BorgWarner Inc. — Q1 2020 Form 10-Q
Business and period: Global supplier of automotive technologies for combustion, hybrid and electric vehicles, primarily serving vehicle OEMs. This unaudited report covers the three months ended March 31, 2020; results were materially affected by the emerging COVID-19 pandemic and are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $2.279 billion | $2.566 billion |
| Gross profit / margin | $447 million / 19.6% | $519 million / 20.2% |
| Operating income | $189 million | $264 million |
| Net earnings attributable to BorgWarner | $129 million | $160 million |
| Diluted EPS | $0.63 | $0.77 |
| Adjusted EBIT (non-GAAP segment measure) | $271 million | $346 million |
| Net cash from operating activities | $263 million | $40 million |
| Capital expenditures, including tooling | $117 million | $117 million |
Sales fell 11.2% year over year; excluding currency and net acquisition/divestiture effects, management reported an approximately 8.1% decline. Lower sales drove weaker gross margin and segment profitability. Engine sales were $1.434 billion and Adjusted EBIT was $208 million; Drivetrain sales were $860 million and Adjusted EBIT was $63 million. Drivetrain Adjusted EBIT margin declined to 7.3% from 10.7%; Engine margin declined to 14.5% from 15.1%.
Operating cash flow increased by $223 million, primarily from favorable working-capital changes, partly offset by lower earnings. Investing cash outflow was $120 million and financing cash outflow was $62 million. Cash and cash equivalents were $901 million at quarter-end, versus $832 million at December 31, 2019.
Debt, liquidity and financial position
- Short-term debt and notes payable were $286 million; long-term debt, net of current portion, was $1.664 billion. Total debt was approximately $1.950 billion, or approximately $1.049 billion net of cash.
- Management reported $2.401 billion of liquidity: $901 million cash plus an undrawn $1.5 billion revolving credit facility. The company was in compliance with its debt covenant and had no borrowings under the revolver or commercial paper program at March 31.
- Debt maturities through year-end 2021 totaled $284 million, including $34 million short-term borrowings and $250 million current long-term debt. The revolver was extended to March 2025 and increased from $1.2 billion to $1.5 billion.
- Moody’s placed its Baa1 rating under review for possible downgrade and S&P placed the company on CreditWatch with negative implications, citing the proposed acquisition and COVID-19 disruption; Fitch’s outlook remained stable. The filing says debt agreements do not require accelerated repayment upon a rating downgrade.
Material changes, outlook and risks
- COVID-19: OEM production suspensions, government restrictions and temporary facility closures disrupted operations. Management expected significant 2020 production declines in Europe, North America and China, and declining full-year revenue excluding currency and acquisition/divestiture effects. It could not reasonably estimate the pandemic’s full future financial impact, but expected a material adverse effect on revenue and profitability, with potential additional closure costs, supply-chain disruption and tax-rate volatility.
- Cost actions: The company temporarily reduced senior leadership and director compensation by 20%, other salaried employee base pay by up to 10%, and discretionary spending. Additional structural-cost actions through 2023 are expected to incur primarily cash restructuring costs of $275–$300 million and generate annual savings of approximately $90–$100 million by 2023.
- Delphi Technologies transaction: The proposed all-stock acquisition remained subject to shareholder, regulatory and other conditions. Following a dispute over Delphi’s $500 million revolver draw, the parties amended the agreement on May 6, 2020, including new debt and leverage conditions and a reduced exchange ratio of 0.4307 BorgWarner shares per Delphi share. Expected ownership after closing was approximately 85% BorgWarner shareholders and 15% Delphi shareholders. Closing was expected in the second half of 2020, but was not assured.
- Other unusual items: Q1 other expense included $21 million acquisition/divestiture costs, $15 million restructuring expense and a $9 million impairment of the Romeo Systems investment, valued at $41 million. The 2020 effective tax rate was 26%, including $12 million of other one-time tax benefits; management estimated an approximately 28% annual rate for ongoing operations, excluding non-comparable items.
- Subsequent event: A tornado damaged the Seneca, South Carolina drivetrain plant on April 13. Limited production resumed May 2, but the timing of full operations and total financial impact were undetermined. Insurance was expected to cover repairs and business interruption, subject to deductibles.
- Contingencies: The company reported environmental exposure at 14 hazardous-waste sites and a $3 million environmental accrual, and said it was cooperating with an SEC investigation into historical accounting for unasserted asbestos-related claims. Management did not expect other disclosed claims to have a material adverse effect overall, while noting an adverse outcome could affect a particular quarter.
Important facts for investors to verify
- How COVID-19-related OEM shutdowns, production recovery and supply-chain conditions affect subsequent-quarter sales, margins and cash generation.
- Whether Delphi satisfies the amended closing conditions, whether the transaction closes, and its financing, integration and dilution implications.
- The Seneca plant’s return to full production, insurance recoveries and any uninsured or timing-related losses.
- Actual restructuring cash costs and savings relative to management’s $275–$300 million cost and $90–$100 million annual savings estimates.
- Liquidity, covenant headroom, debt maturities and credit-rating developments as earnings and production levels change.
- Developments in the SEC asbestos-related accounting investigation, environmental matters and the Romeo investment impairment.