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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended March 31, 2001
Commission file number: 1-12162
BORGWARNER INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3404508
- ----------------------------- -------------------
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
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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 April 30, 2001 the registrant had 26,307,219 shares of Common Stock
outstanding.
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BORGWARNER INC.
FORM 10-Q/A
THREE MONTHS ENDED MARCH 31, 2001
INDEX
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements
Introduction.............................................. 2
Condensed Consolidated Balance Sheets at
March 31, 2001 and December 31, 2000.................. 3
Consolidated Statements of Operations for the three
months ended March 31, 2001 and 2000.................. 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2001 and 2000................. 5
Notes to the Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 12
Item 3. Quantitative and Qualitative Disclosures
About Market Risks.................................. 17
PART II. Other Information
Item 1. Legal Proceedings..................................... 18
Item 2. Changes in Securities................................. 18
Item 3. Defaults Upon Senior Securities....................... 18
Item 4. Submission of Matters to a Vote of
Security Holders.................... 18
Item 5. Other Information..................................... 18
Item 6. Exhibits and Reports on Form 8-K...................... 18
SIGNATURES.......................................................... 19
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BORGWARNER INC.
FORM 10-Q/A
THREE MONTHS ENDED MARCH 31, 2001
PART I.
ITEM 1.
BorgWarner Inc. and Consolidated Subsidiaries'
Financial Statements
The financial statements of BorgWarner Inc. and Consolidated Subsidiaries
("Company") have been prepared in accordance with the instructions to Form 10-Q
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
statements are unaudited but include all adjustments, consisting only of
recurring items, except as noted, which the Company considers necessary for a
fair presentation of the information set forth herein. The results of operations
for the three months ended March 31, 2001 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, 2000.
This Form 10-Q/A has been filed for the sole purpose of correcting two
typographical errors. On page 5, in the Consolidated Statements of Cash Flows
(Unaudited), the caption "Net cash provided by operating activities" is $1.9
million. In the Form 10-Q filed on May 14, 2001, a typographical error caused
the amount to be reported as $(1.9) million. On page 11, in Note 10, the correct
date is April 2001.
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(millions of dollars except share data)
(Unaudited)
March 31, December 31,
2001 2000
-------- --------
ASSETS
Cash and cash equivalents........................ $ 15.5 $ 21.4
Receivables...................................... 202.8 168.9
Inventories...................................... 153.5 161.6
Deferred income tax asset........................ 1.7 1.7
Investments in businesses held for sale.......... 32.1 31.7
Prepayments and other current assets............. 28.9 25.3
-------- --------
Total current assets...................... 434.5 410.6
Property, plant, and equipment at cost........... 1,280.4 1,279.3
Less accumulated depreciation.................... 488.8 472.1
-------- --------
Net property, plant and equipment......... 791.6 807.2
Investments and advances......................... 144.9 142.7
Goodwill, net.................................... 1,191.4 1,203.1
Deferred income tax asset........................ 53.9 49.4
Other noncurrent assets.......................... 151.9 152.9
-------- --------
Total other assets........................ 1,542.1 1,548.1
-------- --------
$2,768.2 $2,765.9
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable.................................... $ 55.9 $ 54.4
Accounts payable and accrued expenses............ 368.1 408.2
Income taxes payable............................. 91.7 67.3
-------- --------
Total current liabilities................. 515.7 529.9
Long-term debt................................... 739.2 740.4
Long-term retirement-related liabilities......... 346.3 345.2
Other long-term liabilities...................... 62.4 63.3
-------- --------
Total long-term liabilities............... 408.7 408.5
Capital stock:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued............... -- --
Common stock, $.01 par value; authorized
50,000,000 shares; issued shares of
27,039,968 in 2001 and outstanding
shares of 26,307,219 in 2001................ 0.3 0.3
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; none issued
and outstanding in 2001..................... -- --
Capital in excess of par value................... 715.7 715.7
Retained earnings................................ 439.0 422.9
Management shareholder note...................... (2.5) (2.5)
Accumulated other comprehensive income (loss).... (18.0) (16.0)
Common stock held in treasury, at cost:
732,749 shares in 2001....................... (29.9) (33.3)
-------- --------
Total stockholders' equity................ 1,104.6 1,087.1
-------- --------
$2,768.2 $2,765.9
======== ========
See accompanying Notes to Consolidated Financial Statements
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
Three Months Ended
March 31,
-------------------------
2001 2000
-------- --------
Net sales........................................ $ 606.8 $ 730.2
Cost of sales.................................... 471.1 550.3
Depreciation..................................... 27.0 26.2
Selling, general and administrative expenses..... 55.6 63.5
Minority interest................................ 0.7 0.7
Goodwill amortization............................ 10.6 11.0
Equity in affiliate earnings and other income.... (4.5) (3.5)
-------- --------
Earnings before interest expense, finance
charges and income taxes.................. 46.3 82.0
Interest expense and finance charges............. 12.8 15.9
-------- --------
Earnings before income taxes.............. 33.5 66.1
Provision for income taxes....................... 12.4 25.1
-------- --------
Net earnings........................ $ 21.1 $ 41.0
======== ========
Net earnings per share
Basic..................................... $ 0.80 $ 1.54
======== ========
Diluted................................... $ 0.80 $ 1.53
======== ========
Average shares outstanding (thousands)
Basic..................................... 26,256 26,684
======== ========
Diluted................................... 26,384 26,772
======== ========
Dividends declared per share..................... $ 0.15 $ 0.15
======== ========
See accompanying Notes to Consolidated Financial Statements
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
Three Months Ended
March 31,
-------------------------
2001 2000
-------- --------
OPERATING
Net earnings..................................... $ 21.1 $ 41.0
Non-cash charges to operations:
Depreciation................................ 27.0 26.2
Goodwill amortization....................... 10.6 11.0
Deferred income tax provision............... - -
Other, principally equity in affiliate
earnings.................................. ( 4.0) (2.7)
Changes in assets and liabilities, net of
effects of acquisitions and divestitures:
Increase in receivables..................... (37.5) (63.0)
(Increase) decrease in inventories.......... 6.1 (16.8)
Increase in prepayments and other
current assets............................ (3.8) (3.2)
Increase(decrease) in accounts payable
and accrued expenses..................... (35.4) 17.5
Increase in income taxes payable............ 25.2 20.6
Net change in other long-term assets
and liabilities........................... (7.4) (7.3)
-------- --------
Net cash provided by
operating activities.............. 1.9* 23.3
INVESTING
Capital expenditures............................. (17.2) (28.3)
Proceeds from sale of businesses................. - 122.3
Payments for taxes on businesses sold............ - (43.0)
Net proceeds from other assets................... 4.0 2.6
-------- --------
Net cash used in investing
activities........................ (13.2) (53.6)
FINANCING
Net increase (decrease) in notes payable......... 4.8 3.6
Additions to long-term debt...................... 13.7 0.5
Reductions in long-term debt..................... (11.5) (79.3)
Payments for purchases of treasury stock......... - (6.1)
Proceeds from stock options exercised............ 2.3 0.1
Dividends paid................................... (4.0) (4.0)
-------- --------
Net cash provided by (used in)
financing activities.............. 5.3 (85.2)
Effect of exchange rate changes on cash flows.... .1 -
-------- --------
Net increase (decrease) in cash and
cash equivalents............................... (5.9) (8.3)
Cash and cash equivalents at beginning of year... 21.4 21.7
-------- --------
Cash and cash equivalents at end of period....... $ 15.5 $ 13.4
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
NET CASH PAID DURING THE PERIOD FOR:
Interest.................................... $ 14.0 $ 20.1
Income taxes................................ 6.3 56.2
Non-cash financing transactions:
Issuance of common stock for acquisition.... $ - $ -
Issuance of treasury stock for
management notes.......................... - 0.5
Issuance of common stock for
Executive Stock Performance Plan.......... 1.0 1.1
* In the Company's Form 10-Q filed on May 14, 2001, a typographical error
resulted in this number being reported as $(1.9) million.
See accompanying Notes to Consolidated Financial Statements
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BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Research and development costs charged to expense for the three months
ended March 31, 2001 were $27.4 million. Research and development costs
charged to expense for the three months ended March 31, 2000 were $29.7
million.
(2) Inventories consisted of the following (millions of dollars):
March 31, December 31,
2001 2000
-------- --------
Raw materials............................... $ 60.0 $ 73.1
Work in progress............................ 54.8 42.0
Finished goods.............................. 38.7 46.5
-------- --------
Total inventories......................... $ 153.5 $ 161.6
======== ========
(3) The Company has a 50% interest in NSK-Warner K.K. ("NSK-Warner"), a joint
venture based in Japan that manufactures automatic transmission components
and systems. The Company's share of the earnings or losses reported by
NSK-Warner is accounted for using the equity method of accounting.
NSK-Warner has a fiscal year-end of March 31.
The Company's investment in NSK-Warner was $143.0 million at March 31, 2001
and $140.9 million at December 31, 2000.
Following are summarized financial data for NSK-Warner. Balance sheet data
is presented as of March 31, 2001 and March 31, 2000 and statement of
income data is presented for the three and twelve months ended March 31,
2001 and 2000. The Company's results include its share of NSK-Warner's
results for the three months ended February 28, 2001 and February 29, 2000.
March 31, March 31,
2001 2000
-------- --------
Balance Sheet (in millions)
Current assets.............................. $ 138.1 $ 196.0
Noncurrent assets........................... 154.6 157.8
Current liabilities (excluding debt)........ 85.1 96.2
Noncurrent liabilities (excluding debt)..... 8.8 8.5
Three Months Ended
March 31,
-------------------------
2001 2000
Statement of Income (in millions)
Net sales................................... $ 80.1 $ 95.1
Gross profit................................ 16.3 25.4
Net income.................................. 5.9 10.1
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Twelve Months Ended
March 31,
--------------------------
(Unaudited)
2001 2000
---------- --------
Statement of Income (in millions)
Net sales................................... $ 333.6 $ 310.3
Gross profit................................ 72.8 70.2
Net income.................................. 29.6 28.2
(4) The Company's provisions for income taxes for the three months ended March
31, 2001 and 2000 are based upon estimated annual tax rates for the year
applied to federal, state and foreign income. The effective rate differed
from the U.S. statutory rate primarily due to a)state income taxes,
b)foreign rates which differ from those in the U.S., c)realization of
certain business tax credits, including foreign tax credits and research
and development credits and d)other non-deductible expenses, such as
goodwill.
(5) Following is a summary of notes payable and long-term debt:
March 31, 2001 December 31, 2000
------------------ ------------------
Current Long-Term Current Long-Term
------- --------- ------- ---------
DEBT (millions of dollars)
Bank borrowings..................... $ 51.0 $ 67.9 $ 48.7 $ 57.7
Bank term loans due through 2009
(at an average rate of 3.6% at
March, 2001 and 3.3% at
December, 2000)................... 3.9 23.1 4.7 23.1
7% Senior Notes due 2006,
net of unamortized discount....... 142.8 - 142.8
6.5% Senior Notes due 2009,
net of unamortized discount....... 188.4 - 188.4
8% Senior Notes due 2019,
net of unamortized discount....... 136.6 - 139.9
7.125% Senior Notes due 2029,
net of unamortized discount....... 179.3 - 187.3
Capital lease liability............. 1.0 1.1 1.0 1.2
------- ------- ------- ------
Total notes payable and
long-term debt............... $ 55.9 $ 739.2 $ 54.4 $740.4
======= ======= ======= ======
The Company maintains a $350 million revolving credit facility. At March
31, 2001, $15.0 million of borrowings under the facility were outstanding
in addition to $6.5 million of obligations under standby letters of credit.
At December 31, 2000, the facility was unused. The facility is available
through July, 2005.
The credit agreement contains numerous financial and operating covenants
including, among others, covenants requiring the Company to maintain
certain financial ratios and restricting its ability to incur additional
foreign indebtedness.
(6) The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by
the United States Environmental Protection Agency and certain state
environmental agencies and private parties as potentially responsible
parties ("PRPs") at various hazardous waste disposal sites under the
Comprehensive
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Environmental Response, Compensation and Liability Act ("Superfund") and
equivalent state laws and, as such, may presently be liable for the cost of
clean-up and other remedial activities at 42 such sites. Responsibility for
clean-up and other remedial activities at a Superfund site is typically
shared among PRPs based on an allocation formula.
Based on information available to the Company, which in most cases,
includes: an estimate of allocation of liability among PRPs; the
probability that other PRPs, many of whom are large, solvent public
companies, will fully pay the cost apportioned to them; currently available
information from PRPs and/or federal or state environmental agencies
concerning the scope of contamination and estimated remediation costs;
remediation alternatives; estimated legal fees; and other factors, the
Company has established a reserve for indicated environmental liabilities
with a balance at March 31, 2001 of approximately $21.6 million. The
Company expects this amount to be expended over the next three to five
years.
BorgWarner believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial condition
or future operating results, generally either because estimates of the
maximum potential liability at a site are not large or because liability
will be shared with other PRPs, although no assurance can be given with
respect to the ultimate outcome of any such matter.
In connection with the sale of Kuhlman Electric Corporation, the Company
agreed to indemnify the buyer and Kuhlman Electric for certain
environmental liabilities relating to the past operations of Kuhlman
Electric. During 2000, Kuhlman Electric notified the Company that it
discovered potential environmental contamination at its Crystals Springs,
Mississippi plant while undertaking an expansion of the plant.
The Company has been working with the Mississippi Department of
Environmental Quality ("MDEQ") and Kuhlman Electric to investigate the
extent of the contamination. To date, the investigation has revealed the
presence of PCBs in portions of the soil at the plant and neighboring areas
and the Company has cleaned several neighboring properties with MDEQ
oversight. The Company has filed a lawsuit against Kuhlman Electric seeking
a declaration of the scope of BorgWarner's contractual indemnity. As the
investigation is in its early stages, and the court has not yet ruled on
the lawsuit, the Company cannot now estimate the potential liability
associated with this matter.
(7) Comprehensive income is a measurement of all changes in stockholders'
equity that result from transactions and other economic events other than
transactions with stockholders. For the Company, this includes foreign
currency translation adjustments, changes in minimum pension liability
adjustments and net earnings. The amounts presented as other comprehensive
income, net of related taxes, are added to net income which results in
comprehensive income.
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The following summarizes the components of other comprehensive income on a
pretax and after-tax basis for the periods ended March 31,
($ in millions) Three Months
--------------------------------------------------------
2001 2000
-------------------------- -------------------------
Income Income
tax After- tax After-
Pretax effect tax Pretax effect tax
------ ------ ------ ------ ------ ------
Foreign currency
translation adjustments...... $(3.2) $ 1.2 $ (2.0) $(16.3) $6.2 $(10.1)
Net income as reported......... 21.1 41.0
------ ------
Total comprehensive income..... $ 19.1 $ 30.9
====== ======
The components of accumulated other comprehensive income (loss), net of
tax, in the Consolidated Balance Sheets are as follows:
($ in millions) March 31, December 31,
2001 2000
------- --------
Foreign currency translation adjustment........ $ (17.8) $ (15.8)
Minimum pension liability adjustment........... ( 0.2) (0.2)
------- --------
Total comprehensive income (loss).............. $ (18.0) $(16.0)
======= ========
(8) The following tables show sales and earnings before interest and taxes and
total assets for each of the Company's five reportable business segments.
Sales
Three Months Ended March 31,
2001 2000
---------------------------- -----------------------------
Inter- Inter-
Customer segment Net Customer segment Net
-------- ------- ------- -------- ------ ------
Air/Fluid Systems $ 89.0 $ 1.9 $ 90.9 $ 121.5 $ 2.6 $124.1
Cooling Systems 58.2 0.1 58.3 80.0 0.1 80.1
Morse TEC 215.2 5.4 220.6 227.5 7.2 234.7
TorqTransfer Systems 125.1 0.3 125.4 146.7 0.6 147.3
Transmission Systems 101.3 2.7 104.0 113.3 2.3 115.6
Divested Operations 18.0 - 18.0 41.2 0.1 41.3
Intersegment eliminations - (10.4) (10.4) - (12.9) (12.9)
------ ------ ------- -------- ------ ------
Consolidated $606.8 $ - $ 606.8 $ 730.2 $ - $730.2
====== ====== ======= ======== ====== ======
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Earnings Before
Interest & Taxes
Three Months Ended Total Assets
March 31, March 31, Dec. 31,
2001 2000 2001 2000
------ ------ -------- --------
Air/Fluid Systems $ 3.0 $ 15.6 $ 400.4 $ 403.2
Cooling Systems 2.0 11.0 531.6 536.8
Morse TEC 27.8 33.4 996.9 1,017.7
TorqTransfer Systems 4.0 10.4 251.8 250.3
Transmission Systems 12.0 14.7 353.6 353.1
Divested Operations (0.2) 2.2 74.3 73.6
------ ------ -------- --------
Total 48.6 87.3 2,608.6 2,634.7
Corporate, including equity
in affiliates (2.3) (5.3) 159.6 131.2
------ ------ -------- --------
Consolidated $ 46.3 $ 82.0 $2,768.2 $2,765.9
====== ====== ======== ========
Divested operations includes: 1) the fuel systems business which was
previously reported in Air/Fluid Systems and 2) the Company's HVAC business
which was sold in December 2000.
(9) Restructuring and other non-recurring charges totaling $62.9 million
pre-tax were incurred in the second half of 2000 in response to
deteriorating market conditions. The charges included the rationalization
and integration of certain businesses and actions taken to bring costs in
line with vehicle production slowdowns in major customer product lines.
Of the $62.9 million in pretax charges, $47.3 million represents non-cash
charges. Approximately $4.4 million was spent in 2000 and $8.1 million was
spent during the three months ended March 31, 2001. The remaining $3.1
million is expected to be spent in the remainder of 2001. We expect to fund
the total cash outlay with cash flow from operations. The actions taken are
expected to generate approximately $19 million in annualized savings,
primarily from lower salaries and benefit costs and reduced depreciation
charges, beginning in 2001. These savings are expected to be more than
offset by the impact of lower revenue from the deterioration in the
automotive and heavy-duty truck markets.
Components of the restructuring and other non-recurring charges are
detailed in the following table and discussed further below.
Balance at
Total Amount March 31,
(millions of dollars) Charges Incurred 2001
--------------------------------------------------------------------------
Severance and other benefit costs $ 8.9 $ (6.7) $ 2.2
Asset write-downs 11.6 (11.6) -
Loss on anticipated sale of business 35.2 (35.2) -
Other exit costs
and non-recurring charges 7.2 ( 6.3) 0.9
----------------------------------
Total $ 62.9 $ (59.8) $ 3.1
----------------------------------
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Severance and other benefit costs relate to the reduction of approximately
220 employees from the workforce. The reductions affect each of our
operating segments, apart from TorqTransfer Systems, across each of our
geographical areas, and across each major functional area, including
production and selling and administrative positions. As of March 31, 2001,
approximately $6.7 million had been paid for severance and other benefits
for 103 terminated employees. The remaining reductions and cash payments
should be complete by the end of 2001.
Asset write-downs primarily consist of the write-off of impaired assets
that will no longer be used in production as a result of the industry
downturn. Such assets have been taken out of production and are being
disposed.
Loss on anticipated sale of business is related to the fuel systems
business, which is currently being reported as an investment in businesses
held for sale on the Consolidated Balance Sheet. Fuel systems produces
metal tanks for the heavy-duty truck market in North America and does not
fit the Company's strategic focus on powertrain technology. In April 2000,
the Company announced its intention to sell this non-core business, which
was acquired as part of the vehicle products business of Kuhlman
Corporation in March 1999. With the deterioration of the North American
heavy-duty truck market in the second half of 2000, the value of this
business has significantly decreased, creating the $35.2 million loss. As
discussed in Note 10, in April 2001 the Company completed its sale of the
fuel systems business.
Other exit costs and non-recurring charges are primarily non-employee
related exit costs incurred to close certain non-production facilities we
no longer need.
(10) In April 2001, the Company completed the sale of its fuel systems business
to an investor group led by TMB Industries, a private equity group. Terms
of the transaction do not have a significant impact on the Company's
results of operations, financial condition or cash flows. Additionally, the
net gain or loss on the sale is expected to be immaterial.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
BorgWarner Inc. (the "Company") is a leading global supplier of highly
engineered systems and components for powertrain applications. Its products are
manufactured and sold worldwide, primarily to original equipment manufacturers
("OEMs") of passenger cars, sport-utility vehicles, trucks, commercial
transportation products and industrial equipment. The Company operates
manufacturing facilities serving customers in the Americas, Europe and Asia, and
is an original equipment supplier to every major OEM in the world.
RESULTS OF OPERATIONS
The Company's products fall into five reportable operating segments: Air/Fluid
Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and Transmission
Systems. The following tables present net sales and earnings before interest and
taxes ("EBIT") by segment for the three months ended March 31, 2001 and 2000 in
millions of dollars.
Three Months Ended
NET SALES March 31,
-------------------------
2001 2000
-------- --------
Air/Fluid Systems $ 90.9 $ 124.1
Cooling Systems 58.3 80.1
Morse TEC 220.6 234.7
TorqTransfer Systems 125.4 147.3
Transmission Systems 104.0 115.6
Divested operations 18.0 41.3
-------- --------
617.2 743.1
Intersegment eliminations (10.4) (12.9)
-------- --------
Net sales $ 606.8 $ 730.2
======== ========
Three Months Ended
EBIT March 31,
-------------------------
2001 2000
-------- --------
Air/Fluid Systems $ 3.0 $ 15.6
Cooling Systems 2.0 11.0
Morse TEC 27.8 33.4
TorqTransfer Systems 4.0 10.4
Transmission Systems 12.0 14.7
Divested operations (0.2) 2.2
-------- --------
Earnings before interest and taxes $ 48.6 $ 87.3
======== ========
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Consolidated sales for the three months ended March 31, 2001 totaled $606.8
million, a 16.9% decline over the first quarter of 2000. For the Company's
ongoing businesses, the decline was 14.5%. This decline was in line with the
North American automotive market, which experienced production decreases of 21%.
Geographically, the sales decline was most significant in North America with
lesser amounts coming from Asia and Europe. Of the overall sales decline, $14
million was the result of weaker currencies in both Europe and Japan. The Morse
TEC and Transmission Systems groups are the most affected by European and Asian
currency fluctuations. Income declined from $41.0 million to $21.1 million, a
48.5% reduction. In addition to the falloff in volumes, there are certain fixed
costs in the statement of operations such as depreciation, amortization, and
interest that cause the percentage decrease in income to be greater than the
percentage decrease in sales. Despite the almost $20 million decline in income,
the Company was able to keep debt levels at about the same as December 31, 2000
through a combination of strong working capital management and control of
capital spending. This effort occurred across all of the Company's business
groups.
The Air/Fluid Systems business was off almost 27% compared to 2000 and EBIT
declined by $12.6 million or 80.8%. Production declines at Chrysler, a major
customer of this group, were primarily responsible for the overall sales
falloff. In addition, the group experienced an unusually high level of emission
related business in the first quarter of 2000 that was non-recurring.
The Cooling Systems business suffered from the continued decline in the
commercial vehicle arena, where volumes in North America have fallen from an
annual rate in excess of 300,000 units for heavy truck, to just above 100,000.
First quarter 2001 sales and EBIT were down 27.2% and 81.8% from first quarter
2000, respectively. The group was also negatively impacted by a model
changeover, which eliminated one application. This business is expected to be
replaced, but not until the end of 2001.
The Morse Tec group had a sales decline of 6.0%. Consistent with the Company's
other business groups, Morse TEC was affected by the downturn in North America,
especially due to the lower volumes for Chrysler and General Motors front-wheel
drive cars and for North American four-wheel drive applications. A softer
commercial market in North America, which translated into lower turbocharger
sales, also affected the group. The European portion of the business continued
to be strong, particularly turbochargers and engine timing systems. However, the
weakness in European currencies mitigated that growth. EBIT declined 16.8% due
to the previously mentioned lower volumes and a change in mix between chain
products and turbocharger products.
The TorqTransfer Systems business experienced a 14.9% sales decrease and a $6.4
million EBIT decline. Most of the sales decline related to Ford, its largest
customer. Reductions in Ford light truck and SUV volumes was exacerbated by the
careful launch of the new Ford Explorer, on which BorgWarner has substantial
content. Substantially all of the earnings decline is attributable to the volume
declines, but the group also gave customers some price reductions. This business
has a relatively high fixed cost structure, which causes larger swings in
earnings when volume changes.
Transmission Systems had a 10.0% sales decline and 18.4% decline in EBIT.
Declines in North American volumes were partially offset by sales increases in
Europe and Asia. Installation rates for automated transmissions continued to
grow in both Europe and Asia, helping to increase our volumes in those regions.
This group has the widest range of OEM customers, and the production declines in
North America were reflected in its sales performance.
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Because of significant cost cutting efforts undertaken in late 2000 and early
2001, the group was able to limit the decrease in EBIT to 18.4%. This group was
quick to respond to the softening North American marketplace and took costs out
of its overhead structure to be more in line with current business levels.
Divested operations included the Company's fuel systems business, which was sold
in April 2001 and its HVAC business, which was sold in December 2000. The sale
of the fuel systems business will be recorded in the second quarter of 2001. The
operating results of the fuel systems business were not material to the
Company's first quarter 2001 results. Additionally, the net gain or loss on the
sale is expected to be immaterial.
Consolidated gross margin for the first quarter of 2001, including depreciation,
was 18.0%, down 3 points from the first quarter of 2000. The gross margin
decline was the result of reduced volumes. Offsetting this is a reduction in
selling, general and administrative expenses, which are down $7.9 million. The
decline is the result of initiatives begun in late 2000 in response to the
slowdown in the North American market. The selling, general and administrative
category includes substantially all the Company's spending on research and
development. For the first quarter of 2001, R & D spending totaled $27.4
million, which is up to 4.5% of sales versus $29.7 million, or 4.1% of sales.
Spending at this level demonstrates the Company's ongoing commitment to new
product development, even in light of the industry downturn. The Company will
continue to monitor its research and development spending to balance short-term
affordability issues with the need to continually update and replenish its
product offering.
Goodwill amortization declined slightly from 2000 due to goodwill related to
divested businesses. Interest expense was down by $3.1 million as a result of
debt reductions throughout 2000 and lower interest rates. The Company is not as
sensitive to interest rate fluctuation, because 72% of its debt has fixed
interest rates. Affiliate earnings and other income rose $1.0 million,
principally due to increases at the Company's 50% owned Japanese affiliate,
NSK-Warner. BorgWarner's share of NSK-Warner's net earnings totaled $4.0 million
in the first quarter of 2001 and $3.4 million in the first quarter of 2000.
Because of the weakness of the Yen, the increase was even greater in local
currency.
The Company's income tax provision is based on estimated annual rates for the
year in the various jurisdictions in which the Company operates. The 37% tax
rate for 2001 varies from standard federal and state rates due to the
realization of certain R&D and foreign tax credits, foreign rates that differ
from U.S. rates and the effect of non-deductible items, such as goodwill. The
Company expects tax rates for 2001 to be in the 37 to 38% range, prior to any
change necessitated by the proposed new accounting standard related to business
combinations.
Net income was $21.1 million for the first quarter, or $0.80 per share, a
decline of 48.5% over the previous year quarter. Shares outstanding decreased
slightly due to share repurchases since the first quarter of 2000. Net income
was 3.5% of sales versus 5.6% last year. Had European and Asian currency
exchange rates been unchanged from last year, net income would have been $0.05
higher for the first quarter of 2001.
For the remainder of 2001, the Company remains concerned about production rates,
particularly in North America. If production stays at current levels, second and
third quarter sales and earnings will be unfavorable compared
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with 2000. This holds true for both the light vehicle market and the heavy-duty
truck market. It would not be until the fourth quarter that market conditions
would be similar year over year. As a result, the Company is being very cautious
in its capital investment plans and is prepared to take additional operating
actions, beyond those taken in the third and fourth quarters of 2000, to keep
its operating costs in line with the level of production volumes. Despite these
issues, the Company maintains a positive long-term outlook for its business and
is committed to ongoing strategic investments in capital and new product
development to enhance its product leadership strategy.
FINANCIAL CONDITION AND LIQUIDITY
In the first quarter BorgWarner's debt was substantially unchanged from year-end
2000, increasing by only $0.3 million. The debt increase was comprised of $4.0
million for dividends offset by $2.3 million in proceeds from stock options
exercised and a $1.4 million inflow from all other activities including
operations and capital expenditures. The $1.4 million was realized despite the
$20 million decline in net earnings and was the result of controlling the
increase in working capital and exercising caution with respect to capital
spending. Working capital increased by $45.4 million, compared with $44.9
million last year. Capital spending was held to $17.2 million compared with
$28.3 million last year. The working capital increase is in part a function of
activity in the last month of the quarter, as receivable balances increase with
the increase in March business. Capital spending remains an area of focus, as
the Company intends to be very careful in making major investments too far in
advance of a recovery in its markets. The Company still expects to spend less
than $150 million on capital in 2001, but this level is subject to ongoing
review based on market conditions. Spending will be a function of the timing of
new programs for customers. The Company expects that over 70% of its capital
spending will be for new and expanded product programs, with the remainder going
to cost reduction and productivity enhancement programs and the Company's new
Powertrain Technical Center.
The net increase in debt of $0.3 million was composed of net increases in
borrowings of $7.0 million and a $6.7 million decrease in the dollar value of
foreign borrowings. Both European and Asian currencies declined versus year-end
2000, causing the dollar value of foreign denominated borrowings to decline. The
Company has a policy of borrowing in the geographies in which it operates to
match the investment in these geographies.
As of March 31,2001 and December 31,2000, the Company had sold $150 million of
receivables under a $153 million Receivables Transfer Agreement for face value
without recourse.
Other balance sheet changes of significance included fixed assets, which
declined $15.6 million and goodwill, which declined $11.7 million. The fixed
asset decline is the result of a $9.8 million excess of depreciation over
capital spending and a $5.8 million decline due to foreign currency exchange
rate changes. The goodwill decline is principally due to goodwill amortization.
The Company believes that the combination of cash from operations and credit
from existing credit facilities will be sufficient to satisfy its cash needs for
the current level of operations and planned operations for the remainder of
2001, despite the industry downturn. The Company plans to continue to manage its
operations to minimize the need for net new investments until it becomes more
evident that the Company's product markets are recovering.
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OTHER MATTERS
Sale of fuel systems
In April 2001, the Company sold its fuel systems business. This business was
acquired as part of the acquisition of Kuhlman Corporation in March 1999. After
evaluating its business, metal fuel tanks and related components for the heavy-
and medium-duty truck markets, the Company determined this business to be
non-core. The proceeds will be used for general corporate purposes, including
the repayment of indebtedness. This business has been included in the divested
operations category for business segment reporting since April 2000. The net
gain or loss on the sale is expected to be immaterial.
Litigation
As discussed more fully in Note 6 to the Consolidated Financial Statements,
various claims and suits seeking money damages arising in the ordinary course of
business and involving environmental liabilities have been filed against the
Company. In each of these cases, the Company believes it has a defendable
position and has made adequate provisions to protect the Company from material
losses. The Company believes that it has established adequate provisions for
litigation liabilities in its financial statements in accordance with generally
accepted accounting principles.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed
to indemnify the buyer and Kuhlman Electric for certain environmental
liabilities relating to the past operations of Kuhlman Electric. During 2000,
Kuhlman Electric notified the Company that it discovered potential environmental
contamination at its Crystal Springs, Mississippi plant while undertaking an
expansion of the plant.
The Company has been working with the Mississippi Department of Environmental
Quality ("MDEQ") and Kuhlman Electric to investigate the extent of the
contamination. To date, the investigation has revealed the presence of PCBs in
portions of the soil at the plant and neighboring areas and the Company has
cleaned several neighboring properties with MDEQ oversight. The Company has
filed a lawsuit against Kuhlman Electric seeking a declaration of the scope of
BorgWarner's contractual indemnity. As the investigation is in its early stages,
and the court has not yet ruled on the lawsuit, the Company cannot now estimate
the potential liability associated with this matter.
Dividends
On April 23, 2001, the Company declared a $0.15 per share dividend to be paid on
May 15, 2001 to shareholders of record as of May 1, 2001.
New Accounting Pronouncements
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This statement standardizes the accounting for
derivative instruments by requiring that an entity recognize all derivatives as
assets or liabilities in the statement of financial position and measure them at
fair value. When certain criteria are met, it also provides for matching the
timing of gain or loss recognition on the derivative hedging instrument with the
recognition of (a) the changes in the fair value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction. The company has a small number of derivative
instruments. Application of SFAS 133 is not material to results of operations,
financial condition or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff
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Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." This SAB provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements of public companies. The
adoption of SAB No. 101 has not had a material effect on the Company's financial
position or results of operations.
In September 2000, the Financial Accounting Standards Board issued SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities which the Company must adopt for all applicable transactions
occurring after March 31, 2001. The Company is currently assessing the impact of
this standard on its results of operations, financial condition and cash flows.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements as
contemplated by the 1995 Private Securities Litigation Reform Act that are based
on management's current expectations, estimates and projections. Words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates,"
variations of such words and similar 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 vehicle production,
the continued use of outside suppliers, fluctuations in demand for vehicles
containing the Company's products, general economic conditions, as well as other
risks detailed in the Company's filings with the Securities and Exchange
Commission, including the Cautionary Statements filed as Exhibit 99.1 to the
Form 10-K for the fiscal year ended December 31, 2000.
Item 3. Quantitative and Qualitative Disclosure about Market Risks
The Company's market risk exposure at March 31, 2001 is consistent with the
types of market risk and amount of exposure presented in its 2000 Annual Report
on Form 10-K.
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PART II
Item 1. Legal Proceedings
On November 20, 2000, the Company filed a patent infringement lawsuit
against New Venture Gear, Inc. ("NVG") in U.S. District Court
(Northern District of Illinois, Eastern Division) with regard to
certain transfer cases manufactured by NVG. The suit requests
unspecified monetary damages as well as a permanent injunction against
the production of infringing transfer cases by NVG.
In response to this lawsuit, on March 20, 2001, NVG filed a patent
infringement lawsuit against the Company in U.S. District Court
(Eastern District of Michigan, Southern Division) with regard to
certain transfer cases manufactured by the Company. The suit requests
unspecified monetary damages as well as a permanent injunction against
the production of allegedly infringing transfer cases by the Company.
The Company had considered the NVG patents being asserted against it
before the filing of the suit against NVG, and again after NVG filed
its lawsuit. The Company believes the counter-suit filed by NVG is
without merit and intends to defend it vigorously. The Company does
not believe that this lawsuit will have a material effect on its
financial position, results of operations or liquidity, although no
assurance can be given with respect to the ultimate outcome.
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
None.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BORGWARNER INC.
(Registrant)
By /s/ William C. Cline
-------------------------
(Signature)
William C. Cline
Vice President and Controller
(Principal Accounting Officer)
Date: May 18, 2001
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