SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 1998
Commission file number: 1-12162
BORG-WARNER AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
Delaware
13-3404508 State or other jurisdiction of
(I.R.S. Employer Incorporation or organization
Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ----
On July 31, 1998 the registrant had 23,371,373 shares of Common Stock and 1,500
shares of Series I Non-Voting Common Stock outstanding.
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
SIX MONTHS ENDED JUNE 30, 1998
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the three
months ended June 30, 1998 and 1997 4
Consolidated Statements of Operations for the six
months ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
SIX MONTHS ENDED JUNE 30, 1998
PART I.
ITEM 1.
A. Borg-Warner Automotive, Inc. and Consolidated Subsidiaries'
Financial Statements
The financial statements of Borg-Warner Automotive, Inc. and Consolidated
Subsidiaries ("Company") have been prepared in accordance with the instructions
to Form 10-Q under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The statements are unaudited but include all adjustments,
consisting only of recurring items, except as noted, which the Company considers
necessary for a fair presentation of the information set forth herein. The
results of operations for the six months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the entire year. The following
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
<PAGE>
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
<TABLE>
<CAPTION> (Unaudited)
June 30, December 31,
1998 1997
--------- --------
<S> <C> <C>
A S S E T S
Cash and cash equivalents $ 13.9 $ 13.4
Receivables 155.7 158.6
Inventories 124.5 108.0
Deferred income tax asset 8.5 8.5
Prepayments and other current assets 23.8 18.4
-------- ------
Total current assets 326.4 306.9
Property, plant, and equipment at cost 1,021.7 971.2
Less accumulated depreciation 392.2 359.5
-------- -------
Net property, plant and equipment 629.5 611.7
Investments and advances 129.7 132.9
Goodwill 534.8 545.6
Deferred income tax asset 19.7 20.6
Other noncurrent assets 122.1 118.6
-------- -------
Total other assets 806.3 817.7
-------- -------
$1,762.2 $1,736.3
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 44.6 $ 67.7
Accounts payable and accrued expenses 259.2 273.6
Income taxes payable 35.6 53.9
--------- ----------
Total current liabilities 339.4 395.2
Long-term debt 330.0 270.4
Long-term retirement-related liabilities 314.7 314.0
Other long-term liabilities 62.5 63.0
--------- ---------
Total long-term liabilities 377.2 377.0
Capital stock:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued shares of
23,753,365 in 1998 and outstanding
shares of 23,418,173 in 1998 0.2 0.2
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; issued shares
of 2,520,000 in 1998 and outstanding shares
of 1,500 in 1998 -- --
Capital in excess of par value 566.0 566.0
Retained earnings 188.5 150.7
Notes receivable - management stock purchase(2.0) --
Cumulative translation adjustment (19.2) (11.3)
Minimum pension liability adjustment (1.7) (1.7)
Common stock held in treasury, at cost:
335,192 shares in 1998 (16.2) (10.2)
------- -------
Total stockholders' equity 715.6 693.7
-------- --------
$1,762.2 $1,736.3
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
<S> <C> <C>
Net sales $ 451.3 $ 449.7
Cost of sales 355.3 346.9
Depreciation 19.3 17.7
Selling, general and administrative expenses 38.6 34.0
Minority interest 0.8 0.5
Goodwill amortization 4.2 4.1
Equity in affiliate earnings and other income (2.9) (4.6)
--------- -----------
Earnings before interest and finance
charges and income taxes 36.0 51.1
Interest expense and finance charges 7.0 6.3
--------- ----------
Earnings before income taxes 29.0 44.8
Provision for income taxes 9.4 15.2
-------- ---------
Net earnings $ 19.6 $ 29.6
======== =========
Net earnings per share
Basic $ 0.84 $ 1.25
======= ==========
Diluted $ 0.83 $ 1.23
======== =========
Average shares outstanding (thousands)
Basic 23,568 23,672
======== =========
Diluted 23,773 23,902
======== =========
Dividends declared per share $ 0.15 $ 0.15
======== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
------ --------
<S> <C> <C>
Net sales $ 916.0 $ 893.2
Cost of sales 720.7 692.6
Depreciation 38.6 34.5
Selling, general and administrative expenses 76.1 70.0
Minority interest 1.5 1.2
Goodwill amortization 8.4 8.2
Equity in affiliate earnings and other income (8.4) (8.6)
-------- ----------
Earnings before interest and finance
charges and income taxes 79.1 95.3
Interest expense and finance charges 13.0 12.8
-------- ----------
Earnings before income taxes 66.1 82.5
Provision for income taxes 20.5 28.1
-------- ---------
Net earnings $ 45.6 $ 54.4
======== =========
Net earnings per share
Basic $ 1.94 $ 2.30
======== =========
Diluted $ 1.92 $ 2.27
========= =========
Average shares outstanding (thousands)
Basic 23,568 23,672
========= =========
Diluted 23,773 23,902
========= ==========
Dividends declared per share $ 0.30 $ 0.30
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
-------- ---------
<S> <C> <C>
Operating
Net earnings $ 45.6 $ 54.4
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Non-cash charges (credits) to operations:
Depreciation 38.7 34.5
Goodwill amortization 8.4 8.2
Deferred income tax provision 0.9 1.2
Other, principally equity in affiliate
earnings (5.7) (9.4)
Changes in assets and liabilities:
(Increase) decrease in receivables 2.5 (22.1)
Increase in inventories (16.2) (11.3)
Increase in prepayments and other
current assets (5.4) (3.7)
Increase (decrease) in accounts payable and accrued
expenses (13.9) 21.5
Increase (decrease) in income taxes
payable (18.2) 14.7
Net change in other long-term assets
and liabilities (9.5) (4.0)
------- ------
Net cash provided by operating activities 27.2 84.0
Investing
Capital expenditures (55.7) (59.5)
(Investment in) proceeds from sale of
affiliates 7.6 --
Proceeds from other assets 0.8 7.5
------- -------
Net cash used in investing activities (47.3) (52.0)
Financing
Net increase (decrease)in notes payable (21.9) 10.8
Additions to long-term debt 61.4 0.4
Reductions in long-term debt (1.4) (19.7)
Payments for purchases of treasury common stock(10.9) --
Proceeds from options exercised 0.4 1.0
Dividends paid (7.1) (7.1)
-------- -------
Net cash provided by (used in)
financing activities 20.5 (14.6)
Effect of exchange rate changes on cash and cash
equivalents 0.1 0.5
-------- ---------
Net increase in cash and cash equivalents 0.5 17.9
Cash and cash equivalents at beginning of year 13.4 11.5
-------- ---------
Cash and cash equivalents at end of period $ 13.9 $ 29.4
======== ==========
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest expense $ 15.5 $ 13.2
Income taxes 24.3 15.2
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(1) Research and development costs charged to expense for the three and six
months ended June 30, 1998 were $17.0 million and $33.2 million, respectively.
Costs charged to expense for the three and six months ended June 30, 1997 were
$13.7 million and $27.3 million, respectively.
(2) Inventories consisted of the following (millions of dollars):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- -----------
<S> <C> <C>
Raw materials $ 51.6 $ 53.9
Work in progress 53.8 33.9
Finished goods 19.1 20.2
-------- -----------
Total inventories $ 124.5 $ 108.0
========= ===========
</TABLE>
(3) The Company has a 50% interest in NSK-Warner K.K. ("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 investment in NSK-Warner was $124.5 million at June 30, 1998
and $124.1 million at December 31, 1997.
Following are summarized financial data for NSK-Warner. Balance sheet data
is presented as of June 30, 1998 and March 31, 1998 and statement of income data
is presented for the three months ended June 30, 1998 and 1997. The Company's
results include its share of NSK-Warner's results for the three and six months
ended May 31, 1998 and 1997.
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
-------- ----------
<S> <C> <C>
Balance Sheet (in millions)
Current assets $ 120.5 $ 139.0
Noncurrent assets 111.4 119.4
Current liabilities (excluding debt) 57.2 68.0
Noncurrent liabilities (excluding debt)6.7 7.0
Total debt - -
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
--------- ------------
<S> <C> <C>
Statement of Income (in millions)
Net sales $ 51.6 $ 68.2
Gross profit 10.1 17.8
Net income 3.0 6.7
</TABLE>
(4) The Company's provisions for income taxes for the three and six months
ended June 30, 1998 and 1997 are based upon estimated annual tax rates for the
year applied to federal, state and foreign income. The effective rate differed
from the U.S. statutory rate primarily due to a)state income taxes, b)foreign
rates which differ from those in the U.S. and c) realization of certain
business tax credits, including foreign tax credits and research and development
credits.
(5) Following is a summary of notes payable and long-term debt:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
Current Long-Term Current Long-Term
-------- ---------- -------- ---------
<S> <C> <C> <C> <C>
DEBT (millions of dollars)
Bank borrowings $ 42.5 $ 154.9 $ 36.1 $ 94.9
Bank term loans due through 2002
(at an average rate of 4.8% at June 1998 and 6.1% at December
1997) 0.7 21.5 30.2 21.8
7% Senior Notes due 2006, net
of unamortized discount -- 149.7 -- 149.6
Capital lease liability 1.4 3.9 1.4 4.1
------- -------- -------- ----------
Total notes payable and
long-term debt $ 44.6 $ 330.0 $ 67.7 $ 270.4
======== ======== ========= ==========
</TABLE>
The Company maintains a $350 million revolving credit facility. At June
30, 1998, $75.0 million of borrowings under the facility were outstanding. At
December 31, 1997, there was $25.0 million outstanding. The facility is
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.
(6) 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 be liable for the cost of clean-up and other remedial
activities at 27 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula.
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 estimate remediation costs; remediation alternatives;
estimate legal fees; and other factors, the Company has established a reserve
in its financial statements for indicated environmental liabilities with a
balance at June 30, 1998 of approximately $6.6 million. The Company expects
this amount to be expended over the next three to five years.
The Company entered into a Settlement Agreement and Specific Mutual
Release dated as of May 31, 1998 (the "Settlement Agreement") with Borg-Warner
Security Corporation ("BWSC"), the successor corporation to its former parent.
The previously-reported dispute involved whether BWSC was entitled to
indemnification from the Company for certain environmental liabilities under a
Distribution and Indemnity Agreement dated January 27, 1993.
Pursuant to the Settlement Agreement, the Company and BWSC agreed to
dismiss and vacate any and all arbitration awards resulting from the
arbitration proceeding and to dismiss with prejudice the lawsuit filed by the
Company in the Circuit Court of Cook County, Illinois on January 27, 1998.
Under the Settlement Agreement, the Company agreed to indemnify BWSC for the
first $2.9 million BWSC pays in environmental costs after April 30, 1998 and
50% of any amounts in excess of $2.9 million. At present, the Company does
not have sufficient information to determine the extent of its liability under
the Settlement Agreement, but does not anticipate that such amount will have a
material adverse effect on its financial position or future operating results.
It is expected that indemnification payments will be made by the Company over
the course of several years as the environmental costs are incurred.
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 matters.
As of June 30, 1998, the Company had sold $100 million of receivables
under a $102 million Receivables Transfer Agreement for face value without
recourse. The Company had sold receivables aggregating $100 million under the
same facility at December 31, 1997.
(7) Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". Comprehensive
income is a measurement of all changes in shareholders' equity that result
from transactions and other economic events other than transactions with
shareholders. The Company change consisted of foreign currency translation
adjustments. The amounts presented as other comprehensive income, net of
related taxes, are added to net income which results in comprehensive income.
The following summarizes the components of other comprehensive income on
a pretax and after-tax basis for the three and six months ended June 30, 1998
and 1997:<PAGE>
<TABLE>
<CAPTION
($ in millions)
Three Months
1998 1997
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
-------- ------- -------- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Foreign currency
translation adjustments $(11.5) $ 3.7 $(7.8) $16.8 $(5.7) $11.1
Net income as reported 19.6 29.6
------- ------
Total comprehensive income $11.8 $40.7
======== ======
Six Months
1998 1997
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
-------- ------- -------- ----- ------ ----
Foreign currency
translation adjustments $(11.6)$ 3.7 $(7.9) $1.5 $(0.5) $ 1.0
Net income as reported 45.6 54.4
----- ------
Total comprehensive income $37.7 $55.4
====== ========
/TABLE
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Borg-Warner Automotive, Inc. (the "Company") operates as a leading,
global supplier to original equipment manufacturers ("OEMs") of passenger
cars, sport utility vehicles and light trucks in the North American, European
and Asian automotive markets. The Company is a product leader in a wide
variety of highly engineered components and systems primarily related to
automatic transmission, four-wheel drive ("4WD") and engine applications.
Examples include "shift quality" automatic transmission components and
systems, 4WD transfer cases, automotive chain and chain systems,
turbochargers, engine timing components and systems, and a variety of air and
fluid control components and systems for engine and fuel systems control.
The following discussion covers the results of operations for the three
and six months ended June 30, 1998 and 1997 and financial condition as of June
30, 1998 and December 31, 1997.
RESULTS OF OPERATIONS
The Company's products have historically fallen into four operating
groups: Powertrain Systems, Automatic Transmission Systems, Morse TEC and
Air/Fluid Systems. Net sales by operating group for the three and six months
ended June 30, 1998 and 1997 are shown in the following table (in millions of
dollars.) In October 1997, the Company acquired 63% of a German turbocharger
business, AG Kuhnle, Kopp & Kausch (the "Turbocharger Acquisition.") The
Company has not yet finalized its plans concerning future integration of the
Turbocharger Acquisition, so it is shown separately.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------- ---------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Powertrain Systems $127.6 $157.6 $261.5 $315.1
Automatic Transmission Systems 119.8 134.6 244.5 262.4
Morse TEC 83.5 81.9 171.9 161.3
Air/Fluid Systems 89.0 90.6 180.1 182.9
AG Kuhnle, Kopp & Kausch 42.4 - 82.5 -
------- ------- ------- ------
462.3 464.7 940.5 921.7
Intergroup eliminations (11.0) (15.0) (24.5) (28.5)
------- --------- ------- -------
Net sales $451.3 $449.7 $916.0 $893.2
======= ======== ======== =======
</TABLE>
Sales for the quarter ended June 30, 1998 were essentially flat from the
same period in the prior year. Adjusted for the effects of the Turbocharger
Acquisition, sales decreased by 9%. Second quarter sales were negatively
impacted by the strike at General Motors, the continued weakness of the Asian
economy, and a low installation rate of 4WD products on a major truck model.
With the recent resolution of the General Motors strike, the Company is
optimistic about sales growth in the second half of the year.
Powertrain Systems sales for the quarter ended June 30,1998 were down 19%
from 1997's strong second quarter results due to the loss to a competitor of a
4WD application for Ford heavy trucks in the second half of 1997, a 37%
reduction in 4WD transfer case shipments for the Ford F-150 truck and a
decline in 4WD transfer case shipments to Ssangyong in Korea. Product
shipments are expected to rebound somewhat in the second half of 1998.
Automatic Transmission Systems sales decreased 11% compared to the prior year
as strong sales in Europe were unable to offset the effects of the General
Motors strike, the Asian economy, and the partial sale of a product line last
year. The Group was also affected by customer product mix issues,
particularly the industry-wide weakness in passenger cars relative to trucks.
Second half sales should benefit from the launch of a new automatic
transmission program at Chrysler. Morse TEC realized a 2% increase in sales
over the same period in 1997. Continued strong North American demand, mainly
from new content on Chrysler engines and increased penetration on GM passenger
cars and Ford engines, offset weaknesses in Asia and the impact of the GM
strike. The positive trend at Morse TEC is expected to continue throughout
1998. Air/Fluid Systems sales declined 2%, in part due to year-over-year
changes in Chrysler LH production. Air/Fluid Systems sales growth is
anticipated for the second half of 1998 from increased demand for air
management products both in North America and Europe. Overall, the strike at
General Motors resulted in approximately $10 million in lost sales. Each of
the main operating groups, apart from AG Kuhnle, Kopp & Kausch, was affected
by the strike, most significantly Automatic Transmission Systems and Morse
TEC.
Sales increased 3% in the first six months of 1998 to $916.0 million from
$893.2 million in the first six months of 1997. Adjusted for the effects of
the Turbocharger Acquisition, sales decreased by 7%. Comparatively, North
American production was essentially flat, Japanese production decreased by 10%
and the European market increased by 3%. In addition to the impact of the
General Motors strike, sales were adversely affected by the weakened Asian
economy and a depressed demand for vehicles with higher-end features with BWA
content, such as automatic transmissions and four-wheel drive. Sales are
expected to improve during the remainder of the year as the result of a new
transmission program at Chrysler with increased BWA content, improvements in
sales of 4WD transfer cases to Ford and Mercedes, and improved stability in
the auto market.
Gross margin through the first six months of 1998 was 21.3%, down from
22.4% in the first half of 1997. The turbocharger business, which has lower
margins than the Company's other businesses, was partly responsible for the
decline. Also, cost reductions and productivity improvements were unable to
offset increases in costs and price concessions given to customers. Margins
are expected to improve in the second half of the year as additional cost
reduction programs are implemented, especially with respect to material costs.
The Company has continued spending on research and development at higher
levels than in the previous year in order to expand its technological
expertise in both product and process. Through June 1998, research and
development spending totaled $33.2 million, a 22% increase over 1997. Net of
the Turbocharger Acquisition, the spending increased by $3 million, or 12%.
Spending represented 3.6% of sales in 1998 compared to 3.1% in 1997.
For the three months ended June 30, 1998 and 1997, the Company's portion
of NSK-Warner's earnings was $2.0 million and $3.9 million, respectively. The
Company's portion of such earnings for the six months ended June 30, 1998
decreased 43% to $4.2 million from $7.4 million in the prior year. NSK-
Warner's yen denominated earnings through June, 1998 declined by 39% over the
prior year, mainly due to the Japanese economy and also due to declines in
selling prices. The additional 4% of the total decrease is attributable to
the continued weakening of the yen against the dollar in 1998.
The Company's income taxes are based upon estimated annual tax rates for
the year. The effective tax rate used for 1998 reflects certain tax credits
related to research and development programs and foreign operations that the
Company expects to realize. As such, the anticipated effective income tax
rate for 1998 is lower than the standard federal and state tax rates. The
effective rate was higher in 1997 because 1997 had a greater percentage of
income from foreign operations which have higher tax rates.
Net earnings for the quarter ended June 30, 1998 declined 34% to $19.6
million compared with $29.6 million for the second quarter ended June 30,
1997, while earnings for the first six months of 1998 declined 16% to $45.6
from $54.4 million for the same period of 1997. The factors discussed above
are responsible for the changes.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and cash equivalents increased by $0.5 million from
December 31, 1997 to June 30, 1998. The change is attributable to operating
cash flow and increased financing, offset by capital spending. Capital
spending decreased $3.8 million to $55.7 million for the six months ended June
30, 1998 compared to $59.5 million for the same period of 1997. The spending
is intended to increase capacities and to fund existing and new programs. The
Company anticipates that capital spending for full-year 1998 will be similar
to 1997's capital spending.
Cash generated from operations for the six months ended June 30, 1998
totaled $27.2 million. Operating cash flow primarily consists of net earnings
of $45.6 million and non-cash items including $38.7 million of depreciation,
offset by an increased investment in net operating assets and liabilities of
$60.7 million. The increase in depreciation is due to the Turbocharger
Acquisition and increased capital expenditures in recent years. The increased
investment in net operating assets reflected in the June 30, 1998 balance
sheet is primarily due to increased inventories as a result of the General
Motors strike and significant payments for accrued income taxes in 1998.
The Company repaid $30 million of its domestic term loans between
December 31, 1997 and June 30, 1998 with funds available under its revolving
credit facilities. Also funded by its revolver borrowings was the excess of
cash required for investing activities over cash generated from operating
activities.
As of June 30, 1998 and December 31, 1997, the Company had sold $100
million of receivables under a $102 million Receivables Transfer Agreement for
face value without recourse.
The Company believes that the combination of cash from its operations and
available credit facilities will be sufficient to satisfy cash needs for its
current level of operations and planned operations for the remainder of 1998
and for the foreseeable future.
OTHER MATTERS
Sale of Connecting Rod Business
In July 1998, the Company announced that it has signed a letter of intent
to sell its precision forged powder metal connecting rod business unit to GKN
Sinter Metals, Inc., a subsidiary of UK-based GKN plc. The connecting rod
product line was originally acquired as part of the Company's purchase of the
Precision Forged Products Division of Federal-Mogul Corporation in 1995. The
connecting rod business does not offer a strategic fit with the Company's core
business and although the business is experiencing rapid growth and is a solid
process-oriented business, it has been determined the Company's resources are
better spent on the Company's core technologies in highly-engineered products
and systems. The final sale is subject to the completion of due diligence,
negotiation of a purchase agreement acceptable to both parties and review by
the appropriate governmental agencies. For the three and six months ended
June 30, 1998, this business reported net sales of $9.9 million and $20.4
million, respectively.
Sale of Torque Converter Business
In April 1998, the Company entered into an agreement to sell
substantially all the remaining assets of its Torque Converter business to
Mannesmann Sachs AG. It was determined that the Torque Converter business no
longer fit the strategic goals of the Company, although the Company plans to
maintain its expertise in the functionality of torque converters in automatic
transmissions. One product line of the Torque Converter business was
previously sold in June 1997. In accordance with the agreement, operations
will be phased out during the course of 1998, with Mannesmann Sachs making
multiple progress payments to the Company as the assets are transferred. The
sale of these assets and the wind-down of this business are not expected to
result in a significant gain or loss. The Torque Converter business
contributed $69.4 million to 1997 full-year sales, less than 4% of the
Company's total revenues, and was expected to contribute only about $40
million in revenues to 1998.
Litigation
As discussed more fully in Note 6 of the Supplemental Notes to the
Consolidated Financial Statements, various claims and suits arising in the
ordinary course of business and seeking money damages have been filed against
the Company. In each of these cases, the Company believes that it has a
defendable position or has made adequate provisions to protect the Company
from material losses. The Company believes that it has established adequate
provisions for litigation liabilities in its financial statements in
accordance with generally accepted accounting principles. These provisions
include both legal fees and possible outcomes of legal proceedings.
The Company entered into a Settlement Agreement and Specific Mutual
Release dated as of May 31, 1998 (the "Settlement Agreement") with Borg-Warner
Security Corporation ("BWSC") the successor corporation to its former parent.
The previously-reported dispute involved whether BWSC was entitled to
indemnification from the Company for certain environmental liabilities under a
Distribution and Indemnity Agreement dated January 27, 1993.
Pursuant to the Settlement Agreement, the Company and BWSC agreed to
dismiss and vacate any and all arbitration awards resulting from the
arbitration proceeding and to dismiss with prejudice the lawsuit filed by the
Company in the Circuit Court of Cook County, Illinois on January 27, 1998.
Under the Settlement Agreement, the Company agreed to indemnify BWSC for the
first $2.9 million BWSC pays in environmental costs after April 30, 1998 and
50% of any amounts in excess of $2.9 million. At present, the Company does
not have sufficient information to determine the extent of its liability under
the Settlement Agreement, but does not anticipate that such amount will have a
material adverse effect on its financial position or future operating results.
It is expected that indemnification payments will be made by the Company over
the course of several years as the environmental costs are incurred.
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 PRP's although no assurance can be given with respect to the
ultimate outcome of any such matter.
Dividends
On July 15, 1998, the Company declared a $0.15 per share dividend to be
paid on August 17, 1998 to shareholders of record on August 3, 1998.
New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), and Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS 132"). These statements
are effective for fiscal years beginning after December 15, 1997, although
SFAS 131 and SFAS 132 do not require adoption in interim periods. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components. See Note 7 to the Consolidated Financial Statements for
presentation of comprehensive income. SFAS 131 establishes standards for
reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers. SFAS 132
standardizes certain disclosure requirements for pension and postretirement
benefits, requires additional information on changes in the benefit
obligations and fair value of plan assets, and eliminates certain other
disclosures. 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 and SFAS 132 on its future reporting.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), issued in June
1998, is required to be adopted in fiscal years beginning after June 15, 1999.
The Company has not yet determined the effect SFAS 133 will have on the
Company's financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Inapplicable.
PART II
Item 1. Legal Proceedings
The Company entered into a Settlement Agreement and Specific Mutual
Release dated as of May 31, 1998 (the "Settlement Agreement") with Borg-Warner
Security Corporation ("BWSC") the successor corporation to its former parent.
The previously-reported dispute involved whether BWSC was entitled to
indemnification from the Company for certain environmental liabilities under a
Distribution and Indemnity Agreement dated January 27, 1993.
Pursuant to the Settlement Agreement, the Company and BWSC agreed to
dismiss and vacate any and all arbitration awards resulting from the
arbitration proceeding and to dismiss with prejudice the lawsuit filed by the
Company in the Circuit Court of Cook County, Illinois on January 27, 1998.
Under the Settlement Agreement, the Company agreed to indemnify BWSC for the
first $2.9 million BWSC pays in environmental costs after April 30, 1998 and
50% of any amounts in excess of $2.9 million. At present, the Company does
not have sufficient information to determine the extent of its liability under
the Settlement Agreement, but does not anticipate that such amount will have a
material adverse effect on its financial position or future operating results.
It is expected that indemnification payments will be made by the Company over
the course of several years as the environmental costs are incurred.
Item 2. Changes in Securities
Inapplicable.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
On April 28, 1998, the Company held its annual meeting of stockholders.
At such meeting, Jere A. Drummond, John F. Fiedler and Ivan W. Gorr were
elected as directors to serve for a term expiring in 2001. Each of William E.
Butler, Andrew F. Brimmer, Paul E. Glaske, John J. Kerley, Alexis P. Michas
and John Rau continued to serve as directors following the meeting. At such
meeting, the following votes were cast in the election of directors:
For Against Withheld
------- ------ ------
Jere A. Drummond 17,063,716 295,625 83,557
John F. Fiedler 17,121,580 237,761 25,693
Ivan W. Gorr 17,142,248 217,093 5,025
At such meeting, the proposal to amend the Company's 1993 Stock Incentive
Plan was approved by the following votes:
For Against Abstain Not-voted
---------- ------- ------- ----------
13,731,772 3,285,987 47,856 6,544,794
At such meeting, the selection of Deloitte & Touche LLP as independent
auditors was approved by the following votes:
For Against Abstain Not-Voted
---------- ------- --------- ---------
17,038,501 9,178 17,937 6,544,793
Item 5. Other Information
Inapplicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial data schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the period.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BORG-WARNER AUTOMOTIVE, INC.
(Registrant)
By /s/ William C. Cline
------------------------
(Signature)
William C. Cline
Vice President and Controller
(Principal Accounting Officer)
Date: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consoidated Balance Sheet as of June 30, 1998 (unaudited) and the
Consolidated Statement of Operations for the Three Months Ended June 30, 1998
(unaudited) and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 8,000
<SECURITIES> 5,900
<RECEIVABLES> 155,700
<ALLOWANCES> 0
<INVENTORY> 124,500
<CURRENT-ASSETS> 326,400
<PP&E> 1,021,700
<DEPRECIATION> 392,200
<TOTAL-ASSETS> 1,762,200
<CURRENT-LIABILITIES> 339,400
<BONDS> 330,000
0
0
<COMMON> 200
<OTHER-SE> 715,400
<TOTAL-LIABILITY-AND-EQUITY> 1,762,200
<SALES> 451,300
<TOTAL-REVENUES> 451,300
<CGS> 355,300
<TOTAL-COSTS> 355,300
<OTHER-EXPENSES> 60,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,000
<INCOME-PRETAX> 29,000
<INCOME-TAX> 9,400
<INCOME-CONTINUING> 19,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,600
<EPS-PRIMARY> $0.84
<EPS-DILUTED> $0.83
</TABLE>
