BORGWARNER INC quarterly report, Q3 FY2021

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BorgWarner Inc. — Q3 2021 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited. BorgWarner supplies combustion, hybrid and electric vehicle technologies to vehicle manufacturers and the aftermarket. Comparisons are affected by the October 2020 Delphi Technologies acquisition; AKASOL results are included from June 4, 2021.

Financial results

  • Q3 revenue: $3.416 billion, up 35% year over year. Excluding acquisition and currency effects, sales decreased approximately 8%, primarily because semiconductor constraints reduced vehicle production.
  • Q3 profitability: Gross profit was $650 million and gross margin was 19.0%, versus $517 million and 20.4% a year earlier. Operating income was $253 million, down from $284 million. Net earnings attributable to BorgWarner were $96 million versus $111 million; diluted EPS was $0.40 versus $0.53.
  • Nine-month revenue: $11.183 billion, up 79%. Excluding acquisition and currency effects, sales increased approximately 21%, reflecting recovery from 2020 production declines and increased demand, partly offset by supply constraints.
  • Nine-month profitability: Gross profit was $2.230 billion and gross margin 19.9%, versus $1.138 billion and 18.2%. Operating income was $973 million versus $404 million. Net earnings attributable to BorgWarner were $408 million versus $142 million; diluted EPS was $1.70 versus $0.69.
  • Significant earnings item: Unrealized losses on equity securities were $61 million in Q3 and $337 million for the nine months, mainly reflecting the decline in BorgWarner’s Romeo Power investment, valued at $95 million at September 30.
  • Cash flow: Nine-month operating cash flow was $764 million, down from $808 million. Investing cash outflow was $1.238 billion, including $759 million for business acquisitions and $494 million in capital expenditures. Financing cash inflow was $350 million. Cash, cash equivalents and restricted cash ended at $1.510 billion.
  • Margins and costs: Q3 segment adjusted EBIT was $365 million versus $356 million, but key segment margins weakened: Air Management was 12.8% versus 15.2%, and e-Propulsion & Drivetrain was 7.0% versus 12.2%. Nine-month segment adjusted EBIT was $1.357 billion versus $656 million. Management cited acquisition mix, lower production, commodity costs and higher R&D among Q3 pressures.
  • Debt and liquidity: September 30 balance-sheet debt included $54 million of short-term notes and $4.288 billion of long-term debt. Cash and cash equivalents were $1.507 billion, plus $3 million restricted cash. The company had no borrowings under its $2.0 billion revolving facility or commercial paper program and was compliant with its debt-to-EBITDA covenant.
  • Working capital and equity: Inventories increased to $1.649 billion from $1.286 billion at year-end 2020; management linked higher inventory and working capital to volatile production conditions. Total equity was $7.020 billion.

Material changes and strategic developments

  • Delphi Technologies contributed $1.025 billion to Q3 revenue and $3.284 billion to nine-month revenue; its results were absent from 2020 comparative periods. Fuel Injection and Aftermarket were new reporting segments following the acquisition.
  • BorgWarner acquired 89% of AKASOL in June for approximately $788 million and owned 93% at quarter-end. AKASOL’s Q3 and nine-month contribution to net sales and net earnings was described as immaterial. The purchase-price allocation remains preliminary.
  • The company issued €1.0 billion of 1.0% notes due 2031 and repaid €500 million of 1.8% notes due 2022, recording a $20 million debt-extinguishment loss.
  • Goodwill rose to $3.285 billion from $2.627 billion at year-end, largely reflecting acquisition accounting. Assets of $105 million and liabilities of $22 million were classified as held for sale for an internal-combustion business; no write-down was recorded.
  • The company paid $122 million in dividends to BorgWarner shareholders during the first nine months. Its $1 billion share-repurchase authorization had $784 million remaining at September 30; no program repurchases were reported for Q3.

Outlook, risks and contingencies

  • Management expected global industry production to be flat to slightly lower year over year, with semiconductor shortages continuing to disrupt production in Q4. It expected company revenue to increase in 2021 excluding currency and net acquisition/divestiture effects, supported by new business growth.
  • Commodity-cost volatility, particularly steel and petroleum-based resins, was expected to continue weighing on results. Management said it was pursuing mitigation measures. The filing does not provide a full-year numerical revenue or earnings guidance range.
  • The company’s electrification strategy targets dispositions of assets generating about $1 billion in annual revenue over the following 12–18 months and $3–$4 billion by 2025. It targets pure-EV product revenue above 25% of total revenue by 2025 and approximately 45% by 2030. Long-term R&D spending expectation is 5.0%–5.5% of sales.
  • A restructuring plan announced in 2020 is expected to cost $300 million through 2022 and generate $90–$100 million in annual gross savings. Cumulative charges were $229 million through September 2021; nearly all related charges are expected to require cash.
  • Risks include semiconductor and other supply disruptions, inflation and commodity availability, COVID-19 effects, cyclical vehicle production, acquisition integration and benefit realization, foreign exchange, and uncertainty around EV demand and technology. Management said it could not reasonably estimate the full future impact of supply constraints or COVID-19.
  • An OEM warranty claim has a $10 million accrual, but the company said liability remains uncertain and further losses could be material to results or cash flow. Environmental liabilities were accrued at $6 million across 26 identified sites. Management did not expect pending claims or environmental matters, individually or collectively, to have a material adverse effect, while noting outcomes cannot be assured.

Important facts for investors to verify

  • Whether semiconductor availability, customer production cuts and commodity inflation worsen or ease, and how effectively BorgWarner passes through or offsets related costs.
  • Underlying performance apart from Delphi and AKASOL acquisitions, foreign exchange, restructuring, and the Romeo Power fair-value loss; reported period comparisons are not fully like-for-like.
  • Progress on AKASOL integration and the German squeeze-out process, including the eventual cash compensation for remaining minority shareholders.
  • Execution and cash costs of restructuring and planned combustion-asset disposals, including whether targeted savings and electrification revenue goals are achieved.
  • Developments in the OEM warranty claim, Romeo Power’s valuation, and other legal or environmental contingencies.