BorgWarner Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results include the Fuel Systems and Aftermarket businesses; the July 3, 2023 PHINIA spin-off occurred after quarter-end. Unless stated otherwise, amounts are in millions of dollars.
Business context and financial performance
BorgWarner supplies propulsion and vehicle-efficiency products to automotive, commercial-vehicle and off-highway OEMs, as well as the aftermarket. Its five reported segments were Air Management, Drivetrain & Battery Systems, Fuel Systems, ePropulsion and Aftermarket. Prior-period segment data was recast for reporting changes.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $4,520 | $3,759 | $8,700 | $7,633 |
| Gross profit / margin | $868 / 19.2% | $712 / 18.9% | $1,618 / 18.6% | $1,462 / 19.2% |
| Operating income / margin | $383 / 8.5% | $272 / 7.2% | $723 / 8.3% | $624 / 8.2% |
| Net earnings attributable to BorgWarner | $204 | $216 | $421 | $416 |
| Diluted EPS | $0.87 | $0.91 | $1.80 | $1.74 |
- Q2 sales increased 20%; management attributed approximately $680 of growth to volume, mix and new business, $99 to customer recovery of material-cost inflation and $18 to acquisitions. Foreign exchange reduced sales by about $36.
- First-half sales increased 14%; volume, mix and new business added approximately $1,078, customer recoveries added $147 and acquisitions added $40, while currency reduced sales by about $198.
- Q2 gross margin improved year over year, while first-half gross margin declined, reflecting inflation and mix effects. Q2 net earnings fell despite higher operating income, partly due to a $54 unrealized loss on debt and equity securities versus an $11 gain in Q2 2022. First-half net earnings were broadly level.
- Segment adjusted operating income was $537 in Q2 versus $410 a year earlier, and $991 for the first half versus $862. ePropulsion remained loss-making, with adjusted operating losses of $19 in Q2 and $53 for the first half, although both improved year over year. These are company-defined non-GAAP segment measures.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $268, down from $332, mainly due to increased working-capital investment, including a $548 use of cash from receivables.
- Capital expenditures, including tooling, were $520, versus $331. Operating cash flow less capital expenditures was negative $252 for the first half (a simple cash-flow measure, not a company-defined metric). Investing cash outflow was $522; financing cash outflow was $207.
- Cash and restricted cash were $848 at June 30, down from $1,338 at year-end. Total debt was approximately $4,256, including short-term borrowings; cash less total debt implies net debt of approximately $3,408. Long-term debt, net of its current portion, was $4,191.
- Management reported liquidity of $2,848: $848 cash and an undrawn $2,000 revolving credit facility. No revolver or commercial-paper borrowings were outstanding, and the company was compliant with its debt-to-EBITDA covenant. Management said liquidity should be sufficient and covenant compliance maintained for at least 12 months.
- Total assets were $17,317 and total equity $7,781 at June 30. Current assets were $6,876 and current liabilities $4,235.
Material changes, outlook and risks
- PHINIA spin-off: On July 3, BorgWarner distributed PHINIA shares to shareholders at one PHINIA share per five BorgWarner shares. From Q3 onward, BorgWarner will no longer consolidate Fuel Systems and Aftermarket; historical results for those businesses will be presented as discontinued operations. The spin-off generated $67 of first-half merger, acquisition and divestiture costs and an approximately $20 discrete tax expense in Q2.
- Strategy and outlook: Management expected global industry production to increase modestly in 2023 and forecast sales growth above that rate, excluding foreign currency effects, supported by new business, product penetration, eProducts and customer material-cost recoveries. It expected higher eProduct R&D spending to partly offset revenue-growth benefits. No specific 2023 numerical sales or earnings guidance is provided in the supplied filing text. The 2027 Charging Forward targets are more than $10 billion in annual eProducts sales, approximately 7% eProducts adjusted operating margin and double-digit adjusted operating margins for Foundational products. First-half eProducts revenue was approximately $925, or 11% of total revenue.
- Restructuring and investment: A new $130–$150 restructuring plan targets structural costs in Foundational businesses; $12 was recorded under the plan in the first half. Capital spending increased to support planned eProducts growth. The Eldor Electric Hybrid Systems acquisition, announced in June, was expected to close in Q3 for €75 million at closing plus up to €175 million in contingent payments.
- Risks and contingencies: Management cited volatile commodity and input costs, customer recovery negotiations, supply and semiconductor disruptions, vehicle-production cyclicality, EV demand and technology uncertainty, foreign-exchange and economic risks, and dependence on major OEMs. The filing describes ordinary-course legal claims and environmental matters; management did not expect them to have a material adverse effect, while acknowledging an adverse outcome could still be material. Environmental liabilities accrued were $7. The filing reported no material risk-factor changes from the 2022 Form 10-K.
- The first-half effective tax rate was 30% versus 25% a year earlier, affected by spin-off costs, tax-audit resolutions and enacted tax-law changes. Management estimated that unrecognized tax benefits and related interest could decrease by approximately $98 over the next 12 months as audits conclude and statutes lapse.
Important facts for investors to verify
- How Q3 reporting and comparative results reflect the PHINIA spin-off, including separation costs, tax effects and ongoing transition-service arrangements.
- Whether sales growth converts to stronger cash generation; first-half operating cash flow fell while receivables and capital expenditures increased.
- Whether inflation recoveries, pricing and production growth offset cost inflation, and whether gross-margin pressure persists.
- Progress toward eProducts profitability and the 2027 targets, including ePropulsion losses, R&D investment and new-program launch costs.
- Outcome and purchase-price allocation of acquisitions, including Eldor closing conditions and contingent payments, and the final valuation of the Hubei Surpass Sun acquisition.
- Potential volatility from unrealized investment marks, foreign exchange, tax positions, legal matters and restructuring estimates.