BorgWarner Inc. (BWA) Earnings

Management highlights

- Financial Performance & Capital Return * Q2 2026 delivered over $3.6 billion in sales, 100 basis points of adjusted operating margin expansion, 17% adjusted EPS growth, and strong free cash flow on relatively flat year-over-year sales, driven by company-wide cost controls and strong operational execution * Returned ~$134 million to shareholders in Q2 2026 via share repurchases and cash dividends; the Board of Directors approved a $1 billion increase to the share repurchase authorization, bringing the total available authorization to $1.35 billion (~10% of BorgWarner's current market capitalization) * Total share repurchases over the past four quarters total ~$650 million, equal to ~5% of the company's market capitalization - New Business Awards * Secured 7 new business awards across foundational and e-product portfolios in Q2 2026, demonstrating the competitiveness of the company's technology and deep customer relationships: - Foundational: New E-Turbo program for a major European OEM hybrid passenger vehicle (production starting 2029); new transfer case supply award for a Chinese OEM full-size SUV (production starts Q4 2026); multiple variable cam timing awards in Europe and China including a conquest win and a volume extension for a premium European OEM - E-products: New integrated drive module award for a global OEM (production 2027); extension of two high-volume high voltage inverter programs for a major European OEM covering plug-in hybrid and 800V BEV applications (production 2029); all new e-product awards include BorgWarner inverter technology, highlighting the company's leading position in high-power inverters - Industrial / Data Center Product Development Progress * Turbine Generator (TG): Achieved CARB emissions standards, an important milestone; UL component certification is scheduled to begin in September 2026 with documentation already submitted; final assembly plant construction is largely complete, with capital equipment installation expected to start in Q3 2026; strong customer interest from multiple hyperscalers, with product launch on track for 2027 * Battery Energy Storage: Targeted for data center AI and mechanical load support, with a modular, scalable, cell-agnostic portfolio covering short-duration high-power and long-duration high-energy applications; customer validation and UL compliance are progressing, with production readiness expected in 2027; quoting activity is ongoing * Microgrid Inverters: Initial customer feedback has been extremely positive; four customers currently have samples, with Gen 2 designs already in development based on early feedback; expanded the product voltage range from 400V to 1500V to address broader market demand; expects to begin customer quoting by the end of 2026 * Increased second half 2026 industrial R&D investment by an incremental $10 to $15 million to accelerate product development for new industrial offerings, while maintaining full-year 2026 financial guidance

Guidance

- Full-year 2026 sales guidance is maintained at $14.0 billion to $14.3 billion, unchanged from prior guidance; organic sales are expected to decline 3.5% to 1.5% year-over-year, in line with the expected 0% to 3% decline in the company's weighted end markets - Full-year 2026 adjusted operating margin guidance is maintained at 10.7% to 10.9%, which represents modest expansion from 2025's 10.7% margin even after accounting for the incremental $10-15 million in industrial R&D investment - Full-year 2026 adjusted EPS guidance is increased to a range of $5.05+, representing approximately 5% growth versus 2025 adjusted EPS, driven by higher than expected share repurchases in the first half of 2026 - Full-year 2026 free cash flow guidance is maintained at $900 million to $1.1 billion, unchanged from prior guidance - The BES segment sales decline is expected to create a 170 basis point headwind to full-year 2026 year-over-year sales growth, with overall light vehicle sales expected to perform in line with the weighted end market, consistent with first half 2026 performance

Segment performance

Overall company Q2 2026 sales came in at over $3.6 billion, relatively flat year-over-year. Organic net sales excluding the Battery Energy System (BES) segment saw a modest year-over-year increase, outperforming the decline in global light vehicle production. Adjusted operating income for the company was $413 million, equal to an 11.3% adjusted operating margin, representing a 100 basis point year-over-year expansion. Adjusted earnings per share grew 17% year-over-year to $X, and free cash flow for the quarter was $492 million. The BES segment saw a $62 million year-over-year sales decline driven by a lack of North American consumer incentives and weaker European demand; restructuring actions in 2025 and 2026 have improved the segment's underlying performance, with total first half 2026 losses totaling only $4 million. All other business units (foundational powertrain, e-products) expanded operating margins in Q2 2026, with 60 basis points of the overall 100 basis point margin expansion coming from strong performance at the foundational TTT and DMS business units, 20 basis points from BES restructuring and the 2025 exit of the charging business, and 20 basis points from company-wide cost controls and lower corporate costs. Light vehicle business makes up over 80% of total company sales, with China accounting for approximately 20% of global sales.

Risks & headwinds

- The BES segment faces ongoing headwinds from a lack of North American consumer tax incentives and weaker than expected demand for EVs in Europe, leading to an expected full-year sales decline - Global light vehicle production is expected to see a modest decline in 2026, with small regional volatility across China, Europe, and North America - New industrial product development depends on hitting strict quality, reliability, and regulatory milestones to meet 2027 launch targets; unforeseen delays could impact commercialization timelines - Scaling new industrial product lines requires future capacity investment decisions, which depend on customer demand and market development that has not yet been fully finalized

Analyst Q&A

• Q: Can you clarify the relationship with Endeavor TurboCell, and how will you announce wins for the data center business? What is a typical size for a battery storage award? /

  A: The partnership with Endeavor continues to strengthen, and recent fundraising activity by Koch/Endeavor does not change the relationship, and adds credibility to their edge data center business. The company achieved CARB emissions certification and is on track for a 2027 TG launch, with strong interest from multiple hyperscalers. Management will only share material milestones and wins with investors; all data center projects are bespoke, but any hyperscaler battery award would be substantial, with more updates expected later this year.

• Q: What is driving the strong margin conversion this quarter, and can these cost controls continue into the second half? When do you expect to decide on adding more TG capacity? /

  A: Of the 100 basis points of year-over-year margin expansion, 60 basis points came from strong performance at foundational businesses, 20 basis points from BES restructuring and the exit of the charging business, and 20 basis points from company-wide cost controls, with all business units expanding margins and lower corporate costs providing an additional tailwind. Management continues to expect strong cost controls will allow the company to hit the upper end of full-year margin guidance. No decision has been made yet on additional TG capacity, but management expects to make a decision in the second half of 2026, and is encouraged by current strong demand.

• Q: The company is increasing industrial R&D by $10-15 million, but operating income guidance is flat, where is the offset? Will this higher R&D spend be sustained? What is your exposure to Chinese vehicle exports and declining European luxury demand in China? /

  A: Second half sales face three headwinds: a $60 million BES sales decline, $80 million FX headwind, and a 1% industry production decline, leading to ~$7 billion in second half revenue at guidance midpoint; decremental conversion is mid-teens, and excluding the incremental R&D, second half margin would be in line with first half. This incremental R&D is focused on expanding the industrial product portfolio, and as market opportunities grow, expect some level of sustained R&D investment, while the company maintains strong margin and EPS growth. China is 20% of global sales; Chinese OEM exports have been very strong in the first half, and the company's strong position with leading Chinese OEMs creates modest tailwinds, with customer diversity offsetting any mix shifts from weaker European luxury demand in China.

• Q: Koch is reportedly looking to sell its stake in EDGE, are there any change of control provisions that would impact your 2027 TG revenue target? /

  A: There are no change of control triggers in the agreement with Endeavor. The entity BorgWarner directly contracts with is 100% owned by Endeavor, and the stake sale discussed is a fundraising activity to support EDGE's growth, which does not impact the partnership. Management does not see this as a material issue, and it adds credibility to Endeavor's growth prospects.

• Q: How do you balance capital allocation between new industrial growth opportunities, M&A, and share repurchases? Do you have all the needed technology in-house for industrial products? /

  A: The company's core priority is growing earnings power and creating value from free cash flow, balancing organic investment, inorganic opportunities, and share repurchases. The new $1.35 billion repurchase authorization gives the company flexibility, and organic R&D and CapEx for industrial growth opportunities will always be prioritized. For M&A, the company sticks to three criteria: it must leverage core competencies, be near-term accretive, and avoid overpaying, with a higher hurdle for transactions currently. The company leverages existing core automotive competencies for industrial products, but will pursue small tuck-in acquisitions if they strengthen the portfolio.