UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

QUARTERLY REPORT

(Mark One)



☑	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September 30, 2019~~March 31, 2020



☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number: 1-12162

BORGWARNER INC.

(Exact name of registrant as specified in its charter)



Delaware			13-3404508
State or other jurisdiction of			(I.R.S. Employer
Incorporation or organization			Identification No.)

3850 Hamlin Road,	Auburn Hills,	Michigan	48326
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code: (248) 754-9200

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	BWA	New York Stock Exchange
1.80% Senior Notes due 2022	BWA22	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting ~~company”~~company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. ~~(Check one):~~



Large accelerated filer	☑	Accelerated filer	☐	Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

As of ~~October 25, 2019,~~May 1, 2020, the registrant had ~~206,493,057~~207,309,940 shares of voting common stock outstanding.

BORGWARNER INC.

FORM 10-Q

THREE ~~AND NINE~~ MONTHS ENDED ~~SEPTEMBER 30, 2019~~MARCH 31, 2020

INDEX



	Page No.
PART I. Financial Information

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (Unaudited)	1

Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (Unaudited)	2

Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~ for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (Unaudited)	3

Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (Unaudited)	4

Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3528

Item 3. Quantitative and Qualitative Disclosures About Market Risk	4335

Item 4. Controls and Procedures	4336

PART II. Other Information

Item 1. Legal Proceedings	4437

Item 1A. Risk Factors	37

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4438

Item 6. Exhibits	4539

SIGNATURES	4640

CAUTIONARY STATEMENTS FOR FORWARD-LOOKING STATEMENTS

Statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) (including Management's Discussion and Analysis of Financial Condition and Results of Operations) may constitute forward-looking statements as contemplated by the 1995 Private Securities Litigation Reform Act (the “Act”) that are based on management's current outlook, expectations, estimates and projections. Words such as "anticipates," "believes," "continues," "could," "designed," "effect," "estimates," "evaluates," "expects," "forecasts," "goal," "guidance," "initiative," "intends," "may," "outlook," "plans," "potential," "predicts," "project," "pursue," "seek," "should," "target," "when," "will," "would," and variations of such words and similar expressions are intended to identify such forward-looking statements. Further, all statements, other than statements of historical fact contained or incorporated by reference in this Form 10-Q, that we expect or anticipate will or may occur in the future regarding our financial position, business strategy and measures to implement that strategy, including changes to operations, competitive strengths, goals, expansion and growth of our business and operations, plans, references to future success and other such matters, are forward-looking statements. Accounting estimates, such as those described under the heading "Critical Accounting Policies" in Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019 (“Form 10-K”), are inherently forward-looking. All forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the circumstances. Forward-looking statements are not guarantees of performance and the Company's actual results may differ materially from those expressed, projected, or implied in or by the forward-looking statements.

You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Forward-looking statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. These risks and uncertainties, among others, include: uncertainties regarding the extent and duration of impacts of matters associated with COVID-19/coronavirus; the failure to complete our anticipated acquisition of Delphi Technologies PLC (“Delphi Technologies”), as a result of, by way of example, the failure to: satisfy the conditions to the completion of the transaction, obtain the regulatory approvals required for the transaction on the terms expected or on the anticipated schedule, or obtain Delphi Technologies stockholder approval in a timely manner or otherwise; our dependence on automotive and truck production, both of which are highly cyclical; our reliance on major OEM customers; commodities availability and pricing; supply disruptions; fluctuations in interest rates and foreign currency exchange rates; availability of credit; our dependence on key management; our dependence on information systems; the uncertainty of the global economic environment; the outcome of existing or any future legal proceedings, including litigation with respect to various claims; future changes in laws and regulations, including, by way of example, tariffs,

in the countries in which we operate; and the other risks, including, by way of example, pandemics and quarantines, noted in reports that we file with the Securities and Exchange Commission, including Item 1A, "Risk Factors" in our most recently-filed Form ~~10-K.~~10-K as updated by Item 1A of this report. We do not undertake any obligation to update or announce publicly any updates to or revisions to any of the forward-looking statements in this Form 10-Q to reflect any change in our expectations or any change in events, conditions, circumstances, or assumptions underlying the statements.

This section and the discussions contained in Item 1A, "Risk Factors," and in Item 7, subheading "Critical Accounting Policies" in our most recently-filed Form 10-K are intended to provide meaningful cautionary statements for purposes of the safe harbor provisions of the Act. This should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties, including without limitation those not currently known to us or that we currently

believe are immaterial, also may impair our business, operations, liquidity, financial condition and prospects.

Use of Non-GAAP Financial Measures

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in millions)	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
ASSETS
Cash	$	916		$	739
Cash and cash equivalents							$	901		$	832
Receivables, net	1,983			1,988			1,735			1,921
Inventories, net	810			781			847			807
Prepayments and other current assets	278			250			258			276
Assets held for sale	—			47
Total current assets	3,987			3,805			3,741			3,836

Property, plant and equipment, net	2,812			2,904			2,839			2,925
Investments and other long-term receivables	694			592			315			318
Goodwill	1,818			1,853			1,818			1,842
Other intangible assets, net	404			439			383			402
Other non-current assets	484			502			406			379
Total assets	$	10,199		$	10,095		$	9,502		$	9,702

LIABILITIES AND EQUITY
Notes payable and other short-term debt	$	419		$	173		$	286		$	286
Accounts payable and accrued expenses	2,048			2,144			1,793			1,977
Income taxes payable	58			59			45			66
Liabilities held for sale	—			23
Total current liabilities	2,525			2,399			2,124			2,329

Long-term debt	1,656			1,941			1,664			1,674

Other non-current liabilities:
Asbestos-related liabilities	723			755
Retirement-related liabilities	273			298			302			306
Other	444			357			548			549
Total other non-current liabilities	1,440			1,410			850			855

Common stock	3			3			3			3
Capital in excess of par value	1,129			1,146			1,109			1,145
Retained earnings	5,757			5,336			6,036			5,942
Accumulated other comprehensive loss	(779		)	(674		)	(801		)	(727		)
Common stock held in treasury	(1,653		)	(1,585		)
Common stock held in treasury, at cost							(1,623		)	(1,657		)
Total BorgWarner Inc. stockholders’ equity	4,457			4,226			4,724			4,706
Noncontrolling interest	121			119			140			138
Total equity	4,578			4,345			4,864			4,844
Total liabilities and equity	$	10,199		$	10,095		$	9,502		$	9,702

See accompanying Notes to Condensed Consolidated Financial Statements.

BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in millions, except per share amounts)	2019			2018			2019			2018			2020			2019
Net sales	$	2,492		$	2,478		$	7,609		$	7,956		$	2,279		$	2,566
Cost of sales	1,968			1,963			6,053			6,270			1,832			2,047
Gross profit	524			515			1,556			1,686			447			519

Selling, general and administrative expenses	230			230			668			720			213			226
Other expense, net	18			7			63			42			45			29
Operating income	276			278			825			924			189			264

Equity in affiliates’ earnings, net of tax	(7		)	(15		)	(25		)	(38		)	(5		)	(9		)
Interest income	(4		)	(1		)	(9		)	(4		)	(2		)	(3		)
Interest expense	15			14			43			45			12			14
Other postretirement (income) expense	(1		)	(3		)	26			(8		)
Other postretirement income													(2		)	—
Earnings before income taxes and noncontrolling interest	273			283			790			929			186			262

Provision for income taxes	66			67			230			192			49			91
Net earnings	207			216			560			737			137			171
Net earnings attributable to the noncontrolling interest, net of tax	13			12			34			36			8			11
Net earnings attributable to BorgWarner Inc.	$	194		$	204		$	526		$	701		$	129		$	160

Earnings per share — basic	$	0.94		$	0.98		$	2.56		$	3.36		$	0.63		$	0.77

Earnings per share — diluted	$	0.94		$	0.98		$	2.54		$	3.34		$	0.63		$	0.77

Weighted average shares outstanding (millions):
Weighted average shares outstanding:
Basic	205.3			207.5			205.9			208.5			205.7			206.5
Diluted	206.3			208.7			206.8			209.8			206.2			207.1

See accompanying Notes to Condensed Consolidated Financial Statements.

BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ~~(LOSS)~~

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in millions)	2019			2018			2019			2018			2020			2019
Net earnings attributable to BorgWarner Inc.	$	194		$	204		$	526		$	701		$	129		$	160

Other comprehensive (loss) income
Other comprehensive income (loss)
Foreign currency translation adjustments*	(114		)	(43		)	(136		)	(124		)	(74		)	(9		)
Hedge instruments*	1			2			—			—			(2		)	—
Defined benefit retirement plans*	4			—			31			5
Defined benefit postretirement plans*													2			8
Total other comprehensive loss attributable to BorgWarner Inc.	(109		)	(41		)	(105		)	(119		)	(74		)	(1		)

Comprehensive income attributable to BorgWarner Inc.*	85			163			421			582			55			159

Net earnings attributable to noncontrolling interest, net of tax	13			12			34			36			8			11
Other comprehensive loss attributable to the noncontrolling interest*	(5		)	(3		)	(7		)	(7		)
Other comprehensive (loss) income attributable to the noncontrolling interest*													(3		)	1
Comprehensive income	$	93		$	172		$	448		$	611		$	60		$	171


*	Net of income taxes.

See accompanying Notes to Condensed Consolidated Financial Statements.

BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended September 30,						Three Months Ended March 31,
(in millions)	2019			2018			2020			2019
OPERATING
Net earnings	$	560		$	737		$	137		$	171
Adjustments to reconcile net earnings to net cash flows from operations:
Depreciation and amortization	324			326			112			107
Stock-based compensation expense	30			38			10			8
Asset impairment							9			—
Restructuring expense, net of cash paid	14			35			2			7
Pension settlement loss	26			—
Deferred income tax provision (benefit)	28			(37		)
Deferred income tax benefit							(5		)	(2		)
Tax reform adjustments to provision for income taxes	16			—			—			22
Equity in affiliates’ earnings, net of dividends received, and other	9			(22		)	(4		)	6
Net earnings adjusted for non-cash charges to operations	1,007			1,077			261			319
Changes in assets and liabilities:
Receivables	(76		)	(111		)	152			(95		)
Inventories	(56		)	(80		)	(58		)	(31		)
Prepayments and other current assets	(24		)	(43		)	(8		)	(23		)
Accounts payable and accrued expenses	(18		)	(201		)	(96		)	(120		)
Prepaid taxes and income taxes payable	15			(54		)	8			(12		)
Other assets and liabilities	(24		)	(32		)	4			2
Net cash provided by operating activities	824			556			263			40

INVESTING
Capital expenditures, including tooling outlays	(346		)	(394		)	(117		)	(117		)
Payments for business acquired	(10		)	—
Payments for business acquired, net of cash acquired							(2		)	(10		)
Proceeds from settlement of net investment hedges							1			—
Proceeds from sale of business, net of cash divested	24			—			—			23
Payments for investments in equity securities	(52		)	(4		)	—			(1		)
Proceeds from asset disposals and other	4			5
Proceeds from asset disposals and other, net							(2		)	1
Net cash used in investing activities	(380		)	(393		)	(120		)	(104		)

FINANCING
Net decrease in notes payable	—			(30		)
Additions to long-term debt, net of debt issuance costs	45			20
Repayments of long-term debt, including current portion	(54		)	(15		)
Additions to debt, net of debt issuance costs							13			11
Repayments of debt, including current portion							(14		)	(26		)
Payments for purchase of treasury stock	(100		)	(150		)	—			(67		)
Payments for stock-based compensation items	(15		)	(15		)	(12		)	(14		)
Contributions from noncontrolling interest stockholders	4			—
Dividends paid to BorgWarner stockholders	(105		)	(106		)	(35		)	(35		)
Dividends paid to noncontrolling stockholders	(23		)	(27		)	(14		)	(22		)
Net cash used in financing activities	(248		)	(323		)	(62		)	(153		)
Effect of exchange rate changes on cash	(19		)	(23		)	(12		)	(5		)
Net increase (decrease) in cash	177			(183		)
Cash and restricted cash at beginning of year	739			545
Cash and restricted cash at end of period	$	916		$	362
Net increase (decrease) in cash and cash equivalents							69			(222		)
Cash and cash equivalents, including restricted cash at beginning of year							832			739
Cash and cash equivalents, including restricted cash at end of period							$	901		$	517

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest	$	58		$	67		$	29		$	26
Income taxes, net of refunds	$	148		$	267		$	43		$	68

See accompanying Notes to Condensed Consolidated Financial Statements.

BORGWARNER INC. AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(1) Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements of BorgWarner Inc. and Consolidated Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes necessary for a comprehensive presentation of financial position, results of operations and cash flow activity required by GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments necessary for a fair statement of results have been included. Operating results for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020. The balance sheet as of December 31, ~~2018~~2019 was derived from the audited financial statements as of that date. For further information, refer to the Consolidated Financial Statements and Footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Certain prior period amounts have been reclassified to conform to current period presentation. Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and accompanying notes, as well as the amounts of revenues and expenses reported during the periods covered by those financial statements and accompanying notes. Actual results could differ from these estimates.

A novel strain of COVID-19/coronavirus was first identified in Wuhan, China in December 2019 and subsequently declared a pandemic by the World Health Organization on March 11, 2020. To date, COVID-19/coronavirus has surfaced in nearly all regions around the world and resulted in travel restrictions, closing of borders and business slowdowns or shutdowns in affected areas. As a result, COVID-19/coronavirus has impacted the Company's business globally. Many OEMs have announced that they have suspended manufacturing operations, particularly in North America and Europe, on a temporary basis due to market conditions and matters associated with COVID-19/coronavirus. Additionally, as a global manufacturer, the Company is responding to shelter-in-place and similar government orders in various locations around the world, including throughout the United States and Europe, resulting in the temporary closures of the Company's manufacturing and assembly facilities.

The Company assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited to, its allowance for credit losses, the carrying value of the Company's goodwill, intangible assets, and other long-lived assets, and valuation allowances in context with the information reasonably available to the Company and the unknown future impacts of COVID-19/coronavirus as of March 31, 2020 and through the date of this report. As a result of these assessments, there were no impairments or material increases in credit allowances or valuation allowances that impacted the Company's Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2020. However, the Company's future assessment of the magnitude and duration of COVID-19/coronavirus, as well as other factors, could result in material impacts to the Consolidated Financial Statements in future reporting periods.

(2) New Accounting Pronouncements

Recently Adopted Accounting Standards

In ~~February 2016,~~March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards

Update ("ASU") No. ~~2016-02,~~2020-4, "~~Leases~~Reference Rate Reform (Topic ~~842)~~848)." ~~Under~~It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These optional expedients and exceptions allow a company to choose not to apply certain modification accounting requirements under GAAP to contracts affected by reference rate reform. A company that makes this ~~guidance, a lease is a contract, or part of a contract, that conveys the right to control the use of an identified asset~~election would present and account for a ~~period~~modified contract as a continuation of ~~time~~the existing contract. It also enables a company to continue to apply hedge accounting for hedging relationships in ~~exchange for consideration. Lessees are required~~which the critical terms change due to ~~recognize a right-of-use asset and a lease liability for leases with a term of more than 12 months, including operating leases defined under previous GAAP.~~rate reform. This guidance was effective ~~for interim~~March 12, 2020 and ~~annual reporting periods beginning after~~provides relief to contract modifications through December ~~15, 2018.~~

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

~~The majority of the Company’s global lease portfolio represents leases of real estate, such as manufacturing facilities, warehouses, and office buildings, while the remainder represents leases of~~

personal property, such as vehicle leases, manufacturing and IT equipment. The Company determines whether a contract is or contains a lease at contract inception. The majority of the Company's lease arrangements are comprised of fixed payments and a limited number of these arrangements include a variable payment component based on certain index fluctuations.

Adoption of ASC 842 resulted in the recording of lease right-of-use assets ("lease assets") and lease liabilities of approximately $104 million and $103 million, respectively, as of January 1, 2019. The adoption did not impact consolidated net earnings and had no impact on cash flows.

~~The changes made to our Consolidated Balance Sheet as of January 1, 2019 for the adoption of ASC 842 were as follows:~~

(in millions) Balance at December 31, 2018 Adjustments due to ASC 842 Balance at January 1, 2019
Other non-current assets $ 502
$ 104
$ 606
Accounts payable and accrued expenses $ 2,144
$ 23
$ 2,167
Other non-current liabilities $ 357
$ 80
$ 437

~~In February 2018, the FASB issued ASU No. 2018-07,~~ ~~"Compensation - Stock Compensation (Topic 718)."~~ It expands the scope of the employee share-based payments guidance, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. This guidance is effective for interim and annual periods beginning after December 15, 2018.31, 2022. The Company adopted this guidance ~~as of January 1, 2019,~~on March 12, 2020, and there was no impact to the ~~consolidated financial statements.~~Condensed Consolidated Financial Statements.

~~Accounting Standards Not Yet Adopted~~

In August 2018, the FASB issued ASU No. 2018-15, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)." It requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance (Subtopic 350-40). This guidance iswas effective for interim and annual periods beginning after December 15, ~~2019, and early adoption is permitted.~~2019. The Company ~~does not expect~~adopted this guidance ~~to have a material~~as of January 1, 2020, and the impact on its ~~consolidated financial statements.~~

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

In August 2018, the FASB issued ASU No. 2018-13, "Fair Value Measurement (Topic 820)." It removes disclosure requirements on fair value measurements including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. It also amends and clarifies certain disclosures and adds new disclosure requirements including the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of significant unobservable inputs used to develop

Level 3 fair value measurements. This guidance iswas effective for interim and annual periods beginning after December 15, 2019. ~~An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until the effective date.~~ The Company ~~does not expect~~adopted this guidance as of January 1, 2020, and there was no impact to ~~have a material impact on its consolidated financial statements.~~the Condensed Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)." It replaces the current incurred loss impairment method with a new method that reflects expected credit losses. Under this new model an entity would recognize an impairment allowance equal to its current estimate of credit losses on financial assets measured at amortized cost. This guidance iswas effective for ~~fiscal years~~annual periods beginning after December 15, ~~2019, with~~2019. The Company adopted this guidance as of January 1, 2020, and the impact on its Condensed Consolidated Financial Statements was immaterial.

Accounting Standards Not Yet Adopted

In January 2020, the FASB issued ASU No. 2020-1, "Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)." It clarifies the interaction between the accounting for equity securities, equity method investments, and certain derivative instruments. Specifically, for the purposes of applying the ASC Topic 321 measurement alternative, a company should consider observable transactions immediately before applying or upon discontinuing the equity method. Additionally, when determining the accounting for certain forward contracts and purchased options entered into to purchase securities, a company should not consider if the underlying securities would be accounted for under the equity method (ASC Topic 323) or fair value option (ASC Topic 825). This guidance is effective for interim and annual periods beginning after December 15, 2020, and early adoption is permitted. The Company is still evaluating the impact of this guidance on its Condensed Consolidated Financial Statements.

In December 2019, the FASB issued ASU No. 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." It removes certain exceptions to the general principles in Accounting

Standards Codification ("ASC") Topic 740 and improve consistent application of and simplify GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. This guidance is effective for interim and annual reporting periods beginning after December 15, 2020. The Company is currently evaluating the impact of this guidance ~~will have~~ on its ~~consolidated financial statements.~~Condensed Consolidated Financial Statements.

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

(3) Revenue from Contracts with Customers

The Company manufactures and sells products, primarily to OEMs of light vehicles and, to a lesser extent, to other OEMs of commercial vehicles, off-highway vehicles, certain tier one vehicle systems suppliers and into the aftermarket. Although the Company may enter into long-term supply arrangements with its major customers, the prices and volumes are not fixed over the life of the arrangements, and a contract does not exist for purposes of applying ASC Topic 606, "Revenue from Contracts with Customers", until volumes are contractually known. Revenue is recognized when performance obligations under the terms of a contract are satisfied, which generally occurs with the transfer of control of the Company's products. For most of the Company's products, transfer of control occurs upon shipment or delivery; however, a limited number of the Company's customer arrangements for highly customized products with no alternative use provide the Company with the right to payment during the production process. As a result, for these limited arrangements, revenue is recognized as goods are produced and control transfers to the customer using the input cost-to-cost method. The Company recorded a contract asset of $9 million and $10 million ~~and $11 million~~ at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, for these arrangements. These amounts are reflected in Prepayments and other current assets in the Company's Condensed Consolidated Balance ~~Sheet.~~Sheets.

Revenue is measured at the amount of consideration the Company expects to receive in exchange for transferring the goods. The Company has a limited number of arrangements with customers where the price paid by the customer is dependent on the volume of product purchased over the term of the arrangement. In other limited arrangements, the Company will provide a rebate to customers based on the volume of products purchased during the course of the arrangement. The Company estimates the volumes to be sold over the term of the arrangement and recognizes revenue based on the estimated amount of consideration to be received from these arrangements. As a result of these arrangements, the Company recognized a liability of $2 million and $6 million at September 30, 2019 and December 31, 2018. These amounts are reflected in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheet.

The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 90 days. The Company has evaluated the terms of its arrangements and determined that they do not contain significant financing components. The Company provides warranties on some of its products. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 9, "Product Warranty," to the Condensed Consolidated Financial Statements for more information. Shipping and handling fees billed to customers are included in sales, while costs of shipping and handling are included in cost of sales. The Company has elected to apply the accounting policy election available under ASC Topic 606 and accounts for shipping and handling activities as a fulfillment cost.

In limited instances, certain customers have provided payments in advance of receiving related products, typically at the onset of an arrangement prior to the beginning of production. These contract liabilities are reflected as Accounts payable and accrued expenses and Other non-current liabilities in the

Condensed Consolidated Balance ~~Sheet~~Sheets and were ~~$12 million and $14 million at September 30, 2019 and~~ $13 million and ~~$17~~$9 million at March 31, 2020 and $10 million and $12 million at December 31, ~~2018,~~2019, respectively. These amounts are reflected as revenue over the term of the arrangement (typically 3 to 7 years) as the underlying products are shipped.

The Company continually seeks business development opportunities and at times provides customer incentives for new program awards. The Company evaluates the underlying economics of each amount of consideration payable to a customer to determine the proper accounting by understanding the reasons for the payment, the rights and obligations resulting from the payment, the nature of the promise in the contract, and other relevant facts and circumstances. When the Company determines that the payments are incremental and incurred only if the new business is obtained and expects to recover these amounts from the customer over the term of the new business arrangement, the Company capitalizes these amounts. The Company recognizes a reduction to revenue, when the products that the upfront payments are related to, are transferred to the customer based on the total amount of products expected to be sold over the term of the arrangement (generally 3 to 7 years). The Company evaluates the amounts capitalized each period end for recoverability and expenses any amounts that are no longer expected to be recovered over the term of the business arrangement. The Company had ~~$36~~$38 million and ~~$29~~$37 million recorded in Prepayments and other current assets in the Condensed Consolidated Balance ~~Sheet~~Sheets at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. The Company had ~~$178~~$171 million and ~~$187~~$180 million recorded in Other non-current assets in the Condensed Consolidated Balance ~~Sheet~~Sheets at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively.

The Company's business is comprised of 2 reporting segments: Engine and Drivetrain. Refer to Note ~~21,~~20, "Reporting Segments," to the Condensed Consolidated Financial Statements for more information. The following table represents a disaggregation of revenue from contracts with customers by segment and region:

Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
(In millions) Engine Drivetrain Total Engine Drivetrain Total
North America $ 397
$ 456
$ 853
$ 392
$ 452
$ 844
Europe 716
203
919
690
209
899
Asia 357
324
681
386
308
694
Other 30
9
39
33
8
41
Total $ 1,500
$ 992
$ 2,492
$ 1,501
$ 977
$ 2,478


													Three Months Ended March 31,
	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018						2020						2019
(In millions)	Engine		Drivetrain		Total		Engine		Drivetrain		Total		Engine		Drivetrain		Total		Engine		Drivetrain		Total
North America	$	1,216	$	1,362	$	2,578	$	1,186	$	1,341	$	2,527	$	387	$	423	$	810	$	412	$	445	$	857
Europe	2,277		641		2,918		2,343		748		3,091		711		191		902		801		227		1,028
Asia	1,053		944		1,997		1,238		982		2,220		291		242		533		340		303		643
Other	91		25		116		95		23		118		30		4		34		31		7		38
Total	$	4,637	$	2,972	$	7,609	$	4,862	$	3,094	$	7,956	$	1,419	$	860	$	2,279	$	1,584	$	982	$	2,566

(4) Research and Development Expenditures

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

acceptance of a prototype component by the customer or upon completion of the performance obligation, as stated in the respective customer agreement.

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in millions)	2019			2018			2019			2018			2020			2019
Gross R&D expenditures	$	123		$	122		$	372		$	386		$	118		$	121
Customer reimbursements	(21		)	(14		)	(53		)	(49		)	(9		)	(17		)
Net R&D expenditures	$	102		$	108		$	319		$	337		$	109		$	104

The Company has contracts with several customers at the Company's various R&D locations. None of the Company's R&D-related customer reimbursements under these contracts exceeded 5% of net R&D expenditures in any of the periods presented.

(5) Other Expense, ~~net~~Net

Items included in ~~other~~Other expense, net consist of:


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
(in millions)	2019		2018		2019		2018			2020		2019
Merger, acquisition and divestiture expense										$	21	$	1
Restructuring expense	$	14	$	5	$	41	$	44		15		14
Merger, acquisition and divestiture expense	4		2		10		5
Other expense (income)	—		—		12		(7		)
Asset impairment										9		—
Unfavorable arbitration loss										—		14
Other expense, net	$	18	$	7	$	63	$	42		$	45	$	29

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, the Company recorded $21 million and $1 million, respectively, of merger, acquisition and divestiture expense, primarily related to professional fees. The expense for 2020 primarily related to the Company's anticipated acquisition of Delphi Technologies PLC and the expense for 2019 primarily related to divestiture activities for non-core pipe and thermostat product lines.

During the three months ended March 31, 2020, the Company recorded restructuring expense of ~~$14~~$15 million, ~~and $41 million, respectively.~~primarily related to actions to reduce structural costs. During ~~the~~the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, the ~~Company~~Company recorded restructuring expense of ~~$5 million and $44 million, respectively.~~$14 million. This restructuring expense primarily ~~relates~~related to Drivetrain and Engine segment actions designed to improve future profitability and competitiveness. Refer to Note ~~19,~~18, "Restructuring," to the Condensed Consolidated Financial Statements for more information.

During the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, the Company recorded ~~expenses, primarily professional fees, related~~a $9 million asset impairment cost to ~~the Company's review of strategic acquisition and divestiture targets, including the 20% equity interest~~record its investment in Romeo ~~Power Technology and the divestiture activities for the non-core pipe and thermostat product lines,~~Systems, Inc. ("Romeo") at its fair value of $4$41 million and $10 million, respectively. During the three and nine months ended September 30, 2018, the Company recorded expenses of $2 million and $5 million, respectively, primarily related to professional fees associated with divestiture activities for the non-core pipe and thermostat product lines.at March 31, 2020. Refer to Note ~~23, "Assets~~21, "Recent Transactions and ~~Liabilities Held For Sale,~~Events," to the Condensed Consolidated Financial Statements for more information.

During the ~~first nine~~three months ofended March 31, 2019, the Company recorded $14 million of expense related to the receipt of a final unfavorable arbitration decision associated with the resolution of a matter related to a previous acquisition.

~~During the first nine months of 2018, the Company recorded a gain of approximately $4 million related to the settlement of a commercial contract for an entity acquired in the 2015 Remy acquisition.~~

(6) Income Taxes

The Company's provision for income taxes is based upon an estimated annual tax rate for the year applied to federal, state and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.

The Company's effective tax rate for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 was 26%. This rate includes reductions in income tax expense of $4 million related to restructuring expense and $12 million for other one-time adjustments. The other one-time adjustments primarily relate to tax law changes in India that were enacted during the quarter and the release of certain unrecognized tax benefits due to the closure of an audit.

The Company's effective tax rate for the three months ended March 31, 2019 was ~~29.2%~~34.7%. This rate includes reductions of income tax expense of~~$11~~ $3 million related to restructuring expense $6and $5 million ~~related to~~for other ~~postretirement expense, and $13 million related to other~~ one-time tax adjustments. This rate also includes an increase in income tax expense of $22 million due to the U.S. Department of the Treasury's issuance of the final regulations in the first quarter of 2019 related to the calculation of the one-time transition ~~tax.~~

~~The Company's effective~~ tax rate for the nine months ended September 30, 2018 was 20.7%. This rate includes income tax expense of $1 million related to a commercial settlement gain, and reductions of income tax expense of $10 million related to restructuring expense, $20 million related to adjustments to measurement period provisional estimates associated with the Tax Cuts and Jobs Act of 2017, $22 million related to an increase to our deferred tax asset due to the Company's ability to record a tax benefit for certain foreign tax credits now available due to actions the Company took during the year, and $11 million for other one-time tax adjustments, primarily due to changes in tax filing positions.2017.

The annual effective tax rates differ from the U.S. statutory rate primarily due to foreign rates which differ from those in the U.S., U.S. taxes on foreign earnings, the realization of certain business tax credits, including foreign tax credits, and favorable permanent differences between book and tax treatment for certain items, including equity in affiliates' earnings.

(7) Inventories, ~~net~~Net

Certain U.S. inventories are measured by the last-in, first-out (“LIFO”) method at the lower of cost or market, while other U.S. and foreign operations use the first-in, first-out (“FIFO”) or average-cost methods at the lower of cost and net realizable value. Inventories, net consisted of the following:


	September 30,			December 31,			March 31,			December 31,
(in millions)	2019			2018			2020			2019
Raw material and supplies	$	515		$	485		$	536		$	502
Work in progress	114			114			114			113
Finished goods	195			199			211			207
FIFO inventories	824			798			861			822
LIFO reserve	(14		)	(17		)	(14		)	(15		)
Inventories, net	$	810		$	781		$	847		$	807

(8) Property, Plant and Equipment, ~~net~~Net


	September 30,			December 31,			March 31,			December 31,
(in millions)	2019			2018			2020			2019
Land, land use rights and buildings	$	843		$	871		$	869		$	860
Machinery and equipment	2,894			2,851			3,056			2,971
Construction in progress							334			360
Finance lease assets	2			2			—			1
Construction in progress	326			426
Total property, plant and equipment, gross	4,065			4,150			4,259			4,192
Less: accumulated depreciation	(1,480		)	(1,473		)	(1,657		)	(1,513		)
Property, plant and equipment, net, excluding tooling	2,585			2,677			2,602			2,679
Tooling, net of amortization	227			227			237			246
Property, plant and equipment, net	$	2,812		$	2,904		$	2,839		$	2,925

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, accounts payable of ~~$60~~$55 million and ~~$104~~$102 million, respectively, were related to property, plant and equipment purchases.

Interest costs capitalized for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ were ~~$13~~$4 million and ~~$17~~$5 million, respectively.

(9) Product Warranty

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

The following table summarizes the activity in the product warranty accrual accounts:


(in millions)	2019			2018			2020			2019
Beginning balance, January 1	$	103		$	112		$	116		$	103
Provisions for current period sales	36			38			15			15
Adjustments of prior estimates	9			9			5			7
Payments	(43		)	(45		)	(18		)	(18		)
Translation adjustment and other	(4		)	(4		)
Ending balance, September 30	$	101		$	110
Translation adjustment							(2		)	—
Ending balance, March 31							$	116		$	107

The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:


	September 30,		December 31,		March 31,		December 31,
(in millions)	2019		2018		2020		2019
Accounts payable and accrued expenses	$	54	$	56	$	64	$	63
Other non-current liabilities	47		47		52		53
Total product warranty liability	$	101	$	103	$	116	$	116

(10) Notes Payable and Long-Term Debt

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had short-term and long-term debt outstanding as follows:


	September 30,		December 31,		March 31,		December 31,
(in millions)	2019		2018		2020		2019
Short-term debt
Short-term borrowings	$	33	$	33	$	34	$	34

Long-term debt
8.00% Senior notes due 10/01/19 ($134 million par value)	134		135
4.625% Senior notes due 09/15/20 ($250 million par value)	251		251		251		251
1.80% Senior notes due 11/7/22 (€500 million par value)	542		570		549		558
3.375% Senior notes due 03/15/25 ($500 million par value)	497		497		497		497
7.125% Senior notes due 02/15/29 ($121 million par value)	119		119		119		119
4.375% Senior notes due 03/15/45 ($500 million par value)	494		494		494		494
Term loan facilities and other	5		15		6		7
Total long-term debt	2,042		2,081		1,916		1,926
Less: current portion	386		140		252		252
Long-term debt, net of current portion	$	1,656	$	1,941	$	1,664	$	1,674

In July 2016, the Company terminated interest rate swaps which had the effect of converting $384 million of fixed rate notes to variable rates. The gain on the termination was recorded as an increase to the notes and is being amortized as a reduction to interest expense over the remaining terms of the notes. The unamortized gain related to these swap terminations was $1 million and $2 million as of September 30, 2019 and December 31, 2018, respectively, on the 4.625% notes.

The Company may utilize uncommitted lines of credit for short-term working capital requirements. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had ~~$33~~$34 million in borrowings under these facilities, which are classified ~~as notes~~in Notes payable and short-term debt on the Condensed Consolidated Balance ~~Sheet.~~Sheets.

The weighted average interest rate on short-term borrowings outstanding as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 was ~~3.3%~~2.3% and ~~4.3%~~2.5%, respectively. The weighted average interest rate on all borrowings outstanding, including the effects of outstanding swaps, as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 was ~~3.4%~~2.8%.

~~The~~On March 13, 2020, the Company ~~has a $1.2 billion~~amended its multi-currency revolving credit facility ~~which includes a feature that~~by increasing the size of the facility from $1.2 billion to $1.5 billion and by extending the maturity until March 13, 2025. The multi-currency revolving credit agreement provides for the facility to automatically increase to $2.0 billion upon the closing of the anticipated acquisition of Delphi Technologies PLC. Additionally, the agreement allows the ~~Company's~~Company the ability to increase the facility ~~to be increased to $1.5~~by $1.0 billion with bank group approval. The ~~facility provides for borrowings through June 29, 2022~~. ~~The Company has~~credit agreement contains customary events of default and one key financial covenant ~~as part of the credit agreement~~ which is a debt to Earnings Before Interest, Taxes, Depreciation and Amortization ("~~EBITDA ")~~EBITDA") ratio. The Company was in compliance with the financial covenant at ~~September 30, 2019.~~March 31, 2020. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had no outstanding borrowings under this facility.

The Company's commercial paper program allows the Company to issue short-term, unsecured commercial paper notes up to a maximum aggregate principal amount outstanding, ofwhich increased from $1.2 ~~billion.~~billion to $1.5 billion effective March 13, 2020. Under this program, the Company may issue notes from time to time and use the proceeds for general corporate purposes. The Company had no outstanding borrowings under this program as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.

The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed ~~$1.2~~$1.5 billion.

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the estimated fair values of the Company’s senior unsecured notes totaled ~~$2,141~~$1,945 million and ~~$2,058~~$2,025 million, respectively. The estimated fair values were ~~$104~~

$35 million ~~more~~higher than their carrying value at ~~September 30, 2019~~March 31, 2020 and $8$106 million ~~less~~higher than their carrying value at December 31, ~~2018.~~2019. Fair market values of the senior unsecured notes are developed using observable values for similar debt instruments, which are considered Level 2 inputs as defined by ASC Topic 820. The carrying values of the Company's multi-currency revolving credit facility and commercial paper program approximates fair value. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.

The Company had outstanding letters of credit of $28 million ~~and $43 million~~ at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, respectively.~~2019. The letters of credit typically act as guarantees of payment to certain third parties in accordance with specified terms and conditions.

(11) Fair Value Measurements

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


Level 1:	Observable inputs such as quoted prices for identical assets or liabilities in active markets;


Level 2:	Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and


Level 3:	Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

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


A.	Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.


B.	Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).


C.	Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).

The following tables classify assets and liabilities measured at fair value on a recurring basis as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


			Basis of fair value measurements									Basis of fair value measurements
(in millions)	Balance at September 30, 2019		Quoted prices in active markets for identical items (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Valuation technique	Balance at March 31, 2020		Quoted prices in active markets for identical items (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Valuation technique
Assets:
Foreign currency contracts	$	2	$	—	$	2	$	—	A	$	3	$	—	$	3	$	—	A
Other long-term receivables (insurance settlement agreement note receivable)	$	35	$	—	$	35	$	—	C
Interest rate swaption contracts										$	1	$	—	$	1	$	—	A
Net investment hedge contracts	$	28	$	—	$	28	$	—	A	$	30	$	—	$	30	$	—	A
Liabilities:
Foreign currency contracts	$	3	$	—	$	3	$	—	A	$	4	$	—	$	4	$	—	A


			Basis of fair value measurements									Basis of fair value measurements
(in millions)	Balance at December 31, 2018		Quoted prices in active markets for identical items (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Valuation technique	Balance at December 31, 2019		Quoted prices in active markets for identical items (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Valuation technique
Assets:
Foreign currency contracts	$	3	$	—	$	3	$	—	A
Other long-term receivables (insurance settlement agreement note receivable)	$	34	$	—	$	34	$	—	C
Net investment hedge contracts	$	12	$	—	$	12	$	—	A	$	3	$	—	$	3	$	—	A
Liabilities:
Foreign currency contracts	$	2	$	—	$	2	$	—	A	$	1	$	—	$	1	$	—	A
Net investment hedge contracts										$	8	$	—	$	8	$	—	A

(12) Financial Instruments

The Company’s financial instruments include cash and cash equivalents, marketable ~~securities.~~securities and accounts receivable. Due to the short-term nature of these instruments, their book value approximates their fair value. The Company’s financial instruments may include long-term debt, interest rate and cross-currency swaps and options, commodity derivative contracts and foreign currency derivative contracts. All derivative contracts are placed with counterparties that have an S&P, or equivalent, investment grade credit rating at the time of the contracts’ placement. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had no derivative contracts that contained credit risk related contingent features.

The Company uses certain commodity derivative contracts to protect against commodity price changes related to forecasted raw material and component purchases. The Company primarily utilizes forward and option contracts, which are designated as cash flow hedges. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the following commodity derivative contracts were outstanding:

Commodity derivative contracts

Commodity

Volume hedged September 30, 2019

Volume hedged December 31, 2018

Units of measure

Duration

Volume hedged March 31, 2020

Volume hedged December 31, 2019

Units of measure

Duration

Copper

261

257

Metric Tons

Dec - 20

148

203

Metric Tons

Dec - 20

The Company manages its interest rate risk by balancing its exposure to fixed and variable rates while attempting to optimize its interest costs. The Company selectively uses interest rate swaps and options to reduce market value risk associated with changes in interest rates (fair value hedges and cash flow hedges). At ~~September 30, 2019 and~~ December 31, ~~2018,~~2019, the Company had no outstanding interest rate swaps.

On February 19, 2020, the Company executed a €750 million notional interest rate swaption contract expiring June 30, 2020, and designated this contract as a cash flow hedge, to mitigate against interest rate fluctuations on anticipated debt issuance. The premium cost for this contract is immaterial. For the three months ended March 31, 2020, the Company recorded a deferred gain of $1 million in accumulated other comprehensive income (loss) ("AOCI") related to this swaption.

The Company uses foreign currency forward and option contracts to protect against exchange rate movements for forecasted cash flows, including capital expenditures, purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. In addition, the Company uses foreign currency forward contracts to hedge exposure associated with ~~our~~its net investment in certain foreign operations (net investment hedges). The Company has also designated its ~~Euro denominated~~Euro-denominated debt as a net investment hedge of the Company's investment in a European ~~subsidiary.~~subsidiaries. Foreign currency derivative contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for the operating units’ local currency. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the following foreign currency derivative contracts were outstanding:

									Foreign currency derivatives (in millions)
Functional currency	Traded currency	Notional in traded currency September 30, 2019	Notional in traded currency December 31, 2018	Ending Duration	Traded currency	Notional in traded currency March 31, 2020	Notional in traded currency December 31, 2019	Ending Duration
Brazilian real	Euro	2	4	Jan - 20
Brazilian real	US dollar	2	5	Dec - 19	Euro	—	1	Mar - 20
British pound	Euro	17	—	Mar - 20	Euro	—	9	Mar - 20
British pound	US dollar	6	—	Mar - 20	US dollar	—	4	Mar - 20
Chinese renminbi	US dollar	10	—	Dec - 19	US dollar	5	2	Dec - 20
Euro	British pound	1	7	Dec - 19	British pound	2	—	Jan - 21
Euro	Chinese renminbi	11	—	Dec - 19	Chinese renminbi	22	—	Oct - 20
Euro	Japanese yen	131	—	Dec - 19	Japanese yen	290	383	Dec - 20
Euro	Polish zloty	7	—	Dec - 19	Polish zloty	165	—	Dec - 20
Euro	Swedish krona	540	540	Jun - 20	US dollar	11	18	Dec - 20
Euro	US dollar	9	19	Dec - 20
Indian rupee					Japanese yen	78	—	Jul - 20
Indian rupee					US dollar	3	—	May - 20
Japanese yen	Chinese renminbi	23	89	Dec - 19	Chinese renminbi	26	—	Jul - 20
Japanese yen	Korean won	1,359	5,785	Dec - 19	Korean won	3,705	—	Dec - 20
Japanese yen	US dollar	1	3	Dec - 19	US dollar	1	—	Jul - 20
Korean won	Euro	2	6	Dec - 19	Euro	10	13	Dec - 20
Korean won	Japanese yen	54	266	Dec - 19	Japanese yen	530	409	Dec - 20
Korean won	US dollar	7	7	Dec - 19	US dollar	38	4	Dec - 20
Swedish krona	Euro	17	56	Jan - 20	Euro	—	3	Jan - 20
US dollar	Euro	14	—	Jan - 20	Euro	2	14	Dec - 20
US dollar	Japanese yen	1,900	—	Dec - 19	Mexican peso	380	—	Mar - 21
US dollar	Korean won	36,721	—	Dec - 19
US dollar	Mexican peso	153	575	Dec - 19

The Company selectively uses cross-currency swaps to hedge the foreign currency exposure associated with ~~our~~its net investment in certain foreign operations (net investment hedges). At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the following cross-currency swap contracts were outstanding:


	Cross-Currency Swaps					Cross-Currency Swaps
(in millions)	Notional in USD		Notional in Local Currency		Duration	Notional in USD		Notional in Local Currency		Duration
Fixed $ to fixed €	$	250	€	206	Sep - 20	$	500	€	450	Mar - 25
Fixed $ to fixed ¥	$	100	¥	10,978	Feb - 23	$	100	¥	10,978	Feb - 23

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:


(in millions)	Assets					Liabilities					Assets					Liabilities
Derivatives designated as hedging instruments Under 815:	Location	September 30, 2019		December 31, 2018		Location	September 30, 2019		December 31, 2018		Location	March 31, 2020		December 31, 2019		Location	March 31, 2020		December 31, 2019
Foreign currency	Prepayments and other current assets	$	2	$	2	Accounts payable and accrued expenses	$	3	$	2	Prepayments and other current assets	$	2	$	—	Accounts payable and accrued expenses	$	4	$	1
Net investment hedges	Prepayments and other current assets	$	26	$	—	Accounts payable and accrued expenses	$	—	$	—	Other non-current assets	$	30	$	3	Other non-current liabilities	$	—	$	8
	Other non-current assets	$	2	$	12	Other non-current liabilities	$	—	$	—
Commodity											Prepayments and other current assets	$	—	$	—	Accounts payable and accrued expenses	$	—	$	—
Swaption											Prepayments and other current assets	$	1	$	—	Accounts payable and accrued expenses	$	—	$	—
Derivatives not designated as hedging instruments
Foreign currency	Prepayments and other current assets	$	—	$	1	Accounts payable and accrued expenses	$	—	$	—	Prepayments and other current assets	$	1	$	—	Accounts payable and accrued expenses	$	—	$	—

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

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

The table below shows deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less. The amount expected to be reclassified to income in one year or less assumes no change in the current relationship of the hedged item at ~~September 30, 2019~~March 31, 2020 market rates.


(in millions)	Deferred gain (loss) in AOCI at						Gain (loss) expected to be reclassified to income in one year or less		Deferred gain (loss) in AOCI at						Gain (loss) expected to be reclassified to income in one year or less
Contract Type	September 30, 2019			December 31, 2018					March 31, 2020			December 31, 2019
Foreign currency									$	(3	)	$	—		$	(3	)
Interest rate swaption									1			—			—
Net investment hedges:
Foreign currency	$	6		$	4		$	—	6			5			—
Cross-currency swaps	28			12			—		51			16			—
Foreign currency denominated debt	(2		)	(30		)	—		(9		)	(17		)	—
Total	$	32		$	(14	)	$	—	$	46		$	4		$	(3	)

Derivative instruments designated as cash flow hedge instruments as defined by ASC Topic 815 held during the period resulted in the following gains and losses recorded in income:

Three Months Ended September 30, 2019
(in millions) Net sales Cost of sales Selling, general and administrative expenses Other comprehensive income(loss)
Total amounts of earnings and other comprehensive income(loss) line items in which the effects of cash flow hedges are recorded $ 2,492
$ 1,968
$ 230
$ (109 )

Gain (loss) on cash flow hedging relationships:
Foreign currency
Gain (loss) recognized in other comprehensive income $ —
Gain (loss) reclassified from AOCI to income $ (2 ) $ —
$ 1


	Nine Months Ended September 30, 2019										Three Months Ended March 31, 2020
(in millions)	Net sales			Cost of sales		Selling, general and administrative expenses		Other comprehensive income(loss)			Net sales		Cost of sales		Selling, general and administrative expenses		Other comprehensive income(loss)
Total amounts of earnings and other comprehensive income(loss) line items in which the effects of cash flow hedges are recorded	$	7,609		$	6,053	$	668	$	(105	)	$	2,279	$	1,832	$	213	$	(74	)

Gain (loss) on cash flow hedging relationships:
Foreign currency
Gain (loss) recognized in other comprehensive income								$	(1	)							$	(3	)
Gain (loss) reclassified from AOCI to income	$	(4	)	$	1	$	2				$	—	$	—	$	—



	Three Months Ended March 31, 2019
(in millions)	Net sales			Cost of sales		Selling, general and administrative expenses		Other comprehensive income(loss)
Total amounts of earnings and other comprehensive income(loss) line items in which the effects of cash flow hedges are recorded	$	2,566		$	2,047	$	226	$	(1	)

Gain (loss) on cash flow hedging relationships:
Foreign currency
Gain (loss) recognized in other comprehensive income								$	—
Gain (loss) reclassified from AOCI to income	$	(1	)	$	—	$	1	$	—

Three Months Ended September 30, 2018
(in millions) Net sales Cost of sales Selling, general and administrative expenses Other comprehensive income(loss)
Total amounts of earnings and other comprehensive income(loss) line items in which the effects of cash flow hedges are recorded $ 2,478
$ 1,963
$ 230
$ (41 )

Gain (loss) on cash flow hedging relationships:
Foreign currency
Gain (loss) recognized in other comprehensive income $ 2
Gain (loss) reclassified from AOCI to income $ (1 ) $ —
$ —

Nine Months Ended September 30, 2018
(in millions) Net sales Cost of sales Selling, general and administrative expenses Other comprehensive income(loss)
Total amounts of earnings and other comprehensive income(loss) line items in which the effects of cash flow hedges are recorded $ 7,956

$ 6,270

$ 720
$ (119 )

Gain (loss) on cash flow hedging relationships:
Foreign currency
Gain (loss) recognized in other comprehensive income $ (4 )
Gain (loss) reclassified from AOCI to income $ (2 )
$ (3 )
$ —

~~There were no~~The gains or losses recorded in income related to components excluded from the assessment of effectiveness for derivative instruments designated as cash flow ~~hedges.~~hedges were immaterial for the periods presented.

Gains and (losses) on derivative instruments designated as net investment hedges were recognized in other comprehensive income during the periods presented below.


(in millions)	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
Net investment hedges	2019		2018		2019		2018		2020		2019
Foreign currency	$	2	$	—	$	2	$	—	$	1	$	—
Cross-currency swaps	$	11	$	3	$	16	$	10	$	35	$	9
Foreign currency denominated debt	$	23	$	4	$	28	$	20	$	8	$	12

Derivatives designated as net investment hedge instruments as defined by ASC Topic 815 held during the period resulted in the following gains recorded in Interest expense and finance charges on components excluded from the assessment of effectiveness:


(in millions)	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
Net investment hedges	2019		2018		2019		2018		2020		2019
Cross-currency swaps	$	3	$	3	$	8	$	6	$	4	$	3

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

Derivatives not designated as hedging instruments are used to hedge remeasurement exposures of monetary assets and liabilities denominated in currencies other than the operating units' functional currency. These derivatives resulted in the following gains and (losses) recorded in income:


(in millions)		Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended March 31,
Contract Type	Location	2019		2018		2019			2018		Location	2020		2019
Foreign Currency	Selling, general and administrative expenses	$	—	$	1	$	(3	)	$	—	Selling, general and administrative expenses	$	3	$	(2	)

(13) Retirement Benefit Plans

The Company has a number of defined benefit pension plans and other postretirement benefit plans covering eligible salaried and hourly employees and their dependents. The estimated contributions to the Company's defined benefit pension plans for ~~2019~~2020 range from ~~$15~~$10 million to $20 million, of which ~~$12~~$5 million has been contributed through the first ~~nine~~three months of the year. The other postretirement benefit plans, which provide medical and life insurance benefits, are unfunded plans.

During the nine months ended September 30, 2019, the Company settled approximately $50 million of its pension projected benefit obligation by liquidating approximately $50 million in plan assets through a lump-sum disbursement made to an insurance company. Pursuant to this agreement, the insurance company unconditionally and irrevocably guarantees all future payments to certain participants that were receiving payments from the U.S. pension plan. The insurance company assumes all investment risk associated with the assets that were delivered as part of this transaction. Additionally, during the nine months ended September 30, 2019, the Company discharged certain U.S. pension plan obligations by making lump-sum payments of $13 million to former employees of the Company. As a result, the Company settled $63 million of projected benefit obligation by liquidating pension plan assets and recorded a non-cash settlement loss of $26 million related to the accelerated recognition of unamortized losses.

The components of net periodic benefit cost recorded in the Condensed Consolidated Statements of Operations are as follows:


	Pension benefits												Other postretirement employee benefits						Pension benefits												Other postretirement employee benefits
(in millions)	2019						2018						Other postretirement employee benefits						2020						2019						Other postretirement employee benefits
Three Months Ended September 30,	US			Non-US			US			Non-US			2019			2018
Three Months Ended March 31,																			US			Non-US			US			Non-US			2020			2019
Service cost	$	—		$	5		$	—		$	5		$	—		$	—		$	—		$	5		$	—		$	5		$	—		$	—
Interest cost	2			3			2			3			—			1			1			2			2			3			1			1
Expected return on plan assets	(3		)	(6		)	(3		)	(7		)	—			—			(3		)	(6		)	(3		)	(5		)	—			—
Amortization of unrecognized prior service credit	(1		)	—			(1		)	—			(1		)	(1		)	—			—			—			—			(1		)	(1		)
Amortization of unrecognized loss	2			2			1			1			1			—			1			3			1			2			—			—
Net periodic benefit cost (income)	$	—		$	4		$	(1	)	$	2		$	—		$	—
Net periodic benefit (income) cost																			$	(1	)	$	4		$	—		$	5		$	—		$	—

Pension benefits
Other postretirement
employee benefits
(in millions) 2019 2018
Nine Months Ended September 30, US Non-US US Non-US 2019 2018
Service cost $ —
$ 14
$ —
$ 14
$ —
$ —
Interest cost 7
9
6
9
2
2
Expected return on plan assets (9 ) (17 ) (10 ) (21 ) —
—
Settlement 26
—
—
—
—
—
Amortization of unrecognized prior service credit (1 ) —
(1 ) —
(3 ) (3 )
Amortization of unrecognized loss 4
7
3
5
1
1
Net periodic benefit cost (income) $ 27
$ 13
$ (2 ) $ 7
$ —
$ —

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

(14) Stock-Based Compensation

The Company has granted restricted common stock and restricted stock units (collectively, "restricted stock") and performance share units as long-term incentive awards to employees and non-employee directors under the BorgWarner Inc. 2014 Stock Incentive Plan, as amended ("2014 Plan") and the BorgWarner Inc. 2018 Stock Incentive Plan ("2018 Plan"). The Company's Board of Directors adopted the 2018 Plan as a replacement to the 2014 Plan in February 2018, and the Company's stockholders approved the 2018 Plan at the annual meeting of stockholders on April 25, 2018. After stockholders approved the 2018 Plan, the Company could no longer make grants under the 2014 Plan. The shares that were available for issuance under the 2014 Plan were cancelled upon approval of the 2018 Plan. The 2018 Plan authorizes the issuance of a total of 7 million shares, of which approximately 65 million shares were available for future issuance as of ~~September 30, 2019.~~March 31, 2020.

Restricted stock In the first ~~nine~~three months of ~~2019,~~2020, the Company granted restricted stock in the ~~amounts~~amount of ~~1,054,006 shares and 23,880~~766,205 shares to ~~employees and non-employee directors, respectively.~~employees. Restricted stock granted to employees generally vests 50% after two years and the remainder after three years. ~~Restricted stock granted to non-employee directors generally vests on the first anniversary of the date of grant.~~ The Company recognizes the value of the restricted stock, which is equal to the market value of the Company’s common stock on the date of grant, as compensation expense ratably over the restricted stock's vesting period. As of ~~September 30, 2019,~~March 31, 2020, the Company had ~~$45~~$51 million of unrecognized compensation expense that will be recognized over a weighted average period of ~~1.9~~2 years. The Company recorded restricted stock compensation expense of ~~$8 million and~~ $7 million for the

three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018, respectively, and $22 million and $19 million for the nine months ended September 30, 2019 and 2018, respectively.~~2019.

A summary of the Company’s nonvested restricted stock for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 is as follows:



	Shares subject to restriction (thousands)		Weighted average grant date fair value
Nonvested at December 31, 2019	1,664		$	44.26
Granted	766		$	34.05
Vested	(466	)	$	46.00
Forfeited	(9	)	$	42.23
Nonvested at March 31, 2020	1,955		$	39.87

Shares subject to restriction
(thousands)
Weighted average grant date fair value
Nonvested at December 31, 2018 1,516
$ 42.97
Granted 930
$ 41.92
Vested (665 ) $ 35.94
Forfeited (6 ) $ 45.41
Nonvested at March 31, 2019 1,775
$ 44.77
Granted 125
$ 40.78
Vested (28 ) $ 50.43
Forfeited (37 ) $ 45.13
Nonvested at June 30, 2019 1,835
$ 44.40
Granted 22
$ 36.68
Vested (7 ) $ 43.81
Forfeited (30 ) $ 44.99
Nonvested at September 30, 2019 1,820
$ 44.29

~~Total Stockholder Return~~ Performance ~~Share Units~~share units The Company grants performance share units to members of senior management that vest at the end of three-year periods based the following metrics:


•	Total Stockholder Return Units:based on the Company's total stockholder return relative to a peer group of companies.


•	Relative Revenue Growth Units:based on the Company's revenue growth relative to the vehicle market.

Adjusted Earnings Per Share Units: introduced in the first quarter of 2020, this performance metric is based on the ~~Company's total stockholder return relative to~~Company’s earnings per share adjusted for certain one-time items and non-operating gains and losses against a peer group of companies. The Company recorded compensation expense of $2 million and $3 million for the three months ended September 30, 2019 and 2018, respectively, and $5 million and $6 million for the nine months ended September 30, 2019 and 2018, respectively.3-year defined target.

A summary of the status of the Company’s nonvested ~~total stockholder return~~ performance share units for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 is as follows:

Number of shares
(thousands)
Weighted average grant date fair value
Nonvested at December 31, 2018 297
$ 60.35
Granted 190
$ 51.52
Forfeited (9 ) $ 55.30
Nonvested at March 31, 2019 478
$ 56.93
Granted 5
$ 51.59
Forfeited (56 ) $ 55.67
Nonvested at June 30, 2019 427
$ 57.03
Forfeited (5 ) $ 57.29
Nonvested at September 30, 2019 422
$ 57.03



	Total Stockholder Return			Relative Revenue Growth			Adjusted Earnings Per Share
	Number of shares (thousands)	Weighted average grant date fair value		Number of shares (thousands)	Weighted average grant date fair value		Number of shares (thousands)	Weighted average grant date fair value
Nonvested at December 31, 2019	240	$	64.61	240	$	48.52	—	$	—
Granted	142	$	28.55	142	$	34.11	115	$	34.11
Vested	—	$	—	—	$	—	—	$	—
Forfeited	—	$	—	—	$	—	—	$	—
Nonvested at March 31, 2020	382	$	48.02	382	$	41.54	115	$	34.11

~~Relative Revenue Growth Performance Share Units~~ ~~The Company also grants performance share units to members of senior management that vest based on the Company's revenue growth relative to the vehicle market over three-year performance periods.~~ The Company recorded compensation expense ~~of $3 million and $5 million~~(reductions) for ~~the three months ended September 30, 2019 and 2018, respectively, and, $3 million and $13 million for the nine months ended September 30, 2019 and 2018, respectively.~~

~~A summary of the status of the Company’s nonvested relative revenue growth~~ performance share units ~~for~~in the ~~nine months ended September 30, 2019 is as follows:~~periods presented below:

Number of shares (thousands) Weighted average grant date fair value
Nonvested at December 31, 2018 297
$ 47.03
Granted 190
$ 41.90
Forfeited (9 ) $ 44.12
Nonvested at March 31, 2019 478
$ 45.04
Granted 5
$ 41.92
Forfeited (56 ) $ 44.24
Nonvested at June 30, 2019 427
$ 45.11
Forfeited (5 ) $ 44.76
Nonvested at September 30, 2019 422
$ 45.11



	Three Months Ended March 31,
(in millions)	2020		2019
Total Stockholder Return	$	1	$	3
Relative Revenue Growth	2		(1		)
Total compensation expense (reduction)	$	3	$	2

In 2018, the Company modified the vesting provisions of restricted stock and performance share unit grants made to certain retiring executive officers to allow certain of the outstanding awards, that otherwise would have been forfeited, to vest upon retirement. This resulted in net restricted stock and performance share unit compensation expense of $6$2 million for the three months ended ~~September 30, 2018 and $2 million for both the nine months ended September 30, 2019 and 2018.~~March 31, 2019.

(15) ~~Stockholder's~~Stockholders' Equity

The changes of the ~~Stockholder's~~Stockholders' Equity items during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ are as follows:


	BorgWarner Inc. stockholder's equity																BorgWarner Inc. stockholders' equity
(in millions)	Issued common stock		Capital in excess of par value		Treasury stock			Retained earnings			Accumulated other comprehensive income (loss)			Noncontrolling interests			Issued common stock		Capital in excess of par value			Treasury stock			Retained earnings			Accumulated other comprehensive income (loss)			Noncontrolling interests
Balance, June 30, 2019	$	3	$	1,116	$	(1,653	)	$	5,598		$	(670	)	$	108
Dividends declared ($0.17 per share) *	—		—		—			(35		)	—			1
Contributions	—		—		—			—			—			4
Balance, December 31, 2019																	$	3	$	1,145		$	(1,657	)	$	5,942		$	(727	)	$	138
Dividends declared ($0.17 per share*)																	—		—			—			(35		)	—			(3		)
Net issuance for executive stock plan	—		4		1			—			—			—			—		(16		)	12			—			—			—
Net issuance of restricted stock	—		9		(1		)	—			—			—			—		(20		)	22			—			—			—
Net earnings	—		—		—			194			—			13			—		—			—			129			—			8
Other comprehensive loss	—		—		—			—			(109		)	(5		)	—		—			—			—			(74		)	(3		)
Balance, September 30, 2019	$	3	$	1,129	$	(1,653	)	$	5,757		$	(779	)	$	121
Balance, March 31, 2020																	$	3	$	1,109		$	(1,623	)	$	6,036		$	(801	)	$	140

BorgWarner Inc. stockholder's equity
(in millions) Issued common stock Capital in excess of par value Treasury stock Retained earnings Accumulated other comprehensive income (loss) Noncontrolling interests
Balance, June 30, 2018 $ 3
$ 1,110
$ (1,544 ) $ 4,973
$ (582 ) $ 94
Dividends declared ($0.17 per share) * —
—
—
(35 ) —
1
Net issuance for executive stock plan —
9
—
—
—
—
Net issuance of restricted stock —
8
(1 ) —
—
—
Purchase of treasury stock —
—
(36 ) —
—
—
Net earnings —
—
—
204
—
12
Other comprehensive income (loss) —
—
—
—
(41 ) (3 )
Balance, September 30, 2018 $ 3
$ 1,127
$ (1,581 ) $ 5,142
$ (623 ) $ 104

BorgWarner Inc. stockholder's equity
(in millions) Issued common stock Capital in excess of par value Treasury stock Retained earnings Accumulated other comprehensive income (loss) Noncontrolling interests
Balance, December 31, 2018 $ 3
$ 1,146
$ (1,585 ) $ 5,336
$ (674 ) $ 119
Dividends declared ($0.51 per share) * —
—
—
(105 ) —
(29 )
Contributions —
—
—
—
—
4
Net issuance for executive stock plan —
(5 ) 8
—
—
—
Net issuance of restricted stock —
(12 ) 24
—
—
—
Purchase of treasury stock —
—
(100 ) —
—
—
Net earnings —
—
—
526
—
34
Other comprehensive loss —
—
—
—
(105 ) (7 )
Balance, September 30, 2019 $ 3
$ 1,129
$ (1,653 ) $ 5,757
$ (779 ) $ 121


	BorgWarner Inc. stockholder's equity																	BorgWarner Inc. stockholders' equity
(in millions)	Issued common stock		Capital in excess of par value			Treasury stock			Retained earnings			Accumulated other comprehensive income (loss)			Noncontrolling interests			Issued common stock		Capital in excess of par value			Treasury stock			Retained earnings			Accumulated other comprehensive income (loss)			Noncontrolling interests
Balance, December 31, 2017	$	3	$	1,118		$	(1,445	)	$	4,531		$	(490	)	$	109
Dividends declared ($0.51 per share) *	—		—			—			(106		)	—			(34		)
Balance, December 31, 2018																		$	3	$	1,146		$	(1,585	)	$	5,336		$	(674	)	$	119
Dividends declared ($0.17 per share*)																		—		—			—			(35		)	—			(20		)
Net issuance for executive stock plan	—		10			5			—			—			—			—		(10		)	7			—			—			—
Net issuance of restricted stock	—		(1		)	9			—			—			—			—		(25		)	21			—			—			—
Purchase of treasury stock	—		—			(150		)	—			—			—			—		—			(69		)	—			—			—
Adoption of accounting standards	—		—			—			16			(14		)	—
Net earnings	—		—			—			701			—			36			—		—			—			160			—			11
Other comprehensive income (loss)	—		—			—			—			(119		)	(7		)	—		—			—			—			(1		)	1
Balance, September 30, 2018	$	3	$	1,127		$	(1,581	)	$	5,142		$	(623	)	$	104
Balance, March 31, 2019																		$	3	$	1,111		$	(1,626	)	$	5,461		$	(675	)	$	111

* The dividends declared relate to BorgWarner common stock.

(16) Accumulated Other Comprehensive Loss

The following tables summarize the activity within ~~accumulated~~Accumulated other comprehensive loss during the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:

(in millions) Foreign currency translation adjustments Hedge instruments Defined benefit retirement plans Other Total
Beginning balance, June 30, 2019 $ (463 ) $ (1 ) $ (208 ) $ 2
$ (670 )
Comprehensive (loss) income before reclassifications (107 ) —
3
—
(104 )
Income taxes associated with comprehensive (loss) income before reclassifications (7 ) —
(1 ) —
(8 )
Reclassification from accumulated other comprehensive loss —
1
3
—
4
Income taxes reclassified into net earnings —
—
(1 ) —
(1 )
Ending balance, September 30, 2019 $ (577 ) $ —
$ (204 ) $ 2
$ (779 )


(in millions)	Foreign currency translation adjustments			Hedge instruments			Defined benefit retirement plans			Other		Total			Foreign currency translation adjustments			Hedge instruments			Defined benefit retirement plans			Other		Total
Beginning balance, June 30, 2018	$	(375	)	$	(3	)	$	(207	)	$	3	$	(582	)
Beginning balance, December 31, 2019															$	(497	)	$	—		$	(230	)	$	—	$	(727	)
Comprehensive (loss) income before reclassifications	(45		)	2			(1		)	—		(44		)	(64		)	(2		)	6			—		(60		)
Income taxes associated with comprehensive (loss) income before reclassifications	2			—			—			—		2			(10		)	—			(2		)	—		(12		)
Reclassification from accumulated other comprehensive loss	—			—			2			—		2			—			—			(3		)	—		(3		)
Income taxes reclassified into net earnings	—			—			(1		)	—		(1		)	—			—			1			—		1
Ending balance, September 30, 2018	$	(418	)	$	(1	)	$	(207	)	$	3	$	(623	)
Ending balance, March 31, 2020															$	(571	)	$	(2	)	$	(228	)	$	—	$	(801	)

(in millions) Foreign currency translation adjustments Hedge instruments Defined benefit retirement plans Other Total
Beginning balance, December 31, 2018 $ (441 ) $ —
$ (235 ) $ 2
$ (674 )
Comprehensive (loss) income before reclassifications (127 ) (1 ) 7
—
(121 )
Income taxes associated with comprehensive (loss) income before reclassifications (9 ) —
(2 ) —
(11 )
Reclassification from accumulated other comprehensive loss —
1
34
—
35
Income taxes reclassified into net earnings —
—
(8 ) —
(8 )
Ending balance, September 30, 2019 $ (577 ) $ —
$ (204 ) $ 2
$ (779 )


(in millions)	Foreign currency translation adjustments			Hedge instruments			Defined benefit retirement plans			Other		Total			Foreign currency translation adjustments			Hedge instruments		Defined benefit retirement plans			Other		Total
Beginning balance, December 31, 2017	$	(294	)	$	(1	)	$	(198	)	$	3	$	(490	)
Adoption of Accounting Standards	—			—			(14		)	—		(14		)
Beginning balance, December 31, 2018															$	(441	)	$	—	$	(235	)	$	2	$	(674	)
Comprehensive (loss) income before reclassifications	(132		)	(4		)	1			—		(135		)	(5		)	—		3			—		(2		)
Income taxes associated with comprehensive (loss) income before reclassifications	8			1			—			—		9			(4		)	—		3			—		(1		)
Reclassification from accumulated other comprehensive loss	—			4			6			—		10			—			—		3			—		3
Income taxes reclassified into net earnings	—			(1		)	(2		)	—		(3		)	—			—		(1		)	—		(1		)
Ending balance, September 30, 2018	$	(418	)	$	(1	)	$	(207	)	$	3	$	(623	)
Ending balance, March 31, 2019															$	(450	)	$	—	$	(227	)	$	2	$	(675	)

(17) ~~Leases~~

The majority of the Company's global lease portfolio represents leases of real estate, such as manufacturing facilities, warehouses, and office buildings, while the remainder represents leases of personal property, such as vehicle leases, manufacturing and IT equipment. Most of the leases are operating leases with options to renew, with renewal terms that can extend the lease term from 1 to 5 years.The option to renew is included in the lease term if it is reasonably certain that the Company will exercise that option. Certain leases also include options to terminate or purchase the leased asset. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option that is reasonably certain of exercise. The amount recognized in lease assets and liabilities for lease arrangements that include an option for renewal or early termination that is reasonably certain of being exercised is immaterial. The Company's lease agreements do not contain any material residual value guarantee or material restrictive covenants. The Company's policy is to account for the lease and non-lease components as a single lease component for all asset classes.

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

All leases with an initial term of 12 months or less that do not include an option to extend or purchase the underlying asset that the Company is reasonably certain to exercise ("short-term leases") are not recorded on the consolidated balance sheet, and lease expense is recognized on a straight-line basis over the lease term.

~~The following table presents the operating lease assets and lease liabilities as of September 30, 2019:~~

(in millions) September 30, 2019
Assets
Operating lease assets Other non-current assets $ 88
Total operating lease assets $ 88

Liabilities
Current
Operating lease liabilities Accounts payable and accrued expenses $ 19
Noncurrent
Operating lease liabilities Other non-current liabilities 68
Total operating lease liabilities $ 87

In the three and nine months ended September 30, 2019, the Company recorded operating lease cost of $6 million and $19 million, respectively, reflected in Selling, general and administrative expenses in the Condensed Consolidated Statement of Operations. The finance lease cost including amortization of leased assets and interest on lease liabilities was less than $1 million in the nine months ended September 30, 2019. Variable costs for the nine months ended September 30, 2019 are immaterial, and the Company does not have sublease income or gains/losses on sale leaseback transactions.

~~The following table presents the maturity of lease liabilities as of September 30, 2019:~~

(in millions) Operating Leases
2019 (excluding the nine months ended September 30, 2019) $ 5
2020 20
2021 15
2022 12
2023 9
After 2023 39
Total (undiscounted) lease payments $ 100
Less: Imputed interest 13
Present value of lease liabilities $ 87

~~Total rent expense was $12 million and $33 million for the three and nine months ended September 30, 2018. Future minimum operating lease payments at December 31, 2018 were as follows:~~

(in millions)
2019 $ 24
2020 21
2021 15
2022 13
2023 10
After 2023 38
Total minimum lease payments $ 121

~~The following table presents the lease terms and discount rates as of September 30, 2019:~~



~~Weighted-average remaining lease term (years)~~
~~Operating leases~~	8
~~Finance leases~~	3
~~Weighted-average discount rate~~
~~Operating leases~~	~~2.8~~	%
~~Finance leases~~	~~3.3~~	%

~~The operating cash flows for operating leases were $19 million for the nine months ended September 30, 2019.~~

~~As of September 30, 2019, the operating and finance leases that the Company signed but have not yet commenced are immaterial.~~

~~(18)~~ Contingencies

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

Environmental

The Company and certain of its current and former direct and indirect corporate predecessors, subsidiaries and divisions have been identified by the United States Environmental Protection Agency and certain state environmental agencies and private parties as potentially responsible parties (“PRPs”) at various hazardous waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act (“Superfund”) and equivalent state ~~laws. The PRPs~~laws and, as such, may ~~currently~~presently be liable for the cost of clean-up and other remedial activities at 2714 such ~~sites.~~sites as of March 31, 2020 and December 31, 2019. Responsibility for clean-up and other remedial activities at a Superfund site is typically shared among PRPs based on an allocation formula.

The Company believes that none of these matters, individually or in the aggregate, will have a material adverse effect on its results of operations, financial position or cash flows. Generally, this is because either the estimates of the maximum potential liability at a site are not material or the liability will be shared with other PRPs, although no assurance can be given with respect to the ultimate outcome of any such matter.

The Company ~~has~~had an accrual for environmental liabilities of ~~$8 million and $9~~$3 million as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018, respectively.~~2019. This accrual is based on information available to the Company (which in most cases ~~includes~~includes: an estimate of allocation of liability among PRPs; the probability that other PRPs, many of whom are large, solvent public companies, will fully pay the cost apportioned to them; currently available information from PRPs and/or federal or state environmental agencies concerning the scope of contamination and estimated remediation and consulting costs; and remediation alternatives).

~~Asbestos-related Liability~~Securities and Exchange Commission ("SEC") Investigation

Like many other industrial companies that have historically operated in the United States, the Company, or parties that the Company is obligated to indemnify, continues to be named as one of many defendants in asbestos-related personal injury actions. The Company vigorously defends against these claims. The Company has been successful in obtaining the dismissal of the majority of the claims asserted against it without any payment. Due to the nature of the fibers used in certain types of automotive products, the encapsulation of the asbestos, and the manner of the products’ use, the Company believes that these products were and are highly unlikely to cause harm. Furthermore, the useful life of nearly all of these products expired many years ago. The Company likewise expects that no payment on these claims will be made by the Company or its insurance carriers in the vast majority of current and future asbestos-related claims.

~~The Company’s asbestos-related claims activity during the nine months ended September 30, 2019 and 2018 is as follows:~~

2019 2018
Beginning Claims January 1 8,598
9,225
New Claims Received 1,667
1,460
Dismissed Claims (967 ) (1,430 )
Settled Claims (237 ) (268 )
Ending Claims September 30 9,061
8,987

~~From the mid-2000s through September 30, 2019 and December 31, 2018, the Company incurred~~$608 million and $574 million, respectively, in asbestos-related claim resolution costs (including settlement payments and judgments) and associated defense costs. During the nine months ended September 30, 2019 and 2018, the Company paid $32 million and $37 million, respectively, in asbestos-related claim resolution costs and associated defense costs. These gross payments are before tax benefits and any potential insurance receipts. Asbestos-related claim resolution costs and associated defense costs are reflected in the Company's operating cash flows.

The Company reviews, on an ongoing basis, its own experience in handling asbestos-related claims and trends affecting asbestos-related claims in the U.S. tort system generally, for the purposes of assessing the value of pending asbestos-related claims and the number and value of those that may be asserted in the future, as well as potential recoveries from the Company’s insurance carriers with respect to such claims and defense costs. The Company has accrued estimated amounts in its consolidated financial statements on account of asbestos-related claims that have been asserted but not yet resolved and for claims that have not yet been asserted. The Company's estimate of asbestos-related claim resolution costs and associated defense costs is not discounted to present value and includes an estimate of liability for potential future claims not yet asserted through December 31, 2064 with a runoff through 2074. The Company currently believes that December 31, 2074 is a reasonable assumption as to the last date on which it is likely to have resolved all asbestos-related claims, based on the nature and useful life of the Company’s products and the likelihood of incidence of asbestos-related disease in the U.S. population generally. As of September 30, 2019 and September 30, 2018, the Company’s reasonable best estimate of the aggregate liability for both asbestos-related claims asserted but not yet resolved and potential asbestos-related claims not yet asserted, including estimated defense costs, is as follows:

(in millions) 2019 2018
Beginning asbestos liability as of January 1 $ 805
$ 828
Claim resolution costs and associated defense costs (33 )
(36 )
Ending asbestos liability as of September 30 $ 772

$ 792

The Company’s estimate of the claim resolution costs and associated defense costs for asbestos-related claims asserted but not yet resolved and potential claims not yet asserted is its reasonable best estimate of such costs. Such estimate is subject to numerous uncertainties. These include future legislative or judicial changes affecting the U.S. tort system, bankruptcy proceedings involving one or more co-defendants, the impact and timing of payments from bankruptcy trusts that currently exist and those that may exist in the future, disease emergence and associated claim filings, the impact of future settlements or significant judgments, changes in the medical condition of claimants, changes in the treatment of asbestos-related disease, and any changes in settlement or defense strategies. The balances recorded for asbestos-related claims are based on the best available information and assumptions that the Company believes are reasonable, including as to the number of future claims that may be asserted, the percentage of claims that may result in a payment, the average cost to resolve such claims, and potential defense costs. The Company has concluded that it is reasonably possible that it may incur additional losses through 2074 for asbestos-related claims, in addition to amounts recorded, of up to approximately $100 million as of September 30, 2019 and December 31, 2018. The various assumptions utilized in arriving at the Company’s estimate may also change over time, and the Company’s actual liability for asbestos-related claims asserted but not yet resolved and those not yet asserted may be higher or lower than the Company’s estimate as a result of such changes.

The Company has certain insurance coverage applicable to asbestos-related claims including primary insurance and excess insurance coverage. Prior to June 2004, claim resolution costs and defense costs associated with all asbestos-related claims were paid by the Company's primary layer insurance carriers under a series of interim funding arrangements. In June 2004, primary layer insurance carriers notified the Company of the alleged exhaustion of their policy limits. A declaratory judgment action was filed in January 2004 in the Circuit Court of Cook County, Illinois by Continental Casualty Company and related companies against the Company and certain of its historical general liability insurance carriers. The Cook County court has issued a number of interim rulings, and discovery is continuing in this proceeding. The Company is vigorously pursuing the litigation against all insurance carriers that continue to be parties to it, which currently includes excess insurance carriers, as well as pursuing settlement discussions with its insurance carriers where appropriate. The Company has entered into settlement agreements with certain of its insurance carriers, resolving such insurance carriers’ coverage disputes through the insurance carriers’ agreement to pay specified amounts to the Company, either immediately or over a specified period. Through September 30, 2019 and December 31, 2018, the Company received $272 million and $271 million, respectively, in cash and notes from insurance carriers on account of asbestos-related claim resolution costs and associated defense costs.

As of September 30, 2019 and December 31, 2018, the Company estimates that it has $385 million and $386 million, respectively, in aggregate insurance coverage available with respect to asbestos-related claims, and their associated defense costs. The Company has recorded this insurance coverage as a long-term receivable for asbestos-related claim resolution costs and associated defense costs that have been incurred, less cash and notes received, and remaining limits as a deferred insurance asset with respect to liabilities recorded for potential future costs for asbestos-related claims. The Company has determined the amount of that estimate by taking into account the remaining limits of the insurance coverage, the number and amount of potential claims from co-insured parties, potential remaining recoveries from insolvent insurance carriers, the impact of previous insurance settlements, and coverage available from solvent insurance carriers not party to the coverage litigation. The Company’s estimated remaining insurance coverage relating to asbestos-related claims and their associated defense costs is the subject of disputes with its insurance carriers, substantially all of which are being adjudicated in the Cook County insurance litigation. The Company believes that its insurance receivable is probable of collection notwithstanding those disputes based on, among other things, the arguments made by the insurance carriers in the Cook County litigation and evaluation of those arguments by the Company and its counsel, the case law applicable to the issues in dispute, the rulings to date by the Cook County court, the absence of any credible evidence alleged by the insurance carriers that they are not liable to indemnify the Company, and the fact that the Company has recovered a substantial portion of its

insurance coverage, $272 million, through September 30, 2019, from its insurance carriers under similar policies. However, the resolution of the insurance coverage disputes, and the number and amount of claims on our insurance from co-insured parties, may increase or decrease the amount of such insurance coverage available to the Company as compared to the Company’s estimate.

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

September 30, December 31,
(in millions) 2019 2018
Assets:
Other long-term asbestos-related insurance receivables $ 336

$ 303
Deferred asbestos-related insurance asset 49
83
Total insurance assets $ 385
$ 386
Liabilities:
Accounts payable and accrued expenses $ 49
$ 50
Other non-current liabilities 723
755
Total accrued liabilities $ 772
$ 805

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

~~(19)~~(18) Restructuring

~~In 2017,~~The Company has initiated a comprehensive plan to reduce existing structural costs. During the three months ended March 31, 2020, the Company ~~initiated~~recorded $5 million and $2 million in the Engine and Drivetrain segments, respectively, primarily related to severance costs, for actions ~~within its~~associated with this plan. Additionally, the Company continues a voluntary termination program in the Engine segment ~~designed to improve future profitability~~that resulted in restructuring expense of $8 million and ~~competitiveness~~$4 million during the three months ended March 31, 2020 and ~~started exploring strategic options for~~2019, respectively.

During the ~~non-core product lines. As a continuation of these actions,~~three months ended March 31, 2019, the Company recorded restructuring expense of $3$7 million, ~~and $14 million during the three and nine months ended September 30, 2019, respectively, and $5 million and $38 million during the three and nine months ended September 30, 2018, respectively,~~ primarily related to professional fees and employee termination ~~benefits.~~

~~The Company is taking several~~benefits, as a continuation of actions ~~to reduce existing structural costs. The Company recorded $3 million in~~within the Engine segment to improve future profitability and ~~$1 million in the Drivetrain segment in the three months ended September 30, 2019 related to these actions. Additionally, the Company initiated a voluntary termination program in the Engine segment~~competitiveness and ~~recorded restructuring expense of $7 million and $18 million in the three and nine months ended September 30, 2019, respectively.~~

explore strategic options for non-core product lines. The Company also recorded restructuring expense of $3 million induring the ~~nine~~three months ended ~~September 30,~~March 31, 2019, related to Corporate restructuring activities.

~~The Company recorded restructuring expense of $6 million in the nine months ended September 30, 2018 in the Drivetrain segment primarily related to manufacturing footprint rationalization activities.~~

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

The Company ~~intends~~is evaluating numerous options across its operations and plans to ~~continue its plan~~take additional restructuring actions to reduce existing structural costs ~~in order to improve~~over the ~~competitiveness of its business and maintain its margin profile.~~next few years. These actions ~~may~~are expected to result in ~~the recognition of additional~~significant restructuring ~~charges that could be material.~~expense.

The following tables display a rollforward of the severance accruals recorded within the Company's Condensed Consolidated Balance Sheet and the related cash flow activity for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018:~~2019:


	Severance Accruals									Severance Accruals
(in millions)	Drivetrain			Engine			Total			Drivetrain		Engine			Total
Balance at December 31, 2018	$	4		$	21		$	25
Balance at December 31, 2019										$	4	$	30		$	34
Provision	—			7			7			1		11			12
Cash payments	—			(20		)	(20		)	—		(13		)	(13		)
Balance at March 31, 2019	$	4		$	8		$	12
Provision	—			8			8
Cash payments	—			(2		)	(2		)
Balance at June 30, 2019	$	4		$	14		$	18
Provision	—			8			8
Cash payments	(1		)	(7		)	(8		)
Balance at September 30, 2019	$	3		$	15		$	18
Balance at March 31, 2020										$	5	$	28		$	33


	Severance Accruals									Severance Accruals
(in millions)	Drivetrain			Engine			Total			Drivetrain		Engine			Total
Balance at December 31, 2017	$	4		$	1		$	5
Balance at December 31, 2018										$	4	$	21		$	25
Provision	1			1			2			—		7			7
Cash payments	(1		)	(1		)	(2		)	—		(20		)	(20		)
Translation adjustment	1			—			1
Balance at March 31, 2018	$	5		$	1		$	6
Provision	1			26			27
Cash payments	(1		)	(5		)	(6		)
Balance at June 30, 2018	$	5		$	22		$	27
Provision	—			2			2
Cash payments	(4		)	(6		)	(10		)
Balance at September 30, 2018	$	1		$	18		$	19
Balance at March 31, 2019										$	4	$	8		$	12

~~(20)~~(19) Earnings Per Share

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

The dilutive impact of stock-based compensation is calculated using the treasury stock method. The treasury stock method assumes that the Company uses the assumed proceeds from the exercise of awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future and compensation cost for future service that the Company has not yet recognized. The dilutive effects of performance-based stock awards described in the Note 14, "Stock-Based Compensation," to

the Condensed Consolidated Financial Statements are included in the computation of diluted earnings per share at the level the related performance criteria are met through the respective balance sheet date. The 114,720 of adjusted earnings per share performance share units granted in 2020 were excluded from the computation of the diluted earnings per share for the three months ended March 31, 2020 because the related performance criteria had not been met as of the balance sheet date.

The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share of common stock:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
(in millions, except per share amounts)	2019		2018		2019		2018		2020		2019
Basic earnings per share:
Net earnings attributable to BorgWarner Inc.	$	194	$	204	$	526	$	701	$	129	$	160
Weighted average shares of common stock outstanding	205.3		207.5		205.9		208.5		205.7		206.5
Basic earnings per share of common stock	$	0.94	$	0.98	$	2.56	$	3.36	$	0.63	$	0.77

Diluted earnings per share:
Net earnings attributable to BorgWarner Inc.	$	194	$	204	$	526	$	701	$	129	$	160

Weighted average shares of common stock outstanding	205.3		207.5		205.9		208.5		205.7		206.5
Effect of stock-based compensation	1.0		1.2		0.9		1.3		0.5		0.6
Weighted average shares of common stock outstanding including dilutive shares	206.3		208.7		206.8		209.8		206.2		207.1
Diluted earnings per share of common stock	$	0.94	$	0.98	$	2.54	$	3.34	$	0.63	$	0.77

Anti-dilutive stock-based awards excluded from the calculation of diluted earnings per share:	0.1		0.1		0.1		0.1		—		0.5

~~(21)~~(20) Reporting Segments

The Company's business is comprised of 2 reporting segments: Engine and Drivetrain. These segments are strategic business groups that are managed separately as each represents a specific grouping of related automotive components and systems.

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

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

Net Sales by Reporting Segment


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in millions)	2019			2018			2019			2018			2020			2019
Engine	$	1,514		$	1,516		$	4,681		$	4,906		$	1,434		$	1,598
Drivetrain	993			976			2,973			3,093			860			982
Inter-segment eliminations	(15		)	(14		)	(45		)	(43		)	(15		)	(14		)
Net sales	$	2,492		$	2,478		$	7,609		$	7,956		$	2,279		$	2,566

Adjusted EBIT


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in millions)	2019			2018			2019			2018			2020			2019
Engine	$	241		$	238		$	731		$	797		$	208		$	241
Drivetrain	100			108			307			345			63			105
Adjusted EBIT	341			346			1,038			1,142			271			346
Merger, acquisition and divestiture expense													21			1
Restructuring expense	14			5			41			44			15			14
Merger, acquisition and divestiture expense	4			2			10			5
Other expense (income)	—			2			14			(3		)
Asset impairment													9			—
Unfavorable arbitration loss													—			14
Officer stock awards modification	—			6			2			2			—			2
Corporate, including stock-based compensation	47			53			146			170			37			51
Equity in affiliates' earnings, net of tax	(7		)	(15		)	(25		)	(38		)	(5		)	(9		)
Interest income	(4		)	(1		)	(9		)	(4		)	(2		)	(3		)
Interest expense	15			14			43			45			12			14
Other postretirement (income) expense	(1		)	(3		)	26			(8		)
Other postretirement income													(2		)	—
Earnings before income taxes and noncontrolling interest	273			283			790			929			186			262
Provision for income taxes	66			67			230			192			49			91
Net earnings	207			216			560			737			137			171
Net earnings attributable to the noncontrolling interest, net of tax	13			12			34			36			8			11
Net earnings attributable to BorgWarner Inc.	$	194		$	204		$	526		$	701		$	129		$	160

Total Assets


	September 30,		December 31,		March 31,		December 31,
(in millions)	2019		2018		2020		2019
Engine	$	4,638	$	4,731	$	4,388	$	4,536
Drivetrain	3,865		3,920		3,887		4,075
Total	8,503		8,651		8,275		8,611
Corporate *	1,696		1,444		1,227		1,091
Total assets	$	10,199	$	10,095	$	9,502	$	9,702

* Corporate assets include investments and other long-term receivables and certain deferred income taxes.____________________________________


*	Corporate assets include cash and cash equivalents, investments and other long-term receivables, and certain deferred income taxes.

~~(22)~~(21) Recent Transactions and Events

Proposed Acquisition of Delphi Technologies PLC

On January 28, 2020, the Company entered into a definitive agreement (the "Transaction Agreement") to acquire Delphi Technologies PLC (“Delphi Technologies”) in an all-stock transaction. The transaction, which is expected to close in the second half of 2020, is subject to approval by Delphi Technologies' stockholders, receipt of regulatory approvals and satisfaction or waiver of other closing conditions.

On March 30, 2020, Delphi Technologies provided notice to the lenders pursuant to its credit agreement, dated September 7, 2017, as amended, to draw the full available amount under the revolving facility thereunder (the “Revolver Draw”), resulting in a total of $500 million outstanding under the revolving facility. Following the Revolver Draw, on March 30, 2020, the Company sent a written notice to Delphi Technologies asserting that Delphi Technologies materially breached the Transaction Agreement

as a result of Delphi Technologies effecting the Revolver Draw without the Company’s prior written consent and asserting that, if such breach was not cured within 30 days, the Company had the right to terminate the Transaction Agreement. The Company received a response letter from Delphi Technologies on that date disputing the Company’s breach assertion on the basis that the Company unreasonably withheld and conditioned its consent to the Revolver Draw, in material breach of the Transaction Agreement.

On May 6, 2020, the Company and Delphi Technologies entered into an Amendment and Consent Agreement (the “Amendment”) pursuant to which, among other things, the Company consented to the Revolver Draw subject to the terms and conditions contained in the Amendment. The Amendment also amends the Transaction Agreement to include the following additional conditions to the Company's obligations to close the transaction (the “Closing”): (a) as of 11:59 p.m. (New York time) on the date immediately prior to the Closing, (i) the net amount of the revolver borrowings outstanding under the credit agreement (net of cash balances) does not exceed $115 million, and (ii) the total amount of revolver borrowings outstanding under the credit agreement does not exceed$225 million, and (b) Delphi Technologies has satisfied a specified net-debt-to-adjusted EBITDA ratio. In addition, the Company and Delphi Technologies have agreed to reduce the exchange ratio such that, pursuant to the terms of the Transaction Agreement, the Company will issue, in exchange for each Delphi Technologies share, 0.4307 shares of BorgWarner common stock. Other than as set forth in the Amendment, no additional changes or waivers with respect to the Transaction Agreement and the obligations thereunder were made, granted or consented to by the Company and Delphi Technologies and the Transaction Agreement remains in full force and effect in all respects.

Upon closing of the transaction, current BorgWarner stockholders are expected to own approximately 85% of the combined company, while current Delphi Technologies shareholders are expected to own approximately 15%.

BorgWarner Morse TEC LLC

Like many other industrial companies that have historically operated in the United States, the Company, or parties that the Company was obligated to indemnify, had been named as one of many defendants in asbestos-related personal injury actions. On October 30, 2019, the Company entered into a Membership Interest Purchase Agreement (the "Purchase Agreement") with Enstar Holdings (US) LLC ("Enstar"). Pursuant to the Purchase Agreement, the Company transferred 100% of the equity interests of BorgWarner Morse TEC LLC ("Morse TEC") to Enstar. As Morse TEC was the obligor for the Company's asbestos-related liabilities and policyholder of the related insurance assets, the rights and obligations related to these items transferred upon the sale, and pursuant to the Purchase Agreement, Morse TEC indemnifies the Company and its affiliates for asbestos-related liabilities as more specifically described in the Purchase Agreement. This indemnification obligation with respect to Asbestos-Related Liabilities (as such term is defined in the Purchase Agreement) is not subject to any cap or time limitation. Following the completion of this transfer, the Company has no obligation with respect to previously recorded asbestos-related liabilities. In accordance with ASC Topic 810, "Consolidation," this subsidiary was derecognized as the Company ceased to control the entity, and the Company removed the associated assets and liabilities from the consolidated balance sheet.

Romeo ~~Power Technology~~Systems, Inc.

In May 2019, the Company invested $50 million in exchange for a 20% equity interest in Romeo, ~~Power Technology ("Romeo"),~~ a technology-leading battery module and pack supplier. The Company accounts for this investment in Series A-1 Preferred Stock of Romeo under the measurement alternative

in ASC Topic 321, ""Investments - Equity ~~Securities"~~ Securities" for equity investments without a readily determinable fair value. Such investments are measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. During the three months ended March 31, 2020, after completing a qualitative assessment which indicated the Company's equity

investment in Romeo may have been impaired, the Company recorded a $9 million asset impairment cost to record this investment at its fair value of $41 million at March 31, 2020. The estimated fair value of Romeo was determined using unobservable inputs including quantitative information from lower valuations in recently completed or proposed financings and the liquidation preferences included in the Romeo stock agreements. These unobservable inputs are considered Level 3.

In September 2019, the Company and Romeo contributed total equity of $10 million and formed a new joint venture, BorgWarner Romeo Power LLC (the "Romeo JV"), in which the Company owns 60% interest. The Romeo JV is a variable interest entity focusing on producing battery module and pack technology. The Company is the primary beneficiary of the Romeo JV and consolidates the Romeo JV in its consolidated financial statements.

Rinehart Motion Systems LLC and AM Racing LLC

On January 2, 2019, the Company acquired Rinehart Motion Systems LLC and AM Racing LLC, two established companies in the specialty electric and hybrid propulsion market, for approximately $15 million, of which $10 million was paid in the first quarter of 2019, $2 million was paid in the first quarter of 2020 and the remaining $5$3 million will be paid upon satisfaction of certain conditions.

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

~~In connection with~~

(22) Subsequent Events

On April 13, 2020, a tornado struck the ~~acquisition,~~Company’s facility in Seneca, South Carolina (the "Seneca Plant"), causing damage to the ~~Company recognized intangible assets of $5 million, goodwill of $7 million within the Drivetrain reporting segment, and other assets and liabilities of $2 million to reflect the preliminary fair value~~Company’s assets. The Seneca Plant, which is one of the ~~assets acquired and liabilities assumed. The intangible assets are being amortized over a period of 2 to 15 years. Various valuation techniques were used to determine~~Company's largest drivetrain plants, was not in operation at the ~~fair value~~time.The Company is still assessing the full impact of the ~~intangible assets, with~~damage; however, the ~~primary techniques being forms~~Company's insurance policies (less applicable deductibles) are expected to cover the repair or replacement of the ~~income approach, which use significant unobservable inputs,~~Company’s assets that incurred loss or ~~Level 3 inputs, as defined by~~damage. In addition, the ~~fair value hierarchy. Under these valuation approaches,~~Company's insurance policies are expected to provide coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses sustained. The Seneca Plant resumed limited production on May 2, 2020; however the time to resume full operations cannot be estimated. The Company ~~is required~~has not yet determined the full impact to ~~make estimates and assumptions about sales, operating margins, growth rates, royalty rates and discount rates based on budgets, business plans, economic projections, anticipated future~~its financial position, results of operations, or cash flows, ~~and marketplace data. Due to~~including the ~~nature~~timing of ~~the transaction, goodwill is not deductible for tax purposes.~~those impacts.

The Company is in the process of finalizing all purchase accounting adjustments related to the acquisition of Cascadia Motion. Certain estimated values for the acquisition, including goodwill, intangible assets and deferred taxes, are not yet finalized, and the preliminary purchase price allocations are subject to change as the Company completes its analysis of the fair value as of the date of acquisition.

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

~~(23) Assets and Liabilities Held For Sale~~

In 2017, the Company started exploring strategic options for non-core product lines in the Engine segment, launched an active program to locate a buyer and initiated all other actions required to complete the plan to sell and exit the non-core pipe and thermostat product lines. During 2018, the Company continued its marketing efforts with interested parties and engaged in active discussions with these parties. In December 2018, after finalizing negotiations regarding various aspects of the sale,On April 29, 2020, the Company entered into a ~~definitive agreement to sell its thermostat product lines for approximately $28~~$750 million subject to customary adjustments. All closing conditions were satisfied, and the sale was closed on April 1, 2019. The Company received cash proceeds of $27 million in the nine months ended September 30, 2019. Additionally, during the nine months ended September 30, 2019, the Company entered into agreements to transition its pipes product lines to multiple buyers for inconsequential

~~proceeds. Based on the cash proceeds in conjunction with~~delayed-draw term loan that matures 364 days after the closing date of the ~~transaction to sell~~facility. The facility expires or must be mandatorily prepaid upon the ~~thermostat product lines,~~termination of the Company determined no additional gain or loss on sale was required during the nine months ended September 30, 2019. During the nine months ended September 30, 2019, the assets and liabilities were removed from the Condensed Consolidated Balance Sheet. The business did not meet the criteria to be classified as a discontinued operation.

~~The Company is in the process of finalizing all purchase price adjustments~~agreement related to the ~~sale~~anticipated acquisition of ~~non-core product lines. Subsequent adjustments may be necessary based on~~Delphi Technologies, the ~~finalization~~receipt of ~~this process.~~

~~The assets and liabilities classified as held for sale at December 31, 2018 were as follows:~~

December 31,
(millions of dollars) 2018
Receivables, net $ 15
Inventories, net 42
Prepayments and other current assets 12
Property, plant and equipment, net 45
Goodwill 7
Other intangible assets, net 20
Impairment of carrying value (94 )
Total assets held for sale $ 47

Accounts payable and accrued expenses $ 18
Other liabilities 5
Total liabilities held for sale $ 23

~~(24) Subsequent Event~~

~~On October 30, 2019,~~proceeds from certain capital markets transactions, or the ~~Company entered into a definitive agreement with Enstar Holdings (US) LLC (“Enstar”), a subsidiary~~receipt of ~~Enstar Group Limited, pursuant to which Enstar acquired 100%~~proceeds from certain asset sales outside the ordinary course of the equity interests of BorgWarner Morse TEC LLC ("Morse TEC"), a consolidated wholly-owned subsidiary of the Company that holds asbestos and certain other liabilities. In connection with the closing, the Company contributed approximately $172 million in cash to Morse TEC. As a result of this transaction, the Company expects to remove the asbestos obligations, related insurance assets and associated deferred tax assets from the Company's Condensed Consolidated Balance Sheet.business. The Company ~~is evaluating the accounting for~~has not drawn any amounts under this ~~transaction, but currently estimates that this transaction could result in an after-tax loss in its consolidated financial statements of up to $40 million in the fourth quarter of 2019.~~

facility.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

BorgWarner Inc. and Consolidated Subsidiaries (the “Company” or "BorgWarner") is a global product leader in clean and efficient technology solutions for combustion, hybrid, and electric vehicles. Our products help improve vehicle performance, propulsion efficiency, stability and air quality. These products are manufactured and sold worldwide, primarily to original equipment manufacturers (“OEMs”) of light vehicles (passenger cars, sport-utility vehicles, vans and light trucks). The Company's products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications). The Company also manufactures and sells its products to certain ~~tier one~~Tier One vehicle systems suppliers and into the aftermarket for light, commercial and off-highway vehicles. The Company operates manufacturing facilities serving customers in Europe, the Americas and Asia and is an original equipment supplier to every major automotive OEM in the world.

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

COVID-19/CORONAVIRUS UPDATE

A novel strain of COVID-19/coronavirus was first identified in Wuhan, China in December 2019 and subsequently declared a pandemic by the World Health Organization on March 11, 2020. To date, COVID-19/coronavirus has surfaced in nearly all regions around the world and resulted in travel restrictions, closing of borders and business slowdowns or shutdowns in affected areas. Furthermore, COVID-19/coronavirus has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates and interest rates. The continued spread of COVID-19/coronavirus has led to disruption and volatility in the global capital markets, which adversely impacts the access to capital and increases the cost of capital.

As a result, COVID-19/coronavirus has impacted our business globally. Many OEMs have announced that they have suspended manufacturing operations, particularly in North America and Europe, on a temporary basis due to market conditions and matters associated with COVID-19/coronavirus. Significant reductions in automotive or truck production would have an adverse effect on the Company's sales to OEMs in these regions, which comprised approximately 70% of the Company's total sales in 2019. Additionally, as a global manufacturer, we are responding to shelter-in-place and similar government orders in various locations around the world, including throughout the United States and Europe.

In response to the outbreak and business disruption, we have, first and foremost, prioritized the health and safety of our employees. Lessons learned from the first interactions with the COVID-19/coronavirus led to a number of employee safety measures to contain the spread, including domestic and international travel restrictions, work-from-home practices, extensive cleaning protocols, and various temporary closures of our manufacturing and assembly facilities.

The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity. These actions include, but are not limited to:

a temporary 20% reduction in base salaries of the Company's senior executive leadership team and annual retainers of the Company’s non-employee directors;

up to 10% temporary base pay reductions for other salaried employees; and

reducing discretionary spending, such as outside professional services

The Company will continue to evaluate further ways to manage costs in line with reduced sales levels.

We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside of our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, the Company cannot reasonably estimate the impacts of COVID-19/coronavirus on our financial condition, results of operations or cash flows in the future. However, we do expect that it will have a material adverse impact on our revenue and overall profitability and may lead to additional temporary closure costs, supply chain disruptions and a volatile effective tax rate driven by changes in the mix of earnings across the Company’s jurisdictions.

As of March 31, 2020, the Company had liquidity of $2,401 million, comprised of cash balances of $901 million and an undrawn revolving credit facility of $1,500 million. The Company is in full compliance with its covenants under the revolving credit facility and has full access to its undrawn revolving credit facility. Total debt maturities through the end of 2021 of $284 million include $34 million in short-term borrowings and $250 million in current portion of long-term borrowings. Given its strong liquidity position, the Company believes it will have sufficient liquidity and maintain compliance with all covenants throughout the next 12 months even in an environment with significantly lower OEM production volumes.

PROPOSED ACQUISITION OF DELPHI TECHNOLOGIES PLC

On January 28, 2020, the Company entered into a definitive agreement to acquire Delphi Technologies PLC (“Delphi Technologies”) in an all-stock transaction. Refer to Note 21, “Recent Transactions and Events,” to the Condensed Consolidated Financial Statements in Item 1 of this report for more information. The Company expects to pay fees, costs and expenses associated with the transaction with available cash. The following discussion and analysis of financial condition and results of operations does not address matters associated with the anticipated acquisition.

SENECA, SOUTH CAROLINA FACILITY TORNADO

On April 13, 2020, a tornado struck the Company’s facility in Seneca, South Carolina (the "Seneca Plant"), causing damage to the Company’s assets. The Seneca Plant, which is one of the Company's largest drivetrain plants, was not in operation at the time.The Company is still assessing the full impact of the damage; however, the Company's insurance policies (less applicable deductibles) are expected to cover the repair or replacement of the Company’s assets that incurred loss or damage. In addition, the Company's insurance policies are expected to provide coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses sustained. The Seneca Plant resumed limited production on May 2, 2020; however the time to resume full operations cannot be estimated. The Company has not yet determined the full impact to its financial position, results of operations, or cash flows, including the timing of those impacts.

RESULTS OF OPERATIONS

Three Months Ended ~~September 30, 2019~~March 31, 2020 vs. Three Months Ended ~~September 30, 2018~~March 31, 2019

Net sales for the three months ended ~~September 30, 2019~~March 31, 2020 totaled ~~$2,492~~$2,279 million, a ~~0.6% increase~~decrease of 11.2% from the three months ended ~~September 30, 2018.~~March 31, 2019. Excluding the impact of weaker foreign currencies relative to the U.S. dollar, primarily the Euro, Chinese Renminbi and Korean Won and the net impact of acquisitions and divestitures, net sales ~~increased~~decreased approximately ~~4.5%.~~8.1% primarily due to the COVID-19/coronavirus impacts discussed above, including production slowdowns and shutdowns.

Cost of sales as a percentage of net sales was ~~79.0% in~~80.4% during the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~79.2% in~~79.8% during the three months ended ~~September 30, 2018.~~March 31, 2019. Gross profit and gross margin were ~~$524~~$447 million and ~~21.0% in~~19.6% during the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~$515~~$519 million and ~~20.8% in~~20.2% during the three months ended ~~September 30, 2018.~~March 31, 2019. The ~~increase~~decrease in gross margin is primarily due to ~~the impact of higher revenue and cost savings actions.~~lower sales.

Selling, general and administrative ("SG&A") expenses for the three months ended ~~September 30, 2019 remained flat at $230~~March 31, 2020 were $213 million as compared to $226 million for the three months ended ~~September 30, 2018.~~March 31, 2019. SG&A as a percentage of net sales was ~~9.2%~~9.3% and ~~9.3%~~8.8% for the three months ended ~~September 30,~~March 31, 2020 and 2019, respectively. The $13 million reduction in SG&A was primarily due to reduced compensation-related costs and ~~2018, respectively.~~discretionary spending reductions, partially offset by an increase in Research and Development ("R&D") expenses. R&D expenses, net of customer reimbursements, which are included in SG&A expenses, for the three months ended ~~September 30, 2019, decreased $6~~March 31, 2020, increased $5 million to ~~$102~~$109 million as compared to ~~$108~~$104 million for the three months ended ~~September 30, 2018.~~March 31, 2019. R&D as a percentage of net sales was ~~4.1%~~4.8% and ~~4.4%~~4.1% for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The increase in R&D expenses was primarily due to reduced customer reimbursements in the period. The Company's current long-term expectation for R&D spending remains in the range of 4.0% to 4.5% of net sales.

Other expense, net of ~~$18~~$45 million for the three months ended ~~September 30, 2019~~March 31, 2020 includes ~~$14~~$21 million of expenses, primarily professional fees, related to the Company's strategic acquisition and divestiture activities, including the anticipated acquisition of Delphi Technologies, $15 million of restructuring expense primarily related to actions to reduce structural costs, and $4$9 million of ~~expenses, primarily professional fees, related~~asset impairment cost. Over the course of the next few years, the Company plans to the Company's review of strategic acquisition and divestiture targets, including the 20% equity interest in Romeo Power Technology and the divestiture activities for the non-core pipe and thermostat product lines. The Company intends to continue its plantake additional actions to reduce existing structural costs. These actions are expected to result in primarily cash restructuring costs in ~~order~~the $275 million to ~~improve~~$300 million range through the ~~competitiveness~~end of ~~its business and maintain its margin profile. These actions may result~~2023. The resulting annual cost savings are expected to be in the ~~recognition~~range of ~~additional restructuring charges that could be material.~~approximately $90 million to $100 million by 2023. The Company plans to utilize these savings to sustain the Company’s strong operating margin profile and long-term cost competitiveness.

Other expense, net of $7$29 million for the three months ended September 30, 2018 includes $5 million of restructuring expense primarily related to actions within the Engine segment designed to improve future profitability and competitiveness and $2 million of expenses primarily related to divestiture activities for the non-core pipes and thermostat product lines.

~~Equity in affiliates’ earnings of $7 million decreased $8 million as compared with the three months ended September 30, 2018 due to lower industry volumes and cost pressures in a reduced market.~~

~~Interest expense of $15 million was relatively flat from the three months ended September 30, 2018.~~

The Company’s earnings per diluted share were $0.94 and $0.98 for the three months ended September 30, 2019 and 2018, respectively. The Company believes the following table is useful in highlighting non-comparable items that impacted its earnings per diluted share.

Three Months Ended
September 30,
2019 2018
Non-comparable items:
Restructuring expense $ (0.04 ) $ (0.03 )
Merger, acquisition and divestiture expense (0.02 ) —
Officer stock awards modification —
(0.03 )
Tax adjustments 0.04
0.04
Total impact of non-comparable items per share — diluted $ (0.02 ) $ (0.02 )

~~Nine months Ended September 30, 2019 vs. Nine months Ended September 30, 2018~~

Net sales for the nine months ended September 30, 2019 totaled $7,609 million, a 4.4% decrease from the nine months ended September 30, 2018. Excluding the impact of weaker foreign currencies, primarily the Euro, Chinese Renminbi and Korean Won, and the net impact of acquisitions and divestitures, net sales increased approximately 0.1%.

Cost of sales as a percentage of net sales was 79.6% in the nine months ended September 30, 2019 compared to 78.8% in the nine months ended September 30, 2018. Gross profit and gross margin were $1,556 million and 20.4% in the nine months ended September 30, 2019 compared to $1,686 million and 21.2% in the nine months ended September 30, 2018. The reduction in gross margin is primarily due to supplier cost reductions not keeping pace with normal customer price deflation and the increased cost from tariffs. The Company's material cost of sales was 55.2% and 54.4% of net sales in the nine months ended September 30, 2019 and 2018, respectively. The Company's remaining cost to convert raw material to finished product was comparable to the nine months ended September 30, 2018.

Selling, general and administrative ("SG&A") expenses for the nine months ended September 30, 2019 decreased $52 million to $668 million as compared to $720 million for the nine months ended September 30, 2018, primarily due to cost savings and lower research and development ("R&D") expenses. SG&A as a percentage of net sales was 8.8% and 9.0% for the nine months ended September 30, 2019 and 2018, respectively. R&D expenses, which are included in SG&A expenses, for the nine months ended September 30, 2019, decreased $18 million to $319 million as compared to $337 million for the nine months ended September 30, 2018. R&D as a percentage of net sales was 4.2% for the nine months ended September 30, 2019 and 2018.

~~Other expense, net of $63 million for the nine months ended September 30,~~March 31, 2019 includes ~~$41~~$14 million of restructuring expense primarily related to actions within the Engine segment designed to improve future profitability and competitiveness, $14 million of expenses related to the receipt of a final unfavorable arbitration decision associated with the resolution of a matter related to a previous

acquisition, and $10 million of expenses, primarily professional fees, related to the Company's review of strategic acquisition and divestiture targets, including the 20% equity interest in Romeo Power Technology and the divestiture activities for the non-core pipe and thermostat product lines. The Company intends to continue its plan to reduce existing structural costs in order to improve the competitiveness of its business and maintain its margin profile. These actions may result in the recognition of additional restructuring charges that could be material.

Other expense, net of $42 million for the nine months ended September 30, 2018 includes $44 million of restructuring expense primarily related to actions within the Engine segment designed to improve future profitability and competitiveness, $5$1 million of expenses primarily related to divestiture activities for ~~the~~ non-core pipes and thermostat product ~~lines and a gain of $4 million related to the settlement of a commercial contract for an entity acquired in the 2015 Remy acquisition.~~lines.

Equity in affiliates’ earnings of ~~$25~~$5 million decreased ~~$13~~$4 million as compared with the ~~nine~~three months ended ~~September 30, 2018~~March 31, 2019 due to lower industry volumes and cost ~~pressures in a reduced market.~~pressures.

Interest expense of ~~$43~~$12 million decreased $2 million as compared with the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019 primarily due to lower ~~debt levels.~~

Other postretirement (income) expense of $26 million increased $34 million as compared with the nine months ended September 30, 2018. The Company settled approximately $50 million of its pension projected benefit obligation by liquidating approximately $50 million in plan assets through a lump-sum pension de-risking disbursement made to an insurance company. Pursuant to this agreement, the insurance company unconditionally and irrevocably guarantees all future payments to certain participants that were receiving payments from the U.S. pension plan. The insurance company assumes all investment risk associated with the assets that were delivered as part of this transaction. Additionally, during the nine months ended September 30, 2019, the Company discharged certain U.S. pension plan obligations by making lump-sum payments of $13 million to former employees of the Company. As a result, the Company settled $63 million of projected pension obligation by liquidating an equivalent amount of pension plan assets and recorded a non-cash settlement loss of $26 million related to the accelerated recognition of unamortized losses.debt.

for other one-time adjustments. The other one-time adjustments primarily relate to tax law changes in India that were enacted during the quarter and the release of certain unrecognized tax benefits due to the closure of an audit. Excluding the impact of these non-comparable items, the Company estimated its annual effective tax rate associated with ongoing operations to be approximately 28% for the year ending December 31, 2020.

The Company's effective tax rate for the three months ended March 31, 2019 was ~~29.2%~~34.7%. This rate includes reductions of income tax expenses of~~$11~~ $3 million related to restructuring expense ~~$6 million related to other postretirement expense,~~ and ~~$13~~$5 million related to other one-time adjustments. This rate also includes an increase in income tax expense of $22 million due to the U.S. Department of the Treasury’s issuance of the final regulations in the first quarter of 2019 related to the calculation of the one-time transition ~~tax. Excluding the impact of these non-comparable items, the Company estimated its annual effective~~ tax ~~rate associated with ongoing operations to be approximately 27% for the year ending December 31, 2019.~~

The Company's effective tax rate for the nine months ended September 30, 2018 was 20.7%. This rate includes income tax expense of $1 million related to a commercial settlement gain and reductions of income tax expense of $10 million associated with restructuring expense, $20 million related to adjustments to measurement period provisional estimates associated with the Tax Cuts and Jobs Act $22 million related to an increase to our deferred tax asset due to the Company's ability to record a tax benefit for certain foreign tax credits now available due to actions the Company took in the second quarter, and $11 million~~for other one-time tax adjustments.~~of 2017.

The Company’s earnings per diluted share were ~~$2.54~~$0.63 and ~~$3.34~~$0.77 for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The Company believes the following table is useful in highlighting non-comparable items that impacted its earnings per diluted share.


	Nine Months Ended September 30,						Three Months Ended March 31,
	2019			2018			2020			2019
Non-comparable items:
Merger, acquisition and divestiture expense							$	(0.10	)	$	(0.01	)
Restructuring expense	$	(0.15	)	$	(0.17	)	(0.06		)	(0.05		)
Pension settlement loss	(0.10		)	—
Loss on arbitration	(0.07		)	—
Merger, acquisition and divestiture expense	(0.04		)	(0.02		)
Asset impairment							(0.04		)	—
Unfavorable arbitration loss							—			(0.07		)
Officer stock awards modification	(0.01		)	(0.01		)	—			(0.01		)
Gain on commercial settlement	—			0.01
Tax adjustments	(0.04		)	0.25			0.06			(0.09		)
Total impact of non-comparable items per share — diluted	$	(0.41	)	$	0.06		$	(0.14	)	$	(0.23	)

Reporting Segments

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

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

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

Net Sales by Reporting Segment

Three Months Ended
September 30, Nine Months Ended
September 30,
(in millions) 2019 2018 2019 2018
Engine $ 1,514
$ 1,516
$ 4,681
$ 4,906
Drivetrain 993
976
2,973
3,093
Inter-segment eliminations (15 ) (14 ) (45 ) (43 )
Net sales $ 2,492
$ 2,478
$ 7,609
$ 7,956



	Three Months Ended March 31,
(in millions)	2020			2019
Engine	$	1,434		$	1,598
Drivetrain	860			982
Inter-segment eliminations	(15		)	(14		)
Net sales	$	2,279		$	2,566

Adjusted EBIT


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
(in millions)	2019			2018			2019			2018			2020			2019
Engine	$	241		$	238		$	731		$	797		$	208		$	241
Drivetrain	100			108			307			345			63			105
Adjusted EBIT	341			346			1,038			1,142			271			346
Merger, acquisition and divestiture expense													21			1
Restructuring expense	14			5			41			44			15			14
Merger, acquisition and divestiture expense	4			2			10			5
Other expense (income)	—			2			14			(3		)
Asset impairment													9			—
Unfavorable arbitration loss													—			14
Officer stock awards modification	—			6			2			2			—			2
Corporate, including stock-based compensation	47			53			146			170			37			51
Equity in affiliates' earnings, net of tax	(7		)	(15		)	(25		)	(38		)	(5		)	(9		)
Interest income	(4		)	(1		)	(9		)	(4		)	(2		)	(3		)
Interest expense	15			14			43			45			12			14
Other postretirement expense (income)	(1		)	(3		)	26			(8		)
Other postretirement income													(2		)	—
Earnings before income taxes and noncontrolling interest	273			283			790			929			186			262
Provision for income taxes	66			67			230			192			49			91
Net earnings	207			216			560			737			137			171
Net earnings attributable to the noncontrolling interest, net of tax	13			12			34			36			8			11
Net earnings attributable to BorgWarner Inc.	$	194		$	204		$	526		$	701		$	129		$	160

Three Months Ended ~~September 30, 2019~~March 31, 2020 vs. Three Months Ended ~~September 30, 2018~~March 31, 2019

The Engine segment net sales decreased $2$164 million, or ~~0.1%~~10.3%, from the three months ended ~~September 30, 2018.~~March 31, 2019. Excluding the impact of weaker foreign currencies relative to the U.S. dollar, primarily the Euro, Chinese Renminbi, and Korean Won, and the net impact of acquisitions and divestitures, net sales ~~increased~~decreased approximately ~~4.6%~~6.4% from the three months ended ~~September 30, 2018,~~March 31, 2019, due to ~~net new business~~the COVID-19/coronavirus impacts discussed above, including production slowdowns and ~~beneficial customer mix.~~shutdowns. The Engine segment Adjusted EBIT margin was ~~15.9% in~~14.5% during the three months ended ~~September 30, 2019, up~~March 31, 2020, down from ~~15.7% in~~15.1% during the three months ended ~~September 30, 2018~~March 31, 2019, primarily due to ~~impact of higher revenue excluding~~ the impact of ~~weaker currencies and the net impact of acquisitions and divestitures.~~

The Drivetrain segment net sales increased $17 million, or 1.7%, from the three months ended September 30, 2018. Excluding the impact of weaker foreign currencies, primarily the Euro, Chinese Renminbi, and Korean Won, net sales increased approximately 4.2% from the three months ended September 30, 2018, primarily due to higher net new business. The Drivetrain segment Adjusted EBIT margin was 10.1% in the three months ended September 30, 2019 down from 11.1% in the three months ended September 30, 2018, primarily due to higher research and development spending and startup costs for launches.

~~Nine months Ended September 30, 2019 vs. Nine months Ended September 30, 2018~~

The Engine segment net sales decreased $225 million, or 4.6%, from the nine months ended September 30, 2018. Excluding the impact of weaker foreign currencies, primarily the Euro, Chinese Renminbi, and Korean Won, and the net impact of acquisitions and divestitures, net sales increased approximately 0.6% from the nine months ended September 30, 2018, due to net new business and beneficial customer mix. The Engine segment Adjusted EBIT margin was 15.6% in the nine months ended September 30, 2019, down from 16.2% in the nine months ended September 30, 2018 primarily due to industry volume declines and supplier cost reductions not keeping pace with normal customer price deflation.lower sales.

The Drivetrain segment net sales decreased ~~$120~~$122 million, or ~~3.9%~~12.4%, from the ~~nine~~three months ended ~~September 30, 2018.~~March 31, 2019. Excluding the impact of weaker foreign currencies relative to the U.S. dollar, primarily the Euro, Chinese Renminbi, and Korean Won, net sales decreased approximately ~~0.6%~~10.6% from the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, primarily due to ~~a decline in industry volumes.~~the COVID-19/coronavirus impacts discussed above, including production slowdowns and shutdowns. The Drivetrain segment Adjusted EBIT margin was ~~10.3% in~~7.3% during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 down from ~~11.2% in~~10.7% during the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, primarily due to ~~industry volume declines,~~the impact of lower sales and higher net research and development ~~spending and startup costs for launches.~~spending.

Outlook

~~Based on~~The Company expects industry production to significantly decline in Europe, North America and China during 2020 driven mainly by the ~~mid-point~~negative production impact caused by COVID-19/coronavirus. Net new business-related sales growth, due to increased penetration of ~~guidance,~~BorgWarner products around the world, is expected to only partially offset the impact of declining global industry production expected. As a result, the Company expects ~~a modest year-over-year decline~~declining revenue in ~~revenue,~~2020, excluding the impact of foreign currencies and the net impact of acquisitions and divestitures. ~~Net new business-related sales growth is expected to partially offset the impact of the declining global industry production expected in 2019.~~

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

FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

The Company maintains various liquidity sources including cash and cash equivalents and the unused portion of its multi-currency revolving credit agreement. At ~~September 30, 2019,~~March 31, 2020, the Company had ~~$916~~$901 million of cash, of which ~~$540~~$571 million of cash is held by our subsidiaries outside of the United States. Cash held by these subsidiaries is used to fund foreign operational activities and future investments, including acquisitions.

The ~~vast~~ majority of cash held outside the United States is available for repatriation. The Tax Act reduced the U.S. federal corporate tax rate from 35 percent to 21 percent and required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. As of January 1, 2018, funds repatriated from foreign subsidiaries are generally no longer taxable for U.S. federal tax purposes. In light of the treatment of foreign earnings under the Tax Act, the Company recorded a liability for the U.S. federal and applicable state income tax liabilities calculated under the provisions of the deemed repatriation of foreign earnings. A deferred tax liability has been recorded for substantially all estimated legally distributable foreign earnings. The Company uses its U.S. liquidity primarily for various corporate purposes, including but not limited to debt service, share repurchases, dividend distributions and other corporate expenses.

~~The~~On March 13, 2020, the Company ~~has a $1.2 billion~~amended its multi-currency revolving credit facility ~~which includes a feature that~~by increasing the size of the facility from $1.2 billion to $1.5 billion and by extending the maturity until March, 13, 2025. The multi-currency revolving credit agreement provides for the facility to automatically increase to $2.0 billion upon the closing of the anticipated acquisition of Delphi Technologies PLC. Additionally, the agreement allows the ~~Company's~~Company the ability to increase the facility ~~to be increased to $1.5~~by $1.0 billion with bank group approval. The ~~facility provides for borrowings through June 29, 2022~~. ~~The Company has~~credit agreement contains customary events of default and one key financial covenant ~~as part of the credit agreement~~ which is a debt to ~~EBITDA ("~~Earnings Before Interest, Taxes, Depreciation and ~~Amortization"~~Amortization ("EBITDA") ratio. The Company was in compliance with the financial covenant at ~~September 30, 2019 and expects to remain compliant in future periods.~~ March 31, 2020. At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had no outstanding borrowings under this facility.

The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed ~~$1.2~~$1.5 billion.

The Company may utilize uncommitted lines of credit for short-term working capital requirements. As of September 30, 2019 and December 31, 2018, the Company had $33 million in borrowings under these facilities, which are classified as notes payable and short-term debt on the Condensed Consolidated Balance Sheet.

In addition to the credit facility, the Company's universal shelf registration provides the ability to issue various debt and equity instruments subject to market conditions. On April 29, 2020, the Company entered into a $750 million delayed-draw term loan that matures 364 days after the closing date of the facility. The facility expires or must be mandatorily prepaid upon the termination of the agreement related

to the anticipated acquisition of Delphi Technologies, the receipt of proceeds from a capital markets transaction, or the receipt of proceeds from any asset sales outside the ordinary course of business. The Company has not drawn any amounts under this facility and may alternatively issue an unsecured senior note.

On February ~~6, 2019,~~12, 2020 and April ~~25, 2019, and July 25, 2019~~29, 2020, the Company’s Board of Directors declared quarterly cash dividends of $0.17 per share of common stock. ~~These~~The dividends declared in the first quarter were paid on March 16, 2020, and the dividends declared in the second quarter will be paid on June 15, ~~2019 and June 17, 2019, and September 16, 2019.~~2020.

~~At September 30, 2019,~~From a credit quality perspective, the Company had a credit rating of BBB+ from both Standard & Poor's and Fitch Ratings and Baa1 from ~~Moody's.~~Moody's as of December 31, 2019, with a stable outlook from all rating agencies. On January 28, 2020, the Company entered into a definitive agreement to acquire Delphi Technologies. Due to uncertainties surrounding this anticipated transaction and the recent business disruptions from COVID-19/coronavirus, Moody's placed the Company's Baa1 rating under review for possible downgrade, while Standard & Poor's placed the Company on CreditWatch with negative implications. The Company’s current outlook from ~~Standard & Poor's, Moody's, and~~ Fitch Ratings isremained stable. None of the Company's debt agreements ~~requires~~require accelerated repayment in the event of a downgrade in credit ratings.

Net cash provided by operating activities increased ~~$268 million~~ to ~~$824~~$263 million in the first ~~nine~~three months of ~~2019~~2020 from ~~$556~~$40 million in the first ~~nine~~three months of ~~2018.~~2019. The $223 million increase in cash ~~increase from~~provided by operating activities ~~of $268 million~~ primarily reflects favorable changes in working capital, partially offset by lower net earnings adjusted for non-cash charges to operations.

Net cash used in investing activities ~~decreased $13~~increased $16 million to ~~$380~~$120 million in the first ~~nine~~three months of ~~2019~~2020 from ~~$393~~$104 million in the first ~~nine~~three months of ~~2018.~~2019. This ~~decrease~~increase is primarily due to the ~~lower capital expenditures, including tooling outlays, and~~non-recurrence of the 2019 proceeds from the sale of the non-core pipe and thermostat product lines, partially offset by the ~~equity investment in Romeo Power Technology and the acquisition~~2019 acquisitions of Rinehart Motion Systems LLC and AM Racing LLC.

Net cash used in financing activities decreased ~~$75~~$91 million to ~~$248~~$62 million in the first ~~nine~~three months of ~~2019~~2020 from ~~$323~~$153 million in the first ~~nine~~three months of ~~2018.~~2019. This decrease is primarily driven by ~~lower~~ share repurchases of $67 million in the first three months of 2019 and ~~higher net~~lower repayments of debt ~~borrowings.~~in the first three months of 2020.

COVID-19/coronavirus has resulted in, and may continue to result in, significant disruption of global financial markets, which may reduce the Company's ability to access capital or its customers’ ability to pay the Company for past or future purchases, which could negatively affect the Company's liquidity. The Company, however, believes that the combination of cash balances, cash from operations, available credit facilities, and the universal shelf registration capacity will be sufficient to satisfy its cash needs for current level of operations, planned operations for the foreseeable future and the current share repurchase program.

The Company intends to continue to balance capital allocation to support its needs for internal growth, external growth, the return of capital to stockholders, debt reduction and cash conservation.

CONTINGENCIES

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

Environmental

~~See~~Refer to Note ~~18, -~~17, "Contingencies," to the Condensed Consolidated Financial Statements for further details and information respecting the Company’s environmental liability.

~~Asbestos-related Liability~~

Like many other industrial companies that have historically operated in the United States, the Company, or parties the Company is obligated to indemnify, continues to be named as one of many defendants in asbestos-related personal injury actions. The Company has an estimated liability of $772 million as of September 30, 2019 for asbestos-related claims and associated costs through 2074, which is the last date by which the Company currently estimates it is likely to have resolved all asbestos-related claims. The Company additionally estimates that, as of September 30, 2019, it has aggregate insurance coverage available in the amount of $385 million to satisfy asbestos-related claims and associated defense costs. See Note 18 - "Contingencies," to the Condensed Consolidated Financial Statements for further details and information respecting the Company’s asbestos-related liability and corresponding insurance asset.

New Accounting Pronouncements

~~See~~Refer to Note 2, - "New Accounting Pronouncements," to the Condensed Consolidated Financial Statements for a detailed description of new applicable accounting pronouncements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the information concerning our exposures to interest rate risk or commodity price risk as stated in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Foreign currency exchange rate risk is the risk that the Company will incur economic losses due to adverse changes in foreign currency exchange rates. Currently, the Company's most significant currency exposures relate to the Chinese Renminbi, the Euro, the Hungarian Forint, the Japanese Yen, the Mexican Peso, the Swedish Krona and the South Korean Won. The Company mitigates its foreign currency exchange rate risk by establishing local production facilities and related supply chain participants in the markets it serves, by invoicing customers in the same currency as the source of the products and by funding some of its investments in foreign markets through local currency loans. The Company also monitors its foreign currency exposure in each country and implements strategies to respond to changing economic and political environments. The depreciation of the British Pound post the United Kingdom's 2016 vote to leave the European Union and planned implementation actions are not expected to have a significant impact on the Company since net sales from the United Kingdom represent less than 2% of the Company's net sales in 2018. In addition, the Company periodically enters

into forward currency contracts in order to reduce exposure to exchange rate risk related to transactions denominated in currencies other than the functional currency.

The foreign currency translation adjustment loss of ~~$114~~$74 million and ~~$136~~$9 million for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and loss of $43 million and $124 million for the three and nine months ended September 30, 2018,~~respectively, contained within the Company's Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~ represent the foreign currency translational impacts of converting its non-U.S. dollar subsidiaries' financial statements to the Company’s reporting currency (U.S. ~~Dollar).~~dollar) and the related gains and losses arising from its net investment hedges. The foreign currency translation adjustment loss of ~~$114~~$74 million induring the three months ended ~~September 30,~~March 31, 2020 was primarily due to the impact of a strengthening U.S. dollar against the Korean Won, Chinese Renminbi, and Brazilian Real, which increased approximately 5%, 2% and 23%, respectively, and decreased other comprehensive income from December 31, 2019 by approximately $21 million, $19 million and $19 million, respectively. The foreign currency translation adjustment loss of $9 million during the three months ended March 31, 2019 was primarily due to the impact of a strengthening U.S. dollar against the Euro, ~~Chinese Renminbi and Korean Won,~~ which increased approximately ~~4% against each currency from June 30, 2019. The foreign currency translation adjustment loss of $136~~2% and decreased other comprehensive income by approximately $46 million, ~~in the nine months ended September 30, 2019 was primarily due to~~offset by the impact of a ~~strengthening~~weakening U.S. dollar against ~~the Euro,~~ Chinese Renminbi and ~~Korean Won,~~British Pound, which decreased approximately 3% and 2% and increased ~~approximately 5%, 4%~~other comprehensive income by $24 million and 7%$6 million, respectively, from December 31, 2018, respectively. The foreign currency translation adjustment loss of $43 million and $124 million in the three and nine months ended September 30, 2018 was primarily due to the impact of a strengthening U.S. dollar against the Euro and Chinese Renminbi, which increased approximately 1% and 4% since June 30, 2018, respectively and approximately 3% and 5% from December 31, 2017, respectively.2018.

Item 4.Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that these controls and procedures are effective. There have been no changes in internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION


Item 1.	Legal Proceedings

The Company is subject to a number of claims and judicial and administrative proceedings (some of which involve substantial amounts) arising out of the Company’s business or relating to matters for which the Company may have a contractual indemnity obligation. ~~See~~Refer to Note ~~18 -~~17, "Contingencies," to the Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a discussion of environmental, ~~asbestos-related liability~~an open SEC investigation and other litigation which is incorporated herein by reference.

Item 1A. Risk Factors

During the three months ended March 31, 2020, there have been no material changes from the risk factors disclosed in the Company's Annual Report on the Form 10-K for the year ended December 31, 2019, except as described below:

Other risks

We face risks related to COVID-19/coronavirus pandemic that could adversely affect our business and financial performance.

The COVID-19/coronavirus pandemic has disrupted, and is likely to continue to disrupt, the global automotive industry and customer sales, production volumes, and purchases of light vehicles by end consumers. Global vehicle production has decreased, and some vehicle manufacturers have completely shut down manufacturing operations in some countries and regions, including the United States and Europe. As a result, we have experienced, and are likely to continue to experience, delays in the production and distribution of our products and the loss of sales. If the global economic effects caused by COVID-19/coronavirus continue or increase, overall customer demand may continue to decrease which could have a further adverse effect on our business, results of operations, and financial condition.

Global government directives and initiatives to reduce the transmission of COVID-19/coronavirus, such as the imposition of travel restrictions, closing of borders, stay-at-home directives and closing of entire plants, cities and countries, have materially impacted our operations. Furthermore, COVID-19/coronavirus has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates, and interest rates. For example, the continued spread of COVID-19/coronavirus has led to disruption and volatility in the global capital markets, which adversely impacts access to capital and increases the cost of capital.

Due to the speed with which the situation is developing and the uncertainty of its duration and the timing of recovery, we are not able at this time to predict the extent to which COVID-19/coronavirus pandemic may have an adverse effect on our business, financial condition, and operating results. The extent of the impact of COVID-19/coronavirus on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frames, will depend on future developments, including, but not limited to, the duration and spread of COVID-19/coronavirus, its severity, the actions to contain COVID-19/coronavirus or treat its impact, related restrictions on travel, and the duration, timing and severity of the impact on customer production, including any recession resulting from COVID-19/coronavirus, all of which are uncertain and cannot be predicted. An extended period of global supply chain and economic disruption as a result of COVID-19/coronavirus would have a further material negative impact on our business, results of operations, access to sources of liquidity and financial condition, though the full extent and duration are uncertain.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

~~The~~In January 2020, the Company's Board of Directors authorized the purchase of up to ~~79.6 million shares~~$1 billion of the Company's common stock, inwhich replaced the ~~aggregate.~~previous share repurchase program. As of ~~September 30, 2019,~~March 31, 2020, the Company had not repurchased ~~75.4 million~~any shares ~~in the aggregate~~ under ~~the~~this common stock repurchase program. All shares purchased under this authorization ~~have been and~~ will ~~continue to~~ be repurchased in the open market at prevailing prices and at times and in amounts to be determined by management as market conditions and the Company's capital position warrant. The Company may use Rule 10b5-1 and 10b-18 plans to facilitate share repurchases. Repurchased shares will be deemed common stock held in treasury and may subsequently be ~~reissued for general corporate purposes.~~reissued.

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

The following table provides information about the Company's purchases of its equity securities that are registered pursuant to Section 12 of the Exchange Act during the quarter ended ~~September 30, 2019:~~March 31, 2020:

												Issuer Purchases of Equity Securities
Period	Total number of shares purchased	Average price per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs	Total number of shares purchased	Average price per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under plans or programs (in millions)
Month Ended July 31, 2019
Month Ended January 31, 2020
Common Stock Repurchase Program	—	$	—	—	4,241,311	—	$	—	—	$	1,000
Employee transactions	—	$	—	—		2,435	$	48.20	—
Month Ended August 30, 2019
Month Ended February 29, 2020
Common Stock Repurchase Program	—	$	—	—	4,241,311	—	$	—	—	$	1,000
Employee transactions	—	$	—	—		364,748	$	32.37	—
Month Ended September 30, 2019
Month Ended March 31, 2020
Common Stock Repurchase Program	—	$	—	—	4,241,311	—	$	—	—	$	1,000
Employee transactions	1,396	$	35.41	—		360	$	25.49	—


Item 6.	Exhibits




	Exhibit 2.1		Transaction Agreement, dated January 28, 2020 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of BorgWarner Inc. filed on January 29, 2020).

	Exhibit 4.1		Fourth Amended and Restated Credit Agreement, dated as of March 13, 2020, among BorgWarner Inc., Bank of America, N.A., as Administrative Agent for the Lenders and as Swingline Lender, and the Lenders party thereto from time to time (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of BorgWarner Inc. filed on March 16, 2020).

	Exhibit 10.1		Form of 2020 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Agreement for Employees.*

	Exhibit 10.2		Form of 2020 BorgWarner Inc. 2018 Stock Incentive Plan Restricted Stock Units Agreement for Non-U.S. Employees.*

	Exhibit 10.3		Form of 2020 BorgWarner Inc. 2018 Stock Incentive Plan Performance Share Award Agreement.*

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

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

	Exhibit 32.1		Section 1350 Certifications.*

	Exhibit 101.SCH		XBRL Taxonomy Extension Schema Document.*

	Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.*

	Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase Document.*

	Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.*

	Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.*

	Exhibit 104.1		The cover page from this Quarterly Report on Form 10-Q, formatted as Inline XBRL.*

*Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, and the undersigned also has signed this report in his capacity as the Registrant’s Controller (Principal Accounting Officer).




			BorgWarner Inc.

			(Registrant)

	By		/s/ Thomas J. McGill
			(Signature)

			Thomas J. McGill

			Vice President and Controller
			(Principal Accounting Officer)

Date: ~~October 31, 2019~~May 6, 2020

4640



(in millions)	Balance at December 31, 2018		Adjustments due to ASC 842		Balance at January 1, 2019
Other non-current assets	$	502	$	104	$	606
Accounts payable and accrued expenses	$	2,144	$	23	$	2,167
Other non-current liabilities	$	357	$	80	$	437



	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
(In millions)	Engine		Drivetrain		Total		Engine		Drivetrain		Total
North America	$	397	$	456	$	853	$	392	$	452	$	844
Europe	716		203		919		690		209		899
Asia	357		324		681		386		308		694
Other	30		9		39		33		8		41
Total	$	1,500	$	992	$	2,492	$	1,501	$	977	$	2,478



	Shares subject to restriction (thousands)		Weighted average grant date fair value
Nonvested at December 31, 2018	1,516		$	42.97
Granted	930		$	41.92
Vested	(665	)	$	35.94
Forfeited	(6	)	$	45.41
Nonvested at March 31, 2019	1,775		$	44.77
Granted	125		$	40.78
Vested	(28	)	$	50.43
Forfeited	(37	)	$	45.13
Nonvested at June 30, 2019	1,835		$	44.40
Granted	22		$	36.68
Vested	(7	)	$	43.81
Forfeited	(30	)	$	44.99
Nonvested at September 30, 2019	1,820		$	44.29



	Number of shares (thousands)		Weighted average grant date fair value
Nonvested at December 31, 2018	297		$	60.35
Granted	190		$	51.52
Forfeited	(9	)	$	55.30
Nonvested at March 31, 2019	478		$	56.93
Granted	5		$	51.59
Forfeited	(56	)	$	55.67
Nonvested at June 30, 2019	427		$	57.03
Forfeited	(5	)	$	57.29
Nonvested at September 30, 2019	422		$	57.03



(in millions)	Operating Leases
2019 (excluding the nine months ended September 30, 2019)	$	5
2020	20
2021	15
2022	12
2023	9
After 2023	39
Total (undiscounted) lease payments	$	100
Less: Imputed interest	13
Present value of lease liabilities	$	87



	2019		2018
Beginning Claims January 1	8,598		9,225
New Claims Received	1,667		1,460
Dismissed Claims	(967	)	(1,430	)
Settled Claims	(237	)	(268	)
Ending Claims September 30	9,061		8,987



	December 31,
(millions of dollars)	2018
Receivables, net	$	15
Inventories, net	42
Prepayments and other current assets	12
Property, plant and equipment, net	45
Goodwill	7
Other intangible assets, net	20
Impairment of carrying value	(94		)
Total assets held for sale	$	47

Accounts payable and accrued expenses	$	18
Other liabilities	5
Total liabilities held for sale	$	23