BorgWarner Inc. — Q1 2010 Form 10-Q
Business context and reporting period. BorgWarner is a global supplier of engineered automotive powertrain systems and components, operating through Engine and Drivetrain segments. This unaudited report covers the three months ended March 31, 2010; comparisons are with Q1 2009 unless stated otherwise. Management cautions that quarterly results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales | $1,286.8 million | $819.5 million |
| Gross profit / gross margin | $238.5 million / 18.5% | $79.6 million / 9.7% |
| Operating income | $106.6 million | $5.5 million |
| Net earnings (loss) attributable to BorgWarner | $76.2 million | $(7.0) million |
| Diluted EPS | $0.63 | $(0.06) |
| Cash provided by operating activities | $64.1 million | $68.0 million |
| Capital expenditures, including tooling | $55.3 million | $38.6 million |
- Sales increased 57.0%; management attributed the increase to stronger vehicle production and demand across major product groups, plus approximately $60 million from stronger foreign currencies. Excluding currency, sales growth was approximately 50%.
- Gross margin improved 8.8 percentage points. Management cited 2009 cost-reduction actions, partly offset by higher raw-material costs.
- SG&A was $130.3 million, or 10.1% of sales, versus $74.1 million, or 9.0%. The comparison is affected by a $27.9 million Muncie plant closure-related net gain in Q1 2009 and a $4.8 million acquisition-related expense that year. Excluding those items, Q1 2009 SG&A was 11.9% of sales.
- Segment sales and EBIT: Engine sales were $906.0 million (up 45.1%) and EBIT was $106.7 million (versus $35.9 million). Drivetrain sales were $385.8 million (up 94.7%) and EBIT was $36.7 million (versus a $32.7 million loss). Currency-adjusted sales growth was 37.9% for Engine and 86.9% for Drivetrain.
- Cash from operations declined $3.9 million despite the return to profitability; management cited higher working-capital needs. Receivables and inventory uses of cash were partly offset by higher payables.
Financial position and liquidity
- At March 31, 2010, cash was $374.1 million, total assets were $4,966.2 million, and stockholders’ equity was $2,242.8 million.
- Short-term debt was $132.4 million and long-term debt was $774.0 million, for total reported debt of $906.4 million. Debt increased $64.1 million from year-end 2009; the debt-to-capital ratio rose to 28.8% from 27.5%.
- The company said much of the reported debt increase reflected adoption of revised receivables-transfer accounting, which added $50 million to both receivables and short-term debt. The $50 million securitization facility matures in December 2012.
- On March 31, the company replaced its $250 million revolving facility with a $550 million facility, expandable to $600 million, available through March 31, 2013. No borrowings were outstanding; the company reported covenant compliance and expected continued compliance. It also reported approximately $376 million remaining under its universal shelf registration.
- Q1 2010 investing cash outflow was $48.3 million; financing cash inflow was $21.5 million. No dividend was declared in Q1 2010; the quarterly dividend had been suspended in March 2009.
Outlook, commentary, risks and unusual items
- Management expressed optimism for 2010, noting stronger-than-expected North American and European production in Q1 and improved expectations for the European market. It provided no specific full-year revenue or earnings guidance in the supplied filing text.
- Management expects long-term demand drivers to include growth in direct-injection engines, automated transmissions, and variable cam and chain timing systems. It plans continued product development and selective capital spending to support new applications, cost reductions and productivity.
- The company reported an estimated 18.9% annual effective tax rate, including a $2.5 million Q1 expense from legislation affecting Medicare Part D subsidy tax treatment; the estimated rate for ongoing operations excluding that impact was 18.0%.
- On April 9, 2010, after quarter-end, BorgWarner acquired Dytech ENSA, an EGR-products supplier with approximately $180 million of 2009 sales, for inclusion in the Engine segment. Purchase price and transaction financing are not stated in the supplied filing text.
- Material contingencies include approximately 23,000 pending asbestos-related claims. The company recorded a $53.4 million liability and an equal insurance receivable, but recovery timing depends in part on insurance-coverage litigation. Management said it could not reasonably estimate potential losses above accrued amounts.
- Environmental liabilities accrued were $20.9 million, with substantially all expected to be paid over three to five years. A UAW retiree-benefits case remained pending; the company also disclosed future Muncie pension-plan payments under its PBGC settlement.
- Other risks identified include vehicle-production and demand fluctuations, general economic conditions, supplier reliance, foreign-exchange and commodity exposure, litigation, and uncertainty in estimates. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the sales and earnings rebound reflects underlying volume and mix versus currency, and whether the improved margins persist as raw-material costs change.
- Whether working-capital demands and capital spending allow operating cash flow to improve alongside reported earnings.
- The implications of the convertible notes, including their dilution potential, and the company’s capacity to service and refinance debt.
- The final acquisition price, financing, integration costs and subsequent contribution from Dytech ENSA.
- Developments in asbestos insurance-coverage litigation, including timing and collectability of the recorded insurance receivable, and any changes in environmental or retiree-benefit obligations.
- Whether management’s favorable production and demand outlook holds after government vehicle incentives expire; the filing provides no quantified full-year guidance.