Business Context and Reporting Period
Company: BorgWarner Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: BorgWarner is a global supplier of highly engineered systems and components for powertrain applications, operating in two reporting segments: Engine and Drivetrain. The company serves original equipment manufacturers (OEMs) of light vehicles, commercial trucks, and the aftermarket.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Sales | $819.5 | $1,498.9 |
| Gross Profit | $79.6 | $283.5 |
| Gross Margin | 9.7% | 18.9% |
| Operating Income | $5.5 | $124.8 |
| Net Earnings (Loss) Attributable to BorgWarner | $(7.0) | $88.7 |
| Diluted EPS | $(0.06) | $0.75 |
| Cash and Cash Equivalents | $90.8 | $203.4 |
| Net Cash Provided by Operating Activities | $68.0 | $74.5 |
| Total Debt (Notes Payable + Long-Term) | $716.9 | $780.3 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 45.3% year-over-year, driven by a 37% decline in global light-vehicle production and unfavorable foreign currency impacts (approx. $82 million).
- Margin Compression: Gross margin fell to 9.7% from 18.9% as sales volume declined faster than the company could reduce its cost structure.
- Segment Performance:
- Engine Segment: Sales dropped 43.1%; EBIT fell 74.0% to $35.9 million.
- Drivetrain Segment: Sales dropped 51.6%; EBIT swung to a loss of $(32.7) million from $18.3 million profit.
- Restructuring and Plant Closure: The company closed its Muncie, Indiana plant, recording a net pre-tax gain of $27.9 million (comprised of a $41.9 million curtailment gain and a $14.0 million settlement loss on retiree obligations).
- Interest Expense: Increased to $19.1 million from $6.5 million, largely due to the termination of interest rate swaps and costs related to the BERU acquisition.
Guidance, Outlook, and Risks
- Outlook: Management expresses caution regarding 2009 due to the financial crisis and deteriorating global economic conditions. No specific numerical guidance was provided for the full year, though the company expects long-term growth trends (diesel, automated transmissions) to resume upon economic recovery.
- Liquidity Actions:
- Suspended quarterly dividends ($0.12/share) effective March 5, 2009, to conserve cash.
- Issued $373.8 million in convertible senior notes on April 9, 2009.
- Extended revolving credit facility to January 2011, though capacity will be reduced to $250 million in July 2009.
- Key Risks and Contingencies:
- Customer Bankruptcy: Chrysler LLC filed for bankruptcy on April 30, 2009. BorgWarner ceased shipments pending payment agreements. Exposure: $29.4 million in Q1 sales; $22.9 million in receivables.
- General Motors: Uncertainty surrounds GM's potential bankruptcy filing. Exposure: $42.2 million in Q1 sales; $34.6 million in receivables.
- Legal: Ongoing litigation regarding retiree health care benefits with the UAW and asbestos-related product liability claims (approx. 24,000 pending claims, though management expects minimal payout due to insurance coverage).
Investor Verification Checklist
- Cash Flow Sustainability: Verify if operating cash flow remains positive given the suspension of dividends and reduced capital expenditures ($38.6 million in Q1 vs. $75.4 million in Q1 2008).
- Customer Exposure: Monitor the resolution of Chrysler's bankruptcy and the status of General Motors to assess potential write-offs on the $57.5 million combined receivables from these two entities.
- Debt Covenants: Confirm continued compliance with credit facility covenants (net worth, debt-to-EBITDA, interest coverage) amidst declining earnings.
- Non-GAAP Adjustments: Review the impact of the $27.9 million Muncie plant closure gain and the $5.7 million interest rate swap termination charge on true operational performance.
- Convertible Note Impact: Assess the future interest expense impact of the new $373.8 million convertible notes, estimated at $22.5 million for the full year 2009 due to amortization of the discount.