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 March 31, 2024
OR
☐ | 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 April 19, 2024, the registrant had 45,682,984 shares of voting common stock outstanding.
PHINIA INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 2024
INDEX
Page No. | |||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHINIA INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in millions) | March 31, 2024 | December 31, 2023 | |||||||||
ASSETS | |||||||||||
Cash and cash equivalents | $ | 325 | $ | 365 | |||||||
Receivables, net | 1,023 | 1,017 | |||||||||
Inventories | 489 | 487 | |||||||||
Prepayments and other current assets | 80 | 58 | |||||||||
Total current assets | 1,917 | 1,927 | |||||||||
Property, plant and equipment, net | 888 | 921 | |||||||||
Investments and long-term receivables | 120 | 115 | |||||||||
Goodwill | 491 | 499 | |||||||||
Other intangible assets, net | 403 | 417 | |||||||||
Other non-current assets | 159 | 162 | |||||||||
Total assets | $ | 3,978 | $ | 4,041 | |||||||
LIABILITIES AND EQUITY | |||||||||||
Short-term borrowings and current portion of long-term debt | $ | 90 | $ | 89 | |||||||
Accounts payable | 612 | 639 | |||||||||
Other current liabilities | 420 | 420 | |||||||||
Total current liabilities | 1,122 | 1,148 | |||||||||
Long-term debt | 706 | 709 | |||||||||
Retirement-related liabilities | 133 | 132 | |||||||||
Other non-current liabilities | 167 | 165 | |||||||||
Total liabilities | 2,128 | 2,154 | |||||||||
Commitments and contingencies (Note 15) | |||||||||||
Common stock | 1 | 1 | |||||||||
Additional paid-in capital | 2,018 | 2,031 | |||||||||
Retained earnings | 26 | 9 | |||||||||
Accumulated other comprehensive loss | (153) | (131) | |||||||||
Treasury stock | (42) | (23) | |||||||||
Total equity | 1,850 | 1,887 | |||||||||
Total liabilities and equity | $ | 3,978 | $ | 4,041 |
See accompanying Notes to Condensed Consolidated Financial Statements.
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PHINIA INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended March 31, | |||||||||||||||||||||||
(in millions, except per share amounts) | 2024 | 2023 | |||||||||||||||||||||
Net sales | $ | 863 | $ | 835 | |||||||||||||||||||
Cost of sales | 671 | 663 | |||||||||||||||||||||
Gross profit | 192 | 172 | |||||||||||||||||||||
Selling, general and administrative expenses | 104 | 99 | |||||||||||||||||||||
Other operating expense, net | 17 | 15 | |||||||||||||||||||||
Operating income | 71 | 58 | |||||||||||||||||||||
Equity in affiliates’ earnings, net of tax | (3) | (3) | |||||||||||||||||||||
Interest expense | 22 | 6 | |||||||||||||||||||||
Interest income | (4) | (3) | |||||||||||||||||||||
Earnings before income taxes | 56 | 58 | |||||||||||||||||||||
Provision for income taxes | 27 | 23 | |||||||||||||||||||||
Net earnings | $ | 29 | $ | 35 | |||||||||||||||||||
Earnings per share — basic | $ | 0.63 | $ | 0.75 | |||||||||||||||||||
Earnings per share— diluted | $ | 0.62 | $ | 0.75 | |||||||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||
Basic | 46.1 | 47.0 | |||||||||||||||||||||
Diluted | 46.5 | 47.0 |
See accompanying Notes to Condensed Consolidated Financial Statements.
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PHINIA INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
(in millions) | 2024 | 2023 | |||||||||||||||||||||||||||||||||
Net earnings | $ | 29 | $ | 35 | |||||||||||||||||||||||||||||||
Other comprehensive (loss) income | |||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments(1) | (21) | 20 | |||||||||||||||||||||||||||||||||
Defined benefit pension plans(1) | (1) | (1) | |||||||||||||||||||||||||||||||||
Hedge instruments(1) | — | 2 | |||||||||||||||||||||||||||||||||
Total other comprehensive (loss) income | (22) | 21 | |||||||||||||||||||||||||||||||||
Comprehensive income | $ | 7 | $ | 56 |
_____________
(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)
Three Months Ended March 31, | |||||||||||
(in millions) | 2024 | 2023 | |||||||||
OPERATING | |||||||||||
Net earnings | $ | 29 | $ | 35 | |||||||
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and tooling amortization | 34 | 34 | |||||||||
Intangible asset amortization | 7 | 7 | |||||||||
Restructuring expense, net of cash paid | 2 | 3 | |||||||||
Stock-based compensation expense | 4 | 1 | |||||||||
Deferred income tax expense | 4 | 8 | |||||||||
Other non-cash adjustments, net | 2 | (8) | |||||||||
Changes in assets and liabilities, excluding foreign currency translation adjustments: | |||||||||||
Receivables | (36) | (36) | |||||||||
Inventories | (6) | (29) | |||||||||
Prepayments and other current assets | (13) | 1 | |||||||||
Accounts payable and other current liabilities | 6 | (43) | |||||||||
Prepaid taxes and income taxes payable | 12 | 24 | |||||||||
Other assets and liabilities | (14) | (29) | |||||||||
Retirement benefit plan contributions | — | (1) | |||||||||
Net cash provided by (used in) operating activities | 31 | (33) | |||||||||
INVESTING | |||||||||||
Capital expenditures, including tooling outlays | (43) | (38) | |||||||||
Proceeds from asset disposals and other, net | 1 | — | |||||||||
Net cash used in investing activities | (42) | (38) | |||||||||
FINANCING | |||||||||||
Repayments of debt, including current portion | (3) | — | |||||||||
Dividends paid to PHINIA stockholders | (12) | — | |||||||||
Payments for purchase of treasury stock | (23) | — | |||||||||
Payments for stock-based compensation items | (3) | — | |||||||||
Cash outflows related to debt due to former parent | — | (100) | |||||||||
Cash inflows related to debt due from former parent | — | 30 | |||||||||
Net transfers to former parent | — | 67 | |||||||||
Net cash used in financing activities | (41) | (3) | |||||||||
Effect of exchange rate changes on cash | 12 | 4 | |||||||||
Net decrease in cash and cash equivalents | (40) | (70) | |||||||||
Cash and cash equivalents at beginning of year | 365 | 251 | |||||||||
Cash and cash equivalents at end of period | $ | 325 | $ | 181 | |||||||
SUPPLEMENTAL CASH FLOW INFORMATION | |||||||||||
Cash paid during the year for: | |||||||||||
Interest, net | $ | 14 | $ | — | |||||||
Income taxes, net of refunds | $ | 18 | $ | 1 | |||||||
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., a manufacturer and supplier of automotive industry components and parts (BorgWarner, or Former Parent) announced plans for the complete legal and structural separation of its Fuel Systems and Aftermarket businesses 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 BorgWarner common stock received one share of PHINIA common stock for every five shares of BorgWarner common stock held on June 23, 2023, the record date. In lieu of fractional shares of PHINIA, BorgWarner stockholders 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 months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. The balance sheet as of December 31, 2023 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. The Company has also corrected for certain immaterial errors that impacted balance sheet footnote disclosures as of December 31, 2023.
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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. For the three months ended March 31, 2023, net corporate allocation expenses totaled $35 million. 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 and $1 million at March 31, 2024 and December 31, 2023, respectively, 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. As of March 31, 2024, the balance of contract liabilities was $7 million, all of which was recorded in Other non-current liabilities. As of December 31, 2023, the balance of contract liabilities was $7 million, of which $6 million was reflected in Other current liabilities and $1 million was reflected as Other non-current liabilities. These amounts are reflected as revenue over the term of the arrangement (typically three to seven years) as the underlying products are shipped and represent the Company’s remaining performance obligations as of the end of the period.
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The following table represents a disaggregation of revenue from contracts with customers by reportable segment and region for the three months ended March 31, 2024 and 2023. Refer to Note 18, “Reportable Segments And Related Information” to the Condensed Consolidated Financial Statements, for more information.
Three Months Ended March 31, 2024 | |||||||||||||||||
(In millions) | Fuel Systems | Aftermarket | Total | ||||||||||||||
Americas | $ | 187 | $ | 192 | $ | 379 | |||||||||||
Europe | 227 | 125 | 352 | ||||||||||||||
Asia | 113 | 19 | 132 | ||||||||||||||
Total | $ | 527 | $ | 336 | $ | 863 | |||||||||||
Three Months Ended March 31, 2023 | |||||||||||||||||
(In millions) | Fuel Systems | Aftermarket | Total | ||||||||||||||
Americas | $ | 167 | $ | 198 | $ | 365 | |||||||||||
Europe | 223 | 112 | 335 | ||||||||||||||
Asia | 119 | 16 | 135 | ||||||||||||||
Total | $ | 509 | $ | 326 | $ | 835 | |||||||||||
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 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 March 31, | |||||||||||||||||||||||
(in millions) | 2024 | 2023 | |||||||||||||||||||||
Gross R&D expenditures | $ | 52 | $ | 49 | |||||||||||||||||||
Customer reimbursements | (25) | (20) | |||||||||||||||||||||
Net R&D expenditures | $ | 27 | $ | 29 |
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NOTE 4 OTHER OPERATING EXPENSE, NET
Items included in Other operating expense, net consist of:
Three Months Ended March 31, | |||||||||||||||||||||||
(in millions) | 2024 | 2023 | |||||||||||||||||||||
Separation and transaction costs | $ | 17 | $ | 18 | |||||||||||||||||||
Restructuring | 2 | 4 | |||||||||||||||||||||
Royalty income from Former Parent | — | (5) | |||||||||||||||||||||
R&D income from Former Parent | — | (1) | |||||||||||||||||||||
Other operating income, net | (2) | (1) | |||||||||||||||||||||
Other operating expense, net | $ | 17 | $ | 15 |
Separation and transaction costs: During the three months ended March 31, 2024 and 2023, the Company recorded separation and transaction costs of $17 million and $18 million, respectively, primarily related to professional fees and other costs associated with the separation of the Company.
Restructuring: The Company recorded $2 million and $4 million of restructuring costs for individually approved restructuring actions that primarily related to reductions in headcount in the three months ended March 31, 2024 and 2023, respectively, in the Fuel Systems segment.
Royalty income from Former Parent: The Company participated in royalty arrangements with BorgWarner businesses prior to the Spin-Off, which involved the licensing of the Delphi Technologies trade name and product-related intellectual properties.
R&D income from Former Parent: The Company provided application testing and other R&D services for other BorgWarner businesses prior to the Spin-Off.
NOTE 5 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 March 31, 2024 and 2023 was 48% and 39%, respectively. The effective tax rate for the three months ended March 31, 2024 increased as compared to the prior year as a result of a change in the jurisdictional mix of pre-tax earnings as well as releases of unrecognized tax benefit reserves that occurred in the three months ended March 31, 2023 that did not occur in the three months ended March 31, 2024.
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 Former Parent’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 the Former Parent). 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 the Former Parent may not be included in these Condensed Consolidated
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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 the Former Parent. Items such as net operating losses, other deferred taxes, income taxes payable, liabilities for uncertain tax positions and valuation allowances may exist in the Consolidated Financial Statements that may or may not exist in the Former Parent’s Consolidated Financial Statements.
For periods subsequent to July 3, 2023, these items are reported based on tax filings and tax attributes of the Company’s legal entities. Indemnification assets and liabilities have been reported for amounts payable to or recoverable from the Former Parent under the Tax Matters Agreement for taxes associated with the period prior to the Spin-Off. The Tax Matters Agreement generally governs the Company’s and the Former Parent’s respective rights, responsibilities and obligations after the distribution with respect to taxes for any tax period ending on or before the distribution date, as well as tax periods beginning before and ending after the distribution date. Generally, the Former Parent is liable for all pre-distribution U.S. income taxes, foreign income taxes, certain non-income taxes attributable to the company’s business, and liabilities for taxes that were incurred as a result of restructuring activities undertaken to effectuate the separation. The Company is generally liable for all other taxes attributable to its business.
The Organization for Economic Co-operation and Development (OECD) has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar 2), with certain aspects of Pillar 2 effective January 1, 2024 and other aspects effective January 1, 2025. While it is uncertain whether the U.S. will enact legislation to adopt Pillar 2, certain countries in which the Company operates have adopted legislation, and other countries are in the process of introducing legislation to implement Pillar 2. The Company does not expect Pillar 2 to have a material impact on its effective tax rate or its consolidated results of operation, financial position or cash flows.
NOTE 6 INVENTORIES
A summary of Inventories is presented below:
(in millions) | March 31, 2024 | December 31, 2023 | |||||||||
Raw material and supplies | $ | 264 | $ | 286 | |||||||
Work-in-progress | 51 | 46 | |||||||||
Finished goods | 174 | 155 | |||||||||
Inventories | $ | 489 | $ | 487 |
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NOTE 7 OTHER CURRENT AND NON-CURRENT ASSETS
(in millions) | March 31, 2024 | December 31, 2023 | |||||||||
Prepayments and other current assets: | |||||||||||
Prepaid taxes | $ | 36 | $ | 26 | |||||||
Prepaid software | 12 | 5 | |||||||||
Customer return assets | 8 | 8 | |||||||||
Prepaid engineering | 6 | 3 | |||||||||
Prepaid customer tooling | 4 | 3 | |||||||||
Deposits | 3 | 3 | |||||||||
Prepaid insurance | 2 | 3 | |||||||||
Other | 9 | 7 | |||||||||
Total prepayments and other current assets | $ | 80 | $ | 58 | |||||||
Investments and long-term receivables: | |||||||||||
Long-term receivables | $ | 50 | $ | 46 | |||||||
Investment in equity affiliates | 49 | 48 | |||||||||
Due from Former Parent | 17 | 17 | |||||||||
Investment in equity securities | 4 | 4 | |||||||||
Total investments and long-term receivables | $ | 120 | $ | 115 | |||||||
Other non-current assets: | |||||||||||
Deferred income taxes | $ | 61 | $ | 61 | |||||||
Operating leases | 59 | 63 | |||||||||
Customer incentive payments | 10 | 10 | |||||||||
Other | 29 | 28 | |||||||||
Total other non-current assets | $ | 159 | $ | 162 |
NOTE 8 GOODWILL AND OTHER INTANGIBLES
During the fourth quarter of each year, the Company assesses its goodwill and indefinite-lived intangibles assigned to each of its reporting units for impairment by either performing a qualitative assessment or a quantitative analysis. No events or circumstances were noted in the first three months of 2024 requiring additional assessment or testing.
A summary of the components in the carrying amount of goodwill as of March 31, 2024 and December 31, 2023 is as follows:
(in millions) | Fuel Systems | Aftermarket | Total | ||||||||||||||
Gross goodwill balance, December 31, 2023 | $ | 61 | $ | 551 | $ | 612 | |||||||||||
Accumulated impairment losses | — | (113) | (113) | ||||||||||||||
Net goodwill balance, December 31, 2023 | $ | 61 | $ | 438 | $ | 499 | |||||||||||
Goodwill during the period: | |||||||||||||||||
Translation adjustment | (2) | (6) | (8) | ||||||||||||||
Net goodwill balance, March 31, 2024 | $ | 59 | $ | 432 | $ | 491 |
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The Company’s other intangible assets, primarily from acquisitions, consist of the following:
March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
(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 | $ | 146 | $ | 43 | $ | 103 | $ | 149 | $ | 41 | $ | 108 | ||||||||||||||||||||||||||||
Customer relationships | 14 - 15 | 265 | 107 | 158 | 268 | 104 | 164 | ||||||||||||||||||||||||||||||||||
Total amortized intangible assets | 411 | 150 | 261 | 417 | 145 | 272 | |||||||||||||||||||||||||||||||||||
Unamortized trade names | 142 | — | 142 | 145 | — | 145 | |||||||||||||||||||||||||||||||||||
Total other intangible assets | $ | 553 | $ | 150 | $ | 403 | $ | 562 | $ | 145 | $ | 417 |
NOTE 9 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. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of the Company’s warranty accrual at the time an obligation becomes probable and can be reasonably estimated. Management believes that the warranty accrual is appropriate; however, in certain cases, initial customer claims exceed the amount accrued. Facts may become known related to these claims that may result in additional losses that could be material to the Company’s results of operations or cash flows. 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.
The following table summarizes the activity in the product warranty accrual accounts:
(in millions) | 2024 | 2023 | |||||||||
Beginning balance, January 1 | $ | 56 | $ | 60 | |||||||
Provisions for current period sales | 9 | 8 | |||||||||
Payments | (10) | (13) | |||||||||
Ending balance, March 31, | $ | 55 | $ | 55 |
The product warranty liability is classified in the Condensed Consolidated Balance Sheets as follows:
(in millions) | March 31, 2024 | December 31, 2023 | ||||||||||||||||||
Other current liabilities | $ | 32 | $ | 30 | ||||||||||||||||
Other non-current liabilities | 23 | 26 | ||||||||||||||||||
Total product warranty liability | $ | 55 | $ | 56 | ||||||||||||||||
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NOTE 10 NOTES PAYABLE AND DEBT
As of March 31, 2024 and December 31, 2023, the Company had debt outstanding as follows:
(in millions) | March 31, 2024 | December 31, 2023 | |||||||||
Short-term debt | |||||||||||
Short-term borrowings | $ | 75 | $ | 75 | |||||||
Long-term debt | |||||||||||
5.000% Senior Notes due 10/01/25 ($24 million par value) | $ | 25 | $ | 25 | |||||||
Term Loan A Facility (net of $3 unamortized issuance costs) | 293 | 295 | |||||||||
Term Loan B Facility (net of $5 unamortized issuance costs and $15 unamortized discount) | 403 | 403 | |||||||||
Total long-term debt | $ | 721 | $ | 723 | |||||||
Less: current portion | 15 | 14 | |||||||||
Long-term debt, net of current portion | $ | 706 | $ | 709 |
As of March 31, 2024, the estimated fair values of the Company’s Senior Notes, Term Loan A Facility and Term Loan B Facility (each as defined below) totaled $753 million, which is $32 million higher than carrying value for the same period. As of December 31, 2023, the estimated fair value of the Company’s Senior Notes, Term Loan A Facility and Term Loan B Facility totaled $758 million, which is $35 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 (the Credit Agreement) consisting of a $500 million revolving credit facility (the Revolving Facility), a $300 million Term Loan A Facility (the Term Loan A Facility) and a $425 million Term Loan B Facility (the Term Loan B Facility; together with the Revolving Facility and the Term Loan A Facility, collectively, the Facilities) in connection with the Spin-Off that occurred on the same date. As of March 31, 2024, the Company had $75 million of outstanding borrowings under the Revolving Facility (exclusive of $1 million of letters of credit outstanding). As of March 31, 2024, the Company had availability under the Revolving Facility of $424 million. The Company was in compliance with all covenants as of March 31, 2024.
On April 4, 2024, the Company, as borrower, and certain subsidiaries of the Company, each acting as guarantors, entered into Amendment No. 1 to the Credit Agreement (the Credit Agreement Amendment). The Credit Agreement Amendment, among other things, (i) modifies certain covenants in the Credit Agreement, (ii) removes the mandatory prepayment based on quarterly and annual operating cash flow calculations, and (iii) increases the total net leverage ratio required to be satisfied under the Company’s financial covenant from 3.00:1.00 to 3.25:1.00 (subject to a step-up to 3.75:1.00 in connection with a qualifying acquisition for the fiscal quarter when such qualifying acquisition is consummated and the following three fiscal quarters).
Senior Secured Notes due 2029
On April 4, 2024, the Company issued $525 million aggregate principal amount of 6.75% Senior Secured Notes due 2029 (the “2029 Notes”) pursuant to an indenture among the Company, as issuer, certain subsidiaries of the Company named as guarantors, and U.S. Bank Trust Company, National Association, as trustee and collateral agent. The 2029 Notes were sold to investors at 100% plus accrued interest, if any, from April 4, 2024 in a private transaction exempt from the registration requirements of the Securities
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Act of 1933, as amended. The net proceeds of the offering of the 2029 Notes were used to repay all of the Company’s outstanding borrowings and accrued interest under the Term Loan B Facility and the Revolving Facility and to pay fees and expenses in connection with the offering. During the second quarter of 2024, the Company expects to record a non-cash pre-tax loss on extinguishment of approximately $20 million related to the difference between the repayment amount and net carrying amount of the Term Loan B Facility.
The 2029 Notes bear interest at a rate of 6.75% per annum. Interest on the 2029 Notes is payable semiannually on April 15 and October 15 of each year, commencing on October 15, 2024. The 2029 Notes will mature on April 15, 2029.
The 2029 Notes are senior secured obligations of the Company and are jointly and severally, fully and unconditionally, guaranteed on a senior secured basis by each of the Company’s existing and future direct and indirect domestic subsidiaries that incurs or guarantees indebtedness under the Facilities. The 2029 Notes and the guarantees are secured by a first-priority security interest in substantially all of the Company’s and the guarantors’ assets, subject to certain excluded assets, exceptions and permitted liens, which security interest ranks equally with the first-priority security interest securing the Facilities.
Senior Notes due 2025
In 2020, the Former Parent completed its acquisition of Delphi Technologies PLC (Delphi Technologies). In connection therewith, the Former Parent completed its offer to exchange Delphi Technologies’ outstanding 5.0% Senior Notes due 2025 (the 2025 Notes). Approximately 97% of the $800 million total outstanding principal amount of the 2025 Notes, were validly exchanged and cancelled for new BorgWarner notes. In connection with the Spin-Off, the obligations under the remaining $24 million in aggregate principal amount of the 2025 Notes were assumed by the Company.
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NOTE 11 OTHER CURRENT AND NON-CURRENT LIABILITIES
Additional detail related to liabilities is presented in the table below:
(in millions) | March 31, 2024 | December 31, 2023 | |||||||||
Other current liabilities: | |||||||||||
Customer related | $ | 112 | $ | 109 | |||||||
Payroll and employee related | 79 | 92 | |||||||||
Income taxes payable | 61 | 39 | |||||||||
Product warranties (Note 9) | 32 | 30 | |||||||||
Accrued freight | 21 | 21 | |||||||||
Operating leases | 17 | 17 | |||||||||
Supplier related | 13 | 14 | |||||||||
Other non-income taxes | 10 | 8 | |||||||||
Employee termination benefits | 7 | 9 | |||||||||
Legal and professional fees | 7 | 6 | |||||||||
Deferred engineering | 2 | 6 | |||||||||
Deferred income | — | 6 | |||||||||
Other | 59 | 63 | |||||||||
Total other current liabilities | $ | 420 | $ | 420 | |||||||
Other non-current liabilities: | |||||||||||
Deferred income taxes | $ | 60 | $ | 56 | |||||||
Operating leases | 46 | 49 | |||||||||
Product warranties (Note 9) | 23 | 26 | |||||||||
Deferred income | 13 | 7 | |||||||||
Uncertain tax positions | 14 | 15 | |||||||||
Other | 11 | 12 | |||||||||
Total other non-current liabilities | $ | 167 | $ | 165 |
NOTE 12 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 2024 range from $4 million to $8 million, of which less than $1 million has been contributed through the first three months of the year.
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The components of net periodic benefit income recorded in the Condensed Consolidated Statements of Operations are as follows:
Three Months Ended March 31, | |||||||||||||||||||||||
(in millions) | 2024 | 2023 | |||||||||||||||||||||
Service cost | $ | 1 | $ | — | |||||||||||||||||||
Interest cost | 11 | 10 | |||||||||||||||||||||
Expected return on plan assets | (10) | (10) | |||||||||||||||||||||
Amortization of unrecognized loss | (1) | — | |||||||||||||||||||||
Net periodic benefit cost | $ | 1 | $ | — |
The non-service cost components of net periodic benefit cost are included in Earnings before income taxes in the Condensed Consolidated Statements of Operations.
NOTE 13 STOCKHOLDERS' EQUITY
The changes of the Stockholders’ Equity items during the three months ended March 31, 2024 and 2023, are as follows:
(in millions) | Issued common stock | Additional paid-in-capital | Treasury stock | Retained earnings | Accumulated other comprehensive income (loss) | Total equity | |||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2023 | $ | 1 | $ | 2,031 | $ | (23) | $ | 9 | (131) | $ | 1,887 | ||||||||||||||||||||||||||||||||||||
Dividends declared (0.25 per share) | — | — | — | (12) | — | (12) | |||||||||||||||||||||||||||||||||||||||||
Spin-Off related adjustments | — | (10) | — | — | — | (10) | |||||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | 4 | — | — | — | 4 | |||||||||||||||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | (23) | — | — | (23) | |||||||||||||||||||||||||||||||||||||||||
Net issuance of executive stock plan | — | (7) | 4 | — | — | (3) | |||||||||||||||||||||||||||||||||||||||||
Net earnings | — | — | — | 29 | — | 29 | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | (22) | (22) | |||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2024 | $ | 1 | $ | 2,018 | $ | (42) | $ | 26 | $ | (153) | $ | 1,850 |
(in millions) | Former Parent investment | Accumulated other comprehensive income (loss) | Total equity | ||||||||||||||
Balance, December 31, 2022 | $ | 1,731 | $ | (88) | $ | 1,643 | |||||||||||
Net earnings | 35 | — | 35 | ||||||||||||||
Other comprehensive income | — | 21 | 21 | ||||||||||||||
Net transfers from Former Parent | 93 | — | 93 | ||||||||||||||
Balance, March 31, 2023 | $ | 1,859 | $ | (67) | $ | 1,792 |
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NOTE 14 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, December 31, 2023 | $ | (98) | $ | (33) | $ | — | $ | (131) | |||||||||||||||
Comprehensive loss before reclassifications | (21) | (2) | — | (23) | |||||||||||||||||||
Reclassification from accumulated other comprehensive (loss) income | — | 1 | — | 1 | |||||||||||||||||||
Ending Balance, March 31, 2024 | $ | (119) | $ | (34) | $ | — | $ | (153) |
(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) | 20 | (1) | 2 | 21 | |||||||||||||||||||
Ending Balance, March 31, 2023 | $ | (65) | $ | (7) | $ | 5 | $ | (67) |
NOTE 15 CONTINGENCIES
In the normal course of 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 expect that an adverse outcome in any of these commercial and legal claims, actions and complaints that are currently pending will 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, financial position or cash flows.
NOTE 16 RELATED-PARTY TRANSACTIONS
Pursuant to the Spin-Off, the Former Parent 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 the Former Parent 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 the Former Parent 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 the Former Parent 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 the Former Parent’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
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subsidiaries of the Former Parent had been allocated to the Former Parent. 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, primarily related to separation and transaction costs, in three months ended March 31, 2023 totaled $35 million. These expenses were primarily included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
Royalty Income from Former Parent and R&D Income from Former Parent
The Company participated in royalty arrangements and provided applications testing and other R&D services to the Former Parent prior to the Spin-Off. See Note 4, “Other operating expense, net” for additional information.
Net Transfers from (to) Former Parent
Net transfers from (to) Former Parent are included within Former Parent investment in the Condensed Consolidated Statements of Changes in Equity. The components of the transfers from (to) Former Parent are as follows:
Three Months Ended March 31, | |||||||||||||||||||||||
(in millions) | 2023 | ||||||||||||||||||||||
General financing activities | $ | 169 | |||||||||||||||||||||
Cash pooling and other equity settled balances with Former Parent | (70) | ||||||||||||||||||||||
Related-party notes converted to equity | (40) | ||||||||||||||||||||||
Corporate allocations | 35 | ||||||||||||||||||||||
Research and development income from Former Parent | (1) | ||||||||||||||||||||||
Total net transfers from Former Parent | $ | 93 | |||||||||||||||||||||
Exclude non-cash items: | |||||||||||||||||||||||
Stock-based compensation | $ | (1) | |||||||||||||||||||||
Other non-cash activities with Former Parent, net | (8) | ||||||||||||||||||||||
Related-party notes converted to equity | 40 | ||||||||||||||||||||||
Cash pooling and intercompany financing activities with Former Parent, net | (57) | ||||||||||||||||||||||
Total net transfers to Former Parent per Condensed Consolidated Statements of Cash Flow | $ | 67 |
NOTE 17 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 March 31, | |||||||||||||||||||||||
(in millions, except per share amounts) | 2024 | 2023 | |||||||||||||||||||||
Basic earnings per share: | |||||||||||||||||||||||
Net earnings | $ | 29 | $ | 35 | |||||||||||||||||||
Weighted average shares of common stock outstanding | 46.1 | 47.0 | |||||||||||||||||||||
Basic earnings per share of common stock | $ | 0.63 | $ | 0.75 | |||||||||||||||||||
Diluted earnings per share: | |||||||||||||||||||||||
Net earnings | $ | 29 | $ | 35 | |||||||||||||||||||
Weighted average shares of common stock outstanding | 46.1 | 47.0 | |||||||||||||||||||||
Effect of stock-based compensation | 0.4 | — | |||||||||||||||||||||
Weighted average shares of common stock outstanding including dilutive shares | 46.5 | 47.0 | |||||||||||||||||||||
Diluted earnings per share of common stock | $ | 0.62 | $ | 0.75 |
NOTE 18 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, separation and transaction costs, 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 March 31, 2024 | |||||||||||||||||||||||||||||||||||
(in millions) | Customers | Inter-segment | Net | ||||||||||||||||||||||||||||||||
Fuel Systems | $ | 527 | $ | 49 | $ | 576 | |||||||||||||||||||||||||||||
Aftermarket | 336 | 2 | 338 | ||||||||||||||||||||||||||||||||
Inter-segment eliminations | — | (51) | (51) | ||||||||||||||||||||||||||||||||
Total | $ | 863 | $ | — | $ | 863 |
Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||
(in millions) | Customers | Inter-segment | Net | ||||||||||||||||||||||||||||||||
Fuel Systems | $ | 509 | $ | 58 | $ | 567 | |||||||||||||||||||||||||||||
Aftermarket | 326 | 4 | 330 | ||||||||||||||||||||||||||||||||
Inter-segment eliminations | — | (62) | (62) | ||||||||||||||||||||||||||||||||
Total | $ | 835 | $ | — | $ | 835 |
Segment Adjusted Operating Income
Three Months Ended March 31, | |||||||||||||||||||||||
(in millions) | 2024 | 2023 | |||||||||||||||||||||
Fuel Systems | $ | 55 | $ | 43 | |||||||||||||||||||
Aftermarket | 60 | 48 | |||||||||||||||||||||
Segment AOI | 115 | 91 | |||||||||||||||||||||
Corporate, including stock-based compensation | 18 | 4 | |||||||||||||||||||||
Separation and transaction costs | 17 | 18 | |||||||||||||||||||||
Intangible asset amortization expense | 7 | 7 | |||||||||||||||||||||
Restructuring expense | 2 | 4 | |||||||||||||||||||||
Equity in affiliates' earnings, net of tax | (3) | (3) | |||||||||||||||||||||
Interest expense | 22 | 6 | |||||||||||||||||||||
Interest income | (4) | (3) | |||||||||||||||||||||
Earnings before income taxes | 56 | 58 | |||||||||||||||||||||
Provision for income taxes | 27 | 23 | |||||||||||||||||||||
Net earnings | $ | 29 | $ | 35 |
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Cautionary Statements For Forward-Looking Information
This Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements other than historical fact that provide current expectations or forecasts of future events based on certain assumptions and are not guarantees of future performance. Forward-looking statements use words such as “anticipate,” “believe,” “continue,” “could,” “designed,” “effect,” “estimate,” “evaluate,” “expect,” “forecast,” “goal,” “initiative,” “intend,” “likely,” “may,” “outlook,” “plan,” “potential,” “predict,” “project,” “pursue,” “seek,” “should,” “target,” “when,” “will,” “would,” or other words of similar meaning.
Forward-looking statements are subject to risks, uncertainties, and factors relating to our business and operations, all of which are difficult to predict and which could cause our actual results to differ materially from the expectations expressed in or implied by such forward-looking statements. Risks, uncertainties, and factors that could cause actual results to differ materially from those implied by these forward-looking statements include, but are not limited to: adverse changes in general business and economic conditions, including recessions, adverse market conditions or downturns impacting the vehicle and industrial equipment industries; our ability to deliver new products, services and technologies in response to changing consumer preferences, increased regulation of greenhouse gas emissions, and acceleration of the market for electric vehicles; competitive industry conditions; failure to identify, consummate, effectively integrate or realize the expected benefits from acquisitions or partnerships; pricing pressures from original equipment manufacturers (OEMs); inflation rates and volatility in the costs of commodities used in the production of our products; changes in U.S. administrative policy, including changes to existing trade agreements and any resulting changes in international trade relations; our ability to protect our intellectual property; failure of or disruption in our information technology infrastructure, including a disruption related to cybersecurity; our ability to identify, attract, retain and develop a qualified global workforce; difficulties launching new vehicle programs; failure to achieve the anticipated savings and benefits from restructuring and product portfolio optimization actions; extraordinary events (including natural disasters or extreme weather events), political disruptions, terrorist attacks, pandemics or other public health crises, and acts of war; risks related to our international operations; the impact of economic, political, and market conditions on our business in China; our reliance on a limited number of OEM customers; supply chain disruptions; work stoppages, production shutdowns and similar events or conditions; governmental investigations and related proceedings regarding vehicle emissions standards, including the ongoing investigation into diesel defeat devices; current and future environmental and health and safety laws and regulations; the impact of climate change and regulations related to climate change, including new and evolving greenhouse gas emissions regulations in California, the U.S. and European Union; liabilities related to product warranties, litigation and other claims; compliance with legislation, regulations, and policies, investigations and legal proceedings, and new interpretations of existing rules and regulations; tax audits and changes in tax laws or tax rates taken by taxing authorities; volatility in the credit market environment; impairment charges on goodwill and indefinite-lived intangible assets; the impact of changes in interest rates and asset returns on our pension funding obligations; the impact of restrictive covenants and requirements in the agreements governing our indebtedness on our financial and operating flexibility; our ability to achieve some or all of the benefits that we expect to achieve from the Spin-off; other risks relating to the Spin-off, including a delay or inability to transition key infrastructure, services and solutions, a determination that the Spin-off does not qualify as tax-free for U.S. federal income tax purposes, restrictions under the Tax Matters Agreement, and our or BorgWarner Inc.’s failure to perform under various transaction agreements; and other risks and uncertainties described in our reports filed from time to time with the Securities and Exchange Commission (SEC).
We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
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Use of Non-GAAP Financial Measures
This Form 10-Q contains information about PHINIA’s financial results that is not presented in accordance with accounting principles generally accepted in the United States (GAAP). Such non-GAAP financial measures are reconciled to their most directly comparable GAAP financial measures in this Form 10-Q. The provision of these comparable GAAP financial measures is not intended to indicate that PHINIA is explicitly or implicitly providing projections on those GAAP financial measures, and actual results for such measures are likely to vary from those presented. The reconciliations include all information reasonably available to the Company at the date of this Form 10-Q and the adjustments that management can reasonably predict.
Management believes that these non-GAAP financial measures are useful to management, investors, and banking institutions in their analysis of the Company’s business and operating performance. Management also uses this information for operational planning and decision-making purposes.
Non-GAAP financial measures are not and should not be considered a substitute for any GAAP measure. Additionally, because not all companies use identical calculations, the non-GAAP financial measures as presented by PHINIA may not be comparable to similarly titled measures reported by other companies.
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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
On December 6, 2022, BorgWarner Inc., a manufacturer and supplier of automotive industry components and parts (BorgWarner, or Former Parent) announced plans for the complete legal and structural separation of its Fuel Systems and Aftermarket businesses 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 BorgWarner common stock 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
We expect strong earnings and cash generation in 2024 as we expect to continue to drive operational efficiencies, exit agreements with our Former Parent and grow our Aftermarket sales. On the original equipment (OE) side, industry-wide commercial vehicle (CV) volumes in 2024 are expected to decline by mid to high single digits percentages in North America and Europe, while other global CV markets are expected to be flat. Global light vehicle (LV) volumes are expected to be slightly down with engine production declining by approximately 4%. Assuming constant foreign exchange rates, we expect modest year-over-year sales growth driven by higher Aftermarket segment sales.
The Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic investments to enhance its product leadership strategy. There are several trends that are driving the Company’s long-term growth that management expects to continue, including market share expansion in the CV market, growth in overall vehicle parc that supports aftermarket demand, increased consumer interest in hybrid and plug-in vehicles, and adoption of additional product offerings enabling low carbon fuel and hydrogen solutions for combustion vehicles. In
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addition, we believe we are well positioned to continue to expand our differentiated offerings and capabilities across electronics, software and complete systems.
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 limited transition and other services described under the heading “Certain Relationships and Related Party Transactions” in the Company’s proxy statement for its 2024 Annual Meeting of Stockholders filed on March 27, 2024. BorgWarner is only obligated to provide the transition services for limited periods following completion of the Spin-Off. Following the Spin-Off and the cessation of any transition services agreements, we will need to provide internally, or obtain from unaffiliated third parties, the services we will no longer receive from BorgWarner. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from BorgWarner. The Company entered into several agreements with BorgWarner that govern the relationship between the parties following the Spin-Off and are described in our Form 8-K filed on July 7, 2023.
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 BorgWarner transactional and operational systems and data centers we currently use. 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
The following table presents a summary of the Company’s operating results:
Three Months Ended March 31, | |||||||||||||||||||||||
(in millions) | 2024 | 2023 | |||||||||||||||||||||
Net sales | % of net sales | % of net sales | |||||||||||||||||||||
Fuel Systems | $ | 576 | 66.7 | % | $ | 567 | 67.9 | % | |||||||||||||||
Aftermarket | 338 | 39.2 | % | 330 | 39.5 | % | |||||||||||||||||
Inter-segment eliminations | (51) | (5.9) | % | (62) | (7.4) | % | |||||||||||||||||
Total net sales | 863 | 100.0 | % | 835 | 100.0 | % | |||||||||||||||||
Cost of sales | 671 | 77.8 | % | 663 | 79.4 | % | |||||||||||||||||
Gross profit | 192 | 22.2 | % | 172 | 20.6 | % | |||||||||||||||||
Selling, general and administrative expenses | 104 | 12.1 | % | 99 | 11.9 | % | |||||||||||||||||
Other operating expense, net | 17 | 2.0 | % | 15 | 1.8 | % | |||||||||||||||||
Operating income | 71 | 8.1 | % | 58 | 6.9 | % | |||||||||||||||||
Equity in affiliates’ earnings, net of tax | (3) | (0.3) | % | (3) | (0.4) | % | |||||||||||||||||
Interest expense | 22 | 2.5 | % | 6 | 0.7 | % | |||||||||||||||||
Interest income | (4) | (0.5) | % | (3) | (0.4) | % | |||||||||||||||||
Earnings before income taxes | 56 | 6.4 | % | 58 | 7.0 | % | |||||||||||||||||
Provision for income taxes | 27 | 3.1 | % | 23 | 2.8 | % | |||||||||||||||||
Net earnings | $ | 29 | 3.3 | % | $ | 35 | 4.2 | % |
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Net sales
Net sales for the three months ended March 31, 2024 totaled $863 million, an increase of $28 million, or 3%, compared to the three months ended March 31, 2023. The change in net sales for the three months ended March 31, 2024 was primarily driven by the following:
•Sales increased $17 million related to certain contract manufacturing agreements with Former Parent that were entered into in connection with the Spin-Off. Sales from these agreements are expected to continue through the second quarter of 2024.
•Customer pricing increased net sales by approximately $12 million. This is primarily related to an increase in recoveries of cost inflation from the Company’s customers due to non-contractual commercial negotiations with those customers and normal contractual customer commodity pass-through arrangements.
•Fluctuations in foreign currencies resulted in a period-over-period increase in sales of approximately $6 million, primarily due to the strengthening of the British Pound and Euro relative to the U.S. Dollar, partially offset by the weakening of the Chinese Renminbi relative to the U.S. Dollar.
•Unfavorable volume and mix decreased sales approximately by $7 million, or 1%. This decrease was primarily driven by lower commercial vehicle sales in Europe.
Cost of sales and gross profit
Cost of sales and cost of sales as a percentage of net sales were $671 million and 78%, respectively, during the three months ended March 31, 2024, compared to $663 million and 79%, respectively, during the three months ended March 31, 2023. The increase of $8 million in cost of sales for the three months ended March 31, 2024 was primarily driven by the following:
•Cost of sales increased $17 million related to certain contract manufacturing agreements with Former Parent that were entered into in connection with the Spin-Off.
•Employee costs increased cost of sales by $11 million compared to the three months ended March 31, 2023, primarily related to inflation and incentive compensation.
•Fluctuations in foreign currencies resulted in a period-over-period increase in cost of sales of approximately $6 million primarily due to the strengthening of the British Pound and Euro relative to the U.S. Dollar, partially offset by the weakening of the Chinese Renminbi relative to the U.S. Dollar.
•Lower supplier-related and inflationary costs decreased cost of sales by approximately $19 million driven primarily by supplier savings and a lump sum supplier settlement of $7 million.
•Lower sales volume, mix and net new business decreased cost of sales by approximately $14 million. This decrease was primarily driven by lower commercial vehicle sales in Europe in the Fuel Systems segment, as well as favorable mix in Europe and the Americas within the Aftermarket segment.
•Other manufacturing costs increased cost of sales by $7 million compared to the three months ended March 31, 2023.
Gross profit and gross margin were $192 million and 22%, respectively, during the three months ended March 31, 2024 compared to $172 million and 21%, respectively, during the three months ended March 31, 2023. The increase in gross margin was primarily due to the factors discussed above.
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Selling, general and administrative expenses (“SG&A”)
SG&A for the three months ended March 31, 2024 was $104 million as compared to $99 million for the three months ended March 31, 2023. SG&A as a percentage of net sales was 12% for both the three months ended March 31, 2024 and 2023. SG&A was comprised of the following:
•Employee-related costs were $35 million for the three months ended March 31, 2024, an increase of $3 million compared to the three months ended March 31, 2023, primarily related to inflation and incentive compensation.
•IT costs incurred directly by the Company were $8 million for the three months ended March 31, 2024, an increase of $1 million compared to the three months ended March 31, 2023.
•Intangible amortization expense was $7 million for the three months ended March 31, 2024, flat compared to the three months ended March 31, 2023.
•Research and development (“R&D”) costs were $27 million for the three months ended March 31, 2024, a decrease of $2 million. R&D costs, net of customer reimbursements, were 3.1% of net sales in the three months ended March 31, 2024, compared to 3.5% of net sales in the three months ended March 31, 2023. The Company will continue to invest in R&D programs, which are necessary to support short- and long-term growth. The Company’s current long-term expectation for R&D spending is 3% of net sales.
•Former Parent allocations, which no longer exist after the Spin-Off, were replaced by standalone costs, leading to a net increase of $3 million compared to the three months ended March 31, 2023.
Other operating expense, net
Other operating expense, net was $17 million and $15 million for the three months ended March 31, 2024 and 2023, respectively. Refer to Note 4, “Other operating expense, net,” for more information. Other operating expense, net was comprised of the following:
•For the three months ended March 31, 2024 and 2023, separation and transaction costs were $17 million and $18 million, respectively, primarily related to professional fees associated with the Spin-Off.
•Restructuring expense was $2 million and $4 million for the three months ended March 31, 2024 and 2023, respectively, related to individually approved restructuring actions that primarily related to reductions in headcount. The Company continues to evaluate different options across its operations to reduce existing structural costs. As we continue to assess our performance and the needs of our business, additional restructuring could be required and may have a significant cost.
•For the three months ended March 31, 2023, the Company recognized royalty income related to licensing of the Delphi Technologies trade name and product-related intellectual properties to other BorgWarner businesses in the amount of $5 million. The royalty arrangements stopped after the Spin-Off was completed.
•For the three months ended March 31, 2023, the Company recognized income related to application testing and other R&D services for other BorgWarner businesses of $1 million. Refer to Note 16, Related-Party Transactions, for further information. The services stopped after the Spin-Off was completed.
Equity in affiliates’ earnings, net of tax
Equity in affiliates’ earnings, net of tax was $3 million in both the three months ended March 31, 2024 and 2023. This line item is driven by the results of the Company’s unconsolidated joint venture.
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Interest expense
Interest expense was $22 million and $6 million in the three months ended March 31, 2024 and 2023, respectively. The increase was primarily related to the issuance of our Term Loan A Facility and Term Loan B Facility, as well as interest incurred on the drawdown of the Revolving Facility.
Interest income
Interest income was $4 million and $3 million in the three months ended March 31, 2024 and 2023.
Provision for income taxes
Provision for income taxes was $27 million for the three months ended March 31, 2024 resulting in an effective tax rate of 48%. This compared to $23 million, or 39%, for the three months ended March 31, 2023. The increase was primarily the result of a change in the jurisdictional mix of pre-tax earnings as well as releases of unrecognized tax benefit reserves that occurred in the three months ended March 31, 2023 that did not occur in the three months ended March 31, 2024.
For further details, see Note 5, “Income Taxes,” to the Condensed Consolidated Financial Statements for the three months ended March 31, 2024 and 2023.
Adjusted earnings per diluted share
The Company defines adjusted net earnings per diluted share as net earnings per share adjusted to exclude the tax-effected impact of restructuring expense, separation and transaction costs, intangible asset amortization, impairment charges, other net expenses, and other gains, losses and tax amounts not reflective of the Company’s ongoing operations.
Three Months Ended March 31, | |||||||||||
2024 | 2023 | ||||||||||
Net earnings per diluted share | $ | 0.62 | $ | 0.75 | |||||||
Separation and transaction costs | 0.34 | 0.38 | |||||||||
Intangible asset amortization expense | 0.13 | 0.15 | |||||||||
Restructuring expense | 0.03 | 0.06 | |||||||||
Royalty income from Former Parent | — | (0.11) | |||||||||
Tax adjustments | (0.04) | (0.04) | |||||||||
Adjusted net earnings per diluted share | $ | 1.08 | $ | 1.19 |
Results by Reportable Segment
The Company’s business is aggregated into 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, separation and transaction costs, 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 $18 million and $4 million for the three months ended March 31, 2024 and 2023, respectively. The increase in corporate expenses in 2024 was primarily related to a decrease in related-party royalty and R&D income from BorgWarner, which did not continue after completion of the Spin-Off, as well as additional costs resulting from operating as a stand-alone company.
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The following table presents Net sales and Segment AOI for the Company’s reportable segments:
Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
2024 | 2023 | ||||||||||||||||||||||||||||||||||
(in millions) | Net Sales to Customers | Segment AOI | % margin | Net Sales to Customers | Segment AOI | % margin | |||||||||||||||||||||||||||||
Fuel Systems | $ | 527 | $ | 55 | 10.4 | % | $ | 509 | $ | 43 | 8.4 | % | |||||||||||||||||||||||
Aftermarket | 336 | 60 | 17.9 | % | 326 | 48 | 14.7 | % | |||||||||||||||||||||||||||
Totals | $ | 863 | $ | 115 | $ | 835 | $ | 91 |
The Fuel Systems segment’s net sales to customers for the three months ended March 31, 2024 increased $18 million, or 4%, and Segment Adjusted Operating Income increased $12 million, or 28%, from the three months ended March 31, 2023. The increase in net sales was primarily due to $17 million related to certain contract manufacturing agreements with BorgWarner and $7 million primarily from non-contractual commercial negotiations with the Company’s customers and normal contractual customer commodity pass-through arrangements. These were offset by approximately $6 million of volume, mix and net new business driven by decreased demand for the Company’s products compared to the prior year, primarily from lower commercial vehicle sales in Europe. Segment Adjusted Operating margin was 10.4% in the three months ended March 31, 2024, compared to 8.4% in the three months ended March 31, 2023. The Segment Adjusted Operating margin increase was primarily due to lower supplier related costs.
The Aftermarket segment’s net sales to customers for the three months ended March 31, 2024 increased $10 million, or 3%, and Segment Adjusted Operating Income increased $12 million, or 25%, from the three months ended March 31, 2023. Foreign currencies resulted in a year-over-year increase in sales of approximately $6 million primarily due to the strengthening of the British Pound and Euro relative to the U.S. Dollar, partially offset by the weakening of the Chinese Renminbi relative to the U.S. Dollar. The increase in net sales excluding the impact of foreign currencies was primarily due to $5 million of customer pricing, offset by approximately $1 million of volume, mix, and net new business driven by decreased demand for the Company’s products compared to the prior year, primarily in the Americas. Segment Adjusted Operating margin was 17.9% in the three months ended March 31, 2024, comparable to 14.7% in the three months ended March 31, 2023. The Segment Adjusted Operating margin increase was primarily driven by favorable mix and customer pricing.
LIQUIDITY AND CAPITAL RESOURCES
Overview
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 March 31, 2024 and December 31, 2023, the Company had $325 million and $365 million of cash and cash equivalents, respectively, of which $288 million and $347 million, respectively, was held by our subsidiaries outside of the United States. We believe our existing cash and cash flows generated from operations and indebtedness incurred in conjunction with the Spin-Off discussed below will be responsive to the needs of our current and planned operations for at least the next 12 months and the foreseeable future thereafter.
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Credit Agreement
On July 3, 2023, the Company entered into a $1.225 billion Credit Agreement (the Credit Agreement) consisting of a $500 million revolving credit facility (the Revolving Facility), a $300 million Term Loan A Facility (the Term Loan A Facility) and a $425 million Term Loan B Facility (the Term Loan B Facility; together with the Revolving Facility and the Term Loan A Facility, collectively, the Facilities) in connection with the Spin-Off that occurred on the same date. As of March 31, 2024, the outstanding principal balance of the Term Loan A Facility was $296 million, the outstanding principal balance of the Term Loan B Facility was $424 million, and the Company had $75 million of outstanding borrowings under the Revolving Facility (exclusive of $1 million of letters of credit outstanding). As of March 31, 2024, the Company had availability under the Revolving Facility of $424 million.
Issuance of Senior Notes
On April 4, 2024, the Company issued $525 million aggregate principal amount of 6.75% Senior Secured Notes due 2029 (the 2029 Notes) pursuant to an indenture among the Company, as issuer, certain subsidiaries of the Company named as guarantors, and U.S. Bank Trust Company, National Association, as trustee and as collateral agent. The 2029 Notes were sold to investors at 100% plus accrued interest, if any, from April 4, 2024 in a private transaction exempt from the registration requirements of the Securities Act of 1933, as amended. The net proceeds of the offering of the 2029 Notes were used to repay all of the Company’s outstanding borrowings and accrued interest under the Term Loan B Facility and the Revolving Facility, and to pay fees and expenses in connection with the offering. During the second quarter of 2024, the Company expects to record a non-cash pre-tax loss on extinguishment of approximately $20 million related to the difference between the repayment amount and net carrying amount of the Term Loan B Facility.
Refer to Note 10. “Notes Payable And Debt” for further information on the Credit Agreement and the 2029 Notes.
Cash Flows
Operating Activities
Net cash provided by operating activities was $31 million and net cash used in operating activities was $33 million in the three months ended March 31, 2024 and 2023, respectively. The change in cash from operating activities for the three months ended March 31, 2024 compared with the three months ended March 31, 2023, was primarily due to working capital changes.
Investing Activities
Net cash used in investing activities was $42 million and $38 million in the three months ended March 31, 2024 and 2023, respectively, primarily related to capital expenditures. As a percentage of sales, capital expenditures were 5.0% and 4.6% for the three months ended March 31, 2024 and 2023, respectively.
Financing Activities
Net cash used in financing activities was $41 million in the three months ended March 31, 2024 primarily related to stock repurchases and dividend payments to PHINIA stockholders.
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 Form 10-K for the fiscal year ended December 31, 2023 (Form 10-K), filed on February 28, 2024. There were no material changes to this information during the quarter ended March 31, 2024.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk appear in “Risk Factors” in the Company’s Form 10-K filed on February 28, 2024. There were no material changes to this information during the quarter ended March 31, 2024.
Item 4. Controls and Procedures
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 these controls and procedures are effective. There have been no 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of its business, the Company is involved in a number of lawsuits and claims, both actual and potential. Proceedings that were previously disclosed may no longer be reported because, as a result of rulings in the case, settlements, changes in our business, or other developments, in our judgment, they are no longer material to the Company’s business, financial position or results of operations. Refer to Note 15, “Contingencies,” to the Condensed Consolidated Financial Statements of this Form 10-Q for additional information.
SEC regulations require disclosure of certain environmental matters when a governmental authority is a party to the proceedings and such proceedings involve potential monetary sanctions that the Company reasonably believes will exceed a specified threshold. Pursuant to these regulations, the Company uses a threshold of $1 million for purposes of determining whether disclosure of any such proceedings is required.
Item 1A. Risk Factors
We face a number of risks and uncertainties that could materially and adversely affect our business, financial condition or results of operations. A discussion of our risk factors can be found in Part I, Item 1A. Risk Factors in the Company’s Form 10-K filed on February 28, 2024. Readers should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. During the three months ended March 31, 2024, there were no material changes to our previously disclosed risk factors.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
In August 2023, the Company’s Board of Directors authorized a $150 million share repurchase program. During the quarter ended March 31, 2024, the Company repurchased $23 million of common stock under its repurchase program. Under the repurchase program, shares may be repurchased in open market transactions, privately negotiated transactions, or pursuant to one or more accelerated stock repurchase programs or Rule 10b5-1 plans in compliance with SEC requirements. The exact amount and timing of any purchases will depend on a number of factors, including trading price, trading volume, and general market conditions. The repurchase program has no expiration date and may be suspended, discontinued, or resumed at any time. Repurchased shares will be deemed common stock held in treasury and may subsequently be reissued.
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The following table provides information about the Company’s purchases of its equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) during the quarter ended March 31, 2024:
Issuer Purchases of Equity Securities | ||||||||||||||||||||||||||
Period | Total number of shares purchased | 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) | ||||||||||||||||||||||
January 1, 2024 - January 31, 2024 | ||||||||||||||||||||||||||
Common Stock Repurchase Program | — | — | — | $ | 126 | |||||||||||||||||||||
February 1, 2024 - February 29, 2024 | ||||||||||||||||||||||||||
Common Stock Repurchase Program | — | $ | — | — | $ | 126 | ||||||||||||||||||||
Employee transactions | 75,669 | $ | 33.52 | — | ||||||||||||||||||||||
March 1, 2024 - March 31, 2024 | ||||||||||||||||||||||||||
Common Stock Repurchase Program | 653,074 | $ | 35.29 | 653,074 | $ | 103 | ||||||||||||||||||||
Employee transactions | 614 | $ | 36.29 | — | ||||||||||||||||||||||
Item 5. Other Information
Trading Arrangements
During the three months ended March 31, 2024, none of the individuals serving as the Company’s directors or “officers,” as defined in Rule 16a-1(f) of the Exchange Act, at that time adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
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Item 6. Exhibits
4.1 | |||||
10.1 | |||||
10.2 | |||||
10.3 | |||||
10.4 | |||||
10.5 | |||||
10.6 | |||||
10.7 | |||||
31.1 | |||||
31.2 | |||||
32.1 | |||||
32.2 | |||||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.* | ||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document.* | ||||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.* | ||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document.* | ||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document.* | ||||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document.* | ||||
104.1 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).* |
____________
*Filed herewith.
** Furnished herewith.
+ Indicates management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PHINIA Inc. | |||||
By: | /s/ Samantha M. Pombier | ||||
(Signature) | |||||
Samantha M. Pombier | |||||
Vice President and Controller (Principal Accounting Officer) |
Date: April 25, 2024
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