BorgWarner Inc. — 2021 Form 10-K Summary
Business context and reporting period
This is BorgWarner’s annual report for the fiscal year ended December 31, 2021, not a standalone fourth-quarter report. BorgWarner supplies combustion, hybrid and electric-vehicle technologies to vehicle manufacturers and aftermarket customers worldwide. Results include Delphi Technologies from its October 2020 acquisition date and AKASOL from June 2021, affecting year-over-year comparability.
The company’s four reporting segments are Air Management, e-Propulsion & Drivetrain, Fuel Injection and Aftermarket. It announced its “Charging Forward” strategy to expand electrification through investment and acquisitions while divesting selected combustion assets.
Key financial metrics
| Metric (USD millions, except per-share data and percentages) | 2021 | 2020 |
|---|---|---|
| Net sales | $14,838 | $10,165 |
| Gross profit / gross margin | $2,855 / 19.2% | $1,910 / 18.8% |
| Operating income / operating margin | $1,151 / 7.8% | $618 / 6.1% |
| Net earnings attributable to BorgWarner | $537 | $500 |
| Diluted earnings per share | $2.24 | $2.34 |
| Cash provided by operating activities | $1,306 | $1,184 |
| Capital expenditures, including tooling | $666 | $441 |
- Sales increased 46%. Management attributed the increase to acquisitions, stronger currencies and higher demand amid a recovery from 2020’s COVID-related production declines. Semiconductor-related supply constraints partly offset the recovery.
- Gross margin rose 0.4 percentage points. Management cited higher sales and a lower material-cost mix, partly offset by commodity inflation and an unfavorable customer warranty settlement.
- Net earnings rose, but diluted EPS declined, reflecting the larger diluted share count following the Delphi acquisition and a $362 million unrealized loss on equity securities, primarily Romeo Power. The 2020 comparison included a $382 million unrealized gain on those securities.
- Net R&D spending was $707 million, or 4.8% of sales, versus $476 million, or 4.7%, in 2020. The company’s long-term R&D spending expectation is 5.0%–5.5% of sales.
- Segment Adjusted EBIT, a company-defined non-GAAP measure, was $1,833 million versus $1,182 million. Segment margins were 14.7% for Air Management, 9.0% for e-Propulsion & Drivetrain, 9.3% for Fuel Injection and 12.5% for Aftermarket. Fuel Injection and Aftermarket were reported as new segments following the Delphi acquisition.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $1,841 million. The company reported total liquidity of $3,841 million, including its undrawn $2.0 billion revolving credit facility.
- Year-end notes payable and debt totaled approximately $4,327 million, including $66 million classified as short-term. Debt maturities through the end of 2022 were $66 million. The company had no borrowings under its revolving facility or commercial paper program and was in compliance with its credit covenant.
- Operating cash flow was $1,306 million. Higher working-capital needs, particularly inventory, partly offset improved cash generation. Investing cash outflow was $1,395 million, including $759 million for business acquisitions; financing cash inflow was $286 million.
- The company issued €1.0 billion of 1.0% notes due 2031, repaid €500 million of 1.8% notes due 2022 and recorded a $20 million debt-extinguishment loss. It paid $0.68 per share in 2021 dividends and made no share repurchases during the year.
Strategy, outlook, risks and unusual items
- AKASOL, acquired for approximately $788 million, added battery-module and pack capabilities; BorgWarner held 93% at year-end and completed the squeeze-out to 100% ownership in February 2022. The company also completed the sale of its Water Valley business at year-end, recording a $22 million loss.
- Management targets pure-EV product revenue above 25% of total revenue by 2025 and approximately 45% by 2030. It aims to dispose of combustion assets generating about $1 billion in annual revenue over the following 12–18 months and $3–$4 billion by 2025. These are targets, not guarantees.
- For 2022, management expected global industry production to increase as semiconductor availability improved modestly, and expected revenue growth excluding foreign-currency effects. It anticipated higher R&D, commodity and supplier costs, partly offset by restructuring savings and Delphi synergies. The filing does not provide specific 2022 revenue, earnings or EPS guidance.
- A customer warranty claim was settled and paid for $130 million in December 2021; the company recorded $124 million of related charges and is seeking partial insurance recovery, with no assurance of recovery.
- Principal risks include semiconductor and other supply disruptions, commodity and supplier-cost inflation, COVID-19 effects, cyclical vehicle production, customer concentration, rapid automotive electrification and execution of acquisitions and planned divestitures. The company reported $7 million of environmental accruals across 26 potentially responsible-party sites. It stated that pending claims are not expected to have a material adverse effect, while noting an adverse outcome could still materially affect results or cash flows.
- Standard & Poor’s reaffirmed the company’s BBB rating with a negative outlook; Moody’s and Fitch had stable outlooks. A stockholder litigation demand concerning prior asbestos accounting and disclosures led to agreed governance reforms awaiting court approval.
Important facts for investors to verify
- Whether semiconductor availability, vehicle production and customer demand support management’s 2022 outlook.
- Progress, pricing and timing of planned combustion-asset divestitures and electrification revenue targets.
- Underlying earnings trends after adjusting for the Romeo Power valuation loss, tax benefits, warranty settlement and other non-comparable items.
- Whether warranty and other contingent liabilities, including potential insurance recovery, require additional charges or cash outlays.
- Post-acquisition cash generation, debt levels, integration synergies and the effect of increased R&D and capital spending.
- Whether the reported $3.841 billion of liquidity remains available as planned and whether credit ratings or covenant compliance change.