BorgWarner Inc. — Q2 2020 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020. BorgWarner supplies automotive technologies to OEMs and other vehicle customers through its Engine and Drivetrain segments. Results were heavily affected by COVID-19-related vehicle production shutdowns and slowdowns.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1.426 billion | $2.551 billion | $3.705 billion | $5.117 billion |
| Gross profit / margin | $174 million / 12.2% | $513 million / 20.1% | $621 million / 16.8% | $1.032 billion / 20.2% |
| Operating income (loss) | $(78) million | $285 million | $111 million | $549 million |
| Net income (loss) attributable to BorgWarner | $(98) million | $172 million | $31 million | $332 million |
| Diluted EPS | $(0.47) | $0.83 | $0.15 | $1.60 |
Q2 sales fell 44.1% year over year (42.7% excluding currency effects); first-half sales fell 27.6% (25.4% excluding currency and net acquisition/divestiture effects). Lower volumes reduced margins, while certain fixed costs could not be adjusted quickly enough. Q2 SG&A declined to $184 million from $212 million, but rose as a share of sales to 12.9% from 8.3%.
- Segments: Q2 Engine sales declined 47.4% and Drivetrain sales 39.2%. Segment adjusted EBIT margins were 3.4% and 0.2%, respectively, versus 15.9% and 10.2% a year earlier. For the first half, segment adjusted EBIT was $300 million versus $697 million.
- Cash flow: First-half operating cash flow was $327 million, down from $467 million. Investing cash outflow was $147 million, including $171 million of capital expenditures. Financing provided $999 million, primarily reflecting the new notes issuance. Cash increased by $1.171 billion to $2.003 billion.
- Liquidity and debt: Management reported $3.503 billion of liquidity at June 30: $2.003 billion cash plus an undrawn $1.5 billion revolver. Balance-sheet debt was approximately $3.059 billion, compared with $1.960 billion at year-end 2019; net debt was approximately $1.056 billion. The company remained covenant-compliant. It issued $1.1 billion of 2.650% notes due 2027, partly to refinance 2020 maturities and in anticipation of the Delphi acquisition.
Material changes, outlook and notable items
- COVID-19 caused material sales and profitability declines as OEMs temporarily suspended production, particularly in North America and Europe. Facilities had resumed operations partially or fully, but management said the pandemic’s future financial impact could not be reasonably estimated.
- Management expected 2020 industry production to decline significantly in Europe, North America and China, with net new business only partly offsetting lower production. It expected revenue to decline, excluding currency and net acquisition/divestiture effects. No specific full-year revenue or earnings guidance was provided.
- The company planned additional restructuring, estimating $275–$300 million of primarily cash costs through 2023 and annual savings of approximately $90–$100 million by 2023. Two European facility closures were expected to affect about 550 employees; related costs could rise following labor negotiations.
- The proposed all-stock Delphi Technologies acquisition remained subject to approvals and closing conditions. The agreement was amended to impose limits on Delphi’s revolver borrowings and a net-debt-to-adjusted-EBITDA condition; the exchange ratio was reduced. If the deal does not close by April 28, 2021, or the agreement is cancelled, BorgWarner must redeem the new 2027 notes at 101% of principal plus accrued interest.
- Q2 other expense included $37 million restructuring, $21 million acquisition-related expense and $17 million impairment costs, partly offset by a $6 million insurance gain. The Romeo investment was written down by $9 million in Q1. Seneca tornado repairs and cleanup through June were recovered by insurance; the plant had resumed operations, but the full financial impact was not yet determined.
- Standard & Poor’s lowered BorgWarner’s rating to BBB with a negative outlook; Moody’s and Fitch maintained their ratings but moved their outlooks to negative. Management said no debt agreement required accelerated repayment because of a ratings downgrade.
- Contingencies include environmental matters at 14 sites, with a $3 million accrual, and an SEC investigation into historical accounting for unasserted asbestos claims. The company reported an understanding in principle on a proposed approximately $1 million civil penalty, subject to SEC approval.
Investor verification priorities
- Track vehicle production recovery, customer demand and the resulting sales, margins and operating cash flow.
- Confirm Delphi closing progress, satisfaction of amended conditions, expected ownership dilution and the potential 2027-note redemption obligation.
- Monitor restructuring cash costs, facility closure negotiations and delivery of projected annual savings.
- Review debt levels, refinancing needs, covenant headroom, credit-rating outlooks and available liquidity.
- Confirm insurance recoveries and remaining Seneca disruption impacts, and follow the SEC investigation and other legal or environmental contingencies.