BorgWarner Inc. — 2020 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2020; it is not a standalone fourth-quarter filing. BorgWarner supplies propulsion and vehicle technologies to automotive, commercial-vehicle, off-highway and aftermarket customers worldwide. The company completed its acquisition of Delphi Technologies on October 1, 2020 and reorganized its reporting into four segments: Air Management, e-Propulsion & Drivetrain, Fuel Injection and Aftermarket.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $10.165 billion | $10.168 billion |
| Gross profit / gross margin | $1.910 billion / 18.8% | $2.101 billion / 20.7% |
| Operating income / operating margin | $618 million / 6.1% | $1.303 billion / 12.8% |
| Net earnings attributable to BorgWarner | $500 million | $746 million |
| Diluted EPS | $2.34 | $3.61 |
| Net cash from operating activities | $1.184 billion | $1.008 billion |
| Capital expenditures, including tooling | $441 million | $481 million |
| Cash and cash equivalents at year-end | $1.650 billion | $832 million |
| Total debt at year-end | $3.787 billion | $1.960 billion |
- Reported sales were nearly unchanged, but included $1.120 billion of Delphi Technologies sales in the fourth quarter. Excluding acquisition effects and currency, sales declined approximately 11%, principally because of COVID-19 production disruptions in the first half; stronger China sales partly offset the decline.
- Gross margin fell 1.9 percentage points. Management cited pandemic-related under-absorption of fixed costs, a $27 million acquired-inventory fair-value charge and lower-margin acquired business.
- Operating cash flow increased year over year, with the comparison benefiting from a $172 million cash contribution related to the 2019 Morse TEC transfer. Lower working-capital investment also helped, partly offset by increased retirement-plan contributions.
- Year-end liquidity was $3.650 billion: $1.650 billion cash and a fully undrawn $2.000 billion revolving facility. The company reported compliance with its credit covenant and $45 million of debt maturities through 2021.
- Cash dividends were $0.68 per share for the year. The company repurchased $216 million of stock under its $1 billion authorization.
Material changes and unusual items
- Delphi acquisition consideration was approximately $2.391 billion, including about 37.2 million BorgWarner shares, cash and repayment of Delphi debt; BorgWarner also assumed debt. The acquired operations contributed $30 million of attributable earnings from the acquisition date through year-end. Purchase accounting remained preliminary.
- Reported 2020 earnings included a $382 million unrealized gain on the company’s Romeo Power investment, which became publicly traded. Management’s non-GAAP reconciliation identified total non-comparable items that reduced diluted EPS by $0.42, after including the gain.
- Restructuring expense rose to $203 million from $72 million. The 2020 charges included facility closures, employee costs and Delphi-related actions. A company plan is expected to incur $300 million of costs through 2022 and generate $90–$100 million of annual gross savings.
- Debt increased following a $1.1 billion bond issuance and the Delphi acquisition. Interest expense rose to $73 million from $55 million. Standard & Poor’s lowered the rating to BBB with a negative outlook; Moody’s and Fitch retained their ratings but moved outlooks to negative.
- Warranty liability was $253 million at year-end, versus $116 million a year earlier; the 2020 warranty provision was $105 million. The increase includes $110 million assumed with Delphi.
- Net unfunded pension status was $501 million, up from $212 million, including assumed Delphi obligations. The company made a $137 million contribution to the acquired U.K. pension scheme and anticipated no further scheme contribution before 2026 at the earliest.
Outlook, risks and contingencies
- Management described its 2021 outlook as positive, expecting global vehicle production to rise as 2020 pandemic-related effects recede. It expected new-business growth to support sales growth in line with or above industry production, excluding currency and acquisition/divestiture effects. No specific numerical revenue or earnings guidance is provided in the filing text.
- Longer-term growth themes include electrified-vehicle products, stricter emissions standards and greater all-wheel-drive penetration. Management’s stated long-term R&D spending expectation is 5.0%–5.5% of net sales.
- Key risks include continued COVID-19 disruption, cyclical vehicle production, OEM customer concentration, supply interruptions and commodity costs, pricing pressure, foreign-exchange exposure, integration and realization of Delphi synergies, and changes in propulsion technology and regulation. Ford and Volkswagen represented approximately 13% and 11% of 2020 sales, respectively; the top ten customers represented 64%.
- The company identified environmental, warranty, product-liability, litigation and tax exposures. It accrued $7 million for environmental liabilities and reported potentially responsible-party involvement at 26 hazardous-waste sites; management did not expect these matters to have a material adverse effect, while noting outcomes remain uncertain.
- After year-end, BorgWarner agreed to make a voluntary cash offer for AKASOL AG at €120 per share, valuing its equity at approximately €727 million. The transaction was expected to close in the second quarter of 2021, subject to conditions and regulatory approvals. A $900 million delayed-draw facility was arranged and was expected to remain undrawn.
- The auditor issued unqualified opinions on the financial statements and internal controls. Delphi Technologies, acquired in October, was excluded from the year-end internal-control assessment and audit; it represented approximately 27% of consolidated assets and 11% of 2020 sales.
Important facts for investors to verify
- Organic sales, margins and cash generation after separating COVID-19 effects, foreign currency and Delphi’s partial-year contribution.
- Progress on Delphi integration, preliminary purchase accounting, expected synergies and the performance of the acquired segments.
- The sustainability of earnings excluding the $382 million Romeo Power fair-value gain and other non-comparable items.
- Debt reduction, ratings outlooks, covenant headroom and funding needs if the AKASOL offer proceeds.
- Restructuring cash costs and delivery of the expected $90–$100 million annual savings, as well as warranty and pension liabilities.
- Whether the 2021 production and sales outlook is achieved amid continuing pandemic, supply-chain, customer and market risks.