BorgWarner Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY 2021. This is an annual filing, not a standalone fourth-quarter report. Amounts are U.S. dollars unless stated otherwise.
Business context
BorgWarner supplies propulsion, emissions, drivetrain and related products to vehicle manufacturers and aftermarket customers worldwide. It reported four segments: Air Management, e-Propulsion & Drivetrain, Fuel Systems and Aftermarket. Approximately 81% of 2022 sales were generated outside the United States; light-vehicle applications accounted for about 76% of sales.
Financial results and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Net sales | $15.801 billion | $14.838 billion |
| Gross profit / gross margin | $3.101 billion / 19.6% | $2.855 billion / 19.2% |
| Operating income / operating margin | $1.374 billion / 8.7% | $1.151 billion / 7.8% |
| Net earnings attributable to BorgWarner | $944 million | $537 million |
| Diluted EPS | $3.99 | $2.24 |
| Cash provided by operating activities | $1.569 billion | $1.306 billion |
| Capital expenditures, including tooling | $723 million | $666 million |
Operating cash flow less capital expenditures was approximately $846 million in 2022, compared with $640 million in 2021 (calculated from reported figures). Year-end cash, cash equivalents and restricted cash were $1.338 billion. Management reported total liquidity of $3.333 billion, comprising $1.333 billion of cash and cash equivalents and the fully undrawn $2.0 billion revolving credit facility. Reported short-term debt and long-term debt totaled $4.228 billion at carrying value; principal debt maturities through 2023 were $62 million. The company reported covenant compliance and said liquidity was sufficient for at least the next 12 months.
Segment adjusted operating income, a company-defined non-GAAP measure, was $1.892 billion versus $1.921 billion in 2021. Segment results were mixed: Air Management income was $1.068 billion, e-Propulsion & Drivetrain $379 million, Fuel Systems $249 million and Aftermarket $196 million. The filing reports quarterly dividends of $0.17 per share and $240 million of share repurchases during 2022.
Changes versus FY 2021
- Sales increased 6%, despite a roughly $961 million adverse foreign-currency translation impact. Volume, mix and net new business added approximately $1.235 billion; customer pricing added approximately $622 million, including inflation recovery.
- Gross margin improved 0.4 percentage points. Cost of sales included approximately $674 million of material-cost inflation, partly offset by $302 million of supply-chain savings. Management said customer recovery agreements did not fully offset higher costs.
- Operating income and attributable net earnings rose. The 2021 comparison included a $362 million unrealized investment loss, a $124 million customer warranty settlement charge and higher restructuring expense; 2022 included a $73 million unrealized loss on debt and equity securities.
- Net R&D spending increased to $786 million from $707 million, or 5.0% of sales versus 4.8%. e-Propulsion & Drivetrain segment margin declined to 6.7% from 9.0%, principally reflecting higher R&D investment.
- Operating cash flow increased, while year-end cash and restricted cash declined by $506 million. Investing included $500 million invested in Wolfspeed convertible debt securities and acquisition spending; financing included share repurchases and dividends.
Outlook, strategy and risks
- Management expected global industry production to be flat to modestly higher in 2023 and projected revenue growth excluding foreign-exchange effects, driven by new business and EV sales. It gave no specific 2023 revenue or earnings target in the provided filing text. Planned higher electrification R&D was expected to partly offset revenue-growth benefits.
- BorgWarner reported approximately $870 million of EV-related revenue in 2022, about 6% of total sales, and targeted $4.3 billion of EV revenue by 2025. Its stated pure-EV product revenue targets were more than 25% of total revenue by 2025 and about 45% by 2030.
- The company intended to spin off Fuel Systems and Aftermarket as a separate publicly traded company, targeting late 2023, subject to customary approvals and other conditions. Completion, timing, tax-free treatment and anticipated benefits were not assured.
- Key disclosed risks include semiconductor and other supply constraints; inflation and incomplete customer cost recovery; vehicle-production cyclicality; foreign-exchange movements; intense competition and technology transition; customer concentration; acquisition integration and impairment risk; cybersecurity and operational disruptions; and legal, environmental, warranty and tax contingencies.
- The filing describes an ongoing German investigation involving alleged diesel emissions issues at two OEM customers; BorgWarner said authorities searched two facilities and that it was cooperating. Management did not expect currently pending commercial and legal matters to have a material adverse effect overall, while acknowledging an adverse outcome could still materially affect results or cash flows.
Important facts for investors to verify
- Progress and final terms, approvals, costs and tax treatment of the planned Fuel Systems and Aftermarket spin-off.
- Whether EV awards convert to revenue at the pace implied by the $4.3 billion 2025 target, and the associated R&D and launch costs.
- Whether pricing and customer agreements recover inflation and commodity costs, and how margins respond to continuing cost pressures.
- Debt maturities and liquidity needs, including the $184 million annual minimum silicon-carbide purchasing commitment beginning in 2024 through 2029.
- Potential effects of the emissions investigation, warranty claims, environmental matters, tax audits and acquisition-related goodwill assumptions. The filing reported $3.397 billion of goodwill and no goodwill impairment in its 2022 annual test.