BorgWarner Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2016. BorgWarner is a global supplier of automotive powertrain systems and components, reporting through Engine and Drivetrain segments. Comparisons below are year over year unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Nine months 2016 |
|---|---|---|
| Net sales | $2,214.2 million, up 17.5% | $6,812.0 million, up 15.5% |
| Sales growth excluding currency and Remy acquisition effects | Approximately 6.1% | Approximately 4.7% |
| Gross profit / margin | $471.1 million / 21.3% | $1,432.1 million / 21.0% |
| Operating income | $150.3 million, versus $237.1 million | $683.9 million, versus $739.2 million |
| Net earnings attributable to BorgWarner | $83.3 million, versus $157.4 million | $411.8 million, versus $484.4 million |
| Diluted EPS | $0.39, versus $0.70 | $1.90, versus $2.14 |
| Adjusted EBIT | $305.1 million, versus $282.2 million | $949.9 million, versus $883.7 million |
Q3 results included a $106.5 million impairment charge for the Remy light vehicle aftermarket business. The filing estimates the charge reduced Q3 diluted EPS by $0.37 and nine-month diluted EPS by $0.36. Q3 gross margin improved from 21.1% in 2015; nine-month gross margin declined from 21.3%. Nine-month cost of sales was 79.0% of sales versus 78.7%.
Q3 Engine sales were $1,359.3 million and Drivetrain sales were $865.9 million. Segment Adjusted EBIT was $218.2 million for Engine and $86.9 million for Drivetrain. Drivetrain growth includes Remy; excluding currency and Remy, segment sales increased approximately 11.4% in Q3 and 7.1% for the nine months. Drivetrain Adjusted EBIT margin declined to 10.0% from 12.0% in Q3 and to 10.0% from 11.7% for the nine months, primarily due to the Remy acquisition.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $593.1 million, up from $470.2 million. Capital expenditures, including tooling, were $354.8 million; investing cash outflow was $342.4 million.
- Financing cash outflow was $310.1 million, including $250.0 million of treasury-stock purchases and $83.8 million of dividends paid to BorgWarner shareholders. Cash declined $59.0 million to $518.7 million.
- At September 30, cash was $518.7 million; notes payable and other short-term debt were $525.4 million, and long-term debt was $2,089.9 million. Net debt to net capital was 35.6%, compared with 35.2% at year-end 2015.
- The company reported $270.0 million outstanding under its commercial paper program and no borrowings under its $1 billion revolving credit facility. It was in compliance with its debt-to-EBITDA covenant. A $150 million-par senior note maturity was due November 1, 2016.
- Cash held outside the United States was $505.7 million; repatriation could result in additional taxes. The company said cash, operating cash flow, available credit and shelf capacity were expected to meet foreseeable needs, including its share repurchase program.
Material changes, outlook and risks
- Remy, acquired in November 2015, materially increased reported Drivetrain sales and expenses. In October 2016, BorgWarner agreed to sell Remy’s light vehicle aftermarket business for approximately $80 million in cash, subject to customary closing conditions and regulatory approvals. The business was classified as held for sale at quarter-end; a $106.5 million impairment was recorded.
- Management described its 2016 outlook as cautious, anticipating weak global vehicle-production growth, partly offset by moderate net new business-related sales growth. A stronger U.S. dollar could reduce the reported value of foreign sales. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- Management cited long-term opportunities in gasoline direct injection, automated transmissions, and variable cam and chain timing, and said it remained committed to product development and strategic capital investment. Weak aftermarket and commercial-vehicle markets were noted as headwinds.
- The estimated annual effective tax rate for ongoing 2016 operations was approximately 31%, excluding specified non-comparable items. The reported nine-month effective tax rate was 32.6%.
- Asbestos-related claims remained a significant contingency: approximately 9,500 claims were pending. The company recorded a $195.0 million net balance of past costs expected to be recovered from insurers, plus a matching $112.4 million insurance asset and liability for unresolved claims; timing of recovery depends on insurance litigation and is uncertain. Environmental liabilities accrued were $4.9 million. A retiree-benefits case remains unresolved, and the company could not reasonably estimate a potential loss range.
- Moody’s outlook was revised from stable to negative during the first quarter; S&P and Fitch ratings were BBB+ with stable outlooks. The filing cites risks including vehicle-production and demand fluctuations, Remy integration and retention, customer or supplier disruption, foreign exchange, and legal and product-liability matters.
Important facts for investors to verify
- Whether the Remy aftermarket sale closed on the expected terms and how the divestiture affected subsequent results and cash flows.
- Underlying sales and margins excluding Remy and currency effects, especially the continued Drivetrain margin pressure.
- Whether the November 2016 note maturity was refinanced or repaid and how debt, cash, and credit ratings changed.
- Progress and recoveries in asbestos insurance litigation, and any changes in claim estimates or other contingencies.
- Full-year results against management’s cautious outlook, including vehicle-production trends, foreign-exchange effects, and the ongoing tax rate.