BorgWarner Inc. — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. Although the request refers to 2016 Q4, this filing is an annual report; it also includes fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
BorgWarner supplies automotive technologies for combustion, hybrid and electric vehicles, primarily to global vehicle manufacturers. Its two reporting segments are Engine and Drivetrain. Approximately 75% of 2016 consolidated sales were attributed to production outside the United States; light-vehicle applications represented about 81% of sales. Ford and Volkswagen accounted for approximately 15% and 13% of sales, respectively.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $9.071 billion | $8.023 billion |
| Gross profit / margin | $1.933 billion / 21.3% | $1.703 billion / 21.2% |
| Operating income / margin | $225.9 million / 2.5% | $939.7 million / 11.7% |
| Net earnings attributable to BorgWarner | $118.5 million | $609.7 million |
| Diluted earnings per share | $0.55 | $2.70 |
| Cash provided by operating activities | $1.036 billion | $867.9 million |
| Capital expenditures, including tooling | $500.6 million | $577.3 million |
| Cash / total debt at year-end | $443.7 million / $2.220 billion | $577.7 million / $2.550 billion |
| Net debt to capital | 35.0% | 35.2% |
Gross margin improved slightly; reported operating margin and earnings fell sharply because of major 2016 charges, especially the asbestos-related charge and the Remy aftermarket divestiture loss. Management’s non-GAAP segment measure, Adjusted EBIT, was $1.289 billion, compared with $1.195 billion in 2015. Cash from operations less capital expenditures was approximately $535 million in 2016.
The 2016 dividend declared was $0.53 per share. The company repurchased $288.0 million of treasury stock in 2016.
Changes versus the prior year
- Sales rose 13.1%; excluding foreign-exchange effects and the 2015 Remy acquisition, sales increased 5.2%.
- Engine sales increased 1.6% and Adjusted EBIT rose 3.7%; the segment’s Adjusted EBIT margin improved to 16.7% from 16.4%.
- Drivetrain sales increased 37.8%, substantially reflecting Remy; excluding foreign exchange and Remy, sales increased 9.9%. Adjusted EBIT rose 20.3%, but its margin declined to 10.1% from 11.5%, primarily due to Remy.
- Operating cash flow increased by $167.8 million, attributed chiefly to higher earnings adjusted for non-cash items and improved working capital. Investing cash outflow decreased substantially versus 2015, which included major acquisitions.
- Total debt decreased $330.8 million and cash decreased $134.0 million; net debt declined $196.8 million. The company repaid its $150 million 5.75% senior notes due in 2016.
Unusual items, outlook and risks
- Asbestos estimate and charge: In Q4, BorgWarner recorded a $703.6 million pre-tax charge ($440.6 million after tax). At year-end, the estimated liability for asserted and potential future claims, including defense costs, was $879.3 million; estimated related insurance coverage was $386.4 million. The liability estimate extends to future claims through 2059, with resolution projected through 2067, and is subject to substantial uncertainty and pending insurance-coverage litigation.
- Remy aftermarket divestiture: The sale of the Remy light-vehicle aftermarket business resulted in a total loss of $127.1 million. Final working-capital adjustments were expected in Q1 2017. The sale was intended to focus the company on original-equipment powertrain electrification.
- Other 2016 items included $26.9 million of restructuring expense, $23.7 million of merger and acquisition expense, and a $12.6 million intangible-asset impairment. The reported 15.9% effective tax rate included substantial one-time tax benefits; the company reported a 30.9% rate for ongoing operations excluding non-comparable items.
- 2017 outlook: Management described the outlook as positive, expecting modest global vehicle-production growth and sales growth from new business, partly offset by a stronger U.S. dollar. No specific numerical sales or earnings guidance is provided in the filing text. Long-term growth drivers cited include turbocharger adoption, automated transmissions, variable cam and chain timing, and hybrid/electric products. Long-term R&D spending expectation is approximately 4% of sales.
- Liquidity includes $443.7 million of cash and a $1 billion multi-currency revolving facility, expandable to $1.25 billion; there were no borrowings under the facility at year-end. Commercial paper outstanding was $50.8 million. The company said available cash, operating cash flow and credit capacity should meet foreseeable needs, while noting most cash was held abroad and repatriation could incur additional taxes.
- Principal risks include cyclical vehicle production, customer price-reduction demands, commodity and supply-chain pressures, foreign-exchange exposure, international and China-market conditions, customer concentration, competition, pension assumptions, environmental and warranty claims, and asbestos liabilities. Moody’s outlook was revised to negative during 2016; S&P and Fitch outlooks were stable. The company reported compliance with its debt covenant.
Important facts for investors to verify
- Whether asbestos claims, defense costs and insurance recoveries develop in line with the estimates, including outcomes of insurer litigation and potential cash impacts.
- The final Remy divestiture working-capital adjustment and whether the sale improves Drivetrain profitability and margins.
- How much of reported sales growth reflects organic new business versus acquisitions, currency movements and changing vehicle production.
- Cash conversion, capital spending, debt maturities, foreign-held cash accessibility and capacity under the credit covenant.
- Whether the 2017 outlook’s production and new-business assumptions are realized, particularly given customer concentration and global automotive cyclicality.