BWA BorgWarner Inc

BorgWarner Inc. (BWA) reported a 44% increase in profit to $1.12 per share in the second quarter of 2011 from 78 cents per share (both excluding a non-recurring item) in the same quarter of the prior-year quarter. The profit exceeded the Zacks Consensus Estimate by 14 cents per share.

Revenues in the quarter soared 28% to $1.82 billion, despite a 2% fall in global vehicle production. The increase in sales was led by higher global demand for advanced powertrain technology, focus on fuel economy and emissions reductions.

Excluding the impact of currency and sales related to the acquisition of Haldex Traction Systems, which was completed in the first quarter of 2011, sales went up 15% in the quarter. Excluding the $29 million pre-tax gain related to the Honeywell settlement, operating income was $199 million or 11.0% of sales.

Revenues in the Engine segment escalated 28% to $1.30 billion on strong global sales growth in nearly all major product groups. Adjusted earnings before interest, income taxes and non-controlling interest (EBIT) were $197 million, up 48% from $133 million in the second quarter of 2010.

Revenues in the Drivetrain segment rose 29% to $526 million due to strong four-wheel drive system sales and traditional transmission component sales in Korea, higher dual clutch transmission module sales in Europe, and the Haldex acquisition. Adjusted EBIT in the segment was $39 million, up marginally by 4% from $37 million in the second quarter of 2010.

BorgWarner had cash amounting to $372.4 million as of June 30, 2011, a decrease from $449.9 million as of December 31, 2010. Long-term debt amounted to $1.28 billion as of June 30, 2011. Long-term debt to capitalization ratio stood at 35%, up by 3 percentage points from the same as of December 31, 2010.

In the first half of 2011, the company had a cash flow of $249.6 million from operating activities, an increase from $208.3 million in the year-ago period, mainly driven by higher profit. Capital expenditures, including tooling outlays, increased to $159.9 million from $107.4 million a year ago.

For full-year 2011, BorgWarner expects sales to grow by 25% to 28%, up from the previous outlook of 19% to 23%. The company also raised its EPS guidance to $4.25 to $4.45 from $3.85 to $4.15. The improved guidance was driven by new business growth and better cost-control measures.

Despite the better results and impressive outlook, we believe strong competition and pricing pressure from the OEMs (about 75% of the company’s sales are to OEMs) will undermine the company’s results in the near term. The company’s primary competitors include Honeywell International Inc. (HON).

As a result, the company retains a Zacks #3 Rank on its stock, which translates into a short-term (1 to 3 months) rating of “Hold” and we reiterate our long-term (more than 6 months) recommendation of “Neutral”.

 
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