2010 Annual Report on Form 10 - K BorgWarner Letter to Stockholders BorgWarner Vision To be the global technology leader in powertrain solutions BorgWarner Mission Develop leading powertrain technologies that improve fuel economy, emissions and performance BorgWarner Beliefs Respect for Each Other Passion for Excellence BorgWarner must operate in a climate of BorgWarner chooses to be a leader — openness, trust, and cooperation, in which in serving our customers, advancing our each of us freely grants others the same respect technologies, and rewarding all who invest in and decency we seek for ourselves. We expect us. To sustain our leadership, we relentlessly open, honest, and timely communication. As seek to improve our performance. We bring a global company, we invite and embrace urgency to every business challenge and the diversity of all our people. opportunity. We anticipate change and shape it to our purpose. We encourage new ideas Power of Collaboration that challenge the status quo, and we seek to involve every mind in the growth of our business. BorgWarner is both a community of entrepreneurial businesses and a single enterprise. Our goal is to preserve the Personal Integrity freedom each of us needs to find personal We at BorgWarner demand uncompromising satisfaction while building a strong business ethical standards in all we do and say. We are that comes from unity of purpose. True unity committed to doing what is right — in good is more than a melding of self-interests; it times and in bad. We are accountable for the results when goals and values are shared. commitments we make. We are, above all, an honorable company of honorable people. Responsibility to Our Communities BorgWarner is committed to good corporate citizenship. We strive to supply goods and services of superior value to our customers; to create jobs that provide meaning for those who do them; and to contribute generously of our talents and our wealth in the communities in which we do business. TO OUR STOCKHOLDERS February 2011 “ Our goal is to ensure that our company’s future is secure, and to seize the opportunities that will Timothy M. Manganello Chairman and Chief Executive Officer maximize value creation for our stakeholders.” The year 2010 was a remarkable one was a mix shift in Europe back toward for BorgWarner. The global automotive vehicles with higher BorgWarner SALES GROWTH market made a solid recovery, growing content, boosting BorgWarner’s Dollars in Billions over 20% in 2010 compared with 2009. performance. Mid-sized and large- During that same period, BorgWarner sized vehicles, the segments in which sales grew 43%, a clear indication that BorgWarner has significant content, $5.6 $5.3 our strategy to focus on improving fuel represented approximately 66% of the $5.3 $4.6 economy and reducing emissions is a total number of vehicles produced in $4.3 $4.0 winning approach. Europe in 2010, up from 62% in 2009. $3.5 $3.1 Last year began with tempered The other markets in which we compete expectations with regard to vehicle also had a strong year. Production '03 '04 '05 '06 '07 '08 ‘09 '10 production in Europe, our largest market. volume in North America grew by Government-sponsored incentive approximately 40%, in China and India programs were expiring across the by approximately 30%, and in Japan EARNINGS PERFORMANCE* continent and there was little visibility and Korea by approximately 20%. It was Per Diluted Share *Excludes special items. with regard to true market demand. a better year for the automotive industry Many believed that Europe’s production than most people anticipated, which is a volume would be lower in 2010 testament to the resilience of automakers, $3.02 compared with 2009, or, at best, suppliers and consumers alike. unchanged. In the end, European $2.44 And while global production volumes production actually grew approximately $2.17 $2.07 $2.04 made a strong recovery in 2010, there 15% in 2010 compared with 2009. $1.83 was an even stronger undercurrent of $1.60 In addition to the volume growth, there $0.40 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 increased demand for BorgWarner number of years. While the Chinese record earnings. It is also noteworthy technologies. Turbocharger and market grows, its adoption of leading that our operating income margin, a key automatic transmission growth continued powertrain technologies grows as well. measure of profitability, rose to levels to outpace the market. Turbocharged This phenomenon is driving accelerated that we had not seen recently. These engines, as a percentage of total engines growth for our business. We expect our are remarkable accomplishments produced, increased from 23% in business to grow between 20% and considering they were achieved at 2009 to 25% in 2010. And automatic 25% per year in China over the next five depressed global industry volumes. transmissions, as a percentage of total years, faster than in any other major We continue to deliver industry-leading transmissions produced, increased from market. Each of our businesses has stockholder returns. In 2010, our share 43% in 2009 to 46% in 2010. established a presence in China and price appreciated 118%, ending the Turbocharging and the conversion of we have developed relationships with year at an all-time high of $72.36. manual transmissions to automatics have domestic Chinese OEMs, such as Furthermore, total shareholder return for been strong trends in the automotive Great Wall, First Auto Works, Shanghai BorgWarner stockholders over the last industry in recent years and we expect Automotive Industry Corporation, five years was 148%, compared with this to continue for years to come. Chery and many others; as well as with 55% for our peer group and 12% for Chinese-Western OEM joint ventures, China continues to grow in importance the S&P 500, providing outstanding such as Shanghai General Motors and on the world stage. Frankly, it is the most results for you, our stockholders. Shanghai Volkswagen. BorgWarner is dynamic market that I’ve encountered well-positioned to enjoy significant Our growth has enabled us to create during my 39 year automotive career. growth in China in the coming years. jobs. During the course of the recession Over the past five years, China vehicle we eliminated approximately 5,000 jobs, production has grown 25% per year, or 28% of our workforce worldwide, in significantly faster than any other major Outstanding Performance an effort to manage costs downward automotive market. Furthermore, China is From a performance standpoint, commensurate with our drastic decline expected to continue to lead the industry 2010 was a fantastic year in which in revenue. However, I am pleased to in vehicle production growth for a BorgWarner posted record sales and report that approximately 3,000 jobs have been restored. Additionally, 1,200 employees joined us with our Dytech TOTAL SHAREHOLDER RETURN ENSA (“ENSA”) acquisition and 350 employees with our Haldex Traction $100 invested on 12/31/05 in stock or index including reinvestment of dividends. Fiscal year ending December 31. Systems acquisition. As we move forward, we expect to continue to add employees judiciously to meet $250 the growing global demand for our products. $200 $150 The Benefits of a Strong Balance Sheet $100 During the year, our strong balance sheet and cash flow enabled us to $50 execute a number of important initiatives: $0 12/05 12/06 12/07 12/08 12/09 12/10 s We enhanced our emissions business by acquiring ENSA, a world leader in BorgWarner Inc. S&P 500 Peer Group SIC 3714 BORGWARNER STOCKHOLDERS LETTER 2010 the design and manufacture of exhaust All of this was done while maintaining turbochargers for the BMW 535i Gran gas recirculation (“EGR”) coolers and our investment grade credit rating, which Turismo featuring a 3.0-liter six-cylinder tubes. Those products combined with is a clear signal that our balance sheet direct-injected gasoline engine. And, our BorgWarner’s EGR valves, result in remains strong and provides opportunities dual-clutch transmission technology will EGR systems that are complementary for the future. make its Chinese debut when we launch to BorgWarner’s turbochargers, engine production for Shanghai Automotive later timing systems and the rest of our this year. Accelerating Growth portfolio of air management systems In the fall, we announced our backlog of Additionally, our other product and components. $2.3 billion of net new business over the technologies continue to grow. Engine s We acquired Haldex Traction Systems, next three years (2011-2013), a record for timing systems, variable cam timing, a leader in advanced front-wheel drive our company. This backlog encompasses thermal systems, traditional transmission (“FWD”), all-wheel drive (“AWD”) some of the most promising technologies components and AWD transfer cases technology. The deal is expected to and geographies in the auto sector and are all meaningful contributors to our accelerate our growth in the global is representative of how BorgWarner is backlog of net new business. Notably, AWD segment as that market continues leading the way in important powertrain Chrysler selected BorgWarner to supply better fuel economy reduced emissions great performance to shift toward FWD-based vehicles. developments around the world. From engine timing systems for its all-new The acquisition adds industry leading a product perspective, turbochargers 3.6-liter Pentastar V6 engine. And, our FWD/AWD technologies, with a and dual-clutch technologies remain Cool Logic® variable speed fan drives strong European customer base, to BorgWarner’s largest growth drivers are now standard on a number of Mack® our existing Drivetrain portfolio. This and we continue to generate important heavy-duty commercial trucks. enables BorgWarner to provide our new business in each of these product The regional mix of our backlog of global customers a broader range families.