Introduction
BorgWarner Inc. and Consolidated Subsidiaries (the
"Company") is a leading global supplier of highly engineered
systems and components for powertrain applications. Our
products help improve vehicle performance, fuel efficiency,
handling and air quality. Our products are manufactured and
sold worldwide, primarily to original equipment
manufacturers (OEM) of passenger cars, sport utility
vehicles, trucks, and commercial transportation products.
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 Company made some key acquisitions in 1999. Kuhlman
Corporation (Kuhlman) was acquired in March of 1999 and the
Eaton Fluid Power Division (Eaton) in October 1999. Both of
these acquisitions were accounted for under the purchase
method of accounting, and the results are reflected in the
accompanying information from the date of acquisition. The
turbocharger business from Kuhlman, combined with our German
turbocharger business, adds to the Morse TEC business
segment's variety of engine-related products to improve
performance, fuel economy and air quality. The Eaton and
Kuhlman powertrain cooling businesses were combined to form
the Cooling Systems business. Substantially all of the
remaining Kuhlman businesses have been sold.
Results of Operations
2001 vs. 2000 vs. 1999
BorgWarner reported net earnings for 2001 of $66.4 million,
or $2.51 per diluted share, compared to 2000 earnings of
$94.0 million, or $3.54 per diluted share. Excluding
restructuring and other non-recurring charges, 2001 earnings
were $85.4 million, or $3.23 per diluted share, compared to
2000 earnings of $132.7 million, or $5.01 per diluted share.
Net earnings in 1999 were $132.3 million or $5.07 per
diluted share.
Overall, our sales declined 11.1% from 2000 and grew 7.6%
between 2000 and 1999. Excluding sold businesses, sales were
7.1% lower in 2001 and 10.2% higher in 2000, than the
previous year. The main cause of the sales decline was the
overall sales decline in the auto industry. As a comparison,
worldwide vehicle production decreased by 3.8% in 2001 and
increased 2.8% in 2000. North American production decreased
by 9.7% in 2001 and increased by 1.3% in 2000, Japanese
production decreased by 2.3% in 2001 and increased by 2.2%
in 2000 and Western European production increased 1.4% and
1.3% in 2001 and 2000, respectively.
Our 2001 results reflected ongoing weak production demand,
the weak Euro and Yen, production slowdowns and shutdowns
across all of our operating segments, and further
deterioration in the heavy truck market. If currencies
remained at their average 2000 rates in 2001, our 2001
revenues would have been approximately $47 million higher
and our 2001 pre-tax income would have been approximately $7
million higher. The primary growth drivers in 2000 over 1999
were relatively strong global automotive markets, growth in
engine timing systems applications, strong demand for
turbochargers, especially in European passenger cars,
increased content on new generations of transmissions,
improvements in four-wheel drive installation rates on light
trucks and results from acquisitions.
Our outlook as we head into 2002 is one of cautious optimism
as the North American automotive market continues to
experience a downturn. We anticipate the first half of 2002
will continue to be weak, but we intend to use our financial
strength to manage through the weakness by controlling costs
and other spending so that we are poised to take advantage
of opportunities as the cycle turns up again. We are
cautiously optimistic that light vehicle production will
recover somewhat in the second half of 2002 and we will see
growth from our new applications. We also saw the beginnings
of a decline in Europe in the fourth quarter of 2001 and
expect this to continue throughout 2002.
Results By Operating Segment
Our products fall into five reportable operating segments:
Air/Fluid Systems, Cooling Systems, Morse TEC, TorqTransfer
Systems, and Transmission Systems. The segments are profiled
on pages 5 through 7. The following tables detail sales and
earnings before interest and taxes (EBIT) by segment for
each of the last three years.
Net Sales
(millions of dollars)
Year Ended December 31, 2001 2000 1999
Air/Fluid Systems $357.8 $427.8 $413.9
Cooling Systems 220.5 281.3 142.8
Morse TEC 869.4 885.8 796.9
TorqTransfer Systems 500.1 526.7 563.3
Transmission Systems 428.8 437.5 413.4
Divested operations and businesses held for sale 18.0 132.9 178.0
Inter-segment eliminations(43.0) (46.1) (49.7)
-------- --------- --------
Net sales $ 2,351.6 $ 2,645.9 $ 2,458.6
======== ========== =========
Earnings Before Interest and Taxes
(millions of dollars)
Year Ended December 31, 2001 2000 1999
Air/Fluid Systems $ 12.9 $ 35.7 $ 36.5
Cooling Systems 7.5 32.1 17.9
Morse TEC 119.8 127.4 109.7
TorqTransfer Systems 24.1 37.2 41.2
Transmission Systems 48.5 46.0 54.1
Divested operations and businesses held for sale (0.2) 3.2 6.9
------- ------- ------
Earnings before interest and
taxes $ 212.6 $281.6 $266.3
======== ======== =========
Air/Fluid Systems experienced a 16.4% decrease in sales and
a 63.9% decrease in EBIT compared to the prior year. The
decline in sales was primarily due to pricing and volume
weakness at DaimlerChrysler, a major Air/Fluid Systems
customer. Volume decreases, product mix issues and
production issues related to facility rationalizations
contributed to the EBIT margin decline.
Sales increased by 3.4% and EBIT decreased 2.2%,
respectively, from 1999 to 2000. The increase in sales was
largely attributable to increased demand for pump products
for emission control. The decline in EBIT was due to product
mix issues and costs related to facility rationalizations.
Despite a tempered outlook for 2002 due to industry
conditions, we believe that Air/Fluid Systems continues to
provide opportunities for growth. We expect the business to
benefit from the trend in automatic transmissions to convert
individual solenoids to modules and "smart" modules with
integrated transmission control units. The business should
also benefit from the trend toward non-conventional
automated transmissions. Other opportunities in the coming
years include products designated to improve fuel efficiency
and reduce emissions as well as fluid pumps for engine
hydraulics supporting variable cam timing and engine
lubrication.
Cooling Systems' sales decreased 21.6% and EBIT decreased
76.6% from the prior year. Cooling Systems was heavily
impacted by the deteriorating North American market
conditions since approximately 80% of the business' sales
are to customers in North America, mainly in the sport
utility (SUV), light, medium and heavy truck markets. This
performance was in line with our expectations due to
weakness in the North American heavy truck market, along
with an application lost in 2001.
The increases in sales and EBIT in 2000 relative to 1999
primarily reflect full year results for this business, which
was formed in 1999.
We expect our leadership position to favorably impact
results once new business is launched and the truck markets
recover, which we currently expect to happen in 2003.
Increasing fuel economy and environmental legislation in
North America and Europe are expected to drive demand for
electronically controlled cooling systems to accommodate
increasingly higher operating engine temperatures. These
same requirements are driving developing countries to
embrace mechanically controlled drives and, because of our
full product range and manufacturing locations in every
major vehicle producing region, we expect to be well
positioned to benefit from the product life cycle in these
markets.
Morse TEC sales decreased by 1.9% and EBIT declined by 6.0%.
The North American automotive downturn affected this
business, but was partially offset by expanded applications,
particularly for engine timing systems. The European portion
of the business continued to be strong, particularly
turbochargers and engine timing systems. However, the
weakness in European currencies mitigated that strength.
Results for the business were also adversely impacted by the
weakness throughout the year in the Yen. The EBIT decline
was due to the previously mentioned lower volumes and a
change in mix between chain products and turbocharger
products.
Morse TEC sales increased 11.2% and EBIT increased 16.1%
from 1999 to 2000, despite being negatively affected by the
weak Euro, both for the turbocharger portion and the timing
chain portion of the business. The growth was due to the
strength of the European turbocharger market for gasoline
and diesel passenger cars and commercial vehicles, as well
as new and expanded engine timing programs in each
geographical region.
Morse TEC revenue is expected to grow in the coming years as
turbocharger capacity is increased to meet demand on
direct-injected diesel passenger cars and as new generations of
turbochargers for commercial diesel applications are
introduced. The introduction of additional new products,
including timing systems for Chrysler overhead cam engines,
increased North American transplant business, Ford's global
four cylinder engine program, and drive chain for the new
Toyota hybrid engine and other Japanese and Korean
applications, are expected in the coming years. This
business expects to benefit from the continued conversion of
engine timing systems from belts to chains in both Europe
and Japan. Such growth may be tempered by the current
downturn.
TorqTransfer Systems' sales decreased 5.1% and EBIT
decreased 35.2% from the prior year. This business suffered
particularly in the early part of the year from the effects
of erratic scheduling, with OEMs cutting volumes at short
notice in response to the market downturn and the continued
effects of the Ford Explorer/ Firestone tire issue.
The EBIT decline caused primarily by the effects of the
downturn was com- pounded by the need to support the launch
of new programs, discussed below, which involved substantial
engineering effort and the installation of new manufacturing
capacity.
Sales were down 6.5% and EBIT was down 9.7% in 2000 versus
1999. The declines were not surprising given the weak second
half of 2000 and the problems with Ford Explorer/Firestone
tires, as the Explorer is a major application for this
segment. Production volume of this vehicle was lower by 4%
compared with 1999, with our sales declining as a result.
Sales of other vehicles that use TorqTransfer Systems'
products were also down in 2000, particularly other Ford
light trucks and SUVs.
August 2000 saw the launch of TorqTransfer's first
InterActive Torque Management (ITM) system application in
the Acura MDX. While the system has great promise going
forward, it did not contribute significantly in 2000 due to
the impact of startup costs and its launch late in the year.
Considering the sales decline, the group did a solid job of
limiting EBIT losses. This was done by recognizing early
that the year would be one of limited growth potential and
this business took a number of actions to control costs,
including restrictions on hiring, controls on non-essential
spending and shifting production to maximize capacity
utilization.
For 2002, this group expects to benefit from a new contract
to supply transfer cases to General Motors, as well as new
business with Kia and Hyundai. In addition, Honda has
requested a significant uplift in volumes for the ITM torque
management device to be used in the Honda Pilot, a new SUV.
We expect moderate growth from this business next year
because of these new product introductions. Shipments
against these new contracts should begin ramping up in the
second quarter, with more significant increases in the third
quarter coinciding with the 2003 model year.
Transmission Systems' sales decreased 2.0%, but EBIT
increased 5.4% in 2001. The sales reduction was linked to
volume decreases experienced by major North American OEMs,
driven by the general North American automotive industry
downturn as well as market share losses by the North
American automakers to European and Asian automakers in
North America. Strong sales to European and Asian customers
partially offset the North American OEM sales decline, due
to their aforementioned export gains as well as solid
domestic volume levels in their respective regions.
Increased installation rates for automated transmissions
continued to grow in Europe and Asia, nearly offsetting the
decline in volume in North America. Because of significant
cost cutting efforts taken in late 2000 and early 2001, this
business was able to increase EBIT, even while sales
decreased. This business was quick to respond to the
softening North American marketplace and took costs out of
its overhead structure to be more in line with current
industry levels.
Compared to 1999, 2000 sales increased 5.8%. The sales
growth came principally from Korea, where this business
benefited from both strong local build rates and an
increasing installation rate for automatic transmissions. In
Europe, sales were strong in local currency, but translated
to fewer dollars because of the weakness of the Euro. In
North America sales were up for the year due to strong
customer build rates in the first half of 2000. Sales
declined in the latter part of the year, particularly in the
fourth quarter. EBIT in 2000 was 15.0% below 1999 levels.
Volume related improvements in Korea were more than offset
by operating problems incurred in North America. The
restructuring charges recognized in the third and fourth
quarters of 2000 were taken in part to restructure
operations at the Transmission Systems group.
Transmission Systems expects to achieve moderate sales
growth in 2002, linked to volume ramp-ups in recently
launched applications as well as continued global market
share increases by key customers in Europe and Asia. This
sales increase is expected in spite of current concerns
about North American automotive market demand levels, which
are likely to remain soft during the first half of the year.
The business should continue to benefit from restructuring
actions taken in 2000 and 2001 to better align the
businesses to the anticipated level of activity and from
significant cost reduction projects initiated in 2001 which
will carry over into the new year.
Divested operations and businesses held for sale includes
the results of Fuel Systems, sold in 2001; the HVAC
business, which was sold during 2000; and the forged powder
metal race business sold in 1999. These businesses did not
fit our strategic goals, and we believe our resources are
better spent on our core technologies in highly engineered
components and systems. The sale of the Fuel Systems
business did not result in a significant gain or loss.
However, we adjusted our carrying value of this business in
2000 as part of the restructuring charge discussed below.
The $5.4 million gain on the sale of the HVAC business in
2000 is included in equity in affiliates and other income.
The sale of the forged powder metal race business did not
result in a significant gain or loss. Divested operations
and businesses held for sale contributed to sales of $18.0
million, $132.9 million, and $178.0 million and EBIT of
$(0.2) million, $3.2 million, and $6.9 million in 2001,
2000, and 1999, respectively.
Corporate, including equity in affiliates was a $30.3
million charge in 2001, compared to a $7.3 million charge in
2000, and a $10.1 million charge in 1999. This amount
represents headquarters expenses, equity in affiliates, and
expenses not assigned to individual segments. The main
reasons for the increase in the charge were a decrease of
$10.5 million in the excess of earnings from pension assets
over the costs of the U.S. pension plans and the $5.4
million gain on the sale of the HVAC business in 2000.
Corporate headquarters expense was relatively unchanged at
$20.5 million in 2001 compared to $19.2 million in 2000.
Our top ten customers accounted for approximately 78% of
consolidated sales compared to 77% in 2000 and 75% in 1999.
Ford continues to be our largest customer with 30% of
consolidated sales in 2001, compared to 30% and 31% in 2000
and 1999, respectively. DaimlerChrysler, our second largest
customer, rep- resented 21% of consolidated sales in 2001
and 19% of consolidated sales in both 2000 and 1999; and
General Motors accounted for 12%, 13%, and 13%, in 2001,
2000, and 1999, respectively. No other customer accounted
for more than 10% of consolidated sales in any of the
periods presented.
Other Factors Affecting Results of Operations
The following table details our results of operations as a
percentage of sales:
Year Ended December 31, 2001* 2000* 1999
- ----------------------- ------- ------- ---------
Net sales 100.0% 100.0% 100.0%
Cost of sales 76.6 75.7 76.8
Gross margin 23.4 24.3 23.2
Depreciation and
amortization 6.2 5.5 5.0
Selling, general and
administrative expenses 10.0 9.2 8.3
Minority interest, affiliate earnings, net of tax and other
income (0.6) (0.8) (0.5)
-------- ------- ----------
Earnings before interest
and taxes 7.8% 10.4% 10.4%
======== ========= ========
(*) To make the table comparable across years, 2001
excludes $28.4 million, or 1.2% of sales, of non-recurring
charges, and 2000 excludes $62.9 million, or 2.4% of sales,
of restructuring and other non-recurring charges.
Gross margin for 2001 was 23.4%, a decrease from the 2000
margin of 24.3%, but a slight increase from the 1999 margin
of 23.2%. The decrease in margin in 2001 is mainly due to
the drop in volume, as we had fewer sales dollars to cover
our fixed plant costs. The margin increase in 2000, compared
to 1999 is partly attributable to the acquisition of higher
margin operations and the divestiture of lower margin
operations in 1999. In addition, many of our core businesses
also showed gross margin improvement. In 2001, the
combination of price reductions to customers and cost
increases for material, labor and overhead totaled
approximately $37 million, as compared to $16 million and
$63 million in 2000 and 1999, respectively. We were able to
partially offset these impacts by actively pursuing
reductions from our suppliers and making changes in product
design and using process technology to remove cost and/or
improve manufacturing capabilities.
Depreciation and amortization as a percentage of sales was
6.2% in 2001 versus 5.5% in 2000 and 5.0% in 1999. The 2001
and 2000 amounts were a result of a full year's amortization
of the goodwill associated with the additional businesses
acquired in 1999 as well as the relatively higher levels of
capital spending in recent years. The 2001 dollar amount was
about the same as 2000; the higher percentage of sales was
due to a lower sales volume.
Selling, general and administrative expenses (SG&A) as a
percentage of sales increased to 10.0% from 9.2% and 8.3% in
2000 and 1999, respectively. Lower sales volumes, as well as
our continued commitment to research and development (R&D)
in order to capitalize on growth opportunities have caused
the increases. R&D spending was $104.5 million, or 4.4% of
sales, as compared with $112.0 million, or 4.2% of sales,
and $91.6 million, or 3.7% of sales in 2001, 2000 and 1999,
respectively. We continue to invest in a number of cross-segment
R&D programs, as well as a number of other key
programs, all of which are necessary for short and long-term
growth. We intend to maintain our commitment to R&D
investment in the coming years while continuing to focus on
controlling other SG&A costs.
Restructuring and other non-recurring charges included $28.4
million of non-recurring charges which were incurred in the
fourth quarter of 2001. These charges primarily include
adjustments to the carrying value of certain assets and
liabilities related to businesses acquired and disposed of
over the past three years. Of the $28.4 million of pretax
charges, $5.0 million represents non-cash charges.
Approximately $3.3 million was spent in 2001, $8.4 million
was transferred to environmental reserves and the remaining
$11.7 million is expected to be spent over the next two
years. The Company expects to fund the total cash outlay of
these actions with cash flow from operations.
Restructuring and other non-recurring charges totaling $62.9
million were incurred in the second half of 2000 in response
to deteriorating market conditions. The charges included 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 $62.9
million in pretax charges, $47.3 million represented non-cash
charges. Approximately $4.4 million was spent in 2000
and the remaining $11.2 million was spent in 2001. The
actions taken as part of the 2000 restructuring charges are
expected to generate approximately $19 million in annualized
savings, primarily from lower salaries and benefit costs and
reduced depreciation charges. These savings were more than
offset by lower revenue from the deterioration in the
automotive and heavy truck markets.
Components of the restructuring and other non-recurring
charges are detailed in the following table and discussed
further below.
(millions of dollars)
Other Exit
Severance Costs and
and Other Asset Loss on Sale Non-Recurring
Benefits Write-downs of Business Charges Total Provisions
$ 8.9$ 11.6 $35.2 $7.2 $62.9
Incurred (4.3) -. -. (0.1) (4.4)
Non-cash write-
offs -. (11.6) (35.2) (0.5) (47.3)
Balance, December 31, 2000
4.6 -. -. 6.6 11.2
Provisions -. 5.0 -. 23.4 28.4
Incurred (4.6) -. -. (18.3) (22.9)
Non-cash write-offs -. (5.0) -. -. (5.0)
Balance,
December 31, 2001 $-. $-. $-. $11.7 $11.7
Severance and other benefit costs relate to the reduction of
approximately 220 employees from the workforce. The
reductions affect each of our operating seg- ments, apart
from TorqTransfer Systems, across each of our geographical
areas, and across each major functional area, including
production and selling and administrative positions. As of
December 31, 2001, approximately $8.9 million had been paid
for severance and other benefits for the terminated
employees.
Asset write-downs primarily consist of the write-off of
impaired assets that will no longer be used in production as
a result of the industry downturn and the consolidation of
certain operations. Such assets have been taken or are in
process of being taken out of productive use and are being
disposed.
Loss on anticipated sale of business is related to the Fuel
Systems business, which was sold in April 2001. Fuel Systems
produced metal tanks for the heavy truck market in North
America and did not fit our strategic focus on powertrain
technology. In April 2000, we announced our intention to
sell this non-core business, which was acquired as part of
the vehicle products business of Kuhlman Corporation in
March 1999. With the deterioration of the North American
heavy truck market in the second half of 2000, the value of
this business had significantly decreased, creating the
$35.2 million pre-tax loss. In April 2001, the Company
completed the sale of its fuel systems business to an
investor group led by TMB Industries, a private equity
group. Terms of the transaction did not have a significant
impact on the Company's results of operations, financial
condition or cash flows.
Other exit costs and non-recurring charges are primarily
non-employee related exit costs incurred to close certain
non-production facilities the Company has previously sold or
no longer needs and non-recurring product quality related
charges.
The 2001 non-recurring charges include $8.4 million of
environmental remediation costs related to sold businesses
and $12.0 million of product quality costs for issues with
products that were sold by acquired businesses prior to
acquisition, all of which have been fixed in the currently
produced products.
Equity in affiliate earnings, net of tax and other income
decreased by $6.8 million from 2000 and increased by $9.7
million between 2000 and 1999. The 2000 number included a
gain on the sale of the HVAC business of $5.4 million. The
other part of the difference is a slight decrease in the
results of our 50% owned Japanese joint venture, NSK-Warner.
Our equity in NSK-Warner's earnings of $15.7 million was
$1.2 million lower than the prior year, which was $4.0
million higher than 1999. NSK-Warner has continued to
perform well since the 1998 economic downturn in the Asian
economy.
Interest expense and finance charges decreased by $14.8
million in 2001 and increased by $13.4 million between 2000
and 1999. The decrease in 2001 was due to lower interest
rates as well as lower debt levels, as the Company used cash
generated in 2000 and 2001 to pay off debt. In 2001 the
Company paid down $57.8 million of debt and reduced the
amount of securitized accounts receivable sold by $30.0
million. The Company took advantage of lower interest rates
through the use of an interest rate swap arrangement
described more fully in Note Six to the Consolidated
Financial Statements. At the end of 2001, the amount of debt
with fixed interest rates was 63% of total debt, including
the impact of the interest rate swap. The increase in 2000
is consistent with higher debt levels required to finance
the two major acquisitions in 1999 and rising interest rates
in the U.S. during 2000. The rising interest rates in early
2000 did not have as significant an impact on interest
expense as might have been expected because in 2000, 73% of
our debt had fixed rates and only 27% had floating rates.
Strong cash flows from operations and proceeds from
divestitures have been used to lower debt levels and
partially offset the impact of acquisitions on interest
expense in 2000.
The provision for income taxes results in an effective tax
rate for 2001 of 37.4% compared with rates of 36.8% for 2000
and 36.1% for 1999. Our effective tax rates have been lower
than the standard federal and state tax rates due to the
realization of certain R&D and foreign tax credits; foreign
rates, which differ from those in the U.S.; and offset
somewhat by non-deductible expenses, such as goodwill. The
increase in rates over the three years is due to the non-
deductibility of a portion of the goodwill associated with
the Kuhlman acquisition, as well as increased income from
higher tax jurisdictions. The tax rates on the restructuring
and non-recurring charges also reflected a difference in the
book and tax carrying values of certain assets that were
written down. For 2002, as a result of certain changes in
the Company's legal structure, the Company anticipates
realizing a 3% to 4% improvement in its effective tax rate.
Financial Condition and Liquidity
Our cash and cash equivalents increased $11.5 million at
December 31, 2001 compared with December 31, 2000. Net cash
provided by operating activities of $195.8 million, along
with proceeds from businesses sold of $14.4 million were
primarily used to fund $140.9 million of capital
expenditures, repay $57.8 million of long-term debt, and
distribute $15.8 million of dividends to our shareholders.
Operating cash flow of $195.8 million is $95.7 million less
than in 2000. The $195.8 million consists of $66.4 million
of net earnings, non-cash charges of $111.5 million and a
$17.9 million decrease in net operating assets and
liabilities, net of the effects of divestitures. Non-cash
charges are primarily comprised of $104.2 million in
depreciation, $42.0 million of goodwill amortization, and
the $5.0 million non-cash portion of the restructuring and
other non-recurring charges recorded in 2001. Accounts
Receivable increased $48.6 million, net of receivables
related to divested businesses, in 2001. However, $30.0
million of the increase was due to the reduction in
securitized accounts receivable sold.
Net cash used in investing activities totaled $123.3
million, compared with $62.0 million in the prior year.
Capital spending totaling $140.9 million in 2001 was $26.2
million lower than in 2000, although at a similar level in
terms of spending as a percentage of sales. Approximately
60% of the 2001 spending was related to expansion, with the
remainder for cost reduction and other purposes. The prior
year included $88.9 million in net proceeds from the sales
of businesses, mainly non-strategic portions of our 1999
acquisitions. There were $14.4 million in sale proceeds in
2001. Heading into 2002, we plan to manage through the
continuing industry downturn using a program of controlled
capital spending, although full year spending should still
be approximately 4.5% to 5.5% of sales.
Stockholders' equity increased by $17.1 million in 2001. Net
income of $66.4 million was partially offset by adjustments
for minimum pension liability of $18.7 million, currency
translation adjustments of $18.4 million, dividends of $15.8
million, and $0.7 million to repurchase shares of treasury
stock. In relation to the dollar, the currencies in foreign
countries where we conduct business, particularly the Euro
and Yen, weakened, causing the currency translation
component of other comprehensive income to decrease in 2001.
Our total capitalization as of December 31, 2001 of $1,841.2
million is comprised of short-term debt of $35.6 million,
long-term debt of $701.4 million and shareholders' equity of
$1,104.2 million. Capitalization at December 31, 2000 was
$1,881.9 million. During the year, we reduced our balance
sheet debt to capital ratio to 40.0% from 42.2% in 2000 and
48.1% in 1999. We have also been able to maintain our
investment grade credit ratings from Moody's (Baa2) and
Standard and Poor's (BBB+).
We have a $350 million revolving credit facility that
extends until July 21, 2005. We also have $300 million
available under a shelf registration statement on file with
the Securities and Exchange Commission through which a
variety of debt and/or equity instruments may be issued.
We believe that the combination of cash from operations and
available credit facilities will be sufficient to satisfy
our cash needs for our current level of operations and our
planned operations for the foreseeable future. We will
continue to balance our needs for internal growth, debt
reduction and share repurchase.
Other Matters
Acquisition of Kuhlman Corporation
On March 1, 1999, we acquired all the outstanding shares of
common stock of Kuhlman Corporation (Kuhlman), for a
purchase price of $693.0 million. We also assumed $131.6
million of Kuhlman's existing indebtedness, which we
subsequently refinanced. We funded the transaction by
issuing 3,287,127 shares of BorgWarner Inc. common stock
with a value of $149.8 million, and by borrowing
approximately $543.2 million.
Kuhlman was a diversified industrial manufacturing company
that operated in two product segments: vehicle and
electrical products. In vehicle products, Kuhlman's
Schwitzer and Kysor units were leading worldwide
manufacturers of proprietary engine components, including
turbochargers, fans and fan drives and other products. Their
results since the date of the acquisition are included in
the Consolidated Financial Statements.
The electrical products businesses acquired from Kuhlman
consisted of Kuhlman Electric and Coleman Cable. These
products did not fit our strategic direction and, at the
time of the Kuhlman acquisition, we announced our intention
to sell the businesses.
In 1999, we completed the sales of both Kuhlman Electric and
Coleman Cable. Kuhlman Electric was sold to Carlyle Group,
L.L.C. for $120.1 million, including debt securities with a
face value of $15.0 million. The $137.3 million sale of
Coleman Cable to a group of equity investors included debt
securities with a face value of $15.3 million. Proceeds from
the sales were used to repay indebtedness. In 2001, the sale
agreement with Coleman Cable was finalized resulting in the
exchange of the debt securities, along with a purchase price
adjustment receivable, for $3.0 million in cash and a $2.0
million note due in 2002.
Acquisition of Eaton Corp.'s Fluid Power Division
Effective October 1, 1999, we acquired Eaton Corp.'s Fluid
Power Division, one of the world's leading manufacturers of
powertrain cooling solutions for the global automotive
industry, for $321.7 million. To partially finance the
acquisition, we issued $150 million of 8.0% senior unsecured
notes maturing September 2019. Cash from operations funded
the remainder of the acquisition price. The Fluid Power
Division designed and produced a variety of fans and viscous
fan drive cooling systems primarily for passenger vehicles
such as light trucks, sport-utility vehicles and vans. Along
with the commercial cooling systems business acquired from
Kuhlman in March 1999, this acquisition positions us to
globalize modular cooling systems integration opportunities
across a full range of vehicle types.
Environmental/Other Commitments and Contingencies
Environmental 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 environ- mental 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 presently be liable
for the cost of clean-up and other remedial activities at 43
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 cost
apportioned to them; currently available information from
PRPs and/or federal or state environmental agencies
concerning the scope of contamination and estimated
remediation costs; remediation alternatives; estimated legal
fees; and other factors, the Company has established a
reserve for indicated environmental liabilities with a
balance at December 31, 2001 of approximately $25.5 million.
The Company expects this amount to be expended over the next
three to five years.
BorgWarner believes that none of these matters, individually
or in the aggregate, will have a material adverse effect on
its financial condition or future operating results,
generally either because estimates of the maximum potential
liability at a site are not large or because liability will
be shared with other PRPs, although no assurance can be
given with respect to the ultimate outcome of any such
matter.
In connection with the sale of Kuhlman Electric Corporation,
the Company agreed to indemnify the buyer and Kuhlman
Electric for certain environmental liabilities relating to
the past operations of Kuhlman Electric. During 2000,
Kuhlman Electric notified the Company that it discovered
potential environmental contamination at its Crystals
Springs, Mississippi plant while undertaking an expansion of
the plant.
The Company has been working with the Mississippi Department
of Environmental Quality and Kuhlman Electric to investigate
the extent of the contamination. The investigation has
revealed the presence of PCBs in portions of the soil at the
plant and neighboring areas. In mid-2001, Kuhlman Electric
and others, including the Company, were sued by twenty-six
plaintiffs in several lawsuits, which claim personal and
property damage. The Company has moved to be dismissed from
these lawsuits.
The Company has filed a lawsuit against Kuhlman Electric
seeking a declaration of the scope of the Company's
contractual indemnity. The Company believes that the reserve
for environmental liabilities is sufficient to cover any
potential liability associated with this matter.
Other Commitments and Contingencies In support of a new
product that will be launched in 2002, a third party has
purchased $22.7 million of fixed assets. Upon launch of the
new product, the Company intends to lease these assets under
an operating lease.
New Accounting Pronouncements
On January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as
amended. This statement standardizes the accounting for
derivative instruments by requiring that an entity recognize
all derivatives as assets or liabilities in the statement of
financial position and measure them at fair value. When
certain criteria are met, it also provides for matching the
timing of gain or loss recognition on the derivative hedging
instrument with the recognition of (a) the changes in the
fair value or cash flows of the hedged asset or liability
attributable to the hedged risk or (b) the earnings effect
of the hedged forecasted transaction. The Company has a
small number of derivative instruments. Application of SFAS
No. 133 had an immaterial impact on the Company's results of
operations and financial condition.
On April 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities." The adoption of this statement has not had and
is not expected to have a material effect on the Company's
results of operations, financial condition or cash flows.
Further disclosure may be found in the Accounts Receivable
section of Note One to the Consolidated Financial
Statements.
In July 2001, the Financial Accounting Standards Board
issued SFAS No. 141 "Business Combinations" and SFAS No. 142
"Goodwill and Other Intangible Assets." SFAS No. 141
requires that all business combinations completed after June
30, 2001 be accounted for under the purchase method only and
that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill.
There are also transition provisions that apply to business
combinations completed before July 1, 2001, that were
accounted for by the purchase method. SFAS No. 142,
effective January 1, 2002, specifies that goodwill and
certain intangible assets will no longer be amortized but
instead will be subject to periodic impairment testing.
The Company is currently assessing the impact that adoption
of SFAS No. 142 will have on its financial position and
results of operations. As of December 31, 2001, the Company
had goodwill, net of accumulated amortization, of
approximately $1,160.6 million, which will be subject to the
transitional assessment provisions of SFAS No. 142.
Amortization expense related to goodwill was $42.0 million
and $43.3 million for 2001 and 2000, respectively.
Qualitative and Quantitative Disclosure About Market Risk
BorgWarner's primary market risks include fluctuations in
interest rates and foreign currency exchange rates. We are
also affected by changes in the prices of commodities used
in our manufacturing operations. Some of our commodity
purchase price risk is covered by supply agreements with
customers and suppliers. Other commodity purchase price risk
is not considered to be material. We do not enter into any
derivative instruments for purposes other than hedging a
specific risk.
We have established policies and procedures to manage
sensitivity to interest rate and foreign currency exchange
rate market risk, which include monitoring the level of
exposure to each market risk.
Interest rate risk is the risk that we will incur economic
losses due to adverse changes in interest rates. Our
earnings exposure related to adverse movements in interest
rates is primarily derived from outstanding floating rate
debt instruments that are indexed to floating money market
rates. A ten percent increase or decrease in the average
cost of our variable rate debt would result in a change in
pre-tax interest expense of approximately $0.8 million.
We also measure interest rate risk by estimating the net
amount by which the fair value of all of our interest rate
sensitive assets and liabilities would be impacted by
selected hypothetical changes in market interest rates. Fair
value is estimated using a discount cash flow analysis.
Assuming a hypothetical instantaneous 10% change in interest
rates as of December 31, 2001, the net fair value of these
instruments would increase by approximately $35.3 million if
interest rates decreased and would decrease by approximately
$31.6 million if interest rates increased. Our interest rate
sensitivity analysis assumes a parallel shift in interest
rate yield curves. The model, therefore, does not reflect
the potential impact of changes in the relationship between
short-term and long-term interest rates. Interest rate
sensitivity at December 31, 2000, measured in a similar
manner, was slightly greater than at December 31, 2001.
Foreign currency risk is the risk that we will incur
economic losses due to adverse changes in foreign currency
exchange rates. We mitigate our foreign currency exchange
rate risk principally by establishing local production
facilities in markets we serve, by invoicing customers in
the same currency as the source of the products and by
funding some of our investments in foreign markets through
local currency loans. Such non-U.S. dollar debt was $116.3
million as of December 31, 2001 and $122.4 million as of
December 31, 2000. We also monitor our foreign currency
exposure in each country and implement strategies to respond
to changing economic and political environments. In
addition, the Company periodically enters into forward
contracts in order to reduce exposure to exchange rate risk
related to transactions denominated in currencies other than
the functional currency. In the aggregate, our exposure
related to such transactions is not material to our
financial position, results of operations or cash flows in
both 2001 and 2000.
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 expressions 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
BorgWarner 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, 2001.
Management's Responsibility
for Consolidated Financial Statements
The information in this report is the responsibility of
management. BorgWarner Inc. and Consolidated Subsidiaries
(the "Company") has in place reporting guidelines and
policies designed to ensure that the statements and other
information contained in this report present a fair and
accurate financial picture of the Company. In fulfilling
this management responsibility, we make informed judgments
and estimates conforming with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been
audited by Deloitte & Touche LLP, independent auditors.
Management has made available all the Company's financial
records and related information deemed necessary by Deloitte
& Touche LLP. Furthermore, management believes that all
representations made by it to Deloitte & Touche LLP during
its audit were valid and appropriate.
Management is responsible for maintaining a comprehensive
system of internal control through its operations that
provides reasonable assurance that assets are protected from
improper use, that material errors are prevented or detected
within a timely period and that records are sufficient to
produce reliable financial reports. The system of internal
control is supported by written policies and procedures that
are updated by management as necessary. The system is
reviewed and evaluated regularly by the Company's internal
auditors as well as by the independent auditors in
connection with their annual audit of the financial
statements. The independent auditors conduct their
evaluation in accordance with auditing standards generally
accepted in the United States of America and perform such
tests of transactions and balances as they deem necessary.
Management considers the recommendations of its internal
auditors and independent auditors concerning the Company's
system of internal control and takes the necessary actions
that are cost-effective in the circumstances. Management
believes that, as of December 31, 2001, the Company's system
of internal control was adequate to accomplish the
objectives set forth in the first sentence of this
paragraph.
The Company's Finance and Audit Committee, composed entirely
of directors of the Company who are not employees, meets
periodically with the Company's management and independent
auditors to review financial results and procedures,
internal financial controls and internal and external audit
plans and recommendations. In carrying out these
responsibilities, the Finance and Audit Committee and the
independent auditors have unrestricted access to each other
with or without the presence of management representatives.
John F. Fiedler George E. Strickler
Chairman and Executive Vice President
Chief Executive Officer and Chief Financial Officer
February 7, 2002
Independent Auditors' Report
To The Board of Directors and Stockholders of BorgWarner
Inc.:
We have audited the consolidated balance sheets of
BorgWarner Inc. and Consolidated Subsidiaries (the
"Company") as of December 31, 2001 and 2000, and the related
consolidated statements of operations, cash flows, and
stock- holders' equity for each of the three years in the
period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and per- form
the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial
position of BorgWarner Inc. and Consolidated Subsidiaries at
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United
States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 7, 2002
Consolidated Statements of Operations
millions of dollars,
except per share amounts))
For the Year Ended
December 31, 2001 2000 1999
- ---------------- ------- ------ ------------
Net sales 2,351.6 $2,645.9 $2,458.6
Cost of sales 1,802.0 2,003.1 1,888.5
Depreciation 104.2 102.2 91.3
Selling, general and administrative expenses
234.3 244.1 203.3
Minority interest 3.8 2.7 1.3
Goodwill amortization42.0 43.3 32.1
Restructuring and other non-recurring charges 28.4 62.9 -
Equity in affiliate earnings, net of tax and other income (17.0) (23.8) (14.1)
------ ------ --------
Earnings before interest expense, finance charges and
income taxes 153.9 211.4 256.2
Interest expense and finance charges
47.8 62.6 49.2
------ -------- ------
Earnings before income
taxes 106.1 148.8 207.0
Provision for income
taxes 39.7 54.8 74.7
------- ------ -------
Net earnings $66.4 $94.0 $132.3
======= ======= ========
Net earnings per share
Basic $ 2.52 $ 3.56 $ 5.10
Diluted $ 2.51 $ 3.54 $ 5.07
Average shares outstanding (thousands)
Basic 26,315 26,391 25,948
Diluted 26,463 26,487 26,078
See accompanying Notes to Consolidated Financial Statements.
(millions of dollars)
December 31, 2001 2000
------- --------
Assets
Cash and cash equivalents $32.9 $21.4
Receivables 203.7 168.9
Inventories 143.8 161.6
Deferred income taxes 23.6 1.7
Prepayments and other current
assets 37.3 57.0
------- ------
Total current assets 441.3 410.6
Land 29.6 30.0
Buildings 246.1 239.1
Machinery and equipment 940.9 906.9
Capital leases 2.7 5.1
Construction in progress 128.4 98.2
------- ------
1,347.7 1,279.3
Less accumulated depreciation 509.5 472.1
------- -------
Net property, plant
and equipment 838.2 807.2
Investments and advances 137.4 142.7
Goodwill 1,160.6 1,203.1
Deferred income taxes 5.7 23.1
Other noncurrent assets 187.7 152.9
Total other assets 1,491.4 1,521.8
Total assets $2,770.9 $2,739.6
========= =========
Liabilities and Stockholders' Equity
Notes payable $35.6 $54.4
Accounts payable and accrued
expenses 410.6 408.2
Income taxes payable 8.8 21.8
-------- ---------
Total current liabilities 455.0 484.4
Long-term debt 701.4 740.4
Long-term liabilities:
Retirement-related liabilities393.0 345.2
Other 105.9 72.2
-------- -------
Total long-term liabilities 498.9 417.4
Minority interest in consolidated subsidiaries 11.4 10.3
Commitments and contingencies
Capital stock:
Preferred stock, $.01 par value; authorized shares:
5,000,000; none
issued - -
Common stock, $.01 par value; authorized shares: 50,000,000;
issued
shares: 2001, 27,039,968 and 2000, 27,040,492; outstanding
shares: 2001, 26,365,169; 2000, 26,225,283 0.30.3
Non-voting common stock, $.01 par value; authorized shares:
25,000,000; none issued and outstanding - -
Capital in excess of par value715.7 715.7
Retained earnings 470.9 422.9
Management shareholder notes (2.0) (2.5)
Accumulated other compre-
hensive income (53.1) (16.0)
Common stock held in treasury,
at cost: 2001, 674,799 shares; 2000,
815,209 shares (27.6) (33.3)
-------- -------
Total stockholders' equity 1,104.2 1,087.1
-------- -------
Total liabilities and
stockholders' equity $2,770.9 $ 2,739.6
========= =========
See accompanying Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
(millions of dollars)
For the Year Ended December 31,2001 2000 1999
Operating
Net earnings $66.4 $94.0 $132.3
Adjustments to reconcile net earnings to net cash flows
from operations:
Non-cash charges (credits) to operations:
Depreciation 104.2 102.2 91.3
Goodwill amortization 42.0 43.3 32.1
Non-cash restructuring and other
non-recurring charges 5.0 47.3 -.
Deferred income tax provision 3.1 (8.5) (4.0)
Other, principally equity in
affiliate earnings, net of tax (42.8) (21.3) (14.1)
Net earnings adjusted for
non-cash charges 177.9 257.0 237.6
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
(Increase) decrease in
receivables (48.6) 18.6 41.1
(Increase) decrease in
inventories 10.1 (14.7) (19.0)
Decrease in prepayments and deferred income taxes 0.1 11.6 0.2
Increase in accounts payable and accrued expenses 23.0 7.0 57.9
Increase (decrease) in income taxes payable (12.7) (25.9) 18.9
Net change in other long-term assets and liabilities 46.0 37.9 7.8
------- ------- -------
Net cash provided by operating
activities 195.8 291.5 344.5
Investing
Capital expenditures (140.9) (167.1) (143.4)
Net proceeds from asset
disposals 6.5 16.2 10.3
Proceeds from sale of
businesses 14.4 131.9 177.9
Payments for taxes on
businesses sold -. (43.0) -.
Payments for businesses
acquired, net of cash acquired (3.3) -. (855.5)
Net cash used in investing
activities (123.3) (62.0) (810.7)
Financing
Net decrease in notes payable (16.5) (74.5) (10.3)
Additions to long-term debt 34.0 86.9 621.8
Reductions in long-term debt (64.3) (192.3) (150.0)
Payments for purchase of
treasury stock (0.7) (22.1) -.
Proceeds from stock options
exercised 2.8 1.1 0.7
Dividends paid (15.8) (15.9) (15.5)
Net cash provided by
(used in) financing
activities (60.5) (216.8) 446.7
Effect of exchange rate changes on cash and cash equivalents (0.5) (13.0) (2.8)
Net increase (decrease) in cash and cash equivalents 11.5 (0.3) (22.3)
Cash and cash equivalents at beginning of year 21.4 21.7 44.0
------- ------ -------
Cash and cash equivalents
at end of year $32.9 $21.4 $21.7
======== ======= =======
Supplemental Cash Flow Information
Net cash paid during the year for:
Interest $50.2 $65.4 $51.1
Income taxes 28.1 107.7 59.1
Non-cash financing transactions:
Issuance of common stock
for acquisition $ - $ - $ 149.8
Issuance of common stock for management notes -. 0.5 -.
Issuance of common stock for Executive Stock
Performance Plan 1.0 0.8 1.1
See accompanying Notes to Consolidated Financial Statements.
BorgWarner Inc. and Consolidated Subsidiaries
Consolidated Statements of Stockholders' Equity
(millions of dollars)
Comprehensive
Number of Shares Stockholders' EquityIncome
Accumulated
Issued Common Issued Capital in Management other
common stock in common excess of Treasury shareholderRetained comprehensive
stock treasury stock par value stock notes earnings income
-------- --------- -------- ------- --------- ------- -------- ----------
Balance, January 1, 1999
23,753,365 (366,192)$0.2 $566.0 $(17.6) $(2.0) $230.2 $0.5
Dividends declared - - -. -. -. -. (15.5) -. -.
Shares issued for Kuhlman
Acquisition
3,287,127 - 0.1 149.7 -. -. -. -. -.
Shares issued under
stock option plans
- 28,000 -. -. 1.3 -. (0.6)-. -.
Shares issued under
executive stock
plan - 21,892 -. -. 1.1 -. -. -. -.
Net income
- - -. -. -. -. 132.3-. $132.3
Adjustment for minimum
pension liability
- - -. -. -. -. -. (0.1)(0.1)
Currency translation
adjustment- - -. -. -. -. -. 11.9 11.9
----------------------------------------------------------------
Balance, December 31, 1999
27,040,492 (316,300) $0.3 $715.7 $(15.2) $(2.0) $346.4 $12.3 $144.1
========
Purchase of treasury stock
- (589,700) -. -. (22.1) -. -. -. -.
Dividends declared - - -. -. -. -. (15.9) -. -.
Shares issued for
management
shareholder note
- 15,223 -. -. 0.7 (0.5) (0.2) -. -.
Shares issued under
stock option plans - 53,750 -. -. 2.2 -. (1.1) -. -.
Shares issued under
executive stock plan- 21,818 -. -. 1.1 -. (0.3) -. -.
Net income - - -. -. -. -. 94.0 -. $94.0
Adjustment for minimum
pension liability - - -. -. -. -. -. (0.1) (0.1)
Currency translation
adjustment - - -. -. -. -. -. (28.2) (28.2)
----------------------------------------------------
Balance, December 31, 2000
27,040,492 (815,209) $0.3 $715.7 $(33.3) $(2.5) $422.9 $(16.0) $65.7
=====
Purchase of treasury
stock - (15,000) -. -. (0.7) -. -. -. -.
Dividends declared - - -. -. -. -. (15.8) -. -.
Management
shareholder notes - - -. -. -. 0.5 -. -. -.
Shares issued under
stock option plans - 129,550 -. -. 5.3 -. (2.5)-. -.
Shares issued under
executive stock plan
- 25,860 -. -. 1.1 -. (0.1) -. -.
Kuhlman shares retired
(524) - -. -. -. -. -. -. -.
Net income - - -. -. -. -. 66.4 -. 66.4
Adjustment for minimum
pension liability
- - -. -. -. -. -. (18.7) (18.7)
Currency translation
adjustment - - -. -. -. -. -. (18.4) (18.4)
Balance, December 31, 2001
27,039,968 (674,799) $0.3 $715.7 $(27.6)$(2.0)$470.9 $(53.1) $ 29.3
======
See accompanying Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
Introduction
BorgWarner Inc. and Consolidated Subsidiaries (the
"Company") is a leading global supplier of highly engineered
systems and components primarily for automotive powertrain
applications. These products are manufactured and sold
worldwide, primarily to original equipment manufacturers of
passenger cars, sport utility vehicles, trucks, commercial
transportation products and industrial equipment. Its
products fall into five operating segments: Air/Fluid
Systems, Cooling Systems, Morse TEC, TorqTransfer Systems
and Transmission Systems.
1Summary of Significant Accounting Policies
The following paragraphs briefly describe significant
accounting policies.
Use of estimates The preparation of financial statements in
conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Principles of consolidation The consolidated financial
statements include all significant majority-owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain
prior amounts have been reclassified to conform to the
current year presentation.
Cash and cash equivalents Cash and cash equivalents are
valued at cost, which approximates market. It is the
Company's policy to classify investments with original
maturities of three months or less as cash and cash
equivalents.
Accounts receivable The Company securitizes and sells
certain receivables through third-party financial
institutions without recourse. The amount sold can vary each
month based on the amount of underlying receivables, up to a
maximum of $150 million. During the year ended December 31,
2001, total cash proceeds from sales of accounts receivable
were $1,706.8 million, and the amount of receivables sold
each month ranged from $120 to $150 million. While there are
no gains or losses booked as a result of these transactions,
the Company is charged fees which are recorded at the time
receivables are sold. At December 31, 2001, the Company had
sold $120 million of receivables under a $153 million
Receivables Transfer Agreement for face value without
recourse. At December 31, 2000, the amount sold was $150
million.
On April 1,2001, the Company adopted Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities." The adoption of this statement has not had a
material effect on the Company's results of operations,
financial condition, or cash flows.
Inventories Inventories are valued at the lower of cost or
market. Cost of U.S. inventories is determined by the
last-in, first-out (LIFO) method, while the foreign operations
use the first-in, first-out (FIFO) method. Inventories held
by U.S. operations was $81.1 million in 2001 and $92.4
million in 2000. Such inventories, if valued at current cost
instead of LIFO, would have been greater by $3.9 million and
$5.1 million, respectively.
Property, plant and equipment and depreciation Property,
plant and equipment are valued at cost less accumulated
depreciation. Expenditures for maintenance, repairs and
renewals of relatively minor items are generally charged to
expense as incurred. Renewals of significant items are
capitalized. Depreciation is computed generally on a
straight-line basis over the estimated useful lives of
related assets ranging from 3 to 30 years. For income tax
purposes, accelerated methods of depreciation are generally
used.
Goodwill Goodwill is being amortized on a straight-line
basis over periods not exceeding 40 years. The Company
periodically evaluates the carrying value of goodwill to
determine if adjustment to the amortization period or to the
unamortized balance is warranted.
Revenue recognition The Company recognizes revenue upon
shipment of product.Although the Company may enter into
long-term supply agreements with its major customers, each
shipment of goods is treated as a separate sale and the
price is not fixed over the life of the agreements.
Financial instruments Financial instruments consist
primarily of investments in cash and cash equivalents,
receivables and debt securities and obligations under
accounts payable, accrued expenses and debt instruments. The
Company believes that the fair value of the financial
instruments approximates the carrying value, except as noted
in Note Six.
The Company received corporate bonds with a face value of
$30.3 million as partial consideration for the sales of
Kuhlman Electric and Coleman Cable in 1999. These bonds were
recorded at their fair market value of $12.9 million using
valuation techniques that considered cash flows discounted
at current market rates and management's best estimates of
credit quality. In 2001, the sale agreement with Coleman
Cable was finalized, resulting in the exchange of the
corporate bonds along with a purchase price receivable, for
$3 million in cash and a $2 million note due in 2002. The
fair value of these instruments was estimated to be $10.9
million at December 31, 2001 and $12.9 million at December
31, 2000. They have been classified as investments
available-for-sale in the other current assets section of
the December 31, 2001 and 2000 Consolidated Balance Sheets.
The contractual maturity of the Kuhlman Electric related
bond is beyond five years.
Foreign currency The financial statements of foreign
subsidiaries are translated to U.S. dollars using the
period-end exchange rate for assets and liabilities and an
average exchange rate for each period for revenues and
expenses. The local currency is the functional currency for
substantially all the Company's foreign subsidiaries.
Translation adjustments for foreign subsidiaries are
recorded as a component of accumulated other comprehensive
income in stockholders' equity.
Derivative financial instruments The Company recognizes that
certain normal business transactions generate risk. Examples
of risks include exposure to exchange rate risk related to
transactions denominated in currencies other than the
functional currency, changes in cost of major raw materials,
and changes in interest rates. It is the objective and
responsibility of the Company to assess the impact of these
transaction risks, and offer protection from selected risks
through various methods including financial derivatives. All
derivative instruments held by the Company are designated as
hedges, have high correlation with the under- lying exposure
and are highly effective in offsetting underlying price
movements. Accordingly, gains and losses from changes in
derivative fair values are deferred until the underlying
transaction occurs. The Company does not enter into any
derivative instruments for purposes other than hedging
specific risk.
On January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as
amended. This statement standardizes the accounting for
derivative instruments by requiring that an entity recognize
all derivatives as assets or liabilities in the statement of
financial position and measure them at fair value. When
certain criteria are met, it also provides for matching the
timing of gain or loss recognition on the derivative hedging
instrument with the recognition of (a) the changes in the
fair value or cash flows of the hedged asset or liability
attributable to the hedged risk or (b) the earnings effect
of the hedged forecasted transaction. Application of SFAS
133 had an immaterial impact on the Company's results of
operations and financial condition.
New accounting pronouncements In July 2001, the Financial
Accounting Standards Board issued SFAS No. 141 "Business
Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS 141 requires that all business
combinations completed after June 30, 2001 be accounted for
under the purchase method only and that certain acquired
intangible assets in a business combination be recognized as
assets apart from goodwill. There are also transition
provisions that apply to business combinations completed
before July 1, 2001, that were accounted for by the purchase
method. SFAS No. 142, effective January 1, 2002, specifies
that goodwill and certain intangible assets will no longer
be amortized but instead will be subject to periodic
impairment testing.
The Company is currently assessing the impact that adoption
of SFAS No. 142 will have on its financial position and
results of operations. As of December 31, 2001, the Company
had goodwill, net of accumulated amortization, of
approximately $1,160.6 million, which will be subject to the
transitional assessment provisions of SFAS No. 142.
Amortization expense related to goodwill was $42.0 million
and $43.3 million in 2001 and 2000, respectively.
2Research and Development Costs
The Company spent approximately $104.5 million, $112.0
million and $91.6 million in 2001, 2000 and 1999,
respectively, on research and development (R&D) activities.
Not included in these amounts were customer-sponsored R&D
activities of approximately $20.0 million, $12.5 million and
$9.4 million in 2001, 2000 and 1999, respectively.
3Equity in Affiliate Earnings, Net of Tax and Other Income
Items included in equity in affiliate earnings, net of tax
and other income consist of:
(millions of dollars)
Year Ended December 31, 2001 2000 1999
------- ------ ---------
Equity in affiliate earnings,
net of tax $ 14.9 $ 15.7 $ 11.7
Gain on sale of business - 5.4 -
Interest income 1.4 0.8 1.1
Gain (loss) on asset
disposals, net (0.2) (0.4) 0.3
Other 0.9 2.3 1.0
Total equity in affiliate earnings, net of tax
and other income $17.0 $23.8 $14.1
====== ======== ======
4Income Taxes
Income before taxes and provision for taxes consist of:
(millions of dollars)
2001 2000 1999
U.S. Non-U.S. TotalU.S. Non-U.S. TotalU.S. Non-U.S. Total
Income before taxes
$19.5 $86.6 $106.1 $72.1 $76.7 $148.8 $121.6 $85.4 $207.0
Income taxes:
Current :
Federal/foreign
$9.8 $24.7 $34.5 $26.8 $24.9 $51.7 $50.0 $21.2 $71.2
State
2.1 - 2.1 11.6 - 11.6 7.5 - 7.5
11.9 24.7 36.6 38.4 24.9 63.3 57.5 21.2 78.7
Deferred
2.0 1.1 3.1 (13.7) 5.2 (8.5)(9.5)5.5 (4.0)
Total income taxes
$13.9 $25.8 $39.7 $24.7 $30.1 $54.8 $48.0 $26.7 $74.7
The analysis of the variance of income taxes as reported
from income taxes computed at the U.S. statutory rate for
consolidated operations is as follows:
(millions of dollars)
2001 2000 1999
----- ----- ------
Income taxes at U.S.
statutory rate of 35% $37.1 $52.0 $72.5
Increases (decreases) resulting from:
Income from non-U.S.
sources (0.1) (0.3) (5.4)
State taxes, net of
federal benefit 1.4 7.5 4.9
Business tax credits, net(7.2) (10.3) (8.4)
Affiliate earnings (5.2) (5.5) (4.1)
Nontemporary differences
and other 13.7 11.4 15.2
----- ------- --------
Income taxes as reported $39.7 $54.8 $74.7
====== ======= =======
Following are the gross components of deferred tax assets
and liabilities as of December 31, 2001 and 2000:
(millions of dollars)
2001 2000
Deferred tax assets - current:
Capital loss carryover $ 22.2 $ -
Accrued costs related to
divested operations 1.4 1.7
Net deferred tax asset - current$ 23.6 $ 1.7
Deferred tax assets - noncurrent:
Postretirement benefits $ 116.2 $ 126.7
Pension 18.6 2.9
Other long-term liabilities and
reserves 29.6 29.5
Foreign tax credits - 2.5
Valuation allowance - (2.5)
Other 20.6 44.8
-------- ---------
185.0 203.9
Deferred tax liabilities - noncurrent:
Fixed assets 98.0 83.7
Pension 32.3 25.2
Goodwill 15.7 10.6
Other 33.3 61.3
------ -------
179.3 180.8
------- -------
Net deferred tax asset - noncurrent$5.7 $23.1
======= =========
No deferred income taxes have been provided on undistributed
earnings of foreign subsidiaries totalling $47.8 million, as
the amounts are essentially permanent in nature. Any such
potential liability would be substantially offset by foreign
tax credits with respect to such undistributed foreign
earnings. The capital loss carryover relates to the sales of
businesses acquired in the Kuhlman acquisition.
5Balance Sheet Information
Detailed balance sheet data are as follows:
(millions of dollars)
December 31, 2001 2000
----- ------
Receivables:
Customers $170.5 $136.6
Other 37.1 37.5
207.6 174.1
Less allowance for losses 3.9 5.2
------ -----------
Net receivables $203.7 $168.9
======= ==========
Inventories:
Raw material $69.7 $73.1
Work in progress 41.5 42.0
Finished goods 32.6 46.5
Total inventories $143.8 $ 161.6
======= ===========
Prepayments and other current assets:
Investment in businesses held for sale
$12.2 $31.7
Other 25.1 25.3
Total prepayments and other current assets
$37.3 $57.0
======= ========
Investments and advances:
NSK-Warner $128.8 $140.9
Other 8.6 1.8
------- --------
Total investments and
advances $137.4 $142.7
========= =========
Other noncurrent assets:
Deferred pension assets $83.4 $66.5
========= =========
Deferred tooling 84.1 65.1
Other 20.2 21.3
-------- ----------
Total other noncurrent
assets $187.7 $52.9
======= ===========
Accounts payable and accrued expenses:
Trade payables $236.7 $230.1
Payroll and related 42.1 53.9
Insurance 20.7 22.7
Warranties and claims 17.1 16.1
Restructuring and other non-recurring charges 11.7 11.2
Other 82.3 74.2
Total accounts payable
and accrued expenses $410.6 $408.2
======= ========
Other long-term liabilities:
Environmental reserves $25.5 $ 20.7
Other 80.4 51.5
------- -------
Total other long-term
liabilities $105.9 $72.2
======== ========
Dividends and other payments received from affiliates
accounted for under the equity method totaled $8.9 million
in 2001, $25.5 million in 2000 and $5.5 million in 1999.
Accumulated amortization of goodwill amounted to $228.4
million in 2001 and $187.6 million in 2000.
The Company has a 50% interest in NSK-Warner, a joint
venture based in Japan that manufactures automatic
transmission components. The Company's share of the earnings
or losses reported by NSK-Warner is accounted for using the
equity method of accounting. NSK-Warner has a fiscal year-end
of March 31. The Company's equity in the earnings of
NSK-Warner consists of the 12 months ended November 30 so as
to reflect earnings on as current a basis as is reasonably
feasible.
Following are summarized financial data for NSK-Warner,
translated using the ending or periodic rates as of and for
the fiscal years ended March 31, 2001, 2000 and 1999:
(millions of dollars)
2001 2000 1999
------- ------- -------
Balance sheets:
Current assets $ 147.6 $196.0 $143.8
Noncurrent assets 151.7 157.8 137.4
Current liabilities 94.3 96.2 69.9
Noncurrent liabilities 5.5 8.5 6.9
Statements of operations:
Net sales $ 333.6 $303.8 $235.9
Gross profit 72.8 64.7 52.6
Net income 29.6 27.7 16.9
The debt as of March 31, 2001, was $8.3 million and the
equity was $196.7 million.
6 Notes Payable and Long-Term Debt
Following is a summary of notes payable and long-term debt.
The weighted average interest rate on all borrowings for
2001 and 2000 was 5.8% and 6.5%, respectively.
(millions of dollars)
2001 2000
December 31, Current Long-Term Current Long-Term
Bank borrowings $30.6 $ 69.4 $ 48.7 $ 57.7
Term loans due through 2011 (at an average rate of 3.3% in
2001 and 4.2% in 2000; and 3.0% at December 31, 2001)
5.0 31.2 4.7 23.1
7% Senior Notes due 2006, net of unamortized discount
- 141.8 - 142.8
6.5% Senior Notes due 2009, net of unamortized discount
- 164.7 - 188.4
8% Senior Notes due 2019, net of unamortized discount
- 134.2 - 139.9
7.125% Senior Notes due 2029, net of unamortized discount
- 159.9 - 187.3
Capital lease liabilities (at an average rate of 7.9%
in 2001 and 7.6% in 2000) - 0.2 1.0 1.2
------------ ---------- ---------- --------
Total notes payable and long-term debt
$35.6 $701.4 $54.4 $740.4
======== ========= ========== =========
Annual principal payments required as of
December 31, 2001 are as follows (in millions of
dollars):
2002 $ 35.6
2003 4.9
2004 4.6
2005 74.0
2006 146.3
after 2006 475.3
Less: Unamortized
discounts (3.7)
-------
Total $ 737.0
========
The Company has a revolving credit facility which provides
for borrowings up to $350 million through July, 2005. At
December 31, 2001, $20.0 million of borrowings under the
facility were outstanding in addition to $6.5 million of
obligations under standby letters of credit. At December 31,
2000, the facility was unused. 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 indebtedness.
In July 2001, the Company entered into an interest rate swap
agreement with a financial institution to swap interest on
$100 million of 7% fixed rate Senior Notes for variable
interest at LIBOR plus 0.98% (approximately 3.0% at December
31, 2001). The agreement terminates when the underlying
Notes mature on November 1, 2006. This interest rate swap
has been recorded as a fair value hedge. There was no
ineffectiveness related to the derivative in 2001. As of
December 31, 2001, the interest rate swap has a notional
amount of $100 million and a fair value of $2.5 million.
As of December 31, 2001 and 2000, the estimated fair values
of the Company's senior unsecured notes totaled $579.6
million and $516.6 million, respectively. The estimated fair
values were $21.0 million lower in 2001, and $141.8 million
lower in 2000, than their respective carrying values. The
fair value of all other debt instruments is estimated to
approximate their recorded value, as their applicable
interest rates approximate current market rates for
borrowings with similar terms and maturities. Fair market
values are developed by the use of estimates obtained from
brokers and other appropriate valuation techniques based on
information available as of year-end. The fair value
estimates do not necessarily reflect the values the Company
could realize in the current markets.
7Restructuring and Other Non-Recurring Charges
Other non-recurring charges of $28.4 million were incurred
in the fourth quarter of 2001. These charges primarily
include adjustments to the carrying value of certain assets
and liabilities related to businesses acquired and disposed
of over the past three years. Of the $28.4 million of pretax
charges, $5.0 million represents non-cash charges.
Approximately $3.3 million was spent in 2001, $8.4 million
was transferred to environmental reserves, and the remaining
$11.7 million is expected to be spent over the next two
years. The Company expects to fund the total cash outlay of
these actions with cash flow from operations.
Restructuring and other non-recurring charges totaling $62.9
million were incurred in the second half of 2000 in response
to deteriorating market conditions. The charges included the
rationalization and integration of certain businesses and
actions taken to bring costs in line with vehicle production
slow- downs in major customer product lines. Of the $62.9
million pretax charges in 2000, $47.3 million represented
non-cash charges. Approximately $4.4 million was spent in
2000 and $11.2 million was spent in 2001.
Components of the restructuring and other non-recurring
charges are detailed in the following table and discussed
further below.
Other Exit
Severance Loss on Costs and
and Other Asset Sale of Non-Recurring
Benefits Write-downs Business Charges Total
--------- ------------- -------- --------- ----------
Provisions $8.9 $11.6 $35.2 $7.2 $62.9
Incurred (4.3) - - (0.1 (4.4)
Non-cash write-
offs -. (11.6) (35.2) (0.5) (47.3)
------ ------- ------- -------- ----------
Balance, December 31, 2000
4.6 -. -. 6.6 11.2
Provisions -. 5.0 -. 23.4 28.4
Incurred (4.6 -. -. (18.3) (22.9)
Non-cash write-
offs -. (5.0) -. -. (5.0)
Balance, December 31, 2001
$-. $-. $-. $11.7 $11.7
Severance and other benefit costs relate to the reduction of
approximately 220 employees from the workforce. The
reductions affect each of the Company's operating segments,
apart from TorqTransfer Systems, across each of the
Company's geographical areas, and across each major
functional area, including production and selling and
administrative positions. As of December 31, 2001,
approximately $8.9 million had been paid for severance and
other benefits for the terminated employees.
Asset write-downs primarily consist of the write-off of
impaired assets that will no longer be used in production as
a result of the industry downturn and the consolidation of
certain operations. Such assets have been taken or are in
the process of being taken out of productive use and are
being disposed.
Loss on anticipated sale of business is related to the Fuel
Systems business, which was sold in April 2001. Fuel Systems
produced metal tanks for the heavy truck market in North
America and did not fit the Company's strategic focus on
powertrain technology. In April 2000, the Company announced
its intention to sell this non-core business, which was
acquired as part of the vehicle products business of Kuhlman
Corporation in March 1999. With the deterioration of the
North American heavy truck market in the second half of
2000, the value of this business had significantly
decreased, creating the $35.2 million pre-tax loss. In April
2001, the Company completed the sale of its Fuel Systems
business to an investor group led by TMB Industries, a
private equity group. Terms of the trans- action did not
have a significant impact on the Company's results of
operations, financial condition or cash flows.
Other exit costs and non-recurring charges are primarily
non-employee related exit costs for certain non-production
facilities the Company has previously sold or no longer
needs and non-recurring product quality related charges. The
2001 non- recurring charges include $8.4 million of
environmental remediation costs related to sold businesses
and $12 million of product quality costs for issues with
products that were sold by acquired businesses prior to
acquisition, all of which have been fixed in the currently
produced products.
8 Retirement Benefit Plans
The Company has a number of defined benefit pension plans
and other postretirement benefit plans covering eligible
salaried and hourly employees. The other postretirement
benefit plans, which provide medical and life insurance
benefits, are unfunded plans. The following provides a
reconciliation of the plans' benefit obligations, plan
assets, funded status and recognition in the Consolidated
Balance Sheets.
(millions of dollars)
Pension Postretirement
Benefits Benefits
December 31, 2001 2000 2001 2000
Change in benefit obligation:
Benefit obligation at beginning of year
$350.3 $349.7 $341.6 $300.1
Service cost 7.1 6.8 4.4 3.8
Interest cost 25.0 23.4 25.0 23.4
Plan participants' con-
tributions 0.2 0.2 -. -.
Amendments 7.5 2.2 -. -.
Net actuarial loss 23.6 8.8 64.2 39.2
Currency translation
adjustment (1.4) (11.5 -. -.
Settlements (0.2) (2.1) (1.4) (0.5)
Special termination benefits-. 0.4 -. -.
Benefits paid (26.4) (27.6) (26.7) (24.4)
-------- -------- -------- ------
Benefit obligation at
end of year $385.7 $350.3 $407.1 $341.6
Change in plan assets:
Fair value of plan assets at
beginning of year $385.1 $447.0
Actual return on plan
assets (2.3) (16.1)
Employer and other
contributions 3.1 (7.5)
Plan participants'
contributions 0.2 0.2
Currency translation
adjustment (1.2) (8.0)
Settlements (0.3) (2.9)
Benefits paid (26.4) (27.6)
Fair value of plan assets
at end of year $358.2 $385.1
========= =======
Reconciliation of funded status:
Funded status $ (27.5) $34.8 $(407.1) $(341.6)
Unrecognized net actuarial
(gain) loss 50.8 (7.4) 98.2 35.5
Unrecognized transition
asset (0.3) (0.4) -. -.
Unrecognized prior
service cost 12.7 7.4 (0.6) (0.7)
-------- --------- ------- --------
Net amount recognized $35.7 $34.4 $(309.5)$(306.8)
====== ====== ======== ========
Amounts recognized in the
consolidated balance sheets:
Prepaid benefit cost $71.1 $66.5 $-. $-.
Accrued benefit liability(35.4) (32.1) (309.5) (306.8)
Additional minimum liability(42.2) (0.2) -. -.
Intangible asset 12.3 -. -. -.
Accumulated other
comprehensive income 29.9 0.2 -. -.
-------- ------- ------ ---------
Net amount recognized $35.7 $34.4 $(309.5) $(306.8)
========= ========== =========
The funded status of pension plans included
above with accumulated benefit obligations in
excess of plan assets at December 31 is as follows:
(millions of dollars)
2001 2000
Accumulated benefit obligation $295.2 $120.6
Plan assets 238.1 90.7
--------- --------
Deficiency $57.1 $29.9
======== =========
(millions of dollars)
Other Postretirement
For the Year Ended Pension Benefits Benefits
December 31, 2001 2000 1999 2001 2000 1999
Components of net periodic benefit cost:
Service cost $ 7.1 $ 6.8 $ 6.2 $ 4.4 $ 3.8 $ 4.8
Interest cost 25.0 23.4 22.6 25.0 23.4 21.1
Expected return on plan assets
(32.1) (36.8) (34.7) -. -. -.
Amortization of unrecognized
transition asset (0.1) (0.1) (0.2) -. -. -.
Amortization of unrecognized
prior service cost 2.2 1.5 1.2 (0.1) (0.1) -.
Amortization of unrecognized
(gain)/loss -. (2.7) -. -. -. -.
Settlement loss 0.1 1.8 0.8 -. -. -.
Curtailment gain -. -. (0.3) -. -. -.
Net periodic benefit cost
(income) $ 2.2 $(6.1) $(4.4) $29.3 $27.1 $25.9
======= ========== ======== ========= ========= =========
The Company's weighted-average assumptions
used as of December 31, in determining the
pension costs and pension liabilities shown above were as follows:
(percent)
Other Postretirement
Pension Benefits Benefits
2001 2000 1999 2001 2000 1999
U.S. plans:
Discount rate 7.25 7.5 8.0 7.25 7.5 8.0
Rate of salary
progression 4.5 4.5 4.5
Expected return on
plan assets 9.5 9.5 9.5
Foreign plans:
Discount rate 5.5-6.0 5.5-6.0 5.5-6.0
Rate of compensation
increase 2.5-4.0 2.5-4.0 2.5-4.5
Expected return on
plan assets 6.5 6.0 6.0
The weighted-average rate of increase in
the per capita cost of covered health care
benefits is projected to be 10% in 2002
grading down annually until the ultimate rate of
4.5% is reached in 2007. A one-percentage
point change in the assumed health care cost
trend would have the following effects:
(millions of dollars)
One Percentage Point
Increase Decrease
Effect on postretirement benefit obligation $46.5 $(39.9)
Effect on total service and interest cost components$4.7 $ (3.9)
9 Stock Incentive Plans
Stock option plans Under the Company's 1993 Stock Incentive
Plan, the Company may grant options to purchase shares of
the Company's common stock at the fair market value on the
date of grant. In 2000, the Company increased the number of
shares available for grant by 1,200,000 to 2,700,000 shares.
The options vest over periods up to three years and have a
term of ten years from date of grant. As of December 31,
2001, there are 1,493,220 outstanding options on the 1993
Stock Incentive Plan.
The Company accounts for stock options in accordance with
Accounting Principles Board Opinion No. 25. Accordingly, no
compensation cost has been recognized for fixed stock
options because the exercise price of the stock options
exceeded or equaled the market value of the Company's common
stock at the date of grant.
A summary of the plan's shares under
option at December 31, 2001, 2000 and 1999 follows:
2001 2000 1999
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(thousands) Price (thousands) Price (thousands) Price
Outstanding at beginning of year
1,248 $41.22 861 $ 43.37 654 $ 38.85
Granted 442 47.99 506 36.11 266 53.25
Exercised(129) 22.51 (54) 19.59 (28) 22.35
Forfeited (68) 45.18 (65) 47.77 (31) 52.03
Outstanding at end
of year 1,493 $44.67 1,248 $41.22 861 $ 43.37
Options exercisable
at year-end 423 $46.81 431 $38.12 328 $ 28.32
Options available for future grants 895
The following table summarizes information
about stock options outstanding at December 31,
2001:
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices (thousands) Life Price (thousands) Price
$22.50 - 44.19 584 7.5 $ 34.95 107 $ 28.63
$48.28 - 53.44 638 8.5 49.50 138 51.06
$53.88 - 57.31 271 7.0 54.24 178 54.44
$22.50 - 57.31 1,493 7.9 $44.67 423 $46.81
Pro forma information regarding net income
and earnings per share is required by Statement
of Financial Accounting Standards No. 123,
and has been determined as if the Company had
accounted for its employee stock options
under the fair value method of that Statement.
The fair value for these options was
estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted-average assumptions:
2001 2000 1999
Risk-free interest rate 5.02% 6.50% 5.43%
Dividend yield 1.49% 1.52% 1.49%
Volatility factor 32.73% 32.54% 31.88%
Weighted-average expected life 6.5 years 6.5 years 6.5 years
For purposes of pro forma disclosures, the
estimated fair value of the options is
amortized to expense over the options'
vesting period. The Company's pro forma net
earnings and earnings per share,
adjusted to include pro forma expense related to stock
options, are as follows:
(millions of dollars,
except per share
and option amounts)
2001 2000 1999
Net earnings - as reported $ 66.4 $ 94.0 $132.3
Net earnings - pro forma 64.8 92.5 130.7
Earnings per share - as reported (basic) 2.52 3.56 5.10
Earnings per share - as reported (diluted)2.51 3.54 5.07
Earnings per share - pro forma (basic) 2.46 3.50 5.04
Earnings per share - pro forma (diluted) 2.45 3.48 5.01
Weighted-average fair value of options granted during
the year 17.28 13.63 19.45
Executive stock performance plan
The Company has an executive stock performance plan which
provides payouts at the end of successive three-year periods
based on the Company's performance in terms of total
stockholder return relative to a peer group of automotive
companies. Payouts earned are payable 40% in cash and 60% in
the Company's common stock. For the three-year measurement
periods ended December 31, 2001, 2000 and 1999, the amounts
earned under the plan and accrued over the three-year
periods were $5.2 million, $3.4 million and $2.0 million,
respectively. Under this plan, 25,860 shares, 21,818 shares
and 21,892 shares were issued in 2001, 2000 and 1999,
respectively. Estimated shares issuable under the plan are
included in the computation of diluted earnings per share as
earned.
Earnings per share In calculating earnings per share,
earnings are the same for the basic and diluted
calculations. Shares increased for diluted earnings per
share by 148,000, 96,000 and 130,000 for 2001, 2000 and
1999, respectively, due to the effects of stock options and
shares issuable under the executive stock performance plan.
10 Other Comprehensive Income
The components of other comprehensive income in the Consolidated Statements of
Stockholders' Equity, net of tax effects, are as follows:
(millions of dollars)
For the Year Ended December 31, 2001 2000 1999
Foreign currency translation adjustment $(14.6) $(28.0) $11.9
Income taxes (3.8) (0.2) -.
Net foreign currency translation
adjustment (18.4) (28.2) 11.9
--------- -------- ---------
Minimum pension liability adjustment (29.7) (0.1) (0.1)
Income taxes 11.0 -. -.
Net minimum pension liability
adjustment (18.7) (0.1) (0.1)
Other comprehensive income (loss) $(37.1) $(28.3) $11.8
======= ========== =========
The components of accumulated other comprehensive income
(net of tax) in the Consolidated Balance Sheets are as
follows:
(millions of dollars)
December 31, 2001 2000
Foreign currency translation adjustment $(34.2) $(15.8)
Minimum pension liability adjustment (18.9) (0.2)
Accumulated other comprehensive income $(53.1) $(16.0)
======= =========
11 Contingent Liabilities
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 presently be liable for the cost of clean-up and
other remedial activities at 43 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 cost
apportioned to them; currently available information from
PRPs and/or federal or state environmental agencies
concerning the scope of contamination and estimated
remediation costs; remediation alternatives; estimated legal
fees; and other factors, the Company has established a
reserve for indicated environmental liabilities with a
balance at December 31, 2001 of approximately $25.5 million.
The Company expects this amount to be expended over the next
three to five years.
BorgWarner believes that none of these matters, individually
or in the aggregate, will have a material adverse effect on
its financial condition or future operating results,
generally either because estimates of the maximum potential
liability at a site are not large or because liability will
be shared with other PRPs, although no assurance can be
given with respect to the ultimate outcome of any such
matter.
In connection with the sale of Kuhlman Electric Corporation,
the Company agreed to indemnify the buyer and Kuhlman
Electric for certain environmental liabilities relating to
the past operations of Kuhlman Electric. During 2000,
Kuhlman Electric notified the Company that it discovered
potential environmental contamination at its Crystals
Springs, Mississippi plant while undertaking an expansion of
the plant.
The Company has been working with the Mississippi Department
of Environmental Quality and Kuhlman Electric to investigate
the extent of the contamination. The investigation has
revealed the presence of PCBs in portions of the soil at the
plant and neighboring areas. In mid 2001, Kuhlman Electric
and others, including the Company, were sued by twenty-six
plaintiffs in several lawsuits, which claim personal and
property damage. The Company has moved to be dismissed from
these lawsuits.
The Company has filed a lawsuit against Kuhlman Electric
seeking a declaration of the scope of the Company's
contractual indemnity. The Company believes that the reserve
for environmental liabilities is sufficient to cover any
potential liability associated with this matter.
12Acquisitions and Divestitures
Acquisitions
Kuhlman Corporation
On March 1, 1999, the Company acquired all the outstanding
shares of common stock of Kuhlman Corporation, a
manufacturer of vehicle and electrical products, for a
purchase price of $693.0 million. The Company funded the
transaction by issuing 3,287,127 shares of the Company's
common stock valued at $149.8 million and by borrowing
$543.2 million in cash. The Company also assumed additional
indebted- ness for the settlement of certain long-term
incentive programs and severance programs, which amounted to
approximately $14 million, net of tax benefits, and
refinanced Kuhlman's other existing indebtedness assumed of
$131.6 million.
The vehicle products businesses were accounted for as a
purchase and the Company began consolidating their results
since the date of acquisition. These businesses have been
integrated into the Air/Fluid Systems, Cooling Systems and
Morse TEC segments.
The electrical products businesses acquired from Kuhlman
consisted of Kuhlman Electric and Coleman Cable. These
businesses manufactured transformers for the utility
industry and wire and cable for utilities and other
industries. These products did not fit the Company's
strategic direction and, at the time of the Kuhlman
Acquisition, the Company announced that it intended to sell
the businesses. These businesses were accounted for as
businesses held for sale during 1999, and as such, no sales
or income between the date of acquisition and their dates of
sale was included in the consolidated results of the
Company.
In 1999, Kuhlman Electric was sold to Carlyle Group, L.L.C.
for $120.1 million, including debt securities with a face
value of $15.0 million. The $137.3 million sale of Coleman
Cable to a group of equity investors included debt
securities with a face value of $15.3 million. See Note One
for the carrying value of debt securities related to the
sales. Proceeds from the sales were used to repay
indebtedness.
Eaton Corporation's Fluid Power Division
On October 1, 1999, the Company acquired Eaton Corporation's
Fluid Power Division, one of the world's leading
manufacturers of powertrain cooling solutions for the global
automotive industry for $321.7 million in cash. The Company
accounted for the acquisition as a purchase and began
consolidating it in October 1999.
The following unaudited pro forma information has been
prepared assuming that both the Kuhlman merger and the Eaton
Corporation's Fluid Power Division acquisition had occurred
at the beginning of 1999, and includes adjustments for
estimated amounts of goodwill amortization, increased
interest expense on borrowings incurred to finance the
transactions, elimination of expenses related to Kuhlman's
corporate headquarters which has been closed, exclusion of
revenues, costs and expenses for Kuhlman's electrical
products businesses, including an allocation of goodwill
amortization and interest expense, and the tax effects of
all preceding adjustments. Sales from divested operations of
$41.3 million in 1999 are included in the pro forma sales
amounts.
(millions of dollars,
except per share amounts)
Year Ended December 31,1999
Net sales $2,684.4
Net earnings 134.8
Net earnings per share
Basic 5.04
Diluted 5.03
13 Operating Segments and Related Information
The Company's business is comprised of five operating
segments: Air/Fluid Systems, Cooling Systems, Morse TEC,
TorqTransfer Systems and Transmission Systems. These
reportable segments are strategic business units which are
managed separately because each represents a specific
grouping of automotive components and systems. The Company
evaluates performance based on earnings before interest and
taxes, which emphasizes realization of a satisfactory return
on the total capital invested in each operating unit.
Intersegment sales, which are not significant, are recorded
at market prices.
BorgWarner Inc. and Consolidated Subsidiaries
Operating Segments
(millions of dollars)
Sales Earnings
Before Long-Lived
Inter- Interest Year End Depreciation/ Assets
Customers segment Net and Taxes Assets Amortization Expenditures(d)
2001
Air/Fluid Systems$350.2 $7.6 $357.8 $12.9 $382.1 $21.6 $17.6
Cooling Systems(a) 220.5 -. 220.5 7.5 510.1 27.7 14.6
Morse TEC 846.7 22.7 869.4 119.8 1,066.4 53.5 75.7
TorqTransfer Systems498.7 1.4 500.1 24.1 266.6 18.7 38.0
Transmission Systems 417.5 11.3 428.8 48.5 359.6 22.3 26.6
Divested operations and businesses
held for sale(b) 18.0 -. 18.0 (0.2) -. 0.2 -.
Intersegment eliminations -. (43.0) (43.0) -. -. -. -.
Total 2,351.6 -. 2,351.6 212.6 2,584.8 144.0 172.5
Corporate, including equity in
affiliates -. -. -. (30.3) 186.1(c) 2.2 10.4
Restructuring and other non-. recurring
charges -. -. -. (28.4) -. -. -.
------- ------ ---- -------- -------- ---------
Consolidated $2,351.6 $ -. $2,351.6 $153.9 $2,770.9 $146.2 $182.9
====== ======= ========= ========= ========= ======= ==========
2000
Air/Fluid Systems$419.0 $8.8 $427.8 $35.7 $403.2 $20.7 $27.0
Cooling Systems(a) 280.8 0.5 281.3 32.1 536.8 27.9 16.7
Morse TEC 860.0 25.8 885.8 127.4 1,017.7 50.3 82.8
TorqTransfer Systems524.9 1.8 526.7 37.2 250.3 18.0 19.2
Transmission Systems428.5 9.0 437.5 46.0 353.1 22.6 32.6
Divested operations and businesses
held for sale(b) 132.7 0.2 132.9 3.2 73.6 2.9 4.6
Intersegment eli-
minations -. (46.1)(46.1) -. -. -. -.
Total 2,645.9 -. 2,645.9 281.6 2,634.7 142.4 182.9
Corporate, including equity in affiliates
-. -. -. (7.3) 104.9(c) 3.1 13.9
Restructuring and other non-recurring
charges -. -. -. (62.9)-. -. -.
Consolidated $2,645.9 $-. $2,645.9 $211.4 $2,739.6 $145.5 $196.8
======= ======= ======== ========= ======== ======== ======
1999
Air/Fluid Systems $406.3 $7.6 $ 413.9 $36.5 $407.9 $19.4 $14.4
Cooling Systems(a) 140.2 2.6 142.8 17.9 560.8 11.4 7.7
Morse TEC 771.4 25.5 796.9 109.7 1,007.4 43.7 88.4
TorqTransfer Systems 560.9 2.4 563.3 41.2 261.3 18.5 31.0
Transmission Systems 405.2 8.2 413.4 54.1 356.0 22.7 21.1
Divested operations
and businesses
held for sale(b) 174.6 3.4 178.0 6.9 123.4 6.1 6.2
Intersegment
eliminations -. (49.7)(49.7) -. -. -. -.
Total 2,458.6 -. 2,458.6 266.3 2,716.8 121.8 168.8
Corporate, including equity in affiliates
-. -. -. (10.1) 253.9(c) 1.6 -.
Consolidated $2,458.6 $-. $2,458.6 $256.2 $2,970.7 $123.4 $168.8
======== ======== ========== ========= ========== ========= =======
(a)Cooling Systems was added in 1999.
(b)Fuel Systems was sold in 2001. The HVAC business was sold
in 2000. The forged powdered metal race business was sold in
1999.
(c)Corporate assets, including equity in affiliates, are net
of trade receivables sold to third parties, and include
cash, marketable securities, deferred taxes and investments
and advances.
(d)Long-lived asset expenditures includes capital spending
and additions to non-perishable tooling, net of customer
reimbursements.
The following table reconciles segments' earnings before
interest and income taxes to consolidated earnings before
income taxes.
(millions of dollars)
2001 2000 1999
Earnings before interest and
income taxes $153.9 $211.4 $256.2
Interest expense and finance
charges (47.8) (62.6) (49.2)
Earnings before income taxes $106.1 $148.8 $207.0
Geographic information No country outside the U.S., other
than Germany, accounts for as much as 5% of consolidated net
sales, attributing sales to the sources of the product
rather than the location of the customer. For this purpose,
the Company's 50% equity investment in NSK-Warner (Note
Five) amounting to $128.8 million at December 31, 2001 is
excluded from the definition of long-lived assets, as are
goodwill and certain other noncurrent assets.
(millions of dollars)
Net SalesLong-Lived Assets
2001 2000 1999 2001 2000 1999
United States $1,687.4 $1,960.2 $1,848.4 $638.5 $591.9 $574.1
Europe:Germany 347.5 350.0 325.6 148.5 132.3 128.9
Other Europe 162.2 183.2 165.6 64.4 60.6 67.1
Total Europe 509.7 533.2 491.2 212.9 192.9 196.0
Other Foreign 154.5 152.5 119.0 75.5 88.6 89.2
Total $2,351.6 $2,645.9 $2,458.6 $926.9 $873.4 $859.3
======== ========= ========= ========= ========= =======
Sales to major customers Consolidated sales included sales
to Ford Motor Company of approximately 30%, 30% and 31%; to
DaimlerChrysler of approximately 21%, 19% and 19%; and to
General Motors Corporation of approximately 12%, 13% and 13%
for the years ended December 31, 2001, 2000 and 1999,
respectively. No other single customer accounted for more
than 10% of consolidated sales in any year between 1999 and
2001. Such sales consisted of a variety of products to a
variety of customer locations worldwide. Each of the five
operating segments had significant sales to all three of the
customers listed above.
Interim Financial Information (Unaudited)
The following information includes all adjustments, as well
as normal recurring items, that the Company considers
necessary for a fair presentation of 2001 and 2000 interim
results of operations. Certain 2001 and 2000 quarterly
amounts have been reclassified to conform to the annual
presentation.
(millions of dollars, except per share amounts)
(millions of dollars, except per share amounts)
2001 2000
Quarter Ended,
2454: March 31June 30 Sept.30 Dec.31Year2001
March31June30 Sept.30 Dec.31 Year 2000
2456:------ ---------- ------ ------- --------
-------- ------- ------- ------- --------
Net sales
2436: $606.8$602.0 $559.9 $582.9$2,351.6$730.2$700.9 $618.5 $596.3 $2,645.9
Cost of sales
2438: 471.1 458.4 429.7 442.8 1,802.0 550.3 531.3 473.0 448.5 2,003.1
Depreciation
27.0 25.7 25.5 26.0 104.2 26.2 25.9 25.2 24.9 102.2
Selling, general and
administrative expenses
55.6 59.3 55.5 63.9 234.3 63.5 57.8 57.5 65.3 244.1
Minority interest
0.7 0.7 1.1 1.3 3.8 0.7 0.4 0.8 0.8 2.7
Goodwill amortization
10.6 10.3 10.4 10.7 42.0 11.0 10.7 10.8 10.8 43.3
Restructuring and other non-recurring charges
- - - - 28.4 28.4 - - 32.6 30.3 62.9
Equity in affiliate earnings, net of tax and other income
(4.5) (4.6) (3.9) (4.0) (17.0) (3.5) (4.7) (4.2) (11.4) (23.8)
Earnings before interest
expense, finance
charges and income
taxes 46.3 52.2 41.6 13.8 153.9 82.0 79.5 22.8 27.1 211.4
Interest expense and
finance charges
12.8 12.4 12.3 10.3 47.8 15.9 15.9 15.9 14.9 62.6
Earnings before income
taxes 33.5 39.8 29.3 3.5 106.1 66.1 63.6 6.9 12.2 148.8
Provision for income taxes
12.4 15.1 10.9 1.3 39.7 25.1 23.5 1.7 4.5 54.8
Net earnings
$21.1 $24.7 $18.4 $2.2 $66.4 $41.0 $40.1 $5.2 $7.7 $94.0
Net earnings per share -
basic $0.80 $0.94 $0.70 $0.08 $2.52 $1.54 $1.52 $0.20 $0.30 $3.56
Net earnings per share -
2496: diluted $0.80 $0.93 $0.70$0.08(a)$2.51
(a)$1.53$1.51$0.20(b)$0.30(b)$3.54(b)
(a)Diluted earnings per share excluding the
fourth quarter non-recurring charges were
$0.80 for the quarter ended December 31, 2001
and $3.23 for the year ended December 31,
2001.
(b)Diluted earnings per share excluding the
restructuring and other non-recurring charges
for the quarters ended September 30, 2000
and December 31, 2000 and for the year ended
December 31, 2000 were $0.95, $1.02 and $5.01, respectively.
(millions of dollars, except per share data)
For the Year Ended December 31,
2001 2000 1999 1998 1997
Statement of Operations Data
Net sales $2,351.6 $2,645.9 $2,458.6 $1,836.8 $1,767.0
Cost of sales 1,802.0 2,003.1 1,888.5 1,450.7 1,375.4
Depreciation 104.2 102.2 91.3 74.8 70.4
Selling, general and ad-
ministrative expenses 234.3 244.1 203.3 135.1 132.0
Minority interest 3.8 2.7 1.3 2.1 3.2
Goodwill amortization 42.0 43.3 32.1 16.8 16.7
Restructuring and other non-
recurring charges 28.4(a) 62.9(b) - - -
Equity in affiliate earnings, net of tax
and other income (17.0) (23.8) (14.1) (10.3) (13.2)
Interest expense and finance
charges 47.8 62.6 49.2 26.9 24.6
Provision for income taxes 39.7 54.8 74.7 46.0 54.7
Net earnings $66.4 $94.0 $132.3 $ 94.7 $103.2
Net earnings per share - basic $2.52(a) $3.56(b) $5.10 $4.03 $4.35
==== ======= ===== ====== ======
Average shares outstanding (thousands) - basic
26,315 26,391 25,948 23,479 23,683
Net earnings per share - diluted
$2.51(a) $3.54(b) $ 5.07 $4.00 $4.31
Average shares outstanding (thousands) - diluted
26,463 26,487 26,078 23,676 23,934
Cash dividend declared per share
$ 0.60 $ 0.60 $ 0.60 $ 0.60 $ 0.60
Balance Sheet Data (at end of period)
Total assets $2,770.9 $2,739.6 $2,970.7 $1,846.1 $1,736.3
Total debt 737.0 794.8 980.3 393.5 338.1
(a)In 2001, the Company recorded $28.4 million
in non-recurring charges. Net of tax, this
totaled $19.0 million or $0.72 per diluted share.
Earnings before non-recurring charges
were $85.4 million or $3.23 per diluted share.
(b)In 2000, the Company recorded $62.9 million
in restructuring and other non-recurring
charges. Net of tax, this totaled $38.7 million
or $1.47 per diluted share. Earnings
before restructuring and other non-recurring
charges were $132.7 million, or $5.01 per
diluted share.