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  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 S&P 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, Delphi’s 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. Porter’s 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. S&P 500 and S&P 400

  24. Excel Time Note: Borg Warner’s 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