PHINIA 10Q 2023 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2023


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 001-41708

PHINIA INC.

(Exact name of registrant as specified in its charter)


Delaware						92-2483604
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

3000 University Drive, Auburn Hills, Michigan						48326
(Address of Principal Executive Offices)						(Zip Code)

Registrant's telephone number, including area code (248) 732-1900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

PHIN

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☑	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of November 1, 2023, the registrant had 46,685,317 shares of voting common stock outstanding.

PHINIA INC.

FORM 10-Q

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023

INDEX


			Page No.
PART I. Financial Information

Item 1. Financial Statements

Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (Unaudited)			1

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022 (Unaudited)			2

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2023 and 2022 (Unaudited)			3

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (Unaudited)			4

Notes to Condensed Consolidated Financial Statements (Unaudited)			5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28

Item 3. Quantitative and Qualitative Disclosures About Market Risk			39

Item 4. Controls and Procedures			39

PART II. Other Information

Item 1. Legal Proceedings			41

Item 1A. Risk Factors			41

Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities			41





Item 5. Other Information			41

Item 6. Exhibits			42

SIGNATURES			44

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PHINIA INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in millions)	September 30, 2023		December 31, 2022
ASSETS
Cash, cash equivalents and restricted cash	$	367	$	251
Receivables, net	1,175		891

Inventories	529		459
Prepayments and other current assets	53		40
Total current assets	2,124		1,641

Property, plant and equipment, net	889		924
Investments and long-term receivables	130		325

Goodwill	486		490
Other intangible assets, net	411		432
Other non-current assets	151		262
Total assets	$	4,191	$	4,074

LIABILITIES AND EQUITY
Short-term borrowings	$	87	$	—
Accounts payable	817		686

Other current liabilities	417		484
Total current liabilities	1,321		1,170

Long-term debt	713		28

Retirement-related liabilities	94		79
Other non-current liabilities	171		1,154
Total liabilities	2,299		2,431

Commitments and contingencies (Note 18)

Common Stock	1		—
Additional paid-in capital	2,023		—
Retained deficit	(1)		—
Former parent investment	—		1,731
Accumulated other comprehensive loss	(122)		(88)
Treasury stock	(9)		—
Total equity	1,892		1,643
Total liabilities and equity	$	4,191	$	4,074

See accompanying Notes to Condensed Consolidated Financial Statements.

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PHINIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Net sales	$	896	$	859	$	2,618	$	2,497
Cost of sales	719		658		2,080		1,964
Gross profit	177		201		538		533

Selling, general and administrative expenses	104		100		306		301

Other operating expense (income), net	15		(10)		60		1
Operating income	58		111		172		231

Equity in affiliates’ earnings, net of tax	(2)		(5)		(8)		(8)
Interest expense	22		5		34		14
Interest income	(4)		(2)		(9)		(3)
Other postretirement income	—		(8)		(1)		(25)
Earnings before income taxes	42		121		156		253

Provision for income taxes	31		32		75		66

Net earnings	$	11	$	89	$	81	$	187

Earnings per share — basic	$	0.24	$	1.89	$	1.72	$	3.98

Earnings per share— diluted	$	0.24	$	1.89	$	1.72	$	3.98

Weighted average shares outstanding:
Basic	47.0		47.0		47.0		47.0
Diluted	47.1		47.0		47.0		47.0

See accompanying Notes to Condensed Consolidated Financial Statements.

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PHINIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Net earnings	$	11	$	89	$	81	$	187

Other comprehensive loss
Foreign currency translation adjustments(1)	(58)		(99)		(28)		(186)
Defined benefit pension plans(1)	(2)		(6)		(3)		(13)
Hedge instruments(1)	(1)		1		(3)		2
Total other comprehensive loss	(61)		(104)		(34)		(197)

Comprehensive (loss) income	$	(50)	$	(15)	$	47	$	(10)

_____________

(1) Net of income taxes.

See accompanying Notes to Condensed Consolidated Financial Statements.

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PHINIA INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine months ended September 30,
(in millions)	2023		2022
OPERATING
Net earnings	$	81	$	187
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and tooling amortization	105		109
Intangible asset amortization	21		21
Restructuring expense, net of cash paid	1		2

Stock-based compensation expense	7		7
Deferred income tax expense	2		—
Other non-cash adjustments, net	(1)		(2)
Adjustments to reconcile net earnings to net cash provided by operating activities	216		324
Changes in assets and liabilities, excluding foreign currency translation adjustments:
Receivables	(123)		(149)

Inventories	(60)		(75)
Prepayments and other current assets	(10)		8
Accounts payable and other current liabilities	169		36

Prepaid taxes and income taxes payable	33		24
Other assets and liabilities	(37)		(46)
Net cash provided by operating activities	188		122
INVESTING
Capital expenditures, including tooling outlays	(117)		(86)
Payments for investment in equity securities	(2)		—
Proceeds from asset disposals and other, net	2		6
Net cash used in investing activities	(117)		(80)
FINANCING

Proceeds from issuance of long-term debt, net of discount	708		—
Payments for debt issuance costs	(14)		—
Borrowings under Revolving Facility	75		—
Repayments of debt, including current portion	(1)		—
Cash outflows related to debt due to former parent	(728)		(113)
Cash inflows related to debt due from former parent	36		29
Purchase of noncontrolling interest	—		(3)
Dividends paid to PHINIA stockholders	(12)		—
Payments for purchase of treasury stock	(9)		—



Net transfers to former parent	(5)		(16)
Net cash provided by (used in) financing activities	50		(103)
Effect of exchange rate changes on cash	(5)		(28)
Net increase (decrease) in cash and cash equivalents	116		(89)
Cash and cash equivalents at beginning of year	251		259
Cash and cash equivalents at end of period	$	367	$	170

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest, net	$	13	$	(3)
Income taxes, net of refunds	$	59	$	42
Non-cash investing transactions:
Period end accounts payable related to property, plant, and equipment purchases	$	31	$	29

See accompanying Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

INTRODUCTION

The accompanying Condensed Consolidated Financial Statements and notes present the condensed consolidated statements of operations, balance sheets, and cash flows of PHINIA Inc. (“PHINIA” or the “Company”). 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). The Company is a global supplier to most major original equipment manufacturers (“OEMs”) seeking to meet and exceed increasingly stringent global regulatory requirements and satisfy consumer demands for an enhanced user experience. Additionally, the Company offers a wide range of original equipment service (“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.

NOTE 1 BASIS OF PRESENTATION

Prior to the Spin-Off on July 3, 2023, the historical financial statements of PHINIA were prepared on a stand-alone combined basis and were derived from BorgWarner’s consolidated financial statements and accounting records as if the Fuel Systems and Aftermarket businesses of BorgWarner had been part of PHINIA for all periods presented. Accordingly, for periods prior to July 3, 2023, our financial statements are presented on a combined basis and for the periods subsequent to July 3, 2023 are presented on a consolidated basis (all periods hereinafter are referred to as “consolidated financial statements”). The Company's Condensed Consolidated Financial Statements were prepared in accordance with accounting principles in the United States of America ("U.S. GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Certain information and footnote disclosures normally included in annual financial statements were condensed or omitted as permitted by such rules and regulations. In the opinion of management, all normal recurring adjustments necessary for a fair statement of results have been included. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. The balance sheet as of December 31, 2022 was derived from the audited financial statements as of that date.

Certain amounts for the prior periods presented were reclassified to conform to the current period presentation. Amounts that were previously presented as Due from BorgWarner, current and Due from BorgWarner, non-current are now presented within Receivables, net and Investments and long-term

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receivables, respectively. Amounts that were previously presented as Due to BorgWarner, current are now presented within Accounts payable and Other current liabilities. Amounts that were previously presented in Due to BorgWarner, non-current are now presented in Other non-current liabilities.

Management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and accompanying notes, as well as amounts of revenues and expenses reported during the periods covered by those financial statements and accompanying notes. The Condensed Consolidated Financial Statements may not be indicative of the Company’s future performance and do not necessarily reflect what the financial position, results of operations, and cash flows would have been had it operated as a standalone company during the periods presented prior to the Spin-Off.

The Condensed Consolidated Statements of Operations include all revenues and costs directly attributable to the Company, including costs for facilities, functions, and services utilized. Costs for certain centralized functions and programs provided and administered by BorgWarner were charged directly to the Company prior to Spin-Off. These centralized functions and programs included, but were not limited to research and development and information technology.

A portion of BorgWarner’s total corporate expenses were allocated to the Company for services rendered by BorgWarner prior to the Spin-Off. These expenses included the cost of corporate functions and resources, including, but not limited to, executive management, finance, accounting, legal, human resources, research and development and sales. Additionally, a portion of the Company’s corporate expenses were allocated to BorgWarner for charges incurred related to subsidiaries of BorgWarner historically supported by the Company, primarily related to information technology. These expenses were allocated based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net revenues, legal entities, headcount or weighted-square footage, as applicable. The Company considers the basis on which the expenses have been allocated to reasonably reflect the utilization of services provided to, or the benefit received by, both the Company and BorgWarner during the periods presented. However, the allocations may not reflect the expenses the Company would have incurred if the Company had been a standalone company for the periods presented prior to July 3, 2023. The nine months ended September 30, 2023 included net corporate allocation expenses incurred prior to the Spin-Off totaling $89 million. For the three and nine months ended September 30, 2022 net corporate allocation expenses totaled $26 million and $95 million, respectively. Corporate allocation expenses were primarily included in Selling, general and administrative expenses.

NOTE 2 REVENUE FROM CONTRACTS WITH CUSTOMERS

The Company manufactures and sells products, primarily to OEMs of commercial vehicle industrial applications and light vehicles, to certain tier one vehicle systems suppliers and into the aftermarket. The Company’s payment terms are based on customary business practices and vary by customer type and products offered. The Company has evaluated the terms of its arrangements and determined that they do not contain significant financing components.

Generally, revenue is recognized upon shipment or delivery; however, a limited number of the Company’s customer arrangements for its highly customized products with no alternative use provide the Company with the right to payment during the production process. As a result, for these limited arrangements, revenue is recognized as goods are produced and control transfers to the customer using the input cost-to-cost method. The Company recorded a contract asset of $2 million at both September 30, 2023 and December 31, 2022 for these arrangements. These amounts are reflected in Prepayments and other current assets in the Company’s Condensed Consolidated Balance Sheets.

In limited instances, certain customers have provided payments in advance of receiving related products, typically at the onset of an arrangement prior to the beginning of production. These contract liabilities are reflected as Other current liabilities in the Condensed Consolidated Balance Sheets and were $3 million

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at both September 30, 2023 and December 31, 2022. These amounts are reflected as revenue over the term of the arrangement (typically 3 to 7 years) as the underlying products are shipped and represent the Company’s remaining performance obligations as of the end of the period.

The following table represents a disaggregation of revenue from contracts with customers by reportable segment and region for the three and nine months ended September 30, 2023 and 2022. Refer to Note 21, “Reportable Segments And Related Information” to the Condensed Consolidated Financial Statements, for more information.


	Three months ended September 30, 2023
(In millions)	Fuel Systems		Aftermarket		Total
Americas	$	199	$	193	$	392
Europe	232		122		354
Asia	130		20		150
Total	$	561	$	335	$	896

	Three months ended September 30, 2022
(In millions)	Fuel Systems		Aftermarket		Total
Americas	$	142	$	207	$	349
Europe	216		101		317
Asia	176		17		193
Total	$	534	$	325	$	859

	Nine months ended September 30, 2023
(In millions)	Fuel Systems		Aftermarket		Total
Americas	$	537	$	591	$	1,128
Europe	711		350		1,061
Asia	373		56		429
Total	$	1,621	$	997	$	2,618

	Nine months ended September 30, 2022
(In millions)	Fuel Systems		Aftermarket		Total
Americas	$	408	$	604	$	1,012
Europe	686		301		987
Asia	451		47		498
Total	$	1,545	$	952	$	2,497

NOTE 3 RESEARCH AND DEVELOPMENT COSTS

The Company’s net research & development (“R&D”) expenditures are primarily included in Selling, general and administrative expenses of the Condensed Consolidated Statements of Operations. Customer reimbursements are netted against gross R&D expenditures as they are considered a recovery of cost. Customer reimbursements for prototypes are recorded net of prototype costs based on customer contracts, typically either when the prototype is shipped or when it is accepted by the customer. Customer reimbursements for engineering services are recorded when performance obligations are satisfied in accordance with the contract. Financial risks and rewards transfer upon shipment, acceptance of a prototype component by the customer or upon completion of the performance obligation as stated in the

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respective customer agreement. The Company has various customer arrangements relating to R&D activities that it performs at its various R&D locations.

The following table presents the Company’s gross and net expenditures on R&D activities:


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Gross R&D expenditures	$	45	$	49	$	143	$	151
Customer reimbursements	(21)		(25)		(62)		(73)
Net R&D expenditures	$	24	$	24	$	81	$	78

NOTE 4 OTHER OPERATING EXPENSE (INCOME), NET

Items included in Other operating expense (income), net consist of:


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Merger, acquisition and divestiture expense	$	13	$	5	$	72	$	27
Restructuring	4		3		10		8
Related-party royalty income	—		(9)		(17)		(22)
Related-party R&D income	—		(3)		(2)		(9)
Asset impairment	—		—		—		5
Other income, net	(2)		(6)		(3)		(8)
Other operating expense (income), net	$	15	$	(10)	$	60	$	1

Merger acquisition and divestiture expense: During the three and nine months ended September 30, 2023 and 2022, the Company recorded merger, acquisition and divestiture expense, primarily related to professional fees associated with the separation of the Company.

Related-party royalty income: The Company participated in royalty arrangements with BorgWarner businesses prior to Spin-Off, which involved the licensing of the Delphi Technologies trade name and product-related intellectual properties.

Related-party R&D income: The Company provided application testing and other R&D services for BorgWarner businesses prior to Spin-Off.

NOTE 5 RESTRUCTURING

The Company’s restructuring expenditures are primarily included in Other operating expense (income), net of the Condensed Consolidated Statements of Operations. The Company’s restructuring activities are undertaken as necessary to execute management’s strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Company’s business and to relocate operations to best-cost locations.

The Company’s restructuring expenses consist primarily of employee termination benefits (principally severance and/or other termination benefits) and other costs, which are primarily professional fees and costs related to equipment moves.

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	Three months ended September 30, 2023						Nine months ended September 30, 2023
(in millions)	Fuel Systems		Aftermarket		Total		Fuel Systems		Aftermarket		Total
Employee termination benefits	$	3	$	—	$	3	$	7	$	1	$	8
Other	1		—		1		2		—		2
Total restructuring expense	$	4	$	—	$	4	$	9	$	1	$	10


	Three months ended September 30, 2022						Nine months ended September 30, 2022
(in millions)	Fuel Systems		Aftermarket		Total		Fuel Systems		Aftermarket		Total
Employee termination benefits	$	—	$	—	$	—	$	2	$	—	$	2
Other	3		—		3		6		—		6
Total restructuring expense	$	3	$	—	$	3	$	8	$	—	$	8

The following table displays a roll forward of the restructuring liability recorded within the Company’s Condensed Consolidated Balance Sheets and the related cash flow activity:


(in millions)	Employee termination benefits		Other		Total
Balance at January 1, 2023	$	20	$	—	$	20
Restructuring expense, net	8		2		10
Cash payments	(17)		(2)		(19)

Balance at September 30, 2023	11		—		11
Less: Non-current restructuring liability	(1)		—		(1)
Current restructuring liability at September 30, 2023	$	10	$	—	$	10


(in millions)	Employee termination benefits		Other		Total
Balance at January 1, 2022	$	60	$	—	$	60
Restructuring expense, net	2		6		8
Cash payments	(36)		(5)		(41)
Foreign currency translation adjustment and other	(4)		—		(4)
Balance at September 30, 2022	22		1		23
Less: Non-current restructuring liability	(5)		—		(5)
Current restructuring liability at September 30, 2022	$	17	$	1	$	18

During the three and nine months ended September 30, 2023, the Company recorded $4 million and $10 million, respectively, of restructuring costs for individually approved restructuring actions that primarily related to reductions in headcount in the Fuel Systems segment.

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In 2019, the Company announced a restructuring plan to reshape and realign its global technical center footprint and reduce salaried and contract staff. The Company recorded charges of $8 million during the nine months ended September 30, 2022, primarily related to employee severance and equipment moves in the Fuel Systems segment. The actions under this program are complete.

Estimates of restructuring expense are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established accruals.

The Company continues to evaluate different options across its operations to reduce existing structural costs. The Company will recognize restructuring expense associated with any future actions at the time they are approved and become probable or are incurred. Any future actions could result in significant restructuring expense.

NOTE 6 INCOME TAXES

The Company’s provision for income taxes is based upon an estimated annual effective tax rate for the year applied to domestic and foreign income. On a quarterly basis, the annual effective tax rate is adjusted, as appropriate, based upon changed facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter.

The Company’s effective tax rate for the three months ended September 30, 2023 and 2022 was 74% and 26%, respectively. The effective tax rate for the three months ended September 30, 2023 increased as compared to the prior year as a 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.

The Company’s effective tax rate for the nine months ended September 30, 2023 and 2022 was 48% and 26%, respectively. The effective tax rate for the nine months ended September 30, 2023 increased as compared to the prior year as a 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. The estimated annual effective tax rate increased in the current quarter due to increases in the U.S. taxes on foreign earnings based on the post Spin-Off structure.

The annual effective tax rates differ from the U.S. statutory rate primarily due to foreign rates which vary from those in the U.S., jurisdictions with pretax losses for which no tax benefit could be realized, U.S. taxes on foreign earnings, and permanent differences between book and tax treatment for certain items including enhanced deduction of research and development expenses in certain jurisdictions.

For periods ended on or prior to July 3, 2023, the Company’s operations have been included in BorgWarner’s U.S. federal consolidated tax return, certain foreign tax returns, and certain state tax returns. For the purposes of these financial statements, the Company’s income tax provision was computed as if the Company filed separate tax returns (i.e., as if the Company had not been included in the consolidated income tax return group with BorgWarner). The separate return method applies ASC 740 to the Condensed Consolidated Financial Statements of each member of a consolidated tax group as if the group member were a separate taxpayer. As a result, actual tax transactions included in the consolidated financial statements of BorgWarner may not be included in these Condensed Consolidated Financial Statements. Further, the Company’s tax results as presented in the Condensed Consolidated Financial Statements may not be reflective of the results that the Company expects to generate in the future. Also, the tax treatment of certain items reflected in the Condensed Consolidated Financial Statements may not be reflected in the Consolidated Financial Statements and tax returns of BorgWarner.

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NOTE 7 INVENTORIES

A summary of Inventories is presented below:


(in millions)	September 30, 2023		December 31, 2022
Raw material and supplies	$	313	$	275
Work-in-progress	38		39
Finished goods	178		145
Inventories	$	529	$	459

NOTE 8 OTHER CURRENT AND NON-CURRENT ASSETS


(in millions)	September 30, 2023		December 31, 2022
Prepayments and other current assets:
Prepaid taxes	$	16	$	11
Prepaid customer tooling	8		3
Customer return assets	7		6
Deposits	4		3
Prepaid insurance	4		—
Prepaid engineering	3		3

Other	11		14
Total prepayments and other current assets	$	53	$	40

Investments and long-term receivables:
Long-term receivables	$	80	$	279
Investment in equity affiliates	46		44
Investment in equity securities	4		2
Total investments and long-term receivables	$	130	$	325

Other non-current assets:
Deferred income taxes	$	58	$	157
Operating leases	64		80
Other	29		25
Total other non-current assets	$	151	$	262

NOTE 9 GOODWILL AND OTHER INTANGIBLES

During the fourth quarter of each year, the Company assesses its goodwill assigned to each of its reporting units for impairment by either performing a qualitative assessment or a quantitative analysis. In addition, the Company may test goodwill in between annual test dates if an event occurs or circumstances change that could more-likely-than-not reduce the fair value of a reporting unit below its carrying value. Similar to goodwill, the Company performs an annual impairment test for indefinite-lived intangibles other than goodwill (trade names) using a qualitative analysis during the fourth quarter each year to determine if it is more-likely-than-not that the fair value of the intangible asset is less than its respective carrying value. If the Company elects to perform or is required to perform a quantitative analysis, the test consists of a comparison of the fair value of the indefinite-lived intangible asset to the

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carrying value of the asset as of the impairment testing date. No events or circumstances were noted in the first nine months of 2023 requiring additional assessment or testing.

Future changes in the judgments, assumptions and estimates from those used in acquisition-related valuations and goodwill impairment testing, including discount rates or future operating results and related cash flow projections, could result in significantly different estimates of the fair values in the future. An increase in discount rates, a reduction in projected cash flows or a combination of the two could lead to a reduction in the estimated fair values, which may result in impairment charges that could materially affect the Company’s financial statements in any given year.

A summary of the components in the carrying amount of goodwill as of September 30, 2023 and December 31, 2022 is as follows:


(in millions)	Fuel Systems		Aftermarket		Total
Gross goodwill balance, December 31, 2022	$	58	$	545	$	603

Accumulated impairment losses	—		(113)		(113)
Net goodwill balance, December 31, 2022	$	58	$	432	$	490
Goodwill during the period:
Translation adjustment	—		(4)		(4)
Net goodwill balance, September 30, 2023	$	58	$	428	$	486

The Company’s other intangible assets consist of the following:


		September 30, 2023						December 31, 2022
(in millions)	Estimated useful lives (years)	Gross carrying amount		Accumulated amortization		Net carrying amount		Gross carrying amount		Accumulated amortization		Net carrying amount
Amortized intangible assets:
Patented and unpatented technology	14 - 15	$	144	$	39	$	105	$	144	$	30	$	114
Customer relationships	14 - 15	263		97		166		263		85		178
Total amortized intangible assets		407		136		271		407		115		292
Unamortized trade names		140		—		140		140		—		140
Total other intangible assets		$	547	$	136	$	411	$	547	$	115	$	432

NOTE 10 PRODUCT WARRANTY

The Company provides warranties on some, but not all, of its products. The warranty terms are typically from one to three years. Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claim settlements as well as product manufacturing and industry developments and recoveries from third parties. Management actively studies trends of warranty claims and takes action to improve product quality and minimize warranty claims. Management believes that the warranty accrual is appropriate; however, in certain cases, initial customer claims exceed the amount accrued. The Company’s warranty provisions are primarily included in Cost of sales in the Condensed Consolidated Statements of Operations. The product warranty accrual is allocated to current and non-current liabilities in the Condensed Consolidated Balance Sheets.

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The following table summarizes the activity in the product warranty accrual accounts:


(in millions)	2023		2022
Beginning balance, January 1	$	60	$	68
Adjustments of prior estimates	1		5
Provisions for current period sales	32		28
Payments	(35)		(35)
Other, primarily translation adjustment	(1)		(4)
Ending balance, September 30,	$	57	$	62

The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:


(in millions)	September 30, 2023		December 31, 2022
Other current liabilities	$	30	$	32
Other non-current liabilities	27		28
Total product warranty liability	$	57	$	60

NOTE 11 NOTES PAYABLE AND DEBT

As of September 30, 2023 and December 31, 2022, the Company had debt outstanding as follows:


(in millions)	September 30, 2023		December 31, 2022
Short-term borrowings	$	75	$	—

Long-term debt
5.000% Senior notes due 10/01/25 ($800 million par value)	$	25	$	26
$300 million Term Loan A Facility (net of $3 unamortized issuance costs)	297		—
$425 million Term Loan B Facility (net of $6 unamortized issuance costs and $16 unamortized discount)	403		—

Other long-term debt	—		2
Total long-term debt	$	725	$	28
Less: current portion	12		—
Long-term debt, net of current portion	$	713	$	28

As of September 30, 2023, the estimated fair values of the Company’s senior unsecured notes, Term Loan A Facility and Term Loan B Facility (each as defined below) totaled $753 million, which is $28 million higher than carrying value for the same period. As of December 31, 2022, the estimated fair value of the Company’s senior unsecured notes totaled $23 million, which was $3 million higher than carrying value for the same period. Fair market values of the long-term debt are developed using observable values for similar debt instruments, which are considered Level 2 inputs as defined by ASC Topic 820. The carrying values of the Company’s other debt facilities approximate fair value. The fair value estimates do not necessarily reflect the values the Company could realize in the current markets.

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

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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.

As of September 30, 2023, the Company had $75 million of outstanding borrowings under the Revolving Facility. 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. The Company was in compliance with all covenants as of September 30, 2023.

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NOTE 12 OTHER CURRENT AND NON-CURRENT LIABILITIES

Additional detail related to liabilities is presented in the table below:


(in millions)	September 30, 2023		December 31, 2022
Other current liabilities:
Customer related	$	105	$	96
Payroll and employee related	86		81
Income taxes payable	51		28
Product warranties (Note 10)	30		32
Accrued freight	19		13
Operating leases	17		18
Employee termination benefits (Note 5)	10		16
Deferred engineering	5		17
Other	94		183
Total other current liabilities	$	417	$	484

Other non-current liabilities:
Deferred income taxes	$	60	$	46
Operating leases	51		67
Product warranties (Note 10)	27		28
Uncertain tax positions	14		37
Deferred income	6		—
Due to former parent	—		957
Other	13		19
Total other non-current liabilities	$	171	$	1,154

NOTE 13 FAIR VALUE MEASUREMENTS

ASC Topic 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:

Level 1:Observable inputs such as quoted prices for identical assets or liabilities in active markets;

Level 2:Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3:Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and liabilities measured at fair value are based on one or more of the following three valuation techniques noted in ASC Topic 820:

A.Market approach: Prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.

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B.Cost approach: Amount that would be required to replace the service capacity of an asset (replacement cost).

C.Income approach: Techniques to convert future amounts to a single present amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).

The following tables classify assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022:


			Basis of fair value measurements
(in millions)	Balance at September 30, 2023		Quoted prices in active markets for identical items (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Valuation Technique
Assets:
Foreign currency contracts	$	1	$	—	$	1	$	—	A
Liabilities:
Foreign currency contracts	$	(1)	$	—	$	(1)	$	—	A


			Basis of fair value measurements
(in millions)	Balance at December 31, 2022		Quoted prices in active markets for identical items (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Valuation Technique
Assets:
Foreign currency contracts	$	7	$	—	$	7	$	—	A
Liabilities:
Foreign currency contracts	$	(1)	$	—	$	(1)	$	—	A

NOTE 14 FINANCIAL INSTRUMENTS

The Company’s financial instruments include cash and cash equivalents, marketable securities and accounts receivable. Due to the short-term nature of these instruments, their book value approximates their fair value. The Company’s financial instruments may also include long-term debt, interest rate and cross-currency swaps, commodity derivative contracts and foreign currency derivative contracts. All derivative contracts are placed with counterparties that have an S&P, or equivalent, investment grade credit rating at the time of the contracts’ placement. An adjustment for non-performance risk is considered in the estimate of fair value in derivative assets based on the counterparty credit default swap (“CDS”) rate. When the Company is in a net derivative liability position, the non-performance risk adjustment is based on its CDS rate. At September 30, 2023 and December 31, 2022, the Company had no derivative contracts that contained credit-risk-related contingent features.

The Company uses foreign currency forward and option contracts to protect against exchange rate movements for forecasted cash flows, including capital expenditures, purchases, operating expenses or sales transactions designated in currencies other than the functional currency of the operating unit. In addition, the Company uses foreign currency forward contracts to hedge exposure associated with its net investment in certain foreign operations (net investment hedges). Foreign currency derivative contracts require the Company, at a future date, to either buy or sell foreign currency in exchange for the operating units’ local currency.

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As of September 30, 2023 and December 31, 2022, the United States dollar equivalent notional values of outstanding currency derivative instruments was $38 million and $309 million, respectively. These amounts were primary related to Euro and British Pound denominated hedging transactions.

As of September 30, 2023 and December 31, 2022, the following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to or receivable from counterparties under ASC Topic 815:

(in millions)

Assets

Liabilities

Derivatives designated as hedging instruments Under Topic 815:

Balance Sheet Location

September 30, 2023

December 31, 2022

Balance Sheet Location

September 30, 2023

December 31, 2022

Foreign currency

Prepayments and other current assets

Other current liabilities

Effectiveness for cash flow hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of effectiveness are deferred into accumulated other comprehensive income (loss) (“AOCI”) and reclassified into income as the underlying operating transactions are recognized. These realized gains or losses offset the hedged transaction and are recorded on the same line in the statement of operations. The initial value of any component excluded from the assessment of effectiveness is recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in fair value of the excluded component and amounts recognized in income under that systematic and rational method are recognized in AOCI.

Effectiveness for net investment hedges is assessed at the inception of the hedging relationship and quarterly, thereafter. Gains and losses arising from these contracts that are included in the assessment of effectiveness are deferred into foreign currency translation adjustments and only released when the subsidiary being hedged is sold or substantially liquidated. The initial value of any component excluded from the assessment of effectiveness is recognized in income using a systematic and rational method over the life of the hedging instrument. Any difference between the change in fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI.

The table below shows deferred gains (losses) reported in AOCI as well as the amount expected to be reclassified to income in one year or less for designated net investment hedges. The amount expected to be reclassified to income in one year or less assumes no change in the current relationship of the hedged item at September 30, 2023 market rates.


(in millions)	Deferred loss in AOCI at				Gain (loss) expected to be reclassified to income in one year or less
Contract Type	September 30, 2023		December 31, 2022
Foreign currency	$	(6)	$	(4)	$	—

Derivative instruments designated as hedging instruments as defined by ASC Topic 815 held during the period resulted in the following gains and losses recorded in income:

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	Three months ended September 30, 2023
(in millions)	Net sales		Cost of sales		Selling, general and administrative expenses		Other comprehensive income (loss)
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded	$	896	$	719	$	104	$	(61)
Gain (loss) on cash flow hedging relationships:
Foreign currency
Loss recognized in Other comprehensive income (loss)							$	(1)

	Nine months ended September 30, 2023
(in millions)	Net sales		Cost of sales		Selling, general and administrative expenses		Other comprehensive income (loss)
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded	$	2,618	$	2,080	$	306	$	(34)
Gain (loss) on cash flow hedging relationships:
Foreign currency
Loss recognized in Other comprehensive income							$	(3)


	Three months ended September 30, 2022
(in millions)	Net sales		Cost of sales		Selling, general and administrative expenses		Other comprehensive income (loss)
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded	$	859	$	658	$	100	$	(104)
Gain (loss) on cash flow hedging relationships:
Foreign currency
Gain recognized in Other comprehensive loss							$	1

	Nine months ended September 30, 2022

(in millions)	Net sales		Cost of sales		Selling, general and administrative expenses		Other comprehensive income (loss)
Total amounts of earnings and other comprehensive income line items in which the effects of cash flow hedges are recorded	$	2,497	$	1,964	$	301	$	(197)
Gain (loss) on cash flow hedging relationships:
Foreign currency
Gain recognized in Other comprehensive income (loss)							$	2

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The gains or losses recorded in income related to components excluded from the assessment of effectiveness for derivative instruments designated as cash flow hedges were immaterial for the periods presented.

Gains and losses on derivative instruments designated as net investment hedges were immaterial for the periods presented.

Derivatives not designated as hedging instruments are used to hedge remeasurement exposures of monetary assets and liabilities denominated in currencies other than the operating units' functional currency. These derivatives resulted in the following gains (losses) recorded in income:


(in millions)		Three months ended September 30,				Nine months ended September 30,
Contract Type	Location	2023		2022		2023		2022
Foreign Currency	Cost of sales	$	—	$	3	$	4	$	—

NOTE 15 RETIREMENT BENEFIT PLANS

PHINIA sponsors various defined contribution savings plans, primarily in the U.S., that allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan specified guidelines. The Company also has a number of defined benefit pension plans, and in connection with the completion of the Spin-Off was required to assume additional defined benefit plan liabilities, along with the associated deferred costs in Accumulated other comprehensive loss. Under specified conditions, the Company will make contributions to the plans and/or match a percentage of the employee contributions up to certain limits. The estimated contributions to the defined benefit pension plans for 2023 are up to $3 million, of which $2 million has been contributed through the first nine months of the year.

The components of net periodic benefit income recorded in the Condensed Consolidated Statements of Operations are as follows:


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Service cost	$	1	$	1	$	2	$	1
Interest cost	11		6		32		18
Expected return on plan assets	(11)		(14)		(32)		(43)
Amortization of unrecognized loss	—		—		(1)		—

Net periodic benefit cost (income)	$	1	$	(7)	$	1	$	(24)

The non-service cost components of net periodic benefit cost (income) are included in Other postretirement income in the Condensed Consolidated Statements of Operations.

NOTE 16 STOCKHOLDERS' EQUITY

The changes of the Stockholders’ Equity items during the three and nine months ended September 30, 2023 and 2022, are as follows:

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(in millions)	Issued common stock		Additional paid-in capital		Treasury stock		Retained deficit		Former parent investment		Accumulated other comprehensive loss		Total equity
Balance, June 30, 2023	$	—	$	—	$	—	$	—	$	2,053	$	(61)	$	1,992
Net earnings	—		—		—		11		—		—		11
Dividends declared ($0.25 per share)	—		—		—		(12)		—		—		(12)
Purchase of treasury stock	—		—		(9)		—		—		—		(9)
Other comprehensive loss	—		—		—		—		—		(61)		(61)
Share-based compensation expense	—		3		—		—		—		—		3

Net transfers to former parent	—		—		—		—		(32)		—		(32)
Reclassification of former parent's net investment and issuance of ordinary shares in connection with Spin-Off	1		2,020		—		—		(2,021)		—		—



Balance, September 30, 2023	$	1	$	2,023	$	(9)	$	(1)	$	—	$	(122)	$	1,892



(in millions)	Former parent investment		Accumulated other comprehensive loss		Noncontrolling interest		Total equity
Balance, June 30, 2022	$	1,755	$	(31)	$	—	$	1,724
Net earnings	89		—		—		89
Other comprehensive loss	—		(104)		—		(104)

Net transfers from former parent	43		—		—		43
Balance, September 30, 2022	$	1,887	$	(135)	$	—	$	1,752



(in millions)	Issued common stock		Additional paid-in capital		Treasury stock		Retained deficit		Former parent investment		Accumulated other comprehensive loss		Total equity
Balance, December 31, 2022	$	—	$	—	$	—	$	—	$	1,731	$	(88)	$	1,643

Net earnings	—		—		—		11		70		—		81
Dividends declared ($0.25 per share)	—		—		—		(12)		—		—		(12)
Purchase of treasury stock	—		—		(9)		—		—		—		(9)
Other comprehensive loss	—		—		—		—		—		(34)		(34)
Share-based compensation expense	—		3		—		—		—		—		3
Net transfers from former parent	—		—		—		—		220		—		220
Reclassification of former parent's net investment and issuance of ordinary shares in connection with Spin-Off	1		2,020		—		—		(2,021)		—		—



Balance, September 30, 2023	$	1	$	2,023	$	(9)	$	(1)	$	—	$	(122)	$	1,892

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(in millions)	Former parent investment		Accumulated other comprehensive loss		Noncontrolling interest		Total equity
Balance, December 31,	$	1,647	$	62	$	3	$	1,712
Net earnings	187		—				187
Other comprehensive loss	—		(197)		—		(197)
Purchase of noncontrolling interest	—		—		(3)		(3)
Net transfers from former parent	53		—		—		53
Balance, September 30, 2022	$	1,887	$	(135)	$	—	$	1,752

NOTE 17 ACCUMULATED OTHER COMPREHENSIVE LOSS

The following tables summarizes the activity within accumulated other comprehensive loss:


(in millions)	Foreign currency translation adjustments		Defined benefit pension plans		Hedge instruments		Total
Beginning balance, June 30, 2023	$	(55)	$	(7)	$	1	$	(61)
Comprehensive income (loss)	(58)		(3)		(1)		(62)
Income taxes associated with comprehensive income	—		1		—		1

Ending Balance, September 30, 2023	$	(113)	$	(9)	$	—	$	(122)


(in millions)	Foreign currency translation adjustments		Defined benefit pension plans		Hedge instruments		Total
Beginning balance, June 30, 2022	$	(82)	$	52	$	(1)	$	(31)
Comprehensive income (loss)	(99)		(7)		1		(105)
Income taxes associated with comprehensive income	—		1		—		1

Ending Balance, September 30, 2022	$	(181)	$	46	$	—	$	(135)


(in millions)	Foreign currency translation adjustments		Defined benefit pension plans		Hedge instruments		Total
Beginning Balance, December 31, 2022	$	(85)	$	(6)	$	3	$	(88)
Comprehensive income (loss)	(28)		(4)		(3)		(35)
Income taxes associated with comprehensive income	—		1		—		1

Ending Balance, September 30, 2023	$	(113)	$	(9)	$	—	$	(122)

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(in millions)	Foreign currency translation adjustments		Defined benefit pension plans		Hedge instruments		Total
Beginning Balance, December 31, 2021	$	5	$	59	$	(2)	$	62
Comprehensive income (loss)	(186)		(16)		2		(200)
Income taxes associated with comprehensive income	—		3		—		3

Ending Balance, September 30, 2022	$	(181)	$	46	$	—	$	(135)

NOTE 18 CONTINGENCIES

In the course of its business, the Company is party to various commercial and legal claims, actions and complaints, including matters involving warranty claims, intellectual property claims, governmental investigations and related proceedings, including relating to alleged or actual violations of vehicle emissions standards, general liability and various other risks. It is not possible to predict with certainty whether or not the Company will ultimately be successful in any of these commercial and legal matters or, if not, what the impact might be. The Company’s management does not believe that adverse outcomes in any of these commercial and legal claims, actions and complaints are reasonably likely to have a material adverse effect on the Company’s results of operations, financial position or cash flows. An adverse outcome could, nonetheless, be material to the results of operations or cash flows.

NOTE 19 RELATED-PARTY TRANSACTIONS

Pursuant to the Spin-Off, BorgWarner ceased to be a related party to PHINIA and accordingly, no related party transactions or balances have been reported subsequent to July 3, 2023. In connection with the Spin-Off, we entered into a number of agreements with BorgWarner to govern the Spin-Off and provide a framework for the relationship between the parties going forward, including a Transition Services Agreement, Tax Matters Agreement, and certain Contract Manufacturing Agreements.

The following discussion summarizes activity between the Company and BorgWarner that occurred prior to the completion of the Spin-Off.

Allocation of General Corporate and Other Expenses

The Condensed Consolidated Statements of Operations include expenses for certain centralized functions and other programs provided and administered by BorgWarner that were charged directly to the Company prior to the Spin-Off. In addition, for purposes of preparing the financial statements on a carve-out basis, a portion of BorgWarner’s total corporate expenses was allocated to the Company. Similarly, certain centralized expenses incurred by the Company prior to the Spin-Off on behalf of subsidiaries of BorgWarner had been allocated to BorgWarner. See Note 1, “Basis Of Presentation,” for a discussion of the methodology used to allocate corporate expenses for purposes of preparing these financial statements on a carve-out basis for periods prior to July 3, 2023.

Net corporate allocation expenses in nine months ended September 30, 2023 totaled $89 million, all of which were incurred prior to the Spin-Off. For the three and nine months ended September 30, 2022 net corporate allocation expenses totaled $26 million and $95 million, respectively. These expenses were primarily included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

Related-Party Royalty Income and Related-Party R&D

The Company participated in royalty arrangements and provided applications testing and other R&D services to BorgWarner prior to the Spin-Off. See Note 4, “Other operating expense (income), net” for additional information.

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Due from BorgWarner

In the Condensed Consolidated Balance Sheets, the Company presents $142 million within Accounts receivable and $208 million within Investments and long-term receivables as of December 31, 2022. These amounts were previously presented as Due from BorgWarner, current and Due from BorgWarner, non-current, respectively.

Due to BorgWarner

In the Condensed Consolidated Balance Sheets, the Company presents $186 million within Accounts payable and $99 million within Other current liabilities. These amounts were previously presented as Due to BorgWarner, current. In addition, the Company presents $957 within Other non-current liabilities as of December 31, 2022. These amounts were previously presented as Due to BorgWarner, non-current.

Net Transfers from (to) BorgWarner

Net transfers from (to) BorgWarner are included within Former parent investment in the Condensed Consolidated Statements of Changes in Equity. The components of the transfers from (to) BorgWarner are as follows:


	Nine months ended September 30,
(in millions)		2023		2022
General financing activities		$	(63)	$	(22)
Cash pooling and other equity settled balances with BorgWarner		(64)		(11)
Related-party notes converted to equity		260		—
Corporate allocations		89		95
Research and development income from BorgWarner		(2)		(9)
Total net transfers from BorgWarner		$	220	$	53
Exclude non-cash items:
Stock-based compensation		$	(4)	$	(7)
Other non-cash activities with BorgWarner, net		(16)		(32)
Related-party notes converted to equity		(260)		—
Cash pooling and intercompany financing activities with BorgWarner, net		55		(30)
Total net transfers to BorgWarner per Condensed Consolidated Statements of Cash Flow		$	(5)	$	(16)

NOTE 20 EARNINGS PER SHARE

The Company presents both basic and diluted earnings per share of common stock (“EPS”) amounts. Basic EPS is calculated by dividing net earnings by the weighted average shares of common stock outstanding during the reporting period. Diluted EPS is calculated by dividing net earnings by the weighted average shares of common stock and common stock equivalents outstanding during the reporting period.

For periods prior to July 3, 2023, the denominator for basic and diluted earnings per share was calculated using the 47.0 million PHINIA ordinary shares outstanding immediately following the Spin-Off. The same number of shares was used to calculate basic and diluted earnings per share in those periods since no PHINIA equity awards were outstanding prior to the Spin-Off.

The dilutive impact of stock-based compensation is calculated using the treasury stock method. The treasury stock method assumes that the Company uses the assumed proceeds from the exercise of

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awards to repurchase common stock at the average market price during the period. The assumed proceeds under the treasury stock method include the purchase price that the grantee will pay in the future and compensation cost for future service that the Company has not yet recognized.

The following table reconciles the numerators and denominators used to calculate basic and diluted earnings per share of common stock:


	Three months ended September 30,				Nine months ended September 30,
(in millions, except per share amounts)	2023		2022		2023		2022
Basic earnings per share:
Net earnings	$	11	$	89	$	81	$	187
Weighted average shares of common stock outstanding	47.0		47.0		47.0		47.0
Basic earnings per share of common stock	$	0.24	$	1.89	$	1.72	$	3.98

Diluted earnings per share:
Net earnings	$	11	$	89	$	81	$	187
Weighted average shares of common stock outstanding	47.0		47.0		47.0		47.0
Effect of stock-based compensation	0.1		—		—		—
Weighted average shares of common stock outstanding including dilutive shares	47.1		47.0		47.0		47.0
Diluted earnings per share of common stock	$	0.24	$	1.89	$	1.72	$	3.98

NOTE 21 REPORTABLE SEGMENTS AND RELATED INFORMATION

The Company’s business is comprised of two reportable segments, which are further described below. These segments are strategic business groups, which are managed separately as each represents a specific grouping of related automotive components and systems.

•Fuel Systems. This segment provides advanced fuel injection systems, fuel delivery modules, canisters, sensors, electronic control modules and associated software. Our highly engineered fuel injection systems portfolio includes pumps, injectors, fuel rail assemblies, engine control modules, and complete systems, including software and calibration services, that reduce emissions and improve fuel economy for traditional and hybrid applications.

•Aftermarket. Through this segment, the Company sells products to independent aftermarket customers and OES customers. Its product portfolio includes a wide range of products as well as maintenance, test equipment and vehicle diagnostics solutions. The Aftermarket segment also includes sales of starters and alternators to OEMs.

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, other net expenses 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.

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The following tables show segment information and Segment AOI for the Company’s reportable segments:

Net Sales by Reportable Segment


	Three months ended September 30, 2023						Nine months ended September 30, 2023
(in millions)	Customers		Inter-segment		Net		Customers		Inter-segment		Net
Fuel Systems	$	561	$	59	$	620	$	1,621	$	173	$	1,794
Aftermarket	335		(3)		332		997		4		1,001
Inter-segment eliminations	—		(56)		(56)		—		(177)		(177)
Total	$	896	$	—	$	896	$	2,618	$	—	$	2,618


	Three months ended September 30, 2022						Nine months ended September 30, 2022
(in millions)	Customers		Inter-segment		Net		Customers		Inter-segment		Net
Fuel Systems	$	534	$	63	$	597	$	1,545	$	162	$	1,707
Aftermarket	325		2		327		952		6		958
Inter-segment eliminations	—		(65)		(65)		—		(168)		(168)
Total	$	859	$	—	$	859	$	2,497	$	—	$	2,497

Segment Adjusted Operating Income


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Fuel Systems	$	55	$	84	$	160	$	193
Aftermarket	46		48		143		137
Segment AOI	101		132		303		330
Corporate, including stock-based compensation	19		17		45		61
Related-party royalty income	—		(9)		(17)		(22)
Merger, acquisition and divestiture expense, net	13		5		72		27
Intangible asset amortization expense	7		7		21		21
Restructuring expense (Note 5)	4		3		10		8
Asset impairments and lease modifications	—		(2)		—		4
Equity in affiliates' earnings, net of tax	(2)		(5)		(8)		(8)
Interest expense	22		5		34		14
Interest income	(4)		(2)		(9)		(3)
Other postretirement income	—		(8)		(1)		(25)
Earnings before income taxes	42		121		156		253
Provision for income taxes	31		32		75		66
Net earnings	$	11	$	89	$	81	$	187

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Cautionary Statements For Forward-Looking Information

Statements in this Form 10-Q (including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) may contain forward-looking statements that are based on management’s current outlook, expectations, estimates and projections. Words such as “anticipates,” “believes,” “continues,” “could,” “designed,” “effect,” “estimates,” “evaluates,” “expects,” “forecasts,” “goal,” “initiative,” “intends,” “may,” “outlook,” “plans,” “potential,” “predicts,” “project,” “pursue,” “seek,” “should,” “target,” “when,” “will,” “would” and variations of such words and similar expressions are intended to identify such forward-looking statements. Further, all statements, other than statements of historical fact contained or incorporated by reference in this Form 10-Q, that we expect or anticipate will or may occur in the future regarding our financial position, business strategy and measures to implement that strategy, including changes to operations, competitive strengths, goals, expansion and growth of our business and operations, plans, references to future success and other such matters, are forward-looking statements. Accounting estimates, such as those described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Information Statement furnished with the Company’s Registration Statement on Form 10-12B/A filed with the Securities and Exchange Commission (“SEC”) on June 9, 2023 and subsequent reports filed with the SEC, are inherently forward-looking. All forward looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. Forward-looking statements are not guarantees of performance and our actual results may differ materially from those expressed, projected or implied in or by the forward-looking statements.

You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. Forward-looking statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. These risks and uncertainties, among others, include: the ability of PHINIA to succeed as a standalone publicly traded company, which is a smaller company relative to BorgWarner; the possibility that the Spin-Off will not achieve its intended benefits; the possibility of disruption, including changes to existing business relationships, disputes, litigation or unanticipated costs; the uncertainty regarding the expected financial performance of PHINIA; supply disruptions, work stoppages or similar events impacting us or our customers, such as the United Auto Workers (“UAW”) strikes against Ford, General Motors and Stellantis North America and the current shortage of semiconductor chips that has impacted OEM customers and their suppliers, including us; commodities availability and pricing; competitive challenges from existing and new competitors including OEM customers; the challenges associated with rapidly-changing technologies, and our ability to innovate in response; the ability to identify targets and consummate acquisitions on acceptable terms; the failure to promptly and effectively integrate acquired businesses; the potential for unknown or inestimable liabilities relating to acquired businesses; our dependence on commercial vehicle, industrial application and light vehicle production, which are highly cyclical and subject to disruptions; our reliance on major OEM customers; fluctuations in interest rates and foreign currency exchange rates; our dependence on information systems; the uncertainty of the global economic environment; the outcome of existing or any future legal proceedings, including litigation with respect to various claims and any governmental investigations; future changes in laws and regulations, including, by way of example, taxes and tariffs, in the countries in which we operate; impacts from any potential future acquisition or disposition transactions; and any other risks noted under “Risk Factors” and in other reports that we file with the SEC. We do not undertake any obligation to update or announce publicly any updates to or revisions to any of the forward-looking statements in this Form 10-Q to reflect any change in our expectations or any change in events, conditions, circumstances or assumptions underlying the statements.

This section, and the similar discussions contained in subsequent reports filed with the SEC, the discussions contained in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Information

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Statement furnished with the Company’s Registration Statement on Form 10-12B/A filed on June 9, 2023, and the similar discussions contained in subsequent reports filed with the SEC, are intended to provide cautionary statements. Those cautionary statements should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties, including without limitation those not currently known to us or that we currently believe are immaterial, also may impair our business, operations, liquidity, financial condition and prospects.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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.

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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.

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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:


	Three months ended September 30, 2023
(in millions)	2023				2022
Net sales			% of net sales				% 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.

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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.

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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.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg


	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


	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)


Issuer Purchases of Equity Securities
Period	Total number of shares repurchased	Average price per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under plans or programs (in millions)
July 1, 2023 - July 31, 2023	—	—		—	—
August 1, 2023 - August 31, 2023	—	—		—	$	150
September 1, 2023 - September 30, 2023	328,344	$	27.40	328,344	$	141
Total	328,344	$	27.40	328,344	$	141

PHINIA (PHIN) 10-Q2023 Q3 Quarterly report

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