BorgWarner Inc. — Q3 2009 Form 10-Q
Reporting period: Three and nine months ended September 30, 2009. Unaudited consolidated results; amounts are in millions of dollars except per-share data. BorgWarner supplies engineered powertrain systems and components to global vehicle manufacturers and aftermarket customers through its Engine and Drivetrain segments.
Financial results and liquidity
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $1,027.8 | $1,316.9 | $2,763.5 | $4,332.4 |
| Gross profit / margin | $151.8 / 14.8% | $202.3 / 15.4% | $347.6 / 12.6% | $764.6 / 17.6% |
| Operating income (loss) | $27.5 | $(103.9) | $(16.5) | $139.6 |
| Net earnings (loss) attributable to BorgWarner | $17.2 | $(130.4) | $(25.7) | $45.8 |
| Diluted EPS | $0.15 | $(1.12) | $(0.22) | $0.39 |
- Q3 sales fell 22.0% year over year; the company attributed approximately $50 million of the decrease to weaker currencies. Excluding currency effects, sales declined about 18%.
- Nine-month sales declined 36.2%; weaker currencies accounted for approximately $232 million, and sales were down about 31% excluding currency effects.
- Q3 gross margin fell 0.6 percentage points; the nine-month margin fell 5.0 points. Management said volume declined faster than costs could be reduced.
- Nine-month cash provided by operating activities was $226.3, versus $265.1 in 2008. Capital expenditures, including tooling, were $127.2, versus $265.6. Operating cash flow less capital expenditures was $99.1, compared with approximately $(0.5) in 2008.
- Cash was $258.8 at September 30, up from $103.4 at year-end 2008. Total notes payable and long-term debt were $847.7, versus $780.3 at year-end; debt-to-capital was 28.1%, compared with 27.7%.
- Current assets were $1,504.9 and current liabilities $1,054.6. The $250 revolving facility, extended to January 22, 2011, had no borrowings outstanding; the company reported compliance with its covenants. Approximately $376 remained available under its universal shelf registration.
Material changes and unusual items
- Segment sales were lower year over year. Q3 Engine sales fell 24.5% and segment EBIT fell 39.9%; Drivetrain sales fell 14.5%, while segment EBIT improved to $7.5 from a loss of $2.9, which management attributed to cost reductions. For the first nine months, Engine EBIT was $136.5 versus $358.4, and Drivetrain EBIT was $(34.0) versus $37.2.
- In Q2, restructuring charges totaled $50.3, including $36.3 of asset impairment. The company reduced its workforce by about 760 across North America, Europe, and Asia. Cash payments for restructuring actions in 2009 were $44.6; remaining payments were expected to be completed by mid-2010.
- The Muncie plant ceased operations on March 31. A $41.9 curtailment gain and $14.0 retiree-health settlement expense produced a $27.9 net pretax gain in Q1. The company was discussing potential pension funding with the PBGC.
- The company issued $373.8 of 3.50% convertible senior notes due 2012. Their balance-sheet liability component was $325.9; the notes carry a 9.365% effective interest rate for accounting purposes. The company also paid $25.2 net for a bond hedge. The $136.7 of 6.50% senior notes matured in February.
- The quarterly dividend was suspended in March 2009; management estimated this would save approximately $42 in cash flow during 2009. Dividends paid to BorgWarner stockholders during the first nine months were $13.8, versus $38.3 in 2008.
- BERU became wholly owned on September 30 through a squeeze-out; the company paid €22.9 million ($33.5) for remaining shares on October 6. Certain minority shareholders challenged the squeeze-out price.
Outlook, risks, and contingencies
- Management was cautiously optimistic: it expected global production volumes in Q4 to be incrementally higher than the first nine months, but said visibility in Europe was limited amid uncertainty about consumer demand and the expiration of government incentives. Non-U.S. currencies were expected to be unfavorable for 2009. No specific earnings or revenue guidance was provided.
- Management expected 2009 operating cash flow after capital expenditures and tooling outlays to be positive, and said available cash, operating cash flow, credit facilities, and shelf capacity should meet foreseeable needs. It anticipated capital spending below 2008 levels.
- The company cited depressed global conditions and uncertain vehicle production as reasons it could not reliably estimate an annual effective tax rate. Nine-month tax benefit was $24.2; the reported effective tax benefit rate was 54.5%.
- Credit ratings were BBB at S&P and Ba1 at Moody’s, both with negative outlooks. Moody’s downgraded the company from Baa3 to Ba1 in March. Management said debt agreements did not require accelerated repayment upon a rating downgrade.
- Asbestos-related claims remained a significant contingent matter: approximately 23,000 were pending. The company recorded a $45.9 liability and matching insurance receivable for estimated future claim resolutions; recovery timing depends on pending insurance litigation. The company could not estimate potential losses beyond recorded amounts.
- Other matters include environmental remediation at 35 sites, with $12 accrued; retiree-benefit litigation; and four lawsuits involving alleged contamination at the former Kuhlman Electric plant. Management did not expect these matters to materially adversely affect results, financial position, or cash flows, but outcomes are uncertain.
- Forward-looking results are subject to vehicle production and demand, economic conditions, currency movements, and other risks described in the company’s prior filings. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Q4 vehicle production and European demand improved as expected, including the effects of expiring incentive programs and foreign exchange.
- Whether operating cash flow remains positive after capital spending, and whether working-capital movements support the reported cash position.
- Debt service, convertible-note accounting and terms, credit-rating outlooks, covenant compliance, and access to the revolving facility and shelf capacity.
- Potential funding obligations connected with the Muncie pension plan and the resolution and collectability of asbestos-insurance recoveries.
- How restructuring, plant closures, warranty claims, and other contingencies affect future costs and segment profitability.