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 stabil- ity. They are manufactured and sold worldwide, primarily to original  equipment manufacturers (OEMs) of light vehicles (i.e. passenger  cars, sport-utility 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 operate manufacturing  facilities serving customers in the Americas, Europe and Asia, and  are an original equipment supplier to every major OEM in the world.  The Company’s products fall into two reportable operating seg- ments: Drivetrain and Engine. The Drivetrain segment is comprised  of all-wheel drive transfer cases, torque management systems and  components and systems for automatic transmissions. The Engine  Segment is comprised of turbochargers, timing chain systems, air  management, emissions and thermal systems.  INTRODUCTION Overview 25 On April 21, 2004 the Company’s stockholders approved an amend- ment to the Company’s Restated Certificate of Incorporation to  increase the number of authorized shares of common stock from  50,000,000 to 150,000,000. The approval of the amendment  allowed the Company to proceed with its two-for-one stock split on  May 17, 2004 to stockholders of record on May 3, 2004. All prior  year share and per share amounts disclosed in this document have  been restated to reflect the two-for-one stock split. On January 4, 2005, the Company acquired 62.2% of the outstand- ing shares of Beru Aktiengesellschaft (Beru), headquartered in  Ludwigsburg, Germany, from the Carlyle Group and certain family  shareholders. In conjunction with the acquisition, the Company  launched a tender offer for the remaining outstanding shares of  Beru. The tender offer period officially ended on January 24, 2005.  Presently the Company holds 69.42% of the shares of Beru at a cost  of approximately €415 million. Beru is a leading global automotive  supplier of diesel cold starting technology (glow plugs and instant  starting systems); gasoline ignition technology (spark plugs and igni- tion coils); and electronic and sensor technology (tire pressure sen- sors, diesel cabin heaters and selected sensors). Beginning in 2005,  the Company will report the operating results of Beru within the  Engine segment. The Company has not included a separate discus- sion of the Beru operations in the outlook for 2005, although many  of the same factors that impact the Company’s other operations can  be expected to impact the business of Beru. In addition, the impact  of Beru on the Company’s future results will be affected by the alloca- tion of the excess purchase price over the net book value of assets  acquired between intangible assets and goodwill.  Beru Transaction A summary of major factors impacting the Company’s net earnings  for the years ended December 31, 2004 in comparison to 2003 and  2002 is as follows:  • Continued demand for our products in both Drivetrain and Engine  segments.  • Continued results of our cost reduction programs, including  containment of selling, general & administrative expenses, which  helped to offset our commodity cost increases and start up costs  incurred for our expansion in Korea and China. • Lower interest expenses due to lower debt levels. • Favorable currency impact of $11.0 million in 2004 and $14.5 mil- lion in 2003. A summary of our operating results by segment for the years ended  December 31, 2004, 2003 and 2002 is as follows: millions of dollars, except per share data Year ended December 31,  2004 2003 2002 Drivetrain  $106.9 $98.4 $99.9 Engine  281.7 239.6 215.9 Segment earnings before  interest and taxes 388.6  338.0   315.8 Corporate  (50.3) (48.0) (44.3) Consolidated earnings before   interest  and  taxes  338.3 290.0 271.5 Interest expense and finance charges  29.7 33.3 37.7 Earnings before income taxes  308.6 256.7 233.8 Provision for income taxes  81.2 73.2 77.2 Minority interest, net of tax  9.1 8.6 6.7 Net earnings before cumulative effect of accounting change 218.3 174.9 149.9 Cumulative effect of change in  accounting principle, net of tax  — — (269.0) Net earnings/(loss)  $218.3 $174.9 $(119.1) Per share data – assuming dilution: Earnings per share before  cumulative  effect  of  accounting  change  $3.86 $3.20 $2.79 Cumulative effect of accounting change  — — (5.01) Earnings/(loss) per share  $3.86 $3.20 $(2.22) Stock Split Management’s Discussion and Analysis  of Financial Condition and Results of Operations BorgWarner Inc.  and Consolidated Subsidiaries Drivetrain 2014 Demand for front-wheel all-wheel drive systems and six-speed automatic  and dual clutch transmissions are expected to drive growth. The number of  automated transmissions in Europe is expected to triple in ten years.  Front-wheel all-wheel drive penetration could grow 34% in the next five years. 22 PSA 2 % ZF 2 % Caterpillar 2 %   Honda 4 % Hyundai/Kia 6 % Renault/Nissan 6 % Toyota 7 % VW/Audi 10 %  1 % BMW 2 % International  2 % John Deere 19 % All Others 16 % Ford 11 % DaimlerChrysler 10 % GM Customer Diversity 2005 Estimated Combined Sales* * Includes Beru and NSK-Warner Engine 20 14 In the next ten years, gasoline engines are expected to experience 34% growth worldwide; diesel engine penetration is anticipated to grow 82%. The need for  improved fuel economy and reduced emissions will drive growth.