PHINIA Inc. — Q3 2023 Form 10-Q
Business context and period. PHINIA develops and supplies fuel systems and aftermarket products for commercial, industrial, light-vehicle and other applications. This report covers the three and nine months ended September 30, 2023. BorgWarner completed PHINIA’s spin-off on July 3, 2023; pre-spin-off periods are carve-out results, and management cautions they may not reflect PHINIA’s results as a standalone company.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $896 million | $859 million | $2,618 million | $2,497 million |
| Gross profit / margin | $177 million / 19.8% | $201 million / 23.4% | $538 million / 20.6% | $533 million / 21.3% |
| Operating income / margin | $58 million / 6.5% | $111 million / 13.0% | $172 million / 6.6% | $231 million / 9.2% |
| Net earnings | $11 million | $89 million | $81 million | $187 million |
| Diluted EPS | $0.24 | $1.89 | $1.72 | $3.98 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $188 million | $122 million |
- Q3 sales rose 4%, but gross margin fell 3.6 percentage points. Management cited higher supplier and inflationary costs, other manufacturing costs and unfavorable volume/mix; customer pricing, foreign exchange and contract-manufacturing sales partly offset these pressures.
- For the first nine months, sales rose 5%; gross profit was nearly flat and operating income declined. Net earnings also reflected higher interest expense and a 48% effective tax rate versus 26% in 2022. Q3’s effective tax rate was 74%, driven in part by jurisdictional earnings mix and the post-spin-off tax structure.
- Q3 segment adjusted operating income (AOI) was $55 million for Fuel Systems (9.8% margin), down from $84 million (15.7%), and $46 million for Aftermarket (13.7%), down from $48 million (14.8%). Nine-month AOI was $160 million for Fuel Systems (9.9% margin) and $143 million for Aftermarket (14.3%).
- Nine-month operating cash flow of $188 million less capital expenditures of $117 million implies approximately $71 million of cash flow after capex; this is a simple calculation, not a company-reported non-GAAP measure. Investing cash outflow was $117 million. Financing cash inflow was $50 million, including new borrowing and offset by payments related to the former parent, dividends and repurchases.
- At September 30, cash and restricted cash were $367 million; current assets were $2.124 billion and current liabilities $1.321 billion. Debt under the new facilities was $800 million in aggregate principal: $75 million revolver, $300 million Term Loan A and $425 million Term Loan B. The debt note reports $713 million long-term debt net of current portion; balance-sheet short-term borrowings include the revolver and current debt portion. PHINIA reported compliance with debt covenants.
Changes, outlook and risks
- PHINIA entered into a $1.225 billion credit agreement at the spin-off, with facilities maturing in 2028 subject to specified provisions. Interest expense rose to $22 million in Q3 from $5 million a year earlier.
- Spin-off-related merger, acquisition and divestiture expenses were $72 million for the first nine months, versus $27 million in 2022; Q3 expense was $13 million. PHINIA also recorded $10 million of nine-month restructuring expense. Certain contract-manufacturing agreements with BorgWarner contributed $26 million of sales during the first nine months and are expected to continue through 2024.
- Management expected global industry production to be flat to modestly higher in 2023 and PHINIA revenue to increase excluding foreign-exchange effects. Expected support included North American GDi program growth and customer recovery of inflation costs; lower commercial-vehicle demand in China was an offset. No specific full-year revenue or earnings target is provided in the filing text.
- UAW strikes affecting PHINIA customers had no material Q3 impact, but prolonged strikes could adversely affect results. Other cited risks include commodity and inflation costs, cyclical vehicle production, customer concentration, supply disruptions, foreign exchange and interest rates, and challenges of operating independently after the spin-off.
- PHINIA said it expects cash, operating cash flows and spin-off-related borrowing to meet current and planned needs for at least 12 months. It also noted potential cost or disruption if it cannot replace BorgWarner-provided services or complete its IT transition effectively.
- Disclosure controls were deemed ineffective as of September 30, 2023 because of an outstanding material weakness in controls over cumulative translation adjustment calculations for carve-out financial statements. Revised controls were implemented in Q3; the company said it would continue assessing their operating effectiveness.
- The company is party to legal and commercial matters, including warranty, intellectual-property and emissions-related matters. Management did not believe adverse outcomes were reasonably likely to have a material adverse effect, while acknowledging an adverse outcome could materially affect results or cash flows.
Investor facts to verify
- How margins and Fuel Systems profitability trend as supplier inflation, product mix and China commercial-vehicle demand evolve.
- Standalone costs, BorgWarner transition-service replacement and IT implementation progress, including remediation of the material weakness.
- Debt balances, borrowing costs, covenant headroom and use of cash, especially in light of the $150 million repurchase authorization and dividends.
- Whether customer pricing and inflation recoveries offset input-cost pressures, and the duration and economics of BorgWarner contract-manufacturing arrangements.
- Effects of UAW strike developments, customer production levels and other supply or market disruptions on the outlook.