BorgWarner Inc. (BWA) Q2 2014 Earnings Report, Transcript and Summary

Good morning. My name is Jeremy, and I will be your conference facilitator. At this time, I would like to welcome everyone to the BorgWarner 2014 Second Quarter Results Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ken Lamb, Vice President of Investor Relations. Mr. Lamb, you may begin your conference.

Thank you, Jeremy. Good morning, and thank you, all, for joining us. We issued our earnings release this morning at 8:00 a.m. Eastern. It's posted on our website, borgwarner.com, and on our Investor Relations home page. A replay of today's conference call will be available through August 7. The dial-in number for that replay is (855) 859-2056. You'll need the conference ID, which is 59589666. The replay will also be available on our website. With regard to our Investor Relations calendar, we will be attending the following conferences between now and our next earnings release: August 12, we'll be at the JPMorgan Automotive Conference in New York; September 3, we will be at the CLSA Autos Assembly in New York; September 10, we will be at the RBC Capital Global Industrials Conference in Las Vegas; September 16, we will be at the Morgan Stanley Laguna Conference in Laguna Beach; and September 23, we'll be at the Citi Global Industrials Conference in Boston. Before we begin, I need to inform you that during this call we may make forward-looking statements which involve risks and uncertainties, as detailed in our 10-K. Our actual results may differ significantly from the matters discussed today. Now moving on to our results. James Verrier, President and CEO, will review highlights of our operating results, as well as some of our recent noteworthy accomplishments. And then Ron Hundzinski, our CFO, will discuss the details of our operating results and also our updated outlook for 2014. With that, I'll turn it over to James.

So, thank you, Ken, and good day, everybody. So, as we start the call, let me just take a moment to congratulate the 119 BorgWarner employees from around the world who were honored for innovation and excellence earlier this month. They epitomize the entrepreneurial spirit that sets BorgWarner apart and helps drive our success. So thanks to all of the BorgWarner employees for your continued dedication and hard work. Now, Ron and I are very pleased to review our second quarter results, as well as some of our recent accomplishments. First of all, the second quarter, we reported sales of $2.2 billion, which is up 16% from a year ago, or 8% if we exclude the impact of foreign currencies and the Wahler acquisition. U.S. GAAP earnings were $0.83 per share, or $0.89 per share when we exclude restructuring charges. Our operating income margin, again, excluding the restructuring charges, was an impressive 13.5% in the quarter. Two key factors drove our strong results: first, solid sales growth in both the Engine and Drivetrain segments; and then operational efficiency and cost controls that enabled strong incremental margins. Really, it's outstanding performance, again, by our operations. Let me take a look now at the Engine segment. We saw that second quarter sales were about $1.5 billion, which is up 16% from a year ago, or 6% when we exclude foreign currencies and Wahler. These impressive results were led by strong turbo sales in Europe and China, and new engine timing and VCT launches, also in China. In the Drivetrain segment, sales were approximately $710 million, which is up 16% from a year ago, or 13% when we exclude foreign currencies. Drivetrain's results were driven by strong all-wheel drive sales in North America, higher dual-clutch transmission module volume in Europe and high transmission component sales in Korea. So we see Drivetrain continues to grow and our restructuring plan is paving the way for a more profitable business. Just this month, we began moving our equipment from our Western European operations to Poland, and these actions will enhance Drivetrain's competitive position, which we expect to translate into winning more business. Now this segment review highlights BorgWarner's core strengths. Our entire product portfolio is in high demand in markets around the world and we're seeing improvements in Drivetrain, as expected, and the continued strong performance in Engine. Our strength and strong performance is based on our ability to anticipate and drive the next technology waves. As I look to the future, BorgWarner just continues to invest for the long-term. Capital spending continues to grow. We spent about 6% of sales on capital in the second quarter, which was is in line with our expectations, and we remain committed to supporting our future growth and productivity improvements. Our investment in R&D was just over 4% of sales in the quarter, which is also in line with our target for the year. And I can tell you the intensity around organic innovation and product development remains very strong. I'm also proud to share some exciting announcements we made during the quarter. We began producing our electronically controlled Vistronic fan drives at our new plant in Itatiba City, Brazil. And this highly efficient engine cooling technology improves fuel economy, reduces emissions for trucks, buses and off-highway applications. BorgWarner supplies 12 of the 15 finalists in the 2014 World Car Awards, including the Audi A3, the Mercedes S-Class, and the Porsche 911 GT3, all of which were winners. We provide one or more advanced technology to each of the finalists, including engine timing systems, turbochargers, EGR components, thermostats, emission systems, cabin heaters, friction plates and all-wheel drive couplings. We also supply our HY-VO transfer case chain for the Lexus GX and the Toyota Land Cruiser Prado, 4runner, Tacoma and also the FJ Cruiser. The chain is designed to reduce the friction in the transfer case, which improves efficiency and fuel economy. BorgWarner will supply Pressure Sensor Glow Plugs for Volkswagen's new 1.4, 1.6, and 2-liter diesel engines later this year. The glow plug pressure sensor measures cylinder pressure in the combustion chamber, and reports that data to the engine control unit, which allows the engine controller to continuously adapt fuel injection for each cylinder. We're also now producing multi-spark ignition coils for Daimler's 6- and 8-cylinder GDI engines, and these advanced ignition coils expand the ignition zone for more controlled and optimized combustion, improving fuel economy and emissions. Now let me take a moment to provide an overview of our revised guidance for 2014. Sales growth in 2014 is expected to be between 13% and 15%, which is up from our 12% to 15% previously. We see our operating margin is now expected to approach 13%, and our earnings guidance has been raised to $3.25 to $3.35 per diluted share from $3.15 to $3.30 per diluted share previously. Both ranges exclude non-comparable items. This is a very high-level overview of our updated guidance, and Ron will provide more details shortly. So the first half of the year was a great strong start to what we expect to be another excellent year for BorgWarner. We're expecting industry-leading revenue growth, continued excellence from our operations, and that combination results in great earnings power for our company. The industry's adoption of our leading-edge powertrain technology will continue for years ahead, and I feel very, very good about our company's future. No company in the auto sector is better positioned for long-term profitable growth than BorgWarner. So, with that, let me now turn the call over to Ron.

Thanks, James, and good day, everyone. Before I begin reviewing the financials, I would like to commend all of our employees for their hard work and congratulate them on another great quarter. Once again, the team exceeded expectations, and congratulations. Now on to the financials. James already provided a detailed review of our sales performance in the quarter. In summary, sales were up 16% from a year ago, or 8% excluding the impact of foreign currencies and the Wahler acquisition. The growth in the quarter came from both segments, from nearly every product group and from around the world. Overall, a strong quarter for sales. Working down the income statement. Gross profit as a percentage of sales was 21.5% in the quarter. That's a 60-basis-point improvement from a year ago, another great quarter. SG&A as a percent of sales was 8.2% in the quarter, flat with the second quarter 2013. R&D spending, which is included in SG&A, was 4.1% of sales in the second quarter, up 30 basis points from a year ago. This implies 30-basis-points improvement in other SG&A spending. We attribute this to good execution of our cost-control plan. Reported operating income in the quarter was $281 million. However, this includes a $15 million charge related to restructuring activities that I will discuss shortly. Excluding the charge, operating income was $296 million or 13.5% of sales compared with 12.9% of sales on a comparable basis a year ago. After excluding the impact of foreign currency, the Wahler acquisition and the restructuring charge, our year-over-year incremental margin was about 31%, well above our mid-teens incremental margin target. In summary, operational efficiency led to an improved gross profit margin. Cost controls led to a lower SG&A spending, and this allowed us to increase R&D spending and expand our operating margin income. That's a great way of running a company, outstanding performance. As you look further down the income statement, equity in affiliate earnings was $12 million in the quarter, up from $11 million last year. This represents the performance of NSK-Warner, our 50-50 joint venture relationship in Japan, which sells transmission components to our Japanese customers in Japan and China; as well as TEL, our turbocharger joint venture in India. Interest expense and finance charges were $9 million in the quarter, flat from the same quarter last year. Provision for income taxes in the quarter on a reported basis was $85 million. However, this included a $2 million tax benefit related to restructuring charges. Excluding the impact of restructuring, provision for income taxes was about $87 million, which is an effective tax rate of 29% in the quarter. Our estimated effective tax rate for the full year, excluding noncomparable items, is now 28.5%, up from 28% previously. The increase is primarily due to a change in expected mix of income from around the world. Net earnings attributable to noncontrolling interest was $10 million in the quarter, up from $6 million a year ago. This line item reflects our minority partner's share in earnings performance of our Korean and Chinese consolidated joint ventures. That brings us back to net earnings, which were $190 million in the quarter or $0.83 per share. Excluding the impact of restructuring activities, net earnings were $0.89 per share, up 19% from $0.75 per share a year ago, outstanding performance for the company. Now let's take a close look at our operating segments in the quarter. As James said earlier, reported Engine segment sales were $1.5 billion in the quarter. Excluding currency and Wahler, Engine segment organic sales growth was 6% from a year ago. Note that our commercial vehicle business, which has faced a challenging environment this year, is in the Engine segment. On a reported basis, adjusted EBIT for the Engine segment was 16.1% of sales. Excluding currency and Wahler, adjusted EBIT for the Engine segment was 17.6% of sales, up 50 basis points from 17.1% reported a year ago. Excluding currency and Wahler, the Engine segment's year-over-year incremental margin was 26% in the second quarter, very good performance for the Engine segment. On our last earnings call, we discussed operational efficiencies and footprint opportunities for Wahler that presented a clear path to double-digit margins. This restructuring plan is expected to cost approximately $28 million, including a $3 million charge taken in the second quarter. The charges will be recorded over the next 2 to 3 years, after which, Wahler is expected to be a double-digit margin business. The total consideration from Wahler, plus the cost of restructuring, is less than 0.5x sales. In the Drivetrain segment, reported sales were just under $710 million in the quarter. Excluding currency, organic sales growth was 13% from a year ago. On a reported basis, adjusted EBIT was 12.6% of sales. Excluding currency, adjusted EBIT was 12.5% of sales, up sharply from 9.7% of sales a year ago. Excluding currency, the Drivetrain segment's year-over-year incremental margin was 35% in the second quarter, another outstanding quarter for the Drivetrain segment. As mentioned earlier, the Drivetrain restructuring continues. In the second quarter, we took a $9 million charge related to the plan. To date, we have recorded approximately $100 million in charges related to the plan, 2/3 of which will be cash outlays for severance and other activities. We expect to record another $40 million by the end of 2015. These remaining charges will also be primarily cash. As a result of the restructuring, we expect Drivetrain's adjusted EBIT margin to improve by at least 100 basis points. Now let's take a look at the balance sheet and cash flow. We generated $326 million of net cash from operating activities in the first 6 months of 2014, up from $300 million a year ago. The increase was primarily related to higher net earnings. Capital spending was $257 million in the first 6 months of 2014, up $63 million from a year ago. The increase was driven by capital required to support our backlog of net new business, which is gaining momentum. Free cash flow, which we define as net cash from operating activities less capital spending, was $69 million in the first 6 months of 2014, down from $105 million during the same period last year, primarily due to higher capital spending. Looking at the balance sheet itself. Balance sheet debt increased $23 million at the end of the second quarter compared to the end of 2013. Cash decreased by $168 million during the same period. The $191 million increase in net debt was primarily due to capital expenditures and the Wahler acquisition. Our net debt-to-capital ratio was 10.9%, up from 7.2% at the end of 2013. Net debt-to-EBITDA at the end of the year, on a trailing 12-month basis, was 0.3x. I meant at the end of the second quarter. Our capital structure remains excellent. Now our guidance for 2014. James reviewed our guidance at a high level, I'd like to discuss some of the finer points. Our sales growth guidance range is now 13% to 15%, up from 12% to 15% previously. The increase is partly due to an improved volume outlook, partly due to stronger foreign currencies and primarily the euro. We still expect raw material inflation of $5 million to $10 million in 2014. Still a headwind, but less than we've seen in a typical year. Our operating income margin is now expected to approach 13% in 2014. This is primarily due to our operations continuing to exceed expectations. Our EPS guidance range has been raised to $3.25 to $3.35 per diluted share, up from $3.15 to $3.30 per diluted share. The $0.08 per share increase from midpoint to midpoint has 2 components; a $0.02 per share decline from a higher tax rate and a $0.10 per share increase from an improved outlook for the business. Our guidance implies lower sales and earnings in the second half of 2014 compared with the first half, so I'd like to review the logic on this. In a stable year, revenue and operating income are typically lower in the second half due to summer shutdowns and year-end holidays in both Europe and North America. In addition, the relocation of Drivetrain's European operations, which began this month and will continue into 2015, will incur start-up costs and other temporary inefficiencies. And you may recall that we deferred spending in 2013 to defend against the slower growth environment that we were in. Some of that spending is expected to return this year, primarily in the second half. With that said, our operations have been performing at a very high level over the last several quarters. The momentum they've gained may, to some degree, offset the challenges ahead. Finally, our expected diluted share count for 2014 is unchanged at approximately 230 million shares. This diluted share count guidance excludes any share repurchases that may be executed during the year. We continue to be confident in our ability to execute in any market. This company has demonstrated a heightened focus on efficiency and cost. This focus resulted in highly efficient growth and record margins in each of the last 4 years. With return to historical growth rates and our operations performing at a very high level, 2014 should be another year of record sales and record profits for BorgWarner. As we look beyond 2014, we intend to execute our growth plan, yielding high-single- to low-double-digit growth, and to efficiently convert our sales growth to profits. The future is bright for BorgWarner. So with that, I'd like to turn the call back over to Ken.

Thanks, Ron. Now let's move to the Q&A portion of the call. Jeremy, please remind everyone of the Q&A procedure.

[Operator Instructions] Your first question comes from the line of Rich Kwas with Wells Fargo Securities.

Ron, on Drivetrain. So, last quarter you indicated that first quarter, you shouldn't use that as the benchmark to build off of, and here in the second quarter you did much better, and I know you just started moving equipment and whatnot here in July. How should we think about the trajectory here off of the base in Q2 on margins? I assume it's down from Q2 levels, but how meaningful? And then when you think about the movement of equipment, how long will that take? It sounds like it probably goes into '15, but any color on that will be helpful.

Okay. So I guess the question, Rich, is where's the base for the segment, is what you're asking. Historically, we said it was double digits. I mean 10, 10.5, right? And I think we said recently that we've moved that benchmark up slightly higher from what we thought originally, going into this restructuring. I think what we did for the quarter is the high mark, but I would say we moved off the lower end of what we expected coming in to restructuring. So we're somewhere in between 10.5 and 12.5 at this point. We moved it up. The other question you asked was how long this would take. This move could take through the end of '15. I'm not sure if it's going to be the end of the third quarter of 2015 or in the fourth quarter. But it's going to take some time. We've just started the moving of equipment. And I expect at least a minimum of 1 year, maybe 5 quarters. Okay?

Okay. And then just a quick follow-up with Engine margins. I know you have some dilution from Wahler here, but the margins have been down, and I know you talked core being up. But any color around what you're seeing on the core business going forward? Do you still expect to see increases in the core business? And I realize here in the back half, you're going to still have some dilution from Wahler. But if we think about it, once that's fully integrated, how should we think about margin trajectory within Engine?

All right. So I'm going to talk about it excluding Wahler, okay? The way I would look at it is the organic growth we're getting in that area is in the mid-teens on incremental margins. Now the issue is you're approaching incremental -- the convergence is just about there. So the basis points are getting really narrow, depending on how you define mid-teens. So I would say it's starting to narrow on the margin expansion in that segment because we're approaching the convergence point on incremental margins.

Okay. And then last one on minority interest, that was a little bit higher than we had expected. Should we think of this as a good run rate going forward?

No. I think we had a little bit of -- there's one operating unit that had a very good outstanding quarter due to some unusual items. So I wouldn't say that's where the run rate is going to be. I would back it off a little bit, okay?

Your next question comes from the line of John Murphy with Bank of America Merrill Lynch.

Just a first question on Wahler. I was curious, what has changed there that you're kind of stepping up these restructuring charges? Is the business performing largely as you expected and this is just incremental integration expense? I'm just trying to understand what's changed there? Because I think we're all kind of assuming that it might be going -- it sounded like it was going a little bit better than expected and it might be a little bit different now.

John, this is James. I would say it's pretty much in line with what we had expected going in. I think if you recall, we talked about that mid-single-digit start point for the business. Good growth trajectory, great technology. And as we take a good look at it and improve the operations more in line with typical BorgWarner performance, over that 2- or 3-year period, we'd be able to get it up to that kind of double-digit range. Nothing's really moved off that. I think what you're seeing, John, is that -- a way to think of it is you're seeing a little bit more clarity now. We kind of knew that going in there'd be some level of restructuring in order to move that operating margin up. And we are a few months in and we've kind of got our arms around that and we're starting to execute, and that's what you're seeing in the restructuring. Fundamentally, John, no change. Just a little bit more clarity and the story's still solid.

Okay. And then, second question, just on Drivetrain and we look at sort of the strength in the first half of this year. How much of that has to do with Ford prebuilding F-150s ahead of the changeover and sort of the weakness we might see in the second half of the year as a result of the changeover? And could we really just see the Drivetrain margins kind of bounce right back up in the first half of next year as that truck launch gets going? I'm just trying to understand what kind of impact that launch is having on your margins.

Yes, this is Ken. So the Drivetrain performance year-to-date is pretty broad, globally and across the product spectrum. So we've had strength in our dual-clutch business, we've had strength in our traditional automatic transmission components and then also in our all-wheel drive business, and it's been all over the world. So I wouldn't point to the F-150 as a reason for it. Obviously it doesn't hurt. But certainly, we've had some broad, good activity in the business. So I think that's the right way to think about it.

Okay, that's helpful. And then just lastly, I mean, schedules through the second quarter seemed like they improved in both North America and Europe through the quarter, and third quarter's schedules are expected to be reasonably strong in North America and Europe. In your early read, I mean, are you seeing sort of schedules being slowly inched higher and downtime being stripped back in a lot of factories? It just sounds like we're sort of in that environment where the companies are being relatively cautious in their initial schedules, but then inching them up as we go through the quarter.

Yes, John. I would say -- I wouldn't say we've seen a lot of meaningful move. I think, in general, second quarter schedules came in, globally, pretty much in line with what we thought, and our read as we go into the third quarter is pretty much the same at a general level. It varies a little bit when you get into the plant-by-plant, customer-by-customer. But I was able, overall, for us as a company, John, it's pretty much following what we'd anticipated. And in general, it's relatively solid and strong. I mean, the schedules when you look at it, particularly North America, are running well and holding well. And that stability in Europe that we were all looking for and hoping for, I think we're seeing that. So I think in general, it's a pretty positive picture, but no real change for us, if that make sense.

Your next question comes from the line of Itay Michaeli from Citi.

So just some quick questions. First one, can you give us some color in the booking activity in the second quarter by any chance?

Yes, sure. I would say it was another good strong quarter for BorgWarner, relatively typical to kind of what we see. Both at an -- and activity level was good, there was a lot of activity. And the ratio, so to speak, of what we were looking to win came in line pretty much with what we thought. And it was very well-balanced globally and very well-balanced across our whole portfolio. So it was another good typical BorgWarner-type quarter for us in bookings.

Excellent, that's very helpful. And then you mentioned that it was balanced globally and across the portfolio. Can you give some color maybe on the growth by region that you saw?

What I would get you to think of is, in a few months, our backlog overview, which gives you that 3-year view. And that's when it's more meaningful, because it's -- the reason I say that is it can bounce around quarter-to-quarter, depending on the customers and the time. But I would say, generally, it was well-balanced, but the better way to look at that is over a longer horizon, like that 3-year period versus an individual quarter. But it was good.

Very helpful. And then just quickly on the margin cadence for the back half of the year, and then kind of incremental margins and that mid-teen target. Just curious as to how we should kind of be thinking about it. I mean, if you take the -- I guess, just on the back of the envelope math, it kind of seems like the back half of the year might be coming in below the mid-teen target. But you did mention that there were some start-up costs and deferred costs that were going to be hitting. Can you quantify those or maybe just give some color, additional color on that?

I'll give some high-level and then maybe after the call, I'm sure everyone will call Ken on more details. But high level is how I would say this. You got to look at it sequentially. And I said in my script that sales are going to be down, and I think if you do some math, you'll see 2% down or something. We're going to have a decremental, obviously, on that, as sales come back for the reasons I mentioned, right? Summer shutdowns and holidays. So you have a decremental on that, 20%, 25%. And then we have, on top of that, we have incremental cost coming back and. So it's in 2 buckets; volume and it's in cost coming back in. And I gave some color about the cost coming in. But that's the high level and you can do the math, maybe give Ken a call later.

Your next question comes from the line of Brett Hoselton with KeyBanc.

Let's see here. Maybe I'll just start off with contribution margins. I understand what your guidance implies, I believe, but as I kind of look at your contribution margins, for example in the quarter, I calculate 17% on operating income basis, overall; 23% if I kind of x out Wahler, and I may have my estimates wrong there. But the point of all that is that it seems like it's trending, or has been trending and continues to trend at a rate higher than the kind of mid-teens contribution margin that you're looking for longer-term. And I'm kind of wondering -- I'm not suggesting that you should change your longer-term guidance. But I'm kind of wondering, over the next 2 to 3 quarters, is there a possibility that we could certainly trend well above that mid-teens contribution margin if we adjust for Wahler and so forth?

Brett, this is Ken, again. Let's talk about this a little bit. So, first of all, as you stated, over the last few quarters, our incremental margins have been well above the expectation of in the mid-teens. First thing that we need to note is, in the second half of last year, there was a very sharp increase in Drivetrain margins that really kind of led to the increase in incremental margins. I don't know the basis points off the top of my head, but it was a pretty sharp increase from the first half to the second half. That's the first thing to think about that probably will not be repeated as we go forward. And then when you add on top of that, we are starting the Drivetrain moves now, just started them this month. So that spending is definitely coming back, and then we have this deferred spending that we talked about last year that's also coming back. So those are the variables to think about it. Is it possible that the momentum in our business could partially offset some of these challenges ahead of us? We do think that that's a possibility, which is why Ron had that in his prepared remarks. But those are all the things of we're thinking about when we were contemplating guidance for you guys.

And then switching gears, capital deployment. Let's see, obviously, we talk about acquisitions quite a bit here. I'm kind of wondering what's your outlook at this point in time. And I guess the specific question is, is there anything imminent, i.e. what's the likelihood of seeing something in the back half of 2014?

Yes, Brett, this is James. I'll give you maybe a little bit of an overview where we are on the M&A pipeline, so to speak. Because I think you know, that's still our preferred path, obviously, for utilization of cash. So, Brett, the good news, the pipeline remains very robust and very strong. The number of potentials in the queue are pretty good and we continue that. I think as we've talked about before, the timing of those is not easy to pin down because of the complexity of the transactions you get into. So we're continuing to drive to outcome on those. I'm not going to make a prediction of timing of when they will get executed, not because I don't want to, it's just that I really don't know, because of the nature of the negotiations that we're in. But I'll tell you, we're pushing hard to get that done. But in the light of that uncertainty, that's why we have other components that we utilize the cash for. And Ron maybe can add a bit of color of where we want to go on that side of it.

Right, Brett. So, obviously, potential of M&A is what we take into consideration. We also look at -- and short of that, we'll do share repurchases. But when we look at that, we have to look at where our cash is, the valuation of our stock, for example, and some other factors the come into play. But I think, another way to look at this is that, for the first half of the year, we spent $190 million on capital allocation. If you include Wahler, if you include the dividends that we're paying and if you include the share repurchase that we have, this rounded it up to $200 million, which is almost half of our free cash flow for the year. So that's another way to look at this, okay? That we have been proactive up to this point okay?

Your next question comes from the line of Brian Johnson with Barclays.

Thinking about the Drivetrain, you've talked about the restructuring and the move. But the question I was asking is, with a more competitive cost base in Drivetrain, are you seeing your business win rate go up or perhaps the margins that you're looking for in there? Just kind of what's the impact of your lower cost base on that?

Yes, this is James, Brian. I think a couple of things that are worth thinking here. And I think you kind of nailed one of the critical points for us. This whole restructuring around Drivetrain is to position us for future growth. We absolutely see a lot of growth potential in that segment and this is an integral part of getting that footprint, combined with the leading-edge technology we've got, puts us in a very strong position. So our quote rates and our win rates have generally been strong in Drivetrain over the last year or so, and you saw some of that in the backlog that Ken took us through last year. And I think this continues to keep us in the competitive position, that the growth rate's going to continue to remain strong for Drivetrain. It's probably a better read or a strong re-brand [ph] will be as you look out 2, 3 years from now, what that translates into. And we'll see that, obviously, in a couple months here as we roll out the backlog. But I will tell you, in terms of our win ratios in the Drivetrain business that we're quoting, both on the transmission side and on the overall Drive side, I'm very comfortable and positive with what I'm seeing.

And somewhat related to that, a large German-based drivetrain competitor has confirmed their interested in acquiring a company that has not a lot of drivetrain content. How do you view acquisitions overall? And does that kind of diversifying acquisition either, a, say anything about what's going on in the drivetrain segment, or b, influence at all the way you think about your acquisition strategy?

Yes. I think I'll talk about our acquisition strategy, Brian, and it remains consistent with prior discussions. And what that really relates to is acquiring leading-edge technology to complement the technology that we've got both on Drivetrain and on Engine side of the business. And when I look at our pipeline of potential opportunities, we see companies in both segments. So, as we look out, we see the majority of our growth on Drivetrain will come organically, because we've got a very good set of technology today. But we remain open to further acquisition activity around Drivetrain.

Your next question comes from the line of Brian Sponheimer with Gabelli.

The other Brian asked my question, but just one other on -- you talked last quarter about repatriating some cash from some of your Chinese JVs as they're now self-funding. Can you talk about any progress you made there during the quarter?

Yes. I think you need to look at repatriation at a higher level than the focus everyone's been putting on China. We repatriate cash from a number of areas in the world, not just China. If you go back about a year ago, we changed -- I think, it was from the Korean operations, we started bringing back some cash more. And that's just -- actually, the China event that you're referring to is just a continuation of what we do every single day in this business as we look at regions of the world and we make decisions on -- are they self-funding going forward. And on the China situation, that was just one of those decisions. So the cash is starting to flow back in the United States. And more importantly, as we look forward, our China operations are growing at a very healthy clip. Cash generation there is going to be very healthy. I just want to make sure we set ourselves up going forward to bring that cash back so we can use it for other investments. So that's all that really is. I think everybody's putting too much emphasis on that China repatriation.

Your next question comes from the line of Ryan Brinkman with JPMorgan. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: Can you talk about your operations in South America, how they tracked in the quarter? And can you remind us of sales in South America as a percentage of total? I think it's a bit less for you than for many other suppliers, but that you recently expanded operations in Brazil.

Sure. Yes, this is James, Ryan. It's a relatively -- we don't disclose the exact percentage, but it's a smaller part of our overall business at the moment, South America. It's concentrated all in Brazil. We serve our South American customers all from Brazil. You're right to note that we did do quite a bit of investment and expansion, and that's for where we see opportunities for future growth in that market, both on the light vehicle and commercial vehicle part of our business. But in the short term, yes, it's definitely a little bit of a headwind for us. The commercial vehicle segment, which is primarily what we serve in Brazil and South America, is very challenged, I think you guys know that. So it's not helping us at all in the short run in Brazil. But we believe, for the long haul, it's still a great growth potential for BorgWarner and that's why we feel the investment we made was the appropriate one. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: Okay, sure, that's fair. And I think you've got an investor event coming up next month. But around this time last year at the summer event, you gave a pretty detailed drill-down of your M&A plans, including the number of targets that you were looking at. Obviously, you've pulled the trigger on Wahler. Is there any update you can give us on sort of the level of activity in evaluating additional acquisitions? Has the evaluation process declined as you work to integrate Wahler? Is there still a lot going on behind the scenes? And sort of last question along those lines, what are the sizes of the potential acquisitions that you're looking at relative to Wahler? Was Wahler one of the larger businesses that you were looking at? The others are more bolt-on technology stuff? Or can you help us there?

Yes, sure. The quick answer, Ryan, is the pipeline is pretty robust and long and deep. And I would say, in general, it's similar to what it was about a year ago. Obviously, from a year ago we got 1 completed, which was Wahler, a couple have fallen out of the process, a few more are being added in. But I would give you a sense of the number of target companies in the pipeline is pretty similar to where it was a year ago. The scale and size is pretty similar. And probably, most importantly is the focus or the target of where we're trying to acquire is very consistent. So, again, we want to acquire technology, we want to acquire leading-edge technology that will drive growth for us. And we're agnostic whether it's engine or drivetrain, and we're agnostic in terms of where it is in the world because we're a global company. So hopefully that helps you little bit. We're very focused on it and we believe, as we look out over the next few years, acquisition will be a part of it. And, in general, it will be adjacencies and complementary technology in the powertrain area is the way to think of it. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: Very helpful. And last question if I can, just on the 290-basis-point improvement in Drivetrain margin, it's obviously very large. Are you able to share how much of that year-over-year improvement relates to some of the pension and other sort of nonoperating legacy cost actions you've taken as opposed to more typical cost cutting and contribution on higher sales?

I'm just going to say it's really based on performance of the operations. Not on any other -- I would say, operational efficiency is where it all came from. Just their performance, concentrating on incremental margins. The sales was very strong, as we've pointed out, and they converted those sales. So it's just operational efficiency is what they're doing there.

Your next question comes from the line of David Leiker with Robert W. Baird & Co. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: This is Joe Vruwink online for David. Can you maybe quantify, or I apologize if I missed it, the headwind from your commercial vehicle and off-highway markets in the quarter?

So we actually didn't provide any numbers around that, Joe. Commercial vehicle is about 15% of the company, and if you throw in aftermarket, it's up to 20%. And as you know, the market, almost the entire market around the world, was pretty depressed. It was decent in North America, but South America was really poor. Europe and China had almost no growth. So it certainly didn't help us when you think about our overall business and how much we grew in other parts of it. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: Yes, I'm just thinking of your revenue guidance for the year. Most of your OE customers have walked back a bit, their outlook on a global basis. So Eastern Europe is weighing on things, South America, some weakness in the off-highway space in Asia. And obviously [indiscernible] from an organic basis. If I think about maybe your automotive business, does that forecast actually inch higher a bit to get you to the updated guidance range?

Well, so I guess I could say this, overall, clearly we have a better expectation for the business. We didn't bifurcate between commercial vehicle and light vehicle. I'd have to say, in general, commercial vehicle is probably a bit weaker now than what we thought at the beginning of the year. So I guess your logic is sound. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: And maybe just last one on this, in thinking about the backlog. So typically with rising GDPs, you'd expect higher equipment demand for a lot of reasons. That hasn't been the case in the commercial vehicle space. What sort of headwind has that been on kind of the backlog deployment in the last couple of years? I mean, since 2011, I think global volumes have been more or less flat, and if you do start to get the cyclical recovery in Europe and North America, is that a tailwind for you over the midterm?

It certainly wouldn't hurt us. There are lot of other factors, of course, in the backlog that we will discuss in detail in November. You and I can talk about that more offline, in detail if you like. But again, November, at your conference, we'll share more detail about the ins and outs, the changes that have happened in the backlog since the last announcement. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: Okay. Focusing for a second equity income, pretty good growth seen in that line item in the quarter. I would imagine you're beginning to see a ramp-up in volume from China. Is it fair to say that since it's still early days, that JV's probably not getting BorgWarner-like profitability? And what might be the timeframe for just seeing greater bottom line leverage in equity income from that growth?

If you're referring to our joint venture in China on dual-clutch, yes, we're gaining momentum there. That's a component in there. But I think it's not materially an impact for us at this point, okay? I wouldn't put a lot of emphasis on it at this point. I think in the future there's going to be much more emphasis, but not in the short run. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just since the M&A scene seems to be in vogue, I'll add one more. When you look at the product adjacencies that might be out there, and when I think of what BorgWarner has done in the last few years, you used to have a smaller air side business with Dytech and Wahler, you significantly enhanced that. Are there similar categories in the portfolio today that are maybe a little smaller in nature but you see a runway through M&A to expand them?

Joe, this is James. I think the example you used is a good one, and that's around the theme of emissions, right? Or emissions products. If you look and think about business, think of it that same way. So we have a theme around all-wheel drive, we have a theme around air management, we have a theme around thermal management, we have a theme around boosting solutions. And there's product or technology that you could add, that would complement that sphere of thermal management or all-wheel drive management. And some of that, obviously, we'll do organically. But that's obviously where we do look for acquisition targets that could get us there quicker and would complement and allow us to offer more comprehensive solutions than what we have today. So I think you're thinking is the right one, Joe. Joseph D. Vruwink - Robert W. Baird & Co. Incorporated, Research Division: And there's not any impediments in terms of...

Joe, thanks, we've got to let somebody else on the call, okay? Thank you.

Your next question comes from the line of Colin Langan with UBS.

Any color? Some suppliers have highlighted there might be some mix [indiscernible] issues heading into Q3. I know you have a lot of Ford exposure and some of their trucks are expected to be down. Is that a near-term headwind when we're thinking about quarter-over-quarter? Is there sort of an underperformance risk mid-term?

Well, I think the way to think of it for us, as you know, we're a very broad and diverse supplier, so we're spread all around the world. So individual programs often don't weigh or drag too heavily in the short-term for us. As Ron said, there is, obviously, the sequential change from Q2 into Q3, where you get the seasonality which will impact us. But we don't see any anything that specific, Colin, if that makes sense to you. And we're comfortable with where we're at.

Okay, that make sense. Any color on the corporate cost for only $23 million, they were down year-over-year. It seemed like a pretty low level. Is that sustainable going forward or was there some special benefits in the quarter?

I think the corporate costs were like $35 million, but I'll give more flavor on it. I think you can anticipate that's been running about $150 million full year. So it's up and down by quarters a little bit. But that's usually what we've been running, about $150 million and it has been pretty flat year-on-year. I think it was $35 million in the quarter.

Okay. I guess just one last question. A lot of suppliers -- a couple of suppliers have taken action to defease their pensions. I mean, how would you think about, long-term, taking actions around your pension plan?

Yes. We constantly look at our pensions. If you recall, in the fourth quarter of '13, we funded a German pension fund over there, which I would like to brag that we're getting good earnings on it, on the pension fund. It was a good move. We had some cash over there. But I think you're probably more referencing like putting them into annuities for example. We are looking at that. It's too soon to tell where it would go. We're in the business of making auto parts, not being a fund manager when it comes to pensions, but we are looking at those options going forward.

We have time for one final question and that question comes from Joe Spak with RBC.

I guess just going back to the backlog, which I know was sort of announced a year ago, and you gave the split between Engine and Drivetrain. If we were to assume that split was consistent across all years, it would appear that Engine's maybe underperforming a little bit, Drivetrain's better. So did something happen there or is the mix of the backlog actually just more skewed to Drivetrain this year, implying that some of the engine backlog is actually a bit more '15 and '16 weighted?

Well, first of all, it is not -- you can't use that ratio for each year. So you're right about that, that's a 3-year look. Over the course of the 3 years, that's how the backlog splits. Now I will say that if you go back a few years and look at the split, it does bounce around a little bit. It's been a little bit heavier in Drivetrain a couple of years back and it's been moving a bit. So it's another factor to consider. I would say maybe the one factor this year that's probably having an effect, where the backlog's probably coming in a little bit differently than expected, is commercial vehicle is a little bit weaker than expected. So that's maybe the one variable. But overall, I think if you're going to look at that split for the 3-year backlog, you got to consider that it's over a longer period of time.

Okay, but is it fair to assume that within that, that maybe Engine was a little bit more back half -- the growth is more back-half weighted than this year?

No, I wouldn't say that. Engine had some strong growth in the first half. I mean, I know it's not been as strong Drivetrain. But again, the commercial vehicle business is contained almost completely by Engine. That's been maybe the one weak spot on the engine side. But I wouldn't say it's a first-half, second-half issue. Ron talked about our growth difference in the second half versus the first half, and it's largely just seasonal.

Okay. And then just one housekeeping, and sorry if I missed this. But did you give what the inventory write-up was for Wahler in the quarter? I think you previously were saying it would about $5 million?

I think it was about $6 million.

I'd like to thank you all, again, for joining us. We expect to file our 10-Q before the end of the day, which will provide details of our results. If you have any follow-up questions about our earnings release, the matters discussed during this call or our 10-Q please, direct them to me. Jeremy, please close up the call.

That does conclude the BorgWarner 2014 second quarter results earnings conference call. You may now disconnect.