BorgWarner, Inc. (NYSE:BWA) makes parts used in car engines and drivetrains, such as transmissions and four-wheel-drive components. BWA's largest customers include Auto Makers Ford Motor Company (F), Daimler AG (DAI) and Volkswagen (VLKAY), who collectively accounted for 30% of BWA's $5.3 billion in 2007 revenue.
A nearly $100-per-ton increase in the price of steel in 2007 increased BorgWarner's cost of goods sold (COGS) by more than 17% year-over-year. Also, when U.S. new car sales declined by over 5% between 2005 and 2007, BorgWarner's sales in the U.S. fell by $110 million, a decline of around 6%. On the other hand, BorgWarner only earned 34% of its 2007 revenue in the U.S.; as such, a weak dollar and favorable exchange rates gave the company's non-U.S. revenue a $262 million boost in 2007.
The Engine group sells products that improve the performance and fuel efficiency of engines. The Engine group's main products are turbochargers, timing chains, and other engine products.
The Drivetrain segment specializes in four-wheel drive (4WD), all-wheel drive (AWD). and dual-clutch transmission systems. The company's 4WD and AWD products include transfer cases, which distribute engine torque to the front and rear axles, and active torque management systems, which sense the wheels that have the most traction and transfer power to those wheels. BorgWarner also manufactures the famous DualTronic® transmission.
Between June 18, 2007 and June 18, 2008, the euro value of one U.S. dollar decreased from 0.75€ to 0.65€. Since BorgWarner reports its revenue in USD but does over half of its business in Europe, the favorable euro-USD exchange rate boosted the value of its international sales. As a result of the dollar's depreciation, BorgWarner's 2007 revenue and net income were boosted by $262 million and $15 million, respectively. While a weak dollar both boosts the value of sales in other currencies and makes BorgWarner's products relatively cheaper on international markets, a strengthening dollar has the exact opposite effects.
Between January 2007 and December 2007, the price of hot rolled steel coil rose from $549 to $630 per metric ton, and the price of hot rolled steel plate rose from $747 to $837 per metric ton. As a result, BorgWarner's cost of sales rose over 17% from 2006 to 2007, and its gross margin fell from 18.5% to 17.8%. Because it is difficult for BorgWarner to pass higher materials costs on to customers as price increases, rises in the cost of raw materials often hurt profitability.
Between 2005 and 2007, U.S. new automobile sales fell nearly 5% from 16.9 million cars in 2005 to 16.14 million in 2007, the lowest level since 1998. Despite attempting to minimize the effects of decreased automobile demand by negotiating contracts, BorgWarner's North American revenues decreased by 5% between 2005 and 2007. In 2007, 73% of BorgWarner's sales came from products used in automobiles (light cars, trucks, SUV's, etc.), making BorgWarner's sales highly dependent on trends in the auto industry.
BorgWarner is heavily dependent on a few key customers, as its three largest customers accounted for right at 33% of its 2007 revenue. Volkswagen (VLKAY), Ford Motor Company (F), and Daimler AG (DAI) accounted for 15%, 12%, and 6%, respectively, of all 2007 sales. The loss of any one of these three key clients would have a significantly negative impact on BorgWarner's revenue and profitability.
BorgWarner and Key Competitors 2007 ($ in millions)
|Company||Revenue||Net Income||Net Profit Margin|
|Honeywell International (HON)||34,589||2,444||7.1%|
|Federal-Mogul Corporation (FDML)||6,914||1,412||20.4%|
|Robert Bosch GmbH||63,491||Pvt.||Pvt.|
Note: Figures for Robert Bosch GmbH were were converted from Euros using average 2007 exchange rates.