SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended September 30, 1998
Commission file number: 1-12162
BORG-WARNER AUTOMOTIVE, INC.
(Exact name of registrant as specified in its charter)
13-3404508 State or other jurisdiction of
(I.R.S. Employer Incorporation or organization
Identification No.) Delaware
200 South Michigan Avenue, Chicago, Illinois 60604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO -----
On October 31, 1998 the registrant had 23,374,373 shares of Common Stock and
1,500 shares of Series I Non-Voting Common Stock outstanding.
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
SIX MONTHS ENDED SEPTEMBER 30, 1998
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations for the three
months ended September 30, 1998 and 1997 4
Consolidated Statements of Operations for the nine
months ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 18
PART II. Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of
Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
BORG-WARNER AUTOMOTIVE, INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 1998
PART I.
ITEM 1.
A. Borg-Warner Automotive, Inc. and Consolidated Subsidiaries'
Financial Statements
The financial statements of Borg-Warner Automotive, Inc. and Consolidated
Subsidiaries ("Company") have been prepared in accordance with the instructions
to Form 10-Q under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The statements are unaudited but include all adjustments,
consisting only of recurring items, except as noted, which the Company considers
necessary for a fair presentation of the information set forth herein. The
results of operations for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the entire year. The
following financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
(unaudited)
September 30, December 31,
1998 1997
------------- --------------
A S S E T S
Cash and cash equivalents $ 11.7 $ 13.4
Receivables 192.0 158.6
Inventories 130.8 108.0
Deferred income tax asset 8.5 8.5
Prepayments and other current assets 25.5 18.4
------- --------
Total current assets 368.5 306.9
Property, plant, and equipment at cost 1,004.8 971.2
Less accumulated depreciation 400.9 359.5
-------- --------
Net property, plant and equipment 603.9 611.7
Investments and advances 122.6 132.9
Goodwill 527.7 545.6
Deferred income tax asset 18.7 20.6
Other noncurrent assets 118.1 118.6
-------- ---------
Total other assets 787.1 817.7
-------- ---------
$ 1,759.5 $ 1,736.3
======== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable $ 46.2 $ 67.7
Accounts payable and accrued expenses 266.6 273.6
Income taxes payable 33.4 53.9
--------- ----------
Total current liabilities 346.2 395.2
Long-term debt 305.5 270.4
Long-term retirement-related liabilities 313.2 314.0
Other long-term liabilities 65.3 63.0
--------- ----------
Total long-term liabilities 378.5 377.0
Capital stock:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued shares of
23,753,365 in 1998 and outstanding
shares of 23,371,873 in 1998 0.2 0.2
Non-voting common stock, $.01 par value;
authorized 5,000,000 shares; issued shares
of 2,520,000 in 1998 and outstanding shares
of 1,500 in 1998 -- --
Capital in excess of par value 566.0 566.0
Retained earnings 202.3 150.7
Notes receivable - management stock purchase (2.0) --
Cumulative translation adjustment (17.2) (11.3)
Minimum pension liability adjustment (1.7) (1.7)
Common stock held in treasury, at cost:
381,492 shares in 1998 (18.3) (10.2)
-------- --------
Total stockholders' equity 729.3 693.7
-------- --------
$ 1,759.5 $1,736.3
======== =========
See accompanying Notes to Consolidated Financial Statements
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
Three Months Ended
September 30,
1998 1997
--------- -------
Net sales $ 431.6 $ 406.8
Cost of sales 337.9 323.7
Depreciation 18.9 17.0
Selling, general and administrative expenses 36.6 25.5
Minority interest 0.9 0.6
Goodwill amortization 4.3 4.2
Equity in affiliate earnings and other income(0.5) (3.1)
------- ---------
Earnings before interest and finance
charges and income taxes 33.5 38.9
Interest expense and finance charges 7.6 6.2
------- --------
Earnings before income taxes 25.9 32.7
Provision for income taxes 8.6 11.1
-------- --------
Net earnings $ 17.3 $ 21.6
======== =========
Net earnings per share
Basic $ 0.74 $ 0.91
======== =========
Diluted $ 0.73 $ 0.90
======== =========
Average shares outstanding (thousands)
Basic 23,509 23,692
======== ==========
Diluted 23,690 23,907
======== ==========
Dividends declared per share $ 0.15 $ 0.15
======== =========
See accompanying Notes to Consolidated Financial Statements
BORG-WARNER AUTOMOTIVE, INC.
AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
Nine Months Ended
September 30,
-----------------
1998 1997
------- -------
Net sales $1,347.6 $1,300.0
Cost of sales 1,058.6 1,016.3
Depreciation 57.5 51.5
Selling, general and administrative
expenses 112.7 95.5
Minority interest 2.4 1.8
Goodwill amortization 12.7 12.4
Equity in affiliate earnings and other
income (8.9) (11.7)
-------- ---------
Earnings before interest and finance
charges and income taxes 112.6 134.2
Interest expense and finance charges 20.6 19.0
---------- ---------
Earnings before income taxes 92.0 115.2
Provision for income taxes 29.1 39.2
--------- ---------
Net earnings $ 62.9 $ 76.0
========= ===========
Net earnings per share
Basic $ 2.68 $ 3.21
========= ===========
Diluted $ 2.65 $ 3.17
========= ===========
Average shares outstanding (thousands)
Basic 23,509 23,692
========= ==========
Diluted 23,690 23,907
========= ==========
Dividends declared per share $ 0.45 $ 0.45
========= ==========
See accompanying Notes to Consolidated Financial Statements
BORG-WARNER AUTOMOTIVE, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
Nine Months Ended
September 30,
--------------------
1998 1997
-------- -----------
Operating
Net earnings $ 62.9 $ 76.0
Adjustments to reconcile net earnings to net cash flows
from operating activities:
Non-cash charges (credits) to operations:
Depreciation 57.5 51.5
Goodwill amortization 12.7 12.4
Deferred income tax provision 1.9 1.2
Other, principally equity in
affiliate earnings (9.2) (11.3)
Changes in assets and liabilities:
Increase in receivables (32.1) (18.0)
Increase in inventories (22.2) (22.9)
Increase in prepayments and other
current assets (7.0) (8.7)
Increase (decrease) in accounts
payable and accrued expenses (9.1) 23.8
Increase (decrease) in income taxes
payable (20.8) 19.6
Net change in other long-term assets
and liabilities (0.5) (9.4)
------- -------
Net cash provided by operating
activities 34.1 114.2
Investing
Capital expenditures (78.8) (88.5)
Proceeds from sales of businesses 49.4 --
Proceeds from other assets 2.0 9.0
------- ------
Net cash used in investing activities(27.4) (79.5)
Financing
Net increase (decrease)in notes payable (18.3) 12.6
Additions to long-term debt 34.4 0.8
Reductions in long-term debt (1.7) (31.1)
Payments for purchases of treasury common
stock (13.0)
Proceeds from options exercised 0.4 2.1
Dividends paid (10.6) (10.7)
------ --------
Net cash used in financing activities (8.8) (26.3)
Effect of exchange rate changes on cash
and cash equivalents 0.4 (0.5)
--------- ---------
Net increase (decrease) in cash and cash
equivalents (1.7) 7.9
Cash and cash equivalents at beginning
of year 13.4 11.5
--------- --------
Cash and cash equivalents at end of
period $ 11.7 $ 19.4
========= ========
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest expense $ 20.5 $ 18.0
Income taxes 34.8 21.3
See accompanying Notes to Consolidated Financial Statements
Borg-Warner Automotive, Inc. and Consolidated Subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
(1) Research and development costs charged to expense for the three and nine
months ended September 30, 1998 were $17.2 million and $50.4 million,
respectively. Costs charged to expense for the three and nine months ended
September 30, 1997 were $13.7 million and $41.0 million, respectively.
(2) Inventories consisted of the following (millions of dollars):
September 30, December 31,
1998 1997
------------- -----------
Raw materials $ 52.3 $ 53.9
Work in progress 54.6 33.9
Finished goods 23.9 20.2
---------- -----------
Total inventories $ 130.8 $ 108.0
========== ==========
(3) The Company has a 50% interest in NSK-Warner K.K. ("NSK-Warner"), a joint
venture based in Japan that manufactures automatic transmission components. The
Company's share of the earnings or losses reported by NSK-Warner is accounted
for using the equity method of accounting. NSK-Warner has a fiscal year-end of
March 31.
The Company's investment in NSK-Warner was $115.9 million at September 30,
1998 and $124.1 million at December 31, 1997.
Following are summarized financial data for NSK-Warner. Balance sheet data
is presented as of September 30, 1998 and March 31, 1998 and statement of income
data is presented for the three and six months ended September 30, 1998 and
1997. The Company's results include its share of NSK-Warner's results for the
three and nine months ended August 31, 1998 and 1997.
Sept. 30, March 31,
1998 1998
--------- ------------
Balance Sheets (in millions)
Current assets $ 121.1 $ 139.0
Noncurrent assets 114.8 119.4
Current liabilities (excluding debt) 58.0 68.0
Noncurrent liabilities (excluding debt)6.8 7.0
Total debt - -
Three Months Ended
September 30,
1998 1997
-------- -----------
Statements of Income (in millions)
Net sales $ 51.3 $ 67.4
Gross profit 10.5 15.3
Net income 3.6 5.5
Six Months Ended
September 30,
-------------------
1998 1997
Statements of Income (in millions)
Net sales $ 103.0 $ 134.8
Gross profit 20.6 33.0
Net income 6.5 12.3
(4) The Company's provisions for income taxes for the three and nine months
ended September 30, 1998 and 1997 are based upon estimated annual tax rates for
the year applied to federal, state and foreign income. The effective rate
differed from the U.S. statutory rate primarily due to a)state income taxes,
b)foreign rates which differ from those in the U.S. and c) realization of
certain business tax credits, including foreign tax credits and research and
development credits.
(5) Following is a summary of notes payable and long-term debt:
September 30, 1998 December 31, 1997
Current Long-Term Current Long-Term
--------- ----------- -------- ---------
DEBT (millions of dollars)
Bank borrowings $ 45.4 $ 129.1 $ 36.1 $ 94.9
Bank term loans due through 2002
(at an average rate of 4.6% at
Sept. 1998 and 6.1% at December
1997) 0.5 22.8 30.2 21.8
7% Senior Notes due 2006, net
of unamortized discount - 149.7 -- 149.6
Capital lease liability 0.3 3.9 1.4 4.1
--------- --------- ------- --------
Total notes payable and
long-term debt $ 46.2 $ 305.5 $ 67.7 $ 270.4
========= ========== ========= =========
The Company maintains a $350 million revolving credit facility. At
September 30, 1998, $95.0 million of borrowings under the facility were
outstanding. The facility is available through September 30, 2001.
The credit agreement contains numerous financial and operating covenants
including, among others, covenants requiring the Company to maintain certain
financial ratios and restricting its ability to incur additional foreign
indebtedness.
(6) The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency and certain state environmental
agencies and private parties as potentially responsible parties ("PRPs") at
various hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act ("Superfund") and equivalent state laws
and, as such, may be liable for the cost of clean-up and other remedial
activities at 28 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula.
Based on information available to the Company which, in most cases,
includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully
pay the costs apportioned to them; currently available information from PRPs
and/or federal or state environmental agencies concerning the scope of
contamination and estimate remediation costs; remediation alternatives; estimate
legal fees; and other factors, the Company has established a reserve in its
financial statements for indicated environmental liabilities with a balance at
September 30, 1998 of approximately $5.9 million. The Company expects this
amount to be expended over the next three to five years.
The Company entered into a Settlement Agreement and Specific Mutual Release
dated as of May 31, 1998 (the "Settlement Agreement") with Borg-Warner Security
Corporation ("BWSC"), the successor corporation to its former parent. The
previously-reported dispute involved whether BWSC was entitled to
indemnification from the Company for certain environmental liabilities under a
Distribution and Indemnity Agreement dated January 27, 1993.
Pursuant to the Settlement Agreement, the Company and BWSC agreed to
dismiss and vacate any and all arbitration awards resulting from the arbitration
proceeding and to dismiss with prejudice the lawsuit filed by the Company in the
Circuit Court of Cook County, Illinois on January 27, 1998. Under the
Settlement Agreement, the Company agreed to indemnify BWSC for the first $2.9
million BWSC pays in environmental costs after April 30, 1998 and 50% of any
amounts in excess of $2.9 million. At present, the Company does not have
sufficient information to determine the extent of its liability under the
Settlement Agreement, but does not anticipate that such amount will have a
material adverse effect on its financial position or future operating results.
It is expected that indemnification payments will be made by the Company over
the course of several years as the environmental costs are incurred.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position or
future operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the ultimate
outcome of any such matters.
As of September 30, 1998, the Company had sold $100 million of receivables
under a $102 million Receivables Transfer Agreement for face value without
recourse. The Company had sold receivables aggregating $100 million under the
same facility at December 31, 1997.
(7) Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". Comprehensive
income is a measurement of all changes in shareholders' equity that result from
transactions and other economic events other than transactions with
shareholders. For the Company, this includes foreign currency translation
adjustments, in addition to net earnings. The amounts presented as other
comprehensive income, net of related taxes, are added to net income which
results in comprehensive income.
The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the three and nine months ended September 30,
1998 and 1997:
($ in millions)
Three Months
1998 1997
------ -------
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
------ -------- ----- ------- ------- -----
Foreign currency
translation adjustments $ 2.8 $(0.8) $ 2.0 $(14.7) $5.0 $ (9.7)
Net income as reported 17.3 21.6
------ ------
Total comprehensive income $19.3 $11.9
======= =======
Nine Months
-------------
1998 1997
------ -------
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
-------- -------- ------- ------- ------ -----
Foreign currency
translation adjustments $ (8.8) $ 2.9 $(5.9) $(13.2) $ 4.5 $(8.7)
Net income as reported 62.9 76.0
------- -----
Total comprehensive income $57.0 $67.3
======= ========
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Borg-Warner Automotive, Inc. (the "Company") operates as a leading, global
supplier to original equipment manufacturers ("OEMs") of passenger cars, sport
utility vehicles and light trucks in the North American, European and Asian
automotive markets. The Company is a product leader in a wide variety of highly
engineered components and systems primarily related to automatic transmission,
four-wheel drive ("4WD") and engine applications. Examples include "shift
quality" automatic transmission components and systems, 4WD transfer cases,
automotive chain and chain systems, turbochargers, engine timing components and
systems, and a variety of air and fluid control components and systems for
engine and fuel systems control.
The following discussion covers the results of operations for the three and
nine months ended September 30, 1998 and 1997 and financial condition as of
September 30, 1998 and December 31, 1997.
RESULTS OF OPERATIONS
The Company's products have historically fallen into four operating groups:
Powertrain Systems, Automatic Transmission Systems, Morse TEC and Air/Fluid
Systems. Net sales by operating group for the three and nine months ended
September 30, 1998 and 1997 are shown in the following table (in millions of
dollars.) The Company has not yet finalized its plans concerning future
integration of its recently acquired German turbocharger business, AG Kuhnle,
Kopp & Kausch, so it is shown separately.
Three Months Nine Months
Ended Sept. 30, Ended September 30,
-------------- ----------------
1998 1997 1998 1997
-------- -------- --------- ---------
Powertrain Systems $118.2 $142.1 $379.7 $ 457.2
Automatic Transmission Systems 113.8 124.6 358.3 387.0
Morse TEC 80.8 78.0 252.7 239.3
Air/Fluid Systems 82.1 76.7 262.2 259.6
AG Kuhnle, Kopp & Kausch 47.3 - 129.8 -
--------- -------- --------- ---------
442.2 421.4 1,382.7 1,343.1
Intergroup eliminations (10.6) (14.6) (35.1) (43.1)
--------- -------- -------- ----------
Net sales $431.6 $406.8 $1,347.6 $1,300.0
======== ======== ======== ==========
Sales for the quarter ended September 30, 1998 increased 6% from the same
period in the prior year. Adjusted for the impact of the turbocharger business,
sales decreased by 6%. Third quarter sales were negatively impacted by the
strike at General Motors, the continued weakness of the Asian economy, and a low
installation rate of 4WD products on a major truck model. The Company is
optimistic about sales growth in the fourth quarter due to strong engine-related
growth and new programs at Chrysler.
Powertrain Systems sales for the quarter ended September 30, 1998 were down
17% from 1997's third quarter due to the loss to a competitor of a 4WD
application for Ford heavy trucks in the second half of 1997, a 33% reduction in
4WD transfer case shipments for the Ford F-150 truck and a decline in 4WD
transfer case shipments to Ssangyong in Korea, which became a unit of Daewoo
Motor Company in 1998. Product shipments have begun rebounding, and along with
growing sales for the Mercedes Benz M-Class SUV, sales are expected to be
stronger in the fourth quarter. Automatic Transmission Systems sales decreased
9% compared to the prior year as strong sales in Europe were unable to offset
the effects of the General Motors strike, the Asian economy and the partial sale
of a product line last year. The Group was also affected by customer product
mix issues, particularly the industry-wide weakness in passenger cars relative
to trucks. Fourth quarter sales will be weakened by the sale of the connecting
rod business but should benefit from the launch of a new automatic transmission
program at Chrysler. Morse TEC realized a 4% increase in sales over the same
period in 1997. Continued strong North American demand, mainly from new content
on Chrysler engines and increased penetration on GM passenger cars and Ford
engines, offset weakness in Asia and the impact of the GM strike. The positive
trend at Morse TEC is expected to continue throughout 1998 and 1999. Air/Fluid
Systems sales increased 7%, in part due to year-over-year changes in Chrysler LH
production. Air/Fluid Systems sales growth is anticipated for the remainder of
1998 from increased demand for air management products both in North America and
Europe. Overall, the strike at General Motors resulted in approximately $15
million in lost sales during the third quarter. Each of the main operating
groups, apart from AG Kuhnle, Kopp & Kausch, was affected by the strike, most
significantly Automatic Transmission Systems and Morse TEC.
Sales increased 4% in the first nine months of 1998 to $1,347.6 million
from $1,300.0 million in the first nine months of 1997. Adjusted for the
effects of the turbocharger business, sales decreased by 6%. Comparatively,
North American and Japanese production decreased by 1% and 10%, respectively,
while European production increased by 6%. In addition to the $25 million
impact of the General Motors strike, year-to-date sales were adversely affected
by the weakened Asian economy and a depressed demand for vehicles with higher-
end features with BWA content, such as automatic transmissions and four-wheel
drive. Sales are expected to improve during the remainder of the year as the
result of a new transmission program at Chrysler with increased BWA content,
improvements in sales of 4WD transfer cases to Ford and Mercedes, and improved
stability in the auto market.
Gross margin through the first nine months of 1998 was 21.4%, down slightly
from 21.8% for the same period of 1997. The turbocharger business, which has
lower margins than the Company's other businesses, was partly responsible for
the decline. Also, cost reductions and productivity improvements were unable to
offset increases in costs and price concessions given to customers. Margins
have been improving and are expected to continue improving in the fourth quarter
as additional cost reduction programs are implemented, especially with respect
to material costs.
The Company has continued spending on research and development at higher
levels than in the previous year in order to expand its technological expertise
in both product and process. Through September 1998, research and development
spending totaled $50.4 million, a 23% increase over 1997. Net of the
turbocharger business, the spending increased by $5.4 million, or 13%. Spending
represented 3.7% of sales in 1998 compared to 3.2% in 1997.
For the three months ended September 30, 1998 and 1997, the Company's
portion of NSK-Warner's earnings was $0.5 million and $2.6 million,
respectively. The Company's portion of such earnings for the nine months ended
September 30, 1998 decreased 43% to $5.7 million from $10.0 million in the prior
year. NSK-Warner's yen denominated earnings through September, 1998 declined by
38% from the prior year, mainly due to the Japanese economy and also due to
declines in selling prices. The remaining 5% of the total decrease is
attributable to the continued weakening of the yen against the dollar in 1998
and fiscal year-end adjustments recorded at NSK-Warner.
Interest expense for the three months ended September 30, 1998 and 1997 was
$7.6 million and $6.2 million, respectively. The Company carried significantly
higher levels of long-term debt third quarter of 1998 than in 1997 in order to
fund the excess of cash required for investing activities over cash generated
from operating activities.
The Company's income taxes are based upon estimated annual tax rates for
the year. The effective tax rate used for 1998 reflects certain tax credits
related to research and development programs and foreign operations that the
Company expects to realize. As such, the anticipated effective income tax rate
for 1998 is lower than the standard federal and state tax rates. The effective
rate was higher in 1997 because 1997 had a greater percentage of income from
foreign operations which have higher tax rates.
Net earnings for the quarter ended September 30, 1998 declined 20% to $17.3
million compared with $21.6 million for the third quarter ended September 30,
1997, while earnings for the first nine months of 1998 declined 17% to $62.9
from $76.0 million for the same period of 1997. Approximately $4.0 million of
the third quarter decrease and $7.1 million of the year-to-date decrease is
attributable to the General Motors strike. The other factors discussed above
are responsible for the remainder of the changes.
FINANCIAL CONDITION AND LIQUIDITY
The Company's cash and cash equivalents decreased by $1.7 million from
December 31, 1997 to September 30, 1998. Cash generated from operating
activities and proceeds from the sales of businesses totaling $34.1 and $49.4
million, respectively, were more than offset by capital spending, treasury stock
purchases and dividends paid.
Operating cash flow consists of net earnings of $62.9 million and non-cash
items including $57.5 million of depreciation, offset by an increased investment
in net operating assets and liabilities of $91.7 million. The increase in
depreciation is due to the turbocharger business and increased capital
expenditures in recent years. The increased investment in net operating assets
reflected in the September 30, 1998 balance sheet is primarily due to increases
in receivables and decreases in payables, particularly income taxes payable.
The increased receivable balance is consistent with the sales improvement in the
third quarter of 1998 versus 1997, while income taxes payable has been impacted
by significant payments for accrued income taxes in 1998.
Capital spending of $78.8 million for the nine months ended September 30,
1998 was $9.7 million less than the same period in 1997. The spending is
intended to increase capacities and to fund existing and new programs. The
Company anticipates that capital spending for full-year 1998 will be just below
1997's level.
The Company repaid $30 million of its domestic term loans decreased its
money market line between December 31, 1997 and September 30, 1998 with funds
available under its revolving credit facilities and proceeds from the sale of
the connecting rod business.
As of September 30, 1998 and December 31, 1997, the Company had sold $100
million of receivables under a $102 million Receivables Transfer Agreement for
face value without recourse.
The Company believes that the combination of cash from its operations and
available credit facilities will be sufficient to satisfy cash needs for its
current level of operations and planned operations for the remainder of 1998 and
for the foreseeable future.
OTHER MATTERS
Sale of Connecting Rod Business
- --------------------------------
In September 1998, the Company sold its precision forged powder metal
connecting rod business unit to GKN Sinter Metals, Inc., a subsidiary of UK-
based GKN plc. GKN paid the Company $41.8 million in the third quarter, with
the final selling price subject to the completion of due diligence. This
transaction did not have a material impact on the Company's earnings for the
third quarter of 1998 and is not expected to impact fourth quarter earnings.
The connecting rod product line was originally acquired as part of the Company's
purchase of the Precision Forged Products Division of Federal-Mogul Corporation
in 1995. The connecting rod business did not offer a strategic fit with the
Company's core business and although the business is experiencing rapid growth
and is a solid process-oriented business, it has been determined the Company's
resources are better spent on the Company's core technologies in highly-
engineered products and systems. For the three and nine months ended September
30, 1998, this business reported net sales of $6.8 million and $27.2 million,
respectively. 1997 sales for the comparable periods were $7.6 million and $22.9
million, respectively.
Sale of Torque Converter Business
- ----------------------------------
In April 1998, the Company entered into an agreement to sell substantially
all the remaining assets of its Torque Converter business to Mannesmann Sachs
AG. It was determined that the Torque Converter business no longer fit the
strategic goals of the Company, although the Company plans to maintain its
expertise in the functionality of torque converters in automatic transmissions.
One product line of the Torque Converter business was previously sold in June
1997. In accordance with the agreement, operations will be phased out during
the course of 1998, with Mannesmann Sachs making multiple progress payments to
the Company as the assets are transferred. Two payments have been received
early in the fourth quarter totaling $4.0 million. The sale of these assets and
the wind-down of this business are not expected to result in a significant gain
or loss. The Torque Converter business contributed $69.4 million to 1997 full-
year sales, less than 4% of the Company's total revenues, and was expected to
contribute only about $40 million in revenues to 1998.
Litigation
- -----------
As discussed more fully in Note 6 of the Supplemental Notes to the
Consolidated Financial Statements, the Company has been identified as a PRP at
various hazardous waste disposal sites and, as such, may be liable for the cost
of clean-up and other remedial activities. In addition, various claims and
suits arising in the ordinary course of business and seeking money damages have
been filed against the Company. In each of these cases, the Company believes
that it has a defendable position or has made adequate provisions to protect the
Company from material losses. The Company believes that it has established
adequate provisions for litigation liabilities in its financial statements in
accordance with generally accepted accounting principles. These provisions
include both legal fees and possible outcomes of legal proceedings.
Pursuant to the Settlement Agreement described more fully in Note 6 of the
Consolidated Financial Statements, the Company agreed to indemnify BWSC for the
first $2.9 million BWSC pays in certain environmental costs after April 30, 1998
and 50% of any amounts in excess of $2.9 million. At present, the Company does
not have sufficient information to determine the extent of its liability under
the Settlement Agreement, but does not anticipate that such amount will have a
material adverse effect on its financial position or future operating results.
It is expected that indemnification payments will be made by the Company over
the course of several years as the environmental costs are incurred.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial position or
future operating results, although no assurance can be given with respect to the
ultimate outcome of any such matter.
Dividends
- -----------
On October 16, 1998, the Company declared a $0.15 per share dividend to be
paid on November 16, 1998 to shareholders of record on November 2, 1998.
Year 2000 Issues
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The Company is in the process of upgrading certain aspects of its
operations to ensure that business systems do not fail to function when the Year
2000 arrives or at other date intervals. The Company has completed an inventory
of key systems and equipment with potential Year 2000 issues in the areas of
business operating systems, manufacturing operations, operating infrastructure,
customers and suppliers. This included an identification of mission critical
systems, an assessment of the readiness of applications for Year 2000 and the
corrective action needed, if any.
The Company is also participating in the process coordinated by the
Automotive Industries Action Group ("AIAG"), a group sponsored by the major U.S.
automakers. The process consists of ongoing surveys to measure a company's
state of readiness and its progress on the assessment and remediation stages of
its program. The survey results are used to monitor progress against
remediation action plans.
The Company's program to become Year 2000 compliant is being operated on an
enterprise-wide basis. A coordinator has been assigned overall administrative
responsibility; however, each operating unit is responsible for compliance at
its location. As of the end of June 1998, inventories and assessments had been
completed at substantially all locations. Corrective action is underway. The
majority of items identified as non-compliant would not significantly interfere
with the Company's operations if not updated. In addition, the exposure to an
enterprise-wide failure is less likely because of the relative autonomy of the
operating units. The Company is operating on a schedule to have substantially
all non-compliant items remedied by mid-1999 and is also seeking confirmation
from key suppliers and other third parties that their systems and applications
that affect the Company will be Year 2000 compliant by mid-1999.
Concurrent with the Year 2000 effort, the process of upgrading certain
business operating systems at a number of operating units to improve both
business operations and control is underway. Any new system acquired is
required to be certified as Year 2000 compliant.
The Company will spend approximately $11.5 million for new systems, to
upgrade systems and equipment and for other efforts to ensure compliance with
Year 2000 between 1997 and 1999. These costs will be paid for with cash from
operations. The bulk of such spending will provide for system improvements and
enhancements including compliance with Year 2000. Through September 30, 1998,
spending has totaled approximately $6 million. Spending solely related to Year
2000 compliance is not expected to be material to either the financial position
or results of operations for any given year.
As with any program to upgrade business systems, there are risks that
programs will not be completed on schedule and that programs will not accomplish
all that they were supposed to accomplish. The chance of this happening
throughout the Company is remote. For individual occurrences, the impact would
most likely be a reduced level of quality control for operations and a
substantial increase in the amount of manual intervention in areas such as
material planning and inventory control, statistical process control, and
financial and operational recordkeeping.
Substantial contingency plans are not in place because the Company believes
that its efforts will be successful. However, specific procedures required to
keep our operations functioning in the event of delays or machine failures have
been identified. As mentioned above, the Company has identified key suppliers
and requested confirmation as to their Year 2000 compliance. Supplier responses
are currently being verified, including supplier audits and other actions as
appropriate. The Company is also considering the availability of alternative
supply sources in the event that they are needed.
The Company cannot provide any assurance that the correction actions being
implemented will prevent dating systems problems or that the cost of doing so
will not be material. In addition, disruptions with respect to the computer
systems of vendors or customers, including both information technology ("IT")
and non-IT systems could impair the Company's ability to obtain necessary
materials or products to sell to or serve its customers. Disruptions of
computer systems or the computer systems of vendors or customers, as well as the
cost of avoiding such disruption, could have a material adverse effect upon the
financial position or operating results of the Company.
Euro Conversion
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On January 1, 1999, 11 of the 15 member countries of the European Union are
scheduled to establish fixed conversion rates between their existing currencies
and a new common currency (the "euro"). The participating countries have agreed
to adopt the euro as their common legal currency on that date. The Company has
begun consideration of the effects of the euro conversion on operations, but is
currently unsure of the potential impact that the euro conversion will have on
the financial position or operating results. Because of the nature of the
Company's business and customers, the effect is not expected to be material.
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"), and Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("SFAS 132"). These statements are effective
for fiscal years beginning after December 15, 1997, although SFAS 131 and SFAS
132 do not require adoption in interim periods. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components. See Note
7 to the Consolidated Financial Statements for presentation of comprehensive
income. SFAS 131 establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. SFAS 132 standardizes certain disclosure
requirements for pension and postretirement benefits, requires additional
information on changes in the benefit obligations and fair value of plan assets,
and eliminates certain other disclosures. These standards expand or modify
current disclosures and, accordingly, will have no impact on the Company's
reported financial position, results of operations and cash flows. The Company
is assessing the impact of SFAS 131 and SFAS 132 on its future reporting.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), issued in June
1998, is required to be adopted in fiscal years beginning after June 15, 1999.
The Company has not yet determined the effect SFAS 133 will have on the
Company's financial position or results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
- ------------------------------------------------
Statements contained in this Form 10-Q 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 by original
equipment manufacturers, fluctuations in demand for vehicles containing the
Company's products, general economic conditions, as well as other risks detailed
in the Company's filings with the Securities and Exchange Commission, including
the Cautionary Statements filed as Exhibit 99.1 to the Form 10-K for the fiscal
year ended December 31, 1997.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
Inapplicable.
PART II
Item 1. Legal Proceedings
Inapplicable.
Item 2. Changes in Securities
Inapplicable.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
27 - Financial data schedule
(b)Reports on Form 8-K
On July 24, 1998, the Company filed a report on Form 8-K announcing its adoption
of a stockholder rights plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BORG-WARNER AUTOMOTIVE, INC.
(Registrant)
By /s/ William C. Cline
---------------------------
(Signature)
William C. Cline
Vice President and Controller
(Principal Accounting Officer)
Date: November 13, 1998