BorgWarner

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W H A T ’ S   N E X T

 
 
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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

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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

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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  

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J O H N   F . F I E D L E R

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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

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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

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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

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15%
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45%
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28%
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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.

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John F. Fiedler

Chairman  and  Chief  Executive  Officer

Moving  our  people  toward  a  culture  of product  leadership includes

 
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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.

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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

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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

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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.

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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) 

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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

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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

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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

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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

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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

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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

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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.

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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

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c o n t r o lled coolin

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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.

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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.

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COOLING  SYSTEMS

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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.

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and diesel engines in Europe and Japan.%3

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boosted by the explosion of direct injected gas

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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. 

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TURBOCHARGERS

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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.

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ELECTRONIC  AWD

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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.

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electronic  actuation

TRANSMISSION  OPTIONS

continuously  variable

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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

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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)

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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)

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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

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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  

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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.

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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