SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarter ended September 30, 2002
Commission file number: 1-12162
(Exact name of registrant as specified in its charter)
Delaware 13-3404508
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)
200 South Michigan Avenue, Chicago, Illinois 60604
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (312) 322-8500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
On September 30, 2002 the registrant had 26,888,043 shares of Common Stock
outstanding.
BORGWARNER INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 2002
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations for the three
months ended September 30, 2002 and 2001 4
Consolidated Statements of Operations for the nine
months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 6
Notes to the Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 22
Item 4. Controls and Procedures 22
PART II. Other Information
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
BORGWARNER INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 2002
PART I.
ITEM 1.
BorgWarner Inc. and Consolidated Subsidiaries'
Financial Statements
The financial statements of BorgWarner Inc. and Consolidated Subsidiaries (the
"Company") have been prepared in accordance with the instructions to Form 10-Q
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
statements are unaudited but include all adjustments, consisting only of
recurring items, except as noted, which the Company considers necessary for a
fair presentation of the information set forth herein. The results of
operations for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the entire year. The
following financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2001.
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(millions of dollars except share data)
September 30, December 31,
2002 2001
ASSETS
Cash and cash equivalents $ 46.3 $ 32.9
Receivables 291.6 203.7
Inventories 172.1 143.8
Deferred income tax asset 23.6 23.6
Investments in businesses held for sale 13.4 12.2
Prepayments and other current assets 40.4 25.1
--------- ----------
Total current assets 587.4 441.3
Property, plant, and equipment at cost1,436.7 1,347.7
Less accumulated depreciation (580.3) (509.5)
--------- ----------
Net property, plant and equipment 856.4 838.2
Tooling, net of amortization 84.6 84.1
Investments and advances 156.5 137.4
Goodwill, net 822.9 1,160.6
Deferred income tax asset 52.6 5.7
Other non-current assets 112.1 103.6
--------- ---------
Total other assets 1,228.7 1,491.4
---------- ----------
$2,672.5 $2,770.9
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY
otes payable $ 12.6 $ 35.6
Accounts payable and accrued expenses 465.3 410.6
Income taxes payable 33.3 8.8
------- -------
Total current liabilities 511.2 455.0
Long-term debt 648.3 701.4
Long-term retirement-related liabilities401.3 393.0
Other long-term liabilities 114.3 105.9
--------- ---------
Total long-term liabilities 515.6 498.9
Minority Interest 12.5 11.4
Capital stock:
Preferred stock, $.01 par value; authorized
5,000,000 shares; none issued - -
Common stock, $.01 par value; authorized
50,000,000 shares; issued shares of
27,325,314 in 2002 and outstanding
shares of 26,888,043 in 2002 0.3 0.3
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; none issued
and outstanding in 2002 - -
Capital in excess of par value 734.1 715.7
Retained earnings 299.1 470.9
Management shareholder note (2.0) (2.0)
Accumulated other comprehensive
income (loss) (28.7) (53.1)
Common stock held in treasury, at cost:
437,271 shares in 2002 (17.9) (27.6)
--------- --------
Total stockholders' equity 984.9 1,104.2
--------- ---------
$2,672.5 $2,770.9
=========== ==========
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
Three Months Ended
September 30,
2002 2001
Net sales $ 684.0 $ 559.9
Cost of sales 556.1 451.5
----------- --------------
Gross profit 127.9 108.4
Selling, general and
administrative expenses 73.2 59.2
Goodwill amortization 0.0 10.4
Other, net (0.2) (0.6)
----------- ------------
Operating Income 54.9 39.4
Equity in affiliate earnings, net of tax(4.5) (3.3)
Interest expense and finance charges 9.3 12.3
------------- ---------------
Income before income taxes 50.1 30.4
Provision for income taxes 16.4 10.9
Minority interest, net of tax 1.8 1.1
---------- --------
Net earnings $ 31.9 $ 18.4
Net earnings per share - Basic $ 1.19 $ 0.70
======== =========
Net earnings per share - Diluted $ 1.18 $ 0.70
========= =========
Average shares outstanding (thousands)
Basic 26,756 26,340
Diluted 26,989 26,496
Dividends declared per share $ 0.15 $ 0.15
======== =========
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions of dollars except share data)
Nine Months Ended
September 30,
2002 2001
Net sales $ 2,030.3 $ 1,768.8
Cost of sales 1,621.6 1,426.2
------------ --------------
Gross profit 408.7 342.6
Selling, general and administrative
expenses 224.3 181.9
Goodwill amortization - 31.4
Other, net (0.6) (1.1)
-------- ---------
Operating Income 185.0 130.4
Equity in affiliate earnings, net of tax (13.9) (12.0)
Interest expense and finance charges 28.7 37.5
-------- -------
Income before income taxes 170.2 104.9
Provision for income taxes 56.2 38.3
Minority interest, net of tax 4.9 2.4
--------- ---------
Net earnings before cumulative
effect of accounting change 109.1 64.2
Cumulative effect of change in accounting principle,
net of tax (269.0) -
-------- ---------
Net earnings/(loss) $(159.9) $ 64.2
===== =======
Net earnings/(loss) per share - Basic
Net earnings per share before cumulative effect
of accounting change $ 4.10 $ 2.44
Cumulative effect of accounting
change (10.11) -
--------- ------------
Net earnings/(loss) per share $ (6.01) $ 2.44
====== =======
Net earnings/(loss) per share - Diluted
Net earnings per share before cumulative effect
of accounting change $ 4.07 $ 2.43
Cumulative effect of accounting
change (10.03) -
--------- -----------
Net earnings/(loss) per share (5.96) $ 2.43
======= =======
Average shares outstanding (thousands)
Basic 26,602 26,300
Diluted 26,835 26,456
Dividends declared per share $ 0.45 $ 0.45
======= ======
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
Nine Months Ended
September 30,
2002 2001
Operating
Net earnings (loss) $(159.9) $ 64.2
Non-cash charges to operations:
Depreciation 80.8 78.4
Amortization of tooling 21.2 18.1
Goodwill amortization - 31.4
Cumulative effect of change in accounting
principle, net of tax 269.0 -
Employee retirement benefits 17.3 -
Other, principally equity in affiliate earnings,
net of tax (13.8) (10.2)
------- -------------
Net earnings (loss) adjusted for
non-cash charges 214.6 181.9
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
Increase in receivables (76.3) (42.1)
(Increase) decrease in inventories (24.9) 8.0
Increase in prepayments and other
current assets (13.3) (3.6)
Increase in accounts payable and
accrued expenses 43.7 7.4
Increase in income taxes payable 24.1 19.6
Net change in other long-term assets
and liabilities (0.8) 10.5
-------- -----------
Net cash provided by operating
activities 167.1 181.7
Investing
Capital expenditures (81.4) (93.2)
Tooling outlays, net of customer
reimbursements (17.3) (22.2)
Net proceeds from asset disposals 9.0 1.4
Proceeds from sale of businesses 2.6 13.9
Tax refunds related to divestitures 20.5 -
---------- -----------
Net cash used in investing activities (66.6) (100.1)
Financing
Net decrease in notes payable (24.0) (12.5)
Additions to long-term debt 2.3 23.2
Reductions in long-term debt (65.1) (65.3)
Payments for purchases of treasury stock 0.0 (0.7)
Proceeds from stock options exercised 9.6 3.9
Dividends paid (11.9) (11.8)
------- -------
Net cash used in financing activities (89.1) (63.2)
Effect of exchange rate changes on cash and
cash equivalents 2.0 (1.2)
------- ---------
Net increase in cash and cash equivalents 13.4 17.2
Cash and cash equivalents at beginning of
period 32.9 21.4
-------- ----------
Cash and cash equivalents at end of period $ 46.3 $ 38.6
======= =======
Supplemental Cash Flow Information
Net cash paid (received) during the period for:
Interest $31.2 $ 39.1
Income taxes (12.6) 13.8
Non-cash financing transactions:
Issuance of common stock for Executive Stock
Performance Plan 1.2 1.0
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Research and development costs charged to expense for the three and nine
months ended September 30, 2002 were $29.6 million and $87.3 million. Research
and development costs charged to expense for the three and nine months ended
September 30, 2001 were $30.0 million and $86.9 million, respectfully.
(2) Inventories consisted of the following (millions of dollars):
September 30, December 31,
2002 2001
Raw materials
Work in progress
Finished goods
Total inventories $ 78.2 $ 65.2
65.9 47.4
28.0 33.8
------- ----------
$ 172.1 $ 146.4
========= ==========
(3) The Company has a 50% interest in NSK-Warner K.K. (NSK-Warner), a joint
venture based in Japan that manufactures automatic transmission components and
systems. 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 investment in NSK-Warner was $150.9 million at September 30, 2002
and $128.8 million at December 31, 2001.
Following are summarized financial data for NSK-Warner. Balance sheet data is
presented as of September 30, 2002 and March 31, 2002 and statement of income
data is presented for the three and six months ended September 30, 2002 and
2001. The Company's results include its share of NSK-Warner's results for the
three and nine months ended August 31, 2002 and August 31, 2001.
September 30, March 31,
2002 2002
(in millions)
Balance Sheet
Current assets $ 173.7 $ 147.2
Non-current assets 146.5 133.8
Current liabilities 93.9 83.1
Non-current liabilities 5.3 4.4
The equity as of September 30, 2002 and March 31, 2002 was $218.8 million and
$191.4 million, respectively. There was no debt as of September 30, 2002 and
March 31, 2002.
Three Months Ended
September 30, 2002 2001
(in millions)
Net sales $ 83.0 $ 71.6
Gross profit 19.9 13.8
Net income 8.9 4.8
Six Months Ended
September 30, 2002 2001
(in millions)
Net sales $ 156.3 $ 141.9
Gross profit 36.1 28.3
Net income 15.7 10.7
(4) The Company's provision for income taxes is based upon estimated annual tax
rates for the year applied to federal, state and foreign income. The effective
rate for 2002 differed from the U.S. statutory rate primarily due to a)state
income taxes, b)foreign rates which differ from those in the U.S. and
c)realization of certain business tax credits, including foreign tax credits and
research and development credits. In 2002, the Company completed a change in the
ownership structure of its foreign operations for strategic business purposes.
An indirect result of this change was lower tax rates on the income of certain
of the Company's foreign operations. The Company expects its effective tax rate
for 2002 to be approximately 33.1% on the basis of which the three and nine
month income statements are presented.
(5) Following is a summary of notes payable and long-term debt:
September 30, 2002 December 31,2001
Current Long-Term Current Long-Term
DEBT (millions of dollars)
Bank borrowings
Term loans due through 2011
(at an average rate of 3.2% at
September, 2002 and 3.0% at
December, 2001)
7% Senior Notes due 2006,
net of unamortized discount
($100 million converted to floating
rate of 2.7% by interest rate swap)
6.5% Senior Notes due 2009,
net of unamortized discount
($25 million converted to floating
rate of 2.2% by interest rate swap)
8% Senior Notes due 2019,
net of unamortized discount
7.125% Senior Notes due 2029,
net of unamortized discount
Capital lease liability
Total notes payable and
long-term debt $ 6.6 $ 58.1 $30.6 $ 69.4
6.0 29.6 5.0 31.2
- 139.3 - 141.8
- 164.9 - 164.7
- 134.2 - 134.2
- 122.0 - 159.9
- 0.2 - 0.2
------------ ---------- ------------ ------------
$12.6 $648.3 $35.6 $701.4
====== ====== ======= =======
The Company has a revolving credit facility that provides for borrowings up to
$350 million through July, 2005. At September 30, 2002, there were no
borrowings outstanding under the facility and the Company had $7.3 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 others, 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
September 30, 2002 follows (currency in millions):
Notional Interest rates(b) Floating interest
Hedge Type Amount Receive Pay Rate basis
Interest Rate Swaps(a) (Millions)
Fixed to floating Fair value $100 7.0% 2.7% 6 month LIBOR+.98%
Fixed to floating Fair value $ 25 6.5% 2.2% 6 month LIBOR+.45%
Cross Currency Swap (matures in 2006)
Floating $ Net $50 2.7% - 6 mo. USD LIBOR+.98% to
Yen 6,430 - 1.3% 6 mo. JPY LIBOR+1.18%
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 September 30, 2002.
The ineffective portion of the cross currency swap was not material. There is
no income statement impact due to changes in the fair value of these swaps.
(6) The Company and certain of its current and former direct and indirect
corporate predecessors, subsidiaries and divisions have been identified by the
United States Environmental Protection Agency and certain state environmental
agencies and private parties as potentially responsible parties (PRPs) at
various hazardous waste disposal sites under the Comprehensive Environmental
Response, Compensation and Liability Act (Superfund) and equivalent state laws
and, as such, may presently be liable for the cost of clean-up and other
remedial activities at 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 the 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 September 30, 2002 of approximately
$21.2 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 environmental
liabilities relating to the past operations of Kuhlman Electric. During 2000,
Kuhlman Electric notified the Company that it discovered potential environmental
contamination at its 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 Polychlorinated 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 injury 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 its reserve for environmental liabilities is
sufficient to cover any potential liability associated with these matters.
Patent infringement actions were filed against the Company's turbocharger unit
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 manufacture and sell a certain
variable turbine geometry turbocharger in Germany until a patent hearing
currently 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 ship
disputed car turbochargers through June of 2003. The agreement with Honeywell
partially settles litigation, suspends the July 2002 preliminary injunction and
provides for a license to ship until June 2003. As part of the agreement,
Honeywell agreed to not seek damages for shipments occurring 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. The Company continues to believe that its current production
designs do not violate the Honeywell patents and are not covered by their
lawsuit. A hearing on the turbocharger model currently in dispute is still
scheduled for December 2002. It is anticipated that the District Court's
decision will thereafter be issued in early 2003.
The Company has and will recognize expense of the $25 million license payment as
it ships the affected products from January 2002 to June 2003.
During the third quarter, the Company entered into a lease obligation for $28.3
million in principal for machinery and equipment. The lease payments are
expected to be $3.5 million in 2003. The lease extends until December 2005 and
is being accounted for as an operating lease.
(7) Comprehensive income (loss) is a measurement of all changes in
stockholders' equity that result from transactions and other economic events
other than transactions with stockholders. For the Company, this includes
foreign currency translation adjustments, changes in the minimum pension
liability adjustment and net earnings. The amounts presented as other
comprehensive income (loss), net of related taxes, are added to net income
resulting in comprehensive income (loss).
The following summarizes the components of other comprehensive income (loss) on
a pretax and after-tax basis for the periods ended September 30,
(in millions) Three Months Ended
2002 2001
Income Income
Tax After- Tax After-
Pretax Effect tax Pretax Effect tax
Foreign currency
translation adjustments $ 11.9 $(2.7) $9.2 $14.4 $ (5.3) $ 9.1
Net income as reported 31.9 18.4
----- -----
Total comprehensive income (loss) $ 41.1 $27.5
====== =======
(in millions) Nine Months Ended
2002 2001
Income Income
Tax After- Tax After-
Pretax Effect tax Pretax Effect tax
Foreign currency
translation adjustments $32.3 $ (7.9) $ 24.4 $(9.6) $ 3.6 $(6.0)
Net income (loss) as reported (159.9) 64.2
-------- ------
Total comprehensive income (loss) $(135.5) $ 58.2
======== =======
The components of accumulated other comprehensive income (loss),net of tax,
in the Consolidated Balance Sheets are as follows:
(in millions) September 30, December 31,
2002 2001
Foreign currency translation adjustments $ (9.8) $ (34.2)
Minimum pension liability adjustment (18.9) (18.9)
-------- ---------
Total comprehensive income (loss) $ (28.7) $ (53.1)
======== ==========
The following tables show sales, earnings before interest and taxes and total
assets for each of the Company's five reportable business segments (in millions
of dollars).
Sales
Three Months Ended September 30, 2002 2001
Inter- Inter-
Customer segment Net Customer segment Net
Air/Fluid Systems $90.9 $ 3.0 $ 93.9 $81.9 $ 1.6 $83.5
Cooling Systems 62.2 - 62.2 53.3 - 53.3
Morse TEC 258.5 7.5 266.0 206.5 5.5 212.0
TorqTransfer Systems 153.7 1.0 154.7 114.1 0.3 114.4
Transmissions Systems 118.7 6.0 124.7 104.1 2.7 106.8
Divested Operations - - - - - -
Inter-segment elimi-
nations - (17.5) (17.5) - (10.1) (10.1)
-------- --------- --------- ---------- ---------- ---------
Consolidated $684.0 $ - $ 684.0$ 559.9 $ - $559.9
===== ====== ===== ===== ====== =====
Sales
Nine Months Ended September 30, 2002 2001
Inter- Inter-
Customer segment Net Customer segment Net
Air/Fluid Systems $ 290.2 $ 9.1 $ 299.3 $263.5 $ 5.5 $269.0
Cooling Systems 177.9 - 177.9 169.6 - 169.6
Morse TEC 757.5 20.7 778.2 637.2 16.7 653.9
TorqTransfer Systems 449.8 2.4 452.2 368.2 0.9 369.1
Transmissions Systems354.9 14.4 369.3 312.3 8.3 320.6
Divested Operations - - - 18.0 - 18.0
Inter-segment
eliminations - (46.6) (46.6) - (31.4) (31.4)
------- -------- ---------- --------- ---------- ---------
Consolidated $2,030.3 $ - $ 2,030.3 $ 1,768.8 $- $ 1,768.8
===== ==== ===== ====== ======= =====
Earnings Before Earnings Before
Interest & Taxes Interest & Taxes
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2001
2002 2001 As Adjusted 2002 2001 As Adjusted
Air/Fluid Systems $4.0 $ 2.1 $ 3.7 $ 21.4 $ 11.1 $ 16.0
Cooling Systems 6.9 1.9 6.3 20.2 6.0 19.3
Morse TEC 34.9 26.9 29.9 110.2 85.6 94.8
TorqTransfer Systems 7.4 2.5 2.5 25.2 12.7 12.7
Transmission Systems 16.3 12.0 13.4 50.1 35.9 40.1
Divested operations - - - - (0.2) (0.2)
------ ------- ------- ------- --------- -------
Total 69.5 45.4 55.8 227.1 151.1 182.7
Corporate, including
equity in affiliates(10.1) (2.7) (2.7) (28.2) (8.7) (8.9)
------- ------- ------- ------- ------- -----
EBIT $59.4 $ 42.7 $ 53.1 $ 198.9 $ 142.4 $ 173.8
======= ====== ======= ======= ======= ======
The 2001 as adjusted columns show the 2001 reported EBIT by segment, excluding
goodwill amortization. This is to be comparable to the 2002 presentation, which
requires that goodwill not be amortized.
Total Assets
September 30, December 31,
2002 2001
Air/Fluid Systems $ 321.8 $382.1
Cooling Systems 247.7 510.1
Morse TEC 1,148.8 1,066.4
TorqTransfer Systems 286.0 266.6
Transmission Systems 380.6 359.6
------- -------
Total 2,384.9 2,584.8
Corporate, including
equity in affiliates 287.6 186.1
-------- --------
Consolidated $2,672.5 $2,770.9
========= =========
(9) Other non-recurring charges of $28.4 million were incurred in the fourth
quarter of 2001. These 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. These 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 environmental
remediation costs related to sold businesses and $12 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.
Of the $28.4 million of pretax charges, $5.0 million represents non-cash
charges. Approximately $3.3 million was spent in 2001, $8.4 million was
transferred to environmental reserves in 2001, $4.8 million was spent in the
nine months ended September 30, 2002, and the remaining $6.9 million is expected
to be spent over the next eighteen months. The Company expects to fund the
total cash outlay of these actions with cash flow from operations.
The roll-forward for the balance of the other exit costs and non-recurring
charges are detailed in the following table.
Other Exit Costs and
Non-Recurring
Charges
(in millions of dollars)
Balance, December 31, 2001 $ 11.7
Incurred 4.8
------
Balance, September 30, 2002 $ 6.9
======
(10) In April 2001, the Company completed the sale of its fuel systems business
to an investor group led by TMB Industries, a private equity group. The
transaction did not have a significant impact on the Company's results of
operations, financial condition or cash flows.
(11) 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, up to a maximum of $120 million.
During the nine months ended September 30, 2002, the amount of receivables sold
ranged from $119 million to $120 million. There are no gains or losses booked
as a result of these transactions. At September 30, 2002, the Company had sold
$120 million of receivables under a Receivables Transfer Agreement for face
value without recourse.
(12) In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 allocated 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 operating 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 nine months ended September 30, 2002, are as
follows:
Torq-
Air/Fluid Cooling Morse Transmission Transfer
Systems Systems TEC Systems Systems Total
Balance at 12/31/2001
$228.9 $417.3 $385.4 $129.0 $0.0 $1,160.6
Translation
adjustments 0.4 1.1 5.8 7.3
Change in accounting
principle (73.5) (271.5) - - - (345.0)
-------- ------- -------- ------ ------- ---------
Balance at 9/30/2002
$155.8 $146.9 $391.2 $129.0 $0.0 $822.9
======== ======= ======== ====== ======= ========
Also as a result of the adoption of SFAS 142, the Company did not amortize
goodwill in 2002. The following table provides adjusted net income (loss) and
earnings per share data for the three and nine months ended September 30, 2002
and 2001 as if goodwill had not been amortized during these periods:
For the Quarter Ended September 30,
2002 2001
(in millions of dollars)
Reported net earnings $ 31.9 $ 18.4
Goodwill amortization, net of tax - 6.6
------- ---------
Adjusted net earnings $ 31.9 $ 25.0
==== =====
Basic earnings per share:
Reported net earnings $ 1.19 $ 0.70
Goodwill amortization - 0.24
-------- ----------
Adjusted net earnings $1.19 $ 0.94
==== ======
Diluted earnings per share:
Reported net earnings $1.18 $0.70
Goodwill amortization - 0.24
Adjusted net earnings $1.18 $0.94
For the Nine Months Ended September 30,
2002 2001
(in millions of dollars)
Reported net earnings before cumulative
effect of change in accounting principle $109.1 $64.2
Goodwill amortization, net of tax - 19.8
-------- ---------
Adjusted net earnings before cumulative
effect of change in accounting principle $109.1 $84.0
Cumulative effect of change in accounting
principle, net of tax (269.0) -
-------- ----------
Adjusted net earnings (loss) ($159.9) $84.0
===== =======
Basic earnings (loss) per share:
Reported net earnings before cumulative
effect of change in accounting principle $4.10 $2.44
Goodwill amortization - 0.74
-------- ----------
Adjusted net earnings before cumulative
effect of change in accounting principle $4.10 $3.18
Cumulative effect of change in accounting
principle, net of tax ($10.11) -
-------- ----------
Adjusted net earnings (loss) ($6.01) $3.18
==== ======
Diluted earnings (loss) per share:
Reported net earnings before cumulative
effect of change in accounting principle $4.07 $2.43
Goodwill amortization - 0.74
------ ----------
Adjusted net earnings before cumulative
effect of accounting change $4.07 $3.17
Cumulative effect of change in accounting
principle, net of tax ($10.03) -
------ ---------
Adjusted net earnings (loss) ($5.96) $3.17
=== ======
(13)In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 classification 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 No. 30 "Reporting 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 companies
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 associated 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.
(14) Certain prior year amounts have been reclassified to conform to the current
year presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading
global supplier of highly engineered systems and components for powertrain
applications. Its products help improve vehicle performance, fuel efficiency,
handling and air quality. Its products are manufactured and sold worldwide,
primarily to original equipment manufacturers (OEMs) of passenger cars, sport
utility vehicles, trucks, and commercial transportation products. The Company
operates manufacturing facilities serving customers in the Americas, Europe and
Asia, and is an original equipment supplier to every major OEM in the world.
RESULTS OF OPERATIONS
The Company's products fall into five reportable operating segments: Air/Fluid
Systems, Cooling Systems, Morse TEC, TorqTransfer Systems and Transmission
Systems. The following tables present net sales and earnings before interest and
taxes (EBIT) by segment for the three and nine months ended September 30, 2002
and 2001 in millions of dollars.
Three Months Nine Months
Net Sales September 30, September 30,
2002 2001 2002 2001
Air/Fluid Systems $ 93.9$ 83.5 299.3 269.0
Cooling Systems 62.2 53.3 177.9 169.6
Morse TEC 266.0 212.0 778.2 653.9
TorqTransfer Systems 154.7 114.4 452.2 369.1
Transmission Systems 124.7 106.8 369.3 320.6
Divested operations - - - 18.0
-------- ------- ---------- ------------
701.55 70.0 2,076.9 1,800.2
Inter-segment eli-
minations (17.5) (10.1) (46.6) (31.4)
------- --------- --------- -----------
Net sales $ 684.0 $ 559.9 $2030.3 $1,768.8
==== ==== ====== =====
Three Months Nine Months
EBIT September 30, September 30,
2001 2001
2002 2001 As Adjusted 2002 2001 As Adjusted
Air/Fluid Systems $ 4.0 $ 2.1 $ 3.7 $ 21.4 $ 11.1 $16.0
Cooling Systems 6.9 1.9 6.3 20.2 6.0 19.3
Morse TEC 34.9 26.9 29.9 110.2 85.6 94.8
TorqTransfer Systems 7.4 2.5 2.5 25.2 12.7 12.7
Transmission Systems 16.3 12.0 13.4 50.1 35.9 40.1
Divested operations - - - - (0.2) (0.2)
---- -------- -------- ---------- --------- ---------
EBIT $ 69.5 $ 45.4 $ 55.8 $ 227.1 $ 151.1 $ 182.7
=== ==== ====== ===== ====== =======
The 2001 as adjusted columns show the 2001 reported EBIT by segment, excluding
goodwill amortization. This is to be comparable to the 2002 presentation, which
required that goodwill not be amortized.
Consolidated sales for the third quarter ended September 30, 2002 totaled $684.0
million, a 22.2% increase over the third quarter of 2001. This increase was
favorable compared to the total North American automotive market, which
experienced production increases of 11%. Geographically, the Company's sales
increase was most significant in North America and Europe with lesser amounts
coming from Asia. Sales increased an additional $5.1 million primarily due to
stronger European currencies. The Morse TEC and Transmission Systems'
businesses are the most affected by currency fluctuations in Europe, Asia, and
the Americas.
Third quarter net income increased from $18.4 million to $31.9 million, a 73%
increase. The increase in operating income was positively impacted by the
elimination of goodwill amortization in accordance with SFAS 142, which the
Company adopted January 1, 2002. If goodwill amortization were removed from the
2001 results, the increase in income would have been 28%. The increase in
income was due to higher revenue and gross margin, lower interest expense and a
lower tax rate, and was partially offset by higher selling, general and
administrative (SG&A) expenses.
For better comparability, all segment EBIT discussions will use adjusted 2001
figures as if they did not contain goodwill amortization.
The Air/Fluid Systems business' revenue increased 12.5% and EBIT increased $0.3
million, or 8.1% from 2001. The increase in revenue was due to higher sales to
the major OEM customer of this business as well as the ramp-up in production
volume of a European customer.
The Cooling Systems business' third quarter 2002 sales and EBIT increased 16.7%
and 9.5% from third quarter 2001, respectively. Penetration into Asian markets
and U.S. aftermarket contributed to increased revenues. EBIT improved due to
volume increases, but the EBIT margin decreased due to the impact of a plant
consolidation.
The Morse TEC business had a sales increase of 25.5%. 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, many
of which utilize the Company's chain products for their four-wheel drive
systems. EBIT increased 16.7% due to the increased volumes. The increase would
have been greater except for the recognition of $6.5 million in costs related to
the Honeywell agreement discussed more fully in Note 6.
The TorqTransfer Systems' business experienced a 35.2% sales increase and a 196%
EBIT increase. This business has a relatively high fixed cost structure, which
causes larger swings in earnings when production volume changes. This benefited
the group during the third quarter of 2002 where revenue increased due to volume
gains in new applications, such as GM, Kia, Honda and Hyundai. Existing
applications to Ford were strong in the third quarter as well.
Transmission Systems had a 16.8% sales increase and 21.6% increase in EBIT.
Sales growth was strong in all regions for this business, due to a combination
of market conditions and new applications, both in North America and overseas.
The EBIT increase was driven by a combination of increased volume and cost
controls.
Consolidated gross margin for the third quarter of 2002 was 18.7%, down 0.7
percentage points from the 2001 margin of 19.4%. The gross margin was
negatively impacted by about 1% due to the recognition of $6.5 million of costs
related to the Honeywell agreement. Without that charge, the gross margin would
have been 19.6%, continuing the trend of gross margin increases over the prior
year. SG&A expenses increased $14.0 million and also increased as a percentage
of sales from 10.6% to 10.7% of sales. This is due to higher health care and
retiree costs, and higher risk management costs. Additionally, the SG&A category
includes substantially all the Company's spending on R&D. For the third quarter
of 2002, R&D spending totaled $29.6 million, or 4.3% of sales versus $30.0
million, or 5.4% of sales for the third quarter of 2001.
There was no goodwill amortization in 2002, compared to $31.4 million
year-to-date
in 2001, due to the change in accounting standards where goodwill is no
longer amortized, but rather is periodically reviewed for impairment.
Third quarter interest expense decreased $3.0 million from third quarter 2001 as
a result of debt reductions throughout 2001 and 2002 as well as lower interest
rates. At September 30, 2002, the amount of debt with fixed interest rates was
60% of total debt. Affiliate earnings, which consist primarily of the Company's
50% share of NSK-Warner in Japan, were up $1.2 million due to a strengthening in
their business.
The Company's provision for income taxes is based on estimated annual tax rates
for the year applied to federal, state and foreign income. The effective rate
for 2002 differed from the U.S. statutory rate primarily due to a) state income
taxes, b) foreign rates which differ from those in the U.S. and c) realization
of certain business tax credits, including foreign tax credits and research and
development credits. In 2002, the Company completed a change in the ownership
structure of certain of its foreign operations for strategic business purposes.
An indirect result of this change was lower tax rates on the income of certain
of the Company's foreign operations. The Company expects its effective tax rate
for 2002 to be 34%.
Net income was $31.9 million for the third quarter, or $1.18 per diluted share,
an increase of 73% over the previous year's third quarter. If last year's
goodwill amortization were not included, the increase in income for the 2002
third quarter would have been 28%. Shares outstanding increased due to the
exercise of options and contributions to benefit plans.
For the remainder of 2002, the Company remains concerned about production rates,
particularly in North America. While it appears that short-term production
rates in 2002 will be higher than 2001, there is uncertainty regarding the
remainder of the year. This holds true for both the light vehicle market and
the heavy truck market. As a result, the Company is continuing to be cautious
in its capital investment plans and other spending. Despite these issues, the
Company maintains a positive long-term outlook for its business and is committed
to ongoing strategic investments in capital and new product development to
enhance its product leadership strategy.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 2002, debt declined from year-end 2001 by $76.1 million,
while cash and cash equivalents increased by $13.4 million. Cash from
operations contributed to the majority of the debt reduction. Capital spending
for the three months was $26.1 million compared with $42.6 million last year.
Careful capital spending remains an area of focus for the Company. The Company
expects to spend less than $130 million on capital in 2002, but this expectation
is subject to ongoing review based on market conditions. The Company expects
that approximately 67% of its capital spending will be for new and expanded
product programs, and the Company's new Powertrain Technical Center. The
remaining spending is expected to be directed at cost reduction and productivity
enhancement programs in order to maintain the Company's operating margins.
As of September 30, 2002 and December 31, 2001, the Company had sold $120
million of receivables under a Receivables Transfer Agreement for face value
without recourse.
Since December 31, 2001, goodwill declined $338 million primarily due to the
implementation of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets." This SFAS requires goodwill to be
periodically reviewed for impairment at a level of detail at or below the
reporting segment level. The Company had a goodwill write down of $345 million
($269 million after tax) as a result of the implementation of SFAS No. 142.
The Company believes that the combination of cash from operations and available
credit facilities will be sufficient to satisfy its cash needs for the current
level of operations and planned operations for the remainder of 2002.
OTHER MATTERS
Sale of fuel systems
In April 2001, the Company sold its fuel systems business. This business was
acquired as part of the acquisition of Kuhlman Corporation in March 1999. After
evaluating its business, metal fuel tanks and related components for the heavy
and medium truck markets, the Company determined this business to be non-core.
The proceeds were used for general corporate purposes, including the repayment
of indebtedness. This business has been included in the divested operations
category for business segment reporting since acquisition. The transaction did
not have a significant impact on the Company's results of operations, financial
condition or cash flows.
Litigation
As discussed more fully in Note 6 to the Consolidated Financial Statements,
various claims and suits seeking money damages arising in the ordinary course of
business and involving environmental liabilities have been filed against the
Company. In each of these cases, the Company believes it has a defendable
position and has made adequate provisions to protect the Company from material
losses. The Company believes that it has established adequate provisions for
litigation liabilities in its financial statements in accordance with generally
accepted accounting principles in the United States of America.
In connection with the sale of Kuhlman Electric Corporation, the Company agreed
to indemnify the buyer and Kuhlman Electric for certain environmental
liabilities relating to the past operations of Kuhlman Electric. During 2000,
Kuhlman Electric notified 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 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 these matters.
Patent infringement actions were filed against the Company's turbocharger unit
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 limiting the Company's ability to manufacture and sell a certain
variable turbine geometry turbocharger in Germany until a patent hearing
currently 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 ship
disputed car turbochargers through June of 2003. The agreement with Honeywell
partially settles litigation, suspends the July 2002 preliminary injunction and
provides for a license to ship until June 2003. As part of the agreement,
Honeywell agreed to not seek damages for shipments occurring 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. The Company continues to believe that its current production designs
do not violate the Honeywell patents and are not covered by their lawsuit. A
hearing on the turbocharger model currently in dispute is still scheduled for
December 2002. It is anticipated that the District Court's decision will
thereafter be issued in early 2003.
The Company has and will recognize expense of the $25 million license payment as
it ships the affected products from January 2002 to June 2003.
Other Commitments and Contingencies
During the third quarter, the Company entered into a lease obligation for $28.3
million in principal for machinery and equipment. The lease payments are
expected to be $3.5 million in 2003. The lease extends until December 2005 and
is being accounted for as an operating lease.
Dividends
On October 9, 2002, the Company declared a $0.15 per share dividend to be paid
on November 15, 2002 to shareholders of record as of November 1, 2002.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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 allocated 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 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 operating 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.
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 classification 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 No. 30 "Reporting 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 companies
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 associated 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.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis of Financial
Condition and Results of Operations may contain forward-looking statements as
contemplated by the 1995 Private Securities Litigation Reform Act that are based
on management's current expectations, estimates and projections. Words such as
"expects," "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 vehicle production,
the continued use of outside suppliers, fluctuations in demand for vehicles
containing the Company's products, general economic conditions, as well as other
risks detailed in the Company's filings with the Securities and Exchange
Commission, including the Cautionary Statements filed as Exhibit 99.1 to the
Form 10-K for the fiscal year ended December 31, 2001.
Item 3. Quantitative and Qualitative Disclosure about Market Risks
There have been no material changes to our exposures to market risk since
December 31, 2001.
Item 4. Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls pursuant to Exchange Act Rule 13a - 14 within the 90-day
period prior to the filing of this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures are effective in ensuring that all material information
required to be filed in this quarterly report has been made known to them in a
timely fashion. There have been no significant changes in internal controls or
in other factors that could significantly affect internal controls, subsequent
to the date the Chief Executive Officer and the Chief Financial Officer
completed their evaluation.
PART II
Item 1. Legal Proceedings
There have been no significant developments in the legal proceedings disclosed
in the Company's Form 10-Q for the quarter ended March 31, 2001.
With respect to the patent infringement lawsuit filed by Honeywell International
and previously disclosed in the Company's form 10-Q for the quarter ended March
31, 2002, the Dusseldorf District Court in Germany entered a preliminary
injunction against the Company on July 9 limiting the Company's ability to
manufacture and sell a certain variable turbine geometry turbocharger in Germany
until a patent hearing currently 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 ship
disputed car turbochargers through June of 2003. The agreement with Honeywell
partially settles litigation, suspends the July 2002 preliminary injunction and
provides for a license to ship until June 2003. As part of the agreement,
Honeywell agreed to not seek damages for shipments occurring 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. The Company continues to believe that its current production designs
do not violate the Honeywell patents and are not covered by their lawsuit. A
hearing on the turbocharger model currently in dispute is still scheduled for
December 2002. It is anticipated that the District Court's decision will
thereafter be issued in early 2003.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
Reports on Form 8-K
July 7, 2002 The Company issued a press release relating to a patent
infringement lawsuit.
August 8, 2002 John F. Fiedler, Chief Executive Officer, and George E.
Strickler, Chief Financial Officer, submitted to the Securities and Exchange
Commission sworn statements pursuant to Securities and Exchange Commission Order
No. 4-460.
August 16, 2002 John F. Fiedler and the Five Dancing Bears L.P. entered into a
trading plan pursuant to Rule 10b5(c)-1 of the Securities and Exchange Act of
1934.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
BorgWarner Inc.
(Registrant)
By /s/ William C. Cline
(Signature)
William C. Cline
Vice President and Controller
(Principal Accounting Officer)
Date: November 14, 2002
CERTIFICATION
I, John F. Fiedler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BorgWarner Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ John F. Fiedler
------------------------
John F. Fiedler
Chairman of the Board and Chief Executive Officer
CERTIFICATION
I, George E. Strickler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of BorgWarner Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ George E. Strickler
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George E. Strickler
Chief Financial Officer