REPORTING SEGMENTS AND RELATED INFORMATION

The Company's business is comprised of two reporting segments: Engine and Drivetrain. These 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. ROIC is comprised of Adjusted EBIT after deducting notional taxes compared to the projected average capital investment required. Adjusted EBIT is comprised of earnings before interest, income taxes and noncontrolling interest (“EBIT") adjusted for restructuring, goodwill impairment charges, affiliates' earnings and other items not reflective of on-going operating income or loss.

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



2013 Segment information
	Net sales								Year-end assets		Depreciation/ amortization		Long-lived asset expenditures (b)
(millions of dollars)	Customers		Inter-segment			Net			Year-end assets		Depreciation/ amortization		Long-lived asset expenditures (b)
Engine	$	4,990.1	$	32.0		$	5,022.1		$	3,519.1	$	189.1	$	277.5
Drivetrain	2,446.5		—			2,446.5			1,786.6		90.5		122.9
Inter-segment eliminations	—		(32.0		)	(32.0		)	—		—		—
Total	7,436.6		—			7,436.6			5,305.7		279.6		400.4
Corporate (a)	—		—			—			1,611.3		19.8		17.4
Consolidated	$	7,436.6	$	—		$	7,436.6		$	6,917.0	$	299.4	$	417.8



2012 Segment information
	Net sales								Year-end assets		Depreciation/ amortization		Long-lived asset expenditures (b)
(millions of dollars)	Customers		Inter-segment			Net			Year-end assets		Depreciation/ amortization		Long-lived asset expenditures (b)
Engine	$	4,884.5	$	28.5		$	4,913.0		$	3,299.2	$	177.8	$	269.9
Drivetrain	2,298.7		—			2,298.7			1,652.2		91.3		125.6
Inter-segment eliminations	—		(28.5		)	(28.5		)	—		—		—
Total	7,183.2		—			7,183.2			4,951.4		269.1		395.5
Corporate (a)	—		—			—			1,449.4		19.5		11.9
Consolidated	$	7,183.2	$	—		$	7,183.2		$	6,400.8	$	288.6	$	407.4



2011 Segment information
	Net sales								Year-end assets		Depreciation/ amortization		Long-lived asset expenditures (b)
(millions of dollars)	Customers		Inter-segment			Net			Year-end assets		Depreciation/ amortization		Long-lived asset expenditures (b)
Engine	$	5,030.2	$	20.4		$	5,050.6		$	3,329.0	$	188.6	$	264.3
Drivetrain	2,084.5		—			2,084.5			1,562.8		80.0		115.9
Inter-segment eliminations	—		(20.4		)	(20.4		)	—		—		—
Total	7,114.7		—			7,114.7			4,891.8		268.6		380.2
Corporate (a)	—		—			—			1,066.8		14.4		13.5
Consolidated	$	7,114.7	$	—		$	7,114.7		$	5,958.6	$	283.0	$	393.7

_______________

(a) Corporate assets include investments and advances and deferred income taxes.

(b) Long-lived asset expenditures include capital expenditures and tooling outlays.

Adjusted earnings before interest, income taxes and noncontrolling interest ("Adjusted EBIT")



	Year Ended December 31,
(millions of dollars)	2013			2012			2011
Engine	$	826.0		$	786.4		$	774.3
Drivetrain	252.2			209.1			161.2
Adjusted EBIT	1,078.2			995.5			935.5
Restructuring expense	52.3			27.4			—
Program termination agreement	11.3			—			—
Retirement related obligations	5.9			17.3			—
Loss from disposal activities	—			39.7			21.5
Patent infringement settlement, net of legal costs incurred	—			—			(29.1		)
Corporate, including equity in affiliates' earnings and stock-based compensation	110.0			115.4			107.4
Interest income	(4.8		)	(4.7		)	(4.8		)
Interest expense and finance charges	34.2			39.4			74.6
Earnings before income taxes and noncontrolling interest	869.3			761.0			765.9
Provision for income taxes	218.3			238.6			195.3
Net earnings	651.0			522.4			570.6
Net earnings attributable to the noncontrolling interest, net of tax	26.7			21.5			20.5
Net earnings attributable to BorgWarner Inc.	$	624.3		$	500.9		$	550.1

Geographic Information

Outside the U.S., only China, Germany, Hungary and South Korea exceeded 5% of consolidated net sales during the year ended December 31, 2013, attributing sales to the location of production rather than the location of the customer. Also, the Company's 50% equity investment in NSK-Warner (see Note 5) of $168.0 million, $184.4 million and $189.2 million at December 31, 2013, 2012 and 2011, respectively, is excluded from the definition of long-lived assets, as are goodwill and certain other non-current assets.



	Net sales						Long-lived assets
(millions of dollars)	2013		2012		2011		2013		2012		2011
United States	$	1,939.7	$	1,857.2	$	1,674.0	$	531.7	$	508.1	$	492.6
Europe:
Germany	1,760.1		1,871.3		2,200.0		430.0		432.2		420.4
Hungary	451.5		448.9		503.2		66.9		64.3		56.9
France	327.6		335.2		363.0		44.4		45.9		63.2
Other Europe	1,132.5		1,015.1		917.8		257.6		225.8		194.6
Total Europe	3,671.7		3,670.5		3,984.0		798.9		768.2		735.1
South Korea	563.5		505.6		471.7		165.2		140.4		124.5
China	636.3		499.1		416.6		238.5		184.3		148.0
Other foreign	625.4		650.8		568.4		205.1		187.0		164.1
Total	$	7,436.6	$	7,183.2	$	7,114.7	$	1,939.4	$	1,788.0	$	1,664.3

Sales to Major Customers

Consolidated net sales to Volkswagen (including its subsidiaries) were approximately 16%, 17% and 19% for the years ended December 31, 2013, 2012 and 2011, respectively; and to Ford (including its subsidiaries) were approximately 14%, 13%, and 12% for the years ended December 31, 2013, 2012 and 2011, respectively. Both of the Company's reporting segments had significant sales to Volkswagen and Ford in 2013, 2012 and 2011. Accounts receivable from these customers at December 31, 2013 comprised approximately 24% ($248.4 million) of total accounts receivable. Such sales consisted of a variety of products to a variety of customer locations and regions. No other single customer accounted for more than 10% of consolidated net sales in any of the years presented.

Sales by Product Line

Sales of turbochargers for light vehicles represented approximately 26% of total net sales for the years ended December 31, 2013, 2012 and 2011. The Company currently supplies light vehicle turbochargers to many OEMs including BMW, Daimler, Fiat, Ford, General Motors, Hyundai, PSA, Renault and Volkswagen. No other single product line accounted for more than 10% of consolidated net sales in any of the years presented.

Interim Financial Information (Unaudited)



(millions of dollars, except per share amounts)	2013															2012
Quarter ended	Mar-31			Jun-30			Sep-30			Dec-31			Year			Mar-31			Jun-30			Sep-30			Dec-31			Year
Net sales	$	1,851.1		$	1,893.9		$	1,806.2		$	1,885.4		$	7,436.6		$	1,912.5		$	1,856.4		$	1,695.2		$	1,719.1		$	7,183.2
Cost of sales	1,476.4			1,497.3			1,426.6			1,478.8			5,879.1			1,516.7			1,473.2			1,351.5			1,374.9			5,716.3
Gross profit	374.7			396.6			379.6			406.6			1,557.5			395.8			383.2			343.7			344.2			1,466.9
Selling, general and administrative expenses	159.3			155.6			157.7			167.1			639.7			169.0			153.1			151.0			156.2			629.3
Other expense (income)	16.9			(2.4		)	(3.7		)	51.8			62.6			1.1			36.6			29.7			17.3			84.7
Operating income	198.5			243.4			225.6			187.7			855.2			225.7			193.5			163.0			170.7			752.9
Equity in affiliates’ earnings, net of tax	(9.7		)	(11.1		)	(10.4		)	(12.3		)	(43.5		)	(9.2		)	(12.5		)	(11.1		)	(10.0		)	(42.8		)
Interest income	(1.0		)	(1.0		)	(1.3		)	(1.5		)	(4.8		)	(1.4		)	(1.3		)	(1.0		)	(1.0		)	(4.7		)
Interest expense and finance charges	9.7			8.8			8.1			7.6			34.2			15.1			12.6			5.0			6.7			39.4
Earnings before income taxes and noncontrolling interest	199.5			246.7			229.2			193.9			869.3			221.2			194.7			170.1			175.0			761.0
Provision for income taxes	50.9			66.6			56.3			44.5			218.3			57.5			68.5			64.2			48.4			238.6
Net earnings	148.6			180.1			172.9			149.4			651.0			163.7			126.2			105.9			126.6			522.4
Net earnings attributable to the noncontrolling interest, net of tax	6.6			6.0			6.1			8.0			26.7			5.7			5.6			4.8			5.4			21.5
Net earnings attributable to BorgWarner Inc. (a)	$	142.0		$	174.1		$	166.8		$	141.4		$	624.3		$	158.0		$	120.6		$	101.1		$	121.2		$	500.9

Earnings per share — basic	$	0.62		$	0.76		$	0.73		$	0.62		$	2.73		$	0.73		$	0.54		$	0.44		$	0.52		$	2.22
Earnings per share — diluted	$	0.61		$	0.75		$	0.72		$	0.62		$	2.70		$	0.64		$	0.50		$	0.43		$	0.51		$	2.09

_______________

(a) The Company's results were impacted by the following:

•

Quarter ended December 31, 2013: The Company incurred restructuring expense of $52.3 million, related to the initiation of Drivetrain segment actions designed to improve future profitability and competitiveness. The Company recorded tax benefits of $7.1 million in connection with the restructuring expense. Additionally, the Company recorded a net tax benefit of $4.4 million related to the reversal of certain state deferred tax asset valuation allowances and other tax adjustments.


•	Quarter ended September 30, 2013: The Company incurred a net tax benefit of $5.6 million, which was comprised of tax benefits of $3.1 million related to 2012 provision to return adjustments and $2.5 million related to the reversal of certain state deferred tax asset valuation allowances.

•

Quarter ended March 31, 2013: The Company incurred $11.3 million of expense related to a program termination agreement. Retirement related obligations expense of $5.9 million was primarily related to a first quarter 2013 grant of restricted stock awards to certain retiring NEOs as to which the Company waived the forfeiture provisions. The Company recorded tax benefits of $3.8 million and $2.1 million related to the program termination agreement and retirement related obligations. Additionally, the Company recorded a net tax benefit of $1.7 million, which was comprised of a $6.6 million tax benefit related to the extension of the federal research and development credit and other international tax provisions resulting from the retroactive impact of U.S. legislation enacted in January 2013, partially offset by a $4.9 million tax expense related to a comprehensive income adjustment.

•

Quarter ended December 31, 2012: Retirement related obligations of $17.3 million are comprised of a $5.7 million loss resulting from the settlement of a portion of the Muncie Plant's pension obligation and an $11.6 million expense associated with the retirement of certain NEOs. These obligations were partially offset by a $6.1 million tax benefit. The Company incurred tax expense of $3.9 million which included $11.1 million of U.S. tax expense to correct the income taxes payable balance, partially offset by tax benefits resulting from changes to the statutory income tax rate in certain countries and the settlement of certain tax audits.

•

Quarter ended September 30, 2012: The Company incurred $1.8 million of expense and $11.2 million of tax expense associated with the completion of the sale of its spark plug business. The Company also recorded restructuring expense of $27.4 million primarily associated with the disposal and future requirements of BERU's on-going business, which was partially offset by a tax benefit of $7.7 million. Additionally, the Company incurred tax expense of $6.9 million primarily resulting from the settlement of certain tax audits.

•

Quarter ended June 30, 2012: The Company recorded expense of $37.9 million primarily due to the write-down of prior purchase price accounting adjustments included within the disposal group as a result of signing a Master Purchase Agreement to sell the spark plug business to Federal-Mogul Corporation, which was partially offset by a tax benefit of $5.5 million resulting from the write-down. Additionally, the Company recorded tax expense of $9.0 million related to its decision to change its cash repatriation assertion for some of its foreign subsidiaries.