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

- Company: [Phinia Inc.](/companies/phin.md) (CIK 1968915)
- Form: 10-Q
- Filed: 2023-11-06
- Accepted by EDGAR: Nov 6, 2023, 13:19 ET
- Period: 2023-09-30
- Accession: 0001968915-23-000035
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1968915/000196891523000035/phin-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1968915/000196891523000035/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $896.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $2.62bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $719.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $2.08bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $177.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $538.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $24.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $81.0m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $104.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $306.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $58.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $172.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $31.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $75.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $11.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $81.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.24 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.72 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.24 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $1.72 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 47,100,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 47,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $188.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $117.0m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $12.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Current assets | at 2023-09-30 | $2.12bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $4.19bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $1.32bn | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $2.30bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $713.0m | us-gaap:LongTermDebt |
| Short-term borrowings | at 2023-09-30 | $75.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-09-30 | $1.89bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 38,026 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,” or “Former Parent”) 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, which was formed on February 9, 2023 (the “Spin-Off”).

On July 3, 2023, BorgWarner 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 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 common stock for every five shares of common stock of BorgWarner held on June 23, 2023, 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. PHINIA 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 from new programs. 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. These increases are expected to be partially offset by reduced demand from key commercial vehicle customers in China through the end of the year. As a result, the Company expects increased revenue in 2023, excluding the impact of foreign currencies.

On September 15, 2023, the UAW launched strikes against Ford, General Motors, and Stellantis North America. In October, the UAW expanded the strike to include Mack Truck. Each of these entities are customers and have limited purchases of our products due to the halt of their production. There were no material impacts to our results during the third quarter of 2023. As of the date of this filing, certain automakers have reached a tentative deal with the UAW; however, if the strikes continue for a prolonged period, it could adversely affect our financial results. We will continue to monitor and assess the progress of negotiations between the UAW and the automakers.

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, increased overall vehicle parc driving that supports 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 and to enhance shareholder value through the payment of dividends and opportunistic repurchases of the Company's stock.

### Relationship with BorgWarner

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 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. 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.

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 September 30, 2023 vs. Three Months Ended September 30, 2022

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

*(in millions)*

| Net sales | Three months ended September 30, 2023 2023 | % of net sales | 2022 | % of net sales |
| --- | ---: | ---: | ---: | ---: |
| Fuel Systems | $620 | 69.2% | $597 | 69.5% |
| Aftermarket | 332 | 37.1 | 327 | 38.1 |
| Inter-segment eliminations | (56) | (6.3) | (65) | (7.6) |
| Total net sales | 896 | 100.0 | 859 | 100.0 |
| Cost of sales | 719 | 80.2 | 658 | 76.6 |
| Gross profit | 177 | 19.8 | 201 | 23.4 |
| Selling, general and administrative expenses | 104 | 11.6 | 100 | 11.6 |
| Other operating expense, net | 15 | 1.7 | (10) | (1.2) |
| Operating income | 58 | 6.5 | 111 | 13.0 |
| Equity in affiliates’ earnings, net of tax | (2) | (0.2) | (5) | (0.6) |
| Interest expense | 22 | 2.5 | 5 | 0.6 |
| Interest income | (4) | (0.4) | (2) | (0.2) |
| Other postretirement income | — | — | (8) | (0.9) |
| Earnings before income taxes | 42 | 4.6 | 121 | 14.1 |
| Provision for income taxes | 31 | 3.5 | 32 | 3.7 |
| Net earnings | $11 | 1.1% | $89 | 10.4% |

### Net sales

Net sales for the three months ended September 30, 2023 totaled $896 million, an increase of $37 million, or 4%, compared to the three months ended September 30, 2022. The change in net sales for the three months ended September 30, 2023 was primarily driven by the following:

- Sales increased $26 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 2024.
- Customer pricing increased net sales by approximately $18 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.
- Fluctuations in foreign currencies resulted in a period-over-period increase in sales of approximately $13 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.
- Unfavorable volume and mix partially offset by net new business decreased sales approximately $20 million, or 2%. This decrease was primarily driven by lower commercial vehicle sales in China, partially offset by higher GDi sales in the Americas.

### Cost of sales and gross profit

Cost of sales and cost of sales as a percentage of net sales were $719 million and 80%, respectively, during the three months ended September 30, 2023, compared to $658 million and 77%, respectively, during the three months ended September 30, 2022. The increase of $61 million in cost of sales for the three months ended September 30, 2023 was primarily driven by the following:

- Cost of sales increased $26 million related to certain contract manufacturing agreements with Former Parent that were entered into in connection with the Spin-Off.
- Cost of sales was also impacted by higher supplier-related and inflationary costs of approximately $23 million arising primarily from $17 million non-contractual commercial negotiations with the Company’s suppliers and normal contractual supplier commodity pass-through arrangements. This impact was partially offset by $7 million of net supply chain savings initiatives.
- Fluctuations in foreign currencies resulted in a period-over-period increase in cost of sales of approximately $13 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.
- Lower sales volume and mix partially offset by net new business decreased cost of sales by approximately $8 million.
- Other manufacturing costs increased cost of sales by $14 million compared to the three months ended September 30, 2022.

Gross profit and gross margin were $177 million and 20%, respectively, during the three months ended September 30, 2023 compared to $201 million and 23%, respectively, during the three months ended September 30, 2022. The decrease 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 September 30, 2023 was $104 million as compared to $100 million for the three months ended September 30, 2022. SG&A as a percentage of net sales was 12% for both the three months ended September 30, 2023 and 2022. SG&A was comprised of the following:

- Employee-related costs were $37 million for the three months ended September 30, 2023, an increase of $12 million compared to the three months ended September 30, 2022, primarily related to inflation and mandated minimum wage increases.
- Research and development (“R&D”) costs were $24 million for the three months ended September 30, 2023, unchanged from the same period in 2022. This includes gross R&D expenditures of $45 million, comprised primarily of employee costs, offset by customer reimbursements of $21 million, which represent recovery of costs incurred.
- IT costs incurred directly by the Company were $9 million for the three months ended September 30, 2023, an increase of $3 million compared to the three months ended September 30, 2022.
- Intangible amortization expense was $7 million for the three months ended September 30, 2023, flat compared to the three months ended September 30, 2022.
- Other SG&A expenses were $27 million for the three months ended September 30, 2023, an increase of $1 million compared to the three months ended September 30, 2022.
- Former Parent allocations, which no longer exist after the Spin-Off, represent a decrease of $12 million compared to the three months ended September 30, 2022.

### Other operating expense (income), net

Other operating expense (income), net was expense of $15 million and income of $10 million for the three months ended September 30, 2023 and 2022, respectively. Refer to Note 4, “Other operating expense (income), net,” for more information. Other operating expense (income), net was comprised of the following:

- For the three months ended September 30, 2023 and 2022, merger, acquisition and divestiture expenses, net were $13 million and $5 million, respectively, primarily related to professional fees associated with the Spin-Off.
- Restructuring expense was $4 million and $3 million for the three months ended September 30, 2023 and 2022, 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.
- For the three months ended September 30, 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 $9 million. The royalty arrangements stopped after the Spin-Off was completed.
- For the three months ended September 30, 2022, the Company recognized income related to application testing and other R&D services for other BorgWarner businesses of $3 million. Refer to Note 19, "Related-Party Transactions," for further information. The services stopped after the Spin-Off was completed.

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

Equity in affiliates’ earnings, net of tax was $2 million and $5 million in the three months ended September 30, 2023 and 2022, respectively. This line item is driven by the results of the Company’s unconsolidated joint venture.

### Interest expense

Interest expense was $22 million and $5 million in the three months ended September 30, 2023 and 2022, respectively. The increase was primarily related to the issuance of our Term Loan A and Term Loan B Facilities, as well as interest incurred on the drawdown of the Revolving Facility.

### Interest income

Interest income was $4 million and $2 million in the three months ended September 30, 2023 and 2022.

### Other postretirement income

Other postretirement income was de minimis and $8 million in the three months ended September 30, 2023 and 2022, respectively. The decrease in other postretirement income for the three months ended September 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 $31 million for the three months ended September 30, 2023 resulting in an effective tax rate of 74%. This compared to $32 million, or 26%, for the three months ended September 30, 2022. 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 tax benefit is recognized, as well as an increase in the estimated annual effective tax rate in the current quarter due to increases in the U.S. taxes on foreign earnings based on the post Spin-Off structure.

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

### Non-comparable items impacting the Company’s earnings per diluted share

The Company’s earnings per diluted share were $0.24 and $1.89 for the three months ended September 30, 2023 and 2022, respectively. The Company believes the following table is useful in highlighting certain expenses that impacted its earnings per diluted share:

|  | Three months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Merger, acquisition and divestiture expense | $(0.21) | $(0.11) |
| Restructuring expense | (0.06) | (0.05) |
| Royalty income from BorgWarner | — | 0.19 |
| Asset impairments and lease modifications | — | 0.04 |
| Tax adjustments | (0.02) | (0.04) |
| Total impact of non-comparable items per share - diluted | $(0.29) | $0.03 |

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

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

Segment Adjusted Operating Income (“AOI”) is the measure of segment income or loss used by the Company. Segment AOI 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 AOI is most reflective of the operational profitability or loss of its reportable segments.

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 $19 million and $17 million for the three months ended September 30, 2023 and 2022, respectively. The increase in corporate expenses in 2023 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.

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

*(in millions)*

|  | Three months ended September 30, 2023 Net Sales to Customers | Segment AOI | % margin | 2022 Net Sales to Customers | Segment AOI | % margin |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Fuel Systems | $561 | $55 | 9.8% | $534 | $84 | 15.7% |
| Aftermarket | 335 | 46 | 13.7% | 325 | 48 | 14.8% |
| Totals | $896 | $101 |  | $859 | $132 |  |

The Fuel Systems segment’s net sales to customers for the three months ended September 30, 2023 increased $27 million, or 5%, and Segment Adjusted Operating Income decreased $29 million, or 35%, from the three months ended September 30, 2022. Foreign currencies resulted in a year-over-year increase in sales of approximately $5 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 excluding the impact of foreign currencies was primarily due to $26 million related to certain contract manufacturing agreements with BorgWarner and $17 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 $21 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 China. Segment Adjusted Operating margin was 9.8% in the three months ended September 30, 2023, compared to 15.7% in the three months ended September 30, 2022. The Segment Adjusted Operating margin decrease was primarily due to higher inflationary costs and supplier-related costs.

The Aftermarket segment’s net sales to customers for the three months ended September 30, 2023 increased $10 million, or 3%, and Segment Adjusted Operating Income decreased $2 million, or 4%, from the three months ended September 30, 2022. Foreign currencies resulted in a year-over-year increase in sales of approximately $8 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. Segment Adjusted Operating margin was 13.7% in the three months ended September 30, 2023, comparable to 14.8% in the three months ended September 30, 2022. The Segment Adjusted Operating margin decrease was primarily driven by higher non-commodity inflationary costs during the period.

### Nine Months Ended September 30, 2023 vs. Nine Months Ended September 30, 2022

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

*(in millions)*

| Net sales | Nine months ended September 30, 2023 | % of net sales | 2022 | % of net sales |
| --- | ---: | ---: | ---: | ---: |
| Fuel Systems | $1,794 | 68.6% | $1,707 | 68.3% |
| Aftermarket | 1,001 | 38.2 | 958 | 38.4 |
| Inter-segment eliminations | (177) | (6.8) | (168) | (6.7) |
| Total net sales | 2,618 | 100.0 | 2,497 | 100.0 |
| Cost of sales | 2,080 | 79.4 | 1,964 | 78.7 |
| Gross profit | 538 | 20.6 | 533 | 21.3 |
| Selling, general and administrative expenses | 306 | 11.7 | 301 | 12.1 |
| Other operating expense, net | 60 | 2.3 | 1 | — |
| Operating income | 172 | 6.6 | 231 | 9.2 |
| Equity in affiliates’ earnings, net of tax | (8) | (0.3) | (8) | (0.3) |
| Interest expense | 34 | 1.3 | 14 | 0.6 |
| Interest income | (9) | (0.3) | (3) | (0.1) |
| Other postretirement income | (1) | — | (25) | (1.0) |
| Earnings before income taxes | 156 | 5.9 | 253 | 10.0 |
| Provision for income taxes | 75 | 2.9 | 66 | 2.6 |
| Net earnings | $81 | 3.0% | $187 | 7.4% |

34

### Net sales

Net sales for the nine months ended September 30, 2023 totaled $2,618 million, an increase of $121 million, or 5%, from the nine months ended September 30, 2022. The change in net sales for the nine months ended September 30, 2023 was primarily driven by the following:

- Customer pricing increased net sales by approximately $64 million. This includes an increase of approximately $41 million related to recoveries from the Company’s customers of cost inflation arising from non-contractual commercial negotiations with those customers and normal contractual customer commodity pass-through arrangements.
- Favorable volume, mix and net new business increased sales approximately $51 million, or 2%. 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.
- Sales increased $26 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 2024.
- Fluctuations in foreign currencies resulted in a year-over-year decrease in sales of approximately $20 million primarily due to the weakening of the Chinese Renminbi relative to the U.S. Dollar, slightly offset by the strengthening of the 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 $2,080 million and 79%, respectively, during the nine months ended September 30, 2023, compared to $1,964 million and 79%, respectively, during the nine months ended September 30, 2022. The increase of $116 million in cost of sales for the nine months ended September 30, 2023 was primarily driven by the following:

- Cost of sales was also impacted by higher supplier-related and inflationary costs of approximately $70 million arising primarily from $49 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 $31 million of net supply chain savings initiatives.
- Higher sales volume, mix and net new business increased cost of sales by approximately $62 million.
- Cost of sales increased $26 million related to certain contract manufacturing agreements with Former Parent that were entered into in connection with the Spin-Off.
- Fluctuations in foreign currencies resulted in a period-over-period decrease in cost of sales of approximately $10 million primarily due to the weakening of the Chinese Renminbi, partially offset by the strengthening of the Euro and British Pound relative to the U.S. Dollar.

Gross profit and gross margin were $538 million and 21%, respectively, during the nine months ended September 30, 2023 compared to $533 million and 21%, respectively, during the nine months ended September 30, 2022. The change in gross margin was primarily due to the factors discussed above.

### Selling, general and administrative expenses

SG&A for the nine months ended September 30, 2023 was $306 million as compared to $301 million for the nine months ended September 30, 2022, SG&A as a percentage of net sales was 12% for both the nine months ended September 30, 2023 and 2022. SG&A was comprised of the following:

- R&D costs were $81 million for the nine months ended September 30, 2023. This includes gross R&D expenditures of $143 million, comprised primarily of employee costs, offset by customer

reimbursements of $62 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 $99 million for the nine months ended September 30, 2023, an increase of $25 million, primarily related to incentive compensation, inflation and mandated minimum wage increases.
- General expense allocations from BorgWarner, which ended subsequent to the Spin-off, were $16 million for the nine months ended September 30, 2023, a decrease of $23 million.
- IT costs incurred directly by the Company were $23 million for the nine months ended September 30, 2023, an increase of $2 million.
- Intangible amortization expense was $21 million for the nine months ended September 30, 2023 and 2022.
- Other SG&A expenses, excluding employee costs and general expense allocations from BorgWarner, were $66 million for the nine months ended September 30, 2023, a decrease of $2 million.

### Other operating expense, net

Other operating expense, net was $60 million and $1 million for the nine months ended September 30, 2023 and 2022, respectively. Refer to Note 4, “Other operating expense (income), net,” for more information. Other operating expense (income), net was comprised of the following:

- For the nine months ended September 30, 2023 and 2022, merger, acquisition and divestiture expenses, net were $72 million and $27 million, respectively, primarily related to professional fees associated with the Spin-Off.
- Restructuring expense was $10 million and $8 million for the nine months ended September 30, 2023 and 2022, respectively, related to individually approved restructuring actions that primarily related to reductions in headcount.
- For the nine months ended September 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 $9 million, respectively. Refer to Note 19, "Related-Party Transactions," for further information.
- For the nine months ended September 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 $22 million, respectively. These royalty arrangements have not continued subsequent to the completion of the Spin-Off.

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

Equity in affiliates’ earnings, net of tax was $8 million in both the nine months ended September 30, 2023 and 2022. This line item is driven by the results of the Company’s unconsolidated joint venture.

### Interest expense

Interest expense was $34 million and $14 million in the nine months ended September 30, 2023 and 2022, respectively. The increase from 2022 to 2023 was primarily due to new debt as part of the Spin-Off.

### Interest income

Interest income was $9 million and $3 million in the nine months ended September 30, 2023 and 2022, respectively. The increase is primarily due to higher interest rates on higher cash and cash equivalents balances.

### Other postretirement income

Other postretirement income was $1 million and $25 million in the nine months ended September 30, 2023 and 2022, respectively. The decrease in other postretirement income for the nine months ended September 30, 2023 was primarily due to higher interest costs and lower expected returns on assets in 2023.

### Provision for income taxes

Provision for income taxes was $75 million for the nine months ended September 30, 2023 resulting in an effective tax rate of 48%. This compared to $66 million, or 26%, for the nine months ended September 30, 2022. 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 tax benefit is recognized, as well as an increase in the estimated annual effective tax rate in the current quarter due to increases in the U.S. taxes on foreign earnings based on the post Spin-Off structure.

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

### Results by Reportable Segment for the nine months ended September 30, 2023 and 2022

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

*(in millions)*

|  | Nine months ended September 30, 2023 Net Sales to Customers | Segment AOI | % margin | 2022 Net Sales to Customers | Segment AOI | % margin |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Fuel Systems | $1,621 | $160 | 9.9% | $1,545 | $193 | 12.5% |
| Aftermarket | 997 | 143 | 14.3% | 952 | 137 | 14.4% |
| Totals | $2,618 | $303 |  | $2,497 | $330 |  |

The Fuel Systems segment’s net sales to customers for the nine months ended September 30, 2023 increased $76 million, or 5%, and Segment Adjusted Operating Income decreased $33 million, or 17%, from the nine months ended September 30, 2022. Foreign currencies resulted in a period-over-period decrease in sales of approximately $23 million primarily due to the weakening of the Chinese Renminbi, partially offset by the strengthening of the Euro and British Pound relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $50 million from non-contractual commercial negotiations with the Company’s customers and normal contractual customer commodity pass-through arrangements, $26 million related to certain contract manufacturing agreements with BorgWarner, and approximately $23 million of volume, mix and net new business driven by higher weighted average market production compared to the prior year. Segment Adjusted Operating margin was 9.9% in the nine months ended September 30, 2023, compared to 12.5% in the nine months ended September 30, 2022. The Segment Adjusted Operating margin decrease was primarily due to product mix and higher supplier costs.

The Aftermarket segment’s net sales to customers for the nine months ended September 30, 2023 increased $45 million, or 5%, and Segment Adjusted Operating Income increased $6 million, or 4%, from the nine months ended September 30, 2022. Foreign currencies resulted in a year-over-year increase in sales of approximately $3 million primarily due to the weakening Chinese Renminbi, partially offset by the strengthening of the Euro and British Pound relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $28 million of volume, mix and net new business driven by increased demand for the Company’s products and approximately $14 million of pricing. Segment Adjusted Operating margin was 14.3% in the nine months ended September 30, 2023, comparable to the 14.4% in the nine months ended September 30, 2022.

### Non-comparable items impacting the Company’s earnings per diluted share

The Company’s earnings per diluted share were $1.72 and $3.98 for the nine months ended September 30, 2023 and 2022, respectively. The Company believes the following table is useful in highlighting certain expenses that impacted its earnings per diluted share:

|  | Nine months ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Merger, acquisition and divestiture expense | $(1.47) | $(0.57) |
| Restructuring expense | (0.17) | (0.13) |
| Royalty income from BorgWarner | 0.36 | 0.47 |
| Asset impairments and lease modifications | — | (0.09) |
| Tax adjustments | $(0.02) | $(0.02) |
| Total impact of non-comparable items per share - diluted | $(1.30) | $(0.34) |

### LIQUIDITY AND CAPITAL RESOURCES

### Overview

To manage liquidity and fund operations prior to the Spin-Off, we 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 were anticipated to be settled in cash were reflected as Receivables, net and Investments and long-term receivables. Any balances due from the Company to BorgWarner as a result of these cash arrangements that were anticipated to be settled in cash were reflected as Other non-current liabilities. Certain other cash pooling balances that were not anticipated to be settled in cash are presented within Former parent investment in our Condensed Consolidated Financial Statements included elsewhere in this Form 10-Q.

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 September 30, 2023 and December 31, 2022, the Company had $367 million and $251 million of cash and cash equivalents, respectively, of which $342 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 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.

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.

Refer to Note 11. “Notes Payable And Debt” for further information on our Credit Agreement.

### Cash Flows

### Operating Activities

Net cash provided by operating activities was $188 million and $122 million in the nine months ended September 30, 2023 and 2022, respectively. The change in cash from operating activities for the nine months ended September 30, 2023, compared with the nine months ended September 30, 2022, was due to working capital changes, including amounts due to the Former Parent, offset by lower net earnings.

### Investing Activities

Net cash used in investing activities was $117 million and $80 million in the nine months ended September 30, 2023 and 2022, respectively, primarily related to capital expenditures. As a percentage of sales, capital expenditures were 4.5% and 3.4% for the nine months ended September 30, 2023 and 2022, respectively.

### Financing Activities

Net cash provided by financing activities was $50 million in the nine months ended September 30, 2023 primarily related to proceeds from external borrowings, offset by payments to the Former Parent, stock repurchases and dividend payments to PHINIA stockholders.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical accounting policies and estimates disclosures appear in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies And Estimates,” 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 September 30, 2023.

## Market risk

As filed, 445 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 September 30, 2023.

## Controls and procedures

As filed, 3,774 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 were not effective as of September 30, 2023 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 condensed 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 September 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 condensed financial statements prepared on a carve-out basis. See Note 1, “Basis of Presentation,” to the Condensed 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 ended 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 condensed 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. During the third quarter of 2023, the Company ceased preparing its financial statements on a carve-out basis and moved to a system-based calculation of cumulative translation adjustment. As of September 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.

#### 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, 474 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 September 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 Nov 6, 2023.
Source: SEC EDGAR, the filing index for accession 0001968915-23-000035. Last ingested by Listed: Oct 29, 2026, 11:04 ET. No prices; not investment advice.