BorgWarner Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2023. All figures are in U.S. dollars unless stated otherwise. BorgWarner completed the spin-off of its Fuel Systems and Aftermarket businesses as PHINIA on July 3, 2023; their historical results are reported as discontinued operations.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3.622 billion | $3.226 billion | $10.676 billion | $9.318 billion |
| Gross profit / margin | $652 million / 18.0% | $607 million / 18.8% | $1.909 billion / 17.9% | $1.730 billion / 18.6% |
| Operating income / margin | $272 million / 7.5% | $265 million / 8.2% | $879 million / 8.2% | $744 million / 8.0% |
| Continuing-operations net earnings | $105 million | $192 million | $532 million | $522 million |
| Diluted EPS from continuing operations | $0.37 | $0.73 | $2.06 | $1.95 |
| Net earnings attributable to BorgWarner, including discontinued operations | $50 million | $273 million | $471 million | $689 million |
- Q3 sales grew 12%; management attributed most of the increase to volume, mix and new business, with additional contributions from currency, customer cost recoveries and acquisitions. Nine-month sales rose 15%.
- Gross margin declined year over year in both periods, reflecting higher input costs and other cost-of-sales effects. In Q3, operating income increased modestly, but operating margin fell.
- Q3 continuing earnings were pressured by a $60 million loss on debt and equity securities, primarily the fair-value adjustment to Wolfspeed convertible debt, and a 56% effective tax rate. The quarter also included a $28 million gain on extinguishing 2025 notes. Nine-month securities losses were $129 million; the effective tax rate was 30%.
- Q3 diluted EPS from continuing operations included a $0.61 per-share net impact from the filing’s listed non-comparable items; the corresponding nine-month impact was $0.75 per share. These items included securities losses and restructuring costs.
- Continuing-operations operating cash flow was $510 million for the first nine months, versus $552 million a year earlier. Capital expenditures, including tooling, were $624 million, versus $427 million. The filing attributes the operating cash flow decline mainly to increased working-capital investment.
- At September 30, cash and restricted cash totaled $949 million; total reported liquidity was $2.949 billion, including an undrawn $2 billion revolving facility. Short- and long-term debt were $63 million and $3.665 billion, respectively. The company repurchased and extinguished $438 million face value of 2025 notes during the quarter.
- Total assets were $14.104 billion and total equity was $6.007 billion at quarter-end. The company reported compliance with its credit-facility covenant and no borrowings under the facility or commercial-paper program.
Segments and material changes
- Q3 segment sales were $1.945 billion for Air Management, $1.145 billion for Drivetrain & Battery Systems, and $571 million for ePropulsion. Segment adjusted operating income was $294 million, $147 million and a $20 million loss, respectively.
- For the first nine months, segment adjusted operating income was $884 million for Air Management, $400 million for Drivetrain & Battery Systems, and a $74 million loss for ePropulsion. ePropulsion’s adjusted loss improved from $89 million in the comparable period, but the segment remained loss-making, primarily reflecting eProduct R&D investment.
- The company announced a $130 million to $150 million restructuring plan for Foundational products. It recorded $68 million of related expense in the first nine months, including $56 million in Q3; actions include a European facility closure affecting approximately 200 employees.
- The PHINIA spin-off materially changed the business perimeter and presentation. Q3 discontinued operations included $52 million of spin-off costs and a $37 million net loss; the comparable 2022 quarter included $100 million of discontinued-operations earnings. Nine-month discontinued operations recorded a $12 million net loss in 2023 versus $225 million of earnings in 2022.
Outlook, risks and unusual items
- Management expected global industry production to increase in 2023 and forecast sales growth excluding foreign-currency effects, supported by new business, product penetration, eProducts and customer recoveries of material-cost inflation. The filing does not provide a clear numeric full-year 2023 revenue or earnings guidance value in the text supplied.
- For 2027, the company targets more than $10 billion in annual eProducts sales, approximately 7% eProducts adjusted operating margin, and double-digit adjusted operating margins for Foundational products. eProducts represented approximately $1.5 billion, or 14%, of nine-month revenue.
- Management expects planned higher eProduct R&D spending to partly offset revenue-growth benefits. It cited volatile commodity prices and elevated inflation as continuing cost pressures.
- At filing time, tentative UAW agreements with Ford, Stellantis and General Motors had been reached, and production had resumed at some facilities, but ratification was pending. BorgWarner had expected sales to these three customers in North America to average just under $250 million per month in 2023 before the strikes; prolonged labor disruption could materially affect results.
- Other cited risks include semiconductor and supply disruptions, vehicle-production cyclicality, customer concentration, uncertain EV demand and technology shifts, foreign-currency movements, and legal or regulatory matters. Management did not expect existing claims or environmental matters to have a material adverse effect, while acknowledging adverse outcomes could affect results or cash flows.
- The company reported $6 million of accrued environmental liabilities. Its effective tax rate and deferred-tax-asset judgments were affected by the spin-off and tax structuring; Q3 included a discrete $87 million tax expense related primarily to changes in judgments about deferred-tax-asset realization, partly offset by discrete tax benefits.
Important facts for investors to verify
- Compare continuing-operations results with prior periods on a consistent basis, accounting for PHINIA’s spin-off and discontinued-operations presentation.
- Track working-capital conversion, especially receivables, and capital spending as eProducts investment expands.
- Assess whether the announced restructuring produces expected cost reductions and whether ePropulsion can improve profitability.
- Monitor Wolfspeed investment valuation changes, tax-rate and deferred-tax assumptions, and the effects of any further unusual items on reported earnings.
- Verify the status and operational impact of labor agreements and production disruptions at major OEM customers, as well as customer recovery of inflation-related costs.
- Review the company’s progress against its 2027 eProducts and Foundational-products margin targets and the terms and completion of the announced Eldor acquisition.