BorgWarner (BWA) Q3 2025 Earnings Call Transcript

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Date

Thursday, October 30, 2025 at 9:30 a.m. ET

Call participants

Vice President, Investor Relations — Patrick Nolan

President and Chief Executive Officer — Joseph F. Fadool

Executive Vice President and Chief Financial Officer — Craig D. Aaron

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Risks

Craig D. Aaron noted a $50 million to $100 million revenue impact in Q4 2025 from a North American customer program disruption.

Joseph F. Fadool explicitly referenced "sales headwind in the battery business" as a 100 basis point drag on overall outgrowth for 2025.

Fadool said, "First, as I look back on 2024 and 2025, it's clear our outgrowth was impacted by EV programs we booked several years ago."

Fadool confirmed both direct and market-wide exposure to Nexperia semiconductor supply disruptions in Europe and China, with anticipated customer shutdowns reflected in full-year guidance.

Takeaways

Sales -- $3.6 billion in sales, up 2% organically, driven by a 6% year-over-year increase in light vehicle e-product sales and a 4% organic rise in foundational product sales, partially offset by lower battery and charging results; foreign currency added $69 million to the total.

Adjusted Operating Margin -- 10.7%, an increase of 60 basis points year over year, despite a $17 million net tariff headwind

Adjusted Operating Income -- $385 million in adjusted operating income, up from $350 million in Q3 2024; on a comparable basis, adjusted operating income increased $46 million on $73 million of higher sales.

Adjusted EPS -- Adjusted EPS was up $0.15 year-over-year, attributed to increased adjusted operating income (non-GAAP; "adjusted" defined as excluding non-comparable items) and the impact of share repurchases in 2024 and 2025.

Free Cash Flow -- $266 million in free cash flow, a 32% year-over-year increase, due to higher net earnings and lower capital expenditures.

Capital Return -- $136 million (over 50% of free cash flow for the quarter) was returned to shareholders via $100 million in share repurchases and $36 million in dividends; the total for 2025 is projected at $420 million to shareholders.

PowerDrive Systems (PDS) Sales -- Exceeded $580 million, with 12% year-over-year organic growth led by China; incremental margin conversion was impacted by a $24 million customer-related recovery last year and the timing of customer pricing, but full-year incremental conversion is still expected in the mid-teens for 2025.

Battery and Charging Segment -- Anticipated to remain a 100 basis point outgrowth headwind for 2025, but expected to be slightly EBITDA and free cash flow positive in 2025.

2025 Guidance: Sales -- Full-year 2025 sales guidance was narrowed to $14.1-$14.3 billion, reflecting higher industry production but a 60 basis point combined headwind from a cyber-related European customer shutdown, North American supply-constrained production, and semiconductor shortages is expected.

2025 Guidance: Adjusted Operating Margin -- Raised to 10.3%-10.5%, up from prior guidance of 10.1%-10.3%, supported by solid operational trends and tariff recoveries of up to 1% of sales, as expected for the full year.

2025 Guidance: Adjusted EPS -- Increased to $4.60-$4.75 per diluted share, a 3% rise from prior guidance, and an 8% increase over 2024 at the midpoint.

2025 Guidance: Free Cash Flow -- Increased to $850 million-$950 million (midpoint: $900 million) for the full year, marking a 23% rise versus 2024, with capital expenditures managed at about 4% of sales for the year versus the historical 4.5%-5% range.

New Business Awards -- Eight new product awards highlighted across both foundational and e-products, including major contracts with Cherry, Stellantis, Great Wall Motor, and a battery system for the Hold On Urban autonomous electric shuttle.

Summary

BorgWarner Inc. (NYSE:BWA) reported sequentially stable sales averaging $3.6 billion per quarter year-to-date and maintained an adjusted operating margin of approximately 10.3% for the year The quarter's free cash flow generation enabled a significant increase to both full-year 2025 free cash flow and adjusted EPS guidance, with higher shareholder returns projected through balanced capital allocation. Management stated tariff recoveries will shift to a $25 million quarterly benefit in Q4 2025, reversing previous losses and supporting margin resilience. BorgWarner’s bookings included 17 awards announced in the past six months, which management expects to contribute meaningfully to revenue growth and outperformance beginning in 2027. Company leaders highlighted ongoing cost controls and strategic redeployment of underutilized capital assets as key levers driving operating leverage and lower capital expenditures going forward.

Craig D. Aaron said, "Third quarter performance allowed us to increase our margin, EPS, and free cash flow guidance." (referring to adjusted, i.e, non-GAAP, margin and EPS guidance for Q3 2025)

Joseph F. Fadool affirmed, "The business is expected to be slightly EBITDA and free cash flow positive in 2025." in the battery segment, despite ongoing sales headwinds.

Management projected a continuation of muted outgrowth into 2026, citing legacy program bookings and regional market slowdowns, but new wins are expected to bolster top-line growth from 2027 onward.

Fadool added, "20% of our sales are in China, and of those, 75% are with Chinese domestic customers." characterizing this as a strong position for global expansion.

Cost discipline is underscored by lower capital expenditures at 4% of sales for the year and ongoing productivity initiatives, with further supply chain risk management dedicated to addressing potential Tier 2/3 supplier disruptions.

Industry glossary

Foundational products: BorgWarner’s legacy combustion-based technologies such as turbochargers, transfer cases, and cam timing systems.

E-products: Electrified vehicle components including integrated drive modules, inverters, battery packs, and high-voltage systems.

Incremental margin: The ratio of organic change in adjusted operating income to the organic change in sales, adjusted for production weighting by region.

PDS (PowerDrive Systems): BorgWarner business unit focused on e-propulsion and drivetrain products.

IDM (Integrated Drive Module): Seven-in-one system for hybrid and electric vehicles integrating motors, inverters, a charger, DC-DC converter, voltage booster, and transmission.

VTG turbocharger: Variable turbine geometry turbocharger, technology featured in new Stellantis programs.

EVCT (Electric Variable Cam Timing): Electrically controlled cam timing unit for engine efficiency, newly awarded to Stellantis programs.

NMC cells: Nickel Manganese Cobalt battery cells, utilized in BorgWarner’s new battery system contract.

Full Conference Call Transcript

Patrick Nolan: Thank you, Ashia. Good morning, everyone, and thank you for joining us today. We issued our earnings release earlier this morning posted on our website borgwarner.com, both on our homepage and on our Investor Relations homepage. With regard to our Investor Relations calendar, we will be attending multiple investor conferences between now and our next earnings release. Please see the Events section of our IR page for a full list. Before we begin, I need to inform you that during this call, we may make forward-looking statements which involve risks and uncertainties as detailed in our 10-Ks. Our actual results may differ significantly from the matters discussed today.

During today's presentation, we highlight certain non-GAAP measures in order to provide a clearer picture about the core business performed and for comparison purposes with prior periods. When you hear us say at a comparable basis, that means excluding the impact of FX, net M&A, and other non-comparable items. When you hear us say adjusted, that means excluding non-comparable items. When you hear us say organic, that means excluding the impact of FX and any net M&A. We will also refer to our incremental margin performance. Our incremental margin is defined as the organic change in our adjusted operating income divided by the organic change in our sales, production-weighted for our geographic exposure.

We encourage you to follow along with these slides during our discussion. With that, I'm happy to turn the call over to Joe.

Joseph F. Fadool: Thank you, Pat, and good morning, everyone. I'm very pleased to share our results for 2025 and provide an overall company update starting on Slide five. I wish to begin by thanking our employees, customers, and suppliers for all of their trust and efforts during the quarter and for their continued support. In the quarter, we achieved organic sales growth of just over 2% despite headwinds for downtime at one of our European customers due to a cyber-related shutdown. Excluding the decline in our CV Battery and Charging Systems segment, our organic sales were up approximately 4% year over year. I'm excited to report that the strong award activity we saw in the first half continued into the third quarter.

Today, I will share eight new business awards across both foundational products and e-products, which are just a sampling of the awards that we secured during the quarter. We believe these awards illustrate the strength of our portfolio and the demand for efficient powertrain technology around the globe. Our adjusted operating margin performance was strong in the third quarter, coming in at 10.7%, which increased 60 basis points year over year despite a 60 basis point net tariff headwind. This strong underlying operational performance was driven by capitalizing on higher sales, continuing to focus on cost controls across our business, and turning earnings into strong free cash flow.

Lastly, we remain focused on the efficient deployment of our capital to drive shareholder value. In the quarter, we returned approximately $136 million or over 50% of our third quarter free cash flow to shareholders through share repurchases and payment of our quarterly cash dividend.

Looking back on our year-to-date performance, I'm very proud of our team and our results. As Craig will detail, our year-to-date performance remains strong and has enabled us to once again increase our adjusted margin, adjusted EPS, and free cash flow guidance for the full year. Now let's look at some of the new foundational product awards on Slide six. BorgWarner has been awarded several four-wheel drive contracts with Cherry to supply its on-demand transfer case with mechanical locking for their pickup truck vehicles and its all-wheel drive coupling for Cherry's SUV models. We believe the new programs further strengthen the long-term partnership between the two companies in advanced drivetrain systems, with mass production scheduled to begin in 2027.

We are honored to extend our collaboration with Cherry in the drivetrain technologies field. As a global leader in this sector, BorgWarner brings a broad product portfolio, deep technical expertise, and sharp insights into international markets. Next, BorgWarner has solidified an agreement with Stellantis to supply our 50-millimeter variable turbine geometry or VTG turbocharger for the OEM's GME T4 EVO four-cylinder gasoline engine. This turbocharger will be featured on the automaker's 2026 Jeep Grand Cherokee. Additionally, BorgWarner will supply its electric variable cam timing or EVCT technology on the OEM Jeep Cherokee engine. We are pleased to partner with Stellantis on these exciting project launches.

Our longstanding relationship includes supplying Stellantis with a number of turbos for previous vehicle models, and this specific project marks our shift into the next generation of turbocharging. The integration of BorgWarner's EVCT into the Jeep Cherokee engine marks the first use of an EVCT on a Stellantis engine. I'm excited to see continued demand for our market-leading foundational products across our portfolio. Now, let's look at some new e-product awards on Slide seven.

First, BorgWarner has secured a contract to supply its seven-in-one integrated drive module or IDM to a leading Chinese OEM, with mass production expected to start in 2026. Exclusively designed for the customer's hybrid SUV, BorgWarner's IDM integrates multiple functions within a single compact unit to boost overall system performance and efficiency. BorgWarner's seven-in-one IDM combines two electric motors featuring the company's patented high voltage hairpin winding technology, a dual inverter integrated with an onboard charger, DC to DC converter, and voltage boost function as well as an eGear transmission.

With deep expertise in electrified propulsion and full-stack in-house capabilities covering e-motors, power electronics, and gearboxes, BorgWarner is able to provide a flexible and highly integrated solution tailored to the customers' needs.

Next, BorgWarner is strengthening its electrified propulsion collaboration with Great Wall Motor. Building on two previously announced dual inverter programs, BorgWarner has secured two additional projects with this OEM. With mass production scheduled by 2025, we believe the extension of this partnership not only reflects recognition of our products and technologies but also underscores our strong commitment to supporting our customers with new energy strategies. We remain dedicated to accelerating their electrified vehicle portfolio. Lastly, BorgWarner has secured a contract to supply its battery system to the all-new Hold On Urban, a 15-person level four autonomous fully electric shuttle.

The system utilizes two 57-kilowatt-hour battery packs and incorporates a modular design with cylindrical NMC cells, which offer the latest generation cell chemistry and benchmark-setting energy density. Additionally, BorgWarner's NMC battery system includes a robust stainless steel battery case and uses a compact active liquid cooling system.

To summarize, the takeaways from today are the following. First, BorgWarner's third quarter results were strong. Second, we secured multiple new business awards across our entire portfolio. And third, we continued returning capital to shareholders. As we focus on a successful finish to 2025, I expect BorgWarner to remain focused on three factors to drive value for our shareholders. First, we must continue to focus on driving strong financial performance. To me, this means successfully launching profitable business around the globe that supports our customers' needs for leading-edge powertrain technology for combustion, hybrid, and electric vehicles, as well as continuously taking the steps to manage our overall cost structure. I expect this to support expanded earnings and cash flow.

Second, we must continue to capitalize on the strong quoting environment that we've been seeing over the last several quarters. BorgWarner intends to remain focused on securing new business across our portfolio, which I expect to contribute to our long-term top-line and bottom-line growth. And last, we need to stay focused on creating additional shareholder value with our strong free cash flow. I expect this to be achieved through a balanced capital allocation approach that rewards shareholders while also making inorganic investments that will grow the earnings power of BorgWarner and improve our long-term positioning. I continue to firmly believe the strength of BorgWarner.

The 17 awards we've announced over the last six months provide me even more confidence that our product strategy is built to drive long-term profitable growth across our entire portfolio. In combination with our deep and long-standing global customer relationships and our disciplined financial approach, our talented team will continue to drive BorgWarner to the next level of success. With that, I will turn the call over to Craig.

Craig D. Aaron: Thank you, Joe, and good morning, everyone. Before I dive into the financials, I'd like to provide a quick overview of our third quarter results. First, we reported just under $3.6 billion in sales, which was up 2% year over year excluding foreign exchange. This performance was modestly weaker than our market production in the quarter due to downtime at one of our European customers and a decline in our battery and charging sales. Second, we had strong adjusted operating margin performance in the quarter at 10.7%. This performance represents a 60 basis point improvement year over year despite a $17 million net tariff headwind in the quarter.

This also represents the sixth quarter in a row with an adjusted operating margin at or above 10%, which we believe demonstrates the consistency of our operating performance. Third, we had strong free cash flow in the quarter of $266 million, which was a 32% increase from a year ago. Now let's turn to slide eight for a look at our year-over-year sales walk for the third quarter.

Last year's Q3 sales were just over $3.4 billion. You can see that stronger foreign currencies drove a year-over-year increase in sales of $69 million. Then you can see an increase in organic sales, which was primarily driven by a 6% increase in light vehicle e-product sales and a 4% increase in foundational sales, partially offset by lower battery and charging sales. Some of all this was just over $3.6 billion of sales in Q3. Turning to Slide nine, you can see our earnings and cash flow performance for the quarter. Third quarter adjusted operating income was $385 million, equating to a strong 10.7% adjusted operating margin. This performance includes a 60 basis point headwind from net tariff cost.

That compares to adjusted operating income from continuing operations of $350 million or 10.1% adjusted operating margin a year ago. On a comparable basis, adjusted operating income increased $46 million on $73 million of higher sales. We believe this is great performance and reflects our ability to capitalize on higher sales as well as a continued focus on cost controls across our business. Our adjusted EPS from continuing operations was up $0.15 compared to a year ago as a result of higher adjusted operating income and the impact of our share repurchases during 2024 and 2025.

And finally, free cash flow from continuing operations was a generation of $266 million, which was up $65 million from a year ago as a result of higher net earnings and lower capital expenditures. Now let's take a look at our full-year outlook. On Slide 10, we are now projecting total 2025 sales in the range of $14.1 to $14.3 billion, which has been narrowed from our prior guidance of $14 to $14.4 billion. This adjusted range incorporates a higher market production outlook offset by the expected impact of a cyber-related shutdown at a European customer, the impact of supply-constrained production for a key North American platform, and global semiconductor supply concerns.

On a combined basis, these customer and supplier-related factors are expected to be a 60 basis point headwind to our year-over-year sales growth. Now let's review our year-over-year sales walk. Starting with foreign currencies, our guidance now assumes an expected full-year sales benefit of $170 million compared to 2024 due to the strengthening of the euro versus the U.S. Dollar. Within our 2025 guidance, our full-year end market assumption has improved to flat to down 1% year over year versus down 0.5% to down 2.5% previously. This improvement is driven by stronger industry production we saw during the third quarter and an improved production outlook in the fourth quarter compared to our prior outlook.

Within this guidance, we continue to expect a tailwind from tariff-related recoveries of up to 1% of sales as this is a pass-through recovery of our costs to our customers. Additionally, we expect the company's full-year sales outgrowth to be roughly flat, which reflects a 100 basis point headwind from our battery business and a 60 basis point headwind from the customer and supplier impacts I just referenced. Based on these assumptions, we expect our 2025 organic sales change to be down 1% to flat year over year. Now let's switch to margin. We are increasing our full-year adjusted operating margin to be in the range of 10.3% to 10.5% compared to our previous guidance range of 10.1% to 10.3%.

We view this as strong underlying performance supported by our solid year-to-date operational results, which we fully expect to continue for the remainder of 2025. Based on this sales and margin outlook, we're expecting full-year adjusted EPS in the range of $4.60 to $4.75 per diluted share, which is a 3% increase versus our prior guidance or an 8% increase versus 2024 at the midpoint of our range. Additionally, we are increasing our full-year free cash flow guidance to a range of $850 million to $950 million, which is a $150 million increase from our prior guidance. With that, that's our 2025 outlook. Let me summarize my financial remarks. Overall, we were very pleased with our third quarter results.

Our adjusted margin, adjusted EPS, and free cash flow performance were strong despite net tariff cost headwinds in the quarter. Our third quarter performance allowed us to increase our margin, EPS, and free cash flow guidance. And on top of that, we returned $136 million of cash to shareholders or over 50% of our free cash flow in the quarter through our share repurchases and dividend. As I look towards the end of the year, we're focused on delivering the improved financial performance outlined in our guidance. We now expect our adjusted operating margin to be up 20 to 40 basis points year over year despite tariff headwinds and second-half volume challenges.

The midpoint of our revised adjusted EPS guidance represents more than an 8% increase year over year, which demonstrates our focus on consistently growing earnings. And finally, we expect to have another year of strong free cash flow of $900 million at the midpoint of our guidance, which is more than a 23% increase versus 2024. By continuing to focus on near-term execution, growing the long-term earnings power of the company through organic and inorganic investments, and following a balanced deployment of our capital, we believe BorgWarner will create significant shareholder value for years to come.

With that, I'd like to turn the call back over to Pat.

Patrick Nolan: Thank you, Craig. Ashia, we're ready to open it up for questions.

Operator: The first question comes from Chris McNally with Evercore. Please go ahead.

Christopher Patrick McNally: Chris? Chris, can you hear us?

Joseph F. Fadool: Sorry. I was on mute. There we go. Joe and Greg, impressive results. Particularly, we know that the Q4 Oswego impact is obviously material to Borg given the high content on the F Series. In the prepared remarks, I just want to make sure you talked about 60 basis points. Could you just dive in a little bit to the visibility you have on Q4 specifically for that single large kind of impact because whether it's 60 basis points, $80 million to $100 million revenue impact, that's like $0.07 to $0.08 for the full year. So that's my first question. Thanks so much.

Craig D. Aaron: Thanks, Chris. Appreciate the comments about the quarter. In our guide, what we've included for that North American program is a $50 million to $100 million impact in the fourth.

Joseph F. Fadool: Okay. Perfect. And then the second question is really around your divisional margins, which were also very impressive. The only questionable area I saw was around PowerDrive or PDS. Obviously, we're going to see a pickup in the European NAV volumes in the second half, and that should start to flow nicely to margins. I know the year-over-year compare in that one division is not easy. I think you had a $20 million one-time recovery last year. So the incremental look more like high single digits.

Can you talk about how you walk us, Craig, from sort of a minus 6% margin year to something better as we exit the year and think about can incrementals start to get back to that sort of mid to high teens next year, which will close the gap to ultimately getting close to breakeven?

Craig D. Aaron: Yes. Thanks, Chris. So when you look at PowerDrive system sales for the quarter, coming in a little over $580 million, it's about 12% growth excluding foreign exchange year over year, led by growth in China. So that was really nice to see. As you mentioned, the conversion was a little bit upside down. You did reference a customer-related recovery last year that we talked about. It was about a $24 million recovery. Pricing was definitely an impact in the quarter year over year. We look into the fourth quarter and for the full year, our expectations remain intact, which is on that extra growth in PDS, we expect to convert in the mid-teens.

That's success for us, and we're focused on executing that for the full year. Q3 was really just a timing impact related to customer pricing between Q3 and Q4.

Joseph F. Fadool: Excellent. Craig, that's great detail. Thanks so much, team.

Craig D. Aaron: Thank you.

Operator: The next question comes from Colin Langan with Wells Fargo. Please go ahead.

Colin M. Langan: Great. Thanks for taking my question. Just is there anything unusual in Q3's margin? It's obviously very strong. If I look at it year over year, it's above that sort of mid-teen conversion. And even sequentially, sales are down, and it's up. Any one-time items that we should be thinking about as maybe not reoccurring?

Craig D. Aaron: Actually, no. No one-time items. When you look at our performance, it was fantastic, pretty much across the board. Adjusted operating income is increasing $29 million on a little over $70 million of sales. That's a 40% incremental conversion. The company was really able to capitalize on the higher sales environment in the quarter. On top of that, Colin, we've been focused on cost controls for the last several quarters. Items like supply chain savings, productivity, and lower cost of poor quality are all really, really important items to deliver, in my opinion, a fantastic result. We're really pleased with the performance.

Colin M. Langan: Got it. And as we look into 2026, I mean, is this quarter rate the right sort of jump-off point into next year? Or is that just too optimistic? Thanks.

Craig D. Aaron: We're going to continue to focus in 2026 just how we executed in 2025. So we're going to focus on capitalizing on that extra sales growth. We're going to plan to convert in the mid-teens, like we've talked about many times. We're going to use all the levers within our control to do that, meaning focus on cost controls, again, chain savings, restructuring, productivity, lower cost of poor quality. We're going to use all of those levers to continue to expand margins as we move forward.

Colin M. Langan: Got it. All right. Thanks for taking my questions.

Craig D. Aaron: Thank you, Colin.

Operator: The next question comes from Joseph Spak with UBS. Please go ahead.

Joseph Robert Spak: Thanks. Good morning, everyone. I wanted to focus on battery and charging a little bit. Wanted to get a sense from you if you thought this low $100 million a quarter level of sales is a good run rate going forward? And then despite those lower sales, clearly good work on the cost side because the loss went down. So I mean, do you think you're with the actions you've taken today properly rightsize that now? Or is there more opportunity to take costs out and rightsize that business?

Joseph F. Fadool: Yes. Good morning, Joe. So we do continue to see sales headwind in the battery business, mainly due to the adoption challenges in this market, but to a lesser degree in Europe. So we expect the decline in the battery and charger sales to be that 100 basis point headwind in the overall outgrowth of 2025. In the near term, these trends are difficult to predict. However, I'm pleased with the cost actions, as Steve referenced, that the team has taken in the business. So I think an important note is that in 2025, the business is expected to be slightly EBITDA and free cash flow positive.

Therefore, we're positioning the business for profitable growth while we navigate these uncertain times on the sales in the short term. We do still strongly believe in the long-term outlook for this business.

Joseph Robert Spak: Thank you. Second question, just wanted to focus on the triple T segment for a second here. If you look in the market, there's obviously been a lot of demand for stationary generators given some of the data center build-out. Those are diesel engines that typically have a turbo. And I just wanted to sort of get a sense from you guys whether you've been participating in that opportunity, how much it's maybe helped growth this year? And what you see as an outlook for that business going forward? Like you obviously had some excess diesel turbo capacity from engines coming down. So have you just been able to repurpose that? Or had that been changed over to gas?

Joseph F. Fadool: So, yes. We do supply turbos for the stationary power stations in support of the industrial and specifically the data center market. Although we haven't disclosed specific sales, I mean, just to provide broader context here, about 17% of BorgWarner sales is commercial vehicle and off-highway, which includes stationary power. So we're excited about the potential there.

Joseph Robert Spak: Thank you.

Operator: The next question comes from Dan Ciccarello with BNP Paribas. Please go ahead.

Dan Ciccarello: Hi, good morning, everybody. I just want to return to PDS, to PowerDrive. And curious what the backlog and the sales trajectory by region looks like. How would you assess the growth for this year thus far? Then just high level, how you foresee the regional trajectories North America, Europe, Asia, playing out into next year? Thanks.

Joseph F. Fadool: Yes. Thanks for the question. So specifically in the third quarter, the light vehicle e-product growth year over year is about 7%. More broadly on the full year, that business is up year to date 27% versus last year. So we're really excited to see those sales start to pull through. And as Craig referenced, on the incrementals, we expect for the full year to achieve our goals of mid to high teen incrementals on that business. We do see in this particular market EV sales were strong through the third quarter. In the fourth quarter and beyond, we expect those market sales to subside.

But remember, we're not participating in a lot of those sales where customers are insourcing the product. Where we do see excellent growth is in China, where a lot of the music is playing on new energy vehicles. Our teams are performing well there. And that's where you see the pull-through of much of our backlog. To a lesser degree, there is growth in Europe. And we expect that to continue into 2026.

Dan Ciccarello: Got it. That's really helpful. And then apologies if I missed this, but for tariffs, regarding the $38 million net headwind the company has incurred year to date, what's embedded for the fourth quarter recovery of that within the guide? And then any color or thoughts on the M&A pipeline and how you're balancing that view against buybacks? Thank you.

Craig D. Aaron: Sure. So I'll handle the tariff question. Through the first three quarters, tariffs have been a negative recovery for us, a lack of recovery. As we move into the fourth quarter, we expect that to flip. We expect it to be a benefit for us in that $25 million range.

Joseph F. Fadool: Regarding M&A, we still remain active, and we're very disciplined in our approach. We continue to believe there are some compelling opportunities for companies with BorgWarner's financial and operational strength. As we've mentioned in the past, we're really focused on three priorities when we consider potential acquisitions. The first one is inorganic investments must have strong industrial logic. We want to leverage the many core competencies that BorgWarner has. The second is really around near-term accretiveness. We want to see near-term profitability. Why is that? Because we want to grow the earnings power of the company. We're in a much better position now than if you look five or six years ago. We like our portfolio.

This is a question about strengthening the portfolio and expanding our earnings power. And then finally, we need to ensure we pay a fair price for any asset. So I continue to see inorganic investment as an opportunity to grow BorgWarner's earning power and improve our long-term positioning.

Dan Ciccarello: Thank you.

Operator: The next question comes from Luke Young with Baird. Please go ahead.

Luke L. Junk: Good morning. Thanks for taking the questions. Craig, maybe to start with the operating margin range relative to implied 4Q, even as you're tightening the revenue range, keeping a couple of hundred bps of room there, that's not dissimilar from prior years, but I guess I'm just thinking with additional variables in the macro, the tariff recovery that you mentioned, customer production impacts, business stewardship situation, just any way to scale those factors that you haven't spoken to and you should think kind of within the range maybe some of the sensitivity? Thank you.

Craig D. Aaron: Sure. Thanks, Luke. So I'll talk about the fourth quarter guide in the context of our year-to-date average. When you think about our year-to-date average from a sales perspective, sales coming in right around $3.6 billion per quarter and our operating margin right around 10.3% for the year. As you go to the high end of the fourth quarter, we would expect revenue to come in pretty similar to our year-to-date average. And if that's the case, we expect our margin to come in right around 10.8%. What you're seeing is that tariff benefit really coming through the P&L, that $25 million I spoke about earlier.

At the low end of the range, we would have revenue coming in quite a bit lower, around $3.35 billion, and we would decrement on that but also have that tariff benefit, which would hold us at that 10.3% year-to-date average.

Luke L. Junk: Got it. Thank you for that. And then for my follow-up, Joe, just relative to flattish outgrowth this year, just at a high level, are some of the major moving pieces you're thinking about going into next year? Obviously, going to be lapping the charging exit in North America post-tax credit. I think the reversion to combustion helps to some extent. And then the awards that you walked us through this morning, those China awards especially, some quick turns and the awards even with some 2026 launches that you're announcing today. Just how do you think about those elements and maybe anything key that I've missed? Thank you.

Joseph F. Fadool: Sure. So in 2025, we are seeing some downtime at a European customer due to a cyber attack on their operations, which I referenced in my remarks. And then as we've spoken about the North American customer that had a fire issue, which is affecting their operation. So those two things pulled down our outgrowth in addition to the battery business. With that said, I'm really pleased with the improved year-over-year performance that we expect to deliver in '25. At the midpoint of our guide, we expect a 30 basis point improvement in margins, 8% growth in EPS, and more than a 20% increase in free cash flow.

So Craig and I are focused really on growing the earnings power of the company. And 2025 is a great example of despite the flattish sales and outgrowth, our ability to deliver on that objective.

Operator: The next question comes from Dan Levy with Barclays. Please go ahead.

Dan Meir Levy: Hi, good morning. Thank you for taking the question. Wanted to start first with a question on your exposure to the North America EV market. And I know that North America is a smaller piece of PowerDrive, but with all the headlines here now of maybe some impairments that some of the OEMs are taking or program cancellations, maybe you could just remind us, we see the current revenue, were there other further maybe bookings that now have to be reconsidered that may dampen the pace of growth within PowerDrive or some of the margin considerations there as well and what recoveries you may need from automakers?

Joseph F. Fadool: Yes. So good question. First, as I look back on 2024 and 2025, it's clear that our outgrowth was impacted by EV programs that we booked several years ago. So as you mentioned, the volume of many of these programs, at least in the Western world and specifically this market, has been lower than expected. So I would expect this dynamic will continue into 2026. I can tell you though, we're not satisfied with that outgrowth that we're seeing in 2025. So what I am pleased with is our bookings strength. We referenced 17 bookings that we've shared with you. It's just a representative of the strong booking year we're having.

And I expect these bookings to support our mid-term goal for our foundational and e-product businesses to outgrow their respective markets. And this we'll start to see the benefit of that in the top line in 2027 and beyond.

Dan Meir Levy: Okay, great. Thank you. As a follow-up, wanted to ask on the capital allocation. And I know you talked about the M&A framework before, but how are you in the interim thinking about it? I know you've done some share buybacks. Is there an opportunity, especially with the strength in your free cash flow, to accelerate the share buybacks, or are you just sort of opportunistically waiting for M&A? And if not, then you'll pursue share buybacks? Thank you.

Craig D. Aaron: Yes. Thanks for the question, Dan. So first, I want to just reemphasize Q3. Really happy about the strength of our balance sheet currently. Really pleased with the $136 million that was returned to shareholders in the quarter, $100 million in share repurchases, $36 million in dividends. As we look into the fourth quarter, we're expecting a similar level to be returned to shareholders right around that $135 million mark. Taking a big step backward, we're going to return $420 million to shareholders this year. And I think we're finding the right balance.

Our plan to return $135 million in the fourth quarter, but also just returning $420 million allows us to not only take advantage of share repurchases and dividends but also have the firepower that we need when an inorganic investment presents itself.

Operator: The next question comes from Manuel Lasner with Wells. Please go ahead.

Manuel Lasner: Great. Thank you so much. Quick question on the free cash flow. So good to see a large improvement in guidance. It seems like about maybe half of it comes from lower CapEx, and apologies if I missed it, but what are the drivers of the lower spending this year than previously expected?

Craig D. Aaron: $700 million of free cash flow through the first nine months. That's great to see. You did reference it. 3% of sales is our current CapEx number for the first nine months. That's lower than we've traditionally seen. I think our teams are doing a great job of effectively managing our capital. Where we have underutilized equipment, we're using it. And that's a great trend that we're seeing. When we look at the full year, CapEx should come in right around 4% of sales. That's lower than we've been historically, usually in that 4.5% to 5% range. That's what we should expect as we move into 2026 and beyond.

Manuel Lasner: Thank you. And then just wanted to follow up on the question around the outgrowth and the go-forward basis. It sounded like from your comments, a lot of the recent wins will support a return to more outgrowth in 2027 and beyond. I think in 2026, have some of the more recent trends continued. Can you maybe speak a little bit about sort of like the puts and takes? Understand for 2026, some of these old EV programs and some of these volumes coming down in cancellation. Are there any positive offsets, I guess, on the ICE side, either programs that are continuing for longer or where the volume cannot be higher than previously anticipated?

Joseph F. Fadool: Yes. So as you mentioned, we do expect a little bit of overhang into '26. But with all the new bookings that we've been announcing across the entire portfolio, we do expect that to contribute to our top line in 2027 and beyond. So what can we expect in 2026? I want to reference back to some of the awards we had earlier in the year, which included some extension of programs, it included some uplift, in addition to new programs including conquest. So there's still a very strong demand for our combustion products in the market. And especially in North America. So we feel we're in a great position.

Operator: The next question comes from Mark Delaney with Goldman Sachs. Please go ahead.

Mark Delaney: Yes, good morning. Thank you for taking my questions and congratulations on the good 3Q results. Hoping first you could double click a bit more on what you're seeing with respect to the Nexperia chip situation. And if you could speak a bit more on any direct exposure BorgWarner has with its own sourcing to that chip company. But then also, I think you said you assumed some degree of negative impact to industry volumes in the fourth quarter. If I understood that correctly, could you be potentially a bit more specific around how much incremental conservatism you've included from market factors from Nexperia?

Joseph F. Fadool: Yes. So I'll take the Nexperia topic. So as you know, Nexperia has some incidents in Europe and in China, and although we haven't shut any customers down, we do expect there to be some shutdowns based on this, especially in Europe and China. So we're managing that well like we have in the past crisis for semiconductor topics. We've reflected what we know in our full-year guide. So we'll continue to manage it as we learn more and find ways to mitigate it.

Mark Delaney: Does BorgWarner have its own direct exposure? Or is this more about just broader market effects?

Joseph F. Fadool: It's both. We have exposure to it directly where our teams are working to secure product on the open market through spot buys, but also find other mitigating ways to make sure it doesn't impact our customers. Then there is a broader market exposure, as you mentioned, both in Europe and China.

Mark Delaney: Okay. My other question is just on the non-automotive business, which you spoke about being 17% of revenue. Spoke on some of the opportunities such as in industrial and data center. But I was hoping you could maybe speak on the trucking business on highway, there's been some pretty weak numbers for the industry, especially with Class 8 in North America. Maybe speak a bit more on what you're seeing in the Class 8 trucking markets, and anything assumed from that in your outlook for the fourth quarter and thoughts on the go-forward potential? Thank you.

Joseph F. Fadool: Yes. As you mentioned, that market has been soft, especially in this country. If I step back and look globally, those CV and off-highway markets, they're roughly flat. You do have some choppiness depending on which market you're playing in. All that knowledge is fully into our full-year guide. So we don't expect a lot of noise by year-end in those markets.

Operator: The next question comes from Alex Porter with Piper Sandler. Please go ahead.

Alex Porter: Hi, guys. Great job in the quarter. I guess I have a couple of higher-level questions. You talk about stranded capital with EV programs going away. And this obviously, you guys have been able to manage this really, really well. That's not apparently the case for everyone, potentially smaller suppliers upstream of you. To what extent does that impact you? Could it impact you from a supply chain sort of reliability standpoint if some of your upstream suppliers, Tier 2, Tier 3 type players, experience financial difficulty?

And I guess a follow-on to that, if something like that occurs, is that a potential M&A opportunity for you guys if you have sort of motivated sellers on the upstream, or is that something you're not thinking about?

Joseph F. Fadool: Yes. So as you mentioned, our teams have been really good about redeploying some of the stranded capital we had, and that's resulting in our lower capital expenditures this year. There always are disruptions in the supply base due to capitalization of the Tier 2s and Tier 3s, and we have dedicated teams that manage that on an ongoing basis. So we don't see anything out of the ordinary that would take us off our plan. But it's something we have to continuously monitor. Obviously, with volume strong still in most of the markets, we don't anticipate any new or major issues here. But as they pop up, that's our job to manage those.

Alex Porter: Okay, perfect. Then I guess one final question, on China. Good to see this continuing alignment with Chinese domestic players, presumably some of that business is in support of those companies' objectives to go global with their own brands. I'm curious to hear what you think in terms of sort of the net impact on a company like BorgWarner. It's obviously exciting to talk about new wins, new bookings with companies like that. But presumably, if they're going to Europe, they're going to South America, they're going elsewhere, and winning share, they could potentially be winning share from your existing European and North American or Japanese OEMs. So is it does it end up being a wash for you?

Is it a net positive? Is it a net headwind? How do you think about basically Chinese customers going global?

Joseph F. Fadool: Yes. So maybe it's important to mention 20% of our sales are in China, and out of those sales, 75% are with the Chinese domestic. We're a little bit overweight with the domestics, which puts us into a really strong position with them as they go global. What we're seeing is some of the products that we've mentioned, like the seven-in-one that we're launching with a leading Chinese OEM. This is not only going to make a difference in China, but we expect these types of technologies will enable us to support them as they go to Europe, South America, Brazil. So we think we're in a great position with the locals.

For us, we don't tend to think too much about customer mix. It's actually one of our strengths. So there will be winners and losers. But as I mentioned, we're in a great position with the leading Chinese OEMs, and these are the ones that are looking to do more export and more localization as they grow in those markets.

Alex Porter: Great. Thanks a lot.

Operator: The last question comes from Edison Liu with Deutsche Bank. Please go ahead.

Edison Yu: Hey, thanks for squeezing us in. Just one topic I wanted to ask about, you did announce this Hold On Urban vehicle win. And I'm wondering if you can provide a little bit more context around that, either the lifetime volume, the kind of content level, this kind of award would be worth per vehicle? Any context would be great.

Joseph F. Fadool: Yes. No, thanks for the question. I mean, we're really excited that our battery technology is finding its way into some of these new use cases, especially around autonomous driving. Long term, we feel autonomous driving will continue to grow in the market, especially in this type of use case that Hold On is using it for. So we're not ready to share yet the sales volumes or revenues associated with that. But we do see it's going to go into production not too far in the future. So we're excited about that.

Edison Yu: Any sense on content per vehicle? I mean, sharing the volume really, but how much more content this would be compared to normal?

Joseph F. Fadool: I mean, you could probably do some backward math. We announced that it's over 100 kilowatt hours of content per vehicle using the NMC cell technology. So that might be something we can share with you offline. Off the top of my head, I don't have that number.

Edison Yu: Great. Thank you.

Patrick Nolan: With that, I'd like to thank you all for your great questions today. If you have any follow-ups, feel free to reach out to me or my team. With that, you can go ahead and conclude today's call.

Operator: This concludes the BorgWarner 2025 third quarter results conference call. You may now disconnect.

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