SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended June 30, 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 July 31, 2000 the registrant had 26,177,033 shares of Common Stock
outstanding.
BORGWARNER INC.
FORM 10-Q
SIX MONTHS ENDED JUNE 30, 2000
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three
months ended June 30, 2000 and 1999 4
Consolidated Statements of Operations for the six
months ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the six
months ended June 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 20
SIGNATURES 21
<PAGE>
BORGWARNER INC.
FORM 10-Q
SIX MONTHS ENDED JUNE 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 six months ended June 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.
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
2000 1999
<S> <C> <C>
A S S E T S
Cash and cash equivalents $21.3 $ 21.7
Receivables 252.2 216.2
Inventories 182.0 164.4
Deferred income tax asset 2.8 2.8
Investments in businesses
held for sale 4.5 129.0
Prepayments and other
current assets 29.1 24.2
--------- ---------
Total current assets 491.9 558.3
Property, plant, and equipment
at cost 1,266.8 1,204.1
Less accumulated depreciation 457.5 408.1
--------- --------
Net property, plant and
equipment 809.3 796.0
Investments and advances 154.6 160.3
Goodwill 1,256.9 1,284.7
Deferred income tax asset 17.9 18.8
Other noncurrent assets 161.2 152.6
--------- -------
Total other assets 1,590.6 1,616.4
--------- -------
$2,891.8 $2,970.7
========= ========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 76.2 $ 134.0
Accounts payable and accrued
expenses 441.8 433.7
Income taxes payable 52.1 92.1
--------- -------------
Total current liabilities 570.1 659.8
Long-term debt 821.1 846.3
Long-term retirement-related
liabilities 343.6 343.9
Other long-term liabilities 61.4 63.2
------ ------
Total long-term liabilities 405.0 407.1
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 26,271,033 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 419.4 346.4
Management shareholder noe (2.5) (2.0)
Accumulated other comprehensive
income (loss) (5.5) 12.3
Common stock held in treasury, at cost:
769,459 shares in 2000 (31.8) (15.2)
---------- --------
Total stockholders' equity 1,095.6 1,057.5
--------- --------
$2,891.8 $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
June 30,
2000 1999
--------- -----------
<S> <C> <C>
Net sales $ 700.9 $ 640.8
Cost of sales 531.3 491.7
Depreciation 25.9 22.8
Selling, general
and administrative
expenses 57.8 53.5
Minority interest 0.4 0.4
Goodwill amortization 10.7 7.7
Equity in affiliate earnings
and other income (4.7) (4.6)
--------- ----------
Earnings before interest
expense, finance
charges and income taxes 79.5 69.3
Interest expense and
finance charges 15.9 12.6
--------- ----------
Earnings before income
taxes 63.6 56.7
Provision for income taxes 23.5 20.4
--------- -------
Net earnings $ 40.1 $ 36.3
========= =========
Net earnings per share
Basic $ 1.52 $ 1.36
======== ========
Diluted $ 1.51 $ 1.35
========= ==========
Average shares outstanding (thousands)
Basic 26,433 26,701
========= =========
Diluted 26,545 26,886
======== =========
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>
Six Months Ended
June 30,
2000 1999
------- -------
<S> <C> <C>
Net sales $1,431.1 $ 1,192.1
Cost of sales 1,081.5 916.1
Depreciation 52.1 43.3
Selling, general and admini-
strative expenses 121.3 95.9
Minority interest 1.2 0.8
Goodwill amortization 21.7 13.4
Equity in affiliate earnings
and other income (8.3) (7.1)
--------- -------
Earnings before interest expense, finance
charges and income taxes 161.6 129.7
Interest expense and finance
charges 31.8 21.2
--------- -------
Earnings before income taxes 129.8 108.5
Provision for income taxes 48.7 40.1
-------- -------
Net earnings $ 81.1 $ 68.4
========= =======
Net earnings per share
Basic $ 3.05 $ 2.71
========== ========
Diluted $ 3.04 $ 2.69
========== ========
Average shares outstanding (thousands)
Basic 26,554 25,285
Diluted 26,656 25,453
======== =======
Dividends declared per share $ 0.30 $ 0.30
======== ========
</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> Six Months Ended
June 30,
2000 1999
-------- --------
<S> <C> <C>
Operating
Net earnings $ 81.1 $ 68.4
Non-cash charges to operations:
Depreciation 52.1 43.3
Goodwill amortization 21.7 13.4
Deferred income tax provision - 1.6
Other, principally equity in
affiliate earnings (7.4) (2.3)
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
(Increase) decrease in
receivables (43.5) 19.8
Increase in inventories (21.3) (23.4)
Increase in prepayments
and other current assets (7.6) (5.7)
Increase in accounts payable
and accrued expenses 19.1 51.2
Increase in income taxes payable 3.1 20.6
Net change in other long-
term assets and liabilities 17.3 0.2
--------- ---------
Net cash provided by
operating activities 114.6 187.1
Investing
Capital expenditures (78.6) (57.9)
Payments for businesses acquired - (543.0)
Proceeds from sale of businesses 122.3 11.5
Payments for taxes on busi-
nesses sold (43.0) -
Net proceeds from other assets 1.8 4.0
------ -------
Net cash provided by (used in)
investing activities 2.5 (585.4)
Financing
Net decrease in notes payable (41.3) (30.5)
Additions to long-term debt 50.1 433.9
Reductions in long-term debt (88.5 (1.6)
Payments for purchases of
treasury stock (18.6) -
Proceeds from stock options
exercised 0.2 0.1
Dividends paid (8.0) (7.5)
----- --------
Net cash provided by (used in)
financing activities (106.1) 394.4
Effect of exchange rate
changes on cash and cash
equivalents (11.4) (2.9)
-------- ---------
Net decrease in cash and
cash equivalents (0.4) (6.8)
Cash and cash equivalents at
beginning of year 21.7 44.0
------- ---------
Cash and cash equivalents at
end of period $ 21.3 $ 37.2
========= =========
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest $ 33.8 $ 18.6
Income taxes 92.6 21.9
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 1.1 1.1
See accompanying Notes to Consolidated Financial Statements
</TABLE>
<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
six months ended June 30, 2000 were $29.3 million and $59.0 million,
respectively. Research and development costs charged to expense for the
three and six months ended June 30, 1999 were $22.2 million and $41.2
million, respectively.
(2) Inventories consisted of the following (millions of dollars):
June 30, December 31,
2000 1999
Raw materials $ 73.8 $ 76.4
Work in progress 64.1 39.1
Finished goods 44.1 48.9
Total inventories $ 182.0 $ 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 $163.6 million at June 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 June 30, 2000 and March 31, 2000 and statement
of income data is presented for the three months ended June 30, 2000 and
1999. The Company's results include its share of NSK-Warner's results
for the three and six months ended May 31, 2000 and 1999.
June 30, March 31,
2000 2000
Balance Sheet (in millions)
Current Assets $173.8 $196.0
Noncurrent assets 161.5 157.8
Current liabilities
(excluding debt) 97.5 96.2
Concurrent liabilities
(excluding debt) 7.6 8.5
Three Months Ended
June 30,
2000 1999
------- -------
Statement of Income (in millions)
Net sales $ 84.0 $ 61.7
Gross profit 18.3 13.1
Net income 7.5 5.0
(4) The Company's provisions for income taxes for the three and six
months ended June 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>
June 30, 2000 December 31, 1999
Current Long-Term Current Long-Term
DEBT (millions of dollars)
<S> <C> <C> <C> <C>
Bank borrowings $ 70.6 $110.1 $131.1 $142.0
Bank term loans due through 2003
(at an average rate of 3.7% at
June, 2000 and 7.7% at
December, 1999) 5.1 26.4 2.2 6.1
7% Senior Notes due 2006,
net of unamortized discount - 149.7 - 149.7
6.5% Senior Notes due 2009,
net of unamortized discount - 194.6 - 198.3
8% Senior Notes due 2019,
net of unamortized discount - 149.9 - 149.9
7.125% Senior Notes due 2029,
net of unamortized discount - 187.4 - 197.2
Capital lease liability 0.5 3.0 0.7 3.1
---- ------ ------- --------
Total notes payable and
long-term debt $ 76.2 $821.1 $134.0 $846.3
======= ======== ======== ======
</TABLE>
The Company maintains a $350 million revolving credit facility. At June
30, 2000, the facility was unused. 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
June 30, 2000 of approximately $14.0 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 June 30, 2000, and at December 31, 1999, the Company had sold
$150.0 million of receivables under a $153.0 million Receivables
Transfer Agreement for face value without recourse.
(7) Comprehensive income is a measurement of all changes in
stockholders' equity that result from transactions and other economic
events other than transactions with stockholders. For the Company, this
includes foreign currency translation adjustments, changes in minimum
pension liability adjustments and net earnings. The amounts presented
as other comprehensive income, net of related taxes, are added to net
income which results in comprehensive income.
The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the periods ended June 30,
<TABLE>
<CAPTION> ($ 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 $(12.4) $4.7 $(7.7) $(4.7) $ 1.7 $(3.0)
Net income as reported 40.1 36.3
------ -------
Total comprehensive income $ 32.4 $33.3
======= =======
($ in millions) ($ in millions) Six Months
2000 1999
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
--------- --------- --------- ------- ------- ----
Foreign currency
translation
adjustments $(28.7) $ 10.9 $(17.8) $(9.8) $ 3.6 $(6.2)
Net income as reported 81.1 68.4
------- -------
Total comprehensive income $ 63.3 $62.2
====== =======
</TABLE>
The components of accumulated other comprehensive income (loss) net of
tax, in the Consolidated Balance Sheets are as follows:
($ in millions) June 30, December 31,
2000 1999
-------- ------------
Foreign currency translation adjustment $(5.4) $ 12.4
Minimum pension liability adjustment (0.1) (0.1)
------ -------
Total comprehensive income (loss) $ (5.5) $ 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.
Sales
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
Inter- Inter-
Customer segment Net Customer segment Net
-------- --------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Air/Fluid Systems $111.3 $ 2.3 $113.6 $ 103.2 $ 1.8 $ 105.0
Cooling Systems 76.8 0.1 76.9 30.3 0.5 30.8
Morse TEC 219.2 6.9 226.1 201.4 7.0 208.4
TorqTransfer Systems142.7 0.5 143.2 141.4 0.7 142.1
Transmission Systems 111.7 2.1 113.8 102.7 2.0 104.7
Divested Operations 39.2 0.1 39.3 61.8 1.0 62.8
Intersegment elimi-
nations - (12.0) (12.0) - (13.0) (13.0)
Consolidated $700.9 $ - $ 700.9 $ 640.8 $ - $ 640.8
====== ====== ====== ====== ===== =======
Sales
Six Months Ended June 30,
2000 1999
Inter- Inter-
Customer segment Net Customer segment Net
-------- --------- -------- --------- -------- -------
Air/Fluid Systems $232.7 $ 5.0 $237.7 $ 198.1 $ 3.8 $201.9
Cooling Systems 156.8 0.2 157.0 39.3 0.8 40.1
Morse TEC 446.7 14.2 460.9 370.9 14.2 385.1
TorqTransfer Systems 289.5 1.0 290.5 290.8 1.5 292.3
Transmission Systems 224.9 4.4 229.3 202.3 4.3 206.6
Divested Operations 80.5 0.1 80.6 90.7 1.8 92.5
Intersegment eli-
minations - (24.9) (24.9) - (26.4) (26.4)
Consolidated $1,431.1$ - $1,431.1 $ 1,192.1 $ - $1,192.1
======= ====== ========= ========= ======= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Earnings Before Earnings Before
Interest & Taxes Interest & Taxes
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------ ------- ------- -------
<S> <C> <C> <C> <C>
Air/Fluid Systems $ 10.1 $ 8.9 $ 25.8 $ 16.9
Cooling Systems 10.2 4.0 21.2 5.4
Morse TEC 32.5 29.0 65.8 55.6
TorqTransfer Systems 9.4 10.4 19.7 21.3
Transmission Systems 13.5 14.6 28.2 30.1
Divested Operations 1.8 5.6 4.2 6.7
--------- -------- -------- ---------
Total 77.5 72.5 164.9 136.0
Corporate, including
equity in affiliates 2.0 (3.2) (3.3) (6.3)
----- ----- ----- --------
Consolidated $ 79.5 $ 69.3 $161.6 $ 129.7
===== ====== ===== ========
</TABLE>
Total Assets
June 30, December 31,
2000 1999
-------- ----------
Air/Fluid Systems $417.2 $ 407.9
Cooling Systems 554.8 560.8
Morse TEC 1,022.3 1,007.4
TorqTransfer Systems 269.6 261.3
Transmission Systems 364.9 356.0
Divested Operations 125.2 123.4
--------- ----------
Total 2,754.0 2,716.8
Corporate, including
equity in affiliates 137.8 253.9
-------- ----------
Consolidated $2,891.8 $ 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 Heating,
Ventilation and Air Conditioning ("HVAC"). 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 truck market in North America. Kysor-Westran HVAC,
previously reported as part of Morse TEC, serves 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.
In May 2000, the Company announced that its board of directors had
authorized the purchase of up to 1.2 million shares of the Company's
common stock. The shares will be repurchased in the open market at
prevailing prices and at times and amounts to be determined by
management as market conditions and its capital position warrant.
Purchased shares will be placed in treasury and may subsequently be
reissued for general corporate use. Between January 1 and June 30,
2000, the Company repurchased 494,700 shares and placed them in treasury
under this program and a previous share repurchase authorization.
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 North 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 six months ended June 30, 2000 and 1999 and financial condition as
of June 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 reclassified to 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
six months ended June 30, 2000 and 1999 in millions of dollars.
<TABLE>
<CAPTION>
Three Months Six Months
NET SALES Ended June 30, Ended June 30,
2000 1999 2000 1999
----- ------ ------ ------
<S> <C> <C> <C> <C>
Air/Fluid Systems $113.6 $105.0 $ 237.7 $ 201.9
Cooling Systems 76.9 30.8 157.0 40.1
Morse TEC 226.1 208.4 460.9 385.1
TorqTransfer Systems 143.2 142.1 290.5 292.3
Transmission Systems 113.8 104.7 229.3 206.6
Divested operations 39.3 62.8 80.6 92.5
------ ------- ------- --------
712.9 653.8 1,456.0 1,218.5
------- ------- ------- --------
Intersegment elimin-
ations (12.0) (13.0) (24.9) (26.4)
Net sales $700.9 $ 640.8 $ 1,431.1 $ 1,192.1
======= ========= ========== =========
Three Months Six Months
EBIT Ended June 30, Ended June 30,
2000 1999 2000 1999
----- ------- ------- -------
Air/Fluid Systems $ 10.1 $ 8.9 $ 25.8 $ 16.9
Cooling Systems 10.2 4.0 21.2 5.4
Morse TEC 32.5 29.0 65.8 55.6
TorqTransfer Systems 9.4 10.4 19.7 21.3
Transmission Systems 13.5 14.6 28.2 30.1
Divested operations 1.8 5.6 4.2 6.7
Earnings before interest
and taxes $ 77.5 $ 72.5 $ 164.9 $ 136.0
</TABLE>
Consolidated sales of $700.9 million for the quarter ended June 30, 2000
were 9% higher than the second quarter sales in the prior year.
Internal growth in sales, comparing businesses owned for both periods,
accounted for 6% or two-thirds of the growth. This was in line with
worldwide automobile and truck production, which increased by 2%, 6%,
and 8% in North America, Europe and Asia, respectively. As shown in the
above table, the improvement was spread across all of the operating
segments. Overall, the Company's 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 increased demand for emission control
products.
The Air/Fluid Systems segment generated 8% growth in sales and 13%
improvement in EBIT for the quarter ended June 30, 2000 compared to the
prior year. The main driver was increased emission control business in
North America. Although demand is expected to soften after the strong
pace exhibited in the first half of the year, continued growth is
expected due to the worldwide emphasis on improved operating efficiency
and reduced emissions, both of which can be realized through improved
air and fuel management.
Cooling Systems' results are not fully comparable to the prior year
because of the October 1999 acquisition of the Eaton Fluid Power
Division. Quarter to date EBIT margin of 13.3% compares favorably with
the full year 1999 margin of 12.7%. The heavy truck market in North
America is softening, but light truck continues very strong.
Morse TEC sales and EBIT for the second quarter increased by 8% and 12%,
respectively, over the second quarter in the prior year despite being
negatively affected by the weak Euro, both for the German turbocharger
business and the Italian timing chain business. This segment's growth
came 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.
TorqTransfer Systems experienced a modest sales increase over the prior
year as unit volumes were slightly higher than the prior year, but
certain price concessions to customers and some cost economics weakened
EBIT comparisons. The segment was successful in cost containment to keep
the decline in EBIT to a minimum. Sales are expected to remain fairly
flat throughout 2000.
Excluding businesses sold in 1999, Transmission Systems increased sales
by 9% due to a strong market and market share gains in shift quality
components. However, price concessions, cost economics and R&D spending
adversely affected the EBIT comparison. EBIT comparisons are expected
to improve somewhat as a result of cost containment efforts.
Sales for the first six months of 2000 increased 20% to $1,431.1 million
from $1,192.1 million for the first six months of 1999. Adjusted for
the effects of acquisitions and divested operations, sales increased by
10%. The Company is expecting many of the favorable industry trends to
continue and anticipates sales to remain strong throughout the year,
despite an anticipated moderation in vehicle builds.
Consolidated gross margin through the first six months of 2000 was
24.4%, up from 23.2% in the first half of 1999. Higher sales volume with
a favorable mix, successful implementation of cost reduction programs
and productivity improvements, inclusion of higher margin businesses
from acquisitions, and 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 June 2000, the Company increased its spending on research and
development ("R&D") to 4.1% of sales from 3.5% in 1999 as the Company
continued to invest in its product leadership position. In part, the
results reflect the mix impact from the newly acquired businesses, which
generate a higher level of R&D expenditures. Nevertheless, efforts are
being made to keep SG&A and R&D levels more consistent with historical
levels. SG&A spending is expected to be approximately 8 - 8 1/2% of
sales, while R&D spending is targeted in the 4% of sales range.
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 June 30, 2000 and 1999, amounted to $4.6 million and $4.1 million,
respectively. June 2000 year to date totaled $8.0 million versus $6.1
million in 1999.
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 due to other non-deductible
expenses, such as goodwill. The Company expects taxes to be in the
range of 37 - 38% of sales throughout 2000.
For the quarter ended June 30, 2000, the Company reported net earnings
of $40.1 million, or $1.51 per diluted share, an increase of $3.8
million and $0.16, respectively, compared to 1999. Year to date
earnings of $81.1 million, or $3.04 per diluted share, exceeded 1999
earnings for the same period of $68.4 million, or $2.69 per diluted
share. The factors discussed above are responsible for the change.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and cash equivalents decreased by $0.4 million at
June 30, 2000 compared to December 31, 1999. Cash generated from
operations for the six months ended June 30, 2000 totaled $114.6 million
and consisted of net earnings of $81.1 million and non-cash charges of
$66.4 million, partially offset by a $32.9 million increase in net
operating assets and liabilities. The primary non-cash charges,
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 the net operating assets and
liabilities 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 in payments a major
customer had deferred in December 1998.
Cash provided by investing activities totaled $2.5 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 six months ended June 30, 2000 increased by
$20.7 million to $78.6 million compared to the same period of 1999,
reflecting 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 facility, which is unused as of June
30, 2000. The Company also repurchased $13.8 of its long-term fixed
interest rate debt and spent $18.6 million to repurchase shares into
treasury during the first half of 2000.
As of June 30, 2000 and December 31, 1999, the Company had sold $150
million of receivables under a $153 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 Heating,
Ventilation and Air Conditioning ("HVAC"). 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 truck market in North America. Kysor-Westran HVAC,
previously reported as part of Morse TEC, serves 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.
Authorization of Share Repurchase Program
In May 2000, the Company announced that its board of directors had
authorized the purchase of up to 1.2 million shares of the Company's
common stock. The shares will be repurchased in the open market at
prevailing prices and at times and amounts to be determined by
management as market conditions and its capital position warrant.
Purchased shares will be placed in treasury and may subsequently be
reissued for general corporate use. Between January 1 and June 30,
2000, the Company repurchased 494,700 shares and placed them in treasury
under this program and a previous share repurchase authorization.
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 July 21, 2000, the Company declared a $0.15 per share dividend to be
paid on August 15, 2000 to shareholders of record as of August 1, 2000.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") The
effective date of SFAS 133 was extended to those fiscal years beginning
after June 15, 2000 by Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" in June 1999.
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. The Company is currently performing an
assessment of the impact of SFAS 133 on its results of operations,
financial condition and cash flows.
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 June 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
On April 26, 2000, the Company held its annual meeting of
stockholders. At such meeting, Phyllis O. Bonanno, Andrew F. Brimmer
and Alexis P. Michas were elected as directors to serve for a term
expiring in 2003. Each of William E. Butler, Jere A. Drummond, John F.
Fiedler, Paul E. Glaske, Ivan W. Gorr and John Rau continued to serve as
directors following the meeting. At such meeting, the following votes
were cast in the election of directors:
For Exception Withheld
Phyllis O. Bonanno 21,383,270 20,519 58,612
Andrew F. Brimmer 21,377,171 26,618 64,711
Alexis P. Michas 21,392,388 11,401 49,494
At such meeting, the proposal to amend the Company's 1993 Stock
Incentive Plan was approved by the following votes:
For Against Abstain Not-voted
19,595,442 1,770,914 75,524 5,243,853
At such meeting, the reapproval of the Company's Executive Stock
Performance Plan was approved by the following votes:
For Against Abstain Not-voted
21,044,237 323,749 73,893 5,243,854
At such meeting, the selection of Deloitte & Touche LLP as independent
auditors was approved by the following votes:
For Against Abstain Not-voted
21,384,446 20,781 46,655 5,243,851
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
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: August 14, 2000
