EXHIBIT 13.1
2002
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BorgWarner Inc. and Consolidated Subsidiaries
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading
global supplier of highly engineered systems and components primarily for
powertrain applications. Our products help improve vehicle performance, fuel
efficiency, air quality and vehicle stability. They are manufactured and sold
worldwide, primarily to original equipment manufacturers (OEM) of passenger
cars, sport-utility vehicles, trucks and commercial transportation products. We
operate manufacturing facilities serving customers in the Americas, Europe and
Asia, and are an original equipment supplier to every major OEM in the world.
RESULTS OF OPERATIONS 2002 VS. 2001 VS. 2000
BorgWarner reported net earnings for 2002 of $149.9 million, or $5.58 per
diluted share, before charges for the cumulative effect of an accounting change
related to goodwill. After this charge, the Company had a net loss of $119.1
million, or $(4.44) per diluted share. The Company's net earnings in 2001 were
$66.4 million, or $2.51 per diluted share. Net earnings in 2000 were $94.0
million or $3.54 per diluted share.
The following table reconciles reported earnings to earnings before
non-recurring charges and effects of change in accounting principle.
<Table>
<Caption>
millions of dollars
Year Ended December 31, 2002 2001 2000
-------- -------- --------
Reported net earnings/(loss) $ (119.1) $ 66.4 $ 94.0
Change in accounting principle, net
of tax 269.0 -- --
Goodwill amortization, net of tax -- 26.5 27.3
Non-recurring charges, net of tax -- 19.0 38.7
-------- -------- --------
Adjusted net earnings $ 149.9 $ 111.9 $ 160.0
======== ======== ========
</Table>
The earnings comparison for 2002 to 2001, other than the items reflected in the
table above, was positively affected by increased sales, operating leverage,
lower interest expense and a lower tax rate.
Overall, our sales increased 16.1% from 2001 and declined 11.1% between 2001 and
2000. The main causes of the sales increase in 2002 were increased production in
the auto industry, increased demand for turbochargers, especially in Europe, and
new business. As a comparison, worldwide vehicle production increased by 2.3% in
2002 and decreased by 3.8% in 2001. North American production increased by 5.7%
in 2002 and decreased by 9.7% in 2001, Japanese production increased by 3.8% in
2002 and decreased by 2.3% in 2001 and Western European production decreased
1.5% in 2002 and increased 1.4% in 2001.
Our 2001 results reflected weak production demand, the weak Euro and Yen,
production slowdowns and shutdowns, and further deterioration in the heavy truck
market.
Our outlook for the industry as we head into 2003 is one of caution and
uncertainty. The North American automotive market was strong in 2002, but
increased incentives drove consumer sales. It is uncertain whether these
incentive levels will continue in 2003 and what impact this will have. We
anticipate global production levels of light vehicles to be steady or slightly
lower than the 2002 levels. There is also uncertainty in the medium- and heavy-
truck markets as these markets continue to reflect depressed business levels. We
expect the medium and heavy truck markets to continue to be down in the first
half of 2003, and are cautiously optimistic of a recovery in the second half of
2003. Assuming these conditions and no major negative events, we anticipate our
sales and earnings to grow due to new business from increased penetration, new
customers and new applications.
RESULTS BY OPERATING SEGMENT
We announced a reorganization into two reportable operating segments in December
of 2002 to be effective January 1, 2003. The two segments are Driveline and
Engine. The Driveline segment is primarily the combination of the TorqTransfer
Systems and Transmissions Systems segments. The Engine segment is primarily the
combination of the Morse TEC, Air/Fluid Systems, and Cooling Systems segments.
For purposes of this discussion, we will show the operating segment structure in
place for 2002, where our products fell into five reportable operating segments:
Morse TEC, Air/Fluid Systems, Cooling Systems, TorqTransfer Systems, and
Transmission Systems. Set forth below are our results under both organizational
structures for each of the last three years.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002. Accordingly,
the segment EBITA table below and all Management's Discussion and Analysis
segment comparisons of the three-year period excludes goodwill amortization. See
Note Thirteen to the Consolidated Financial Statements for further details on
the Company's implementation of SFAS No. 142.
29
BorgWarner
2002
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NET SALES
<Table>
<Caption>
millions of dollars
Year Ended December 31, 2002 2001 2000
-------- -------- --------
Morse TEC $1,046.9 $ 869.4 $ 885.8
Air/Fluid Systems 388.4 357.8 427.8
Cooling Systems 235.8 220.5 281.3
TorqTransfer Systems 630.1 500.1 526.7
Transmission Systems 495.2 428.8 437.5
Divested operations and businesses held
for sale -- 18.0 132.9
Inter-segment eliminations (65.3) (43.0) (46.1)
-------- -------- --------
Net sales $2,731.1 $2,351.6 $2,645.9
======== ======== ========
</Table>
EARNINGS BEFORE INTEREST, TAXES AND GOODWILL AMORTIZATION
(EBITA)
<Table>
<Caption>
millions of dollars
Year Ended December 31, 2002 2001 2000
-------- -------- --------
Morse TEC $ 159.2 $ 132.1 $ 139.9
Air/Fluid Systems 23.4 19.4 42.6
Cooling Systems 25.1 25.2 49.6
TorqTransfer Systems 39.2 24.2 37.1
Transmission Systems 64.9 54.2 51.7
Divested operations and businesses
held for sale -- (0.2) 4.0
-------- -------- --------
Earnings before interest, taxes and
goodwill amortization $ 311.8 $ 254.9 $ 324.9
======== ======== ========
</Table>
MORSE TEC sales increased by 20.4% and EBITA increased by 20.5%. Contributing to
the sales increase were strong sales of engine timing chains, increased usage of
turbochargers, and continued strength in sales of sport-utility vehicles (SUVs),
many of which utilize the Company's chain products for their four wheel drive
systems. The EBITA increase was due to greater productivity from increased
production volume. The EBITA increase would have been greater except for the
impact of the Honeywell International Inc. (Honeywell) agreement discussed more
fully in Note Eleven to the Consolidated Financial Statements.
Morse TEC sales decreased 1.9% and EBITA declined by 5.6% from 2000 to 2001. The
North American automotive downturn affected this business, but was partially
offset by expanded applications, particularly for engine timing systems. The
EBITA decline was due to the previously mentioned lower volumes and a change in
mix between chain products and lower margin turbocharger products.
Morse TEC revenue is expected to grow in the coming years as turbocharger
capacity is increased to meet demand on direct-injected diesel passenger cars
and as new generations of variable geometry turbochargers for commercial diesel
applications are introduced. The introduction of additional products, including
timing systems for Chrysler overhead cam engines, increased North American
transplant business, Ford's global four-cylinder engine program, and drive chain
for the new Toyota hybrid engine and other Japanese and Korean applications, are
expected in the coming years. This business expects to benefit from the
continued conversion of engine timing systems from belts to chains in both
Europe and Japan. Such growth may be tempered by the current economic climate,
where new programs at OEMs could be delayed.
AIR/FLUID SYSTEMS experienced an 8.6% increase in sales and a 20.6% increase in
EBITA compared to 2001. The increase in sales was primarily due to continued
ramp up and higher volumes of transmission control modules for DaimlerChrysler,
a major customer. The increase in EBITA was due to the increased volume and
higher productivity from facility rationalizations in late 2000.
Sales decreased by 16.4% and EBITA decreased 54.5%, from 2001 to 2000. The
decline in sales was primarily due to pricing and volume weakness at
DaimlerChrysler. The decline in EBITA was due to volume decreases, product mix
issues and production issues related to facility rationalizations.
Despite a tempered outlook for 2003, we believe that this segment continues to
provide opportunities for growth. We expect the segment to benefit from the
trend in automatic transmissions to convert individual solenoids to modules and
"smart" modules with integrated transmission control units. The segment should
also benefit from the trend toward non-conventional automated transmissions.
Other opportunities in the coming years include products designed to improve
fuel efficiency and reduce emissions as well as fluid pumps for engine
hydraulics supporting variable cam timing and engine lubrication.
COOLING SYSTEMS' sales increased 6.9% and EBITA decreased 0.4%. Penetration into
Asian and European markets contributed to the increased revenues. EBITA
decreased primarily due to raw material price increases and costs associated
with a facility rationalization that began in late 2001 and should be completed
by early 2003.
Sales decreased by 21.6% and EBITA decreased by 49.2% from 2000 to 2001.
Revenues and EBITA were heavily impacted by the deteriorating North American
market conditions. Approximately 80% of the business' sales are to customers in
North America, mainly in the sport-utility, light-, medium- and heavy-truck
markets. This performance was in line with our expectations due to weakness in
the North American heavy truck market, along with an application lost in 2001.
30
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
We expect better results in 2003 when new business is launched and the truck
markets recover. Increasing fuel economy and environmental legislation in North
America and Europe are expected to drive demand for electronically controlled
cooling systems to accommodate increasingly higher operating engine
temperatures. These requirements are also driving developing countries to
embrace mechanically controlled drives. Because of our full product range and
manufacturing locations in every major vehicle producing region, we expect to be
well positioned to benefit from adoption of more advanced cooling technologies
in these markets.
TORQTRANSFER SYSTEMS' sales increased 26.0% and EBITA increased 62.0% from the
prior year. The increase in sales was due to higher volumes for Hyundai and Kia,
and the InterActive Torque Management (ITM)(TM) system application in the Acura
MDX and the recently released Honda Pilot. Additionally, TorqTransfer Systems
launched new applications for some GM vehicles, including the Hummer H2 and GMC
Yukon, in mid-2002. The EBITA increase was due to higher volumes, and since this
segment has a relatively high fixed cost structure, production volume changes
result in larger swings in earnings.
Sales were down 5.1% and EBITA was down 34.8% in 2001 versus 2000. This segment
suffered particularly in the early part of the year from the effects of erratic
scheduling. OEMs cut volumes at short notice in response to the market downturn
and the effects of the Ford Explorer/Firestone tire issue. The EBITA decline was
compounded by the need to support the launch of some new programs, which
involved substantial engineering effort and the installation of new
manufacturing capacity.
For 2003, this segment expects to benefit from a full year of a new contract to
supply transfer cases to General Motors, as well as continued increases in
business with Kia and Hyundai. We expect moderate growth from this segment in
2003.
TRANSMISSION SYSTEMS' sales increased 15.5%, and EBITA increased 19.7% in 2002.
Sales growth was strong in all regions for this segment, due to a combination of
market conditions and new applications, both in North America and overseas. The
EBITA increase was driven by a combination of increased volume and cost
controls.
Compared to 2000, 2001 sales decreased 2.0%. The sales reduction was linked to
volume decreases experienced by major North American OEMs, driven by the general
North American automotive industry downturn as well as market share losses to
European and Asian automakers in North America. EBITA in 2001 was 4.8% above
2000 levels. Because of significant cost cutting efforts taken in late 2000 and
early 2001, this segment was able to increase EBITA, even while sales decreased.
This segment was quick to respond to the softening North American marketplace
and reduced overhead costs to be more in line with the then current industry
levels.
We expect the Transmission Systems segment to achieve moderate sales growth in
2003, linked to volume ramp-ups in recently launched applications as well as
continued global market share increases by key customers in Europe and Asia.
NEW OPERATING SEGMENT STRUCTURE FOR 2003. Below is the table for sales and EBITA
for the past three years under the new operating structure. Note the EBITA
numbers exclude goodwill amortization.
NET SALES
<Table>
<Caption>
millions of dollars
Year Ended December 31, 2002 2001 2000
-------- -------- --------
Driveline $1,122.1 $ 937.2 $ 980.0
Engine 1,648.2 1,426.6 1,568.3
Divested operations and businesses
held for sale -- 18.0 132.9
Inter-segment eliminations (39.2) (30.2) (35.3)
-------- -------- --------
Net sales $2,731.1 $2,351.6 $2,645.9
======== ======== ========
</Table>
EARNINGS BEFORE INTEREST, TAXES AND GOODWILL AMORTIZATION (EBITA)
<Table>
<Caption>
millions of dollars
Year Ended December 31, 2002 2001 2000
-------- -------- --------
Driveline $ 99.4 $ 76.8 $ 85.3
Engine 212.4 178.3 235.6
Divested operations and businesses
held for sale -- (0.2) 4.0
-------- -------- --------
Earnings before interest, taxes and
goodwill amortization $ 311.8 $ 254.9 $ 324.9
======== ======== ========
</Table>
DIVESTED OPERATIONS AND BUSINESSES HELD FOR SALE includes the results of Fuel
Systems, which was sold in 2001; and the HVAC business, which was sold during
2000. These businesses did not fit our strategic goals, and we believe our
resources are better spent on our core technologies in highly engineered
powertrain components and systems. The sale of the Fuel Systems business did not
result in a significant gain or loss. We adjusted our carrying value of this
business in 2000 as part of the restructuring charge discussed on page 32. The
$5.4 million gain on the sale of the HVAC business in 2000 is included in other
income. Divested operations and businesses held for sale contributed sales of
$18.0 million, and $132.9 million and EBITA of $(0.2) million, and $4.0 million
in 2001 and 2000, respectively.
31
BorgWarner
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CORPORATE is the difference between calculated total company EBITA and the total
from the segments and represents corporate headquarters expenses and expenses
not directly attributable to the individual segments. This expense was $40.3
million in 2002, $26.5 million in 2001, and $4.6 million in 2000, excluding
non-recurring charges in 2001 and 2000. This amount represents headquarters
expenses and expenses not assigned to individual segments. The main reason for
the increase in the expense was a decrease in excess of earnings from pension
assets over the costs of the U.S. pension plans of $5.3 million from 2001 to
2002 and $10.5 million from 2000 to 2001. Additionally, expenses for post
retirement benefits for discontinued operations, which are captured at the
corporate level, contributed to the increase in 2002. Also impacting this number
was a $5.4 million gain on the sale of the HVAC business in 2000. Corporate
headquarters expense was slightly higher at $24.0 million in 2002 compared to
$20.5 million in 2001 and $19.2 million in 2000.
Our top ten customers accounted for approximately 78% of consolidated sales in
2002 and 2001 compared to 77% in 2000. Ford continues to be our largest customer
with 26% of consolidated sales in 2002, compared to 30% in 2001 and 2000.
DaimlerChrysler, our second largest customer, represented 20% of consolidated
net sales in 2002, 21% in 2001 and 19% in 2000; and General Motors accounted for
12%, 12%, and 13%, in 2002, 2001, and 2000, respectively. No other customer
accounted for more than 10% of sales in any of the periods presented.
OTHER FACTORS AFFECTING RESULTS OF OPERATIONS
The following table details our results of operations as a percentage of sales:
<Table>
<Caption>
Year Ended December 31, 2002 2001 2000
-------- -------- --------
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.7 80.4 79.0
-------- -------- --------
Gross profit 20.3 19.6 21.0
Selling, general and administrative
expenses 11.1 10.6 9.8
Goodwill amortization -- 1.8 1.6
Restructuring and other
non-recurring charges -- 1.2 2.4
Other, net -- (0.1) (0.3)
-------- -------- --------
Operating income 9.2% 6.1% 7.5%
======== ======== ========
</Table>
GROSS PROFIT for 2002 was 20.3%, an increase from 19.6% in 2001 and down from
the 21.0% in 2000. The increase in gross profit in 2002 is mainly due to higher
sales volumes. The decrease in 2001 compared to 2000 is attributable to lower
sales volumes, which made it more difficult to cover the fixed costs of our
manufacturing facilities. Additionally, many of our core businesses also showed
gross margin improvement in both 2001 and 2000. The decrease in margin from 2000
to 2002 is due mainly to a shift in sales to lower margin businesses. For
example, TorqTransfer Systems had the largest percentage sales gain in 2002, but
has the lowest gross profit percentage because its products have the highest
purchased content. Each group has experienced gross profit improvement at the
operating level in 2002.
The combination of price reductions to customers and cost increases for
material, labor and overhead totaled approximately $75 million in 2002, as
compared to $37 million and $16 million in 2001 and 2000, respectively. We were
able to partially offset these impacts by actively pursuing reductions from our
suppliers, making changes in product design and by using process technology to
remove cost and/or improve manufacturing capabilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A) as a percentage of sales
increased to 11.1% from 10.6% and 9.8% in 2001 and 2000, respectively. The
increase in SG&A is due to several factors, including an increase in retiree
costs for both pension and health care. Another factor is our continued
commitment to research and development (R&D) in order to capitalize on growth
opportunities. R&D spending was $109.1 million, or 4.0% of sales, as compared
with $104.5 million, or 4.4% of sales, and $112.0 million, or 4.2% of sales in
2002, 2001 and 2000, respectively. We continue to invest in a number of
cross-segment R&D programs, as well as a number of other key programs, all of
which are necessary for short- and long-term growth. We intend to maintain our
commitment to R&D investment while continuing to focus on controlling other SG&A
costs.
RESTRUCTURING AND OTHER NON-RECURRING CHARGES were $28.4 million in 2001 and
$62.9 million in 2000. The 2001 non-recurring charges primarily include
adjustments to the carrying value of certain assets and liabilities related to
businesses acquired and disposed of over the past three years. Of the $28.4
million of pretax charges in 2001, $5.0 million represents non-cash charges.
Approximately $3.3 million was spent in 2001, $8.4 million was spent in 2002,
and $8.4 million was transferred to environmental reserves
32
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
in 2001. The remaining $3.3 million is expected to be spent in 2003. The 2001
non-recurring charges included $8.4 million of environmental remediation costs
related to sold businesses and $12.0 million of product quality costs for issues
with products that were sold by acquired businesses prior to acquisition, all of
which have been corrected in the currently produced products. The Company
expects to fund the total cash outlay of these actions from operations.
Restructuring and other non-recurring charges totaling $62.9 million were
incurred in the second half of 2000 in response to deteriorating market
conditions. The charges included the rationalization and integration of certain
businesses and actions taken to bring costs in line with vehicle production
slowdowns in major customer product lines. Of the $62.9 million in pretax
charges, $47.3 million represented non-cash charges. Approximately $4.4 million
was spent in 2000 and the remaining $11.2 million was spent in 2001. The actions
taken as part of the 2000 restructuring charges are expected to generate
approximately $19 million in annualized savings, primarily from lower salaries
and benefit costs and reduced depreciation charges. These savings were more than
offset by lower revenue from the deterioration in the automotive and heavy-duty
truck markets.
Components of the restructuring and other non-recurring charges are detailed in
the following table and discussed further below.
<Table>
<Caption>
millions of dollars
Other Exit
Severance Costs and
and Other Asset Loss on Sale Non-Recurring
Benefits Write-downs of Business Charges Total
---------- ---------- ------------ ------------- ----------
Provisions $ 8.9 $ 11.6 $ 35.2 $ 7.2 $ 62.9
Incurred (4.3) -- -- (0.1) (4.4)
Non-cash write-offs -- (11.6) (35.2) (0.5) (47.3)
---------- ---------- ---------- ---------- ----------
Balance,
December 31, 2000 4.6 -- -- 6.6 11.2
---------- ---------- ---------- ---------- ----------
Provisions -- 5.0 -- 23.4 28.4
Incurred (4.6) -- -- (18.3) (22.9)
Non-cash write-offs -- (5.0) -- -- (5.0)
---------- ---------- ---------- ---------- ----------
Balance,
December 31, 2001 -- -- -- 11.7 11.7
---------- ---------- ---------- ---------- ----------
Provisions -- -- -- -- --
Incurred -- -- -- (8.4) (8.4)
Non-cash write-offs -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance,
December 31, 2002 $ -- $ -- $ -- $ 3.3 $ 3.3
========== ========== ========== ========== ==========
</Table>
Severance and other benefit costs relate to the reduction of approximately 220
employees from the workforce. The reductions affected 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. Approximately $8.9 million had been paid for
severance and other benefits for the terminated employees.
Asset write-downs primarily consist of the write-off of impaired assets no
longer used in production as a result of the industry downturn and the
consolidation of certain operations. Such assets have been taken out of
productive use and have been disposed.
Loss on anticipated sale of business represents the Fuel Systems business, which
was sold to an investor group led by TMB Industries, a private equity group, in
April 2001 for a pretax loss of $35.2 million. Fuel Systems produced metal tanks
for the heavy-duty truck market in North America and did not fit our strategic
focus on powertrain technology. Terms of the transaction did not have a
significant impact on the Company's results of operations, financial condition
or cash flows.
Other exit costs and non-recurring charges are primarily non-employee related
exit costs incurred to close certain non-production facilities the Company has
previously sold or no longer needs and non-recurring product quality related
charges. The 2001 non-recurring charges include $8.4 million of environmental
remediation costs related to sold businesses and $12.0 million of product
quality costs for issues with products that were sold by acquired businesses
prior to acquisition, all of which have been fixed in the currently produced
products.
GOODWILL AMORTIZATION was zero in 2002, compared to $42.0 million in 2001 and
$43.3 million in 2000. As discussed more fully in Note Thirteen to the
Consolidated Financial Statements, the Company adopted the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets," which discontinued the
amortization of goodwill effective January 1, 2002.
OTHER, NET decreased to $0.9 million of income in 2002, from $2.1 million in
2001 and $8.1 million in 2000. The 2000 number included a gain on the sale of
the HVAC business of $5.4 million.
33
BorgWarner
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
EQUITY IN AFFILIATE EARNINGS, NET OF TAX increased by $4.6 million from 2001 and
decreased by $0.8 million between 2001 and 2000. This line item is driven by the
results of our 50% owned Japanese joint venture, NSK-Warner. Our equity in
NSK-Warner's earnings of $20.4 million was $4.7 million higher than 2001, which
was $1.2 million lower than 2000.
INTEREST EXPENSE, NET decreased by $10.1 million in 2002 and decreased by $14.8
million between 2001 and 2000. The decreases in 2002 and 2001 were due to lower
interest rates as well as lower debt levels, as the Company used cash generated
in 2002 and 2001 to pay off debt. In 2002, the Company paid down $90.3 million
of balance sheet debt and reduced the amount of securitized accounts receivable
sold by $30.0 million. In 2001, the Company paid down $57.8 million of balance
sheet debt and reduced the amount of securitized accounts receivable sold by
$30.0 million. The Company took advantage of lower interest rates through the
use of interest rate swap arrangements described more fully in Note Six to the
Consolidated Financial Statements. At the end of 2002, the amount of debt with
fixed interest rates was 61% of total debt, including the impact of the interest
rate swaps.
The provision for income taxes results in an effective tax rate for 2002 of
33.0% compared with rates of 36.1% for 2001 and 36.2% for 2000. Our effective
tax rates have been lower than the standard federal and state tax rates due to
the realization of certain R&D and foreign tax credits; foreign rates, which
differ from those in the U.S.; and offset somewhat by non-deductible expenses.
The decrease in rates is also a result of certain changes in the Company's legal
structure. In 2003, the Company anticipates realizing a further 2% to 4%
improvement in its income tax rate.
FINANCIAL CONDITION AND LIQUIDITY
Our cash and cash equivalents increased $3.7 million at December 31, 2002
compared with December 31, 2001. Net cash provided by operating activities of
$261.4 million was primarily used to fund $138.4 million of capital
expenditures, repay $120.3 million of long-term debt, and distribute $16.0
million of dividends to our shareholders.
Operating cash flow of $261.4 million is $23.6 million more than in 2001. The
$261.4 million consists of a net loss of $119.1 million, non-cash charges of
$453.5 million and a $73.0 million decrease in net operating assets and
liabilities, net of the effects of divestitures. Non-cash charges are primarily
comprised of $137.4 million in depreciation and amortization and the $269.0
million, net of tax non-cash charge for a change in accounting principle.
Accounts receivable increased $67.4 million, however, $30.0 million of the
increase was due to the reduction in securitized accounts receivable sold.
Net cash used in investing activities totaled $130.0 million, compared with
$165.3 million in the prior year. 2001 investing activities benefited by $14.4
million in net proceeds from the sales of businesses, mainly non-strategic
portions of our 1999 acquisitions. Capital spending totaling $138.4 million in
2002 was $2.5 million lower than in 2001. Approximately 60% of the 2002 spending
was related to expansion, with the remainder for cost reduction and other
purposes. Heading into 2003, we plan to keep capital spending under control to
be prepared if the industry slows down. Our goal is to reduce spending as a
percentage of sales from historical levels of up to 6% to a target of 4.5% to
5.5%.
Stockholders' equity decreased by $122.8 million in 2002. The decrease was
caused by net loss of $119.1 million along with adjustments for minimum pension
liability of $42.3 million, dividends of $16.0 million, and purchase of treasury
stock of $18.1 million, offset by currency translation adjustments of $40.9
million and stock issuances to retirement plans of $20.8 million. In relation to
the dollar, the currencies in foreign countries where we conduct business,
particularly the Euro, strengthened, especially at the end of 2002, therefore
causing the currency translation component of other comprehensive income to
increase in 2002.
Our total capitalization as of December 31, 2002 of $1,628.1 million is
comprised of short-term debt of $14.4 million, long-term debt of $632.3 million
and stockholders' equity of $981.4 million. Capitalization at December 31, 2001
was $1,841.2 million. During the year, we reduced our balance sheet debt to
capital ratio to 39.9% from 40.0% in 2001 and 42.2% in 2000. If the reduction to
equity associated with the adoption of SFAS No. 142 had taken place in 2001, the
2001 ratio would have been 46.9%.
The Company has a $350 million revolving credit facility that extends until July
21, 2005. Additionally, the Company also has $300 million available under a
shelf registration statement on file with the Securities and Exchange Commission
through which a variety of debt and/or equity instruments may be issued. The
Company has access to the commercial paper market through an accounts receivable
securitization facility which is rolled over annually. As of December 31, 2002,
the facility was sized at $90 million and has been in place with its current
funding partner since January 1994. From
34
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
a credit quality perspective, the Company has an investment grade credit rating
of BBB+ from Standard & Poor's and Baa2 from Moody's.
The Company's required debt principal amortization and payment obligations under
lease commitments at December 31, 2002, are as follows:
<Table>
<Caption>
Total 2003 2004 2005 2006 2007+
---------- ---------- ---------- ---------- ---------- ----------
Indebtedness $ 646.7 $ 14.4 $ 7.5 $ 39.0 $ 149.5 $ 436.3
---------- ---------- ---------- ---------- ---------- ----------
Operating Leases 36.4 4.3 4.2 22.7 0.9 4.3
Total $ 683.1 $ 18.7 $ 11.7 $ 61.7 $ 150.4 $ 440.6
========== ========== ========== ========== ========== ==========
</Table>
We believe that the combination of cash from operations and available credit
facilities will be sufficient to satisfy our cash needs for our current level of
operations and our planned operations for the foreseeable future. We will
continue to balance our needs for internal growth, debt reduction and share
repurchase.
OTHER MATTERS
Environmental/Contingencies
The Company and certain of its current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by the United
States Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties (PRPs) at various
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund) and equivalent state laws and, as
such, may presently be liable for the cost of clean-up and other remedial
activities at 44 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula.
Based on information available to the Company, which in most cases, includes: an
estimate of allocation of liability among PRPs; the probability that other PRPs,
many of whom are large, solvent public companies, will fully pay the cost
apportioned to them; currently available information from PRPs and/or federal or
state environmental agencies concerning the scope of contamination and estimated
remediation costs; remediation alternatives; estimated legal fees; and other
factors, the Company has established a reserve for indicated environmental
liabilities with a balance at December 31, 2002 of approximately $20.3 million.
The Company expects this amount to be expended over the next three to five
years.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial 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 Crystal Springs, Mississippi plant while undertaking an
expansion of the plant.
The Company has been working with the Mississippi Department of Environmental
Quality and Kuhlman Electric to investigate the extent of the contamination. The
investigation has revealed the presence of polychlorinated biphenyls (PCBs) in
portions of the soil at the plant and neighboring areas. Kuhlman Electric and
others, including the Company, have been sued in several related lawsuits which
claim personal and property damage. The Company has moved to be dismissed from
some of these lawsuits.
The Company's lawsuit against Kuhlman Electric seeking declaration of the scope
of the Company's contractual indemnity has been amicably resolved and dismissed.
The Company believes that the reserve for environmental liabilities is
sufficient to cover any potential liability associated with this matter.
However, due to the nature of environmental liability matters, there can be no
assurance that the actual amount of environmental liabilities will not exceed
the amount reserved.
Patent infringement actions were filed against the Company's turbocharger unit
located in Europe in late 2001 and in 2002 by Honeywell International. The
Dusseldorf District Court in Germany entered a preliminary injunction against
the Company on July 9, 2002 limiting the Company's ability to manufacture and
sell a certain variable turbine geometry (VTG) turbocharger in Germany until a
patent hearing, then scheduled for December 2002.
In order to continue uninterrupted service to its customer, the Company paid
Honeywell $25 million in July 2002 so that it could continue to make and deliver
disputed car turbochargers through June of 2003. The agreement with Honeywell
partially settles litigation, suspends the July 2002 preliminary injunction and
provides for a license to deliver until June 2003. As part of the agreement,
Honeywell agreed to not seek damages for deliveries made before June 30, 2003.
35
BorgWarner
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company appealed the granting of the July preliminary injunction, but
Honeywell withdrew the preliminary injunction before the Company's appeal could
be heard. In January 2003, the Dusseldorf District Court decided that the
Company's current design of the VTG turbocharger infringes the patent asserted
by Honeywell. The Company continues to believe that its current production
designs do not violate the Honeywell patents and are not covered by their
lawsuit and plans to challenge the District Court's decision. The Company has
informed its customers of its inability to deliver the current design VTG
turbocharger after June 30, 2003. The Company continues to develop a new
generation VTG turbocharger to replace the current model and expects to begin
delivery of the new generation VTG turbocharger by July 1, 2003 if approved by
the customers.
The Company is recognizing expense of the $25 million license payment as it
ships the affected products from January 2002 to June 2003. In 2002, $14.5
million of expense was recognized.
Critical Accounting Policies
The Consolidated Financial Statements are prepared in conformity with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires the use of estimates, judgments and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. In preparing these financial statements,
management has made its best estimates and judgments of certain amounts
included in the financial statements, giving due consideration to materiality.
The significant accounting principles which management believes are the most
important to aid in fully understanding our financial results are included
below. Management also believes that all of the accounting policies are
important to investors. Therefore, the Notes to the Consolidated Financial
Statements provide a more detailed description of these and other accounting
policies of the Company.
SALES OF RECEIVABLES
The Company securitizes and sells certain receivables through third party
financial institutions without recourse. The amount sold can vary each month
based on the amount of underlying receivables. In December 2002, the Company
reduced the maximum size of the facility from $120 million to $90 million.
PRODUCT WARRANTY
Provisions for estimated expenses related to product warranty are made at the
time products are sold. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claims.
Management actively studies trends of warranty claims and takes action to
improve vehicle quality and minimize warranty claims. Management believes that
the warranty reserve is appropriate; however, actual claims incurred could
differ from the original estimates, requiring adjustments to the reserve.
GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"
effective January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized;
however, it must be tested for impairment at least annually. Amortization
continues to be recorded for other intangible assets with definite lives. The
Company is subject to financial statement risk to the extent that goodwill and
indefinite-lived intangible assets become impaired. See Note Thirteen to the
Consolidated Financial Statements for more information regarding goodwill and
the adoption of SFAS No. 142.
PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company's employee pension and other postretirement benefit (i.e., health
care) costs and obligations are dependent on management's assumptions used by
actuaries in calculating such amounts. These assumptions include discount
rates, health care cost trend rates, inflation, long-term return on plan assets,
retirement rates, mortality rates and other factors. Management bases the
discount rate assumption on investment yields available at year-end on AA-rated
corporate long-term bond yields. Health care cost trend assumptions are
developed based on historical cost data, the near-term outlook, and an
assessment of likely long-term trends. The inflation assumption is based on an
evaluation of external market indicators. Retirement and mortality rates are
based primarily on actual plan experience. Actual results that differ from the
assumptions are accumulated and amortized over future periods and, therefore,
generally affect the recognized expense and recorded obligation in such future
periods. While management believes that the assumptions used are appropriate,
significant differences in actual experience or significant changes in
assumptions would affect pension and other postretirement benefit costs and
obligations. See Note Eight to the Consolidated Financial Statements for more
information regarding costs and assumptions for employee retirement benefits.
36
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying value of its long-lived assets
held and used and assets to be disposed of, including other intangible assets,
when events and circumstances warrant such a review. This review is performed
using estimates of future cash flows. If the carrying value of a long-lived
asset is considered impaired, an impairment charge is recorded for the amount by
which the carrying value of the long-lived asset exceeds its fair value.
Management believes that the estimates of future cash flows and fair value are
reasonable; however, changes in estimates of such cash flows and fair value
could affect the evaluations.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142 "Goodwill and Other Intangible Assets." SFAS No. 142, effective January 1,
2002, specifies that goodwill and certain intangible assets will no longer be
amortized but instead will be subject to periodic impairment testing. SFAS No.
142 also requires that, upon adoption, goodwill be allocated to the Company's
reporting units and a two-step impairment analysis be performed.
The Company adopted SFAS No. 142 effective January 1, 2002. Under the
transitional provisions of the SFAS, the Company allocated goodwill to its
reporting units and performed the two-step impairment analysis. The fair value
of the Company's businesses used to determine the goodwill impairment was
computed using the expected present value of associated future cash flows. As a
result of this analysis, the Company determined that goodwill associated with
its Cooling Systems and Air/Fluid Systems operating segments was impaired due to
fundamental changes in their served markets, particularly the medium- and
heavy-truck markets, and weakness at a major customer. As a result a charge of
$269 million, net of taxes of $76 million, was recorded. The impairment loss was
recorded in the first quarter of 2002 as a cumulative effect of change in
accounting principle.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The Company adopted SFAS No. 144 effective January 1, 2002.
The adoption of SFAS No. 144 had no impact on the Company's results of
operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary component of income and requires that
such gain or loss be evaluated for extraordinary classification under the
guidelines of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations." This statement also requires sales-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sales-leaseback transactions and makes various other technical corrections to
the existing pronouncements mentioned above. The adoption of SFAS No. 145 had no
impact on the Company's results of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company does not expect that the adoption of SFAS
No. 146 will have a material impact on the Company's results of operations,
financial position or cash flows.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" (FIN 45), which expands previously issued accounting
guidance and disclosure requirements for certain guarantees. FIN 45 requires
the Company to recognize an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
will not have a material impact on the Company's financial position, operating
results or liquidity and resulted in additional disclosures in the Company's
Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." This Statement amends FASB Statement No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements to require prominent disclosures in both annual and interim
financial statements about the method of
37
BorgWarner
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company is required to adopt SFAS No. 148 on
January 1, 2004. The Company is currently assessing the impact of the adoption
of SFAS No. 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," (FIN 46). FIN 46 requires that the assets,
liabilities and results of the activity of variable interest entities be
consolidated into the financial statements of the entity that has the
controlling financial interest. FIN 46 also provides the framework for
determining whether a variable interest entity should be consolidated based on
voting interest or significant financial support provided to it. For the
Company, this Interpretation is effective immediately for variable interest
entities created after January 31, 2003 and effective July 1, 2003, for variable
interest entities acquired before February 1, 2003. The Company does not expect
the adoption of FIN 46 to have any impact on its fiscal 2003 Consolidated
Financial Statements.
Qualitative and Quantitative Disclosure About Market Risk
The Company's primary market risks include fluctuations in interest rates and
foreign currency exchange rates. We are also affected by changes in the prices
of commodities used or consumed in our manufacturing operations. Some of our
commodity purchase price risk is covered by supply agreements with customers
and suppliers. Other commodity purchase price risk is addressed by hedging
strategies, which include forward contracts. We do not engage in any derivative
instruments for purposes other than hedging specific risk.
We have established policies and procedures to manage sensitivity to interest
rate, foreign currency exchange rate market, and commodity purchase price risk,
which include monitoring the level of exposure to each market risk.
Interest rate risk is the risk that we will incur economic losses due to adverse
changes in interest rates. Our earnings exposure related to adverse movements
in interest rates is primarily derived from outstanding floating rate debt
instruments that are indexed to floating money market rates. A 10% increase or
decrease in the average cost of our variable rate debt would result in a change
in pre-tax interest expense of approximately $0.5 million.
We also measure interest rate risk by estimating the net amount by which the
fair value of all of our interest rate sensitive assets and liabilities would be
impacted by selected hypothetical changes in market interest rates. Fair value
is estimated using a discount cash flow analysis. Assuming a hypothetical
instantaneous 10% change in interest rates as of December 31, 2002, the net fair
value of these instruments would increase by approximately $29.2 million if
interest rates decreased and would decrease by approximately $26.6 million if
interest rates increased. Our interest rate sensitivity analysis assumes a
parallel shift in interest rate yield curves. The model, therefore, does not
reflect the potential impact of changes in the relationship between short-term
and long-term interest rates. Interest rate sensitivity at December 31, 2001,
measured in a similar manner, was slightly greater than at December 31, 2002.
Foreign currency risk is the risk that we will incur economic losses due to
adverse changes in foreign currency exchange rates. We mitigate our foreign
currency exchange rate risk principally by establishing local production
facilities in markets we serve, by invoicing customers in the same currency as
the source of the products and by funding some of our investments in foreign
markets through local currency loans. Such non-U.S. dollar debt was $152.0
million as of December 31, 2002 and $116.3 million as of December 31, 2001. We
also monitor our foreign currency exposure in each country and implement
strategies to respond to changing economic and political environments. In
addition, the Company periodically enters into forward contracts in order to
reduce exposure to exchange rate risk related to transactions denominated in
currencies other than the functional currency. In the aggregate, our exposure
related to such transactions was not material to our financial position, results
of operations or cash flows in both 2002 and 2001.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements as
contemplated by the 1995 Private Securities Litigation Reform Act that are based
on management's current expectations, estimates and projections. Words such as
"expects," "anticipates," "intends," "plans," "believes," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. Forward-looking statements are subject to risks and
uncertainties, which could cause actual results to differ materially from those
projected or implied in the forward-looking statements. Such risks and
uncertainties include: fluctuations in domestic or foreign automotive
production, the continued use of outside suppliers, fluctuations in demand for
vehicles containing BorgWarner products, general economic conditions, as well
as other risks detailed in the Company's filings with the Securities and
Exchange Commission, including the Cautionary Statements filed as Exhibit 99.1
to the Form 10-K for the fiscal year ended December 31, 2002.
38
BorgWarner
2002
MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The information in this report is the responsibility of management. BorgWarner
Inc. and Consolidated Subsidiaries (the "Company") has in place reporting
guidelines and policies designed to ensure that the statements and other
information contained in this report present a fair and accurate financial
picture of the Company. In fulfilling this management responsibility, we make
informed judgments and estimates conforming with accounting principles generally
accepted in the United States of America.
The accompanying Consolidated Financial Statements have been audited by Deloitte
& Touche LLP, independent auditors. Management has made available all the
Company's financial records and related information deemed necessary by Deloitte
& Touche LLP. Furthermore, management believes that all representations made by
it to Deloitte & Touche LLP during its audit were valid and appropriate.
Management is responsible for maintaining a comprehensive system of internal
control through its operations that provides reasonable assurance that assets
are protected from improper use, that material errors are prevented or detected
within a timely period and that records are sufficient to produce reliable
financial reports. The system of internal control is supported by written
policies and procedures that are updated by management as necessary. The system
is reviewed and evaluated regularly by the Company's internal auditors as well
as by the independent auditors in connection with their annual audit of the
financial statements. The independent auditors conduct their evaluation in
accordance with auditing standards generally accepted in the United States of
America and perform such tests of transactions and balances as they deem
necessary. Management considers the recommendations of its internal auditors and
independent auditors concerning the Company's system of internal control and
takes the necessary actions that are cost-effective in the circumstances.
Management believes that, as of December 31, 2002, the Company's system of
internal control was adequate to accomplish the objectives set forth in the
first sentence of this paragraph.
The Company's Finance and Audit Committee, composed entirely of directors of the
Company who are not employees, meets periodically with the Company's management
and independent auditors to review financial results and procedures, internal
financial controls and internal and external audit plans and recommendations. In
carrying out these responsibilities, the Finance and Audit Committee and the
independent auditors have unrestricted access to each other with or without the
presence of management representatives.
/s/ TIMOTHY M. MANGANELLO /s/ GEORGE E. STRICKLER
Timothy M. Manganello George E. Strickler
President and Chief Executive Executive Vice President and Chief
Officer Financial Officer
February 6, 2003
2002
BorgWarner Inc. and Consolidated Subsidiaries
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of BorgWarner Inc.:
We have audited the consolidated balance sheets of BorgWarner Inc. and
Consolidated Subsidiaries (the "Company") as of December 31, 2002 and 2001, and
the related consolidated statements of operations, cash flows, and stockholders'
equity for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of BorgWarner Inc. and Consolidated
Subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note Thirteen to the Consolidated Financial Statements,
effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangibles," and accordingly,
discontinued the amortization of goodwill to conform to the provisions of this
standard. Note Thirteen provides transitional disclosures regarding the impact
of the adoption of SFAS No. 142.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 6, 2003
39
BorgWarner
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
millions of dollars, except per share amounts
For the Year Ended December 31, 2002 2001 2000
------------ ------------ ------------
Net sales ................................................................. $ 2,731.1 $ 2,351.6 $ 2,645.9
Cost of sales ............................................................. 2,176.5 1,890.8 2,090.7
------------ ------------ ------------
Gross profit ............................................................ 554.6 460.8 555.2
Selling, general and administrative expenses .............................. 303.5 249.7 258.7
Goodwill amortization ..................................................... -- 42.0 43.3
Other, net ................................................................ (0.9) (2.1) (8.1)
Restructuring and other non-recurring charges ............................. -- 28.4 62.9
------------ ------------ ------------
Operating income ........................................................ 252.0 142.8 198.4
Equity in affiliate earnings, net of tax .................................. (19.5) (14.9) (15.7)
Interest expense and finance charges ...................................... 37.7 47.8 62.6
------------ ------------ ------------
Earnings before income taxes ............................................ 233.8 109.9 151.5
Provision for income taxes ................................................ 77.2 39.7 54.8
Minority interest, net of tax ............................................. 6.7 3.8 2.7
------------ ------------ ------------
Net earnings before cumulative effect of accounting change .............. 149.9 66.4 94.0
Cumulative effect of change in accounting principle, net of tax ........... (269.0) -- --
------------ ------------ ------------
Net earnings/(loss) ..................................................... $ (119.1) $ 66.4 $ 94.0
============ ============ ============
Net earnings/(loss) per share - Basic
Net earnings per share before cumulative effect of accounting change ...... $ 5.63 $ 2.52 $ 3.56
Cumulative effect of accounting change .................................... (10.10) -- --
------------ ------------ ------------
Net earnings/(loss) per share ........................................... $ (4.47) $ 2.52 $ 3.56
Net earnings/(loss) per share - Diluted
Net earnings per share before cumulative effect of accounting change ...... $ 5.58 $ 2.51 $ 3.54
Cumulative effect of accounting change .................................... (10.02) -- --
------------ ------------ ------------
Net earnings/(loss) per share ........................................... $ (4.44) $ 2.51 $ 3.54
Average shares outstanding (thousands)
Basic ................................................................... 26,625 26,315 26,391
============ ============ ============
Diluted ................................................................. 26,854 26,463 26,487
============ ============ ============
</Table>
See accompanying Notes to Consolidated Financial Statements.
40
BorgWarner
2002
CONSOLIDATED BALANCE SHEETS
BorgWarner Inc. and Consolidated Subsidiaries
<Table>
<Caption>
millions of dollars
December 31, 2002 2001
--------- ---------
ASSETS
Cash and cash equivalents .............................................................................. $ 36.6 $ 32.9
Receivables ............................................................................................ 292.1 203.7
Inventories ............................................................................................ 180.3 143.8
Deferred income taxes .................................................................................. 11.4 23.6
Investments in businesses held for sale ................................................................ 14.2 12.2
Prepayments and other current assets ................................................................... 31.9 25.1
--------- ---------
Total current assets ............................................................................... 566.5 441.3
Land ................................................................................................... 40.6 29.6
Buildings .............................................................................................. 288.0 246.1
Machinery and equipment ................................................................................ 1,060.0 940.9
Capital leases ......................................................................................... 2.7 2.7
Construction in progress ............................................................................... 76.5 128.4
--------- ---------
1,467.8 1,347.7
Less accumulated depreciation .......................................................................... 572.9 509.5
--------- ---------
Net property, plant and equipment .................................................................. 894.9 838.2
Tooling, net of amortization ........................................................................... 82.0 84.1
Investments and advances ............................................................................... 153.1 137.4
Goodwill ............................................................................................... 827.0 1,160.6
Deferred income taxes .................................................................................. 51.2 5.7
Other noncurrent assets ................................................................................ 108.2 103.6
--------- ---------
Total other assets ................................................................................... 1,221.5 1,491.4
--------- ---------
Total assets ....................................................................................... $ 2,682.9 $ 2,770.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable and current portion of long-term debt .................................................... $ 14.4 $ 35.6
Accounts payable and accrued expenses .................................................................. 435.6 410.6
Income taxes payable ................................................................................... 1.2 8.8
--------- ---------
Total current liabilities .......................................................................... 451.2 455.0
Long-term debt ......................................................................................... 632.3 701.4
Long-term liabilities:
Retirement-related liabilities ....................................................................... 478.3 393.0
Other ................................................................................................ 125.2 105.9
--------- ---------
Total long-term liabilities ........................................................................ 603.5 498.9
Minority interest in consolidated subsidiaries ......................................................... 14.5 11.4
Commitments and contingencies .......................................................................... -- --
Capital stock:
Preferred stock, $.01 par value; authorized shares: 5,000,000; none issued ........................... -- --
Common stock, $.01 par value; authorized shares: 50,000,000; issued shares: 2002, 27,398,891
and 2001, 27,039,968; outstanding shares: 2002, 26,580,004; 2001, 26,365,169 ....................... 0.3 0.3
Non-voting common stock, $.01 par value; authorized shares: 25,000,000; none issued and outstanding .. -- --
Capital in excess of par value ......................................................................... 737.7 715.7
Retained earnings ...................................................................................... 335.8 470.9
Management shareholder note ............................................................................ (2.0) (2.0)
Accumulated other comprehensive income/(loss) .......................................................... (54.5) (53.1)
Common stock held in treasury, at cost: 2002, 818,887 shares; 2001, 674,799 shares ..................... (35.9) (27.6)
--------- ---------
Total stockholders' equity ........................................................................... 981.4 1,104.2
--------- ---------
Total liabilities and stockholders' equity ......................................................... $ 2,682.9 $ 2,770.9
========= =========
</Table>
See accompanying Notes to Consolidated Financial Statements.
41
BorgWarner
2002
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
millions of dollars
For the Year Ended December 31, 2002 2001 2000
-------- -------- --------
OPERATING
Net earnings/(loss) .................................................................... $ (119.1) $ 66.4 $ 94.0
Adjustments to reconcile net earnings/(loss) to net cash flows from operations:
Non-cash charges (credits) to operations:
Depreciation ......................................................................... 108.1 104.2 102.2
Goodwill amortization ................................................................ -- 42.0 43.3
Amortization of tooling .............................................................. 29.3 23.7 24.9
Non-cash restructuring and other non-recurring charges ............................... -- 5.0 47.3
Cumulative effect of change in accounting principle, net of tax ...................... 269.0 -- --
Employee retirement benefits ......................................................... 20.8 19.8 --
Deferred income tax provision ........................................................ 30.4 3.1 (8.5)
Other, principally equity in affiliate earnings ...................................... (4.1) (25.9) 6.9
-------- -------- --------
Net earnings adjusted for non-cash charges ......................................... 334.4 238.3 310.1
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
(Increase) decrease in receivables ................................................... (67.4) (48.6) 18.6
(Increase) decrease in inventories ................................................... (29.3) 10.1 (14.7)
(Increase) decrease in prepayments and deferred income taxes ......................... (3.4) 0.1 11.6
Increase (decrease) in accounts payable and accrued expenses ......................... (14.7) 23.0 7.0
Increase (decrease) in income taxes payable .......................................... 14.1 (12.7) (25.9)
Net change in other long-term assets and liabilities ................................. 27.7 27.6 14.5
-------- -------- --------
Net cash provided by operating activities .......................................... 261.4 237.8 321.2
INVESTING
Capital expenditures ................................................................... (138.4) (140.9) (167.1)
Tooling outlays, net of customer reimbursements ........................................ (27.7) (42.0) (29.7)
Net proceeds from asset disposals ...................................................... 12.3 6.5 16.2
Proceeds from sale of businesses ....................................................... 3.3 14.4 131.9
Tax refunds/(payments) related to businesses sold ...................................... 20.5 -- (43.0)
Payments for businesses acquired, net of cash acquired ................................. -- (3.3) --
-------- -------- --------
Net cash used in investing activities .............................................. (130.0) (165.3) (91.7)
FINANCING
Net decrease in notes payable .......................................................... (22.8) (16.5) (74.5)
Additions to long-term debt ............................................................ 2.3 34.0 86.9
Reductions in long-term debt ........................................................... (85.3) (64.3) (192.3)
Payments for purchase of treasury stock ................................................ (18.1) (0.7) (22.1)
Proceeds from stock options exercised .................................................. 9.8 2.8 1.1
Dividends paid ......................................................................... (16.0) (15.8) (15.9)
-------- -------- --------
Net cash used in financing activities .............................................. (130.1) (60.5) (216.8)
Effect of exchange rate changes on cash and cash equivalents ........................... 2.4 (0.5) (13.0)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ................................... 3.7 11.5 (0.3)
Cash and cash equivalents at beginning of year ......................................... 32.9 21.4 21.7
-------- -------- --------
Cash and cash equivalents at end of year ............................................... $ 36.6 $ 32.9 $ 21.4
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Net cash paid/(refunded) during the year for:
Interest ............................................................................. $ 39.5 $ 50.2 $ 65.4
Income taxes ......................................................................... (11.0) 28.1 107.7
Non-cash financing transactions:
Issuance of common stock for management notes ........................................ $ -- $ -- $ 0.5
Issuance of common stock for Executive Stock Performance Plan ........................ 1.2 1.0 0.8
</Table>
See accompanying Notes to Consolidated Financial Statements.
42
BorgWarner
2002
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BorgWarner Inc. and Consolidated Subsidiaries
<Table>
<Caption>
millions of dollars
Number of Shares Stockholders' Equity
---------------------------- ------------------------------------------
Issued Common Issued Capital in
common stock in common excess of Treasury
stock treasury stock par value stock
------------ ------------ ------------ ------------ ------------
Balance, January 1, 2000 27,040,492 (316,300) $ 0.3 $ 715.7 $ (15.2)
Purchase of treasury stock -- (589,700) -- -- (22.1)
Dividends declared -- -- -- -- --
Shares issued for management shareholder note -- 15,223 -- -- 0.7
Shares issued under stock option plans -- 53,750 -- -- 2.2
Shares issued under executive stock plan -- 21,818 -- -- 1.1
Net income -- -- -- -- --
Adjustment for minimum pension liability -- -- -- -- --
Currency translation adjustment -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 27,040,492 (815,209) $ 0.3 $ 715.7 $ (33.3)
Purchase of treasury stock -- (15,000) -- -- (0.7)
Dividends declared -- -- -- -- --
Management shareholder notes -- -- -- -- --
Shares issued under stock option plans -- 129,550 -- -- 5.3
Shares issued under executive stock plan -- 25,860 -- -- 1.1
Kuhlman shares retired (524) -- -- -- --
Net income -- -- -- -- --
Adjustment for minimum pension liability -- -- -- -- --
Currency translation adjustment -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 27,039,968 (674,799) $ 0.3 $ 715.7 $ (27.6)
Purchase of treasury stock -- (385,000) -- -- (18.1)
Dividends declared -- -- -- -- --
Shares issued under stock option plans -- 217,632 -- 0.9 8.9
Shares issued under executive stock plan -- 23,280 -- 0.3 0.9
Shares issued under retirement savings plans 358,923 -- -- 20.8 --
Net loss -- -- -- -- --
Adjustment for minimum pension liability -- -- -- -- --
Currency translation adjustment -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2002 27,398,891 (818,887) $ 0.3 $ 737.7 $ (35.9)
============ ============ ============ ============ ============
<Caption>
millions of dollars
Comprehensive
Stockholders' Equity income/(loss)
--------------------------------------------- ------------
Accumulated
Management other
shareholder Retained comprehensive
notes earnings income/(loss)
------------ ------------ ------------- ------------
Balance, January 1, 2000 $ (2.0) $ 346.4 $ 12.3
Purchase of treasury stock -- -- -- --
Dividends declared -- (15.9) -- --
Shares issued for management shareholder note (0.5) (0.2) -- --
Shares issued under stock option plans -- (1.1) -- --
Shares issued under executive stock plan -- (0.3) -- --
Net income -- 94.0 -- $ 94.0
Adjustment for minimum pension liability -- -- (0.1) (0.1)
Currency translation adjustment -- -- (28.2) (28.2)
------------ ------------ ------------ ------------
Balance, December 31, 2000 $ (2.5) $ 422.9 $(16.0) $ 65.7
------------ ------------ ------------ ------------
Purchase of treasury stock -- -- -- --
Dividends declared -- (15.8) -- --
Management shareholder notes 0.5 -- -- --
Shares issued under stock option plans -- (2.5) -- --
Shares issued under executive stock plan -- (0.1) -- --
Kuhlman shares retired -- -- -- --
Net income -- 66.4 -- $ 66.4
Adjustment for minimum pension liability -- -- (18.7) (18.7)
Currency translation adjustment -- -- (18.4) (18.4)
------------ ------------ ------------ ------------
Balance, December 31, 2001 $ (2.0) $ 470.9 $(53.1) $ 29.3
------------ ------------ ------------ ------------
Purchase of treasury stock -- -- -- --
Dividends declared -- (16.0) -- --
Shares issued under stock option plans -- -- -- --
Shares issued under executive stock plan -- -- -- --
Shares issued under retirement savings plans -- -- -- --
Net loss -- (119.1) -- $ (119.1)
Adjustment for minimum pension liability -- -- (42.3) (42.3)
Currency translation adjustment -- -- 40.9 40.9
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2002 $ (2.0) $ 335.8 $ (54.5) $ (120.5)
============ ============ ============ ============
</Table>
See accompanying Notes to Consolidated Financial Statements.
43
BorgWarner
2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading
global supplier of highly engineered systems and components primarily for
powertrain applications. These products are manufactured and sold worldwide,
primarily to original equipment manufacturers of passenger cars, sport-utility
vehicles, trucks, commercial transportation products and industrial equipment.
For purposes of this annual report, its products fall into five operating
segments: Morse TEC, Air/Fluid Systems, Cooling Systems, TorqTransfer Systems
and Transmission Systems. Effective January 1, 2003, the Company will be
reporting its results under its reorganized structure of two reportable
operating segments: Driveline and Engine. The Driveline segment is primarily the
combination of the TorqTransfer Systems and Transmission Systems segments. The
Engine segment is primarily the combination of the Morse TEC, Air/Fluid Systems,
and Cooling Systems segments.
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following paragraphs briefly describe significant accounting policies.
USE OF ESTIMATES The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all
significant majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain prior amounts
have been reclassified to conform to the current year presentation.
CASH AND CASH EQUIVALENTS Cash and cash equivalents are valued at cost, which
approximates market. It is the Company's policy to classify investments with
original maturities of three months or less as cash and cash equivalents.
ACCOUNTS RECEIVABLE The Company securitizes and sells certain receivables
through third party financial institutions without recourse. The amount sold can
vary each month based on the amount of underlying receivables. In December 2002,
the Company reduced the maximum size of the facility from $120 million to $90
million. During the year ended December 31, 2002, total cash proceeds from sales
of accounts receivable were $1,389.2 million, and the amount of receivables sold
ranged from $90 to $120 million at any time during the year. In 2002, the
Company paid a servicing fee of $2.5 million related to these receivables, which
is included in interest expense and finance charges. At December 31, 2002, the
Company had sold $90 million of receivables under a Receivables Transfer
Agreement for face value without recourse. At December 31, 2001, the amount sold
was $120 million.
INVENTORIES Inventories are valued at the lower of cost or market. Cost of U.S.
inventories is determined by the last-in, first-out (LIFO) method, while the
foreign operations use the first-in, first-out (FIFO) method. Inventories held
by U.S. operations was $96.0 million in 2002 and $81.1 million in 2001. Such
inventories, if valued at current cost instead of LIFO, would have been greater
by $3.6 million and $3.9 million, respectively.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION Property, plant and equipment are
valued at cost less accumulated depreciation. Expenditures for maintenance,
repairs and renewals of relatively minor items are generally charged to expense
as incurred. Renewals of significant items are capitalized. Depreciation is
computed generally on a straight-line basis over the estimated useful lives of
the assets. Useful lives for buildings range from 15 to 40 years and useful
lives for machinery and equipment range from 3 to 12 years. For income tax
purposes, accelerated methods of depreciation are generally used.
GOODWILL AND OTHER INTANGIBLE ASSETS The Company adopted SFAS No. 142, "Goodwill
and Other Intangible Assets," effective January 1, 2002. Under SFAS No. 142,
goodwill is no longer amortized; however, it must be tested for impairment at
least annually. Amortization continues to be recorded for other intangible
assets with definite lives. See Note Thirteen for further details on the
adoption of SFAS No. 142.
The Company had intangible assets with a cost of $14.7 million, less accumulated
amortization of $7.6 million and $6.5 million at December 31, 2002 and 2001,
respectively. The intangible assets are being amortized on a straight-line basis
over their legal lives, which range from 10 to 15 years. Annual amortization
expense recognized was $1.1 million in each of the years 2002, 2001 and 2000.
The estimated future annual amortization expense for each of the successive
years 2003 through 2007 is $1.1 million.
44
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
REVENUE RECOGNITION The Company recognizes revenue upon shipment of product when
title and risk of loss pass to the customer. Although the Company may enter into
long-term supply agreements with its major customers, each shipment of goods is
treated as a separate sale and the price is not fixed over the life of the
agreements.
FINANCIAL INSTRUMENTS Financial instruments consist primarily of investments in
cash, short-term securities, receivables and debt securities, and obligations
under accounts payable, accrued expenses and debt instruments. The Company
believes that the fair value of the financial instruments approximates the
carrying value, except as noted in Note Six.
The Company received corporate bonds with a face value of $30.3 million as
partial consideration for the sales of Kuhlman Electric and Coleman Cable in
1999. These bonds were recorded at their fair market value of $12.9 million
using valuation techniques that considered cash flows discounted at current
market rates and management's best estimates of credit quality. In 2001, the
sale agreement with Coleman Cable was finalized, resulting in the exchange of
the corporate bonds along with a purchase price receivable, for $3 million in
cash and a $2 million note, which was collected in 2002. The fair value of these
instruments was estimated to be $8.8 million at December 31, 2002 and $10.9
million at December 31, 2001. They have been classified as investments
available-for-sale in the other current assets section of the Consolidated
Balance Sheets. The contractual maturities of these bonds are beyond five years.
FOREIGN CURRENCY The financial statements of foreign subsidiaries are translated
to U.S. dollars using the period-end exchange rate for assets and liabilities
and an average exchange rate for each period for revenues and expenses. The
local currency is the functional currency for substantially all the Company's
foreign subsidiaries. Translation adjustments for foreign subsidiaries are
recorded as a component of accumulated other comprehensive income in
stockholders' equity.
PRODUCT WARRANTIES The Company provides warranties on some of its products. The
warranty terms are typically from one to three years. Provisions for estimated
expenses related to product warranty are made at the time products are sold.
These estimates are established using historical information about the nature,
frequency, and average cost of warranty claims. Management actively studies
trends of warranty claims and takes action to improve vehicle quality and
minimize warranty claims. Management believes that the warranty reserve is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve. The reserve is represented in
both long-term and short-term liabilities on the balance sheet.
Below is a table that shows the activity in the warranty accrual accounts:
<Table>
<Caption>
millions of dollars
2002 2001 2000
-------- -------- --------
Beginning balance $ 19.5 $ 16.5 $ 22.8
Provisions 14.2 18.3 7.4
Incurred (10.0) (15.3) (13.7)
-------- -------- --------
Ending balance $ 23.7 $ 19.5 $ 16.5
======== ======== ========
</Table>
DERIVATIVE FINANCIAL INSTRUMENTS The Company recognizes that certain normal
business transactions generate risk. Examples of risks include exposure to
exchange rate risk related to transactions denominated in currencies other than
the functional currency, changes in cost of major raw materials and supplies,
and changes in interest rates. It is the objective and responsibility of the
Company to assess the impact of these transaction risks, and offer protection
from selected risks through various methods including financial derivatives. All
derivative instruments held by the Company are designated as hedges, have high
correlation with the underlying exposure and are highly effective in offsetting
underlying price movements. Accordingly, gains and losses from changes in
derivative fair values are deferred until the underlying transaction occurs. The
Company does not engage in any derivative instruments for purposes other than
hedging specific risk.
NEW ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company adopted SFAS No. 144
effective January 1, 2002. The adoption of SFAS No. 144 had no impact on the
Company's results of operations, financial position or cash flows.
45
BorgWarner
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary component of income and requires that
such gain or loss be evaluated for extraordinary classification under the
guidelines of Accounting Principles Board Opinion No. 30 "Reporting the Results
of Operations." This statement also requires sales-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sales-leaseback transactions and makes various other technical corrections to
the existing pronouncements mentioned above. The adoption of SFAS No. 145 had no
impact on the Company's results of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company does not expect that the adoption of SFAS
No. 146 will have a material impact on the Company's results of operations,
financial position or cash flows.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others" (FIN 45), which expands previously issued accounting
guidance and disclosure requirements for certain guarantees. FIN 45 requires the
Company to recognize an initial liability for the fair value of an obligation
assumed by issuing a guarantee. The provision for initial recognition and
measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
will not have a material impact on the Company's financial position, operating
results or liquidity and resulted in additional disclosures in the Company's
Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." This Statement amends FASB Statement No. 123 to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirements to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
is required to adopt SFAS No. 148 on January 1, 2004. The Company is currently
assessing the impact of the adoption of SFAS No. 148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," (FIN 46). FIN 46 requires that the assets,
liabilities and results of the activity of variable interest entities be
consolidated into the financial statements of the entity that has the
controlling financial interest. FIN 46 also provides the framework for
determining whether a variable interest entity should be consolidated based on
voting interest or significant financial support provided to it. For the
Company, this Interpretation is effective immediately for variable interest
entities created after January 31, 2003 and effective July 1, 2003, for variable
interest entities acquired before February 1, 2003. The Company does not expect
the adoption of FIN 46 to have any impact on its fiscal 2003 Consolidated
Financial Statements.
2
RESEARCH AND DEVELOPMENT COSTS
The Company spent approximately $109.1 million, $104.5 million and $112.0
million in 2002, 2001 and 2000, respectively, on research and development (R&D)
activities. Not included in these amounts were customer-sponsored R&D activities
of approximately $14.2 million, $20.0 million and $12.5 million in 2002, 2001
and 2000, respectively.
3
OTHER INCOME
Items included in other income consist of:
<Table>
<Caption>
millions of dollars
Year Ended December 31, 2002 2001 2000
------ ------ ------
Gains on sales of business $ -- $ -- $ 5.4
Interest income 1.7 1.4 0.8
Loss on asset disposals, net (1.5) (0.2) (0.4)
Other 0.7 0.9 2.3
------ ------ ------
Total other income $ 0.9 $ 2.1 $ 8.1
====== ====== ======
</Table>
46
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
4
INCOME TAXES
Earnings before taxes and provision for taxes consist of:
<Table>
<Caption>
millions of dollars
2002 2001 2000
--------------------------- --------------------------- ----------------------------
U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total
------- -------- ------- ------- -------- ------- ------- -------- -------
Earnings before taxes $ 150.7 $ 83.1 $ 233.8 $ 23.3 $ 86.6 $ 109.9 $ 74.8 $ 76.7 $ 151.5
------- ------- ------- ------- ------- ------- ------- ------- -------
Income taxes:
Current :
Federal/foreign $ 11.1 $ 10.6 $ 21.7 $ 9.8 $ 24.7 $ 34.5 $ 26.8 $ 24.9 $ 51.7
State 3.1 -- 3.1 2.1 -- 2.1 11.6 -- 11.6
------- ------- ------- ------- ------- ------- ------- ------- -------
14.2 10.6 24.8 11.9 24.7 36.6 38.4 24.9 63.3
Deferred 44.8 7.6 52.4 2.0 1.1 3.1 (13.7) 5.2 (8.5)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total income taxes $ 59.0 $ 18.2 $ 77.2 $ 13.9 $ 25.8 $ 39.7 $ 24.7 $ 30.1 $ 54.8
======= ======= ======= ======= ======= ======= ======= ======= =======
</Table>
The analysis of the variance of income taxes as reported from income taxes
computed at the U.S. statutory rate for consolidated operations is as follows:
<Table>
<Caption>
millions of dollars
2002 2001 2000
------- ------- -------
Income taxes at U.S. statutory rate of 35% $ 81.8 $ 38.5 $ 53.0
Increases (decreases) resulting from:
Income from non-U.S. sources (6.8) (0.1) (0.3)
State taxes, net of federal benefit 2.0 1.4 7.5
Business tax credits, net (4.7) (7.2) (10.3)
Affiliate earnings (6.8) (5.2) (5.5)
Nontemporary differences and other 11.7 12.3 10.4
------- ------- -------
Income taxes as reported $ 77.2 $ 39.7 $ 54.8
======= ======= =======
</Table>
At December 31, 2002, the Company had $8.4 million of foreign tax credit
carryforwards, $3.0 million of R&D tax credit carryforwards, and $1.9 million of
net foreign operating loss carryforwards available to offset future taxable
income. The foreign tax credits and net operating loss carryforwards will expire
in 2007. The R&D tax credit carryforward will expire in 2022.
Following are the gross components of deferred tax assets and liabilities as of
December 31, 2002 and 2001:
<Table>
<Caption>
millions of dollars
2002 2001
---------- ----------
Deferred tax assets - current:
Capital loss carryover $ -- $ 22.2
Accrued costs related to divested operations -- 1.4
Foreign tax credits 8.4 --
Research and development credits 3.0 --
---------- ----------
Net deferred tax asset - current $ 11.4 $ 23.6
========== ==========
Deferred tax assets - noncurrent:
Postretirement benefits $ 121.2 $ 116.2
Pension 52.5 18.6
Other long-term liabilities and reserves 32.3 29.6
Goodwill 26.0 --
Other 14.7 20.6
---------- ----------
246.7 185.0
Deferred tax liabilities - noncurrent:
Fixed assets 135.9 98.0
Pension 35.0 32.3
Goodwill -- 28.9
Other 24.6 20.1
---------- ----------
195.5 179.3
---------- ----------
Net deferred tax asset - noncurrent $ 51.2 $ 5.7
========== ==========
</Table>
No deferred income taxes have been provided on undistributed earnings of foreign
subsidiaries totaling $59.2 million and $47.8 million in 2002 and 2001,
respectively, as the amounts are essentially permanent in nature. Any such
potential liability would be substantially offset by foreign tax credits with
respect to such undistributed foreign earnings.
47
BorgWarner
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
BALANCE SHEET INFORMATION
Detailed balance sheet data are as follows:
<Table>
<Caption>
millions of dollars
December 31, 2002 2001
-------- --------
Receivables:
Customers $ 247.9 $ 170.5
Other 49.3 37.1
-------- --------
Gross receivables 297.2 207.6
Less allowance for losses 5.1 3.9
-------- --------
Net receivables $ 292.1 $ 203.7
======== ========
Inventories:
Raw material $ 85.3 $ 69.7
Work in progress 57.6 41.5
Finished goods 37.4 32.6
-------- --------
Total inventories $ 180.3 $ 143.8
======== ========
Investments and advances:
NSK-Warner $ 148.3 $ 128.8
Other 4.8 8.6
-------- --------
Total investments and advances $ 153.1 $ 137.4
======== ========
Other noncurrent assets:
Deferred pension assets $ 91.0 $ 83.4
Other 17.2 20.2
-------- --------
Total other noncurrent assets $ 108.2 $ 103.6
======== ========
Accounts payable and accrued expenses:
Trade payables $ 257.0 $ 236.7
Payroll and related 70.9 42.1
Insurance 26.1 20.7
Warranties and claims 16.3 17.1
Restructuring and other non-recurring charges 3.3 11.7
Other 62.0 82.3
-------- --------
Total accounts payable and accrued expenses $ 435.6 $ 410.6
======== ========
Other long-term liabilities:
Environmental reserves $ 20.3 $ 25.5
Other 104.9 80.4
-------- --------
Total other long-term liabilities $ 125.2 $ 105.9
======== ========
</Table>
Dividends and other payments received from affiliates accounted for under the
equity method totaled $8.4 million in 2002, $8.9 million in 2001 and $25.5
million in 2000.
The Company has a 50% interest in NSK-Warner, a joint venture based in Japan
that manufactures automatic transmission components. The Company's share of the
earnings or losses reported by NSK-Warner is accounted for using the equity
method of accounting. NSK-Warner has a fiscal year-end of March 31. The
Company's equity in the earnings of NSK-Warner consists of the 12 months ended
November 30 so as to reflect earnings on as current a basis as is reasonably
feasible.
Following are summarized financial data for NSK-Warner, translated using the
ending or periodic rates as of and for the fiscal years ended March 31, 2002,
2001 and 2000:
<Table>
<Caption>
millions of dollars
2002 2001 2000
-------- -------- --------
Balance sheets:
Current assets $ 147.2 $ 147.6 $ 196.0
Noncurrent assets 133.8 151.7 157.8
Current liabilities 83.1 94.3 96.2
Noncurrent liabilities 4.4 5.5 8.5
Statements of operations:
Net sales $ 285.2 $ 333.6 $ 303.8
Gross profit 59.6 72.8 64.7
Net income 27.9 29.6 27.7
</Table>
The equity of NSK-Warner as of March 31, 2002, was $193.5 million.
48
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
6
NOTES PAYABLE AND LONG-TERM DEBT
Following is a summary of notes payable and long-term debt. The weighted average
interest rate on all borrowings for 2002 and 2001 was 5.2% and 5.8%,
respectively.
<Table>
<Caption>
millions of dollars
December 31, 2002 2001
--------------------- ---------------------
Current Long-Term Current Long-Term
------- --------- ------- ---------
Bank borrowings and other $ 8.0 $ 40.4 $ 30.6 $ 69.6
Term loans due through 2011
(at an average rate of 3.1% in
2002 and 3.3% in 2001; and
3.2% at December 31, 2002) 6.4 31.5 5.0 31.2
7% Senior Notes due 2006,
net of unamortized discount -- 139.3 -- 141.8
6.5% Senior Notes due 2009,
net of unamortized discount -- 164.9 -- 164.7
8% Senior Notes due 2019,
net of unamortized discount -- 134.2 -- 134.2
7.125% Senior Notes due 2029,
net of unamortized discount -- 122.0 -- 159.9
------- --------- ------- ---------
Total notes payable
and long-term debt $ 14.4 $ 632.3 $ 35.6 $ 701.4
======= ========= ======= =========
</Table>
Annual principal payments required as of December 31, 2002 are as follows (in
millions of dollars):
<Table>
2003 $ 14.4
2004 7.5
2005 39.0
2006 149.5
2007 5.2
After 2007 434.1
Less: Unamortized discounts (3.0)
------
Total $646.7
======
</Table>
The Company has a revolving credit facility which provides for borrowings up to
$350 million through July, 2005. At December 31, 2002, there were no borrowings
outstanding under the facility and the Company had $7.1 million of obligations
under standby letters of credit. At December 31, 2001, $20.0 million of
borrowings under the facility were outstanding in addition to $6.5 million of
obligations under standby letters of credit. The credit agreement contains
numerous financial and operating covenants including, among others, covenants
requiring the Company to maintain certain financial ratios and restricting its
ability to incur additional indebtedness.
The Company has entered into interest rate and currency swaps to manage interest
rate and foreign currency risk. A summary of these instruments outstanding at
December 31, 2002 follows (currency in millions):
<Table>
<Caption>
INTEREST RATES (b)
Hedge Notional ------------------ Floating Interest
Type Amount Receive Pay Rate Basis
---------- -------- ------- ----- -------------------
INTEREST RATE SWAPS (a)
Fixed to floating Fair value $ 125 7.0% 2.8% 6 month LIBOR+1.43%
Fixed to floating Fair value $ 25 6.5% 1.8% 6 month LIBOR+.45%
CROSS CURRENCY SWAPS
(MATURE IN 2006)
Floating $ Cash Flow $ 70 2.8% -- 6 mo. USD LIBOR+1.43%
to floating Y. Investment Y.8,871 -- 1.3% 6 mo. JPY LIBOR+1.21%
</Table>
(a) The maturity of the swaps corresponds with the maturity of the hedged item
as noted in the debt summary, unless otherwise indicated.
(b) Interest rates are as of December 31, 2002.
The ineffective portion of the swaps was not material. As of December 31, 2002,
the fair value of the fixed to floating interest rate swaps was $14.9 million.
Cross currency swaps were recorded at their fair value of $(4.8) million. Fair
value is based on quoted market prices for contracts with similar maturities.
As of December 31, 2002 and 2001, the estimated fair values of the Company's
senior unsecured notes totaled $610.7 million and $579.6 million, respectively.
The estimated fair values were $50.3 million higher in 2002, and $21.0 million
lower in 2001, than their respective carrying values. Fair market values are
developed by the use of estimates obtained from brokers and other appropriate
valuation techniques based on information available as of year-end. The fair
value estimates do not necessarily reflect the values the Company could realize
in the current markets.
49
BorgWarner
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
RESTRUCTURING AND OTHER NON-RECURRING CHARGES
Other non-recurring charges of $28.4 million were incurred in the fourth quarter
of 2001. The charges primarily include adjustments to the carrying value of
certain assets and liabilities related to businesses acquired and disposed of
over the past three years. Of the $28.4 million of pretax charges, $5.0 million
represents non-cash charges. Approximately $3.3 million was spent in 2001, $8.4
million in 2002, and $8.4 million was transferred to environmental reserves in
2001. The remaining $3.3 million is expected to be spent in 2003. The Company
expects to fund the total cash outlay of these actions with cash flow from
operations.
Restructuring and other non-recurring charges totaling $62.9 million were
incurred in 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 pretax charges in 2000, $47.3 million
represented non-cash charges. Approximately $4.4 million was spent in 2000 and
$11.2 million was spent in 2001.
Components of the restructuring and other non-recurring charges are detailed in
the following table and discussed further below.
<Table>
<Caption>
millions of dollars
Severance Loss on Other Exit Costs
and Other Asset Sale of and Non-Recurring
Benefits Write-down Business Charges Total
--------- ---------- -------- ----------------- -----
Provisions $ 8.9 $ 11.6 $ 35.2 $ 7.2 $ 62.9
Incurred (4.3) -- -- (0.1) (4.4)
Non-cash write-offs -- (11.6) (35.2) (0.5) (47.3)
------ ------ -------- -------- ------
Balance,
December 31, 2000 $ 4.6 $ -- $ -- $ 6.6 $ 11.2
------ ------ -------- -------- ------
Provisions -- 5.0 -- 23.4 28.4
Incurred (4.6) -- -- (18.3) (22.9)
Non-cash write-offs -- (5.0) -- -- (5.0)
------ ------ -------- -------- ------
Balance,
December 31, 2001 $ -- $ -- $ -- $ 11.7 $ 11.7
------ ------ -------- -------- ------
Provisions -- -- -- -- --
Incurred -- -- -- (8.4) (8.4)
Non-cash write-offs -- -- -- -- --
------ ------ -------- -------- ------
Balance,
December 31, 2002 $ -- $ -- $ -- $ 3.3 $ 3.3
====== ====== ======== ======== ======
</Table>
Severance and other benefit costs relate to the reduction of approximately 220
employees from the workforce. The reductions affected each of the Company's
operating segments, apart from TorqTransfer Systems, across each of the
Company's geographical areas, and across each major functional area, including
production and selling and administrative positions. Approximately $8.9 million
had been paid for severance and other benefits for the terminated employees.
Asset write-downs primarily consist of the write-off of impaired assets no
longer used in production as a result of the industry downturn and the
consolidation of certain operations. Such assets have been taken out of
productive use and have been disposed.
Loss on anticipated sale of business represents the Fuel Systems business, which
was sold in April 2001 to an investor group led by TMB Industries, a private
equity group, for a pretax loss of $35.2 million. Fuel Systems produced metal
tanks for the heavy-duty truck market in North America and did not fit the
Company's strategic focus on powertrain technology. Terms of the transaction did
not have a significant impact on the Company's results of operations, financial
condition or cash flows.
Other exit costs and non-recurring charges are primarily non-employee related
exit costs for certain non-production facilities the Company has previously sold
or no longer needs and non-recurring product quality related charges. The 2001
non-recurring charges include $8.4 million of environmental remediation costs
related to sold businesses and $12.0 million of product quality costs for issues
with products that were sold by acquired businesses prior to acquisition, all of
which have been fixed in the currently produced products.
8
RETIREMENT BENEFIT PLANS
The Company has a number of defined benefit pension plans and other
postretirement benefit plans covering eligible salaried and hourly employees.
The other postretirement benefit plans, which provide medical and life insurance
benefits, are unfunded plans. The following provides a reconciliation of the
plans' benefit obligations, plan assets, funded status and recognition in the
Consolidated Balance Sheets.
50
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
<Table>
<Caption>
millions of dollars
Pension Postretirement
Benefits Benefits
---------------------- ----------------------
December 31, 2002 2001 2002 2001
-------- -------- -------- --------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 385.7 $ 350.3 $ 407.1 $ 341.6
Service cost 7.6 7.1 5.0 4.4
Interest cost 26.3 25.0 28.8 25.0
Plan participants' contributions 0.2 0.2 -- --
Amendments -- 7.5 (2.3) --
Net actuarial loss 32.7 23.6 37.9 64.2
Currency translation adjustment 17.3 (1.4) -- --
Settlements -- (0.2) -- (1.4)
Curtailments -- -- (0.5) --
Benefits paid (26.7) (26.4) (29.5) (26.7)
-------- -------- -------- --------
Benefit obligation at end of year $ 443.1 $ 385.7 $ 446.5 $ 407.1
======== ======== ======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year $ 358.2 $ 385.1
Actual return on plan assets (27.7) (2.3)
Employer and other contributions 11.7 3.1
Plan participants' contributions 0.2 0.2
Currency translation adjustment 7.8 (1.2)
Settlements -- (0.3)
Benefits paid (26.7) (26.4)
-------- --------
Fair value of plan assets at end of year $ 323.5 $ 358.2
======== ========
RECONCILIATION OF FUNDED STATUS:
Funded status $ (119.6) $ (27.5) $ (446.5) $ (407.1)
Unrecognized net actuarial loss 142.9 50.8 131.4 98.2
Unrecognized transition asset (0.1) (0.3) -- --
Unrecognized prior service cost 11.1 12.7 (2.6) (0.6)
-------- -------- -------- --------
Net amount recognized $ 34.3 $ 35.7 $ (317.7) $ (309.5)
======== ======== ======== ========
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS:
Prepaid benefit cost $ 80.3 $ 71.1 $ -- $ --
Accrued benefit liability (46.0) (35.4) (317.7) (309.5)
Additional minimum liability (106.0) (42.2) -- --
Intangible asset 10.7 12.3 -- --
Accumulated other
comprehensive income 95.3 29.9 -- --
-------- -------- -------- --------
Net amount recognized $ 34.3 $ 35.7 $ (317.7) $ (309.5)
======== ======== ======== ========
</Table>
The funded status of pension plans included above with accumulated benefit
obligations in excess of plan assets at December 31 is as follows:
<Table>
<Caption>
millions of dollars
2002 2001
-------- --------
Accumulated benefit obligation $ 343.8 $ 295.2
Plan assets 216.7 238.1
-------- --------
Deficiency $ 127.1 $ 57.1
======== ========
</Table>
The $127.1 million deficiency in 2002 consists of $60.7 million related to U.S.
plans, $25.0 million related to UK plans, and $41.4 million related to German
plans. The 2001 deficiency of $57.1 million consists of $19.2 million related to
U.S. plans, $5.1 million related to UK plans, and $32.8 million related to
German plans.
<Table>
<Caption>
millions of dollars
Pension Benefits Other Postretirement Benefits
For the Year Ended -------------------------------- --------------------------------
December 31, 2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
COMPONENTS OF NET
PERIODIC BENEFIT COST:
Service cost $ 7.6 $ 7.1 $ 6.8 $ 5.0 $ 4.4 $ 3.8
Interest cost 26.3 25.0 23.4 28.8 25.0 23.4
Expected return
on plan assets (30.7) (32.1) (36.8) -- -- --
Amortization of
unrecognized
transition asset (0.2) (0.1) (0.1) -- -- --
Amortization of
unrecognized
prior service cost 1.6 2.2 1.5 (0.1) (0.1) (0.1)
Amortization of
unrecognized (gain)/loss 2.2 -- (2.7) 4.0 -- --
Settlement loss -- 0.1 1.8 -- -- --
-------- -------- -------- -------- -------- --------
Net periodic benefit
cost (income) $ 6.8 $ 2.2 $ (6.1) $ 37.7 $ 29.3 $ 27.1
======== ======== ======== ======== ======== ========
</Table>
51
BorgWarner
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's weighted-average assumptions used as of December 31, in
determining the net periodic benefit cost and the benefit obligation liabilities
shown above were as follows:
<Table>
<Caption>
percent
Pension Benefits Other Postretirement Benefits
------------------------------ ------------------------------
2002 2001 2000 2002 2001 2000
-------- -------- -------- -------- -------- --------
U.S. plans:
Discount rate 6.75 7.25 7.5 6.75 7.25 7.5
Rate of compensation
increase 4.5 4.5 4.5
Expected return
on plan assets 8.75 9.5 9.5
Foreign plans:
Discount rate 5.5-6.0 5.5-6.0 5.5-6.0
Rate of compensation
increase 2.5-4.0 2.5-4.0 2.5-4.0
Expected return
on plan assets 7.0 6.5 6.0
</Table>
The weighted-average rate of increase in the per capita cost of covered health
care benefits is projected to be 8% in 2003 grading down 1% per year until the
ultimate rate of 4.5% is reached in 2007. A one-percentage point change in the
assumed health care cost trend would have the following effects:
<Table>
<Caption>
millions of dollars
One Percentage Point
Increase Decrease
-------- --------
Effect on postretirement benefit obligation $ 53.3 $ (44.7)
Effect on total service and interest cost components $ 5.0 $ (4.1)
</Table>
9
STOCK INCENTIVE PLANS
STOCK OPTION PLANS Under the Company's 1993 Stock Incentive Plan, the Company
may grant options to purchase shares of the Company's common stock at the fair
market value on the date of grant. In 2000, the Company increased the number of
shares available for grant by 1,200,000 to 2,700,000 shares. The options vest
over periods up to three years and have a term of ten years from date of grant.
As of December 31, 2002, there are 1,825,105 outstanding options under the 1993
Stock Incentive Plan.
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly,
no compensation cost has been recognized for fixed stock options because the
exercise price of the stock options exceeded or equaled the market value of the
Company's common stock at the date of grant.
A summary of the plan's shares under option at December 31, 2002, 2001 and 2000
follows:
<Table>
<Caption>
2002 2001 2000
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(thousands) Price (thousands) Price (thousands) Price
----------- --------- ----------- --------- ----------- ---------
Outstanding at
beginning of year 1,493 $ 44.67 1,248 $ 41.22 861 $ 43.37
Granted 616 50.67 442 47.99 506 36.11
Exercised (217) 45.22 (129) 22.51 (54) 19.59
Forfeited (67) 46.26 (68) 45.18 (65) 47.77
----------- --------- ----------- --------- ----------- ---------
Outstanding at
end of year 1,825 $ 46.57 1,493 $ 44.67 1,248 $ 41.22
----------- --------- ----------- --------- ----------- ---------
Options exercisable
at year-end 594 $ 45.21 423 $ 46.81 431 $ 38.12
----------- --------- ----------- --------- ----------- ---------
Options available
for future grants 345
-----------
</Table>
52
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
The following table summarizes information about stock options outstanding at
December 31, 2002:
<Table>
<Caption>
Options Outstanding Options Exercisable
------------------------------------------ ----------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices (thousands) Contractual Life Price (thousands) Price
----------- ---------------- --------- ----------- --------
$22.50 - 44.19 491 6.7 $35.54 258 $ 34.66
$48.28 - 53.44 1,149 8.4 50.05 151 52.32
$53.88 - 57.31 185 5.9 54.17 185 54.17
------ ---- ------ ---- --------
$22.50 - 57.31 1,825 7.7 $46.57 594 $ 45.21
====== ==== ====== ==== ========
</Table>
Pro-forma information regarding net income and earnings per share is required by
SFAS No. 123, "Accounting for Stock-Based Compensation," and has been determined
as if the Company had accounted for its employee stock options under the fair
value method of that Statement. The fair value for the Company's options was
estimated at the date of grant using a Black-Scholes options pricing model with
the following weighted average assumptions:
<Table>
<Caption>
2002 2001 2000
--------- --------- ---------
Risk-free interest rate 4.34% 5.02% 6.50%
Dividend yield 1.32% 1.49% 1.52%
Volatility factor 33.66% 32.73% 32.54%
Weighted-average expected life 6.5 YEARS 6.5 years 6.5 years
</Table>
For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's
pro-forma net earnings/(loss) and earnings/(loss) per share, adjusted to include
pro-forma expense related to stock options, are as follows:
<Table>
<Caption>
millions of dollars,
except per share and option amounts
2002 2001 2000
---------- ---------- ----------
Net earnings/(loss) - as reported $ (119.1) $ 66.4 $ 94.0
Net earnings/(loss) - pro-forma (121.8) 64.8 92.5
Earnings/(loss) per share - as reported (basic) (4.47) 2.52 3.56
Earnings/(loss) per share - as reported (diluted) (4.44) 2.51 3.54
Earnings/(loss) per share - pro-forma (basic) (4.57) 2.46 3.50
Earnings/(loss) per share - pro-forma (diluted) (4.54) 2.45 3.48
Weighted-average fair value of options
granted during the year 20.26 17.28 13.63
</Table>
EXECUTIVE STOCK PERFORMANCE PLAN The Company has an executive stock performance
plan which provides payouts at the end of successive three-year periods based on
the Company's performance in terms of total stockholder return relative to a
peer group of automotive companies. Payouts earned are payable 40% in cash and
60% in the Company's common stock. For the three-year measurement periods ended
December 31, 2002, 2001 and 2000, the amounts earned and expensed under the plan
were $4.5 million, $3.6 million and $1.7 million, respectively. Under this plan,
23,280 shares, 25,860 shares and 21,818 shares were issued in 2002, 2001 and
2000, respectively. Estimated shares issuable under the plan are included in the
computation of diluted earnings per share as earned.
EARNINGS PER SHARE In calculating earnings per share, earnings are the same for
the basic and diluted calculations. Shares increased for diluted earnings per
share by 229,000, 148,000 and 96,000 for 2002, 2001 and 2000, respectively, due
to the effects of stock options and shares issuable under the executive stock
performance plan.
10
OTHER COMPREHENSIVE INCOME
The tax effects of the components of other comprehensive income/(loss) in the
Consolidated Statements of Stockholders' Equity are as follows:
<Table>
<Caption>
millions of dollars
For the Year Ended December 31, 2002 2001 2000
-------- -------- --------
Foreign currency translation adjustment $ 55.9 $ (14.6) $ (28.0)
Income taxes (15.0) (3.8) (0.2)
-------- -------- --------
Net foreign currency translation adjustment 40.9 (18.4) (28.2)
-------- -------- --------
Minimum pension liability adjustment (65.4) (29.7) (0.1)
Income taxes 23.1 11.0 --
-------- -------- --------
Net minimum pension liability adjustment (42.3) (18.7) (0.1)
-------- -------- --------
Other comprehensive loss $ (1.4) $ (37.1) $ (28.3)
======== ======== ========
</Table>
53
BorgWarner
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of accumulated other comprehensive loss, net of tax, in the
Consolidated Balance Sheets are as follows:
<Table>
<Caption>
millions of dollars
December 31, 2002 2001
-------- --------
Foreign currency translation adjustment $ 6.7 $ (34.2)
Minimum pension liability adjustment (61.2) (18.9)
-------- --------
Accumulated other comprehensive loss $ (54.5) $ (53.1)
======== ========
</Table>
11
COMMITMENTS AND CONTINGENCIES
The Company and certain of its current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by the United
States Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties (PRPs) at various
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (Superfund) and equivalent state laws and, as
such, may presently be liable for the cost of clean-up and other remedial
activities at 44 such sites. Responsibility for clean-up and other remedial
activities at a Superfund site is typically shared among PRPs based on an
allocation formula.
Based on information available to the Company, which in most cases, includes: an
estimate of allocation of liability among PRPs; the probability that other PRPs,
many of whom are large, solvent public companies, will fully pay the cost
apportioned to them; currently available information from PRPs and/or federal or
state environmental agencies concerning the scope of contamination and estimated
remediation costs; remediation alternatives; estimated legal fees; and other
factors, the Company has established a reserve for indicated environmental
liabilities with a balance at December 31, 2002 of approximately $20.3 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 Crystal Springs, Mississippi plant while undertaking an
expansion of the plant.
The Company has been working with the Mississippi Department of Environmental
Quality and Kuhlman Electric to investigate the extent of the contamination. The
investigation has revealed the presence of polychlorinated biphenyls (PCBs) in
portions of the soil at the plant and neighboring areas. Kuhlman Electric and
others, including the Company, have been sued in several related lawsuits which
claim personal and property damage. The Company has moved to be dismissed from
some of these lawsuits.
The Company's lawsuit against Kuhlman Electric seeking declaration of the scope
of the Company's contractual indemnity has been amicably resolved and dismissed.
The Company believes that the reserve for environmental liabilities is
sufficient to cover any potential liability associated with this matter.
However, due to the nature of environmental liability matters, there can be no
assurance that the actual amount of environmental liabilities will not exceed
the amount reserved.
Patent infringement actions were filed against the Company's turbocharger unit
located in Europe in late 2001 and in 2002 by Honeywell International. The
Dusseldorf District Court in Germany entered a preliminary injunction against
the Company on July 9, 2002 limiting the Company's ability to manufacture and
sell a certain variable turbine geometry (VTG) turbocharger in Germany until a
patent hearing, then scheduled for December 2002.
In order to continue uninterrupted service to its customer, the Company paid
Honeywell $25 million in July 2002 so that it could continue to make and deliver
disputed car turbochargers through June of 2003. The agreement with Honeywell
partially settles litigation, suspends the July 2002 preliminary injunction and
provides for a license to deliver until June 2003. As part of the agreement,
Honeywell agreed to not seek damages for deliveries made before June 30, 2003.
The Company appealed the granting of the July preliminary injunction, but
Honeywell withdrew the preliminary injunction before the Company's appeal could
be heard.
54
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
In January 2003, the Dusseldorf District Court decided that the Company's
current design of the VTG turbocharger infringes the patent asserted by
Honeywell. The Company continues to believe that its current production designs
do not violate the Honeywell patents and are not covered by their lawsuit and
plans to challenge the District Court's decision. The Company has informed its
customers of its inability to deliver the current design VTG turbocharger after
June 30, 2003. The Company continues to develop a new generation VTG
turbocharger to replace the current model and expects to begin delivery of the
new generation VTG turbocharger by July 1, 2003 if approved by the customers.
The Company is recognizing expense of the $25 million license payment as it
ships the affected products from January 2002 to June 2003. In 2002, $14.5
million of expense was recognized.
12
LEASES
Certain assets are leased under long-term operating leases. These include
machinery and equipment at one plant, rent for the corporate headquarters, and a
leased plane. Most leases contain renewal options for various periods. Leases
generally require the Company to pay for insurance, taxes and maintenance of the
leased property. Total rent expense was $11.4 million in 2002, $8.3 million in
2001, and $10.1 million in 2000. The Company does not have any material capital
leases.
The Company has guaranteed the residual values of the leased machinery and
equipment. The guarantees extend through the maturity of the underlying lease,
which is in 2005. In the event the Company exercised its option not to purchase
the machinery and equipment, the Company has guaranteed a residual value of
$16.3 million.
Future minimum operating lease payments at December 31, 2002 were as follows:
<Table>
<Caption>
millions of dollars
2003 $ 4.3
2004 4.2
2005 22.7
2006 0.9
2007 0.9
After 2007 3.4
-------
Total minimum lease payments $ 36.4
=======
</Table>
13
GOODWILL
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 142, effective January 1, 2002,
specifies that goodwill and certain intangible assets will no longer be
amortized but instead will be subject to periodic impairment testing. SFAS No.
142 also requires that, upon adoption, goodwill be allocated to the Company's
reporting units and a two-step impairment analysis be performed.
The Company adopted SFAS No. 142 effective January 1, 2002. Under the
transitional provisions of the SFAS, the Company allocated goodwill to its
reporting units and performed the two-step impairment analysis. The fair value
of the Company's businesses used in determination of the goodwill impairment was
computed using the expected present value of associated future cash flows. As a
result of this analysis, the Company determined that goodwill associated with
its Cooling Systems and Air/Fluid Systems operating businesses was impaired
due to fundamental changes in their served markets, particularly the medium and
heavy truck markets, and weakness at a major customer. As a result a charge of
$269 million, net of taxes of $76 million, was recorded. The impairment loss was
recorded in the first quarter of 2002 as a cumulative effect of change in
accounting principle. The changes in the carrying amount of goodwill (in
millions of dollars) for the twelve months ended December 31, 2002, are as
follows:
<Table>
<Caption>
Morse Air/Fluid Cooling Transmission TorqTransfer
TEC Systems Systems Systems Systems Total
--------- --------- --------- ------------ ------------ ---------
Balance at
12/31/2001 $ 385.4 $ 228.9 $ 417.3 $ 129.0 $ -- $ 1,160.6
Translation
adjustments 8.9 0.5 2.0 -- -- 11.4
Change in accounting
principle -- (73.5) (271.5) -- -- (345.0)
--------- --------- --------- ------------ ------------ ---------
Balance at
12/31/2002 $ 394.3 $ 155.9 $ 147.8 $ 129.0 $ -- $ 827.0
========= ========= ========= ============ ============ =========
</Table>
55
BorgWarner
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also as a result of the adoption of SFAS No. 142, the Company did not amortize
goodwill in 2002. The following table provides adjusted net earnings/(loss) and
earnings per share data for the years ended December 31, 2002, 2001, and 2000 as
if goodwill had not been amortized during these periods:
<Table>
<Caption>
millions of dollars
For the Twelve Months Ended December 31, 2002 2001 2000
---------------- ---------------- ----------------
Reported net earnings before cumulative
effect of change in accounting principle $ 149.9 $ 66.4 $ 94.0
Goodwill amortization, net of tax -- 26.5 27.3
---------------- ---------------- ----------------
Adjusted net earnings before cumulative
effect of change in accounting principle 149.9 92.9 121.3
Cumulative effect of change in accounting
principle, net of tax (269.0) -- --
---------------- ---------------- ----------------
Adjusted net earnings/(loss) $ (119.1) $ 92.9 $ 121.3
================ ================ ================
BASIC EARNINGS (LOSS) PER SHARE:
Reported net earnings before cumulative
effect of change in accounting principle $ 5.63 $ 2.52 $ 3.56
Goodwill amortization -- 1.00 1.03
---------------- ---------------- ----------------
Adjusted net earnings before cumulative
effect of change in accounting principle 5.63 3.52 4.59
Cumulative effect of change in accounting
principle, net of tax (10.10) -- --
---------------- ---------------- ----------------
Adjusted net earnings/(loss) $ (4.47) $ 3.52 $ 4.59
================ ================ ================
DILUTED EARNINGS (LOSS) PER SHARE:
Reported net earnings before cumulative
effect of change in accounting principle $ 5.58 $ 2.51 $ 3.54
Goodwill amortization -- 1.00 1.03
---------------- ---------------- ----------------
Adjusted net earnings before cumulative
effect of change in accounting principle 5.58 3.51 4.57
Cumulative effect of change in accounting
principle, net of tax (10.02) -- --
---------------- ---------------- ----------------
Adjusted net earnings/(loss) $ (4.44) $ 3.51 $ 4.57
================ ================ ================
</Table>
14
OPERATING SEGMENTS
GEOGRAPHIC INFORMATION No country outside the U.S., other than Germany, accounts
for as much as 5% of consolidated net sales, attributing sales to the sources of
the product rather than the location of the customer. For this purpose, the
Company's 50% equity investment in NSK-Warner (Note Five) amounting to $148.3
million at December 31, 2002 is excluded from the definition of long-lived
assets, as are goodwill and certain other noncurrent assets.
<Table>
<Caption>
millions of dollars
Net Sales Long-Lived Assets
2002 2001 2000 2002 2001 2000
----------- ----------- ----------- ----------- ----------- -----------
United States $ 1,859.1 $ 1,687.4 $ 1,960.2 $ 643.0 $ 638.5 $ 591.9
----------- ----------- ----------- ----------- ----------- -----------
Europe:
Germany 453.4 347.5 350.0 182.3 148.5 132.3
Other Europe 236.0 162.2 183.2 72.4 64.4 60.6
----------- ----------- ----------- ----------- ----------- -----------
Total Europe 689.4 509.7 533.2 254.7 212.9 192.9
Other foreign 182.6 154.5 152.5 80.8 75.5 88.6
----------- ----------- ----------- ----------- ----------- -----------
Total $ 2,731.1 $ 2,351.6 $ 2,645.9 $ 978.5 $ 926.9 $ 873.4
=========== =========== =========== =========== =========== ===========
</Table>
SALES TO MAJOR CUSTOMERS Consolidated sales included sales to Ford Motor Company
of approximately 26%, 30% and 30%; to DaimlerChrysler of approximately 20%, 21%
and 19%; and to General Motors Corporation of approximately 12%, 12% and 13% for
the years ended December 31, 2002, 2001 and 2000, respectively. No other single
customer accounted for more than 10% of consolidated sales in any year between
2000 and 2002. Such sales consisted of a variety of products to a variety of
customer locations worldwide. Each of the five operating segments had
significant sales to all three of the customers listed above.
For purposes of this footnote, the Company's business was comprised of five
operating segments: Morse TEC, Air/Fluid Systems, Cooling Systems, TorqTransfer
Systems and Transmission Systems. These reportable segments are strategic
business units which are managed separately because each represents a specific
grouping of automotive components and systems. The Company evaluates performance
based on earnings before interest and taxes, which emphasizes realization of a
satisfactory return on the total capital invested in each operating unit.
Intersegment sales, which are not significant, are recorded at market prices.
This footnote presents summary segment information.
56
BorgWarner
BorgWarner Inc. and Consolidated Subsidiaries
OPERATING SEGMENTS
<Table>
<Caption>
millions of dollars
Sales Earnings
---------------------------------- Before Long-Lived
Inter- Interest Year End Depreciation/ Assets
Customers segment Net and Taxes Assets Amortization Expenditures(c)
--------- --------- --------- --------- --------- --------------- ----------------
2002
Morse TEC $ 1,018.7 $ 28.2 $ 1,046.9 $ 159.2 $ 1,190.5 $ 54.9 $ 72.0
Air/Fluid Systems 375.6 12.8 388.4 23.4 310.0 19.9 15.4
Cooling Systems 235.8 -- 235.8 25.1 239.4 13.1 7.6
TorqTransfer Systems 626.5 3.6 630.1 39.2 280.5 25.9 18.0
Transmission Systems 474.5 20.7 495.2 64.9 397.6 21.5 33.2
Inter-segment eliminations -- (65.3) (65.3) -- -- -- --
--------- --------- --------- --------- --------- --------------- ---------------
Total 2,731.1 -- 2,731.1 311.8 2,418.0 135.3 146.2
Corporate -- -- -- (40.3) 264.9(b) 2.1 19.9
--------- --------- --------- --------- --------- --------------- ---------------
Consolidated $ 2,731.1 $ -- $ 2,731.1 $ 271.5(d) $ 2,682.9 $ 137.4 $ 166.1
========= ========= ========= ========= ========= =============== ===============
2001
Morse TEC $ 846.7 $ 22.7 $ 869.4 $ 119.8 $ 1,066.4 $ 62.3 $ 75.7
Air/Fluid Systems 350.2 7.6 357.8 12.9 382.1 25.1 17.6
Cooling Systems 220.5 -- 220.5 7.5 510.1 30.6 14.6
TorqTransfer Systems 498.7 1.4 500.1 24.1 266.6 23.4 38.0
Transmission Systems 417.5 11.3 428.8 48.5 359.6 26.1 26.6
Divested operations and
businesses held for sale* 18.0 -- 18.0 (0.2) -- 0.2 --
Inter-segment eliminations -- (43.0) (43.0) -- -- -- --
--------- --------- --------- --------- --------- --------------- ---------------
Total 2,351.6 -- 2,351.6 212.6 2,584.8 167.7 172.5
Corporate -- -- -- (26.5) 186.1(b) 2.2 10.4
Restructuring and other
non-recurring charges -- -- -- (28.4) -- -- --
--------- --------- --------- --------- --------- --------------- ---------------
Consolidated $ 2,351.6 $ -- $ 2,351.6 $ 157.7(d) $ 2,770.9 $ 169.9 $ 182.9
========= ========= ========= ========= ========= =============== ===============
2000
Morse TEC $ 860.0 $ 25.8 $ 885.8 $ 127.4 $ 1,017.7 $ 58.7 $ 82.8
Air/Fluid Systems 419.0 8.8 427.8 35.7 403.2 25.6 27.0
Cooling Systems 280.8 0.5 281.3 32.1 536.8 30.5 16.7
TorqTransfer Systems 524.9 1.8 526.7 37.2 250.3 24.0 19.2
Transmission Systems 428.5 9.0 437.5 46.0 353.1 25.5 32.6
Divested operations and
businesses held for sale* 132.7 0.2 132.9 3.2 73.6 3.0 4.6
Inter-segment eliminations -- (46.1) (46.1) -- -- -- --
--------- --------- --------- --------- --------- --------------- ---------------
Total 2,645.9 -- 2,645.9 281.6 2,634.7 167.3 182.9
Corporate -- -- -- (4.6) 104.9(b) 3.1 13.9
Restructuring and other
non-recurring charges -- -- -- (62.9) -- -- --
--------- --------- --------- --------- --------- --------------- ---------------
Consolidated $ 2,645.9 $ -- $ 2,645.9 $ 214.1(d) $ 2,739.6 $ 170.4 $ 196.8
========= ========= ========= ========= ========= =============== ===============
</Table>
(a) Fuel Systems was sold in 2001. The HVAC business was sold in 2000.
(b) Corporate assets, including equity in affiliates, are net of trade
receivables sold to third parties, and include cash, marketable securities,
deferred taxes and investments and advances.
(c) Long-lived asset expenditures includes capital spending and additions to
non-perishable tooling, net of customer reimbursements.
(d) Earnings before interest and taxes above is net of interest expense and
finance charges of $37.7, $47.8 and $62.6 million in 2002, 2001 and 2000,
respectively. Had these amounts been included in the table above, earnings
before income taxes for the years 2002, 2001 and 2000 would be $233.8,
$109.9 and $151.5 million, respectively.
57
BorgWarner
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2002 and
2001 interim results of operations. Certain 2002 and 2001 quarterly amounts have
been reclassified to conform to the annual presentation.
<Table>
<Caption>
millions of dollars, except per share amounts
2002
Quarter Ended, March 31 June 30 Sept. 30 Dec. 31 Year 2002
--------- --------- --------- --------- ---------
Net sales $ 633.9 $ 712.4 $ 684.0 $ 700.8 $ 2,731.1
Cost of sales 504.2 561.4 556.1 554.8 2,176.5
--------- --------- --------- --------- ---------
Gross profit 129.7 151.0 127.9 146.0 554.6
Selling, general and administrative expenses 74.5 76.5 73.2 79.3 303.5
Goodwill amortization -- -- -- -- --
Other, net (0.5) 0.1 (0.2) (0.3) (0.9)
Restructuring and other non-recurring charges -- -- -- -- --
--------- --------- --------- --------- ---------
Operating income 55.7 74.4 54.9 67.0 252.0
Equity in affiliate earnings, net of tax (3.4) (6.0) (4.5) (5.6) (19.5)
Interest expense, net 9.8 9.5 9.3 9.1 37.7
--------- --------- --------- --------- ---------
Income before income taxes 49.3 70.9 50.1 63.5 233.8
Provision for income taxes 16.3 23.6 16.4 20.9 77.2
Minority interest, net of tax 1.5 1.6 1.8 1.8 6.7
--------- --------- --------- --------- ---------
Net earnings before cumulative effect
of accounting change $ 31.5 $ 45.7 $ 31.9 $ 40.8 $ 149.9
========= ========= ========= ========= =========
Cumulative effect of accounting changes (269.0) -- -- -- (269.0)
--------- --------- --------- --------- ---------
Net earnings/(loss) $ (237.5) $ 45.7 $ 31.9 $ 40.8 $ (119.1)
========= ========= ========= ========= =========
Net earnings/(loss) per share - basic $ (8.98) $ 1.72 $ 1.19 $ 1.52 $ (4.47)
========= ========= ========= ========= =========
Net earnings/(loss) per share - diluted $ (8.90) $ 1.70 $ 1.18 $ 1.52 $ (4.44)
========= ========= ========= ========= =========
<Caption>
millions of dollars, except per share amounts
2001
Quarter Ended, March 31 June 30 Sept. 30 Dec. 31 Year 2001
--------- --------- --------- --------- ---------
Net sales $ 606.8 $ 602.0 $ 559.9 $ 582.9 $ 2,351.6
Cost of sales 494.3 480.4 451.5 464.6 1,890.8
--------- --------- --------- --------- ---------
Gross profit 112.5 121.6 108.4 118.3 460.8
Selling, general and administrative expenses 59.4 63.0 59.2 68.1 249.7
Goodwill amortization 10.6 10.3 10.4 10.7 42.0
Other, net (0.6) 0.2 (0.6) (1.1) (2.1)
Restructuring and other non-recurring charges -- -- -- 28.4 28.4
--------- --------- --------- --------- ---------
Operating income 43.1 48.1 39.4 12.2 142.8
Equity in affiliate earnings, net of tax (3.9) (4.8) (3.3) (2.9) (14.9)
Interest expense, net 12.8 12.4 12.3 10.3 47.8
--------- --------- --------- --------- ---------
Income before income taxes 34.2 40.5 30.4 4.8 109.9
Provision for income taxes 12.4 15.1 10.9 1.3 39.7
Minority interest, net of tax 0.7 0.7 1.1 1.3 3.8
--------- --------- --------- --------- ---------
Net earnings before cumulative effect
of accounting change $ 21.1 $ 24.7 $ 18.4 $ 2.2 $ 66.4
========= ========= ========= ========= =========
Cumulative effect of accounting changes -- -- -- -- --
--------- --------- --------- --------- ---------
Net earnings/(loss) $ 21.1 $ 24.7 $ 18.4 $ 2.2 $ 66.4
========= ========= ========= ========= =========
Net earnings/(loss) per share - basic $ 0.80 $ 0.94 $ 0.70 $ 0.08 $ 2.52
========= ========= ========= ========= =========
Net earnings/(loss) per share - diluted $ 0.80 $ 0.93 $ 0.70 $ 0.08(b)$ 2.51(b)
========= ========= ========= ========= =========
</Table>
(a) In 2002, the Company recorded a $269.0 million charge for cumulative effect
of change in accounting principle, net of tax. This charge was $10.02 per
diluted share. Earnings before cumulative effect of change in accounting
principle were $149.9 million or $5.58 per diluted share.
(b) Diluted earnings per share excluding the fourth quarter non-recurring
charges were $0.80 for the quarter ended December 31, 2001 and $3.23 for
the year ended December 31, 2001.
58
BorgWarner
2002
SELECTED FINANCIAL DATA BorgWarner Inc. and Consolidated Subsidiaries
<Table>
<Caption>
millions of dollars, except per share data
For the Year Ended December 31, 2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
STATEMENT OF OPERATIONS DATA
Net sales $ 2,731.1 $ 2,351.6 $ 2,645.9 $ 2,458.6 $ 1,836.8
---------- ---------- ---------- ---------- ----------
Cost of sales 2,176.5 1,890.8 2,090.7 1,968.3 1,518.0
Gross profit 554.6 460.8 555.2 490.3 318.8
Selling, general and administrative expenses 303.5 249.7 258.7 214.8 142.6
Goodwill amortization -- 42.0 43.3 32.1 16.8
Other, net (0.9) (2.1) (8.1) (2.4) (4.8)
Restructuring and other non-recurring charges -- 28.4(b) 62.9(c) -- --
---------- ---------- ---------- ---------- ----------
Operating income 252.0 142.8 198.4 245.8 164.2
Equity in affiliate earnings, net of tax (19.5) (14.9) (15.7) (11.7) (5.5)
Interest expense, net 37.7 47.8 62.6 49.2 26.9
---------- ---------- ---------- ---------- ----------
Income before income taxes 233.8 109.9 151.5 208.3 142.8
Provision for income taxes 77.2 39.7 54.8 74.7 46.0
Minority interest, net of tax 6.7 3.8 2.7 1.3 2.1
---------- ---------- ---------- ---------- ----------
Net earnings before cumulative effect of
accounting change 149.9 66.4 94.0 132.3 94.7
Cumulative effect of change in accounting
principle, net of tax (269.0)(a) -- -- -- --
---------- ---------- ---------- ---------- ----------
Net earnings/(loss) $ (119.1) $ 66.4 $ 94.0 $ 132.3 $ 94.7
---------- ---------- ---------- ---------- ----------
Net earnings/(loss) per share - basic $ (4.47)(a) $ 2.52(b) $ 3.56(c) $ 5.10 $ 4.03
---------- ---------- ---------- ---------- ----------
Average shares outstanding (thousands) - basic 26,625 26,315 26,391 25,948 23,479
Net earnings/(loss) per share - diluted $ (4.44)(a) $ 2.51(b) $ 3.54(c) $ 5.07 $ 4.00
---------- ---------- ---------- ---------- ----------
Average shares outstanding (thousands) - diluted 26,854 26,463 26,487 26,078 23,676
Cash dividend declared per share $ 0.63 $ 0.60 $ 0.60 $ 0.60 $ 0.60
BALANCE SHEET DATA (at end of period)
Total assets $ 2,682.9 $ 2,770.9 $ 2,739.6 $ 2,970.7 $ 1,846.1
Total debt 646.7 737.0 794.8 980.3 393.5
</Table>
(a) In 2002, upon the adoption of SFAS No. 142, the Company recorded a $269.0
million charge for cumulative effect of accounting principle, net of tax.
This charge was $10.02 per diluted share. Earnings before cumulative effect
of change in accounting principle were $149.9 million or $5.58 per diluted
share.
(b) In 2001, the Company recorded $28.4 million in non-recurring charges. Net
of tax, this totaled $19.0 million or $0.72 per diluted share. Earnings
before non-recurring charges were $85.4 million or $3.23 per diluted share.
(c) In 2000, the Company recorded $62.9 million in restructuring and other
non-recurring charges. Net of tax, this totaled $38.7 million or $1.47 per
diluted share. Earnings before restructuring and other non-recurring
charges were $132.7 million, or $5.01 per diluted share.
59
BorgWarner
CORPORATE INFORMATION
COMPANY INFORMATION
BorgWarner Inc.
200 South Michigan Avenue, Chicago, IL 60604 312-322-8500
www.bwauto.com
STOCK LISTING
Shares are listed and traded on the New York Stock Exchange. Ticker symbol: BWA.
<Table>
<Caption>
High Low
------ --------
Fourth Quarter 2002 $52.51 $39.15
Third Quarter 2002 62.06 48.89
Second Quarter 2002 67.86 55.87
First Quarter 2002 64.12 49.71
Fourth Quarter 2001 $52.25 $39.88
Third Quarter 2001 54.50 36.49
Second Quarter 2001 49.62 39.60
First Quarter 2001 45.81 38.90
</Table>
DIVIDENDS
The current dividend practice established by the directors is to declare regular
quarterly dividends. The last such dividend of 18 cents per share of common
stock was declared on December 9, 2002, payable February 17, 2003, to
stockholders of record on February 3, 2003. The current practice is subject to
review and change at the discretion of the Board of Directors.
SHAREHOLDER SERVICES
Mellon Investor Services is the transfer agent, registrar and dividend
dispersing agent for BorgWarner common stock.
Mellon Investor Services for BorgWarner
85 Challenger Road
Ridgefield Park, NJ 07660
www.mellon-investor.com
Communications concerning stock transfer, change of address, lost stock
certificates or proxy statements for the annual meeting should be directed to
Mellon Investor Services at 800-851-4229.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The BorgWarner Dividend Reinvestment and Stock Purchase Plan has been
established so that anyone can make direct purchases of BorgWarner common stock
and reinvest dividends. We pay the brokerage commissions on purchases. Questions
about the plan can be directed to Mellon at 800-851-4229. To receive a
prospectus and enrollment package, contact Mellon at 800-842-7629.
ANNUAL MEETING OF STOCKHOLDERS
The 2003 annual meeting of stockholders will be held on Wednesday, April 23,
2003, beginning at 10:00 a.m. on the 19th floor of our headquarters at 200 South
Michigan Avenue in Chicago.
STOCKHOLDERS
As of December 31, 2002, there were 2,979 holders of record and an estimated
9,000 beneficial holders.
INVESTOR INFORMATION
Visit WWW.BWAUTO.COM for a wide range of company information. For investor
information, including the following, click on Investor Information.
o BorgWarner News Releases
o BorgWarner Stock Quote
o Earnings Release Conference Call Calendar
o Analyst Coverage
o Shareholder Services
o BorgWarner In The News Articles
o Annual Reports
o Proxy Statement and Card
o Dividend Reinvestment/Stock Purchase Plan
o Financials and SEC Filings (including the Annual Report on Form 10K)
o Request Information Form
NEWS RELEASE SIGN-UP
At our Investor Information web page, you can sign up to receive BorgWarner's
news releases. Here's how to sign up:
1. Go to WWW.BWAUTO.COM
2. Click Investor Information
3. Click News Releases Sign-up and follow the instructions
INVESTOR INQUIRIES
Investors and securities analysts requiring financial reports, interviews or
other information should contact Mary E. Brevard, Director of Investor Relations
and Communications at BorgWarner headquarters, 312-322-8683. For copies of
printed material, call our BorgWarner Investor Relations Hot Line at
312-322-8524.
BorgWarner Inc. owns U.S. trademark registrations for: BorgWarner, (LOGO),
(BORGWARNER LOGO) and TORQUE-ON-DEMAND. BorgWarner owns the following
trademarks: ITM, InterActive Torque Management and DualTronic.
PTC photo:(C)Studio B Architects, Michael Collyer Photographer
60
BorgWarner