Borg Warner

1
Borg Warner

• April 28th, 2005
• By Tom Smith

2
Presentation Overview

• Overview of Company
• Macroeconomic Conditions
• Relevant Financial Data
• View Excel Sheet
• Future outlooks for company and industry
• Wrap-up

3
Overview of Borg Warner

• Borg Warner Corporation formed in 1928 by Borg
  Beck, Warner Gear, and 2 other companies
• Became private in 1987 and returned as a separate
  independent company in 1993
• Company specializes in innovating and creating
  components to help improve engines and
  transmissions mainly for automobiles
• 14,500 employees
• Headquartered in Auburn Hills, Michigan

4
Strategy

• Vision
• Leader in advanced products and technologies that
  satisfy customer needs
• Innovation International Growth
• From CEO Timothy Manganello Our technology,
  our customer diversity, our financial discipline,
  and our staunch commitment to product leadership
  have built us a strong foundation for continued
  global growth.

5
What Makes Borg Warner a Good Company?

• Constant Product Innovation to satisfy customers
• Diversified International Growth
• Good Corporate Governance

6
Products

• Engine Group
• Develops strategies and products to manage
  engines for fuel efficiency, reduced emissions,
  and enhanced performance
• Chain Products automotive chain systems
• Boosting System Turbochargers (15 fuel economy
  improvement)
• Emissions and Thermal Systems Control
  emissions, engine air and thermal management
• Beru Technologies Diesel cold start technology

7
Products

• Drivetrain Group
• Innovates transmission 4-wheel drive technology
  with control systems
• Transmission Products Shift quality
  components and systems (used with automatic
  transmissions as well)
• Torque Management Torque Distribution and
  Management systems to enhance drivability,
  stability, and handling.

8
Recent Product Innovations

• Product Innovation
• Focused products on fuel efficiency and engine
  efficiency
• Won 2005 Automotive News PACE award for
  Industry-First DualTronic Transmission Technology
• Discussed Variable Cam Timing, a technology that
  is becoming popular globally
• VCT technology to grow 500 from 5.2 Million
  engines to 26 million engines by 2009

9
Diversified International Growth

• Located in 17 different countries
• Products shipped to all over globe for various
  car manufacturers
• Recent acquisition of German Company Beru AG
  helps diversify operations

10
Customers

• Borg Warner is very well diversified with many
  different customers across the globe
• 3.5 Billion in Sales
• 1.95 Billion from the U.S
• 1.25 Billion from Europe
• .3 Billion from Other Countries
• Do not rely too heavily on one customer
• Ford is biggest with 16 of sales

11
Customers
Customer Diversity
12
Strong Corporate Governance

• Corporate Governance Committee
• Determine qualifications for Board Members
• Develop Corporate Governance Principles that
  Board Members adopt for company
• Finance Audit Committee
• Monitor integrity of Financial Statements
• Monitor Independence of Auditors
  (external/internal)
• Code of Ethics
• Corporate Governance Quotient Better than 90.8
  of SP 400 companies and 95 of automobile and
  components companies

13
Macroeconomic Conditions

• Overall Outlook for the auto industry is negative
  for 2005, especially in North America
• GM tightening grip on suppliers because of low
  profits, lost 1.1 billion in 1st quarter 2005
• Car Manufacturers cutting production in 2005 due
  to excess capacity already
• Raw material prices for steel and aluminum
  reached highs in 2004 due to many factors
• shortage of certain raw materials

14
Competitors

• Main 4 Competitors
• Eaton Corp
• Delphi Corp
• Dana Corp
• Honeywell International
• Competitors are struggling as car industry
  outlook appears bleak
• Dana Corp profits down, Delphis debt rating have
  recently been cut (BB 2nd highest Junk Level)

15
Competitors

• Most competitors are involved in other parts of
  car industry or other industries all together
• Eaton also provides servicing of fluid power
  systems for industrial, mobile, and aircraft
  equipment
• Delphi provides automotive electronics,
  halfshafts, condensers, batteries, filters, spark
  plugs, generators and compressors
• Dana Corp provides chassis and vehicle
  architecture technologies
• Honeywell focused in aerospace and defense
  industry

16
Porters Five Forces Analysis

• Bargaining Power of Buyers High
• Bargaining Power of Suppliers High
• Threat of Substitutes Low
• Threat of New Entrants Moderate
• Industry Rivalry Moderate

17
Borg Warner vs. Auto Industry

• Sales Growth for past decade

18
Relevant Financial Statistics

• Key Statistics
• Market Cap. 2.57 Billion
• P/E 11.79
• PEG ratio .83
• Profit Margin 6.45
• ROA 6.97
• ROE 15.67
• Revenue Growth 14.9 on 3.53 Billion
• Net Income 218 Million
• Total Debt 584.5 Million
• Beta .983
• Div Yield 1.22

19
Financial Data Comparison with Competitors

• Borg Warner
• Market Cap. 2.57 Billion
• P/E 11.79
• Profit Margin 6.45
• ROE 15.67
• Revenue Growth 14.9
• Debt 584.5 Million
• Dana Corp
• Market Cap. 1.74 Billion
• P/E 29.2
• Profit Margin .39
• ROE 2.7
• Revenue Growth 11.40
• Debt 2.35 Billion

• Eaton
• Market Cap. 10.77 Billion
• P/E 13.8
• Profit Margin 6.85
• ROE 20.98
• Revenue Growth 21.80
• Debt 2.1 Billion
• Honeywell International
• Market Cap. 30.93 Billion
• P/E 23.28
• Profit Margin 5.20
• ROE 12.11
• Revenue Growth 10.80
• Debt 6.07 Billion

20
Extra Financials

• Borg Warner has 229.7 Million in Cash
• Cash from Operations 426 Million
• Total Debt 584.5 Million
• Earnings Growth is 14.76 and 20.55 in 2003 and
  2004 respectively

21
Stock Chart 1 Year
22
Stock Chart 5 Year
23
Borg Warner vs. SP 500 and SP 400
24

• Excel Time
• Note Borg Warners income statement does not
  show separate items for depreciation and
  amortization. These numbers were taken from the
  cash flow sheet and they are assumed to be
  included within cost of goods sold on the income
  statement.

25
Sensitivity Analysis

• Cogs 77 of Revenues
• Stock Price 42.13
• Cogs 77 of Revenue, Revenue Growth 12
• Stock Price 45.26
• Cogs 76 of Revenues
• Stock Price 49.21
• Cogs Decrease from 76-75, Rev. increase from
  10-12
• Stock Price 54.72
• Cogs 77 of Revenues, Revenue Growth 8
• Stock Price 39.17
• As we can see, slight movement up in COGS or down
  in Revenues greatly affects stock price
  negatively

26
Future Expectations

• Borg Warner management is very forward looking
• Predict the number of automated fuel efficient
  engines in Europe will triple by 2009
• Foresee that commodity prices will decrease
  because they were at all-time highs in 2004
• Sales in China and India expected to increase
  5-fold over next 5 years

27
Future Expectations

• Continued focus on cost improvements
• Production and procurement of raw materials
• Have built a disciplined cost reduction process
• Have reduced expenses will continuing to invest
  in research and development

28
New Company Developments

• Acquisition of Beru allows Borg Warner to enter
  and thrive in cold diesel engine segment of
  market
• Dualtronic technology as mentioned earlier

29
Threats to Company

• Overall condition of market
• Suppliers can get crunched and production on
  automobiles will slow down
• Commodity prices continue to increase or remain
  high
• GM and Ford (26 of Sales) are struggling
  cutting production
• Forecasted Sales do not occur at predicted pace
• Exchange Rate hurts company
• Sales increased heavily in Europe, where Euro was
  stronger than dollar, in 2003-2004 generated
  over 3 of revenue in 2004.

30
Decision

• I propose that we put Borg Warner on the watch
  list
• Too much risk in cost of raw materials
• Automobile industry is faltering
• Wait till close to end of 2005 to see how well
  company predicted sales and costs

31
In Conclusion

• Borg Warner is well positioned for future global
  growth
• Still have backloads for orders from 2004, may be
  able to get through 2005 downturn
• However, condition in industry and market is too
  risky at the moment
• Company remains a viable supplier, class should
  look at it in the fall 2005 semester