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, 2000
Commission file number: 1-12162
BORGWARNER 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 September 30, 2000 the registrant had 26,198,333 shares of Common Stock
outstanding.
BORGWARNER INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 2000
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three
months ended September 30, 2000 and 1999 4
Consolidated Statements of Operations for the nine
months ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
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>
BORGWARNER INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 2000
PART I.
ITEM 1.
BorgWarner Inc. and Consolidated Subsidiaries'
Financial Statements
The financial statements of BorgWarner 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 and nine months ended September 30, 2000 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,
1999.
<PAGE>
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
(Unaudited)
September 30, December 31,
2000 1999
<S> <C> <C>
A S S E T S
Cash and cash equivalents $ 28.1 $ 21.7
Receivables 231.0 216.2
Inventories 184.5 164.4
Deferred income tax asset 2.8 2.8
Investments in businesses held
for sale 4.8 129.0
Prepayments and other current
assets 29.5 24.2
------- -------
Total current assets 480.7 558.3
Property, plant, and equipment
at cost 1,268.5 1,204.1
Less accumulated depreciation 465.4 408.1
------- -------
Net property, plant and equipment803.1 796.0
Investments and advances 155.7 160.3
Goodwill 1,222.5 1,284.7
Deferred income tax asset 18.3 18.8
Other noncurrent assets 163.7 152.6
-------- -------
Total other assets 2,363.3 1,616.4
-------- -------
$2,844.0 $2,970.7
========= ========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 68.1 $ 134.0
Accounts payable and accrued
expenses 423.2 433.7
Income taxes payable 39.4 92.1
-------- ---------
Total current liabilities 530.7 659.8
Long-term debt 825.8 846.3
Long-term retirement-related
liabilities 343.0 343.9
Other long-term liabilities 62.4 63.2
--------- ---------
Total long-term liabilities 405.4 407.1
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 2000 and outstanding
shares of 26,198,333 in 2000 0.3 0.3
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; none issued
and outstanding in 2000 -- --
Capital in excess of par value 715.7 715.7
Retained earnings 420.0 346.4
Management shareholder note (2.5) (2.0)
Accumulated other comprehensive
income (loss) (17.0) 12.3
Common stock held in treasury, at cost:
842,159 shares in 2000 (34.4) (15.2)
-------- ------
Total stockholders' equity 1,082.1 1,057.5
-------- --------
$2,844.0 $2,970.7
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
2000 1999
<S> <C> <C>
Net sales $ 618.5 $ 589.7
Cost of sales 473.1 458.6
Depreciation 25.2 22.6
Selling, general and admini-
strative expenses 57.5 51.0
Minority interest 0.7 0.4
Goodwill amortization 10.8 7.7
Restructuring charge 32.6 -
Equity in affiliate earnings
and other income (4.2) (3.9)
--------- ----------
Earnings before interest expense, finance
charges and income taxes 22.8 53.3
Interest expense and finance
charges 15.9 10.5
--------- ----------
Earnings before income taxes 6.9 42.8
Provision for income taxes 1.6 15.4
--------- ---------
Net earnings $ 5.3 $ 27.4
========= =========
Net earnings per share
Basic $ 0.20 $ 1.03
========= =========
Diluted $ 0.20 $ 1.02
========= =========
Average shares outstanding (thousands)
Basic 26,210 26,716
Diluted 26,297 26,810
========= =========
Dividends declared per share $ 0.15 $ 0.15
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
<S> <C> <C>
Net sales $2,049.6 $1,781.8
Cost of sales 1,554.6 1,374.7
Depreciation 77.2 65.9
Selling, general and admini-
strative expenses 178.8 146.9
Minority interest 1.9 1.2
Goodwill amortization 32.5 21.1
Restructuring charge 32.6 -
Equity in affiliate earnings
and other income (12.3) (11.0)
-------- ---------
Earnings before interest expense, finance
charges and income taxes 184.3 183.0
Interest expense and finance charges 47.7 31.7
--------- ---------
Earnings before income taxes 136.6 151.3
Provision for income taxes 50.3 55.5
--------- -------
Net earnings $ 86.3 $ 95.8
Net earnings per share
Basic $ 3.27 $ 3.73
========= =========
Diluted $ 3.26 $ 3.71
========= =========
Average shares outstanding (thousands)
Basic 26,445 25,716
========= =========
Diluted 26,540 25,856
=========== =========
Dividends declared per share $ 0.45 $ 0.45
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
Operating 2000 1999
------- --------
<S> <C> <C>
Net earnings $ 86.3 $ 95.8
Non-cash charges to operations:
Depreciation 77.2 65.9
Goodwill amortization 32.5 21.1
Restructuring charge 32.6 -
Deferred income tax provision - 2.7
Other, principally equity in
affiliate earnings (11.7) (14.0)
Changes in assets and liabilities,
net of effects of
acquisitions and divestitures:
(Increase) decrease in receivables (28.3) 31.7
(Increase) in inventories (27.3) (28.0)
(Increase) in prepayments and other
current assets (8.4) (1.3)
Increase(decrease)in accounts
payable and accrued expenses (1.2) 41.9
Increase(decrease)in income taxes
payable (8.9) 24.7
Net change in other long-term
assets and liabilities 15.0 (8.1)
Net cash provided by
operating activities 157.8 232.4
Investing
Capital expenditures (111.5) (92.8)
Investments in affiliates 0.4 10.2
Payments for businesses acquired - (543.0)
Proceeds from sale of businesses 122.3 11.5
Payments for taxes on businesses sold (43.0) -
Proceeds from other assets 4.2 3.5
-------- --------
Net cash used in investing activities (27.6) (610.6)
Financing
Net decrease in notes payable (47.3) (27.6)
Additions to long-term debt 121.2 583.8
Reductions in long-term debt (154.4) (183.1)
Payments for purchases of
treasury stock (22.1) -
Proceeds from stock options exercised 0.4 0.6
Dividends paid (12.0) (11.5)
---------- ----------
Net cash provided by (used in)
financing activities (114.2) 362.2
Effect of exchange rate changes on
cash and cash equivalents (9.6) (2.8)
---------- ----------
Net increase (decrease) in cash
and cash equivalents 6.4 (18.8)
Cash and cash equivalents at beginning
of year 21.7 44.0
--------- ---------
Cash and cash equivalents at end
of period $ 28.1 $ 25.2
========= =========
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest $ 51.4 $ 44.0
Income taxes 57.0 34.3
Non-cash financing transactions:
Issuance of common stock for
acquisition $ - $149.8
Issuance of treasury stock for
management notes 0.5
Issuance of common stock for Executive Stock
Performance Plan 0.7 1.1
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
BORGWARNER 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, 2000 were $30.1 million and $85.2 million,
respectively. 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.
(2) Inventories consisted of the following (millions of dollars):
September 30, December 31,
2000 1999
Raw materials $ 68.6 $ 76.4
Work in progress 67.2 39.1
Finished goods 48.7 48.9
Total inventories $184.5 $164.4
========= ===========
(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 $152.5 million at September 30,
2000 and $154.2 million at December 31, 1999.
Following are summarized financial data for NSK-Warner. Balance sheet data
is presented as of September 30, 2000 and March 31, 2000 and statement of
income data is presented for the three and six months ended September 30,
2000 and 1999. The Company's results include its share of NSK-Warner's
results for the three and nine months ended August 31, 2000 and 1999.
September 30, March 31,
2000 2000
Balance Sheet (in millions)
Current assets $152.2 $196.0
Noncurrent assets 187.0 157.8
Current liabilities (excluding debt)90.9 96.2
Noncurrent liabilities
(excluding debt) 9.6 8.5
Three Months Ended
September 30,
2000 1999
Statement of Income (in millions)
Net sales $ 82.4 $ 72.3
Gross profit 18.0 14.8
Net income 6.3 6.0
Six Months Ended
September 30,
2000 1999
Statement of Income (in millions)
Net sales $166.0 $134.4
Gross profit 36.2 28.0
Net income 13.8 11.0
(4) The Company's provisions for income taxes for the three and nine
months ended September 30, 2000 and 1999 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:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
Current Long-Term Current Long-Term
DEBT (millions of dollars)
<S> <C> <C> <C> <C>
Bank borrowings $ 60.5 $ 132.3 $131.1 $142.0
Bank term loans due through 2003
(at an average rate of 3.9% at
September, 2000 and 7.7% at
December, 1999) 6.6 24.1 2.2 6.1
7% Senior Notes due 2006,
net of unamortized discount 144.7 - 149.7
6.5% Senior Notes due 2009,
net of unamortized discount 188.4 - 198.3
8% Senior Notes due 2019,
net of unamortized discount 146.9 - 149.9
7.125% Senior Notes due 2029,
net of unamortized discount 187.3 - 197.2
Capital lease liability 1.0 2.1 0.7 3.1
---- ------- ------ --------
Total notes payable and
long-term debt $ 68.1 $ 825.8 $134.0 $846.3
======= ========= ======= =========
</TABLE>
The Company maintains a $350 million revolving credit facility. At
September 30, 2000, $75.0 million of borrowings under the facility were
outstanding. At December 31, 1999, $66.0 million of borrowings under the
facility were outstanding. The facility was revised and extended until
July 21, 2005.
The credit agreement contains numerous financial and operating covenants
including, among others, covenants requiring the Company to maintain
certain financial ratios and restricting its ability to incur additional
foreign indebtedness.
(6) The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by
the United States Environmental Protection Agency and certain state
environmental agencies and private parties as potentially responsible
parties ("PRPs") at various hazardous waste disposal sites under the
Comprehensive Environmental Response, Compensation and Liability Act
("Superfund") and equivalent state laws and, as such, may be liable for the
cost of clean-up and other remedial activities at 42 such sites.
Responsibility for clean-up and other remedial activities at a Superfund
site is typically shared among PRPs based on an allocation formula.
Based on information available to the Company which, in most cases,
includes: an estimate of allocation of liability among PRPs; the
probability that other PRPs, many of whom are large, solvent public
companies, will fully pay the costs apportioned to them; currently
available information from PRPs and/or federal or state environmental
agencies concerning the scope of contamination and estimate remediation
costs; remediation alternatives; 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, 2000 of
approximately $16.3 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, 2000, and at December 31, 1999, the Company had sold
$150.0 million of receivables under a $153.0 million Receivables Transfer
Agreement for face value without recourse.
(7) Comprehensive income is a measurement of all changes in stockholders'
equity that result from transactions and other economic events other than
transactions with stockholders. For the Company, this includes foreign
currency translation adjustments, changes in minimum pension liability
adjustments and net earnings. The amounts presented as other comprehensive
income, net of related taxes, are added to net income which results in
comprehensive income.
The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the periods ended September 30,
<TABLE>
<CAPTION>
($ in millions) Three Months
2000 1999
-------------------------- --------------------------
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
------- -------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Foreign
currency
translation
adjustments $(18.3) $ 6.8 $(11.5) $21.3 $(7.7) $13.6
Net income as reported 5.3 27.4
-------- ------
Total comprehensive income $ (6.2) $ 41.0
======== =======
($ in millions) Nine Months
2000 1999
------------------------- -------------------------
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
-------- -------- -------- -------- -------- -------
Foreign currency
translation
adjustments $(46.9) $17.6 $(29.3) $ 11.6 $(4.2) $ 7.4
Net income as reported 86.3 95.8
-------- ----
Total comprehensive income $ 57.0 $103.2
======= =======
</TABLE>
The components of accumulated other comprehensive income (loss), net of
tax, in the Consolidated Balance Sheets are as follows:
($ in millions) September 30, December 31,
2000 1999
Foreign currency translation adjustment $(16.9) $ 12.4
Minimum pension liability adjustment (0.1) (0.1)
------- --------
Total comprehensive income (loss) $(17.0) $ 12.3
======= =========
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.
<TABLE>
<CAPTION>
Sales
Three Months Ended September 30,
2000 1999
Inter- Inter-
Customer segment Net Customer segment Net
----------- -------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Air/Fluid
Systems $ 96.7 $ 2.0 $ 98.7 $ 96.9 $ 1.8 $ 98.7
Cooling
Systems 66.5 0.2 66.7 27.4 0.2 27.6
Morse TEC 209.7 5.8 215.5 193.0 6.5 199.5
TorqTransfer
Systems 115.5 0.4 115.9 127.7 0.5 128.2
Transmission
Systems 101.4 1.9 103.3 97.4 1.1 98.5
Divested
Operations 28.7 - 28.7 47.3 1.4 48.7
Intersegment
eliminations - (10.3) (10.3) - (11.5) (11.5)
------ ------- ---------- ------- ------- ---------
Consolidated $618.5 $ - $ 618.5 $ 589.7 $ - $ 589.7
======= ======= ======== ========= ======= ==========
Sales
Nine Months Ended September 30,
2000 1999
Inter- Inter-
Customer segment Net Customer segment Net
--------- --------- -------- ----------- ---------- ---------
Air/Fluid
Systems $ 329.4 $ 7.0 $ 336.4 $ 295.0 $ 5.6 $ 300.6
Cooling
Systems 223.3 0.4 223.7 66.7 1.0 67.7
Morse TEC 656.4 20.0 676.4 563.9 20.7 584.6
TorqTransfer
Systems 405.0 1.4 406.4 418.6 1.9 420.5
Transmission
Systems 326.4 6.2 332.6 299.7 5.4 305.1
Divested
Operations 109.1 0.2 109.3 137.9 3.3 141.2
Intersegment
eliminations - (35.2) (35.2) - (37.9) (37.9)
------ ------- -------- ------- ---------- --------
Consolidated $2,049.6 $ - $2,049.6 $1,781.8 $ - $ 1,781.8
======== ====== ========= ======== ========== ==========
</TABLE>
Earnings Before Earnings Before
Interest & Taxes Interest & Taxes
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
Air/Fluid Systems $ 4.8 $ 6.8 $ 30.5 $ 23.7
Cooling Systems 6.9 3.3 28.1 8.7
Morse TEC 30.3 26.5 96.2 82.1
TorqTransfer Systems 7.0 8.2 26.7 29.5
Transmission Systems 9.2 11.6 37.4 41.7
Divested Operations (0.3) (0.3) 4.0 6.4
-------- ------- ------- -------
Total 57.9 56.1 222.9 192.1
Corporate, including
equity in affiliates(35.1) (2.8) (38.6) (9.1)
-------- -------- ------- ------
Consolidated $ 22.8 $ 53.3 $184.3 $ 183.0
========= ======== ======== =======
Total Assets
September 30, December 31,
2000 1999
Air/Fluid Systems $ 413.5 $ 407.9
Cooling Systems 544.5 560.8
Morse TEC 1,002.1 1,007.4
TorqTransfer Systems 264.7 261.3
Transmission Systems 362.8 356.0
Divested Operations 121.1 123.4
----------- -----------
Total 2,708.7 2,716.8
Corporate, including
equity in affiliates 135.3 253.9
----------- -----------
Consolidated $2,844.0 $ 2,970.7
=========== ===========
Divested operations includes 1) the fuel systems business which is
currently held for sale and previously reported in Air/Fluid Systems, 2)
Kysor-Westran which is currently held for sale and previously reported in
Morse TEC and 3) the forged powder metal race business sold in 1999 which
had previously been included in the results of the Transmission Systems
segment. Also, effective January 1, 2000, the Company's instrumentation
business has been transferred from the Morse TEC segment to Air/Fluid
Systems.
(9) Announcement to Sell Fuel Systems and Kysor-Westran
In April 2000, the Company announced its intention to sell two non-core
businesses, which did not fit the Company's strategic focus on powertrain
technology, Fuel Systems and Kysor-Westran. These businesses were acquired
as part of the vehicle products business of Kuhlman Corporation in March of
1999. Both divisions have been reclassified for segment sales and EBIT
reporting to divested operations. The Fuel Systems unit, previously
reported as part of Air/Fluid Systems, produces metal tanks for the heavy-duty
and medium-duty truck markets in North America. Kysor-Westran,
previously reported as part of Morse TEC, produces heating, ventilation and
air conditioning products for the agricultural/off highway market in North
America and Europe. Proceeds from the sales are expected to be used for
general corporate purposes, including repaying indebtedness or repurchasing
the Company's stock on the open market.
(10)During the third quarter of 2000, the Company recorded a one-time
restructuring charge of $32.6 million ($19.6 million after tax), or $0.75
per diluted share for the three months ended September 30,2000. The charge
included restructuring costs related to the rationalization and integration
of certain businesses and actions taken to bring costs in line with vehicle
production slowdowns in major customer product lines. Of the $32.6 million
restructuring charge, $6.3 million is based on estimates of future cash expen-
ditures. The Company expects to terminate approximately 170
employees under the plan. These reductions will take place across each
business segment except TorqTransfer Systems, across each geographic area
of the Company and across each major functional area, including production
and selling and administrative positions.
Following is a summary of the impact of the restructuring charge on
operations for the three and nine months ended September 30, 2000:
Three Months
From
Consolidated Restructuring Operations
Sales $ 618.5 $ - $ 618.5
Earnings before interest
and taxes 22.8 (32.6) 55.4
Interest expense 15.9 - 15.9
----------- ---------- --------
Earnings before income
taxes 6.9 (32.6) 39.5
Provision for income
taxes 1.6 (13.0) 14.6
---------- --------- -------
Net earnings $ 5.3 $ (19.6) $ 24.9
========== ======== ========
Net earnings per
share - diluted $ 0.20 $ (0.75) $ 0.95
Nine Months
From
Consolidated Restructuring Operations
Sales $2,049.6 $ - $2,049.6
Earnings before interest
and taxes 184.3 (32.6) 216.9
Interest expense 47.7 - 47.7
-------- -------- --------
Earnings before income
taxes 136.6 (32.6) 169.2
Provision for income
taxes 50.3 (13.0) 63.3
--------- -------- -------
Net earnings $ 86.3 $ (19.6) $ 105.9
Net earnings per share
- diluted $ 3.26 $ (0.74) $ 4.00
=========== =========== ===========
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
BorgWarner Inc. (the "Company") is a leading global supplier of highly
engineered systems and components for 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 the Americas, 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, 2000 and 1999 and financial condition as of
September 30, 2000 and December 31, 1999.
RESULTS OF OPERATIONS
The Company's products fall into five reportable operating segments:
Air/Fluid Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and
Transmission Systems. Two businesses are currently for sale and have been
classified in divested operations: The Fuel Systems business, previously
reported in Air/Fluid Systems, and Kysor-Westran, previously reported in
Morse TEC. The following tables present net sales and earnings before
interest and taxes ("EBIT") by segment for the three and nine months ended
September 30, 2000 and 1999 in millions of dollars.
<TABLE>
<CAPTION>
Three Months Nine Months
NET SALES Ended September 30, Ended September 30,
2000 1999 2000 1999
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
Air/Fluid Systems $ 98.7 $ 98.7 $ 336.4 $ 300.6
Cooling Systems 66.7 27.6 223.7 67.7
Morse TEC 215.5 199.5 676.4 584.6
TorqTransfer Systems 115.9 128.2 406.4 420.5
Transmission Systems 103.3 98.5 332.6 305.1
Divested operations 28.7 48.7 109.3 141.2
-------- -------- --------- ---------
628.8 601.2 2,084.8 1,819.7
Intersegment eliminations(10.3) (11.5) (35.2) (37.9)
Net sales $618.5 $589.7 $2,049.6 $1,781.8
======== ======== ======== =========
Three Months Nine Months
EBIT Ended September 30, Ended September 30,
2000 1999 2000 1999
------- -------- -------- --------
Air/Fluid Systems $ 4.8 $ 6.8 $ 30.5 $ 23.7
Cooling Systems 6.9 3.3 28.1 8.7
Morse TEC 30.3 26.5 96.2 82.1
TorqTransfer Systems 7.0 8.2 26.7 29.5
Transmission Systems 9.2 11.6 37.4 41.7
Divested operations (0.3) (0.3) 4.0 6.4
-------- ---------- -------- ------
Earnings before interest
and taxes $ 57.9 $ 56.1 $ 222.9 $ 192.1
========= ========= ========= =========
</TABLE>
Consolidated sales for the quarter ended September 30, 2000 reached $618.5
million, a 5% increase over 1999's third quarter performance. Comparing
businesses owned for both periods, sales were essentially flat. This was
against a backdrop of flat worldwide light vehicle production, which
decreased by 1% and 4% in North America and Western Europe, respectively,
while Asia increased by 4%. The North American heavy truck market, which
has become more of a factor for the Company as a result of recent
acquisitions, declined by 33% versus the prior year. Overall, the Company's
growth came principally from Europe and Asia, as the number of applications
for the Company's advanced products continues to expand. At the same time,
weak European currencies negatively affected the European sales growth
rate. Had the European exchange rates been at the same levels as in 1999,
sales would have been approximately $16 million higher. The impact of the
Euro was felt most strongly in our Morse TEC and Transmission Systems
segments.
Third quarter sales for the Air/Fluid Systems segment were flat compared to
the prior year, while EBIT declined by $2 million. Strong sales of pump
products for emission control were more than offset by pricing and volume
weakness at their major customer which impacted the sales of a variety of
control products. Demand is expected to continue softening after the
strong pace exhibited in the first half of the year.
Cooling Systems' results are not fully comparable to the prior year because
of the October 1999 acquisition of the Eaton Fluid Power Division. While
the light truck market remained strong, the market for heavy trucks
softened, placing pressure on margins. Steps are already underway to
realign the cost structure with the reduced demand for heavy trucks.
Morse TEC sales and EBIT for the third quarter increased by 8% and 14%,
respectively, over the third quarter in the prior year despite being
negatively affected by the weak Euro, both for the turbocharger business
and the timing chain business. Sales growth would have been about 14% had
the European exchange rates been at their 1999 levels. This segment's
growth continues to come from new and expanded engine timing programs in
each geographical region, and continued penetration of turbochargers on
direct injected diesel engines as well as gasoline engines. Third quarter
growth was at a slower pace than the first half of the year due to a
softening of car and light truck/SUV builds in the United States.
TorqTransfer Systems experienced sales and EBIT decreases over the prior
year of 10% and 15%, respectively, because of declines in unit volumes and
mix issues, principally at their major customer. Certain price concessions
to customers and cost economics further weakened EBIT comparisons, but the
segment was successful in cost containment to keep the decline in EBIT to a
minimum.
Excluding businesses sold in 1999, Transmission Systems increased sales by
5% due to a strong market and market share gains in shift quality
components. However, price concessions, operating problems, customer
shutdowns for model changeovers and R&D spending adversely affected the
EBIT comparison. This group took significant steps in September to address
its cost structure and improve margins.
Divested operations include Fuel Systems and Kysor-Westran currently for
sale, as well as the forged powder metal race business sold in October
1999. The decline in sales is attributable to the state of the heavy truck
market as well as the sale of the forged powder metal race business in the
prior year.
Sales for the first nine months of 2000 increased 15% to $2,049.6 million
from $1,781.8 million for the first nine months of 1999. Adjusted for the
effects of acquisitions and divested operations, sales were essentially
flat. The Company has taken steps to focus on getting costs in line to
manage through this anticipated period of slower industry growth.
Consolidated gross margin through the first nine months of 2000 was 24.2%,
up from 22.8% for the first nine months of 1999. A better mix of higher
margin businesses, such as Morse TEC and Cooling Systems, and the
divestiture of lower margin operations in 1999 drove the improvement.
Partially offsetting the margin gain was an increase in selling, general
and administrative expenses ("SG&A"). Through September 2000, the Company
increased its spending on research and development ("R&D") to 4.2% of sales
from 3.7% in 1999 to continue investing in a number of key programs that
are necessary for both short and long term growth. In part, the results
also reflect the mix impact from the newly acquired businesses, which
generate a higher level of R&D expenditures. Nevertheless, the Company
remains committed to R&D investment while continuing to control SG&A costs.
Goodwill amortization and interest both increased over last year as a
result of the acquisition of the Eaton Fluid Power Division in October
1999. Other factors influencing interest expense were strong operating
cash flow and proceeds from divestitures, both of which reduced debt
levels. The macroeconomic increase in interest rates did not impact
interest expense significantly since most of the Company's debt has fixed
interest rates.
The increase in equity in affiliate earnings and other income is mainly
attributable to the Company's 50% owned Japanese joint venture, NSK-Warner.
The Company's share of NSK-Warner's income for the three months ended
September 30, 2000 and 1999, amounted to $3.9 million and $3.1 million,
respectively. September 2000 year to date totaled $11.9 million versus
$9.2 million in 1999.
During the third quarter of 2000, the Company recorded a one-time
restructuring charge of $32.6 million ($19.6 million after tax), or $0.75
per diluted share. The charge included restructuring costs related to the
rationalization and integration of certain businesses and actions taken to
bring costs in line with vehicle production slowdowns in major customer
product lines. Of the $32.6 million restructuring charge, $6.3 million is
based on estimates of future cash expenditures. The Company expects to
terminate approximately 170 employees under the plan. These reductions
will take place across each business segment except TorqTransfer Systems,
across each geographic area of the Company and across each major functional
area, including production and selling and administrative positions.
The Company's income taxes are based upon estimated annual tax rates for
the year. The anticipated effective income tax rate for 2000 is lower than
the standard federal and state tax rates due to the expected realization of
certain R&D and foreign tax credits, due to foreign rates which differ from
those in the U.S. and offset somewhat by non-deductible expenses, such as
goodwill. The Company expects taxes to be in the range of 37 - 38% of
pretax income throughout 2000, exclusive of the restructuring charge. The
tax rate on the restructuring charge reflected a difference in the book and
tax carrying values of the assets written-down.
For the quarter ended September 30, 2000, the Company reported net earnings
before the restructuring charge of $24.9 million, or $0.95 per diluted
share, a decrease of $2.5 million and $0.07, respectively, compared to
1999. Including the restructuring charge, net earnings were $5.3 million or
$0.20 per diluted share. During the quarter, the combination of the weak
Euro and the soft heavy truck market penalized earnings by an estimated
$0.09 per share. The Ford situation also contributed to the decline in
results. Year to date earnings excluding the restructuring charge of $105.9
million, or $4.00 per diluted share, exceeded 1999 earnings for the same
period of $95.8 million, or $3.71 per diluted share. Net of the
restructuring charge, year to date net earnings were $86.3 million, or
$3.26 per diluted share.
For the remainder of the year, the Company remains concerned about the same
external factors that have been influencing the industry in the past few
months, namely the devaluation of the Euro, the reduction in orders in the
heavy-duty truck market and customer mix issues. As a result, the fourth
quarter is expected to be lower than 1999. Despite these issues, the
Company is anticipating modest growth in continuing operations in 2001, and
maintains a positive long-term outlook due to the viability of its product
leadership strategy.
FINANCIAL CONDITION AND LIQUIDITY
Cash generated from operations for the nine months ended September 30, 2000
totaled $157.8 million and consists of net earnings of $86.3 million and
non-cash charges of $130.6 million, partially offset by a $59.1 million
increase in net operating assets and liabilities. Non-cash charges to
operations include $77.2 million of depreciation, $32.5 million of goodwill
amortization, a $32.6 million pre-tax restructuring charge and ($11.7)
million of other items. Depreciation and amortization increased in
comparison to the prior year mainly due to the acquisitions made in 1999
and the increased capital spending in recent years. Increases in net
working capital line items are consistent with the higher levels of
business the Company has experienced in 2000 relative to 1999. 1999 cash
flows were also enhanced by the collection of $33 million of accounts
receivable a major customer had deferred in December 1998.
Cash used in investing activities totaled $27.6 million. The sale of
Coleman Cable Systems, Inc., one of the electrical products businesses
acquired from Kuhlman Corporation in March 1999, cleared escrow in January
2000. The total sales price of $137 million included debt securities with a
face value of $15 million and $122 million in cash. Partially offsetting
this inflow was $43 million in tax payments related to the sales of the
electrical products businesses.
Capital spending for the nine months ended September 30, 2000 increased by
$18.7 million to $111.5 million compared to the same period of 1999. This
reflects the full run rate effect of 1999's acquisitions, several expansion
projects being launched to support the Company's strong order book and the
land purchase for the BorgWarner Powertrain Technical Center. Of the
capital spending, about 60% is related to expansion projects with the
remaining funds being applied to cost reduction programs. The Company
anticipates that capital spending for full-year 2000 will continue to be
higher than in 1999 in order to fund existing and new programs, but remain
at about 6.5% of sales.
In the first half of 2000, the Company repaid $66.0 million of borrowings
under its $350 million revolving credit facility. In the third quarter an
additional $75.0 million was borrowed under the facility. During the first
nine months of 2000, the Company has also repurchased $27.8 million of its
long-term fixed interest rate debt and spent $22.1 million to repurchase
shares into treasury.
As of September 30, 2000 and December 31, 1999, the Company had sold $150.0
million of receivables under a $153.0 million Receivables Transfer
Agreement for face value without recourse.
The Company believes that the combination of cash from its operations and
available credit facilities will be sufficient to satisfy cash needs for
its current level of operations and planned operations for the remainder of
2000 and for the foreseeable future.
OTHER MATTERS
Announcement to Sell Fuel Systems and Kysor-Westran
In April 2000, the Company announced its intention to sell two non-core
businesses, which did not fit the Company's strategic focus on powertrain
technology, Fuel Systems and Kysor-Westran. These businesses were acquired
as part of the vehicle products business of Kuhlman Corporation in March of
1999. Both divisions have been reclassified for segment sales and EBIT
reporting to divested operations. The Fuel Systems unit, previously
reported as part of Air/Fluid Systems, produces metal tanks for the heavy-
duty and medium-duty truck markets in North America. Kysor-Westran,
previously reported as part of Morse TEC, produces heating, ventilation and
air conditioning products for the agricultural/off highway market in North
America and Europe. Proceeds from the sales are expected to be used for
general corporate purposes, including repaying indebtedness or repurchasing
the Company's stock on the open market.
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 20, 2000, the Company declared a $0.15 per share dividend to be
paid on November 15, 2000 to shareholders of record as of November 1, 2000.
New Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133". This statement defers the
effective date of SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities" to those fiscal years beginning after June 15, 2000.
SFAS 133 established accounting and reporting requirements for derivative
instruments, including the recognition of all derivative instruments in the
statement of financial condition as either assets or liabilities, measured
at fair value. This statement additionally requires changes in the fair
value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", as a further
amendment to SFAS No. 133. This statement eases SFAS No. 133
implementation difficulties by permitting normal purchases and sales
exceptions to be applied to contracts that meet certain net settlement
provisions and redefining the risks that can be identified as the hedged
risk. The Company is in the process of implementing the appropriate systems
and processes to adopt these statements effective January 1, 2001, as
required, and management is currently assessing the impact of SFAS 133 on
the Company's results of operations, financial condition and cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, entitled "Revenue Recognition in Financial
Statements." SAB 101A was issued by the SEC on March 24, 2000 and delayed
the required implementation date of SAB 101 until the second quarter of
2000. SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements of public companies. The
adoption of SAB 101 has not had a material effect on the Company's
financial position or results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations 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 vehicle 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, 1999.
Item 3. Quantitative and Qualitative Disclosure about Market Risks
The Company's market risk exposure at September 30, 2000 is consistent with
the types of market risk and amount of exposure presented in its 1999
Annual Report on Form 10-K.
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
Exhibits
10.1 - Credit Agreement dated as of July 21, 2000 among BorgWarner
Inc., as Borrower, The Lenders Party Hereto, The Chase Manhattan Bank, as
Administrative Agent, Bank America, N.A., as Syndication Agent and Bank
One, N.A., as Documentation Agent.
27.1 - Financial Data Schedule
Reports on Form 8-K
None
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.
BorgWarner Inc.
(Registrant)
By /s/ William C. Cline
(Signature)
William C. Cline
Vice President and Controller
(Principal Accounting Officer)
Date: November 14, 2000
