# DEAR FELLOW STOCKHOLDERS

_Source: `DeepSeekOCR_Ardian_pruned_1k/consumer-cyclical-auto-parts/NYSE_BWA_2019/NYSE_BWA_2019.mmd` · pages 1-7_

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DEAR FELLOW STOCKHOLDERS,

As I look back on my first full year as President and CEO, I am grateful for the strength of the team around me and our ability to work cohesively to drive the business forward. We made several important changes to our executive team, most of which were internal promotions. Our ability to successfully promote from within highlights both the breadth and depth of our talent base, plus the strength of our internal development programs, which are crucial to our long-term success.

One important management addition last year was Kevin Nowlan, who joined the Company as Executive Vice President and Chief Financial Officer at the start of the second quarter of 2019. Given his broad financial and operational experience, Kevin made an immediate positive impact on our business and engaged well with our corporate culture, continuing our long legacy of financial discipline and strength, and enhancing our already strong finance team. Ultimately, we ended 2019 with a world-class management team that allows us to function effectively and efficiently.

## External Commitment and Recognition

As a world leader in clean and efficient solutions for combustion, hybrid and electric vehicles, BorgWarner has received numerous awards for our products and

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EARNINGS PERFORMANCE \( ^{*} \) 
Per Diluted Share

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 \( ^{*} \) Excludes impact of M&A and non-comparable items

achievements over the company's long history. There were two important but less obvious developments that occurred during 2019 that I want to highlight:

First, BorgWarner joined a growing coalition of more than 800 CEOs that have come together for CEO Action for Diversity and Inclusion in the workplace. I am committed to cultivating a workplace where diverse perspectives and experiences are welcomed and respected. For BorgWarner to remain an innovative, global leader, we need to include all possible talents and attract, develop and retain the best people. A common denominator across these issues is access, and so our strategy includes access to

SALES
Billions of Dollars

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leaders and mentors to ensure all are invited, and their contributions are valued.

Second, we were proud to be named as one of Barron's 100 Most Sustainable U.S. Companies during 2019. This designation is determined by 200 key indicators and nearly 30 issues related to environmental, social and corporate governance. Companies on the list serve a variety of industries, and BorgWarner is one of just a few automotive companies to receive this honor. Our vision is to achieve a clean, energy-efficient world, and this recognition from Barron's confirms our progress toward turning this vision into a reality.

## Advancing our Global Product Leadership

BorgWarner gained its reputation as one of the foremost industry leaders by developing a unique portfolio of market-leading products that are able to meet and exceed the demands of the world's leading OEMs – and consistently building upon that legacy. Over the past year, we have maintained and expanded our competitive advantages during a less favorable industry environment. We firmly believe we have the right strategy in place, which will allow us to maintain our long-term profitable growth trajectory. We continue to relentlessly pursue new business and deliver important new technologies, maintaining and growing our leadership position.

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"We continue to relentlessly pursue new business and deliver important new technologies."

Of course, improving fuel economy and reducing emissions remain the key focuses of our technologies for combustion vehicles, where we have innovative solutions ready for any technological challenge and any type of vehicle. The overall market will increase for many of our combustion products as they are viable and available for hybrid vehicles. Even though combustion market volumes are declining, we have continued to increase our penetration within the market and are confident about our prospects and the trends in cleaner combustion.

We believe our combined knowledge of combustion and hybrid technology is a major competitive advantage, and our highly diverse hybrid product portfolio ensures we are invited to the table by every major OEM to discuss their hybrid options. For light vehicles as well as commercial vehicles, our creative solutions allow automakers maximum flexibility when considering which propulsion technology is right for their company and specific program.

I am delighted that we recently secured a contract with a major European OEM to supply our high-performing eTurbo \( ^{™} \)  on a passenger vehicle. This business award marks our first serial production contract for the eTurbo, with production slated to begin in 2022. The integrated solution delivers the traditional benefits of a standard turbocharger with the added advantage of electrified boost assistance for superior response. We believe this is one of the largest industry awards to date for this type of technology and is an important milestone for our company.

With our dynamic electric vehicle (EV) product portfolio, we already cover virtually

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## CUSTOMER DIVERSITY WORLDWIDE

2019 Sales

all critical fields of EV technology. Our unique competitive position means we design and produce the motor, transmission and power electronics, and fully understand the overall design, structure and cost of the system.

One of the most important developments at the company during 2019 was the first contract award for the Integrated Drive Module (iDM). This product integrates our highly efficient power electronics with our advanced transmission system and drive motor technology. Importantly, all of the components in the iDM are part of BorgWarner's owned technologies. We are supplying an Asian EV brand for an electric vehicle, which is scheduled to go into mass production in 2021. With the first contract secured, we have ongoing interest from several customers and are currently pursuing multiple additional program awards. Clearly, with our ongoing product leadership capability, we believe we are well positioned to manage the business throughout the demand cycle.

Produced Strong 2019 Financial Results, Plus 2020 Guidance that Highlights Market Outgrowth

It is no secret that 2019 was a turbulent year for the industry, with challenges across multiple fronts. I am pleased to report that we maintained focus and delivered stronger-

"As a management team, we are taking the tough but necessary actions to maintain our company's historically strong margin profile and strengthen our competitive positioning."

11% ASIA (EX. CHINA)
6% Hyundai
5% Other Asia

37% EUROPE
10% VW/Audi
5% Daimler PC
3% BMW
3% Ford
2% Renault/Nissan
2% Volvo
2% Commercial Vehicle
1% JLR
1% Aftermarket
7% Other Europe

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eTurbo \( ^{®} \) 

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Integrated Drive Module (iDM)

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Torque Vectoring Dual-Clutch

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# $2.5B-$2.6B

Net New Business 2020 thru 2023

$699M

Free Cash Flow

than-expected top-line and margin performance, which exceeded the guidance we provided in July 2019. Our performance is even more impressive when you consider the industry was down for the year. Excluding the impact of foreign currencies and the net impact of acquisitions and divestitures, our organic sales for 2019 were up 0.7%, despite the 4.6% decline in industry production. BorgWarner's market outgrowth was approximately 530 basis points for the year, which was well ahead of our expectations. Our revenue outgrowth was driven primarily by higher volumes of new programs and strong mix, especially in Europe and Asia, during the second half of the year. Margin performance was driven by strong sales and our focus on cost management actions.

Importantly, our top-line performance drove $4.13 of adjusted earnings per share, which was ahead of our latest guidance, due to our robust fourth-quarter performance. Additionally, we were particularly pleased with our strong free cash flow results of $699 million for the year. Overall, we are proud of these results given the challenges we faced, and while we will continue to face a difficult environment in 2020, we have the confidence to execute our strategy, knowing we are more than capable of achieving strong market outgrowth in the future.

Clearly, an important factor in achieving our recent results is the ongoing implementation of our near-term cost control actions to sustain our strong margin profile. Over the past year, the team has identified additional restructuring opportunities in all major regions. These actions are expected to generate significant annual cost savings by 2023. As a management team, we are taking the tough but necessary actions to maintain our company's historically strong margin profile and strengthen our competitive positioning.

Overall, we anticipate the challenging industry conditions to continue in 2020, as end markets are likely to decline for the third straight year. However, we are on track to outgrow the market despite this headwind. As a result, we expect adjusted operating margin to be in the range of 11.6% to 12.0%. For full-year adjusted EPS, our guidance range is \(3.85 to \)4.15 per diluted share. And finally, we are targeting free cash flow of \(675 to \)725 million, even with an expected increase in capital spending to support future growth. Importantly, we believe our recently announced backlog supports these assertions. For 2021 to 2023, we expect a combined net new business backlog of

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"Of course, a strong focus on cash generation allows us to reinvest in the business to support our continued revenue outgrowth initiatives. It also gives us an ability to provide real cash returns to our shareholders."

$2.1 billion, which we believe will support average outgrowth of 500 basis points. Within this, we expect more than 20% of our net backlog will be related to vehicles with electric propulsion systems.

## Focused on Consistent Cash Flow and Balanced Capital Deployment

Driving cash flow has become an important focus for the company in recent years. We are very proud of our track record in 2019 as we delivered full year free cash flow of $699 million, compared with $580 million in 2018. This significant increase, despite the overall industry volume decline, was driven by our strong margin profile and increased focus on cash management.

Of course, a strong focus on cash generation allows us to reinvest in the

## TOTAL STOCKHOLDER RETURN

$100 invested on 12/31/14 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

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SIC 3714 Motor Vehicle Parts

S&P 500

BorgWarner Inc.

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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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business to support our continued revenue outgrowth initiatives. It also gives us an ability to provide real cash returns to our shareholders. BorgWarner has been relatively balanced in how it has deployed capital over time. Over the last five years, we've utilized approximately half of our free cash flow for strategic growth opportunities, while deploying the other half toward returns of capital to shareholders. We believe our 2019 acquisitions of Rinehart Motion Systems and AM Racing, as well as our joint venture with Romeo Systems, Inc., have positioned our company for success in both the near- and long-term. In addition,

in October 2019 we completed a transaction with Enstar Holdings (US) LLC, to divest the subsidiary that was the obligor for the company's asbestos-related liabilities and improved our free cash flow generation ability going forward. Finally, we returned $140 million to investors via our dividends and repurchased $100 million worth of BorgWarner stock during the year.

More recently, the Board of Directors authorized a $1 billion share repurchase program to be executed over the next three years. This is consistent with our historical approach of maintaining a

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Combustion

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AWD Transfer Case

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Hybrid

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P2 On-Axis

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Electric

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Electric Drive Motor (eDM)

balanced approach to capital allocation and demonstrates confidence in our ability to deliver strong free cash flow generation over the long term.