# DEAR FELLOW STOCKHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-cyclical-auto-parts/NYSE_BWA_2018/NYSE_BWA_2018.mmd` · pages 1-7_

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DEAR FELLOW STOCKHOLDERS

I believe today's rapidly changing landscape in the global automotive market is both fascinating and invigorating. The pace of change and the remarkable ideas being developed provides more exciting opportunities than at almost any point in the more than 90-year history of our Company. While we experienced a considerable amount of dynamic change at BorgWarner in 2018 as our evolution continued, many factors remain consistent. As I write this letter, looking back on the past year and my new position, it is a privilege to have assumed the role of President and CEO for such a remarkable Company.

One of our Company's greatest strengths is the breadth and depth of its team and the ability to develop talent. I am a product of that culture and have been a member of our Strategy Board for the past seven years. As such, I am fully aligned with our current vision, mission and the associated strategies. Of course, plans may be calibrated and adjusted over time, but, by and large, we are focused on executing and accelerating the current plans. James Verrier was an excellent CEO and when he decided to retire this past summer, the Company had never been in a stronger position. I want to thank James for his strong leadership and advice over the years.

During my roughly 30-year career in the automotive industry, 20 years of which have been with BorgWarner, I

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have been fortunate enough to work with several different businesses with many talented people that I am very proud to call colleagues and friends. As these people can attest, the core focus of my business philosophy is the relentless pursuit of profitable growth, which I will continue in my current role.

Today, we firmly believe we have the right strategy and an extremely strong portfolio of products, which allows us to focus on delivering profitable growth, above market growth rates across combustion, hybrid and electric propulsion systems. BorgWarner maintains a unique position as a company that can specify, develop and manufacture a broad product offering across all three propulsion systems. Ultimately, we are addressing one of the most important challenges facing our industry as well as society: creating our vision of a cleaner, more energy-efficient world.

Soon after I assumed the CEO role, I outlined a simple "State of the Company," which I believe succinctly outlines where we stand today, and our near-term focus. We are a product leader in clean and efficient solutions for combustion, hybrid and electric vehicles. Our products help improve vehicle performance, propulsion efficiency, stability and air quality. We have maintained and expanded our competitive advantages of customer, geographic and propulsion system diversity. And finally, we are delivering growth significantly above market growth across all three major propulsion categories.

As we look forward, there are four key factors to our ongoing success:

■ Execute a balanced propulsion strategy

■ Maintain product leadership - the primary driver of our business

■ Strengthen operational discipline

■ Deliver growth across all propulsion categories

While our business is clearly evolving, one thing has not changed: product leadership remains the driver of our

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"While our
business is clearly
evolving, one
thing has not
changed: product
leadership
remains the driver
of our business."
business. To ensure ongoing success in this industry and progress towards our vision, our Company must deliver the quality products that our customers, end consumers and governments want and need, in high volumes to make a positive impact.

There are three key elements to create and maintain our product leadership. The first building block is organic research and development ("R&D"), and we are constantly reinvesting approximately 4% of our revenue in this area. We are striving to invest in the right products for the future, constantly assessing our balance and directing additional investment where needed, while starting to deemphasize other more mature areas. Acquisitions are the second key element of product leadership, which has been a proven success in recent years. We now have a team that is fully focused on identifying and assessing targets and presenting the targets to my leadership team for consideration. Finally, we are participating in venture capital investments, which allows us to efficiently keep our fingers on the pulse of the latest ideas around the globe and potential new emerging technologies and trends.

When I travel around the world, I am always amazed by diversity of talent and backgrounds that we have in this Company. Our vision of a clean, energy-efficient world has attracted high-quality engineers and talented people of all backgrounds who want to help our Company achieve its vision and participate in the next generation of propulsion architectures. We are pleased that greater than 50% of new hires in 2018 were people with engineering backgrounds, and our focus on training and employee development will continue to be a key aspect of our strategy going forward.

One sometimes overlooked competitive differentiator is our operational discipline, particularly around quality and delivery, which is even more impressive given that we operate 68 facilities around

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## CUSTOMER DIVERSITY WORLDWIDE
2018 Sales

the world in 19 countries, producing hundreds of millions of parts every year. Today, we have a renewed focus on quality, with many of our internal key performance metrics showing improvement year-over-year. Our plant managers did a fantastic job focusing on our Quality Board's initiatives in 2018. These initiatives complement our already robust quality management systems and help better disseminate best practices around the world. These actions are important as we continue to build upon our success as we look to the future.

To reiterate the long-term outlook for BorgWarner that we first outlined in September 2018:
■ We expect 2023 revenue of $14 billion, before any benefits from M&A.

We are growing faster than the industry and will be overweight in hybrid and electric revenue compared to the industry by 2023, producing some impressive growth rates.

We also plan to be overweight in hybrid and electric by 2023 in terms of content per vehicle, and our penetration rates are growing rapidly.

Although we continue to lead the industry, we can always improve and as such we have set a target to deliver $1 billion of free cash flow in 2023.

"We firmly believe we have the right strategy and an extremely strong portfolio of products, which allows us to focus on delivering profitable growth, above market growth rates across combustion, hybrid and electric propulsion systems."
11% ASIA (EX. CHINA)

6% Hyundai
5% Other Asia

## 38% EUROPE

10% VW/Audi
4% Daimler PC
3% Ford
2% Renault/Nissan
2% Volvo
2% BMW
2% Commercial Vehicle
1% JLR
1% Aftermarket
11% Other Europe

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DualClutch and Control Module

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P2 Module and Hydraulic Control Unit

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Integrated Drive Module (iDM)

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# $14B
in sales by 2023

# $1B in free cash flow
by 2023

As we drive forward towards these goals, we believe 2018 was a year of strong execution for our Company, which laid a strong foundation from which we can build. Despite the industry volatility, we delivered organic growth of more than 600 basis points over our light vehicle market. We successfully completed significant project launches and won new business across combustion, hybrid and electric vehicle platforms. The integration of the Sevcon acquisition was completed in 2018 and we added many high-quality people to the BorgWarner family. The integration was completed successfully on time, and today our combined teams present seamlessly to our customers, allowing us to win a wider range of business opportunities. Clearly, we continue to be considered as a balanced propulsion partner by our customers, and we believe our industry position, expertise and portfolio of products remains a significant differentiator in the marketplace.

The current market is volatile with headwinds facing the industry, focused in Europe and China. In Europe, conditions have stabilized but we still expect industry volume declines in the near term as customers work through the final impacts related to WLTP. In China, we expect industry volume declines to continue near-term as customers reduce inventory, which will also impact the launch of some new projects. As we look to 2019 as a whole, we expect an industry volume decline in the range of 2.0% to 5.0% adjusted for

 \( ^{1} \) Under conditions defined by EU law, the Worldwide Harmonized Light Vehicle Test Procedure (WLTP) laboratory test is used to measure fuel consumption and CO2 emissions from passenger cars, as well as their pollutant emissions.

our regional exposure. Overall, our team is doing an excellent job adjusting to the more challenging industry backdrop, and we expect to continue to outgrow the market in 2019.

For the full-year 2019, we expect to produce organic revenue growth of up to 2.0%, or 250 to 400 basis points over our expected end-market decline, meaning net sales are expected to be in the range of \(9.90 billion to \)10.37 billion. We expect our earnings per share to be in the range of \(4.00 to \)4.35. While we continue to deliver strong market outgrowth in 2019, we will also look at ways to adjust our cost structure to adapt to the current environment.

We also recently announced our three-year net new business backlog ("Backlog"), which includes many exciting

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"As we look forward, there are four key factors to our ongoing success: execute a balanced propulsion strategy, maintain product leadership, strengthen operational discipline, and deliver growth across all propulsion categories."

opportunities. Importantly, this Backlog will support average organic growth over market of 5.0% to 6.0% for the next three years. The customers in this Backlog represent a diverse group around the world. Our diverse customer base is increasingly important, not in the least because of the insights this provides us across the entire propulsion system landscape.

From a product perspective, we see growth across the portfolio with 20% of the Backlog related to combustion propulsion systems, 70% related to vehicles with hybrid propulsion systems and 10% related to electric propulsion systems. From a regional perspective, we continue to see Backlog growth in all of our major markets, with 25% of the Backlog in the Americas, 15% in Europe, and 60% in Asia, with China

## TOTAL STOCKHOLDER RETURN

$100 invested on 12/31/13 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

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## The Drivetrain Segment

The Drivetrain Segment harnesses BorgWarner's legacy of more than 100 years as an innovator in transmission and all-wheel drive technology. By leveraging its deep understanding of powertrain clutching technology, the Drivetrain group is developing leading-edge interactive control systems and advancing the capabilities of hybrid and electric vehicles.

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Combustion

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AWD Transfer Case

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Hybrid

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Integrated Motor Generator (MGI)

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accounting for 50% of the overall Backlog. Despite the near-term industry volume headwinds, we remain focused on continuing to secure new business with our customers around the world and expect to continue to outgrow the market. We firmly believe that our targets are achievable because electrification accelerates the opportunities for us.

On behalf of the entire management team and Board of Directors, I want to thank all of the plant managers and employees in our 68 facilities around the world who, through their dedication and consistent hard work, allow us to maintain and improve our competitive positioning year after year. Our success is predicated on the entire 30,000 strong team, working together to achieve our vision.

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