BorgWarner Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. BorgWarner is a global automotive systems and components supplier, reporting Engine and Drivetrain segments. Comparisons below are to Q1 2012 unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
- Revenue: Net sales were $1.851 billion, down 3.2%. Excluding 2012 dispositions and currency effects, sales declined about 1%. The company cited lower vehicle production, particularly in Europe.
- Profit and margins: Gross profit was $374.7 million, down from $395.8 million; gross margin fell to 20.2% from 20.7%. Operating income was $198.5 million versus $225.7 million. Net earnings attributable to BorgWarner were $142.0 million versus $158.0 million. Diluted EPS was $1.22 versus $1.28; basic EPS was $1.23 versus $1.46.
- Segment results: Engine sales were $1.258 billion and Adjusted EBIT was $202.3 million; its Adjusted EBIT margin was 16.1%, up from 16.0%. Drivetrain sales were $601.4 million and Adjusted EBIT was $56.0 million; its margin fell to 9.3% from 10.0%.
- Cash flow: Operating cash flow was $16.3 million, down from $30.8 million. Investing used $73.6 million, including $87.4 million of capital expenditures and tooling outlays. Financing provided $59.7 million. Cash declined $20.3 million to $695.4 million. Operating cash flow less reported capital expenditures was negative $71.1 million.
- Liquidity and debt: At March 31, cash was $695.4 million and balance-sheet short-term and long-term debt was $229.3 million and $971.4 million, respectively. The company reported a debt-net-of-cash-to-capital ratio of 13.8%, up from 10.0% at year-end 2012. It had borrowed $280 million under its revolving facility and was in compliance with its covenants. On April 12, after quarter-end, it increased the facility from $650 million to $750 million.
- Other metrics: Net R&D spending increased to $71.8 million from $67.7 million. The estimated 2013 annual effective tax rate was about 26%, or about 27% for ongoing operations excluding specified non-comparable items.
Changes and notable items
- Reported sales and earnings declined year over year; management attributed the sales comparison partly to foreign-exchange movements and prior-year dispositions, and noted weaker European production. Estimated global light-vehicle production was down 1%, including a 9% decline in Europe.
- Other expense rose to $16.9 million, primarily from an $11.3 million program termination agreement and a $5.9 million retirement-related restricted-stock obligation. Management estimated these items and tax adjustments reduced diluted EPS by a net $0.08.
- Interest expense fell to $9.7 million from $15.1 million, primarily following settlement of convertible notes in April 2012. Foreign-currency translation contributed an $84.8 million loss to other comprehensive income.
- The company paid $49.9 million to repurchase treasury stock during the quarter. The board subsequently authorized an additional 5 million shares for repurchase on April 24, 2013.
Outlook, risks and contingencies
- Management described its 2013 outlook as cautious given weakening global economic conditions, particularly in Europe. It expected global production to be slightly higher than 2012, European production to decline, and BorgWarner sales to grow as adoption of its products increases. It also cited long-term demand trends in direct-injection engines, automated transmissions, and variable cam and chain timing systems.
- Management said cash, operating cash flow, available credit and shelf-registration capacity should be sufficient for planned operations. Most cash held outside the U.S. was available for repatriation, but repatriation could trigger additional taxes.
- About 16,000 asbestos-related claims were pending. The company recorded $95.2 million in estimated liabilities for unresolved claims and an equal insurance-recovery asset; recovery timing depends on insurer litigation or settlements and was not expected before the relevant coverage litigation is resolved. It also reported $118.6 million of net amounts paid or accrued for past claims expected to be recovered from insurers.
- Other matters include a continuing retiree-benefits class action for which the company could not reasonably estimate a possible loss, environmental exposure at 33 sites with a $3.7 million accrual, and product-warranty liabilities of $68.0 million. Management did not expect these matters to have a material adverse effect, but outcomes remain uncertain.
- Forward-looking results are exposed to vehicle-production and demand fluctuations, economic conditions, and other risks described in the company’s prior Form 10-K. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth and margin performance meet the outlook, especially given continued weakness in Europe and currency effects.
- How working-capital movements, capital spending and operating cash flow affect cash generation over the remainder of 2013.
- Debt levels, revolving-facility usage and covenant headroom following the April facility increase.
- Whether the insurer recoveries for asbestos claims are received as expected, and developments in the related coverage litigation and retiree-benefits case.
- The realized effect of the program termination and retirement-related charges, and the company’s execution of its repurchase authorization.