Following a disappointing 2015 and a difficult start to 2016 -- management lowered long-term growth forecasts in January -- powertrain engineer BorgWarner Inc. (BWA +0.82%) was under pressure to deliver. The first-quarter results saw the company get back on track, and the recent second-quarter earnings saw the company trump its own expectations while slightly raising full-year guidance. Let's take a closer look at the earnings.
BorgWarner Inc.'s growth prospects largely rely on auto production rates. Image source: Getty Images.
BorgWarner's second-quarter earnings: The raw numbers
The headline figures:
- Net sales of $2.329 billion represented growth of 14.6% compared to guidance for 10.6% to 16% growth.
- Net sales growth, excluding foreign currency and the Remy acquisition, came in at 3.5% compared to guidance for 1.5% to 4.8%.
- Adjusted diluted EPS of $0.84 compared to guidance for $0.78 to $0.83, with Remy adding $0.04 compared to guidance for $0.03.
In short, sales and underlying sales growth came in ahead of the midpoint of guidance, and earnings excluding Remy were at the top of the guidance range. Meanwhile, the Remy acquisition contributed $0.01 more than expected in the quarter -- solid execution.
Turning to guidance:
- Full-year net sales guidance for growth of 13.5% to 17.5% compared to previous guidance for 12.7% to 17.5%.
- Excluding foreign currency headwinds and the impact of the Remy acquisition, net sales growth is still expected to be 3% to 5.5%, compared to previous guidance for 2.5% to 5.5%.
- Net diluted EPS is still expected to be in the range of $3.16 to $3.32,compared to previous guidance for $3.11 to $3.32.
- Remy still expected to contribute $0.12 for the full year.
As you can see above, management raised the bottom end of its full-year revenue, adjusted revenue, and earnings forecasts -- signaling the company is back on track.
What happened with BorgWarner's second quarter?
The company spent much of last year adjusting to a weaker-than-expected global commercial vehicle market, some mix issues -- in particular a slow ramp-up in production from a major customer in North America, which hit the drivetrain segment -- and lower-than-forecast production growth in China. However, with market expectations now reduced for commercial vehicle production, the customer ramp-up issue resolved, and China's auto sales growth seemingly back on track, BorgWarner generated solid underlying growth in the quarter.
| Segment | Revenue (in millions) |
Reported Sales Growth | Adjusted Sales Growth |
Adjusted EBIT (in millions) |
Adjusted EBIT Growth |
|---|---|---|---|---|---|
|
Engine | $1,444 | 2.2% | 2.8% | $235 | 3.5% |
| Drivetrain | $895 | 42.8% | 5.4% | $93 | 13.5% |
Data source: BorgWarner Inc. presentations. Adjusted figures exclude foreign currency and acquisitions.
Market uncertainties
It's a pretty good result, bearing in mind that, on the previous quarter's earnings call, CEO James Verrier talked of an environment in which risks were outweighing opportunities. One of those risks, namely a vote in favor of Brexit, came to fruition, although it's unclear how leaving the European Union would affect car production in the U.K. -- where BorgWarner's biggest clients, Ford and Volkswagen, have substantial operations.
Indeed, Ford is believed to be considering closing plants in the U.K. Meanwhile, Volkswagen faces ongoing, and much documented, issues following the emissions scandal. Throw in an uncertain outlook for auto sales in North America and China and a commercial vehicle market that remains, in Verrier's words, "challenged," and BorgWarner clearly still has a lot to do in 2016.
Looking ahead
This was a solid quarter from BorgWarner. Increasing the bottom end of guidance was a welcome fillip, and investors will be hoping that the risks and uncertainties in BorgWarner's end markets don't come to fruition in the coming quarters.
In truth, there is little the company can do about its end markets -- a company like BorgWarner will always be subject to speculation on production rates at its key automotive customers -- but so far in 2016 the company has executed in line with its game plan.
