BorgWarner Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statements are unaudited. BorgWarner supplies propulsion, efficiency and related products primarily to vehicle manufacturers and aftermarket customers. Results include Delphi Technologies, acquired October 1, 2020; AKASOL was consolidated beginning June 4, 2021. Therefore, year-over-year comparisons are not fully like-for-like, and Q2 2020 was also heavily affected by pandemic-related production shutdowns.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $3.758 billion | $1.426 billion | $7.767 billion | $3.705 billion |
| Gross profit / margin | $762 million / 20.3% | $174 million / 12.2% | $1.580 billion / 20.3% | $621 million / 16.8% |
| Operating income (loss) / margin | $317 million / 8.4% | $(78) million / (5.5)% | $720 million / 9.3% | $120 million / 3.2% |
| Net earnings attributable to BorgWarner | $247 million | $(98) million | $312 million | $31 million |
| Diluted EPS | $1.03 | $(0.47) | $1.30 | $0.15 |
Sales rose 164% in Q2 and 110% for the first half. Excluding the estimated effects of Delphi and currency, management reported sales growth of approximately 75% in Q2 and 41% for the first half, principally reflecting recovery from 2020’s COVID-related downturn and stronger product demand. Higher sales drove margin improvement; the company also cited restructuring savings. Q2 Segment Adjusted EBIT was $479 million; segment margins were 14.9% for Air Management, 9.9% for e-Propulsion & Drivetrain, 7.9% for Fuel Injection and 14.2% for Aftermarket.
Cash, liquidity and debt
- First-half operating cash flow was $622 million, versus $327 million a year earlier. Capital expenditures, including tooling, were $342 million, versus $171 million.
- Investing cash outflow was $1.099 billion, including $759 million of net acquisition payments. Cash, cash equivalents and restricted cash ended the period at $1.568 billion, down $82 million from year-end 2020.
- At June 30, cash and cash equivalents were $1.553 billion, with $15 million restricted. Long-term debt was $4.360 billion, including current portion; short-term borrowings were $1 million. The $2.0 billion revolving facility was undrawn, and the company reported compliance with its debt-to-EBITDA covenant.
- In May, BorgWarner issued €1.0 billion of 1.00% notes due 2031, partly in anticipation of AKASOL and to refinance €500 million of notes due 2022. It repaid the 2022 notes in June and recorded a $20 million extinguishment loss.
Material developments and unusual items
- BorgWarner acquired 89% of AKASOL on June 4 for approximately $788 million and held 93% at June 30 after additional purchases. It consolidated approximately $77 million of AKASOL gross debt. The acquisition’s reported Q2 and first-half sales and earnings impact was immaterial; purchase accounting remained provisional, including $707 million of goodwill.
- The six-month results included a $276 million unrealized loss on the Romeo Power investment; its fair value was $156 million at June 30. The Q2 unrealized loss was $4 million.
- First-half income tax expense included stated discrete benefits of $55 million related to a tax matter, $20 million from a UK tax-rate change and $24 million primarily related to withholding-rate changes. These items contributed to a 16% effective tax rate for the first half, compared with 45% in 2020.
- Restructuring expense was $92 million for the first half. The 2020 structural-cost plan is expected to cost $300 million through 2022, with anticipated annual gross savings of $90–$100 million. The company warned that further Delphi-related restructuring charges could be significant.
- As of August 2, 2021, the company had initiated a German squeeze-out process for AKASOL’s remaining minority shares; the cash compensation had not yet been determined.
Outlook, risks and contingencies
Management described its 2021 outlook as positive and expected global production and BorgWarner sales, excluding currency and acquisition/divestiture effects, to increase. It did not provide a quantified full-year earnings or revenue forecast in the supplied filing text. Management expected semiconductor and other component constraints to continue disrupting production in the second half, and commodity-cost volatility—particularly steel and petroleum-based resins—to remain a headwind. It also cited uncertainty from COVID-19 resurgence and cyclical vehicle production.
Longer-term strategy includes increased electrification R&D and technology acquisitions, planned dispositions of combustion assets generating about $1 billion in annual revenue over 12–18 months and $3–$4 billion by 2025, and targets for pure-EV product revenue to exceed 25% of total revenue by 2025 and reach approximately 45% by 2030. These are targets, not guarantees. The filing identified acquisition integration, EV demand forecasting, supply disruptions, competition, customer concentration, commodity and currency movements, and legal and environmental matters as risks. Environmental liabilities were accrued at $7 million; the company reported potential responsibility at 26 sites. A shareholder demand concerning past asbestos-liability accounting and disclosures was under board consideration; a related derivative suit had been dismissed without payment.
Important facts for investors to verify
- Separate underlying sales and margin trends from Delphi acquisition effects, currency movements and the unusual 2020 COVID comparison.
- Track semiconductor availability, commodity inflation and working-capital needs, including the first-half inventory and receivables cash uses.
- Assess AKASOL integration, final purchase-price allocation, remaining-share compensation and the realization of expected electrification benefits.
- Evaluate earnings excluding the Romeo fair-value loss, discrete tax benefits, debt-extinguishment loss and restructuring/acquisition costs; reconcile any non-GAAP measures to GAAP.
- Monitor execution and costs of restructuring and combustion-asset dispositions, and progress against EV revenue targets.