BorgWarner Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Results are for continuing operations unless noted. PHINIA, spun off in July 2023, is presented as discontinued operations for prior-period comparisons.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $3.595 billion | $3.383 billion |
| Gross profit / margin | $644 million / 17.9% | $577 million / 17.1% |
| Operating income / margin | $295 million / 8.2% | $274 million / 8.1% |
| Continuing-operations net earnings | $228 million | $181 million |
| Continuing-operations diluted EPS | $0.93 | $0.72 |
| Net earnings attributable to BorgWarner, including discontinued operations | $206 million | $217 million |
| Operating cash flow, continuing operations | $(118) million | $59 million |
| Capital expenditures, including tooling | $190 million | $239 million |
Sales increased 6% year over year: favorable volume, mix and new business added approximately $233 million; foreign exchange reduced sales by about $32 million; acquisitions added $11 million. Weighted-average market production was down approximately 1%, according to the Company. Net earnings attributable to BorgWarner fell despite improved continuing-operations results, primarily because discontinued operations recorded a $7 million loss in 2024 versus $49 million earnings in 2023.
SG&A was $329 million versus $299 million, including higher R&D investment. Net R&D expense rose to $187 million from $166 million. Restructuring expense increased to $19 million from $3 million. The effective tax rate was 21%, compared with 27%; the prior-year comparison included discrete tax items.
Segments and business mix
- Air Management: Sales of $2.030 billion, up 3%; adjusted operating income of $308 million and margin of 15.2%, versus $285 million and 14.4%.
- Drivetrain & Battery Systems: Sales of $1.159 billion, up 21%; adjusted operating income of $158 million and margin of 13.6%, versus $111 million and 11.6%.
- ePropulsion: Sales of $436 million, down 10%; adjusted operating loss widened to $62 million from $35 million, with margin of (14.2)% versus (7.2)%. The Company cited lower North American light-vehicle eProduct demand, higher R&D investment and Eldor-related impacts.
eProducts revenue was $506 million, or 14% of total sales, versus $415 million, or 12%, a year earlier. Foundational products revenue was $3.089 billion versus $2.968 billion.
Cash, debt and liquidity
- Cash, cash equivalents and restricted cash were $1.037 billion at March 31, down from $1.534 billion at year-end. The Company reported $3.037 billion of liquidity, including $2.0 billion available under its undrawn revolving facility.
- Balance-sheet short-term debt was $445 million and long-term debt was $3.295 billion. The increase in short-term debt classification includes $387 million of long-term debt due within one year; senior notes include maturities in 2025.
- Continuing-operations operating cash flow was negative $118 million, versus positive $59 million, mainly reflecting working-capital investment and cash tax payments. Receivables and accounts payable/accrued expenses were significant uses of cash.
- Financing cash use was $183 million, including $100 million of share repurchases and $25 million of dividends to BorgWarner shareholders. Capital spending was $190 million, or 5.3% of sales.
- The Company was in compliance with its revolving-credit debt-to-EBITDA covenant and reported no borrowings under the revolver or commercial-paper program.
Outlook, commentary and notable matters
- Management expects global vehicle production to be flat or modestly lower in 2024, but expects increased full-year revenue excluding foreign-currency effects, driven by new business and product penetration. It expects revenue-growth earnings benefits to be partly offset by the Eldor acquisition. No specific 2024 revenue or earnings guidance range is provided in the supplied filing text.
- Long-term Charging Forward targets for 2027 are more than $10 billion of annual eProduct sales, approximately 7% eProduct adjusted operating margin, and a double-digit adjusted operating margin for Foundational products.
- The 2023 restructuring plan targets $130–$150 million in charges and $80–$90 million of annual gross savings by 2027. The Company had incurred $98 million cumulatively through Q1 2024 and cautioned that further actions could create significant expense.
- Lowered ePropulsion expectations prompted an interim goodwill impairment test. No impairment was recorded, but estimated fair value exceeded carrying value by only approximately 5%; the valuation is sensitive to revenue, margins, discount rates and market assumptions.
- Management cited continuing inflationary pressure on labor, energy and other inputs, with costs expected to be slightly higher or flat. Key risks include vehicle-production cyclicality, OEM dependence, EV-demand uncertainty, competition, supply disruptions, foreign exchange, geopolitics, and legal or regulatory matters.
- Legal and environmental matters were not considered reasonably likely to have a material adverse effect by management, though outcomes remain uncertain. Environmental liabilities accrued were $5 million; the Company was identified as a potentially responsible party at 17 sites.
- The Company estimated a possible decrease of approximately $113 million in unrecognized tax benefits and interest over the next 12 months, associated with audit resolutions and statute expirations. The PHINIA transition-services arrangement was expected to be substantially complete by June 30, 2024.
Important facts for investors to verify
- Whether 2024 sales growth materializes if production is flat or lower, and how much comes from new business versus market demand, currency and acquisitions.
- Whether ePropulsion demand, losses and goodwill valuation improve; the reported goodwill headroom was approximately 5%.
- Progress, cash costs and realized savings under the restructuring plan, including the stated 2027 savings target.
- Whether working-capital outflows reverse and operating cash flow recovers after the negative Q1 result.
- Debt maturities and refinancing plans, particularly the notes due in 2025, alongside capital returns and liquidity needs.
- Potential tax, legal, environmental and PHINIA separation-related developments, including the estimated unrecognized-tax-benefit change.
- The April 2024 authorization for up to $767 million of share repurchases, which replaced the prior authorization after quarter-end.