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 March 31, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12-b2 of the Exchange Act).
YES X NO
On March 31, 2003 the registrant had 26,720,400 shares of Common Stock
outstanding.
BORGWARNER INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 2003
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
March 31, 2003 and December 31, 2002 3
Consolidated Statements of Operations for the three
months ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2003 and 2002 5
Notes to the Consolidated Financial Statements6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations15
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 20
Item 4. Controls and Procedures 20
PART II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
BORGWARNER INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 2003
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 months ended March 31, 2003 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,
2002.
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(millions of dollars except share data)
March 31, December 31,
2003 2002
ASSETS
Cash and cash equivalents $ 25.9 $ 36.6
Receivables 358.8 292.1
Inventories 189.2 180.3
Deferred income tax asset 11.4 11.4
Investments in businesses held for sale 14.7 14.2
Prepayments and other current assets 28.7 31.9
------- ------
Total current assets 628.7 566.5
Property, plant, and equipment at cost 1,498.4 1,467.8
Less accumulated depreciation (601.4) (572.9)
------- ------
Net property, plant and equipment 897.0 894.9
Tooling, net of amortization 80.8 82.0
Investments and advances 157.6 153.1
Goodwill 828.5 827.0
Deferred income tax asset 47.2 51.2
Other non-current assets 108.5 108.2
------- -------
Total other assets 1,222.6 1,221.5
------- -------
$2,748.3 $2,682.9
======= ========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable and current portion of
long-term debt $ 15.2 $ 14.4
Accounts payable and accrued expenses 448.2 435.6
Income taxes payable 8.0 1.2
------- -------
Total current liabilities 471.4 451.2
Long-term debt 633.6 632.3
Long-term retirement-related liabilities481.6 478.3
Other long-term liabilities 126.1 125.2
------- -------
Total long-term liabilities 607.7 603.5
Minority interest 10.2 14.5
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
27,474,092 and outstanding
shares of 26,720,400 in 2003 0.3 0.3
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; none issued
and outstanding in 2003 - -
Capital in excess of par value 742.1 737.7
Retained earnings 375.2 335.8
Management shareholder note (2.0) (2.0)
Accumulated other comprehensive income/
(loss) (56.9) (54.5)
Common stock held in treasury, at cost:
753,692 shares in 2003 (33.3) (35.9)
------- ------
Total stockholders' equity 1,025.4 981.4
------- -------
$2,748.3 $2,682.9
======== ========
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
March 31,
2003 2002
Net sales $ 775.7 $ 633.9
Cost of sales 624.2 504.2
------ ------
Gross profit 151.5 129.7
Selling, general and administrative expenses 83.6 74.5
Other, net - (0.5)
------ ------
Operating income 67.9 55.7
Equity in affiliate earnings, net of tax (6.4) (3.4)
Interest expense and finance charges 9.0 9.8
----- ------
Income before income taxes 65.3 49.3
Provision for income taxes 18.9 16.3
Minority interest, net of tax 2.2 1.5
----- ------
Net earnings before cumulative
effect of accounting change 44.2 31.5
Cumulative effect of change in accounting principle,
net of tax - (269.0)
----- ------
Net earnings/(loss) $44.2 $(237.5)
====== =======
Net earnings/(loss) per share - Basic
Net earnings per share before cumulative effect
of accounting change $ 1.66 $ 1.19
Cumulative effect of accounting change - (10.16)
----- -------
Net earnings/(loss) per share $ 1.66 $ (8.97)
====== =======
Net earnings/(loss) per share Diluted
Net earnings per share before cumulative effect
of accounting change $ 1.65 $ 1.18
Cumulative effect of accounting change - (10.08)
------ -------
Net earnings/(loss) per share 1.65 $ (8.90)
====== ========
Average shares outstanding (thousands)
Basic 26,647 26,486
Diluted 26,797 26,697
Dividends declared per share $ 0.18 $ 0.15
======= =======
See accompanying Notes to Consolidated Financial Statements
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions of dollars)
Three months ended
March 31,
2003 2002
Operating
Net earnings/(loss) $44.2 $(237.5)
Non-cash charges to operations:
Depreciation 29.7 27.0
Amortization of tooling 7.8 6.5
Cumulative effect of change in accounting
principle, net of tax - 269.0
Employee retirement benefits 3.7 4.0
Other, principally equity in affiliate earnings,
net of tax (1.1) (1.8)
------ ------
Net earnings adjusted for
non-cash charges 84.3 67.2
Changes in assets and liabilities:
Increase in receivables (62.6) (48.4)
Increase in inventories (8.0) (0.5)
(Increase)/decrease in prepayments
and other current assets 4.2 (0.5)
Increase in accounts payable and
accrued expenses 9.9 16.4
Increase in income taxes payable 7.3 14.1
Net change in other long-term
assets and liabilities (5.9) (16.0)
------ ------
Net cash provided by operating
activities 29.2 32.3
Investing
Capital expenditures (25.3) (26.1)
Tooling outlays, net of customer
reimbursements (9.4) (7.8)
Net proceeds from asset disposals 0.4 7.0
Tax refunds related to divestitures - 20.5
----- -----
Net cash used in investing
activities (34.3) (6.4)
Financing
Net increase in notes payable 0.7 18.7
Additions to long-term debt 0.3 0.4
Reductions in long-term debt (0.7) (57.5)
Payments for purchases of
treasury stock (0.2) -
Proceeds from stock options
exercised 0.2 4.5
Dividends paid (4.8) (4.1)
------ ------
Net cash used in financing
activities (4.5) (38.0)
Effect of exchange rate changes
on cash and cash equivalents (1.1) 0.9
------ ------
Net decrease in cash and cash
equivalents (10.7) (11.2)
Cash and cash equivalents at
beginning of period 36.6 32.9
------ ------
Cash and cash equivalents at end
of period $ 25.9 $ 21.7
====== ======
Supplemental Cash Flow Information
Net cash paid/(refunded) during the period for:
Interest $ 10.0 $ 11.5
Income taxes 10.5 (29.1)
Non-cash financing transactions:
Issuance of common stock for Executive Stock
Performance Plan 3.3 1.5
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 months ended
March 31, 2003 were $28.7 million. Research and development costs charged to
expense for the three months ended March 31, 2002 were $26.9 million.
(2) Inventories consisted of the following (millions of dollars):
March 31, December 31,
2003 2002
------- -------
Raw materials $ 82.4 $ 85.3
Work in progress 76.0 57.6
Finished goods 30.8 37.4
------ ------
otal inventories $ 189.2 $ 180.3
======= =======
(3) The Company accounts for its stock based employee compensation plans under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted
under those plans had an exercise price equal to or in excess of the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation.
Three Months Ended March 31,
2003 2002
Net earnings/(loss), as reported $ 44.2 $(237.5)
Deduct:
Total stock based
employee compensation expense
determined under fair value
based methods for all awards,
net of tax effects (1.1) (1.2)
------ ------
Pro forma net earnings/(loss) $ 43.1 $ (238.7)
====== =======
Earnings/(loss) per share
Basic - as reported $ 1.66 $ (8.97)
Basic - pro forma 1.62 (9.01)
Diluted - as reported 1.65 (8.90)
Diluted - pro forma 1.61 (8.94)
In calculating earnings per share, earnings are the same for the basic and
diluted calculations. Shares increased for diluted earnings per share by
150,000 and 211,000 for the period ended March 31, 2003 and 2002, respectively,
due to the effects of stock options and shares issuable under the executive
stock performance plan. For the three months ended March 31, 2003 and 2002, the
amounts earned and expensed under the plan were $1.1 million and $0.5 million,
respectively.
(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 2003 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 Companys foreign operations. The Company expects its effective tax rate
for 2003 to be approximately 29.0% on the basis of which the three month income
statements are presented.
(5) Following is a summary of notes payable and long-term debt:
March 31, 2003 December 31,2002
-------------- -----------------
Current Long-Term Current Long-Term
------- --------- ------- ----------
DEBT (millions of dollars)
Bank borrowings and other $ 8.7 $ 40.8 $8.0 $ 40.4
Term loans due through 2011
(at an average rate of 3.2% at
March, 2003 and 3.2% at
December, 2002) 6.5 32.9 6.4 31.5
7% Senior Notes due 2006,
net of unamortized discount
($125 million converted to floating
rate of 2.7% by interest
rate swap) - 139.4 - 139.3
6.5% Senior Notes due 2009,
net of unamortized discount
($50 million converted to floating
rate of 2.8% by interest
rate swap) - 164.6 - 164.9
8% Senior Notes due 2019,
net of unamortized discount - 133.9 - 134.2
7.125% Senior Notes due 2029,
net of unamortized discount - 122.0 - 122.0
------ ------ ------ ------
Total notes payable and
long-term debt $ 15.2 $ 633.6 $ 14.4 $ 632.3
====== ====== ====== =======
The Company has a revolving credit facility that provides for borrowings up to
$350 million through July, 2005. At March 31, 2003, there were no borrowings
outstanding under the facility and the Company had $0.6 million of obligations
under standby letters of credit. 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.
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 is in compliance with its credit agreement covenants as of March 31,
2003.
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
March 31, 2003 follows (currency in millions):
Notional Interest rates Floating interest
(b)
Hedge Type Amount Receive Pay Rate basis
---------- ------ ------- ---- -----------
(Millions)
Interest Rate Swaps
(a)
Fixed to floating Fair value $125 7.0% 2.7% 6 month LIBOR+1.43%
Fixed to floating Fair value $ 50 6.5% 2.8% 6 month LIBOR+1.57%
Cross Currency Swaps (mature in 2006)
Floating $ Net $70 2.7% - 6 mo. USD LIBOR+ 1.43%
floating YEN investment Y8,871 - 1.3% 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 March 31, 2003.
The ineffective portion of the cross currency swap was not material. The fair
value of the interest rate swaps at March 31, 2003 was $16.0 million. Cross
currency swaps were recorded at their fair value of $(5.1) million.
The Company also entered into certain commodity derivative instruments to
protect against commodity price changes related to forecasted raw material and
supplies purchases. The primary purpose of the commodity price hedging
activities is to manage the volatility associated with these forecasted
purchases. The Company primarily utilizes forward and option contracts with
maturities of less than twelve months, which qualify as cash flow hedges. These
instruments are intended to offset the effect of changes in commodity prices on
forecasted purchases. The fair value of the commodity derivative instruments at
March 31, 2003 was $(0.3) million.
(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 (EPA) 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 March 31, 2003 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, the EPA 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 Companys
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.
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
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 (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 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 deliveries 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. 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 challenged 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 the new version to be
available for customers by July 2003, subject to completion of customer
validation.
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. In the period ended March 31, 2003, $5.7
million of expense has been recognized.
In 2002, 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. The Company has guaranteed the residual
values of the leased machinery and equipment. The guarantees extend through the
maturity of the underlying lease. In the event the Company exercised its option
not to purchase the machinery and equipment, the Company has guaranteed a
residual value of $16.3 million.
The Company provides warranties on some of its products. 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 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. 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 (in
millions):
For the three
months ended March 31,2003
Beginning balance $ 23.7
Provisions 3.5
Incurred (1.9)
-----
Ending balance $ 25.4
(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 March 31,
(in millions) Three Months Ended
2003 2002
Income Income
Tax After- Tax After-
Pretax Effect tax Pretax Effect tax
------ ------ ----- ------ ------- -----
Foreign currency
translation
adjustments $ (2.6) $0.2 $ (2.4) $(25.2) $ 3.2 $(22.0)
Net income as reported 44.2 (237.5)
Total comprehensive income/(loss) $ 41.8 $(259.5)
The components of accumulated other comprehensive income/(loss), net of tax, in
the Consolidated Balance Sheets are as follows:
(in millions) March 31, December 31,
2003 2002
Foreign currency translation adjustments$ 4.3 $ 6.7
Minimum pension liability adjustment (61.2) (61.2)
Total comprehensive income/(loss) $(56.9) $(54.5)
The following tables show sales, earnings before interest and taxes and total
assets for the Company's reportable business segments (in millions of dollars).
Sales
Three Months Ended March 31,
2003 2002
Inter- Inter-
Customer segment Net Customer segment Net
------- ------- ----- -------- ------- ----
Drivetrain$ 321.7 $ - $ 321.7 $253.7 $ - $ 253.7
Engine 454.0 11.8 465.8 380.2 9.1 389.3
Inter-segment
eliminations - (11.8) (11.8) - (9.1) (9.1)
----- ------ ------ ------ ----- ------
Consolidated$775.7 $ - $ 775.7 $633.9 $ - $633.9
====== ======= ======== ======= ===== =======
Earnings Before
Interest & Taxes
Three Months Ended Total Assets
March 31, March 31, December 31,
2003 2002 2003 2002
----- ------ ----- ------
Drivetrain $ 26.1 $ 19.6 $ 716.5 $ 678.1
Engine 60.9 48.9 1,788.3 1,739.9
EBIT 87.0 68.5 2,504.8 2,418.0
Corporate, including
equity in
affiliates (12.7) (9.4) 243.5 264.9
------ ------ ------- -------
EBIT $ 74.3 $ 59.1 $ 2,748.3 $ 2,682.9
====== ====== ======== ========
(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, $8.4 million was spent in 2002,
$1.3 million was spent in the first three months of 2003, and the remaining $2.0
million is expected to be spent over the next nine 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, 2002 $ 3.3
Incurred 1.3
----
Balance, March 31, 2003 $ 2.0
=====
(10) 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 $90 million.
During the three months ended March 31, 2003, the amount of receivables sold
remained constant at $90 million and total cash proceeds from sales of accounts
receivable were $270.0 million. For the three months ended March 31, 2003, the
Company paid a servicing fee of $0.4 million related to these receivables, which
is included in interest expense and finance charges. At March 31, 2003 and
December 31, 2002, the Company had sold $90 million of receivables under a
Receivables Transfer Agreement for face value without recourse.
(11) 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 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 three months ended March 31, 2003, are as follows:
Drivetrain Engine Total
Balance at December 31, 2002 $129.0 $698.0 $827.0
Translation Adjustment 0.1 1.4 1.5
Balance at March 31, 2003 $129.1 $699.4 $828.5
(12)In August 2001, the 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." This 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.
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 guarantees. FIN 45 requires the
Company to recognize an initial liability for fair value of an obligation
assumed by issuing the 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 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 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, 2003. See Note 3 for the
required new disclosures.
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 interest entity should be consolidated based on
voting interest or significant financial support provided to it. For the
Company, this Interpretation is effective immediately for variable interest
entities created after January 31, 2003 and effective July 1, 2003, for variable
interest entities created before February 1, 2003. The Company does not expect
the adoption of FIN 46 to have any impact on its 2003 Consolidated Financial
Statements.
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 two reportable operating segments: Drivetrain
and Engine. The following tables present net sales and earnings before interest
and taxes (EBIT) by segment for the three months ended March 31, 2003 and 2002
in millions of dollars.
Net Sales EBIT
March 31, March 31,
2003 2002 2003 2002
----- ---- ---- -----
Drivetrain $ 321.7 $ 253.7 Drivetrain $ 26.1 $ 19.6
Engine 465.8 389.3 Engine 60.9 48.9
Inter-segment Segment EBIT $87.0 $ 68.5
eliminations (11.8) (9.1)
Net sales $ 775.7 $ 633.9
Consolidated sales for the first quarter ended March 31, 2003 totaled $775.7
million, a 22.4% increase over the first quarter of 2002. This increase was
favorable compared to the total North American automotive market, which
experienced production increases of 3%. Geographically, the Company's sales
increase was most significant in North America and Europe with lesser amounts
coming from Asia. Sales increased an additional $43 million due to stronger
currencies, primarily in Europe. Turbochargers and automatic transmissions are
the products most affected by currency fluctuations in Europe, Asia, and the
Americas.
First quarter net income increased from $31.5 million, before cumulative effect
of accounting change, to $44.2 million, a 40.3% increase. The increase in
income was due to the higher revenues, lower interest expense and a lower tax
rate.
The Drivetrain business' revenue increased 26.8% and EBIT increased $6.5
million, or 33.2% from 2002. These gains were due to four wheel drive transfer
case programs with General Motors, increased sales of the Company's Interactive
Torque Management (TM) all-wheel drive systems to Honda and Hyundai, and steady
demand for transmission components and systems, especially with increased
automatic transmission penetration in Europe.
The Engine business' first quarter 2003 sales and EBIT increased 19.6% and 24.5%
from first quarter 2002, respectively. This group benefited from several
factors. These included continued demand for the Company's chain timing systems
and turbochargers for European passenger cars, growth in sales of turbochargers
and cooling systems for European commercial vehicles, and continued solid sales
of sports-utility vehicles that increased demand for four-wheel drive chains.
Also contributing to the sales and EBIT increase was growth for a variety of
products in emerging markets such as India and China.
Consolidated gross margin for the first quarter of 2003 was 19.5%, down 1.0
percentage point from the 2002 margin of 20.5%. The gross margin was negatively
impacted about 1% due to higher growth in our lower margin products as well as
the recognition of $5.7 million of costs related to the Honeywell agreement.
Selling, general and administrative (SG&A) costs increased $9.1 million but
decreased as a percentage of sales from 11.8% to 10.8% of sales. The increase in
dollars is due to 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 first quarter of 2003, R&D spending totaled $28.7
million, or 3.7% of sales versus $26.9 million, or 4.2% of sales for the first
quarter of 2002.
First quarter interest expense decreased $0.8 million from first quarter 2002 as
a result of debt reductions throughout 2002 and 2003 as well as lower interest
rates. At March 31, 2003, the amount of debt with fixed interest rates was 58%
of total debt. Affiliate earnings, which consist primarily of the Company's 50%
share of NSK-Warner in Japan, were up $3.0 million due to strong business
performance and stronger currency.
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 2003 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 2003 to be approximately 29%.
Net income was $44.2 million for the first quarter, or $1.65 per diluted share,
an increase of 40% over the previous year's first quarter before accounting
change. Shares outstanding increased slightly due to the exercise of options
and contributions to benefit plans.
For the remainder of 2003, the Company remains concerned about production rates,
particularly in North America. This holds true for both the light vehicle
market and the commercial 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 March 31, 2003, debt increased from year-end 2002 by $2.1 million, while
cash and cash equivalents decreased by $10.7 million. Capital spending for the
three months was $25.3 million compared with $26.1 million last year. Careful
capital spending remains an area of focus for the Company. The Company expects
to spend $140 million - $150 million on capital in 2003, but this expectation is
subject to ongoing review based on market conditions. The remaining spending is
expected to be directed at cost reduction and productivity enhancement programs
in order to maintain or increase the Company's operating margins.
As of March 31, 2003 and December 31, 2002, the Company had sold $90.0 million
of receivables under a Receivables Transfer Agreement for face value without
recourse.
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 2003.
OTHER MATTERS
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, the Environmental Protection Agency 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 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
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, 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 preliminary injunction and
provides for a license to deliver 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. 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 challenged 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 the new version to be
available for customers by July 2003, subject to completion of customer
validation.
The Company is recognizing expense of the $25 million license payment as it
ships the affected products from January 2002 to June 2003. For the period ended
December 31, 2002, $14.5 million of expense was recognized. In the first
quarter of 2003, $5.7 million of expense was recognized.
Dividends
On April 3, 2003, the Company declared a $0.18 per share dividend to be paid on
May 15, 2003 to shareholders of record as of May 1, 2003.
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 segments 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.
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 guarantees. FIN 45 requires
the Company to recognize an initial liability for 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 liquidity and resulted in additional disclosures in the Company's
annual 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 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 January 1, 2003. See Note 3 for the required
new disclosures.
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 interest entity should be consolidated based on
voting interest or significant financial support provided to it. For the
Company, this Interpretation is effective immediately for variable interest
entities created after January 31, 2003 and effective July 1, 2003, for variable
interest entities created 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.
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, 2002.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
There have been no material changes to our exposures to market risk since
December 31, 2002.
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
The Company and New Venture Gear, Inc. have settled the lawsuits initially
described in the Company's Form 10-Q for the quarter ended March 31, 2001 by
filing dismissals with prejudice.
With respect to the patent infringement lawsuit filed by Honeywell International
and disclosed in the Companys previous filings, the Dusseldorf District Court
decided in January 2003 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 is challenging 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 the new version to be available for customers by July 2003,
subject to completion of customer validation.
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
On February 5, 2003 the Company issued a press release announcing Timothy M.
Manganello as Chief Executive Offer.
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: May 14, 2003
CERTIFICATION
I, Timothy M. Manganello, 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: May 14, 2003
/s/ Timothy M. Manganello
-----------------------------
Timothy M. Manganello
President 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: May 14, 2003
/s/ George E. Strickler
--------------------
George E. Strickler
Executive Vice President and Chief Financial Officer