BorgWarner Inc. — Q1 2017 Form 10-Q
Business context and reporting period: Global automotive components supplier serving vehicle and other OEMs, aftermarket customers, and commercial and off-highway markets. Results cover the three months ended March 31, 2017, compared with Q1 2016. Reporting segments are Engine and Drivetrain.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $2,407.0 million | $2,268.6 million | +6.1% |
| Gross profit / margin | $517.3 million / 21.5% | $464.3 million / 20.5% | Margin +1.0 percentage point |
| Operating income | $292.7 million | $264.2 million | +10.8% |
| Net earnings attributable to BorgWarner | $189.2 million | $164.1 million | +15.3% |
| Diluted EPS | $0.89 | $0.75 | +$0.14 |
| Operating cash flow | $60.3 million | $34.4 million | +$25.9 million |
| Capital expenditures, including tooling | $130.9 million | $104.3 million | +$26.6 million |
Higher sales and improved gross margin supported earnings growth. SG&A rose to $218.8 million from $188.4 million, reflecting higher R&D, stock-based compensation and other employee costs. Net R&D expense was $96.4 million, up from $85.3 million. Q1 operating cash flow less capital expenditures was negative $70.6 million, a derived measure; the company attributed the operating cash flow improvement primarily to higher earnings, partly offset by working-capital changes, including a $215.4 million use of cash from receivables.
Segments and material comparisons
- Engine: Sales of $1,495.4 million, up 6.9%; Adjusted EBIT of $247.0 million versus $236.7 million. Adjusted EBIT margin was 16.5%, compared with 16.9%. Excluding currency effects, sales grew approximately 9.5%, driven by turbochargers and engine timing systems.
- Drivetrain: Sales of $924.9 million, up 5.2%; Adjusted EBIT of $104.8 million versus $86.3 million. Adjusted EBIT margin increased to 11.3% from 9.8%. Excluding the Remy aftermarket divestiture and currency effects, sales grew approximately 18.8%, led by all-wheel drive systems and transmission components.
- Company sales growth was approximately 12.8% excluding the Remy light-vehicle aftermarket divestiture and weakening currencies, primarily the Euro and Chinese Renminbi.
- Other expense was $5.8 million versus $11.7 million. Q1 2017 included a $5.3 million European property lease termination loss; Q1 2016 included $6.4 million of restructuring expense and $5.8 million of Remy-related costs.
Cash, debt and liquidity
Cash was $358.4 million at March 31, 2017, down from $443.7 million at year-end; $352.1 million was held outside the United States. Total debt was approximately $2.30 billion, including $255.1 million of short-term debt and $2,040.3 million of long-term debt. Net debt to net capital was 35.8%, up from 35.0% at December 31, 2016. The weighted average rate on all borrowings was 3.8%.
The company had a $1 billion multi-currency revolving credit facility, expandable to $1.25 billion, with no borrowings outstanding; commercial paper outstanding was $160.0 million. The company was in compliance with its debt-to-EBITDA covenant and expected to remain compliant. Management said cash, operating cash flow, available credit and shelf capacity should cover foreseeable needs, including planned operations and the share repurchase program. Repatriating foreign cash could result in additional taxes.
Outlook, risks and unusual items
- Management described the 2017 outlook as positive: new-business sales growth is expected to exceed modest global industry production growth, partly offset by a stronger U.S. dollar. No specific full-year revenue or EPS forecast is provided in the filing text.
- Long-term growth drivers cited include turbocharger adoption, automated transmissions, variable cam and chain timing systems, and hybrid and electric vehicle offerings.
- Excluding $3.4 million of one-time tax expense, management estimated an approximately 29% annual effective tax rate for 2017. The reported Q1 effective rate was 30.2%.
- Asbestos-related liabilities were $865.7 million, with a separately recorded $386.4 million insurance asset that the company expects to recover fully. The liability estimate includes projected claims and defense costs through 2067; actual outcomes and insurance recoveries remain uncertain. Approximately 9,500 claims were pending at quarter-end.
- Environmental liabilities accrued were $6.1 million, with substantially all expected to be paid over the next five years. The company identified potential responsibility at 27 hazardous-waste sites. Management did not expect ordinary commercial and legal claims or environmental matters to materially affect consolidated results, financial position or cash flows, while noting particular-quarter effects are possible.
- Other risks include changes in vehicle production and demand, economic conditions, foreign exchange, and the ability to realize acquisition benefits. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether sales growth, segment margins and new-business gains persist after adjusting for currency movements and the Remy divestiture.
- Working-capital trends and the funding of capital expenditures, given Q1 operating cash flow below capital spending.
- Debt, commercial paper usage, foreign-cash availability and compliance with the credit facility covenant.
- The assumptions supporting asbestos claim estimates and the amount, timing and collectability of insurance recoveries.
- The effect and implementation of the new revenue-recognition standard, which the company expected to adopt January 1, 2018; management was still evaluating its financial impact.