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, 2004
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, 2004 the registrant had 27,853,652 shares of Common Stock
outstanding.
BORGWARNER INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 2004
INDEX
Page No.
PART I. Financial Information
Item 1. Financial Statements
Introduction 2
Condensed Consolidated Balance Sheets at
March 31, 2004 and December 31, 2003 3
Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003 4
Consolidated Statements of Cash Flows for the three
months ended March 31, 2004 and 2003 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
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, 2004
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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, 2004 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,
2003.
BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(millions of dollars except share data)
March 31, December 31,
2004 2003
------------ ------------
ASSETS
Cash and cash equivalents $ 78.7 $ 113.1
Receivables 515.6 414.9
Inventories 215.7 201.3
Deferred income tax asset 32.9 32.8
Investments in businesses
held for sale 39.8 32.0
Prepayments and other current
assets 45.9 30.5
---- -----
Total current assets 928.6 824.6
Property, plant, and equipment
at cost 1,700.4 1,665.7
Less accumulated depreciation (707.0) (680.4)
---- -------
Net property, plant and
equipment 993.4 985.3
Tooling, net of amortization 94.9 90.5
Investments and advances 184.3 177.3
Goodwill 851.7 852.0
Other non-current assets 116.9 109.2
------ -------
Total other assets 1,247.8 1,229.0
------- -------
$ 3,169.8 $ 3,038.9
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Notes payable and current portion of
long-term debt $ 9.1 $ 10.0
Accounts payable and
accrued expenses 551.3 460.3
Income taxes payable 34.7 -
----- -----
Total current liabilities 595.1 470.3
Long-term debt 603.1 634.0
Long-term retirement-related
liabilities 482.5 503.0
Other long-term liabilities 134.6 154.0
----- -----
Total long-term liabilities 617.1 657.0
Minority interest 15.1 17.2
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:2004,
27,853,883; 2003, 27,614,927; outstanding
shares: 2004,27,853,652;2003,
27,578,595 0.3 0.3
Non-voting common stock, $.01 par value;
authorized 25,000,000 shares; none issued
and outstanding in 2004 - -
Capital in excess of par value 778.4 756.3
Retained earnings 535.5 491.3
Accumulated other comprehensive
income 25.3 14.0
Common stock held in treasury, at cost:
2004, 1,992 shares; 2003,
36,332 shares (0.1) (1.5)
----- -------
Total stockholders' equity 1,339.4 1,260.4
-------- --------
$ 3,169.8 $ 3,038.9
========= ========
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,
2004 2003
----- ------
Net sales $ 903.1 $ 775.7
Cost of sales 730.5 624.2
------ ------
Gross profit 172.6 151.5
Selling, general and
administrative expenses 94.7 83.6
Other, net .3 -
----- -----
Operating income 77.6 67.9
Equity in affiliate earnings,
net of tax (6.5) (6.4)
Interest expense and finance charges 7.5 9.0
------ -----
Income before income taxes 76.6 65.3
Provision for income taxes 22.9 18.9
Minority interest, net of tax 2.6 2.2
------ ------
Net earnings $ 51.1 $ 44.2
======= ========
Net earnings per share - Basic $ 1.84 $ 1.66
======== =========
Net earnings per share Diluted $ 1.82 $ 1.65
======== =========
Average shares outstanding (thousands)
Basic 27,722 26,647
Diluted 28,022 26,797
Dividends declared per share $ 0.25 $ 0.18
======= =======
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,
2004 2003
------ ---------
Operating
Net earnings $ 51.1 $ 44.2
Non-cash charges to operations:
Depreciation 33.7 29.7
Amortization of tooling 9.8 7.8
Employee retirement benefits 18.9 3.7
Other, principally equity
in affiliate earnings,
net of tax (6.5) (1.1)
------ ------
Net earnings adjusted for
non-cash charges 107.0 84.3
Changes in assets and liabilities:
Increase in receivables (102.6) (62.6)
Increase in inventories (14.2) (8.0)
(Increase)/decrease in prepayments
and other current assets (8.3) 4.2
Increase in accounts payable
and accrued expenses 91.2 9.9
Increase in income taxes payable 34.1 7.3
Net change in other long-term
assets and liabilities (40.5) (5.9)
------ ------
Net cash provided by
operating activities 66.7 29.2
Investing
Capital expenditures (40.5) (25.3)
Tooling outlays, net of
customer reimbursements (13.7) (9.4)
Net proceeds from asset disposals - 0.4
Investment in unconsolidated
subsidiary (7.8) -
------- --------
Net cash used in investing
activities (62.0) (34.3)
Financing
Net increase/(decrease) in
notes payable (0.8) 0.7
Additions to long-term debt .2 0.3
Reductions in long-term debt (34.2) (0.7)
Payments for purchases of
treasury stock - (0.2)
Proceeds from stock options
exercised 2.2 0.2
Dividends paid (6.9) (4.8)
------- -------
Net cash used in financing
activities (39.5) (4.5)
Effect of exchange rate changes
on cash and cash equivalents 0.4 (1.1)
------- -------
Net decrease in cash and
cash equivalents (34.4) (10.7)
Cash and cash equivalents at
beginning of period 113.1 36.6
-------- -------
Cash and cash equivalents
at end of period $78.7 $ 25.9
======== ========
Supplemental Cash Flow Information
Net cash paid during the period for:
Interest $ 9.4 $ 10.0
Income taxes 6.5 10.5
Non-cash financing transactions:
Issuance of common stock for Executive Stock
Performance Plan 2.0 3.3
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, 2004 were $29.6 million. Research and development costs charged to
expense for the three months ended March 31, 2003 were $29.5 million.
(2) Inventories consisted of the following (millions of dollars):
March 31, December 31,
2004 2003
--------- ---------
Raw materials $93.5 $ 95.5
Work in progress 70.7 65.1
Finished goods 51.5 40.7
------ -------
Total inventories $ 215.7 $ 201.3
======= ========
(3) The Company accounts for its stock-based employee compensation plans under
the recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected in net
income for stock options, 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 provision of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," to all stock-based employee
compensation awards.
Three Months Ended March 31,
2004 2003
------ -------
Net earnings, as reported $51.1 $ 44.2
Add:
Stock-based employee compensation
expense included in net income,
net of income tax 0.4 0.4
Deduct:
Total stock-based employee
compensation expense
determined under fair
value based methods for
all awards, net of tax effects(1.2) (1.5)
------ -------
Pro forma net earnings $ 50.3 $ 43.1
======= ========
Net earnings per share
Basic as reported $ 1.84 $ 1.66
Basic pro forma 1.81 1.62
Diluted as reported 1.82 1.65
Diluted pro forma 1.80 1.61
In calculating earnings per share, earnings are the same for the basic and
diluted calculations. Shares increased for diluted earnings per share by
300,000 and 150,000 for the period ended March 31, 2004 and 2003, respectively,
due to the effects of stock options and shares issuable under the executive
stock performance plan. For the three months ended March 31, 2004 and 2003, the
amounts earned and expensed under the plan were $1.1 million and $1.1 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 2004 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. The Company expects its effective tax rate for
2004 to be approximately 30.0%. This rate is about 1.5% higher than the full
prior year due to changes in tax laws in some of the countries where the Company
does business.
(5) Following is a summary of notes payable and long-term debt:
March 31, 2004 December 31,2003
Current Long-Term Current Long-Term
-------- ---------- -------- -----------
DEBT (millions of dollars)
Bank borrowings and other $ 2.0 $ 37.1 $ 2.9 $ 42.5
Term loans due through 2011
(at an average rate of 3.3% at
March 31, 2004 and 3.4% at
December 31, 2003) 7.1 30.7 7.1 31.4
7% Senior Notes due 2006,
net of unamortized discount
($139 million converted to floating
rate of 2.9% by interest rate
swap at March 31, 2004) - 139.4 - 139.4
6.5% Senior Notes due 2009,
net of unamortized discount
($75 million converted to floating
rate of 3.8% by interest rate
swap at March 31, 2004) - 139.9 - 164.7
8% Senior Notes due 2019,
net of unamortized discount
($75 million converted to
floating rate of 3.8% by
interest rate swap at
March 31, 2004) - 133.9 - 133.9
7.125% Senior Notes due 2029,
net of unamortized discount - 122.1 - 122.1
------ -------- ------- -------
Total notes payable and
long-term debt $ 9.1 $ 603.1 $ 10.0 $ 634.0
======= ======== ======== =======
The Company has a revolving credit facility that provides for borrowings up
to $350 million through July 2005. At March 31, 2004 and December 31, 2003,
there were no borrowings outstanding and no obligations under standby letters of
credit under the facility. 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, 2004.
(6) 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, 2004 follows (currency in millions):
Notional Interest rates Floating interest
Hedge Type Amount (b)Receive Pay Rate basis
---------- -------- ---------- ------ --------------
Interest Rate Swaps (Millions)
(a)
Fixed to floating Fair value $139 7.0% 2.9% 6 month LIBOR+1.7%
Fixed to floating Fair value $ 75 6.5% 3.8% 6 month LIBOR+2.6%
Fixed to floating Fair Value $ 75 8.0% 3.8% 6 month LIBOR+2.6%
Cross Currency Swap (matures in 2006)
Floating $ Investment $100 2.2% - 6 mo. USD LIBOR+1.0%
To floating (Y) (Y)12,192 - 1.3% 6 mo. JPY LIBOR+1.2%
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, 2004.
The ineffective portion of the swaps was not material. As of March 31, 2004 and
December 31, 2003, the fair value of the fixed to floating interest rate swaps
was $17.2 and $11.5 million, respectively. The cross currency swaps were
recorded at their fair value of $(16.8) and $(13.6) million at March 31, 2004
and December 31, 2003, respectively. Fair value is based on quoted market
prices for contracts with similar maturities.
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 are designated as cash flow
hedges.
These instruments are intended to offset the effect of changes in commodity
prices on forecasted purchases. As of March 31, 2004 the Company had no forward
and option commodity contracts outstanding. At December 31, 2003, the Company
had forward and option commodity contracts with a total notional value of $1.1
million and a fair value of $0.1 million. During the three months ended March
31, 2004 and 2003, hedge ineffectiveness of these contracts was not material.
The Company uses foreign exchange forward contracts to hedge forecasted future
purchases of materials consumed in the production process, and the receivables
related to forecasted sales through the second quarter of 2009, and are
designated as cash flow hedges. Foreign currency contracts require the Company,
at a future date, to either buy or sell foreign currency in exchange for
primarily U.S. Dollars, Euro, Japanese Yen and British Pounds Sterling.
Contracts outstanding as of March 31, 2004 will mature over the next 3 years and
had net sales contract notional amounts of $19.6 million and E82.1 million and
fair value of $5.7 million, which is deferred in Other Comprehensive Income and
will be reclassified into income as the related inventories are sold. Contracts
outstanding as of December 31, 2003 had contract notional amounts of $21.9
million and E3.0 million and a fair value of $1.1 million.
(7) 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 41 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, 2004 of approximately
$21.0 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 and remediate
the contamination. The investigation revealed the presence of Polychlorinated
Biphenyls (PCBs) in portions of the soil at the plant and neighboring areas.
Clean up began in 2000 and is continuing. 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 believes that the reserve for environmental liabilities and any
insurance recoveries are adequate to cover any potential liability associated
with environmental matters. However, due to the nature of environmental
remediation, there can be no assurance that the actual amount of environmental
liabilities will not exceed the amount reserved.
The Company has guaranteed the residual values of certain leased machinery and
equipment at one of its facilities. The guarantees extend through the maturity
of the underlying lease, which is in 2005. In the event the Company exercises
its option not to purchase the machinery and equipment, the Company has
guaranteed a residual value of $16.3 million. We don't believe we have any loss
exposure due to this guarantee.
The Company entered into a royalty agreement with Honeywell International for
certain variable turbine geometry (VTG) turbochargers after a German court ruled
in favor of Honeywell in a patent infringement action. In order to continue
shipping to its OEM customers, the Company and Honeywell entered into two
separate royalty agreements, signed in July 2002 and June 2003, respectively.
The June 2003 agreement runs through 2006 and calls for a minimum royalty to be
paid over stated volume levels, meaning the royalty will increase for any units
sold above the stated amounts in the royalty agreement.
The royalty costs recognized under the agreement were $5.7 million in the first
quarter 2003 and $4.7 million in the first quarter 2004. These costs were all
recognized as part of cost of goods sold. These costs will continue to decrease
in 2004 and be at minimal levels in 2005 and 2006 as the Company's primary
customers are anticipated to convert to the Company's next generation VTG
turbocharger beginning in mid-2004.
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, 2004
Beginning balance $ 28.7
Provisions 3.9
Incurred (2.8)
-------
Ending balance $ 29.8
=======
(8) Comprehensive income 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, net of
related taxes, are added to net income resulting in comprehensive income.
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
----------------------
2004 2003
----- -----
Income Income
Tax After- Tax After-
Pretax Effect tax Pretax Effect tax
------- -------- ------- ------- ------- --------
Foreign currency
translation
adjustments $ 13.7 $(2.4) $11.3 $(2.6) $ 0.2 $(2.4)
Net income as
reported 51.1 44.2
----- -------
Total comprehensive
income $62.4 $ 41.8
====== ========
The components of accumulated other comprehensive income, net of tax, in the
Consolidated Balance Sheets are as follows:
(in millions) March 31, December 31,
2004 2003
------ -------
Foreign currency translation adjustments $85.8 $ 74.5
Minimum pension liability adjustment (60.5) (60.5)
------ -------
Total comprehensive income $25.3 $ 14.0
======= ========
(9) The following tables show net sales, earnings before interest and taxes and
total assets for the Company's reportable operating segments (in millions of
dollars).
Net Sales
Three Months Ended March 31,
2004 2003
Inter- Inter-
Customer segment Net Customer segment Net
--------- -------- ------- -------- -------- --------
Drivetrain $ 359.6 $ - $ 359.6 $321.7 $ - $ 321.7
Engine 543.5 13.6 557.1 454.0 11.8 465.8
Inter-segment
eliminations - (13.6) (13.6) - (11.8) (11.8)
------- ------- ------- ------- ------- --------
Consolidated $ 903.1 $ - $ 903.1 $775.7 $ - $ 775.7
======= ======= ======= ======= ======== ========
Earnings Before
Interest & Taxes
Three Months Ended Total Assets
March 31, March 31, December 31,
2004 2003 2004 2003
------ ------ ------- ------
Drivetrain $ 30.7 $ 26.1 $ 825.3 $ 778.8
Engine 68.0 60.9 2,017.4 1,925.1
------ ------ --------- ---------
subtotal 98.7 87.0 2,842.7 2,703.9
Corporate, including
equity in affiliates (14.6) (12.7) 327.1 335.0
----- ------ -------- ---------
Total $84.1 $ 74.3 $3,169.8 $3,038.9
===== ====== ========= =========
(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 $50 million.
During the three months ended March 31, 2004, the amount of receivables sold
remained constant at $50 million and total cash proceeds from sales of accounts
receivable were $150.0 million. For the three months ended March 31, 2004, the
Company paid a servicing fee of $0.1 million related to these receivables, which
is included in interest expense and finance charges. At March 31, 2004 and
December 31, 2003, the Company had sold $50 million of receivables under a
Receivables Transfer Agreement for face value without recourse.
(11) The changes in the carrying amount of goodwill (in millions of dollars) for
the three months ended March 31, 2004, are as follows:
Drivetrain Engine Total
Balance at December 31, 2003 $134.3 $717.7 $852.0
Translation adjustment (0.1) (0.2) (0.3)
------ ------ ------
Balance at March 31, 2004 $134.2 $717.5 $851.7
====== ====== ======
(12) The Company has a number of defined benefit pension plans and other
postretirement benefit plans covering eligible salaried and hourly employees.
The other postretirement benefits plans, which provide medical and life
insurance benefits, are unfunded plans. The estimated contributions for 2004 are
from $30 to $35 million, of which about $22 million has been contributed in the
first quarter. The components of net periodic benefit cost recorded in the
Company's Consolidated Statement of Operations, are as follows:
Pension Other
Benefits Postretirement
Benefits
Three Months Ended March 31,
2004 2003 2004 2003
---- ------ ----- ------
Service cost $0.8 $2.5 $1.7 $1.3
Interest cost 4.6 7.0 7.9 7.4
Expected return on plan assets(6.5) (6.6) - -
Amortization of unrecognized - 0.1 - -
transition asset
Amortization of unrecognized 0.4 0.4 - -
prior service cost
Amortization of unrecognized
loss 1.7 2.4 2.9 1.5
---- ----- ----- -----
Net periodic benefit cost $1.0 $5.8 $12.5 $10.2
===== ====== ====== =====
(13)In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51,"which was revised in December 2003. FIN No. 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 No. 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, as revised, was effective January
1, 2004. The Company has no variable interest entities required to be
consolidated as a result of adopting FIN No. 46, therefore, there was no impact
on our Consolidated Financial Statements.
In December 2003, the FASB issued a revised SFAS No. 132, "Employer's
Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132
changes employers' disclosures about pension plans and other postretirement
benefits and requires additional disclosures about assets, obligations, cash
flows and net periodic benefit cost. The Statement is effective for annual and
interim periods ended after December 15, 2003. The Company adopted SFAS No. 132
as of December 31, 2003, resulting in additional disclosures in the Company's
annual and interim Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation ("FIN") No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others", which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN No.
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 No.
45 on January 1, 2003 did not have any impact on the Company's financial
position, operating results or liquidity and resulted in additional disclosures
in the Company's Consolidated Financial Statements.
In January 2004, the FASB issued FASB Staff Position SFAS ("FSP") No. 106-1,
"Accounting Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2002 (the Act). The
Act, signed into law in December 2003, establishes a prescription drug benefit
under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. The Act introduces two new features to Medicare
that must be considered when measuring accumulated postretirement benefit
costs.
The new features include a subsidy to the plan sponsors that is based on 28% of
an individual beneficiary's annual prescription drug costs between $250 and
$5,000 and an opportunity for a retiree to obtain a prescription drug benefit
under Medicare. The Act is expected to reduce the Company's net postretirement
benefit costs.
The Company has elected to defer the adoption of FSP No. 106-1 due to lack of
specific accounting guidance. Therefore, the net post retirement benefit costs
disclosed in the Consolidated Financial Statements do not reflect the impact of
the Act on the plans. The deferral will continue to apply until specific
authoritative accounting guidance for the federal subsidy is issued.
Authoritative guidance on the accounting for the federal subsidy is pending and,
when issued, could require information previously reported in the Company's
Consolidated Financial Statements to change. The Company is currently
investigating the impacts of FSP No. 106-1's initial recognition, measurement
and disclosure provisions on its Consolidated Financial Statements.
Item 2. 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 vehicle
powertrain applications. Our products help improve vehicle performance, fuel
efficiency, handling, and air quality. They 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, 2004 and 2003
in millions of dollars.
Net Sales EBIT
March 31, March 31,
2004 2003 2004 2003
------- ------ ------ ------
Drivetrain $359.6 $ 321.7 Drivetrain $ 30.7 $ 26.1
Engine 557.1 465.8 Engine 68.0 60.9
Inter-segment Segment EBIT$ 98.7 $ 87.0
eliminations (13.6) (11.8) ====== ======
Net sales $903.1 $775.7
====== ======
Consolidated sales for the first quarter ended March 31, 2004 totaled $903.1
million, a 16.4% increase over the first quarter of 2003. This increase occurred
in a relatively flat market, as production in North America and Europe was down
approximately 1% from the previous year's quarter. Sales increased an
additional $42.4 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. Without the currency
impact, the increase in sales would have been 10.9%.
First quarter 2004 net income increased from $44.2 million to $51.1 million in
the prior year quarter, a 15.6% increase. The increase in income was due
primarily from the profits on the increased revenues.
The Drivetrain business' revenue increased 11.8% and EBIT increased $4.6
million, or 17.6% from 2003. These gains were due to four-wheel drive transfer
case programs with General Motors and Ford, 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 2004 sales and EBIT increased 19.6% and 11.7%
from first quarter 2003, respectively. This group benefited from continued
demand for the Company's turbochargers for European passenger cars and
commercial vehicles, as well as moderate growth in the chain portion of the
group. The EBIT was due to increased revenue, but was partially offset by start
up costs for Variable Cam Timing systems, which will launch later in 2004 and
for new Korean operations.
Consolidated gross margin for the first quarter of 2004 was 19.1%, compared to
the 2003 margin of 19.5%. Gross margin decreased due to relatively higher
growth in lower margin products and higher materials prices for commodities,
particularly steel, aluminum and copper.
Selling, general and administrative (SG&A) costs increased $11.1 million, but
decreased as a percentage of sales from 10.8% to 10.5% of sales. The increase in
dollars was due to additional administration needed to support the growth of the
Company's various businesses. Also contributing to the dollar increase was a
$3.7 million write down of a note receivable related to a previous sale of a
non-core business arising from an acquisition. For the first quarter of 2004,
spending on research and development (R&D), which is included in SG&A, totaled
$29.6 million, or 3.3% of sales versus $29.5 million, or 3.8% of sales for the
first quarter of 2003.
First quarter interest expense decreased $1.5 million from first quarter 2003 as
a result of reduced debt level and lower interest rates. At March 31, 2004, the
amount of debt with fixed interest rates was 49% of total debt. Equity in
affiliate earnings, which consist primarily of the Company's 50% share of
NSK-Warner in Japan, was up $0.1 million.
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 2004 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 2004 to be approximately 30%. This is a slight increase over last year due
to changes in tax laws in some of the countries where the Company does business.
Net income was $51.1 million for the first quarter, or $1.82 per diluted share,
an increase of $.17 over the previous year's first quarter. The increase from
prior years first quarter was due to operations $.10 per share, favorable
currency of $.14 per share offset by a share dilution impact of $(.17) per
share. Shares outstanding increased due to the exercise of options and
contributions to benefit plans.
For the remainder of 2004, the Company remains concerned about production rates,
particularly in North America. This holds true for both the light vehicle
market and the commercial market. Despite these concerns, 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
Operating cash flows increased from $29.2 million in 2003 to $66.7 million in
2004. The main factors were an increase in income and certain liabilities
offset by increased asset levels. The Company made a scheduled royalty payment
of $14.2 million in the first quarter of 2004.
Capital spending for the three months was $40.5 million compared with $25.3
million last year. Careful capital spending remains an area of focus for the
Company, both in order to support new business and for cost reductions and
productivity improvements. The Company expects to spend $180 million - $190
million on capital in 2004, but this expectation is subject to ongoing review
based on market conditions.
As of March 31, 2004, debt decreased from year-end 2003 by $31.8 million, while
cash and cash equivalents decreased by $34.4 million. The primary reason for
this was the paydown of $34.2 million of debt. The Company paid dividends of
$6.9 million and $4.8 million in the first quarter of 2004 and 2003
respectively.
As of March 31, 2004 and December 31, 2003, the Company had sold $50.0 million
of receivables under a Receivables Transfer Agreement for face value without
recourse.
From a credit quality perspective, we have an investment grade credit rating of
A- from Standard & Poor's and Baa2 from Moody's. The Standard & Poor's rating
was upgraded from BBB+ to A- on May 5, 2004. Moody's confirmed their rating on
April 22, 2004 and raised their outlook from stable to positive.
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 2004.
OTHER MATTERS
Litigation
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 41 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, 2004 of approximately
$21.0 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 and remediate
the contamination. The investigation revealed the presence of Polychlorinated
Biphenyls (PCBs) in portions of the soil at the plant and neighboring areas.
Clean up began in 2000 and is continuing. 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 believes that the reserve for environmental liabilities and any
insurance recoveries are adequate to cover any potential liability associated
with environmental matters. However, due to the nature of environmental
remediation, there can be no assurance that the actual amount of environmental
liabilities will not exceed the amount reserved.
Stock Split/Dividends
On April 21, 2004, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of common stock from 50,000,000 to 150,000,000. The approval
of the amendment will allow the Company to proceed with its previously announced
2-for-1 stock split on May 17, 2004 to stockholders of record on May 3, 2004.
On April 21, 2004, the Company declared a $0.125 per post-split share ($0.25 on
a pre-split basis) dividend to be paid on May 17, 2004 to stockholders of record
as of May 3, 2004.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51,"which was revised in December 2003. FIN No. 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 No. 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, as revised, was effective January
1, 2004. The Company has no variable interest entities required to be
consolidated as a result of adopting FIN No. 46, therefore, there was no impact
on our Consolidated Financial Statements.
In December 2003, the FASB issued a revised SFAS No. 132, "Employer's
Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132
changes employers' disclosures about pension plans and other postretirement
benefits and requires additional disclosures about assets, obligations, cash
flows and net periodic benefit cost. The Statement is effective for annual and
interim periods ended after December 15, 2003. The Company adopted SFAS No. 132
as of December 31, 2003, resulting in additional disclosures in the Company's
annual and interim Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation ("FIN") No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others", which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN No.
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 No.
45 on January 1, 2003 did not have ny impact on the Company's financial
position, operating results or liquidity and resulted in additional disclosures
in the Company's Consolidated Financial Statements.
In January 2004, the FASB issued FASB Staff Position SFAS ("FSP") No. 106-1,
"Accounting Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2002 (the Act). The
Act, signed into law in December 2003, establishes a prescription drug benefit
under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. The Act introduces two new features to Medicare
that must be considered when measuring accumulated postretirement benefit
costs.
The new features include a subsidy to the plan sponsors that is based on 28% of
an individual beneficiary's annual prescription drug costs between $250 and
$5,000 and an opportunity for a retiree to obtain a prescription drug benefit
under Medicare. The Act is expected to reduce the Company's net postretirement
benefit costs.
The Company has elected to defer the adoption of FSP No. 106-1 due to lack of
specific accounting guidance. Therefore, the net post retirement benefit costs
disclosed in the Consolidated Financial Statements do not reflect the impact of
the Act on the plans. The deferral will continue to apply until specific
authoritative accounting guidance for the federal subsidy is issued.
Authoritative guidance on the accounting for the federal subsidy is pending and,
when issued, could require information previously reported in the Company's
Consolidated Financial Statements to change. The Company is currently
investigating the impacts of FSP No. 106-1's initial recognition, measurement
and disclosure provisions on its 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, 2003.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
There have been no material changes to our exposures to market risk since
December 31, 2003.
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 and procedures as of the end of the period covered by 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 information required to be disclosed in reports that
the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There have been no changes in internal
controls over financial reporting that occurred during the period covered by
this report that have materially affected, or are likely to materially affect
our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various judicial and administrative proceedings which
are considered to be routine and incidental to its business including those
described under Other Matters Litigation. Management does not believe that the
results of any of these proceedings are likely to have a material adverse effect
on the Company's liquidity, financial condition or results of operations.
Like many other industrial companies, the Company continues to be named as one
of the defendants in asbestos-related personal injury actions. Management
believes that the Company's involvement is limited to claims that relate to a
few types of automotive friction products, manufactured many years ago, that
contained encapsulated asbestos. The Company aggressively defends against these
lawsuits and has been successful in obtaining dismissal of many cases without
any payment whatsoever or, in many cases for nominal or minimal settlement
payments. The Company has significant insurance coverage with solvent carriers
and, to date, has not incurred any out-of-pocket costs, other than immaterial
administration expenses, in connection with these lawsuits or any settlements
thereof.
A declaratory judgment action was filed in January 2004 in the Circuit Court of
Cook County, Illinois by Continental Casualty Company and related companies
("CNA") against the Company and certain of its other historical general
liability insurers. CNA provided the Company with primary and excess insurance,
and, in conjunction with another primary insurer, is currently defending and
indemnifying the Company in all of its pending asbestos-related claims. The
lawsuit seeks to determine the extent of insurance coverage available to the
Company including whether the available limits exhaust on a "per occurrence" or
an aggregate basis, and to determine how the applicable coverage
responsibilities should be apportioned. In addition to the primary insurance
available for these claims, the Company has substantial historical excess and
umbrella insurance available for any anticipated asbestos-related liabilities.
Although it is impossible to predict the outcome of pending or future claims, in
light of the nature of the products, our experience in defending and resolving
claims in the past, our insurance coverage and existing reserves, management
does not believe that asbestos-related claims will have a material adverse
effect on the Company's liquidity, financial condition or results of
operations.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer
Exhibit 32 Section 1350 Certifications
Reports on Form 8-K
On February 5, 2004, the Company filed a report on Form 8-K, furnishing a copy
of a news release relating to its earnings for the fourth quarter of 2003 and
for the 2003 fiscal year.
Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51,"which was revised in December 2003. FIN No. 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 No. 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, as revised, was effective January
1, 2004. The Company has no variable interest entities required to be
consolidated as a result of adopting FIN No. 46, therefore, there was no impact
on our Consolidated Financial Statements.
In December 2003, the FASB issued a revised SFAS No. 132, "Employer's
Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132
changes employers' disclosures about pension plans and other postretirement
benefits and requires additional disclosures about assets, obligations, cash
flows and net periodic benefit cost. The Statement is effective for annual and
interim periods ended after December 15, 2003. The Company adopted SFAS No. 132
as of December 31, 2003, resulting in additional disclosures in the Company's
annual and interim Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation ("FIN") No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others", which expands previously issued
accounting guidance and disclosure requirements for certain guarantees. FIN No.
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 No.
45 on January 1, 2003 did not have any impact on the Company's financial
position, operating results or liquidity and resulted in additional disclosures
in the Company's Consolidated Financial Statements.
In January 2004, the FASB issued FASB Staff Position SFAS ("FSP") No. 106-1,
"Accounting Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to
make a one-time election to defer accounting for the effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2002 (the Act). The
Act, signed into law in December 2003, establishes a prescription drug benefit
under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. The Act introduces two new features to Medicare
that must be considered when measuring accumulated postretirement benefit
costs.
The new features include a subsidy to the plan sponsors that is based on 28% of
an individual beneficiary's annual prescription drug costs between $250 and
$5,000 and an opportunity for a retiree to obtain a prescription drug benefit
under Medicare. The Act is expected to reduce the Company's net postretirement
benefit costs.
The Company has elected to defer the adoption of FSP No. 106-1 due to lack of
specific accounting guidance. Therefore, the net post retirement benefit costs
disclosed in the Consolidated Financial Statements do not reflect the impact of
the Act on the plans. The deferral will continue to apply until specific
authoritative accounting guidance for the federal subsidy is issued.
Authoritative guidance on the accounting for the federal subsidy is pending and,
when issued, could require information previously reported in the Company's
Consolidated Financial Statements to change. The Company is currently
investigating the impacts of FSP No. 106-1's initial recognition, measurement
and disclosure provisions on its 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, 2003.
Item 3. Quantitative and Qualitative Disclosure About Market Risks
There have been no material changes to our exposures to market risk since
December 31, 2003.
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 and procedures as of the end of the period covered by 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 information required to be disclosed in reports that
the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. There have been no changes in internal
controls over financial reporting that occurred during the period covered by
this report that have materially affected, or are likely to materially affect
our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various judicial and administrative proceedings which
are considered to be routine and incidental to its business including those
described under Other Matters Litigation. Management does not believe that the
results of any of these proceedings are likely to have a material adverse effect
on the Company's liquidity, financial condition or results of operations.
Like many other industrial companies, the Company continues to be named as one
of the defendants in asbestos-related personal injury actions. Management
believes that the Company's involvement is limited to claims that relate to a
few types of automotive friction products, manufactured many years ago, that
contained encapsulated asbestos. The Company aggressively defends against these
lawsuits and has been successful in obtaining dismissal of many cases without
any payment whatsoever or, in many cases for nominal or minimal settlement
payments. The Company has significant insurance coverage with solvent carriers
and, to date, has not incurred any out-of-pocket costs, other than immaterial
administration expenses, in connection with these lawsuits or any settlements
thereof.
A declaratory judgment action was filed in January 2004 in the Circuit Court of
Cook County, Illinois by Continental Casualty Company and related companies
("CNA") against the Company and certain of its other historical general
liability insurers. CNA provided the Company with primary and excess insurance,
and, in conjunction with another primary insurer, is currently defending and
indemnifying the Company in all of its pending asbestos-related claims. The
lawsuit seeks to determine the extent of insurance coverage available to the
Company including whether the available limits exhaust on a "per occurrence" or
an aggregate basis, and to determine how the applicable coverage
responsibilities should be apportioned. In addition to the primary insurance
available for these claims, the Company has substantial historical excess and
umbrella insurance available for any anticipated asbestos-related liabilities.
Although it is impossible to predict the outcome of pending or future claims, in
light of the nature of the products, our experience in defending and resolving
claims in the past, our insurance coverage and existing reserves, management
does not believe that asbestos-related claims will have a material adverse
effect on the Company's liquidity, financial condition or results of
operations.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive
Officer
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial
Officer
Exhibit 32 Section 1350 Certifications
Reports on Form 8-K
On February 5, 2004, the Company filed a report on Form 8-K, furnishing a copy
of a news release relating to its earnings for the fourth quarter of 2003 and
for the 2003 fiscal year.
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 7, 2004