PHINIA INC. quarterly report, Q2 FY2023

Business context and reporting period

PHINIA’s unaudited Form 10-Q covers the three and six months ended June 30, 2023. The statements present BorgWarner’s Fuel Systems and Aftermarket businesses on a combined carve-out basis; they may not reflect the costs or results PHINIA would have had as a standalone company. PHINIA completed its spin-off from BorgWarner on July 3, 2023 and began trading independently as PHIN.

Financial performance and position

Unless noted otherwise, figures are in millions of dollars.

• Q2 sales rose 11%, mainly from higher volume, mix and new business (+$64), and customer pricing (+$30); currency reduced sales by about $3. First-half sales increased 5%, with volume, mix and new business contributing about $71 and pricing about $46; currency reduced sales by about $33.
• Q2 operating income improved, but net earnings fell as other operating expense rose to $30 from $8 and the effective tax rate increased to 38% from 24%. First-half operating income and net earnings declined; the effective tax rate was 39% versus 26%.
• Segment adjusted operating income was $111 in Q2 versus $94; Fuel Systems contributed $62 (11.3% margin) and Aftermarket $49 (14.6%). For the first half, segment adjusted operating income was $202 versus $198; Fuel Systems was $105 (9.9% margin) and Aftermarket $97 (14.7%). This is a non-GAAP segment measure.
• First-half net cash from operations was $33 versus $77. Investing used $80, including $80 of capital expenditures, versus $58 used in the prior period. Cash and cash equivalents were $213 at June 30, down from $251 at December 31, 2022.
• At June 30, total assets were $3,869 and total liabilities $1,877. The balance sheet showed $25 of long-term debt and $742 due to BorgWarner ($99 current and $643 non-current), reflecting pre-spin-off arrangements.
• On July 3, PHINIA entered a $1.225 billion credit agreement: $500 revolving, $300 term loan A and $425 term loan B. It reported $800 outstanding ($75 revolving and $725 term loans). The facilities generally mature in 2028 and include leverage and interest-coverage covenants; the filing describes covenant thresholds.

Changes, outlook and risks

• Revenue growth and gross-margin improvement were offset by lower net earnings, weaker first-half operating income, and lower operating cash flow. Supplier-related costs and inflation remained pressures, partly offset by customer pricing and supply-chain savings.
• Q2 merger, acquisition and divestiture expense was $41, primarily professional fees for the spin-off; first-half expense was $59. These costs, together with the separation, are significant unusual items. BorgWarner royalty income was $12 in Q2 and $17 in the first half, and is not expected to continue after the spin-off.
• Management expected 2023 global industry production to be flat to modestly higher, continued North American gasoline direct injection growth, and higher revenue excluding foreign currency effects, supported in part by customer inflation recoveries. It cited long-term opportunities in commercial-vehicle recovery, aftermarket demand, emissions standards and product development. The filing gives no specific full-year revenue or earnings guidance figures.
• Management said existing cash, operating cash flow and spin-off-related borrowing should meet operating needs for at least 12 months. Standalone execution risks include replacing BorgWarner-provided services, completing new IT systems, possible transition costs or interruptions, cyclical production, OEM concentration, supply availability, inflation, currency and interest-rate movements, and competition.
• Disclosure controls were deemed ineffective due to an outstanding material weakness in controls over calculating and reviewing cumulative translation adjustments in the carve-out statements. Revised controls were implemented by June 30; the company planned to move to a system-based calculation in Q3. Management also noted legal, warranty, intellectual-property and emissions-related matters; it did not believe adverse outcomes were reasonably likely to materially affect results, financial position or cash flows, while acknowledging an adverse outcome could be material.

Key facts for investors to verify

• Actual standalone results, costs and cash flows after the July 3 spin-off, including separation and transition-service expenses and the end of BorgWarner royalty income.
• Use of the $800 million drawn under the new facilities, ongoing interest costs, covenant headroom and leverage after the spin-off.
• Whether cash generation recovers from the first-half decline and supports capital expenditure and working-capital needs.
• Progress in remediating the material weakness and establishing effective standalone financial-reporting and IT controls.
• Whether customer pricing and inflation recoveries continue to offset supplier, wage and other input-cost pressures, and whether segment margins hold up.