BorgWarner Inc. Reports Operating Results (10-K)
Borgwarner Inc. has a market cap of $8.45 billion; its shares were traded at around $78.85 with a P/E ratio of 18.5 and P/S ratio of 1.5.
Highlight of Business Operations:Consolidated net sales to Volkswagen were approximately 19% for the years ended December 31, 2011 and 2010 and 22% for the year ended December 31, 2009; and to Ford of approximately 12%, 11% and 12% for the years ended December 31, 2011, 2010 and 2009, respectively. Both of our reporting segments had significant sales to the customers listed above. Such sales consisted of a variety of products to a variety of customer locations and regions. No other single customer accounted for more than 10% of consolidated net sales in any of the years presented.
Cost of sales as a percentage of net sales was 80.2%, 80.7% and 85.8% in the years ended December 31, 2011, 2010 and 2009, respectively. The Company's material cost of sales was approximately 50% of net sales in the years ended December 31, 2011, 2010 and 2009. The Company's remaining cost to convert raw material to finished product, which includes direct labor and manufacturing overhead, has continued to improve during the years ended December 31, 2011 and December 31, 2010 compared to December 31, 2009 as a result of increased net sales and successful cost reduction actions. Gross profit as a percentage of net sales was 19.8%, 19.3% and 14.2% in the years ended December 31, 2011, 2010 and 2009, respectively.
Selling, general and administrative expenses (“SG&A”) as a percentage of net sales were 8.7%, 10.0% and 11.6% in the years ended December 31, 2011, 2010 and 2009, respectively. SG&A expenses increased $54.4 million, or 9.6%, compared to the year ended December 31, 2010. The increase was primarily due to the $58.7 million, or 31.7%, increase in research and development ("R&D") costs, which are included in SG&A expenses. SG&A as a percentage of net sales has continued to improve during the years ended December 31, 2011 and December 31, 2010 compared to December 31, 2009 primarily as a result of significant year over year increases in net sales.
R&D costs, net of customer reimbursements, was $243.7 million, or 3.4% of net sales, in the year ended December 31, 2011, compared to $185.0 million, or 3.3% of net sales, and $155.2 million, or 3.9% of net sales, in the years ended December 31, 2010 and 2009, respectively. We will continue to invest in a number of cross-business R&D programs, as well as a number of other key programs, all of which are necessary for short and long-term growth. Our current long-term expectation for R&D spending is approximately 4% of net sales.
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to minimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). At December 31, 2011, the amount of debt with fixed interest rates was 62.4% of total debt, including the impact of the interest rate swaps. Our earnings exposure related to adverse movements in interest rates is primarily derived from outstanding floating rate debt instruments that are indexed to floating money market rates. A 10% increase or decrease in the average cost of our variable rate debt would result in a change in pre-tax interest expense of approximately $1.8 million, $1.6 million and $1.5 million in the years ended December 31, 2011, 2010 and 2009, respectively.
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