Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
BorgWarner Inc. (collectively with its consolidated subsidiaries, the “Company” or “BorgWarner”) is a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles. BorgWarner’s products help improve vehicle performance, propulsion efficiency, stability and air quality. The Company manufactures and sells these products worldwide, primarily to original equipment
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manufacturers (“OEMs”) of light vehicles (passenger cars, sport-utility vehicles, vans and light trucks). The Company’s products are also sold to 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 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 nearly every major automotive OEM in the world.
BorgWarner Strategy
The Company’s current strategy is to focus on profitable growth across its technology-focused product portfolio that supports electric, hybrid and combustion vehicles. This entails growing its product portfolio through organic investments and technology-focused acquisitions. The Company’s balanced portfolio is particularly critical as the automotive industry continues to see electric vehicle adoption volatility across different regions. During the years ended December 31, 2025, 2024 and 2023, the Company’s revenue from eProducts, which include all products utilized on or for electric vehicles (“EVs”) plus those same products and components that are included in hybrid powertrains whose underlying technologies are adaptable or applicable to those used in or for EVs, was approximately $2.6 billion, $2.3 billion and $2.0 billion, respectively, or 18%, 17% and 14% of its total revenue, respectively, and the Company’s revenue from Foundational products, which include all products utilized on internal combustion engines plus those same products and components that are also included in hybrid powertrains, was approximately $11.7 billion, $11.8 billion and $12.2 billion, respectively, or 82%, 83% and 86% of its total revenue, respectively.
Lawsuit Against PHINIA
On September 19, 2024, the Company commenced a lawsuit against PHINIA, seeking to recover from PHINIA approximately $120 million of value added tax (“VAT”) refunds that PHINIA received or expects to receive from governmental agencies as well as damages and interest. These refunds consisted of VAT paid by the Company in periods prior to or directly related to the spin-off that established PHINIA as an independent company. PHINIA responded to the lawsuit and also asserted counterclaims against the Company. On October 15, 2025, the Company entered into a settlement agreement (the “Settlement Agreement”) with PHINIA, pursuant to which PHINIA agreed to pay the Company $78 million, resolving the lawsuit and certain other matters relating to the spin-off. In connection with the Settlement Agreement, the Company and PHINIA also entered into an amended and restated tax matters agreement that, among other things, limits the Company’s responsibility to certain defined tax obligations. As a result, the Company recorded a net charge of $40 million during the year ended December 31, 2025, for the reduction of VAT-related receivables, the elimination of certain Company liabilities under the amended and restated tax matters agreement and related legal fees, which is included in Other operating expense, net in the Company’s Consolidated Statements of Operations. As of December 31, 2025, after giving effect to the Settlement Agreement and the $31 million payment received during the fourth quarter of 2025, the Company had assets related to these VAT refunds of approximately $47 million included in Receivables, net in the Company’s Consolidated Balance Sheet in Item 8 of this report.
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Portfolio Actions
In February 2025, the Company made the decision to exit its charging business within the Battery & Charging Systems reportable segment. Production operations ceased during the second quarter of 2025. This decision was made following the Company’s continuing evaluation of its product portfolio and future investments. This action was intended to create a more focused portfolio and is expected to eliminate approximately $30 million of annualized adjusted operating losses by 2026. Refer to Note 2, “Acquisitions and Dispositions,” to the Consolidated Financial Statements in Item 8 of this report for more information.
The Company also made the decision to consolidate its North American battery systems business, which is expected to align the business’ cost structure to current market dynamics. This action is expected to result in annual cost savings of approximately $20 million by 2026.
North Carolina Facility Hurricane
On September 26, 2024, a hurricane made landfall in North Carolina disrupting operations at the Company’s facility in Arden, North Carolina (the “Arden Plant”). The Arden Plant was largely untouched, but the Company experienced some loss or damage to the Company’s assets amounting to less than $10 million. The Arden plant resumed full operations during the fourth quarter of 2024. The Company’s insurance policies (less applicable deductibles) covered the repair or replacement of the Company’s assets that incurred loss or damage and provided coverage for interruption to its business, including lost profits, and reimbursement for other expenses and costs that were incurred related to the damages and losses sustained. For the year ended December 31, 2025, the Company recorded committed insurance recoveries of approximately $9 million, which are included as a reduction of Cost of sales in the Company’s Consolidated Statements of Operations in Item 8 of this report and were fully collected.
Acquisitions and Dispositions
Acquisitions have been an integral component of the Company’s growth and value creation strategy. Refer to Note 2, “Acquisitions and Dispositions,” to the Consolidated Financial Statements in Item 8 of this report for more information, including a summary of recent acquisitions.
Key Trends and Economic Factors
Economic Conditions. The Company’s financial performance depends on conditions in the global automotive industry. Automotive and truck production and sales are cyclical and sensitive to general economic conditions and other factors, including interest rates, consumer credit and consumer spending and preferences. Government policies, such as the imposition of, termination of or other changes in tariffs (including retaliatory tariffs), or the commencement or termination of consumer tax incentives, such as EV tax credits and programs to invest in infrastructure, including EV charging stations, may affect consumer preferences. Economic declines or impacts of tariffs that result in a material reduction in automotive or truck production would have an adverse effect on the Company’s sales. The weighted average market production, as estimated by the Company for the year ended December 31, 2025, was approximately flat from the year ended December 31, 2024. Weighted average market production reflects light and commercial vehicle production as reported by S&P Global, weighted for the Company’s geographic exposure, as estimated by the Company.
Commodities and Other Inflationary Impacts. During 2025, prices for commodities showed a lower level of volatility in comparison to what the Company had experienced from the beginning of 2021. The Company expects commodities and other costs to be relatively flat in 2026. However, the Company has experienced impacts from commodity pricing, inflation and tariffs over the last several years. Volatility in these areas and other factors could cause actual costs to be materially higher than expected in 2026.
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Outlook
The Company expects global industry production to be flat to down modestly year-over-year in 2026. The Company expects a negative sales impact from declining sales in the Company’s Battery & Charging Systems segment. As a result, at the mid-point of its outlook, the Company expects total sales in 2026 to decline year-over-year, excluding the impact of foreign currencies.
The Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic investments to enhance its product leadership strategy. There are several trends that are driving the Company’s long-term growth that management expects to continue, including adoption of product offerings for electrified vehicles and increasingly stringent global emissions standards that support demand for the Company’s products that drive vehicle efficiency.
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RESULTS OF OPERATIONS
A detailed comparison of the Company’s 2023 operating results to the Company’s 2024 operating results can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2024 Annual Report on Form 10-K filed February 6, 2025.
The following table presents a summary of the Company’s operating results:
Year Ended December 31,
(in millions, except per share data)
Net sales
% of net sales
% of net sales
Turbos & Thermal Technologies
Drivetrain & Morse Systems
PowerDrive Systems
Battery & Charging Systems
Inter-segment eliminations
Total net sales
Cost of sales
Gross profit
Selling, general and administrative expenses - R&D, net
Selling, general and administrative expenses - Other
Restructuring expense
Other operating expense, net
Impairment charges
Operating income
Equity in affiliates’ earnings, net of tax
Unrealized (gain) loss on equity securities
Interest expense, net
Other postretirement expense
Earnings from continuing operations before income taxes and noncontrolling interest
Provision for income taxes
Net earnings from continuing operations
Net loss from discontinued operations
Net earnings
Net earnings from continuing operations attributable to the noncontrolling interest, net of tax
Net earnings attributable to BorgWarner Inc.
Earnings per share from continuing operations — diluted
Net sales
Net sales for the year ended December 31, 2025 totaled $14,316 million, an increase of $230 million, or 2%, from the year ended December 31, 2024. The change in net sales for the year ended December 31, 2025 was primarily driven by the following:
• Fluctuations in foreign currencies resulted in a year-over-year increase in sales of approximately $154 million, primarily due to the strengthening of the Euro and Thai Baht, partially offset by the weakening of the Korean Won and Brazilian Real, in each case relative to the U.S. Dollar.
• Customer recoveries relating to tariffs increased sales by approximately $80 million.
• Sales increased approximately $52 million related to favorable volume, mix and net new business and higher eProduct sales, partially offset by unfavorable customer pricing and downtime at one of the Company’s European customers due to a cyber-related shutdown. The weighted average market production as estimated by the Company, was approximately flat from the year ended
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December 31, 2025 in comparison to December 31, 2024. Weighted average market production reflects light and commercial vehicle production as reported by S&P Global, weighted for the Company’s geographic exposure, as estimated by the Company.
• Sales decreased approximately $56 million related to the exit of its charging business.
Cost of sales and gross profit
Cost of sales and cost of sales as a percentage of net sales were $11,642 million and 81.3%, respectively, during the year ended December 31, 2025, compared to $11,438 million and 81.2%, respectively, during the year ended December 31, 2024. The change in cost of sales for the year ended December 31, 2025 was primarily driven by the following:
• Fluctuations in foreign currencies resulted in a year-over-year increase in cost of sales of approximately $133 million, primarily due to the strengthening of the Euro, partially offset by the weakening of the Korean Won and Brazilian Real relative to the U.S. Dollar.
• Tariff expense resulted in a year-over-year increase in cost of sales of approximately $108 million.
• Cost of sales decreased approximately $21 million related to an insurance recovery on a resolved historical warranty matter.
• Cost of sales decreased approximately $20 million primarily due to purchasing and restructuring savings, partially offset by favorable volume, mix and net new business.
Gross profit and gross margin were $2,674 million and 18.7%, respectively, during the year ended December 31, 2025 compared to $2,648 million and 18.8%, respectively, during the year ended December 31, 2024. The change in gross margin was primarily due to the factors discussed above.
Selling, general and administrative expenses (“SG&A”)
SG&A for the year ended December 31, 2025 was $1,304 million as compared to $1,350 million for the year ended December 31, 2024. SG&A as a percentage of net sales was 9.1% and 9.6% for the years ended December 31, 2025 and 2024, respectively. The change in SG&A was primarily attributable to:
• Research and development (“R&D”) costs decreased $26 million. R&D costs, net of customer reimbursements, were 5.0% of net sales in the year ended December 31, 2025, compared to 5.2% of net sales in the year ended December 31, 2024. The decrease in R&D costs, net of customer reimbursements, was primarily due to decreasing net investment related to the Company’s eProducts.
• SG&A decreased approximately $17 million primarily related to fluctuations in foreign currencies partially offset by incentive compensation.
Restructuring expense was $101 million and $74 million for the years ended December 31, 2025 and 2024, respectively, primarily related to employee termination benefits. Refer to Note 4 “Restructuring” to
the Consolidated Financial Statements in Item 8 of this report for more information.
In 2023, the Company announced a $130 million to $150 million restructuring plan to address structural cost primarily in its Foundational products businesses. During the year ended December 31, 2025, the Company recorded $8 million of restructuring costs related to this plan. The actions under this plan are complete. The resulting gross savings related to this plan are expected to be in the range of at least $80 million to $90 million annually by 2027 and are being utilized to sustain overall operating margin profile and cost competitiveness.
In June 2024, the Company announced a $75 million restructuring plan to address the cost structure in its PowerDrive Systems segment due to increased market volatility, which could include realignment of the segment’s manufacturing footprint. During the year ended December 31, 2025, the Company recorded $31 million of restructuring costs related to this plan. The resulting annual cost savings related to this plan are expected to be approximately $100 million by 2026.
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During the year ended December 31, 2025, the Company recorded $62 million of restructuring costs for individually approved restructuring actions.
Nearly all of the restructuring charges are expected to be cash expenditures, funded by cash on hand.
Other operating expense, net was an expense of $109 million and expense of $32 million for the years ended December 31, 2025 and 2024, respectively. The change in Other operating expense, net was primarily due to:
• During the year ended December 31, 2025, the Company recorded a charge of $40 million related to a legal settlement, inclusive of associated legal fees. Refer to Note 21, “Contingencies,” to the Consolidated Financial Statements in Item 8 of this report for more information.
• During the year ended December 31, 2025, the Company recorded charges of $23 million related to the exit of its charging business within the Battery & Charging Systems reportable segment. Refer to Note 2, “Acquisitions and Dispositions,” and Note 12, “Goodwill and Other Intangibles,” to the Consolidated Financial Statements in Item 8 of this report for more information.
• During the year ended December 31, 2025, the Company recorded a charge of $16 million related to the impairment of an investment without a readily determinable fair value.
• During the year ended December 31, 2025, the Company recorded charges of $11 million related to duplicative CEO compensation.
• During the year ended December 31, 2025, the Company recorded a loss of $9 million related to the sale of equipment from a closed facility in North America and the sale of a building in Europe. During the year ended December 31, 2024, the Company recorded a $2 million loss on the sale of fixed assets at a European manufacturing facility.
• During the year ended December 31, 2025, the Company recorded expense of $7 million primarily for adjustments related to the contract manufacturing agreement with PHINIA and adjustments to net amounts owed to the Company related to the tax matters agreement between the Company and PHINIA, unrelated to the legal settlement discussed above. During the year ended December 31, 2024, the Company recorded expense of $17 million primarily for adjustments to net amounts owed to the Company related to the tax matters agreement between the Company and PHINIA.
• During the year ended December 31, 2025, the Company recorded merger and acquisition expense, net of $5 million primarily related to professional fees associated with specific acquisition initiatives. During the year ended December 31, 2024, the Company recorded merger and acquisition expense, net of $2 million, primarily due to professional fees associated with specific acquisition initiatives, mostly offset by a gain of $6 million related to the revision of its expected earn-out-related to the Drivetek acquisition.
• During the year ended December 31, 2025, the Company recorded a net loss of $2 million related to a business closure in North America, a plant disposal in China and the sale of an operation in Europe. During the year ended December 31, 2024, the Company recorded a net loss on sale of business of $6 million primarily related to the estimated loss on an immaterial business that met held for sale accounting criteria.
• During the year ended December 31, 2024, the Company recorded a loss of approximately $15 million related to the settlement of a commercial contract assumed in its acquisition of the electric hybrid systems business segment of Eldor Corporation.
• During the year ended December 31, 2024, the Company recorded other income in the amount of $5 million for net service reimbursements related to the Spin-Off. These transition services were related to information technology, human resources, finance, facilities, procurement, sales, intellectual property and engineering. Refer to Note 26, “Discontinued Operations,” to the Consolidated Financial Statements in Item 8 of this report for more information.
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Other operating expense, net is primarily comprised of items included within the subtitle “Non-comparable items impacting the Company’s earnings per diluted share and net earnings” below.
Impairment charges were $624 million and $646 million for the years ended December 31, 2025 and 2024, respectively. The change in Impairment charges was primarily due to:
• During the year ended December 31, 2025, the Company recorded goodwill impairment of $423 million related to goodwill at Battery & Charging Systems. During the year ended December 31, 2024, the Company recorded goodwill impairment charges of $577 million related to goodwill at PowerDrive Systems and Battery & Charging Systems. Refer to Note 2, “Acquisitions and Dispositions,” and Note 12, “Goodwill and Other Intangibles,” to the Consolidated Financial Statements in Item 8 of this report for more information.
• During the year ended December 31, 2025, the Company recorded charges of $174 million related to certain property, plant and equipment at locations in the Company’s Battery & Charging Systems and PowerDrive Systems reporting segments. During the year ended December 31, 2024, the Company recorded charges of $69 million related to certain property, plant and equipment at locations in the Company’s Battery & Charging Systems and PowerDrive Systems reporting segments. Refer to Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements in Item 8 of this report for more information.
• During the year ended December 31, 2025, the Company recorded intangible asset impairment of $27 million, of which $22 million related to the exit of its charging business within the Battery & Charging Systems reportable segment. Refer to Note 2, “Acquisitions and Dispositions,” to the Consolidated Financial Statements in Item 8 of this report for more information. Additionally, the Company recorded impairment of $5 million related to intangible assets at PowerDrive Systems.
Equity in affiliates’ earnings, net of tax was $35 million and $27 million in the years ended December 31, 2025 and 2024, respectively. This line item is driven by the results of the Company’s unconsolidated joint ventures.
Unrealized (gain) loss on equity securities was a gain of $3 million and a loss of $1 million in the years ended December 31, 2025 and 2024, respectively. This line item reflects the net unrealized gains or losses recognized due to valuing the Company’s investments at fair value.
Interest expense, net was $39 million and $20 million in the years ended December 31, 2025 and 2024, respectively. The increase was primarily due to higher interest rates following the Company’s refinancing and issuance of $1 billion of notes in 2024 and $10 million gain on debt extinguishment in August 2024.
Other postretirement expense was $11 million and $13 million in the years ended December 31, 2025 and 2024, respectively. The decrease in other postretirement expense for the year ended December 31, 2025 was primarily due to lower settlement costs.
Provision for income taxes was $189 million for the year ended December 31, 2025, resulting in an effective tax rate of 36%. This compared to $111 million, or an effective rate of 21%, for the year ended December 31, 2024. In 2025, the Company reflected a $126 million tax impact of non-deductible impairment of goodwill. In addition, the Company recorded a tax benefit of $29 million related to reductions in certain unrecognized tax benefits and accrued interest for matters remeasured after various audit closures, a tax benefit of $16 million related to the exit of the charging business and a tax benefit of $7 million related to tax law changes.
In 2024, the Company reflected a $151 million tax impact of non-deductible impairment of goodwill. In addition, the Company recorded a tax benefit of $107 million related to reductions in certain unrecognized tax benefits and accrued interest for matters where the statute of limitations lapsed and a tax benefit of $36 million related to post Spin-Off restructuring.
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For further details, see Note 7, “Income Taxes,” to the Consolidated Financial Statements in Item 8 of this report.
Net earnings attributable to the noncontrolling interest, net of tax was $58 million and $61 million in the years ended December 31, 2025 and 2024, respectively. The decrease was primarily due to a decline in demand for certain of the Company’s Foundational products in China.
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Non-comparable items impacting the Company’s earnings per diluted share and net earnings
The Company’s earnings per diluted share were $1.28 and $1.63 for the years ended December 31, 2025 and 2024, respectively. The non-comparable items presented below are calculated after tax using the corresponding effective tax rate discrete to each item and the weighted average number of diluted shares for each of the years then ended. The Company believes the following table is useful in highlighting non-comparable items that impacted its earnings per diluted share:
Year Ended December 31,
Non-comparable items:
Impairment charges
Restructuring expense
Accelerated depreciation
Legal settlement
Costs to exit charging business
Impairment of investment
Chief Executive Officer ("CEO") transition compensation
Loss on sale of assets
Adjustments associated with Spin-Off related balances
Write-off of customer incentive asset
Merger and acquisition expense, net
Loss on sale of businesses
Change in accounting method
Commercial contract settlement
Gain on debt extinguishment
Unrealized gain on equity securities
Insurance recovery
Tax adjustments 1
Other non-comparable items
Total impact of non-comparable items per share — diluted:
In 2025, the Company recorded a tax benefit of $29 million related to reductions in certain unrecognized tax benefits and accrued interest for matters remeasured after various audit closures. In addition, the Company recorded a tax benefit of $16 million related to the exit of the charging business and a tax benefit of $7 million related to tax law changes. In 2024, the Company recorded a tax benefit of $107 million related to reductions in certain unrecognized tax benefits and accrued interest for matters where the statute of limitations lapsed and a tax benefit of $36 million related to post Spin-Off restructuring.
Results by Reportable Segment
The Company discloses segment information under four reportable segments, consistent with the way operating results are evaluated by management: Turbos & Thermal Technologies, Drivetrain & Morse Systems, PowerDrive Systems and Battery & Charging Systems. These segments are strategic business groups, which are managed separately as each represents a specific grouping of related automotive components and systems.
Segment Adjusted Operating Income (Loss) is the measure of segment income or loss used by the Company. Segment Adjusted Operating Income (Loss) is comprised of operating income adjusted for restructuring, merger, acquisition and divestiture expense, intangible asset amortization expense, impairment charges and other items not reflective of ongoing operating income or loss. The Company believes Segment Adjusted Operating Income (Loss) is most reflective of the operational profitability or loss of its reportable segments.
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Segment Adjusted Operating Income (Loss) excludes certain corporate costs, which primarily represent headquarters’ expenses not directly attributable to the individual segments. Corporate expenses not allocated to Segment Adjusted Operating Income (Loss) were $261 million and $279 million for the years ended December 31, 2025 and 2024, respectively.
A detailed comparison of the Company’s 2023 net sales and Segment Adjusted Operating Income (Loss) to the Company’s 2024 net sales and Segment Adjusted Operating Income (Loss) for the Company’s reportable segments can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s 2024 Annual Report on Form 10-K filed February 6, 2025.
The following tables present net sales and Segment Adjusted Operating Income (Loss) for the Company’s reportable segments:
Year Ended December 31, 2025 vs. Year Ended December 31, 2024
Year ended December 31, 2025
Year ended December 31, 2024
(in millions)
Net sales
Segment Adjusted Operating Income (Loss)
% margin
Net sales
Segment Adjusted Operating Income (Loss)
% margin
Turbos & Thermal Technologies
Drivetrain & Morse Systems
PowerDrive Systems
Battery & Charging Systems
Inter-segment eliminations
Totals
Turbos & Thermal Technologies net sales for the year ended December 31, 2025 decreased $115 million, or 2%, and Segment Adjusted Operating Income increased $2 million from the year ended December 31, 2024. The sales decrease was primarily due to volume of approximately $192 million driven by lower volumes in Europe, partially offset by higher volumes in the Americas and aftermarket. These decreases were partially offset by the impact of foreign currencies, which resulted in a year-over-year increase in sales of approximately $77 million, primarily due to the strengthening of the Euro and British Pound, partially offset by the weakening of the Brazilian Real and Korean Won, in each case relative to the U.S. Dollar. Segment Adjusted Operating margin was 15.2% for the year ended December 31, 2025, compared to 14.9% in the year ended December 31, 2024. The Segment Adjusted Operating margin increase was primarily due to supply chain savings, manufacturing efficiencies and restructuring savings, partially offset by decremental conversion on lower sales.
Drivetrain & Morse Systems net sales for the year ended December 31, 2025 increased $77 million, or 1%, and Segment Adjusted Operating Income increased $31 million from the year ended December 31, 2024. Foreign currencies resulted in a year-over-year increase in sales of approximately $42 million, primarily due to the strengthening of the Euro and Thai Baht, partially offset by the weakening of the Korean Won, in each case relative to the U.S. Dollar. The increase was also due to approximately $35 million of volume, mix and net new business driven by higher transfer case volumes in the Americas, partially offset by lower sales in China and downtime at one of the Company’s European customers due to a cyber related shutdown. Segment Adjusted Operating margin was 18.4% in the year ended December 31, 2025, compared to 18.1% in the year ended December 31, 2024. The Segment Adjusted Operating margin increase was primarily due to incremental conversion on higher sales, supply chain savings and manufacturing efficiencies.
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PowerDrive Systems net sales for the year ended December 31, 2025 increased $410 million, or 21%, and Segment Adjusted Operating Loss decreased $61 million from the year ended December 31, 2024. The sales increase was primarily due to approximately $388 million of volume, mix and net new business driven by eProducts growth in China and Europe. Foreign currencies also resulted in a year-over-year increase in sales of approximately $22 million, primarily due to the strengthening of the Euro, partially offset by the weakening of the Korean Won, in each case relative to the U.S. Dollar. Segment Adjusted Operating margin was (3.5)% in the year ended December 31, 2025, compared to (7.4)% in the year ended December 31, 2024. The increase in Segment Adjusted Operating margin was primarily due to incremental conversion on higher sales, customer volume recoveries and supply chain and restructuring savings.
Battery & Charging Systems net sales for the year ended December 31, 2025 decreased $139 million, or 19%, and Segment Adjusted Operating Loss decreased $8 million from the year ended December 31, 2024. The sales decrease was primarily due to approximately $65 million of lower volume, mix and net new business primarily due to lower battery back volumes. Additionally, sales decreased approximately $56 million related to the exit of the charging business. Finally, a decrease in normal contractual customer commodity pass-through arrangements decreased net sales by $31 million. These decreases were partially offset by the impact of foreign currencies, which resulted in a year-over-year increase in sales of approximately $13 million, primarily due to the strengthening in the Euro relative to the U.S. Dollar. Segment Adjusted Operating margin was (6.6)% in the year ended December 31, 2025, compared to (6.4)% in the year ended December 31, 2024. The decrease in the Segment Adjusted Operating margin was primarily due to lower sales and higher depreciation costs, offset by restructuring savings, customer recoveries and other operational improvements.
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LIQUIDITY AND CAPITAL RESOURCES
The Company maintains various liquidity sources, including cash and cash equivalents and the unused portion of its multi-currency revolving credit agreement. As of December 31, 2025, the Company had liquidity of $4,313 million, comprised of cash and cash equivalent balances of $2,313 million and an undrawn revolving credit facility of $2,000 million. The Company was in full compliance with its covenants under the revolving credit facility and had full access to its undrawn revolving credit facility. The total debt expected to mature through the end of 2026 is $5 million. Given the Company’s strong liquidity position, management believes that it will have sufficient liquidity and will maintain compliance with all covenants through at least the next 12 months.
As of December 31, 2025, cash balances of $1,350 million were held by the Company’s subsidiaries outside of the United States. Cash and cash equivalents held by these subsidiaries are used to fund foreign operational activities and future investments, including acquisitions. The majority of cash and cash equivalents held outside the United States is available for repatriation. The Company uses its U.S. liquidity primarily for various corporate purposes, including but not limited to debt service, share repurchases, dividend distributions, acquisitions and other corporate expenses.
The Company has a $2.0 billion multi-currency revolving credit facility, which includes a feature that allows the facility to be increased by $1.0 billion with bank group approval. This facility matures in September 2028. The credit facility agreement contains customary events of default and one key financial covenant, which is a debt-to-EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio. The Company was in compliance with the financial covenant at December 31, 2025. At December 31, 2025 and 2024, the Company had no outstanding borrowings under this facility.
The Company’s commercial paper program allows the Company to issue up to $2.0 billion of short-term, unsecured commercial paper notes under the limits of its multi-currency revolving credit facility. 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 December 31, 2025 and 2024.
The total current combined borrowing capacity under the multi-currency revolving credit facility and commercial paper program cannot exceed $2.0 billion.
In addition to the revolving credit facility, the Company’s universal shelf registration statement filed with the U.S. Securities and Exchange Commission provides the Company with the ability to issue various debt and equity securities subject to market conditions.
On February 6, 2025 and April 30, 2025, the Company’s Board of Directors declared quarterly cash dividends of $0.11 per share of common stock, respectively. The dividends declared in the first quarter and second quarter were paid on March 17, 2025 and June 16, 2025, respectively. On July 30, 2025 and November 12, 2025 , the Company’s Board of Directors declared quarterly cash dividends of $0.17 per share of common stock, respectively. The dividends declared in the third quarter and fourth quarter were paid on September 15, 2025 and December 15, 2025, respectively.
From a credit quality perspective, the Company has a credit rating of BBB from Standard & Poor’s, Baa1 from Moody’s and BBB+ from Fitch Ratings. The current outlook from each of Standard & Poor’s, Moody’s and Fitch is stable. None of the Company's debt agreements requires accelerated repayment in the event of a downgrade in credit ratings.
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Cash Flows
Operating Activities
Year Ended December 31,
(in millions)
OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net earnings from continuing operations
Adjustments to reconcile net earnings from continuing operations to net cash provided by operating activities from continuing operations:
Depreciation and tooling amortization
Intangible asset amortization
Restructuring expense, net of cash paid
Stock-based compensation expense
Loss on sales of assets
Loss on sales of businesses
Gain on debt extinguishment
Asset impairments
Impairment of investment
Change in accounting method
Unrealized and realized (gain) loss on equity securities
Deferred income tax benefit
Other non-cash adjustments
Adjustments to reconcile net earnings from continuing operations to net cash provided by operating activities from continuing operations
Retirement plan contributions
Changes in assets and liabilities:
Receivables
Inventories
Accounts payable and accrued expenses
Other assets and liabilities
Net cash provided by operating activities from continuing operations
Net cash provided by operating activities was $1,648 million for the year ended December 31, 2025 compared to $1,382 million for the year ended December 31, 2024. The increase for the year ended December 31, 2025, compared with the year ended December 31, 2024, was primarily due to higher net earnings adjusted for non-cash charges, lower pension contributions and change in working capital.
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Investing Activities
Year Ended December 31,
(in millions)
INVESTING ACTIVITIES OF CONTINUING OPERATIONS
Capital expenditures, including tooling outlays
Customer advances related to capital expenditures
Insurance proceeds received for damage to property, plant and equipment
Proceeds from sale of businesses, net
Proceeds from settlement of net investment hedges, net
Payments for investments in equity securities, net
Proceeds from asset disposals and other, net
Net cash used in investing activities from continuing operations
Net cash used in investing activities was $368 million for the year ended December 31, 2025 compared to $603 million for the year ended December 31, 2024. As a percentage of sales, capital expenditures were 3.3% and 4.8% for the years ended December 31, 2025 and 2024, respectively. The year-over-year decline in capital expenditures primarily reflects lower eProduct investments.
Financing Activities
Year Ended December 31,
(in millions)
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Payments on notes payable
Additions to debt
Repayments of debt, including current portion
Payments for debt issuance costs
Payments for purchase of treasury stock
Payments for stock-based compensation items
Payments for business acquired, net of cash acquired
Payments for contingent consideration
Dividends paid to BorgWarner stockholders
Dividends paid to noncontrolling stockholders
Net cash used in financing activities from continuing operations
Net cash used in financing activities was $1,116 million for the year ended December 31, 2025 compared to $167 million for the year ended December 31, 2024. Net cash used in financing activities during the year ended December 31, 2025 was primarily related to $508 million of BorgWarner share repurchases, $409 million of debt repayments associated with the maturity of the Company’s 3.375% senior notes on March 15, 2025 and other short-term borrowings, $119 million in dividends paid to the Company’s stockholders and $49 million in dividends paid to noncontrolling stockholders of the Company’s consolidated joint ventures.
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Contractual Obligations
The Company’s significant cash requirements for contractual obligations as of December 31, 2025 primarily consisted of the principal and interest payments on its notes payable and long-term debt, non-cancelable financing lease obligations, capital spending obligations and purchase obligations. The principal amount of notes payable due within the next twelve months was $5 million and long-term debt was $3,925 million, excluding the impact of unamortized premiums and discounts of approximately $31 million, as of December 31, 2025. The projected interest payments over the terms of that debt due within the next twelve months and beyond were $109 million and $805 million, respectively, as of December 31, 2025. Refer to Note 14, “Debt,” to the Consolidated Financial Statements in Item 8 of this report for more information.
As of December 31, 2025, non-cancelable operating lease obligations due within twelve months and beyond were $39 million and $165 million, respectively. Refer to Note 22, “Leases and Commitments,” to the Consolidated Financial Statements in Item 8 of this report for more information. Capital spending obligations due within the next twelve months were $116 million as of December 31, 2025.
The Company enters into agreements with its suppliers to assist in meeting its customers’ production needs. These agreements vary as to duration and terms, and historically, most do not provide for minimum purchases by the Company, or they are requirements-based arrangements. However, as of December 31, 2025, the Company had contractual purchase commitments of approximately $180 million for certain electronics components to be paid through 2027.
Management believes that the combination of cash from operations, cash balances, available credit facilities, and the universal shelf registration capacity will be sufficient to satisfy the Company’s cash needs for its current level of operations and its planned operations for the foreseeable future. Management will continue to balance the Company’s needs for organic growth, inorganic growth, debt reduction, cash conservation and return of cash to shareholders.
Postretirement Defined Benefits
The Company’s policy is to fund its defined benefit pension plans in accordance with applicable government regulations and to make additional contributions when appropriate. At December 31, 2025, all legal funding requirements had been met. The Company contributed $23 million, $39 million and $21 million to its defined benefit pension plans in the years ended December 31, 2025, 2024 and 2023, respectively.
The Company expects to contribute approximately $25 million into its defined benefit pension plans during 2026. Of the $25 million in projected 2026 contributions, $8 million are contractually obligated, while any remaining payments would be discretionary.
The funded status of all pension plans was a net unfunded position of $36 million and $66 million at December 31, 2025 and 2024, respectively. T he decrease in the net unfunded position was a result of a higher pension assets, which was primarily due to asset returns during the period and the impact of foreign exchange. Of t he total net unfunded amounts, $17 million and $32 million at December 31, 2025 and 2024, respectively, were related to plans in Germany, where there is no tax deduction allowed under the applicable regulations to fund the plans; hence, the common practice is to make contributions as benefit payments become due.
Other postemployment benefits primarily consist of health care benefits for certain former employees and retirees of the Company’s U.S. operations. The Company funds these benefits as retiree claims are incurred. Other postemployment benefits had an unfunded status of $27 million and $29 million at December 31, 2025 and 2024, respectively.
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In August 2025, the Company executed an amendment to the plan document of one of the Company’s U.S. defined benefit pension plans (“U.S. Pension Plan”) to terminate the plan effective October 31, 2025. The termination of the U.S. Pension Plan is expected to take up to eighteen months to complete. As part of the termination process, the Company expects to settle benefit obligations under the U.S. Pension Plan through a combination of lump sum payments to eligible plan participants and the purchase of a group annuity contract under which future benefit obligations and administration will be transferred to a third-party insurance company. Such settlements will be funded primarily from plan assets. At December 31, 2025, the U.S. Pension Plan’s projected benefit obligation exceeded the fair value of the assets by $4 million under U.S. GAAP.
In December 2024, the Company entered into a second buy-in contract (the first buy-in contract was entered into in 2019) with an insurance company related to its U.K. pension plan. Pursuant to this agreement, the Company liquidated approximately $50 million of pension plan assets to invest in an insurance annuity. At December 31, 2025, the U.K. pension plan had plan assets of $131 million, all held by the insurance company. The projected benefit obligation of the U.K. pension plan at December 31, 2025 was $104 million under U.S. GAAP. The U.K. pension plan was overfunded by $27 million as of December 31, 2025, under U.S. GAAP.
The Company believes it will be able to fund the requirements of these plans through cash generated from operations or other available sources of financing for the foreseeable future.
Refer to Note 18, “Retirement Benefit Plans,” to the Consolidated Financial Statements in Item 8 of this report for more information regarding costs and assumptions for employee retirement benefits.
OTHER MATTERS
Contingencies
In the normal course of business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, governmental investigations and related proceedings, general liability and other risks. It is not possible to predict with certainty whether or not the Company will ultimately be successful in any of these commercial and legal matters or what the impact might be. The Company does not believe that adverse outcomes in any of these commercial and legal claims, actions and complaints are reasonably likely to have a material adverse effect on the Company’s results of operations, financial position or cash flows. An adverse outcome could, nonetheless, be material to the results of operations or cash flows as the ultimate resolutions of these matters are inherently unpredictable.
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Lawsuit Against PHINIA
On September 19, 2024, the Company commenced a lawsuit against PHINIA, seeking to recover from PHINIA approximately $120 million of VAT refunds that PHINIA received or expects to receive from governmental agencies as well as damages and interest. These refunds consisted of VAT paid by the Company in periods prior to or directly related to the Spin-Off that established PHINIA as an independent company. PHINIA responded to the lawsuit and also asserted counterclaims against the Company. On October 15, 2025, the Company entered into the Settlement Agreement with PHINIA, pursuant to which PHINIA agreed to pay the Company $78 million, resolving the lawsuit and certain other matters relating to the Spin-Off. In connection with the Settlement Agreement, the Company and PHINIA also entered into an amended and restated tax matters agreement that, among other things, limits the Company’s responsibility to certain defined tax obligations. As a result, the Company recorded a net charge of $40 million during the year ended December 31, 2025, for the reduction of VAT-related receivables, the elimination of certain Company liabilities under the amended and restated tax matters agreement and related legal fees, which is included in Other operating expense, net in the Company’s Consolidated Statements of Operations. As of December 31, 2025, after giving effect to the Settlement Agreement and the $31 million payment received during the fourth quarter of 2025, the Company had assets related to these VAT refunds of approximately $47 million included in Receivables, net on the Company’s Consolidated Balance Sheet.
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 or local laws and, as such, may have been liable for the cost of clean-up and other remedial activities at 16 and 17 such sites as of December 31, 2025 and 2024, respectively. 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.
Refer to Note 21, “Contingencies,” to the Consolidated Financial Statements in Item 8 of this report for further details and information respecting the Company’s environmental liability.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. Critical accounting policies are those that are most important to the portrayal of the Company’s financial condition and results of operations. Some of these policies require management's most difficult, subjective or complex judgments in the preparation of the financial statements and accompanying notes. Management makes estimates and assumptions about the effect of matters that are inherently uncertain, relating to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. The Company’s most critical accounting policies are discussed below.
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Business combinations The Company allocates the cost of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess value of the cost of an acquired business over the estimated fair value of the assets acquired and liabilities assumed is recognized as goodwill. The valuation of the acquired assets and liabilities will impact the determination of future operating results. The Company uses a variety of information sources to determine the value of acquired assets and liabilities, including third-party appraisers for the values and lives of property, identifiable intangibles and inventories, and actuaries for defined benefit retirement plans. Goodwill is assigned to reporting units as of the date of the related acquisition. If goodwill is assigned to more than one reporting unit, the Company utilizes a method that is consistent with the manner in which the amount of goodwill in a business combination is determined. Costs related to the acquisition of a business are expensed as incurred.
Acquired intangible assets include customer relationships, developed technology and trade names. The Company estimates the fair value of acquired intangible assets using various valuation techniques. The primary valuation techniques used include forms of the income approach, specifically the relief-from-royalty and multi-period excess earnings valuation methods. Under these valuation approaches, the Company is required to make estimates and assumptions from a market participant perspective, which may include revenue growth rates, estimated earnings, royalty rates, obsolescence factors, contributory asset charges, customer attrition and discount rates. Under the multi-period excess earnings method, value is estimated as the present value of the benefits anticipated from ownership of the asset, in excess of the returns required on the investment in contributory assets that are necessary to realize those benefits. The intangible asset’s estimated earnings are determined as the residual earnings after quantifying estimated earnings from contributory assets. When the Company estimates fair value using the relief-from-royalty method, it calculates the cost savings associated with owning rather than licensing the assets. Assumed royalty rates are applied to projected revenue for the remaining useful lives of the assets to estimate the royalty savings.
While the Company uses its best estimates and assumptions, fair value estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statement of earnings.
Future changes in the judgments, assumptions and estimates that are used in acquisition valuations and intangible asset and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect the Company’s financial statements in any given year.
Impairment of long-lived assets, including definite-lived intangible assets The Company reviews the carrying value of its long-lived assets, whether held for use or disposal, including other amortizing intangible assets, when events and circumstances warrant such a review under Accounting Standards Codification (“ASC”) Topic 360. In assessing long-lived assets for an impairment loss, assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. In assessing long-lived assets for impairment, management generally considers individual facilities to be the lowest level for which identifiable cash flows are largely independent. A recoverability review is performed using the undiscounted cash flows if there is a triggering event. If the undiscounted cash flow test for recoverability identifies a possible impairment, management will perform a fair value analysis. Management determines fair value under ASC Topic 820 using the appropriate valuation technique of market, income or cost approach. If the carrying value of a long-lived asset is considered impaired, an impairment charge is
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recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value, calculated based on independent appraisals, discounted cash flows, estimated salvage value, or estimated orderly liquidation value, giving consideration to the highest and best use of the relevant assets.
Management believes that the estimates of future cash flows and fair value assumptions are reasonable; however, changes in assumptions underlying these estimates could affect the valuations. Significant judgments and estimates used by management when evaluating long-lived assets for impairment include (i) an assessment as to whether an adverse event or circumstance has triggered the need for an impairment review; (ii) undiscounted future cash flows generated by the asset; and (iii) fair valuation of the asset. Events and conditions that could result in impairment in the value of long-lived assets include changes in the industries in which the Company operates, particularly the impact of a downturn in the global economy, as well as competition and advances in technology, adverse changes in the regulatory environment, or other factors leading to reduction in expected long-term sales or profitability.
Goodwill and other indefinite-lived intangible assets During the fourth quarter of each year, the Company tests goodwill for impairment by either performing a qualitative assessment or a quantitative analysis. In addition, the Company may test goodwill in between annual test dates if an event occurs or circumstances change that could indicate it is more-likely-than-not that the fair value of a reporting unit is below its carrying value.
The qualitative assessment evaluates various events and circumstances, such as macroeconomic conditions, industry and market conditions, cost factors, relevant events and financial trends, that may impact a reporting unit's fair value. Using this qualitative assessment, the Company determines whether it is more-likely-than-not the reporting unit's fair value exceeds its carrying value. If it is determined that it is not more-likely-than-not the reporting unit's fair value exceeds the carrying value, or upon consideration of other factors, including recent acquisition, restructuring or disposal activity or to refresh the fair values, the Company performs a quantitative goodwill impairment analysis.
During the first quarter of 2025, as a result of the Company’s plan to exit the charging business, the Company separately allocated the goodwill from its historical reporting unit of Battery & Charging Systems to the battery systems business and to the charging business on a relative fair value basis. The Company estimated the allocated fair values of the businesses from the historical reporting unit based upon the present value of their anticipated future cash flows. The estimated fair value of the charging business was determined using a cost approach. The Company’s determination of fair value involved judgment and the use of estimates and assumptions. During the first quarter, the relative fair value analysis resulted in an allocation, and subsequent impairment, of $13 million related to the goodwill allocated to the charging business. Refer to Note 2, “Acquisitions and Dispositions,” to the Consolidated Financial Statements in Item 8 of this report for more information.
In conjunction with the goodwill allocation in the first quarter of 2025, the Company performed a quantitative impairment assessment of the Battery & Charging Systems’ goodwill after the impairment of the charging business’ goodwill. Based on the interim impairment test in the first quarter of 2025, the Battery & Charging Systems reporting unit had an estimated fair value that exceeded its carrying value, including goodwill, by approximately 18%, resulting in no impairment at that time.
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During the fourth quarter of 2025, the Company performed a qualitative analysis on its Turbos & Thermal Technologies and Drivetrain & Morse Systems reporting units and performed a quantitative analysis on its Battery & Charging Systems reporting unit. The goodwill associated with the Company’s PowerDrive Systems reporting unit was fully impaired during the year ended December 31, 2024. The Company’s qualitative assessment indicated it was more-likely-than-not that the fair value of the Turbos & Thermal Technologies and Drivetrain & Morse Systems reporting units exceeded their carrying values. For the quantitative analysis, the estimated fair values were determined using an income approach. Under the income approach, fair value is determined based on present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used internal forecasts to estimate future cash flows and included an estimate of long-term future growth rates based on the Company’s most recent views of the long-term outlook for its business.
For the reporting unit for which the Company performed a quantitative analysis, the Company believes the assumptions and estimates used to determine the estimated fair value are reasonable. Different assumptions could materially affect the estimated fair value. The significant assumptions affecting the Company’s 2025 goodwill quantitative impairment review were as follows:
• Discount rates: The Company used a 14% weighted average cost of capital (“WACC”) as the discount rates for future cash flows. The WACC is intended to represent a rate of return that would be expected by a market participant.
• Operating income (loss) margin: The Company used historical and expected operating income (loss) margins, which may vary based on the projection of the reporting unit being evaluated.
• Revenue growth rates: The Company used a global automotive market industry growth rate forecast adjusted to estimate its own market participation for product lines.
I n addition to the above significant assumptions, the Company noted the following risks to volume and operating income assumptions that could have an impact on the discounted cash flow models:
• The automotive industry is cyclical, and the Company’s results of operations could be adversely affected by industry downturns.
• The automotive industry is evolving, and if the Company does not respond appropriately, its results of operations could be adversely affected.
• The Company is dependent on market segments that use its key products and could be affected by decreasing demand in those segments.
• The Company is subject to risks related to international operations.
During the fourth quarter of 2025, in connection with the preparation of the Company’s annual financial statements, the Company noted deterioration in the forecast for its Battery & Charging Systems business. This deterioration was due to dual sourcing actions by certain customers, pricing pressures from competitors and electric vehicle adoption delays in North America. As a result, during the fourth quarter of 2025, the Company recorded a goodwill impairment charge of $410 million related to the Battery & Charging Systems reporting unit.
The fair value of the Battery & Charging Systems reporting unit’s goodwill is sensitive to differences between estimated and actual cash flows, including changes in the projected revenue, projected operating margin and discount rate used to evaluate the fair value of these assets and market multiples assumptions applied by the Company. Future changes in the judgments, assumptions and estimates from those used in valuations and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the
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two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect the Company’s financial statements in any given year.
Similar to goodwill, the Company can elect to perform the impairment test for indefinite-lived intangibles other than goodwill (primarily trade names) using a qualitative analysis, considering similar factors as outlined in the goodwill discussion, to determine if it is more-likely-than-not that the fair value of the trade names is less than the respective carrying values. If the Company elects to perform or is required to perform a quantitative analysis, the test consists of a comparison of the fair value of the indefinite-lived intangible asset to the carrying value of the asset as of the impairment testing date. The Company estimates the fair value of indefinite-lived intangibles using the relief-from-royalty method, which it believes is an appropriate and widely used valuation technique for such assets. The fair value derived from the relief-from-royalty method is measured as the discounted cash flow savings realized from owning such trade names and not being required to pay a royalty for their use.
Refer to Note 12, “Goodwill and Other Intangibles,” to the Consolidated Financial Statements in Item 8 of this report for more information regarding goodwill.
Product warranties 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. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of the Company’s warranty accrual at the time an obligation becomes probable and can be reasonably estimated. Management believes that the warranty accrual is appropriate; however, if actual claims incurred differ from the original estimates or there are changes in our assumptions, it could materially affect the Company’s financial statements.
At December 31, 2025, the total accrued warranty liability was $254 million. The accrual is represented as $86 million in Other current liabilities and $168 million in Other non-current liabilities on the Consolidated Balance Sheets.
Refer to Note 13, “Product Warranty,” to the Consolidated Financial Statements in Item 8 of this report for more information regarding product warranties.
Postretirement defined benefits The Company provides postretirement defined benefits to a number of its current and former employees. Costs associated with postretirement defined benefits include pension and other postemployment health care expenses for former employees, retirees and surviving spouses and dependents.
The Company’s defined benefit pension and other postemployment benefit plans are accounted for in accordance with ASC Topic 715. The determination of the Company’s obligation and expense for its pension and other postemployment benefits, such as retiree health care, is dependent on certain assumptions used by actuaries in calculating such amounts. Certain assumptions, including the expected long-term rate of return on plan assets, discount rate, rates of increase in compensation and health care costs trends are described in Note 18, “Retirement Benefit Plans,” to the Consolidated Financial Statements in Item 8 of this report. The effects of any modification to those assumptions, or actual results that differ from assumptions used, are either recognized immediately or amortized over future periods in accordance with GAAP.
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The primary assumptions affecting the Company’s accounting for employee benefits under ASC Topics 712 and 715 as of December 31, 2025 are as follows:
• Expected long-term rate of return on plan assets : The expected long-term rate of return is used in the calculation of net periodic benefit cost. The required use of the expected long-term rate of return on plan assets may result in recognized returns that are greater or less than the actual returns on those plan assets in any given year. Over time, however, the expected long-term rate of return on plan assets is designed to approximate actual earned long-term returns. The expected long-term rate of return for pension assets has been determined based on various inputs, including historical returns for the different asset classes held by the Company’s trusts and its asset allocation, as well as inputs from internal and external sources regarding expected capital market return, inflation and other variables. The Company also considers the impact of active management of the plans’ invested assets. In determining its pension expense for the year ended December 31, 2025, the Company used long-term rates of return on plan assets ranging from 2.8% to 7.9% outside of the U.S. and 5% in the U.S. The primary funded non-U.S. plans are in the U.K. and Germany.
Actual returns on U.S. pension assets were 7.3% and 0.6% for the years ended December 31, 2025 and 2024, respectively, compared to the expected rate of return assumptions of 5% for the years ended December 31, 2025 and 2024.
Actual returns on U.K. pension assets were 5.9% and (3.7)% for the years ended December 31, 2025 and 2024, respectively, compared to the expected rate of return assumption of 4.8% and 4.0%, respectively, for the same years ended.
Actual returns on German pension assets were 0.8% and 7.0% for the years ended December 31, 2025 and 2024, respectively, compared to the expected rate of return assumptions of 4.2% for the years ended December 31, 2025 and 2024.
• Discount rate : The discount rate is used to calculate pension and other postemployment benefit (“OPEB”) obligations. In determining the discount rate, the Company utilizes a full-yield approach in the estimation of service and interest components by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. For its significant plans, the Company used discount rates ranging from 1.0% to 10.5% to determine its pension and other benefit obligations as of December 31, 2025, including weighted average discount rates of 4.1% in the U.S., 4.6% outside of the U.S. (including 5.5% in the U.K.) and 4.9% for U.S. other postemployment health care plans. The U.S. and U.K. discount rates reflect the fact that the U.S. and U.K. pension plans have been closed for new participants.
• Health care cost trend : For postemployment employee health care plan accounting, the Company reviews external data and Company-specific historical trends for health care cost to determine the health care cost trend rate assumptions. In determining the projected benefit obligation for postemployment health care plans as of December 31, 2025, the Company used health care cost trend rates of 6.8%, declining to an ultimate trend rate of 4.8% by the year 2034.
While the Company believes that these assumptions are appropriate, significant differences in actual experience or significant changes in these assumptions may materially affect the Company's pension and OPEB and its future expense.
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The sensitivity to a 25 basis point change in the assumptions for discount rate related to 2026 pre-tax pension expense for Company sponsored U.S. and non-U.S. pension plans is expected to be negligible.
The following table illustrates the sensitivity to a change in expected return on assets related to 2026 pre-tax pension expense for Company sponsored U.S. and non-U.S. pension:
(in millions)
Impact on U.S. PBO
Impact on Non-U.S. PBO
25 basis point decrease in expected return on assets
25 basis point increase in expected return on assets
The following table illustrates the sensitivity to a change in discount rate for Company sponsored U.S. and non-U.S. pension plans on its pension obligations:
(in millions)
Impact on U.S. PBO
Impact on Non-U.S. PBO
25 basis point decrease in discount rate
25 basis point increase in discount rate
The sensitivity to a 25 basis point change in the discount rate assumption and to the assumed health care cost trend related to the Company’s OPEB obligation and service and interest cost is expected to be negligible.
Refer to Note 18, “Retirement Benefit Plans,” to the Consolidated Financial Statements in Item 8 of this report for more information regarding the Company’s retirement benefit plans.
Restructuring Restructuring costs may occur when the Company takes action to exit or significantly curtail a part of its operations or implements a reorganization that affects the nature and focus of operations. A restructuring charge can consist of severance costs associated with reductions to the workforce, costs to terminate a contract, professional fees and other costs incurred related to the implementation of restructuring activities.
The Company generally records costs associated with voluntary separations at the time of employee acceptance. Costs for involuntary separation programs are recorded when management has approved the plan for separation, the employees are identified and aware of the benefits to which they are entitled and it is unlikely that the plan will change significantly. When a plan of separation requires approval by or consultation with the relevant labor organization or government, the costs are recorded upon agreement. Costs associated with benefits that are contingent on the employee continuing to provide service are expensed over the required service period.
Restructuring accruals can include estimates related to employee termination costs. Actual costs may vary from these estimates. These accruals are reviewed on a quarterly basis and changes to restructuring accruals are appropriately recognized when identified.
Income taxes The Company accounts for income taxes in accordance with ASC Topic 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.
Accounting for income taxes is complex, in part because the Company conducts business globally and, therefore, files income tax returns in numerous tax jurisdictions. Management judgment is required in
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determining the Company’s worldwide provision for income taxes and recording the related assets and liabilities, including accruals for unrecognized tax benefits and assessing the need for valuation allowances. In calculating the provision for income taxes on an interim basis, the Company uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. In determining the need for a valuation allowance, the historical and projected financial performance of the operation recording the net deferred tax asset is considered along with any other pertinent information. Since future financial results may differ from previous estimates, periodic adjustments to the Company’s valuation allowance may be necessary.
The Company is subject to income taxes in the U.S. at the federal and state level and numerous non-U.S. jurisdictions. The determination of accruals for unrecognized tax benefits includes the application of complex tax laws in a multitude of jurisdictions across the Company's global operations. Management judgment is required in determining the accruals for unrecognized tax benefits. In the ordinary course of the Company’s business, there are many transactions and calculations where the ultimate tax determination is less than certain. Accruals for unrecognized tax benefits are established when, despite the belief that tax positions are supportable, there remain certain positions that do not meet the minimum probability threshold, which is a tax position that is more-likely-than-not to be sustained upon examination by the applicable taxing authority. The Company has certain U.S. state income tax returns and certain non-U.S. income tax returns that are currently under various stages of audit by applicable tax authorities. At December 31, 2025, the Company had a liability for tax positions the Company estimates are not more-likely-than-not to be sustained based on the technical merits, which is included in Other non-current liabilities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
The Company records valuation allowances to reduce the carrying value of certain deferred tax assets to amounts that it expects are more-likely-than-not to be realized. Existing deferred tax assets, net operating losses and tax credits by jurisdiction and expectations of the ability to utilize these tax attributes are assessed through a review of past, current and estimated future taxable income and tax planning strategies.
Estimates of future taxable income, including income generated from prudent and feasible tax planning strategies resulting from actual or planned business and operational developments, could change in the near term, perhaps materially, which may require the Company to consider any potential impact to the assessment of the recoverability of the related deferred tax asset. Such potential impact could be material to the Company’s consolidated financial condition or results of operations for an individual reporting period.
In future periods, the Company’s effective tax rate and tax liability may be impacted due to changes in U.S. and non-U.S. tax laws and as a result of regulatory or legislative developments related to such laws. This could include U.S. and non-U.S. tax law developments related to changes to long-standing tax principles arising from proposals made by the Organization for Economic Co-operation and Development that seek to allocate greater taxing rights to countries where customers are located and establish a global minimum tax rate of at least 15% .
Refer to Note 7, “Income Taxes,” to the Consolidated Financial Statements in Item 8 of this report for more information regarding income taxes.
New Accounting Pronouncements
Refer to Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements in Item 8 of this report for more information regarding new applicable accounting pronouncements.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s primary market risks include fluctuations in interest rates and foreign currency exchange rates. To manage these risks, the Company enters into a variety of derivative contracts with the intent of mitigating our risk to fluctuations in currency exchange rates and interest rates. The Company is also affected by changes in the prices of commodities used or consumed in its manufacturing operations. Some of its commodity purchase price risk is covered by supply agreements with customers and suppliers. Other commodity purchase price risk is occasionally addressed by hedging strategies, which include forward contracts. The Company enters into derivative instruments only with high credit quality counterparties and diversifies its positions across such counterparties to reduce its exposure to credit losses. The Company does not engage in any derivative instruments for purposes other than hedging specific operating risks.
The Company has established policies and procedures to manage sensitivity to interest rate, foreign currency exchange rate and commodity purchase price risk, which include monitoring the level of exposure to each market risk. For quantitative disclosures about market risk, refer to Note 17, “Financial Instruments,” to the Consolidated Financial Statements in Item 8 of this report for information with respect to interest rate risk, foreign currency exchange rate risk and commodity purchase price risk.
Interest Rate Risk
Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates. The Company manages its interest rate risk by monitoring its exposure to fixed and variable rates while attempting to optimize its interest costs. The Company selectively uses interest rate swaps to reduce market value risk associated with changes in interest rates (fair value hedges). At December 31, 2025, all of the Company’s long-term debt had fixed interest rates.
Foreign Currency Exchange Rate Risk
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 Brazilian Real, British Pound, Chinese Renminbi, Euro, Hungarian Forint, Korean Won, Mexican Peso, Polish Zloty and Swiss Franc. 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. In addition, the Company regularly enters into forward currency contracts, cross-currency swaps and foreign currency-denominated debt designated as net investment hedges to reduce exposure to translation exchange rate risk. As of December 31, 2025 and 2024, the Company recorded a deferred loss of $35 million and a deferred gain of $245 million, respectively, before taxes, for designated cash flow and net investment hedges within accumulated other comprehensive income (loss) in the Consolidated Balance Sheets in Item 8 of this report.
The significant foreign currency translation adjustments, including the impact of the cash flow net investment hedges discussed above, during the years ended December 31, 2025 and 2024, are shown in the following table, which provides the percentage change in U.S. Dollars against the respective currencies and the approximate impacts of these changes recorded within other comprehensive income (loss) for the respective periods.
Table of Contents
(in millions, except for percentages)
December 31, 2025
Euro
Chinese Renminbi
British Pound
Brazilian Real
(in millions, except for percentages)
December 31, 2024
Euro
Chinese Renminbi
Korean Won
Commodity Price Risk
Commodity price risk is the possibility that the Company will incur economic losses due to adverse changes in the cost of raw materials used in the production of its products. Commodity forward and option contracts are occasionally executed to offset exposure to potential change in prices mainly for various non-ferrous metals and natural gas consumption used in the manufacturing of vehicle components. As of December 31, 2025 and 2024, the Company had no outstanding commodity swap contracts.
Disclosure Regarding Forward-Looking Statements
The matters discussed in this Item 7 include forward looking statements. See “Forward Looking Statements” at the beginning of this report.
