EX-99.1 2 exhibit991-form10a2.htm EX-99.1 Document
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                    , 2023
Dear BorgWarner Shareholders:
In December 2022, we announced the intended separation of BorgWarner’s Fuel Systems and Aftermarket Segments into a new, publicly traded entity. The name of the new, publicly traded entity is PHINIA Inc. Through this transaction, we will create two industry-leading, focused companies positioned to drive value creation – BorgWarner will be a leader in electrification with a focused ICE business, and PHINIA will be a product leader in fuel systems and aftermarket distribution with advanced technologies that optimize performance, increase efficiency and reduce emissions. The intended separation supports advancing our electrification journey and optimizing our combustion portfolio and will best position BorgWarner for sustainable and profitable growth. As separate companies, both businesses will benefit from enhanced strategic focus and flexibility to pursue their differentiated market opportunities and deliver significant value to shareholders.
The intended separation is the next step in our Charging Forward strategy. BorgWarner will be positioned as one of the market leaders in electric vehicle (“EV”) propulsion technology and will have the opportunity to capitalize on long-term, secular tailwinds in electrification, with an enhanced focus on the development and commercialization of EV technologies. BorgWarner will also retain a focused portfolio of conventional propulsion assets to support customers as they go through their own EV transitions, while driving operational and financial benefits for our EV business. With organic bookings and acquisitions to date, we believe we are on track to meet or exceed our goal of 25% of revenue from EV by 2025 as part of Charging Forward. The intended separation will also address our previously stated goal of completing dispositions by 2025 of internal combustion assets generating approximately $3 billion to $4 billion in annual revenue.
Upon completion of the intended separation, BorgWarner shareholders will receive one share of PHINIA common stock for each five shares of BorgWarner common stock they hold via a pro rata, special distribution of PHINIA shares. The effect of the distribution will be that BorgWarner shareholders as of the record date for the distribution will own shares in both companies. We expect that the spin-off will be tax-free to BorgWarner and its stockholders for U.S. federal income tax purposes, except for cash that shareholders may receive (if any) in lieu of fractional shares. Shareholder approval is not required for the distribution. Shareholders will not need to pay any consideration or surrender or exchange their shares of BorgWarner common stock to receive common shares of PHINIA on the distribution date.
I encourage you to read the attached information statement, which is being provided to all BorgWarner shareholders as of the record date for the distribution of PHINIA shares. The information statement describes the separation in detail and contains important business and financial information about PHINIA.
This is an exciting time for the company, and we are extremely proud of BorgWarner’s accomplishments thus far. Our company’s 100-plus-year history is a story of evolution, built on superior product leadership and disciplined financial and operational management. This announcement is the next step, and we are confident that its execution will deliver substantial value for shareholders. We thank you for your investment in BorgWarner.
Sincerely,
Frédéric B. Lissalde
President and CEO, BorgWarner


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                    , 2023
Dear Future PHINIA Shareholders:
I want to extend a warm welcome to you as the future shareholders of PHINIA when we become a newly independent, publicly traded company following the completion of PHINIA’s planned spin-off from BorgWarner.
PHINIA will be a product leader in fuel systems and aftermarket distribution with advanced technologies that optimize performance, increase efficiency and reduce emissions. As a standalone company, we expect to benefit from a set of unique strategic advantages and a differentiated financial profile:
•Market-leading, technology-driven fuel systems, starters, alternators and aftermarket portfolio
•Embedded relationships with global OEMs, with sales to most major OEMs and no single customer accounting for more than 12% of our revenues
•Balanced and synergistic exposure across Commercial Vehicle and Industrial Applications, Light Vehicle and Aftermarket end markets globally
•Positioned to benefit from secular growth trends in Gasoline Direct Injection and Hydrogen Injection Systems
•Expected to maintain a strong operating margin profile, solid free cash flow, and moderate levels of leverage to support current business operations and longer-term strategies that further enhance shareholder value
We expect to deliver shareholder value through our focused strategy, and we will continue to innovate and expand on our portfolio of advanced technologies. We are also committed to continuing in the BorgWarner tradition of superior product leadership, operational excellence and disciplined financial management.
I encourage you to learn more about us and our strategic initiatives by reading the attached information statement. Thank you in advance for your support as a future shareholder of PHINIA.
Sincerely,
Brady D. Ericson
President and CEO, PHINIA


Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.
Subject to Completion—Dated June 9, 2023
INFORMATION STATEMENT
PHINIA Inc.
Common Stock
(par value $0.01 per share)
We are sending you this Information Statement in connection with the spin-off by BorgWarner Inc. (“BorgWarner” or the “Parent”) of its wholly-owned subsidiary, PHINIA Inc. (“PHINIA,” the “Company,” “we,” “us,” or “our”), which holds BorgWarner’s Fuel Systems and Aftermarket businesses.
To effect the Spin-Off, BorgWarner will contribute to PHINIA Inc. certain assets of BorgWarner’s Fuel Systems and Aftermarket businesses in exchange for our common stock and our assumption of certain liabilities of BorgWarner’s Fuel Systems and Aftermarket businesses and distribute 100% of our common stock on a pro rata basis to the holders of BorgWarner common stock (the “BorgWarner stockholders”) (such transactions, the “Spin-Off”).
We expect that the distribution of our common stock will be tax-free to holders of BorgWarner common stock for U.S. federal income tax purposes, except for cash that stockholders may receive (if any) in lieu of fractional shares.
If you are a holder of record of BorgWarner common stock as of the close of business on June 23, 2023, which is the record date for the Spin-Off, you will be entitled to receive one share of our common stock for every five shares of BorgWarner common stock that you hold on that date. BorgWarner will distribute its shares of our common stock in book-entry form, which means that we will not issue physical stock certificates. The distribution agent will not distribute any fractional shares of our common stock.
The distribution will be effective as of 5:00 p.m., New York City time, on July 3, 2023. Immediately after the distribution becomes effective, we will be an independent, publicly traded company.
BorgWarner’s stockholders are not required to vote on or take any other action to approve the Spin-Off. We are not asking you for a proxy and request that you do not send us a proxy. BorgWarner stockholders will not be required to pay any consideration for the shares of our common stock they receive in the Spin-Off, and they will not be required to surrender or exchange their shares of BorgWarner common stock or take any other action in connection with the Spin-Off.
No trading market for our common stock currently exists. We expect, however, that a limited trading market for our common stock, commonly known as a “when-issued” trading market, will develop on the third trading day prior to the distribution date, and we expect “regular-way” trading of our common stock will begin on the first trading day after the distribution date. We have applied to list our common stock on the New York Stock Exchange under the ticker symbol “PHIN.”
In reviewing this Information Statement, you should carefully consider the matters described in the section entitled “Risk Factors” beginning on page 12 of this Information Statement.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Information Statement is truthful or complete. Any representation to the contrary is a criminal offense.
This Information Statement is not an offer to sell, or a solicitation of an offer to buy, any securities.
The date of this Information Statement is               , 2023.


TABLE OF CONTENTS
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INDUSTRY, RANKING AND MARKET DATA
This Information Statement contains various historical and projected information concerning our industry, the markets in which we participate and our positions in these markets. Some of this information is from industry publications and other third-party sources, and other information is from our own analysis of data received from these third-party sources, our own internal data, and market research that our management team commissions for our own evaluations and planning. All of this information involves a variety of assumptions, limitations, and methodologies and is inherently subject to uncertainties, and therefore you are cautioned not to give undue weight to these estimates.
NON-GAAP FINANCIAL DATA
All financial information presented in this Information Statement is derived from our Combined Financial Statements included elsewhere in this Information Statement. All financial information presented in this Information Statement has been prepared in U.S. Dollars in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), except for the presentation of the following non-GAAP financial measures: adjusted operating income, adjusted operating margin, adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted net earnings, and free cash flow.
We present adjusted operating income, adjusted operating margin, adjusted net earnings, and free cash flow in this Information Statement because we believe such measures provide investors with additional information to measure our performance. Please refer to “Information Statement Summary—Summary Historical and Unaudited Pro Forma Condensed Combined Financial Information” for an explanation on why we use these non-GAAP financial measures, their definitions, and their limitations.
Because of their limitations, these non-GAAP financial measures are not intended as alternatives to U.S. GAAP financial measures as indicators of our operating performance and should not be considered as measures of cash available to us to invest in the growth of our business or that will be available to us to meet our obligations. We compensate for these limitations by using these non-GAAP financial measures along with other comparative tools, together with U.S. GAAP financial measures, to assist in the evaluation of operating performance.
For more information on the use of adjusted operating income, adjusted operating margin, adjusted net earnings, and free cash flow and reconciliations to their nearest U.S. GAAP financial measures, see “Information Statement Summary—Summary Historical and Unaudited Pro Forma Condensed Combined Financial Information.”
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BASIS OF PRESENTATION
Unless otherwise indicated or the context otherwise requires, in this Information Statement:
(i)the “Company,” “PHINIA,” “we,” “us,” and “our” refer to PHINIA Inc. (a newly formed holding company) and its direct and indirect subsidiaries after giving effect to the Spin-Off;
(ii)the “Board” and “our Board” refer to the board of directors of the Company;
(iii)our “bylaws” refer to our amended and restated bylaws that will become effective as part of the Spin-Off, the form of which is filed as an exhibit to our Registration Statement on Form 10 of which this Information Statement is a part;
(iv)our “certificate of incorporation” refers to our amended and restated certificate of incorporation that will become effective as part of the Spin-Off, the form of which is filed as an exhibit to our Registration Statement on Form 10 of which this Information Statement is a part;
(v)the “Spin-Off” refers to the transactions in which BorgWarner will (1) contribute certain assets of BorgWarner’s Fuel Systems and Aftermarket businesses to PHINIA Inc. in exchange for our common stock and our assumption of certain liabilities of BorgWarner’s Fuel Systems and Aftermarket businesses and (2) distribute to BorgWarner’s stockholders 100% of the shares of our common stock on a pro-rata basis (the “distribution”);
(vi)the “Exchange” refers to the New York Stock Exchange;
(vii)“BorgWarner” or the “Parent” refers to BorgWarner Inc. and its direct and indirect subsidiaries;
(viii)the “BorgWarner Board” refers to the board of directors of BorgWarner;
(ix)“stockholders” refer to stockholders of BorgWarner or stockholders of PHINIA, depending on the context; and
(x)the “Internal Restructuring” refers to a series of internal transactions that will result in all of the assets, liabilities, and legal entities comprising BorgWarner’s Fuel Systems and Aftermarket businesses being owned directly, or indirectly through its subsidiaries, by PHINIA.
Certain percentages and other figures provided and used in this Information Statement may not add up to 100.0% due to the rounding of individual components.
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QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF
Questions and Answers about BorgWarner’s Reasons for the Spin-Off
The following provides only a summary of certain information regarding BorgWarner’s reasons for the Spin-Off. You should read this Information Statement in its entirety for a more detailed description of the matters described below.
Q:Why am I receiving this document?
A:BorgWarner is making this document available to you because you are a BorgWarner stockholder. If you are a holder of BorgWarner common stock as of the close of business on the Record Date (as defined below), you will be entitled to receive a distribution of one share of our common stock for every five shares of common stock of BorgWarner that you hold on that date. This document will help you understand how the Spin-Off will result in your ownership of shares in PHINIA and the operations of PHINIA as a stand-alone entity.
Q:What are the reasons for the Spin-Off?
A:The BorgWarner Board believes that the separation of BorgWarner’s Fuel Systems and Aftermarket businesses from BorgWarner is in the best interests of BorgWarner and its stockholders and for the success of the Fuel Systems and Aftermarket businesses for a number of reasons. See “The Spin-Off—Reasons for the Spin-Off.”
Q:Why is our separation structured as a spin-off?
A:Following a comprehensive review of alternative disposition strategies, the BorgWarner Board, with the help of its legal and financial advisors, concluded that separating the businesses as a spin-off would maximize value for its stockholders. See “The Spin-Off—Reasons for the Spin-Off.”
Questions and Answers about the Spin-Off
The following provides only a summary of certain information regarding the Spin-Off. You should read this Information Statement in its entirety for a more detailed description of the matters described below.
Q:What is the Spin-Off?
A:The Spin-Off is the method by which PHINIA will separate from BorgWarner. In the Spin-Off, BorgWarner will distribute to its stockholders 100% of the outstanding shares of our common stock. Following the Spin-Off, we will be an independent, publicly traded company.
Q:Is the completion of the Spin-Off subject to the satisfaction or waiver of any conditions?
A:Yes, the completion of the Spin-Off is subject to the satisfaction, or the BorgWarner Board’s waiver, of certain conditions. Any of these conditions may be waived by the BorgWarner Board to the extent such waiver is permitted by law. In addition, BorgWarner may at any time until the distribution decide to abandon the Spin-Off or modify or change the terms of the Spin-Off. See “The Spin-Off—Conditions to the Spin-Off.” Alternatively, BorgWarner may waive any of the conditions to the distribution and proceed with the distribution even if all of such conditions have not been met. If BorgWarner waives any such condition and the distribution is completed, such waiver could have a material adverse effect on BorgWarner’s and PHINIA’s respective business, financial condition or results of operations, the trading price of our common stock, or the ability of stockholders to sell their shares after the distribution, including, without limitation, as a result of illiquid trading due to the failure of our common stock to be accepted for listing or litigation giving rise to any preliminary or permanent injunctions sought to prevent the consummation of the distribution. If BorgWarner elects to proceed with the distribution notwithstanding that one or more of the conditions to
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the distribution has not been met, BorgWarner will evaluate the applicable facts and circumstances at that time and make such additional disclosure and take such other actions as BorgWarner determines to be necessary or appropriate in accordance with applicable law.
In particular, if BorgWarner waives the condition that BorgWarner will receive an opinion of Ernst & Young LLP to the effect that the Spin-Off will qualify as a tax-free “reorganization” within the meaning of Sections 368(a)(1)(D) and 355 of the Code, then we would notify BorgWarner stockholders (1) by filing an amendment to the Registration Statement on Form 10 of which this Information Statement forms a part if the waiver occurs before the Registration Statement becomes effective or (2) by filing a Current Report on Form 8-K if the waiver occurs after the Registration Statement becomes effective, as described in “The Spin-Off — Conditions to the Spin-Off.” If BorgWarner waives that condition and then it is determined that the Spin-Off does not qualify as a tax-free “reorganization,” then in addition to the potential material adverse effects described above, there could be material adverse tax consequences to BorgWarner and its stockholders. See “Risk Factors—Risks Related to the Spin-Off— The Spin-Off could result in significant tax liability to BorgWarner and its stockholders if it is determined to be a taxable transaction” and “Material U.S. Federal Income Tax Consequences of the Spin-Off— Material U.S. Federal Income Tax Consequences if the Distribution Is Taxable.” BorgWarner does not currently intend to waive this condition to the distribution.
Q:Can BorgWarner cancel the Spin-Off even if all conditions have been met?
A:Yes. Until the distribution has occurred, BorgWarner has the right to not complete the Spin-Off, even if all of the conditions are satisfied. See “The Spin-Off—Conditions to the Spin-Off.”
Q:Will the number of BorgWarner shares I own change as a result of the Spin-Off?
A:No, the number of shares of BorgWarner common stock you own will not change as a result of the Spin-Off.
Q:Will the Spin-Off affect the trading price of my BorgWarner common stock?
A:BorgWarner believes that our separation from BorgWarner offers its stockholders the greatest long-term value. It is possible that, after the Spin-Off, the combined equity value of PHINIA and BorgWarner will be less than BorgWarner’s equity value before the Spin-Off, and the trading price of BorgWarner’s shares of common stock will be lower than immediately prior to the Spin-Off, as the trading price of BorgWarner’s shares will no longer reflect the value of the Fuel Systems and Aftermarket businesses.
Q:What will I receive in the Spin-Off in respect of my BorgWarner common stock?
A:As a holder of BorgWarner common stock, you will receive a distribution of one share of our common stock for every five shares of BorgWarner common stock you hold on the Record Date. The distribution agent will distribute only whole shares of our common stock in the Spin-Off. See “The Spin-Off—Treatment of Fractional Shares” for more information on the treatment of the fractional shares you might otherwise be entitled to receive in the Spin-Off. Your proportionate interest in BorgWarner will not change as a result of the Spin-Off. For a more detailed description, see “The Spin-Off.”
Q:What is being distributed in the Spin-Off?
A:BorgWarner will distribute approximately 47,016,147 shares of our common stock in the Spin-Off, based on the approximately 235,080,738 shares of BorgWarner common stock outstanding as of May 31, 2023. The actual number of shares of our common stock that BorgWarner will distribute will depend on the total number of shares of BorgWarner common stock outstanding on the Record Date. The shares of our common stock that BorgWarner
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distributes will constitute 100% of the issued and outstanding shares of our common stock immediately prior to the Spin-Off. For more information on the shares being distributed in the Spin-Off, see “Description of Our Capital Stock—Common Stock.”
Q:What do I have to do to participate in the Spin-Off?
A:All holders of BorgWarner’s common stock as of the Record Date will participate in the Spin-Off. You are not required to take any action to participate, but we urge you to read this Information Statement carefully. Holders of BorgWarner common stock on the Record Date will not need to pay any cash or deliver any other consideration, including any shares of BorgWarner common stock, to receive shares of our common stock in the Spin-Off. In addition, no stockholder approval of the Spin-Off is required. We are not asking you for a vote and request that you do not send us a proxy card.
Q:What is the record date for the distribution?
A:BorgWarner will determine record ownership as of the close of business on June 23, 2023, which we refer to as the “Record Date.”
Q:When will the distribution occur?
A:The distribution will be effective as of 5:00 p.m., New York City time, on July 3, 2023, which we refer to as the “Distribution Date.”
Q:How will BorgWarner distribute shares of PHINIA common stock?
A:On the Distribution Date, BorgWarner will release the shares of our common stock to the distribution agent to distribute to BorgWarner stockholders. The whole shares of our common stock will be credited in book-entry accounts for BorgWarner stockholders entitled to receive the shares in the Spin-Off. If you own BorgWarner common stock as of the close of business on the Record Date, the shares of our common stock that you are entitled to receive in the Spin-Off will be issued to your account as follows:
Registered stockholders: If you own your shares of BorgWarner common stock directly, either in book-entry form through an account at Computershare, BorgWarner’s transfer agent, and/or if you hold paper stock certificates, you are a registered stockholder. In this case, the distribution agent will credit the whole shares of our common stock you receive in the Spin-Off by way of direct registration in book-entry form to a new account with our transfer agent. Registration in book-entry form refers to a method of recording share ownership where no physical stock certificates are issued to stockholders, as will be the case in the Spin-Off. You will be able to access information regarding your book-entry account for shares of our common stock at www.computershare.com or by calling 800-851-4229 (domestic) and 201-680-6578 (international).
“Street name” or beneficial stockholders: If you own your shares of BorgWarner common stock beneficially through a bank, broker, or other nominee, then the bank, broker, or other nominee holds the shares in “street name” and records your ownership on its books. In this case, your bank, broker, or other nominee will credit your account with the whole shares of our common stock that you receive in the Spin-Off on or shortly after the Distribution Date. We encourage you to contact your bank, broker, or other nominee if you have any questions concerning the mechanics of having shares held in “street name.”
See “The Spin-Off—When and How You Will Receive Our Shares” for a more detailed explanation.
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Q:If I sell my shares of BorgWarner common stock on or before the Distribution Date, will I still be entitled to receive shares of PHINIA common stock in the Spin-Off?
A:If you sell your shares of BorgWarner common stock before the Record Date, you will not be entitled to receive shares of our common stock in the Spin-Off. If you hold shares of BorgWarner common stock on the Record Date and decide to sell them on or before the Distribution Date, you may have the ability to choose to sell your BorgWarner common stock with or without your entitlement to receive our common stock in the Spin-Off. You should discuss the available options in this regard with your bank, broker, or other nominee. See “The Spin-Off—Trading Prior to the Distribution Date.”
Q:How will fractional shares be treated in the Spin-Off?
A:The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of BorgWarner stockholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees, transfer taxes and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). See “The Spin-Off—Treatment of Fractional Shares” for a more detailed explanation of the treatment of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable to the recipient BorgWarner stockholders for U.S. federal income tax purposes as described in the section entitled “Material U.S. Federal Income Tax Consequences of the Spin-Off.” The distribution agent will, in its sole discretion, without any influence by BorgWarner or us, determine when, how, through which broker-dealer and at what price to sell the whole shares of our common stock. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either BorgWarner or us.
Q:What will govern my rights as a PHINIA stockholder?
A:Your rights as a PHINIA stockholder will be governed by Delaware law, our amended and restated certificate of incorporation and our amended and restated by-laws. We believe that, immediately following the Spin-Off, the only material differences between your rights as a PHINIA stockholder and your rights as a BorgWarner stockholder will be that PHINIA stockholders (1) will not be entitled to act by written consent, (2) will not be entitled to call a special meeting and (3) will be subject to an exclusive forum provision in our amended and restated by-laws. See “Description of Our Capital Stock” and “Risk Factors—Our by-laws will provide that certain courts in the State of Delaware or the federal district courts of the United States will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.”
Q:What are the U.S. federal income tax consequences to me of the Spin-Off?
A:A condition to the closing of the Spin-Off is BorgWarner’s receipt of a written opinion of Ernst & Young LLP, to the effect that the Spin-Off will qualify under the Internal Revenue Code of 1986, as amended (the “Code”), as a transaction that is tax-free to BorgWarner and to its stockholders. If the Spin-Off so qualifies, for U.S. federal income tax purposes, you will not recognize any gain or loss, and no amount will be included in your income in connection with the Spin-Off, except with respect to any cash received in lieu of fractional shares. You should review the section entitled “Material U.S. Federal Income Tax Consequences of the Spin-Off” for a discussion of the material U.S. federal income tax consequences of the Spin-Off and should consult your own tax advisor as to the particular consequences of the Spin-Off to you, including the applicability and effect of any U.S. federal, state, and local tax laws as well as any non-U.S. tax laws.
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Q:What will PHINIA’s relationship be with BorgWarner following the Spin-Off?
A:In connection with the Spin-Off, we and BorgWarner will enter into the Separation and Distribution Agreement and various other agreements, including transition services agreements, a tax matters agreement, an employee matters agreement, real estate lease agreements, intellectual property agreements, an electronics collaboration agreement and contract manufacturing and supply agreements. These agreements will provide a framework for our relationship with BorgWarner after the Spin-Off and provide for the allocation between us and BorgWarner of BorgWarner’s assets, employees, liabilities, and obligations (including its property, employee benefits, environmental liabilities, pension liabilities and tax liabilities) attributable to periods prior to, at, and after our Spin-Off from BorgWarner. For additional information regarding the Separation and Distribution Agreement and other transaction agreements, see “Certain Relationships and Related Person Transactions—Agreements with BorgWarner” and “Risk Factors—Risks Related to the Spin-Off.”
Q:Who will manage PHINIA after the Spin-Off?
A:Led by Brady D. Ericson, who will be our President and Chief Executive Officer after the Spin-Off, our executive management team possesses deep knowledge of, and extensive experience in, our business and our industry. Our executive management team has been involved in strategic decisions with respect to PHINIA and in establishing a vision for the future of PHINIA. See “Management.”
Q:Do I have appraisal rights in connection with the Spin-Off?
A:No. Holders of BorgWarner common stock are not entitled to appraisal rights in connection with the Spin-Off.
Q:Where can I get more information?
A:If you have any questions relating to the mechanics of the Spin-Off, you should contact the distribution agent at:
Computershare
150 Royal Street
Canton, MA 02021
Attention: Client Services
800-851-4229 (domestic) and 201-680-6578 (international)
Before the Spin-Off, if you have any questions relating to the Spin-Off, you should contact BorgWarner at:
BorgWarner, Inc.
3850 Hamlin Road
Auburn Hills, MI 48326
Attention: Investor Relations
After the Spin-Off, if you have any questions relating to PHINIA, you should contact us at:
PHINIA Inc.
3000 University Drive
Auburn Hills, MI 48326
Attention: Investor Relations
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Questions and Answers about PHINIA
The following provides only a summary of certain information regarding PHINIA. You should read this Information Statement in its entirety for a more detailed description of the matters described below.
Q:Does PHINIA intend to pay cash dividends?
A:Once the Spin-Off is effective, our Board will evaluate whether to pay cash dividends to our stockholders. The timing, declaration, amount, and payment of future dividends to stockholders, if any, will fall within the discretion of our Board. Among the items our Board will consider when establishing a dividend policy will be the capital needs of our business and opportunities to retain future earnings for use in the operation of our business and to fund future growth. See “Dividend Policy.”
Q:Will PHINIA incur any debt prior to or at the time of the Spin-Off?
A:In connection with the Spin-Off, we expect to incur indebtedness in an aggregate principal amount of approximately $800 million, the proceeds of which we expect to use to repay historical indebtedness to BorgWarner. The indebtedness is expected to be incurred under a senior secured credit facility that would provide for up to approximately $800 million of term loans and a $500 million committed revolving credit facility. The terms of such indebtedness are subject to change and will be finalized prior to the closing of the Spin-Off. See “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Q:How will PHINIA common stock trade?
A:We have applied to list our common stock on the Exchange under the ticker symbol “PHIN.” Currently, there is no public market for our common stock. We anticipate that trading in our common stock will begin on a “when-issued” basis on the third trading day prior to the Distribution Date and will continue up to and including the Distribution Date. “When-issued” trading in the context of a spin-off refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. “When-issued” trades generally settle within two trading days after the Distribution Date. On the first trading day following the Distribution Date, any “when-issued” trading of our common stock will end and “regular-way” trading will begin. Regular-way trading refers to trading after the security has been distributed and typically involves a trade that settles on the second full trading day following the date of the trade. See “The Spin-Off—Trading Prior to the Distribution Date.” We cannot predict the trading prices for our common stock before, on, or after the Distribution Date.
Q:Who is the transfer agent and registrar for PHINIA common stock?
A:Computershare is the transfer agent and registrar for our common stock.
Q:Are there risks associated with owning shares of PHINIA common stock?
A:Yes, there are substantial risks associated with owning shares of our common stock. Accordingly, you should read carefully the information set forth under “Risk Factors” in this Information Statement.
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INFORMATION STATEMENT SUMMARY
The following summary contains selected information about us and about the Spin-Off. It does not contain all of the information that is important to you. You should review this Information Statement in its entirety, including matters set forth under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Combined Financial Statements and the notes thereto included elsewhere in this Information Statement. Some of the statements in the following summary constitute forward-looking statements. See “Cautionary Statements for Forward-Looking Information.”
Our Business
Overview
PHINIA’s business 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 original equipment manufacturers (“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 original equipment service (“OES”) solutions and remanufactured products as well as an expanded range of products for the independent (non-OEM) aftermarket.
We have an extensive original equipment portfolio of advanced fuel injection systems, fuel delivery modules, canisters, starters, alternators, sensors, electronic control modules and associated software. Our global footprint includes 17 major manufacturing facilities and seven major technical centers utilizing a regional service model, which enables us to efficiently and effectively serve our global customers. We have a presence in 24 countries and a team of approximately 1,500 scientists, engineers and technicians globally who focus on innovating and developing market-relevant product solutions.
We also manufacture and sell our products to leading aftermarket participants, including independent retailers and wholesale distributors. In addition to the range of OEM products we describe above, we supply the independent aftermarket with a suite of new and remanufactured products such as diagnostic equipment, ignition coils, smart remote actuators, exhaust gas recirculation valves, brakes, steering, suspension, and other products. We add aftermarket know-how in category management, logistics, training, marketing, and other dedicated services to provide a broad range of aftermarket solutions that extend the service lives of vehicles and industrial equipment.
Our business is well diversified across regions, product types, customer types and customers. In 2022, we derived 39% of our revenue from Europe, 41% from the Americas, and 20% from Asia. Further, 24% of our net sales in 2022 were for original equipment commercial vehicle and industrial applications, 44% were for original equipment light vehicles, 11% were for OES, and 21% for independent aftermarket customers. We have a diverse customer base with only one customer accounting for more than 10% of our net sales in 2022 (General Motors accounted for 12% of net sales), and our top five customers accounted for a total of approximately 32% of net sales.
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Breakdown of 2022 Sales by Geography, Segment and Customer Type
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Strengths
Our business is a recognized leader in combustion and hybrid propulsion technologies for both OEMs and aftermarket customers. Our competitive strengths stem from our portfolio of advanced technologies, history of proven innovation, strong customer relationships across diverse markets and global operations near key OEM customer manufacturing sites. We believe we are well positioned to partner with global OEMs and help them meet tighter regulations and improve efficiency. We believe we can also expand channel penetration and global reach with our independent aftermarket business leveraging our strong brands, product breadth and leading off-the-shelf product availability.
•Portfolio of Advanced Technologies Aligned to Customer Demands: We have an established product portfolio that includes technologies for all combustion and hybrid propulsion systems including gas, diesel, and alternative fuels including hydrogen, ethanol and natural gas, which we sell to our diverse OEM and aftermarket customer base.
Fuel Systems:
Our Fuel Systems segment comprises a range of technologies that enable us to provide complete fuel management solutions, from tank to combustion chamber. Our highly engineered fuel injection systems portfolio includes pumps, injectors, fuel rail assemblies and engine control modules that reduce emissions and improve fuel economy for traditional and hybrid applications. Our common rail fuel injection system is the core technology for both on- and off-highway commercial vehicle, industrial and light vehicle applications. We also offer software and calibration services which allows us to develop a complete turnkey system.
Our fuel delivery modules and canisters are specifically engineered to individual vehicle applications to maximize safety, efficiency, performance and emissions legislation compliance. We believe our strong market position, especially in the North American market, is built on strong engineering capabilities, which enable us to customize the product to fit within specific application envelopes and to deliver high performance, high durability products.
Aftermarket:
Our Aftermarket segment sells products to independent aftermarket customers and OES customers with both new and remanufactured products. Our product portfolio includes a wide range of products as well as maintenance, test equipment and vehicle and industrial equipment
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diagnostics solutions. We believe the Aftermarket segment’s business provides a recurring and stable revenue base, as replacement of many of these products is non-discretionary in nature. The growing number of vehicles on the road, along with the higher average age of vehicles and increasing miles driven, collectively represent trends that we expect to lead to growing demand for our aftermarket products.
Our Aftermarket segment includes our extensive range of OEM and aftermarket starters and alternators for commercial vehicle, industrial and light vehicle applications. These deliver class-leading power density, durability and performance for the most demanding applications. Based on our proven track record of leading performance for premium commercial vehicle and industrial solutions, customers actively choose to specify our starters and alternators.
•Technology Advantage from Long History of Investment and Differentiated System Capabilities: We have a team of approximately 1,500 scientists, engineers and technicians across seven major technical centers globally. With rights to approximately 2,260 active patents and patent applications, we have a strong track record of developing technologies focused on addressing consumer demands and industry trends. We have well-defined product and system technology roadmaps designed to provide solutions for a variety of different emission standards and engine architectures. With our extensive portfolio of products, we believe we are well positioned to benefit from increasing OEM demand for turnkey solutions. We are developing an extensive hydrogen portfolio to capitalize on secular growth trends in hydrogen injection systems, with our first product launch planned for 2024. We also leverage our OEM product engineering capabilities across our aftermarket product lines to capture value over the lifetime of a vehicle or piece of industrial equipment. Our ability to provide the latest technologies to improve fuel economy and lower emissions has enabled us to realize revenue growth above that associated with changes in global production of combustion and hybrid propulsion vehicles and, we believe, industrial applications.
•Diverse Business Mix Across Customer Types and Customers: Our business is well diversified across customer types and customers with 24% of our net sales in 2022 were for original equipment commercial vehicle and industrial applications, 44% were for original equipment light vehicles, 11% were for OES, and 21% for independent aftermarket customers. Our customer base includes most of the largest commercial vehicle and industrial application OEMs and light vehicle OEMs in the world. Our top five customers collectively represented 32% of our net sales in 2022 with our largest customer accounting for only 12%. We believe our longstanding relationships with leading global OEMs will position us well to continue to capitalize on opportunities for geographic and portfolio expansion to drive growth.
•Established Global Platform with Operations Near Key OEM Customer Manufacturing Sites: We operate 17 major manufacturing facilities and seven major technical centers and have a presence in 24 countries throughout the world. Our global manufacturing footprint enables us to efficiently manufacture in and supply from primarily best-cost countries near our customers. Our regional engineering teams also allow us to stay connected to local market requirements and partner with our customers during all phases of the development process, from design through production. By working in collaboration with our customers, we expect to continue to increase market share and grow through technological advancements.
•Track Record of Operational Excellence: We have made significant investments to reduce our cost structure by rotating our manufacturing capabilities toward best-cost countries and consolidating our engineering organization to further improve our cost position and drive margin expansion. From 2020 to 2022, our Fuel Systems and Aftermarket segments adjusted operating margins increased by 300 and 510 basis points, respectively, as the benefits of these investments began to take hold. Additionally, we leverage our lean enterprise operating system to reduce product lead times and successfully execute product launches. We believe our enterprise
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operating system, strong supply chain strategy and strategic manufacturing footprint will allow us to continue to maintain strong operating margins.
•Strong Margins and Free Cash Flow with Above-Market Growth: We expect to continue to leverage our portfolio of leading products and systems and strong customer relationships to drive key program wins, deliver strong margins and realize revenue growth above changes in global production of combustion and hybrid propulsion vehicles and, we believe, industrial applications. Some of our long-time competitors have exited or are in the process of exiting the market, which we believe provides us additional opportunities for future growth. We believe our innovative culture, lean cost structure and manufacturing expertise, combined with a robust aftermarket (independent aftermarket and OES) revenue stream, will allow us to generate consistent earnings growth and strong cash flow.
•Proven Leadership Team with Operational Momentum: We have a strong management team with extensive experience both within the industry and across our business. Through the combination of their longstanding customer relationships and proven track record of operational excellence, we believe the leadership team has positioned us for future revenue growth and strong cash flow.
Strategies
•Maintain Leadership in our Technologies to Solve Our Customers’ Most Complex Challenges: We are focused on providing technologies and solutions that solve our customers’ biggest challenges. Leveraging the breadth and depth of our engineering capabilities, we believe we have strong positions in fuel injection systems, fuel delivery modules, canisters, starters, and alternators. Additionally, we are a leading provider of aftermarket products. Our extensive product portfolio helps customers meet increasingly stringent global regulatory requirements while also enhancing performance. We expect to maintain and grow our leadership through enhanced focus and dedicated resources to capitalize on future opportunities.
•Greater Focus on Commercial Vehicle and Industrial Customers and Systems: We have strong customer relationships with most of the largest global commercial vehicle OEMs and numerous industrial application OEMs. We plan to continue to focus and expand our commercial vehicle and industrial application offerings, as we expect this market to be predominantly combustion-based through at least 2040 and that liquid or gaseous fuels will continue to be primary energy sources to propel vehicles and power other industrial solutions. We are developing the next generation of products, including fuel injection systems, starters and alternators, needed to support Euro 7 and other future advanced emissions requirements. We plan to continue to invest in the development of innovative products and solutions that take advantage of key secular trends, including hydrogen, ethanol, and natural gas. We aim to invest across our organization to win new customers and expand into new markets.
•Global Expansion of Leading Aftermarket Position: We have strong relationships with many of the largest global aftermarket customers, including independent retailers and wholesale distributors. We supply a wide suite of aftermarket products, category management, logistics, training, marketing and other dedicated services to support our customers over the lifetime of a vehicle or piece of industrial equipment. We plan to continue to increase scale with a focus on higher growth markets, including Asia. In addition, we plan to prioritize high-value solutions where we have expertise, including diagnostics, software, services, training and repair kits.
•Capitalize on Identified Organic Growth Opportunities: We have identified several high-value opportunities where we see potential to deliver the breadth of our company-wide capabilities to drive continued organic growth. We see a significant market opportunity to develop a portfolio of hydrogen and other alternative combustion solutions to serve as viable alternatives to electrification or fuel cell solutions. In addition, we believe we are well positioned to continue to expand differentiated offerings in electronics, software and complete systems capabilities. We
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also see an opportunity to increase our revenues from sales to OEMs of static industrial applications, such as power generation systems and pump sets.
•Accelerate Growth Through Targeted Acquisitions: Our business has a history of successful strategic acquisitions and integration. We believe we have developed a pipeline of acquisition candidates that complement existing products, expand geographic reach, and enhance our technical expertise and capabilities. We believe our industry knowledge, culture of operational excellence, and integration experience will position us well to continue to pursue disciplined and accretive strategic acquisitions.
•Leverage Our Lean and Flexible Cost Structure to Deliver Strong Earnings and Cash Flow Growth: We recognize the importance of maintaining a lean and flexible business model to deliver earnings and cash flow growth. We intend to improve our cost competitiveness by increasing operational efficiency, maximizing manufacturing output and leveraging our facilities in best-cost countries.
Summary of Risk Factors
An investment in our company is subject to a number of risks. These risks relate to our strategy, our industry, our business, our customers, our suppliers, the Spin-Off, and our common stock and the securities markets. Any of these risks and other risks could materially and adversely affect our business, financial condition or results of operations and the actual outcome of matters as to which forward-looking statements are made in this Information Statement. Please read the information in the section captioned “Risk Factors” of this Information Statement for a description of the principal risks that we face. Some of the more significant challenges and risks we face include the following:
•If we do not deliver new products, services and technologies in response to changing consumer preferences and increased regulation of greenhouse gas emissions, or if the market for electric vehicles accelerates faster than expected, our business could suffer.
•The failure to realize the expected benefits of acquisitions and other risks associated with acquisitions could adversely affect our business.
•Goodwill and indefinite-lived intangible assets, which are subject to periodic impairment evaluations, represent a significant portion of our total assets. An impairment charge on these assets could have a material adverse impact on our financial condition and results of operations.
•Conditions in the vehicle industry may adversely affect our business.
•We face strong competition.
•We are subject to potential governmental investigations and related proceedings relating to vehicle emissions standards.
•We face risks related to the COVID-19 pandemic that could adversely affect our business and financial performance.
•We are under substantial pressure from OEMs to reduce the prices of our products.
•We continue to face volatile costs of commodities used in the production of our products and elevated levels of inflation.
•We may not be able to access the capital and credit markets on terms that are favorable to us or at all.
•Our business may be adversely affected by the current credit market environment.
•Changes in U.S. administrative policy, including changes to existing trade agreements and any resulting changes in international trade relations, may have an adverse effect on us.
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•We use important intellectual property in our business. If we are unable to protect our intellectual property or if a third party makes assertions against us or our customers relating to intellectual property rights, our business could be adversely affected.
•A failure of or disruption in our information technology infrastructure, including a disruption related to cybersecurity, could adversely impact our business and operations.
•Our business success depends on attracting and retaining qualified employees.
•Work stoppages, production shutdowns and similar events could significantly disrupt our business.
•Changes in interest rates and asset returns could increase our pension funding obligations, which could reduce our profitability and cash flow.
•We are subject to extensive environmental regulations that are subject to change and involve significant risks.
•Climate change and regulations related to climate change may adversely impact our operations.
•We have liabilities related to product warranties, litigation and other claims.
•We are subject to risks related to our international operations.
•We could incur restructuring charges as we execute actions in an effort to improve future profitability and competitiveness and to optimize our product portfolio and may not achieve the anticipated savings and benefits from these actions.
•The occurrence or threat of extraordinary events, including natural disasters, political disruptions, terrorist attacks, public health issues, and acts of war, could significantly disrupt production or impact consumer spending.
•We could be adversely affected by supply shortages of components from our suppliers.
•Suppliers’ economic distress could result in the disruption of our operations and could adversely affect our business.
•The Spin-Off could result in significant tax liability to BorgWarner and its stockholders if it is determined to be a taxable transaction.
•If the Spin-Off were determined not to qualify as tax-free for U.S. federal income tax purposes, we could have an indemnification obligation to BorgWarner, which could adversely affect our business, financial condition, cash flows, and results of operations.
•We intend to agree to restrictions to preserve the tax-free treatment of the Spin-Off, which may reduce our strategic and operating flexibility.
•We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.
•Some of the terms we will receive in our agreements with BorgWarner could be less beneficial than the terms we may have otherwise received from unaffiliated third parties, and our costs under the agreements could be greater than we anticipate.
•We are a smaller company relative to BorgWarner, which could result in increased costs because of a decrease in our purchasing power and make it difficult to maintain existing customer relationships and obtain new customers.
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•Following the Spin-Off, we could incur substantial additional costs and experience temporary business interruptions, and we may not be adequately prepared to meet the requirements of an independent, publicly traded company on a timely or cost-effective basis.
•As an independent, publicly traded company, we may not enjoy the same benefits that we did as a part of BorgWarner.
•We have no operating history as an independent, publicly traded company, and our historical combined financial information is not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.
•We have identified a material weakness in our internal control over financial reporting. If we are unable to remediate this material weakness, or if we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business.
•We expect to incur new indebtedness concurrently with or prior to the Spin-Off, and the degree to which we will be leveraged following completion of the Spin-Off could adversely affect our business, results of operations, cash flows, and financial condition.
•Certain provisions in our certificate of incorporation, by-laws, and Delaware law may discourage takeovers and limit the power of our stockholders.
The Spin-Off
On December 6, 2022, BorgWarner announced plans for the complete legal and structural separation of BorgWarner’s Fuel Systems and Aftermarket businesses from BorgWarner by the Spin-Off. Prior to the decision to pursue the Spin-Off of the Fuel Systems and Aftermarket businesses, BorgWarner considered a range of potential structural alternatives and concluded that the Spin-Off is the most attractive alternative for enhancing stockholder value. To effect the Spin-Off, BorgWarner will undertake the Internal Restructuring and subsequently distribute 100% of our common stock to BorgWarner’s stockholders. These transactions will result in all of the assets, liabilities, and legal entities comprising BorgWarner’s Fuel Systems and Aftermarket businesses being owned directly, or indirectly through its subsidiaries, by PHINIA. Following the Spin-Off, PHINIA, holding the Fuel Systems and Aftermarket businesses, will become an independent, publicly traded company. Prior to completion of the Spin-Off, we intend to enter into a separation and distribution agreement (the “Separation and Distribution Agreement”) and several other agreements with BorgWarner related to the Spin-Off. These agreements will govern our relationship with BorgWarner up to and after completion of the Spin-Off and allocate between us and BorgWarner various assets, liabilities and obligations, including employee benefits, intellectual property, and tax-related assets and liabilities. See “Certain Relationships and Related Person Transactions—Agreements with BorgWarner.”
Completion of the Spin-Off is subject to the satisfaction or waiver of a number of customary conditions. In addition, BorgWarner has the right not to complete the Spin-Off if, at any time, the BorgWarner Board determines, in its sole and absolute discretion, that the Spin-Off is not in the best interests of BorgWarner or its stockholders, or is otherwise not advisable. See “The Spin-Off—Conditions to the Spin-Off.”
The Spin-Off is intended to maximize shareholder value by creating two focused and strong companies, each pursuing its respective strategies. Following the Internal Restructuring, we will hold BorgWarner’s former Fuel Systems and Aftermarket businesses, and we will have greater agility to deliver market-leading innovation and solutions. As we believe our Fuel Systems and Aftermarket businesses will continue to outgrow their respective markets, we believe PHINIA would also be well positioned for success as a standalone public company. Further, the Spin-Off will allow our management team to devote its time and attention to the corporate strategies and policies that are based specifically on the needs of the Fuel Systems and Aftermarket businesses. We plan to create incentives for our management and
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employees that align with our business performance and the interests of our stockholders, which will help us attract, retain, and motivate highly qualified employees. Moreover, following the Spin-Off, each company will be able to use its capital to pursue and achieve its strategic objectives. Additionally, we and BorgWarner believe the Spin-Off will help align our respective stockholder bases with the characteristics and risk profile of the respective businesses. See “The Spin-Off—Reasons for the Spin-Off.”
Following the Spin-Off, we expect our common stock will trade on the Exchange under the ticker symbol “PHIN.”
Our Corporate Information
Currently, we are a wholly-owned subsidiary of BorgWarner. We were formed on February 9, 2023 for purposes of holding the Fuel Systems and Aftermarket businesses. Our corporate headquarters will be located at 3000 University Drive, Auburn Hills, MI 48326, and our telephone number is (248) 754-9200. Our website address is PHINIA.com. Information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this Information Statement.
Summary Historical and Unaudited Pro Forma Condensed Combined Financial Information
The following summary financial information reflect the combined operations of PHINIA. The summary historical and unaudited pro forma condensed combined financial information shown below should be read in conjunction with the sections herein entitled “Capitalization,” “Management’s Discussion and Analysis of Financial Condition of Results of Operations,” “Unaudited Pro Forma Condensed Combined Financial Statements,” and “Certain Relationships and Related Person Transactions—Agreements with BorgWarner” as well as our Combined Financial Statements and the corresponding notes included elsewhere in this Information Statement. For factors that could cause actual results to differ materially from those presented in the summary historical and pro forma condensed combined financial information, see “Cautionary Statements for Forward-Looking Information” and “Risk Factors” included elsewhere in this Information Statement.
We derived the summary historical combined financial information for each of the years in the three-year period ended December 31, 2022, from our audited combined financial statements and for the three months ended March 31, 2023 from our unaudited combined financial statements, which are included elsewhere in this Information Statement.
The summary unaudited pro forma condensed combined financial information as of and for the three months ended March 31, 2023 and for the year ended December 31, 2022 has been derived from our unaudited pro forma condensed combined financial information, which is included elsewhere in this Information Statement.
Pro Forma
Historical
As of
March 31,
As of
March 31,
As of
December 31,
($ in millions)
2023
2023
2022
2021
Cash and cash equivalents
$265 $181 $251 $259 
Total assets
3,836 4,196 4,074 4,182 
Due to parent, current and non-current
1,274 1,242 1,288 
Long-term debt
799 27 28 27 
Total liabilities
2,059 2,404 2,431 2,470 
Total equity
1,777 1,792 1,643 1,712 
Total liabilities and equity
3,836 4,196 4,074 4,182 
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Pro Forma
Historical

Three months ended
March 31,
Year ended December 31,
Three months ended
March 31,
Year ended
December 31,
($ in millions)
2023
2022
2023
2022
2021
2020(a)
Net sales$858 $3,445 $835 $3,348 $3,227 $1,034 
Cost of sales685 2,719 663 2,627 2,551 859 
Gross profit173 726 172 721 676 175 
Selling, general and administrative expenses
100 412 99 407 460 147 
Restructuring expense4 11 4 11 55 37 
Goodwill impairment— — — — — 82 
Other operating (income) expense, net16 16 11 (15)(13)2 
Operating income (loss)$53 $287 $58 $318 $174 $(93)
Operating margin
6.2 %8.3 %6.9 %9.5 %5.4 %(9.0)%
Net earnings (loss) attributable to PHINIA$19 $185 $35 $262 $152 $(124)
Net cash provided by (used in) operating activities$(33)$303 $147 $(97)
Other data(b)
Adjusted operating income(c)
$82 $364 $87 $395 $282 $72 
Adjusted operating margin(c)
9.6 %10.6 %10.4 %11.8 %8.7 %7.0 %
Adjusted net earnings(c)
$38 $220 $54 $297 $202 $25 
Free cash flow(c)
$(71)$196 $1 $(151)
_____________
(a)On October 1, 2020, BorgWarner completed its acquisition of 100% of the outstanding ordinary shares of Delphi Technologies PLC from the shareholders of Delphi Technologies. The subset of the Delphi Technologies business consisting of the Aftermarket business, the Fuel Systems business and a portion of the Powertrain Products business were integrated into the Company. Accordingly, the Company’s Historical Combined Financial Statements reflect the results of the Acquired Delphi business following the date of acquisition.
(b)In addition to our operating results, as calculated in accordance with U.S. GAAP, we use, and plan to continue using, non-GAAP financial measures when monitoring and evaluating operating performance. The non-GAAP financial measures presented in this Information Statement are supplemental measures of our performance and our liquidity that we believe help investors understand our financial condition and operating results and assess our future prospects. We believe that these non-GAAP financial measures, in addition to the corresponding U.S. GAAP financial measures, are important supplemental measures that exclude non-cash or other items that may not be indicative of or are unrelated to our core operating results and the overall health of our company. For more information about our non-GAAP financial measures, see “Non-GAAP Financial Data.”
(c)Non-GAAP financial measures.
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Adjusted Operating Income, Adjusted Operating Margin and Adjusted EBITDA
We define adjusted operating income as operating income adjusted to exclude the impact of restructuring expense, merger, acquisition and divestiture expense, intangible asset amortization, other net expenses, discontinued operations, and other gains and losses not reflective of our ongoing operations. Adjusted operating margin is defined as adjusted operating income divided by net sales. We define adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA") as adjusted operating income plus depreciation expense.
Pro FormaHistorical
Three months ended
March 31,
Year ended December 31,
Three months ended
March 31,
Year ended
December 31,
(in millions)202320222023202220212020
Operating income (loss)$53 $287 $58 $318 $174 $(93)
Operating margin6.2 %8.3 %6.9 %9.5 %5.4 %(9.0)%
Merger, acquisition and divestiture expense$18 $31 $18 $31 $7 $10 
Intangible asset amortization7 28 7 28 29 15 
Restructuring expense4 11 4 11 55 37 
Asset impairments, write offs and lease modifications— 5 — 5 17 82 
Amortization of inventory fair value adjustment— — — — — 21 
Other— 2 — 2 — — 
Adjusted operating income$82 $364 $87 $395 $282 $72 
Adjusted operating margin9.6 %10.6 %10.4 %11.8 %8.7 %7.0 %
Depreciation expense$34 $142 $34 $142 $175 $47 
Adjusted EBITDA$116 $506 $121 $537 $457 $119 
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Adjusted Net Earnings
We define adjusted net earnings as net earnings attributable to PHINIA adjusted to eliminate the impact of restructuring expense, merger, acquisition and divestiture expense, other net expenses, discontinued operations, and other gains and losses not reflective of our ongoing operations, and related tax effects.
Pro FormaHistorical
Three months ended
March 31,
Year ended December 31,
Three months ended
March 31,
Year ended
December 31,
(in millions)202320222023202220212020
Net earnings (loss) attributable to PHINIA$19 $185 $35 $262 $152 $(124)
Merger, acquisition and divestiture expense$18 $31 $18 $31 $7 $10 
Restructuring expense3 9 3 9 53 30 
Asset impairments, write offs and lease modifications— 5 — 5 13 82 
Amortization of inventory fair value adjustment— — — — — 17 
Other— 1 — 1 — — 
Tax adjustments(2)(11)(2)(11)(23)10 
Adjusted net earnings$38 $220 $54 $297 $202 $25 
Free Cash Flow
We define free cash flow as net cash provided by operating activities minus capital expenditures, and it is useful to both management and investors in evaluating the Company’s ability to service and repay its debt.
Historical
Three months ended
March 31,		Year ended
December 31,
(in millions)2023202220212020
Net cash (used in) provided by operating activities$(33)$303 $147 $(97)
Capital expenditures, including tooling outlays(38)(107)(146)(54)
Free cash flow$(71)$196 $1 $(151)
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RISK FACTORS
You should carefully consider the following risks and other information in this Information Statement in evaluating PHINIA and PHINIA’s common stock. Any of the following risks could materially and adversely affect PHINIA’s business, financial condition, or results of operations.
Risks Related to Our Strategy
If we do not deliver new products, services and technologies in response to changing consumer preferences and increased regulation of greenhouse gas emissions, or if the market for electric vehicles accelerates faster than expected, our business could suffer.
The vehicle industry is increasingly focused on increased fuel efficiency and reduced emissions, including the development of hybrid and electric vehicles, largely as a result of changing consumer preferences and increasingly stringent global regulatory requirements related to climate change. In recent years, electric vehicle adoption has increased, with some cities limiting access and a number of countries announcing plans to implement limits or phase outs on sales by 2035 for certain combustion powered vehicles. Although we are focused on driving growth through our ability to capitalize on certain potential trends, such as adoption of alternative fuels (e.g., ethanol, hydrogen and e-fuels), some of the focuses and trends, such as the move to electric vehicles, are not part of our product line or strategy. If we do not continue to innovate and develop, or acquire, new and compelling products that capitalize upon new technologies in response to OEM and consumer preferences, if the adoption rate for electric vehicles (particularly commercial vehicles) accelerates faster than expected, or if authorities actually implement limits or phase-outs on a broad basis, this could have an adverse impact on our results of operations.
The failure to realize the expected benefits of acquisitions and other risks associated with acquisitions could adversely affect our business.
The success of our acquisitions is dependent, in part, on our ability to realize the expected benefits from combining our businesses and businesses that we acquire. To realize these anticipated benefits, both companies must be successfully combined, which is subject to our ability to consolidate operations, corporate cultures and systems and to eliminate redundancies and costs. If we are unsuccessful in combining companies, the anticipated benefits of the acquisitions may not be realized fully or at all or may take longer to realize than expected. Further, there is potential for unknown or inestimable liabilities relating to the acquired businesses. In addition, the actual integration may result in additional and unforeseen expenses, which could reduce the anticipated benefits of the acquisitions.
The combination of independent businesses is a complex, costly and time-consuming process that requires significant management attention and resources. It is possible that the integration process could result in the loss of key employees, the disruption of our operations, the inability to maintain or increase our competitive presence, inconsistencies in standards, controls, procedures and policies, difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition, the diversion of management’s attention to integration matters and/or difficulties in the assimilation of employees and corporate cultures. Any or all of these factors could adversely affect our ability to maintain relationships with customers and employees or to achieve the anticipated benefits of the acquisition and could have an adverse effect on the combined company. In addition, many of these factors are outside of our control, and any one of these factors could result in increased costs, decreases in the amount of expected revenues and additional diversion of management’s time and energy, which could materially adversely impact our business, financial condition and results of operations.
Goodwill and indefinite-lived intangible assets, which are subject to periodic impairment evaluations, represent a significant portion of our total assets. An impairment charge on these assets could have a material adverse impact on our financial condition and results of operations.
We have recorded goodwill and indefinite-lived intangible assets related to acquisitions. We periodically assess these assets to determine if they are impaired. Significant negative industry or macroeconomic
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trends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets, dispositions, and market capitalization declines may impair these assets, and any of these factors may be increasingly present during the ongoing COVID-19 pandemic.
We review goodwill and indefinite-lived intangible assets for impairment either annually or whenever changes in circumstances indicate that the carrying value may not be recoverable. The risk of impairment to goodwill and indefinite-lived intangible assets is higher during the early years following an acquisition. This is because the fair values of these assets align very closely with what was paid to acquire the reporting units to which these assets are assigned. As a result, the difference between the carrying value of the reporting unit and its fair value (typically referred to as “headroom”) is smaller at the time of acquisition. Until this headroom grows over time, due to business growth or lower carrying value of the reporting unit, a relatively small decrease in reporting unit fair value can trigger impairment charges. When impairment charges are triggered, they tend to be material due to the size of the assets involved. Future acquisitions could present similar risks. Any charges relating to such impairments could adversely affect our results of operations in the periods recognized.
Risks Related to Our Industry
Conditions in the vehicle industry may adversely affect our business.
Our financial performance materially depends on conditions in the global vehicle and industrial equipment industry. Commercial vehicle, industrial application and light vehicle production and sales are cyclical and sensitive to general economic conditions and other factors including interest rates, consumer credit, and consumer spending and preferences. Economic declines that result in significant reductions in commercial vehicle or light vehicle production would have an adverse effect on our sales to OEMs.
We face strong competition.
We compete globally with a number of other manufacturers and distributors that produce and sell similar products. Price, quality, delivery, technological innovation, engineering development and program launch support are the primary elements of competition. Our competitors include a large number of independent domestic and international suppliers. A number of our competitors are larger than us and have more diverse product portfolios, and some competitors have greater financial and other resources than we do. Our customers, faced with intense international competition, have continued to expand their global sourcing of components. As a result, we have experienced competition from suppliers in other parts of the world that enjoy economic advantages, such as lower labor costs, lower health care costs, lower tax rates and, in some cases, export or raw materials subsidies. Increased competition could adversely affect our business. In addition, any of our competitors may foresee the course of market development more accurately than we do, develop products that are superior to our products, produce similar products at a cost that is lower than our cost, or adapt more quickly than we do to new technologies or evolving customer requirements. As a result, our products may not be able to compete successfully with our competitors’ products, and we may not be able to meet the growing demands of customers. These trends may adversely affect our sales as well as the profit margins on our products.
We are subject to potential governmental investigations and related proceedings relating to vehicle emissions standards.
In recent years, within the vehicle industry, there have been governmental investigations and related proceedings relating to alleged or actual violations of vehicle emissions standards. Alleged or actual violations by us or our predecessor entities of existing or future emissions standards could result in government investigations and other legal proceedings, including class actions and other private civil actions, the recall of one or more of our products, negotiated remedial actions, fines, disgorgement of profits, restricted product offerings, reputational harm or a combination of any of those items. Any of these actions or related costs that we incur could have a material adverse effect on our business and financial results. For example, as previously reported, German authorities announced a diesel defeat device
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investigation in 2022, which we believe is focused on engines sold by two of our light vehicle OEM customers prior to 2020, when BorgWarner acquired Delphi Technologies PLC. We are the indirect parent of the Delphi Technologies entity that had supplied engine control units, software and calibration services to these OEM customers, and German authorities searched two of our facilities seeking information relating to software supplied to the customers. Under the Separation and Distribution Agreement we will enter into with BorgWarner in connection with the Spin-Off, as between BorgWarner and us, we are generally allocated responsibility for any consequences arising out of the German diesel defeat device investigation and any similar investigations. We are cooperating with that investigation, which is ongoing and has resulted and will continue to result in us incurring significant related costs and could ultimately lead to any of the consequences we outline above.
Risks Related to Our Business
We face risks related to the COVID-19 pandemic that could adversely affect our business and financial performance.
The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy. In 2022, COVID-19 outbreaks in certain regions caused intermittent disruptions in our supply chain and local manufacturing operations. For a significant portion of the second quarter of 2022, China imposed lockdowns in many cities due to an increase in COVID-19 cases in the region, which contributed to a decline in industry production in China during the quarter. As a result, we have experienced, and may continue to experience, delays in the production and distribution of our products and the loss of sales. If the global economic effects caused by COVID-19 continue or increase, overall customer demand may decrease, which could further adversely affect our business, results of operations, and financial condition. Furthermore, COVID-19 has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, traditional functioning of financial and capital markets, foreign currency exchange rates, and interest rates.
During 2021, and to a lesser extent in 2022, trailing impacts of the shutdowns and production declines related, in part, to COVID-19 created supply constraints of certain components, particularly semiconductor chips. These supply constraints have had and are expected to continue to have significant impacts on global industry production levels. Due to the uncertainty of its duration and the timing of recovery, at this time, we are unable to predict the extent to which COVID-19, including its existing and future variants that may emerge, may have an adverse effect on our business, financial condition, operating results or cash flows. The extent of the impact of COVID-19 on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frames, will depend on future developments, including, but not limited to, the duration and spread of COVID-19, including variants, its severity, COVID-19 containment and treatment efforts, including the availability, efficacy, and acceptance of the vaccines and any related restrictions on travel. Furthermore, the duration, timing and severity of the impact on customer production, including any recession resulting from COVID-19, are uncertain and unpredictable. An extended period of global supply chain and economic disruption as a result of COVID-19 would have a further material negative impact on our business, results of operations, access to sources of liquidity and financial condition, although the full extent and duration are uncertain.
We are under substantial pressure from OEMs to reduce the prices of our products.
There is substantial and continuing pressure on OEMs to reduce costs, including costs of products we supply. OEM customers expect annual price reductions in our business. To maintain our profit margins, we seek price reductions from our suppliers, improved production processes to increase manufacturing efficiency, and streamlined product designs to reduce costs, and we attempt to develop new products, the benefits of which support stable or increased prices. While we seek to recover inflationary and other costs and surcharges from our customers and have had some success in the past in recovering a portion of these costs and surcharges, our ability to pass through increased raw material costs to our OEM customers is limited, with any cost recovery often less than 100% and often on a delayed basis, and there
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can be no assurance that such recoveries will continue in the future. Inability to reduce costs in an amount equal to annual price reductions, increases in raw material costs, increases in employee wages and benefits and other inflationary headwinds could have an adverse effect on us.
We continue to face volatile costs of commodities used in the production of our products and elevated levels of inflation.
We use a variety of commodities (including aluminum, copper, nickel, plastic resins, steel, other raw materials and energy) and materials purchased in various forms such as castings, powder metal, forgings, stampings and bar stock. Beginning in 2021, we have experienced price increases for base metals (e.g., steel, aluminum and nickel) and precious metals (e.g., palladium). Increasing commodity costs will have an impact on our results. We have sought to alleviate the impact of increasing costs by including a material pass-through provision in our customer contracts wherever possible and by selectively hedging certain commodity exposures. Customers frequently challenge these contractual provisions and rarely pay the full cost of any increases in the cost of materials. The discontinuation or lessening of our ability to pass through or hedge increasing commodity costs could adversely affect our business.
From time to time, commodity prices may also fall rapidly. If this happens, suppliers may withdraw capacity from the market until prices improve which may cause periodic supply interruptions. The same may be true of transportation carriers and energy providers. If these supply interruptions occur, it could adversely affect our business.
In addition, during 2022, many global economies, including the United States, experienced elevated levels of inflation more generally, which drove an increase in input costs. We reached pricing-related agreements with various customers in 2022, but these agreements do not enable us to recover 100 percent of our increased costs, and as a result, our operating margins have been negatively impacted. While we will continue to negotiate the pass through and recovery of higher costs with our customers, perpetuation of this trend could adversely affect our business.
We may not be able to access the capital and credit markets on terms that are favorable to us or at all.
The capital and credit markets may experience extreme volatility or disruptions that may lead to uncertainty and liquidity issues for both borrowers and investors. We expect to access the capital markets to supplement our existing funds and cash generated from operations to satisfy our needs for working capital, to meet capital expenditure and debt service requirements, and for other business initiatives. However, disruptions, uncertainty or volatility in the credit markets, including as a result of a recession, may adversely impact our ability to access credit already arranged and the availability and cost of credit to us in the future. These market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to grow and maintain our business. Accordingly, we may be forced to delay raising capital or pay unattractive interest rates, which could increase our interest expense, decrease our profitability and significantly reduce our financial flexibility, cash flows and market prices of our securities. Longer-term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could adversely affect our access to liquidity needed for our business. Any disruption could require us to take measures to conserve cash until the markets stabilize or until alternative credit arrangements or other funding for our business needs can be arranged. Such measures could include deferring capital expenditures and reducing or eliminating any planned distributions to shareholders or other discretionary uses of cash. Overall, our results of operations, financial condition and cash flows could be materially adversely affected by disruptions in the credit markets.
Our business may be adversely affected by the current credit market environment.
As a result of the current credit market and banking conditions (including uncertainties with respect to financial institutions and the global capital markets), depressed equity markets across the globe and other
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macro-economic challenges currently affecting the economy of the United States and other parts of the world, customers or suppliers may experience serious cash flow problems, and as a result, customers may seek to modify, delay or cancel plans to purchase our products and suppliers may seek to significantly and quickly increase their prices or reduce their output. If customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Any inability of current and/or potential customers to pay us for our products will adversely affect our earnings and cash flow. If our suppliers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to meet their supply obligations to us, which in turn may impact our ability to supply our customers and adversely impact our earnings and cash flow. If economic conditions in the United States and other key markets deteriorate further or do not show improvement, we may experience material adverse impacts to our financial condition, profitability and/or cash flows. Additionally, if these economic conditions persist, our intangible assets at various businesses may become impaired.
Changes in U.S. administrative policy, including changes to existing trade agreements and any resulting changes in international trade relations, may have an adverse effect on us.
The United States has maintained tariffs on certain imported steel, aluminum and items originating from China. These tariffs have increased the cost of raw materials and components we purchase. The imposition of tariffs by the United States has resulted in retaliatory tariffs from a number of countries, including China, which increase the cost of products we sell. If the United States or other countries impose additional tariffs, that will have a further adverse impact on us.
We use important intellectual property in our business. If we are unable to protect our intellectual property or if a third party makes assertions against us or our customers relating to intellectual property rights, our business could be adversely affected.
We own important intellectual property, including patents, trademarks, copyrights, and trade secrets, and are involved in numerous licensing arrangements. Our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design around the patents we own or license. Further, as we expand our operations in jurisdictions where the enforcement of intellectual property rights is less robust, the risk of others duplicating our proprietary technologies increases, despite efforts we undertake to protect them. Our inability to protect or enforce our intellectual property rights or claims that we are infringing intellectual property rights of others could adversely affect our business and our competitive position.
A failure of or disruption in our information technology infrastructure, including a disruption related to cybersecurity, could adversely impact our business and operations.
We rely on the capacity, reliability and security of our information technology systems and infrastructure, including information technology systems and infrastructure that BorgWarner will provide to us pursuant to transition services agreements for a period of time following the Spin-Off. Information technology systems are vulnerable to disruptions, including those resulting from natural disasters, cyber-attacks or failures in third-party provided services. Disruptions and attacks on our information technology systems pose a risk to the security of our systems and our ability to protect our networks and the confidentiality, availability and integrity of information and data and that of third parties, including our employees. Some cyber-attacks depend on human error or manipulation, including phishing attacks or schemes that use social engineering to gain access to systems or carry out disbursement of funds or other frauds, which raise the risks from such events and the costs associated with protecting against such attacks. Although we have implemented security policies, processes, and layers of defense designed to help identify and protect against intentional and unintentional misappropriation or corruption of our systems and information, and disruptions of our operations, we have been, and likely will continue to be, subjected to such attacks or disruptions. Future attacks or disruptions could potentially lead to the inappropriate disclosure of confidential information, including our intellectual property, improper use of our systems and networks, access to and manipulation and destruction of our or third-party data, production downtimes, lost
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revenues, inappropriate disbursement of funds and both internal and external supply shortages. In addition, we may be required to incur significant costs to protect against damage caused by such attacks or disruptions in the future. These consequences could cause significant damage to our reputation, affect our relationships with our customers and suppliers, lead to claims against us and ultimately adversely affect our business.
Our business success depends on attracting and retaining qualified employees.
Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and diverse management team and workforce around the globe. In particular, any unplanned turnover or inability to attract and retain key employees and employees with engineering, technical and software capabilities in numbers sufficient for our needs could adversely affect our business.
Our profitability and results of operations may be adversely affected by program launch difficulties.
The launch of a new vehicle program for a customer is a complex process, the success of which depends on a wide range of factors, including the production readiness of our manufacturing facilities and manufacturing processes and those of our suppliers as well as factors related to tooling, equipment, employees, initial product quality and other factors. Our failure to successfully launch vehicle programs, or our inability to accurately estimate the cost to design, develop and launch new vehicle programs, could have an adverse effect on our profitability and results of operations.
To the extent we are not able to successfully launch a new vehicle program, our customer’s vehicle production could be significantly delayed or shut down. Such situations could result in significant financial penalties to us or a diversion of employees and financial resources to improving launches rather than investment in continuous process improvement or other growth initiatives and could result in our customers shifting work away from us to a competitor, all of which could result in loss of revenue or loss of market share and could have an adverse effect on our profitability and cash flows.
Work stoppages, production shutdowns and similar events could significantly disrupt our business.
Because the vehicle and equipment industries rely heavily on just-in-time delivery of components during the assembly and manufacture of products, a work stoppage or production shutdown at one or more of our manufacturing and assembly facilities, including as a result of a prolonged dispute with the unionized employees at certain of our international facilities, could have adverse effects on our business. Similarly, if one or more of our customers were to experience a work stoppage or production shutdown, that customer would likely halt or limit purchases of our products, which could result in the shutdown of the related manufacturing facilities. A significant disruption in the supply of a key component due to supply constraints, such as the constraints experienced in 2021 and 2022 related to semiconductor chips, or due to a work stoppage or production shutdown at one of our suppliers or any other supplier could have the same consequences and, accordingly, have an adverse effect on our financial results.
Changes in interest rates and asset returns could increase our pension funding obligations, which could reduce our profitability and cash flow.
In connection with the Spin-Off, BorgWarner will transfer to us plan assets and obligations primarily associated with our active, retired, and other former BorgWarner employees in certain jurisdictions, and we will provide the benefits directly from the plan assets. The actual assumed net benefit plan obligations and related expenses could change significantly from our estimates. In particular, the valuation of our future payment obligations under these pension plans and the related plan assets is subject to significant adverse changes if the credit and capital markets cause interest rates and projected rates of return to decline. Such declines could also require us to make significant additional contributions to our pension plans in the future. Additionally, a material deterioration in the funded status of the plans could significantly increase our pension expenses and reduce profitability in the future. For more information
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about our pension assets and liabilities, see Note 18, “Retirement Benefit Plans,” to the Combined Financial Statements in this Information Statement.
We are subject to extensive environmental regulations that are subject to change and involve significant risks.
Our operations are subject to laws governing, among other things, emissions to air, discharges to waters, and the generation, management, transportation and disposal of waste and other materials. The operation of vehicle and industrial equipment parts manufacturing plants entails risks in these areas, and we cannot assure you that we will not incur material costs or liabilities as a result. A number of our manufacturing facilities have been acquired through various acquisitions over the years, and we cannot assure that we will not incur material costs and liabilities relating to activities that predate our ownership or the ownership of BorgWarner. In addition, potentially significant expenditures could be required to comply with evolving interpretations of existing environmental, health and safety laws and regulations or any new such laws and regulations (including concerns about global climate change and its impact) that may be adopted in the future. Costs associated with failure to comply with such laws and regulations could have an adverse effect on our business.
Climate change and regulations related to climate change may adversely impact our operations.
Climate change is receiving increasing attention worldwide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. Our manufacturing plants use energy, including electricity and natural gas, and certain of our plants emit amounts of greenhouse gas that may be affected by these legislative and regulatory efforts. Greenhouse gas regulation could increase the price of the electricity we purchase, increase costs for use of natural gas, potentially restrict access to or the use of natural gas, require us to purchase allowances to offset our own emissions or result in an overall increase in costs of raw materials, any one of which could increase our costs, reduce competitiveness in a global economy or otherwise negatively affect our financial condition, results of operations and reputation. Many of our suppliers face similar circumstances. Supply disruptions could result in an increase in costs, jeopardize the continuity of production, and have an adverse effect on our financial results.
Climate changes could also disrupt our operations by impacting the availability and cost of materials within our supply chain, and could also increase insurance and other operating costs. These factors may impact our decisions to construct new facilities.
We have liabilities related to product warranties, litigation and other claims.
We provide product warranties to our customers for some of our products. Under these product warranties, we may be required to bear costs and expenses for the repair or replacement of these products. As suppliers become more integrally involved in the design of vehicles and equipment and assume more of the assembly functions, OEMs are increasingly looking to their suppliers for contribution when faced with recalls and product warranty claims. A recall claim brought against us, or a product warranty claim brought against us, could adversely impact our results of operations. In addition, a recall claim could require us to review our entire product portfolio to assess whether similar issues are present in other product lines, which could result in significant disruption to our business and could have an adverse impact on our results of operations. Factors outside our control, including the quality of fuel in end user markets or our products operating under conditions not originally contemplated, may increase our exposure for warranty or recall claims. We cannot assure that costs and expenses associated with these product warranties will not be material or that those costs will not exceed any amounts accrued for such product warranties in our financial statements.
We are currently, and may in the future become, subject to legal proceedings and commercial or contractual disputes. These claims typically arise in the normal course of business and may include, but not be limited to, commercial or contractual disputes with our customers and suppliers, intellectual property matters, personal injury, product liability, environmental and employment claims. There is a possibility that such claims may have an adverse impact on our business that is greater than we
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anticipate. While we maintain insurance for certain risks, the amount of insurance may not be adequate to cover all insured claims and liabilities. The incurring of significant liabilities for which there is no, or insufficient, insurance coverage could adversely affect our business.
Compliance with and changes in laws could be costly and could affect operating results.
We have operations in multiple countries that can be impacted by expected and unexpected changes in the legal and business environments in which we operate. Compliance-related issues in certain countries associated with laws such as the Foreign Corrupt Practices Act and other anti-corruption laws could adversely affect our business. We have internal policies and procedures relating to compliance with such laws; however, there is a risk that such policies and procedures will not always protect us from the improper acts of employees, agents, business partners, joint venture partners, or representatives, particularly in the case of recently acquired operations that may not have significant training in applicable compliance policies and procedures. Violations of these laws, which are complex, may result in criminal penalties, sanctions and/or fines that could have an adverse effect on our business, financial condition, and results of operations and reputation.
Changes that could impact the legal environment include new legislation, new regulations, new policies, investigations and legal proceedings, and new interpretations of existing legal rules and regulations, in particular, changes in import and export control laws or exchange control laws, additional restrictions on doing business in countries subject to sanctions, additional limitations on greenhouse gas emissions or other matters related to climate change, and other changes in laws in countries where we operate or intend to operate.
Changes in tax laws or tax rates taken by taxing authorities and tax audits or similar processes could adversely affect our business.
Changes in tax laws or tax rates, the resolution of tax assessments or audits or similar processes by various tax authorities, and the inability to fully utilize our tax loss carryforwards and tax credits could adversely affect our operating results. In addition, we may periodically restructure our legal entity organization. If taxing authorities were to disagree with our tax positions in connection with any such restructurings, our effective tax rate could be materially affected. Our tax filings for various periods are subject to audit by the tax authorities in most jurisdictions where we conduct business. We have received tax assessments from various taxing authorities and are currently at varying stages of appeals and/or litigation regarding these matters. These audits may result in assessment of additional taxes that are resolved with the authorities or through the courts. We believe these assessments may occasionally be based on erroneous and even arbitrary interpretations of local tax law. Although Mexico levies value added taxes and customs duties on temporary imports, in the course of the conduct of our manufacturing operations, we generally do not pay that tax due to a special certification the availability of which depends upon our compliance with certain requirements and regulations, such as maintaining accurate records and providing periodic reports to authorities. We are aware of instances in which we may not have complied with those requirements and regulations and intend to pursue voluntary processes with the relevant authorities to reconstruct records, which may result in value added taxes being assessed for periods in which we claimed an ability to not make payments and/or in the imposition of penalties, either of which could be material. Any tax liability is indeterminable at this time and is ultimately a BorgWarner responsibility under the Tax Matters Agreement to the extent it relates to any period prior to the distribution. To the extent we are unable to comply with those requirements and regulations after the distribution, any consequences would be our responsibility. Resolution of any tax matters involves uncertainties, and there are no assurances that the outcomes will be favorable.
We are subject to risks related to our international operations.
We have manufacturing and technical facilities in many regions including Europe, Asia, and the Americas. For 2022, approximately 73% of our combined net sales were outside the United States. Consequently, our results could be affected by changes in trade, monetary and fiscal policies, trade restrictions or prohibitions, import or other charges or taxes, fluctuations in foreign currency exchange rates, limitations
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on the repatriation of funds, changing economic conditions, unreliable intellectual property protection and legal systems, insufficient infrastructures, social unrest, political instability and disputes, international terrorism and other factors that may be discrete to a particular country or geography. Compliance with multiple and potentially conflicting laws and regulations of various countries is challenging, burdensome and expensive.
The financial statements of foreign subsidiaries are translated to U.S. Dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for each period for revenues, expenses and capital expenditures. The local currency is typically the functional currency for our foreign subsidiaries. Significant foreign currency fluctuations and the associated translation of those foreign currencies could adversely affect our business. Additionally, significant changes in currency exchange rates, particularly the Euro, Chinese Renminbi, British Pound, Brazilian Real and Indian Rupee could cause fluctuations in the reported results of our businesses’ operations that could negatively affect our results of operations.
Because we are a U.S. holding company, one significant source of our funds is distributions from our non-U.S. subsidiaries. Certain countries in which we operate have adopted or could institute currency exchange controls that limit or prohibit our local subsidiaries’ ability to convert local currency into U.S. Dollars or to make payments outside the country. This could subject us to the risks of local currency devaluation and business disruption.
Our business in China is subject to aggressive competition and is sensitive to economic, political, and market conditions.
Maintaining a strong position in the Chinese market is a key component of our global growth strategy. The vehicle and other equipment supply markets in China are highly competitive, with competition from many of the largest global manufacturers and numerous smaller domestic manufacturers. As the Chinese market evolves, we anticipate that market participants will act aggressively to increase or maintain their market share. Increased competition may result in price reductions, reduced margins and our inability to gain or hold market share. In addition, our business in China is sensitive to economic, political, social and market conditions that drive sales volumes in China. Economic growth has slowed in China. If we are unable to maintain our position in the Chinese market or if vehicle sales in China decrease, our business and financial results could be adversely affected.
We could incur restructuring charges as we execute actions in an effort to improve future profitability and competitiveness and to optimize our product portfolio and may not achieve the anticipated savings and benefits from these actions.
We or BorgWarner have initiated, and we may initiate, restructuring actions designed to improve the competitiveness of our business and sustain our margin profile, optimize our product portfolio or create an optimal legal entity structure. We may not realize anticipated savings or benefits from past or future actions in full or in part or within the time periods we expect. We are also subject to the risks of labor unrest, negative publicity and business disruption in connection with our actions. Failure to realize anticipated savings or benefits from our actions could have an adverse effect on our business.
The occurrence or threat of extraordinary events, including natural disasters, political disruptions, terrorist attacks, public health issues, and acts of war, could significantly disrupt production or impact consumer spending.
As a company with global operations, we are subject to increased risk of damage or disruption to us and our employees, facilities, suppliers, distributors, or customers. Extraordinary events, including natural disasters resulting from but not limited to climate change, political disruptions, terrorist attacks, public health issues, such as the current COVID-19 pandemic, and acts of war may disrupt our business and operations and impact our supply chain and access to necessary raw materials or could adversely affect the economy generally, resulting in a loss of sales and customers. Any of these disruptions or other extraordinary events outside of our control that impact our operations or the operations of our suppliers
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could have an adverse effect on our business. In addition, these types of events could negatively impact consumer spending in the impacted regions or depending on the severity, globally, which could have an adverse effect on our business.
Risks Related to Our Customers
We face credit, operational and concentration risks related to our customers.
We rely on sales to OEMs around the world of varying credit quality and manufacturing demands. Supply to several of these customers requires significant investment by us. We base our growth projections, in part, on commitments made by our customers. These commitments by OEMs generally renew yearly during a program life cycle. Among other things, the level of production orders we receive is dependent on the ability of our OEM customers to design and sell products that consumers desire to purchase. If actual production orders from our customers do not approximate such commitments due to a variety of factors including non-renewal of purchase orders, a customer’s financial hardship or other unforeseen reasons, it could adversely affect our business.
Some of our sales are concentrated. Our global sales in 2022 to General Motors constituted approximately 12% of our 2022 combined net sales.
We are sensitive to the effects of our major customers’ labor relations.
A majority of our customers’ operations are represented by various unions. Any extended work stoppage at one or more of our customers could have an adverse effect on our business.
Risks Related to Our Suppliers
We could be adversely affected by supply shortages of components from our suppliers.
In an effort to manage and reduce the cost of purchased goods and services, we have been rationalizing our supply base. As a result, we remain dependent on fewer sources of supply for certain components used in the manufacture of our products. We select suppliers based on total value (including total landed price, quality, delivery, and technology), taking into consideration their production capacities and financial condition. We expect that they will deliver to our stated written expectations.
However, there can be no assurance that capacity limitations, industry shortages, labor or social unrest, weather emergencies, commercial disputes, government actions, riots, wars, such as Russia’s invasion of Ukraine in 2022, sabotage, cyber-attacks, non-conforming parts, acts of terrorism, “Acts of God,” or other problems that our suppliers experience will not result in occasional shortages or delays in their supply of components to us. During 2021 and to a lesser extent in 2022, trailing impacts of the shutdowns and production declines related, in part, to COVID-19, created supply constraints of certain components, particularly semiconductor chips. These supply constraints have had, and are expected to continue to have, significant impacts on global industry production levels. If we experience a prolonged shortage of critical components from any of our suppliers and cannot procure the components from other sources, we may be unable to meet the production schedules for some of our key products and could miss customer delivery expectations. In addition, with fewer sources of supply for certain components, each supplier may perceive that it has greater leverage and, therefore, some ability to seek higher prices from us at a time that we face substantial pressure from OEMs to reduce the prices of our products. This could adversely affect our customer relations and business.
Suppliers’ economic distress could result in the disruption of our operations and could adversely affect our business.
Rapidly changing industry conditions such as volatile production volumes, our need to seek price reductions from our suppliers as a result of the substantial pressure we face from OEMs to reduce the prices of our products, credit tightness, changes in foreign currencies; raw material, commodity, tariffs, transportation, and energy price escalation, drastic changes in consumer preferences, and other factors could adversely affect our supply chain, and sometimes with little advance notice. These conditions could
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also result in increased commercial disputes and supply interruption risks. In certain instances, it would be difficult and expensive for us to change suppliers that are critical to our business. On occasion, we may provide financial support to distressed suppliers or take other measures to protect our supply lines. We cannot predict with certainty the potential adverse effects these costs might have on our business.
We are subject to possible insolvency of financial counterparties.
We engage in numerous financial transactions and contracts including insurance policies, letters of credit, credit line agreements, financial derivatives, and investment management agreements involving various counterparties. We are subject to the risk that one or more of these counterparties may become insolvent and, therefore, be unable to meet our obligations under such contracts.
Risks Related to the Spin-Off
The Spin-Off could result in significant tax liability to BorgWarner and its stockholders if it is determined to be a taxable transaction.
Completion of the Spin-Off is conditioned on BorgWarner’s receipt of a written opinion from Ernst & Young, LLP to the effect that the Spin-Off will qualify as a tax-free “reorganization” within the meaning of Sections 368(a)(1)(D) and 355 of the Code.
The opinion of Ernst & Young, LLP will not address any U.S. state or local or foreign tax consequences of the Spin-Off. The opinion assumes that the Spin-Off will be completed according to the terms of the Separation and Distribution Agreement and relies on the facts as stated in the Separation and Distribution Agreement, the Tax Matters Agreement, the other ancillary agreements, this Information Statement and a number of other documents.
In addition, the opinion of Ernst & Young, LLP will rely on certain facts, assumptions, representations, and undertakings from BorgWarner and us regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations, or undertakings are incorrect or not otherwise satisfied, or if BorgWarner or PHINIA breaches any of its representations or covenants contained in the Separation and Distribution Agreement and certain other agreements, the opinion of Ernst & Young, LLP may no longer be valid, or the conclusions reached therein may be materially altered by such incorrectness, non-satisfaction or breach.
The opinion of Ernst & Young, LLP will not be binding on the IRS or the courts, and there can be no assurance that the IRS or a court will not take a contrary position. Notwithstanding the opinion of Ernst & Young, LLP, the IRS could determine on audit that the Spin-Off or any of certain related transactions is taxable if it determines that any of these facts, assumptions, representations, or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion, including as a result of certain significant changes in the stock ownership of BorgWarner or us after the Spin-Off. If the conclusions expressed in the opinion of Ernst & Young, LLP are challenged by the IRS and the IRS prevails in such challenge, the tax consequences of the Spin-Off (including the tax consequences to BorgWarner and the U.S. holders (as defined herein)) could be materially less favorable.
If the Spin-Off were determined not to qualify for tax-free treatment, each U.S holder who receives our common stock in the Spin-Off would generally be treated as receiving a distribution in an amount equal to the fair market value of our common stock received, which would generally result in: (1) a taxable dividend to the U.S holder to the extent of that U.S holder’s pro rata share of BorgWarner’s current or accumulated earnings and profits; (2) a reduction in the U.S holder’s basis (but not below zero) in BorgWarner common stock to the extent the amount received exceeds the stockholder’s share of BorgWarner’s earnings and profits; and (3) taxable gain from the exchange of BorgWarner common stock to the extent the amount received exceeds the sum of the U.S holder’s share of BorgWarner’s earnings and profits and the U.S holder’s basis in its BorgWarner common stock. See below and “Material U.S. Federal Income Tax Consequences of the Spin-Off.”
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If the Spin-Off were determined not to qualify as tax-free for U.S. federal income tax purposes, we could have an indemnification obligation to BorgWarner, which could adversely affect our business, financial condition, cash flows, and results of operations.
If, as a result of any of our representations being untrue or our covenants being breached, the Spin-Off were determined not to qualify for its intended tax-free treatment, we could be required by the Tax Matters Agreement to indemnify BorgWarner for the resulting taxes and related expenses. Those amounts could be material. Any such indemnification obligation could adversely affect our business, financial condition, cash flows, and results of operations.
For example, if we or our stockholders were to engage in transactions that resulted in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Spin-Off, the Spin-Off would generally be taxable to BorgWarner, but not to BorgWarner stockholders, under Section 355(e), unless it were established that such transactions and the Spin-Off were not part of a plan or series of related transactions. If the Spin-Off were taxable to BorgWarner due to such a 50% or greater change by vote or value in the ownership of our stock, BorgWarner would recognize gain equal to the excess of the fair market value on the Distribution Date of our common stock distributed to BorgWarner stockholders over BorgWarner’s tax basis in our common stock, and we generally would be required to indemnify BorgWarner for the tax on such gain and related expenses. Those amounts could be material. Any such indemnification obligation could adversely affect our business, financial condition, cash flows, and results of operations. See “Certain Relationships and Related Person Transactions—Agreements with BorgWarner—Tax Matters Agreement.”
We intend to agree to restrictions to preserve the tax-free treatment of the Spin-Off, which may reduce our strategic and operating flexibility.
To preserve the tax-free nature of the Spin-Off and certain related transactions, we intend to agree in the Tax Matters Agreement to covenants and indemnification obligations that address compliance with the intended tax-free treatment of the Spin-Off and certain related transactions for U.S. federal income tax purposes as well as for state, local and foreign tax purposes. These covenants will include certain restrictions on our activity for a period of two years following the Spin-Off. Specifically, we will be subject to certain restrictions on our ability to enter into acquisition, merger, liquidation, sale and stock redemption transactions with respect to our stock or assets, and we may be required to indemnify BorgWarner against any resulting tax liabilities even if we do not participate in or otherwise facilitate the acquisition. Furthermore, we will be subject to specific restrictions on discontinuing the active conduct of our trade or business, the issuance or sale of stock or other securities (including securities convertible into our stock but excluding certain compensatory arrangements), and sales of assets outside the ordinary course of business. These covenants and indemnification obligations may limit our ability to pursue strategic transactions or engage in new businesses or other transactions that may maximize the value of our business, and might discourage or delay a strategic transaction that our stockholders may consider favorable. See “Certain Relationships and Related Person Transactions—Agreements with BorgWarner—Tax Matters Agreement.”
We may be unable to achieve some or all of the benefits that we expect to achieve from the Spin-Off.
We may be unable to achieve the full strategic and financial benefits expected to result from the separation and distribution, or such benefits may be delayed or not occur at all. We believe that, as an independent, publicly traded company, we will be able to, among other things, more effectively focus on our own distinct operating priorities and strategies, enhance our ability to better address specific market dynamics and target innovation, create incentives for our management and employees that align more closely with our business performance and the interests of our stockholders, and allow us to articulate a clear investment proposition and tailored capital allocation policy to attract a long-term investor base best suited to our business needs. We may be unable to achieve some or all of the benefits that we expect to achieve as an independent company in the time we expect, if at all, for a variety of reasons, including: (1)
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the completion of the Spin-Off and compliance with the requirements of being an independent, publicly traded company will require significant amounts of our management’s time and effort, which may divert management’s attention from operating and growing our business; (2) following the Spin-Off, we may be more susceptible to market fluctuations and other adverse events than if we were still a part of BorgWarner; (3) following the Spin-Off, our businesses will be less diversified than BorgWarner’s businesses prior to the separation; (4) the other actions required to separate BorgWarner’s and our respective businesses could disrupt our operations; and (5) under the terms of the Tax Matters Agreement, we will be restricted from taking certain actions that could cause the Spin-Off or certain related transactions to fail to qualify for their intended tax treatment and these restrictions may limit us for a period of time from pursuing strategic transactions and equity issuances or engaging in other transactions that may increase the value of our business. If we fail to achieve some or all of the benefits that we expect to achieve as an independent company, or do not achieve them in the time we expect, our business, financial condition, cash flows, and results of operations could be adversely affected.
Some of the terms we will receive in our agreements with BorgWarner could be less beneficial than the terms we may have otherwise received from unaffiliated third parties, and our costs under the agreements could be greater than we anticipate.
The agreements we will enter into with BorgWarner in connection with the separation will be negotiated prior to the Spin-Off, at a time when our business will still be operated by BorgWarner. Many aspects of the agreements will be entered into on arm’s-length terms similar to those that would be agreed with an unaffiliated third party such as a buyer in a sale transaction, but we will not have an independent board of directors or a management team independent of BorgWarner representing our interests while the agreements are being negotiated. In addition, until the distribution occurs, we will continue to be a wholly owned subsidiary of BorgWarner and, accordingly, BorgWarner will still have the discretion to determine and change the terms of the separation until the Distribution Date. As a result of these factors, some of the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties, and it is possible that we might have been able to achieve more favorable terms if the circumstances differed. In addition, the duration of these agreements may be longer, and our costs under the agreements greater, than we currently anticipate, which may adversely affect our cash flows and results of operations. See “Certain Relationships and Related Person Transactions—Agreements with BorgWarner.”
We are a smaller company relative to BorgWarner, which could result in increased costs because of a decrease in our purchasing power and make it difficult to maintain existing customer relationships and obtain new customers.
Prior to the Spin-Off, we were able to take advantage of BorgWarner’s size and purchasing power in procuring goods, technology and services, including insurance, employee benefit support and audit and other professional services. We are a smaller company than BorgWarner, and we cannot assure you that we will have access to financial and other resources comparable to those available to us prior to the Spin-Off. As a standalone company, we may be unable to obtain office space, goods, technology and services at prices or on terms as favorable as those available to us prior to the Spin-Off, which could increase our costs and reduce our profitability. Likewise, we may find it more difficult to attract and retain high-quality employees as a smaller company than we were operating within as a wholly owned subsidiary of BorgWarner, which could impact our results of operations. Our future success also depends on our ability to develop and maintain relationships with customers. Our reduced relationship with BorgWarner and our smaller relative size as a result of the Spin-Off may make it more difficult to develop and maintain relationships with customers or recover increased costs or surcharges from customers, either of which could adversely affect our prospects.
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Following the Spin-Off, we could incur substantial additional costs and experience temporary business interruptions, and we may not be adequately prepared to meet the requirements of an independent, publicly traded company on a timely or cost-effective basis.
We have historically operated as part of BorgWarner and have had access to various corporate functions. Following the Spin-Off, BorgWarner will not provide us with assistance other than the transition and other services described under “Certain Relationships and Related Person Transactions—Agreements with BorgWarner.” These services do not include every service that we have received from BorgWarner in the past, and BorgWarner is only obligated to provide the transition services for limited periods following completion of the Spin-Off. Following the Spin-Off and the cessation of any transition services agreements, we will need to provide internally or obtain from unaffiliated third parties the services we will no longer receive from BorgWarner. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from BorgWarner.
In connection with the Spin-Off, we have been installing and implementing information technology infrastructure to support certain of our business functions, including accounting and financial reporting, human resources, legal and compliance, communications, engineering, manufacturing and distribution, and sourcing. We may incur substantially higher costs than currently anticipated as we transition from the existing transactional and operational systems and data centers we currently use as part of BorgWarner. If we are unable to transition effectively, we may incur temporary interruptions in business operations. Any delay in implementing, or operational interruptions suffered while implementing, our new information technology infrastructure could disrupt our business and have a material adverse effect on our results of operations.
In addition, in connection with the Spin-Off, we will be directly subject to reporting and other obligations under the U.S. Securities and Exchange Act of 1934, as amended (the “Exchange Act”). The Exchange Act requires that we file annual, quarterly, and current reports with respect to our business and financial condition. Beginning with our second required Annual Report on Form 10-K, we intend to comply with Section 404 of the Sarbanes Oxley Act of 2002, as amended (the “Sarbanes Oxley Act”), which will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm on the effectiveness of internal control over financial reporting. Under the Sarbanes Oxley Act, we are also required to maintain effective disclosure controls and procedures. To comply with these requirements, we may need to upgrade our systems, implement additional financial and management controls, reporting systems, and procedures and hire additional accounting and finance staff. These reporting and other obligations may place significant demands on management, administrative, and operational resources, including accounting systems and resources. If we are unable to upgrade our financial and management controls, reporting systems, information technology systems, and procedures in a timely and effective fashion, our ability to comply with financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired, and we may be unable to conclude that our internal control over financial reporting is effective. If we are not able to comply with the requirements of Section 404 of the Sarbanes Oxley Act in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of shares of our common stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
Moreover, we cannot be certain that these measures would ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Even if we were to conclude, and our auditors were to concur, that our internal control over financial reporting provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP, because of its inherent limitations, internal control over financial reporting might not prevent or detect fraud or misstatements. This, in turn, could have an adverse impact on trading prices for shares of our common stock, and could adversely affect our ability to access the capital markets.
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As an independent, publicly traded company, we may not enjoy the same benefits that we did as a part of BorgWarner.
There is a risk that, by separating from BorgWarner, we may become more susceptible to market fluctuations and other adverse events than we would have been if we were still a part of the current BorgWarner organizational structure. As part of BorgWarner, we have been able to enjoy certain benefits from BorgWarner’s operating diversity, size, purchasing power, financial resources, cost of capital and opportunities to pursue integrated strategies with BorgWarner’s other businesses. As an independent, publicly traded company, we will not have the same benefits. In particular, some of our customers and suppliers may decide to limit the amount, or change the terms, of their purchases from us or sales to us. Additionally, as part of BorgWarner, we have been able to leverage BorgWarner’s historical reputation, performance, and brand identity to recruit and retain key employees to run and operate our business. As an independent, publicly traded company, we will need to develop new strategies, and it may be more difficult for us to recruit or retain such key employees.
We have no operating history as an independent, publicly traded company, and our historical combined financial information is not necessarily representative of the results we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.
We derived the historical combined financial information included in this Information Statement from BorgWarner’s consolidated financial statements, and this information does not necessarily reflect the results of operations and financial position we would have achieved as an independent, publicly traded company during the periods presented, or those that we will achieve in the future. This is primarily because of the following factors:
•Prior to the Spin-Off, we operated as part of BorgWarner, and BorgWarner performed various corporate functions for us. Our historical combined financial information reflects allocations of corporate expenses from BorgWarner for these functions. These allocations may not reflect the costs we will incur for similar services in the future as an independent, publicly traded company.
•We will enter into transactions with BorgWarner that did not exist prior to the Spin-Off, such as BorgWarner’s provision of transition and other services, and undertake indemnification obligations, which will cause us to incur new costs. See “Certain Relationships and Related Person Transactions—Agreements with BorgWarner.”
•Our historical combined financial information does not reflect changes that we expect to experience in the future as a result of our separation from BorgWarner, including changes in the financing, cash management, operations, cost structure, and employee needs of our business. As part of BorgWarner, we enjoyed certain benefits from BorgWarner’s operating diversity, reputation, size, purchasing power, ability to borrow, and available capital for investments, and we will lose these benefits after the Spin-Off. As an independent entity, we may be unable to purchase goods, services, and technologies, obtain insurance and health care benefits, computer software licenses, or other services or licenses, or access capital markets, on terms as favorable to us as those we obtained as part of BorgWarner prior to the Spin-Off, and our results of operations may be adversely affected. In addition, our historical combined financial statements do not include an allocation of interest expense comparable to the interest expense we will incur as a result of the Internal Restructuring and the Spin-Off, including interest expense in connection with our incurrence of indebtedness.
Following the Spin-Off, we will also face additional costs and demands on management’s time associated with being an independent, publicly traded company, including costs and demands related to investor and public relations, public financial reporting and corporate governance, including board of directors fees and expenses. For additional information about our past financial performance and the basis of presentation of our combined financial statements, see “Unaudited Pro Forma Condensed Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
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and our historical combined financial statements and the notes thereto included elsewhere in this Information Statement.
We have identified a material weakness in our internal control over financial reporting. If we are unable to remediate this material weakness, or if we identify additional material weaknesses in the future or otherwise fail to maintain effective internal control over financial reporting, we may not be able to accurately or timely report our financial condition or results of operations, which may adversely affect our business.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Any failure to maintain effective internal control over financial reporting could cause us to fail to accurately or timely report our financial condition or results of operations to meet our reporting obligations.
We identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim combined financial statements will not be prevented or detected on a timely basis. The Company did not design and maintain effective controls over the determination and review of the calculation of cumulative translation adjustment in the Company’s combined financial statements prepared on a carve-out basis. See Note 1, “Summary Of Significant Accounting Policies,” to the Combined Financial Statements in this Information Statement for a discussion of the methodology used to prepare the financial statements on a carve-out basis. This material weakness resulted in material adjustments to Accumulated other comprehensive income (loss) and Parent company investment at December 31, 2021 and Other comprehensive income (loss) for the years ending December 31, 2021 and 2020 all of which were recorded prior to the issuance of the combined financial statements. Additionally, this material weakness could result in a misstatement of those account balances or disclosures that would result in a material misstatement to the annual or interim combined financial statements that would not be prevented or detected. During 2023, we are enhancing our internal control over financial reporting to remediate the material weakness. As of December 31, 2022, the Company was in the process of designing and implementing the revised and enhanced controls. Therefore, management has concluded that the material weakness cannot be considered remediated.
We cannot assure that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiency that led to this material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. In addition, neither our management nor an independent registered public accounting firm has performed an evaluation of our internal control over financial reporting because no such evaluation has been required. Had we or our independent registered public accounting firm performed an evaluation of our internal control over financial reporting, we or our independent registered public accounting firm may have identified additional material weaknesses. If we are unable to successfully remediate our existing or any future material weaknesses in our internal control over financial reporting, or we identify any additional material weaknesses, the accuracy and timing of our financial reporting may be adversely affected, potentially resulting in restatements of our combined financial statements; we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports and applicable stock exchange listing requirements; investors may lose confidence in our financial reporting; and our stock price may decline as a result.
We expect to incur new indebtedness concurrently with or prior to the Spin-Off, and the degree to which we will be leveraged following completion of the Spin-Off could adversely affect our business, results of operations, cash flows, and financial condition.
In connection with the Spin-Off, we expect to incur indebtedness in an aggregate principal amount of approximately $800 million, the proceeds of which we expect to use to repay historical indebtedness to BorgWarner. The indebtedness is expected to be incurred under a senior secured credit facility that would
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provide for up to approximately $800 million of term loans and a $500 million committed revolving credit facility. The terms of such indebtedness are subject to change and will be finalized prior to the completion of the Spin-Off. See “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Our cash balance at the time of the Spin-Off is expected to be approximately $300 million, subject to a cash adjustment. See “Certain Relationships and Related Person Transactions—Agreements with BorgWarner—Separation and Distribution Agreement—Cash Adjustment.”
We have historically relied upon BorgWarner to fund our working capital requirements and other cash requirements. After the Spin-Off, we will not be able to rely on the earnings, assets, or cash flow of BorgWarner, and BorgWarner will not provide funds to finance our working capital or other cash requirements. As a result, after the Spin-Off, we will be responsible for servicing our own debt and obtaining and maintaining sufficient working capital and other funds to satisfy our cash requirements. After the Spin-Off, our access to and cost of debt financing will be different from the historical access to and cost of debt financing under BorgWarner. Differences in access to and cost of debt financing may result in differences in the interest rate charged to us on financings as well as the amount of indebtedness, types of financing structures and debt markets that may be available to us. Our ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the Spin-Off as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
A lowering or withdrawal of the ratings, outlook, or watch assigned to our new debt by rating agencies may increase our future borrowing costs, reduce our access to capital, and adversely impact our financial performance.
Any credit rating, outlook, or watch assigned to our indebtedness by a credit agency could be lowered or withdrawn entirely by a credit rating agency if, in that credit rating agency’s judgment, current or future circumstances relating to the basis of the credit rating, outlook, or watch such as adverse changes to our business, so warrant. Any future lowering of our credit ratings, outlook, or watch likely would make it more difficult or more expensive for us to obtain additional debt financing. Moreover, a reduction in our credit rating could cause certain customers to reduce or cease to do business with us, which would adversely impact our financial performance.
Following the Spin-Off, certain of our employees may have actual or potential conflicts of interest because of their financial interests in BorgWarner or because of their previous positions with BorgWarner.
Because of their current or former positions with BorgWarner, certain of our expected executive officers own equity interests in both us and BorgWarner. Continuing ownership of BorgWarner shares could create, or appear to create, potential conflicts of interest if we and BorgWarner face decisions that could have implications for both us and BorgWarner. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between us and BorgWarner regarding the terms of the agreements governing the separation and distribution and our relationship with BorgWarner following the separation and distribution. Potential conflicts of interest may also arise out of any commercial arrangements that we or BorgWarner may enter into in the future.
We or BorgWarner may fail to perform under various transaction agreements that will be executed as part of the separation.
In connection with the separation, and prior to the distribution, we and BorgWarner will enter into various transaction agreements related to the Spin-Off, pursuant to which both we and BorgWarner will have liabilities and performance obligations. All of these agreements will also govern our relationship with BorgWarner following the Spin-Off. We will rely on BorgWarner to satisfy its performance obligations under these agreements. If we or BorgWarner are unable to satisfy our or its respective obligations under these agreements, including indemnification obligations, our business, results of operations, cash flows,
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and financial condition could be adversely affected. See “Certain Relationships and Related Person Transactions—Agreements with BorgWarner.”
Transfer or assignment to us of some contracts and other assets will require the consent of a third party. If such consent is not given, we may not be entitled to the benefit of such contracts, investments, and other assets in the future.
Transfer or assignment of some of the contracts and other assets in connection with the Spin-Off will require the consent of a third party to the transfer or assignment. Similarly, in some circumstances, we are joint beneficiaries of contracts, and we will need to enter into a new agreement with the third party to replicate the existing contract or assign the portion of the existing contract related to our business. While we anticipate that most of these contract assignments and new agreements will be obtained prior to the Spin-Off, we may not be able to obtain all required consents or enter into all such new agreements, as applicable, until after the Distribution Date. Some parties may use the requirement of a consent to seek more favorable contractual terms from us, which could include our having to obtain letters of credit or other forms of credit support. If we are unable to obtain such consents or such credit support on commercially reasonable and satisfactory terms, we may be unable to obtain some of the benefits, assets, and contractual commitments that are intended to be allocated to us as part of the Spin-Off. In addition, where we do not intend to obtain consent from third-party counterparties based on our belief that no consent is required, the third-party counterparties may challenge the transaction on the basis that the terms of the applicable commercial arrangements require their consent. We may incur substantial litigation and other costs in connection with any such claims and, if we do not prevail, our ability to use these assets could be adversely impacted.
We cannot provide assurance that all such required third-party consents and new agreements will be procured or put in place, as applicable, prior to the Distribution Date. Consequently, we may not realize certain of the benefits that are intended to be allocated to us as part of the Spin-Off.
Risks Related to Our Common Stock and the Securities Markets
No market for our common stock currently exists and an active trading market may not develop or be sustained after the Spin-Off. Following the Spin-Off, our stock price may fluctuate significantly, and there can be no assurance that, after the Spin-Off, the combined equity value of PHINIA and BorgWarner will not be less than BorgWarner’s equity value before the Spin-Off.
There is currently no public market for our common stock. In connection with the Spin-Off, we have applied to list our common stock on the Exchange. We anticipate that before the Distribution Date, trading of shares of our common stock will begin on a “when-issued” basis and this trading will continue through the Distribution Date. However, an active trading market for our common stock may not develop as a result of the Spin-Off or may not be sustained in the future. The lack of an active market may make it more difficult for stockholders to sell our shares and could lead to our share price being depressed or volatile.
We cannot predict the prices at which our common stock may trade after the Spin-Off or whether, after the Spin-Off, the combined equity value of PHINIA and BorgWarner will be more or less than BorgWarner’s equity value before the Spin-Off. The market price of our common stock may fluctuate widely depending on many factors, some of which may be beyond our control.
Furthermore, our business profile and market capitalization may not fit the investment objectives of some BorgWarner stockholders and, as a result, these BorgWarner stockholders may sell their shares of our common stock after the Spin-Off. See “—Substantial sales of our common stock may occur in connection with the Spin-Off, or in the future, either of which could cause our stock price to decline or be volatile.” Low trading volume for our stock, which may occur if an active trading market does not develop, among other reasons, would amplify the effect of the above factors on our stock price volatility. Should the market price of our shares drop significantly, stockholders may institute securities class action lawsuits against
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us. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.
Substantial sales of our common stock may occur in connection with the Spin-Off or in the future, either of which could cause our stock price to decline or be volatile.
BorgWarner stockholders receiving shares of our common stock in the Spin-Off generally may sell those shares immediately in the public market. It is likely that some BorgWarner stockholders, including some of its larger stockholders, will sell their shares of our common stock received in the Spin-Off, for reasons such as our business profile or market capitalization as an independent company, we do not fit their investment objectives or, in the case of index funds, we are not a participant in the index in which they are investing. The sales of significant amounts of our common stock or the perception in the market that such sales might occur may decrease the market price of our common stock.
We will evaluate whether to pay cash dividends on shares of our common stock in the future.
Once the Spin-Off is effective and we are an independent, publicly traded company, our Board will evaluate whether to pay cash dividends to our stockholders. The timing, declaration, amount, and payment of future dividends to stockholders, if any, will fall within the discretion of our Board. Our Board’s decisions regarding the payment of dividends will depend on consideration of many factors, such as our financial condition, earnings, sufficiency of distributable reserves, opportunities to retain future earnings for use in the operation of our business and to fund future growth, capital requirements, debt service obligations, legal requirements, regulatory constraints, and other factors that our Board deems relevant. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends. See “Dividend Policy.”
Holders of our common stock may be diluted due to equity issuances.
In the future, holders of our common stock may be diluted because of equity issuances for acquisitions, capital market transactions, or otherwise, including any equity awards that we will grant to our directors, officers, and employees. Our employees will have stock-based awards that correspond to shares of our common stock after the Spin-Off as a result of the conversion of and/or adjustments to their BorgWarner stock-based awards. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. We also plan to issue additional stock-based awards, including annual awards, new hire awards, and periodic retention awards, as applicable, to our directors, officers, and other employees under our employee benefits plans as part of our ongoing equity compensation program.
Certain provisions in our certificate of incorporation, by-laws, and Delaware law may discourage takeovers and limit the power of our stockholders.
Several provisions of our certificate of incorporation, by-laws, and Delaware law may discourage, delay, or prevent a merger or acquisition. These include, among others, provisions that (1) establish advance notice requirements for stockholder nominations and proposals; (2) prohibit stockholder action by written consent and do not allow stockholders to call special meetings; (3) provide the Board the right to issue shares of preferred stock without stockholder approval; and (4) provide for the ability of our directors, and not stockholders, to fill vacancies on the Board (including those resulting from an enlargement of the Board). In addition, we are subject to Section 203 of the Delaware General Corporation Law, which could have the effect of delaying or preventing a change of control that you may favor. See “Description of Our Capital Stock.”
These and other provisions of our certificate of incorporation, by-laws and Delaware law as well as the restrictions in our Tax Matters Agreement (see “Certain Relationships and Related Person Transactions—Agreements with BorgWarner—Tax Matters Agreement”), may discourage, delay, or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of BorgWarner, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price. We
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believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with the Board and by providing the Board with more time to assess any acquisition proposal. These provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that the Board determines is not in our and our stockholders’ best interests. See “Description of Our Capital Stock.”
Our by-laws will provide that certain courts in the State of Delaware or the federal district courts of the United States will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our by-laws will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery located within the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee, or stockholder to us or our stockholders, any action asserting a claim arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our by-laws or to which the Delaware General Corporation Law confers jurisdiction on the Court of Chancery, or any action asserting a claim governed by the internal affairs doctrine. However, if the Court of Chancery within the State of Delaware lacks jurisdiction over such action, the action may be brought in another court of the State of Delaware or, if no court of the State of Delaware has jurisdiction, then in the U.S. District Court for the District of Delaware. Additionally, our by-laws will state that the foregoing provision will not apply to claims arising under the Securities Act. Unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. The exclusive forum provisions will be applicable to the fullest extent permitted by applicable law, subject to certain exceptions. Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provisions will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. There is, however, uncertainty as to whether a court would enforce the exclusive forum provisions, and investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for state and federal courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and, to the fullest extent permitted by law, to have consented to the provisions of our by-laws described above. The choice of forum provision may result in increased costs for investors to bring a claim. Further, the choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, other employees, or stockholders, which may discourage such lawsuits against us and our directors, officers, other employees, or stockholders. However, the enforceability of similar forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings. If a court were to find the exclusive choice of forum provision contained in our by-laws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions.
Other Risks
A variety of other factors could adversely affect our business.
Any of the following could materially and adversely affect our business: the loss of or changes in supply contracts or sourcing strategies of our major customers or suppliers; start-up expenses associated with new vehicle programs or delays or cancellation of such programs; low levels of utilization of our manufacturing facilities, which can be dependent on a single product line or customer; inability to recover engineering and tooling costs; market and financial consequences of recalls that may be required on
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products we supplied; delays or difficulties in new product development; the possible introduction of similar or superior technologies by others; and global excess capacity and vehicle platform proliferation.
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CAUTIONARY STATEMENTS FOR FORWARD-LOOKING INFORMATION
Statements contained in this Information Statement (including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) may contain forward-looking statements that are based on management’s current outlook, expectations, estimates and projections. Words such as “anticipates,” “believes,” “continues,” “could,” “designed,” “effect,” “estimates,” “evaluates,” “expects,” “forecasts,” “goal,” “initiative,” “intends,” “may,” “outlook,” “plans,” “potential,” “predicts,” “project,” “pursue,” “seek,” “should,” “target,” “when,” “will,” “would,” and variations of such words and similar expressions are intended to identify such forward-looking statements. Further, all statements, other than statements of historical fact contained or incorporated by reference in this Information Statement, that we expect or anticipate will or may occur in the future regarding our financial position, business strategy and measures to implement that strategy, including changes to operations, competitive strengths, goals, expansion and growth of our business and operations, plans, references to future success and other such matters, are forward-looking statements. Accounting estimates, such as those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in this Information Statement, are inherently forward-looking. All forward looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate in the circumstances. Forward-looking statements are not guarantees of performance and our actual results may differ materially from those expressed, projected or implied in or by the forward-looking statements.
You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Information Statement. Forward-looking statements are subject to risks and uncertainties, many of which are difficult to predict and generally beyond our control, that could cause actual results to differ materially from those expressed, projected or implied in or by the forward-looking statements. These risks and uncertainties, among others, include the ability of PHINIA to succeed as a standalone publicly traded company, which is a smaller company relative to BorgWarner; the possibility that the Spin-Off will not be completed within the anticipated time period or at all; the possibility that the Spin-Off will not achieve its intended benefits; the possibility of disruption, including changes to existing business relationships, disputes, litigation, or unanticipated costs in connection with the Spin-Off; the uncertainty regarding the expected financial performance of PHINIA following completion of the transaction; the impacts of any information and consultation processes with works councils and other employee representatives in connection with the Spin-Off; supply disruptions impacting us or our customers, such as the current shortage of semiconductor chips that has impacted OEM customers and their suppliers, including us; commodities availability and pricing; competitive challenges from existing and new competitors including OEM customers; the challenges associated with rapidly-changing technologies, and our ability to innovate in response; uncertainties regarding the extent and duration of impacts of matters associated with COVID-19, including additional production disruptions; the ability to identify targets and consummate acquisitions on acceptable terms; the failure to promptly and effectively integrate acquired businesses; the potential for unknown or inestimable liabilities relating to acquired businesses; our dependence on commercial vehicle, industrial application and light vehicle production, which are highly cyclical and subject to disruptions; our reliance on major OEM customers; fluctuations in interest rates and foreign currency exchange rates; our dependence on information systems; the uncertainty of the global economic environment; the outcome of existing or any future legal proceedings, including litigation with respect to various claims and any governmental investigations; future changes in laws and regulations, including, by way of example, taxes and tariffs, in the countries in which we operate; impacts from any potential future acquisition or disposition transactions; and the other risks noted under “Risk Factors,” and in other reports that we file with the Securities and Exchange Commission (“SEC”). We do not undertake any obligation to update or announce publicly any updates to or revisions to any of the forward-looking statements in this Information Statement to reflect any change in our expectations or any change in events, conditions, circumstances, or assumptions underlying the statements.
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This section and the discussions contained in “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in this Information Statement are intended to provide cautionary statements. Those cautionary statements should not be construed as a complete list of all of the economic, competitive, governmental, technological and other factors that could adversely affect our expected consolidated financial position, results of operations or liquidity. Additional risks and uncertainties, including without limitation those not currently known to us or that we currently believe are immaterial, also may impair our business, operations, liquidity, financial condition and prospects.
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THE SPIN-OFF
Background
On December 6, 2022, BorgWarner announced plans for the complete legal and structural separation of the Fuel Systems and Aftermarket businesses from BorgWarner by the Spin-Off. In reaching the decision to pursue the Spin-Off of the Fuel Systems and Aftermarket businesses, BorgWarner considered a range of potential structural alternatives and concluded that the Spin-Off is the most attractive alternative for enhancing stockholder value. To effect the Spin-Off, BorgWarner will undertake the Internal Restructuring and the distribution, as described below.
On June 7, 2023, the BorgWarner Board approved the distribution of 100% of the issued and outstanding shares of our common stock, on the basis of one share of our common stock for every five shares of BorgWarner common stock held as of the close of business on the record date of June 23, 2023.
On July 3, 2023, the Distribution Date, each BorgWarner stockholder will receive one share of our common stock for every five shares of BorgWarner common stock held at close of business on the record date. Following the Spin-Off, we will operate independently from BorgWarner. No approval of BorgWarner’s stockholders is required in connection with the Spin-Off, and BorgWarner’s stockholders will not have any appraisal rights in connection with the Spin-Off.
Completion of the Spin-Off is subject to the satisfaction, or the BorgWarner Board’s waiver, to the extent permitted by law, of a number of conditions. In addition, BorgWarner may at any time until the distribution decide to abandon the Spin-Off or modify or change the terms of the Spin-Off. For a more detailed discussion, see “—Conditions to the Spin-Off.”
Reasons for the Spin-Off
In 2021, BorgWarner announced its Charging Forward strategy to aggressively grow its electrification portfolio over time through organic investments and technology-focused acquisitions, including BorgWarner’s recent acquisitions of AKASOL AG, Santroll’s light vehicle eMotor business, Rhombus Energy Solutions, Drivetek AG and Hubei Surpass Sun Electric’s charging business. Additionally, BorgWarner announced a plan to dispose of certain internal combustion assets, targeting dispositions by 2025 of assets generating approximately $3 to $4 billion in annual revenue. As a result of these actions, BorgWarner expected its revenue from products for pure electric vehicles to be over 25% of its total revenue in 2025 and approximately 45% of its total revenue in 2030.
In the intervening period since that announcement, BorgWarner evaluated a number of potential alternatives to effect the dispositions called for by its Charging Forward strategy. As part of this evaluation, the BorgWarner Board considered a number of factors, including strategic clarity and flexibility for BorgWarner and PHINIA after the Spin-Off, the ability of the PHINIA business to compete and operate efficiently in the global vehicle and industrial equipment industry, the financial profile of PHINIA, PHINIA’s ability to execute acquisitions and other capital allocation strategies for its focus areas, the expected tax impact of each structural alternative, and the potential reaction of investors and customers. After evaluating these and other considerations, the BorgWarner Board concluded that the other alternatives considered did not present the same advantages as the Spin-Off, that the separation of the PHINIA business from the remainder of BorgWarner as a stand-alone, public company is the most attractive alternative for enhancing long-term stockholder value and that proceeding with the Spin-Off would be in the best interests of BorgWarner and its stockholders.
In particular, the BorgWarner Board considered the following potential benefits in making the determination to consummate the Spin-Off:
•Enhanced Strategic and Operational Focus: The Spin-Off will permit both PHINIA and BorgWarner, and their respective management teams and boards of directors, to more effectively focus on pursuing distinct operating strategies and to leverage their deep domain expertise. As a
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result, we will have greater agility to deliver market-leading innovation across our products and solutions. This will enable each company to better serve and adapt faster to clients’ changing needs.
•Strong Financial Profile to Support Growth: BorgWarner and PHINIA anticipate that the Spin-Off will enable each business to maintain moderate leverage profiles and strong earnings characteristics and to independently drive growth and investment to better address specific market dynamics and target innovation.
•More Flexible and Efficient Allocation of Capital: The Spin-Off is expected to allow each company to use its securities to pursue and achieve strategic objectives including evaluating and effectuating acquisitions and other growth opportunities.
•Alignment of Incentives with Performance: The Spin-Off will enable each company to create incentives for its management and employees that align more closely with business performance and the interests of their respective stockholders, which is also expected to help each company attract, retain, and motivate highly qualified employees.
•Better Focused Investor Base: The Spin-Off allows each company to articulate a clear investment proposition and tailored capital allocation policy to attract a long-term investor base well suited to its business needs.
In determining whether to effect the Spin-Off, the BorgWarner Board considered the costs and risks associated with the transaction, including:
•the costs associated with preparing PHINIA to become an independent, publicly traded company,
•the risk of volatility in our stock price immediately following the Spin-Off due to sales by BorgWarner stockholders whose investment objectives may no longer be met by shares of our common stock,
•the time it may take for us to attract our optimal stockholder base,
•the possibility of disruptions in our business as a result of the Spin-Off,
•the risk that, after the Spin-Off, the combined equity value of PHINIA and BorgWarner will be less than BorgWarner’s equity value before the Spin-Off, and
•the loss of synergies and scale, including the improved capital allocation from operating as one company.
Notwithstanding these costs and risks, taking into account the factors discussed above, BorgWarner determined that the Spin-Off provided the best opportunity to achieve the above benefits and enhance long-term stockholder value. See “Risk Factors—Risks Related to the Spin-Off” elsewhere in this Information Statement for additional considerations.
When and How You Will Receive Our Shares
BorgWarner will distribute to its stockholders, as a pro rata distribution, one share of our common stock for every five shares of BorgWarner common stock outstanding as of June 23, 2023, the Record Date of the Spin-Off.
Prior to the Spin-Off, BorgWarner will deliver 100% of the issued and outstanding shares of our common stock to the distribution agent. Computershare will serve as distribution agent in connection with the Spin-Off and as transfer agent and registrar for our common stock.
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If you own BorgWarner common stock as of the close of business on the Record Date, the shares of our common stock that you are entitled to receive in the Spin-Off will be issued to your account as follows:
•Registered stockholders. If you own your shares of BorgWarner common stock directly through BorgWarner’s transfer agent, you are a registered stockholder. In this case, the distribution agent will credit the whole shares of our common stock you receive in the Spin-Off by way of direct registration in book-entry form to a new account with our transfer agent. Registration in book-entry form refers to a method of recording share ownership where no physical stock certificates are issued to stockholders, as is the case in the Spin-Off. You will be able to access information regarding your book-entry account for our shares at www.computershare.com or by calling 800-851-4229 (domestic) and 201-680-6578 (international). Commencing on or shortly after the Distribution Date, the distribution agent will mail you an account statement that indicates the number of whole shares of our common stock that have been registered in book-entry form in your name. We expect it will take the distribution agent up to two weeks after the Distribution Date to complete the distribution of the shares of our common stock and mail statements of holding to all registered stockholders.
•“Street name” or beneficial stockholders. If you own your shares of BorgWarner common stock beneficially through a bank, broker, or other nominee, then the bank, broker, or other nominee holds the shares in “street name” and records your ownership on its books. In this case, your bank, broker, or other nominee will credit your account with the whole shares of our common stock that you receive in the Spin-Off on or shortly after the Distribution Date. We encourage you to contact your bank, broker, or other nominee if you have any questions concerning the mechanics of having shares held in “street name.”
If you sell any of your shares of BorgWarner common stock on or before the Distribution Date, the buyer of those shares may in some circumstances be entitled to receive the shares of our common stock to be distributed in respect of the BorgWarner shares you sold. See “—Trading Prior to the Distribution Date.”
We are not asking BorgWarner stockholders to take any action in connection with the Spin-Off. We are not asking you for a proxy and request that you not send us a proxy. We are also not asking you to make any payment or surrender or exchange any of your shares of BorgWarner common stock for shares of our common stock. The number of outstanding shares of BorgWarner common stock will not change as a result of the Spin-Off.
Number of Shares You Will Receive
On the Distribution Date, you will be entitled to receive one share of our common stock for every five shares of BorgWarner common stock that you hold on the record date.
Treatment of Fractional Shares
The distribution agent will not distribute any fractional shares of our common stock in connection with the Spin-Off. Instead, the distribution agent will aggregate all fractional shares into whole shares and sell the whole shares in the open market at prevailing market prices on behalf of BorgWarner stockholders entitled to receive a fractional share. The distribution agent will then distribute the aggregate cash proceeds of the sales, net of brokerage fees, transfer taxes, and other costs, pro rata to these holders (net of any required withholding for taxes applicable to each holder). The distribution agent will, in its sole discretion, without any influence by BorgWarner or us, determine when, how, through which broker-dealer, and at what price to sell the whole shares. The distribution agent is not, and any broker-dealer used by the distribution agent will not be, an affiliate of either BorgWarner or us.
The distribution agent will send to each registered holder of BorgWarner common stock entitled to a fractional share a check in the cash amount deliverable in lieu of that holder’s fractional share as soon as practicable following the Distribution Date. We expect the distribution agent to take about two weeks after the Distribution Date to complete the distribution of cash in lieu of fractional shares to BorgWarner stockholders. If you hold your shares through a bank, broker, or other nominee, then your bank, broker, or
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other nominee will receive, on your behalf, your pro rata share of the aggregate net cash proceeds of the sales. No interest will be paid on any cash you receive in lieu of a fractional share. The cash you receive in lieu of a fractional share will generally be taxable to you for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences of the Spin-Off.”
Incurrence of Debt
In connection with the Spin-Off, we expect to incur indebtedness in an aggregate principal amount of approximately $800 million, the proceeds of which we expect to use to repay historical indebtedness to BorgWarner. The indebtedness is expected to be incurred under a senior secured credit facility that would provide for up to approximately $800 million of term loans and a $500 million committed revolving credit facility. The terms of such indebtedness are subject to change and will be finalized prior to the completion of the Spin-Off. See “Capitalization,” “Unaudited Pro Forma Condensed Combined Financial Statements,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Our cash balance at the time of the Spin-Off is expected to be approximately $300 million, subject to a cash adjustment. See “Certain Relationships and Related Person Transactions—Agreements with BorgWarner—Separation and Distribution Agreement—Cash Adjustment.”
Treatment of Equity Awards
In connection with the Spin-Off, we anticipate that outstanding equity-based awards under the BorgWarner 2018 Stock Incentive Plan and BorgWarner 2023 Stock Incentive Plan will be treated as described below.
Restricted Stock and Restricted Stock Units
Each BorgWarner restricted stock award and restricted stock unit award held at the time of the Spin-Off by a PHINIA service provider will be replaced with a substitute restricted stock or restricted stock unit award relating to our common stock that will be granted under our 2023 Stock Incentive Plan (the “PHINIA Plan”). The number of shares of our restricted stock or restricted stock units subject to each substitute award will be equal to the number of shares of BorgWarner restricted stock or BorgWarner restricted stock units subject to the BorgWarner award held by the service provider at the time of the Spin-Off multiplied by a conversion ratio designed to preserve the intrinsic value of the award immediately following the Spin-Off. Each substitute award will otherwise generally have the same terms and conditions as the corresponding BorgWarner award.
Each BorgWarner restricted stock award, restricted stock unit award or deferred stock unit award held at the time of the Spin-Off by a person other than a PHINIA service provider will be adjusted by a conversion ratio designed to preserve the intrinsic value of the award immediately following the Spin-Off. Each adjusted award will otherwise generally have the same terms and conditions as the corresponding BorgWarner award.
Performance Shares
Each BorgWarner performance share award held at the time of the Spin-Off by any PHINIA service provider will be replaced with a substitute restricted stock unit award relating to our common stock granted under the PHINIA Plan. For purposes of determining the number of our restricted stock units subject to the substitute award, we will apply a conversion ratio designed to preserve the intrinsic value of the award immediately after the Spin-Off to the number of BorgWarner performance shares that BorgWarner determines would have been earned with respect to such BorgWarner performance share award based on BorgWarner’s performance results through the end of the fiscal quarter immediately preceding the Spin-Off and expected performance through the remainder of the applicable performance period (except that, unless BorgWarner determines otherwise, performance share awards for which less than one year of the performance period has elapsed will be considered earned at target). Each substitute award will have a vesting period ending on the last day of the performance period applicable to the corresponding BorgWarner performance share award to which it relates, and will otherwise generally
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have the same terms and conditions (other than performance conditions) as the corresponding BorgWarner performance share award.
Each BorgWarner performance share award held at the time of the Spin-Off by any person who is not a PHINIA service provider will be adjusted by a conversion ratio designed to preserve the intrinsic value of the award immediately following the Spin-Off. The BorgWarner Board or its compensation committee may adjust any performance goals applicable to the adjusted performance share awards in any manner it deems in its discretion to be appropriate to take into account the Spin-Off and related effects, and the adjusted performance share award will otherwise generally continue to have the same terms and conditions as prior to the Spin-Off.
Results of the Spin-Off
After the Spin-Off, we will be an independent, publicly traded company. Immediately following the Spin-Off, we expect to have approximately 47,016,147 shares of our common stock outstanding, based on the number of BorgWarner shares of common stock outstanding on May 31, 2023. The actual number of shares of our common stock BorgWarner will distribute in the Spin-Off will depend on the actual number of shares of BorgWarner common stock outstanding on the Record Date, which will reflect any issuance of new shares, vesting of equity awards, or exercises of outstanding options pursuant to BorgWarner’s equity plans, and any repurchase of BorgWarner shares by BorgWarner under its common stock repurchase program, on or prior to the Record Date. Shares of BorgWarner common stock held by BorgWarner as treasury shares will not be considered outstanding for purposes of, and will not be entitled to participate in, the Spin-Off. The Spin-Off will not affect the number of outstanding shares of BorgWarner common stock or any rights of BorgWarner stockholders. However, following the Spin-Off, the equity value of BorgWarner will no longer reflect the value of the PHINIA. Although BorgWarner believes that our separation from BorgWarner offers its stockholders the greatest long-term value, there can be no assurance that the combined equity value of BorgWarner and PHINIA will equal or exceed what the equity value of BorgWarner would have been in absence of the Spin-Off.
Before our separation from BorgWarner, we intend to enter into the Separation and Distribution Agreement and several other agreements with BorgWarner related to the Spin-Off. These agreements will govern the relationship between us and BorgWarner up to and after completion of the Spin-Off and allocate between us and BorgWarner various assets, liabilities, rights and obligations, including employee benefits, environmental, intellectual property, and tax-related assets and liabilities. We describe these arrangements in greater detail under “Certain Relationships and Related Person Transactions—Agreements with BorgWarner.”
Listing and Trading of Our Common Stock
As of the date of this Information Statement, we are a wholly owned subsidiary of BorgWarner. Accordingly, no public market for our common stock currently exists, although a “when-issued” market in our common stock may develop prior to the Spin-Off. See “—Trading Prior to the Distribution Date” below for an explanation of a “when-issued” market. We have applied to list our shares of common stock on the Exchange under the ticker symbol “PHIN.” Following the Spin-Off, BorgWarner common stock will continue to trade on the Exchange under the ticker symbol “BWA.”
Although BorgWarner believes that our separation from BorgWarner offers its stockholders the greatest long-term value, neither we nor BorgWarner can assure you as to the trading price of BorgWarner common stock or our common stock after the Spin-Off, or as to whether our and BorgWarner’s combined equity value after the Spin-Off will equal or exceed the equity value of BorgWarner prior to the Spin-Off. The trading price of our common stock may fluctuate significantly following the Spin-Off.
The shares of our common stock distributed to BorgWarner stockholders will be freely transferable, except for shares received by individuals who are our affiliates. Individuals who may be considered our affiliates after the Spin-Off include individuals who control, are controlled by, or are under common control with us, as those terms generally are interpreted for federal securities law purposes. These individuals
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may include some or all of our directors and executive officers. Individuals who are our affiliates will be permitted to sell their shares of our common stock only pursuant to an effective registration statement under the Securities Act, or an exemption from the registration requirements of the Securities Act, such as those afforded by Section 4(a)(1) of the Securities Act or Rule 144 thereunder.
Trading Prior to the Distribution Date
We expect a “when-issued” market in our common stock to develop on the third trading day before the Distribution Date and continue up to and including the Distribution Date. “When-issued” trading refers to a sale or purchase made conditionally on or before the Distribution Date because the securities of the spun-off entity have not yet been distributed. If you own shares of BorgWarner common stock at the close of business on the Record Date, you will be entitled to receive shares of our common stock in the Spin-Off. You may trade this entitlement to receive shares of our common stock, without the shares of BorgWarner common stock you own, on the “when-issued” market. We expect “when-issued” trades of our common stock to settle within two trading days after the Distribution Date. On the first trading day following the Distribution Date, we expect that “when-issued” trading of our common stock will end and “regular-way” trading will begin.
We also anticipate that, on the third trading day before the Distribution Date and continuing up to and including the Distribution Date, there will be two markets in BorgWarner common stock: a “regular-way” market and an “ex-distribution” market. Shares of BorgWarner common stock that trade on the regular-way market will trade with an entitlement to receive shares of our common stock in the Spin-Off. Shares that trade on the ex-distribution market will trade without an entitlement to receive shares of our common stock in the Spin-Off. Therefore, if you sell shares of BorgWarner common stock in the regular-way market up to and including the Distribution Date, you will be selling your right to receive shares of our common stock in the Spin-Off. However, if you own shares of BorgWarner common stock at the close of business on the Record Date and sell those shares on the ex-distribution market up to and including the Distribution Date, you will still receive the shares of our common stock that you would otherwise be entitled to receive in the Spin-Off.
If “when-issued” trading occurs, the listing for our common stock is expected to be under a trading symbol different from our regular-way trading symbol. We will announce our “when-issued” trading symbol when and if it becomes available. If the Spin-Off does not occur, all “when-issued” trading will be null and void.
Conditions to the Spin-Off
We expect that the Spin-Off will be completed, and the distribution will be effective, on the Distribution Date, provided that the following conditions shall have been satisfied or waived by BorgWarner:
•the BorgWarner Board shall have approved the Spin-Off and not withdrawn such approval, and shall have declared the dividend of our common stock to BorgWarner stockholders;
•the Separation and Distribution Agreement as well as the ancillary agreements contemplated by the Separation and Distribution Agreement, shall have been executed by each party to those agreements;
•the SEC shall have declared effective our Registration Statement on Form 10, of which this Information Statement is a part, under the Exchange Act, and no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings for that purpose shall be pending before or threatened by the SEC;
•our common stock shall have been accepted for listing on a national securities exchange approved by BorgWarner, subject to official notice of issuance;
•BorgWarner shall have received the written opinion of Ernst & Young, LLP to the effect that the Spin-Off will qualify as a tax-free “reorganization” within the meaning of Sections 368(a)(1)(D) and 355 of the Code;
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•the Internal Restructuring shall have been completed (other than those steps that are expressly contemplated to occur at or after the Spin-Off);
•no order, injunction, or decree issued by any governmental authority of competent jurisdiction or other legal restraint or prohibition preventing consummation of the Spin-Off shall be in effect, and no other event outside the control of BorgWarner shall have occurred or failed to occur that prevents the consummation of the Spin-Off;
•completion of information and consultations processes with works councils and other employee representative bodies, as required;
•no other events or developments shall have occurred prior to the Spin-Off that, in the judgment of the BorgWarner Board, in its sole and absolute discretion, makes it inadvisable for BorgWarner to effect the Spin-Off by distributing our common stock to its stockholders or to effect any other transaction in the Internal Restructuring or Spin-Off;
•prior to the Distribution Date, the Notice of Internet Availability of this Information Statement or this Information Statement shall have been mailed to the holders of BorgWarner common stock as of the Record Date; and
•certain other conditions set forth in the Separation and Distribution Agreement.
Any of the above conditions may be waived by BorgWarner to the extent such waiver is permitted by law. If BorgWarner waives any condition to the Spin-Off or changes the terms of the Spin-Off before the Registration Statement on Form 10 of which this Information Statement forms a part becomes effective and the result of such waiver or change is material to BorgWarner stockholders, then we will file an amendment to the Registration Statement on Form 10 to revise the disclosure in the Information Statement accordingly. In the event that BorgWarner waives a condition to the Spin-Off or changes the terms of the Spin-Off after the Registration Statement on Form 10 becomes effective and such waiver or change is material to BorgWarner stockholders, we would communicate such waiver or change to BorgWarner’s stockholders by filing a Current Report on Form 8-K describing the waiver or change.
The fulfillment of the above conditions will not create any obligation on BorgWarner’s part to complete the Spin-Off. We are not aware of any material federal, foreign, or state regulatory requirements with which we must comply, other than SEC rules and regulations, or any material approvals that we must obtain, other than the approval for listing of our common stock and the SEC’s declaration of the effectiveness of the Registration Statement, in connection with the Spin-Off. BorgWarner may at any time until the distribution decide to abandon the Spin-Off or modify or change the terms of the Spin-Off.
Reasons for Furnishing This Information Statement
We are furnishing this Information Statement solely to provide information to BorgWarner’s stockholders who will receive shares of our common stock in the Spin-Off. You should not construe this Information Statement as an inducement or encouragement to buy, hold, or sell any of our securities or any securities of BorgWarner. We believe that the information contained in this Information Statement is accurate as of the date set forth on the cover. Changes to the information contained in this Information Statement may occur after that date, and neither we nor BorgWarner undertakes any obligation to update the information except in the normal course of our and BorgWarner’s public disclosure obligations and practices.
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DIVIDEND POLICY
Although our management intends to request that our Board approve, and believes our expected cash flow will support, paying quarterly dividends following the Spin-Off, after the Spin-Off is complete and we are an independent, publicly traded company, our Board will evaluate whether to pay cash dividends to our stockholders. The timing, declaration, amount, and payment of future dividends to stockholders, if any, will fall within the discretion of our Board. Our Board’s decisions regarding the payment of dividends will depend on consideration of many factors, such as our financial condition, earnings, sufficiency of distributable reserves, opportunities to retain future earnings for use in the operation of our business and to fund future growth, capital requirements, debt service obligations, legal requirements, regulatory constraints, and other factors that our Board deems relevant. There can be no assurance that we will pay a dividend in the future or continue to pay any dividend if we do commence the payment of dividends.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2023, on a historical basis and on a pro forma basis to give effect to the Spin-Off and the transactions related to the Spin-Off, as if they occurred on March 31, 2023. You should review the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited combined financial statements and the notes thereto, and our “Unaudited Pro Forma Condensed Combined Financial Statements” and the notes thereto included elsewhere in this Information Statement.
March 31, 2023
(dollar amounts in millions)ActualPro Forma
Cash and cash equivalents$181 $265 
Capitalization:
Debt Outstanding
Due to Parent, non-current947 — 
Long-term debt27 799 
Total indebtedness974 799 
Equity
Common stock, par value $0.01n/a— 
Paid in capitaln/a1,844 
Parent company investment1,859 — 
Accumulated other comprehensive loss(67)(67)
Total equity1,792 1,777 
Total capitalization$2,766 $2,576 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma Condensed Combined Financial Statements consist of the unaudited pro forma Condensed Combined Balance Sheet as of March 31, 2023 and the unaudited pro forma Condensed Combined Statements of Operations for the three months ended March 31, 2023 and the year ended December 31, 2022.
The unaudited pro forma Condensed Combined Financial Statements reflect adjustments to our historical unaudited Condensed Combined Balance Sheet as of March 31, 2023, our historical unaudited Condensed Combined Statement of Operations for the three months ended March 31, 2023 and our historical audited Combined Statement of Operations for the year ended December 31, 2022.
The unaudited pro forma Condensed Combined Balance Sheet gives effect to the Spin-Off and related transactions, described below, as if they occurred as of March 31, 2023, our latest balance sheet date. The unaudited pro forma Condensed Combined Statements of Operations give effect to the Spin-Off and related transactions as if they had occurred on January 1, 2022, the beginning of our most recently completed fiscal year.
The unaudited pro forma Condensed Combined Financial Statements have been prepared to reflect transaction accounting and autonomous entity adjustments to present the financial condition and results of operations as if we were a separate stand-alone entity. The unaudited pro forma Condensed Combined Financial Statements have been adjusted to give effect to the following (collectively, the “Pro Forma Transactions”):
•the contribution of assets and liabilities that comprise our business by BorgWarner as well as the settlement of related party balances pursuant to the Separation and Distribution Agreement;
•the expected transfer to us, prior to or concurrent with the Spin-Off of various BorgWarner assets and liabilities not included in our historical Condensed Combined Balance Sheet (including the transfer of certain pension and employee benefit obligations, net of any related assets, associated with our active, retired, and other former employees from BorgWarner);
•the anticipated post-Spin-Off capital structure, including; (i) the issuance of approximately 47.0 million shares of our common stock to holders of BorgWarner common stock in connection with the Spin-Off and (ii) the expected issuance of approximately $800 million of borrowings pursuant to debt financing with third-parties (prior to original issue discount and issuance costs), and additional details on debt issuance can be found in note (a);
•the impact of the Tax Matters Agreement to be entered into with BorgWarner in connection with the Spin-Off;
•the impact of the Transition Services Agreement to be entered into with BorgWarner in connection with the Spin-Off;
•the impact of the Contract Manufacturing and Service Agreements with revenue and costs expected to be incurred;
•the impact of new lease agreements between BorgWarner and PHINIA; and
•the impact of a Supply Agreement to be entered into with BorgWarner.
The unaudited pro forma Condensed Combined Financial Statements were prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma Condensed Combined Financial Statements are presented for informational purposes only and do not purport to represent what our financial position and results of operations actually would have been had the Pro Forma Transactions occurred on the dates indicated, or to project our financial performance for any future period. The unaudited pro forma
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Condensed Combined Financial Statements are based on information and assumptions that are described in the accompanying notes.
Our historical Combined Financial Statements, which were the basis for the unaudited pro forma Condensed Combined Financial Statements, were prepared on a carve-out basis as we did not operate as a stand-alone entity for the periods presented. Accordingly, such financial information reflects an allocation of certain corporate costs, such as finance, supply chain, human resources, information technology, insurance, employee benefits, and other expenses. See Note 1, “Summary Of Significant Accounting Policies,” and Note 23, “Related-Party Transactions,” to the Combined Financial Statements in this Information Statement for further information on the allocation of corporate costs.
The unaudited pro forma Condensed Combined Financial Statements include transaction accounting (including the impact of changes to our legal entity structure in anticipation of the Spin-Off), autonomous entity to reflect the financial condition and results of operations as if we were a stand-alone entity. Transaction accounting adjustments have been presented to show the impact and associated cost as a result of the legal separation from BorgWarner, including the incurrence of indebtedness, transfer of assets or assumption of liabilities not included in historical financial statements, transfer of additional pension and employee benefit assets and liabilities, and the Tax Matters Agreement. Autonomous entity adjustments have been presented to show the impact of items such as the Transition Services Agreement, Contract Manufacturing Agreement and Intellectual Property Agreements with BorgWarner.
The unaudited pro forma condensed combined financial information reported below should be read in conjunction with the section herein entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical Combined Financial Statements in this Information Statement.
To operate as an independent, publicly traded company, we expect our recurring costs to replace certain services to approximate those costs historically allocated to us from BorgWarner. The significant assumptions involved in determining our estimates of the recurring costs of being an independent, publicly traded company include, but are not limited to, costs to perform financial reporting, tax, corporate governance, treasury, legal, internal audit and investor relations activities; compensation expense, including equity-based awards, and benefits; and incremental third-party costs with respect to insurance, audit services, tax services, employee benefits and legal services. The operating expenses reported in our historical Combined Statements of Operations include allocations of certain BorgWarner costs. These costs include allocation of BorgWarner corporate costs that benefit us, including executive management, finance, accounting, legal, information technology, human resources, research and development, sales and other general and administrative costs. We estimate the costs to operate as an independent, publicly traded company approximate the amount of allocated costs that have been presented in our historical Combined Statements of Operations and as such a management pro forma adjustment has not been made to the accompanying unaudited pro forma Condensed Combined Statement of Operations. Certain factors could impact these stand-alone public company costs, including the finalization of our staffing and infrastructure needs.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Period ended March 31, 2023
HistoricalTransaction Accounting AdjustmentsAutonomous Entity AdjustmentsPro Forma
(in millions, except per share amounts)
Net sales$835 $23 k$— $858 
Cost of sales663 22 k— 685 
Gross profit172 1 — 173 
Selling, general and administrative expenses99 — 1 l100 
Restructuring expense4 — — 4 
Other operating expense, net11 5 h— 16 
Operating income58 (4)(1)53 
Equity in affiliates’ earnings, net of tax(3)— — (3)
Interest expense, net3 14 a— 17 
Other postretirement income— — — — 
Earnings before income taxes58 (18)(1)39 
Provision for income taxes23 (3)j— 20 
Net earnings$35 $(15)$(1)$19 
Earnings per share of common stock
Basic o$0.41 
Dilutedo$0.41 
Weighted-average number of common shares outstanding
Basico46.6 
Dilutedo46.6 
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Period ended December 31, 2022
HistoricalTransaction Accounting AdjustmentsAutonomous Entity AdjustmentsPro Forma
(in millions, except per share amounts)
Net sales$3,348 $97 k$— $3,445 
Cost of sales2,627 92 c,i, k— 2,719 
Gross profit721 5 — 726 
Selling, general and administrative expenses407 4 i1 l,m412 
Restructuring expense11 — — 11 
Goodwill impairment— — — — 
Other operating (income) expense, net(15)31 h— 16 
Operating income318 (30)(1)287 
Equity in affiliate's earnings, net of tax(11)— — (11)
Interest expense, net14 61 a— 75 
Other postretirement income(32)— — (32)
Earnings before income taxes347 (91)(1)255 
Provision for income taxes85 (15)j— 70 
Net earnings$262 $(76)$(1)$185 
Earnings per share of common stock
Basico$3.93 
Dilutedo$3.93 
Weighted-average number of common shares outstanding
Basico47.1 
Dilutedo47.1 
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of March 31, 2023
HistoricalTransaction Accounting AdjustmentsAutonomous Entity AdjustmentsPro Forma
(in millions)
ASSETS
Cash and cash equivalents$181 $84 a$— $265 
Receivables, net791 58 d— 849 
Due from Parent, current230 (230)f— — 
Inventories, net493 — — 493 
Prepayments and other current assets41 41 d,e— 82 
Total current assets1,736 (47)— 1,689 
Property, plant and equipment, net911 15 b,k— 926 
Investments and long-term receivables124 — — 124 
Due from Parent, non-current240 (240)f— — 
Goodwill492 — — 492 
Other intangible assets, net427 — — 427 
Other non-current assets266 (84)c,d,e(4)m178 
Total assets$4,196 $(356)$(4)$3,836 
LIABILITIES AND EQUITY
Accounts payable$478 $— $— $478 
Due to Parent, current327 (327)f— — 
Other current liabilities361 160 d,e(1)m520 
Total current liabilities1,166 (167)(1)998 
Long-term debt27 772 a— 799 
Due to Parent, non-current947 (947)a,f— — 
Retirement-related liabilities75 10 c— 85 
Other non-current liabilities189 (9)d(3)m177 
Total liabilities2,404 (341)(4)2,059 
Commitments and contingencies
Parent company investment1,859 (1,859)a,b,c,d,e,f,g,k— — 
Common stock— — g— — 
Paid in capital— 1,844 g— 1,844 
Accumulated other comprehensive (loss) income(67)— — (67)
Total equity1,792 (15)— 1,777 
Total liabilities and equity$4,196 $(356)$(4)$3,836 
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Note 1. Notes to Unaudited Pro Forma Condensed Combined Financial Statements
The unaudited pro forma Condensed Combined Balance Sheet as of March 31, 2023 and the unaudited pro forma Condensed Combined Statement of Operations for the three months ended March 31, 2023 and the unaudited pro forma Combined Statement of Operations for the year ended December 31, 2022 include the following adjustments:
Transaction Accounting Adjustments
a.Reflects approximately $800 million of borrowings in connection with the Spin-Off pursuant to an expected $1.3 billion senior secured credit facility with third-parties (the “Credit Facility”), offset by anticipated original issuance discount and debt issuance costs of $28 million. The net proceeds from the borrowings will be used to settle certain outstanding related party liabilities due to BorgWarner.
The Credit Facility will also include a 5-year revolving credit facility (“revolver”) with availability of $500 million and a commitment fee of 20 to 25 basis points. The revolver will mainly be used to support the post-separation operational cash flow needs of the Company. The borrowings are expected to incur variable rate interest using SOFR plus credit spread adjustment and a fixed spread. The terms of this indebtedness have not been finalized, and the pro forma adjustments may change accordingly. The impact of the Credit Facility on interest expense is net of historically recorded interest expense on related party debt of $4 million and $13 million for the periods ended March 31, 2023 and December 31, 2022, respectively.
(in millions)Three months ended March 31, 2023Year ended December 31, 2022
Interest expense from the Credit Facility$18 $74 
Less: historical related-party interest expense4 13 
Pro forma interest adjustments$14 $61 
A 1/8% variance in the estimated effective interest rate on debt would change the interest expense by an insignificant amount for the three months ended March 31, 2023. A 1/8% variance in the estimated effective rate on debt would change the interest expense by $1 million for the year ended December 31, 2022.
It is expected that PHINIA will have a cash and cash equivalents balance of $300 million at the time of the Spin-Off, subject to a cash adjustment (see “Certain Relationships and Related Person Transactions—Agreements with BorgWarner—Separation and Distribution Agreement—Cash Adjustment.”). This cash adjustment was estimated to be $35 million at March 31, 2023, resulting in an anticipated cash balance of $265 million. The net proforma adjustment increases cash and cash equivalents by $84 million.
(in millions)
Targeted cash and cash equivalents at Spin-Off$300 
Less: estimated cash adjustment(35)
Less: cash and cash equivalents at March 31, 2023(181)
Pro forma cash adjustment$84 
b.Reflects the impact of property, plant and equipment owned and historically utilized by BorgWarner that will be transferred to us in connection with the Spin-Off. The adjustment increases property, plant and equipment, net of $13 million.
c.Reflects additional retirement and non-pension postretirement benefit plan assets and obligations that will be transferred to us prior to the Spin-Off, including pension plan assets of $10 million, employee
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related obligations of $20 million, and associated deferred tax asset of $3 million, as of March 31, 2023. These plan assets and obligations are excluded from our Condensed Combined Balance Sheet as of March 31, 2023 as they are related to commingled plans with BorgWarner that were accounted for using the multi-employer approach. The adjustment also increases cost of sales by $1 million related to service cost for the year ended December 31, 2022. Net periodic pension cost (income) related to non-service costs was previously allocated to PHINIA and recorded in the historical audited and unaudited Combined Statement of Operations. As such, no additional pro forma adjustment is required for net periodic pension cost (income) for these plans.
d.Reflects the modification of tax balances due to changes to our legal entity structure in anticipation of the Spin-Off and stand-alone effects within the respective jurisdictions, including (but not limited to) changes to the amount of deferred income tax assets associated with net operating losses and other carryforward income tax attributes; the realization of deferred tax assets which are current subject to valuation allowances; and the reduction of non-current liabilities for unrecognized tax benefits that will be retained by BorgWarner in connection with the Spin-Off. These adjustments are estimates and the impacts of which are presented below.
(in millions)As of March, 31, 2023
Receivables, net$58 
Prepayments and other current assets$(5)
Other non-current assets$(101)
Other current liabilities$(3)
Other non-current liabilities$(9)
Parent company investment$(36)
e.These adjustments reflect the indemnification assets and liabilities established pursuant to the Tax Matters Agreement. These adjustments are estimates, the impacts of which are presented below.
(in millions)As of March, 31, 2023
Prepayments and other current assets$46 
Other non-current assets$14 
Other current liabilities$163 
Parent company Investment$(103)
f.Reflects settlement of certain transactions historically included in related party accounts (Due from/to Parent) as of March 31, 2023.
(in millions)As of March, 31, 2023
Due from Parent, current$(230)
Due from Parent, non-current$(240)
Due to Parent, current $327 
Due to Parent, non-current$165 
Parent company investment$(22)
This also reflects settlement of certain related party balances in conjunction with the use of proceeds from the term debt and revolver transaction adjustments discussed above.
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(in millions)As of March, 31, 2023
Due to Parent, non-current - cash settled using proceeds from debt described in (a)$(782)
Remaining outstanding Due to Parent, non-current - settled through parent company investment(165)
Pro forma Due to Parent, non-current adjustment$(947)
g.Reflects the reclassification of BorgWarner’s net investment in us to common stock and additional paid-in capital to be reflected at Spin-Off. Reflects the reclassification of BorgWarner’s net investment in our Company, as well as the issuance of 47.0 million shares of our common stock with a par value of $0.01 per share pursuant to the Separation and Distribution Agreement. The determination of PHINIA common shares to be issued was based on a 5-to-1 issuance ratio using 235.1 million shares of BorgWarner common stock outstanding on May 31, 2023. The actual number of shares issued will not be known until the record date for the distribution.
h.Reflects the reversal of royalty income previously recognized from intellectual property (“IP”) license rights granted to BorgWarner from PHINIA that were used in the operation of their business. Under the Intellection Property Agreements, these rights will be granted on a royalty-free basis as of the Spin-Off. The adjustment is $5 million and $31 million for the three months ended March 31, 2023 and the year ended December 31, 2022, respectively.
i.Reflects the impact of changes from a Supply Agreement with a certain PHINIA entity and BorgWarner. The Supply Agreement replaces cost reimbursement provided by BorgWarner, previously recorded in selling, general and administrative expenses, with a discount in product supply cost. The agreement will only affect the pro forma Condensed Combined Statement of Operations for the year ended December 31, 2022 as the arrangement is already accounted for on this basis in 2023. The agreement has an impact of decreasing cost of sales by $3 million and increasing selling, general and administrative expenses by $4 million.
j.Reflects the tax effects of the transaction accounting adjustments at the applicable statutory income tax rates, where valuation allowances were not required, based on the locations generating the related taxable activity. The applicable tax rates could be materially higher or lower depending on several factors subsequent to the Spin-Off, including profitability in the local jurisdictions and the legal entity structure implemented subsequent to the Spin-Off.
k.Reflects the impact of Contract Manufacturing Agreements that PHINIA and BorgWarner will enter into in connection with the Spin-Off for product supply and a service agreement between BorgWarner and PHINIA. The Contract Manufacturing Agreements relate to entities in Mexico and China. PHINIA will both sell to and purchase products from BorgWarner under the arrangements resulting in the pro forma recognition of net sales and cost of sales as this activity was not previously recorded in the historical PHINIA financial statements. The arrangements feature consideration set at cost plus a fixed margin for designated products. The impact of these arrangements on net sales is $23 million and $97 million for the three months ended March 31, 2023 and the year ended December 31, 2022, respectively. The impact of these arrangements on cost of sales is $22 million and $94 million for the three months ended March 31, 2023 and the year ended December 31, 2022, respectively. In accordance with the terms of one of the Contract Manufacturing Agreements, certain property, plant, and equipment assets will transfer to PHINIA in situations where PHINIA is purchasing product. The impact of those transfers is $2 million for property, plant, and equipment. The estimate for these adjustments is based upon the terms of the latest draft agreement and is subject to change.
Autonomous Entity Adjustments
l.In connection with the Spin-Off, PHINIA will enter into a Transition Services Agreement with BorgWarner whereby BorgWarner will continue to provide PHINIA support with functional area services at a cost to PHINIA (cost plus markup of 5%). These services cover finance, information technology, and infrastructure. The adjustment for Transition Services Agreement costs is expected to have an
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incremental $2 million impact on selling, general, and administrative expenses for the year ended December 31, 2022 and $1 million for the three-months ended March 31, 2023, as the historical Condensed Combined and Combined Statements of Operations for those periods already reflect an allocation of costs for these services. The Transition Services Agreement is being drafted and will be completed prior to the Spin-Off. The estimate of these adjustments is based upon the terms of the latest draft agreement and is subject to change.
m.Reflects the net impact of lease and sublease arrangements with BorgWarner for facilities that have been entered into or will be entered into prior to the Spin-Off. These adjustments record adjustments to the right-of-use assets and related lease liabilities based on the estimated present value of the lease payments over the lease term and adjustments to lease expense to reflect the expected lease terms, for lessee arrangements. The estimate of these adjustments is based upon the terms of the latest draft agreement and is subject to change.
n.Reflects the tax effects of the autonomous entity adjustments at the applicable statutory income tax rates, where valuation allowances were not required, based on the locations generating the related taxable activity. The applicable tax rates could be materially higher or lower depending on several factors subsequent to the Spin-Off, including profitability in the local jurisdictions and the legal entity structure implemented subsequent to the Spin-Off.
Pro Forma Earnings Per Share
o.The weighted-average number of shares of common stock used to compute pro forma basic earnings per share for the three months ended March 31, 2023 and the year ended December 31, 2022 is based on the number of weighted-average BorgWarner shares outstanding during the three months ended March 31, 2023 and year ended December 31, 2022, respectively, assuming a 5-to-1 common stock issuance ratio.
The weighted-average number of shares of common stock used to compute pro forma diluted earnings per share for the three months ended March 31, 2023 and the year ended December 31, 2022 is based on the number of weighted-average BorgWarner shares outstanding during the three months ended March 31, 2023 and year ended December 31, 2022, respectively, assuming a 5-to-1 common stock issuance ratio. At this time, the dilutive effects of shares granted under the Employee Matters Agreement cannot be estimated. The actual dilutive effect following the completion of the Spin-Off will depend on various factors, including post-spin market activity, employees who may change employment between BorgWarner and PHINIA and impact of equity-based compensation arrangements.
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OUR BUSINESS
Overview
PHINIA’s business 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 original equipment manufacturers (“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 original equipment service (“OES”) solutions and remanufactured products as well as an expanded range of products for the independent (non-OEM) aftermarket.
We have an extensive original equipment portfolio of advanced fuel injection systems, fuel delivery modules, canisters, starters, alternators, sensors, electronic control modules and associated software. Our global footprint includes 17 major manufacturing facilities and seven major technical centers utilizing a regional service model, which enables us to efficiently and effectively serve our global customers. We have a presence in 24 countries and a team of approximately 1,500 scientists, engineers and technicians globally who focus on innovating and developing market-relevant product solutions.
We also manufacture and sell our products to leading aftermarket participants, including independent retailers and wholesale distributors. In addition to the range of OEM products we describe above, we supply the independent aftermarket with a suite of new and remanufactured products such as diagnostic equipment, ignition coils, smart remote actuators, exhaust gas recirculation valves, brakes, steering, suspension, and other products. We add aftermarket know-how in category management, logistics, training, marketing, and other dedicated services to provide a broad range of aftermarket solutions that extend the service lives of vehicles and industrial equipment.
Our business is well diversified across regions, product types, customer types and customers. In 2022, we derived 39% of our revenue from Europe, 41% from the Americas, and 20% from Asia. Further, 24% of our net sales in 2022 were for original equipment commercial vehicle and industrial applications, 44% were for original equipment light vehicles, 11% were for OES, and 21% for independent aftermarket customers. We have a diverse customer base with only one customer accounting for more than 10% of our net sales in 2022 (General Motors accounted for 12% of net sales), and our top five customers accounted for a total of approximately 32% of net sales.
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Breakdown of 2022 Sales by Geography, Segment and Customer Type
infostatement1da.jpg
Strengths
Our business is a recognized leader in combustion and hybrid propulsion technologies for both OEMs and aftermarket customers. Our competitive strengths stem from our portfolio of advanced technologies, history of proven innovation, strong customer relationships across diverse markets and global operations near key OEM customer manufacturing sites. We believe we are well positioned to partner with global OEMs and help them meet tighter regulations and improve efficiency. We believe we can also expand channel penetration and global reach with our independent aftermarket business leveraging our strong brands, product breadth and leading off-the-shelf product availability.
•Portfolio of Advanced Technologies Aligned to Customer Demands: We have an established product portfolio that includes technologies for all combustion and hybrid propulsion systems including gas, diesel, and alternative fuels including hydrogen, ethanol and natural gas, which we sell to our diverse OEM and aftermarket customer base.
Fuel Systems:
Our Fuel Systems segment comprises a range of technologies that enable us to provide complete fuel management solutions, from tank to combustion chamber. Our highly engineered fuel injection systems portfolio includes pumps, injectors, fuel rail assemblies and engine control modules that reduce emissions and improve fuel economy for traditional and hybrid applications. Our common rail fuel injection system is the core technology for both on- and off-highway commercial vehicle, industrial and light vehicle applications. We also offer software and calibration services which allows us to develop a complete turnkey system.
Our fuel delivery modules and canisters are specifically engineered to individual vehicle applications to maximize safety, efficiency, performance and emissions legislation compliance. We believe our strong market position, especially in the North American market, is built on strong engineering capabilities, which enable us to customize the product to fit within specific application envelopes and to deliver high performance, high durability products.
Aftermarket:
Our Aftermarket segment sells products to independent aftermarket customers and OES customers with both new and remanufactured products. Our product portfolio includes a wide range of products as well as maintenance, test equipment and vehicle and industrial equipment
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diagnostics solutions. We believe the Aftermarket segment’s business provides a recurring and stable revenue base, as replacement of many of these products is non-discretionary in nature. The growing number of vehicles on the road, along with the higher average age of vehicles and increasing miles driven, collectively represent trends that we expect to lead to growing demand for our aftermarket products.
Our Aftermarket segment includes our extensive range of OEM and aftermarket starters and alternators for commercial vehicle, industrial and light vehicle applications. These deliver class-leading power density, durability and performance for the most demanding applications. Based on our proven track record of leading performance for premium commercial vehicle and industrial solutions, customers actively choose to specify our starters and alternators.
•Technology Advantage from Long History of Investment and Differentiated System Capabilities: We have a team of approximately 1,500 scientists, engineers and technicians across seven major technical centers globally. With rights to approximately 2,260 active patents and patent applications, we have a strong track record of developing technologies focused on addressing consumer demands and industry trends. We have well-defined product and system technology roadmaps designed to provide solutions for a variety of different emission standards and engine architectures. With our extensive portfolio of products, we believe we are well positioned to benefit from increasing OEM demand for turnkey solutions. We are developing an extensive hydrogen portfolio to capitalize on secular growth trends in hydrogen injection systems, with our first product launch planned for 2024. We also leverage our OEM product engineering capabilities across our aftermarket product lines to capture value over the lifetime of a vehicle or piece of industrial equipment. Our ability to provide the latest technologies to improve fuel economy and lower emissions has enabled us to realize revenue growth above that associated with changes in global production of combustion and hybrid propulsion vehicles and, we believe, industrial applications.
•Diverse Business Mix Across Customer Types and Customers: Our business is well diversified across customer types and customers with 24% of our net sales in 2022 were for original equipment commercial vehicle and industrial applications, 44% were for original equipment light vehicles, 11% were for OES, and 21% for independent aftermarket customers. Our customer base includes most of the largest commercial vehicle and industrial application OEMs and light vehicle OEMs in the world. Our top five customers collectively represented 32% of our net sales in 2022 with our largest customer accounting for only 12%. We believe our longstanding relationships with leading global OEMs will position us well to continue to capitalize on opportunities for geographic and portfolio expansion to drive growth.
•Established Global Platform with Operations Near Key OEM Customer Manufacturing Sites: We operate 17 major manufacturing facilities and seven major technical centers and have a presence in 24 countries throughout the world. Our global manufacturing footprint enables us to efficiently manufacture in and supply from primarily best-cost countries near our customers. Our regional engineering teams also allow us to stay connected to local market requirements and partner with our customers during all phases of the development process, from design through production. By working in collaboration with our customers, we expect to continue to increase market share and grow through technological advancements.
•Track Record of Operational Excellence: We have made significant investments to reduce our cost structure by rotating our manufacturing capabilities toward best-cost countries and consolidating our engineering organization to further improve our cost position and drive margin expansion. From 2020 to 2022, our Fuel Systems and Aftermarket segments adjusted operating margins increased by 300 and 510 basis points, respectively, as the benefits of these investments began to take hold. Additionally, we leverage our lean enterprise operating system to reduce product lead times and successfully execute product launches. We believe our enterprise
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operating system, strong supply chain strategy and strategic manufacturing footprint will allow us to continue to maintain strong operating margins.
•Strong Margins and Free Cash Flow with Above-Market Growth: We expect to continue to leverage our portfolio of leading products and systems and strong customer relationships to drive key program wins, deliver strong margins and realize revenue growth above changes in global production of combustion and hybrid propulsion vehicles and, we believe, industrial applications. Some of our long-time competitors have exited or are in the process of exiting the market, which we believe provides us additional opportunities for future growth. We believe our innovative culture, lean cost structure and manufacturing expertise, combined with a robust aftermarket (independent aftermarket and OES) revenue stream, will allow us to generate consistent earnings growth and strong cash flow.
•Proven Leadership Team with Operational Momentum: We have a strong management team with extensive experience both within the industry and across our business. Through the combination of their longstanding customer relationships and proven track record of operational excellence, we believe the leadership team has positioned us for future revenue growth and strong cash flow.
Strategies
•Maintain Leadership in our Technologies to Solve Our Customers’ Most Complex Challenges: We are focused on providing technologies and solutions that solve our customers’ biggest challenges. Leveraging the breadth and depth of our engineering capabilities, we believe we have strong positions in fuel injection systems, fuel delivery modules, canisters, starters, and alternators. Additionally, we are a leading provider of aftermarket products. Our extensive product portfolio helps customers meet increasingly stringent global regulatory requirements while also enhancing performance. We expect to maintain and grow our leadership through enhanced focus and dedicated resources to capitalize on future opportunities.
•Greater Focus on Commercial Vehicle and Industrial Customers and Systems: We have strong customer relationships with most of the largest global commercial vehicle OEMs and numerous industrial application OEMs. We plan to continue to focus and expand our commercial vehicle and industrial application offerings as we expect this market to be predominantly combustion-based through at least 2040 and that liquid or gaseous fuels will continue to be primary energy sources to propel vehicles and power other industrial solutions. We are developing the next generation of products, including fuel injection systems, starters and alternators, needed to support Euro 7 and other future advanced emissions requirements. We plan to continue to invest in the development of innovative products and solutions that take advantage of key secular trends, including hydrogen, ethanol, and natural gas. We aim to invest across our organization to win new customers and expand into new markets.
•Global Expansion of Leading Aftermarket Position: We have strong relationships with many of the largest global aftermarket customers, including independent retailers and wholesale distributors. We supply a wide suite of aftermarket products, category management, logistics, training, marketing and other dedicated services to support our customers over the lifetime of a vehicle or piece of industrial equipment. We plan to continue to increase scale with a focus on higher growth markets, including Asia. In addition, we plan to prioritize high-value solutions where we have expertise, including diagnostics, software, services, training and repair kits.
•Capitalize on Identified Organic Growth Opportunities: We have identified several high-value opportunities where we see potential to deliver the breadth of our company-wide capabilities to drive continued organic growth. We see a significant market opportunity to develop a portfolio of hydrogen combustion and other alternative solutions to serve as viable alternatives to electrification or fuel cell solutions. In addition, we believe we are well positioned to continue to expand differentiated offerings in electronics, software and complete systems capabilities. We
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also see an opportunity to increase our revenues from sales to OEMs of static industrial applications, such as power generation systems and pump sets.
•Accelerate Growth Through Targeted Acquisitions: Our business has a history of successful strategic acquisitions and integration. We believe we have developed a pipeline of acquisition candidates that complement existing products, expand geographic reach, and enhance our technical expertise and capabilities. We believe our industry knowledge, culture of operational excellence, and integration experience will position us well to continue to pursue disciplined and accretive strategic acquisitions.
•Leverage Our Lean and Flexible Cost Structure to Deliver Strong Earnings and Cash Flow Growth: We recognize the importance of maintaining a lean and flexible business model to deliver earnings and cash flow growth. We intend to improve our cost competitiveness by increasing operational efficiency, maximizing manufacturing output and leveraging our facilities in best-cost countries.
Financial Information About Reporting Segments
Refer to Note 24, “Reporting Segments And Related Information,” to the Combined Financial Statements in this Information Statement for financial information about our reporting segments.
Narrative Description of Reporting Segments
We report our results under two reporting segments: Fuel Systems and Aftermarket. Net sales by reporting segment were as follows:
Year Ended December 31,
(in millions)202220212020
Fuel Systems$2,293 $2,233 $585 
Aftermarket1,284 1,218 492 
Inter-segment eliminations(229)(224)(43)
Net sales$3,348 $3,227 $1,034 
The sales information presented above does not include the sales by our unconsolidated joint venture. See “—Joint Venture.” Such net sales totaled approximately $235 million, $201 million and $54 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Fuel Systems
Our Fuel Systems 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
The Aftermarket segment sells products to independent aftermarket customers and OES customers. Its product portfolio includes a wide range of solutions covering the fuel injection, starters, alternators, electronics, engine management, maintenance, test equipment and vehicle diagnostics categories. The Aftermarket segment also includes sales of starters and alternators to OEMs. We believe the Aftermarket segment’s business provides a recurring and stable revenue base, as replacement of many of these products is non-discretionary in nature.
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Joint Venture
As of December 31, 2022, we had one joint venture in which we had a less-than-100% ownership interest. Results from this joint venture in which we exercise significant influence but do not have a controlling financial interest, was reported by us using the equity method of accounting pursuant to which we record our proportionate share of the joint venture’s income or loss each period.
Management of the unconsolidated joint venture is shared with our joint venture partner. Certain information concerning our joint venture is set forth below:
Joint ventureProductsYear OrganizedPercentage owned by the CompanyLocation of operationJoint venture partner
Delphi-TVS Diesel Systems Ltd.
Diesel fuel injection equipment200152.5%IndiaCheema TVS Industrial Ventures Private Limited
Financial Information About Geographic Areas
We have a global presence. During the year ended December 31, 2022, approximately 27% of our net sales were generated in the United States, and 73% were generated outside the United States. Refer to Note 24, “Reporting Segments And Related Information,” to the Combined Financial Statements in this Information Statement for additional financial information about geographic areas.
Sales by Customer Type and Customers
During the year ended December 31, 2022, approximately 24% of our net sales in 2022 were for original equipment commercial vehicle and industrial applications, 44% were for original equipment light vehicles, 11% were for OES, and 21% for independent aftermarket customers.
Our net sales to General Motors (including its subsidiaries) were approximately 12% for the year ended December 31, 2022. No other single customer accounted for more than 10% of our combined net sales in any of the years presented. Sales to our top five customers represented approximately 32% of combined net sales for the year ended December 31, 2022.
Our vehicle products are generally sold directly to OEMs, substantially pursuant to negotiated annual contracts, long-term supply agreements or terms and conditions as may be modified by the parties. Deliveries are subject to periodic authorizations based upon OEM production schedules. We typically ship our products directly from our plants to the OEMs.
Sales and Marketing
Each of our businesses within our reporting segments has its own sales function. Account managers for each of our businesses are assigned to serve specific customers for one or more of the businesses’ products. Account managers spend the majority of their time in direct contact with customers’ purchasing and engineering employees and are responsible for servicing existing business and for identifying and obtaining new business. Because of their close relationship with customers, account managers are able to identify and meet customers’ needs based upon their knowledge of our product design and manufacturing capabilities. Upon securing a new order, account managers participate in product launch team activities and serve as a key interface with customers. In addition, sales and marketing employees of our reporting segments often work together to explore cross-development opportunities where appropriate.
Seasonality
Our operations are directly related to the commercial vehicle and light vehicle industry. Consequently, our segments may experience seasonal fluctuations to the extent vehicle production slows, such as for OEM
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shutdowns in summer or OEM winter breaks, and for aftermarket parts depending on primary repair periods (summer for buses) or primary failure periods due to extreme heat or cold.
Research and Development
We have our own research and development (“R&D”) organization, including engineers and technicians, engaged in R&D activities at facilities around the globe. We also operate testing facilities such as prototype, measurement and calibration, life-cycle testing and dynamometer, test and validate laboratories. By working closely with OEMs and anticipating their future product needs, our R&D employees conceive, design, develop, test and validate new proprietary components and systems. R&D employees also work to improve current products and production processes. We believe our commitment to R&D will allow us to continue to obtain new orders from our OEM customers.
Our net R&D expenditures are primarily included in selling, general and administrative expenses of the Combined 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.
Year Ended December 31,
(in millions)202220212020
Gross R&D expenditures$200 $247 $46 
Customer reimbursements(96)(115)— 
Net R&D expenditures$104 $132 $46 
Net R&D expenditures as a percentage of net sales were 3.1%, 4.1% and 4.4% for the years ended December 31, 2022, 2021 and 2020, respectively.
Intellectual Property
We have rights to approximately 2,260 active domestic and foreign patents and patent applications pending or under preparation and receives royalties from licensing patent rights to others. While we consider our patents on the whole to be important, we do not consider any single patent, any group of related patents or any single license essential to our operations in the aggregate or to the operations of any of our business groups individually. The expiration of the patents individually and in the aggregate is not expected to have a material effect on our financial position or future operating results. We own numerous trademarks, some of which are valuable, but none of which are essential to our business in the aggregate. See “Certain Relationships and Related Person Transactions—Agreements with BorgWarner—Intellectual Property Agreements” and “Certain Relationships and Related Person Transactions—Agreements with BorgWarner—Supply Agreements and Contract Manufacturing Agreements” for information about agreements we are entering into with BorgWarner in connection with the Spin-Off.
Competition
Our reporting segments compete globally with a number of other manufacturers and distributors that produce and sell similar products. Many of these competitors are larger, have more diverse product portfolios and have greater resources than us. Technological innovation, application engineering development, quality, price, delivery and program launch support are the primary methods of competition.
Our major competitors are Robert Bosch GmbH, Cummins Inc., Denso Corporation, Dorman Products, Hitachi, Ltd., Magneti Marelli S.p.A., Mitsubishi, Valeo, Schaeffler Group, SEG Automotive North America LLC, Asian Industry Co., Ltd., Tenneco, ZF Group, SMP Auto Inc., and Vitesco Technologies.
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For many of our products, our competitors include suppliers in parts of the world that enjoy economic advantages such as lower labor costs, lower health care costs, lower tax rates and, in some cases, export subsidies and/or raw materials subsidies. Also, see “Risk Factors.”
Human Capital Management
Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and diverse management team and workforce globally. We believe the skills, experience, and industry knowledge of our employees significantly benefit our operations and performance.
Our Compensation Committee will oversee human capital management and assesses whether environmental, social and governance (“ESG”) goals and milestones, if appropriate, are effectively reflected in executive compensation. Our full Board will oversee talent reviews and succession planning for us.
As of December 31, 2022, we had a salaried and hourly workforce as follows:
Americas5,400
Asia1,600
Europe5,900
Total employees
12,900
Salaried4,600
Hourly8,300
Total employees
12,900
We plan to use an array of practices to attract, develop and retain highly qualified talent, including the following:
•Diversity, Equity & Inclusion (“DE&I”). We intend to cultivate a culture where employees are treated with respect and their differences are valued. We plan to continually review our policies, programs and processes to ensure alignment with our DE&I strategy and undertake targeted recruitment that serves as a strategic opportunity to build a diverse talent and leadership pipeline.
•Engagement & Sentiment. We intend to actively deploy strategies to attract highly qualified talent and to engage and retain our talent. We plan to recognize and reward employee contributions with competitive pay and benefits and closely monitor employee turnover as part of our efforts to improve retention and to identify potential opportunities for improvement.
•Education & Development. We intend to provide formal development opportunities at all levels and stages of the career journey of our employees. These opportunities would be delivered in a variety of formats to make our portfolio of solutions flexible, accessible, scalable and translatable to meet the needs of our evolving workplace and workforce.
•Health & Safety. The safety of our employees is vitally important, and we are dedicated to continuously improving safety performance. We intend to maintain safety management systems at our manufacturing facilities.
As of May 31, 2023:
•two of our six anticipated Board members immediately after the Spin-Off are women and/or racial/ethnic minorities.
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•two of our 12 anticipated executive management team members immediately after the Spin-Off are women and/or racial/ethnic minorities.
Employees at certain international facilities are unionized. We believe the present relations with our workforce to be satisfactory. We recognize that, in many of the locations where we operate, employees have freedom of association rights with third-party organizations such as labor unions. We respect and support those rights, including the right to collective bargaining, in accordance with local laws.
Raw Materials
We use a variety of raw materials in the production of our products including aluminum, copper, nickel, plastic resins, steel, certain alloy elements, and semiconductor chips. Manufacturing operations for each of our operating segments are dependent upon natural gas (including carbon dioxide and helium), fuel oil, and electricity.
We use a variety of tactics in an attempt to limit the impact of supply shortages and inflationary pressures. Our global procurement organization works to accelerate cost reductions, purchase from best-cost regions, optimize the supply base, mitigate risk, and collaborate on our buying activities. In addition, we use long-term contracts, cost sharing arrangements, design changes, customer buy programs, and limited financial instruments to help control costs. We intend to use similar measures in 2023 and beyond. Refer to Note 17, “Financial Instruments,” to the Combined Financial Statements in this Information Statement for information related to our hedging activities.
For 2023, we believe there will be continuing inflationary pressures in certain raw materials, labor, and energy. We believe there will continue to be supply constraints related to semiconductor chips. Supplies of other raw materials are adequate and available from multiple sources to support our manufacturing requirements.
Regulations
We operate in a constantly evolving global regulatory environment and are subject to numerous and varying regulatory requirements for our product performance and material content. Our practice is to identify potential regulatory and quality risks early in the design and development process and proactively manage them throughout the product lifecycle through the use of routine assessments, protocols, standards, performance measures and audits. New regulations and changes to existing regulations are managed in collaboration with our OEM customers and implemented through our global systems and procedures designed to ensure compliance with existing laws and regulations. We demonstrate material content compliance through the International Material Data System (“IMDS”), which is the vehicle industry material data system. In the IMDS, all materials used for vehicle manufacturing are archived and maintained to meet the obligations placed on the vehicle manufacturers, and thus on their suppliers, by national and international standards, laws and regulations.
We work collaboratively with a number of stakeholder groups, including government agencies such as the National Highway Traffic Safety Administration, our customers and our suppliers, to proactively engage in federal, state and international public policy processes.
Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the impact of environmental regulations on our business. Also, see “Risk Factors.”
Legal Proceedings
See Note 21, “Contingencies,” to the Combined Financial Statements in this Information Statement for a discussion of warranty, intellectual property, general liability and other litigation, which is incorporated herein by reference.
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Properties
As of the date of this Information Statement, we have 22 major manufacturing, assembly and technical locations worldwide excluding unconsolidated joint ventures and administrative offices. Our worldwide headquarters are located in a leased facility in Auburn Hills, Michigan. In general, we believe our facilities to be suitable and adequate to meet our current and reasonably anticipated needs and do not anticipate difficulty in renewing existing leases as they expire or finding alternative facilities.
The Company, its subsidiaries and affiliates operate principal manufacturing, assembly and technical facilities in the following regions:
AmericasEuropeAsiaTotal
Number of major manufacturing, assembly and technical facilities(1)
79622
_____________
(1)Excludes unconsolidated joint ventures and administrative offices.
Of the facilities noted above, 16 have leased land rights or a leased facility.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
PHINIA’s business 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 original equipment manufacturers (“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 original equipment service (“OES”) solutions and remanufactured products as well as an expanded range of products for the independent (non-OEM) aftermarket.
Key Trends and Economic Factors
COVID-19 and Supplier Disruptions. The impact of COVID-19, including changes in consumer behavior, pandemic fears and market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy. Recent COVID-19 outbreaks in certain regions continue to cause intermittent COVID-19-related disruptions in the Company’s supply chain and local manufacturing operations. For a significant portion of the second quarter of 2022, China imposed lock-downs in many cities due to an increase in COVID-19 cases in the region, which contributed to a decline in industry production in China during the quarter. The Company also continues to face supplier disruptions due to a global semiconductor shortage in the automotive industry. Further, actions taken by Russia in Ukraine have impacted the automotive industry particularly in Europe, including the Company’s suppliers, its customers and its operations more generally. In 2022, the Company wound down its Aftermarket operation in Russia, which involved purchasing the noncontrolling interest of a joint venture. The Russia operations were not material to the Company’s financial statements.
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.
In 2022, following non-contractual negotiations, the Company reached agreement for the pass through and recovery of higher costs with various customers. These agreements did not enable the Company to recover 100 percent of its increased costs, and as a result, the Company’s operating margins have been negatively impacted.
Foreign Currency Impacts. The rapid strengthening of the U.S. Dollar in 2022 relative to major foreign currencies, including the Euro, British Pound and Chinese Renminbi, and related translation of these currencies to the U.S. Dollar, unfavorably impacted the Company’s net sales, earnings and cash flows. Continued significant fluctuations of foreign currencies against the U.S. Dollar may further negatively impact the Company’s financial results.
Outlook
The Company expects global industry production to be flat to a modest increase year over year in 2023. The Company also expects to see a continued ramp up of gasoline direct injection, or GDi, volumes in North America as new programs come on stream. Recoveries from the Company’s customers of material cost inflation arising from non-contractual commercial negotiations with those customers are also expected to increase net sales year over year. As a result, the Company expects increased revenue in 2023, excluding the impact of foreign currencies.
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The Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic investments to enhance its product leadership strategy. There are several trends that are driving the Company’s long-term growth that management expects to continue, including recovery of the commercial vehicle market, growth of the overall vehicle parc driving increased aftermarket demand, adoption of product offerings with hydrogen solutions for combustion vehicles to serve as a viable alternative to electrification or fuel cell solutions and increasingly stringent global emissions standards that support demand for the Company’s products driving efficiency and reduced emissions. In addition, we believe we are well positioned to continue to expand differentiated offerings in electronics, software and complete systems capabilities.
Transition to Standalone Company
On December 6, 2022, BorgWarner announced its plan for the complete legal and structural separation of BorgWarner’s Fuel Systems and Aftermarket businesses through the Spin-Off, including a tax-free pro rata distribution of 100% of the outstanding shares of common stock to BorgWarner stockholders.
Completion of the Spin-Off is subject to certain conditions, which are described more fully under “The Spin-Off,” including receipt of a tax opinion of Ernst & Young, LLP to the effect that the Spin-Off will qualify as a tax-free “reorganization” within the meaning of Sections 368(a)(1)(D) and 355 of the Code.
Relationship with BorgWarner
Historically, we have relied on BorgWarner to provide various corporate functions. Following the Spin-Off, BorgWarner will not provide us with assistance other than the transition and other services described under “Certain Relationships and Related Person Transactions.” These services do not include every service that we have received from BorgWarner in the past, and BorgWarner is only obligated to provide the transition services for limited periods following completion of the Spin-Off. Following the Spin-Off and the cessation of any transition services agreements, we will need to provide internally or obtain from unaffiliated third parties the services we will no longer receive from BorgWarner. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those we receive from BorgWarner.
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 & distribution, and sourcing. We may incur substantially higher costs than currently anticipated as we transition from the existing transactional and operational systems and data centers we currently use as part of BorgWarner. If we are unable to transition effectively, we may incur temporary interruptions in business operations. Any delay in implementing, or operational interruptions suffered while implementing, our new information technology infrastructure could disrupt our business and have a material adverse effect on our results of operations.
Stand-Alone Company Expenses
As a result of the Spin-Off, we will become subject to the requirements of federal and state securities laws and stock exchange requirements. We will have to establish additional procedures and practices as a stand-alone public company. As a result, we will incur additional costs related to external reporting, internal audit, treasury, investor relations, board of directors and officers, stock administration and other corporate costs.
See “Unaudited Pro Forma Combined Financial Statements” for additional details.
Acquisition of Delphi Technologies
On October 1, 2020, BorgWarner completed its acquisition of 100% of the outstanding ordinary shares of Delphi Technologies PLC (“Delphi Technologies”) from the shareholders of Delphi Technologies. The subset of the Delphi Technologies business consisting of the Aftermarket business, the Fuel Systems
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business and a portion of the Powertrain Products business (the “Acquired Delphi business”) were integrated into the Company. Results of operations for the Acquired Delphi business are included in the Company’s financial information following the date of acquisition on October 1, 2020.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
The following table presents a summary of the Company’s operating results:
Three Months Ended March 31,
(in millions)20232022
Net sales% of net sales% of net sales
Fuel Systems$567 67.9 %$586 69.6 %
Aftermarket330 39.5 307 36.5 
Inter-segment eliminations(62)(7.4)(51)(6.1)
Total net sales835 100.0 842 100.0 
Cost of sales663 79.4 668 79.3 
Gross profit172 20.6 174 20.7 
Selling, general and administrative expenses99 11.9 100 11.9 
Restructuring expense4 0.5 2 0.2 
Other operating expense, net11 1.3 1 0.1 
Operating income58 6.9 71 8.5 
Equity in affiliates’ earnings, net of tax(3)(0.4)(2)(0.2)
Interest expense, net3 0.4 4 0.5 
Other postretirement income— — (9)(1.1)
Earnings before income taxes58 6.9 78 9.3 
Provision for income taxes23 2.8 21 2.5 
Net earnings$35 4.1 $57 6.8 
Net sales
Net sales for the three months ended March 31, 2023 totaled $835 million, a decrease of $7 million, or 1%, from the three months ended March 31, 2022. The change in net sales for the three months ended March 31, 2023 was primarily driven by the following:
•Fluctuations in foreign currencies resulted in a year-over-year decrease in sales of approximately $30 million, primarily due to the weakening of the Chinese Renminbi, British Pound and Euro relative to the U.S. Dollar.
•Customer pricing increased net sales by approximately $16 million.
•Favorable volume, mix and net new business increased sales approximately $7 million, or 1%. This increase was primarily driven by increased demand for the Company’s products in the aftermarket. This increase was partially offset by lower commercial vehicle sales in China.
Cost of sales and gross profit
Cost of sales and cost of sales as a percentage of net sales were $663 million and 79%, respectively, during the three months ended March 31, 2023, compared to $668 million and 79%, respectively, during
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the three months ended March 31, 2022. The change in cost of sales for the three months ended March 31, 2023 was primarily driven by the following:
•Fluctuations in foreign currencies resulted in a year-over-year decrease in cost of sales of approximately $23 million primarily due to the weakening of the Chinese Renminbi, British Pound and Euro relative to the U.S. Dollar.
•Cost of sales was also impacted by higher supplier-related costs of approximately $25 million arising primarily from non-contractual commercial negotiations with the Company’s suppliers and normal contractual supplier commodity pass-through arrangements. This impact was partially offset by $16 million of net supply chain savings initiatives.
•Higher sales volume, mix and net new business increased cost of sales by approximately $13 million.
Gross profit and gross margin were $172 million and 20.6%, respectively, during the three months ended March 31, 2023 compared to $174 million and 20.7%, respectively, during the three months ended March 31, 2022. The decrease in gross margin was primarily due to the factors discussed above.
Selling, general and administrative expenses (“SG&A”)
SG&A for the three months ended March 31, 2023 was $99 million as compared to $100 million for the three months ended March 31, 2022. SG&A as a percentage of net sales was 12% for both the three months ended March 31, 2023 and 2022. SG&A was comprised of the following:
•Employee-related costs were $32 million for the three months ended March 31, 2023, an increase of $6 million, primarily related to incentive compensation.
•Research and development (R&D) costs were $29 million for the three months ended March 31, 2023. This includes gross R&D expenditures of $49 million, comprised primarily of employee costs, and customer reimbursements of $20 million, which represent recovery of costs incurred. R&D costs increased $4 million, primarily related to a reduction in customer reimbursements. The Company’s current long-term expectation for R&D spending is approximately 3% of net sales.
•General expense allocations from the Parent were $9 million for the three months ended March 31, 2023, a decrease of $7 million, primarily related to IT costs and professional fees.
•IT costs incurred directly by PHINIA were $7 million for the three months ended March 31, 2023, flat compared to the three months ended March 31, 2022.
•Intangible amortization expense was $7 million for the three months ended March 31, 2023, flat compared to the three months ended March 31, 2022.
•Other selling, general and administrative expenses were $15 million for the three months ended March 31, 2023, a decrease of $4 million.
Restructuring expense was $4 million and $2 million for the three months ended March 31, 2023 and 2022, respectively, related to individually approved restructuring actions that primarily related to reductions in headcount. Refer to Note 4 “Restructuring” to the Combined Financial Statements for the three months ended March 31, 2023 and 2022 in this Information Statement for more information.
Other operating expense, net was $11 million and $1 million for the three months ended March 31, 2023 and 2022, respectively. Refer to Note 5, “Other Operating Expense, Net,” to the Combined Financial Statements for the three months ended March 31, 2023 and 2022 in this Information Statement for more information.
For the three months ended March 31, 2023 and 2022, merger, acquisition and divestiture expenses, net were $18 million and $10 million, respectively, primarily related to professional fees associated with the Spin-Off.
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For the three months ended March 31, 2023 and 2022, the Company recognized income related to application testing and other R&D services for other BorgWarner businesses of $1 million and $2 million, respectively. Refer to Note 19, "Related-Party Transactions," to the Combined Financial Statements for the three months ended March 31, 2023 and 2022 for further information.
For the three months ended March 31, 2023 and 2022, the Company recognized royalty income related to licensing of the Delphi Technologies trade name and product-related intellectual properties to other BorgWarner businesses in the amount of $5 million and $7 million, respectively. It is anticipated that these royalty arrangements will not continue after the Spin-Off is completed.
Equity in affiliates’ earnings, net of tax was $3 million and $2 million in the three months ended March 31, 2023 and 2022, respectively. This line item is driven by the results of the Company’s unconsolidated joint venture.
Interest expense, net was $3 million and $4 million in the three months ended March 31, 2023 and 2022, respectively. The decrease from 2022 to 2023 was primarily due to higher interest rates on cash and cash equivalents balances.
Other postretirement income was nil and $9 million in the three months ended March 31, 2023 and 2022, respectively. The decrease in other postretirement income for the three months ended March 31, 2023 was primarily due to higher interest cost and lower expected returns on assets in 2023.
Provision for income taxes was $23 million for the three months ended March 31, 2023 resulting in an effective tax rate of 39%. This compared to $21 million, or 26%, for the three months ended March 31, 2022.
For further details, see Note 7, “Income Taxes,” to the Combined Financial Statements for the three months ended March 31, 2023 and 2022 in this Information Statement.
Adjustments impacting the Company’s operating income
The Company’s operating income was $58 million and $71 million for the three months ended March 31, 2023 and 2022, respectively. The Company believes the following table is useful in highlighting adjustments that impacted its operating income:
Three Months Ended March 31,
Adjustments:20232022
Merger, acquisition and divestiture expense$18 $10 
Intangible asset amortization7 7 
Restructuring expense4 2 
Other
— 1 
Total impact of adjustments:$29 $20 
Results by Reporting Segment for the Three Months Ended March 31, 2023 and 2022
The Company’s business is comprised of two reporting segments: Fuel Systems and Aftermarket.
Segment Adjusted Operating Income is the measure of segment income or loss used by the Company. Segment Adjusted Operating Income is comprised of operating income adjusted for restructuring, merger, acquisition and divestiture expense, intangible asset amortization expense, impairment charges and other items not reflective of ongoing operating income or loss. The Company believes Segment Adjusted Operating Income is most reflective of the operational profitability or loss of its reporting segments.
Segment Adjusted Operating Income excludes certain corporate costs, which primarily represent headquarters’ expenses not directly attributable to the individual segments. Corporate expenses not allocated to Segment Adjusted Operating Income were $4 million and $13 million for the three months
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ended March 31, 2023 and 2022, respectively. The decrease in corporate expenses in 2023 was primarily related to cost reductions in IT and professional fees.
The following table presents Net sales and Segment Adjusted Operating Income for the Company’s reporting segments:
Three Months Ended March 31,
20232022
(in millions)Net salesSegment Adjusted Operating Income% marginNet salesSegment Adjusted Operating Income% margin
Fuel Systems$567 $43 7.6 %$586 $66 11.3 %
Aftermarket330 48 14.5 %307 38 12.4 %
Inter-segment eliminations(62)— (51)— 
Totals$835 $91 $842 $104 
The Fuel Systems segment’s net sales for the three months ended March 31, 2023 decreased $19 million, or 3%, and Segment Adjusted Operating Income decreased $23 million, or 35%, from the three months ended March 31, 2022. Foreign currencies resulted in a year-over-year decrease in sales of approximately $24 million primarily due to the weakening of the Chinese Renminbi, British Pound and Euro relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $11 million of customer pricing, partially offset by $19 million of volume, mix and net new business driven by lower commercial vehicle sales in China. Segment Adjusted Operating margin was 7.6% in the three months ended March 31, 2023, compared to 11.3% in the three months ended March 31, 2022. The Segment Adjusted Operating margin decrease was primarily due to product mix, higher supplier-related costs and higher net R&D expenses.
The Aftermarket segment’s net sales for the three months ended March 31, 2023 increased $23 million, or 7%, and Segment Adjusted Operating Income increased $10 million, or 26%, from the three months ended March 31, 2022. Foreign currencies resulted in a year-over-year decrease in sales of approximately $6 million primarily due to the weakening of the Euro relative to the U.S. Dollar. The increase excluding the impact of foreign currencies was primarily due to approximately $26 million of volume, mix and net new business driven by increased demand for the Company’s products and approximately $5 million of pricing. Segment Adjusted Operating margin was 14.5% in the three months ended March 31, 2023, compared to 12.4% in the three months ended March 31, 2022. The Segment Adjusted Operating margin increase was primarily due to increased pricing and the benefit of higher volumes.
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RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020
The following table presents a summary of the Company’s operating results
Year Ended December 31,
(in millions)202220212020
Net sales% of net sales% of net sales% of net sales
Fuel Systems$2,293 68.4 %$2,233 69.2 %$585 56.6 %
Aftermarket1,284 38.4 1,218 37.7 492 47.6 
Inter-segment eliminations(229)(6.8)(224)(6.9)(43)(4.2)
Total net sales3,348 100.0 3,227 100.0 1,034 100.0 
Cost of sales2,627 78.5 2,551 79.1 859 83.1 
Gross profit721 21.5 676 20.9 175 16.9 
Selling, general and administrative expenses407 12.2 460 14.3 147 14.2 
Restructuring expense11 0.3 55 1.7 37 3.6 
Goodwill impairment— — — — 82 7.9 
Other operating (income) expense, net(15)(0.4)(13)(0.4)2 0.2 
Operating income (loss)318 9.4 174 5.3 (93)(9.0)
Equity in affiliates’ earnings, net of tax(11)(0.3)(7)(0.2)(1)(0.1)
Interest expense, net14 0.4 34 1.1 16 1.5 
Other postretirement income(32)(1.0)(39)(1.2)(3)(0.3)
Earnings (loss) before income taxes and noncontrolling interest347 10.3 186 5.6 (105)(10.1)
Provision for income taxes85 2.5 33 1.0 19 1.8 
Net earnings (loss)262 7.8 153 4.6 (124)(11.9)
Net earnings attributable to the noncontrolling interest, net of tax— — 1 — — — 
Net earnings (loss) attributable to PHINIA$262 7.8 %$152 4.6 %$(124)(11.9)%
Net sales
2022 vs. 2021
Net sales for the year ended December 31, 2022 totaled $3,348 million, an increase of $121 million, or 4%, from the year ended December 31, 2021. The change in net sales for the year ended December 31, 2022 was primarily driven by the following:
•Favorable volume, mix and net new business increased sales approximately $195 million, or 6%. This increase was primarily driven by higher weighted average OEM market production as estimated by the Company, which was up approximately 2% from the year ended December 31, 2021. The remaining increase primarily reflects sales growth above weighted average market production, which the Company believes reflects higher demand for its products. Weighted average market production reflects commercial and light vehicle production as reported by IHS weighted for the Company’s geographic exposure, as estimated by the Company.
•Fluctuations in foreign currencies resulted in a year-over-year decrease in sales of approximately $174 million primarily due to the weakening of the Euro, British Pound and Chinese Renminbi relative to the U.S. Dollar.
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•Customer pricing increased net sales by approximately $120 million. This includes an increase of approximately $55 million related to recoveries from the Company’s customers of material cost inflation arising from non-contractual commercial negotiations with those customers and normal contractual customer commodity pass-through arrangements.
2021 vs. 2020
Net sales for the year ended December 31, 2021 totaled $3,227 million, an increase of $2,193 million, from the year ended December 31, 2020. The change in net sales for the year ended December 31, 2020 was primarily driven by the impact of the Delphi Technologies acquisition, which increased sales $2,113 million.
Cost of sales and gross profit
2022 vs. 2021
Cost of sales and cost of sales as a percentage of net sales were $2,627 million and 79%, respectively, during the year ended December 31, 2022, compared to $2,551 million and 79%, respectively, during the year ended December 31, 2021. The change in cost of sales for the year ended December 31, 2022 was primarily driven by the following:
•Higher sales volume, mix and net new business increased cost of sales by approximately $179 million.
•Fluctuations in foreign currencies resulted in a year-over-year decrease in cost of sales of approximately $132 million primarily due to the weakening of the Euro, British Pound and Chinese Renminbi relative to the U.S. Dollar.
•Cost of sales was also impacted by material cost inflation of approximately $45 million arising from non-contractual commercial negotiations with the Company’s suppliers and normal contractual supplier commodity pass-through arrangements. This impact was partially offset by $8 million of net supply chain savings initiatives.
•Cost of sales also included an increase of $26 million of launch and start up costs, primarily for a production facility in North America.
Gross profit and gross margin were $721 million and 21.5%, respectively, during the year ended December 31, 2022 compared to $676 million and 20.9%, respectively, during the year ended December 31, 2021. The increase in gross margin was primarily due to the factors discussed above.
2021 vs. 2020
Cost of sales and cost of sales as a percentage of net sales were $2,551 million and 79%, respectively, during the year ended December 31, 2021, compared to $859 million and 83%, respectively, during the year ended December 31, 2020. The change in cost of sales for the year ended December 31, 2021 was primarily driven by the impact of the Delphi Technologies acquisition.
Gross profit and gross margin were $676 million and 20.9%, respectively, during the year ended December 31, 2021 compared to $175 million and 16.9%, respectively, during the year ended December 31, 2020. The increase in gross margin was primarily due to cost improvement measures.
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Selling, general and administrative expenses (“SG&A”)
2022 vs. 2021
SG&A for the year ended December 31, 2022 was $407 million as compared to $460 million for the year ended December 31, 2021. SG&A as a percentage of net sales was 12% and 14% for the years ended December 31, 2022 and 2021, respectively. SG&A was comprised of the following:
•Research and development (R&D) costs were $104 million for the year ended December 31, 2022. This includes gross R&D expenditures of $200 million, comprised primarily of employee costs, and customer reimbursements of $96 million, which represent recovery of costs incurred. R&D costs decreased $28 million, primarily related to a reduction in employee costs as a result of past restructuring actions. The Company’s current long-term expectation for R&D spending is approximately 3% of net sales.
•Employee-related costs were $102 million for the year ended December 31, 2022, a decrease of $20 million, primarily related to incentive compensation.
•General expense allocations from the Parent were $65 million for the year ended December 31, 2022, an increase of $24 million, primarily related to IT costs.
•IT costs incurred directly by PHINIA were $28 million for the year ended December 31, 2022, a decrease of $32 million, primarily related to synergies as more IT costs were centralized at the Parent.
•Intangible amortization expense was $28 million for the year ended December 31, 2022, a decrease of $1 million driven by foreign exchange rates.
•Other selling, general and administrative expenses, excluding employee costs, were $82 million for the year ended December 31, 2022, an decrease of $1 million.
2021 vs. 2020
SG&A for the year ended December 31, 2021 was $460 million as compared to $147 million for the year ended December 31, 2020. SG&A as a percentage of net sales was 14% for both the years ended December 31, 2021 and 2020. The change in SG&A was primarily attributable to the acquisition of Delphi Technologies.
Restructuring expense was $11 million, $55 million and $37 million for the years ended December 31, 2022, 2021 and 2020, respectively, related to various initiatives. Refer to Note 4 “Restructuring” to the Combined Financial Statements in this Information Statement for more information.
During 2022, the Company approved individual restructuring actions that primarily related to equipment relocation and professional fees and recorded $6 million of restructuring expense related to these actions.
In 2019, legacy Delphi Technologies announced a restructuring plan to reshape and realign its global technical center footprint and reduce salaried and contract staff. The Company continued actions under this program post-acquisition and recorded restructuring costs of $5 million and $55 million in the years ended December 31, 2022 and 2021, respectively, primarily related to employee termination benefits.
During the year ended December 31, 2020, the Company recorded $37 million of restructuring costs primarily related to contractually required severance and stock-based compensation cash payments associated with Delphi Technologies executive officers and other employee termination benefits.
Goodwill impairment was $82 million for the year ended December 31, 2020 based on a quantitative analysis performed by the Company that showed that the carrying value exceeded the fair value for the Aftermarket segment. The impairment was primarily the result of an increase in the discount rate and a decrease in the anticipated perpetual growth rate for the reporting unit during the year.
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Other operating (income) expense, net was income of $15 million and $13 million for the years ended December 31, 2022 and 2021, respectively, and expense of $2 million for the year ended December 31, 2020. Refer to Note 6, “Other Operating (Income) Expense, Net,” to the Combined Financial Statements in this Information Statement for more information.
For the years ended December 31, 2022, 2021 and 2020, 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 $31 million, $22 million and $5 million, respectively. It is anticipated that these royalty arrangements will not continue after the Spin-Off is completed.
For the years ended December 31, 2022, 2021 and 2020, the Company recognized income related to application testing and other R&D services for other BorgWarner businesses of $11 million, $10 million and $2 million, respectively. Refer to Note 23, "Related-Party Transactions," for further information.
For the years ended December 31, 2022, 2021 and 2020, merger, acquisition and divestiture expenses, net were $31 million, $7 million and $10 million, respectively, primarily related to professional fees associated with the Spin-Off and the Delphi Technologies acquisition.
During the year ended December 31, 2022, the Company also recorded expense of $5 million related to the closure of operations in Russia, primarily for the impairment of an intangible asset related to this business. During the year ended December 31, 2021, the Company recorded an impairment charge of $14 million to reduce the carrying value of an indefinite-lived trade name to its fair value.
For the years ended December 31, 2022, 2021 and 2020, other income, net was $9 million, $2 million and $1 million, respectively. The increase in other income for 2022 was primarily due to a settlement agreement under which the Company recovered $5 million.
Equity in affiliates’ earnings, net of tax was $11 million, $7 million and $1 million in the years ended December 31, 2022, 2021 and 2020, respectively. This line item is driven by the results of the Company’s unconsolidated joint venture. The increase from 2021 to 2022 was driven by market improvements, and the increase from 2020 to 2021 was due to the timing of the Delphi Technologies acquisition.
Interest expense, net was $14 million, $34 million and $16 million in the years ended December 31, 2022, 2021 and 2020, respectively. The decrease from 2021 to 2022 was primarily due to lower interest expense on notes payable due to the Parent and higher interest rates on cash and cash equivalents balances. The increase from 2020 to 2021 was due to the timing of the Delphi Technologies acquisition.
Other postretirement income was $32 million, $39 million and $3 million in the years ended December 31, 2022, 2021 and 2020, respectively. The decrease in other postretirement income for the year ended December 31, 2022 was primarily due to higher interest cost in 2022. The increase from 2020 to 2021 was due to the assumption of the Delphi Technologies pension plans.
Provision for income taxes was $85 million for the year ended December 31, 2022 resulting in an effective tax rate of 24%. This compared to $33 million, or 18%, for the year ended December 31, 2021 and $19 million, or (18)%, for the year ended December 31, 2020.
In 2022, the Company recognized discrete tax benefits of $7 million, primarily due to certain unrecognized tax benefits and accrued interest related to a matter for which the statute of limitations had lapsed.
In 2021, the Company recognized a discrete tax benefit of $21 million related to an increase in its deferred tax assets as a result of an increase in the United Kingdom tax rate from 19% to 25%. This rate change was enacted in June 2021 and becomes effective April 2023.
In 2020, the effective tax rate was negatively impacted by the impairment of goodwill that is non-deductible for tax purposes of $17 million.
For further details, see Note 7, “Income Taxes,” to the Combined Financial Statements in this Information Statement.
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Adjustments impacting the Company’s operating income
The Company’s operating income was $318 million and $174 million for the years ended December 31, 2022 and 2021, respectively, and a loss of $93 million for the year ended December 31, 2020. The Company believes the following table is useful in highlighting adjustments that impacted its operating income:
Year Ended December 31,
Adjustments:202220212020
Merger, acquisition and divestiture expense$31 $7 $10 
Intangible asset amortization28 29 15 
Restructuring expense11 55 37 
Asset impairments, write offs and lease modifications5 17 82 
Amortization of inventory fair value adjustment(1)
— — 21 
Other
2 — — 
Total impact of adjustments:$77 $108 $165 
_____________
(1)Represents the non-cash charges related to the amortization of the fair value adjustment of inventories acquired in connection with the acquisition of Delphi Technologies during the year ended December 31, 2020. Refer to Note 2, “Acquisitions,” to the Combined Financial Statements in this Information Statement.
Results by Reporting Segment for the Years Ended December 31, 2022, 2021 and 2020
The Company’s business is comprised of two reporting segments: Fuel Systems and Aftermarket.
Segment Adjusted Operating Income is the measure of segment income or loss used by the Company. Segment Adjusted Operating Income is comprised of operating income adjusted for restructuring, merger, acquisition and divestiture expense, intangible asset amortization expense, impairment charges and other items not reflective of ongoing operating income or loss. The Company believes Segment Adjusted Operating Income is most reflective of the operational profitability or loss of its reporting segments.
Segment Adjusted Operating Income excludes certain corporate costs, which primarily represent headquarters’ expenses not directly attributable to the individual segments. Corporate expenses not allocated to Segment Adjusted Operating Income were $48 million, $94 million and $23 million for the years ended December 31, 2022, 2021 and 2020, respectively. The decrease in corporate expenses in 2022 was primarily related to cost reductions driven by synergies from acquisitions.
The following table presents Net sales and Segment Adjusted Operating Income for the Company’s reporting segments:
Year ended December 31,
202220212020
(in millions)Net salesSegment Adjusted Operating Income% marginNet salesSegment Adjusted Operating Income% marginNet salesSegment Adjusted Operating Income% margin
Fuel Systems$2,293 $252 11.0 %$2,233 $227 10.2 %$585 $47 8.0 %
Aftermarket1,284 191 14.9 %1,218 149 12.2 %492 48 9.8 %
Inter-segment eliminations(229)— (224)— (43)— 
Totals$3,348 $443 $3,227 $376 $1,034 $