BorgWarner Inc. (BWA) showed a profit of 78 cents per share (before special items) in the second quarter of the year, ahead of the Zacks Consensus Estimate of 67 cents per share. This was a significant improvement from a loss of 5 cents per share (before special items) in the prior-year quarter, driven by strong demand for the company’s powertrain products and increased content in Europe.

Revenues increased a robust 55% to $1.42 billion, up from the Zacks Consensus Estimate of $1.32 billion. Operating profit improved to $117.3 million or 8.3% of sales from an operating loss of $49.5 million. Excluding special items, operating profit was $137.3 million or 9.7% of sales during the quarter.

Revenues in the Engine segment soared 52% to $1.02 billion, driven by strong demand for turbocharger products in Asia and Europe. Excluding the impact of currency, revenues were up 55%.

Revenues in the Drivetrain segment shot up 64% to $408.7 million, driven by higher sales of its four-wheel drive system in Asia, and of dual clutch transmission modules and other automatic transmission components in Europe. Excluding the impact of currency, revenues increased by 66%.

BorgWarner had cash amounting to $187.5 million as of June 30, 2010 a decline from $357.4 million as of December 31, 2009. Long-term debt was $781 million as of the above date. Long-term debt to capitalization ratio stood at 28%, up by 2 percentage points from the period ended December 31, 2009.

In the first half of the year, cash flow from operating activities rose to $208.3 million from $173.8 million in the prior-year period due to an improvement in profit. Capital expenditures, including tooling outlays, increased to $107.4 million from $88.3 million a year ago.

BorgWarner raised its earnings outlook for 2010 based on growing demand for its products. The company anticipates sales to grow 32%–35% in 2010, up from the prior guidance of 28%–32%. Consequently, earnings are expected in the range of $2.60 to $2.80 per share, up from the previous outlook of $2.20–$2.50 per share.

Despite the improved results and raised outlook, we believe strong competition and pricing pressure from the OEMs (about 75% of the company’s sales are to OEMs) will undermine the company’s results in near term. As a result, we recommend the shares of the company as Zacks #3 Rank (Hold) in the short term (1–3 months).
 
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