Executive Summary / Key Takeaways

• BorgWarner's diversified portfolio across combustion, hybrid, and electric vehicle technologies provides resilience and enables consistent market outgrowth despite volatility in regional EV adoption.
• First quarter 2025 results demonstrated solid operational execution, with adjusted operating margin expanding to 10.0% and sales outgrowth of approximately 4% against a declining market.
• Strategic portfolio actions, including the exit of the charging business and consolidation of North American battery systems, are aimed at enhancing focus, right-sizing the cost structure, and improving profitability and competitiveness.
• The company's 2025 guidance reflects expectations for continued market outperformance (200-400 bps outgrowth), strong adjusted operating margin (9.6%-10.2%), and robust free cash flow generation ($650M-$750M), supported by cost controls and strategic initiatives.
• BorgWarner's financial strength, operational efficiency, and technological leadership in key areas like thermal management, power electronics, and advanced drivetrain systems position it to capture opportunities in the evolving mobility landscape and return value to shareholders.

BorgWarner: Navigating the Shifting Sands of Automotive Propulsion

BorgWarner (NYSE:BWA) stands as a global product leader in the automotive supply industry, specializing in clean and efficient technology solutions for a diverse range of vehicles, from light passenger cars to heavy-duty commercial trucks. With a history spanning over 130 years, the company has built a foundation on engineering expertise and deep relationships with nearly every major global automotive original equipment manufacturer (OEM). This legacy is rooted in developing products that enhance vehicle performance, improve propulsion efficiency, and contribute to better air quality, primarily within the realm of internal combustion engines.

The automotive industry is currently undergoing a transformative shift towards electrification, yet the pace and nature of this transition vary significantly by region. This volatility, coupled with broader macroeconomic factors like interest rates, consumer preferences, and geopolitical events, creates a complex operating environment. BorgWarner's strategic response centers on maintaining a balanced product portfolio that serves combustion, hybrid, and electric powertrains. This approach is designed to provide resilience and capture growth opportunities regardless of the specific trajectory of propulsion mix in different markets. The company aims for profitable growth through a combination of focused organic investments and strategic, technology-enhancing acquisitions.

BorgWarner's competitive position is underpinned by its scale, intellectual property, and the high switching costs associated with integrating complex powertrain components into vehicle platforms. While competing with large Tier 1 suppliers like Aptiv (APTV), Magna International (MGA), and Visteon (VC), BorgWarner differentiates itself through its deep expertise in specific powertrain niches and its established relationships across diverse customer groups and geographies. For instance, its strong presence with domestic Chinese OEMs, who command over 70% of that market and represent roughly 15% of BorgWarner's total sales, provides a distinct advantage in a rapidly evolving region. The company's decentralized operating model is also cited as a strength, fostering speed, accountability, and agility necessary to adapt to market dynamics.

Technological differentiation is central to BorgWarner's strategy and competitive moat. The company's DNA is fundamentally focused on efficiency – both fuel efficiency for traditional and hybrid vehicles and electron efficiency for electrified applications. In its foundational business, technologies like Variable Cam Timing (VCT) systems dynamically optimize valve timing to improve combustion efficiency and reduce emissions. Exhaust Gas Recirculation (EGR) systems similarly reduce NOx emissions and enhance fuel economy. In the eProduct space, BorgWarner offers a range of solutions including high-voltage coolant heaters (HVCH), electric cross differentials (eXD) for torque management, high-voltage eFan systems, and eMotors utilizing technologies like S-wind winding. While specific, universally quantifiable performance metrics across all technologies are not always publicly detailed, the company emphasizes that these technologies provide tangible benefits such as improved thermal efficiency, enhanced power density, faster response times, and cost-effectiveness compared to alternatives, contributing to customer value and BorgWarner's ability to secure new business. The company continues to invest in R&D, focusing on application engineering and targeting a 15% return on invested capital for new programs, ensuring its portfolio remains relevant and competitive.

Performance and Strategic Adjustments

BorgWarner's first quarter 2025 results reflect the ongoing dynamics of the global automotive market and the impact of the company's strategic initiatives. Net sales for the quarter totaled $3,515 million, a decrease of 2% compared to the $3,595 million reported in the first quarter of 2024. This decline occurred against a backdrop of estimated weighted average market production decreasing by approximately 4% year-over-year, indicating BorgWarner achieved sales outgrowth of roughly 4% in the period. The sales change was primarily influenced by unfavorable foreign currency movements, which reduced sales by approximately $85 million, partially offset by a modest $5 million increase from favorable volume, mix, and net new business, driven by higher eProduct sales.

Gross profit was $639 million, resulting in a gross margin of 18.2%, an improvement from 17.9% in the prior year period. This margin expansion was primarily attributed to purchasing savings and manufacturing efficiencies, partially offset by the impact of sales volume and $6 million in tariff expense incurred but not recovered. Selling, general, and administrative (SGA) expenses decreased to $315 million, or 9.0% of net sales, down from $329 million, or 9.2% of net sales, in the prior year. This reduction was mainly due to lower employee-related costs and a $5 million decrease in net R&D expenditures, which remained consistent at 5.2% of net sales.

Operating income, however, decreased to $237 million from $295 million in the first quarter of 2024. This was impacted by increased restructuring expense ($31 million vs $19 million), higher other operating expense, net ($17 million vs $1 million, primarily due to $19 million in charges related to the charging business exit), and impairment charges ($39 million) related to the charging business exit (including $22 million intangible assets, $13 million goodwill, $4 million fixed assets). Equity in affiliates earnings increased to $10 million from $5 million. Interest expense, net, rose to $12 million from $5 million, reflecting higher debt levels. The effective tax rate for continuing operations was 26% in Q1 2025, up from 21% in Q1 2024, influenced by discrete tax items. Net earnings attributable to BorgWarner Inc. were $157 million, or $0.72 per diluted share, compared to $206 million, or $0.90 per diluted share, in the prior year period. Excluding non-comparable items, the impact on diluted EPS was $0.39 in Q1 2025.

Segment performance in Q1 2025 reflected varied dynamics. The Turbos Thermal Technologies segment saw sales decrease by 8% to $1,454 million, but its Segment Adjusted Operating Margin expanded significantly to 16.2% from 14.5%, driven by cost savings and efficiencies. Drivetrain Morse Systems sales were down 4% to $1,361 million, with a stable Segment Adjusted Operating Margin of 17.9%. The PowerDrive Systems segment experienced strong sales growth, up 29% to $561 million, primarily from eProducts, though its Segment Adjusted Operating Margin decreased to 7.7% from 14.2%. The Battery Charging Systems segment's sales decreased 15% to $150 million, impacted by lower battery cell prices and FX, but its Segment Adjusted Operating Margin increased to 14.7% from 8.5%.

In response to market volatility and portfolio evaluation, BorgWarner took decisive strategic actions in early 2025. The company announced its decision to exit the charging business within the Battery Charging Systems segment, expected to be substantially completed in the second quarter of 2025. This move aims to create a more focused portfolio and eliminate approximately $30 million of annualized adjusted operating losses by 2026. Additionally, the company began consolidating its North American battery systems business footprint, shifting production to its Seneca, South Carolina plant. This action is expected to align the cost structure with current market dynamics and generate approximately $20 million in annual cost savings by 2026. These actions, while incurring near-term costs, are intended to enhance the company's long-term competitiveness and profitability.

Outlook and Risks

Looking ahead, BorgWarner's management anticipates a challenging but manageable environment in 2025. The company expects global industry production to decrease year-over-year, with its weighted market production assumption reduced to down 2% to 4% (from down 1%-3% previously), reflecting estimated impacts of tariffs on customer demand, particularly in North America. Despite this headwind, BorgWarner forecasts continued sales outgrowth of 200 to 400 basis points, leading to an expected organic sales change of down 2% to up 2% year-over-year.

The company's total 2025 sales guidance is in the range of $13.6 billion to $14.2 billion, an increase from prior guidance, primarily due to stronger foreign currencies and anticipated tariff cost recoveries, partially offset by the lower market outlook and the charging business exit. Adjusted operating margin guidance is set at 9.6% to 10.2%, a slight reduction from the prior range, as estimated tariff recoveries are expected to flow through sales with no benefit to margin, resulting in approximately 20 basis points of dilution. Adjusted EPS is projected between $4.00 and $4.45 per diluted share, with the midpoint unchanged from previous guidance. Free cash flow is expected to remain strong, guided in the range of $650 million to $750 million. Management expresses confidence in their ability to deliver this guidance, citing solid Q1 execution, cost controls, and the benefits of restructuring actions.

BorgWarner's liquidity position remains robust, with $3,707 million available as of March 31, 2025, including $1,707 million in cash and a $2,000 million undrawn revolving credit facility. This financial strength supports ongoing investments, capital allocation to shareholders (including a consistent $0.11 quarterly dividend and share repurchases, with $300 million already repurchased under the current authorization), and the ability to navigate market uncertainties.

Key risks to the outlook include the cyclical nature of automotive production, sensitivity to economic conditions, and volatility in EV adoption rates. Changes in trade policies and the imposition of tariffs, particularly from the U.S. and retaliatory measures from other countries, pose a risk of increased costs and reduced demand, although the company is actively pursuing mitigation and customer recovery. Competitive challenges from existing and new players, including OEM insourcing, remain a factor. Legal proceedings, such as the lawsuit against PHINIA (PHIN) regarding VAT refunds and environmental liabilities, also present potential, though currently not expected to be material, impacts.

Conclusion

BorgWarner is navigating a complex and dynamic automotive landscape defined by the accelerating, yet regionally uneven, transition to electrified mobility. The company's long history and established position as a leader in powertrain efficiency provide a strong foundation, while its strategic evolution, including portfolio adjustments and a focus on both foundational and eProducts, positions it for continued relevance. The first quarter 2025 results demonstrated operational resilience and the ability to outperform a declining market, supported by cost controls and initial benefits from restructuring.

While challenges persist, particularly regarding market volatility and the impact of tariffs, BorgWarner's updated 2025 guidance reflects confidence in its ability to maintain market outgrowth, deliver solid profitability, and generate strong free cash flow. The strategic decisions to exit the charging business and consolidate battery operations are proactive steps to align the cost structure and enhance competitiveness in key growth areas. BorgWarner's balanced portfolio, technological capabilities, and financial discipline provide a compelling investment thesis for those seeking exposure to the evolving automotive sector, underpinned by a management team focused on driving efficiency and delivering value amidst transition.