BorgWarner Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial statements are unaudited. BorgWarner supplies propulsion, vehicle-efficiency and related products mainly to automotive OEMs, with operations across the Americas, Europe and Asia.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $3.759B | $3.758B | $7.633B | $7.767B |
| Gross profit / margin | $712M / 18.9% | $762M / 20.3% | $1.462B / 19.2% | $1.580B / 20.3% |
| Operating income / margin | $272M / 7.2% | $317M / 8.4% | $624M / 8.2% | $720M / 9.3% |
| Net earnings attributable to BorgWarner | $216M | $247M | $416M | $312M |
| Diluted EPS | $0.91 | $1.03 | $1.74 | $1.30 |
| Operating cash flow | Not separately provided for Q2 | Not separately provided for Q2 | $332M | $622M |
For the six-month period, capital expenditures including tooling were $331M; net cash used in investing activities was $388M and net cash used in financing activities was $348M. Cash, cash equivalents and restricted cash totaled $1.390B at June 30, down from $1.844B at year-end 2021. Debt comprised $60M of short-term debt and $4.156B of long-term debt on the balance sheet. The company reported $3.390B of liquidity, including $2.0B available under its undrawn revolving facility, and was in compliance with its debt-to-EBITDA covenant.
Material changes and drivers
- Q2 sales were essentially flat year over year, while first-half sales declined 2%. Currency translation reduced sales by approximately $221M in Q2 and $334M in the first half. Acquisitions added sales, while the 2021 Water Valley facility sale reduced the comparison.
- Gross and operating margins contracted, principally reflecting higher commodity, material and other input costs. Management said customer agreements and negotiations do not recover all increased costs.
- Q2 net earnings and diluted EPS declined year over year. First-half net earnings rose to $416M from $312M, but the comparison includes a $276M unrealized loss on equity securities in 2021, primarily related to Romeo Power. First-half 2022 included a $28M unrealized loss on equity securities.
- Segment adjusted operating income, a company-defined non-GAAP measure, was $410M in Q2 versus $499M; first-half results were $862M versus $1.032B. Aftermarket segment margins improved, while Air Management and e-Propulsion & Drivetrain margins weakened materially.
- First-half operating cash flow fell to $332M from $622M, with management citing higher working-capital needs and lower earnings adjusted for non-cash items. Receivables and inventories used $353M and $194M of cash, respectively.
Outlook, risks and unusual items
- Management expected global industry production to increase modestly in 2022 as some component supply improved in the second half. It expected BorgWarner sales to increase excluding foreign-currency effects, with net new business growth exceeding industry production growth; no numeric full-year revenue or earnings guidance is stated in the provided filing text.
- Expected offsets included inflation and commodity costs, supply-chain constraints, increased electrification R&D spending and effects of Russia’s invasion of Ukraine. COVID-related disruptions and semiconductor shortages continued, including China lockdowns during much of Q2.
- Net R&D expense was $207M in Q2 and $398M in the first half, compared with $166M and $349M, respectively, in 2021. Management’s long-term R&D spending expectation was 5.0%–5.5% of sales.
- The 2020 structural-cost plan had incurred $274M cumulatively and was expected to reach $300M through 2022; expected annual gross savings were more than $100M. First-half restructuring expense was $42M versus $92M a year earlier.
- BorgWarner acquired Santroll’s eMotor business in March 2022 for stated total consideration of $212M; its reported Q2 and first-half contribution was immaterial. It completed the AKASOL squeeze-out in February 2022. On July 29, 2022, after the reporting date, it acquired Rhombus Energy Solutions for approximately $130M at closing, with up to $55M in contingent payments.
- The company recorded a $24M pre-tax gain from selling its interest in the Romeo joint venture and liquidated its remaining Romeo Power shares. The first-half effective tax rate was 25% versus 16% in 2021; 2021 included significant discrete tax benefits.
- Management did not expect pending commercial or legal matters to materially affect results, financial position or cash flows, but acknowledged adverse outcomes could be material. Environmental liabilities accrued were $9M for eight sites. A derivative lawsuit settlement with fees below $1M remained subject to final court approval.
Important facts for investors to verify
- Whether pricing and customer cost-recovery arrangements can offset continuing commodity, supplier and inflationary pressure enough to stabilize margins.
- Whether supply improvements and new-business growth materialize despite semiconductor constraints, China disruptions, currency movements and geopolitical risks.
- Working-capital trends and cash conversion, given the sharp first-half operating cash flow decline and cash used by receivables and inventories.
- Execution, integration and returns from Santroll, AKASOL and Rhombus, including Santroll’s contingent earn-out and Rhombus’s potential payments.
- Progress and cash costs of restructuring, and whether anticipated savings are achieved; also monitor the company’s repurchases, dividends, debt and covenant headroom.