BorgWarner Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. BorgWarner supplies engineered automotive systems and components, principally through its Engine and Drivetrain segments. Financial statements are unaudited.
Financial performance and liquidity
- Sales: $1.984 billion, down 4.8% year over year. Excluding currency effects and the Wahler and BERU Diesel acquisitions, sales increased approximately 3%.
- Profitability: Gross profit was $429.0 million versus $445.8 million; gross margin improved to 21.6% from 21.4%. Operating income rose to $259.6 million from $233.2 million. Net earnings attributable to BorgWarner were $178.9 million, up from $159.1 million; diluted EPS was $0.79 versus $0.69.
- Cash flow: Operating cash flow was $32.7 million, down from $46.4 million. Capital expenditures, including tooling, were $140.0 million; operating cash flow less capital expenditures was negative $107.3 million. Investing used $151.8 million; financing provided $416.8 million. Cash increased to $1.036 billion from $797.8 million at year-end.
- Debt and liquidity: Balance-sheet current and long-term debt totaled $1.838 billion at quarter-end, compared with $1.340 billion at December 31, 2014. The company issued $1 billion of senior notes: $500 million at 3.375% due 2025 and $500 million at 4.375% due 2045. Net debt to net capital increased to 18.4% from 12.8%. The company had no borrowings under its revolving credit facility or commercial paper program at March 31; it reported compliance with its debt-to-EBITDA covenant.
- Other metrics: The effective tax rate was 27.8%; management estimated an approximately 29% full-year rate for ongoing operations, excluding specified non-comparable items. Quarterly dividends declared were $0.13 per share.
Changes versus the prior-year quarter
- Reported sales fell, primarily reflecting a stronger U.S. dollar; management reported approximately 3% growth excluding currency and acquisition effects.
- Engine sales decreased 2.2% reported but rose approximately 6% excluding currency and acquisitions; Engine Adjusted EBIT margin improved to 16.7% from 16.4%.
- Drivetrain sales declined 10.2% reported and approximately 2% excluding currency, primarily due to lower all-wheel-drive system sales. Its Adjusted EBIT margin eased to 11.6% from 11.8%.
- Net earnings increased despite lower sales, alongside substantially lower restructuring expense ($12.1 million versus $39.5 million) and a $10.8 million gain on the previously held BERU Diesel interest. Management’s reconciliation said non-comparable items added $0.01 to diluted EPS in 2015, versus reducing it by $0.13 in 2014.
- Foreign currency translation loss was $249.8 million, versus $2.7 million a year earlier, largely due to the U.S. dollar strengthening against the euro. Comprehensive loss was $54.3 million despite higher net earnings.
Outlook, risks, and unusual items
- Management described its 2015 outlook as positive and expected strong net-new-business sales growth, partly offset by the stronger U.S. dollar. Long-term growth drivers cited include gasoline direct injection, automated transmissions, and variable cam and chain timing systems. No specific full-year sales or EPS guidance was provided in the supplied filing text.
- Management said available cash, operating cash flow, credit facilities, and shelf-registration capacity should support operations and the planned $1 billion share-repurchase program. The March note proceeds were intended for general corporate purposes, including repurchases and repayment of U.S. short-term debt.
- Further restructuring costs were expected: approximately $21 million over the next year for Drivetrain and approximately $16 million over the next two years for Engine. Separately, a restructuring note anticipates about $6 million of additional employee termination benefits, with related cash payments expected to finish by year-end 2015.
- Contingencies include asbestos-related claims, environmental matters, and retiree-benefit litigation. The company reported approximately 12,500 pending asbestos claims and a $35 million adverse jury verdict under appeal, supported by a $55 million surety bond. It recorded $113.2 million of asbestos-related liabilities and an equal insurance-recovery asset for unresolved claims; recovery timing depends on insurance litigation, which was not expected to resolve before after March 31, 2016. Management said it could not reasonably estimate potential losses beyond accrued amounts.
- Foreign exchange is a significant exposure. Cash held outside the U.S. was $612.3 million; repatriation could generate additional taxes. Management also cautioned that vehicle production, customer demand, economic conditions, and other risks could affect results.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether underlying sales growth offsets currency translation and the reported weakness in Drivetrain.
- Cash generation and capital-spending needs, given low quarterly operating cash flow and negative operating cash flow less capital expenditures.
- Use of the $1 billion note proceeds, share-repurchase pace, and the effect of higher debt and interest expense.
- Actual restructuring costs and savings compared with the remaining expected charges.
- Developments in asbestos insurance recoveries, the appealed verdict, and other litigation or environmental exposures.
- Whether the positive 2015 outlook is maintained as foreign exchange and vehicle-production conditions evolve.