AUBURN HILLS, Mich. — BorgWarner reported second quarter 2010 U.S. GAAP earnings of 68 cents per diluted share. Excluding non-recurring items in both periods, earnings were 78 cents per diluted share compared with a net loss of 5 cents per diluted share a year ago. Sales were up 55.2 percent from second quarter 2009 as growing demand for its fuel-efficient technologies drove the global powertrain systems supplier’s strong results.
Second Quarter Highlights
• Sales were $1.421.7 billion, up 55.2 percent from second quarter 2009.
• U.S. GAAP earnings were 68 cents per diluted share. For comparison with other periods, second quarter 2010 earnings were 78 cents per diluted share excluding non-recurring items. Non-recurring items included a $28 million environmental litigation settlement, partially offset by an $8 million equity investment gain.
• Operating income was $117.3 million on a reported basis. Excluding non-recurring items, operating income was $137.3 million, or 9.7 percent of sales.
• The company repurchased approximately 4.1 million shares of its common stock.
Net debt-to-capital ratio at the end of the quarter was 27.5 percent.
"Growing demand for our leading-edge powertrain products drove our second quarter results," said Timothy Manganello, chairman and CEO of BorgWarner. "Our sales were up 55 percent in second quarter 2010 compared with second quarter 2009, while global vehicle production was up 29 percent. The primary driver of our out-performance was new business growth as our product technology continued to penetrate the global market. Favorable macroeconomic trends, such as the continued volume shift in Europe toward vehicles with higher BorgWarner content, including diesels, also boosted results.
"In addition, a continued sharp focus on managing costs while sales grew resulted in an operating income margin of 9.7 percent in the quarter, excluding non-recurring items, which is the highest quarterly operating income margin that we have achieved since 2002."
2010 Improved Outlook
The company raised its earnings guidance for 2010 to a range of $2.60 to $2.80 per diluted share from a previous range of $2.20 to $2.50 per diluted share. Both the current guidance range and the previous guidance range exclude non-recurring items. Revenue growth in 2010 is now expected to be 32 percent to 35 percent compared with 2009.
"Our outlook for vehicle production in North America, Europe and China has improved since we last provided guidance," Manganello said. "More importantly, we expect our growth to outpace the market as demand for our products continues to gain momentum. It is our expectation that 2010 will be a record earnings year for the company."
Financial Results
Sales were $1.421.7 billion in second quarter 2010, up 55.2 percent from $916.2 million in second quarter 2009. Net earnings in the quarter were $82.8 million, or 68 cents per diluted share, compared with a net loss of $35.9 million, or 31 cents per diluted share in second quarter 2009. Second quarter 2010 net earnings included net non-recurring items of 10 cents per diluted share. Second quarter 2009 net earnings included net non-recurring items of 26 cents per diluted share. These items are listed in a table below as reconciliations of non-U.S. GAAP measures, which are provided by the company for comparison with other results and the most directly comparable U.S. GAAP measures. The impact of foreign currencies in second quarter 2010, primarily the Euro, lowered sales by $24.1 million, while the impact on net earnings was 1 cent per diluted share.
For the first six months of 2010, sales were $2.708 billion, up 56 percent compared with $1.735 billion in the first six months of 2009. Net income in the first six months of 2010 was $159 million, or $1.31 per diluted share, compared with a net loss of $42.9 million, or 37 cents per diluted share, in the first six months of 2009. Net earnings in the first six months of 2010 included net non-recurring items of 12 cents per diluted share. The company’s net loss in the first six months of 2009 included net non-recurring items of 20 cents per diluted share. These items are listed in a table below as reconciliations of non-U.S. GAAP measures, which are provided by the Company for comparison with other results, and the most directly comparable U.S. GAAP measures. The impact of foreign currencies, primarily the Euro, increased sales by $35.5 million in the first six months of 2010 compared with the first six months of 2009, while the impact on net earnings was 5 cents per diluted share.
Net cash provided by operating activities was $208.3 million in the first six months of 2010 compared with $173.8 million in the first six months of 2009. Investments in capital expenditures, including tooling outlays, totaled $107.4 million in the first six months of 2010, compared with $88.3 million in the first six months of 2009. Balance sheet debt increased by $124.0 million and cash on hand decreased by $169.9 million compared with the end of 2009 primarily due to the acquisition of Dytech ENSA SL, the repurchase of approximately 4.1 million shares of common stock and the adoption of amended ASC Topic 860, "Accounting for Transfer of Financial Assets," which requires the company to reflect its $50 million receivables securitization facility in its financial statements. The ratio of balance sheet debt net of cash to capital was 27.5 percent at the end of second quarter 2010 compared with 17.9 percent at the end of 2009.
Engine Group Results
Engine segment net sales were $1.017 billion in second quarter 2010, up 51.8 percent from $670.4 million in the prior year’s quarter as a result of strong turbocharger and timing system growth in the Asian markets along with solid turbocharger growth in Europe. Excluding the impact of currency, sales were up approximately 55 percent.
Adjusted earnings before interest and income taxes were $132.8 million for the Engine Group in second quarter 2010 compared with $44 million in second quarter 2009.
Drivetrain Group Results
Drivetrain segment net sales were $408.7 million in second quarter 2010, up 64.3 percent from $248.8 million in the prior year’s quarter. Excluding the impact of currency, sales were up approximately 66 percent. Four-wheel drive system sales in the Asian markets were sharply higher in second quarter 2010 compared with second quarter 2009. Also, higher dual clutch transmission modules and other automatic transmission component sales in Europe boosted results. Adjusted earnings before interest and income taxes were $37.3 million for the Drivetrain Group in second quarter 2010 compared with a loss of $8.8 million in second quarter 2009.
Recent Highlights
The company’s Board of Directors authorized the repurchase of an additional 5 million shares of common stock. The new authorization was made in anticipation of exhausting the limited number of shares that remain available under the previous authorization from 2008. The company has maintained share repurchase programs since 1997.
In April, the company acquired Dytech ENSA SL, a producer of exhaust gas recirculation (EGR) coolers, EGR tubes, and integrated EGR modules including valves for automotive and commercial vehicle applications, both on- and off-road. With locations in Spain, Portugal and India, Dytech ENSA employs approximately 1,000 people and supplies customers such as Renault/Nissan, VW/Audi, Ford, Fiat, Navistar, GM, Daimler, PSA, Suzuki, Mahindra & Mahindra, TATA, Ashok Leyland, MAN and IVECO. Dytech ENSA’s annual sales for 2009 were approximately $180 million.
In anticipation of market growth expected for its electric cabin heaters, BorgWarner bought out its joint venture partner in BERU-Eichenauer GmbH, which was formed to develop and manufacture electric cabin heaters. The acquisition formally took effect on May 1, 2010.
BorgWarner has been selected by JCB Power Systems to supply both wastegate and variable turbine geometry (VTG) turbochargers for the new versions of its Dieselmax 4.4-Liter engines starting in 2012. Designated the JCB "Ecomax T4," the engines will be used in a number of applications including agricultural, construction, and materials handling machinery. BorgWarner’s turbocharger technology will help this new engine meet stringent Interim Tier 4/Stage III B regulations without the need for exhaust aftertreatment or (DPF) Diesel Particulate Filters. These regulations require up to a 50 percent reduction in nitrogen oxide (NOx) emissions compared with previous standards.
Powered by BorgWarner’s regulated two-stage (R2S) and variable turbine geometry (VTG) turbocharging technologies, the new 740d boasts BMW’s most powerful 3.0-liter straight six-cylinder diesel engine, while improving fuel economy up to 4 percent compared with its predecessor.
For the first time in a passenger car, the combination of direct fuel injection plus R2S and VTG turbocharging sets new standards in improved performance and torque as well as reduced emissions and increased fuel economy. Accelerating from 0 to 62 mph (100 km/h) in just 6.3 seconds, the BMW 740d achieves a combined 34 mpg (6.9 liters/100 km) and meets Euro 5 emissions standards.
BorgWarner’s improved Cool Logic variable speed fan drives are now standard equipment on MACK Granite, Titan and Pinnacle model heavy-duty commercial diesel trucks, used in dump truck, mixer and snow plow applications, as well as highway hauling. Based on 4 million miles of fleet testing, Cool Logic fan drives improve fuel economy up to 3 percent (depending on route terrain, truck load and duty cycle) compared with traditional fan drives, delivering substantial savings to truck fleet owners.
BorgWarner has been chosen to supply its regulated two-stage turbocharging (R2S) technology to MAN for engines used to power medium-duty trucks and urban buses in the Latin American market beginning in 2012. To meet growing demand for increased power output and reduced emissions, MAN selected BorgWarner’s innovative turbocharging system for its common-rail, four-cylinder and six-cylinder diesel. Produced at BorgWarner’s facility in Campinas, Brazil, the optimized turbocharging system helps the new engines achieve impressive fuel economy, reduced emissions and improved performance. MAN Latin America leads the truck market in Brazil with a market share of more than 30 percent.
