BorgWarner Inc. — 2013 Form 10-K Summary
Business and reporting period. BorgWarner is a global automotive powertrain supplier with Engine and Drivetrain segments, serving primarily vehicle manufacturers. This annual filing covers the year ended December 31, 2013; it is not a standalone fourth-quarter filing. Figures are in U.S. dollars unless noted. Prior-year share and per-share data reflect the December 2013 two-for-one stock split.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $7,436.6 million | $7,183.2 million |
| Gross profit / margin | $1,557.5 million / 20.9% | $1,466.9 million / 20.4% |
| Operating income / margin | $855.2 million / 11.5% | $752.9 million / 10.4% |
| Net earnings attributable to BorgWarner | $624.3 million | $500.9 million |
| Diluted EPS | $2.70 | $2.09 |
| Cash from operating activities | $718.8 million | $878.7 million |
| Capital expenditures, including tooling | $417.8 million | $407.4 million |
| Cash / total debt at year-end | $939.5 million / $1,222.6 million | $715.7 million / $1,067.2 million |
Revenue increased 3.5%; management said sales rose approximately 4% excluding 2012 dispositions and currency effects. Cash from operations declined, primarily reflecting working-capital changes, including a $137.5 million discretionary German pension contribution and higher receivables. Net debt was $283.1 million, down from $351.5 million; net debt to capitalization fell to 7.2% from 10.0%. Current assets were $2,798.5 million and current liabilities $1,623.9 million.
Engine sales were $5,022.1 million and segment Adjusted EBIT was $826.0 million (16.4% margin). Drivetrain sales were $2,446.5 million and Adjusted EBIT was $252.2 million (10.3% margin). Both segment margins improved, with Drivetrain Adjusted EBIT up 20.6%, supported by operational improvements and cost management. Net R&D spending rose to $303.2 million, or 4.1% of sales. The company reinstated its quarterly dividend in 2013; dividends declared were $0.25 per share for the year.
Fourth-quarter 2013 sales were $1,885.4 million, operating income $187.7 million, net earnings attributable to BorgWarner $141.4 million, and diluted EPS $0.62. The quarter included $52.3 million of restructuring expense.
Material changes, outlook, and risks
- Annual operating income and net earnings rose versus 2012; reported earnings included non-comparable items. 2013 items included $52.3 million of restructuring costs, an $11.3 million program termination expense, and $5.9 million of retirement-related expense. Restructuring principally involved Drivetrain facilities and approximately 300 employees; about $90 million of additional charges were estimated over the following two years.
- Management expected moderate global vehicle-production growth in 2014 and forecast BorgWarner sales growth to outpace production, citing adoption of its products. It also cited long-term demand trends in turbocharging, automated transmissions, and variable cam and chain timing. Net R&D spending was expected to remain around 4% of sales over the long term.
- The company signed an agreement to acquire Wahler, an EGR and thermostat supplier, expected to close in first-quarter 2014 subject to regulatory approvals. Wahler’s 2013 sales were expected to be approximately $350 million.
- Liquidity included $939.5 million of cash, of which $936.8 million was held outside the U.S.; repatriation could generate additional taxes. The $750 million revolving facility had $320 million outstanding, ran through June 2016, and was subject to financial covenants with which the company reported compliance. Management expected available liquidity and operating cash to cover planned needs.
- Key exposures include automotive production cycles, OEM pricing pressure, commodity and supply-chain risks, international operations and currency movements, customer concentration (Volkswagen 16% and Ford 14% of 2013 sales), pension obligations, IT disruption, and environmental, warranty, litigation and product-liability claims.
- Asbestos-related claims numbered approximately 17,000 at year-end. A $35 million jury verdict was on appeal; $32.5 million was non-compensatory and would not be insured if upheld. The company posted a $55 million appeal bond and stated it could not estimate the possible loss. It recorded a $96.7 million liability and matching insurance asset for unresolved claims, while recovery of other past costs depended on insurance disputes.
- The company reported a $4.0 million environmental liability accrual and did not expect environmental matters to have a material overall effect. A retiree-benefits class action remained pending, with a decision potentially in 2014 and loss not reasonably estimable.
Management and the independent auditor reported effective internal control over financial reporting as of year-end. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether 2014 sales growth exceeded global vehicle-production growth and whether segment margins continued to improve.
- Actual timing, purchase terms, financing, and integration results for the Wahler acquisition, and total Drivetrain restructuring costs versus the estimated additional $90 million.
- Cash conversion and working-capital trends after the 2013 decline in operating cash flow; also review the location and tax implications of overseas cash.
- Debt maturities, revolving-credit usage and covenant headroom, pension funding needs, and the sustainability of dividends and repurchases.
- Developments in asbestos insurance recovery and litigation, the appealed verdict, warranty accruals, and other contingencies.