BorgWarner profits slip in Q3, acquires EV business

AUBURN HILLS, Mich.—Production pauses and increased commodity costs hit BorgWarner Inc.'s bottom line in the third quarter, but the automotive supplier also reported making strides toward the goal of electrifying its business.

The Auburn Hills, Mich.-based company had adjusted operating income of $311 million on net sales of $3.4 billion for the quarter, compared with pro forma operating income of $396 million on revenue of $2.5 billion for the same period last year, according to its Nov. 3 earnings report.

The 35-percent sales increase reflects revenue gains from the acquisition of Delphi Technologies and increased demand for products, which "more than offset the decline in industry production," according to the company.

The decrease in profit was caused largely by supply chain issues, including a $24 million increase in commodity costs, CFO Kevin Nowlan said on a call with investors. Lower than anticipated income and higher than planned inventory levels led the company to consume $10 million in free cash flow.

"Fundamentally, when production declines this rapidly and unexpectedly, it's difficult to get that inventory out of the system in the near-term," Nowlan said. "We expect inventory to improve in the coming quarters once we see less volatility in production orders, which will give us the ability to right-size our supply chain demands accordingly."

Full-year net sales are expected to be in the range of $14.4 billion to $14.7 billion, "under the assumption that the semiconductor supply issues do not worsen and there are no additional production disruptions arising from COVID-19," the company said in a news release. Its previous guidance called for a range of $15.2 billion to $15.6 billion.

CEO Frédéric Lissalde said on the call that BorgWarner expects market volatility to extend "well into" 2022.

"The third quarter operating environment was very challenged, both from an absolute volume perspective and in light of the production volatility we experienced throughout this quarter," he said.

During the investor presentation, the company highlighted two recent awards as major steps in its goal to move from ICE engines to EVs: a contract for a North American high-voltage inverter program from an undisclosed automaker, expected to launch in 2024, and a contract for a similar program with an undisclosed German automaker, expected to launch in early 2025.

Crain's Detroit Business requested more details on the contracts.

BorgWarner said the program in North America is its largest inverter award to date, marking $2.3 billion of EV-related revenue by 2025 on the books—just shy of its goal of $2.5 billion by 2025 per its "Charging Forward" initiative.

"Overall, we're doing a solid job managing the near-term environment while securing our future growth," Lissalde said.