10-Q 1 qskip.txt SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q QUARTERLY REPORT Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter ended March 31, 2004 Commission file number: 1-12162 (Exact name of registrant as specified in its charter) Delaware 13-3404508 State or other jurisdiction of (I.R.S. Employer Incorporation or organization Identification No.) 200 South Michigan Avenue, Chicago, Illinois 60604 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (312) 322-8500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _____ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b2 of the Exchange Act). YES X NO _____ On March 31, 2004 the registrant had 27,853,652 shares of Common Stock outstanding. BORGWARNER INC. FORM 10-Q THREE MONTHS ENDED MARCH 31, 2004 INDEX Page No. PART I. Financial Information Item 1. Financial Statements Introduction 2 Condensed Consolidated Balance Sheets at March 31, 2004 and December 31, 2003 3 Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 5 Notes to the Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risks 20 Item 4. Controls and Procedures 20 PART II. Other Information Item 1. Legal Proceedings 21 Item 6. Exhibits and Reports on Form 8-K 21 SIGNATURES 22 BORGWARNER INC. FORM 10-Q THREE MONTHS ENDED MARCH 31, 2004 PART I. FINANCIAL INFORMATION Item 1. Financial Statements BorgWarner Inc. and Consolidated Subsidiaries' Financial Statements The financial statements of BorgWarner Inc. and Consolidated Subsidiaries (the "Company") have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The statements are unaudited but include all adjustments, consisting only of recurring items, except as noted, which the Company considers necessary for a fair presentation of the information set forth herein. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the entire year. The following financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003. BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (millions of dollars except share data) March 31, December 31, 2004 2003 ------------ ------------ ASSETS Cash and cash equivalents $ 78.7 $ 113.1 Receivables 515.6 414.9 Inventories 215.7 201.3 Deferred income tax asset 32.9 32.8 Investments in businesses held for sale 39.8 32.0 Prepayments and other current assets 45.9 30.5 ---- ----- Total current assets 928.6 824.6 Property, plant, and equipment at cost 1,700.4 1,665.7 Less accumulated depreciation (707.0) (680.4) ---- ------- Net property, plant and equipment 993.4 985.3 Tooling, net of amortization 94.9 90.5 Investments and advances 184.3 177.3 Goodwill 851.7 852.0 Other non-current assets 116.9 109.2 ------ ------- Total other assets 1,247.8 1,229.0 ------- ------- $ 3,169.8 $ 3,038.9 ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY Notes payable and current portion of long-term debt $ 9.1 $ 10.0 Accounts payable and accrued expenses 551.3 460.3 Income taxes payable 34.7 - ----- ----- Total current liabilities 595.1 470.3 Long-term debt 603.1 634.0 Long-term retirement-related liabilities 482.5 503.0 Other long-term liabilities 134.6 154.0 ----- ----- Total long-term liabilities 617.1 657.0 Minority interest 15.1 17.2 Capital stock: Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued - - Common stock, $.01 par value; authorized 50,000,000 shares; issued shares:2004, 27,853,883; 2003, 27,614,927; outstanding shares: 2004,27,853,652;2003, 27,578,595 0.3 0.3 Non-voting common stock, $.01 par value; authorized 25,000,000 shares; none issued and outstanding in 2004 - - Capital in excess of par value 778.4 756.3 Retained earnings 535.5 491.3 Accumulated other comprehensive income 25.3 14.0 Common stock held in treasury, at cost: 2004, 1,992 shares; 2003, 36,332 shares (0.1) (1.5) ----- ------- Total stockholders' equity 1,339.4 1,260.4 -------- -------- $ 3,169.8 $ 3,038.9 ========= ======== See accompanying Notes to Consolidated Financial Statements BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (millions of dollars except share data) Three months ended March 31, 2004 2003 ----- ------ Net sales $ 903.1 $ 775.7 Cost of sales 730.5 624.2 ------ ------ Gross profit 172.6 151.5 Selling, general and administrative expenses 94.7 83.6 Other, net .3 - ----- ----- Operating income 77.6 67.9 Equity in affiliate earnings, net of tax (6.5) (6.4) Interest expense and finance charges 7.5 9.0 ------ ----- Income before income taxes 76.6 65.3 Provision for income taxes 22.9 18.9 Minority interest, net of tax 2.6 2.2 ------ ------ Net earnings $ 51.1 $ 44.2 ======= ======== Net earnings per share - Basic $ 1.84 $ 1.66 ======== ========= Net earnings per share Diluted $ 1.82 $ 1.65 ======== ========= Average shares outstanding (thousands) Basic 27,722 26,647 Diluted 28,022 26,797 Dividends declared per share $ 0.25 $ 0.18 ======= ======= See accompanying Notes to Consolidated Financial Statements BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (millions of dollars) Three months ended March 31, 2004 2003 ------ --------- Operating Net earnings $ 51.1 $ 44.2 Non-cash charges to operations: Depreciation 33.7 29.7 Amortization of tooling 9.8 7.8 Employee retirement benefits 18.9 3.7 Other, principally equity in affiliate earnings, net of tax (6.5) (1.1) ------ ------ Net earnings adjusted for non-cash charges 107.0 84.3 Changes in assets and liabilities: Increase in receivables (102.6) (62.6) Increase in inventories (14.2) (8.0) (Increase)/decrease in prepayments and other current assets (8.3) 4.2 Increase in accounts payable and accrued expenses 91.2 9.9 Increase in income taxes payable 34.1 7.3 Net change in other long-term assets and liabilities (40.5) (5.9) ------ ------ Net cash provided by operating activities 66.7 29.2 Investing Capital expenditures (40.5) (25.3) Tooling outlays, net of customer reimbursements (13.7) (9.4) Net proceeds from asset disposals - 0.4 Investment in unconsolidated subsidiary (7.8) - ------- -------- Net cash used in investing activities (62.0) (34.3) Financing Net increase/(decrease) in notes payable (0.8) 0.7 Additions to long-term debt .2 0.3 Reductions in long-term debt (34.2) (0.7) Payments for purchases of treasury stock - (0.2) Proceeds from stock options exercised 2.2 0.2 Dividends paid (6.9) (4.8) ------- ------- Net cash used in financing activities (39.5) (4.5) Effect of exchange rate changes on cash and cash equivalents 0.4 (1.1) ------- ------- Net decrease in cash and cash equivalents (34.4) (10.7) Cash and cash equivalents at beginning of period 113.1 36.6 -------- ------- Cash and cash equivalents at end of period $78.7 $ 25.9 ======== ======== Supplemental Cash Flow Information Net cash paid during the period for: Interest $ 9.4 $ 10.0 Income taxes 6.5 10.5 Non-cash financing transactions: Issuance of common stock for Executive Stock Performance Plan 2.0 3.3 See accompanying Notes to Consolidated Financial Statements BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) Research and development costs charged to expense for the three months ended March 31, 2004 were $29.6 million. Research and development costs charged to expense for the three months ended March 31, 2003 were $29.5 million. (2) Inventories consisted of the following (millions of dollars): March 31, December 31, 2004 2003 --------- --------- Raw materials $93.5 $ 95.5 Work in progress 70.7 65.1 Finished goods 51.5 40.7 ------ ------- Total inventories $ 215.7 $ 201.3 ======= ======== (3) The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income for stock options, as all options granted under those plans had an exercise price equal to or in excess of the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to all stock-based employee compensation awards. Three Months Ended March 31, 2004 2003 ------ ------- Net earnings, as reported $51.1 $ 44.2 Add: Stock-based employee compensation expense included in net income, net of income tax 0.4 0.4 Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax effects(1.2) (1.5) ------ ------- Pro forma net earnings $ 50.3 $ 43.1 ======= ======== Net earnings per share Basic as reported $ 1.84 $ 1.66 Basic pro forma 1.81 1.62 Diluted as reported 1.82 1.65 Diluted pro forma 1.80 1.61 In calculating earnings per share, earnings are the same for the basic and diluted calculations. Shares increased for diluted earnings per share by 300,000 and 150,000 for the period ended March 31, 2004 and 2003, respectively, due to the effects of stock options and shares issuable under the executive stock performance plan. For the three months ended March 31, 2004 and 2003, the amounts earned and expensed under the plan were $1.1 million and $1.1 million, respectively. (4) The Company's provision for income taxes is based upon estimated annual tax rates for the year applied to federal, state and foreign income. The effective rate for 2004 differed from the U.S. statutory rate primarily due to a) state income taxes, b) foreign rates which differ from those in the U.S. and c) realization of certain business tax credits, including foreign tax credits and research and development credits. The Company expects its effective tax rate for 2004 to be approximately 30.0%. This rate is about 1.5% higher than the full prior year due to changes in tax laws in some of the countries where the Company does business. (5) Following is a summary of notes payable and long-term debt: March 31, 2004 December 31,2003 Current Long-Term Current Long-Term -------- ---------- -------- ----------- DEBT (millions of dollars) Bank borrowings and other $ 2.0 $ 37.1 $ 2.9 $ 42.5 Term loans due through 2011 (at an average rate of 3.3% at March 31, 2004 and 3.4% at December 31, 2003) 7.1 30.7 7.1 31.4 7% Senior Notes due 2006, net of unamortized discount ($139 million converted to floating rate of 2.9% by interest rate swap at March 31, 2004) - 139.4 - 139.4 6.5% Senior Notes due 2009, net of unamortized discount ($75 million converted to floating rate of 3.8% by interest rate swap at March 31, 2004) - 139.9 - 164.7 8% Senior Notes due 2019, net of unamortized discount ($75 million converted to floating rate of 3.8% by interest rate swap at March 31, 2004) - 133.9 - 133.9 7.125% Senior Notes due 2029, net of unamortized discount - 122.1 - 122.1 ------ -------- ------- ------- Total notes payable and long-term debt $ 9.1 $ 603.1 $ 10.0 $ 634.0 ======= ======== ======== ======= The Company has a revolving credit facility that provides for borrowings up to $350 million through July 2005. At March 31, 2004 and December 31, 2003, there were no borrowings outstanding and no obligations under standby letters of credit under the facility. The credit agreement contains numerous financial and operating covenants including, among others, covenants requiring the Company to maintain certain financial ratios and restricting its ability to incur additional indebtedness. The Company is in compliance with its credit agreement covenants as of March 31, 2004. (6) The Company has entered into interest rate and currency swaps to manage interest rate and foreign currency risk. A summary of these instruments outstanding at March 31, 2004 follows (currency in millions): Notional Interest rates Floating interest Hedge Type Amount (b)Receive Pay Rate basis ---------- -------- ---------- ------ -------------- Interest Rate Swaps (Millions) (a) Fixed to floating Fair value $139 7.0% 2.9% 6 month LIBOR+1.7% Fixed to floating Fair value $ 75 6.5% 3.8% 6 month LIBOR+2.6% Fixed to floating Fair Value $ 75 8.0% 3.8% 6 month LIBOR+2.6% Cross Currency Swap (matures in 2006) Floating $ Investment $100 2.2% - 6 mo. USD LIBOR+1.0% To floating (Y) (Y)12,192 - 1.3% 6 mo. JPY LIBOR+1.2% a) The maturity of the swaps corresponds with the maturity of the hedged item as noted in the debt summary, unless otherwise indicated. b) Interest rates are as of March 31, 2004. The ineffective portion of the swaps was not material. As of March 31, 2004 and December 31, 2003, the fair value of the fixed to floating interest rate swaps was $17.2 and $11.5 million, respectively. The cross currency swaps were recorded at their fair value of $(16.8) and $(13.6) million at March 31, 2004 and December 31, 2003, respectively. Fair value is based on quoted market prices for contracts with similar maturities. The Company also entered into certain commodity derivative instruments to protect against commodity price changes related to forecasted raw material and supplies purchases. The primary purpose of the commodity price hedging activities is to manage the volatility associated with these forecasted purchases. The Company primarily utilizes forward and option contracts with maturities of less than twelve months, which are designated as cash flow hedges. These instruments are intended to offset the effect of changes in commodity prices on forecasted purchases. As of March 31, 2004 the Company had no forward and option commodity contracts outstanding. At December 31, 2003, the Company had forward and option commodity contracts with a total notional value of $1.1 million and a fair value of $0.1 million. During the three months ended March 31, 2004 and 2003, hedge ineffectiveness of these contracts was not material. The Company uses foreign exchange forward contracts to hedge forecasted future purchases of materials consumed in the production process, and the receivables related to forecasted sales through the second quarter of 2009, and are designated as cash flow hedges. Foreign currency contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for primarily U.S. Dollars, Euro, Japanese Yen and British Pounds Sterling. Contracts outstanding as of March 31, 2004 will mature over the next 3 years and had net sales contract notional amounts of $19.6 million and E82.1 million and fair value of $5.7 million, which is deferred in Other Comprehensive Income and will be reclassified into income as the related inventories are sold. Contracts outstanding as of December 31, 2003 had contract notional amounts of $21.9 million and E3.0 million and a fair value of $1.1 million. (7) The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency (EPA) and certain state environmental agencies and private parties as potentially responsible parties (PRPs) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at 41 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Based on the information available to the Company, which in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation costs; remediation alternatives; estimated legal fees; and other factors, the Company has established a reserve for indicated environmental liabilities with a balance at March 31, 2004 of approximately $21.0 million. The Company expects this amount to be expended over the next three to five years. The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial condition or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. The Company has been working with the Mississippi Department of Environmental Quality, the EPA and Kuhlman Electric to investigate the extent of and remediate the contamination. The investigation revealed the presence of Polychlorinated Biphenyls (PCBs) in portions of the soil at the plant and neighboring areas. Clean up began in 2000 and is continuing. Kuhlman Electric and others, including the Company, have been sued in several related lawsuits, which claim personal injury and property damage. The Company has moved to be dismissed from some of these lawsuits. The Company believes that the reserve for environmental liabilities and any insurance recoveries are adequate to cover any potential liability associated with environmental matters. However, due to the nature of environmental remediation, there can be no assurance that the actual amount of environmental liabilities will not exceed the amount reserved. The Company has guaranteed the residual values of certain leased machinery and equipment at one of its facilities. The guarantees extend through the maturity of the underlying lease, which is in 2005. In the event the Company exercises its option not to purchase the machinery and equipment, the Company has guaranteed a residual value of $16.3 million. We don't believe we have any loss exposure due to this guarantee. The Company entered into a royalty agreement with Honeywell International for certain variable turbine geometry (VTG) turbochargers after a German court ruled in favor of Honeywell in a patent infringement action. In order to continue shipping to its OEM customers, the Company and Honeywell entered into two separate royalty agreements, signed in July 2002 and June 2003, respectively. The June 2003 agreement runs through 2006 and calls for a minimum royalty to be paid over stated volume levels, meaning the royalty will increase for any units sold above the stated amounts in the royalty agreement. The royalty costs recognized under the agreement were $5.7 million in the first quarter 2003 and $4.7 million in the first quarter 2004. These costs were all recognized as part of cost of goods sold. These costs will continue to decrease in 2004 and be at minimal levels in 2005 and 2006 as the Company's primary customers are anticipated to convert to the Company's next generation VTG turbocharger beginning in mid-2004. The Company provides warranties on some of its products. The warranty terms are typically from one to three years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve vehicle quality and minimize warranty claims. Management believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. The reserve is represented in both long-term and short-term liabilities on the balance sheet. Below is a table that shows the activity in the warranty accrual accounts (in millions): For the three months ended March 31, 2004 Beginning balance $ 28.7 Provisions 3.9 Incurred (2.8) ------- Ending balance $ 29.8 ======= (8) Comprehensive income is a measurement of all changes in stockholders' equity that result from transactions and other economic events other than transactions with stockholders. For the Company, this includes foreign currency translation adjustments, changes in the minimum pension liability adjustment and net earnings. The amounts presented as other comprehensive income, net of related taxes, are added to net income resulting in comprehensive income. The following summarizes the components of other comprehensive income/ (loss) on a pretax and after-tax basis for the periods ended March 31, (in millions) Three Months Ended ---------------------- 2004 2003 ----- ----- Income Income Tax After- Tax After- Pretax Effect tax Pretax Effect tax ------- -------- ------- ------- ------- -------- Foreign currency translation adjustments $ 13.7 $(2.4) $11.3 $(2.6) $ 0.2 $(2.4) Net income as reported 51.1 44.2 ----- ------- Total comprehensive income $62.4 $ 41.8 ====== ======== The components of accumulated other comprehensive income, net of tax, in the Consolidated Balance Sheets are as follows: (in millions) March 31, December 31, 2004 2003 ------ ------- Foreign currency translation adjustments $85.8 $ 74.5 Minimum pension liability adjustment (60.5) (60.5) ------ ------- Total comprehensive income $25.3 $ 14.0 ======= ======== (9) The following tables show net sales, earnings before interest and taxes and total assets for the Company's reportable operating segments (in millions of dollars). Net Sales Three Months Ended March 31, 2004 2003 Inter- Inter- Customer segment Net Customer segment Net --------- -------- ------- -------- -------- -------- Drivetrain $ 359.6 $ - $ 359.6 $321.7 $ - $ 321.7 Engine 543.5 13.6 557.1 454.0 11.8 465.8 Inter-segment eliminations - (13.6) (13.6) - (11.8) (11.8) ------- ------- ------- ------- ------- -------- Consolidated $ 903.1 $ - $ 903.1 $775.7 $ - $ 775.7 ======= ======= ======= ======= ======== ======== Earnings Before Interest & Taxes Three Months Ended Total Assets March 31, March 31, December 31, 2004 2003 2004 2003 ------ ------ ------- ------ Drivetrain $ 30.7 $ 26.1 $ 825.3 $ 778.8 Engine 68.0 60.9 2,017.4 1,925.1 ------ ------ --------- --------- subtotal 98.7 87.0 2,842.7 2,703.9 Corporate, including equity in affiliates (14.6) (12.7) 327.1 335.0 ----- ------ -------- --------- Total $84.1 $ 74.3 $3,169.8 $3,038.9 ===== ====== ========= ========= (10) The Company securitizes and sells certain receivables through third party financial institutions without recourse. The amount sold can vary each month based on the amount of underlying receivables, up to a maximum of $50 million. During the three months ended March 31, 2004, the amount of receivables sold remained constant at $50 million and total cash proceeds from sales of accounts receivable were $150.0 million. For the three months ended March 31, 2004, the Company paid a servicing fee of $0.1 million related to these receivables, which is included in interest expense and finance charges. At March 31, 2004 and December 31, 2003, the Company had sold $50 million of receivables under a Receivables Transfer Agreement for face value without recourse. (11) The changes in the carrying amount of goodwill (in millions of dollars) for the three months ended March 31, 2004, are as follows: Drivetrain Engine Total Balance at December 31, 2003 $134.3 $717.7 $852.0 Translation adjustment (0.1) (0.2) (0.3) ------ ------ ------ Balance at March 31, 2004 $134.2 $717.5 $851.7 ====== ====== ====== (12) The Company has a number of defined benefit pension plans and other postretirement benefit plans covering eligible salaried and hourly employees. The other postretirement benefits plans, which provide medical and life insurance benefits, are unfunded plans. The estimated contributions for 2004 are from $30 to $35 million, of which about $22 million has been contributed in the first quarter. The components of net periodic benefit cost recorded in the Company's Consolidated Statement of Operations, are as follows: Pension Other Benefits Postretirement Benefits Three Months Ended March 31, 2004 2003 2004 2003 ---- ------ ----- ------ Service cost $0.8 $2.5 $1.7 $1.3 Interest cost 4.6 7.0 7.9 7.4 Expected return on plan assets(6.5) (6.6) - - Amortization of unrecognized - 0.1 - - transition asset Amortization of unrecognized 0.4 0.4 - - prior service cost Amortization of unrecognized loss 1.7 2.4 2.9 1.5 ---- ----- ----- ----- Net periodic benefit cost $1.0 $5.8 $12.5 $10.2 ===== ====== ====== ===== (13)In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"which was revised in December 2003. FIN No. 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the entity that has the controlling financial interest. FIN No. 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. For the Company, this Interpretation, as revised, was effective January 1, 2004. The Company has no variable interest entities required to be consolidated as a result of adopting FIN No. 46, therefore, there was no impact on our Consolidated Financial Statements. In December 2003, the FASB issued a revised SFAS No. 132, "Employer's Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132 changes employers' disclosures about pension plans and other postretirement benefits and requires additional disclosures about assets, obligations, cash flows and net periodic benefit cost. The Statement is effective for annual and interim periods ended after December 15, 2003. The Company adopted SFAS No. 132 as of December 31, 2003, resulting in additional disclosures in the Company's annual and interim Consolidated Financial Statements. In November 2002, the FASB issued Interpretation ("FIN") No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others", which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN No. 45 requires the Company to recognize an initial liability for fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 on January 1, 2003 did not have any impact on the Company's financial position, operating results or liquidity and resulted in additional disclosures in the Company's Consolidated Financial Statements. In January 2004, the FASB issued FASB Staff Position SFAS ("FSP") No. 106-1, "Accounting Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2002 (the Act). The Act, signed into law in December 2003, establishes a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Act introduces two new features to Medicare that must be considered when measuring accumulated postretirement benefit costs. The new features include a subsidy to the plan sponsors that is based on 28% of an individual beneficiary's annual prescription drug costs between $250 and $5,000 and an opportunity for a retiree to obtain a prescription drug benefit under Medicare. The Act is expected to reduce the Company's net postretirement benefit costs. The Company has elected to defer the adoption of FSP No. 106-1 due to lack of specific accounting guidance. Therefore, the net post retirement benefit costs disclosed in the Consolidated Financial Statements do not reflect the impact of the Act on the plans. The deferral will continue to apply until specific authoritative accounting guidance for the federal subsidy is issued. Authoritative guidance on the accounting for the federal subsidy is pending and, when issued, could require information previously reported in the Company's Consolidated Financial Statements to change. The Company is currently investigating the impacts of FSP No. 106-1's initial recognition, measurement and disclosure provisions on its Consolidated Financial Statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations INTRODUCTION BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading global supplier of highly engineered systems and components for vehicle powertrain applications. Our products help improve vehicle performance, fuel efficiency, handling, and air quality. They are manufactured and sold worldwide, primarily to original equipment manufacturers (OEMs) of passenger cars, sport utility vehicles, trucks, and commercial transportation products. The Company operates manufacturing facilities serving customers in the Americas, Europe and Asia, and is an original equipment supplier to every major OEM in the world. RESULTS OF OPERATIONS The Company's products fall into two reportable operating segments: Drivetrain and Engine. The following tables present net sales and earnings before interest and taxes (EBIT) by segment for the three months ended March 31, 2004 and 2003 in millions of dollars. Net Sales EBIT March 31, March 31, 2004 2003 2004 2003 ------- ------ ------ ------ Drivetrain $359.6 $ 321.7 Drivetrain $ 30.7 $ 26.1 Engine 557.1 465.8 Engine 68.0 60.9 Inter-segment Segment EBIT$ 98.7 $ 87.0 eliminations (13.6) (11.8) ====== ====== Net sales $903.1 $775.7 ====== ====== Consolidated sales for the first quarter ended March 31, 2004 totaled $903.1 million, a 16.4% increase over the first quarter of 2003. This increase occurred in a relatively flat market, as production in North America and Europe was down approximately 1% from the previous year's quarter. Sales increased an additional $42.4 million due to stronger currencies, primarily in Europe. Turbochargers and automatic transmissions are the products most affected by currency fluctuations in Europe, Asia, and the Americas. Without the currency impact, the increase in sales would have been 10.9%. First quarter 2004 net income increased from $44.2 million to $51.1 million in the prior year quarter, a 15.6% increase. The increase in income was due primarily from the profits on the increased revenues. The Drivetrain business' revenue increased 11.8% and EBIT increased $4.6 million, or 17.6% from 2003. These gains were due to four-wheel drive transfer case programs with General Motors and Ford, increased sales of the Company's Interactive Torque Management (TM) all-wheel drive systems to Honda and Hyundai, and steady demand for transmission components and systems, especially with increased automatic transmission penetration in Europe. The Engine business' first quarter 2004 sales and EBIT increased 19.6% and 11.7% from first quarter 2003, respectively. This group benefited from continued demand for the Company's turbochargers for European passenger cars and commercial vehicles, as well as moderate growth in the chain portion of the group. The EBIT was due to increased revenue, but was partially offset by start up costs for Variable Cam Timing systems, which will launch later in 2004 and for new Korean operations. Consolidated gross margin for the first quarter of 2004 was 19.1%, compared to the 2003 margin of 19.5%. Gross margin decreased due to relatively higher growth in lower margin products and higher materials prices for commodities, particularly steel, aluminum and copper. Selling, general and administrative (SG&A) costs increased $11.1 million, but decreased as a percentage of sales from 10.8% to 10.5% of sales. The increase in dollars was due to additional administration needed to support the growth of the Company's various businesses. Also contributing to the dollar increase was a $3.7 million write down of a note receivable related to a previous sale of a non-core business arising from an acquisition. For the first quarter of 2004, spending on research and development (R&D), which is included in SG&A, totaled $29.6 million, or 3.3% of sales versus $29.5 million, or 3.8% of sales for the first quarter of 2003. First quarter interest expense decreased $1.5 million from first quarter 2003 as a result of reduced debt level and lower interest rates. At March 31, 2004, the amount of debt with fixed interest rates was 49% of total debt. Equity in affiliate earnings, which consist primarily of the Company's 50% share of NSK-Warner in Japan, was up $0.1 million. The Company's provision for income taxes is based on estimated annual tax rates for the year applied to federal, state and foreign income. The effective rate for 2004 differed from the U.S. statutory rate primarily due to a) state income taxes, b) foreign rates which differ from those in the U.S. and c) realization of certain business tax credits, including foreign tax credits and research and development credits. In 2002, the Company completed a change in the ownership structure of certain of its foreign operations for strategic business purposes. An indirect result of this change was lower tax rates on the income of certain of the Company's foreign operations. The Company expects its effective tax rate for 2004 to be approximately 30%. This is a slight increase over last year due to changes in tax laws in some of the countries where the Company does business. Net income was $51.1 million for the first quarter, or $1.82 per diluted share, an increase of $.17 over the previous year's first quarter. The increase from prior years first quarter was due to operations $.10 per share, favorable currency of $.14 per share offset by a share dilution impact of $(.17) per share. Shares outstanding increased due to the exercise of options and contributions to benefit plans. For the remainder of 2004, the Company remains concerned about production rates, particularly in North America. This holds true for both the light vehicle market and the commercial market. Despite these concerns, the Company maintains a positive long-term outlook for its business and is committed to ongoing strategic investments in capital and new product development to enhance its product leadership strategy. FINANCIAL CONDITION AND LIQUIDITY Operating cash flows increased from $29.2 million in 2003 to $66.7 million in 2004. The main factors were an increase in income and certain liabilities offset by increased asset levels. The Company made a scheduled royalty payment of $14.2 million in the first quarter of 2004. Capital spending for the three months was $40.5 million compared with $25.3 million last year. Careful capital spending remains an area of focus for the Company, both in order to support new business and for cost reductions and productivity improvements. The Company expects to spend $180 million - $190 million on capital in 2004, but this expectation is subject to ongoing review based on market conditions. As of March 31, 2004, debt decreased from year-end 2003 by $31.8 million, while cash and cash equivalents decreased by $34.4 million. The primary reason for this was the paydown of $34.2 million of debt. The Company paid dividends of $6.9 million and $4.8 million in the first quarter of 2004 and 2003 respectively. As of March 31, 2004 and December 31, 2003, the Company had sold $50.0 million of receivables under a Receivables Transfer Agreement for face value without recourse. From a credit quality perspective, we have an investment grade credit rating of A- from Standard & Poor's and Baa2 from Moody's. The Standard & Poor's rating was upgraded from BBB+ to A- on May 5, 2004. Moody's confirmed their rating on April 22, 2004 and raised their outlook from stable to positive. The Company believes that the combination of cash from operations and available credit facilities will be sufficient to satisfy its cash needs for the current level of operations and planned operations for the remainder of 2004. OTHER MATTERS Litigation The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency (EPA) and certain state environmental agencies and private parties as potentially responsible parties (PRPs) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (Superfund) and equivalent state laws and, as such, may presently be liable for the cost of clean-up and other remedial activities at 41 such sites. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula. Based on the information available to the Company, which in most cases, includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation costs; remediation alternatives; estimated legal fees; and other factors, the Company has established a reserve for indicated environmental liabilities with a balance at March 31, 2004 of approximately $21.0 million. The Company expects this amount to be expended over the next three to five years. The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its financial condition or future operating results, generally either because estimates of the maximum potential liability at a site are not large or because liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter. In connection with the sale of Kuhlman Electric Corporation, the Company agreed to indemnify the buyer and Kuhlman Electric for certain environmental liabilities relating to the past operations of Kuhlman Electric. During 2000, Kuhlman Electric notified the Company that it discovered potential environmental contamination at its Crystal Springs, Mississippi plant while undertaking an expansion of the plant. The Company has been working with the Mississippi Department of Environmental Quality, the EPA and Kuhlman Electric to investigate the extent of and remediate the contamination. The investigation revealed the presence of Polychlorinated Biphenyls (PCBs) in portions of the soil at the plant and neighboring areas. Clean up began in 2000 and is continuing. Kuhlman Electric and others, including the Company, have been sued in several related lawsuits, which claim personal injury and property damage. The Company has moved to be dismissed from some of these lawsuits. The Company believes that the reserve for environmental liabilities and any insurance recoveries are adequate to cover any potential liability associated with environmental matters. However, due to the nature of environmental remediation, there can be no assurance that the actual amount of environmental liabilities will not exceed the amount reserved. Stock Split/Dividends On April 21, 2004, the Company's stockholders approved an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 50,000,000 to 150,000,000. The approval of the amendment will allow the Company to proceed with its previously announced 2-for-1 stock split on May 17, 2004 to stockholders of record on May 3, 2004. On April 21, 2004, the Company declared a $0.125 per post-split share ($0.25 on a pre-split basis) dividend to be paid on May 17, 2004 to stockholders of record as of May 3, 2004. New Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"which was revised in December 2003. FIN No. 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the entity that has the controlling financial interest. FIN No. 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. For the Company, this Interpretation, as revised, was effective January 1, 2004. The Company has no variable interest entities required to be consolidated as a result of adopting FIN No. 46, therefore, there was no impact on our Consolidated Financial Statements. In December 2003, the FASB issued a revised SFAS No. 132, "Employer's Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132 changes employers' disclosures about pension plans and other postretirement benefits and requires additional disclosures about assets, obligations, cash flows and net periodic benefit cost. The Statement is effective for annual and interim periods ended after December 15, 2003. The Company adopted SFAS No. 132 as of December 31, 2003, resulting in additional disclosures in the Company's annual and interim Consolidated Financial Statements. In November 2002, the FASB issued Interpretation ("FIN") No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others", which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN No. 45 requires the Company to recognize an initial liability for fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 on January 1, 2003 did not have ny impact on the Company's financial position, operating results or liquidity and resulted in additional disclosures in the Company's Consolidated Financial Statements. In January 2004, the FASB issued FASB Staff Position SFAS ("FSP") No. 106-1, "Accounting Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2002 (the Act). The Act, signed into law in December 2003, establishes a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Act introduces two new features to Medicare that must be considered when measuring accumulated postretirement benefit costs. The new features include a subsidy to the plan sponsors that is based on 28% of an individual beneficiary's annual prescription drug costs between $250 and $5,000 and an opportunity for a retiree to obtain a prescription drug benefit under Medicare. The Act is expected to reduce the Company's net postretirement benefit costs. The Company has elected to defer the adoption of FSP No. 106-1 due to lack of specific accounting guidance. Therefore, the net post retirement benefit costs disclosed in the Consolidated Financial Statements do not reflect the impact of the Act on the plans. The deferral will continue to apply until specific authoritative accounting guidance for the federal subsidy is issued. Authoritative guidance on the accounting for the federal subsidy is pending and, when issued, could require information previously reported in the Company's Consolidated Financial Statements to change. The Company is currently investigating the impacts of FSP No. 106-1's initial recognition, measurement and disclosure provisions on its Consolidated Financial Statements. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act that are based on management's current expectations, estimates and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied in the forward-looking statements. Such risks and uncertainties include: fluctuations in domestic or foreign vehicle production, the continued use of outside suppliers, fluctuations in demand for vehicles containing the Company's products, general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including the Cautionary Statements filed as Exhibit 99.1 to the Form 10-K for the fiscal year ended December 31, 2003. Item 3. Quantitative and Qualitative Disclosure About Market Risks There have been no material changes to our exposures to market risk since December 31, 2003. Item 4. Controls and Procedures The Company's management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no changes in internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are likely to materially affect our internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is party to various judicial and administrative proceedings which are considered to be routine and incidental to its business including those described under Other Matters Litigation. Management does not believe that the results of any of these proceedings are likely to have a material adverse effect on the Company's liquidity, financial condition or results of operations. Like many other industrial companies, the Company continues to be named as one of the defendants in asbestos-related personal injury actions. Management believes that the Company's involvement is limited to claims that relate to a few types of automotive friction products, manufactured many years ago, that contained encapsulated asbestos. The Company aggressively defends against these lawsuits and has been successful in obtaining dismissal of many cases without any payment whatsoever or, in many cases for nominal or minimal settlement payments. The Company has significant insurance coverage with solvent carriers and, to date, has not incurred any out-of-pocket costs, other than immaterial administration expenses, in connection with these lawsuits or any settlements thereof. A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies ("CNA") against the Company and certain of its other historical general liability insurers. CNA provided the Company with primary and excess insurance, and, in conjunction with another primary insurer, is currently defending and indemnifying the Company in all of its pending asbestos-related claims. The lawsuit seeks to determine the extent of insurance coverage available to the Company including whether the available limits exhaust on a "per occurrence" or an aggregate basis, and to determine how the applicable coverage responsibilities should be apportioned. In addition to the primary insurance available for these claims, the Company has substantial historical excess and umbrella insurance available for any anticipated asbestos-related liabilities. Although it is impossible to predict the outcome of pending or future claims, in light of the nature of the products, our experience in defending and resolving claims in the past, our insurance coverage and existing reserves, management does not believe that asbestos-related claims will have a material adverse effect on the Company's liquidity, financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K Exhibits Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer Exhibit 32 Section 1350 Certifications Reports on Form 8-K On February 5, 2004, the Company filed a report on Form 8-K, furnishing a copy of a news release relating to its earnings for the fourth quarter of 2003 and for the 2003 fiscal year. Accounting Pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,"which was revised in December 2003. FIN No. 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the entity that has the controlling financial interest. FIN No. 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interest or significant financial support provided to it. For the Company, this Interpretation, as revised, was effective January 1, 2004. The Company has no variable interest entities required to be consolidated as a result of adopting FIN No. 46, therefore, there was no impact on our Consolidated Financial Statements. In December 2003, the FASB issued a revised SFAS No. 132, "Employer's Disclosures About Pensions and Other Postretirement Benefits." SFAS No. 132 changes employers' disclosures about pension plans and other postretirement benefits and requires additional disclosures about assets, obligations, cash flows and net periodic benefit cost. The Statement is effective for annual and interim periods ended after December 15, 2003. The Company adopted SFAS No. 132 as of December 31, 2003, resulting in additional disclosures in the Company's annual and interim Consolidated Financial Statements. In November 2002, the FASB issued Interpretation ("FIN") No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others", which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN No. 45 requires the Company to recognize an initial liability for fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN No. 45 on January 1, 2003 did not have any impact on the Company's financial position, operating results or liquidity and resulted in additional disclosures in the Company's Consolidated Financial Statements. In January 2004, the FASB issued FASB Staff Position SFAS ("FSP") No. 106-1, "Accounting Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003." FSP No. 106-1 permits a sponsor to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2002 (the Act). The Act, signed into law in December 2003, establishes a prescription drug benefit under Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Act introduces two new features to Medicare that must be considered when measuring accumulated postretirement benefit costs. The new features include a subsidy to the plan sponsors that is based on 28% of an individual beneficiary's annual prescription drug costs between $250 and $5,000 and an opportunity for a retiree to obtain a prescription drug benefit under Medicare. The Act is expected to reduce the Company's net postretirement benefit costs. The Company has elected to defer the adoption of FSP No. 106-1 due to lack of specific accounting guidance. Therefore, the net post retirement benefit costs disclosed in the Consolidated Financial Statements do not reflect the impact of the Act on the plans. The deferral will continue to apply until specific authoritative accounting guidance for the federal subsidy is issued. Authoritative guidance on the accounting for the federal subsidy is pending and, when issued, could require information previously reported in the Company's Consolidated Financial Statements to change. The Company is currently investigating the impacts of FSP No. 106-1's initial recognition, measurement and disclosure provisions on its Consolidated Financial Statements. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act that are based on management's current expectations, estimates and projections. Words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those projected or implied in the forward-looking statements. Such risks and uncertainties include: fluctuations in domestic or foreign vehicle production, the continued use of outside suppliers, fluctuations in demand for vehicles containing the Company's products, general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including the Cautionary Statements filed as Exhibit 99.1 to the Form 10-K for the fiscal year ended December 31, 2003. Item 3. Quantitative and Qualitative Disclosure About Market Risks There have been no material changes to our exposures to market risk since December 31, 2003. Item 4. Controls and Procedures The Company's management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no changes in internal controls over financial reporting that occurred during the period covered by this report that have materially affected, or are likely to materially affect our internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is party to various judicial and administrative proceedings which are considered to be routine and incidental to its business including those described under Other Matters Litigation. Management does not believe that the results of any of these proceedings are likely to have a material adverse effect on the Company's liquidity, financial condition or results of operations. Like many other industrial companies, the Company continues to be named as one of the defendants in asbestos-related personal injury actions. Management believes that the Company's involvement is limited to claims that relate to a few types of automotive friction products, manufactured many years ago, that contained encapsulated asbestos. The Company aggressively defends against these lawsuits and has been successful in obtaining dismissal of many cases without any payment whatsoever or, in many cases for nominal or minimal settlement payments. The Company has significant insurance coverage with solvent carriers and, to date, has not incurred any out-of-pocket costs, other than immaterial administration expenses, in connection with these lawsuits or any settlements thereof. A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies ("CNA") against the Company and certain of its other historical general liability insurers. CNA provided the Company with primary and excess insurance, and, in conjunction with another primary insurer, is currently defending and indemnifying the Company in all of its pending asbestos-related claims. The lawsuit seeks to determine the extent of insurance coverage available to the Company including whether the available limits exhaust on a "per occurrence" or an aggregate basis, and to determine how the applicable coverage responsibilities should be apportioned. In addition to the primary insurance available for these claims, the Company has substantial historical excess and umbrella insurance available for any anticipated asbestos-related liabilities. Although it is impossible to predict the outcome of pending or future claims, in light of the nature of the products, our experience in defending and resolving claims in the past, our insurance coverage and existing reserves, management does not believe that asbestos-related claims will have a material adverse effect on the Company's liquidity, financial condition or results of operations. Item 6. Exhibits and Reports on Form 8-K Exhibits Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer Exhibit 32 Section 1350 Certifications Reports on Form 8-K On February 5, 2004, the Company filed a report on Form 8-K, furnishing a copy of a news release relating to its earnings for the fourth quarter of 2003 and for the 2003 fiscal year. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. BORGWARNER INC. (Registrant) By: /s/ William C. Cline Signature William C. Cline Vice President and Controller (Principal Accounting Officer) Date: May 7, 2004