BorgWarner Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. BorgWarner supplies engineered automotive powertrain systems and components through its Engine and Drivetrain segments. Results are unaudited interim figures.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Net sales | $1,730.4 million | $1,286.8 million | Up 34.5% |
| Gross profit / margin | $342.8 million / 19.8% | $238.5 million / 18.5% | Margin improved 1.3 percentage points |
| Operating income | $179.3 million | $106.6 million | Up 68.2% |
| Net earnings attributable to BorgWarner | $124.5 million | $76.2 million | Up 63.4% |
| Diluted EPS | $1.00 | $0.63 | Up 58.7% |
| Operating cash flow | $(41.4) million | $64.1 million | Turned negative, primarily with higher working-capital needs, compensation payouts and taxes |
| Capital expenditures, including tooling | $70.2 million | $55.3 million | Increased |
Sales growth included the Haldex Traction Systems acquisition, the 2010 Dytech acquisition and approximately $6.1 million of favorable currency impact. Excluding currency, sales increased approximately 34%. Management said worldwide light-vehicle production rose 5% year over year. Engine sales were $1,249.4 million and segment Adjusted EBIT was $186.1 million, versus $906.0 million and $106.7 million. Drivetrain sales were $486.4 million and Adjusted EBIT was $32.0 million, versus $385.8 million and $36.7 million; segment profit declined amid higher R&D, European operating inefficiencies and Haldex-related costs.
Balance sheet, debt and liquidity
- Cash was $222.9 million at March 31, down from $449.9 million at year-end 2010. Total assets were $6,007.0 million.
- Short-term debt and notes payable were $176.2 million on the balance sheet; long-term debt was $1,259.5 million. The company reported total debt increased $255.3 million from year-end and its debt-to-capital ratio rose to 37.9% from 33.8%.
- The $550 million revolving facility, with an option to increase to $600 million, had $200 million outstanding; it matures March 31, 2013. The company said it complied with its financial covenants and expected continued compliance. Credit ratings were BBB from S&P and Fitch and Baa3 from Moody’s, all with stable outlooks.
- Financing cash flow was $78.6 million, including $206.7 million of net long-term debt additions and $181.9 million paid for treasury shares. The company repurchased 2.53 million shares during the quarter at an average $74.27 per share, for a reported total cost of $188.2 million.
Material developments and outlook
- On January 31, BorgWarner acquired Haldex Traction Systems for $214.9 million net of cash acquired; cash paid was $203.7 million. The business was included in Drivetrain from the acquisition date.
- Management described its 2011 outlook as positive: it expected global vehicle production to increase and company sales to grow faster than production, supported by increased adoption of its products. No quantified full-year sales or earnings guidance was provided.
- Management cited ongoing growth drivers including direct-injection diesel and gasoline engines, automated transmissions, and variable cam and chain timing systems. It planned continued product development and selective capital investment.
- The March 2011 Japan earthquake and tsunami caused no reported facility damage and had a negligible effect on Q1 results; management expected limited business impact while monitoring potential customer and supplier disruption.
Risks, contingencies and notable items
- Approximately 16,000 asbestos-related claims were pending. The company said it expected most to result in no payment, but outcomes and potential losses beyond accrued amounts could not be reasonably estimated. It recorded $54.0 million of estimated liabilities for unresolved claims with a matching insurance asset; recovery timing and insurer disputes remain relevant.
- Environmental accruals were $13.2 million at March 31, compared with $28.0 million at year-end; substantially all accrued amounts were expected to be paid over three to five years. The company also disclosed ongoing retiree-benefit litigation for which it could not estimate a potential loss range.
- Warranty liability rose to $74.6 million from $66.8 million at year-end. Actual warranty claims may differ from estimates.
- The 2011 estimated annual effective tax rate was 24.0%, versus a reported Q1 2010 rate of 20.4%; the prior-year rate included a $2.5 million one-time Medicare Part D tax-law charge.
- The $353.3 million carrying value of 3.50% convertible notes due April 15, 2012 is a refinancing, repayment or conversion item to monitor. The filing states the share price exceeded the conversion price at quarter-end.
Investor verification checklist
- Confirm whether revenue growth and margin gains persist after separating acquisition contributions, vehicle-production trends and currency effects.
- Track working-capital conversion and operating cash flow, which were negative despite higher earnings.
- Assess whether Drivetrain profitability recovers as Haldex is integrated and identified operating and R&D costs evolve.
- Monitor debt, revolver usage, the 2012 convertible-note maturity and share repurchases against cash generation.
- Review developments in asbestos insurance recoveries, retiree litigation, environmental obligations and warranty claims.
EPS note: Reported basic EPS was $1.13 and diluted EPS was $1.00 in Q1 2011. The filing’s diluted calculation includes convertible-note and warrant effects; investors should review the EPS reconciliation when comparing per-share results.