BorgWarner Inc. 2009 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 Form 10-K covers the fiscal year ended December 31, 2009; fourth-quarter results are included but the filing is not a stand-alone quarterly report. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance and liquidity
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $3,961.8 | $5,263.9 |
| Gross profit / margin | $560.8 / 14.2% | $838.5 / 15.9% |
| Operating income | $50.8 | $7.3 |
| Net earnings (loss) attributable to BorgWarner | $27.0 | $(35.6) |
| Diluted EPS | $0.23 | $(0.31) |
| Cash from operating activities | $351.0 | $400.8 |
| Capital expenditures, including tooling | $172.0 | $369.7 |
| Cash at year-end | $357.4 | $103.4 |
| Total debt | $842.3 | $780.3 |
| Total debt to capital | 27.5% | 27.7% |
Operating cash flow declined by $49.8 million, mainly because of lower operating earnings, partly offset by lower working-capital needs. Inventory fell $143.0 million, excluding currency effects. The company had a $250 million revolving credit facility, undrawn at year-end, and reported compliance with its covenants. The facility matures in January 2011. A new $50 million receivables securitization facility was entered into in December 2009.
Changes versus comparable periods
- Annual sales fell 24.7% year over year, or 21.5% excluding unfavorable currency effects. Worldwide light-vehicle production declined 13.7%; BorgWarner attributed its steeper sales drop mainly to its greater exposure to North America and Europe and product-mix changes.
- Gross margin declined to 14.2% from 15.9%, as sales volumes fell faster than the company could reduce costs. SG&A fell in dollars but rose to 11.6% of sales from 10.3%.
- Engine sales decreased 25.3%; segment EBIT fell 44.3% to $219.8 million, with a 7.6% margin versus 10.2% in 2008. Drivetrain sales decreased 23.3%; segment EBIT was a loss of $13.5 million, compared with a $4.9 million loss in 2008.
- Reported fourth-quarter sales were $1,198.3 million versus $931.5 million in fourth-quarter 2008; net earnings attributable to BorgWarner were $52.7 million versus a loss of $81.4 million. The 2008 quarter included substantial restructuring, goodwill impairment and warranty charges.
Outlook, unusual items and risks
- Management was cautiously optimistic for 2010 and expected global vehicle production to rise from 2009 levels, but cited limited European visibility because of uncertain consumer demand and the expiration of government incentive programs. No quantified earnings or sales guidance was provided.
- 2009 included $50.3 million of restructuring expense, including $36.3 million of asset impairments; the company reduced headcount across regions. A $27.9 million net gain from retiree-obligation changes related to the Muncie plant closure supported results. Adoption of the business-combinations accounting standard generated a $4.8 million charge.
- The company issued $373.8 million of convertible senior notes due in 2012. Interest expense and finance charges rose to $57.2 million from $38.8 million; reported 2009 convertible-note interest expense was $22.2 million, including $12.7 million non-cash amortization.
- Management described the business as cyclical and exposed to vehicle-production declines, OEM pricing pressure and customer concentration. Volkswagen represented about 22% of 2009 sales and Ford about 12%; together they accounted for about 23% of year-end receivables.
- Other significant exposures include commodity and supplier disruptions, foreign exchange, pension and retiree-benefit obligations, environmental matters, asbestos claims and litigation. Pension plans were underfunded by approximately $229.9 million; other post-employment benefits had an unfunded status of $278.5 million.
- The filing reports environmental liability figures of $21.0 million in one discussion and $22.3 million including the $1.3 million conditional asset-retirement obligation elsewhere. The exact presentation should be checked against the financial-statement notes. The company also reported about 23,000 pending asbestos claims and expected insurance reimbursement for recorded related liabilities, subject to ongoing insurance litigation.
Most important facts for investors to verify
- Whether the 2010 production recovery and European demand developed as management expected; the filing provides no quantified earnings guidance.
- Cash generation, working-capital needs, and refinancing or renewal of the $250 million revolving facility before its January 2011 maturity.
- The 2012 convertible-note repayment or conversion terms, effective interest cost, and potential dilution.
- Progress in restoring Drivetrain profitability and sustaining Engine margins amid lower volumes and OEM price pressure.
- Assumptions and potential cash requirements for pension and retiree benefits, environmental liabilities, asbestos insurance recoveries, and outstanding litigation.