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 September 30, 1999
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 October 31, 1999 the registrant had 27,040,492 shares of Common Stock
outstanding.
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 1999
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the three
months ended September 30, 1999 and 1998 4
Consolidated Statements of Operations for the nine
months ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 and 1998 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 22
PART II. Other Information
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 1999
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 (collectively, the "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 nine months ended September 30, 1999
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, 1998.
<PAGE>
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
A S S E T S
Cash and cash equivalents $ 25.2 $ 44.0
Receivables 215.6 185.4
Inventories 175.4 115.7
Deferred income tax asset 11.5 4.7
Investments in businesses held for sale 227.0 16.8
Prepayments and other current assets 13.7 9.5
----------- ------
Total current assets 668.4 376.1
Property, plant, and equipment at cost 1,139.4 1,004.9
Less accumulated depreciation 414.3 370.4
----------- ------
Net property, plant and equipment 725.1 634.5
Investments and advances 154.6 141.9
Goodwill 1,037.5 560.4
Deferred income tax asset 20.2 7.7
Other noncurrent assets 140.2 125.5
--------- -------
Total other assets 1,352.5 835.5
--------- -------
$2,746.0 1,846.1
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 118.5 $ 145.0
Accounts payable and accrued expenses 389.0 276.9
Income taxes payable 56.0 32.2
----------- ----------
Total current liabilities 563.5 454.1
Long-term debt 777.4 248.5
Long-term retirement-related liabilities 336.2 318.6
Other long-term liabilities 48.2 47.6
----------- -------
Total long-term liabilities 384.4 366.2
Capital stock:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued shares of
27,040,492 in 1999 and outstanding
shares of 26,721,192 in 1999 0.3 0.2
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; none issued
and outstanding in 1999 -- --
Capital in excess of par value 715.7 566.0
Retained earnings 314.1 230.2
Management shareholder note (2.0) (2.0)
Accumulated other comprehensive income 7.9 0.5
Common stock held in treasury, at cost:
319,300 shares in 1999 (15.3) (17.6)
--------- -------
Total stockholders' equity 1,020.7 777.3
--------- -------
$2,746.0 $1,846.1
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
<S> <C> <C>
Net sales $ 589.7 $ 431.6
Cost of sales 458.6 340.4
Depreciation 22.6 18.9
Selling, general and administrative expenses 51.0 34.1
Minority interest 0.4 0.9
Goodwill amortization 7.7 4.3
Equity in affiliate earnings and other income(3.9) (0.5)
------ ------
Earnings before interest expense, finance
charges and income taxes 53.3 33.5
Interest expense and finance charges 10.5 7.6
------ ------
Earnings before income taxes 42.8 25.9
Provision for income taxes 15.4 8.6
------ ------
Net earnings $ 27.4 $ 17.3
======= =======
Net earnings per share
Basic $ 1.03 $ 0.74
======== =======
Diluted $ 1.02 $ 0.73
======== ========
Average shares outstanding (thousands)
Basic 26,716 23,509
========= ======
Diluted 26,810 23,690
======== ========
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>
Nine Months Ended
September 30,
1999 1998
------- -------
<S> <C> <C>
Net sales $1,781.8 $1,347.6
Cost of sales 1,374.7 1,065.5
Depreciation 65.9 57.5
Selling, general and administrative
expenses 146.9 105.8
Minority interest 1.2 2.4
Goodwill amortization 21.1 12.7
Equity in affiliate earnings and other
income (11.0) (8.9)
-------- ---------
Earnings before interest expense, finance
charges and income taxes 183.0 112.6
Interest expense and finance charges 31.7 20.6
Earnings before income taxes 151.3 92.0
Provision for income taxes 55.5 29.1
------- --------
Net earnings $ 95.8 $ 62.9
========= =========
Net earnings per share
Basic $ 3.73 $ 2.68
========= ==========
Diluted $ 3.71 $ 2.65
========= ==========
Average shares outstanding (thousands)
Basic 25,716 23,509
Diluted 25,856 23,690
========= =========
Dividends declared per share $ 0.45 $ 0.45
</TABLE>
See accompanying Notes to Consolidated Financial Statements
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------- ---------
<S> <C> <C>
Operating
Net earnings $ 95.8 $ 62.9
Adjustments to reconcile net earnings to
net cash flows from operating activities:
Non-cash charges to operations:
Depreciation 65.9 57.5
Goodwill amortization 21.1 12.7
Deferred income tax provision 2.7 1.9
Other, principally equity in affiliate
earnings (14.0) (9.2)
Changes in assets and liabilities, net of
effects of acquisitions and divestitures:
Decrease (increase) in receivables 31.7 (32.1)
Increase in inventories (28.0) (22.2)
Decrease in prepayments and other
current assets (1.3) (7.0)
Increase (decrease) in accounts payable and accrued
Expenses 41.9 (9.1)
Increase (decrease) in income taxes
payable 24.7 (20.8)
Net change in other long-term assets
and liabilities (8.1) (0.5)
------ -------
Net cash provided by operating activities 232.4 34.1
Investing
Capital expenditures (92.8) (78.8)
Investments in affiliates 10.2 7.6
Payments for businesses acquired (543.0) -
Proceeds from sale of businesses 11.5 41.8
Proceeds from other assets 3.5 2.0
Net cash used in investing
activities (610.6) (27.4)
Financing
Net decrease in notes payable (27.6) (18.3)
Additions to long-term debt 583.8 34.4
Reductions in long-term debt (183.1) (1.7)
Payments for purchases of treasury common stock - (13.0)
Proceeds from options exercised 0.6 0.4
Dividends paid (11.5) (10.6)
------- -------
Net cash provided by financing activities 362.2 8.8
Effect of exchange rate changes on cash
and cash equivalents (2.8) 0.4
-------- -------
Net increase (decrease) in cash and cash
equivalents (1.7)
Cash and cash equivalents at beginning of year 44.0 13.4
---------- --------
Cash and cash equivalents at end of period $ 25.2 $ 11.7
========== =======
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest $ 44.0 $ 20.5
Income taxes 34.3 34.8
</TABLE>
See accompanying Notes to Consolidated Financial Statements
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
nine months ended September 30, 1999 were $24.1 million and $65.3 million,
respectively. Research and development costs charged to expense for the
three and nine months ended September 30, 1998 were $17.2 million and $50.4
million, respectively.
(2) Inventories consisted of the following (millions of dollars):
September 30, December 31,
1999 1998
-------------- -------------
Raw materials $ 70.2 $ 57.3
Work in progress 71.5 32.7
Finished goods 33.7 25.7
----------- ------------
Total inventories $ 175.4 $ 115.7
============ ============
(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 and systems. 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 $145.4 million at September 30,
1999 and $133.6 million at December 31, 1998.
Following are summarized financial data for NSK-Warner. Balance sheet data
is presented as of September 30, 1999 and March 31, 1999 and statement of
income data is presented for the three and six months ended September 30,
1999 and 1998. The Company's results include its share of NSK-Warner's
results for the three and nine months ended August 31, 1999 and 1998.
September 30, March 31,
1999 1999
--------- ---------
Balance Sheet (in millions)
Current assets $ 169.6 $ 143.8
Noncurrent assets 159.3 137.4
Current Liabilities (excluding debt) 83.4 69.9
Noncurrent liabilities (excluding debt)8.2 6.9
Three Months Ended
September 30,
1999 1998
----------- ----------
Statement of Income (in millions)
Net sales $ 72.3 $ 51.3
Gross profit 14.8 10.5
Net income 6.0 3.6
Six Months Ended
September 30,
1999 1998
Statement of Income (in millions)
Net sales $ 134.4 $ 103.0
Gross profit 28.0 20.6
Net income 11.0 6.5
(4) The Company's provisions for income taxes for the three and nine
months ended September 30, 1999 and 1998 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.,
c) realization of certain business tax credits, including foreign tax
credits and research and development credits and d)other non-deductible
expenses, such as goodwill.
(5) Following is a summary of notes payable and long-term debt:
September 30, 1999 December 31, 1998
------------------ -----------------
Current Long-Term Current Long-Term
DEBT (millions of dollars)
Bank borrowings $115.6 $64.1 $144.4 $ 69.5
Bank term loans due through 2003
(at an average rate of 5.2% at
September,1999 and 4.6% at
December 1998) 2.3 15.1 0.2 25.5
7% Senior Notes due 2006,
net of unamortized discount - 149.7 - 149.7
6.5% Senior Notes due 2009,
net of unamortized discount - 198.2 - -
8% Senior Notes due 2019, net
of unamortired discount - 149.9 - -
7.125% Senior Notes due 2029,
net of unamortized discount - 197.2 - -
Capital lease liability 0.6 3.2 0.4 3.8
------- -------- ------- -------
Total notes payable and
long-term debt $118.5 $777.4 $145.0 $ 248.5
======== ======== ======== =======
The Company maintains a $350 million revolving credit facility. At
September 30, 1999, and December 31, 1998, the facility was unused. 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.
On February 22, 1999, the Company issued $200 million of 6.5% senior
unsecured notes maturing in February 2009 and $200 million of 7.125%
unsecured notes maturing in February 2029 to partially fund the acquisition
of Kuhlman Corporation ("Kuhlman ").
On September 28, 1999, the Company issued $150 million of 8.0% senior
unsecured notes maturing in September 2019 to partially fund the
acquisition of the Fluid Power Division of Eaton Corporation ("Eaton").
Since the Eaton acquisition was not effective until October 1, 1999, the
proceeds from the debt issuance were used to repay the Company's borrowings
under its revolving credit facility.
(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 39 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 September 30, 1999 of
approximately $12.2 million. The Company expects this amount to be
expended over the next three to five years.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be
shared with other PRPs, although no assurance can be given with respect to
the ultimate outcome of any such matters.
As of September 30, 1999, the Company had sold $150 million of receivables
under a $153 million Receivables Transfer Agreement for face value without
recourse. The Company had sold receivables aggregating $125 million under
a $127.5 million facility at December 31, 1998.
(7) Comprehensive income is a measurement of all changes in shareholders'
equity that result from transactions and other economic events other than
transactions with shareholders. For the Company, this includes foreign
currency translation adjustments in addition to net earnings. The amounts
presented as other comprehensive income, net of related taxes, are added to
net income which results in comprehensive income.
The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the periods ended September 30,
($ in millions)
Three Months
1999 1998
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
------- -------- ------- ------- -------- ------
Foreign currency
translation
adjustments $21.3 $ (7.7) $13.6 $ 2.8 $(0.8) $ 2.0
Net income as
reported 27.4 17.3
------ -------
Total comprehensive income $41.0 $19.3
====== =======
($ in millions)
Nine Months
1999 1998
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
------- -------- ------- ------- -------- ------
Foreign currency
translation
adjustments $11.6 $ (4.2) $7.4 $(8.8) $ 2.9 $(5.9)
Net income as reported 95.8 62.9
----- ------
Total comprehensive income $103.2 $57.0
======= =======
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", requires the
presentation of descriptive information about reportable segments which is
consistent with the information made available to the management of the
Company to assess performance. Following is the required information:
<TABLE>
<CAPTION>
Sales
Three Months Ended September 30,1999 1998
Customers Inter-segment Net Customers Inter-segment Net
<S> <C> <C> <C> <C> <C> <C>
Powertrain Systems $127.7 $ 0.5 $128.2 $117.7 $ 0.5 $118.2
Automatic Transmission
Systems 97.4 1.1 98.5 81.5 1.9 83.4
Morse TEC 237.6 6.7 244.3 122.2 8.5 130.7
Air/Fluid Systems 115.0 1.7 116.7 80.5 1.6 82.1
Divested operations 12.0 1.5 13.5 29.7 0.7 30.4
Intersegment
eliminations - (11.5) (11.5) - (13.2) (13.2)
Total 589.7 - 589.7 431.6 - 431.6
Corporate, including
equity in affiliates - - - - - -
Consolidated $589.7 $ 0.0 $589.7 $451.3 $ 0.0 $431.6
Sales
Nine Months Ended September 30,1999 1998
Customers Inter-segment Net Customers Inter-segment Net
Powertrain Systems $418.6 $ 1.9 $420.5 $377.9 $ 1.8 $379.7
Automatic Transmission
Systems 299.7 5.4 305.1 254.3 6.7 261.0
Morse TEC 672.5 21.3 693.8 363.8 27.4 391.2
Air/Fluid Systems 353.8 5.2 359.0 255.8 6.4 262.2
Divested operations 37.2 3.3 40.5 95.8 1.5 97.3
Intersegment
eliminations - (37.1) (37.1) - (43.8) (43.8)
Total 1,781.8 - 1,781.8 1,347.6 - 1,347.6
Corporate, including
equity in affiliates - - - - - -
Consolidated $1,781.8 $ 0.0 $1,781.8 $1,347.6 $ 0.0 $1,347.6
</TABLE>
Earnings Before Earnings Before
Interest & Taxes Interest & Taxes
Three Months Ended Sept. 30, Nine months Ended Sept. 30,
1999 1998 1999 1998
Powertrain Systems $ 8.3 $ 4.6 $ 29.5 $ 16.4
Automatic Transmission
Systems 11.6 10.2 41.7 30.2
Morse TEC 31.1 17.4 94.4 52.6
Air/Fluid Systems 6.8 4.1 30.3 17.0
Divested operations (1.8) 1.1 (4.5) (1.3)
------ ----- ----- ----
Total 56.0 37.4 191.4 114.9
Corporate, including (2.7) (3.9) (8.4) (2.3)
equity in affiliates
Consolidated $ 53.3 $ 33.5 $ 183.0 $ 112.6
Total Assets
September 30, December 31,
1999 1998
Powertrain Systems $ 266.5 $ 288.1
Automatic Transmission
Systems 381.9 386.6
Morse TEC 1,361.8 649.0
Air/Fluid Systems 428.6 380.0
Divested operations 48.4 62.1
Intersegment elimination (4.1) (4.9)
---------- --------
Total 2,483.1 $1,760.9
Corporate, including 262.9 85.2
equity in affiliates
Consolidated $2,746.0 $1,846.1
========= ==========
The Company's torque converter and connecting rod businesses sold in 1998,
as well as the powdered metal business sold in October, 1999, have
previously been included in the results of the Automatic Transmission
Systems segment.
Acquisition of Kuhlman Corporation
In March 1, 1999, the Company acquired all the outstanding shares of common
stock of Kuhlman for a purchase price of approximately $693 million in a
merger transaction (the "merger"). The Company funded the transaction by
issuing 3,286,596 shares of the Company's common stock valued at
approximately $150 million and borrowing approximately $543 million in
cash. Subject to the provisions of the Agreement and Plan of Merger among
the Company, BWA Merger Corp., and Kuhlman, dated as of December 17, 1998,
each outstanding share of Kuhlman common stock was converted into the right
to receive (1) $39.00 in cash, without interest, or (2) $39.00 worth of
shares of Borg-Warner Automotive common stock. In addition, the Company
assumed additional indebtedness for the settlement of certain long-term
incentive programs and severance programs, which amounted to approximately
$14 million, net of tax benefits. Substantially all of such payments were
made prior to closing, excluding the tax benefit, and are included in
Kuhlman's debt balance at the date of the merger. Subsequent to the
merger, the Company refinanced Kuhlman's existing indebtedness of $132
million.
As was originally intended when the merger was announced, the Company has
completed the sale of Kuhlman Electric and has entered into a definitive
agreement to sell Kuhlman Corporation's other electrical products business,
Coleman Cable. In the September 30, 1999 Consolidated Balance Sheet, the
Company's net investment in the electrical products businesses is reflected
as an asset held for sale in current assets. The investment includes a
portion of the goodwill related to the merger. The amount of goodwill was
allocated based on the relative historical performance of the electrical
products businesses compared with the total Kuhlman business. The Company
believes that the net investment in the electrical products businesses is
not greater than the amounts that the Company will receive upon sale of the
businesses. Proceeds from the sales will be used to repay indebtedness.
The Company has accounted for the merger as a purchase for financial
reporting purposes. Accordingly, the Consolidated Statements of Operations
include Kuhlman's results since the date of acquisition. The purchase
price of Kuhlman is calculated as the sum of the value of the equity
issued, the net cash paid, and the Company's transaction costs. A
preliminary allocation of the purchase price has been performed with the
excess of the purchase price over the book value of the identifiable
tangible and intangible assets acquired, less the liabilities assumed and
incurred, and the amount allocated to the businesses held for sale,
recorded as goodwill to be amortized over a period of 40 years. The actual
amount of goodwill will vary from the estimate currently recorded based
upon the final purchase price allocation and the difference between the
expected and actual proceeds received from the sales of the electrical
products businesses. The Company is currently performing a revaluation of
the basis of Kuhlman's acquired assets and assumed liabilities to fair
value. Changes in goodwill and the related amortization expense resulting
from these revaluations may be material. The preliminary allocation of the
purchase price is as follows (in millions):
Purchase price $ 686.2
Transaction costs 6.8
---------
Total purchase price $ 693.0
=========
The purchase price has been allocated as follows (in millions):
Fair value of assets acquired $ 187.8
Businesses held for sale 212.0
Goodwill 424.8
Liabilities assumed (131.6)
----------
$ 693.0
===========
The pro forma consolidated statements of operations information was
prepared assuming that the merger had occurred on January 1, 1998. The pro
forma information includes the following adjustments: i) the effects of
amortization of the goodwill related to the merger (which is being
amortized over a 40-year life), ii) interest expense on borrowings incurred
to finance the merger, iii) the elimination of expenses related to
Kuhlman's corporate headquarters which has been closed, iv) exclusion of
revenues, costs and expenses for the electrical products businesses,
including an allocation of goodwill amortization and interest expense, and
v) tax effects of all the preceding adjustments.
Pro forma (in millions):
Nine Months Ended
September 30, Year Ended
1999 1998 December 31, 1998
------ ------ --------------
Revenue $1,860.5 $1,690.6 $2,293.3
Net earnings 96.5 72.2 107.8
Net earnings per share
Basic $ 3.61 $ 2.68 $ 4.03
Diluted $ 3.59 $ 2.65 $ 4.00
The pro forma results are presented for informational purposes only and do
not purport to be indicative of what the actual results would have been had
the merger occurred as described above for the periods presented. The pro
forma consolidated statements of operations information should not be
considered indicative of the results of future operations of the merged
companies.
Sale of Kuhlman Electric
On October 7, 1999, the Company completed the sale of Kuhlman Electric, a
producer of transformers for the utility industry to Carlyle Group, L.L.C.
for approximately $120 million less debt of about $1 million. This
business was acquired as part of the Kuhlman acquisition in March 1999, at
which time it was announced that it did not strategically fit the Company's
core businesses and would be sold.
Definitive Agreement to Sell Coleman Cable
On August 23, 1999, the Company signed a definitive agreement to sell
Coleman Cable, a producer of wire and cable for utilities and other
industries, to a group of equity investors including management for an
estimated $144 million less debt of approximately $4 million. This
business was also acquired as part of the Kuhlman acquisition in March
1999, at which time it was announced that it did not strategically fit the
Company's core businesses and would be sold. The September 30, 1999
balance sheet includes the Company's investment in both Kuhlman Electric
and Coleman Cable.
Acquisition of Eaton Corp.'s Fluid Power Division
Effective October 1, 1999, the Company acquired Eaton's Fluid Power
Division, one of the world's leading manufacturers of powertrain cooling
solutions for the global automotive industry, for approximately $310
million. The Fluid Power Division, with sales of approximately $190
million, designs and produces a variety of viscous fan drive cooling
systems primarily for passenger vehicles such as light trucks, sport-utility
vehicles and vans. Along with the commercial cooling systems
business acquired from Kuhlman in March, 1999, this acquisition will
position the Company to globalize modular cooling systems integration
opportunities across a full range of vehicle types. To partially finance
the acquisition, the Company issued $150 million of 8.0% senior unsecured
notes maturing September 2019. The remainder of the financing was funded
in October, 1999 by bank borrowings.
Sale of Forged Powdered Metal Business
On October 7, 1999 the Company completed its sale of its forged powdered
metal business in Gallipolis, Ohio to GKN Sinter Metals, Inc., a subsidiary
of UK-based GKN plc. This transaction is not expected to have a material
impact on the Company's earnings for the fourth quarter of 1999. The
forged powdered metal business was originally acquired as part of the
Company's purchase of the Precision Forged Products Division of Federal-Mogul
Corporation in 1995. It was determined that this business did not
offer a strategic fit with the Company's core expertise in designing and
developing shift quality modules for automatic transmissions. Sales for the
nine months ended September 30, 1999 totaled $40.5 million and 1998 full
year sales amounted to $47.5 million.
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 of highly engineered systems and components for vehicle powertrain
applications. Its products are manufactured and sold worldwide, primarily
to original equipment manufacturers ("OEMs") of passenger cars, sport
utility vehicles, trucks, commercial transportation products and industrial
equipment. The Company operates manufacturing facilities serving customers
in North America, South America, Europe and Asia, and is an original
equipment supplier to every major OEM in the world.
The following discussion covers the results of operations for the three and
nine months ended September 30, 1999 and 1998 and financial condition as of
September 30, 1999 and December 31, 1998.
RESULTS OF OPERATIONS
The Company's products fall into four reportable operating segments:
Powertrain Systems, Automatic Transmission Systems, Morse TEC and Air/Fluid
Systems. The following tables present net sales and earnings before
interest and taxes ("EBIT") by segment for the three and nine months ended
September 30, 1999 and 1998 in millions of dollars.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
Net Sales 1999 1998 1999 1998
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Powertrain Systems $128.2 $118.2 $ 420.5 $379.7
Automatic Trans-
mission Systems 98.5 83.4 305.1 261.0
Morse TEC 244.3 130.7 693.8 391.2
Air/Fluid Systems 116.7 82.1 359.0 262.2
Divested operations 13.5 30.4 40.5 97.3
----- ------ ----- -----
601.2 444.8 1,818.9 1,391.4
Intersegment
eliminations (11.5) (13.2) (37.1) (43.8)
-------- -------- --------- ---------
Net sales $589.7 $431.6 $1,781.8 $1,347.6
========= ========= ========= ========
Three Months Nine Months
Ended September 30, Ended September 30,
EBIT 1999 1998 1999 1998
------ ------- ------ --------
Powertrain Systems $ 8.3 $ 4.6 $ 29.5 $16.4
Automatic Transmission
Systems 11.6 10.2 41.7 30.2
Morse TEC 31.1 17.4 94.4 52.6
Air/Fluid Systems 6.8 4.1 30.3 17.0
Divested operations (1.8) 1.1 (4.5) (1.3)
------- ------- -------- --------
Earnings before interest
and taxes $56.0 $37.4 $191.4 $114.9
======== ========= ========= =========
</TABLE>
The Company's 1999 third quarter sales were the highest in the third
quarter in the Company's history. Consolidated sales for the quarter ended
September 30, 1999 of $589.7 million were 37% higher than third quarter
sales in the prior year. Adjusted for the effects of the Kuhlman
acquisition and the product lines divested in 1999 and 1998, sales
increased by 17%. As shown above, the improvement was spread across each
of the operating segments, with above-average internal growth accounting
for a significant portion of the increase. Overall, the increase in sales
is attributable to strong worldwide vehicle production, the continued
popularity of light trucks and sport utility vehicles, the trend toward
turbocharged direct injected diesel engines in Europe, and increased Borg-
Warner Automotive ("BWA") content in new engine and automatic transmission
programs that improve fuel economy and emissions. Year over year
comparisons also benefit from the negative impacts on 1998 sales of the
strike at General Motors and the low installation rate of 4WD drive
products on a major truck model.
Powertrain Systems' third quarter 1999 sales and EBIT exceeded 1998 results
by $10.0 million and $3.7 million, or 9% and 80%, respectively. The segment
benefited from an increase in four-wheel drive installation rates,
particularly on Ford light trucks and volume increases for the Mercedes-Benz M-
Class All Activity Vehicle. Also, with the stabilization of the
Asian economy, shipments to Ssangyong, a division of Daewoo, in Korea
showed improvement over the prior year. Given these improvements, year
over year Powertrain Systems comparisons are also expected to remain strong
throughout 1999. Net of product lines divested in 1999 and 1998, Automatic
Transmission Systems sales and EBIT increased by $15.1 million and $1.4
million, or 18% and 14%, respectively. Strong European demand, stabilized
economic conditions in Asia, and improved sales of General Motors mid-sized
passenger cars contributed to the improvement. This segment was also
heavily impacted by the GM strike in the second and third quarters of 1998.
Automatic Transmission Systems results are also expected to remain strong
throughout 1999. The Morse TEC segment experienced continued growth as
sales and EBIT rose by $113.6 million and $13.7 million, respectively. Net
of the effect of the Kuhlman acquisition, sales increased by $28.9 million,
or 22%, and EBIT improved by $7.6 million, or 44%. Morse TEC's strong
growth is mainly attributable to the increased proportion of direct-injection
diesel engines with turbochargers in European passenger cars and
the continued strong demand for its chain products and systems for engines,
automatic transmissions and four-wheel drive products. The positive trend
at Morse TEC is expected to continue in the coming quarters, particularly
as the Company expands its worldwide turbocharger capacity. Air/Fluid
Systems sales and EBIT also showed improvement over the third quarter of
1998, with sales increasing by 42% and EBIT by 66%. Net of the business
attributed to Air/Fluid Systems as part of the Kuhlman acquisition, sales
and EBIT increased by $10.4 million, or 13%, and $2.3 million, or 56%,
respectively. The growth was mainly driven strong demand for emission
enhancement products. Continued growth is expected due to increased
worldwide emphasis on reduced emissions and direct injection engines.
Sales for the first three quarters of 1999 increased by 32% to $1,781.8
million from $1,347.6 million for the first nine months of 1998. Adjusted
for the effects of the Kuhlman acquisition and the product lines divested
in 1999 and 1998, sales increased by 17%. The Company's year-to-date sales
growth has outpaced worldwide automobile and light truck production which
increased by 10% and 4% in North America and Europe, respectively, while
remaining essentially flat in Japan. The Company expects to see continued
strong growth in engine components and systems through next year, with
industry trends favoring vehicles with good BWA content.
Consolidated gross margin through the first nine months of 1999 was 22.8%,
up from 20.9% in the first three quarters of 1998. Higher sales volume with
a favorable mix, successful cost reduction programs and productivity
improvements, inclusion of higher margin business from the Kuhlman
acquisition, and divestiture of lower margin operations in 1998 drove the
improvement.
The Company has continued its increase in spending on research and
development ("R&D") in 1999 in order to maintain and expand its commitment
to be a product leader, and includes spending on promising initiatives that
should result in significant future sales. Through September 1999, R&D
spending has totaled $65.3 million, or 3.7% of sales, a 30% increase over
R&D spending in the first three quarters of 1998. Net of the Kuhlman
acquisition, R&D spending totaled $57.2 million through September 1999.
R&D spending should continue to exceed historical R&D levels in the coming
quarters as the Company focuses on new initiatives.
Equity in affiliate earnings for the three months ended September 30, 1999
and 1998, amounted to $3.1 million and $0.5 million, respectively.
September 1999 year to date versus 1998 totaled $9.2 million and $5.4
million, respectively. Substantially all of the income is related to the
Company's stake in its Japanese joint venture, NSK-Warner. Equity in
affiliate earnings has improved over the prior year, despite a relatively
flat Japanese market, largely because of the implementation of effective
cost control programs at NSK-Warner. Even though the Japanese economy has
shown signs of improvement, the Company remains cautious about a
substantial recovery.
Interest expense and finance charges increased by $11.1 million to $31.7
million through September 1999, due mainly to the additional debt required
to fund the Kuhlman acquisition. As a percent of sales, interest expense
and finance charges increased to 1.8% from 1.5% in the prior year.
The Company's income taxes are based upon estimated annual tax rates for
the year. The effective tax rate used for 1999 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 1999 is slightly lower than the standard federal and state tax
rates. The effective rate is higher than in 1998 due mainly to the non-
deductibility of goodwill related to the Kuhlman acquisition and an
increase in income from foreign operations with higher tax rates.
For the quarter ended September 30, 1999, the Company reported net earnings
of $27.4 million, or $1.02 per diluted share, an increase of $10.1 million
and $0.29, respectively, compared to 1998. Year to date earnings of $95.8
million, or $3.71 per diluted share, exceeded 1998 earnings for the same
period of $62.9 million, or $2.65 per diluted share. The factors discussed
above are responsible for the change. Because of the additional shares
issued, the Kuhlman acquisition had only a minor impact on earnings per
share through September 1999. Net of the Kuhlman acquisition, net income
would have been $90.6 million, or $3.51 per diluted share.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and cash equivalents decreased by $18.8 million to $25.2
million at September 30, 1999 compared with December 31, 1998. The $543.0
million cash paid for the acquisition of Kuhlman was partly funded by
proceeds from long-term debt issuances and the excess of cash generated
from operating activities over capital expenditures. In addition to the
cash paid, the Kuhlman acquisition was funded by non-cash consideration,
including the issuance of $150.0 million of the Company's common stock, the
increase in the receivables transfer agreement by $25 million and the
assumption, and subsequent refinancing, of $131.6 million of debt.
Cash generated from operations for the nine months ended September 30, 1999
totaled $232.4 million. Operating cash flow consisted of net earnings of
$95.8 million, $75.7 million of non-cash charges, including $65.9 million
of depreciation, and a $60.9 million decrease in net operating assets and
liabilities. The increase in depreciation is related to seven months of
activity at the new Kuhlman business and increased capital expenditures in
recent years, offset slightly by businesses divested in 1998. The decrease
in net operating investment primarily resulted from decreased receivables,
greater inventory consistent with the increase in business levels and
increased payables and accruals. Operating cash flow benefited from
collection of a $33 million payment a major customer had deferred at year-end
1998, offset partly by increased receivable balances consistent with
the increase in sales. The increase in the effective income tax rate as
explained above accounts for the impact from income taxes payable.
For the nine months ended September 30, 1999, capital spending increased
$14.0 million to $92.8 million compared to the same period of 1998. The
Company anticipates that capital spending for full-year 1999 will be
significantly higher than 1998 due to the Kuhlman acquisition, additional
spending to increase worldwide turbocharger capacity and continued funding
of other existing and new programs.
On February 22, 1999, the Company issued $200 million of 6.5% senior
unsecured notes maturing in February 2009 and $200 million of 7.125%
unsecured notes maturing in February 2029 to partially fund the Kuhlman
acquisition. Free cash flow from operations since this issuance has been
used to repay $30.5 million of notes payable. Borrowings under the
Company's revolving credit facilities accounted for the remainder of the
additions to long-term debt for the year.
On September 28, 1999, the Company issued $150 million of 8.0% senior
unsecured notes maturing September 2019 to partially fund the acquisition
of the Fluid Power Division of Eaton. Since the Eaton acquisition was not
effective until October 1, 1999, the proceeds from the debt issuance were
used to repay the Company's borrowings under a $350 million revolving
credit facility at September 30, 1999. The facility, which was also unused
as of December 31, 1998, is available through September 30, 2001.
An agreement with a financial institution to sell, without recourse,
eligible receivables was amended from $127.5 million to $153 million in the
first quarter of 1999. At September 30, 1999, the Company had sold $150
million of receivables under the agreement and $125 million was sold at
December 31, 1998.
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
1999 and for the foreseeable future.
OTHER MATTERS
Acquisition of Kuhlman Corporation
On March 1, 1999, the Company acquired all the outstanding shares of common
stock of Kuhlman, at a purchase price of $693 million. The Company funded
the transaction by borrowing approximately $543 million and issuing
3,286,596 shares of Borg-Warner Automotive common stock with a value of
$150 million.
Kuhlman was a diversified industrial manufacturing company that operated in
two product segments: industrial products and electrical products.
Kuhlman's Schwitzer Group, which included the industrial products business,
was a leading worldwide manufacturer of proprietary engine components,
including turbochargers, fans and fan drives, fuel tanks, instrumentation,
heating/ventilation/air conditioning systems, and other products used
primarily in commercial transportation products and industrial equipment.
The Company is in the process of integrating the former Schwitzer units and
has included their results since the date of the acquisition, including
$165.4 million in sales in the consolidated financial statements.
The electrical products businesses acquired from Kuhlman include the
manufacture of transformers and other products for electrical utilities and
industrial users, as well as electrical and electronic wire and cable
products for use to enter into agreements in consumer, commercial and
industrial applications. The Company does not feel these products fit the
strategic direction of the Company and, at the time of the purchase of
Kuhlman Corporation, announced that it intended to sell the electrical
products businesses by the end of the year. These businesses are accounted
for as a business held for sale in the consolidated balance sheets as of
September 30, 1999, and as such, no sales or income since the date of
acquisition are included in the consolidated results of the Company.
Sale of Kuhlman Electric
On October 7, 1999, the Company completed the sale of Kuhlman Electric, a
producer of transformers for the utility industry to Carlyle Group, L.L.C.
for approximately $120 million less debt of about $1 million. This
business was acquired as part of the Kuhlman acquisition in March 1999, at
which time it was announced that it did not strategically fit the Company's
core businesses and would be sold.
Definitive Agreement to Sell Coleman Cable
On August 23, 1999, the Company signed a definitive agreement to sell
Coleman Cable, a producer of wire and cable for utilities and other
industries, to a group of equity investors including management for an
estimated $144 million less debt of approximately $4 million. This
business was also acquired as part of the Kuhlman acquisition in March
1999, at which time it was announced that it did not strategically fit the
Company's core businesses and would be sold. The September 30, 1999
balance sheet includes the Company's investment in both Kuhlman Electric
and Coleman Cable.
Acquisition of Eaton Corp.'s Fluid Power Division
Effective October 1, 1999, the Company acquired Eaton's Fluid Power
Division, one of the world's leading manufacturers of powertrain cooling
solutions for the global automotive industry, for approximately $310
million. The Fluid Power Division, with sales of approximately $190
million, designs and produces a variety of viscous fan drive cooling
systems primarily for passenger vehicles such as light trucks, sport-utility
vehicles and vans. Along with the commercial cooling systems
business acquired from Kuhlman in March, 1999, this acquisition will
position the Company to globalize modular cooling systems integration
opportunities across a full range of vehicle types. To partially finance
the acquisition, the Company issued $150 million of 8.0% senior unsecured
notes maturing September 2019. The remainder of the financing was funded
in October, 1999 by bank borrowings.
Sale of Forged Powdered Metal Business
On October 7, 1999 the Company completed its sale of its forged powdered
metal business in Gallipolis, Ohio to GKN Sinter Metals, Inc., a subsidiary
of UK-based GKN plc. This transaction is not expected to have a material
impact on the Company's earnings for the fourth quarter of 1999. The
forged powdered metal business was originally acquired as part of the
Company's purchase of the Precision Forged Products Division of Federal-Mogul
Corporation in 1995. It was determined that this business did not
offer a strategic fit with the Company's core expertise in designing and
developing shift quality modules for automatic transmissions. Sales for the
nine months ended September 30, 1999 totaled $40.5 million and 1998 full
year sales amounted to $47.5 million.
Litigation
As discussed more fully in Note 6 of the Notes to the Consolidated
Financial Statements, various claims and suits seeking money damages
arising in the ordinary course of business and involving environmental
liabilities have been filed against the Company. In each of these cases,
the Company believes that it has a defendable position and 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 Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position or
future operating results, although no assurance can be given with respect
to the ultimate outcome of any such matter.
Dividends
On October 19, 1999, the Company declared a $0.15 per share dividend to be
paid on November 15, 1999 to shareholders of record on November 1, 1999.
Year 2000 Issues
The Company is in the process of upgrading certain aspects of its
operations to ensure that business systems do not fail to function when the
Year 2000 arrives or at other date intervals. The Company has completed
its remediation of key systems and equipment with potential Year 2000
issues in the areas of business operating systems, manufacturing
operations, operating infrastructure, customers and suppliers. This
included an identification of mission critical systems, an assessment of
the readiness of applications for Year 2000 and the corrective action
needed, if any.
The Company is also participating in the process coordinated by the
Automotive Industries Action Group ("AIAG"), a group sponsored by the major
U.S. automakers. The process consists of ongoing surveys to measure a
company's state of readiness and its progress on the assessment and
remediation stages of its program. The survey results are used to monitor
progress against remediation action plans.
The Company's program to become Year 2000 compliant is being operated on an
enterprise-wide basis. A coordinator has been assigned overall
administrative responsibility; however, each operating unit is responsible
for compliance at its location. As of September 30, 1999, substantially
all of the Company's operations have completed remedial actions to become
Year 2000 compliant. The Company's exposure to an enterprise-wide failure
is less likely because of the relative autonomy of the operating units.
Key suppliers and other third parties have confirmed their systems and
applications that affect the Company will be Year 2000 compliant.
Concurrent with the Year 2000 effort, the process of upgrading certain
business operating systems at a number of operating units to improve both
business operations and control is underway. Any new system acquired is
required to be certified as Year 2000 compliant. The Company will spend
approximately $13 million for new systems, to upgrade systems and equipment
and for other efforts to ensure compliance with Year 2000 between 1997 and
1999. These costs will be paid for with cash from operations. The bulk of
such spending will provide for system improvements and enhancements
including compliance with Year 2000. Through September 30, 1999, spending
has totaled approximately $12 million. Spending solely related to Year
2000 compliance is not expected to be material to either the financial
position or results of operations for any given period.
As with any program to upgrade business systems, there are risks that
programs will not be completed on schedule and that programs will not
accomplish all that they were supposed to accomplish. The chance of this
happening throughout the Company is remote. Moreover, the impact of
individual failures to upgrade timely and effectively would most likely be
a reduced level of quality control for the affected operations and a
substantial increase in manual intervention in areas such as material
planning and inventory control, statistical process control, and financial
and operational recordkeeping.
Substantial contingency plans are not in place because the Company believes
that its efforts will be successful. However, specific procedures required
to keep our operations functioning in the event of delays or machine
failures have been identified. As mentioned above, the Company has
identified key suppliers and requested confirmation as to their Year 2000
compliance. Supplier responses are currently being verified, including
supplier audits and other actions as appropriate. The Company is also
considering the availability of alternative supply sources in the event
that they are needed.
The Company cannot provide any assurance that the correction actions being
implemented will prevent dating systems problems or that the cost of doing
so will not be material. In addition, disruptions with respect to the
computer systems of vendors or customers, including both information
technology ("IT") and non-IT systems could impair the Company's ability to
obtain necessary materials or products to sell to or serve its customers.
Disruptions of computer systems or the computer systems of vendors or
customers, as well as the cost of avoiding such disruption, could have a
material adverse effect upon the financial position or operating results of
the Company.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is required to be
adopted in fiscal years beginning after June 15, 2000. SFAS 133 requires
that all derivatives be recognized as either assets or liabilities in the
balance sheet and that derivative instruments be measured at fair value.
The Company is in the process of determining the effect SFAS 133 will have
on the Company's financial position and results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") may contain forward-
looking statements as contemplated by the 1995 Private Securities
Litigation Reform Act that are based on management's current expectations,
estimates and projections. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," variations of such words and
similar expression are intended to identify such forward-looking
statements. Forward-looking statements are subject to risks and
uncertainties, which could cause actual results to differ materially from
those projected or implied in the forward-looking statements. Such risks
and uncertainties include: fluctuations in domestic or foreign automotive
production, the continued use of outside suppliers, fluctuations in demand
for vehicles containing the Company's products, general economic
conditions, as well as other 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, 1998.
Item 3 Quantitative and Qualitative Disclosure about Market Risks
The Company's market risk exposure at September 30, 1999 is consistent with
the types of market risk and amount of exposure presented in its 1998
Annual Report on on Form 10-K.
<PAGE>
PART II
Item 1. Legal Proceedings
Inapplicable.
Item 2. Changes in Securities
Inapplicable.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
10.1 First Amendment dated as of March 25, 1999 to Amended and
Restated Receivables Loan Agreement dated as of December 23, 1998
27 - Financial data schedule
(b) Reports on Form 8-K
Form 8-K
On August 16, 1999, the Company filed a report on Form 8-K
announcing that it had entered into a definitive agreement to
acquire the fluid power division of Eaton Corporation for $310
million.
On September 21, 1999, the Company filed a report on Form
8-K which attached the consolidated financial statements of Kuhlman
Corporation and the Independent Public Accountants' report.
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: November 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of September 30, 1999 (unaudited) and
the Consolidated Statement of Operations for the Nine Months Ended September 30,
1999 (unaudited) and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,700
<SECURITIES> 7,500
<RECEIVABLES> 215,600
<ALLOWANCES> 0
<INVENTORY> 175,400
<CURRENT-ASSETS> 668,400
<PP&E> 1,139,400
<DEPRECIATION> (414,300)
<TOTAL-ASSETS> 2,746,000
<CURRENT-LIABILITIES> 563,500
<BONDS> 777,400
0
0
<COMMON> 300
<OTHER-SE> 1,020,400
<TOTAL-LIABILITY-AND-EQUITY> 2,746,000
<SALES> 1,781,800
<TOTAL-REVENUES> 1,781,800
<CGS> 1,374,700
<TOTAL-COSTS> 1,374,700
<OTHER-EXPENSES> 224,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,700
<INCOME-PRETAX> 151,300
<INCOME-TAX> 55,500
<INCOME-CONTINUING> 95,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,800
<EPS-BASIC> 3.73
<EPS-DILUTED> 3.71
</TABLE>
First Amendment
Dated as of March 25, 1999
to
Amended and Restated Receivables Loan Agreement
Amended and Restated Receivables Purchase Agreement
Amended and Restated Subordination Agreement
Amended and Restated Limited Guaranty
and
Second Amendment to Amended and Restated Indemnity Agreement
Each Dated as of December 23, 1998
This Amendment (the "Amendment"), dated as of March 25, 1999, is entered
into among BWA Receivables Corporation (the "Borrower"), Borg-Warner Automotive,
Inc. ("BWAI" and in its capacity as Collection Agent, the "Collection Agent"),
Borg-Warner Automotive Diversified Transmission Products Corporation ("DTP"),
Borg-Warner Automotive Air/Fluid Systems Corporation ("AFS"), Borg-Warner
Automotive Morse TEC Corporation ("TEC"), Borg-Warner Automotive Automatic
Transmission Systems Corporation ("ATS"), Borg-Warner Automotive Powertrain
Systems Corporation ("PTS"), Borg-Warner Automotive Turbo Systems Corporation
("Turbo"), Borg-Warner Automotive Fuel Systems Corporation ("Fuel"; Turbo and
Fuel at times being hereinafter referred to individually as a "New Originator"
and collectively as the "New Originators"), Windmill Funding Corporation, a
Delaware corporation ("Windmill"), ABN AMRO Bank N.V., as Windmill's program
letter of credit provider (the "Program LOC Provider"), the Bank listed on the
signature page hereof (the "Bank") and ABN AMRO Bank N.V., as agent for
Windmill, the Program LOC Provider and the Banks (the "Agent").
Reference is hereby made to (i) that certain Amended and Restated
Receivables Loan Agreement, dated as of December 23, 1998 (as amended,
supplemented or otherwise modified through the date hereof, the "Loan
Agreement"), among the Borrower, the Collection Agent, Windmill, the Program LOC
Provider, the Bank and the Agent, (ii) that certain Amended and Restated
Receivables Purchase Agreement, dated as of December 23, 1998 (as amended,
supplemented or otherwise modified through the date hereof, the "Purchase
Agreement"), among DTP, AFS, TEC, ATS, PTS and the Borrower, (iii) that certain
Amended and Restated Indemnity Agreement, dated as of December 23, 1998 (as
amended, supplemented or otherwise modified through the date hereof, the
"Indemnity Agreement"), among DTP, AFS, TEC, ATS, PTS and the Agent, (iv) that
certain Amended and Restated Limited Guaranty, dated as of December 23, 1998 (as
amended, supplemented or otherwise modified through the date hereof, the
"Guaranty"), by BWAI, DTP, AFS, TEC, ATS and PTS in favor of the Borrower and
(v) that certain Amended and Restated Subordination Agreement, dated as of
December 23, 1998 (as amended, supplemented or otherwise modified through the
date hereof, the "Subordination Agreement"), among DTP, AFS, TEC, ATS, PTS, the
Borrower and Agent (each of the Loan Agreement, Purchase Agreement, Indemnity
Agreement, Guaranty and Subordination Agreement being referred to herein
individually as an "Amended Agreement" and collectively as the "Amended
Agreements"). Terms used herein and not otherwise defined herein which are
defined in each Amended Agreement or the other Transaction Documents (as defined
in the Loan Agreement) shall have the same meaning herein as defined therein.
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto hereby agree as follows:
Section 1. Amendments to Loan Agreement. Subject to the following
terms and conditions, including without limitation the conditions precedent set
forth in Section 6, upon execution by the parties hereto in the space provided
for that purpose below, the Loan Agreement shall be, and it hereby is, amended
as follows:
(a) The defined term "Aggregate Bank Commitment" appearing in Section 1.1
of the Loan Agreement is amended in its entirety to be and to read as follows:
"Aggregate Bank Commitment" shall mean an amount equal to One Hundred Thirty
Seven Million Seven Hundred Thousand Dollars ($137,700,000), as such amount may
be reduced pursuant to Section 2.6.
(b) The defined term "Approved Obligor" appearing in Section 1.1 of the
Loan Agreement is amended in its entirety to be and to read as follows:
"Approved Obligor" shall mean each of Ford Motor Company, General Motors
Corporation, Daimler Chrysler Corporation, New Venture Gear, Caterpillar
Corporation, Freightliner Corporation and the wholly-owned Subsidiaries of each
of the foregoing.
(c) The defined term "Approved Obligor Limit" appearing in Section 1.1 of
the Loan Agreement is amended in its entirety to be and to read as follows:
"Approved Obligor Limit" shall mean, (a) with respect to Ford Motor Company,
$72,000,000, (b) with respect to General Motors Corporation, $40,000,000,
(c) with respect to Daimler Chrysler Corporation, $42,000,000, (d) with respect
to New Venture Gear, $10,000,000, (e) with respect to Caterpillar Corporation,
$7,000,000 and (f) with respect to Freightliner Corporation, $7,000,000;
provided, however, that the Agent may designate a lesser amount as the Approved
Obligor Limit for any Approved Obligor, upon the request of any Bank or the
Program LOC Provider following the occurrence of a Downgrading Event with
respect to such Approved Obligor or any Subsidiary of such Approved Obligor.
(d) The defined term "Aggregate Commitment" appearing in Section 1.1 of
the Loan Agreement is amended in its entirety to be and to read as follows:
"Aggregate Commitment" shall mean One Hundred Fifty Three Million Dollars
($153,000,000), as such amount may be reduced pursuant to Section 2.6.
(e) The defined term "Loan Limit" appearing in Section 1.1 of the Loan
Agreement is amended in its entirety to be and to read as follows:
"Loan Limit" means One Hundred Fifty Million Dollars $150,000,000).
(f) The defined term "Originator" appearing in Section 1.1 of the Loan
Agreement is amended in its entirety to be and to read as follows:
"Originator" shall mean each of the following Delaware corporations: Borg-
Warner Automotive Diversified Transmission Products Corporation; Borg-Warner
Automotive Air/Fluid Systems Corporation; Borg-Warner Automotive Morse TEC
Corporation; Borg-Warner Automotive Automatic Transmission Systems Corporation;
and Borg-Warner Automotive Powertrain Systems Corporation, Borg-Warner
Automotive Turbo Systems Corporation and Borg-Warner Automotive Fuel Systems
Corporation.
(g) The defined term "Program LOC Provider Commitment" appearing in Section 1.1
of the Loan Agreement is amended in its entirety to be and to read as follows:
"Program LOC Provider Commitment" shall mean Fifteen Million Three Hundred
Thousand Dollars ($15,300,000), as such amount may be reduced pursuant to
Section 2.6.
(h) Exhibit C, Exhibit G, Exhibit H and Schedule I to the Loan Agreement are
each amended in their entirety to be and to read as set forth on Annex I hereto.
Section 2. Amendments to Purchase Agreement. Subject to the following terms
and conditions, including without limitation the conditions precedent set forth
in Section 6, upon execution by the parties hereto in the space provided for
that purpose below, the Purchase Agreement shall be, and it hereby is, amended
as follows:
(a) The cover page of the Purchase Agreement shall be deemed amended so as to
include Turbo and Fuel as one of the parties to the Purchase Agreement.
(b) The first paragraph of the Purchase Agreement is amended in its entirety to
be and to read as follows:
Amended and Restated Receivables Purchase Agreement (this "Agreement"), dated as
of December 23, 1998, by and among Borg-Warner Automotive Diversified
Transmission Products Corporation ("DTP"), Borg-Warner Automotive Air/Fluid
Systems Corporation ("AFS"), Borg-Warner Automotive Morse TEC Corporation
("TEC"), Borg-Warner Automotive Automatic Transmission Systems Corporation
("ATS"), Borg-Warner Automotive Powertrain Systems Corporation ("PTS"), Borg-
Warner Automotive Turbo Systems Corporation ("Turbo") and Borg-Warner Automotive
Fuel Systems Corporation ("Fuel" and collectively with DTP, AFS, TEC, PTS, ATS
and Turbo, the "Sellers") and BWA Receivables Corporation (the "Purchaser")."
(c) Exhibit D and Exhibit E to the Purchase Agreement are each amended in their
entirety to be and to read as set forth on Annex II hereto.
Section 3. Amendment to Indemnity Agreement. Subject to the following terms
and conditions, including without limitation the conditions precedent set forth
in Section 6, upon execution by the parties hereto in the space provided for
that purpose below, the Indemnity Agreement shall be and it hereby is amended by
amending in its entirety the first paragraph of the Indemnity Agreement to be
and to read as follows:
" Amended and Restated Indemnity Agreement (this "Indemnity Agreement"), dated
as of December 23, 1998, made by and among Borg-Warner Automotive, Inc., Borg-
Warner Automotive Diversified Transmission Products Corporation, Borg-Warner
Automotive Air/Fluid Systems Corporation, Borg-Warner Automotive Morse TEC
Corporation, Borg-Warner Automotive Automatic Transmission Systems Corporation,
Borg-Warner Automotive Powertrain Systems Corporation, Borg-Warner Automotive
Turbo Systems Corporation and Borg-Warner Automotive Fuel Systems Corporation
(collectively, the "Indemnifiers") and the Agent (as defined below) for the
benefit of the Beneficiaries (as defined below)."
Section 4. Amendment to Guaranty. Subject to the following terms and
conditions, including without limitation the conditions precedent set forth in
Section 6, upon execution of the parties hereto in the space provided for that
purpose below, the Guaranty shall be, and it hereby is, amended by amending in
its entirety the first paragraph of the Guaranty to be and to read as follows:
"Amended and Restated Limited Guaranty (this "Guaranty"), dated as of
December 23, 1998, made by Borg-Warner Automotive, Inc. ("BWAI"), Borg-Warner
Automotive Diversified Transmission Products Corporation ("DTP"), Borg-Warner
Automotive Air/Fluid Systems Corporation ("AFS"), Borg-Warner Automotive Morse
TEC Corporation ("TEC"), Borg-Warner Automotive Automatic Transmission Systems
Corporation ("ATS"), Borg-Warner Automotive Powertrain Systems Corporation
("PTS"), Borg-Warner Automotive Turbo Systems Corporation ("Turbo") and Borg-
Warner Automotive Fuel Systems Corporation ("Fuel" and collectively with DTP,
AFS, TEC, ATS and Turbo, the "Originators" and collectively with BWAI, DTP, AFS,
TEC, ATS and Turbo, the "Guarantors"), in favor of BWA Receivables Corporation
(the "Beneficiary")."
Section 5. Amendment to Subordination Agreement. Subject to the following
terms and conditions, including without limitation the conditions precedent set
forth in Section 6, upon execution by the parties hereto in the space provided
for that purpose below, the Subordination Agreement shall be, and it hereby is,
amended by amending in its entirety the first paragraph of the Subordination
Agreement to be and to read as follows:
"Amended and Restated Subordination Agreement (this "Subordination Agreement"),
dated as of December 23, 1998, by and among Borg-Warner Automotive, Inc.
("BWAC"), Borg-Warner Automotive Air/Fluid Systems Corporation ("AFS"), Borg-
Warner Automotive Morse TEC Corporation ("TEC"), Borg-Warner Automotive
Automatic Transmission Systems Corporation ("ATS"), Borg-Warner Automotive
Powertrain Systems Corporation ("PTS"), Borg-Warner Automotive Turbo Systems
Corporation ("Turbo"), Borg-Warner Automotive Fuel Systems Corporation ("Fuel"
and collectively with DTP, AFS, TEC, ATS, PTS and Turbo, the "Subordinated
Creditors"), BWA Receivables Corporation (the "Borrower"), and ABN AMRO Bank
N.V., as agent for the Lenders (as defined below) (in such capacity, the
"Agent"), for the benefit of the Agent and the Lenders (the Agent and the
Lenders being collectively referred to herein as the "Senior Creditors"."
Section 6. The effectiveness of this Amendment is subject to the
satisfaction of all of the following conditions precedent:
(a) Each of the parties hereto shall have accepted this Amendment in the spaces
provided for that purpose below.
(b) The Agent shall have received in form and substance satisfactory to the
Agent:
(i) Revolving Subordinated Promissory Notes executed by the Borrower in favor
of each New Originator;
(ii) Originals of proper UCC-1 financing statements executed by each New
Originator;
(iii) Copies of the resolutions of the board of directors of each of
the New Originators, certified by its secretary or any assistant secretary,
approving each of the Transaction Documents to which it is (or is stated to be)
a party.
(iv) A Certificate of incorporation of each of the New Originators
certified by the Secretary of State of its state of incorporation.
(v) Good standing certificates for each of the New Originators issued by
the Secretaries of State of each jurisdiction where it has material operations.
(vi) A certificate of the secretary or any assistant secretary of each of
the New Originators certifying (i) the names and signatures of the officers
authorized on its behalf to execute each Transaction Document to which it is (or
is stated to be) a party and (ii) a copy of its by-laws.
(vii) Favorable opinions of counsel to each of the New Originators in
substantially the form of Exhibit I to the Loan Agreement, and as to such other
matters as the Agent may reasonably request.
(viii) All other legal matters incident to the execution and delivery
hereof and to the transactions contemplated hereby shall be satisfactory to the
Agent.
Section 7. Each Amended Agreement, as amended and supplemented hereby or as
contemplated herein, and all rights and powers created thereby and thereunder or
under the other Transaction Documents and all other documents executed in
connection therewith, are in all respects ratified and confirmed. From and
after the date hereof, each Amended Agreement shall be amended and supplemented
as herein provided, and, except as so amended and supplemented, each Amended
Agreement, each of the other Transaction Documents and all other documents
executed in connection therewith shall remain in full force and effect.
Section 8. This Amendment may be executed in two or more counterparts, each
of which shall constitute an original but both or all of which, when taken
together, shall constitute but one instrument.
Section 9. This Amendment shall be governed and construed in accordance with
the internal laws of the State of Illinois.
[Signature Pages to Follow]
<PAGE>
In Witness Whereof, the parties have caused this
Amendment to be executed and delivered by their duly authorized officers as
of the date first above written.
ABN AMRO Bank N.V., as the Agent, as a Bank and as the Program LOC Provider
By:
Title:
By:
Title:
Windmill Funding Corporation
By:
Title:
BWA Receivables Corporation
By:
Title:
Borg-Warner Automotive, Inc.
By:
Title:
Borg-Warner Automotive Diversified Transmission Products Corporation
By:
Title:
Borg-Warner Automotive Air/Fluid Systems Corporation
By:
Title:
Borg-Warner Automotive Morse TEC Corporation
By
Title:
Borg-Warner Automotive Automatic Transmission Systems Corporation
By:
Title:
Borg-Warner Automotive Powertrain Systems Corporation
By:
Title:
<PAGE>
By its execution below, each of the undersigned hereby elects to become
(i) a Seller under the Purchase Agreement, (ii) an Indemnifier under the
Indemnity Agreement, (iii) an Originator and a Guarantor under the Guaranty and
(iv) a Subordinated Creditor under the Subordination Agreement. Upon the
effectiveness of this Agreement, each of the undersigned shall have all the
rights and obligations under each relevant Transaction Document as held by each
of the other Originators prior to giving effect this Amendment.
Borg-Warner Automotive Turbo Systems Corporation
By:
Title:
Address:
Attention:
Telephone:
Telecopy:
Borg-Warner Automotive Fuel Systems Corporation
By:
Title:
Address:
Attention:
Telephone:
Telecopy:
<PAGE>
Annex I
Exhibit C
To
Receivables Loan Agreement
Lockboxes and Lockbox Banks
<PAGE>
Exhibit G
To
Receivables Loan Agreement
Addresses of Borrower And Originator
<PAGE>
Exhibit H
to
Receivables Loan Agreement
Borrower's and Borg-Warner Entities' Corporate Names; Trade Names; Assumed Names
1.) Borg-Warner Automotive, Inc.
2.) Borg-Warner Automotive Powertrain Systems Corporation
-Borg-Warner Powertrain Assemblies
3.) Borg-Warner Automotive Diversified Transmission Products Corporation
-Borg-Warner Powertrain Assemblies
4.) Borg-Warner Automotive Air/Fluid Systems Corporation
Borg-Warner Automotive Electronic & Mechanical Systems Corporation
-Borg-Warner Control Systems
5.) Borg-Warner Automotive Morse TEC Corporation
-Borg-Warner Automotive Transmission & Engine Components Corporation
-Morse Chain Systems
6.) Borg-Warner Automotive Automatic Transmission Systems Corporation
-Borg-Warner Automotive Transmission & Engine Components Corporation
-Borg-Warner Automotive Automatic Transmission Systems (ATS)
-Borg & Beck
7.) BWA Receivables Corporation
8.) Borg-Warner Automotive Turbo Systems Corporation
9.) Borg-Warner Automotive Fuel Systems Corporation
<PAGE>
Schedule I
To
Receivables Loan Agreement
Banks and Bank Commitments
Name of Bank Bank Commitment
ABN AMRO Bank N.V. $137,700,000
<PAGE>
Annex II
Exhibit D
To
Receivables Purchase Agreement
List of Principal Places of Business and Location of Records
<PAGE>
Exhibit E
to
Receivables Purchase Agreement
Corporate Names; Trade Names; Assumed Names; Assumed Names
1.) Borg-Warner Automotive, Inc.
2.) Borg-Warner Automotive Powertrain Systems Corporation
-Borg-Warner Powertrain Assemblies
3.) Borg-Warner Automotive Diversified Transmission Products Corporation
-Borg-Warner Powertrain Assemblies
4.) Borg-Warner Automotive Air/Fluid Systems Corporation
Borg-Warner Automotive Electronic & Mechanical Systems Corporation
-Borg-Warner Control Systems
5.) Borg-Warner Automotive Morse TEC Corporation
-Borg-Warner Automotive Transmission & Engine Components Corporation
-Morse Chain Systems
6.) Borg-Warner Automotive Automatic Transmission Systems Corporation
-Borg-Warner Automotive Transmission & Engine Components Corporation
-Borg-Warner Automotive Automatic Transmission Systems (ATS)
-Borg & Beck
7.) Borg-Warner Automotive Turbo Systems Corporation
8.) Borg-Warner Automotive Fuel Systems Corporation
