BorgWarner Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2011. Amounts are in millions of dollars except per-share data. Comparisons are with the corresponding 2010 periods unless noted.
Business context and results
BorgWarner is a global supplier of automotive powertrain systems and components, organized into Engine and Drivetrain segments. Management attributed growth to demand for fuel-efficient, lower-emission technologies, above-market adoption of its products, acquisitions and favorable foreign currency effects.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,791.8 | $1,410.9 | $5,341.0 | $4,119.4 |
| Gross profit / margin | $350.8 / 19.6% | $273.3 / 19.4% | $1,050.7 / 19.7% | $787.2 / 19.1% |
| Operating income / margin | $198.8 / 11.1% | $123.0 / 8.7% | $606.4 / 11.4% | $346.9 / 8.4% |
| Net earnings attributable to BorgWarner | $141.6 | $106.7 | $428.1 | $265.7 |
| Diluted EPS | $1.15 | $0.87 | $3.45 | $2.18 |
| Cash from operating activities | Not presented by quarter | $473.1 | $312.7 | |
| Capital expenditures, including tooling | Not presented by quarter | $274.1 | $187.8 |
Financial position and liquidity
- At September 30, 2011, cash was $377.0, total assets $6,094.3 and total equity $2,465.7. Cash was down from $449.9 at year-end 2010.
- Current assets were $2,267.7 and current liabilities $1,924.1. Total debt, including short-term debt and current maturities, was approximately $1,392.5, compared with approximately $1,180.4 at December 31, 2010. Debt-to-capital was 36.1%, up from 33.8%.
- Nine-month operating cash flow of $473.1 less capital expenditures of $274.1 implies approximately $199.0 of cash flow after capital spending. Investing activities used $468.8; financing activities used $68.5. Cash declined $72.9 during the period.
- The amended $650 million revolving credit facility runs through June 30, 2016, with potential capacity up to $1 billion. $175.0 was drawn at quarter-end; the company reported compliance with covenants and expected continued compliance. The company said available cash, operating cash flow, credit and shelf capacity should meet foreseeable needs.
- The $363.3 million carrying amount of 3.50% convertible notes is classified as current and is due April 15, 2012. The company reported a 5.6% weighted average rate on borrowings outstanding.
Changes versus the prior comparable periods
- Sales rose 27.0% in Q3 and 29.7% for the first nine months. Excluding acquisitions and currency effects, management estimated growth of approximately 16% and 19%, respectively. Q3 currency effects added about $102 million to sales; nine-month effects added about $243 million.
- Worldwide light-vehicle production increased 5% in Q3 and 4% year to date. Management cited higher volumes and manufacturing-cost leverage for improved gross margins; Q3 conversion costs also improved.
- Q3 segment sales were $1,258.2 for Engine and $538.7 for Drivetrain; adjusted EBIT was $188.2 and $43.5, respectively. Nine-month adjusted EBIT was $571.5 for Engine and $114.4 for Drivetrain. Drivetrain’s nine-month adjusted EBIT growth was more modest than Engine’s.
- Research and development expense increased to $58.4 in Q3 and $184.1 year to date, from $45.8 and $134.2. SG&A as a share of sales fell despite higher year-to-date SG&A expense.
- Q3 diluted EPS comparison includes a $0.17-per-share 2010 benefit from reversal of a foreign-tax-credit valuation allowance. Nine-month 2011 results include a $29.1 net Honeywell patent settlement gain; 2010 included a $28.0 environmental settlement expense and an $8.0 BERU-Eichenauer acquisition gain.
Outlook, commentary, risks and unusual items
- Management’s 2011 outlook was positive: it expected global vehicle production to exceed 2010 levels and company sales growth to outpace global production growth. It also cited continued long-term demand trends in fuel-efficient engines, automated transmissions and variable cam/chain timing. No specific numerical sales or earnings guidance was provided.
- The January 2011 Haldex Traction Systems acquisition cost $214.9 net of cash acquired and was included in Drivetrain. In August, BorgWarner purchased the remaining 40% interest in its Indian emissions-systems joint venture for $29.4.
- Cash generation and earnings benefited from the Honeywell patent settlement: $32.5 received, less $3.4 legal costs, for a $29.1 net gain. The estimated annual tax rate was 23.6%; management estimated 24% for ongoing 2011 operations after excluding specified settlement-related tax expense and tax adjustments.
- Key uncertainties include vehicle-production and demand fluctuations, general economic conditions, foreign exchange, and the effects of events in Japan. The filing says market-risk exposures had no material change from the 2010 annual report.
- Contingencies include an ongoing retiree-benefits class action for which the company could not estimate a potential loss; environmental liabilities accrued at $11.3, expected to be paid substantially over three to five years; and approximately 16,000 pending asbestos-related claims. The company expects insurance recovery for recorded asbestos-related amounts, but timing depends partly on insurer disputes and settlements; possible losses beyond accruals could not be estimated.
Important facts for investors to verify
- Whether the 2011 growth and margins are sustainable after separating organic growth from acquisitions and currency effects.
- How BorgWarner will address the $363.3 million convertible-note maturity in April 2012, and the effect of any conversion or refinancing on cash, debt and share dilution.
- Whether higher capital spending and working-capital needs continue to constrain cash conversion as sales grow.
- Progress on the retiree-benefits litigation, environmental exposures, asbestos claims and expected insurance reimbursements.
- Actual vehicle-production trends, customer adoption of BorgWarner technologies, and delivery of the company’s broad, non-numerical 2011 outlook.