BorgWarner Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; filed February 14, 2013. Although the request refers to 2012 Q4, this is an annual filing. Fourth-quarter figures are identified separately below. BorgWarner supplies engineered powertrain systems and components to vehicle OEMs worldwide through its Engine and Drivetrain segments. Approximately 74% of 2012 consolidated sales were generated outside the United States.
Key financial metrics
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | FY 2012 | FY 2011 | Change / context |
|---|---|---|---|
| Net sales | $7,183.2 | $7,114.7 | Up 1.0%; up approximately 6% excluding acquisitions, divestitures and currency effects |
| Gross profit / margin | $1,466.9 / 20.4% | $1,410.4 / 19.8% | Margin improved |
| Operating income / margin | $752.9 / 10.4% | $797.5 / 11.2% | Income and margin declined, including 2012 unusual charges |
| Net earnings attributable to BorgWarner | $500.9 | $550.1 | Down 8.9% |
| Diluted EPS | $4.17 | $4.45 | Down 6.3% |
| Cash from operations | $878.7 | $708.2 | Increase attributed primarily to improved working-capital management |
| Capital expenditures, including tooling | $407.4 | $393.7 | Higher spending to support program launches |
| Cash / total debt at year end | $715.7 / $1,067.2 | $359.6 / $1,329.1 | Net debt declined to $351.5 from $969.5 |
Fourth-quarter 2012 sales were $1,719.1, operating income was $170.7, net earnings attributable to BorgWarner were $121.2, and diluted EPS was $1.03. In Q4 2011, the corresponding figures were $1,773.7, $191.1, $122.0 and $1.00.
- Segments: Engine sales were $4,913.0, down 2.7%; adjusted EBIT was $786.4, up 1.6%, with a 16.0% margin versus 15.3%. Drivetrain sales were $2,298.7, up 10.3%; adjusted EBIT was $209.1, up 29.7%, with a 9.1% margin versus 7.7%.
- Liquidity and debt: Current assets were $2,472.8 and current liabilities were $1,603.1. The $650 million multi-currency revolver (with an expansion feature to $1 billion) matures in 2016; borrowings were $140 million at year end. The company reported compliance with its financial covenants.
- Funding and returns: The $373.8 million convertible notes were settled in April 2012 with treasury shares. The company repurchased $295.9 million of stock during the year. The quarterly common dividend remained suspended.
Material changes and unusual items
- Reported sales growth was modest; the company attributed stronger underlying growth to product demand, partly offset by divestitures and weaker foreign currencies, particularly the euro. Estimated worldwide light-vehicle production rose 6% in 2012, while Europe fell 6%.
- Gross margin improved, but operating income declined. 2012 included a $39.7 million loss on the spark-plug business sale, $27.4 million of restructuring expense and $17.3 million of retirement-related obligations. Management estimated these and other non-comparable items reduced diluted EPS by $0.80 in total.
- The effective tax rate rose to 31.4% from 25.5%; management cited tax audit settlements, a change in the repatriation assertion for certain foreign subsidiaries and a correction to income taxes payable, among other items. The ongoing-operations tax rate, excluding specified items, was 26.8%.
- Cash increased and total debt fell, principally reflecting operating cash generation and settlement of the convertible notes, partly offset by share repurchases. Pension plans remained underfunded: the reported net unfunded pension position was $317.1 million, and other postretirement benefits were unfunded by $220.5 million.
Outlook, risks and contingencies
- Management characterized its 2013 outlook as cautious amid weakening global economic conditions, especially in Europe. It expected global vehicle production to be slightly higher than in 2012, but European production to decline; higher adoption of BorgWarner products was expected to support company sales growth. No numerical sales or earnings guidance was provided in the filing text.
- Management expects long-term demand to benefit from fuel-efficiency and emissions trends, including turbocharging, direct-injection engines, automated transmissions and variable cam/chain timing. It expects long-term R&D spending of approximately 4% of sales; 2012 net R&D was $265.9 million, or 3.7% of sales.
- Principal business risks include automotive production cyclicality, pressure from OEM annual price reductions, volatile material costs and limited cost pass-through, competition, supplier disruption, foreign-exchange and international-market exposure, and dependence on major customers. Volkswagen represented 17% and Ford 13% of 2012 sales; together they accounted for about 18% of year-end receivables.
- The company reported approximately 16,000 pending asbestos-related claims. It recorded $85.6 million of liabilities for asserted but unresolved claims and an equal insurance asset, while $111.0 million of past defense and settlement costs remained expected to be recovered from insurers. Recovery timing depends on ongoing insurance litigation and settlements. Environmental liabilities accrued were $3.9 million. A retiree medical-benefit class action remained pending; the company said it could not reasonably estimate any potential loss.
- Management and the auditor reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether underlying sales growth and Drivetrain profitability persist after considering currency, divestitures, acquisition effects and vehicle-production trends, especially in Europe.
- The composition and recurrence of unusual operating charges, and the effect of tax adjustments on reported versus ongoing earnings.
- Cash accessibility and potential tax costs: $712.1 million of year-end cash was held by subsidiaries outside the United States.
- Actual pension contributions and the sensitivity of retirement obligations to discount rates, asset returns and healthcare costs.
- Timing and collectability of asbestos insurance recoveries, as well as outcomes of material litigation and environmental matters.
- Customer concentration, OEM pricing pressure, and the company’s ability to fund investment and debt obligations while continuing share repurchases.