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10-Q: BORGWARNER INC

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

BorgWarner Inc. and Consolidated Subsidiaries (the "Company" or "BorgWarner") is a global product leader in clean and efficient technology solutions for combustion, hybrid, and electric vehicles. Our products help improve vehicle performance, propulsion efficiency, stability and air quality. These products are manufactured and sold worldwide, primarily to original equipment manufacturers ("OEMs") of light vehicles (passenger cars, sport-utility vehicles, vans and light trucks). The Company's products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications). We also manufacture and sell out products to certain tier one vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers in Europe, the Americas and Asia and is an original equipment supplier to nearly every major automotive OEM in the world.

On October 1, 2020, the Company completed its acquisition of 100% of the outstanding ordinary shares of Delphi Technologies PLC ("Delphi Technologies"). Results of operations for Delphi Technologies are included in the Company's financial information for the three months ended March 31, 2021. Refer to Note 3, "Acquisitions," to the Condensed Consolidated Financial Statements in Item 1 of this report for more information.

COVID-19 Pandemic Update

Throughout 2020, COVID-19 materially impacted the Company's business and results of operations. During the first quarter of 2020, the impact of COVID-19 was initially experienced primarily by operations in China. Following the declaration of COVID-19 as a global pandemic on March 11, 2020, government authorities around the world began to impose shelter-in-place orders and other restrictions. As a result, many OEMs began suspending manufacturing operations, particularly in North America and Europe. This led to various temporary closures of, or reduced operations at, the Company's manufacturing facilities, late in the first quarter of 2020 and throughout the second quarter of 2020

During the second half of 2020, as global management of COVID-19 evolved and government restrictions were removed or lessened, production levels improved, and substantially all of our production facilities resumed closer to normal operations by the end of the third quarter of 2020. We continue to monitor the evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside of our control requiring us to adjust our operating plan. It is possible COVID-19 could result in adverse impacts in the future. We cannot reasonably estimate the full impact COVID-19 could have on our financial condition, results of operations or cash flows in the future.

Proposed Acquisition of AKASOL AG

On February 15, 2021, the Company entered into a Business Combination Agreement with AKASOL AG ("AKASOL"). Pursuant to the agreement, on March 26, 2021, a wholly-owned subsidiary of the Company launched a voluntary public takeover offer at ?120.00 per share in cash for all outstanding shares of AKASOL, which valued 100% of AKASOL's equity at approximately ?727 million. Holders of approximately 59% of AKASOL's outstanding shares committed through Irrevocable Undertakings to accept the offer with respect to their shares. The final acceptance period for this takeover offer is expected to end on May 26, 2021. Refer to Note 3, "Acquisitions," to the Condensed Consolidated Financial Statements in Item 1 of this report for more information. The Company anticipates the transaction will be funded primarily with a combination of available cash and incremental debt. The transaction is expected to close in the second quarter of 2021, has received regulatory approval and is subject to the satisfaction of other customary closing conditions.

Recent Developments - Electrification Portfolio Strategy

The Company recently announced, at its Investor Day on March 23, 2021, its strategy to continue to deliberately grow its electrification portfolio over time through organic investments and technology-focused acquisitions, most recently through the 2020 purchase of Delphi Technologies as well as the pending acquisition of AKASOL AG. The Company believes it is well positioned for the industry's anticipated migration to electric vehicles, and recently announced plans to continue to expand its electrification portfolio by allocating more R&D investment toward electrification technologies and through incremental technology focused acquisitions. Additionally, the Company announced a plan to dispose of certain internal combustion assets, targeting dispositions of assets generating approximately $1 billion in annual revenue in the next 12 to 18 months and approximately $3 to $4 billion in annual revenue by 2025. The Company is targeting its revenue from products for pure electric vehicles to be over 25% of its total revenue by 2025 and approximately 45% of its total revenue by 2030.







        RESULTS OF OPERATIONS
        Three Months Ended March 31, 2021 vs. Three Months Ended March 31, 2020
        The following table presents a summary of our operating results:
                                                                                   Three Months Ended March 31,
        (in millions, except per share data)                               2021                                      2020
        Net sales                                                                 % of net sales                         % of net sales
        Air Management                                     $       2,011                 50.2  %       $  1,434                 62.9  %
        e-Propulsion & Drivetrain                                  1,466                 36.6               860                 37.7
        Fuel Injection                                               475                 11.8                 -                    -
        Aftermarket                                                  197                  4.9                 -                    -
        Inter-segment eliminations                                  (140)                (3.5)              (15)                (0.7)
        Total net sales                                            4,009                100.0             2,279                100.0
        Cost of sales                                              3,191                 79.6             1,832                 80.4
        Gross profit                                                 818                 20.4               447                 19.6
        Selling, general and administrative expenses - R&D           183                  4.6               109                  4.8
        Selling, general and administrative expenses -
        Other                                                        194                  4.8               104                  4.6
        Other operating expense - Restructuring expense               30                  0.7                15                  0.7
        Other operating expense, net - Other                           8                  0.2                21                  0.9
        Operating income                                             403                 10.1               198                  8.7
        Equity in affiliates' earnings, net of tax                   (12)                (0.3)               (5)                (0.2)
        Unrealized loss on equity securities                         272                  6.8                 9                  0.4
        Interest income                                               (3)                (0.1)               (2)                (0.1)
        Interest expense                                              21                  0.5                12                  0.5
        Other postretirement income                                  (11)                (0.3)               (2)                (0.1)
        Earnings before income taxes and noncontrolling
        interest                                                     136                  3.4               186                  8.2
        Provision for income taxes                                    42                  1.0                49                  2.2
        Net earnings                                                  94                  2.3               137                  6.0
        Net earnings attributable to the noncontrolling
        interest, net of tax                                          29                  0.7                 8                  0.4
        Net earnings attributable to BorgWarner Inc.       $          65                  1.6  %       $    129                  5.7  %
        Earnings per share - diluted                       $        0.27                               $   0.63
        


Net sales for the three months ended March 31, 2021 totaled $4,009 million, an increase of 76% from the three months ended March 31, 2020. During the three months ended March 31, 2021, legacy Delphi Technologies increased revenues by $1,142 million. Excluding the net impact of stronger foreign currencies relative to the U.S. Dollar, primarily the Euro, Chinese Renminbi and Korean Won, and the net impact of the Delphi Technologies acquisition, net sales increased approximately 20%, primarily due to increased demand for the Company's products and the recovery of global markets from the negative effects of COVID-19 on 2020 production, primarily in China.

Cost of sales as a percentage of net sales was 79.6% during the three months ended March 31, 2021, compared to 80.4% during the three months ended March 31, 2020. The Company's material cost of sales was 52% and 55% of net sales during the three months ended March 31, 2021 and 2020, respectively. Gross profit and gross margin were $818 million and 20.4%, respectively, during the three months ended March 31, 2021 compared to $447 million and 19.6%, respectively, during the three months ended March 31, 2020. The increase in gross margin was primarily due to conversion on higher sales.

Selling, general and administrative ("SG&A") expenses for the three months ended March 31, 2021 were $377 million as compared to $213 million for the three months ended March 31, 2020. SG&A as a percentage of net sales was 9.4% and 9.3% for the three months ended March 31, 2021 and 2020, respectively. The increase in SG&A was primarily related to Delphi Technologies.

Research and Development ("R&D") expenses, net of customer reimbursements, were $183 million, or 4.6% of net sales, for the three months ended March 31, 2021, compared to $109 million, or 4.8% of net sales, for the three months ended March 31, 2020. The increase in R&D costs, net of customer reimbursements, for the three months ended March 31, 2021 compared with the three months ended March 31, 2020 was primarily due to the acquisition of Delphi Technologies, which increased R&D costs by $71 million. The Company plans to continue to invest in a number of cross-business R&D programs, as well as a number of other key programs, all of which the Company believes are necessary to support short- and long-term growth. The Company's current long-term expectation for R&D spending is in the range of 5.0% to 5.5% of net sales.

Restructuring expense was $30 million and $15 million for the three months ended March 31, 2021 and 2020, respectively, primarily related to employee benefit costs. The increase in 2021 was primarily due to continued costs related to the Company's actions to reduce structural costs. Refer to Note 5 "Restructuring" to the Condensed Consolidated Financial Statements in Item 1 of this report for more information.

In February 2020, the Company announced a restructuring plan to address existing structural costs. During the three months ended March 31, 2021 and 2020, the Company recorded $24 million and $15 million of restructuring charges related to this plan, respectively. Cumulatively, the Company has incurred $172 million of restructuring charges related to this plan. This plan is expected to result in a total of $300 million of restructuring costs through 2022. The resulting annual gross savings is expected to be $90 million to $100 million and will be utilized to sustain overall operating margin profile and cost competitiveness. Nearly all of the restructuring charges associated with this plan are expected to be cash expenditures.

In 2019, legacy Delphi Technologies announced a restructuring plan to reshape and realign its global technical center footprint and reduce salaried and contract staff. The Company continued actions under this program post-acquisition and has recorded cumulative charges of $7 million since October 1, 2020, including approximately $5 million in restructuring charges during the three months ended March 31, 2021. Actions under this program have been substantially completed as of March 31, 2021. Any remaining charges related to this program are subject to consultation with employee works councils and other employee representatives and are not expected to be significant.

Other operating expense, net - other represents items other than restructuring and was net expense of $8 million and $21 million for the three months ended March 31, 2021 and 2020, respectively, and primarily related to merger, acquisition and divestiture expense of $13 million and $21 million, for the three months ended March 31, 2021 and 2020, respectively.

Equity in affiliates' earnings, net of tax was $12 million for the three months ended March 31, 2021 representing an increase of $7 million as compared with the three months ended March 31, 2020. This line item is driven by the results of our unconsolidated joint ventures, NSK-Warner K.K., Turbo Energy Private Limited ("TEL") and Delphi-TVS Diesel Systems Ltd. ("DTVS").

Unrealized loss on equity securities was $272 million and $9 million for the three months ended March 31, 2021 and 2020. This line item reflects the net unrealized gains or losses recognized during the period related to the Company's equity securities. The amounts for the three months ended March 31, 2021 and 2020 were both related to the Company's investment in Romeo Power, Inc. For further details, see Note 3, "Acquisitions," to the Condensed Consolidated Financial Statements in Item 1 of this report.

Interest expense was $21 million for the three months ended March 31, 2021 which is an increase of $9 million as compared with the three months ended March 31, 2020, primarily due to the Company's $1.1 billion senior notes issuance in June 2020 and the $800 million of senior notes acquired as part of the Delphi Technologies acquisition.

Provision for income taxes the Company's effective tax rate for the three months ended March 31, 2021 and 2020 was 31% and 26%, respectively. The 2021 rate was unfavorably impacted by jurisdictions with pretax losses for which no tax benefit could be realized. Additionally, the Company's effective tax rate includes a net discrete tax benefit of $20 million primarily related to changes to the withholding rates applied to unremitted earnings. The 2020 rate includes reductions in income tax expense of $4 million related to restructuring expense and $12 million for other one-time adjustments. The other one-time adjustments primarily relate to tax law changes in India that were enacted during the quarter and the release of certain unrecognized tax benefits due to the closure of an audit.

Net earnings attributable to noncontrolling interest, net of tax of $29 million for the three months ended March 31, 2021 increased by $21 million compared to the three months ended March 31, 2020. The increase was due to the recovery of global markets from negative effects of COVID-19 on 2020 production, primarily in China, resulting in increased profit in joint ventures and the addition of noncontrolling interests from the Delphi Technologies acquisition.

Non-comparable items impacting the Company's earnings per diluted share and net earnings

The Company's earnings per diluted share were $0.27 and $0.63 for the three months ended March 31, 2021 and 2020, respectively. The Company believes the following table is useful in highlighting non-comparable items that impacted its earnings per diluted share.







                                                                                 Three Months Ended March 31,
                                                                                   2021                  2020
        Non-comparable items:
        Restructuring expense                                                $        (0.12)         $   (0.06)
        Merger, acquisition and divestiture expense1                                  (0.04)             (0.10)
        Unrealized loss on equity securities2                                         (0.87)             (0.04)
        Tax adjustments3                                                               0.09               0.06
        Total impact of non-comparable items per share - diluted             $        (0.94)         $   (0.14)
        ________________
        


Reporting Segments

The Company's business is comprised of four reporting segments: Air Management, e-Propulsion & Drivetrain, Fuel Injection and Aftermarket.

The Company allocates resources to each segment based upon the projected after-tax return on invested capital ("ROIC") of its business initiatives. ROIC is comprised of Segment Adjusted EBIT after deducting notional taxes compared to the projected average capital investment required. Segment Adjusted EBIT is comprised of earnings before interest, income taxes and noncontrolling interest ("EBIT") adjusted for restructuring, goodwill impairment charges, affiliates' earnings and other items not reflective of ongoing operating income or loss.

Segment Adjusted EBIT is the measure of segment income or loss used by the Company. The Company believes Segment Adjusted EBIT is most reflective of the operational profitability or loss of our reporting segments. The following tables show segment information and Segment Adjusted EBIT for the Company's reporting segments.







        Segment Adjusted EBIT
                                                           Three Months Ended March 31,
        (in millions)                              2021                   % margin      2020       % margin
        Air Management                $         322                         16.0  %    $ 208         14.5  %
        e-Propulsion & Drivetrain               137                          9.3  %       63          7.3  %
        Fuel Injection                           33                          6.9  %        -         n/a
        Aftermarket                              21                         10.7  %        -         n/a
        Segment Adjusted EBIT         $         513                                    $ 271
        


Three Months Ended March 31, 2021 vs. Three Months Ended March 31, 2020

The Air Management segment's net sales increased $577 million, or 40%, and Segment Adjusted EBIT increased $114 million, or 55%, from the three months ended March 31, 2020. The Delphi Technologies acquisition increased Air Management revenues by $322 million for the three months ended March 31, 2021. Excluding the net impact of stronger foreign currencies relative to the U.S. Dollar, primarily the Euro, Chinese Renminbi and Korean Won, and the net impact of the Delphi Technologies acquisition, net sales increased approximately 12% from the three months ended March 31, 2020, primarily due to the recovery of global markets from the negative effects of COVID-19 on 2020 production, primarily in China, and increased demand for the Company's products. The Segment Adjusted EBIT margin was 16.0% for the three months ended March 31, 2021, compared to 14.5% for the three months ended March 31, 2020. The Segment Adjusted EBIT margin increase was primarily due to the impact of higher sales and the Company's restructuring savings.

The e-Propulsion & Drivetrain segment's net sales increased $606 million, or 70%, and Segment Adjusted EBIT increased $74 million, or 117%, from the three months ended March 31, 2020. The Delphi Technologies acquisition increased e-Propulsion & Drivetrain revenues by $268 million for the three months ended March 31, 2021. Excluding the impact of stronger foreign currencies relative to the U.S. Dollar, primarily the Euro, Chinese Renminbi and Korean Won, and the net impact of the Delphi Technologies acquisition, net sales increased 33% from the three months ended March 31, 2020, primarily due to the recovery of global markets from the negative effects of COVID-19 on 2020 production, primarily in China, and increased demand for the Company's products. The e-Propulsion & Drivetrain Segment Adjusted EBIT margin was 9.3% during the three months ended March 31, 2021, up from 7.3% during the three months ended March 31, 2020, primarily due to the impact of higher sales.

The Fuel Injection segment's net sales and Segment Adjusted EBIT for the three months ended March 31, 2021 were $475 million and $33 million, respectively. The Segment Adjusted EBIT margin was 6.9% in the three months ended March 31, 2021. The Segment Adjusted EBIT for the three months ended March 31, 2021 included expense of $18 million related to an agreement to continue supply from a troubled supplier. This is a new reporting segment following the acquisition of Delphi Technologies on October 1, 2020.

The Aftermarket segment's net sales and Segment Adjusted EBIT for the three months ended March 31, 2021 were $197 million and $21 million, respectively. The Segment Adjusted EBIT margin was 10.7% in the three months ended March 31, 2021. This is a new reporting segment following the acquisition of Delphi Technologies on October 1, 2020.

Outlook

Our overall outlook for 2021 is positive. The Company expects global industry production to increase year over year based on the assumption that the negative effects of COVID-19 on 2020 production will not recur in 2021. The Company expects net new business-related sales growth, due to increased penetration of BorgWarner products around the world, to drive a sales increase in line with or greater than the year-over-year increase in industry production. As result, the Company expects increasing revenue in 2021, excluding the impact of foreign currencies and the net impact of acquisitions and divestitures. The Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic capital investments to enhance its product leadership strategy.

There are several trends that are driving the Company's long-term growth that we expect to continue, including adoption of product offerings for electrified vehicles, increasingly stringent global emissions standards that support demand for the Company's products driving vehicle efficiency and increased global penetration of all-wheel drive.

Additionally, in the first quarter of 2021, we began to experience component supply constraints similar to others in the automotive industry, as have our customers. These supply constraints began to impact production in March and are expected to continue to cause further reductions in volumes in our second quarter.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

The Company maintains various liquidity sources, including cash and cash equivalents and the unused portion of its multi-currency revolving credit agreement. At March 31, 2021, the Company had $1,755 million of cash and cash equivalents, of which $1,213 million was held by our subsidiaries outside the United States. Cash held by these subsidiaries is used to fund foreign operational activities and future investments, including acquisitions.

The vast majority of cash held outside the United States is available for repatriation. The Company uses its U.S. liquidity primarily for various corporate purposes, including but not limited to debt service, share repurchases, dividend distributions and other corporate expenses.

The Company has a $2.0 billion multi-currency revolving credit facility which allows the Company the ability to increase the facility by $1.0 billion with bank group approval. The credit agreement contains customary events of default and one key financial covenant, which is a debt to Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") ratio. The Company was in compliance with the financial covenant at March 31, 2021. At March 31, 2021 and December 31, 2020, the Company had no outstanding borrowings under this facility.

The Company's commercial paper program allows the Company to issue up to $2.0 billion of short-term, unsecured commercial paper notes under the limits of its multi-currency revolving credit facility. Under this program, the Company may issue notes from time to time and use the proceeds for general corporate purposes. The Company had no outstanding borrowings under this program as of March 31, 2021 and December 31, 2020.

The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed $2 billion. In addition to the credit facility, the Company's universal shelf registration provides the ability to issue various debt and equity instruments subject to market conditions.

On February 12, 2021 and April 28, 2021, the Company's Board of Directors declared quarterly cash dividends of $0.17 per share of common stock. The dividends declared in the first quarter were paid on March 15, 2021, and the dividends declared in the second quarter will be paid on June 15, 2021.

From a credit quality perspective, the Company had a credit rating of BBB+ from both Standard & Poor's and Fitch Ratings and Baa1 from Moody's as of December 31, 2019, with a stable outlook from all rating agencies. On January 28, 2020, the Company entered into a definitive agreement to acquire Delphi Technologies. During 2020, due to the recent business disruptions from COVID-19 and uncertainties surrounding the Delphi Technologies acquisition, Standard & Poor's downgraded the Company's rating from BBB+ with a stable outlook to BBB with a negative outlook. Additionally, Moody's and Fitch adjusted their outlooks from stable to negative but have maintained the Company's credit ratings at Baa1 . . .

May 05, 2021

COMTEX_385911336/2041/2021-05-05T11:31:48

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