BorgWarner Inc. (BWA) Q3 2014 Earnings Report, Transcript and Summary

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

Thank you, Kyle. Good morning, and thank you, all, for joining us. We issued our earnings release this morning at around 8:10 a.m. Eastern Time. It's posted on our website, borgwarner.com, on our Investor Relations homepage. A replay of today's conference call will be available through November 6 also on our website. The dial-in number for that replay is (855) 859-2056. You'll need the conference ID, which is 99689813. With regard to our Investor Relations calendar, we will be attending the following conferences between now and the end of the year: November 4, we will be at the Gabelli Automotive symposium in Las Vegas; November 12, we will be at the Goldman Sachs Industrial Conference in Boston; November 20, we will be at the Barclays Global Automotive Conference in New York; December 4, we will be at the Goldman Sachs Global Automotive Conference in London; and finally on November 10, we will be at the Baird Industrial Conference in Chicago. Also on that date, November 10, at around 8:00 a.m. Eastern, we will release our 2015 through 2017 book of net new business. At 9:30 a.m. Eastern that day, we will post a brief Q&A conference call regarding the backlog. Now 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 highlight our quarterly operating results as well as some of our recent noteworthy accomplishments. And then Ron Hundzinski, our CFO, will discuss the details of our quarterly operating results and also our updated outlook for 2014. With that, I'll turn it over to James.

Thank you, Ken, and good day, everybody. Ron and I are very pleased today to be reviewing our third quarter results as well as some of our recent accomplishments. But before I get into the details, let me just take a moment to thank all of our BorgWarner employees around the world for delivering yet another outstanding quarter for the company. So on to the results. So for the third quarter, reported sales were just over $2 billion, which is up 13% from a year ago or 8% when we exclude the impact of foreign currencies and the Wahler acquisition. U.S. GAAP earnings were $0.73 per share or $0.79 per share excluding nonrecurring charges. Our operating income margin, again, excluding nonrecurring charges, was an impressive 12.5% in the quarter. Two key factors that drove our strong results: solid sales growth and operational efficiency in the Engine segment and good cost controls across the corporation. So outstanding performance again by our operations. Let me talk a little bit about the 2 segments. First, in the Engine segment, third quarter sales were $1.4 billion, which is up 17% from a year ago or 10% after excluding the impact of foreign currencies and Wahler. Those results were led by strong turbocharger sales in Europe, China and Korea and new VCT launches in China. I'll switch over to the Drivetrain segment where sales were approximately $630 million, which is up 4% from a year ago or 3% when we exclude foreign currencies. Drivetrain's sales growth is driven by high dual-clutch transmission volumes in Europe, but this was partially offset by a planned slow ramp-up of a major program by a North American customer. Drivetrain continues to grow and our restructuring plan is on track. In July, we began moving equipment from our Western European operations to Poland. And we've said that before that the equipment moves may cause some inefficiencies in the business, which we saw a little of in the third quarter. However, these actions which will enhance Drivetrain's competitive position are critically important to the long-term success of the business. The segment review highlights BorgWarner's core strengths, a product portfolio in high-demand in markets around the world, strong operational performance from the Engine segment and very good execution of the Drivetrain restructuring plan designed to improve long-term performance. Our financial strength and strong performance is based on our ability to anticipate and drive the next technology waves. As we look to the future, BorgWarner continues to invest for the long term. Capital spending continues to grow. We spent about 7% of sales on capital in the third quarter, which is slightly above our target of 6%, 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 in line with our target for the year. And 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. First of all, BorgWarner supplies its mini direct-acting variable force solenoid for General Motors global front-wheel-drive 6-speed automatic transmission program. Featured in the range of 2015 Chevy, Buick and GMC vehicles, BorgWarner's solenoid enables improved fuel economy and shift feel and applications exist in every major global market including the Americas, Europe, China and South Korea. Last month, we officially opened our second turbocharger production facility in China, the new green facility is strategically located in the city of Taicang, a major development area close to Shanghai, and the facility will produce advanced turbocharging technologies for several automakers. Our production facility in Ningbo, China has produced more than $1.5 million exhaust gas recirculation valves or EGR valves for both passenger cars and commercial diesel vehicles. EGR helps reduce emissions and improve fuel economy. And the plant has been supplying our customers in China with EGR valves since 2010 and also EGR coolers and modules since 2013. BorgWarner expects to produce about 1 million EGR valves annually in Ningbo beginning in 2016. Also, BorgWarner supplies its high-performance wet friction technology for Volkswagen's new hybrid DQ 400e dual-clutch transmission launching in the 2014 Volkswagen Golf and the Audi's A3 e-tron. The transmission hybrid vehicles employs 3 clutches, the dual-clutch module plus a disconnecting clutch to smoothly connect and disconnect the electric engine from the drivetrain. For all 3 clutches, BorgWarner's leading wet friction technology improves shift performance, NVH and fuel economy. BorgWarner's production facility and engineering center in Itatiba City, Brazil recently received Leadership in Energy and Environmental Design, also known as the LEED certification. This achievement is a first for an automotive supplier in Brazil, and LEED certification affirms sustainable building strategies and practice. Our environmentally friendly Brazilian campus was specifically designed and built to fulfill the demanding requirements for this LEED certification, and it's one of several BorgWarner facilities around the globe to achieve this prestigious certification. Now let me take a moment to provide an overview of our revised guidance for 2014. Sales growth in 2014 is expected to be 12% to 13%, which is down a little from our previous guidance range of 13% to 15%. This change is due to weaker foreign currencies. So as a result of the lower sales guidance, we're trimming our earnings guidance to a range of $3.23 to $3.28 per diluted share, and the range excludes noncomparable items. Our operating margin is still expected to approach 13%. Our operations have performed at a very high level for the past several quarters, and we expect that to continue. I recognize this is only a high-level overview of our updated guidance, and Ron will take you through the details shortly. So the first 3 quarters of the year were very strong for BorgWarner, and as we look ahead to the remainder of the year and beyond, our expectations for the company are unchanged. We're expecting industry-leading revenue growth and continued excellence from our operation, and that combination will result in tremendous earnings power for our company. The industry's adoption of our leading-edge powertrain technology will continue for years, and I feel very, very good of our company's future, and I see no company in the auto sector better-positioned for long-term profitable growth than BorgWarner. So now with that, let me turn the call over to Ron.

Thanks, James, and good day, everyone. Before I begin reviewing the financials, I also would like to commend all of our employees for their hard work and congratulate them on another solid quarter. So now, on to our financials. James already provided a detailed review of our sales performance in the quarter. In summary, sales were up 13% from a year ago or 8%, excluding the impact of foreign currencies and the Wahler acquisition. The growth in the quarter came primarily from the Engine segment, while the Drivetrain segment had a tough year-over-year comparison. I'll talk more about that later. Overall, it was a strong -- another strong quarter for our sales. Working down the income statement, gross profit as a percentage of sales was 20.9% in the quarter, down 10 basis points from a year ago. During the same period, SG&A as a percentage of sales was 8.6%, down 10 basis points. R&D spending, which is included in SG&A, was up 20 basis points. This implies a 30-basis-point improvement in other SG&A spending. Reported operating income in the quarter was $238 million. However, this includes nonrecurring items related to restructuring activities and a pension plan settlement. The $13 million restructuring charge includes expenses related to the continued relocation of 2 drivetrain facilities from Western to Eastern Europe, the continuing investment in improving Wahler's operational efficiency and footprint, and a global legal entity realignment plan and tentative enhanced [ph] treasury management flexibility. The $3 million pension plan settlement is related to a lump sum payment made to former employees to discharge our obligation under the plan. Excluding nonrecurring items, operating income was $254 million or 12.5% of sales, flat with the same period a year ago. However, if you exclude the Wahler acquisition, operating margin would have been 13.2% of sales or 70 basis points better, a strong performance concerning the restructuring-related inefficiencies -- efficiencies that we were working through. Excluding the impact of foreign currency, the Wahler acquisition and nonrecurring items, our year-over-year incremental margin was 22%, above our mid-teens incremental margin target. This is the sixth straight quarter in which we have surpassed our target. As you look further down the income statement, equity and affiliate earnings were $15 million in the quarter, up from $10 million last year. This represents the performance of NSK-Warner, our 50-50 joint venture in Japan, which sells transmission components to our Japanese customers in China and Japan, as well as TEL, our turbocharger joint venture in India. Interest expense and finance charges were $9 million in the quarter, up slightly from a year ago. Provision for income taxes in the quarter on a reported basis were $72 million. However, this included a tax benefit of $2 million related to the restructuring and pension settlement charges. Excluding the impact of the nonrecurring items, provision for income taxes was about $74 million, which is an effective tax rate of about 28.5% in the quarter. Our estimated effective tax rate for the full year, excluding noncomparable items, remains at 28.5%. Net earnings attributable to noncontrolling interest was $6 million in the quarter, basically flat with the third quarter 2013. 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 $167 million in the quarter or $0.73 per share. Excluding the impact of nonrecurring items, net earnings were $0.79 per share, up 13% from $0.70 per share a year ago, outstanding performance for the company. Now let's take a closer look at operating segments in the quarter. As James said earlier, reported Engine segment sales were $1.4 billion in the quarter. Excluding currency and Wahler, Engine segment organic sales growth was 10% compared with the same period a year ago. On a reported basis, adjusted EBIT for the Engine segment was 15.8% of sales. Excluding currency and Wahler, adjusted EBIT for the Engine segment was 17% of sales, up 80 basis points from 16.2% reported a year ago. Excluding currency and Wahler, the Engine segment's year-over-year incremental margin was 26% in the third quarter, very good performance by the Engine segment. Restructuring plan for Wahler is on target. The remaining charges will be recorded over the next 2 years or so, after which Wahler is expected to be a double-digit margin business. So now the Drivetrain segment. Reported sales were about $630 million in the quarter. Excluding currency, organic sales growth was just over 3% compared with the same period a year ago. As I said earlier, Drivetrain faced a tough year-over-year comparison. The third quarter 2013 was the beginning of a surge in all-wheel drive sales in North America and dual-clutch module sales in Europe for the company. Third quarter 2014 is the anniversary of that surge in growth, making it a tough comparison. Also, in the third quarter of 2014, Drivetrain was impacted by a planned slow ramp-up of a major program by a North American customer. On a reported basis, adjusted EBIT was 10.8% of sales. Excluding currency, adjusted EBIT was 10.7% of sales, down slightly from 10.9% of sales a year ago. Excluding currency, the Drivetrain segment's year-over-year incremental margin was about 5% in the third quarter. So let's keep this in perspective. Drivetrain delivered $1 million of incremental adjusted EBIT on $20 million of incremental sales. That means the segment was only $2 million to $3 million shy of a 15% to 20% incremental margin, which can be attributed to costs associated with our new DCT component plant in Taicang, China that has not yet launched production and the restructuring challenges faced in the quarter. The Drivetrain restructuring plan is also on target with regard to both timing and cost. We still expect to have the relocations completed by the end of 2015, after which, Drivetrain would be in a much better competitive position in Europe. Now let's take a look at our balance sheet and cash flow. We generated $546 million of net cash from operating activities in the first 9 months of 2014, up from $514 million a year ago. The increase was primarily related to higher net earnings. Capital spending was $398 million in the first 9 months of 2014, up $100 million from a year ago. The increase was driven by capital required to support our backlog of net new business. Free cash flow, which was defined -- which we defined as net cash from operating activities less capital spending, was $146 million in the first 9 months of 2014, down from $216 million during the same period last year primarily due to higher capital spending. Looking at the balance sheet itself, balance sheet debt increased by $89 million at the end of the third quarter compared with the end of 2013. Cash decreased by $157 million during the same period. The $246 million increase in net debt was primarily due to dividend payments to shareholders, share repurchases and the Wahler acquisition. Our net debt to capital ratio is 12.2%, 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 0.4x. Our capital structure remains in excellent shape. Now I'd like to discuss our guidance for 2014. James reviewed our guidance at a high level. I'll discuss some of the finer points. As James said, the decrease in our sales guidance is due to weakening foreign currencies, mainly the euro. We've taken our full year forecast for the euro down from $1.35 to the euro to approximately $1.33 to the euro. Our sales and margin guidance implies a mid-teen incremental margin in the fourth quarter on a comparable basis. While this is in line with our long-term target, we do not concede that this is at the end of our above-target performance. We think this is more a function of our near-term environment spending for our new DCT component plant in China and restructuring-related efficiencies. Finally, our expected diluted share count for 2014 is now 229 million, down from approximately 230 million shares primarily related to share repurchase executed today. We continue to be very confident in our ability to execute in any market. This company has demonstrated a heightened focus on efficiency and cost. This focus resulted in a highly efficient growth and record margins in each of the last 4 years. With return to historical growth rates and operations performing at a very high level, 2014 should be another record of sales and profits for BorgWarner. So 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. Kyle, can you please remind everyone of the Q&A procedure?

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

Ron, on the comment about Drivetrain with mid-teens incremental margins, is that exclusive of the restructuring inefficiencies? So should we assume a lower rate for Q4 because of ongoing inefficiencies from the restructuring?

Rich, mid-teens is our target exclusive of restructuring. Am I saying that right? However, the restructuring inefficiency is included in that mid-teens incremental target.

Okay, alright. I just wanted to clarify that. And then on the currency assumption, that 1 33 is the average for the year, not for the quarter, correct?

That's correct. I knew Rich was wanting to talk about currency for a second. You're absolutely correct. The spot rate is about 1 26, 1 27. BorgWarner uses an average. So the 1 33 is the average that would be -- we're anticipating for the full year if the spot rate remains in this 1 26, 1 27 range.

Okay. Alright. And then on commercial, off-road has been weak here recently. Could you just remind us your exposure both -- to that end market both from a regional standpoint as well as an end market, whether it's ag, construction, et cetera?

Yes, Richard, this is James. Roughly about 15% thereabouts of our annual revenue is commercial vehicle. And that's pretty well split relatively equally between on-road and off-road. And from a geographical perspective, the 4 markets primarily we serve are Europe and North America, which are the 2 bigger markets for us, and then we also serve Brazil and China. And our view, Rich, is those markets, with the exception of North America, remain kind of weak, particularly obviously in South America. So if that helps you out, that's a general thing. And then the last comment, Rich, just from a product perspective, the 3 primary products that we serve our market with are turbo and fan drives business in the thermal part of the company and our emissions products, both valves and coolers [ph]. So hope that's gives you hopefully a bit of a summary.

On the North America piece, are you -- others have talked about some weakness here lately. You're not seeing that in your book of business, off-road specifically?

Not significantly. Not enough to move us significantly, Rich. No.

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

I apologize. I guess, I'm kind of -- I'm trying to think -- I'm thinking about the fourth quarter, and I'm thinking about contribution margins. And my simple back of the envelope math leads me to a 6% contribution margin in the fourth quarter. And I'm kind of thinking 12.2% operating margins and $2,050,000,000 in sales, or something along those lines. I'm thinking that seems a lot different than mid-teens. I know that you just kind of addressed that to some extent. But I guess I'm still somewhat confused. Is my math completely incorrect? Feel free to say that. Or is there some headwinds I need to account for that caused that differential.

Brett, are you doing a fourth quarter year-over-year comparison?

Yes.

So have you taken into consideration the Wahler impact on us?

No, I'm just saying all-in total company, you're at 6%, so I guess Wahler would be one of the major differentials there.

Right, right. Well, no. In the quarter, Wahler on the total company was about 70 basis points impact. On the full -- and I think I gave the color around the actual segment, so it's a significant margin impact if you do the math. Go back through the transcript and you'll see the magnitude of that I gave you.

Yes, okay. I guess, and then, let me ask you about just capital deployment, just switching gears here. As we think about capital deployment, it sounds like you're moving toward a more deliberate approach towards capital deployment, particularly share repurchase. I'm wondering, how should we think about the pace of share repurchase as we move through 2015?

Okay. Brett, so, let me just talk about total capital deployment. I think we have a very balanced approach right now, is what you're seeing. You're seeing CapEx is up, so we're funding the CapEx. We put in a dividend, so the dividend payments are in there, then the share repurchases. And then you go take into consideration M&A activity, right? So I would take a look at M&A and share repurchases together. And I think we've said in the past, in the absence of M&A activity, we would fill that gap with share repurchases. So to answer your question, in '15, I think, one of the question needs to be the M&A activity consideration, right? In absence of, we would move to share repurchases. If we had M&A activity, we would focus on M&A activity.

And that makes sense. I guess what I'm asking here is, if my calculations are correct, if I use your leverage targets, your debt-to-capital targets, I've got about $1 billion of buying power out there, and that's a lot. And so it seems like your incremental capital free cash flow might be available towards share repurchase, and we might be able to think about modeling maybe a more consistent level of share repurchase activity than we've seen over the past 8 quarters. And I guess I'm wondering, is that the direction we're moving? And if so, is there a dollar amount that you'd recommend or would you just, "Look, I wouldn't model anything for now. Just hold off and it'll all be incremental upside."

Brett, the unknowns here are the size of the M&A activities, right? And what I mean by that is, if you have an M&A activity that's pushing $500 million, $600 million, that changes that discussion because that would give us in a leverage range quicker. So I would say this though. Share repurchases are part of our deployment of capital. That's the bottom line. We're not going to give guidance at this point as far as what value that is because it's predicated on an M&A strategy, and when transactions in M&A actually happen.

And Brett, this is Ken. I want to add to what Ron just said. He mentioned in his prepared remarks about the global realignment plan to increase our treasury management flexibility. And a part of that flexibility is around using cash for various things including share repurchases. That's the plan we've been talking about for the last several months. It is underway. We expect to have that in place no later than the beginning of 2016. And I think that there can be some more consistency in our share repurchases at that time.

Your next question comes from the line of Rod Lache from Deutsche Bank.

It's Rob Lache here. So a couple of questions. First is, could you maybe help us with a couple things on the organic growth in the fourth quarter? You may be -- just first of all, what is the FX impact that you're expecting in terms of dollars. Is it around $75 million for Q4?

Relative to what, Rod? To...

Prior year -- no, no the year-over-year effect. We're just trying to back into what you're achieving.

That's correct. You're in the range, yes.

Okay. So if you use the midpoint of your guidance range, revenue growth is around $170 million. Add back the $75 million from FX, maybe subtract the $88 million from Wahler. So organic growth is maybe $157 million, $158 million, up around 8.5% from last year? You did 1.885 . Your production is a positive. Obviously, pricing is a little bit of a negative. So there was expected to be some uptick in your backlog to get to that $700 million full year backlog. I think that the uptick -- you'd have to do something like north of $200 million, maybe $250 million of backlog in the fourth quarter? Is there something that is meaningfully affecting that $700 million full year backlog? Is that the slow ramp-up from the customer. Can you maybe just elaborate on what are some of the components of the organic growth guidance for the fourth quarter?

So I'm trying to keep up with your math. But essentially, our guidance, when we came into the year, organic sales growth was going to be between 7% and 11%. And as we do all the puts and takes that we just talked about, I think, that's exactly where we ended up landing. And that original guidance was based on our backlog of around $700 million this year. So last year, well, I'll just say that the impact that you talked about, they seem to be in the range. I'll have to maybe work with you offline to see if there's any other missing pieces, but that sounds right.

Were you expecting an uptick in the contribution from backlog in the fourth quarter relative to earlier in the year? And is that still the case?

No, no. We, as you know, when we give our guidance for the year, even our backlog, it's kind of an annual look. I can't say that there's an expectation that there is going to be any strong lift in the fourth quarter versus the other quarters. And then let me reiterate, our guidance now is very well-aligned with what our guidance was in January, which was based on our backlog that we -- the announcement we made last November.

Okay. Could you talk a little bit about the timing of the drag from restructuring inefficiencies in Europe? How should we be thinking about some of the big moves that you're making and how that kind of flows through? And then, lastly, I don't know if you have any comments on this, but obviously, there's some reviews of testing procedures that's going on in Europe. One of which -- one of the changes being discussed is moving from this new European driving cycle to WLPT. Do you see that as having any puts and takes or puts or takes vis-a-vis the outlook for backlog or for mix for you?

Rob, this is James. I'll comment a little on the evolution of driving test cycles, et cetera. In a nutshell, we don't really expect any meaningful change in -- for us in terms of our product strategy, our growth expectations. We just -- we don't. I think there's always been this element of test cycles versus real world driving and there's always been some disparity. I think any move towards aligning those closer or aligning it consistently globally, around the world is a good thing. I don't believe there's anything materially that's going to adjust the automaker strategies around maybe fuel economy and emission standards. And so therefore, I think, our product plans will stay in place. So I don't think it's going to really make any much difference to BorgWarner, Rod, if that helps you. But in terms of the Drivetrain piece, let me just comment, if I can, just from a macro point rather. Then if Ron or Ken want to add detailed numbers, that's fine. First and foremost, the Drivetrain restructuring remains really important for us, and the reason it remains important for us is to support our growth plans for Drivetrain. It's an integral part of our growth strategy and we wanted to put ourself in a position where we can capitalize on that growth by an optimized footprint. Let's just -- it's a refresh. And the really good news, that plan stays on track where, as Ron alluded to, we're now in a phase of moving equipment and then going through all that stuff. What we've talked about, Rod, is that would meaningfully kick off in the middle of this year and it would run through most of next year until we're fully, fully done. And I think what we talked about -- that's staying on track. And what we talked about is, when we were running in the higher incremental lines earlier, in earlier quarters, in the 30s, we talked about a couple of headwinds and one of them was Drivetrain restructuring but our target and our goal is that would probably moderate us back to the mid-teens or maybe a little more than that. And I think, we feel good actually, that's kind of what we're seeing play out. So it's not a 1-quarter event, Rod. We'll see some noise in that over the next few quarters, but that's not going to take us through all our commitment to the mid-teens. And if it works out a little better than we hoped, it'd maybe take us a little north of the mid-teens. So does that help a little, Rod, give you some better understanding on it or...

So just kind of at a high level, if you were to do 15% incremental in 2015, because this is, obviously, this is going to take a while before this is done, would 15% be in line or somewhat disappointing for you?

I would say, the mid-teens is our expectation, and we would look to hope to exceed that. I mean, that's typically the way we look at it, right? We don't manage the company to run at mid-teens. We're always looking to improve. And I think what I'm trying to characterize a little, Rod, is there's a lot of moving pieces when you do it over a 12- or 18-month period. So there's going to be noise, but we'll look to try and exceed that if we can. But I think, mid-teens is a reasonable minimum expectation.

Your next question comes from the line of Ravi Shanker from Morgan Stanley.

I'm sorry, I'm going to ask you another guidance question because I still can't make the math work. If I were to just take, just for ease of calculation, the high end of your guidance for revenues at 13% and your margin of approaching 13%, I get to an EPS number that's about $0.05 above the high end of your guidance range on EPS. I'm just kind of starting to figure it out, is there anything below the line that's hurting numbers? Or why that would be the case?

No, there's nothing that would be a negative that -- we know we have restructuring at this point, and we're trying to work through what those restructuring impact of moving those facilities to Western Europe are. But that -- there's nothing really I can say that's a negative.

Okay. Maybe I'll follow-up with Ken post the call, but I think you're getting a number of these questions because I think people are just trying to make the math work. And I think your guidance change on revenues and margins makes a lot of sense. But it just seems like EPS is moving a lot more than that. And I think people want to figure out why. I'll follow up again post the call.

One comment, Ravi, just before you move on. Our -- the difference -- the main difference is that expectations may have been different than our guidance as of the last quarter, I think. But our -- we can work through that offline, but I have a math model here that supports this. So I'm sure we'll figure it out.

Understood, understood. Just on the slow ramp by that North American customer, can you just give more detail on who, what, why, how long it's going to last, or how much dollar impact that is on 3Q and going forward?

Ravi, I don't want to give too much specificity about which customer, but what I will say is, it's planned and it's in line with what we were kind of expected, and it's not a long-term thing. I think it'll be sorted by the fourth quarter and back to normal levels. So it's not a surprise or a shock. It's kind of about on track to what we were expecting actually, and we should be through it by the end of the year.

Okay. And then just lastly, you guys had hinted earlier in the year that you may be closing in on another acquisition before the end of the year. Any update on that?

The update probably, Ravi, is we continue to have a number of targets in the pipeline. And I think what has been typical over recent quarters, we've always got 1 or 2 that are kind of closer towards completion than others, and I think that's pretty much where we are right now. So we're working really very hard and very diligently to try and get one completed. I think you just know. It's just -- you can't predict that date just because of the uncertainty of the process itself. But the intensity is strong. The pipeline is very robust actually. And again, typically, we've got 1 or 2 that are kind of getting closer to completion and I think -- I would say that's where we're at right now, Ravi.

Okay. And I'm sorry, just one more. Just on the backlog and recently, you guys sounded fairly confident in talking about the backlog math. I think you've -- Ken even said that it's best macro environment in 2 years, doing [ph] the backlog math. And any update on that? I mean do you feel like things have deteriorated as you've done more math? Or what's your view going into a couple of weeks now?

I think that if you visit us at November 10, you'll get the whole picture of what you're looking for, Ravi.

That's very helpful.

I know that it's not, but I have to defer till then. Sorry.

Your next question comes from the line of Joe Spak from RBC Capital Markets.

First, maybe to just talk about the fourth quarter guidance in a different way. If you do the math on the FX impact, it does come to about -- down [ph] EPS level, $0.03. The low end of the range lowered by about that much but the high end was more like $0.07. So I'm just wondering what the delta is and what could really cause that larger discrepancy behind. Is it more cost? Is it some additional volume pressure?

All right, Joe. So the first question, are you referring to the prior guidance number sequentially you're trying to do it or year-over-year? Because that's important too.

Yes. Well. I guess, what I'm doing is I'm looking at sort of your prior full year guidance range versus your new year guidance range.

Yes, alright, so I get about a little bit north of $100 million in sales reduction, okay? Now maybe the difference is the third quarter difference as well but I get $100 million. And typically, it's $0.12, $0.14 on the dollar that FX impact has on the operating income, then you have to flush it through the EPS. So I get more of a $0.05. I think, you're getting $0.03 a share, right?

So just to be clear, I guess, I'm wondering, so if you look at just new versus old for the full year, the high end was lowered by much more than the low end. I'm just wondering what caused that discrepancy.

We'd have to...

We could follow up later.

Joe, I get $0.05 at the midpoint, I will say that. Now, if it's $0.06 or $0.005 on the high end, low end, in the midpoint, it's roughly $0.05. And it's not just the euro, you have to take into consideration that there's strength against just about every major currency except the Korean won. So there's currencies involved. But top level, it's about 100-plus million. You can always use this $0.11, $0.12, $0.13 decremental to the operating number, and then you flush it through the EPS, you get about $0.05, I think on the midpoint.

Okay. And then on the Drivetrain revenues, so it sounds like some of the delayed program should be through by -- or delayed ramp should be through by the fourth quarter, but you also mentioned the tougher comps, which really should persist for, I guess, another three. So is it -- and should we expect just some lower growth overall in that segment for a couple of quarters here before a little bit of an acceleration and more towards the back-half of '15? Is that a fair way to think about it?

Well, we'll have to talk about 2015 a little bit more in January. But I think it's a fair way of thinking about it. If you look at the progression of Drivetrain over the last 18 months, you will see that surge in the second half of last year, and it has anniversary-ed now. So yes, that's going to slow down the growth a bit. And the other things that we've been talking about in that segment, the restructuring-related inefficiency. This new plant that we opened in China that's not going to start producing parts until third quarter 2015, those are going to be things that we're dealing with. We have been saying over the last couple of quarters, Drivetrain is going to be a little bit bumpy for the next few quarters, but at the end of that, the thing is going to be a much more competitive business. So we're taking those steps for the benefit of the long term.

Your next question comes from the line of Ryan Brinkman from JPMorgan. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: I know that you already dodged one backlog question, but just approaching it a different way just in terms of an overall industry background question. Can you remind us of what drove in recent years the phenomena of automakers pushing out the timing of planned new programs? Was that more about them trying to cut cost during the downturn particularly in Europe. And as sales are improving in that region, have we maybe cycled past this phenomena?

Yes, I mean just from my point, Ryan, I think if you look back on it historically, if you -- the downturn period clearly caused some of the automakers to stall and postpone and realign programs. So that was obviously a significant event. Over and above that, generally, programs really move around a little bit just based on more than anything the ability of the OEMs with their suppliers to get products launched. And when you're managing a transmission or an engine program launch over a 3- or a 4-year period, to have a month or a quarter change or a slight volume adjustment up or down, is very normal, and we have a lot of those just like any other supplier does. But -- so I would say those are the 2 points that there was a big adjustment in the past. And then normal course of business is customers will tweak programs and volume launch dates based on a number of things, and we just try and true that up, and that's why we do the backlog press just [ph] once a year. Ryan J. Brinkman - JP Morgan Chase & Co, Research Division: Okay, that's very helpful. And then relative to the planned slow ramp at a major customer program in North America. Now you earlier didn't want to identify that specific customer program. But maybe just along those lines, can you remind us what your biggest programs in North America are? And then specifically, what your revenue exposure might be to the Ford F series program, on which I know you've got some great turbos including 2 I think on 1 Engine, right? So...

Yes, our largest programs are the truck programs with the domestic OEMs, generally speaking.

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

Yes, a couple of questions. I just want to kind of reiterate what I think I'm hearing on Drivetrain going into 4Q in 2015. Basically, that while we have been spoiled by very strong sort of 20-ish percent incrementals in a pace to 15% margins there, at least for the first couple of quarters of 2015, as you grow into the DCT plant, before you get the benefit of other restructuring, we're not going to see that same kind of margin expansion?

You said it very well, but I'm not going to agree to the numbers yet until we work through our 2015 plan, Brian. But I think the high level of analysis you just played out could play out that way, okay? It was very well put.

Okay. And is there any tailwind there from the shift to see these SUVs either in Europe or in China? We had great Jeep numbers yesterday, and they're launching their -- not necessarily the program you're on, but as evidence of the segment. And is that that potentially providing some revenue upside in Drivetrain?

No, I'm not sure I have that specific level of detail on that, Brian. I'll just say, in general, the growth on Drivetrain, it's been strong across both our transmission business and the overall drive business, and it's kind of multiple programs, multiple regions of the world. I mean, I think, at a macro level, I would say we've certainly benefited well from truck mix and truck strength in North America. I think that's for sure. And in Asia or China specifically, we've done very well. So I wouldn't want to break it down vehicle segment so much other than truck in North America and generally Asia, both China and Korea has been strong for us.

Okay. And as a final housekeeping, just for the fourth quarter, equity income, I think a fair amount might come from NSK-Warner. Should we be thinking about this mystery around the top line, op income and EPS? Could currency pressures in the equity income line be part of what the fourth quarter guided here?

No. I just want to comment on the third quarter. Equity income was outstanding, and the year-over-year variance looked quite large. But actually, Brian, if you go back sequentially, it's not that far off on a sequential basis. We're just -- NSK-Warner also serves to the Chinese market, I'll just point it out that way, and a lot that came from that side of the business. But no, to answer your question, that is not impacting us on the fourth.

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

Just a quick question on cash flow actually. Any update to the outlook for the full year? It seems like the operating cash flow was running a little bit behind your -- perhaps what was implied in the prior 2014 outlook.

Yes. Yes, it is. In fact, we're just talking about that a little bit this morning, about that stuff. Operating cash flow, is -- I think what we're being impacted by is restructuring activities floating in and out. Because remember, we have to start from a GAAP basis. We don't normalize it for a continuing basis, so we're seeing some of the spending of cash in restructuring activities.

Okay. Do you still expect to kind of hit that range you've previously outlined?

No, I think, the range is going to come down slightly. We're going update that range slightly down.

Okay, great. I'm just hoping we could talk a little bit about just your overall tone of global macro where you're seeing things a little bit better, maybe worse, and just your initial kind of industry view perhaps into 2015. Just love to get your updated thoughts there.

Maybe I would -- maybe we can start in Europe. I think as we came into the year, Itay, we were relatively cautious around growth in Europe. We said it'll be relatively very small and slow and a little bit bumpy through the year. I think that's pretty much what we've seen and we -- as we talked about it through this year, we probably anticipate a similar thing going into next year. So I think it's going to be very small kind of growth and a little bit lumpy. North America, I think, has been a strong market this year. And it's a little early to know what '15 is going to look like, but I think that's a robust market, and there'll be some growth in North America going into next year also. I think the other market of note on the macro is China, and we continue to see a relatively strong market growth in China both this year, and I wouldn't expect that to change. Next year, I think it'll be another strong growth year for China. Whether it moderates between 7%, 8%, 9% in that range, we'll see, but it's still meaningful growth. And obviously, when you layer the content growth on top of that for BorgWarner, it's a real strong platform for us. And then the other macro that we -- I alluded to earlier, Itay, was commercial vehicle, there's a little been bit of growth in North America, which has been welcome. The other regions of the world continue to be a challenge, and we're going to take a good look at that as we go through the fourth quarter of how we think that will play out next year. So not too bad overall. I mean, there's still modest to moderate growth for the industry, and it's just primarily China and North America are the 2 stronger zones for the world and for us as well.

Your next question comes from the line of Patrick Archambault from Goldman Sachs.

Just maybe 2 items left for me. So there was a question earlier about the timing of the footprint actions. Can we just go through the catalog of some of those onetimers that aren't restructuring charges, that are kind of temporary factors? I think you talked about those. Obviously, you talked about the China plant, which isn't really seeing revenue until the fourth quarter, I think. And then I thought there were some other costs had been deferred maybe in the first half of this year, end of last year that were also still coming back. So maybe just going through those items and when they're actually sort of impacting you and also how much of an impact they had this quarter would be helpful.

Sure, Pat. So we announced this restructuring back in the third quarter -- fourth quarter of 2013. And typically in the first 2 quarters, what we saw is mostly severance cost and so on and so forth, then that gets put into restructuring. What doesn't get put into the restructuring and call-out line items are items like excess labor sitting at the receiving plant, transportation cost for bringing in more inventory or shift in inventory between the plants, some bringing cost for example. Those inefficiencies at start-up, those costs are not pulled out. Those are in our operating results. Now they can be -- they can run very high at times or we can control them, but they're very difficult to actually predict to be honest. But those are the types of cost that comes into the operations at the gross profit numbers, which you saw here a little bit of a 10 basis points reduction. Those are the type of costs that come into the business. The other costs you were referring to were more on SG&A side that we deferred in 2013 for, I would say, personal development investment, I guess, is one way to say it, everything from training activities, IT, improvement, things of that nature. Those items we deferred in '13. And once the organization was given the greenlight basically in '14, that the growth was back to spend those. Those start to come into the business. So you're going to -- at the gross profit line and you starting to see that coming in SG&A line as well. Does that help you out? The timing is -- when they came in. Remember, we thought the second quarter was going to be a little bit but we saw them in the third quarter. So -- okay?

So I just want to put all Ron's explanation together, I think it's kind of worth it as we kind of come towards the end of this. BorgWarner's been performing in the mid-30s and low 30s incremental rate over a number of quarters, which is just incredible performance, which we've all talked about. And I think just to refresh what we talked about was some moderation of that back towards the mid-teens or a little above. I think that's what we're seeing. So I just want to reiterate that this is -- I think what hopefully we've been projecting and I think that's what's coming. We remain very confident that we're going to run this company with that mid-teen incremental and/or above. And I think that's what we've demonstrated. And the third quarter is another great example of it. With all of those headwinds, we still delivered a very solid incremental. So I think -- I just think it's important we don't lose sight of that bigger view as we go forward.

Okay, helpful. Can I just fit in one more? Just on -- there's something you said earlier I wanted to clarify about, I guess, the -- restructuring some of the -- I'm probably saying this wrong, but the legal aspects to be able to repatriate cash more effectively from overseas. And I thought you had said that that's -- maybe the language was that's going to make it easier to kind of pay dividends kind of in the 2016 time frame. But I just want to make sure that wasn't precluding cash deployment between now and then just because obviously right now you do have some acquisitions in the hopper, but you are fairly far out of that leverage range that you guys have typically kind of guided to.

Yes, let me restate what's going on here maybe. Back in the early part of the last decade, there was a legal structure that was put in place to support the strategic growth of the company. We've outgrown that structure. And growth is a little bit different now. It has to be reengineered, and we're going through the process of reengineering that structure to support different growth objectives in other parts of the world. So what this will do is this gives us more flexibility to execute that plan basically, okay? So that's what it really is. It's just that 10 years ago, it was a different business than it is today. This work that we're doing is going to provide a tremendous amount of flexibility in all aspects of our business from cash flow to other strategic items that we have on the table, and it's not inhibiting us tremendously today. It would just enhance and give us flexibility to be more proactive in the future.

Our last question will come from the line of John Murphy from Bank of America Merrill Lynch.

I just have 2 quick ones here. Just first, as we think about the pressure that you're seeing from the slow ramp of this program in North America in Drivetrain, I would assume that you'd see some pressure in the Engine business just because you have turbos on that same program. So as we see sort of this lift from the slow ramp impacting positively Drivetrain, could it also have a real positive impact on the Engine business as well as we get through the fourth quarter?

Well, I mean, yes. But to a lesser degree, I think, it's less impactful on the Engine side of the business because it's bigger business. So relatively speaking, it's not going to have a material impact. But, yes, directionally, that's correct.

Okay. And just a last question, and I hate to keep asking about this treasury reorg, but could that potentially have any impact on taxes positively or negatively, and hopefully positively, as you go through this reorg?

John, I'm not going to predict which way, but to answer your question, it would impact cash, taxes and various other items. It impacts quite a few things. We have to work through the plans. Ken, I think, said earlier is going to take us through next year. And then the outcome of that will be more clear as far as the total impacts on the total company, all right?

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. Actually, I think I'll be quite busy this afternoon. Kyle, go ahead and close out call.

That does conclude the BorgWarner 2014 Third Quarter Results Earnings Conference Call. You may now disconnect.