Strengthening Leadership

in Electrification

BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
Driving Toward a Cleaner Future
2019 Stockholders letter and annual report on form 10-K

borgwarner.com
 No Offer or Solicitation statements. In some cases, you can identify these statements by Adjusted operating income and Adjusted earnings per share
This communication is being made in respect of the proposed forward-looking words such as “may,” “might,” “will,” “should,” may not be comparable to other similarly titled measures of
acquisition (the “proposed transaction”) of Delphi Technologies “could,” “designed,”“effect,” “evaluates,” “forecasts,” “goal,” other companies.
PLC (“Delphi Technologies”) by BorgWarner Inc. (“BorgWar- “guidance,” “initiative,” “intends,” “pursue,” “seek,” “target,”
Full-Year 2020
ner”). This communication is not intended to and does not “when,” “will,” “expects,” “plans,” “intends,” “anticipates,” “be-
constitute an offer to sell or the solicitation of an offer to lieves,” “estimates,” “predicts,” “projects,” “potential,” “outlook” Low High
subscribe for or buy or an invitation to purchase or subscribe for or “continue,” the negatives thereof and other comparable Earnings per diluted share $3.22 $3.75
any securities or the solicitation of any vote or approval in any terminology. Factors that could cause actual results relating Non-comparable items:
jurisdiction pursuant to the proposed transaction or otherwise, to the proposed transaction with Delphi Technologies to differ Restructuring and other expense 0.41 0.23
nor shall there be any sale, issuance or transfer of securities in materially from these forward-looking statements include, but Merger, acquisition and divestiture expense 0.22 0.17
any jurisdiction in contravention of applicable law. In particular, are not limited to, the possibility that the proposed transaction Adjusted earnings per diluted share $3.85 $4.15
this communication is not an offer of securities for sale into the will not be pursued; failure to obtain necessary shareholder ap-
United States. No offer of securities shall be made in the United provals, regulatory approvals or required financing or to satisfy
States absent registration under the U.S. Securities Act of 1933, any of the other conditions to the proposed transaction; adverse Adjusted Earnings Per Share to US GAAP Reconciliation
as amended (the “Securities Act”), or pursuant to an exemption effects on the market price of Delphi Technologies’ ordinary The Company defines adjusted earnings per diluted share as
from, or in a transaction not subject to, such registration require- shares or BorgWarner’s shares of common stock and on Delphi earnings per diluted share adjusted for the items below and
ments. Any securities issued in the proposed transaction are Technologies’ or BorgWarner’s operating results because of a related tax effects.
anticipated to be issued in reliance upon available exemptions failure to complete the proposed transaction; failure to realize
from such registration requirements pursuant to Section 3(a) the expected benefits of the proposed transaction; failure to
Year Ended December 31

We maintained focus
(10) of the Securities Act. In connection with the proposed promptly and effectively integrate Delphi Technologies’ busi-
transaction, Delphi Technologies will file certain proxy materials, nesses; negative effects relating to the announcement of the 2019 2018
which shall constitute the scheme document and the proxy proposed transaction or any further announcements relating to Earnings per diluted share $3.61 $4.44
Non-comparable items:

and delivered stronger-

statement relating to the proposed transaction (the “proxy the proposed transaction or the consummation of the proposed
statement”). The proxy statement will contain the full terms and transaction on the market price of Delphi Technologies’ ordinary Restructuring expense 0.26 0.24
conditions of the proposed transaction, including details with shares or BorgWarner’s shares of common stock; significant Pension settlement loss 0.10 -
respect to the Delphi Technologies shareholder vote in respect transaction costs and/or unknown or inestimable liabilities;

than-expected top-line
Unfavorable arbitration loss 0.07 -
of the proposed transaction. Any decision in respect of, or other potential litigation associated with the proposed transaction;
Merger, acquisition and divestiture expense 0.05 0.03
response to, the proposed transaction should be made only on general economic and business conditions that affect the com-
the basis of the information contained in the proxy statement. bined company following the consummation of the proposed Asset impairment and loss on divestiture 0.03 0.09

and margin performance.

transaction; changes in global, political, economic, business, Officer stock awards modification 0.01 0.04
Participants in the Solicitation
competitive, market and regulatory forces; changes in tax laws, Gain on derecognition of subsidiary (0.02) -
Delphi Technologies, BorgWarner and certain of their respective
regulations, rates and policies; future business acquisitions or Asbestos-related adjustments - 0.08
directors, executive officers and employees may be deemed
disposals; competitive developments; and the timing and occur- Gain on sale of building - (0.07)
“participants” in the solicitation of proxies from Delphi Tech-
rence (or non-occurrence) of other events or circumstances that
nologies shareholders in respect of the proposed transaction. Gain on commercial settlement - (0.01)
may be beyond Delphi Technologies’ or BorgWarner’s control.
Information regarding the foregoing persons, including a de- Tax reform adjustments - (0.06)
scription of their direct or indirect interests, by security holdings For additional information about these and other factors, Tax adjustments 0.02 (0.30)
or otherwise, will be set forth in the proxy statement and any see the information under the caption “Risk Factors” in Delphi Adjusted earnings per diluted share $4.13 $4.48
other relevant documents to be filed with the Securities and Technologies’ most recent Annual Report on Form 10-K filed
Exchange Commission (the “SEC”). You can find information with the SEC and “Management’s Discussion and Analysis of
about Delphi Technologies’ directors and executive officers in its Financial Condition and Results of Operations” filed on February Adjusted Operating Income to US GAAP Reconciliation
Annual Report on Form 10-K for the fiscal year ended December 13, 2020, and the information under the caption “Risk Factors” in FY 2020 Guidance
31, 2019 and its definitive proxy statement filed with the SEC on BorgWarner’s most recent Annual Report on Form 10-K filed with Low High
Schedule 14A on March 15, 2019. You can find information about the SEC and “Management’s Discussion and Analysis of Financial
FRÉDÉRIC LISSALDE BorgWarner’s directors and executive officers in its Annual Condition and Results of Operations” on February 13, 2020.
Net Sales $9,750 $10,075
Operating income $975 $1,110
President and Chief Executive Officer Report on Form 10-K for the fiscal year ended December 31,
Delphi Technologies’ and BorgWarner’s forward-looking Operating margin 10.0% 11.0%
2019 and its definitive proxy statement filed with the SEC on
statements speak only as of the date of this communication Non-comparable items
Schedule 14A on March 15, 2019.
or as of the date they are made. Delphi Technologies and Restructuring expense $115 $65
Additional Information and Where to Find It BorgWarner each disclaim any intent or obligation to update Merger, acquisition and divestiture expense 45 35
This communication may be deemed solicitation material in or revise any “forward looking statement” made in this com-
Adjusted operating income $1,135 $1,210
respect of the proposed transaction. In connection with the munication to reflect changed assumptions, the occurrence
proposed transaction, Delphi Technologies will file with the of unanticipated events or changes to future operating results Adjusted operating income margin 11.6% 12.0%
SEC and furnish to Delphi Technologies’ shareholders a proxy over time, except as may be required by law. All subsequent
DEAR FELLOW STOCKHOLDERS, Chief Financial Officer at the start of the statement and other relevant documents. This communication written and oral forward-looking statements attributable to Free Cash Flow to US GAAP Reconciliation
does not constitute a solicitation of any vote or approval. Before Delphi Technologies, BorgWarner or their respective directors, The Company defines free cash flow as net cash provided
second quarter of 2019. Given his broad making any voting decision, Delphi Technologies’ shareholders executive officers or any person acting on behalf of any of them by operating activities plus the derecognition of subsidiary
As I look back on my first full year as financial and operational experience, are urged to read the proxy statement and any other relevant are expressly qualified in their entirety by this paragraph.
minus capital expenditures. The measure is useful to both
documents filed or to be filed with the SEC in connection with
President and CEO, I am grateful for the Forward-looking statements concerning BorgWarner’s management and investors in evaluating the Company’s ability
Kevin made an immediate positive impact the proposed transaction or incorporated by reference in the
business without regard to the proposed transaction are also
proxy statement (if any) carefully and in their entirety when to service and repay its debt.
strength of the team around me and on our business and engaged well with they become available because they will contain important subject to risks and uncertainties, many of which are difficult to Year Ended December 31
predict and generally beyond our control, that could cause actu-
our ability to work cohesively to drive our corporate culture, continuing our long information about the proposed transaction and the parties to
al results to differ materially from those expressed, projected or
2019 2018
the proposed transaction. Investors will be able to obtain free of Cash provided by operating activities $1,008 $1,126
the business forward. We made several legacy of financial discipline and strength, charge the proxy statement and other documents filed with the implied in or by the forward-looking statements. These risks and
uncertainties, among others, include: our dependence on auto- Derecognition of subsidiary 172 -
SEC at the SEC’s website at http://www.sec.gov. In addition, the
important changes to our executive team, and enhancing our already strong finance proxy statement and Delphi Technologies’ and BorgWarner’s motive and truck production, both of which are highly cyclical; Capital expenditures (481) (546)
our reliance on major OEM customers; commodities availability Free cash flow $699 $580
most of which were internal promotions. team. Ultimately, we ended 2019 with a respective annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to and pricing; supply disruptions; fluctuations in interest rates and
Our ability to successfully promote from world-class management team that allows those reports filed or furnished pursuant to section 13(a) or foreign currency exchange rates; availability of credit; our de- Full Year 2020 Outlook
15(d) of the U.S. Securities Exchange Act of 1934, as amended, pendence on key management; our dependence on information Low High
within highlights both the breadth and us to function effectively and efficiently. are available free of charge through Delphi Technologies’ and systems; the uncertainty of the global economic environment;
Cash provided by operating activities $1,250 $1,250
depth of our talent base, plus the strength BorgWarner’s websites at www.delphi.com and www.borgwar- the outcome of existing or any future legal proceedings, includ-
Derecognition of subsidiary - -
ner.com, respectively, as soon as reasonably practicable after ing litigation with respect to various claims; future changes in
of our internal development programs, External Commitment and Recognition they are electronically filed with, or furnished to, the SEC. laws and regulations, including, by way of example, tariffs, in the Capital expenditures (575) (525)
countries in which we operate; and the other risks noted under Free cash flow $675 $725
which are crucial to our long-term success. Notice Regarding Forward-Looking Statements
Item 1A, “Risk Factors,” of BorgWarner’s most recent Annual
This communication may contain forward-looking statements as
As a world leader in clean and efficient contemplated by the 1995 Private Securities Litigation Reform
Report on Form 10-K filed with the SEC and in other reports that
we file with the SEC.
One important management addition last solutions for combustion, hybrid and Act that reflect, when made, Delphi Technologies’ or BorgWar-
ner’s respective current views with respect to future events, This should not be construed as a complete list of all of
year was Kevin Nowlan, who joined the electric vehicles, BorgWarner has received including the proposed transaction, and financial performance the economic, competitive, governmental, technological
or that are based on their respective management’s current and other factors that could adversely affect our expected
Company as Executive Vice President and numerous awards for our products and outlook, expectations, estimates and projections, including consolidated financial position, results of operations or liquidity.
with respect to the combined company following the proposed Additional risks and uncertainties, including without limitation
transaction, if completed. Such forward-looking statements those not currently known to us or that we currently believe are
are subject to many risks, uncertainties and factors relating to immaterial, also may impair our business, operations, liquidity,
Delphi Technologies’ or BorgWarner’s respective operations financial condition and prospects.
and business environment, which may cause the actual results
of Delphi Technologies or BorgWarner to be materially different
from those indicated in the forward-looking statements. Adj. EPS Guidance to US GAAP Reconciliation
All statements that address future operating, financial or The Company defines Adjusted earnings per share as
business performance or Delphi Technologies’ or BorgWarner’s Adjusted net income divided by diluted shares. Because not
respective strategies or expectations are forward-looking all companies use identical calculations, this presentation of
 1 2 0 1 9 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K 1

E A R N I N G S P E R F O R M A N C E* SALES
Per Diluted Share Billions of Dollars

$4.48

$4.13
$10.5B
$10.2B
$3.89
$9.8B

$9.1B
$3.27
$3.04 $8.0B

2015 2016 2017 2018 2019 2015 2016 2017 2018 2019
*Excludes impact of M&A and non-comparable items

he achievements over the company’s long leaders and mentors to ensure all are Advancing our Global Product Leadership
d history. There were two important but invited, and their contributions are valued.
less obvious developments that occurred BorgWarner gained its reputation as one of
pact during 2019 that I want to highlight: Second, we were proud to be named as the foremost industry leaders by developing
h one of Barron’s 100 Most Sustainable U.S. a unique portfolio of market-leading
ong First, BorgWarner joined a growing Companies during 2019. This designation products that are able to meet and exceed
gth, coalition of more than 800 CEOs that is determined by 200 key indicators and the demands of the world’s leading OEMs –
nce have come together for CEO Action for nearly 30 issues related to environmental, and consistently building upon that legacy.
a Diversity and Inclusion in the workplace. I social and corporate governance. Over the past year, we have maintained and
ows am committed to cultivating a workplace Companies on the list serve a variety of expanded our competitive advantages
y. where diverse perspectives and industries, and BorgWarner is one of just during a less favorable industry
experiences are welcomed and respected. a few automotive companies to receive environment. We firmly believe we have the
n For BorgWarner to remain an innovative, this honor. Our vision is to achieve a clean, right strategy in place, which will allow us to
global leader, we need to include all energy-efficient world, and this recognition maintain our long-term profitable growth
t possible talents and attract, develop from Barron’s confirms our progress trajectory. We continue to relentlessly
and retain the best people. A common toward turning this vision into a reality. pursue new business and deliver important
ived denominator across these issues is access, new technologies, maintaining and growing
d and so our strategy includes access to our leadership position.
 2

“We continue
to relentlessly
pursue new Of course, improving fuel economy and
reducing emissions remain the key focuses
allow automakers maximum flexibility
when considering which propulsion

business and of our technologies for combustion vehicles,

where we have innovative solutions ready for
technology is right for their company and
specific program.

deliver important any technological challenge and any type of

vehicle. The overall market will increase for I am delighted that we recently secured a

new technologies.” many of our combustion products as they are

viable and available for hybrid vehicles. Even
contract with a major European OEM to
supply our high-performing eTurbo™ on a
though combustion market volumes are passenger vehicle. This business award
declining, we have continued to increase our marks our first serial production contract for
penetration within the market and are the eTurbo, with production slated to begin
confident about our prospects and the in 2022. The integrated solution delivers the
trends in cleaner combustion. traditional benefits of a standard
turbocharger with the added advantage of
We believe our combined knowledge of electrified boost assistance for superior
combustion and hybrid technology is a response. We believe this is one of the
major competitive advantage, and our largest industry awards to date for this type
highly diverse hybrid product portfolio of technology and is an important milestone
ensures we are invited to the table by for our company.
every major OEM to discuss their hybrid
options. For light vehicles as well as With our dynamic electric vehicle (EV)
commercial vehicles, our creative solutions product portfolio, we already cover virtually

USES OF CASH
Millions of Dollars Dividends M & A Activity Share Repurchase Capital Expenditures Derecognition of Asbestos-related Subsidiary

$117 $113 $124 $142 $140

$577 $501 $560 $6 $546 $481
$63
$288

$189
$1200 $350 $150
$100
$100
$172
2015 2016 2017 2018 2019
 2 0 1 9 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K 3

17 % C H INA 11% ASIA (EX. CHINA)

4% Great Wall 6% Hyundai

2% VW/Audi 5% Other Asia
1% FAW
1% Chang’an
1% Honda
8% Other China 37% EUROPE
10% VW/Audi
CUSTOMER DIVERSITY WORLDWIDE 5% Daimler PC
2019 Sales 35 % A M ERI CAS 3% BMW
3% Ford
12% Ford 2% Renault/Nissan
6% FCA 2% Volvo
3% GM 2% Commercial Vehicle
3% Asian OEMs 2% JLR
3% Commercial Vehicle 1% Aftermarket
2% Aftermarket 7% Other Europe
6% Other Americas

all critical fields of EV technology. Our unique production in 2021. With the first contract
competitive position means we design and secured, we have ongoing interest from
produce the motor, transmission and power several customers and are currently
electronics, and fully understand the overall pursuing multiple additional program
design, structure and cost of the system. awards. Clearly, with our ongoing product
leadership capability, we believe we are well
One of the most important developments at positioned to manage the business
the company during 2019 was the first throughout the demand cycle.
contract award for the Integrated Drive eTurbo ™

Module (iDM). This product integrates our Produced Strong 2019 Financial Results,
highly efficient power electronics with our Plus 2020 Guidance that Highlights Market
advanced transmission system and drive Outgrowth
motor technology. Importantly, all of the
components in the iDM are part of It is no secret that 2019 was a turbulent year
BorgWarner’s owned technologies. We are for the industry, with challenges across
supplying an Asian EV brand for an electric multiple fronts. I am pleased to report that
vehicle, which is scheduled to go into mass we maintained focus and delivered stronger-

Integrated Drive Module (iDM)

“As a management team, we are taking

the tough but necessary actions to
maintain our company’s historically
strong margin profile and strengthen Torque Vectoring Dual-Clutch

our competitive positioning.”

4

$2.5B - $2.6B
Net New Business 2020 thru 2023

$699M
Free Cash Flow

than-expected top-line and margin was ahead of our latest guidance, due to our taking the tough but necessary actions to $2.1 billion, w
performance, which exceeded the guidance robust fourth-quarter performance. maintain our company’s historically strong average outg
we provided in July 2019. Our performance Additionally, we were particularly pleased margin profile and strengthen our Within this, w
is even more impressive when you consider with our strong free cash flow results of competitive positioning. our net back
the industry was down for the year. $699 million for the year. Overall, we are with electric
Excluding the impact of foreign currencies proud of these results given the challenges Overall, we anticipate the challenging
and the net impact of acquisitions and we faced, and while we will continue to face industry conditions to continue in 2020, Focused on C
divestitures, our organic sales for 2019 were a difficult environment in 2020, we have the as end markets are likely to decline for the Balanced Ca
up 0.7%, despite the 4.6% decline in confidence to execute our strategy, knowing third straight year. However, we are on
industry production. BorgWarner’s market we are more than capable of achieving track to outgrow the market despite this Driving cash
outgrowth was approximately 530 basis strong market outgrowth in the future. headwind. As a result, we expect adjusted important fo
points for the year, which was well ahead of operating margin to be in the range of years. We are
our expectations. Our revenue outgrowth Clearly, an important factor in achieving 11.6% to 12.0%. For full-year adjusted EPS, record in 201
was driven primarily by higher volumes of our recent results is the ongoing our guidance range is $3.85 to $4.15 per free cash flow
new programs and strong mix, especially in implementation of our near-term cost diluted share. And finally, we are targeting with $580 m
Europe and Asia, during the second half of control actions to sustain our strong free cash flow of $675 to $725 million, increase, des
the year. Margin performance was driven by margin profile. Over the past year, the even with an expected increase in capital volume decli
strong sales and our focus on cost team has identified additional spending to support future growth. margin profil
management actions. restructuring opportunities in all major Importantly, we believe our recently cash manage
regions. These actions are expected to announced backlog supports these
Importantly, our top-line performance drove generate significant annual cost savings assertions. For 2021 to 2023, we expect a Of course, a
$4.13 of adjusted earnings per share, which by 2023. As a management team, we are combined net new business backlog of generation a
 2 0 1 9 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K 5

“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.”

y actions to $2.1 billion, which we believe will support T O TA L S T O C K H O L D E R R E T U R N

rically strong average outgrowth of 500 basis points. $100 invested on 12/31/14 in stock or index, including
our Within this, we expect more than 20% of reinvestment of dividends. Fiscal year ending December 31.
our net backlog will be related to vehicles
with electric propulsion systems.
$200
lenging SIC 3714 Motor Vehicle Parts
e in 2020, Focused on Consistent Cash Flow and
ecline for the Balanced Capital Deployment S&P 500
we are on $150
espite this Driving cash flow has become an BorgWarner Inc.
ect adjusted important focus for the company in recent
range of years. We are very proud of our track
djusted EPS, record in 2019 as we delivered full year $100
o $4.15 per free cash flow of $699 million, compared
are targeting with $580 million in 2018. This significant
million, increase, despite the overall industry
$50
se in capital volume decline, was driven by our strong
owth. margin profile and increased focus on
cently cash management.
these
2014 2015 2016 2017 2018 2019
we expect a Of course, a strong focus on cash
acklog of generation allows us to reinvest in the
6

The Drivetrain Segment The E

The Drivetrain Segment harnesses BorgWarner’s legacy of The Engin
more than 100 years as an innovator in transmission and and prod
all-wheel drive technology. By leveraging its deep AWD Transfer Case emissions
understanding of powertrain clutching technology, the enhanced
Drivetrain group is developing leading-edge interactive timing sy
control systems and advancing the capabilities of hybrid thermal m
and electric vehicles. expertise
in combu

P2 On-Axis
Sales in Millions of Dollars $4,140 M Sales in Millio
$4,015 M
$3,790 M
$3,524 M

$2,557 M

Electric Drive Motor (eDM)

2015 2016 2017 2018 2019

business to support our continued in October 2019 we completed a balanced approach to capital allocation systems that is
revenue outgrowth initiatives. It also transaction with Enstar Holdings (US) and demonstrates confidence in our advantage of
gives us an ability to provide real cash LLC, to divest the subsidiary that was the ability to deliver strong free cash flow addition of De
returns to our shareholders. BorgWarner obligor for the company’s asbestos- generation over the long term. industry-leadi
has been relatively balanced in how it has related liabilities and improved our free electronics tec
deployed capital over time. Over the last cash flow generation ability going Delivering Our Ongoing Evolution: established pr
five years, we’ve utilized approximately forward. Finally, we returned $140 million Acquisition of Delphi Technologies base. At the sa
half of our free cash flow for strategic to investors via our dividends and combustion, c
growth opportunities, while deploying the repurchased $100 million worth of In January 2020, we announced the proposed aftermarket bu
other half toward returns of capital to BorgWarner stock during the year. acquisition of Delphi Technologies in an market balanc
shareholders. We believe our 2019 all-stock transaction that estimated Delphi
acquisitions of Rinehart Motion Systems More recently, the Board of Directors Technologies’ enterprise value at We have been
and AM Racing, as well as our joint authorized a $1 billion share repurchase approximately $3.3 billion. This deal would slightly overw
venture with Romeo Systems, Inc., have program to be executed over the next strengthen BorgWarner’s electronics and vehicle revenu
positioned our company for success in three years. This is consistent with our power electronics products, capabilities and balanced exp
both the near- and long-term. In addition, historical approach of maintaining a scale, creating a leader in electrified propulsion the industry t
 2 0 1 9 S T O C K H O L D E R S L E T T E R A N D A N N U A L R E P O R T O N F O R M 10 - K 7

The Engine Segment

The Engine Segment develops thermal management strategies
and products to optimize vehicle fuel efficiency, reduce
emissions and enhance performance. The group’s efforts are Boosting Technologies

enhanced by BorgWarner’s efforts in innovating new engine

timing systems, boosting systems, ignition systems and
thermal management systems. This unique combination of
expertise allows BorgWarner to continually break new ground
in combustion, hybrid and electric vehicle technology.

Variable Cam Timing

Sales in Millions of Dollars $6,447 M
$6,214 M
$6,062 M

$5,500 M $5,590 M

Cabin and Battery Heaters

2015 2016 2017 2018 2019

allocation systems that is well positioned to take the addition of Delphi Technologies is an energy-efficient world.
in our advantage of future propulsion migration. The important move, with the combined When reviewing 2019, it is clear we will
ash flow addition of Delphi Technologies would provide company offering a unique, more continue to accelerate our evolution, while
. industry-leading electronics and power comprehensive portfolio, resulting in greater maintaining prudent financial controls. We
electronics technology and talent, with an content per vehicle. expect to continue to outgrow the market and
ion: established production, supply and customer preserve our strong margin performance,
gies base. At the same time, it would enhance our Once the deal is completed, we expect the successfully managing through the anticipated
combustion, commercial vehicle and combined company to realize meaningful weaker industry volume environment. We are
he proposed aftermarket businesses – delivering even better run-rate cost synergies by 2023, driven both proud and protective of BorgWarner’s
s in an market balance for the combined company. primarily by SG&A and procurement savings. In unique ability to deliver a breadth of products
ed Delphi addition, we expect significant long-term at the cutting edge of technology for all vehicle
We have been positioning BorgWarner to be revenue synergies, primarily from the propulsion categories.
eal would slightly overweight in hybrid and electric opportunity to offer more integrated electrified
nics and vehicle revenue by 2023, while maintaining a products. We are confident that this transaction
bilities and balanced exposure to the overall industry. As will deliver enhanced returns for stockholders,
ed propulsion the industry transitions toward electrification, while also advancing our vision of a clean,
8

Finally, and most importantly, on behalf

of the management team and Board
of Directors, I want to commend the
entire BorgWarner team for how they
have reacted to the challenging external
environment. We appreciate your efforts!
It is your dedication, intelligence and
Successfully manage the present
ingenuity that allow the company to
successfully manage the present while
while continuing to prospectively
continuing to prospectively position
for the future. Our ongoing success is position for the future.
predicated on our 29,000 team members
working together to achieve our vision.

Sincerely,

Frédéric B. Lissalde
President and Chief Executive Officer

See accompanying Annual Report on Form

10-K for important information and inside
back cover for non-GAAP reconciliations.

BorgWarner will provide its full financial report electronically as part of its environmental initiative to conserve resources
and reduce costs. For more information on the company’s financial performance and sustainability initiatives, please visit our
website at borgwarner.com.
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
ANNUAL REPORT
(Mark One)
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2019
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

Commission File Number: 1-12162

BorgWarner Inc.
(Exact name of registrant as specified in its charter)

Delaware 13-3404508
State or other jurisdiction of Incorporation or organization (I.R.S. Employer Identification No.)
3850 Hamlin Road,
Auburn Hills, Michigan 48326
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (248) 754-9200
Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on

Title of each class Trading Symbol(s) which registered
Common Stock, par value $0.01 per share BWA New York Stock Exchange
1.80% Senior Notes due 2022 BWA22 New York Stock Exchange
Securities registered Pursuant to Section 12(g) of the Act: None
_________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-TT (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-
K or any amendment to this Form 10-K
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The aggregate market value of the voting common stock of the registrant held by stockholders (not including voting common stock held by directors and
executive officers of the registrant) on June 28, 2019 (the last business day of the most recently completed second fiscal quarter) was approximately $8.6
billion.
As of February 7, 2020, the registrant had 206,409,586 shares of voting common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated herein by reference into the Part of the Form 10-K indicated.

Document Part of Form 10-K into which incorporated

Portions of the BorgWarner Inc. Proxy Statement for the 2019 Annual Meeting of Stockholders Part III
 BORGWARNER INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2019
INDEX
Page No.
PART I.
Item 1. Business 5
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 25
Item 2. Properties 26
Item 3. Legal Proceedings 27
Item 4. Mine Safety Disclosures 27

PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 27
Item 6. Selected Financial Data 30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 51
Item 8. Financial Statements and Supplementary Data 52
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure 114
Item 9A. Controls and Procedures 115
Item 9B. Other Information 115

PART III.
Item 10. Directors, Executive Officers and Corporate Governance 116
Item 11. Executive Compensation 116
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 116
Item 13. Certain Relationships and Related Transactions and Director Independence 116
Item 14. Principal Accountant Fees and Services 117

PART IV.
Item 15. Exhibits and Financial Statement Schedules 117
Item 16. Form 10-K Summary 117

2
CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION

Statements contained in this Annual Report on Form 10-K ("Form 10-K") (including Management's
Discussion and Analysis of Financial Condition and Results of Operations) may contain forward-looking
statements as contemplated by the 1995 Private Securities Litigation Reform Act (the “Act”) that are
based on management's current outlook, expectations, estimates and projections. Words such as
"anticipates," "believes," "continues," "could," "designed," "effect," "estimates," "evaluates," "expects,"
"forecasts," "goal," "initiative," "intends," "outlook," "plans," "potential," "project," "pursue," "seek,"
"should," "target," "when," "would," and variations of such words and similar expressions are intended to
identify such forward-looking statements. Further, all statements, other than statements of historical fact
contained or incorporated by reference in this Form 10-K, that we expect or anticipate will or may occur
in the future regarding our financial position, business strategy and measures to implement that strategy,
including changes to operations, competitive strengths, goals, expansion and growth of our business and
operations, plans, references to future success and other such matters, are forward-looking statements.
Accounting estimates, such as those described under the heading "Critical Accounting Policies" in Item 7
of this Annual Report on Form 10-K, are inherently forward-looking. All forward looking statements are
based on assumptions and analyses made by us in light of our experience and our perception of
historical trends, current conditions and expected future developments, as well as other factors we
believe are appropriate in the circumstances. Forward-looking statements are not guarantees of
performance and the Company's actual results may differ materially from those expressed, projected or
implied in or by the forward-looking statements.

You should not place undue reliance on these forward-looking statements, which speak only as of the
date of this Annual Report. Forward-looking statements are subject to risks and uncertainties, many of
which are difficult to predict and generally beyond our control, that could cause actual results to differ
materially from those expressed, projected or implied in or by the forward-looking statements. These
risks and uncertainties, among others, include: our dependence on automotive and truck production, both
of which are highly cyclical; our reliance on major OEM customers; commodities availability and pricing;
supply disruptions; fluctuations in interest rates and foreign currency exchange rates; availability of
credit; our dependence on key management; our dependence on information systems; the uncertainty of
the global economic environment; the outcome of existing or any future legal proceedings, including
litigation with respect to various claims; future changes in laws and regulations, including, by way of
example, tariffs, in the countries in which we operate; and the other risks noted under Item 1A, “Risk
Factors,” and in other reports that we file with the Securities and Exchange Commission. We do not
undertake any obligation to update or announce publicly any updates to or revisions to any of the
forward-looking statements in this Form 10-K to reflect any change in our expectations or any change in
events, conditions, circumstances, or assumptions underlying the statements.

This section and the discussions contained in Item 1A, "Risk Factors," and in Item 7, subheading
"Critical Accounting Policies" in this report, are intended to provide meaningful cautionary statements for
purposes of the safe harbor provisions of the Act. This should not be construed as a complete list of all of
the economic, competitive, governmental, technological and other factors that could adversely affect our
expected consolidated financial position, results of operations or liquidity. Additional risks and
uncertainties, including without limitation those not currently known to us or that we currently believe are
immaterial, also may impair our business, operations, liquidity, financial condition and prospects.

Use of Non-GAAP Financial Measures

In addition to results presented in accordance with accounting principles generally accepted in the
United States of America (“GAAP”), this report includes non-GAAP financial measures. The Company
believes these non-GAAP financial measures provide additional information that is useful to investors in
3
understanding the underlying performance and trends of the Company. Readers should be aware that
non-GAAP financial measures have inherent limitations and should be cautious with respect to the use of
such measures. To compensate for these limitations, we use non-GAAP measures as comparative tools,
together with GAAP measures, to assist in the evaluation of our operating performance or financial
condition. We calculate these measures using the appropriate GAAP components in their entirety and
compute them in a manner intended to facilitate consistent period-to-period comparisons. The
Company's method of calculating these non-GAAP measures may differ from methods used by other
companies. These non-GAAP measures should not be considered in isolation or as a substitute for those
financial measures prepared in accordance with GAAP. Where non-GAAP financial measures are used,
the most directly comparable GAAP financial measure, as well as the reconciliation to the most directly
comparable GAAP financial measure, can be found in this report.

4
 PART I

ITEM 1. BUSINESS

BorgWarner Inc. (together with it Consolidated Subsidiaries, the “Company” or "BorgWarner") is a

Delaware corporation incorporated in 1987. We are a global product leader in clean and efficient
technology solutions for combustion, hybrid and electric vehicles. Our products help improve vehicle
performance, propulsion efficiency, stability and air quality. We manufacture and sell 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 OEMs of
commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles
(agricultural and construction machinery and marine applications). We also manufacture and sell our
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 every major automotive OEM in the world.

Proposed Acquisition of Delphi Technologies PLC

On January 28, 2020, the Company entered into a definitive agreement to acquire Delphi
Technologies PLC (“Delphi Technologies”) in an all-stock transaction valued at approximately $3.3 billion,
based on the closing price of BorgWarner stock on January 27, 2020. Refer to Note 23, “Subsequent
Event,” to the Consolidated Financial Statements in Item 8 of this report for more information. The
Company believes this acquisition will increase our power electronics products, capabilities and scale,
creating a leader in electrified propulsion systems that is well positioned to take advantage of future
propulsion migration, enhance our combustion, commercial vehicle and aftermarket businesses and
maintain flexibility across combustion, hybrid and electric propulsion, consistent with our evolution
towards the propulsion market of the future.

Financial Information About Reporting Segments

Refer to Note 21, “Reporting Segments and Related Information,” to the Consolidated Financial
Statements in Item 8 of this report for financial information about the Company's reporting segments.

Narrative Description of Reporting Segments

The Company reports its results under two reporting segments: Engine and Drivetrain. Net sales by
reporting segment for the years ended December 31, 2019, 2018 and 2017 are as follows:

Year Ended December 31,

(in millions) 2019 2018 2017
Engine $ 6,214 $ 6,447 $ 6,062
Drivetrain 4,015 4,140 3,790
Inter-segment eliminations (61) (57) (53)
Net sales $ 10,168 $ 10,530 $ 9,799

The sales information presented above does not include the sales by the Company's unconsolidated
joint ventures (see sub-heading “Joint Ventures”). Such unconsolidated sales totaled approximately $827
million, $947 million, and $844 million for the years ended December 31, 2019, 2018 and 2017,
respectively.

5
Engine

The Engine Segment develops and manufactures products to improve fuel economy, reduce
emissions and enhance performance. Increasingly stringent regulations of, and consumer demand for,
better fuel economy and emissions performance are driving demand for the Engine Segment's products
in combustion, hybrid and electric propulsion systems. The Engine Segment's technologies include:
turbochargers, eBoosters, timing systems, emissions systems, thermal systems, gasoline ignition
technology, cabin heaters, battery heaters and battery charging.

Turbochargers provide several benefits including increased power for a given engine size, improved
fuel economy and reduced emissions. The Engine Segment has benefited from the growth in
turbocharger demand around the world for both combustion and hybrid propulsion systems. The Engine
Segment provides turbochargers for light, commercial and off-highway applications for combustion and
hybrid vehicles in Europe, the Americas and Asia. The Engine Segment also designs and manufactures
turbocharger actuators using integrated electronics to precisely control turbocharger speed and pressure
ratio.

Sales of turbochargers for light vehicles represented approximately 28%, 27% and 28% of total net
sales for the years ended December 31, 2019, 2018 and 2017, respectively. The Engine Segment
currently supplies turbochargers to many OEMs including BMW, Daimler, Fiat Chrysler Automobiles
("FCA"), Ford, General Motors, Hyundai, Jaguar Land Rover, Renault, Volkswagen and Volvo. The
Engine Segment also supplies turbochargers to several commercial vehicle and off-highway OEMs
including Caterpillar, Daimler, Deutz, John Deere, MAN, Navistar International and Weichai.

The Engine Segment's timing systems enable precise control of air and exhaust flow through the
engine, improving fuel economy and emissions. The Engine Segment's timing systems products include
timing chain, variable cam timing (“VCT”), crankshaft and camshaft sprockets, tensioners, guides and
snubbers, HY-VO® front-wheel drive (“FWD”) transmission chain, four-wheel drive (“4WD”) chain for light
vehicles and hybrid power transmission chain. The Engine Segment is a leading manufacturer of timing
systems for OEMs around the world.

The Engine Segment's engine timing technology includes VCT with mid-position lock, which allows a
greater range of camshaft positioning thereby enabling better control over airflow and the opportunity to
improve fuel economy, reduce emissions and improve engine performance compared with conventional
VCT systems.

The Engine Segment's emissions systems products improve emissions performance and fuel
economy. Products include electric air pumps and exhaust gas recirculation ("EGR") modules, EGR
coolers, EGR valves, glow plugs and instant starting systems for combustion, both gasoline and diesel
propulsion systems, and hybrid vehicles.

The Engine Segment's thermal systems products are designed to optimize temperatures in
propulsion systems and vehicle cabins. Products include viscous fan drives that sense and respond to
multiple cooling requirements, polymer fans, coolant pumps, cabin heaters, battery heaters and battery
charging.

In 2017, the Company started exploring strategic options for its non-core emission product lines in
the Engine segment and launched an active program to locate a buyer and initiated other actions
required to complete the plan to sell and exit the non-core pipes and thermostat product lines. In
December 2018, the Company reached an agreement to sell its thermostat product lines, and the sale
was closed on April 1, 2019. Additionally, during the year, the Company entered into agreements to
transition its pipes product lines to multiple buyers. During the year, the assets and liabilities were

6
removed from the Consolidated Balance Sheet. Refer to Note 20, “Assets and Liabilities Held for Sale,”
to the Consolidated Financial Statements in Item 8 of this report for more information.

Drivetrain

The Drivetrain Segment develops and manufactures products to improve fuel economy, reduce
emissions and enhance performance in combustion, hybrid and electric vehicles. The Drivetrain
Segment’s technologies include: rotating electrical components, power electronics, clutching systems,
control modules and all-wheel drive systems. The core design features of its rotating electrical
components portfolio meet the demands of increasing vehicle electrification, improved fuel efficiency,
reduced weight, and lowered electrical and mechanical noise. The Drivetrain Segment's mechanical
products include friction, controls products for automatic transmissions and torque management products
for All-Wheel Drive ("AWD") vehicles, and its rotating electrical components include starter motors,
alternators and electric motors for hybrid and electric vehicles.

Friction and mechanical products for automatic transmissions include dual clutch modules, friction
clutch modules, friction and separator plates, transmission bands, torque converter clutches, one-way
clutches and torsional vibration dampers. Controls products for automatic transmissions feature electro-
hydraulic solenoids for standard and high pressure hydraulic systems, transmission solenoid modules
and dual clutch control modules. The Company's 50%-owned joint venture in Japan, NSK-Warner KK
("NSK-Warner"), is a leading producer of friction plates and one-way clutches in Japan and China.

The Drivetrain Segment has led the globalization of today's dual clutch transmission ("DCT")
technology for over 15 years. BorgWarner's award-winning DualTronic® technology enables a
conventional, manual gearbox to function as a fully automatic transmission by eliminating the interruption
in power flow that occurs when shifting a single clutch manual transmission. The result is a smooth
shifting automatic transmission with the fuel efficiency and driving experience of a manual gearbox.

The Drivetrain Segment's torque management products include rear-wheel drive (“RWD”)-AWD
transfer case systems, FWD-AWD coupling systems and cross-axle coupling systems. The Drivetrain
Segment's focus is on developing electronically-controlled torque management devices and systems that
will benefit fuel economy and vehicle dynamics.

Transfer cases are installed on RWD-based light trucks, SUVs, cross-over utility vehicles, and
passenger cars. A transfer case attaches to the transmission and distributes torque to the front and rear
axles improving vehicle traction and stability in dynamic driving conditions. There are many variants of
the Drivetrain Segment's transfer case technology in the market today, including Torque On-Demand
(TOD®), chain-driven, gear-driven, Pre-Emptive, Part-Time, 1-speed and 2-speed transfer cases. The
Drivetrain Segment's transfer cases are featured on Ford and Ram light-duty and heavy-duty trucks.

The Drivetrain Segment is involved in the AWD market for FWD-based vehicles with couplings that
use electronically-controlled clutches to distribute power to the rear wheels as traction is required. The
Drivetrain Segment's latest coupling innovation, the Centrifugal Electro-Hydraulic (“CEH”) Actuator, used
to engage the clutches in the coupling, produces outstanding vehicle stability and traction while
promoting better fuel economy with reduced weight. The CEH Actuator is found in the AWD couplings
featured in several current FWD-AWD vehicles.

In 2015, the Company acquired Remy International, Inc. (“Remy”), a global market leader in the
design, manufacture, remanufacture and distribution of rotating electrical components for light and
commercial vehicles, OEMs and the aftermarket. Remy's principal products include starter motors,
alternators and electric motors. The Company’s starter motors and alternators are used in gasoline,
diesel, natural gas and alternative fuel engines for light vehicle, commercial vehicle, and off-highway
applications. The product technology continues to evolve to meet the demands of increasing vehicle

7
electrical loads, improved fuel efficiency, reduced weight and lowered electrical and mechanical noise.
The Company’s electric motors are used in both light and commercial vehicles including off-highway
applications. These include both pure electric applications as well as hybrid applications, where the
electric motors are combined with traditional gasoline or diesel propulsion systems.

The Company sells new starters, alternators and hybrid electric motors to OEMs globally for factory
installation on new vehicles, and remanufactured and new starters and alternators to heavy duty
aftermarket customers outside of Europe and to OEMs for original equipment service. As a leading
remanufacturer, BorgWarner obtains used starters and alternators, commonly referred to as cores, then
disassembles, cleans, combines them with new subcomponents and reassembles them into saleable,
finished products, which are tested to meet OEM requirements.

In 2017, the Company acquired Sevcon, Inc. ("Sevcon"), a global provider of electrification
technologies, serving customers in the U.S., U.K., France, Germany, Italy, China and the Asia Pacific
region. Principal products include motor controllers, battery chargers, and uninterrupted power source
systems for electric and hybrid vehicles, industrial, medical and telecom applications. These products
complement BorgWarner’s power electronics capabilities utilized to provide electrified propulsion
solutions.

Joint Ventures

As of December 31, 2019, the Company had eight joint ventures in which it had a less-than-100%
ownership interest. Results from the six joint ventures in which the Company is the majority owner are
consolidated as part of the Company's results. Results from the two joint ventures in which the
Company's effective ownership interest is 50% or less, were reported by the Company using the equity
method of accounting. In 2019, the Company and Romeo Systems, Inc. formed a new joint venture,
BorgWarner Romeo Power LLC (the "Romeo JV"), in which the Company owns a 60% interest. The
Romeo JV focuses on producing battery module and pack technology.

8
 Management of the unconsolidated joint ventures is shared with the Company's respective joint
venture partners. Certain information concerning the Company's joint ventures is set forth below:
Percentage Location
Year owned by the of Fiscal 2019 net sales
Joint venture Products organized Company operation Joint venture partner (in millions) (a)
Unconsolidated:
NSK-Warner Transmission 1964 50% Japan/ NSK Ltd. $ 610
components China
Turbo Energy Private Limited (b) Turbochargers 1987 32.6% India Sundaram Finance Limited; $ 217
Brakes India Limited
Consolidated:
BorgWarner Transmission Transmission 1987 60% Korea NSK-Warner $ 238
Systems Korea Ltd. (c) components
Borg-Warner Shenglong Fans and fan drives 1999 70% China Ningbo Shenglong $ 79
(Ningbo) Co. Ltd. Automotive Powertrain
Systems Co., Ltd.
BorgWarner TorqTransfer Transfer cases 2000 80% China Beijing Hainachuan $ 243
Systems Beijing Co. Ltd. Automotive Parts Holding
Co., Ltd.
SeohanWarner Turbo Systems Turbochargers 2003 71% Korea Korea Flange Company $ 199
Ltd.
BorgWarner United Transmission Transmission 2009 66% China China Automobile $ 361
Systems Co. Ltd. components Development United
Investment Co., Ltd.
BorgWarner Romeo Power LLC Battery module and 2019 60% US Romeo Systems, Inc. $ —
pack technology

________________
(a) All sales figures are for the year ended December 31, 2019, except NSK-Warner and Turbo Energy Private Limited.
NSK-Warner’s sales are reported for the 12 months ended November 30, 2019. Turbo Energy Private Limited’s sales
are reported for the 12 months ended September 30, 2019.
(b) The Company made purchases from Turbo Energy Private Limited totaling $45 million, $42 million and $32 million for
the years ended December 31, 2019, 2018 and 2017, respectively. The Company made purchases from NSK-Warner
totaling $6 million, $10 million and $12 million for the years ended December 31, 2019, 2018 and 2017, respectively.
(c) BorgWarner Inc. owns 50% of NSK-Warner, which has a 40% interest in BorgWarner Transmission Systems Korea Ltd.
This gives the Company an additional indirect effective ownership percentage of 20%, resulting in a total effective
ownership interest of 80%.

Financial Information About Geographic Areas

Refer to Note 21, “Reporting Segments and Related Information,” to the Consolidated Financial
Statements in Item 8 of this report for financial information about geographic areas.

Product Lines and Customers

During the year ended December 31, 2019, approximately 83% of the Company's net sales were for
light-vehicle applications; approximately 9% were for commercial vehicle applications; approximately 4%
were for off-highway vehicle applications; and approximately 4% were to distributors of aftermarket
replacement parts.

The Company’s worldwide net sales to the following customers (including their subsidiaries) were
approximately as follows:
Year Ended December 31,
Customer 2019 2018 2017
Ford 15% 14% 15%
Volkswagen 11% 12% 13%

No other single customer accounted for more than 10% of our consolidated net sales in any of the
years presented.

9
 The Company's automotive products are generally sold directly to OEMs, substantially pursuant to
negotiated annual contracts, long-term supply agreements or terms and conditions as may be modified
by the parties. Deliveries are subject to periodic authorizations based upon OEM production schedules.
The Company typically ships its products directly from its plants to the OEMs.

Sales and Marketing

Each of the Company's businesses within its two reporting segments has its own sales function.
Account executives for each of our businesses are assigned to serve specific customers for one or more
businesses' products. Our account executives spend the majority of their time in direct contact with
customers' purchasing and engineering employees and are responsible for servicing existing business
and for identifying and obtaining new business. Because of their close relationship with customers,
account executives are able to identify and meet customers' needs based upon their knowledge of our
products' design and manufacturing capabilities. Upon securing a new order, account executives
participate in product launch team activities and serve as a key interface with customers. In addition,
sales and marketing employees of our Engine and Drivetrain reporting segments often work together to
explore cross-development opportunities where appropriate.

Seasonality

Our operations are directly related to the automotive industry. Consequently, our Engine and
Drivetrain segments may experience seasonal fluctuations to the extent automotive vehicle production
slows, such as in the summer months when many customer plants typically close for model year
changeovers or vacations. Historically, model changeovers or vacations have generally resulted in lower
sales volume in the Company's third quarter.

Research and Development

The Company conducts advanced Engine and Drivetrain research. This advanced engineering
function seeks to leverage know-how and expertise across product lines to create new Engine and
Drivetrain systems and modules that can be commercialized. This function oversees the Company's
investments in certain venture capital funds that provide seed money for start-up businesses developing
new technologies pertinent to the automotive industry and the Company's propulsion strategies.

In addition, each of the Company's businesses within its two reporting segments has its own research
and development (“R&D”) organization, including engineers and technicians, engaged in R&D activities
at facilities worldwide. The Company also operates testing facilities such as prototype, measurement and
calibration, life cycle testing and dynamometer laboratories.

By working closely with OEMs and anticipating their future product needs, the Company's R&D
personnel conceive, design, develop and manufacture new proprietary automotive components and
systems. R&D personnel also work to improve current products and production processes. The Company
believes its commitment to R&D will allow it to continue to obtain new orders from its OEM customers.

The Company's net R&D expenditures are included in selling, general and administrative expenses of
the Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D
expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are
recorded net of prototype costs based on customer contracts, typically either when the prototype is
shipped or when it is accepted by the customer. Customer reimbursements for engineering services are
recorded when performance obligations are satisfied in accordance with the contract. Financial risks and
rewards transfer upon shipment, acceptance of a prototype component by the customer or upon
completion of the performance obligation as stated in the respective customer agreement.

10
 Year Ended December 31,
(in millions) 2019 2018 2017
Gross R&D expenditures $ 498 $ 512 $ 473
Customer reimbursements (85) (72) (65)
Net R&D expenditures $ 413 $ 440 $ 408

Net R&D expenditures as a percentage of net sales were 4.1%, 4.2% and 4.2% for the years ended
December 31, 2019, 2018 and 2017, respectively. None of the Company's R&D related contracts
exceeded 5% of net R&D expenditures in any of the years presented.

Intellectual Property

The Company has approximately 6,430 active domestic and foreign patents and patent applications
pending or under preparation and receives royalties from licensing patent rights to others. While it
considers its patents on the whole to be important, the Company does not consider any single patent,
any group of related patents or any single license essential to its operations in the aggregate or to the
operations of any of the Company's business groups individually. The expiration of the patents
individually and in the aggregate is not expected to have a material effect on the Company's financial
position or future operating results. The Company owns numerous trademarks, some of which are
valuable, but none of which are essential to its business in the aggregate.

The Company owns the “BorgWarner” trade name and numerous BORGWARNER trademarks,
including without limitation "BORGWARNER" and "BORGWARNER and Bug Design", which are material
to the Company's business.

11
Competition

The Company's reporting segments compete worldwide with a number of other manufacturers and
distributors that produce and sell similar products. Many of these competitors are larger and have greater
resources than the Company. Technological innovation, application engineering development, quality,
price, delivery and program launch support are the primary methods of competition.

The Company’s major non-OEM competitors by product type follow:

Product Type: Engine Names of Competitors
Turbochargers: Cummins Turbo Technology IHI
Garrett Motion, Inc. Mitsubishi Heavy Industries (MHI)
BMTS Technology Vitesco Technologies

Emissions systems: Mahle T.RAD

Denso Pierburg
Bosch NGK
Eldor Eberspaecher

Timing systems: Denso Schaeffler Group

Iwis Tsubaki Group
Delphi Technologies

Thermal systems: Horton Usui

Mahle Xuelong

Product Type: Drivetrain Names of Competitors

Torque management systems: GKN Driveline JTEKT
Magna Powertrain

Rotating electrical components: Denso Valeo

SEG Automotive Vitesco Technologies

Mitsubishi Electric Bosch

Transmission systems: Bosch FCC

Dynax Schaeffler Group
Valeo Denso

In addition, a number of the Company's major OEM customers manufacture, for their own use and for
others, products that compete with the Company's products. Other current OEM customers could elect to
manufacture products to meet their own requirements or to compete with the Company. There is no
assurance that the Company's business will not be adversely affected by increased competition in the
markets in which it operates.

For many of its products, the Company's competitors include suppliers in parts of the world that enjoy
economic advantages such as lower labor costs, lower health care costs, lower tax rates and, in some
cases, export subsidies and/or raw materials subsidies. Also, see Item 1A, "Risk Factors."

12
Workforce

As of December 31, 2019, the Company had a salaried and hourly workforce of approximately
29,000 (as compared with approximately 30,000 at December 31, 2018), of which approximately 6,800
were in the U.S. Approximately 13% of the Company's U.S. workforce is unionized. The workforces at
certain international facilities are also unionized. The Company believes the present relations with our
workforce to be satisfactory.

We have one domestic collective bargaining agreement which is for one facility in New York, which
expires in September 2020.

Raw Materials

The Company uses a variety of raw materials in the production of its products including aluminum,
copper, nickel, plastic resins, steel and certain alloy elements. Manufacturing operations for each of the
Company's operating segments are dependent upon natural gas, fuel oil and electricity.

The Company uses a variety of tactics to limit the impact of supply shortages and inflationary
pressures. The Company's global procurement organization works to accelerate cost reductions,
purchases from lower cost regions, optimize the supply base, mitigate risk and collaborate on its buying
activities. In addition, the Company uses long-term contracts, cost sharing arrangements, design
changes, customer buy programs and limited financial instruments to help control costs. The Company
intends to use similar measures in 2020 and beyond. Refer to Note 11, “Financial Instruments,” to the
Consolidated Financial Statements in Item 8 of this report for information related to the Company's
hedging activities.

For 2020, the Company believes that its supplies of raw materials are adequate and available from
multiple sources to support its manufacturing requirements.

Available Information

Through its Internet website (www.borgwarner.com), the Company makes available, free of charge,
its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all
amendments to those reports, and other filings with the Securities and Exchange Commission as soon
as reasonably practicable after they are filed or furnished. The Company also makes the following
documents available on its Internet website: the Audit Committee Charter; the Compensation Committee
Charter; the Corporate Governance Committee Charter; the Company's Corporate Governance
Guidelines; the Company's Code of Ethical Conduct; and the Company's Code of Ethics for CEO and
Senior Financial Officers. You may also obtain a copy of any of the foregoing documents, free of charge,
if you submit a written request to Investor Relations, 3850 Hamlin Road, Auburn Hills, Michigan 48326.
The public may read and copy materials filed by the Company with the SEC at the SEC’s Public
Reference Room at 100 F Street, NE, Washington, DC, 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov.

13
Information About Executive Officers of the Company

Set forth below are the names, ages, positions and certain other information concerning the
executive officers of the Company as of February 13, 2020.

Name Age Position with the Company

Frederic B. Lissalde 52 President and Chief Executive Officer
Kevin A. Nowlan 48 Executive Vice President, Chief Financial Officer
Tonit M. Calaway 51 Executive Vice President, Chief Legal Officer and Secretary
Felecia Pryor 45 Executive Vice President, Chief Human Resources Officer
Craig D. Aaron 42 Vice President and Treasurer
Stefan Demmerle 55 Vice President
Brady D. Ericson 48 Vice President
Joseph F. Fadool 53 Vice President
Thomas J. McGill 53 Vice President and Controller
Volker Weng 49 Vice President
Hakan Yilmaz 41 Vice President, Chief Technology Officer

Mr. Lissalde has been President and Chief Executive Officer of the Company since August 2018. He
was Executive Vice President and Chief Operating Officer of the Company from January 2018 to July
2018. From May 2013 to December 2017, he was Vice President of the Company and President and
General Manager of BorgWarner Turbo Systems LLC, a subsidiary.

Mr. Nowlan has been Executive Vice President and Chief Financial Officer since April 2019. He was
Senior Vice President, President, Trailer, Components and Chief Financial Officer of Meritor, Inc., a
commercial truck and industrial supplier, from March 2018 to March 2019. He was Senior Vice President
and Chief Financial Officer of Meritor, Inc. from May 2013 to March 2018.

Ms. Calaway has been Executive Vice President and Chief Legal Officer and Secretary since August
2018. She was Chief Human Resources Officer of the Company from August 2016 to August 2018. She
was Vice President of Human Resources of Harley-Davidson Inc., a motorcycle manufacturer, and
President of The Harley-Davidson Foundation from February 2010 to July 2016. Since October 2019,
Ms. Calaway has served as a member of the Board of Directors of Astronics Corporation, an aerospace
and defense company.

Ms. Pryor has been Executive Vice President and Chief Human Resources Officer since April 2019.
She was Vice President of Human Resources of BorgWarner Ithaca LLC (d/b/a BorgWarner Morse
Systems), a subsidiary, from October 2018 to March 2019. She was Global Human Resources Director -
Global Personnel, Organization & Planning for Ford Motor Company, an automotive manufacturer, from
January 2018 to October 2018. She was Vice President of Human Resources for Ford Motor Company -
ASEAN Markets from August 2016 to January 2018. She was HR Director for Ford’s Research &
Engineer Center located in Nanjing, China from August 2014 to August 2016.

Mr. Aaron has been Vice President and Treasurer since March 2019. He was Vice President of
Finance of BorgWarner Ithaca LLC (d/b/a BorgWarner Morse Systems), a subsidiary, from December
2016 to February 2019. He was Director, Financial Reporting from August 2012 to November 2016.

Dr. Demmerle has been Vice President of the Company and President and General Manager of
BorgWarner PDS (USA) Inc. (formerly known as BorgWarner TorqTransfer Systems Inc.), a subsidiary,
since September 2012 and President and General Manager of BorgWarner PDS (Indiana) Inc. (formerly
known as Remy International, Inc.), a subsidiary, since December 2015.

14
 Mr. Ericson has been Vice President of the Company and President and General Manager of
BorgWarner Ithaca LLC (d/b/a BorgWarner Morse Systems), a subsidiary, since June 2019. He was the
Executive Vice President and Chief Strategy Officer of the Company from January 2017 until June 2019.
He was Vice President of the Company and President and General Manager of BorgWarner Emissions
Systems LLC, a subsidiary, from March 2014 until December 2016, during which time BorgWarner BERU
Systems GmbH was combined with BorgWarner Emissions Systems Inc.

Mr. Fadool has been Vice President of the Company and President and General Manager of
BorgWarner Emissions Systems LLC, BorgWarner Thermal Systems Inc. and Turbo Systems LLC,
subsidiaries of the Company, since October 2019. He was Vice President of the Company and President
and General Manager of Turbo Systems LLC, a subsidiary, from May 2019 to October 2019. He was Vice
President of the Company and President and General Manager of BorgWarner Emissions Systems LLC
and BorgWarner Thermal Systems Inc., both subsidiaries, from January 2017 to May 2019. He was Vice
President of the Company and President and General Manager of BorgWarner Ithaca LLC (d/b/a
BorgWarner Morse Systems), a subsidiary, from July 2015 until December 2016. From May 2012 to July
2015, he was the Vice President of the Company and President and General Manager of BorgWarner
Morse TEC Inc., a subsidiary.

Mr. McGill has been Vice President and Controller since April 2019. He was Vice President and
Interim Chief Financial Officer from January 2019 to April 2019. Additionally, he was the Treasurer of the
Company from May 2012 to March 2019.

Dr. Weng has been Vice President of the Company and President and General Manager of
BorgWarner Transmission Systems LLC since October 2019. He was President and General Manager
for BorgWarner Emissions Systems LLC and BorgWarner Thermal Systems Inc., both subsidiaries, from
May 2019 to September 2019. He was Vice President and General Manager, Europe for BorgWarner
Emissions Systems LLC and BorgWarner Thermal Systems Inc., both subsidiaries, from April 2017 to
April 2019. He was Vice President and General Manager, Asia for Turbo Systems LLC, a subsidiary,
from July 2015 to April 2017. He was General Manager, China for Turbo Systems LLC, a subsidiary,
from January 2013 to July 2015.

Mr. Yilmaz has been Vice President and Chief Technology Officer since January 2018. He was Vice
President, Global Head of Powertrain Systems and Advanced Engineering for Robert Bosch, a global
supplier of technology and services, from May 2016 to December 2017. He was Vice President,
Business Strategy and Strategic Marketing for Robert Bosch from January 2015 to April 2016. He was
Vice President of Global Program Management and Engineering, for Robert Bosch from January 2013 to
December 2014.

Item 1A. Risk Factors

The following risk factors and other information included in this Annual Report on Form 10-K should
be considered. The risks and uncertainties described below are not the only ones we face. Additional
risks and uncertainties not presently known to us or that we currently deem immaterial also may impact
our business operations. If any of the following risks occur, our business including its financial
performance, financial condition, operating results and cash flows could be adversely affected.

15
Risks related to our industry

Conditions in the automotive industry may adversely affect our business.

Our 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 to OEMs.

We face strong competition.

We compete worldwide with a number of other manufacturers and distributors that produce and sell
products similar to ours. Price, quality, delivery, technological innovation, engineering development and
program launch support are the primary elements of competition. Our competitors include vertically
integrated units of our major OEM customers, as well as a large number of independent domestic and
international suppliers. A number of our competitors are larger than we are, and some competitors have
greater financial and other resources than we do. Although OEMs have indicated that they will continue
to rely on outside suppliers, a number of our major OEM customers manufacture products for their own
uses that directly compete with our products. These OEMs could elect to manufacture such products for
their own uses in place of the products we currently supply. Our traditional OEM customers, faced with
intense international competition, have continued to expand their worldwide sourcing of components. As
a result, we have experienced competition from suppliers in other parts of the world that enjoy economic
advantages, such as lower labor costs, lower health care costs, lower tax rates and, in some cases,
export or raw materials subsidies. Increased competition could adversely affect our business. In addition,
any of our competitors may foresee the course of market development more accurately than we do,
develop products that are superior to our products, produce similar products at a cost that is lower than
our cost, or adapt more quickly than we do to new technologies or evolving customer requirements. As a
result, our products may not be able to compete successfully with our competitors' products, and we may
not be able to meet the growing demands of customers. These trends may adversely affect our sales as
well as the profit margins on our products.

If we do not respond appropriately, the evolution of the automotive industry could adversely
affect our business.

The automotive industry is increasingly focused on the development of hybrid and electric vehicles
and of advanced driver assistance technologies, with the goal of developing and introducing a
commercially-viable, fully-automated driving experience. There has also been an increase in consumer
preferences for mobility on demand services, such as car and ride sharing, as opposed to automobile
ownership, which may result in a long-term reduction in the number of vehicles per capita. In addition,
some industry participants are exploring transportation through alternatives to automobiles. These
evolving areas have also attracted increased competition from entrants outside the traditional automotive
industry. If we do not continue to innovate and develop, or acquire new and compelling products that
capitalize upon new technologies in response to OEM and consumer preferences, this could have an
adverse impact on our results of operations.

16
The increased adoption of gasoline and hybrid propulsion systems in Western Europe may
materially reduce the demand for our current products.

The industry mix shift away from diesel propulsion systems in Western Europe has resulted and is
expected to result in lower demand for current diesel components. This shift is expected to drive further
increased demand for gasoline and hybrid propulsion systems. Although we have developed and are
currently in production with products for gasoline and hybrid propulsion systems and industry penetration
rates for these products are expected to increase over the next several years, due to the high current
penetration rates of our key technologies on diesel propulsion systems, this industry mix shift could
adversely impact our near-term results of operations, financial condition, and cash flows.

Risks related to our business

We are under substantial pressure from OEMs to reduce the prices of our products.

There is substantial and continuing pressure on OEMs to reduce costs, including costs of products
we supply. OEM customers expect annual price reductions in our business. To maintain our profit
margins, we seek price reductions from our suppliers, improved production processes to increase
manufacturing efficiency, and streamlined product designs to reduce costs, and we attempt to develop
new products, the benefits of which support stable or increased prices. Our ability to pass through
increased raw material costs to our OEM customers is limited, with cost recovery often less than 100%
and often on a delayed basis. Inability to reduce costs in an amount equal to annual price reductions,
increases in raw material costs, and increases in employee wages and benefits could have an adverse
effect on our business.

We continue to face volatile costs of commodities used in the production of our products.

The Company uses a variety of commodities (including aluminum, copper, nickel, plastic resins, steel,
other raw materials and energy) and materials purchased in various forms such as castings, powder
metal, forgings, stampings and bar stock. Increasing commodity costs will have an impact on our results.
We have sought to alleviate the impact of increasing costs by including a material pass-through
provision in our customer contracts wherever possible and by selectively hedging certain commodity
exposures. Customers frequently challenge these contractual provisions and rarely pay the full cost of
any increases in the cost of materials. The discontinuation or lessening of our ability to pass through or
hedge increasing commodity costs could adversely affect our business.

From time to time, commodity prices may also fall rapidly. If this happens, suppliers may withdraw
capacity from the market until prices improve which may cause periodic supply interruptions. The same
may be true of our transportation carriers and energy providers. If these supply interruptions occur, it
could adversely affect our business.

Changes in U.S. administrative policy, including changes to existing trade agreements and any
resulting changes in international trade relations, may have an adverse effect on us.

The United States has implemented tariffs on imported steel and aluminum. The United States has
also implemented tariffs on items imported by us from China or other countries and may implement tariffs
on additional products and export controls on additional items. The impact of these tariffs has increased
the cost of raw materials and components we purchase and additional tariffs would likely result in
additional increases. The imposition of tariffs by the United States has resulted in retaliatory tariffs from a
number of countries, including China, which increase the cost of products we sell. A continuing trade war
could have a negative impact on the global market and a more significant adverse effect on our business.
The potential imposition of additional tariffs on Chinese imports and imports of automobiles, including

17
cars, SUVs, vans and light trucks, and automotive parts could increase our costs and could result in
lowering our gross margin on products sold.

We use important intellectual property in our business. If we are unable to protect our intellectual
property or if a third party makes assertions against us or our customers relating to intellectual
property rights, our business could be adversely affected.

We own important intellectual property, including patents, trademarks, copyrights, and trade secrets,
and are involved in numerous licensing arrangements. Our intellectual property plays an important role in
maintaining our competitive position in a number of the markets that we serve. Our competitors may
develop technologies that are similar or superior to our proprietary technologies or design around the
patents we own or license. Further, as we expand our operations in jurisdictions where the enforcement
of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies
increases, despite efforts we undertake to protect them. Our inability to protect or enforce our intellectual
property rights or claims that we are infringing intellectual property rights of others could adversely affect
our business and our competitive position.

We are subject to business continuity risks associated with increasing centralization of our
information technology (IT) systems.

To improve efficiency and reduce costs, we have regionally centralized the information systems that
support our business processes such as invoicing, payroll, and general management operations. If the
centralized systems are disrupted or disabled, key business processes could be interrupted, which could
adversely affect our business.

A failure of or disruption in our information technology infrastructure, including a disruption

related to cybersecurity, could adversely impact our business and operations.

We rely on the capacity, reliability and security of our IT systems and infrastructure. IT systems are
vulnerable to disruptions, including those resulting from natural disasters, cyber attacks or failures in
third-party-provided services. Disruptions and attacks on our IT systems pose a risk to the security of our
systems and our ability to protect our networks and the confidentiality, availability and integrity of
information and data and that of third parties, including our employees. Some cyber attacks depend on
human error or manipulation, including phishing attacks or schemes that use social engineering to gain
access to systems or carry out disbursement of funds or other frauds, which raise the risks from such
events and the costs associated with protecting against such attacks. Although we have implemented
security policies, processes, and layers of defense designed to help identify and protect against
intentional and unintentional misappropriation or corruption of our systems and information, and
disruptions of our operations, we have been, and likely will continue to be, subjected to such attacks or
disruptions. Future attacks or disruptions could potentially lead to the inappropriate disclosure of
confidential information, including our intellectual property, improper use of our systems and networks,
access to and manipulation and destruction of Company or third party data, production downtimes, lost
revenues, inappropriate disbursement of funds and both internal and external supply shortages. In
addition, we may be required to incur significant costs to protect against damage caused by such attacks
or disruptions in the future. These consequences could cause significant damage to our reputation, affect
our relationships with our customers and suppliers, lead to claims against the Company and ultimately
adversely affect our business.

18
Our business success depends on attracting and retaining qualified personnel.

Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled
and diverse management team and workforce worldwide. In particular, any unplanned turnover or
inability to attract and retain key employees and employees with technical and software capabilities in
numbers sufficient for our needs could adversely affect our business.

Our profitability and results of operations may be adversely affected by program launch
difficulties.

The launch of new business is a complex process, the success of which depends on a wide range of
factors, including the production readiness of our manufacturing facilities and manufacturing processes
and those of our suppliers, as well as factors related to tooling, equipment, employees, initial product
quality and other factors. Our failure to successfully launch new business, or our inability to accurately
estimate the cost to design, develop and launch new business, could have an adverse effect on our
profitability and results of operations.

To the extent we are not able to successfully launch new business, vehicle production at our
customers could be significantly delayed or shut down. Such situations could result in significant financial
penalties to us or a diversion of personnel and financial resources to improving launches rather than
investment in continuous process improvement or other growth initiatives, and could result in our
customers shifting work away from us to a competitor, all of which could result in loss of revenue, or loss
of market share and could have an adverse effect on our profitability and cash flows.

Part of our workforce is unionized which could subject us to work stoppages.

As of December 31, 2019, approximately 13% of our U.S. workforce was unionized. We have a
domestic collective bargaining agreement for one facility in New York, which expires in September 2020.
The workforce at certain of our international facilities is also unionized. A prolonged dispute with our
employees could have an adverse effect on our business.

Work stoppages, production shutdowns and similar events could significantly disrupt our
business.

Because the automotive industry relies heavily on just-in-time delivery of components during the
assembly and manufacture of vehicles, a work stoppage or production shutdown at one or more of our
manufacturing and assembly facilities could have adverse effects on our business. Similarly, if one or
more of our customers were to experience a work stoppage or production shutdown, that customer would
likely halt or limit purchases of our products, which could result in the shutdown of the related
manufacturing facilities. A significant disruption in the supply of a key component due to a work stoppage
or production shutdown at one of our suppliers or any other supplier could have the same consequences
and, accordingly, have an adverse effect on our financial results.

Changes in interest rates and asset returns could increase our pension funding obligations and
reduce our profitability.

We have unfunded obligations under certain of our defined benefit pension and other postretirement
benefit plans. The valuation of our future payment obligations under the plans and the related plan assets
is subject to significant adverse changes if the credit and capital markets cause interest rates and
projected rates of return to decline. Such declines could also require us to make significant additional
contributions to our pension plans in the future. Additionally, a material deterioration in the funded status
of the plans could significantly increase our pension expenses and reduce profitability in the future.

19
 We also sponsor post-employment medical benefit plans in the U.S. that are unfunded. If medical
costs continue to increase or actuarial assumptions are modified, this could have an adverse effect on
our business.

We are subject to extensive environmental regulations.

Our operations are subject to laws governing, among other things, emissions to air, discharges to
waters, and the generation, handling, storage, transportation, treatment and disposal of waste and other
materials. The operation of automotive parts manufacturing plants entails risks in these areas, and we
cannot assure that we will not incur material costs or liabilities as a result. Through various acquisitions
over the years, we have acquired a number of manufacturing facilities, and we cannot assure that we will
not incur material costs and liabilities relating to activities that predate our ownership. In addition,
potentially significant expenditures could be required to comply with evolving interpretations of existing
environmental, health and safety laws and regulations or any new such laws and regulations (including
concerns about global climate change and its impact) that may be adopted in the future. Costs
associated with failure to comply with such laws and regulations could have an adverse effect on our
business.

We have liabilities related to environmental, product warranties, litigation and other claims.

We and certain of our current and former direct and indirect corporate predecessors, subsidiaries and
divisions have been identified by the United States Environmental Protection Agency and certain state
environmental agencies and private parties as potentially responsible parties at various hazardous waste
disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act and
equivalent state laws, and, as such, may be liable for the cost of clean-up and other remedial activities at
such sites. While responsibility for clean-up and other remedial activities at such sites is typically shared
among potentially responsible parties based on an allocation formula, we could have greater liability
under applicable statutes. Refer to Note 15, "Contingencies," to the Consolidated Financial Statements in
item 8 of this report for further discussion.

We provide product warranties to our customers for some of our products. Under these product
warranties, we may be required to bear costs and expenses for the repair or replacement of these
products. As suppliers become more integrally involved in the vehicle design process and assume more
of the vehicle assembly functions, auto manufacturers are increasingly looking to their suppliers for
contribution when faced with recalls and product warranty claims. A recall claim brought against us, or a
product warranty claim brought against us, could adversely impact our results of operations. In addition,
a recall claim could require us to review our entire product portfolio to assess whether similar issues are
present in other product lines, which could result in significant disruption to our business and could have
an adverse impact on our results of operations. We cannot assure that costs and expenses associated
with these product warranties will not be material or that those costs will not exceed any amounts
accrued for such product warranties in our financial statements.

We are currently, and may in the future become, subject to legal proceedings and commercial or
contractual disputes. These claims typically arise in the normal course of business and may include, but
not be limited to, commercial or contractual disputes with our customers and suppliers, intellectual
property matters, personal injury, product liability, environmental and employment claims. There is a
possibility that such claims may have an adverse impact on our business that is greater than we
anticipate. While the Company maintains insurance for certain risks, the amount of insurance may not be
adequate to cover all insured claims and liabilities. The incurring of significant liabilities for which there is
no, or insufficient, insurance coverage could adversely affect our business.

20
Compliance with and changes in laws could be costly and could affect operating results.

We have operations in multiple countries that can be impacted by expected and unexpected changes
in the legal and business environments in which we operate. Compliance-related issues in certain
countries associated with laws such as the Foreign Corrupt Practices Act and other anti-corruption laws
could adversely affect our business. We have internal policies and procedures relating to compliance with
such laws; however, there is a risk that such policies and procedures will not always protect us from the
improper acts of employees, agents, business partners, joint venture partners, or representatives,
particularly in the case of recently-acquired operations that may not have significant training in applicable
compliance policies and procedures. Violations of these laws, which are complex, may result in criminal
penalties, sanctions and/or fines that could have an adverse effect on our business, financial condition,
and results of operations and reputation.

Changes that could impact the legal environment include new legislation, new regulations, new
policies, investigations and legal proceedings, and new interpretations of existing legal rules and
regulations, in particular, changes in import and export control laws or exchange control laws, additional
restrictions on doing business in countries subject to sanctions, and changes in laws in countries where
we operate or intend to operate.

Changes in tax laws or tax rates taken by taxing authorities and tax audits could adversely affect
our business.

Changes in tax laws or tax rates, the resolution of tax assessments or audits by various tax
authorities, and the inability to fully utilize our tax loss carryforwards and tax credits could adversely
affect our operating results. In addition, we may periodically restructure our legal entity organization.

If taxing authorities were to disagree with our tax positions in connection with any such restructurings,
our effective tax rate could be materially affected. Our tax filings for various periods are subject to audit
by the tax authorities in most jurisdictions where we conduct business. We have received tax
assessments from various taxing authorities and are currently at varying stages of appeals and/or
litigation regarding these matters. These audits may result in assessment of additional taxes that are
resolved with the authorities or through the courts. We believe these assessments may occasionally be
based on erroneous and even arbitrary interpretations of local tax law. Resolution of any tax matters
involves uncertainties, and there are no assurances that the outcomes will be favorable.

Our growth strategy may prove unsuccessful.

We have a stated goal of increasing sales and operating income at a rate greater than growth, if any,
in global vehicle production by increasing content per vehicle with innovative new components and
through select acquisitions.

We may not meet our goal due to many factors, including any of the risks identified in the paragraph
that follows, failure to develop new products that our customers will purchase, technology changes that
could render our products obsolete, and a reversal of the trend of supplying systems (which allows us to
increase content per vehicle) instead of components, among other things.

We expect to continue to pursue business ventures, acquisitions, and strategic alliances that
leverage our technology capabilities, enhance our customer base, geographic representation, and scale
to complement our current businesses, and we regularly evaluate potential growth opportunities, some of
which could be material. While we believe that such transactions are an integral part of our long-term
strategy, there are risks and uncertainties related to these activities. Assessing a potential growth
opportunity involves extensive due diligence. However, the amount of information we can obtain about a
potential growth opportunity can be limited, and we can give no assurance that past or future business

21
ventures, acquisitions, and strategic alliances will positively affect our financial performance or will
perform as planned. We may not be able to successfully assimilate or integrate companies that we have
acquired or acquire in the future, including their personnel, financial systems, distribution, operations and
general operating procedures. The integration of companies that we have acquired or will acquire in the
future may be more difficult, time consuming or costly than expected. Revenues following the acquisition
of a company may be lower than expected, customer loss and business disruption (including, without
limitation, difficulties in maintaining relationships with employees, customers, or suppliers) may be
greater than expected, and we may not be able to retain key employees at the acquired company. We
may also encounter challenges in achieving appropriate internal control over financial reporting in
connection with the integration of an acquired company. If we fail to assimilate or integrate acquired
companies successfully, our business, reputation and operating results could be adversely affected.
Likewise, our failure to integrate and manage acquired companies or realize certain synergies
successfully may lead to future impairment of any associated goodwill and intangible asset balances.
Failure to execute our growth strategy could adversely affect our business.

Our proposed acquisition of Delphi Technologies is subject to conditions, as well as other

uncertainties, and there can be no assurances as to whether or when it may be completed.
Failure to complete the proposed transaction could adversely affect our business.

The completion of our proposed acquisition of Delphi Technologies is subject to a number of

conditions, including, among other things, the approval by Delphi Technologies stockholders and the
receipt of certain regulatory approvals, which make the completion and timing of the completion of the
proposed transaction uncertain. If the proposed transaction is not completed, our business may be
adversely affected and, without realizing any of the benefits of having completed the proposed
transaction, we will be subject to a number of risks, including the following:

• a potential decline to the market price of our common stock;

• an inability to find another acquisition, with comparable electronic components, systems and
technical capabilities;
• a loss of time and resources that our management redirected to matters relating to the proposed
transaction that could otherwise have been devoted to pursuing other beneficial opportunities; and
• potential negative reactions from the financial markets or from our customers, suppliers, or
employees.

In addition, we could be subject to litigation related to any failure to complete the proposed
transaction. The materialization of any of these risks could adversely impact our ongoing businesses.
Similarly, delays in the completion of the proposed transaction could, among other things, result in
additional transaction costs, loss of revenue or personnel, or other negative effects associated with
uncertainty about completion of the proposed transaction.

We are subject to risks related to our international operations.

We have manufacturing and technical facilities in many regions including Europe, Asia, and the
Americas. For 2019, approximately 77% of our consolidated net sales were outside the U.S.
Consequently, our results could be affected by changes in trade, monetary and fiscal policies, trade
restrictions or prohibitions, import or other charges or taxes, fluctuations in foreign currency exchange
rates, limitations on the repatriation of funds, changing economic conditions, unreliable intellectual
property protection and legal systems, insufficient infrastructures, social unrest, political instability and
disputes, international terrorism and other factors that may be discrete to a particular country or
geography. Compliance with multiple and potentially conflicting laws and regulations of various countries
is challenging, burdensome and expensive.

22
 The financial statements of foreign subsidiaries are translated to U.S. dollars using the period-end
exchange rate for assets and liabilities and an average exchange rate for each period for revenues,
expenses and capital expenditures. The local currency is typically the functional currency for the
Company's foreign subsidiaries. Significant foreign currency fluctuations and the associated translation of
those foreign currencies could adversely affect our business. Additionally, significant changes in currency
exchange rates, particularly the Euro, Korean Won and Chinese Renminbi, could cause fluctuations in
the reported results of our businesses’ operations that could negatively affect our results of operations.

Because we are a U.S. holding company, one significant source of our funds is distributions from our
non-U.S. subsidiaries. Certain countries in which we operate have adopted or could institute currency
exchange controls that limit or prohibit our local subsidiaries' ability to convert local currency into U.S.
dollars or to make payments outside the country. This could subject us to the risks of local currency
devaluation and business disruption.

Our business in China is subject to aggressive competition and is sensitive to economic,

political, and market conditions.

Maintaining a strong position in the Chinese market is a key component of our global growth strategy.
The automotive supply market in China is highly competitive, with competition from many of the largest
global manufacturers and numerous smaller domestic manufacturers. As the Chinese market evolves,
we anticipate that market participants will act aggressively to increase or maintain their market share.
Increased competition may result in price reductions, reduced margins and our inability to gain or hold
market share. In addition, our business in China is sensitive to economic, political, social and market
conditions that drive sales volumes in China. In fact, recently, economic growth has slowed in China. If
we are unable to maintain our position in the Chinese market or if vehicle sales in China decrease, our
business and financial results could be adversely affected.

A downgrade in the ratings of our debt could restrict our ability to access the debt capital
markets.

Changes in the ratings that rating agencies assign to our debt may ultimately impact our access to
the debt capital markets and the costs we incur to borrow funds. If ratings for our debt fall below
investment grade, our access to the debt capital markets could become restricted and our cost of
borrowing or the interest rate for any subsequently issued debt would likely increase.

Our revolving credit agreement includes an increase in interest rates if the ratings for our debt are
downgraded. The interest costs on our revolving credit agreement are based on a rating grid agreed to
in our credit agreement. Further, an increase in the level of our indebtedness and related interest costs
may increase our vulnerability to adverse general economic and industry conditions and may affect our
ability to obtain additional financing.

We could incur additional restructuring charges as we continue to execute actions in an effort to

improve future profitability and competitiveness and to optimize our product portfolio and may
not achieve the anticipated savings and benefits from these actions.

We have initiated and may continue to initiate restructuring actions designed to improve the
competitiveness of our business and sustain our margin profile, optimize our product portfolio or create
an optimal legal entity structure. We may not realize anticipated savings or benefits from past or future
actions in full or in part or within the time periods we expect. We are also subject to the risks of labor
unrest, negative publicity and business disruption in connection with our actions. Failure to realize
anticipated savings or benefits from our actions could have an adverse effect on our business.

23
Risks related to our customers

We rely on sales to major customers.

We rely on sales to OEMs around the world of varying credit quality and manufacturing demands.
Supply to several of these customers requires significant investment by the Company. We base our
growth projections, in part, on commitments made by our customers. These commitments generally
renew yearly during a program life cycle. Among other things, the level of production orders we receive is
dependent on the ability of our OEM customers to design and sell products that consumers desire to
purchase. If actual production orders from our customers do not approximate such commitments due to a
variety of factors including non-renewal of purchase orders, a customer's financial hardship or other
unforeseen reasons, it could adversely affect our business.

Some of our sales are concentrated. Our worldwide sales in 2019 to Ford and Volkswagen
constituted approximately 15% and 11% of our 2019 consolidated net sales, respectively.

We are sensitive to the effects of our major customers’ labor relations.

All three of our primary North American customers, Ford, Fiat Chrysler Automobiles, and General
Motors, have major union contracts with the United Automobile, Aerospace and Agricultural Implement
Workers of America. Because of domestic OEMs' dependence on a single union, we are affected by
labor difficulties and work stoppages at OEMs' facilities. Similarly, a majority of our global customers'
operations outside of North America are also represented by various unions. Any extended work
stoppage at one or more of our customers could have an adverse effect on our business.

Risks related to our suppliers

We could be adversely affected by supply shortages of components from our suppliers.

In an effort to manage and reduce the cost of purchased goods and services, we have been
rationalizing our supply base. As a result, we are dependent on fewer sources of supply for certain
components used in the manufacture of our products. We select suppliers based on total value (including
total landed price, quality, delivery, and technology), taking into consideration their production capacities
and financial condition. We expect that they will deliver to our stated written expectations.

However, there can be no assurance that capacity limitations, industry shortages, labor or social
unrest, weather emergencies, commercial disputes, government actions, riots, wars, sabotage, cyber
attacks, non-conforming parts, acts of terrorism, “Acts of God," or other problems that our suppliers
experience will not result in occasional shortages or delays in their supply of components to us. If we
were to experience a significant or prolonged shortage of critical components from any of our suppliers
and could not procure the components from other sources, we would be unable to meet the production
schedules for some of our key products and could miss customer delivery expectations. In addition, with
fewer sources of supply for certain components, each supplier may perceive that it has greater leverage
and, therefore, some ability to seek higher prices from us at a time that we face substantial pressure from
OEMs to reduce the prices of our products. This could adversely affect our customer relations and
business.

24
Suppliers’ economic distress could result in the disruption of our operations and could adversely
affect our business.

Rapidly changing industry conditions such as volatile production volumes; our need to seek price
reductions from our suppliers as a result of the substantial pressure we face from OEMs to reduce the
prices of our products; credit tightness; changes in foreign currencies; raw material, commodity, tariffs,
transportation, and energy price escalation; drastic changes in consumer preferences; and other factors
could adversely affect our supply chain, and sometimes with little advance notice. These conditions could
also result in increased commercial disputes and supply interruption risks. In certain instances, it would
be difficult and expensive for us to change suppliers that are critical to our business. On occasion, we
must provide financial support to distressed suppliers or take other measures to protect our supply lines.
We cannot predict with certainty the potential adverse effects these costs might have on our business.

We are subject to possible insolvency of financial counterparties.

We engage in numerous financial transactions and contracts including insurance policies, letters of
credit, credit line agreements, financial derivatives, and investment management agreements involving
various counterparties. We are subject to the risk that one or more of these counterparties may become
insolvent and therefore be unable to meet its obligations under such contracts.

Other risks

A variety of other factors could adversely affect our business.

Any of the following could materially and adversely affect our business: the loss of or changes in
supply contracts or sourcing strategies of our major customers or suppliers; start-up expenses
associated with new vehicle programs or delays or cancellation of such programs; low levels of utilization
of our manufacturing facilities, which can be dependent on a single product line or customer; inability to
recover engineering and tooling costs; market and financial consequences of recalls that may be
required on products we supplied; delays or difficulties in new product development; the possible
introduction of similar or superior technologies by others; global excess capacity and vehicle platform
proliferation; and the impact of fire, flood, or other natural disasters including pandemics and quarantines.

Item 1B. Unresolved Staff Comments

The Company has received no written comments regarding its periodic or current reports from the
staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end
of its 2019 fiscal year that remain unresolved.

25
Item 2. Properties

As of December 31, 2019, the Company had 67 manufacturing, assembly, and technical
locations worldwide. The Company's worldwide headquarters are located in a leased facility in Auburn
Hills, Michigan. In general, the Company believes its facilities to be suitable and adequate to meet its
current and reasonably anticipated needs.

The following is additional information concerning principal manufacturing, assembly, and technical
facilities operated by the Company, its subsidiaries, and affiliates.

ENGINE(a)
Americas Europe Asia
Asheville, North Carolina Arcore, Italy Aoyama, Japan
Auburn Hills, Michigan (d) Bradford, England (UK) Chennai, India (b)
Cadillac, Michigan Kirchheimbolanden, Germany Chungju-City, South Korea
Dixon, Illinois Ludwigsburg, Germany Taicang, China (b)
El Salto Jalisco, Mexico Lugo, Italy (b) Kakkalur, India
Fletcher, North Carolina Markdorf, Germany Manesar, India
Itatiba, Brazil Muggendorf, Germany Nabari City, Japan
Ithaca, New York Oberboihingen, Germany Ningbo, China (b) (e)
Marshall, Michigan Oroszlany, Hungary (d) Pune, India
Ramos, Mexico Rzeszow, Poland (d) Pyongtaek, South Korea (b) (c)
Tralee, Ireland Rayong, Thailand (d)
Viana de Castelo, Portugal
Vigo, Spain
(a)
DRIVETRAIN
Americas Europe Asia
Anderson, Indiana (b) Arnstadt, Germany Beijing, China (b)
Bellwood, Illinois Gateshead, England (UK) Dae-Gu, South Korea (b)
Brusque, Brazil (b) Heidelberg, Germany Dalian, China (b)
Frankfort, Illinois Ketsch, Germany Eumsung, South Korea
Irapuato, Mexico Landskrona, Sweden (b) Fukuroi City, Japan
Laredo, Texas (b) Tulle, France Changnyeong, South Korea
Livonia, Michigan Wrexham, Wales (UK) Ochang, South Korea (b)
Melrose Park, Illinois (b) Shanghai, China (b)
Noblesville, Indiana (b) Tianjin, China (b)
San Luis Potosi, Mexico (b) Wuhan, China (b)
Seneca, South Carolina
Water Valley, Mississippi
Waterloo, Ontario, Canada
________________
(a) The table excludes joint ventures owned less than 50% and administrative offices.
(b) Indicates leased land rights or a leased facility.
(c) City has 2 locations: a wholly owned subsidiary and a joint venture.
(d) Location serves both segments.
(e) City has 3 locations: 2 wholly owned subsidiaries and a joint venture

26
Item 3. Legal Proceedings

The Company is subject to a number of claims and judicial and administrative proceedings (some of
which involve substantial amounts) arising out of the Company’s business or relating to matters for which
the Company may have a contractual indemnity obligation. See Note 15, "Contingencies," to the
Consolidated Financial Statements in Item 8 of this report for a discussion of environmental, product
liability and other litigation, which is incorporated herein by reference.

On July 31, 2018, the Division of Enforcement of the SEC informed the Company that it is conducting
an investigation related to the Company's accounting for asbestos-related claims not yet asserted. The
Company is fully cooperating with the SEC in connection with its investigation.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities

The Company's common stock is listed for trading on the New York Stock Exchange under the
symbol BWA. As of February 7, 2020, there were 1,549 holders of record of Common Stock.

While the Company currently expects that quarterly cash dividends will continue to be paid in the
future at levels comparable to recent historical levels, the dividend policy is subject to review and change
at the discretion of the Board of Directors.

27
 The line graph below compares the cumulative total shareholder return on our Common Stock with
the cumulative total return of companies on the Standard & Poor's (S&P's) 500 Stock Index, and
companies within Standard Industrial Code (“SIC”) 3714 - Motor Vehicle Parts.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among BorgWarner Inc., the S&P 500 Index, and SIC 374 Motor Vehicle Parts

___________
*$100 invested on 12/31/2014 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
Copyright© 2020 S&P, a division of S&P Global. All rights reserved.

BWA and S&P 500 data are from Capital IQ; SIC Code Index data is from Research Data Group
December 31,
2014 2015 2016 2017 2018 2019
BorgWarner Inc.(1) $ 100.00 $ 79.48 $ 73.65 $ 96.64 $ 66.71 $ 84.83
S&P 500(2) 100.00 101.38 113.51 138.29 132.23 173.86
SIC Code Index(3) 100.00 102.17 116.88 155.78 128.11 173.86
________________
(1) BorgWarner Inc.
(2) S&P 500 — Standard & Poor’s 500 Total Return Index
(3) Standard Industrial Code (“SIC”) 3714-Motor Vehicle Parts

28
Purchase of Equity Securities

On November 13, 2019, the Company's Board of Directors increased the cumulative authorization for
the purchase of the Company's common stock up to 89.6 million shares in the aggregate. As of
December 31, 2019, the Company had repurchased 75.4 million shares in the aggregate under the
common stock repurchase program. All shares purchased under this authorization have been and will
continue to be repurchased in the open market at prevailing prices and at times and in amounts to be
determined by management as market conditions and the Company's capital position warrant. The
Company may use Rule 10b5-1 and 10b-18 plans to facilitate share repurchases. Repurchased shares
will be deemed common stock held in treasury and may subsequently be reissued.

Employee transactions include restricted stock withheld to offset statutory minimum tax withholding
that occurs upon vesting of restricted stock. The BorgWarner Inc. 2014 Stock Incentive Plan, as
amended and the BorgWarner Inc. 2018 Stock Incentive Plan provide that the withholding obligations be
settled by the Company retaining stock that is part of the award. Withheld shares will be deemed
common stock held in treasury and may subsequently be reissued for general corporate purposes.

The following table provides information about the Company's purchases of its equity securities that
are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") during the quarter ended December 31, 2019:
Issuer Purchases of Equity Securities
Total number of shares Maximum number of
purchased as part of shares that may yet be
Total number of Average price per publicly announced purchased under the
Period shares purchased share plans or programs plans or programs
Month Ended October 31, 2019
Common Stock Repurchase Program — $ — — 4,241,311
Employee transactions 4,858 $ 40.31 —
Month Ended November 30, 2019
Common Stock Repurchase Program — $ — — 14,241,311
Employee transactions 623 $ 37.59 —
Month Ended December 31, 2019
Common Stock Repurchase Program — $ — — 14,241,311
Employee transactions — $ — —

Equity Compensation Plan Information

As of December 31, 2019, the number of shares of options, restricted common stock, warrants and
rights outstanding under our equity compensation plans, the weighted average exercise price of
outstanding options, restricted common stock, warrants and rights and the number of securities
remaining available for issuance were as follows:
Number of securities remaining
Number of securities to be issued Weighted average exercise available for future issuance
upon exercise of outstanding price of outstanding options, under equity compensation
options, restricted common stock, restricted common stock, plans (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan category (a) (b) (c)
Equity compensation plans approved
by security holders 1,663,812 $ 44.26 5,984,977
Equity compensation plans not
approved by security holders — $ — —
Total 1,663,812 44.26 5,984,977

29
Item 6. Selected Financial Data

Year Ended December 31,

(in millions) 2019 2018 2017 2016 2015
Operating results
Net sales $ 10,168 $ 10,530 $ 9,799 $ 9,071 $ 8,023
Operating income (a) $ 1,303 $ 1,190 $ 1,072 $ 973 $ 888
(a)
Net earnings attributable to BorgWarner Inc. $ 746 $ 931 $ 440 $ 595 $ 577

Earnings per share — basic $ 3.63 $ 4.47 $ 2.09 $ 2.78 $ 2.57

Earnings per share — diluted $ 3.61 $ 4.44 $ 2.08 $ 2.76 $ 2.56

Net R&D expenditures $ 413 $ 440 $ 408 $ 343 $ 307

Capital expenditures, including tooling outlays $ 481 $ 546 $ 560 $ 501 $ 577
Depreciation and amortization $ 439 $ 431 $ 408 $ 391 $ 320

Number of employees 29,000 30,000 29,000 27,000 30,000

Financial position
Cash and cash equivalents $ 832 $ 739 $ 545 $ 444 $ 578
Total assets $ 9,702 $ 10,095 $ 9,788 $ 8,835 $ 9,211
Total debt $ 1,960 $ 2,114 $ 2,188 $ 2,220 $ 2,550

Common share information

Cash dividend declared and paid per share $ 0.68 $ 0.68 $ 0.59 $ 0.53 $ 0.52

Weighted average shares outstanding

Basic 205.7 208.2 210.4 214.4 224.4
Diluted 206.8 209.5 211.5 215.3 225.6
________________
(a) Refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for discussion
of non-comparable items impacting the years ended December 31, 2019 and 2018.

30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) is a global product leader in clean
and efficient technology solutions for combustion, hybrid and electric vehicles. Our products help
improve vehicle performance, propulsion efficiency, stability and air quality. These products are
manufactured and sold 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). We also
manufacture and sell our 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 every major
automotive OEM in the world.

The Company's products fall into two reporting segments: Engine and Drivetrain. The Engine
segment's products include turbochargers, timing systems, emissions systems and thermal systems. The
Drivetrain segment's products include transmission systems, torque transfer systems and rotating
electrical components.

Proposed Acquisition of Delphi Technologies PLC

On January 28, 2020, the Company entered into a definitive agreement to acquire Delphi
Technologies PLC (“Delphi Technologies”) in an all-stock transaction valued at approximately $3.3 billion,
based on the closing price of BorgWarner stock on January 27, 2020. Refer to Note 23, “Subsequent
Event,” to the Consolidated Financial Statements in Item 8 of this report for more information. The
Company expects to pay fees, costs and expenses associated with the transaction with available cash.
The following discussion and analysis of financial condition and results of operations does not address
matters associated with the anticipated acquisition.

31
RESULTS OF OPERATIONS

A detailed comparison of the Company’s 2017 operating results to its 2018 operating results can be
found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations
section in the Company’s 2018 Annual Report on Form 10-K filed February 19, 2019.

A summary of our operating results for the years ended December 31, 2019 and 2018 is as follows:
Year Ended December 31,
(in millions, except per share data) 2019 2018
Net sales $ 10,168 $ 10,530
Cost of sales 8,067 8,300
Gross profit 2,101 2,230
Selling, general and administrative expenses 873 946
Other (income) expense, net (75) 94
Operating income 1,303 1,190
Equity in affiliates’ earnings, net of tax (32) (49)
Interest income (12) (6)
Interest expense 55 59
Other postretirement expense (income) 27 (10)
Earnings before income taxes and noncontrolling interest 1,265 1,196
Provision for income taxes 468 211
Net earnings 797 985
Net earnings attributable to the noncontrolling interest, net of tax 51 54
Net earnings attributable to BorgWarner Inc. $ 746 $ 931
Earnings per share — diluted $ 3.61 $ 4.44

32
Non-comparable items impacting the Company's earnings per diluted share and net earnings

The Company's earnings per diluted share were $3.61 and $4.44 for the years ended December 31,
2019 and 2018, respectively. The non-comparable items presented below are calculated after tax using
the corresponding effective tax rate and the weighted average number of diluted shares for each of the
years then ended. The Company believes the following table is useful in highlighting non-comparable
items that impacted its earnings per diluted share:
Year Ended December 31,
Non-comparable items: 2019 2018
Restructuring expense $ (0.26) $ (0.24)
Pension settlement loss (0.10) —
Unfavorable arbitration loss (0.07) —
Merger, acquisition and divestiture expense (0.05) (0.03)
Asset impairment and loss on divestiture (0.03) (0.09)
Officer stock awards modification (0.01) (0.04)
Gain on derecognition of subsidiary 0.02 —
Asbestos-related adjustments — (0.08)
Gain on sale of building — 0.07
Gain on commercial settlement — 0.01
Tax reform adjustments — 0.06
Tax adjustments (0.02) 0.30
Total impact of non-comparable items per share — diluted: $ (0.52) $ (0.04)

A summary of non-comparable items impacting the Company’s net earnings for the years ended
December 31, 2019 and 2018 is as follows:

Year ended December 31, 2019:

• The Company recorded restructuring expense of $72 million primarily related to actions to
reduce structural costs. Refer to Note 16, "Restructuring," to the Consolidated Financial
Statements in Item 8 of this report for more information. Over the course of the next few years,
the Company plans to take additional actions to reduce existing structural costs. These actions
are expected to result in primarily cash restructuring costs in the $275 million to $300 million
range through the end of 2023. The resulting annual cost savings are expected to be in the
range of approximately $90 million to $100 million by 2023. The Company plans to utilize these
savings to sustain the Company’s strong operating margin profile and long-term cost
competitiveness.
• During the year ended December 31, 2019, the Company settled approximately $50 million of its
U.S. pension projected benefit obligation by liquidating approximately $50 million in plan assets
through a lump-sum pension de-risking disbursement made to an insurance company. Pursuant
to this agreement, the insurance company unconditionally and irrevocably guarantees all future
payments to certain participants that were receiving payments from the U.S. pension plan. The
insurance company assumes all investment risk associated with the assets that were delivered
as part of this transaction. Additionally, during 2019, the Company discharged certain U.S.
pension plan obligations by making lump-sum payments of $15 million to former employees of
the Company. As a result, the Company settled $65 million of projected pension obligation by
liquidating an equivalent amount of pension plan assets and recorded a non-cash settlement
loss of $27 million related to the accelerated recognition of unamortized losses.
• During the year ended December 31, 2019, the Company recorded $14 million of expenses
related to the receipt of a final unfavorable arbitration decision associated with the resolution of a
matter related to a previous acquisition.

33
 • During the year ended December 31, 2019, the Company recorded $11 million of expenses,
primarily professional fees, related to the Company's strategic acquisition and divestiture
activities, including the transfer of Morse TEC, the anticipated acquisition of Delphi Technologies,
and the 20% equity interest in Romeo Systems, Inc. and the divestiture activities for the non-core
pipes and thermostat product lines.
• During the year ended December 31, 2019, the Company recorded an additional loss on sale of
$7 million to account for the cash proceeds and finalization of the purchase price adjustments
related to the sale of the non-core pipes and thermostat product lines. Refer to Note 20, "Assets
and Liabilities Held for Sale," to the Consolidated Financial Statements in Item 8 of this report for
more information.
• During the year ended December 31, 2019, the Company recorded a pre-tax gain on the
derecognition of BorgWarner Morse TEC LLC ("Morse TEC") of $177 million and removed the
asbestos obligations and related insurance assets from the Consolidated Balance Sheet. In
addition, the Company recorded tax expense as a result of the reversal of the previously recorded
deferred tax assets related to the asbestos liabilities of $173 million, resulting in an after-tax gain
of $4 million. Refer to Note 19, "Recent Transactions," to the Consolidated Financial Statements
in Item 8 of this report for more information.
• The Company's provision for income taxes for the year ended December 31, 2019, includes
reductions to tax expense of $19 million related to restructuring and merger, acquisition and
divestiture expense and $6 million related to pension settlement loss. This rate also includes
increases to tax expense of $22 million due to the U.S. Department of the Treasury’s issuance of
the final regulations in the first quarter of 2019 related to the calculation of the one-time transition
tax partially offset by reductions to tax expense of $11 million for a global realignment plan and $8
million related to other one-time adjustments.

Year ended December 31, 2018:

• The Company recorded restructuring expense of $67 million related to Engine and Drivetrain
segment actions designed to improve future profitability and competitiveness, primarily related to
employee termination benefits, professional fees, and manufacturing footprint rationalization
activities.
• During the year ended December 31, 2018, the Company recorded an asset impairment expense
of $26 million to adjust the net book value of the pipes and thermostat product lines to fair value
less costs to sell. Additionally, the Company recorded $6 million of merger, acquisition and
divestiture expense primarily related to professional fees associated with divestiture activities for
the non-core pipes and thermostat product lines. Refer to Note 20, "Assets and Liabilities Held for
Sale," to the Consolidated Financial Statements in Item 8 of this report for more information.
• The Company recorded net restricted stock and performance share unit compensation expense
of $8 million in the year ended December 31, 2018 as the Company modified the vesting
provisions of restricted stock and performance share unit grants made to retiring executive
officers to allow certain of the outstanding awards, that otherwise would have been forfeited, to
vest upon retirement. Refer to Note 13, "Stock-Based Compensation," to the Consolidated
Financial Statements in Item 8 of this report for more information.
• During the year ended December 31, 2018, the Company recorded asbestos-related adjustments
resulting in an increase to Other Expense of $23 million. This increase was the result of actuarial
valuation changes of $23 million associated with the Company's estimate of liabilities for
asbestos-related claims asserted but not yet resolved and potential claims not yet asserted. Refer
to Note 15, "Contingencies," to the Consolidated Financial Statements in Item 8 of this report for
more information.
• During the fourth quarter of 2018, the Company recorded a gain of $19 million related to the sale
of a building at a manufacturing facility located in Europe.

34
 • During the year ended December 31, 2018, the Company recorded a gain of approximately $4
million related to the settlement of a commercial contract for an entity acquired in the 2015 Remy
acquisition.
• The Company's provision for income taxes for the year ended December 31, 2018 includes
reductions of income tax expense of $15 million related to restructuring expense, $6 million
related to the asbestos-related adjustments, and $8 million related to asset impairment expense,
offset by increases to tax expense of $1 million and $6 million related to a gain on commercial
settlement and a gain on the sale of a building, respectively, discussed in Note 4, "Other
Expense, Net," to the Consolidated Financial Statements. The provision for income taxes also
includes reductions of income tax expense of $13 million related to final adjustments made to
measurement period provisional estimates associated with the Tax Cuts and Jobs Act (the "Tax
Act"), $22 million related to a decrease in our deferred tax liability due to a tax benefit for certain
foreign tax credits now available due to actions the Company took during the year, $9 million
related to valuation allowance releases, $3 million related to tax reserve adjustments, and $30
million related to changes in accounting methods and tax filing positions for prior years primarily
related to the Tax Act. Refer to Note 5, "Income Taxes," to the Consolidated Financial Statements
in Item 8 of this report for more information.

Net Sales

Net sales for the year ended December 31, 2019 totaled $10,168 million, a 3.4% decrease from the
year ended December 31, 2018. Excluding the impact of weaker foreign currencies and the net impact
of acquisitions and divestitures, net sales increased 0.7%.

The following table details our results of operations as a percentage of net sales:
Year Ended December 31,
(percentage of net sales) 2019 2018
Net sales 100.0% 100.0%
Cost of sales 79.3 78.8
Gross profit 20.7 21.2
Selling, general and administrative expenses 8.6 9.0
Other (income) expense, net (0.7) 0.9
Operating income 12.8 11.3
Equity in affiliates’ earnings, net of tax (0.3) (0.5)
Interest income (0.1) (0.1)
Interest expense 0.5 0.6
Other postretirement expense (income) 0.3 (0.1)
Earnings before income taxes and noncontrolling interest 12.4 11.4
Provision for income taxes 4.6 2.0
Net earnings 7.8 9.4
Net earnings attributable to the noncontrolling interest, net of tax 0.5 0.5
Net earnings attributable to BorgWarner Inc. 7.3% 8.9%

Cost of sales as a percentage of net sales was 79.3% and 78.8% in the years ended December 31,
2019 and 2018, respectively. The Company's material cost of sales was approximately 55% of net sales
in the years ended December 31, 2019 and 2018. Gross profit as a percentage of net sales was 20.7%
and 21.2% in the years ended December 31, 2019 and 2018, respectively. The reduction of gross margin
in 2019 compared to 2018 was primarily due to the impact of lower revenue, the increased cost from
tariffs and supplier cost reductions not keeping pace with normal customer price deflation.

35
 Selling, general and administrative expenses (“SG&A”) was $873 million and $946 million, or
8.6% and 9.0% of net sales for the years ended December 31, 2019 and 2018, respectively. The
decrease in SG&A expenses was primarily due to stock-based compensation expense and cost control
measures.

Research and development ("R&D") costs, net of customer reimbursements, were $413 million, or
4.1% of net sales, in the year ended December 31, 2019, compared to $440 million, or 4.2% of net sales,
in the year ended December 31, 2018. The decrease of R&D costs, net of customer reimbursements, in
the year ended December 31, 2019 compared with the year ended December 31, 2018 was primarily
due to cost control measures and an increase in customer reimbursements. We will continue to invest in
a number of cross-business R&D programs, as well as a number of other key programs, all of which are
necessary for short- and long-term growth. Our current long-term expectation for R&D spending remains
in the range of 4% to 4.5% of net sales.

Other (income) expense, net was $(75) million and $94 million for the years ended December 31,
2019 and 2018, respectively. This line item is primarily comprised of non-income tax items discussed
within the subtitle "Non-comparable items impacting the Company's earnings per diluted share and net
earnings" above.

Equity in affiliates' earnings, net of tax was $32 million and $49 million in the years ended
December 31, 2019 and 2018, respectively. This line item is driven by the results of our 50%-owned
Japanese joint venture, NSK-Warner KK, and our 32.6%-owned Indian joint venture, Turbo Energy
Private Limited (“TEL”). The decrease in equity in affiliates' earnings in the year ended December 31,
2019 was due to lower industry volumes and cost pressures in a reduced market.

Interest expense and finance charges were $55 million and $59 million in the years ended
December 31, 2019 and 2018, respectively. The decrease in interest expense for the year ended
December 31, 2019 compared with the year ended December 31, 2018 was primarily due to lower debt
levels.

Provision for income taxes the provision for income taxes resulted in an effective tax rate of 37%
for the year ended December 31, 2019, compared with the rate of 17.7% for the year ended December
31, 2018. As of December 31, 2018, the Company has completed its accounting for the tax effects of the
Tax Act. For further details, see Note 5, "Income Tax," to the Consolidated Financial Statements in Item
8.

The effective tax rate of 37% for the year ended December 31, 2019 includes an increase in income
tax expense of $173 million related to the derecognition of the Morse TEC asbestos-related deferred tax
assets and $22 million due to the U.S. Department of the Treasury’s issuance of the final regulations in
the first quarter of 2019 related to the calculation of the one-time transition tax. This rate also includes
reductions of income tax expense of $19 million related to restructuring expense, $11 million for a global
realignment plan, $8 million related to other one-time adjustments and $6 million related to pension
settlement loss. Excluding the impact of these non-comparable items, the Company's annual effective tax
rate associated with ongoing operations is 26% for the year ended December 31, 2019.

The effective tax rate of 17.7% for the year ended December 31, 2018 includes reductions of income
tax expense of $15 million related to restructuring expense, $6 million related to the asbestos-related
adjustments, and $8 million related to asset impairment expense, offset by increases to tax expense of
$1 million and $6 million related to a gain on commercial settlement and a gain on the sale of a building,
respectively, discussed in Note 4, "Other (Income) Expense, Net," to the Consolidated Financial
Statements. The provision for income taxes also includes reductions of income tax expense of $13
million related to final adjustments made to measurement period provisional estimates associated with
the Tax Act, $22 million related to a decrease in our deferred tax liability due to a tax benefit for certain

36
foreign tax credits now available due to actions the Company took during the year, $9 million related to
valuation allowance releases, $3 million related to tax reserve adjustments, and $30 million related to
changes in accounting methods and tax filing positions for prior years primarily related to the Tax Act.
Excluding the impact of these non-comparable items, the Company's annual effective tax rate associated
with ongoing operations for 2018 was 23.8%.

Net earnings attributable to the noncontrolling interest, net of tax of $51 million for the year
ended December 31, 2019 decreased by $3 million compared to the year ended December 31, 2018.
The decrease was due to lower industry volumes resulting in lower sales and earnings by the Company’s
joint ventures.

Results By Reporting Segment

The Company's business is comprised of two reporting segments: Engine and Drivetrain. These
segments are strategic business groups, which are managed separately as each represents a specific
grouping of related automotive components and systems.

The Company allocates resources to each segment based upon the projected after-tax return on
invested capital ("ROIC") of its business initiatives. ROIC is comprised of Adjusted EBIT after deducting
notional taxes compared to the projected average capital investment required. Adjusted EBIT is
comprised of earnings before interest, income taxes and noncontrolling interest (“EBIT") adjusted for
restructuring, goodwill impairment charges, affiliates' earnings and other items not reflective of ongoing
operating income or loss.

Adjusted EBIT is the measure of segment income or loss used by the Company. The Company
believes Adjusted EBIT is most reflective of the operational profitability or loss of our reporting segments.

The following tables show segment information and Adjusted EBIT for the Company's reporting
segments.

Net Sales by Reporting Segment

Year Ended December 31,
(in millions) 2019 2018
Engine $ 6,214 $ 6,447
Drivetrain 4,015 4,140
Inter-segment eliminations (61) (57)
Net sales $ 10,168 $ 10,530

37
Adjusted Earnings Before Interest, Income Taxes and Noncontrolling Interest ("Adjusted EBIT")
Year Ended December 31,
(in millions) 2019 2018
Engine $ 995 $ 1,040
Drivetrain 443 475
Adjusted EBIT 1,438 1,515
Gain on derecognition of subsidiary (177) —
Restructuring expense 72 67
Unfavorable arbitration loss 14 —
Merger, acquisition and divestiture expense 11 6
Asset impairment and loss on divestiture 7 25
Officer stock awards modification 2 8
Asbestos-related adjustments — 23
Gain on sale of building — (19)
Lease termination settlement — —
Other income — (4)
Corporate, including stock-based compensation 206 219
Equity in affiliates' earnings, net of tax (32) (49)
Interest income (12) (6)
Interest expense 55 59
Other postretirement expense (income) 27 (10)
Earnings before income taxes and noncontrolling interest 1,265 1,196
Provision for income taxes 468 211
Net earnings 797 985
Net earnings attributable to the noncontrolling interest, net of tax 51 54
Net earnings attributable to BorgWarner Inc. $ 746 $ 931

The Engine segment's net sales for the year ended December 31, 2019 decreased $233 million, or
3.6%, and segment Adjusted EBIT decreased $45 million, or 4.3%, from the year ended December 31,
2018. Excluding the impact of weakening foreign currencies, primarily the Euro, Chinese Renminbi, and
Korean Won, and the net impact of acquisitions and divestitures, net sales increased 1.3% from the year
ended December 31, 2018. The increase in sales was due to higher sales of light vehicle turbochargers
and engine timing systems, which was partially offset by weaker commercial vehicle markets around the
world. The segment Adjusted EBIT margin was 16.0% for the year ended December 31, 2019,
compared to 16.1% in the year ended December 31, 2018.

The Drivetrain segment's net sales for the year ended December 31, 2019 decreased $125 million,
or 3.0%, and segment Adjusted EBIT decreased $32 million, or 6.7%, from the year ended December 31,
2018. Excluding the impact of weakening foreign currencies, primarily the Euro, Chinese Renminbi, and
Korean Won, net sales were flat from the year ended December 31, 2018. The segment Adjusted EBIT
margin was 11.0% in the year ended December 31, 2019, compared to 11.5% in the year ended
December 31, 2018. The Adjusted EBIT margin decrease was primarily due to startup costs for launches.

Corporate represents headquarters' expenses not directly attributable to the individual segments.
This net expense was $206 million and $219 million for the years ended December 31, 2019 and 2018,
respectively. The decrease in Corporate expenses in 2019 compared to 2018 is primarily due to lower
costs associated with stock-based compensation and cost control initiatives.

38
Outlook

Our overall outlook for 2020 is cautious. Net new business-related sales growth, due to increased
penetration of BorgWarner products around the world, is expected to be partially offset by declining
global industry production expected in 2020. The Company expects flat to modestly declining revenue in
2020, excluding the impact of foreign currencies and the net impact of acquisitions and divestitures.

The Company maintains a positive long-term outlook for its global business and is committed to new
product development and strategic capital investments to enhance its product leadership strategy. The
several trends that are driving the Company's long-term growth are expected to continue, including the
increased turbocharger adoption in North America and Asia, the increased adoption of automated
transmissions in Asia-Pacific, and increased global penetration of all-wheel drive. The Company's long-
term growth is also expected to benefit from the adoption of product offerings for hybrid and electric
vehicles.

LIQUIDITY AND CAPITAL RESOURCES

The Company maintains various liquidity sources including cash and cash equivalents and the
unused portion of our multi-currency revolving credit agreement. At December 31, 2019, the Company
had $832 million of cash and cash equivalents, of which $562 million of cash and cash equivalents was
held by our subsidiaries outside of the United States. Cash and cash equivalents held by these
subsidiaries is used to fund foreign operational activities and future investments, including acquisitions.

The vast majority of cash and cash equivalents held outside the United States is available for
repatriation. The Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent and
required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were
previously tax deferred. As of January 1, 2018, funds repatriated from foreign subsidiaries are generally
no longer taxable for U.S. federal tax purposes. In light of the treatment of foreign earnings under the Tax
Act, the Company recorded a liability for the U.S. federal and applicable state income tax liabilities
calculated under the provisions of the deemed repatriation of foreign earnings. A deferred tax liability has
been recorded for substantially all estimated legally distributable foreign earnings. 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 divestitures and other corporate expenses.

The Company has a $1.2 billion multi-currency revolving credit facility, which includes a feature that
allows the Company's facility to be increased to $1.5 billion with bank approval. The facility provides for
borrowings through June 29, 2022. The Company has one key financial covenant as part of the credit
agreement which is a debt to EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization")
ratio. The Company was in compliance with the financial covenant at December 31, 2019 and expects to
remain compliant in future periods. At December 31, 2019 and December 31, 2018, the Company had
no outstanding borrowings under this facility.

The Company's commercial paper program allows the Company to issue short-term, unsecured
commercial paper notes up to a maximum aggregate principal amount outstanding of $1.2 billion. 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 December
31, 2019 and December 31, 2018.

The total current combined borrowing capacity under the multi-currency revolving credit facility and
commercial paper program cannot exceed $1.2 billion.

In addition to the credit facility, the Company's universal shelf registration provides the ability to issue
various debt and equity instruments subject to market conditions.

39
 On February 6, 2019, April 25, 2019, July 25, 2019 and November 13, 2019, the Company’s Board of
Directors declared quarterly cash dividends of $0.17 per share of common stock. These dividends were
paid on March 15, 2019, June 17, 2019, September 16, 2019 and December 16, 2019.

From a credit quality perspective, the Company had a credit rating of BBB+ from both Standard &
Poor's and Fitch Ratings and Baa1 from Moody's as of December 31, 2019 with a stable outlook from all
rating agencies. On January 28, 2020, the Company entered into a definitive agreement to acquire
Delphi Technologies. Due to uncertainties surrounding this anticipated transaction, Moody's adjusted
their outlook to negative and Standard & Poor's placed the Company on CreditWatch with negative
implications. The Company’s current outlook from Fitch Ratings remained stable. None of the Company's
debt agreements require accelerated repayment in the event of a downgrade in credit ratings.

Capitalization

Total equity increased by $499 million in the year ended December 31, 2019 as follows:
(in millions)
Balance, January 1, 2019 $ 4,345
Net earnings 797
Purchase of treasury stock (100)
Stock-based compensation 27
Other comprehensive loss (55)
Noncontrolling interest contributions 4
Dividends declared to BorgWarner stockholders (140)
Dividends declared to noncontrolling stockholders (34)
Balance, December 31, 2019 $ 4,844

Operating Activities

Net cash provided by operating activities was $1,008 million and $1,126 million in the years ended
December 31, 2019 and 2018, respectively. The decrease for the year ended December 31, 2019
compared with the year ended December 31, 2018 primarily reflected the cash outflow related to the
derecognition of a subsidiary, partially offset by changes in working capital.

Investing Activities

Net cash used in investing activities was $489 million and $514 million in the years ended December
31, 2019 and 2018, respectively. The decrease in the year ended December 31, 2019 compared with
the year ended December 31, 2018 was primarily due to lower capital expenditures, including tooling
outlays in 2019. Year-over-year capital spending decrease of $65 million during the year ended
December 31, 2019 was primarily due to timing of the investment activity in the Engine segment.

Financing Activities

Net cash used in financing activities was $420 million and $383 million in the years ended December
31, 2019 and 2018, respectively. The increase in the year ended December 31, 2019 compared with the
year ended December 31, 2018 was primarily driven by higher debt repayments, partially offset by lower
share repurchases.

40
 The Company's significant contractual obligations at December 31, 2019 are as follows:
(in millions) Total 2020 2021-2022 2023-2024 After 2024
Other postretirement employee benefits, excluding
pensions (a) $ 68 $ 10 $ 18 $ 15 $ 25
Defined benefit pension plans (b) 55 4 11 10 30
Notes payable and long-term debt 1,973 286 565 1 1,121
Projected interest payments 757 66 113 95 483
Non-cancelable operating leases 97 20 28 16 33
Capital spending obligations 102 102 — — —
Total $ 3,052 $ 488 $ 735 $ 137 $ 1,692
________________
(a) Other postretirement employee benefits, excluding pensions, include anticipated future payments to cover retiree medical
and life insurance benefits. Amount contained in “After 2024” column includes estimated payments through 2029. Refer to
Note 12, "Retirement Benefit Plans," to the Consolidated Financial Statements in Item 8 of this report for disclosures
related to the Company’s other postretirement employee benefits.
(b) Since the timing and amount of payments for funded defined benefit pension plans are usually not certain for future years
such potential payments are not shown in this table. Amount contained in “After 2024” column is for unfunded plans and
includes estimated payments through 2029. Refer to Note 12, "Retirement Benefit Plans," to the Consolidated Financial
Statements in Item 8 of this report for disclosures related to the Company’s pension benefits.

We believe that the combination of cash from operations, cash balances, available credit facilities,
and the universal shelf registration capacity will be sufficient to satisfy our cash needs for our current
level of operations and our planned operations for the foreseeable future. We will continue to balance our
needs for internal growth, external growth, debt reduction and cash conservation.

Pension and Other Postretirement Employee Benefits

The Company's policy is to fund its defined benefit pension plans in accordance with applicable
government regulations and to make additional contributions when appropriate. At December 31, 2019,
all legal funding requirements had been met. The Company contributed $26 million, $26 million and $18
million to its defined benefit pension plans in the years ended December 31, 2019, 2018 and 2017,
respectively. The Company expects to contribute a total of $10 million to $20 million into its defined
benefit pension plans during 2020. Of the $10 million to $20 million in projected 2020 contributions, $4
million are contractually obligated, while any remaining payments would be discretionary.

The funded status of all pension plans was a net unfunded position of $212 million and $211 million at
December 31, 2019 and 2018, respectively. Of these amounts, $107 million and $95 million at December
31, 2019 and 2018, respectively, were related to plans in Germany, where there is not a tax deduction
allowed under the applicable regulations to fund the plans; hence the common practice is to make
contributions as benefit payments become due.

Other postretirement employee benefits primarily consist of postretirement health care benefits for
certain employees and retirees of the Company's U.S. operations. The Company funds these benefits as
retiree claims are incurred. Other postretirement employee benefits had an unfunded status of $81
million and $87 million at December 31, 2019 and 2018, respectively.

The Company believes it will be able to fund the requirements of these plans through cash generated
from operations or other available sources of financing for the foreseeable future.

Refer to Note 12, "Retirement Benefit Plans," to the Consolidated Financial Statements in Item 8 of
this report for more information regarding costs and assumptions for employee retirement benefits.

41
OTHER MATTERS

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, general
liability and various 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, if not, what the impact might be.
The Company's environmental and product liability contingencies are discussed separately below. The
Company's management does not expect that an adverse outcome in any of these commercial and legal
claims, actions and complaints will have a material adverse effect on the Company's results of
operations, financial position or cash flows, although it could be material to the results of operations in a
particular quarter.

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 state 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 presently be
liable for the cost of clean-up and other remedial activities at 14 such sites. 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 15, "Contingencies," to the Consolidated Financial Statements in Item 8 of this report
for further details and information respecting the Company’s environmental liability.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are prepared in conformity with accounting principles
generally accepted in the United States (“GAAP”). In preparing these financial statements, management
has made its best estimates and judgments of certain amounts included in the financial statements,
giving due consideration to materiality. Critical accounting policies are those that are most important to
the portrayal of the Company's financial condition and results of operations. Some of these policies
require management's most difficult, subjective or complex judgments in the preparation of the financial
statements and accompanying notes. Management makes estimates and assumptions about the effect
of matters that are inherently uncertain, relating to the reporting of assets, liabilities, revenues, expenses
and the disclosure of contingent assets and liabilities. Our most critical accounting policies are
discussed below.

Revenue recognition The Company recognizes revenue when performance obligations under the
terms of a contract are satisfied, which generally occurs with the transfer of control of our products.
Although the Company may enter into long-term supply arrangements with its major customers, the
prices and volumes are not fixed over the life of the arrangements, and a contract does not exist for
purposes of applying Accounting Standards Codification ("ASC") Topic 606 until volumes are
contractually known. For most of our products, transfer of control occurs upon shipment or delivery;

42
however, a limited number of our customer arrangements for our highly customized products with no
alternative use provide us with the right to payment during the production process. As a result, for these
limited arrangements, revenue is recognized as goods are produced and control transfers to the
customer. Revenue is measured at the amount of consideration we expect to receive in exchange for
transferring the good.

The Company continually seeks business development opportunities and at times provides customer
incentives for new program awards. Customer incentive payments are capitalized when the payments
are incremental and incurred only if the new business is obtained and these amounts are expected to be
recovered from the customer over the term of the new business arrangement. The Company recognizes
a reduction to revenue as products that the upfront payments are related to are transferred to the
customer, based on the total amount of products expected to be sold over the term of the arrangement
(generally 3 to 7 years). The Company evaluates the amounts capitalized each period end for
recoverability and expenses any amounts that are no longer expected to be recovered over the term of
the business arrangement.

Impairment of long-lived assets, including definite-lived intangible assets The Company

reviews the carrying value of its long-lived assets, whether held for use or disposal, including other
amortizing intangible assets, when events and circumstances warrant such a review under ASC Topic
360. In assessing long-lived assets for an impairment loss, assets are grouped with other assets and
liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of
other assets and liabilities. In assessing long-lived assets for impairment, management generally
considers individual facilities the lowest level for which identifiable cash flows are largely independent. A
recoverability review is performed using the undiscounted cash flows if there is a triggering event. If the
undiscounted cash flow test for recoverability identifies a possible impairment, management will perform
a fair value analysis. Management determines fair value under ASC Topic 820 using the appropriate
valuation technique of market, income or cost approach. If the carrying value of a long-lived asset is
considered impaired, an impairment charge is recorded for the amount by which the carrying value of the
long-lived asset exceeds its fair value.

Management believes that the estimates of future cash flows and fair value assumptions are
reasonable; however, changes in assumptions underlying these estimates could affect the valuations.
Significant judgments and estimates used by management when evaluating long-lived assets for
impairment include: (i) an assessment as to whether an adverse event or circumstance has triggered the
need for an impairment review; (ii) undiscounted future cash flows generated by the asset; and (iii) fair
valuation of the asset. Events and conditions that could result in impairment in the value of our long-lived
assets include changes in the industries in which we operate, particularly the impact of a downturn in the
global economy, as well as competition and advances in technology, adverse changes in the regulatory
environment, or other factors leading to reduction in expected long-term sales or profitability.

Assets and liabilities held for sale The Company classifies assets and liabilities (disposal groups)
to be sold as held for sale in the period in which all of the following criteria are met: management, having
the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is
available for immediate sale in its present condition subject only to terms that are usual and customary
for sales of such disposal groups; an active program to locate a buyer and other actions required to
complete the plan to sell the disposal group have been initiated; the sale of the disposal group is
probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale
within one year, except if events or circumstances beyond the Company's control extend the period of
time required to sell the disposal group beyond one year; the disposal group is being actively marketed
for sale at a price that is reasonable in relation to its current fair value; and actions required to complete
the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be
withdrawn.

43
 The Company initially measures a disposal group that is classified as held for sale at the lower of its
carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized
in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale
of a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less
any costs to sell, each reporting period it remains classified as held for sale and reports any subsequent
changes as an adjustment to the carrying value of the disposal group, as long as the new carrying value
does not exceed the carrying value of the disposal group at the time it was initially classified as held for
sale. Additionally, depreciation is not recorded during the period in which the long-lived assets, included
in the disposal group, are classified as held for sale.

Upon determining that a disposal group meets the criteria to be classified as held for sale, the
Company reports the assets and liabilities of the disposal group, if material, in the line items assets held
for sale and liabilities held for sale in the Consolidated Balance Sheet.

Refer to Note 20, "Assets and Liabilities Held for Sale," to the Consolidated Financial Statements in
Item 8 of this report for more information.

Goodwill and other indefinite-lived intangible assets During the fourth quarter of each year, the
Company qualitatively assesses its goodwill assigned to each of its reporting units. This qualitative
assessment evaluates various events and circumstances, such as macro economic conditions, industry
and market conditions, cost factors, relevant events and financial trends, that may impact a reporting
unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-
than-not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-
likely-than-not the reporting unit's fair value exceeds the carrying value, or upon consideration of other
factors, including recent acquisition, restructuring or divestiture activity or to refresh the fair values, the
Company performs a quantitative, "step one," goodwill impairment analysis. In addition, the Company
may test goodwill in between annual test dates if an event occurs or circumstances change that could
more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

Similar to goodwill, the Company can elect to perform the impairment test for indefinite-lived
intangibles other than goodwill (primarily trade names) using a qualitative analysis, considering similar
factors as outlined in the goodwill discussion in order to determine if it is more-likely-than-not that the fair
value of the trade names is less than the respective carrying values. If the Company elects to perform or
is required to perform a quantitative analysis, the test consists of a comparison of the fair value of the
indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. The
Company estimates the fair value of indefinite-lived intangibles using the relief-from-royalty method,
which it believes is an appropriate and widely used valuation technique for such assets. The fair value
derived from the relief-from-royalty method is measured as the discounted cash flow savings realized
from owning such trade names and not being required to pay a royalty for their use.

During the fourth quarter of 2019, the Company performed an analysis on each reporting unit. Based
on the factors above, the Company elected to perform quantitative, "step one," goodwill impairment
analyses, on three reporting units. This requires the Company to make significant assumptions and
estimates about the extent and timing of future cash flows, discount rates and growth rates. The basis of
this goodwill impairment analysis is the Company's annual budget and long-range plan (“LRP”). The
annual budget and LRP includes a five-year projection of future cash flows based on actual new products
and customer commitments and assumes the last year of the LRP data is a fair indication of the future
performance. Because the LRP is estimated over a significant future period of time, those estimates and
assumptions are subject to a high degree of uncertainty. Further, the market valuation models and other
financial ratios used by the Company require certain assumptions and estimates regarding the
applicability of those models to the Company's facts and circumstances.

44
 The Company believes the assumptions and estimates used to determine the estimated fair value
are reasonable. Different assumptions could materially affect the estimated fair value. The primary
assumptions affecting the Company's December 31, 2019 goodwill quantitative, "step one," impairment
review are as follows:

• Discount rate: the Company used a 10.7% weighted average cost of capital (“WACC”) as the
discount rate for future cash flows. The WACC is intended to represent a rate of return that
would be expected by a market participant.

• Operating income margin: the Company used historical and expected operating income
margins, which may vary based on the projections of the reporting unit being evaluated.

• Revenue growth rate: the Company used a global automotive market industry growth rate
forecast adjusted to estimate its own market participation for product lines.

In addition to the above primary assumptions, the Company notes the following risks to volume and
operating income assumptions that could have an impact on the discounted cash flow models:

• The automotive industry is cyclical, and the Company's results of operations would be adversely
affected by industry downturns.
• The Company is dependent on market segments that use our key products and would be affected
by decreasing demand in those segments.
• The Company is subject to risks related to international operations.

Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter of
2019 indicated the Company's goodwill assigned to the reporting units that were quantitatively assessed
were not impaired and contained fair values substantially higher than the reporting units' carrying values.
Additionally, for the reporting units quantitatively assessed, sensitivity analyses were completed
indicating that a one percentage point increase in the discount rate, a one percentage point decrease in
the operating margin, or a one percentage point decrease in the revenue growth rate assumptions would
not result in the carrying value exceeding the fair value.

Refer to Note 7, "Goodwill and Other Intangibles," to the Consolidated Financial Statements in Item 8
of this report for more information regarding goodwill.

Product warranties The Company provides warranties on some, but not all, of its products. The
warranty terms are typically from one to three years. Provisions for estimated expenses related to
product warranty are made at the time products are sold. These estimates are established using
historical information about the nature, frequency and average cost of warranty claim settlements as well
as product manufacturing and industry developments and recoveries from third parties. Management
actively studies trends of warranty claims and takes action to improve product quality and minimize
warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims
incurred could differ from the original estimates, requiring adjustments to the accrual:
Year Ended December 31,
(in millions) 2019 2018
Net sales $ 10,168 $ 10,530
Warranty provision $ 72 $ 68
Warranty provision as a percentage of net sales 0.7% 0.6%

45
 The following table illustrates the sensitivity of a 25 basis point change (as a percentage of net sales)
in the assumed warranty trend on the Company's accrued warranty liability:
December 31,
(in millions) 2019 2018
25 basis point decrease (income)/expense $ (25) $ (26)
25 basis point increase (income)/expense $ 25 $ 26

At December 31, 2019, the total accrued warranty liability was $116 million. The accrual is
represented as $63 million in current liabilities and $53 million in non-current liabilities on our
Consolidated Balance Sheet.

Refer to Note 8, "Product Warranty," to the Consolidated Financial Statements in Item 8 of this report
for more information regarding product warranties.

Asbestos Like many other industrial companies that have historically operated in the United States,
the Company, or parties that the Company is obligated to indemnify, has been named as one of many
defendants in asbestos-related personal injury actions. Morse TEC, a former wholly-owned subsidiary of
the Company, was the obligor for the Company's recorded asbestos-related liabilities and the
policyholder of the related insurance assets. On October 30, 2019, the Company transferred 100% of its
equity interests to Enstar Holdings (US) LLC. In the fourth quarter of 2019, the Company derecognized
Morse TEC and removed asbestos obligations, related insurance assets and associated deferred tax
assets from the Consolidated Balance Sheet.

With the assistance of a third-party actuary, the Company estimated the liability and corresponding
insurance recovery for pending and future claims not yet asserted to extend through December 31, 2064
with a runoff through 2074 and defense costs. This estimate was based on the Company's historical
claim experience and estimates of the number and resolution cost of potential future claims that may be
filed based on anticipated levels of unique plaintiff asbestos-related claims in the U.S. tort system against
all defendants. As with any estimates, actual experience may differ. This estimate was not discounted to
present value. The Company believed that December 31, 2074 was a reasonable assumption as to the
last date on which it was likely to have resolved all asbestos-related claims, based on the nature and
useful life of the Company’s products and the likelihood of incidence of asbestos-related disease in the
U.S. population generally. The Company assessed the sufficiency of its estimated liability for pending and
future claims not yet asserted and defense costs by evaluating actual experience regarding claims filed,
settled and dismissed, and amounts paid in claim resolution costs. In addition to claims experience, the
Company considered additional quantitative and qualitative factors such as changes in legislation, the
legal environment, and the Company's defense strategy. The Company continued to have additional
excess insurance coverage available for potential future asbestos-related claims. In connection with the
Company’s review of its asbestos-related claims, the Company also reviewed the amount of its potential
insurance coverage for such claims, taking into account the remaining limits of such coverage, the
number and amount of claims on the Company's insurance from co-insured parties, ongoing litigation
against the Company’s insurance carriers, potential remaining recoveries from insolvent insurance
carriers, the impact of previous insurance settlements, and coverage available from solvent insurance
carriers not party to the coverage litigation.

Refer to Note 15, "Contingencies," to the Consolidated Financial Statements in Item 8 of this report
for more information regarding management's judgments applied in the recognition and measurement of
asbestos-related assets and liabilities.

Pension and other postretirement defined benefits The Company provides postretirement defined
benefits to a number of its current and former employees. Costs associated with postretirement defined

46
benefits include pension and postretirement health care expenses for employees, retirees and surviving
spouses and dependents.

The Company's defined benefit pension and other postretirement plans are accounted for in
accordance with ASC Topic 715. The determination of the Company's obligation and expense for its
pension and other postretirement employee benefits, such as retiree health care, is dependent on certain
assumptions used by actuaries in calculating such amounts. Certain assumptions, including the expected
long-term rate of return on plan assets, discount rate, rates of increase in compensation and health care
costs trends are described in Note 12, "Retirement Benefit Plans," to the Consolidated Financial
Statements in Item 8 of this report. The effects of any modification to those assumptions are either
recognized immediately or amortized over future periods in accordance with GAAP.

In accordance with GAAP, actual results that differ from assumptions used are accumulated and
generally amortized over future periods. The primary assumptions affecting the Company's accounting
for employee benefits under ASC Topics 712 and 715 as of December 31, 2019 are as follows:

• Expected long-term rate of return on plan assets: The expected long-term rate of return is used
in the calculation of net periodic benefit cost. The required use of the expected long-term rate of
return on plan assets may result in recognized returns that are greater or less than the actual returns
on those plan assets in any given year. Over time, however, the expected long-term rate of return on
plan assets is designed to approximate actual earned long-term returns. The expected long-term rate
of return for pension assets has been determined based on various inputs, including historical returns
for the different asset classes held by the Company's trusts and its asset allocation, as well as inputs
from internal and external sources regarding expected capital market return, inflation and other
variables. The Company also considers the impact of active management of the plans' invested
assets. In determining its pension expense for the year ended December 31, 2019, the Company
used long-term rates of return on plan assets ranging from 1.75% to 5.9% outside of the U.S. and
6.0% in the U.S.

Actual returns on U.S. pension assets were 18.0% and -4.1% for the years ended December 31,
2019 and 2018, respectively, compared to the expected rate of return assumption of 6.0% for the
same years ended.

Actual returns on U.K. pension assets were 9.5% and -3.1% for the years ended December 31, 2019
and 2018, respectively, compared to the expected rate of return assumption of 5% for the year ended
December 31, 2019 and 6% for the year ended in 2018.

Actual returns on German pension assets were 21.0% and -4.2% for the years ended December 31,
2019 and 2018, respectively, compared to the expected rate of return assumption of 5.9% for the
same years ended.

• Discount rate: The discount rate is used to calculate pension and other postretirement employee
benefit (“OPEB”) obligations. In determining the discount rate, the Company utilizes a full-yield
approach in the estimation of service and interest components by applying the specific spot rates
along the yield curve used in the determination of the benefit obligation to the relevant projected cash
flows. The Company used discount rates ranging from 0.74% to 9.0% to determine its pension and
other benefit obligations as of December 31, 2019, including weighted average discount rates of
3.17% in the U.S., 1.61% outside of the U.S., and 2.95% for U.S. other postretirement health care
plans. The U.S. discount rate reflects the fact that our U.S. pension plan has been closed for new
participants since 1989 (1999 for our U.S. health care plan).

• Health care cost trend: For postretirement employee health care plan accounting, the Company
reviews external data and Company-specific historical trends for health care cost to determine the

47
 health care cost trend rate assumptions. In determining the projected benefit obligation for
postretirement employee health care plans as of December 31, 2019, the Company used health care
cost trend rates of 6.25%, declining to an ultimate trend rate of 5% by the year 2025.

While the Company believes that these assumptions are appropriate, significant differences in actual
experience or significant changes in these assumptions may materially affect the Company's pension
and OPEB and its future expense.

The following table illustrates the sensitivity to a change in certain assumptions for Company
sponsored U.S. and non-U.S. pension plans on its 2020 pre-tax pension expense:
Impact on U.S. 2020 Impact on Non-U.S.
pre-tax pension 2020 pre-tax pension
(in millions) (expense)/income (expense)/income
One percentage point decrease in discount rate $ — * $ (7)
One percentage point increase in discount rate $ — * $ 7
One percentage point decrease in expected return on assets $ (2) $ (5)
One percentage point increase in expected return on assets $ 2 $ 5
________________
* A one percentage point increase or decrease in the discount rate would have a negligible impact on the Company’s U.S. 2020
pre-tax pension expense.

The sensitivity to a change in the discount rate assumption related to the Company's total 2020 U.S.
OPEB expense is expected to be negligible, as any increase in interest expense will be offset by net
actuarial gains.

The following table illustrates the sensitivity to a one-percentage point change in the assumed health
care cost trend related to the Company's OPEB obligation and service and interest cost:
One Percentage Point
(in millions) Increase Decrease
Effect on other postretirement employee benefit obligation $ 5 $ (5)
Effect on total service and interest cost components $ — $ —

Refer to Note 12, "Retirement Benefit Plans," to the Consolidated Financial Statements in Item 8 of
this report for more information regarding the Company’s retirement benefit plans.

Restructuring Restructuring costs may occur when the Company takes action to exit or significantly
curtail a part of its operations or implements a reorganization that affects the nature and focus of
operations. A restructuring charge can consist of severance costs associated with reductions to the
workforce, costs to terminate an operating lease or contract, professional fees and other costs incurred
related to the implementation of restructuring activities.

The Company generally records costs associated with voluntary separations at the time of employee
acceptance. Costs for involuntary separation programs are recorded when management has approved
the plan for separation, the employees are identified and aware of the benefits they are entitled to and it
is unlikely that the plan will change significantly. When a plan of separation requires approval by or
consultation with the relevant labor organization or government, the costs are recorded upon agreement.
Costs associated with benefits that are contingent on the employee continuing to provide service are
accrued over the required service period.

Income taxes The Company accounts for income taxes in accordance with ASC Topic 740. Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and liabilities and their respective tax
48
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled.

Accounting for income taxes is complex, in part because the Company conducts business globally
and therefore files income tax returns in numerous tax jurisdictions. Management judgment is required in
determining the Company’s worldwide provision for income taxes and recording the related assets and
liabilities, including accruals for unrecognized tax benefits. In calculating the provision for income taxes
on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts
and circumstances known at each interim period. In determining the need for a valuation allowance, the
historical and projected financial performance of the operation recording the net deferred tax asset is
considered along with any other pertinent information. Since future financial results may differ from
previous estimates, periodic adjustments to the Company’s valuation allowance may be necessary.

The Company is subject to income taxes in the U.S. at the federal and state level and numerous non-
U.S. jurisdictions. The determination of accruals for unrecognized tax benefits includes the application of
complex tax laws in a multitude of jurisdictions across the Company's global operations. Management
judgment is required in determining the accruals for unrecognized tax benefits. In the ordinary course of
the Company's business, there are many transactions and calculations where the ultimate tax
determination is less than certain. Accruals for unrecognized tax benefits are established when, despite
the belief that tax positions are supportable, there remain certain positions that do not meet the minimum
probability threshold, which is a tax position that is more-likely-than-not to be sustained upon examination
by the applicable taxing authority. The Company has certain U.S. state income tax returns and certain
non-U.S. income tax returns which are currently under various stages of audit by applicable tax
authorities. At December 31, 2019, the Company has a liability for tax positions the Company estimates
are not more-likely-than-not to be sustained based on the technical merits, which is included in other
current and non-current liabilities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the
issues raised by the taxing authorities may differ materially from the amounts accrued for each year.

The Tax Act that was signed into law in December 2017 constitutes a major change to the U.S. tax
system. The impact of the Tax Act on the Company is based on management’s current interpretations of
the Tax Act, recently issued regulations and related analysis. The Company's tax liability may be
materially different based on regulatory developments. In future periods, our effective tax rate could be
subject to additional uncertainty as a result of regulatory developments related to the Tax Act.

Refer to Note 5, "Income Taxes," to the Consolidated Financial Statements in Item 8 of this report for
more information regarding income taxes.

New Accounting Pronouncements

Refer to Note 1, "Summary of Significant Accounting Policies," to the Consolidated Financial

Statements in Item 8 of this report for more information regarding new applicable accounting
pronouncements.

49
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risks include fluctuations in interest rates and foreign currency
exchange rates. We are also affected by changes in the prices of commodities used or consumed in our
manufacturing operations. Some of our commodity purchase price risk is covered by supply agreements
with customers and suppliers. Other commodity purchase price risk is addressed by hedging strategies,
which include forward contracts. The Company enters into derivative instruments only with high credit
quality counterparties and diversifies its positions across such counterparties in order to reduce its
exposure to credit losses. We do not engage in any derivative instruments for purposes other than
hedging specific operating risks.

We have established policies and procedures to manage sensitivity to interest rate, foreign currency
exchange rate and commodity purchase price risk, which include monitoring the level of exposure to
each market risk. For quantitative disclosures about market risk, refer to Note 11, "Financial
Instruments," to the Consolidated Financial Statements in Item 8 of this report for information with
respect to interest rate risk and foreign currency exchange rate risk and commodity purchase price risk.

Interest Rate Risk

Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest
rates. The Company manages its interest rate risk by balancing its exposure to fixed and variable rates
while attempting to optimize its interest costs. The Company selectively uses interest rate swaps to
reduce market value risk associated with changes in interest rates (fair value hedges). At December 31,
2019, all of the Company's debt had fixed interest rates.

Foreign Currency Exchange Rate Risk

Foreign currency exchange rate risk is the risk that we will incur economic losses due to adverse
changes in foreign currency exchange rates. Currently, our most significant currency exposures relate to
the Chinese Renminbi, the Euro, the Hungarian Forint, the Japanese Yen, the Mexican Peso, the
Swedish Krona and the South Korean Won. We mitigate our foreign currency exchange rate risk by
establishing local production facilities and related supply chain participants in the markets we serve, by
invoicing customers in the same currency as the source of the products and by funding some of our
investments in foreign markets through local currency loans. Such non-U.S. Dollar debt was $41 million
and $47 million as of December 31, 2019 and 2018, respectively. We also monitor our foreign currency
exposure in each country and implement strategies to respond to changing economic and political
environments. The depreciation of the British Pound following the United Kingdom's 2016 vote to leave
the European Union has not and is not expected to have a significant impact on the Company since net
sales from the United Kingdom represent less than 2% of the Company's net sales in 2019. In addition,
the Company periodically enters into forward currency contracts to reduce exposure to exchange rate
risk related to transactions denominated in currencies other than the functional currency. As of
December 31, 2018, the Company recorded a deferred gain of $2 million and a deferred loss of $2
million related to foreign currency derivatives. As of December 31, 2019, deferred gains and losses
related to foreign currency derivatives were immaterial.

The foreign currency translation adjustment loss of $55 million and foreign currency translation
adjustment loss of $148 million for the year ended December 31, 2019 and 2018, respectively, contained
within our Consolidated Statements of Comprehensive Income represent the foreign currency
translational impacts of converting our non-U.S. dollar subsidiaries' financial statements to the
Company’s reporting currency (U.S. Dollar) and the related gains and losses arising from our net
investment hedges. The 2019 foreign currency translation adjustment loss was primarily due to the
impact of a strengthening U.S. dollar against the Euro, Chinese Renminbi and Swedish Krona, which
increased approximately 2%, 1% and 6% and increased other comprehensive loss by

50
approximately $18 million, $17 million and $15 million, respectively. The 2018 foreign currency translation
adjustment loss was primarily due to the impact of a strengthening U.S. dollar against the Euro and
Chinese Renminbi, which increased approximately 4% and 5% and increased other comprehensive loss
by approximately $58 million and $48 million, respectively. In addition, the Company periodically enters
into foreign currency contracts, cross-currency swaps, and foreign currency denominated debt
designated as net investment hedges to reduce exposure to translational exchange rate risk. As of
December 31, 2019 and 2018, the Company recorded a deferred gain of $4 million and a deferred loss of
$14 million, respectively, for net investment hedges.

Commodity Price Risk

Commodity price risk is the possibility that we will incur economic losses due to adverse changes in
the cost of raw materials used in the production of our products. Commodity forward and option contracts
are executed to offset our exposure to potential change in prices mainly for various non-ferrous metals
and natural gas consumption used in the manufacturing of vehicle components. As of December 31,
2019 and 2018, the Company had outstanding commodity swap contracts with total notional values of $1
million and $2 million, respectively. The related fair value of these swaps were immaterial.

Disclosure Regarding Forward-Looking Statements

The matters discussed in this Item 7 include forward looking statements. See "Forward Looking
Statements" at the beginning of this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative information regarding market risk, please refer to the discussion in
Item 7 of this report under the caption "Quantitative and Qualitative Disclosures about Market Risk."

For information regarding interest rate risk, foreign currency exchange risk and commodity price risk,
refer to Note 11, "Financial Instruments," to the Consolidated Financial Statements in Item 8 of this
report. For information regarding the levels of indebtedness subject to interest rate fluctuation, refer to
Note 9, "Notes Payable and Long-Term Debt," to the Consolidated Financial Statements in Item 8 of this
report. For information regarding the level of business outside the United States, which is subject to
foreign currency exchange rate market risk, refer to Note 21, "Reporting Segments and Related
Information," to the Consolidated Financial Statements in Item 8 of this report.

51
Item 8. Financial Statements and Supplementary Data

Index to Financial Statements and Supplementary Data Page No.

Report of Independent Registered Public Accounting Firm 53

Consolidated Balance Sheets 55

Consolidated Statements of Operations 56

Consolidated Statements of Comprehensive Income 57

Consolidated Statements of Cash Flows 58

Consolidated Statements of Equity 59

Notes to Consolidated Financial Statements 60

52
 Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of BorgWarner Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of BorgWarner Inc. and its subsidiaries (the
“Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, of
comprehensive income, of equity and of cash flows for each of the three years in the period ended December 31,
2019, including the related notes (collectively referred to as the “consolidated financial statements”). We also have
audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company's management is responsible for these consolidated financial statements, for maintaining effective
internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A.
Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's
internal control over financial reporting based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement, whether due to error or fraud, and whether effective internal control over financial
reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable

53
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that (i)
relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.

Income Taxes - Worldwide Provision for Income Taxes

As described in Notes 1 and 5 to the consolidated financial statements, the Company has recorded income taxes
from continuing operations of $468 million for the year ended December 31, 2019. Management judgment is
required in determining the Company’s worldwide provision for income taxes and recording the related assets and
liabilities, including accruals for unrecognized tax benefits. As disclosed by management, accounting for income
taxes is complex, in part because the Company conducts business globally and therefore files income tax returns in
numerous tax jurisdictions. The Company is subject to income taxes in the U.S. at the federal and state level and
numerous non-U.S. jurisdictions. In the ordinary course of the Company’s business, there are many transactions
and calculations where the ultimate tax determination is less than certain. Accruals for unrecognized tax benefits
are established when, despite the belief that tax positions are supportable, there remain certain positions that do
not meet the minimum probability threshold, which is a tax position that is more-likely-than-not to be sustained upon
examination by the applicable taxing authority. The determination of accruals for unrecognized tax benefits includes
the application of complex tax laws in a multitude of jurisdictions across the Company’s global operations.

The principal considerations for our determination that performing procedures relating to management’s worldwide
provision for income taxes is a critical audit matter are there was significant judgment by management when
developing the worldwide provision for income taxes, including the accruals for unrecognized tax benefits. This in
turn led to a high degree of auditor judgment, subjectivity and effort in performing our audit procedures relating to
management’s worldwide provision for income taxes. Also, the audit effort involved the use of professionals with
specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence
obtained.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our
overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of
controls relating to management’s worldwide provision for income taxes and accruals for unrecognized tax benefits.
These procedures also included, among others, testing the accuracy of the worldwide provision for income taxes,
including the rate reconciliation and permanent and temporary differences, evaluating the completeness of
management’s identification of uncertain tax positions, and evaluating the reasonableness of management’s more-
likely-than-not determination in consideration of the tax laws in relevant jurisdictions. Professionals with specialized
skill and knowledge were used to assist in testing the accuracy of the worldwide provision for income taxes and
evaluating the completeness of management’s identification of accruals for unrecognized tax benefits.

/s/ PricewaterhouseCoopers LLP

Detroit, Michigan
February 13, 2020

We have served as the Company’s auditor since 2008.

54
 BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
(in millions, except share and per share amounts) 2019 2018
ASSETS
Cash and cash equivalents $ 832 $ 739
Receivables, net 1,921 1,988
Inventories, net 807 781
Prepayments and other current assets 276 250
Assets held for sale — 47
Total current assets 3,836 3,805

Property, plant and equipment, net 2,925 2,904

Investments and other long-term receivables 318 592
Goodwill 1,842 1,853
Other intangible assets, net 402 439
Other non-current assets 379 502
Total assets $ 9,702 $ 10,095

LIABILITIES AND EQUITY

Notes payable and other short-term debt $ 286 $ 173
Accounts payable and accrued expenses 1,977 2,144
Income taxes payable 66 59
Liabilities held for sale — 23
Total current liabilities 2,329 2,399

Long-term debt 1,674 1,941

Other non-current liabilities:

Asbestos-related liabilities — 755
Retirement-related liabilities 306 298
Other 549 357
Total other non-current liabilities 855 1,410

Commitments and contingencies

Capital stock:
Preferred stock, $0.01 par value; authorized shares: 5,000,000; none issued and outstanding — —
Common stock, $0.01 par value; authorized shares: 390,000,000; issued shares: (2019 -
246,387,057; 2018 - 246,387,057); outstanding shares: (2019 - 206,407,543; 2018 -
208,214,934) 3 3
Non-voting common stock, $0.01 par value; authorized shares: 25,000,000; none issued and
outstanding — —
Capital in excess of par value 1,145 1,146
Retained earnings 5,942 5,336
Accumulated other comprehensive loss (727) (674)
Common stock held in treasury, at cost: (2019 - 39,979,514 shares; 2018 - 38,172,123 shares) (1,657) (1,585)
Total BorgWarner Inc. stockholders’ equity 4,706 4,226
Noncontrolling interest 138 119
Total equity 4,844 4,345
Total liabilities and equity $ 9,702 $ 10,095

See Accompanying Notes to Consolidated Financial Statements.

55
 BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
(in millions) 2019 2018 2017
Net sales $ 10,168 $ 10,530 $ 9,799
Cost of sales 8,067 8,300 7,684
Gross profit 2,101 2,230 2,115

Selling, general and administrative expenses 873 946 899

Other (income) expense, net (75) 94 144
Operating income 1,303 1,190 1,072

Equity in affiliates’ earnings, net of tax (32) (49) (51)

Interest income (12) (6) (6)
Interest expense 55 59 71
Other postretirement expense (income) 27 (10) (5)
Earnings before income taxes and noncontrolling interest 1,265 1,196 1,063

Provision for income taxes 468 211 580

Net earnings 797 985 483

Net earnings attributable to the noncontrolling interest, net of tax 51 54 43

Net earnings attributable to BorgWarner Inc. $ 746 $ 931 $ 440

Earnings per share — basic $ 3.63 $ 4.47 $ 2.09

Earnings per share — diluted $ 3.61 $ 4.44 $ 2.08

Weighted average shares outstanding:

Basic 205.7 208.2 210.4
Diluted 206.8 209.5 211.5

See Accompanying Notes to Consolidated Financial Statements.

56
 BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

(in millions) 2019 2018 2017
Net earnings attributable to BorgWarner Inc. $ 746 $ 931 $ 440

Other comprehensive (loss) income

Foreign currency translation adjustments (55) (148) 237
Hedge instruments* — 2 (6)
Defined benefit postretirement plans* 4 (23) —
Other* (2) (1) 1
Total other comprehensive (loss) income attributable to BorgWarner Inc. (53) (170) 232

Comprehensive income attributable to BorgWarner Inc.* 693 761 672

Net earnings attributable to noncontrolling interest, net of tax* 51 54 43

Other comprehensive (loss) income attributable to the noncontrolling interest* (2) (8) 11
Comprehensive income $ 742 $ 807 $ 726
____________________________________
* Net of income taxes.

See Accompanying Notes to Consolidated Financial Statements.

57
 BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
(in millions) 2019 2018 2017
OPERATING
Net earnings $ 797 $ 985 $ 483
Adjustments to reconcile net earnings to net cash flows from operations:
Non-cash charges (credits) to operations:
Depreciation and amortization 439 431 408
Deferred income tax provision (benefit) 186 (57) 42
Stock-based compensation expense 42 53 52
Restructuring expense, net of cash paid 30 33 27
Pension settlement loss 27 — —
Tax reform adjustments to provision for income taxes 16 (13) 274
Asset impairment and loss on divestiture 7 26 71
Gain on derecognition of subsidiary (177) — —
Equity in affiliates’ earnings, net of dividends received, and other — (12) (32)
Net earnings adjusted for non-cash charges to operations 1,367 1,446 1,325
Derecognition of a subsidiary (172) — —
Changes in assets and liabilities:
Receivables 19 (43) (168)
Inventories (36) (53) (85)
Prepayments and other current assets (18) (19) 1
Accounts payable and accrued expenses (123) (76) 233
Prepaid taxes and income taxes payable (8) (85) (43)
Other assets and liabilities (21) (44) (83)
Net cash provided by operating activities 1,008 1,126 1,180
INVESTING
Capital expenditures, including tooling outlays (481) (546) (560)
Payments for investments in equity securities (53) (6) (3)
Payments for businesses acquired, including restricted cash, net of cash acquired (10) — (186)
Proceeds from sale of businesses, net of cash divested 24 — —
Proceeds from (payments for) settlement of net investment hedges 22 2 (8)
Proceeds from asset disposals and other 9 36 5
Net cash used in investing activities (489) (514) (752)
FINANCING
Net decrease in notes payable — (34) (88)
Additions to debt, net of debt issuance costs 63 59 3
Repayments of long term debt, including current portion (204) (66) (20)
Payments for debt issuance cost — — (2)
Payments for purchase of treasury stock (100) (150) (100)
Payments for stock-based compensation items (15) (15) (2)
Capital contribution from noncontrolling interest 4 — —
Dividends paid to BorgWarner stockholders (140) (142) (124)
Dividends paid to noncontrolling stockholders (28) (35) (30)
Net cash used in financing activities (420) (383) (363)
Effect of exchange rate changes on cash (6) (35) 36
Net increase in cash and cash equivalents 93 194 101
Cash and cash equivalents at beginning of year 739 545 444
Cash and cash equivalents at end of year $ 832 $ 739 $ 545

SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid during the year for:
Interest $ 72 $ 84 $ 92
Income taxes, net of refunds $ 243 $ 316 $ 280
Non-cash investing transactions
Liabilities assumed from business acquired $ — $ — $ 18

See Accompanying Notes to Consolidated Financial Statements.

58
 BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Number of shares BorgWarner Inc. stockholder's equity
Accumulated
Issued Common Issued Capital in other
common stock held in common excess of Treasury Retained comprehensive Noncontrolling
(in millions, except share data) stock treasury stock par value stock earnings income (loss) interests
Balance, January 1, 2017 246,387,057 (34,124,092) $ 3 $ 1,104 $ (1,382) $ 4,215 $ (722) $ 84
Dividends declared ($0.59 per share) * — — — — — (124) — (29)
Stock incentive plans — 473,419 — (11) 19 — — —
Net issuance for executive stock plan — 73,935 — 21 3 — — —
Net issuance of restricted stock — 402,184 — 4 15 — — —
Purchase of treasury stock — (2,399,710) — — (100) — — —
Business divestiture — — — — — — — —
Net earnings — — — — — 440 — 43
Other comprehensive loss — — — — — — 232 11
Balance, December 31, 2017 246,387,057 (35,574,264) $ 3 $ 1,118 $ (1,445) $ 4,531 $ (490) $ 109
Adoption of accounting standards — — — — — 16 (14) —
Dividends declared ($0.68 per share) * — — — — — (142) — (36)
Net issuance for executive stock plan — 154,642 — 18 4 — — —
Net issuance of restricted stock — 284,946 — 10 6 — — —
Purchase of treasury stock — (3,037,447) — — (150) — — —
Business divestiture — — — — — — — —
Net earnings — — — — — 931 — 54
Other comprehensive income — — — — — — (170) (8)
Balance, December 31, 2018 246,387,057 (38,172,123) $ 3 $ 1,146 $ (1,585) $ 5,336 $ (674) $ 119
Dividends declared ($0.68 per share) * — — — — — (140) — (34)
Noncontrolling interest contributions — — — — — — — 4
Net issuance for executive stock plan — 199,135 — — 7 — — —
Net issuance of restricted stock — 571,996 — (1) 21 — — —
Purchase of treasury stock — (2,578,522) — — (100) — — —
Net earnings — — — — — 746 — 51
Other comprehensive loss — — — — — — (53) (2)
Balance, December 31, 2019 246,387,057 (39,979,514) $ 3 $ 1,145 $ (1,657) $ 5,942 $ (727) $ 138

____________________________________
* The dividends declared relate to BorgWarner common stock.

See Accompanying Notes to Consolidated Financial Statements.

59
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INTRODUCTION

BorgWarner Inc. (together with it Consolidated Subsidiaries, the “Company”) is a Delaware

corporation incorporated in 1987. We are a global product leader in clean and efficient technology
solutions for combustion, hybrid and electric vehicles. Our products help improve vehicle performance,
propulsion efficiency, stability and air quality. We manufacture and sell 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 OEMs of commercial
vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and
construction machinery and marine applications). We also manufacture and sell our 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 every major automotive OEM in the world. The Company's
products fall into two reporting segments: Engine and Drivetrain.

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following paragraphs briefly describe the Company's significant accounting policies.

Basis of presentation Certain prior period amounts have been reclassified to conform to current
period presentation.

Use of estimates The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities as of the date of the financial statements and the
accompanying notes, as well as the amounts of revenues and expenses reported during the periods
covered by these financial statements and accompanying notes. Actual results could differ from those
estimates.

Principles of consolidation The Consolidated Financial Statements include all majority-owned

subsidiaries with a controlling financial interest. All inter-company accounts and transactions have been
eliminated in consolidation. The Company has investments in two joint ventures of which it owns 32.6%
and 50%, that are accounted for under the equity method as the Company does not have a controlling
financial interest. Interests in privately-held companies that do not have readily determinable fair values
are measured at cost less impairments, adjusted for observable price changes in orderly transactions for
the identical or similar investment of the same issuer. There were no impairments or upward adjustments
recorded during the years ended December 31, 2019, 2018 or 2017.

Revenue recognition The Company recognizes revenue when performance obligations under the
terms of a contract are satisfied, which generally occurs with the transfer of control of our products.
Although the Company may enter into long-term supply arrangements with its major customers, the
prices and volumes are not fixed over the life of the arrangements, and a contract does not exist for
purposes of applying Accounting Standards Codification ("ASC") Topic 606 until volumes are
contractually known. For most of our products, transfer of control occurs upon shipment or delivery,
however, a limited number of our customer arrangements for our highly customized products with no
alternative use provide us with the right to payment during the production process. As a result, for these
limited arrangements, revenue is recognized as goods are produced and control transfers to the
customer. Revenue is measured at the amount of consideration we expect to receive in exchange for
transferring the good.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company continually seeks business development opportunities and at times provides customer
incentives for new program awards. Customer incentive payments are capitalized when the payments
are incremental and incurred only if the new business is obtained and these amounts are expected to be
recovered from the customer over the term of the new business arrangement. The Company recognizes
a reduction to revenue as products that the upfront payments are related to are transferred to the
customer, based on the total amount of products expected to be sold over the term of the arrangement
(generally 3 to 7 years). The Company evaluates the amounts capitalized each period end for
recoverability and expenses any amounts that are no longer expected to be recovered over the term of
the business arrangement.

Cost of sales The Company includes materials, direct labor and manufacturing overhead within cost
of sales. Manufacturing overhead is comprised of indirect materials, indirect labor, factory operating costs
and other such costs associated with manufacturing products for sale.

Cash and cash equivalents Cash and cash equivalents are valued at fair market value. It is the
Company's policy to classify all highly liquid investments with original maturities of three months or less
as cash and cash equivalents. Cash and cash equivalents are maintained with several financial
institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand and are maintained with financial institutions
of reputable credit and therefore bear minimal risk.

Receivables, net Accounts receivable are stated at cost less an allowance for bad debts. An
allowance for doubtful accounts is recorded when it is probable amounts will not be collected based on
specific identification of customer circumstances or age of the receivable.

Refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements for more
information.

Inventories, net Cost of certain U.S. inventories is determined using the last-in, first-out (“LIFO”)
method at the lower of cost or market, while other U.S. and foreign operations use the first-in, first-out
(“FIFO”) or average-cost methods at the lower of cost or net realizable value. Inventory held by U.S.
operations using the LIFO method was $193 million and $138 million at December 31, 2019 and 2018,
respectively. Such inventories, if valued at current cost instead of LIFO, would have been greater by $15
million and $17 million at December 31, 2019 and 2018, respectively.

Refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements for more
information.

Pre-production costs related to long-term supply arrangements Engineering, research and

development and other design and development costs for products sold on long-term supply
arrangements are expensed as incurred unless the Company has a contractual guarantee for
reimbursement from the customer. Costs for molds, dies and other tools used to make products sold on
long-term supply arrangements for which the Company has title to the assets are capitalized in property,
plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or
over the estimated useful lives of the assets, typically three to five years. Costs for molds, dies and other
tools used to make products sold on long-term supply arrangements for which the Company has a
contractual guarantee for lump sum reimbursement from the customer are capitalized in prepayments
and other current assets.

Property, plant and equipment, net Property, plant and equipment is valued at cost less
accumulated depreciation. Expenditures for maintenance, repairs and renewals of relatively minor items
are generally charged to expense as incurred. Renewals of significant items are capitalized. Depreciation
is generally computed on a straight-line basis over the estimated useful lives of the assets. Useful lives

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for buildings range from 15 to 40 years and useful lives for machinery and equipment range from three to
12 years. For income tax purposes, accelerated methods of depreciation are generally used.

Refer to Note 6, "Balance Sheet Information," to the Consolidated Financial Statements for more
information.

Impairment of long-lived assets, including definite-lived intangible assets The Company

reviews the carrying value of its long-lived assets, whether held for use or disposal, including other
amortizing intangible assets, when events and circumstances warrant such a review under ASC Topic
360. In assessing long-lived assets for an impairment loss, assets are grouped with other assets and
liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of
other assets and liabilities. In assessing long-lived assets for impairment, management generally
considers individual facilities the lowest level for which identifiable cash flows are largely independent. A
recoverability review is performed using the undiscounted cash flows if there is a triggering event. If the
undiscounted cash flow test for recoverability identifies a possible impairment, management will perform
a fair value analysis. Management determines fair value under ASC Topic 820 using the appropriate
valuation technique of market, income or cost approach. If the carrying value of a long-lived asset is
considered impaired, an impairment charge is recorded for the amount by which the carrying value of the
long-lived asset exceeds its fair value.

Management believes that the estimates of future cash flows and fair value assumptions are
reasonable; however, changes in assumptions underlying these estimates could affect the valuations.
Significant judgments and estimates used by management when evaluating long-lived assets for
impairment include: (i) an assessment as to whether an adverse event or circumstance has triggered the
need for an impairment review; (ii) undiscounted future cash flows generated by the asset; and (iii) fair
valuation of the asset.

Assets and liabilities held for sale The Company classifies assets and liabilities (disposal groups)
to be sold as held for sale in the period in which all of the following criteria are met: management, having
the authority to approve the action, commits to a plan to sell the disposal group; the disposal group is
available for immediate sale in its present condition subject only to terms that are usual and customary
for sales of such disposal groups; an active program to locate a buyer and other actions required to
complete the plan to sell the disposal group have been initiated; the sale of the disposal group is
probable, and transfer of the disposal group is expected to qualify for recognition as a completed sale
within one year, except if events or circumstances beyond the Company's control extend the period of
time required to sell the disposal group beyond one year; the disposal group is being actively marketed
for sale at a price that is reasonable in relation to its current fair value; and actions required to complete
the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be
withdrawn.

The Company initially measures a disposal group that is classified as held for sale at the lower of its
carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized
in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale
of a disposal group until the date of sale. The Company assesses the fair value of a disposal group, less
any costs to sell, each reporting period it remains classified as held for sale and reports any subsequent
changes as an adjustment to the carrying value of the disposal group, as long as the new carrying value
does not exceed the carrying value of the disposal group at the time it was initially classified as held for
sale.

Upon determining that a disposal group meets the criteria to be classified as held for sale, the
Company reports the assets and liabilities of the disposal group, if material, in the line items assets held
for sale and liabilities held for sale in the Consolidated Balance Sheets. Additionally, depreciation is not

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

recorded during the period in which the long-lived assets, included in the disposal group, are classified as
held for sale.

Goodwill and other indefinite-lived intangible assets During the fourth quarter of each year, the
Company qualitatively assesses its goodwill assigned to each of its reporting units. This qualitative
assessment evaluates various events and circumstances, such as macro economic conditions, industry
and market conditions, cost factors, relevant events and financial trends, that may impact a reporting
unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-
than-not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-
likely-than-not the reporting unit's fair value exceeds the carrying value, or upon consideration of other
factors, including recent acquisition, restructuring or divestiture activity or to refresh the fair values, the
Company performs a quantitative, "step one," goodwill impairment analysis. In addition, the Company
may test goodwill in between annual test dates if an event occurs or circumstances change that could
more-likely-than-not reduce the fair value of a reporting unit below its carrying value.

Similar to goodwill, the Company can elect to perform the impairment test for indefinite-lived
intangibles other than goodwill (primarily trade names) using a qualitative analysis, considering similar
factors as outlined in the goodwill discussion in order to determine if it is more-likely-than-not that the fair
value of the trade names is less than the respective carrying values. If the Company elects to perform or
is required to perform a quantitative analysis, the test consists of a comparison of the fair value of the
indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. The
Company estimates the fair value of indefinite-lived intangibles using the relief-from-royalty method,
which it believes is an appropriate and widely used valuation technique for such assets. The fair value
derived from the relief-from-royalty method is measured as the discounted cash flow savings realized
from owning such trade names and not being required to pay a royalty for their use.

Refer to Note 7, "Goodwill and Other Intangibles," to the Consolidated Financial Statements for more
information.

Product warranties The Company provides warranties on some, but not all, of its products. The
warranty terms are typically from one to three years. Provisions for estimated expenses related to
product warranty are made at the time products are sold. These estimates are established using
historical information about the nature, frequency and average cost of warranty claim settlements as well
as product manufacturing and industry developments and recoveries from third parties. Management
actively studies trends of warranty claims and takes action to improve product quality and minimize
warranty claims. Management believes that the warranty accrual is appropriate; however, actual claims
incurred could differ from the original estimates, requiring adjustments to the accrual. The product
warranty accrual is allocated to current and non-current liabilities in the Consolidated Balance Sheets.

Refer to Note 8, "Product Warranty," to the Consolidated Financial Statements for more information.

Other loss accruals and valuation allowances The Company has numerous other loss exposures,
such as customer claims, workers' compensation claims, litigation and recoverability of assets.
Establishing loss accruals or valuation allowances for these matters requires the use of estimates and
judgment in regard to the risk exposure and ultimate realization. The Company estimates losses under
the programs using consistent and appropriate methods; however, changes to its assumptions could
materially affect the recorded accrued liabilities for loss or asset valuation allowances.

Asbestos Like many other industrial companies that have historically operated in the United States,
the Company, or parties that the Company is obligated to indemnify, has been named as one of many
defendants in asbestos-related personal injury actions. BorgWarner Morse TEC LLC ("Morse TEC"), a
former wholly-owned subsidiary of the Company, was the obligor for the Company's recorded asbestos-
related liabilities and the policyholder of the related insurance assets. On October 30, 2019, the

63
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company transferred 100% of its equity interests to Enstar Holdings (US) LLC (“Enstar”). In the fourth
quarter of 2019, the Company derecognized Morse TEC and removed asbestos obligations, related
insurance assets and associated deferred tax assets from the Consolidated Balance Sheet.

With the assistance of a third-party actuary, the Company estimated the liability and corresponding
insurance recovery for pending and future claims not yet asserted to extend through December 31, 2064
with a runoff through 2074 and defense costs. This estimate was based on the Company's historical
claim experience and estimates of the number and resolution cost of potential future claims that may be
filed based on anticipated levels of unique plaintiff asbestos-related claims in the U.S. tort system against
all defendants. As with any estimates, actual experience may differ. This estimate was not discounted to
present value. The Company believed that December 31, 2074 was a reasonable assumption as to the
last date on which it was likely to have resolved all asbestos-related claims, based on the nature and
useful life of the Company’s products and the likelihood of incidence of asbestos-related disease in the
U.S. population generally. The Company assessed the sufficiency of its estimated liability for pending and
future claims not yet asserted and defense costs by evaluating actual experience regarding claims filed,
settled and dismissed, and amounts paid in claim resolution costs. In addition to claims experience, the
Company considered additional quantitative and qualitative factors such as changes in legislation, the
legal environment, and the Company's defense strategy. The Company continued to have additional
excess insurance coverage available for potential future asbestos-related claims. In connection with the
Company’s review of its asbestos-related claims, the Company also reviewed the amount of its potential
insurance coverage for such claims, taking into account the remaining limits of such coverage, the
number and amount of claims on the Company's insurance from co-insured parties, ongoing litigation
against the Company’s insurance carriers, potential remaining recoveries from insolvent insurance
carriers, the impact of previous insurance settlements, and coverage available from solvent insurance
carriers not party to the coverage litigation.

Refer to Note 15, "Contingencies," to the Consolidated Financial Statements for more information.

Environmental contingencies The Company accounts for environmental costs in accordance with
ASC Topic 450. Costs related to environmental assessments and remediation efforts at operating
facilities are accrued when it is probable that a liability has been incurred and the amount of that liability
can be reasonably estimated. Estimated costs are recorded at undiscounted amounts, based on
experience and assessments and are regularly evaluated. The liabilities are recorded in accounts
payable and accrued expenses and other non-current liabilities in the Company's Consolidated Balance
Sheets.

Refer to Note 15, "Contingencies," to the Consolidated Financial Statements for more information.

Derivative financial instruments The Company recognizes that certain normal business
transactions generate risk. Examples of risks include exposure to exchange rate risk related to
transactions denominated in currencies other than the functional currency, changes in commodity costs
and interest rates. It is the objective of the Company to assess the impact of these transaction risks and
offer protection from selected risks through various methods, including financial derivatives. Virtually all
derivative instruments held by the Company are designated as hedges, have high correlation with the
underlying exposure and are highly effective in offsetting underlying price movements. Accordingly, gains
and losses from changes in qualifying hedge fair values are matched with the underlying transactions.
Hedge instruments are generally reported gross, with no right to offset, on the Consolidated Balance
Sheets at their fair value based on quoted market prices for contracts with similar maturities. The
Company does not engage in any derivative transactions for purposes other than hedging specific risks.

Refer to Note 11, "Financial Instruments," to the Consolidated Financial Statements for more
information.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Foreign currency The financial statements of foreign subsidiaries are translated to U.S. dollars
using the period-end exchange rate for assets and liabilities and an average exchange rate for each
period for revenues, expenses and capital expenditures. The local currency is the functional currency for
substantially all of the Company's foreign subsidiaries. Translation adjustments for foreign subsidiaries
are recorded as a component of accumulated other comprehensive income (loss) in equity. The
Company recognizes transaction gains and losses arising from fluctuations in currency exchange rates
on transactions denominated in currencies other than the functional currency in earnings as incurred.

Refer to Note 14, "Accumulated Other Comprehensive Loss," to the Consolidated Financial
Statements for more information.

Pensions and other postretirement employee defined benefits The Company's defined benefit
pension and other postretirement employee benefit plans are accounted for in accordance with ASC
Topic 715. Disability, early retirement and other postretirement employee benefits are accounted for in
accordance with ASC Topic 712.

Pensions and other postretirement employee benefit costs and related liabilities and assets are
dependent upon assumptions used in calculating such amounts. These assumptions include discount
rates, expected returns on plan assets, health care cost trends, compensation and other factors. In
accordance with GAAP, actual results that differ from the assumptions used are accumulated and
amortized over future periods, and accordingly, generally affect recognized expense in future periods.

Refer to Note 12, "Retirement Benefit Plans," to the Consolidated Financial Statements for more
information.

Restructuring Restructuring costs may occur when the Company takes action to exit or significantly
curtail a part of its operations or implements a reorganization that affects the nature and focus of
operations. A restructuring charge can consist of severance costs associated with reductions to the
workforce, costs to terminate an operating lease or contract, professional fees and other costs incurred
related to the implementation of restructuring activities.

The Company generally records costs associated with voluntary separations at the time of employee
acceptance. Costs for involuntary separation programs are recorded when management has approved
the plan for separation, the employees are identified and aware of the benefits they are entitled to and it
is unlikely that the plan will change significantly. When a plan of separation requires approval by or
consultation with the relevant labor organization or government, the costs are recorded upon agreement.
Costs associated with benefits that are contingent on the employee continuing to provide service are
accrued over the required service period.

Refer to Note 16, "Restructuring," to the Consolidated Financial Statements for more information.

Income taxes In accordance with ASC Topic 740, the Company's income tax expense is calculated
based on expected income and statutory tax rates in the various jurisdictions in which the Company
operates and requires the use of management's estimates and judgments. Accounting for income taxes
is complex, in part because the Company conducts business globally and therefore files income tax
returns in numerous tax jurisdictions. Management judgment is required in determining the Company’s
worldwide provision for income taxes and recording the related assets and liabilities, including accruals
for unrecognized tax benefits.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The determination of accruals for unrecognized tax benefits includes the application of complex tax
laws in a multitude of jurisdictions across the Company's global operations. Management judgment is
required in determining the gross unrecognized tax benefits related liabilities. In the ordinary course of
the Company's business, there are many transactions and calculations where the ultimate tax
determination is less than certain. Accruals for unrecognized tax benefits are established when, despite
the belief that tax positions are supportable, there remain certain positions that do not meet the minimum
probability threshold, which is a tax position that is more-likely-than-not to be sustained upon examination
by the applicable taxing authority.

Refer to Note 5, "Income Taxes," to the Consolidated Financial Statements for more information.

New Accounting Pronouncements

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") No. 2016-02, "Leases (Topic 842)." Under this guidance, a lease is a contract, or part of
a contract, that conveys the right to control the use of an identified asset for a period of time in exchange
for consideration. Lessees are required to recognize a right-of-use asset and a lease liability for leases
with a term of more than 12 months, including operating leases defined under previous GAAP. This
guidance was effective for interim and annual reporting periods beginning after December 15, 2018.

The Company adopted ASC Topic 842 as of January 1, 2019, using the optional transition method
provided in ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements." Under this method, the
Company recorded an adjustment as of the effective date and did not include any retrospective
adjustments to comparative periods to reflect the adoption of ASC Topic 842. In addition, the Company
elected the package of practical expedients permitted under the transition guidance within ASC Topic
842, which among other things, does not require the Company to reassess whether existing contracts
contain leases, classification of leases identified, nor classification and treatment of initial direct costs
capitalized under ASC Topic 840. The Company also elected the practical expedients to combine the
lease and non-lease components. The Company did not elect the practical expedient to apply hindsight
as part of the leases evaluation. Additionally, the Company elected the practical expedient under ASU
No. 2018-01, "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842", which
allows an entity to not reassess whether any existing land easements are or contain leases.

The Company's lease agreements primarily consist of real estate property, such as manufacturing
facilities, warehouses, and office buildings, in addition to personal property, such as vehicles,
manufacturing and information technology equipment. The Company determines whether a contract is or
contains a lease at contract inception. The majority of the Company's lease arrangements are comprised
of fixed payments and a limited number of these arrangements include a variable payment component
based on certain index fluctuations.

Adoption of ASC Topic 842 resulted in the recording of lease right-of-use assets ("lease assets") and
lease liabilities of approximately $104 million and $103 million, respectively, as of January 1, 2019. The
adoption did not impact consolidated net earnings and had no impact on cash flows. Refer to Note 17,
"Leases and Commitments," to the Consolidated Financial Statements for more information.

Accounting Standards Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740) - Simplifying the
Accounting for Income Taxes.” The amendments in the standard remove certain exceptions to the
general principles in Topic 740 and improve consistent application of and simplify GAAP for other areas
of Topic 740 by clarifying and amending existing guidance. This guidance is effective for interim and

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

annual reporting periods beginning after December 15, 2020. The Company is currently evaluating the
impact of this guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use
Software (Subtopic 350-40)." It requires implementation costs incurred by customers in cloud computing
arrangements to be deferred and recognized over the term of the arrangement, if those costs would be
capitalized by the customer in a software licensing arrangement under the internal-use software
guidance (Subtopic 350-40). This guidance is effective for interim and annual periods beginning after
December 15, 2019 and early adoption is permitted. The Company does not expect this guidance to
have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-14, "Compensation - Retirement Benefits - Defined
Benefit Plans - General (Subtopic 715-20)." The new standard (i) requires the removal of disclosures
that are no longer considered cost beneficial; (ii) clarifies specific requirements of certain disclosures; (iii)
adds new disclosure requirements, including the weighted average interest crediting rates for cash
balance plans and other plans with promised interest crediting rates, and reasons for significant gains
and losses related to changes in the benefit obligation. This guidance is effective for annual periods
beginning after December 15, 2020 and early adoption is permitted. The Company does not expect this
guidance to have a material impact on its consolidated financial statements and will include enhanced
disclosures in the consolidated financial statements upon adoption.

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820)." It
removes disclosure requirements on fair value measurements including the amount of and reasons for
transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers
between levels, and the valuation processes for Level 3 fair value measurements. It also amends and
clarifies certain disclosures and adds new disclosure requirements including the changes in unrealized
gains and losses for the period included in other comprehensive income for recurring Level 3 fair value
measurements, and the range and weighted average of significant unobservable inputs used to develop
Level 3 fair value measurements. This guidance is effective for interim and annual periods beginning
after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures and
delay adoption of the additional disclosures until the effective date. The Company does not expect this
guidance to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic
326)." It replaces the current incurred loss impairment method with a new method that reflects expected
credit losses. Under this new model an entity would recognize an impairment allowance equal to its
current estimate of credit losses on financial assets measured at amortized cost. This guidance is
effective for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company
does not expect this guidance to have a material impact on its consolidated financial statements.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 2 REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company manufactures and sells products, primarily to OEMs of light vehicles, and to a lesser
extent, to other OEMs of commercial vehicles and off-highway vehicles, to certain Tier One vehicle
systems suppliers and into the aftermarket. Although the Company may enter into long-term supply
arrangements with its major customers, the prices and volumes are not fixed over the life of the
arrangements, and a contract does not exist for purposes of applying ASC Topic 606, "Revenue from
Contracts with Customers", until volumes are contractually known. Revenue is recognized when
performance obligations under the terms of a contract are satisfied, which generally occurs with the
transfer of control of our products. For most of our products, transfer of control occurs upon shipment or
delivery; however, a limited number of our customer arrangements for our highly customized products
with no alternative use provide us with the right to payment during the production process. As a result,
for these limited arrangements, revenue is recognized as goods are produced and control transfers to the
customer using the input cost-to-cost method. The Company recorded a contract asset of $10 million and
$11 million at December 31, 2019 and December 31, 2018, respectively, for these arrangements. These
amounts are reflected in Prepayments and other current assets in the Company's Consolidated Balance
Sheets.

Revenue is measured at the amount of consideration we expect to receive in exchange for

transferring the goods. The Company has a limited number of arrangements with customers where the
price paid by the customer is dependent on the volume of product purchased over the term of the
arrangement. In other limited arrangements, the Company will provide a rebate to customers based on
the volume of products purchased during the course of the arrangement. The Company estimates the
volumes to be sold over the term of the arrangement and recognizes revenue based on the estimated
amount of consideration to be received from these arrangements. As a result of these arrangements, the
Company recognized a liability of $2 million and $6 million at December 31, 2019 and December 31,
2018. These amounts are reflected in Accounts payable and accrued expenses in the Company's
Consolidated Balance Sheets.

The Company’s payment terms with customers are customary and vary by customer and geography
but typically range from 30 to 90 days. We have evaluated the terms of our arrangements and
determined that they do not contain significant financing components. The Company provides warranties
on some of its products. Provisions for estimated expenses related to product warranty are made at the
time products are sold. Refer to Note 8, "Product Warranty," to the Consolidated Financial Statements for
more information. Shipping and handling fees billed to customers are included in sales, while costs of
shipping and handling are included in cost of sales. The Company has elected to apply the accounting
policy election available under ASC Topic 606 and accounts for shipping and handling activities as a
fulfillment cost.

In limited instances, certain customers have provided payments in advance of receiving related
products, typically at the onset of an arrangement prior to the beginning of production. These contract
liabilities are reflected in Accounts payable and accrued expenses and Other non-current liabilities in the
Company's Consolidated Balance Sheets and were $10 million and $12 million at December 31, 2019
and $13 million and $17 million at December 31, 2018, respectively. These amounts are reflected as
revenue over the term of the arrangement (typically 3 to 7 years) as the underlying products are shipped.

The Company continually seeks business development opportunities and at times provides customer
incentives for new program awards. The Company evaluates the underlying economics of each amount
of consideration payable to a customer to determine the proper accounting by understanding the reasons
for the payment, the rights and obligations resulting from the payment, the nature of the promise in the
contract, and other relevant facts and circumstances. When the Company determines that the payments
are incremental and incurred only if the new business is obtained and expects to recover these amounts
from the customer over the term of the new business arrangement, the Company capitalizes these
amounts. The Company recognizes a reduction to revenue as products that the upfront payments are

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

related to are transferred to the customer, based on the total amount of products expected to be sold
over the term of the arrangement (generally 3 to 7 years). The Company evaluates the amounts
capitalized each period end for recoverability and expenses any amounts that are no longer expected to
be recovered over the term of the business arrangement. The Company had $37 million and $29 million
recorded in Prepayments and other current assets, and $180 million and $187 million recorded in Other
non-current assets in the Consolidated Balance Sheets at December 31, 2019 and December 31, 2018.

The following table represents a disaggregation of revenue from contracts with customers by
segment and region:

Year Ended December 31, 2019

(In millions) Engine Drivetrain Total
North America $ 1,584 $ 1,791 $ 3,375
Europe 2,980 830 3,810
Asia 1,468 1,365 2,833
Other 121 29 150
Total $ 6,153 $ 4,015 $ 10,168

Year Ended December 31, 2018

(In millions) Engine Drivetrain Total
North America $ 1,573 $ 1,799 $ 3,372
Europe 3,074 948 4,022
Asia 1,621 1,362 2,983
Other 122 31 153
Total $ 6,390 $ 4,140 $ 10,530

Year Ended December 31, 2017

(In millions) Engine Drivetrain Total
North America $ 1,509 $ 1,691 $ 3,200
Europe 2,783 952 3,735
Asia 1,615 1,116 2,731
Other 102 31 133
Total $ 6,009 $ 3,790 $ 9,799

NOTE 3 RESEARCH AND DEVELOPMENT COSTS

The Company's net Research & Development ("R&D") expenditures are included in selling, general
and administrative expenses of the Consolidated Statements of Operations. Customer reimbursements
are netted against gross R&D expenditures as they are considered a recovery of cost. Customer
reimbursements for prototypes are recorded net of prototype costs based on customer contracts,
typically either when the prototype is shipped or when it is accepted by the customer. Customer
reimbursements for engineering services are recorded when performance obligations are satisfied in
accordance with the contract. Financial risks and rewards transfer upon shipment, acceptance of a
prototype component by the customer or upon completion of the performance obligation as stated in the
respective customer agreement.

The following table presents the Company’s gross and net expenditures on R&D activities:

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Year Ended December 31,

(in millions) 2019 2018 2017
Gross R&D expenditures $ 498 $ 512 $ 473
Customer reimbursements (85) (72) (65)
Net R&D expenditures $ 413 $ 440 $ 408

Net R&D expenditures as a percentage of net sales were 4.1%, 4.2% and 4.2% for the years ended
December 31, 2019, 2018 and 2017, respectively. The Company has contracts with several customers at
the Company's various R&D locations. None of the Company's R&D-related customer reimbursements
under these contracts exceeded 5% of net R&D expenditures in any of the periods presented.

NOTE 4 OTHER (INCOME) EXPENSE, NET

Items included in Other (income) expense, net consist of:

Year Ended December 31,
(in millions) 2019 2018 2017
Gain on derecognition of subsidiary $ (177) $ — $ —
Restructuring expense 72 67 58
Unfavorable arbitration loss 14 — —
Merger, acquisition and divestiture expense 11 6 10
Asset impairment and loss on divestiture 7 25 71
Asbestos-related adjustments — 23 —
Gain on sale of building — (19) —
Gain on commercial settlement — (4) —
Lease termination settlement — — 5
Other income (2) (4) —
Other (income) expense, net $ (75) $ 94 $ 144

On October 30, 2019, the Company entered into a definitive agreement with Enstar, a subsidiary of
Enstar Group Limited, pursuant to which Enstar acquired 100% of the equity interests of Morse TEC, a
consolidated wholly-owned subsidiary of the Company that holds asbestos and certain other liabilities. In
connection with the closing, the Company recorded a pre-tax gain of $177 million. Refer to Note 19
“Recent Transactions,” to the Consolidated Financial Statements for more information.

During the year ended December 31, 2019 the Company recorded $72 million of restructuring
expense, primarily related to actions to reduce structural costs. During the years ended December 31,
2018 and 2017, the Company recorded restructuring expense of $67 million and $58 million, respectively,
primarily related to Drivetrain and Engine segment actions designed to improve future profitability and
competitiveness. Refer to Note 16, "Restructuring," to the Consolidated Financial Statements for more
information.

During the year ended December 31, 2019, the Company recorded $14 million of expense related to
the receipt of a final unfavorable arbitration decision associated with the resolution of a matter related to
a previous acquisition.

During the years ended December 31, 2019, 2018 and 2017, the Company recorded $11 million, $6
million and $10 million of merger, acquisition and divestiture expenses. The merger, acquisition and
divestiture expense in the year ended December 31, 2019 was primarily professional fees, related to the
Company's review of strategic acquisition and divestiture targets, including the transfer of Morse TEC,
the anticipated acquisition of Delphi Technologies PLC, and the 20% equity interest in Romeo Systems,
Inc. and the divestiture activities for the non-core pipes and thermostat product lines. The merger,
acquisition and divestiture expense in the year ended December 31, 2018 primarily related to
70
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

professional fees associated with divestiture activities for the non-core pipes and thermostat product
lines. Refer to Note 20, "Assets and Liabilities Held For Sale," to the Consolidated Financial Statements
for more information. The merger and acquisition expense in the year ended December 31, 2017
primarily related to the acquisition of Sevcon. Refer to Note 19, "Recent Transactions," to the
Consolidated Financial Statements for more information.

In the third quarter of 2017, the Company started exploring strategic options for non-core emission
product lines. In the fourth quarter of 2017, the Company launched an active program to locate a buyer
for these non-core pipes and thermostat product lines and initiated all other actions required to complete
the plan to sell these non-core product lines. The Company determined that the assets and liabilities of
the pipes and thermostat product lines met the held for sale criteria as of December 31, 2017. As a
result, the Company recorded an asset impairment expense of $71 million in the fourth quarter of 2017 to
adjust the net book value of this business to its fair value less cost to sell. In December 2018, the
Company reached an agreement to sell its thermostat product lines for approximately $28 million. As a
result, the Company recorded an additional asset impairment expense of $25 million in the year ended
December 31, 2018 to adjust the net book value of this business to fair value less costs to sell. All closing
conditions were satisfied, and the sale was closed on April 1, 2019. Based on the agreement reached in
the fourth quarter of 2019 regarding the finalization of the purchase price adjustments related to the sale
of the thermostat product lines, the Company determined that $7 million of additional loss on sale was
required during the year ended December 31, 2019.

During the year ended December 31, 2018, the Company recorded asbestos-related adjustments
resulting in an increase to Other (income) expense, net, of $23 million. This increase was the result of
actuarial valuation changes of $23 million associated with the Company's estimate of liabilities for
asbestos-related claims asserted but not yet resolved and potential claims not yet asserted. Refer to
Note 15, "Contingencies," to the Consolidated Financial Statements for more information.

During the fourth quarter of 2018, the Company recorded a gain of $19 million related to the sale of a
building at a manufacturing facility located in Europe.

During the year ended December 31, 2018, the Company recorded a gain of approximately $4
million related to the settlement of a commercial contract for an entity acquired in the 2015 Remy
acquisition.

During the first quarter of 2017, the Company recorded a loss of $5 million related to the termination
of a long-term property lease for a manufacturing facility located in Europe.

71
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 5 INCOME TAXES

Earnings before income taxes and the provision for income taxes are presented in the following table.
Year Ended December 31,
(in millions) 2019 2018 2017
Earnings before income taxes:
U.S. $ 310 $ 220 $ 203
Non-U.S. 955 976 860
Total $ 1,265 $ 1,196 $ 1,063
Provision for income taxes:
Current:
Federal $ 32 $ 17 $ 36
State 4 5 5
Foreign 245 259 247
Total current 281 281 288
Deferred:
Federal 150 (40) 324
State 23 (8) 2
Foreign 14 (22) (34)
Total deferred 187 (70) 292
Total provision for income taxes $ 468 $ 211 $ 580

The provision for income taxes resulted in an effective tax rate of 37%, 17.7% and 54.7% for the
years ended December 31, 2019, 2018 and 2017, respectively. An analysis of the differences between
the effective tax rate and the U.S. statutory rate for the years ended December 31, 2019, 2018 and 2017
is presented below.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act"), was enacted into law, which
significantly changed existing U.S. tax law and included many provisions applicable to the Company,
such as reducing the U.S. federal statutory tax rate, imposing a one-time transition tax on deemed
repatriation of deferred foreign income, and adopting a territorial tax system. The Tax Act reduced the
U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. The Tax Act also includes a
provision to tax Global Intangible Low-Taxed Income (“GILTI”) of foreign subsidiaries, a special tax
deduction for Foreign-Derived Intangible Income (“FDII”), and a Base Erosion Anti-Abuse (“BEAT”) tax
measure that may tax certain payments between a U.S. corporation and its subsidiaries. These
additional provisions of the Tax Act were effective beginning January 1, 2018.

In accordance with guidance provided by Staff Accounting Bulletin No 118 (SAB 118), as of
December 31, 2017, the Company had not completed its accounting for the tax effects of the Tax Act and
had recorded provisional estimates for significant items including the following: (i) the effects on existing
deferred balances, including executive compensation, (ii) the one-time transition tax, and (iii) its indefinite
reinvestment assertion. In light of the treatment of foreign earnings under the Tax Act, the Company
reconsidered its indefinite reinvestment position and concluded it would no longer assert indefinite
reinvestment with respect to the Company's foreign unremitted earnings as of December 31, 2017. The
Company recognized income tax expense of $274 million for the year ended December 31, 2017 for the
significant items it could reasonably estimate associated with the Tax Act. This amount was comprised of
(i) a revaluation of U.S. deferred tax assets and liabilities at December 31, 2017, resulting in a tax charge
of $75 million, including $11 million for executive compensation (ii) a one-time transition tax resulting in a
tax charge of $105 million and (iii) a tax charge of $94 million for additional provisional deferred tax
liabilities with respect to the expected future remittance of foreign earnings.

72
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For the year ended December 31, 2018, the Company completed its accounting for the tax effects of
the Tax Act. The final SAB 118 adjustments resulted in: (i) an increase in the Company's existing deferred
tax asset balances of $13 million, including $9 million for executive compensation (ii) a tax charge of $8
million for the one-time transition tax, and (iii) a decrease in the deferred tax liability associated with its
indefinite reinvestment assertion of $7 million. The total impact to tax expense from these adjustments
was a net tax benefit of $13 million. Compared to the year ended December 31, 2017, this additional tax
benefit from the final adjustments was a result of further analysis performed by the Company and the
issuance of additional regulatory guidance.

In 2018, the Company made an accounting policy election to treat the future tax impacts of the GILTI
provisions of the Tax Act as a period cost to the extent applicable.

As discussed above, in light of the treatment of foreign earnings under the Tax Act, the Company
reconsidered its indefinite reinvestment position with respect to its foreign unremitted earnings in 2017,
and the Company is no longer asserting indefinite reinvestment with respect to its foreign unremitted
earnings. The Company recorded a deferred tax liability of $56 million with respect to its foreign
unremitted earnings at December 31, 2019. With respect to certain book versus tax basis differences not
represented by undistributed earnings of approximately $400 million as of December 31, 2019, the
Company continues to assert indefinite reinvestment of these basis differences. These basis differences
would become taxable upon the sale or liquidation of the foreign subsidiaries. The Company's best
estimate of the unrecognized deferred tax liability on these basis differences is approximately $20 million
as of December 31, 2019.

The following table provides a reconciliation of tax expense based on the U.S. statutory tax rate to
final tax expense.
Year Ended December 31,
(in millions) 2019 2018 2017
Income taxes at U.S. statutory rate of 21% for 2019 and 2018 (35% for
2017) $ 266 $ 251 $ 372
Increases (decreases) resulting from:
Impact of transactions 124 (1) 4
Reserve adjustments, settlements and claims 46 32 8
Foreign rate differentials 35 28 (100)
Net tax on remittance of foreign earnings 22 (22) 80
U.S. tax on non-U.S. earnings 15 37 171
Other foreign taxes 10 8 8
State taxes, net of federal benefit 3 6 2
Non-deductible transaction costs 3 3 11
Impact of foreign derived intangible income (1) (15) —
Valuation allowance adjustments (2) (11) 12
Affiliates' earnings (7) (10) (18)
Changes in accounting methods and filing positions (7) (30) (2)
Tax credits (17) (26) (24)
Tax holidays (26) (28) (31)
Revaluation of U.S. deferred taxes — (4) 64
Other 4 (7) 23
Provision for income taxes, as reported $ 468 $ 211 $ 580

The change in the effective tax rate for 2019, as compared to 2018, was primarily due to the
derecognition of Morse TEC and items related to the Tax Act. The derecognition of Morse TEC resulted in
73
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

an increase in income tax expense of $173 million for the reversal of the asbestos-related deferred tax
assets. This amount is offset in the rate reconciliation above by a benefit of $37 million representing the
impact of the nontaxable pre-tax gain of $177 million. The items related to the Tax Act include an
increase in tax expense of $22 million due to the U.S. Department of the Treasury’s issuance of the final
regulations in the first quarter of 2019 related to the calculation of the one-time transition tax.
Additionally, the Company recorded a tax expense of $22 million on net remittance of foreign earnings in
2019 compared to a tax benefit recorded in 2018. The tax benefit in 2018 is related to the refinement in
the Company’s change in the indefinite reinvestment assertion.

The Company's provision for income taxes for the year ended December 31, 2019 includes an
increase in income tax expense for the items mentioned above. In addition, the provision for income
taxes also includes reductions of income tax expense of $19 million related to restructuring and merger,
acquisition and divestiture expense, $11 million for a global realignment plan, $8 million related to other
one-time adjustments and $6 million related to pension settlement loss.

The change in the effective tax rate for 2018, as compared to 2017, was primarily due to items
related to the Tax Act. The Tax Act includes a reduction in the US income tax rate from 35% to 21%, as of
January 1, 2018. Tax expense includes a provision for GILTI of $29 million, net of foreign tax credits and
a tax benefit for FDII of $15 million that was not applicable in 2017. The one-time transition tax that
resulted in a tax charge of $105 million in 2017 was not applicable in 2018. There was also a tax charge
of $75 million related to a revaluation of U.S. deferred tax assets and liabilities, including $11 million for
executive compensation in 2017 and the initial tax charge of $94 million related to the Company’s change
in indefinite reinvestment assertion with respect to the expected future remittance of undistributed foreign
earnings in 2017.

The Company's provision for income taxes for the year ended December 31, 2018 includes
reductions of income tax expense of $15 million related to restructuring expense, $6 million related to the
asbestos-related adjustments, and $8 million related to asset impairment expense, offset by increases to
tax expense of $1 million and $6 million related to a gain on commercial settlement and a gain on the
sale of a building, respectively, discussed in Note 4, "Other (Income) Expense, Net," to the Consolidated
Financial Statements. The provision for income taxes also includes reductions of income tax expense of
$13 million related to final adjustments made to measurement period provisional estimates associated
with the Tax Act, $22 million related to a decrease in the Company's deferred tax liability due to a tax
benefit for certain foreign tax credits now available due to actions the Company took during the year, $9
million related to valuation allowance releases, $3 million related to tax reserve adjustments, and $30
million related to changes in accounting methods and tax filing positions for prior years primarily related
to the Tax Act.

The Company's provision for income taxes for the year ended December 31, 2017 includes
reductions of income tax expense of $10 million, $1 million, $18 million and $4 million related to the
restructuring expense, merger and acquisition expense, asset impairment expense and other one-time
adjustments, respectively, discussed in Note 4, "Other (Income) Expense, Net," to the Consolidated
Financial Statements.

74
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A roll forward of the Company's total gross unrecognized tax benefits for the years ended December
31, 2019 and 2018, respectively, is presented below:
(in millions) 2019 2018 2017
Balance, January 1 $ 120 $ 92 $ 91
Additions based on tax positions related to current year 7 24 17
Additions/(reductions) for tax positions of prior years 26 18 (2)
Reductions for closure of tax audits and settlements — (8) (20)
Reductions for lapse in statute of limitations (6) — (1)
Translation adjustment (1) (6) 7
Balance, December 31 $ 146 $ 120 $ 92

The Company recognizes interest and penalties related to unrecognized tax benefits in income tax
expense. The amounts recognized in income tax expense for 2019 and 2018 are $15 million and $10
million, respectively. The Company has an accrual of approximately $46 million and $32 million for the
payment of interest and penalties at December 31, 2019 and 2018, respectively. As of December 31,
2019, approximately $144 million represents the amount that, if recognized, would affect the Company's
effective income tax rate in future periods. This amount includes a decrease in U.S. federal income taxes
that would occur upon recognition of the state tax benefits and U.S. foreign tax credits included therein.
The Company estimates that approximately $5 million will be released in the next 12 months for the
closure of an audit and the lapse in statute of limitations subsequent to the reporting period from certain
taxing jurisdictions.

The Company and/or one of its subsidiaries files income tax returns in the U.S. federal, various state
jurisdictions and various foreign jurisdictions. In certain tax jurisdictions, the Company may have more
than one taxpayer. The Company is no longer subject to income tax examinations by tax authorities in its
major tax jurisdictions as follows:
Tax jurisdiction Years no longer subject to audit Tax jurisdiction Years no longer subject to audit
U.S. Federal 2014 and prior Japan 2018 and prior
China 2012 and prior Mexico 2013 and prior
France 2015 and prior Poland 2013 and prior
Germany 2011 and prior South Korea 2013 and prior
Hungary 2013 and prior

In the U.S., certain tax attributes created in years prior to 2015 were subsequently utilized. Even
though the U.S. federal statute of limitations has expired for years prior to 2015, the years in which these
tax attributes were created could still be subject to examination, limited to only the examination of the
creation of the tax attribute.

75
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The components of deferred tax assets and liabilities as of December 31, 2019 and 2018 consist of
the following:
December 31,
(in millions) 2019 2018
Deferred tax assets:
Research and development capitalization $ 74 $ 92
Net operating loss and capital loss carryforwards 70 84
Other comprehensive loss 53 64
Unrecognized tax benefits 49 41
Employee compensation 32 24
Pension and other postretirement benefits 25 19
State tax credits 21 20
Warranty 15 14
Foreign tax credits 13 —
Asbestos-related — 172
Other 67 80
Total deferred tax assets $ 419 $ 610
Valuation allowance (71) (86)
Net deferred tax asset $ 348 $ 524
Deferred tax liabilities:
Goodwill and intangible assets (174) (183)
Fixed assets (144) (118)
Unremitted foreign earnings (56) (57)
Other (20) (19)
Total deferred tax liabilities $ (394) $ (377)
Net deferred taxes $ (46) $ 147

At December 31, 2019, certain non-U.S. subsidiaries have net operating loss carryforwards totaling
$212 million available to offset future taxable income. Of the total $212 million, $147 million expire at
various dates from 2020 through 2039 and the remaining $65 million have no expiration date. The
Company has a valuation allowance recorded against $134 million of the $212 million of non-U.S. net
operating loss carryforwards. The Company has a U.S. foreign tax credit carryover of $13 million, which
is partially offset by a valuation allowance of $2 million. Certain U.S. subsidiaries have state net operating
loss carryforwards totaling $571 million, which are largely offset by a valuation allowance of $504 million.
The state net operating loss carryforwards expire at various dates from 2020 to 2039. Certain U.S.
subsidiaries also have state tax credit carryforwards of $21 million which are partially offset by a
valuation allowance of $19 million. Certain non-U.S. subsidiaries located in China had tax exemptions or
tax holidays, which reduced local tax expense approximately $26 million and $28 million in 2019 and
2018, respectively. The tax holidays for these subsidiaries are issued in three-year terms with expirations
for certain subsidiaries ranging from 2019 to 2021.

76
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 6 BALANCE SHEET INFORMATION

Detailed balance sheet data is as follows:

December 31,
(in millions) 2019 2018
Receivables, net:
Customers $ 1,713 $ 1,728
Indirect taxes 106 114
Other 108 153
Gross receivables 1,927 1,995
Bad debt allowance (a) (6) (7)
Total receivables, net $ 1,921 $ 1,988
Inventories, net:
Raw material and supplies $ 502 $ 485
Work in progress 113 114
Finished goods 207 199
FIFO inventories 822 798
LIFO reserve (15) (17)
Total inventories, net $ 807 $ 781
Prepayments and other current assets:
Prepaid taxes $ 95 $ 84
Prepaid tooling 83 83
Other 98 83
Total prepayments and other current assets $ 276 $ 250
Property, plant and equipment, net:
Land and land use rights $ 105 $ 108
Buildings 755 763
Machinery and equipment 2,971 2,851
Capital leases 1 3
Construction in progress 360 426
Property, plant and equipment, gross 4,192 4,151
Accumulated depreciation (1,513) (1,474)
Property, plant and equipment, net, excluding tooling 2,679 2,677
Tooling, net of amortization 246 227
Property, plant and equipment, net $ 2,925 $ 2,904
Investments and other long-term receivables:
Investment in equity affiliates $ 256 $ 244
Cost method investments 60 8
Other long-term asbestos-related insurance receivables* — 303
Other long-term receivables* 2 37
Total investments and other long-term receivables $ 318 $ 592
Other non-current assets:
Operating leases $ 85 $ —
Deferred income taxes* 79 198
Deferred asbestos-related insurance asset* — 83
Other 215 221
Total other non-current assets $ 379 $ 502

77
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

December 31,
(in millions) 2019 2018
Accounts payable and accrued expenses:
Trade payables $ 1,325 $ 1,485
Payroll and employee related 233 233
Customer related 71 49
Product warranties 63 56
Indirect taxes 61 73
Severance 34 25
Operating leases 18 —
Interest 18 19
Insurance 17 12
Retirement related 15 16
Dividends payable to noncontrolling shareholders 14 17
Asbestos-related* — 50
Other 108 109
Total accounts payable and accrued expenses $ 1,977 $ 2,144
Other non-current liabilities:
Deferred income taxes $ 125 $ 51
Operating leases 67 —
Product warranties 53 47
Deferred revenue 49 51
Other 255 208
Total other non-current liabilities $ 549 $ 357
________________
* Relates to the derecognition of Morse TEC, refer to Note 19, “Recent Transactions” to the Consolidated Financial Statements
for more information.

(a) Bad debt allowance: 2019 2018 2017

Beginning balance, January 1 $ (7) $ (6) $ (3)
Provision (1) (5) (3)
Write-offs 2 4 —
Ending balance, December 31 $ (6) $ (7) $ (6)

As of December 31, 2019 and December 31, 2018, accounts payable of $102 million and $104
million, respectively, were related to property, plant and equipment purchases.

Interest costs capitalized for the years ended December 31, 2019, 2018 and 2017 were $16 million,
$22 million and $20 million, respectively.

NOTE 7 GOODWILL AND OTHER INTANGIBLES

During the fourth quarter of each year, the Company qualitatively assesses its goodwill assigned to
each of its reporting units. This qualitative assessment evaluates various events and circumstances,
such as macro economic conditions, industry and market conditions, cost factors, relevant events and
financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the
Company determines whether it is more-likely-than-not the reporting unit's fair value exceeds its carrying
value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the
carrying value, or upon consideration of other factors, including recent acquisition, restructuring or
divestiture activity or to refresh the fair values, the Company performs a quantitative, "step one," goodwill
impairment analysis. In addition, the Company may test goodwill in between annual test dates if an event
78
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

occurs or circumstances change that could more-likely-than-not reduce the fair value of a reporting unit
below its carrying value.

During the fourth quarter of 2019, the Company performed an analysis on each reporting unit. Based
on the factors above, the Company elected to perform quantitative, "step one," goodwill impairment
analyses, on three reporting units. This requires the Company to make significant assumptions and
estimates about the extent and timing of future cash flows, discount rates and growth rates. The basis of
this goodwill impairment analysis is the Company's annual budget and long-range plan (“LRP”). The
annual budget and LRP includes a five-year projection of future cash flows based on actual new products
and customer commitments and assumes the last year of the LRP data is a fair indication of the future
performance. Because the LRP is estimated over a significant future period of time, those estimates and
assumptions are subject to a high degree of uncertainty. Further, the market valuation models and other
financial ratios used by the Company require certain assumptions and estimates regarding the
applicability of those models to the Company's facts and circumstances.

The Company believes the assumptions and estimates used to determine the estimated fair value
are reasonable. Different assumptions could materially affect the estimated fair value. The primary
assumptions affecting the Company's December 31, 2019 goodwill quantitative, "step one," impairment
review are as follows:

• Discount rate: the Company used a 10.7% weighted average cost of capital (“WACC”) as the
discount rate for future cash flows. The WACC is intended to represent a rate of return that
would be expected by a market participant.

• Operating income margin: the Company used historical and expected operating income
margins, which may vary based on the projections of the reporting unit being evaluated.

• Revenue growth rate: the Company used a global automotive market industry growth rate
forecast adjusted to estimate its own market participation for product lines.

In addition to the above primary assumptions, the Company notes the following risks to volume and
operating income assumptions that could have an impact on the discounted cash flow models:

• The automotive industry is cyclical, and the Company's results of operations would be adversely
affected by industry downturns.
• The Company is dependent on market segments that use our key products and would be affected
by decreasing demand in those segments.
• The Company is subject to risks related to international operations.

Based on the assumptions outlined above, the impairment testing conducted in the fourth quarter of
2019 indicated the Company's goodwill assigned to the reporting units that were quantitatively assessed
were not impaired and contained fair values substantially higher than the reporting units' carrying values.
Additionally, for the reporting units quantitatively assessed, sensitivity analyses were completed
indicating that a one percentage point increase in the discount rate, a one percentage point decrease in
the operating margin, or a one percentage point decrease in the revenue growth rate assumptions would
not result in the carrying value exceeding the fair value.

79
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018
are as follows:
2019 2018
(in millions) Engine Drivetrain Engine Drivetrain
Gross goodwill balance, January 1 $ 1,343 $ 1,012 $ 1,360 $ 1,024
Accumulated impairment losses, January 1 (502) — (502) —
Net goodwill balance, January 1 $ 841 $ 1,012 $ 858 $ 1,024
Goodwill during the year:
Acquisitions* — 7 — 2
Translation adjustment and other (6) (12) (17) (14)
Ending balance, December 31 $ 835 $ 1,007 $ 841 $ 1,012
________________
* Acquisitions relate to the Company's 2019 purchase of Rinehart Motion Systems LLC and AM Racing LLC and the 2017
purchase of Sevcon.

The Company’s other intangible assets, primarily from acquisitions, consist of the following:
December 31, 2019 December 31, 2018
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in millions) amount amortization amount amount amortization amount
Amortized intangible assets:
Patented and unpatented
technology $ 154 $ 70 $ 84 $ 152 $ 61 $ 91
Customer relationships 481 224 257 490 201 289
Miscellaneous 10 4 6 8 4 4
Total amortized intangible assets 645 298 347 650 266 384
Unamortized trade names 55 — 55 55 — 55
Total other intangible assets $ 700 $ 298 $ 402 $ 705 $ 266 $ 439

Amortization of other intangible assets was $39 million, $40 million and $40 million for the years
ended December 31, 2019, 2018 and 2017, respectively. The estimated useful lives of the Company's
amortized intangible assets range from 3 to 20 years. The Company utilizes the straight line method of
amortization recognized over the estimated useful lives of the assets. The estimated future annual
amortization expense, primarily for acquired intangible assets, is as follows: $39 million in 2020, $38
million in 2021, $37 million in 2022, $31 million in 2023, and $31 million in 2024.

A roll forward of the gross carrying amounts of the Company's other intangible assets is presented
below:
(in millions) 2019 2018
Beginning balance, January 1 $ 705 $ 730
Acquisitions* 5 —
Translation adjustment (10) (25)
Ending balance, December 31 $ 700 $ 705
________________
* Acquisitions relate to the Company's 2019 purchase of Rinehart Motion Systems LLC and AM Racing LLC and the 2017
purchase of Sevcon.

80
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A roll forward of the accumulated amortization associated with the Company's other intangible assets
is presented below:
(in millions) 2019 2018
Beginning balance, January 1 $ 266 $ 237
Amortization 39 40
Translation adjustment (7) (11)
Ending balance, December 31 $ 298 $ 266

NOTE 8 PRODUCT WARRANTY

The changes in the carrying amount of the Company’s total product warranty liability for the years
ended December 31, 2019 and 2018 were as follows:
(in millions) 2019 2018
Beginning balance, January 1 $ 103 $ 112
Provisions for current period sales 63 56
Adjustments of prior estimates 9 12
Payments (57) (73)
Translation adjustment (2) (4)
Ending balance, December 31 $ 116 $ 103

The product warranty liability is classified in the Consolidated Balance Sheets as follows:
December 31,
(in millions) 2019 2018
Accounts payable and accrued expenses $ 63 $ 56
Other non-current liabilities 53 47
Total product warranty liability $ 116 $ 103

81
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 9 NOTES PAYABLE AND LONG-TERM DEBT

As of December 31, 2019 and 2018, the Company had short-term and long-term debt outstanding as
follows:
December 31,
(in millions) 2019 2018
Short-term debt
Short-term borrowings $ 34 $ 33

Long-term debt
8.00% Senior notes due 10/01/19 ($134 million par value) — 135
4.625% Senior notes due 09/15/20 ($250 million par value) 251 251
1.80% Senior notes due 11/7/22 (€500 million par value) 558 570
3.375% Senior notes due 03/15/25 ($500 million par value) 497 497
7.125% Senior notes due 02/15/29 ($121 million par value) 119 119
4.375% Senior notes due 03/15/45 ($500 million par value) 494 494
Term loan facilities and other 7 15
Total long-term debt $ 1,926 $ 2,081
Less: current portion 252 140
Long-term debt, net of current portion $ 1,674 $ 1,941

In July 2016, the Company terminated interest rate swaps which had the effect of converting $384
million of fixed rate notes to variable rates. The gain on the termination was recorded as an increase to
the notes and is being amortized as a reduction to interest expense over the remaining terms of the
notes. The unamortized gain related to these swap terminations was $1 million and $2 million as of
December 31, 2019 and December 31, 2018, respectively, on the 4.625% notes.

The Company may utilize uncommitted lines of credit for short-term working capital requirements. As
of December 31, 2019 and 2018, the Company had $34 million and $33 million, respectively, in
borrowings under these facilities, which are reported in Notes payable and short-term debt on the
Consolidated Balance Sheets.

The weighted average interest rate on short-term borrowings outstanding as of December 31, 2019
and 2018 was 2.5% and 4.3%, respectively. The weighted average interest rate on all borrowings
outstanding, including the effects of outstanding swaps, as of December 31, 2019 and 2018 was 2.8%
and 3.4%, respectively.

Annual principal payments required as of December 31, 2019 are as follows:

(in millions)
2020 $ 286
2021 3
2022 562
2023 1
2024 —
After 2024 1,121
Total payments $ 1,973
Less: unamortized discounts 13
Total $ 1,960

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company's long-term debt includes various covenants, none of which are expected to restrict
future operations.

The Company has a $1.2 billion multi-currency revolving credit facility, which includes a feature that
allows the Company's facility to be increased to $1.5 billion with bank approval. The facility provides for
borrowings through June 29, 2022. The Company has one key financial covenant as part of the credit
agreement which is a debt to EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization")
ratio. The Company was in compliance with the financial covenant at December 31, 2019. At December
31, 2019 and December 31, 2018, the Company had no outstanding borrowings under this facility.

The Company's commercial paper program allows the Company to issue short-term, unsecured
commercial paper notes up to a maximum aggregate principal amount outstanding of $1.2 billion. 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 December
31, 2019 and December 31, 2018.

The total current combined borrowing capacity under the multi-currency revolving credit facility and
commercial paper program cannot exceed $1.2 billion.

As of December 31, 2019 and 2018, the estimated fair values of the Company's senior unsecured
notes totaled $2,025 million and $2,058 million, respectively. The estimated fair values were $106 million
higher than carrying value at December 31, 2019 and $8 million less than their carrying value at
December 31, 2018. Fair market values of the senior unsecured notes are developed using observable
values for similar debt instruments, which are considered Level 2 inputs as defined by ASC Topic 820.
The carrying values of the Company's multi-currency revolving credit facility and commercial paper
program approximate fair value. The fair value estimates do not necessarily reflect the values the
Company could realize in the current markets.

The Company had outstanding letters of credit of $28 million and $43 million at December 31, 2019
and 2018, respectively. The letters of credit typically act as guarantees of payment to certain third parties
in accordance with specified terms and conditions.

NOTE 10 FAIR VALUE MEASUREMENTS

ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based on assumptions that
market participants would use in pricing an asset or liability. As a basis for considering market participant
assumptions in fair value measurements, ASC Topic 820 establishes a fair value hierarchy, which
prioritizes the inputs used in measuring fair values as follows:

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or
indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting
entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following three valuation
techniques noted in ASC Topic 820:

A. Market approach: Prices and other relevant information generated by market

transactions involving identical or comparable assets, liabilities or a group of assets or
liabilities, such as a business.

83
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

B. Cost approach: Amount that would be required to replace the service capacity of an
asset (replacement cost).
C. Income approach: Techniques to convert future amounts to a single present amount
based upon market expectations (including present value techniques, option-pricing and
excess earnings models).

The following tables classify assets and liabilities measured at fair value on a recurring basis as of
December 31, 2019 and 2018:
Basis of fair value measurements
Quoted prices Significant
in active other Significant
markets for observable unobservable
Balance at identical items inputs inputs Valuation
(in millions) December 31, 2019 (Level 1) (Level 2) (Level 3) technique
Assets:
Net investment hedge contracts $ 3 $ — $ 3 $ — A
Liabilities:
Foreign currency contracts $ 1 $ — $ 1 $ — A
Net investment hedge contracts $ 8 $ — $ 8 $ — A

Basis of fair value measurements

Quoted prices Significant
in active other Significant
markets for observable unobservable
Balance at identical items inputs inputs Valuation
(in millions) December 31, 2018 (Level 1) (Level 2) (Level 3) technique
Assets:
Foreign currency contracts $ 3 $ — $ 3 $ — A
Other long-term receivables
(insurance settlement agreement note
receivable) $ 34 $ — $ 34 $ — C
Net investment hedge contracts $ 12 $ — $ 12 $ — A
Liabilities:
Foreign currency contracts $ 2 $ — $ 2 $ — A

The following tables classify the Company's defined benefit plan assets measured at fair value on a
recurring basis as of December 31, 2019 and 2018:
Basis of fair value measurements

Quoted prices in Significant

active markets Significant other unobservable Assets
for identical observable inputs measured at
Balance at items inputs (Level 3) Valuation NAV
(in millions) December 31, 2019 (Level 1) (Level 2) (a) technique (b)

U.S. Plans:
Fixed income securities $ 88 $ — $ — $ — — 88
Equity securities 59 8 — — A 51
Real estate and other 29 15 — — A 14
$ 176 $ 23 $ — $ — $ 153
Non-U.S. Plans:
Fixed income securities $ 168 $ — $ — $ — — 168
Equity securities 185 111 — — A 74
Insurance contract and other 152 — — 110 C 42
$ 505 $ 111 $ — $ 110 $ 284

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Basis of fair value measurements

Quoted prices Significant

in active other Significant Assets
markets for observable unobservable measured at
Balance at identical items inputs inputs Valuation NAV
(in millions) December 31, 2018 (Level 1) (Level 2) (Level 3) technique (b)

U.S. Plans:
Fixed income securities $ 122 $ 1 $ — $ — A 121
Equity securities 71 11 — — A 60
Real estate and other 23 18 — — A 5
$ 216 $ 30 $ — $ — $ 186
Non-U.S. Plans:
Fixed income securities $ 239 $ — $ — $ — — 239
Equity securities 163 93 — — A 70
Other 36 — — — — 36
$ 438 $ 93 $ — $ — $ 345
________________
(a) In 2019, the BW Plan, a defined benefit plan in the United Kingdom, purchased an insurance contract that guarantees
payment of specified pension liabilities. The Company measures the fair value of the insurance asset by projecting
expected future cash flows from the contract and discounting them to present value based on current market rates,
including an assessment for non-performance risk of the insurance company. The assumptions used to project
expected future cash flows are based on actuarial estimates and are unobservable; therefore, the contract is
categorized within Level 3 of the hierarchy.

(b) Certain assets that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not
been classified in the fair value hierarchy. These amounts represent investments in commingled and managed funds
which have underlying assets in fixed income securities, equity securities, and other assets.

The reconciliation of Level 3 defined benefit plans assets was as follows:

Fair Value Measurements

(in millions) Using Significant Unobservable Inputs (Level 3)
Balance at December 31, 2018 $ —
Purchase of insurance contract 106
Unrealized gains on assets still held at the reporting date 2
Translation adjustment 2
Balance at December 31, 2019 $ 110

Refer to Note 12, "Retirement Benefit Plans," to the Consolidated Financial Statements for more
detail surrounding the defined plan’s asset investment policies and strategies, target allocation
percentages and expected return on plan asset assumptions.

NOTE 11 FINANCIAL INSTRUMENTS

The Company’s financial instruments include cash and cash equivalents, marketable securities and
accounts receivable. Due to the short-term nature of these instruments, their book value approximates
their fair value. The Company’s financial instruments may include long-term debt, interest rate and cross-
currency swaps, commodity derivative contracts and foreign currency derivative contracts. All derivative
contracts are placed with counterparties that have an S&P, or equivalent, investment grade credit rating
at the time of the contracts’ placement. At December 31, 2019 and 2018, the Company had no derivative
contracts that contained credit-risk-related contingent features.

The Company uses certain commodity derivative contracts to protect against commodity price
changes related to forecasted raw material and component purchases. The Company primarily utilizes
85
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

forward and option contracts, which are designated as cash flow hedges. At December 31, 2019 and
December 31, 2018, the following commodity derivative contracts were outstanding.
Commodity derivative contracts
Volume hedged Volume hedged
Commodity December 31, 2019 December 31, 2018 Units of measure Duration
Copper 203 257 Metric Tons Dec - 20

The Company manages its interest rate risk by balancing its exposure to fixed and variable rates
while attempting to optimize its interest costs. The Company selectively uses interest rate swaps to
reduce market value risk associated with changes in interest rates (fair value hedges). At December 31,
2019 and December 31, 2018, the Company had no outstanding interest rate swaps.

The Company uses foreign currency forward and option contracts to protect against exchange rate
movements for forecasted cash flows, including capital expenditures, purchases, operating expenses or
sales transactions designated in currencies other than the functional currency of the operating unit. In
addition, the Company uses foreign currency forward contracts to hedge exposure associated with our
net investment in certain foreign operations (net investment hedges). The Company has also designated
its Euro-denominated debt as a net investment hedge of the Company's investment in a European
subsidiary. Foreign currency derivative contracts require the Company, at a future date, to either buy or
sell foreign currency in exchange for the operating units’ local currency. At December 31, 2019 and
December 31, 2018, the following foreign currency derivative contracts were outstanding:
Foreign currency derivatives (in millions)
Notional in traded currency Notional in traded currency
Functional currency Traded currency December 31, 2019 December 31, 2018 Ending duration
Brazilian real Euro 1 4 Mar - 20
Brazilian real US dollar — 5 Jun - 19
British pound Euro 9 — Mar - 20
British pound US dollar 4 — Mar - 20
Chinese renminbi US dollar 2 — Aug - 20
Euro British pound — 7 Oct - 19
Euro Japanese yen 383 — Dec - 20
Euro Swedish krona — 540 Jun - 19
Euro US dollar 18 19 Dec - 20
Japanese yen Chinese renminbi — 89 Dec - 19
Japanese yen Korean won — 5,785 Dec - 19
Japanese yen US dollar — 3 Dec - 19
Korean won Euro 13 6 Dec - 20
Korean won Japanese yen 409 266 Dec - 20
Korean won US dollar 4 7 Dec - 20
Swedish krona Euro 3 56 Jan - 20
US dollar Euro 14 — Dec - 20
US dollar Mexican peso — 575 Dec - 19

The Company selectively uses cross-currency swaps to hedge the foreign currency exposure
associated with our net investment in certain foreign operations (net investment hedges). In December
2019, the Company terminated its $250 million cross-currency swap contract originally maturing in
September 2020, and executed a $500 million cross-currency swap contract to mature in March 2025,
resulting in cash proceeds of $23 million and a deferred gain of $21 million that is expected to remain in
accumulated other comprehensive loss. At December 31, 2019 and December 31, 2018, the following
cross-currency swap contracts were outstanding:
86
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cross-currency swaps

(in millions) December 31, 2019 December 31, 2018 Ending duration
US dollar to Euro:
Fixed receiving notional $ 500 $ 250 Mar - 25
Fixed paying notional € 450 € 206 Mar - 25
US dollar to Japanese yen:
Fixed receiving notional $ 100 $ 100 Feb - 23
Fixed paying notional ¥ 10,978 ¥ 10,978 Feb - 23

At December 31, 2019 and 2018, the following amounts were recorded in the Consolidated Balance
Sheets as being payable to or receivable from counterparties under ASC Topic 815:
(in millions) Assets Liabilities

Derivatives
designated as
hedging
instruments Under December 31, December 31, December 31, December 31,
Topic 815: Location 2019 2018 Location 2019 2018

Prepayments and other Accounts payable and 1 2

Foreign currency $ — $ 2 $ $
current assets accrued expenses

Net investment Other non-current Other non-current 8

$ 3 $ 12 $ $ —
hedges assets liabilities
Derivatives not
designated as
hedging
instruments
Prepayments and other Accounts payable and
Foreign currency current assets $ — $ 1 accrued expenses $ — $ —

Effectiveness for cash flow hedges is assessed at the inception of the hedging relationship and
quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of
effectiveness are deferred into accumulated other comprehensive income (loss) ("AOCI") and reclassified
into income as the underlying operating transactions are recognized. These realized gains or losses
offset the hedged transaction and are recorded on the same line in the statement of operations. The
initial value of any component excluded from the assessment of effectiveness will be recognized in
income using a systematic and rational method over the life of the hedging instrument. Any difference
between the change in fair value of the excluded component and amounts recognized in income under
that systematic and rational method will be recognized in AOCI.

Effectiveness for net investment hedges is assessed at the inception of the hedging relationship and
quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment
of effectiveness are deferred into foreign currency translation adjustments and only released when the
subsidiary being hedged is sold or substantially liquidated. The initial value of any component excluded
from the assessment of effectiveness will be recognized in income using a systematic and rational
method over the life of the hedging instrument. Any difference between the change in fair value of the
excluded component and amounts recognized in income under that systematic and rational method will
be recognized in AOCI.

87
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The table below shows deferred gains (losses) reported in AOCI as well as the amount expected to
be reclassified to income in one year or less. The amount expected to be reclassified to income in one
year or less assumes no change in the current relationship of the hedged item at December 31, 2019
market rates.
Gain (loss)
(in millions) Deferred gain (loss) in AOCI at expected to be
reclassified to
income in one
Contract Type December 31, 2019 December 31, 2018 year or less
Net investment hedges:
Foreign currency 5 4 —
Cross-currency swaps 16 12 —
Foreign currency denominated debt (17) (30) —
Total $ 4 $ (14) $ —

88
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Derivative instruments designated as hedging instruments as defined by ASC Topic 815 held during
the period resulted in the following gains and losses recorded in income:
Year Ended December 31, 2019
Selling, general and Other comprehensive
(in millions) Net sales Cost of sales administrative expenses income
Total amounts of earnings and other
comprehensive income line items in which the
effects of cash flow hedges are recorded $ 10,168 $ 8,067 $ 873 $ (53)

Gain (loss) on cash flow hedging relationships:

Foreign currency
Gain (loss) recognized in other
comprehensive income $ (1)
Gain (loss) reclassified from AOCI to income $ (5) $ 1 $ 3 $ —

Year Ended December 31, 2018

Selling, general and Other comprehensive
(in millions) Net sales Cost of sales administrative expenses income
Total amounts of earnings and other
comprehensive income line items in which the
effects of cash flow hedges are recorded $ 10,530 $ 8,300 $ 946 $ (170)

Gain (loss) on cash flow hedging relationships:

Foreign currency
Gain (loss) recognized in other
comprehensive income $ (1)
Gain (loss) reclassified from AOCI to income $ (2) $ (1) $ — $ —

Year Ended December 31, 2017

Selling, general and Other comprehensive
(in millions) Net sales Cost of sales administrative expenses income
Total amounts of earnings and other
comprehensive income line items in which the
effects of cash flow hedges are recorded $ 9,799 $ 7,684 $ 899 $ 232

Gain (loss) on cash flow hedging relationships:

Foreign currency
Gain (loss) recognized in other
comprehensive income $ (5)
Gain (loss) reclassified from AOCI to income $ 3 $ — $ — $ —

Commodity
Gain (loss) recognized in other
comprehensive income $ — $ — $ — $ 1
Gain (loss) reclassified from AOCI to income $ — $ 1 $ — $ —

There were no gains and (losses) recorded in income related to components excluded from the
assessment of effectiveness for derivative instruments designated as cash flow hedges.

Gains and (losses) on derivative instruments designated as net investment hedges were recognized
in other comprehensive income during the periods presented below.
(in millions) Year Ended December 31,
Net investment hedges 2019 2018 2017
Foreign currency $ 1 $ 2 $ (8)
Cross-currency swaps $ 4 $ 12 $ —
Foreign currency denominated debt $ 13 $ 27 $ (84)

89
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Derivatives designated as net investment hedge instruments as defined by ASC Topic 815 held
during the period resulted in the following gains and (losses) recorded in Interest expense and finance
charges on components excluded from the assessment of effectiveness:
(in millions) Year Ended December 31,
Net investment hedges 2019 2018 2017
Foreign currency $ — $ 1 $ 1
Cross-currency swaps $ 11 $ 9 $ —

There were no gains and (losses) recorded in income related to components excluded from the
assessment of effectiveness for foreign currency denominated debt designated as net investment
hedges. There were no gains and losses reclassified from AOCI for net investment hedges during the
periods presented.

Derivatives not designated as hedging instruments are used to hedge remeasurement exposures of
monetary assets and liabilities denominated in currencies other than the operating units' functional
currency. These derivatives resulted in the following gains and (losses) recorded to income:
(in millions) Year Ended December 31,
Contract Type Location 2019 2018 2017
Foreign Currency Selling, general and administrative expenses $ (3) $ 1 $ (1)

NOTE 12 RETIREMENT BENEFIT PLANS

The Company sponsors various defined contribution savings plans, primarily in the U.S., that allow
employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan
specified guidelines. Under specified conditions, the Company will make contributions to the plans and/or
match a percentage of the employee contributions up to certain limits. Total expense related to the defined
contribution plans was $37 million, $35 million and $34 million in the years ended December 31, 2019,
2018 and 2017, respectively.

The Company has a number of defined benefit pension plans and other postretirement employee
benefit plans covering eligible salaried and hourly employees and their dependents. The defined pension
benefits provided are primarily based on (i) years of service and (ii) average compensation or a monthly
retirement benefit amount. The Company provides defined benefit pension plans in France, Germany,
Ireland, Italy, Japan, Mexico, South Korea, Sweden, U.K. and the U.S. The other postretirement employee
benefit plans, which provide medical benefits, are unfunded plans. Our U.S. and U.K. defined benefit
plans are frozen and no additional service cost is being accrued. All pension and other postretirement
employee benefit plans in the U.S. have been closed to new employees. The measurement date for all
plans is December 31.

During the year ended December 31, 2019, the Company settled approximately $50 million of its U.S.
pension projected benefit obligation by liquidating approximately $50 million in plan assets through a
lump-sum disbursement made to an insurance company. Pursuant to this agreement, the insurance
company unconditionally and irrevocably guarantees all future payments to certain participants that were
receiving payments from the U.S. pension plan. The insurance company assumes all investment risk
associated with the assets that were delivered as part of this transaction. Additionally, during the year
ended December 31, 2019, the Company discharged certain U.S. pension plan obligations by making
lump-sum payments of $15 million to former employees of the Company. As a result, the Company
settled $65 million of projected benefit obligation by liquidating pension plan assets and recorded a non-
cash settlement loss of $27 million related to the accelerated recognition of unamortized losses.

90
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the expenses for the Company's defined contribution and defined
benefit pension plans and the other postretirement defined employee benefit plans:
Year Ended December 31,
(in millions) 2019 2018 2017
Defined contribution expense $ 37 $ 35 $ 34
Defined benefit pension expense 45 8 12
Other postretirement employee benefit expense — — 1
Total $ 82 $ 43 $ 47

The following provides a roll forward of the plans’ benefit obligations, plan assets, funded status and
recognition in the Consolidated Balance Sheets:
Pension benefits Other postretirement
Year Ended December 31, employee benefits
2019 2018 Year Ended December 31,
(in millions) US Non-US US Non-US 2019 2018
Change in projected benefit obligation:
Projected benefit obligation, January 1 $ 253 $ 612 $ 283 $ 629 $ 87 $ 107
Service cost — 18 — 18 — —
Interest cost 8 12 9 12 3 3
Plan amendments — — — 2 — —
Settlement and curtailment (65) (5) — (4) — —
Actuarial (gain) loss 17 75 (18) 5 3 (6)
Currency translation — (1) — (30) — —
Benefits paid (15) (16) (21) (20) (12) (17)
Projected benefit obligation, December 31 $ 198 $ 695 $ 253 $ 612 $ 81 $ 87
Change in plan assets:
Fair value of plan assets, January 1 $ 216 $ 438 $ 240 $ 483
Actual return on plan assets 29 68 (11) (18)
Employer contribution 10 16 7 19
Settlements (65) (5) — (4)
Currency translation — 4 — (22)
Benefits paid (14) (16) (20) (20)
Fair value of plan assets, December 31 $ 176 $ 505 $ 216 $ 438
Funded status $ (22) $ (190) $ (37) $ (174) $ (81) $ (87)
Amounts in the Consolidated Balance Sheets
consist of:
Non-current assets $ — $ 28 $ — $ 17 $ — $ —
Current liabilities (1) (4) — (5) (10) (11)
Non-current liabilities (21) (214) (37) (186) (71) (76)
Net amount $ (22) $ (190) $ (37) $ (174) $ (81) $ (87)
Amounts in accumulated other comprehensive
loss consist of:
Net actuarial loss $ 82 $ 211 $ 113 $ 193 $ 16 $ 13
Net prior service (credit) cost (5) 2 (6) 2 (8) (12)
Net amount $ 77 $ 213 $ 107 $ 195 $ 8 $ 1

Total accumulated benefit obligation for all plans $ 198 $ 660 $ 253 $ 583

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The funded status of pension plans with accumulated benefit obligations in excess of plan assets at
December 31 is as follows:
December 31,
(in millions) 2019 2018
Accumulated benefit obligation $ (633) $ (650)
Plan assets 425 450
Deficiency $ (208) $ (200)
Pension deficiency by country:
United States $ (22) $ (37)
Germany (107) (95)
Other (79) (68)
Total pension deficiency $ (208) $ (200)

The weighted average asset allocations of the Company’s funded pension plans and target allocations
by asset category are as follows:
December 31,
Target
2019 2018 Allocation
U.S. Plans:
Real estate and other 16% 11% 0% - 15%
Fixed income securities 50% 56% 45% - 65%
Equity securities 34% 33% 25% - 45%
100% 100%
Non-U.S. Plans:
Insurance contract, real estate and other 30% 8% 0% - 36%
Fixed income securities 33% 55% 29% - 62%
Equity securities 37% 37% 30% - 43%
100% 100%

The Company's investment strategy is to maintain actual asset weightings within a preset range of
target allocations. The Company believes these ranges represent an appropriate risk profile for the
planned benefit payments of the plans based on the timing of the estimated benefit payments. In each
asset category, separate portfolios are maintained for additional diversification. Investment managers are
retained in each asset category to manage each portfolio against its benchmark. Each investment
manager has appropriate investment guidelines. In addition, the entire portfolio is evaluated against a
relevant peer group. The defined benefit pension plans did not hold any Company securities as
investments as of December 31, 2019 and 2018. A portion of pension assets is invested in common and
commingled trusts.

The Company expects to contribute a total of $10 million to $20 million into its defined benefit pension
plans during 2020. Of the $10 million to $20 million in projected 2020 contributions, $4 million are
contractually obligated, while any remaining payments would be discretionary.

Refer to Note 10, "Fair Value Measurements," to the Consolidated Financial Statements for more
detail surrounding the fair value of each major category of plan assets, as well as the inputs and valuation
techniques used to develop the fair value measurements of the plans' assets at December 31, 2019 and
2018.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

See the table below for a breakout of net periodic benefit cost between U.S. and non-U.S. pension
plans:
Pension benefits
Other postretirement
Year Ended December 31, employee benefits
2019 2018 2017 Year Ended December 31,
(in millions) US Non-US US Non-US US Non-US 2019 2018 2017
Service cost $ — $ 18 $ — $ 18 $ — $ 18 $ — $ — $ —
Interest cost 8 12 9 12 9 11 3 3 3
Expected return on plan assets (11) (22) (14) (27) (13) (24) — — —
Settlements, curtailments and other 27 1 — — — — — — —
Amortization of unrecognized prior service
(credit) cost (1) — (1) — (1) — (4) (4) (4)
Amortization of unrecognized loss 4 9 4 7 4 8 1 1 2
Net periodic cost (income) $ 27 $ 18 $ (2) $ 10 $ (1) $ 13 $ — $ — $ 1

The components of net periodic benefit cost other than the service cost component are included in
Other postretirement income in the Consolidated Statements of Operations.

The estimated net loss for the defined benefit pension plans that will be amortized from accumulated
other comprehensive loss into net periodic benefit cost over the next fiscal year is $14 million. The
estimated net loss and prior service credit for the other postretirement employee benefit plans that will be
amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal
year are $1 million and $3 million, respectively.

The Company's weighted-average assumptions used to determine the benefit obligations for its
defined benefit pension and other postretirement employee benefit plans as of December 31, 2019 and
2018 were as follows:
December 31,
(percent) 2019 2018
U.S. pension plans:
Discount rate 3.17 4.24
Rate of compensation increase N/A N/A
U.S. other postretirement employee benefit plans:
Discount rate 2.95 4.05
Rate of compensation increase N/A N/A
Non-U.S. pension plans:
Discount rate 1.61 2.28
Rate of compensation increase 3.05 2.99

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company's weighted-average assumptions used to determine the net periodic benefit cost/
(income) for its defined benefit pension and other postretirement employee benefit plans for the years
ended December 31, 2019 and 2018 were as follows:
Year Ended December 31,
(percent) 2019 2018
U.S. pension plans:
Discount rate - service cost 4.24 3.55
Effective interest rate on benefit obligation 3.88 3.13
Expected long-term rate of return on assets 6.00 6.00
Average rate of increase in compensation N/A N/A
U.S. other postretirement plans:
Discount rate - service cost 3.43 2.65
Effective interest rate on benefit obligation 3.68 2.86
Expected long-term rate of return on assets N/A N/A
Average rate of increase in compensation N/A N/A
Non-U.S. pension plans:
Discount rate - service cost 2.55 2.71
Effective interest rate on benefit obligation 2.06 1.98
Expected long-term rate of return on assets 5.23 5.73
Average rate of increase in compensation 3.03 2.98

The Company's approach to establishing the discount rate is based upon the market yields of high-
quality corporate bonds, with appropriate consideration of each plan's defined benefit payment terms and
duration of the liabilities. In determining the discount rate, the Company utilizes a full-yield approach in the
estimation of service and interest components by applying the specific spot rates along the yield curve
used in the determination of the benefit obligation to the relevant projected cash flows.

The Company determines its expected return on plan asset assumptions by evaluating estimates of
future market returns and the plans' asset allocation. The Company also considers the impact of active
management of the plans' invested assets.

The estimated future benefit payments for the pension and other postretirement employee benefits are
as follows:
Pension benefits Other
(in millions) postretirement
employee
Year U.S. Non-U.S. benefits
2020 $ 20 $ 20 $ 10
2021 15 23 9
2022 14 23 9
2023 14 24 8
2024 14 24 7
2025-2029 62 137 25

The weighted-average rate of increase in the per capita cost of covered health care benefits is
projected to be 6.25% in 2019 for pre-65 and post-65 participants, decreasing to 5% by the year 2025. A
one-percentage point change in the assumed health care cost trend would have the following effects:

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

One Percentage Point

(in millions) Increase Decrease
Effect on other postretirement employee benefit obligation $ 5 $ (5)
Effect on total service and interest cost components $ — $ —

NOTE 13 STOCK-BASED COMPENSATION

The Company has granted restricted common stock and restricted stock units (collectively, "restricted
stock") and performance share units as long-term incentive awards to employees and non-employee
directors under the BorgWarner Inc. 2014 Stock Incentive Plan, as amended ("2014 Plan") and the
BorgWarner Inc. 2018 Stock Incentive Plan ("2018 Plan"). The Company's Board of Directors adopted
the 2018 Plan as a replacement to the 2014 Plan in February 2018, and the Company's stockholders
approved the 2018 Plan at the annual meeting of stockholders on April 25, 2018. After stockholders
approved the 2018 Plan, the Company could no longer make grants under the 2014 Plan. The shares
that were available for issuance under the 2014 Plan were cancelled upon approval of the 2018 Plan.
The 2018 Plan authorizes the issuance of a total of 7 million shares, of which approximately 6 million
shares were available for future issuance as of December 31, 2019.

Stock Options A summary of the plans’ shares under option at December 31, 2019, 2018 and 2017
is as follows:
Weighted average
Weighted remaining Aggregate intrinsic
Shares average contractual life value
(thousands) exercise price (in years) (in millions)
Outstanding at January 1, 2017 473 $ 17.47 0.1 $ 10.4
Exercised (473) $ 17.47 $ 10.4
Outstanding at December 31, 2017 — $ — 0.0 $ —
Exercised — $ — $ —
Outstanding at December 31, 2018 — $ — 0.0 $ —
Exercised — $ — $ —
Outstanding at December 31, 2019 — $ — 0.0 $ —

Options exercisable at December 31, 2019 — $ — 0.0 $ —

Proceeds from stock option exercises for the years ended December 31, 2019, 2018 and 2017 were
as follows:
Year Ended December 31,
(in millions) 2019 2018 2017
Proceeds from stock options exercised — gross $ — $ — $ 8
Tax benefit — — 8
Proceeds from stock options exercised, net of tax $ — $ — $ 16

Restricted Stock The value of restricted stock is determined by the market value of the Company’s
common stock at the date of grant. In 2019, restricted stock in the amount of 1,058,180 shares and
23,880 shares was granted to employees and non-employee directors, respectively. The value of the
awards is recognized as compensation expense ratably over the restriction periods. As of December 31,
2019, there was $37 million of unrecognized compensation expense that will be recognized over a
weighted average period of approximately 1.8 years.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Restricted stock compensation expense recorded in the Consolidated Statements of Operations is as

follows:
Year Ended December 31,
(in millions, except per share data) 2019 2018 2017
Restricted stock compensation expense $ 30 $ 26 $ 27
Restricted stock compensation expense, net of tax $ 23 $ 20 $ 20

A summary of the status of the Company’s nonvested restricted stock for employees and non-
employee directors at December 31, 2019, 2018 and 2017 is as follows:
Shares subject Weighted
to restriction average grant
(thousands) date fair value
Nonvested at January 1, 2017 1,429 $ 44.12
Granted 804 $ 40.10
Vested (521) $ 56.53
Forfeited (119) $ 38.97
Nonvested at December 31, 2017 1,593 $ 38.86
Granted 737 $ 51.70
Vested (556) $ 42.25
Forfeited (258) $ 44.51
Nonvested at December 31, 2018 1,516 $ 42.97
Granted 1,082 $ 41.66
Vested (724) $ 36.81
Forfeited (210) $ 44.82
Nonvested at December 31, 2019 1,664 $ 44.26

Total Shareholder Return Performance Share Units The 2014 and 2018 Plans provide for
awarding of performance shares to members of senior management at the end of successive three-year
periods based on the Company's performance in terms of total shareholder return relative to a peer
group of automotive companies. Based on the Company’s relative ranking within the performance peer
group, it is possible for none of the awards to vest or for a range up to 200% of the target shares to vest.

The Company recognizes compensation expense relating to its performance share plans ratably over
the performance period regardless of whether the market conditions are expected to be achieved.
Compensation expense associated with the performance share plans is calculated using a lattice model
(Monte Carlo simulation). The amounts expensed under the plan and the common stock issuances for
the three-year measurement periods ended December 31, 2019, 2018 and 2017 were as follows:

Year Ended December 31,

(in millions, except share data) 2019 2018 2017
Expense $ 5 $ 9 $ 10
Number of shares — — —

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the status of the Company's nonvested total shareholder return performance share
units at December 31, 2019, 2018 and 2017 is as follows:
Number of Weighted
shares average grant
(thousands) date fair value
Nonvested at January 1, 2017 410 $ 43.99
Granted 201 $ 45.57
Forfeited (256) $ 61.40
Nonvested at December 31, 2017 355 $ 32.35
Granted 287 $ 68.38
Forfeited (345) $ 38.26
Nonvested at December 31, 2018 297 $ 60.35
Granted 196 $ 51.52
Vested (160) $ 45.78
Forfeited (93) $ 55.82
Nonvested at December 31, 2019 240 $ 64.61

As of December 31, 2019, there was $7 million of unrecognized compensation expense that will be
recognized over a weighted average period of approximately 1.7 years.

Relative Revenue Growth Performance Share Units The 2014 and 2018 Plans provide for
awarding of performance shares to reward members of senior management based on the Company's
performance in terms of revenue growth relative to the vehicle market over three-year performance
periods. The value of this performance share award is determined by the market value of the Company’s
common stock at the date of grant. The Company recognizes compensation expense relating to its
performance share plans over the performance period based on the number of shares expected to vest
at the end of each reporting period. The actual performance of the Company is evaluated quarterly, and
the expense is adjusted according to the new projections. The amounts expensed under the plan and
common stock issuance for the years ended December 31, 2019, 2018 and 2017 were as follows:
Year Ended December 31,
(in millions, except share data) 2019 2018 2017
Expense $ 7 $ 18 $ 16
Number of shares 315,000 249,000 126,000

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the status of the Company’s nonvested relative revenue growth performance shares at
December 31, 2019, 2018 and 2017 is as follows:
Number of Weighted
shares average grant
(thousands) date fair value
Nonvested at January 1, 2017 320 $ 38.62
Granted 198 $ 40.08
Vested (156) $ 38.62
Forfeited (7) $ 39.20
Nonvested at December 31, 2017 355 $ 39.42
Granted 287 $ 50.82
Vested (166) $ 38.62
Forfeited (179) $ 45.82
Nonvested at December 31, 2018 297 $ 47.03
Granted 196 $ 41.90
Vested (160) $ 40.10
Forfeited (93) $ 44.30
Nonvested at December 31, 2019 240 $ 48.52

Based on the Company’s relative revenue growth in excess of the industry vehicle production, it is
possible for none of the awards to vest or for a range up to 200% of the target shares to vest. As of
December 31, 2019, there was $8 million of unrecognized compensation expense that will be recognized
over a weighted average period of approximately 1.7 years. The unrecognized amount of compensation
expense is based on projected performance as of December 31, 2019.

In 2018, the Company modified the vesting provisions of restricted stock and performance share unit
grants made to retiring executive officers to allow certain of the outstanding awards, that otherwise would
have been forfeited, to vest upon retirement. This resulted in net restricted stock and performance share
unit compensation expense of $2 million and $8 million for the years ended December 31, 2019 and
2018, respectively.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 14 ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table summarizes the activity within accumulated other comprehensive loss during the
years ended December 31, 2019, 2018 and 2017:
Foreign
currency Defined benefit
translation Hedge postretirement
(in millions) adjustments instruments plans Other Total
Beginning Balance, January 1, 2017 $ (530) $ 5 $ (198) $ 1 $ (722)
Comprehensive (loss) income before
reclassifications 236 (4) (5) 2 229
Income taxes associated with comprehensive
(loss) income before reclassifications — 1 (1) — —
Reclassification from accumulated other
comprehensive (loss) income — (4) 9 — 5
Income taxes reclassified into net earnings — 1 (3) — (2)
Ending Balance December 31, 2017 $ (294) $ (1) $ (198) $ 3 $ (490)
Adoption of accounting standard — — (14) — (14)
Comprehensive (loss) income before
reclassifications (153) (2) (42) (1) (198)
Income taxes associated with comprehensive
(loss) income before reclassifications 5 — 14 — 19
Reclassification from accumulated other
comprehensive (loss) income — 4 8 — 12
Income taxes reclassified into net earnings — (1) (2) — (3)
Ending Balance December 31, 2018 $ (442) $ — $ (234) $ 2 $ (674)
Comprehensive (loss) income before
reclassifications (51) (1) (29) (2) (83)
Income taxes associated with comprehensive
(loss) income before reclassifications (4) — 4 — —
Reclassification from accumulated other
comprehensive (loss) income — 1 37 — 38
Income taxes reclassified into net earnings — — (8) — (8)
Ending Balance December 31, 2019 $ (497) $ — $ (230) $ — $ (727)

NOTE 15 CONTINGENCIES

The Company's environmental and product liability contingencies are discussed separately below. In
the normal course of business, the Company is also party to various other commercial and legal claims,
actions and complaints, including matters involving warranty claims, intellectual property claims, general
liability and various other risks. It is not possible to predict with certainty whether or not the Company will
ultimately be successful in any of these other commercial and legal matters or, if not, what the impact
might be. The Company's management does not expect that an adverse outcome in any of these other
commercial and legal claims, actions and complaints will have a material adverse effect on the
Company's results of operations, financial position or cash flows, although it could be material to the
results of operations in a particular quarter.

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 state 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. The PRPs may currently be
liable for the cost of clean-up and other remedial activities at 14 and 28 such sites as of December 31,
2019 and 2018, respectively. Responsibility for clean-up and other remedial activities at a Superfund site
is typically shared among PRPs based on an allocation formula.

99
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

The Company has an accrual for environmental liabilities of $3 million and $9 million as of December
31, 2019 and December 31, 2018, respectively. This accrual is based on information available to the
Company (which in most cases includes: an estimate of allocation of liability among PRPs; the probability
that other PRPs, many of whom are large, solvent public companies, will fully pay the cost apportioned to
them; currently available information from PRPs and/or federal or state environmental agencies
concerning the scope of contamination and estimated remediation and consulting costs; and remediation
alternatives). The decrease in both the number of sites and accrual was primarily the result of
divestitures completed during 2019 including Morse TEC and non-core pipes and thermostat product
lines. Refer to Note 19, "Recent Transactions," to the Consolidated Financial Statements for more
information.

Asbestos-related Liability

Like many other industrial companies that have historically operated in the United States, the
Company, or parties that the Company is obligated to indemnify, has been named as one of many
defendants in asbestos-related personal injury actions. Morse TEC, a former wholly-owned subsidiary of
the Company, was the obligor for the Company's recorded asbestos-related liabilities and the
policyholder of the related insurance assets. On October 30, 2019, the Company transferred 100% of its
equity interests to Enstar. As a result of the transaction, the Company removed Morse TEC's asbestos-
related liabilities, related insurance assets and associated deferred tax assets from the Consolidated
Balance Sheet. Refer to Note 19 "Recent Transactions," to the Consolidated Financial Statements for
more information.

The Company’s asbestos-related claims activity during the years ended December 31, 2019 and
2018 is as follows:

2019 2018
Beginning claims January 1 8,598 9,225
New claims received 1,667 1,932
Dismissed claims (967) (2,189)
Settled claims (237) (370)
Derecognized claims (9,061) —
Ending claims December 31 — 8,598

During the years ended December 31, 2019 and 2018, the Company paid $38 million and $46
million, respectively, in asbestos-related claim resolution costs and associated defense costs. Asbestos-
related claim resolution costs and associated defense costs are reflected in the Company's operating
cash flows.

Prior to the derecognition of Morse TEC, the Company reviewed its own experience in handling
asbestos-related claims and trends affecting asbestos-related claims in the U.S. tort system generally for
the purposes of assessing the value of pending asbestos-related claims and the number and value of
those that may be asserted in the future, as well as potential recoveries from the Company’s insurance
carriers with respect to such claims and defense costs.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As part of its review and assessment of asbestos-related claims, the Company utilized a third-party
actuary to further assist in the analysis of potential future asbestos-related claim resolution costs and
associated defense costs. The actuary’s work utilized data and analysis resulting from the Company’s
claim review process, including input from national coordinating counsel and local counsel, and included
the development of an estimate of the potential value of asbestos-related claims asserted but not yet
resolved as well as the number and potential value of asbestos-related claims not yet asserted. In
developing the estimate of liability for potential future claims, the actuary projected a potential number of
future claims based on the Company’s historical claim filings and patterns and compared that to
anticipated levels of unique plaintiff asbestos-related claims asserted in the U.S. tort system against all
defendants. The actuary also utilized assumptions based on the Company’s historical proportion of
claims resolved without payment, historical claim resolution costs for those claims that result in a
payment, and historical defense costs. The liabilities were estimated by multiplying the pending and
projected future claim filings by projected payments rates and average claim resolution amounts and
then adding an estimate for defense costs.

The Company determined based on the factors described above, including the analysis and input of
the actuary, its best estimate of the aggregate liability both for asbestos-related claims asserted but not
yet resolved and potential asbestos-related claims not yet asserted, including estimated defense costs.
This liability reflected the actuarial central estimate, which was intended to represent an expected value
of the most probable outcome. As of December 31, 2019 and 2018, the Company estimates that its
aggregate liability for such claims, including defense costs, is as follows:

(in millions) 2019 2018

Beginning asbestos liability as of January 1 $ 805 $ 828
Actuarial revaluation — 23
Claim resolution costs and defense related costs (37) (46)
Derecognized liability (768) —
Ending asbestos liability as of December 31 $ — $ 805

The Company's estimate of asbestos-related claim resolution costs and associated defense costs
was not discounted to present value and included an estimate of liability for potential future claims not yet
asserted through December 31, 2064 with a runoff through 2074. The Company believed that December
31, 2074 was a reasonable assumption as to the last date on which it was likely to have resolved all
asbestos-related claims, based on the nature and useful life of the Company’s products and the
likelihood of incidence of asbestos-related disease in the U.S. population generally.

During the year ended December 31, 2018, the Company recorded an increase to its asbestos-
related liabilities of $23 million as a result of actuarial valuation changes. This increase was the result of
higher future defense costs resulting from recent trends in the ratio of defense costs to claim resolution
costs. During the year ended December 31, 2017, the Company, with the assistance of counsel and its
third party actuary, reviewed the Company's claims experience against external data sources and
concluded no actuarial valuation adjustment to the liability in 2017 was necessary.

The Company’s estimate of the claim resolution costs and associated defense costs for asbestos-
related claims asserted but not yet resolved and potential claims not yet asserted was its reasonable best
estimate of such costs. Such estimate was subject to numerous uncertainties. The balances recorded
for asbestos-related claims were based on the best available information and assumptions that the
Company believed to be reasonable, but those assumptions may change over time. The Company
concluded that it was reasonably possible that it may incur additional losses through 2074 for asbestos-
related claims, in addition to amounts recorded, of up to approximately $100 million as of December 31,
2018.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company had certain insurance coverage applicable to asbestos-related claims. The rights to
this insurance were transferred with Morse TEC upon the sale of its membership interests. Prior to the
derecognition, the coverage was the subject of litigation that remained pending at the time of the
derecognition.

As of December 31, 2018, the Company estimated that it had $386 million in aggregate insurance
coverage available with respect to asbestos-related claims, and their associated defense costs. The
Company had recorded this insurance coverage as a long-term receivable for asbestos-related claim
resolution costs and associated defense costs that have been incurred, less cash and notes received,
and remaining limits as a deferred insurance asset with respect to liabilities recorded for potential future
costs for asbestos-related claims. The Company had determined the amount of that estimate by taking
into account the remaining limits of the insurance coverage, the number and amounts of potential claims
from co-insured parties, potential remaining recoveries from insolvent insurance carriers, the impact of
previous insurance settlements, and coverage available from solvent insurance carriers not party to the
coverage litigation. The Company’s estimated remaining insurance coverage relating to asbestos-related
claims and their associated defense costs was the subject of disputes with its insurance carriers. The
Company believed that its insurance receivable was probable of collection when recorded
notwithstanding those disputes based on, among other things, the arguments made by the insurance
carriers in litigation proceedings and evaluation of those arguments by the Company and its counsel, the
case law applicable to the issues in dispute, the rulings to date by the court, the absence of any credible
evidence alleged by the insurance carriers that they were not liable to indemnify the Company, and the
fact that the Company had recovered a substantial portion of its insurance coverage, $271 million
through December 31, 2018, from its insurance carriers under similar policies. However, the resolution of
the insurance coverage disputes, and the number and amounts of claims on our insurance from co-
insured parties, could have increased or decreased the amount of such insurance coverage available to
the Company as compared to the Company’s estimate.

The amounts recorded in the Consolidated Balance Sheets respecting asbestos-related claims are
as follows:

December 31,
(in millions) 2019 2018
Assets:
Other long-term asbestos-related insurance receivables $ — $ 303
Deferred asbestos-related insurance asset — 83
Total insurance assets $ — $ 386
Liabilities:
Accounts payable and accrued expenses $ — $ 50
Other non-current liabilities — 755
Total accrued liabilities $ — $ 805

On July 31, 2018, the Division of Enforcement of the Securities and Exchange Commission ("SEC")
informed the Company that it is conducting an investigation related to the Company's historical
accounting for asbestos-related claims not yet asserted. The Company is fully cooperating with the SEC
in connection with its investigation.

NOTE 16 RESTRUCTURING

The Company has initiated several actions to reduce existing structural costs. The Company
recorded $5 million in the Engine segment and $6 million in the Drivetrain segment in the year ended
December 31, 2019 related to these actions. Additionally, the Company initiated a voluntary termination

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

program in the Engine segment where approximately 350 employees accepted termination packages
and recorded restructuring expense of $37 million in the year ended December 31, 2019.

In 2017, the Company initiated actions within its Engine segment designed to improve future
profitability and competitiveness and started exploring strategic options for the non-core product lines. As
a continuation of these actions, the Company recorded restructuring expense of $18 million and $54
million in the years ended December 31, 2019 and 2018, respectively, primarily related to professional
fees, employee termination benefits and relocation costs. The largest portion of this was a voluntary
termination program in the European emissions business where approximately 140 employees accepted
the termination packages. As a result, the Company recorded approximately $28 million of employee
severance expense during the year ended December 31, 2018. In addition, the Company recorded $6
million in employee termination benefits in other locations in the Engine segment in the year ended
December 31, 2018. The Company recorded restructuring expense of $48 million within its emissions
business in the year ended December 31, 2017, primarily related to professional fees and negotiated
commercial costs associated with business divestiture and manufacturing footprint rationalization
activities.

The Company also recorded restructuring expense of $6 million in the year ended December
31, 2019, related to Corporate restructuring activities.

Additionally, the Company recorded restructuring expense of $10 million in the year ended December
31, 2018 in the Drivetrain segment primarily related to manufacturing footprint rationalization activities.

On September 27, 2017, the Company acquired 100% of the equity interests of Sevcon Inc
("Sevcon"). In connection with this transaction, the Company recorded restructuring expense of $7 million
during the year ended December 31, 2017, primarily related to contractually required severance
associated with Sevcon executive officers and other employee termination benefits.

Estimates of restructuring expense are based on information available at the time such charges are
recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts
paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record
revisions of previous estimates by adjusting previously established accruals.

The Company is evaluating numerous options across its operations and plans to take additional
restructuring actions to reduce existing structural costs over the next few years. These actions are
expected to result in significant restructuring expense.

The following table displays a rollforward of the severance accruals recorded within the Company's
Consolidated Balance Sheets and the related cash flow activity for the years ended December 31, 2019
and 2018:
Severance Accruals
(in millions) Drivetrain Engine Total
Balance at January 1, 2018 $ 4 $ 1 $ 5
Provision 7 35 42
Cash payments (7) (15) (22)
Balance at December 31, 2018 4 21 25
Provision 1 43 44
Cash payments (1) (34) (35)
Balance at December 31, 2019 $ 4 $ 30 $ 34

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 17 LEASES AND COMMITMENTS

The Company's lease agreements primarily consist of real estate property, such as manufacturing
facilities, warehouses, and office buildings, in addition to personal property, such as vehicles,
manufacturing and information technology equipment. A significant portion of leases are classified as
operating leases, and as of December 31, 2019, finance leases were immaterial.

Generally, the Company’s operating leases have renewal options that extend lease terms an
additional 1 to 5 years, and some include options to terminate the agreement or purchase the leased
asset. The amortizable life of these assets is the lesser of its useful life or the lease term, including
renewal periods reasonably assured of being exercised at lease inception. The Company’s lease
arrangements with renewal periods reasonably assured of being exercised at lease inception are
immaterial.

For the year ended December 31, 2019, leased assets obtained in exchange for lease obligations
were $4 million.

All leases with an initial term of 12 months or less without an option to extend or purchase the
underlying asset that the Company is reasonably certain to exercise ("short-term leases") are not
recorded on the Consolidated Balance Sheet, and lease expense is recognized on a straight-line basis
over the lease term.

The following table presents the operating lease assets and lease liabilities:

(in millions) December 31, 2019

Assets Location
Operating leases Other non-current assets $ 85
Total operating leases $ 85

Liabilities
Operating leases Accounts payable and accrued expenses $ 18
Operating leases Other non-current liabilities 67
Total operating lease liabilities $ 85

The following table presents the maturity of lease liabilities as of December 31, 2019:

(in millions) Operating leases

2020 $ 20
2021 15
2022 13
2023 9
2024 7
After 2024 33
Total (undiscounted) lease payments $ 97
Less: Imputed interest 12
Present value of lease liabilities $ 85

In the year ended December 31, 2019, the Company recorded operating lease costs of $24 million
and short-term lease costs of $18 million, primarily in Cost of sales in the Consolidated Statement of

104
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Operations. Under the previous lease accounting standard, total rent expense was $42 million and $40
million in the years ended December 31, 2018 and 2017, respectively. The operating cash flows for
operating leases were $24 million for the year ended December 31, 2019.

ASC Topic 842 requires that the rate implicit in the lease be used if readily determinable. Generally,
implicit rates are not readily determinable in the Company's agreements and the incremental borrowing
rate is used for each lease arrangement. The incremental borrowing rates are determined using rates
specific to the term of the lease, economic environments where lease activity is concentrated, value of
lease portfolio, and assuming full collateralization of the loans. The following table presents the terms
and discount rates:

Operating leases As of December 31, 2019

Weighted-average remaining lease term (years) 8
Weighted-average discount rate 2.8%

NOTE 18 EARNINGS PER SHARE

The Company presents both basic and diluted earnings per share of common stock (“EPS”) amounts.
Basic EPS is calculated by dividing net earnings attributable to BorgWarner Inc. by the weighted average
shares of common stock outstanding during the reporting period. Diluted EPS is calculated by dividing
net earnings attributable to BorgWarner Inc. by the weighted average shares of common stock and
common equivalent stock outstanding during the reporting period.

The dilutive impact of stock-based compensation is calculated using the treasury stock method. The
treasury stock method assumes that the Company uses the assumed proceeds from the exercise of
awards to repurchase common stock at the average market price during the period. The assumed
proceeds under the treasury stock method include the purchase price that the grantee will pay in the
future, and compensation cost for future service that the Company has not yet recognized. Options are
only dilutive when the average market price of the underlying common stock exceeds the exercise price
of the options. The dilutive effects of performance-based stock awards described in Note 13, "Stock-
Based Compensation," to the Consolidated Financial Statements are included in the computation of
diluted earnings per share at the level the related performance criteria are met through the respective
balance sheet date.

105
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table reconciles the numerators and denominators used to calculate basic and diluted
earnings per share of common stock:
Year Ended December 31,
(in millions except share and per share amounts) 2019 2018 2017
Basic earnings per share:
Net earnings attributable to BorgWarner Inc. $ 746 $ 931 $ 440
Weighted average shares of common stock outstanding 205.7 208.2 210.4
Basic earnings per share of common stock $ 3.63 $ 4.47 $ 2.09

Diluted earnings per share:

Net earnings attributable to BorgWarner Inc. $ 746 $ 931 $ 440

Weighted average shares of common stock outstanding 205.7 208.2 210.4

Effect of stock-based compensation 1.1 1.3 1.1
Weighted average shares of common stock outstanding including
dilutive shares 206.8 209.5 211.5
Diluted earnings per share of common stock $ 3.61 $ 4.44 $ 2.08

Antidilutive stock-based awards excluded from the calculation of diluted

earnings per share 0.1 0.1 —

NOTE 19 RECENT TRANSACTIONS

BorgWarner Morse TEC LLC

On October 30, 2019, the Company entered into a Membership Interest Purchase Agreement (the
"Purchase Agreement") with Enstar. Pursuant to the Purchase Agreement, the Company transferred
100% of the equity interests of Morse TEC to Enstar. In connection with this transfer, the Company
contributed approximately $172 million in cash to Morse TEC. As Morse TEC was the obligor for the
Company's asbestos-related liabilities and policyholder of the related insurance assets, the rights and
obligations related to these items transferred upon the sale, and pursuant to the Purchase Agreement,
Morse TEC indemnifies the Company and its affiliates for asbestos-related liabilities as more specifically
described in the Purchase Agreement. This indemnification obligation with respect to Asbestos-Related
Liabilities (as such terms are defined in the Purchase Agreement) are not subject to any cap or time
limitation. Following the completion of this transfer, the Company has no obligation with respect to
previously recorded asbestos-related liabilities. In accordance with ASC Topic 810 this subsidiary was
derecognized as the Company ceased to control the entity, and the Company removed the associated
assets and liabilities from the Consolidated Balance Sheet, resulting in a pre-tax gain of $177 million. In
addition, the Company recorded tax expense as a result of the reversal of the previously recorded
deferred tax assets related to the asbestos liabilities of $173 million, resulting in an after-tax gain of $4
million.

106
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a summary of the impacts to the Consolidated Balance Sheet:

(in millions)
Cash and cash equivalents $ (172)
Receivables, net (9)
Investments and other long-term receivables (371)
Other non-current assets (223)
Accounts payable and accrued expenses 7
Asbestos-related and environmental liabilities 772
Gain on derecognition of subsidiary, net $ 4

Romeo Systems, Inc.

In May 2019, the Company invested $50 million in exchange for a 20% equity interest in Romeo
Systems, Inc. ("Romeo"), a technology-leading battery module and pack supplier. The Company
accounts for this investment in Series A-1 Preferred Stock of Romeo under the measurement alternative
in ASC Topic 321, "Investments - Equity Securities" for equity investments without a readily determinable
fair value. Such investments are measured at cost, less any impairment, plus or minus changes resulting
from observable price changes in orderly transactions for an identical or similar investment of the same
issuer. In September 2019, the Company and Romeo contributed total equity of $10 million and formed a
new joint venture, BorgWarner Romeo Power LLC (the "Romeo JV"), in which the Company owns
60% interest. The Romeo JV is a variable interest entity focusing on producing battery module and pack
technology. The Company is the primary beneficiary of the Romeo JV and consolidates the Romeo JV in
its consolidated financial statements.

Rinehart Motion Systems LLC and AM Racing LLC

On January 2, 2019, the Company acquired Rinehart Motion Systems LLC and AM Racing LLC, two
established companies in the specialty electric and hybrid propulsion market, for approximately $15
million, of which $10 million was paid in the first quarter of 2019, and the remaining $5 million will be paid
upon satisfaction of certain conditions.

The Company created Cascadia Motion LLC ("Cascadia Motion") to combine assets and operations
of these two acquired companies. Based in Oregon, Cascadia Motion specializes in design, development
and production of hybrid and electric propulsion solutions for prototype and low-volume production
applications. It allows the Company to offer design, development and production of full electric and hybrid
propulsion systems for niche and low-volume manufacturing applications.

In connection with the acquisition, the Company recognized intangible assets of $5 million, goodwill
of $7 million within the Drivetrain reporting segment, and other assets and liabilities of $2 million to reflect
the preliminary fair value of the assets acquired and liabilities assumed. The intangible assets will be
amortized over a period of 2 to 15 years. Various valuation techniques were used to determine the fair
value of the intangible assets, with the primary techniques being forms of the income approach, which
use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Under these
valuation approaches, the Company is required to make estimates and assumptions about sales,
operating margins, growth rates, royalty rates and discount rates based on budgets, business plans,
economic projections, anticipated future cash flows and marketplace data. Due to the nature of the
transaction, goodwill is not deductible for tax purposes.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Sevcon, Inc.

On September 27, 2017, the Company acquired 100% of the equity interests in Sevcon for cash of
$186 million. This amount includes $27 million paid to settle outstanding debt and $5 million paid for
Sevcon stock-based awards attributable to pre-combination services.

Sevcon is a global provider of electrification technologies, serving customers in the U.S., U.K.,
France, Germany, Italy, China and the Asia-Pacific region. Sevcon products complement BorgWarner’s
power electronics capabilities utilized to provide electrified propulsion solutions. Sevcon's operating
results and assets are reported within the Company's Drivetrain reporting segment.

The following table summarizes the aggregated fair value of the assets acquired and liabilities
assumed on September 27, 2017, the date of acquisition:
(in millions)
Receivables, net $ 16
Inventories, net 17
Other current assets 3
Property, plant and equipment, net 7
Goodwill 128
Other intangible assets 71
Deferred tax liabilities (9)
Income taxes payable (1)
Other assets and liabilities (3)
Accounts payable and accrued expenses (25)
Total consideration, net of cash acquired 204

Less: Assumed retirement-related liabilities 18

Cash paid, net of cash acquired $ 186

In connection with the acquisition, the Company capitalized $18 million for customer relationships,
$49 million for developed technology and $4 million for the Sevcon trade name. These intangible assets,
excluding the indefinite-lived trade name, will be amortized over a period of 7 to 20 years. Various
valuation techniques were used to determine the fair value of the intangible assets, with the primary
techniques being forms of the income approach, specifically, the relief-from-royalty and excess earnings
valuation methods, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair
value hierarchy. Under these valuation approaches, the Company is required to make estimates and
assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on
budgets, business plans, economic projections, anticipated future cash flows and marketplace data. Due
to the nature of the transaction, goodwill is not deductible for tax purposes.

In the third quarter of 2018, the Company finalized all purchase accounting adjustments related to the
acquisition and recorded fair value adjustments based on new information obtained during the
measurement period primarily related to intangible assets. These adjustments have resulted in a
decrease in goodwill of $6 million from the Company's initial estimate.

Due to its insignificant size relative to the Company, supplemental pro forma financial information of
the combined entity for the current and prior reporting period is not provided.

108
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 20 ASSETS AND LIABILITIES HELD FOR SALE

In 2017, the Company started exploring strategic options for non-core emission product lines. In the
fourth quarter of 2017, the Company launched an active program to locate a buyer for these non-core
pipes and thermostat product lines and initiated all other actions required to complete the plan to sell
these non-core product lines. The Company determined that the assets and liabilities of the pipes and
thermostat product lines met the held for sale criteria as of December 31, 2017. As a result, the Company
recorded an asset impairment expense of $71 million in the fourth quarter of 2017 to adjust the net book
value of this business to its fair value less cost to sell. In December 2018, the Company reached an
agreement to sell its thermostat product lines for approximately $28 million. As a result, the Company
recorded an additional asset impairment expense of $25 million in the year ended December 31, 2018 to
adjust the net book value of this business to fair value less costs to sell. All closing conditions were
satisfied, and the sale was closed on April 1, 2019. Based on the agreement reached in the fourth quarter
of 2019 regarding the finalization of the purchase price adjustments related to the sale of the thermostat
product lines, the Company determined that $7 million of additional loss on sale was required during the
year ended December 31, 2019. During the year ended December 31, 2019, the assets and liabilities
were removed from the Consolidated Balance Sheet. The business did not meet the criteria to be
classified as a discontinued operation.

The assets and liabilities classified as held for sale at December 31, 2018 were as follows:
December 31,
(in millions) 2018
Receivables, net $ 15
Inventories, net 42
Prepayments and other current assets 12
Property, plant and equipment, net 45
Goodwill 7
Other intangible assets, net 20
Other assets —
Impairment of carrying value (94)
Total assets held for sale $ 47

Accounts payable and accrued expenses $ 18

Other liabilities 5
Total liabilities held for sale $ 23

NOTE 21 REPORTING SEGMENTS AND RELATED INFORMATION

The Company's business is comprised of two reporting segments: Engine and Drivetrain. These
segments are strategic business groups, which are managed separately as each represents a specific
grouping of related automotive components and systems.

The Company allocates resources to each segment based upon the projected after-tax return on
invested capital ("ROIC") of its business initiatives. ROIC is comprised of Adjusted EBIT after deducting
notional taxes compared to the projected average capital investment required. Adjusted EBIT is
comprised of earnings before interest, income taxes and noncontrolling interest (“EBIT") adjusted for
restructuring, goodwill impairment charges, affiliates' earnings and other items not reflective of on-going
operating income or loss.

109
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Adjusted EBIT is the measure of segment income or loss used by the Company. The Company
believes Adjusted EBIT is most reflective of the operational profitability or loss of our reporting segments.
The following tables show segment information and Adjusted EBIT for the Company's reporting
segments:

2019 Segment information

Net sales
Depreciation/ Long-lived asset
(in millions) Customers Inter-segment Net Year-end assets amortization expenditures (a)
Engine $ 6,153 $ 61 $ 6,214 $ 4,536 $ 227 $ 219
Drivetrain 4,015 — 4,015 4,075 183 254
Inter-segment eliminations — (61) (61) — — —
Total 10,168 — 10,168 8,611 410 473
Corporate (b) — — — 1,091 29 8
Consolidated $ 10,168 $ — $ 10,168 $ 9,702 $ 439 $ 481

2018 Segment information

Net sales
Depreciation/ Long-lived asset
(in millions) Customers Inter-segment Net Year-end assets amortization expenditures (a)
Engine $ 6,390 $ 57 $ 6,447 $ 4,731 $ 226 $ 278
Drivetrain 4,140 — 4,140 3,920 175 254
Inter-segment eliminations — (57) (57) — — —
Total 10,530 — 10,530 8,651 401 532
Corporate (b) — — — 1,444 30 14
Consolidated $ 10,530 $ — $ 10,530 $ 10,095 $ 431 $ 546

2017 Segment information

Net sales
Depreciation/ Long-lived asset
(in millions) Customers Inter-segment Net Year-end assets amortization expenditures (a)
Engine $ 6,009 $ 53 $ 6,062 $ 4,733 $ 219 $ 305
Drivetrain 3,790 — 3,790 3,904 161 242
Inter-segment eliminations — (53) (53) — — —
Total 9,799 — 9,799 8,637 380 547
Corporate (b) — — — 1,151 28 13
Consolidated $ 9,799 $ — $ 9,799 $ 9,788 $ 408 $ 560
_______________
(a) Long-lived asset expenditures include capital expenditures and tooling outlays.
(b) Corporate assets include investments and other long-term receivables and deferred income taxes.

110
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Adjusted earnings before interest, income taxes and noncontrolling interest ("Adjusted EBIT")

Year Ended December 31,

(in millions) 2019 2018 2017
Engine $ 995 $ 1,040 $ 992
Drivetrain 443 475 448
Adjusted EBIT 1,438 1,515 1,440
Gain on derecognition of subsidiary (177) — —
Restructuring expense 72 67 58
Unfavorable arbitration loss 14 — —
Merger, acquisition and divestiture expense 11 6 10
Asset impairment and loss on divestiture 7 25 71
Officer stock awards modification 2 8 —
Asbestos-related adjustments — 23 —
Gain on sale of building — (19) —
Lease termination settlement — — 5
Other (income) expense — (4) 2
Corporate, including stock-based compensation 206 219 222
Equity in affiliates' earnings, net of tax (32) (49) (51)
Interest income (12) (6) (6)
Interest expense 55 59 71
Other postretirement expense (income) 27 (10) (5)
Earnings before income taxes and noncontrolling interest 1,265 1,196 1,063
Provision for income taxes 468 211 580
Net earnings 797 985 483
Net earnings attributable to the noncontrolling interest, net of tax 51 54 43
Net earnings attributable to BorgWarner Inc. $ 746 $ 931 $ 440

111
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Geographic Information

During the year ended December 31, 2019, approximately 77% of the Company's consolidated net
sales were outside the United States ("U.S."), attributing sales to the location of production rather than
the location of the customer. Outside the U.S., only Germany, China, South Korea, Mexico, Poland and
Hungary exceeded 5% of consolidated net sales during the year ended December 31, 2019. Also, the
Company's equity investments are excluded from the definition of long-lived assets, as are goodwill and
certain other non-current assets.
Net sales Long-lived assets
(in millions) 2019 2018 2017 2019 2018 2017
United States $ 2,335 $ 2,394 $ 2,280 $ 752 $ 729 $ 719
Europe:
Germany 1,507 1,665 1,653 328 371 413
Poland 627 519 522 180 171 152
Hungary 589 687 656 164 153 148
Other Europe 1,087 1,151 904 285 282 274
Total Europe 3,810 4,022 3,735 957 977 987
China 1,711 1,801 1,560 605 589 555
Mexico 1,040 978 920 247 223 201
South Korea 786 859 877 221 235 244
Other foreign 486 476 427 152 151 158
Total $ 10,168 $ 10,530 $ 9,799 $ 2,934 $ 2,904 $ 2,864

Sales to Major Customers

Consolidated net sales to Ford (including its subsidiaries) were approximately 15%, 14%, and 15%
for the years ended December 31, 2019, 2018 and 2017, respectively, and to Volkswagen (including its
subsidiaries) were approximately 11%, 12% and 13% for the years ended December 31, 2019, 2018 and
2017, respectively. Both of the Company's reporting segments had significant sales to Ford and
Volkswagen in 2019, 2018 and 2017. Such sales consisted of a variety of products to a variety of
customer locations and regions. No other single customer accounted for more than 10% of consolidated
net sales in any of the years presented.

Sales by Product Line

Sales of turbochargers for light vehicles represented approximately 28%, 27% and 28% of total net
sales for the years ended December 31, 2019, 2018 and 2017, respectively. The Company currently
supplies light vehicle turbochargers to many OEMs including BMW, Daimler, Fiat Chrysler Automobiles,
Ford, General Motors, Great Wall, Hyundai, Renault, Volkswagen and Volvo. No other single product line
accounted for more than 10% of consolidated net sales in any of the years presented.

112
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 22 INTERIM FINANCIAL INFORMATION (Unaudited)

The following table presents summary quarterly financial data:

(in millions, except per share amounts) 2019 2018

Quarter ended Mar-31 Jun-30 Sep-30 Dec-31 Year Mar-31 Jun-30 Sep-30 Dec-31 Year
Net sales $ 2,566 $ 2,551 $ 2,492 $ 2,559 $ 10,168 $ 2,784 $ 2,694 $ 2,478 $ 2,574 $ 10,530
Cost of sales 2,047 2,038 1,968 2,014 8,067 2,193 2,114 1,963 2,030 8,300
Gross profit 519 513 524 545 2,101 591 580 515 544 2,230
Selling, general and administrative
expenses 226 212 230 205 873 253 237 230 226 946
Other expense (income), net 29 16 18 (138) (75) 5 30 7 52 94
Operating income 264 285 276 478 1,303 333 313 278 266 1,190
Equity in affiliates’ earnings, net of
tax (9) (9) (7) (7) (32) (10) (13) (15) (11) (49)
Interest income (3) (2) (4) (3) (12) (2) (1) (1) (2) (6)

Interest expense 14 14 15 12 55 16 15 14 14 59

Other postretirement expense

(income) — 27 (1) 1 27 (3) (2) (3) (2) (10)
Earnings before income taxes and
noncontrolling interest 262 255 273 475 1,265 332 314 283 267 1,196

Provision for income taxes 91 73 66 238 468 95 30 67 19 211

Net earnings 171 182 207 237 797 237 284 216 248 985
Net earnings attributable to the
noncontrolling interest, net of tax 11 10 13 17 51 12 12 12 18 54
Net earnings attributable to
BorgWarner Inc. (a) $ 160 $ 172 $ 194 $ 220 $ 746 $ 225 $ 272 $ 204 $ 230 $ 931

Earnings per share — basic $ 0.77 $ 0.84 $ 0.94 $ 1.07 $ 3.63 $ 1.07 $ 1.30 $ 0.98 $ 1.11 $ 4.47
Earnings per share — diluted $ 0.77 $ 0.83 $ 0.94 $ 1.06 $ 3.61 $ 1.07 $ 1.30 $ 0.98 $ 1.10 $ 4.44

_______________
(a) The Company's results were impacted by the following:

• Quarter ended December 31, 2019: The Company recorded a pre-tax gain on the derecognition of Morse TEC of
$177 million. In addition, the Company recorded tax expense as a result of the reversal of the previously recorded
deferred tax assets related to the asbestos liabilities of $173 million, resulting in an after-tax gain of $4 million. The
Company recorded restructuring expense of $31 million primarily related to actions to reduce structural costs. The
Company recorded $7 million of additional loss on sale related to the finalization of the purchase price adjustments
related to the sale of the non-core pipes and thermostat product lines. The Company recorded reductions of
income tax expense of $11 million related to a global realignment plan and $8 million related to restructuring
expense, partially offset by an increase in income tax of $5 million related to other one-time adjustments.
• Quarter ended September 30, 2019: The Company recorded restructuring expense of $14 million primarily
related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The
Company recorded expenses, primarily professional fees, related to the Company's review of strategic acquisition
and divestiture targets, including the 20% equity interest in Romeo, and the divestiture activities for the non-core
pipes and thermostat product lines of $4 million. The Company recorded reductions of income tax expense of $4
million related to restructuring expense and $9 million related to other one-time adjustments.
• Quarter ended June 30, 2019: The Company recorded restructuring expense of $13 million primarily related to
Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The Company
recorded expenses, primarily professional fees, related to the Company's review of strategic acquisition and
divestiture targets, including the 20% equity interest in Romeo, and the divestiture activities for the non-core pipes
and thermostat product lines of $5 million. The Company recorded reductions of income tax expense of $4
million related to restructuring expense, $6 million related to pension settlement loss, partially offset by an increase
in income tax of $1 million related to other one-time adjustments.

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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
• Quarter ended March 31, 2019: The Company recorded restructuring expense of $14 million primarily related to
Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. The Company
recorded expenses, primarily professional fees, associated with divestiture activities for the non-core pipes and
thermostat product lines of $1 million. The Company recorded $14 million of expense related to the receipt of a
final unfavorable arbitration decision associated with the resolution of a matter related to a previous acquisition.
The Company recorded reductions of income tax expense of $3 million related to restructuring expense and $5
million related to other one-time adjustments. The Company recorded an increase in income tax expense of $22
million due to the U.S. Department of the Treasury's issuance of the final regulations in the first quarter of 2019
related to the calculation of the one-time transition tax.
• Quarter ended December 31, 2018: The Company recorded an asset impairment expense of $26 million to adjust
the net book value of the pipes and thermostat product lines to fair value. The Company recorded asbestos-related
adjustments resulting in a net increase to Other Expense of $23 million. The Company recorded restructuring
expense of $23 million primarily related to the Engine and Drivetrain segment actions designed to improve future
profitability and competitiveness. The Company recorded a gain of $19 million related to the sale of a building at a
manufacturing facility located in Europe. The Company also recorded merger and acquisition expense of $1 million
primarily related to professional fees associated with divestiture activities for the non-core pipes and thermostat
product line. The Company recorded reductions of income tax expense of $6 million related to restructuring
expense, $6 million related to asbestos-related adjustments, $8 million related to asset impairment expense, $9
million related to valuation allowance releases, $3 million related to tax reserve adjustments, and $19 million
related to changes in accounting methods and tax filing positions for prior years primarily related to the Tax Act.
Additionally, the Company recorded income tax expense of $6 million related to a gain on the sale of a building,
and $7 million related to adjustments to measurement period provisional estimates associated with the Tax Act.
• Quarter ended September 30, 2018: The Company recorded restructuring expense of $6 million primarily related
to the actions within its Engine segment designed to improve future profitability and competitiveness. The
Company also recorded merger and acquisition expense of $2 million primarily related to professional fees
associated with divestiture activities for the non-core pipes and thermostat product line. The Company recorded
reductions of income tax expense of $1 million related to restructuring expense, $7 million related to adjustments to
measurement period provisional estimates associated with the Tax Act, $1 million related to a decrease in our
deferred tax liability due to the Company's ability to record a tax benefit for certain foreign tax credits available due
to actions the Company took during the year, and $2 million related to other one-time tax adjustments, primarily
due to changes in tax filing positions.
• Quarter ended June 30, 2018: The Company recorded restructuring expense of $31 million primarily related to
the initiation of actions within its emissions business in the Engine segment designed to improve future profitability
and competitiveness. The Company also recorded merger and acquisition expense of $1 million primarily related to
professional fees associated with divestiture activities for the non-core pipes and thermostat product line. The
Company recorded reductions of income tax expenses of $8 million associated with restructuring expense, $13
million related to adjustments to measurement period provisional estimates associated with the Tax Act, $21 million
related to a decrease in our deferred tax liability due to the Company's ability to record a tax benefit for certain
foreign tax credits available due to actions the Company took in the second quarter, and $10 million related to
other one-time tax adjustments.
• Quarter ended March 31, 2018: The Company recorded restructuring expense of $8 million primarily related to
Engine and Drivetrain segment actions designed to improve future profitability and competitiveness. The Company
recorded a gain of approximately $4 million related to the settlement of a commercial contract for an entity acquired
in the 2015 Remy acquisition. The Company also recorded merger and acquisition expense of $2 million primarily
related to professional fees associated with divestiture activities for the non-core pipes product line. The Company
recorded income tax expenses of $1 million, and reductions of income tax expense of $1 million which is
associated with restructuring expense.

Note 23. Subsequent Event

On January 28, 2020, the Company entered into a definitive agreement to acquire Delphi
Technologies PLC (“Delphi Technologies”) in an all-stock transaction valued at approximately $3.3 billion,
based on the closing price of BorgWarner stock on January 27, 2020. The transaction, which is expected
to close in the second half of 2020, is subject to approval by Delphi Technologies' stockholders, the
satisfaction of customary closing conditions and receipt of regulatory approvals.

Under the terms of the agreement, Delphi Technologies stockholders would receive a fixed exchange
ratio of 0.4534 shares of BorgWarner common stock for each share of Delphi Technologies stock. Upon
closing of the transaction, current BorgWarner stockholders are expected to own approximately 84% of
the combined company, while current Delphi Technologies stockholders are expected to own
approximately 16%.

114
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the benefits of controls must be
considered relative to costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. However, our disclosure controls
and procedures are designed to provide reasonable assurance of achieving their objectives.

The Company has adopted and maintains disclosure controls and procedures that are designed
to provide reasonable assurance that information required to be disclosed in the reports filed or
submitted under the Exchange Act, such as this Form 10-K, is collected, recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the Securities and
Exchange Commission. The Company's disclosure controls and procedures are also designed to ensure
that such information is accumulated and communicated to management to allow timely decisions
regarding required disclosure. As required under Exchange Act Rule 13a-15, the Company's
management, including the Chief Executive Officer and Chief Financial Officer, has conducted an
evaluation of the effectiveness of disclosure controls and procedures as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective.

Management's Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an
assessment of the Company's internal control over financial reporting based on the framework and
criteria established by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control - Integrated Framework (2013). Based on the assessment, management concluded that,
as of December 31, 2019, the Company's internal control over financial reporting is effective based on
those criteria.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the
Company's consolidated financial statements and the effectiveness of internal control over financial
reporting as of December 31, 2019 as stated in its report included herein.

Changes in Internal Control over Financial Reporting

There have been no changes in internal control over the financial reporting that occurred during the
most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.

Item 9B. Other Information

Not applicable.

115
 PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information with respect to directors, executive officers and corporate governance that appears in the
Company's proxy statement for its 2020 Annual Meeting of Stockholders under the captions “Election of
Directors,” “Information on Nominees for Directors,” “Board Committees,” “Section 16(a) Beneficial
Ownership Reporting Compliance,” “Code of Ethics,” and “Compensation Committee Report” is
incorporated herein by this reference and made a part of this report.

Code of Ethics
The Company has long maintained a Code of Ethical Conduct, updated from time to time, which is
applicable to all directors, officers, and employees of the Company. In addition, the Company has
adopted a Code of Ethics for CEO and Senior Financial Officers, which applies to the Company’s CEO,
CFO, Treasurer, and Controller. Each of these codes is posted on the Company’s website at
www.borgwarner.com. We intend to disclose any amendments to, or waivers from, a provision of our
Code of Ethical Conduct or Code of Ethics for CEO and Senior Financial Officers on our website within
four business days following the date of any amendment or waiver.
Delinquent Section 16(a) Reports

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers,
directors, and persons who beneficially own more than 10% of a registered class of the Company’s
equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of
the Company’s common stock. Such officers, directors and persons are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms that they file with the SEC.

One Form 4 was filed eight business days late on behalf of each of Directors Lissalde, Michas,
Carlson, Cuneo, Hanley, Mascarenas, McKernan, McWhinney, and Sato due to miscommunication of
stock grant information. Otherwise, based on information provided to the Company by each director and
executive officer, the Company believes all beneficial ownership reports required to be filed in 2019 were
timely.

Item 11. Executive Compensation

Information with respect to director and executive compensation that will appear in the Company's
proxy statement for its 2020 Annual Meeting of Stockholders under the captions “Director
Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Compensation
Discussion and Analysis,” “Restricted Stock,” “Long-Term Equity Incentives,” and “Change of Control
Agreements” is incorporated herein by this reference and made a part of this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

Information with respect to security ownership and certain beneficial owners and management and
related stockholders matters that will appear in the Company's proxy statement for its 2020 Annual
Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and
Management” is incorporated herein by this reference and made a part of this report.

For information regarding the Company's equity compensation plans, see Item 5 “Market for the
Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in
this Annual Report on Form 10-K.

Item 13. Certain Relationships and Related Transactions and Director Independence
116
 Information with respect to certain relationships and related transactions and director independence
that will appear in the Company's proxy statement for its 2020 Annual Meeting of Stockholders under the
caption “Certain Relationships and Related Transactions, and Director Independence” is incorporated
herein by this reference and made a part of this report.

Item 14. Principal Accountant Fees and Services

Information with respect to principal accountant fees and services that will appear in the Company's
proxy statement for its 2020 Annual Meeting of Stockholders under the caption “Fees Paid to PwC” is
incorporated herein by this reference and made a part of this report.

PART IV

Item 15. Exhibits and Financial Statement Schedules

The information required by this Section (a)(3) of Item 15 is set forth on the Exhibit Index that
precedes the Signatures page of this Form 10-K. The information required by this Section (a)(1) of
Item 15 is set forth above in Item 8, Financial Statements and Supplementary Data. All financial
statement schedules have been omitted, since the required information is not applicable or is not present
in amounts sufficient to require submission of the schedule, or because the information required is
included in the consolidated financial statements and notes thereto included in this Form 10-K.

Item 16. Form 10-K Summary

Not applicable.

117
 EXHIBIT INDEX
Exhibit Number Description

2.1 Membership Interest Purchase Agreement, dated as of October 30, 2019, among BorgWarner
Inc., BorgWarner Morse TEC LLC, and Enstar Holdings (US) LLC (incorporated by reference
to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed October 30, 2019).

3.1 Restated Certificate of Incorporation of the Company, as amended through April 26, 2018
(incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2018 filed July 26, 2018).

3.2 Amended and Restated By-Laws of the Company, as amended through April 25, 2018
(incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2018 filed July 26, 2018).

4.1 Indenture, dated as of February 15, 1999, between Borg-Warner Automotive, Inc. and The Bank
of New York Mellon Trust Company, N.A. (successor in interest to The First National Bank of
Chicago), as trustee (incorporated by reference to Exhibit No. 4.5 to the Company's Registration
Statement No. 333-172198 filed on February 11, 2011).

4.2 Indenture, dated as of September 23, 1999, between Borg-Warner Automotive, Inc. and The
Bank of New York Mellon Trust Company, N.A. (successor in interest to Chase Manhattan Trust
Company, National Association), as trustee (incorporated by reference to Exhibit No. 4.6 to the
Company's Registration Statement 333-172198 filed on February 11, 2011).

4.3 Third Supplemental Indenture, dated as of September 16, 2010, between the Company and
The Bank of New York Mellon Trust Company, N.A., as the indenture trustee (incorporated by
reference to Exhibit 4.9 to the Company's Registration Statement 333-172198 filed on February
11, 2011).

4.4 Fourth Supplemental Indenture dated as of March 16, 2015, between the Company and The
Bank of New York Mellon Trust Company, N.A., as the indenture trustee (incorporated by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed March 16, 2015).

4.5 Fifth Supplemental Indenture dated as of November 6, 2015, between the Company and
Deutsche Bank Trust Company Americas, as the indenture trustee (incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K filed November 6, 2015).

4.6 Description of Securities*

10.1 Third Amended and Restated Credit Agreement dated as of June 29, 2017, among the Company,
as borrower, the Administrative Agent named therein, and the Lenders that are parties thereto
(incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed
June 30, 2017).

†10.2 Form of 2019 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for
Employees (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2019 filed on July 25, 2019).

†10.3 Form of 2019 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for Non-
U.S. Employees (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2019 filed on July 25, 2019).

A-1
Exhibit Number Description

†10.4 Form of 2019 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for Non-
U.S. Employees (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2019 filed on July 25, 2019).

†10.5 Form of 2019 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for Non-
U.S. Directors (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2019 filed on July 25, 2019).

†10.6 Form of 2019 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for Non-
U.S. Directors (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2019 filed on July 25, 2019).

†10.7 BorgWarner Inc. 2018 Stock Incentive Plan (incorporated by reference to Appendix A to the
Company’s Definitive Proxy Statement filed March 16, 2018).

†10.8 Form of 2018 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for Non-
Employee Directors (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018 filed on February 19, 2019).

†10.9 Form of 2018 BorgWarner Inc. 2018 Stock Incentive Plan Stock Units Award Agreement for
Non-U.S. Directors (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018 filed on February 19, 2019).

†10.10 Form of 2018 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for
Employees (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2018 filed on February 19, 2019).

†10.11 BorgWarner Inc. 2014 Stock Incentive Plan (incorporated by reference to Annex A to the
Company’s Definitive Proxy Statement filed March 21, 2014).*

†10.12 First Amendment to the BorgWarner Inc. 2014 Stock Incentive Plan (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 2, 2016).

†10.13 Form of 2017 BorgWarner Inc. 2014 Stock Incentive Plan Performance Share Award Agreement
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2017 filed April 27, 2017).

†10.14 Form of 2017 BorgWarner Inc. 2014 Stock Incentive Plan Restricted Stock Agreement for
Employees (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2017 filed April 27, 2017).

†10.15 Form of 2017 BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement for
Non-U.S. Employees (incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2017 filed April 27, 2017).

†10.16 Form of February 2016 RRG BorgWarner Inc. 2014 Stock Incentive Plan Performance Share
Award Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended March 31, 2016 filed April 28, 2016).

†10.17 Form of February 2016 BorgWarner Inc. 2014 Stock Incentive Plan Performance Share Award
Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2016 filed April 28, 2016).

A-2
Exhibit Number Description

†10.18 Form of April 2015 BorgWarner Inc. 2014 Stock Incentive Plan Restricted Stock Agreement for
Employees (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2015 filed July 30, 2015).

†10.19 Form of April 2015 BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement
for Non-U.S. Employees (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2015 filed July 30, 2015).

†10.20 Form of BorgWarner Inc. 2014 Stock Incentive Plan Restricted Stock Agreement for Employees
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2015 filed April 30, 2015).

†10.21 Form of BorgWarner Inc. 2014 Stock Incentive Plan Performance Share Award Agreement
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2015 filed April 30, 2015).

†10.22 Form of BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement -- Non-U.S.
Employees (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2015 filed April 30, 2015).

†10.23 Form of 2017 BorgWarner Inc. 2014 Stock Incentive Plan Restricted Stock Agreement for Non-
Employee Directors (incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2017 filed July 27, 2017).

†10.24 Form of 2017 BorgWarner Inc. 2014 Stock Incentive Plan Stock Units Award Agreement for
Non-U.S. Directors (incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2017 filed July 27, 2017).

†10.25 Form of 2018 BorgWarner Inc. 2014 Stock Incentive Plan Performance Share Award Agreement
(incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2018 filed April 26, 2018.

†10.26 Amended and Restated Executive Incentive Plan as amended, restated, and renamed effective
April 26, 2015 (incorporated by reference to Appendix A to the Company's Definitive Proxy
Statement filed March 20, 2015).

†10.27 Amended and Restated BorgWarner Inc. Management Incentive Bonus Plan, effective as of
December 31, 2008(incorporated by reference to Exhibit 10.22 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018 filed on February 19, 2019).

†10.28 BorgWarner Inc. Retirement Savings Excess Benefit Plan, as amended and restated, effective
January 1, 2009 (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018 filed on February 19, 2019).

†10.29 BorgWarner Inc. Board of Directors Deferred Compensation Plan, as amended and restated,
effective January 1, 2009 (incorporated by reference to Exhibit 10.24 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2018 filed on February 19, 2019).

†10.30 First Amendment, dated as of January 1, 2011, to BorgWarner Inc. Board of Directors Deferred
Compensation Plan (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018 filed on February 19, 2019).

A-3
Exhibit Number Description

†10.31 Second Amendment, dated as of August 1, 2016, to BorgWarner Inc. Board of Directors Deferred
Compensation Plan. (incorporated by reference to Exhibit 10.31 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2016 filed February 9, 2017).

†10.32 Form of Amended and Restated Change of Control Employment Agreement for Executive
Officers (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2018 filed on February 19, 2019).

†10.33 Form of Amended and Restated Change of Control Employment Agreement for Executive
Officers (effective 2009) (incorporated by reference to Exhibit 10.28 to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2018 filed on February 19, 2019).

†10.34 BorgWarner Inc. 2004 Deferred Compensation Plan, as amended and restated, effective January
1, 2009 (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form
10-K for the year ended December 31, 2018 filed on February 19, 2019).

†10.35 Transition and Retirement Agreement, dated as of June 5, 2018, between BorgWarner Inc. and
James R. Verrier (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2018 filed July 26, 2018).

†10.36 Agreement, dated as of May 9, 2018, between BorgWarner Inc. and John J. Gasparovic
(incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended June 30, 2018 filed July 26, 2018).

†10.37 Retention Bonus Agreement, dated as of December 7, 2018, between BorgWarner Inc. and
Anthony D. Hensel (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018 filed on February 19, 2019).

10.38 Offer Letter, dated as of March 8, 2019, between BorgWarner Inc. and Kevin A. Nowlan
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for
the quarter ended March 31, 2019 filed on April 25, 2019).

10.39 Distribution and Indemnity Agreement, dated as of January 27, 1993, between Borg-Warner
Automotive, Inc. and Borg-Warner Security (incorporated by reference to Exhibit 10.25 to the
Company’s Annual Report on Form 10-K/A for the year ended December 31, 2017 filed
September 28, 2018).

10.40 Assignment of Trademarks and License Agreement, dated as of November 2, 1994, between
Borg-Warner Security Corporation and Borg-Warner Automotive, Inc. (incorporated by reference
to Exhibit 10.26 to the Company’s Annual Report on Form 10-K/A for the year ended December
31, 2017 filed September 28, 2018).

10.41 Amendment to Assignment of Trademarks and License Agreement, dated as of July 31, 1998,
between Borg-Warner Security Corporation and Borg-Warner Automotive, Inc. (incorporated by
reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K/A for the year ended
December 31, 2017 filed September 28, 2018).

21.1 Subsidiaries of the Company.*

23.1 Independent Registered Public Accounting Firm's Consent.*

31.1 Rule 13a-14(a)/15d-14(a) Certification by Principal Executive Officer.*

A-4
 Exhibit Number Description

31.2 Rule 13a-14(a)/15d-14(a) Certification by Principal Financial Officer.*

32.1 Section 1350 Certifications.*

101.INS XBRL Instance Document.*

101.SCH XBRL Taxonomy Extension Schema Document.*

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.*

101.LAB XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.*

101.DEF XBRL Taxonomy Extension Definition Linkbase Document.*

104.1 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).*

*Filed herewith.
† Indicates a management contract or compensatory plan or arrangement.

A-5
 SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BORGWARNER INC.

By: /s/ Frederic B. Lissalde

Frederic B. Lissalde
President and Chief Executive Officer
Date: February 13, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
person on behalf of the registrant and in the capacities indicated on the 13th day of February, 2020.

Signature Title

/s/ Frederic B. Lissalde President and Chief Executive Officer

Frederic B. Lissalde (Principal Executive Officer) and Director

Executive Vice President and Chief

/s/ Kevin A. Nowlan Financial Officer
Kevin A. Nowlan (Principal Financial Officer)

/s/ Thomas J. McGill Vice President and Controller

Thomas J. McGill (Principal Accounting Officer)

/s/ Jan Carlson

Jan Carlson Director

/s/ Dennis C. Cuneo

Dennis C. Cuneo Director

/s/ Michael S. Hanley

Michael S. Hanley Director

/s/ John R. McKernan, Jr.

John R. McKernan, Jr. Director

/s/ Deborah D. McWhinney

Deborah D. McWhinney Director

/s/ Paul A. Mascarenas

Paul A. Mascarenas Director

/s/ Alexis P. Michas

Alexis P. Michas Director and Non-Executive Chairman

/s/ Vicki L. Sato

Vicki L. Sato Director
 No Offer or Solicitation statements. In some cases, you can identify these statements by Adjusted operating income and Adjusted earnings per share
This communication is being made in respect of the proposed forward-looking words such as “may,” “might,” “will,” “should,” may not be comparable to other similarly titled measures of
acquisition (the “proposed transaction”) of Delphi Technologies “could,” “designed,”“effect,” “evaluates,” “forecasts,” “goal,” other companies.
PLC (“Delphi Technologies”) by BorgWarner Inc. (“BorgWar- “guidance,” “initiative,” “intends,” “pursue,” “seek,” “target,”
Full-Year 2020
ner”). This communication is not intended to and does not “when,” “will,” “expects,” “plans,” “intends,” “anticipates,” “be-
constitute an offer to sell or the solicitation of an offer to lieves,” “estimates,” “predicts,” “projects,” “potential,” “outlook” Low High
subscribe for or buy or an invitation to purchase or subscribe for or “continue,” the negatives thereof and other comparable Earnings per diluted share $3.22 $3.75
any securities or the solicitation of any vote or approval in any terminology. Factors that could cause actual results relating Non-comparable items:
jurisdiction pursuant to the proposed transaction or otherwise, to the proposed transaction with Delphi Technologies to differ Restructuring and other expense 0.41 0.23
nor shall there be any sale, issuance or transfer of securities in materially from these forward-looking statements include, but Merger, acquisition and divestiture expense 0.22 0.17
any jurisdiction in contravention of applicable law. In particular, are not limited to, the possibility that the proposed transaction Adjusted earnings per diluted share $3.85 $4.15
this communication is not an offer of securities for sale into the will not be pursued; failure to obtain necessary shareholder ap-
United States. No offer of securities shall be made in the United provals, regulatory approvals or required financing or to satisfy
States absent registration under the U.S. Securities Act of 1933, any of the other conditions to the proposed transaction; adverse Adjusted Earnings Per Share to US GAAP Reconciliation
as amended (the “Securities Act”), or pursuant to an exemption effects on the market price of Delphi Technologies’ ordinary The Company defines adjusted earnings per diluted share as
from, or in a transaction not subject to, such registration require- shares or BorgWarner’s shares of common stock and on Delphi earnings per diluted share adjusted for the items below and
ments. Any securities issued in the proposed transaction are Technologies’ or BorgWarner’s operating results because of a related tax effects.
anticipated to be issued in reliance upon available exemptions failure to complete the proposed transaction; failure to realize
from such registration requirements pursuant to Section 3(a) the expected benefits of the proposed transaction; failure to
Year Ended December 31

We maintained focus
(10) of the Securities Act. In connection with the proposed promptly and effectively integrate Delphi Technologies’ busi-
transaction, Delphi Technologies will file certain proxy materials, nesses; negative effects relating to the announcement of the 2019 2018
which shall constitute the scheme document and the proxy proposed transaction or any further announcements relating to Earnings per diluted share $3.61 $4.44
Non-comparable items:

and delivered stronger-

statement relating to the proposed transaction (the “proxy the proposed transaction or the consummation of the proposed
statement”). The proxy statement will contain the full terms and transaction on the market price of Delphi Technologies’ ordinary Restructuring expense 0.26 0.24
conditions of the proposed transaction, including details with shares or BorgWarner’s shares of common stock; significant Pension settlement loss 0.10 -
respect to the Delphi Technologies shareholder vote in respect transaction costs and/or unknown or inestimable liabilities;

than-expected top-line
Unfavorable arbitration loss 0.07 -
of the proposed transaction. Any decision in respect of, or other potential litigation associated with the proposed transaction;
Merger, acquisition and divestiture expense 0.05 0.03
response to, the proposed transaction should be made only on general economic and business conditions that affect the com-
the basis of the information contained in the proxy statement. bined company following the consummation of the proposed Asset impairment and loss on divestiture 0.03 0.09

and margin performance.

transaction; changes in global, political, economic, business, Officer stock awards modification 0.01 0.04
Participants in the Solicitation
competitive, market and regulatory forces; changes in tax laws, Gain on derecognition of subsidiary (0.02) -
Delphi Technologies, BorgWarner and certain of their respective
regulations, rates and policies; future business acquisitions or Asbestos-related adjustments - 0.08
directors, executive officers and employees may be deemed
disposals; competitive developments; and the timing and occur- Gain on sale of building - (0.07)
“participants” in the solicitation of proxies from Delphi Tech-
rence (or non-occurrence) of other events or circumstances that
nologies shareholders in respect of the proposed transaction. Gain on commercial settlement - (0.01)
may be beyond Delphi Technologies’ or BorgWarner’s control.
Information regarding the foregoing persons, including a de- Tax reform adjustments - (0.06)
scription of their direct or indirect interests, by security holdings For additional information about these and other factors, Tax adjustments 0.02 (0.30)
or otherwise, will be set forth in the proxy statement and any see the information under the caption “Risk Factors” in Delphi Adjusted earnings per diluted share $4.13 $4.48
other relevant documents to be filed with the Securities and Technologies’ most recent Annual Report on Form 10-K filed
Exchange Commission (the “SEC”). You can find information with the SEC and “Management’s Discussion and Analysis of
about Delphi Technologies’ directors and executive officers in its Financial Condition and Results of Operations” filed on February Adjusted Operating Income to US GAAP Reconciliation
Annual Report on Form 10-K for the fiscal year ended December 13, 2020, and the information under the caption “Risk Factors” in FY 2020 Guidance
31, 2019 and its definitive proxy statement filed with the SEC on BorgWarner’s most recent Annual Report on Form 10-K filed with Low High
Schedule 14A on March 15, 2019. You can find information about the SEC and “Management’s Discussion and Analysis of Financial
FRÉDÉRIC LISSALDE BorgWarner’s directors and executive officers in its Annual Condition and Results of Operations” on February 13, 2020.
Net Sales $9,750 $10,075
Operating income $975 $1,110
President and Chief Executive Officer Report on Form 10-K for the fiscal year ended December 31,
Delphi Technologies’ and BorgWarner’s forward-looking Operating margin 10.0% 11.0%
2019 and its definitive proxy statement filed with the SEC on
statements speak only as of the date of this communication Non-comparable items
Schedule 14A on March 15, 2019.
or as of the date they are made. Delphi Technologies and Restructuring expense $115 $65
Additional Information and Where to Find It BorgWarner each disclaim any intent or obligation to update Merger, acquisition and divestiture expense 45 35
This communication may be deemed solicitation material in or revise any “forward looking statement” made in this com-
Adjusted operating income $1,135 $1,210
respect of the proposed transaction. In connection with the munication to reflect changed assumptions, the occurrence
proposed transaction, Delphi Technologies will file with the of unanticipated events or changes to future operating results Adjusted operating income margin 11.6% 12.0%
SEC and furnish to Delphi Technologies’ shareholders a proxy over time, except as may be required by law. All subsequent
DEAR FELLOW STOCKHOLDERS, Chief Financial Officer at the start of the statement and other relevant documents. This communication written and oral forward-looking statements attributable to Free Cash Flow to US GAAP Reconciliation
does not constitute a solicitation of any vote or approval. Before Delphi Technologies, BorgWarner or their respective directors, The Company defines free cash flow as net cash provided
second quarter of 2019. Given his broad making any voting decision, Delphi Technologies’ shareholders executive officers or any person acting on behalf of any of them by operating activities plus the derecognition of subsidiary
As I look back on my first full year as financial and operational experience, are urged to read the proxy statement and any other relevant are expressly qualified in their entirety by this paragraph.
minus capital expenditures. The measure is useful to both
documents filed or to be filed with the SEC in connection with
President and CEO, I am grateful for the Forward-looking statements concerning BorgWarner’s management and investors in evaluating the Company’s ability
Kevin made an immediate positive impact the proposed transaction or incorporated by reference in the
business without regard to the proposed transaction are also
proxy statement (if any) carefully and in their entirety when to service and repay its debt.
strength of the team around me and on our business and engaged well with they become available because they will contain important subject to risks and uncertainties, many of which are difficult to Year Ended December 31
predict and generally beyond our control, that could cause actu-
our ability to work cohesively to drive our corporate culture, continuing our long information about the proposed transaction and the parties to
al results to differ materially from those expressed, projected or
2019 2018
the proposed transaction. Investors will be able to obtain free of Cash provided by operating activities $1,008 $1,126
the business forward. We made several legacy of financial discipline and strength, charge the proxy statement and other documents filed with the implied in or by the forward-looking statements. These risks and
uncertainties, among others, include: our dependence on auto- Derecognition of subsidiary 172 -
SEC at the SEC’s website at http://www.sec.gov. In addition, the
important changes to our executive team, and enhancing our already strong finance proxy statement and Delphi Technologies’ and BorgWarner’s motive and truck production, both of which are highly cyclical; Capital expenditures (481) (546)
our reliance on major OEM customers; commodities availability Free cash flow $699 $580
most of which were internal promotions. team. Ultimately, we ended 2019 with a respective annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to and pricing; supply disruptions; fluctuations in interest rates and
Our ability to successfully promote from world-class management team that allows those reports filed or furnished pursuant to section 13(a) or foreign currency exchange rates; availability of credit; our de- Full Year 2020 Outlook
15(d) of the U.S. Securities Exchange Act of 1934, as amended, pendence on key management; our dependence on information Low High
within highlights both the breadth and us to function effectively and efficiently. are available free of charge through Delphi Technologies’ and systems; the uncertainty of the global economic environment;
Cash provided by operating activities $1,250 $1,250
depth of our talent base, plus the strength BorgWarner’s websites at www.delphi.com and www.borgwar- the outcome of existing or any future legal proceedings, includ-
Derecognition of subsidiary - -
ner.com, respectively, as soon as reasonably practicable after ing litigation with respect to various claims; future changes in
of our internal development programs, External Commitment and Recognition they are electronically filed with, or furnished to, the SEC. laws and regulations, including, by way of example, tariffs, in the Capital expenditures (575) (525)
countries in which we operate; and the other risks noted under Free cash flow $675 $725
which are crucial to our long-term success. Notice Regarding Forward-Looking Statements
Item 1A, “Risk Factors,” of BorgWarner’s most recent Annual
This communication may contain forward-looking statements as
As a world leader in clean and efficient contemplated by the 1995 Private Securities Litigation Reform
Report on Form 10-K filed with the SEC and in other reports that
we file with the SEC.
One important management addition last solutions for combustion, hybrid and Act that reflect, when made, Delphi Technologies’ or BorgWar-
ner’s respective current views with respect to future events, This should not be construed as a complete list of all of
year was Kevin Nowlan, who joined the electric vehicles, BorgWarner has received including the proposed transaction, and financial performance the economic, competitive, governmental, technological
or that are based on their respective management’s current and other factors that could adversely affect our expected
Company as Executive Vice President and numerous awards for our products and outlook, expectations, estimates and projections, including consolidated financial position, results of operations or liquidity.
with respect to the combined company following the proposed Additional risks and uncertainties, including without limitation
transaction, if completed. Such forward-looking statements those not currently known to us or that we currently believe are
are subject to many risks, uncertainties and factors relating to immaterial, also may impair our business, operations, liquidity,
Delphi Technologies’ or BorgWarner’s respective operations financial condition and prospects.
and business environment, which may cause the actual results
of Delphi Technologies or BorgWarner to be materially different
from those indicated in the forward-looking statements. Adj. EPS Guidance to US GAAP Reconciliation
All statements that address future operating, financial or The Company defines Adjusted earnings per share as
business performance or Delphi Technologies’ or BorgWarner’s Adjusted net income divided by diluted shares. Because not
respective strategies or expectations are forward-looking all companies use identical calculations, this presentation of
 Strengthening Leadership
in Electrification

BorgWarner Inc.
World Headquarters
3850 Hamlin Road
Auburn Hills, MI 48326
Driving Toward a Cleaner Future
2019 Stockholders letter and annual report on form 10-K

borgwarner.com