# Phinia Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Phinia Inc.](/companies/phin.md) (CIK 1968915)
- Form: 10-Q
- Filed: 2023-08-07
- Accepted by EDGAR: Aug 7, 2023, 16:04 ET
- Period: 2023-06-30
- Accession: 0001968915-23-000005
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1968915/000196891523000005/phin-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1968915/000196891523000005/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $887.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $1.72bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $698.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $1.36bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $189.0m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $361.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-04-01 to 2023-06-30 | $28.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-01-01 to 2023-06-30 | $57.0m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-04-01 to 2023-06-30 | $103.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2023-01-01 to 2023-06-30 | $202.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $56.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $114.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $21.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $44.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $35.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $70.0m | us-gaap:NetIncomeLoss |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $33.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $80.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Current assets | at 2023-06-30 | $1.67bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $3.87bn | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $947.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $1.88bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $1.99bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,908 characters.

### INTRODUCTION

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.

### Transition to Standalone Company

On December 6, 2022, BorgWarner Inc. (“BorgWarner”) announced plans for the complete legal and structural separation of BorgWarner’s Fuel Systems and Aftermarket businesses from BorgWarner by the spin-off of its wholly-owned subsidiary, PHINIA Inc., which was formed on February 9, 2023 and holds BorgWarner’s Fuel Systems and Aftermarket businesses (the “Spin-Off”).

On July 3, 2023, PHINIA completed the Spin-Off in a transaction intended to qualify as tax-free to the Company’s stockholders for U.S. federal income tax purposes, which was accomplished by the distribution of the outstanding common stock of PHINIA Inc. to holders of record of common stock of BorgWarner on a pro rata basis. Each holder of record of common stock of BorgWarner received one share of PHINIA Inc. common stock for every five shares of common stock of BorgWarner held on June 23, 2023, the record date (the “Record Date”). In lieu of fractional shares of PHINIA, stockholders of the Company received cash. As a result of these transactions, all of the assets, liabilities, and legal entities comprising BorgWarner’s Fuel Systems and Aftermarket businesses are now owned directly, or indirectly through its subsidiaries, by PHINIA Inc. PHINIA Inc. is an independent public company trading under the symbol “PHIN” on the New York Stock Exchange.

### Key Trends and Economic Factors

*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.

### Outlook

The Company expects global industry production to be flat to a modest increase year over year in 2023. The Company also expects to see a continued ramp up of gasoline direct injection (“GDi”) volumes in North America as new programs come on stream. Recoveries from the Company’s customers of material cost inflation arising from non-contractual commercial negotiations with those customers are also expected to increase net sales year over year. As a result, the Company expects increased revenue in 2023, excluding the impact of foreign currencies.

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 recovery of the commercial vehicle market, growth of the overall vehicle parc driving increased aftermarket demand, adoption of product offerings with hydrogen solutions for combustion vehicles to serve as a viable alternative to electrification or fuel cell solutions and increasingly stringent global emissions standards that support demand for the Company’s products driving efficiency and reduced emissions. In addition, we believe we are well positioned to continue to expand differentiated offerings in electronics, software and complete systems capabilities.

### Relationship with BorgWarner

Historically, we have relied on BorgWarner to provide various corporate functions. Following the Spin-Off, BorgWarner will not provide us with assistance other than the transition and other services described under “Certain Relationships and Related Person Transactions” in our Information Statement furnished with the Company’s Registration Statement on Form 10-12B/A filed on June 9, 2023. These services do not include every service that we have received from BorgWarner in the past, and 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.

In connection with the Spin-Off, we have been installing and implementing 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. We may incur substantially higher costs than currently anticipated as we transition from the existing transactional and operational systems and data centers we currently use as part of BorgWarner. If we are unable to transition effectively, we may incur temporary interruptions in business operations. Any delay in implementing, or operational interruptions suffered while implementing, our new information technology infrastructure could disrupt our business and have a material adverse effect on our results of operations.

### RESULTS OF OPERATIONS

### Three Months Ended June 30, 2023 vs. Three Months Ended June 30, 2022

The following table presents a summary of the Company’s operating results:

*(in millions)*

| Net sales | Three months ended June 30, 2023 2023 | % of net sales | 2022 | % of net sales |
| --- | ---: | ---: | ---: | ---: |
| Fuel Systems | $607 | 68.4% | $524 | 65.8% |
| Aftermarket | 339 | 38.2 | 324 | 40.7 |
| Inter-segment eliminations | (59) | (6.6) | (52) | (6.5) |
| Total net sales | 887 | 100.0 | 796 | 100.0 |
| Cost of sales | 698 | 78.7 | 638 | 80.2 |
| Gross profit | 189 | 21.3 | 158 | 19.8 |
| Selling, general and administrative expenses | 103 | 11.6 | 101 | 12.7 |
| Other operating expense, net | 30 | 3.4 | 8 | 1.0 |
| Operating income | 56 | 6.3 | 49 | 6.1 |
| Equity in affiliates’ earnings, net of tax | (3) | (0.3) | (1) | (0.1) |
| Interest expense, net | 4 | 0.5 | 4 | 0.5 |
| Other postretirement income | (1) | (0.1) | (8) | (1.0) |
| Earnings before income taxes | 56 | 6.2 | 54 | 6.7 |
| Provision for income taxes | 21 | 2.4 | 13 | 1.6 |
| Net earnings | $35 | 3.8% | $41 | 5.1% |

33

### Net sales

Net sales for the three months ended June 30, 2023 totaled $887 million, an increase of $91 million, or 11%, from the three months ended June 30, 2022. The change in net sales for the three months ended June 30, 2023 was primarily driven by the following:

- Favorable volume, mix and net new business increased sales approximately $64 million, or 8%. This increase was primarily driven by higher commercial vehicle sales in Europe and continued expansion of GDi sales in the Americas. This increase was partially offset by lower commercial vehicle sales in China.
- Customer pricing increased net sales by approximately $30 million. This includes an increase of approximately $19 million related to recoveries from the Company’s customers of material cost inflation arising from non-contractual commercial negotiations with those customers and normal contractual customer commodity pass-through arrangements.
- Fluctuations in foreign currencies resulted in a period-over-period decrease in sales of approximately $3 million, primarily due to the weakening of the Chinese Renminbi partially offset by the strengthening Euro relative to the U.S. Dollar.

### Cost of sales and gross profit

Cost of sales and cost of sales as a percentage of net sales were $698 million and 79%, respectively, during the three months ended June 30, 2023, compared to $638 million and 80%, respectively, during the three months ended June 30, 2022. The change in cost of sales for the three months ended June 30, 2023 was primarily driven by the following:

- Higher sales volume, mix and net new business increased cost of sales by approximately $57 million.
- Cost of sales was also impacted by higher supplier-related costs of approximately $22 million arising primarily from $16 million of non-contractual commercial negotiations with the Company’s suppliers and normal contractual supplier commodity pass-through arrangements. This impact was partially offset by $10 million of net supply chain savings initiatives.

Gross profit and gross margin were $189 million and 21%, respectively, during the three months ended June 30, 2023 compared to $158 million and 20%, respectively, during the three months ended June 30, 2022. The increase in gross margin was primarily due to the factors discussed above.

***Selling, general and administrative expenses (“***SG&A”)

SG&A for the three months ended June 30, 2023 was $103 million as compared to $101 million for the three months ended June 30, 2022. SG&A as a percentage of net sales was 12% for the three months ended June 30, 2023 and 13% for the three months ended June 30, 2022. SG&A was comprised of the following:

- Research and development (“R&D”) costs were $28 million for the three months ended June 30, 2023. This includes gross R&D expenditures of $49 million, comprised primarily of employee costs, and customer reimbursements of $21 million, which represent recovery of costs incurred. The Company’s current long-term expectation for R&D spending is approximately 3% of net sales.
- Employee-related costs were $31 million for the three months ended June 30, 2023, an increase of $6 million, primarily related to inflation and mandated minimum wage increases.
- General expense allocations from BorgWarner were $9 million for the three months ended June 30, 2023, a decrease of $7 million, primarily related to IT costs and professional fees.
- IT costs incurred directly by the Company were $7 million for the three months ended June 30, 2023, flat compared to the three months ended June 30, 2022.
- Intangible amortization expense was $7 million for the three months ended June 30, 2023, flat compared to the three months ended June 30, 2022.
- Other SG&A expenses were $23 million for the three months ended June 30, 2023, an increase of $4 million, primarily related to foreign currency transaction losses.

### Restructuring expense

Restructuring expense was $2 million and $3 million for the three months ended June 30, 2023 and 2022, respectively, related to individually approved restructuring actions that primarily related to reductions in headcount. Refer to Note 3 “Restructuring” for more information. 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.

### Other operating expense, net

Other operating expense, net was $30 million and $8 million for the three months ended June 30, 2023 and 2022, respectively. Refer to Note 5, “Other Operating Expense, Net,” for more information. Other operating expense, net was comprised of the following:

- For the three months ended June 30, 2023 and 2022, merger, acquisition and divestiture expenses, net were $41 million and $12 million, respectively, primarily related to professional fees associated with the Spin-Off.
- For the three months ended June 30, 2023 and 2022, the Company recognized income related to application testing and other R&D services for other BorgWarner businesses of $1 million and $4 million, respectively. Refer to Note 19, "Related-Party Transactions," for further information.
- For the three months ended June 30, 2023 and 2022, 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 and $6 million, respectively. It is anticipated that these royalty arrangements will not continue after the Spin-Off is completed.

### Equity in affiliates’ earnings, net of tax

Equity in affiliates’ earnings, net of tax was $3 million and $1 million in the three months ended June 30, 2023 and 2022, respectively. This line item is driven by the results of the Company’s unconsolidated joint venture.

### Interest expense, net

Interest expense, net was $4 million in both the three months ended June 30, 2023 and 2022.

### Other postretirement income

Other postretirement income was $1 million and $8 million in the three months ended June 30, 2023 and 2022, respectively. The decrease in other postretirement income for the three months ended June 30, 2023 was primarily due to higher interest cost and lower expected returns on assets in 2023.

### Provision for income taxes

Provision for income taxes was $21 million for the three months ended June 30, 2023 resulting in an effective tax rate of 38%. This compared to $13 million, or 24%, for the three months ended June 30, 2022.

For further details, see Note 6, “Income Taxes,” to the Condensed Combined Financial Statements for the three months ended June 30, 2023 and 2022.

### Certain expenses impacting the Company’s operating income

The Company’s operating income was $56 million and $49 million for the three months ended June 30, 2023 and 2022, respectively. The Company believes the following table is useful in highlighting certain expenses that impacted its operating income:

|  | Three Months Ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Merger, acquisition and divestiture expense | $41 | $12 |
| Intangible asset amortization | 7 | 7 |
| Restructuring expense | 2 | 3 |
| Royalty income from BorgWarner | (12) | (6) |
| Other | — | 5 |
| Total impact of these expenses | $38 | $21 |

### Results by Reportable Segment for the Three Months Ended June 30, 2023 and 2022

The Company’s business is comprised of two reportable segments: Fuel Systems and Aftermarket.

Segment Adjusted Operating Income is the measure of segment income or loss used by the Company. Segment Adjusted Operating Income is comprised of segment operating income adjusted for restructuring, merger, acquisition and divestiture expense, intangible asset amortization expense, impairment charges and other items not reflective of ongoing operating income or loss. The Company believes Segment Adjusted Operating Income is most reflective of the operational profitability or loss of its reportable segments.

Segment Adjusted Operating Income excludes certain corporate costs, which primarily represent corporate expenses not directly attributable to the individual segments. Corporate expenses not allocated to Segment Adjusted Operating Income were $5 million and $18 million for the three months ended June 30, 2023 and 2022, respectively. The decrease in corporate expenses in 2023 was primarily related to lower allocations from BorgWarner and an increase in related-party royalty income from BorgWarner.

The following table presents Net sales and Segment Adjusted Operating Income for the Company’s reportable segments:

*(in millions)*

|  | Three Months Ended June 30, 2023 Net Sales to Customers | Segment Adjusted Operating Income | % margin | 2022 Net Sales to Customers | Segment Adjusted Operating Income | % margin |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Fuel Systems | $551 | $62 | 11.3% | $473 | $43 | 9.1% |
| Aftermarket | 336 | 49 | 14.6% | 323 | 51 | 15.8% |
| Totals | $887 | $111 |  | $796 | $94 |  |

36

The Fuel Systems segment’s net sales to customers for the three months ended June 30, 2023 increased $78 million, or 16%, and Segment Adjusted Operating Income increased $19 million, or 44%, from the three months ended June 30, 2022. Foreign currencies resulted in a year-over-year decrease in sales of approximately $4 million primarily due to the weakening of the Chinese Renminbi, partially offset by the strengthening of the Euro relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $60 million of volume, mix and net new business driven by increased demand for the Company’s products compared to the prior year and approximately $22 million primarily from non-contractual commercial negotiations with the Company’s customers and normal contractual customer commodity pass-through arrangements. Segment Adjusted Operating margin was 11.3% in the three months ended June 30, 2023, compared to 9.1% in the three months ended June 30, 2022. The Segment Adjusted Operating margin increase was primarily due to higher revenue and the benefit of customer pricing actions, net of inflation and other supplier-related costs.

The Aftermarket segment’s net sales to customers for the three months ended June 30, 2023 increased $13 million, or 4%, and Segment Adjusted Operating Income decreased $2 million, or 4%, from the three months ended June 30, 2022. Foreign currencies resulted in a year-over-year increase in sales of approximately $1 million primarily due to the strengthening of the Euro relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $4 million of volume, mix and net new business driven by increased demand for the Company’s products and approximately $8 million of pricing. Segment Adjusted Operating margin was 14.6% in the three months ended June 30, 2023, compared to 15.8% in the three months ended June 30, 2022. The Segment Adjusted Operating margin decrease was primarily due to product mix.

### Six Months Ended June 30, 2023 vs. Six Months Ended June 30, 2022

The following table presents a summary of the Company’s operating results

*(in millions)*

| Net sales | Six months ended June 30, 2023 | % of net sales | 2022 | % of net sales |
| --- | ---: | ---: | ---: | ---: |
| Fuel Systems | $1,174 | 68.1% | $1,110 | 67.8% |
| Aftermarket | 669 | 38.9 | 631 | 38.5 |
| Inter-segment eliminations | (121) | (7.0) | (103) | (6.3) |
| Total net sales | 1,722 | 100.0 | 1,638 | 100.0 |
| Cost of sales | 1,361 | 79.0 | 1,306 | 79.7 |
| Gross profit | 361 | 21.0 | 332 | 20.3 |
| Selling, general and administrative expenses | 202 | 11.7 | 201 | 12.3 |
| Other operating expense, net | 45 | 2.6 | 11 | 0.7 |
| Operating income | 114 | 6.7 | 120 | 7.3 |
| Equity in affiliates’ earnings, net of tax | (6) | (0.3) | (3) | (0.2) |
| Interest expense, net | 7 | 0.4 | 8 | 0.5 |
| Other postretirement income | (1) | (0.1) | (17) | (1.0) |
| Earnings before income taxes | 114 | 6.7 | 132 | 8.0 |
| Provision for income taxes | 44 | 2.6 | 34 | 2.1 |
| Net earnings | $70 | 4.1% | $98 | 5.9% |

37

### Net sales

Net sales for the six months ended June 30, 2023 totaled $1,722 million, an increase of $84 million, or 5%, from the six months ended June 30, 2022. The change in net sales for the six months ended June 30, 2023 was primarily driven by the following:

- Favorable volume, mix and net new business increased sales approximately $71 million, or 4%. This increase was primarily driven by higher demand for the Company’s products. This increase was partially offset by lower commercial vehicle sales in China.
- Customer pricing increased net sales by approximately $46 million. This includes an increase of approximately $23 million related to recoveries from the Company’s customers of material cost inflation arising from non-contractual commercial negotiations with those customers and normal contractual customer commodity pass-through arrangements.
- Fluctuations in foreign currencies resulted in a year-over-year decrease in sales of approximately $33 million primarily due to the weakening of the Chinese Renminbi and British Pound relative to the U.S. Dollar.

### Cost of sales and gross profit

Cost of sales and cost of sales as a percentage of net sales were $1,361 million and 79%, respectively, during the six months ended June 30, 2023, compared to $1,306 million and 80%, respectively, during the six months ended June 30, 2022. The change in cost of sales for the six months ended June 30, 2023 was primarily driven by the following:

- Higher sales volume, mix and net new business increased cost of sales by approximately $70 million.
- Cost of sales was also impacted by higher supplier-related costs of approximately $47 million arising primarily from $32 million from non-contractual commercial negotiations with the Company’s suppliers and normal contractual supplier commodity pass-through arrangements. This impact was partially offset by $26 million of net supply chain savings initiatives.
- Fluctuations in foreign currencies resulted in a period-over-period decrease in cost of sales of approximately $23 million primarily due to the weakening of the Chinese Renminbi and British Pound relative to the U.S. Dollar.

Gross profit and gross margin were $361 million and 21%, respectively, during the six months ended June 30, 2023 compared to $332 million and 20%, respectively, during the six months ended June 30, 2022. The increase in gross margin was primarily due to the factors discussed above.

### Selling, general and administrative expenses

SG&A for the six months ended June 30, 2023 was $202 million as compared to $201 million for the six months ended June 30, 2022, SG&A as a percentage of net sales was 12% for both the six months ended June 30, 2023 and 2022. SG&A was comprised of the following:

- R&D costs were $57 million for the six months ended June 30, 2023. This includes gross R&D expenditures of $98 million, comprised primarily of employee costs, and customer reimbursements of $41 million, which represent recovery of costs incurred. R&D costs increased $3 million, primarily related to a reduction in customer reimbursements. The Company’s current long-term expectation for R&D spending is approximately 3% of net sales.
- Employee-related costs were $62 million for the six months ended June 30, 2023, an increase of $11 million, primarily related to incentive compensation, inflation and mandated minimum wage increases.
- General expense allocations from BorgWarner were $16 million for the six months ended June 30, 2023, a decrease of $11 million, primarily related to IT costs and professional fees.
- IT costs incurred directly by the Company were $14 million for the six months ended June 30, 2023, a decrease of $1 million.
- Intangible amortization expense was $14 million for the six months ended June 30, 2023 and 2022.
- Other SG&A expenses, excluding employee costs, were $38 million for the six months ended June 30, 2023, a decrease of $4 million.

### Restructuring expense

Restructuring expense was $6 million and $5 million for the six months ended June 30, 2023 and 2022, respectively, related to individually approved restructuring actions that primarily related to reductions in headcount. Refer to Note 3 “Restructuring” for more information.

### Other operating expense, net

Other operating expense, net was $45 million and $11 million for the six months ended June 30, 2023 and 2022, respectively. Refer to Note 5, “Other Operating Expense, Net,” for more information. Other operating expense, net was comprised of the following:

- For the six months ended June 30, 2023 and 2022, merger, acquisition and divestiture expenses, net were $59 million and $22 million, respectively, primarily related to professional fees associated with the Spin-Off.
- For the six months ended June 30, 2023 and 2022, the Company recognized income related to application testing and other R&D services for other BorgWarner businesses of $2 million and $6 million, respectively. Refer to Note 19, "Related-Party Transactions," for further information.
- For the six months ended June 30, 2023 and 2022, 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 $17 million and $13 million, respectively. It is anticipated that these royalty arrangements will not continue after the Spin-Off is completed.

### Equity in affiliates’ earnings, net of tax

Equity in affiliates’ earnings, net of tax was $6 million and $3 million in the six months ended June 30, 2023 and 2022, respectively. This line item is driven by the results of the Company’s unconsolidated joint venture.

### Interest expense, net

Interest expense, net was $7 million and $8 million in the six months ended June 30, 2023 and 2022, respectively. The decrease from 2022 to 2023 was primarily due to higher interest rates on cash and cash equivalents balances.

### Other postretirement income

Other postretirement income was $1 million and $17 million in the six months ended June 30, 2023 and 2022, respectively. The decrease in other postretirement income for the six months ended June 30, 2023 was primarily due to higher interest cost and lower expected returns on assets in 2023.

### Provision for income taxes

Provision for income taxes was $44 million for the six months ended June 30, 2023 resulting in an effective tax rate of 39%. This compared to $34 million, or 26%, for the six months ended June 30, 2022.

For further details, see Note 6, “Income Taxes,” to the Condensed Combined Financial Statements for the six months ended June 30, 2023 and 2022.

### Certain expenses impacting the Company’s operating income

The Company’s operating income was $114 million and $120 million for the six months ended June 30, 2023 and 2022, respectively. The Company believes the following table is useful in highlighting certain expenses that impacted its operating income:

|  | Six months ended June 30, 2023 | 2022 |
| --- | ---: | ---: |
| Merger, acquisition and divestiture expense | $59 | $22 |
| Intangible asset amortization | 14 | 14 |
| Restructuring expense | 6 | 5 |
| Royalty income from BorgWarner | (17) | (13) |
| Other | — | 6 |
| Total impact of these expenses | $62 | $34 |

### Results by Reportable Segment for the six months ended June 30, 2023 and 2022

The Company’s business is comprised of two reportable segments: Fuel Systems and Aftermarket.

Segment Adjusted Operating Income is the measure of segment income or loss used by the Company. Segment Adjusted Operating Income is comprised of operating income adjusted for restructuring, merger, acquisition and divestiture expense, intangible asset amortization expense, impairment charges and other items not reflective of ongoing operating income or loss. The Company believes Segment Adjusted Operating Income is most reflective of the operational profitability or loss of its reportable segments.

Segment Adjusted Operating Income excludes certain corporate costs, which primarily represent corporate expenses not directly attributable to the individual segments. Corporate expenses not allocated to Segment Adjusted Operating Income were $9 million and $31 million for the six months ended June 30, 2023 and 2022, respectively. The decrease in corporate expenses was primarily related to increased related-party royalty and R&D income.

The following table presents Net sales and Segment Adjusted Operating Income for the Company’s reportable segments:

*(in millions)*

|  | Six months ended June 30, 2023 Net Sales to Customers | Segment Adjusted Operating Income | % margin | 2022 Net Sales to Customers | Segment Adjusted Operating Income | % margin |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Fuel Systems | $1,060 | $105 | 9.9% | $1,011 | $109 | 10.8% |
| Aftermarket | 662 | 97 | 14.7% | 627 | 89 | 14.2% |
| Totals | $1,722 | $202 |  | $1,638 | $198 |  |

The Fuel Systems segment’s net sales to customers for the six months ended June 30, 2023 increased $49 million, or 5%, and Segment Adjusted Operating Income decreased $4 million, or 4%, from the six months ended June 30, 2022. Foreign currencies resulted in a period-over-period decrease in sales of approximately $28 million primarily due to the weakening of the Chinese Renminbi and British Pound relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $41 million of volume, mix and net new business driven by higher weighted average market production compared to the prior year and approximately $33 million from non-contractual commercial negotiations with the Company’s customers and normal contractual customer commodity pass-through arrangements. Segment Adjusted Operating margin was 9.9% in the six months ended June 30, 2023, compared to 10.8% in the six months ended June 30, 2022. The Segment Adjusted Operating margin decrease was primarily due to product mix and higher supplier and employee-related costs.

The Aftermarket segment’s net sales to customers for the six months ended June 30, 2023 increased $35 million, or 6%, and Segment Adjusted Operating Income increased $8 million, or 9%, from the six months ended June 30, 2022. Foreign currencies resulted in a year-over-year decrease in sales of approximately $5 million primarily due to the weakening of the Euro relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $30 million of volume, mix and net new business driven by increased demand for the Company’s products and approximately $13 million of pricing. Segment Adjusted Operating margin was 14.7% in the six months ended June 30, 2023, compared to 14.2% in the six months ended June 30, 2022. The Segment Adjusted Operating margin increase was primarily due to increased pricing and the benefit of higher volumes.

### LIQUIDITY AND CAPITAL RESOURCES

### Overview

To manage liquidity and fund operations prior to the Spin-off, we have participated in BorgWarner’s cash pooling arrangements and BorgWarner has participated in our cash pooling arrangements. Any balances owed to the Company from BorgWarner as a result of these cash arrangements that are anticipated to be settled in cash are reflected as Due from BorgWarner. Any balances due from the Company to BorgWarner as a result of these cash arrangements that are anticipated to be settled in cash are reflected as Due to BorgWarner. Certain other cash pooling balances that are not anticipated to be settled in cash are presented within BorgWarner investment in our Condensed Combined Financial Statements included elsewhere in this Form 10-Q.

Upon completion of this Spin-Off, we ceased participation in BorgWarner’s cash pooling arrangements, and our cash and cash equivalents are held and used solely for our own operations. Our capital structure, long-term commitments, and sources of liquidity will change significantly from our historical practices. For additional detail regarding changes to our capital structure, see “Incurrence of Debt” section furnished with the Company’s Registration Statement on Form 10-12B/A filed on June 9, 2023. Our cash balance on the date of the completion of this Spin-Off was approximately $300 million subject to a cash adjustment.

We utilize certain arrangements with various financial institutions to sell eligible trade receivables from certain customers in North America and Europe. We may terminate any or all of these arrangements at any time subject to prior written notice. While we do not depend on these arrangements for our liquidity, if we elected to terminate these arrangements, there would be a one-time unfavorable timing impact on the collection of the outstanding receivables.

At June 30, 2023 and December 31, 2022, the Company had $213 million and $251 million of cash and cash equivalents, respectively, of which $179 million and $247 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 to be 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.

### Credit Agreement

On July 3, 2023, the Company entered into a $1.225 billion 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 correlation with the Spin-Off that occurred on the same date. Subject to extension by the lenders, at their option, upon the Company’s request, the Facilities mature on July 3, 2028; provided, however, that if earlier, the Revolving Facility and the Term Loan A Facility will mature 91 calendar days prior to the scheduled maturity of the Term Loan B Facility or any refinancing or replacement thereof in an aggregate principal amount exceeding $100 million that is secured pari passu with the Revolving Facility and the Term Loan A Facility and matures on or prior to July 3, 2028.

Borrowings under the Credit Agreement bear interest at varying rates, depending on the type of loan and, in some cases, the rates of designated benchmarks and the Company’s related election. For borrowings under the Credit Agreement, the Company may choose among the following interest rates: (i) solely in the case of U.S. dollar-denominated loans, an interest rate equal to the highest of (1) the prime rate in effect from time to time, (2) the federal funds effective rate in effect from time to time plus 0.5%, (3) adjusted term Secured Overnight Financing Rate (“SOFR”) (which includes a 0.10% credit spread adjustment to term SOFR) for a one month interest period plus 1.00%, and (4) 1.00%, in each case plus a rate (x) with respect to the Revolving Facility and the Term Loan A Facility, ranging from 1.50% to 2.00% depending on the Company’s consolidated net leverage ratio or (y) with respect to the Term Loan B Facility, 3.00%; or (ii) an interest rate equal to (1) solely in the case of U.S. dollar-denominated loans, adjusted term SOFR, (2) solely in the case of euro-denominated loans, Euro Interbank Offered Rate (“EURIBOR”), or (3) solely in the case of pound sterling-denominated loans, adjusted Sterling Overnight Index Average Reference Rate (“SONIA”) (which includes a 0.0326% credit spread adjustment to SONIA), as applicable, in each case for the applicable interest period plus a rate (x) with respect to adjusted term SOFR for the Revolving Facility and the Term Loan A Facility, EURIBOR and SONIA, ranging from 2.50% to 3.00% depending on our consolidated net leverage ratio, and (y) with respect to adjusted term SOFR for the Term Loan B Facility, 4.00%. Additionally, the Company will pay a quarterly commitment fee based on the actual daily amount of the available Revolving Facility commitment.

Proceeds of the Term Loan A Facility and the Term Loan B Facility were used only for certain payments in connection with the Spin-Off and the Credit Agreement. Proceeds of the Revolving Facility were used for certain payments in connection with the Spin-Off and the Credit Agreement and will be for working capital and general corporate purposes. As of the date hereof, $75 million is outstanding under the Revolving Facility, $300 million is outstanding under the Term Loan A Facility and $425 million is outstanding under the Term Loan B Facility, totaling $800 million aggregate principal outstanding under the Facilities.

The Credit Agreement contains customary covenants relating to us and our subsidiaries concerning, among other things, investments, dispositions of assets, indebtedness, liens on assets, and dividends and other distributions. Solely in respect of the Revolving Facility and the Term Loan A Facility, the Credit Agreement also contains financial covenants requiring (i) the consolidated net leverage ratio of the Company, determined as of the end of each fiscal quarter, not to exceed 3.00 to 1.00 (or, at our election and subject to certain conditions, 3.50 to 1.00 for the period in which such election is made and the next succeeding testing period and, thereafter, 3.25 to 1.00 for the next two succeeding testing periods) and (ii) the consolidated interest coverage ratio of the Company, determined as of the end of each fiscal quarter, to be at least 3.00 to 1.00.

### Cash Flows

### Operating Activities

Net cash provided by operating activities was $33 million and $77 million in the six months ended June 30, 2023 and 2022, respectively. The change in cash from operating activities for the six months ended

June 30, 2023, compared with the six months ended June 30, 2022, was due to a decrease in net earnings, primarily as the result of higher merger, acquisition and divestiture expenses and other working capital changes.

### Investing Activities

Net cash used in investing activities was $80 million and $58 million in the six months ended June 30, 2023 and 2022, respectively primarily related to capital expenditures. As a percentage of sales, capital expenditures were 4.6% and 3.7% for the six months ended June 30, 2023 and 2022, respectively.

### Financing Activities

Net cash used in financing activities decreased $103 million in the six months ended June 30, 2023 primarily related to funding activities with BorgWarner.

## Market risk

As filed, 440 characters.

Quantitative and qualitative disclosures about market risk appear in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk,” in the Company’s Information Statement furnished with the Company’s Registration Statement on Form 10-12B/A filed on June 9, 2023. There were no material changes to this information during the quarter ended June 30, 2023.

## Controls and procedures

As filed, 3,729 characters.

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and

15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are not effective due to the material weakness in our internal control over financial reporting, as described below.

#### Material Weakness in Internal Control Over Financial Reporting

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim combined financial statements will not be prevented or detected on a timely basis.

We identified a material weakness in our internal control over financial reporting, which remains outstanding as of June 30, 2023. The Company did not design and maintain effective controls over the determination and review of the calculation of cumulative translation adjustment in the Company’s combined financial statements prepared on a carve-out basis. See Note 1, “Basis of Presentation,” to the Combined Financial Statements in this Form 10-Q for a discussion of the methodology used to prepare the financial statements on a carve-out basis. This material weakness resulted in material adjustments to Accumulated other comprehensive income (loss) and Parent company investment at December 31, 2021 and Other comprehensive income (loss) for the years ending December 31, 2021 and 2020, all of which were recorded prior to the issuance of the combined financial statements. Additionally, this material weakness could result in a misstatement of those account balances or disclosures that would result in a material misstatement to the annual or interim combined financial statements that would not be prevented or detected.

#### Remediation Plan

During 2023, the Company has taken steps to enhance our internal control over financial reporting in response to the material weakness. As of June 30, 2023, the Company implemented the revised and enhanced controls surrounding the calculation of cumulative translation adjustment and will continue to evaluate the operating effectiveness of these controls. During the third quarter of 2023, the Company will cease preparing its financial statements on a carve-out basis and move to a system-based calculation of cumulative translation adjustment.

#### Changes in Internal Control Over Financial Reporting

Other than the changes implemented as part of our remediation plan discussed above, there have been no other changes in internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 469 characters.

Information regarding risk factors appears in the “Risk Factors” section of the Company’s Information Statement furnished with the Company’s Registration Statement on Form 10-12B/A filed on June 9, 2023. There were no material changes during the three months ended June 30, 2023 to the risk factors disclosed in the “Risk Factors” section of the Company’s Information Statement furnished with the Company’s Registration Statement on Form 10-12B/A filed on June 9, 2023.

Filed Aug 7, 2023.
Source: SEC EDGAR, the filing index for accession 0001968915-23-000005. Last ingested by Listed: Oct 29, 2026, 11:04 ET. No prices; not investment advice.