PHINIA delivered a solid second quarter of 2026 with net sales up 5.6% to $940 million, growth in both fuel systems ($584 million, +5%) and aftermarket ($356 million, +6.6%), a post-spin record gross margin of about 23%, and adjusted EPS (ex non-operating items) up 20.5% to $1.53. On a GAAP basis, diluted EPS was $1.05 with an 8.5% operating margin, while adjusted EBITDA rose $4 million to $130 million at a 13.8% margin (down 40 bps as FX, tariff recoveries and mix were slightly dilutive) and total segment adjusted operating income reached $125 million (13.3% margin). The headline strategic move was a definitive agreement to acquire the stoba Group at roughly 6x EBITDA — adding ~$80 million of third-party revenue and ~$25 million of adjusted EBITDA, expected to close in Q4 2026 and be ~40 basis points margin accretive — a vertical-integration tuck-in of a longtime supplier that adds a second aerospace-and-defense-qualified German site, semiconductor-equipment exposure and new customers (Liebherr, Zeiss, ZF, Dyson). Cash generation was strong (adjusted free cash flow $74 million, operating cash flow up $34 million, capex just 2.3% of sales), the balance sheet remained healthy (net leverage 1.3x, $820 million liquidity), and $53 million was returned to shareholders, bringing post-spin capital returns to $665 million. Management tightened full-year revenue guidance to $3.57-3.67 billion (midpoint held), set adjusted EBITDA at $485-515 million, and raised adjusted free cash flow guidance to $210-250 million, noting that an $11 million IEEPA tariff-recovery benefit (about half owed back to customers) was offset by higher incentive compensation, with back-half productivity and supply-chain savings expected to lift underlying margins about 100 basis points half over half. Leadership emphasized diversification away from light-vehicle exposure toward commercial vehicle, off-highway, industrial and aerospace, and flagged a robust, still-active M&A pipeline.
Thank you. Good morning, everyone. We appreciate you joining us. Our conference call materials were issued this morning and are available on PHINIA's investor relations website, including a slide deck that we'll be referencing in our remarks. We're also broadcasting this call via webcast. Joining us today are Brady Ericson, CEO, and Chris Gropp, CFO. During this call, we will make forward-looking statements, including comments related to our 2026 guidance, which are based on management's current expectations and are subject to risks and uncertainties. Actual results may differ materially from these statements due to a variety of factors, including those described in our SEC filings. We caution listeners not to place undue reliance upon any such forward-looking statements. With that, it's my pleasure to turn the call over to Brady.
Thank you, Gordon. Thank you, everyone, for joining us this morning. I'll start with some highlights on the second quarter and some key developments in the quarter that support our strategy. Chris will then provide additional details on our second quarter results and discuss our 2026 financial outlook. We will then open up the call for questions. The second quarter developed largely as we expected, with highlights including continued revenue growth from both fuel systems and aftermarket, leading us to a refinement of our full-year guidance. We were also excited to announce that the company has entered into a definitive agreement to acquire the stoba Group, a global technology partner specialized in high-precision components, systems, and integrated solutions globally. As slides six and seven detail, stoba has operations in four countries, expected run rate third-party revenue of approximately $80 million, and accretive EBITDA of approximately $25 million.
We expect the integration of the stoba Group to expand our exposure in off-highway, industrial, and other customers and markets, and drive synergistic profit expansion through supply chain ownership, integration of key capabilities, and cost efficiencies. This will also add an additional aerospace and defense qualified location to our portfolio, as well as greater exposure to these customers. Excitingly, these assets support the global semiconductor industry with high-performance equipment components, opening another avenue of growth and diversification. Closing of the deal is expected in the fourth quarter of 2026 and will be funded with available liquidity. Returning capital to shareholders is a key component of our capital allocation strategy. With a healthy balance sheet, we continue paying dividends and repurchasing shares. We are confident of our operational and financial performance that allows us ongoing run rate capital returns to our shareholders.
While the environment continues to evolve rapidly, our teams are managing our business well and delivered results that strengthen our long-term foundation. Our diversification across regions, customers, end markets, and products helped offset variability in any single region or segment. Finally, we continue to adapt to ongoing changes in government policy governing tariffs. As such, book expected net refunds during the quarter with some cash settlements already received. Chris will discuss further details in her commentary. Turning to slide eight, PHINIA continued to demonstrate resilience in a mixed macroeconomic environment. Demand conditions across key end markets remained steady, supported by durable replacement cycle fundamentals and ongoing positive results in the commercial vehicle industry. We continue to navigate ongoing geopolitical and trade-related uncertainty, tariff changes as previously noted, shipping challenges, and regional production variability. Through strong operational execution and disciplined cost management, we've managed these challenges effectively.
We continued our streak of year-over-year growth in both aftermarket and fuel system segments. Total net sales in the quarter were $940 million, up 5.6% from the same period of the prior year. Excluding FX impacts, the impact of tariff recoveries, and the contribution of SEM, revenue was up 2%. We've reported adjusted EBITDA of $130 million for the quarter, up $4 million, representing a margin of 13.8%. Total segment adjusted operating income was $125 million, or 13.3% margin. The fuel system segment delivered a strong quarter with sales of $584 million, up 5%, and adjusted operating margin of 11%. The aftermarket segment had sales of $356 million, up 6.6%, with adjusted operating margin of 17.1%. Adjusted earnings per diluted share, excluding non-operating items, was $1.53 for the quarter, compared with $1.27 in the same period of the prior year, a 20.5% increase year-over-year.
From a balance sheet perspective, PHINIA continues to demonstrate financial stability and consistency. We exited the quarter with a cash position of $370 million and a total liquidity of $820 million. Our net leverage ratio is 1.3x, which is under our target of 1.5. We returned $53 million to shareholders in the form of share repurchases and dividends. Our balance sheet continued to provide the financial flexibility to support growth initiatives while returning capital to shareholders. In summary, while the external environment continues to evolve, we remain focused on the current and future of the business. The second quarter performance underscore the durability and resilience of our business amid a rapidly changing global environment by serving a broad mix of regions, customers, end markets and products. Moving to slide nine. I am pleased with the success we are having with respect to gaining new business.
The second quarter was another good quarter for us, reflecting continued progress across multiple fronts. Importantly, we're continuing to grow with our existing customers, adding new ones, and gaining real traction in new areas of our portfolio. This quarter included notable wins across OE and aftermarket channels, reinforcing customer trust, technology differentiation, and PHINIA's ability to deliver premium solutions to our customers. Launch progress on important programs in our portfolio include aerospace, off-highway, heavy-duty truck continued at an advanced pace, which will support our progress through the end of the decade and beyond. Key fuel system wins in the quarter include a new business for a heated tip MPFI system supporting light passenger vehicle engine applications, further expanding PHINIA's alternative fuel portfolio. A 24 V starter program supporting a Class 8 commercial vehicle platform, reinforcing PHINIA's long-standing position in the heavy-duty on-highway market.
A complete common rail system program for agricultural applications highlight the strength of PHINIA's integrated fuel system portfolio in reinforcing our position in the growing off-highway sector. Turning to slide 10. Our aftermarket business continues to be a steady and reliable contributor to our results. Demand remains consistent, driven by an aging fleet and a growing vehicle park. As vehicles stay on the road longer, customers around the world rely on our quality parts and service more than ever. Our strong and recognizable brands, broad and consistently expanding product offerings, and focus on customer service are helping us build deeper relationships and win new opportunities. Recent wins were across diverse geographies, further strengthening our position in the independent aftermarket. A few notable changes during the quarter include open vehicle electronic distribution with a leading Pan-European distributor, significantly expanding market access across the EMEA region.
Expanded the global aftermarket footprint through new customer acquisitions, branch expansion, and increased distribution penetration across North Africa, Eastern Europe, North and South America, China, Southeast Asia, and Oceania. We introduced more than 2,650 new SKUs globally during the first half of 2026, while adding more than 150,000 cross-references to regional catalogs, expanding vehicle coverage, and enhancing customer access to PHINIA products. These wins show consistent progress towards seamlessly diversifying into higher growth end markets by leveraging our existing human and manufacturing capital. Additionally, we had several significant product launches this quarter, including a 500 bar GDI system, showcasing our full system capabilities and continued leadership in advanced gasoline technologies. A fuel delivery module in India, broadening our CV portfolio and supporting growth in a key strategic market. A next generation GDI pump, reinforcing our position in passenger and light commercial vehicle applications.
Moving next to capital allocation on slide 12, our approach remains unchanged. We are staying disciplined and balanced and are continuing to invest in our business to support long-term growth, both organically and through strategic opportunities that strengthen our competitive position and expand our long-term opportunities. At the same time, we are committed to maintaining a healthy balance sheet and returning cash to shareholders through dividends and share buybacks, which do not slow down despite striking the deal for the stoba acquisition. This approach reflects our strong financial position, our confidence in the path ahead, and our focus on long-term value creation. During the quarter, we returned $53 million to shareholders in the form of dividends and repurchases. $216 million remains under our current share repurchase authorization.
Since the spin-off in July 2023 through the second quarter of this year, we have repurchased $534 million worth of shares, representing approximately 24% of our original share count, and paid $131 million in dividends. In total, we have returned $665 million to shareholders through share buybacks and dividends since July 2023. We've achieved all of this while keeping net leverage below our target, preserving strong liquidity and continuing to fund the growth of our business. Finally, I want to thank and congratulate all of our employees as we just surpassed our third anniversary as an independent, publicly traded company. It's been a great journey so far and look forward to many more years to come. I'll now turn the call over to Chris to discuss our financial results in more detail and discuss our 2026 outlook.
Thanks, Brady, and thanks to all of you for joining us this morning. As a reminder, reconciliations of all non-GAAP financial measures that I will discuss can be found in today's press release and in the presentation, both of which are on our website. In the second quarter, we delivered results in line with our expectations, that reflect both the strength of our diversified portfolio and the benefits of our operational discipline. Diving into the details, which you can find on slides 13 and 14 of the presentation, I will bridge our revenue and adjusted EBITDA for the second quarter. Specifically, during the quarter, we generated $940 million in net sales, an increase of 5.6% versus a year ago. Compared to Q2 2025, our top line rose 2.4%, unfavorable foreign exchange of $21 million as the Chinese renminbi, euro, and Brazilian real strengthened against the US dollar.
We saw a positive contribution from volume and mix of $18 million, or 2%, on positive customer pricing and higher sales in the Americas aftermarket. Revenue in the quarter was reduced from net tariff pass-through of $7 million, affected mainly by anticipated tariff refunds from the government expected to be passed through to customers who had previously reimbursed us for portions of the impact. Finally, SEM contributed sales of $18 million in the quarter. Excluding the FX impact, SEM contribution, and tariff pass-throughs, sales were up 2% in the quarter. Moving next to the bridge on slide 14. Adjusted EBITDA was $130 million in the quarter, with a margin of 13.8%, representing a year-over-year increase of $4 million and a 40 basis point decrease in margin. Net tariff expense and anticipated refunds were an $11 million contribution to earnings in the quarter.
Contribution from SEM was $3 million, or a 16.6% margin in the quarter. Product mix, partially offset by supplier savings and cost control measures, was a $1 million headwind. Other costs, including corporate costs, were up approximately $9 million, primarily due to adjustments for short and long-term incentive compensation. All changes are related to previously published incentive compensation schemes for PHINIA associates, which reward improvements in economic value and the cash generation of the business. We continue to effectively execute our disciplined capital allocation strategy, successfully balancing significant cash return to shareholders with the potential for strategic accretive M&A. Cash and cash equivalents at quarter-end were $370 million, while available capacity under our credit facilities was approximately $450 million for a resulting liquidity of $820 million. Cash flow from operations was $91 million, an increase of $34 million over second quarter 2025.
Adjusted free cash flow was $74 million, with capital expenditures of 2.3% coming in below our target of 4%, and efficient uses of working capital in the quarter, including approximately $1 million in cash tariff refunds received. Share repurchases and dividends represented our primary use of capital, with value back to our shareholders of $42 million and $11 million, respectively, in the quarter for year-to-date totals of $98 million and $22 million, respectively. As Brady noted, we announced the purchase of stoba Group in late June with an expected close date of Q4 2026, dependent upon normal regulatory approvals and customary closing conditions. With a purchase price of approximately six times EBITDA, we expect the inclusion of the business to be accretive on a run-rate EBITDA basis, adding approximately 40 basis points on an annual basis.
While full stoba Group sales were approximately $200 million, this balance includes sales to PHINIA operations, which upon consolidation are eliminated as intercompany sales. On a third-party basis, this asset will add full-year sales of approximately $80 million and $25 million or 31% in adjusted EBITDA. We are excited to welcome the group into the PHINIA family, strengthening capabilities, expertise, and future growth opportunities in multiple markets and product lines. We continue to generate strong free cash flow, supporting our near and long-term capital allocation priorities. Our broadening portfolio of products, solutions, and services, coupled with our healthy balance sheet, will enable us to continue to deploy capital with discipline focused on delivering long-term, sustainable, profitable growth, creating value for our shareholders. Moving next to slide 15 to comment on our 2026 outlook. As we move through the year, we're refining the full-year guidance we issued earlier this year.
Specifically, we're tightening the range of revenue while keeping the midpoint of our revenue outlook range. At $3.57 billion-$3.67 billion, we would expect an increase in net sales in the mid-single digit range, inclusive of FX. Excluding expected FX, our growth is projected to be in the low single digit area. We are now guiding adjusted EBITDA to be $485 million-$515 million, with an EBITDA margin of 13.5%-14.1%, as sales impacts from FX and net tariff recoveries, as well as product mix, have had a slightly dilutive impact on margins. We believe the business is well positioned to continue generating meaningful free cash flow, and we've updated our 2026 outlook for adjusted free cash flow to $210 million-$250 million. We expect the adjusted tax rate to be in the 30%-33% range, as meaningful progress has been made in addressing legacy tax structure headwinds.
Overall, we expect to continue to deliver strong results in 2026 as we drive operational efficiencies and search for new areas of growth for both segments. As a reminder, our outlook does not account for potential impacts from changes related to the announced stoba acquisition. In addition to recent or future government policy changes, or other risks described in our filings with the SEC that could influence our operations or technical centers. This includes measures such as additional tariffs, tax reforms, or any other policies that might either increase or decrease our revenue assumptions and/or alter our cost structure. With that said, we believe PHINIA is well positioned to navigate global market conditions and changes, and we are confident in our operations and our ability to generate sufficient cash for our needs, while also continuing to invest in the future.
As we look forward to the rest of the year, we look forward to managing the business as demand, risks, and opportunities develop while providing solid returns to our shareholders. We want to thank you all for joining us on this call today, and we are ready to open up the call to questions. Operator, please open the lines.