Executive Summary / Key Takeaways

• BorgWarner demonstrated robust financial performance in Q3 2025, achieving a 10.7% adjusted operating margin and increasing its full-year 2025 guidance for sales, EPS, and free cash flow, underscoring operational excellence amidst market volatility.
• Strategic portfolio optimization, including the exit of the charging business and consolidation of North American battery systems, is enhancing profitability and focus, projected to eliminate $30 million and generate $20 million in annualized operating losses and cost savings, respectively, by 2026.
• Significant new business awards across both foundational and e-products, particularly in advanced hybrids and the rapidly evolving Chinese EV market, validate BorgWarner's balanced technology strategy and position it for long-term outgrowth.
• The company maintains a disciplined capital allocation approach, returning over 50% of Q3 2025 free cash flow to shareholders while retaining "firepower" for accretive inorganic investments that meet strict criteria.
• Despite industry challenges such as fluctuating EV adoption rates, tariff headwinds, and supply chain disruptions, BorgWarner's diversified product portfolio, technological leadership, and stringent cost controls are expected to drive sustained earnings and cash flow growth.

A Balanced Portfolio for a Dynamic Automotive Landscape

BorgWarner Inc., founded in 1928, stands as a global product leader in clean and efficient technology solutions for combustion, hybrid, and electric vehicles. Operating manufacturing facilities across Europe, the Americas, and Asia, the company serves nearly every major automotive Original Equipment Manufacturer (OEM) worldwide. Its core strategy centers on profitable growth across a technology-focused product portfolio, leveraging efficiency for all powertrain types. This balanced approach is particularly critical as the automotive industry experiences varying rates of electric vehicle adoption across different regions.

The company's historical journey has shaped its current strategic responses to market dynamics. Significant structural changes include the July 2023 spin-off of its Fuel Systems and Aftermarket segments into PHINIA, Inc. , and strategic acquisitions like Drivetek AG in December 2022 to bolster power electronics, and Hubei Surpass Sun Electric (SSE) in March 2023 to expand its charging footprint. However, BorgWarner has also demonstrated agility in divesting underperforming assets, exemplified by the February 2025 decision to exit its charging business, including SSE operations, due to unmet market growth and return on invested capital (ROIC) targets. This move is expected to eliminate approximately $30 million in annualized adjusted operating losses by 2026. Concurrently, the company is consolidating its North American battery systems capacity, shifting production to its Seneca, South Carolina plant, anticipating annual cost savings of approximately $20 million by 2026.

Technological Edge and Innovation Driving Future Mobility

BorgWarner's competitive advantage is deeply rooted in its differentiated technology across both foundational and e-product categories. The company's eProducts, encompassing solutions for electric vehicles (EVs) and hybrid powertrains adaptable to EVs, showcase significant innovation. For instance, BorgWarner secured a contract to supply a 7-in-1 integrated drive module (iDM) to a leading Chinese OEM for a hybrid SUV. This iDM integrates two electric motors featuring BorgWarner's patented high-voltage hairpin winding technology, a dual inverter (with an onboard charger, DC to DC converter, and voltage boost function), and an e-gear transmission, boosting overall system performance and efficiency.

In foundational products, BorgWarner's expertise is equally pronounced. The company will supply its 50-millimeter variable turbine geometry (VTG) turbocharger for Stellantis (STLA)'s GME T4 EVO 4-cylinder gasoline engine in the 2026 Jeep Grand Cherokee, representing a shift into the next generation of turbocharging. Furthermore, BorgWarner's electric variable cam timing (eVCT) technology will be featured on Stellantis' Jeep Cherokee engine, marking the first use of eVCT on a Stellantis engine. This technology dynamically optimizes the timing of intake and exhaust valve events, improving combustion efficiency and reducing emissions. The company's battery systems, such as those supplied to the HOLON Urban autonomous shuttle, utilize two 57-kilowatt-hour battery packs with cylindrical NMC cells, offering the latest generation cell chemistry and benchmark-setting energy density.

BorgWarner's research and development (R&D) efforts are strategically aligned with market demands. In China, the speed to market demanded by OEMs results in lower R&D costs, with development programs sometimes lasting less than 12 months. This agility is facilitated by OEMs' openness to off-the-shelf solutions with minor tweaks and BorgWarner's ability to reuse capital and build scale rapidly in its significant eProduct business in China. For investors, these technological differentiators contribute to BorgWarner's competitive moat, enabling higher efficiency, potentially better margins through reduced energy waste, and stronger customer loyalty, particularly in hybrid applications and specialized segments like off-highway vehicles.

Competitive Positioning in a Fragmented Market

BorgWarner operates in a highly competitive global automotive supplier market, facing both direct and indirect rivals. Among its direct competitors are Aptiv PLC (APTV), Magna International Inc. (MGA), and Continental AG (CTTAY).

Compared to Aptiv, BorgWarner's strengths lie in its mechanical and thermal systems expertise, offering reliable mechanical integration for e-propulsion and drivetrain components. Aptiv, conversely, excels in electronic and software-driven solutions for connectivity and safety, often exhibiting stronger revenue growth in high-growth EV segments. BorgWarner's comprehensive coverage of both traditional and hybrid powertrains provides a unique value proposition, though it may lag in software integration compared to Aptiv's more advanced capabilities.

Against Magna International, BorgWarner's offerings are more specialized in components like turbochargers and battery systems, while Magna provides broader systems integration and leverages its larger operational scale for cost-effective production. BorgWarner's focused R&D for hybrid technologies offers qualitatively greater efficiency in certain thermal systems, but Magna's extensive OEM partnerships and scale enable faster production ramp-ups.

In comparison to Continental AG, BorgWarner emphasizes propulsion and thermal systems, while Continental excels in integrated electronics and braking technologies, with a stronger focus on digital solutions. BorgWarner's established presence in fuel injection and aftermarket services offers reliability in mechanical systems, but it trails in advanced driver-assistance systems (ADAS) innovation, where Continental's capabilities are more advanced.

BorgWarner's overall market positioning is strong in hybrid and combustion vehicle segments, where its foundational products hold a number one or number two market share position. The company's ability to bring competitive technology to market, coupled with its deep customer intimacy (especially with Chinese domestic OEMs, who account for 75% of its China sales), and speed to market, particularly in China, are key competitive advantages. However, vulnerabilities include customer concentration and potential technological gaps in advanced electronics, which could impact its market share in rapidly evolving EV segments. Barriers to entry, such as high R&D costs and stringent regulatory requirements, help protect BorgWarner's established position.

Financial Performance and Strategic Execution

BorgWarner's financial performance in 2025 reflects a strategic focus on operational efficiency and cost control, even amidst a challenging market. For the three months ended September 30, 2025, net sales increased by 4% year-over-year to $3,591 million. This growth was primarily driven by a $69 million benefit from foreign currency fluctuations and a $54 million increase from favorable volume, mix, and net new business, partially offset by a cyber-related shutdown at a European customer. Gross profit for the quarter was $664 million, resulting in an 18.5% gross margin, an increase from 18.4% in the prior year.

The company achieved a strong adjusted operating margin of 10.7% in Q3 2025, a 60 basis point improvement year-over-year, despite a 60 basis point net tariff headwind. This marks the sixth consecutive quarter with an adjusted operating margin at or above 10%, demonstrating consistent operational performance. Adjusted operating income increased by $29 million on just over $70 million of higher sales, representing a 40% incremental conversion, indicating the company's ability to capitalize on sales growth. However, net earnings attributable to BorgWarner Inc. for Q3 2025 decreased to $158 million from $234 million in Q3 2024, and diluted earnings per share from continuing operations fell to $0.73 from $1.08. This was influenced by a $38 million legal settlement with PHINIA (PHIN), $8 million in adjustments related to the PHINIA spin-off agreements, and $5 million for duplicative CEO compensation.

For the nine months ended September 30, 2025, net sales increased by $97 million to $10,744 million. Operating income for the nine months decreased to $774 million from $862 million in the prior year, partly due to $42 million in impairment charges related to the exit of the charging business and consolidation of North American battery systems. Net cash provided by operating activities from continuing operations was robust at $1,029 million for the nine months, a significant increase from $700 million in the prior year, primarily due to changes in working capital. Capital expenditures for the first nine months of 2025 were 3% of sales, lower than historical levels, reflecting effective capital management.

Segment-wise, Turbos Thermal Technologies saw its adjusted operating income rise to $219 million (15.2% margin) in Q3 2025, driven by higher sales, supply chain, and restructuring savings. Drivetrain Morse Systems also increased its adjusted operating income to $267 million (18.4% margin), benefiting from higher transfer case volumes and manufacturing efficiencies. PowerDrive Systems' adjusted operating income grew to $35 million (6.0% margin) in Q3 2025, fueled by eProducts growth in China and Europe. The Battery Charging Systems segment, despite a 33% decline in net sales due to the charging business exit, maintained a relatively flat adjusted operating income through restructuring savings and operational improvements.

Outlook, Guidance, and Capital Deployment

BorgWarner's management has provided an optimistic yet disciplined outlook for 2025, reflecting confidence in its strategic initiatives. The company narrowed its total 2025 sales guidance to a range of $14.1 billion to $14.3 billion. This incorporates a higher market production outlook, offset by specific headwinds such as a cyber-related shutdown at a European customer, supply-constrained production for a key North American platform, and global semiconductor supply concerns, which are expected to be a 60 basis point headwind to year-over-year sales growth. Organic sales are projected to be down 1% to flat year-over-year, with the battery business contributing a 100 basis point headwind to overall outgrowth.

The adjusted operating margin guidance for 2025 was increased to a range of 10.3% to 10.5%, signaling strong underlying performance. Adjusted EPS is now expected to be in the range of $4.60 to $4.75 per diluted share, representing an 8% increase versus 2024 at the midpoint. Free cash flow guidance was also significantly increased to a range of $850 million to $950 million, a $150 million increase from prior guidance. Management expects to convert extra sales growth in the PowerDrive Systems segment in the mid-teens for the full year. Looking further ahead, new bookings are anticipated to support midterm goals for foundational and e-product businesses to outgrow their respective markets, with benefits to the top line expected to materialize from 2027 and beyond.

BorgWarner's capital allocation strategy is balanced and focused on delivering sustained shareholder value. As of September 30, 2025, the company boasted $4,172 million in total liquidity, comprising $2,172 million in cash and equivalents and an undrawn $2,000 million revolving credit facility. In Q3 2025, approximately $136 million, or over 50% of its free cash flow, was returned to shareholders through share repurchases and dividends. The Board of Directors authorized the purchase of up to $1 billion of common stock in July 2025, replacing a previous authorization, and increased the quarterly cash dividend by 55% in Q2 2025. This demonstrates confidence in the company's long-term cash-generating ability and a commitment to consistent shareholder returns. Inorganic investments remain a strategic avenue, with strict criteria focusing on strong industrial logic, near-term earnings accretion, and fair valuation.

Risks and Challenges

Despite a robust outlook, BorgWarner faces several pertinent risks. The continuing delay of Battery Electric Vehicle (BEV) adoption in Western markets led to a $577 million goodwill impairment charge in Q4 2024 for the PowerDrive Systems and Battery and Charging Systems business units. While BorgWarner's diversified portfolio is designed to compensate with strong margin and free cash flow from foundational products if BEV adoption is slower than anticipated, this trend remains a key watchpoint.

Global trade policies, including the imposition of tariffs and retaliatory tariffs, pose ongoing uncertainty. BorgWarner has direct and indirect exposure to these tariffs, expecting some shutdowns in Europe and China due to Nexperia chip issues. While the company expects a $25 million benefit from tariff recoveries in Q4 2025, the overall impact on costs and demand remains a concern. Supply chain disruptions, including those affecting Tier 2 and Tier 3 suppliers, and customer concentration with major OEMs also present inherent risks. However, BorgWarner maintains dedicated teams to manage these disruptions and actively engages in commercial negotiations to recover costs.

Conclusion

BorgWarner's recent performance and strategic direction paint a compelling picture of a company adeptly navigating the complex and evolving automotive landscape. Its balanced product portfolio, spanning advanced combustion, hybrid, and electric vehicle technologies, provides resilience against the varied pace of propulsion mix changes globally. The company's commitment to technological differentiation, exemplified by its innovative iDMs, VTG turbochargers, and eVCT systems, underpins its ability to secure significant new business awards and outgrow industry production.

Despite facing headwinds from fluctuating EV adoption, tariff uncertainties, and supply chain challenges, BorgWarner's disciplined financial management, evidenced by strong adjusted operating margins and robust free cash flow generation, positions it favorably. The strategic decisions to optimize its portfolio, such as exiting the charging business and consolidating battery systems, further enhance its focus and profitability. With a clear roadmap for organic and inorganic growth, coupled with a balanced approach to capital allocation, BorgWarner is poised to continue expanding its earnings power and delivering sustained shareholder value in the years to come.