RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

The Audit Committee of the Company's Board of Directors concluded on June 12, 2018, after careful consideration of the relevant facts and circumstances and following consultation with the Company's management and PricewaterhouseCoopers LLP, the Company's independent registered public accounting firm, that the Company’s consolidated financial statements for the fiscal years ended December 31, 2016 and 2015 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 should be restated, and that such consolidated financial statements should no longer be relied upon, due to the Company’s re-evaluation of its accounting for liabilities relating to the estimated value of asbestos-related claims not yet asserted as of those dates and their associated defense costs. See the Contingencies footnote to the Consolidated Financial Statements for additional information.

The Company has historically been named, and anticipates it will be named in the future, as one of many defendants in asbestos-related personal injury actions. For the fiscal period ended September 30, 2016 and prior fiscal periods, the Company determined, through its application of ASC 450-20, Contingencies, that its liability for asbestos-related claims not yet asserted and their associated defense costs could not then be reasonably estimated for reasons described in the Company’s Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for such periods.

The Company further evaluated its ability to estimate asbestos-related claims not yet asserted in connection with the preparation of its consolidated financial statements for the fiscal year ended December 31, 2016, consistent with its standard practice. Management concluded that beginning with the fourth quarter of 2016 it was able to make a reasonable estimate of the liability for asbestos-related claims not yet asserted including associated defense costs. The Company believed, as set forth in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016, that a culmination of factors relating to asbestos-related claims in 2016 made a reasonable estimate of the liability for unasserted asbestos-related claims possible at that time. The Company accordingly recorded a $703.6 million pretax asbestos-related charge, net of insurance recoveries, in the fourth quarter of 2016. That charge included, for the first time, an estimate of the Company’s liability for asbestos-related claims not yet asserted, consistent with the Company’s interpretation of ASC 450-20.

The Company engaged in discussions with the staff of the United States Securities and Exchange Commission (the “Staff”) beginning in May 2017 concerning the Company’s accounting for the asbestos-related charge recorded in its Consolidated Financial Statements for the fiscal year ended December 31, 2016. Following discussions with the Staff, the Company concluded that a re-evaluation of its accounting for asbestos-related claims not yet asserted in the relevant periods and their associated costs was necessary. Based on that re-evaluation, the Company concluded that it should have recorded an estimated liability for such claims and costs prior to the fourth quarter of 2016 and the failure to record such an estimated liability in an earlier period(s) was an error in the Company’s consolidated financial statements for such period(s).

As a result of the Company's reevaluation of its accounting for unasserted asbestos-related claims including associated defense costs, the Company is amending its 2017 Annual Report to restate certain Consolidated Financial Statements contained therein to reflect the following effects:

•

The Company has retroactively determined, with the assistance of its outside actuarial consultant, an appropriate estimated liability for asbestos-related claims and their associated defense costs to be accrued as of December 31, 2012. This amount, together with the impact from recording the corresponding insurance recoveries and deferred tax assets resulted in a decrease to retained earnings of $410.1 million as of December 31, 2012;

•

The estimated amount accrued for asbestos-related claims including their associated defense costs as of December 31, 2012 has been included in the Company’s Consolidated Financial Statements for each fiscal year ended December 31, 2013, 2014, 2015, and 2016, adjusted for amounts actually spent by the Company during each of those years on account of asbestos-related claims and associated defense costs in addition to any changes in the valuation of the liability;


•	The charge originally taken by the Company on account of unasserted asbestos-related claims in the fourth quarter of 2016 has been reversed, resulting in an increase of $700.6 million before tax ($438.7 million after tax) in the Company’s 2016 earnings; and


•	The Company has made appropriate adjustments to the valuation of its insurance assets that are responsive to asbestos-related claims to account for the estimated value of those assets in all applicable years.

The Consolidated Statements of Operations, Consolidated Statements of Comprehensive Income, Consolidated Statements of Equity, Consolidated Statements of Cash Flows, and Notes 3, 4, 14, 17, 20 and 21, were updated to reflect the restatement.

The following tables identify each financial statement line item affected by the restatement.

CONSOLIDATED STATEMENTS OF OPERATIONS



(in millions, except share and per share amounts)	Year Ended December 31,
	2016							2015
	As Reported		Adjustments			As Restated		As Reported		Adjustments			As Restated
Other expense, net	889.7		(752.2		)	137.5		101.4		51.4			152.8
Operating income	225.9		752.2			978.1		939.7		(51.4		)	888.3
Earnings before income taxes and noncontrolling interest	190.5		752.2			942.7		926.8		(51.4		)	875.4
Provision for income taxes	30.3		275.7			306.0		280.4		(18.9		)	261.5
Net earnings	160.2		476.5			636.7		646.4		(32.5		)	613.9
Net earnings attributable to the noncontrolling interest, net of tax	41.7		—			41.7		36.7		—			36.7
Net earnings attributable to BorgWarner Inc.	$	118.5	$	476.5		$	595.0	$	609.7	$	(32.5	)	$	577.2

Earnings per share - basic	$	0.55	$	2.23		$	2.78	$	2.72	$	(0.15	)	$	2.57

Earnings per share - diluted	$	0.55	$	2.21		$	2.76	$	2.70	$	(0.14	)	$	2.56

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



(in millions of dollars)	Year Ended December 31,
	2016						2015
	As Reported		Adjustments		As Restated		As Reported		Adjustments			As Restated
Net earnings attributable to BorgWarner Inc.	$	118.5	$	476.5	$	595.0	$	609.7	$	(32.5	)	$	577.2
Comprehensive income attributable to BorgWarner Inc.	6.6		476.5		483.1		383.1		(32.5		)	350.6
Comprehensive income	$	43.2	$	476.5	$	519.7	$	414.7	$	(32.5	)	$	382.2

CONSOLIDATED STATEMENTS OF CASH FLOWS



(in millions of dollars)	Year Ended December 31,
	2016									2015
	As Reported			Adjustments			As Restated			As Reported		Adjustments			As Restated
Net earnings	$	160.2		$	476.5		$	636.7		$	646.4	$	(32.5	)	$	613.9
Adjustments to reconcile net earnings to net cash flows from operations:
Non-cash charges (credits) to operations:
Asbestos-related adjustments	703.6			(752.2		)	(48.6		)	—		51.4			51.4
Deferred income tax provision (benefit)	(268.9		)	275.7			6.8			13.3		(18.9		)	(5.6		)

CONSOLIDATED STATEMENTS OF EQUITY



(in millions of dollars)	Retained earnings
Balance, January 1, 2015
As Reported	$	3,717.1
Adjustments	(444.0		)
As Restated	3,273.1

Balance, December 31, 2015
As Reported	4,210.1
Adjustments	(476.5		)
As Restated	$	3,733.6