PHINIA INC. (PHIN)

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

INTRODUCTION

PHINIA is a diversified industrial supplier and global leader in the development of fuel systems, electrical systems, and aftermarket solutions, with a strong portfolio of trusted brands that includes DELPHI®, DELCO REMY®, and HARTRIDGE™. With over 100 years of manufacturing expertise and industry relationships, PHINIA has approximately 12,500 talented employees and over 40 locations in 20 countries and is headquartered in Auburn Hills, Michigan, USA. PHINIA systems and solutions are designed to keep combustion engines operating at peak performance across a variety of applications: medium- and heavy-duty commercial vehicle (on-road vehicles used for commercial transport classified class 4–8, 14,001 pounds or heavier); light commercial vehicle (on-road vehicles used for commercial transport classified class 1–3, 14,000 pounds or lighter); light passenger vehicles (on-road vehicles used primarily for carrying passengers); and off-highway, industrial, and other (including construction and agricultural machinery, vocational vehicles, marine, industrial applications, power generation, and aerospace and defense). PHINIA’s service solutions include vehicle repair and replacement parts, offering both new and remanufactured products through the original equipment manufacturer dealer network and the independent aftermarket channel.

Acquisition of Swedish Electromagnet Invest AB (SEM)

On August 1, 2025, PHINIA completed the acquisition of SEM, a provider of advanced natural gas, hydrogen and other alternative fuel ignition systems, injector stators and linear position sensors, for $46 million, comprised of $14 million of cash consideration and $32 million cash used to extinguish debt assumed through the acquisition. See Note 2, “Acquisition”, for further discussion.

Key Trends and Economic Factors

The global economy continues to grapple with semi-conductor shortages, supply chain disruptions, and economic and geopolitical tensions. These factors have affected and may continue to affect production, pricing, and consumer demand. In addition, evolving trade restrictions, including export controls, and increases in tariffs could have a material impact on our business, financial condition, or results of operations, including increasing our input costs and decreasing the demand for our products. Although the nature of these trade restrictions and tariffs continue to change, they increase the risk for elevated inflation more generally, which may drive and has driven an increase in our other input costs.

Trade Policy and Tariffs

As of June 30, 2026, we expect to receive tariff reimbursements from the federal government related to the International Emergency Economic Powers Act (IEEPA) and tariff rulings from the United States Supreme Court and the Court of International Trade. Although we have started to receive reimbursements for certain claims, the ultimate timing of collection is uncertain and subject to changes in trade policy. The tariff environment remains highly dynamic, and the specific tariffs applicable to goods imported continue to evolve, including with respect to the U.S.-Mexico-Canada Agreement, which is currently under trilateral review.

Outlook

We expect improved earnings and cash generation in 2026 as compared to 2025, as we expect foreign currency, operational efficiencies, and share gains to more than offset a softening original equipment (OE) market. Continued economic and geopolitical uncertainty is expected to continue to impact light vehicle (LV) volumes, which are expected to decline by mid-single digit percentages in our key markets. Commercial vehicle (CV) volumes are now expected to decline by low-single digit percentages in our key markets. Assuming constant foreign exchange rates and excluding sales from acquisitions, we expect a modest increase in sales. Additionally, we expect to continue to be impacted by other macroeconomic

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challenges in the second half of 2026, which may include but are not limited to elevated inflation, supply chain constraints, market volatility, higher tariffs (particularly in Mexico and China), evolving trade restrictions, government shutdowns, geopolitical tensions, and changes in international trade relations.

Despite the near-term uncertainties, the Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic investments to support its product leadership and growth strategies. There are several trends that are driving the Company’s long-term growth that management expects to continue, including expansion in the CV market, growth in overall vehicle parc that supports aftermarket demand, increased consumer interest in hybrid and plug-in hybrid electric vehicles, adoption of additional product offerings enabling lower-carbon fuel solutions for combustion vehicles, and continued expansion in the aerospace and defense industry. In addition, we believe we are well positioned to continue to expand our differentiated offerings and capabilities across electronics, software and complete systems.

Use of Non-GAAP Financial Measures

This Form 10-Q contains information about PHINIA’s financial results that is not presented in accordance with accounting principles generally accepted in the United States (GAAP). Such non-GAAP financial measures are reconciled to their most directly comparable GAAP financial measures in this Form 10-Q. The reconciliations include all information reasonably available to the Company at the date of this Form 10-Q and the adjustments that management can reasonably predict.

Management believes that these non-GAAP financial measures are useful to management, investors, and banking institutions in their analysis of the Company's business and operating performance. Management also uses this information for operational planning and decision-making purposes.

Non-GAAP financial measures are not and should not be considered a substitute for any GAAP measure. Additionally, because not all companies use identical calculations, the non-GAAP financial measures as presented by PHINIA may not be comparable to similarly titled measures reported by other companies.

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2026 vs. Three Months Ended June 30, 2025

The following table presents a summary of the Company’s operating results:

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Net sales and Cost of sales

Net sales for the three months ended June 30, 2026 totaled $940 million, an increase of $50 million, or 6%, compared to the three months ended June 30, 2025. Cost of sales and cost of sales as a percentage of net sales were $724 million and 77%, respectively, during the three months ended June 30, 2026, compared to $693 million and 78%, respectively, during the three months ended June 30, 2025. The change in net sales, cost of sales, and gross profit for the three months ended June 30, 2026 was primarily driven by the impacts below.

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1 Cost of sales in the three months ended June 30, 2026 included a benefit related to one-time IEEPA tariff refunds, while net sales included a reduction related to estimated amounts to be returned to customers for these amounts.

Selling, general and administrative expenses (SG&A)

SG&A for the three months ended June 30, 2026 was $128 million as compared to $112 million for the three months ended June 30, 2025. SG&A as a percentage of net sales was 14% for the three months ended June 30, 2026, compared to 13% for the three months ended June 30, 2025. SG&A expenses increased period-over-period, primarily attributable to increased employee costs, including stock-based compensation, as well as foreign currency exchange impacts and professional fees.

Restructuring expense

Restructuring expense was $8 million and $2 million for the three months ended June 30, 2026 and 2025, respectively. See Note 4, “Restructuring”, for further discussion.

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Other operating income, net

Other operating income, net was de minimis compared to income of $6 million for the three months ended June 30, 2026 and 2025. The change in other operating income, net was primarily driven by a decrease in separation-related benefits. Other operating income, net was comprised of the following:

Equity in affiliates’ earnings, net of tax

Equity in affiliates’ earnings, net of tax was $4 million in the three months ended June 30, 2026 and 2025. This line item is driven by the results of the Company’s unconsolidated joint venture.

Interest income

Interest income was $2 million and $4 million in the three months ended June 30, 2026 and 2025, respectively. The interest income is primarily related to interest earned on funds held in money market, local overnight deposits, and short term investments.

Interest expense

Interest expense was $21 million in

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

PHINIA is a leader in the development, design and manufacture of integrated components and systems that are designed to optimize performance, enhance efficiency and reduce emissions in combustion and hybrid propulsion systems for commercial vehicles and industrial applications (medium-duty and heavy-duty trucks, buses and other off-highway construction, marine, agricultural and aerospace and defense), light commercial vehicles (vans and trucks) and light passenger vehicles (passenger cars, mini-vans, cross-overs and sport-utility vehicles). We are a global supplier to most major OEMs seeking to meet or exceed evolving and increasingly stringent global regulatory requirements and satisfy consumer demands for an enhanced user experience. Additionally, we offer a wide range of OES solutions and remanufactured products as well as an expanded range of products for the independent (non-OEM) aftermarket.

Transition to Standalone Company

On July 3, 2023, PHINIA became an independent publicly traded company as a result of the legal and structural separation of the Fuel Systems and Aftermarket businesses from BorgWarner Inc. (BorgWarner or Former Parent). The separation was completed in the form of a distribution of the outstanding common stock of PHINIA to holders of record of common stock of BorgWarner on a pro rata basis (the Spin-Off). In connection with the Spin-Off, we entered into an agreement with the Former Parent which governs the Company’s and the Former Parent’s respective rights, responsibilities and obligations after the distribution with respect to taxes for any tax period ending on or before the distribution date, as well as tax periods beginning before and ending after the distribution date (Tax Matters Agreement).

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Acquisition of Swedish Electromagnet Invest AB (SEM)

On August 1, 2025, PHINIA completed the acquisition of Swedish Electromagnet Invest AB (SEM), a provider of advanced natural gas, hydrogen and other alternative fuel ignition systems, injector stators and linear position sensors, for $47 million, comprised of $15 million of cash consideration and $32 million cash used to extinguish debt assumed through the acquisition. See Note 2, “Acquisition”, for further discussion.

Key Trends and Economic Factors

The automotive industry is currently grappling with renewed semi-conductor shortages, supply chain disruptions, and economic and geopolitical tensions. These factors may affect production, pricing, and consumer demand. In addition, new trade restrictions, including export controls, and/or increases in tariffs could have a material impact on our business, financial condition, or results of operations, including increasing our input costs and decreasing demand in the commercial vehicle (CV) and light vehicle (LV) markets, although the nature of those trade restrictions and tariffs remains unclear. These new trade restrictions and tariffs increase the risk for elevated inflation more generally, which may drive an increase in other input costs.

Outlook

We expect improved earnings and cash generation in 2026, as we expect foreign currency, operational efficiencies, and share gains to more than offset a softening original equipment (OE) market. Continued economic and geopolitical uncertainty is expected to continue to impact LV and CV volumes. In our key markets for 2026, LV and CV volumes are expected to decline by mid-single and low-single digit percentages, respectively. Assuming constant foreign exchange rates and excluding sales from acquisitions, we expect a modest increase in sales. Additionally, we expect to continue to be impacted by other macroeconomic challenges in 2026, including but not limited to elevated inflation, supply chain constraints, market volatility, higher tariffs (particularly in Mexico and China), government shutdowns, and changes in international trade relations.

Despite the near-term uncertainties, the Company maintains a positive long-term outlook for its global business and is committed to new product development and strategic investments to support its product leadership and growth strategies. There are several trends that are driving the Company’s long-term growth that management expects to continue, including market share expansion in the CV market, growth in overall vehicle parc that supports aftermarket demand, increased consumer interest in hybrid and plug-in hybrid electric vehicles, adoption of additional product offerings enabling zero- and lower-carbon fuel solutions for combustion vehicles, and expansion in the aerospace and defense industry. In addition, we believe we are well positioned to continue to expand our differentiated offerings and capabilities across electronics, software and complete systems.

Use of Non-GAAP Financial Measures

This Form 10-K contains information about PHINIA’s financial results that is not presented in accordance with accounting principles generally accepted in the United States (GAAP). Such non-GAAP financial measures are reconciled to their most directly comparable GAAP financial measures in this Form 10-K. The reconciliations include all information reasonably available to the Company at the date of this Form 10-K and the adjustments that management can reasonably predict.

Management believes that these non-GAAP financial measures are useful to management, investors, and banking institutions in their analysis of the Company's business and operating performance. Management also uses this information for operational planning and decision-making purposes.

Non-GAAP financial measures are not and should not be considered a substitute for any GAAP measure. Additionally, because not all companies use identical calculations, the non-GAAP financial measures as presented by PHINIA may not be comparable to similarly titled measures reported by other companies.

RESULTS OF OPERATIONS

A detailed comparison of the Company’s 2024 operating results to its 2023 operating results can be found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section in the Company’s Annual Report on Form 10-K filed on February 13, 2025.

The following table presents a summary of the Company’s 2025 and 2024 operating results:

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Net sales and Cost of sales

Net sales for the year ended December 31, 2025 totaled $3,483 million, an increase of $80 million, or 2.4%, from the year ended December 31, 2024. Cost of sales and cost of sales as a percentage of net sales were $2,721 million and 78.1%, respectively, during the year December 31, 2025, compared to $2,647 million and 77.8%, respectively, during the year ended December 31, 2024. The change in net sales, cost of sales, and gross profit for the year ended December 31, 2025 was primarily driven by the impacts below.

Selling, general and administrative expense (SG&A)

SG&A for the year ended December 31, 2025 was $445 million as compared to $442 million for the year ended December 31, 2024. SG&A as a percentage of net sales was 13% for the years ended December 31, 2025 and 2024.

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Restructuring expense

Restructuring expense was $17 million and $14 million for the year ended December 31, 2025 and 2024, respectively. See Note 4, “Restructuring”, for further discussion.

Other operating expense, net

Other operating expense, net was $46 million and $41 million for the year ended December 31, 2025 and 2024, respectively. The change in Other operating expense, net was primarily driven by an increase in separation-related costs, primarily from a $39 million loss in connection with the settlement of separation-related claims with the Former Parent, partially offset by the non-recurrence of non-cash impairment expense related to the write down of property, plant and equipment associated with a Fuel Systems manufacturing plant in Europe. Other operating expense, net was comprised of the following:

Equity in affiliates’ earnings, net of tax

Equity in affiliates’ earnings, net of tax was $15 million and $11 million in the years ended December 31, 2025 and 2024, respectively. This line item is driven by the results of the Company’s unconsolidated joint venture.

Interest income

Interest income was $14 million and $16 million in the years ended December 31, 2025 and 2024, respectively. The decrease was primarily due to decreased cash and cash equivalents balances, as well as lower interest rates on cash and cash equivalents balances.

Interest expense

Interest expense was $81 million and $99 million in the years ended December 3

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