BorgWarner Inc. — 2011 Form 10-K
Business context and reporting period. BorgWarner is a global supplier of engineered automotive powertrain components and systems, reported in Engine and Drivetrain segments. This annual filing covers the fiscal year ended December 31, 2011; it also reports fourth-quarter results. Figures are in millions of dollars unless stated otherwise.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $7,114.7 | $5,652.8 |
| Gross profit / margin | $1,410.4 / 19.8% | $1,093.3 / 19.3% |
| Operating income / margin | $797.5 / 11.2% | $504.3 / 8.9% |
| Net earnings attributable to BorgWarner | $550.1 | $377.4 |
| Diluted earnings per share | $4.45 | $3.07 |
| Cash from operating activities | $708.2 | $538.9 |
| Capital expenditures, including tooling | $393.7 | $276.6 |
| Cash at year-end | $359.6 | $449.9 |
| Total debt | $1,329.1 | $1,180.4 |
| Debt net of cash | $969.5 | $730.5 |
Fourth-quarter net sales were $1,773.7 versus $1,533.4 in the prior-year quarter; earnings attributable to BorgWarner were $122.0 versus $111.7.
Material changes versus the prior comparable period
- Full-year sales increased 25.9% (about 17% excluding currency effects and the Dytech and Haldex acquisitions), while estimated worldwide light-vehicle production rose 2.8%.
- Operating income rose about 58% and attributable earnings about 46%. Gross margin increased 0.5 percentage points; operating margin increased 2.3 points.
- Engine sales grew 24.4%; its segment EBIT margin improved to 15.3% from 13.2%. Drivetrain sales grew 29.4%, but its margin declined to 7.7% from 8.5%, reflecting European operational inefficiencies and Haldex-related costs.
- Operating cash flow improved, but investing outflows rose to $564.5, including $393.7 of capital spending and $203.7 of net cash paid for acquired businesses. Cash declined by $90.3.
- Debt net of cash rose to $969.5 from $730.5; net debt to total capitalization increased to 28.3% from 24.0%. The company spent $357.6 repurchasing treasury shares. No dividend was paid; the quarterly dividend had been suspended in 2009.
Liquidity, debt, and other financial considerations
- The company reported $359.6 cash and a $650 revolving credit facility, expandable to $1 billion; $70.0 was drawn at year-end. It reported compliance with financial covenants and expected continued compliance.
- $381.5 of debt was classified as current at year-end, including $368.5 carrying value of 3.50% convertible notes due April 15, 2012. Management announced an intention to settle those notes in shares held in treasury.
- Management stated that operating cash flow, cash, available facilities, and shelf capacity should cover foreseeable operating and planned needs. Contractual obligations totaled $2,505.8, including $583.0 due in 2012; this includes projected interest and other benefit and operating commitments.
- Unfunded status was $236.4 for defined-benefit pension plans and $251.0 for other post-employment benefits. Planned 2012 pension contributions were $30–$40.
- Simple operating cash flow less capital expenditures was approximately $314.5 in 2011; this is not a company-reported free-cash-flow measure.
Outlook, commentary, risks, and unusual items
- Management described the 2012 outlook as positive: it expected global vehicle production to increase, but European production to decline. It expected BorgWarner sales to grow faster than global production through increased adoption of its products. No quantified company revenue or earnings guidance was provided.
- Management cited fuel-efficiency and emissions requirements, turbocharger adoption, direct-injection engines, automated transmissions, and variable cam and chain timing as long-term growth drivers. It expected long-term R&D spending of about 4% of sales; 2011 net R&D was $243.7, or 3.4% of sales.
- 2011 included a $29.1 net gain from a patent-infringement settlement and $21.5 of expense related to the tire-pressure-monitoring business sale and a write-down in ignition/electronics. The tire-pressure-monitoring business was sold during the fourth quarter. These items affected comparability.
- Principal risks include vehicle-production cyclicality, pricing pressure and limited recovery of higher material costs, commodity and supply disruptions, competition, foreign exchange and international exposure, and reliance on major OEM customers. Volkswagen accounted for about 19% and Ford 12% of 2011 sales; together they represented about 20% of year-end receivables.
- Contingencies include environmental matters at 39 sites and asbestos-related claims. The company had approximately 16,000 pending asbestos claims and recorded $61.7 of related liabilities with an equal insurance asset for unresolved claims; recovery timing depends partly on insurer disputes. A separate retiree-benefit class action remained unresolved, with potential loss not reasonably estimable.
- Management and the independent auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- How the April 2012 convertible-note maturity was settled, and the resulting dilution and debt profile.
- Whether sales growth and Engine profitability continued, and whether Drivetrain’s margin recovered from 7.7%.
- Cash conversion after elevated capital spending, acquisitions, and share repurchases; also the company’s remaining liquidity and covenant headroom.
- Progress and cash impact of pension and other post-employment obligations, environmental liabilities, asbestos claims, and insurance recoveries.
- Exposure to Volkswagen and Ford, vehicle-production trends—particularly in Europe—and commodity, supplier, and currency risks.