BorgWarner Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited. BorgWarner supplies combustion, hybrid and electric vehicle technologies to vehicle manufacturers and the aftermarket.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $4,180 | $3,874 |
| Gross profit / margin | $750 / 17.9% | $750 / 19.4% |
| Operating income / margin | $340 / 8.1% | $352 / 9.1% |
| Net earnings attributable to BorgWarner | $217 | $200 |
| Diluted EPS | $0.93 | $0.84 |
| Operating cash flow | $(12) | $116 |
| Capital expenditures, including tooling | $278 | $177 |
Sales rose 8%, primarily from volume, mix and new business (+$398 million); customer commodity-cost recoveries contributed $48 million, acquisitions $22 million, while foreign exchange reduced sales by about $162 million. Gross profit was unchanged as higher sales were offset by costs; gross margin fell 1.5 percentage points. Supplier-related material inflation added about $76 million to cost of sales. Net earnings increased despite lower operating income, with lower unrealized investment losses and interest expense contributing.
Operating cash flow declined by $128 million year over year, which management attributed primarily to higher working-capital investment. Receivables and inventories used $224 million and $100 million, respectively; accounts payable and accrued expenses used $138 million. Cash and restricted cash were $950 million at quarter-end, down from $1,338 million at December 31, 2022.
At March 31, total debt was approximately $4.24 billion, including $62 million of short-term debt and $4.18 billion of long-term debt. The company reported $2.95 billion of liquidity: $950 million of cash and $2.0 billion available under its undrawn revolving facility. It was in compliance with the facility’s debt-to-EBITDA covenant. Current assets were $6.61 billion and current liabilities $4.15 billion.
Material changes and segment performance
- Air Management sales grew 12% to $1,979 million; adjusted operating income rose to $285 million and margin to 14.4%.
- Drivetrain & Battery Systems sales grew 7% to $955 million, but adjusted operating income fell to $110 million and margin to 11.5%, reflecting product mix and higher electrification R&D.
- Fuel Systems sales fell 4% to $568 million; adjusted operating income declined to $48 million and margin to 8.5%, amid mix, supplier costs and R&D spending.
- ePropulsion sales increased 11% to $487 million, while its adjusted operating loss widened to $34 million; margin was negative 7.0%, primarily due to planned electrification R&D investment.
- Aftermarket sales increased 7% to $330 million; adjusted operating income rose to $45 million and margin to 13.6%.
In Q1 2023, BorgWarner began reporting Drivetrain & Battery Systems and ePropulsion as separate segments; prior-period segment information was recast. Capital expenditures were 6.7% of sales, up from 4.6%, with spending directed toward anticipated electrification growth.
Outlook, management commentary and risks
- Management expected global industry production to be flat to modestly higher in 2023 and anticipated company sales growth excluding foreign-exchange effects, supported by new business, electrification and customer recoveries of material-cost inflation. The filing does not provide a specific numerical full-year revenue or earnings forecast in this discussion.
- Management said it was on track to exceed its 2025 organic EV-related sales target and expected $4.3 billion of EV-related revenue in 2025, based on awards and acquisitions to date. Q1 EV-related revenue was approximately $270 million, or 6% of total revenue. The longer-term target is EV products exceeding 25% of total revenue in 2025 and approximately 45% in 2030.
- Electrification R&D spending was expected to rise in 2023 to support program launches. Management’s long-term R&D expectation is 5.0%–5.5% of sales; Q1 net R&D was 4.6% of sales.
- The company intended to spin off Fuel Systems and Aftermarket as a tax-free, separately traded company, targeting completion by the end of Q3 2023, subject to customary conditions. Q1 merger, acquisition and divestiture expense was $22 million, primarily associated with the proposed separation and other transactions.
- Key risks include vehicle-production cyclicality and customer concentration; semiconductor and other supply disruptions; commodity inflation and uncertain customer cost recovery; foreign-exchange movements; uncertain EV demand and technology shifts; and execution, timing and potential benefits of the planned spin-off. Legal and environmental matters remain outstanding; management did not consider adverse outcomes reasonably likely to materially affect the company, but noted an adverse outcome could still affect results or cash flows. Environmental liabilities accrued were $7 million.
Other notable items: Q1 restructuring expense was $7 million versus $15 million a year earlier. The 2020 structural-cost plan had incurred $290 million of its $300 million planned charges and was substantially complete; expected annual gross savings exceed $100 million. Q1 included a $13 million discrete tax benefit from tax-audit resolutions and a $10 million discrete tax expense from enacted tax-law changes. Non-comparable items reduced diluted EPS by $0.16, compared with a $0.21 reduction in Q1 2022.
Important facts for investors to verify
- Whether the proposed Fuel Systems and Aftermarket spin-off completed on the expected timetable and on the disclosed terms.
- Whether EV-related sales, new-business growth and program launches progress toward management’s 2025 targets, and how electrification investment affects ePropulsion profitability.
- Whether customer recoveries keep pace with supplier inflation and whether gross margin stabilizes after the Q1 decline.
- Whether working-capital investment reverses and operating cash flow improves, given the Q1 cash outflow and higher capital spending.
- Final purchase-price allocations and contingent-payment exposure for recent acquisitions, along with developments in warranty, legal and environmental matters.