BorgWarner Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. BorgWarner supplies engineered automotive powertrain systems and components to global vehicle manufacturers and aftermarket customers. Its reporting segments are Engine and Drivetrain.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,806.2 million | $1,695.2 million | $5,551.2 million | $5,464.1 million |
| Gross profit / margin | $379.6 million / 21.0% | $343.7 million / 20.3% | $1,150.9 million / 20.7% | $1,122.7 million / 20.5% |
| Operating income | $225.6 million | $163.0 million | $667.5 million | $582.2 million |
| Net earnings attributable to BorgWarner | $166.8 million | $101.1 million | $482.9 million | $379.7 million |
| Diluted EPS | $1.45 | $0.85 | $4.16 | $3.15 |
- Q3 sales increased 6.5% year over year; excluding 2012 dispositions and currency effects, management reported approximately 6% growth. Nine-month sales increased 1.6%, or approximately 2% excluding those effects.
- Q3 operating margin was approximately 12.5%, compared with 9.6% a year earlier; nine-month margin was approximately 12.0%, compared with 10.7%.
- Q3 results improved partly because 2012 included spark-plug disposal and restructuring charges. Nine-month 2013 included $11.3 million for a program termination agreement and $5.9 million in retirement-related obligations; 2012 included disposal and restructuring expenses. Management reported these items reduced 2013 nine-month diluted EPS by $0.03, versus a $0.67 reduction in 2012.
- Segment performance strengthened: Q3 Engine sales rose 3.6% and Adjusted EBIT margin reached 16.2% (15.8% prior year); Drivetrain sales rose 13.0% and margin reached 10.9% (8.3%). For nine months, Engine and Drivetrain Adjusted EBIT margins were 16.5% and 10.0%, respectively, both above 2012.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $514.8 million, versus $542.6 million. Investing cash outflow was $275.1 million, including $297.9 million of capital expenditures and tooling outlays. Financing cash outflow was $59.2 million. Cash increased $204.7 million to $920.4 million. Operating cash flow less capital expenditures and tooling outlays was approximately $216.9 million, compared with $259.6 million in 2012.
- At September 30, cash was $920.4 million, including $916.8 million held by foreign subsidiaries. Short-term debt was approximately $253.7 million and long-term debt $1,018.6 million; net debt was approximately $351.9 million. Debt net of cash to capital was 9.3%, versus 10.0% at year-end 2012.
- The revolving credit facility was increased to $750 million in April 2013 and matures June 30, 2016; $320 million was drawn at quarter-end. The company said it was compliant with financial covenants and expected to remain compliant. Ratings were Baa2 from Moody’s and BBB+ from S&P and Fitch, all with stable outlooks.
- Nine-month dividends paid to BorgWarner shareholders were $28.5 million; dividends declared were $0.25 per share. Treasury-stock purchases used $225.5 million of cash. Management said available cash, operating cash flow and credit capacity should meet foreseeable needs.
Outlook, commentary and risks
- Management was cautious about the remainder of 2013 amid uncertain global economic conditions. It expected global vehicle production to be slightly higher for 2013 than 2012, with European production lower, while product adoption was expected to support BorgWarner sales growth. No specific full-year revenue or EPS guidance was provided in the filing text.
- Management maintained a positive long-term view, citing growth in direct-injection engines, automated transmissions, and variable cam and chain timing systems, and reaffirmed investment in product development and strategic capital projects.
- Asbestos litigation is a significant contingency: approximately 16,000 claims were pending. An August 2013 jury verdict awarded $35.0 million, including $32.5 million in non-compensatory damages that would not be insured if upheld. The company planned to defend and appeal and said it could not estimate the possible loss. It recorded $109.0 million of liabilities for asserted unresolved claims with a matching insurance asset; recovery timing depends on insurance litigation and settlements. It also reported $139.8 million of net past defense and indemnity costs expected to be recovered from insurers.
- Environmental liabilities accrued were $4.7 million for 32 identified sites. The company also disclosed ongoing retiree-benefit litigation for which potential loss could not be reasonably estimated. Management did not expect the discussed contingencies to materially affect overall results, financial position or cash flows, but noted a particular quarter could be affected.
- Other risks include changes in vehicle production and demand, economic conditions, currency movements, and execution of product and investment plans. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether sales and margin momentum, particularly in Drivetrain, persisted after Q3 and whether European production weakness affected results.
- Cash-flow conversion and planned capital spending, given lower year-over-year operating cash flow and higher investment outlays.
- Debt and liquidity trends, including revolving-credit utilization, covenant headroom, and the availability and tax cost of repatriating foreign cash.
- Developments in the $35 million asbestos verdict, insurance-coverage litigation, insurer recoveries, and the adequacy of recorded asbestos liabilities and matching assets.
- How the estimated 26% 2013 GAAP tax rate compares with the approximately 27% rate management cited for ongoing operations, and the effects of non-comparable tax items.