, discharge
to waters and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials. The Company believes that its business,
operations and facilities have been and are being operated in compliance in all
material respects with applicable environmental and health and safety laws and
regulations, many of which provide for substantial fines and criminal sanctions
for violations. However, the operation of automotive parts manufacturing plants
entails risks in these areas, and there can be no assurance that the Company
will not incur material costs or liabilities. In addition, potentially
significant expenditures could be required in order to comply with evolving
environmental and health and safety laws, regulations or requirements that may
be adopted or imposed in the future.
The Company believes that the overall impact of compliance with regulations
and legislation protecting the environment will not have a material effect on
its financial position or future operating results, although no assurance can be
given in this regard. Capital expenditures and expenses in 1995 attributable to
compliance with such legislation were not material.
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
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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 for indicated environmental
liabilities in the aggregate amount of approximately $11 million at December 31,
1995. 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.
EXECUTIVE OFFICERS
Set forth below are the names, ages, positions and certain other
information concerning the executive officers of the Company as of March 15,
1996.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
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<S> <C> <C>
John F. Fiedler............... 57 Chairman and Chief Executive Officer
Robin J. Adams................ 42 Vice President and Treasurer
William C. Cline.............. 46 Vice President and Controller
Gary P. Fukayama.............. 48 Executive Vice President
Christopher A. Gebelein....... 49 Vice President--Business Development
Laurene H. Horiszny........... 40 Vice President, Secretary and General Counsel
Geraldine Kinsella............ 48 Vice President--Human Resources
Fred M. Kovalik............... 58 Executive Vice President
Ronald M. Ruzic............... 57 Executive Vice President
Terry A. Schroeder............ 47 Vice President
</TABLE>
Mr. Fiedler has been Chairman of the Board of Directors since March 1996
and has been Chief Executive Officer of the Company since January 1995. He was
President from June 1994 to March 1996. He was Chief Operating Officer from June
1994 to December 1994. Mr. Fiedler was Executive Vice President of Goodyear Tire
& Rubber Company in charge of the North American Tire division, from 1991 to
1994. He is a director of Navistar, Inc.
Mr. Adams has been Vice President and Treasurer of the Company since May
1993. He was Assistant Treasurer of the Company from 1991 to 1993 and Assistant
Treasurer of BW-Security from 1991 to 1993.
Mr. Cline has been Vice President and Controller of the Company since May
1993. He was Assistant Controller of BW-Security from 1987 to 1993.
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Mr. Fukayama has been Executive Vice President of the Company since
November 1992. He has been President and General Manager of Borg-Warner
Automotive Automatic Transmission Systems Corporation since January 1995. He was
President and General Manager of Borg-Warner Automotive Transmission & Engine
Components Corporation, Automatic Transmission Systems from November 1992 to
December 1994. He was President and General Manager of the Friction Products
Business Group of Borg-Warner Automotive Transmission & Engine Components
Corporation from February 1991 to October 1992 and President and General Manager
of Borg & Beck Torque Systems, Inc. from January 1989 to January 1991.
Mr. Gebelein has been Vice President-Business Development of the Company
since January 1995. He was General Manager of Corporate Development of Inland
Steel Industries from 1987 to 1994.
Ms. Horiszny has been Vice President, Secretary and General Counsel of the
Company since May 1993. She was Assistant General Counsel of the Company from
December 1991 to 1993, and Senior Attorney from 1988 to December 1991.
Ms. Kinsella has been Vice President-Human Resources of the Company since
May 1993. She was Vice President-Human Resources of Borg-Warner Automotive
Transmission & Engine Components Corporation, Automatic Transmission Systems
from November 1990 to 1993.
Mr. Kovalik has been Executive Vice President of the Company and President
and General Manager of Borg-Warner Automotive Powertrain Systems Corporation
since March 1994. He was General Manager-Heavy and Medium Duty Transmissions for
Eaton Corporation from April 1992 to February 1994; Marketing
Manager-Transmissions from February 1991 to April 1992 and Manager-Manufacturing
and Quality from February 1989 to 1991.
Mr. Ruzic has been Executive Vice President of the Company and President
and General Manager of Borg-Warner Automotive Morse TEC Corporation since
October 1992. He was President and General Manager of Borg-Warner Automotive
Transmission & Engine Components Corporation, Morse Chain Systems from December
1989 to 1992.
Mr. Schroeder has been Vice President of the Company since April 1995 and
President and General Manager of the Company's Control Systems Group since
December 1993. Mr. Schroeder was Vice President and Director of Business
Development for ITT Cannon ("Cannon") from February 1993 to November 1993, and
General Manager for Cannon's Components Group in North America and Asia from
1991 to February 1993.
ITEM 2. PROPERTIES
The Company operates 13 manufacturing facilities in the United States, two
facilities in Germany and one facility in each of Canada, France, Italy, Japan,
Korea and Wales. The Company also has numerous sales offices, warehouses and
technical centers. The Company's executive offices, which are leased, are
located in Chicago, Illinois. In general, the Company believes that its
properties are in good condition and are adequate to meet its current and
reasonably anticipated needs. In 1995, the Company purchased a 211,000 sq. ft.
facility in Seneca, South Carolina, to establish the production facility for
manufacture of the Mercedes-Benz transfer case.
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The following is additional information concerning the major manufacturing
plants operated by the Company and its consolidated subsidiaries. Unless
otherwise noted, these plants are owned by the Company.
<TABLE>
<CAPTION>
1995
PERCENT OF
CAPACITY
LOCATIONS UTILIZATION*
------------------------------------------------------------ ------------
<S> <C> <C>
U.S.: Blytheville, Arkansas (leased); Bellwood, Dixon and
Frankfort, Illinois; Muncie, Indiana; Sterling Heights,
Coldwater, Livonia and Romulus, Michigan; Ithaca, New York
(2 plants); Gallipolis, Ohio; Cary, North Carolina.......... 114%
Non-U.S.: Canada, France, Germany (2 plants), Italy (leased), Japan,
Korea, and Wales............................................ 83%
</TABLE>
- ---------------
* The figure shown in each case is a weighted average of the percentage
utilization of each major plant within the category, with an individual plant
weighted in proportion to the number of employees employed when such plant
runs at 100% capacity. Capacity utilization at the 100% level is defined as
operating five days per week, with two eight-hour shifts per day and normal
vacation schedules.
ITEM 3. 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 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.
Centaur Insurance Company ("Centaur"), Old Borg-Warner's discontinued
property and casualty insurance subsidiary and currently a wholly owned
subsidiary of BW-Security, ceased writing insurance 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 Centaur's assets. In
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the security holders of the Company
during the fourth quarter of 1995.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is listed for trading on the New York Stock
Exchange. As of March 15, 1996, there were approximately 169 holders of record
of Common Stock.
Eight times during the last two fiscal years, the Company has paid cash
dividends on its Common Stock and Non-Voting Common Stock. A quarterly dividend
of $.125 per share was paid on February 15, 1994. A quarterly dividend of $.15
per share was paid on May 16, August 15 and November 15, 1994, and February 15,
May 15, August 15 and November 15, 1995. While the Company currently expects
that comparable quarterly cash dividends will continue to be paid in the future,
the dividend policy is subject to review and change at the discretion of the
Board of Directors.
High and low sales prices (as reported on the New York Stock Exchange
composite tape) for the Common Stock for each quarter in 1994 and 1995 were:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ------- -------
<S> <C> <C>
March 31, 1994....................................... $34.000 $26.375
June 30, 1994........................................ $31.625 $22.625
September 30, 1994................................... $29.125 $22.625
December 31, 1994.................................... $25.500 $21.625
March 31, 1995....................................... $26.125 $22.375
June 30, 1995........................................ $29.375 $23.500
September 30, 1995................................... $33.875 $28.500
December 31, 1995.................................... $32.250 $27.625
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data for the five years ended December 31, 1995,
with respect to the following line items set forth on page 31 of the Company's
Annual Report is incorporated herein by reference and made a part of this
report: Net sales; earnings (loss) before cumulative effect of accounting
change; earnings (loss) per share before cumulative effect of accounting change;
total assets; total debt; and cash dividend declared per share. See the material
incorporated herein by reference in response to Item 7 of this report for a
discussion of the factors that materially affect the comparability of the
information contained in such data.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations set forth on pages 13 through 17 in the Company's Annual Report
are incorporated herein by reference and made a part of this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements (including the notes thereto) of the
Company and the Independent Auditors' Report as set forth on pages 18 through 31
in the Company's Annual Report are incorporated herein by reference and made a
part of this report. Supplementary financial information regarding quarterly
results of operations (unaudited) for the years ended December 31, 1995 and 1994
is set forth in Note 11 of the Notes to Consolidated Financial Statements on
page 29 of the Company's Annual Report. For a list of financial statements filed
as part of this report, see Item 14, "Exhibits, Financial Statement Schedules,
and Reports on Form 8-K" beginning on page 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
12
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors and nominees for election as
directors of the Company under the caption "Election of Directors" on pages 1
through 3 of the Company's Proxy Statement and information under the caption
"Section 16(a) Compliance" on page 6 of the Company's Proxy Statement is
incorporated herein by reference and made a part of this report. Information
with respect to executive officers of the Company is set forth in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to compensation of executive officers and
directors of the Company under the captions "Compensation of Directors" on pages
4 and 5 of the Company's Proxy Statement and "Executive Compensation," "Stock
Options," "Long-Term Incentive Plans," "Employment Agreements" and "Compensation
Committee Interlocks and Insider Participation" on pages 7 through 10 of the
Company's Proxy Statement is incorporated herein by reference and made a part of
this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership by persons known to the
Company to beneficially own more than five percent of the Company's Common
Stock, by directors and nominees for directors of the Company and by all
directors and executive officers of the Company as a group under the caption
"Stock Ownership" on pages 5 and 6 of the Company's Proxy Statement is
incorporated herein by reference and made a part of this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
under the captions "Compensation Committee Interlocks and Insider Participation"
on page 10 of the Company's Proxy Statement and "Certain Relationships and
Related Transactions" on pages 15 through 16 of the Company's Proxy Statement is
incorporated herein by reference and made a part of this report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following consolidated financial statements of the Company on
pages 18 through 31 of the Company's Annual Report are incorporated herein
by reference:
Independent Auditors' Report
Consolidated Statements of Operations -- years ended December 31,
1995, 1994 and 1993
Consolidated Balance Sheets -- December 31, 1995 and 1994
Consolidated Statements of Cash Flows -- years ended December 31,
1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity -- years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. Certain schedules for which provisions are made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
3. The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index on page A-1.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the three-month
period ended December 31, 1995.
13
<PAGE> 14
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
BORG-WARNER AUTOMOTIVE, INC.
By: /s/ JOHN F. FIEDLER
----------------------------------
John F. Fiedler
Chairman and Chief Executive Officer
Date: March 22, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED ON THIS 22ND DAY OF MARCH, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JOHN F. FIEDLER Chairman of the Board of Directors and Chief
- ----------------------------------------------- Executive Officer (Principal Executive
John F. Fiedler Officer)
/s/ ROBIN J. ADAMS Vice President and Treasurer (Principal
- ----------------------------------------------- Financial Officer)
Robin J. Adams
/s/ WILLIAM C. CLINE Vice President and Controller (Principal
- ----------------------------------------------- Accounting Officer)
William C. Cline
/s/ MATTHIAS B. BOWMAN Director
- -----------------------------------------------
Matthias B. Bowman
/s/ ALBERT J. FITZGIBBONS, III Director
- -----------------------------------------------
Albert J. Fitzgibbons, III
(by John F. Fiedler)
/s/ PAUL E. GLASKE Director
- -----------------------------------------------
Paul E. Glaske
(by John F. Fiedler)
/s/ IVAN W. GORR Director
- -----------------------------------------------
Ivan W. Gorr
(by John F. Fiedler)
/s/ JAMES J. KERLEY Director
- -----------------------------------------------
James J. Kerley
(by John F. Fiedler)
/s/ ALEXIS P. MICHAS Director
- -----------------------------------------------
Alexis P. Michas
(by John F. Fiedler)
/s/ DONALD C. TRAUSCHT Director
- -----------------------------------------------
Donald C. Trauscht
(by John F. Fiedler)
</TABLE>
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
- -------- -------------------- -----------
<C> <S> <C>
*3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to Exhibit No. 3.1 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993).
*3.2 By-laws of the Company (incorporated by reference to Exhibit No. 3.2 of
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993).
*10.1 Credit Agreement dated as of December 7, 1994 among Borg-Warner
Automotive, Inc., as Borrower, the Lenders listed therein, as Lenders,
Chemical Bank and the Bank of Nova Scotia, as Co-Arrangers, Chemical
Bank, as Administrative Agent and The Bank of Nova Scotia as
Documentation Agent (incorporated by reference to Exhibit No. 10.1 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1994).
10.2 First Amendment of Credit Agreement dated as of December 15, 1995.
*10.3 Distribution and Indemnity Agreement dated January 27, 1993 between
Borg-Warner Automotive, Inc. and Borg-Warner Security Corporation
(incorporated by reference to Exhibit No. 10.2 to Registration
Statement No. 33-64934).
*10.4 Tax Sharing Agreement dated January 27, 1993 between Borg-Warner
Automotive, Inc. and Borg-Warner Security Corporation (incorporated by
reference to Exhibit No. 10.3 to Registration Statement No. 33-64934).
*10.5 Registration Rights Agreement dated January 27, 1993 (incorporated by
reference to Exhibit No. 10.5 to Registration Statement No. 33-64934).
+*10.6 Borg-Warner Automotive, Inc. Management Stock Option Plan, as amended
(incorporated by reference to Exhibit No. 10.6 to Registration
Statement No. 33-64934).
+10.7 Borg-Warner Automotive, Inc. 1993 Stock Incentive Plan as amended
effective November 8, 1995.
*10.8 Receivables Transfer Agreement dated as of January 28, 1994 among BWA
Receivables Corporation, ABN AMRO Bank N.V. as Agent and the Program
LOC Provider and Windmill Funding Corporation (incorporated by
reference to Exhibit No. 10.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1993).
*10.9 First Amendment of Receivables Transfer Agreement dated as of December
21, 1994 (incorporated by reference to Exhibit No. 10.11 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994).
*10.10 Second Amendment of Receivables Transfer Agreement dated as of January
1, 1995 (incorporated by reference to Exhibit No. 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).
10.11 Third Amendment of Receivables Transfer Agreement dated as of October
23, 1995.
</TABLE>
A-1
<PAGE> 16
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
- -------- -------------------- -----------
<C> <S> <C>
*10.12 Service Agreement, dated as of December 31, 1992, by and between Borg-
Warner Security Corporation and Borg-Warner Automotive, Inc.
(incorporated by reference to Exhibit No. 10.10 to Registration
Statement No. 33-64934).
*10.13 Government Relations Service Agreement, dated as of September 1, 1993,
by and between Borg-Warner Security Corporation and Borg-Warner
Automotive, Inc. (incorporated by reference to Exhibit No. 10.14 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993).
+*10.14 Borg-Warner Automotive, Inc. Transitional Income Guidelines for
Executive Officers amended as of May 1, 1989 (incorporated by reference
to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993).
+*10.15 Form of Employment Agreement for Executive Officers (incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993).
+*10.16 Borg-Warner Automotive, Inc. Management Incentive Bonus Plan dated
January 1, 1994 (incorporated by reference to Exhibit No. 10.18 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1993).
+*10.17 Borg-Warner Automotive, Inc. Retirement Savings Excess Benefit Plan
dated January 27, 1993 (incorporated by reference to Exhibit No. 10.20
of the Company's Annual Report on Form 10-K for the year ended December
31, 1993).
+10.18 Borg-Warner Automotive, Inc. Retirement Savings Plan dated January 27,
1993 as further amended and restated effective as of April 1, 1994.
+*10.19 Borg-Warner Automotive, Inc. Deferred Compensation Plan dated January
1, 1994 (incorporated by reference to Exhibit No. 10.24 of the
Company's Annual Report on Form 10-K for the year ended December 31,
1993).
+*10.20 Form of Employment Agreement for John F. Fiedler (incorporated by
reference to Exhibit No. 10.0 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994).
+*10.21 Form of Change of Control Employment Agreement for Executive Officers
(incorporated by reference to Exhibit No. 10.0 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended September 30,
1995).
*10.22 Assignment of Trademarks and License Agreement (incorporated by
reference to Exhibit No. 10.0 of the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1994).
+10.23 Borg-Warner Automotive, Inc. Executive Stock Performance Plan.
11. Computation of earnings per share.
13. Annual Report to Stockholders for the year ended December 31, 1995 with
manually signed Independent Auditors' Report. (The Annual Report,
except for those portions which are expressly incorporated by reference
in the Form 10-K, is furnished for the information of the Commission
and is not deemed filed as part of the Form 10-K).
21. Subsidiaries of the Company.
23. Independent Auditors' Consent.
</TABLE>
A-2
<PAGE> 17
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DOCUMENT DESCRIPTION NUMBER
- -------- -------------------- -----------
<C> <S> <C>
24. Power of Attorney.
99.1 Cautionary Statements.
</TABLE>
- ---------------
*Incorporated by reference.
+Indicates a management contract or compensatory plan or arrangement required to
be filed pursuant to Item 14(c).
A-3
<PAGE> 1
EXHIBIT 13
[BORG-WARNER AUTOMOTIVE LOGO]
1995 ANNUAL REPORT
ENGINEERED FOR GROWTH
<PAGE> 2
Corporate Profile
BORG-WARNER AUTOMOTIVE, INC. is a technology-driven supplier of highly
engineered components and systems, primarily for automotive drivetrain
applications. The company, which operates 33 manufacturing facilities in 12
countries serving the North American, European and Asian automotive markets, is
an original equipment supplier to every major automaker in the world. Its
products fall into four operating groups: Automatic Transmission Systems,
Control Systems, Morse TEC and Powertrain Systems. The Chicago-based company
employs 8,600 worldwide.
THE COMPANY'S MISSION IS:
- - To become a $2 billion-plus company by the year 2000;
- - To undertake an aggressive business development and acquisition program in
order to reach this goal;
- - To acquire businesses that complement our existing operations--the
manufacture of technology-driven, highly engineered automotive components
and systems for original equipment manufacturers worldwide;
- - To expand our operations in all significant global markets to balance the
cyclical nature of our business; and
- - To continuously improve all facets of our organization, especially research
and development, to ensure high levels of innovation and efficiency that
will allow us to remain a productive and competitive supplier to the
automotive original equipment industry.
[PHOTOS]
AUTOMATIC TRANSMISSION SYSTEMS
Automatic Transmission Systems supplies "shift quality" components and systems
such as one-way clutches, friction plates and bands to virtually every
automatic transmission-maker in the world. The group also produces precision
forged sintered products such as one-way clutch races and engine connecting
rods.
CONTROL SYSTEMS
Control Systems designs and produces electronic and electromechanical products
for passenger cars and light trucks that reduce engine emissions and fuel
evaporation, improve power-train performance, and control ride and handling
characteristics to increase vehicle safety.
MORSE TEC
Morse TEC engineers and manufactures a range of automotive chain components and
systems for engine timing, automatic transmission and four-wheel drive
applications. The group also produces engine turbochargers.
POWERTRAIN SYSTEMS
Powertrain Systems develops and manufactures transfer cases for both four-wheel
and all-wheel drive vehicles, and fully assembled manual transmissions for
high-performance passenger cars and light trucks.
<PAGE> 3
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(millions of dollars except per share data) Year ended December 31, 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $1,329.1 $1,223.4
- ----------------------------------------------------------------------------------------------------------------
Net earnings 74.2 64.4
- ----------------------------------------------------------------------------------------------------------------
Net earnings per share 3.15 2.75
- ----------------------------------------------------------------------------------------------------------------
Average number of shares outstanding 23.6 23.4
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
[BAR CHARTS]
*Income and EPS before cumulative effect of accounting change.
Borg-Warner Automotive became a public company in August 1993.
CONTENTS
1 Financial Highlights
2 Letter to Stockholders
4 Core Strengths
12 Operating Information
13 Management's Discussion and Analysis of Financial Condition and Results
of Operations
18 Management's Responsibility for Consolidated Financial Statements
18 Independent Auditors' Report
19 Consolidated Statements of Operations
20 Consolidated Balance Sheets
21 Consolidated Statements of Cash Flows
22 Consolidated Statements of Stockholders' Equity
23 Notes to Financial Statements
31 Selected Financial Data
32 Board of Directors and Officers
IBC Corporate Information
Borg-Warner Automotive, Inc. 1
<PAGE> 4
[PHOTO OF JOHN F. FIELDER]
Every day millions of people worldwide rely on Borg-Warner Automotive products.
Whether they drive a car, pickup truck or a sport-utility vehicle, our
company's technology and products play a key role in the efficient and reliable
operation of their vehicles' engines and transmissions.
To Our Stockholders: 1995 was another year of solid growth for
Borg-Warner Automotive. Our sales and profits rose to record levels. We
achieved this despite a 3 percent decline in North American automotive
production compared to a year earlier, enabling the company to outperform the
North American auto market for the sixth year in a row. Our European, Japanese
and Korean operations also performed better than their respective markets.
The company's sales increased 9 percent to $1.3 billion. Earnings improved
15 percent to $74.2 million, or $3.15 per share. We met our own financial
expectations for the year as well as the expectations of the investment
community. The stock market recognized our company's ability to produce
results. Our total return to stockholders increased more than 30 percent during
the year, outperforming many of the companies in our peer group of automotive
suppliers.
In North America, new product technology and changing trends helped
boost our company's sales. Our new, revolutionary Torque-On-Demand(TM)
four-wheel drive (4WD) transfer case featured on the 1995 Ford Explorer
sport-utility vehicle and our MORSE GEMINI(TM) Transmission Chain System both
contributed to our sales growth. Trends such as the shift to four and
five-speed automatic transmissions, the popularity of 4WD light trucks and
sport-utility vehicles, and more stringent safety and environmental regulations
heightened sales of automatic transmission components, 4WD transfer cases, 4WD
chain, and transmission and emission control devices. Unfortunately, a major
decline in the sales of manual transmissions offset some of this North American
growth.
Our European and Korean automatic transmission component and 4WD transfer
case businesses and our Japanese chain operation contributed to improved sales
abroad. In addition, the company's unconsolidated NSK-Warner Japanese automatic
transmission component 50/50 joint venture recorded a 16 percent increase in
sales in a flat market.
Last year I outlined our company's plan to increase stockholder value by
growing our business and strengthening our product lines around the world.
Successful acquisitions and the expansion of products into new markets in 1995
brought us closer to reaching our goal of being a more globally balanced, $2
billion revenue-producing company by the year 2000.
In North America, we acquired Federal-Mogul's Precision Forged Products
Division. This purchase allows us to expand our company's automatic
transmission systems capability. In Europe, we completed an acquisition of
Societe de l'Usine de la Marque'
[PHOTO OF TROPHY]
The Borg-Warner Indianapolis 500 Trophy* is one of the most famous symbols in
all of sports.
*The Indianapolis 500 Trophy is a registered trademark of Borg-Warner
Automotive, Inc.
2 Borg-Warner Automotive
<PAGE> 5
(SUM), a French manufacturer of electronic and electromechanical control
devices. This gives our Control Systems operating group a European presence
needed to serve new and existing customers in the region. We also established a
turbocharger joint venture in Italy, Warner-Ishi Europe, and purchased all the
shares of the company's existing Italian chain joint venture, renaming it Morse
TEC Europe. Both of these moves position the company to supply products for
diesel and overhead-cam engine expansion in Europe. In Asia, we established
joint ventures in India and China to participate in emerging market growth for
manual transmissions and four-wheel drive transfer cases, and a joint venture
in Taiwan to produce chain for the growing Asian chain market.
Looking ahead in 1996, we will continue to pursue other strategic and
complementary business alignments in order to grow our business and strengthen
our product lines. On the pages that follow, our company's core strengths are
outlined. By concentrating on these core strengths--our technological
expertise, our ability to provide systems solutions, our broad global presence
and our long-standing relationships with original equipment manufacturers
around the world--Borg-Warner Automotive will continue to enhance its position
as a leading global automotive supplier.
For 1996, we expect flat to slightly declining automotive production in
North America and Europe, and slightly improved production in Asia. We will
continue to control our operating expenses to keep them in line with the types
of automotive production cycles we are now entering in each of the markets we
serve.
To maximize stockholder value, we continue to look for new acquisition
opportunities as well as to divest ourselves of businesses that no longer fit
with our product lines or contribute to our bottom line. To that end, we
recently announced our intention to sell our North American manual transmission
business. The decline in sales of sporty cars--our only real market
niche--combined with the rise of in-house suppliers in the shrinking manual
transmission business in North America has led us to pursue the sale of this
business. We hope to conclude this sale before the end of 1996, thereby putting
an end to the drag this business had on our company's overall results in the
last half of 1995.
In closing, I would like to take a moment to remember someone very special
to our company. Last July, we suffered a painful loss with the death of our
Chairman, J. Gordon Amedee. Gordon was a great leader and a dear friend to us.
He unselfishly came out of retirement in 1993 to run this company, and we are
indebted to him for moving Borg-Warner Automotive in the right direction as a
new, independent company. On behalf of all Borg-Warner Automotive employees, I
would like to pay tribute to a great man for the critical role he played in the
transformation of our company.
I am committed to follow the direction that Gordon and I laid out together
in 1994 and 1995. I thank you for your continued investment in our company, and
look forward to the challenges and opportunities that lie ahead for Borg-Warner
Automotive in the changing global automotive industry.
February 23, 1996
John F. Fiedler
Chairman and Chief Executive Officer
[LINE GRAPH] [PHOTO OF GEARS]
The acquisition of the Precision
Forged Products Division expanded
our product line in 1995.
Borg-Warner Automotive 3
<PAGE> 6
[PHOTO OF FORD EXPLORER]
Powertrain Systems' revolutionary Torque-On-Demand(TM) four-wheel
drive transfer case is an integral feature in the new top-selling Ford
Explorer.
Borg-Warner Automotive has made significant advances in products to meet
expanding vehicle environmental regulation in the U.S. and Europe.
[PHOTO OF AUTOMOTIVE PARTS]
[PHOTO OF TRANSMISSION CHAIN]
Beginning in 1997, the innovative MORSE GEMINI(TM) Transmission Chain System,
currently in Chrysler's LH vehicles, will also be incorporated in GM's
front-wheel drive vehicles.
[PICTURE OF MAN IN FRONT OF A COMPUTER]
4 A CAD engineer from our Automatic Transmission Systems operating group
examines a one-way clutch assembly prototype. This and other new
technologies are enabling us to engineer and manufacture entire systems.
<PAGE> 7
[PHOTO OF FOUR-WHEEL DRIVE TRANSFER CASE]
Superior design and manufacturing technology set Borg-Warner Automotive apart
from other automotive suppliers. Commitment to research and development is key
to our success. This is evident at our Powertrain Systems operating group,
where engineers are developing lighter and better-performing four-wheel drive
transfer cases.
TECHNOLOGY
Technological improvements lead directly to superior products and
refined manufacturing processes. In 1995, $37 million was invested in research
and development in addition to another $11 million on special customer-funded
projects. We continually strive to introduce new patented designs and
streamline manufacturing processes at our own technology centers as well as
through alliances with Original Equipment Manufacturer (OEM) engineering
laboratories and university research facilities around the globe. This
commitment to technological innovation has never been more important to
Borg-Warner Automotive because it also enables us to meet our OEM customers'
annual price reduction goals.
Engineers at our Automatic Transmission Systems group have developed new
ways to stamp friction material to reduce waste. The expensive material used in
producing friction plates was traditionally stamped in circular forms and
bonded to the metal plate in one round piece. Gains in manufacturing technology
have allowed us to begin stamping and bonding the material in segments,
reducing the amount of unusable friction material and saving millions of
dollars a year.
Engineers are also developing carbon-based technology as well as different
resins for next-generation friction material. These would provide higher
performance and more durable products while bringing even greater efficiency to
our production process.
Technological advances are also being made at our Powertrain Systems
operating group. Engineers are studying how to change both the shape and
material of four-wheel drive transfer case covers.
These housings, which are currently die-cast aluminum or magnesium, may be
replaced with injection-molded materials in the future, providing significant
reduction in weight and improved strength and performance characteristics.
Today at Borg-Warner Automotive there is a renewed dedication to
cutting-edge research and development. Product and process innovation will
enable us to remain an industry leader by providing our customers around the
world with technologically advanced products at more competitive prices.
Borg-Warner Automotive 5
<PAGE> 8
Automatic Transmission Systems has the ability to supply preassembled
packages of friction and separator plates called sandwich packs.
In 1995, Morse TEC increased its engine timing systems capability by introducing
a new generation of Morse designed hydraulic tensioners.
[PICTURE OF CAR WITH ENGINE AND PARTS SHOWING]
Borg-Warner Automotive is now able to produce one-way clutch systems, including
inner and outer races, with the 1995 acquisition of the Precision Forged
Products Division.
Control Systems continues to pursue methods to combine a vehicle's performance
components--like our transmission solenoid--into more integrated systems.
6 Borg-Warner Automotive
<PAGE> 9
[PHOTO OF ENGINE TIMING CHAIN]
Borg-Warner Automotive continues to provide systems solutions by taking
advantage of greater outsourcing by our customers and the consolidation of
worldwide automotive suppliers. The company's Morse TEC operating group has
taken the lead in this area by expanding its product line to include complete
engine timing chain systems for Ford's family of modular engines.
SYSTEMS
Automotive suppliers have traditionally designed and produced
individual parts that required further assembly by the OEMs. Redundancies in
product design and production often occurred. To improve quality and reduce
overall costs, OEMs increasingly rely on suppliers to design and manufacture
entire systems.
Our Automatic Transmission Systems operating group recently expanded its
relationship with Ford Europe. In the past, we provided the friction plates and
one-way clutches for Ford's automatic transmissions. This year, our Ketsch,
Germany, plant installed new equipment and began the production of housings for
a one-way clutch/drum assembly, including the drum, one-way clutch, races and
housing. The entire system assembly is scheduled to be in production by
mid-1996.
Technological innovations have also provided the opportunity for systems
growth. Ford's shift to overhead-cam engines--the engines featured in its new
Contour, Taurus, Continental and F-150 vehicles--has given our Morse TEC
operating group new opportunities to expand its engine timing systems
capability.
Providing these timing systems, which consist of chains, sprockets, snubbers
and tensioners, allows us to increase our content per vehicle tenfold compared
to the supply of a single timing chain on pushrod-style engines. In 1995, we
further increased our systems capability with the installation of equipment to
produce a new generation of Morse-designed hydraulic tensioners.
Acquisitions are also allowing us to combine complementary technology and
components to build systems. Our recent purchase of Federal-Mogul's Precision
Forged Products Division gives Automatic Transmission Systems the ability to
produce an entire one-way clutch system, including precision forged sintered
metal inner and outer races. This new capability permits the design of races
and a one-way clutch as a unit, providing a higher quality product with reduced
system costs.
Borg-Warner Automotive will continue to provide system solutions to OEMs
around the world. This gives us the opportunity to reengineer our products and
increase our content per vehicle while providing productivity and technological
improvements for our customers.
Borg-Warner Automotive 7
<PAGE> 10
[PICTURE OF TWO FLAGS]
In 1995, we established joint ventures in China and India to meet manual
transmission and transfer case growth in two significant emerging markets.
For over 30 years we have been supplying Toyota with automatic transmission
components from our $350 million revenue-producing NSK-Warner joint venture,
located in Japan.
The four-wheel drive SsangYong Musso, a popular sport-utility vehicle in Korea,
features a new Borg-Warner Automotive trans- fer case.
[PICTURE OF SSANG YOUNG MUSSO]
[TOYOTO TRADEMARK]
For over 30 years we have been supplying Toyota with automatic transmission
components from our $350 million revenue-producing NSK-Warner joint venture,
located in Japan.
[PICTURE OF FOUR-WHEEL DRIVE CHAIN]
Morse TEC engineers and produces HY-VO(R) four-wheel drive chain in North
America, Europe and Japan for customers around the globe.
[PICTURE OF THE EARTH]
8 Borg-Warner Automotive
<PAGE> 11
[PHOTO OF AUTOMOTIVE PARTS]
Borg-Warner Automotive continued to strengthen and expand its product lines in
North America, Europe and Asia in 1995 through joint ventures and acquisitions.
In Europe, we broadened our reach by acquiring SUM, a French manufacturer of
control devices. This gives us greater global balance and will allow us to take
advantage of growth opportunities in the region.
GLOBAL
Greater global outsourcing, shifting technological trends, emerging
markets and the desire to balance the cyclical nature of the automotive
business all drive Borg-Warner Automotive's global expansion efforts.
Our company continues to take advantage of trends around the world. During
the past year, Morse TEC bought out its Italian joint venture partner, creating
Morse TEC Europe. This operating group also established a new joint venture in
Italy, Warner-Ishi Europe. These actions better position Borg-Warner Automotive
for European engine timing chain and turbocharger growth, as vehicles in the
region increasingly turn to overhead-cam and diesel engine configurations for
greater fuel economy.
Tapping emerging markets is an important source of growth, and our company
continues to seek opportunities around the globe. In 1995, our Powertrain
Systems operating group established a joint venture, Divgi-Warner, in India to
supply manual transmissions and four-wheel drive transfer cases to two major
Indian automotive manufacturers. Production is expected to begin in mid-1996.
A joint venture was also formed in central China. Huazhong Warner will begin
producing a newly designed, five-speed manual transmission for a Chinese
vehicle starting in late 1997. In addition, Morse TEC started a new operation
in Taiwan to produce chain systems.
Borg-Warner Automotive also benefits from a strong global position because
the world's automotive cycles are not synchronized. Different markets follow
different cycles, and by serving numerous regions, our dependence on any one
market is reduced. To that end, our Control Systems operating group recently
purchased SUM, a French manufacturer of electronic and electromechanical
control devices that enhance vehicle performance while ensuring that
environmental regulations are met. This acquisition gives us the ability to
serve our existing European customers from a local base while adding new
products and expanding our relationship with customers such as Renault and
Peugeot.
Borg-Warner Automotive has conducted business in the global arena for over
five decades. We continue to position our company to respond to technological
trends, shifting automotive cycles and emerging growth opportunities around the
world.
Borg-Warner Automotive 9
<PAGE> 12
Borg-Warner Automotive's top five customers (unconsolidated) in 1995 were Ford,
GM, Toyota, Chrysler and Nissan, accounting for over 80 percent of our total
revenue.
Beginning in 1996, our partnership with Mercedes will expand to include the
transfer case for its new All-Activity Vehicle and additional automatic
transmission components for its passenger cars.
Our relationships with Korean OEMs continue to grow. We produce automatic
transmission components for Hyundai, Daewoo and Kia, a four-wheel drive
transfer case for Ssang-Yong and recently were chosen to develop a transfer
case for Hyundai Precision.
[FORD, GM, TOYOTA, CHRYSLER AND NISSAN LOGOS]
10 Borg-Warner Automotive
<PAGE> 13
[PHOTO OF FRICTION PLATE]
Our ability to build strong working partnerships with new and existing global
customers is instrumental to Borg-Warner Automotive's success. Engineers at our
Automatic Transmission Systems operating group teamed with its NSK-Warner joint
venture to produce a more durable friction plate for Toyota that will soon be
incorporated into our customer's automatic transmissions.
RELATIONSHIPS
Borg-Warner Automotive engineering and design are integral parts of the
vehicle development process. Because our components are located in a model's
engine or transmission, they are typically designed in for the life of the
model. To manufacture such important products, it is critical for our engineers
to understand our customers' needs in terms of performance, quality and cost
early in the development process.
To facilitate the development of innovative products and systems,
Borg-Warner Automotive engineers are often placed on site at customer vehicle
development centers and manufacturing facilities. They guide the application
and development of our components and systems and, ultimately, the integration
of our products into our customers' vehicles.
Ford--our company's largest customer--relies on us to develop and produce a
number of its key components. In 1992, engineers at our Powertrain Systems
operating group teamed with Ford to introduce a new four-wheel drive transfer
case for its Explorer sport-utility vehicle. We developed over 250 prototypes
in extensive proving ground and laboratory testing leading up to the successful
1995 launch of this top-selling vehicle.
Our dedication to building strong relationships with customers and our
ability to deliver superior-quality products has led to new opportunities for
our operating groups. In 1995, Chrysler selected our Control Systems operating
group to supply 100 percent of the four-speed transmission solenoids for all
its front-wheel drive vehicles. This extended working partnership has led to
our recent development of a secondary seal module for Chrysler's on-board
diagnostic systems, which warn if fuel is evaporating or leaking from the fuel
tank.
Our relationships are as strong globally as they are in North America.
Automatic Transmission Systems has engineers working closely with our Japanese
NSK-Warner joint venture, recently yielding several new products for the Asian
market. Additionally, our German engineering center developed new friction
products for Mercedes and Volkswagen that will expand our European business in
1996.
Relationships with our customers are essential to maintaining and expanding
successful operations around the world. Borg-Warner Automotive stands
committed to strengthening these working partnerships.
Borg-Warner Automotive 11
<PAGE> 14
<TABLE>
<CAPTION>
Headquarters and Automatic Control Systems Morse TEC Powertrain Systems
Advanced Engineering Transmission Systems Dixon, Illinois Ithaca, New York Sterling Heights, Michigan
Centers Lombard, Illinois
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NORTH AMERICA Bellwood, Illinois Blytheville, Arkansas Shelbyville, Illinois Blytheville, Arkansas
Frankfort, Illinois Dixon, Illinois (50% JV) Muncie, Indiana
Lombard, Illinois Cary, North Carolina Ithaca, New York Livonia, Michigan
(Aftermarket) Simcoe, Ontario, Canada Seneca, South Carolina
Coldwater, Michigan Guadalajara, Mexico
Plymouth, Michigan (85% JV)
Romulus, Michigan Mexico City, Mexico
Sterling Heights, Michigan
Gallipolis, Ohio
- ---------------------------------------------------------------------------------------------------------------------------------
EUROPE Heidelberg, Germany Tulle, France Como, Italy Margam, Wales
Ketsch, Germany Milan, Italy (50% JV)
Margam, Wales
- ---------------------------------------------------------------------------------------------------------------------------------
ASIA Fukuroi City, Japan Nabari City, Japan Beijing, China (39% JV)
(50% JV) Tainan Ken, Taiwan Shiyan, China (60% JV)
Eumsung, Korea Pune, India (60% JV)
(60% JV)
Taegu, Korea
(20% JV)
</TABLE>
[PICTURE OF THE EARTH]
[BAR CHARTS]
12 Borg-Warner Automotive
<PAGE> 15
INTRODUCTION
Borg-Warner Automotive, Inc. (the "Company") became an independent company on
January 27, 1993, when its common stock was distributed to the stockholders of
its then parent, Borg-Warner Security Corporation ("BW-Security") as a dividend
(the "Spin-Off"). The initial capital structure was established with $480
million of equity and $251 million of debt. In August 1993, the Company
completed an initial public offering of 3.66 million shares of common stock,
yielding net proceeds of $83.2 million.
The Company operates as a major supplier to automotive original equipment
manufacturers ("OEMs") in the North American, European and various Asian
markets. Its products include a wide variety of highly engineered components
and systems primarily related to drivetrain applications. Examples include
"shift quality" automatic transmission components and systems, four-wheel drive
transfer cases, automotive chain, engine timing components and systems, and
sensors, valves and other engine and fuel systems control devices.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations should be read in conjunction with the historical Consolidated
Financial Statements of the Company. See "Index to Financial Statements."
RESULTS OF OPERATIONS
The following table details the Company's results of operations as a percentage
of sales:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
------------------------------------------------------------------------
Cost of sales 78.6 77.5 78.1
------------------------------------------------------------------------
Depreciation 5.1 5.0 5.8
------------------------------------------------------------------------
Selling, general and
administrative expenses 7.4 7.5 8.5
------------------------------------------------------------------------
Goodwill amortization 0.7 0.8 1.0
------------------------------------------------------------------------
Minority interest, affiliate earnings
and other income, net (1.2) (0.8) (1.1)
------------------------------------------------------------------------
</TABLE>
Historically, the Company's sales have been seasonal in nature, with the
fourth quarter of each year generally having higher sales. This trend is less
prevalent in recent years. The fourth quarter has traditionally been the
quarter for new model introduction by the automotive industry, but this trend
is diminishing as the auto industry becomes more global and competitive
pressure for continual model updates intensifies.
1995 compared with 1994
North American automotive production was down 3% in 1995 versus 1994,
while Japan was down about 3%, Korea was up 12% and Europe was flat. Against
this backdrop, the Company was able to register gains in sales of 9% and
earnings of 15%. The gains were the result of the Company's participation in
one of the most rapidly growing segments in the overall automotive
marketplace--sport-utility vehicles and light trucks--and the Company's
ability to increase the value of components supplied per vehicle through ongoing
aggressive marketing and engineering programs. The Company's acquisition of the
Precision Forged Products Division ("PFPD") of Federal-Mogul in 1995 was
responsible for approximately 40% of the sales gain, or $52 million. After
adjusting for the acquisition and the 1994 disposition of a marine and
industrial business, sales increased 7%.
The following table shows net sales by product grouping:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------
(millions of dollars)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Powertrain Systems $544.8 $529.9 $418.4
- ------------------------------------------------------------------------
Automatic Transmission Systems 454.4 378.5 307.6
- ------------------------------------------------------------------------
Morse TEC 257.6 239.9 202.3
- ------------------------------------------------------------------------
Control Systems 107.6 97.3 83.7
- ------------------------------------------------------------------------
Interbusiness eliminations (35.3) (22.2) (26.6)
- ------------------------------------------------------------------------
</TABLE>
Powertrain Systems' sales grew by 3% in 1995 (8% excluding a 1994
disposition). In the 4WD transfer case business, the Torque-On-Demand(TM)
transfer case for the Ford Explorer yielded higher volume due to Ford's
increased capacity for this sport-utility vehicle. Increased features over the
transfer case model it replaced also improved the Company's revenue per unit.
Volume increases in large transfer cases for full-size pickup truck
applications were, in part, offset by the loss of the automatic locking hub
business. In 1995, the Company sold 452,000 small transfer cases and 395,000
large transfer cases compared with 398,000 and 343,000, respectively, in 1994.
Revenue from manual transmissions declined by $29 million to $148 million in
1995 because of the loss of the GM S-Truck business combined with declines in
volume for the principal remaining North American
applications--high-performance five-speed sporty cars such as Ford Mustang,
Chevrolet Camaro, Pontiac Firebird and Dodge Viper. See page 17 for a
discussion of the Company's decision to seek a buyer for the North American
manual transmission business.
The Automatic Transmission Systems group realized a $75.9 million increase
in sales over 1994, up 20%. Of the increase, $52 million resulted from the
acquisition of the PFPD business in April 1995. The remainder of the increase
(6% over 1994) resulted from volume gains in North America, Germany and Korea,
which was offset by approximately $2.3 million in price reductions to
customers. In Korea, the volume increase was market driven. In North America
and Europe, the volume gains were the result of the Company's increased content
per vehicle.
Borg-Warner Automotive 13
<PAGE> 16
This group sells to the widest array of OEMs and is most susceptible to trends
in the marketplace. In 1995, it benefited from the move to four and five-speed
automatic transmissions from three-speed models, which increases the Company's
componentry even if market volumes are flat. During 1995, the Company saw the
first of what it believes will be an increasing number of five-speed
transmission models, again affording the opportunity to improve volume without
being dependent upon overall market growth. The acquisition of the PFPD
business also should lead to opportunities to bundle components into a system,
thereby increasing the Company's content per vehicle. PFPD also offers a
promising product line in engine connecting rods, a new area for the Company.
The Morse TEC group continued its sales growth in 1995 with a 7% gain.
Two percentage points of the gain resulted from favorable exchange rates for
the yen. The remainder is the result of increased volume and improved product
mix. The group realized a full year of sales of the MORSE GEMINI(TM)
Transmission Chain System, which it began providing for the Chrysler LH series
in mid-1994. However, monthly volumes for the Chrysler LH fell in 1995 versus
1994. In 1995, the group was selected to provide the GEMINI system for all of
GM's front-wheel drive automatic transmission applications beginning in 1997.
The transmission chain business benefited from increased sales of sport-utility
vehicles, which use the Morse HY-VO(R) chain. Engine timing systems sales also
grew as Ford expanded its modular engine program to the Taurus/Sable as well as
the new F-Series pickup truck, which was introduced in the beginning of 1996.
The modular engine series uses a Morse engine timing system, consisting of
chains, sprockets, tensioners and snubbers. Previously the Company provided
only a single chain. The modular engine series at Ford now consists of 2.5
liter and 3.0 liter V-6s and 4.6 liter and 5.2 liter V-8s.
Control Systems realized an 11% sales increase in 1995. The group received a
full year of benefit of providing 100% of certain Chrysler transmission
solenoid requirements for its front-wheel drive vehicles. The group also
increased its volume of Ford EGR valves (required for emission regulations) and
began providing the clutch coil incorporated in the Company's Torque-On-Demand
transfer case. With the recent acquisition of SUM, the Control Systems business
is expected to contribute a greater portion of consolidated revenues in 1996
and beyond.
Because of the nature of the OEM marketplace, the Company's sales tend to be
concentrated among a small number of large customers. In 1995, the Company's
top ten customers constituted about 86% of total consolidated sales compared
with 83% in 1994. Ford, the Company's largest customer, accounted for 41% of
sales in 1995 and 39% of sales in 1994. General Motors accounted for 25% of
1995 sales and 27% of 1994 sales. These sales represent a variety of different
products to a number of OEM divisions worldwide.
Gross margin in 1995 slipped to 21.4% versus 22.5% in 1994. Four factors
were responsible for the decline. First, the decline in volume in the manual
transmission business had a material impact on margins. Excluding the manual
transmission business, gross margin would have been 23.5% in 1995 versus 24.5%
in 1994. Next, raw material prices increased at a faster rate than the
Company's ability to pass through such increases. For example, aluminum went
from $.63 per pound at the beginning of 1994 to $.97 at the beginning of 1995
to $.77 at the end of 1995. Aluminum is a key component of the Company's
transfer cases and cases for solenoids. The Company's contracts with OEMs have
economic pass-through clauses, but these do not provide for 100% recovery, and
in many cases, recovery takes place on a delayed basis. The Company has sought
to minimize its exposure to material cost fluctuations through pass-through
clauses, and through the use of alternative materials where feasible. The third
factor affecting the margin comparison is price reductions to customers where
the Company has not been able to achieve offsetting cost reductions. The timing
required to implement and get approval for cost reduction proposals is
partially responsible for this factor. The final significant factor in the
margin comparison is that the newly acquired PFPD business has a relatively
lower margin than the Company as a whole.
Annual price reductions to customers have become a permanent feature of the
Company's business environment. Price reductions granted in 1995 totaled
approximately $8.0 million. Contractual price reductions can in some cases be
offset by economic pass-through of material costs and credit for other product
features or savings realized by the customer. To maintain margins, the Company
has a three-part strategy. The first is to reduce costs by continual
improvement in the Company's production processes and by price reductions from
suppliers. The next is to update product designs to reduce cost and/or improve
productivity by the OEM customer in the final application. Finally, the Company
makes an ongoing effort to develop new products whose benefits support the
pricing.
The increase in sales, offset by the margin decline, translated into
earnings before interest and taxes ("EBIT") of $125.4 million, a $3.8 million,
or 3%, increase over 1994. Other trends affecting EBIT include higher
depreciation from increased capital spending in recent years. Depreciation
increased $7.1 million, or 12%, in 1995. Selling, general and administrative
expenses increased by $5.7 million, or 6%, in 1995. As a percentage of sales,
such expenses declined to 7.4% in 1995 from 7.5% in 1994. Included in the 1995
expenses was $36.7 million in research and development ("R&D") spending, a 9%
increase over 1994. The Company continued to invest in R&D at a rate in excess
of 2.7% of sales, recognizing that a key corporate strategy is to position the
Company on the leading technological edge. Examples of new products resulting
from the R&D investments in recent years
14 Borg-Warner Automotive
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
include the Torque-On-Demand transfer case, the MORSE GEMINI Chain System and
the new Ford one-way clutch/drum system, which the Company will begin to
produce in mid-1996. In 1994, the Company provided approximately $5.2 million
of additional accruals for environmental and other liabilities. No similar
accruals were provided for in 1995.
Equity in affiliate earnings and other income jumped to $18.6 million in
1995 compared with $10.6 million in 1994. The Company's 50%-owned joint
venture in Japan, NSK-Warner, continued to outperform the Japanese automotive
marketplace. The Company's share of earnings for this venture increased to
$19.0 million in 1995 versus $13.9 million in 1994. The venture experienced 16%
sales growth in 1995 to $352 million. Earnings were up approximately 25% in
local currency, with the rest of the increase attributable to the strong yen in
1995. The remainder of the increase resulted from the net loss in 1994 of $3.5
million from the disposition of certain non-core investments and assets. No
similar losses were realized in 1995.
Interest expense was essentially flat between the two years at around $14
million. Higher debt levels resulting from acquisitions during 1995 were offset
by lower interest rates on foreign debt outstanding. The Company benefited from
the general decline in foreign interest rates throughout 1995 and improved
spreads versus nominal borrowing rates in 1995. As a result of the above items,
pretax earnings were $111.2 million in 1995, a 3% increase over $107.7 million
in 1994.
Income taxes totaled $37.0 million in 1995, an effective rate of 33.3%,
versus an effective rate of 40.2% in 1994. A significant reason for the
improved tax rate was substantially higher credits against taxes otherwise
payable, particularly for research and development spending and foreign
credits. The Company has available approximately $22 million of foreign tax
credits, which can be offset only against foreign source income. Other factors
affecting the nominal tax rate were the level of affiliate earnings, which are
recognized on an after-tax basis, and goodwill amortization, which is
non-deductible.
1994 compared with 1993
The overall growth in the North American automotive market was 11% in 1994.
Europe was up slightly and Japan was essentially flat. Compared with these
market trends, Company sales of $1.2 billion increased 24% from 1993. Each of
the Company's four business groups contributed to the overall increase.
The Powertrain Systems group increased sales by $111.5 million, or 27% over
the prior year. This increase was driven by substantial volume growth in both
transfer cases and manual transmissions. Transfer case sales volume growth
resulted from increased installations in pickup trucks, as Ford Explorer sport-
utility sales were essentially flat at full capacity. The increase in manual
transmission sales resulted from gains in GM pickup truck installations, sporty
car installations and the introduction of the new Ford Mustang.
The Automatic Transmission Systems group reported sizable growth in U.S.
sales in 1994, while European sales increased only marginally as the region was
emerging from a recession. This group's products are on a large variety of
models from all major OEMs, so the group benefited from industry growth. A
higher rate of four-speed automatic transmission applications, which require
more of the Company's components, also caused sales to increase.
The Company's Morse TEC group continued its sales growth in 1994 with
increased volume of transmission chain and engine timing chain components and
systems. The group introduced the MORSE GEMINI Transmission Chain System in
mid-1994 on the Chrysler LH series, yielding substantial incremental 1994
sales. The timing system for the Ford modular engine program was expanded to
the 2.5 liter V-6 Duratec model for the Contour/ Mystique vehicles in mid-1994.
The group also benefited from increased popularity of four-wheel drive
vehicles, most of which use the Company's chain in their transfer cases.
Control Systems group sales have increased with the improving demand for
various solenoids and valves. The group provided 100% of Chrysler's
requirements for certain transmission solenoids.
Gross margin in 1994 of 22.5% improved over the prior year's 21.9%. This
translated to a greater gain in EBIT. EBIT of $121.6 million in 1994 increased
61.1% over 1993 levels of $75.5 million, and the EBIT margin increased to 10.0%
from 7.7%. The EBIT gains were the result of ongoing cost reduction programs,
as well as operating leverage due to the somewhat fixed nature of certain
elements of the cost structure. The Company continues to focus on its
manufacturing processes for opportunities to reduce cost.
As in 1993, the Company has adapted to the industry-wide practice of
continuous price reduction pressures from its customers, causing the Company to
give actual price reductions, as well as forego some recovery of inflationary
costs.
Selling, general and administrative expenses increased from $83.5 million in
1993 to $92.1 million in 1994 but decreased as a percentage of sales from 8.5%
in 1993 to 7.5% in 1994. The Company provided approximately $5.2 million of
additional accruals for environmental and other liabilities in 1994 and $3.3
million in 1993. Overall selling, general and administrative spending increased
at a much lower rate than the level of business increased.
Depreciation increased from $57.9 million in 1993 to $60.9 million in 1994.
The increase can be attributed to higher capital expenditures over the past two
years.
Borg-Warner Automotive 15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Equity in affiliate earnings and other income for both 1994 and 1993 was
$10.6 million. Even though the Japanese economy was essentially flat, the
Company's portion of its Japanese joint venture's earnings increased $4.5
million to $13.9 million in 1994. The increase in earnings from affiliates was
partially offset by a net loss of $3.5 million attributed to the sales of
certain non-core investments and assets in 1994.
Interest expense and finance charges decreased $4.5 million from 1993 to
$13.9 million in 1994. The decrease was due to lower debt levels, resulting
from higher operating cash flows in 1994 and proceeds from the initial public
offering in August 1993.
Pretax income improved $50.6 million, or 88.6% from the prior year income of
$57.1 million. The improvement can be attributed to the large increase in sales
volume, the improved margins and the decrease in interest expense and finance
charges offset by an increase in selling, general and administrative expenses.
Income taxes increased from $24.3 million in 1993 to $43.3 million in 1994.
However, the effective tax rate for 1994 decreased to 40.2% compared to 42.6%
in 1993. The income tax rate for both 1994 and 1993 exceeded the U.S. statutory
rate due to state taxes, foreign taxes that exceed U.S. rates and the
non-deductibility of goodwill amortization.
In 1993, the Company recorded a $130.8 million charge, net of tax benefit of
$76.8 million, for the cumulative effect of the adoption of Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106").
FINANCIAL CONDITION AND LIQUIDITY
The Company was able to maintain a strong financial position in 1995 despite
spending $46 million for various acquisitions during the year. The Company
ended the year with $135 million in balance sheet debt, an increase of $27
million over year-end 1994. The Company generated approximately $112 million in
cash from operations, compared with $158 million in 1994. The decrease
reflected a higher level of working capital offset by overall increased
business levels. This operating cash was used to fund $93 million in capital
spending and the acquisition program, with the shortfall necessitating the debt
increase.
In April 1995, the Company acquired PFPD, a maker of forged sintered
transmission and engine components, including races and connecting rods. The
price was $28 million plus certain working capital. In early 1995, the Company
acquired the remaining 47% of its Italian chain joint venture for $5 million.
In December, the Company acquired SUM, a French maker of control components
such as solenoids and sensors, for $13 million. The results of PFPD were
included in consolidated results beginning in May 1995. No results were
included for SUM, but its accounts were included in the December 31, 1995
balance sheet.
Capital spending for 1995 totaled $93 million, a slight reduction from the
$99 million in 1994 but substantially larger than the $66 million in 1993.
Major spending programs included the Ford large transfer case, expansion of the
MORSE GEMINI program, continued spending on the Ford modular engine timing
system, the Chrysler solenoid program, the Ford one-way clutch/drum program in
Germany and the purchase of the Seneca, South Carolina, plant for future
Mercedes-Benz transfer case business. Spending in 1995 was at a ratio of 1.4
times depreciation versus 1.6 times in 1994. The Company remains committed to
be a net investor in its continuing businesses. The Company believes that the
combination of cash flow from its operations and available credit facilities
will be adequate to satisfy cash needs for 1996. The credit facility, if
necessary, can be used for future acquisitions.
The Company's objective is to reach $2 billion in sales by the end of the
decade. Achievement of this goal will require both internal growth and selected
acquisitions similar to those made in 1995. The Company believes that it will
have adequate sources of capital, including funds from operations, borrowing
capacity and access to equity markets, if necessary, to support this program
growth.
At December 31, 1995, net working capital increased by $19 million,
excluding notes payable. This is in part the result of working capital of
acquisitions and in part a weakness in managing payables and accruals in line
with the levels of business. The Company increased the amount of its
receivables sold under its receivables transfer agreement by $10 million to $85
million. The increase in net property, plant and equipment of $61 million was
primarily due to net spending of $25 million and fixed assets of acquisitions
of $42 million, offset by disposals of $9 million.
The increase in investments and advances reflected the earnings from the
NSK-Warner joint venture, net of dividends of $13 million and an increase due
to the change in exchange rates. The Company entered into two other ventures in
1995 but has not yet invested in them. Divgi-Warner Private, Ltd. will be a
60%-owned joint venture making transfer cases and manual transmissions for the
Indian market. Huazhong Warner Transmission Company, Ltd. will manufacture
manual transmissions for light-truck applications for the central Chinese
market. The Company also formed joint ventures for the production of chains in
Taiwan and turbochargers in Italy.
Other balance sheet changes included an increase in other noncurrent assets
of $11 million due to the recognition of $10 million of intangible pension
assets. Retirement-related long-term liabilities rose by only $12 million,
despite a decline in the discount rate for such liabilities. This was due to
earnings from pension plan assets offset by the annual expenses associated with
such liabilities exceeding the related cash disbursements.
16 Borg-Warner Automotive
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Equity increased by $65 million primarily as a result of net earnings of $74
million offset by $14 million of dividends and $3 million less in currency
translation adjustments as rates were not as favorable for the U.S. dollar. The
equity component of the minimum pension liability declined by $3 million. This
was due to the earnings on pension assets exceeding the impact of the change in
discount rates.
OTHER FINANCIAL CONDITION MATTERS
North American manual transmission business
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 niche served by the
Company--sporty and performance cars--suffered declines of 20-30% in 1995, a
trend the Company feels is long-term in nature. This business had sales of $148
million in 1995, $177 million in 1994 and $102 million in 1993. Although
profitable in 1994, the business lost money on an operating basis in 1995 due
to declining volume. The business has a nominal investment of approximately $60
million, including $21 million in working capital. This amount does not reflect
any retirement-related liabilities. 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 sale
process is still in its very early stages. 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.
Environment
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 the 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 cost 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 in the aggregate amount of approximately
$11 million at December 31, 1995. 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 of these matters.
Other matters
Certain statements contained in this Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A") and
elsewhere in this Annual Report are "forward looking statements" as
contemplated by the Private Securities Litigation Reform Act of 1995. Such
forward looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those projected in the forward
looking statements. The Cautionary Statements at Exhibit 00.0 to the Company's
Form 10-K for the fiscal year ended December 31, 1995 as filed with the
Securities and Exchange Commission are incorporated into this MD&A and Annual
Report by reference. Investors are specifically referred to such Cautionary
Statements for a discussion of risk factors and uncertainties.
Borg-Warner Automotive 17
<PAGE> 20
MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The information in this report is the responsibility of management. Borg-Warner
Automotive, Inc. (the "Company") has in place reporting guidelines and policies
designed to ensure that the statements and other information contained in this
report present a fair and accurate financial picture of the Company. In
fulfilling this management responsibility, we make informed judgments and
estimates conforming with generally accepted accounting principles.
The accompanying financial statements have been audited by Deloitte & Touche
LLP, independent auditors. Management has made available all the Company's
financial records and related information deemed necessary by Deloitte & Touche
LLP. Furthermore, management believes that all representations made by it to
Deloitte & Touche LLP during its audit were valid and appropriate.
Management is responsible for maintaining a comprehensive system of internal
control through its operations that provides reasonable assurance that assets
are protected from improper use, that material errors are prevented or detected
within a timely period and that records are sufficient to produce reliable
financial reports. The system of internal control is supported by written
policies and procedures that are updated by management as necessary. The system
is reviewed and evaluated regularly by the Company's internal auditors as well
as by the independent auditors in connection with their annual audit of the
financial statements. The independent auditors conduct their evaluation in
accordance with generally accepted auditing standards and perform such tests of
transactions and balances as they deem necessary. Management considers the
recommendations of its internal auditors and independent auditors concerning
the Company's system of internal control and takes the necessary actions that
are cost-effective in the circumstances. Management believes that, as of
December 31, 1995, the Company's system of internal control was adequate to
accomplish the objectives set forth in the first sentence of this paragraph.
The Company's Finance and Audit Committee, composed entirely of directors of
the Company who are not employees, meets periodically with the Company's
management and independent auditors to review financial results and procedures,
internal financial controls and internal and external audit plans and
recommendations. To guarantee independence, the Finance and Audit Committee and
the independent auditors have unrestricted access to each other with or without
the presence of management representatives.
John F. Fiedler William C. Cline
Chairman and Vice President and Controller
Chief Executive Officer
January 31, 1996
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Board of Directors and Shareholders
of Borg-Warner Automotive, Inc.
We have audited the consolidated balance sheets of Borg-Warner Automotive, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Borg-Warner Automotive, Inc.
and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 6, the Company changed its method of accounting for
postretirement benefits other than pensions in 1993.
Deloitte & Touche LLP
Chicago, Illinois
January 31, 1996
18 Borg-Warner Automotive
<PAGE> 21
Consolidated Statements of Operations
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
<TABLE>
<CAPTION>
(millions of dollars except per share amounts) For the Year Ended December 31, 1995 1994 1993
===================================================================================================================================
<S> <C> <C> <C>
Net sales $ 1,329.1 $1,223.4 $985.4
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of sales 1,044.99 948.4 769.3
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation 68.0 60.9 57.9
- ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 97.8 92.1 83.5
- ------------------------------------------------------------------------------------------------------------------------------------
Minority interest 2.0 1.4 0.1
- ----------------------------------------------------------------------------------------------------------------------------------
Goodwill amortization 9.6 9.6 9.7
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in affiliate earnings and other income (18.6) (10.6) (10.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before interest expense and finance charges and income taxes 125.4 121.6 75.5
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense and finance charges 14.2 13.9 18.4
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 111.2 107.7 57.1
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 37.0 43.3 24.3
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change 74.2 64.4 32.8
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of initial application of new accounting standard
for postretirement benefits, net of taxes Note 6 -- -- (130.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 74.2 $ 64.4 $(98.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share (pro forma in 1993):
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change $ 3.15 $ 2.75 $ 1.41
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of initial application of new accounting
standard for postretirement benefits, net of taxes -- -- (5.62)
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 3.15 $ 2.75 $(4.21)
- ------------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding (pro forma in 1993) (thousands) 23,562 23,424 23,284
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Borg-Warner Automotive 19
<PAGE> 22
Consolidated Balance Sheets Borg-Warner Automotive, Inc. and
Consolidated Subsidiaries
<TABLE>
<CAPTION>
(millions of dollars) December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
Cash $ 5.1 $ 4.4
- ------------------------------------------------------------------------------------------------------------------------------------
Short term securities 7.0 10.5
- ------------------------------------------------------------------------------------------------------------------------------------
Receivables 91.4 89.5
- ------------------------------------------------------------------------------------------------------------------------------------
Inventories 94.0 81.3
- ------------------------------------------------------------------------------------------------------------------------------------
Prepayments 10.0 9.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 207.5 195.3
- -----------------------------------------------------------------------------------------------------------------------------------
Land 23.0 22.3
- ------------------------------------------------------------------------------------------------------------------------------------
Buildings 180.0 157.4
- ------------------------------------------------------------------------------------------------------------------------------------
Machinery and equipment 671.9 572.2
- ------------------------------------------------------------------------------------------------------------------------------------
Capital leases 7.5 7.5
- ------------------------------------------------------------------------------------------------------------------------------------
Construction in progress 45.4 67.4
- ------------------------------------------------------------------------------------------------------------------------------------
927.8 826.8
- ------------------------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation 404.8 364.5
- ------------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 523.0 462.3
- ------------------------------------------------------------------------------------------------------------------------------------
Investments and advances 140.0 126.1
- ------------------------------------------------------------------------------------------------------------------------------------
Goodwill 313.0 312.6
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred income tax asset 40.8 43.7
- ------------------------------------------------------------------------------------------------------------------------------------
Other noncurrent assets 110.9 100.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total other assets 604.7 582.7
- ------------------------------------------------------------------------------------------------------------------------------------
$1,335.2 $1,240.3
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Notes payable $ 31.6 $ 20.5
- ------------------------------------------------------------------------------------------------------------------------------------
Accounts payable and accrued expenses 194.3 203.7
- ------------------------------------------------------------------------------------------------------------------------------------
Income taxes payable 26.6 23.6
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 252.5 247.8
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt 103.1 86.8
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term liabilities:
- ------------------------------------------------------------------------------------------------------------------------------------
Retirement-related liabilities 337.4 325.9
- ------------------------------------------------------------------------------------------------------------------------------------
Other 39.0 41.7
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 376.4 367.6
- ------------------------------------------------------------------------------------------------------------------------------------
Minority stockholders' interest in consolidated subsidiaries 3.2 3.2
- ------------------------------------------------------------------------------------------------------------------------------------
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 23,054,526 shares in 1995
and 21,720,614 in 1994; outstanding shares of 23,054,526 in 1995 and 21,704,588 in 1994 0.2 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Non-voting common stock, $.01 par value; authorized 25,000,000 shares; issued 2,520,000 in
1995 and 1994; outstanding shares of 412,530 in 1995 and 1,417,595 in 1994 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Capital in excess of par value 560.1 562.5
- ------------------------------------------------------------------------------------------------------------------------------------
Retained earnings 34.1 (33.6)
- ------------------------------------------------------------------------------------------------------------------------------------
Currency translation adjustment 22.3 25.2
- ------------------------------------------------------------------------------------------------------------------------------------
Minimum pension liability adjustment (16.7) (19.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 600.0 534.9
- -----------------------------------------------------------------------------------------------------------------------------------
$1,335.2 $1,240.3
</TABLE>
See accompanying notes to consolidated financial statements.
20 Borg-Warner Automotive
<PAGE> 23
Consolidated Statements of Cash Flows Borg-Warner Automotive, Inc.
and Consolidated Subsidiaries
<TABLE>
<CAPTION>
(millions of dollars) For the Year Ended December 31, 1995 1994 1993
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING
------------------------------------------------------------------------------------------------------------------------
Earnings before cumulative effect of accounting change $ 74.2 $ 64.4 $32.8
------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile earnings to net cash flows from operations:
------------------------------------------------------------------------------------------------------------------------
Non-cash charges (credits) to operations:
------------------------------------------------------------------------------------------------------------------------
Depreciation 68.0 60.9 57.9
------------------------------------------------------------------------------------------------------------------------
Goodwill amortization 9.6 9.6 9.7
------------------------------------------------------------------------------------------------------------------------
Other, principally equity in affiliate earnings (19.2) (13.1) (11.1)
------------------------------------------------------------------------------------------------------------------------
Changes in assets and liabilities:
------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in receivables 6.9 2.1 (15.6)
------------------------------------------------------------------------------------------------------------------------
Increase in inventories (6.5) (12.3) (3.8)
------------------------------------------------------------------------------------------------------------------------
(Increase) decrease in prepayments 1.0 (3.5) (1.4)
------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in accounts payable and accrued expenses (28.6) 57.6 (12.5)
------------------------------------------------------------------------------------------------------------------------
Increase in income taxes payable 2.7 2.9 10.0
------------------------------------------------------------------------------------------------------------------------
Net change in other long-term assets and liabilities 4.1 (10.9) 8.1
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 112.2 157.7 74.1
------------------------------------------------------------------------------------------------------------------------
INVESTING
------------------------------------------------------------------------------------------------------------------------
Capital expenditures (92.5) (98.8) (65.5)
------------------------------------------------------------------------------------------------------------------------
Investment in affiliates (0.9) (0.6) (5.6)
------------------------------------------------------------------------------------------------------------------------
Payments for businesses acquired (46.5) -- --
------------------------------------------------------------------------------------------------------------------------
Proceeds from other assets 15.6 11.8 4.7
------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (124.3) (87.6) (66.4)
------------------------------------------------------------------------------------------------------------------------
FINANCING
------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in notes payable 4.0 (0.3) 19.0
------------------------------------------------------------------------------------------------------------------------
Additions to long-term debt 20.0 63.5 330.1
------------------------------------------------------------------------------------------------------------------------
Reductions in long-term debt -- (118.6) (185.9)
------------------------------------------------------------------------------------------------------------------------
Proceeds from options exercised 5.0 3.9 1.7
------------------------------------------------------------------------------------------------------------------------
Dividends paid $ (13.9) (13.3) --
------------------------------------------------------------------------------------------------------------------------
Proceeds from initial sale of common stock -- -- 83.2
------------------------------------------------------------------------------------------------------------------------
Purchases of treasury common stock -- -- (0.6)
------------------------------------------------------------------------------------------------------------------------
Net change in intercorporate indebtedness -- -- (254.9)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 15.1 (64.8) (7.4)
------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (5.8) 0.2 (0.3)
------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (2.8) 5.5 --
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 14.9 9.4 9.4
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 12.1 $ 14.9 $ 9.4
------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION
------------------------------------------------------------------------------------------------------------------------
Net cash paid during the year for:
------------------------------------------------------------------------------------------------------------------------
Interest expense $ 15.2 $ 13.4 $14.3
------------------------------------------------------------------------------------------------------------------------
Income taxes 31.7 37.3 16.3
------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
Borg-Warner Automotive 21
<PAGE> 24
Consolidated Statements of Stockholders' Equity Borg-Warner Automotive, Inc.
and Consolidated Subsidiaries
<TABLE>
<CAPTION>
Number of Shares (million of dollars) Stockholders' Equity
---------------------- --------------------------------------------------------------
Currency Minimum
trans- pension BW-
Issued Common Issued Capital in lation liability Security
For the Three Years Ended common stock in common excess of Retained adjust- adjust- invest-
December 31, 1995 stock treasury stock par value earnings ment ment ment
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 -- -- $ -- $ -- $ -- $ -- $ -- $728.2
Repayment of debt to BW-Security -- -- -- -- -- -- -- (156.1)
1993 pre-Spin-Off adjustment to
BW-Security investment -- -- -- -- -- -- -- (92.4)
Balance at Spin-Off -- -- -- -- -- -- -- 479.7
Allocation of BW-Security
investment 18,813,384 -- 0.2 487.6 -- 7.7 (15.8) (479.7)
Net loss -- -- -- -- (98.0) -- -- --
Dividends declared -- -- -- (2.9) -- -- -- --
Issuance of stock 3,660,300 -- -- 83.2 -- -- -- --
Purchase of treasury shares -- 24,200 -- (0.6) -- -- -- --
Shares issued under stock
option plans 270,586 -- -- 1.7 -- -- -- --
Adjustment for minimum
pension liability -- -- -- -- -- -- (12.5) --
Currency translation adjustment -- -- -- -- -- 9.0 -- --
Balance, December 31, 1993 22,744,270 24,200 0.2 569.0 (98.0) 16.2 (28.3) --
Net income -- -- -- -- 64.4 -- -- --
Dividends declared -- -- -- (10.4) (--) -- -- --
Shares issued under stock
option plans 393.939 (8,174) -- 3.9 -- -- -- --
Adjustment for minimum
pension liability -- -- -- -- -- -- 8.9 --
Currency translation adjustment -- -- -- -- -- 9.0 -- --
Balance, December 31, 1994 23,138,209 16,026 0.2 562.5 (33.6) 25.2 (19.4) --
Net income -- -- -- -- 74.2 -- -- --
Dividends declared -- -- -- (7.4) (6.5) -- -- --
Shares issued under stock
option plans 328,847 (16,026) -- 5.0 -- -- -- --
Adjustment for minimum
pension liability -- -- -- -- -- -- 2.7 --
Currency translation adjustment -- -- -- -- -- (2.9) -- --
Balance, December 31, 1995 23,467,056 -- $0.2 $ 560.1 $34.1 $22.3 $ (16.7) $ --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22 Borg-Warner Automotive
<PAGE> 25
Notes to Consolidated Financial Statements Borg-Warner Automotive, Inc. and
Consolidated Subsidiaries
INTRODUCTION
Borg-Warner Automotive, Inc. (the "Company") was a wholly owned subsidiary of
Borg-Warner Security Corporation ("BW-Security") until January 27, 1993, at
which time it was distributed to the stockholders of BW-Security in a tax-free
distribution (the "Spin-Off").
The Company is a technology-driven supplier of highly engineered components
and systems, primarily for automotive drivetrain applications. The Company,
which operates 33 manufacturing facilities in 12 countries serving the North
American, European and Asian automotive markets, is an original equipment
supplier to every major automaker in the world. Its products fall into four
operating groups: Automatic Transmission Systems, Control Systems, Morse TEC
and Powertrain Systems.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following paragraphs briefly describe significant accounting policies.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles of consolidation
The consolidated financial statements include all significant majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform to the current year presentation.
Short-term securities
Short-term securities are valued at cost, which approximates market. It is the
Company's policy to classify investments with original maturities of three
months or less as cash equivalents for purposes of preparing the Consolidated
Statement of Cash Flows. All short-term securities meet this criterion.
Accounts receivable
In 1995, an agreement with a financial institution to sell, without recourse,
eligible receivables was amended from $75 million to $85 million and extended
to January 1999. Accounts receivable were recorded net of this agreement, which
was fully utilized at December 31, 1995 and 1994 and a smaller foreign
agreement together totaling $85.6 million at December 31, 1995 and $75.4
million at December 31, 1994.
Inventories
Inventories are valued at the lower of cost or market. Cost of U.S. inventories
is determined by the last-in, first-out (LIFO) method, while the foreign
operations use the first-in, first-out (FIFO) method.
Property, plant and equipment and depreciation
Property, plant and equipment is valued at cost less
accumulated depreciation. Expenditures for maintenance, repairs and renewals of
relatively minor items are generally charged to expense as incurred. Renewals
of significant items are capitalized. Depreciation is computed generally on a
straight-line basis over the estimated useful lives of related assets ranging
from 3 to 30 years. For income tax purposes, accelerated methods of
depreciation are generally used.
Goodwill
Goodwill is being amortized on a straight-line basis over periods not exceeding
forty years. The Company periodically reviews its operations to determine
whether there has been a diminution in value of its goodwill. If the review
indicates a decline in the carrying value, the Company would adjust the
amortization accordingly.
Intercorporate allocations
In 1993, the Company entered into a service agreement with BW-Security which
provided for a monthly payment of $750,000 to BW-Security for a twelve-month
period to cover office space and services provided by BW-Security. The monthly
payment was reduced for services that the Company provided for itself. The
agreement expired on December 31, 1993. Following the expiration, the Company
subleased space at BW-Security's headquarters in Chicago for a cost equal to
50% of rent and common overhead expenses related to the BW-Security lease which
expires in 1999. This expense was approximately $125,000 per month.
The Company entered into a service agreement with BW-Security for the year
ending 1994, under which it purchased certain administrative services from
BW-Security. The Company paid BW-Security $1.9 million for the administrative
services in 1994. In 1995, only minor administrative services of BW-Security
were contracted for by the Company.
The Company paid BW-Security $10 million for a trademark license agreement
in 1994.
In 1996, the Company replaced the above-mentioned sublease of BW-Security's
headquarters in Chicago. The Company will continue to occupy the same space in
Chicago but will lease its space from the building's owners and sublease from
BW-Security a portion of the previously subleased space which is jointly used
by the two companies.
BW-Security investment
On the Consolidated Statement of Stockholders' Equity, the $92.4 million on the
1993 pre-Spin-Off adjustment to BW-Security investment line represents the
normal operating activity that took place between December 31, 1992 and the
date of the Spin-Off, and other various adjustments and allocations to the
investment account.
Borg-Warner Automotive 23
<PAGE> 26
Notes to Consolidated Financial Statements Borg-Warner Automotive, Inc.
and Consolidated Subsidiaries
Earnings per common share (pro forma in 1993)
Earnings per share have been calculated assuming that the offering of shares of
the Company's common stock in August 1993 had been outstanding for the entire
year.
Revenue recognition
The Company recognizes revenue upon shipment of product. Although the
Company may enter into long-term supply agreements with its major shipment of
goods is treated as a separate sale. Although the Company has entered into
long-term supply agreements, the price is not fixed over the life of the
agreements.
Financial instruments
Financial instruments consist primarily of investments in cash, short-term
securities, and receivables and obligations under accounts payable and accrued
expenses and debt instruments, primarily variable rate debt. The Company
believes that the fair value of the financial instruments approximates the
carrying value.
NOTE 2 BALANCE SHEET INFORMATION
Detailed balance sheet data are as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
-----------------------------------------------------------
<S> <C> <C>
(millions of dollars)
-----------------------------------------------------------
Receivables:
-----------------------------------------------------------
Customers $ 63.0 $ 68.2
-----------------------------------------------------------
Other 29.4 22.6
-----------------------------------------------------------
$ 92.4 $ 90.8
-----------------------------------------------------------
Less allowance for losses 1.0 1.3
-----------------------------------------------------------
Net receivables $ 91.4 $ 89.5
-----------------------------------------------------------
Inventories:
-----------------------------------------------------------
Raw material $ 48.6 $ 35.7
-----------------------------------------------------------
Work in progress 31.6 31.1
-----------------------------------------------------------
Finished goods 13.8 14.5
-----------------------------------------------------------
Total inventories $ 94.0 $ 81.3
-----------------------------------------------------------
Investments and advances:
-----------------------------------------------------------
NSK-Warner $128.9 $117.9
-----------------------------------------------------------
Other 11.1 8.2
-----------------------------------------------------------
Total investments and advances $140.0 $126.1
-----------------------------------------------------------
Other noncurrent assets:
-----------------------------------------------------------
Deferred pension assets $ 50.9 $ 40.5
-----------------------------------------------------------
Deferred tooling 43.5 38.6
-----------------------------------------------------------
Other 16.5 21.2
-----------------------------------------------------------
Total other noncurrent assets $ 110.9 $ 100.3
-----------------------------------------------------------
Accounts payable and accrued expenses:
-----------------------------------------------------------
Trade payables $114.9 $120.2
-----------------------------------------------------------
Payroll and related 15.4 16.9
-----------------------------------------------------------
Insurance 13.3 15.1
-----------------------------------------------------------
Retirement benefits 11.1 8.0
-----------------------------------------------------------
Other 39.6 43.5
-----------------------------------------------------------
Total accounts payable and accrued
expenses $194.3 $203.7
-----------------------------------------------------------
Other long-term liabilities:
-----------------------------------------------------------
Environmental reserve $ 10.9 $ 14.0
-----------------------------------------------------------
Other 28.1 27.7
-----------------------------------------------------------
Total other Long-term liabilities $ 39.0 $ 41.7
</TABLE>
Inventory held by U.S. operations was $72.6 million in 1995 and $65.9
million in 1994. Inventories, if valued at current cost instead of LIFO, would
have been greater by $11.1 million in 1995 and $10.9 million in 1994.
Dividends received from affiliates accounted for under the equity method
totaled $6.5 million in 1995, $4.3 million in 1994 and $2.6 million in 1993.
Accumulated amortization related to capital leases amounted to $5.4 million
in 1995 and $6.3 million in 1994. Accumulated amortization of goodwill
amounted to $83.1 million in 1995 and $73.5 million in 1994.
The Company has a 50% interest in 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 equity
in the earnings of NSK-Warner consists of the twelve months ended November 30
so as to reflect earnings on as current a basis as is reasonably feasible.
Following are summarized financial data for NSK-Warner, translated using the
ending or periodic rates as of and for the years ended March 31, 1995, 1994 and
1993:
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------------------------
(millions of dollars)
<S> <C> <C> <C>
-----------------------------------------------------------------
Balance sheet:
-----------------------------------------------------------------
Current assets $168.4 $ 98.3 $ 82.7
-----------------------------------------------------------------
Noncurrent assets 187.6 166.3 155.9
-----------------------------------------------------------------
Current liabilities 99.4 70.1 94.5
-----------------------------------------------------------------
Noncurrent liabilities 17.2 13.3 28.4
-----------------------------------------------------------------
Statement of operations:
-----------------------------------------------------------------
Net sales $336.8 $280.9 $269.7
-----------------------------------------------------------------
Gross profit 98.5 70.9 61.4
-----------------------------------------------------------------
Net income 35.9 23.3 15.9
-----------------------------------------------------------------
</TABLE>
24 Borg-Warner Automotive
<PAGE> 27
NOTE 3 COMMITMENTS
The Company is committed to pay rents on non-cancellable leases with terms
exceeding one year. Rental amounts committed for future years are summarized at
December 31, 1995 as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Leases Leases Total
------------------------------------------------------------
(millions of dollars)
------------------------------------------------------------
<S> <C> <C> <C>
1996 $ 6.3 $0.7 $ 7.0
------------------------------------------------------------
1997 7.6 0.7 8.3
------------------------------------------------------------
1998 5.9 1.8 7.7
------------------------------------------------------------
1999 3.1 0.6 3.7
------------------------------------------------------------
2000 2.2 0.8 3.0
------------------------------------------------------------
2001 and after 8.0 4.2 12.2
------------------------------------------------------------
Total $ 33.1 $8.8 $41.9
------------------------------------------------------------
</TABLE>
Total rental expense amounted to $7.5 million in 1995, $5.1 million in 1994
and $4.6 million in 1993. Future capital lease rental payments include interest
expense of $2.7 million and principal payments of $6.1 million.
NOTE 4 CONTINGENT LIABILITIES
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 PRPs' volumetric contribution of
waste to the 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 in the aggregate amount of approximately
$11 million at December 31, 1995. 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.
The Company has guaranteed borrowings of $3.5 million of affiliate
operations as of December 31, 1995 and 1994.
NOTE 5 NOTES PAYABLE AND LONG-TERM DEBT
Following is a summary of notes payable and long-term debt which reflects all
borrowings of the Company.
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
-------------------------------------------------------------------------------
Current Long-term Current Long-term
-------------------------------------------------------------------------------
(millions of dollars)
<S> <C> <C> <C> <C>
Bank borrowings $24.5 $ 19.5 $ 14.0 $ 0.7
-------------------------------------------------------------------------------
Bank term loans due through
1998 (at an average rate
of 6.0% in 1995 and
5.2% in 1994; and 5.6%
at December 1995) 6.9 77.7 -- 81.8
-------------------------------------------------------------------------------
14% Korean debentures
due 1995 -- -- 6.3 --
-------------------------------------------------------------------------------
Capital lease liabilities (at an
average rate of 6.5% in
1995 and 1994; and 7.1%
at December 1995) 0.2 5.9 0.2 4.3
-------------------------------------------------------------------------------
Total notes payable and
long-term debt $31.6 $103.1 $20.5 $ 86.8
-------------------------------------------------------------------------------
</TABLE>
Annual principal payments required as of December 31, 1995 are as follows
(in millions of dollars):
<TABLE>
<S> <C>
- ---------------------------------------------------------------
1996 $31.6
- ---------------------------------------------------------------
1997 34.2
- ---------------------------------------------------------------
1998 45.2
- ---------------------------------------------------------------
1999 19.2
- ---------------------------------------------------------------
2000 0.5
- ---------------------------------------------------------------
after 2000 4.0
- ---------------------------------------------------------------
</TABLE>
On January 27, 1993, BW-Security distributed the stock of the Company in the
Spin-Off. The capital structure of the Company was established with $480
million of equity and debt of $251 million.
For periods prior to the Spin-Off, all of the Company's debt and equity were
classified as BW-Security's investment and reported as equity. At January 1,
1993, BW-Security's investment was $728.2 million.
In December 1994, the Company amended and restated its credit agreement to a
$300 million revolving credit facility. The facility was unused at December
31, 1995 and 1994 and remains fully available through December 1999.
Borg-Warner Automotive 25
<PAGE> 28
Notes to Consoldiated Financial Statements Borg-Warner Automotive, Inc.
Consolidated Subsidiaries
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 of $84.6 million outstanding at December 31, 1995 are
subject to annual reductions of $6.9 million in 1996, $33.9 million in 1997 and
$43.8 million in 1998.
NOTE 6 RETIREMENT BENEFIT PLANS
A number of eligible salaried and hourly employees participate in contributory
or noncontributory defined benefit or defined contribution plans. The funding
policy for defined benefit plans is based upon independent actuarial valuations
and is within the limits required by ERISA for U.S. defined benefit plans and
similar legal requirements for non-U.S. plans.
The benefits provided to certain salaried employees covered under various
defined benefit plans are based on years of service and final average pay and
utilize the projected unit credit method for cost allocation. The benefits
provided to certain hourly employees under various defined benefit plans are
based on years of service and utilize the unit credit method for cost
allocation.
A number of employees in the U.S. participate in defined contribution plans,
where contributions by the Company or the subsidiary sponsoring the plans are
based on the employees' salary, age and years of service. These contributions
are charged to earnings as they are made to the various plans.
Retirement benefit expense amounted to $46.0 million, $39.9 million and
$44.8 million in 1995, 1994 and 1993, respectively. This expense includes
postretirement life insurance and medical benefits of $22.0 million, $21.3
million and $24.6 million in 1995, 1994 and 1993, respectively. Also included
are defined contribution plan expenses of $13.3 million, $10.3 million and $9.4
million in 1995, 1994 and 1993, respectively.
In 1993, the U.K. operations incurred a $1.2 million charge to reflect the
curtailment and augmentation of lump-sum retirement benefits for early
retirees.
Reconciliation of the funded status of the U.S. and foreign defined benefit
pension plans with related amounts included in the balance sheets follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 December 31, 1994
----------------------------------------------------------------------
OVER- UNDER- Over- Under-
FUNDED FUNDED funded funded
PLANS PLANS Plans Plans
----------------------------------------------------------------------
(millions of dollars)
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
----------------------------------------------------------------------
Vested benefits $ 77.9 $192.6 $ 69.0 $166.4
----------------------------------------------------------------------
Non-vested benefits 0.4 25.1 0.6 16.7
----------------------------------------------------------------------
Accumulated benefit obligations 78.3 217.7 69.6 183.1
----------------------------------------------------------------------
Effect of projected future
compensation levels 6.3 3.8 5.0 3.5
----------------------------------------------------------------------
Projected benefit obligation 84.6 221.5 74.6 186.6
----------------------------------------------------------------------
Plan assets at fair value 109.1 135.7 94.9 109.1
----------------------------------------------------------------------
Assets in excess of (less than)
projected benefit obligation 24.5 (85.8) 20.3 (77.5)
----------------------------------------------------------------------
Unamortized net (asset)
liability from transition (2.6) 1.5 (2.9) 1.5
----------------------------------------------------------------------
Unrecognized net loss 11.9 27.1 16.2 31.7
----------------------------------------------------------------------
Unrecognized prior
service cost 1.6 14.9 1.8 4.6
----------------------------------------------------------------------
Adjustment required to
recognize minimum
liability -- (41.9) -- (35.8)
----------------------------------------------------------------------
Net asset (liability) on
balance sheets $ 35.4 $ (84.2) $ 35.4 $(75.5)
----------------------------------------------------------------------
</TABLE>
Funding is based on requirements set forth by ERISA as well as requirements
imposed by collective bargaining agreements.
As part of the Spin-Off in 1993, the Company agreed with the PBGC to make an
additional $17.5 million contribution to an underfunded pension plan in 1993
and make a supplemental contribution of $1 million per year for the next ten
years.
Assets held in trust for the defined benefit plans are comprised of
marketable equity and fixed income securities and real estate.
Net periodic pension expense was comprised as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
-------------------------------------------------------------------------
(millions of dollars)
-------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 3.2 $ 3.6 $ 3.3
-------------------------------------------------------------------------
Interest cost 21.1 20.2 21.8
-------------------------------------------------------------------------
Actual (return) loss on assets (55.8) 3.7 (24.3)
-------------------------------------------------------------------------
Net amortization and deferrals 40.3 (20.3) 7.7
-------------------------------------------------------------------------
Net periodic pension cost $ 8.8 $ 7.2 $ 8.5
-------------------------------------------------------------------------
</TABLE>
26 Borg-Warner Automotive
<PAGE> 29
Notes to Consolidated Financial Statements Borg-Warner Automotive,
Inc. and Consolidated
Subsidiaries
The Company's assumptions used as of December 31, 1995, 1994 and 1993 in
determining the pension cost and pension liability shown above were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------------------------------------
(percent)
------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. plans:
------------------------------------------------------------------------
Discount rate 7.25 8.5 7.25
------------------------------------------------------------------------
Rate of salary progression 4.5 4.5 4.5
------------------------------------------------------------------------
Long-term rate of return on assets 9.5 9.5 9.5
------------------------------------------------------------------------
Foreign plans:
------------------------------------------------------------------------
Discount rate 7.0-7.5 7.5-8.0 7.0-7.25
------------------------------------------------------------------------
Rate of salary progression 3.5-6.0 4.0-6.0 4.0-6.0
------------------------------------------------------------------------
Long-term rate of return on assets 7.75 8.25 7.25
------------------------------------------------------------------------
</TABLE>
Effective January 1, 1993, the Company adopted the provisions of SFAS 106
using the immediate recognition method and recorded a cumulative effect charge
of $130.8 million (net of $76.8 million of deferred tax benefit) or $5.62 per
share. In the U.S., the Company has in place comprehensive medical plans
covering certain retirees and their eligible dependents. The plans require
certain cost-sharing payments by retirees. The plans are not funded. The
assumptions used as of January 1, 1993 in adopting SFAS 106 were a 9.0%
discount rate and medical inflation of 12.0% in 1993, descending to a 7.0%
annual rate by 1998. The liability related to foreign plans, where applicable,
is not significant.
Net periodic postretirement benefit cost was comprised as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
-----------------------------------------------------------
(millions of dollars)
-----------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 2.7 $ 3.2 $ 3.2
-----------------------------------------------------------
Interest cost 19.3 18.1 21.4
-----------------------------------------------------------
$22.0 $21.3 $24.6
</TABLE>
Reconciliation of the actuarial present value of postretirement benefit
obligations of the U.S. plans with the related liability included in the
balance sheets follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
------------------------------------------------------------
(millions of dollars)
------------------------------------------------------------
<S> <C> <C>
Actuarial present value of postretirement
benefit obligations:
------------------------------------------------------------
Retirees $194.1 $176.7
------------------------------------------------------------
Other fully eligible participants 28.8 23.5
------------------------------------------------------------
Other active participants 52.7 31.6
------------------------------------------------------------
Accumulated Postretirement benefit 275.6 231.8
obligation
------------------------------------------------------------
Unrecognized gain (loss) (19.4) 19.7
------------------------------------------------------------
Unrecognized prior service cost 0.3 0.3
------------------------------------------------------------
Net liability on balance sheets $256.5 $251.8
------------------------------------------------------------
Assumed discount rate (percent) 7.25 8.5
------------------------------------------------------------
</TABLE>
As of December 31, 1995, the actuarial present value of postretirement
medical and life insurance benefits was calculated using assumptions of medical
inflation of 8.25% in 1996, descending to a 5.25% annual rate by 1999. As of
December 31, 1994, the actuarial present value of postretirement medical and
life insurance benefits was calculated using assumptions of medical inflation
of 9.25% in 1995, descending to a 5.25% annual rate by 1999. A one percentage
point increase in the assumed medical inflation rate at December 31, 1995 would
have increased the accumulated benefit obligation, service cost and interest
cost by approximately $34.3 million, $0.7 million and $2.2 million,
respectively.
NOTE 7 OPERATIONS OUTSIDE THE UNITED STATES
The Company's equity in net earnings of consolidated subsidiaries located
outside the United States was $18.7 million in 1995, $13.9 million in 1994 and
$6.6 million in 1993. The Company's equity in the net assets of these
companies is summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995 1994
-----------------------------------------------------------
(millions of dollars)
<S> <C> <C>
Current assets $ 79.1 $ 63.8
-----------------------------------------------------------
Noncurrent assets 152.1 125.9
-----------------------------------------------------------
Total assets 231.2 189.7
-----------------------------------------------------------
Current liabilities 80.8 56.2
-----------------------------------------------------------
Noncurrent liabilities 87.3 77.3
-----------------------------------------------------------
Net assets before minority interest 63.1 56.2
-----------------------------------------------------------
Minority interest 3.2 3.2
-----------------------------------------------------------
Equity in net assets $ 59.9 $ 53.0
-----------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, current liabilities included debt of $27.2
million and $16.3 million and noncurrent liabilities included debt of $28.4
million and $32.5 million, respectively.
NOTE 8 EQUITY IN AFFILIATE EARNINGS AND OTHER INCOME
Items included in equity in affiliate earnings and other income consist of:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
-----------------------------------------------------------
(millions of dollars)
-----------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 0.4 $ 0.5 $ 0.5
-----------------------------------------------------------
Loss on asset disposals, net (1.0) (4.2) (1.0)
-----------------------------------------------------------
Equity in affiliate earnings 19.2 14.3 11.1
-----------------------------------------------------------
Total $18.6 $10.6 $10.6
-----------------------------------------------------------
</TABLE>
Borg-Warner Automotive 27
<PAGE> 30
Notes to Consolidated Financial Statements Borg-Warner Automotive, Inc.
and Consolidated Subsidiaries
NOTE 9 GEOGRAPHIC INFORMATION
The Company's consolidated operations are engaged entirely in the manufacture
and sale of automotive components and systems. General corporate assets
primarily include cash, marketable securities, a deferred tax asset and
investments and advances.
Sales, transfers between geographic areas, operating profit and identifiable
assets by major geographic area, in millions of dollars, are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------
<S> <C> <C> <C>
Sales:
- --------------------------------------------------------------
United States $1,114.8 $1,048.1 $829.5
- --------------------------------------------------------------
Europe 125.8 105.3 96.9
- --------------------------------------------------------------
Other foreign 88.5 70.0 59.0
- --------------------------------------------------------------
Total $1,329.1 $1.223.4 $985.4
</TABLE>
Included in U.S. sales are export sales of $140 million in 1995, $136
million in 1994 and $101 million in 1993.
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------
Transfers between geographic areas:
- ----------------------------------------------------------------------------
United States $13.4 $12.5 $9.0
- ----------------------------------------------------------------------------
Europe 7.1 6.8 6.1
- ----------------------------------------------------------------------------
Other foreign 3.8 1.1 1.2
- ----------------------------------------------------------------------------
Total $24.3 $20.4 $16.3
Year Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating profit:
- ----------------------------------------------------------------------------
United States $ 83.4 $102.1 $60.4
- ----------------------------------------------------------------------------
Europe 11.4 7.8 5.4
- ----------------------------------------------------------------------------
Other foreign 26.3 21.3 15.8
- ----------------------------------------------------------------------------
Total 121.1 131.2 81.6
Other expenses, net (including corporate
headquarters expense of $12.4 million,
$12.3 million and $10.7 million for
1995, 1994 and 1993, respectively) (15.3) (24.4) (17.7)
- -------------------------------------------------------------------------------
Interest income and equity in
affiliate earnings 19.6 14.8 11.6
- -------------------------------------------------------------------------------
Interest expense and finance charges (14.2) (13.9) (18.4)
- -------------------------------------------------------------------------------
Income before taxes 111.2 107.7 57.1
- -------------------------------------------------------------------------------
Income taxes (37.0) (43.3) (24.3)
- -------------------------------------------------------------------------------
Net earnings $ 74.2 $ 64.4 $32.8
- -------------------------------------------------------------------------------
December 31, 1995 1994
- -------------------------------------------------------------------------------
Identifiable assets:
- -------------------------------------------------------------------------------
United States $924.3 $864.6
- -------------------------------------------------------------------------------
Europe 149.3 110.2
- -------------------------------------------------------------------------------
Other foreign 81.9 83.8
- -------------------------------------------------------------------------------
Total assets of operations 1,155.5 1,058.6
- -------------------------------------------------------------------------------
Affiliates at equity 132.7 123.2
- -------------------------------------------------------------------------------
General corporate assets 57.4 67.1
- -------------------------------------------------------------------------------
Consolidation--elimination (10.4) (8.6)
- -------------------------------------------------------------------------------
Total $1,335.2 $1,240.3
</TABLE>
Sales to major customers
Consolidated sales included sales to Ford Motor Company of approximately 41%,
39% and 40% and to General Motors Corporation of approximately 25%, 27% and 24%
for the years ended December 31, 1995, 1994 and 1993, respectively. No other
single customer accounted for 10% or more of consolidated sales in the period
1993 through 1995.
Note 10 STOCK OPTIONS AND MANAGEMENT STOCK PURCHASES
Stock option plans
In connection with the Spin-Off, in January 1993 each outstanding option under
the BW-Security stock option plan was exchanged for (i) an adjusted option to
purchase the same number of post-Spin-Off shares of BW-Security common stock at
a price equal to 50% of the pre-Spin-Off exercise price and (ii) an option to
purchase the same number of shares of common stock of the Company at a price
equal to 50% of the pre-Spin-Off exercise price. Options granted to date to
purchase common stock of the Company under this plan carry exercise prices
ranging from $5.00 to $20.20 per share. The 300,603 outstanding options at
December 31, 1995 will be fully vested in 1996.
In 1993, the Company adopted a stock option plan which authorizes the grant
of options to purchase 500,000 shares of the Company's common stock. Options
granted to date under this plan carry exercise prices ranging from $22.50 to
$30.63 per share. The 331,500 outstanding options at December 31, 1995 will
vest over periods up to three years based upon employment.
The fair value of the options granted in the current year are immaterial in
nature.
A summary of the two plans' shares under option at December 31, 1995,
1994 and 1993 follows:
28 Borg-Warner Automotive
<PAGE> 31
Notes to Consolidated Financial Statements Borg-Warner Automotive, Inc.
Consolidated Subsidiaries
NOTE 12 INCOME TAXES
The Company has not provided deferred taxes on the excess of its financial book
investment in foreign joint ventures and subsidiaries over its tax basis in
these investments as they are essentially permanent in nature. It is not
practicable to estimate the amount of unrecognized deferred tax liability.
Income before taxes from continuing operations and provision for taxes, in
millions of dollars, consists of:
Components of income tax expense
<TABLE>
<CAPTION>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
U.S. NON-U.S. TOTAL U.S. Non-U.S. Total U.S. Non-U.S. Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before income taxes $78.8 $32.4 $111.2 $83.3 $24.4 $107.7 $42.2 $14.9 $57.1
- ------------------------------------------------------------------------------------------------------------------------
Income taxes:
- ------------------------------------------------------------------------------------------------------------------------
Current:
- ------------------------------------------------------------------------------------------------------------------------
Federal/foreign $19.0 $12.5 $ 31.5 $29.4 $ 9.7 $ 39.1 $16.5 $11.6 $28.1
- ------------------------------------------------------------------------------------------------------------------------
State 6.4 - 6.4 7.5 - 7.5 4.9 - 4.9
- ------------------------------------------------------------------------------------------------------------------------
25.4 12.5 37.9 36.9 9.7 46.6 21.4 11.6 33.0
- ------------------------------------------------------------------------------------------------------------------------
Deferred (2.1) 1.2 (0.9) (4.1) 0.8 (3.3) (5.4) (3.3) (8.7)
- ------------------------------------------------------------------------------------------------------------------------
Total income taxes $23.3 $13.7 $ 37.0 $ 32.8 $10.5 $43.3 $16.0 $8.3 $24.3
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The analysis of the variance of income taxes as reported from income
taxes computed at the U.S. statutory rate for consolidated operations for 1995,
1994 and 1993, in millions of dollars, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at U.S. statutory
rate of 35% $38.9 $37.7 $20.0
- ---------------------------------------------------------------------------------------------------
Increases (decreases) resulting from:
- ---------------------------------------------------------------------------------------------------
Income (net) from non-U.S. sources 4.7 4.6 4.4
- ---------------------------------------------------------------------------------------------------
State taxes 4.1 4.3 2.7
- ---------------------------------------------------------------------------------------------------
Business tax credits, net (5.7) (1.7) (5.1)
- ---------------------------------------------------------------------------------------------------
Affiliate earnings (6.7) (5.0) (3.8)
- ---------------------------------------------------------------------------------------------------
Nontemporary differences 1.6 3.1 6.7
- ---------------------------------------------------------------------------------------------------
Other, net 0.1 0.3 (0.6)
- ---------------------------------------------------------------------------------------------------
Income taxes as reported $37.0 $43.3 $24.3
- ---------------------------------------------------------------------------------------------------
</TABLE>
Following are the gross components of the deferred tax liability (asset) as
of December 31, 1995 and 1994 in millions of dollars:
<TABLE>
<CAPTION>
1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred tax liabilities $110.7 $103.5
- --------------------------------------------------------------------------------------------------
Deferred tax assets $151.5 $147.2
- --------------------------------------------------------------------------------------------------
Foreign tax credits 22.3 17.3
- --------------------------------------------------------------------------------------------------
Valuation allowance (22.3) (151.5) (17.3) (147.2)
- --------------------------------------------------------------------------------------------------
Net deferred tax asset $(40.8) $(43.7)
- --------------------------------------------------------------------------------------------------
</TABLE>
The foreign tax credit has been fully considered in the valuation
allowance.
The most significant element of the gross deferred tax liability at
December 31, 1995 and 1994, in millions of dollars, was as follows:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Excess of financial accounting basis in
fixed assets over tax basis $69.7 $70.3
- -------------------------------------------------------------------------------------------------
</TABLE>
Significant elements of the gross deferred tax asset at December 31, 1995
and 1994, in millions of dollars, were as follows:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Pension liabilities $20.1 $19.1
- -------------------------------------------------------------------------------------------------
Postretirement benefits 97.4 95.7
- -------------------------------------------------------------------------------------------------
</TABLE>
NOTE 13 RESEARCH AND DEVELOPMENT COSTS
Total research and development costs amounted to $36.7 million in 1995, $33.8
million in 1994 and $25.2 million in 1993.
30 Borg-Warner Automotive
<PAGE> 32
Notes to Consolidated Financial Statements Borg-Warner Automotive, Inc. and
Consolidated Subsidiaries
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1995 1994
- -------------------------------------------------------------------------- ----------------------------------
Weighted- Weighted-
Shares average Shares average
(thousands) exercise plan (thousands) exercise price
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 987 $17.66 1,343 $14.75
- ----------------------------------------------------------------------------------------------------------------------
Granted 16 $25.43 79 $26.12
- ----------------------------------------------------------------------------------------------------------------------
Exercised (345) $14.69 (402) $ 9.47
- ----------------------------------------------------------------------------------------------------------------------
Forfeitures (26) $19.65 (33) $19.44
- ----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 632 $19.39 987 $17.66
- ----------------------------------------------------------------------------------------------------------------------
Options exercisable at year-end 384 537
- ----------------------------------------------------------------------------------------------------------------------
Shares available for future grants 144 184
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1993
- ----------------------------------------------------------------------------------------
Weighted-
Shares average
(thousands) exercise plan
<S> <C> <C>
- ----------------------------------------------------------------------------------------
Outstanding at beginning of year 1,339 $10.44
- ----------------------------------------------------------------------------------------
Granted 341 $24.95
- ----------------------------------------------------------------------------------------
Exercised (274) $ 6.39
- ----------------------------------------------------------------------------------------
Forfeitures (63) $14.56
- ----------------------------------------------------------------------------------------
Outstanding at end of year 1,343 $14.75
- ----------------------------------------------------------------------------------------
Options exercisable at year-end 833
- ----------------------------------------------------------------------------------------
Shares available for future grants 230
- ----------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information
about the options outstanding at December 31, 1995:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------- --------------------------------------
Weighted-
Number average Weighted- Number Weighted-
Range of outstanding remaining average exercisable average
exercisable prices at 12/31/95 contractual life exercise prices at 12/31/95 exercise prices
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
$5.00 114 1.6 $ 5.00 89 $ 5.00
- -------------------------------------------------------------------------------------------------------------------------
13.91-20.20 187 5.2 17.82 183 17.87
- -------------------------------------------------------------------------------------------------------------------------
22.50-25.00 288 7.7 24.73 112 24.92
- -------------------------------------------------------------------------------------------------------------------------
25.31-30.63 43 8.5 28.58 - -
- -------------------------------------------------------------------------------------------------------------------------
$5.00-30.63 632 5.9 19.39 384 16.93
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 11 INTERIM FINANCIAL INFORMATION (UNAUDITED)
The following information includes all adjustments, as well as
normal recurring items, which the Company considers necessary
for a fair presentation of 1995 and 1994 interim results of
operations.
<TABLE>
<CAPTION>
1995 1994
(millions of dollars) Quarter Ended Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------------
March June Sept. Dec. Year March June Sept. Dec. Year
31 30 30 31 1995 31 30 30 31 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $327.8 $356.0 $298.5 $346.8 $1,329.1 $287.2 $312.1 $285.0 $339.1 $1,2334.1
- ----------------------------------------------------------------------------------------------------------------------------
Cost of sales 253.0 276.9 241.0 274.0 1,044.9 221.2 240.5 221.6 265.1 948.1
- ----------------------------------------------------------------------------------------------------------------------------
Depreciation 17.2 18.1 15.8 16.9 68.0 15.2 15.6 15.8 14.3 60.9
- ----------------------------------------------------------------------------------------------------------------------------
Selling, general and
administrative expenses 26.4 26.3 22.1 23.0 97.8 23.0 22.0 24.6 22.5 92.1
- ----------------------------------------------------------------------------------------------------------------------------
Minority interest 0.4 0.6 0.5 0.5 0.5 2.0 0.2 0.3 0.4 1.4
- ----------------------------------------------------------------------------------------------------------------------------
Goodwill amortization 2.4 2.3 2.5 2.4 9.6 2.4 2.4 2.4 2.4 9.6
- ----------------------------------------------------------------------------------------------------------------------------
Equity in affiliate earnings
and other income (4.2) (5.9) (4.7) (3.8) (18.6) (2.9) (3.9) (3.5) (0.3) (10.6)
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before interest
expense and finance
charges and income taxes 32.6 37.7 21.3 33.8 125.4 28.1 35.0 23.8 34.7 121.6
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense and
finance charges 3.5 3.6 3.6 3.5 14.2 3.5 3.4 3.4 3.6 13.9
- ----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes 29.1 34.1 17.7 30.3(a) 111.2 24.6 31.6 20.4 31.1 107.7
- ----------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 11.5 13.0 4.5 8.0(b) 37.0 10.9 12.8 8.4 11.2 43.3
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 17.6 $ 21.1 $ 13.2 $ 22.3 $ 74.2 $ 13.7 $ 18.8 $ 12.0 $ 19.9 $ 64.4
- ----------------------------------------------------------------------------------------------------------------------------
Earnings per share:
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings $0.75 $ 0.90 $ 0.56 $ 0.95 $ 3.15 $ 0.58 $ 0.81 $ 0.51 0.85 $ 2.75
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes favorable year-end adjustments of approximately $3.0 million
relating prmarily to inventories and accruals.
(b) Includes a favorable year-end adjustment of approximately $3.0 million
relating primarily to research and experimentation credits and foreign
credits.
<PAGE> 33
Notes to Consolidated Financial Statements
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
NOTE 14 PENDING SALE OF NORTH AMERICAN MANUAL TRANSMISSION BUSINESS
In January 1996, the Company announced that its North American manual
transmission business was being offered for sale. This decision was the result
of the Company only having one niche available in the declining North American
rear-wheel drive manual transmission market--sporty and performance cars. Other
applications are served by suppliers allied with OEMs. The sporty and
performance car niche suffered 20-30% declines in 1995, a trend viewed as
long-term by the Company. In 1995, the Company incurred an operating loss on
this business on net sales of $148 million. The Company's investment in the net
assets of the business approximates $60 million, including net working capital
of $21 million and excluding any retirement-related liabilities. Disposal of
the business is expected to be completed in 1996. Because the sale process is
in an early stage, no estimate can be made as to the range of gain or loss
reasonably likely to be incurred upon disposal of the business.
Selected Financial Data
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
<TABLE>
<CAPTION>
Year Ended December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(millions of dollars, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $1,329.1 $1,223.4 $ 985.4 $ 926.0 $ 820.3
- ------------------------------------------------------------------------------------------------------------------------------------
Cost of sales 1,044.9 948.4 769.3 755.2(a) 660.4
- ------------------------------------------------------------------------------------------------------------------------------------
Depreciation 68.0 60.9 57.9 64.3(a) 62.0(b)
- ------------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 97.8 92.1 83.5 69.6 77.7
- ------------------------------------------------------------------------------------------------------------------------------------
Minority interest 2.0 1.4 0.1 (1.3) (1.3)
- ------------------------------------------------------------------------------------------------------------------------------------
Goodwill amortization 9.6 9.6 9.7 9.7 9.7
- ------------------------------------------------------------------------------------------------------------------------------------
Equity in affiliate earnings and other income (18.6) (10.6) (10.6) (6.9) (9.9)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense and finance charges 14.2 13.9 18.4 44.8(d) 53.8(d)
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 37.0 43.3 24.3 2.7 3.7
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect
of accounting change 74.2 64.4 32.8 (12.1) (35.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change(b) - - (130.8) - 4.8
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 74.2 $ 64.4 $ (98.0) $ (12.1) $ (31.0)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share before cumulative
effect of accounting changec $ 3.15 $ 2.75 $1.41 $ (0.53) $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of initial application of
new accounting standard for postretire-
ment benefits, net of taxes per sharec - - (5.62) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per sharec $ 3.15 $ 2.75 $ (4.21) $ (0.53) $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding (thousands)(c) 23,562 23,424 23,284 23,005 -
- ------------------------------------------------------------------------------------------------------------------------------------
Cash dividend declared per share $ 0.60 $ 0.45 $ 0.125 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (at end of period)
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $1,335.2 $1,240.3 $1,159.4 $ 1,074.2 $ 1,080.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt 134.7 107.3 159.6 -(d) - (d)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Cost of sales for 1992 included a $28.7 million charge for the write-off of
excess capacity and depreciation includes $7.3 million related to such capacity.
(b) Amounts reflect the adoption of SFAS No. 109 in 1991 and SFAS No. 106 in
1993. In 1991, depreciation increased by $11.2 million because of an adjustment
to fixed assets related to the adoption of SFAS No. 109.
(c) See Note 1 to the Company's Consolidated Financial Statements for
additional information with respect to per share calculations.
(d) Prior to the Spin-Off, interest was allocated to the Company on the
basis of the Company's relative operating investment compared to BW-Security's
overall capital investment (debt plus equity). Prior to the Spin-Off, all debt
was considered to be part of the BW-Security investment.
Borg-Warner Automotive 31
<PAGE> 34
DIRECTORS
Matthias B. Bowman
Vice Chairman, Investment Banking
Merrill Lynch & Co.
John F. Fiedler
Chairman and Chief Executive Officer
Albert J. Fitzgibbons, III
Partner and Director
Stonington Partners, Inc.
Paul E. Glaske
Chairman, President and Chief Executive Officer
Blue Bird Corporation
Ivan W. Gorr
Chairman and Chief Executive Officer, Retired
Cooper Tire and Rubber Company
James J. Kerley
Chairman, Retired
Rohr, Inc.
Alexis P. Michas
Partner and Director
Stonington Partners, Inc.
Donald C. Trauscht
Chairman, Retired
Borg-Warner Security Corporation
COMMITTEES OF THE BOARD
EXECUTIVE COMMITTEE
John F. Fiedler
Albert J. Fitzgibbons, III
Alexis P. Michas
Donald C. Trauscht
FINANCE AND AUDIT COMMITTEE
James J. Kerley, Chairman
Ivan W. Gorr
Alexis P. Michas
Donald C. Trauscht
COMPENSATIAON COMMITTEE
Albert J. Fitzgibbons, III, Chairman
Paul E. Glaske
Alexis P. Michas
Donald C. Trauscht
EXECUTIVE OFFICERS
John F. Fiedler
Chairman and Chief Executive Officer
Gary P. Fukayama
Executive Vice President
President and General Manager,
Automatic Transmission Systems Corporation
Fred M. Kovalik
Executive Vice President
President and General Manager,
Powertrain Systems Corporation
Ronald M. Ruzic
Executive Vice President
President and General Manager,
Morse TEC Corporation
Terry A. Schroeder
Vice President
President and General Manager,
Control Systems Corporation
Robin J. Adams
Vice President and Treasurer
William C. Cline
Vice President and Controller
Christopher A. Gebelein
Vice President, Business Development
Laurene H. Horiszny
Vice President, Secretary and General Counsel
Geraldine Kinsella
Vice President, Human Resources
EXECUTIVE OPERATING COMMITTEE
Robin J. Adams
Leslie Cleveland Hague, Director,
Communications/Investor Relations
William C. Cline
Greg Dziegielewski, Director, Patents
John F. Fiedler
Gary P. Fukayama
Christopher A. Gebelein
Laurene H. Horiszny
Geraldine Kinsella
Fred M. Kovalik
Dennis W. Krol, Director, Taxes
Ronald M. Ruzic
Terry A. Schroeder
32 Borg-Warner Automotive
<PAGE> 35
Corporate Information
COMPANY HEADQUARTERS
Borg-Warner Automotive, Inc.
200 South Michigan Avenue
Chicago, IL 60604
312-322-8500
STOCK LISTING
Borg-Warner Automotive shares are
listed and traded on the New York Stock Exchange. Ticker symbol: BWA. The stock
tables in most daily newspapers list the company shares as "BorgWAut."
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
- --------------------------------------------
Fourth Quarter 1995 $32 1/4 $27 5/8
- --------------------------------------------
Third Quarter 1995 33 7/8 28 1/2
- --------------------------------------------
Second Quarter 1995 29 3/8 23 1/2
- --------------------------------------------
First Quarter 1995 26 1/8 22 3/8
- --------------------------------------------
High Low
- --------------------------------------------
Fourth Quarter 1994 $25 1/2 $21 3/8
- --------------------------------------------
Third Quarter 1994 29 1/8 22 5/8
- --------------------------------------------
Second Quarter 1994 31 5/8 22 5/8
- --------------------------------------------
First Quarter 1994 34 26 3/8
- --------------------------------------------
</TABLE>
DIVIDENDS
The current dividend practice established by the directors is to declare
regular quarterly dividends. The last such dividend of 15 cents per share of
common stock was declared on January 16, 1996, payable February 15, 1996, to
stockholders of record on February 1, 1996. The current practice is subject to
review and change at the discretion of the Board of Directors.
STOCKHOLDERS
As of December 31, 1995, there were 163 holders of record.
ANNUAL MEETING OF STOCKHOLDERS
The 1996 annual meeting of stockholders will be held on Tuesday, April 23,
1996, beginning at 11:00 a.m. on the 19th floor of the company's headquarters
at 200 South Michigan Avenue in Chicago.
SECURITIES INFORMATION
Chemical Bank is the transfer agent,
registrar and dividend dispersing agent for Borg-Warner Automotive common
stock. Communications concerning stock transfer, change of address, lost stock
certificates or proxy statement for annual meeting should be directed to:
Chemical Mellon
Shareholder Services
450 West 33rd Street, 15th Floor
New York, NY 10001
800-851-9677
INVESTOR INQUIRIES
Financial investors and securities analysts requiring financial reports,
interviews or other information should contact the Communications/Investor
Relations Department at company headquarters, 312-322-8683.
FORM 10-K REPORT
A copy of the company's annual report
on Form 10-K, filed with the Securities and Exchange Commission, is available
to stockholders without charge by writing the Communications/Investor Relations
Department at the company headquarters or calling 312-322-8547 or 8607.
Designed and produced by Boller Coates & Neu, Chicago, Ill.
Photography by Anthony Arciero, Howard Ash and Andy Goodwin
Printed by Lake County Press, Waukegan, Ill.
Borg-Warner Automotive
<PAGE> 36
BORG-WARNER AUTOMOTIVE, INC.
200 South Michigan Avenue
Chicago, Illinois 60604
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition at December 31, 1995
(audited) and the Condensed Consolidated Statement of Income for the Twelve
Months Ended December 31, 1995 (audited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,100
<SECURITIES> 7,000
<RECEIVABLES> 91,400
<ALLOWANCES> 0
<INVENTORY> 94,000
<CURRENT-ASSETS> 207,500
<PP&E> 927,800
<DEPRECIATION> 404,800
<TOTAL-ASSETS> 1,335,200
<CURRENT-LIABILITIES> 252,500
<BONDS> 103,100
0
0
<COMMON> 200
<OTHER-SE> 599,800
<TOTAL-LIABILITY-AND-EQUITY> 1,335,200
<SALES> 1,329,100
<TOTAL-REVENUES> 1,329,100
<CGS> 1,044,900
<TOTAL-COSTS> 1,044,900
<OTHER-EXPENSES> 158,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,200
<INCOME-PRETAX> 111,200
<INCOME-TAX> 37,000
<INCOME-CONTINUING> 74,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,200
<EPS-PRIMARY> 3.15
<EPS-DILUTED> 3.15
</TABLE>
