MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Borg-Warner Automotive, Inc. (the "Company") became an independent company on
January 27, 1993, when its common stock was distributed to the stockholders of
its then parent, Borg-Warner Security Corporation ("BW-Security") as a dividend
(the "Spin-Off"). The initial capital structure was established with $480
million of equity and $251 million of debt. In August 1993, the Company
completed an initial public offering of 3.66 million shares of common stock,
yielding net proceeds of $83.2 million.
The Company operates as a major supplier to automotive original equipment
manufacturers ("OEMs") in the North American, European and various Asian
markets. Its products include a wide variety of highly engineered components
and systems primarily related to drivetrain applications. Examples include
"shift quality" automatic transmission components and systems, four-wheel drive
transfer cases, automotive chain, engine timing components and systems, and a
variety of air and fluid control components and systems for engine and fuel
systems control.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the historical
Consolidated Financial Statements of the Company.
RESULTS OF OPERATIONS
The following table details the Company's results of operations as a percentage
of sales:
Year Ended December 31, 1996 1995 1994
-------- -------- -------
Net sales 100.0% 100.0% 100.0%
Cost of sales 78.3 78.6 77.5
Depreciation 4.6 5.1 5.0
Selling, general and
administrative expenses 8.0 7.4 7.5
Goodwill amortization 0.9 0.7 0.8
Loss on sale on business 4.0 - -
Minority interest, affiliate earnings
and other income, net (0.7) (1.2) (0.8)
------- ------ -------
Earnings before interest 4.9% 9.4% 10.0%
and taxes ====== ====== ========
Historically, the Company's sales have been seasonal in nature, with the
fourth quarter of each year generally having higher sales. This trend is less
prevalent in recent years. The fourth quarter has traditionally been the quarter
for new model introduction by the automotive industry, but this trend is
diminishing as the auto industry becomes more global and competitive pressure
for continual model updates intensifies.
1996 compared with 1995
The Company reported a 15.9% increase in sales in 1996, representing a growth
rate significantly higher than that of world auto production. North American
automotive production was flat for 1996, while Europe and Japan were up 4% and
2%, respectively. The sales improvement is the result of the Company's
continued increase in content per vehicle through new products and systems as
well as accelerated growth in air and fuel management systems through
acquisitions. The Company's acquisition of the Holley Automotive, Coltec
Automotive and Performance Friction Products businesses ('Coltec Acquisition')
from Coltec Industries contributed $123 million in sales, or approximately 60%
of the sales gain.
The following table shows net sales by product grouping:
Year Ended December 31, 1996 1995 1994
---------- ----------- -----------
(millions of dollars)
Powertrain Systems $ 562.7 $ 544.8 $ 529.9
Automatic Transmission Systems 481.8 454.4 378.5
Morse TEC 276.5 257.6 239.9
Air/Fluid Systems 258.8 107.6 97.3
---------- ----------- ----------
1,579.8 1,364.4 1,245.6
Interbusiness eliminations (39.7) (35.3) (22.2)
---------- ----------- ----------
Net sales $1,540.1 $1,329.1 $1,223.4
========== =========== ==========
Powertrain Systems realized a $17.9 million increase in sales over 1995, a
3% improvement. Excluding the manual transmission business, which was sold in
1996, sales grew 17%. Manual transmission sales decreased $48 million or 33% as
a result of the loss of the GM S-Truck business combined with declines in sales
of high-performance five- and six-speed sporty cars (see "Other Financial
Condition Matters" herein for a discussion of the sale of the manual
transmission business). In the four-wheel drive ("4WD") transfer case business,
sales increased by $72 million, or 18%, due to the introduction of new large
transfer cases for the new Ford Expedition sport-utility vehicle ("SUV") and
F-150 pick-up trucks. The Expedition features the Torque-On-Demand(TM) transfer
case called "Control Trac" by Ford. The growth in small transfer case volume
slowed in 1996 as production of Ford's popular Explorer SUV was flat compared to
the prior year due to Ford capacity constraints. In 1996, the Company sold
481,000 small transfer cases and 480,000 large transfer cases compared with
452,000 and 395,000, respectively, in 1995 and 398,000 and 343,000,
respectively, in 1994. Powertrain Systems continues to take advantage of
worldwide growth in light truck and sport-utility vehicle production, which
utilizes transfer cases. This continued market penetration should enable the
Company to offset the manual transmission revenue loss in 1997.
Automatic Transmission Systems experienced continued growth with a $27.4
million increase in sales over 1995. The increase includes $23 million
attributable to a full year of operations from the Precision Forged Products
Division acquired in April 1995. The remainder of the increase was the result
of volume gains, most notably in Korea, which experienced a market-driven volume
increase of approximately 21%. Sales gains in 1996 were offset by price
concessions of approximately $3.5 million. This group is a supplier to
virtually every major automatic transmission manufacturer in the world and
therefore is susceptible to market trends. In 1996 and 1995, the Company
benefited from the move to four- and five-speed automatic transmissions. The
Company is well positioned to continue to take advantage of this trend toward
five-speed automatic transmissions, thus increasing content, as the Company
supplies friction elements, as well as one-way clutches for these systems. The
Company is also well positioned to take advantage of customer trends toward
ordering systems incorporating various combinations of friction plates, one-way
clutches, races, drums and housings.
The Morse TEC group again experienced 7% sales growth in 1996 despite a 3%
decline due to weakening of the yen. The sales gain is attributable to
increased volume from new timing chain system applications for both single and
double overhead cam engines for passenger cars and light trucks due to a strong
trend toward use of these engines for enhanced fuel economy and performance.
Additionally, the group benefited from the initial sales of the MORSE GEMINI(TM)
Chain System for all of GM's front-wheel drive automatic transmission
applications used in mid-sized vehicles. Finally, in 1996 Morse TEC's Italian
facility began to provide the engine timing chain system for Ford's new 4 liter
overhead cam engine produced in Germany for the Ford Explorer. In 1997, Morse
TEC will begin supplying the engine timing chain system for Chrysler's new 2.7
liter double overhead cam V-6 engines used in the Chrysler LH series sedans
(Dodge Intrepid, Chrysler Concord and Eagle Vision). Additionally, in 1996, the
group was selected to design and produce a complete engine timing chain system
for Chrysler's new overhead cam 4.7 liter, V8 engine that will begin production
in 1998. The Morse TEC engineered timing chain system consists of numerous
components including chains, sprockets, tensioners and snubbers. The Company
announced in 1996 that the Morse TEC group plans to begin high-volume production
of powdered metal sprockets by mid-1998. The addition of this production
capability will enable the Company to increase its flexibility in providing
innovative sprocket solutions for both its engine timing systems and MORSE
GEMINI(TM) Chain Systems, as well as provide greater control over the technical
advancements and economics of these components.
Air/Fluid Systems' sales more than doubled, with a $151.2 million or 141%
increase primarily due to the Coltec Acquisition, which contributed $123 million
in sales, and the acquisition of Tulle (formerly referred to as Societe' de
l'Usine de la Marque ("SUM")), acquired at the end of 1995, which contributed
$18 million to 1996 sales. These acquisitions position the Company well to take
advantage of the fast-growing air/fluid systems market and to supply entire air
management systems. The Air/Fluid Systems group is expected to experience the
fastest growth and therefore continue to represent a greater portion of
consolidated revenues in 1997 and beyond.
In 1996, the Company's top 10 customers accounted for approximately 82% of
total consolidated sales compared with 86% in 1995 and 83% in 1994. Ford
continues to be the Company's largest customer, accounting for 42% of sales in
1996 compared to 41% and 39% of sales in 1995 and 1994, respectively. General
Motors accounted for 21% of sales in 1996 compared to 25% and 27% of sales in
1995 and 1994, respectively. Sales to Chrysler significantly increased to 9% of
sales as a result of the Coltec Acquisition.
Net earnings of $41.8 million for 1996 included a $61.5 million one-time
pretax charge for the loss on the sale of the North American manual transmission
business, which, net of tax benefit of $26.5 million, resulted in an aftertax
charge of $35 million, or $1.49 per share. Excluding this one-time charge, net
earnings were $76.8 million, or $3.26 per share, a $2.6 million improvement over
1995 net earnings of $74.2 million, or $3.15 per share. The improvement in
earnings was dampened by the operating results for the manual transmission
business, which reported a pretax loss from operations of $17 million in 1996
compared to $3 million in 1995 ($.46 per share loss and $.09 per share loss,
respectively).
Gross margin improved slightly to 21.7% compared to 21.4% in 1995.
Excluding the manual transmission business, gross margin would have been 24.2%
in 1996 compared to 23.5% in 1995. The margin improvement is the result of
productivity gains and cost reduction efforts as well as volume gains as certain
elements of the cost structure are partially fixed in nature. In addition,
costs for certain raw materials such as aluminum moderated in 1996 versus 1995.
Offsetting cost reduction efforts were continuing price reduction pressures
from customers. Price reductions granted in 1996 totaled approximately $10
million compared to $8 million in 1995. To maintain profit margins, the
Company, among other things, seeks price reductions from its own suppliers,
adopts improved production processes to increase manufacturing efficiency,
updates product designs to reduce costs and develops new products whose benefits
support increased pricing. The Company's ability to pass through increased raw
material and other costs to its OEM customers is also limited, with cost
recovery less than 100% and often on a delayed basis.
Earnings before interest and taxes ("EBIT") were $76.1 million in 1996
compared to $125.4 million in 1995. Excluding the pretax loss of $61.5 million
on the sale of the North American manual transmission business, EBIT increased
$12.2 million to $137.6 million. The improvement resulted from increased sales
due to both acquisitions and an overall increase in the core businesses of the
Company as well as improved margins, offset by the operating loss from the
manual transmission business. The Coltec Acquisition contributed $13 million to
EBIT, whereas the manual transmission business negatively impacted EBIT by $14
million more in 1996 than in 1995. Depreciation increased $3.3 million in 1996
primarily as a result of acquisitions. Selling, general and administrative
expenses increased to 8.0% of sales in 1996 from 7.4% of sales in 1995 primarily
as a result of increased spending on research and development. Research and
development expenses totaled $54.4 million in 1996, a $17.7 million increase
over 1995 due to additional spending related to the Coltec businesses,
accounting for $6.3 million of the increase, and to maintain and expand
technological expertise in both product and process in all of the Company's core
businesses. Additionally, recovery from customers for research and development
expenditures was lower in 1996 as it is becoming increasingly more difficult to
recover costs from customers for prototypes. Research and development
continues to remain a key corporate strategy as the Company's ability to develop
proprietary new products allows it to remain competitive.
Equity in affiliate earnings and other income decreased $5.5 million from
1995 to $13.1 million in 1996. The Company's share of earnings for NSK-Warner, a
50%-owned joint venture in Japan, was $14.3 million in 1996 versus $19.0
million in 1995. Earnings are down primarily due to a weakening of the yen
against the dollar and a slight decline in yen-denominated sales levels as a
result of a sluggish Japanese economy.
Interest expense and finance charges increased by $7.2 million to $21.4
million in 1996 compared with $14.2 million in 1995. The increase is
attributable to additional borrowings used to finance the Coltec Acquisition
offset by lower market interest rates on the Company's outstanding bank
borrowings.
Pretax earnings were $54.7 million in 1996, which includes a pretax loss of
$61.5 million on the sale of the North American manual transmission business as
previously mentioned, compared with $111.2 million of pretax earnings in 1995.
Excluding the loss on the manual transmission sale and the operating loss from
the manual transmission business, 1996 pretax earnings would have been $133.2
million, a 17% increase over 1995.
Income taxes decreased from $37 million in 1995 to $12.9 million in 1996,
an effective rate of 23.6% versus an effective rate of 33.3% in 1995. Income
tax expense in 1996 includes a $26.5 million tax benefit on the pretax loss of
$61.5 million for the manual transmission business sale, an effective rate of
43% as a result of recognizing differences between financial reporting and tax
basis of the business sold. Other factors that caused the effective tax rate to
be lower than the standard federal and state rates were realization of certain
tax credits related to research and development and foreign operations. In
1995, the Company also realized similar types of credits along with a higher
level of affiliate earnings, which are recognized on an aftertax basis.
1995 compared with 1994
North American automotive production was down 3% in 1995 versus 1994, while
Japan was down about 3%, Korea was up 12% and Europe was flat. Against this
backdrop, the Company was able to register gains in sales of 9% and earnings of
15%. The gains were the result of the Company's participation in one of the
most rapidly growing segments in the overall automotive marketplace --
sport-utility vehicles and light trucks -- and the Company's ability to increase
the value of components supplied per vehicle through ongoing aggressive
engineering and marketing programs. The Company's acquisition of the Precision
Forged Products Division ("PFPD") of Federal-Mogul in 1995 was responsible for
approximately 40% of the sales gain, or $52 million. After adjusting for the
acquisition and the 1994 disposition of a marine and industrial business, sales
increased 7%.
Powertrain Systems' sales grew by 3% in 1995 (8% excluding a 1994
disposition). In the 4WD transfer case business, the Torque-On-Demand(TM)
transfer case for the Ford Explorer yielded higher volume due to Ford's
increased capacity for this sport-utility vehicle. Increased features over the
transfer case model it replaced also improved the Company's revenue per unit.
Volume increases in large transfer cases for full-size pickup truck applications
were, in part, offset by the loss of the automatic locking hub business.
Revenue from manual transmissions declined by $29 million to $148 million in
1995 because of the loss of the GM S-Truck business combined with declines in
volume for the principal remaining North American applications -- high-perfor-
mance five-speed sporty cars such as Ford Mustang, Chevrolet Camaro,
Pontiac Firebird and Dodge Viper. See "Other Financial Condition Matters" for a
discussion of the Company's sale of the North American manual transmission
business.
The Automatic Transmission Systems group realized a $75.9 million increase
in sales over 1994, up 20%. Of the increase, $52 million resulted from the
acquisition of the PFPD business in April 1995. The remainder of the increase
(6% over 1994) resulted from volume gains in North America, Germany and Korea,
which were offset by approximately $2.3 million in price reductions to
customers. In Korea, the volume increase was market driven. In North America
and Europe, the volume gains were the result of the Company's increased content
per vehicle. This group sells to the widest array of OEMs and is most
susceptible to trends in the marketplace. In 1995, it benefited from the move
to four- and five-speed automatic transmissions from three-speed models, which
increases the Company's componentry even if market volumes are flat. During
1995, the Company saw the first of what it believes will be an increasing number
of five-speed transmission models, again affording the opportunity to improve
volume without being dependent upon overall market growth. The acquisition of
the PFPD business has led to opportunities to bundle components into a system,
thereby increasing the Company's content per vehicle. PFPD also offers a
promising product line in engine connecting rods, a new area for the Company.
The Morse TEC group continued its sales growth in 1995 with a 7% gain. Two
percentage points of the gain resulted from favorable exchange rates for the
yen. The remainder is the result of increased volume and improved product mix.
The group realized a full year of sales of the MORSE GEMINI(TM) Chain System,
which it began providing for the Chrysler LH series in mid-1994. However,
monthly volumes for the Chrysler LH fell in 1995 versus 1994. In 1995, the group
was selected to provide the MORSE GEMINI(TM) Chain System for all of GM's front-
wheel drive automatic transmission applications beginning in 1997. The
transmission chain business benefited from increased sales of sport-utility
vehicles, which use the Morse HY-VO(R) chain. Engine timing systems sales also
grew as Ford expanded its modular engine program to the Taurus/Sable as well as
the new F-Series pickup truck, which was introduced in the beginning of 1996.
The modular engine series uses a Morse engine timing system, consisting of
chains, sprockets, tensioners and snubbers. Previously the Company provided
only a single chain. The modular engine series at Ford now consists of 2.5
liter and 3.0 liter V-6s and 4.6 liter and 5.2 liter V-8s.
Air/Fluid Systems realized an 11% sales increase in 1995. The group
received a full year of benefit of providing 100% of certain Chrysler
transmission solenoid requirements for its front-wheel drive vehicles. The
group also increased its volume of Ford EGR valves (required for emission
regulations) and began providing the clutch coil incorporated in the Company's
Torque-On-Demand(TM) transfer case.
Gross margin in 1995 slipped to 21.4% versus 22.5% in 1994. Four factors
were responsible for the decline. First, the decline in volume in the manual
transmission business had a material impact on margins. Excluding the manual
transmission business, gross margin would have been 23.5% in 1995 versus 24.5%
in 1994. Next, raw material prices increased at a faster rate than the
Company's ability to pass through such increases. For example, aluminum went
from $.63 per pound at the beginning of 1994 to $.97 at the beginning of 1995
to $.77 at the end of 1995. Aluminum is a key component of the Company's
transfer cases and cases for solenoids. The Company's contracts with OEMs have
economic passthrough clauses, but these do not provide for 100% recovery, and in
many cases, recovery takes place on a delayed basis. The Company has sought to
minimize its exposure to material cost fluctuations through passthrough clauses,
and through the use of alternative materials where feasible. The third factor
affecting the margin comparison was price reductions to customers where the
Company has not been able to achieve offsetting cost reductions. The timing
required to implement and get approval for cost reduction proposals is partially
responsible for this factor. The final significant factor in the margin
comparison was that the newly acquired PFPD business has a relatively lower
margin than the Company as a whole.
The increase in sales, offset by the margin decline, translated into
earnings before interest and taxes ("EBIT") of $125.4 million, a $3.8 million,
or 3%, increase over 1994. Other trends affecting EBIT include higher
depreciation from increased capital spending in recent years. Depreciation
increased $7.1 million, or 12%, in 1995. Selling, general and administrative
expenses increased by $5.7 million, or 6%, in 1995. As a percentage of sales,
such expenses declined to 7.4% in 1995 from 7.5% in 1994. Included in the 1995
expenses was $36.7 million in research and development ("R&D") spending, a 9%
increase over 1994. The Company continued to invest in R&D at a rate in excess
of 2.7% of sales, recognizing that a key corporate strategy is to position the
Company on the leading technological edge. Examples of new products resulting
from the R&D investments in recent years include the Torque-On-Demand(TM)
transfer case, the MORSE GEMINI(TM) Chain System and the Ford one-way
clutch/drum system. In 1994, the Company provided approximately $5.2 million of
additional accruals for environmental and other liabilities. No similar
accruals were provided for in 1995.
Equity in affiliate earnings and other income jumped to $18.6 million in
1995 compared with $10.6 million in 1994. The Company's 50%-owned joint venture
in Japan, NSK-Warner, continued to outperform the Japanese automotive
marketplace. The Company's share of earnings for this venture increased to
$19.0 million in 1995 versus $13.9 million in 1994. The venture experienced 16%
sales growth in 1995 to $352 million. Earnings were up approximately 25% in
local currency, with the rest of the increase attributable to the strong yen in
1995. The remainder of the increase resulted from the net loss in 1994 of $3.5
million from the disposition of certain non-core investments and assets. No
similar losses were realized in 1995.
Interest expense was essentially flat between the two years at around $14
million. Higher debt levels resulting from acquisitions during 1995 were offset
by lower interest rates on foreign debt outstanding. The Company benefited from
the general decline in foreign interest rates throughout 1995 and improved
spreads versus nominal borrowing rates in 1995. As a result of the above items,
pretax earnings were $111.2 million in 1995, a 3% increase over $107.7 million
in 1994.
Income taxes totaled $37.0 million in 1995, an effective rate of 33.3%,
versus an effective rate of 40.2% in 1994. A significant reason for the
improved tax rate was substantially higher credits against taxes otherwise
payable, particularly for research and development spending and foreign credits.
The Company has available approximately $22 million of foreign tax credits,
which can be offset only against foreign source income. Other factors affecting
the nominal tax rate were the level of affiliate earnings, which are recognized
on an aftertax basis, and goodwill amortization, which is non-deductible.
FINANCIAL CONDITION AND LIQUIDITY
Cash generated from operations during 1996 totaled $177.9 million primarily from
earnings of $41.8 million, a net reduction in operating assets and liabilities
of $4.6 million, as well as non-cash items, including $71.3 million of
depreciation and $61.5 million related to the loss on sale of the North American
manual transmission business. The operating cash was used to fund $92 million
in capital spending, excluding the Coltec Acquisition.
On June 17, 1996, the Company acquired the operations and substantially all
of the operating assets of three of Coltec Industries Inc.'s automotive OEM
businesses: Holley Automotive, Coltec Automotive and Performance Friction
Products. The Company paid $287.8 million in cash, including $4.8 million of
costs related to the acquisition, which was initially financed by utilization of
$260 million under the Company's revolving credit facility and borrowings under
various money market facilities. In November 1996, the Company issued $150
million of 7.0% Senior Notes and used the proceeds to pay down revolving credit
borrowings. The Company ended the year with $317.3 million in balance sheet
debt, an increase of $182.6 million over 1995 primarily due to this acquisition.
Net working capital, excluding notes payable, decreased by $33.4 million.
Receivables increased by $33.2 million due to higher sales, the Coltec
Acquisition and a $17 million receivable related to the sale of the inventory of
the North American manual transmission business. Inventories decreased by $2.9
million due to the sale of the manual transmission inventory offset by an
increase due to the Coltec Acquisition and increases commensurate with the
increased operating activity of the Company. Accounts payable and accrued
expenses increased by $75 million due to an accrual of approximately $47 million
related to the sale of the manual transmission business as well as the Coltec
Acquisition and the overall increase in level of business. The Company increased
the amount of its receivables sold under its receivables transfer agreement by
$16 million to $102 million in 1996. Net property plant and equipment increased
$11.2 million primarily due to capital spending in excess of depreciation of $21
million and fixed assets of acquisitions of $26 million, offset by disposals of
$30 million including $27 million related to the sale of the North American
manual transmission business.
Capital spending totaled $92 million for 1996, relatively consistent with
prior levels of spending of $93 million for 1995 and $99 million for 1994.
Major spending programs included continued spending on the Ford large transfer
case capacity uplift, MORSE GEMINI(TM) programs for both Chrysler and GM,
Chyrsler timing systems for the 2.7 liter engine and Renault transmission
solenoid program in Tulle, as well as expansion programs at Coltec for air
induction systems and continued spending for the Mercedes-Benz transfer case
program. The Company anticipates that capital spending will be slightly higher
in 1997 as a result of increased spending to increase capacities and to continue
to fund existing and new programs. The Company believes that the combination of
cash flow from its operations and available credit facilities will be adequate
to satisfy cash needs for 1997.
Investments and advances decreased by $4.1 million to $135.9 million
reflecting $9.3 million of earnings from the NSK-Warner joint venture, net of
dividends, offset by a significant decrease due to the change in exchange rates.
Goodwill increased approximately $243 million primarily as a result of $242
million of goodwill related to the Coltec Acquisition.
Other balance sheet changes include a decrease in other noncurrent assets
of $1.6 million primarily due to the reduction of intangible pension assets.
Retirement-related long-term liabilities decreased $10.6 million due to stronger
earnings from pension plan assets and an increase in the discount rate for such
liabilities.
Equity increased by $28.8 million primarily as a result of net earnings of
$41.8 million offset by $14.1 million of dividends and $12 million of currency
translation adjustments primarily due to a weakening of the yen against the
dollar. The equity component of the minimum pension liability declined by $9.3
million. This was due to strong earnings on pension assets and a favorable
impact from the change in discount rates.
In October 1996, the Company amended its existing revolving credit
facility. Major changes included increasing the amount of the facility from
$300 million to $350 million, extending the maturity of the facility from 1999
to 2001, and releasing the subsidiaries' guaranties of the credit facility.
OTHER FINANCIAL CONDITION MATTERS
Sale of North American Manual Transmission Business
On December 31, 1996, the Company sold its North American manual transmission
business to Transmisiones Y Equipos Mecanicos S.A. De C.V. Under the agreement,
the Company received $20.3 million in cash at closing for certain assets of the
business and will receive approximately $20 million in cash during a transition
period (estimated at 15 to 18 months) for the value of inventory and certain
services to be provided. The Company recorded a pretax loss on the sale of
$61.5 million during the fourth quarter of 1996, which, net of tax benefit of
$26.5 million, results in an aftertax charge of $35 million or $1.49 per share.
The effective income tax rate differs from the U.S. statutory rate as a result
of recognizing differences between financial reporting and tax basis of the
business sold. The charge includes a loss on the assets sold; costs necessary
to supply existing customers while the business is transferred to its new
location; and costs of reconfiguring the Muncie, Indiana facility to support
continuing operations of the remaining four-wheel drive transfer case business.
The decision to sell the business resulted from the recognition that all major
North American OEMs have allied suppliers for their significant rear-wheel drive
manual transmission applications, which left only niches open to the Company in
North America. The business lost money in 1996 and 1995, on an operating basis,
as a result of declining volumes, due both to the loss of the GM truck business
in the third quarter of 1995 and declining volumes in the Company's remaining
niche - sporty and performance cars that utilize five- and six-speed manual
transmissions. The business had sales of $100 million in 1996, $148 million in
1995 and $177 million in 1994. In 1996, the Company incurred a $0.46 per share
loss from the manual transmission business compared to $0.09 per share loss in
1995. Despite the sale, the Company plans to continue to implement its strategy
to capitalize on manual transmission opportunities in developing markets in
Asia.
Environment
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 27 hazardous
waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws and, as
such, may be liable for the cost of clean-up and other remedial activities at
these 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; estimated legal fees; and other
factors, the Company has established a reserve in its financial statements for
indicated environmental liabilities with a balance of approximately $8.9 million
at December 31, 1996. The Company expects this amount to be expended over the
next three to five years.
In connection with the Spin-Off, the Company and BW-Security entered into a
Distribution and Indemnity Agreement which provided for, among other matters,
certain cross-indemnities designed principally to place financial responsibility
for the liabilities of businesses conducted by BW-Security and its subsidiaries
with BW-Security and financial responsibility for liabilities of the Company or
related to its automotive business with the Company. The Company has been
advised that BW-Security believes that the Company is responsible for certain
liabilities relating to environmental matters retained by BW-Security at the
time of the Spin-Off. BW-Security has requested indemnification from the
Company for past costs of approximately $1.6 million and for future costs
related to these environmental matters. At the time of the Spin-Off, BW-Secur-
ity maintained a letter of credit for approximately $9 million with respect
to the principal portion of such environmental matters. Although there can be
no assurance, based upon information currently available to the Company, the
Company does not believe that it is required to indemnify BW-Security under the
Distribution and Indemnity Agreement with respect to such liabilities. The
parties have agreed to submit this matter to binding arbitration which is
expected to be completed during 1997. The Company does not currently have
information sufficient to determine what its liability would be if it is
ultimately determined that it is required to indemnify BW-Security with respect
such liabilities.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matter.
OTHER MATTERS
Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") and elsewhere in this
Annual Report are "forward-looking statements" as contemplated by the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from future results experienced, projected or
implied by such forward-looking statements. The Cautionary Statements at
Exhibit 99.1 to the Company's Form 10-K for the fiscal year ended December 31,
1996 as filed with the Securities and Exchange Commission are incorporated into
this MD&A and Annual Report by reference. Investors are specifically referred
to such Cautionary Statements for a discussion of risk factors and
uncertainties.
MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The information in this report is the responsibility of management. Borg-Warner
Automotive, Inc. (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 generally accepted accounting principles.
The accompanying 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 generally accepted auditing standards 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, 1996, 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. To guarantee independence, 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 William C. Cline
Chairman and Chief Executive Officer Vice President and Controller
February 3, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
of Borg-Warner Automotive, Inc.
We have audited the consolidated balance sheets of Borg-Warner Automotive, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 Borg-Warner Automotive, Inc.
and subsidiaries at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 3, 1997
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(millions of dollars except per share amounts)
FOR THE YEAR ENDED
December 31,
-----------------------------------
1996 1995 1994
-------- -------- ---------
Net sales $1,540.1 $1,329.1 1,223.4
Cost of sales 1,205.5 1,044.9 948.4
Depreciation 71.3 68.0 60.9
Selling, general and administrative expenses 122.7 97.8 92.1
Minority interest 2.6 2.0 1.4
Goodwill amortization 13.5 9.6 9.6
Loss on sale of business 61.5 - -
Equity in affiliate earnings and other income (13.1) (18.6) (10.6)
--------- -------- ---------
Earnings before interest expense and finance charges
and income taxes 76.1 125.4 121.6
Interest expense and finance charges 21.4 14.2 13.9
--------- -------- ---------
Earnings before income taxes 54.7 111.2 107.7
Provision for income taxes 12.9 37.0 43.3
--------- -------- ---------
Net earnings $ 41.8 $ 74.2 $ 64.4
======== ======== ========
Net earnings per share $ 1.77 $ 3.15 $ 2.75
======== ======== ========
Average shares outstanding (thousands) 23,564 23,562 23,424
======== ======== ========
See accompanying notes to consolidated financial statements.
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(millions of dollars)
December 31,
--------------
1996 1995
------ -----
ASSETS
Cash $ 6.8 $ 5.1
Short-term securities 4.7 7.0
Receivables 124.6 91.4
Inventories 91.1 94.0
Prepayments 8.1 10.0
Deferred income tax asset 17.8 -
------- -------
Total current assets 253.1 207.5
Land 22.5 23.0
Buildings 183.7 180.0
Machinery and equipment 591.5 671.9
Capital leases 6.5 7.5
Construction in progress 58.9 45.4
------ -------
863.1 927.8
Less accumulated depreciation 328.9 404.8
------- ------
Net property, plant and equipment 534.2 523.0
Investments and advances 135.9 140.0
Goodwill 555.7 313.0
Deferred income tax asset 35.4 40.8
Other noncurrent assets 109.3 110.9
----- -----
Total other assets 836.3 604.7
------- ------
$1,623.6 $1,335.2
========= =======
See accompanying notes to consolidated financial statements.
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(millions of dollars)
December 31,
---------------------------
1996 1995
---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 38.0 $ 31.6
Accounts payable and accrued expenses 269.3 194.3
Income taxes payable 30.6 26.6
--------- --------
Total current liabilities 337.9 252.5
Long-term debt 279.3 103.1
Long-term liabilities:
Retirement-related liabilities 326.8 337.4
Other 43.8 39.0
--------- --------
Total long-term liabilities 370.6 376.4
Minority stockholders' interest in
consolidated subsidiaries 7.0 3.2
Capital stock:
Preferred stock, $.01 par value;
authorized 5,000,000 shares;
none issued - -
Common stock, $.01 par value;
authorized shares: 50,000,000;
issued and outstanding shares:
1996, 23,585,840; 1995, 23,054,526 0.2 0.2
Non-voting common stock, $.01 par value;
authorized shares: 25,000,000; issued
shares: 2,520,000 in 1996 and 1995;
outstanding shares: 1996,59,000;
1995,412,530 - -
Capital in excess of par value 563.9 560.1
Retained earnings 61.8 34.1
Currency translation adjustment 10.3 22.3
Minimum pension liability adjustment (7.4) (16.7)
---------- ----------
Total stockholders' equity 628.8 600.0
---------- ----------
$1,623.6 $1,335.2
========= ==========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
(millions of dollars) For The Year Ended December 31,
-----------------------------
OPERATING 1996 1995 1994
------ ------- -------
Net earnings $ 41.8 $ 74.2 $ 64.4
Adjustments to reconcile net earnings
to net cash flows from operations:
Non-cash charges (credits) to operations:
Depreciation 71.3 68.0 60.9
Goodwill amortization 13.5 9.6 9.6
Loss on sale of business 61.5 - -
Other, principally equity in affiliate earnings(14.8) (19.2) (13.1)
Changes in assets and liabilities, net of effects
of acquisitions and dispositions:
Decrease in receivables 4.0 6.9 2.1
Increase in inventories (8.7) (6.5) (12.3)
(Increase) decrease in prepayments
and deferred income tax asset (8.9) 1.0 (3.5)
Increase (decrease) in accounts payable and
accrued expenses 7.5 (28.6) 57.6
Increase in income taxes payable 4.2 2.7 2.9
Net change in other long-term assets
and liabilities 6.5 4.1 (10.9)
-------- -------- -------
Net cash provided by operating activities 177.9 112.2 157.7
INVESTING
Capital expenditures (91.9) (92.5) (98.8)
Investment in affiliates (0.5) (0.9) (0.6)
Payments for businesses acquired (287.8) (46.5) -
Proceeds from sale of business 20.3 - -
Proceeds from other assets 8.1 15.6 11.8
------- ---------- -------
Net cash used in investing activities (351.8) (124.3) (87.6)
FINANCING
Net increase (decrease) in notes payable (7.4) 4.0 (0.3)
Additions to long-term debt 192.4 20.0 63.5
Reductions in long-term debt - - (118.6)
Proceeds from options exercised 2.6 5.0 3.9
Dividends paid (14.1) (13.9) (13.3)
------- -------- -------
Net cash provided by (used in)
financing activities 173.5 15.1 (64.8)
Effect of exchange rate changes on cash and
cash equivalents (0.2) (5.8) 0.2
------- --------- -------
Net increase (decrease) in cash and
cash equivalents (0.6) (2.8) 5.5
Cash and cash equivalents at beginning of year 12.1 14.9 9.4
------- --------- -------
Cash and cash equivalents at end of year $ 11.5 $ 12.1 $ 14.9
======= ========= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid during the year for:
Interest expense $ 20.8 $ 15.2 $ 13.4
Income taxes 33.4 31.7 37.3
See accompanying notes to consolidated financial statements.
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1996
Number of Shares (millions of dollars)
----------------- --------------------------------
Issued Common Issued Capital in
common stock in common excess of Retained
stock treasury stock par value earnings
---------- -------- ------- --------- --------
Balance, January 1,1994 22,744,270 24,200 $ 0.2 $ 569.0 $(98.0)
============ ======== ======= ======== ========
Net income - - - - 64.4
Dividends declared - - - (10.4) -
Shares issued under stock
option plans 393,939 (8,174) - 3.9 -
Adjustment for minimum
pension liability - - - - -
Currency translation adjustment- - - - -
--------- ------- ------- ------- ------
Balance,December 31,1994 23,138,209 16,026 $ 0.2 $ 562.5 $(33.6)
=========== ======== ======== ====== =======
Net income - - - - 74.2
Dividends declared - - - (7.4) (6.5)
Shares issued under stock
option plans 328,847 (16,026) - 5.0 -
Adjustment for minimum
pension liability - - - - -
Currency translation adjustment - - - - -
----------- -------- ------- ------- -------
Balance, December 31, 1995 23,467,056 - $ 0.2 $560.1 $ 34.1
=========== ======== ======== ======= =======
Net income - - - - 41.8 -
Dividends declared - - - - (14.1)
Shares issued under stock
option plans 177,784 - - 3.8 -
Adjustment for minimum
pension liability - - - - -
Currency translation adjustment - - - - -
---------- -------- -------- ------- -------
BALANCE, DECEMBER 31, 1996 23,644,840 - $ 0.2 $563.9 $61.8
========== ======== ======== ====== ======
(table continued) Stockholders' Equity
-------------------------------------------------
Currency Translation Minimum pension liability
adjustment adjustment
--------------------- --------------------------
For the three years ended
December 31, 1996
Balance, January 1, 1994 $16.2 $(28.3)
Net income - -
Dividends declared - -
Shares issued under stock option plans - -
Adjustment for minimum pension liability - 8.9
Currency translation adjustment 9.0 -
--------- --------
Balance, December 31, 1994 $25.2 $(19.4)
======= =======
Net income - -
Dividends declared - -
Shares issued under stock option plans - -
Adjustment for minimum pension liability - 2.7
Currency translation adjustment (2.9) -
------- --------
Balance, December 31, 1995 $22.3 $(16.7)
======== =========
Net income - -
Dividends declared - -
Shares issued under stock option plans - -
Adjustment for minimum pension liability - 9.3
Currency translation adjustment (12.0) -
---------- ------
BALANCE, DECEMBER 31, 1996 $10.3 $(7.4)
========== ========
See accompanying notes to consolidated financial statements
BORG-WARNER AUTOMOTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
Borg-Warner Automotive, Inc. (the "Company") was a wholly owned subsidiary of
Borg-Warner Security Corporation ("BW-Security") until January 27, 1993, at
which time it was distributed to the stockholders of BW-Security in a tax-free
distribution (the "Spin-Off").
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 ("OEMs") of passenger cars, sport utility vehicles and light
trucks. The Company, which operates 36 manufacturing facilities in 12 countries
serving the North American, European and Asian automotive markets, is an
original equipment supplier to every major OEM in the world. Its products fall
into four operating groups: Automatic Transmission Systems, Air/Fluid Systems
(formerly known as Control Systems), Morse TEC and Powertrain Systems.
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following paragraphs briefly describe significant accounting policies.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
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 year amounts have been reclassified
to conform to the current year presentation.
Short-term securities
Short-term securities 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 equivalents for purposes of preparing the Consolidated
Statement of Cash Flows. All short-term securities meet this criterion.
Accounts receivable
In 1996, an agreement with a financial institution to sell, without recourse,
eligible receivables was amended from $86 million to $102 million. Accounts
receivable were recorded net of this agreement, which was fully utilized at
December 31, 1996 and 1995. The agreement extends to January 1999.
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.
Property, plant and equipment and depreciation
Property, plant and equipment is 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 reviews its operations to determine whether
there has been a diminution in value of its goodwill. If the review indicates a
decline in the carrying value, the Company would adjust the amortization
accordingly.
Intercorporate allocations
In 1995, the Company subleased space at BW-Security headquarters in Chicago for
a cost equal to 50% of BW-Security's rent and common overhead expenses under
their lease. In 1996, the Company replaced the sublease, leased the same space
from the building's owners and subleased from BW-Security a portion of the
previously subleased space which is jointly used by the two companies.
The Company entered into a service agreement with BW-Security in 1994,
under which it purchased certain administrative services from BW-Security. The
Company paid BW-Security $1.9 million for the administrative services in 1994.
In 1996 and 1995, only minor administrative services of BW-Security were
contracted for by the Company.
The Company paid BW-Security $10 million for a trademark license agreement
in 1994.
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. Although the Company has
entered into long-term supply agreements, the price is not fixed over the life
of the agreements.
Financial instruments
Financial instruments consist primarily of investments in cash, short-term
securities, and receivables and obligations under accounts payable and accrued
expenses and debt instruments, primarily variable rate debt. The fair value of
debt is estimated based on current borrowing rates for loans with similar terms
and maturities. The Company believes that the fair value of the financial
instruments approximates the carrying value.
NOTE 2 BALANCE SHEET INFORMATION
Detailed balance sheet data are as follows:
December 31,
---------------
1996 1995
------ --------
(millions of dollars)
Receivables:
Customers $ 77.4 $ 63.0
Other 48.8 29.4
------- -------
126.2 92.4
Less allowance for losses 1.6 1.0
------- -------
Net receivables $124.6 91.4
======= =======
Inventories:
Raw material $ 43.5 $ 48.6
Work in progress 30.9 31.6
Finished goods 16.7 13.8
------- -------
Total inventories $ 91.1 $ 94.0
======= =======
Investments and advances:
NSK-Warner $127.1 $128.9
Other 8.8 11.1
------- -------
Total investments and advances $135.9 $140.0
======= =======
Other noncurrent assets:
Deferred pension assets $ 49.5 $ 50.9
Deferred tooling 38.9 43.5
Other 20.9 16.5
------- -------
Total other noncurrent assets $109.3 $110.9
======= =======
/TABLE
BORG-WARNER AUTOMOTIVE, INC.
Notes to consolidated financial statements (continued)
Accounts payable and accrued expenses:
Trade payables $143.5 $114.9
Payroll and related 27.0 15.4
Insurance 10.9 13.3
Retirement benefits 9.4 11.1
Accrued costs related to
manual transmission sale 46.7 -
Other 31.8 39.6
------- -------
Total accounts payable and accrued expenses $269.3 $194.3
======= =======
Other long-term liabilities
Environmental reserve $ 8.9 $ 10.9
Other 34.9 28.1
------- -------
Total other long-term liabilities $ 43.8 $ 39.0
======= =======
Inventory held by U.S. operations was $68.8 million in 1996 and $72.6
million in 1995. Inventories, if valued at current cost instead of LIFO, would
have been greater by $11.3 million in 1996 and $11.1 million in 1995.
Dividends received from affiliates accounted for under the equity method
totaled $5.0 million in 1996, $6.5 million in 1995 and $4.3 million in 1994.
Accumulated amortization related to capital leases amounted to $4.7 million
in 1996 and $5.4 million in 1995. Accumulated amortization of goodwill amounted
to $92.8 million in 1996 and $83.3 million in 1995.
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 years ended March 31, 1996, 1995
and 1994:
1996 1995 1994
----- ----- -----
(millions of dollars)
Balance sheet:
Current assets $156.5 $168.4 $ 98.3
Noncurrent assets 152.0 187.6 166.3
Current liabilities 85.8 99.4 70.1
Noncurrent liabilities 11.1 17.2 13.3
Statement of operations:
Net sales $334.7 $327.8 $ 280.4
Gross profit 91.8 95.9 70.7
Net income 32.3 35.0 23.3
/TABLE
NOTE 3 COMMITMENTS
The Company is committed to pay rents on non-cancellable leases with terms
exceeding one year. Rental amounts committed for future years are summarized at
December 31, 1996 as follows:
Operating Capital
Year Leases Leases Total
----------- --------- --------
(millions of dollars)
1997 $ 6.2 $ 0.8 $ 7.0
1998 6.5 1.8 8.3
1999 5.7 0.7 6.4
2000 3.3 0.9 4.2
2001 1.9 2.3 4.2
2002 and after 6.0 1.9 7.9
---------- --------- --------
Total $ 29.6 $ 8.4 $ 38.0
========== ========= ========
Total rental expense amounted to $8.6 million in 1996, $7.5 million in 1995
and $5.1 million in 1994. Future capital lease rental payments include
interest expense of $2.3 million and principal payments of $6.1 million.
NOTE 4 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 27 hazardous
waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act ("Superfund") and equivalent state laws, and, as
such, may be liable for the cost of clean-up and other remedial activities at
these sites. Responsibility for clean-up and other remedial activities at a
Superfund site is typically shared among PRPs based on an allocation formula.
Based on information available to the Company which, in most cases,
includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully
pay the costs apportioned to them; currently available information from PRPs
and/or federal or state environmental agencies concerning the scope of
contamination and estimated remediation costs; estimated legal fees; and other
factors, the Company has established a reserve in its financial statements for
indicated environmental liabilities with a balance of approximately $8.9 million
at December 31, 1996. The Company expects this amount to be expended over the
next three to five years.
In connection with the Spin-Off, the Company and BW-Security entered into a
Distribution and Indemnity Agreement which provided for, among other matters,
certain cross-indemnities designed principally to place financial responsibility
for the liabilities of businesses conducted by BW-Security and its subsidiaries
with BW-Security and financial responsibility for liabilities of the Company or
related to its automotive businesses with the Company. The Company has been
advised that BW-Security believes that the Company is responsible for certain
liabilities relating to environmental matters retained by BW-Security at the
time of the Spin-Off. BW-Security has requested indemnification from the
Company for past costs of approximately $1.6 million and for future costs
related to these environmental matters. At the time of the Spin-Off, BW-Secur-
ity maintained a letter of credit for approximately $9 million with respect
to the principal portion of such environmental matters. Although there can be
no assurance based upon information currently available to the Company, the
Company does not believe that it is required to indemnify BW-Security under the
Distribution and Indemnity Agreement with respect to such liabilities. The
parties have agreed to submit this matter to binding arbitration which is
expected to be completed during 1997. The Company does not currently have
information sufficient to determine what its liability would be if it is
ultimately determined that it is required to indemnify BW-Security with respect
to such liabilities.
The Company believes that none of these matters, individually or in the
aggregate will have a material adverse effect on its financial position or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with the respect to the
ultimate outcome of any such matter.
The Company has guaranteed borrowings of $3.5 million of affiliate
operations as of December 31, 1996.
NOTE 5 NOTES PAYABLE AND LONG-TERM DEBT
Following is a summary of notes payable and long-term debt which reflects
all borrowings of the Company.
December 31, 1996 December 31, 1995
------------------ ------------------
Current Long-Term Current Long-Term
------- --------- -------- ---------
(millions of dollars)
Bank borrowings $ 17.9 $ 56.5 $ 24.5 $ 19.5
Bank term loans due through
1998 (at an average rate of
5.5% in 1996 and 6.0% in
1995; and 5.1% at December
1996) 20.0 67.2 6.9 77.7
7.0% Senior Notes due 2006,
net of unamortized discount - 149.6 - -
Capital lease liabilities
(at an average rate of 6.4%
in 1996 and 6.5% in 1995) 0.1 6.0 0.2 5.9
------- -------- ------- ------
Total notes payable and
long-term debt $ 38.0 $279.3 $ 31.6 $103.1
======= ======== ======== =======
Annual principal payments required as of December 31, 1996 are as follows
(in millions of dollars):
1997 $ 38.0
1998 32.8
1999 7.5
2000 14.2
2001 68.4
after 2001 156.8
/TABLE
In October 1996, the Company amended its existing revolving credit
facility. Major changes include increasing the amount of the facility from $300
million to $350 million, extending the maturity of the facility from 1999 to
2001 and releasing the subsidiaries' guaranties of the credit facility. The
facility was unused at December 31, 1996 and 1995 and remains fully available
through September 30, 2001.
The credit agreement contains numerous financial and operating covenants
including, among others, covenants requiring the Company to maintain certain
financial ratios and restricting its ability to incur additional foreign
indebtedness.
On November 5, 1996, the Company issued $150 million of 7% senior unsecured
notes due 2006. Interest is payable semiannually on May 1 and November 1
commencing May 1, 1997. The indenture contains certain covenants including,
among others, covenants limiting liens, sale/leaseback transactions, mergers and
the sale of substantially all of the Company's assets.
Bank term loans of $87.2 million outstanding at December 31, 1996 are
subject to annual reductions of $20.0 million in 1997, $30.0 million in 1998,
$6.4 million in 1999, $12.9 million in 2000, and $17.9 million in 2001 and
thereafter.
NOTE 6 RETIREMENT BENEFIT PLANS
A number of eligible salaried and hourly employees participate in contributory
or noncontributory defined benefit or defined contribution plans. The funding
policy for defined benefit plans is based upon independent actuarial valuations
and is within the limits required by ERISA for U.S. defined benefit plans and
similar legal requirements for non-U.S. plans.
The benefits provided to certain salaried employees covered under various
defined benefit plans are based on years of service and final average pay and
utilize the projected unit credit method for cost allocation. The benefits
provided to certain hourly employees under various defined benefit plans are
based on years of service and utilize the unit credit method for cost
allocation.
A number of employees in the United States participate in defined
contribution plans, where contributions by the Company or the subsidiary
sponsoring the plans are based on the employees' salary, age and years of
service. These contributions are charged to earnings as they are made to the
various plans.
Retirement benefit expense amounted to $47.3 million, $46.0 million and
$39.9 million in 1996, 1995 and 1994, respectively. This expense includes
postretirement life insurance and medical benefits of $24.1 million, $22 million
and $21.3 million in 1996, 1995 and 1994, respectively. Also included are
defined contribution plan expenses of $15.6 million, $13.3 million and $10.3
million in 1996, 1995 and 1994, respectively, and pension expenses for
miscellaneous foreign units of $1.4 million, $1.9 million and $1.1 million in
1996, 1995 and 1994, respectively.
In addition to the retirement benefit expense above, in 1996 the Company
recognized a $5.0 million partial curtailment loss from the sale of the North
American manual transmission business.
Reconciliation of the funded status of the U.S. and foreign defined benefit
pension plans with related amounts included in the balance sheets follows:
December 31, 1996
------------------
Overfunded Underfunded
Plans Plans
---------- ------------
Actuarial present value of benefit obligations: (millions of dollars)
Vested benefits $ 87.8 $180.4
Non-vested benefits 0.7 29.3
------- --------
Accumulated benefit obligations 88.5 209.7
Effect of projected future compensation levels 7.1 3.8
------- --------
Projected benefit obligation 95.6 213.5
Plan assets at fair value 127.5 143.7
------- --------
Assets in excess of (less than) projected
benefit obligation 31.9 (69.8)
Unamortized net (asset) liability from transition (2.4) 1.2
Unrecognized net loss 7.6 19.7
Recognized prior service cost 1.5 11.4
Adjustment required to recognize
minimum liability - (28.3)
------- ---------
Net asset (liability) on balance sheets $ 38.6 $(65.8)
======= =========
(table continued) December 31, 1995
----------------------------------------
(millions of dollars) Overfunded Plans Underfunded Plans
Actuarial present value of
benefit obligations:
Vested benefits $77.9 $192.6
Non-vested benefits 0.4 25.1
--------- --------
Accumulated benefit obligations 78.3 217.7
Effect of projected future compensation
levels 6.3 3.8
---------- ---------
Projected benefit obligation 84.6 221.5
Plan assets at fair value 109.1 135.7
========== ========
Assets in excess of (less than)
projected benefit obligation 24.5 (85.8)
Unamortized net (asset) liability from
transition (2.6) 1.5
Unrecognized net loss 11.9 27.1
Unrecognized prior service cost 1.6 14.9
Adjustment required to recognize minimum
liability - (41.9)
---------- ----------
Net asset (liability) on balance sheets $35.4 $(84.2)
Funding is based on requirements set forth by ERISA as well as requirements
imposed by collective bargaining agreements.
As part of the Spin-Off in 1993, the Company agreed with the PBGC to make
an additional $17.5 million contribution to an underfunded pension plan in 1993
and make a supplemental contribution of $1 million per year for the next 10
years.
Assets held in trust for the defined benefit plans are comprised of
marketable equity and fixed income securities and real estate.
Year Ended December 31,
----------------------
1996 1995 1994
----- ----- ----
(millions of dollars)
Service cost $ 4.3 $ 3.2 $ 3.6
Interest cost 21.4 21.1 20.2
Actual (return) loss on assets (32.8) (55.8) 3.7
Net amortization and deferrals 13.3 40.3 (20.3)
-------- -------- --------
Net periodic pension cost $ 6.2 $ 8.8 $ 7.2
======== ======== ========
The Company's assumptions used as of December 31, 1996, 1995 and 1994 in
determining the pension cost and pension liability shown above were as follows:
1996 1995 1994
------ ------ ------
(Percent)
U.S. plans:
Discount rate 7.5 7.25 8.5
Rate of salary progression 4.5 4.5 4.5
Long-term rate of return on assets 9.5 9.5 9.5
Foreign plans:
Discount rate 6.0-7.5 7.0-7.5 7.5-8.0
Rate of salary progression 3.0-6.0 3.5-6.0 4.0-6.0
Long-term rate of return on assets . . . 7.75 7.75 8.25
/TABLE
Net periodic postretirement benefit cost was comprised as follows:
Year Ended December 31,
------------------------
1996 1995 1994
------ ------ ------
(millions of dollars)
Service cost $ 4.4 $ 2.7 $ 3.2
Interest cost 19.7 19.3 18.1
------ -------- --------
$ 24.1 $ 22.0 $ 21.3
======= ======== ========
Reconciliation of the actuarial present value of postretirement benefit
obligations of the U.S. plans with the related liability included in the balance
sheets follows:
December 31,
-------------------
1996 1995
----- -----
(millions of dollars)
Actuarial present value of postretirement benefit obligations:
Retirees $169.7 $194.1
Other fully eligible participants 32.2 28.8
Other active participants 59.3 52.7
------- --------
Accumulated postretirement benefit obligation 261.2 275.6
Unrecognized gain (loss) 1.7 (19.4)
Unrecognized prior service cost 0.3 0.3
Net liability on balance sheets $263.2 $256.5
======= ========
Assumed discount rate (percent) 7.5 7.25
As of December 31, 1996, the actuarial present value of postretirement
medical and life insurance benefits was calculated using assumptions of medical
inflation of 7.25% in 1997, descending to a 5.25% annual rate by 1999. As of
December 31, 1995, the amount was calculated using assumptions of medical
inflation of 8.25% in 1996, descending to a 5.25% annual rate by 1999. A 1
percentage point increase in the assumed medical inflation rate at December 31,
1996 would have increased the accumulated benefit obligation, service cost and
interest cost by approximately $32.6 million, $1.3 million and $2.5 million,
respectively.
NOTE 7 OPERATIONS OUTSIDE THE UNITED STATES
The Company's equity in net earnings of consolidated subsidiaries located
outside the United States was $17.6 million in 1996, $18.7 million in 1995 and
$13.9 million in 1994. Such amounts do not include the Company's equity in
earnings of non-U.S. affiliates. The Company's equity in the net assets of
these companies is summarized as follows:
December 31,
----------------
1996 1995
------ -------
(millions of dollars)
Current assets $ 81.4 $ 79.1
Noncurrent assets 153.5 142.9
------ -------
Total assets 234.9 222.0
Current liabilities 66.4 80.8
Noncurrent liabilities 95.6 83.9
------ -------
Net assets before minority interest 72.9 57.3
Minority interest 7.0 3.2
------- -------
Equity in net assets $ 65.9 $ 54.1
======= =======
At December 31, 1996 and 1995, current liabilities included debt of $15.7
million and $27.2 million and noncurrent liabilities included debt of $35.8
million and $28.4 million, respectively.
NOTE 8 EQUITY IN AFFILIATE EARNINGS AND OTHER INCOME
Items included in equity in affiliate earnings and other income consist of:
Year Ended December 31,
-----------------------
1996 1995 1994
----- ------- ------
(millions of dollars)
Interest income $ 0.3 $ 0.4 $ 0.5
Loss on asset disposals, net (1.5) (1.0) (4.2)
Equity in affiliate earnings 14.3 19.2 14.3
------ ------- ------
Total $13.1 $18.6 $10.6
======= ======== =======
NOTE 9 GEOGRAPHIC INFORMATION
The Company's consolidated operations are engaged entirely in the manufacture
and sale of automotive components and systems. General corporate assets
primarily include cash, marketable securities, deferred tax assets and
investments and advances.
Sales, transfers between geographic areas, operating profit and
identifiable assets by major geographic area, in millions of dollars, are
summarized as follows:
Year Ended December 31,
-----------------------
1996 1995 1994
----- ------- -------
Sales:
United States $1,309.2 $1,114.8 $1,048.1
Europe 142.3 125.8 105.3
Other foreign 88.6 88.5 70.0
------- -------- ---------
Total $1,540.1 $1,329.1 $1,223.4
======== ========= =========
Included in U.S. sales are export sales of $191 million in 1996,
$140 million in 1995 and $136 million in 1994.
Year Ended December 31,
----------------------
1996 1995 1994
----- ------ -------
Transfers between geographic areas:
United States $ 17.6 $ 13.4 $ 12.5
Europe 8.5 7.1 6.8
Other foreign 4.0 3.8 1.1
----- ------- -------
Total $ 30.1 $ 24.3 $ 20.4
====== ======= =======
/TABLE
Year Ended December 31,
-------------------------
1996 1995 1994
-------- -------- -------
Operating profit:
United States $108.1 $ 83.4 $102.1
Europe 8.6 11.4 7.8
Other foreign. 25.6 26.3 21.3
------- -------- ------
Total 142.3 121.1 131.2
Other expenses, net (including corporate headquarters
expense of $12.3 million, $12.4 million and $12.3 million
for 1996, 1995 and 1994, respectively) (19.3) (15.3) (24.4)
Loss on sale of business (61.5) - -
Interest income and equity in affiliate earnings 14.6 19.6 14.8
Interest expense and finance charges (21.4) (14.2) (13.9)
------ ------- -----
Income before taxes 54.7 111.2 107.7
Income taxes (12.9) (37.0) (43.3)
------- ------- -------
Net earnings $ 41.8 $ 74.2 $ 64.4
======= ======= =======
December 31,
--------------------
1996 1995
------ ------
Identifiable assets:
United States $ 1,173.1 $ 924.3
Europe 156.3 149.3
Other foreign 86.7 81.9
------- --------
Total assets of operations 1,416.1 1,155.5
Affiliates at equity 130.4 132.7
General corporate assets 90.3 57.4
Consolidation - elimination (13.2) (10.4)
-------- --------
Total $ 1,623.6 $1,335.2
============ ========
Sales to major customers
Consolidated sales included sales to Ford Motor Company of approximately 42%,
41% and 39% and to General Motors Corporation of approximately 21%, 25% and 27%
for the years ended December 31, 1996, 1995 and 1994, respectively. No other
single customer accounted for 10% or more of consolidated sales in the period
1994 through 1996. Such sales consisted of a variety of products to a variety
of customer locations worldwide.
NOTE 10 STOCK OPTIONS AND MANAGEMENT STOCK PURCHASES
Stock option plans
In connection with the Spin-Off, in January 1993 each outstanding option under
the BW-Security stock option plan was exchanged for options to purchase the same
number of post-Spin-Off shares of the Company's common stock at prices equal to
50% of the pre-Spin-Off exercise price. Options granted prior to the Spin-Off
to purchase common stock of the Company under this plan carry exercise prices
ranging from $5.00 to $18.83 per share. The 178,609 outstanding options at
December 31, 1996 are fully vested. Options available for grant of 144,648
under this plan are available for grant until July 1997.
In 1993, the Company adopted a stock option plan that authorizes the grant
of options to purchase 500,000 shares of the Company's common stock. Options
granted to date under this plan carry exercise prices ranging from $22.50 to
$38.94 per share and vest over periods up to three years based upon employment.
There are 282,500 outstanding options at December 31, 1996.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock options grants. Had compensation cost for options granted
in 1996 and 1995 (16,000 shares each year) been determined based on the fair
value at the grant date consistent with the method prescribed by Statement of
Financial Accounting Standards No. 123, net earnings and earnings per share for
each year would have been reduced by de minimis amounts (less than $.01 per
share).
A summary of the two plans' shares under option at December 31, 1996, 1995
and 1994 follows:
1996 1995 1994
--------------------- -------------------- --------------------
Weighted Weighted Weighted
Shares average Shares average Shares average
(thousands) exercise (thousands) exercise (thousands) exercise
price price price
----------- ---------- ---------- -------- -------- --------
Outstanding at
beginning of
year 632 $19.39 987 $17.66 1,343 $14.75
Granted 16 32.41 16 25.43 79 26.12
Exercised (178) 14.72 (345) 14.69 (402) 9.47
Forfeitures (9) 23.09 (26) 19.65 (33) 19.44
------ ------ -------- -------- ------- -------
Outstanding at end
of year 461 $21.57 632 $19.39 987 $17.66
===== ===== ====== ======= ====== =======
Options exercisable
at year-end 395 384 537
====== ==== ======
Shares available for
future grants 242 249 184
====== ===== =======
The following table summarizes information about the options outstanding at
December 31, 1996:
Options Outstanding Options Exercisable
- --------------------------------------------- --------------------
Number Weighted- Weighted-
Range of outstanding average average Number Weighted-
exercisable at 12/31/96 remaining exercise exercis- average exer-
prices contractual life price able at 12/31/96 cise prices
- ------------ ---------- -------------- --------- ---------------- ---------
$5.00 41 0.8 $ 5.00 41 $ 5.00
13.91-18.83 138 4.4 17.81 138 17.81
22.50-25.00 223 6.7 24.81 202 24.95
25.31-38.94 59 7.9 29.62 14 30.27
---- ---- --------- ----- ---------
$5.00-38.94 461 5.6 $21.57 395 $20.58
===== ==== ========== ===== =========
/TABLE
NOTE 11 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 1996 and 1995 interim results of operations. Certain 1996 quarterly
amounts have been reclassified to conform to the annual presentation.
1996
-----------------------------------
(millions of dollars) Quarter Ended
- -------------------------------------------------------------------
March June Sept. Dec. Year
31 30 30 31 1996
------ ------ ------ ----- --------
Net sales $ 348.9 $ 381.8 $ 387.7 $ 421.7 $1,540.1
Cost of sales 277.5 297.5 308.1 322.4 1,205.5
Depreciation 18.4 17.5 17.8 17.6 71.3
Selling, general and
administrative expenses 30.8 29.2 27.1 35.6 122.7
Minority interest 0.7 0.5 0.7 0.7 2.6
Goodwill amortization 2.6 2.8 4.0 4.1 13.5
Loss on sale of business - - - 61.5(c) 61.5(c)
Equity in affiliate earnings
and other income (4.1) (2.8) (3.6) (2.6) (13.1)
----- ----- ----- ----- ------
Earnings (loss) before interest
expense and finance
charges and income taxes 23.0 37.1 33.6 (17.6) 76.1
Interest expense and
finance charges 3.5 3.5 7.0 7.4 21.4
----- ----- ----- ----- -----
Earnings (loss) before
income taxes 19.5 33.6 26.6 (25.0) 54.7
Provision (benefit) for
income taxes 7.2 11.8 7.8 (13.9)(c) 12.9(c)
----- ----- ----- ----- ------
Earnings (loss) $ 12.3 $ 21.8 $ 18.8 $(11.1) $ 41.8
====== ===== ====== ====== =====
Net earnings (loss)
per share $ 0.52 $ 0.93 $ 0.80 $(0.47)(c) $ 1.77
====== ====== ====== ====== ======
(table continued) 1995
- -------------------------------------------------------------------------
Quarter Ended (millions of dollars)
- -------------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31 Year 1995
Net sales $327.8 $356.0 $298.5 $346.8 $1,329.1
Cost of sales 253.0 276.9 241.0 274.0 1,044.9
Depreciation 17.2 18.1 15.8 16.9 68.0
Selling,general
and administr-
ative expenses 26.4 26.3 22.1 23.0 97.8
Minority interest 0.4 0.6 0.5 0.5 2.0
Goodwill amortiz-
ation 2.4 2.3 2.5 2.4 9.6
Loss on sale of
business - - - - -
Equity in affiliate
earnings and other
(income) expense (4.2) (5.9) (4.7) (3.8) (18.6)
----- -------- ------- -------- --------
Earnings (loss) be-
fore interest expense
and finance charge and
income taxes 32.6 37.7 21.3 33.8 125.4
Interest expense and
finance charges 3.5 3.6 3.6 3.5 14.2
------- --------- --------- -------- ---------
Earnings (loss) be-
fore taxes 29.1 34.1 17.7 30.3(a) 111.2
Provision (benefit)
for income taxes 11.5 13.0 4.5 8.0(b) 37.0
--------- ---------- --------- ---------- ----------
Net earnings (loss)$ 17.6 $21.1 $13.2 $22.3 $74.2
========= =========== ========== ========== ==========
Net earnings(loss)$ 0.75 $0.90 $0.56 $0.95 $3.15
per share ========= =========== =========== =========== ==========
(a) Includes favorable year-end adjustments of approximately $3.0 million
relating primarily to inventories and accruals.
(b) Includes a favorable year-end adjustment of approximately $3.0 million
relating primarily to research and experimentation credits and foreign
credits.
(c) The Company recorded a pretax operating loss on the sale of the North
American manual transmission business of $61.5 million, which, net of tax
benefit of $26.5 million, results in an aftertax charge of $35 million, or
$1.49 per share. See Note 15 to the Company's consolidated financial
statements for additional information.
NOTE 12 INCOME TAXES
The Company has not provided deferred taxes on the excess of its financial book
investment in foreign joint ventures and subsidiaries over its tax basis in
these investments as they are essentially permanent in nature. It is not
practicable to estimate the amount of unrecognized deferred tax liability.
Income before taxes from continuing operations and provision for taxes, in
millions of dollars, consists of:
Components of income tax expense:
1996 1995 1994
------------------- ---------------------- ----------
U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total
----- ------ ----- ----- ----- ----- ----- ------ ------
Income before
taxes $25.1 $29.6 $54.7 $78.8 $32.4 $111.2 $83.3 $24.4 $107.7
===== ===== ===== ===== ===== ====== ====== ===== =====
Income taxes:
Current :
Federal/
foreign $12.0 $11.0 $23.0 $19.0 $12.5 $ 31.5 $29.4 $ 9.7 $ 39.1
State 2.3 - 2.3 6.4 - 6.4 7.5 - 7.5
----- ------ ------ ----- ----- ------ ------ ------ ----
14.3 11.0 25.3 25.4 12.5 37.9 36.9 9.7 46.6
Deferred (13.4) 1.0 (12.4) (2.1) 1.2 (0.9) (4.1) 0.8 (3.3)
----- ----- ------ ----- ----- ------ ------ ------ -----
Total income
taxes $ 0.9 $12.0 $ 12.9 $23.3 $13.7 $ 37.0 $ 32.8 $ 10.5 $43.3
===== ====== ===== ===== ====== ======= ====== ======= =====
The analysis of the variance of income taxes as reported from income
taxes computed at the U.S. statutory rate for consolidated operations for
1996, 1995 and 1994, in millions of dollars,is as follows:
1996 1995 1994
----- ------ ------
Income taxes at U.S. statutory rate of 35% $19.1 $ 38.9 $ 37.7
Increases (decreases) resulting from:
Income from non-U.S. sources 2.7 4.7 4.6
State taxes, net of federal benefit 1.5 4.1 4.3
Business tax credits, net (3.8) (5.7) (1.7)
Affiliate earnings (5.0) (6.7) (5.0)
Nontemporary differences 2.5 1.6 3.1
Basis difference on assets sold (4.2) - -
Other, net 0.1 0.1 0.3
----- ------ ------
Income taxes as reported $12.9 $ 37.0 $ 43.3
====== ======== =======
Following are the gross components of the deferred taxes as of
December 31, 1996 and 1995 in millions of dollars:
1996 1995
------- --------
Deferred tax assets - current:
Accrued costs related to manual transmission sale $ 17.8 $ -
======= =======
Deferred tax assets - noncurrent:
Postretirement benefits $100.0 $ 97.4
Pension 14.4 20.1
Other long-term liabilities and reserves 18.5 19.2
Foreign tax credits 14.4 22.3
Valuation allowance (14.4) (22.3)
Other 11.2 14.8
------ -------
144.1 151.5
Deferred tax liabilities - noncurrent:
Fixed assets 72.6 69.7
Pension 18.8 19.3
Other 17.3 21.7
------ -------
108.7 110.7
------ -------
Net deferred tax asset - noncurrent $ 35.4 $ 40.8
======== ========
The foreign tax credit has been fully considered in the valuation
allowance.
NOTE 13 RESEARCH AND DEVELOPMENT COSTS
Total research and development costs amounted to $54.4 million in 1996, $36.7
million in 1995 and $33.8 million in 1994.
NOTE 14 ACQUISITION OF BUSINESS
On June 17, 1996, the Company acquired the operations and substantially all of
the operating assets of three of Coltec Industries Inc.'s automotive OEM
businesses: Holley Automotive, Coltec Automotive and Performance Friction
Products. The businesses have a broad base of air and fluid management
products, established OEM relationships and three technologically advanced
manufacturing facilities. The Company paid $287.8 million in cash, including
$4.8 million of costs related to the acquisition, which was initially financed
by utilization of $260 million under the Company's revolving credit facility and
borrowings under various money market facilities. As discussed in Note 5, in
November 1996, the Company issued $150 million of 7.0% Senior Notes and used the
proceeds to pay down revolving credit borrowings.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the assets acquired based upon
their estimated fair market values. The excess of the purchase price over the
estimated fair value of net assets acquired amounted to $242 million, which has
been accounted for as goodwill and is being amortized over 40 years using the
straight-line method.
Included in the consolidated statement of earnings are sales of $123
million and pretax operating income of $13 million from the businesses since the
date of acquisition. The following pro forma information has been prepared
assuming that the acquisition had occurred at the beginning of 1996 and 1995,
and includes adjustments for estimated amounts of goodwill amortization and
increased interest expense. The pro forma financial information is not
necessarily indicative of the results of operations that would have occurred had
the transaction been consummated at the beginning of the respective periods, nor
is it necessarily indicative of results of operations that may occur in the
future.
Year Ended December 31,
------------------------
1996 1995
------ ------
(millions of dollars, except
per share amounts)
Net sales $1,669.0 $1,584.2
Net earnings 46.7 81.6
Net earnings per share $ 1.98 $ 3.47
NOTE 15 SALE OF NORTH AMERICAN MANUAL TRANSMISSION BUSINESS
On December 31, 1996, the Company sold its North American manual transmission
business located in Muncie, Indiana, to Transmisiones Y Equipos Mecanicos S.A.
De C.V. Under the agreement, the Company received $20.3 million in cash at
closing for certain assets of the business and will receive approximately $20
million in cash during a transition period for the value of inventory and
certain services to be provided. The Company recorded a pretax loss on the sale
of $61.5 million during the fourth quarter of 1996, which, net of tax benefit of
$26.5 million, results in an aftertax charge of $35 million, or $1.49 per share.
The effective income tax rate differs from the U.S. statutory rate as a result
of recognizing differences between financial reporting and tax basis of the
business sold. The charge includes a loss on the assets sold; costs necessary
to supply existing customers while the business is transferred to its new
location; and costs of reconfiguring the Muncie facility to support continuing
operations of the remaining four-wheel drive transfer case business. In 1996,
the Company incurred a pretax operating loss of $17 million from the manual
transmission business on net sales of $100 million.
Selected Financial Data
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
Year Ended December 31,
-----------------------------------------
1996 1995 1994 1993 1992
------ ------- ------ ------- -----
(millions of dollars, except per share data)
STATEMENT OF OPERATIONS DATA
Net sales $1,540.1 $1,329.1 $1,223.4 $985.4 $ 926.0
Cost of sales 1,205.5 1,044.9 948.4 769.3 755.2(a)
Depreciation 71.3 68.0 60.9 57.9 64.3(a)
Selling, general and adminisrative
expenses 122.7 97.8 92.1 83.5 69.6
Minority interest 2.6 2.0 1.4 0.1 (1.3)
Goodwill amortization 13.5 9.6 9.6 9.7 9.7
Loss on sale of business 61.5(e) - - - -
Equity in affiliate earnings and
other income (13.1) (18.6) (10.6) (10.6) (6.9)
Interest expense and finance
charges(d) 21.4 14.2 13.9 18.4 44.8(d)
Provision for income taxes 12.9 37.0 43.3 24.3 2.7
----- ------ ----- ----- ------
Earnings (loss) before cumulative
effect of accounting change 41.8 74.2 64.4 32.8 (12.1)
Cumulative effect of accounting
change(b) - - - (130.8) -
Net earnings (loss) $ 41.8 $74.2 $ 64.4 $ (98.0) $ (12.1)
========== ======= ======== ======= =======
Earnings (loss) per share before cumulative effect
of accounting change(c) $ 1.77(e) $ 3.15 $ 2.75 $ 1.41 $ (0.53)
Cumulative effect of initial
application of new accounting
standard for postretirement benefits,
net of taxes per share(c) - - - (5.62) -
-------- -------- ----- ------ -----
Net earnings (loss) per $ 1.77 $ 3.15 $ 2.75 $ (4.21) $(0.53)
share (c) ========= ======== ======== ======= =======
Average shares outstanding
(thousands)(c) 23,564 23,562 23,424 23,284 23,005
Cash dividend declared per
share $ 0.60 $ 0.60 $ 0.45 $ 0.125 -
BALANCE SHEET DATA (at end of period)
Total assets $ 1,623.6 $1,335.2 $1,240.3 $1,159.4 $1,074.2
Total debt 317.3 134.7 107.3 159.6 -(d)
(a)Cost of sales for 1992 included a $28.7 million charge for the write-off of
excess capacity and depreciation includes $7.3 million related to such
capacity.
(b)Amount reflects the adoption of SFAS No. 106 in 1993.
(c)Earnings per share have been calculated assuming that the offering of shares
of the Company's common stock in August 1993 had been outstanding for the entire
year.
(d)Prior to the Spin-Off, interest was allocated to the Company on the basis of
the Company's relative operating investment compared to BW-Security's overall
capital investment (debt plus equity). Prior to the Spin-Off, all debt was
considered to be part of the BW-Security investment.
(e)The Company recorded a pretax loss on the sale of the North American manual
transmission business of $61.5 million, which, net of tax benefit of $26.5
million, results in an aftertax charge of $35 million, or $1.49 per share. See
Note 15 to the Company's consolidated financial statements for additional
information.
STOCK PRICE
High Low
--------- --------
Fourth Quarter 1996 $ 40-7/8 $ 33-1/4
Third Quarter 1996 40-3/8 34
Second Quarter 1996 43 33-5/8
First Quarter 1996 33-5/8 28-3/8
Fourth Quarter 1995 $ 32-1/4 $ 27-5/8
Third Quarter 1995 33-7/8 28-1/2
Second Quarter 1995 29-3/8 23-1/2
First Quarter 1995 26-1/8 22-3/8