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 March 31, 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 April 30, 1998 the registrant had 23,618,853 shares of Common Stock and 1,500
shares of Series I Non-Voting Common Stock outstanding.
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 1998
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Balance Sheets at
March 31, 1998 and December 31, 1997 . . . . 3
Consolidated Statements of Operations for the three
months ended March 31, 1998 and 1997 . . . . 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 . . . . 5
Notes to Consolidated Financial Statements . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . .10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . 15
PART II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . 16
Item 2. Changes in Securities . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities . . . . . . . 17
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . 17
Item 5. Other Information . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . 17
SIGNATURES
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 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 three months ended March 31, 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)
March 31, December 31,
---------- ------------
<S> <C> <C>
A S S E T S 1998 1997
Cash and cash equivalents $ 7.5 $ 13.4
Receivables 183.5 158.6
Inventories 108.7 108.0
Prepayments 14.6 18.4
Deferred income tax asset 8.5 8.5
------------ ------------
Total current assets 322.8 306.9
Property, plant, and equipment at cost 996.5 971.2
Less accumulated depreciation 376.2 359.5
------------- -------------
Net property, plant and equipment 620.3 611.7
Investments and advances 130.8 132.9
Goodwill 541.2 545.6
Deferred income tax asset 20.4 20.6
Other noncurrent assets 122.0 118.6
------------- -------------
Total other assets 814.4 817.7
------------- --------------
$1,757.5 $1,736.3
============== ==============
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 45.2 $ 67.7
Accounts payable and accrued expenses 272.9 273.6
Income taxes payable 39.1 53.9
------------- ---------------
Total current liabilities 357.2 395.2
Long-term debt 313.3 270.4
Long-term retirement-related liabilities 308.1 314.0
Other long-term liabilities 62.0 63.0
------------- ---------------
Total long-term liabilities 370.1 377.0
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 23,612,743 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 172.6 150.7
Notes receivable - management stock purchase (2.0) --
Cumulative translation adjustment (11.4) (11.3)
Minimum pension liability adjustment (1.7) (1.7)
Common stock held in treasury, at cost:
1998, 140,622 (6.8) (10.2)
----------- -----------
Total stockholders' equity 716.9 693.7
------------ -----------
$1,757.5 $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
March 31,
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 464.7 $ 443.5
Cost of sales 365.4 345.7
Depreciation 19.3 16.8
Selling, general and administrative expenses 37.5 36.0
Minority interest 0.7 0.7
Goodwill amortization 4.2 4.1
Equity in affiliate earnings and other income (5.5) (4.0)
------- ---------
Earnings before interest and finance
charges and income taxes 43.1 44.2
Interest expense and finance charges 6.0 6.5
-------- ---------
Earnings before income taxes 37.1 37.7
Provision for income taxes 11.1 12.9
-------- ---------
Net earnings $ 26.0 $ 24.8
========= =========
Net earnings per share
Basic $ 1.10 $ 1.05
========== =======
Diluted $ 1.09 $ 1.04
========== =========
Average shares outstanding(thousands)
Basic 23,589 23,657
========== =========
Diluted 23,803 23,859
========== =========
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 CASH FLOWS (UNAUDITED)
(millions of dollars)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------ ------
<S> <C> <C>
Operating
Net earnings $ 26.0 $ 24.8
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Non-cash charges (credits) to operations:
Depreciation 19.3 16.8
Goodwill amortization 4.2 4.1
Other, principally equity in affiliate earnings (4.0) (3.9)
Changes in assets and liabilities:
Increase in receivables (18.1) (23.7)
Increase in inventories (0.7) (9.0)
(Increase)decrease in prepayments 8.7 (3.2)
Increase (decrease) in accounts payable and
accrued expenses (0.6) 25.4
Increase (decrease) in income taxes payable (14.7) 8.9
Net change in other long-term assets and liabilities (9.9) 0.3
------- -----
Net cash provided by operating activities 10.2 40.5
Investing
Capital expenditures (29.5) (23.4)
Investment in affiliates (3.7) -
Proceeds from other assets 0.2 0.4
-------- -------
Net cash used for investing activities (33.0) (23.0)
Financing
Net increase (decrease) in notes payable (22.0) 0.1
Additions to long-term debt 43.4 -
Reduction in long-term debt - (12.4)
Payments for purchases of treasury common stock (1.2) -
Proceeds from options exercised 0.2 0.4
Dividends paid (3.5) (3.5)
-------- ---------
Net cash provided by (used for) financing activities 16.9 (15.4)
Effect of exchange rate changes on cash and cash
equivalents - (0.4)
-------- ----------
Net increase (decrease) in cash and cash equivalents (5.9) 1.7
Cash and cash equivalents at beginning of year 13.4 11.5
-------- ----------
Cash and cash equivalents at end of period $ 7.5 $ 13.2
======= ======
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest expense $ 5.0 $ 4.1
Income taxes 9.8 5.4
</TABLE>
See accompanying Notes to Consolidated Financial Statements<PAGE>
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(1) Research and development costs charged to expense for the three months
ended March 31, 1998 were $16.2 million. Costs charged to expense for the
three months ended March 31, 1997 were $13.6 million.
(2) Inventories consisted of the following (millions of dollars):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- -----------
<S> <C> <C>
Raw materials $ 44.7 $ 53.9
Work in progress 48.6 33.9
Finished goods 15.4 20.2
---------- -----------
Total inventories $108.7 $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 $126.9 million at March 31, 1998
and $124.1 million at December 31, 1997.
Following are summarized financial data for NSK-Warner. Balance sheet data
is presented as of March 31, 1998 and March 31, 1997 and statement of
income data is presented for the three and twelve months ended March 31,
1998 and 1997. The Company's results include its share of NSK-Warner's
results for the three months ended February 28, 1998 and 1997.
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
-------- ---------
<S> <C> <C>
Balance Sheet (in millions)
- --------------
Current assets $ 139.9 $ 145.7
Noncurrent assets 120.2 124.7
Current liabilities (excluding debt) 67.9 74.1
Noncurrent liabilities (excluding debt) 6.2 8.1
Total debt - 7.4
Three Months Ended
March 31,
1998 1997
-------- --------
Statement of Income (in millions)
---------------------
Net sales $ 63.1 $ 75.7
Gross profit 13.0 24.3
Net income 5.2 7.6
Twelve Months Ended
March 31,
1998 1997
-------- ----------
Statement of Income (in millions)
---------------------
Net sales $ 264.2 $ 296.5
Gross profit 61.3 82.6
Net income 23.1 29.0
</TABLE>
(4) The Company's provisions for income taxes for the three months ended March
31, 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.
<PAGE>
(5) Following is a summary of notes payable and long-term debt:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
Current Long-Term Current Long-Term
------- --------- ---------- ------------
DEBT (millions of dollars)
-------
<S> <C> <C> <C> <C>
Bank borrowings $ 43.6 $ 138.3 $ 36.1 $ 94.9
Bank term loans due through 2002
(at an average rate of 4.6% at
March, 1998 and 6.1% at
December, 1997) 0.2 21.3 30.2 21.8
7% Senior Notes due 2006, net
of unamortized discount - 149.6 - 149.6
Capital lease liability 1.4 4.1 1.4 4.1
-------- --------- --------- -----------
Total notes payable and
long-term debt $ 45.2 $ 313.3 $ 67.7 $ 270.4
======== =========== ========= ============
</TABLE>
<PAGE>
The Company maintains a $350 million revolving credit facility. At March 31,
1998, $100.3 million of borrowings under the facility were outstanding. At
December 31, 1997, there was $20.5 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 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 March 31, 1998 of
approximately $6.8 million. 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 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 agreed to
submit this matter to arbitration, and on November 4, 1997, the Arbitrator
ruled against the Company. 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.
As of March 31, 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 under facilities aggregating
$100 million at December 31, 1997.
(7) Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income".
Comprehensive income is a mesaurement of all changes in shareholders'
equity that result from transactions and other economic events other than
transactions with shareholders. The Company change consisted of foreign
currency translation adjustments. The amounts presented as other
comprehensive income, net of related taxes, are added to net income which
results in comprehensive income.
<PAGE>
The following summarizes the components of other comprehensive income on
a pretax and after-tax basis for the periods ended March 31,
<TABLE>
<CATPION>
($ in millions)
1998 1997
------ -------
Income Income
tax After- tax After-
Pretax affect tax Pretax effect tax
-------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency
translation
adjustments $(0.1) $- $(0.1) $(10.1) $ 3.4 $(6.7)
Net income as reported 26.0 24.8
------ ------
Total comprehensive income $25.9 $18.1
</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 drivetrain applications.
Examples include "shift quality" automatic transmission components and systems,
four-wheel drive ("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 months
ended March 31, 1998 and 1997 and financial condition as of March 31, 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 months ended March 31, 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>
<CATPION>
Three Months Ended
March 31,
1998 1997
----- ------
<S> <C> <C>
Powertrain Systems $133.9 $157.5
Automatic Transmission Systems 124.7 127.8
Morse TEC 88.4 79.4
Air/Fluid Systems 91.1 92.3
AG Kuhnle, Kopp & Kausch 40.1 -
------- --------
478.2 457.0
Intergroup eliminations (13.5) (13.5)
------- --------
Net sales $464.7 $443.5
======= =========
</TABLE>
Sales for the quarter ended March 31, 1998 were 5% higher than the exceptionally
strong first quarter sales in the prior year. Adjusted for the effects of the
Turbocharger Acquisition, sales decreased by 4%, primarily due to a variety of
customer product mix issues. Worldwide automobile and light truck production
over the same period was relatively flat, with increases of 0.5% and 6.9% in
North America and Europe, respectively, and a 6.8% decrease in Japan. The
Company's sales growth is expected to improve during the remainder of the year
and should continue to outpace the industry growth rate.
Powertrain Systems sales were 15% below first quarter 1997's exceptional
results. A significant portion of the reduction is due to the loss to a
competitor of a 4WD application for Ford heavy trucks in the second half of
1997. Also, production changes at Ford led to a 30% decline in builds of the
Ford F-150 series trucks and a reduction in overall four-wheel drive
installation rates. Given these production issues, Powertrain System sales may
trend downward over the next few quarters. Automatic Transmission Systems sales
declined 2%, primarily due to weak sales of General Motors mid-sized passenger
cars and lost sales in Korea due to recent problems in the Korean economy. The
$2.8 million decrease in Korean sales compared to the first quarter of 1997 was
caused entirely by exchange rate changes, as 1998's first quarter local currency
sales actually increased by 13.8% over the prior year's first quarter sales.
These negative impacts were offset somewhat by strong results in Europe for
Automatic Transmission Systems. Morse TEC sales rose 11%, reflecting the
continued strong demand for its engine, transmission and four-wheel drive
components and systems. The positive trend at Morse TEC is expected to continue
throughout 1998. Air/Fluid Systems sales were down 1% from the first quarter of
1997. Improvement is expected over the remainder of the year due to increased
demand for air induction modules for new Chrysler LH vehicles and other air
management products both in North America and in Europe.
Gross margin was 21.4%, down from 22.1% in the first quarter of 1997. The
Turbocharger Acquisition, which has historically had lower margins than the
Company's other businesses, is partly responsible for the decline. Cost
reductions and productivity improvements were nearly sufficient to offset
increases in costs and price concessions given to customers. Margins are
expected to improve during the year as additional cost reduction programs are
implemented.
The Company has increased its spending on research and development by $2.6
million to $16.2 million for the three months ended March 31, 1998 in order to
maintain and expand its technological expertise in both product and process.
The increase, net of the Turbocharger Acquisition, amounted to $1.7 million.
Spending represented 3.5% of sales for the first quarter of 1998 compared with
3.1% of sales for the first quarter of 1997.
For the three months ended March 31, 1998 and 1997, the Company's portion of
NSK-Warner's earnings was $2.2 million and $3.5 million, respectively, a 37.0%
decrease from the prior year. NSK-Warner's yen denominated earnings declined
31.8% due mostly to the Japanese economy and also due to declines in selling
prices. An additional 5.2% of the total decrease is attributable to the
continued weakening of the yen against the dollar for the first quarter of 1998.
As a result of the Company's desire to focus its future turbocharger product
growth in AG Kuhnle, Kopp & Kausch, in which the Company recently acquired a 63%
ownership interest, the Company agreed to sell its 50% ownership in two
turbocharger joint ventures, Warner-Ishi Corporation and Warner-Ishi Europe
S.p.A. to its joint venture partner, Ishikawajima-Harima Heavy Industries Co.
Ltd. The transaction resulted in a pre-tax gain of $3.3 million.
The Company's income taxes are based upon estimated annual tax rates for the
year. For 1998 the Company expects to realize certain tax credits related to
research and development programs and foreign operations. 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.
For the quarter ended March 31, 1998, the Company reported net earnings of $26.0
million, an increase of $1.2 million compared to $24.8 million for the same
period of 1997. The factors discussed above are responsible for the change.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and cash equivalents decreased by $5.9 million from December
31, 1997 to March 31, 1998. The decrease is primarily attributable to capital
spending, offset by operating cash flow and increased financing. Capital
spending increased $6.1 million to $29.5 million for the three months ended
March 31, 1998 compared to $23.4 million for the same period of 1997. The
increase in 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 higher than 1997 due to a full year of spending on the Turbocharger
Acquisition and continued funding of existing and new programs.
Cash generated from operations for the three months ended March 31, 1998 totaled
$10.2 million. Operating cash flow primarily consists of net earnings of $26.0
million and non-cash items including $19.3 million of depreciation, offset by an
increased investment in net operating assets and liabilities of $35.3 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 reflects working capital increases consistent with higher
business levels and a payment for accrued income taxes.
The Company repaid $30.0 million of its domestic term loan between December 31,
1997 and March 31, 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 March 31, 1998 and December 31, 1997, the Company had sold $100 million of
receivables under an $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 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 is 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 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. The balance of the reserve at March 31, 1998, $6.8 million, is
expected to be expended over the next three to five years. These provisions
include both legal fees and possible outcomes of legal proceedings.
In connection with the Spin-Off, the Company and BW-Security entered into a
Distribution and Indemnity Agreement which provided for, among other matters,
certain cross-indemnities designed principally to place financial responsibility
for the liabilities of businesses conducted by BW-Security and its subsidiaries
with BW-Security and financial responsibility for liabilities of the Company or
related to its automotive businesses with the Company. The Company has been
advised that BW-Security 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 with respect to the principal portion of such
environmental matters. The parties agreed to submit this matter to arbitration,
and on November 4, 1997, the Arbitrator ruled against the Company. The Company
plans to vigorously contest the arbitration award and plans to oppose any
attempt by BW-Security to obtain 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.
Dividends
On April 17, 1998, the Company declared a $0.15 per share dividend to be paid on
May 15, 1998 to shareholders of record on May 1, 1998.
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"). These
statements are effective for fiscal years beginning after December 15, 1997,
although SFAS 131 does 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. These standards
expand or modify current disclosures and, accordingly, will have no impact on
the Companys reported financial position, results of operations and cash flows.
The Company is assessing the impact of SFAS 131 on its future reporting.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q which are not historical facts 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 expected, projected or implied in the
forward-looking statements. Such risks and uncertainties include fluctuations
in domestic and foreign automotive production, the continued use of outside
suppliers by original equipment manufacturers, and general economic conditions,
as well as risks detailed in the Company's filings with the Securities and
Exchange Commission, including the Cautionary Statements filed as Exhibit 99.1
to the Form 10-K for the fiscal year ended December 31, 1997.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Inapplicable.
PART II
Item 1. Legal Proceedings
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 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 agreed to submit this matter
to arbitration, and on November 4, 1997, the Arbitrator ruled against the
Company. 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.
Item 2. Changes in Securities
Inapplicable.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 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: May 15, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Statement of Financial Condition as of March 31, 1998
(unaudited) and the Condensed Consolidated Statement of Operations for the Three
Months Ended March 31, 1998 (unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,500
<SECURITIES> 4,000
<RECEIVABLES> 183,500
<ALLOWANCES> 0
<INVENTORY> 108,700
<CURRENT-ASSETS> 322,800
<PP&E> 996,500
<DEPRECIATION> 376,200
<TOTAL-ASSETS> 1,757,500
<CURRENT-LIABILITIES> 357,200
<BONDS> 313,300
0
0
<COMMON> 200
<OTHER-SE> 716,700
<TOTAL-LIABILITY-AND-EQUITY> 1,757,500
<SALES> 464,700
<TOTAL-REVENUES> 464,700
<CGS> 365,400
<TOTAL-COSTS> 365,400
<OTHER-EXPENSES> 56,200
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,000
<INCOME-PRETAX> 37,100
<INCOME-TAX> 11,100
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,000
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.09
</TABLE>
