BorgWarner
Annual Report 1999

Plain-text annual report

T R O P E R L A U N N A 9 9 9 1 D R I V I N G G R O W T H D R I V I N G G R O W T H F I N A N C I A L H I G H L I G H T S B o rg Wa r n e r 247247 Growth Leader in Cyclical Industry NA Auto Industry 130130 1 9 9 0 1 9 9 3 1 9 9 6 1 9 9 9 BorgWarner Outpaces Industry Sales Our sales have grown five times faster than North American vehicle sales when indexed to 1989 (1989 equals 100). BorgWarner Inc. and Consolidated Subsidiaries millions of dollars, except per share data 1 9 9 9 1 9 9 8 Net sales $2,458.6 $1,836.8 Net earnings 132.3 Net earnings per share – basic 5.10 Net earnings per share – diluted 5.07 94.7 4.03 4.00 Average number of shares outstanding – basic {millions} 25.9 23.5 Average number of shares outstanding – diluted {millions} 26.1 23.7 Number of employees 14,400 10,100 Letter to Shareholders 2 Business Profile 4 Engines 6 Power Transfer 12 Financial Review 17 Corporate Information 44 Inside Back Cover Board of Directors and Officers BorgWarner, driven by its pursuit of powertrain leadership and the passion of its people, is harnessing the momentum of worldwide technology changes in cars and trucks to propel profitable growth. Our expertise in engines and power transfer translates into cleaner air and improved performance for vehicles that are also fun to drive, secure and affordable. John F. Fiedler, Chairman and Chief Executive Officer “Our commitment to growth through powertrain product leadership is a reaffirmation of the potential of our heritage.” Grow t h By Ma rk e t 68% Americas • • 14% Asia • 18% Europe C o m b i n e d Wo rl d w i d e Sa l e s TO OUR SHAREHOLDERS The past year has been one of our most ambitious and successful. Earnings rose 27% per share; sales climbed 34%. A number of factors drove our record results: • Increased BorgWarner content in new engine and auto- matic transmission programs that improve fuel economy and emissions • Strong global auto production • The continued popularity of sport-utility vehicles and 2004 light trucks • Moving our people toward a culture of product leadership includes linking employee interests more closely with those of shareholders. The connection has been strengthened between employee compensation at all levels and creating value through better returns on our investments. An additional element of executive compensation is directly tied to total shareholder returns. We stated in 1998 that, given the opportunities we had identified within our powertrain focus, we could double the size of the company by 2004 while delivering propor- tional earnings and returns. This is not growth for growth’s sake but achieving our full potential and • Strong internal growth boosted by acquisitions positioning us for the future. As a result, we entered 2000 with a solid base in powertrain technol- ogy that should fuel profitable growth, but with a frus- tration that our share price does not reflect our earnings potential. Our accomplishments in 1999 track our growth plan illustrated here: • Strong internal growth accounted for over one- third of our sales increase in 1999. Each of our businesses delivered solid results. Of our 15% annual sales growth since 1994, 64% has come from existing operations. • Our engine management technology was expanded with the strategic acquisitions of turbo- charger and cooling systems businesses. Integration of these operations is underway, with gains in market shares and operating mar- gins anticipated. Two major acquisitions in one year were challenging, but they complete a significant part of our plan. • Four new cross-business project teams are developing leading- edge powertrain products. These projects range from automating manual transmissions and providing electronic front-wheel drive based four-wheel drive solutions to elimi- nating turbo lag and creating on-demand pump technology. Some of these projects are highlighted in this report. • Our anticipated new business over the next three years is significantly higher than past levels, demonstrating the value of our commitment to research and development. Over this period, engine-related sales comprise about 70% of the new business, including major European turbocharger programs and the largest global engine program ever launched. BORGWARNER GROWTH STRATEGY L A N R E T X E L A N R E T N I Acquisitions Internal Growth CROSS BUSINESS EXISTING BUSINESSES TECHNOLOGY OPPORTUNITIES Throughout our history we have been expert at capitalizing on tech- nology changes — catching technology waves. The sport-utility vehicle wave created double-digit growth through 1997. As that wave crested, we moved aggressively to catch the wave of oppor- tunity in engines. About half of our revenues in 2000 is expected to come from engine manage- ment components and systems. Beyond engines, we are creating new waves with leading-edge concepts in transmissions and in passenger-car- based four-wheel drive systems. This versatility is nothing new. BorgWarner has been innovating since 1928. 3 CURRENT BUSINESS 1998 During 1999, we delivered record earnings and rewarded employees for economic value creation. Our stock price, however, was down almost 20%. I could cite the negative performance of the entire auto sector and indeed most manufacturing stocks, but it would not change the deep disappointment which all shareholders, including me, have felt. While I believe that the value of our earnings growth will ultimately be recognized in the marketplace, we continue to explore addi- tional ways to reward shareholders that take advantage of our earnings power. Because I believe in our strategy and our people, I maintain my strong conviction that if you wish to own only one auto stock, that stock should be BorgWarner. Sincerely, John F. Fiedler C h a i r m a n a n d C h i e f E xe c u t i ve O f f i c e r M O R S E T E C | TURBO SYSTEMS T O R Q T R A N S F E R S Y S T E M S 1 9 9 9 H I G H L I G H T S Sales rise 60%. Strong demand for Morse TEC chain products and systems for engines, automatic transmissions and four-wheel drive boosts sales of these products. Accelerating demand for European passenger car turbochargers continues to fuel Turbo Systems’ results. To better serve the growing market for turbochargers, Kuhlman Corporation is acquired in March. Facilities in Germany and Japan are expanded to accommodate new business. M O R S E T E C T U R B O S Y S T E M S B U S I N E S S D E S C R I P T I O N B U S I N E S S D E S C R I P T I O N Global leader in the design and manufacture of automotive chain systems and components for engine timing, automatic transmission and four-wheel drive applications. G R O W T H O P P O R T U N I T I E S 4 • Timing chain systems for direct injected diesel engines • Engine timing systems moving from belts to chains in Japan and Europe • Growth of overhead cam engines Leading designer and manufacturer of turbochargers for the passenger car and commercial vehicle markets. G R O W T H O P P O R T U N I T I E S • Direct injected diesel engines • Emissions / fuel economy needs • Emerging applications on light trucks and sport-utility vehicles • New technologies such as variable geometry • Systems integration; alternative PL AN T S A N D TE C HNIC AL C EN T E R S technologies • Chain belts and HY-VO pump drives for continuously variable transmissions • MORSE GEMINI chain systems for noise reduction HEADQUARTERS: Indianapolis, Indiana Asheville, North Carolina Bradford, England Campinas, Brazil Kirchheimbolanden, Germany PLANTS AND TECHNIC AL CEN T ER S HEADQUARTERS: Ithaca, New York Kysor/Westran Byron, Illinois Arcore, Italy Guadalajara, Mexico Ithaca, New York Nabari City, Japan Simcoe, Ontario, Canada Tainan Shien, Taiwan 1 9 9 9 H I G H L I G H T S Sales are up 9%, reflecting the continued popularity of light trucks and sport-utility vehicles. Four-wheel drive system sales to Ford light trucks and sport-utility vehicles and the Mercedes M-Class All-Activity Vehicle are strong. Exports of four-wheel drive (4WD) transfer cases to Korea recover. Development work intensifies on new all-wheel drive (AWD) systems for passenger cars and cross-over vehicles, attracting new customer interest. B U S I N E S S D E S C R I P T I O N Leading independent global designer and producer of transfer cases and systems for four-wheel and all-wheel drive vehicles for the sport-utility, light truck and cross-over vehicle markets. Systems enhance driver safety, security, driveability and ease of use. G R O W T H O P P O R T U N I T I E S • Continued popularity of 4WD in an established market segment • Growing popularity of 4WD/AWD passenger cars and cross-over vehicles • European and emerging markets • Application of electronically controlled torque management expertise in alternative technologies P LA NT S A N D TE C HNICAL CENTERS HEADQUARTERS: Sterling Heights, Michigan Beijing, China (49% JV) Cary, North Carolina Livonia, Michigan Longview, Texas Margam, Wales Muncie, Indiana Pune, India (60% JV) Seneca, South Carolina Sirsi, India (60% JV) S A L E S millions of dollars S A L E S millions of dollars 95 96 97 98 99 257.6 276.6 349.0 536.2 856.0 9595 9696 9797 9898 9999 405.5 476.8 613.6 518.8 563.3 A I R / F L U I D S Y S T E M S T R A N S M I S S I O N S Y S T E M S C O O L I N G S Y S T E M S 1 9 9 9 H I G H L I G H T S 1 9 9 9 H I G H L I G H T S 1 9 9 9 H I G H L I G H T S Sales are up 40%. Demand for emission reduction products and transmission control modules drives growth, along with the inclusion of an acquired fuel systems business from Kuhlman Corporation. Electronic and electromechanical expertise supports new cross-business systems growth opportunities. B U S I N E S S D E S C R I P T I O N Full service supplier of air induction and fluid control systems and electro- mechanical components, for enhanced engine and transmission performance, reduced emissions, fuel vapor recovery, and increased vehicle safety. G R O W T H O P P O R T U N I T I E S • Market consolidation of suppliers in strong strategic product segments • Phase-in of new emission regulations in Europe and North America • Direct injected gasoline and diesel engines • Increased use of electronics and electromechanical actuation for underhood applications PLANTS AND TECHNICAL CEN T ER S HEADQUARTERS: Warren, Michigan Blytheville, Arkansas Buffalo, New York Charlotte, North Carolina Chester, South Carolina Dixon, Illinois Grand Rapids, Michigan Rothbury, Michigan Sallisaw, Oklahoma Springfield, Ohio Spring Lake, Michigan Tulle, France Water Valley, Mississippi White Pigeon, Michigan Sales are up 16%, excluding sold product lines. The group sees growth in revenues from increased European automatic transmission production, for both home and export markets. Demand remains strong in North America, driven by record light vehicle production and numerous new transmission programs. Business conditions have stabilized in Japan while a strong recovery is under- way in Korea. Development of new sys- tems to automate manual transmissions progresses into prototype and testing phases with European customers. B U S I N E S S D E S C R I P T I O N Supplies “shift quality” components and systems including one-way clutches, transmission bands, friction plates, and clutch pack assemblies to virtually every automatic transmission maker in the world. G R O W T H O P P O R T U N I T I E S • Move from four- to five- to six-speed transmissions • Shift from components to sub-systems strategy • Development of subsystems for continuously variable transmissions (CVT) • Automation of manual transmissions • Substitution of modular wet starting clutches for torque converters PL ANT S A N D TE C HNIC AL C EN T E R S HEADQUARTERS: Lombard, Illinois Bellwood, Illinois Coldwater, Michigan Eumsung, Korea (80% JV) Frankfort, Illinois Fukuroi City, Japan (50% JV) Heidelberg, Germany Ketsch, Germany Lombard, Illinois (Aftermarket) Margam, Wales Sterling Heights, Michigan Group is created from the 1999 acquisitions of the Fluid Power Division of Eaton Corporation and the cooling business of Kuhlman Corporation. The moves create the world leader in highly engineered engine cooling system solutions for improved engine temperature management. Worldwide operations present opportunities for market penetration and market share gains. B U S I N E S S D E S C R I P T I O N Global leader in the design and supply of cooling system fan clutches and fans primarily for the sport-utility, light truck and commercial vehicle markets. G R O W T H O P P O R T U N I T I E S 5 • Continued popularity of light truck and SUVs • Consolidation of supplier base in commercial vehicles • European, South American and Asian market expansion • Module development agreements with other key suppliers • Emission regulations related to diesels P LA NT S A N D TE C HNICAL CENTERS HEADQUARTERS: Marshall, Michigan Bradford, England Cadillac, Michigan Changwon, South Korea Fletcher, North Carolina Gainesville, Georgia Hengoed, Wales Indianapolis, Indiana Markdorf, Germany Ningbo, China (70% JV) São José dos Campos, Brazil S A L E S millions of dollars S A L E S millions of dollars S A L E S millions of dollars 97.8 242.7 95 96 97 98 99 342.4 351.4 491.5 9595 9696 9797 9898 9999 378.1 392.2 369.4 355.0 413.4 99 142.8 Engines More power, less waste. We add value as a partner More power, less waste. We add value as a partner in the development of new engines. Our technology in the development of new engines. Our technology 6 makes them quieter, better performing, cleaner makes them quieter, better performing, cleaner burning and more fuel-efficient and durable. burning and more fuel-efficient and durable. T R E N D S T E C H N O L O G Y R E S U L T S F U E L E C O N O M Y T I M I N G A N D C O O L I N G S Y S T E M S A I R Q U A L I T Y T U R B O C H A R G E R S & A I R M A N A G E M E N T Engines Engines G A S O L I N E G A S O L I N E Timing Chain/Systems Chain types include inverted tooth silent, small pitch silent and roller chain; crankshaft and cam shaft sprockets; tensioners and snubbers; engine accessory and balance shaft drive components, variable valve timing systems Turbochargers Turbochargers with water-cooled bearing housings; integrated boost pressure control valves and waste- gates; variable sliding ring turbines; exhaust manifolds with integrated turbine housings; compressor housings with integrated recirculation valves; two-stage turbo- charging systems Air Management/Emission Systems Program management and software and system design; air induction and secondary air systems; throttle bodies, electric vacuum regulators, exhaust gas recirculation valves, solenoids, control valves, oil pumps Cooling Systems Integrated cooling modules; electronically and mechan- ically controlled air sensing and coolant sensing fan clutch products; nylon and metal engine cooling fans 7 D I E S E L D I E S E L Timing Chain/Systems Chain types include inverted tooth silent, MORSE GEMINI, small pitch silent and roller chain; sprockets, tensioners and snubbers; torsional absorbing shaft drives; engine accessory components Turbochargers Single, twin entry and water-cooled turbine housings; integrated boost pressure control valves and wastegates; variable geometry and variable sliding ring turbines; exhaust manifolds with integrated turbine housings; two-stage turbocharging and turbocompound systems Air Management/Emission Systems Program management, device software and system design; variable turbine geometry control; electronic throttle control; air induction systems; throttle bodies, electric vacuum regulators, exhaust gas recirculation valves, solenoids, control valves Cooling Systems Integrated cooling modules; electronically and mechan- ically controlled air sensing and coolant sensing fan clutch products; nylon and metal engine cooling fans ➜ ➜ ➜ ➜ ➜ ➜ ➜ ➜ The demand for turbochargers is exploding, especially in Europe, where direct injected diesel engines are powering more and more passenger cars. For both diesel and gas-powered vehicles, turbochargers lower fuel consumption, allow smaller engines to provide the power of larger ones, and reduce emissions. That’s because turbochargers use exhaust gases to boost engine power by delivering more air to the engine for a cleaner, leaner burn. To meet demand, we are expanding capacity and improving manufacturing efficiencies. T U R B O C H A R G E R G ROW T H 1998 UNITS Europe Japan l e s e i D 3,250,000 650,000 2004 UNITS +23% 6,000,000 +85% 800,000 Europe Japan e n i l o s a G 485,000 +106% 1,000,000 +85% 800,000 775,000 T U R B O C H A R G E R S The worldwide market for passenger car turbo- chargers is expected to grow 72% by 2004. K I R C H H E I M B O L A N D E N , G E R M A N Y From left to right: Klaus-Peter Dörle, Edeltraut Wahl, Günter Krämer BorgWarner Turbo Systems J A P A N 9 Engine Chain Potential C H A I N D R I V E S Y S T E M S Driven by higher-torque, more efficient gas and diesel engines, the move is on from simple chain or belt-driven engine components to more durable, quiet and smaller chain systems. In North America, the development of overhead cam engines is creating demand. In Europe, the growth driver is direct injected diesel engines. In Japan, carmakers are developing new generation engines with chain drives for sales worldwide. Production for the first program is underway, with rollout expected across five vehicle platforms. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 Chain Engines Belt Engines Western Europe 33% Growth Japan 115% Growth North America 7% Growth 98 03 98 03 98 03 (cid:2) With our new entry in engine management, we are a leading supplier of highly engineered cooling systems. Our products can improve fuel economy and enhance emission reductions in SUVs, light trucks and commercial vehicles. Growth will come from market expansion and share gains, and from the move to integrated cooling modules. Modules will combine electronics, aerodynamics and materials science for lighter weight, greater efficiency and precise fan control, to ultimately improve fuel economy and maximize cooling potential. C O O L I N G S Y S T E M S F O R D F - 1 5 0 S E R I E S I N T E G R A T E D M O D U L E S W I L L D R I V E G R O W T H Trucks and SUVs will need to meet the same emission standards as cars by 2004. Carmakers must deliver fuel economy across their fleet of vehicles. Air particulates (smog: NOx) are main concern. E U R O P E A U S Strict emission requirements are being phased in by 2005. Carbon emissions that have been linked to global warming are main focus. Lower cost diesel fuel burns cleaner in new turbocharged engines. 11 Congestion in cities brings increasing focus on government regulations. High fuel prices. Smog and global warming are issues, balanced against basic trans- portation and infrastructure needs. J A P A N / A S I A A I R Q U A L I T Y Innovation in air and fluid management is expanding as concern for air quality grows. We are developing integrated solutions that improve performance and reduce emissions. These include active air induction systems for all types of engines; electronic valves and controls for more precise engine control; more responsive electronic throttle control systems for gasoline engines; and specialized oil pumps that facilitate higher powertrain efficiency. The move to higher-volt electrical systems also creates opportunities for on-demand systems that run only when needed. Catching Technology Waves 1 9 9 7 S a l e s 2 0 0 0 S a l e s 15% Engines 40% 4WD 50% Engines 22% 4WD 45% AT 28% AT As technology change creates opportunity, engine components and systems are our new growth catalyst. (cid:2) (cid:2) (cid:2) (cid:2) Power Transfer Electronically controlled, dr iveable power — We’re experts at how to take raw engine output and transfer it through the drivetrain. From smooth 12 shifts to four-wheel drive control, our proprietary expertise moves the world’s cars and trucks. 4 W D M A R K E T D I R E C T I O N A U T O M AT I C T R A N S M I S S I O N P R O D U C T I O N W O R L D W I D E S E L C I H E V F O S N O I L L I M 6 5 4 3 2 1 0 RWD FWD VEHICLE BASE S T I N U F O S N O I L L I M 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1997 1998 1999 2000 2001 2002 2003 Korea North America Europe Japan AUTOMATED AUTOMATED TRANSMISSION TRANSMISSION ➜ Traditional Automatics Shift quality components and systems including trans- mission bands, friction plates, clutchpack modules, one-way and bi-directional clutches and clutch sys- tems; torque converter lockup clutches; solenoids and control modules; HY-VO chain and sprocket systems; transmission pumps Continuously Variable Wet starting clutches, forward/reverse shifting compo- nents and systems; CVT chain belts, HY-VO pump drives; electro-hydraulic control devices and systems Automated Manuals Wet clutch modules; electro-hydraulic control modules 13 TORQUE TORQUE MANAGEMENT MANAGEMENT ➜ Rear-Wheel Drive Four-Wheel Drive (SUVs and light trucks) Part-time, full-time and on-demand transfer cases; automatic locking hubs; synchronizers; electronic con- trol units; sensors and actuators; 4WD chain; clutch systems; pumps; electronic controls Front-Wheel Drive AWD/4WD (passenger cars and cross-over vehicles) Torque management systems and devices A new transmission concept that is as fuel efficient and fun to drive as a manual but feels like an automatic, is exciting automakers throughout Europe. That’s good news for drivers in congested cities using cellular telephones and for carmakers with manual transmission production facilities. We are the first to marry wet clutch technology with controls expertise to provide both a smooth automatic shift and a manual option. A cross-business project, it creates a $1 billion new market opportunity. A U T O M A T I C / M A N U A L 1 9 9 8 2 0 0 8 Traditional Automatic Manual Automated Manual Continuously Variable Automatic transmissions, both auto manuals and traditional automatics, are expected to grow from 18% to 55%. (cid:2) European Transmission Market K E T S C H , G E R M A N Y From left to right: Eric Sandstrom, Katharina Skop-Cardarella Automated Manual Cross-Business Team S E E P D 4 5 6 D D P P E E E E S S I N F I N I T Y 15 R E I N V E N T I N G T R A N S M I S S I O N S The automatic transmission will continue to be the shift mode of choice in North America, Japan, Korea, and a growing portion of Europe. Along with developing alternative technologies, we are also reinventing traditional transmissions for improved fuel efficiency and shift quality. Five-speed transmissions are emerging in Europe and Japan. On the horizon are six-speed transmissions, more outsourcing of subsystems by automakers, the continued development of advanced friction materials, and “smart” transmissions where a computerized “brain” function is built right into a transmission. a n s missions s h i f t atic t r m o t u A o f v e h 50% i c l e s produ c e d a b o u t . r a e y a c h e Imagine the security of electronic four-wheel drive, like that in large sport-utility vehicles, but in small, affordable systems for passenger cars and small SUVs. That’s our next great idea in four-wheel drive. Beyond the passive systems of today’s small SUVs, we’ve patented technology to integrate torque management in front- wheel drive cars and trucks, creating one of the most responsive four-wheel/all-wheel drive systems yet. Watch for it in mini-vans, station wagons and cross-over vehicles, the first of which roll off production lines in 2001. ) S N O I L L I M ( S E L C I H E V 1.4 1.2 1.0 .8 .6 .4 .2 0 FWD 4X4 GROWTH BY REGION T O R Q U E M A N A G E M E N T 1998 2000 2002 2004 North America Western Europe Japan V E H I C L E DY NA M I C S { Active AWD: fast response maintains control Passive AWD: slower response limits control } D E T R O I T , M I C H I G A N , U S A From left to right: Chris Kowalsky, Robert Meilinger, Chris Blair Integrated Torque Management Cross-Business Team 1 9 9 9 S O L I D S A L E S G R O W T H millions of dollars Combined Worldwide Sales Consolidated Worldwide Sales 1992 1993 1994 1995 1996 1997 1998 1999 3000 2500 2000 1500 1000 500 0 Combined Worldwide Sales 17% DaimlerChrysler 17 S A L E S D I S T R I B U T I O N B Y M A R K E T R I S I N G N E T I N C O M E 12% GM 6% Toyota 4% VW-Audi 2% Renault/Nissan millions of dollars 28% Ford 31% All Others 150 120 90 60 30 0 1993 1994 1995 1996 1997 1998 1999 Management’s Discussion and Analysis of Financial Condition and Results of Operations 18 Management’s Responsibility for Consolidated Financial Statements 25 Independent Auditors’ Report 25 Consolidated Statements 26 Notes to Consolidated Financial Statements 30 Selected Financial Data 43 Corporate Information 44 M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LY S I S O F F I NA N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S B O R G W A R N E R I N T R O D U C T I O N BorgWarner Inc. (formerly Borg-Warner Automotive, Inc.) (the result of the acquisitions described above. TorqTransfer Systems was previously named Powertrain Systems and Transmission Systems “Company”) is a leading global supplier of highly engineered systems was previously known as Automatic Transmission Systems. The name and components for powertrain applications. Its products are manu- changes were made to recognize the expanded growth opportunities factured and sold worldwide, primarily to original equipment manu- for each of these businesses. The segments are profiled on pages 4 facturers (“OEMs”) of passenger cars, sport-utility vehicles, trucks, and 5. The following tables detail sales and earnings before interest commercial transportation products and industrial equipment. The and taxes (“EBIT”) by segment for each of the last three years. following significant acquisitions and divestitures have strengthened the product leadership focus of the Company in recent years. Net Sales millions of dollars In March 1999, the Company acquired Kuhlman Corporation Y E A R E N D E D D E C E M B E R 3 1 , 1999 1998 1997 (“Kuhlman Acquisition”), a manufacturer of vehicle and electrical prod- ucts. The electrical products businesses did not fit the Company’s strategic direction and were sold later in 1999 as planned. The remain- ing businesses, formerly known as the Schwitzer Group (“Schwitzer”) and Kysor, primarily manufacture turbochargers, fuel systems, fans and fan drives and HVAC. These businesses have been integrated into the following operating segments: Air/Fluid Systems, Cooling Systems 18 and Morse TEC. Air/Fluid Systems Cooling Systems Morse TEC TorqTransfer Systems Transmission Systems Divested operations Intersegment eliminations $ 491.5 $ 351.4 $ 342.4 142.8 856.0 563.3 413.4 41.3 (49.7) — 536.2 518.8 355.0 121.1 (45.7) — 349.0 613.6 369.4 150.2 (57.6) In October 1999, the Company acquired the Fluid Power Division of Eaton Corporation (“Fluid Power Acquisition”), a leader in manufacturing powertrain cooling solutions, and combined them with the Schwitzer cooling businesses to form a new operating segment, Cooling Systems. In October 1997, the Company acquired a majority interest in a German turbocharger and turbomachinery manufacturer, AG Kühnle, Kopp & Kausch (“AG Kühnle”). Since the turbomachinery business does not fit the strategic direction of the Company, its results have been excluded from the consolidated financial statements and it has been reported as an investment held for sale. In October 1998, the Company purchased 100% of AG Kühnle’s turbocharger business, which is reported as part of the Morse TEC operating segment. The divestiture of three businesses in recent years, historically included in the Transmission Systems operating segment, also affect year-over- year comparisons. In 1999, the Company sold its forged powder metal race business. The sales of the forged powder metal connecting rod business and the torque converter business were completed in 1998. These acquisitions and divestitures are discussed in more detail later in this analysis. R E S U L T S O F O P E R A T I O N S Results by Operating Segment Net sales $2,458.6 $1,836.8 $1,767.0 Earnings Before Interest and Taxes Y E A R E N D E D D E C E M B E R 3 1 , 1999 1998 1997 millions of dollars Air/Fluid Systems Cooling Systems Morse TEC TorqTransfer Systems Transmission Systems Divested operations $ 44.9 $ 25.1 $ 15.1 18.2 112.9 41.2 54.1 (5.0) — 78.5 28.4 42.7 2.0 — 64.7 46.4 56.4 (3.2) Earnings before interest and taxes $266.3 $176.7 $179.4 Air/Fluid Systems experienced increases in sales and EBIT of $140.1 million and $19.8 million, or 39.9% and 78.9%, respectively, compared to the prior year. Net of the effects of the Kuhlman Acquisition, sales and EBIT increased by $42.5 million, or 12.1%, and $10.3 million, or 41.0%, respectively. The increases were largely attributable to increased demand for emission reduction products and transmission solenoids. The increase in 1998 sales to $351.4 million was due largely to changes in transmission solenoid production for a new Chrysler transmission and increased demand for air induction modules on Chrysler LH vehicles. Air/Fluid Systems remains a substantial opportunity for growth because The Company’s products fall into five reportable operating segments: of the increased worldwide emphasis on improved operating efficiency Air/Fluid Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and reduced emissions, both of which can be realized through improved and Transmission Systems. Cooling Systems was added in 1999 as a engine air and fuel management. Other opportunities in the coming M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LY S I S O F F I NA N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S years include control devices for automated manual transmissions, and stabilization or reversal of certain factors which had deflated 1998 because of the fragmented nature of the supplier base in this segment, results, including reductions in four-wheel drive (“4WD”) transfer case system solutions for fuel economy and emission requirements. shipments for the Ford F-150 truck and declines in 4WD transfer case Cooling Systems, formed as a combination of the Fluid Power Division acquired from Eaton Corporation and the commercial cooling businesses acquired in the Kuhlman Acquisition, represents a new growth platform for the Company. Sales of viscous fan clutches, on- shipments to Ssangyong in Korea due to the sluggish Asian economy. Significantly higher 4x4 installation rates on Ford V8 and small pick-up trucks in 1999 and the continued popularity of SUVs and light trucks also enhanced results. off fan drives and fans providing better fuel economy and improved TorqTransfer Systems 1998 sales trailed exceptional 1997 results by emissions in a full range of sport-utility vehicles (“SUV”), light trucks $94.8 million. Strong 4x4 installation rates on the Ford Ranger and a and commercial vehicles are expected to provide strong growth in the full year of sales on the Mercedes-Benz M-Class All-Activity Vehicle coming years. For the abbreviated portion of 1999 that these businesses launched in 1997 were only partially able to offset the negative impact were owned by the Company, they contributed sales of $142.8 million of the 1998 factors discussed above. and EBIT of $18.2 million. While sales are expected to remain strong, the revenue growth for The Morse TEC business segment experienced continued growth in 1999 as sales and EBIT increased by $319.8 million and $34.4 mil- TorqTransfer Systems is not expected to return to 1997 levels. Sales are expected to be fairly level over the next few years and efforts will lion, respectively. Net of the effect of the Kuhlman Acquisition, sales be made to keep cost reductions in line with selling price concessions increased by $129.7 million, or 24.2%, and EBIT improved by $26.3 given to customers. Market expansion into 4WD for front-wheel drive 19 million, or 33.5%. Year over year comparisons benefit from elevated passenger cars, currently under development, is expected to stimulate worldwide demand for engine timing systems, and the increased growth longer-term. proportion of direct-injection diesel engines with turbochargers in European passenger cars. The Company expanded its European turbocharger capacity during 1999, and will continue to expand in the future, in an effort to capitalize on this trend. Transmission Systems, net of the businesses divested in 1999 and 1998, showed increases in sales and EBIT of $58.4 million and $11.4 million, or 16.5% and 26.7%, respectively, versus the prior year. Of the Company’s operating segments, Transmission Systems benefited most Morse TEC sales revenue increased $187.2 million in 1998 from 1997, from the strong worldwide automotive production in 1999 because of and, net of the turbocharger business acquired in 1997, sales increased the segment’s global diversification and application to passenger cars, by $29.2 million, or 9.0%. Strong North American demand more than SUVs and light trucks. Comparisons are also enhanced by the absence offset weakness in Asia and the impact of the 1998 General Motors of the 1998 North American GM strike and the stabilization of the Asian (“GM”) strike. economy in 1999. The strong growth trend at Morse TEC is expected to continue in the The segment experienced a 3.9% decrease in sales in 1998 from 1997. coming years as turbocharger capacity is increased to meet ramped- Strong sales in Europe did not offset the negative impact of the North up demand on direct-injection diesel passenger cars and as new American GM strike and the weakness of the Asian economy. Customer generations of variable geometry turbochargers for commercial diesel product mix issues also heavily impacted this segment, particularly the applications are introduced. These factors are expected to translate industry-wide shift in emphasis from passenger cars to trucks. into double-digit growth rates for this segment. The introduction of additional new products, including timing systems for Chrysler over- head cam engines, other timing systems, transmission applications, and drive chain for the new Toyota hybrid engine and other Japanese applications are expected in the coming years. This segment is also expected to benefit from the conversion of engine timing systems from belts to chains in both Europe and Japan. TorqTransfer Systems’ sales and EBIT rebounded from 1998, increasing by $44.5 million and $12.8 million, or 8.6% and 45.1%, respectively. The improvements over 1998 were largely related to the Transmission Systems expects strong results in the coming years based on industry trends and opportunities to develop and provide entire sub- systems for future generations of automatic transmissions and system solutions for alternative drivetrain configurations, including continuously variable transmissions and automated manual transmissions. Increased penetration of automatic transmissions and increased content as auto- matic transmissions trend from four- to five-speed and from five- to six- speed transmissions should also provide opportunities. M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LY S I S O F F I NA N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S B O R G W A R N E R Divested operations includes three divested Transmission Systems businesses; the forged powder metal race business sold in 1999, and by 4.2%, including increases of 9.5% and 1.0% in North America and Japan, respectively, while Western European production was essentially the torque converter and connecting rod businesses sold separately in flat. The Schwitzer and Kysor businesses which were owned for ten 1998. These businesses did not fit the strategic goals of the Company months in 1999 contributed $381.3 million to sales and the Fluid Power and management believed the Company’s resources were better spent businesses, which were owned for the last three months of 1999 con- on its core technologies in highly engineered components and sys- tributed $46.8 million to sales. tems. The sales of these businesses did not result in a significant gain or loss in any of the years presented. Together, these businesses con- tributed sales of $41.3 million, $121.1 million and $150.2 million and EBIT of $(5.0) million, $2.0 million and $(3.2) million in 1999, 1998 and 1997, respectively. The Company’s top ten customers accounted for approximately 75% of consolidated sales compared to 81% in 1998 and 84% in 1997. Net earnings for 1999 of $132.3 million, or $5.07 per diluted share, were 39.7% above 1998 earnings of $94.7 million, or $4.00 per diluted share. The primary growth drivers, as discussed above, were strong global automotive markets, growth in engine timing systems applica- tions and strong demand for turbochargers, especially in European passenger cars, increased content on new generations of transmis- sions, improvements in 4x4 installation rates on light trucks and acqui- The decline in the overall percentage of sales to the top ten customers sitions. Improvements over 1998 also reflect the absence of the 1998 resulted from new customers gained through acquisitions. Ford con- GM strike and the improved condition of the Asian economy in 1999. tinues to be the Company’s largest customer with 31% of consolidated 20 sales in 1999, compared to 36% and 43% in 1998 and 1997, respec- tively. DaimlerChrysler, the Company’s second largest customer, repre- sented 19%, 19% and 14% of consolidated sales in 1999, 1998 and 1997, respectively, and GM accounted for 13%, 16%, and 20%, respec- tively. No other customer accounted for more than 10% of sales in any of the periods presented. O T H E R F A C T O R S A F F E C T I N G R E S U L T S O F O P E R A T I O N S The following table details the Company’s results of operations as a percentage of sales: millions of dollars Y E A R E N D E D D E C E M B E R 3 1 , 1999 1998 1997 Gross margin for 1999 was 23.2%, an improvement from 1998 and 1997 margins of 21.0% and 22.2%, respectively. While the increase is partly attributable to higher margin businesses acquired during the year, the Company’s core businesses also showed gross margin improve- ment, despite price reductions to customers of approximately $35 million in 1999, as compared to $23 million and $18 million in 1998 and 1997, respectively. To offset the impact of price reductions, the Company actively pursues offsetting reductions from its suppliers and changes in product design to remove cost and/or improve manufactura- bility. The Company was nearly able to offset price concessions with cost reduction and productivity improvement programs. The relatively high level of worldwide automobile and light truck production also contributed to the margin improvement through economies of scale. 100.0% 100.0% 100.0% Consolidated EBIT increased by $88.6 million. For the businesses held Net sales Cost of sales Depreciation Selling, general and administrative expenses Goodwill amortization Minority interest, affiliate earnings and other income, net Earnings before interest and taxes 1999 compared with 1998 76.8 3.7 8.3 1.3 79.0 4.1 7.4 0.9 77.8 4.0 7.5 1.0 (0.5) 10.4% (0.5) 9.1% (0.6) 10.3% Overall, the Company realized a 33.9% sales growth in 1999 versus 1998. While much of the increase was related to acquisitions, internal growth from businesses held for both periods amounted to 14.7%. As a comparison, worldwide automobile and light truck production increased for all periods, the increase was $58.8 million. Although depreciation as a percentage of sales decreased somewhat in 1999, depreciation expense increased by $16.5 million as a result of the additional busi- nesses acquired in 1999 as well as the relatively higher levels of capital spending in recent years. The acquisitions also increased amortization expense in 1999 by $15.3 million over the prior year. Together, depreci- ation and amortization expense remained at 5% of sales. Selling, gen- eral and administrative expenses (“SG&A”) as a percentage of sales increased to 8.3% from 7.4%. The increase resulted from the acquisi- tion of businesses with higher SG&A spending levels, as well as the Company’s continued commitment to research and development (“R&D”) in order to capitalize on growth opportunities. R&D spending increased to $91.6 million, or 3.7% of sales, in 1999, as compared with M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LY S I S O F F I NA N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S $65.1 million, or 3.5% of sales in 1998. A number of cross-segment In particular, the weakness of the Asian economy impacted earnings R&D programs were initiated during 1999, which are expected to result by approximately $.60 per share, while the GM strike cost the Company in increased revenues within a few years. The Company anticipates approximately $.30 per share in earnings. The effects of the Asian down- R&D approaching 4.0% of sales in the coming years in order to support turn were most damaging to the Transmission Systems and Morse TEC its commitment to product leadership. At the same time, the Company business segments, as well as to affiliate earnings; the other segments plans to concentrate on controlling non-R&D SG&A costs in order to were less affected by Asia. The GM strike affected each of the business maintain SG&A levels near 8.0% of sales. segments, most significantly Transmission Systems and Morse TEC. Equity in affiliate earnings and other income increased $3.8 million from The Company experienced a decline in consolidated EBIT of 8.2% to 1998, mainly due to the improved results of the Company’s 50% owned $167.6 million for 1998. For businesses held throughout both years, Japanese joint venture, NSK-Warner. The Company’s equity in NSK- the decrease was 14.9%. Depreciation continued to increase in 1998 Warner’s earnings of $12.9 million was $5.3 million higher than the due mainly to a full year of results from the turbocharger business and prior year. Approximately two-thirds of the increase was attributable to increases in capital spending in recent years. SG&A as a percentage improved operating performance, with the remaining one-third due to of sales declined slightly to 7.4% from 7.5% as the Company continued the stabilization of the yen in 1999. its commitment to keeping spending down in this area, apart from R&D. The $22.3 million increase in interest expense and finance charges is consistent with higher debt levels required to finance the two major acquisitions in 1999 and rising interest rates in the U.S. The Company views spending on R&D as a key corporate strategy necessary in order to develop proprietary new products and enhance- ments to existing products. In 1998, R&D spending represented 3.5% of sales versus 3.3% in 1997. In order to support its commitment to 21 The effective tax rate for 1999 was 36.1% compared with a rate of product leadership, the Company plans to increase R&D spending in 32.7% for 1998. The increase is largely due to the non-deductibility the future. of the goodwill associated with the Kuhlman Acquisition, as well as increased income in higher tax jurisdictions. 1998 compared with 1997 The Company realized 4.0% sales growth in 1998 versus 1997 against a backdrop of essentially flat worldwide automobile and light truck pro- duction, with North American and Japanese production decreasing 1.4% and 8.5%, respectively, and European production increasing 6.5%. However, for businesses held throughout both years, the Company’s sales declined 3.7%. The German turbocharger business, AG Kühnle, contributed $182.9 million to 1998 sales, an increase of $158.1 million over the two months the business was owned in 1997. Equity in affiliate earnings and other income was down $2.9 million from 1997, including an $8.5 million decline in equity in affiliate earn- ings. The decrease in equity in affiliate earnings is largely attributable to the weakness of the Asian economy in 1998. As a result, the Company’s equity in the earnings of NSK-Warner declined to $7.6 million in 1998 from $13.7 million in 1997. Partially offsetting the reduc- tions in affiliate earnings were certain transactions of a non-recurring or non-operating nature. The Company recorded a $3.3 million gain on the sale of its 50% share of Warner-Ishi in 1998 and recorded a $4.3 million charge in 1997 to reduce the carrying value of certain joint venture investments in China and Korea. Two product lines sold during 1998, as discussed above, contributed Interest expense and finance charges increased by $2.3 million versus $73.5 million to 1998 sales, a decrease of $27.9 million from the prior 1997. The Company incurred interest on its additional borrowings to pur- year. Factors cutting across each of the business segments that nega- chase the turbocharger business in October 1998 and also needed to tively impacted the Company’s 1998 sales included the GM strike in maintain slightly higher debt levels to finance operations because cash June and July of 1998 and the weakness of the Asian economy. These flow from operations trailed prior year levels throughout much of 1998. external events deflated sales by approximately $25 million and $33 million, respectively. The effective tax rate for 1998 was 32.7% compared with a rate of 34.6% for 1997. The tax rates for both years were below the standard federal Net earnings for 1998 totaling $94.7 million, or $4.00 per diluted share, and state rates due to the realization of R&D and foreign tax credits. were 8.2% below 1997 earnings of $103.2 million, or $4.31 per diluted share. The factors discussed above are responsible for the changes. M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LY S I S O F F I NA N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S B O R G W A R N E R F I N A N C I A L C O N D I T I O N A N D L I Q U I D I T Y The Company’s cash and cash equivalents decreased $22.3 million Capital spending totaling $143.4 million in 1999 was $21.2 million greater than in 1998. Approximately 55% of the 1999 spending was at December 31, 1999 compared with December 31, 1998. The $542.4 related to expansion, as opposed to renewal and replacement, cost million net cash paid for the Kuhlman Acquisition and the $313.1 million reduction and other. Capital spending increased in all geographic net cash paid for the Fluid Power Acquisition were partly funded by regions, including Europe and Asia, particularly in support of double- proceeds from long-term debt issuances and the excess of cash gen- digit sales growth for turbochargers and timing systems. Major capital erated from operating activities over capital expenditures. In addition projects included the expansion of the Company’s facility in Japan to the cash paid, the Kuhlman Acquisition was funded by additional and its turbocharger operations in Germany. The Company anticipates consideration, including the issuance of $149.8 million of the Company’s maintaining higher capital spending levels in 2000 to drive expansion. common stock, the increase in receivables sold by $25.0 million and the assumption, and subsequent refinancing, of $131.6 million of debt. Stockholders’ equity increased by $280.2 million in 1999. In addition to the $149.8 million of common stock issued to partially finance the On February 22, 1999, the Company issued $200 million of 6.5% Kuhlman Acquisition, net income of $132.3 million was partially offset senior unsecured notes maturing in February 2009 and $200 million of by dividends of $15.5 million. In relation to the dollar, the currencies in 7.125% unsecured notes maturing in February 2029 to partially fund foreign countries where the Company conducts business strengthened, the Kuhlman Acquisition. On September 28, 1999, the Company issued causing the currency translation component of other comprehensive $150 million of 8% senior unsecured notes maturing September 2019 income to increase by $11.9 million in 1999. to partially fund the Fluid Power Acquisition. 22 The Company believes that the combination of cash from its operations During 1999, the Company received a $30.3 million dividend and other and available credit facilities will be sufficient to satisfy cash needs for amounts from AG Kühnle. The dividend had no effect on cash flow its current level of operations and planned operations for the foresee- since the $30.3 million of AG Kühnle cash had been recorded on the able future. December 31, 1998 Consolidated Balance Sheet. Cash proceeds from the sales of Kuhlman Electric, the forged powder metal race business and the land and building remaining from the 1998 divestiture of the torque converter business, amounting to $105.1 million, $45.5 million and $11.5 million, respectively, were primarily used to lower the Company’s long-term debt. Operating cash flow of $344.5 million for 1999 exceeded 1998 operat- ing cash flow by $211.9 million, and consists of $132.3 million of net earnings, non-cash charges of $105.3 million and a $106.9 million decrease in net operating assets and liabilities, net of the effects of acquisitions and divestitures. Non-cash charges are primarily com- O T H E R M A T T E R S Acquisition of Kuhlman Corporation On March 1, 1999, the Company acquired all the outstanding shares of common stock of Kuhlman Corporation (“Kuhlman”), for a purchase price of $693.0 million. The Company also assumed $131.6 million of Kuhlman’s existing indebtedness, which it subsequently refinanced. The Company funded the transaction by issuing 3,287,127 shares of BorgWarner Inc. common stock with a value of $149.8 million and by borrowing approximately $543.2 million. prised of $91.3 million in depreciation and $32.1 million of goodwill Kuhlman was a diversified industrial manufacturing company that amortization, both of which increased compared to 1998. Depreciation operated in two product segments: vehicle and electrical products. In expense increased by $16.5 million due to the additional businesses vehicle products, Kuhlman’s Schwitzer and Kysor units were leading acquired in 1999 as well as the relatively higher levels of capital spend- worldwide manufacturers of proprietary engine components, including ing in recent years. The increase in goodwill amortization is attributable turbochargers, fans and fan drives, fuel tanks, instrumentation, heating/ to the Kuhlman and Fluid Power Acquisitions. The decreased investment ventilation/air conditioning systems, and other products for commercial in net operating assets reflected in the December 31, 1999 balance transportation and industrial equipment. The Company is in the process sheet is mainly due to decreased receivables and increased payables of integrating the former Schwitzer and Kysor units and has included and accrued expenses. The cash flow effect from a decrease in receiv- their results since the date of the acquisition in the consolidated finan- ables was $41.1 million in 1999 due mainly to a major customer defer- cial statements. ring $33 million in payments at the end of 1998. This represented a one-time reversing cash flow item as the payment was received in early January 1999. Accounts payable and accrued expenses increased by $57.9 million due to higher business levels. The electrical products businesses acquired from Kuhlman consisted of Kuhlman Electric Corporation (“Kuhlman Electric”) and Coleman Cable Systems, Inc. (“Coleman Cable”). These businesses manufactured M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LY S I S O F F I NA N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S transformers for the utility industry and wire and cable for utilities and Litigation other industries. These products did not fit the Company’s strategic direction and, at the time of the Kuhlman Acquisition, the Company announced that it intended to sell the businesses by the end of the year. These businesses were accounted for as businesses held for sale during 1999, and as such, no sales or income between the date of acquisition and their dates of sale was included in the consolidated results of the Company. As of December 31, 1999, the Company has completed the sales of both Kuhlman Electric and Coleman Cable. Kuhlman Electric was sold to Carlyle Group, L.L.C. for a net sale price of $120.1 million, including 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 40 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allo- debt securities with a face value of $15.0 million. The sale of Coleman cation formula. Cable for a net sales price of $137.3 million to a group of equity investors, closed into escrow as of December 30 and cleared escrow on January 4, 2000. Proceeds included debt securities with a face value of $15.3 million. Proceeds from the sales were used to repay indebtedness. In the December 31, 1999 Consolidated Balance Sheet, the Company’s net investment in Coleman Cable, is reflected as an asset held for sale in current assets. The investment includes a portion of the goodwill related to the merger. The amount of goodwill was allocated based on the relative historical performance of the electrical products business compared with the total Kuhlman business. Acquisition of Eaton Corporation’s Fluid Power Division Effective October 1, 1999, the Company acquired Eaton Corporation’s Fluid Power Division, one of the world’s leading manufacturers of pow- ertrain cooling solutions for the global automotive industry, at a total cost of $321.7 million. To partially finance the acquisition, the Company issued $150 million of 8% senior unsecured notes maturing September 2019. Cash from operations funded the remainder of the acquisition price. The Fluid Power Division designs and produces a variety of vis- cous fan drive cooling systems primarily for passenger vehicles such 23 Based on information available to the Company, which in most cases, includes: an estimate of allocation of liability among PRPs; the proba- bility that other PRPs, many of whom are large, solvent public compa- nies, 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, 1999 of approximately $17.8 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 position or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. Year 2000 Issues as light trucks, sport-utility vehicles and vans. Along with the commer- Throughout 1998 and 1999, the Company was engaged in programs to cial cooling systems business acquired from Kuhlman in March, 1999, upgrade certain aspects of its operations to ensure that business systems this acquisition positions the Company to globalize modular cooling would continue to function effectively when year 2000 arrived or when systems integration opportunities across a full range of vehicle types. other potentially triggering dates were reached. These programs encom- Sale of Forged Powder Metal Race Business In October 1999, the Company sold its one-way clutch forged powder metal race business in Gallipolis, Ohio to GKN Sinter Metals, Inc., a passed business operating systems, manufacturing operations, operat- ing infrastructure, customers and suppliers. The Company used these programs as an opportunity to upgrade and enhance many of its busi- ness systems as well as to deal with year 2000 non-compliant items. subsidiary of UK-based GKN plc. GKN initially paid the Company $45.5 These efforts identified a few non-compliant items, substantially all million in the fourth quarter, subject to a post-closing adjustment. No of which were dealt with on a timely basis. Items not corrected were significant gain or loss was recorded on this sale. The forged powder deemed to be non-critical or not having a failure mode. Corrections metal business was originally acquired as part of the Company’s pur- were implemented throughout 1999, with most completed in accor- chase of the Precision Forged Products Division of Federal-Mogul dance with the timelines established by the Automotive Industries Corporation in 1995. Action Group (“AIAG”). M A NAG E M E N T ’ S D I S C U S S I O N A N D A NA LY S I S O F F I NA N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S B O R G W A R N E R On January 1, 2000, the Company ran all its systems utilizing the new value of all of its interest rate sensitive assets and liabilities would be year 2000 date. Some minor failures were experienced, but immediately impacted by selected hypothetical changes in market interest rates. remedied. Since January 1, no significant failures have occurred. In Fair value is estimated using a discounted cash flow analysis. addition, the Company has not experienced any significant year 2000 Assuming a hypothetical, instantaneous 10% change in interest rates related problems with its customers, vendors or suppliers. as of December 31, 1999, the net fair value of these instruments would Total spending related to these programs was $14.4 million through December 31, 1999, of which approximately $10.4 million was capital- ized and $4.0 million was expensed. The bulk of such spending was for system improvements and enhancements, and not to correct year 2000 non-compliance. New Accounting Pronouncements In June 1998, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), to estab- lish accounting and reporting requirements for derivative instruments. This standard requires recognition of all derivative instruments in the statement of financial condition as either assets or liabilities, measured 24 at fair value. This statement additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the deriva- tives. The Company is currently assessing the impact of this statement on the Company’s results of operations, financial condition and cash flows. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, “Accounting for Derivative Instruments and Hedging activities – Deferral of the Effective Date of FASB Statement No. 133,” which amends SFAS 133 by deferring for one year, the effective date decrease by approximately $45.2 million if interest rates decreased, and would increase by approximately $40.3 million if interest rates increased. The Company’s 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. Foreign currency risk is the risk that the Company will incur economic losses due to adverse changes in foreign currency exchange rates. The Company mitigates its foreign currency exchange rate risk princi- pally by establishing local production facilities in markets it serves, by invoicing customers in the same currency as the source of the products and by funding some of its investments in foreign markets through local currency loans. The Company also monitors its foreign currency exposure in each country and implements strategies to respond to changing economic and political environments. In the aggregate, the Company’s exposure related to such transactions is not material to the Company’s financial position, results of operations or cash flows. D I S C L O S U R E R E G A R D I N G F O R W A R D - L O O K I N G S T A T E M E N T S Statements contained in this Management’s Discussion and Analysis of SFAS 133, to those fiscal years beginning after June 15, 2000. of Financial Condition and Results of Operations may contain forward- Market Risk Disclosure The Company’s primary market risks include fluctuations in interest rates and foreign currency exchange rates. The Company is also exposed to changes in the prices of commodities used in its manufac- turing operations. However, commodity price risk is not considered to be material. The Company does not hold any market risk sensitive instruments for trading purposes. looking statements as contemplated by the 1995 Private Securities Litigation Reform Act that are based on management’s current expec- tations, estimates and projections. Words such as “expects,” “antici- pates,” “intends,” “plans,” “believes,” “estimates,” variations of such words and similar expression are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncer- tainties, 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 The Company has established policies and procedures to manage production, the continued use of outside suppliers by vehicle manufac- sensitivity to interest rate and foreign currency exchange rate market turers, fluctuations in demand for vehicles containing the Company’s risk, which include monitoring of the Company’s level of exposure to products, general economic conditions, as well as other risks detailed each market risk. Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates. The Company meas- ures its interest rate risk by estimating the net amount by which the fair 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, 1999. M A NAG E M E N T ’ S R E S P O N S I B I L I T Y F O R C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S I N D E P E N D E N T A U D I TO R S ’ R E P O RT The information in this report is the responsibility of management. The Board of Directors and Stockholders of BorgWarner Inc. BorgWarner Inc. (the “Company”) has in place reporting guidelines and policies designed to ensure that the statements and other information contained in this report present a fair and accurate financial picture of the Company. In fulfilling this management responsibility, we make informed judgments and estimates conforming with generally accepted accounting principles. We have audited the consolidated balance sheets of BorgWarner Inc. and subsidiaries (formerly Borg-Warner Automotive, Inc.) as of December 31, 1999 and 1998, and the related consolidated statements of operations, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 1999. These financial state- ments are the responsibility of the Company’s management. Our The accompanying consolidated financial statements have been audited responsibility is to express an opinion on these financial statements by Deloitte & Touche LLP, independent auditors. Management has made based on our audits. available all the Company’s financial records and related information deemed necessary by Deloitte & Touche LLP. Furthermore, manage- ment believes that all representations made by it to Deloitte & Touche LLP during its audit were valid and appropriate. We conducted our audits in accordance with generally accepted audit- ing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial state- ments are free of material misstatement. An audit includes examining, Management is responsible for maintaining a comprehensive system of on a test basis, evidence supporting the amounts and disclosures in the internal control through its operations that provides reasonable assur- financial statements. An audit also includes assessing the accounting ance that assets are protected from improper use, that material errors principles used and significant estimates made by management, as well are prevented or detected within a timely period and that records are as evaluating the overall financial statement presentation. We believe sufficient to produce reliable financial reports. The system of internal that our audits provide a reasonable basis for our opinion. 25 In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BorgWarner Inc. and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Chicago, Illinois February 2, 2000 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 independ- ent auditors in connection with their annual audit of the financial state- ments. The independent auditors conduct their evaluation in accordance with generally accepted auditing standards and perform such tests of transactions and balances as they deem necessary. Management con- siders 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, 1999, the Company’s system of internal control was adequate to accomplish the objectives set forth in the first sentence of this paragraph. The Company’s Finance and Audit Committee, composed entirely of directors of the Company who are not employees, meets periodically with the Company’s management and independent auditors to review financial results and procedures, internal financial controls and internal and external audit plans and recommendations. To guarantee independ- ence, the Finance and Audit Committee and the independent auditors have unrestricted access to each other with or without the presence of management representatives. John F. Fiedler Chairman and Chief Executive Officer February 2, 2000 Lawrence B. Skatoff Executive Vice President and Chief Financial Officer C O N S O L I DAT E D S TAT E M E N T S O F O P E R AT I O N S F O R T H E Y E A R E N D E D D E C E M B E R 3 1 , Net sales Cost of sales Depreciation Selling, general and administrative expenses Minority interest Goodwill amortization Equity in affiliate earnings and other income Earnings before interest expense, finance charges and income taxes Interest expense and finance charges Earnings before income taxes Provision for income taxes Net earnings Net earnings per share Basic Diluted Average shares outstanding (thousands) 26 Basic Diluted S E E A C C O M PA N Y I N G N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S . B O R G W A R N E R millions of dollars except per share amounts 1999 1998 1997 $2,458.6 1,888.5 $1,836.8 1,450.7 $1,767.0 1,375.4 91.3 203.3 1.3 32.1 (14.1) 256.2 49.2 207.0 74.7 $ 132.3 $ $ 5.10 5.07 25,948 26,078 74.8 135.1 2.1 16.8 (10.3) 167.6 26.9 140.7 46.0 94.7 4.03 4.00 23,479 23,676 $ $ $ 70.4 132.0 3.2 16.7 (13.2) 182.5 24.6 157.9 54.7 $ 103.2 $ $ 4.35 4.31 23,683 23,934 C O N S O L I DAT E D BA L A N C E S H E E T S D E C E M B E R 3 1 , Assets Cash Short-term securities Receivables Inventories Deferred income taxes Prepayments and other current assets Total current assets Land Buildings Machinery and equipment Capital leases Construction in progress Less accumulated depreciation Net property, plant and equipment Investments and advances Goodwill Deferred income taxes Other noncurrent assets Total other assets Liabilities and Stockholder s’ Equity Notes payable Accounts payable and accrued expenses Income taxes payable Total current liabilities Long-term debt Long-term liabilities: Retirement-related liabilities Other Total long-term liabilities Minority interest in consolidated subsidiaries 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: 1999, 27,040,492; 1998, 23,753,365; outstanding shares: 1999, 26,724,192; 1998, 23,387,173 Non-voting common stock, $.01 par value; authorized shares: 25,000,000; none issued and outstanding Capital in excess of par value Retained earnings Management shareholder note Accumulated other comprehensive income Common stock held in treasury, at cost: 1999, 316,300 shares; 1998, 366,192 shares Total stockholders’ equity Total Liabilities and Stockholders’ Equity S E E A C C O M PA N Y I N G N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S . millions of dollars 1999 1998 $ 11.1 10.6 216.2 164.4 2.8 153.2 558.3 32.5 239.0 834.1 5.3 93.2 1,204.1 408.1 796.0 160.3 1,284.7 18.8 152.6 1,616.4 $ 37.8 6.2 185.4 115.7 4.7 26.3 376.1 24.0 199.7 692.6 5.7 82.9 1,004.9 370.4 634.5 141.9 560.4 7.7 125.5 835.5 27 $2,970.7 $1,846.1 $ 134.0 433.7 92.1 659.8 846.3 343.9 54.4 398.3 8.8 — — 0.3 — 715.7 346.4 (2.0) 12.3 (15.2) 1,057.5 $2,970.7 $ 145.0 276.9 32.2 454.1 248.5 318.6 39.1 357.7 8.5 — — 0.2 — 566.0 230.2 (2.0) 0.5 (17.6) 777.3 $1,846.1 C O N S O L I DAT E D S TAT E M E N T S O F CA S H F L OW S F O R T H E Y E A R E N D E D D E C E M B E R 3 1 , 1999 1998 1997 B O R G W A R N E R millions of dollars Operating Net earnings Adjustments to reconcile net earnings to net cash flows from operations: Non-cash charges (credits) to operations: Depreciation Goodwill amortization Deferred income tax provision Other, principally equity in affiliate earnings Changes in assets and liabilities, net of effects of acquisitions and divestitures: (Increase) decrease in receivables Increase in inventories (Increase) decrease in prepayments and deferred income taxes Increase (decrease) in accounts payable and accrued expenses Increase (decrease) in income taxes payable Net change in other long-term assets and liabilities 28 Net cash provided by operating activities Investing Capital expenditures Investment in affiliates Payments for businesses acquired, net of cash acquired Proceeds from sales of businesses Proceeds from other assets Net cash used in investing activities Financing Net increase (decrease) in notes payable Additions to long-term debt Reductions in long-term debt Payments for purchase of treasury stock Proceeds from stock options exercised Dividends paid Net cash provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental Cash Flow Infor mation Net cash paid during the year for: Interest Income taxes Non-cash financing transactions: Issuance of common stock for acquisition Issuance of common stock for management notes Issuance of common stock for Executive Stock Performance Plan S E E A C C O M PA N Y I N G N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S . $ 132.3 $ 94.7 $ 103.2 91.3 32.1 (4.0) (14.1) 41.1 (19.0) 0.2 57.9 18.9 7.8 344.5 (143.4) 5.5 (855.5) 177.9 4.8 (810.7) (10.3) 621.8 (150.0) — 0.7 (15.5) 446.7 (2.8) (22.3) 44.0 21.7 51.1 59.1 $ $ 74.8 16.8 16.7 (11.4) (29.3) (9.1) (7.6) 3.0 (22.3) 6.3 132.6 (122.2) (5.7) (65.4) 51.8 13.9 (127.6) 73.3 2.4 (26.1) (13.0) 0.7 (14.1) 23.2 2.4 30.6 13.4 70.4 16.7 24.1 (11.8) (13.6) (8.9) (1.3) (3.9) 23.9 (31.4) 167.4 (135.1) (0.1) (42.4) 5.8 2.7 (169.1) 31.8 37.6 (42.5) (10.2) 2.1 (14.3) 4.5 (0.9) 1.9 11.5 $ 44.0 $ 13.4 $ 30.3 36.8 $ 27.1 28.9 $ 149.8 $ — $ — — 1.1 2.0 1.8 — — C O N S O L I DAT E D S TAT E M E N T S O F S TO C K H O L D E R S ’ E QU I T Y millions of dollars Number of Shares Stockholders’ Equity Issued common stock Common stock in treasury Issued common stock Capital in excess of par value Treasury stock Management shareholder note Retained earnings Comprehensive Income Accumulated other comprehensive income Balance, January 1, 1997 23,644,840 — $ 0.2 $563.9 $ — $ — $ 61.8 $ 2.9 Purchase of treasury stock Dividends declared Shares issued under stock option plans Net income Adjustment for minimum pension liability Currency translation adjustment — — (212,100) — 110,025 1,500 — — — — — — — — — — — — — — 2.1 — — — (10.2) — — — — — — — — — — — — (14.3) — 103.2 — — — — $103.2 — — 5.7 (21.6) 5.7 (21.6) Balance, December 31, 1997 23,754,865 (210,600) $ 0.2 $566.0 $(10.2) $ — $150.7 $(13.0) $ 87.3 Purchase of treasury stock Dividends declared Shares issued for management shareholder note Shares issued under stock option plans Shares issued under executive stock plan — — — — — (273,200) — 36,930 43,614 35,564 Non-voting common stock converted to voting common stock (1,500) 1,500 Net income Adjustment for minimum pension liability Currency translation adjustment — — — — — — — — — — — — — — — — — (13.0) — — — — (14.1) 0.3 1.7 (2.0) — (0.3) 2.1 — — — — — 1.8 — — — — — — — — — — (1.1) — — 94.7 — — — — — — — — — 29 $ 94.7 1.7 11.8 1.7 11.8 Balance, December 31, 1998 23,753,365 (366,192) $ 0.2 $566.0 $(17.6) $(2.0) $230.2 $ 0.5 $108.2 Dividends declared Shares issued for — Kuhlman Acquisition 3,287,127 — — — — 0.1 149.7 Shares issued under stock option plans Shares issued under executive stock plan Net income Adjustment for minimum pension liability Currency translation adjustment — 28,000 — — — — 21,892 — — — — — — — — — — — — — — — 1.3 1.1 — — — — (15.5) — (0.6) — 132.3 — — — — — — — — — — — $132.3 — — (0.1) 11.9 (0.1) 11.9 Balance, December 31, 1999 27,040,492 (316,300) $ 0.3 $715.7 $(15.2) $(2.0) $346.4 $ 12.3 $144.1 S E E A C C O M PA N Y I N G N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S . N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S B O R G W A R N E R I N T R O D U C T I O N Inventory held by U.S. operations was $96.2 million in 1999 and $66.3 BorgWarner Inc. (formerly Borg-Warner Automotive, Inc.) (the million in 1998. Such inventories, if valued at current cost instead of “Company”) and Consolidated Subsidiaries is a leading global supplier LIFO, would have been greater by $6.3 million in both 1999 and 1998. of highly engineered systems and components primarily for automo- tive powertrain applications. These products are manufactured and sold worldwide, primarily to original equipment manufacturers of pas- senger cars, sport-utility vehicles, trucks, commercial transportation products and industrial equipment. Its products fall into five operating segments: Air/Fluid Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and Transmission Systems. O N E Summary of Significant Accounting Policies 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 signifi- cant items are capitalized. Depreciation is computed generally on a straight-line basis over the estimated useful lives of related assets rang- ing from 3 to 30 years. For income tax purposes, accelerated methods of depreciation are generally used. Goodwill Goodwill is being amortized on a straight-line basis over The following paragraphs briefly describe significant accounting policies. periods not exceeding 40 years. The Company periodically evaluates Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make the carrying value of goodwill to determine if adjustments to the amorti- zation period or to the unamortized balance is warranted. 30 estimates and assumptions. These estimates and assumptions affect Revenue recognition The Company recognizes revenue upon the reported amounts of assets and liabilities and disclosure of contin- shipment of product. Although the Company may enter into long-term gent assets and liabilities at the date of the financial statements and supply agreements with its major customers, each shipment of goods the reported amounts of revenues and expenses during the reporting is treated as a separate sale and the price is not fixed over the life of period. Actual results could differ from those estimates. the agreements. Principles of consolidation The consolidated financial statements Financial instruments Financial instruments consist primarily of include all significant majority-owned subsidiaries. All significant inter- investments in cash, short-term securities, receivables and debt securi- company accounts and transactions have been eliminated in consolida- ties and obligations under accounts payable and accrued expenses and tion. Certain prior year amounts have been reclassified to conform to debt instruments. The Company believes that the fair value of the finan- the current year presentation. cial instruments approximates the carrying value, except as noted in Short-term securities Short-term securities are valued at cost, which Footnote SIX and in the following paragraph. approximates market. It is the Company’s policy to classify investments The Company received corporate bonds with a face value of $30.3 with original maturities of three months or less as cash equivalents for million as partial consideration for the sales of Kuhlman Electric and purposes of preparing the Consolidated Statements of Cash Flows. Coleman Cable in 1999. These bonds have been recorded at their fair All short-term securities meet this criterion. Accounts receivable In 1999, an agreement with a financial institution to sell, without recourse, eligible receivables was amended from $127.5 million to $153.0 million. Under this agreement, the Company has sold $150.0 million of accounts receivable as of December 31, 1999 and $125.0 million as of December 31, 1998. The gains or losses on sales 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. They have been classified as investments available-for-sale in the other current assets section of the December 31, 1999 Consolidated Balance Sheet. The contractual maturities of these bonds are beyond five years. were not material in 1999 or 1998. The agreement extends through Foreign currency The financial statements of foreign subsidiaries are December 2000. 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. translated to U.S. dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for each period for rev- enues and expenses. The local currency is the functional currency for all of the Company’s foreign subsidiaries, except for subsidiaries located N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S in Brazil. Translation adjustments for foreign subsidiaries are recorded T W O Research and Development Costs as a component of accumulated other comprehensive income in stock- holders’ equity. New accounting pronouncements In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), to establish accounting and reporting requirements for derivative instruments. This standard requires recognition of all derivative instruments in the statement of financial The Company spent approximately $91.6 million, $65.1 million and $59.0 million in 1999, 1998 and 1997, respectively, on research and development activities. Not included in these amounts were customer- sponsored R&D activities of approximately $9.4 million, $8.4 million and $8.0 million in 1999, 1998 and 1997, respectively. T H R E E Equity in Affiliate Earnings and Other Income condition as either assets or liabilities, measured at fair value. This state- Items included in equity in affiliate earnings and other income consist of: ment additionally requires changes in the fair value of derivatives to be recorded each period in current earnings or comprehensive income depending on the intended use of the derivatives. The Company is currently assessing the impact of this statement on the Company’s results of operations, financial condition and cash flows. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, D E C E M B E R 3 1 , Equity in affiliate earnings Gain on sale of affiliate Interest income Gain (loss) on asset disposals, net “Accounting for Derivative Instruments and Hedging Activities – Deferral Other of the Effective Date of FASB Statement No. 133,” which amends SFAS 133 by deferring for one year, the effective date of SFAS 133, to those fiscal years beginning after June 15, 2000. millions of dollars 1999 $11.7 — 1.1 0.3 1.0 1998 $ 5.5 3.3 0.4 (0.1) 1.2 1997 $14.0 — 0.4 (3.7) 2.5 31 $14.1 $10.3 $13.2 F O U R Income Taxes Income before taxes and provision for taxes consist of: 1999 millions of dollars 1998 1997 U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total Income before taxes $121.6 $85.4 $207.0 $99.3 $41.4 $140.7 $115.7 $42.2 $157.9 Income taxes: Current : Federal/foreign State Deferred Total income taxes $ 50.0 $21.2 $ 71.2 $ 6.4 $18.5 $ 24.9 $ 19.8 $ 7.2 $ 27.0 7.5 57.5 (9.5) — 21.2 5.5 7.5 78.7 (4.0) 4.4 10.8 14.8 — 18.5 1.9 4.4 29.3 16.7 3.6 23.4 19.0 — 7.2 5.1 3.6 30.6 24.1 $ 48.0 $26.7 $ 74.7 $25.6 $20.4 $ 46.0 $ 42.4 $12.3 $ 54.7 N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S B O R G W A R N E R The analysis of the variance of income taxes as reported from income F I V E Balance Sheet Information taxes computed at the U.S. statutory rate for consolidated operations is as follows: Detailed balance sheet data are as follows: D E C E M B E R 3 1 , 1999 1998 1997 D E C E M B E R 3 1 , millions of dollars Income taxes at U.S. statutory rate of 35% $72.5 $49.2 $55.3 Increases (decreases) resulting from: Income from non-U.S. sources State taxes, net of federal benefit Business tax credits, net Affiliate earnings Nontemporary differences and other Income taxes as reported (5.4) 4.9 (8.4) (4.1) 15.2 $74.7 6.7 2.9 (8.5) (1.9) (2.4) 1.7 2.3 (2.5) (4.9) 2.8 $46.0 $54.7 Following are the gross components of deferred tax assets and liabilities as of December 31, 1999 and 1998: 32 D E C E M B E R 3 1 , Deferred tax assets - current: millions of dollars 1999 1998 Accrued costs related to divested operations $ 2.8 $ 4.7 Deferred tax assets - noncurrent: Postretirement benefits Pension Other long-term liabilities and reserves Foreign tax credits Valuation allowance Other Deferred tax liabilities - noncurrent: Fixed assets Pension Other Net deferred tax asset - noncurrent 1.5 45.8 11.2 (11.2) 40.3 200.8 72.8 23.8 85.4 182.0 $ 18.8 4.5 18.9 9.2 (9.2) 12.6 140.2 77.1 20.6 34.8 132.5 $ 7.7 Receivables: Customers Other Less allowance for losses Net receivables Inventories: Raw material Work in progress Finished goods Total inventories Prepayments and other current assets: Investment in business held for disposition Other Total prepayments and other current assets Investments and advances: NSK-Warner Other Other noncurrent assets: Deferred pension assets Deferred tooling Other millions of dollars 1999 1998 $182.6 $147.5 38.4 221.0 4.8 40.6 188.1 2.7 $216.2 $185.4 $ 76.4 $ 57.3 39.1 48.9 32.7 25.7 $164.4 $115.7 $129.0 24.2 $153.2 $154.1 6.2 $160.3 $ 16.8 9.5 $ 26.3 $133.6 8.3 $141.9 $ 65.1 $ 54.1 62.3 25.2 53.1 18.3 Total other noncurrent assets $152.6 $125.5 Accounts payable and accrued expenses: Trade payables Payroll and related Insurance Accrued costs related to divested operations Warranties and claims Other $222.9 $164.3 60.4 32.1 11.7 20.0 86.6 34.2 18.4 13.9 11.1 35.0 Total accounts payable and accrued expenses $433.7 $276.9 $113.2 $104.2 Total investments and advances No deferred income taxes have been provided on undistributed earnings of foreign subsidiaries as the amounts are essentially permanent in nature. A valuation allowance has been provided for those foreign tax credits which are estimated to expire before they are utilized. Other long-term liabilities: Environmental reserves Other Total other long-term liabilities $ 17.8 36.6 $ 54.4 $ 7.9 31.2 $ 39.1 N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S Dividends and other payments received from affiliates accounted for S I X Notes Payable and Long-Term Debt under the equity method totaled $5.5 million in 1999, $3.9 million in 1998 and $4.8 million in 1997. Accumulated amortization of goodwill amounted to $148.7 million in 1999 and $117.8 million in 1998. The Company has a 50% interest in NSK-Warner, a joint venture based Following is a summary of notes payable and long-term debt. The weighted average interest rate on all borrowings for 1999 and 1998 was 6.5% and 6.3%, respectively. millions of dollars 1999 1998 in Japan that manufactures automatic transmission components. The D E C E M B E R 3 1 , Current Long-Term Current Long-Term Company’s share of the earnings or losses reported by NSK-Warner is Bank borrowings $131.1 $142.0 $144.4 $69.5 accounted for using the equity method of accounting. NSK-Warner has Bank term loans due through a fiscal year-end of March 31. The Company’s equity in the earnings of NSK-Warner consists of the 12 months ended November 30 so as to reflect earnings on as current a basis as is reasonably feasible. Following are summarized financial data for NSK-Warner, translated using the ending or periodic rates as of and for the years ended March 31, 1999, 1998 and 1997: millions of dollars M A R C H 3 1 , Balance sheets: Current assets Noncurrent assets Current liabilities Noncurrent liabilities Statements of operations: Net sales Gross profit Net income $143.8 137.4 69.9 6.9 $139.0 119.4 68.0 7.0 $145.7 124.7 74.1 8.1 $235.9 $264.1 $296.5 52.6 16.9 64.7 21.5 82.6 29.0 1999 1998 1997 net of unamortized discount 2003 (at an average rate of 5.3% in 1999 and 5.3% in 1998; and 7.7% at December 31, 1999) 2.2 6.1 0.2 25.5 7% Senior Notes due 2006, net of unamortized discount 6.5% Senior Notes due 2009, net of unamortized discount 8% Senior Notes due 2019, 7.125% Senior Notes due 2029, net of unamortized discount Capital lease liabilities (at an average rate of 6.8% in 1999 — — — — 149.7 198.3 149.9 197.2 — — — — 149.7 — — — 33 and 7.2% in 1998) 0.7 3.1 0.4 3.8 Total notes payable and long-term debt $134.0 $846.3 $145.0 $248.5 Annual principal payments required as of December 31, 1999 are as follows (in millions of dollars): 2000 2001 2002 2003 2004 after 2004 $134.0 149.1 1.1 0.3 0.1 695.7 The Company has a revolving credit facility which provides for borrow- ings up to $350 million through September, 2001. At December 31, 1999, $66.0 million of borrowings under the facility were outstanding; at December 31, 1998, the facility was unused. The credit agreement contains numerous financial and operating covenants including, among others, covenants requiring the Company to maintain certain financial ratios and restricting its ability to incur additional foreign indebtedness. N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S On February 22, 1999, the Company issued $200 million of 6.5% senior unsecured notes maturing in February 2009 and $200 million of 7.125% unsecured notes maturing in February 2029 to partially fund the acquisi- D E C E M B E R 3 1 , tion of Kuhlman Corporation (“Kuhlman”). Interest is payable semiannu- Change in benefit obligation: B O R G W A R N E R millions of dollars Pension Benefits Postretirement Benefits 1999 1998 1999 1998 ally on February 15 and August 15. On September 28, 1999, the Company issued $150 million of 8% senior unsecured notes maturing in September 2019 to partially fund the acquisition of the Fluid Power Division of Eaton Corporation (“Eaton”). Interest is payable semiannually on April 1 and October 1. The indenture on the senior unsecured notes contains certain covenants including, among others, covenants limiting liens, sale/ leaseback transactions, mergers and the sale of substantially all of the Company’s assets. Benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Amendments Net actuarial (gain) loss Acquisitions/divestitures Currency translation Curtailments Settlements Special termination benefits $345.8 $330.1 $ 296.8 $ 271.2 6.2 22.6 0.2 — (32.1) 43.7 (8.6) (0.3) (17.3) — 5.4 21.7 0.3 0.3 13.2 — 2.8 (3.8) (3.5) 1.8 4.8 21.1 — (0.5) (26.6) 29.4 — — (0.5) — 4.6 18.7 — (0.1) 28.6 — — (6.8) (2.7) 0.9 Bank term loans of $8.3 million outstanding at December 31, 1999 are subject to annual reductions of $2.2 million in 2000, $4.9 million in 2001, Benefits paid (26.2) (22.5) (24.4) (17.6) Benefit obligation at end of year $334.0 $345.8 $300.1 $296.8 34 $1.0 million in 2002, and $0.2 million in 2003. As of December 31, 1999 and 1998, the estimated fair values of the Company’s senior unsecured notes totaled $651.6 million and $154.0 million, respectively. The estimated fair values were $43.5 million higher in 1999, and $4.3 million lower in 1998, than their respective carrying values. The fair value of all other debt instruments is estimated to approximate their recorded value, as their applicable interest rates approximate current market rates for borrowings with similar terms and maturities. Fair market values are estimated 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. S E V E N 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, Change in plan assets: Fair value of plan assets at beginning of year $378.7 $328.2 Actual return on plan assets Acquisitions/divestitures Employer contributions Plan participants’ contributions Currency translation Settlements Benefits paid Fair value of plan assets at 50.5 45.6 4.0 0.2 (3.7) (18.1) (26.2) 63.7 — 12.5 0.3 0.6 (4.1) (22.5) end of year $431.0 $378.7 Reconciliation of funded status: Funded status $97.0 $32.9 $(300.1) $(296.8) Unrecognized net actuarial (gain) loss (71.1) (23.0) (3.2) 23.1 Unrecognized transition asset Unrecognized prior service cost (0.8) 6.7 (0.9) 7.6 (0.7) (0.3) Net amount recognized $ 31.8 $ 16.6 $(304.0) $(274.0) Amounts recognized in the consolidated balance sheets: Prepaid benefit cost $ 65.1 $ 54.1 $ — $ — funded status and recognition in the Consolidated Balance Sheets. Accrued benefit liability (33.5) (37.5) (304.0) (274.0) Accumulated other comprehensive income 0.2 — — — Net amount recognized $ 31.8 $ 16.6 $(304.0) $(274.0) N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S F O R T H E Y E A R E N D E D D E C E M B E R 3 1 , Components of net periodic benefit cost: Service cost Interest cost Expected return on plan assets Amortization of unrecognized transition asset Amortization of unrecognized prior service cost Amortization of unrecognized loss Settlement loss Curtailment gain Net periodic benefit cost (income) Pension Benefits 1998 1997 1999 Other Postretirement Benefits 1997 1998 1999 millions of dollars $ 6.2 $ 5.4 $ 4.5 $ 4.8 21.1 $ 4.6 18.7 $ 4.1 19.0 22.6 (34.7) (0.2) 1.2 — 0.8 (0.3) $ (4.4) 21.7 (28.6) (0.2) 1.5 — — (0.8) 21.8 (24.6) (0.2) 1.5 0.5 — — $ (1.0) $ 3.5 $25.9 $23.3 $23.1 The Company’s weighted-average assumptions used as of December 31 in determining the pension costs and pension liabilities shown above were as follows: F O R T H E Y E A R E N D E D D E C E M B E R 3 1 , U.S. plans: Discount rate Rate of salary progression Expected return on plan assets Foreign plans: Discount rate Rate of compensation increase Expected return on plan assets Pension Benefits 1998 1997 1999 Other Postretirement Benefits 1997 1998 1999 35 percent 8.0 6.75 7.0 8.0 4.5 9.5 6.75 4.5 9.5 7.0 4.5 9.5 5.5-6.0 2.5-4.0 6.0 5.0-6.0 2.5-4.5 6.0 6.0-6.75 2.5-5.5 6.0-7.0 Certain plans which had been underfunded in 1998 became overfunded The weighted-average rate of increase in the per capita cost of covered in 1999. The funded status of pension plans included above with accu- health care benefits is projected to be 5.25% in 2000 and for each mulated benefit obligations in excess of plan assets at December 31 is future year. A one-percentage point change in the assumed health care as follows: cost trend would have the following effects: D E C E M B E R 3 1 , Accumulated benefit obligation Plan assets Deficiency millions of dollars 1999 $30.6 — $30.6 1998 $52.0 26.4 $25.6 D E C E M B E R 3 1 , Effect on postretirement benefit obligation Effect on total service and interest cost components millions of dollars One Percentage Point Decrease Increase $39.9 $ 4.9 $(31.8) $ (3.9) N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S B O R G W A R N E R E I G H T Stock Incentive Plans options outstanding at December 31, 1999 that were granted under a predecessor plan. Stock option plans Under the Company’s 1993 Stock Incentive Plan, the Company may grant options to purchase up to 1,500,000 shares of the Company’s common stock at the fair market value on the date of grant. The options vest over periods up to three years and have a The Company accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for stock options grants. term of ten years from date of grant. There are 778,975 outstanding A summary of the two plans’ shares under option at December 31, options at December 31, 1999. There are also 82,300 fully vested 1999, 1998 and 1997 follows: 1 9 9 9 1 9 9 8 1 9 9 7 Shares (thousands) Weighted- average exercise price Shares (thousands) Weighted- average exercise price Shares (thousands) Weighted- average exercise price Outstanding at beginning of year Granted Exercised Forfeited 36 Outstanding at end of year Options exercisable at year-end Options available for future grants $38.85 53.25 22.35 52.03 $43.37 654 266 (28) (31) 861 328 511 471 242 (44) (15) 654 294 $30.72 51.76 17.44 53.42 $38.85 461 130 (111) (9) 471 323 $21.57 53.48 19.14 35.34 $30.72 The following table summarizes information about the options out- standing at December 31, 1999: Range of exercise prices $16.56 – 18.83 $22.50 – 44.19 $50.91 – 53.44 $53.88 – 57.31 $16.56 – 57.31 Options Outstanding Weighted- average remaining contractual life Number outstanding (thousands) 82 214 237 328 861 1.5 4.5 8.4 9.0 7.0 Weighted- average exercise price $17.85 27.14 51.82 54.22 $43.37 Options Exercisable Number exercisable (thousands) Weighted- average exercise price 82 196 1 49 328 $17.85 25.91 51.41 55.05 $28.32 N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S Pro forma information regarding net income and earnings per share ended December 31, 1999 and 1998, the amounts earned under the is required by Statement of Financial Accounting Standards No. 123, plan and accrued over the three-year periods were $2.0 million and and has been determined as if the Company had accounted for its $4.3 million, respectively. Under this plan, 21,892 shares and 35,564 employee stock options under the fair value method of that Statement. shares were issued in 1999 and 1998, respectively. Estimated shares The fair value for these options was estimated at the date of grant using issuable under the plan are included in the computation of diluted earn- a Black-Scholes options pricing model with the following weighted aver- ings per share as earned. age assumptions: D E C E M B E R 3 1 , Risk-free interest rate Dividend yield Volatility factor millions of dollars 1999 5.43% 1.49% 1998 5.57% 1.16% 31.88% 31.37% Weighted-average expected life 6.5 years 6.5 years 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 130,000, 197,000 and 251,000 for 1999, 1998 and 1997, respectively, due to the effects of stock options and shares issuable under the executive stock performance plan. 1997 6.35% 1.67% 27.64% 7 years For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma net earnings and earnings per share, adjusted to include pro forma expense related to options, are as follows: N I N E Other Comprehensive Income The tax effects of the components of other comprehensive income in the Consolidated Statements of Stockholders’ Equity are as follows: 37 D E C E M B E R 3 1 , Net earnings – as reported Net earnings – pro forma Earnings per share – as reported (basic) Earnings per share – as reported (diluted) Earnings per share – pro forma (basic) Earnings per share – pro forma (diluted) Weighted-average fair value of options millions of dollars except per share and option amounts 1999 $132.3 130.7 5.10 5.07 5.04 5.01 1998 $94.7 93.1 4.03 4.00 3.96 3.93 1997 $103.2 102.9 4.35 4.31 4.34 4.30 millions of dollars F O R T H E Y E A R E N D E D D E C E M B E R 3 1 , 1999 1998 1997 Foreign currency translation adjustment $18.6 $17.6 $(33.0) Income taxes (6.7) Net foreign currency translation adjustment 11.9 Minimum pension liability adjustment Income taxes Net minimum pension liability adjustment (0.2) 0.1 (0.1) (5.8) 11.8 2.5 (0.8) 1.7 11.4 (21.6) 8.7 (3.0) 5.7 Other comprehensive income (loss) $11.8 $13.5 $(15.9) granted during the year 19.45 18.52 19.60 The components of accumulated other comprehensive income (net of tax) in the Consolidated Balance Sheets are as follows: Executive stock performance plan The Company has an executive stock performance plan which provides payouts at the end of succes- D E C E M B E R 3 1 , sive three-year periods based on the Company’s performance in terms of total stockholder return relative to a peer group of automotive Foreign currency translation adjustment Minimum pension liability adjustment companies. Payouts earned are payable 40% in cash and 60% in the Accumulated other comprehensive income Company’s common stock. For the three-year measurement periods millions of dollars 1999 $12.4 (0.1) $12.3 1998 $0.5 — $0.5 N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S B O R G W A R N E R T E N Contingent Liabilities E L E V E N Acquisitions and Divestitures The Company and certain of its current and former direct and indirect A C Q U I S I T I O N S corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain Kuhlman Corporation state environmental agencies and private parties as potentially respon- On March 1, 1999, the Company acquired all the outstanding shares of sible parties (“PRPs”) at various hazardous waste disposal sites under common stock of Kuhlman for a purchase price of $693.0 million in a the Comprehensive Environmental Response, Compensation and merger transaction (the “merger”). The Company funded the transaction Liability Act (“Superfund”) and equivalent state laws and, as such, may by issuing 3,287,127 shares of the Company’s common stock valued presently be liable for the cost of clean-up and other remedial activities at $149.8 million and borrowing $543.2 million in cash. Subject to the at 40 such sites. Responsibility for clean-up and other remedial activi- provisions of the Agreement and Plan of Merger among the Company, ties at a Superfund site is typically shared among PRPs based on an BWA Merger Corp., and Kuhlman, dated as of December 17, 1998, allocation formula. Based on information available to the Company, which in most cases, includes: an estimate of allocation of liability among PRPs; the probabil- ity that other PRPs, many of whom are large, solvent public companies, 38 will fully pay the cost apportioned to them; currently available informa- tion from PRPs and/or federal or state environmental agencies concern- ing 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, 1999 of approximately $17.8 million. each outstanding share of Kuhlman common stock was converted into the right to receive (1) $39.00 in cash, without interest, or (2) $39.00 worth of shares of BorgWarner Inc. common stock. In addition, the Company assumed additional indebtedness for the settlement of cer- tain long-term incentive programs and severance programs, which amounted to approximately $14 million, net of tax benefits. Substan- tially all of such payments were made prior to closing, excluding the tax benefit, and are included in Kuhlman’s debt balance at the date of the merger. Subsequent to the merger, the Company refinanced Kuhlman’s existing indebtedness assumed of $131.6 million. The Company expects this amount to be expended over the next three The electrical products businesses acquired from Kuhlman consisted of 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 position or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. Kuhlman Electric and Coleman Cable. These businesses manufactured transformers for the utility industry and wire and cable for utilities and other industries. These products did not fit the Company’s strategic direction and, at the time of the merger, the Company announced that it intended to sell the businesses by the end of the year. These businesses were accounted for as businesses held for sale during 1999, and as such, no sales or income between the date of acquisition and their dates of sale was included in the consolidated results of the Company. As of December 31, 1999, the Company has completed the sales of both Kuhlman Electric and Coleman Cable. Kuhlman Electric was sold to Carlyle Group, L.L.C. for a net sale price of $120.1 million, including debt securities with a face value of $15.0 million. The sale of Coleman Cable for a net sales price of $137.3 million to a group of equity investors, closed into escrow as of December 30 and cleared escrow on January 4, 2000. Proceeds included debt securities with a face value N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S of $15.3 million. See Note ONE for the carrying value of debt securities related to the sales. Proceeds from the sales were used to repay indebt- edness. In the December 31, 1999 Consolidated Balance Sheet, the Company’s net investment in Coleman Cable, is reflected as an asset held for sale in current assets. The investment includes a portion of the Cash paid Estimated future payments due to Eaton Corporation Transaction costs Total purchase price millions of dollars $310.0 8.1 3.6 $321.7 0,000.0 0,000.0 goodwill related to the merger. The amount of goodwill was allocated The acquisition was accounted for using the purchase method of based on the relative historical performance of the electrical products accounting. Accordingly, the Consolidated Statements of Operations business compared with the total Kuhlman business. include Eaton Fluid Power’s results since the date of acquisition. The The Company has accounted for the merger as a purchase for finan- cial reporting purposes. Accordingly, the Consolidated Statements of Operations include Kuhlman’s results since the date of acquisition. The purchase price of Kuhlman is calculated as the sum of the value of the equity issued, the net cash paid, and the Company’s transaction purchase price was allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values. The excess of the purchase price over the estimated fair value of assets acquired and liabilities assumed has been accounted for as good- will and is being amortized over 20 years using the straight-line method. costs. An allocation of the purchase price has been performed with the The purchase price has been allocated as follows: millions of dollars 39 $ 91.1 255.1 (24.5) $321.7 excess of the purchase price over the fair value of the identifiable tangi- ble and intangible assets acquired, less the liabilities assumed and incurred, recorded as goodwill to be amortized over a period of 40 years using the straight-line method. The calculation of the purchase Fair value of assets acquired Goodwill Liabilities assumed price is as follows: Cash paid BorgWarner Inc. common stock ussued Transaction costs Total purchase price millions of dollars $536.4 149.8 6.8 $693.0 0,000.0 0,000.0 The purchase price has been allocated as follows: Fair value of assets acquired Estimated proceeds from disposition of businesses, net of tax Goodwill Liabilities assumed millions of dollars $ 242.3 205.6 497.7 0,000.0 0,000.0 (252.6) $ 693.0 The following unaudited pro forma information has been prepared assuming that both the Kuhlman merger and the Fluid Power Acquisition had occurred at the beginning of 1998, and includes adjustments for estimated amounts of goodwill amortization, increased interest expense on borrowings incurred to finance the transactions, elimination of expenses related to Kuhlman’s corporate headquarters which has been closed, exclusion of revenues, costs and expenses for Kuhlman’s electri- cal products businesses, including an allocation of goodwill amortization and interest expense, and the tax effects of all the preceding adjust- ments. Sales from divested operations of $41.3 million in 1999 and $121.1 million in 1998 are included in the pro forma sales amounts. Eaton Corporation’s Fluid Power Division On October 1, 1999, the Company acquired Eaton Corporation’s Fluid Power Division (“Fluid Power Acquisition”), one of the world’s leading manufacturers of powertrain cooling solutions for the global automotive industry. The calculation of the purchase price is as follows: Y E A R E N D E D D E C E M B E R 3 1 , Net sales Net earnings Net earnings per share Basic Diluted millions of dollars except per share amounts 1999 1998 $2,684.4 $2,482.4 134.8 105.7 5.04 5.03 3.95 3.92 N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S B O R G W A R N E R The unaudited pro forma financial information is presented for informa- D I V E S T I T U R E S tional purposes only and is not necessarily indicative of the results of operations that would have occurred had the transactions been consum- mated at the beginning of 1998, nor is it necessarily indicative of the results of operations that may occur in the future. AG Kühnle, Kopp & Kausch On October 31, 1997, the Company acquired 63% of the capital stock of AG Kühnle, Kopp & Kausch (“AG Kühnle”), a German manufacturer of turbochargers and turbomachinery, for $42.4 million. The Company accounted for the acquisition of the turbocharger business as a pur- chase and began consolidating it in October 1997. Because AG Kühnle’s Forged Powder Metal Race Business In October 1999, the Company sold its one-way clutch forged powder metal race business in Gallipolis, Ohio to GKN Sinter Metals, Inc., a subsidiary of UK-based GKN plc. GKN initially paid the Company $45.5 million in the fourth quarter, subject to a post-closing adjustment. No significant gain or loss was recorded on this sale. The forged powder metal business was originally acquired as part of the Company’s pur- chase of the Precision Forged Products Division of Federal-Mogul Corporation in 1995. turbomachinery business did not fit the Company’s strategic plan, the T W E LV E Operating Segments and Related Information turbomachinery business was not consolidated and the net carrying value was included in prepayments and other current assets as a busi- The Company’s business comprises five operating segments: Air/Fluid ness to be disposed. 40 On October 31, 1998, the Company purchased 100% of the net assets of the turbocharger business from AG Kühnle for $95.7 million, renaming it 3K-Warner Turbosystems. Included in 1998 results of operations are sales of $182.9 million and net earnings of $3.3 million (net of minority interest of $1.1 million that existed prior to November 1, 1998). During 1999, the Company received a dividend payment of $30.3 million and other amounts from AG Kühnle which were slightly in excess of the Company’s remaining carrying value in AG Kühnle. The Company intends to realize its remaining ownership of AG Kühnle as soon as is practicable. Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and Transmission Systems. These reportable segments are strategic busi- ness 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. N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S Operating Segments 1999 Air/Fluid Systems Cooling Systemsb Morse TEC TorqTransfer Systems Transmission Systems Divested operationsa Intersegment eliminations Total Corporate, including equity in affiliates Consolidated 1998 Air/Fluid Systems Morse TEC TorqTransfer Systems Transmission Systems Divested operationsa Intersegment eliminations Total Corporate, including equity in affiliates Consolidated 1997 Air/Fluid Systems Morse TEC TorqTransfer Systems Transmission Systems Divested operationsa Intersegment eliminations Total Corporate, including equity in affiliates Consolidated Sales Inter- segment Customers millions of dollars Earnings Before Interest and Taxes Net Year End Assets Depreciation/ Amortization Long-Lived Assets Expendituresd $ 484.4 $ 7.1 $ 491.5 $ 44.9 $ 457.1 $ 20.7 $ 15.6 140.2 829.9 560.9 405.2 38.0 — 2,458.6 — 2.6 26.1 2.4 8.2 3.3 (49.7) — — 142.8 856.0 563.3 413.4 41.3 (49.7) 2,458.6 — 18.2 112.9 41.2 54.1 (5.0) — 266.3 (10.1) 560.8 1,081.6 261.3 356.0 — — 2,716.8 260.4c $2,458.6 $ — $2,458.6 $256.2 $2,977.2 11.4 46.1 18.5 22.7 2.4 — 121.8 1.6 $123.4 7.7 89.7 31.0 21.1 3.7 — 168.8 — $168.8 $ 351.4 $ 25.1 $ 380.0 $ 17.2 $ 21.0 41 $ 343.9 511.4 516.4 346.4 118.7 — 1,836.8 — $ 7.5 24.8 2.4 8.6 2.4 (45.7) — — 536.2 518.8 355.0 121.1 (45.7) 1,836.8 — 78.5 28.4 42.7 2.0 — 176.7 (9.1) 649.0 288.1 386.6 62.1 (4.9) 1,760.9 85.2c 29.0 17.7 21.1 5.0 — 90.0 1.6 $1,836.8 $ — $1,836.8 $167.6 $1,846.1 $ 91.6 60.3 13.4 22.7 15.9 133.3 3.7 $137.0 $ 330.0 $ 12.4 $ 342.4 $ 15.1 $ 383.6 $ 16.2 $ 20.0 318.3 610.8 359.2 148.7 — 1,767.0 — $1,767.0 30.7 2.8 10.2 1.5 (57.6) — — 349.0 613.6 369.4 150.2 (57.6) 1,767.0 — $ — $1,767.0 64.7 46.4 56.4 (3.2) — 179.4 3.1 $182.5 488.8 270.3 377.1 105.6 (5.3) 1,620.1 116.2c 24.8 17.5 21.5 5.2 — 85.2 1.9 $1,736.3 $ 87.1 47.8 41.7 26.8 30.1 — 166.4 — $166.4 (a) The forged powder metal race business was sold in 1999. The torque converter and connecting rod businesses were sold in 1998. (b) Cooling Systems was added in 1999. (c) Corporate assets, including equity in affiliates, are net of trade receivables sold to third parties, and include cash, marketable securities, deferred taxes and investments and advances. (d) Long-lived asset expenditures includes capital spending and additions to non-perishable tooling, net of customer reimbursements. N OT E S TO C O N S O L I DAT E D F I NA N C I A L S TAT E M E N T S B O R G W A R N E R The following table reconciles segments’ earnings before interest and income taxes to consolidated earnings before income taxes. millions of dollars Net Sales Long-Lived Assets 1999 1998 1997 1999 1998 1997 millions of dollars United States $1,848.4 $1,410.0 $1,485.2 $574.1 $494.9 $508.7 F O R T H E Y E A R S E N D E D D E C E M B E R 3 1 , 1999 1998 1997 Europe: Earnings before interest and income taxes $256.2 $167.6 Interest expense and finance charges (49.2) (26.9) $182.5 (24.6) Germany Other Europe Total Europe 325.6 165.6 491.2 264.2 93.6 98.9 89.6 128.9 67.1 91.7 55.5 76.1 51.6 357.8 188.5 196.0 147.2 127.7 Earnings before income taxes $207.0 $140.7 $157.9 Other Foreign 119.0 69.0 93.3 89.2 56.3 43.2 Total $2,458.6 $1,836.8 $1,767.0 $859.3 $698.4 $679.6 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 $154.1 million at December 31, 1999 is excluded from the definition of long-lived assets, as are goodwill and certain other noncurrent assets. 42 Sales to major customers Consolidated sales included sales to Ford Motor Company of approximately 31%, 36% and 43%; to Daimler- Chrysler of approximately 19%, 19% and 14%; and to General Motors Corporation of approximately 13%, 16% and 20% for the years ended December 31, 1999, 1998 and 1997, respectively. No other single cus- tomer accounted for 10% or more of consolidated sales in any year between 1997 and 1999. Such sales consisted of a variety of products to a variety of customer locations worldwide. Each of the five operating segments had significant sales to all three of the customers listed above. Interim Financial Information (Unaudited) The following information includes all adjustments, as well as normal recurring items, that the Company considers necessary for a fair presentation of 1999 and 1998 interim results of operations. Certain 1999 and 1998 quarterly amounts have been reclassified to conform to the annual presentation. millions of dollars except per share amounts 1999 1998 Q U A R T E R E N D E D, March 31 June 30 Sept. 30 Dec. 31 Year 1999 March 31 June 30 Sept. 30 Dec. 31 Year 1998 Net sales Cost of sales Depreciation Selling, general and administrative expenses Minority interest Goodwill amortization Equity in affiliate earnings and $551.3 $640.8 $589.7 $676.8 $2,458.6 $464.7 $451.3 $431.6 $489.2 $1,836.8 424.4 20.5 42.4 0.4 5.7 491.7 22.8 53.5 0.4 7.7 458.6 22.6 51.0 0.4 7.7 513.8 25.4 1,888.5 91.3 56.4 0.1 11.0 203.3 1.3 32.1 365.7 19.3 37.2 0.7 4.2 359.4 19.3 34.5 0.8 4.2 340.4 18.9 34.1 0.9 4.3 385.2 1,450.7 17.3 74.8 29.3 (0.3) 4.1 135.1 2.1 16.8 other income (2.5) (4.6) (3.9) (3.1) (14.1) (5.5) (2.9) (0.5) (1.4) (10.3) Earnings before interest expense, finance charges and income taxes Interest expense and finance charges Earnings before income taxes Provision for income taxes Net earnings Net earnings per share – basic Net earnings per share – diluted 60.4 69.3 53.3 73.2 256.2 43.1 36.0 33.5 55.0 167.6 8.6 51.8 19.7 $ 32.1 $ 1.33 $ 1.32 12.6 56.7 20.4 $ 36.3 $ 1.36 $ 1.35 10.5 42.8 15.4 $ 27.4 $ 1.03 $ 1.02 17.5 55.7 19.2 $ 36.5 $ 1.36 $ 1.36 49.2 207.0 74.7 $ 132.3 $ $ 5.10 5.07 6.0 37.1 11.1 $ 26.0 $ 1.10 $ 1.09 7.0 29.0 9.4 $ 19.6 $ 0.84 $ 0.83 7.6 25.9 8.6 $ 17.3 $ 0.74 $ 0.73 6.3 48.7 16.9 $ 31.8 $ 1.35 $ 1.35 $ $ $ 26.9 140.7 46.0 94.7 4.03 4.00 S E L E C T E D F I NA N C I A L DATA F O R T H E Y E A R E N D E D D E C E M B E R 3 1 , 1999 1998 1997 1996 1995 millions of dollars except per share data Statement of Operations Data Net sales Cost of sales Depreciation Selling, general and administrative expenses Minority interest Goodwill amortization Loss on sale of business Equity in affiliate earnings and other income Interest expense and finance charges Provision for income taxes Net earnings Net earnings per share - basic Average shares outstanding (thousands) - basic Net earnings per share - diluted Average shares outstanding (thousands) - diluted Cash dividend declared per share Balance Sheet Data (at end of period) Total assets Total debt $2,458.6 1,888.5 $1,836.8 1,450.7 $1,767.0 1,375.4 $1,540.1 1,205.5 $1,329.1 1,044.9 91.3 203.3 1.3 32.1 — (14.1) 49.2 74.7 $ 132.3 $ $ $ 5.10 25,948 5.07 26,078 0.60 $2,970.7 980.3 74.8 135.1 2.1 16.8 — (10.3) 26.9 46.0 94.7 4.03 23,479 4.00 23,676 0.60 $ $ $ $ $1,846.1 393.5 70.4 132.0 3.2 16.7 — (13.2) 24.6 54.7 $ 103.2 $ $ $ 4.35 23,683 4.31 23,934 0.60 $1,736.3 338.1 71.3 122.7 2.6 13.5 61.5a (13.1) 21.4 12.9 41.8 1.77a $ $ 23,564 $ 1.75a 23,830 $ 0.60 68.0 97.8 2.0 9.6 — (18.6) 14.2 37.0 74.2 3.18 23,303 3.15 23,570 0.60 $ $ $ $ $1,623.6 $1,335.2 317.3 134.7 43 (a) The Company recorded a pretax loss on the sale of the North American manual transmission business of $61.5 million, which, net of tax benefit of $26.5 million, results in an after-tax charge of $35.0 million, or $1.49 per share. C O R P O R AT E I N F O R M AT I O N B O R G W A R N E R Company Information BorgWarner Inc. 200 South Michigan Avenue Chicago, IL 60604 312-322-8500 Securities Information ChaseMellon Shareholder Services is the transfer agent, registrar and dividend dispersing agent for BorgWarner common stock. Communica- tions concerning stock transfer, change of address, lost stock certifi- cates or proxy statements for the annual meeting should be directed to: Stock Listing ChaseMellon Shareholder Services for BorgWarner Shares are listed and traded on the New York Stock Exchange. 450 West 33rd Street, 15th Floor Ticker symbol: BWA. H i g h L o w http://www.cmssonline.com New York, NY 10001 800-851-4229 Fourth Quarter 1999 Third Quarter 1999 Second Quarter 1999 First Quarter 1999 44 Fourth Quarter 1998 Third Quarter 1998 Second Quarter 1998 First Quarter 1998 $ 43 3⁄8 $ 36 3⁄4 Investor Inquiries 57 7⁄8 60 56 40 7⁄8 46 3⁄8 42 7⁄16 H i g h L o w Financial investors and securities analysts requiring financial reports, interviews or other information should contact Mary Brevard, Director of Investor Relations and Communications, at the Company’s head- quarters, 312-322-8683. Form 10-K Report $ 5513⁄16 $ 33 5⁄16 A copy of the Company’s annual report on Form 10-K, filed with the 519⁄16 681⁄8 641⁄2 37 1⁄16 4311⁄16 49 5⁄8 Securities and Exchange Commission, is available to stockholders without charge through the Company’s internet homepage or by writ- ing the Investor Relations and Communications Department at the Company’s headquarters or by calling 312-322-8524. Dividends Dividend Reinvestment and Stock Purchase Plan The current dividend practice established by the directors is to declare The BorgWarner Dividend Reinvestment and Stock Purchase Plan regular quarterly dividends. The last such dividend of 15 cents per has been established so that anyone can make direct purchases of share of common stock was declared on January 20, 2000, payable BorgWarner common stock and reinvest dividends. The Company February 15, 2000, to stockholders of record on February 1, 2000. pays the brokerage commissions on purchases. To receive a prospec- The current practice is subject to review and change at the discretion tus and enrollment package, contact ChaseMellon at 800-842-7629. of the Board of Directors. Stockholders As of December 31, 1999, there were 3,304 holders of record and an estimated 10,000 beneficial holders. Questions about the plan can be directed to ChaseMellon at 800-851-4229. Information is also available through the Company’s internet homepage. Internet Homepage Annual Meeting of Stockholders visit our new Internet Homepage: www.bwauto.com. For current news, stock quotes and other information on BorgWarner, The 2000 annual meeting of stockholders will be held on Wednesday, April 26, 2000, beginning at 11:00 a.m. on the 19th floor of the Company’s headquarters at 200 South Michigan Avenue in Chicago. , BorgWarner, TORQUE-ON-DEMAND, MORSE, GEMINI, HY-VO and the BorgWarner Indianapolis 500 Trophy are registered trademarks of BorgWarner Inc. D I R E C T O R S E X E C U T I V E O F F I C E R S Phyllis Bonanno (2) President Columbia College Dr. Andrew F. Brimmer (2) President Brimmer & Company, Inc. William E. Butler (3,4) Chairman and Chief Executive Officer, Retired Eaton Corporation Jere A. Drummond (1,3,4) Vice Chairman BellSouth Corporation John F. Fiedler (1) Chairman and Chief Executive Officer BorgWarner Inc. Paul E. Glaske (3,4) Chairman, President and Chief Executive Officer, Retired Blue Bird Corporation Ivan W. Gorr (4) Chairman and Chief Executive Officer, Retired Cooper Tire & Rubber Company James J. Kerley (2) Chairman, Retired Rohr, Inc. Alexis P. Michas (1,2) Managing Partner and Director Stonington Partners, Inc. John Rau (2,3) President and Chief Executive Officer Chicago Title Corporation John F. Fiedler Chairman and Chief Executive Officer Lawrence B. Skatoff Executive Vice President and Chief Financial Officer Gary P. Fukayama Executive Vice President Group President and General Manager, Air/Fluid Systems Ronald M. Ruzic Executive Vice President Group President and General Manager, Morse TEC and Turbo Systems Robert D. Welding Executive Vice President President and General Manager, Transmission Systems Timothy M. Manganello Vice President President and General Manager, TorqTransfer Systems John J. McGill Vice President President and General Manager, Cooling Systems F. Lee Wilson Vice President President and General Manager, Turbo Systems Jeffrey L. Obermayer Vice President and Treasurer William C. Cline Vice President and Controller Christopher A. Gebelein Vice President, Business Development Laurene H. Horiszny Vice President, General Counsel and Secretary John A. Kalina Vice President and Chief Information Officer Geraldine Kinsella Vice President, Human Resources C O M M I T T E E S O F T H E B OA R D 1 Executive Committee 2 Finance and Audit Committee 3 Compensation Committee 4 Board Affairs Committee 2 0 0 S O U T H M I C H I G A N A V E N U E | C H I C A G O , 2 0 0 S O U T H M I C H I G A N A V E N U E | C H I C A G O , I L 6 0 6 0 4 I L 6 0 6 0 4 

Continue reading text version or see original annual report in PDF format above