BorgWarner Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. This is an annual filing; quarterly figures below identify the fourth quarter where relevant. BorgWarner supplies engineered automotive powertrain systems and components through its Engine and Drivetrain segments.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $8,023.2 million | $8,305.1 million | Down 3.4% reported; up 4.3% excluding currency and acquisition effects, as described by the company |
| Gross profit / margin | $1,703.1 million / 21.2% | $1,756.4 million / 21.1% | Margin up 0.1 percentage point |
| Operating income / margin | $939.7 million / 11.7% | $963.7 million / 11.6% | Income down 2.5%; margin up 0.1 point |
| Net earnings attributable to BorgWarner | $609.7 million | $655.8 million | Down 7.0% |
| Diluted EPS | $2.70 | $2.86 | Down 5.6% |
| Operating cash flow | $867.9 million | $801.8 million | Up $66.1 million |
| Capital expenditures, including tooling | $577.3 million | $563.0 million | Up $14.3 million |
| Cash at year-end | $577.7 million | $797.8 million | Down $220.1 million |
| Total debt | $2,566.1 million | $1,340.0 million | Up $1,226.1 million |
| Net debt to net capital | 35.4% | 12.8% | Up 22.6 percentage points |
Operating cash flow less capital expenditures was approximately $290.6 million, compared with $238.8 million in 2014. Investing activities used $1,759.1 million, principally reflecting acquisitions and capital spending. The company reported $3,135.3 million of current assets and $2,357.3 million of current liabilities at year-end. It had a $1 billion revolving credit facility, with no borrowings outstanding under the facility, and was in compliance with its debt-to-EBITDA covenant.
Approximately 75% of consolidated sales were generated outside the U.S. Volkswagen and Ford each represented about 15% of 2015 sales. Light-vehicle turbochargers represented approximately 31% of sales. The company declared and paid $0.52 per share in dividends during 2015.
Fourth-quarter results
Fourth-quarter 2015 sales were $2,123.1 million, versus $1,991.9 million in fourth-quarter 2014. Operating income was $200.5 million versus $212.2 million; net earnings attributable to BorgWarner were $125.3 million versus $139.9 million; and diluted EPS was $0.56 versus $0.61. Fourth-quarter 2015 results included restructuring charges, a pension settlement loss and Remy-related acquisition expenses.
Material changes and unusual items
- Reported annual sales declined, partly reflecting a stronger U.S. dollar, especially against the euro. On the company’s stated adjusted basis, sales increased 4.3%; Engine sales excluding currency and specified acquisition effects increased 6.7%, while Drivetrain sales excluding currency and Remy effects decreased 0.8%.
- Gross margin improved slightly, but lower net earnings and EPS reflected, among other factors, higher interest expense and non-comparable charges. Interest expense and finance charges rose to $60.4 million from $36.4 million, primarily following 2015 note issuances.
- Non-comparable 2015 items included $65.7 million of restructuring expense, a $25.7 million non-cash pension settlement loss and $21.8 million of merger and acquisition expense, partly offset by a $10.8 million gain on a previously held BERU Diesel interest. The company estimated about $4 million of additional Drivetrain restructuring expense.
- In November 2015, BorgWarner acquired Remy International for $29.50 per share in cash and settled approximately $361 million of Remy debt. Cash paid, net of cash acquired, was $1,187.0 million. Remy’s post-acquisition operating results were described as insignificant to 2015 consolidated results. Purchase accounting remained preliminary at year-end.
- The company issued $1 billion of U.S. senior notes in March 2015 and €500 million of 1.80% senior notes in November 2015. The proceeds supported general corporate purposes, including the Remy acquisition, share repurchases and repayment of short-term debt. Commercial paper borrowings were $215.0 million at year-end, versus $460.9 million.
- Foreign currency translation losses were $260.5 million in 2015, contributing to accumulated other comprehensive loss of $610.2 million at year-end. The filing attributes the currency impact primarily to the stronger U.S. dollar.
Outlook, risks and contingencies
Management described its 2016 outlook as cautious, anticipating weak global vehicle-production growth but moderate net new-business-related sales growth. A stronger U.S. dollar was expected to reduce the reported value of foreign-currency sales. Management maintained a positive long-term outlook, citing adoption of gasoline direct injection, automated transmissions and variable cam and chain timing systems. It expects liquidity from operating cash flow, cash balances, credit facilities and shelf-registration capacity to meet foreseeable needs.
- Key exposures include cyclical vehicle production, OEM pricing pressure, commodity costs and supply interruptions, foreign exchange, competition, customer concentration, and the integration and expected benefits of Remy.
- At year-end, cash held by foreign subsidiaries was $441.3 million; repatriation could trigger additional taxes. The company’s stated liquidity plan balances internal investment, acquisitions, debt reduction and cash conservation.
- The company had approximately 10,100 pending asbestos-related claims. It recorded $108.5 million of related liabilities and an equal insurance asset for unresolved claims; recovery is expected after resolution of continuing insurance coverage litigation, which was not expected before after December 31, 2016. It also reported $163.3 million of net past defense and indemnity costs expected to be recovered from insurers.
- Environmental liabilities accrued were $5.4 million for 26 identified sites. A retiree-benefits lawsuit remained pending, and the company said potential loss could not be reasonably estimated. Management did not expect the identified matters to have a material adverse effect overall, while noting outcomes remain uncertain.
- Pension plans had a net unfunded position of $178.3 million; the company expected to contribute $15 million to $25 million in 2016. The auditor and management reported effective internal control over financial reporting, but Remy was excluded from the 2015 assessment because it was acquired in November.
Important facts for investors to verify
- How much of the stated 4.3% adjusted sales growth reflects underlying volume and pricing versus acquisitions and the company’s adjustment methodology.
- Remy’s ongoing contribution, integration costs and synergies, and the final purchase-price allocation and related goodwill and intangible-asset assumptions.
- Debt-service capacity and refinancing needs, given higher debt, the 35.4% net-debt-to-net-capital ratio and scheduled principal payments, including $441.5 million due in 2016.
- The timing and collectability of asbestos insurance recoveries, and any changes in claims, coverage litigation or accrual estimates.
- Whether vehicle-production trends, currency movements, customer concentration and commodity or supplier pressures differ materially from management’s 2016 assumptions.