BorgWarner Inc. is a product leader in highly engineered components and systems for vehicle powertrain applications worldwide. The company operates manufacturing and technical facilities in several countries. Customers include Ford DaimlerChrysler General Motors Toyota Caterpillar Navistar PSA and VW Group. (Company Press Release) Borgwarner Inc. has a market cap of $3.78 billion; its shares were traded at around $32.44 with a P/E ratio of 120.1 and P/S ratio of 0.7. Borgwarner Inc. had an annual average earning growth of 0.5% over the past 10 years.
Highlight of Business Operations:Selling, general and administrative (SG&A) costs for the first nine months of 2009 decreased $135 million to $315.4 million from $450.4 million, and increased as a percentage of net sales to 11.4% from 10.4%. The decrease in SG&A was impacted by a $27.9 million aforementioned net gain related to the Companys Plant Shutdown Agreement with the UAW and subsequent closure of the Muncie Plant. This gain was partially offset by a $4.8 million expense associated with the adoption of Topic 805. Without these non-comparable items, SG&A as a percentage of net sales was 12.2%. R&D costs, which are included in SG&A expenses, decreased $56.3 million to $109.7 million from $166.0 million as compared to the first nine months of 2008. As a percentage of sales, R&D costs increased to 4.0% from 3.8% in the first nine months of 2008. Our continued investment in a number of cross-business R&D programs, as well as other key programs, is necessary for the Companys short and long-term growth.
In the second quarter of 2009, the Company took additional restructuring actions. The Company reduced its North American workforce by approximately 550 people, or 12%; its European workforce by approximately 150 people, or 2%; and its Asian workforce by approximately 60 people, or 3% in the second quarter. The net restructuring expense recognized in the second quarter was $9.0 million for employee termination benefits. In addition to employee termination costs, the Company recorded $36.3 million of asset impairment and $5.0 million of other charges in the second quarter of 2009 related to the North American and European restructuring. The combined 2009 restructuring expenses of $50.3 million are broken out by segment as follows: Engine $27.2 million, Drivetrain $19.7 million and Corporate $3.4 million.
In 2006, the Company entered into a series of interest rate swap agreements to effectively convert a portion of its senior notes from fixed to variable interest rates and were designated as fair value hedges for the senior notes. In the first quarter of 2009, $100 million of interest rate swap agreements relating to the 2009 fixed-rate debt matured. Also, in the first quarter of 2009, the Company terminated $150 million of interest rate swap agreements relating to the 2016 fixed rate debt and $75 million of interest rate swap agreements relating to the 2019 fixed rate debt. The early termination of the 2016 and 2019 interest rate swap agreements resulted in a gain of $34.5 million that will be amortized as a reduction of interest expense over the remaining life of the respective 2016 and 2019 debt. The Company recognized $5.7 million in interest expense in the first quarter of 2009 as a result of the early termination. This early termination also resulted in the Company receiving net cash proceeds of $30.0 million. As of September 30, 2009, there were no outstanding interest rate swap agreements.
As of September 30, 2009, debt increased from year-end 2008 by $67.4 million and cash increased by $155.4 million. Our debt to capital ratio was 28.1% at the end of the third quarter versus 27.7% at the end of 2008. The debt and debt to capital ratio increase between September 30, 2009 and December 31, 2008 was primarily due to the April 9, 2009 issuance of $373.8 million in convertible senior notes due April 15, 2012, offset somewhat by the maturity of our $136.7 million, 6.50% senior notes. The net proceeds from the convertible senior notes issuance were used to repay both short and long-term bank debt and provide cash for operating needs. The Company paid dividends to its stockholders of $13.8 million and $38.3 million in the first nine months of 2009 and 2008, respectively. The Company repurchased 1,148,608 shares of its common stock for $48.4 million in the first nine months of 2008, while no common shares were repurchased in the first nine months of 2009.
On April 9, 2009, the Company issued $373.8 million in convertible senior notes due April 15, 2012. Under Topic 470, Accounting for Convertible Debt Instruments That May be Settled in Cash Upon Conversion (Including Partial Cash Settlement), the Company must account for the convertible senior notes by bifurcating the instrument between their liability and equity components. The value of the debt component is based on the fair value of issuing a similar nonconvertible debt security. The equity component of the convertible debt security is calculated by deducting the value of the liability from the proceeds received at issuance. Therefore, the Companys September 30, 2009 Condensed Consolidated Balance Sheet includes an increase in debt of $325.9 million and an increase in capital in excess of par of $36.5 million. Additionally, Topic 470 requires us to accrete the discounted carrying value of the convertible notes to their face value over the term of the notes. The Companys interest expense associated with this bond accretion is based on the effective interest rate of the convertible senior notes of 9.365%. The total interest expense related to the convertible notes in the Companys Consolidated Statement of Operations for the three and nine months ended September 30, 2009 was $7.1 million and $14.5 million, respectively. The non-cash portion of interest expense for the convertible notes for the three and nine months ended September 30, 2009 was $4.2 million and $8.4 million, respectively. For the full year of 2009, interest expense related to the convertible notes will be approximately $22.2 million, of which approximately $12.7 million will be non-cash. The notes will pay interest semi-annually of $6.5 million, which is at a coupon rate of 3.50% per year, beginning in October of this year.
Holders of the notes may convert their notes at their option at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date of the notes, in multiples of $1,000 principal amount. The initial conversion rate for the notes is 30.4706 shares of the Companys common stock per $1,000 principal amount of notes (representing an initial conversion price of approximately $32.82 per share of common stock). The conversion price represents a conversion premium of 27.5% over the last reported sale price of the Companys common stock on the New York Stock Exchange on April 6, 2009, of $25.74 per share. As of September 30, 2009, the Companys stock price was below the conversion price of $32.82. There was no dilutive impact to weighted average shares outstanding for the three and nine months ended September 30, 2009 due to the convertible senior notes. In conjunction with the note offering, the Company entered into a bond hedge overlay at a net pre-tax cost of $25.2 million, effectively raising the conversion premium to 50.0%, or approximately $38.61 per share. Upon conversion, the Company will pay or deliver cash, shares of our common stock or a combination thereof at our election. The convertible senior notes were issued under the Companys $750 million universal shelf registration filed with the Securities and Exchange Commission, leaving approximately $376 million available as of September 30, 2009.
Read the The complete ReportBWA is in the portfolios of Charles Brandes of Brandes Investment.