SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1997 Commission file number: 1-12162
Borg-Warner Automotive, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3404508
(State of Incorporation) (I.R.S. Employer Identification No.)
200 South Michigan Avenue
Chicago, Illinois 60604
(312) 322-8500
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------ -----------------------
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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) on March 16, 1998 was approximately $1.4 billion. As
of March 16, 1998, the registrant had 23,610,409 shares of Common Stock and
1,500 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./x/
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated herein by reference into
the Part of the Form 10-K indicated.
Part of Form 10-K
into which
Document incorporated
-------- ---------------------
Borg-Warner Automotive, Inc. 1997 Annual
Report to Stockholders Parts II and IV
Borg-Warner Automotive, Inc. Proxy Statement
for the 1998 Annual Meeting of Stockholders Part III
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
INDEX
Item
Number Page
PART I
1. Business 3
2. Properties 10
3. Legal Proceedings 10
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 11
6. Selected Financial Data 11
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 12
11. Executive Compensation 12
12. Security Ownership of Certain Beneficial Owners and
Management 12
13. Certain Relationships and Related Transactions 12
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 13
<PAGE>
PART I
Item 1. Business
Borg-Warner Automotive, Inc., a Delaware corporation (the "Company"), was
incorporated in 1987. The Company is a leading, global Tier I supplier of highly
engineered systems and components, primarily for automotive powertrain
applications. These products are manufactured and sold worldwide, primarily to
original equipment manufacturers ("OEMs") of passenger cars, sport utility
vehicles and light trucks. The Company, which operates 36 manufacturing
facilities in 12 countries serving the North American, European and Asian
automotive markets, is an original equipment supplier to every major OEM in the
world.
Company Business Units
The Company's products fall into four categories: Powertrain Systems,
Automatic Transmission Systems, Morse TEC and Air/Fluid Systems. Net revenues by
product grouping for the three years ended December 31, 1997, 1996 and 1995, are
as follows (in millions of dollars):
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Powertrain Systems $ 605.2 $ 562.7 $ 544.8
Automatic Transmission Systems 519.8 481.8 454.4
Morse TEC 324.1 276.5 257.6
Air/Fluid Systems 357.0 258.8 107.6
AG Kuhnle, Kopp & Kausch 24.8 -- --
--------- ------- --------
1,830.9 1,579.8 1,364.4
Interbusiness eliminations (63.9) (39.7) (35.3)
-------- --------- ----------
Net sales $1,767.0 $1,540.1 $1,329.1
========= ========== =========
</TABLE>
The Company's newest acquisition, a majority interest in AG Kuhnle, Kopp &
Kausch, is shown separately since the Company is not the sole stockholder and
has not yet finalized its plans concerning future integration of the business
nor determined which product grouping is appropriate.
The sales information presented above excludes the sales by the Company's
unconsolidated joint ventures. See "Joint Ventures." Such sales totaled
approximately $386 million in 1997, approximately $430 million in 1996 and
approximately $394 million in 1995.
The Company conducts business in one industry segment. See Note 9 of the
Notes to Consolidated Financial Statements on pages 33 and 34 of the Company's
Annual Report.
Powertrain Systems
Powertrain Systems' products include four-wheel drive ("4WD") and all-wheel
drive transfer cases.
Transfer cases are installed primarily 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. The Company has designed and developed an
exclusive 4WD Torque-on-Demand ("TOD") transfer case system, which allows
vehicles to automatically shift from two-wheel drive to 4WD when electronic
sensors indicate it is necessary. The TOD transfer case is available on the Ford
Explorer, the best selling sport-utility vehicle in the United States in 1996
and 1997, and the new Ford Expedition and Lincoln Navigator.
Sales of 4WD transfer cases represented 33% of the Company's total revenues
for 1997 and 30% of total revenues for 1996 and 1995. The Company believes that
it is the world's leading independent manufacturer of 4WD transfer cases,
producing approximately 1.2 million transfer cases in 1997. 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, the Ford Expedition, the Ford F-150
pick-up truck, the Mercury Mountaineer and the Lincoln Navigator.
The Company supplies transfer cases for a new Mercedes-Benz M-Class
all-activity vehicle, which was first made available to consumers in 1997 and is
manufactured at Mercedes-Benz's new United States passenger-vehicle
manufacturing facility. Under a five-year agreement, which has a three-year
extension provision, the Company developed and supplies Mercedes-Benz with new
two-speed, electronically controlled, all-wheel drive transfer cases that are
compatible with its anti-skid braking system.
Automatic Transmission Systems
The Company engineers and manufactures components for automatic
transmissions and the systems which combine such components around the world.
Principal product lines include friction plates, one-way clutches, transmission
bands, races and torque converters for automatic transmissions. The Company is a
supplier to virtually every major automatic transmission manufacturer in the
world. The Company's 50%-owned joint venture in Japan, NSK-Warner Kabushiki
Kaisha ("NSK Warner"), is a leading producer of friction plates and one-way
clutches in Japan.
Morse TEC
Morse TEC manufactures chain and chain systems, including HY-VO
front-wheel drive transmission chain ("FWD") and 4WD chain, MORSE GEMINI Chain
Systems, timing chain and timing chain systems, crankshaft and camshaft
sprockets, chain tensioners and snubbers.
HY-VO(R) chain is used in transmissions and for 4WD 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 the 1997 model year, beginning in
the third quarter of 1996, GM began incorporating this system in its FWD
vehicles. The chain in a transfer case distributes power between the front and
rear output shafts which, in turn, drive the front and rear wheels. The Company
believes it is the world's leading manufacturer of chain for FWD transmissions
and 4WD transfer cases. The Company is an original equipment supplier to every
major manufacturer that uses chain for such applications.
The Company's timing chain system is used on Ford's new family of overhead
cam engines, including the Duratech and Triton engines. The Company has been
selected to design and produce complete timing chain systems for Chrysler's new
3.7 liter and 4.7 liter overhead cam engines beginning in 1998. The Company
believes that it is the world's leading manufacturer of timing chain.
Air/Fluid Systems
Air/Fluid Systems designs and manufactures sophisticated mechanical,
electro-mechanical and electronic components and systems used for engine air
intake and exhaust management, fuel and vapor management, electronically
controlled automatic transmissions and steering and suspension systems. Key
products for engine air intake management produced by the Company include
throttle bodies, intake manifolds, throttle position sensors, and complete
engine induction systems. The Company's products for emissions control and
improved gas mileage include mechanical and electrical air pumps, air control
valves and pressure feedback exhaust gas re-circulation valves. The fuel
management and vapor recovery products include roll valves, canister purge
solenoids and complete vapor recovery systems. The Company also produces oil
pumps.
Effective October 31, 1997, the Company purchased from Penske Corporation a
63% interest in AG Kuhnle, Kopp & Kausch, a German corporation ("AG Kuhnle"). AG
Kuhnle is a manufacturer of turbochargers and turbomachinery. AG Kuhnle supplies
turbochargers to European diesel and spark ignition engine manufacturers for use
in the passenger car and commercial vehicle markets as well as for industrial
locomotive and marine engines. AG Kuhnle's turbomachinery business manufacturers
compressors and turbines for use in the energy and environmental support
markets. AG Kuhnle's sales of turbochargers included in the Company's 1997
results of operations for the period from October 31, 1997 were $25 million. The
Company is primarily interested in AG Kuhnle's turbocharger business which
provides the Company with another strategic technology to develop advanced
powertrain solutions to reduce emissions and improve fuel economy. The net
carrying value of the turbo-machinery business is included in prepayments and
other current assets on the December 31, 1997 balance sheet.
Joint Ventures
The Company has six joint ventures in which it has a less-than-100%
ownership interest. Results from two of these ventures, in which the Company is
the majority owner, are consolidated as part of the Company's results. The
Company's ownership interest in the remaining four joint ventures ranges from
39% to 50%. The results of NSK-Warner, Warner-Ishi Corporation, Beijing Warner
Gear Co., Ltd. and Warner-Ishi Europe S.p.A. are reported using the equity
method.
Management of the unconsolidated joint ventures is shared with the
Company's respective joint venture partners. Certain information concerning the
Company's joint ventures is set forth below:
<PAGE>
<TABLE>
<CAPTION>
Percentage Fiscal
Owned by Location 1997 Sales
Year the of Joint Venture ($ 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. $297
Warner-Ishi
Corporation Turbochargers 1980 50% U.S. Ishikawajima-Harima
Heavy Industries
Co., Ltd. $19
Beijing Warner
Gear Co., Ltd. Manual
transmissions 1992 39% China Beijing Gear Works $25
Warner-Ishi
Europe,S.p.A. Turbochargers 1995 50% Italy Ishikawajima-Harima
Heavy Industries
Co., Ltd. $13
Consolidated
Borg-Warner
Automotive
Korea, Inc. Friction
products 1987 60% Korea Hyundai Motor
Company,
NSK Warner K.K. $32
Divgi-Warner
Limited Transfer cases,
manual transmissions
and automatic locking
hubs 1995 60% India Divgi Metalwares,
Ltd. $0.2
</TABLE>
See Note 9 of the Notes to Consolidated Financial Statements on pages 33 and 34
of the Company's Annual Report for geographic information.
<PAGE>
Customers
Approximately 85% of the Company's total sales in 1997 were to automotive
OEMs, with the remaining 15% 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 1997 to Ford, General Motors Corporation
("GM") and Chrysler Corporation ("Chrysler") constituted approximately 43%, 20%
and 10%, respectively, of its 1997 consolidated sales. Approximately 16% of
consolidated sales for 1997 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 pages 33 and 34 of the Company's Annual
Report.
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.
Sales and Marketing
Each of the Company's four business groups has its own sales function
headed by a Vice President of Sales. Account executives for each group are
assigned to serve specific OEM customers for one or more of a business group's
products. Such account executives spend the majority of their time in direct
contact with OEM purchasing and engineering employees and are responsible for
servicing existing business and for identifying and obtaining new business.
Because of their close relationship with the OEMs, account executives are able
to identify and meet customers' needs based upon their knowledge of the
Company's products and design and manufacturing capabilities. Upon securing a
new order, account executives participate in product launch team activities as a
key interface to the customers.
Research and Development
Each of the Company's business groups has its own research and development
("R&D") organization. Over 400 employees, including engineers, mechanics and
technicians, are engaged in R&D 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 R&D personnel conceive, design, develop and manufacture new
proprietary automotive components and systems. R&D personnel also work to
improve current products and production processes. The Company believes its
commitment to R&D will allow it to obtain new orders from its OEM customers.
Consistent with its strategy of developing technologically innovative
products, the Company spent approximately $59 million, $54.4 million and
$36.7 million in 1997, 1996 and 1995, respectively, on R&D activities. Not
included in the reported R&D activities were customer-sponsored R&D activities
that were approximately $8 million, $10 million and $11.3 million in 1997, 1996
and 1995, respectively.
Patents and Licenses
The Company has approximately 2,000 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 "Borg-Warner Automotive" trade name, and the housemark adopted in 1984
are material to the Company's business. The Company and Borg-Warner Security
Corporation ("BW-Security") have entered into an Assignment of Trademarks and
License Agreement (the "Trademark Agreement") whereby BW-Security assigned
certain trademarks and trade names (including the "Borg-Warner 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 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 and for others, 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 products to meet their own
requirements or to compete with the Company. There can be no 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 health care costs and, in some cases, export subsidies and/or raw
materials subsidies.
Employees
As of December 31, 1997, the Company and its consolidated subsidiaries had
approximately 10,400 salaried and hourly employees (as compared with 9,800
employees at December 31, 1996), of which approximately 8,100 were
U.S. employees. Approximately 37% of the Company's domestic hourly workers are
unionized. The Company's Muncie, Indiana plant has approximately 1,600 employees
represented by the United Auto Workers union. Approximately 880 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 1998 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 1997 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
United States Environmental Protection Agency and certain state environmental
agencies and private parties as potentially responsible parties ("PRPs") at
various hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") and equivalent state laws
and, as such, may presently be liable for the cost of cleanup and other remedial
activities at 26 such 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; remediation alternatives;
estimated legal fees; and other factors, the Company has established a reserve
for indicated environmental liabilities in the aggregate amount of approximately
$7.2 million at December 31, 1997. The Company expects this amount to be
expended over the next three to five years.
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"). In connection with the Spin-Off, the Company and BW-Security
entered into a Distribution and Indemnity Agreement (the "Indemnity Agreement")
which provided for, among other matters, certain cross-indemnities designed
principally to place financial responsibility for the liabilities of businesses
conducted by BW-Security and its subsidiaries with BW-Security and financial
responsibility for liabilities of the Company or related to its automotive
businesses with the Company. BW-Security has requested indemnification from the
Company for past costs of approximately $3.3 million and for future costs
related to these environmental matters. At the time of the Spin-Off, BW-Security
maintained a letter of credit for approximately $9 million with respect to the
principal portion of such environmental matters. The parties submitted the
matter to arbitration and on November 4, 1997, the Arbitrator ruled against the
Company. The Company appealed the Arbitrator's ruling and on February 13, 1998,
the ruling was upheld by an arbitration appeal panel. The Company plans to
vigorously contest the arbitration award and plans to oppose any attempt by
BW-Security to obtain a judgment based on the arbitration. The Company does not
currently have information sufficient to determine the extent of its liability
to BW-Security for indemnification of such liabilities.
In addition, on January 27, 1998, the Company filed a lawsuit in the
Circuit Court of Cook County, Illinois against BW-Security and certain others,
alleging, among other things, breach of fiduciary duty and breach of contract in
connection with apportionment of environmental liabilities and assets in the
Spin-Off. While the Company intends to pursue its claims vigorously and believes
such claims to be valid, it is too early in the proceedings to determine the
likelihood of success in this litigation. Both parties have agreed to mediate
this dispute.
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 16,
1998.
Name Age Position with Company
- -------- ----- ---------------------
John F. Fiedler 59 Chairman and Chief Executive Officer
Robin J. Adams 44 Vice President and Treasurer
William C. Cline 48 Vice President and Controller
Gary P. Fukayama 50 Executive Vice President
Christopher A. Gebelein 51 Vice President--Business Development
Laurene H. Horiszny 42 Vice President, Secretary and General Counsel
Geraldine Kinsella 50 Vice President--Human Resources
Fred M. Kovalik 60 Executive Vice President
Ronald M. Ruzic 59 Executive Vice President
Robert D. Welding 49 Vice President
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 International Corporation.
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.
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.
Mr. Fukayama has been Executive Vice President of the Company since
November 1992 and is Group President and General Manager of Borg-Warner
Automotive Air/Fluid Systems Corporation. He was President and General Manager
of Borg-Warner Automotive Automatic Transmission Systems Corporation from
January 1995 to April 1996. He was President and General Manager of Borg-Warner
Automotive Transmission & Engine Components Corporation, Automatic Transmission
Systems from November 1992 to December 1994.
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 since
March 1994 and is President and General Manager of Borg-Warner Automotive
Powertrain Systems Corporation. He was General Manager-Heavy and Medium Duty
Transmissions for Eaton Corporation from April 1992 to February 1994.
Mr. Ruzic has been Executive Vice President of the Company since
October 1992 and is Group President and General Manager of Borg-Warner
Automotive Morse TEC Corporation ("Morse TEC"). He was President and General
Manager of Borg-Warner Automotive Transmission & Engine Components Corporation,
Chain Systems, from October 1989 to December 1994 and of Morse TEC from
January 1995 to October 1997.
Mr. Welding has been Vice President of the Company since May 1996 and is
President and General Manager of Borg-Warner Automotive Automatic Transmission
Systems Corporation. He was Vice President--Operations of Borg-Warner Automotive
Automatic Transmission Systems Corporation, Bellwood Plant, from November 1993
to May 1996. He was Vice President--Operations of Borg-Warner Automotive
Automatic Transmission Systems Corporation, Frankfort Plant, from November 1990
to October 1993.
Item 2. Properties
The Company has numerous manufacturing facilities which are strategically
located in the United States and worldwide. The Company has three facilities in
Germany, two facilities in Japan, India and Italy, and one facility in each of
Canada, China, France, Korea, Taiwan 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.
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>
1997
Percent of
Capacity
Utilization
Location (1)(2)
--------- --------
<S> <C> <C>
U.S.: Blytheville, Arkansas (leased); Bellwood,
Dixon and Frankfort, Illinois; Muncie, Indiana;
Sterling Heights, Coldwater, Livonia and Romulus,
Michigan; Water Valley, Mississippi; Ithaca,
New York; Gallipolis, Ohio; Sallisaw, Oklahoma; Cary,
North Carolina; Seneca, South Carolina and Longview,
Texas (leased). 126%
Non-U.S.: Canada, China, France, Germany, Italy, India,
Japan, Korea, Taiwan and Wales. 86%
</TABLE>
(1) 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"), a discontinued property and casualty
insurance subsidiary and 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 1997.
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 16, 1998, there were approximately 244 holders of record
of Common Stock and one registered holder of the Company's Non-Voting Common
Stock.
The Company has paid cash dividends of $.15 per share on its Common Stock
and Non-Voting Common Stock during each quarter for the last two fiscal years.
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 1996 and 1997 were:
<TABLE>
<CAPTION>
<S> <C> <C>
Quarter ended High Low
- --------------- -------- -------
March 31, 1996 $33.625 $28.375
June 30, 1996 $43.000 $33.625
September 30, 1996 $40.375 $34.000
December 31, 1996 $40.875 $33.250
March 31, 1997 $42.625 $38.375
June 30, 1997 $53.250 $42.000
September 30, 1997 $57.750 $50.437
December 31, 1997 $60.875 $46.750
</TABLE>
Item 6. Selected Financial Data
The Selected Financial Data for the five years ended December 31, 1997 with
respect to the following line items set forth on page 38 of the Company's Annual
Report is incorporated herein by reference and made a part of this report: Net
sales; earnings before cumulative effect of accounting change; earnings 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 17 through 22 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 23 through 37
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, 1997 and 1996
is set forth in Note 11 of the Notes to Consolidated Financial Statements on
page 35 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.
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) Beneficial Ownership Reporting 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," and "Employment Agreements" 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 page 5 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 caption "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 23 through 37 of the Company's Annual Report are incorporated herein by
reference:
Independent Auditors' Report
Consolidated Statements of Operations--years ended December 31, 1997, 1996
and 1995
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Cash Flows--years ended December 31, 1997, 1996 and
1995
Consolidated Statements of Stockholders' Equity--years ended December 31,
1997, 1996 and 1995
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, 1997.
<PAGE>
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 20, 1998
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
20th day of March, 1998.
Signature Title
/s/ John F. Fiedler Chairman of the Board of Directors and Chief
John F. Fiedler Executive Officer (Principal Executive Officer)
/s/ Robin J. Adams Vice President and Treasurer (Principal
Robin J. Adams Financial Officer)
/s/ William C. Cline Vice President and Controller (Principal
William C. Cline Accounting Officer)
*
Andrew F. Brimmer Director
*
William E. Butler Director
*
Jere A. Drummond Director
*
Paul E. Glaske Director
*
Ivan W. Gorr Director
*
James J. Kerley Director
*
Alexis P. Michas Director
*
John Rau Director
/s/ John F. Fiedler As attorney-in-fact for the directors marked
John F. Fiedler by an asterisk.
<PAGE>
EXHIBIT INDEX
Exhibit
Number Document Description
- --------- -----------------------
*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).
*4.1 Indenture, dated as of November 1, 1996, between Borg-Warner
Automotive, Inc. and The First National Bank of Chicago
(incorporated by reference to Exhibit No. 4.1 to Registration
Statement No. 333-14717).
*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
(incorporated by reference to Exhibit 10.2 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
*10.3 Second Amendment of Credit Agreement dated as of January 16, 1996
(incorporated by reference to Exhibit 10.3 of the Company's Annual
Report on Form 10-K for the year ended December 31, 1996).
*10.4 Replacement and Restatement Agreement dated as of October 10, 1996 to
the Credit Agreement dated as of December 7, 1994 (incorporated by
reference to Exhibit 10.1 on Form 10-Q for the quarter ended
September 30, 1996).
*10.5 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).
*10.6 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).
*10.7 Borg-Warner Automotive, Inc. Management Stock Option Plan, as amended
(incorporated by reference to Exhibit No. 10.6 to Registration
Statement No. 33-64934).
*10.8 Borg-Warner Automotive, Inc. 1993 Stock Incentive Plan as amended
effective November 8, 1995 and further amended April 29, 1997
(incorporated by reference to Appendix A of the Company's Proxy
Statement dated March 21, 1997).
<PAGE>
Exhibit
Number Document Description
- ------ ---------------------
*10.9 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).
*10.10 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).
*10.11 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).
*10.12 Third Amendment of Receivables Transfer Agreement dated as of
October 23, 1995 (incorporated by reference to Exhibit No. 10.11 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995).
*10.13 Fourth Amendment of Receivables Transfer Agreement dated as of
June 21, 1996 (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).
*10.14 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).
*10.15 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).
*10.16 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
(incorporated by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
*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 Employment Agreement for John F. Fiedler dated January 27,
1998.
Exhibit
Number Document Description
- ------- ---------------------
+*10.22 Form of Change of Control Employment Agreement for Executive Officers
(incorporated by reference to Exhibit No. 10.1 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended September 30,
1997).
+10.23 Amendment to the Change of Control Employment Agreement between the
Company and John F. Fiedler effective January 30, 1998.
*10.24 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).
+*10.25 Borg-Warner Automotive, Inc. Executive Stock Performance Plan
(incorporated by reference to Exhibit No. 10.23 of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995).
*10.26 Agreement of Purchase and Sale dated as of May 31, 1996 by and among
Coltec Industries Inc., Holley Automotive Group, Ltd., Holley
Automotive Inc., Coltec Automotive Inc., and Holley Automotive Systems
GmbH and Borg-Warner Automotive, Inc., Borg-Warner Automotive
Air/Fluid Systems Corporation and Borg-Warner Automotive Air/Fluid
Systems Corporation of Michigan (incorporated by reference to
Exhibit 10.1 of the Company's Current Report on Form 8-K dated as of
June 17, 1996).
13.1 Annual Report to Stockholders for the year ended December 31, 1997
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).
21.1 Subsidiaries of the Company.
23.1 Independent Auditors' Consent.
24.1 Power of Attorney.
27.1 Financial Data Schedule.
99.1 Cautionary Statements.
* Incorporated by reference.
+ Indicates a management contract or compensatory plan or arrangement required
to be filed pursuant to Item 14(c).
AMENDMENT
TO THE
CHANGE OF CONTROL EMPLOYMENT AGREEMENT
The Change of Control Employment Agreement (the "Agreement") entered into
between Borg-Warner Automotive, Inc., a Delaware Corporation (the "Company"),
and John F. Fiedler (the "Executive"), dated July 24, 1997, is hereby amended by
mutual agreement of the parties, effective as of January 30, 1998, as follows:
1. The word "and" is deleted from the end of Section 6(a)(iii) of the
Agreement, the "." at the end of Section 6(a)(iv) of the Agreement is replaced
by "; and", and the following new subparagraph (v) is added to the end of
Section 6(a) of the Agreement:
"(v) The $2,000,000 Non-Negotiable Full Recourse Promissory Note executed
by the Executive in favor of the Company on January 30, 1998 (the "Note") shall
be forgiven with respect to all outstanding principal and accumulated interest
thereon as of the date of the Executive's termination of employment."
2. The following sentence is added to the end of Section 6(b) of the
Agreement:
"In addition, upon the termination of the Executive's employment by
reason of the Executive's death during the Employment Period, the Note
shall be forgiven with respect to all outstanding principal and
accumulated interest thereon as of the date of the Executive's death."
3. The following sentence is added to the end of Section 6(c) of the
Agreement:
"In addition, upon the termination of the Executive's employment by
reason of the Executive's Disability during the Employment Period, the
Note shall be forgiven with respect to all outstanding principal and
accumulated interest thereon as of the date of the Executive's
termination of employment."
4. The following sentence is added to the end of Section 6(d) of the
Agreement:
"If the Executive's employment shall be terminated for Cause during
the Employment Period or if the Executive voluntarily terminates
employment other than for Good Reason during the Employment Period,
the outstanding principal and accumulated interest thereon under the
Note will become immediately due and payable in full to the Company by
the Executive."
IN WITNESS WHEREOF, the Executive and, pursuant to the authorization from
its Board of Directors, the Company have caused this Amendment to the Agreement
to be executed as of the effective date specified above.
/s/ JOHN F. FIEDLER
--------------------------------
John F. Fiedler
BORG-WARNER AUTOMOTIVE, INC.
By:/s/ LAURENE H. HORISZNY
---------------------------
Laurene H. Horiszny,
Vice President,
General Counsel and Secretary
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
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 Asian markets. Its
products include a wide variety of highly engineered components and systems
primarily related to drivetrain applications. Examples include "shift quality"
automotive transmission components and systems, four-wheel drive transfer cases,
automotive chain, engine timing components and systems, and a variety of air and
fluid control components and systems for engine and fuel systems control.
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.
Results of Operations
The following table details the Company's results of operations as a percentage
of sales:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 77.8 78.3 78.6
Depreciation 4.0 4.6 5.1
Selling, general and
administrative expenses 7.5 8.0 7.4
Goodwill amortization 1.0 0.9 0.7
Loss on sale of business - 4.0 -
Minority interest, affiliate earnings
and other income, net (0.6) (0.7) (1.2)
------- ------- -------
Earnings before interest
and taxes 10.3% 4.9% 9.4%
======= ======== =========
</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.
1997 compared with 1996
The Company realized 14.7% growth in revenues in 1997 versus 1996. This growth
was against a backdrop of a minimal increase in the worldwide automobile and
light truck production. North American, European and Japanese production in 1997
were up 3%, 5%,and 6% respectively. The Company's sales growth included a 13%
gain in operations owned for all comparable periods. The three operations
acquired from Coltec Industries, Inc in mid-1996 (the "Coltec Acquisition")
contributed $116 million for the first half of 1997; the German turbocharger
business, AG Kuhnle, Kopp & Kausch, 63% of which was acquired in October 1997
(the "Turbocharger Acquisition"), contributed $25 million; and the manual
transmission business sold at the end of 1996 had contributed $100 million to
1996 sales. The Company was able to increase sales by increasing its content per
vehicle through the development and offering of improved components and system
solutions for customer needs. By group, sales for the past three years are shown
in the following table. The Company's newest acquisition, a majority interest in
AG Kuhnle, Kopp & Kausch, is shown separately since the Company is not the sole
stockholder and has not yet finalized its plans concerning future integration of
the business nor determined which product grouping is appropriate.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
------ -------- -------
[millions of dollars]
<S> <C> <C> <C>
Powertrain Systems $ 605.2 $ 562.7 $ 544.8
Automatic Transmission Systems 519.8 481.8 454.4
Morse TEC 324.1 276.5 257.6
Air/Fluid Systems 357.0 258.8 107.6
AG Kuhnle, Kopp & Kausch 24.8 - -
--------- --------- ----------
1,830.9 1,579.8 1,364.4
Interbusiness eliminations (63.9) (39.7) (35.3)
--------- --------- ----------
Net sales $1,767.0 $1,540.1 $1,329.1
========= ========= ==========
</TABLE>
Powertrain Systems' sales were 8% over 1996, despite the elimination of $100
million in sales from the manual transmission business sold at the end of 1996.
The core four-wheel drive ("4WD") business was up 30%. The business realized
unprecedented demand for its various 4WD products on applications such as the
Ford Expedition, Explorer and F-Series trucks, the Lincoln Navigator and Mercury
Mountaineer, and a variety of non-U.S. applications from manufacturers such as
Rover, Isuzu and Ssangyong of Korea. The revenue comparison for 1997 versus 1996
was aided by a full year of Expedition sales and the introduction of the
Navigator. In addition, the Company's 4WD system is on the Mercedes-Benz
M-Class, the All-Activity Vehicle built in Alabama and launched in 1997. Overall
the Company sold 541,000 small and 652,000 large transfer cases in 1997 as
compared with 481,000 small and 480,000 large transfer cases in 1996 and 452,000
small and 395,000 large transfer cases in 1995. The Powertrain Systems business
has benefited over recent years due to the industry trend toward sport utility
vehicles ("SUVs"). While remaining strong, growth in this segment is expected to
slow in coming years. In addition, the Company has lost one 4WD application for
Ford heavy-duty trucks. These factors may cause revenue growth for Powertrain
Systems to trail recent experience.
Automatic Transmission Systems experienced continued growth in sales in 1997.
Sales reached $520 million, an 8% increase over 1996. Growth came from increased
penetration of automatic transmissions, and increased content as automatic
transmissions continued the trends from three- to four-speed and from four- to
five-speed transmissions. The business also realized a full year of sales on one
of its first systems, a one-way clutch and drum combination for Ford of Europe.
The volume gains were realized in each of its geographic regions: North America,
Europe and Asia. This group has supplied virtually every major manufacturer of
automatic transmissions in the world and is positioned to continue to benefit
from positive trends with respect to such applications. The business has also
invested in technology to increase understanding of transmission functioning.
This will increase the Company's ability to provide entire subsystems
incorporating combinations of components, both manufactured and purchased, for
future automatic transmission designs. The business is also investing to develop
solutions for alternative drivetrain configurations, including continuously
variable transmissions ("CVTs") and automated manual transmissions.
The Morse TEC business increased revenue by 17% to $324 million. This business
also increased sales in each of North America, Europe and Asia. Growth in Asia,
principally Japan, was tempered by changes in exchange rates. The overall growth
was the result of a number of new applications in both engine timing systems and
front-wheel drive automatic transmissions, and the continued expansion of the
4WD market. Ford has continued to expand its lineup of new overhead cam engines
in North America, all of which contain a Morse TEC timing system, with
applications ranging from 2.5 liter to 6.8 liter displacement. The 4.0 liter
overhead cam engine from Ford was launched in Europe in late 1996. Chrysler
introduced its 2.7 liter overhead cam engine, featuring a Morse TEC timing
system, in 1997. On the transmission side, the business benefited from a full
year's sales of MORSE GEMINI(TM)Chain Systems for all of GM's front-wheel drive
automatic transmission applications for mid-sized vehicles. This application was
introduced in mid-1996. New products coming in 1998 and beyond include timing
systems for the new Chrysler 3.7 liter and 4.7 liter overhead cam engines,
powder metal sprockets for both timing system and transmission applications,
timing chains and systems for Japanese engine applications and a drive chain for
the new Toyota hybrid engine. The addition of powder metal sprockets gives the
business additional design and manufacturing control for innovative system
solutions for both engine timing and transmission applications, and affords the
opportunity to control the economics of such applications.
Air/Fluid Systems saw sales increase by 38% in 1997 to $357 million due to a
full year of sales from the Coltec Acquisition. The remainder of the business
was virtually flat. Certain components reached the end of their life cycle as
the related applications were discontinued or replaced. In addition, the ramp-up
of certain Chrysler applications, such as the new LH model, was slow in the
second half of 1997, resulting in slower sales growth. This group continues to
offer the greatest opportunity for growth into the next century because of the
increased emphasis on improved operating efficiency and reduced emissions, both
of which can be realized through improved engine air and fuel management. In
addition, no single supplier or group of suppliers has a significant position in
most aspects of air and fuel management, thus creating an opportunity to meet
economic and emission requirements through system solutions.
In 1997, the Company's top 10 customers accounted for approximately 83% of total
consolidated sales compared with 82% in 1996 and 86% in 1995. Ford continues to
be the Company's largest customer, accounting for 43% of sales in 1997 compared
to 42% and 41% of sales in 1996 and 1995, respectively. General Motors accounted
for 20% of sales in 1997 compared to 21% and 25% of sales in 1996 and 1995,
respectively. Sales to Chrysler significantly increased to 10% of sales in 1997
as a result of the Coltec Acquisition. They accounted for 9% of 1996 sales and
6% of 1995 sales.
Net earnings for 1997 totaled $103.2 million, or $4.35 per basic share and $4.31
per diluted share. Earnings were almost two and one-half times the 1996 level of
$41.8 million. In 1996 the Company incurred a one-time after-tax charge of $35
million ($61.5 million on a pretax basis) for the loss on the sale of the North
American manual transmission business. Excluding this charge, 1997 earnings were
34%, or $26.4 million, higher than 1996. The improvement in earnings was also
helped by the elimination of the loss from the manual transmission business,
which reported a $17 million pretax loss in 1996 and a $3 million pretax loss in
1995.
Gross margin continued to improve, with 1997 at 22.2% compared with 21.7% in
1996 and 21.4% in 1995. However, excluding the manual transmission business, the
1996 margin would have been 24.2%. The margin trend reflects the difficulty in
achieving cost reductions and productivity improvements sufficient to offset
both increases in costs and annual price reductions given to customers. Gains in
profitability are the result of volume improvements and the partially fixed
nature of certain elements of the cost structure. In 1997 price reductions to
customers totaled approximately $18 million as compared with $10 million in 1996
and $8 million in 1995. To offset the impact of price reductions, the Company
pursues offsetting reductions from its suppliers, improved productivity and
changes in product design to remove cost and/or improve manufacturability. The
ability of the Company to pass through its increased raw material and other
costs to its OEM customers is also limited, with cost recovery less than 100%
and often on a delayed basis.
Earnings before interest and taxes ("EBIT") improved to $182.5 million in 1997,
a 33% increase over 1996 levels excluding the one-time manual transmission loss.
The improvement was 18% excluding both the operating loss on the manual
transmission business and the one-time manual transmission loss. The increase in
volume more than offset the margin compression. The Company also benefited from
an entire year of the Coltec Acquisition versus one-half year in 1996.
Depreciation, excluding that related to the manual transmission business, was up
$3 million due to increased capital spending in recent years. Selling, general
and administrative expenses (S,G & A), although up by $9 million, represented
only 7.5% of sales in 1997 versus 8% in 1996. The increase in spending was due
to increased research and development spending which reached $59 million in 1997
compared with $54.4 million in 1996. The Company also spent $8 million on
research projects which were reimbursed by customers. The minimal increase in
the remainder of selling, general and administrative expenses reflected the
Company's ability to control spending not directly related to products despite
continuing revenue growth. The Company is committed to keeping its overall S,G &
A spending in the 7.5% of sales range. At the same time, the Company is
committed to spending on research and development as a key corporate strategy to
develop proprietary new products, allowing it to remain competitive. In 1997
research and development spending represented 3.3% of sales versus 3.5% in 1996
and 2.8% in 1995. Major programs included new engine timing systems, powder
metal sprockets, advanced 4WD systems, new air induction systems, advanced
transmission solenoids, increased systems development for automatic
transmissions, and advanced friction material research. The Company is in the
process of formalizing its commitment to product leadership. Such a strategic
direction could lead to increased research and development spending in the
future.
Equity in affiliates and other income was up slightly in 1997 at $13.2 million
versus $13.1 million in 1996. The Company's equity in the earnings of its 50%
owned Japanese joint venture, NSK-Warner, was off slightly in U.S. dollars at
$14 million versus $14.3 million in 1996. This was due to continued weakness of
the Japanese yen, which in 1997 was 10% below 1996.
Included in EBIT for 1997 are certain transactions of a non-recurring or
non-operating nature. The Company recorded a $4.3 million charge to reduce the
value of certain joint venture investments in China and Korea. Approximately $3
million was spent to relocate product lines from one facility to another during
1997. Also during 1997 the Company reduced its reserve for loss on the sale of
the manual transmission business by approximately $6 million as the result of
favorable experience for certain elements of the reserve.
Interest expense and finance charges increased by $3.2 million in 1997. The
Company incurred interest on its borrowing for the Coltec Acquisition for a full
year in 1997 versus one-half year in 1996. In addition, interest was incurred
for the Turbocharger Acquisition. Offsetting these items was a continuing
reduction in interest rates on the Company's bank borrowings. Approximately 54%
of the Company's debt has rates that fluctuate with the market.
Pretax earnings of $157.9 million were almost three times larger than 1996
earnings of $54.7 million. However, 1996 included $61.5 million for the loss on
the sale of the manual transmission business. Excluding this loss and the $17
million loss from operations for that business, the gain in 1997 was 19%. This
gain was the result of all the factors discussed above.
The effective tax rate for 1997 was 34.6% compared with a rate of 33.9% in 1996,
excluding the manual transmission sale loss. The slight increase is due to
relatively fewer foreign tax credits in 1997. The tax rate for both years was
below the standard federal and state rates due to the realization of credits for
research and development and foreign tax credits. This was partially offset by
higher foreign tax rates in certain jurisdictions in which the Company operates.
1996 compared with 1995
The Company reported a 15.9% increase in sales in 1996, representing a growth
rate significantly higher than that of world auto production. North American
automotive production was flat for 1996, while Europe and Japan were up 4% and
2%, respectively. The sales improvement was the result of the Company's
continued increase in content per vehicle through new products and systems as
well as accelerated growth in air and fuel management systems through
acquisitions. The Coltec Acquisition contributed $123 million in sales, or
approximately 60% of the sales gain.
Powertrain Systems realized a $17.9 million increase in sales over 1995, a 3%
improvement. Excluding the manual transmission business, which was sold in 1996,
sales grew 17%. Manual transmission sales decreased $48 million or 33% as a
result of the loss of the GM S-Truck business combined with declines in sales of
high-performance five- and six-speed sporty cars. In the 4WD transfer case
business, sales increased by $72 million, or 18%, due to the introduc-tion of
new large transfer cases for the new Ford Expedition SUV and F-150 pick-up
trucks. The Expedition features the Torque-On-Demand(R) transfer case called
"Control Trac" by Ford. The growth in small transfer case volume slowed in 1996
as production of Ford's popular Explorer SUV was flat compared to the prior year
due to Ford capacity constraints.
Automatic Transmission Systems experienced continued growth with a $27 million
increase in sales over 1995. The increase included $23 million attributable to a
full year of operations from the Precision Forged Products Division acquired in
April 1995. The remainder of the increase was the result of volume gains, most
notably in Korea, which experienced a market-driven volume increase of
approximately 21%. Sales gains in 1996 were offset by price concessions of
approximately $3.5 million. This group is a supplier to virtually every major
automatic transmission manufacturer in the world and therefore is susceptible to
market trends. In 1996 and 1995, the Company benefited from the move to four-
and five-speed automatic transmissions.
The Morse TEC group again experienced 7% sales growth in 1996 despite a 3%
decline due to weakening of the yen. The sales gain was attributable to
increased volume from new timing chain system applications for both single and
double overhead cam engines for passenger cars and light trucks. The increased
use of these engines is due to a strong trend toward enhanced fuel economy and
performance. Additionally, the group benefited from the initial sales of the
MORSE GEMINI(TM) Chain System for all of GM's front-wheel drive automatic
transmission applications used in mid-sized vehicles. Finally, in 1996 Morse
TEC's Italian facility began to provide the engine timing chain system for
Ford's new 4.0 liter overhead cam engine produced in Germany for the Ford
Explorer.
Air/Fluid Systems' sales more than doubled, with a $151.2 million or 141%
increase primarily due to the Coltec Acquisition, which contributed $123 million
in sales, and the acquisition of Tulle (formerly referred to as Societe de
l'Usine de la Marque ("SUM")), acquired at the end of 1995, which contributed
$18 million to 1996 sales. These acquisitions position the Company to take
advantage of the fast-growing air/fluid systems' market and to supply entire air
management systems.
Net earnings of $41.8 million for 1996 included a $61.5 million one-time pretax
charge for the loss on the sale of the North American manual transmission
business, which, net of tax benefit of $26.5 million, resulted in an aftertax
charge of $35 million, or $1.49 per basic share. Excluding this one-time charge,
net earnings were $76.8 million, or $3.26 per basic share, a $2.6 million
improvement over 1995 net earnings of $74.2 million, or $3.18 per basic share.
The improvement in earnings was dampened by the operating results for the manual
transmission business, which reported a pretax loss from operations of $17
million in 1996 compared to $3 million in 1995 ($.46 and $.09 per basic share
losses, respectively).
Gross margin improved slightly to 21.7% compared to 21.4% in 1995. Excluding the
manual transmission business, gross margin would have been 24.2% in 1996
compared to 23.5% in 1995. The margin improvement is the result of productivity
gains and cost reduction efforts as well as volume gains as certain elements of
the cost structure are partially fixed in nature. In addition, costs for certain
raw materials such as aluminum moderated in 1996 versus 1995.
Earnings before interest and taxes ("EBIT") were $76.1 million in 1996 compared
to $125.4 million in 1995. Excluding the pretax loss of $61.5 million on the
sale of the North American manual transmission business, EBIT increased $12.2
million to $137.6 million. The improvement resulted from increased sales due to
both acquisitions and an overall increase in the core businesses of the Company
as well as improved margins, offset by the operating loss from the manual
transmission business. The Coltec Acquisition contributed $13 million to EBIT,
whereas the manual transmission business negatively impacted EBIT by $14 million
more in 1996 than in 1995. Depreciation increased $3.3 million in 1996 primarily
as a result of acquisitions. Selling, general and administrative expenses
increased to 8.0% of sales in 1996 from 7.4% of sales in 1995 primarily as a
result of increased spending on research and development. Research and
development expenses totaled $54.4 million in 1996, a $17.7 million increase
over 1995. The increase is due to additional spending related to the Coltec
businesses, accounting for $6.3 million, and to the maintenance and expansion of
technological expertise in both products and processes in all of the Companys
core businesses. Additionally, recovery from customers for research and
development expenditures was lower in 1996 as it is becoming increasingly more
difficult to recover costs from customers for prototypes. Research and
development remains a key corporate strategy as the Company's ability to develop
proprietary new products allows it to remain competitive.
Equity in affiliate earnings and other income decreased $5.5 million from 1995
to $13.1 million in 1996. The Companys earnings for NSK-Warner, a 50% owned
joint venture in Japan, was $14.3 million in 1996 versus $19.0 million in 1995.
Earnings were down primarily due to a weakening of the yen against the dollar
and a slight decline in yen-denominated sales levels as a result of a sluggish
Japanese economy.
Interest expense and finance charges increased by $7.2 million to $21.4 million
in 1996 compared with $14.2 million in 1995. The increase is attributable to
additional borrowings used to finance the Coltec Acquisition offset by lower
market interest rates on the Companys outstanding bank borrowings.
Pretax earnings were $54.7 million in 1996, which includes a pretax loss of
$61.5 million on the sale of the North American manual transmission business as
previously mentioned, compared with $111.2 million of pretax earnings in 1995.
Excluding the loss on the manual transmission sale and the operating loss from
the manual transmission business, 1996 pretax earnings would have been $133.2
million, a 17% increase over 1995.
Income taxes decreased from $37 million in 1995 to $12.9 million in 1996, an
effective rate of 23.6% versus an effective rate of 33.3% in 1995. Income tax
expense in 1996 includes a $26.5 million tax benefit on the pretax loss of $61.5
million for the manual transmission business sale, an effective rate of 43% as a
result of recognizing differences between financial reporting and tax basis of
the business sold. Other factors that caused the effective tax rate to be lower
than the standard federal and state rates were realization of certain tax
credits related to research and development and foreign operations. In 1995, the
Company also realized similar types of credits along with a higher level of
affiliate earnings which are recognized on an aftertax basis.
Financial Condition and Liquidity
Cash from operations for 1997 totaled $167.4 million primarily from earnings and
depreciation. That compared with $177.9 million in 1996, which also reflected
the $61.5 million loss on the manual transmission business. Despite an increase
of almost 15% in revenues, the Company was able to keep its working capital at
levels comparable to 1996. The Company acquired 63% of AG Kuhnle, Kopp & Kausch
in October 1997. The acquisition was financed by borrowings under the Company's
revolving credit facility. In addition the Company repurchased $10 million of
its common stock. These transactions, net of cash from operating and investing
activities, resulted in the $21 million increase in balance sheet debt.
Net working capital, excluding notes payable, cash and securities, increased by
$24 million. Receivables increased by $34 million. Of the increase, $25 million
came from the turbocharger business and the remainder reflected increased levels
of business. Inventories increased by only $17 million, of which $14 million
related to the turbocharger business. The base business has continued to improve
its inventory management, enabling the Company to minimize its inventory growth.
Prepayments and other current assets increased by $10 million. The increase was
due to the net carrying value of the turbomachinery business acquired as part of
the Turbocharger Acquisition. Accounts payable and accrued expenses increased by
$4 million. The base business increased by $13 million and the turbocharger
business added $14 million. These increases were offset by a decline in the
accrual established for the sale of the manual transmission business. The
decline resulted from spending related to the sale and changes in
the estimates for future spending. As of December 31, 1997, the Company still
has an accrual of $23 million related to this transaction, which is expected to
be fully resolved by December 31, 1998. Net property, plant and equipment
increased by $78 million. This was the result of $135 million in capital
spending and $32 million related to the Turbocharger Acquisition, offset by $70
million in depreciation. Disposals and the impact of weaker foreign currencies,
which resulted in property, plant and equipment from foreign units translating
to fewer dollars, account for the remainder of the change.
As noted above, capital spending totaled $135 million in 1997, approximately
twice the $70 million in depreciation. This compared with $92 million in
spending in 1996 and $93 million in 1995. Approximately 70% of 1997 spending was
expansion versus renewal and replacement, cost reduction and research and
development related. Major projects in 1997 included increased capacity for
larger transfer cases for Ford, programs at both Air/Fluid Systems and Automatic
Transmission Systems for new Chrysler automatic transmissions, a new Morse TEC
plant in Italy, new powder metal sprocket capability, continued spending for
Mercedes-Benz transfer cases, additional connecting rod capacity, capacity for
timing systems for new Chrysler 3.7 and 4.7 liter engines, and an Automatic
Transmission Systems plant expansion. The Company was able to fund its increased
spending from operations. For 1998 the Company anticipates that it will spend at
similar levels as 1997 with some increase for the turbocharger business. Funds
from operations, supplemented by available credit facilities, if necessary,
should be adequate to fund 1998 capital requirements.
Investments and advances increased by $3 million. Affiliate earnings totaled $14
million. NSK-Warner had earnings of $14 million, while the Company's 39% owned
Chinese joint venture incurred a small loss in 1997, which was offset by a small
gain from the Warner-Ishi joint venture. Total dividends received from the
ventures were approximately $5 million and changes in currency rates reduced
investment by $10 million. Goodwill declined by $10 million as amortization
exceeded the $6 million of goodwill related to the Turbocharger Acquisition.
Deferred charges increased by $19 million due principally to spending on
tooling, including $5 million for the Turbocharger Acquisition. Warranties and
other liabilities increased by $9 million due principally to the increase in
minority interest related to the Turbocharger Acquisition.
Equity increased by $65 million. Earnings were $103 million offset by dividends
of $14 million and stock repurchases of $10 million. The currency translation
component of equity decreased by $22 million as substantially all countries in
which the Company conducts business realized a decline in their currency
relative to the U. S. dollar. The minimum pension adjustment increased equity by
$6 million as the Company's pension fund investments realized another year of
outstanding performance.
Other Financial Matters
Sale of North American Manual Transmission Business
In 1996 the Company sold its North American manual transmission business to
Transmisiones Y Equipos Mecanicos S.A. De C.V. The sale generated a pretax loss
of $61.5 million, which net of a tax benefit of $26.5 million, resulted in a net
charge of $35 million. As part of the accounting for the sale, the Company
established an accrual of $47 million to cover costs related to the sale,
including commitments to produce product for the purchaser over the transition
period. As a result of favorable experience during 1997, the Company was able to
reduce its accrual at the end of 1997 by $6 million. At December 31, 1997, the
accrual balance was $23 million, which the Company believes is adequate for the
remaining anticipated costs. Such remaining anticipated costs include warranty
costs and the cost to reconfigure the Muncie, Indiana facility to support the
remaining four-wheel drive business.
The decision to sell the business resulted from the recognition that all major
North American OEMs have allied suppliers for their significant rear-wheel drive
manual transmission applications, which left only niches open to the Company in
North America. The business lost money in 1996 and 1995, on an operating basis,
as a result of declining volumes, due both to the loss of the GM truck business
in the third quarter of 1995 and declining volumes in the Company's remaining
niche sporty and performance cars that utilize five- and six-speed manual
transmissions. The business had sales of $100 million in 1996 and $148 million
in 1995. In 1996, the Company incurred a $0.46 per basic share loss from the
manual transmission business compared to $0.09 per basic share loss in 1995.
Despite the sale, the Company plans to continue to implement its strategy to
capitalize on manual transmission opportunities in developing markets in Asia.
Year 2000
The Company is in the process of reviewing its operations to remedy situations
where electronic data processing equipment would fail to function as the Company
approaches the year 2000. The review includes the assessment and remediation of
business operating systems, the manufacturing operations themselves, customers
and suppliers. The Company is participating in the program being coordinated by
the Automotive Industries Action Group ("AIAG"), a group sponsored and supported
by the three major U.S. automakers-Ford, Chrysler and General Motors. The AIAG
effort consists of a survey to determine the areas in which a company needs to
take action. This information will be employed to create a systematic action
plan to remediate any deficiencies. The Company is engaged in an enterprise-wide
compliance program and is in the process of appointing local coordinators for
each business unit. Concurrent with this effort, the Company continues to update
business operating systems at a number of its units to improve business
operations and controls. As part of such upgrades, the Company is seeking
certification from vendors that the software being put in place is compliant
with year 2000 requirements. The Company anticipates that it will spend between
$5 and $8 million on new systems in the next two years. The bulk of such
spending is to implement system improvements and enhancements, with the year
2000 compliance as an added benefit. The incremental spending specifically
related to year 2000 is not expected to be material to the Company's financial
position or results of operations in any given year.
Environment
The Company and certain of its current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by the United
States Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties ("PRPs") at various
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may presently be liable for the cost of clean-up and other remedial
activities at 26 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula.
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; remediation alternatives; estimated legal fees; and other
factors, the Company has established a reserve in its financial statements for
indicated environmental liabilities with a balance at December 31, 1997 of
approximately $7.2 million. The Company expects this amount to be expended over
the next three to five years.
In connection with the Spin-Off, the Company and BW-Security entered into a
Distribution and Indemnity Agreement (the "Indemnity Agreement") which provided
for, among other matters, certain cross-indemnities designed principally to
place financial responsibility for the liabilities of businesses conducted by
BW-Security and its subsidiaries with BW-Security and financial responsibility
for liabilities of the Company or related to its automotive businesses with the
Company. BW-Security has claimed that, under the Indemnity Agreement, the
Company must indemnify it for certain liabilities relating to environmental
matters retained by BW-Security at the time of the Spin-Off. BW-Security has
requested indemnification from the Company for past costs of approximately $3.3
million and for future costs related to these environmental matters. At the time
of the Spin-Off, BW-Security maintained a letter of credit for approximately $9
million (the "Letter of Credit") with respect to the principal portion of such
environmental matters. The parties submitted the matter to arbitration and, on
November 4, 1997, the Arbitrator ruled against the Company. The ruling was
upheld by an arbitration panel on February 13, 1998. The Company plans to
vigorously contest the arbitration award and plans to oppose any attempt by
BW-Security to obtain a judgment based on the arbitration. The Company does not
currently have information sufficient to determine the extent of its potential
liability to BW-Security for indemnification of such liabilities.
In addition, on January 27, 1998, the Company filed a lawsuit in the Circuit
Court of Cook County, Illinois against BW-Security and certain others, alleging,
among other things, breach of fiduciary duty and breach of contract in
connection with the apportionment of environmental liabilities and assets in the
Spin-Off. While the Company intends to pursue its claims vigorously and believes
such claims to be valid, it is too early in the proceedings to determine the
likelihood of success in this litigation. Both parties have agreed to mediate
this dispute.
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.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS 131 establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
current disclosures and, accordingly, will have no impact on the Company's
reported financial position, results of operations and cash flows. The Company
is assessing the impact of SFAS 131 on its future reporting.
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, uncertainties and other factors which could cause actual
results to differ materially from future results experienced, projected or
implied by such forward-looking statements. The Cautionary Statements at
Exhibit 99.1 to the Company's Form 10-K for the fiscal year ended December 31,
1997 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.
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 Companys 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
Companys system of internal control and takes the necessary actions that are
cost-effective in the circumstances. Management believes that, as of December
31, 1997, the Companys system of internal control was adequate to accomplish the
objectives set forth in the first sentence of this paragraph.
The Companys Finance and Audit Committee, composed entirely of directors of the
Company who are not employees, meets periodically with the Companys 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
Chairman and Chief Executive Officer
William C. Cline
Vice President and Controller
January 30, 1998
Independent Auditors Report
The Board of Directors and Stockholders of Borg-Warner Automotive, Inc.
We have audited the consolidated balance sheets of Borg-Warner Automotive, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
January 30, 1998
(February 13, 1998 as to the third paragraph of Note 4)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
[millions of dollars except per share amounts]
For the Year Ended December 31, 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net sales $1,767.0 $1,540.1 $1,329.1
Cost of sales 1,375.4 1,205.5 1,044.9
Depreciation 70.4 71.3 68.0
Selling, general and administrative
expenses 132.0 122.7 97.8
Minority interest 3.2 2.6 2.0
Goodwill amortization 16.7 13.5 9.6
Loss on sale of business - 61.5 -
Equity in affiliate earnings and other
income (13.2) (13.1) (18.6)
-------- --------- -------
Earnings before interest expense,
finance charges and income taxes 182.5 76.1 125.4
Interest expense and finance charges 24.6 21.4 14.2
Earnings before income taxes 157.9 54.7 111.2
Provision for income taxes 54.7 12.9 37.0
-------- -------- -------
Net earnings $ 103.2 $ 41.8 $ 74.2
========= ======== =========
Net earnings per share
Basic $ 4.35 $ 1.77 $ 3.18
Diluted $ 4.31 $ 1.75 $ 3.15
========= ======== =========
Average shares outstanding (thousands)
Basic 23,683 23,564 23,303
Diluted 23,934 23,830 23,570
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
[millions of dollars] December 31, 1997 1996
------ ------
<S> <C> <C>
Assets
Cash $ 10.6 $ 6.8
Short-term securities 2.8 4.7
Receivables 158.6 124.6
Inventories 108.0 91.1
Deferred income tax asset 8.5 17.8
Prepayments and other current assets 18.4 8.1
---------- --------
Total current assets 306.9 253.1
Land 21.6 22.5
Buildings 195.2 183.7
Machinery and equipment 657.3 591.5
Capital leases 5.5 6.5
Construction in progress 91.6 58.9
--------- ---------
971.2 863.1
Less accumulated depreciation 359.5 328.9
--------- ---------
Net property, plant and equipment 611.7 534.2
Investments and advances 132.9 135.9
Goodwill 545.6 555.7
Deferred income tax asset 20.6 35.4
Other noncurrent assets 118.6 109.3
--------- ---------
Total other assets 817.7 836.3
--------- ----------
Total Assets $1,736.3 $1,623.6
========= ===========
Liabilities and Stockholders' Equity
Notes payable $ 67.7 $ 38.0
Accounts payable and accrued expenses 273.6 269.3
Income taxes payable 53.9 30.6
--------- ----------
Total current liabilities 395.2 337.9
Long-term debt 270.4 279.3
Long-term liabilities:
Retirement-related liabilities 314.0 326.8
Other 42.3 43.8
---------- ----------
Total long-term liabilities 356.3 370.6
Minority stockholders' interest in
consolidated subsidiaries 20.7 7.0
Capital stock:
Preferred stock, $.01 par value;
authorized shares:5,000,000;none issued - -
Common stock, $.01 par value;
authorized shares:50,000,000;issued
shares: 1997, 23,753,365; 1996, 23,585,840;
outstanding shares: 1997, 23,542,765; 1996,
23,585,840 0.2 0.2
Non-voting common stock, $.01 par value;
authorized shares: 25,000,000; issued and
outstanding shares: 1997, 1,500; 1996,
59,000 - -
Capital in excess of par value 566.0 563.9
Retained earnings 150.7 61.8
Cumulative translation adjustment (11.3) 10.3
Minimum pension liability adjustment (1.7) (7.4)
--------- ---------
Common stock held in treasury, at cost: 1997,
210,600 shares; 1996, none (10.2) -
Total stockholders' equity 693.7 628.8
-------- ---------
Total Liabilities and Stockholders'Equity $ 1,736.3 $1,623.6
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
[millions of dollars]
For the Year Ended December 31, 1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Operating
Net earnings $103.2 $ 41.8 $ 74.2
Adjustments to reconcile net earnings to
net cash flows from operations:
Non-cash charges (credits) to operations:
Depreciation 70.4 71.3 68.0
Goodwill amortization 16.7 13.5 9.6
Loss on sale of business - 61.5 -
Deferred income tax provision 24.1 (12.4) (0.9)
Other, principally equity in
affiliate earnings (11.8) (14.8) (19.2)
Changes in assets and liabilities, net
of effects of acquisitions and dispositions:
(Increase) decrease in receivables (13.6) 4.0 6.9
Increase in inventories (8.9) (8.7) (6.5)
(Increase) decrease in prepayments
and other current assets (1.3) 3.5 1.9
Increase (decrease) in accounts
payable and accrued expenses (3.9) 7.5 (28.6)
Increase in income taxes payable 23.9 4.2 2.7
Net change in other long-term assets
and liabilities (31.4) 6.5 4.1
--------- ---------- --------
Net cash provided by operating
activities 167.4 177.9 112.2
Investing
Capital expenditures (135.1) (91.9) (92.5)
Investment in affiliates (0.1) (0.5) (0.9)
Payments for businesses acquired (42.4) (287.8) (46.5)
Proceeds from sale of businesses 5.8 20.3 -
Proceeds from other assets 2.7 8.1 15.6
---------- --------- ---------
Net cash used in investing
activities (169.1) (351.8) (124.3)
Financing
Net increase (decrease) in notes payable 31.8 (7.4) 4.0
Additions to long-term debt 37.6 192.4 20.0
Reductions in long-term debt (42.5) - -
Payments for purchase of treasury stock (10.2) - -
Proceeds from options exercised 2.1 2.6 5.0
Dividends paid (14.3) (14.1) (13.9)
---------- --------- ---------
Net cash provided by financing
activities 4.5 173.5 15.1
Effect of exchange rate changes on cash
and cash equivalents (0.9) (0.2) (5.8)
--------- ----------- --------
Net increase (decrease) in cash and cash
equivalents 1.9 (0.6) (2.8)
Cash and cash equivalents at beginning of
year 11.5 12.1 14.9
----------- --------- ---------
Cash and cash equivalents at end of year $ 13.4 $ 11.5 $ 12.1
=========== =========== =========
Supplemental Cash Flow Information
Net cash paid during the year for:
Interest $ 27.1 $ 20.8 $ 15.2
Income taxes 28.9 33.4 31.7
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Consolidated Statements of Stockholders' Equity
Borg-Warner Automotive, Inc.
and Consolidated Subsidiaries
For the Three Years Ended December 31, 1997
<TABLE>
<CAPTION>
Number of Shares [millions of dollars] Stockholders' Equity
------------- ---------------------------------------------------
Outstanding
-------------- Minimum
Issued Common Issued Capital in Cumulative pension
common stock in common excess of Retained translationliability
stock treasury stock par value earnings adjustment adjustment
---- -------- ------ -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
January 1,1994 23,138,209 (16,026) $0.2 $562.9 $(33.6) $ 25.2 $(19.4)
========== ======== ===== ======= ====== ======= ======
Net income - - - - 74.2 - -
Dividends declared - - - (7.4) (6.5) - -
Shares issued under
stock option plans328,847 16,026 - 4.6 - - -
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)
========= ======= ===== ====== ======== ======== =======
Net income - - - - 41.8 - -
Dividends declared - - - - (14.1) - -
Shares issued under stock
option plans 177,784 - - 3.8 - - -
Adjustment for minimum
pension liability - - - - - - 9.3
Currency translation
adjustment - - - - - (12.0) -
-------- -------- ----- ------ ------- -------- ------
Balance,
December 31,1996 23,644,840 - $0.2 $563.9 $61.8 $ 10.3 $ (7.4)
========== ======== ====== ====== ======== ======= ======
Net income - - - - 103.2 - -
Dividends declared - - - - (14.3) - -
Shares issued under
stock option
plans 110,025 1,500 - 2.1 - -
Adjustment for minimum
pension liability - - - - - - 5.7
Purchase of treasury
stock - (212,100) - - - - -
Currency translation
adjustment - - - - - (21.6) -
------- ------- ------ ------ ------- -------- -------
Balance,
December 31,1997 23,754,865 (210,600) $0.2 $566.0 $150.7 $(11.3) $(1.7)
=========== ========= ====== ======= ======= ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
[table continued]
[millions of dollars] Stockholders' Equity
- --------------------------------------------------------
Treasury
Stock
--------
<S> <C>
Balance,
January 1,1994 $(0.4)
======
Net income -
Dividends declared -
Shares issued under
stock option plans 0.4
Adjustment for minimum
pension liability -
Currency translation
adjustment -
-------
Balance,
December 31,1995 -
=======
Net income -
Dividends declared -
Shares issued under stock
option plans -
Adjustment for minimum
pension liability -
Currency translation
adjustment -
-------
Balance,
December 31,1996 -
=======
Net income -
Dividends declared -
Shares issued under
stock option
plans -
Adjustment for minimum
pension liability -
Purchase of treasury
stock (10.2)
Currency translation
adjustment -
-------
Balance,
December 31,1997 $(10.2)
=========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
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 leading, global supplier of highly engineered systems and
components, primarily for automotive powertrain applications. These products are
manufactured and sold worldwide, primarily to original equipment manufacturers
("OEMs") of passenger cars, sport utility vehicles and light trucks. The
Company, which operates 36 manufacturing facilities in 12 countries serving the
North American, European and Asian automotive markets, is an original equipment
supplier to every major OEM in the world. Its products fall into four operating
groups: Automatic Transmission Systems, Air/Fluid Systems, Morse TEC and
Powertrain Systems. The Company has not finalized its plans concerning
integration and product grouping for its acquisition of 63% of AG Kuhnle, Kopp &
Kausch, see Note 14.
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 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 1996, an agreement with a financial institution to sell, without recourse,
eligible receivables was amended from $86 million to $102 million. Accounts
receivable are recorded net of this agreement, under which $100 million was sold
at December 31, 1997 and $102 million was sold at December 31, 1996. The
agreement extends to January 1999.
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
40 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.
Revenue recognition
The Company recognizes revenue upon shipment of product. Although the Company
may enter into long-term supply agreements with its major customers, each
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 fair value of
debt is estimated based on current borrowing rates for loans with similar terms
and maturities. The Company believes that the fair value of the financial
instruments approximates the carrying value.
Earnings per share
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share; it is effective for financial statements issued for periods
ending after December 15, 1997 and requires retroactive application to all prior
periods presented. In calculating earnings per share, earnings are the same for
the basic and diluted calculations. Shares increased for diluted earnings per
share by 251,000, 266,000 and 267,000 for 1997, 1996, and 1995, respectively,
due to the effects of stock options and shares issuable under an executive stock
performance plan.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS 131 establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
current disclosures and, accordingly, will have no impact on the Company's
reported financial position, results of operations and cash flows. The Company
is assessing the impact of SFAS 131 on its future reporting.
Note 2 Balance Sheet Information
<TABLE>
<CAPTION>
Detailed balance sheet data are as follows:
[millions of dollars]
December 31,
1997 1996
------ --------
<S> <C> <C>
Receivables:
Customers $118.6 $ 77.4
Other 42.2 48.8
-------- -------
160.8 126.2
Less allowance for losses 2.2 1.6
-------- -------
Net receivables $158.6 $124.6
======== ========
Inventories:
Raw material $ 53.9 $ 43.5
Work in progress 33.9 30.9
Finished goods 20.2 16.7
------- --------
Total inventories $108.0 $ 91.1
======= =========
Investments and advances:
NSK-Warner $124.1 $127.1
Other 8.8 8.8
------- --------
Total investments and advances $132.9 $135.9
======= =========
Other noncurrent assets:
Deferred pension assets $ 42.0 $ 49.5
Deferred tooling 59.3 38.9
Other 17.3 20.9
-------- --------
Total other noncurrent assets $118.6 $109.3
======== =========
Accounts payable and accrued expenses:
Trade payables $166.7 $143.5
Payroll and related 33.3 27.0
Insurance 18.3 10.9
Retirement benefits 8.0 9.4
Accrued costs related to manual
transmission sale 22.8 46.7
Other 24.5 31.8
------- ---------
Total accounts payable and
accrued expenses $273.6 $269.3
======== ==========
Other long-term liabilities:
Environmental reserve $ 7.2 $ 8.9
Other 35.1 34.9
-------- ----------
Total other long-term liabilities$ 42.3 $ 43.8
======== ===========
</TABLE>
Inventory held by U.S. operations was $69.7 million in 1997 and $68.8 million in
1996. Inventories, if valued at current cost instead of LIFO, would have been
greater by $8.7 million in 1997 and $11.3 million in 1996.
Dividends received from affiliates accounted for under the equity method totaled
$4.8 million in 1997, $5.0 million in 1996 and $6.5 million in 1995.
Accumulated amortization related to capital leases amounted to $4.3 million in
1997 and $4.7 million in 1996. Accumulated amortization of goodwill amounted to
$101.4 million in 1997 and $92.8 million in 1996.
The Company has a 50% interest in NSK-Warner, a joint venture based in Japan
that manufactures automatic transmission components. 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 12 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, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
[millions of dollars] 1997 1996 1995
------ ------- ------
<S> <C> <C> <C>
Balance sheet:
Current assets $145.7 $156.5 $168.4
Noncurrent assets 124.7 152.0 187.6
Current liabilities 74.1 85.8 99.4
Noncurrent liabilities 8.1 11.1 17.2
Statement of operations:
Net sales $296.5 $334.7 $327.8
Gross profit 82.6 91.8 95.9
Net income 29.0 32.3 35.0
</TABLE>
Note 3 Commitments
The Company is committed to pay rents on non-cancelable leases with terms
exceeding one year. Rental amounts committed for future years are summarized at
December 31, 1997 as lows:
<TABLE>
<CAPTION>
Operating Capital
Year [millions of dollars] Leases Leases Total
- ------ ------- --------- --------
<S> <C> <C> <C>
1998 $ 5.5 $1.9 $ 7.4
1999 4.7 0.7 5.4
2000 4.1 0.9 5.0
2001 3.5 2.3 5.8
2002 2.4 0.2 2.6
2003 and after 5.1 1.6 6.7
------- -------- -------
Total $25.3 $7.6 $32.9
======= ======== ========
</TABLE>
Total rental expense amounted to $7.8 million in 1997, $8.6 million in 1996 and
$7.5 million in 1995. Future capital lease rental payments include interest
expense of $2.1 million and principal payments of $5.5 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 United
States Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties ("PRPs") at various
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may presently be liable for the cost of clean-up and other remedial
activities at 26 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula.
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; remediation alternatives; estimated legal fees; and other
factors, the Company has established a reserve in its financial statements for
indicated environmental liabilities with a balance at December 31, 1997 of
approximately $7.2 million. The Company expects this amount to be expended over
the next three to five years.
In connection with the Spin-Off, the Company and BW-Security entered into a
Distribution and Indemnity Agreement (the "Indemnity Agreement") which provided
for, among other matters, certain cross-indemnities designed principally to
place financial responsibility for the liabilities of businesses conducted by
BW-Security and its subsidiaries with BW-Security and financial responsibility
for liabilities of the Company or related to its automotive businesses with the
Company. BW-Security has claimed that, under the Indemnity Agreement, the
Company must indemnify it for certain liabilities relating to environmental
matters retained by BW-Security at the time of the Spin-Off. BW-Security has
requested indemnification from the Company for past costs of approximately $3.3
million and for future costs related to these environmental matters. At the time
of the Spin-Off, BW-Security maintained a letter of credit for approximately $9
million (the "Letter of Credit") with respect to the principal portion of such
environmental matters. The parties submitted the matter to arbitration and, on
November 4, 1997, the Arbitrator ruled against the Company. The ruling was
upheld by an arbitration panel on February 13, 1998. The Company plans to
vigorously contest the arbitration award and plans to oppose any attempt by
BW-Security to obtain a judgment based on the arbitration. The Company does not
currently have information sufficient to determine the extent of its potential
liability to BW-Security for indemnification of such liabilities.
In addition, on January 27, 1998, the Company filed a lawsuit in the Circuit
Court of Cook County, Illinois against BW-Security and certain others, alleging,
among other things, breach of fiduciary duty and breach of contract in
connection with the apportionment of environmental liabilities and assets in the
Spin-Off. While the Company intends to pursue its claims vigorously and believes
such claims to be valid, it is too early in the proceedings to determine the
likelihood of success in this litigation. Both parties have agreed to mediate
this dispute.
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 borrowing capacity up to $3.5 million of affiliate
operations as of December 31, 1997 of which $1.7 million was outstanding at the
end of the year.
Note 5 Notes Payable and Long-Term Debt
Following is a summary of notes payable and long-term debt.
<TABLE>
<CAPTION>
December 31, 1997 December 31,1996
------------------- --------------------
[millions of dollars] Current Long-term Current Long-term
------- --------- ------- -----------
<S> <C> <C> <C> <C>
Bank borrowings $36.1 $ 94.9 $17.9 $ 56.5
Bank term loans due
through 2002 (at an
average rate of 5.2%
in 1997 and 5.4%
in 1996; and 6.1%
at December 1997) 30.2 21.8 20.0 67.2
7% Senior Notes
due 2006, net of
unamortized discount - 149.6 - 149.6
Capital lease liabilities
(at an average rate
of 6.5% in 1997 and
6.6% in 1996) 1.4 4.1 0.1 6.0
-------- --------- -------- -------
Total notes payable
and long-term debt $67.7 $270.4 $38.0 $279.3
======== ========== ======== =========
</TABLE>
<PAGE>
Annual principal payments required as of December 31, 1997 are as follows (in
millions of dollars):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 67.7
1999 0.5
2000 6.3
2001 109.4
2002 0.1
after 2003 154.1
</TABLE>
In October 1996, the Company amended its existing revolving credit facility.
Major changes included increasing the amount of the facility from $300 million
to $350 million, extending the maturity of the facility from 1999 to 2001 and
releasing the subsidiaries' guaranties of the credit facility. At December 31,
1997, $25.0 million of borrowings under the facility were outstanding; whereas,
at December 31, 1996 the facility was unused. The facility remains fully
available through September 30, 2001.
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.
On November 5, 1996, the Company issued $150 million of 7% senior unsecured
notes due 2006. Interest is payable semiannually on May 1 and November 1. The
indenture contains certain covenants including, among others, covenants limiting
liens, sale/leaseback transactions, mergers and the sale of substantially all of
the Company's assets.
Bank term loans of $52.0 million outstanding at December 31, 1997 are subject to
annual reductions of $30.2 million in 1998, $0.2 million in 1999, $5.8 million
in 2000, $15.7 million in 2001, and $0.1 million for 2002 and thereafter.
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 United States 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 $47.2 million, $47.3 million and $46.0
million in 1997, 1996 and 1995, respectively. This expense includes
postretirement life insurance and medical benefits of $23.1 million, $24.1
million and $22 million in 1997, 1996 and 1995, respectively. Also included are
defined contribution plan expenses of $19.0 million, $15.6 million and $13.3
million in 1997, 1996 and 1995, respectively, and pension expenses for
miscellaneous foreign units of $1.6 million, $1.4 million and $1.9 million in
1997, 1996 and 1995, respectively.
In addition to the retirement benefit expense above, in 1996 the Company
recognized a $5.0 million partial curtailment loss from the sale of the North
American manual transmission business.
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, 1997 December 31,1996
------------------ -------------------
Over- Under- Over- Under-
funded funded funded funded
[millions of dollars] Plans Plans Plans Plans
Actuarial present value
of benefit obligations:
<S> <C> <C> <C> <C>
Vested benefits $109.0 $198.5 $ 87.8 $180.4
Non-vested benefits 1.5 32.6 0.7 29.3
------- --------- --------- ---------
Accumulated benefit
obligations 110.5 231.1 88.5 209.7
Effect of projected future
compensation levels 7.9 3.3 7.1 3.8
-------- --------- --------- ---------
Projected benefit obligation118.4 234.4 95.6 213.5
Plan assets at fair value 161.7 177.5 127.5 143.7
-------- --------- -------- ----------
Assets in excess of
(less than) projected
benefit obligation 43.3 (56.9) 31.9 (69.8)
Unamortized net (asset)
liability from transition (2.1) 0.9 (2.4) 1.2
Unrecognized net (gain) loss (1.6) 0.3 7.6 19.7
Unrecognized prior
service cost 1.4 5.0 1.5 11.4
Adjustment required
to recognize
minimum liability - (3.9) - (28.3)
Liability included in the net
carrying value of the
acquired turbomachinery
business - 11.6 - -
------- --------- ---------- ---------
Net asset (liability) on
balance sheets $ 41.0 $(43.0) $ 38.6 $ (65.8)
======== ========== ========= ==========
</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 10 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:
[millions of dollars]
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
------- -------- ----------
<S> <C> <C> <C>
Service cost $ 4.5 $ 4.3 $ 3.2
Interest cost 21.8 21.4 21.1
Actual return on assets (68.6) (32.8) (55.8)
Net amortization and deferrals 45.8 13.3 40.3
-------- --------- --------
Net periodic pension cost $ 3.5 $ 6.2 $ 8.8
======== ========== ===========
</TABLE>
The Company's assumptions used as of December 31, 1997, 1996 and 1995 in
determining the pension cost and pension liability shown above were as follows:
[percent]
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
U.S. plans:
Discount rate 7.0 7.5 7.25
Rate of salary progression 4.5 4.5 4.5
Long-term rate of return on assets9.5 9.5 9.5
Foreign plans:
Discount rate 6.0-6.75 6.0-7.5 7.0-7.5
Rate of salary progression 2.5-5.5 3.0-6.0 3.5-6.0
Long-term rate of return
on assets 6.0-7.0 7.75 7.75
</TABLE>
Net periodic postretirement benefit cost was comprised as follows:
<TABLE>
<CAPTION>
[millions of dollars]
Year ended December 31, 1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Service cost $ 4.1 $ 4.4 $ 2.7
Interest cost 19.0 19.7 19.3
-------- -------- ---------
Net periodic postretirement
benefit cost $23.1 $24.1 $22.0
======== ========= =========
</TABLE>
Reconciliation of the actuarial present value of post retirement benefit
obligations of the U.S. plans with the related liability included in the balance
sheets follows:
<TABLE>
<CAPTION>
[millions of dollars] December 31, 1997 1996
------ -------
<S> <C> <C>
Actuarial present value of postretirement
benefit obligations:
Retirees $172.9 $169.7
Other fully eligible participants 29.9 32.2
Other active participants 68.4 59.3
-------- --------
Accumulated postretirement
benefit obligation 271.2 261.2
Unrecognized gain (loss) (1.0) 1.7
Unrecognized prior service cost 0.2 0.3
Net liability on balance sheets $270.4 $263.2
======== ==========
Assumed discount rate (percent) 7.0 7.5
</TABLE>
As of December 31, 1997, the actuarial present value of postretirement medical
and life insurance benefits was calculated using assumptions of medical
inflation of 6.25% in 1998, descending to a 5.25% annual rate by 1999. As of
December 31, 1996, the amount was calculated using assumptions of medical
inflation of 7.25% in 1997, descending to a 5.25% annual rate by 1999. A one
percentage point increase in the assumed medical inflation rate at December 31,
1997 would have increased the accumulated benefit obligation, service cost and
interest cost by approximately $35.2 million, $1.1 million and $2.5 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 $29.9 million in 1997, $17.6 million in 1996 and
$18.7 million in 1995. Such amounts do not include the Company's equity in
earnings of non-U.S. affiliates. The Company's equity in the net assets of these
consolidated subsidiaries is summarized as follows:
<TABLE>
<CAPTION>
[millions of dollars] December 31, 1997 1996
------- ---------
<S> <C> <C>
Current assets $121.2 $ 81.4
Noncurrent assets 200.5 153.5
--------- --------
Total assets 321.7 234.9
Current liabilities 115.2 66.4
Noncurrent liabilities 90.5 95.6
--------- ---------
Net assets before minority interest116.0 72.9
Minority interest 20.7 7.0
---------- ---------
Equity in net assets $ 95.3 $ 65.9
========= ==========
</TABLE>
At December 31, 1997 and 1996, current liabilities included debt of $36.3
million and $15.7 million and noncurrent liabilities included debt of $20.7
million and $35.8 million, respectively.
Note 8 Equity in Affiliate Earnings and Other Income
Items included in equity in affiliate earnings and other income consist of:
[millions of dollars]
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
------- --------- ---------
<S> <C> <C> <C>
Equity in affiliate earnings $14.0 $14.3 $19.2
Interest income 0.4 0.3 0.4
Loss on asset disposals, net (3.7) (2.4) (1.0)
Other 2.5 0.9 -
------- -------- --------
$13.2 $13.1 $18.6
======= ========= =========
</TABLE>
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, deferred tax assets 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, 1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Sales:
United States $1,485.2 $1,309.2 $1,114.8
Europe 188.5 142.3 125.8
Other foreign 93.3 88.6 88.5
--------- --------- ---------
Total $1,767.0 $1,540.1 $1,329.1
======== ========= ==========
</TABLE>
Included in U.S. sales are export sales of $204 million in 1997, $191 million in
1996 and $140 million in 1995.
<TABLE>
<CAPTION>
Year ended December 31, 1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Transfers between geographic areas:
United States $17.0 $17.6 $ 13.4
Europe 9.9 8.5 7.1
Other foreign 7.8 4.0 3.8
------- -------- ----------
Total $34.7 $30.1 $24.3
======= ========= ==========
Year ended December 31, 1997 1996 1995
-------- -------- --------
Operating profit:
United States $149.1 $108.1 $ 83.4
Europe 13.4 8.6 11.4
Other foreign 30.8 25.6 26.3
--------- --------- ---------
Total 193.3 142.3 121.1
Other expenses, net (including
corporate headquarters expense
of $13.1 million, $12.3 million and
$12.4 million for 1997, 1996 and
1995, respectively) (25.2) (19.3) (15.3)
Loss on sale of business - (61.5) -
Interest income and equity
in affiliate earnings 14.4 14.6 19.6
Interest expense and finance charges(24.6) (21.4) (14.2)
Earnings before income taxes 157.9 54.7 111.2
Income taxes (54.7) (12.9) (37.0)
------- -------- -------
Net earnings $103.2 $ 41.8 $ 74.2
======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997 1996
------ ------
<S> <C> <C>
Identifiable assets:
United States $1,230.3 $1,173.1
Europe 257.2 156.3
Other foreign 78.8 86.7
---------- --------
Total assets of operations 1,566.3 1,416.1
Affiliates at equity 127.0 130.4
General corporate assets 57.3 90.3
Consolidation elimination (14.3) (13.2)
-------- ---------
Total $1,736.3 $1,623.6
========= =========
</TABLE>
Sales to major customers
Consolidated sales included sales to Ford Motor Company of approximately 43%,
42% and 41%; to General Motors Corporation of approximately 20%, 21% and 25%;
and to Chrysler Corporation of approximately 10%, 9% and 6% for the years ended
December 31, 1997, 1996 and 1995, respectively. No other single customer
accounted for 10% or more of consolidated sales in any year between 1995 through
1997. Such sales consisted of a variety of products to a variety of customer
locations worldwide.
Note 10 Stock Incentive Plans
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 options to purchase the same
number of post-Spin-Off shares of the Company's common stock at prices equal to
50% of the pre-Spin-Off exercise price. Options granted prior to the Spin-Off to
purchase common stock of the Company under this plan carry exercise prices
ranging from $5.00 to $18.83 per share, equal to the market price of the
Company's common stock on the date of grant. The 121,914 outstanding options at
December 31, 1997 are fully vested. As of July 1997, the remaining 147,818
options available for grant expired. No additional options are available for
grant under this plan.
In 1993, the Company adopted a stock option plan that 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
$57.31 per share, equal to the market price of the Company's common stock on the
date of grant. The options vest over periods up to three years based upon
employment and have a term of ten years from date of grant. There are 349,275
outstanding options at December 31, 1997. In 1998, the Company will seek
approval from stockholders for an additional 1,000,000 options to be authorized
for grant. In anticipation of such approval, the Company provisionally granted
113,000 options in July 1997. The tables below assume that such approval will be
granted.
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation cost has been recognized for
stock options grants.
A summary of the two plans' shares under option at
December 31, 1997, 1996 and 1995 follows:
<TABLE>
<CAPTION>
Shares Weighted-average
1997 (thousands) exercise price
<S> <C> <C>
Outstanding at beginning of year 461 $21.57
Granted 130 53.48
Exercised (111) 19.14
Forfeitures (9) 35.34
Outstanding at end of year 471 30.72
Options exercisable at year-end 323
Shares available for future grants 973
Shares Weighted-average
1996 (thousands) exercise price
Outstanding at beginning of year 632 $19.39
Granted 16 32.41
Exercised (178) 14.72
Forfeitures (9) 23.09
Outstanding at end of year 461 21.57
Options exercisable at year-end 395
Shares available for future grants 242
Shares Weighted-average
1995 (thousands) exercise price
Outstanding at beginning of year 987 $17.66
Granted 16 25.43
Exercised (345) 14.69
Forfeitures (26) 19.65
Outstanding at end of year 632 19.39
Options exercisable at year-end 384
Shares available for future grants 249
</TABLE>
The following table summarizes information about the options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
---------------------
Weighted-
Number average Weighted-
Range of outstanding remaining average
exercise prices (thousands) contractual life exercise price
<S> <C> <C> <C>
$ 5.00 9 0.3 $ 5.00
$13.91-18.83 113 3.4 17.78
$22.50-25.00 192 5.7 24.82
$25.31-38.94 37 7.8 30.55
$40.44-57.31 120 9.6 54.28
----- ----- ------
$ 5.00-57.31 471 6.2 30.72
===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------
Number Weighted-
Range of exercisable average
exercise prices (thousands) exercise price
<S> <C> <C>
$ 5.00 9 $ 5.00
$13.91-18.83 113 17.78
$22.50-25.00 192 24.82
$25.31-38.94 9 25.74
$40.44-57.31 - -
----- ------
$ 5.00-57.31 323 21.82
====== =======
</TABLE>
Pro forma information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards No. 123, and has been determined as
if the Company had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1997, 1996, and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate 6.35% 5.73% 7.21%
Dividend yield 1.67% 1.88% 2.12%
Volatility factor 27.64% 27.62% 27.83%
Weighted average expected life7 years 7 years 7 years
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma net earnings and earnings per share are as follows:
<TABLE>
<CAPTION> 1997 1996 1995
------ ------- --------
<S> <C> <C> <C>
Net earnings - as reported $103.2 $41.8 $74.2
Net earnings - pro forma 102.9 41.8 74.2
Earnings per share -
as reported (basic) 4.35 1.77 3.18
Earnings per share -
as reported (diluted) 4.31 1.75 3.15
Earnings per share-pro forma(basic) 4.34 1.77 3.18
Earnings per share-pro forma(diluted)4.30 1.75 3.15
Weighted average fair value of
options granted during the year 19.60 10.81 9.49
</TABLE>
Executive stock performance plan
The Company has an executive stock performance plan which provides payouts at
the end of a three-year period based on the Company's performance in terms of
total stockholder return relative to a peer group of automotive companies.
Payouts earned are payable 40% in cash and 60% in the Company's common stock.
For the first three-year measurement period, which ended December 31, 1997, the
amount earned under the plan and accrued over the three-year period was $3.0
million. Estimated shares issuable under the plan are included in the
computation of diluted earnings per share as earned.
Note 11 Interim Financial Information (Unaudited)
The following information includes all adjustments, as well as normal recurring
items, that the Company considers necessary for a fair presentation of 1997 and
1996 interim results of operations. Certain 1996 quarterly amounts have been
reclassified to conform to the annual presentation. <PAGE>
<TABLE>
<CAPTION>
1997 1996
---- -----
Quarter Ended Quarter Ended
[millions of March June Sept. Dec. Year March June Sept.Dec. Year
dollars except 31 30 30 31 1997 31 30 30 31 1996
per amounts] ---- ---- ----- ---- ----- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $443.5$449.7$406.8$467.0 $1,767.0$348.9$381.8$387.7$421.7$1,540.1
Cost of sales 345.7 346.9 323.7 359.1 1,375.4 277.5 297.5 308.1 322.4 1,205.5
Depreciation 16.8 17.7 17.0 18.9 70.4 18.4 17.5 17.8 17.6 71.3
Selling,general and
administrative
expenses 36.0 34.0 25.5 36.5 132.0 30.8 29.2 27.1 35.6 122.7
Minority interest 0.7 0.5 0.6 1.4 3.2 0.7 0.5 0.7 0.7 2.6
Goodwill amorti-
zation 4.1 4.1 4.2 4.3 16.7 2.6 2.8 4.0 4.1 13.5
Loss on sale of
business - - - - - - - - 61.5a 61.5a
Equity in affiliate
earnings and
other income (4.0) (4.6) (3.1) (1.5) (13.2) (4.1) (2.8) (3.6) (2.6) (13.1)
Earnings(loss)before
interest expense,
finance charges
and income taxes44.2 51.1 38.9 48.3 182.5 23.0 37.1 33.6 (17.6) 76.1
Interest expense
and finance
charges 6.5 6.3 6.2 5.6 24.6 3.5 3.5 7.0 7.4 21.4
Earnings(loss)before
income taxes 37.7 44.8 32.7 42.7 157.9 19.5 33.6 26.6 (25.0) 54.7
Provision(benefit)
for income taxes 12.9 15.2 11.1 15.5 4.7 7.2 11.8 7.8 (13.9) 12.9
Net earnings(loss)$24.8 $29.6 $21.6 $27.2 $103.2 $12.3 $21.8 $18.8 $(11.1)$41.8
Net earnings(loss)
per share-basic $1.05 $1.25 $0.91 $1.14 $4.35 $0.52 $0.93 $0.80 $(0.47)$1.77
Net earnings(loss)
per share-diluted$1.04 $1.23 $0.90 $1.14 $4.31 $0.52 $0.93 $0.79 $(0.47)$1.75
</TABLE>
<PAGE>
(a) The Company recorded a pretax operating loss on the sale of the North
American manual transmission business of $61.5 million, which, net of tax
benefit of $26.5 million, resulted in an aftertax charge of $35 million, or
$1.49 per share. See Note 14 for additional information.
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:
<PAGE>
Components of income tax expense:
<TABLE>
<CAPTION>
1997 1996 1995
------- --------- -----------
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 $115.7 $42.2 $157.9 $25.1 $29.6 $ 54.7 $78.8 $32.4 $111.2
====== ======= ====== ======= ===== ====== ======= ===== =====
Income taxes:
Current:
Federal/
foreign $ 19.8 $ 7.2 $ 27.0 $12.0 $11.0 $ 23.0 $19.0 $12.5 $31.5
State 3.6 - 3.6 2.3 - 2.3 6.4 - 6.4
----- ------ ----- ------- ------ -------- ----- ------ ------
23.4 7.2 30.6 14.3 11.0 25.3 25.4 12.5 37.9
Deferred 19.0 5.1 24.1 (13.4) 1.0 (12.4) (2.1) 1.2 (0.9)
------ ------ ------ ------- ------ ------- ------- ----- -----
Total income
taxes $ 42.4 $12.3 $ 54.7 $ 0.9 $12.0 $ 12.9 $23.3 $13.7 $37.0
===== ====== ====== ====== ====== ====== ====== ====== ======
</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 1997, 1996
and 1995, in millions of dollars, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ -------- ----------
<S> <C> <C> <C>
Income taxes at U.S. statutory rate
of 35% $55.3 $19.1 $38.9
Increases (decreases) resulting from:
Income from non-U.S. sources 1.7 2.7 4.7
State taxes, net of federal benefit 2.3 1.5 4.1
Business tax credits, net (2.5) (3.8) (5.7)
Affiliate earnings (4.9) (5.0) (6.7)
Nontemporary differences 2.8 2.5 1.6
Basis difference on assets sold - (4.2) -
Other, net - 0.1 0.1
-------- -------- ----------
Income taxes as reported $54.7 $12.9 $37.0
</TABLE>
Following are the gross components of the deferred taxes as of December 31,
1997 and 1996 in millions of dollars:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets - current:
Accrued costs related to manual
transmission sale $ 8.5 $ 17.8
======== =========
Deferred tax assets - noncurrent:
Postretirement benefits $102.8 $100.0
Pension 4.7 14.4
Other long-term liabilities and reserves 19.5 18.5
Foreign tax credits 18.6 14.4
Valuation allowance (18.8) (14.4)
Other 15.5 11.2
142.3 144.1
--------- ---------
Deferred tax liabilities - noncurrent:
Fixed assets 73.8 72.6
Pension 16.0 18.8
Other 31.9 17.3
------- ----------
121.7 108.7
------- ----------
Net deferred tax asset - noncurrent $ 20.6 $ 35.4
======== ========
</TABLE>
The foreign tax credit has been fully considered in the valuation allowance.
<PAGE>
Note 13 Research and Development Costs
The Company spent approximately $59.0 million, $54.4 million and $36.7 million
in 1997, 1996 and 1995, respectively, on research and development activities.
Not included in the these amounts were customer-sponsored R&D activities of
approximately $8.0 million, $10.0 million and $11.3 million in 1997, 1996 and
1995, respectively.
Note 14 Acquisitions and Divestiture
Acquisitions
AG Kuhnle, Kopp & Kausch
On October 31, 1997, the Company acquired 63% of the capital stock of AG Kuhnle,
Kopp & Kausch, a German manufacturer of turbochargers and turbomachinery. The
acquisition was accounted for as a purchase. Pending completion of analysis to
allocate purchase price to the assets acquired, the excess of purchase price
over net carrying value, $6.3 million, has been classified as goodwill. The
consolidated balance sheet includes the accounts of the turbocharger business,
and the statement of operations includes the results of operations for the
turbocharger business for the period from November 1 through December 31, 1997.
Results of operations include sales of $24.8 million and net income of $0.9
million (net of minority interest of $0.6 million.) The net carrying value of
the turbomachinery business is included in prepayments and other current assets
on the December 31, 1997 balance sheet. Such value, $10.3 million, includes
$16.7 million of cash and $6.0 million of assumed indebtedness. The
turbomachinery business does not fit the Company's strategic plan and the
Company is considering alternate means of realizing its investment in this
business.
Coltec
On June 17, 1996, the Company acquired the operations and substantially all of
the operating assets of three of Coltec Industries Inc's automotive OEM
businesses: Holley Automotive, Coltec Automotive and Performance Friction
Products. The businesses have a broad base of air and fluid management products,
established OEM relationships and three technologically advanced manufacturing
facilities. The Company paid $287.8 million in cash, including $4.8 million of
costs related to the acquisition, which was initially financed by utilization of
$260 million under the Company's revolving credit facility and borrowings under
various money market facilities. As discussed in Note 5, in November 1996, the
Company issued $150 million of 7.0% senior unsecured notes and used the proceeds
to pay down revolving credit borrowings.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the assets acquired based upon
their estimated fair values. The excess of the purchase price over the estimated
fair value of net assets acquired amounted to $242 million, which has been
accounted for as goodwill and is being amortized over 40 years using the
straight-line method. Included in the 1996 consolidated statement of earnings
were sales of $123 million and pretax operating income of $13 million.
The following unaudited pro forma information has been prepared assuming that
the acquisitions had occurred at the beginning of 1996, and includes adjustments
for estimated amounts of goodwill amortization, minority interest and increased
interest expense. The unaudited pro forma financial information is not
necessarily indicative of the results of operations that would have occurred had
the transactions been consummated at the beginning of 1996 nor is it necessarily
indicative of results of operations that may occur in the future.
<TABLE>
<CAPTION>
[millions of dollars
except per share amounts] Year Ended December 31,
1997 1996
-------- --------
<S> <C> <C>
Net sales $1,884.1 $1,809.3
Net earnings 103.6 43.5
Net earnings per share - basic $ 4.37 $ 1.84
Net earnings per share - diluted $ 4.33 $ 1.83
</TABLE>
Divestiture
North American Manual Transmission Business
On December 31, 1996, the Company sold its North American manual transmission
business located in Muncie, Indiana, to Transmisiones Y Equipos Mecanicos S.A.
De C.V. Under the agreement, the Company received $20.3 million in cash at
closing for certain assets of the business and will receive approximately $20
million in cash during a transition period for the value of inventory and
certain services to be provided. The Company recorded a pretax loss on the sale
of $61.5 million during the fourth quarter of 1996, which, net of tax benefit of
$26.5 million, resulted in an aftertax charge of $35 million, or $1.49 per
share. The effective income tax rate differed from the U.S. statutory rate as a
result of recognizing differences between financial reporting and tax basis of
the business sold. The charge included a loss on the assets sold; costs
necessary to supply existing customers while the business transferred to its new
location; and costs of reconfiguring the Muncie facility to support continuing
operations of the remaining 4WD transfer case business. In 1996, the Company
incurred a pretax operating loss of $17 million from the manual transmission
business on net sales of $100 million.
<PAGE>
Selected Financial Data
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
<TABLE>
<CAPTION>
[millions of dollars, except per share data]
Year Ended December 31, 1997 1996 1995 1994 1993
------ ------- -------- ------- --------
Statement of Operations Data
<S> <C> <C> <C> <C> <C>
Net sales $1,767.0 $1,540.1 $1,329.1 $1,223.4 $985.4
Cost of sales 1,375.4 1,205.5 1,044.9 948.4 769.3
Depreciation 70.4 71.3 68.0 60.9 57.9
Selling, general and administrative
expenses 132.0 122.7 97.8 92.1 83.5
Minority interest 3.2 2.6 2.0 1.4 0.1
Goodwill amortization 16.7 13.5 9.6 9.6 9.7
Loss on sale of business - 61.5c - - -
Equity in affiliate earnings and
other income (13.2) (13.1) (18.6) (10.6) (10.6)
Interest expense and finance
chargesb 24.6 21.4 14.2 13.9 18.4
Provision for income taxes 54.7 12.9 37.0 43.3 24.3
Earnings before cumulative effect
of accounting change 103.2 41.8 74.2 64.4 32.8
Cumulative effect of accounting
changea - - - - (130.8)
Net earnings (loss) $ 103.2 $ 41.8 $ 74.2 $ 64.4 $ (98.0)
Earnings per share before
cumulative effect of accounting
changeb basic $ 4.35 $ 1.77c $ 3.18 $ 2.79 $ 1.46
Cumulative effect of initial
application of new accounting
standard for postretirement
benefits, net of taxes per shareb - - - - (5.81)
Net earnings (loss) per shareb -
basic $ 4.35 $ 1.77 $ 3.18 $ 2.79 $4.35)
Average shares outstanding
(thousands)b -basic 23,683 23,564 23,303 23,048 22,522
Earnings per share before
cumulative effect of accounting
changeb -diluted $ 4.31 $ 1.75c $ 3.15 $ 2.75 $1.42
Cumulative effect of initial
application of new accounting
standard for postretirement
benefits, net of taxes per shareb - - - - (5.65)
Net earnings (loss) per shareb
- diluted $ 4.31 $ 1.75 $ 3.15 $ 2.75 $(4.23)
Average shares outstanding
(thousands)b - diluted 23,934 23,830 23,570 23,424 23,148
Cash dividend declared per share$ 0.60 $ 0.60 $ 0.60 $ 0.45 $ 0.125
Balance Sheet Data (at end of
period)
Total assets $1,736.3 $ 1,623.6 $ 1,335.2 $ 1,240.3 $1,159.4
Total debt 338.1 317.3 134.7 107.3 159.6
</TABLE>
(a) Amount reflects the adoption of SFAS No. 106 regarding post
retirement benefits in 1993.
(b) 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.
(c) The Company recorded a pretax loss on the sale of the North American manual
transmission business of $61.5 million, which, net of tax benefit of $26.5
million, results in an aftertax charge of $35 million, or $1.49 per share.
See Note 14 to the Company's consolidated financial statements for additional
information.
<PAGE>
DIRECTORS
Dr. Andrew F. Brimmer (2)
President
Brimmer & Company, Inc.
William E. Butler
Chairman and Chief Executive Officer, Retired
Eaton Corporation
Jere A. Drummond (1,3)
President and Chief Executive Officer
BellSouth Telecommunications, Inc.
John F. Fiedler (1)
Chairman and Chief Executive Officer
Paul E. Glaske (3,4)
Chairman, President and Chief Executive Officer, Blue Bird Corporation
Ivan W. Gorr (2,3,4)
Chairman and Chief Executive Officer, Retired
Cooper Tire & Rubber Company
James J. Kerley (2,3,4)
Chairman, Retired
Rohr, Inc.
Alexis P. Michas (2,4)
Managing Partner and Director
Stonington Partners, Inc.
John Rau
President and Chief Executive Officer
Chicago Title and Trust Company
Committees of the Board
(1) Executive Committee
(2) Finance and Audit Committee
(3) Compensation Committee
(4) Board Affairs Committee
EXECUTIVE OFFICERS
John F. Fiedler
Chairman and Chief Executive Officer
Gary P. Fukayama
Executive Vice President
Group President and General Manager,
Air/Fluid Systems
Fred M. Kovalik
Executive Vice President
President and General Manager,
Powertrain Systems
Ronald M. Ruzic
Executive Vice President
Group President and General Manager,
Morse TEC
Robert D. Welding
Vice President
President and General Manager,
Automatic Transmission Systems
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, General Counsel and Secretary
Geraldine Kinsella
Vice President, Human Resources
Corporate Information
Company Information
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.
<TABLE>
<CAPTION>
High Low
---------- --------
<S> <C> <C>
Fourth Quarter 1997 $60 7/8 $46 1/8
Third Quarter 1997 57 3/4 50 7/16
Second Quarter 1997 53 1/4 42
First Quarter 1997 42 5/8 38 3/8
High Low
Fourth Quarter 1996 $40 7/8 $33 1/4
Third Quarter 1996 40 3/8 34
Second Quarter 1996 43 33 5/8
First Quarter 1996 33 5/8 28 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 19, 1998, payable February 17, 1998, to
stockholders of record on February 2, 1998. The current practice is subject to
review and change at the discretion of the Board of Directors.
Stockholders
As of December 31, 1997, there were 212 holders of record and an estimated
10,000 beneficial holders.
Annual Meeting of Stockholders
The 1998 annual meeting of stockholders will be held on Tuesday, April 28, 1998,
beginning at 11:00 a.m. on the 19th floor of the Company's headquarters at 200
South Michigan Avenue in Chicago.
Securities Information
ChaseMellon Shareholder Services 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
statements for the annual meeting should be directed to:
ChaseMellon Shareholder Services
450 West 33rd Street, 15th Floor
New York, NY 10001
800-851-9677
http://www.cmssonline.com
Investor Inquiries
Financial investors and securities analysts requiring financial reports,
interviews or other information should contact Mary Brevard, Director of
Investor Relations and Communications, 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 Investor Relations and Communications Department at company headquarters or
calling 312-322-8524.
Dividend Reinvestment and Stock Purchase Plan
The Borg-Warner Automotive Dividend Reinvestment and Stock Purchase Plan has
been established so that anyone can make direct purchases of Borg-Warner
Automotive common stock and reinvest dividends. The company pays the brokerage
commissions on purchases. To receive a prospectus and enrollment package,
contact ChaseMellon at 800-842-7629. Questions about the plan can be directed to
ChaseMellon at 800-851-4229.
Vehicle photographs in this report were provided by various automakers. The
photographs are protected by copyrights and are used with permission.
The Borg-Warner Indianapolis 500 Trophy is a registered trademark of Borg-Warner
Automotive, Inc.
BORG-WARNER AUTOMOTIVE, INC.
NAME OF SUBSIDIARY % VOTING SECURITIES OWNED BY PARENT
Borg-Warner Automotive Powertrain Systems Corporation 100
Borg-Warner Automotive South Asia Corporation 100
Divgi-Warner Limited 60
Huazhong (Automotive) Transmission Company, Ltd. 60
Borg-Warner Automotive PTS Service Corporation 100
Borg-Warner Automotive Powdered Metals Corporation 100
Borg-Warner Automotive Diversified
Transmission Products Corporation 100
Borg-Warner Automotive Air/Fluid Systems Corporation 100
Borg-Warner Automotive Air/Fluid Systems
Corporation of Michigan 100
Borg-Warner Automotive Air/Fluid Systems Holding Corporation100
Borg-Warner Automotive Air/Fluid Systems Europe S.A.S. 90
Borg-Warner Automotive Air/Fluid Systems,Tulle SA 100
Borg-Warner Automotive Morse TEC Corporation 100
Borg-Warner Automotive (Canada) Ltd. 100
Borg-Warner Automotive Japan Corporation 100
Borg-Warner Automotive K.K. 100
Borg-Warner Automotive Taiwan Co., Ltd. 100
B.W. Componentes Mexicanos de Transmisxones S.A. de C.V. 86
Morse TEC Europe Sp.A 100
Borg-Warner Automotive Foreign Sales Corporation 100
Borg-Warner Automotive Automatic Transmission Systems Corporation100
Borg-Warner Automotive Europe Corporation 100
AG Kuhnle, Kopp & Kausch 63
Borg-Warner Automotive GmbH 100
Borg-Warner Automotive Europa Vertriebs-und
Verwaltungs-GmbH 100
3K Warner Turbosystems GmbH 100
Borg & Beck Torque Systems, Inc. 100
Borg-Warner Automotive-NW Corporation 100
Borg-Warner Automotive Korea, Inc. 60
Creon Insurance Agency, Ltd. 100
Creon Trustees, Ltd. 100
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-45491, 333-45493, 333-45507 and 333-45499 dated February 3, 1998; 33-75564,
33-75566, 33-75568, 33-75572, 33-75574, 33-67822 and 33-67824 dated February 1,
1995; 33-92430, 33-92428, 33-92432 and 33-92426 dated May 17, 1995; 33-92862 and
33-92860 dated May 30, 1995; 33-92858 dated June 1, 1995; 333-12941, 333-12875
and 333-12939 dated Septembeer 27, 1996; and 333-17179 dated December 3, 1996 of
Borg-Warner Automotive, Inc. on Form S-8 of our report, incorporated by
reference in the Annual Report on Form 10-K of Borg-Warner Automotive, Inc. for
the year ended December 31, 1997.
/s/ DELOITTE & TOUCHE LLP
- ----------------------
Deloitte & Touche LLP
Chicago, Illinois
March 20, 1998
POWER OF ATTORNEY
The undersigned directors of Borg-Warner Automotive, Inc. (the
"Corporation"), hereby appoint John F. Fiedler as their true and lawful
attorney-in-fact, with full power for and on their behalf to execute, in their
names and capacities as directors of the Corporation, and to file with the
Securities and Exchange Commission on behalf of the Corporation under the
Securities Exchange Act of 1934, as amended, the Annual Report on Form 10-K for
the fiscal year ended December 31, 1997.
This Power of Attorney shall automatically terminate at the close of
business on March 31, 1998.
In witness whereof, the undersigned has executed this Power of Attorney on
this 12th day of March, 1998.
/s/ Jere A. Drummond /s/ Andrew F. Brimmer
- ------------------------- -------------------------
JERE A. DRUMMOND ANDREW F. BRIMMER
/s/ Ivan W. Gorr /s/ William E. Butler
- ------------------------- --------------------------
IVAN W. GORR WILLIAM E. BUTLER
/s/ Paul E. Glaske /s/ John Rau
- ------------------------- --------------------------
PAUL E. GLASKE JOHN RAU
/s/ Alexis P. Michas /s/ James J. Kerley
- ------------------------- --------------------------
ALEXIS P. MICHAS JAMES J. KERLEY
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Financial Condition at December 31, 1997 and the
Consolidated Statement of Income for the Twelve Months Ended December and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,600
<SECURITIES> 2,800
<RECEIVABLES> 158,600
<ALLOWANCES> 0
<INVENTORY> 108,000
<CURRENT-ASSETS> 306,900
<PP&E> 971,200
<DEPRECIATION> 359,500
<TOTAL-ASSETS> 1,736,300
<CURRENT-LIABILITIES> 395,200
<BONDS> 270,400
0
0
<COMMON> 200
<OTHER-SE> 693,500
<TOTAL-LIABILITY-AND-EQUITY> 1,736,300
<SALES> 1,767,000
<TOTAL-REVENUES> 1,767,000
<CGS> 1,375,400
<TOTAL-COSTS> 1,375,400
<OTHER-EXPENSES> 209,100
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,600
<INCOME-PRETAX> 157,900
<INCOME-TAX> 54,700
<INCOME-CONTINUING> 103,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103,200
<EPS-PRIMARY> 4.35
<EPS-DILUTED> 4.31
</TABLE>
CAUTIONARY STATEMENTS
Information provided by the Company from time to time may contain "forward-
looking statements" as defined by the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are subject to risks and uncertainties
including, but not limited to, those discussed below, which could cause actual
results to differ materially from those expressed, projected or implied in the
forward-looking statement.
1. The Company's principal operations are cyclical, because they are directly
related to domestic and foreign automotive production, which is itself cyclical
and dependent on general economic conditions and other factors. Any significant
reduction in automotive production would have an adverse effect on the level of
the Company's sales to automotive original equipment manufacturers ("OEMs") and
the Company's financial position and operating results.
2. Many of the Company's products are currently used exclusively in sport-
utility vehicles and light trucks, the most rapidly growing segment in the
overall automotive market. Any significant reduction in production in this
market segment would have an adverse effect on the level of the Company's sales
to OEMs and the Company's financial position and operating results.
3. A number of the Company's major OEM customers manufacture products for their
own use that 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 products for their own use and in place of the
products now supplied by the Company.
4. The Company has a stated goal of increasing its revenues through the
expansion of existing business and select acquisitions. Failure to grow
existing business in sufficient volume because of changes in the automotive
market and/or the unavailability of suitable acquisition candidates could result
in nonattainment of this goal.
5. Annual price reductions to OEM customers have become a permanent feature of
the Company's business environment. To maintain its profit margins, the
Company, among other things, seeks price reductions from its own suppliers,
adopts improved production processes to increase manufacturing efficiency,
updates product designs to reduce costs and develops new products whose benefits
support increased pricing. The Company's ability to pass through increased raw
material costs to its OEM customers is also limited, with cost recovery less
than 100% and often on a delayed basis. There can be no assurance that the
Company will be able to reduce costs in an amount equal to the annual price
reductions and the increase in raw material costs.
6. The Company makes a significant annual investment in research and
development activities to develop new and improved products and manufacturing
processes. There can be no assurance that research and development activities
will yield new or improved products or products which will be purchased by the
OEMs, or new and improved manufacturing processes.
7. The Company has a stated goal to expand its operations in all significant
global markets to balance the cyclical nature of the automotive business. There
can be no assurance that the Company will be able to expand its existing
business or acquire new business outside of North America to balance its sales.
In addition, there can be no assurance that automotive production in North
America, Europe and Asia will not decline simultaneously.
8. The Company has a stated goal of continuing to increase revenues and
operating earnings at a rate greater than overall world automotive production by
increasing its content per vehicle with innovative new components and systems.
Any of the following factors could cause the Company to fail to outperform world
automotive production: (a) a significant drop in production of sport utility
vehicles and light trucks, high content vehicles for the Company's products; (b)
a failure of research and development spending to result in new components and
systems which will be purchased by the OEMs; (c) technology changes which could
render the Company's components and systems obsolete; and (d) a reversal of the
trend of supplying systems (which allows the Company to increase content per
vehicle) instead of components.
9. With operations and sales in countries outside the United States, the
Company could be affected by changes in trade, monetary and fiscal policies
(both in the United States and elsewhere), trade restrictions or prohibitions,
import and other charges or taxes, and fluctuations in foreign currency and
foreign exchange rates, and political instability and disputes.
January 27, 1998
Mr. John F. Fiedler
195 North Harbor Drive
#5505
Chicago, Illinois 60601
Dear John:
This letter sets forth certain terms and conditions of your employment by
Borg-Warner Automotive, Inc., a Delaware Corporation ("BWA"), and will
hereinafter be referred to as the "Agreement."
RECITALS
BWA desires to recognize your performance and demonstrated value to BWA and
to provide a significant additional incentive for you to continue to provide
services for the benefit of BWA and its affiliates, and you desire to accept
such employment with BWA under the terms and conditions of this Agreement;
In the course of your employment with BWA, you will have access to
confidential information that relates to or will relate to the business of BWA
and its affiliates; and
BWA desires that any such information not be disclosed to other parties or
otherwise used for unauthorized purposes.
In consideration of the above and the following mutual covenants and
conditions, we agree as follows:
1. Employment. BWA shall employ you under this Agreement as its Chief
Executive Officer for the period January 1, 1998 to December 30, 2002. During
this period, you will also continue to serve as Chairman of the BWA Board of
Directors (subject to the annual approval by the BWA Board of Directors of your
appointment and your re-election by the BWA stockholders). You hereby accept
such employment and appointment and agree to the remaining terms and conditions
set forth in this Agreement.
2. Duties. You shall work for BWA in a full-time capacity, and you shall
have the duties, responsibilities, powers, and authority customarily associated
with the position of Chief Executive Officer and Chairman of the BWA Board of
Directors. In addition to, or in lieu of, the foregoing, you shall also perform
such other and unrelated services and duties as may be assigned to you from time
to time by the BWA Board of Directors. You shall diligently, competently, and
faithfully perform all duties, and shall devote your business time, energy,
attention, and skill to the performance of duties for BWA or its affiliates and
use your best efforts to promote the interests of BWA.
3. Term of Employment. This Agreement shall begin January 1, 1998 and
end on December 30, 2002.
4. Compensation.
A. Base Salary. BWA will pay you the amount of $500,000 per year as
"Base Salary," payable in accordance with BWA's normal payroll practices. The
payment of your Base Salary shall be subject to any payroll or other deductions
as may be required to be made pursuant to law, government order, or by agreement
with or consent of you. Base Salary may be increased (but not decreased) from
time to time, following an annual review in January of each year, and any
reference to Base Salary herein shall include any increases to such salary.
B. Performance Bonus. You shall continue to participate in the
Borg-Warner Automotive, Inc. Management Incentive Bonus Plan or any successor
plan (the "BWA Bonus Plan"), as such plan may exist from time to time, the terms
of which are expressly incorporated herein. Your minimum annual target
incentive under the BWA Bonus Plan shall be $437,800.
C. Long-Term Incentive. You shall continue to participate in the
Borg-Warner Automotive, Inc. Executive Stock Performance Plan or any successor
plan (the "BWA Long-Term Incentive Plan"), as such plan may exist from time to
time, the terms of which are expressly incorporated herein. Your minimum target
incentive under the BWA Long-Term Incentive Plan for any performance cycle shall
be $595,000. You shall be entitled to a pro-rata portion of any award payable
under the BWA Long-Term Incentive Plan for any performance cycle that is
partially completed as of the expiration of this Agreement on December 30, 2002,
which pro-rata award will be payable to you on or about the end of such
performance cycle.
D. Stock Incentives. On January 27, 1998 the BWA Board of Directors
shall grant you a Non-Qualified Stock Option (as such term is defined in the
Borg-Warner Automotive, Inc. 1993 Stock Incentive Plan (the "BWA Stock Incentive
Plan ")), subject to the provisions of the BWA Stock Incentive Plan and the
terms and conditions set forth in a Non-Qualified Stock Option Agreement, to
purchase from the Company 75,000 shares of Stock (as such term is defined in the
Incentive Plan) at the Fair Market Value (as such term is defined in the BWA
Stock Incentive Plan) per share of Stock on January 27, 1998, such Option to be
exercisable for the entire 75,000 shares on December 30, 2002, subject to
accelerated vesting in the event of your death, "disability" (as defined in the
BWA Stock Incentive Plan), or involuntary termination of your employment other
than for "cause" (as defined in the BWA Stock Incentive Plan), or in the event
of a "change in control" (as defined in the BWA Stock Incentive Plan). You
shall continue to participate in the BWA Stock Incentive Plan as the BWA Board
of Directors may determine and as such plan may exist from time to time, the
terms of which are expressly incorporated herein.
E. Loan to Purchase BWA Stock. On January 30, 1998, BWA will loan
you $2,000,000, which you will use to purchase BWA Common Stock. In exchange
for this loan, you will issue to BWA a full recourse note (the "Note"), a copy
of which is attached to this Agreement as Attachment A, by which you will agree
to repay the $2,000,000 loan, plus interest at 5.84% per annum, which is the
applicable Federal mid-term rate (as defined in Section 1274(d) of the Internal
Revenue Code of 1986, as amended) as of January 30, 1998, compounded semi-
annually. The Note shall provide that the principal and accumulated interest
shall be payable in full on December 30, 2002, or earlier upon your voluntary
termination of employment or your involuntary termination by BWA for "cause" (as
defined in paragraph 5 below) prior to the December 30, 2002 expiration of this
Agreement. Notwithstanding the foregoing, the entire loan, including all
accumulated interest, shall be forgiven by BWA as of the December 30, 2002
expiration of this Agreement if you remain employed by BWA through that date, or
as of the earlier termination of your employment upon your death, "disability"
(as defined in Paragraph 5 below), or involuntary termination other than for
"cause" (as defined in Paragraph 5 below). Also notwithstanding the foregoing,
upon your termination of employment following the occurrence of a "change of
control" (as defined in the "Change of Control Employment Agreement" entered
into between you and BWA as of July 24, 1997 (the "Change of Control
Agreement")), the Note shall either be forgiven or payable in full, pursuant to
the applicable terms of the Change of Control Agreement, as it may be amended
from time to time. You hereby agree not to sell any of the BWA Common Stock
purchased with the loan proceeds until the earlier of your full payment of the
Note or BWA's forgiveness of the entire outstanding Note. The transfer of such
BWA Common Stock to your immediate family members (whether directly or through a
family trust or partnership) shall not be deemed a sale for this purpose.
F. Other Benefits. During the term of this Agreement, BWA shall
include you in any life insurance, disability insurance, medical, dental or
health care insurance, retirement plans and other benefit plans or programs
(including, if applicable, any excess benefit or supplemental executive
retirement plans) maintained by BWA for the benefit of its executives.
5. Termination. Your services under this Agreement shall terminate only
upon the first to occur of the following events:
A. At the end of the term of this Agreement.
B. Upon your date of death or the date you are given written notice
by the BWA Board of Directors (by majority action) that BWA has determined you
to be disabled. For purposes of this Agreement, you shall be deemed to be
"disabled" if you, as a result of illness or incapacity, shall be unable to
perform substantially your required duties for a period of six consecutive
months or for any aggregate period of six months in any 12-month period.
C. On the date the BWA Board of Directors (by majority action),
provides you with written notice that you are being terminated for cause. For
purposes of this Agreement, you shall be deemed terminated for "cause" if you
are terminated after you:
(1) shall be convicted of any felony including, but not limited
to, a felony involving fraud, theft, misappropriation, dishonesty, or
embezzlement of BWA's property;
(2) shall have committed intentional acts that materially impair
the goodwill or business of BWA or cause material damage to its property,
goodwill, or business;
(3) shall have refused to, or willfully failed to, perform your
material duties hereunder; or
(4) shall have materially violated any of the terms and
conditions set forth in Paragraph 8 below.
D. On the date you terminate your employment for any reason,
provided that you shall give the BWA Board of Directors 30 days' written notice
prior to such date of your intention to terminate this Agreement.
E. On the date the BWA Board of Directors (by majority action),
terminates your employment for any other reason, provided that BWA shall give
you 30 days written notice prior to such date of its intention to terminate this
Agreement.
6. Compensation Upon Termination. If your services are terminated
pursuant to Paragraph 5, you shall be entitled to your Base Salary, then in
effect, through your final date of active employment, plus any accrued but
unused vacation pay. Except as may be limited in the event of your termination
for "cause," you shall also be entitled to any benefits mandated under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended, ("COBRA") or
required under the terms of any death, insurance, incentive, or retirement plan,
program, or agreement provided by BWA and to which you are a party or in which
you are a participant, including, but not limited to, the following: (i) any
short-term or long-term disability plan or program, if applicable; (ii) the BWA
Bonus Plan; (iii) the Long-Term Incentive Plan; and (iv) the Incentive Plan.
7. Retirement. Upon the expiration of this Agreement, you will retire
from BWA (unless your employment or Board of Directors' membership is continued
by mutual agreement of BWA and you). During the term of this Agreement, you
shall use your best efforts to work with the BWA Board of Directors in
developing and implementing a succession plan and selecting and engaging a
successor to your position. In so doing, you shall cooperate fully with
decisions made by and directions given by the BWA Board of Directors.
8. Protective Covenants. You acknowledge that during the course of your
employment by, and relationship with, BWA, you have acquired or will acquire
"Confidential Information," as hereinafter defined, as well as special knowledge
of BWA's relationships with its customers and business brokers, and that BWA has
long-term, near-permanent relationships with its customers and business brokers.
In return for the consideration described in this Agreement, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and as a condition precedent to BWA entering into this Agreement,
and as an inducement to BWA to do so, you hereby represent, warrant, and
covenant as follows:
A. You have executed and delivered this Agreement as your free and
voluntary act, after having determined that the provisions contained herein are
of a material benefit to you, and that the duties and obligations imposed on you
hereunder are fair and reasonable and will not prevent you from earning a
livelihood following the termination of your employment with BWA;
B. You have read and fully understand the terms and conditions set
forth herein, have had time to reflect on and consider the benefits and
consequences of entering into this Agreement, and have had the opportunity to
review the terms hereof with an attorney or other representative, if you so
choose;
C. Your execution and delivery of this Agreement does not conflict
with, or result in a breach of or constitute a default under, any agreement or
contract, whether oral or written, to which you are a party or by which you may
be bound;
D. You agree that during the time of your employment and for a
period of two years after the termination of your employment hereunder for any
reason whatsoever or for no reason, whether voluntary or involuntary, you will
not, except on behalf of BWA:
(1) directly or indirectly, contact, solicit or direct any
person, firm, or corporation to contact or solicit, any of BWA's customers,
prospective customers, or business brokers (as hereinafter defined) for the
purpose of selling or attempting to sell, any products and/or services that are
the same as or similar to the products and services provided by BWA to its
customers during the term hereof. In addition, you will not disclose the
identity of any such business brokers, customers, or prospective customers, or
any part thereof, to any person, firm, corporation, association, or other entity
for any reason or purpose whatsoever;
(2) directly or indirectly, whether as an investor, lender,
owner, stockholder (except merely as a less than 1% stockholder in a publicly-
traded corporation having at least 1,000 shares), officer, director, consultant,
employee, agent, salesperson or in any other capacity, whether part-time or
full-time, engage in any business involved in the design, manufacture,
marketing, or servicing of products then constituting 10% or more of the annual
sales of BWA. You agree that the scope described above is necessary and
reasonable in order to protect BWA in the conduct of its business;
(3) solicit or accept if offered to you, with or without
solicitation, on your own behalf or on behalf of any other person, the services
of any person who is an employee of BWA, nor solicit any of BWA's employees to
terminate employment with BWA; or
(4) act as a consultant, advisor, officer, manager, agent,
director, partner, independent contractor, owner, or employee for or on behalf
of any of BWA's business brokers, customers, or prospective customers (as
hereinafter defined), with respect to or in any way with regard to any aspect of
BWA's business and/or any other business activities in which BWA engages during
the term hereof;
E. You agree that both during your employment and thereafter you
will not, for any reason whatsoever, whether voluntary or involuntary, use for
yourself or disclose to any person not employed by BWA any "Confidential
Information" of BWA acquired by you during your relationship with BWA, both
prior to and during the term of this Agreement. You further agree to use
Confidential Information solely for the purpose of performing duties with BWA
and further agree not to use Confidential Information for your own private use
or commercial purposes or in any way detrimental to BWA. "Confidential
Information" includes but is not limited to: (a) any financial, business,
planning, operations, services, potential services, products, potential
products, technical information and/or know-how, formulas, production,
purchasing, marketing, sales, personnel, customer, broker, supplier, or other
information of BWA; (b) any papers, data, records, processes, methods,
techniques, systems, models, samples, devices, equipment, compilations,
invoices, customer lists, or documents of BWA; (c) any confidential information
or trade secrets of any third party provided to BWA in confidence or subject to
other use or disclosure restrictions or limitations; and (d) any other
information, written, oral, or electronic, whether existing now or at some time
in the future, whether pertaining to current or future developments, and whether
previously accessed during your tenure with BWA or to be accessed during your
future employment with BWA, which pertains to BWA's affairs or interests or with
whom or how BWA does business. BWA acknowledges and agrees that Confidential
Information does not include (i) information properly in the public domain, or
(ii) information in your possession prior to the date of your original
employment with BWA;
F. During and after the term of employment hereunder, you will not
remove from BWA's premises any documents, records, files, notebooks,
correspondence, computer printouts, computer programs, computer software, price
lists, microfilm, or other similar documents containing Confidential
Information, including copies thereof, whether prepared by you or others, except
as your duty shall require, and in such cases, will promptly return such items
to BWA. Upon termination of your employment with BWA, all such items including
summaries or copies thereof, then in your possession, shall be returned to BWA
immediately. You agree to the return of such items, which shall be a
requirement in order for you to receive, at the time of such termination, or any
time thereafter, any compensation due you pursuant to any paragraphs hereunder
or otherwise;
G. You recognize and acknowledge that the identity of BWA's
customers, prospective customers, and business brokers, as they may exist from
time to time, are and will continue to be, valuable, special and unique assets.
For purposes of this Paragraph 8, "customer" shall be defined as any person,
firm, or entity that purchased any type of product and/or service from BWA or is
or was doing business with BWA or you within the 36-month period immediately
preceding termination of your employment. For purposes of this Paragraph 8,
"prospective customer" shall be defined as any person, firm, or entity contacted
or solicited by BWA or you (whether directly or indirectly) or who contacted BWA
or you (whether directly or indirectly) within the 12-month period immediately
preceding termination of your employment for the purpose of having such persons,
firms, or entities become customers of BWA. For purposes of this Paragraph 8,
"business broker" shall be defined as any person, firm, or entity who is or was
doing business with BWA or you or who was contacted or solicited by BWA or you
(whether directly or indirectly) or who contacted or solicited BWA or you
(whether directly or indirectly) within the 36-month period immediately
preceding termination of your employment;
H. You recognize and agree that all ideas, inventions, enhancements,
plans, writings, and other developments or improvements (the "Inventions")
conceived by you, alone or with others, during the term of your employment,
whether or not during working hours, that are within the scope of BWA's business
operations or that relate to any of BWA's work or projects, are the sole and
exclusive property of BWA. You further agree that (a) you will promptly
disclose all Inventions to BWA and hereby assign to BWA all present and future
rights you have or may have in those Inventions, including without limitation
those relating to patent, copyright, trademark or trade secrets; and (b) all of
the Inventions eligible under the copyright laws are "work made for hire." At
the request of and without charge to BWA, you will do all things deemed by BWA
to be reasonably necessary to perfect title to the Inventions in BWA and to
assist in obtaining for BWA such patents, copyrights or other protection as may
be provided under law and desired by BWA, including but not limited to executing
and signing any and all relevant applications, assignments or otherinstruments.
Notwithstanding the foregoing, pursuant to the Employee Patent Act, Illinois
Public Act 83-493, BWA hereby notifies you that the provisions of this Paragraph
8 shall not apply to any Inventions for which no equipment, supplies, facility
or trade secret information of BWA was used and which were developed entirely on
your own time, unless (a) the Invention relates (i) to the business of BWA or
(ii) to actual or demonstrably anticipated research or development of BWA, or
(b) the Invention results from any work performed by you for BWA;
I. You acknowledge and agree that all customer lists, supplier
lists, and customer and supplier information, including, without limitation,
addresses and telephone numbers, are and shall remain the exclusive property of
BWA, regardless of whether such information was developed, purchased, acquired,
or otherwise obtained by BWA or you. You agree to furnish to BWA on demand at
any time during the term of this Agreement, and upon termination of this
Agreement, your complete list of the correct names, places of business and
telephone numbers of all of its customers served by you and located within any
or all of the territories to which you have been assigned, including all copies
wherever located. You further agree to notify immediately BWA of the name and
address of any new customer, and report all changes of a location of old
customers, so that upon the termination of this Agreement, BWA will have a
complete list of the correct names and addresses of all of its customers with
which you have had dealings. Also, you agree to furnish to BWA on demand at any
time during the term of this Agreement, and upon the termination of this
Agreement, any other records, notes, computer printouts, computer programs,
computer software, price lists, microfilm, or any other documents related to
BWA's business, including originals and copies thereto; and
J. It is agreed that any breach or anticipated or threatened breach
of any of your covenants contained in this Paragraph 8 will result in
irreparable harm and continuing damages to BWA and its business and that BWA's
remedy at law for any such breach or anticipated or threatened breach will be
inadequate, and, accordingly, in addition to any and all other remedies that may
be available to BWA at law or in equity in such event, any court of competent
jurisdiction may issue a decree of specific performance or issue a temporary and
permanent injunction, without posting bond or furnishing other security and
without proving special damages or irreparable injury, enjoining and restricting
the breach, or threatened breach, of any such covenant, including, but not
limited to, any injunction restraining the breaching party from disclosing, in
whole or part, any Confidential Information. The prevailing party shall be
entitled to an award of costs and expenses, including reasonable attorneys' and
accountants' fees, incurred in the application of this Paragraph 8J.
9. Notices. Any and all notices required in connection with this
Agreement shall be deemed adequately given only if (a) in writing and personally
delivered, or sent by first class, registered, or certified mail, postage
prepaid, return receipt requested or by recognized overnight courier, (b) sent
by telefacsimile, provided a hard copy is mailed on that date to the party for
whom such notices are intended, or (c) sent by other means at least as fast and
reliable as first class mail. A written notice shall be deemed to have been
given to the recipient party on the earlier of (a) the date it shall be
delivered to the address required by this Agreement; (b) the date delivery shall
have been refused at the address required by this Agreement; (c) with respect to
notices sent by mail or overnight courier, the date as of which the Postal
Service or overnight courier, as the case may be, shall have indicated such
notice to be undeliverable at the address required by this Agreement; or (d)
with respect to a telefacsimile, the date on which the telefacsimile is sent and
receipt of which is confirmed. Any and all notices referred to in this
Agreement, or which either party desires to give to the other, shall be
addressed to your residence in your case, or to its principal office in the case
of BWA.
10. Waiver of Breach. A waiver by BWA of a breach of any provision of
this Agreement by you shall not operate or be construed as a waiver or estoppel
of any subsequent breach by you. No waiver shall be valid unless in writing and
signed by an authorized officer of BWA.
11. Assignment. You acknowledge that the services to be rendered by you
are unique and personal. Accordingly, you may not assign any of your rights or
delegate any of your duties or obligations under this Agreement. The rights and
obligations of BWA under this Agreement shall inure to the benefit of and shall
be binding upon the successors and assigns of BWA.
12. Entire Agreement. This Agreement sets forth the entire and final
agreement and understanding of the parties and contains all of the agreements
made between the parties with respect to the subject matter hereof. This
Agreement supersedes any and all other agreements, either oral or in writing,
between the parties hereto, with respect to the subject matter hereof. No
change or modification of this Agreement shall be valid unless in writing and
signed by a person so authorized by the BWA Board of Directors and you. If any
provision of this Agreement shall be invalid or unenforceable, in whole or in
part, then such provision shall be deemed modified or restricted to the extent
and in the manner necessary to render the same valid and enforceable, or shall
be deemed excised from this Agreement, as the case may require, and this
Agreement shall be construed and enforced to the maximum extent permitted by
law, as if such provision had been originally incorporated herein as so modified
or restricted, or as if such provision had not been originally incorporated
herein, as the case may be. The parties further agree to seek a lawful
substitute for any provision found to be unlawful.
13. Headings. The headings in this Agreement are inserted for convenience
only and are not to be considered a construction of the provisions hereof.
14. Execution of Agreement. This Agreement may be executed in several
counterparts, each of which shall be considered an original, but which when
taken together, shall constitute one agreement.
15. Recitals. The recitals to this agreement are an integral part hereof
and shall be considered as substantive and not precatory language.
16. Arbitration Any controversy or claim arising out of or relating to
this Agreement or breach thereof, or arising out of or relating to the
employment relationship between BWA and you, other than any controversy or claim
arising under Paragraph 8, shall be settled by arbitration in accordance with
the Voluntary Labor Arbitration Rules of the American Arbitration association,
and judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction thereof in the State of Illinois. In reaching its
decision, the arbitrator shall have no authority (a) to interpret or enforce
Paragraph 8 of this Agreement (for which Paragraph 17 shall provide the
exclusive venue), (b) to change or modify any provision of this Agreement, or
(c) to base any part of its decision on the common law principle of constructive
termination. If you are the prevailing party herein, you shall be entitled to
an award of costs and reasonable attorneys' fees, and you may petition the
arbitrator for pre and post-judgment interest to be included in the award. If
BWA is the prevailing party herein, or the arbitrator determines that there is
no prevailing party, the parties shall each be responsible for its own costs and
fees incurred in the application of this Paragraph 16.
17. Governing Law. This Agreement shall be governed by the laws of the
State of Illinois, without reference to its conflict of law provisions, and any
court action commenced to enforce Paragraph 8 of this Agreement shall have as
its venue the County of Cook, Illinois.
If this letter meets with your understanding and approval, kindly sign and
return to BWA the enclosed copy of this letter which will then constitute our
agreement on this subject.
Sincerely,
BORG-WARNER AUTOMOTIVE, INC.
By:
------------------------
Paul E. Glaske,
Chairman of the Compensation
Committee of the BWA Board
of Directors
Accepted and agreed to this
- -----day of -------, 1998
By:
--------------------
John F. Fiedler<PAGE>
APPENDIX A
NON-NEGOTIABLE FULL RECOURSE PROMISSORY NOTE
January 30, 1998
Maturity Date: December 30, 2002 Amount $2,000,000
On or before December 30, 2002 (the "Maturity Date"), for value received,
JOHN F. FIEDLER, 195 North Harbor Drive, #4603, Chicago, IL 60601 ("Borrower"),
promises to pay to the order of BORG-WARNER AUTOMOTIVE, INC. a Delaware
corporation ("Company"), the principal sum of Two Million Dollars ($2,000,000)
together with interest thereon from the date hereof at the rate of 5.84% per
annum, compounded semiannually, on the unpaid balance until paid.
Notwithstanding the foregoing, Borrower shall be obligated to prepay his
entire obligation hereunder (including principal and interest accrued thereon
through the date of prepayment) within ten (10) days of the effective date of
his voluntary termination of employment with Company prior to the Maturity Date
(other than upon his "disability," as defined in the letter agreement governing
the terms of Borrower's employment with Company through the Maturity Date (the
"Letter Agreement")) or his involuntary termination of employment with Company
prior to the Maturity Date for "cause," as defined in the Letter Agreement.
Also notwithstanding the foregoing, Borrower's obligation hereunder
(including principal and interest thereon) shall be deemed satisfied and shall
thereby be forgiven by Company upon the occurrence of certain events and/or
Borrowers satisfaction of certain conditions in accordance with the terms and
conditions set forth in Paragraph 4E of the Letter Agreement.
Also notwithstanding the foregoing, the status of Borrower's obligation
hereunder upon his termination of employment from the Company following a
"change of control" (as defined in the Change of Control Employment Agreement
entered into between Company and Borrower on July 24, 1997) shall be as set
forth in such Agreement, as it may be amended from time to time.
Company has the right to set-off any amounts due and owing under this Note
from any distributions Company shall make to Borrower from time to time.
Borrower shall have the right under this Note to prepay the principal amount
without penalty; provided that all such prepayment shall be first applied to
accrued but unpaid interest.
Borrower hereby waives presentment, demand, notice of dishonor, protest and
all other notices whatsoever, and agrees that Company may in its sole
discretion, from time to time, extend or renew this Note for any period of time
and grant any releases, compromises, extensions, renewals or indulgences with
respect to this Note or Borrower, all without notice to or consent of Borrower,
without affecting in any manner the Note. Upon and after any default, Company
may in its sole discretion, declare the Note to be immediately due and payable
without notice or demand to Borrower or any other person.
This Note is a full-recourse note evidencing an unconditional promise by
Borrower to make the payments specified herein.
No delay or omission on the part of the holder hereof to exercise rights
under this Note shall impair any such right or power or shall be construed to be
a waiver of any such default or acquiescence therein. No waiver of any default
shall be construed, taken or held to be a waiver of any other default or
acquiescence in or consent to any further or succeeding default of the same
nature.
BORROWER ACKNOWLEDGES THAT THIS NOTE IS BEING ACCEPTED BY COMPANY IN
PARTIAL CONSIDERATION OF COMPANY'S RIGHT TO ENFORCE IN THE JURISDICTION STATED
BELOW THE TERMS AND PROVISIONS HEREUNDER. BORROWER CONSENTS TO JURISDICTION IN,
AND CONSTRUCTION OF THIS NOTE UNDER THE INTERNAL LAWS OF THE STATE OF ILLINOIS
AND VENUE IN THE COUNTY OF COOK FOR SUCH PURPOSES AND BORROWER WAIVES ANY AND
ALL RIGHTS TO CONTEST SUCH JURISDICTION AND VENUE. BORROWER WAIVES ANY RIGHT TO
COMMENCE ANY ACTION AGAINST COMPANY IN ANY JURISDICTION EXCEPT THE AFORESAID
COUNTIES AND STATE.
SIGNED AND DELIVERED in Chicago, Illinois, by the undersigned as of
the 30th day of January, 1998.
-------------------------
John F. Fiedler
