BorgWarner
Annual Report 2000

Plain-text annual report

T R O P E R L A U N N A 0 0 0 2 W H A T ’ S N E X T W H A T ’ S N E X T Y T I L I B A T S E L C I H E V I N N O V AT I O N Y M O N O C E L E U F INTELLIGENT SYSTEMS F I R S T T O M A R K E T E L E C T R O N I C C O N T R O L Y T I L A U Q R I A S T H G I L H G I H L A I C N A N I F BorgWarner (millions of dollars, except per share data) Net sales Net earnings Net earnings excluding restructuring and other non-recurring charges Net earnings per diluted share Net earnings per diluted share excluding restructuring and other non-recurring charges Average number of shares outstanding – diluted Number of employees 2 0 0 0 $2,645.9 94.0 132.7 3.54 5.01 26.5 14,000 1 9 9 9 $2,458.6 132.3 132.3 5.07 5.07 26.1 14,400 L E T T E R T O S H A R E H O L D E R S 2 BUSINESS PROFILE 6 ENGINES 8 POWER TRANSFER 14 DIRECTORS AND EXECUTIVE OFFICERS 20 FINANCIALS 2000 21 CORPORATE INFORMATION 48 S E N I G N E R E F S N A R T R E W O P E N G I N E M A N A G E M E N T I N T E G R AT E D M O D U L E S P O W E R B O O S T I N G V E H I C L E S TA B I L I T Y S M A R T T R A N S M I S S I O N S F U E L E F F I C I E N T F U N C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L J O H N F . F I E D L E R r e c i f f O e v i t u c e x E f e i h C d n a n a m r i a h C T O O U R S H A R E H O L D E R S Every shareholder letter that I have written since becoming your chairman recommends that if you wish to own only one automotive stock, that stock should be BorgWarner. We supported that premise in 2000 with our stock outperforming the major indexes and all but a very few of our peer companies. But 2000 was not a year to celebrate; it was one of extremes. We started the year with an inspired performance—record profits in a period of record production. However, the second half was extremely disappointing. The Federal Reserve clearly overshot interest rate levels. The Ford/Firestone debacle was a media event. A major management crisis ensued at DaimlerChrysler. Record car and truck production bred high inventories and run-away incentives. 2 0 0 0 A c c o m p l i s h m e n t s Despite a weak ending to the year, we made major strides in our quest to be a powertrain product leader. During 2000 we: Secured a major European automaker as the first customer for new concept, fuel-efficient transmission technology Integrated key engine system acquisitions in turbochargers and cooling systems Introduced the first application of computer-controlled all-wheel drive for passenger cars and cross-over vehicles Won a major contract from General Motors for four-wheel drive systems Launched first phases of major multi-year contracts with Ford and Honda for engine timing systems Rode a 30% wave of turbocharger growth in Europe boosted by new engine technology Introduced the first generation of electronically controlled cooling systems GEOGRAPHIC PRESENCE Combined Worldwide Sales 15% ASIA 18% EUROPE 67% AMERICAS 3 These accomplishments were tempered by a number of factors. A weak Euro reduced our excellent European growth when sales and income were translated into U.S. dollars. Customer recall and production slowdowns, along with the deterioration of the industry by year-end, also moderated results. However, we took action early in the 2000 third quarter, and again in the fourth, to help us manage effectively through this period of industry turmoil. B a l a n c i n g A c t I often talk to our people about our bright future. Recently I have had to caution them about soft industry conditions and even layoffs. As a result, they have asked me, “Which is the real BorgWarner?” I have told them — we are both. We must act decisively now to deal with the short-term issues, and manage through this period effectively, because we do have a bright future longer term. It is a future that we are building through powertrain product leadership. The evidence is our expected new business over the next three years, which while modest in 2001, gains momentum going forward. When we laid out our product leadership growth model in 1998, we knew that there would be bumps in the road like the current period. While we are responding by tightening our belts, we also continue to invest and plan for the future. We continue to invest about 4% of sales in research and development. If we do not stay at the leading edge of powertrain technology and continue to score new business wins, we face the prospects of eroding margins and of our products T O T A L S H A R E H O L D E R R E T U R N BorgWarner outper- formed its peers and the major indexes in total shareholder return (price plus reinvested dividends), based on an investment of $100 on December 31, 1999. BorgWarner Industry Peers S&P Composite $105 90 75 60 45 30 15 0 2000 becoming commodities even more vulnerable to industry pricing pressures. We also continue to invest in cost reduction and expansion projects. Two important projects in 2001 are putting assets in place for new four-wheel drive and trans- mission business. In light of business conditions, however, we are only funding key projects. We have a strong balance sheet and cash flow, a reasonable debt level and investment grade credit rating, a customer base that becomes more global each year and an outstanding book of new business. GLOBAL CUSTOMERS Combined Worldwide Sales GM 12% FORD 26% HONDA 1% VW/AUDI 3% 17% DAIMLERCHRYSLER 7% TOYOTA 5% RENAULT/NISSAN 29% ALL OTHERS C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L 4 Our growth strategy is based on catching technology waves. In the mid 90s, the wave was SUVs and four-wheel drive. Today, our growth catalyst is fuel economy and air quality, with sales from engine management products accounting for about 50% of our 2000 revenue. 1 9 9 7 2 0 0 0 • • • 15% Engines 45% Automatic Transmission 40% 4WD 50% Engines 28% Automatic Transmission 22% 4WD • • • W h a t ’s N e x t At BorgWarner, the innovation of our people provides us with “what’s next” great ideas. Our expected new business over the next three years includes engine- related programs, significant new four-wheel drive business and the beginning of one of the most exciting developments in 50 years as a transmission innovator. We are creating an entire new market for a hybrid transmission—the best of both manual and automatic technology. Our people are working very hard to create the foundation for a future built on our powertrain product leadership competencies. Investors are beginning to recognize the value of our technology driven strategy. I believe that our relative performance to our peers in 2000 is an indicator that as the industry recovers, investors will be attracted to a company like BorgWarner. When I visit with investors, I stress our technology position and our unique ability to demonstrate “what’s next.” We have identifiable and sustainable internal growth opportunities. As a high value-added supplier with leading market shares in our businesses, we are well positioned for the new world of business-to-business e-commerce. Even when fewer vehicles are built, we expect to increase our content on those vehicles as we move from components to systems, enter new markets with new products and gain share in existing markets. We are confident that we do, indeed, have a bright future. I want to thank all the people of BorgWarner for their efforts, especially during this difficult period. I also appreciate the support and guidance of our Board of Directors. My special thanks to Jim Kerley, who retired from the Board during 2000, for his service and wisdom as we positioned BorgWarner for the future. t x e N s ’ t a h W John F. Fiedler Chairman and Chief Executive Officer Moving our people toward a culture of product leadership includes 5 V A L U E P R O P O S I T I O N BorgWarner is the recognized leader in the world specializing in advanced products and technologies to satisfy customer needs in powertrain components and system solutions. Our Goal: Customers rely on us because we know more about powertrain systems than anyone else in the world. C O R E V A L U E S Dignity of the Individual For BorgWarner to succeed, we must operate in a climate of openness and trust, in which each of us freely grants others the same respect, cooperation and decency we seek for ourselves. Responsibility to the Common Good Our challenge is to supply goods and services that are of superior value to those who use them; to create jobs that provide meaning for those who do them; to honor and enhance human life; and to offer our talents and our wealth to help improve the world we share. Endless Quest for Excellence Though we may be better today than we were yesterday, we are not as good as we must become. BorgWarner chooses to be a leader—in serving our customers, advancing our technologies and rewarding all who invest in us their time, money and trust. None of us can settle for doing less than our best, and we can never stop trying to surpass what already has been achieved. Continuous Renewal To follow our vision to the future, we must see the difference between traditions that give us continuity and strength, and conventions that no longer serve us— and have the courage to act on that knowledge. We must be among the few who anticipate change, and shape it to our purpose. Commonwealth of BorgWarner and its People BorgWarner is both a federation of businesses and a community of people. Our goal is to preserve the freedom each of us needs to find personal satisfaction while building the strength that comes from unity. True unity is more than a melding of self-interests; it results when values and ideals also are shared. Our people are working very hard to create the foundation for a future built on our powertrain product leadership competencies. linking employee interests more closely with those of shareholders. C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L 6 C E T E S R O M S M E T S Y S O B R U T S M E T S Y S R E F S N A R T Q R O T 7 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 C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L M O R S E TEC / T U R B O S Y S T E M S h i g h l i g h t s 2000 Sales are up 11% despite the weak Euro which masks 885.8 9 . 6 9 7 S A L E S s r a l l o d f o s n o i l l i m 2 . 6 3 5 0 . 9 4 3 6 . 6 7 2 the true growth in Europe. Sales in both Europe and North America are driven by demand for engine timing systems and turbochargers. During the year, a number of new engine programs are announced or begin to ramp-up. These include major timing system programs with Ford for worldwide production of their new family of inline 4-cylinder engines. Honda is converting all of its major engines, including 4-cylinder, V6 and V8 engines, to ones designed with timing chain systems; and a major European customer is secured for timing system business. Also during the year, the headquarters for the turbocharger business is 96 97 98 99 00 consolidated in Europe, the fastest growing market for these products, and a new technical center is opened in Germany. Asheville, North Carolina, becomes the new center for turbocharger technical and engineering support in North America. Future business relationships are aided by entering long-term agreements with major customers in North America and Europe. C E T E S R O M S M E T S Y S O B R U T B U S I N E S S D E S C R I P T I O N P L A N T S A N D T E C H N I C A L C E N T E R S Global leader in the design and manufacture of automotive chain H e a d q u a r t e rs : Ithaca, New York 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 • Engine timing systems moving from belts to chains in Japan and Europe • Variable cam timing systems • Timing chain systems for direct injected diesel engines • Growth of overhead cam engines • Systems integration; alternative technologies • Chain belts and HY-VO pump drives for continuously variable transmissions • MORSE GEMINI chain systems for noise reduction Arcore, Italy Cortland, New York Guadalajara, Mexico Nabari City, Japan Simcoe, Ontario, Canada Tainan Shien, Taiwan B U S I N E S S D E S C R I P T I O N P L A N T S A N D T E C H N I C A L C E N T E R S Leading designer and manufacturer of turbochargers H e a d q u a r t e rs : Kirchheimbolanden, Germany Asheville, North Carolina Bradford, England Campinas, Brazil 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 • Continued growth of turbocharged diesel engines in European passenger cars • Engine downsizing for improved fuel consumption and emissions leads to increasing use of turbocharging on gasoline engines • Emerging applications on light trucks and SUVs • Variable geometry turbos for passenger car and truck diesel engines • Electronic control for turbochargers • Electrically powered boosting devices • Use of advanced materials for improved service life B U S I N E S S D E S C R I P T I O N P L A N T S A N D T E C H N I C A L C E N T E R S Leading independent global designer and producer of torque H e a d q u a r t e rs : Sterling Heights, Michigan distribution and management systems — transfer cases, InterActive Torque Management (ITM) devices — for four-wheel drive vehicles for the sport-utility, light truck and cross-over vehicle markets. These systems enhance driver security, driveability and handling. Beijing, China (JV) Livonia, Michigan Longview, Texas Margam, Wales Muncie, Indiana Pune, India (JV) Seneca, South Carolina Sirsi, India (JV) C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L h i g h l i g h t s 2000 Sales are down from the prior year but important new business launches and wins are expected to provide future growth. Our interactive four-wheel drive system for passenger car based vehicles, an industry first, is intro- T O R QTR A N S F E R S Y S T E M S S A L E S s r a l l o d f o s n o i l l i m . 8 6 7 4 . 6 3 1 6 . 3 3 6 5 . 8 8 1 5 526.7 96 97 98 99 00 duced on the Acura MDX, Motor Trend’s SUV of 2001. G R O W T H O P P O R T U N I T I E S Next generation technology for broader application in the • Continued popularity of 4WD in an established market segment market is developed. The group also wins a major contract • Growing popularity of 4WD/AWD passenger cars and cross-over vehicles with General Motors for four-wheel drive systems. • Continued application of electronically controlled torque management devices in RWD and AWD vehicles • Expanded customer base in RWD segment A I R / F L U I D S Y S T E M S S A L E S s r a 4 . 2 4 3 4 . 1 5 3 l l o d f o s n o i l l i m 7 . 2 4 2 9 . 3 1 4 427.8 96 97 98 99 00 T R A N S M I S S I O N S Y S T E M S S A L E S s r a 4 . 9 6 3 0 . 5 5 3 1 . 6 4 3 l l o d f o s n o i l l i m 4 . 3 1 4 437.5 B U S I N E S S D E S C R I P T I O N P L A N T S A N D T E C H N I C A L C E N T E R S Full service supplier of air induction and fluid control systems H e a d q u a r t e rs : Warren, Michigan h i g h l i g h t s 2000 Sales are up 3%. New business is launched with BMW and electromechanical components, for enhanced engine and transmission performance, reduced emissions, fuel vapor recovery, and increased vehicle safety. for an innovative two-stage oil pump with technology to match the demands of oil pressure-actuated variable G R O W T H O P P O R T U N I T I E S valve timing systems. Electronic and electromechanical expertise continues to support new cross-business growth opportunities including new concept transmission technology, and engine cooling and charging systems. • Increased use of electronics and electromechanical actuation for underhood applications • Phase-in of new emission regulations in Europe and North America • Dual clutch control systems for new concept automated transmissions Dixon, Illinois Rothbury, Michigan Sallisaw, Oklahoma Spring Lake, Michigan Tulle, France Water Valley, Mississippi h i g h l i g h t s 2000 Sales are up 6%. The group continues to gain market share in products for automatic transmissions and is entering new markets with technology to improve the efficiency of transmissions. Results in Japan improve due to productivity improvements and an increase in production of small cars with automatic transmissions. A major European customer introduces a 6-speed automatic with our content, and B U S I N E S S D E S C R I P T I O N P L A N T S A N D T E C H N I C A L C E N T E R S Supplies “shift quality” components and systems including one-way H e a d q u a r t e rs : Lombard, Illinois clutches, transmission bands, friction plate 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 • Dual clutch systems for automated manual transmissions • Shift from components to modules Bellwood, Illinois Eumsung, Korea (JV) Frankfort, Illinois Fukuroi City, Japan (JV) Heidelberg, Germany • European and Korean market growth of automatic transmissions Ketsch, Germany • Move from four- to five- to six-speed transmissions Sterling Heights, Michigan 96 97 98 99 00 clutch modules for a new concept transmission. • Substitution of modular wet starting clutches for torque converters another selects us to supply industry-first control and • Subsystems for continuously variable transmissions (CVT) C O O L I N G S Y S T E M S S A L E S s r a 281.3 l l o d f o s n o i l l i m 8 . 2 4 1 99 00 h i g h l i g h t s 2000 Sales double in this new business group created from 1999 acquisitions. A new generation of products with electronic control is introduced to provide better engine cooling and improved fuel economy. The group also forms strategic alliances to develop complete systems to achieve improved fuel efficiency by increasing thermal and aerodynamic efficiency. The group positions its European operations for increased market penetration. Growth opportunities are expanded in emerging markets. B U S I N E S S D E S C R I P T I O N P L A N T S A N D T E C H N I C A L C E N T E R S Global leader in the design and supply of cooling solutions for the H e a d q u a r t e rs : Marshall, Michigan 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 • Continued popularity of light trucks and SUVs • Consolidation of supplier base in commercial vehicles • Central and Eastern Europe, South American and Asian market expansion • System development agreements with other key suppliers • Emission regulations related to diesels • Higher fuel economy challenges • Exhaust and noise reduction Bradford, England Cadillac, Michigan Changwon, South Korea Fletcher, North Carolina Gainesville, Georgia Markdorf, Germany Ningbo, China (JV) São José dos Campos, Brazil C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L Engines. I N C R E A S E D C O N T E N T . T h e p a c e o f c h a n g e i n a n d a r o u n d t h e e n g i n e i s driving BorgWarner growth. We add value as a partner in the development of new engines for efficient power generation, resulting in increased content for us, and b e t t e r f u e l e c o n o m y a n d r e d u c e d e m i s s i o n s f o r o u r v e h i c l e m a k e r c u s t o m e r s . Over the next five years, the growth in chain-driven engine timing systems will expand significantly. ENGINE CHAIN GROWTH EXPANDS OUR CUSTOMER BASE ADDS CONTENT 107% in Japan 34% in Europe 10% in North America y t i l i b a r u d p r o p r i e t a r y t e c h n o l o g y CHAIN SYSTEMS OPENS NEW MARKETS n e w g e n e r a t i o n e n g i n e s The move to chain systems from rubber belts positions us to add content, expand our customer base and enter new markets. e u q r o t r e h g i h G L O B A L G R O W T H The move to chain timing systems is driven by new engine designs—overhead cam engines in North America, direct injection in Europe, new generation Japanese engines and the advent of variable cam timing. 99 C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L c o n t r o lled coolin g a e r o d y n a m i c e f f i c i e n c y a l l y n i c s y s t e C O O L S O L U T I O N S. OUR PRODUCTS IMPROVE FUEL ECONOMY AND ENHANCE EMISSION REDUCTIONS IN SUVS, LIGHT TRUCKS AND COMMERCIAL VEHICLES. WITH THE MOVE TO INTEGRATED COOLING MODULES, WE COMBINE ELECTRONICS, AERODYNAMICS AND MATERIALS SCIENCE FOR LIGHTER WEIGHT, NOISE REDUCTION AND PRECISE FAN CONTROL, TO ULTIMATELY IMPROVE FUEL ECONOMY AND MAXIMIZE COOLING POTENTIAL. electr o of s e l a S . s r a e y 5 n i e u n e v re m s a r e e x p e c t e d t o g r o w fro 30% m 7% to a b o 30%ofcooling u t E L E C T R O N I C C O N T R O L Electronics integrated in cooling systems allow an engine to operate at optimal temperatures for better fuel economy and a potential reduction in exhaust emissions to address increasingly stringent regulations. l o r t n o c c i n o r t c e l e COOLING SYSTEMS g i n t e g r a t e d m o d u l e s n i l o o c d e z i m i x a m 11 C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L 12 13 T U R B O T E C H N O L O G Y We are investing in pacesetting turbocharger technologies that lower fuel consumption to reduce the cost of operating a vehicle and improve emissions to help meet regulations for CO2 and NOx. Next generation charging devices will include electronic power boosting. d t e c e p x e i s s r e g r a h c o b r r t u a c r e g n e s s p a r and diesel engines in Europe and Japan.%3 d f o n D e m a t o g r o w 3 0 % boosted by the explosion of direct injected gas t o a l m o s t 1 0 m i f i v e y e a r s , i n l l i o n u n i t s , P O W E R B O O S T. THE DEVELOPMENT OF MORE FUEL EFFICIENT ENGINES IS CREATING AN EXPLOSION IN TURBOCHARGER GROWTH. USING THE ENERGY IN A VEHICLE’S HOT EXHAUST GASES TO COMPRESS COLD INTAKE AIR, TURBOCHARGERS ACHIEVE A CLEANER, LEANER BURN. BY PROVIDING HIGHER POWER DENSITY, SMALL TURBOCHARGED ENGINES CAN REPLACE LARGER, LESS FUEL-EFFICIENT ONES. n o i t c e j n i t c e r i d l o w e r f u e l c o n s u m p t i o n TURBOCHARGERS c l e a n e r, l e a n e r b u r n r e w o p e n i g n e s t s o o b C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L Power Transfer. N E W M A R K E T S . Taking raw engine power and transferring it through the drivetrain to the wheels is what we do best. Smooth shifts, four-wheel drive stability — our proprietary expertise moves the world’s cars and trucks. Our industry-first technologies, incorporating electronic control in new transmission concepts and all-wheel drive, are revolutionizing the driving experience. 35 30 25 20 15 10 5 0 31% GROWTH As drivers experience the security of four- wheel drive, millions of front-wheel drive cars, minivans and small SUVs are expected to employ this technology to enhance handling and stability, providing 31% growth by 2005. T O R Q U E M A N A G E M E N T The use of four-wheel and all-wheel drive on front-wheel drive vehicles is about to explode. We are adapting our leading-edge electronic controls technology to this new market. Interactive systems provide better handling through individual wheel traction and torque management, front to rear, side to side. y t i l i b a t s e l c i h e v f u e l e c o n o m y ELECTRONIC AWD b e t t e r h a n d l i n g t s r i f y r t s u d n i 15 C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L 16 17 C R I T I C A L I N T E R F A C E S As developments in electronics permit manufacturers to rethink traditional transmissions and experiment with alternatives, our engineers are creating the critical interfaces that convert electrical signals into transmission functions and gear changes. 70% 2010 2008 2006 2004 2002 2000 A U T O M A T E D T R A N S M I S S I O N S By 2010, 70% of European transmissions are expected to be automated, up from just 18% today. Electronics is propelling this growth, allowing the commercialization of fuel-efficient transmission options such as automated manuals and dual clutch and continuously variable transmissions. S M A R T T R A N S M I S S I O N S. THE PUSH IS ON TO IMPROVE THE FUEL EFFICIENCY AND PERFORMANCE OF THE TRADITIONAL AUTOMATIC TRANSMISSION. ON THE HORIZON ARE SIX-SPEED, DUAL CLUTCH AND CONTINUOUSLY VARIABLE TRANS- MISSIONS, MORE OUTSOURCING OF SUBSYSTEMS, ADVANCED FRICTION MATERIALS AND “SMART” TRANSMISSIONS THAT INCORPORATE OUR ELECTROMECHANICAL EXPERTISE. s l a i r e t a m n o i t c i r f d e c n a v d a electronic actuation TRANSMISSION OPTIONS continuously variable s d e e p s e r o m C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L 18 19 F I R S T T O M A R K E T Our wet clutch expertise combined with our advanced control strategies is propelling us to market first with technology for a new concept automated transmission. This same technology, when applied to traditional automatics or continuously variable transmissions, provides improved fuel economy. 15% Fuel efficiency on transmissions using our dual wet clutch and controls technology is 15% better than a five-speed automatic and 5% improved over a manual transmission. I N T E L L I G E N T I N N O VAT I O N . OUR DUAL CLUTCH TRANSMISSION T E C H N O L O G Y W A S D E S I G N E D F O R T H E D R I V E R W H O VA L U E S A S P O R T Y DRIVING EXPERIENCE, BUT DEMANDS FUEL EFFICIENCY AND THE CONVENIENCE OF THE AUTOMATIC WHILE NAVIGATING CONGESTED CITIES. WE ARE WORKING WITH MANUFACTURERS WORLDWIDE TO COMMERCIALIZE THIS INNOVATION W H I C H I S E X P E C T E D T O C R E AT E A $ 1 B I L L I O N M A R K E T O P P O R T U N I T Y. t e k r a m w e n f u e l e f f i c i e n t AUTOMATIC/MANUAL e s m o o t h s h i f t v i r d o t n u f C H A I N S Y S T E M S C O O L I N G S Y S T E M S T U R B O C H A R G E R S E L E C T R O N C A W D I O P T I O N S T R A N S M I S S I O N A U T O M A T I C / M A N U A L 20 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 O. BONANNO (2) President TradeBuilders, Inc. 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 Chairman, Retired Rohr, Inc. (Retired from Board April 2000) 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 ROGER J. WOOD Vice President President and General Manager, Morse TEC WILLIAM C. CLINE Vice President and Controller LAURENE H. HORISZNY Vice President, General Counsel and Secretary JOHN A. KALINA Vice President and Chief Information Officer GERALDINE KINSELLA Vice President, Human Resources JEFFREY L. OBERMAYER Vice President and Treasurer ALEXIS P. MICHAS (1,2) Managing Partner and Director Stonington Partners, Inc. JOHN RAU (2,3) Former President and Chief Executive Officer Chicago Title Corporation 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 21 0 0 0 2 R E N R A W G R O B F I N A N C I A L S 2 0 0 0 S O L I D S A L E S G R O W T H millions of dollars I N V E S T I N G F O R T H E F U T U R E millions of dollars R E D U C I N G D E B T as a percent Consolidated Sales Combined Worldwide Sales R&D Spending Capital Spending $3,000 2,500 2,000 1,500 1,000 500 0 $180 150 120 90 60 30 0 48 40 32 24 16 8 0 96 97 98 99 0 0 0 2 96 97 98 99 0 0 0 2 96 97 98 99 0 0 0 2 We have delivered 15% average sales growth over the past five years, including results from our joint ventures worldwide. While acquisitions have contributed to our growth, much of it has been generated internally. Investing in technology is a key to our future success. We invest about 4% of sales in research and development and about 6% of sales in capital for new customer programs and cost reduction projects. After financing acquisitions in 1999, we have successfully reduced our debt and are working toward a debt-to-total capital ratio below 40%. We are committed to maintain- ing a strong balance sheet and investment grade credit rating. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 22 MANAGEMENT’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS 29 INDEPENDENT AUDITORS’ REPORT 29 CONSOLIDATED FINANCIAL STATEMENTS 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 SELECTED FINANCIAL DATA 47 CORPORATE INFORMATION 48 22 B O R G W A R N E R 2 0 0 0 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A 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 BorgWarner Inc. and Consolidated Subsidiaries Introduction BorgWarner Inc. is a leading global supplier of highly engineered Our outlook as we head into 2001 is one of caution as the North American automotive market is already experiencing a downturn. We systems and components for powertrain applications. Our products anticipate the first half of 2001 will be markedly lower than the very help improve vehicle performance, fuel efficiency and handling and strong first half of 2000, but we intend to use our financial strength to reduce emissions. They are manufactured and sold worldwide, primarily manage through the weakness by controlling costs and other spend- to original equipment manufacturers of passenger cars, sport utility ing so that we are poised to take advantage of opportunities as the vehicles, trucks and commercial transportation products. We have cycle turns up again. We have already taken actions to adjust our experienced solid internal growth over the past three years but have cost structure and will continue to do so if the downturn continues. also enhanced our product leadership position and focus through key acquisitions. Kuhlman Corporation (Kuhlman) was acquired in March of 1999 and the Eaton Fluid Power Division (Eaton) in October 1999. The turbocharger business from Kuhlman, combined with our German Results By Operating Segment Our products fall into five reportable operating segments: Air/Fluid turbocharger business, adds to the Morse TEC segment’s variety of Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and engine related products to improve performance, fuel economy and Transmission Systems. The segments are profiled on pages 6 and 7. emissions. The Eaton and Kuhlman powertrain cooling businesses The following tables detail sales and earnings before interest and were combined to form our newest operating segment, Cooling Systems. taxes (EBIT) by segment for each of the last three years. The remaining Kuhlman businesses either have been, or will be, sold. Results of Operations 2000 vs. 1999 vs. 1998 BorgWarner reported net earnings for 2000 of $94.0 million, or $3.54 per diluted share, which included after-tax restructuring and other non-recurring charges of $38.7 million or $1.47 per diluted share. Excluding the restructuring and other non-recurring charges, which are discussed in detail below, net earnings were $132.7 million or $5.01 per diluted share. Net earnings in 1999 and 1998 were $132.3 million and $94.7 million, or $5.07 and $4.00 per diluted share, respectively. Overall, we realized a 7.6% sales growth over 1999 and a 33.9% sales growth between 1999 and 1998. While much of the increase was related to acquisitions, internal growth from businesses held for parison, worldwide vehicle production increased by 2.8% in 2000 and 4.2% in 1999. North American production increased by 1.3% and 9.5%, Japanese production increased by 2.2% and 1.0% and Western European production increased 1.3% in 2000 and was flat the year before. Despite a very strong first half, our 2000 results were tempered by the weak Euro, production slowdowns and shutdowns during the last half of the year and deterioration in the heavy-duty truck market. The primary growth drivers in 1999 and the first half of 2000 were Net Sales Y E A R E N D E D D E C E M B E R 3 1 , 2000 1999 1998 millions of dollars Air/Fluid Systems Cooling Systems Morse TEC TorqTransfer Systems Transmission Systems Divested operations and businesses held for sale Intersegment eliminations $ 427.8 $ 413.9 $ 351.4 281.3 885.8 526.7 437.5 132.9 (46.1) 142.8 796.9 563.3 413.4 178.0 (49.7) — 536.2 518.8 355.0 121.1 (45.7) Net sales $2,645.9 $2,458.6 $1,836.8 Earnings Before Interest and Taxes Air/Fluid Systems Cooling Systems Morse TEC TorqTransfer Systems Transmission Systems Divested operations and businesses held for sale millions of dollars 2000 1999 1998 $ 35.7 $ 36.5 $ 25.1 32.1 127.4 37.2 46.0 17.9 109.7 41.2 54.1 3.2 6.9 — 78.5 28.4 42.7 2.0 Earnings before interest and taxes $281.6 $266.3 $176.7 all periods amounted to 0.3% in 2000 and 14.7% in 1999. As a com- Y E A R E N D E D D E C E M B E R 3 1 , strong global automotive markets, growth in engine timing systems applications, strong demand for turbochargers especially in European Air/Fluid Systems experienced a 3.4% increase in sales and a 2.2% decrease in EBIT compared to the prior year. Strong sales of passenger cars, increased content on new generations of trans- pump products for emission control were more than offset by pricing missions, improvements in 4x4 installation rates on light trucks and and volume weakness at DaimlerChrysler, a major Air/Fluid Systems results from acquisitions. Improvements over 1998 also reflect the customer, particularly late in the year. Product mix issues along with absence of the 1998 GM strike and the improved condition of the Asian economy in 1999. B O R G W A R N E R 2 0 0 0 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A 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 BorgWarner Inc. and Consolidated Subsidiaries soft costs related to facility rationalizations contributed to the EBIT year comparisons benefited from elevated worldwide demand for margin decline. Sales and EBIT increased by 17.8% and 45.4%, respectively, from 1998 to 1999. The increases were largely attributable to increased demand for emission enhancement products and transmission solenoids. Despite a tempered outlook for 2001 due to industry conditions, Air/Fluid Systems continues to promise a substantial opportunity for growth because of the increased worldwide emphasis on improved operating efficiency and reduced emissions, both of which can be realized through improved engine air and fuel management. Other opportunities in the coming years include control devices for automated manual transmissions and, because of the fragmented nature of the supplier base in this segment, system solutions for fuel economy and emission requirements. Cooling Systems’ increases in sales and EBIT primarily reflect full year results for the new segment. Cooling Systems was heavily impacted by the deteriorating North American market conditions since approximately 80% of the segment’s sales are to customers in North America, mainly in the sport utility (SUV), light, medium and heavy truck markets. We expect that weakness in the North American heavy truck market, along with an application lost in 2001, should cause this segment to be off from 2000 levels. New applications go into production in the second half of 2001. We expect our leadership position in these key markets to favorably impact results as the economy recovers. Increasing fuel economy and environmental legislation in North America and Europe are expected to drive demand for electronically controlled cooling systems to accommodate increasingly higher operating engine temperatures. These same requirements are driving developing countries to embrace mechanically controlled drives and, because of our full product range and manufacturing locations in every major vehicle producing region, we expect to be well positioned to benefit from the product life cycle in these markets. Morse TEC sales increased by $88.9 million, or 11.2% and EBIT improved by $17.7 million, or 16.1%, despite being negatively affected by the weak Euro, both for the turbocharger business and the timing chain business. The growth was due to the continued strength of the European turbocharger market for gasoline and diesel passenger cars and commercial vehicles, and new and expanded engine timing programs in each geographical region. engine timing systems and the increased proportion of direct-injection diesel engines with turbochargers in European passenger cars. We expanded our European turbocharger capacity during 1999 and anticipate future expansion in an effort to capitalize on this trend. The growth trend at Morse TEC is expected to continue in the coming years as turbocharger capacity is increased to meet ramped-up demand of direct-injection diesel passenger cars and as new generations of variable geometry turbochargers for commercial diesel applications are introduced. The introduction of additional new products, including timing systems for Chrysler overhead cam engines, powder metal sprockets for both timing system and transmission applications, and drive chain for the new Toyota hybrid engine and other Japanese applications, are expected in the coming years. This segment expects to benefit from the conversion of engine timing systems from belts to chains in both Europe and Japan. Such growth may be tempered by the current downturn in the North American market. TorqTransfer Systems’ sales and EBIT slipped in 2000, with sales off 6.5% to $526.7 million and EBIT down 9.7% to $37.2 million. We had expected TorqTransfer Systems results would be fairly even with 1999 levels, so the declines were not surprising given the weak second half of 2000 and the problems with Ford Explorer/Firestone tires. The Explorer is a major application for this segment. Production volume of this vehicle was lower by 4% compared with 1999 with our sales declining as a result. Other vehicles that use TorqTransfer systems were also down in 2000, particularly other Ford light trucks and SUVs. August 2000 saw the launch of TorqTransfer’s first InterActive Torque Management System application in the Acura MDX. While the system has great promise going forward, it did not contribute significantly in 2000 due to the incursion of start-up costs and its launch late in the year. Considering the sales decline, the group did a solid job of limiting EBIT losses by recognizing early that the year would be one of limited growth potential and took a number of actions to control costs, including restrictions on hiring, controls on non-essential spending and shifting production to maximize capacity utilization. TorqTransfer Systems’ 1999 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 stabilization or reversal of certain factors which had deflated 1998 results, including reductions in four-wheel drive (4WD) transfer case shipments for the Ford F-150 truck and declines in 4WD transfer Morse TEC experienced strong growth in 1999 as sales and EBIT case shipments to Ssangyong, Korea due to the sluggish Asian increased by $260.7 million and $31.2 million, respectively. Net of the economy. Significantly higher 4x4 installation rates on Ford V8 small effect of the Kuhlman acquisition, sales increased by $129.7 million, pick-up trucks in 1999 and the continued popularity of SUVs and light or 24.2%, and EBIT improved by $26.3 million, or 33.5%. Year-over- trucks also enhanced results. 24 B O R G W A R N E R 2 0 0 0 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A 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 BorgWarner Inc. and Consolidated Subsidiaries For 2001, we do not expect growth from this segment because of the not result in a significant gain or loss in any of the years presented. slowdown in North America and the timing of new product introduc- Divested operations and businesses held for sale contributed sales of tions. TorqTransfer has been awarded a significant contract to supply $132.9 million, $178.0 million and $121.1 million and EBIT of $3.2 mil- transfer cases to General Motors, the first units being shipped in lion, $6.9 million and $2.0 million in 2000, 1999 and 1998, respectively. 2002. In 2001, the group will incur significant start-up costs as the plant prepares for this significant new opportunity. Our top ten customers accounted for approximately 77% of consolidated sales compared to 75% in 1999 and 81% in 1998. A Transmission Systems’ sales increased 5.8% to $437.5 million. The sales growth came principally from Korea, where we benefited full year’s sales to new customers gained through 1999 acquisitions drove the increase in the percentage. Despite our expanding customer from both strong local build rates and an increasing installation rate base, Ford continues to be our largest customer with 30% of consoli- for automatic transmissions. In Europe our sales were strong in local currency, but translated to fewer dollars because of the weakness of dated sales in 2000, compared to 31% and 36% in 1999 and 1998, respectively. DaimlerChrysler, our second largest customer, represented the Euro. In North America sales were up for the year because of 19% of consolidated sales in each of 2000, 1999 and 1998; and strong customer build rates in the first half of 2000. Sales declined in General Motors accounted for 13%, 13%, and 16%, respectively. the latter part of the year, particularly in the fourth quarter. EBIT of No other customer accounted for more than 10% of sales in any of $46.0 million was 15.0% below 1999 levels. Volume related improve- the periods presented. ments in Korea were more than offset by operating problems incurred in North America. The restructuring charges recognized in the third and fourth quarters were taken in part to restructure operations at the Transmission Systems group. Other Factors Affecting Results of Operations The following table details our results of operations as a percentage Net of the businesses divested in 1999 and 1998, this segment of sales: showed increases in sales and EBIT of $58.4 million and $11.4 mil- Y E A R E N D E D D E C E M B E R 3 1 , 2000* 1999 1998 lion, or 16.5% and 26.7%, respectively, versus the prior year. Of our operating segments, Transmission Systems benefited most from the strong worldwide automotive production in 1999 because of the seg- ment’s global diversification and application to passenger cars, SUVs and light trucks. The absence of the 1998 North American General Motors strike and the stabilization of the Asian economy in 1999 also enhanced comparisons. While we believe that the group will benefit from the actions taken in Net sales Cost of sales Gross margin Depreciation and amortization Selling, general and administrative expenses Minority interest, affiliate earnings and other income, net 2000 to better align the businesses to the anticipated level of activity, Earnings before interest and taxes 100.0% 100.0% 100.0% 75.7 24.3 5.5 9.2 76.8 23.2 5.0 79.0 21.0 5.0 8.3 7.4 (0.8) 10.4% (0.5) 10.4% (0.5) 9.1% we also feel that the group is likely to experience declines in sales and EBIT due to industry softness, particularly in North America. *To make the table comparable across years, 2000 excludes $62.9 million, or 2.4% of sales, of restructuring and other non-recurring charges. Divested operations and businesses held for sale includes the results of Fuel Systems, which is currently held for sale; Kysor- Westran, which was sold during 2000; and three former Transmission Systems businesses: the forged powder metal race business sold in 1999, and the torque converter and connecting rod businesses sold separately in 1998. These businesses did not fit our strategic goals, and we believe our resources are better spent on our core technologies in highly engineered components and systems. The anticipated loss on the sale of Fuel Systems was recorded as part of the restructuring charges discussed below, and the $5.4 million gain on the sale of Kysor-Westran in 2000 is included in equity in affiliates and other Gross margin for 2000 was 24.3%, an improvement from 1999 and 1998 margins of 23.2% and 21.0%, respectively. While the increase is partly attributable to the acquisition of higher margin operations and the divestiture of lower margin operations in 1999, many of our core businesses also showed gross margin improvement. Our operations were able to make margin gains despite price reductions to customers of approximately $16 million in 2000, as compared to $35 million and $23 million in 1999 and 1998, respectively. For the first time in several years, we were able to offset the impact of price reductions in 2000 by actively pursuing reductions from our suppliers and making changes in product design and using process technology to remove cost income. The sales of the former Transmission Systems businesses did and/or improve manufacturing capabilities. B O R G W A R N E R 2 0 0 0 25 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A 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 BorgWarner Inc. and Consolidated Subsidiaries Depreciation and amortization as a percentage of sales increased to 5.5% in 2000 versus 5.0% in each of 1999 and 1998 as a result of a full year’s amortization of the goodwill associated with the additional businesses acquired in 1999 as well as the relatively higher levels of capital spending in recent years. Total depreciation and amortization increased by $22.1 million versus 1999. Selling, general and administrative expenses (SG&A) as a percentage of sales increased to 9.2% from 8.3% and 7.4% in 1999 and 1998, respectively. Our acquisition of businesses with higher SG&A spending levels, as well as our continued commitment to research and development (R&D) in order to capitalize on growth Components of the restructuring and other non-recurring charges are detailed in the following table and discussed further below. millions of dollars Total Charges Amount Incurred Balance at December 31, 2000 Severance and other benefit costs $ 8.9 $ (4.3) $ 4.6 Asset write-downs Loss on anticipated sale of business Other exit costs and non-recurring charges Total 11.6 35.2 7.2 $62.9 (11.6) (35.2) (0.6) $(51.7) — — 6.6 $11.2 Severance and other benefit costs relate to the reduction of approxi- opportunities have caused the increases. R&D spending increased to mately 240 employees from the workforce. The reductions affect each $112.0 million, or 4.2% of sales, as compared with $91.6 million, or of our operating segments, apart from TorqTransfer Systems, across 3.7% of sales, and $65.1 million, or 3.5% of sales in 2000, 1999 and each of our geographical areas, and across each major functional area, 1998, respectively. We continue to invest in a number of cross-segment including production and selling and administrative positions. As of R&D programs that were initiated during 1999, as well as a number December 31, 2000, approximately $4.3 million had been paid for sev- of other key programs, all of which are necessary for short- and long- erance and other benefits for 82 terminated employees. The remaining term growth. We intend to maintain our commitment to R&D investment reductions and cash payments should be complete by the end of 2001. in the coming years while continuing to focus on controlling other SG&A costs. The relative increase in the non-R&D spending in SG&A is due in part to the changing mix of businesses. We have already taken steps to focus on getting costs in line to manage though the anticipated period of slower industry growth in the coming quarters. Asset write-downs primarily consist of the write-off of impaired assets that will no longer be used in production as a result of the industry downturn. Such assets have been taken out of production and are being disposed. Additional actions are possible in 2001 to keep our cost structure Loss on anticipated sale of business is related to the Fuel Systems competitive during the industry downturn. Restructuring and other non-recurring charges totaling $62.9 million were incurred in the second half of 2000 in response to deterio- business, which is currently being reported as an investment in busi- nesses held for sale on the Consolidated Balance Sheet. Fuel Systems produces metal tanks for the heavy-duty truck market in North America and does not fit our strategic focus on powertrain technology. In April rating market conditions. The charges included the rationalization and 2000, we announced our intention to sell this non-core business, which integration of certain businesses and actions taken to bring costs in line was acquired as part of the vehicle products business of Kuhlman with vehicle production slowdowns in major customer product lines. Corporation in March 1999. With the deterioration of the North American Of the $62.9 million in pretax charges, $47.3 million represents non- cash charges. Approximately $4.4 million was spent in 2000 and the heavy-duty truck market in the second half of 2000, the value of this business has significantly decreased, creating the $35.2 million loss. remaining $11.2 million is expected to be spent in 2001. We expect to Other exit costs and non-recurring charges are primarily non-employee fund the total cash outlay with cash flow from operations. The actions related exit costs incurred to close certain non-production facilities taken are expected to generate approximately $19 million in annual- we no longer need. ized savings, primarily from lower salaries and benefit costs and reduced depreciation charges, beginning in 2001. These savings are expected to be more than offset by lower revenue from the deterioration Equity in affiliate earnings and other income increased by $9.7 million from 1999 and by $3.8 million between 1999 and 1998. in the automotive and heavy-duty truck markets. In addition to the $5.4 million gain on the sale of Kysor-Westran recorded in 2000, the increases are attributable to the improved results of our 50% owned Japanese joint venture, NSK-Warner. Our equity in NSK-Warner’s earnings of $16.9 million was $4.0 million higher than the prior year, which was $5.3 million higher than 1998. NSK-Warner has continued to perform well since the 1998 economic downturn in the Asian economy. 26 B O R G W A R N E R 2 0 0 0 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A 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 BorgWarner Inc. and Consolidated Subsidiaries Interest expense and finance charges increased by $13.4 million in 2000 and by $22.3 million between 1999 and 1998. The increases The decreased investment in net operating assets reflected in the December 31, 2000 balance sheet is mainly due to the continued are consistent with higher debt levels required to finance the two emphasis on tight working capital management. major acquisitions in 1999 and rising interest rates in the U.S. The rising interest rates through the first part of 2000 did not have as significant an impact on interest expense as might have been expected because 73% of our debt has fixed rates and only 27% has floating rates. Strong cash flows from operations and proceeds from divestitures have lowered debt levels to partially offset the impact of acquisitions on interest expense in 2000. The increase in interest expense between 1999 and 1998 was primarily the result of the acquisitions, as interest rates were more constant in 1999. The provision for income taxes results in an effective tax rate for 2000 of 36.8% compared with rates of 36.1% for 1999 and 32.7% for 1998. Our effective tax rates have been lower than the standard federal and state tax rates due to the realization of certain R&D and foreign tax credits; foreign rates, which differ from those in the U.S.; and offset somewhat by non-deductible expenses, such as goodwill. The increase in rates over the 3 years is largely due to the non- Net cash used in investing activities totaled $62.0 million, compared with $810.7 million in the prior year. The large decrease is primarily related to the acquisitions made in the prior year. The sale of Coleman Cable Systems, Inc., one of the electrical products businesses acquired from Kuhlman in March 1999, cleared escrow in January 2000. The total sales price of $137.3 million included debt securities with a face value of $15.3 million and $122 million in cash. Partially offsetting this inflow was $43 million in tax payments related to the sales of the electrical businesses. Capital spending totaling $167.1 million in 2000 was $23.7 million greater than in 1999, although at a similar level in terms of spending as a percentage of sales. Approximately 60% of the 2000 spending was related to expansion, with the remainder for cost reduction and other purposes. Heading into 2001, we plan to manage through the industry downturn using a program of controlled capital spending, although full year spending should still be approximately 5.5% to 6.5% of sales. deductibility of the goodwill associated with the Kuhlman acquisition, Stockholders’ equity increased by $29.6 million in 2000. Net income as well as increased income from higher tax jurisdictions. The tax of $94.0 million was partially offset by dividends of $15.9 million and rate on the restructuring charge also reflected a difference in the $22.1 million to repurchase 589,700 shares of treasury stock. In book and tax carrying values of certain assets that were written down. relation to the dollar, the currencies in foreign countries where we Financial Condition and Liquidity Our cash and cash equivalents decreased $0.3 million at December 31, 2000 compared with December 31, 1999. Net cash provided by operating activities of $302.3 million, along with proceeds from businesses sold of $131.9 million were primarily used to fund $167.1 million of capital expenditures, repay $192.3 million of long- term debt, pay $43.0 million of taxes on businesses sold, repurchase $22.1 million of treasury stock and distribute $15.9 million of dividends to our shareholders. Operating cash flow of $302.3 million is $42.2 million less than in 1999, and consists of $94.0 million of net earnings, non-cash charges of $163.0 million and a $45.3 million decrease in net operating assets and liabilities, net of the effects of divestitures. Non-cash charges are primarily comprised of $102.2 million in depreciation, $43.3 million of conduct business, particularly the Euro, weakened, causing the currency translation component of other comprehensive income to decrease by $28.2 million in 2000. Our total capitalization as of December 31, 2000 of $1,881.9 million is comprised of short-term debt of $54.4 million, long-term debt of $740.4 million and shareholders’ equity of $1,087.1 million. Capitalization at December 31, 1999 was $2,037.8 million. During the year, we reduced our balance sheet debt to capital ratio to 42.2% from 48.1%. We have also been able to maintain our investment grade credit ratings from Moody’s (Baa2) and Standard and Poor’s (BBB+). As of December 31, 2000, we maintain a $350 million revolving credit facility that was revised and extended until July 21, 2005. We also have $200 million available under a shelf registration statement on file with the Securities and Exchange Commission through which a variety of debt instruments may be issued. goodwill amortization, both of which increased compared to 1999, We believe that the combination of cash from operations and available and the $47.3 million non-cash portion of the restructuring and other credit facilities will be sufficient to satisfy our cash needs for our current non-recurring charges recorded in 2000. Depreciation and goodwill level of operations and our planned operations for the foreseeable increased by $10.9 million and $11.2 million, respectively, due to a future. We will continue to balance our needs for internal growth, debt full year’s activity on the additional businesses acquired in 1999. reduction and share repurchase. B O R G W A R N E R 2 0 0 0 27 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A 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 BorgWarner Inc. and Consolidated Subsidiaries Other Matters Acquisition of Kuhlman Corporation On March 1, 1999, we acquired all the outstanding shares of common stock of Kuhlman Corporation (Kuhlman), for a purchase price of $693.0 million. We also assumed $131.6 million of Kuhlman’s existing indebtedness, which we subsequently refinanced. We 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. Kuhlman was a diversified industrial manufacturing company that operated in two product segments: vehicle and electrical products. In vehicle products, Kuhlman’s Schwitzer and Kysor units were leading worldwide manufacturers of proprietary engine components, including turbochargers, fans and fan drives and other products. Their results since the date of the acquisition are in the consolidated financial statements. The electrical products businesses acquired from Kuhlman consisted of Kuhlman Electric and Coleman Cable. These products did not fit our strategic direction and, at the time of the Kuhlman acquisition, we announced our intention to sell the businesses. In 1999, we completed the sales of both Kuhlman Electric and Coleman Cable. Kuhlman Electric was sold to Carlyle Group, L.L.C. for $120.1 million, including debt securities with a face value of $15.0 million. The $137.3 million sale of Coleman Cable to a group of equity investors included debt securities with a face value of $15.3 million. Proceeds from the sales were used to repay indebtedness. Acquisition of Eaton Corp.’s Fluid Power Division Effective October 1, 1999, we acquired Eaton Corp.’s Fluid Power Division, one of the world’s leading manufacturers of powertrain cooling solutions for the global automotive industry, for $321.7 million. To partially finance the acquisition, we issued $150 million of 8.0% senior unsecured notes maturing September 2019. Cash from opera- tions funded the remainder of the acquisition price. The Fluid Power Environmental and Litigation BorgWarner and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identi- fied 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 42 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Based on information available to us, which in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concern- ing the scope of contamination and estimated remediation costs; remediation alternatives; estimated legal fees; and other factors, we have established a reserve for indicated environmental liabilities with a balance at December 31, 2000 of approximately $20.7 million. We expect this amount to be expended over the next three to five years. BorgWarner believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial 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. In connection with the sale of Kuhlman Electric Corporation, we agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. During 2000, Kuhlman Electric notified us that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. Division designs and produces a variety of viscous fan drive cooling We have been working with the Mississippi Department of systems primarily for passenger vehicles such as light trucks, sport- Environmental Quality and Kuhlman Electric to investigate the extent utility vehicles and vans. Along with the commercial cooling systems of the contamination. To date, the investigation has revealed the business acquired from Kuhlman in March 1999, this acquisition presence of PCBs in portions of the soil at the plant and neighboring positions us to globalize modular cooling systems integration areas. We have filed a lawsuit against Kuhlman Electric seeking opportunities across a full range of vehicle types. a declaration of the scope of our contractual indemnity. As the investigation is in its early stages, and the court has not yet ruled on the lawsuit, we cannot now estimate the potential liability associated with this matter. 28 B O R G W A R N E R 2 0 0 0 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A 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 BorgWarner Inc. and Consolidated Subsidiaries Year 2000 Issues BorgWarner has not experienced any significant system failures or year 2000 related problems with its customers, vendors or suppliers. New Accounting Pronouncements On January 1, 2001, we adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. This statement standardizes the accounting for derivative instruments by requiring that an entity recognize all derivatives as assets or liabilities in the statement of financial position and measure them at fair value. When certain criteria are met, it also provides for matching the timing of gain or loss recognition on the derivative hedging instrument with the recognition of (a) the changes in the fair value or cash flows of the hedged asset or liability attributable to the hedged risk or (b) the earnings effect of the hedged forecasted transaction. We have a small number of derivative instruments. Application of SFAS 133 is not material to results of operations, financial condition or cash flows. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements.” This SAB provides guidance on the recognition, presentation and disclosure of revenue in the financial statements of public companies. The adoption of SAB No. 101 has not had a material effect on our reported results of operations, financial condition or cash flows. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” which we must adopt for all applicable transactions occurring after March 31, 2001. We are currently assessing the impact of this standard on our results of operations, financial condition and cash flows. Qualitative and Quantitative Disclosure About Market Risk Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. We measure our interest rate risk by estimating the net amount by which the fair value of all of our interest rate sensitive assets and liabilities would be impacted by selected hypothetical changes in market interest rates. Fair value is estimated using a discount cash flow analysis. Assuming a hypothetical instanta- neous 10% change in interest rates as of December 31, 2000, the net fair value of these net debt instruments would increase by approxi- mately $38.7 million if interest rates decreased and would decrease by approximately $34.0 million if interest rates increased. Our interest rate sensitivity analysis assumes a parallel shift in interest rate yield curves. The model, therefore, does not reflect the potential impact of changes in the relationship between short-term and long-term interest rates. Interest rate sensitivity at December 31, 1999, measured in a similar manner, was slightly greater than at December 31, 2000. Foreign currency risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. We miti- gate our foreign currency exchange rate risk principally by establishing local production facilities in markets we serve, by invoicing customers in the same currency as the source of the products and by funding some of our investments in foreign markets through local currency loans. We also monitor our foreign currency exposure in each country and implement strategies to respond to changing economic and political environments. In the aggregate, our exposure related to such transactions is not material to our financial position, results of operations or cash flows in both 2000 and 1999. Disclosure Regarding Forward-Looking Statements Statements contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward- looking statements as contemplated by the 1995 Private Securities Litigation Reform Act that are based on management’s current expectations, estimates and projections. Words such as “expects,” BorgWarner’s primary market risks include fluctuations in interest rates “anticipates,” “intends,” “plans,” “believes,” “estimates,” variations of such and foreign currency exchange rates. We are also affected by changes words and similar expressions are intended to identify such forward- in the prices of commodities used in our manufacturing operations. looking statements. Forward-looking statements are subject to risks However, commodity price risk is not considered to be material. We and uncertainties, which could cause actual results to differ materially do not hold any market risk sensitive instruments for trading purposes. from those projected or implied in the forward-looking statements. Such We have established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate market risk, which include monitoring of our level of exposure to each market risk. risks and uncertainties include: fluctuations in domestic or foreign automotive production, the continued use of outside suppliers, fluctu- ations in demand for vehicles containing BorgWarner products, general economic conditions, as well as other risks detailed in the company’s filings with the Securities and Exchange Commission, including the Cautionary Statements filed as Exhibit 99.1 to the Form 10-K for the fiscal year ended December 31, 2000. B O R G W A R N E R 2 0 0 0 29 MANAGEMENT ’S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITORS’ REPORT BorgWarner Inc. and Consolidated Subsidiaries To The Board of Directors and Stockholders of BorgWarner Inc.: We have audited the consolidated balance sheets of BorgWarner Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, cash flows, and stockholders’ equity for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the finan- cial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BorgWarner Inc. and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Chicago, Illinois February 7, 2001 The information in this report is the responsibility of management. BorgWarner Inc. has in place reporting guidelines and policies designed to ensure that the statements and other information con- tained in this report present a fair and accurate financial picture of the company. In fulfilling this management responsibility, we make informed judgments and estimates conforming with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available all the company’s financial records and related information deemed necessary by Deloitte & Touche LLP. Furthermore, management believes that all representations made by it to Deloitte & Touche LLP during its audit were valid and appropriate. Management is responsible for maintaining a comprehensive system of internal control through its operations that provides reasonable assurance that assets are protected from improper use, that material errors are prevented or detected within a timely period and that records are sufficient to produce reliable financial reports. The system of internal control is supported by written policies and procedures that are updated by management as necessary. The system is reviewed and evaluated regularly by the company’s internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their evaluation in accordance with auditing standards generally accepted in the United States of America and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the company’s system of internal control and takes the necessary actions that are cost-effective in the circumstances. Management believes that, as of December 31, 2000, the company’s system of internal control was adequate to accomplish the objectives set forth in the first sentence of this paragraph. The company’s Finance and Audit Committee, composed entirely of directors of the company who are not employees, meets periodically with the company’s management and independent auditors to review financial results and procedures, internal financial controls and internal and external audit plans and recommendations. In carrying out these responsibilities, the Finance and Audit Committee and the independ- ent auditors have unrestricted access to each other with or without the presence of management representatives. John F. Fiedler Chairman and Chief Executive Officer Lawrence B. Skatoff Executive Vice President and Chief Financial Officer February 7, 2001 30 B O R G W A R N E R 2 0 0 0 C O N S O L I D AT E D S TAT E M E N T S O F O P E R AT I O N S BorgWarner Inc. and Consolidated Subsidiaries 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 Restructuring and other non-recurring charges 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) 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 . millions of dollars except per share amounts 2000 $2,645.9 2,003.1 102.2 244.1 2.7 43.3 62.9 (23.8) 211.4 62.6 148.8 54.8 1999 $2,458.6 1,888.5 91.3 203.3 1.3 32.1 — (14.1) 256.2 49.2 207.0 74.7 $ 94.0 $ 132.3 $ $ 3.56 3.54 26,391 26,487 $ $ 5.10 5.07 25,948 26,078 1998 $1,836.8 1,450.7 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 $ $ $ B O R G W A R N E R 2 0 0 0 31 C O N S O L I D AT E D B A L A N C E S H E E T S BorgWarner Inc. and Consolidated Subsidiaries 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 Stockholders’ 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: 2000 and 1999, 27,040,492; outstanding shares: 2000, 26,225,283; 1999, 26,724,192 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 notes Accumulated other comprehensive income Common stock held in treasury, at cost: 2000, 815,209 shares; 1999, 316,300 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 2000 1999 $ 10.1 11.3 168.9 161.6 1.7 57.0 410.6 30.0 239.1 906.9 5.1 98.2 1,279.3 472.1 807.2 142.7 1,203.1 49.4 152.9 1,548.1 $2,765.9 $ 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 $2,970.7 $ 54.4 $ 134.0 408.2 67.3 529.9 740.4 345.2 53.0 398.2 10.3 — — 0.3 — 715.7 422.9 (2.5) (16.0) (33.3) 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) 1,087.1 $2,765.9 1,057.5 $2,970.7 32 B O R G W A R N E R 2 0 0 0 C O N S O L I D AT E D S TAT E M E N T S O F C A S H F L O W S BorgWarner Inc. and Consolidated Subsidiaries 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 , Operating Net earnings Adjustments to reconcile net earnings to net cash flows from operations: Non-cash charges (credits) to operations: Depreciation Goodwill amortization Non-cash restructuring charge 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 in accounts payable and accrued expenses Increase (decrease) in income taxes payable Net change in other long-term assets and liabilities Net cash provided by operating activities Investing Capital expenditures Payments for businesses acquired, net of cash acquired Proceeds from sales of businesses Payments for taxes on businesses sold 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 (used in) 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 Information 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 . millions of dollars 2000 1999 1998 $ 94.0 $ 132.3 $ 94.7 102.2 43.3 47.3 (8.5) (21.3) 18.7 (14.7) 11.6 7.0 19.5 3.2 302.3 (167.1) — 131.9 (43.0) 16.2 (62.0) (74.5) 86.9 (192.3) (22.1) 1.1 (15.9) (216.8) (23.8) (0.3) 21.7 91.3 32.1 — (4.0) (14.1) 41.1 (19.0) 0.2 57.9 18.9 7.8 344.5 (143.4) (855.5) 177.9 — 10.3 (810.7) (10.3) 621.8 (150.0) — 0.7 (15.5) 446.7 (2.8) (22.3) 44.0 74.8 16.8 — 16.7 (11.4) (29.3) (9.1) (7.6) 3.0 (22.3) 6.3 132.6 (122.2) (65.4) 51.8 — 8.2 (127.6) 73.3 2.4 (26.1) (13.0) 0.7 (14.1) 23.2 2.4 30.6 13.4 $ 21.4 $ 21.7 $ 44.0 $ 65.4 107.7 $ 51.1 59.1 $ 30.3 36.8 $ — $ 149.8 $ — 0.5 0.8 — 1.1 2.0 1.8 B O R G W A R N E R 2 0 0 0 33 C O N S O L I D AT E D S TAT E M E N T S O F S T O C K H O L D E R S ’ E Q U I T Y BorgWarner Inc. and Consolidated Subsidiaries 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 notes Retained earnings Comprehensive Income Accumulated other comprehensive income Balance, January 1, 1998 23,754,865 (210,600) $ 0.2 $566.0 $(10.2) $ — $150.7 $(13.0) Purchase of treasury stock Dividends declared Shares issued for management shareholder note Shares issued under stock option plans Shares issued under executive stock plan Non-voting common stock — — — — — (273,200) — 36,930 43,614 35,564 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 — — — — — — — — — 1.7 11.8 — — — — — — — $ 94.7 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 Shares issued under stock option plans Shares issued under executive stock plan Net income Adjustment for minimum pension liability Currency translation adjustment — 3,287,127 — — — — 0.1 149.7 — 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 Purchase of treasury stock Dividends declared Shares issued for management shareholder note Shares issued under stock option plans Shares issued under executive stock plan Net income Adjustment for minimum pension liability Currency translation adjustment — — — — — — — — (589,700) — 15,223 53,750 21,818 — — — — — — — — — — — — — — — — — — — (22.1) — 0.7 2.2 1.1 — — — — — — (15.9) (0.5) (0.2) — — — — — (1.1) (0.3) 94.0 — — — — — — — — — — — — — $ 94.0 (0.1) (28.2) (0.1) (28.2) Balance, December 31, 2000 27,040,492 (815,209) $ 0.3 $715.7 $(33.3) $(2.5) $422.9 $(16.0) $ 65.7 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 . 34 B O R G W A R N E R 2 0 0 0 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 I N T R O D U C T I O N Accounts receivable In 1999, an agreement with a financial institution BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a to sell, without recourse, eligible receivables was amended from leading global supplier of highly engineered systems and components $127.5 million to $153.0 million. Under this agreement, the Company primarily for automotive powertrain applications. These products are has sold $150.0 million of accounts receivable as of December 31, manufactured and sold worldwide, primarily to original equipment 2000 and December 31, 1999. The agreement extends through manufacturers of passenger cars, sport utility vehicles, trucks, com- December 19, 2001. mercial transportation products and industrial equipment. Its products fall into five operating segments: Air/Fluid Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and Transmission Systems. 1 Summary of Significant Accounting Policies 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. Inventory held by U.S. operations was $92.4 million in 2000 and $96.2 million in 1999. Such inventories, if valued at current cost instead of LIFO, would have been greater by $5.1 million and $6.3 The following paragraphs briefly describe significant accounting policies. million, respectively. Use of estimates The preparation of financial statements in conformity Property, plant and equipment and depreciation Property, plant with accounting principles generally accepted in the United States of and equipment are valued at cost less accumulated depreciation. America requires management to make estimates and assumptions. Expenditures for maintenance, repairs and renewals of relatively These estimates and assumptions affect the reported amounts of minor items are generally charged to expense as incurred. Renewals assets and liabilities and disclosure of contingent assets and liabilities of significant items are capitalized. Depreciation is computed generally at the date of the financial statements and the reported amounts of on a straight-line basis over the estimated useful lives of related revenues and expenses during the reporting period. Actual results assets ranging from 3 to 30 years. For income tax purposes, acceler- could differ from those estimates. ated methods of depreciation are generally used. Principles of consolidation The consolidated financial statements Goodwill Goodwill is being amortized on a straight-line basis over include all significant majority-owned subsidiaries. All significant periods not exceeding 40 years. The Company periodically evaluates intercompany accounts and transactions have been eliminated in the carrying value of goodwill to determine if adjustment to the consolidation. Certain prior amounts have been reclassified to conform amortization period or to the unamortized balance is warranted. to the current year presentation. Short-term securities Short-term securities are valued at cost, shipment of product. Although the Company may enter into long-term which approximates market. It is the Company’s policy to classify supply agreements with its major customers, each shipment of goods investments with original maturities of three months or less as cash is treated as a separate sale and the price is not fixed over the life Revenue recognition The Company recognizes revenue upon equivalents for purposes of preparing the Consolidated Statements of the agreements. of Cash Flows. All short-term securities meet this criterion. Financial instruments Financial instruments consist primarily of investments in cash, short-term securities, receivables and debt securities and obligations under accounts payable and accrued expenses and debt instruments. The Company believes that the fair value of the financial instruments approximates the carrying value, except as noted in Note 6. B O R G W A R N E R 2 0 0 0 35 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 The Company received corporate bonds with a face value of $30.3 In December 1999, the Securities and Exchange Commission issued million as partial consideration for the sales of Kuhlman Electric and Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Coleman Cable in 1999. These bonds have been recorded at their Financial Statements.” This SAB provides guidance on the recognition, fair market value of $12.9 million using valuation techniques that presentation and disclosure of revenue in the financial statements of considered cash flows discounted at current market rates and man- public companies. The adoption of SAB No. 101 has not had a material agement’s best estimates of credit quality. They have been classified effect on the Company’s reported results of operations, financial as investments available-for-sale in the other current assets section condition or cash flows. of the December 31, 2000 and 1999 Consolidated Balance Sheets. The contractual maturities of these bonds are beyond five years. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, “Accounting for Transfers and Servicing of Financial Foreign currency The financial statements of foreign subsidiaries Assets and Extinguishments of Liabilities” which the Company must are translated to U.S. dollars using the period-end exchange rate for adopt for all applicable transactions occurring after March 31, 2001. assets and liabilities and an average exchange rate for each period for The Company is currently assessing the impact of this standard on revenues and expenses. The local currency is the functional currency its results of operations, financial condition and cash flows. for all the Company’s foreign subsidiaries. Translation adjustments for foreign subsidiaries are recorded as a component of accumulated other comprehensive income in stockholders’ equity. 2 Research and Development Costs New accounting pronouncements On January 1, 2001, the The Company spent approximately $112.0 million, $91.6 million and Company adopted Statement of Financial Accounting Standards $65.1 million in 2000, 1999 and 1998, respectively, on research and (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging development activities. Not included in these amounts were customer- Activities,” as amended. This statement standardizes the accounting sponsored R&D activities of approximately $12.5 million, $9.4 million for derivative instruments by requiring that an entity recognize all and $8.4 million in 2000, 1999 and 1998, respectively. derivatives as assets or liabilities in the statement of financial position and measure them at fair value. When certain criteria are met, it also provides for matching the timing of gain or loss recognition on the derivative hedging instrument with the recognition of (a) the changes 3 Equity in Affiliate Earnings and Other Income in the fair value or cash flows of the hedged asset or liability attributable Items included in equity in affiliate earnings and other income consist of: to the hedged risk or (b) the earnings effect of the hedged fore- casted transaction. The Company has a small number of derivative D E C E M B E R 3 1 , instruments. Application of SFAS 133 is not material to results of operations, financial condition or cash flows. Equity in affiliate earnings Gains on sale of businesses Interest income Gain (loss) on asset disposals, net Other millions of dollars 2000 $15.7 5.4 0.8 (0.4) 2.3 1999 $11.7 — 1.1 0.3 1.0 1998 $ 5.5 3.3 0.4 (0.1) 1.2 $23.8 $14.1 $10.3 36 B O R G W A R N E R 2 0 0 0 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 4 Income Taxes Income before taxes and provision for taxes consist of: 2000 millions of dollars 1999 1998 U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S. Total Income before taxes $72.1 $76.7 $148.8 $121.6 $85.4 $207.0 $99.3 $41.4 $140.7 Income taxes: Current : Federal/foreign State Deferred Total income taxes $26.8 11.6 38.4 (13.7) $24.7 $24.9 $ 51.7 $ 50.0 $21.2 $ 71.2 $ 6.4 $18.5 $ 24.9 — 24.9 5.2 11.6 63.3 (8.5) 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 $30.1 $54.8 $ 48.0 $26.7 $ 74.7 $25.6 $20.4 $ 46.0 The analysis of the variance of income taxes as reported from Following are the gross components of deferred tax assets and income taxes computed at the U.S. statutory rate for consolidated liabilities as of December 31, 2000 and 1999: operations is as follows: Income taxes at U.S. statutory rate of 35% 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 millions of dollars DECEMBER 31, 2000 1999 1998 Deferred tax assets – current: millions of dollars 2000 1999 $52.0 $72.5 $49.2 Deferred tax assets – noncurrent: Accrued costs related to divested operations $ 1.7 $ 2.8 Postretirement benefits $126.7 $113.2 (0.3) 7.5 (10.3) (5.5) 11.4 $54.8 (5.4) 4.9 (8.4) (4.1) 15.2 $74.7 6.7 2.9 (8.5) (1.9) (2.4) $46.0 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 29.5 2.5 (2.5) 38.8 196.5 78.7 25.2 43.2 147.1 $ 49.4 1.5 45.8 11.2 (11.2) 40.3 200.8 72.8 23.8 85.4 182.0 $ 18.8 No deferred income taxes have been provided on undistributed earn- ings 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. B O R G W A R N E R 2 0 0 0 37 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 Dividends and other payments received from affiliates accounted for under the equity method totaled $25.5 million in 2000, $5.5 million in 1999 and $3.9 million in 1998. Accumulated amortization of goodwill amounted to $187.6 million in 2000 and $148.7 million in 1999. The Company has a 50% interest in NSK-Warner, a joint venture based in Japan that manufactures automatic transmission compo- nents. The Company’s share of the earnings or losses reported by NSK-Warner is accounted for using the equity method of accounting. NSK-Warner has a fiscal year-end of March 31. The Company’s equity in the earnings of NSK-Warner consists of the 12 months ended November 30 so as to reflect earnings on as current a basis as is reasonably feasible. Following are summarized financial data for NSK-Warner, translated using the ending or periodic rates as of and for the fiscal years ended March 31, 2000, 1999 and 1998: Balance sheets: Current assets Noncurrent assets Current liabilities Noncurrent liabilities Statements of operations: Net sales Gross profit Net income millions of dollars 2000 1999 1998 $196.0 157.8 96.2 8.5 $143.8 137.4 69.9 6.9 $139.0 119.4 68.0 7.0 $303.8 $235.9 $264.1 64.7 27.7 52.6 16.9 64.7 21.5 5 Balance Sheet Information Detailed balance sheet data are as follows: D E C E M B E R 3 1 , 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 businesses held for sale Other Total prepayments and other current assets Investments and advances: NSK-Warner Other Total investments and advances Other noncurrent assets: Deferred pension assets Deferred tooling Other millions of dollars 2000 1999 $136.6 $182.6 37.5 174.1 5.2 38.4 221.0 4.8 $168.9 $216.2 $ 73.1 $ 76.4 42.0 46.5 39.1 48.9 $161.6 $164.4 $ 31.7 25.3 $57.0 $129.0 24.2 $153.2 $140.9 $154.1 1.8 6.2 $142.7 $160.3 $ 66.5 $ 65.1 65.1 21.3 62.3 25.2 Total other noncurrent assets $152.9 $152.6 Accounts payable and accrued expenses: Trade payables Payroll and related Insurance Accrued costs related to divested operations Warranties and claims Restructuring and other non-recurring charges Other $230.1 $222.9 53.9 22.7 5.0 16.1 11.2 69.2 60.4 32.1 11.7 20.0 — 86.6 Total accounts payable and accrued expenses $408.2 $433.7 Other long-term liabilities: Environmental reserves Other Total other long-term liabilities $ 20.7 32.3 $ 17.8 36.6 $ 53.0 $ 54.4 38 B O R G W A R N E R 2 0 0 0 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 6 Notes Payable and Long-Term Debt Following is a summary of notes payable and long-term debt. The weighted average interest rate on all borrowings for 2000 and 1999 was 6.6% and 6.5%, respectively. millions of dollars 2000 1999 D E C E M B E R 3 1 , Current Long-Term Current Long-Term Bank borrowings $48.7 $ 57.7 $131.1 $142.0 Bank term loans due through 2009 (at an average rate of 4.2% in 2000 and 5.3% in 1999; and 3.3% at December 31, 2000) 7% Senior Notes due 2006, net of unamortized discount 6.5% Senior Notes due 2009, net of unamortized discount 8% Senior Notes due 2019, net of unamortized discount 7.125% Senior Notes due 2029, net of unamortized discount Capital lease liabilities (at an average rate of 7.6% in 2000 and 6.8% in 1999) 4.7 23.1 2.2 6.1 — — — — 142.8 188.4 139.9 187.3 — — — — 149.7 198.3 149.9 197.2 As of December 31, 2000 and 1999, the estimated fair values of the Company’s senior unsecured notes totaled $516.6 million and $651.6 million, respectively. The estimated fair values were $141.8 million lower in 2000, and $43.5 million lower in 1999, 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 developed by the use of estimates obtained from brokers and other appropriate valuation techniques based on information available as of year-end. The fair- value estimates do not necessarily reflect the values the Company could realize in the current markets. 7 Restructuring and Other Non-Recurring Charges Restructuring and other non-recurring charges totaling $62.9 million were incurred in the second half of 2000 in response to deteriorating market conditions. The charges included the rationalization and inte- gration of certain businesses and actions taken to bring costs in line 1.0 1.2 0.7 3.1 with vehicle production slowdowns in major customer product lines. Total notes payable and long-term debt $54.4 $740.4 $134.0 $846.3 Of the $62.9 million pretax charges, $47.3 million represents non- cash charges. Approximately $4.4 million was spent in 2000 and the Annual principal payments, which reflect $4.5 million of unamortized remaining $11.2 million is expected to be spent in 2001. The Company discounts, required as of December 31, 2000 are as follows (in millions expects to fund the total cash outlay with cash flow from operations. of dollars): 2001 2002 2003 2004 2005 after 2005 $ 54.4 4.5 3.2 3.1 60.7 673.4 The Company has a revolving credit facility which provides for bor- rowings up to $350 million through July, 2005. At December 31, 2000, The actions taken are expected to generate approximately $19 million in annualized savings, primarily from lower salaries and benefit costs and reduced depreciation charges, beginning in 2001. These savings are expected to be more than offset by lower revenue from the deterioration in the automotive and heavy-duty truck markets. Components of the restructuring and other non-recurring charges are detailed in the following table and discussed further below. Total Charges Amount December 31, Incurred 2000 Balance at the facility was unused; at December 31, 1999, $66.0 million of bor- millions of dollars rowings under the facility were outstanding. 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. Bank term loans of $27.8 million outstanding at December 31, 2000 are subject to annual reductions of $4.7 million in 2001, $3.3 million in 2002, $3.2 million in 2003, $3.1 million in 2004, and $13.5 million in 2005 and thereafter. Severance and other benefit costs $ 8.9 $ (4.3) $ 4.6 Asset write-downs Loss on anticipated sale of business Other exit costs and non-recurring charges Total 11.6 35.2 7.2 $62.9 (11.6) (35.2) (0.6) $(51.7) — — 6.6 $11.2 B O R G W A R N E R 2 0 0 0 39 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 Severance and other benefit costs relate to the reduction of approxi- mately 240 employees from the workforce. The reductions affect each of the Company’s operating segments, apart from TorqTransfer Systems, across each of the Company’s geographical areas, and across each major functional area, including production and selling and administrative positions. As of December 31, 2000, approximately $4.3 million had been paid for severance and other benefits for 82 terminated employees. The remaining reductions and cash payments should be complete by the end of 2001. Asset write-downs primarily consist of the write-off of impaired assets that will no longer be used in production as a result of the industry downturn. Such assets have been taken out of production and are being disposed. Loss on anticipated sale of business is related to the Fuel Systems business, which is currently being reported as an investment in businesses held for sale on the Consolidated Balance Sheet. Fuel Systems produces metal tanks for the heavy-duty truck market in North America and does not fit the Company’s strategic focus on powertrain technology. In April 2000, the Company announced its intention to sell this non-core business, which was acquired as part of the vehicle products business of Kuhlman Corporation in March 1999. With the deterioration of the North American heavy-duty truck market in the second half of 2000, the value of this business has significantly decreased, creating the $35.2 million loss. DECEMBER 31, Change in benefit obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Amendments Net actuarial (gain) loss Acquisitions/divestitures Currency translation adjustment (11.5) Curtailments Settlements Special termination benefits — (2.1) 0.4 millions of dollars Pension Benefits Postretirement Benefits 2000 1999 2000 1999 $349.7 $345.8 $ 300.1 $ 296.8 6.8 23.4 0.2 2.2 8.8 — 6.2 22.6 0.2 — (30.2) 57.8 (8.8) (0.3) (17.3) — 3.8 23.4 — — 4.8 21.1 — (0.5) 39.2 (26.6) — — — (0.5) — 29.4 — — (0.5) — Benefits paid (27.6) (26.3) (24.4) (24.4) Benefit obligation at end of year $350.3 $349.7 $ 341.6 $ 300.1 Change in plan assets: Fair value of plan assets at beginning of year $447.0 $378.7 Actual return on plan assets (16.1) Acquisitions/divestitures Employer and other contributions Plan participants’ contributions Currency translation adjustment Settlements Benefits paid Fair value of plan assets at — (7.5) 0.2 (8.0) (2.9) (27.6) 53.0 57.8 5.5 0.2 (3.8) (18.1) (26.3) Other exit costs and non-recurring charges are primarily non-employee end of year $385.1 $447.0 related exit costs incurred to close certain non-production facilities Reconciliation of funded status: the Company no longer needs. Funded status $ 34.8 $ 97.3 $(341.6) $(300.1) 8 Retirement Benefit Plans Unrecognized net actuarial (gain) loss Unrecognized transition asset Unrecognized prior service cost (7.4) (0.4) 7.4 (71.4) 35.5 (3.2) (0.8) 6.7 (0.7) (0.7) The Company has a number of defined benefit pension plans and Net amount recognized $ 34.4 $ 31.8 $(306.8) $(304.0) other postretirement benefit plans covering eligible salaried and hourly employees. The other postretirement benefit plans, which provide Amounts recognized in the consolidated balance sheets: medical and life insurance benefits, are unfunded plans. The following provides a reconciliation of the plans’ benefit obligations, plan assets, Prepaid benefit cost $ 66.5 $ 65.1 $ — $ — Accrued benefit liability (32.3) (33.5) (306.8) (304.0) Accumulated other funded status and recognition in the Consolidated Balance Sheets. comprehensive income 0.2 0.2 — — Net amount recognized $ 34.4 $ 31.8 $(306.8) $(304.0) 40 B O R G W A R N E R 2 0 0 0 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 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 Pension Benefits 1999 2000 1998 $ 6.8 $ 6.2 $ 5.4 23.4 (36.8) (0.1) 1.5 (2.7) 1.8 — 22.6 (34.7) (0.2) 1.2 — 0.8 21.7 (28.6) (0.2) 1.5 — — (0.3) (0.8) Other Postretirement Benefits 1999 2000 1998 $ 3.8 23.4 $ 4.8 21.1 $ 4.6 18.7 (0.1) — — Net periodic benefit cost (income) $ (6.1) $ (4.4) $ (1.0) $27.1 $25.9 $23.3 The Company’s weighted-average assumptions used as of December 31, in determining the pension costs and pension liabilities shown above were as follows: 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 2000 Pension Benefits 1999 1998 percent 8.0-8.25 4.5 9.5 5.5-6.0 2.5-4.0 6.0 8.0 4.5 9.5 5.5-6.0 2.5-4.5 6.0 6.75 4.5 9.5 5.0-6.0 2.5-4.5 6.0 Other Postretirement Benefits 1999 2000 1998 7.5 8.0 6.75 The funded status of pension plans included above with accumulated The weighted-average rate of increase in the per capita cost of benefit obligations in excess of plan assets at December 31 is as follows: covered health care benefits is projected to be 8.0% in 2001 grading DECEMBER 31, Accumulated benefit obligation Plan assets Deficiency millions of dollars 2000 1999 $120.6 90.7 $ 29.9 $30.6 — $30.6 down 1% per year until the ultimate rate of 4.5% is reached in 2005. A one-percentage point change in the assumed health care cost trend would have the following effects: D E C E M B E R 3 1 , millions of dollars One Percentage Point Increase Decrease Effect on postretirement benefit obligation $37.4 Effect on total service and interest cost components $ 3.5 $(31.7) $ (3.0) B O R G W A R N E R 2 0 0 0 41 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 9 Stock Incentive Plans Stock option plans Under the Company’s 1993 Stock Incentive Plan, the Company may grant options to purchase shares of the outstanding options on the 1993 Stock Incentive Plan and 37,050 fully vested options outstanding that were granted under a predecessor plan. Company’s common stock at the fair market value on the date of The Company accounts for stock options in accordance with Accounting grant. In 2000, the Company increased the number of shares Principles Board Opinion No. 25. Accordingly, no compensation cost available for grant by 1,200,000 to 2,700,000 shares. The options has been recognized for fixed stock options because the exercise vest over periods up to three years and have a term of ten years price of the stock options exceeded or equaled the market value of from date of grant. As of December 31, 2000, there are 1,211,371 the Company’s common stock at the date of grant. A summary of the two plans’ shares under option at December 31, 2000, 1999 and 1998 follows: 2000 1999 1998 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 Outstanding at end of year Options exercisable at year-end Options available for future grants 861 506 (54) (65) 1,248 431 1,269 $43.37 36.11 19.59 47.77 $41.22 $38.12 654 266 (28) (31) 861 328 $38.85 53.25 22.35 52.03 $43.37 $28.32 471 242 (44) (15) 654 294 $30.72 51.76 17.44 53.42 $38.85 $22.83 The following table summarizes information about stock options outstanding at December 31, 2000: Range of exercise prices $16.56 – 18.83 $22.50 – 44.19 $50.91 – 53.44 $53.88 – 57.31 $16.56 – 57.31 Number outstanding (thousands) 37 690 223 298 1,248 Options Outstanding Weighted- average remaining contractual life 1.1 7.8 7.4 8.0 7.6 Weighted- average exercise price $16.98 33.47 51.87 54.24 $41.22 Options Exercisable Number exercisable (thousands) Weighted- average exercise price 37 193 109 92 431 $16.98 26.39 51.86 55.05 $38.12 42 B O R G W A R N E R 2 0 0 0 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 Pro forma information regarding net income and earnings per share Executive stock performance plan The Company has an executive is required by Statement of Financial Accounting Standards No. 123, stock performance plan which provides payouts at the end of suc- and has been determined as if the Company had accounted for its cessive three-year periods based on the Company’s performance in employee stock options under the fair value method of that Statement. terms of total stockholder return relative to a peer group of automotive The fair value for these options was estimated at the date of grant companies. Payouts earned are payable 40% in cash and 60% in using a Black-Scholes options pricing model with the following the Company’s common stock. For the three-year measurement weighted average assumptions: periods ended December 31, 2000, 1999 and 1998, the amounts DECEMBER 31, Risk-free interest rate Dividend yield Volatility factor 2000 6.50% 1.52% 1999 5.43% 1.49% 1998 5.57% 1.16% 32.54% 31.88% 31.37% earned under the plan and accrued over the three-year periods were $3.4 million, $2.0 million and $4.3 million, respectively. Under this plan, 21,818 shares, 21,892 shares and 35,564 shares were issued in 2000, 1999 and 1998, respectively. Estimated shares Weighted-average expected life 6.5 years 6.5 years 6.5 years issuable under the plan are included in the computation of diluted For purposes of pro forma disclosures, the estimated fair value of earnings per share as earned. the options is amortized to expense over the options’ vesting period. Earnings per share In calculating earnings per share, earnings are The Company’s pro forma net earnings and earnings per share, the same for the basic and diluted calculations. Shares increased for adjusted to include pro forma expense related to stock options, are diluted earnings per share by 96,000, 130,000 and 197,000 for 2000, as follows: DECEMBER 31, millions of dollars except per share and option amounts 2000 1999 1998 Net earnings – as reported $94.0 $132.3 $94.7 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 92.5 3.56 3.54 3.50 3.48 130.7 5.10 5.07 5.04 5.01 93.1 4.03 4.00 3.96 3.93 granted during the year 13.63 19.45 18.52 1999 and 1998, respectively, due to the effects of stock options and shares issuable under the executive stock performance plan. 10 Other Comprehensive Income The tax effects of the components of other comprehensive income in the Consolidated Statements of Shareholders’ Equity are as follows: 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 , 2000 1999 1998 Foreign currency translation adjustment $(44.8) $18.6 $17.6 Income taxes 16.6 Net foreign currency translation adjustment (28.2) Minimum pension liability adjustment Income taxes Net minimum pension liability adjustment (0.2) 0.1 (0.1) (6.7) 11.9 (0.2) 0.1 (0.1) (5.8) 11.8 2.5 (0.8) 1.7 Other comprehensive income (loss) $(28.3) $11.8 $13.5 B O R G W A R N E R 2 0 0 0 43 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 The components of accumulated other comprehensive income (net of In connection with the sale of Kuhlman Electric Corporation, the tax) in the Consolidated Balance Sheets are as follows: Company agreed to indemnify the buyer and Kuhlman Electric for D E C E M B E R 3 1 , Foreign currency translation adjustment Minimum pension liability adjustment millions of dollars 2000 1999 $(15.8) $12.4 (0.2) (0.1) certain environmental liabilities relating to the past operations of Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystals Springs, Mississippi plant while undertaking an Accumulated other comprehensive income $(16.0) $12.3 expansion of the plant. 11 Contingent Liabilities 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 42 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Based on information available to the Company, which in most cases, The Company has been working with the Mississippi Department of Environmental Quality and Kuhlman Electric to investigate the extent of the contamination. To date, the investigation has revealed the presence of PCBs in portions of the soil at the plant and neighboring areas. The Company has filed a lawsuit against Kuhlman Electric seeking a declaration of the scope of BorgWarner’s contractual indemnity. As the investigation is in its early stages, and the court has not yet ruled on the lawsuit, the Company cannot now estimate the potential liability associated with this matter. 12 Acquisitions and Divestitures Acquisitions Kuhlman Corporation includes: an estimate of allocation of liability among PRPs; the On March 1, 1999, the Company acquired all the outstanding shares probability that other PRPs, many of whom are large, solvent public of common stock of Kuhlman Corporation, a manufacturer of vehicle companies, will fully pay the cost apportioned to them; currently avail- and electrical products, for a purchase price of $693.0 million. The able information from PRPs and/or federal or state environmental Company funded the transaction by issuing 3,287,127 shares of the agencies concerning the scope of contamination and estimated Company’s common stock valued at $149.8 million and by borrowing remediation costs; remediation alternatives; estimated legal fees; and $543.2 million in cash. The Company also assumed additional other factors, the Company has established a reserve for indicated indebtedness for the settlement of certain long-term incentive pro- environmental liabilities with a balance at December 31, 2000 of grams and severance programs, which amounted to approximately approximately $20.7 million. The Company expects this amount to $14 million, net of tax benefits, and refinanced Kuhlman’s other be expended over the next three to five years. existing indebtedness assumed of $131.6 million. BorgWarner believes that none of these matters, individually or in the The vehicle products were accounted for as a purchase and the aggregate, will have a material adverse effect on its financial position Company began consolidating their results since the date of inception. or future operating results, generally either because estimates of the These businesses have been integrated into the Air/Fluid Systems, maximum potential liability at a site are not large or because liability Cooling Systems and Morse TEC segments. will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. 44 B O R G W A R N E R 2 0 0 0 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 The electrical products businesses acquired from Kuhlman consisted The following unaudited pro forma information has been prepared of Kuhlman Electric and Coleman Cable. These businesses manufac- assuming that both the Kuhlman merger and the Eaton Corporation’s tured transformers for the utility industry and wire and cable for utilities Fluid Power Division acquisition had occurred at the beginning of and other industries. These products did not fit the Company’s strategic 1998, and includes adjustments for estimated amounts of goodwill direction and, at the time of the Kuhlman Acquisition, the Company amortization, increased interest expense on borrowings incurred to announced that it intended to sell the businesses by the end of the finance the transactions, elimination of expenses related to Kuhlman’s year. These businesses were accounted for as businesses held for corporate headquarters which has been closed, exclusion of revenues, sale during 1999, and as such, no sales or income between the date costs and expenses for Kuhlman’s electrical products businesses, of acquisition and their dates of sale was included in the consolidated including an allocation of goodwill amortization and interest expense, results of the Company. In 1999, Kuhlman Electric was sold to Carlyle Group, L.L.C. for $120.1 million, including debt securities with a face value of $15.0 million. The $137.3 million sale of Coleman Cable to a group of equity investors included debt securities with a face value of $15.3 million. See Note 1 for the carrying value of debt securities related to the sales. 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. Eaton Corporation’s Fluid Power Division and the tax effects of all preceding adjustments. Sales from divested operations of $41.3 million in 1999 and $121.1 million in 1998 are included in the pro forma sales amounts. 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 13 Operating Segments and Related Information The Company’s business comprises five operating segments: Air/Fluid Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and On October 1, 1999, the Company acquired Eaton Corporation’s Transmission Systems. These reportable segments are strategic busi- Fluid Power Division, one of the world’s leading manufacturers of ness units which are managed separately because each represents powertrain cooling solutions for the global automotive industry for a specific grouping of automotive components and systems. The $321.7 million in cash. The Company accounted for the acquisition Company evaluates performance based on earnings before interest as a purchase and began consolidating it in October 1999. 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. B O R G W A R N E R 2 0 0 0 45 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 Operating Segments 2000 Air/Fluid Systems Cooling Systemsb Morse TEC TorqTransfer Systems Transmission Systems Divested operations and businesses held for salea Intersegment eliminations Total Corporate, including equity in affiliates Restructuring and other non-recurring charges Consolidated 1999 Air/Fluid Systems Cooling Systemsb Morse TEC TorqTransfer Systems Transmission Systems Divested operations and businesses held for salea Intersegment eliminations Total Corporate, including equity in affiliates Consolidated 1998 Air/Fluid Systems Morse TEC TorqTransfer Systems Transmission Systems Divested operations and businesses held for salea Sales Inter- segment Customers millions of dollars Earnings Before Interest and Taxes Net Year End Assets Depreciation/ Amortization Long-Lived Assets Expenditures d $ 419.0 $ 8.8 $ 427.8 $ 35.7 $ 403.2 $ 20.7 $ 27.0 280.8 860.0 524.9 428.5 132.7 — 2,645.9 — — 0.5 25.8 1.8 9.0 0.2 (46.1) — — — 281.3 885.8 526.7 437.5 132.9 (46.1) 2,645.9 — — 32.1 127.4 37.2 46.0 3.2 — 281.6 (7.3) (62.9) 536.8 1,017.7 250.3 353.1 73.6 — 2,634.7 131.2c — 27.9 50.3 18.0 22.6 2.9 — 142.4 3.1 — 16.7 82.8 19.2 32.6 4.6 — 182.9 13.9 — $2,645.9 $ — $2,645.9 $211.4 $2,765.9 $145.5 $196.8 $ 406.3 $ 7.6 $ 413.9 $ 36.5 $ 407.9 $ 19.4 $ 14.4 140.2 771.4 560.9 405.2 174.6 — 2,458.6 — 2.6 25.5 2.4 8.2 3.4 (49.7) — — 142.8 796.9 563.3 413.4 178.0 (49.7) 2,458.6 — 17.9 109.7 41.2 54.1 6.9 — 266.3 (10.1) 560.8 1,007.4 261.3 356.0 123.4 — 2,716.8 253.9c $2,458.6 $ — $2,458.6 $256.2 $2,970.7 11.4 43.7 18.5 22.7 6.1 — 121.8 1.6 $123.4 7.7 88.4 31.0 21.1 6.2 — 168.8 — $168.8 $ 343.9 511.4 516.4 346.4 118.7 $ 7.5 24.8 2.4 8.6 2.4 $ 351.4 $ 25.1 $ 380.0 $ 17.2 $ 21.0 536.2 518.8 355.0 121.1 (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 60.3 13.4 22.7 15.9 — 133.3 3.7 $137.0 Intersegment eliminations — (45.7) Total Corporate, including equity in affiliates 1,836.8 — — — Consolidated $1,836.8 $ — $1,836.8 $167.6 $1,846.1 $ 91.6 (a) Kysor-Westran was sold in 2000. The forged powdered 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. 46 B O R G W A R N E R 2 0 0 0 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 The following table reconciles segments’ earnings before interest and millions of dollars income taxes to consolidated earnings before income taxes. millions of dollars Net Sales Long-Lived Assets 2000 1999 1998 2000 1999 1998 FOR THE YEARS ENDED DECEMBER 31, 2000 1999 1998 United States $1,960.2 $1,848.4 $1,410.0 $591.9 $574.1 $494.9 Earnings before interest and income taxes $211.4 $256.2 $167.6 Interest expense and finance charges (62.6) (49.2) (26.9) Earnings before income taxes $148.8 $207.0 $140.7 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 invest- ment in NSK-Warner (Note 5) amounting to $140.9 million at December 31, 2000 is excluded from the definition of long-lived assets, as are goodwill and certain other noncurrent assets. Europe: Germany 350.0 325.6 264.2 132.3 128.9 Other Europe 183.2 165.6 93.6 60.6 67.1 91.7 55.5 Total Europe 533.2 491.2 357.8 192.9 196.0 147.2 Other Foreign 152.5 119.0 69.0 88.6 89.2 56.3 Total $2,645.9 $2,458.6 $1,836.8 $873.4 $859.3 $698.4 Sales to major customers Consolidated sales included sales to Ford Motor Company of approximately 30%, 31% and 36%; to DaimlerChrysler of approximately 19%, 19% and 19%; and to General Motors Corporation of approximately 13%, 13% and 16% for the years ended December 31, 2000, 1999 and 1998, respectively. No other single customer accounted for more than 10% of consolidated sales in any year between 1998 and 2000. 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 2000 and 1999 interim results of operations. Certain 2000 and 1999 quarterly amounts have been reclassified to conform to the annual presentation. Q U A R T E R E N D E D, March 31 June 30 Sept. 30 Dec. 31 Year 2000 March 31 June 30 Sept. 30 Dec. 31 Year 1999 millions of dollars except per share amounts 2000 1999 Net sales Cost of sales Depreciation Selling, general and administrative expenses Minority interest Goodwill amortization Restructuring and other non-recurring charges 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 Net earnings per share – diluted $730.2 $700.9 $618.5 $596.3 $2,645.9 $551.3 $640.8 $589.7 $676.8 $2,458.6 550.3 26.2 63.5 0.7 11.0 531.3 25.9 57.8 0.4 10.7 473.0 25.2 57.5 0.8 10.8 448.5 24.9 2,003.1 102.2 65.3 0.8 10.8 244.1 2.7 43.3 424.4 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 — — 32.6 30.3 62.9 — — — — — (3.5) (4.7) (4.2) (11.4) (23.8) (2.5) (4.6) (3.9) (3.1) (14.1) 82.0 79.5 22.8 27.1 211.4 60.4 69.3 53.3 73.2 256.2 15.9 66.1 25.1 $ 41.0 $ 1.54 $ 1.53 15.9 63.6 23.5 $ 40.1 $ 1.52 $ 1.51 15.9 6.9 1.7 14.9 12.2 4.5 $ 5.2 $ 0.20 $ 7.7 $ 0.30 $ 0.20a $ 0.30a $ $ $ 62.6 148.8 54.8 94.0 3.56 3.54a 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 49.2 207.0 74.7 $ 36.5 $ 132.3 $ 1.36 $ 1.36 $ $ 5.10 5.07 (a) Diluted earnings per share excluding the restructuring and other non-recurring charges for the quarters ended September 30, 2000 and December 31, 2000 and for the year ended December 31, 2000 were $0.95, $1.02 and $5.01, respectively. B O R G W A R N E R 2 0 0 0 47 S E L E C T E D F I N A N C I A L D ATA BorgWarner Inc. and Consolidated Subsidiaries 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 , 2000 1999 1998 1997 1996 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 Restructuring and other non-recurring charges 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 $2,645.9 2,003.1 $2,458.6 1,888.5 $1,836.8 1,450.7 $1,767.0 1,375.4 $1,540.1 1,205.5 102.2 244.1 2.7 43.3 62.9b — (23.8) 62.6 54.8 $ 94.0 $ 3.56b 26,391 $ 3.54b 26,487 $ 0.60 $2,765.9 794.8 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 71.3 122.7 2.6 13.5 — 61.5 a (13.1) 21.4 12.9 41.8 1.77a $ $ 23,564 $ 1.75a 23,830 $ 0.60 $1,736.3 $1,623.6 338.1 317.3 (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, resulted in an after-tax charge of $35.0 million, or $1.49 per diluted share. (b) In 2000, the Company recorded $62.9 million in restructuring and other non-recurring charges. Net of tax, this totalled $38.7 million or $1.47 per diluted share. Earnings before restructuring and other non-recurring charges were $132.7 million, or $5.01 per diluted share. 48 B O R G W A R N E R 2 0 0 0 C O R P O R AT E I N F O R M AT I O N Company Information BorgWarner Inc. 200 South Michigan Avenue Chicago, IL 60604 312-322-8500 www.bwauto.com Stock Listing Shares are listed and traded on the New York Stock Exchange. Ticker symbol: BWA. H i g h L o w $ 40 $ 33 37 441⁄8 39 7⁄16 319⁄16 351⁄8 301⁄16 Fourth Quarter 2000 Third Quarter 2000 Second Quarter 2000 First Quarter 2000 Fourth Quarter 1999 Third Quarter 1999 Second Quarter 1999 First Quarter 1999 Securities Information Mellon Investor Services is the transfer agent, registrar and dividend dispersing agent for BorgWarner common stock. Communications concerning stock transfer, change of address, lost stock certificates or proxy statements for the annual meeting should be directed to: Mellon Investor Services for BorgWarner 85 Challenger Road Ridgefield Park, NJ 07660 800-851-4229 www.mellon-investor.com Investor Inquiries Financial investors and securities analysts requiring financial reports, interviews or other information should contact Mary E. Brevard, Director of Investor Relations and Communications, at BorgWarner headquarters, 312-322-8683. H i g h L o w Form 10-K Report $ 43 3⁄8 $ 36 3⁄4 A copy of our annual report on Form 10-K, filed with the Securities 57 7⁄8 60 56 40 7⁄8 46 3⁄8 42 7⁄16 and Exchange Commission, is available to stockholders without charge at www.bwauto.com, by writing to the Investor Relations and Communications Department at our 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 9, 2001, payable BorgWarner common stock and reinvest dividends. We pay the February 15, 2001, to stockholders of record on February 1, 2001. brokerage commissions on purchases. To receive a prospectus and The current practice is subject to review and change at the discretion enrollment package, contact Mellon at 800-842-7629. Questions about of the Board of Directors. the plan can be directed to Mellon at 800-851-4229. Information is also Stockholders As of December 31, 2000, there were 3,104 holders of record and an Internet Homepage available at www.bwauto.com. estimated 9,000 beneficial holders. For current news, stock quotes and other information on BorgWarner, visit our Internet Homepage: www.bwauto.com. Annual Meeting of Stockholders The 2001 annual meeting of stockholders will be held on Wednesday, April 25, 2001, beginning at 10:00 a.m. on the 19th floor of our headquarters at 200 South Michigan Avenue in Chicago. , BorgWarner, TORQUE-ON-DEMAND, MORSE, GEMINI, HY-VO and ITM are trademarks of BorgWarner Inc. 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 

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