THE FACE OF LEADERSHIP
2002 Annual Repor t
FRONT COVER, FROM LEFT TO RIGHT:
M E L I S S A KO E N I G
Manager
Advanced Transmission Control Systems
Transmission Systems
Driveline Group
RO N A L D C A R R
Senior Technician
Emissions/Thermal Systems
Engine Group
M A R I A N A B R AVO
Marketing Analyst
Morse TEC
Engine Group
H A R T M U T C L A U S
Manager, Application Engineering
Turbo Systems
Engine Group
R AV I N A R AYA N A S WA M Y
Product Engineer
TorqTransfer Systems
Driveline Group
B I A N C A C A M P O S
Administrative Assistant
Emissions/Thermal Systems
Engine Group
T E R RY L I N D Q U I S T
Director
Powertrain Technical Center
Corporate
BACK COVER, FROM LEFT TO RIGHT:
R AC Q U EL HOWA RD
Sr. Administrative Assistant
Corporate
RO B E R T L A M
Director, Friction Products
Transmission Systems
Driveline Group
J E S S I C A C R E S P O
Program Engineer
Emissions/Thermal Systems
Engine Group
S U E S T RO O P E
Lead Product Engineer
TorqTransfer Systems
Driveline Group
T O N Y M E S S I N A
Vice President and General Manager
Emissions Systems
Emissions/Thermal Systems
Engine Group
S T E V E M C K I N L E Y
Director
Business Development
Passenger Car NA
Turbo Systems
Engine Group
20
F I N A N C I A L H I G H L I G H T S millions of dollars, except employee and per share data
Net sales
Net earnings before cumulative effect of accounting change
Cumulative effect of change in accounting principle, net of tax
Net earnings (loss)
Net earnings (loss) per share — diluted
Net earnings before cumulative effect of accounting change and
excluding restructuring and other non-recurring charges
Net earnings per diluted share before cumulative effect of accounting change
and excluding restructuring and other non-recurring charges
Average number of shares outstanding — diluted (millions)
EBITDA
Capital spending
Research & Development
Debt
Stockholders’ equity
Number of employees
2002 2001 % Change
16.1%
125.8%
$2,731.1
149.9
(269.0)
(119.1)
(4.44)
$2,351.6
66.4
—
66.4
2.51
149.9
85.4
75.5%
5.58
26.9
408.9
138.4
109.1
646.7
981.4
14,000
3.23
26.5
327.6
140.9
104.5
737.0
1,104.2
13,000
72.8%
24.8%
(1.8)%
4.4%
(12.3)%
(11.1)%
L E A D E R S H I P It’s people with purpose. There’s no formula for it. You either have it or you don’t.
It is an intangible confidence that inspires and energizes. You can’t fake it or force it. It gets you
where you want to go. It’s what makes customers loyal, employees motivated and goals achievable.
1
O D U C
L E A D E R S H
ENGINE
Turbocharger Technology
TODAY’S TURBOCHARGER TECHNOLOGIES LOWER FUEL CON-
COMPRESS COLD INTAKE AIR, TURBOCHARGERS ACHIEVE
SUMPTION TO REDUCE THE COST OF OPERATING A VEHICLE
A CLEANER, LEANER BURN. BY PROVIDING HIGHER POWER
AND IMPROVE EMISSIONS TO HELP MEET REGULATIONS.
DENSITY, SMALL TURBOCHARGED ENGINES CAN REPLACE
USING THE ENERGY IN A VEHICLE’S HOT EXHAUST GASES TO
LARGER, LESS FUEL-EFFICIENT ONES.
2
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Chain Timing Systems
DURABILITY, PERFORMANCE AND NOISE REDUCTION —
ENGINE DESIGNS — OVERHEAD CAM ENGINES IN NORTH
THESE ARE THE REASONS AUTOMAKERS AROUND THE
AMERICA, DIRECT INJECTION IN EUROPE, NEW GENERATION
WORLD ARE SWITCHING TO OUR CHAIN SYSTEMS. THE
HIGHER TORQUE JAPANESE ENGINES AND THE ADVENT OF
MOVE TO CHAIN TIMING SYSTEMS IS DRIVEN BY NEW
VARIABLE CAM TIMING.
3
P R O D U C T
L E A D E R S H I P
DRIVELINE
DualTronic Transmission System
WE HAVE COMBINED OUR CLUTCHING AND CONTROLS
FUEL EFFICIENCY AND CONVENIENCE, OUR MARKET-LEADING
EXPERTISE IN A NEW SYSTEM THAT IS REDEFINING THE
TECHNOLOGY IS ATTRACTING THE ATTENTION OF AUTOMAKERS
AUTOMATIC TRANSMISSION. DESIGNED FOR THE DRIVER WHO
WORLDWIDE. EUROPE IS LEADING THE WAY IN THE ADOPTION
VALUES A SPORTY DRIVING EXPERIENCE, BUT DEMANDS
OF THIS INNOVATION.
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InterActive Torque Management
OUR SYSTEMS PROVIDE MORE THAN JUST FOUR-WHEEL
FLEXIBILITY THAN PASSIVE, MECHANICAL FOUR-WHEEL DRIVE
DRIVE. BY INTERFACING WITH OTHER VEHICLE FUNCTIONS,
SYSTEMS. OUR PATENTED TECHNOLOGY ELECTRONICALLY
OUR INTELLIGENT SYSTEMS OFFER DRIVERS BETTER HAN-
SENSES WHEEL SLIP AND INSTANTANEOUSLY TRANSFERS
DLING AND FUEL ECONOMY, IMPROVED SECURITY AND MORE
POWER TO MAINTAIN TRACTION.
5
from left to right
Timothy M. Manganello
President and Chief Executive Offi cer
John F. Fiedler
Chairman
George E. Strickler
Executive Vice President and
Chief Financial Offi cer
TO O U R S H A R E H O L D E R S
My last letter to you as chairman of BorgWarner
is a gratifying one to write. We delivered a
record year in 2002 and booked more than $1
billion in anticipated new business for the next
few years. BorgWarner is a solid company —
financially, technically and ethically.
In 2003, we celebrate ten years as BorgWarner
Inc., the company that became a public entity
in 1993. Our roots go back to 1928 when four
auto suppliers joined forces. These businesses,
and those that joined after that time, have
individual histories of innovation that go back
to the 18th and 19th centuries, both in North
America and in Europe. By coming together,
we have forged a powertrain powerhouse
like no other company in the world. But more
than being united by technology, the people
of BorgWarner are also linked by a collective
culture that directs our actions with honesty
and respect.
Growth in a low-growth industry
My first letter to you as chairman and chief
executive officer in 1995 cited “another
year of solid growth…our sales and profits
rose to record levels…despite a decline in
North American automotive production.” Our
record that year was $1.3 billion in sales,
with earnings of $3.15 per share. This year’s
records dwarf those results. In 2002, we
delivered $2.7 billion in sales and $5.58 per
share on an operating basis.
This kind of performance is really the BorgWarner
story — steady and sustainable growth in a
low-growth industry. Yes, we’ve had up years
and down years. But I am as proud of our
managing through the down years without large
layoffs or cuts in research and development
spending, as I am of a great year like this last
one. Our solid performance is the reason I have
always believed that if you are going to own one
automotive stock, it should be BorgWarner.
When I looked back at my first letter, I was
also struck by other highlights from 1995. “Our
total return to shareholders increased…during
the year, outperforming many of our peers.”
The same is true for 2002.
New technology, trends boost sales
I told you “new technology and changing trends
helped boost sales.“ Back then our “revolution-
ary” Torque-on-Demand four-wheel drive system
and new chain systems contributed to growth,
and the popularity of sport-utility vehicles and
light trucks was the growth wave we were riding.
In 2002 it was an entirely new category of vehi-
cles, the crossover, and concerns about vehicle
stability that drove our four-wheel drive busi-
ness. Our engine products benefited from the
stunning growth in fuel-efficient engines in
Europe. With societal and governmental con-
cerns for air quality, fuel efficiency, performance
and vehicle stability, we believe our growth is
assured as long as we continue to innovate.
S
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2002
New business growth exceeded our expectations with the popularity of the new Honda Pilot, Hyundai Santa Fe and
Kia Sorento with our electronic four-wheel drive systems.
We could barely keep up with the demand for turbochargers for new fuel-efficient cars in Europe, especially those with 1.4 litre engines.
Production began in the fall for our fuel-efficient transmission technology, the most significant change in transmissions in fifty years.
To keep the growth going, we organized the company into Engine and Driveline groups at year-end.
Some things never change. I was amused to
see that in 1995 we said, “We expect flat to
slightly declining automotive production” the
following year, but that we expected continued
growth. The same is true as we look at 2003.
While we expect production in North America
to decline, and that in Asia and Europe to be
flat, we continue to grow in the fastest growing
parts of the industry — fuel-efficient engines
and transmissions in Europe and four-wheel
drive systems that link electronically with
vehicle stability systems in North America.
of investors. We were an unknown entity in
1993. We had never been tested through a
downturn and were heavily reliant on North
American customers. Today, we have a global
customer base and proven financial strength.
My thanks to our customers. We don’t often
talk about loyalty in our industry, but I appreci-
ate the loyalty of our long-time customers and
our acceptance by new customers. Together,
we have made cars and trucks more affordable,
to everyone’s benefit.
At BorgWarner, we continue to challenge inno-
vative people to deliver profitable growth. We
set growth goals when we went public in 1993.
These goals, reiterated in my first letter, were
very straightforward — provide growth; expand
globally; and improve operations, especially
research and development. Five years ago we
formalized these goals under the mission of
product leadership. We have even more chal-
lenging growth targets today.
The face of BorgWarner
I cannot end my last letter without expressing
my gratitude to all those who have made my
time at BorgWarner the best years of my life.
First, I appreciate the support and confidence
As for the people of BorgWarner, there are
hardly words to express my feelings. There
is something so special about BorgWarner
that when we interview potential employees,
or consider acquisitions, we know at some
visceral level whether or not they belong
in our organization. The highest compliment
we can pay is to say someone is “a
BorgWarner person.” To be one of those
people was a thrill.
I leave the company in the hands of capable
people. Our succession process has allowed
us to cultivate and promote new leaders from
within the company. In February of 2002, we
named Tim Manganello to the position of
president and chief operating officer. He was
elected chief executive officer in February of
2003. Tim and his executive management
team are BorgWarner people. In addition,
some 14,000 people worldwide are the face
of BorgWarner product leadership to their
customers, fellow employees and our share-
holders every day.
One of my proudest moments was the opening
of the BorgWarner Powertrain Technical
Center in metropolitan Detroit last fall. In
dedicating that building to the men and
women of BorgWarner, I was reminded that we
stand on the shoulders of those who came
before us — people like George Borg and
Henry Warner, whose names we share. I hope
that in the years to come, the contributions of
those of us who crafted this first successful
decade of BorgWarner Inc. will be regarded as
equally influential.
Sincerely,
John F. Fiedler
Chairman
6
7
Engine Group
Roger J. Wood
President and
General Manager
Morse TEC
F. Lee Wilson
President and
General Manager
Turbo Systems
Alfred Weber
President and
General Manager
Emissions/Thermal Systems
Driveline Group
Robert D. Welding
Group President; President
and General Manager
Transmission Systems
John J. McGill
President and
General Manager
TorqTransfer Systems
The Engine Group will develop strategies and products to manage engines for fuel efficiency, reduced emissions
and enhanced performance. BorgWarner’s expertise in engine timing, boosting, air and noise management,
cooling and controls are the foundation for this collaboration.
The Driveline Group harnesses our 100-year legacy as an industry innovator in transmission and four-wheel
drive technology. The group will leverage this understanding of powertrain torque management to develop
interactive control systems and strategies for our traditional mechanical products.
2 0 0 2 H I G H L I G H T S
B U S I N E S S U N I T S
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
2 0 0 2 H I G H L I G H T S
B U S I N E S S U N I T S
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
Sales rose 16%, driven by strong sales of engine timing chains,
increased usage of turbochargers and continued strength in sales of
Morse TEC
Global leader in the design and manu-
Americas
Asheville, North Carolina
Asia
Changwon, South Korea
A sales increase of 20% came from stronger than anticipated growth
in new business and applications. We benefited from higher four-
Transmission Systems
Supplies “shift quality” components
Americas
Auburn Hills, Michigan
Asia
Beijing, China (JV)
sport-utility vehicles. The demand for small, fuel-efficient diesel engines
facture of automotive chain systems
Auburn Hills, Michigan
Chennai, India
wheel drive demand from Hyundai and Kia, and the InterActive Torque
and systems including one-way clutch-
with our products made Europe our fastest growing market. Also
and components for engine timing,
Cadillac, Michigan
Chennai, India (JV)
Management (ITM) system application in the Acura MDX and the
es, transmission bands, friction plates
contributing to sales were further penetration into emerging markets
automatic transmission and four-wheel
Campinas, Brazil
Hitachinaka City, Japan (JV)
new Honda Pilot and the launch of new applications for some GM
and clutch pack assemblies to virtually
and growth in the commercial vehicle aftermarket. Operating income
drive applications.
benefited from greater productivity on increased production volume.
Cortland, New York
Dixon, Illinois
Kakkalur, India (JV)
Nabari City, Japan
G R O W T H O P P O R T U N I T I E S
(cid:127) Stricter emission regulations for Europe, North America and Asia
(cid:127) Continued growth of diesel engines in European passenger cars
(cid:127) Emission regulations related to commercial diesels
(cid:127) Engine downsizing for improved fuel consumption and emissions
in gasoline engines
(cid:127) Electronic controls
(cid:127) Continued popularity of light trucks and SUVs
(cid:127) Engine timing systems moving from belts to chains
(cid:127) Development of variable cam timing systems
(cid:127) Growth of overhead cam engines
(cid:127) Systems integration; alternative technologies
8
Turbo Systems
Leading designer and manufacturer of
Fletcher, North Carolina
Ningbo, China (JV)
Guadalajara, Mexico
Tainan Shien, Taiwan
turbochargers and boosting systems
Ithaca, New York
for the passenger car and commercial
Marshall, Michigan
vehicle markets.
Sallisaw, Oklahoma
Europe
Arcore, Italy
Emissions/Thermal Systems*
Air/Fluid Systems: Full-service supplier
of air and fluid control systems and
components for enhanced engine per-
formance, reduced emissions, improved
fuel economy and increased vehicle
safety.
Cooling Systems: Global leader in the
design and supply of cooling system
solutions for the sport-utility, light truck,
commercial medium and heavy truck
and off-highway vehicle markets.
* Units combined in December 2002
Simcoe, Ontario, Canada
Bradford, England
Warren, Michigan
Kirchheimbolanden, Germany
Water Valley, Mississippi
Markdorf, Germany
Oroszlany, Hungary
S A L E S millions of dollars
98
99
00
01
02
$852.3
$1,316.9
$1,568.3
$1,426.6
$1,648.2
vehicles, including the Hummer H2 and GMC Yukon. Market conditions
every automatic transmission maker in
contributed to sales growth of transmission systems in all regions.
the world.
Operating income improvement was due to a combination of increased
TorqTransfer Systems
Leading independent global designer
and producer of torque distribution and
management systems — 4WD transfer
cases, InterActive Torque Management
(ITM) devices and synchronizer systems.
These systems enhance driver security,
drivability, shift quality and handling.
volume and cost controls.
G R O W T H O P P O R T U N I T I E S
(cid:127) Introduction of new automated transmission systems for Europe
and North America
(cid:127) Introduction of new five- and six-speed transmissions
(cid:127) Shift from components to modules
(cid:127) European and Korean market growth of automatic transmissions
(cid:127) Subsystems for continuously variable transmissions (CVT)
(cid:127) Substitution of modular wet starting clutches for torque converters
(cid:127) Growing popularity of four-wheel drive and all-wheel drive passenger
cars and crossover vehicles
(cid:127) Continued application of electronically controlled torque
management devices in four-wheel drive and all-wheel drive vehicles
(cid:127) Expanded customer base in rear-wheel drive based four-wheel
drive segment
(cid:127) Growing focus on improved shiftability within manual transmission
Bellwood, Illinois
Frankfort, Illinois
Livonia, Michigan
Lombard, Illinois
Longview, Texas
Muncie, Indiana
Seneca, South Carolina
Eumsung, South Korea (JV)
Eumsung, South Korea
Fukuroi City, Japan (JV)
Pune, India (JV)
Sirsi, India (JV)
Europe
Heidelberg, Germany
Ketsch, Germany
Margam, Wales
Tulle, France
S A L E S millions of dollars
98
99
00
01
02
$898.2
$1,003.1
$980.0
$937.2
$1,122.1
9
T H E F A C E O F
L E A D E R S H I P
As a newly public company in 1993, BorgWarner set out to redefi ne itself; to create
a company that wasn’t limited by geographic boundaries or conventional thinking.
Innovation has fueled our transformation into a dynamic global leader in our industry.
10
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M A R K E T
L E A D E R S H I P
BY PENETRATING NEW MARKETS WITH NEW PRODUCTS,
WE ARE CREATING GLOBAL DIVERSITY IN OUR
CUSTOMER BASE WHILE DELIVERING PROFITABLE GROWTH.
A C O N V E R S AT I O N W I T H J O H N F I E D L E R
Q&A
Today’s BorgWarner went public
in 1993. You joined the company
in 1994. What are the biggest
changes you have seen?
We have gone from surviving to building a solid foundation for growth and sustainability. In 1993, our
sales were less than $1 billion. We depended on customers in North America and our growth story was
tied to four-wheel drive. We had to prove to investors and ourselves that we could make it as a supplier
in one of the toughest industries in the world. One of BorgWarner’s great strengths is recognizing and
riding the waves of growth in an industry with little growth. Today, we have built a powertrain business that
is balanced between engine and driveline products, with growth prospects in our full range of products
and with customers around the world.
BorgWarner’s business outside
of the US has grown from about
33% of worldwide sales in 1993
to an expected 43% in 2005.
What are the challenges of
operating a global company?
We got a head start on understanding the implications of being a global business because of our pres-
ence in Japan dating back to the 1960s and operations in Germany prior to that. We operate locally;
our businesses are run by men and women who know their markets and customers. When we began
to aggressively expand our customer base in Asia and Europe, however, it was a challenge to create a
common global perspective and to gain credibility, especially on the engine side of the business. It was
our technology that opened doors and shaped our people’s understanding of opportunities. And while we
talk about a global automotive market, there are important regional differences to understand, especially
regarding emissions concerns.
You will retire in 2003.
What do you consider your
major accomplishment as
Chief Executive Officer?
Without a doubt, the creation of our growth plan through the Product Leadership proposition. I wanted
to leave BorgWarner with a road map for sustainable growth. I believe that we have done that. In 1997–
1998, our top managers from around the world worked to create that map based on our heritage as an
innovator, and our agreement that our expertise in engine and driveline technology was our growth driver.
This process is how we defined our mission to be a powertrain product leader on whom our customers
rely to improve performance, fuel economy, air quality and vehicle stability. It also meant that we needed
to build our engine expertise, broaden our customer base, take risks to commercialize new ideas and
start thinking as a total BorgWarner entity. Our plan is dynamic, one we review and modify. It continues
to serve us well today.
12
13
A C O N V E R S AT I O N W I T H J O H N F I E D L E R c o n t i n u e d
Q&A
What do you mean by Product
Leadership?
The first things that come to mind with product leadership are products and technology — but that’s too
narrow. It’s a simple answer, but misses the point that it takes an entire company and everyone in it to
be a product leader. We all have a role to play. Product leadership must become a state of mind, the way
we do business. We have identified five key competencies of a product leader and of the people who
work for a product leader — speed, innovation, talent, market agility and continuous learning. These are
qualities that people can put into action each day and for which they are rewarded, whether they work
GROWTH TRENDS >
With a heritage of innovative products for hot trends, we have
established BorgWarner as a leader in engine and driveline technology.
Whether it’s for trucks, sport-utility vehicles or today’s fuel-efficient
European cars, we design systems for the fastest growing segments of
the vehicle market, providing growth in a low-growth industry.
in product development, manufacturing or administration.
I n c r e a s e d C u s t o m e r D i v e r s i t y
What are the most significant
industry changes that you
have observed?
Two changes stand out. First is the global nature of business. Second is the affordability of cars and
trucks. Over the past ten years, we’ve gone from talking about a global auto industry to becoming one.
We have real-time information, reduced inventories and are more responsive. I hope this means the end
of the boom and bust auto cycles of the past. We have also succeeded in making cars and trucks a
better value. There is a lot of focus on the negative aspects of the price pressure within our industry.
But the benefit, especially to consumers, has been more affordable vehicles. The monthly cost of a car
or truck today is half of what it was in the 1980s.
BorgWarner is considered one of
the only “green” auto suppliers.
Tell us what this means and how
it shapes the company.
For us, it is easy being green. We have always targeted our technology to the faster growing parts of
our market and benefited from being ahead of the curve. Right now, and for many years to come, fuel-
efficient, low-emission engines and transmissions, especially in Europe, will drive growth. I’m not sure
that America has the political will to address these issues, but the same technology that provides for
efficiency and cleaner air, can also boost performance, convenience and the fun of driving for drivers
around the world.
2 0 0 5 e
2 0 0 2
55%
47%
< GLOBAL DIVERSITY
Over the past ten years, we have dramatically expanded our customer
base and geographic presence. By 2005, we expect 55% of our sales to
come from non “Big Three” automakers, up from 47% today. Sales outside
of North America are expected to grow to 43% from 37% in 2002.
ENGINE BOOST >
Our engine business has grown four-fold since 1997, thanks
to both internal growth and acquisitions aimed at the fastest
growing part of the market — small, boosted engines for European
passenger cars. Our turbochargers and timing systems enhance
the performance of both gasoline and diesel engines.
14
15
T H E F A C E O F
L E A D E R S H I P
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Being a leader in technology means knowing what your customers want today — and
tomorrow — even before they do. When we say, “we sell the smarts, not just the
parts,” we mean that no one can match our powertrain expertise.
16
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17
T E C H N O L O G Y
L E A D E R S H I P
DEMANDS FOR FUEL ECONOMY, AIR QUALITY AND ENHANCED
PERFORMANCE WILL DRIVE OUR GROWTH
— NEXT YEAR AND FOR MANY YEARS TO COME.
A C O N V E R S AT I O N W I T H T I M M A N G A N E L L O
Q&A
What are your priorities in your
new leadership position within
BorgWarner?
I will focus on enhancing our growth as a leading powertrain innovator through collaboration, expanded
global presence and an emphasis on controls strategies. Productivity and quality will remain a key focus.
And, of course, continued progress toward our financial goals — increased sales, cash flow and profit
margins and return on invested capital — is a priority.
Why is an emphasis on controls
strategies important?
Control strategy expertise is a major differentiator between BorgWarner and our competitors for most of
our product lines. The control function is the “brainpower” of the powertrain and is the critical element for
powertrains of the future. BorgWarner knows more about powertrains than any other supplier, but we need
to make sure we are leveraging that expertise where it counts. Our business units are at various stages
in terms of their ability to design, develop and implement control strategies. At the forefront of this exper-
tise are our intelligent four-wheel drive systems, like InterActive Torque Management, our new DualTronic
transmission technology that has just been introduced in Europe and the development of variable cam
timing. Our continued success in the area of controls will require truly expert integration of multiple tech-
nologies and know-how. We already have the knowledge and the expertise. Now we need to take it to the
next level that gives us proprietary products and enables us to maximize our capital and profits.
Tell us about innovation. How
do you take such an intangible
concept and incorporate it into
day-to-day business?
BorgWarner has long been a community of innovators. The people who built the foundation of this
company — George Borg, Henry Warner, the Ingersolls, Louis Schwitzer, George and Earl Holley, to name
just a few — were the inventors of their day. Our culture has always been one of a lean, priority-driven
organization that values getting the job done. Innovation has always been part of that. We also have
a clearly defined Innovation Process that is driven by collaborative market sensing and team-based
concept development and execution. It is tangible to our people because it energizes us and provides
recognition and rewards. It’s tangible to our customers through market-leading technology. Ultimately, it
is tangible to our shareholders through our continued strong financial performance.
18
19
A C O N V E R S AT I O N W I T H T I M M A N G A N E L L O c o n t i n u e d
Q&A
You recently organized the
company into two groups, Engine
and Driveline. How will the new
structure facilitate growth?
What will BorgWarner look
like in five years? Ten years?
What opportunities and threats
do you foresee?
The new organization is designed to bring out the best in BorgWarner through collaboration, while main-
taining the entrepreneurial spirit of our individual business units. That spirit has been a big part of what
has made BorgWarner a success thus far, and we don’t intend to change what is already working very
well. But there is certainly the potential for greater synergy. No supplier has the combination of product
and engine expertise that we have. We will tap that expertise in executing our strategy in the Engine
Group. The Driveline Group harnesses our 100-year legacy as an industry innovator in transmission and
four-wheel drive technology. Our ability to continue to meet our growth goals will depend on how well we
leverage our deep knowledge and broad expertise. It will take bold new concepts and imaginative solu-
tions to improve fuel economy, air quality and vehicle handling. The new structure is designed to facilitate
this kind of cooperative innovation.
Well, change is the only constant in this industry, especially recently. Anyone who claims to be able to
accurately predict the future is somewhat suspect. But one thing that’s certain is that BorgWarner’s busi-
ness will still be powertrain-focused. Our business is a long-term one, so many of the opportunities and
threats will be much the same as well. Today’s demands for greater fuel economy, better air quality and
enhanced vehicle stability will still be there tomorrow, and so will the opportunities that these needs
present. Our competition is working just as hard as we are, so the threats remain as well. But the things
that differentiate BorgWarner today, and what will keep us at the forefront of the industry, are our continu-
ing ability to supply innovative technology; our diversity — both in terms of our customer base and our
geographic presence; and our financial strength.
Describe your leadership style.
Approachable. Tenacious. Strategic. Focused on problem solving. Open to ideas. A believer in teamwork.
What challenges do you face
in 2003?
This industry has never lacked challenges. But I think my greatest challenge is to make sure that
BorgWarner’s overall performance — in the eyes of our customers, shareholders, employees and the
communities in which we do business — results in an outcome that is better than any of our individual
units could achieve on its own. The whole should be greater than the sum of the parts. When we achieve
that, all the other challenges will have been addressed as well.
CONTROL STRATEGY EXPERTISE >
Our understanding of powertrain functions sets us apart from our
competitors. This expertise is showcased in our intelligent four-wheel
drive systems, like the one in the new Hyundai Santa Fe, and new
transmission technology being introduced by Volkswagen.
HYBRID TECHNOLOGY >
Our powertrain know-how provides solutions for the development of
alternative powertrains like the one used in the Honda Civic gasoline/electric
hybrid. Our newest technologies can help make these hybrids marketable
and also improve the fuel efficiency of traditional engines and drivelines.
< NEW HOME FOR INNOVATION
The BorgWarner Powertrain Technical Center, which opened in Michigan
in 2002, will enhance our approach to innovative teamwork and profitable
growth. The building features an officeless, open work environment
designed to foster collaboration and knowledge sharing.
20
21
T H E F A C E O F
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Investor confi dence. It comes from knowing that things have been done right. Despite
economic uncertainty, our ability to not just survive, but thrive, is proof of our fi nancial
depth. These qualities enable our continued success and ability to build value.
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22
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23
F I N A N C I A L
L E A D E R S H I P
A C O N V E R S AT I O N W I T H G E O R G E S T R I C K L E R
Q&A
WE ARE KNOWN AS A COMPANY THAT IS VERY
STRAIGHTFORWARD
IN ITS DEALINGS. WE TELL PEOPLE WHAT WE
EXPECT TO DO, AND THEN WE DO IT.
BorgWarner’s sales have tripled
and profits more than quadrupled
over the past ten years. Can you
sustain that kind of growth?
Yes. Our goals are to deliver sales growth in the 8% to 11% range and earnings in the 12% to 16% range
long term. Our pipeline of new business, broad customer base and geographic growth are the foundation
for these expectations. Because our technology provides solutions to improve fuel economy and air quality,
which are worldwide concerns, we anticipate continued growth for many years to come. Because of the
timing of how new programs come on stream, our growth in any single year may be higher or lower.
BorgWarner has done well
in difficult years like 2001.
What is your secret?
We are a lean, decentralized organization that is very conscious of costs, installed capacity and the need
to generate strong cash flow. To protect our margins, we have increased our efforts to balance centralized
efficiency with the entrepreneurial benefits of decentralization. Each year in our planning process, we
create a number of scenarios. Each of our businesses has the flexibility to do what is necessary within that
business to react to conditions. For example, we have moved to more flexible manufacturing processes
and schedules. During 2001, we lowered our breakeven point, which has benefited us.
Yours is a capital-intensive
business, but you are beginning
to reduce your capital spending
levels. How do you expect to
continue to grow while keeping
capital expenditures at lower
levels?
We had some catch-up spending to do when we got our feet on the ground after going public in 1993.
We needed to invest to expand our engine business, spur manufacturing productivity and strengthen
our engineering capabilities. In the past few years, for example, we have invested nearly $75 million in
research and engineering centers to better serve our customers and keep the pipeline of new products
and applications flowing. Past capital spending has averaged 6% to 6.5% of sales excluding tooling. We
are now beginning to harvest the benefits of that spending and expect the pace of capital investment to
slow to 4.5% to 5% of sales. We are becoming more focused on our core competencies.
The company has set a goal to
improve its after-tax return on
invested capital from an historic
range of 7% to 9% to 14% by
2004. How do you expect to
accomplish this?
We are improving our return on invested capital in a number of ways. First, we can generate nearly 75% to
80% of our growth from our existing businesses. Second, we are more efficient. We have made the invest-
ments during the last five years to create a global manufacturing base to handle our diverse customer
base, built four new technical facilities to keep us on the leading edge in technology and developed
cellular manufacturing capabilities that provide us flexibility and improved productivity. From these
investments, we expect to reduce our capital spending from about eighty cents to generate a dollar of
sales to about fifty cents. Productivity improvements are outstripping cost increases and we are outsourcing
low value-added manufacturing processes. Third, our operating margins are expected to improve as we
bring on higher-margin new business and improve margins in our lower-margin businesses. Finally, our
compensation system, driven by economic value, rewards our people for the improvements they make.
24
25
A C O N V E R S AT I O N W I T H G E O R G E S T R I C K L E R c o n t i n u e d
Q&A
BorgWarner invests a larger
percent of sales in research
and development than most
auto suppliers. How do you
determine the level and benefits
of this spending?
BorgWarner not only has worked
on top-line growth and improving
margins, but you have improved
your financial measures and
balance sheet.
The life-blood of BorgWarner is the flow of new ideas that result in new business. We have a pipeline of
$1.2 billion in new business over the next three years. This expected business has more than doubled
since 1997, and it is the true measure of the value of our research and development process. Each of
our businesses is responsible for balancing the cost of development against profitable growth. This inno-
vation process and higher levels of R&D spending have permitted us to develop new products that have
either maintained or enhanced our operating margins. To encourage larger projects that might require
more risk and resources, the company provides seed money to launch ideas that are backed by solid
business cases. Once these projects are commercialized, our units pay back the initial investment to fund
new ideas. Both DualTronic, our new, fuel-efficient transmission technology being launched in Europe this
year with VW, and a version of our electronic all-wheel drive, introduced on the Hyundai Santa Fe in 2002,
were created through this process.
When we saw the downturn coming in late 2000, we established a target to reduce our debt to debt-plus-
equity from its high of 55% to below 40%. In the last three years, we have reduced debt by $394 million
and reduced our debt to debt-plus-equity. Our goals are to maintain our ratio between 30% and 40%. The
direct benefit of the cash flow we generated is the reduction of our annual interest expense to $38 million
in 2002, down by $25 million or 40% since the peak of $63 million in 2000. With current interest rates,
we have repositioned our capital structure to be 60% fixed and 40% variable rates, with sufficient credit
lines to support our global growth plan. One significant advantage of our global growth and international
expansion is our improved global tax position. We have reduced our global tax rate by 4% in the last two
years and can continue to improve.
Tell us about your compensation
system and how it benefits
shareholders and employees.
Throughout our company, employee pay is based in part on the improvements each one of us makes and
the value created for shareholders. We determine value creation based on the ability to generate incre-
mental profitability above the related investment cost. We are in the fifth year of using this approach. It
has already changed the way we make decisions and invest for the future. As a company, this change is
manifested in our improvements in sales and earnings and our increasing return on invested capital. Our
return has improved from 8.7% in 2001 to 11.0% in 2002. We are well on our way to hit 14% in 2004.
HARVESTING INVESTMENTS >
Significant investments in research and development and new
engineering centers are paying off for us in new business. Having
made these investments, we benefit going forward because we can
lower our rate of spending while continuing to deliver growth.
MANUFACTURING FLEXIBILITY >
Automation and cellular manufacturing provide us flexibility and improved
efficiency. Productivity improvements are outstripping cost increases
and we are outsourcing low value-added manufacturing processes. Our
compensation system rewards people for the improvements they make.
< GLOBAL NETWORK
We are improving our return on invested capital by leveraging our worldwide
network of manufacturing and technical facilities to support global
customers. For example, four-wheel drive systems for the new Kia Sorento
are produced using available European capacity, and then exported.
26
27
D I R E C T O R S
Phyllis O. Bonanno (2)
President, International
Trade Solutions, 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, Retired
BellSouth Corporation
John F. Fiedler (1)
Chairman
BorgWarner Inc.
Committees
of the Board
1 Executive
Committee
2 Finance and
Audit Committee
3 Compensation
Committee
4 Board Affairs
Committee
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
Timothy M. Manganello
President and Chief
Executive Officer
BorgWarner Inc.
Alexis P. Michas (1,2)
Managing Partner
and Director
Stonington Partners, Inc.
John Rau (2,3)
President and
Chief Executive Officer
Miami Corporation
E X E C U T I V E O F F I C E R S
John F. Fiedler
Chairman
Timothy M. Manganello
President and
Chief Executive Officer
George E. Strickler
Executive Vice President
and Chief Financial Officer
Robert D. Welding
Executive Vice President
Group President,
Driveline Group
President and
General Manager,
Transmission Systems
John J. McGill
Vice President
President and
General Manager,
TorqTransfer Systems
Alfred Weber
Vice President
President and
General Manager,
Emissions/Thermal 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
Kimberly Dickens
Vice President,
Human Resources
28
Anthony D. Hensel
Vice President,
Business Development
and Acquisitions
Laurene H. Horiszny
Vice President, General
Counsel and Secretary
John A. Kalina
Vice President and
Chief Information Officer
Jeffrey L. Obermayer
Vice President
and Treasurer
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a lead-
ing global supplier of highly engineered systems and components primarily
for powertrain applications. Our products help improve vehicle performance,
fuel efficiency, air quality and vehicle stability. They are manufactured and sold
worldwide, primarily to original equipment manufacturers (OEM) of passenger
cars, sport-utility vehicles, trucks and commercial transportation products. We
operate manufacturing facilities serving customers in the Americas, Europe and
Asia, and are an original equipment supplier to every major OEM in the world.
RESULTS OF OPERATIONS 2002 vs. 2001 vs. 2000
BorgWarner reported net earnings for 2002 of $149.9 million, or $5.58 per
diluted share, before charges for the cumulative effect of an accounting change
related to goodwill. After this charge, the Company had a net loss of $119.1
million, or $(4.44) per diluted share. The Company’s net earnings in 2001 were
$66.4 million, or $2.51 per diluted share. Net earnings in 2000 were $94.0
million or $3.54 per diluted share.
The following table reconciles reported earnings to earnings before non-recur-
ring charges and effects of change in accounting principle.
Year Ended December 31,
millions of dollars
2002
2001
2000
Reported net earnings/(loss) $(119.1) $ 66.4 $ 94.0
Change in accounting principle, net of tax 269.0 — —
Goodwill amortization, net of tax — 26.5 27.3
Non-recurring charges, net of tax — 19.0 38.7
Adjusted net earnings $ 149.9 $111.9 $160.0
The earnings comparison for 2002 to 2001, other than the items reflected in
the table above, was positively affected by increased sales, operating leverage,
lower interest expense and a lower tax rate.
Overall, our sales increased 16.1% from 2001 and declined 11.1% between
2001 and 2000. The main causes of the sales increase in 2002 were
increased production in the auto industry, increased demand for turbochargers,
especially in Europe, and new business. As a comparison, worldwide vehicle
production increased by 2.3% in 2002 and decreased by 3.8% in 2001. North
American production increased by 5.7% in 2002 and decreased by 9.7% in
2001, Japanese production increased by 3.8% in 2002 and decreased by
2.3% in 2001 and Western European production decreased 1.5% in 2002 and
increased 1.4% in 2001.
Our 2001 results reflected weak production demand, the weak Euro and Yen,
production slowdowns and shutdowns, and further deterioration in the heavy
truck market.
Our outlook for the industry as we head into 2003 is one of caution and
uncertainty. The North American automotive market was strong in 2002, but
increased incentives drove consumer sales. It is uncertain whether these incen-
tive levels will continue in 2003 and what impact this will have. We anticipate
global production levels of light vehicles to be steady or slightly lower than the
2002 levels. There is also uncertainty in the medium- and heavy- truck markets
as these markets continue to reflect depressed business levels. We expect
the medium and heavy truck markets to continue to be down in the first half of
2003, and are cautiously optimistic of a recovery in the second half of 2003.
Assuming these conditions and no major negative events, we anticipate our
sales and earnings to grow due to new business from increased penetration,
new customers and new applications.
RESULTS BY OPERATING SEGMENT
We announced a reorganization into two reportable operating segments in
December of 2002 to be effective January 1, 2003. The two segments are
Driveline and Engine. The Driveline segment is primarily the combination of the
TorqTransfer Systems and Transmissions Systems segments. The Engine seg-
ment is primarily the combination of the Morse TEC, Air/Fluid Systems, and
Cooling Systems segments. For purposes of this discussion, we will show the
operating segment structure in place for 2002, where our products fell into five
reportable operating segments: Morse TEC, Air/Fluid Systems, Cooling Systems,
TorqTransfer Systems, and Transmission Systems. Set forth below are our
results under both organizational structures for each of the last three years.
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, “Goodwill and Other Intangible Assets,” effective January 1, 2002.
Accordingly, the segment EBITA table below and all Management’s Discussion
and Analysis segment comparisons of the three-year period excludes goodwill
amortization. See Note Thirteen to the Consolidated Financial Statements for
further details on the Company’s implementation of SFAS No. 142.
29
BorgWarner
Management’s Discussion and Analysis of Financial Condition and Results of Operations
BorgWar ner Inc. and C onsolidated Subsidiaries
Net Sales
Year Ended December 31,
millions of dollars
2002
2001
2000
Morse TEC $1,046.9 $ 869.4 $ 885.8
Air/Fluid Systems 388.4 357.8 427.8
Cooling Systems 235.8 220.5 281.3
TorqTransfer Systems 630.1 500.1 526.7
Transmission Systems 495.2 428.8 437.5
Divested operations and businesses held for sale — 18.0 132.9
Inter-segment eliminations (65.3) (43.0) (46.1)
Net sales $2,731.1 $2,351.6 $2,645.9
Earnings Before Interest, Taxes and Goodwill Amortization (EBITA)
millions of dollars
Year Ended December 31, 2002 2001 2000
Morse TEC $159.2 $132.1 $139.9
Air/Fluid Systems 23.4 19.4 42.6
Cooling Systems 25.1 25.2 49.6
TorqTransfer Systems 39.2 24.2 37.1
Transmission Systems 64.9 54.2 51.7
Divested operations and businesses held for sale — (0.2) 4.0
Earnings before interest, taxes and
goodwill amortization $311.8 $254.9 $324.9
Morse TEC sales increased by 20.4% and EBITA increased by 20.5%. Contributing
to the sales increase were strong sales of engine timing chains, increased usage
of turbochargers, and continued strength in sales of sport-utility vehicles (SUVs),
many of which utilize the Company’s chain products for their four wheel drive
systems. The EBITA increase was due to greater productivity from increased
production volume. The EBITA increase would have been greater except for the
impact of the Honeywell International Inc. (Honeywell) agreement discussed
more fully in Note Eleven to the Consolidated Financial Statements.
Morse TEC sales decreased 1.9% and EBITA declined by 5.6% from 2000 to
2001. The North American automotive downturn affected this business, but was
partially offset by expanded applications, particularly for engine timing systems.
The EBITA decline was due to the previously mentioned lower volumes and a
change in mix between chain products and lower margin turbocharger products.
Morse TEC revenue is expected to grow in the coming years as turbocharger
capacity is increased to meet demand on direct-injected diesel passenger cars
and as new generations of variable geometry turbochargers for commercial
diesel applications are introduced. The introduction of additional products,
including timing systems for Chrysler overhead cam engines, increased North
American transplant business, Ford’s global four-cylinder engine program, and
drive chain for the new Toyota hybrid engine and other Japanese and Korean
applications, are expected in the coming years. This business expects to
benefit from the continued conversion of engine timing systems from belts to
chains in both Europe and Japan. Such growth may be tempered by the current
economic climate, where new programs at OEMs could be delayed.
Air/Fluid Systems experienced an 8.6% increase in sales and a 20.6% increase in
EBITA compared to 2001. The increase in sales was primarily due to continued
ramp up and higher volumes of transmission control modules for DaimlerChrysler,
a major customer. The increase in EBITA was due to the increased volume and
higher productivity from facility rationalizations in late 2000.
Sales decreased by 16.4% and EBITA decreased 54.5%, from 2001 to 2000.
The decline in sales was primarily due to pricing and volume weakness at
DaimlerChrysler. The decline in EBITA was due to volume decreases, product
mix issues and production issues related to facility rationalizations.
Despite a tempered outlook for 2003, we believe that this segment continues
to provide opportunities for growth. We expect the segment to benefit from the
trend in automatic transmissions to convert individual solenoids to modules
and “smart” modules with integrated transmission control units. The segment
should also benefit from the trend toward non-conventional automated trans-
missions. Other opportunities in the coming years include products designed to
improve fuel efficiency and reduce emissions as well as fluid pumps for engine
hydraulics supporting variable cam timing and engine lubrication.
Cooling Systems’ sales increased 6.9% and EBITA decreased 0.4%. Penetration
into Asian and European markets contributed to the increased revenues. EBITA
decreased primarily due to raw material price increases and costs associated
with a facility rationalization that began in late 2001 and should be completed
by early 2003.
Sales decreased by 21.6% and EBITA decreased by 49.2% from 2000 to 2001.
Revenues and EBITA were heavily impacted by the deteriorating North American
market conditions. Approximately 80% of the business’ sales are to customers
in North America, mainly in the sport-utility, light-, medium- and heavy-truck mar-
kets. This performance was in line with our expectations due to weakness in the
North American heavy truck market, along with an application lost in 2001.
We expect better results in 2003 when new business is launched and the truck
markets recover. Increasing fuel economy and environmental legislation in
North America and Europe are expected to drive demand for electronically con-
trolled cooling systems to accommodate increasingly higher operating engine
temperatures. These requirements are also driving developing countries to
embrace mechanically controlled drives. Because of our full product range and
manufacturing locations in every major vehicle producing region, we expect to
be well positioned to benefit from adoption of more advanced cooling technolo-
gies in these markets.
TorqTransfer Systems’ sales increased 26.0% and EBITA increased 62.0% from the
prior year. The increase in sales was due to higher volumes for Hyundai and Kia,
and the InterActive Torque Management (ITM)™ system application in the Acura
MDX and the recently released Honda Pilot. Additionally, TorqTransfer Systems
launched new applications for some GM vehicles, including the Hummer H2
and GMC Yukon, in mid-2002. The EBITA increase was due to higher volumes,
and since this segment has a relatively high fixed cost structure, production
volume changes result in larger swings in earnings.
Sales were down 5.1% and EBITA was down 34.8% in 2001 versus 2000. This
segment suffered particularly in the early part of the year from the effects of
erratic scheduling. OEMs cut volumes at short notice in response to the market
downturn and the effects of the Ford Explorer/Firestone tire issue. The EBITA
decline was compounded by the need to support the launch of some new pro-
grams, which involved substantial engineering effort and the installation of new
manufacturing capacity.
For 2003, this segment expects to benefit from a full year of a new contract
to supply transfer cases to General Motors, as well as continued increases in
business with Kia and Hyundai. We expect moderate growth from this segment
in 2003.
Transmission Systems’ sales increased 15.5%, and EBITA increased 19.7% in
2002. Sales growth was strong in all regions for this segment, due to a com-
bination of market conditions and new applications, both in North America and
overseas. The EBITA increase was driven by a combination of increased volume
and cost controls.
Compared to 2000, 2001 sales decreased 2.0%. The sales reduction was
linked to volume decreases experienced by major North American OEMs, driven
by the general North American automotive industry downturn as well as market
share losses to European and Asian automakers in North America. EBITA in
2001 was 4.8% above 2000 levels. Because of significant cost cutting efforts
taken in late 2000 and early 2001, this segment was able to increase EBITA,
even while sales decreased. This segment was quick to respond to the soften-
ing North American marketplace and reduced overhead costs to be more in line
with the then current industry levels.
We expect the Transmission Systems segment to achieve moderate sales growth
in 2003, linked to volume ramp-ups in recently launched applications as well as
continued global market share increases by key customers in Europe and Asia.
New operating segment structure for 2003. Below is the table for sales and EBITA
for the past three years under the new operating structure. Note the EBITA
numbers exclude goodwill amortization.
Net Sales
Year Ended December 31,
millions of dollars
2002
2001
2000
Driveline $1,122.1 $ 937.2 $ 980.0
Engine 1,648.2 1,426.6 1,568.3
Divested operations and businesses held for sale — 18.0 132.9
Inter-segment eliminations (39.2) (30.2) (35.3)
Net sales $2,731.1 $2,351.6 $2,645.9
Earnings Before Interest, Taxes and Goodwill Amortization (EBITA)
millions of dollars
Year Ended December 31, 2002 2001 2000
Driveline $ 99.4 $ 76.8 $ 85.3
Engine 212.4 178.3 235.6
Divested operations and businesses held for sale — (0.2) 4.0
Earnings before interest, taxes and
goodwill amortization $311.8 $254.9 $324.9
Divested operations and businesses held for sale includes the results of Fuel
Systems, which was sold in 2001; and the HVAC business, which was sold
during 2000. These businesses did not fit our strategic goals, and we believe
our resources are better spent on our core technologies in highly engineered
powertrain components and systems. The sale of the Fuel Systems business
did not result in a significant gain or loss. We adjusted our carrying value of this
business in 2000 as part of the restructuring charge discussed on page 32.
The $5.4 million gain on the sale of the HVAC business in 2000 is included in
other income. Divested operations and businesses held for sale contributed
sales of $18.0 million, and $132.9 million and EBITA of $(0.2) million, and
$4.0 million in 2001 and 2000, respectively.
30
BorgWarner
31
BorgWarner
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
Corporate is the difference between calculated total company EBITA and the
total from the segments and represents corporate headquarters expenses
and expenses not directly attributable to the individual segments. This
expense was $40.3 million in 2002, $26.5 million in 2001, and $4.6 million
in 2000, excluding non-recurring charges in 2001 and 2000. This amount
represents headquarters expenses and expenses not assigned to individual
segments. The main reason for the increase in the expense was a decrease
in excess of earnings from pension assets over the costs of the U.S. pen-
sion plans of $5.3 million from 2001 to 2002 and $10.5 million from 2000
to 2001. Additionally, expenses for post retirement benefits for discontinued
operations, which are captured at the corporate level, contributed to the
increase in 2002. Also impacting this number was a $5.4 million gain on
the sale of the HVAC business in 2000. Corporate headquarters expense
was slightly higher at $24.0 million in 2002 compared to $20.5 million in
2001 and $19.2 million in 2000.
Our top ten customers accounted for approximately 78% of consolidated
sales in 2002 and 2001 compared to 77% in 2000. Ford continues to be
our largest customer with 26% of consolidated sales in 2002, compared
to 30% in 2001 and 2000. DaimlerChrysler, our second largest customer,
represented 20% of consolidated net sales in 2002, 21% in 2001 and 19%
in 2000; and General Motors accounted for 12%, 12%, and 13%, in 2002,
2001, and 2000, respectively. No other customer accounted for more than
10% of sales in any of the periods presented.
OT H ER FAC TORS AFFEC TI NG R ESULT S O F O PE RATIONS
The following table details our results of operations as a percentage of sales:
Year Ended December 31, 2002
2001 2000
Net sales 100.0% 100.0% 100.0%
Cost of sales 79.7 80.4 79.0
Gross profit 20.3 19.6 21.0
Selling, general and administrative expenses 11.1 10.6 9.8
— 1.8 1.6
Goodwill amortization
— 1.2 2.4
Restructuring and other non-recurring charges
— (0.1) (0.3)
Other, net
Operating income 9.2% 6.1% 7.5%
Gross profit for 2002 was 20.3%, an increase from 19.6% in 2001 and down
from the 21.0% in 2000. The increase in gross profit in 2002 is mainly due
to higher sales volumes. The decrease in 2001 compared to 2000 is attrib-
utable to lower sales volumes, which made it more difficult to cover the fixed
costs of our manufacturing facilities. Additionally, many of our core busi-
nesses also showed gross margin improvement in both 2001 and 2000. The
decrease in margin from 2000 to 2002 is due mainly to a shift in sales to
lower margin businesses. For example, TorqTransfer Systems had the largest
percentage sales gain in 2002, but has the lowest gross profit percentage
because its products have the highest purchased content. Each group has
experienced gross profit improvement at the operating level in 2002.
The combination of price reductions to customers and cost increases for
material, labor and overhead totaled approximately $75 million in 2002, as
compared to $37 million and $16 million in 2001 and 2000, respectively.
We were able to partially offset these impacts by actively pursuing reduc-
tions from our suppliers, making changes in product design and by using pro-
cess technology to remove cost and/or improve manufacturing capabilities.
Selling, general and administrative expenses (SG&A) as a percentage of sales
increased to 11.1% from 10.6% and 9.8% in 2001 and 2000, respectively.
The increase in SG&A is due to several factors, including an increase in
retiree costs for both pension and health care. Another factor is our contin-
ued commitment to research and development (R&D) in order to capitalize
on growth opportunities. R&D spending was $109.1 million, or 4.0% of
sales, as compared with $104.5 million, or 4.4% of sales, and $112.0 mil-
lion, or 4.2% of sales in 2002, 2001 and 2000, respectively. We continue
to invest in a number of cross-segment R&D programs, as well as a number
of other key programs, all of which are necessary for short- and long-term
growth. We intend to maintain our commitment to R&D investment while
continuing to focus on controlling other SG&A costs.
Restructuring and other non-recurring charges were $28.4 million in 2001 and
$62.9 million in 2000. The 2001 non-recurring charges primarily include
adjustments to the carrying value of certain assets and liabilities related to
businesses acquired and disposed of over the past three years. Of the
$28.4 million of pretax charges in 2001, $5.0 million represents non-cash
charges. Approximately $3.3 million was spent in 2001, $8.4 million was
spent in 2002, and $8.4 million was transferred to environmental reserves
in 2001. The remaining $3.3 million is expected to be spent in 2003. The
2001 non-recurring charges included $8.4 million of environmental reme-
diation costs related to sold businesses and $12.0 million of product qual-
ity costs for issues with products that were sold by acquired businesses
prior to acquisition, all of which have been corrected in the currently pro-
duced products. The Company expects to fund the total cash outlay of these
actions from operations.
Restructuring and other non-recurring charges totaling $62.9 million were
incurred in the second half of 2000 in response to deteriorating market con-
ditions. The charges included the rationalization and integration of certain
businesses and actions taken to bring costs in line with vehicle production
slowdowns in major customer product lines. Of the $62.9 million in pretax
charges, $47.3 million represented non-cash charges. Approximately $4.4
million was spent in 2000 and the remaining $11.2 million was spent in
2001. The actions taken as part of the 2000 restructuring charges are
expected to generate approximately $19 million in annualized savings,
primarily from lower salaries and benefit costs and reduced depreciation
charges. These savings were more than offset by lower revenue from the
deterioration in the automotive and heavy-duty truck markets.
Components of the restructuring and other non-recurring charges are
detailed in the following table and discussed further below.
millions of dollars
Other Exit
Severance Costs and
and Other Asset Loss on Sale Non-Recurring
Benefits Write-downs of Business Charges Total
Provisions $ 8.9 $ 11.6 $ 35.2 $ 7.2 $ 62.9
Incurred (4.3) — — (0.1) (4.4)
Non-cash write-offs — (11.6) (35.2) (0.5) (47.3)
Balance,
December 31, 2000 4.6 — — 6.6 11.2
Provisions — 5.0 — 23.4 28.4
Incurred (4.6) — — (18.3) (22.9)
Non-cash write-offs — (5.0) — — (5.0)
Balance,
December 31, 2001 — — — 11.7 11.7
Provisions — — — — —
Incurred — — — (8.4) (8.4)
Non-cash write-offs — — — — —
Balance,
December 31, 2002 $ — $ — $ — $ 3.3 $ 3.3
Severance and other benefit costs relate to the reduction of approximately
220 employees from the workforce. The reductions affected each of our
operating segments, apart from TorqTransfer Systems, across each of our
geographical areas, and across each major functional area, including produc-
tion and selling and administrative positions. Approximately $8.9 million had
been paid for severance and other benefits for the terminated employees.
Asset write-downs primarily consist of the write-off of impaired assets no
longer used in production as a result of the industry downturn and the
consolidation of certain operations. Such assets have been taken out of
productive use and have been disposed.
Loss on anticipated sale of business represents the Fuel Systems busi-
ness, which was sold to an investor group led by TMB Industries, a private
equity group, in April 2001 for a pretax loss of $35.2 million. Fuel Systems
produced metal tanks for the heavy-duty truck market in North America
and did not fit our strategic focus on powertrain technology. Terms of the
transaction did not have a significant impact on the Company’s results of
operations, financial condition or cash flows.
Other exit costs and non-recurring charges are primarily non-employee relat-
ed exit costs incurred to close certain non-production facilities the Company
has previously sold or no longer needs and non-recurring product quality
related charges. The 2001 non-recurring charges include $8.4 million of
environmental remediation costs related to sold businesses and $12.0
million of product quality costs for issues with products that were sold by
acquired businesses prior to acquisition, all of which have been fixed in the
currently produced products.
Goodwill amortization was zero in 2002, compared to $42.0 million in 2001
and $43.3 million in 2000. As discussed more fully in Note Thirteen to the
Consolidated Financial Statements, the Company adopted the provisions of
SFAS No. 142, “Goodwill and Other Intangible Assets,” which discontinued
the amortization of goodwill effective January 1, 2002.
Other, net decreased to $0.9 million of income in 2002, from $2.1 million in
2001 and $8.1 million in 2000. The 2000 number included a gain on the
sale of the HVAC business of $5.4 million.
32
BorgWarner
33
BorgWarner
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
Equity in affiliate earnings, net of tax increased by $4.6 million from 2001 and
decreased by $0.8 million between 2001 and 2000. This line item is driven
by the results of our 50% owned Japanese joint venture, NSK-Warner. Our
equity in NSK-Warner’s earnings of $20.4 million was $4.7 million higher
than 2001, which was $1.2 million lower than 2000.
Interest expense, net decreased by $10.1 million in 2002 and decreased by
$14.8 million between 2001 and 2000. The decreases in 2002 and 2001
were due to lower interest rates as well as lower debt levels, as the
Company used cash generated in 2002 and 2001 to pay off debt. In 2002,
the Company paid down $90.3 million of balance sheet debt and reduced
the amount of securitized accounts receivable sold by $30.0 million. In
2001, the Company paid down $57.8 million of balance sheet debt and
reduced the amount of securitized accounts receivable sold by $30.0 mil-
lion. The Company took advantage of lower interest rates through the use
of interest rate swap arrangements described more fully in Note Six to the
Consolidated Financial Statements. At the end of 2002, the amount of debt
with fixed interest rates was 61% of total debt, including the impact of the
interest rate swaps.
The provision for income taxes results in an effective tax rate for 2002 of
33.0% compared with rates of 36.1% for 2001 and 36.2% for 2000. Our
effective tax rates have been lower than the standard federal and state
tax rates due to the realization of certain R&D and foreign tax credits;
foreign rates, which differ from those in the U.S.; and offset somewhat by
non-deductible expenses. The decrease in rates is also a result of certain
changes in the Company’s legal structure. In 2003, the Company antici-
pates realizing a further 2% to 4% improvement in its income tax rate.
FI NANC I AL CO ND ITION AND LIQU ID ITY
Our cash and cash equivalents increased $3.7 million at December 31,
2002 compared with December 31, 2001. Net cash provided by operating
activities of $261.4 million was primarily used to fund $138.4 million of
capital expenditures, repay $120.3 million of long-term debt, and distribute
$16.0 million of dividends to our shareholders.
Operating cash flow of $261.4 million is $23.6 million more than in 2001.
The $261.4 million consists of a net loss of $119.1 million, non-cash charges
of $453.5 million and a $73.0 million decrease in net operating assets and
liabilities, net of the effects of divestitures. Non-cash charges are primarily
comprised of $137.4 million in depreciation and amortization and the $269.0
million, net of tax non-cash charge for a change in accounting principle.
Accounts receivable increased $67.4 million, however, $30.0 million of the
increase was due to the reduction in securitized accounts receivable sold.
Net cash used in investing activities totaled $130.0 million, compared
with $165.3 million in the prior year. 2001 investing activities benefited
by $14.4 million in net proceeds from the sales of businesses, mainly
non-strategic portions of our 1999 acquisitions. Capital spending totaling
$138.4 million in 2002 was $2.5 million lower than in 2001. Approximately
60% of the 2002 spending was related to expansion, with the remainder
for cost reduction and other purposes. Heading into 2003, we plan to keep
capital spending under control to be prepared if the industry slows down.
Our goal is to reduce spending as a percentage of sales from historical
levels of up to 6% to a target of 4.5% to 5.5%.
Stockholders’ equity decreased by $122.8 million in 2002. The decrease
was caused by net loss of $119.1 million along with adjustments for
minimum pension liability of $42.3 million, dividends of $16.0 million, and
purchase of treasury stock of $18.1 million, offset by currency translation
adjustments of $40.9 million and stock issuances to retirement plans of
$20.8 million. In relation to the dollar, the currencies in foreign countries
where we conduct business, particularly the Euro, strengthened, especially
at the end of 2002, therefore causing the currency translation component
of other comprehensive income to increase in 2002.
Our total capitalization as of December 31, 2002 of $1,628.1 million is
comprised of short-term debt of $14.4 million, long-term debt of $632.3
million and stockholders’ equity of $981.4 million. Capitalization at
December 31, 2001 was $1,841.2 million. During the year, we reduced our
balance sheet debt to capital ratio to 39.9% from 40.0% in 2001 and 42.2%
in 2000. If the reduction to equity associated with the adoption of SFAS No.
142 had taken place in 2001, the 2001 ratio would have been 46.9%.
The Company has a $350 million revolving credit facility that extends until
July 21, 2005. Additionally, the Company also has $300 million available
under a shelf registration statement on file with the Securities and Exchange
Commission through which a variety of debt and/or equity instruments may
be issued. The Company has access to the commercial paper market
through an accounts receivable securitization facility which is rolled over
annually. As of December 31, 2002, the facility was sized at $90 million and
has been in place with its current funding partner since January 1994. From
a credit quality perspective, the Company has an investment grade credit
rating of BBB+ from Standard & Poor’s and Baa2 from Moody’s.
The Company’s required debt principal amortization and payment obligations
under lease commitments at December 31, 2002, are as follows:
Total 2003 2004 2005
2006 2007+
Indebtedness
Operating Leases
Total
$646.7
36.4
$683.1
$14.4
4.3
$18.7
$ 7.5
4.2
$11.7
$39.0
22.7
$61.7
$149.5
0.9
$150.4
$436.3
4.3
$440.6
We believe that the combination of cash from operations and available
credit facilities will be sufficient to satisfy our cash needs for our current
level of operations and our planned operations for the foreseeable future.
We will continue to balance our needs for internal growth, debt reduction
and share repurchase.
OTHER MATTERS
Environmental/Contingencies
The Company and certain of its current and former direct and indirect cor-
porate predecessors, subsidiaries and divisions have been identified by
the United States Environmental Protection Agency and certain state envi-
ronmental agencies and private parties as potentially responsible parties
(PRPs) at various hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act (Superfund) and
equivalent state laws and, as such, may presently be liable for the cost of
clean-up and other remedial activities at 44 such sites. Responsibility for
clean-up and other remedial activities at a Superfund site is typically shared
among PRPs based on an allocation formula.
Based on information available to the Company, which in most cases,
includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully
pay the cost apportioned to them; currently available information from PRPs
and/or federal or state environmental agencies concerning the scope of
contamination and estimated remediation costs; remediation alternatives;
estimated legal fees; and other factors, the Company has established a
reserve for indicated environmental liabilities with a balance at December 31,
2002 of approximately $20.3 million. The Company expects this amount to
be expended over the next three to five years.
The Company believes that none of these matters, individually or in the
aggregate, will have a material adverse effect on its financial condition
or future operating results, generally either because estimates of the
maximum potential liability at a site are not large or because liability will be
shared with other PRPs, although no assurance can be given with respect
to the ultimate outcome of any such matter.
In connection with the sale of Kuhlman Electric Corporation, the Company
agreed to indemnify the buyer and Kuhlman Electric for certain environmen-
tal liabilities relating to the past operations of Kuhlman Electric. During
2000, Kuhlman Electric notified the Company that it discovered potential
environmental contamination at its Crystal Springs, Mississippi plant while
undertaking an expansion of the plant.
The Company has been working with the Mississippi Department of
Environmental Quality and Kuhlman Electric to investigate the extent of the
contamination. The investigation has revealed the presence of polychlori-
nated biphenyls (PCBs) in portions of the soil at the plant and neighboring
areas. Kuhlman Electric and others, including the Company, have been sued
in several related lawsuits which claim personal and property damage. The
Company has moved to be dismissed from some of these lawsuits.
The Company’s lawsuit against Kuhlman Electric seeking declaration of the
scope of the Company’s contractual indemnity has been amicably resolved
and dismissed. The Company believes that the reserve for environmental
liabilities is sufficient to cover any potential liability associated with this
matter. However, due to the nature of environmental liability matters, there
can be no assurance that the actual amount of environmental liabilities will
not exceed the amount reserved.
Patent infringement actions were filed against the Company’s turbocharger
unit located in Europe in late 2001 and in 2002 by Honeywell International.
The Dusseldorf District Court in Germany entered a preliminary injunction
against the Company on July 9, 2002 limiting the Company’s ability to manu-
facture and sell a certain variable turbine geometry (VTG) turbocharger in
Germany until a patent hearing, then scheduled for December 2002.
In order to continue uninterrupted service to its customer, the Company paid
Honeywell $25 million in July 2002 so that it could continue to make and
deliver disputed car turbochargers through June of 2003. The agreement
with Honeywell partially settles litigation, suspends the July 2002 prelimi-
nary injunction and provides for a license to deliver until June 2003. As part
of the agreement, Honeywell agreed to not seek damages for deliveries
made before June 30, 2003.
34
BorgWarner
35
BorgWarner
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
The Company appealed the granting of the July preliminary injunction, but
Honeywell withdrew the preliminary injunction before the Company’s appeal
could be heard. In January 2003, the Dusseldorf District Court decided that
the Company’s current design of the VTG turbocharger infringes the patent
asserted by Honeywell. The Company continues to believe that its current
production designs do not violate the Honeywell patents and are not cov-
ered by their lawsuit and plans to challenge the District Court’s decision.
The Company has informed its customers of its inability to deliver the cur-
rent design VTG turbocharger after June 30, 2003. The Company continues
to develop a new generation VTG turbocharger to replace the current model
and expects to begin delivery of the new generation VTG turbocharger by
July 1, 2003 if approved by the customers.
The Company is recognizing expense of the $25 million license payment as
it ships the affected products from January 2002 to June 2003. In 2002,
$14.5 million of expense was recognized.
Critical Accounting Policies
The Consolidated Financial Statements are prepared in conformity with
accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the use of estimates,
judgments and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. In preparing these
financial statements, management has made its best estimates and judg-
ments of certain amounts included in the financial statements, giving due
consideration to materiality. The significant accounting principles which
management believes are the most important to aid in fully understanding
our financial results are included below. Management also believes that all
of the accounting policies are important to investors. Therefore, the Notes
to the Consolidated Financial Statements provide a more detailed descrip-
tion of these and other accounting policies of the Company.
Sales of Receivables
The Company securitizes and sells certain receivables through third party
financial institutions without recourse. The amount sold can vary each
month based on the amount of underlying receivables. In December 2002,
the Company reduced the maximum size of the facility from $120 million to
$90 million.
Product Warranty
Provisions for estimated expenses related to product warranty are made at
the time products are sold. These estimates are established using historical
information about the nature, frequency, and average cost of warranty claims.
Management actively studies trends of warranty claims and takes action to
improve vehicle quality and minimize warranty claims. Management believes
that the warranty reserve is appropriate; however, actual claims incurred could
differ from the original estimates, requiring adjustments to the reserve.
Goodwill and Other Intangible Assets
The Company adopted SFAS No. 142, “Goodwill and Other Intangible
Assets,” effective January 1, 2002. Under SFAS No. 142, goodwill is no
longer amortized; however, it must be tested for impairment at least annu-
ally. Amortization continues to be recorded for other intangible assets with
definite lives. The Company is subject to financial statement risk to the
extent that goodwill and indefinite-lived intangible assets become impaired.
See Note Thirteen to the Consolidated Financial Statements for more infor-
mation regarding goodwill and the adoption of SFAS No. 142.
Pension and Other Postretirement Benefits
The Company’s employee pension and other postretirement benefit (i.e.,
health care) costs and obligations are dependent on management’s
assumptions used by actuaries in calculating such amounts. These assump-
tions include discount rates, health care cost trend rates, inflation, long-term
return on plan assets, retirement rates, mortality rates and other factors.
Management bases the discount rate assumption on investment yields
available at year-end on AA-rated corporate long-term bond yields. Health
care cost trend assumptions are developed based on historical cost data,
the near-term outlook, and an assessment of likely long-term trends. The
inflation assumption is based on an evaluation of external market indica-
tors. Retirement and mortality rates are based primarily on actual plan expe-
rience. Actual results that differ from the assumptions are accumulated and
amortized over future periods and, therefore, generally affect the recognized
expense and recorded obligation in such future periods. While management
believes that the assumptions used are appropriate, significant differences
in actual experience or significant changes in assumptions would affect
pension and other postretirement benefit costs and obligations. See Note
Eight to the Consolidated Financial Statements for more information regard-
ing costs and assumptions for employee retirement benefits.
Impairment of Long-Lived Assets
The Company periodically reviews the carrying value of its long-lived assets
held and used and assets to be disposed of, including other intangible
assets, when events and circumstances warrant such a review. This review
is performed using estimates of future cash flows. If the carrying value of a
long-lived asset is considered impaired, an impairment charge is recorded
for the amount by which the carrying value of the long-lived asset exceeds
its fair value. Management believes that the estimates of future cash flows
and fair value are reasonable; however, changes in estimates of such cash
flows and fair value could affect the evaluations.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142 “Goodwill and Other Intangible Assets.” SFAS No. 142, effective
January 1, 2002, specifies that goodwill and certain intangible assets will
no longer be amortized but instead will be subject to periodic impairment
testing. SFAS No. 142 also requires that, upon adoption, goodwill be allo-
cated to the Company’s reporting units and a two-step impairment analysis
be performed.
The Company adopted SFAS No. 142 effective January 1, 2002. Under the
transitional provisions of the SFAS, the Company allocated goodwill to its
reporting units and performed the two-step impairment analysis. The fair
value of the Company’s businesses used to determine the goodwill impair-
ment was computed using the expected present value of associated future
cash flows. As a result of this analysis, the Company determined that good-
will associated with its Cooling Systems and Air/Fluid Systems operating
segments was impaired due to fundamental changes in their served mar-
kets, particularly the medium- and heavy-truck markets, and weakness at a
major customer. As a result a charge of $269 million, net of taxes of $76
million, was recorded. The impairment loss was recorded in the first quarter
of 2002 as a cumulative effect of change in accounting principle.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. The Company adopted SFAS No. 144 effective January 1, 2002.
The adoption of SFAS No. 144 had no impact on the Company’s results of
operations, financial position or cash flows.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.” This statement eliminates the automatic classifica-
tion of gain or loss on extinguishment of debt as an extraordinary component
of income and requires that such gain or loss be evaluated for extraor-
dinary classification under the guidelines of Accounting Principles Board
Opinion No. 30, “Reporting the Results of Operations.” This statement also
requires sales-leaseback accounting for certain lease modifications that
have economic effects that are similar to sales-leaseback transactions and
makes various other technical corrections to the existing pronouncements
mentioned above. The adoption of SFAS No. 145 had no impact on the
Company’s results of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” This standard requires com-
panies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associ-
ated with a restructuring, discontinued operation, plant closing, or other exit
or disposal activity. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does
not expect that the adoption of SFAS No. 146 will have a material impact on
the Company’s results of operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others” (FIN 45), which expands previously
issued accounting guidance and disclosure requirements for certain guaran-
tees. FIN 45 requires the Company to recognize an initial liability for the fair
value of an obligation assumed by issuing a guarantee. The provision for
initial recognition and measurement of the liability will be applied on a pro-
spective basis to guarantees issued or modified after December 31, 2002.
The adoption of FIN 45 will not have a material impact on the Company’s
financial position, operating results or liquidity and resulted in additional
disclosures in the Company’s Consolidated Financial Statements.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-
Based Compensation – Transition and Disclosure – an amendment of FASB
Statement No. 123.” This Statement amends FASB Statement No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation
and amends the disclosure requirements to require prominent disclosures
in both annual and interim financial statements about the method of
36
BorgWarner
37
BorgWarner
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Responsibility Independent
for Consolidated Financial Statements Auditors’ Report
BorgWar ner Inc. and Consolidated Subsidiaries
accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company is required to adopt SFAS
No. 148 on January 1, 2004. The Company is currently assessing the
impact of the adoption of SFAS No. 148.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of
Variable Interest Entities,” (FIN 46). FIN 46 requires that the assets, liabilities
and results of the activity of variable interest entities be consolidated into the
financial statements of the entity that has the controlling financial interest.
FIN 46 also provides the framework for determining whether a variable inter-
est entity should be consolidated based on voting interest or significant
financial support provided to it. For the Company, this Interpretation is effec-
tive immediately for variable interest entities created after January 31, 2003
and effective July 1, 2003, for variable interest entities acquired before
February 1, 2003. The Company does not expect the adoption of FIN 46 to
have any impact on its fiscal 2003 Consolidated Financial Statements.
Qualitative and Quantitative Disclosure About Market Risk
The Company’s primary market risks include fluctuations in interest rates and
foreign currency exchange rates. We are also affected by changes in the prices
of commodities used or consumed in our manufacturing operations. Some of
our commodity purchase price risk is covered by supply agreements with cus-
tomers and suppliers. Other commodity purchase price risk is addressed by
hedging strategies, which include forward contracts. We do not engage in any
derivative instruments for purposes other than hedging specific risk.
We have established policies and procedures to manage sensitivity to interest
rate, foreign currency exchange rate market, and commodity purchase price
risk, which include monitoring the level of exposure to each market risk.
Interest rate risk is the risk that we will incur economic losses due to adverse
changes in interest rates. Our earnings exposure related to adverse move-
ments in interest rates is primarily derived from outstanding floating rate debt
instruments that are indexed to floating money market rates. A 10% increase
or decrease in the average cost of our variable rate debt would result in a
change in pre-tax interest expense of approximately $0.5 million.
We also measure interest rate risk by estimating the net amount by which
the fair value of all of our interest rate sensitive assets and liabilities would
be impacted by selected hypothetical changes in market interest rates. Fair
value is estimated using a discount cash flow analysis. Assuming a hypo-
thetical instantaneous 10% change in interest rates as of December 31,
2002, the net fair value of these instruments would increase by approxi-
mately $29.2 million if interest rates decreased and would decrease by
approximately $26.6 million if interest rates increased. Our interest rate
sensitivity analysis assumes a parallel shift in interest rate yield curves.
The model, therefore, does not reflect the potential impact of changes in
the relationship between short-term and long-term interest rates. Interest
rate sensitivity at December 31, 2001, measured in a similar manner, was
slightly greater than at December 31, 2002.
Foreign currency risk is the risk that we will incur economic losses due to
adverse changes in foreign currency exchange rates. We mitigate our foreign
currency exchange rate risk principally by establishing local production facili-
ties in markets we serve, by invoicing customers in the same currency as the
source of the products and by funding some of our investments in foreign
markets through local currency loans. Such non-U.S. dollar debt was $152.0
million as of December 31, 2002 and $116.3 million as of December 31,
2001. We also monitor our foreign currency exposure in each country and
implement strategies to respond to changing economic and political environ-
ments. In addition, the Company periodically enters into forward contracts
in order to reduce exposure to exchange rate risk related to transactions
denominated in currencies other than the functional currency. In the aggre-
gate, our exposure related to such transactions was not material to our finan-
cial position, results of operations or cash flows in both 2002 and 2001.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Management’s Discussion and Analysis of
Financial Condition and Results of Operations may contain forward-look-
ing statements as contemplated by the 1995 Private Securities Litigation
Reform Act that are based on management’s current expectations, estimates
and projections. Words such as “expects,” “anticipates,” “intends,” “plans,”
“believes,” “estimates,” variations of such words and similar expressions
are intended to identify such forward-looking statements. Forward-looking
statements are subject to risks and uncertainties, which could cause actual
results to differ materially from those projected or implied in the forward-
looking statements. Such risks and uncertainties include: fluctuations in
domestic or foreign automotive production, the continued use of outside
suppliers, fluctuations in demand for vehicles containing BorgWarner prod-
ucts, general economic conditions, as well as other risks detailed in the
Company’s filings with the Securities and Exchange Commission, including
the Cautionary Statements filed as Exhibit 99.1 to the Form 10-K for the
fiscal year ended December 31, 2002.
38
BorgWarner
The information in this report is the responsibility of management.
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) has in
place reporting guidelines and policies designed to ensure that the state-
ments and other information contained in this report present a fair and
accurate financial picture of the Company. In fulfilling this management
responsibility, we make informed judgments and estimates conforming with
accounting principles generally accepted in the United States of America.
The accompanying Consolidated Financial Statements have been audited by
Deloitte & Touche LLP, independent auditors. Management has made avail-
able 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 inter-
nal 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 reli-
able 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 audi-
tors 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 balanc-
es as they deem necessary. Management considers the recommendations of
its internal auditors and independent auditors concerning the Company’s sys-
tem of internal control and takes the necessary actions that are cost-effec-
tive in the circumstances. Management believes that, as of December 31,
2002, the Company’s system of internal control was adequate to accomplish
the objectives set forth in the first sentence of this paragraph.
The Company’s Finance and Audit Committee, composed entirely of directors
of the Company who are not employees, meets periodically with the Company’s
management and independent auditors to review financial results and proce-
dures, internal financial controls and internal and external audit plans and
recommendations. In carrying out these responsibilities, the Finance and
Audit Committee and the independent auditors have unrestricted access to
each other with or without the presence of management representatives.
Timothy M. Manganello George E. Strickler
President and Chief Executive Officer Executive Vice President and Chief Financial Officer
February 6, 2003
To The Board of Directors and Stockholders of BorgWarner Inc.:
We have audited the consolidated balance sheets of BorgWarner Inc. and
Consolidated Subsidiaries (the “Company”) as of December 31, 2002 and
2001, and the related consolidated statements of operations, cash flows,
and stockholders’ equity for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assess-
ing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of BorgWarner Inc. and Consolidated
Subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles gener-
ally accepted in the United States of America.
As discussed in Note Thirteen to the Consolidated Financial Statements,
effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangibles,”
and accordingly, discontinued the amortization of goodwill to conform to the
provisions of this standard. Note Thirteen provides transitional disclosures
regarding the impact of the adoption of SFAS No. 142.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 6, 2003
39
BorgWarner
Consolidated Statements of Operations
Consolidated Balance Sheets
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
millions of dollars, except per share amounts
For the Year Ended December 31,
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Goodwill amortization
Other, net
Restructuring and other non-recurring charges
Operating income
Equity in affiliate earnings, net of tax
Interest expense and finance charges
Earnings before income taxes
Provision for income taxes
Minority interest, net of tax
Net earnings before cumulative effect of accounting change
Cumulative effect of change in accounting principle, net of tax
Net earnings/(loss)
Net earnings/(loss) per share – Basic
Net earnings per share before cumulative effect of accounting change
Cumulative effect of accounting change
Net earnings/(loss) per share
Net earnings/(loss) per share – Diluted
Net earnings per share before cumulative effect of accounting change
Cumulative effect of accounting change
Net earnings/(loss) per share
Average shares outstanding (thousands)
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
2002
$2,731.1
2,176.5
554.6
303.5
—
(0.9)
—
252.0
(19.5)
37.7
233.8
77.2
6.7
149.9
(269.0)
$ (119.1)
$ 5.63
(10.10)
$ (4.47)
$ 5.58
(10.02)
$ (4.44)
26,625
26,854
2001 2000
$2,351.6
1,890.8
460.8
249.7
42.0
(2.1)
28.4
142.8
(14.9)
47.8
109.9
39.7
3.8
66.4
—
$ 66.4
$ 2.52
—
$ 2.52
$ 2.51
—
$ 2.51
26,315
26,463
$2,645.9
2,090.7
555.2
258.7
43.3
(8.1)
62.9
198.4
(15.7)
62.6
151.5
54.8
2.7
94.0
—
$ 94.0
$ 3.56
—
$ 3.56
$ 3.54
—
$ 3.54
26,391
26,487
40
BorgWarner
millions of dollars
December 31, 2002
2001
Assets
Cash and cash equivalents $ 36.6
Receivables 292.1
Inventories 180.3
Deferred income taxes 11.4
Investments in businesses held for sale 14.2
Prepayments and other current assets 31.9
Total current assets 566.5
Land 40.6
Buildings 288.0
Machinery and equipment 1,060.0
Capital leases 2.7
Construction in progress 76.5
1,467.8
Less accumulated depreciation 572.9
Net property, plant and equipment 894.9
Tooling, net of amortization 82.0
Investments and advances 153.1
Goodwill 827.0
Deferred income taxes 51.2
Other noncurrent assets 108.2
Total other assets 1,221.5
Total assets $2,682.9
Liabilities and Stockholders’ Equity
Notes payable and current portion of long-term debt $ 14.4
Accounts payable and accrued expenses 435.6
Income taxes payable 1.2
Total current liabilities 451.2
Long-term debt 632.3
Long-term liabilities:
Retirement-related liabilities 478.3
Other 125.2
Total long-term liabilities 603.5
Minority interest in consolidated subsidiaries 14.5
Commitments and contingencies —
Capital stock:
Preferred stock, $.01 par value; authorized shares: 5,000,000; none issued —
Common stock, $.01 par value; authorized shares: 50,000,000; issued shares: 2002, 27,398,891
and 2001, 27,039,968; outstanding shares: 2002, 26,580,004; 2001, 26,365,169 0.3
Non-voting common stock, $.01 par value; authorized shares: 25,000,000; none issued and outstanding —
Capital in excess of par value 737.7
Retained earnings 335.8
Management shareholder note (2.0)
Accumulated other comprehensive income/(loss) (54.5)
Common stock held in treasury, at cost: 2002, 818,887 shares; 2001, 674,799 shares (35.9)
Total stockholders’ equity 981.4
Total liabilities and stockholders’ equity $2,682.9
See accompanying Notes to Consolidated Financial Statements.
$ 32.9
203.7
143.8
23.6
12.2
25.1
441.3
29.6
246.1
940.9
2.7
128.4
1,347.7
509.5
838.2
84.1
137.4
1,160.6
5.7
103.6
1,491.4
$2,770.9
$ 35.6
410.6
8.8
455.0
701.4
393.0
105.9
498.9
11.4
—
—
0.3
—
715.7
470.9
(2.0)
(53.1)
(27.6)
1,104.2
$2,770.9
41
BorgWarner
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders’ Equity
BorgWar ner Inc. and Consolidated Subsidiaries
millions of dollars
For the Year Ended December 31, 2002 2001 2000
Operating
Net earnings/(loss) $(119.1) $ 66.4 $ 94.0
Adjustments to reconcile net earnings/(loss) to net cash flows from operations:
Non-cash charges (credits) to operations:
Depreciation 108.1 104.2 102.2
Goodwill amortization — 42.0 43.3
Amortization of tooling 29.3 23.7 24.9
Non-cash restructuring and other non-recurring charges — 5.0 47.3
Cumulative effect of change in accounting principle, net of tax 269.0 — —
Employee retirement benefits 20.8 19.8 —
Deferred income tax provision 30.4 3.1 (8.5)
Other, principally equity in affiliate earnings (4.1) (25.9) 6.9
Net earnings adjusted for non-cash charges 334.4 238.3 310.1
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
(Increase) decrease in receivables (67.4) (48.6) 18.6
(Increase) decrease in inventories (29.3) 10.1 (14.7)
(Increase) decrease in prepayments and deferred income taxes (3.4) 0.1 11.6
Increase (decrease) in accounts payable and accrued expenses (14.7) 23.0 7.0
Increase (decrease) in income taxes payable 14.1 (12.7) (25.9)
Net change in other long-term assets and liabilities 27.7 27.6 14.5
Net cash provided by operating activities 261.4 237.8 321.2
Investing
Capital expenditures (138.4) (140.9) (167.1)
Tooling outlays, net of customer reimbursements (27.7) (42.0) (29.7)
Net proceeds from asset disposals 12.3 6.5 16.2
Proceeds from sale of businesses 3.3 14.4 131.9
Tax refunds/(payments) related to businesses sold 20.5 — (43.0)
Payments for businesses acquired, net of cash acquired — (3.3) —
Net cash used in investing activities (130.0) (165.3) (91.7)
Financing
Net decrease in notes payable (22.8) (16.5) (74.5)
Additions to long-term debt 2.3 34.0 86.9
Reductions in long-term debt (85.3) (64.3) (192.3)
Payments for purchase of treasury stock (18.1) (0.7) (22.1)
Proceeds from stock options exercised 9.8 2.8 1.1
Dividends paid (16.0) (15.8) (15.9)
Net cash used in financing activities (130.1) (60.5) (216.8)
Effect of exchange rate changes on cash and cash equivalents 2.4 (0.5) (13.0)
Net increase (decrease) in cash and cash equivalents 3.7 11.5 (0.3)
Cash and cash equivalents at beginning of year 32.9 21.4 21.7
Cash and cash equivalents at end of year $ 36.6 $ 32.9 $ 21.4
Supplemental Cash Flow Information
Net cash paid/(refunded) during the year for:
Interest $ 39.5 $ 50.2 $ 65.4
Income taxes (11.0) 28.1 107.7
Non-cash financing transactions:
Issuance of common stock for management notes $ — $ — $ 0.5
Issuance of common stock for Executive Stock Performance Plan 1.2 1.0 0.8
See accompanying Notes to Consolidated Financial Statements.
42
BorgWarner
millions of dollars
Number of Shares Stockholders’ Equity
Comprehensive
income/(loss)
Accumulated
Issued Common Issued Capital in Management other
common stock in common excess of Treasury shareholder Retained comprehensive
stock treasury stock par value stock notes earnings income/(loss)
Balance, January 1, 2000 27,040,492 (316,300) $ 0.3 $715.7 $(15.2) $(2.0) $346.4 $ 12.3
Purchase of treasury stock — (589,700) — — (22.1) — — — —
Dividends declared — — — — — — (15.9) — —
Shares issued for management shareholder note — 15,223 — — 0.7 (0.5) (0.2) — —
Shares issued under stock option plans — 53,750 — — 2.2 — (1.1) — —
Shares issued under executive stock plan — 21,818 — — 1.1 — (0.3) — —
Net income — — — — — — 94.0 — $ 94.0
Adjustment for minimum pension liability — — — — — — — (0.1) (0.1)
Currency translation adjustment — — — — — — — (28.2) (28.2)
Balance, December 31, 2000 27,040,492 (815,209) $ 0.3 $715.7 $(33.3) $(2.5) $422.9 $(16.0) $ 65.7
Purchase of treasury stock — (15,000) — — (0.7) — — — —
Dividends declared — — — — — — (15.8) — —
Management shareholder notes — — — — — 0.5 — — —
Shares issued under stock option plans — 129,550 — — 5.3 — (2.5) — —
Shares issued under executive stock plan — 25,860 — — 1.1 — (0.1) — —
Kuhlman shares retired (524) — — — — — — — —
Net income — — — — — — 66.4 — $ 66.4
Adjustment for minimum pension liability — — — — — — — (18.7) (18.7)
Currency translation adjustment — — — — — — — (18.4) (18.4)
Balance, December 31, 2001 27,039,968 (674,799) $ 0.3 $715.7 $(27.6) $(2.0) $470.9 $(53.1) $ 29.3
Purchase of treasury stock — (385,000) — — (18.1) — — — —
Dividends declared — — — — — — (16.0) — —
Shares issued under stock option plans — 217,632 — 0.9 8.9 — — — —
Shares issued under executive stock plan — 23,280 — 0.3 0.9 — — — —
Shares issued under retirement savings plans 358,923 — — 20.8 — — — — —
Net loss — — — — — — (119.1) — $(119.1)
Adjustment for minimum pension liability — — — — — — — (42.3) (42.3)
Currency translation adjustment — — — — — — — 40.9 40.9
Balance, December 31, 2002 27,398,891 (818,887) $ 0.3 $737.7 $(35.9) $(2.0) $335.8 $(54.5) $(120.5)
See accompanying Notes to Consolidated Financial Statements.
43
BorgWarner
Notes to Consolidated Financial Statements
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a lead-
ing global supplier of highly engineered systems and components primarily
for powertrain applications. These products are manufactured and sold
worldwide, primarily to original equipment manufacturers of passenger
cars, sport-utility vehicles, trucks, commercial transportation products and
industrial equipment. For purposes of this annual report, its products fall
into five operating segments: Morse TEC, Air/Fluid Systems, Cooling
Systems, TorqTransfer Systems and Transmission Systems. Effective
January 1, 2003, the Company will be reporting its results under its reor-
ganized structure of two reportable operating segments: Driveline and
Engine. The Driveline segment is primarily the combination of the
TorqTransfer Systems and Transmission Systems segments. The Engine
segment is primarily the combination of the Morse TEC, Air/Fluid Systems,
and Cooling Systems segments.
1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following paragraphs briefly describe significant accounting policies.
Use of estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of consolidation The consolidated financial statements include all
significant majority-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain prior amounts
have been reclassified to conform to the current year presentation.
Cash and cash equivalents Cash and cash equivalents are valued at cost, which
approximates market. It is the Company’s policy to classify investments with
original maturities of three months or less as cash and cash equivalents.
Accounts receivable The Company securitizes and sells certain receivables
through third party financial institutions without recourse. The amount sold
can vary each month based on the amount of underlying receivables. In
December 2002, the Company reduced the maximum size of the facility
from $120 million to $90 million. During the year ended December 31,
2002, total cash proceeds from sales of accounts receivable were $1,389.2
million, and the amount of receivables sold ranged from $90 to $120 million
at any time during the year. In 2002, the Company paid a servicing fee of
$2.5 million related to these receivables, which is included in interest
expense and finance charges. At December 31, 2002, the Company had
sold $90 million of receivables under a Receivables Transfer Agreement for
face value without recourse. At December 31, 2001, the amount sold was
$120 million.
Inventories Inventories are valued at the lower of cost or market. Cost of U.S.
inventories is determined by the last-in, first-out (LIFO) method, while the
foreign operations use the first-in, first-out (FIFO) method. Inventories held
by U.S. operations was $96.0 million in 2002 and $81.1 million in 2001.
Such inventories, if valued at current cost instead of LIFO, would have been
greater by $3.6 million and $3.9 million, respectively.
Property, plant and equipment and depreciation Property, plant and equip-
ment are valued at cost less accumulated depreciation. Expenditures for
maintenance, repairs and renewals of relatively minor items are generally
charged to expense as incurred. Renewals of significant items are capital-
ized. Depreciation is computed generally on a straight-line basis over the
estimated useful lives of the assets. Useful lives for buildings range from
15 to 40 years and useful lives for machinery and equipment range from 3
to 12 years. For income tax purposes, accelerated methods of depreciation
are generally used.
Goodwill and other intangible assets The Company adopted SFAS No. 142,
“Goodwill and Other Intangible Assets,” effective January 1, 2002. Under
SFAS No. 142, goodwill is no longer amortized; however, it must be tested
for impairment at least annually. Amortization continues to be recorded for
other intangible assets with definite lives. See Note Thirteen for further
details on the adoption of SFAS No. 142.
The Company had intangible assets with a cost of $14.7 million, less accu-
mulated amortization of $7.6 million and $6.5 million at December 31,
2002 and 2001, respectively. The intangible assets are being amortized on
a straight-line basis over their legal lives, which range from 10 to 15 years.
Annual amortization expense recognized was $1.1 million in each of the years
2002, 2001 and 2000. The estimated future annual amortization expense
for each of the successive years 2003 through 2007 is $1.1 million.
Revenue recognition The Company recognizes revenue upon shipment of prod-
uct when title and risk of loss pass to the customer. Although the Company
may enter into long-term supply agreements with its major customers, each
shipment of goods is treated as a separate sale and the price is not fixed
over the life of the agreements.
Financial instruments Financial instruments consist primarily of investments
in cash, short-term securities, receivables and debt securities, and obliga-
tions under accounts payable, accrued expenses and debt instruments. The
Company believes that the fair value of the financial instruments approxi-
mates the carrying value, except as noted in Note Six.
The Company received corporate bonds with a face value of $30.3 million as
partial consideration for the sales of Kuhlman Electric and Coleman Cable
in 1999. These bonds were recorded at their fair market value of $12.9
million using valuation techniques that considered cash flows discounted
at current market rates and management’s best estimates of credit quality.
In 2001, the sale agreement with Coleman Cable was finalized, resulting in
the exchange of the corporate bonds along with a purchase price receivable,
for $3 million in cash and a $2 million note, which was collected in 2002.
The fair value of these instruments was estimated to be $8.8 million at
December 31, 2002 and $10.9 million at December 31, 2001. They have
been classified as investments available-for-sale in the other current assets
section of the Consolidated Balance Sheets. The contractual maturities of
these bonds are beyond five years.
Foreign currency The financial statements of foreign subsidiaries are trans-
lated to U.S. dollars using the period-end exchange rate for assets and
liabilities and an average exchange rate for each period for revenues and
expenses. The local currency is the functional currency for substantially
all the Company’s foreign subsidiaries. Translation adjustments for foreign
subsidiaries are recorded as a component of accumulated other compre-
hensive income in stockholders’ equity.
Product warranties The Company provides warranties on some of its prod-
ucts. The warranty terms are typically from one to three years. Provisions
for estimated expenses related to product warranty are made at the time
products are sold. These estimates are established using historical infor-
mation about the nature, frequency, and average cost of warranty claims.
Management actively studies trends of warranty claims and takes action
to improve vehicle quality and minimize warranty claims. Management
believes that the warranty reserve is appropriate; however, actual claims
incurred could differ from the original estimates, requiring adjustments to
the reserve. The reserve is represented in both long-term and short-term
liabilities on the balance sheet.
Below is a table that shows the activity in the warranty accrual accounts:
2002 2001 2000
Beginning balance $ 19.5 $ 16.5 $ 22.8
Provisions 14.2 18.3 7.4
Incurred (10.0) (15.3) (13.7)
Ending balance $ 23.7 $ 19.5 $ 16.5
millions of dollars
Derivative financial instruments The Company recognizes that certain normal
business transactions generate risk. Examples of risks include exposure to
exchange rate risk related to transactions denominated in currencies other
than the functional currency, changes in cost of major raw materials and
supplies, and changes in interest rates. It is the objective and responsibility
of the Company to assess the impact of these transaction risks, and offer
protection from selected risks through various methods including financial
derivatives. All derivative instruments held by the Company are designated
as hedges, have high correlation with the underlying exposure and are highly
effective in offsetting underlying price movements. Accordingly, gains and
losses from changes in derivative fair values are deferred until the under-
lying transaction occurs. The Company does not engage in any derivative
instruments for purposes other than hedging specific risk.
New accounting pronouncements In August 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The
Company adopted SFAS No. 144 effective January 1, 2002. The adoption
of SFAS No. 144 had no impact on the Company’s results of operations,
financial position or cash flows.
44
BorgWarner
45
BorgWarner
Notes to Consolidated Financial Statements
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections.” This statement eliminates the automatic classifica-
tion of gain or loss on extinguishment of debt as an extraordinary component
of income and requires that such gain or loss be evaluated for extraordinary
classification under the guidelines of Accounting Principles Board Opinion
No. 30 “Reporting the Results of Operations.” This statement also requires
sales-leaseback accounting for certain lease modifications that have
economic effects that are similar to sales-leaseback transactions and
makes various other technical corrections to the existing pronouncements
mentioned above. The adoption of SFAS No. 145 had no impact on the
Company’s results of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities.” The standard requires compa-
nies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or
disposal plan. Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associ-
ated with a restructuring, discontinued operation, plant closing, or other exit
or disposal activity. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The Company does
not expect that the adoption of SFAS No. 146 will have a material impact on
the Company’s results of operations, financial position or cash flows.
In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others” (FIN 45), which expands previ-
ously issued accounting guidance and disclosure requirements for certain
guarantees. FIN 45 requires the Company to recognize an initial liability
for the fair value of an obligation assumed by issuing a guarantee. The
provision for initial recognition and measurement of the liability will be
applied on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 will not have a material
impact on the Company’s financial position, operating results or liquid-
ity and resulted in additional disclosures in the Company’s Consolidated
Financial Statements.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-
Based Compensation – Transition and Disclosure – an amendment of FASB
Statement No. 123.” This Statement amends FASB Statement No. 123 to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation
and amends the disclosure requirements to require prominent disclosures in
both annual and interim financial statements about the method of account-
ing for stock-based employee compensation and the effect of the method
used on reported results. The Company is required to adopt SFAS No. 148
on January 1, 2004. The Company is currently assessing the impact of the
adoption of SFAS No. 148.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of
Variable Interest Entities,” (FIN 46). FIN 46 requires that the assets, liabilities
and results of the activity of variable interest entities be consolidated into the
financial statements of the entity that has the controlling financial interest.
FIN 46 also provides the framework for determining whether a variable inter-
est entity should be consolidated based on voting interest or significant
financial support provided to it. For the Company, this Interpretation is effec-
tive immediately for variable interest entities created after January 31, 2003
and effective July 1, 2003, for variable interest entities acquired before
February 1, 2003. The Company does not expect the adoption of FIN 46 to
have any impact on its fiscal 2003 Consolidated Financial Statements.
2
RESEARCH AND DEVELOPMENT COSTS
The Company spent approximately $109.1 million, $104.5 million and
$112.0 million in 2002, 2001 and 2000, respectively, on research and
development (R&D) activities. Not included in these amounts were custom-
er-sponsored R&D activities of approximately $14.2 million, $20.0 million
and $12.5 million in 2002, 2001 and 2000, respectively.
3
OTHER INCOME
Items included in other income consist of:
Year Ended December 31,
millions of dollars
2002
2001
2000
Gains on sales of business $ — $ — $ 5.4
Interest income 1.7 1.4 0.8
Loss on asset disposals, net (1.5) (0.2) (0.4)
Other 0.7 0.9 2.3
Total other income $ 0.9 $ 2.1 $ 8.1
46
BorgWarner
Earnings before taxes and provision for taxes consist of:
4
INCOME TAXES
2002 2001 2000
U.S. Non-U.S. Total U.S. Non-U.S. Total U.S. Non-U.S.
Total
millions of dollars
Earnings before taxes $150.7
Income taxes:
Current :
Federal/foreign $ 11.1
State 3.1
14.2
Deferred 44.8
Total income taxes $ 59.0
$83.1 $233.8 $23.3 $86.6
$109.9 $74.8 $76.7
$151.5
$10.6 $ 21.7 $ 9.8 $24.7
— 3.1 2.1 —
10.6 24.8 11.9 24.7
7.6 52.4 2.0 1.1
$18.2 $ 77.2 $13.9 $25.8
$ 34.5 $26.8 $24.9
2.1 11.6 —
36.6 38.4 24.9
3.1 (13.7) 5.2
$ 39.7 $24.7 $30.1
$ 51.7
11.6
63.3
(8.5)
$ 54.8
The analysis of the variance of income taxes as reported from income
taxes computed at the U.S. statutory rate for consolidated operations is
as follows:
millions of dollars
2002 2001 2000
Income taxes at U.S. statutory rate of 35% $81.8 $38.5 $53.0
Increases (decreases) resulting from:
Income from non-U.S. sources (6.8) (0.1) (0.3)
State taxes, net of federal benefit 2.0 1.4 7.5
Business tax credits, net (4.7) (7.2) (10.3)
Affiliate earnings (6.8) (5.2) (5.5)
Nontemporary differences and other 11.7 12.3 10.4
Income taxes as reported $77.2 $39.7 $54.8
At December 31, 2002, the Company had $8.4 million of foreign tax credit
carryforwards, $3.0 million of R&D tax credit carryforwards, and $1.9 million
of net foreign operating loss carryforwards available to offset future taxable
income. The foreign tax credits and net operating loss carryforwards will
expire in 2007. The R&D tax credit carryforward will expire in 2022.
Following are the gross components of deferred tax assets and liabilities as
of December 31, 2002 and 2001:
millions of dollars
2002 2001
Deferred tax assets – current:
Capital loss carryover $ — $ 22.2
Accrued costs related to divested operations — 1.4
Foreign tax credits 8.4 —
Research and development credits 3.0 —
Net deferred tax asset – current $ 11.4 $ 23.6
Deferred tax assets – noncurrent:
Postretirement benefits $121.2 $116.2
Pension 52.5 18.6
Other long-term liabilities and reserves 32.3 29.6
Goodwill 26.0 —
Other 14.7 20.6
246.7 185.0
Deferred tax liabilities – noncurrent:
Fixed assets 135.9 98.0
Pension 35.0 32.3
Goodwill — 28.9
Other 24.6 20.1
195.5 179.3
Net deferred tax asset – noncurrent $ 51.2 $ 5.7
No deferred income taxes have been provided on undistributed earnings of
foreign subsidiaries totaling $59.2 million and $47.8 million in 2002 and
2001, respectively, as the amounts are essentially permanent in nature. Any
such potential liability would be substantially offset by foreign tax credits
with respect to such undistributed foreign earnings.
47
BorgWarner
Notes to Consolidated Financial Statements
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
Dividends and other payments received from affiliates accounted for under
the equity method totaled $8.4 million in 2002, $8.9 million in 2001 and
$25.5 million in 2000.
The Company has a 50% interest in NSK-Warner, a joint venture based
in Japan that manufactures automatic transmission components. The
Company’s share of the earnings or losses reported by NSK-Warner is
accounted for using the equity method of accounting. NSK-Warner has a
fiscal year-end of March 31. The Company’s equity in the earnings of NSK-
Warner consists of the 12 months ended November 30 so as to reflect
earnings on as current a basis as is reasonably feasible.
Following are summarized financial data for NSK-Warner, translated using
the ending or periodic rates as of and for the fiscal years ended March 31,
2002, 2001 and 2000:
millions of dollars
2002 2001 2000
Balance sheets:
Current assets $147.2 $147.6 $196.0
Noncurrent assets 133.8 151.7 157.8
Current liabilities 83.1 94.3 96.2
Noncurrent liabilities 4.4 5.5 8.5
Statements of operations:
Net sales $285.2 $333.6 $303.8
Gross profit 59.6 72.8 64.7
Net income 27.9 29.6 27.7
The equity of NSK-Warner as of March 31, 2002, was $193.5 million.
5
BALANCE SHEET INFORMATION
Detailed balance sheet data are as follows:
millions of dollars
December 31, 2002 2001
Receivables:
Customers $247.9 $170.5
Other 49.3 37.1
Gross receivables 297.2 207.6
Less allowance for losses 5.1 3.9
Net receivables $292.1 $203.7
Inventories:
Raw material $ 85.3 $ 69.7
Work in progress 57.6 41.5
Finished goods 37.4 32.6
Total inventories $180.3 $143.8
Investments and advances:
NSK-Warner $148.3 $128.8
Other 4.8 8.6
Total investments and advances $153.1 $137.4
Other noncurrent assets:
Deferred pension assets $ 91.0 $ 83.4
Other 17.2 20.2
Total other noncurrent assets $108.2 $103.6
Accounts payable and accrued expenses:
Trade payables $257.0 $236.7
Payroll and related 70.9 42.1
Insurance 26.1 20.7
Warranties and claims 16.3 17.1
Restructuring and other non-recurring charges 3.3 11.7
Other 62.0 82.3
Total accounts payable and accrued expenses $435.6 $410.6
Other long-term liabilities:
Environmental reserves $ 20.3 $ 25.5
Other 104.9 80.4
Total other long-term liabilities $125.2 $105.9
6
NOTES PAYABLE AND LONG-TERM DEBT
Following is a summary of notes payable and long-term debt. The weighted
average interest rate on all borrowings for 2002 and 2001 was 5.2% and
5.8%, respectively.
December 31,
Current Long-Term Current Long-Term
millions of dollars
2002 2001
Bank borrowings and other $ 8.0 $ 40.4
$30.6
$ 69.6
Term loans due through 2011
(at an average rate of 3.1% in
2002 and 3.3% in 2001; and
3.2% at December 31, 2002) 6.4 31.5
7% Senior Notes due 2006,
net of unamortized discount — 139.3
6.5% Senior Notes due 2009,
net of unamortized discount — 164.9
8% Senior Notes due 2019,
net of unamortized discount — 134.2
7.125% Senior Notes due 2029,
net of unamortized discount — 122.0
Total notes payable
and long-term debt $14.4 $632.3
5.0
31.2
—
—
—
—
141.8
164.7
134.2
159.9
$35.6
$701.4
Annual principal payments required as of December 31, 2002 are as
follows (in millions of dollars):
2003
2004
2005
2006
2007
After 2007
Less: Unamortized discounts
Total
$ 14.4
7.5
39.0
149.5
5.2
434.1
(3.0)
$646.7
The Company has a revolving credit facility which provides for borrowings up
to $350 million through July, 2005. At December 31, 2002, there were no
borrowings outstanding under the facility and the Company had $7.1 million
of obligations under standby letters of credit. At December 31, 2001, $20.0
million of borrowings under the facility were outstanding in addition to $6.5
million of obligations under standby letters of credit. The credit agreement
contains numerous financial and operating covenants including, among oth-
ers, covenants requiring the Company to maintain certain financial ratios
and restricting its ability to incur additional indebtedness.
The Company has entered into interest rate and currency swaps to manage
interest rate and foreign currency risk. A summary of these instruments
outstanding at December 31, 2002 follows (currency in millions):
Hedge Notional
Type Amount Receive Pay
Interest Rates (b)
Floating Interest
Rate Basis
Interest rate swaps (a)
Fixed to floating
Fixed to floating
Cross currency swaps
(mature in 2006)
Floating $
to floating ¥
Fair value
Fair value
$125
$ 25
7.0%
6.5%
2.8%
1.8%
6 month LIBOR+1.43%
6 month LIBOR+.45%
Cash Flow
Investment
$ 70
¥8,871
2.8%
—
—
1.3%
6 mo. USD LIBOR+1.43%
6 mo. JPY LIBOR+1.21%
(a) The maturity of the swaps corresponds with the maturity of the hedged item as noted in the debt
summary, unless otherwise indicated.
(b) Interest rates are as of December 31, 2002.
The ineffective portion of the swaps was not material. As of December 31,
2002, the fair value of the fixed to floating interest rate swaps was $14.9
million. Cross currency swaps were recorded at their fair value of $(4.8)
million. Fair value is based on quoted market prices for contracts with
similar maturities.
As of December 31, 2002 and 2001, the estimated fair values of the
Company’s senior unsecured notes totaled $610.7 million and $579.6
million, respectively. The estimated fair values were $50.3 million higher
in 2002, and $21.0 million lower in 2001, than their respective carrying
values. Fair market values are developed by the use of estimates obtained
from brokers and other appropriate valuation techniques based on informa-
tion available as of year-end. The fair value estimates do not necessarily
reflect the values the Company could realize in the current markets.
48
BorgWarner
49
BorgWarner
Notes to Consolidated Financial Statements
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
RESTRUCTURING AND OTHER NON-RECURRING CHARGES
7
Other non-recurring charges of $28.4 million were incurred in the fourth
quarter of 2001. The charges primarily include adjustments to the carrying
value of certain assets and liabilities related to businesses acquired and
disposed of over the past three years. Of the $28.4 million of pretax charg-
es, $5.0 million represents non-cash charges. Approximately $3.3 million
was spent in 2001, $8.4 million in 2002, and $8.4 million was transferred
to environmental reserves in 2001. The remaining $3.3 million is expected
to be spent in 2003. The Company expects to fund the total cash outlay of
these actions with cash flow from operations.
Restructuring and other non-recurring charges totaling $62.9 million were
incurred in 2000 in response to deteriorating market conditions. The charg-
es included the rationalization and integration of certain businesses and
actions taken to bring costs in line with vehicle production slowdowns in
major customer product lines. Of the $62.9 million pretax charges in 2000,
$47.3 million represented non-cash charges. Approximately $4.4 million
was spent in 2000 and $11.2 million was spent in 2001.
Components of the restructuring and other non-recurring charges are
detailed in the following table and discussed further below.
millions of dollars
Loss on
Severance
and Other
Sale of
Asset
Benefits Write-downs Business
Other Exit Costs
and Non-Recurring
Charges
Total
Provisions $ 8.9
Incurred (4.3)
Non-cash write-offs —
Balance,
December 31, 2000 $ 4.6
Provisions —
Incurred (4.6)
Non-cash write-offs —
Balance,
December 31, 2001 $ —
Provisions —
Incurred —
Non-cash write-offs —
Balance,
December 31, 2002 $ —
$ 11.6
—
(11.6)
$ 35.2 $ 7.2 $ 62.9
— (0.1) (4.4)
(35.2) (0.5) (47.3)
$ —
5.0
—
(5.0)
$ —
—
—
—
$ — $ 6.6 $ 11.2
— 23.4 28.4
— (18.3) (22.9)
— — (5.0)
$ — $ 11.7 $ 11.7
— — —
— (8.4) (8.4)
— — —
$ —
$ — $ 3.3 $ 3.3
Severance and other benefit costs relate to the reduction of approximately
220 employees from the workforce. The reductions affected each of the
Company’s operating segments, apart from TorqTransfer Systems, across
each of the Company’s geographical areas, and across each major func-
tional area, including production and selling and administrative positions.
Approximately $8.9 million had been paid for severance and other benefits
for the terminated employees.
Asset write-downs primarily consist of the write-off of impaired assets no
longer used in production as a result of the industry downturn and the
consolidation of certain operations. Such assets have been taken out of
productive use and have been disposed.
Loss on anticipated sale of business represents the Fuel Systems business,
which was sold in April 2001 to an investor group led by TMB Industries,
a private equity group, for a pretax loss of $35.2 million. Fuel Systems
produced metal tanks for the heavy-duty truck market in North America and
did not fit the Company’s strategic focus on powertrain technology. Terms of
the transaction did not have a significant impact on the Company’s results
of operations, financial condition or cash flows.
Other exit costs and non-recurring charges are primarily non-employee
related exit costs for certain non-production facilities the Company has
previously sold or no longer needs and non-recurring product quality related
charges. The 2001 non-recurring charges include $8.4 million of environ-
mental remediation costs related to sold businesses and $12.0 million of
product quality costs for issues with products that were sold by acquired
businesses prior to acquisition, all of which have been fixed in the currently
produced products.
8
RETIREMENT BENEFIT PLANS
The Company has a number of defined benefit pension plans and other
postretirement benefit plans covering eligible salaried and hourly employ-
ees. The other post retirement benefit plans, which provide medical and life
insurance benefits, are unfunded plans. The following provides a recon-
ciliation of the plans’ benefit obligations, plan assets, funded status and
recognition in the Consolidated Balance Sheets.
Pension Postretirement
Benefits Benefits
December 31, 2002 2001 2002
2001
millions of dollars
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Amendments
Net actuarial loss
Currency translation adjustment
Settlements
Curtailments
Benefits paid
Benefit obligation at end of year
$ 385.7
7.6
26.3
0.2
—
32.7
17.3
—
—
(26.7)
$ 443.1
$350.3
7.1
25.0
0.2
7.5
23.6
(1.4)
(0.2)
—
(26.4)
$385.7
$ 407.1
5.0
28.8
—
(2.3)
37.9
—
—
(0.5)
(29.5)
$ 446.5
$341.6
4.4
25.0
—
—
64.2
—
(1.4)
—
(26.7)
$407.1
$ 358.2
Change in plan assets:
Fair value of plan assets at
beginning of year
Actual return on plan assets
Employer and other contributions
Plan participants’ contributions
Currency translation adjustment
Settlements
Benefits paid
Fair value of plan assets at end of year $ 323.5
(27.7)
11.7
0.2
7.8
—
(26.7)
$385.1
(2.3)
3.1
0.2
(1.2)
(0.3)
(26.4)
$358.2
Reconciliation of funded status:
Funded status
Unrecognized net actuarial loss
Unrecognized transition asset
Unrecognized prior service cost
Net amount recognized
Amounts recognized in the
consolidated balance sheets:
Prepaid benefit cost
Accrued benefit liability
Additional minimum liability
Intangible asset
Accumulated other
comprehensive income
Net amount recognized
$(119.6)
142.9
(0.1)
11.1
$ 34.3
$(27.5)
50.8
(0.3)
12.7
$(446.5) $(407.1)
98.2
—
(0.6)
131.4
—
(2.6)
$ 35.7
$(317.7) $(309.5)
$ 80.3
$ 71.1
(46.0)
(106.0)
10.7
(35.4)
(42.2)
12.3
$ — $ —
(309.5)
(317.7)
—
—
—
—
95.3
$ 34.3
29.9
$ 35.7
—
—
$(317.7) $(309.5)
The funded status of pension plans included above with accumulated ben-
efit obligations in excess of plan assets at December 31 is as follows:
2002 2001
Accumulated benefit obligation $343.8 $295.2
Plan assets 216.7 238.1
Deficiency $127.1 $ 57.1
millions of dollars
The $127.1 million deficiency in 2002 consists of $60.7 million related to
U.S. plans, $25.0 million related to UK plans, and $41.4 million related
to German plans. The 2001 deficiency of $57.1 million consists of $19.2
million related to U.S. plans, $5.1 million related to UK plans, and $32.8
million related to German plans.
millions of dollars
For the Year Ended
December 31, 2002 2001 2000 2002 2001
Pension Benefits Other Postretirement Benefits
2000
Components of net
periodic benefit cost:
Service cost $ 7.6 $ 7.1 $ 6.8 $ 5.0 $ 4.4 $ 3.8
Interest cost 26.3 25.0 23.4 28.8 25.0 23.4
Expected return
on plan assets (30.7) (32.1) (36.8) — — —
Amortization of
unrecognized
transition asset (0.2) (0.1) (0.1) — — —
Amortization of
unrecognized
prior service cost 1.6 2.2 1.5 (0.1) (0.1) (0.1)
Amortization of
unrecognized (gain)/loss 2.2 — (2.7) 4.0 — —
Settlement loss — 0.1 1.8 — — —
Net periodic benefit
cost (income) $ 6.8 $ 2.2 $ (6.1) $37.7 $29.3 $27.1
50
BorgWarner
51
BorgWarner
Notes to Consolidated Financial Statements
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
The Company’s weighted-average assumptions used as of December 31, in
determining the net periodic benefit cost and the benefit obligation liabili-
ties shown above were as follows:
percent
Pension Benefits Other Postretirement Benefits
2002 2001 2000 2002 2001 2000
U.S. plans:
Discount rate 6.75 7.25 7.5 6.75 7.25 7.5
Rate of compensation
increase 4.5 4.5 4.5
Expected return
on plan assets 8.75 9.5 9.5
Foreign plans:
Discount rate 5.5-6.0 5.5-6.0 5.5-6.0
Rate of compensation
increase 2.5-4.0 2.5-4.0 2.5-4.0
Expected return
on plan assets 7.0 6.5 6.0
The weighted-average rate of increase in the per capita cost of covered
health care benefits is projected to be 8% in 2003 grading down 1% per
year until the ultimate rate of 4.5% is reached in 2007. A one-percentage
point change in the assumed health care cost trend would have the follow-
ing effects:
millions of dollars
One Percentage Point
Increase Decrease
Effect on postretirement benefit obligation $53.3 $(44.7)
Effect on total service and interest cost components $ 5.0 $ (4.1)
9
STOCK INCENTIVE PLANS
Stock option plans Under the Company’s 1993 Stock Incentive Plan, the
Company may grant options to purchase shares of the Company’s com-
mon stock at the fair market value on the date of grant. In 2000, the
Company increased the number of shares available for grant by 1,200,000
to 2,700,000 shares. The options vest over periods up to three years and
have a term of ten years from date of grant. As of December 31, 2002, there
are 1,825,105 outstanding options under the 1993 Stock Incentive Plan.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees.” Accordingly, no compensation cost has been recognized
for fixed stock options because the exercise price of the stock options
exceeded or equaled the market value of the Company’s common stock at
the date of grant.
A summary of the plan’s shares under option at December 31, 2002, 2001
and 2000 follows:
2002 2001 2000
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(thousands) Price (thousands) Price (thousands) Price
Outstanding at
beginning of year 1,493 $44.67 1,248 $41.22 861 $43.37
Granted 616 50.67 442 47.99 506 36.11
Exercised (217) 45.22 (129) 22.51 (54) 19.59
Forfeited (67) 46.26 (68) 45.18 (65) 47.77
Outstanding at
end of year 1,825 $46.57 1,493 $44.67 1,248 $41.22
Options exercisable
at year-end 594 $45.21 423 $46.81 431 $38.12
Options available
for future grants 345
The following table summarizes information about stock options out standing at
December 31, 2002:
Options Outstanding Options Exercisable
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices (thousands) Contractual Life Price (thousands) Price
$22.50 – 44.19 491 6.7 $35.54 258 $34.66
$48.28 – 53.44 1,149 8.4 50.05 151 52.32
$53.88 – 57.31 185 5.9 54.17 185 54.17
$22.50 – 57.31 1,825 7.7 $46.57 594 $45.21
Pro-forma information regarding net income and earnings per share is
required by SFAS No. 123, “Accounting for Stock-Based Compensation,” and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for the
Company’s options was estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average assumptions:
2002 2001 2000
Risk-free interest rate 4.34% 5.02% 6.50%
Dividend yield 1.32% 1.49% 1.52%
Volatility factor 33.66% 32.73% 32.54%
Weighted-average expected life 6.5 years 6.5 years 6.5 years
For purposes of pro-forma disclosures, the estimated fair value of the options
is amortized to expense over the options’ vesting period. The Company’s
pro-forma net earnings/(loss) and earnings/(loss) per share, adjusted to
include pro-forma expense related to stock options, are as follows:
millions of dollars,
except per share and option amounts
2002 2001 2000
Net earnings/(loss) – as reported $(119.1) $66.4 $94.0
Net earnings/(loss) – pro-forma (121.8) 64.8 92.5
Earnings/(loss) per share – as reported (basic) (4.47) 2.52 3.56
Earnings/(loss) per share – as reported (diluted) (4.44) 2.51 3.54
Earnings/(loss) per share – pro-forma (basic) (4.57) 2.46 3.50
Earnings/(loss) per share – pro-forma (diluted) (4.54) 2.45 3.48
Weighted-average fair value of options
granted during the year 20.26 17.28 13.63
Executive stock performance plan The Company has an executive stock per-
formance plan which provides payouts at the end of successive three-year
periods based on the Company’s performance in terms of total stockholder
return relative to a peer group of automotive companies. Payouts earned
are payable 40% in cash and 60% in the Company’s common stock. For
the three-year measurement periods ended December 31, 2002, 2001 and
2000, the amounts earned and expensed under the plan were $4.5 million,
$3.6 million and $1.7 million, respectively. Under this plan, 23,280 shares,
25,860 shares and 21,818 shares were issued in 2002, 2001 and 2000,
respectively. Estimated shares issuable under the plan are included in the
computation of diluted earnings per share as earned.
Earnings per share In calculating earnings per share, earnings are the same
for the basic and diluted calculations. Shares increased for diluted earnings
per share by 229,000, 148,000 and 96,000 for 2002, 2001 and 2000,
respectively, due to the effects of stock options and shares issuable under
the executive stock performance plan.
10
OTHER COMPREHENSIVE INCOME
The tax effects of the components of other comprehensive income/(loss) in
the Consolidated Statements of Stockholders’ Equity are as follows:
millions of dollars
For the Year Ended December 31, 2002 2001 2000
Foreign currency translation adjustment $ 55.9 $(14.6) $(28.0)
Income taxes (15.0) (3.8) (0.2)
Net foreign currency translation adjustment 40.9 (18.4) (28.2)
Minimum pension liability adjustment (65.4) (29.7) (0.1)
Income taxes 23.1 11.0 —
Net minimum pension liability adjustment (42.3) (18.7) (0.1)
Other comprehensive loss $ (1.4) $(37.1) $(28.3)
52
BorgWarner
53
BorgWarner
Notes to Consolidated Financial Statements
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
The components of accumulated other comprehensive loss, net of tax, in
the Consolidated Balance Sheets are as follows:
December 31, 2002 2001
Foreign currency translation adjustment $ 6.7 $(34.2)
Minimum pension liability adjustment (61.2) (18.9)
Accumulated other comprehensive loss $(54.5) $(53.1)
millions of dollars
11
COMMITMENTS AND CONTINGENCIES
The Company and certain of its current and former direct and indirect cor-
porate predecessors, subsidiaries and divisions have been identified by
the United States Environmental Protection Agency and certain state envi-
ronmental agencies and private parties as potentially responsible parties
(PRPs) at various hazardous waste disposal sites under the Comprehensive
Environmental Response, Compensation and Liability Act (Superfund) and
equivalent state laws and, as such, may presently be liable for the cost of
clean-up and other remedial activities at 44 such sites. Responsibility for
clean-up and other remedial activities at a Superfund site is typically shared
among PRPs based on an allocation formula.
Based on information available to the Company, which in most cases,
includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully
pay the cost apportioned to them; currently available information from PRPs
and/or federal or state environmental agencies concerning the scope of
contamination and estimated remediation costs; remediation alternatives;
estimated legal fees; and other factors, the Company has established a
reserve for indicated environmental liabilities with a balance at December
31, 2002 of approximately $20.3 million. The Company expects this
amount to be expended over the next three to five years.
BorgWarner believes that none of these matters, individually or in the aggre-
gate, will have a material adverse effect on its financial condition or future
operating results, generally either because estimates of the maximum
potential liability at a site are not large or because liability will be shared
with other PRPs, although no assurance can be given with respect to the
ultimate outcome of any such matter.
In connection with the sale of Kuhlman Electric Corporation, the Company
agreed to indemnify the buyer and Kuhlman Electric for certain environmen-
tal liabilities relating to the past operations of Kuhlman Electric. During
2000, Kuhlman Electric notified the Company that it discovered potential
environmental contamination at its Crystal Springs, Mississippi plant while
undertaking an expansion of the plant.
The Company has been working with the Mississippi Department of
Environmental Quality and Kuhlman Electric to investigate the extent of the
contamination. The investigation has revealed the presence of polychlori-
nated biphenyls (PCBs) in portions of the soil at the plant and neighboring
areas. Kuhlman Electric and others, including the Company, have been sued
in several related lawsuits which claim personal and property damage. The
Company has moved to be dismissed from some of these lawsuits.
The Company’s lawsuit against Kuhlman Electric seeking declaration of the
scope of the Company’s contractual indemnity has been amicably resolved
and dismissed. The Company believes that the reserve for environmental
liabilities is sufficient to cover any potential liability associated with this
matter. However, due to the nature of environmental liability matters, there
can be no assurance that the actual amount of environmental liabilities will
not exceed the amount reserved.
Patent infringement actions were filed against the Company’s turbocharger
unit located in Europe in late 2001 and in 2002 by Honeywell International.
The Dusseldorf District Court in Germany entered a preliminary injunction
against the Company on July 9, 2002 limiting the Company’s ability to manu-
facture and sell a certain variable turbine geometry (VTG) turbocharger in
Germany until a patent hearing, then scheduled for December 2002.
In order to continue uninterrupted service to its customer, the Company paid
Honeywell $25 million in July 2002 so that it could continue to make and
deliver disputed car turbochargers through June of 2003. The agreement
with Honeywell partially settles litigation, suspends the July 2002 prelimi-
nary injunction and provides for a license to deliver until June 2003. As
part of the agreement, Honeywell agreed to not seek damages for deliveries
made before June 30, 2003. The Company appealed the granting of the
July preliminary injunction, but Honeywell withdrew the preliminary injunction
before the Company’s appeal could be heard.
In January 2003, the Dusseldorf District Court decided that the Company’s
current design of the VTG turbocharger infringes the patent asserted by
Honeywell. The Company continues to believe that its current production
designs do not violate the Honeywell patents and are not covered by their
lawsuit and plans to challenge the District Court’s decision. The Company
has informed its customers of its inability to deliver the current design VTG
turbocharger after June 30, 2003. The Company continues to develop a
new generation VTG turbocharger to replace the current model and expects
to begin delivery of the new generation VTG turbocharger by July 1, 2003 if
approved by the customers.
The Company is recognizing expense of the $25 million license payment as
it ships the affected products from January 2002 to June 2003. In 2002,
$14.5 million of expense was recognized.
12
LEASES
Certain assets are leased under long-term operating leases. These include
machinery and equipment at one plant, rent for the corporate headquarters,
and a leased plane. Most leases contain renewal options for various peri-
ods. Leases generally require the Company to pay for insurance, taxes and
maintenance of the leased property. Total rent expense was $11.4 million
in 2002, $8.3 million in 2001, and $10.1 million in 2000. The Company
does not have any material capital leases.
The Company has guaranteed the residual values of the leased machinery
and equipment. The guarantees extend through the maturity of the underly-
ing lease, which is in 2005. In the event the Company exercised its option
not to purchase the machinery and equipment, the Company has guaran-
teed a residual value of $16.3 million.
Future minimum operating lease payments at December 31, 2002 were
as follows:
millions of dollars
2003 $ 4.3
2004 4.2
2005 22.7
2006 0.9
2007 0.9
After 2007 3.4
Total minimum lease payments $36.4
13
GOODWILL
In July 2001, the Financial Accounting Standards Board issued SFAS No.
142, “Goodwill and Other Intangible Assets.” SFAS No. 142, effective
January 1, 2002, specifies that goodwill and certain intangible assets will
no longer be amortized but instead will be subject to periodic impairment
testing. SFAS No. 142 also requires that, upon adoption, goodwill be allo-
cated to the Company’s reporting units and a two-step impairment analysis
be performed.
The Company adopted SFAS No. 142 effective January 1, 2002. Under the
transitional provisions of the SFAS, the Company allocated goodwill to its
reporting units and performed the two-step impairment analysis. The fair
value of the Company’s businesses used in determination of the goodwill
impairment was computed using the expected present value of associated
future cash flows. As a result of this analysis, the Company determined that
goodwill associated with its Cooling Systems and Air/Fluid Systems operat-
ing businesses was impaired due to fundamental changes in their served
markets, particularly the medium and heavy truck markets, and weakness
at a major customer. As a result a charge of $269 million, net of taxes of
$76 million, was recorded. The impairment loss was recorded in the first
quarter of 2002 as a cumulative effect of change in accounting principle.
The changes in the carrying amount of goodwill (in millions of dollars) for
the twelve months ended December 31, 2002, are as follows:
Morse Air/Fluid Cooling Transmission TorqTransfer
TEC Systems Systems Systems
Systems Total
Balance at
12/31/2001
Translation
adjustments
Change in accounting
principle
Balance at
12/31/2002
$385.4
$228.9
$ 417.3
$129.0
$ —
$1,160.6
8.9
0.5
2.0
—
(73.5)
(271.5)
—
—
—
—
11.4
(345.0)
$394.3
$155.9
$ 147.8
$129.0
$ —
$ 827.0
54
BorgWarner
55
BorgWarner
Notes to Consolidated Financial Statements
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
Also as a result of the adoption of SFAS No. 142, the Company did not amor-
tize goodwill in 2002. The following table provides adjusted net earnings/(loss)
and earnings per share data for the years ended December 31, 2002, 2001,
and 2000 as if goodwill had not been amortized during these periods:
millions of dollars
For the Twelve Months Ended December 31, 2002 2001 2000
Reported net earnings before cumulative
effect of change in accounting principle $ 149.9 $66.4 $ 94.0
Goodwill amortization, net of tax — 26.5 27.3
Adjusted net earnings before cumulative
effect of change in accounting principle 149.9 92.9 121.3
Cumulative effect of change in accounting
principle, net of tax (269.0) — —
Adjusted net earnings/(loss) $(119.1) $92.9 $121.3
Basic earnings (loss) per share:
Reported net earnings before cumulative
effect of change in accounting principle $ 5.63 $2.52 $ 3.56
Goodwill amortization — 1.00 1.03
Adjusted net earnings before cumulative
effect of change in accounting principle 5.63 3.52 4.59
Cumulative effect of change in accounting
principle, net of tax (10.10) — —
Adjusted net earnings/(loss) $ (4.47) $3.52 $ 4.59
Diluted earnings (loss) per share:
Reported net earnings before cumulative
effect of change in accounting principle $ 5.58 $2.51 $ 3.54
Goodwill amortization — 1.00 1.03
Adjusted net earnings before cumulative
effect of change in accounting principle 5.58 3.51 4.57
Cumulative effect of change in accounting
principle, net of tax (10.02) — —
Adjusted net earnings/(loss) $ (4.44) $3.51 $ 4.57
14
OPERATING SEGMENTS
Geographic information No country outside the U.S., other than Germany,
accounts for as much as 5% of consolidated net sales, attributing sales to
the sources of the product rather than the location of the customer. For
this purpose, the Company’s 50% equity investment in NSK-Warner (Note
Five) amounting to $148.3 million at December 31, 2002 is excluded
from the definition of long-lived assets, as are goodwill and certain other
noncurrent assets.
millions of dollars
Net Sales Long-Lived Assets
2002 2001 2000 2002 2001 2000
United States $1,859.1 $1,687.4 $1,960.2 $643.0 $638.5
Europe:
Germany 453.4 347.5 350.0 182.3 148.5
Other Europe 236.0 162.2 183.2 72.4 64.4
Total Europe 689.4 509.7 533.2 254.7 212.9
Other foreign 182.6 154.5 152.5 80.8 75.5
Total $2,731.1 $2,351.6 $2,645.9 $978.5 $926.9
$591.9
132.3
60.6
192.9
88.6
$873.4
Sales to major customers Consolidated sales included sales to Ford Motor
Company of approximately 26%, 30% and 30%; to DaimlerChrysler of
approximately 20%, 21% and 19%; and to General Motors Corporation of
approximately 12%, 12% and 13% for the years ended December 31, 2002,
2001 and 2000, respectively. No other single customer accounted for more
than 10% of consolidated sales in any year between 2000 and 2002. Such
sales consisted of a variety of products to a variety of customer locations
worldwide. Each of the five operating segments had significant sales to all
three of the customers listed above.
For purposes of this footnote, the Company’s business was comprised of
five operating segments: Morse TEC, Air/Fluid Systems, Cooling Systems,
TorqTransfer Systems and Transmission Systems. These reportable seg-
ments are strategic business units which are managed separately because
each represents a specific grouping of automotive components and sys-
tems. The Company evaluates performance based on earnings before inter-
est and taxes, which emphasizes realization of a satisfactory return on the
total capital invested in each operating unit. Intersegment sales, which are
not significant, are recorded at market prices. This footnote presents sum-
mary segment information.
56
BorgWarner
Operating Segments
millions of dollars
Sales Earnings
Before Long-Lived
Inter- Interest Year End Depreciation/ Assets
Customers segment Net and Taxes Assets Amortization Expendituresc
2002
Morse TEC $1,018.7 $28.2 $1,046.9 $159.2 $1,190.5 $ 54.9 $ 72.0
Air/Fluid Systems 375.6 12.8 388.4 23.4 310.0 19.9 15.4
Cooling Systems 235.8 — 235.8 25.1 239.4 13.1 7.6
TorqTransfer Systems 626.5 3.6 630.1 39.2 280.5 25.9 18.0
Transmission Systems 474.5 20.7 495.2 64.9 397.6 21.5 33.2
Inter-segment eliminations — (65.3) (65.3) — — — —
Total 2,731.1 — 2,731.1 311.8 2,418.0 135.3 146.2
Corporate — — — (40.3) 264.9b 2.1 19.9
Consolidated $2,731.1 $ — $2,731.1 $271.5d $2,682.9 $137.4 $166.1
2001
Morse TEC $ 846.7 $22.7 $ 869.4 $119.8 $1,066.4 $ 62.3 $ 75.7
Air/Fluid Systems 350.2 7.6 357.8 12.9 382.1 25.1 17.6
Cooling Systems 220.5 — 220.5 7.5 510.1 30.6 14.6
TorqTransfer Systems 498.7 1.4 500.1 24.1 266.6 23.4 38.0
Transmission Systems 417.5 11.3 428.8 48.5 359.6 26.1 26.6
Divested operations and businesses held for sale a 18.0 — 18.0 (0.2) — 0.2 —
Inter-segment eliminations — (43.0) (43.0) — — — —
Total 2,351.6 — 2,351.6 212.6 2,584.8 167.7 172.5
Corporate — — — (26.5) 186.1b 2.2 10.4
Restructuring and other non-recurring charges — — — (28.4) — — —
Consolidated $2,351.6 $ — $2,351.6 $157.7d $2,770.9 $169.9 $182.9
2000
Morse TEC $ 860.0 $25.8 $885.8 $127.4 $1,017.7 $ 58.7 $ 82.8
Air/Fluid Systems 419.0 8.8 427.8 35.7 403.2 25.6 27.0
Cooling Systems 280.8 0.5 281.3 32.1 536.8 30.5 16.7
TorqTransfer Systems 524.9 1.8 526.7 37.2 250.3 24.0 19.2
Transmission Systems 428.5 9.0 437.5 46.0 353.1 25.5 32.6
Divested operations and businesses held for sale a 132.7 0.2 132.9 3.2 73.6 3.0 4.6
Inter-segment eliminations — (46.1) (46.1) — — — —
Total 2,645.9 — 2,645.9 281.6 2,634.7 167.3 182.9
Corporate — — — (4.6) 104.9b 3.1 13.9
Restructuring and other non-recurring charges — — — (62.9) — — —
Consolidated $2,645.9 $ — $2,645.9 $214.1d $2,739.6 $170.4 $196.8
(a) Fuel Systems was sold in 2001. The HVAC business was sold in 2000.
(b) Corporate assets, including equity in affiliates, are net of trade receivables sold to third parties, and include cash, marketable securities, deferred taxes and investments and advances.
(c) Long-lived asset expenditures includes capital spending and additions to non-perishable tooling, net of customer reimbursements.
(d) Earnings before interest and taxes above is net of interest expense and finance charges of $37.7, $47.8 and $62.6 million in 2002, 2001 and 2000, respectively. Had these amounts been included in the
table above, earnings before income taxes for the years 2002, 2001 and 2000 would be $233.8, $109.9 and $151.5 million, respectively.
57
BorgWarner
Notes to Consolidated Financial Statements
Selected Financial Data
Borg War ner Inc. and Co n s o l i d a t e d Subsidiaries
Interim Financial Information (Unaudited)
The following informa tion includes all adjustments, as well as normal recurring
items, that the Company considers necessary for a fair presentation of 2002
and 2001 interim results of operations. Certain 2002 and 2001 quarterly
amounts have been reclassified to conform to the annual presentation.
2002 2001
Quarter Ended,
March 31 June 30 Sept. 30 Dec. 31 Year 2002 March 31 June 30 Sept. 30 Dec. 31 Year 2001
millions of dollars, except per share amounts
Net sales
Cost of sales
Gross profit
$ 633.9 $712.4 $684.0 $700.8 $2,731.1 $606.8 $602.0 $559.9 $582.9 $2,351.6
504.2 561.4 556.1 554.8 2,176.5 494.3 480.4 451.5 464.6 1,890.8
129.7 151.0 127.9 146.0 554.6 112.5 121.6 108.4 118.3 460.8
Selling, general and administrative expenses
74.5 76.5 73.2 79.3 303.5 59.4 63.0 59.2 68.1 249.7
Goodwill amortization
Other, net
— — — — — 10.6 10.3 10.4 10.7 42.0
(0.5) 0.1 (0.2) (0.3) (0.9) (0.6) 0.2 (0.6) (1.1) (2.1)
Restructuring and other non-recurring charges
— — — — — — — — 28.4 28.4
Operating income
55.7 74.4 54.9 67.0 252.0 43.1 48.1 39.4 12.2 142.8
Equity in affiliate earnings, net of tax
(3.4) (6.0) (4.5) (5.6) (19.5) (3.9) (4.8) (3.3) (2.9) (14.9)
Interest expense, net
9.8 9.5 9.3 9.1 37.7 12.8 12.4 12.3 10.3 47.8
Income before income taxes
49.3 70.9 50.1 63.5 233.8 34.2 40.5 30.4 4.8 109.9
Provision for income taxes
Minority interest, net of tax
Net earnings before cumulative effect
of accounting change
16.3 23.6 16.4 20.9 77.2 12.4 15.1 10.9 1.3 39.7
1.5 1.6 1.8 1.8 6.7 0.7 0.7 1.1 1.3 3.8
$ 31.5 $ 45.7 $ 31.9 $ 40.8 $ 149.9 $ 21.1 $ 24.7 $ 18.4 $ 2.2 $ 66.4
Cumulative effect of accounting changea
(269.0) — — — (269.0) — — — — —
Net earnings/(loss)
$(237.5) $ 45.7 $ 31.9 $ 40.8 $ (119.1) $ 21.1 $ 24.7 $ 18.4 $ 2.2 $ 66.4
Net earnings/(loss) per share – basic
$ (8.98) $ 1.72 $ 1.19 $ 1.52 $ (4.47) $ 0.80 $ 0.94 $ 0.70 $ 0.08 $ 2.52
Net earnings/(loss) per share – diluted
$ (8.90) $ 1.70 $ 1.18 $ 1.52 $ (4.44) $ 0.80 $ 0.93 $ 0.70 $ 0.08b $ 2.51b
(a) In 2002, the Company recorded a $269.0 million charge for cumulative effect of change in accounting principle, net of tax. This charge was $10.02 per diluted share. Earnings before cumulative effect of
change in accounting principle were $149.9 million or $5.58 per diluted share.
(b) Diluted earnings per share excluding the fourth quarter non-recurring charges were $0.80 for the quarter ended December 31, 2001 and $3.23 for the year ended December 31, 2001.
millions of dollars, except per share data
For the Year Ended December 31, 2002 2001 2000 1999 1998
Statement of Operations Data
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Goodwill amortization
Other, net
Restructuring and other non-recurring charges
Operating income
Equity in affiliate earnings, net of tax
Interest expense, net
Income before income taxes
Provision for income taxes
Minority interest, net of tax
Net earnings before cumulative effect of accounting change
Cumulative effect of change in accounting principle, net of tax
Net earnings/(loss)
Net earnings/(loss) per share – basic
Average shares outstanding (thousands) – basic
Net earnings/(loss) per share – diluted
Average shares outstanding (thousands) – diluted
Cash dividend declared per share
Balance Sheet Data (at end of period)
Total assets
Total debt
$2,731.1
2,176.5
554.6
303.5
—
(0.9)
—
252.0
(19.5)
37.7
233.8
77.2
6.7
149.9
(269.0)a
$ (119.1)
$ (4.47)a
26,625
$ (4.44)a
26,854
$ 0.63
$2,682.9
646.7
$2,351.6
1,890.8
460.8
249.7
42.0
(2.1)
28.4b
142.8
(14.9)
47.8
109.9
39.7
3.8
66.4
—
$ 66.4
$ 2.52b
26,315
$ 2.51b
26,463
$ 0.60
$2,770.9
737.0
$2,645.9
2,090.7
$2,458.6
1,968.3
$1,836.8
1,518.0
555.2
258.7
43.3
(8.1)
62.9c
198.4
(15.7)
62.6
151.5
54.8
2.7
94.0
—
$ 94.0
$ 3.56c
26,391
$ 3.54c
26,487
$ 0.60
$2,739.6
794.8
490.3
214.8
32.1
(2.4)
—
245.8
(11.7)
49.2
208.3
74.7
1.3
132.3
—
$ 132.3
$ 5.10
25,948
$ 5.07
26,078
$ 0.60
$2,970.7
980.3
318.8
142.6
16.8
(4.8)
—
164.2
(5.5)
26.9
142.8
46.0
2.1
94.7
—
$ 94.7
$ 4.03
23,479
$ 4.00
23,676
$ 0.60
$1,846.1
393.5
(a) In 2002, upon the adoption of SFAS No. 142, the Company recorded a $269.0 million charge for cumulative effect of accounting principle, net of tax. This charge was $10.02 per diluted share. Earnings before
cumulative effect of change in accounting principle were $149.9 million or $5.58 per diluted share.
(b) In 2001, the Company recorded $28.4 million in non-recurring charges. Net of tax, this totaled $19.0 million or $0.72 per diluted share. Earnings before non-recurring charges were $85.4 million or $3.23 per
diluted share.
(c) In 2000, the Company recorded $62.9 million in restructuring and other non-recurring charges. Net of tax, this totaled $38.7 million or $1.47 per diluted share. Earnings before restructuring and other
non-recurring charges were $132.7 million, or $5.01 per diluted share.
58
BorgWarner
59
BorgWarner
Corporate Information
COMPANY INFOR MAT IO N
BorgWarner Inc.
200 South Michigan Avenue, Chicago, IL 60604
312-322-8500
www.bwauto.com
STOCK L I STI NG
Shares are listed and traded on the New York Stock Exchange. Ticker
symbol: BWA.
Fourth Quarter 2002
Third Quarter 2002
Second Quarter 2002
First Quarter 2002
Fourth Quarter 2001
Third Quarter 2001
Second Quarter 2001
First Quarter 2001
High
$52.51
62.06
67.86
64.12
$52.25
54.50
49.62
45.81
Low
$39.15
48.89
55.87
49.71
$39.88
36.49
39.60
38.90
DI V ID ENDS
The current dividend practice established by the directors is to declare regular
quarterly dividends. The last such dividend of 18 cents per share of common
stock was declared on December 9, 2002, payable February 17, 2003, to
stockholders of record on February 3, 2003. The current practice is subject
to review and change at the discretion of the Board of Directors.
SH AR EH OL D ER S ERVICE S
Mellon Investor Services is the transfer agent, registrar and dividend
dispersing agent for BorgWarner common stock.
Mellon Investor Services for BorgWarner
85 Challenger Road
Ridgefield Park, NJ 07660
www.mellon-investor.com
Communica tions concerning stock transfer, change of address, lost stock
certificates or proxy statements for the annual meeting should be directed
to Mellon Investor Services at 800-851-4229.
DI V ID END RE INV EST MEN T AN D STO C K PUR C H ASE P LAN
The BorgWarner Dividend Reinvestment and Stock Purchase Plan has been
established so that anyone can make direct purchases of BorgWarner com-
mon stock and reinvest dividends. We pay the brokerage commissions
on purchases. Questions about the plan can be directed to Mellon at
800-851-4229. To receive a prospectus and enrollment package, contact
Mellon at 800-842-7629.
60
BorgWarner
ANNUAL MEETING OF STOCKHOLDERS
The 2003 annual meeting of stockholders will be held on Wednesday,
April 23, 2003, beginning at 10:00 a.m. on the 19th floor of our headquarters
at 200 South Michigan Avenue in Chicago.
STOCKHOLDERS
As of December 31, 2002, there were 2,979 holders of record and an
estimated 9,000 beneficial holders.
INVESTOR INFORMATION
Visit www.bwauto.com for a wide range of company information. For investor
information, including the following, click on Investor Information.
(cid:127) BorgWarner News Releases
(cid:127) BorgWarner Stock Quote
(cid:127) Earnings Release Conference Call Calendar
(cid:127) Analyst Coverage
(cid:127) Shareholder Services
(cid:127) BorgWarner In The News Articles
(cid:127) Annual Reports
(cid:127) Proxy Statement and Card
(cid:127) Dividend Reinvestment/Stock Purchase Plan
(cid:127) Financials and SEC Filings (including the Annual Report on Form 10K)
(cid:127) Request Information Form
NEWS RELEASE SIGN-U P
At our Investor Information web page, you can sign up to receive BorgWarner’s
news releases. Here’s how to sign up:
1. Go to www.bwauto.com
2. Click Investor Information
3. Click News Releases Sign-up and follow the instructions
INVESTOR INQUIRIES
Investors and securities analysts requiring financial reports, interviews or
other information should contact Mary E. Brevard, Director of Investor
Relations and Communications at BorgWarner headquarters, 312-322-8683.
For copies of printed material, call our BorgWarner Investor Relations Hot
Line at 312-322-8524.
BorgWarner Inc. owns U.S. trademark registrations for: BorgWarner, , and
TORQUE-ON-DEMAND. BorgWarner owns the following trademarks: ITM, InterActive Torque Management
and DualTronic.
PTC photo: © Studio B Architects, Michael Collyer Photographer
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
Responsibility to
the Common Good
Endless Quest
for Excellence
Continuous Renewal
Commonwealth
of BorgWarner
and its People
For BorgWarner to succeed,
Our challenge is to supply goods
Though we may be better today
To follow our vision to the future,
BorgWarner is both a federation
we must operate in a climate of
and services that are of superior
than we were yesterday, we are
we must see the difference
of businesses and a community
openness and trust, in which each
value to those who use them; to
not as good as we must become.
between traditions that give
of people. Our goal is to preserve
of us freely grants others the
create jobs that provide meaning
BorgWarner chooses to be a
us continuity and strength,
the freedom each of us needs to
same respect, cooperation and
for those who do them; to honor
leader — in serving our custom-
and conventions that no longer
find personal satisfaction while
decency we seek for ourselves.
and enhance human life; and to
ers, advancing our technologies
serve us — and have the courage
building the strength that comes
offer our talents and our wealth to
and rewarding all who invest in
to act on that knowledge. We
from unity. True unity is more
help improve the world we share.
us their time, money and trust.
must be among the few who
than a melding of self-interests;
None of us can settle for doing
anticipate change, and shape
it results when values and ideals
less than our best, and we can
it to our purpose.
also are shared.
never stop trying to surpass
what already has been achieved.
200 South Michigan
Chicago, IL 60604