BorgWarner (BWA) Q3 2025: 31% E-Product Growth Drives Margin Outperformance and Capital Return Surge
BorgWarner’s 31% light vehicle e-product surge offset foundational segment softness, enabling resilient margin delivery and a 55% dividend hike. Disciplined capital returns and selective M&A reinforce a balanced strategy as battery headwinds persist, but hybrid and turbocharger wins signal future outgrowth. Investors should watch for further e-product scale and battery segment stabilization in the coming quarters.
Summary
- E-Product Acceleration: Electrified powertrain sales outpaced the market, underpinning margin consistency.
- Capital Allocation Discipline: Share repurchase authorization and dividend both increased, showing long-term cash confidence.
- Hybrid and Turbocharger Wins: New business awards highlight competitive strength in both legacy and next-gen propulsion.
Performance Analysis
BorgWarner delivered flat organic sales year-over-year, masking a sharp divergence between robust electrified product growth and foundational segment contraction. Light vehicle e-product sales soared 31%, notably outpacing global hybrid and battery electric vehicle (BEV) production growth, while battery and charging systems (BCS) continued to drag, especially in North America. Excluding BCS, organic sales were modestly positive, reflecting the company’s ability to offset legacy declines with next-gen offerings.
Adjusted operating margin held at 10.3% despite a $15 million tariff headwind, extending a five-quarter streak above 10%. Free cash flow jumped 71% year-over-year, reaching $507 million, driven by strong working capital and capex discipline. Shareholder returns exceeded $130 million for the quarter, split between buybacks and dividends, culminating in a 55% dividend increase and expanded $1 billion repurchase authorization. Guidance for full-year sales, margin, EPS, and free cash flow was raised, reflecting operational execution, currency tailwinds, and improved industry production outlook.
- E-Product Outgrowth: Electrified product revenue now drives outperformance, with 39% first-half growth vs. 21% market expansion.
- Tariff Recovery Management: Net tariff costs diluted margin by 40 basis points, but recoveries are expected in the second half.
- Foundational Headwinds Persist: Combustion and battery segments remain pressured, but hybrid and turbocharger wins offer offsetting growth vectors.
Overall, BorgWarner’s execution on cost controls and portfolio shift allowed the company to deliver stable profitability and cash flow, even as legacy segments faced cyclical and structural headwinds.
Executive Commentary
"Our sales performance was supported by a 31% increase in light vehicle e-product sales. This growth was well ahead of the high teens increase in global hybrid and BEV production in the quarter. Our adjusted operating margin performance was strong in the second quarter, coming in at 10.3%, which includes a 40 basis point tariff headwind. Lastly, we remain focused on the efficient deployment of our capital to drive shareholder value. In the quarter, we returned over $130 million to shareholders through share repurchases and payment of our cash dividend. Additionally, Our Board of Directors approved both a 55% increase in our quarterly cash dividend per share and an increase in our current share repurchase authorization to $1 billion."
Joe, President and Chief Executive Officer
"We had strong free cash flow in the quarter of $507 million, which was a 71% increase from a year ago. Our second quarter adjusted operating income was $373 million, equating to a strong 10.3% adjusted operating margin. This also represents the fifth quarter in a row with a margin at or above 10% which demonstrates the consistency of our operating performance."
Greg, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Electrification Outpaces Market
BorgWarner’s e-product portfolio, including inverters, motors, and high-voltage heaters, is rapidly scaling, with 31% growth in light vehicle e-products—well above underlying market expansion. The company’s Chinese operations benefit from shorter development cycles and lower R&D intensity, enabling faster launches and improved cost leverage. Platform-based designs allow reuse across multiple NEV (new energy vehicle) models, supporting further scale and margin gains.
2. Foundational Segments: Hybrid and Turbocharger Resilience
While combustion and battery segments face secular and cyclical headwinds, BorgWarner continues to secure new turbocharger and hybrid awards with major OEMs in Europe, North America, and Asia. These wins—often for next-generation hybrid platforms—validate the company’s technology leadership and ability to outgrow declining end markets by capturing share and content in hybridization trends.
3. Capital Allocation: Balanced and Opportunistic
Capital deployment remains split between shareholder returns and technology-focused M&A, with just under 50% of capital returned since 2020. The recent 55% dividend hike and expanded buyback authorization signal confidence in long-term cash generation. Management’s M&A framework now emphasizes near-term earnings accretion and disciplined pricing, reflecting a pivot from purely strategic deals to those with clear financial upside.
4. Battery Segment: Headwinds and Restructuring
The BCS segment remains a material headwind, subtracting approximately 100 basis points from annual outgrowth. Management is executing cost actions and consolidation, targeting $15 million in savings this year, with the segment now EBITDA positive and cash flow breakeven. Longer term, BorgWarner remains bullish on battery and energy storage, but volatility is expected in the near term.
5. Hybrid Momentum and OEM Demand Shifts
RFQ (request for quotation) activity for advanced hybrids is accelerating, reflecting OEMs’ evolving regulatory and market strategies. This positions BorgWarner to capture both combustion and electric content on the same platforms, maximizing wallet share as automakers pivot to hybrid architectures.
Key Considerations
BorgWarner’s quarter reflects a business in active transition, balancing the decline of legacy combustion and battery systems with aggressive growth in electrified propulsion and hybrid content. The company’s ability to maintain margins and cash flow during this shift is a key differentiator.
Key Considerations:
- E-Product Scaling: Sustained double-digit e-product growth is essential to offset foundational declines and support future outgrowth.
- Tariff Recovery Execution: Margin resilience depends on successfully passing through tariff costs to customers in the second half.
- Hybrid Content Expansion: Turbocharger and hybrid wins suggest continued share gains even as combustion volumes decline.
- Capital Returns vs. M&A: The company’s discipline in capital allocation will be tested as it balances opportunistic M&A with rising shareholder return expectations.
Risks
Persistent headwinds in the battery and foundational combustion segments threaten organic growth, with near-term volatility in battery demand and pricing. Tariff cost recovery remains a key risk to margin stability, and increased capital returns could limit flexibility for strategic investments if cash generation falters. Regulatory shifts and OEM powertrain strategy changes may alter the pace of hybrid and e-product adoption, impacting order visibility and outgrowth assumptions.
Forward Outlook
For Q4 2025, BorgWarner guided to:
- Continued sales outgrowth of 100 to 150 basis points above market production
- Flat to up 20 basis points in adjusted operating margin year-over-year, despite tariff pressures
For full-year 2025, management raised guidance:
- Sales of $14.0 to $14.4 billion
- Adjusted operating margin of 10.1% to 10.3%
- Adjusted EPS of $4.45 to $4.65 (up 8% from prior guide)
- Free cash flow of $700 to $800 million
Management emphasized ongoing cost controls, strong e-product demand, and disciplined capital allocation as drivers of the upgraded outlook. Investors should watch for:
- Tariff recovery timing and effectiveness
- Stabilization or rebound in battery and foundational segment demand
Takeaways
BorgWarner’s quarter underscores a successful pivot toward electrified growth, with margin and cash flow stability supporting aggressive capital returns. The company’s ability to win hybrid and turbocharger programs offers a buffer against foundational market declines, while disciplined M&A and restructuring actions position it for long-term outperformance.
- E-Product Momentum: Electrified propulsion is now the primary growth engine, with scale and margin leverage improving each quarter.
- Balanced Capital Deployment: Management’s willingness to return cash and invest selectively in M&A supports both near-term returns and future earnings power.
- Watch for Battery Stabilization: The pace of recovery—or further contraction—in the battery segment will shape organic growth and margin trajectory in 2026.
Conclusion
BorgWarner’s Q3 2025 results reflect a company executing on its electrification pivot while maintaining operational discipline and returning capital at an accelerated pace. Hybrid and e-product wins provide visibility into future outgrowth, but battery segment volatility and tariff recoveries remain watchpoints for investors as the company navigates industry transformation.
Industry Read-Through
BorgWarner’s results highlight the accelerating shift toward hybrid and electrified propulsion across global OEMs, with demand for both foundational and next-gen technologies. Suppliers able to scale e-products, win hybrid content, and manage cost headwinds are best positioned to outgrow the market. Tariff management and disciplined capital returns are increasingly critical as volatility in battery adoption and regulatory policy introduces new risks. Peers with similar legacy exposure must balance cost controls and innovation investment to remain competitive in a rapidly evolving powertrain landscape.