BorgWarner Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. BorgWarner supplies automotive components and systems through its Engine and Drivetrain segments, serving vehicle manufacturers and other customers globally.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $2,551 million | $2,694 million | $5,117 million | $5,478 million |
| Gross profit / margin | $513 million / 20.1% | $580 million / 21.5% | $1,032 million / 20.2% | $1,171 million / 21.4% |
| Operating income | $285 million | $313 million | $549 million | $646 million |
| Net earnings attributable to BorgWarner | $172 million | $272 million | $332 million | $497 million |
| Diluted EPS | $0.83 | $1.30 | $1.60 | $2.36 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $467 million | $305 million |
- Q2 sales declined 5.3%; excluding foreign-currency effects and the net impact of acquisitions and divestitures, sales declined approximately 0.3%. First-half sales fell 6.6%, or approximately 1.8% on that adjusted basis.
- Gross margin contracted as lower revenue, tariffs, and supplier cost reductions that lagged customer price deflation pressured results. SG&A fell, primarily from lower compensation costs.
- First-half operating cash flow increased $162 million year over year, mainly from favorable working-capital changes despite lower earnings. Capital expenditures, including tooling, were $244 million; operating cash flow less these expenditures was $223 million.
Financial position and liquidity
- At June 30, 2019, cash was $710 million, total debt was approximately $2.1 billion, and net debt was approximately $1.4 billion. Current assets were $3.85 billion and current liabilities were $2.31 billion.
- The company had no borrowings under its $1.2 billion revolving credit facility or commercial paper program; their combined borrowing capacity was capped at $1.2 billion. It was in compliance with its debt-to-EBITDA covenant and expected to remain compliant.
- $599 million of cash was held by non-U.S. subsidiaries and was primarily intended for foreign operations and investment. The company said most overseas cash was available for repatriation.
- First-half investing cash outflow was $277 million, including investment in Romeo Power and an acquisition; financing cash outflow was $218 million, including $100 million of share repurchases and $70 million of dividends paid to BorgWarner stockholders.
Material changes and notable items
- Both segments reported lower first-half sales and Adjusted EBIT: Engine sales were $3.17 billion and Adjusted EBIT $490 million; Drivetrain sales were $1.98 billion and Adjusted EBIT $207 million. Segment margins declined, reflecting industry-volume weakness and, for Drivetrain, higher R&D and launch costs.
- The first-half effective tax rate was 31.7%, versus 19.4% in 2018; 2019 included a $22 million tax expense from final U.S. transition-tax regulations. Management estimated an approximately 27% full-year effective tax rate for ongoing operations excluding specified non-comparable items.
- A pension de-risking transaction and lump-sum payments settled $63 million of projected benefit obligations and generated a $26 million non-cash settlement loss.
- BorgWarner invested $50 million for a 20% equity interest in Romeo Power Technology and planned a battery-module-and-pack joint venture in which BorgWarner would hold 60%. It also acquired two specialty electric/hybrid propulsion businesses for approximately $15 million.
- The thermostat product-line sale closed in April 2019 for approximately $27 million in cash proceeds; the pipe product lines were transitioned to buyers. These businesses were not classified as discontinued operations.
Outlook, risks and contingencies
- Management expected a modest year-over-year revenue decline, excluding foreign-currency effects and the net impact of acquisitions and divestitures. New-business growth was expected to partly offset lower forecast global vehicle production. No specific revenue or EPS guidance figure is provided in the filing text.
- Management cited long-term opportunities from turbocharger adoption, automated transmissions, variable-cam timing, and hybrid and electric vehicle products, while continuing product development and strategic investment.
- Risks include cyclical vehicle and truck production, reliance on major OEMs, tariffs and supplier disruptions, currency and interest-rate movements, global economic conditions, and legal proceedings. Management said restructuring actions may generate additional charges that could be material.
- Asbestos liabilities were $783 million, with estimated available insurance coverage of $386 million; coverage is disputed in ongoing insurer litigation. The company estimated reasonably possible additional asbestos losses of up to approximately $100 million. An SEC investigation into accounting for asbestos claims not yet asserted was ongoing, and the company said it was cooperating.
- Environmental liabilities were accrued at $8 million for 27 identified hazardous-waste sites. Management did not expect environmental matters or other commercial and legal claims to materially affect overall results, financial position, or cash flows, while noting individual-quarter effects could be material.
Important facts for investors to verify
- Whether sales and segment margins stabilize as global vehicle production weakens, and whether tariffs and customer price deflation continue to pressure gross margin.
- How operating cash flow and working capital perform in subsequent periods relative to capital spending, dividends, and share repurchases.
- Whether the estimated 27% ongoing full-year tax rate and the stated modest revenue decline remain consistent with later company guidance.
- Developments in asbestos insurance recoveries, the SEC investigation, and the potential additional asbestos losses disclosed in the filing.
- Execution, funding, and returns from the Romeo Power joint venture and other electrification investments.