Garrett Motion Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations, which we refer to as our “MD&A,” should be read in conjunction with our Consolidated Interim Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q as well as the audited annual Consolidated and Combined Financial Statements for the year ended December 31, 2020, included in our Form 10-K, as filed with the Securities and Exchange Commission on February 16, 2021 (our “2020 Form 10-K”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the “Risk Factors” section of our 2020 Form 10-K and this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied, by these forward-looking statements. The following, Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand the results of operations and financial condition of Garrett Motion Inc. for the three and six months ended June 30, 2021. Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act. All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding the following, are forward-looking statements: statements regarding our future results of operations and financial position, the consequences of the Chapter 11 Cases, other potential claims against the Debtors related to the Chapter 11 Cases, the anticipated impact of the COVID-19 pandemic and expected recovery on our business, results of operations and financial position, expectations regarding the growth of the turbocharger and electric vehicle markets and other industry trends, the sufficiency of our cash and cash equivalents, anticipated sources and uses of cash, anticipated investments in our business, our business strategy, pending litigation, anticipated interest expense, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements . These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including: • the consequences of our recent emergence from bankruptcy; • the potential to experience increased levels of employee attrition as a result of the Chapter 11 Cases; • ability to utilize our net operating loss carryforwards in future years; • changes in the automotive industry and economic or competitive conditions; • our ability to develop new technologies and products, and the development of either effective alternative turbochargers or new replacement technologies; • any failure to protect our intellectual property or allegations that we have infringed the intellectual property of others; and our ability to license necessary intellectual property from third parties; • potential material losses and costs as a result of any warranty claims and product liability actions brought against us; • any significant failure or inability to comply with the specifications and manufacturing requirements of our original equipment manufacturer customers or by increases or decreases to the inventory levels maintained by our customers; • changes in the volume of products we produce and market demand for such products and prices we charge and the margins we realize from our sales of our products; • any loss of or a significant reduction in purchases by our largest customers, material nonpayment or nonperformance by any our key customers, and difficulty collecting receivables; 40 • inaccuracies in estimates of volumes of awarded business; • work stoppages, other disruptions or the need to relocate any of our facilities; • supplier dependency; • any failure to meet our minimum delivery requirements under our supply agreements; • any failure to increase productivity or successfully execute repositioning projects or manage our workforce; • potential material environmental liabilities and hazards; • natural disasters and physical impacts of climate change; • pandemics, including without limitation the COVID-19 pandemic, and effects on our workforce and supply chain; • technical difficulties or failures, including cybersecurity risks; • changes in legislation or government regulations or policies, including with respect to CO 2 reduction targets in Europe as part of the Green Deal objectives or other similar changes which may contribute to a proportionately higher level of battery electric vehicles; • risks related to international operations and our investment in foreign markets, including risks related to the withdrawal of the United Kingdom from the European Union; • the terms of our indebtedness and our ability to access capital markets; • unforeseen adverse tax effects; • our leveraged capital structure and liabilities to Honeywell may pose significant challenges to our overall strategic and financial flexibility and have a material adverse effect on our business, liquidity position and financial position; • inability to recruit and retain qualified personnel; and • the other factors described under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated in this Quarterly Report on Form 10-Q, and in our other filings with the SEC. You should read this Quarterly Report on Form 10-Q and the documents that we reference herein completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. Overview and Business Trends Garrett designs, manufactures and sells highly engineered turbocharger and electric-boosting technologies for light and commercial vehicle original equipment manufacturers (“OEMs”) and the global vehicle independent aftermarket as well as automotive software solutions. These OEMs in turn ship to consumers globally. We are a global technology leader with significant expertise in delivering products across gasoline, diesel, natural gas and electric (hybrid and fuel cell) powertrains. These products are key enablers for fuel economy and emission standards compliance. Market penetration of vehicles with a turbocharger is expected to increase from approximately 52% in 2020 to approximately 55% by 2024, according to IHS Markit (“IHS”) for Light Vehicle and other industry sources for Commercial Vehicle on-highway and off-highway, which we believe will allow the turbocharger market to grow at a faster rate than overall automobile production. We expect that the powertrain mix evolution trends will remain mostly unchanged, which should support the turbocharger industry in the short to medium term. In the first half of 2021, a significant increase in battery electric vehicle (“BEV”) sales as been observed in Europe and in China. with BEV representing respectively 6% and 9% of vehicle sold. In China, renewed sales incentives, especially in Tier 2 and Tier 3 cities, as well as non-financial incentives such as more generous license-plate quotas for major metropolitan areas, bolsters Chinese BEV penetration. In Europe, the COVID-19 stimulus packages are mostly directed to electric vehicles, as well as fleet average CO2 targets to be achieved by OEMS are supporting BEV penetration. It has to be noticed that short term, selling price, charging time, charging infrastructure availability and profitability issues for OEMs remain challenges to adoption. In the long term, the expected revision of CO2 reduction targets by 2030 proposed by the E.U. could drive further increase of BEV penetration in Europe beyond currently forecasted levels. In the USA, the expected tightening of CO2 / mileage targets is expected to drive higher turbo penetration. 41 In the short to medium term, we believe that turbo penetration will grow as turbos remain one of the most cost-efficient levers to improve the fuel efficiency of conventional Gasoline and Diesel vehicles as well as hybrid and fuel-cell vehicles. Growth in the turbo market is expected in all regions, with special mention for high-growth regions in Asia, where rising income levels continue to drive long-term automotive and vehicle content demand. While these positive factors do not isolate the turbo industry from fluctuations in global vehicle production volumes, such factors may mitigate the negative impact of macroeconomic cycles, or the negative impact of a shift from light vehicle Diesel to light vehicle Gasoline engines. At the same time, the global semiconductor shortage is creating uncertainty across multiple industries, including the automotive industry, and will keep influenc ing our operating activity until the end of the year. Automotive OEMs have reduced production plans in the first two quarters. The C ompany is currently reviewing production at OEM plants and is closely monitoring supply chain disruptions related to semiconductor shortages in an effort to minimize the impact of the bottleneck in supply and to mitigate any potential disruption in production. Emergence from Chapter 11 For more detailed information regarding the emergence from Chapter 11 see Note 2, Plan of Reorganization of the Notes to the Consolidated Interim Financial Statements. Impact of COVID-19 Pandemic After the extensive impact on our sales in the second half of 2020 year caused by the COVID-19 pandemic, we have observed a fast recovery in all geographies since mid-2020, that enabled us to ramp up production in most of our production sites to normal levels in the third quarter of 2020 and continuing through the second quarter of 2021, despite the resurgence of infection rates in the U.S. and European Union. If the COVID-19 pandemic, despite vaccination campaigns, drives new lockdown measures impacting our manufacturing facilities, our facilities may be forced to shut down or operate at reduced capacity again. Additional or continued facility closures or reductions in operations could significantly reduce our production volumes and have a material adverse impact on our business, results of operations and financial condition. According to IHS and other industry sources, in 2020 a 16% decrease in global light vehicle production and a 5% decline in commercial vehicle production were observed, a larger drop than during the financial crisis in 2008 and 2009. In 2021, a partial recovery is expected with a rebound of light vehicle production of 11% and commercial vehicles of 6%. As a result, we estimate that a contraction of approximately 13% for the combined light and commercial vehicle turbocharger industry volume occurred in 2020 and we expect a strong rebound in 2021, which is observed since the second half of 2020. We have prepared contingency plans for multiple scenarios that we believe will allow us to react swiftly to changes in customer demand while protecting Garrett’s long-term growth potential. The supplies needed for our operations were generally available throughout 2020. In limited circumstances, certain suppliers experienced financial distress during 2020, resulting in supply disruptions. In line with action already started in 2020, we continue to systematically monitor supplier risks associated with COVID-19 and other material supply shortages and believe we have substantially addressed such risks with manageable economic impacts including use of Premium Freight or adjusted payment terms that are limited in time. In addition, we have implemented cost control measures and cash management actions, including: • Postponing capital expenditures; • Optimizing working capital requirements; • Lowering discretionary spending; • Flexing organizational costs by implementing short-term working schemes; • Reducing temporary workforce and contract service workers; and • Restricting external hiring. 42 The following charts show our percentage of revenues by geographic region and product line for the three and six months ended June 30, 2021 and the percentage change from the prior year comparable period. By Geography By Product Line • We are a global business that generated revenues of approximately $0.9 billion and $1.9 billion for the three and six months ended June 30, 2021 respectively. • Light vehicle products (which includes Diesel and Gas products, including products for passenger cars, SUVs, light trucks, and other products) accounted for approximately 67% and 69% of our revenues for the three and six months ended June 30, 2021. Commercial vehicle products (products for on-highway trucks and off-highway trucks, construction, agriculture and power-generation machines) accounted for 20% and 19% of our revenues for the three and six months ended June 30, 2021. • Our OEM sales contributed approximately 87% and 88% of our revenues while our aftermarket and other products contributed 11% and 10% of our revenues for the three and six months ended June 30, 2021. • Approximately 52% and 52% of our revenues came from sales to customers located in Europe, 32% and 32% from sales to customers located in Asia, 15% and 15% from sales to customers in North America, and 1% and 1% from sales to customers in other international markets for the three and six months ended June 30, 2021. Basis of Presentation The Consolidated Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All amounts presented are in millions, except per share amounts. 43 Results of Operations for the three and six months ended June 30, 2021 compared with the three and six months ended June 30, 2020 Net Sales For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Net sales $ 935 $ 477 $ 1,932 $ 1,222 % change compared with prior period 96.0 % 58.1 % The change in net sales compared to prior year period is attributable to the following: For the Three Months Ended June 30, 2021 For the Six Months Ended June 30, 2021 Volume 85.9 % 51.0 % Price (3.3 %) (3.2 %) Foreign Currency Translation 13.4 % 10.3 % 96.0 % 58.1 % Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020 Our net sales increased for the three months ended June 30, 2021 compared to the prior year period by $458 million or 96.0% (including a favorable impact of 13.4% due to foreign currency translation). The increase in sales was primarily driven by light vehicles OEM products increase of $332 million, commercial vehicles OEM products increase of $91 million, aftermarket products net sales increase of $32 million and other products’ increase of $3 million. Our higher net sales of light vehicles OEM products was primarily driven by higher gasoline and diesel volumes in Europe and North America. The increase in net sales for commercial vehicles and aftermarket product sales were primarily driven by higher volumes in Europe and North America. The increase in aftermarket product sales was primarily driven by higher volumes in Europe and North America. The production at our facilities in Europe and North America increased significantly, compared to the three months ended June 30, 2020. We experienced diminished production in our manufacturing facilities for that same time period during 2020, due to the COVID-19 pandemic. Six Months Ended June 30, 2021 compared with Six Months Ended June 30, 2020 Our net sales increased for the six months ended June 30, 2021 compared to the prior year period by $710 million or 58.1% (including a positive impact of 10.3% due to foreign currency translation). The increase in sales was primarily driven by light vehicles OEM products increase of $529 million, commercial vehicles OEM products increase of $135 million, aftermarket products increase of $41 million and other products’ increase of $5 million. Our higher net sales of light vehicles OEM products was primarily driven by higher diesel volumes in Europe and higher gasoline volumes in Europe and China. The increase in net sales for commercial vehicles OEM products and aftermarket product sales were primarily driven by higher volumes in Europe and North America. The increase in other net sales was primarily driven by an increase in prototype volumes. The production at our facilities in China has increased significantly, compared to the six months ended June 30, 2020, given that our manufacturing facility in Wuhan, China, was shut down for six weeks in February and March 2020 and we saw diminished production in our Shanghai, China facility for the same time period, due to the COVID-19 pandemic. The production at our facilities in Europe and North America has increased significantly, compared to the six months ended June 30, 2020, given that we saw diminished production in our manufacturing facilities for that same time period during 2020, due to the COVID-19 pandemic. 44 Cost of Goods Sold For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Cost of goods sold $ 742 $ 397 $ 1,543 $ 1,004 % change compared with prior period 86.9 % 53.7 % Gross profit percentage 20.6 % 16.8 % 20.1 % 17.8 % Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020 Costs of goods sold increased for the three months ended June 30, 2021 compared to the prior year period by $345 million or 86.9% primarily due to an increase in direct material and labor costs of $290 million. Gross profit percentage increased by 3.8% primarily due to favorable impact of productivity including higher volume leverage (10.0%) and the favorable impacts from foreign and exchange rates (0.7%), partially offset by unfavorable impacts from mix and price (3.3%), unfavorable impacts from inflation (1.4%), unfavorable impact from repositioning costs (0.2%), and other factors (2.0%), mainly driven by material scrap and prior year period cost savings actions to mitigate Covid-19 impact. Six Months Ended June 30, 2021 compared with Six Months Ended June 30, 2020 Costs of goods sold increased in the six months ended June 30, 2021 compared to the prior year period by $539 million or 53.7% primarily due to an increase in direct material and labor costs of $451 million. Gross profit percentage increased by 2.3% primarily due to favorable impact of productivity including higher volume leverage (7.4%) and the favorable impacts from foreign and exchange rates (0.6%), partially offset by unfavorable impacts from mix and price (3.1%), unfavorable impacts from inflation (0.9%), unfavorable impact from repositioning costs (0.3%), and other factors (1.4%), mainly driven by Brazil environmental expenses and prior year period cost savings actions to mitigate Covid-19 impact. Selling, General and Administrative Expenses For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Selling, general and administrative expense $ 51 $ 47 $ 106 $ 104 % of sales 5.5 % 9.9 % 5.5 % 8.5 % Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020 Selling, general and administrative expenses increased for the three months ended June 30, 2021 compared to the prior year period by $4 million, mainly driven by foreign exchange rate. The cost savings actions implemented in the three months ended June 30, 2020 to mitigate the impact of COVID-19 were offset by the strategic planning costs incurred during the same year period. During current year period, the accrual for employee incentives increased, reflecting expected payout in 2021, and was partially offset by lower spend and timing from external services and bad debt recovery. As a percentage of net sales, SG&A for the three months ended June 30, 2021 was 5.5% versus 9.9% in the prior year period. Six Months Ended June 30, 2021 compared with Six Months Ended June 30, 2020 Selling, general and administrative expenses increased for the six months ended June 30, 2021 compared to the prior year period by $2 million, mainly driven by foreign exchange rate. The cost savings actions implemented in the six months ended June 30, 2020 to mitigate the impact of COVID-19, were offset by the strategic planning costs incurred in the same year period. During current year period, the accrual for employee incentives increased, reflecting expected payout in 2021 and was partially offset by lower spend and timing from external services and bad debt recovery. As a percentage of net sales, SG&A for the six months ended June 30, 2021 was 5.5% versus 8.5% in the prior year period. 45 Other Expense, Net For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Other expense, net $ — $ 15 $ 1 $ 31 % of sales % — 3.1 % 0.1 % 2.5 % Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020 Other expense, net decreased for the three months ended June 30, 2021 compared to the prior year period by $15 million. The decrease was attributable to the cancellation of the liability related to the Honeywell Indemnity Agreement and associated litigation, following emergence from Chapter 11. Six Months Ended June 30, 2021 compared with Six Months Ended June 30, 2020 Other expense, net decreased for the six months ended June 30, 2021 compared to the prior year period by $30 million. The decrease was attributable to the cancellation of the liability related to the Honeywell Indemnity Agreement and associated litigation, following emergence from Chapter 11. Interest Expense For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Interest expense $ 24 $ 20 $ 45 $ 36 Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020 Interest expense increased in the three months ended June 30, 2021 compared to the prior year period by $4 million, primarily due to $7 million related to the Series B Preferred Stock, partially offset by prior year period fees related to amendments to our previous credit facilities. Six Months Ended June 30, 2021 compared with Six Months Ended June 30, 2020 Interest expense increased in the six months ended June 30, 2021 compared to the prior year period by $9 million, mainly due to $7 million related to the Series B Preferred Stock and the addition of supplementary financing under our Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “DIP Credit Agreement”), partially offset by prior year period fees related to amendments to our previous credit facilities. Non-operating (income) expense For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Non-operating (income) expense $ (26 ) $ (4 ) $ — $ (8 ) Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020 Non-operating (income) expense for the three months ended June 30, 2021 increased to an income of $26 million from income of $4 million in the prior year period, primarily due to foreign exchange rates fluctuations related to the debt, which were unhedged due to the restrictions placed on the company in Chapter 11 Cases. 46 Six Months Ended June 30, 20 2 1 compared with Six Months Ended June 30, 2020 Non-operating (income) expense for the six months ended June 30, 2021 decreased $8 million from income of $8 million in the prior year period, primarily due to foreign exchange rates fluctuations related to the debt, which were unhedged due to the restrictions placed on the company in Chapter 11 Cases. Reorganization items, net For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Reorganization items, net $ (295 ) $ — $ (121 ) $ — Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020 Reorganization items, net for the three months ended June 30, 2021 were $295 million gain, representing $502 million gain on settlement of Honeywell claims, partially offset by $96 million professional service fees related to the Chapter 11 Cases, $39 million in Directors and Officers insurance related to Chapter 11 Cases, $25 million write off on debt issuance costs of the old term loan debt, $13 million in employee stock awards cancellation and $34 million in other costs mainly related to unsecured notes settlement. There were no Reorganization items, net for the three months ended June 30, 2020, since these are new items related to the Chapter 11 Cases. Six Months Ended June 30, 2021 compared with Six Months Ended June 30, 2020 Reorganization items, net for the six months ended June 30, 2021 were $121 million gain, representing $502 million gain on settlement of Honeywell claims, partially offset by $181 million professional service fees related to the Chapter 11 Cases, $79 million related to termination of and expense reimbursement under the Stalking Horse Purchase Agreement, $39 million Directors and Officers insurance related to Chapter 11 Cases, $25 million write off on debt issuance costs of the old term loan debt, $13 million in employee stock awards cancellation and $44 million in other costs mainly related to unsecured notes settlement. There were no Reorganization items, net for the six months ended June 30, 2020, since these are new items related to the Chapter 11 Cases. Tax Expense For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Tax expense $ 30 $ 11 $ 54 $ 12 Effective tax rate 6.8 % 550 % 15.1 % 21.8 % See Note 7, Income Taxes of the Notes to the Consolidated Interim Financial Statements for a discussion of the change in effective tax rates for the three and six months ended June 30, 2021 versus the prior year periods. Net Income (loss) For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Net income (loss) $ 409 $ (9 ) $ 304 $ 43 Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020 As a result of the factors described above, net income was $409 million for the three months ended June 30, 2021 as compared to net loss of $9 million for the three months ended June 30, 2020. 47 Six Months Ended June 30, 20 2 1 compared with Six Months Ended June 30, 2020 As a result of the factors described above, net income was $304 million for the six months ended June 30, 2021 as compared to net income of $43 million for the six months ended June 30, 2020. Non-GAAP Measures It is management’s intent to provide non-GAAP financial information to supplement the understanding of our business operations and performance, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the most directly comparable GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies and may not be comparable to other similarly titled measures used by other companies. Additionally, the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Company’s operating results as reported under GAAP. EBITDA and Adjusted EBITDA ( 1 ) For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) Net income (loss) — GAAP $ 409 $ (9 ) $ 304 $ 43 Net interest expense 23 19 43 34 Tax expense 30 11 54 12 Depreciation 24 18 47 37 EBITDA (Non-GAAP) $ 486 $ 39 $ 448 $ 126 Other expense, net (which consists of indemnification, asbestos and environmental expenses) (2) — 14 — 30 Non-operating income (3) (3 ) (3 ) (6 ) (5 ) Reorganization items, net (4) (295 ) — (121 ) — Stock compensation expense (5) 1 4 3 6 Repositioning charges (6) 3 1 11 6 Foreign exchange (gain) loss on debt, net of related hedging (gain) loss (24 ) (1 ) 9 (1 ) Professional service costs (7) — 9 — 9 Adjusted EBITDA (Non-GAAP) $ 168 $ 63 $ 344 $ 171 ( 1 ) We evaluate performance on the basis of EBITDA and Adjusted EBITDA. We define “EBITDA” as our net income/loss calculated in accordance with U.S. GAAP, plus the sum of net interest expense/income, tax expense/benefit and depreciation. We define “Adjusted EBITDA” as EBITDA, plus the sum of non-operating income/expense, other expenses, net (which consists of indemnification, asbestos and environmental expenses), stock compensation expense, reorganization items, net, repositioning charges and foreign exchange gain/loss on debt, net of related hedging gain/loss. We believe that EBITDA and Adjusted EBITDA are important indicators of operating performance and provide useful information for investors because: • EBITDA and Adjusted EBITDA exclude the effects of income taxes, as well as the effects of financing and investing activities by eliminating the effects of interest and depreciation expenses and therefore more closely measure our operational performance; and • certain adjustment items, while periodically affecting our results, may vary significantly from period to period and have disproportionate effect in a given period, which affects comparability of our results. In addition, our management may use Adjusted EBITDA in setting performance incentive targets in order to align performance measurement with operational performance. 48 (2) The accounting for the majority of our asbestos-related liability payments and accounts payable reflect the terms of the Honeywell Indemnity Agreement with Honeywell entered into on September 12, 2018, under which Garrett ASASCO is currently required to make payments to Honeywell in amounts equal to 90% of Honeywell’s asbestos-related liability payments and accounts payable, primarily related to Honeywell’s former Bendix business in the United States, as well as certain environmental-related liability payments and accounts payable and non-United States asbestos-related liability payments and accounts payable, in each case related to legacy elements of the Bendix business, including the legal costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts and, as may be applicable, certain other recoveries associated with such liabilities. The Plan as confirmed by the Bankruptcy Court include s a global settlement with Honeywell providing for, among other things, the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to the Honeywell Indemnity Agreement, that certain Indemnification Guarantee Agreement, dated as of September 27, 2018 (as amended, restated, amended and restated, supplemented, or otherwise modified from time to time), by and among Honeywell ASASCO 2 Inc. as payee, Garrett ASASCO as payor, and certain subsidiary guarantors as defined therein (the “Guarantee Agreement,” and together with the Honeywell Indemnity Agreement, the “Indemnity Agreements”) and the Tax Matters Agreement. See Note 2 2 , Commitments and Contingencies of Notes to the Consolidated Interim Financial Statements. (3) Non-operating income adjustment includes the non-service component of pension expense and other expense, net and excludes interest income, equity income of affiliates, and the impact of foreign exchange. (4) The Company applied ASC 852 for periods subsequent to the Petition Date to distinguish transactions and events that were directly associated with the Company's reorganization from the ongoing operations of the business. Accordingly, certain expenses and gains incurred during the Chapter 11 Cases are recorded within Reorganization items, net in the Consolidated Interim Statements of Operations. The Company applied U.S. GAAP for period subsequent to the Effective Date. See Note 1, Background and Basis of Presentation of Notes to the Consolidated Interim Financial Statements. (5) Stock compensation expense adjustment includes only non-cash expenses. (6) Repositioning charges adjustment primarily includes severance costs related to restructuring projects to improve future productivity. (7) Professional service costs consist of professional service fees related to strategic planning for the Company in the period before the Debtors filed for relief under Chapter 11 of the Bankruptcy Code in September 2020 . We consider these costs to be unrelated to our ongoing core business operations. Three Months Ended June 30, 2021 compared with Three Months Ended June 30, 2020 Adjusted EBITDA (non-GAAP) increased by $105 million for the three months ended June 30, 2021 compared to the prior year period. The increase was primarily due to favorable impacts of sales volume ($125 million), foreign exchange including the prior year’s hedge losses ($15 million) and favorable impact of productivity, net of mix ($5 million), partially offset by price ($16 million), inflation ($13 million), higher research and development expenses ($7 million) and higher selling, general and administrative expenses ($4 million). Six Months Ended June 30, 2021 compared with Six Months Ended June 30, 2020 Adjusted EBITDA (non-GAAP) increased by $173 million for the six months ended June 30, 2021 compared to the prior year period. The increase was primarily due to favorable impacts of sales volume ($190 million), foreign exchange including the prior year’s hedge gains ($31 million) and favorable impact of productivity, net of mix ($20 million), partially offset by price ($39 million), inflation ($17 million), higher research and development expenses ($10 million) and higher selling, general and administrative expenses ($2 million). Cash flow from operations less Expenditures for property, plant and equipment (1) For the Three Months Ended June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in millions) (Dollars in millions) Net cash (used for) provided by operating activities — GAAP (423 ) (152 ) (391 ) (95 ) Expenditures for property, plant and equipment (22 ) (24 ) (40 ) (63 ) Cash flow from operations less Expenditures for property, plant and equipment (Non-GAAP) $ (445 ) $ (176 ) $ (431 ) $ (158 ) 49 (1) Cash flow from operations less Expenditures for property, plant and equipment is a non-GAAP financial measure that reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a supplemental understanding of factors and trends affecting our cash flows. Cash flow from operations less Expenditures for property, plant and equipment is calculated by subtracting Expenditures for property, plant and equipment from Net cash provided by (used for) operating activities. We believe it is a more conservative measure of cash flow, and therefore useful to investors, because purchases of fixed assets are necessary for ongoing operations. We believe it is important to view Cash flow from operations less Expenditures for property, plant and equipment as a supplement to our Consolidated Interim Statements of Cash Flows. Cash flow from operations less Expenditures for property, plant and equipment (non-GAAP) decreased by $273 million for the six months ended June 30, 2021 versus the prior year period, primarily due to a $375 million payment to Honeywell pursuant to the Plan, in the current year period, partially offset by $8 million prior period payment to Honeywell. Additionally, there was an increase in net loss, net of deferred taxes and non-cash gains related to reorganization of $94 million, partially offset by a favorable impact from working capital of $54 million and an increase of $111 million in other items (mainly other assets and accrued liabilities). Additionally, Expenditures for property, plant and equipment expenses decreased by $23 million. Liquidity and Capital Resources During the six months ended June 30, 2021, we funded our operations primarily through the cash flows from operating activities, proceeds from the issuance of Series A Preferred Stock rights offerings and borrowings from Credit facilities. On June 30, 2021, the Company reported a cash and cash equivalents position of $401 million (not including $215 million in restricted cash as of June 30, 2021) as compared to $592 million on December 31, 2020 (not including $101 million in restricted cash as of December 31, 2020). As of June 30, 2021, the Company had no outstanding borrowings under the Revolving Facility and had available borrowing capacity of $261 million. This amount consisted of $300 million less undrawn letters of credit of $39 million. In addition, on June 30, 2021, the Company had $1,247 million outstanding in Term Loan Facilities. The Company currently expects that the holders of the Series B Preferred Stock may have the right to require the Company to redeem the Series B Preferred Stock as soon as the fourth quarter of 2021. Emergence - Exit Financing and Entry into Credit Facilities Upon our emergence from Chapter 11 proceedings on the Effective Date, the following transactions significantly improved the Company’s liquidity: • Net proceeds from the issuance of Term Loan Facilities of $1,221 million; • The Company obtained $300 million in commitments under a five-year secured first-lien multi-currency Revolving Facility, $125 million of which may be used for the issuance of letters of credit; • The Company obtained a $35 million letter of credit facility for a term of five years; • Debt repayment of $1,103 million in Secured term loan facilities and accrued interest, repayment of $374 million in revolving credit facility, $461 million in Senior notes and accrued interest and $101 million repayment of Debtor-in-possession Term Loan facility and accrued interest; • Issuance of Series A Preferred Stock in a rights offering for $1,301 million; • Settlement of $1,459 million of claims with Honeywell for a $375 million payment and $577 million of Series B Preferred Stock. 50 Going Concern Our ability to continue as a going concern was contingent upon the Company’s ability to successfully implement a Plan of Reorganization in the Chapter 11 Cases, among other factors. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities were subject to uncertainty. While we were operating as debtors-in-possession under the Bankruptcy Code, we have sold or otherwise disposed of or liquidated assets or settled liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in our Consolidated Interim Financial Statements. As a result of our improved liquidity, as noted above, and removal of the risks and uncertainties surrounding the Chapter 11 Cases, substantial doubt no longer exists that we will be able to continue as a going concern. Listing on NASDAQ On September 20, 2020, we were notified by the New York Stock Exchange (the “NYSE”) that, as a result of the Chapter 11 Cases the NYSE had commenced proceedings to delist our Common Stock from the NYSE. After certain administrative actions our Common Stock was removed from listing and registration on the NYSE effective as of the opening of business on October 19, 2020. Following our emergence from Chapter 11, our Common Stock commenced trading on the Nasdaq Global Select Market under the ticker symbol “GTX” on May 3, 2021. Cash Flow Summary for the Six Months Ended June 30, 2021 and 2020 For the Six Months Ended June 30, 2021 2020 (Dollars in millions) Cash (used for) provided by: Operating activities (391 ) (95 ) Investing activities (39 ) (64 ) Financing activities 359 114 Effect of exchange rate changes on cash and restricted cash (6 ) (3 ) Net decrease in cash, cash equivalents and restricted cash $ (77 ) $ (48 ) Cash used for operating activities increased by $296 million for the six months ended June 30, 2021 versus the prior year period, primarily due to a $375 million payment to Honeywell pursuant to the Plan, in the current year period, partially offset by $8 million from prior period payment to Honeywell. Additionally, there was an increase in net loss, net of deferred taxes and non-cash gains related to reorganization of $94 million, partially offset by a favorable impact from working capital of $54 million and an increase of $111 million in other items (mainly other assets and accrued liabilities). Cash used for investing activities decreased by $25 million for the six months ended June 30, 2021 versus the prior year period, primarily due to decrease in Expenditures for property, plant and equipment of $23 million, due to higher customer contribution and lower spend. Cash provided by financing activities increased by $245 million for the six months ended June 30, 2021 versus the prior year period. The change was driven by $1,301 million proceeds from issuance of Series A Preferred Stock and $1,221 million, proceeds from issuance of the new long-term debt, partially offset by $201 million repayments on DIP Credit Agreement, $1,513 million payments of the old long term debt and $69 million payments for Cash-Out election. Additionally, there was $497 million of full payment of our Old Revolving Facility, net of prior year period proceeds. Seasonality Our business is typically moderately seasonal. Our primary North American customers historically reduce production during the month of July and halt operations for approximately one week in December; our European customers generally reduce production during the months of July and August and for one week in December; and our Chinese customers often reduce production during the period surrounding the Chinese New Year. Shut-down periods in the rest of the world generally vary by country. In addition, automotive production is traditionally reduced in the months of July, August and September due to the launch of parts production for new vehicle models. Accordingly, our results have historically reflected this seasonality. Our sales predictability in the short term might also be impacted by sudden changes in customer demand, driven by our OEM customers’ supply chain management. 51 We also typically experience seasonality in cash flow, as a relatively small portion of our full year cash flow is typically generated in the first quarter of the year and a relatively large portion in the last quarter. This seasonality in cash flow is mostly caused by timing of supplier payments for capital expenditures, changes in working capital balances related to the sales seasonality discussed above, and the impact of incentive payments to management. Additionally, tax payments are due based on jurisdictional requirements which vary in timing throughout the year. Contractual Obligations and Probable Liability Payments The summary of our significant contractual obligations and probable liability payments at June 30, 2021 were as set forth in the table below: Payments by Period Total 2021 2022-2023 2024-2025 Thereafter (Dollars in millions) Obligations to Honeywell – Series B Preferred Stock (1) 835 — 135 200 500 Long-term debt (2) 1,247 2 14 14 1,217 Interest payments on long-term debt (3) 281 21 82 81 97 Minimum lease payments 45 7 19 11 8 Purchase obligations (4) 118 96 22 — — $ 2,526 $ 126 $ 272 $ 306 $ 1,822 (1) Under the terms of the Series B Preferred Stock issued to Honeywell pursuant to the Plan, we are obligated to pay an aggregate of $834.8 million to Honeywell, payable in annual cash installments beginning in 2022 and ending in 2030, subject to various conditions and put and call rights set forth in the Certificate of Designations for the Series B Preferred Stock. The Company currently expects that the holders of the Series B Preferred Stock may have the right to require the Company to redeem the Series B Preferred Stock as soon as the fourth quarter of 2021. Of the $585 million recorded on our Consolidated Interim Balance Sheet as of June 30, 2021, $550 million is classified as a long-term liability. If the Company has Consolidated EBITDA (as defined in the Series B Certificate of Designations) for the twelve months ended June 30, 2021 and for the twelve months ended September 30, 2021 of over $600 million, the entire recorded amount will be classified as current on our September 30, 2021 Consolidated Interim Balance Sheet. (2) Assumes all long-term debt is outstanding until contractual maturity. Does not include expected utilization of our Revolving Facility. (3) Interest payments are estimated based on the interest rates applicable as of June 30, 2021. This includes the impact of the cross currency interest rate swap and the interest rate swap. This does not include the expected utilization of our Revolving Facility. (4) Purchase obligations are entered into with various vendors in the normal course of business and are consistent with our expected requirements. Capital Expenditures We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand. Productivity projects have freed up capacity in our manufacturing facilities and are expected to continue to do so. We expect to continue investing to expand and modernize our existing facilities and invest in our facilities to create capacity for new product development. Off-Balance Sheet Arrangements We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 52 Critical Accounting Policies The preparation of our Consolidated Interim Financial Statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. Actual results could differ from our estimates and assumptions, and any such differences could be material to our financial statements. Our critical accounting policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2020 Form 10-K. In connection with the filing of the Chapter 11 Cases on the Petition Date, the Consolidated Interim Financial Statements included herein have been prepared in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852, Reorganizations. At the Effective Date, we did not meet the requirements under ASC 852 for fresh start accounting. See Note 1, Background and Basis of Presentation, of the Consolidated Interim Financial Statements for further details. Recent Accounting Pronouncements See Note 3, Summary of Significant Accounting Policies of the Notes to Consolidated Interim Financial Statements for further discussion of recent accounting pronouncements. Other Matters Litigation and Environmental Matters See Note 22, Commitments and Contingencies of the Notes to the Consolidated Interim Financial Statements for a discussion of environmental, asbestos and other litigation matters. 53