PHINIA INC

Previous wording

PHINIA is a leader in the development, design and manufacture of integrated components and systems that optimize performance, increase efficiency and reduce emissions in combustion and hybrid propulsion for commercial vehicles and industrial applications (medium-duty and heavy-duty trucks, buses and other off-highway construction, marine, agricultural and industrial applications) and light vehicles (passenger cars, trucks, vans and sport-utility vehicles). We are a global supplier to most major OEMs seeking to meet and exceed increasingly stringent global regulatory requirements and satisfy consumer demands for an enhanced user experience. Additionally, we offer a wide range of OES solutions and remanufactured products as well as an expanded range of products for the independent (non-OEM) aftermarket.

Current wording

PHINIA is a leader in the development, design and manufacture of integrated components and systems that are designed to optimize performance, increase efficiency and reduce emissions for combustion and hybrid propulsion systems for commercial vehicles and industrial applications (medium-duty and heavy-duty trucks, off-highway construction, marine, aviation, and agricultural) and light vehicles (passenger cars, trucks, vans and sport-utility). We are a global supplier to most major OEMs seeking to meet evolving and increasingly stringent global regulatory requirements and satisfy consumer demands for an enhanced user experience. Additionally, we offer a wide range of OES solutions and remanufactured products as well as an expanded range of products for the independent (non-OEM) aftermarket.

Previous wording

We expect strong earnings and cash generation in 2024 as we expect to continue to drive operational efficiencies, exit agreements with our Former Parent and grow our Aftermarket sales. On the original equipment (OE) side, industry-wide commercial vehicle (CV) volumes in 2024 are expected to decline by mid to high single digits percentages in North America and Europe, while other global CV markets are expected to be flat. Global light vehicle (LV) volumes are expected to be slightly down with engine production declining by approximately 4%. Assuming constant foreign exchange rates, we expect modest year-over-year sales growth driven by higher Aftermarket segment sales.

Current wording

We expect strong earnings and cash generation in 2024 as we expect to continue to drive operational efficiencies, exit agreements with our Former Parent and grow our Aftermarket sales. On the original equipment (OE) side, industry-wide commercial vehicle (CV) volumes in 2024 are expected to decline by low double digit percentages in North America and Europe, while global light vehicle (LV) volumes are expected to have a modest decline in 2024. Assuming constant foreign exchange rates, we expect a modest year-over-year decline in sales despite strong growth in our Aftermarket segment.

Previous wording

The Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic investments to enhance its product leadership strategy. There are several trends that are driving the Company’s long-term growth that management expects to continue, including market share expansion in the CV market, growth in overall vehicle parc that supports aftermarket demand, increased consumer interest in hybrid and plug-in vehicles, and adoption of additional product offerings enabling low carbon fuel and hydrogen solutions for combustion vehicles. In addition, we believe we are well positioned to continue to expand our differentiated offerings and capabilities across electronics, software and complete systems.

Current wording

The Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic investments to enhance its product leadership strategy. There are several trends that are driving the Company’s long-term growth that management expects to continue, including market share expansion in the CV market, growth in overall vehicle parc that supports aftermarket demand, increased consumer interest in hybrid and plug-in vehicles, and adoption of additional product offerings enabling zero- and lower-carbon fuel solutions for combustion vehicles. In addition, we believe we are well positioned to continue to expand our differentiated offerings and capabilities across electronics, software and complete systems.

Previous wording

Historically, we have relied on BorgWarner to provide various corporate functions. Following the Spin-Off, BorgWarner does not provide us with assistance other than the limited transition and other services described under the heading “Certain Relationships and Related Party Transactions” in the Company’s proxy statement for its 2024 Annual Meeting of Stockholders filed on March 27, 2024. BorgWarner is only obligated to provide the transition services for limited periods following completion of the Spin-Off. Following the Spin-Off and the cessation of any transition services agreements, we will need to provide internally, or obtain from unaffiliated third parties, the services we will no longer receive from BorgWarner. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from BorgWarner. The Company entered into several agreements with BorgWarner that govern the relationship between the parties following the Spin-Off and are described in our Form 8-K filed on July 7, 2023.

Current wording

Historically, we have relied on BorgWarner to provide various corporate functions. Following the Spin-Off, BorgWarner has not provided us with assistance other than the limited transition and other services described under the heading “Certain Relationships and Related Party Transactions” in the Company’s proxy statement for its 2024 Annual Meeting of Stockholders filed on March 27, 2024. The Company entered into several agreements with BorgWarner that govern the relationship between the parties following the Spin-Off that are described in our Form 8-K filed on July 7, 2023. BorgWarner was only obligated to provide the transition services for limited periods following the completion of the Spin-Off. As of June 30, 2024, the Company has successfully exited all transition services agreements. We have installed and implemented information technology infrastructure to support certain of our business functions, including accounting and financial reporting, human resources, legal and compliance, communications, engineering, manufacturing and distribution, and sourcing.

Previous wording

Net sales for the three months ended March 31, 2024 totaled $863 million, an increase of $28 million, or 3%, compared to the three months ended March 31, 2023. The change in net sales for the three months ended March 31, 2024 was primarily driven by the following:

Current wording

Net sales for the three months ended June 30, 2024 totaled $868 million, a decrease of $19 million, or 2%, compared to the three months ended June 30, 2023. The change in net sales for the three months ended June 30, 2024 was primarily driven by the following:

Previous wording

•Fluctuations in foreign currencies resulted in a period-over-period increase in sales of approximately $6 million, primarily due to the strengthening of the British Pound and Euro relative to the U.S. Dollar, partially offset by the weakening of the Chinese Renminbi relative to the U.S. Dollar.

Current wording

•Fluctuations in foreign currencies resulted in a period-over-period decrease in sales of approximately $6 million, primarily due to the weakening of the Chinese Renminbi, Euro, and Brazilian Real relative to the U.S. Dollar.

Previous wording

•Sales increased $17 million related to certain contract manufacturing agreements with Former Parent that were entered into in connection with the Spin-Off. Sales from these agreements are expected to continue through the second quarter of 2024.

Current wording

•Sales increased $5 million related to certain contract manufacturing agreements with Former Parent that were entered into in connection with the Spin-Off. Sales from these agreements are not expected to continue beyond 2024.

Previous wording

Cost of sales and cost of sales as a percentage of net sales were $671 million and 78%, respectively, during the three months ended March 31, 2024, compared to $663 million and 79%, respectively, during the three months ended March 31, 2023. The increase of $8 million in cost of sales for the three months ended March 31, 2024 was primarily driven by the following:

Current wording

Cost of sales and cost of sales as a percentage of net sales were $680 million and 78%, respectively, during the three months ended June 30, 2024, compared to $698 million and 79%, respectively, during the three months ended June 30, 2023. The decrease of $18 million in cost of sales for the three months ended June 30, 2024 was primarily driven by the following:

Previous wording

•Fluctuations in foreign currencies resulted in a period-over-period increase in cost of sales of approximately $6 million primarily due to the strengthening of the British Pound and Euro relative to the U.S. Dollar, partially offset by the weakening of the Chinese Renminbi relative to the U.S. Dollar.

Current wording

•Fluctuations in foreign currencies resulted in a period-over-period decrease in cost of sales of approximately $6 million primarily due to the weakening of the Chinese Renminbi, Euro, and Brazilian Real relative to the U.S. Dollar.

Previous wording

•Employee costs increased cost of sales by $11 million compared to the three months ended March 31, 2023, primarily related to inflation and incentive compensation.

Current wording

•Employee costs increased cost of sales by $3 million compared to the three months ended June 30, 2023, primarily related to inflation and incentive compensation.

Previous wording

Gross profit and gross margin were $192 million and 22%, respectively, during the three months ended March 31, 2024 compared to $172 million and 21%, respectively, during the three months ended March 31, 2023. The increase in gross margin was primarily due to the factors discussed above.

Current wording

Gross profit and gross margin were $188 million and 22%, respectively, during the three months ended June 30, 2024 compared to $189 million and 21%, respectively, during the three months ended June 30, 2023. The increase in gross margin was primarily due to the factors discussed above.

Previous wording

SG&A for the three months ended March 31, 2024 was $104 million as compared to $99 million for the three months ended March 31, 2023. SG&A as a percentage of net sales was 12% for both the three months ended March 31, 2024 and 2023. SG&A was comprised of the following:

Current wording

SG&A for the three months ended June 30, 2024 was $112 million as compared to $103 million for the three months ended June 30, 2023. SG&A as a percentage of net sales was 13% and 12% for the three months ended June 30, 2024 and 2023, respectively. SG&A was comprised of the following:

Previous wording

•Employee-related costs were $35 million for the three months ended March 31, 2024, an increase of $3 million compared to the three months ended March 31, 2023, primarily related to inflation and incentive compensation.

Current wording

•Employee-related costs were $42 million for the three months ended June 30, 2024, an increase of $11 million compared to the three months ended June 30, 2023, primarily due to inflation, incentive compensation, and increases in headcount associated with the transition to a standalone company.

Previous wording

•Research and development (“R&D”) costs were $27 million for the three months ended March 31, 2024, a decrease of $2 million. R&D costs, net of customer reimbursements, were 3.1% of net sales in the three months ended March 31, 2024, compared to 3.5% of net sales in the three months ended March 31, 2023. The Company will continue to invest in R&D programs, which are necessary to support short- and long-term growth. The Company’s current long-term expectation for R&D spending is 3% of net sales.

Current wording

•R&D costs were $30 million for the three months ended June 30, 2024, an increase of $2 million compared to the three months ended June 30, 2023. R&D costs, net of customer reimbursements, were 3.5% of net sales in the three months ended June 30, 2024, compared to 3.2% of net sales in the three months ended June 30, 2023. The Company will continue to invest in R&D programs, which are necessary to support short- and long-term growth. The Company’s current long-term expectation for R&D spending is 3% of net sales.

Previous wording

•IT costs incurred directly by the Company were $8 million for the three months ended March 31, 2024, an increase of $1 million compared to the three months ended March 31, 2023.

Current wording

•IT costs incurred directly by the Company were $6 million for the three months ended June 30, 2024, a decrease of $1 million compared to the three months ended June 30, 2023.

Previous wording

Other operating expense, net was $17 million and $15 million for the three months ended March 31, 2024 and 2023, respectively. Refer to Note 4, “Other operating expense, net,” for more information. Other operating expense, net was comprised of the following:

Current wording

Other operating expense, net was $5 million and $30 million for the three months ended June 30, 2024 and 2023, respectively. Refer to Note 4, “Other operating expense, net,” for more information. Other operating expense, net was comprised of the following:

Previous wording

•For the three months ended March 31, 2024 and 2023, separation and transaction costs were $17 million and $18 million, respectively, primarily related to professional fees associated with the Spin-Off.

Current wording

•For the three months ended June 30, 2024 and 2023, separation and transaction costs were $3 million and $41 million, respectively, primarily related to professional fees associated with the Spin-Off.

Previous wording

•Restructuring expense was $2 million and $4 million for the three months ended March 31, 2024 and 2023, respectively, related to individually approved restructuring actions that primarily related to reductions in headcount. The Company continues to evaluate different options across its operations to reduce existing structural costs. As we continue to assess our performance and the needs of our business, additional restructuring could be required and may have a significant cost.

Current wording

•Restructuring expense was $3 million and $2 million for the three months ended June 30, 2024 and 2023, respectively, related to individually approved restructuring actions that primarily related to reductions in headcount. The Company continues to evaluate different options across its operations to reduce existing structural costs. As we continue to assess our performance and the needs of our business, additional restructuring could be required and may have a significant cost.

Previous wording

•For the three months ended March 31, 2023, the Company recognized income related to application testing and other R&D services for other BorgWarner businesses of $1 million. Refer to Note 16, Related-Party Transactions, for further information. The services stopped after the Spin-Off was completed.

Current wording

•For the three months ended June 30, 2023, the Company recognized income related to application testing and other R&D services for other BorgWarner businesses of $1 million. The services stopped after the Spin-Off was completed.

Previous wording

•For the three months ended March 31, 2023, the Company recognized royalty income related to licensing of the Delphi Technologies trade name and product-related intellectual properties to other BorgWarner businesses in the amount of $5 million. The royalty arrangements stopped after the Spin-Off was completed.

Current wording

•For the three months ended June 30, 2023, the Company recognized royalty income related to licensing of the Delphi Technologies trade name and product-related intellectual properties to other BorgWarner businesses in the amount of $12 million. The royalty arrangements stopped after the Spin-Off was completed.

Previous wording

Equity in affiliates’ earnings, net of tax was $3 million in both the three months ended March 31, 2024 and 2023. This line item is driven by the results of the Company’s unconsolidated joint venture.

Current wording

Equity in affiliates’ earnings, net of tax was $2 million and $3 million in the three months ended June 30, 2024 and 2023, respectively. This line item is driven by the results of the Company’s unconsolidated joint venture.

Previous wording

Interest income was $4 million and $3 million in the three months ended March 31, 2024 and 2023.

Current wording

Interest income was $4 million and $2 million in the three months ended June 30, 2024 and 2023. The increase is primarily due to higher interest rates on higher cash and cash equivalents balances.

Previous wording

Provision for income taxes was $27 million for the three months ended March 31, 2024 resulting in an effective tax rate of 48%. This compared to $23 million, or 39%, for the three months ended March 31, 2023. The increase was primarily the result of a change in the jurisdictional mix of pre-tax earnings as well as releases of unrecognized tax benefit reserves that occurred in the three months ended March 31, 2023 that did not occur in the three months ended March 31, 2024.

Current wording

Provision for income taxes was $23 million for the three months ended June 30, 2024 resulting in an effective tax rate of 62%. This compared to $21 million, or 38%, for the three months ended June 30, 2023. The increase was primarily the result of a change in the jurisdictional mix of pre-tax earnings, most notably an increase in pre-tax losses where no benefit is recognized.

Previous wording

Results by Reportable Segment

Current wording

Results by Reportable Segment for the three months ended June 30, 2024 and 2023

Previous wording

Segment AOI excludes certain corporate costs, which primarily represent corporate expenses not directly attributable to the individual segments. Corporate expenses not allocated to Segment AOI were $18 million and $4 million for the three months ended March 31, 2024 and 2023, respectively. The increase in corporate expenses in 2024 was primarily related to a decrease in related-party royalty and R&D income from BorgWarner, which did not continue after completion of the Spin-Off, as well as additional costs resulting from operating as a stand-alone company.

Current wording

Segment AOI excludes certain corporate costs, which primarily represent corporate expenses not directly attributable to the individual segments. Corporate expenses not allocated to Segment AOI were $21 million and $5 million for the three months ended June 30, 2024 and 2023, respectively. The increase in corporate expenses in 2024 was primarily related to a decrease in related-party royalty and R&D income from BorgWarner, which did not continue after completion of the Spin-Off, as well as additional costs resulting from operating as a standalone company.

Previous wording

The Fuel Systems segment’s net sales to customers for the three months ended March 31, 2024 increased $18 million, or 4%, and Segment Adjusted Operating Income increased $12 million, or 28%, from the three months ended March 31, 2023. The increase in net sales was primarily due to $17 million related to certain contract manufacturing agreements with BorgWarner and $7 million primarily from non-contractual commercial negotiations with the Company’s customers and normal contractual customer commodity pass-through arrangements. These were offset by approximately $6 million of volume, mix and net new business driven by decreased demand for the Company’s products compared to the prior year, primarily from lower commercial vehicle sales in Europe. Segment Adjusted Operating margin was 10.4% in the three months ended March 31, 2024, compared to 8.4% in the three months ended March 31, 2023. The Segment Adjusted Operating margin increase was primarily due to lower supplier related costs.

Current wording

The Aftermarket segment’s net sales to customers for the three months ended June 30, 2024 increased $14 million, or 4%, and Segment Adjusted Operating Income increased $4 million, or 8%, from the three months ended June 30, 2023. The increase in net sales was primarily due to $8 million of customer pricing and approximately $6 million of favorable volume, mix, and net new business driven by increased demand for the Company’s products compared to the prior year, primarily in Europe. Segment Adjusted Operating margin was 15.1% in the three months ended June 30, 2024, comparable to 14.6% in the three months ended June 30, 2023. The Segment Adjusted Operating margin increase was primarily driven by favorable mix and customer pricing.

Previous wording

•Unfavorable volume and mix decreased sales approximately by $7 million, or 1%. This decrease was primarily driven by lower commercial vehicle sales in Europe.

Current wording

•Unfavorable volume and mix decreased sales by approximately $25 million, or 1%. This decrease was primarily driven by lower commercial vehicle sales in Europe and lower light vehicle sales in China within the FS segment.

Previous wording

•Lower supplier-related and inflationary costs decreased cost of sales by approximately $19 million driven primarily by supplier savings and a lump sum supplier settlement of $7 million.

Current wording

•Cost of sales was impacted by lower supplier-related and inflationary costs of approximately $32 million arising primarily from supplier savings and a lump sum supplier settlement of $7 million.

Previous wording

•Lower sales volume, mix and net new business decreased cost of sales by approximately $14 million. This decrease was primarily driven by lower commercial vehicle sales in Europe in the Fuel Systems segment, as well as favorable mix in Europe and the Americas within the Aftermarket segment.

Current wording

•Lower sales volume, mix and net new business decreased cost of sales by approximately $28 million. This decrease was primarily driven by lower commercial vehicle sales in Europe and lower light vehicle sales in China in the Fuel Systems segment, as well as favorable mix in Europe within the Aftermarket segment.

Previous wording

The Aftermarket segment’s net sales to customers for the three months ended March 31, 2024 increased $10 million, or 3%, and Segment Adjusted Operating Income increased $12 million, or 25%, from the three months ended March 31, 2023. Foreign currencies resulted in a year-over-year increase in sales of approximately $6 million primarily due to the strengthening of the British Pound and Euro relative to the U.S. Dollar, partially offset by the weakening of the Chinese Renminbi relative to the U.S. Dollar. The increase in net sales excluding the impact of foreign currencies was primarily due to $5 million of customer pricing, offset by approximately $1 million of volume, mix, and net new business driven by decreased demand for the Company’s products compared to the prior year, primarily in the Americas. Segment Adjusted Operating margin was 17.9% in the three months ended March 31, 2024, comparable to 14.7% in the three months ended March 31, 2023. The Segment Adjusted Operating margin increase was primarily driven by favorable mix and customer pricing.

Current wording

The Aftermarket segment’s net sales to customers for the six months ended June 30, 2024 increased $24 million, or 4%, and Segment Adjusted Operating Income increased $16 million, or 16%, from the six months ended June 30, 2023. Foreign currencies resulted in a year-over-year increase in sales of approximately $6 million primarily due to the strengthening of the British Pound relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $13 million of pricing and approximately $5 million of favorable volume, mix and net new business driven by increased demand for the Company’s products, primarily in the Americas. Segment Adjusted Operating margin was

Previous wording

At March 31, 2024 and December 31, 2023, the Company had $325 million and $365 million of cash and cash equivalents, respectively, of which $288 million and $347 million, respectively, was held by our subsidiaries outside of the United States. We believe our existing cash and cash flows generated from operations and indebtedness incurred in conjunction with the Spin-Off discussed below will be responsive to the needs of our current and planned operations for at least the next 12 months and the foreseeable future thereafter.

Current wording

At June 30, 2024 and December 31, 2023, the Company had $339 million and $365 million of cash and cash equivalents, respectively, of which $329 million and $347 million, respectively, was held by our subsidiaries outside of the United States. We believe our existing cash and cash flows generated from operations and indebtedness incurred in conjunction with the Spin-Off discussed below will be responsive to the needs of our current and planned operations for at least the next 12 months and the foreseeable future thereafter.

Previous wording

On July 3, 2023, the Company entered into a $1.225 billion Credit Agreement (the Credit Agreement) consisting of a $500 million revolving credit facility (the Revolving Facility), a $300 million Term Loan A Facility (the Term Loan A Facility) and a $425 million Term Loan B Facility (the Term Loan B Facility; together with the Revolving Facility and the Term Loan A Facility, collectively, the Facilities) in connection with the Spin-Off that occurred on the same date. As of March 31, 2024, the outstanding principal balance of the Term Loan A Facility was $296 million, the outstanding principal balance of the Term Loan B Facility was $424 million, and the Company had $75 million of outstanding borrowings under the Revolving Facility (exclusive of $1 million of letters of credit outstanding). As of March 31, 2024, the Company had availability under the Revolving Facility of $424 million.

Current wording

On July 3, 2023, the Company entered into a $1.225 billion Credit Agreement (the Credit Agreement) consisting of a $500 million revolving credit facility (the Revolving Facility), a $300 million Term Loan A Facility (the Term Loan A Facility) and a $425 million Term Loan B Facility (the Term Loan B Facility; together with the Revolving Facility and the Term Loan A Facility, collectively, the Facilities) in connection with the Spin-Off that occurred on the same date. As of June 30, 2024, the outstanding principal balance of the Term Loan A Facility was $296 million, and the Company had no outstanding borrowings under the Revolving Facility. As of June 30, 2024, the Company had availability under the Revolving Facility of $499 million. The Term Loan B Facility was fully repaid in connection with the issuance of the 6.75% Senior Secured Notes due 2029 on April 4, 2024, as discussed below.

Previous wording

On April 4, 2024, the Company issued $525 million aggregate principal amount of 6.75% Senior Secured Notes due 2029 (the 2029 Notes) pursuant to an indenture among the Company, as issuer, certain subsidiaries of the Company named as guarantors, and U.S. Bank Trust Company, National Association, as trustee and as collateral agent. The 2029 Notes were sold to investors at 100% plus accrued interest, if any, from April 4, 2024 in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended. The net proceeds of the offering of the 2029 Notes were used to repay all of the Company’s outstanding borrowings and accrued interest under the Term Loan B Facility and the Revolving Facility, and to pay fees and expenses in connection with the offering. During the second quarter of 2024, the Company expects to record a non-cash pre-tax loss on extinguishment of approximately $20 million related to the difference between the repayment amount and net carrying amount of the Term Loan B Facility.

Current wording

On April 4, 2024, the Company issued $525 million aggregate principal amount of 6.75% Senior Secured Notes due 2029 (the 2029 Notes) pursuant to an indenture among the Company, as issuer, certain subsidiaries of the Company named as guarantors, and U.S. Bank Trust Company, National Association, as trustee and as collateral agent. The 2029 Notes were sold to investors at 100% plus accrued interest, if any, from April 4, 2024 in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended. The net proceeds of the offering of the 2029 Notes were used to repay all of the Company’s outstanding borrowings and accrued interest under the Term Loan B Facility and the Revolving Facility, and to pay fees and expenses in connection with the offering. During the second quarter of 2024, the Company recorded a non-cash pre-tax loss on extinguishment of $20 million related to the difference between the repayment amount and net carrying amount of the Term Loan B Facility.

Previous wording

Net cash provided by operating activities was $31 million and net cash used in operating activities was $33 million in the three months ended March 31, 2024 and 2023, respectively. The change in cash from operating activities for the three months ended March 31, 2024 compared with the three months ended March 31, 2023, was primarily due to working capital changes.

Current wording

Net cash provided by operating activities was $140 million and $33 million in the six months ended June 30, 2024 and 2023, respectively. The change in cash from operating activities for the six months ended

Previous wording

Net cash used in investing activities was $42 million and $38 million in the three months ended March 31, 2024 and 2023, respectively, primarily related to capital expenditures. As a percentage of sales, capital expenditures were 5.0% and 4.6% for the three months ended March 31, 2024 and 2023, respectively.

Current wording

Net cash used in investing activities was $59 million and $80 million in the six months ended June 30, 2024 and 2023, respectively, primarily related to capital expenditures. As a percentage of sales, capital expenditures were 3.5% and 4.6% for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

Net cash used in financing activities was $41 million in the three months ended March 31, 2024 primarily related to stock repurchases and dividend payments to PHINIA stockholders.

Current wording

Net cash used in financing activities was $126 million in the six months ended June 30, 2024 primarily related to the repayment of Term Loan B Facility, stock repurchases, dividend payments to PHINIA stockholders and issuance of the 2029 Notes.