BorgWarner Inc. — Q3 2017 Form 10-Q
Business context and reporting period
BorgWarner supplies automotive technologies for combustion, hybrid and electric vehicles to OEMs and other customers worldwide. Its reporting segments are Engine and Drivetrain. This unaudited filing covers the three and nine months ended September 30, 2017; comparisons are with the same 2016 periods.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $2,416.2m | $2,214.2m | $7,212.9m | $6,812.0m |
| Gross profit / margin | $522.7m / 21.6% | $471.1m / 21.3% | $1,554.2m / 21.5% | $1,432.1m / 21.0% |
| Operating income | $275.9m | $150.3m | $868.1m | $683.9m |
| Net earnings attributable to BorgWarner | $184.9m | $83.3m | $586.1m | $411.8m |
| Diluted EPS | $0.88 | $0.39 | $2.77 | $1.90 |
| Adjusted EBIT | $350.0m | $310.9m | $1,055.7m | $967.3m |
Q3 sales rose 9.1% year over year; excluding currency effects and the Remy aftermarket divestiture, management reported growth of approximately 10.8%. Nine-month sales increased 5.9%, or approximately 10.4% excluding those effects. Q3 diluted EPS included an estimated $0.08 per-share net impact from non-comparable items, versus $0.39 in Q3 2016, principally reflecting the prior-year Remy business impairment.
For the first nine months, cash from operations was $623.9m versus $593.1m. Capital expenditures, including tooling, were $389.7m; investing cash use was $570.7m, including $180.6m paid for Sevcon. Financing cash use was $106.2m, and cash declined $29.4m to $414.3m. The cash-flow statement reports no asset impairment expense in 2017, compared with $106.5m in 2016.
Financial position and liquidity
At September 30, 2017, cash was $414.3m, current assets $3,401.1m and current liabilities $2,381.2m. Short-term debt and notes payable were $303.2m and long-term debt, net of current portion, was $2,091.9m. Net debt to net capital was 33.6%, compared with 35.0% at December 31, 2016. Cash included $407.6m held by non-U.S. subsidiaries; repatriation could result in additional taxes.
The amended revolving credit facility provides $1.2bn of capacity, with an option to increase to $1.5bn, through June 2022; there were no borrowings under it at quarter-end. Commercial paper borrowings were $200.0m. The company reported compliance with its debt-to-EBITDA covenant and expected to remain compliant. Management said cash, operating cash flow, available credit and shelf capacity should cover anticipated needs and the current repurchase program.
Material changes, outlook and risks
- Engine Q3 sales increased 10.8%; its adjusted EBIT margin declined to 15.8% from 16.3%, primarily due to emissions-business inefficiencies. Drivetrain Q3 sales increased 6.5%; its adjusted EBIT margin improved to 12.1% from 10.3%, reflecting the Remy aftermarket divestiture and conversion on higher sales.
- On September 27, BorgWarner acquired electrification technology company Sevcon for cash consideration of $185.7m. Sevcon’s results through quarter-end were insignificant; preliminary purchase accounting included $133.6m of goodwill and remains subject to finalization.
- Q3 restructuring expense was $13.3m, largely tied to Engine-segment emissions actions. The company plans to explore strategic options for non-core European emissions product lines; further impairment or restructuring charges could be material.
- Management described its 2017 outlook as positive, expecting new-business growth to exceed modest global vehicle production growth. Long-term growth drivers cited include turbochargers, automated transmissions, variable cam and chain timing, and hybrid and electric vehicle products. No specific full-year revenue or EPS guidance is provided in the filing text.
- Asbestos-related liabilities were $838.3m, with a separately recorded $386.4m insurance asset. The company estimated reasonably possible additional asbestos losses of up to approximately $100m through 2067; insurance recovery estimates depend on coverage and litigation outcomes. Environmental liabilities accrued were $6.9m. Management did not expect other commercial and legal claims to materially affect consolidated results, position or cash flows, though a quarter could be affected.
- Management identified vehicle production, customer demand, economic conditions, acquisition integration and other previously disclosed risk factors as uncertainties. Foreign exchange is also relevant: currency movements affected reported sales and translation results.
Important facts for investors to verify
- Whether reported sales growth and segment margins persist after separating currency movements, divestiture effects and operational factors.
- Final Sevcon purchase accounting, integration progress and the acquisition’s contribution to growth and cash generation.
- The scope and cost of emissions restructuring or strategic actions, including any additional impairment charges.
- Asbestos liability assumptions, insurance recoverability and developments in related coverage litigation.
- Working-capital requirements, capital spending, short-term borrowing levels, and cash availability given the concentration of cash outside the U.S.
- The eventual revenue-recognition impact of adopting ASC 606 in 2018; the company was still assessing effects on certain customized products and contract pricing provisions.