Business Context and Reporting Period
Company: Borg-Warner Automotive, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Nine months ended September 30, 1998 (with comparative data for the three months ended September 30, 1998 and 1997).
Business Overview: A global supplier of highly engineered components and systems to original equipment manufacturers (OEMs) for passenger cars, SUVs, and light trucks. Key product areas include automatic transmission systems, four-wheel drive (4WD) systems, and engine applications.
Key Financial Metrics
| Metric (in millions) | 9 Months Ended Sep 30, 1998 | 9 Months Ended Sep 30, 1997 | 3 Months Ended Sep 30, 1998 | 3 Months Ended Sep 30, 1997 |
|---|---|---|---|---|
| Net Sales | $1,347.6 | $1,300.0 | $431.6 | $406.8 |
| Net Earnings | $62.9 | $76.0 | $17.3 | $21.6 |
| Earnings Per Share (Diluted) | $2.65 | $3.17 | $0.73 | $0.90 |
| Gross Margin | 21.4% | 21.8% | 21.7% | 20.4% |
| Operating Cash Flow | $34.1 | $114.2 | N/A | N/A |
| Cash and Equivalents (Sep 30, 1998) | $11.7 | $13.4 (Dec 31, 1997) | N/A | N/A |
| Total Debt (Notes Payable + Long-Term) | $351.7 | $338.1 (Dec 31, 1997) | N/A | N/A |
Note: Gross margin calculated as (Net Sales - Cost of Sales) / Net Sales.
Material Changes vs. Prior Period
- Revenue: Nine-month sales increased 4% to $1,347.6 million. However, excluding the newly acquired turbocharger business (AG Kuhnle, Kopp & Kausch), sales decreased 6% due to the General Motors strike, Asian economic weakness, and lower 4WD installation rates.
- Profitability: Net earnings declined 17% year-to-date to $62.9 million. The third-quarter decline was 20%. Approximately $7.1 million of the year-to-date earnings decrease is attributed to the GM strike.
- Margins: Gross margin decreased slightly to 21.4% from 21.8%. The lower-margin turbocharger business and price concessions to customers offset cost reduction efforts.
- Cash Flow: Operating cash flow dropped significantly to $34.1 million from $114.2 million in the prior year, driven by increased investment in receivables and a decrease in accounts payable and income taxes payable.
- Debt: Total debt increased to $351.7 million from $338.1 million at year-end 1997, primarily due to higher long-term debt levels to fund investing activities.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Fourth Quarter Expectations: Management anticipates sales growth in Q4 driven by strong engine-related growth and new programs at Chrysler. Margins are expected to improve as cost reduction programs take effect.
- Capital Spending: Full-year 1998 capital spending is expected to be just below 1997 levels. Year-to-date spending was $78.8 million.
- Dividends: A quarterly dividend of $0.15 per share was declared on October 16, 1998.
Risks and Contingencies
- Environmental Liabilities: The Company is a potentially responsible party (PRP) at 28 hazardous waste sites. A reserve of $5.9 million has been established. A settlement with former parent Borg-Warner Security Corporation requires indemnification for the first $2.9 million of certain environmental costs and 50% of amounts in excess thereof.
- Year 2000 Compliance: The Company estimates spending approximately $11.5 million between 1997 and 1999 to ensure system compliance. While risks of disruption exist, the Company believes the impact will not be material.
- Market Risks: Operations are sensitive to fluctuations in automotive production, particularly in North America and Asia, and the continued use of outside suppliers by OEMs.
Unusual Items
- Asset Sales: Sold the connecting rod business for $41.8 million (Q3 1998) and agreed to sell the torque converter business to Mannesmann Sachs AG. These divestitures are part of a strategy to focus on core technologies.
- Joint Venture Performance: Earnings from the NSK-Warner joint venture in Japan declined 43% year-to-date due to the Japanese economy and a weakening yen.
Investor Verification Checklist
- GM Strike Impact: Verify the extent of the $15 million lost sales in Q3 and the projected recovery in Q4.
- Turbocharger Integration: Assess the long-term margin impact of the AG Kuhnle, Kopp & Kausch acquisition, which currently drags down overall gross margins.
- Working Capital Trends: Investigate the significant increase in receivables ($32.1 million increase in operating cash flow adjustments) and the decrease in payables.
- Environmental Exposure: Monitor the status of the 28 hazardous waste sites and the potential liability under the settlement with Borg-Warner Security Corporation.
- Year 2000 Costs: Track actual spending against the $11.5 million estimate and verify supplier compliance status.