q63007.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT
(Mark
One)
X
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For
the
quarterly period ended June 30, 2007
OR
___
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For
the
transition period from ____________ to ____________
Commission
file number: 1-12162
BORGWARNER
INC.
(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.)
3850
Hamlin Road, Auburn Hills,
Michigan 48326
(Address
of principal executive
offices) (Zip
Code)
Registrant's
telephone number, including area code: (248) 754-9200
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
(Check
one):
Large
Accelerated Filer X
Accelerated Filer___ Non-Accelerated Filer___
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ___ NO
X
On
June
30, 2007, the registrant had 57,934,275 shares of Common Stock
outstanding.
BORGWARNER
INC.
FORM
10-Q
THREE
AND SIX MONTHS ENDED JUNE 30, 2007
INDEX
|
Page
No.
|
PART
I. Financial
Information
|
|
Item
1. Financial Statements
|
|
Condensed
Consolidated Balance Sheets as of June
30, 2007 (Unaudited) and December 31, 2006
|
3
|
Condensed
Consolidated Statements of Operations (Unaudited) for the three
and six
months ended June 30, 2007 and 2006
|
4
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the six months
ended
June 30, 2007 and 2006
|
5
|
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
6
|
Item
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
|
23
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
32
|
Item
4. Controls and Procedures
|
32
|
PART
II. Other
Information
|
|
Item
1. Legal Proceedings
|
34
|
Item
2. Repurchases of Equity Securities
|
34
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
34
|
Item
6. Exhibits
|
36
|
SIGNATURES
|
37
|
PART
I. FINANCIAL INFORMATION
BORGWARNER
INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(millions
of dollars)
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$ |
118.5
|
|
|
$ |
123.3
|
|
Marketable
securities
|
|
|
58.4
|
|
|
|
59.1
|
|
Receivables
|
|
|
848.3
|
|
|
|
744.0
|
|
Inventories
|
|
|
424.6
|
|
|
|
386.9
|
|
Deferred
income taxes
|
|
|
36.7
|
|
|
|
33.7
|
|
Prepayments
and other current assets
|
|
|
95.6
|
|
|
|
90.5
|
|
Total
current assets
|
|
|
1,582.1
|
|
|
|
1,437.5
|
|
|
|
|
|
|
|
|
|
|
Property,
plant & equipment, net
|
|
|
1,476.7
|
|
|
|
1,460.7
|
|
|
|
|
|
|
|
|
|
|
Investments
& advances
|
|
|
218.8
|
|
|
|
198.0
|
|
Goodwill
|
|
|
1,095.4
|
|
|
|
1,086.5
|
|
Other
non-current assets
|
|
|
402.6
|
|
|
|
401.3
|
|
Total
other assets
|
|
|
1,716.8
|
|
|
|
1,685.8
|
|
Total
assets
|
|
$ |
4,775.6
|
|
|
$ |
4,584.0
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$ |
87.8
|
|
|
$ |
151.7
|
|
Accounts
payable and accrued expenses
|
|
|
925.6
|
|
|
|
843.4
|
|
Income
taxes payable
|
|
|
34.9
|
|
|
|
39.7
|
|
Total
current liabilities
|
|
|
1,048.3
|
|
|
|
1,034.8
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
557.6
|
|
|
|
569.4
|
|
Other
non-current liabilities:
|
|
|
|
|
|
|
|
|
Retirement-related
liabilities
|
|
|
668.0
|
|
|
|
660.9
|
|
Other
|
|
|
315.4
|
|
|
|
281.4
|
|
Total
other non-current liabilities
|
|
|
983.4
|
|
|
|
942.3
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in consolidated subsidiaries
|
|
|
161.4
|
|
|
|
162.1
|
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
0.6
|
|
|
|
0.6
|
|
Capital
in excess of par value
|
|
|
905.9
|
|
|
|
871.1
|
|
Retained
earnings
|
|
|
1,161.9
|
|
|
|
1,064.1
|
|
Accumulated
other comprehensive loss
|
|
|
(27.2 |
) |
|
|
(60.3 |
) |
Treasury
stock
|
|
|
(16.3 |
) |
|
|
(0.1 |
) |
Total
stockholders' equity
|
|
|
2,024.9
|
|
|
|
1,875.4
|
|
Total
liabilities and stockholders' equity
|
|
$ |
4,775.6
|
|
|
$ |
4,584.0
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements
BORGWARNER
INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(millions
of dollars, except share and per share data)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,364.3
|
|
|
$ |
1,168.7
|
|
|
$ |
2,642.1
|
|
|
$ |
2,323.9
|
|
Cost
of sales
|
|
|
1,116.7
|
|
|
|
937.6
|
|
|
|
2,178.6
|
|
|
|
1,869.5
|
|
Gross
profit
|
|
|
247.6
|
|
|
|
231.1
|
|
|
|
463.5
|
|
|
|
454.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
135.2
|
|
|
|
124.3
|
|
|
|
261.9
|
|
|
|
253.8
|
|
Other
income
|
|
|
(1.2 |
) |
|
|
(0.7 |
) |
|
|
(1.9 |
) |
|
|
(1.2 |
) |
Operating
income
|
|
|
113.6
|
|
|
|
107.5
|
|
|
|
203.5
|
|
|
|
201.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in affiliates' earnings, net of tax
|
|
|
(8.8 |
) |
|
|
(8.5 |
) |
|
|
(18.0 |
) |
|
|
(18.5 |
) |
Interest
expense and finance charges
|
|
|
9.3
|
|
|
|
9.9
|
|
|
|
18.2
|
|
|
|
19.3
|
|
Earnings
before income taxes and minority interest
|
|
|
113.1
|
|
|
|
106.1
|
|
|
|
203.3
|
|
|
|
201.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
30.5
|
|
|
|
29.7
|
|
|
|
54.9
|
|
|
|
56.3
|
|
Minority
interest, net of tax
|
|
|
6.9
|
|
|
|
6.2
|
|
|
|
14.3
|
|
|
|
13.2
|
|
Net
earnings
|
|
$ |
75.7
|
|
|
$ |
70.2
|
|
|
$ |
134.1
|
|
|
$ |
131.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic
|
|
$ |
1.30
|
|
|
$ |
1.22
|
|
|
$ |
2.31
|
|
|
$ |
2.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - diluted
|
|
$ |
1.29
|
|
|
$ |
1.21
|
|
|
$ |
2.28
|
|
|
$ |
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,050
|
|
|
|
57,328
|
|
|
|
57,983
|
|
|
|
57,254
|
|
Diluted
|
|
|
58,908
|
|
|
|
57,998
|
|
|
|
58,763
|
|
|
|
57,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per share
|
|
$ |
0.17
|
|
|
$ |
0.16
|
|
|
$ |
0.34
|
|
|
$ |
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements
BORGWARNER
INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED
STATEMENTS
OF CASH FLOWS (UNAUDITED)
(millions
of dollars)
|
|
|
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
OPERATING
|
|
|
|
|
|
|
Net
earnings
|
|
$ |
134.1
|
|
|
$ |
131.5
|
|
Adjustments
to reconcile net earnings to net cash flows from
operations:
|
|
|
|
|
|
|
|
|
Non-cash
charges (credits) to operations:
|
|
|
|
|
|
|
|
|
Depreciation
and tooling amortization
|
|
|
117.8
|
|
|
|
117.5
|
|
Amortization
of intangible assets and other
|
|
|
8.3
|
|
|
|
6.6
|
|
Stock
option compensation expense
|
|
|
9.1
|
|
|
|
5.9
|
|
Deferred
income tax benefit
|
|
|
(5.9 |
) |
|
|
(7.4 |
) |
Equity
in affiliates' earnings, net of dividends received, minority interest
and
other
|
|
|
11.8
|
|
|
|
20.4
|
|
Net
earnings adjusted for non-cash charges (credits) to
operations
|
|
|
275.2
|
|
|
|
274.5
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(90.1 |
) |
|
|
(58.2 |
) |
Inventories
|
|
|
(30.4 |
) |
|
|
(9.9 |
) |
Prepayments
and other current assets
|
|
|
(4.4 |
) |
|
|
(0.1 |
) |
Accounts
payable and accrued expenses
|
|
|
68.9
|
|
|
|
26.1
|
|
Income
taxes payable
|
|
|
(5.2 |
) |
|
|
(6.6 |
) |
Other
non-current assets and liabilities
|
|
|
9.4
|
|
|
|
7.4
|
|
Net
cash provided by operating activities
|
|
|
223.4
|
|
|
|
233.2
|
|
|
|
|
|
|
|
|
|
|
INVESTING
|
|
|
|
|
|
|
|
|
Capital
expenditures, including tooling outlays
|
|
|
(122.5 |
) |
|
|
(145.5 |
) |
Net
proceeds from asset disposals
|
|
|
2.3
|
|
|
|
2.6
|
|
Purchases
of marketable securities
|
|
|
(12.6 |
) |
|
|
(30.8 |
) |
Proceeds
from sales of marketable securities
|
|
|
14.7
|
|
|
|
13.4
|
|
Net
cash used in investing activities
|
|
|
(118.1 |
) |
|
|
(160.3 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
|
|
|
|
|
|
|
|
|
Net
decrease in notes payable
|
|
|
(65.9 |
) |
|
|
(74.6 |
) |
Additions
to long-term debt
|
|
|
20.7
|
|
|
|
100.0
|
|
Repayments
of long-term debt
|
|
|
(20.0 |
) |
|
|
(81.4 |
) |
Payment
for purchase of treasury stock
|
|
|
(16.3 |
) |
|
|
-
|
|
Proceeds
from stock options exercised
|
|
|
17.5
|
|
|
|
7.3
|
|
Dividends
paid to BorgWarner stockholders
|
|
|
(19.7 |
) |
|
|
(18.3 |
) |
Dividends
paid to minority shareholders
|
|
|
(15.5 |
) |
|
|
(16.2 |
) |
Net
cash used in financing activities
|
|
|
(99.2 |
) |
|
|
(83.2 |
) |
Effect
of exchange rate changes on cash
|
|
|
(10.9 |
) |
|
|
(12.2 |
) |
Net
decrease in cash
|
|
|
(4.8 |
) |
|
|
(22.5 |
) |
Cash
at beginning of year
|
|
|
123.3
|
|
|
|
89.7
|
|
Cash
at end of period
|
|
$ |
118.5
|
|
|
$ |
67.2
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Net
cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
21.3
|
|
|
$ |
22.0
|
|
Income
taxes
|
|
|
45.1
|
|
|
|
48.1
|
|
Non-cash
financing transactions:
|
|
|
|
|
|
|
|
|
Issuance
of common stock for stock performance plans
|
|
|
2.3
|
|
|
|
3.0
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements
BORGWARNER
INC. AND CONSOLIDATED SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1)
Basis of Presentation
The
accompanying unaudited consolidated financial statements of BorgWarner Inc.
and
Consolidated Subsidiaries (the “Company”) have been prepared in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes necessary for a comprehensive
presentation of financial position, results of operations and cash flow activity
required by GAAP for complete financial statements. In the opinion of
management, all normal recurring adjustments necessary for a fair presentation
of results have been included. Operating results for the three and
six months ended June 30, 2007 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2007. The
balance sheet as of December 31, 2006 was derived from the audited financial
statements as of that date. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2006.
Management
makes estimates and assumptions that affect the reported amounts of assets
and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and accompanying notes, as well as the amounts
of
revenues and expenses reported during the periods covered by those financial
statements and accompanying notes. Actual results could differ from
these estimates.
(2)
Research and Development
The
following table presents the Company’s gross and net expenditures on research
and development (“R&D”) activities:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
R&D expenditures
|
|
$ |
65.0
|
|
|
$ |
54.2
|
|
|
$ |
125.5
|
|
|
$ |
107.8
|
|
Customer
reimbursements
|
|
|
(8.3 |
) |
|
|
(6.4 |
) |
|
|
(17.9 |
) |
|
|
(13.9 |
) |
Net
R&D expenditures
|
|
$ |
56.7
|
|
|
$ |
47.8
|
|
|
$ |
107.6
|
|
|
$ |
93.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company’s net R&D expenditures are included in the selling, general and
administrative expenses of the Condensed Consolidated Statements of
Operations. Customer reimbursements are netted against gross R&D
expenditures upon billing of services performed. The Company has
contracts with several customers at the Company’s various R&D
locations. No such contract exceeded $6 million in any of the periods
presented.
(3)
Income Taxes
The
Company's provision for income taxes is based upon an estimated annual tax
rate
for the year applied to federal, state and foreign income. The
projected effective tax rate of 27.0% for 2007 differs from the U.S. statutory
rate primarily due to foreign rates, which differ from those in the U.S.,
the
realization of certain
business
tax credits including R&D and foreign tax credits and favorable permanent
differences between book and tax treatment for items, including equity in
affiliates’ earnings and a Medicare prescription drug benefit. This
rate is expected to be greater than the full year 2006 effective tax rate of
12.0% because the 2006 rate included the release of tax accrual accounts upon
conclusion of certain tax audits, the tax effects of dispositions and
adjustments to various tax accounts, including changes in tax laws.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. As a
result of the implementation of FIN 48, the Company recognized a $16.6 million
reduction to the January 1, 2007 balance of retained earnings.
At
January 1, 2007, the balance of gross unrecognized tax benefits is $50.5
million. Included in the balance at January 1, 2007 are $43.1 million
of tax positions that are permanent in nature and, if recognized, would reduce
the effective tax rate. However, the Company’s federal, certain state
and certain non-U.S. income tax returns are currently under various stages
of
audit by applicable tax authorities and the amounts ultimately paid, if any,
upon resolution of the issues raised by the taxing authorities may differ
materially from the amounts accrued for each year. Any possible
change in the unrecognized tax benefits within the next 12 months cannot be
reasonably estimated.
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states and foreign jurisdictions. The
Company is no longer subject to income tax examinations by tax authorities
in
its major tax jurisdictions as follows:
|
Years
No Longer
|
Tax
Jurisdiction
|
Subject
to Audit
|
U.S.
Federal
|
2001
and prior
|
Brazil
|
2002
and prior
|
France
|
2003
and prior
|
Germany
|
2002
and prior
|
Hungary
|
2004
and prior
|
Italy
|
2001
and prior
|
Japan
|
2005
and prior
|
South
Korea
|
2004
and prior
|
United
Kingdom
|
2003
and prior
|
In
certain tax jurisdictions the Company may have more than one
taxpayer. The table above reflects the status of the major taxpayers
in each major tax jurisdiction.
The
Company recognizes interest and penalties related to unrecognized tax benefits
in income tax expense. The Company had $5.3 million accrued at
January 1, 2007 for the payment of any such interest and penalties.
(4)
Marketable Securities
As
of
June 30, 2007 and December 31, 2006, the Company held $58.4 million and $59.1
million, respectively, of highly liquid investments in marketable securities,
primarily bank notes. The securities are carried at fair value with
the unrealized gain or loss, net of tax, reported in other comprehensive
income. As of June 30, 2007 and December 31, 2006, $44.5 million and
$45.5 million of the contractual maturities are within one to five years
and
$13.9 million and $13.6 million are due beyond five years,
respectively. The Company does not intend to hold these investments
until maturity; rather, they are available to support
current
operations if needed.
(5)
Sales of Receivables
The
Company securitizes and sells certain receivables through third party financial
institutions without recourse. The amount sold can vary each month
based on the amount of underlying receivables. At both June 30, 2007
and December 31, 2006, the Company had sold $50 million of receivables
under a Receivables Transfer Agreement for face value without
recourse. During both of the six-month periods ended June 30, 2007
and 2006, total cash proceeds from sales of accounts receivable were $300
million. The Company paid servicing fees related to these receivables
for the three and six months ended June 30, 2007 and 2006 of $0.7 million and
$0.7 million and $1.4 million and $1.3 million, respectively. These
amounts are recorded in interest expense and finance charges in the Condensed
Consolidated Statements of Operations.
(6)
Inventories
Inventories
are valued at the lower of cost or market. The cost of U.S.
inventories is determined by the last-in, first-out (“LIFO”) method, while the
operations outside the U.S. use the first-in, first-out (“FIFO”) or average-cost
methods. Inventories consisted of the following:
|
|
June
30,
|
|
|
December
31,
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Raw
material and supplies
|
|
$ |
217.1
|
|
|
$ |
207.4
|
|
Work
in progress
|
|
|
102.6
|
|
|
|
100.0
|
|
Finished
goods
|
|
|
116.9
|
|
|
|
91.9
|
|
FIFO
inventories
|
|
|
436.6
|
|
|
|
399.3
|
|
LIFO
reserve
|
|
|
(12.0 |
) |
|
|
(12.4 |
) |
Net
inventories
|
|
$ |
424.6
|
|
|
$ |
386.9
|
|
(7)
Property, plant & equipment
(millions)
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
Land
and buildings
|
|
|
$ |
561.2
|
|
|
$ |
552.3
|
|
Machinery
and equipment
|
|
|
|
1,707.4
|
|
|
|
1,687.8
|
|
Capital
leases
|
|
|
|
1.1
|
|
|
|
1.1
|
|
Construction
in progress
|
|
|
|
119.7
|
|
|
|
112.8
|
|
Total
property, plant & equipment
|
|
|
|
2,389.4
|
|
|
|
2,354.0
|
|
Less
accumulated depreciation
|
|
|
|
(1,009.5 |
) |
|
|
(988.4 |
) |
|
|
|
|
1,379.9
|
|
|
|
1,365.6
|
|
Tooling,
net of amortization
|
|
|
|
96.8
|
|
|
|
95.1
|
|
Property,
plant & equipment - net
|
|
|
$ |
1,476.7
|
|
|
$ |
1,460.7
|
|
Interest
costs capitalized during the six-month periods ended June 30, 2007 and 2006
were
$4.4 million and $3.5 million, respectively.
As
of
June 30, 2007 and December 31, 2006, accounts payable of $30.4 million and
$36.0
million,
respectively,
were related to property, plant and equipment purchases.
As
of
June 30, 2007 and December 31, 2006, specific assets of $21.8 million and $21.3
million, respectively, were pledged as collateral under certain of the Company’s
long-term debt agreements.
(8)
Product Warranty
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 product quality and minimize warranty
claims. While management believes that the warranty accrual is
appropriate, actual claims incurred could differ from the original estimates,
requiring adjustments to the accrual. The accrual is recorded in both
long-term and short-term liabilities on the balance sheet. The
following table summarizes the activity in the warranty accrual
accounts:
|
|
Six
months ended
|
|
|
|
June
30,
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
60.0
|
|
|
$ |
44.0
|
|
Provision
|
|
|
37.2
|
|
|
|
10.7
|
|
Payments
|
|
|
(22.5 |
) |
|
|
(10.7 |
) |
Currency
translation
|
|
|
1.5
|
|
|
|
3.2
|
|
Ending
balance
|
|
$ |
76.2
|
|
|
$ |
47.2
|
|
Contained
within the provision recognized in the six months ended June 30, 2007 is
approximately $14 million for a warranty-related issue surrounding a product,
built during a 15-month period in 2004 and 2005, that is no longer in
production.
(9)
Notes Payable and Long-Term Debt
Following
is a summary of notes payable and long-term debt. The weighted
average interest rate on all borrowings outstanding as of June 30, 2007 and
December 31, 2006 was 5.1% and 4.9%, respectively.
(millions)
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
Bank
borrowings and other
|
|
$ |
44.6
|
|
|
$ |
5.4
|
|
|
$ |
131.8
|
|
|
$ |
5.9
|
|
Term
loans due through 2013 (at an average rate of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3%
in 2007 and 3.0% in 2006)
|
|
|
43.2
|
|
|
|
23.9
|
|
|
|
19.9
|
|
|
|
23.1
|
|
5.75%
Senior Notes due 11/01/16,
net of unamortized discount (a)
|
|
|
-
|
|
|
|
149.1
|
|
|
|
-
|
|
|
|
149.0
|
|
6.50%
Senior Notes due 02/15/09,
net of unamortized discount (a)
|
|
|
-
|
|
|
|
136.4
|
|
|
|
-
|
|
|
|
136.4
|
|
8.00%
Senior Notes due 10/01/19,
net of unamortized discount (a)
|
|
|
-
|
|
|
|
133.9
|
|
|
|
-
|
|
|
|
133.9
|
|
7.125%
Senior Notes due 02/15/29, net of unamortized discount
|
|
|
-
|
|
|
|
119.2
|
|
|
|
-
|
|
|
|
119.2
|
|
Carrying
amount of notes payable and long-term debt
|
|
|
87.8
|
|
|
|
567.9
|
|
|
|
151.7
|
|
|
|
567.5
|
|
Impact
of derivatives on debt
|
|
|
-
|
|
|
|
(10.3 |
) |
|
|
-
|
|
|
|
1.9
|
|
Total
notes payable and long-term debt
|
|
$ |
87.8
|
|
|
$ |
557.6
|
|
|
$ |
151.7
|
|
|
$ |
569.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) The
Company entered into several interest rate swaps, which have the
effect of
converting $325.0 million of these fixed rate notes to variable
rates as
of June 30, 2007 and December 31, 2006. The weighted average
effective interest rates for these borrowings, including the effects
of
outstanding swaps as noted in Note 10, were 4.8% and 4.5% as of
June 30,
2007 and December 31, 2006, respectively.
|
|
The
Company has a multi-currency revolving credit facility, which provides for
borrowings up to $600 million through July 2009. At June 30, 2007 and
December 31, 2006, there were no borrowings outstanding under the
facility. The credit agreement is subject to the usual terms and
conditions applied by banks to an investment grade company. The
Company was in compliance with all covenants at June 30, 2007 and expects to
be
compliant in future periods. The Company had outstanding letters of
credit of $22.1 million at June 30, 2007 and $27.0 million at December 31,
2006. The letters of credit typically act as a guarantee of payment
to certain third parties in accordance with specified terms and
conditions.
As
of
June 30, 2007 and December 31, 2006, the estimated fair values of the Company’s
senior unsecured notes totaled $555.7 million and $572.7 million,
respectively. The estimated fair values were $17.1 million higher at
June 30, 2007 and $34.2 million higher at December 31, 2006 than their
respective carrying values. Fair market values are developed by the
use of estimates obtained from brokers and other appropriate valuation
techniques based on information available as of year-end. The fair
value estimates do not necessarily reflect the values the Company could realize
in the current markets.
(10)
Financial Instruments
The
Company’s financial instruments include cash, marketable securities, trade
receivables, trade payables, and notes payable. Due to the short-term
nature of these instruments, the book value approximates fair
value. The Company’s financial instruments also include long-term
debt, interest rate and currency swaps, commodity swap contracts, and foreign
currency forward contracts. All derivative contracts are placed with
counterparties that have a credit rating of “A-” or better.
The
Company manages its interest rate risk by balancing its exposure to fixed and
variable rates while attempting to minimize its interest costs. The
Company selectively uses interest rate swaps to reduce market value risk
associated with changes in interest rates (fair value hedges). The
Company also selectively uses cross-currency swaps to hedge the foreign currency
exposure associated with our net investment in certain foreign operations (net
investment hedges).
A
summary
of these instruments outstanding at June 30, 2007 follows (currency in
millions):
|
|
|
Notional
|
|
|
|
Hedge
Type
|
Amount
|
Maturity
(a)
|
Interest
rate swaps
|
|
|
|
|
Fixed
to floating
|
|
Fair
value
|
$100
|
February
15, 2009
|
Fixed
to floating
|
|
Fair
value
|
$150
|
November
1, 2016
|
Fixed
to floating
|
|
Fair
value
|
$75
|
October
1, 2019
|
|
|
|
|
|
Cross
currency swap
|
|
|
|
|
Floating
$ to floating €
|
|
Net
Investment
|
$100
|
February
15, 2009
|
Floating
$ to floating ¥
|
|
Net
Investment
|
$150
|
November
1, 2016
|
Floating
$ to floating €
|
|
Net
Investment
|
$75
|
October
1, 2019
|
|
|
|
|
|
(a) The
maturity of the swaps corresponds with the maturity of the hedged
item as
noted in the debt summary, unless otherwise indicated.
|
|
|
|
|
|
Effectiveness
for interest rate and cross currency swaps is assessed at the inception of
the
hedging relationship. If specified criteria for the assumption of
effectiveness are not met at hedge inception, effectiveness is assessed
quarterly. Ineffectiveness is measured quarterly and results are
recognized in earnings.
As
of
June 30, 2007, the fair values of the fixed to floating interest rate swaps
were
recorded as a non-current liability of $10.3 million and a corresponding
reduction in long-term debt of $10.3 million. As of December 31,
2006, the fair values of the fixed to floating interest rate swaps were recorded
as a non-current asset of $1.9 million and a corresponding increase in long-term
debt of $1.9 million. No hedge ineffectiveness was recognized in
relation to fixed to floating swaps. Fair values are based on quoted
market prices for contracts with similar maturities.
As
of
June 30, 2007, the fair values of the cross currency swaps were recorded as
a
non-current asset of $6.1 million and a non-current liability of $10.3
million. As of December 31, 2006, the fair values of the cross
currency swaps were recorded as a non-current asset of $1.7 million and a
non-current liability of $5.5 million. Hedge ineffectiveness of $1.5
million was recognized as of June 30, 2007 in relation to cross currency
swaps. Fair values are 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, which are designated as cash flow hedges. As of June 30,
2007, the Company had forward and option commodity contracts with a total
notional value of $86.7 million. As of June 30, 2007, the Company was
holding commodity derivatives with positive and negative fair market values
of
$1.6 million and $(6.8) million, respectively ($1.4 million gains and ($2.9)
million losses mature in less than one year). To the extent that
derivative instruments are deemed to be effective as defined by FAS 133, gains
and losses arising from these contracts are deferred in other comprehensive
income. Such gains and losses will be reclassified into income as the
underlying operating transactions are realized. Gains and losses not
qualifying for deferral treatment have been credited/charged to income as they
are recognized. As of December 31, 2006, the Company had forward and
option commodity contracts with a total notional value of $19.1
million. The fair market values of the forward contracts were
negative ($2.0) million ($(1.9) million losses maturing in less than one
year). Gains and losses not qualifying for deferral associated with
these contracts for June 30, 2007 were negligible. At December 31,
2006, losses not qualifying for deferral were $(0.1) million.
The
Company uses foreign exchange forward and option contracts to protect against
exchange rate movements for forecasted cash flows for purchases, operating
expenses or sales transactions designated in currencies other than the
functional currency of the operating unit. Most contracts mature in
less than one year, however certain long-term commitments are covered by forward
currency arrangements to protect against currency risk through
2009. Foreign currency contracts require the Company, at a future
date, to either buy or sell foreign currency in exchange for the operating
units’ local currency. At June 30, 2007,
contracts
were outstanding to buy or sell British Pounds Sterling, Euros, Hungarian
Forints, Japanese Yen, Mexican Pesos, South Korean Won and U.S.
Dollars. To the extent that derivative instruments are deemed to be
effective as defined by FAS 133, gains and losses arising from these contracts
are deferred in other comprehensive income. Such gains and losses
will be reclassified into income as the underlying operating transactions
are
realized. Any gains or losses not qualifying for deferral are
credited/charged to income as they are recognized. As of June 30,
2007, the Company was holding foreign exchange derivatives with a positive
market value of $4.5 million ($3.4 million maturing in less than one
year). Derivative contracts with negative value amounted to $(1.3)
million (all maturing in less than one year). As of December 31,
2006, the Company was holding foreign exchange derivatives with a positive
market value of $5.1 million ($4.5 million maturing in less than one
year). Derivatives contracts with negative value amounted to $(0.1)
million (all maturing in less than one year). Losses not qualifying
for deferral associated with these contracts as of June 30, 2007 were ($0.1)
million. As of December 31, 2006, gains not qualifying for deferral
amounted to $0.7 million.
(11)
Retirement Benefit Plans
The
Company has a number of defined benefit pension
plans and other post employment benefit plans covering eligible salaried and
hourly employees. The other post employment benefits plans, which
provide medical and life insurance benefits, are unfunded plans. The
estimated contributions to pension plans for 2007 range from $10 to $15 million,
of which $5.6 million has been contributed through the first six months of
the
year. The components of net periodic benefit cost recorded in the
Company’s Condensed Consolidated Statements of Operations are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
post
|
|
(millions)
|
|
Pension
benefits
|
|
|
employment
|
|
Three
months ended June 30,
|
|
2007
|
|
|
2006
|
|
|
benefits
|
|
|
|
US
|
|
|
Non-US
|
|
|
US
|
|
|
Non-US
|
|
|
2007
|
|
|
2006
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
0.5
|
|
|
$ |
2.3
|
|
|
$ |
0.5
|
|
|
$ |
3.1
|
|
|
$ |
1.7
|
|
|
$ |
2.2
|
|
Interest
cost
|
|
|
4.3
|
|
|
|
3.9
|
|
|
|
4.2
|
|
|
|
3.3
|
|
|
|
7.4
|
|
|
|
7.0
|
|
Expected
return on plan assets
|
|
|
(7.4 |
) |
|
|
(3.1 |
) |
|
|
(7.0 |
) |
|
|
(2.5 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transition
obligation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.1 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
service cost (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
0.2
|
|
|
|
-
|
|
|
|
(3.9 |
) |
|
|
(6.3 |
) |
Amortization
of unrecognized loss
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
1.6
|
|
|
|
0.7
|
|
|
|
3.8
|
|
|
|
5.3
|
|
Other
|
|
|
-
|
|
|
|
0.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
periodic benefit cost (benefit)
|
|
$ |
(2.1 |
) |
|
$ |
3.7
|
|
|
$ |
(0.5 |
) |
|
$ |
4.5
|
|
|
$ |
9.0
|
|
|
$ |
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
post
|
|
(millions)
|
|
Pension
benefits
|
|
|
employment
|
|
Six
months ended June 30,
|
|
2007
|
|
|
2006
|
|
|
benefits
|
|
|
|
US
|
|
|
Non-US
|
|
|
US
|
|
|
Non-US
|
|
|
2007
|
|
|
2006
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1.0
|
|
|
$ |
5.3
|
|
|
$ |
1.2
|
|
|
$ |
6.3
|
|
|
$ |
3.3
|
|
|
$ |
5.4
|
|
Interest
cost
|
|
|
8.7
|
|
|
|
7.9
|
|
|
|
8.4
|
|
|
|
6.8
|
|
|
|
14.9
|
|
|
|
15.9
|
|
Expected
return on plan assets
|
|
|
(14.8 |
) |
|
|
(6.2 |
) |
|
|
(14.2 |
) |
|
|
(5.3 |
) |
|
|
-
|
|
|
|
-
|
|
Amortization
of unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prior
service cost (benefit)
|
|
|
-
|
|
|
|
|
|
|
|
0.4
|
|
|
|
-
|
|
|
|
(7.9 |
) |
|
|
(7.3 |
) |
Amortization
of unrecognized loss
|
|
|
1.0
|
|
|
|
0.7
|
|
|
|
3.2
|
|
|
|
1.3
|
|
|
|
7.6
|
|
|
|
11.1
|
|
Other
|
|
|
-
|
|
|
|
0.3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
periodic benefit cost (benefit)
|
|
$ |
(4.1 |
) |
|
$ |
8.0
|
|
|
$ |
(1.0 |
) |
|
$ |
9.1
|
|
|
$ |
17.9
|
|
|
$ |
25.1
|
|
(12) Stock-Based Compensation
Under
the
Company's 1993 Stock Incentive Plan, the Company granted options to purchase
shares of the Company's common stock at the fair market value on the date
of
grant. The options vest over periods up to three years and have a
term of ten years from date of grant. As of December 31, 2003, there
were no options available for future grants under the 1993 plan. The
1993 plan expired at the end of 2003 and was replaced by the Company's 2004
Stock Incentive Plan, which was amended at the Company’s 2006 Annual
Stockholders Meeting, among other things, to increase the number of shares
available for issuance under the
plan. Under
the BorgWarner Inc. Amended and Restated 2004 Stock Incentive Plan (“2004 Stock
Incentive Plan”), the number of shares authorized for grant is
5,000,000. As of June 30, 2007, there were a total of 3,772,705
outstanding options under the 1993 and 2004 Stock Incentive Plans.
Stock
option compensation expense reduced income before income taxes and net earnings
by $4.9 million and $3.6 million ($0.06 per basic and diluted share) and by
$2.9
million and $2.1 million ($0.04 per basic and diluted share) for the three
months ended June 30, 2007 and 2006, respectively. Stock option
compensation expense reduced income before income taxes and net earnings by
$9.1
million and $6.7 million ($0.12 and $0.11 per basic and diluted shares,
respectively) and by $5.9 million and $4.2 million ($0.07 per basic and diluted
share) for the six months ended June 30, 2007 and 2006,
respectively. Stock option compensation expense affected both
operating activities ($9.1 million and $5.9 million non-cash charge backs)
and
financing activities ($2.4 million and $1.7 million tax benefits) of the
Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 2007 and 2006, respectively.
Total
unrecognized compensation cost related to nonvested stock options at June 30,
2007 is approximately $28.2 million. This cost is expected to be
recognized over the next 2.6 years. On a weighted average basis, this
cost is expected to be recognized over 1.1 years.
A
summary
of the plans’ shares under option as of and for the six months ended June 30,
2007 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
|
(thousands)
|
|
|
Price
|
|
|
Life
(in years)
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
3,471
|
|
|
$ |
47.48
|
|
|
|
|
|
|
|
Granted
|
|
|
908
|
|
|
|
69.89
|
|
|
|
|
|
|
|
Exercised
|
|
|
(295 |
) |
|
|
35.12
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(169 |
) |
|
|
41.04
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2007
|
|
|
3,915
|
|
|
$ |
53.88
|
|
|
|
8.2
|
|
|
$ |
84.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(107 |
) |
|
|
32.43
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(35 |
) |
|
|
53.86
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
3,773
|
|
|
$ |
54.49
|
|
|
|
8.1
|
|
|
$ |
119.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exerciseable at June 30, 2007
|
|
|
725
|
|
|
$ |
32.82
|
|
|
|
5.6
|
|
|
$ |
38.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
calculating earnings per share, earnings are the same for the basic and diluted
calculations. Shares increased for diluted earnings per share by
858,000 and 670,000 for the three months ended June 30, 2007 and 2006,
respectively, and 780,000 and 624,000 for the six months ended June 30, 2007
and
2006, respectively, due to the effects of stock options and shares issuable
under the Performance Stock Plan.
The
fair
value for options granted in February 2007 was $21.04 per option. The
Company did not grant any options during the six months ended June 30, 2006,
as
2006 options were granted in July. The fair value at date of grant
was estimated using the Black-Scholes options pricing model with the following
assumptions:
|
2007 |
Risk-free interest rate
|
4.82% |
Dividend yield
|
0.97% |
Volatility factor
|
28.64% |
Expected life
|
4.7
years |
The
expected lives of the awards are based on historical exercise patterns and
the
terms of the options. The risk-free interest rate is based on zero
coupon Treasury bond rates corresponding to the expected life of the
awards. The expected volatility assumption was derived by referring
to changes in the Company’s historical common stock prices over the same
timeframe as the expected life of the awards. The expected dividend
yield of stock is based on the Company’s historical dividend
yield. The Company has no reason to believe that the expected
dividend yield or the future stock volatility is likely to differ from
historical patterns.
(13)
Comprehensive Income (Loss)
The
amounts presented as changes in accumulated other comprehensive income (loss),
net of related taxes, are added to (deducted from) net earnings resulting in
comprehensive income (loss). The following table summarizes the
components of comprehensive income (loss) on an after-tax basis for the three
and six-month periods ended June 30, 2007 and 2006.
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments, net
|
|
$ |
20.3
|
|
|
$ |
43.7
|
|
|
$ |
39.3
|
|
|
$ |
73.7
|
|
Market
value change in hedge instruments, net
|
|
|
(3.9 |
) |
|
|
(2.1 |
) |
|
|
(2.7 |
) |
|
|
(3.0 |
) |
Minimum
pension liability adjustment, net
|
|
|
(3.5 |
) |
|
|
-
|
|
|
|
(3.5 |
) |
|
|
-
|
|
Unrealized
(loss) gain on available-for-sale securities, net
|
|
|
0.2 |
|
|
|
(0.5 |
) |
|
|
- |
|
|
|
(0.3 |
) |
Change
in accumulated other comprehensive loss
|
|
|
13.1
|
|
|
|
41.1
|
|
|
|
33.1
|
|
|
|
70.4
|
|
Net
earnings as reported
|
|
|
75.7
|
|
|
|
70.2
|
|
|
|
134.1
|
|
|
|
131.5
|
|
Total
comprehensive income
|
|
$ |
88.8
|
|
|
$ |
111.3
|
|
|
$ |
167.2
|
|
|
$ |
201.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14)
Contingencies
In
the
normal course of business the Company and its subsidiaries are parties to
various commercial and legal claims, actions and complaints, including matters
involving warranty claims, intellectual property claims, general liability
and
various other risks. It is not possible to predict with certainty
whether or not the Company and its subsidiaries will ultimately be successful
in
any of these commercial and legal matters or, if not, what the impact might
be. The Company’s environmental and product liability contingencies
are discussed separately below. The Company’s management does not
expect that the results of these commercial and legal claims, actions and
complaints will have a material adverse effect on the Company’s results of
operations, financial position or cash flows.
Environmental
The
Company and certain of its current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by the United
States Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties (“PRPs”) at various
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (“Superfund”) and equivalent state laws and, as
such, may presently be liable for the cost of clean-up and other remedial
activities at 33 such sites. Responsibility for clean-up and other
remedial activities at a Superfund site is typically shared among PRPs based
on
an allocation formula.
The
Company believes that none of these matters, individually or in the aggregate,
will have a material adverse effect on its results of operations, financial
position, or cash flows. Generally, this is because either the
estimates of the maximum potential liability at a site are not large or the
liability will be shared with other PRPs, although no assurance can be given
with respect to the ultimate outcome of any such matter.
Based
on
information available to the Company (which in most cases, includes: an estimate
of allocation of liability among PRPs; the probability that other PRPs, many
of
whom are large, solvent public companies, will fully pay the cost apportioned
to
them; currently available information from PRPs and/or federal or state
environmental agencies concerning the scope of contamination and estimated
remediation and consulting costs; remediation alternatives; estimated legal
fees; and other factors), the Company has established an accrual for indicated
environmental liabilities with a balance at June 30, 2007 of $13.7
million. Excluding the Crystal Springs site discussed below for which
$5.3 million has been accrued, the Company has accrued amounts that do not
exceed $3.0 million related to any individual site and management does not
believe that the costs related to any of these other individual sites will
have
a material adverse effect on the Company’s results of operations, cash flows or
financial condition. The Company expects to pay out substantially all
of the $13.7 million accrued environmental liability over the next three to
five
years.
In
connection with the sale of Kuhlman Electric Corporation, the Company agreed
to
indemnify the buyer and Kuhlman Electric for certain environmental liabilities,
then unknown to the Company, relating to the past operations of Kuhlman
Electric. The liabilities at issue result from operations of Kuhlman
Electric that pre-date the Company’s acquisition of Kuhlman Electric’s parent
company, Kuhlman Corporation, in 1999. 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 is continuing to work with the Mississippi
Department of Environmental Quality and Kuhlman Electric to investigate and
remediate to the extent necessary, if any, historical contamination at the
plant
and surrounding area. Kuhlman Electric and others, including the
Company, were sued in numerous related lawsuits, in which multiple claimants
alleged personal injury and property damage. In 2005, the Company and
other defendants, including the Company’s subsidiary Kuhlman Corporation,
entered into settlements that resolved approximately 99% of the known personal
injury and property damage claims relating to the alleged environmental
contamination. Those settlements involved payments by the defendants
of $28.5 million in the second half of 2005 and $15.7 million in the first
quarter of 2006, in exchange for, among other things, dismissal with prejudice
of these lawsuits.
Conditional
Asset Retirement Obligations
In
March
2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations - an interpretation of FASB Statement No.
143 (“FIN 47”), which requires the Company to recognize legal obligations
to perform asset retirements in which the timing and/or method of settlement
are
conditional on a future event that may or may not be within the control of
the
entity. Certain government
regulations
require the removal and disposal of asbestos from an existing facility at the
time the facility undergoes major renovations or is demolished. The
liability exists because the facility will not last forever, but it is
conditional on future renovations (even if there are no immediate plans to
remove the materials, which pose no health or safety hazard in their current
condition). Similarly, government regulations require the removal or
closure of underground storage tanks (“USTs”) when their use ceases, the
disposal of polychlorinated biphenyl (“PCB”) transformers and capacitors when
their use ceases, and the disposal of used furnace bricks and liners, and
lead-based paint in conjunction with facility renovations or
demolition. The Company currently has 17 manufacturing locations that
have been identified as containing these items. The fair value to
remove and dispose of this material has been estimated and recorded at $1.0
million as of June 30, 2007 and December 31, 2006.
Product
Liability
Like
many
other industrial companies who have historically operated in the U.S., the
Company (or parties the Company is obligated to indemnify) continues to be
named
as one of many defendants in asbestos-related personal injury
actions. Management believes that the Company’s involvement is
limited because, in general, these claims relate to a few types of automotive
friction products that were manufactured many years ago and contained
encapsulated asbestos. The nature of the fibers, the encapsulation
and the manner of use lead the Company to believe that these products are highly
unlikely to cause harm. As of June 30, 2007, the Company had
approximately 42,000 pending asbestos-related product liability
claims. Of these outstanding claims, approximately 34,000 are pending
in just three jurisdictions, where significant tort reform activities are
underway.
The
Company’s policy is to aggressively defend against these lawsuits and the
Company has been successful in obtaining dismissal of many claims without any
payment. The Company expects that the vast majority of the pending
asbestos-related product liability claims where it is a defendant (or has an
obligation to indemnify a defendant) will result in no payment being made by
the
Company or its insurers. In the first six months of 2007, of the
approximately 3,000 claims resolved, only 97 (3.2%) resulted in any payment
being made to a claimant by or on behalf of the Company. In 2006, of
the approximately 27,000 claims resolved, only 169 (0.6%) resulted in any
payment being made to a claimant by or on behalf of the Company.
Prior
to
June 2004, the settlement and defense costs associated with all claims were
covered by the Company’s primary layer insurance coverage, and these carriers
administered, defended, settled and paid all claims under a funding
arrangement. In June 2004, primary layer insurance carriers notified
the Company of the alleged exhaustion of their policy limits. This
led the Company to access the next available layer of insurance
coverage. Since June 2004, secondary layer insurers have paid
asbestos-related litigation defense and settlement expenses pursuant to a
funding arrangement. To date, the Company has paid $21.2 million
in defense and indemnity in advance of insurers’ reimbursement and has received
$6.6 million in cash from insurers. The outstanding balance of
$14.6 million is expected to be fully recovered. Timing of the
recovery is dependent on final resolution of the declaratory judgment action
referred to below. At December 31, 2006, insurers owed
$11.7 million in association with these claims.
At
June
30, 2007, the Company has an estimated liability of $41.5 million for future
claims resolutions, with a related asset of $41.5 million to recognize the
insurance proceeds receivable by the Company for estimated losses related to
claims that have yet to be resolved. Insurance carrier reimbursement
of 100% is expected based on the Company’s experience, its insurance contracts
and decisions received to date in the declaratory judgment action referred
to
below. At December 31, 2006, the comparable value of the insurance
receivable and accrued liability was $39.9 million.
The
amounts recorded in the Condensed Consolidated Balance Sheets related to
the
estimated future settlement of existing claims are as
follows:
|
|
June
30,
|
|
|
December
31,
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
Assets:
|
|
|
|
|
|
|
Prepayments
and other current assets
|
|
$ |
21.8
|
|
|
$ |
23.3
|
|
Other
non-current assets
|
|
|
19.7
|
|
|
|
16.6
|
|
Total
insurance receivable
|
|
$ |
41.5
|
|
|
$ |
39.9
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
21.8
|
|
|
$ |
23.3
|
|
Other
non-current liabilities
|
|
|
19.7
|
|
|
|
16.6
|
|
Total
accrued liability
|
|
$ |
41.5
|
|
|
$ |
39.9
|
|
The
Company cannot reasonably estimate possible losses, if any, in excess of those
for which it has accrued, because it cannot predict how many additional claims
may be brought against the Company (or parties the Company has an obligation
to
indemnify) in the future, the allegations in such claims, the possible outcomes,
or the impact of tort reform legislation that may be enacted at the State or
Federal levels.
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 both primary and
additional layer insurance, and, in conjunction with other insurers, is
currently defending and indemnifying the Company in its pending asbestos-related
product liability 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. On August 15, 2005, the Court issued an interim order
regarding the apportionment matter. The interim order has the effect
of making insurers responsible for all defense and settlement costs pro rata
to
time-on-the-risk, with the pro-ration method to hold the insured harmless for
periods of bankrupt or unavailable coverage. Appeals of the interim
order were denied. However, the issue is reserved for appellate
review at the end of the action. In addition to the primary insurance
available for asbestos-related claims, the Company has substantial additional
layers of insurance available for potential future asbestos-related product
claims. As such, the Company continues to believe that its coverage
is sufficient to meet foreseeable liabilities.
Although
it is impossible to predict the outcome of pending or future claims or the
impact of tort reform legislation that may be enacted at the State or Federal
levels, due to the encapsulated nature of the products, the Company’s
experiences in aggressively defending and resolving claims in the past, and
the
Company’s significant insurance coverage with solvent carriers as of the date of
this filing, management does not believe that asbestos-related product liability
claims are likely to have a material adverse effect on the Company’s results of
operations, cash flows or financial condition.
(15)
Leases and Commitments
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 September 2007. In the
event the Company exercises its option not to purchase the machinery and
equipment, the Company
has
guaranteed a residual value of $14.4 million. The Company has accrued
a loss on this guarantee of $6.0 million, which is expected to be paid in
2008.
(16)
Restructuring
On
September 22, 2006, the Company announced the reduction of its North American
workforce by approximately 850 people, or 13%, spread across its 19 operations
in the U.S., Canada and Mexico. In addition to employee related costs
of $6.7 million, the Company recorded $4.8 million of asset impairment charges
related to the North American restructuring. The restructuring
expenses broken out by segment were as follows: Engine $7.3 million,
Drivetrain $3.6 million and Corporate $0.6 million.
During
the fourth quarter of 2006, the Company recorded restructuring expense
associated with closing its Drivetrain plant in Muncie, Indiana and adjusted
the
carrying values of other assets primarily related to its four-wheel drive
transfer case product line. Production activity at the Muncie
facility is scheduled to cease no later than the expiration of the current
labor
contract in 2009. The Company recorded employee related costs of
$14.8 million, asset impairments of $51.6 million and pension curtailment
expense of $6.8 million in the fourth quarter of 2006. The expenses
broken out by segment were as follows: Engine $5.9 million and Drivetrain $67.3
million.
Estimates
of restructuring expense are based on information available at the time such
charges are recorded. Due to the inherent uncertainty involved in
estimating restructuring expenses, actual amounts paid for such activities
may
differ from amounts initially recorded. Accordingly, the Company may
record revisions of previous estimates by adjusting previously established
reserves.
The
table
below summarizes accrual activity for employee related costs related to the
Company’s previously announced restructuring actions for the six months ended
June 30, 2007 (in millions):
|
|
Employee
|
|
|
|
Related
Costs
|
|
Balance
at December 31, 2006
|
|
$ |
16.2
|
|
Cash
payments
|
|
|
(6.1 |
) |
Balance
at March 31, 2007
|
|
|
10.1
|
|
Cash
payments
|
|
|
(0.9 |
) |
Balance
at June 30, 2007
|
|
$ |
9.2
|
|
Future
cash payments for these restructuring activities are expected to be complete
by
the end of 2009.
(17)
Operating Segments
The
Company’s business is comprised of two operating segments: Engine and
Drivetrain. These reportable segments are strategic business groups,
which are managed separately as each represents a specific grouping of related
automotive components and systems.
The
Company allocates resources to each segment based upon the projected after-tax
return on invested capital (“ROIC”) of its business initiatives. The
ROIC is comprised of projected earnings before interest and income taxes
(“EBIT”) adjusted for income taxes compared to the projected average capital
investment required.
EBIT
is
considered a “non-GAAP financial measure.” Generally, a non-GAAP
financial measure is a numerical measure of a company’s financial performance,
financial position or cash flows that excludes (or includes) amounts that are
included in (or excluded from) the most directly comparable measure calculated
and presented in accordance with GAAP. EBIT is defined as earnings
before interest, income taxes and minority interest. “Earnings” is
intended to mean net earnings as presented in the Consolidated Statements of
Operations under GAAP.
The
Company believes that EBIT is useful to demonstrate the operational
profitability of its segments by excluding interest and income taxes, which
are
generally accounted for across the entire Company on a consolidated
basis. EBIT is also one of the measures used by the Company to
determine resource allocation within the Company. Although the
Company believes that EBIT enhances understanding of our business and
performance, it should not be considered an alternative to, or more meaningful
than, net earnings or cash flows from operations as determined in accordance
with GAAP.
The
following tables show net sales, Segment EBIT and total assets for the Company’s
reportable operating segments.
Net
Sales by Operating Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Engine
|
|
$ |
955.4
|
|
|
$ |
792.0
|
|
|
$ |
1,849.5
|
|
|
$ |
1,577.9
|
|
Drivetrain
|
|
|
417.7
|
|
|
|
386.3
|
|
|
|
809.7
|
|
|
|
763.3
|
|
Inter-segment
eliminations
|
|
|
(8.8 |
) |
|
|
(9.6 |
) |
|
|
(17.1 |
) |
|
|
(17.3 |
) |
Net
sales
|
|
$ |
1,364.3
|
|
|
$ |
1,168.7
|
|
|
$ |
2,642.1
|
|
|
$ |
2,323.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Earnings Before Interest and Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Engine
|
|
$ |
108.3
|
|
|
$ |
95.4
|
|
|
$ |
193.6
|
|
|
$ |
191.7
|
|
Drivetrain
|
|
|
33.3
|
|
|
|
28.6
|
|
|
|
61.0
|
|
|
|
51.3
|
|
Segment
earnings before interest and income taxes ("Segment EBIT")
|
|
|
141.6
|
|
|
|
124.0
|
|
|
|
254.6
|
|
|
|
243.0
|
|
Corporate,
including equity in affiliates' earnings and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock-based
compensation
|
|
|
19.2 |
|
|
|
8.0 |
|
|
|
33.1 |
|
|
|
22.7 |
|
Consolidated
earnings before interest and taxes ("EBIT")
|
|
|
122.4
|
|
|
|
116.0
|
|
|
|
221.5
|
|
|
|
220.3
|
|
Interest
expense and finance charges
|
|
|
9.3
|
|
|
|
9.9
|
|
|
|
18.2
|
|
|
|
19.3
|
|
Earnings
before income taxes and minority interest
|
|
|
113.1
|
|
|
|
106.1
|
|
|
|
203.3
|
|
|
|
201.0
|
|
Provision
for income taxes
|
|
|
30.5
|
|
|
|
29.7
|
|
|
|
54.9
|
|
|
|
56.3
|
|
Minority
interest, net of tax
|
|
|
6.9
|
|
|
|
6.2
|
|
|
|
14.3
|
|
|
|
13.2
|
|
Net
earnings
|
|
$ |
75.7
|
|
|
$ |
70.2
|
|
|
$ |
134.1
|
|
|
$ |
131.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Engine
|
|
|
|
|
|
|
|
|
|
$ |
3,317.8
|
|
|
$ |
3,103.1
|
|
Drivetrain
|
|
|
|
|
|
|
|
|
|
|
1,246.3
|
|
|
|
1,191.0
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
4,564.1
|
|
|
|
4,294.1
|
|
Corporate,
including equity in affiliates (a)
|
|
|
|
|
|
|
|
|
|
|
211.5
|
|
|
|
289.9
|
|
Total
assets
|
|
|
|
|
|
|
|
|
|
$ |
4,775.6
|
|
|
$ |
4,584.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Corporate
assets, including equity in affiliates, are net of trade receivables
securitized and sold to third parties, and include cash, deferred
income
|
|
taxes
and investments & advances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18)
New Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (“FAS 157”). FAS 157
defines fair value, establishes a framework for measuring fair value in GAAP
and
expands disclosures about fair value measurements. FAS 157 is
effective for the Company beginning with its quarter ending March 31,
2008. The adoption of FAS 157 is not expected to have a material
impact on the Company’s consolidated financial position, results of operations
or cash flows.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (“FAS 159”). FAS 159 allows entities to irrevocably
elect to recognize most financial assets and financial liabilities at fair
value
on an instrument-by-instrument basis. The stated objective of FAS 159
is to improve financial reporting by giving entities the opportunity
to
elect
to
measure certain financial assets and liabilities at fair value in order to
mitigate earnings volatility caused when related assets and liabilities are
measured differently. FAS 159 is effective for the Company beginning
with its quarter ending March 31, 2008. The adoption of FAS 159
is not expected to have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
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 primarily for powertrain
applications. Our products help improve vehicle performance, fuel
efficiency, air quality and vehicle stability. They are manufactured
and sold worldwide, primarily to original equipment manufacturers (“OEMs”) of
light vehicles (i.e., passenger cars, sport-utility vehicles (“SUVs”),
cross-over vehicles, vans and light-trucks). Our products are also
manufactured and sold to OEMs of commercial trucks, buses and agricultural
and
off-highway vehicles. We also manufacture and sell our products into
the aftermarket for light and commercial vehicles. We operate
manufacturing facilities serving customers in the Americas, Europe and Asia,
and
are an original equipment supplier to every major automaker in the
world.
The
Company’s products fall into two reportable operating
segments: Engine and Drivetrain. The Engine segment’s
products include turbochargers, timing chain systems, air management, emissions
systems, thermal systems, as well as diesel and gas ignition
systems. The Drivetrain segment’s products are all-wheel drive
transfer cases, torque management systems, and components and systems for
automated transmissions.
RESULTS
OF OPERATIONS
Three
months ended June 30, 2007 vs. Three months ended June 30,
2006
Consolidated
net sales for the second quarter ended June 30, 2007 totaled $1,364.3 million,
a
16.7% increase over second quarter 2006. This increase occurred while
light-vehicle production was up 3% worldwide and down 3% in North America from
the previous year’s quarter. Light-vehicle production increased 6% in
Asia-Pacific and 4% in Europe. The net sales increase included the
effect of stronger foreign currencies, primarily the Euro, of approximately
$51
million. Turbochargers, timing chain systems, ignition systems and
automatic transmission components and systems are the products most affected
by
currency fluctuations in Europe and Asia-Pacific. Without the
currency impact, the increase in net sales would have been 12.4% due to strong
demand for the Company’s products in Europe and Asia-Pacific.
Gross
profit and gross margin were $247.6 million and 18.1% for second quarter 2007
as
compared to $231.1 million and 19.8% for second quarter 2006. Our
gross margin percentage was negatively impacted by higher raw material costs,
including nickel, steel, copper and plastic resin, and lower vehicle production
in North America. Raw material costs, net of recoveries, increased
approximately $21 million as compared to the second quarter 2006, of which
nickel was the single largest contributor. Our focused cost reduction
programs in our operations partially offset these higher raw material
costs.
Second
quarter selling, general and administrative (“SG&A”) costs increased $10.9
million to $135.2 million from $124.3 million, but decreased as a percentage
of
net sales to 9.9% from 10.6%. The increase in SG&A is primarily
due to higher R&D costs and incentive compensation, partially offset by cost
reduction initiatives. R&D costs increased $8.9 million to $56.7
million from $47.8 million as compared to second quarter 2006. The
increase is primarily driven by our continued investment in a number of
cross-business R&D programs, as well as other key programs, all of which are
necessary for short and long-term growth. As a percentage of sales,
R&D costs increased to 4.2% from 4.1% in second quarter 2006.
Other
income of $(1.2) million and $(0.7) million for second quarter 2007 and 2006,
respectively, are comprised primarily of interest income.
Equity
in
affiliates’ earnings of $8.8 million increased $0.3 million as compared to
second quarter 2006 due to increased sales and improved operating performance
at
our joint ventures, which offset unfavorable changes in currency exchange
rates.
Second
quarter interest expense and finance charges of $9.3 million decreased $0.6
million as compared with second quarter 2006, primarily due to lower outstanding
debt levels, partially offset by rising global interest rates.
The
Company's provision for income taxes is based upon an estimated annual tax
rate
for the year applied to federal, state and foreign income. The
projected effective tax rate of 27.0% for 2007 differs from the U.S. statutory
rate primarily due to foreign rates, which differ from those in the U.S., and
favorable permanent differences between book and tax treatment for items,
including equity in affiliates’ earnings and Medicare prescription drug
benefit. This rate is expected to be greater than the full year 2006
effective tax rate of 12.0% because the 2006 rate included the release of tax
accrual accounts upon conclusion of certain tax audits, the tax effects of
dispositions and adjustments to various tax accounts, including changes in
tax
laws.
Net
earnings were $75.7 million for the second quarter, or $1.29 per diluted share,
an increase of $0.08 per diluted share over the previous year’s second
quarter.
Six
months ended June 30, 2007 vs. Six months ended June 30,
2006
Consolidated
net sales for the six months ended June 30, 2007 totaled $2,642.1 million,
a
13.7% increase over the six months ended June 30, 2006. This increase
occurred while light-vehicle production was up 3% worldwide and down 5% in
North
America from the previous year’s first six months. Light-vehicle
production increased 6% in Asia-Pacific and 5% in Europe. The net
sales increase included the effect of stronger foreign currencies, primarily
the
Euro, of approximately $111 million. Turbochargers, timing chain
systems, ignition systems and automatic transmission components and systems
are
the products most affected by currency fluctuations in Europe and
Asia-Pacific. Without the currency impact, the increase in net sales
would have been 8.9% due to strong demand for the Company’s products in Europe
and Asia-Pacific.
Gross
profit and gross margin were $463.5 million and 17.5% for the first six months
of 2007 as compared to $454.4 million and 19.6% for the first six months of
2006. Our gross margin percentage was negatively impacted by: a
warranty-related issue; higher raw material costs, including nickel, steel,
copper and plastic resin; and lower vehicle production in North
America. The warranty-related issue surrounded a product, built
during a 15-month period in 2004 and 2005, that is no longer in
production. This resulted in a pre-tax charge of approximately $14
million. Raw material costs, net of recoveries, increased
approximately $44 million as compared to the first six months of 2006, of which
nickel was the single largest contributor. Our focused cost reduction
programs in our operations partially offset these higher raw material
costs.
Selling,
general and administrative (“SG&A”) costs for the first six months of 2007
increased $8.1 million to $261.9 million from $253.8 million, but decreased
as a
percentage of net sales to 9.9% from 10.9%. The increase in SG&A
is primarily due to higher R&D costs and incentive compensation, partially
offset by cost reduction initiatives. R&D costs increased $13.7
million to $107.6 million from $93.9 million as compared to the first six months
of 2006. The increase is primarily driven by our continued investment
in a number of cross-business R&D programs, as well as other key programs,
all of which are necessary for short and long-term growth. As a
percentage of sales, R&D costs increased to 4.1% from 4.0% in the first six
months of 2006.
Other
income of $(1.9) million and $(1.2) million for the first six months of 2007
and
2006, respectively, are comprised primarily of interest income.
Equity
in
affiliates’ earnings of $18.0 million decreased $0.5 million as compared to the
first six months of 2006 due to unfavorable changes in currency exchange rates,
which more than offset increased sales and operating performance at our joint
ventures.
Interest
expense and finance charges for the first six months of 2007 were $18.2 compared
with $19.3 million in the first six months of 2006, primarily due to reduced
debt levels, partially offset by rising global interest rates.
The
Company's provision for income taxes is based upon an estimated annual tax
rate
for the year applied to federal, state and foreign income. The
projected effective tax rate of 27.0% for 2007 differs from the U.S. statutory
rate primarily due to foreign rates, which differ from those in the U.S., and
favorable permanent differences between book and tax treatment for items,
including equity in affiliates’ earnings and Medicare prescription drug
benefit. This rate is expected to be greater than the full year 2006
effective tax rate of 12.0% because the 2006 rate included the release of tax
accrual accounts upon conclusion of certain tax audits, the tax effects of
dispositions and adjustments to various tax accounts, including changes in
tax
laws.
Net
earnings for the first six months of 2007 were $134.1 million, or $2.28 per
diluted share, an increase of $0.01 per diluted share over the previous year’s
first six months.
Reportable
Operating Segments
The
Company’s business is comprised of two operating segments: Engine and
Drivetrain. These reportable segments are strategic business groups,
which are managed separately as each represents a specific grouping of related
automotive components and systems.
The
Company allocates resources to each segment based upon the projected after-tax
return on invested capital (“ROIC”) of its business initiatives. The
ROIC is comprised of projected earnings before interest and income taxes
(“EBIT”) adjusted for income taxes compared to the projected average capital
investment required.
EBIT
is
considered a “non-GAAP financial measure.” Generally, a non-GAAP
financial measure is a numerical measure of a company’s financial performance,
financial position or cash flows that excludes (or includes) amounts that are
included in (or excluded from) the most directly comparable measure calculated
and presented in accordance with GAAP. EBIT is defined as earnings
before interest, income taxes and minority interest. “Earnings” is
intended to mean net earnings as presented in the Consolidated Statements of
Operations under GAAP.
The
Company believes that EBIT is useful to demonstrate the operational
profitability of our segments by excluding interest and income taxes, which
are
generally accounted for across the entire Company on a consolidated
basis. EBIT is also one of the measures used by the Company to
determine resource allocation within the Company. Although the
Company believes that EBIT enhances understanding of our business and
performance, it should not be considered an alternative to, or more meaningful
than, net earnings or cash flows from operations as determined in accordance
with GAAP.
The
following tables present net sales and Segment EBIT by segment for the three
and
six months ended June 30, 2007 and 2006.
Net
Sales by Operating Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Engine
|
|
$ |
955.4
|
|
|
$ |
792.0
|
|
|
$ |
1,849.5
|
|
|
$ |
1,577.9
|
|
Drivetrain
|
|
|
417.7
|
|
|
|
386.3
|
|
|
|
809.7
|
|
|
|
763.3
|
|
Inter-segment
eliminations
|
|
|
(8.8 |
) |
|
|
(9.6 |
) |
|
|
(17.1 |
) |
|
|
(17.3 |
) |
Net
sales
|
|
$ |
1,364.3
|
|
|
$ |
1,168.7
|
|
|
$ |
2,642.1
|
|
|
$ |
2,323.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
Earnings Before Interest and Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Engine
|
|
$ |
108.3
|
|
|
$ |
95.4
|
|
|
$ |
193.6
|
|
|
$ |
191.7
|
|
Drivetrain
|
|
|
33.3
|
|
|
|
28.6
|
|
|
|
61.0
|
|
|
|
51.3
|
|
Segment
earnings before interest and income taxes ("Segment EBIT")
|
|
|
141.6
|
|
|
|
124.0
|
|
|
|
254.6
|
|
|
|
243.0
|
|
Corporate,
including equity in affiliates' earnings and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock-based
compensation
|
|
|
19.2 |
|
|
|
8.0 |
|
|
|
33.1 |
|
|
|
22.7 |
|
Consolidated
earnings before interest and taxes ("EBIT")
|
|
|
122.4
|
|
|
|
116.0
|
|
|
|
221.5
|
|
|
|
220.3
|
|
Interest
expense and finance charges
|
|
|
9.3
|
|
|
|
9.9
|
|
|
|
18.2
|
|
|
|
19.3
|
|
Earnings
before income taxes and minority interest
|
|
|
113.1
|
|
|
|
106.1
|
|
|
|
203.3
|
|
|
|
201.0
|
|
Provision
for income taxes
|
|
|
30.5
|
|
|
|
29.7
|
|
|
|
54.9
|
|
|
|
56.3
|
|
Minority
interest, net of tax
|
|
|
6.9
|
|
|
|
6.2
|
|
|
|
14.3
|
|
|
|
13.2
|
|
Net
earnings
|
|
$ |
75.7
|
|
|
$ |
70.2
|
|
|
$ |
134.1
|
|
|
$ |
131.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2007 vs. Three months ended June 30,
2006
The
Engine segment net sales increased $163.4 million, or 20.6%, and Segment EBIT
increased $12.9 million, or 13.5%, from second quarter
2006. Excluding the impact of stronger foreign currencies, primarily
the Euro, sales increased 15.5%. The Engine segment continued to
benefit from European and Asian automaker demand for turbochargers, timing
systems and emissions products, and European demand for diesel engine ignition
systems. In North America, higher turbocharger sales offset lower
sales of other Engine segment products, which were lower primarily due to lower
domestic vehicle production. The Segment EBIT margin was negatively
impacted by sharply higher commodity costs, primarily nickel.
The
Drivetrain segment net sales increased $31.4 million, or 8.1%, and Segment
EBIT
increased $4.7 million, or 16.4%, from second quarter 2006. Excluding
the impact of stronger foreign currencies, primarily the Euro, sales increased
5.4%. The sales increase was driven by growth outside of North
America including higher sales of DualTronic®
transmission modules and torque transfer products.
Six
months ended June 30, 2007 vs. Six months ended June 30,
2006
The
Engine segment net sales increased $271.6 million, or 17.2%, and Segment EBIT
increased $1.9 million, or 1.0%, from the first six months of
2006. Excluding the impact of stronger foreign currencies, primarily
the Euro, sales increased 11.7%. The Engine segment continued to
benefit from European and Asian automaker demand for turbochargers, timing
systems and emissions products, and European demand for diesel engine ignition
systems. In North America, higher turbocharger sales offset lower
sales of other Engine segment products, which were lower primarily due to lower
domestic vehicle production. The
Segment
EBIT margin was negatively impacted by the approximate $14 million
warranty-related charge recognized in first quarter 2007 and by sharply higher
commodity costs, primarily nickel.
The
Drivetrain segment net sales increased $46.4 million, or 6.1%, and Segment
EBIT
increased $9.7 million, or 18.9%, from the first six months of
2006. Excluding the impact of stronger foreign currencies, primarily
the Euro, sales increased 3.0%. The sales increase was driven by growth
outside of North America including higher sales of DualTronic®
transmission modules and torque transfer products.
Outlook
for the remainder of 2007
Our
overall outlook for 2007 remains positive, as we expect our sales to grow in
excess of a projected moderate global vehicle production growth
rate. The outlook for global vehicle production by region is for
moderate declines in North America, moderate increases in Europe, and solid
growth in Asia. While expecting only moderate overall growth in
global vehicle production, we expect to benefit from strong European and Asian
automaker demand for our engine products, including turbochargers, timing
systems, ignition systems and emissions products. We expect continued
and growing demand for our drivetrain products outside of North America,
including increased sales of dual-clutch transmission products, which also
is a
positive trend for the Company. The impact of raw materials,
including nickel, steel, copper, aluminum and plastic resin, is expected to
continue to pressure gross profit. Based upon these and other
assumptions, we expect continued long-term sales and net earnings
growth.
The
Company maintains a positive long-term outlook for its business and is committed
to new product development and strategic capital investments to enhance its
product leadership strategy. The trends that are driving our
longer-term growth are expected to continue, including the growth of diesel
engines worldwide, the increased adoption of automatic transmissions in Europe
and Asia-Pacific, the popularity of cross-over vehicles in North America and
the
move to chain engine timing systems in both Europe and
Asia-Pacific. To take advantage of these trends, the Company is
establishing a technical center in China, a turbocharger production facility
to
be located in Poland and a drivetrain production facility to be located in
Mexico.
FINANCIAL
CONDITION AND LIQUIDITY
Net
cash
provided by operating activities decreased $9.8 million to $223.4 million for
the first six months of 2007 from $233.2 million in the first six months of
2006. Capital spending, including tooling outlays, was $122.5 million
in the first six months of 2007, compared with $145.5 million in
2006. Selective capital spending remains an area of focus for the
Company, both in order to support our book of new business, and for cost
reductions and productivity improvements. The Company expects to
spend approximately $325 million on capital and tooling expenditures in 2007,
but this expectation is subject to ongoing review based on market
conditions.
As
of
June 30, 2007, debt decreased from year-end 2006 by $75.7 million, cash
decreased by $4.8 million and marketable securities decreased by $0.7
million. Our debt to capital ratio was 22.8% at the end of the second
quarter versus 26.1% at the end of 2006. The Company paid dividends
to BorgWarner stockholders of $19.7 million and $18.3 million in the first
six
months of 2007 and 2006, respectively. The Company repurchased
196,300 shares of its common stock for $16.3 million in the first six months
of
2007.
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. At both June 30, 2007
and 2006, the Company had sold $50 million of receivables under a Receivables
Transfer
Agreement
for face value without recourse. During both of the six-month periods
ended June 30, 2007 and 2006, total cash proceeds from sales of accounts
receivable were $300 million. The Company paid servicing fees related
to these receivables for the three and six months ended June 30, 2007 and 2006
of $0.7 million and $0.7 million and $1.4 million and $1.3 million,
respectively. These amounts are recorded in interest expense and
finance charges in the Condensed Consolidated Statements of
Operations.
The
Company has a multi-currency revolving credit facility, which provides for
borrowings up to $600 million through July 2009. At June 30, 2007 and
December 31, 2006, there were no borrowings outstanding under the
facility. The credit agreement is subject to the usual terms and
conditions applied by banks to an investment grade company. The
Company was in compliance with all covenants at June 30, 2007 and expects to
be
compliant in future periods. The Company had outstanding letters of
credit of $22.1 million at June 30, 2007 and $27.0 million at December 31,
2006. The letters of credit typically act as a guarantee of payment
to certain third parties in accordance with specified terms and
conditions.
From
a
credit quality perspective, we have an investment grade credit rating of A-
from
Standard & Poor’s and Baa2 from Moody’s.
The
Company believes that the combination of cash balances, cash flow from
operations, available credit facilities and $50 million available under a shelf
registration statement on file with the Securities and Exchange Commission,
under which a variety of debt instruments could be issued, will be sufficient
to
satisfy its cash needs for the current level of operations and planned
operations for the remainder of 2007. The Company expects that net
cash provided by operating activities will be approximately $500 million in
2007.
OTHER
MATTERS
Contingencies
In
the
normal course of business the Company and its subsidiaries are parties to
various commercial and legal claims, actions and complaints, including matters
involving warranty claims, intellectual property claims, general liability
and
various other risks. See Notes 8 and 14 of the unaudited condensed
consolidated financial statements that are part of this Quarterly Report on
Form
10-Q. It is not possible to predict with certainty whether or not the
Company and its subsidiaries will ultimately be successful in any of these
commercial and legal matters or, if not, what the impact might
be. The Company’s environmental and product liability contingencies
are discussed separately below. The Company’s management does not
expect that the results of these commercial and legal claims, actions and
complaints will have a material adverse effect on the Company’s results of
operations, financial position or cash flows.
Environmental
The
Company and certain of its current and former direct and indirect corporate
predecessors, subsidiaries and divisions have been identified by the United
States Environmental Protection Agency and certain state environmental agencies
and private parties as potentially responsible parties (“PRPs”) at various
hazardous waste disposal sites under the Comprehensive Environmental Response,
Compensation and Liability Act (“Superfund”) and equivalent state laws and, as
such, may presently be liable for the cost of clean-up and other remedial
activities at 33 such sites. Responsibility for clean-up and other
remedial activities at a Superfund site is typically shared among PRPs based
on
an allocation formula.
The
Company believes that none of these matters, individually or in the aggregate,
will have a material adverse effect on its results of operations, financial
position, or cash flows. Generally, this is because either the
estimates of the maximum potential liability at a site are not large or the
liability will be shared with other PRPs, although no assurance can be given
with respect to the ultimate outcome of any such matter.
Based
on
information available to the Company (which in most cases, includes: an estimate
of allocation of liability among PRPs; the probability that other PRPs, many
of
whom are large, solvent public companies, will fully pay the cost apportioned
to
them; currently available information from PRPs and/or federal or state
environmental agencies concerning the scope of contamination and estimated
remediation and consulting costs; remediation alternatives; estimated legal
fees; and other factors), the Company has established an accrual for indicated
environmental liabilities with a balance at June 30, 2007 of $13.7
million. Excluding the Crystal Springs site discussed below for which
$5.3 million has been accrued, the Company has accrued amounts that do not
exceed $3.0 million related to any individual site and management does not
believe that the costs related to any of these other individual sites will
have
a material adverse effect on the Company’s results of operations, cash flows or
financial condition. The Company expects to pay out substantially all
of the $13.7 million accrued environmental liability over the next three to
five
years.
In
connection with the sale of Kuhlman Electric Corporation, the Company agreed
to
indemnify the buyer and Kuhlman Electric for certain environmental liabilities,
then unknown to the Company, relating to the past operations of Kuhlman
Electric. The liabilities at issue result from operations of Kuhlman
Electric that pre-date the Company’s acquisition of Kuhlman Electric’s parent
company, Kuhlman Corporation, in 1999. 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 is continuing to work with the Mississippi
Department of Environmental Quality and Kuhlman Electric to investigate and
remediate to the extent necessary, if any, historical contamination at the
plant
and surrounding area. Kuhlman Electric and others, including the
Company, were sued in numerous related lawsuits, in which multiple claimants
alleged personal injury and property damage. In 2005, the Company and
other defendants, including the Company’s subsidiary Kuhlman Corporation,
entered into settlements that resolved approximately 99% of the known personal
injury and property damage claims relating to the alleged environmental
contamination. Those settlements involved payments by the defendants
of $28.5 million in the second half of 2005 and $15.7 million in the first
quarter of 2006, in exchange for, among other things, dismissal with prejudice
of these lawsuits.
Conditional
Asset Retirement Obligations
In
March
2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations - an interpretation of FASB Statement No. 143
(“FIN 47”), which requires the Company to recognize legal obligations to perform
asset retirements in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of
the
entity. Certain government regulations require the removal and
disposal of asbestos from an existing facility at the time the facility
undergoes major renovations or is demolished. The liability exists
because the facility will not last forever, but it is conditional on future
renovations (even if there are no immediate plans to remove the materials,
which
pose no health or safety hazard in their current
condition). Similarly, government regulations require the removal or
closure of underground storage tanks (“USTs”) when their use ceases, the
disposal of polychlorinated biphenyl (“PCB”) transformers and capacitors when
their use ceases, and the disposal of used furnace bricks and liners, and
lead-based paint in conjunction with facility renovations or
demolition. The Company currently has 17 manufacturing locations that
have been identified as containing these items. The fair value to
remove and dispose of this material has been estimated and recorded at $1.0
million as of June 30, 2007 and December 31, 2006.
Product
Liability
Like
many
other industrial companies who have historically operated in the U.S., the
Company (or parties the Company is obligated to indemnify) continues to be
named
as one of many defendants in asbestos-related personal injury
actions. Management believes that the Company’s involvement is
limited because, in general, these claims relate to a few types of automotive
friction products that were manufactured many years ago and contained
encapsulated asbestos. The nature of the fibers, the encapsulation
and the manner of use lead the Company to believe that these products are highly
unlikely to cause harm. As of June 30, 2007, the Company had
approximately 42,000 pending asbestos-related product liability
claims. Of these outstanding claims, approximately 34,000 are pending
in just three jurisdictions, where significant tort reform activities are
underway.
The
Company’s policy is to aggressively defend against these lawsuits and the
Company has been successful in obtaining dismissal of many claims without any
payment. The Company expects that the vast majority of the pending
asbestos-related product liability claims where it is a defendant (or has an
obligation to indemnify a defendant) will result in no payment being made by
the
Company or its insurers. In the first six months of 2007, of the
approximately 3,000 claims resolved, only 97 (3.2%) resulted in any payment
being made to a claimant by or on behalf of the Company. In 2006, of
the approximately 27,000 claims resolved, only 169 (0.6%) resulted in any
payment being made to a claimant by or on behalf of the Company.
Prior
to
June 2004, the settlement and defense costs associated with all claims were
covered by the Company’s primary layer insurance coverage, and these carriers
administered, defended, settled and paid all claims under a funding
arrangement. In June 2004, primary layer insurance carriers notified
the Company of the alleged exhaustion of their policy limits. This
led the Company to access the next available layer of insurance
coverage. Since June 2004, secondary layer insurers have paid
asbestos-related litigation defense and settlement expenses pursuant to a
funding arrangement. To date, the Company has paid $21.2 million
in defense and indemnity in advance of insurers’ reimbursement and has received
$6.6 million in cash from insurers. The outstanding balance of
$14.6 million is expected to be fully recovered. Timing of the
recovery is dependent on final resolution of the declaratory judgment action
referred to below. At December 31, 2006, insurers owed
$11.7 million in association with these claims.
At
June
30, 2007, the Company has an estimated liability of $41.5 million for future
claims resolutions, with a related asset of $41.5 million to recognize the
insurance proceeds receivable by the Company for estimated losses related to
claims that have yet to be resolved. Insurance carrier reimbursement
of 100% is expected based on the Company’s experience, its insurance contracts
and decisions received to date in the declaratory judgment action referred
to
below. At December 31, 2006, the comparable value of the insurance
receivable and accrued liability was $39.9 million.
The
amounts recorded in the Condensed Consolidated Balance Sheets related to the
estimated future settlement of existing claims are as follows:
|
|
June
30,
|
|
|
December
31,
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
Assets:
|
|
|
|
|
|
|
Prepayments
and other current assets
|
|
$ |
21.8
|
|
|
$ |
23.3
|
|
Other
non-current assets
|
|
|
19.7
|
|
|
|
16.6
|
|
Total
insurance receivable
|
|
$ |
41.5
|
|
|
$ |
39.9
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
21.8
|
|
|
$ |
23.3
|
|
Other
non-current liabilities
|
|
|
19.7
|
|
|
|
16.6
|
|
Total
accrued liability
|
|
$ |
41.5
|
|
|
$ |
39.9
|
|
The
Company cannot reasonably estimate possible losses, if any, in excess of those
for which it has accrued, because it cannot predict how many additional claims
may be brought against the Company (or parties the Company has an obligation
to
indemnify) in the future, the allegations in such claims, the possible outcomes,
or the impact of tort reform legislation that may be enacted at the State or
Federal levels.
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 both primary and
additional layer insurance, and, in conjunction with other insurers, is
currently defending and indemnifying the Company in its pending asbestos-related
product liability 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. On August 15, 2005, the Court issued an interim order
regarding the apportionment matter. The interim order has the effect
of making insurers responsible for all defense and settlement costs pro rata
to
time-on-the-risk, with the pro-ration method to hold the insured harmless for
periods of bankrupt or unavailable coverage. Appeals of the interim
order were denied. However, the issue is reserved for appellate
review at the end of the action. In addition to the primary insurance
available for asbestos-related claims, the Company has substantial additional
layers of insurance available for potential future asbestos-related product
claims. As such, the Company continues to believe that its coverage
is sufficient to meet foreseeable liabilities.
Although
it is impossible to predict the outcome of pending or future claims or the
impact of tort reform legislation that may be enacted at the State or Federal
levels, due to the encapsulated nature of the products, the Company’s
experiences in aggressively defending and resolving claims in the past, and
the
Company’s significant insurance coverage with solvent carriers as of the date of
this filing, management does not believe that asbestos-related product liability
claims are likely to have a material adverse effect on the Company’s results of
operations, cash flows or financial condition.
New
Accounting Pronouncements
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (“FAS 157”). FAS 157
defines fair value, establishes a framework for measuring fair value in GAAP
and
expands disclosures about fair value measurements. FAS 157 is
effective for the Company
beginning
with its quarter ending March 31, 2008. The adoption of FAS 157
is not expected to have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (“FAS 159”). FAS 159 allows entities to irrevocably
elect to recognize most financial assets and financial liabilities at fair
value
on an instrument-by-instrument basis. The stated objective of FAS 159
is to improve financial reporting by giving entities the opportunity to elect
to
measure certain financial assets and liabilities at fair value in order to
mitigate earnings volatility caused when related assets and liabilities are
measured differently. FAS 159 is effective for the Company beginning
with its quarter ending March 31, 2008. The adoption of FAS 159
is not expected to have a material impact on the Company’s consolidated
financial position, results of operations or cash flows.
Recent
Development
On
July
20, 2007, the Company announced a $0.17 per share dividend to be paid on August
15, 2007 to stockholders of record on August 1, 2007.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
Statements
contained in this Form 10-Q (including 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, many of which are difficult to predict and generally beyond
our
control, that could cause actual results to differ materially from those
expressed, projected or implied in or by 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 our products, changes in general
economic conditions, and other risks detailed in our filings with the Securities
and Exchange Commission, including the Risk Factors, identified in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2006. We
do not undertake any obligation to update any forward-looking
statements.
Item
3.
Quantitative and Qualitative Disclosure About Market Risk
There
have been no material changes to our exposures related to market risk as stated
in the Company’s Annual Report on Form 10-K for the year ended December 31,
2006.
Item
4.
Controls and Procedures
The
Company maintains disclosure controls and procedures (as defined in Exchange
Act
Rules 13a-15(e) and 15d-15(e)) that are designed to provide reasonable assurance
that the information required to be disclosed in the reports it files with
the
Securities and Exchange Commission is collected and then processed, summarized
and disclosed within the time periods specified in the rules of the Securities
and Exchange Commission. Under the supervision and with the
participation of the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, the Company has evaluated the
effectiveness
of the design and operation of its disclosure controls and procedures as of
the
end of the period covered by this report. Based on such evaluation,
the Company’s Chief Executive Officer and Chief Financial Officer have concluded
that these procedures are effective. There have been no changes in
internal control over financial reporting that occurred during the period
covered by this report that have materially affected, or are likely to
materially affect, the Company’s internal control over financial
reporting.
PART
II. OTHER INFORMATION
Item
1.
Legal Proceedings
The
Company is subject to a number of claims and judicial and administrative
proceedings (some of which involve substantial amounts) arising out of the
Company’s business or relating to matters for which the Company may have a
contractual indemnity obligation. See Note 14 – Contingencies to the
condensed consolidated financial statements for a discussion of environmental,
product liability and other litigation, which is incorporated herein by
reference.
Item
2.
Repurchases of Equity Securities
The
Company’s Board of Directors previously authorized the purchase of up to 2.4
million shares (adjusted for the Company’s 2004 two-for-one stock split) of the
Company's common stock. As of June 30, 2007, the Company has
repurchased 1,630,160 shares.
All
shares purchased under this authorization have been and will continue to be
repurchased in the open market at prevailing prices and at times and amounts
to
be determined by management as market conditions and the Company’s capital
position warrant. The Company may use Rule 10b5-1 plans to facilitate
share repurchases. Repurchased shares will be deemed treasury shares
and may subsequently be reissued for general corporate purposes.
The
following table provides information about Company purchases of its equity
securities that are registered pursuant to Section 12 of the Exchange Act
during the quarter ended June 30, 2007, at a total cost of $16.3
million:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Period
|
|
(a)
Total Number of Shares (or Units) Purchased
|
|
|
(b)
Average Price Paid per Share (or Unit)
|
|
|
(c)
Total Number of Shares (or Units) Purchased as Part of Publicly
Announced
Plans or Programs
|
|
|
(d)
Maximum Number (or Approximate Dollar Value) of Shares (or Units)
that May
Yet be Purchased Under the Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month
Ended April 30, 2007
|
|
|
-
|
|
|
$ |
-
|
|
|
|
-
|
|
|
|
996,140
|
|
Month
Ended May 31, 2007
|
|
|
91,300
|
|
|
|
81.65
|
|
|
|
91,300
|
|
|
|
874,840
|
|
Month
Ended June 30, 2007
|
|
|
105,000
|
|
|
|
83.80
|
|
|
|
105,000
|
|
|
|
769,840
|
|
Total
|
|
|
196,300
|
|
|
$ |
82.80
|
|
|
|
196,300
|
|
|
|
769,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE:
All purchases were made on the open market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
4.
Submission of Matters to a Vote of Security Holders
On
April
25, 2007, the Company held its Annual Meeting of Stockholders. The
following nominees for Class II Directors were elected to three year terms
on
the Company’s Board of Directors: Jere A. Drummond, Timothy M. Manganello and
Ernest J. Novak, Jr.
Each
of
Robin J. Adams, Phyllis O. Bonanno, David T. Brown, Paul E. Glaske, Alexis
P.
Michas, Richard O. Schaum and Thomas T. Stallkamp continues to serve as
directors. At such meeting, the following votes were cast in each
proposal.
Proposal
1: The election of Directors of the Company:
|
|
|
|
|
Shares
|
|
Name
|
|
Shares
For
|
|
|
Withheld
|
|
Jere
A. Drummond
|
|
|
43,584,731
|
|
|
|
1,253,776
|
|
Timothy
M. Manganello
|
|
|
43,596,811
|
|
|
|
1,241,696
|
|
Ernest
J. Novak, Jr.
|
|
|
44,079,857
|
|
|
|
758,650
|
|
Proposal
2: To vote upon a shareholder proposal concerning director
elections:
For
|
|
Against
|
|
Abstain
|
|
Broker
Non-Vote
|
25,087,745
|
|
16,185,700
|
|
99,208
|
|
3,465,854
|
Proposal
3: To ratify the appointment of Deloitte & Touche LLP as independent
registered public accounting firm for the Company for 2007:
For
|
|
Against
|
|
Abstain
|
44,716,122
|
|
102,526
|
|
19,859
|
Item
6.
Exhibits
Exhibit
31.1 Rule
13a-14(a)/15d-14(a) Certification of the
Principal
Executive
Officer
Exhibit
31.2 Rule
13a-14(a)/15d-14(a) Certification of the
Principal
Financial
Officer
Exhibit
32 Section
1350 Certifications
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/
Jeffrey L. Obermayer
(Signature)
Jeffrey L. Obermayer
Vice President and Controller
(Principal Accounting Officer)
Date:
July 26, 2007