BorgWarner Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. BorgWarner is a global automotive systems and components supplier, reporting Engine and Drivetrain segments. Financial statements are unaudited.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $2,197.0 million | $1,893.9 million | $4,281.1 million | $3,745.0 million |
| Gross profit / margin | $472.8 million / 21.5% | $396.6 million / 20.9% | $918.6 million / 21.5% | $771.3 million / 20.6% |
| Operating income | $280.6 million | $243.4 million | $513.8 million | $441.9 million |
| Net earnings attributable to BorgWarner | $190.2 million | $174.1 million | $349.3 million | $316.1 million |
| Diluted EPS | $0.83 | $0.75 | $1.52 | $1.36 |
| Operating cash flow | Not separately provided | Not separately provided | $326.2 million | $300.0 million |
Q2 sales increased 16.0%; excluding Wahler acquisition and favorable currency effects, growth was approximately 8%. First-half sales rose 14.3%, or approximately 9% excluding those effects. Cost of sales declined as a share of revenue, lifting gross margin in both comparisons. First-half R&D expense increased to $172.1 million from $144.4 million.
For the first half, capital expenditures including tooling were $257.3 million, leaving operating cash flow less capital expenditures of approximately $68.9 million. Investing cash outflow was $361.7 million, including the Wahler acquisition; financing cash outflow was $129.1 million. Cash declined $168.1 million to $771.4 million.
At June 30, cash was $771.4 million and current assets and current liabilities were $3,037.3 million and $2,170.7 million, respectively. The balance sheet reports $541.1 million of notes payable and other short-term debt and $704.2 million of long-term debt. The debt note separately reports $524.9 million of short-term debt and $720.4 million of total long-term debt before current portion; investors should reconcile these classifications. Net debt to net capital was 10.9%, up from 7.2% at year-end 2013.
Segments and material changes
- Engine: Q2 sales grew 16.2% to $1,497.5 million; first-half sales grew 14.3% to $2,909.6 million. Adjusted EBIT margins were 16.1% in Q2 and 16.3% for the half, versus 17.1% and 16.6%. Wahler added sales but contributed relatively little Adjusted EBIT, partly due to purchase-accounting expenses.
- Drivetrain: Q2 sales grew 15.5% to $708.7 million; first-half sales grew 14.4% to $1,389.4 million. Adjusted EBIT margins improved to 12.6% in Q2 and 12.2% for the half, versus 9.7% and 9.5%.
- Adjusted EBIT rose to $330.8 million in Q2 from $280.1 million and to $643.0 million for the first half from $538.4 million.
- Other expense included $15.0 million of Q2 restructuring charges and $54.5 million for the first half, compared with no restructuring charge in the 2013 periods. Restructuring reduced diluted EPS by $0.06 in Q2 and $0.19 for the half.
Outlook, liquidity and risks
Management described its 2014 outlook as positive, expecting moderate global vehicle-production growth and BorgWarner sales growth to outpace industry production. It cited continued demand trends in direct-injection engines, automated transmissions and variable cam and chain timing systems. No specific consolidated revenue or earnings guidance was provided. Management estimated an approximately 28.5% annual effective tax rate for ongoing 2014 operations, excluding non-comparable restructuring effects.
The company acquired Wahler on February 28, 2014 for $106.4 million cash net of cash acquired; it also assumed $40.3 million of debt. Management said the acquisition was not expected to materially affect 2014 consolidated revenue or earnings. The company expects approximately $42 million of additional Drivetrain and $25 million of Engine restructuring expense over the next two years; related cash payments are expected to be substantially complete by the end of 2015 for the specified Drivetrain actions.
The revolving credit facility was amended and extended to $1 billion, with a $1.25 billion expansion feature, through June 30, 2019; there were no borrowings under it at quarter-end. Commercial paper borrowings were $320 million. Management reported covenant compliance and believed cash, operating cash flow and available credit would cover foreseeable needs. Most cash ($769.4 million) was held outside the U.S.; repatriation could incur additional taxes.
Risks include vehicle-production and demand fluctuations, economic conditions, and legal and product-liability exposure. Approximately 17,500 asbestos-related claims were pending at June 30. The company accrued $112.4 million for unresolved claims and recorded an equal insurance-recovery asset; collection timing depends on insurer litigation and is not expected before resolution of that action, likely after June 30, 2015. A separate $35 million asbestos verdict is under appeal, with a $55 million surety bond posted. Environmental liabilities accrued were $7.5 million. Management did not expect these matters to have a material adverse effect overall, but acknowledged uncertainty and potential quarterly impacts.
Important facts to verify
- Reconcile the balance-sheet debt presentation with the detailed debt-note classifications and monitor short-term commercial-paper borrowing.
- Track whether expected sales growth and segment profitability persist, particularly Engine margins following the Wahler acquisition.
- Assess the cash costs, timing and execution of the announced restructuring actions and acquisition integration.
- Monitor asbestos insurer recoveries, the pending appeal, unresolved claims and environmental matters; recorded recovery assets do not eliminate timing or collection risk.
- Confirm performance against the non-numeric 2014 outlook and changes in currency, vehicle-production and customer-demand conditions.