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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