BorgWarner Inc. — Second-Quarter 2009 Form 10-Q
Reporting period: Three and six months ended June 30, 2009. BorgWarner supplies engineered powertrain systems and components to vehicle manufacturers and aftermarket customers. Its reporting segments are Engine and Drivetrain. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $916.2 | $1,516.6 | $1,735.7 | $3,015.5 |
| Gross profit | $116.2 | $278.8 | $195.8 | $562.3 |
| Gross margin | 12.7% | 18.4% | 11.3% | 18.6% |
| Operating income (loss) | ($49.5) | $118.7 | ($44.0) | $243.5 |
| Net earnings (loss) attributable to BorgWarner | ($35.9) | $87.5 | ($42.9) | $176.2 |
| Diluted EPS | ($0.31) | $0.74 | ($0.37) | $1.49 |
- Q2 sales declined 39.6%; first-half sales declined 42.4%. Management attributed the contraction mainly to lower vehicle production, with weaker currencies reducing sales by approximately $100 in Q2 and $182 in the first half. Excluding currency, sales fell 33.0% and 36.4%, respectively.
- Operating cash flow was $173.8 for the first half, versus $267.1 a year earlier. Capital expenditures, including tooling, were $88.3 versus $162.2; operating cash flow less those expenditures was approximately $85.5.
- Cash was $256.9 at June 30, up from $103.4 at year-end. Total notes payable and long-term debt were $862.0, up from $780.3 at year-end; debt-to-capital was 29.3%, versus 27.7%.
- Current assets were $1,394.8 and current liabilities $985.1. The $250 revolving credit facility had no borrowings at quarter-end; it was reduced from $600 effective July 23, 2009. The company reported covenant compliance.
- Engine sales were $670.4 in Q2 and segment EBIT was $44.0; Drivetrain sales were $248.8 and segment EBIT was a loss of $8.8. First-half segment EBIT was $79.9 for Engine and a loss of $41.5 for Drivetrain.
Material changes and unusual items
- Global light-vehicle production fell 26% in Q2 and 30% in the first half year over year; North American production fell 48% and 50%, respectively. Management said sales volume declined faster than costs could be reduced, compressing gross margins.
- Q2 restructuring charges totaled $50.3: $9.0 for employee termination benefits, $36.3 for asset impairments and $5.0 for other charges. The company reported workforce reductions across North America, Europe and Asia; $22.3 of impairment related to a European facility.
- The Muncie, Indiana plant ceased operations at the end of March. Related retiree-benefit actions produced a first-quarter net pre-tax gain of $27.9, comprising a $41.9 curtailment gain and $14.0 settlement expense. A $34.0 settlement amount is payable in installments through April 2010; discussions with the PBGC about possible pension-plan funding were ongoing.
- In April, BorgWarner issued $373.8 of convertible senior notes due in 2012. The balance sheet recorded $321.7 as debt and $34.6 in additional paid-in capital under the applicable accounting treatment. The notes have a 3.5% coupon; accounting accretion uses a 9.365% effective rate. Management estimated 2009 note-related interest expense of about $22.5, including $12.8 non-cash.
- The $50 receivables securitization facility matured in April and was not renewed, increasing receivables and reducing cash by $50. The quarterly dividend was temporarily suspended in March; management expected this to save about $42 in 2009.
- Management noted a $4.8 first-quarter expense for ongoing acquisition-related activity following adoption of revised business-combination accounting rules. A $34.5 gain from terminating interest-rate swaps is to be amortized as a reduction of interest expense over the remaining debt terms.
Outlook, risks and contingencies
- Management remained cautious, citing uncertainty about the breadth and duration of the global recession and limited visibility. It expected continued weak global production, with a marginal increase in the second half compared with the first half, and expected currency headwinds to lessen versus 2008. No specific full-year revenue or earnings guidance was provided.
- The company expected operating cash flow after capital expenditures to remain positive in 2009 and stated that cash, operating cash flow, credit availability and remaining shelf capacity should fund foreseeable needs. It intended to continue selective investment in new applications and productivity projects.
- Moody’s downgraded BorgWarner to Ba1 in March; both Moody’s and S&P had negative outlooks at quarter-end. The company reported ratings of Ba1 and BBB, respectively. Its credit agreement included net-worth, leverage and interest-coverage covenants.
- Contingencies include environmental liabilities accrued at $12.3, asbestos-related claims (approximately 24,000 pending) and related insurance recovery uncertainty, and pending retiree-benefit litigation. Asbestos-related accrued liabilities and insurance receivables were each $40.3; recovery of previously advanced defense and settlement costs was subject to insurance litigation. Management did not expect these matters to have a material adverse effect, but outcomes remain uncertain.
- Other risks identified include changes in vehicle production and demand, general economic conditions, and the ability to manage costs and restructuring. Management stated that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether vehicle production and customer demand recover as expected, and how quickly margins respond to volume changes.
- Cash generation, working-capital trends and capital spending relative to management’s positive after-capex cash-flow expectation.
- Debt maturities, the reduced revolving-facility capacity, covenant headroom and any effects of negative credit outlooks.
- Actual restructuring cash costs and whether further facility impairments or workforce actions are required.
- Developments in Muncie pension funding and retiree litigation, asbestos insurance recoveries, and environmental matters.
- The continuing impact of the suspended dividend and the convertible notes’ interest expense and potential dilution or cash settlement.