BorgWarner Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period is Q1 2021. Figures are in U.S. dollars unless noted.
Business context and key financial results
BorgWarner supplies components and technology for combustion, hybrid and electric vehicles, primarily to vehicle manufacturers. Its reporting segments are Air Management, e-Propulsion & Drivetrain, Fuel Injection and Aftermarket.
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $3.874 billion | $4.009 billion |
| Gross profit / margin | $750 million / 19.4% | $818 million / 20.4% |
| Operating income / margin | $352 million / 9.1% | $403 million / 10.1% |
| Net earnings attributable to BorgWarner | $200 million | $65 million |
| Diluted EPS | $0.84 | $0.27 |
| Operating cash flow | $116 million | $342 million |
| Capital expenditures, including tooling | $177 million | $195 million |
Net earnings include a $39 million unrealized loss on equity securities in 2022, versus a $272 million loss in 2021, primarily reflecting the Romeo Power investment. The company sold its remaining Romeo Power shares in Q1 2022. Its reported non-GAAP reconciliation identifies total non-comparable impacts of negative $0.21 per diluted share in 2022 versus negative $0.94 in 2021; therefore, the year-over-year EPS increase should not be read as a direct measure of underlying operating improvement.
Material changes and operating performance
- Sales declined 3%. The company attributed the decrease to lower industry production, the prior-year Water Valley facility sales that did not recur, and approximately $113 million of unfavorable foreign-currency effects. AKASOL contributed $44 million of Q1 2022 sales.
- Gross margin fell to 19.4% from 20.4%; material costs rose to 56% of sales from 54%, primarily reflecting commodity and other input-cost inflation.
- Segment Adjusted Operating Income was $452 million, down from $533 million. Air Management margin declined to 13.3% from 16.4%; e-Propulsion & Drivetrain to 8.6% from 10.2%. Fuel Injection margin improved to 11.0% from 7.2%, and Aftermarket to 11.7% from 10.7%.
- Operating cash flow declined to $116 million, which management attributed mainly to lower earnings adjusted for noncash items and higher working-capital needs. Receivables and inventories used $282 million and $124 million of cash, respectively.
- Q1 investing cash outflow was $254 million, including $157 million paid for the Santroll eMotor business. Financing cash outflow was $195 million, including $59 million for the AKASOL squeeze-out, $40 million of share repurchases, and dividends.
Financial position, outlook, risks and unusual items
- At March 31, cash and cash equivalents were $1.501 billion; total debt was approximately $4.287 billion, including $64 million of short-term debt. The company reported liquidity of $3.501 billion, including its undrawn $2.0 billion revolving facility. It was in compliance with the facility covenant and stated it expects sufficient liquidity and covenant compliance for at least the next 12 months.
- Management expected global vehicle production to increase modestly in 2022, with semiconductor supply also expected to improve modestly. It expected BorgWarner sales to increase excluding foreign-currency effects, supported by new business and product penetration; the filing provides no specific full-year revenue or earnings guidance figures.
- Management warned that supply-chain disruptions, semiconductor shortages, COVID-19 restrictions, Russia’s invasion of Ukraine, inflation and higher commodity and supplier costs could offset production improvements. Planned R&D investment for electrification was also expected to weigh on results. Long-term R&D spending expectation is 5.0%–5.5% of sales.
- The company recorded a $24 million gain from selling its 60% interest in Romeo JV, alongside the $39 million equity-security loss. Santroll was acquired for total consideration of $212 million, including estimated earn-outs; purchase-price allocations were provisional. The company completed the acquisition of the remaining AKASOL shares in February.
- Ongoing restructuring included $15 million of Q1 expense. The 2020 structural-cost plan had accumulated $264 million in charges toward an expected $300 million through 2022; management expected annual gross savings above $100 million. The company also disclosed ordinary-course litigation and environmental matters, including a $7 million environmental accrual, and stated it did not expect currently pending matters to have a material adverse effect, while noting outcomes could still be material.
Important facts for investors to verify
- Whether supply constraints, production levels, inflation and currency movements evolve consistently with management’s outlook.
- How much of the earnings and EPS improvement reflects the prior-year Romeo-related loss rather than operating performance; monitor segment margins and cash conversion.
- Working-capital trends, particularly receivables and inventory, and the sustainability of operating cash flow.
- Final Santroll purchase accounting and earn-out amounts, and the realization of expected restructuring savings and acquisition benefits.
- Developments in legal, environmental, warranty and other contingencies, and the company’s access to liquidity and compliance with debt covenants.