BorgWarner Inc. — 2010 Form 10-K Summary
Business context and reporting period
BorgWarner supplies engineered automotive powertrain systems and components, primarily to vehicle manufacturers. Its two reporting segments are Engine and Drivetrain. This 10-K covers the fiscal year ended December 31, 2010; it is an annual report, not a standalone fourth-quarter filing. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | 2010 | 2009 |
|---|---|---|
| Net sales | $5,652.8 | $3,961.8 |
| Gross profit / gross margin | $1,093.3 / 19.3% | $560.8 / 14.2% |
| Operating income / operating margin | $504.3 / 8.9% | $50.8 / 1.3% |
| Net earnings attributable to BorgWarner | $377.4 | $27.0 |
| Diluted earnings per share | $3.07 | $0.23 |
| Cash provided by operating activities | $538.9 | $351.0 |
| Cash / total debt at year-end | $449.9 / $1,180.4 | $357.4 / $842.3 |
| Debt to total capitalization | 33.8% | 27.5% |
Sales increased 42.7% year over year (45.0% excluding currency effects), compared with estimated worldwide light-vehicle production growth of 23.5%. Engine sales were $4,060.8 and Drivetrain sales were $1,611.4. Segment Adjusted EBIT was $537.9 for Engine and $137.0 for Drivetrain; both segments improved substantially from 2009.
Investing activities used $429.5, including acquisitions and $276.6 of capital spending; financing activities used $13.2. Cash increased $92.5 during the year. The company had no borrowings outstanding on its $550 million revolving credit facility at year-end and reported compliance with its covenants. In 2010 it issued $250 million of 4.625% senior notes due 2020. The 2010 cash dividend was zero; the quarterly dividend had been suspended in 2009.
Unaudited fourth-quarter results were sales of $1,533.4, operating income of $157.4, net earnings attributable to BorgWarner of $111.7, and diluted EPS of $0.89, versus $1,198.3, $67.3, $52.7, and $0.45, respectively, in fourth-quarter 2009.
Material changes and unusual items
- Recovery in vehicle production and continued cost controls drove the strong year-over-year rebound; 2009 had been affected by sharply lower automotive demand and $50.3 of restructuring expense. No restructuring expense was recorded in 2010.
- 2010 included a $28.0 environmental litigation settlement charge, an $8.0 gain on revaluing the company’s existing BERU-Eichenauer investment, and a $21.2 reversal of a U.S. foreign-tax-credit valuation allowance. Management identified the net impact of listed non-recurring or non-comparable items as a positive $0.05 per diluted share.
- Acquisitions included Dytech ENSA for approximately $147.6 net of cash and the remaining interest in BERU-Eichenauer. After year-end, on January 31, 2011, BorgWarner acquired Haldex’s Traction Systems division for approximately $205.
- Total debt rose 40.1%. The increase reflected the 2020 note issuance, the inclusion of $80 of receivables securitization debt following an accounting change, acquisition spending and share repurchases. The company repurchased 7.1 million shares for $325.7 during 2010.
Outlook, commentary and risks
Management expected global vehicle production to increase in 2011 and projected BorgWarner sales growth above global production growth, citing wider adoption of its products. It also described a positive long-term outlook tied to direct-injection engines, automated transmissions, and variable cam and chain timing systems. Management planned continued product development and capital investment; its stated long-term R&D spending expectation was approximately 4% of sales.
Key risks include automotive-industry cyclicality, OEM pricing pressure and customer concentration (Volkswagen accounted for about 19% and Ford 11% of 2010 sales), commodity inflation and supply interruptions, foreign currency and international exposure, and the ability to convert customer awards into actual orders. Environmental, asbestos, warranty, pension and retiree-benefit matters also warrant attention. The company reported approximately 17,000 pending asbestos claims and expected insurance recovery for recorded amounts, while noting that recovery timing depends on litigation. A Michigan retiree-benefits class action remained unresolved, with potential loss not estimable. One Engine reporting unit’s estimated fair value was only 112% of carrying value; a 1-percentage-point increase in the discount rate or decrease in operating margin would require further goodwill impairment evaluation.
Most important facts for investors to verify
- Review the audited statements and cash-flow detail, especially the sustainability of 2010’s margin rebound and the working-capital demands of higher sales.
- Confirm debt maturities, interest costs, revolver availability and the effects of the receivables-securitization accounting change.
- Track the Haldex acquisition’s integration, purchase accounting and contribution to Drivetrain results, along with returns on capital spending.
- Monitor the asbestos-insurance recovery dispute, environmental and retiree litigation exposures, pension funding needs, and the Engine unit’s goodwill sensitivity.
- Compare actual 2011 sales and production growth with management’s outlook; the filing does not provide a specific numerical earnings or sales forecast.