The Henry Fund Henry B. Tippie School of Management Benjamin Martin [Benjamin‐[email protected]] BorgWarner, Inc. (BWA) March 31, 2016 Consumer Discretionary – Automobile Parts Manufacturers Stock Rating Buy Investment Thesis Target Price $70 ‐ $76 Henry Fund DCF $76.90 The Buy rating given to BorgWarner is based on a discounted cash flow model Henry Fund DDM $32.63 and a holding period of 3 – 5 years. This recommendation reflects our view Relative P/E $40.12 that the company has a solid position in technology that reduces emissions and Price Data improves fuel economy. In addition, they are making investments in Current Price $38.40 hybrid/electric engine technology, which is anticipated to be an important segment of the auto market in coming years. 52wk Range $27.68 – $62.70 Consensus 1yr Target $41.53 Drivers of Thesis Key Statistics  Increasingly strict emissions regulations and zero‐emission vehicle Market Cap (B) $7.65 mandates in several US states are driving demand for more fuel efficient Shares Outstanding (M) $224.4 vehicles. Institutional Ownership 96.6%  Increased adoption of turbocharger technology is expected to benefit Five Year Beta 1.75 BorgWarner’s engine segment. Currently, turbocharger sales are expected Dividend Yield 1.59% to grow in the neighborhood of 8% per year. Est. 5yr Growth 10.7%  The 2015 acquisition of Remy International positions BorgWarner to gain Price/Earnings (TTM) 12.93 from an acceleration in demand for hybrid electric vehicles. Price/Earnings (FY1) 12.11  Low oil prices typically provide a boost to the global auto market. Price/Sales (TTM) 1.0

Risks to Thesis Price/Book (mrq) 2.2  Lower GDP per Capita expectations for China and the other BRIC nations Profitability has weighed heavily on shares. Operating Margin 11.7%  Only a small portion of total automotive sales are expected to come from Profit Margin 7.6% electric vehicles until at least 2020. Return on Assets (TTM) 7.6%  Oil & gas prices have different effects depending on the region of the world Return on Equity (TTM) 16.7% and may not be as relevant in certain markets BWA Auto Parts: OEM  Additionally, low oil and gasoline prices may cause some consumers to lose 30 interest in hybrid/electric vehicle technology, pressuring sales in the near 25 term. 26.4 20

15 16.7 10 12.1 Earnings Estimates 11.1 5 Year 2013 2014 2015 2016E 2017E 2018E 7.3 7.1 EPS $2.73 $2.89 $2.72 $2.90 $3.37 $3.87 0 growth 23.0% 5.9% ‐5.9% 6.5% 16.5% 14.6% NTM P/E ROE EV/EBITDA 12 Month Performance Company Description BWA S&P 500 BorgWarner, Inc. is a global supplier of 0% automotive components for powertrain applications such as turbochargers and automatic transmissions. The company operates primarily as ‐20% a Tier 1 supplier to many of the major global automotive original equipment manufacturers, ‐40% with Ford & Volkswagen comprising 15% each. In 2015, approximately 75% of revenue was ‐60% generated outside of the United States. China is Source: Yahoo Finance currently BorgWarner’s most important growth ‐80% market, averaging 25% annual growth over the MAMJ J A SOND J F last five years.

Important disclosures appear on the last page of this report.

EXECUTIVE SUMMARY 2015 Sales by Product Line BorgWarner has managed to carve out a respectable stake Aftermarket Off‐Highway 5% in the global auto parts supply industry. By focusing on 4% improving fuel economy and reducing emissions output in Commercial Vechicles the vehicles they supply BorgWarner managed to weather 7% the storm of the financial crisis and build a business that is even stronger than before. Over the last five years, this focus has allowed them to grow total revenue at more than double the rate of global auto production, the underlying driver of demand at the company. Going Light forward, stricter fuel economy standards and emissions Vehicles regulations, combined with a couple other broad auto Source: BWA 2015 10‐k 84% trends, should allow BorgWarner to continue to grow their top line around 5% per year out to 2020 compared to auto production growth of 3.7% over that same time period. As a result of the demand for more fuel efficient vehicles, BorgWarner’s sales of turbochargers, which help boost However, this expectation comes with more than a few engine power while improving fuel economy and reducing risks. Of the most significant is a further slowdown in emissions, grew to 31% of total revenue in 2015. China. Over the last 30 years, the world’s second largest economy has been able to achieve incredible growth, the result of a highly subsidized, export driven economy. However, as they begin to shift towards a more sustainable model built on domestic consumption, growth is expected to slow. In 2015, the impact of these lower growth estimates triggered a correction among parts suppliers with significant exposure in that region, including BorgWarner. Historical Forecast

While this news is certainly something to keep an eye on, the underlying drivers of growth are still intact and the company is well positioned relative to their competitors. It is for these reasons that we believe the worst is behind us and a Hold rating is recommended. The company reports in two segments, Engine and Drivetrain, and has operations all over the world. COMPANY DESCRIPTION

BorgWarner is classified as a Tier 1 auto parts supplier, meaning that the majority of their products are sold directly to the original equipment manufacturers (OEMs). Many of the company’s products are aimed at increasing fuel efficiency and reducing vehicle emissions. These products include turbochargers, timing systems, emissions systems, thermal systems, various mechanical/electrical components for automatic transmissions and, as of 2015, hybrid electric motors. Approximately 95% of BorgWarner’s revenue is generated by direct sales to OEMs, with the remaining 5% coming from distributors of aftermarket replacement parts.

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Engine

BorgWarner’s Engine segment produces turbochargers, timing systems, emissions systems, thermal systems, thermostats, and diesel cold start/gasoline ignition technology. These products all help vehicles run more efficiently and with fewer carbon emissions. At a high level, demand for these types of products is driven by global automobile production. Going forward, growth in this segment will be influenced by two factors: global auto production and growth in turbocharger sales. Based on estimates by IHS Automotive and PricewaterhouseCoopers, auto production is anticipated to grow at an average annual rate of 3.7% out to 2020. Sales of turbochargers are expected to grow at nearly double this rate, or 8% annually, driven by stricter fuel economy and emissions standards. In 2015, the United States regained the lead from Germany as BorgWarner’s most important individual Drivetrain country, the result of lower sales to Volkswagen following the highly publicized emissions scandal at the German BorgWarner’s Drivetrain segment designs and auto manufacturer late last year. manufactures two broad types of products: mechanical products (friction plates, clutch modules, torque management products, etc.) for automatic transmissions BWA Sales by Geography ‐ and rotating electrical components (starter motors, 2015 alternators, & hybrid electric engines) for light and commercial vehicles. While operating margins are lower Other Foreign than in the Engine segment, Drivetrain has made some 8% significant progress overseas through a combination of joint ventures and acquisitions. One recent example is the China United 13% acquisition of Remy International, which added several States 25% models of hybrid electric motors to BorgWarner’s product South Korea line‐up. However, hybrid/EV engines are only a small part 9% (~$14 million in 2015) of segment revenue. As a result, we Germany 23% have modeled Drivetrain revenue growing at an annual rate of 3.7%, approximately in‐line with global auto Other Source: BWA production. Europe 11% France Hungary 2015 10‐k 4% 6% Customers & Geography However, Europe as a whole still accounted for 44% of Two OEMs, Ford and Volkswagen, both account for total sales, demonstrating the importance of international approximately 15% of BorgWarner’s total revenue. As a markets to overall results. Sales in China grew an result, BorgWarner’s results are highly influenced by auto impressive 14% and finally surpassed the $1 billion mark. activity in both the United States and in Germany. BorgWarner entered the Chinese market in 2005 when their Japanese joint venture, NSK‐Warner, opened their first production facility in Ningbo. China is a key market in the company’s global growth plan and, since 2010, has averaged 25% annual revenue growth.

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Earnings are a similar story to revenue. While they took a few years to recover to prerecession levels, BorgWarner’s Growth 2015 results saw EPS growing at a 4.4% annual rate since 2006. Following a 22% jump in 2016, EPS growth is forecasted to slow to 8.9% in 2020. Profitability

Despite volatility in the year‐over‐year growth rate, BorgWarner has managed to increase their revenue from ~$4.5 billion to just over $8 billion since 2006, a 6.4% annual growth rate over that time. Key drivers of revenue growth over the last 10 years have been a recovery in light Despite a slight decline in revenue and earnings during vehicle sales following the Great Recession and the 2015, BorgWarner managed to maintain both their gross growing market for turbocharger technology that has and operating margins. On their 2015 conference call, resulted from a renewed focus on greater fuel economy management attributed this to the flexibility of their and tougher emissions regulations. M&A has also played a workforce, 10% ‐ 20% of which is temporary, which allows part in fueling growth. In 2015, the ‐3.4% decline in the company to quickly adjust to changing market revenue was partially the result of tougher end market conditions. Additionally, BorgWarner’s net profit margin conditions and partially the result of a stronger US dollar. posted a slight decline, the result of higher interest 2016 revenue is forecasted to grow 18.1% before expense related to debt issued during the year to pay for moderating to an annual rate of 4.6% ‐ 5.7%. The large acquisitions and share repurchases. Going forward, we jump in 2016 is the result of fully incorporating Remy model BorgWarner’s expenses to be consistent with levels International’s business. Ex. Remy, BorgWarner’s top line seen over the last five years, resulting in stable margins in is forecasted to grow 5.1% in 2016. the forecast period.

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Leverage & Liquidity

Sept. 18,2015 Violation notice issued by EPA

Source: Yahoo Finance

Source: BWA 10‐k While scandals of this nature are not typically devastating on an industry level, the individual companies involved are usually punished as competitors seize on an opportunity As we can see in the chart above, BorgWarner has typically to grab market share. The situation is no different this time maintained a debt‐to‐equity ratio between 1x and 1.4x, as several rival automakers have begun to offer aggressive which is pretty reasonable given the industry average of discounts in Germany in order to capitalize on VW’s 2.3x. However, in 2015 the company made the decision to current weakness. As a result of these efforts, VW’s market issue approximately $1 billion in debt in order to fund share in the EU region has declined to 11.7% from 13% a acquisitions and share repurchases. BorgWarner currently year ago16. has about $900 million of their debt coming due over the next five years, with almost half ($441 M) in 2016. We These results are particularly concerning for BorgWarner expect that the company should have no trouble making as VW is one of their largest customers, accounting for this payment and will continue to reduce their debt to 15% of 2015 revenue. However, once we put these events more normal levels in the coming years. in perspective, is not likely that this scandal will have a dramatic, long‐term impact on BorgWarner’s business17. RECENT DEVELOPMENTS While Volkswagen’s sales are still posting declines (1.3% in Q1 2016), the rate of decline is slowing. In regards to VW Emissions Scandal BorgWarner, only about 4% of revenue is generated from light diesel vehicle components sold to Volkswagen and Late in Q3 2015, German automaker Volkswagen became just 0.5% of revenue came from affected vehicles. In embroiled in a scandal when the US Environmental addition, no BorgWarner part is involved in any recall Protection Agency (EPA) discovered that certain VW cars solution. Also, a possible bright spot from these events is had been sold with modified software that was designed that it has allowed regulators to renew their focus on to fool emissions tests. Installed in an approximate 11 tighter emissions standards, which bodes well for million vehicles worldwide, the software allowed VW BorgWarner’s turbocharger business. diesel cars to pass US emissions tests while emitting up to 40 times the nitrogen oxide pollutants that are allowed Acquisition of Remy International under the current law. Within four days, VW’s stock had lost over a third of its value and CEO Martin Winterkorn In November 2015, BorgWarner closed the $1.2 billion had resigned. In addition to the reputational damage, the acquisition of Remy International, a manufacturer of financial consequences associated with a broad recall and alternators, starters, and hybrid electric motors18. The potential fines could be in excess of $18 billion. acquisition was paid for through a combination of cash and debt and was made in order to strengthen BorgWarner’s fuel‐saving product offerings and begin to build a position in hybrid/electric technology. While the market for electric vehicles is still relatively small and not expected to grow

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significantly until 2020 or later3, the market for alternators nearly 17% during the first week of 2016, largely the result should continue to grow as auto manufacturers continue of broad market turmoil. Then, on January 13, the impact to add more sophisticated electrical components to their of the overall market weakness was exacerbated by the cars. Additionally, one of Remy’s key products includes issuance of initial 2016 guidance that was again below start‐stop technology, which cuts the car’s engine while consensus25. Shares hit a low of $28.23 on January 25 (‐ stopped, reducing idle time and improving fuel efficiency 33%) following the subsequent downward revisions in by an estimated 3% ‐ 12%20. This market, which can be earnings. viewed as an intermediate step on the way to full electric vehicles, is expected to double to approximately 41.1 Since then, the outlook for BorgWarner’s shares has million units by 201820. improved. Q4 and FY 2015 earnings beat the revised consensus expectations and the initial 2016 guidance, Our model assumes the acquisition will add approximately which is now in‐line with consensus, was reaffirmed26. All $1.06 billion in revenue in 2016 and that Remy’s business that is left is to wait and see if management can deliver on lines will grow in‐line with industry trends. According to these expectations and begin to rebuild the trust of management, the company is also expected to achieve shareholders. about $15 million in cost savings once the companies are fully integrated (estimated to happen in 2017)21. 2015 Financial Results 2016 Guidance (issued 1/13/16) Low High Model 2015 was a challenging year for BorgWarner. While shares Revenue ($B) $ 9.08 $ 9.49 $ 9.48 of their stock were initially buoyed by positive results in EPS$ 3.11 $ 3.32 $ 3.32 2014, they began to plateau after the company reported first quarter earnings results. Reported earnings were Operating Margin 11.4% 12.0% 11.7% 1 $0.78/share, below consensus and guidance of $0.84 . Source: BWA Investor Relations Attributing the results to mild weakness in Asia and North America, management went on to state that the issues were expected to be temporary and left their full‐year guidance unchanged22. However, the situation INDUSTRY TRENDS deteriorated further in the second quarter when the There are currently several industry trends playing out that company reported a second earnings miss. Citing weaker have the potential to benefit BorgWarner’s business. than expected light vehicle production growth in China Increased regulation and shifting consumer preferences and a weak global market for commercial vehicles, have led automakers to focus on improving the fuel management lowered their full year 2015 guidance to a economy of their vehicles. This has led to an increase in range well below consensus23. Up until this point, 2015 turbocharged vehicle sales, a trend that is expected to consensus estimates had been revised down accelerate out to 2020. Furthermore, anticipated declines approximately 8%. In the two weeks following Q2 in the cost of electric vehicles are expected to significantly earnings, estimates came down another 8% and shares increase their market share over the next couple decades, sold off 10%1. Just when BorgWarner’s stock was looking which has the potential to benefit companies who are like it was stabilizing, the Volkswagen emissions scandal making investments in the technology now. broke, sending the stock down another 12% over the next four days. CAFE and ZEV Mandates By Q3 it looked like expectations had been appropriately Originally developed in 1975 as a response to the Arab oil set, leading to the first earnings beat of the year1. embargo, the Corporate Average Fuel Economy (CAFE) However, another round of lowered guidance (driven by standards require that automakers produce vehicles that weaker market conditions in China and in the commercial meet increasingly stringent fuel economy targets. The vehicle market) sent the stock down 10% the day of the program is administrated by the National Highway Traffic announcement. While BorgWarner’s shares recovered Safety Administration (NHTSA) and has been reasonably most of the post‐Q3 loss by the end of 2015, the stock fell

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successful since its inception with the average MPG of new Massachusetts, New Jersey, New York, Oregon, Rhode passenger cars rising from 24.3 in 1980 to 36.4 in 20146. Island, and Vermont) and three that have adopted the less stringent Low Emission Vehicle (LEV) program Currently, the standards require the collective auto fleet (Washington, Delaware, and Pennsylvania)9. to be able to achieve 49.6 MPG by 20257. Although automakers are fighting to weaken the standards, the amount of political will behind these standards make it unlikely that they will achieve any significant reduction.

As the standards required by these programs ramp up, automakers are increasingly turning to technology that While the CAFE standards are the federal government’s improves the fuel efficiency and reduces the emissions attempt to reduce dependency on fossil fuels and improve output of their vehicles. This is very positive for the fuel economy of cars, several states are taking things BorgWarner given their product portfolio. one step farther. First enacted in 1990 as a response to the poor air quality in Los Angeles, the California Air Resources Rise of Hybrid/Electric Cars Board (CARB) began requiring that a certain percentage of all automobiles delivered in the state be “zero‐emission”, Over the last several years, the popularity of electric in other words, an automobile that emits no pollutants or vehicles (EVs) has increased as consumer preferences have has zero impact on the environment. While the program begun to shift towards more fuel efficient vehicles. As initially implemented a fixed percentage system, pressure options for EVs become more readily available, an from the automakers has led the state to adopt a credit increasing number of consumers have shown a willingness based system that allows manufacturers a little more to adopt the technology. Evidence for this trend can be flexibility in their ability to meet the ZEV requirements8. seen in the 2015 sales numbers, where an estimated 462,000 EVs were sold, an increase of 60% over 20143. However, this does not mean that the world is ready to turn its back on conventional internal combustion engines (ICE) just yet. Two of the largest current headwinds include the low price of oil/gas and the total cost of ownership. While oil and gas prices are not expected to remain at current levels forever (the EIA expects oil prices to recover to about $50 in 2017 and gradually trend higher out to 20404), their current depressed levels have raised doubts in some consumer’s minds over the real benefits of owning an electric vehicle. Additionally, hybrid/electric vehicles typically cost several thousand dollars45 more than Source: California Air Resources Board traditional vehicles and the payback period can range between 8 and 15 years in some cases5, largely due to the Currently, there are 9 additional states that have adopted cost of the lithium‐ion batteries used in these cars. The California’s ZEV standards (Connecticut, Maine, Maryland, cost for these batteries has already declined significantly

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over the last few years (65% since 2010) and is expected output. The end result is significantly increased to continue to fall going forward. By 2030, EV battery costs horsepower without an increase in engine weight, leading are expected to decline to $120 per kilowatt hour (kWh) to an increase in fuel economy. from their current level of $350 per kWh3. These benefits have led most major auto manufacturers to Until oil prices start to rise again and until battery adopt the technology and the current expectation is that technology becomes cheaper, it is expected that this trend will continue. A 2015 report by Honeywell (a traditional automobiles will maintain their total cost of competitor to BorgWarner) predicts that 47% of all ownership advantage and electric vehicles will comprise vehicles sold will include turbochargers with the most less than 5% of total auto sales. However, this advantage pronounced increases in North America and China10. is expected to deteriorate in the mid‐2020’s and the mass adoption of EVs is expected to drive total market share up Sales of Turbocharged Vehicles % of Total to 35% in 2040. Not coincidentally, this is also in line with the higher ZEV requirements outlined in the previous Region 2015 2020 E section. North America 23% 39% China 28% 47% Forecasted Auto Fleet Mix Europe 69% 73% 2015 ‐ 2040 India 43% 48% Japan 22% 27% Korea 48% 53% South America 20% 30% Source: Honeywell

MARKETS AND COMPETITION

Automotive Supplier Overview

The Auto Parts and Equipment industry is a sub‐ Legend ICE – Internal Combustion Engine component of the broader Auto Parts industry. Companies HEV – Hybrid Electric Vehicle in this industry typically generate most of their revenues BEV – Battery Electric Vehicle by supplying products to automotive original equipment PHEV – Plug‐in Hybrid Vehicle manufacturers (OEMs) who then integrate their products into the complete automobile. Suppliers can be grouped Increasing Adoption of Turbocharger into three categories: Tier 1 (T1) suppliers sell assembled Technology components and systems directly to OEMs; Tier 2 (T2) suppliers sell parts to be incorporated into T1 products (i.e. As mentioned above, electric vehicles are slated to ball bearings, gears, etc.); and Tier 3 (T3) suppliers process become an increasingly important segment of the total raw materials (steel, aluminum, etc.) which are then sold automotive fleet (read: good for BorgWarner’s Drivetrain to T2 suppliers. These suppliers typically have had very segment). However, their adoption is expected to be little bargaining power due to the high number of suppliers gradual and take several decades. Meanwhile, CAFE and relatively few buyers. Among the three tiers, T1 standards require that automakers make consistent suppliers typically have the most bargaining power due to progress towards higher levels of fuel economy, leading their direct relationship with the OEMs. This is expected to automakers to seek out technology that can help them persist in the future as the OEMs consolidate their supplier achieve this goal. Currently, one of the most popular base47. products for doing so is the turbocharger, which works by compressing the air flowing into the engine thereby Companies in the auto parts supplier industry supply a allowing more fuel to be injected and increasing the power wide variety of parts to OEMs. Products in this industry can

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be grouped into several categories including electrical & and it is considered unlikely that increases in the cost of electronic components, steering & suspension, exhaust materials will be recouped. systems, brake systems, auto body parts & wheels, HVAC parts, airbags, filters, radiators, & other components. Basis for Competition

A breakdown of industry products by type is shown in the Being a mature industry with a high number of companies following table27. (800+)31, competition in auto parts supply is intense. Several factors influence the competitive environment including:

Company Major Customers % of 2015 Revenue BorgWarner Volkswagen, Ford 30% Delphi General Motors 14% TRW* Volkswagen, Ford, Fiat 58% *Pre‐acquisition 2014 revenues *Source: BorgWarner, Delphi, TRW Automotive annual reports Many suppliers, few buyers – While there well over 1,000 global parts suppliers, there are only around 50 significant manufacturers of automobiles39. As a result, a large portion of supplier’s revenue comes from only one or two OEMs. The implication of this imbalance is that the Demand for these products is driven by global automotive OEMs have a very large influence on how products are production as more parts are required during periods priced and typically demand annual price decreases from where OEMs are producing more vehicles. Ultimately, their suppliers. This puts a huge amount of pressure on demand for automobiles is influenced by several supplier margins and leads to price‐based competition. macroeconomic factors including GDP growth, consumer spending, wage/disposable income growth, employment Automotive Suppliers Product levels, and interest rates. Due to the global nature of the Categories & Competitors industry, the economic situations in North America, Product Competitors Europe, and the BRIC nations (Brazil, Russia, India, China) BorgWarner Cummins Turbochargers tends to be the most influential. Currently, auto Honeywell Bosch Mitsubishi Heavy Industries IHI production is expected to grow about 3.3% annually to just Mahle BorgWarner 44 under 108 M units by 2020 . T. RAD Denso Emissions systems Pierburg Bosch To a lesser extent, demand is also influenced by the NKG Eldor BorgWarner production mix. In periods of economic stability and rising Thermal Systems Iwis Denso incomes, demand for more expensive trucks and luxury Tsubake Group Schaeffler Group cars is boosted and suppliers’ margins may realize a slight Advics ZF Group/TRW expansion. Chassis Systems JTEKT Bosch Nexteer Continental AG Key Safety ZF Group/TRW Safety Systems Automotive parts are manufactured from a wide variety of Takata Autoliv raw materials and, as a result, profitability can be affected Delphi Bosch by volatile commodity prices. Major industry inputs Electronics Denso Autoliv Magna Continental AG include steel, copper, aluminum, and plastic resins. While Mitsubishi Electronics Alpine a limited amount of hedging takes place to help alleviate Aisin Seiki Bosch these costs, suppliers will usually try to pass through any Infotainment Delphi Panasonic material increase in raw material costs to the OEMs. Harman Continental AG Denso Visteon However, suppliers are rarely successful in these efforts Source: Automotive News – 2014 Top Suppliers Report

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Multiple competitors in every product category – A Recent Developments in Automotive Supply number of different companies are competing in each area of the industry, requiring investment in R&D in order to Increased Globalization & OEM Portfolio Rationalization stay on the cutting edge and continue to secure design wins. A few examples of major product categories and The financial crisis of 2008 had a devastating impact on the their competitors are listed in the table on the prior page28. auto industry, particularly in the United States. Light vehicle sales declined from 16.2 million in 2007 to a low of 29 Success Factors 10.1 million in 2009 (‐38%) and many major OEMs were on the verge of bankruptcy. Among some of the major global suppliers, total revenue growth is expected to be in the low single‐digits (roughly in‐line with auto production) and the high degree of competition has whittled net profit margins down to about 5%40. The degree of success that companies in this industry realize depends on a few different factors including:

Degree of Globalization – Driven by the global expansion of OEMs, auto parts suppliers who can capitalize on opportunities in foreign markets will typically enjoy a larger degree of success. For example, among the top 100 global OEM parts suppliers, almost every single one generates a significant amount of revenue in North America, Europe, and Asia. An important component of Ultimately, the American manufacturers were saved by this factor includes outsourcing manufacturing operations the actions of the US government who, through an $80 to areas where they can be utilized in the just‐in‐time billion dollar investment, effectively saved the industry manufacturing operations of the OEMs. Currently, some of from collapse. In the aftermath of these events, the both the best positioned companies in this region are Chrysler and General Motors (GM) implemented Continental AG, Delphi Automotive, Autoliv, BorgWarner, significant restructuring programs in an attempt to restore and Bosch. profitability and return to growth. In addition to reducing their labor force and cutting benefits, the US automakers Investments in R&D – Successful companies need to eliminated several lines of vehicles in order to focus invest sufficient capital into research and development in exclusively on their most popular and highest margin order to stay ahead of the technology curve and continue brands. For example, GM effectively reduced the number to secure design wins and supply contracts. In 2015, top of brands carried by 50% by terminating their Pontiac, spenders on R&D included Continental AG, Autoliv, Saturn, Hummer, and Saab brands while retaining WABCO Holdings, Allison Transmission, and BorgWarner. Chevrolet, Cadillac, Buick, & GMC due to their popularity Effective cost controls – As the industry becomes in the US and abroad. Also, while the Detroit 3 (Ford, GM, increasingly global and as new, low‐cost, regional suppliers Chrysler) shuttered domestic assembly plants and enter the market (particularly in China), success may come increased the capacity utilization of the ones that remain down to who can operate more efficiently. In addition, in an attempt to grow profits at a more sustainable rate, many OEMs demand annual price reductions from their foreign‐headquartered auto manufacturers moved their suppliers, further pressuring margins and placing an production facilities to the US. In turn, the US automakers emphasis on efficient operations. Based on 2015 results, have started major pushes into foreign markets, 30 some of the companies who are executing successfully in particularly Europe and the BRIC nations. this area are BorgWarner, Delphi Automotive, Continental This trend has significant implications for the auto parts AG, and Hyundai Mobis. supply industry. Namely, as part of their cost reduction efforts, OEMs are demanding more from their suppliers. These demands require that the suppliers produce not just parts, but entire systems or modules (i.e. an entire

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interior). The pressure to meet these expectations is even Driving Assist system which is designed to assist greater as foreign suppliers enter the market. drivers through automatic steering, braking, acceleration, and lane maintenance while on the Industry Consolidation highway33.  In 2015, it was announced that Johnson Controls In order keep pace with the global growth strategies of would spin‐off their auto interior business and merge their biggest customers, auto parts suppliers are also with a Chinese supplier. Named Adient, the new expanding their operations overseas, primarily through company is expected to have about 15% market share the acquisition of smaller, regional companies. In addition, in the auto interior market34. as the major OEMs continue to consolidate their supplier  base, T1 suppliers are buying up smaller competitors to Also in 2015, Harman International Industries, Inc. increase their product offerings and hopefully regain some paid about $950 million to acquire two automotive bargaining power. infotainment systems companies (Symphony Teleca and Red Band Software, Inc.). The pair of acquisitions are expected to accelerate growth in Harman’s infotainment and navigation product line up35. Peer Comparisons

The table on the next page shows a few operating metrics for some of the larger automotive parts suppliers.

Going forward, the companies that are likely to outperform are those that position themselves to take advantage of the long‐term trends currently playing out in the auto industry (fuel efficiency, hybrid/electric vehicles, interconnected vehicles, autonomous vehicles, active Source: PwC Automotive safety) as well as companies who are executing on the In 2015, auto parts suppliers closed over 200 deals for a success factors mentioned in the previous section (global total of about $48 billion31, marking six consecutive years presence, investment in R&D, cost controls). In addition, of increased M&A activity. However, it is worth noting that companies with the financial strength to make acquisitions $29 billion of that value is the result of Johnson Controls are likely will likely realize the highest growth rates and be spin‐off of their auto interiors business34. Excluding that less risky in times of global economic uncertainty. Based transaction, the total would be a more on‐trend $19 on these factors some of the best positioned companies billion. Popular targets for acquisition include producers of are: powertrain components (particularly ones that help Honeywell International Inc. – Supplies parts and improve fuel economy), technology for connected equipment (aircraft engines, power systems, electronics, vehicles/autonomous driving, and infotainment products. etc.) to the aerospace industry; manufacturers There were a number of acquisitions in 2015 that are turbochargers for autos; provides products and services consistent with these trends. Examples include: (heating/cooling, ventilation, lighting, etc.) for homes, commercial buildings, and industrial facilities; provides  On November 10, 2015 BorgWarner closed the $1.2 process technology for the production of petroleum billion acquisition of Remy International in a bid to products; and produces high performance chemicals and enter into the hybrid/electric motor market and materials. While they do operate in the auto space, the further establish themselves as a leader in fuel majority of their revenue comes from their other business economy18. lines, possibly explaining their above average  In May 2015, German auto supplier ZF Friedrichshafen performance. (ZF Group) acquired TRW Automotive, a leader in 32 active and passive safety systems . In July, the new combined company demonstrated their Highway

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Company Market Cap 2015 Revenues Gross Margin Net Margin Debt/Equity P/E Honeywell International Inc 83,202 38,581 30.7% 12.4% 1.66 17.5 NSK Ltd. (Japan) 56,032 8,125 23.1% 6.4% 1.47 108.5 Johnson Controls Inc 24,613 37,179 17.3% 4.2% 1.86 15.7 Mitsubishi Electric Corp. 23,188 36,032 29.9% 5.4% 1.20 11.9 Continental AG (Germany, Fed. Rep.) 20,733 41,942 25.1% 6.9% 1.83 7.2 Delphi Automotive Plc 19,852 15,165 19.9% 9.6% 4.32 13.7 Cummins, Inc. 17,823 19,110 25.9% 7.3% 1.04 12.7 Magna International Inc. 16,852 36,641 13.7% 5.1% 1.09 9.0 Denso Corp. (Japan) 15,861 35,921 17.6% 6.0% 0.59 7.4 JTEKT Corp 13,944 11,302 15.0% 3.1% 1.38 39.3 Aisin Seiki Co., Ltd. 11,398 24,704 14.0% 2.6% 1.52 17.7 Autoliv Inc. 9,912 9,170 20.1% 5.0% 1.18 21.7 Goodyear Tire & Rubber Co. 8,748 16,443 26.0% 1.9% 3.19 28.5 Lear Corp. 8,117 18,211 10.0% 4.1% 2.21 10.9 BorgWarner Inc 7,652 8,023 21.2% 7.6% 1.49 12.6 WABCO Holdings Inc 5,609 2,628 29.9% 10.5% 2.29 20.4 Allison Transmission Holdings Inc 4,344 1,986 47.0% 9.2% 2.71 23.8 Visteon Corp. 2,833 3,245 13.3% 70.4% 3.43 1.2 Tenneco Inc 2,738 8,209 16.6% 3.0% 8.16 11.1 Faurecia S.A. (France) 2,431 22,887 8.3% 0.9% 4.30 12.1 Dana Holding Corp 1,951 6,060 14.0% 2.6% 4.94 12.3 NTN Corp. (Japan) 1,786 5,850 18.8% 3.3% 2.49 9.2 Calsonic Kansei Corp 1,340 8,048 8.2% 2.1% 1.31 8.0 American Axle & Manufacturing Holdings Inc 1,174 3,903 16.3% 6.0% 9.62 5.0 Metaldyne Performance Group Inc 984 3,047 16.9% 4.1% 3.99 7.9 Meritor Inc 736 3,505 13.2% 1.8% ‐4.27 11.5 Takata Corp 734 5,358 16.3% ‐4.6% 2.23 N/A TS Tech Co., Ltd. Private 3,620 16.1% 5.1% 0.60 N/A Mando Corp Private 5,357 14.4% 3.2% 2.07 N/A Mahle GmbH (Germany) Private 12,460 21.6% 2.7% 2.42 N/A ZF Friedrichshafen AG (Germany) Private 22,384 16.8% 3.5% 2.07 N/A Hyundai Mobis Co Ltd (South Korea) Private 33,073 14.3% 9.5% 0.69 N/A Bosch (Robert) GmbH (Germany Fed. Rep.) Private 59,500 34.7% 4.9% 1.19 N/A

Averages 19.6% 4.9% 2.31 13.9 Source: Mergent Online Note: Average net margin excludes results from Visteon (large gain from discontinued operations) and average P/E excludes NSK.

Cummins Inc. – Manufacturers and services diesel Allison Transmission Holdings Inc. – Manufacturers a engines, turbochargers, filtration systems, and various variety of different transmission products for the other control systems for the commercial truck industry. commercial vehicle and defense industries. One possible Unlike most of the other companies on this list, Cummins reason that the company had a 2015 gross margin well focuses almost exclusively on the commercial vehicle above the entire peer group could be that they only have market, which operates on a different cycle and may be 2,700 total employees vs. an average of 16,500 for other influencing their 2015 results. companies with $2 billion ‐ $6 billion in revenue last year. (For reference, these companies report their direct labor WABCO Holdings Inc. – Produces braking systems, expenses as a part of their cost of sales). transmissions, suspensions, and electronics systems for commercial trucks and buses. Like Cummins, WABCO ZF Friedrichshafen – Doesn’t have the strongest margins focuses their efforts on the commercial vehicle market. and leverage is a little high but their recent acquisition of TRW Automotive leaves them well positioned within autonomous driving/active safety.

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BorgWarner Inc. – Strong position in turbocharger technology and hybrid/electric vehicles, above average margins, and reasonable leverage.

Continental AG – Has a presence in hybrid/electric vehicles, autonomous driving, active safety, and connectivity, strong margins, and reasonable leverage.

Autoliv – Presence in active safety, strong margins, and reasonable leverage.

Mitsubishi Electric Corp. – Various fuel efficiency products, strong margins, and low leverage. Another important factor for the auto industry is growth Robert Bosch GmbH – Bosch is the world’s largest in wages and employment. One of the concerns raised in automotive parts supplier. Their core products include recent years is that the rate of wage growth has been electrical components, starters, and steering systems. subdued since by post‐recession standards. Looking at the chart below, we can see that this certainly was the case for several years. However, national wage growth has since recovered and has been growing right in line with the ECONOMIC OUTLOOK average rate observed over the last 30 years. The automobile sector is highly cyclical and is typically strongest during times of stable economic growth and growing consumer wealth. In 2015, 61% of BorgWarner’s revenue came from three countries: the United States, Germany, and China. Underlying demand is driven by automobile production which is, in turn, driven by auto sales. Additionally, factors such as real GDP growth, interest rates, income/employment levels, and global oil prices can be very influential as well. United States

In the United States, auto sales are typically the best during stable periods of real GDP growth. In 2008, auto Similar to the wages story, there has been some concern sales suffered a steep decline as unemployment spiked that the labor market is not as strong as it should be. and consumers lost access to credit. Since then, sales have However, despite this concern, the US unemployment has recovered to higher levels than ever. Going forward, the recovered substantially since the Great Recession and CBO projects that real GDP will grow between 1.8% and currently stands at 4.9%. The Henry Fund team is currently 2.5% out to 202048. Accordingly, IHS Automotive expects optimistic on employment and expects this rate to hold auto sales in the US to grow 1.8% in 201611. steady over the next two years. While the official unemployment rate does not tell the complete story, the results are encouraging as they are far from levels that would seriously impair demand for automobiles.

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Germany As in the United States, the German labor market has mounted a significant recovery since 2007, falling from a German light vehicle sales have exhibited volatility similar peak of 9.6% to 4.3% as of January 2016. In addition to low to the US market, with steep declines following the global unemployment, the total number of people employed financial crisis. Additionally, their recovery has been reached the highest levels since German reunification. subdued as Europe as a whole has faced persistent Despite some weakness in manufacturing, higher labor problems with certain regional players (Greece, etc.). force participation and the immigration of foreign workers have helped keep the labor market strong12.

Source: International Organization of Motor Vehicle China Manufacturers As BorgWarner’s most important growth market, the economic outlook in China is particularly important. Over the last 30 years, China’s export driven economy has been Currently, the outlook for German real GDP is relatively able to achieve incredible levels of growth due in part to positive. After a weak showing in 2012 and 2013, growth large government investments in the manufacturing in real GDP recovered to a stable 1% ‐ 2% in 2014 and 2015. sector. However, realizing this path is not sustainable The World Bank is currently forecasting that these levels forever, the government has begun to deliberately shift hold out to 2018. While Germany is exposed to more risk their economy towards a domestic consumption and from their exposure to the uncertainty facing Europe as a services driven model. While many agree that this shift is whole, this is relatively in‐line with historical averages and long overdue, the downside is lower growth going is likely to be a positive for autos. forward. Currently, growth in real GDP is projected to slow to 6.5% over the next five years, down from 7% ‐ 10% in 2010 – 201413. Ultimately, this shift should be a positive for the world’s second largest economy, but it will likely

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continue to cause some turbulence in financial markets as disposable income of consumers and is typically good for market participants adjust to this new reality. auto sales. Assuming a sustained drop in prices does not spark a recession, these lower gas prices and the greater levels of purchasing power among consumers should be a positive for the auto industry.

Chinese light vehicle registrations grew 7% in 2014 and 4.7% in 201539. While 2016 expectations were initially cut to 4.5% ‐ 5%, recent data has indicated that the auto market in China is not as weak as the downward revisions in GDP would suggest. Last month, the 2016 forecast was raised to 6%51, in‐line with recent growth. CATALYSTS FOR GROWTH

At the end of the day, demand for BorgWarner’s products is driven by global automobile production and sales. A few factors that may influence production in the future include:

 GDP growth in North America, Europe, and BRIC nations  Oil and gas prices

Specific trends relevant to BorgWarner include:

 Increased adoption of turbocharger technology driven Source: International Organization of Motor Vehicle by tighter regulations on automakers Manufacturers  Production mix of traditional internal combustion engines and hybrid/electric vehicles

Global Oil Prices INVESTMENT POSITIVES Beginning in June 2014, an abundance of supply and subdued demand has sent the price of WTI oil tumbling  Strong position in turbocharger production. This from over $100/barrel to less than $30, a level many never should benefit BorgWarner as increasingly strict fuel expected to see again. Currently, many industry experts economy standards begin to take effect. are beginning to adopt the stance that prices will remained  Acquisition of Remy International gives BorgWarner a low for the foreseeable future and the Henry Fund team foothold in the production of hybrid/electric vehicles, agrees. The majority of our analysts expect oil to remain in one of the biggest trends currently facing the auto the $40 ‐ $50 range over the next two years. Additionally, industry. the average price of gasoline in the U.S. has fallen 20% in the last year alone14. This action effectively increases the

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 Joint ventures in China give BorgWarner access to an Drivetrain Segment important growth market.  Low oil prices typically increase the demand for The drivetrain segment is currently forecast to grow at a automobiles. 3.6% CAGR out to 2020, in‐line with global auto production. This is due to a lack of any specific product (i.e. turbochargers) that may drive outperformance. INVESTMENT NEGATIVES Remy International

 Slower growth expectations in China may continue to Revenues from the Remy acquisition are anticipated to weigh on shares. grow at a 4% CAGR out to 2020. While this segment will be incorporated into the drivetrain segment in the future, we  Hybrid/EV market is still in its infancy and is expected view it as prudent to forecast revenues separately for the to make up less than 5% of total auto production until time being. For the model, this segment was divided into 2020. This forecast may be pushed out by a few years four sub‐segments: commercial vehicle, aftermarket, if oil and gas prices remain low longer than expected. original equipment, and hybrid/electric engines.

Commercial Vehicle – Revenues are forecasted to grow in‐ VALUATION line with the IHS Automotive forecast for global medium/heavy trucks. Currently, the forecast calls for The target price range for BorgWarner of $70 ‐ $76 is 3.3% growth in 2016 which moderates to 1.5% in 2020. based on a discounted cash flow valuation model. Aftermarket – Currently forecasted to grow 6% in each Furthermore, based on our 2016 earnings forecast and a year out to 2020. This is based on comments from some of set of comparable companies, we see a price floor in the the larger retailers of aftermarket parts. neighborhood of $43. Original Equipment – Forecast to grow in‐line with global Revenue light vehicle production.

The most important fundamental factor in DCF model is Hybrid/Electric Engines – This is the smallest but fastest the revenue forecast. At BorgWarner, revenue was divided growing segment of Remy. While hybrid/EV engines only into three segments: engine, drivetrain, and Remy. generated $14.2 million in revenue in 2015, a KPMG survey of auto industry executives indicated that this will be the Engine Segment fastest growing segment of the auto market going Revenue in the engine segment is forecasted to grow forward. Consistent with this expectation, we have between 5.4% in 2016. Growth should improve to 6.2% in modeled hybrid/EV revenue growing 16.1% in 2016, which 2018 as auto production picks up slightly before moderates down to 4.1% by 2020. moderating back down to 5.6% in 2020. This forecast is driven by two factors: global light vehicle production and Key Expenses and Margins growth in turbocharger revenue. There are three key expenses that have a significant Global Light Vehicle Production ‐ Estimates from IHS impact on the valuation of BorgWarner: Cost of Goods Sold Automotive and PricewaterhouseCoopers indicate that (COGS), Selling, General, & Administrative expenses global light vehicle production is expected to increase (S,G,&A), and Research and Development (R&D). between 3.2% and 4.7% over the 2016 – 2020 period. Cost of Goods Sold – BorgWarner has been able to Turbochargers ‐ Data from competitor Honeywell improve their cost of goods sold marginally over the last indicates that the total market for turbochargers should 5 years. We anticipate modest improvement to 74.5% of grow about 8% annually out to 202010. revenue in 2016, which holds steady out to 2020. As a result, gross margin is expected to maintain historical levels of just over 21%

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Selling, General & Administrative Expenses – With no Invested Capital – The next step in the DCF valuation clear trend over the last five years, SG&A expenses are process is to estimate invested capital. There are three forecasted as a constant 4.7% of revenue. This is primary inputs in this calculation: net operating working consistent with recent performance. capital (NWC), net property, plant, & equipment (net P,P,&E), and other long‐term operating assets and Research & Development – R&D is an important liabilities. component of BorgWarner’s cost structure as these investments are made in programs that fuel both short Net Operating Working Capital (NWC) – BorgWarner’s key and long‐term growth. Historically, R&D has held steady working capital accounts include the following: normal between 3% and 4% of total revenue. For the purposes of cash, accounts receivable, inventories, prepaid expenses, the model, R&D is expected to remain constant at 4% of trade payables, accrued expenses, and income tax revenue. This estimate is based on the company’s long‐ payable. In 2015, many of these accounts increased term R&D target as laid out in their 2015 10‐k. significantly compared to prior years. However, an examination of BorgWarner’s 2015 10‐k reveals that these Operating Margin – After accounting for these key increases are almost entirely the result of the Remy expenses, operating margin is forecast to hold steady International acquisition, which closed late in the year and between 11.4% and 11.7% out to 2020. This is consistent didn’t give BorgWarner enough time to unwind some of with recent years but below the 12% target issued by these accounts. Going forward, the model assumes that all management. of these accounts will be scaled back to levels more in‐line Discounted Cash Flow Valuation with their historical averages by 2018/2019. Net Property, Plant, & Equipment (net P,P,&E) – As As previously mentioned, the DCF target price for BorgWarner continues to grow and expand their BorgWarner indicates a value of about $76 per share. In manufacturing capabilities, continued investments in order to arrive at that target price, we must first come up P,P,&E are going to be necessary. In the model, the with forward looking estimates for NOPLAT, invested forecasts for capital expenditures and depreciation are the capital (IC), and the weighted‐average cost of capital key drivers. Capital expenditures are forecasted as a (WACC). constant 6% of sales ($500 ‐ $700 million), in‐line with historical levels. Annual depreciation is expected to be a Net Operating Profit Less Adjusted Taxes (NOPLAT) – constant 15% of prior year net P,P,&E which is also in‐line NOPLAT is calculated by estimating earnings before with historical levels. interest, taxes, and amortized goodwill (EBITA), subtracting the provision for income taxes (once it has Other Long‐Term Operating Assets/Liabilities – Line items been adjusted for non‐operating expenses), and adding in these categories include intangible assets, capitalized back any change in deferred tax liabilities. As can be seen operating leases, deferred revenue, and “other” in the attached Value Driver worksheet, the revenue and assets/liabilities. All of these items (excluding intangibles) expense assumptions mentioned above have the largest are expected to remain at a constant percentage of sales influence on EBITA. However, a few other relatively minor out to 2020. Intangible assets are expected to gradually expenses such as stock based compensation, the implied amortize over time according to the schedule laid out in interest on operating leases, and “other” expenses must BorgWarner’s 2015 10‐k. also be accounted for. Next, we need to adjust the provision for income taxes for the tax effects of any non‐ Other Inputs operating expenses like interest expense/income and Weighted Average Cost of Capital – The final input to the impact of affiliate investments. Finally, by assuming DCF model is the discount rate or the weighted average deferred tax assets and liabilities will continue to grow in‐ cost of capital. Our model estimates this variable at 9.16%. line with their average rate over the last five years, we The key estimates in my cost of capital are the risk‐free arrive at an estimate for NOPLAT. rate, the equity risk premium, beta, pre‐tax cost of debt,

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and marginal tax rate. The assumptions for these variables revenue grew 0% in each year of our forecast period, our are laid out as follows: target price is still just under $70. Risk‐Free Rate – approximates as 2.61% which is based on Model vs. Consensus Estimates the 30‐Yr Treasury bond YTM as of 3/31/2016. Currently, consensus estimates are predicting 2016 Equity Risk Premium – estimate of 5% is the consensus revenue and earnings to come in at $9.2 billion and $3.26, ERP from the Henry Fund. respectively. Our model in slightly more optimistic at $9.4 Beta – average of the 1, 2, 3, 4, & 5‐year monthly beta billion and $3.32. While this is slightly higher than calculations via Bloomberg. consensus, we are right at the high end of management’s guidance range. Pre‐Tax Cost of Debt – YTM of a BBB+ rated bond recently issued by BorgWarner that matures in 2045. Despite similar operating expectations, our target price range is substantially above the consensus target price of Marginal Tax Rate – 26% in the forecast period. Calculated $41. The biggest reason we have identified for the from data in BorgWarner’s 2015 10‐k. divergence is our preference for the DCF method of Results of Model and Sensitivity Testing valuation compared to the price‐to‐earnings multiples used by nearly all of the sell side analysts. While the Henry After all forecasts have been made, free cash flow is Fund believes that DCF is a superior method for estimating expected to grow at an 8.3% CAGR from 2016 – 2020. the long‐term value a company can generate, we Additionally, ROIC is expected come in around 27% ‐ 29%, recognize that it may take time for the market to recognize down from the low 30% range observed over the last few that value. years. Given the WACC of 9.16% and a 3% continuing value NOPLAT assumption, we arrive at our target price of Relative Valuation $76.88. While our recommendation of Buy is based primarily on a After running sensitivity analyses on several of the key DCF valuation, it is important to consider other metrics in input variables, a target price range of $70 ‐ $76 seems order to help build an understanding of how other market reasonable. However, the model is quite sensitive to participants are valuing a stock. In BorgWarner’s case, with several variables. Predictably, the estimate of intrinsic the amount of fear and uncertainty currently present in value is very sensitive to our continuing value ROIC and NOPLAT assumptions of 29.4% and 3%, respectively. global financial markets, it is prudent to examine how the However, we view our assumptions as reasonable given company’s stock is priced relative to a group of the historical performance of the firm and the long term competitors. The peer group chosen consists of 9 other outlook for the global auto industry. The model is also tier 1 global auto parts suppliers with a similar geographic extremely sensitive to beta and the equity risk premium. distribution to BorgWarner. Based on 2016 and 2017 While the beta of BorgWarner is certainly not set in stone, earnings estimates1, the industry average forward P/E we view our 1.6 as appropriate. Even if the beta were to ratio for 2016 is 12.1x and 10.8x for 2017. BorgWarner is increase to 1.8 (as it has over certain time periods) our intrinsic value still comes in at just under $70. Additionally, currently trading at 11.6x and 10.9x the modeled 2016 and we view our estimate of 5% for the equity risk premium as 2017 EPS estimates. While this is modestly below the conservative given the premiums observed in the market industry average, it is reasonable in the context of over the last 10 years. Even if the ERP were to rise to near BorgWarner’s 5‐Yr EPS CAGR, as predicted by the model, 7%, as it did in 2008, BorgWarner still appears which is slightly below most of the other companies that undervalued. Finally, while there are many different have higher valuations, such as Plastic Omnium and Hella drivers of revenue, our target price appears to be most sensitive to the assumption we have made regarding Hueck & Co. Additionally, they are valued at a premium to turbocharger growth. That said, even if turbocharger most of the companies with lower growth rates, like Schaeffler AG and Dana Holding Corp.

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Looking at a long‐term chart of BorgWarner’s NTM P/E 1. FactSet multiple, we can see that their shares are trading at some 2. Bloomberg Terminal of the lowest levels in the last decade. If we exclude the 3. Bloomberg New Energy Finance: Electric Vehicle Report spike in NTM P/E caused by the extreme negative earnings http://about.bnef.com/press‐releases/electric‐ revisions coming out of the Great Recession, the average vehicles‐to‐be‐35‐of‐global‐new‐car‐sales‐by‐2040/ NTM P/E for BorgWarner is about 14.7x. If shares were 4. U.S. Energy Information Administration: Annual able to regain ground to 14x – 15x 2016 EPS it would imply Energy Outlook 2015 a share price of about $43, an approximate 20% premium http://www.eia.gov/forecasts/aeo/ from current levels. 5. FuelEconomy.gov: Hybrid Comparison http://www.fueleconomy.gov/feg/hybridCompare.js p 6. Bureau of Transportation Statistics: Avg. Fuel Economy of Light Vehicles http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/fil es/publications/national_transportation_statistics/ht ml/table_04_23.html 7. Edmunds.com: New Corporate Average Fuel Economy Standards http://www.edmunds.com/fuel‐economy/faq‐new‐ corporate‐average‐fuel‐economy‐standards.html 8. California Air Resources Board: ZEV Regulations http://www.arb.ca.gov/msprog/zevprog/zevregs/zev Source: FactSet regs.htm 9. EV News: 10 EV Friendly States and Counting KEYS TO MONITOR http://evnews.net/ten‐us‐ev‐friendly‐zev‐states‐ counting/ Going forward, BorgWarner is positioned well to take 10. Honeywell: Turbocharger Adoption Report advantage of several of the intermediate and long‐term https://turbo.honeywell.com/whats‐new‐in‐ trends taking place in the auto industry. Assuming these turbo/press‐release/honeywells‐2015‐turbocharger‐ trends play out as expected, the company has a very good forecast‐signals‐increased‐expectations‐of‐turbo‐ chance to realize above average top and bottom line technology‐as‐global‐penetration‐nears‐50‐percent‐ growth. However, as we continue to hold their stock, there by‐2020/ are several sources of data that will be important to 11. IHS Automotive: US Light Vehicle Report for February monitor to determine if our thesis is still on track. http://blog.ihs.com/same‐day‐analysis%3A‐us‐light‐ Auto production and sales ‐ The International vehicle‐sales‐grow‐69‐february%2C‐best‐monthly‐ Organization of Motor Vehicle Manufacturers (OICA) saar‐in‐15‐yearsDeStatis reports quarterly production numbers and auto sales are 12. German Labor Market Statistics reported monthly by the industry blog, Automotive News. https://www.destatis.de/EN/FactsFigures/Indicators/ ShortTermIndicators/LabourMarket/arb410.html BWA earnings and guidance ‐ Next report is scheduled for 13. China GDP Forecast late April/early May. http://data.worldbank.org/country/china 14. AAA: National Average Fuel Prices Growth news out of China ‐ Monitor news and estimates http://fuelgaugereport.aaa.com/ from the International Monetary Fund and the World 15. BBC News: Volkswagen Scandal Explained Bank, both of which provide estimates for growth. http://www.bbc.com/news/business‐34324772 16. Automotive News Europe: European January Auto

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http://europe.autonews.com/article/20160216/ANE/ https://www.chicagofed.org/publications/economic‐ 160219917/european‐car‐sales‐rise‐6‐in‐january‐but‐ perspectives/2012/2q‐klier‐rubenstein vw‐share‐hit‐by‐diesel 30. Wards Auto: GM International Operations 17. Barron’s.com: BorgWarner VW Impact http://wardsauto.com/news‐analysis/gm‐ http://blogs.barrons.com/stockstowatchtoday/2015/ international‐operations‐powering‐reorganized‐auto‐ 09/21/why‐volkswagen‐turmoil‐is‐no‐big‐deal‐for‐ maker borgwarner‐harman/ 31. PwC Strategy: M&A in the Global Auto Industry 18. BorgWarner/Remy Intl. Acquisition Completion Notice http://www.strategyand.pwc.com/reports/mergers‐ http://www.borgwarner.com/en/News/PressRelease acquisitions‐auto‐industry s/BWNews/11%2010%2015%20BorgWarner%20Com 32. ZF TRW Acquisition Press Release pletes%20Acquisition%20of%20Remy%20Internation http://ir.trw.com/releasedetail.cfm?ReleaseID=91341 al.pdf 7 19. WSJ.com: BorgWarner to Acquire Remy Intl. 33. PR Newswire: ZF TRW Demonstration http://www.wsj.com/articles/borgwarner‐to‐buy‐ http://www.prnewswire.com/news‐releases/zf‐trw‐ remy‐international‐1436790596 demonstrates‐semi‐automated‐highway‐driving‐ 20. Remy International 10‐k assist‐system‐300107352.html http://ir.remyinc.com/phoenix.zhtml?c=132337&p=ir 34. WSJ.com: JCI Spin‐off ol‐irhome http://www.wsj.com/articles/SB10001424052702304 21. BorgWarner Q4 2015 Earnings Call 198504579569741641633918 http://seekingalpha.com/article/3890306‐ 35. Bloomberg.com: Harman Acquisition borgwarners‐bwa‐ceo‐james‐verrier‐q4‐2015‐results‐ http://www.bloomberg.com/news/articles/2015‐01‐ earnings‐call‐transcript?part=single 22/harman‐spending‐almost‐1‐billion‐on‐two‐ 22. BorgWarner Q1 2015 Earnings Press Release software‐acquisitions http://www.borgwarner.com/en/News/PressRelease 36. BorgWarner 2015 10‐k s/BWNews/8%20K%203.31.2015%20Exhibit%2099.1 http://www.borgwarner.com/en/Investors/SEC/defa %20Press%20Release.pdf ult.aspx 23. BorgWarner Q2 2015 Earnings Press Release 37. TRW Automotive 2014 10‐k http://www.borgwarner.com/en/News/PressRelease http://ir.trw.com/sec.cfm s/BWNews/8%20K%206.30.2015%20Exhibit%2099.1 38. Harman International Industries 2015 10‐k %20Press%20Release_w%20Logo.pdf http://investor.harman.com/sec.cfm?DocType=Annu 24. BorgWarner Q3 2015 Earnings Press Release al&Year=&SortOrder=Date+Descending&FormatFilter http://www.borgwarner.com/en/News/PressRelease 39. International Organization of Motor Vehicle s/BWNews/8%20K%209.30.2015%20Exhibit%2099.1 Manufacturers: Annual Production Statistics %20Press%20Release.pdf http://www.oica.net/category/production‐ 25. BorgWarner 2016 Guidance Update statistics/2014‐statistics/ http://www.borgwarner.com/en/News/PressRelease 40. Mergent Online s/BWNews/2016%20Net%20New%20Business%20an http://mergentonline.com/basicsearch.php d%20Guidance%20Release_010916.pdf 41. Thomson ONE Investment Banking research portal 26. BorgWarner 2015 Earnings Press Release 42. BorgWarner Q3 Conference Call Transcript http://www.borgwarner.com/en/News/PressRelease http://seekingalpha.com/article/3621976‐ s/BWNews/8%20K%2012.31.2015%20Exhibit%2099.1 borgwarners‐bwa‐ceo‐james‐verrier‐q3‐2015‐results‐ %20Press%20Release%20‐%20with%20logo.pdf earnings‐call‐transcript?part=single 27. IBISWorld 43. Zipcar statement on impact of ride sharing market 28. Automotive News: 2014 Top Suppliers Report https://sustainabledevelopment.un.org/content/doc http://www.magna.com/docs/default‐ uments/10664zipcar.pdf source/default‐document‐library/2014‐top‐suppliers‐ 44. PwC Global Market Update 06‐15‐2015.pdf?sfvrsn=2 http://www.pwc.com/gx/en/automotive/autofacts/a 29. Chicago Fed: Detroit Back from the Brink? nalyst‐notes/pdf/pwc‐analyst‐note‐global‐market‐ update‐november‐2015.pdf

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45. PwC State of the Plug in Electric Vehicle Market http://www.pwc.com/gx/en/automotive/industry‐ publications‐and‐thought‐leadership/assets/pwc‐ec‐ state‐of‐pev‐market‐final.pdf 46. KPMG: Global Automotive Executive Survey 2015 http://www.kpmg.com/LU/en/IssuesAndInsights/Arti clespublications/Pages/Global‐Automotive‐Executive‐ Survey‐2015.aspx 47. Bloomberg.com: Ford Supplier Reductions http://www.bloomberg.com/news/articles/2013‐10‐ 21/ford‐wants‐to‐pare‐number‐of‐suppliers‐by‐40‐ executive‐says 48. Congressional budget Office: The Budget & Economic Outlook 2016 – 2026 (Jan 2016) https://www.cbo.gov/publication/51129 49. WSJ.com: German GDP Growth Forecast http://www.wsj.com/articles/german‐government‐ cuts‐economic‐growth‐forecast‐for‐2016‐to‐1‐7‐ 1453901950 50. German GDP Estimates http://data.worldbank.org/country/germany#cp_gep 51. IHS Automotive: Chinese Auto Forecast http://blog.ihs.com/same‐day‐analysis%3A‐ihs‐ automotive‐upgrades‐chinese‐growth‐forecast

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

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CV NOPLAT Growth S,G,&A % of Sales $ 76.90 ‐2.0% ‐1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%$ 76.90 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 5.00% 66.97 63.38 59.00 53.55 46.59 37.36 24.55 5.60 (25.33) (84.87) (246.72) 2.0% 78.20 78.05 77.91 77.77 77.63 77.48 77.34 77.20 77.06 76.91 10.00% 58.20 58.56 59.00 59.55 60.25 61.17 62.46 64.36 67.47 73.45 89.71 2.5% 78.05 77.91 77.77 77.63 77.48 77.34 77.20 77.06 76.91 76.77 15.00% 55.28 56.96 59.00 61.55 64.80 69.11 75.10 83.95 98.41 126.22 201.85 3.0% 77.91 77.77 77.63 77.48 77.34 77.20 77.06 76.91 76.77 76.63 CV ROIC 20.00% 53.82 56.15 59.00 62.55 67.08 73.08 81.41 93.75 113.87 152.61 257.92 3.5% 77.77 77.63 77.48 77.34 77.20 77.06 76.91 76.77 76.63 76.49 25.00% 52.94 55.67 59.00 63.14 68.45 75.47 85.20 99.62 123.16 168.44 291.57 R&D % of 4.0% 77.63 77.48 77.34 77.20 77.06 76.91 76.77 76.63 76.49 76.34 30.00% 52.36 55.35 59.00 63.54 69.36 77.05 87.73 103.54 129.34 179.00 314.00 Sales 4.5% 77.48 77.34 77.20 77.06 76.91 76.77 76.63 76.49 76.34 76.20 35.00% 51.94 55.12 59.00 63.83 70.01 78.19 89.54 106.34 133.76 186.54 330.02 5.0% 77.34 77.20 77.06 76.91 76.77 76.63 76.49 76.34 76.20 76.06 5.5% 77.20 77.06 76.91 76.77 76.63 76.49 76.34 76.20 76.06 75.92 Beta 6.0% 77.06 76.91 76.77 76.63 76.49 76.34 76.20 76.06 75.92 75.77 $ 76.90 1.00 1.20 1.40 1.60 1.80 2.00 2.20 2.40 2.60 6.5% 76.91 76.77 76.63 76.49 76.34 76.20 76.06 75.92 75.77 75.63 1% 807.97 654.72 549.79 473.44 415.39 369.77 332.96 302.65 277.25 2% 369.77 302.65 255.65 220.90 194.17 172.96 155.72 141.43 129.40 CapEx % of Sales 3% 237.07 194.17 163.91 141.43 124.07 110.25 99.00 89.65 81.76 $ 76.90 2% 3% 4% 5% 6% 7% 8% 9% 10% 4% 172.96 141.43 119.13 102.51 89.65 79.40 71.03 64.08 58.21 1% 78.35 78.55 78.74 78.94 79.14 79.34 79.54 79.74 79.93 Equity Risk 5% 135.17 110.25 92.58 79.40 69.18 61.02 54.37 48.83 44.14 2% 78.32 78.52 78.72 78.91 79.11 79.31 79.51 79.71 79.90 Premium 6% 110.25 89.65 75.01 64.08 55.60 48.83 43.29 38.68 34.78 3% 78.29 78.49 78.69 78.88 79.08 79.28 79.48 79.68 79.87 Share 7% 92.58 75.01 62.52 53.18 45.93 40.13 35.39 31.44 28.10 4% 78.26 78.46 78.66 78.86 79.05 79.25 79.45 79.65 79.85 Repurchases 8% 79.40 64.08 53.18 45.02 38.68 33.61 29.46 26.00 23.07 5% 78.23 78.43 78.63 78.83 79.02 79.22 79.42 79.62 79.82 % of Sales 9% 69.18 55.60 45.93 38.68 33.05 28.54 24.85 21.77 19.16 6% 78.20 78.40 78.60 78.80 78.99 79.19 79.39 79.59 79.79 10% 61.02 48.83 40.13 33.61 28.54 24.48 21.15 18.37 16.02 7% 78.17 78.37 78.57 78.77 78.97 79.16 79.36 79.56 79.76 8% 78.14 78.34 78.54 78.74 78.94 79.13 79.33 79.53 79.73

Drivetrain Growth Relative to Global Electrified Powertrain Forecast $ 76.90 ‐2 ‐1.75 ‐1.5 ‐1.25 ‐1 ‐0.75 ‐0.25 0 0.25 0.5 0.75 1 1.25 1.5 1.75 2 ‐2 59.05 59.61 60.18 60.78 61.40 62.05 63.40 64.12 64.86 65.63 66.42 67.25 68.10 68.98 69.88 70.83 Engine Growth ‐1.75 59.71 60.26 60.84 61.44 62.06 62.70 64.06 64.77 65.52 66.28 67.08 67.90 68.75 69.63 70.54 71.48 Relative to ‐1.5 60.39 60.94 61.52 62.12 62.74 63.38 64.74 65.45 66.19 66.96 67.76 68.58 69.43 70.31 71.22 72.16 Global Auto ‐1.25 61.09 61.65 62.22 62.82 63.44 64.08 65.44 66.16 66.90 67.67 68.46 69.28 70.13 71.01 71.92 72.86 Forecast ‐1 61.82 62.38 62.95 63.55 64.17 64.81 66.17 66.89 67.63 68.40 69.19 70.01 70.87 71.74 72.65 73.59 ‐0.75 62.58 63.13 63.71 64.31 64.93 65.57 66.93 67.65 68.39 69.16 69.95 70.77 71.62 72.50 73.41 74.35 ‐0.25 64.18 64.73 65.31 65.91 66.53 67.17 68.53 69.25 69.99 70.76 71.55 72.37 73.22 74.10 75.01 75.95 0 65.02 65.58 66.15 66.75 67.37 68.02 69.37 70.09 70.83 71.60 72.39 73.22 74.07 74.95 75.86 76.80 0.25 65.90 66.45 67.03 67.63 68.25 68.89 70.25 70.96 71.71 72.47 73.27 74.09 74.94 75.82 76.73 77.67 0.5 66.80 67.36 67.93 68.53 69.15 69.79 71.15 71.87 72.61 73.38 74.17 74.99 75.85 76.72 77.63 78.57 0.75 67.74 68.29 68.87 69.47 70.09 70.73 72.09 72.81 73.55 74.31 75.11 75.93 76.78 77.66 78.57 79.51 1 68.71 69.26 69.84 70.44 71.06 71.70 73.06 73.77 74.52 75.28 76.08 76.90 77.75 78.63 79.54 80.48 1.25 69.71 70.26 70.84 71.44 72.06 72.70 74.06 74.78 75.52 76.29 77.08 77.90 78.75 79.63 80.54 81.48 1.5 70.75 71.30 71.88 72.48 73.10 73.74 75.10 75.81 76.55 77.32 78.12 78.94 79.79 80.67 81.58 82.52 1.75 71.82 72.37 72.95 73.55 74.17 74.81 76.17 76.88 77.63 78.39 79.19 80.01 80.86 81.74 82.65 83.59 2 72.93 73.48 74.06 74.66 75.28 75.92 77.28 77.99 78.73 79.50 80.30 81.12 81.97 82.85 83.76 84.70

Annual Growth in Turbochargers $ 76.90 ‐10% ‐8% ‐6% ‐4% ‐2% 0% 2% 4% 6% 8% 10% ‐6% 61.74 62.83 64.02 65.31 66.72 68.23 69.88 71.65 73.56 75.62 77.84 ‐5% 61.82 62.92 64.11 65.40 66.80 68.32 69.96 71.73 73.65 75.71 77.92 ‐4% 61.91 63.00 64.19 65.49 66.89 68.41 70.05 71.82 73.74 75.79 78.01 ‐3% 62.00 63.10 64.29 65.58 66.98 68.50 70.14 71.91 73.83 75.89 78.10 ‐2% 62.10 63.19 64.38 65.68 67.08 68.60 70.24 72.01 73.92 75.98 78.20 ‐1% 62.20 63.29 64.48 65.78 67.18 68.70 70.34 72.11 74.02 76.08 78.30 0% 62.30 63.40 64.59 65.88 67.28 68.80 70.44 72.21 74.13 76.19 78.40 Annual Growth 1% 62.41 63.50 64.69 65.99 67.39 68.91 70.55 72.32 74.23 76.29 78.51 in Aftermarket 2% 62.52 63.62 64.81 66.10 67.50 69.02 70.66 72.43 74.35 76.41 78.62 3% 62.64 63.73 64.92 66.22 67.62 69.14 70.78 72.55 74.46 76.52 78.74 4% 62.76 63.85 65.04 66.34 67.74 69.26 70.90 72.67 74.58 76.64 78.86 5% 62.89 63.98 65.17 66.46 67.86 69.38 71.02 72.80 74.71 76.77 78.98 6% 63.02 64.11 65.30 66.59 67.99 69.51 71.16 72.93 74.84 76.90 79.11 7% 63.15 64.25 65.44 66.73 68.13 69.65 71.29 73.06 74.98 77.04 79.25 8% 63.29 64.39 65.58 66.87 68.27 69.79 71.43 73.20 75.12 77.18 79.39 BorgWarner Inc. Revenue Decomposition

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Global auto forecast (millions) 87.6 89.7 91.1 94.0 97.1 101.7 105.3 108.7 Y/Y Growth 4.0% 2.4% 1.5% 3.2% 3.3% 4.7% 3.5% 3.2% Electrified powertrain forecast (millions) 2.1 2.6 3.1 3.6 4.1 4.6 4.9 5.1 Y/Y Growth 10.5% 23.8% 19.2% 16.1% 13.9% 12.2% 6.5% 4.1% Commercial Vehicle Production (millions) 3.1 3.2 3.3 3.4 3.5 3.6 Y/Y Growth 3.3% 3.6% 4.6% 2.2% 1.5% Aftermarket auto parts 5 Yr growth consensus est. Annual increase in turbocharger revenue

Revenue by Segment Engine ex Turbochargers 3,088.6 3,380.5 3,012.8 3,109.2 3,211.9 3,364.1 3,483.2 3,595.6 Y/Y Growth 1.4% 9.5% ‐10.9% 3.2% 3.3% 4.7% 3.5% 3.2% Y/Y Growth (toggle) 3.2% 3.3% 4.7% 3.5% 3.2%

Sales of Turbochargers to light vehicles % of Net Sales 26.0% 28.0% 31.0% 28.3% 29.3% 29.9% 30.8% 31.7% Sales of Turbochargers ‐ $ 1,933.5 2,325.4 2,487.2 2,686.2 2,901.1 3,133.1 3,383.8 3,654.5 Y/Y Growth 3.5% 20.3% 7.0% 8.0% 8.0% 8.0% 8.0% 8.0% Y/Y Growth (toggle)

Drivetrain 2,446.5 2,631.4 2,556.7 2,638.5 2,725.7 2,854.8 2,955.9 3,051.3 Y/Y Growth 6.4% 7.6% ‐2.8% 3.2% 3.3% 4.7% 3.5% 3.2% Y/Y Growth (toggle) 3.2% 3.3% 4.7% 3.5% 3.2%

Remy Revenue 1,140.2 1,182.3 1,000.0 1,043.6 1,071.5 1,126.7 1,171.4 1,214.3 344.5 356.8 373.3 381.7 387.4 Commercial Vehicle 333.3 3.3% 3.6% 4.6% 2.2% 1.5% 353.3 374.5 397.0 420.8 446.1 Aftermarket 333.3 6.0% 6.0% 6.0% 6.0% 6.0% 329.31 340.19 356.31 368.92 380.83 Original Equipment 319.1 3.2% 3.3% 4.7% 3.5% 3.2% Sales of Hybrids 16.8 14.1 14.2 16.5 18.8 21.1 22.4 23.4 ‐52.9% ‐16.1% 0.7% 16.1% 13.9% 12.2% 6.5% 4.1%

Inter‐segment eliminations (32.0) (32.2) (33.5) Total Net Sales 7,436.6 8,305.1 8,023.2 9,477.5 9,910.2 10,478.7 10,994.3 11,515.7 Y/Y Growth 3.5% 11.7% ‐3.4% 18.1% 4.6% 5.7% 4.9% 4.7%

Revenue by Geography United States 1,939.7 2,008.1 1,985.1 Europe: Germany 1,760.1 2,145.6 1,857.1 Hungary 451.5 518.1 500.5 France 327.6 405.2 339.2 Other Europe 1,132.5 1,097.3 921.8 Total Europe 3,671.7 4,166.2 3,618.6

South Korea 563.5 623.0 741.7 China 636.3 885.1 1,009.0 Other Foreign 625.4 622.7 668.8 Total Net Sales 7,436.6 8,305.1 8,023.2 BorgWarner Inc. Income Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Sales $ 7,436.6 $ 8,305.1 $ 8,023.1 $ 9,477.5 $ 9,910.2 $10,478.7 $10,994.3 $11,515.7 COGS ex. D&A 5,571.7 6,217.3 5,999.9 7,060.7 7,383.1 7,806.6 8,190.7 8,579.2 Depreciation 272.7 303.2 301.0 367.2 397.4 427.0 457.3 487.6 Amortization of Intangibles 26.7 27.2 19.1 40.4 39.2 37.9 37.4 37.0 Gross Income 1,565.5 1,757.4 1,703.1 2,009.1 2,090.5 2,207.2 2,308.9 2,411.9

SG&A Expense 336.5 362.7 354.6 448.7 469.2 496.1 520.6 545.2 R&D Expense, net 303.2 336.2 307.4 361.7 378.2 399.9 419.6 439.5 Stock-Based Compensation Expense 36.6 32.1 40.2 46.9 49.1 51.9 54.4 57.0 Other expense (income) 26.0 61.7 61.2 46.3 48.4 51.2 53.7 56.2 Goodwill Write Off ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Reorganization and Restructure Expense ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ EBIT (Operating Income) 863.2 964.7 939.7 1,105.47 1,145.53 1,208.02 1,260.57 1,313.86

Equity in Earnings of Affiliates 43.5 47.3 40.0 42.1 44.3 46.6 49.0 51.6 Interest income 4.8 5.5 7.5 5.3 7.4 6.0 4.6 3.6 Interest expense & finance charges (34.2) (36.4) (60.4) (124.4) (145.7) (129.3) (114.5) (100.1) Pretax Income 869.3 980.1 926.8 1,028.5 1,051.5 1,131.3 1,199.7 1,268.9

Total Provision for Income Taxes 218.3 292.6 280.4 267.4 273.4 294.1 311.9 329.9

Consolidated Net Income 651.0 687.5 646.4 761.1 778.1 837.1 887.7 939.0 Minority Interest 26.7 31.7 36.7 41.1 46.0 51.5 57.7 64.6 Net Income 624.3 655.8 609.7 720.0 732.1 785.6 830.1 874.4

EPS (recurring) $ 2.73 $ 2.89 $ 2.72 $ 3.32 $ 3.51 $ 3.91 $ 4.28 $ 4.66 Total Shares Outstanding 228.6 227.2 224.4 216.8 208.6 201.0 194.1 187.7 Total Dividends 56.8 116.1 116.7 144.0 146.4 157.1 166.0 174.9 Dividends per Share 0.25 0.51 0.52 0.66 0.70 0.78 0.86 0.93 BorgWarner Inc. Balance Sheet

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Assets Cash 939.5 797.8 577.7 810.6 654.0 500.0 390.4 262.8 Accounts Receivables, net 1,248.5 1,443.5 1,665.0 1,895.5 1,882.9 1,886.2 1,869.0 1,957.7 Inventories, net 458.1 505.7 723.6 805.6 743.3 733.5 714.6 748.5 Prepaid Expenses 83.7 130.2 169.0 130.7 136.7 144.6 151.7 158.9 Deferred Income Taxes 68.7 93.6 - - - - - ‐ Total Current Assets 2,798.5 2,970.8 3,135.3 3,642.5 3,416.9 3,264.2 3,125.7 3,127.9

Total Gross P,P,&E 3,038.7 3,170.7 3,484.9 4,053.5 4,648.2 5,276.9 5,936.5 6,627.5 Accumulated Depreciation 1,099.3 1,076.8 1,036.8 1,404.0 1,801.4 2,228.5 2,685.7 3,173.3 Total Net P,P,&E 1,939.4 2,093.9 2,448.1 2,649.5 2,846.7 3,048.4 3,250.8 3,454.1

LT Investment - Affiliate Companies 201.5 184.2 200.1 211.5 223.5 236.1 249.4 263.3 Other Long-Term Receivables 203.6 219.1 260.8 241.1 252.1 266.6 279.7 293.0

Net Goodwill 1,197.0 1,205.7 1,757.7 1,757.7 1,757.7 1,757.7 1,757.7 1,757.7 Net Other Intangibles 169.5 151.1 543.8 503.4 464.2 426.3 388.9 351.9

Deferred Income Taxes 257.6 180.5 213.5 213.5 213.5 213.5 213.5 213.5 Product Liability Insurance Asset 96.7 111.8 108.5 132.7 138.7 146.7 153.9 161.2 Tangible Other Assets 53.2 110.9 173.7 189.5 198.2 209.6 219.9 230.3 Total Assets 6,917.0 7,228.0 8,841.5 9,541.45 9,511.60 9,569.14 9,639.49 9,852.99

Liabilities & Shareholders' Equity ST Debt 194.8 601.2 280.7 288.4 304.7 309.1 316.5 322.8 Current Portion of LT Debt 6.8 22.5 160.8 49.9 13.9 134.1 259.9 14.6 Trade Payables 872.6 979.2 1,225.6 1,374.2 1,387.4 1,414.6 1,429.3 1,497.0 Accrued Expenses 511.2 551.1 640.8 659.1 689.2 728.7 764.6 800.8 Income Tax Payable 38.5 14.2 49.4 45.9 46.9 50.4 53.5 56.6 Total Current Liabilities 1,623.9 2,168.2 2,357.3 2,417.5 2,442.1 2,637.0 2,823.7 2,691.8

Long-Term Debt 1,021.0 716.3 2,124.6 2,479.1 2,182.7 1,771.5 1,360.4 1,387.4 Retirement-Related Liabilities 312.9 326.6 312.9 287.9 262.8 237.8 212.7 187.7 Deferred Income Taxes 81.3 46.8 120.1 120.1 120.1 120.1 120.1 120.1 Other Liabilities (excl. Deferred Income) 199.3 241.4 258.5 284.7 297.7 314.8 330.3 346.0 Deferred Income 46.2 37.8 36.6 44.0 46.0 48.7 51.1 53.5 Total Liabilities 3,284.6 3,537.1 5,210.0 5,633.30 5,351.45 5,129.85 4,898.26 4,786.46

Common Stock & APIC 1,124.4 1,114.9 1,112.2 1,135.6 1,135.6 1,135.6 1,135.6 1,135.6 Retained Earnings 3,177.4 3,717.1 4,210.1 4,827.2 5,458.9 6,138.9 6,860.6 7,624.7 Accumulated Other Comprehensive Income/(Loss) (14.0) (383.6) (610.2) (637.6) (666.3) (696.6) (728.4) (761.7) Treasury Stock (727.2) (832.2) (1,158.4) (1,503.8) (1,865.0) (2,246.9) (2,647.5) (3,067.2) Total Shareholders' Equity 3,560.6 3,616.2 3,553.7 3,821.3 4,063.2 4,331.0 4,620.2 4,931.3

Accumulated Minority Interest 71.8 74.7 77.8 86.8 97.0 108.3 121.0 135.2 Total Equity 3,632.4 3,690.9 3,631.5 3,908.1 4,160.1 4,439.3 4,741.2 5,066.5

Total Liabilities & Shareholders' Equity 6,917.0 7,228.0 8,841.5 9,541.45 9,511.60 9,569.14 9,639.49 9,852.99 BorgWarner Inc. Cash Flow Statement

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E Operating Activities

Net Income $ 761.1 $ 778.1 $ 837.1 $ 887.7 $ 939.0

Adjustments for Non-Cash Charges Depreciation 367.2 397.4 427.0 457.3 487.6 Amortization of Intangibles 40.4 39.2 37.9 37.4 37.0 Goodwill Write Off ‐ ‐ ‐ ‐ ‐ Restructuring Charges ‐ ‐ ‐ ‐ ‐ Equity in Affiliate Earnings, net of dividends (11.4) (12.0) (12.6) (13.3) (14.0) Change in Deferred Taxes ‐ ‐ ‐ ‐ ‐

Changes in Working Capital Receivables (230.5) 12.6 (3.2) 17.1 (88.7) Inventories (82.0) 62.3 9.8 18.9 (33.9) Prepaid Expenses 38.3 (6.0) (7.8) (7.1) (7.2) Trade Payables 148.6 13.2 27.2 14.6 67.8 Accrued Expenses 18.3 30.1 39.5 35.9 36.3 Income Taxes Payable (3.5) 1.0 3.6 3.0 3.1 Deferred Revenue 7.4 2.0 2.6 2.4 2.4 Net Operating Cash Flow 1,053.9 1,318.0 1,361.0 1,454.0 1,429.5

Investing Activities Capital Expenditures (568.6) (594.6) (628.7) (659.7) (690.9) Net Assets from Acquisitons/Sale of Business ‐ ‐ ‐ ‐ ‐ (Purchase)/Sale of Investments ‐ ‐ ‐ ‐ ‐ (Increase)/Decrease in Other Assets (20.4) (25.7) (33.8) (30.6) (31.0) (Increase)/Decrease in Other Liabilities 1.2 (12.0) (8.0) (9.6) (9.4) Net Investing Cash Flow (587.8) (632.4) (670.5) (699.9) (731.3)

Financing Activities Cash Dividends Paid (144.0) (146.4) (157.1) (166.0) (174.9) Repurchase of Common & Preferred Stk. (345.4) (361.2) (381.9) (400.7) (419.7) Sale of Common & Preferred Stock 23.4 ‐ ‐ ‐ ‐ Change in Current Debt (103.2) (19.7) 124.6 133.2 (239.0) Issuance/(Reduction) of Long-Term Debt 354.5 (296.4) (411.2) (411.2) 27.0 Change in Minority Interest 9.0 10.1 11.3 12.7 14.2 Net Financing Cash Flow (205.7) (813.6) (814.2) (832.0) (792.4)

Exchange Rate Effects (27.4) (28.7) (30.3) (31.8) (33.3)

Net Change in Cash 232.9 (156.6) (154.0) (109.7) (127.5)

Beginning Cash 577.7 810.6 654.0 500.0 390.4 Ending Cash 810.6 654.0 500.0 390.4 262.8 BorgWarner Inc. Common Size Income Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% COGS ex. D&A 74.92% 74.86% 74.78% 74.50% 74.50% 74.50% 74.50% 74.50% Depreciation 3.67% 3.65% 3.75% 3.87% 4.01% 4.08% 4.16% 4.23% Amortization of Intangibles 0.36% 0.33% 0.24% 0.43% 0.40% 0.36% 0.34% 0.32% Gross Income 21.05% 21.16% 21.23% 21.20% 21.09% 21.06% 21.00% 20.94%

SG&A Expense 4.52% 4.37% 4.42% 4.73% 4.73% 4.73% 4.73% 4.73% R&D Expense, net 4.08% 4.05% 3.83% 3.82% 3.82% 3.82% 3.82% 3.82% Stock-Based Compensation Expense 0.49% 0.39% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% Other expense (income) 0.35% 0.74% 0.76% 0.49% 0.49% 0.49% 0.49% 0.49% Goodwill Write Off 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Reorganization and Restructure Expense 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% EBIT (Operating Income) 11.61% 11.62% 11.71% 11.66% 11.56% 11.53% 11.47% 11.41%

Equity in Earnings of Affiliates 0.58% 0.57% 0.50% 0.44% 0.45% 0.44% 0.45% 0.45% Interest income 0.06% 0.07% 0.09% 0.06% 0.07% 0.06% 0.04% 0.03% Interest expense & finance charges ‐0.46% ‐0.44% ‐0.75% ‐1.31% ‐1.47% ‐1.23% ‐1.04% ‐0.87% Pretax Income 11.69% 11.80% 11.55% 10.85% 10.61% 10.80% 10.91% 11.02%

Total Provision for Income Taxes 2.94% 3.52% 3.49% 2.82% 2.76% 2.81% 2.84% 2.86%

Consolidated Net Income 8.75% 8.28% 8.06% 8.03% 7.85% 7.99% 8.07% 8.15% Minority Interest 0.36% 0.38% 0.46% 0.43% 0.46% 0.49% 0.52% 0.56% Net Income 8.39% 7.90% 7.60% 7.60% 7.39% 7.50% 7.55% 7.59% BorgWarner Inc. Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Assets Cash 12.63% 9.61% 7.20% 8.55% 6.60% 4.77% 3.55% 2.28% Accounts Receivables, net 16.79% 17.38% 20.75% 20.00% 19.00% 18.00% 17.00% 17.00% Inventories, net 6.16% 6.09% 9.02% 8.50% 7.50% 7.00% 6.50% 6.50% Prepaid Expenses 1.13% 1.57% 2.11% 1.38% 1.38% 1.38% 1.38% 1.38% Deferred Income Taxes 0.92% 1.13% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total Current Assets 37.63% 35.77% 39.08% 38.43% 34.48% 31.15% 28.43% 27.16%

Gross P,P,&E 40.86% 38.18% 43.44% 42.77% 46.90% 50.36% 54.00% 57.55% Accumulated Depreciation 14.78% 12.97% 12.92% 14.81% 18.18% 21.27% 24.43% 27.56% Net P,P,&E 26.08% 25.21% 30.51% 27.96% 28.73% 29.09% 29.57% 29.99%

LT Investment - Affiliate Companies 2.71% 2.22% 2.49% 2.23% 2.25% 2.25% 2.27% 2.29% Other Long-Term Receivables 2.74% 2.64% 3.25% 2.54% 2.54% 2.54% 2.54% 2.54%

Net Goodwill 16.10% 14.52% 21.91% 18.55% 17.74% 16.77% 15.99% 15.26% Net Other Intangibles 2.28% 1.82% 6.78% 5.31% 4.68% 4.07% 3.54% 3.06%

Deferred Tax Assets 3.46% 2.17% 2.66% 2.25% 2.15% 2.04% 1.94% 1.85% Deferred Charges 1.30% 1.35% 1.35% 1.40% 1.40% 1.40% 1.40% 1.40% Tangible Other Assets 0.72% 1.34% 2.16% 2.00% 2.00% 2.00% 2.00% 2.00% Total Assets 93.01% 87.03% 110.20% 100.67% 95.98% 91.32% 87.68% 85.56%

Liabilities & Shareholders' Equity ST Debt 2.62% 7.24% 3.50% 3.04% 3.07% 2.95% 2.88% 2.80% Current Portion of LT Debt 0.30% 1.94% 0.62% 0.15% 1.35% 2.48% 0.13% 0.00% Trade Payables 11.73% 11.79% 15.28% 14.50% 14.00% 13.50% 13.00% 13.00% Accrued Expenses 6.87% 6.64% 7.99% 6.95% 6.95% 6.95% 6.95% 6.95% Income Tax Payable 0.52% 0.17% 0.62% 0.48% 0.47% 0.48% 0.49% 0.49% Total Current Liabilities 21.84% 26.11% 29.38% 25.51% 24.64% 25.17% 25.68% 23.38%

Long-Term Debt 13.73% 8.62% 26.48% 26.16% 22.02% 16.91% 12.37% 12.05% Retirement-Related Liabilities 4.21% 3.93% 3.90% 3.04% 2.65% 2.27% 1.94% 1.63% Deferred Income Taxes 1.09% 0.56% 1.50% 1.27% 1.21% 1.15% 1.09% 1.04% Other Liabilities (excl. Deferred Income) 2.68% 2.91% 3.22% 3.00% 3.00% 3.00% 3.00% 3.00% Deferred Income 0.62% 0.46% 0.46% 0.46% 0.46% 0.46% 0.46% 0.46% Total Liabilities 44.17% 42.59% 64.94% 59.44% 54.00% 48.96% 44.55% 41.56%

Common Stock & APIC 15.12% 13.42% 13.86% 11.98% 11.46% 10.84% 10.33% 9.86% Retained Earnings 42.73% 44.76% 52.47% 50.93% 55.08% 58.58% 62.40% 66.21% Accumulated Other Comprehensive Income/(Loss) ‐0.19% ‐4.62% ‐7.61% ‐6.73% ‐6.72% ‐6.65% ‐6.63% ‐6.61% Treasury Stock ‐9.78% ‐10.02% ‐14.44% ‐15.87% ‐18.82% ‐21.44% ‐24.08% ‐26.64% Total Shareholders' Equity 47.88% 43.54% 44.29% 40.32% 41.00% 41.33% 42.02% 42.82%

Accumulated Minority Interest 0.97% 0.90% 0.97% 0.92% 0.98% 1.03% 1.10% 1.17% Total Equity 48.84% 44.44% 45.26% 41.24% 41.98% 42.36% 43.12% 44.00%

Total Liabilities & Shareholders' Equity 93.01% 87.03% 110.20% 100.67% 95.98% 91.32% 87.68% 85.56% BorgWarner Inc. Value Driver Estimation

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Marginal tax rate calculation Pre‐Tax Income 869.3 980.1 926.8 Tax at US statutory rate of 35% 304.3 343.0 324.4 State Taxes 2.3 2.6 8.2 Foreign rate differentia (73.4 (84.1 (92.6) 233.2 261.5 240.0 Marginal Tax Rate 27% 27% 26% 26% 26% 26% 26% 26%

NOPLAT Calculation

Net Revenue 7,436.6 8,305.1 8,023.1 9,477.5 9,910.2 10,478.7 10,994.3 11,515.7 ‐COGS 5,571.7 6,217.3 5,999.9 7,060.7 7,383.1 7,806.6 8,190.7 8,579.2 ‐S,G,&A Expense 336.5 362.7 354.6 448.7 469.2 496.1 520.6 545.2 ‐R&D Expense, net 303.2 336.2 307.4 361.7 378.2 399.9 419.6 439.5 ‐Stock Based Compensation Expense 36.6 32.1 40.2 46.9 49.1 51.9 54.4 57.0 ‐Other Expense 26.0 61.7 61.2 46.3 48.4 51.2 53.7 56.2 +Implied interest on operating leases 2.5 3.3 3.5 3.8 4.1 4.4 4.7 5.0 EBITA 1,165.1 1,298.4 1,263.3 1,516.9 1,586.3 1,677.3 1,759.9 1,843.5

Less: Adjusted taxes Income tax provision 218.3 292.6 280.4 267.4 273.4 294.1 311.9 329.9 +Tax shield on goodwill write‐of ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ +Tax shield on reorganization expens ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐Tax on equity in earnings of affiliate 11.7 12.6 10.4 10.9 11.5 12.1 12.7 13.4 +Tax shield on interest expense 9.2 9.7 15.6 32.3 37.9 33.6 29.8 26.0 ‐Tax on interest income 1.3 1.5 1.9 1.4 1.9 1.6 1.2 0.9 +Tax shield on implied interest on Op Leases 0.7 0.9 0.9 1.0 1.1 1.1 1.2 1.3 Adjusted Taxes 241.1 317.3 309.3 313.0 325.8 342.6 356.8 371.6

Plus: Change in Deferred Tax Liabilities LT deferred tax liability 281.5 266.5 441.1 458.7 477.1 496.2 516.0 536.7 LT deferred tax asset 522.7 491.0 534.5 542.8 551.1 559.6 568.3 577.1 Net deferred tax liabilities (241.2) (224.5) (93.4) (84.0) (74.0) (63.5) (52.3) (40.4) Change in deferred tax liabilities 6.8 16.7 131.1 9.4 10.0 10.6 11.2 11.9

NOPLAT 930.8 997.8 1,085.2 1,213.2 1,270.5 1,345.3 1,414.3 1,483.8

Invested Capital Calculation

Operating Current Assets "Normal" cash 148.7 166.1 160.5 189.5 198.2 209.6 219.9 230.3 Accounts receivable 1,248.5 1,443.5 1,665.0 1,895.5 1,882.9 1,886.2 1,869.0 1,957.7 Inventories 458.1 505.7 723.6 805.6 743.3 733.5 714.6 748.5 Prepaid Expenses 83.7 130.2 169.0 130.7 136.7 144.6 151.7 158.9 Total operating current assets 1,939.0 2,245.5 2,718.1 3,021.4 2,961.1 2,973.8 2,955.2 3,095.4

Operating Current Liabilities Accounts payable & accrued expenses 872.6 979.2 1,225.6 1,374.2 1,387.4 1,414.6 1,429.3 1,497.0 Income tax payable 38.5 14.2 49.4 45.9 46.9 50.4 53.5 56.6 Total operating current liabilities 911.1 993.4 1,275.0 1,420.1 1,434.3 1,465.1 1,482.7 1,553.6

Net Operating Working Capita 1,027.9 1,252.1 1,443.1 1,601.3 1,526.8 1,508.7 1,472.5 1,541.7

Plus: Net P,P,&E Gross P,P,&E 3,038.7 3,170.7 3,484.9 4,053.5 4,648.2 5,276.9 5,936.5 6,627.5 Accumulated depreciation 1,099.3 1,076.8 1,036.8 1,404.0 1,801.4 2,228.5 2,685.7 3,173.3 Net P,P,&E 1,939.4 2,093.9 2,448.1 2,649.5 2,846.7 3,048.4 3,250.8 3,454.1

Plus: Other LT Operating Assets Net other intangibles 169.5 151.1 543.8 503.4 464.2 426.3 388.9 351.9 Present value of operating leases 48.0 63.5 68.3 73.9 79.4 85.0 90.7 96.3 Tangible other assets 53.2 110.9 173.7 189.5 198.2 209.6 219.9 230.3 Total LT operating assets 270.7 325.5 785.8 766.9 741.8 720.9 699.5 678.6

Less: Other LT Operating Liabilities Other liabilities 199.3 241.4 258.5 284.7 297.7 314.8 330.3 346.0 Deferred revenue 46.2 37.8 36.6 44.0 46.0 48.7 51.1 53.5 Total LT operating liabilities 245.5 279.2 295.1 328.8 343.8 363.5 381.4 399.5

Invested Capital 2,992.5 3,392.3 4,381.8 4,688.9 4,771.6 4,914.6 5,041.4 5,275.0

Return on Invested Capital NOPLAT 930.8 997.8 1,085.2 1,213.2 1,270.5 1,345.3 1,414.3 1,483.8 Beg. Invested Capital 2,783.3 2,992.5 3,392.3 4,381.8 4,688.9 4,771.6 4,914.6 5,041.4 ROIC 33.44% 33.34% 31.99% 27.69% 27.09% 28.19% 28.78% 29.43%

Free Cash Flow NOPLAT 930.8 997.8 1,085.2 1,213.2 1,270.5 1,345.3 1,414.3 1,483.8 Change in Invested Capital 209.2 399.8 989.5 307.1 82.7 143.0 126.8 233.6 Free Cash Flow 721.6 598.0 95.7 906.2 1,187.8 1,202.3 1,287.5 1,250.1

Economic Profit Beg. Invested Capital 2,783.3 2,992.5 3,392.3 4,381.8 4,688.9 4,771.6 4,914.6 5,041.4 ROIC 33.44% 33.34% 31.99% 27.69% 27.09% 28.19% 28.78% 29.43% WACC 9% 9% 9% 9% 9% 9% 9% 9% Economic Profit 675.7 723.6 774.3 811.7 840.8 908.1 963.9 1,021.8 BorgWarner Inc. Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 3.00% CV ROIC 29.43% WACC 9.16% Cost of Equity 10.83%

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

DCF Model 12345 NOPLAT $ 1,213 $ 1,270 $ 1,345 $ 1,414 $ 1,484 Beginning Invested Capital 4,382 4,689 4,772 4,915 5,041 Ending Invested Capital 4,689 4,772 4,915 5,041 5,275 ∆ Invested Capital 307 83 143 127 234

ROIC 27.69% 27.09% 28.19% 28.78% 29.43%

Free Cash Flow 906 1,188 1,202 1,288 1,250 Continuing Value 21,619 PV of Free Cash Flow 830 997 924 907 15,224

Value of Operating Assets$ 18,882 + LT Investment ‐ Afiliate Companies 200 ‐ Total Debt (2,566) ‐ ESOP (27) ‐ PV of Operating Leases (68) Value of Equity 16,420 Shares Outstanding 219 Intrinsic Value per Share $ 74.87

Intrinsic Value (adj. for fraction of year) $ 76.90

EP Model Beginning Invested Capital $ 4,382 $ 4,689 $ 4,772 $ 4,915 $ 5,041 ROIC 27.69% 27.09% 28.19% 28.78% 29.43% WACC 9.16% 9.16% 9.16% 9.16% 9.16% Economic Profit 812 841 908 964 1,022 Continuing Value 16,578 PV of Economic Profit 744 706 698 679 11,674

PV of Economic Profit$ 14,500 + Beginning Invested Capital 4,382 Value of Operating Assets 18,882 + LT Investment ‐ Afiliate Companies 200 ‐ Total Debt (2,566) ‐ ESOP (27) ‐ PV of Operating Leases (68) Value of Equity 16,420 Shares Outstanding 219.32 Intrinsic Value per Share 74.87

Intrinsic Value (adj. for fraction of year) $ 76.90 BorgWarner Inc. Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E

EPS$ 3.32 $ 3.51 $ 3.91 $ 4.28 $ 4.66

Key Assumptions CV growth 3.00% CV ROE 16.00% Cost of Equity 10.83%

Future Cash Flows P/E Multiple (CV Year) 10.4 x EPS (CV Year) $ 4.66 Future Stock Price$ 48.33 Dividends Per Share$ 0.66 $ 0.70 $ 0.78 $ 0.86 $ 0.93 Future Cash Flows$ 0.66 $ 0.70 $ 0.78 $ 0.86 $ 49.26 Discounting Period 1 2 3 4 5

Discounted Cash Flows 0.60 0.57 0.57 0.57 29.45

Intrinsic Value$ 31.76

Intrinsic Value (adj. for fraction of year) $ 32.63 BorgWarner Inc. Relative Valuation Models EPS EPS Est. 5yr Ticker Company Price 2016E 2017E P/E 16 P/E 17 EPS gr. PEG 16 PEG 17 ALV Autoliv Inc. $107.00 $6.82 $7.54 15.7 14.2 0.073 2.15 1.94 SHA‐DE Schaeffler AG $15.36 $1.66 $1.78 9.3 8.6 0.075 1.23 1.15 TEN Tenneco Inc. $45.75 $5.50 $6.21 8.3 7.4 0.136 0.61 0.54 HLE‐DE Hella KGaA Hueck & Co $48.55 $3.60 $4.00 13.5 12.1 0.122 1.10 0.99 HON Honewell $107.98 $6.60 $7.25 16.4 14.9 0.092 1.78 1.62 POM‐FR Plastic Omnium SA $30.91 $2.32 $2.84 13.3 10.9 0.193 0.69 0.56 DLPH Delphi Automotive $75.02 $6.05 $6.98 12.4 10.7 0.142 0.87 0.76 CON Continental AG $213.13 $16.81 $18.14 12.7 11.7 0.062 2.04 1.89 DAN Dana Holding Corp $12.31 $1.70 $1.97 7.2 6.2 0.034 2.11 1.82 Average 12.1 10.8 1.4 1.3

BWA BorgWarner Inc. $38.40 $ 3.32 $ 3.51 11.6 10.9 0.114 1.0 1.0

Implied Value: Relative P/E (EPS16) $ 40.12 Source: FactSet Relative P/E (EPS17)$ 37.78 Euro/USD exchange rate = 0.91 (2/28/2016) PEG Ratio (EPS16)$ 52.84 Prices as of 2/26/2016 PEG Ratio (EPS17)$ 50.05 BorgWarner Inc. Weighted Average Cost of Capital (WACC) Estimation

Data as of: 3/3/2016 Beta Estimates (As of 2/25/2016 via Bloomberg) Current price: $38.40 Time Period Weekly Monthly 1 Yr 1.36 1.45 Risk free rate 2.61% 2 Yr 1.43 1.78 Equity risk premium 5% 3 Yr 1.43 1.72 Beta (avg. of monthly betas) 1.64 4 Yr 1.47 1.53 Cost of equity 10.83% 5 Yr 1.46 1.75 Average 1.43 1.64 Pre‐tax cost of debt 5.17% Marginal tax rate 26.00% After‐tax cost of debt 3.83%

Shares outstanding 219.32 Current price/share $38.40 MV of equity (E)$ 8,422.07

Short‐term debt 280.7 Current portion of LT debt 160.8 Lont‐term debt 2124.6 PV of operating leases 68 Total BV of debt (D)$ 2,634.39

MV of equity$ 8,422.07 BV of debt$ 2,634.39 Total value of firm (V)$ 11,056.46

WACC Calculation Cost of equity 10.83% *(E/V) 76.17% + After‐tax cost of debt 3.83% *(D/V) 23.83% WACC 9.16% BorgWarner Inc. Key Management Ratios

Fiscal Years Ending Dec. 31 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Liquidity Ratios Current Ratio Current Assets/Current Liabilities 1.12 1.54 1.72 1.37 1.33 1.51 1.40 1.24 1.11 1.16 Quick Ratio (Current Assets‐Inventory)/Current Liabilities 0.88 1.26 1.44 1.14 1.02 1.17 1.09 0.96 0.85 0.88 Cash Ratio Cash/Current Liabilities 0.19 0.45 0.58 0.37 0.25 0.34 0.27 0.19 0.14 0.10

Activity or Asset‐Management Ratios Receivables Turnover Total Revenue/Average Accounts Receivable 6.4 6.2 6.2 6.2 5.2 5.3 5.2 5.6 5.9 6.0 Average Collection Period 365/Receivables Turnover 56.6 59.2 58.8 59.2 70.7 68.6 69.6 65.6 62.3 60.6

Inventory Turnover COGS/Average Inventory 12.3 12.1 12.3 12.9 9.8 9.2 9.5 10.6 11.3 11.7 Days in Inventory (DIO) 365/Inventory Turnover 29.8 30.2 29.7 28.3 37.4 39.5 38.3 34.5 32.3 31.1

Payables Turnover COGS/Average Trade Payables 7.0 6.7 6.6 6.7 5.4 5.4 5.3 5.6 5.8 5.9 Days Payables Outstanding (DPO) 365/Payables Turnover 52.5 54.9 55.3 54.4 67.1 67.2 68.3 65.5 63.4 62.2

Cash Conversion Cycle Avg. Collection Period + DIO ‐ DPO 33.9 34.6 33.2 33.1 41.0 40.9 39.6 34.7 31.2 29.5

Financial Leverage Ratios Debt‐to‐Equity Total Liabilities/Total Equity 1.4 1.0 0.9 1.0 1.4 1.4 1.3 1.2 1.0 0.9 Debt‐to‐Total Capital Total Debt/(Total Debt+Total Equity) 0.6 0.5 0.5 0.5 0.6 0.6 0.6 0.5 0.5 0.5 Interest Coverage Operating Income/Interest Expense 10.7 18.7 25.2 26.5 15.6 8.9 7.9 9.3 11.0 13.1

Profitability Ratios Gross Margin Gross Income/ Total Revenue 19.8% 20.2% 21.1% 21.2% 21.2% 21.2% 21.1% 21.1% 21.0% 20.9% Operating Margin Operating Income/Total Revenue 11.2% 10.3% 11.6% 11.6% 11.7% 11.7% 11.6% 11.5% 11.5% 11.4%

Return on Average Equity (ROE) Net Income/Average Total Equity 23.1% 17.9% 18.4% 17.9% 16.7% 19.1% 18.1% 18.3% 18.1% 17.8% Return on Average Assets (ROA) Net Income/Average Total Assets 9.6% 8.1% 9.4% 9.3% 7.6% 7.8% 7.7% 8.2% 8.6% 9.0%

Payout Policy Ratios Current Dividend Yield Current Per Share Dividends/Current Price 1.59% Dividend Payout Ratio Total Dividends/Net Income N/A N/A 9.1% 17.7% 19.1% 20.0% 20.0% 20.0% 20.0% 20.0% Total Payout Ratio (Total Dividends+Share Repurchases)/Net Income 65.0% 59.1% 45.2% 39.0% 76.5% 68.0% 69.3% 68.6% 68.3% 68.0%