BorgWarner Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. BorgWarner is a global automotive powertrain supplier, reporting Engine and Drivetrain segments. Financial statements are unaudited.
Financial performance and position
- Q2 revenue and earnings: Net sales were $1,893.9 million, up 2.0% year over year. Operating income was $243.4 million versus $193.5 million; net earnings attributable to BorgWarner were $174.1 million versus $120.6 million. Diluted EPS was $1.50 versus $1.00.
- First-half results: Net sales were $3,745.0 million, down 0.6%. Operating income rose to $441.9 million from $419.2 million; attributable net earnings were $316.1 million versus $278.6 million. Diluted EPS was $2.72 versus $2.28.
- Margins: Q2 gross margin improved to 20.9% from 20.6%; first-half gross margin was 20.6% versus 20.7%. Q2 Engine and Drivetrain adjusted EBIT margins were 17.1% and 9.7%, respectively, both higher year over year. First-half margins were 16.6% for Engine and 9.5% for Drivetrain; Drivetrain declined from 9.6%.
- Cash flow: First-half operating cash flow was $300.0 million, compared with $310.1 million. Capital expenditures, including tooling, were $194.8 million, leaving operating cash flow less capital expenditures of about $105 million. Cash increased to $817.0 million from $715.7 million.
- Debt and liquidity: At June 30, cash was $817.0 million and short- and long-term debt totaled approximately $1.23 billion; the company reported a debt-net-of-cash-to-capital ratio of 11.3%, up from 10.0% at year-end. Its revolving facility was increased from $650 million to $750 million, with $220 million drawn; the company reported covenant compliance and expected continued compliance. Cash included $814.3 million held outside the U.S.; repatriation could incur additional taxes.
- Other measures: Net R&D expense rose to $72.6 million in Q2 and $144.4 million in the first half. The estimated 2013 annual effective tax rate was approximately 26%, or about 27% excluding specified non-comparable items.
Changes and notable items
- Q2 sales growth excluding 2012 dispositions and currency effects was approximately 3%; first-half adjusted growth was approximately 1%. Management cited higher Q2 worldwide light-vehicle production and growth in selected markets and products.
- First-half earnings comparisons included 2013 charges of $11.3 million for a program termination agreement and $5.9 million for retirement-related obligations. The 2012 comparison included a $37.9 million loss related primarily to the planned sale of the spark plug business. Management estimated these and tax-related non-comparable items reduced diluted EPS by $0.08 in first-half 2013 and $0.33 in first-half 2012.
- First-half operating cash flow declined modestly, primarily reflecting lower dividends received from affiliates, partly offset by improved working-capital management. Receivables used $220.7 million of cash during the period.
- The board declared a quarterly dividend of $0.25 per share, payable August 15, 2013. The company spent $150.5 million on treasury-stock purchases in the first half.
Outlook, risks and contingencies
- Management described the 2013 outlook as cautious because of uncertain global economic conditions, particularly in Europe. It expected global vehicle production to be slightly higher than in 2012, but European production to decline; higher adoption of BorgWarner products was expected to support company sales growth. No specific sales or earnings guidance figures were provided.
- Management cited longer-term demand drivers including direct-injection engines, automated transmissions, and variable cam and chain timing systems, and reaffirmed investment in product development and strategic capital.
- Key business risks include fluctuations in vehicle production and demand, economic conditions, and foreign-exchange movements. Management said available operating cash, cash balances, credit facilities, and shelf capacity should fund foreseeable needs.
- Contingencies include approximately 16,000 pending asbestos-related claims. The company recorded a $103.6 million liability for asserted but unresolved claims and an equal insurance asset, which it expects to recover; collection timing depends on insurer litigation and is not expected before resolution, likely after June 30, 2014. Separately, $129.5 million of previously paid and accrued defense and settlement costs remained expected to be recovered from insurers. Management cautioned it cannot estimate potential losses beyond recorded amounts.
- Other matters include an unresolved retiree-benefits lawsuit for which potential loss could not be reasonably estimated, and environmental liabilities accrued at $3.6 million. Management did not expect the discussed matters to have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether product growth, especially in Europe, supports the company’s cautious 2013 sales outlook.
- How much of the reported earnings improvement reflects ongoing operations versus prior-year disposal charges, current-period special items, tax effects, and share-count changes.
- Cash conversion and working-capital trends, particularly receivables, alongside capital spending and continued share repurchases.
- Timing and collectability of asbestos-related insurance recoveries, the continued growth in unresolved-claim accruals, and developments in the insurer and retiree-benefits litigation.
- Debt levels, revolving-credit availability, covenant compliance, and the tax implications of repatriating foreign-held cash.