Borgwarner Inc: Form 10-Q for the period ended Sep 30, 2024

INTRODUCTION

BorgWarner Inc. and Consolidated Subsidiaries (the “Company” or “BorgWarner”) is a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles. BorgWarner’s products help improve vehicle performance, propulsion efficiency, stability and air quality. The Company manufactures and sells these products worldwide, primarily to original equipment manufacturers (“OEMs”) of light vehicles (passenger cars, sport-utility vehicles (“SUVs”), vans and light trucks). The Company’s products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications). The Company also manufactures and sells its products to certain tier one vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers in Europe, the Americas and Asia and is an original equipment supplier to nearly every major automotive OEM in the world.

During the nine months ended September 30, 2024, the Company recognized a $19 million increase in Net earnings attributable to BorgWarner Inc. in the Condensed Consolidated Statement of Operations for the correction of misstatements related to certain accruals, of which $12 million related to 2023 (the remainder relates to periods prior to 2023). The Company has evaluated the effect of these out-of-period adjustments for the current reporting period, as well as on the previous interim and annual periods in which they should have been recognized, and concluded that these adjustments are not material to any of the periods affected.

Charging Forward - Electrification Portfolio Strategy

In 2021, the Company announced its strategy to aggressively grow its eProducts over time through organic investments and technology-focused acquisitions. eProducts include all products utilized on or for electric vehicles (“EVs”) plus those same products and components that are included in hybrid powertrains whose underlying technologies are adaptable or applicable to those used in or for EVs. The Company believes it is well positioned for the industry’s anticipated migration to EVs.

In June 2023, the Company announced the next phase of its Charging Forward strategy, which focuses on profitably growing eProducts while maximizing the value of the Company’s Foundational products portfolio. Foundational products include all products utilized on internal combustion engines plus those same products and components that are also included in hybrid powertrains. During the nine months ended September 30, 2024 and 2023, the Company’s eProducts revenue was approximately $1,721 million and $1,494 million, respectively, or 16% and 14% of its total revenue, respectively.

On July 3, 2023, BorgWarner completed the previously announced spin-off (“Spin-Off”) of its Fuel Systems and Aftermarket segments in a transaction intended to qualify as tax free to the Company’s stockholders for U.S. federal income tax purposes, which was accomplished by the distribution of 100% of the outstanding common stock of PHINIA, Inc. (“PHINIA”) to holders of record of common stock of the Company on a pro-rata basis. Each holder of record of common stock of the Company received one share of PHINIA common stock for every five shares of common stock of the Company held on June 23, 2023, the record date for the distribution. In lieu of fractional shares of PHINIA, stockholders of the Company received cash. PHINIA is an independent public company trading under the symbol “PHIN” on the New York Stock Exchange.

The historical results of operations of PHINIA for periods prior to the Spin-Off are presented as discontinued operations in the accompanying Condensed Consolidated Financial Statements.

Lawsuit Against PHINIA

On September 19, 2024, the Company commenced a lawsuit against PHINIA, seeking to recover from PHINIA approximately $120 million of value added tax (“VAT”) refunds that PHINIA has received or expects to receive from governmental agencies as well as damages and interest, which PHINIA has refused to pay to the Company. These refunds consist of VAT paid by the Company in periods prior to or directly related to the Spin-Off through which the Company established PHINIA as an independent company. Prior to the initiation of the lawsuit, PHINIA had paid certain VAT refund amounts to the Company. The Company asserts PHINIA’s obligation to pay the Company these VAT refunds and related amounts is plainly set forth in a binding tax matters agreement between the Company and PHINIA, which the parties agreed to prior to the Spin-Off. As of September 30, 2024, the Company had an asset related to these VAT refunds of approximately $120 million, which is included in Receivables, net in the Condensed Consolidated Balance Sheet. Because the Company was unable to predict the timing of collection of these VAT refunds from the applicable governmental agencies, the Company has not included these amounts in its 2024 free cash flow guidance.

North Carolina Facility Hurricane

On September 26, 2024, a hurricane made landfall in North Carolina disrupting operations at the Company’s facility in Arden, North Carolina (the “Arden Plant”). The Arden Plant was largely untouched, but the Company believes there is some loss or damage to the Company’s assets. While the Company is still assessing the full impact of the damage, the Company expects the loss of assets to be less than $10 million. The Company’s insurance policies (less applicable deductibles) are expected to cover the repair or replacement of the Company’s assets that incurred loss or damage. In addition, the Company’s insurance policies are expected to provide coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses sustained. The Arden plant resumed limited production in early October 2024; however, has not yet resumed full operations. The Company has not yet determined the full impact to its financial position, results of operations, or cash flows, including the timing of those impacts.

Acquisitions

Eldor Corporation’s Electric Hybrid Systems Business

On December 1, 2023, the Company completed its acquisition of the electric hybrid systems business segment of Eldor Corporation (“Eldor”), which is headquartered in Italy. The Company expects the acquisition to complement its existing PowerDrive Systems product portfolio by enhancing the Company’s engineering capabilities in power electronics. The Company paid €72 million ($78 million) at closing and is obligated to remit up to €175 million ($191 million) of earn-out payments that could be paid over the two years following closing.

Hubei Surpass Sun Electric Charging Business

On March 1, 2023, the Company completed its acquisition of the electric vehicle solution, smart grid and smart energy businesses of Hubei Surpass Sun Electric, pursuant to an Equity Transfer Agreement. The acquisition is expected to complement the Company’s existing European and North American charging footprint by adding a presence in China. The total consideration was ¥288 million ($42 million), including ¥268 million ($39 million) of base purchase price and ¥20 million ($3 million) of estimated earn-out payments. The Company paid ¥217 million ($31 million) of the base purchase price in the year ended December 31, 2023. The Company paid ¥25 million ($4 million) during the nine months ended September 30, 2024. The remaining ¥26 million ($4 million) of base purchase price is payable in two installments with the last payment due before October 31, 2025. In addition, pursuant to the agreement, the Company could be obligated to remit up to ¥103 million ($15 million), in the form of contingent payments over approximately two years following the closing.

Drivetek AG

On December 1, 2022, the Company acquired Drivetek AG, an engineering and product development company located in Switzerland. This acquisition is expected to strengthen the Company’s power electronics capabilities in auxiliary inverters to accelerate the growth of the High Voltage eFan business. The Company paid ₣27 million ($29 million) of base purchase price at closing, and up to ₣10 million ($10 million) could be paid in the form of contingent earn-out payments over three years following the closing.

Rhombus Energy Solutions

On July 29, 2022, the Company acquired Rhombus Energy Solutions, a provider of charging solutions in the North American market. The acquisition is expected to complement the Company’s existing European charging footprint to accelerate organic growth and adds North American regional presence to its charging business. The Company paid $131 million at closing, and up to $30 million could be paid in the form of contingent earn-out payments over three years following the closing. The Company’s current estimates indicate that the minimum thresholds for these earn-out targets will not be achieved; thus, no amount for the earn-out payments has been included in the purchase consideration.

Santroll Automotive Components

On March 31, 2022, the Company acquired Santroll Automotive Components, a carve-out of Santroll Electric Auto’s eMotor business. The acquisition is expected to strengthen the Company’s vertical integration, scale and portfolio breadth in light vehicle eMotors while allowing for increased speed to market. The total final consideration was $192 million, including approximately ¥1.0 billion ($152 million) of base purchase price and ¥0.25 billion ($40 million) of originally estimated earn-out payments. The Company paid approximately ¥1.0 billion ($157 million) of base purchase price in the year ended December 31, 2022 and no longer expects to recapture a previously anticipated $5 million of post-closing adjustments, which was recorded in Other operating expense, net during the three months ended March 31, 2023. Pursuant to the Equity Transfer Agreement for the acquisition, the obligation of the Company to remit up to ¥0.3 billion (approximately $47 million) of earn-out payments was contingent upon achievement of certain sales volume targets and certain estimated future volume targets associated with newly awarded business. During the second quarter of 2023, the Company paid approximately ¥0.2 billion ($24 million) to settle the remaining earn-out liability and related adjustments.

Refer to Note 3, “Acquisitions,” to the Condensed Consolidated Financial Statements in Item 1 of this report for more information.

Key Trends and Economic Factors

Economic Conditions. The Company’s financial performance depends on conditions in the global automotive industry. Automotive and truck production and sales are cyclical and sensitive to general economic conditions and other factors, including interest rates, consumer credit, and consumer spending and preferences. Economic declines that result in significant reduction in automotive or truck production would have an adverse effect on our sales. The weighted average market production, as estimated by the Company for the nine months ended September 30, 2024, was down approximately 2% from the nine months ended September 30, 2023. Weighted average market production reflects light and commercial vehicle production as reported by S&P Global, weighted for the Company’s geographic exposure, as estimated by the Company.

Commodities and Other Inflationary Impacts. Prices for commodities have started showing a lower level of volatility in comparison to what the Company had experienced from the beginning of 2021. At the same time, many economies, including the United States, are still experiencing elevated levels of inflation, which continues to put pressure on other input costs (e.g. labor, energy, other materials). These pressures have softened in 2024, and as a result, the Company expects a trend of slight decreasing or flat costs.

Outlook

The Company expects global market production to decrease year-over-year in 2024. However, the Company expects net new business-related sales growth, due to the increased penetration of BorgWarner products, including eProducts, to allow the Company’s year-over-year change in net sales to outperform the market production decline. As a result, the Company expects net sales to be flat to modestly decline in 2024, excluding the impact of foreign currencies. The Company expects its full year earnings to improve year over year driven by BorgWarner’s technology-focused portfolio and strong cost controls.

The Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic investments to enhance its product leadership strategy. There are several trends that are driving the Company’s long-term growth that management expects to continue, including adoption of product offerings for electrified vehicles and increasingly stringent global emissions standards that the Company believes support demand for the Company’s products that drive vehicle efficiency.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2024 vs. Three Months Ended September 30, 2023

The following table presents a summary of our operating results:

(in millions, except per share data)

Net sales

Net sales for the three months ended September 30, 2024 totaled $3,449 million, a decrease of $173 million, or 5%, compared to the three months ended September 30, 2023. The change in net sales for the three months ended September 30, 2024 was primarily driven by the following:

• Lower volume, mix and net new business decreased sales approximately $147 million. This decrease was primarily driven by a decline in market production. The weighted average market production as estimated by the Company was down approximately 6% from the three months ended September 30, 2023. Weighted average market production reflects light and commercial vehicle production as reported by S&P Global, weighted for the Company’s geographic exposure, as estimated by the Company.
• A reduction of $39 million related to the Company’s normal contractual customer commodity pass-through arrangements.
• Acquisitions contributed $9 million in additional sales during the three months ended September 30, 2024.
• Fluctuations in foreign currencies resulted in a year-over-year increase in sales of approximately $4 million primarily due to the strengthening of the Euro, Chinese Renminbi, and weakening of the Korean Won and Brazilian Real, in each case relative to the U.S. Dollar.

Cost of sales and gross profit

Cost of sales and cost of sales as a percentage of net sales were $2,813 million and 81.6%, respectively, during the three months ended September 30, 2024, compared to $2,970 million and 82.0%, respectively, during the three months ended September 30, 2023. The change in cost of sales for the three months ended September 30, 2024 was primarily driven by the following:

• Lower sales volume, mix and net new business and purchasing savings decreased cost of sales by approximately $135 million.
• Fluctuations in foreign currencies resulted in a year-over-year increase in cost of sales of approximately $4 million primarily due to the strengthening of the Euro, Chinese Renminbi, and weakening of the Korean Won and Brazilian Real, in each case relative to the U.S. Dollar.

Gross profit and gross margin were $636 million and 18.4%, respectively, during the three months ended September 30, 2024, compared to $652 million and 18.0%, respectively, during the three months ended September 30, 2023. The increase in gross margin was primarily due to the factors discussed above.

Selling, general and administrative expenses (“SG&A”)

SG&A for the three months ended September 30, 2024 was $340 million as compared to $330 million for the three months ended September 30, 2023. SG&A as a percentage of net sales was 9.9% and 9.1% for the three months ended September 30, 2024 and 2023, respectively. The change in SG&A was primarily attributable to:

• Increased employee-related and other administrative costs of $11 million, primarily related to incentive compensation.
• Research and Development (“R&D”) costs decreased by $2 million. R&D costs, net of customer reimbursements, were 5.5% of net sales for the three months ended September 30, 2024, compared to 5.3% of net sales for the three months ended September 30, 2023.

Restructuring expense was $21 million and $56 million for the three months ended September 30, 2024 and 2023, respectively, primarily related to employee termination benefits. Refer to Note 5, “Restructuring,” to the Condensed Consolidated Financial Statements in Item 1 of this report for more information.

In 2023, the Company announced a $130 million to $150 million restructuring plan to address structural costs primarily in its Foundational products businesses. During the three months ended September 30, 2024 and 2023, the Company recorded $18 million and $56 million, respectively, of restructuring costs related to this plan. The resulting gross savings related to this plan are expected to be in the range of at least $80 million to $90 million annually by 2027 and are being utilized to sustain overall operating margin profile and cost competitiveness.

In June 2024, the Company announced a $75 million restructuring plan to address the cost structure in its PowerDrive Systems segment due to increased market volatility, which could include realignment of the segment’s manufacturing footprint. During the three months ended September 30, 2024, the Company recorded $3 million of restructuring charges related to this plan. The resulting annual cost savings related to this plan are expected to be approximately $100 million by 2026.

Nearly all of the restructuring charges are expected to be cash expenditures, funded by cash on hand.

Other operating expense (income), net was expense of $5 million and income of $6 million for the three months ended September 30, 2024 and 2023, respectively. The change in Other operating expense (income), net was primarily due to:

• During the three months ended September 30, 2024, the Company recorded a charge of $6 million related to the estimated loss on an immaterial business that met held for sale accounting criteria.
• During the three months ended September 30, 2024, the Company recorded $4 million of expense for bonuses related to the ratification of a collective bargaining agreement at a facility in New York.
• A gain related to merger and acquisition activity of $5 million, during the three months ended September 30, 2024, primarily due to a $6 million revision of the Company’s expected earn-out related to the Drivetek acquisition.
• A gain of $7 million, during the three months ended September 30, 2023, related to the sale of a European manufacturing facility.

Other operating expense (income), net is primarily comprised of items included within the subtitle “Non-comparable items impacting the Company’s earnings per diluted share and net earnings” below.

Equity in affiliates’ earnings, net of tax was $6 million and $10 million for the three months ended September 30, 2024 and 2023, respectively. This line item is driven by the results of the Company’s unconsolidated joint ventures.

Unrealized (gain) loss on equity and debt securities was a gain of $2 million and a loss of $60 million for the three months ended September 30, 2024 and 2023, respectively. This line item reflects the net unrealized gains or losses recognized due to valuing the Company’s investments at fair value. For the three months ended June 30, 2023, this primarily related to losses recognized to adjust the Company’s investment in Wolfspeed Inc. (“Wolfspeed”) convertible debt securities to fair value. The Company sold its Wolfspeed convertible debt securities during the third and fourth quarters of 2023.

Interest expense (income), net was an expense of $4 million and income of $19 million for the three months ended September 30, 2024 and 2023, respectively. Included in net interest expense for the three months ended September 30, 2024 and 2023 was a gain on extinguishment of $3 million and $28 million, respectively. The gains on debt extinguishment are primarily due to the partial extinguishment of the Company’s 3.375% and 5.000% senior notes during the three months ended September 30, 2024 and 2023.

Provision for income taxes was $13 million for the three months ended September 30, 2024, resulting in an effective rate of 5%. This compared to a provision of $133 million, or an effective rate of 56%, for the three months ended September 30, 2023. During the three months ended September 30, 2024, the Company recorded a discrete tax benefit of approximately $18 million related to a reduction in certain unrecognized tax benefits and accrued interest for matters where the statute of limitations lapsed, a discrete tax expense of $4 million related to net changes to valuation allowances, a discrete tax benefit of approximately $36 million related to post Spin-Off restructuring and a discrete tax benefit of approximately $1 million related to various changes in filing positions for prior years. During the three months ended September 30, 2023, the Company recorded a discrete tax benefit of approximately $31 million related to various changes in filing positions for prior years, a discrete tax benefit of approximately $12 million in relation to the Spin-Off and a discrete tax expense of approximately $87 million for changes in judgment related to the realization of deferred tax assets, primarily due to the impact of the Spin-Off on the allocation of the Company’s profits across jurisdictions for tax purposes as well as various tax structuring actions and strategies.

Nine Months Ended September 30, 2024 vs. Nine Months Ended September 30, 2023

The following table presents a summary of our operating results:

(in millions, except per share data)

Net sales

Net sales for the nine months ended September 30, 2024 totaled $10,647 million, a decrease of $29 million, compared to the nine months ended September 30, 2023. The change in net sales for the nine months ended September 30, 2024 was primarily driven by the following:

• Favorable volume, mix and net new business increased sales approximately $134 million. This increase was primarily driven by growth despite flat market production, which the Company believes reflects higher demand for its products. The weighted average market production as estimated by the Company, was down approximately 2% from the nine months ended September 30, 2023. Weighted average market production reflects light and commercial vehicle production as reported by S&P Global, weighted for the Company’s geographic exposure, as estimated by the Company.
• Acquisitions contributed $26 million in additional sales during the nine months ended September 30, 2024.
• A reduction of $99 million related to the Company’s normal contractual customer commodity pass-through arrangements.
• Fluctuations in foreign currencies resulted in a year-over-year decrease in sales of approximately $90 million primarily due to the weakening of the Chinese Renminbi and Korean Won, in each case relative to the U.S. Dollar.

Cost of sales and gross profit

Cost of sales and cost of sales as a percentage of net sales were $8,682 million and 81.5%, respectively, during the nine months ended September 30, 2024, compared to $8,767 million and 82.1%, respectively, during the nine months ended September 30, 2023. The change in cost of sales for the nine months ended September 30, 2024 was primarily driven by the following:

• Fluctuations in foreign currencies resulted in a year-over-year decrease in cost of sales of approximately $67 million primarily due to the weakening of the Chinese Renminbi and Korean Won, in each case relative to the U.S. Dollar.
• Lower sales volume, mix and net new business and purchasing savings decreased cost of sales by approximately $12 million.

Gross profit and gross margin were $1,965 million and 18.5%, respectively, during the nine months ended September 30, 2024, compared to $1,909 million and 17.9%, respectively, during the nine months ended September 30, 2023. The increase in gross margin was primarily due to the factors discussed above.

Selling, general and administrative expenses (“SG&A”)

SG&A for the nine months ended September 30, 2024 was $1,010 million as compared to $963 million for the nine months ended September 30, 2023. SG&A as a percentage of net sales was 9.5% and 9.0% for the nine months ended September 30, 2024 and 2023, respectively. The change in SG&A was primarily attributable to:

• Research and Development (“R&D”) costs that increased $25 million. R&D costs, net of customer reimbursements, were 5.3% of net sales for the nine months ended September 30, 2024, compared to 5.1% of net sales for the nine months ended September 30, 2023. The increase in R&D costs, net of customer reimbursements, was primarily due to increasing net investment related to the Company’s eProduct portfolio.
• Increased employee-related costs of $23 million, primarily related to incentive compensation.

Restructuring expense was $65 million and $68 million for the nine months ended September 30, 2024 and 2023, respectively, primarily related to employee termination benefits. Refer to Note 5, “Restructuring,” to the Condensed Consolidated Financial Statements in Item 1 of this report for more information.

In 2023, the Company announced a $130 million to $150 million restructuring plan to address structural costs primarily in its Foundational products businesses. During the nine months ended September 30, 2024 and 2023, the Company recorded $52 million and $68 million, respectively, of restructuring costs related to this plan.

In June 2024, the Company announced a $75 million restructuring plan to address the cost structure in its PowerDrive Systems segment. During the nine months ended September 30, 2024, the Company recorded $13 million of restructuring charges related to this plan.

Other operating expense (income), net was an expense of $28 million and income of $1 million for the nine months ended September 30, 2024 and 2023, respectively. The change in Other operating expense (income), net was primarily due to:

• A loss of approximately $15 million related to the settlement of a commercial contract assumed in its acquisition of the electric hybrid systems business segment of Eldor during the nine months ended September 30, 2024.
• Expense of approximately $14 million primarily for Spin-Off adjustments to net amounts owed to the Company related to the tax matters agreement during the nine months ended September 30, 2024.
• Merger and acquisition expense, net was less than $1 million during the nine months ended September 30, 2024, primarily related to professional fees associated with specific acquisition initiatives offset by a gain of $6 million related to the revision of its expected earn-out related to the Drivetek acquisition. Merger acquisition expense, net was $18 million during the nine months ended September 30, 2023, primarily related to professional fees associated with specific acquisition initiatives.
• During the three months ended September 30, 2024, the Company recorded $4 million of expense for bonuses related to the ratification of a collective bargaining agreement at a facility in New York.
• During the nine months ended September 30, 2024, the Company recorded a charge of $3 million, primarily related to the recognition of a $6 million estimated loss on an immaterial business that met held for sale accounting criteria.
• During the nine months ended September 30, 2023, the Company recorded a gain on the sale of businesses of $5 million related to the recognition of earn-outs on prior dispositions.
• A gain of $13 million related to the sale of certain fixed assets during the nine months ended September 30, 2023.

Other operating expense (income), net is primarily comprised of items included within the subtitle “Non-comparable items impacting the Company’s earnings per diluted share and net earnings” below.

Equity in affiliates’ earnings, net of tax was $23 million for both the nine months ended September 30, 2024 and 2023. This line item is driven by the results of the Company’s unconsolidated joint ventures.

Unrealized and realized loss on equity and debt securities was $129 million for the nine months ended September 30, 2023. This line item reflects the net unrealized gains or losses recognized due to valuing the Company’s investments at fair value. For the nine months ended September 30, 2023, this primarily related to losses recognized to adjust the Company’s investment in Wolfspeed convertible debt securities to fair value. The Company sold its Wolfspeed convertible debt securities during the third and fourth quarters of 2023.

Interest expense, net was $17 million and $3 million for the nine months ended September 30, 2024 and 2023, respectively. This increase in net interest expense was primarily due to a $28 million gain on debt extinguishment recognized in 2023. Excluding the gain on debt extinguishment, net interest expense has decreased year-over-year primarily due to higher cash and cash equivalents balances and interest received on those balances.

Provision for income taxes was $44 million for the nine months ended September 30, 2024, resulting in an effective rate of 5%. This compared to $230 million, or an effective rate of 30%, for the nine months ended September 30, 2023. During the nine months ended September 30, 2024, the Company recorded a discrete tax benefit of approximately $107 million related to reductions in certain unrecognized tax benefits and accrued interest for matters where the statute of limitations lapsed, a discrete tax benefit of approximately $36 million related to post Spin-Off restructuring and a discrete tax benefit of approximately $4 million related to various changes in filing positions for prior years. During the nine months ended September 30, 2023, the Company recorded a discrete tax benefit of approximately $41 million in relation to the Spin-Off, a discrete tax benefit of approximately $39 million related to various changes in filing positions for prior years, a discrete tax benefit of approximately $14 million related to the resolution of tax audits, a discrete tax expense of approximately $9 million for the impact of enacted tax law changes and a discrete tax expense of approximately $85 million for changes in judgment related to the realization of deferred tax assets, primarily due to the impact of the Spin-Off on the allocation of the Company’s profits across jurisdictions for tax purposes as well as various tax structuring actions and strategies.

Non-comparable items impacting the Company’s earnings per diluted share

The Company’s earnings per diluted share were $1.08 and $0.37 for the three months ended September 30, 2024 and 2023, respectively and $3.40 and $2.06 for the nine months ended September 30, 2024 and 2023, respectively. The non-comparable items presented below are calculated after tax using the corresponding effective tax rate discrete to each item and the weighted average number of diluted shares for each of the periods then ended. The Company believes the following table is useful in highlighting non-comparable items that impacted its earnings per diluted share:

Results by Reportable Segment

The Company discloses segment information under four reportable segments, consistent with the way operating results are evaluated by management. These segments are strategic business groups that are managed separately as each represents a specific grouping of related automotive components and systems. In prior quarters, the Company presented its results under three reportable segments: Air Management, Drivetrain & Battery Systems and ePropulsion.

Effective July 1, 2024, the Company implemented a new business unit and management structure designed to further enhance the execution of the Company’s Charging Forward strategy. The Company now reports its results in the following four reportable segments: Turbos & Thermal Technologies, Drivetrain & Morse Systems, PowerDrive Systems and Battery & Charging Systems.

The reportable segment disclosures have been updated accordingly, which included recasting prior period information for the new reporting structure.

Segment Adjusted Operating Income (Loss) is the measure of segment income or loss used by the Company. Segment Adjusted Operating Income (Loss) is comprised of operating income for the Company’s reportable segments adjusted for restructuring, merger, acquisition and divestiture expense, intangible asset amortization expense, impairment charges and other items not reflective of ongoing operating income or loss. The Company believes Segment Adjusted Operating Income (Loss) is most reflective of the operational profitability or loss of our reportable segments.

The following tables present net sales and Segment Adjusted Operating Income (Loss) for the Company’s reportable segments:

Three Months Ended September 30, 2024 vs. Three Months Ended September 30, 2023

(in millions)

The Turbos & Thermal Technologies segment’s net sales decreased $88 million, or 6%, and Segment Adjusted Operating Income decreased $12 million from the three months ended September 30, 2023. The decrease in net sales was primarily due to approximately $77 million of a reduction in volume, mix, and net new business driven by a decline in market production. Additionally, normal contractual customer commodity pass-through arrangements decreased net sales by $10 million. Segment Adjusted Operating Margin was 14.6% for the three months ended September 30, 2024, compared to 14.5% during the three months ended September 30, 2023. The Segment Adjusted Operating Income decreased primarily due to lower sales, partially offset by purchasing savings and manufacturing efficiencies.

The Drivetrain & Morse Systems segment’s net sales decreased $84 million, or 6%, and Segment Adjusted Operating Income decreased $2 million from the three months ended September 30, 2023. Foreign currencies resulted in a year-over-year increase in net sales of approximately $2 million primarily due to the strengthening of the Chinese Renminbi and Euro and weakening of the Korean Won, in each case relative to the U.S. Dollar. The decrease excluding the impact of foreign currencies was primarily due to approximately $80 million of volume, mix and net new business driven by a decline in market production. Additionally, normal contractual customer commodity pass-through arrangements decreased net sales by $6 million. Segment Adjusted Operating Margin was 18.4% for the three months ended September 30, 2024, compared to 17.5% during the three months ended September 30, 2023. The Segment Adjusted Operating Income was flat primarily due to lower sales partially offset by purchasing savings, manufacturing efficiencies and restructuring.

The PowerDrive Systems segment’s net sales decreased $59 million, or 10%, and Segment Adjusted Operating Loss decreased $1 million from the three months ended September 30, 2023. Foreign currencies resulted in a year-over-year increase in net sales of approximately $2 million primarily due to the strengthening of the Chinese Renminbi and Euro and weakening of the Korean Won, in each case relative to the U.S. Dollar. Acquisitions contributed $9 million in additional sales during the three months ended September 30, 2024. The decrease excluding these items was primarily due to approximately $94 million of a reduction in volume, mix and net new business driven by decreased demand for the Company’s light vehicle Foundational products, which was partially offset by $24 million of customer recoveries related to the volume decrease. Segment Adjusted Operating Margin was (3.7)% for the three months ended September 30, 2024, compared to (3.5)% during the three months ended September 30, 2023. The Segment Adjusted Operating Loss was flat primarily due to lower sales offset by purchasing savings, customer volume related recoveries and restructuring.

The Battery & Charging Systems segment’s net sales increased $51 million, or 35%, and Segment Adjusted Operating Loss decreased $18 million from the three months ended September 30, 2023. The increase in net sales was primarily due to approximately $59 million of volume, mix and net new business driven by increased European demand. Additionally, normal contractual customer commodity pass-through arrangements decreased net sales by $23 million, which was partially offset by other pricing increases of $14 million. Segment Adjusted Operating Margin was (4.1)% for the three months ended September 30, 2024, compared to (17.8)% during the three months ended September 30, 2023. The Segment Adjusted Operating Loss decreased primarily due to conversion on higher sales.

Nine Months Ended September 30, 2024 vs. Nine Months Ended September 30, 2023

(in millions)

The Turbos & Thermal Technologies segment’s net sales decreased $95 million, or 2% and Segment Adjusted Operating Income decreased $6 million from the nine months ended September 30, 2023. Foreign currencies resulted in a year-over-year decrease in net sales of approximately $21 million primarily due to the weakening of the Chinese Renminbi and Korean Won, in each case relative to the U.S. Dollar. The decrease excluding the impact of foreign currencies was primarily due to approximately $40 million of volume, mix and net new business driven by a decline in market production. Additionally, normal contractual customer commodity pass-through arrangements decreased net sales by $34 million. Segment Adjusted Operating Margin was 14.6% for the nine months ended September 30, 2024, compared to 14.4% during the nine months ended September 30, 2023. The Segment Adjusted Operating Income decreased primarily due to lower sales, partially offset by savings related to purchasing and restructuring.

The Drivetrain & Morse Systems segment’s net sales increased $80 million, or 2%, and Segment Adjusted Operating Income increased $70 million from the nine months ended September 30, 2023. Foreign currencies resulted in a year-over-year decrease in net sales of approximately $52 million primarily due to the weakening of the Chinese Renminbi and Korean Won, in each case relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $145 million of volume, mix and net new business driven by increased demand for drivetrain products in Asia. Additionally, normal contractual customer commodity pass-through arrangements decreased net sales by $13 million. Segment Adjusted Operating Margin was 18.2% for the nine months ended September 30, 2024, compared to 16.9% during the nine months ended September 30, 2023. The Segment Adjusted Operating Income increase was primarily due to conversion on higher sales and savings related to purchasing and restructuring.

The PowerDrive Systems segment’s net sales decreased $212 million, or 13%, and Segment Adjusted

Operating Loss increased $56 million from the nine months ended September 30, 2023. Foreign currencies resulted in a year-over-year decrease in net sales of approximately $17 million primarily due to the weakening of the Chinese Renminbi relative to the U.S. Dollar. Acquisitions contributed $21 million in additional sales during the nine months ended September 30, 2024. The decrease excluding these items was primarily due to approximately $243 million of a reduction in volume, mix and net new business driven by decreased demand for the Company’s light vehicle Foundational products, which was partially offset by $27 million of customer recoveries related to the volume decrease. Segment Adjusted Operating Margin was (9.2)% for the nine months ended September 30, 2024, compared to (4.6)% during the nine months ended September 30, 2023. The Segment Adjusted Operating Loss increased due to lower sales, higher R&D investments and impacts related to the Eldor acquisition, partially offset by restructuring savings and customer volume related recoveries.

The Battery & Charging Systems segment’s net sales increased $172 million, or 44%, and Segment Adjusted Operating Loss decreased $43 million from the nine months ended September 30, 2023. The increase in net sales was primarily due to approximately $177 million of volume, mix and net new business driven by increased demand for battery system products in Europe and North America. Additionally, normal contractual customer commodity pass-through arrangements decreased net sales by $52 million, which was partially offset by other pricing increases of $42 million. Acquisitions contributed $5 million in additional sales during the nine months ended September 30, 2024. Segment Adjusted Operating Margin was (5.8)% for the nine months ended September 30, 2024, compared to (19.2)% during the nine months ended September 30, 2023. The Segment Adjusted Operating Loss decrease was primarily due to conversion on higher sales and lower input costs, partially offset by higher investments in R&D for battery systems.

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

The Company maintains various liquidity sources, including cash and cash equivalents and the unused portion of its multi-currency revolving credit agreement. As of September 30, 2024, the Company had liquidity of $4,000 million, comprised of cash and cash equivalent balances of $2,000 million and an undrawn revolving credit facility of $2,000 million. On October 17, 2024, the Company announced that the remaining outstanding balance of $343 million on the 5.000% senior notes due in October 2025 will be redeemed in full on November 1, 2024 using cash on hand, in accordance with the terms of the agreement.

The Company was in full compliance with its covenants under the revolving credit facility and had full access to its undrawn revolving credit facility. Given the Company’s strong liquidity position, management believes that it will have sufficient liquidity and will maintain compliance with all covenants through at least the next 12 months.

As of September 30, 2024, cash and cash equivalent balances of $728 million were held by the Company’s subsidiaries outside the United States. Cash and cash equivalents held by these subsidiaries are used to fund foreign operational activities and future investments, including acquisitions. The majority of cash held outside the United States is available for repatriation. The Company uses its U.S. liquidity primarily for various corporate purposes, including but not limited to debt service, share repurchases, dividend distributions, acquisitions and other corporate expenses.

The Company has a $2.0 billion multi-currency revolving credit facility that includes a feature allowing the Company the ability to increase the facility by $1.0 billion with bank group approval. This facility matures in September 2028. The credit facility agreement contains customary events of default and one key financial covenant, which is a debt-to-EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio. The Company was in compliance with the financial covenant at September 30, 2024. At September 30, 2024 and December 31, 2023, the Company had no outstanding borrowings under this facility.

The Company’s commercial paper program allows the Company to issue up to $2.0 billion of short-term, unsecured commercial paper notes under the limits of its multi-currency revolving credit facility. Under this program, the Company may issue notes from time to time and use the proceeds for general corporate purposes. The Company had no outstanding borrowings under this program as of September 30, 2024 and December 31, 2023.

The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed $2.0 billion.

In addition to the revolving credit facility, the Company’s universal shelf registration statement filed with the U.S. Securities and Exchange Commission provides the Company with the ability to issue various debt and equity securities subject to market conditions.

On February 7, 2024, April 24, 2024 and July 23, 2024, the Company’s Board of Directors declared quarterly cash dividends of $0.11 per share of common stock, respectively. The dividends were paid on March 15, 2024, June 17, 2024 and September 16, 2024, respectively.

From a credit quality perspective, the Company has a credit rating of BBB from Standard & Poor’s, Baa1 from Moody’s and BBB+ from Fitch Ratings. The current outlook from each of Standard & Poor’s, Moody’s and Fitch is stable. None of the Company's debt agreements requires accelerated repayment in the event of a downgrade in credit ratings.

Cash Flows

Operating Activities

(in millions)

Net cash provided by operating activities was $700 million for the nine months ended September 30, 2024 compared to $510 million for the nine months ended September 30, 2023. The increase for the nine months ended September 30, 2024 compared with the nine months ended September 30, 2023 was primarily due to higher net earnings adjusted for non-cash charges and changes in working capital.

Investing Activities

(in millions)

Net cash used in investing activities was $460 million during the first nine months of 2024 compared to $538 million during the first nine months of 2023. As a percentage of sales, capital expenditures were 4.8% and 5.8% for the nine months ended September 30, 2024 and 2023, respectively. The year-over-year reduction in capital expenditures was primarily due to lower eProduct investments. In 2023, the Company recorded net proceeds from investments in equity and debt securities of $63 million, that was primarily related to the Company’s sale of Wolfspeed convertible debt securities. Additionally, in 2023, the Company paid $31 million related to the acquisition of the electric vehicle solution, smart grid and smart energy businesses of Hubei Surpass Sun Electric.

Financing Activities

(in millions)

Net cash provided by financing activities was $250 million during the first nine months of 2024 compared to net cash used in financing activities of $278 million during the first nine months of 2023. Net cash provided by financing activities during the nine months ended September 30, 2024 was primarily related to the Company’s issuance of $500 million of 4.950% senior notes due August 2029 and $500 million of 5.400% senior notes due August 2034, offset by $401 million of BorgWarner share repurchases, $175 million of debt repayments, $74 million in dividends paid to the Company’s stockholders and $63 million in dividends paid to noncontrolling stockholders of the Company’s consolidated joint ventures. In 2023, the Company executed the Spin-Off and received a net distribution, part of which was utilized to purchase and extinguish a portion of senior notes due in 2025.

CONTINGENCIES

In the normal course of business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, governmental investigations and related proceedings, general liability and other risks. It is not possible to predict with certainty whether or not the Company will ultimately be successful in any of these commercial and legal matters or what the impact might be. The Company does not believe that adverse outcomes in any of these commercial and legal claims, actions and complaints are reasonably likely to have a material adverse effect on the Company’s results of operations, financial position or cash flows. An adverse outcome could, nonetheless, be material to the results of operations or cash flows.

Lawsuit Against PHINIA

On September 19, 2024, the Company commenced a lawsuit against PHINIA, seeking to recover from PHINIA approximately $120 million of value added tax (“VAT”) refunds that PHINIA has received or expects to receive from governmental agencies as well as damages and interest, which PHINIA has refused to pay to the Company. These refunds consist of VAT paid by the Company in periods prior to or directly related to the Spin-Off through which the Company established PHINIA as an independent company. Prior to the initiation of the lawsuit, PHINIA had paid certain VAT refund amounts to the Company. The Company asserts PHINIA’s obligation to pay the Company these VAT refunds and related amounts is plainly set forth in a binding tax matters agreement between the Company and PHINIA, which the parties agreed to prior to the Spin-Off. As of September 30, 2024, the Company had an asset related to these VAT refunds of approximately $120 million, which is included in Receivables, net in the Condensed Consolidated Balance Sheet.

Environmental

The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain local environmental agencies and private parties as potentially responsible parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state laws and, as such, may be presently liable for the cost of clean-up and other remedial activities at 17 such sites as of both September 30, 2024 and December 31, 2023. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula.

The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its results of operations, financial position or cash flows. Generally, this is because either the estimates of the maximum potential liability at a site are not material or the liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.

Refer to Note 20, “Contingencies,” to the Condensed Consolidated Financial Statements in Item 1 of this report for further details and information with respect to the Company’s environmental liability.

New Accounting Pronouncements

Refer to Note 2, “New Accounting Pronouncements,” to the Condensed Consolidated Financial Statements in Item 1 of this report for a detailed description of new applicable accounting pronouncements.

There have been no material changes to the information concerning the Company’s exposures to interest rate risk or commodity price risk as stated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Foreign currency exchange rate risk is the risk that the Company will incur economic losses due to adverse changes in foreign currency exchange rates. Currently, the Company’s most significant currency exposures relate to the British Pound, Chinese Renminbi, Euro, Hungarian Forint, Japanese Yen, Korean Won, Mexican Peso, Polish Zloty, Swiss Franc and Thai Baht. The Company mitigates its foreign currency exchange rate risk by establishing local production facilities and related supply chain participants in the markets it serves, by invoicing customers in the same currency as the source of the products and by funding some of its investments in foreign markets through local currency loans. The Company also monitors its foreign currency exposure in each country and implements strategies to respond to changing economic and political environments. In addition, the Company regularly enters into forward currency contracts, cross-currency swaps and foreign currency-denominated debt designated as net investment hedges to reduce exposure to translation exchange rate risk. As of September 30, 2024 and December 31, 2023, the Company recorded a deferred gain of $107 million and $112 million, respectively, both before taxes, for designated net investment hedges within accumulated other comprehensive income (loss).

The significant foreign currency translation adjustments during the three and nine months ended September 30, 2024 and 2023 are shown in the following tables, which provide the percentage change in U.S. Dollar against the respective currencies and the approximate impacts of these changes recorded within other comprehensive income (loss) for the respective periods.

(in millions, except for percentages)

(in millions, except for percentages)

57

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

During the three months ended September 30, 2024, there have been no material changes from the risk factors disclosed in the Company’s Annual Report on the Form 10-K for the year ended December 31, 2023.