BorgWarner Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020. Amounts are in U.S. dollars unless noted. Results include Delphi Technologies, acquired October 1, 2020, so reported year-over-year comparisons are not fully comparable.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $4.009 billion | $2.279 billion |
| Gross profit / margin | $818 million / 20.4% | $447 million / 19.6% |
| Operating income / margin | $403 million / 10.1% | $198 million / 8.7% |
| Net earnings attributable to BorgWarner | $65 million | $129 million |
| Diluted EPS | $0.27 | $0.63 |
| Operating cash flow | $342 million | $263 million |
| Capital expenditures, including tooling | $195 million | $117 million |
Sales rose 76%; excluding the net effects of Delphi Technologies and stronger foreign currencies, management reported growth of approximately 20%, driven mainly by market recovery and demand. Gross and operating margins improved, reflecting higher sales and, for gross margin, conversion on that volume. Net earnings fell principally because of a $272 million unrealized loss on the Romeo Power investment, which reduced diluted EPS by $0.87; its quarter-end fair value was $160 million. The filing’s non-GAAP segment measure, Segment Adjusted EBIT, was $513 million versus $271 million.
Cash and equivalents were $1.755 billion at March 31, 2021, including $1.213 billion held outside the United States. The balance sheet reported $51 million of notes payable and other short-term debt and $3.708 billion of long-term debt, net of current portion. The company had no borrowings under its $2.0 billion revolving facility or commercial-paper program and was in compliance with its debt-to-EBITDA covenant. The separate $900 million delayed-draw facility for the proposed AKASOL transaction was undrawn.
Changes, outlook, and notable items
- Delphi Technologies contributed $1.142 billion of Q1 2021 revenue. The two new reporting segments, Fuel Injection and Aftermarket, recorded sales of $475 million and $197 million, respectively.
- Operating cash flow increased by $79 million year over year, while higher receivables and inventory used cash as sales grew. Investing cash outflow was $185 million, primarily reflecting higher capital spending.
- Management described its 2021 outlook as positive: it expects global vehicle production to increase and company sales, excluding currency and acquisition/divestiture effects, to rise. However, component supply constraints began affecting production in March and were expected to reduce Q2 volumes.
- At its March 2021 Investor Day, the company set a strategy to grow electrification through R&D and acquisitions, target pure-electric-vehicle product revenue above 25% of total revenue by 2025 and approximately 45% by 2030, and dispose of assets generating about $1 billion of annual revenue within 12–18 months and $3–$4 billion by 2025. These are targets, not guaranteed outcomes.
- The company expects restructuring costs of $300 million through 2022 under its 2020 plan; it had incurred $172 million cumulatively by March 31, 2021. Expected annual gross savings are $90–$100 million. Long-term R&D spending expectation is 5.0%–5.5% of sales.
- The proposed AKASOL offer valued its equity at approximately €727 million, or €120 per share; holders of about 59% had committed to accept. Closing was expected in Q2 2021, subject to customary conditions. Funding was expected primarily from cash and incremental debt.
Risks and contingencies
Key risks include COVID-19 impacts, automotive and truck production cyclicality, component and other supply disruptions, reliance on major OEM customers, Delphi integration and acquisition risks, and whether the AKASOL transaction closes and delivers expected benefits. The company reported environmental matters at 26 sites and a $7 million environmental accrual, while stating it did not expect these matters to have a material adverse effect. A derivative lawsuit concerning past asbestos-liability accounting and disclosures was dismissed without prejudice on April 22, 2021, with no payment by BorgWarner. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported growth and margin improvement is attributable to Delphi, foreign exchange, market recovery, and underlying organic demand.
- Romeo Power’s valuation volatility and the effect of any further fair-value changes on reported earnings.
- The magnitude and duration of supply constraints, particularly their effect on Q2 production and full-year expectations.
- AKASOL offer acceptance, closing conditions, final funding mix, and resulting debt and integration costs.
- Progress and cash costs against the restructuring plan, expected savings, and announced asset-disposal and electrification targets.
- Working-capital trends, capital spending, liquidity, and continued compliance with debt covenants.