PHINIA INC

Previous wording

Commodities and Other Inflationary Impacts. Prices for commodities remain volatile, and since the beginning of 2021, the Company has experienced price increases for base metals (e.g., steel, aluminum and nickel) and precious metals (e.g., palladium). In addition, many global economies are experiencing elevated levels of inflation more generally, which is driving an increase in other input costs. As a result, the Company has experienced, and is continuing to experience, higher costs.

Current wording

Commodities and Other Inflationary Impacts. Prices for commodities remain volatile, and since the beginning of 2021, the Company has experienced price increases for energy and base metals (e.g., steel, aluminum and copper) while slightly decreasing in the third quarter of 2024. In addition, many global economies are experiencing elevated levels of inflation more generally, which is driving an increase in other input costs. As a result, the Company has experienced, and is continuing to experience, higher costs.

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 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.

Current wording

We expect strong earnings and cash generation in 2024 as we have and expect to continue to drive operational efficiencies, exit agreements with our Former Parent and grow our Aftermarket sales. On the original equipment (OE) side, continued economic and political uncertainty has caused the commercial vehicle (CV) and light vehicle (LV) markets to soften. Volumes in 2024 are expected to decline by low single digit percentages. Assuming constant foreign exchange rates, we expect a modest year-over-year decline in sales despite strong growth in our Aftermarket segment.

Previous 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.

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 had 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 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:

Current wording

Net sales for the three months ended September 30, 2024 totaled $839 million, a decrease of $57 million, or 6%, compared to the three months ended September 30, 2023. The change in net sales for the three months ended September 30, 2024 was primarily driven by the following:

Previous 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.

Current wording

•Unfavorable volume decreased sales by approximately $51 million, or 6%. This decrease was primarily driven by lower commercial vehicle sales in Europe and China within the Fuel Systems segment, partially offset by favorable volume in Europe within the Aftermarket segment.

Previous 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.

Current wording

•Fluctuations in foreign currencies resulted in a period-over-period increase in sales of approximately $1 million, primarily due to the strengthening of the British Pound largely offset by the weakening of the Brazilian Real relative to the U.S. Dollar.

Previous 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:

Current wording

Cost of sales and cost of sales as a percentage of net sales were $652 million and 78%, respectively, during the three months ended September 30, 2024, compared to $719 million and 80%, respectively, during the three months ended September 30, 2023. The decrease of $67 million in cost of sales for the three months ended September 30, 2024 was primarily driven by the following:

Previous wording

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

Current wording

•Lower sales volume and mix decreased cost of sales by approximately $43 million. This decrease was primarily driven by lower commercial vehicle sales in Europe and China in the Fuel Systems segment, partially offset by favorable mix in Europe within the Aftermarket segment.

Previous wording

•Cost of sales decreased by approximately $13 million due to lower supplier-related and inflationary costs.

Current wording

•Cost of sales decreased by approximately $11 million due to lower supplier-related and inflationary costs.

Previous 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.

Current wording

•Employee costs increased cost of sales by $4 million compared to the three months ended September 30, 2023, primarily related to inflation and incentive compensation.

Previous wording

•Other manufacturing costs increased cost of sales by $7 million compared to the three months ended June 30, 2023.

Current wording

•Other manufacturing costs increased cost of sales by $8 million compared to the three months ended September 30, 2023.

Previous 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.

Current wording

Gross profit and gross margin were $187 million and 22%, respectively, during the three months ended September 30, 2024 compared to $177 million and 20%, respectively, during the three months ended September 30, 2023. The increase in gross margin was primarily due to the factors discussed above.

Previous 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:

Current wording

SG&A for the three months ended September 30, 2024 was $108 million as compared to $104 million for the three months ended September 30, 2023. SG&A as a percentage of net sales was 13% and 12% for the three months ended September 30, 2024 and 2023, respectively. SG&A was comprised of the following:

Previous 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.

Current wording

•Employee-related costs were $41 million for the three months ended September 30, 2024, an increase of $4 million compared to the three months ended September 30, 2023, primarily due to inflation, incentive compensation, and increases in headcount associated with the transition to a standalone company.

Previous 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.

Current wording

•R&D costs were $26 million for the three months ended September 30, 2024, an increase of $2 million compared to the three months ended September 30, 2023. R&D costs, net of customer reimbursements, were 3.1% of net sales in the three months ended September 30, 2024, compared to 2.7% of net sales in the three months ended September 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 $6 million for the three months ended June 30, 2024, a decrease of $1 million compared to the three months ended June 30, 2023.

Current wording

•IT costs incurred directly by the Company were $8 million for the three months ended September 30, 2024, a decrease of $1 million compared to the three months ended September 30, 2023.

Previous wording

•Other SG&A costs were $27 million for the three months ended June 30, 2024, a decrease of $3 million compared to the three months ended June 30, 2023.

Current wording

•Other SG&A costs were $26 million for the three months ended September 30, 2024, a decrease of $1 million compared to the three months ended September 30, 2023.

Previous 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:

Current wording

Other operating expense, net was $13 million and $27 million for the three months ended September 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

•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.

Current wording

•Restructuring expense was $6 million and $4 million for the three months ended September 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 result in significant costs.

Previous 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.

Current wording

•For the three months ended September 30, 2024 and 2023, separation and transaction costs were $4 million and $25 million, respectively, primarily related to professional fees associated with the Spin-Off.

Previous 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.

Current wording

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

Previous wording

Interest expense was $61 million and $12 million in the six months ended June 30, 2024 and 2023, respectively. The increase from 2023 to 2024 was primarily related to the issuance of debt in connection with the Spin-Off as well as the loss on extinguishment of debt of $20 million during the quarter ended June 30, 2024. See Note 10, “Notes Payable and Debt”, for further discussion of the extinguishment of debt.

Current wording

Interest expense was $20 million and $22 million in the three months ended September 30, 2024 and 2023, respectively. The decrease was primarily related to reduced interest rates as a result of the restructuring of the Company’s debt positions, partially offset by a loss on extinguishment of debt of $2 million during the quarter ended September 30, 2024. See Note 11, “Notes Payable and Debt”, for further discussion on the extinguishment of debt.

Previous 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.

Current wording

Interest income was $4 million in the three months ended September 30, 2024 and 2023.

Previous 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.

Current wording

Provision for income taxeswas $22 million for the three months ended September 30, 2024 resulting in an effective tax rate of 42%. This compared to $31 million, or 103%, for the three months ended September 30, 2023. The decrease was primarily the result of a change in the jurisdictional mix of pre-tax earnings, most notably a decrease in pre-tax losses where no benefit is recognized and a decrease in U.S. tax on foreign earnings.

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 $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.

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 $24 million and $19 million for the three months ended September 30, 2024 and 2023, respectively. The increase in corporate expenses in 2024 was primarily related to 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 June 30, 2024 decreased $33 million, or 6%, and Segment Adjusted Operating Income decreased $10 million, or 16%, compared to the three months ended June 30, 2023. Foreign currencies resulted in a year-over-year 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. The decrease in net sales excluding the impact of foreign currencies was primarily due to approximately $24 million of unfavorable 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 and lower light vehicle sales in China. The decrease in net sales was also driven by $8 million of pricing, primarily related to non-contractual commercial negotiations with the Company’s customers which did not recur. These were offset by approximately $5 million related to certain contract manufacturing agreements with BorgWarner. Segment Adjusted Operating margin was 10.0% in the three months ended June 30, 2024, compared to 11.3% in the three months ended June 30, 2023. The Segment Adjusted Operating margin decrease was primarily due to non-contractual commercial negotiations with the Company’s customers which did not recur.

Current wording

The Fuel Systems segment’s net sales to customers for the three months ended September 30, 2024 decreased $77 million, or 14%, and Segment Adjusted Operating Income was flat compared to the three months ended September 30, 2023. Foreign currencies resulted in a year-over-year increase in sales of approximately $1 million primarily due to the strengthening of the British Pound, largely offset by the weakening of the Brazilian Real relative to the U.S. Dollar. The decrease in net sales excluding the impact of foreign currencies was primarily due to approximately $58 million of unfavorable volume 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 and China. The decrease in net sales was also driven by approximately $25 million related to certain contract manufacturing agreements with BorgWarner, which ended in the quarter. These were offset by $5 million of pricing. Segment Adjusted Operating margin was 11.4% in the three months ended September 30, 2024, compared to 9.8% in the three months ended September 30, 2023. The Segment Adjusted Operating margin increase was primarily driven by supplier cost savings.

Previous 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.

Current wording

The Aftermarket segment’s net sales to customers for the three months ended September 30, 2024 increased $20 million, or 6%, and Segment Adjusted Operating Income increased $10 million, or 22%, from the three months ended September 30, 2023. The increase in net sales was primarily due to $13 million of customer pricing and approximately $7 million of favorable volume 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 15.8% in the three months ended September 30, 2024, comparable to 13.7% in the three months ended September 30, 2023. The Segment Adjusted Operating margin increase was primarily driven by customer pricing.

Previous wording

Net sales for the six months ended June 30, 2024 totaled $1,731 million, an increase of $9 million, or 1%, compared to the six months ended June 30, 2023. The change in net sales for the six months ended June 30, 2024 was primarily driven by the following:

Current wording

Net sales for the nine months ended September 30, 2024 totaled $2,570 million, a decrease of $48 million, or 2%, compared to the nine months ended September 30, 2023. The change in net sales for the nine months ended September 30, 2024 was primarily driven by the following:

Previous wording

•Unfavorable volume and mix decreased sales by approximately $18 million, or 2%. This decrease was primarily driven by lower commercial vehicle sales in Europe and lower light vehicle sales in China within the Fuel Systems segment, partially offset by favorable mix in Europe within the Aftermarket segment.

Current wording

•Unfavorable volume decreased sales by approximately $76 million, or 3%. This decrease was primarily driven by lower commercial vehicle sales in Europe and lower sales in China within the Fuel Systems segment, partially offset by favorable volume in Europe within the Aftermarket segment.

Previous wording

•Customer pricing increased net sales by approximately $12 million. This is primarily related to an increase in recoveries of cost inflation from the Company’s customers due to non-contractual commercial negotiations with those customers and normal contractual customer commodity pass-through arrangements.

Current wording

•Customer pricing increased net sales by approximately $30 million. This is primarily related to an increase in recoveries of inflationary costs from the Company’s customers due to non-contractual commercial negotiations with those customers and normal contractual customer commodity pass-through arrangements.

Previous 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.

Current wording

•Fluctuations in foreign currencies resulted in a period-over-period increase in net sales of approximately $1 million, primarily due to the strengthening of the British Pound and Euro, largely offset by the weakening of the Chinese Renminbi and Brazilian Real, each relative to the U.S. Dollar.

Previous wording

Cost of sales and cost of sales as a percentage of net sales were $1,351 million and 78%, respectively, during the six months ended June 30, 2024, compared to $1,361 million and 79%, respectively, during the six months ended June 30, 2023. The decrease of $10 million in cost of sales for the six months ended June 30, 2024 was primarily driven by the following:

Current wording

Cost of sales and cost of sales as a percentage of net sales were $2,003 million and 78%, respectively, during the nine months ended September 30, 2024, compared to $2,080 million and 79%, respectively, during the nine months ended September 30, 2023. The decrease of $77 million in cost of sales for the nine months ended September 30, 2024 was primarily driven by the following:

Previous 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.

Current wording

•Lower sales volume, mix and net new business decreased cost of sales by approximately $71 million. This decrease was primarily driven by lower commercial vehicle sales in Europe and lower sales in China in the Fuel Systems segment, partially offset by favorable mix in Europe within the Aftermarket segment.

Previous 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.

Current wording

•Cost of sales was impacted by lower supplier-related and inflationary costs of approximately $43 million arising primarily from supplier savings and a lump sum supplier settlement of $7 million.

Previous wording

•Employee costs increased cost of sales by $14 million, primarily related to inflation and incentive compensation.

Current wording

•Employee costs increased cost of sales by $18 million, primarily related to inflation and incentive compensation.

Previous wording

•Other manufacturing costs increased cost of sales by $14 million compared to the six months ended June 30, 2023.

Current wording

•Other manufacturing costs increased cost of sales by $22 million compared to the nine months ended September 30, 2023.

Previous wording

Gross profit and gross margin were $380 million and 22%, respectively, during the six months ended June 30, 2024 compared to $361 million and 21%, respectively, during the six months ended June 30, 2023. The increase in gross margin was primarily due to the factors discussed above.

Current wording

Gross profit and gross margin were $567 million and 22%, respectively, during the nine months ended September 30, 2024 compared to $538 million and 21%, respectively, during the nine months ended September 30, 2023. The increase in gross margin was primarily due to the factors discussed above.

Previous wording

SG&A for the six months ended June 30, 2024 was $216 million as compared to $202 million for the six months ended June 30, 2023. SG&A as a percentage of net sales was 13% and 12% for the six months ended June 30, 2024 and 2023, respectively. SG&A was comprised of the following:

Current wording

SG&A for the nine months ended September 30, 2024 was $324 million as compared to $306 million for the nine months ended September 30, 2023. SG&A as a percentage of net sales was 13% and 12% for the nine months ended September 30, 2024 and 2023, respectively. SG&A was comprised of the following:

Previous wording

•Employee-related costs were $77 million for the six months ended June 30, 2024, an increase of $14 million, primarily due to inflation, incentive compensation, and increases in headcount associated with the transition to a standalone company.

Current wording

•Employee-related costs were $118 million for the nine months ended September 30, 2024, an increase of $18 million, primarily due to inflation, incentive compensation, and increases in headcount associated with the transition to a standalone company.

Previous wording

•R&D costs were $57 million for the six months ended June 30, 2024. This includes gross R&D expenditures of $104 million, comprised primarily of employee costs, offset by customer reimbursements of $47 million, which represent recovery of costs incurred. R&D costs remained flat compared to the six months ended June 30, 2023. R&D costs, net of customer reimbursements, were 3.3% of net sales in both the six months ended June 30, 2024 and 2023. The Company’s current long-term expectation for R&D spending is approximately 3% of net sales.

Current wording

•R&D costs were $83 million for the nine months ended September 30, 2024. This includes gross R&D expenditures of $154 million, comprised primarily of employee costs, offset by customer reimbursements of $71 million, which represent recovery of costs incurred. R&D costs increased $2 million compared to the nine months ended September 30, 2023. R&D costs, net of customer reimbursements, were 3.2% of net sales in both the nine months ended September 30, 2024 and 2023. The Company’s current long-term expectation for R&D spending is approximately 3% of net sales.