BorgWarner Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. BorgWarner supplies technologies for combustion, hybrid and electric vehicles, principally to vehicle manufacturers. All amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $4.060 billion | $3.416 billion | $11.693 billion | $11.183 billion |
| Gross profit / margin | $806 million / 19.9% | $650 million / 19.0% | $2.268 billion / 19.4% | $2.230 billion / 19.9% |
| Operating income / margin | $389 million / 9.6% | $253 million / 7.4% | $1.013 billion / 8.7% | $973 million / 8.7% |
| Net earnings attributable to BorgWarner | $273 million | $96 million | $689 million | $408 million |
| Diluted EPS | $1.16 | $0.40 | $2.90 | $1.70 |
| Operating cash flow | Not separately provided | Not separately provided | $679 million | $764 million |
- Q3 sales rose 19% year over year; nine-month sales increased 5%. Foreign currency translation reduced sales by approximately $320 million in Q3 and $654 million year to date. Higher production, demand and customer commercial negotiations supported sales.
- Q3 gross margin improved, while nine-month gross margin declined. Management attributed cost pressure to commodities and other inputs; materials were 57% of sales in both 2022 periods shown, versus 54% in 2021.
- Nine-month operating cash flow was lower, with working-capital outflows including receivables of $726 million and inventories of $258 million. Capital expenditures, including tooling, were $511 million.
- At September 30, cash and restricted cash totaled $1.241 billion; short-term debt was $56 million and long-term debt was $4.080 billion. The company reported $3.241 billion of liquidity, including its undrawn $2.0 billion revolving facility, and compliance with its debt covenant. The facility matures in March 2025.
- Total assets were $16.077 billion and total liabilities were $9.040 billion. Cash declined $603 million from year-end 2021, including an unfavorable $103 million exchange-rate effect.
Material changes and notable items
- Q3 segment adjusted operating income, a company-defined non-GAAP measure, was $495 million versus $390 million. Nine-month segment adjusted operating income was $1.357 billion versus $1.422 billion. Nine-month margins weakened in Air Management and e-Propulsion & Drivetrain, while Fuel Systems and Aftermarket improved.
- Q3 2021 included a $61 million unrealized loss on equity securities; the comparable 2022 period recorded a $1 million gain. Nine-month unrealized losses were $27 million in 2022 versus $337 million in 2021, primarily reflecting the prior-year Romeo Power investment. The company sold its remaining Romeo Power shares in 2022.
- Nine-month earnings included a $24 million gain from selling the company’s interest in BorgWarner Romeo Power LLC. Q3 other operating expense also included a $9 million loss from revising an earn-out estimate related to a prior divestiture.
- Restructuring expense fell to $50 million for the first nine months from $143 million a year earlier. The 2020 structural-cost plan was substantially complete; remaining costs were expected by year-end 2022. Annual gross savings are expected to exceed $100 million.
- Acquisitions included Santroll Automotive Components, completed in March for final consideration of $207 million, and Rhombus Energy Solutions, completed in July for $131 million upfront. The company also announced a planned Hubei Surpass Sun Electric business acquisition, valued up to $60 million and expected to close in Q1 2023, subject to customary conditions.
Outlook, risks and contingencies
- Management expected global industry production to increase modestly in 2022 and expected revenue growth excluding foreign-currency effects, with net new business growth exceeding industry production growth. The filing provides no clear numerical full-year revenue or earnings guidance.
- Management cited elevated commodity and supplier costs, semiconductor and other supply disruptions, intermittent COVID-19 impacts, China lockdowns, the war in Ukraine, and adverse currency movements. Customer recoveries of higher costs were partial, and margins remained exposed.
- R&D investment was increasing to support electrification programs; long-term R&D spending was expected to be 5.0%–5.5% of sales. Electrification demand and program launches also involve forecasting and execution uncertainty.
- Management stated it expected sufficient liquidity and covenant compliance for at least the next 12 months. Pending commercial and legal matters were not expected to have a material adverse effect, though an adverse outcome could affect results or cash flows. Environmental liabilities accrued were $8 million; the company identified 26 potentially responsible-party sites.
- The company settled a derivative lawsuit through agreed governance reforms and attorneys’ fees and expenses under $1 million; the court approved the settlement in September 2022.
Important facts for investors to verify
- Whether customer pricing and cost-recovery actions can offset persistent commodity, supplier and inflationary costs.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside planned capital spending and shareholder returns.
- Segment profitability trends, especially e-Propulsion & Drivetrain margins and the effect of electrification R&D investment.
- Acquisition integration, contingent payments and final purchase accounting valuations, as well as the timing and terms of the planned Hubei transaction.
- How much reported earnings improvement reflects recurring operations versus prior-year investment losses, restructuring, tax items and other non-comparable items.