BorgWarner Inc. — Q2 2010 Form 10-Q
Business context and period. Global supplier of engineered powertrain systems and components, reporting in Engine and Drivetrain segments. This unaudited filing covers the three and six months ended June 30, 2010; comparisons are with the same 2009 periods unless noted. Results reflect a strong rebound in global vehicle production and the Dytech acquisition.
Financial performance
| Metric ($ millions, except per-share data) | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | 1,421.7 | 916.2 | 2,708.5 | 1,735.7 |
| Gross profit / gross margin | 275.4 / 19.4% | 116.2 / 12.7% | 513.9 / 19.0% | 195.8 / 11.3% |
| Operating income (loss) | 117.3 | (49.5) | 223.9 | (44.0) |
| Net earnings (loss) attributable to BorgWarner | 82.8 | (35.9) | 159.0 | (42.9) |
| Diluted earnings (loss) per share | $0.68 | $(0.31) | $1.31 | $(0.37) |
| Cash from operating activities | — | 208.3 | 173.8 | |
| Cash used in investing activities | — | (263.2) | (82.1) | |
| Cash from (used in) financing activities | — | (82.3) | 57.0 |
Balance sheet and liquidity
- At June 30, cash was $187.5 million, down from $357.4 million at year-end 2009. Current assets were $1,702.3 million and current liabilities $1,382.3 million.
- Total notes payable and long-term debt were $966.3 million, versus $842.3 million at December 31, 2009; the reported debt-to-capital ratio rose to 32.0% from 27.5%. The filing attributes debt changes partly to the $50 million receivables-securitization accounting change, acquisitions, and share repurchases.
- A $550 million revolving credit facility, expandable to $600 million, runs through March 31, 2013; there were no borrowings under it at quarter-end. The company reported compliance with its financial covenants. Approximately $376 million remained available under its shelf registration.
Material changes and drivers
- Q2 sales rose 55.2%; six-month sales rose 56.0%. The company cited higher vehicle production, broad product growth, and Dytech. Q2 currency effects reduced sales by about $24 million; first-half currency effects increased sales by about $35 million.
- Gross margin improvement reflected higher volume and 2009 cost reductions, partly offset by higher raw-material costs. SG&A increased in dollars but fell as a percentage of sales. Net R&D expense increased to $46.1 million in Q2 and $88.4 million in the first half.
- Adjusted EBIT improved in both segments. Q2 Engine / Drivetrain adjusted EBIT was $132.8 million / $37.3 million, versus $44.0 million / loss of $8.8 million. First-half adjusted EBIT was $239.5 million / $74.0 million, versus $79.9 million / loss of $41.5 million.
- Six-month operating cash flow increased by $34.5 million, with higher earnings partly offset by working-capital needs, particularly receivables and inventories. Investing outflows included Dytech ($147.6 million net), BERU-Eichenauer ($9.6 million), and capital spending of $107.4 million.
- The company repurchased 4.06 million shares in Q2 for $154.8 million. It suspended its quarterly dividend in 2009; no dividend was declared in the periods reported for 2010.
Outlook, unusual items, and risks
- Management was optimistic about 2010, citing stronger-than-expected North American and European production, expected higher global vehicle production, and a favorable shift in Europe and Asia toward vehicles with higher BorgWarner content. No quantitative full-year revenue or earnings guidance is provided in the filing.
- Management cited longer-term opportunities in direct-injection engines, automated transmissions, and variable cam and chain timing systems, and said it would continue product development and strategic capital investment.
- Q2 other expense included a $28.0 million environmental litigation settlement, partly offset by an $8.0 million BERU-Eichenauer remeasurement gain. The filing estimates these items reduced Q2 diluted EPS by a net $0.10. The projected 2010 effective tax rate was 21.8%, including specified one-time tax effects; the estimated ongoing rate was 22%, raised from 18% due mainly to forecast earnings in higher-tax jurisdictions.
- Environmental liabilities accrued were $47.4 million, including the $28 million settlement payable in two installments in October 2010 and January 2011. A separate asbestos-related New Jersey ruling led to a $36.7 million increase in both estimated liability and insurance receivable; the company expected to pay $40.7 million in July 2010. The timing and amount of insurance recoveries depend in part on ongoing coverage litigation.
- Approximately 18,000 asbestos-related claims were pending at quarter-end. Management expected insurance to cover recorded amounts, but said it could not reasonably estimate potential losses beyond accrued amounts. Other disclosed exposures include ongoing retiree-benefit litigation, environmental remediation at 38 sites, warranty claims, and ordinary-course legal matters.
- Forward-looking results are subject to vehicle-production and demand fluctuations, general economic conditions, supplier reliance, and other risks described in the company’s Form 10-K. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key investor verification points
- Verify the sustainability of the sharp sales and margin rebound after separating vehicle-production recovery, Dytech, currency effects, and nonrecurring items.
- Track cash conversion and working capital, particularly receivables and inventory growth, alongside acquisition and capital-spending requirements.
- Confirm that the environmental settlement payments and asbestos-related insurance reimbursements occur as expected; monitor coverage litigation and exposure beyond recorded accruals.
- Assess the effects of the $154.8 million share repurchase, higher debt and debt-to-capital ratio, and remaining authorized buybacks on liquidity and capital allocation.
- Monitor vehicle-production assumptions, tax-rate estimates, credit-facility covenant compliance, and any future quantitative guidance.