BorgWarner's Q3 2025: Contradictions in Battery Sales, Tariff Recovery, CapEx, and eProduct Growth

Date of Call: October 30, 2025

Financials Results

• Revenue: $3.6B in Q3 (reported just under $3.6B); organic sales up just over 2% YOY (excluding battery & charging sales, organic sales ~+4% YOY)
• EPS: Adjusted EPS up $0.15 YOY in Q3; full-year adjusted EPS guidance $4.60–$4.75 per diluted share (midpoint ~+8% vs 2024)
• Operating Margin: Adjusted operating margin 10.7% in Q3, up 60 bps YOY; full-year adjusted operating margin guidance 10.3%–10.5% (expect +20–40 bps YOY)

Guidance:

• Full-year 2025 sales narrowed to $14.1B–$14.3B.
• Expect 2025 organic sales change down 1% to flat (battery business ~100 bps headwind; customer/supplier impacts ~60 bps headwind).
• Full-year adjusted operating margin guidance 10.3%–10.5% (up 20–40 bps YOY).
• Full-year adjusted EPS $4.60–$4.75 (midpoint up ~8% vs 2024).
• Full-year free cash flow $850M–$950M (midpoint ~$900M, ~+23% vs 2024).

Business Commentary:

* Strong Financial Performance: - BorgWarner reported $3.6 billion in third-quarter sales, up 2% year-over-year, excluding foreign exchange. - The adjusted operating margin was 10.7%, an increase of 60 basis points year-over-year, despite a 60 basis point net tariff headwind. - The robust results were driven by higher sales, cost controls, and efficient capital management.

• New Business Awards and Market Demand:
• The company secured 8 new business awards across foundational and e-products in Q3, illustrating strong market demand for efficient powertrain technology.
• This includes contracts with Chery, Stellantis, and a leading Chinese OEM for electric drive modules.

• The awards reflect the strength of BorgWarner's product portfolio and demand for electrified propulsion solutions.

• Guidance Increase and Free Cash Flow:

• BorgWarner raised its full-year guidance for adjusted EPS to $4.60 to $4.75 per diluted share, a 3% increase from prior guidance.
• The adjusted operating margin guidance was increased to 10.3% to 10.5%, and free cash flow guidance was raised to $850 million to $950 million.

• This reflects strong sales performance and improved operational efficiency.

• Power Drive Systems' Margin Recovery:

• Power Drive Systems sales grew by 12% year-over-year, excluding foreign exchange.
• Despite lower margins in Q3 due to pricing impacts, the company expects mid-teens incremental margins for the full year.
• The expected recovery is due to sales growth, particularly in China, and strategic pricing and cost management.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted strong Q3 results: "adjusted operating margin...10.7%, which increased 60 basis points year-over-year," raised full-year margin, EPS and free cash flow guidance, and noted $266M of free cash flow in Q3 and $136M returned to shareholders, signaling confidence in execution.

Q&A:

• Question from Chris McNally (Evercore): What visibility do you have on the Q4 impact from the North American program (Oswego) and its estimated magnitude?
  Response: Management said the North American program impact in Q4 is expected to be $50M–$100M.

• Question from Chris McNally (Evercore): Can you discuss Power Drive Systems margins and how you expect to get incrementals back to mid‑/high‑teens next year?
  Response: Management expects PDS to convert in the mid‑teens on incremental sales for the full year; Q3 weakness was timing/pricing related and execution will drive improvement.

• Question from Colin Langan (Wells Fargo): Was there anything unusual or one‑time in Q3 margin strength that shouldn't recur?
  Response: Management said no one‑time items; margin upside came from strong sales conversion (≈40% incremental conversion) and continued cost controls (supply‑chain savings, productivity, lower cost of poor quality).

• Question from Colin Langan (Wells Fargo): Is this quarter a realistic baseline for 2026 margin improvement?
  Response: Management will run the same playbook in 2026—capitalize on sales growth and mid‑teen conversion using cost levers (supply‑chain savings, restructuring, productivity).

• Question from Joseph Spak (UBS): Is the low ~$100M/quarter battery & charging sales run‑rate sustainable and have you properly rightsized costs?
  Response: Management expects near‑term sales headwinds; cost actions have positioned the business to be slightly EBITDA and free‑cash‑flow positive in 2025 and to be positioned for profitable growth long term.

• Question from Joseph Spak (UBS): Have you been participating in stationary generator (data center) turbo demand and repurposed excess diesel turbo capacity?
  Response: Management confirmed they supply turbos into stationary power/data center markets (part of CV/off‑highway ~17% of sales) but did not disclose specific sales contribution.

• Question from James Picariello (BNP Paribas): What does PDS backlog and regional sales trajectory look like and which regions are driving growth?
  Response: Management said PDS growth is led by China (strong pull‑through); light‑vehicle e‑product sales YTD up ~27% and they expect mid‑to‑high‑teen incrementals with China the primary driver and some Europe growth.

• Question from James Picariello (BNP Paribas): How much tariff recovery is embedded for Q4 and what's your M&A vs buyback approach?
  Response: Craig: Q4 tariff benefit expected ~+$25M; Joe: M&A remains active and disciplined (industrial logic, near‑term accretiveness, fair price) while balancing buybacks/dividends and maintaining firepower.

• Question from Luke Junk (Baird): How should we think about Q4 margin sensitivity around revenue scenarios, tariff recovery and chip/customer impacts?
  Response: Management outlined scenarios: high‑end Q4 revenue near YTD average → margin ~10.8% (including ~$25M tariff benefit); low‑end revenue ~ $3.35B → margin held ~10.3% because of tariff benefit.

• Question from Luke Junk (Baird): What are the major moving pieces into 2026 and how do recent awards affect outlook?
  Response: Management noted near‑term headwinds (downtime, battery weakness) but emphasized bookings/awards will support top‑line growth in 2027+, with focus on growing earnings power.

• Question from Dan Levy (Barclays): How exposed are you to North American EV program cancellations or impairments and effect on PDS growth?
  Response: Management acknowledged some booked EV program volumes are lower than expected and that this overhang may continue into 2026, but strong booking activity should support midterm targets with benefits manifesting from 2027.

• Question from Dan Levy (Barclays): With strong FCF, will you accelerate buybacks or wait for M&A opportunities?
  Response: Management returned $420M YTD and plans to return ~ $135M in Q4; they aim to balance repurchases/dividends with preserving capacity for disciplined M&A.

• Question from Emmanuel Rosner (Wolfe): What drove the lower CapEx that improved free cash flow guidance?
  Response: Management said lower CapEx resulted from redeploying underutilized equipment and tighter capital management; CapEx ~3% of sales YTD and expected ~4% for full year versus historical 4.5–5%.

• Question from Emmanuel Rosner (Wolfe): For 2026, what are the puts and takes on outgrowth and are ICE program extensions offsetting EV headwinds?
  Response: Management expects some 2026 overhang but noted combustion program extensions, uplifts and recent wins will provide offsets and contribute to growth in 2027+.

• Question from Mark Delaney (Goldman): What's your exposure to the Nexperia chip issues and how much conservatism is in the guide?
  Response: Management said they expect some shutdowns in Europe/China from Nexperia issues, have direct exposure (working spot buys/mitigations), and have reflected known impacts in the full‑year guidance.

• Question from Mark Delaney (Goldman): Is the exposure direct to BorgWarner or mainly broader market effects?
  Response: Management: both — direct exposure exists and teams are securing parts/mitigations, plus there is broader market exposure in Europe and China.

• Question from Mark Delaney (Goldman): What are you seeing in Class‑8 trucking/on‑highway demand and implications for Q4?
  Response: Management said CV/off‑highway is roughly flat globally with regional choppiness (North America softer); these dynamics are baked into the guide with no expected major year‑end noise.

• Question from Alex Potter (Piper Sandler): Could financial stress among Tier‑2/3 suppliers from stranded EV capital pose supply reliability risks?
  Response: Management monitors supplier capitalization and has teams managing issues; currently no material disruptions expected but they continuously monitor and mitigate risks.

• Question from Alex Potter (Piper Sandler): Chinese OEMs going global — net impact for BorgWarner: wash, positive or negative?
  Response: Management views it positively: ~20% of sales in China with ~75% to domestics, positioning BorgWarner to support these OEMs as they globalize and capture export/localization opportunities.

• Question from Xin Yu (Deutsche Bank): Can you provide context on the HOLON Urban battery win (lifetime volume, content per vehicle, revenue)?
  Response: Management confirmed the battery system uses two 57 kWh packs and >100 kWh content per vehicle, but did not disclose volumes or revenue yet and will share details offline when available.

• Question from Xin Yu (Deutsche Bank): Any sense of content per vehicle versus typical content?
  Response: Management reiterated the >100 kWh content comment and suggested doing backward math; no specific per‑vehicle revenue figure provided on the call.

Contradiction Point 1

Battery and Charging Sales Outlook

It involves differing expectations and growth prospects for the battery and charging systems segment, which affects the overall financial outlook and strategic positioning of the company.

Can you provide details on Q4 2025 visibility, specifically regarding the single large impact on sales from the North American production issue? - Chris McNally (Evercore ISI Institutional Equities)

2025Q3: We expect the decline in battery and charging sales to contribute a 100 basis point headwind to the full-year outgrowth. - Joseph Fadool(CEO)

How will reduced tariffs affect organic growth, especially in the battery business? - Joseph Robert Spak (UBS)

2025Q2: The decline in the battery and charging systems segment is expected to contribute about a 100 basis point headwind to the full-year outgrowth, along with a 60 basis point impact from tariffs and associated recoveries. - Joseph Fadool(CEO)

Contradiction Point 2

Tariff Recovery and Impact

It involves the recovery of tariffs and their impact on financial results, which are critical for financial forecasting and investor expectations.

What does the Q4 2025 guidance cover for tariff recovery, and is there M&A pipeline activity? - James Picariello (BNP Paribas Exane)

2025Q3: We expect a $25 million tariff benefit in Q4 after negative recovery in the first three quarters. - Craig Aaron(CFO)

What factors are driving the high conversion rate within the guidance, especially considering the positive FX impact on sales? - Colin M. Langan (Wells Fargo Securities, LLC)

2025Q2: We expect the full-year impact from tariffs to be approximately 60 basis points. - Craig D. Aaron (CFO)

Contradiction Point 3

Capital Expenditure (CapEx) Expectations

It involves changes in capital expenditure expectations, which are crucial for understanding the company's investment strategy and financial planning.

What drove the lower 2025 CapEx vs. previous expectations? - Emmanuel Rosner (Wolfe Research, LLC)

2025Q3: Our teams have effectively managed capital, reducing underutilized equipment usage. This has resulted in 3% of sales for CapEx, lower than our historical range of 4.5% to 5%. - Joseph Fadool(CEO)

Can you discuss foundational segment performance and the path to positive organic growth? - Dan Meir Levy (Barclays Bank PLC)

2025Q2: Full-year CapEx guidance of 5% is maintained. - Craig D. Aaron (CFO)

Contradiction Point 4

Light Vehicle eProduct Sales Growth

It involves the expected growth trajectory of the company's eProduct sales, which is a key driver of business performance and strategic focus.

What is the backlog and sales trajectory for Power Drive Systems? - James Picariello (BNP Paribas Exane)

2025Q3: Light vehicle e-product sales are up 7% year-over-year, with full-year growth of 27%. - Joseph Fadool(CEO)

Why did you revise the light vehicle market outlook to a 2% to 4% decline? - Colin Langan (Wells Fargo)

2025Q1: Light vehicle e-products grew by 6% in the first quarter, and we expect this to be in line with our full year guidance. - Joseph Fadool(CEO)