BorgWarner Inc. 2010 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Amounts are in millions of dollars except per-share data. BorgWarner supplies engineered powertrain systems and components through its Engine and Drivetrain segments.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,410.9 | $1,027.8 | $4,119.4 | $2,763.5 |
| Gross profit / margin | $273.3 / 19.4% | $151.8 / 14.8% | $787.2 / 19.1% | $347.6 / 12.6% |
| Operating income (loss) | $123.0 | $27.5 | $346.9 | $(16.5) |
| Net earnings (loss) attributable to BorgWarner | $106.7 | $17.2 | $265.7 | $(25.7) |
| Diluted EPS | $0.87 | $0.15 | $2.18 | $(0.22) |
| Operating cash flow | Not separately reported for the quarter | $312.7 | $226.3 |
Sales rose 37.3% in Q3 and 49.1% for the first nine months. Higher vehicle production and the Dytech acquisition drove growth; weaker currencies, primarily the euro, reduced Q3 sales by about $64 million and nine-month sales by about $29 million. Excluding currency effects, reported sales growth was approximately 44% and 50%, respectively. Gross-margin improvement reflected higher sales and prior cost-reduction actions, partly offset by higher raw-material costs. Segment Adjusted EBIT for Q3 was $136.4 million in Engine and $31.1 million in Drivetrain; nine-month results were $375.9 million and $105.1 million, respectively.
Cash flow, balance sheet and capital
- Cash was $432.2 million at September 30, 2010, up from $357.4 million at year-end 2009. Nine-month investing cash outflow was $342.1 million, including $187.8 million of capital expenditures and tooling outlays and acquisition payments. Financing cash inflow was $106.5 million; cash increased $74.8 million over the period.
- Total debt, including short-term debt, was $1,191.3 million, versus $842.3 million at year-end 2009. The debt-to-capital ratio increased to 34.1% from 27.5%. The increase reflects the $250 million senior-note issuance, the $80 million receivables-securitization balance recognized under new accounting rules, the Dytech acquisition and share repurchases. The $80 million accounting change increased both receivables and short-term debt.
- On September 16, BorgWarner issued $250 million of 4.625% senior notes due 2020. It also had $343.7 million of 3.50% convertible notes due 2012. The weighted-average interest rate on borrowings was 6.4% at quarter-end.
- Cash and current assets were $432.2 million and $2,103.7 million; current liabilities were $1,421.6 million. The company had a $550 million revolving credit facility, expandable to $600 million, with no borrowings outstanding. It reported compliance with financial covenants and expected continued compliance. Approximately $126 million remained under its shelf registration.
- The company repurchased 5,019,400 shares during the first nine months for $198.9 million; $197.3 million was paid during the period. No dividends were declared in 2010; the quarterly dividend had been suspended in 2009.
Changes, outlook and notable items
- Growth was broad-based: Q3 worldwide light-vehicle production was up 10% year over year; nine-month production was up 29%. Both reporting segments increased sales and Adjusted EBIT, with management attributing stronger segment margins to growth and cost management.
- Management described the 2010 outlook as positive, citing stronger-than-expected North American and European production, increased confidence in European demand after incentive programs ended, and a favorable mix shift toward vehicles with greater BorgWarner content. It expects long-term growth from direct-injection engines, automated transmissions and variable cam/chain timing systems. No specific full-year sales or EPS forecast is provided in the supplied filing text.
- Q3’s 3.6% effective tax rate included a $21.2 million benefit from reversing a U.S. foreign-tax-credit valuation allowance, adding $0.17 to diluted EPS. Excluding the reversal, Q3’s rate was 22%. The projected 2010 annual tax rate was 17.3%, versus 22% for ongoing business absent specified tax and unusual items.
- Nine-month results included a $28.0 million environmental-litigation charge and an $8.0 million gain related to the BERU-Eichenauer acquisition. The Dytech acquisition cost $147.6 million net of cash acquired; the company also acquired the remaining interest in BERU-Eichenauer. Nine-month diluted EPS adjustments for identified non-recurring or non-comparable items netted to a positive $0.05 per share.
- Environmental liabilities accrued were $45.0 million, including a $28 million settlement expected to be paid in November 2010 and February 2011. The company also reported approximately 17,000 pending asbestos claims. It expects insurance recovery for recorded asbestos-related amounts, but recovery timing depends on ongoing insurance-coverage litigation; possible losses beyond recorded amounts could not be reasonably estimated.
- Other risks include vehicle-production and demand changes, general economic conditions, warranty claims, environmental matters and ongoing retiree-benefit litigation. Management stated that it did not expect the disclosed claims to materially adversely affect results, financial position or cash flows. Disclosure controls were reported effective, with no material change to internal control over financial reporting during the period.
Most important facts for investors to verify
- How much of sales and earnings growth reflects underlying volume, acquisition contributions, currency and any non-recurring items.
- Whether working-capital needs, especially receivables and inventory, affect cash conversion as production grows.
- Debt levels, interest costs, convertible-note dilution and compliance with revolving-credit covenants.
- Whether the positive production and product-mix outlook holds, particularly in Europe after incentive programs ended.
- Environmental settlement payments and the timing and collectability of asbestos-related insurance recoveries.
- The sustainability of the reported tax rate, given the valuation-allowance reversal and other tax adjustments.