INTRODUCTION
BorgWarner Inc. and Consolidated Subsidiaries (the "Company") is a leading global supplier of highly engineered systems and components primarily for powertrain applications. Our products help improve vehicle performance, fuel efficiency, air quality and vehicle stability. They are manufactured and sold worldwide, primarily to original equipment manufacturers ("OEMs") of light vehicles (i.e., passenger cars, sport-utility vehicles ("SUVs"), cross-over vehicles, vans and light-trucks). Our products are also manufactured and sold to OEMs of commercial trucks, buses and agricultural and off-highway vehicles. We also manufacture and sell our products into the aftermarket for light and commercial vehicles. We operate manufacturing facilities serving customers in the Americas, Europe and Asia, and are an original equipment supplier to every major automaker in the world.
The Company's products fall into two reporting segments: Engine and Drivetrain. The Engine segment's products include turbochargers, timing chain systems, air management, emissions systems, thermal systems, as well as diesel and gas ignition systems. The Drivetrain segment's products are all-wheel drive transfer cases, torque management systems, and components and systems for automated transmissions.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008 Consolidated net sales for the three months ended September 30, 2009 totaled $1,027.8 million, a 22.0% decrease from the three months ended September 30, 2008. This decrease occurred while light-vehicle production was down 9% worldwide and down 20% in North America from the previous year's third quarter. Light-vehicle production was flat in Asia-Pacific and decreased 14% in Europe. The net sales decrease included the effect of weaker foreign currencies, primarily the Euro, of approximately $50 million. Currency fluctuations impacted all of the Company's product lines. Without the currency impact, the decrease in global net sales would have been approximately 18%.
Gross profit and gross margin were $151.8 million and 14.8% for the third quarter of 2009 as compared to $202.3 million and 15.4% for third quarter 2008. The gross margin percentage decrease was due to sales volume declining faster than our ability to reduce our cost structure. Cost reduction actions taken in 2009 to reduce our cost structure included headcount reductions, global pay cuts, selected plant shutdowns and reduced work weeks outside of the U.S. Third quarter selling, general and administrative ("SG&A") costs decreased $8.9 million to $125.9 million from $134.8 million, and increased as a percentage of net sales to 12.2% from 10.2%. R&D costs, which are included in SG&A expenses, decreased $9.3 million to $41.4 million from $50.7 million as compared to third quarter 2008. As a percentage of sales, R&D costs increased to 4.0% from 3.8% in the third quarter of 2008. Our continued investment in a number of cross-business R&D programs, as well as other key programs, is necessary for the Company's short and long-term growth.
Equity in affiliates' earnings of $6.5 million decreased $2.7 million as compared with the third quarter of 2008 primarily due to lower vehicle production in Asia.
Third quarter interest expense and finance charges of $13.0 million increased $1.8 million as compared with third quarter 2008 primarily due to increased debt levels, offset somewhat by reduced global interest rates.

The Company's provision for income taxes is normally based on an estimated tax rate for the year applied to the year-to-date federal, state and foreign income. However, due to unprecedented depressed global economic conditions there is significant uncertainty regarding industry production volumes for the remainder of the year. This precludes us from making a reliable estimate of the annual effective tax rate for the year. Accordingly, we have made our 2009 income tax provision pursuant to Financial Accounting Standards Board ("FASB") Topic 740, Accounting for Income Taxes in Interim Periods, which provides that tax (or benefit) in each foreign jurisdiction that is not subject to a valuation allowance be separately computed as ordinary income/(loss) occurs within the jurisdiction for the quarter. The actual global effective tax rate for the nine months is calculated to be a benefit of 54.5%, which resulted in a 7.0% tax rate for the third quarter. This represents an income tax benefit of ($24.2) million on the loss of ($44.4) million for the first nine months of 2009. It results in a $1.5 million expense on earnings before income taxes and noncontrolling interest of $21.5 million for the third quarter of 2009.
The Company's net earnings were $17.2 million for the third quarter, or $0.15 per diluted share, an increase of $1.27 per diluted share over the previous year's third quarter. The Company believes the following table is useful for comparison with on-going results from prior periods. It details a number of non-recurring or non-comparable items that impacted earnings or loss per share in 2009 and 2008.

                                                                     Three Months Ended
                                                                        September 30,
                                                                    2009             2008
GAAP earnings or (loss) per share - diluted                       $    0.15         $ (1.12 )

Non-recurring or non-comparable items:
Goodwill impairment charge                                                -           (1.27 )
Restructuring activities                                                  -           (0.16 )
Tax valuation allowance                                                   -           (0.12 )
DTP retiree healthcare litigation outcome                                 -           (0.03 )

Total impact of non-recurring or non-comparable items per
share - diluted                                                   $       -         $ (1.58 )

Nine months ended September 30, 2009 vs. Nine months ended September 30, 2008 Consolidated net sales for the nine months ended September 30, 2009 totaled $2,763.5 million, a 36.2% decrease over the nine months ended September 30, 2008. This decrease occurred while light-vehicle production was down 23% worldwide and down 41% in North America from the previous year's first nine months. Light-vehicle production decreased 13% in Asia-Pacific and 29% in Europe. The net sales decrease included the effect of weaker foreign currencies, primarily the Euro, of approximately $232 million. Currency fluctuations impacted all of the Company's product lines. Without the currency impact, the decrease in global net sales would have been approximately 31%.
Gross profit and gross margin were $347.6 million and 12.6% for the first nine months of 2009 as compared to $764.6 million and 17.6% for the first nine months of 2008. The gross margin percentage decrease was due to sales volume declining faster than our ability to reduce our cost structure. Cost reduction actions taken in 2009 to reduce our cost structure included headcount reductions, global pay cuts, selected plant shutdowns and reduced work weeks outside of the U.S. On February 26, 2009, the Company's subsidiary, BorgWarner Diversified Transmission Products Inc. ("DTP"), entered into a Plant Shutdown Agreement with the United Auto Workers ("UAW") for its Muncie, Indiana automotive component plant (the "Muncie Plant"). Management subsequently wound-down production activity at the plant, with operations effectively ceased as of March 31, 2009. As a result of the

closure of the Muncie Plant, the Company recorded a curtailment gain of $41.9 million in the first quarter of 2009.
The Plant Shutdown Agreement with the UAW for the Muncie Plant also included a settlement of a portion of the UAW retiree health care obligation, resulting in the remeasurement of the retiree medical plan. The financial impact of this settlement resulted in expense recognition of $14.0 million, a $47.2 million reduction to retirement-related liabilities, a $27.2 million increase in accumulated other comprehensive income and a $34.0 million increase in accounts payable and accrued expenses in the first quarter of 2009. The $34.0 million in accounts payable and accrued expenses will be paid in monthly installments, which began in May 2009 and will conclude in April 2010. With the plant closing announcement, the Company has entered into discussions with the Pension Benefit Guaranty Corporation regarding potential funding of the Muncie Plant's defined benefit pension plan.
The combined pre-tax impact of these actions was a net gain of $27.9 million, comprised of a $41.9 million curtailment gain and $14.0 million settlement loss on the Company's Condensed Consolidated Statements of Operations as of March 31, 2009.
Selling, general and administrative ("SG&A") costs for the first nine months of 2009 decreased $135 million to $315.4 million from $450.4 million, and increased as a percentage of net sales to 11.4% from 10.4%. The decrease in SG&A was impacted by a $27.9 million aforementioned net gain related to the Company's Plant Shutdown Agreement with the UAW and subsequent closure of the Muncie Plant. This gain was partially offset by a $4.8 million expense associated with the adoption of Topic 805. Without these non-comparable items, SG&A as a percentage of net sales was 12.2%. R&D costs, which are included in SG&A expenses, decreased $56.3 million to $109.7 million from $166.0 million as compared to the first nine months of 2008. As a percentage of sales, R&D costs increased to 4.0% from 3.8% in the first nine months of 2008. Our continued investment in a number of cross-business R&D programs, as well as other key programs, is necessary for the Company's short and long-term growth. In the second quarter of 2009, the Company took additional restructuring actions. The Company reduced its North American workforce by approximately 550 people, or 12%; its European workforce by approximately 150 people, or 2%; and its Asian workforce by approximately 60 people, or 3% in the second quarter. The net restructuring expense recognized in the second quarter was $9.0 million for employee termination benefits. In addition to employee termination costs, the Company recorded $36.3 million of asset impairment and $5.0 million of other charges in the second quarter of 2009 related to the North American and European restructuring. The combined 2009 restructuring expenses of $50.3 million are broken out by segment as follows: Engine $27.2 million, Drivetrain $19.7 million and Corporate $3.4 million.
Included in the second quarter of 2009 asset impairment charge is $22.3 million related to one of the Company's European locations. During the second quarter of 2009 circumstances caused the Company to evaluate the long range outlook of the facility using an undiscounted and discounted cash flow model, both of which indicated that assets were impaired. The Company then used an estimate of cost replacement to determine the fair value of the assets at the facility. This reduction of asset value was included in the Engine segment.
Equity in affiliates' earnings of $11.5 million decreased $18.7 million as compared to the first nine months of 2008 primarily due to lower vehicle production in Asia.

Interest expense and finance charges for the first nine months of 2009 were $41.1 million and increased $12.6 million as compared with the first nine months of 2008. This increase was primarily due to increased debt levels and a net $1.8 million non-cash charge related to net hedge ineffectiveness, offset somewhat by reduced global interest rates.
The Company's provision for income taxes is normally based on an estimated tax rate for the year applied to the year-to-date federal, state and foreign income. However, due to unprecedented depressed global economic conditions there is significant uncertainty regarding industry production volumes for the remainder of the year. This precludes us from making a reliable estimate of the annual effective tax rate for the year. Accordingly, we have made our 2009 income tax provision pursuant to Financial Accounting Standards Board ("FASB") Topic 740, Accounting for Income Taxes in Interim Periods, which provides that tax (or benefit) in each foreign jurisdiction that is not subject to a valuation allowance be separately computed as ordinary income/(loss) occurs within the jurisdiction for the quarter. The actual global effective tax rate for the nine months is calculated to be a benefit of 54.5%, which resulted in a 7.0% tax rate for the third quarter. This represents an income tax benefit of ($24.2) million on the loss of ($44.4) million for the first nine months of 2009. It results in a $1.5 million expense on earnings before income taxes and noncontrolling interest of $21.5 million for the third quarter of 2009.
The Company's net loss was $25.7 million for the first nine months of 2009, or $0.22 loss per diluted share, a decrease of $0.61 per diluted share over the previous year's first nine months. The Company believes the following table is useful for comparison with on-going results from prior periods. It details a number of non-recurring or non-comparable items that impacted earnings or loss per share in 2009 and 2008.

                                                                      Nine Months Ended
                                                                        September 30,
                                                                     2009            2008
GAAP earnings or (loss) per share - diluted                       $    (0.22 )      $  0.39

Non-recurring or non-comparable items:
Goodwill impairment charge                                                 -          (1.24 )
Restructuring activities                                               (0.29 )        (0.16 )
Tax valuation allowance                                                    -          (0.11 )
DTP retiree healthcare litigation outcome                                  -          (0.03 )
Interest rate derivative agreements                                    (0.03 )            -
Topic 805 adoption                                                     (0.03 )            -
Change in retiree obligation related to Muncie closure                  0.15              -
BERU purchase accounting                                                   -          (0.04 )

Total impact of non-recurring or non-comparable items per
share - diluted                                                   $    (0.20 )      $ (1.58 )

Reporting Segments
The Company's business is comprised of two reporting segments: Engine and Drivetrain. These reporting segments are strategic business groups, which are managed separately as each represents a specific grouping of related automotive components and systems.
The Company allocates resources to each segment based upon the projected after-tax return on invested capital ("ROIC") of its business initiatives. The ROIC is comprised of projected earnings before interest, income taxes and noncontrolling interest ("EBIT") adjusted for income taxes compared to the projected average capital investment required.

EBIT is considered a "non-GAAP financial measure." Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. EBIT is defined as earnings before interest, income taxes and noncontrolling interest. "Earnings" is intended to mean net earnings as presented in the Consolidated Statements of Operations under GAAP.
The Company believes that EBIT is useful to demonstrate the operational profitability of our segments by excluding interest and income taxes, which are generally accounted for across the entire Company on a consolidated basis. EBIT is also one of the measures used by the Company to determine resource allocation within the Company. Although the Company believes that EBIT enhances understanding of our business and performance, it should not be considered an alternative to, or more meaningful than, net earnings (loss) or cash flows from operations as determined in accordance with GAAP.
The following tables present net sales and segment EBIT by reporting segment for the three and nine months ended September 30, 2009 and 2008.

Net Sales by Reporting Segment

                                      Three months ended           Nine months ended
                                         September 30,               September 30,
       (millions)                     2009          2008          2009          2008
       Engine                       $   735.3     $   974.1     $ 2,030.2     $ 3,181.2
       Drivetrain                       296.8         347.2         743.8       1,171.4
       Inter-segment eliminations        (4.3 )        (4.4 )       (10.5 )       (20.2 )

       Net sales                    $ 1,027.8     $ 1,316.9     $ 2,763.5     $ 4,332.4

Segment Earnings (Loss) Before Interest and Income Taxes

                                                  Three months ended                Nine months ended
                                                    September 30,                     September 30,
(millions)                                      2009              2008             2009            2008
Engine                                        $    56.6         $   94.1        $    136.5        $ 358.4
Drivetrain                                          7.5             (2.9 )           (34.0 )         37.2

Segment earnings before interest and
income taxes ("Segment EBIT")                      64.1             91.2             102.5          395.6
Muncie closure retiree obligation net
gain                                                  -                -              27.9              -
Corporate, including equity in
affiliates' earnings and stock-based
compensation                                      (30.1 )          (14.1 )           (85.1 )        (54.0 )

Consolidated earnings before interest
and taxes ("EBIT")                                 34.0             77.1              45.3          341.6
Restructuring expense                                 -             25.0              50.3           25.0
Goodwill impairment charge                            -            146.8                 -          146.8
Interest income                                    (0.5 )           (2.2 )            (1.7 )         (6.4 )
Interest expense and finance charges               13.0             11.2              41.1           28.5

Earnings (loss) before income taxes and
noncontrolling interest                            21.5           (103.7 )           (44.4 )        147.7
Provision (benefit) for income taxes                1.5             24.3             (24.2 )         87.7

Net earnings (loss)                                20.0           (128.0 )           (20.2 )         60.0
Net earnings attributable to the
noncontrolling interest                             2.8              2.4               5.5           14.2

Net earnings (loss) attributable to
BorgWarner Inc.                               $    17.2         $ (130.4 )      $    (25.7 )      $  45.8

Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008 The Engine segment net sales decreased $238.8 million, or 24.5%, and segment EBIT decreased $37.5 million, or 39.9%, from third quarter 2008. Excluding the impact of weaker foreign currencies, primarily the Euro, sales decreased approximately 21%. The sales and EBIT decrease was primarily driven by reduced global vehicle production that depressed demand for engine products, especially in Europe.
The Drivetrain segment net sales decreased $50.4 million, or 14.5%, and segment EBIT increased $10.4 million from third quarter 2008. Excluding the impact of weaker foreign currencies, primarily the Euro, sales decreased approximately 10%. The sales decrease was driven by lower global production, primarily in

Europe, North America and Japan. The EBIT increase was driven by the Company's 2009 cost reduction actions to reduce our cost structure.
Nine months ended September 30, 2009 vs. Nine months ended September 30, 2008 The Engine segment net sales decreased $1,151 million, or 36.2%, and segment EBIT decreased $221.9 million, or 61.9%, from the first nine months of 2008. Excluding the impact of weaker foreign currencies, primarily the Euro, sales decreased approximately 31%. The sales and EBIT decrease was primarily driven by reduced global vehicle production that depressed demand for engine products, especially in Europe.
The Drivetrain segment net sales decreased $427.6 million, or 36.5%, and segment EBIT decreased $71.2 million from the first nine months of 2008. Excluding the impact of weaker foreign currencies, primarily the Euro, sales decreased approximately 32%. The sales and EBIT decrease was driven by lower global production, primarily in Europe, North America and Japan. Outlook for the Remainder of 2009
The Company is cautiously optimistic about the remainder of 2009. The Company expects global production volumes to be incrementally higher in the fourth quarter of 2009 compared with the first nine months. However, visibility is limited in Europe due to uncertainty surrounding consumer demand, the impact of expiring government-sponsored incentive programs and other market dynamics. The impact of non-U.S. currencies is expected to be unfavorable in 2009 versus 2008. The Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic capital investments to enhance its product leadership strategy. The trends that are driving our long-term growth are expected to continue, including the growth of direct injection diesel and gasoline engines worldwide, the increased adoption of automated transmissions in Europe and Asia-Pacific, and the move to variable cam and chain engine timing systems in both Europe and Asia-Pacific. As the recovery from current global economic conditions occurs, we expect long-term sales and net earnings growth to resume to historical rates.
FINANCIAL CONDITION AND LIQUIDITY
The Company had $258.8 million of cash on hand at September 30, 2009. The Company has a multi-currency revolving credit facility, which provides for borrowings up to $250 million through January 22, 2011. The facility is secured by unperfected pledges of the Company's equity interests in its subsidiaries and certain assets. No secured party is entitled to perfect its lien on any of the collateral until the long term unsecured senior, non-credit enhanced debt rating of the Company is less than or equal to BB+ by Standard & Poor's and less than or equal to Ba1 by Moody's. The three key covenants of the credit agreement are a net worth test, a debt compared to EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization") test, and an interest coverage test. The Company was in compliance with all covenants at September 30, 2009 and expects to be compliant in future periods. At September 30, 2009 and December 31, 2008 there were no outstanding borrowings under the facility. In addition to the credit facility, as of September 30, 2009, the Company had approximately $376 million available under a universal shelf registration statement on file with the Securities and Exchange Commission under which a variety of debt and equity instruments could be issued. From a credit quality perspective, the Company has a credit rating of BBB from Standard & Poor's and Ba1 from Moody's. On March 18, 2009, Moody's downgraded the Company's credit rating from Baa3 to Ba1. The current outlook from Standard & Poor's and Moody's is negative. None of the Company's debt agreements require accelerated repayment in the event of a decrease in credit ratings.

On April 24, 2009 the Company's $50 million accounts receivable securitization facility matured and was not renewed. The impact of this maturity was an increase in receivables of $50 million and a decrease in cash of $50 million in the second quarter of 2009. This is reflected as a Financing activity in the Condensed Consolidated Statements of Cash Flows.
During the nine-month periods ended September 30, 2009 and 2008, total cash proceeds from sales of accounts receivable were $200 million and $450 million, respectively. The Company paid servicing fees related to these receivables for the three months ended September 30, 2008 of $0.4 million. The Company paid servicing fees related to these receivables for the nine months ended September 30, 2009 and 2008 of $0.4 million and $1.4 million, respectively. These amounts are recorded in interest expense and finance charges in the Condensed Consolidated Statements of Operations.
In 2006, the Company entered into a series of interest rate swap agreements to effectively convert a portion of its senior notes from fixed to variable interest rates and were designated as fair value hedges for the senior notes. In the first quarter of 2009, $100 million of interest rate swap agreements relating to the 2009 fixed-rate debt matured. Also, in the first quarter of 2009, the Company terminated $150 million of interest rate swap agreements relating to the 2016 fixed rate debt and $75 million of interest rate swap agreements relating to the 2019 fixed rate debt. The early termination of the 2016 and 2019 interest rate swap agreements resulted in a gain of $34.5 million that will be amortized as a reduction of interest expense over the remaining life of the respective 2016 and 2019 debt. The Company recognized $5.7 million in interest expense in the first quarter of 2009 as a result of the early termination. This early termination also resulted in the Company receiving net cash proceeds of $30.0 million. As of September 30, 2009, there were no outstanding interest rate swap agreements.
Net cash provided by operating activities decreased $38.8 million to $226.3 million for the first nine months of 2009 from $265.1 million in the first nine months of 2008. The decrease reflected lower earnings, somewhat offset by lower working capital needs in the first nine months of 2009 as compared to the first nine months of 2008. Capital spending, including tooling outlays, was $127.2 million in the first nine months of 2009, compared with $265.6 million in 2008. Selective capital spending remains an area of focus for the Company, both in order to support our book of new business and for cost reductions and productivity improvements. The Company expects to continue to spend capital to support the launch of our new applications and for cost reductions and productivity improvement projects, but at levels considerably lower than 2008. The Company expects that net cash provided by operating activities, after capital expenditures, including tooling outlays to be positive in 2009.
As of September 30, 2009, debt increased from year-end 2008 by $67.4 million and cash increased by $155.4 million. Our debt to capital ratio was 28.1% at the end . . .