BorgWarner Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Unaudited results; dollar amounts below are in millions except per-share data. BorgWarner supplies engineered automotive powertrain systems and components through its Engine and Drivetrain segments.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $2,032.1 | $1,806.2 | $6,313.2 | $5,551.2 |
| Gross profit / margin | $424.5 / 20.9% | $379.6 / 21.0% | $1,343.1 / 21.3% | $1,150.9 / 20.7% |
| Operating income | $237.7 | $225.6 | $751.5 | $667.5 |
| Net earnings attributable to BorgWarner | $166.6 | $166.8 | $515.9 | $482.9 |
| Diluted EPS | $0.73 | $0.72 | $2.25 | $2.08 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $546.2 | $514.8 |
| Capital expenditures, including tooling | Not presented by quarter | Not presented by quarter | $397.9 | $297.9 |
Q3 sales rose 12.5%; excluding the Wahler acquisition and currency effects, management reported growth of approximately 8%. Nine-month sales rose 13.7%, or approximately 8% excluding those effects. Q3 net earnings attributable to BorgWarner were essentially flat. Nine-month diluted EPS increased to $2.25 from $2.08.
At September 30, cash was $782.8, down from $939.5 at year-end 2013. Total current assets were $2,951.8 and current liabilities $2,122.8. Notes payable and other short-term debt were $605.7, compared with $201.6 at year-end; long-term debt was $705.8, compared with $1,021.0. Net debt to net capital rose to 12.2% from 7.2%. The filing reports a 3.3% weighted-average interest rate on borrowings.
Nine-month cash flow included $501.1 used in investing and $149.5 used in financing; cash declined $156.7. Investing outflows included the $106.4 Wahler acquisition and increased capital spending. Financing included $369.9 net increase in notes payable, $422.7 in long-term debt repayments, and $86.8 of dividends paid to BorgWarner stockholders.
Segments and material changes
- Engine: Q3 sales were $1,412.4, up 16.7%; nine-month sales were $4,322.0, up 15.1%. Adjusted EBIT was $222.6 in Q3 and $696.0 year to date. Nine-month adjusted EBIT margin declined to 16.1% from 16.5%, with Wahler adding sales but initially contributing relatively little adjusted EBIT.
- Drivetrain: Q3 sales were $627.0, up 3.8%; nine-month sales were $2,016.4, up 10.9%. Adjusted EBIT was $68.0 in Q3 and $237.6 year to date. Nine-month adjusted EBIT margin improved to 11.8% from 10.0%.
- Consolidated nine-month gross margin improved to 21.3% from 20.7%; Q3 gross margin eased to 20.9% from 21.0%. Net R&D spending rose to $257.4 for nine months from $216.2.
- Other expense included $67.6 of nine-month restructuring expense and a $2.7 pension settlement loss. Restructuring reduced nine-month diluted EPS by an estimated $0.24; the pension settlement reduced it by $0.01.
Outlook, liquidity, and risks
Management described the 2014 outlook as positive, expected moderate global vehicle production growth, and anticipated BorgWarner sales growth to exceed industry production growth. It cited continued product adoption and long-term demand trends in direct-injection engines, automated transmissions, and variable cam and chain timing systems. Management estimated an approximately 28.5% annual effective tax rate for 2014 ongoing operations, excluding specified non-comparable items.
The company amended its revolving credit facility to $1 billion, extendible to $1.25 billion, with availability through June 30, 2019; it had no borrowings under the facility at quarter-end and was in compliance with its debt-to-EBITDA covenant. Commercial paper borrowings were $355.0. The combined current capacity of the facility and commercial paper program is capped at $1 billion. Management said cash, operating cash flow, available credit, and shelf-registration capacity should meet foreseeable needs. Of $782.8 cash, $779.1 was held by non-U.S. subsidiaries; repatriation could incur additional taxes.
Restructuring actions cover Drivetrain, Wahler, and a global legal-entity realignment. Management estimated additional Drivetrain and Engine restructuring expense of approximately $35 and $23, respectively, over the next two years; the filing also describes approximately $15 of further employee termination benefits for Drivetrain. Cash payments for the cited Drivetrain actions were expected to be complete by the end of 2015.
Key contingencies include approximately 18,000 pending asbestos-related claims. The company recorded $111.8 of estimated liabilities for asserted unresolved claims and a matching insurance asset, with recovery expected only after the insurer-coverage litigation is resolved, anticipated after September 30, 2015. It also reported $198.8 of net past asbestos costs expected to be recovered from insurers. A $35.0 asbestos verdict, including $32.5 non-compensatory damages, was under appeal; a $55.0 surety bond had been posted. Environmental liabilities accrued were $6.8. Management cautioned that outcomes and recovery timing remain uncertain and that possible losses beyond recorded amounts cannot be reasonably estimated.
Most important facts for investors to verify
- Whether sales growth and margins persist excluding Wahler and currency effects, especially the Engine segment’s lower margin.
- Execution, timing, cash costs, and final charges for restructuring, including the additional expense estimates.
- Short-term borrowing levels, cash availability, and the extent to which offshore cash can be accessed without added tax.
- Timing and collectability of asbestos insurance recoveries, and the appeal outcome and related insurer-coverage litigation.
- Whether operating cash flow continues to cover elevated capital expenditures, dividends, and other capital needs.