BorgWarner Inc. — Q1 2014 Form 10-Q
Business context and period: Global automotive systems and components supplier, with Engine and Drivetrain reporting segments. Unaudited results cover the three months ended March 31, 2014; comparisons are with Q1 2013 unless noted. Prior-year share and per-share amounts reflect the 2013 two-for-one stock split.
Financial results
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $2,084.1 million | $1,851.1 million |
| Gross profit / margin | $445.8 million / 21.4% | $374.7 million / 20.2% |
| Operating income | $233.2 million | $198.5 million |
| Net earnings attributable to BorgWarner | $159.1 million | $142.0 million |
| Diluted EPS | $0.69 | $0.61 |
| Operating cash flow | $46.4 million | $16.3 million |
| Capital expenditures, including tooling | $126.2 million | $87.4 million |
| Cash at quarter end | $808.1 million | $695.4 million |
Sales grew 12.6%; excluding the Wahler acquisition and currency effects, management reported growth of approximately 9%. Cost of sales fell to 78.6% of sales from 79.8%. Operating income included $39.5 million of restructuring expense; the company identified a $0.13-per-share diluted EPS impact from this item. Adjusted EBIT was $312.2 million versus $258.3 million.
Engine sales were $1,412.1 million and adjusted EBIT was $231.7 million; Drivetrain sales were $680.7 million and adjusted EBIT was $80.5 million. Drivetrain adjusted EBIT margin improved to 11.8% from 9.3%; Engine margin rose to 16.4% from 16.1%.
Balance sheet, debt, and liquidity
At March 31, 2014, total assets were $7,357.8 million and total equity was $3,737.3 million. Cash decreased $131.4 million during the quarter. Investing used $231.1 million, including $106.4 million paid for Wahler and higher capital spending; financing provided $56.0 million. Operating cash flow less capital expenditures was negative $79.8 million.
Debt totaled approximately $1,366.1 million, based on the balance-sheet current and long-term debt amounts, versus approximately $1,222.6 million at December 31, 2013. Management reported debt net of cash to capital of 13.0%, up from 7.2%, primarily due to the acquisition. The weighted-average borrowing rate was 3.4%. The company had $320 million drawn on its $750 million revolving facility and $100 million outstanding under a new commercial paper program with a $1 billion limit. It was in compliance with credit facility covenants and expected to remain compliant. Management said cash, operating cash flow, available credit, and shelf capacity should cover foreseeable needs.
Cash held outside the United States was $750.7 million; repatriation could result in additional taxes. A $0.125-per-share quarterly dividend was paid in February, and another $0.125 dividend was declared for payment in May.
Material changes, outlook, and risks
- Restructuring: Q1 charge of $39.5 million, mainly tied to Drivetrain actions and agreements covering about 350 employees at two Western European facilities. Management anticipated approximately $51 million of additional restructuring charges over two years; the note separately estimates $26 million of further employee termination benefits. Expected cash payments for the described actions were to be completed by the end of 2015.
- Acquisition: BorgWarner acquired Wahler on February 28 for $106.4 million cash, net of cash acquired, and assumed $33.3 million of debt. Wahler operates in Germany, Brazil, the U.S., China, and Slovakia. It was included in Engine; management did not expect a material effect on 2014 consolidated revenue or earnings. Purchase accounting remained subject to final adjustments.
- Outlook: Management described the 2014 outlook as positive, expected moderate global vehicle-production growth, and expected BorgWarner sales growth to outpace production. It cited continued product-adoption trends and investment in product development and strategic capital. No specific full-year revenue or earnings guidance was provided in the supplied filing text.
- Contingencies: Approximately 17,500 asbestos-related claims were pending. The company reported a $35 million adverse 2013 jury verdict under appeal and a $55 million surety bond; it could not estimate possible loss from that case. It recorded $107.1 million of liabilities for unresolved claims with a matching insurance asset and expected related recovery after resolution of insurance litigation, likely later than March 31, 2015. Past defense and settlement costs net of insurer recoveries were $169.3 million and were expected to be recovered, though timing depended on litigation or settlements. Environmental liabilities accrued were $7.7 million. A retiree-benefit case remained pending, with potential loss not reasonably estimable.
- Other risks: Results are exposed to vehicle production and demand, economic conditions, currency movements, and legal and environmental claims. Management cautioned that actual results could differ from forward-looking statements. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether reported sales growth and segment margin improvements continue after separating acquisition and currency effects.
- The timing and total cash cost of Drivetrain restructuring, including the difference between expected additional charges and employee termination benefits.
- Wahler’s final purchase accounting, integration performance, and contribution to results.
- Cash availability and potential tax costs if foreign-held funds are repatriated; also monitor short-term borrowing and net debt.
- Progress and outcomes in asbestos insurance-recovery litigation, the appealed verdict, retiree-benefit litigation, and environmental matters.