BorgWarner Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter filing; selected Q4 figures are included below. BorgWarner supplies automotive technologies for combustion, hybrid and electric vehicles through its Engine and Drivetrain segments.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $10.530 billion | $9.799 billion |
| Gross profit / margin | $2.229 billion / 21.2% | $2.116 billion / 21.6% |
| Operating income / margin | $1.190 billion / 11.3% | $1.072 billion / 10.9% |
| Net earnings attributable to BorgWarner | $930.7 million | $439.9 million |
| Diluted earnings per share | $4.44 | $2.08 |
| Cash from operating activities | $1.127 billion | $1.180 billion |
| Capital expenditures, including tooling | $546.6 million | $560.0 million |
| Cash / total debt at year-end | $739.4 million / $2.113 billion | $545.3 million / $2.188 billion |
| Net debt to net capital | 24.0% | 30.0% |
Current assets were $3.805 billion and current liabilities were $2.399 billion at year-end. The company reported $1.2 billion of combined current borrowing capacity under its revolving credit facility and commercial paper program, with no borrowings under either at year-end. Operating cash flow less reported capital expenditures was approximately $580 million in 2018, calculated from the amounts above.
Performance and changes versus prior year
- Sales rose 7.5%; excluding foreign currency effects and the net impact of acquisitions and divestitures, sales increased 4.8%.
- Engine segment sales increased 6.4% and adjusted EBIT rose 4.8%; its adjusted EBIT margin fell to 16.1% from 16.4%, primarily amid sharp European and Chinese industry-volume declines in the second half.
- Drivetrain segment sales increased 9.2% and adjusted EBIT rose 6.0%; its adjusted EBIT margin declined to 11.5% from 11.8%, primarily reflecting the Sevcon acquisition.
- Gross margin declined 0.4 percentage points, with management citing newly enacted tariffs and limited ability to adjust costs quickly as industry volumes fell in the second half. Operating margin nevertheless increased 0.4 percentage points.
- Operating cash flow decreased $53.8 million, principally due to working-capital changes, partly offset by higher earnings adjusted for noncash items. Cash increased $194.1 million and debt fell $75.0 million.
- Reported net earnings and EPS increased substantially, but comparisons are distorted by taxes: 2017 included a $273.5 million Tax Act charge; 2018’s 17.7% effective tax rate included tax-related and other discrete benefits. The company stated its 2018 ongoing-operations effective tax rate, excluding non-comparable items, was 23.8%.
Fourth-quarter detail
Q4 2018 sales were $2.573 billion versus $2.586 billion in Q4 2017. Operating income was $265.6 million versus $207.8 million. Net earnings attributable to BorgWarner were $230.0 million, compared with a $146.2 million loss in Q4 2017; the prior-year quarter included the $273.5 million Tax Act charge. Q4 2018 also included restructuring expense, impairment and asbestos-related adjustments, partly offset by a building-sale gain and tax benefits.
Outlook, risks and unusual items
- Management described its 2019 overall outlook as neutral. It expected net new business-related sales growth to support flat-to-increasing growth excluding foreign currency and acquisition/divestiture effects, despite expected declining global vehicle production. No specific full-year revenue, earnings or cash-flow guidance was provided in the supplied filing text.
- Management cited long-term opportunities in turbochargers, automated transmissions, variable cam timing, and hybrid and electric vehicle products; it expects long-term R&D spending of about 4% of sales. Net R&D spending was $440.1 million, or 4.2% of sales, in 2018.
- Unusual 2018 items included $67.1 million of restructuring expense, $25.6 million of impairment expense for non-core pipe and thermostat product lines, $22.8 million of asbestos-related expense, a $19.4 million building-sale gain, and $8.3 million of modified executive stock-award expense. The thermostat product lines were under an agreement to sell for approximately $28 million, with closing expected in Q1 2019 subject to customary conditions.
- Asbestos exposure is a significant uncertainty: the recorded liability was $805.3 million, against estimated insurance coverage of $386.4 million. The company reported that substantially all remaining coverage was disputed in litigation and that additional losses of up to approximately $100 million were reasonably possible. The SEC informed the company in July 2018 of an investigation into its accounting for asbestos claims not yet asserted; BorgWarner said it was cooperating.
- Principal risks include cyclical vehicle production, customer concentration (Ford 14% and Volkswagen 12% of 2018 sales), pricing and commodity pressures, tariffs and trade-policy changes, foreign exchange, supplier interruptions, technological shifts, China market conditions, product warranty and environmental claims, and pension funding exposure. Management reported a modestly negative 2018 impact from new tariffs.
- Other financial considerations include $103.2 million of accrued product warranties, a $210.9 million net unfunded pension position, and $121.3 million of future non-cancelable operating lease payments. The company expected $15–$25 million of pension contributions in 2019.
Most important facts for investors to verify
- How much of the earnings increase reflects recurring operating performance versus the 2017 Tax Act charge and 2018 discrete tax benefits.
- Whether the anticipated thermostat-product sale closed on expected terms, and the status of the remaining pipe-product divestiture.
- Developments in the SEC asbestos-accounting investigation, insurance-coverage litigation, and the assumptions behind asbestos liability and recoveries.
- Whether margins and cash generation withstand further vehicle-production weakness, tariffs, and customer pricing pressure.
- Debt maturities, covenant compliance, and liquidity capacity; the filing identifies $172.6 million of 2019 scheduled principal payments and reports year-end compliance with the revolving-credit covenant.