BorgWarner Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. BorgWarner is a global automotive supplier focused on Engine and Drivetrain technologies for combustion, hybrid and electric vehicles. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Key financial results
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $9,799.3 million | $9,071.0 million |
| Gross profit / margin | $2,120.1 million / 21.6% | $1,933.1 million / 21.3% |
| Operating income / margin | $1,077.1 million / 10.9% | $225.9 million / 2.5% |
| Net earnings attributable to BorgWarner | $439.9 million | $118.5 million |
| Diluted earnings per share | $2.08 | $0.55 |
| Cash provided by operating activities | $1,180.3 million | $1,035.7 million |
| Capital expenditures, including tooling | $560.0 million | $500.6 million |
| Cash and total debt at year-end | $545.3 million / $2,188.3 million | $443.7 million / $2,219.5 million |
Operating cash flow less capital expenditures was approximately $620 million. Net debt to net capital improved to 30.0% from 35.0%. Gross margin rose modestly; the reported operating and net earnings comparisons were heavily affected by unusual expenses and tax items. The 2017 effective tax rate was 54.6%, including a $273.5 million charge related to the Tax Cuts and Jobs Act; the company reported a 28.2% effective rate for ongoing operations excluding specified non-comparable items.
Business performance and changes
- Sales increased 8.0% year over year; excluding currency effects and the net impact of acquisitions and divestitures, management reported growth of 10.3%.
- Engine sales were $6,061.5 million, up 8.4%; segment Adjusted EBIT was $995.7 million, up 5.1%, with margin declining to 16.4% from 16.9%, partly due to inefficiencies in non-core emissions products.
- Drivetrain sales were $3,790.3 million, up 7.6%; segment Adjusted EBIT was $449.8 million, up 23.4%, and margin improved to 11.9% from 10.3%. Management cited higher AWD and transmission sales and the prior divestiture of the Remy light-vehicle aftermarket business.
- Net R&D expenditures increased to $407.5 million, or 4.2% of sales, from $343.2 million, or 3.8%. Management’s long-term R&D spending expectation remained approximately 4% of sales.
- BorgWarner acquired electrification technology company Sevcon for $185.7 million cash in September 2017. Its post-acquisition operating results were insignificant to consolidated results for the year.
Unusual items, outlook and risks
- The company recorded a $71.0 million impairment in 2017 after classifying its non-core pipes and thermostat product lines as held for sale. It was seeking a buyer at year-end; the business was not classified as discontinued operations. The company also recorded $58.5 million of restructuring expense and $10.0 million of acquisition expense.
- Fourth-quarter 2017 included a $273.5 million tax-reform charge and the $71.0 million impairment, among other items. BorgWarner reported a quarterly net loss attributable to the company of $146.2 million, or diluted loss per share of $0.70.
- Management described its 2018 outlook as positive: net new-business growth was expected to exceed modest global vehicle-production growth. The filing provides no specific 2018 revenue or earnings guidance. Management estimated a 2018 effective tax rate of approximately 28%, subject to further analysis of the new tax law.
- Liquidity included $545.3 million in cash, of which $541.2 million was held by foreign subsidiaries, and an undrawn $1.2 billion revolving credit facility. The company reported compliance with its debt-to-EBITDA covenant and said available cash, operating cash flow and credit sources should meet foreseeable needs. A portion of foreign cash repatriation could have tax consequences.
- Asbestos-related liability was estimated at $828.2 million at year-end, with estimated insurance coverage of $386.4 million. Coverage is subject to insurer disputes; management estimated reasonably possible additional asbestos losses of up to approximately $100 million. The SEC staff had not confirmed completion of its review of the company’s 2016 asbestos charge accounting; the company stated it believed its accounting was appropriate.
- Principal risks include automotive production cycles, customer concentration and pricing pressure, competition, commodity and supplier risks, foreign exchange and international exposure, cybersecurity and IT disruption, environmental and product claims, pensions, and tax uncertainty. Ford and Volkswagen represented approximately 15% and 13% of 2017 sales, respectively.
Important facts for investors to verify
- Progress, final sale terms and any further charges for the pipes and thermostat product lines, and the expected benefits of emissions restructuring.
- Developments in asbestos claims and insurance-coverage litigation, including the SEC staff review of the 2016 accounting and the assumptions behind recorded estimates.
- Final tax-reform accounting and the resulting effective tax rate, cash-tax payments and foreign earnings treatment.
- Whether sales growth, segment margins and cash generation meet management’s outlook amid vehicle-production cycles, currency movements and customer concentration.
- Debt maturities, pension funding requirements and the availability of foreign-held cash for U.S. corporate purposes.