BorgWarner Inc. Q2 2007 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007, and the six months ended on that date. BorgWarner Inc. is a global supplier of highly engineered systems and components for powertrain applications, operating through two segments: Engine (turbochargers, emissions, ignition) and Drivetrain (transfer cases, transmission components). The company serves original equipment manufacturers (OEMs) worldwide.
Key Financial Metrics
| Metric | Q2 2007 | Q2 2006 | 6 Months 2007 | 6 Months 2006 |
|---|---|---|---|---|
| Net Sales | $1,364.3 million | $1,168.7 million | $2,642.1 million | $2,323.9 million |
| Gross Profit | $247.6 million | $231.1 million | $463.5 million | $454.4 million |
| Gross Margin | 18.1% | 19.8% | 17.5% | 19.6% |
| Operating Income | $113.6 million | $107.5 million | $203.5 million | $201.8 million |
| Net Earnings | $75.7 million | $70.2 million | $134.1 million | $131.5 million |
| Diluted EPS | $1.29 | $1.21 | $2.28 | $2.27 |
| Cash from Operations (6mo) | $223.4 million (vs. $233.2 million prior year) | |||
| Total Debt (Current + Long-Term) | $645.4 million (as of June 30, 2007) | |||
| Cash & Marketable Securities | $176.9 million (as of June 30, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16.7% in Q2 and 13.7% for the six months. Approximately $51 million (Q2) and $111 million (6 months) of this increase was attributable to favorable foreign currency fluctuations, primarily the Euro. Organic growth was driven by strong demand in Europe and Asia-Pacific.
- Margin Compression: Gross margins declined due to higher raw material costs (nickel, steel, copper, plastic resin) and a specific warranty charge. Raw material costs increased by approximately $21 million in Q2 and $44 million for the six months.
- Warranty Charge: A pre-tax charge of approximately $14 million was recognized in the first six months of 2007 related to a product built in 2004-2005 that is no longer in production.
- Debt Reduction: Total debt decreased by $75.7 million compared to year-end 2006. The debt-to-capital ratio improved to 22.8% from 26.1%.
- Share Repurchases: The company repurchased 196,300 shares for $16.3 million in the first six months of 2007.
Guidance, Outlook, and Risks
- Outlook: Management expects sales to grow in excess of the projected moderate global vehicle production growth rate for 2007. They anticipate moderate declines in North American production but solid growth in Asia and moderate increases in Europe.
- Capital Expenditures: The company expects to spend approximately $325 million on capital and tooling expenditures in 2007, subject to market conditions.
- Dividends: A quarterly dividend of $0.17 per share was declared, payable August 15, 2007.
- Risks and Contingencies:
- Asbestos Litigation: Approximately 42,000 pending asbestos-related product liability claims exist. The company has accrued $41.5 million for future resolutions, with an equal insurance receivable. Management believes coverage is sufficient and does not expect a material adverse effect.
- Environmental: The company is a potentially responsible party at 33 hazardous waste sites. An accrual of $13.7 million exists for these liabilities.
- Commodity Prices: Continued pressure on gross profit from raw material costs (nickel, steel, etc.) is expected.
Investor Verification Checklist
- Verify the sustainability of the 14% organic sales growth (excluding currency) in the Engine and Drivetrain segments.
- Monitor the trajectory of raw material costs, specifically nickel, and the effectiveness of cost-reduction programs in offsetting them.
- Review the status of the $14 million warranty charge to ensure no further provisions are required for the affected product line.
- Assess the resolution timeline for the asbestos litigation and the certainty of the $41.5 million insurance recovery.
- Confirm the company's ability to maintain its investment-grade credit rating (A-/Baa2) amidst global economic fluctuations.