BorgWarner Inc. — Q1 2012 Form 10-Q
Business context and reporting period. BorgWarner is a global supplier of engineered automotive powertrain systems and components, organized into Engine and Drivetrain segments. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise noted. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $1,912.5 | $1,730.4 | +10.5% |
| Gross profit / margin | $395.8 / 20.7% | $342.8 / 19.8% | Margin +0.9 percentage points |
| Operating income | $225.7 | $179.3 | +25.9% |
| Net earnings attributable to BorgWarner | $158.0 | $124.5 | +26.9% |
| EPS, basic / diluted | $1.46 / $1.28 | $1.13 / $1.00 | Both increased |
| Operating cash flow | $30.8 | $(41.4) | Improved $72.2 |
| Capital expenditures, including tooling | $95.0 | $70.2 | Increased $24.8 |
Gross margin improvement reflected lower conversion costs; material costs remained about 50% of sales. SG&A was $169.0 (8.8% of sales), versus $165.1 (9.5%). Net R&D expense rose to $67.7 from $61.0, or 3.5% of sales in both periods. The estimated annual effective tax rate was 26%, versus 24% in Q1 2011, reflecting greater profitability in higher-tax jurisdictions.
Segments. Engine sales rose 4.7% to $1,308.2 and Adjusted EBIT increased to $209.8 from $186.1; its Adjusted EBIT margin rose to 16.0% from 14.9%. Drivetrain sales rose 25.7% to $611.4 and Adjusted EBIT increased to $61.2 from $32.0; its margin rose to 10.0% from 6.6%. Management attributed performance to global product growth, operational improvements and cost management. Drivetrain sales also reflected the Haldex Traction acquisition; excluding acquisition and currency effects, management said segment sales grew approximately 24%.
Financial position and liquidity
At March 31, 2012, cash was $396.9, versus $359.6 at year-end 2011. Current assets were $2,410.0 and current liabilities $1,881.2. Total debt, including short-term debt and current maturities, was approximately $1,410.0, compared with $1,329.1 at December 31; the reported debt-to-capital ratio declined to 27.1% from 28.3%. The weighted-average borrowing rate was 5.7%. The company had $170.0 drawn on its $650 million revolving facility, expandable to $1 billion, and was in compliance with its financial covenants. Management said available cash, operating cash flow, credit facilities and shelf capacity should meet expected needs.
Operating cash flow turned positive, principally due to higher earnings and improved working capital, although receivables used $167.6 of cash. Investing used $92.4, compared with $267.8 in Q1 2011, when the company paid $203.7 for an acquisition. Financing provided $97.3. Cash increased $37.3 during the quarter.
Material changes, outlook and risks
- Sales growth exceeded the 4% increase in worldwide light-vehicle production. Management cited stronger production in North America and Asia, partly offset by a 7% decline in Europe, and continued demand for fuel-efficiency and emissions technologies. Excluding specified acquisition, disposition and currency effects, company sales increased approximately 13%.
- Management’s 2012 outlook was generally positive: global vehicle production was expected to rise, while European production was expected to decline. BorgWarner expected sales growth above global production growth, supported by adoption of its products. No specific full-year revenue or earnings target was provided.
- The $373.8 million convertible notes due April 15, 2012 were settled after quarter-end by delivering approximately 11.4 million treasury shares. The related call option was also settled in April, with approximately 6.5 million shares received. These transactions affect debt and share counts; warrants remained outstanding and were scheduled to mature in October 2012.
- Management identified vehicle-production and demand fluctuations, economic conditions and other risks described in the 2011 Form 10-K as factors that could affect results. The filing also notes uncertainty in litigation and environmental matters. The company had about 16,000 pending asbestos-related claims; it reported $119.5 million of net insurer recoverables for prior defense and settlement costs and a separately matched $64.1 million liability and insurance asset for asserted, unresolved claims. Management said recovery timing depends partly on insurer litigation and settlements.
- Environmental liabilities accrued were $6.7 million at quarter-end. A retiree-benefit class action remained pending, and the company said it could not reasonably estimate any potential loss. Management did not expect the discussed claims to materially adversely affect results, financial position or cash flows.
Most important facts for investors to verify
- Whether sales growth and improved segment margins persist, particularly amid expected European production weakness and foreign-currency effects.
- How operating cash flow develops as receivables, capital spending and program-launch requirements evolve.
- The post-quarter accounting and share-count effects of the convertible-note and call-option settlements, and the eventual impact of outstanding warrants.
- Whether the company maintains covenant compliance and sufficient liquidity as debt levels and investment needs change.
- Actual asbestos-insurance recoveries, the outcome of insurer and retiree-benefit litigation, and any changes to environmental or warranty exposures.