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, 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 April 30, 1999 the registrant had 26,700,661 shares of Common Stock
outstanding.
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 1999
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 18
PART II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
<PAGE>
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 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 ("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, 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)
March 31, December 31,
1999 1998
------- ------
<S> <C> <C>
A S S E T S
Cash and cash equivalents $ 47.3 $ 44.0
Receivables 230.4 185.4
Inventories 165.1 115.7
Deferred income tax asset 10.2 4.7
Investments in businesses held for sale 227.4 16.8
Prepayments and other current assets 14.2 9.5
-------- ------------
Total current assets 694.6 376.1
Property, plant, and equipment at cost 1,088.3 1,004.9
Less accumulated depreciation 384.9 370.4
--------- -------------
Net property, plant and equipment 703.4 634.5
Investments and advances 146.6 141.9
Goodwill 1,048.2 560.4
Deferred income tax asset 22.1 7.7
Other noncurrent assets 140.7 125.5
------- ------------
Total other assets 1,357.6 835.5
--------- ----------
$2,755.6 $1,846.1
========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 145.1 $ 145.0
Accounts payable and accrued expenses 377.1 276.9
Income taxes payable 49.2 32.2
------------ ----------
Total current liabilities 571.4 454.1
Long-term debt 851.1 248.5
Long-term retirement-related liabilities 332.8 318.6
Other long-term liabilities 46.5 47.6
------------ -----------
Total long-term liabilities 379.3 366.2
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
27,039,961 in 1999 and outstanding
shares of 26,699,661 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 258.7 230.2
Management shareholder note (2.0) (2.0)
Accumulated other comprehensive income (2.7) 0.5
Common stock held in treasury, at cost:
340,300 shares in 1999 (16.2) (17.6)
--------- -----------
Total stockholders' equity 953.8 777.3
--------- ----------
$2,755.6 $1,846.1
=========== ============
</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,
-----------------
1999 1998
-------- ---------
<S> <C> <C>
Net sales $ 551.3 $ 464.7
Cost of sales 424.4 365.7
Depreciation 20.5 19.3
Selling, general and administrative expenses 42.4 37.2
Minority interest 0.4 0.7
Goodwill amortization 5.7 4.2
Equity in affiliate earnings and other income (2.5) (5.5)
-------- ---------
Earnings before interest expense, finance
charges and income taxes 60.4 43.1
Interest expense and finance charges 8.6 6.0
-------- --------
Earnings before income taxes 51.8 37.1
Provision for income taxes 19.7 11.1
--------- ---------
Net earnings $ 32.1 $ 26.0
============ ============
Net earnings per share
Basic $ 1.33 $ 1.10
========== ===========
Diluted $ 1.32 $ 1.09
=========== ============
Average shares outstanding (thousands)
Basic 24,172 23,589
========== =========
Diluted 24,330 23,803
========== ==========
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,
1999 1998
--------- -----------
<S> <C> <C>
Operating
Net earnings $ 32.1 $ 26.0
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Non-cash charges to operations:
Depreciation 20.5 19.3
Goodwill amortization 5.7 4.2
Deferred income tax provision 0.8 0.2
Other, principally equity in affiliate earnings (2.7) (4.2)
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
(Increase) decrease in receivables 24.3 (18.1)
Increase in inventories (14.2) (0.7)
(Increase) decrease in prepayments and other
current assets (1.7) 8.7
Increase (decrease) in accounts payable and accrued
expenses 32.7 (0.6)
Increase (decrease) in income taxes payable 18.0 (14.7)
Net change in other long-term assets and
liabilities (15.8) (9.9)
-------- ----------
Net cash provided by operating activities 99.7 10.2
Investing
Capital expenditures (27.4) (29.5)
Payments for businesses acquired (543.0) -
Investment in affiliates 0.8 (3.7)
Proceeds from other assets 2.4 0.2
-------- ---------
Net cash used in investing activities (567.2) (33.0)
Financing
Net increase (decrease) in notes payable 3.6 (22.0)
Additions to long-term debt 473.7 43.4
Reductions in long-term debt (0.2) -
Payments for purchases of treasury common stock - (1.2)
Proceeds from options exercised 0.1 0.2
Dividends paid (3.5) (3.5)
------- --------
Net cash provided by financing activities 473.7 16.9
Effect of exchange rate changes on cash and
cash equivalents (2.9) -
Net increase (decrease) in cash and cash equivalents 3.3 (5.9)
Cash and cash equivalents at beginning of year 44.0 13.4
------ --------
Cash and cash equivalents at end of period $ 47.3 $ 7.5
======= =========
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest expense $ 8.8 $ 5.0
Income taxes 5.6 9.8
</TABLE>
See accompanying Notes to Consolidated Financial Statements<PAGE>
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(1) Research and development costs charged to expense for the three months
ended March 31, 1999 were $19.0 million. Costs charged to expense for the three
months ended March 31, 1998 were $16.2 million.
(2) Inventories consisted of the following (millions of dollars):
March 31, December 31,
1999 1998
------- --------
Raw materials $ 69.2 $ 57.3
Work in progress 63.0 32.7
Finished goods 32.9 25.7
------- -------
Total inventories $165.1 $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 $135.0 million at March 31, 1999
and $133.6 million at December 31, 1998.
Following are summarized financial data for NSK-Warner. Balance sheet data
is presented as of March 31, 1999 and March 31, 1998 and statement of income
data is presented for the three and twelve months ended March 31, 1999 and
1998. The Company's results include its share of NSK-Warner's results for the
three months ended February 28, 1999 and 1998.
March 31, March 31,
1999 1998
----------- -----------
Balance Sheets (in millions)
Current assets $ 143.2 $ 139.0
Noncurrent assets 136.6 119.4
Current liabilities 69.2 68.0
Noncurrent liabilities 6.9 7.0
Three Months Ended
March 31,
1999 1998
-------- --------
Statements of Income (in millions)
Net sales $ 66.2 $ 63.0
Gross profit 14.2 16.2
Net income 5.0 3.7
Twelve Months Ended
March 31,
1999 1998
-------- --------
Statements of Income(in millions)
Net sales $ 233.1 $ 264.1
Gross profit 48.8 64.7
Net income 16.3 21.5
(4) The Company's provisions for income taxes for the three months ended March
31, 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.
<PAGE>
(5) Following is a summary of notes payable and long-term debt:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------- ------------------
Current Long-Term Current Long-Term
------- -------- -------- ----------
<S> <C> <C> <C> <C>
DEBT (millions of dollars)
Bank borrowings $143.6 $277.6 $144.4 $ 69.5
Bank term loans due through 2003
(at an average rate of 5.5% at
March, 1999 and 4.6% at
December 1998) 1.1 24.8 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 amortized discount - 198.1 - -
7.125% Senior Notes due 2029,
net of amortized discount - 197.2 - -
Capital lease liability 0.4 3.7 0.4 3.8
------ ------ ------ ------
Total notes payable and
Long-term debt $145.1 $851.1 $145.0 $248.5
======== ======== ========= =========
</TABLE>
<PAGE>
The Company maintains a $350 million revolving credit facility. At March
31, 1999, $ 250.0 million of borrowings under the facility were outstanding; at
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 Kuhlman acquisition.
(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 42 such sites. This number includes sites associated with
subsidiaries of Kuhlman Corporation ("Kuhlman") which the Company currently
expects to sell by the end of the third quarter. Responsibility for clean-up
and other remedial activities at a Superfund site is typically shared among PRPs
based on an allocation formula.
Based on information available to the Company which, in most cases,
includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully
pay the costs apportioned to them; currently available information from PRPs
and/or federal or state environmental agencies concerning the scope of
contamination and estimate remediation costs; remediation alternatives; estimate
legal fees; and other factors, the Company has established a reserve in its
financial statements for indicated environmental liabilities with a balance at
March 31, 1999 of approximately $12.8 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 March 31, 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
$127.5 million facility at December 31, 1998.
(7) Comprehensive income is a measurement of all changes in shareholders'
equity that result from transactions and other economic events other than
transactions with shareholders. For the Company, this includes foreign currency
translation adjustments in addition to net earnings. The amounts presented as
other comprehensive income, net of related taxes, are added to net income which
results in comprehensive income.
The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the periods ended March 31,
<PAGE>
<TABLE>
<CAPTION>
($ in millions)
1999 1998
------- ------
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
------- --------- ------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Foreign currency
translation
adjustments $(5.2) $ 2.0 $(3.2) $(0.1) $ -- $(0.1)
Net income as reported 32.1 26.0
------- ------
Total comprehensive income $28.9 $25.9
======== =======
</TABLE>
<PAGE>
Accumulated other comprehensive income is presented net of tax in the
equity section of the Consolidated Balance Sheets. It is comprised entirely of
foreign currency translation adjustment.
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.
<PAGE>
<TABLE>
<CAPTION>
Millions of Dollars
1999 1998
NetCustomers Inter-segment NetCustomers Inter-segment
<S> <C> <C> <C> <C> <C> <C>
Powertrain Systems $149.4 $ 0.8 $150.2 $133.2 $ 0.7 $133.9
Automatic Transmission
Systems 112.4 3.1 115.5 100.7 2.8 103.5
Morse TEC 184.7 7.2 191.9 121.9 6.6 128.5
Air/Fluid Systems 104.8 1.9 106.7 87.7 3.4 91.1
Divested operations N/A N/A N/A 21.2 0.0 21.2
Intersegment
Eliminations - (13.0) (13.0) - (13.5) (13.5)
Consolidated $551.3 $ 0.0 $551.3 $464.7 $ 0.0 $464.7
</TABLE>
<TABLE>
Millions of Dollars
Earnings Before Total Assets
Interest & Taxes March 31, December 31,
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Powertrain Systems $ 10.9 $ 7.0 $ 268.6 $ 288.1
Automatic Transmission
Systems 14.2 10.1 437.5 434.8
Morse TEC 29.1 18.7 1,280.5 649.0
Air/Fluid Systems 9.8 6.7 429.4 380.0
Divested operations N/A (0.5) N/A 13.9
Intersegment
eliminations - - (4.0) (4.9)
------------------------- ----------------------------
Total 64.0 42.0 2,412.0 1,760.9
Corporate, including (3.6) 1.1 343.6 85.2
equity in affiliates------------------------ ----------------------------
Consolidated $ 60.4 $ 43.1 $2,755.6 $1,846.1
================== =============================
</TABLE>
The Company's torque converter and connecting rod businesses sold in 1998
had previously been included in the results of the Automatic Transmission
Systems segment.<PAGE>
(9) On March 1, 1999, the Company acquired all the outstand-
ing shares of common stock of Kuhlman for a purchase price of approximately
$693 million (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.
The Company intends to sell Kuhlman's electrical products businesses by the
end of the third quarter. In the March 31, 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
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 were
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):
Three Months Ended
March 31,
-----------------------
1999 1998
---------- ---------
Revenue $ 630.0 $ 576.4
Net earnings 32.8 27.8
Net earnings per share
Basic $ 1.23 $ 1.04
Diluted $ 1.22 $ 1.03
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.
<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 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, and both on and off road commercial transportation vehicles.
The Company operates manufacturing facilities serving customers in North
America, Europe, Asia and South America, and is an original equipment supplier
to every major OEM in the world.
The following discussion covers the results of operations for the three months
ended March 31, 1999 and 1998 and financial condition as of March 31, 1999 and
December 31, 1998.
RESULTS OF OPERATIONS
The Company's products fall into four 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 months ended March 31, 1999 and 1998 in millions of
dollars.
Three Months Ended
March 31,
Net Sales 1999 1998
------- --------
Powertrain Systems $150.2 $133.9
Automatic Transmission Systems 115.5 103.5
Morse TEC 191.9 128.5
Air/Fluid Systems 106.7 91.1
Divested operations N/A 21.2
------- -------
564.3 478.2
Intersegment eliminations (13.0) (13.5)
------- --------
Net sales $551.3 $464.7
======= =========
Three Months Ended
March 31,
EBIT 1999 1998
------ --------
Powertrain Systems $ 10.9 $ 7.0
Automatic Transmission Systems 14.2 10.1
Morse TEC 29.1 18.7
Air/Fluid Systems 9.8 6.7
Divested operations N/A (0.5)
------- --------
Earnings before interest and taxes $ 64.0 $ 42.0
======= ========
Consolidated sales of $551.3 million for the quarter ended March 31, 1999 were
19% higher than the first quarter sales in the prior year. Adjusted for the
effects of the Kuhlman acquisition and the product lines divested in 1998, sales
increased by 15%. As shown in the above table, the improvement was spread
across each of the operating segments. Overall, the increase is attributable to
strong worldwide vehicle production, the continued popularity of trucks and
sport utility vehicles, the trend toward turbocharged direct injected diesel
engines in Europe, and the stabilization of the Asian economy. The Company's
first quarter sales growth outpaced worldwide automobile and light truck
production. The Company is anticipating the favorable industry trends to
continue into the second quarter and expects sales to remain strong throughout
the year.
Powertrain Systems' first quarter 1999 sales and EBIT exceeded 1998 results by
$16.3 million and $3.9 million, or 12% and 56%, respectively. The segment
benefited from an increase in four-wheel drive installation rates, particularly
on Ford light trucks and from an increase in sport utility vehicle and light
truck production. Also, with the stabilization of the Asian economy, shipments
to Ssangyong in Korea showed improvement over the prior year. Given the above
improvements, year over year Powertrain Systems comparisons are expected to
remain strong over the next few quarters. Net of product lines divested in
1998, Automatic Transmission Systems sales and EBIT increased by $12.0 million
and $4.1 million, or 12% and 41%, respectively. Strong European demand,
stabilized economic conditions in Asia, and improved sales of General Motors
mid-sized passenger cars contributed to the improvement. The Morse TEC
operating segment experienced continued growth as sales and EBIT rose by $63.4
million and $10.4 million, respectively. Net of the effect of the Kuhlman
acquisition, sales increased by $35.2 million, or 27%, and EBIT improved by $7.7
million, or 41%. Morse TEC's strong growth is mainly attributable to the
increased penetration of direct-injection diesel engines with turbochargers in
European passenger cars and the continued strong demand for its chain products
at Ford and DaimlerChrysler due to the popularity of overhead cam engines. The
positive trend at Morse TEC is expected to continue throughout 1999,
particularly as the Company expands its worldwide turbocharger capacity.
Air/Fluid Systems sales and EBIT also improved from the first quarter of 1998,
with sales increasing by 17% and EBIT by 46%. Net of the business attributed to
Air/Fluid Systems as part of the Kuhlman acquisition, sales and EBIT increased
by $3.9 million, or 4.3%, and $1.2 million, or 17.9%, respectively. The growth
was mainly driven by the ramp-up of new engine and transmission programs at
DaimlerChrysler. Continued growth is expected into the next century due to
increased worldwide emphasis on reduced emissions and direct injection engines.
Consolidated gross margin was 23.0%, up from 21.3% in the first quarter of 1998.
Higher sales volume with a favorable mix, successful implementation of cost
reduction programs and productivity improvements, inclusion of higher margin
Kuhlman businesses, and divestiture of lower margin operations in 1998 drove the
improvement.
The Company has increased its spending on research and development ("R&D") by
$2.8 million to $19.0 million, or 3.4% of sales, for the three months ended
March 31, 1999. The Company continues to maintain and expand its technological
expertise in both product and process. Net of the Kuhlman acquisition, R&D
spending of $18.0 million remained in-line with the prior year's level of
spending as a percent of sales, 3.5%.
Equity in affiliate earnings for the three months ended March 31, 1999 and 1998,
amounted to $2.0 million and $1.2 million, respectively. The majority of the
income is related to the Company's stake in its Japanese joint venture,
NSK-Warner. Even though the Japanese economy has shown signs of recovery, the
Company remains cautious and does not expect a significant increase in equity
in affiliate earnings over the remainder of the year.
Interest expense and finance charges increased by $2.6 million to $8.6 million
for the first quarter due mainly to the additional debt required to fund the
Kuhlman acquisition. As a percent of sales, interest expense and finance
charges increased to 1.6% from 1.3% 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, offset by non-deductible expenses, including goodwill. 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 March 31, 1999, the Company reported net earnings of $32.1
million, or $1.32 per diluted share, an increase of $6.1 million and $0.23,
respectively, compared to 1998. 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 in the first quarter. Net of the
effect of the Kuhlman acquisition, net income was $30.7 million, or $1.31 per
diluted share.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and cash equivalents increased by $3.3 million at March 31,
1999 compared with December 31, 1998. The $543.0 million cash paid for the
acquisition of Kuhlman was funded by $473.7 million of 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 exchange of $150.0 million of
the Company's common stock and the assumption of $131.6 million of Kuhlman debt.
For the three months ended March 31, 1999, capital spending decreased $2.1
million to $27.4 million compared to the same period of 1998. The decrease in
spending is related to the timing of existing and new program funding. 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.
Cash generated from operations for the three months ended March 31, 1999 totaled
$99.7 million. Operating cash flow consisted of net earnings of $32.1 million,
$24.3 million of non-cash charges, including $20.5 million of depreciation, and
a $43.3 million decrease in net operating assets and liabilities. The increase
in depreciation is related to one month of activity at the new Kuhlman business
and increased capital expenditures in recent years. The decrease in net
operating investment primarily resulted from decreased receivables and increased
payables and accruals. The $33 million payment a major customer had deferred at
year-end 1998 was received in January, accounting for the change in the cash
flow effect from receivables. The increase in the effective income tax rate as
explained above accounts for the impact from income taxes payable.
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. Borrowings
under the Company's revolving credit facilities accounted for the remainder of
the additions to long-term debt.
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 March 31, 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 1998 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 Corporation, at a purchase price of approximately $693 million.
The Company funded the transaction by borrowing approximately $543 million and
issuing $150 million, 3,286,596 shares, of the Company's common stock.
Kuhlman is a diversified industrial manufacturing company that currently
operates two product segments: industrial products and electrical products.
Their products are sold to over 5,000 domestic and international customers
operating in more than 60 countries. Kuhlman's Schwitzer Group, which includes
the industrial products business, is 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. Kuhlman's electrical products businesses 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 in consumer, commercial and industrial applications. The Company does
not feel these products fit the strategic direction of the Company and intends
to sell the electrical products businesses by the end of the third quarter. The
Company is in the process of integrating the Schwitzer units and has included
their results since the date of the acquisition, including $39.9 million in
sales, in the consolidated financial statements.
Litigation
As discussed more fully in Note 6 of the Notes to the Consolidated Financial
Statements, the Company has been identified as a PRP at various hazardous waste
disposal sites and, as such, may be liable for the cost of clean-up and other
remedial activities. In addition, various claims and suits arising in the
ordinary course of business and seeking money damages have been filed against
the Company. In each of these cases, the Company believes that it has a
defendable position or has made adequate provisions to protect the Company from
material losses. The Company believes that it has established adequate
provisions for litigation liabilities in its financial statements in accordance
with generally accepted accounting principles. These provisions include both
legal fees and possible outcomes of legal proceedings.
The Company 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 March 31, 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.
Dividends
On April 20, 1999, the Company declared a $0.15 per share dividend to be paid on
May 17, 1999 to shareholders of record on May 3, 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 an inventory 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. Inventories and assessments have been completed at substantially
all locations. Corrective action is underway. The majority of items identified
as non-compliant would not significantly interfere with the Company's operations
if not updated. In addition, the exposure to an enterprise-wide failure is less
likely because of the relative autonomy of the operating units. The Company is
operating on a schedule to have substantially all non-compliant items remedied
by mid-1999 and is also seeking confirmation from key suppliers and other third
parties that their systems and applications that affect the Company will be Year
2000 compliant by mid-1999. The Company is also in the process of integrating
the acquired Kuhlman businesses into its Year 2000 program. These businesses'
on-going Year 2000 programs have been reviewed by the Company and are in-line
with the Company's overall program.
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, including spending relative to the acquired Kuhlman businesses, 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 is being expensed as
incurred, and will provide for system improvements and enhancements including
compliance with Year 2000. Through March 31, 1999, spending has totaled
approximately $10 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. For individual occurrences, the impact would most likely be
a reduced level of quality control for operations and a substantial increase in
the amount of 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
has 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.
Euro Conversion
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies and a new
common currency (the "Euro"). The participating countries adopted the Euro as
their common legal currency on that date. The Company has begun consideration
of the effects of the Euro conversion on operations, but is currently unsure of
the potential impact that the Euro conversion will have on the financial
position or operating results. Because of the nature of the Company's business
and customers, the effect is not expected to be significant.
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, 1999. 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," "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
Inapplicable.
<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
Inapplicable.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial data schedule
(b) Reports on Form 8-K
On January 27, 1999, the Company filed a report on Form 8-K announcing
the expiration of the waiting period under the Hart-Scott-Rodino Act for the
Kuhlman acquisition.
On February 1, 1999, the Company reported that a class action lawsuit
had been filed in connection with the Agreement and Plan of Merger between the
Company, BWA Merger Corp. and Kuhlman Corporation.
On February 9, 1999, the Company filed a report on Form 8-K announcing
fourth quarter results.
On February 18, 1999, the Company announced that it received clearance
from the German merger control authority to proceed with the Kuhlman
acquisition.
On February 24, 1999, the Company announced the exchange ratio for the
stock portion of the acquisition of Kuhlman.
On March 1, 1999, the Company issued a press release announcing the
completion of the Kuhlman Corporation acquisition.
On March 15, 1999, the Company filed a report on Form 8-K announcing
the completion of the Kuhlman acquisition and attaching certain financial
statements in connection with the Kuhlman acquisition.
<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 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet as of March 31, 1999 (unaudited) and the
Consolidated Statement of Operations for the Three Months Ended March 31, 1999
(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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 36,600
<SECURITIES> 10,700
<RECEIVABLES> 230,400
<ALLOWANCES> 0
<INVENTORY> 165,100
<CURRENT-ASSETS> 694,600
<PP&E> 1,088,300
<DEPRECIATION> 384,900
<TOTAL-ASSETS> 2,755,600
<CURRENT-LIABILITIES> 571,400
<BONDS> 851,100
0
0
<COMMON> 300
<OTHER-SE> 953,500
<TOTAL-LIABILITY-AND-EQUITY> 2,755,600
<SALES> 551,300
<TOTAL-REVENUES> 551,300
<CGS> 424,400
<TOTAL-COSTS> 424,400
<OTHER-EXPENSES> 66,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,600
<INCOME-PRETAX> 51,800
<INCOME-TAX> 19,700
<INCOME-CONTINUING> 32,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,100
<EPS-PRIMARY> $1.33
<EPS-DILUTED> $1.32
</TABLE>
