BorgWarner (BWA +2.82%) has a well-earned reputation for outgrowing its end markets and the company's performance in the second quarter only served to enhance that reputation. There's an understandable nervousness about the global automotive industry right now, but if one company is well-placed to ride out the slowdown, it's BorgWarner. Let's take a look at its second-quarter earnings report and what management said about the rest of 2018.
BorgWarner second-quarter earnings: The raw numbers
Starting with the headline numbers from the quarter as compared to management's guidance:
- Net sales of $2.7 billion came in at low end of the guidance range of $2.7 billion to 2.75 billion.
- Organic (excluding foreign currency and Sevcon acquisition) sales growth of 7.3% compared to the guidance range of 7% to 9%.
- Adjusted EPS of $1.18 came in above the guidance range of $1.09 to $1.11
The EPS figure was boosted by a more-favorable-than-expected effective tax rate of 24% compared to management's guidance for 28%, but by my calculations, it was worth around $0.06. In other words, the adjusted EPS figure of $1.18 was still above the high end of guidance -- a good result considering sales came in at the low end of guidance.
Image source: Getty Images.
Full-year guidance
Turning to management's revision of full-year guidance, you can see below that organic sales growth guidance has been increased and so has EPS. I'll discuss the sales growth in a moment, but focusing on the EPS guidance hike it's worth noting that BorgWarner has increased the amount allocated for share repurchases and it will have a lower than previously expected tax rate -- both will enhance EPS.
By my rough calculations, the combination of a lower tax rate and share repurchases more than accounts for the $0.125 hike in the midpoint of EPS guidance. Indeed, management is now guiding toward full-year operating income of $1.334 billion to $1.351 billion compared to previous guidance of $1.345 billion to $1.375 billion.
|
BorgWarner Full-Year Guidance Metric |
At Q4 2017 |
At Q1 2018 |
At Q2 2018 |
|---|---|---|---|
|
Organic sales growth |
5%-7% |
5%-7% |
6%-7% |
|
EPS |
$4.25-$4.35 |
$4.30-$4.40 |
$4.45-$4.50 |
|
Free cash flow |
$525 million-$575 million |
$525 million-$575 million |
$550 million-$575 million |
|
Tax rate |
28% |
28% |
26% |
|
Share repurchases |
100 million |
100 million |
150 million |
Data source: BorgWarner presentations.
In a nutshell, the increase in the headline EPS guidance is not telling the full picture. Regardless, BorgWarner's earnings report is still a good one.
Why BorgWarner did well in the second quarter
Outgoing CEO James Verrier is always candid and engaging, and he outlined how the second quarter had "an environment with global light vehicle production a little bit weaker than we'd expected going into the quarter." He went on to point out that BorgWarner's particular geographically weighted light vehicle production market was up 2% in the quarter when the company had been expecting 3.5%.
That said, BorgWarner put in a relatively good performance, just as it did in the first quarter. For example, CFO Ron Hundzinski disclosed that the company saw 26% growth in China compared to a production market up 9%.
Meanwhile, Europe was up 7% for BorgWarner compared to the market being up 4% and North America was flat on last year even though market production declined 2.5%. North America would have been up 4% for BorgWarner if it hadn't been for the negative impact of a shutdown in Ford F-150 pickup production.
All told, a combination of weaker-than-expected production and the Ford issue produced a "200 basis points headwind" to organic revenue growth, according to Hundzinski. That's why organic sales growth came in at the low end of guidance.
Why BorgWarner raised sales guidance
As noted above, despite the weaker-than-expected end market in the second quarter, BorgWarner raised the low end of its full-year sales guidance. The reasons?
- Verrier maintained that the full-year light vehicle industry forecast "is consistent" with his previous forecast.
- Ford F-150 production is expected to bounce back.
- Hundzinski talked of " a couple other launches that are coming in the back half the year."
Looking ahead
It remains to be seen if global light vehicle production will pan out as expected, but BorgWarner is doing a good job of outperforming its end markets. If there's any upside to production expectations, then it's a reasonable bet that the company is well-placed to benefit.
