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 nine months ended September 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, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “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; • 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; 41 • 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 the sales of our products; • any loss of, or a significant reduction in purchases by, our largest customers, material nonpayment or nonperformance by any of our key customers, and difficulty collecting receivables; • 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 and growing recognition among consumers of the dangers of climate change, which may affect demand for our products, our supply chain, and our results of operations; • 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; • 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 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 42 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 emissions standards compliance. Market penetration of vehicles with a turbocharger is expected to increase from approximately 52% in 2020 to approximately 54% 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 in the short to medium term. In the first half of 2021, a significant increase in battery electric vehicle (“BEV”) sales has been observed in Europe and China, with BEV representing, respectively 6% and 8% of vehicles 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, b olster 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. The Company acknowledges 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 a 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 in the short to medium-term. Mid-to-long-term, the US President has signed an executive order with the goal of making half of all new vehicles sold in 2030 zero-emissions vehicles, including battery electric, plug-in hybrid electric, or fuel cell electric vehicles, which is expected to impact the powertrain mix . In China, the roadmap released by the China Society of Automotive Engineers, Energy-saving and New Energy Vehicle Technology Roadmap 2.0, outlines a technology path for the next ten years that aims at finding a balance between fuel consumption improvement for hybrids and the introduction of electric vehicles. In that context, the turbocharger industry is expected to keep contributing to fuel economy optimization of both conventional gasoline and diesel vehicles and hybrid vehicles. 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 vehicles. In addition, fuel cell vehicles also require a high-performance electric boosting system. In the commercial vehicle market, we expect a slower transition to BEVs, which could also bolster turbo penetration. 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. At the same time, the global semiconductor shortage is creating uncertainty across multiple industries, including the automotive industry, and will keep influencing our operating activity until mid of 2022 at least. Automotive OEMs have reduced production plans in the first two quarters of 2022. The Company is currently reviewing production levels 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. In addition, our business uses substantial amounts of energy in production, and our production activities may therefore be impacted by power outages in the places where we produce our products, such as China (Jiangsu province in particular). As of September 30, 2021, Garrett plants in China have not experienced power outage impacts at our own production facilities. However, reduced supplier capacity may not meet our demands, and we may also encounter demand reduction from customers or power cuts in our own plants going forward. Any power outage impacts are closely monitored. In addition, as of September 30, 2021, the global economy has experienced an increased risk of shortages and other disruptions to global supply chains, including as a result of the continuing impact of the COVID-19 pandemic. Emergence from Chapter 11 For more detailed information regarding our 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 caused by the COVID-19 pandemic, we have observed a fast recovery in all geographies since mid-2020, which 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 third 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 43 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 was 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 2% and commercial vehicles of 5%. As a result, we estimate that a contraction of approximately 12% for the combined light and commercial vehicle turbocharger industry volume occurred in 2020 and rebound is not expected until 2022 due to semiconductor shortage in the overall automotive industry. 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 the 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 the 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. 44 The following charts show our percentage of revenues by geographic region and product line for the three and nine months ended September 30, 2021 and the percentage change from the prior year comparable period. By Geography Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 By Product Line Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 • We are a global business that generated revenues of approximately $0.8 billion and $2.8 billion for the three and nine months ended September 30, 2021, respectively. 45 • Light vehicle products (which includes diesel and gas products, including products for passenger cars, SUVs, light trucks, and other products) accounted for approximately 66% and 68% of our revenues for the three and nine months ended September 30, 2021, respectively. Commercial vehicle products (products for on-highway trucks and off-highway trucks, construction, agriculture and power-generation machines) accounted for 19% and 19% of our revenues for the three and nine months ended September 30, 2021, respectively. • Our OEM sales contributed approximately 85% and 87% of our revenues while our aftermarket and other products contributed 15% and 13% of our revenues for the three and nine months ended September 30, 2021, respectively. • Approximately 47% and 51% of our revenues came from sales to customers located in Europe, 34% and 33% from sales to customers located in Asia, 17% and 15% from sales to customers in North America, and 2% and 1% from sales to customers in other international markets for the three and nine months ended September 30, 2021, respectively. Results of Operations for the three and nine months ended September 30, 2021 compared with the three and nine months ended September 30, 2020 Net Sales For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Net sales $ 839 $ 804 $ 2,771 $ 2,026 % change compared with prior period 4.4 % 36.8 % Three Months Ended September 30, 2021 compared with Three Months Ended September 30, 2020 The change in net sales for the three months ended September 30, 2021 compared with the three months ended September 30, 2020 is attributable to the following: Our net sales increased for the three months ended September 30, 2021 compared to the prior-year period by $35 million or 4.4% (including a favorable impact of $18 million or 2.2% due to foreign currency translation driven by a higher Euro-to-US dollar exchange rate). Gasoline product sales increased by $10 million or 3% (including a favorable impact of $11 million or 3% due to foreign currency translation) over the same period last year, with both ramp-up to peak volumes and new launches of certain products in North America and other regions partially offsetting the impact of the semiconductor shortage on net sales in Europe. Diesel product sales in the period decreased by $9 million or 4% (including a favorable impact of $4 million or 1% due to foreign currency translation), primarily driven by the impact of the semiconductor shortage on net sales in Europe. 46 Commercial vehicle sales increased by $17 million or 12% (including a favorable impact of $2 million or 2% due to foreign currency translation), primarily driven by the continuing recovery in customer demand following the pandemic related disruptions experienced in 2020, with both ramp-up to peak volumes and new launches of certain products in Europe and North America off-highway business, which offset the market decline in China following the implementation of the heightened China 6a emissions standards for heavy-duty trucks on 1 July 2021 and in North America on-highway due to component shortage. Aftermarket sales improved by $20 million or 23% (including a favorable impact of $1 million or 1% due to foreign currency translation), primarily driven by North America off-highway business and service replacements in aftermarket, following economic recovery in major regions after pandemic related disruptions. Nine Months Ended September 30, 2021 compared with Nine Months Ended September 30, 2020 The change in net sales for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020 is attributable to the following: Our net sales increased for the nine months ended September 30, 2021 compared to the prior-year period by $745 million or 36.8% reported (including a favorable impact of $143 million or 7.1% due to foreign currency translation driven by a higher Euro-to-US dollar exchange rate). Gasoline product sales increased by $307 million or 40% (including a favorable impact of $64 million or 8% due to foreign currency translation), primarily driven by the continuing recovery in customer demand following the pandemic related disruptions experienced in 2020, with both ramp-up to peak volumes and new launches of certain products in North America and China. Diesel product sales increased by $225 million or 38% (including a favorable impact of $49 million or 9% due to foreign currency translation), primarily driven by the strong recovery in customer demand in the first six months ending June, 30 2021 following the pandemic related disruptions experienced in 2020, which was partially offset by the semiconductor shortage in the three months ended September 30, 2021. Commercial Vehicle sales increased by $150 million or 39% (including a favorable impact of $19 million or 5% due to foreign currency translation), primarily driven by the continuing recovery in customer demand following the pandemic related disruptions experienced in 2020 and with both ramp-up to peak volumes and new launches of certain products in Europe and China. Aftermarket sales increased by $61 million or 26% (including a favorable impact of $9 million or 4% due to foreign currency translation), primarily due to continuing recovery in customer demand following the pandemic-related disruptions experienced in 2020 driven by service replacements. 47 Cost of Goods Sold For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Cost of goods sold $ 676 $ 657 $ 2,219 $ 1,661 % change compared with prior period 2.9 % 33.6 % Gross profit percentage 19.4 % 18.3 % 19.9 % 18.0 % Three Months Ended September 30, 2021 compared with Three Months Ended September 30, 2020 Costs of goods sold increased for the three months ended September 30, 2021 compared to the prior-year period by $19 million or 2.9% (including an unfavorable impact of $14 million or 2.1% due to foreign currency translation). This increase in cost of goods sold was primarily driven by higher direct material and labor costs of $10 million, an increase in freight costs of $7 million (of which $5 million represents transportation inflation), and an increase in R&D expenses of $5 million as we continue to invest in new technologies, which was partially offset by benefits from productivity including higher volume leverage. Gross profit percentage increased by 1.1% primarily due to favorable impact of productivity (2.8%) and other factors (1.1%) mainly driven by the non-recurrence of environmental costs in Brazil incurred in the prior year and China Government incentives received in 2021, which was partially offset by unfavorable impacts from inflation (2.2%), unfavorable impacts from price net of a favorable mix (0.5%), and an unfavorable impact from repositioning costs (0.1%). Nine Months Ended September 30, 2021 compared with Nine Months Ended September 30, 2020 Costs of goods sold increased in the nine months ended September 30, 2021 compared to the prior-year period by $558 million or 33.6% (including an unfavorable impact of $106 million or 6.4% due to foreign currency translation). This increase in cost of goods sold was primarily driven by higher direct material and labor costs of $462 million driven by higher volume, an increase in freight costs of $31 million (of which $15 million represents transportation inflation), as well as an increase in R&D expenses of $15 million as we continue to invest in new technologies. Gross profit percentage increased by 1.9% primarily due to favorable impact of productivity including higher volume leverage (6.0%) and the favorable impacts from foreign and exchange rates (0.4%), partially offset by unfavorable impacts from mix and price (2.3%), unfavorable impacts from inflation (1.6%), unfavorable impact from repositioning costs (0.2%), and other factors (0.3%) mainly driven by prior year period cost savings actions to mitigate COVID-19 impact, which was partially offset by the non-recurrence of environmental costs in Brazil incurred in the prior year and China Government incentives received in 2021. Selling, General and Administrative Expenses For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Selling, general and administrative expense $ 60 $ 98 $ 166 $ 202 % of sales 7.2 % 12.2 % 6.0 % 10.0 % Three Months Ended September 30, 2021 compared with Three Months Ended September 30, 2020 Selling, general and administrative (“SG&A”) expenses decreased for the three months ended September 30, 2021 compared to the prior-year period by $38 million, mainly driven by $44 million of the strategic planning costs incurred during the three months ended September 30, 2020. This was partially offset by labor inflation, higher accrual for employees incentives which reflect the expected payouts in 2021, a $2 million capital tax expense and an unfavorable impact of foreign exchange. We also implemented a number of cost savings initiatives in the three months ended September 30, 2020 to mitigate the impact of COVID-19, which were offset by the strategic planning costs incurred in the same period. As a percentage of net sales, SG&A for the three months ended September 30, 2021 was 7.2% versus 12.2% in the prior-year period. 48 Nine Months Ended September 30, 2021 compared with Nine Months Ended September 30, 2020 SG&A expenses decreased for the nine months ended September 30, 2021 compared to the prior-year period by $36 million, mainly driven by $51 million of strategic planning costs incurred during the nine months ended September 30, 2020. This was partially offset by labor inflation, higher accrual for employees incentives which reflect the expected payouts in 2021 and an unfavorable impact of foreign exchange. We also implemented a number of costs savings initiatives in the nine months ended September 30, 2020 to mitigate the impact of COVID-19, which were offset by the strategic planning costs incurred in the same year period. As a percentage of net sales, SG&A for the nine months ended September 30, 2021 was 6.0% versus 10.0% in the prior-year period. Other Expense, Net For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 Other expense, net $ — $ 14 $ 1 $ 45 % of sales — % 1.7 % — % 2.2 % Three Months Ended September 30, 2021 compared with Three Months Ended September 30, 2020 Other expense, net decreased for the three months ended September 30, 2021 compared to the prior-year-period by $14 million. The decrease is attributable to the cancellation of the liability related to the Honeywell Indemnity Agreement and associated litigation, following our emergence from Chapter 11. Nine Months Ended September 30, 2021 compared with Nine Months Ended September 30, 2020 Other expense, net decreased for the nine months ended September 30, 2021 compared to the prior-year-period by $44 million. The decrease is attributable to the cancellation of the liability related to the Honeywell Indemnity Agreement and associated litigation, following our emergence from Chapter 11. Interest Expense For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Interest expense $ 25 $ 20 $ 70 $ 56 Three Months Ended September 30, 2021 compared with Three Months Ended September 30, 2020 Interest expense increased in the three months ended September 30, 2021 compared to the prior-year period by $5 million, primarily due to $11 million in accretion expense on the Series B Preferred Stock, partially offset by $5 million lower interest expense on our current credit facilities compared to our credit facility in the prior-year period, before emergence from Chapter 11. Nine Months Ended September 30, 2021 compared with Nine Months Ended September 30, 2020 Interest expense increased in the nine months ended September 30, 2021 compared to the prior-year period by $14 million, mainly due to $18 million accrued on 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. 49 Non-operating (income) expense For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Non-operating (income) expense $ (4) $ 1 $ (4) $ (7) Three Months Ended September 30, 2021 compared with Three Months Ended September 30, 2020 Non-operating (income) expense for the three months ended September 30, 2021 increased to an income of $4 million from an expense of $1 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. Nine Months Ended September 30, 2021 compared with Nine Months Ended September 30, 2020 Non-operating (income) expense for the nine months ended September 30, 2021 decreased $3 million from income of $7 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, partially offset by higher non-service pension benefit in the current year period. Reorganization items, net For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Reorganization items, net $ (9) $ 4 $ (130) $ 4 Three Months Ended September 30, 2021 compared with Three Months Ended September 30, 2020 Reorganization items, net for the three months ended September 30, 2021 were a $9 million gain, representing the reversal of the excess accrual of professional service fees related to the Chapter 11 Cases. During the prior-year period, $6 million of expense within reorganization items was attributable to the write-off on debt issuance costs of the Pre-petition Credit Agreement. Nine Months Ended September 30, 2021 compared with Nine Months Ended September 30, 2020 Reorganization items, net for the nine months ended September 30, 2021 were a $130 million gain, representing a $502 million gain on the settlement of Honeywell claims, partially offset by $173 million professional service fees related to the Chapter 11 Cases, $79 million related to the termination of and expense reimbursement under the Stalking Horse Purchase Agreement, $39 million in Directors and Officers insurance related to Chapter 11 Cases, a $25 million write off on debt issuance costs of the Pre-petition Credit Agreement debt, $13 million in employee stock awards cancellation and $43 million in other costs mainly related to unsecured notes settlement. During the prior-year period, $6 million were attributable to the write-off on debt issuance costs of the Pre-petition Credit Agreement. 50 Tax Expense For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Tax expense $ 28 $ (1) $ 82 $ 11 Effective tax rate 30.8 % (10.0) % 18.3 % 16.9 % 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 nine months ended September 30, 2021 versus the prior-year periods. Net Income For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Net income $ 63 $ 11 $ 367 $ 54 Three Months Ended September 30, 2021 compared with Three Months Ended September 30, 2020 As a result of the factors described above, net income was $63 million for the three months ended September 30, 2021 as compared to net income of $11 million for the three months ended September 30, 2020. Nine Months Ended September 30, 2021 compared with Nine Months Ended September 30, 2020 As a result of the factors described above, net income was $367 million for the nine months ended September 30, 2021 as compared to net income of $54 million for the nine months ended September 30, 2020. Non-GAAP Measures Management intends 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. 51 EBITDA and Adjusted EBITDA (1) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Net income — GAAP $ 63 $ 11 $ 367 $ 54 Net interest expense 24 19 67 53 Tax expense (benefit) 28 (1) 82 11 Depreciation 23 23 70 60 EBITDA (Non-GAAP) $ 138 $ 52 $ 586 $ 178 Other expense, net (which consists of indemnification, asbestos and environmental expenses) (2) — 14 — 44 Non-operating income (3) (3) (3) (9) (8) Reorganization items, net (4) (9) 4 (130) 4 Stock compensation expense (5) 2 2 5 8 Repositioning charges (6) 3 2 14 8 Foreign exchange loss on debt, net of related hedging loss — 5 9 4 Professional service costs (7) 1 44 1 53 Capital tax expense (8) 2 — 2 — Adjusted EBITDA (Non-GAAP) $ 134 $ 120 $ 478 $ 291 (1) We evaluate performance based on 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, foreign exchange gain (loss) on debt, net of related hedging (gain) loss, Spin-Off costs, professional services costs and Capital tax expense. 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 the comparability of our results. In addition, our management may use Adjusted EBITDA in setting performance incentive targets to align performance measurement with operational performance. (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 was expected 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 includes 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 Agreements. 52 (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 the period subsequent to the Effective Date. See Note 1, Background and Basis of Presentation of the 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. Costs incurred in 2020 relate to the period before the Debtors filed for relief under Chapter 11 of the Bankruptcy Code in September 2020. Costs incurred in 2021 relate to strategic planning activities for the Company which occurred following the effective date. We consider these costs to be unrelated to our ongoing core business operations. (8) The canton of Vaud, Switzerland generally provides for crediting the cantonal corporate income tax against capital tax. There was no income tax payable for the period ended September 30, 2021 and therefore the 2021 capital tax due of $2 million was recorded in Selling, General, and Administrative expenses. 53 Three Months Ended September 30, 2021 compared with Three Months Ended September 30, 2020 For the three months ended September 30, 2021, Garrett’s Adjusted EBITDA of $134 million increased $14 million compared to the same period last year, mainly due to benefits from productivity and positive mix, offset by metal, labor and transportation inflation. In the three months ended September 30, 2021, our volumes totaled 3.1 million units, a decrease of approximately 1% from the three months ended September 30, 2020 and a decrease of 8.8% from the three months ended June 30, 2021. Our Adjusted EBITDA margin in the three months ended September 30, 2021 of 16.0% represented a year-over-year improvement of 105 basis points. We benefited from a positive sales mix in the three months ended September 30, 2021 due to the global semiconductor shortages as OEMs are placing greater effort in producing their larger, higher-margin vehicles. We also maintained our focus on productivity in the three months ended September 30, 2021 as rising commodity prices led to higher raw material costs, particularly for aluminum and steel. We recovered a majority of the increase from our customer pass-through agreements, especially for nickel, and continue to actively manage our supply base and cost recovery mechanisms with the aim of minimizing the impact of materials cost inflation. SG&A increased by $3 million which represents labor inflation year-over-year. Also, for the three months ended September 30, 2020, we took a number of temporary cost control and cash management actions to combat the Covid crisis. R&D expenses increased by $5 million as we continue to invest in new technologies. The benefit from foreign currency translation in the three months ended September 30, 2021 was $2 million. Nine Months Ended September 30, 2021 compared with Nine Months Ended September 30, 2020 For the nine months ended September 30, 2021, Garrett’s Adjusted EBITDA of $478 million increased $187 million compared to the same period last year, mainly due to benefits from volume and productivity, partially offset by mix and metal, labor and transportation inflation. In 2021, our volumes totaled 10.4 million units, an increase of approximately 30% from 2020. 54 Our Adjusted EBITDA margin year-to-date of 17.3% represented a year-over-year improvement of 290 basis points. We started the year with high volume demand following the COVID-19 crisis recovery, but have been facing demand volatility driven by the global semiconductor shortage, primarily for the three months ended June 30, 2021 and September 30, 2021. We also maintained our focus on productivity in the nine months ended September 30, 2021 as rising commodity prices led to higher raw material costs, particularly for aluminum and steel. We recovered a majority of the increase from our customer pass-through agreements, especially for nickel, and continue to actively manage our supply base and cost recovery mechanisms to minimize the impact of materials cost inflation. SG&A increased by $16 million and includes year-over-year labor inflation and increased accrual for employee incentives, reflecting expected payout in 2021 and was partially offset by bad debt recovery. Also, for the six months ended September 30, 2020, we took a number of temporary cost control and cash management actions to combat the Covid crisis. R&D expenses increased by $15 million as we continue to invest in new technologies. The benefit from foreign currency translation in the nine months ended September 30, 2021 was $33 million and was primarily driven by a higher Euro-to-US dollar exchange rate versus the prior-year period. Cash flow from operations less Expenditures for property, plant and equipment (1) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2021 2020 2021 2020 (Dollars in millions) Net cash (used for) provided by operating activities — GAAP $ (55) $ (41) $ (446) $ (136) Expenditures for property, plant and equipment (34) (16) (74) (79) Cash flow from operations less Expenditures for property, plant and equipment (Non-GAAP) $ (89) $ (57) $ (520) $ (215) (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 $305 million for the nine months ended September 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 $6 million in prior-period payment to Honeywell. Additionally, there was an increase in net loss, net of deferred taxes and non-cash gains related to the reorganization of $46 million, partially offset by a favorable impact from working capital of $15 million and an increase of $102 million in other items (mainly other assets). Additionally, Expenditures for property, plant and equipment expenses decreased by $5 million. Liquidity and Capital Resources During the nine months ended September 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 September 30, 2021 , the Company reported a cash and cash equivalents position of $456 million (not including $78 million in restricted cash as of September 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 September 30, 2021 , the Company had no borrowings outstanding under the Revolving Facility, $4 million of outstanding letters of credit, and available borrowing capacity of $296 million. In addition, on September 30, 2021 , the Company had $1,237 million outstanding in Term Loan 55 Facilities and $24 million in available letter of credit facilities. On September 30, 2021, the Company filed the A&R Certificate of Designations amending and restating the terms of the Series B Preferred Stock. The A&R Certificate of Designations became effective on October 1, 2021. The A&R Certificate of Designations amended and restated the original Series B Certificate of Designations to, among other things, (i) require the Company to effect a Planned Partial Early Redemption and (ii) provide that the Holder Put Right cannot be exercised until after December 31, 2022 at the earliest (subject to the prior occurrence of a triggering event), unless the Planned Partial Early Redemption does not occur on or prior to March 31, 2022, in which case the Holder Put Right can be exercised (subject to the prior occurrence of a triggering event) after March 31, 2022 on the terms set forth in the A&R Certificate of Designations. In connection with the amendment to the Series B Certificate of Designations, Garrett expects to partially redeem the Series B Preferred Stock prior to the end of the first quarter of 2022, which would result in a cash payment of approximately $213 million as of January 1, 2022. 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 the issuance of $577 million of Series B Preferred Stock. 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 (“Nasdaq”) under the ticker symbol “GTX” on May 3, 2021. On October 1, 2021, our Series A Preferred Stock commenced trading on Nasdaq under the ticker symbol “GTXAP.” 56 Cash Flow Summary for the Nine Months Ended September 30, 2021 and 2020 For the Nine Months Ended September 30, 2021 2020 (Dollars in millions) Cash (used for) provided by: Operating activities $ (446) $ (136) Investing activities (73) (79) Financing activities 362 340 Effect of exchange rate changes on cash and restricted cash (2) 3 Net decrease in cash, cash equivalents and restricted cash $ (159) $ 128 Cash used for operating activities increased by $310 million for the nine months ended September 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 $6 million from a prior-period payment to Honeywell. Additionally, there was an increase in net loss, net of deferred taxes and non-cash gains related to the reorganization of $46 million, partially offset by a favorable impact from working capital of $15 million and an increase of $102 million in other items including prepayments made in 2020 of approximately $39 million for Directors and Officers insurance in relation to our reorganization. Cash used for investing activities decreased by $6 million for the nine months ended September 30, 2021 versus the prior-year period, primarily due to a decrease in Expenditures for property, plant and equipment of $5 million. Cash provided by financing activities increased by $22 million for the nine months ended September 30, 2021 versus the prior-year period. The change was driven by $1,301 million in proceeds from the issuance of Series A Preferred Stock and $1,221 million in proceeds from the issuance of the new long-term debt, partially offset by $200 million repayments on the DIP Credit Agreement, $1,513 million payments of the old long-term debt and $69 million in payments for the 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 July and halt operations for approximately one week in December; our European customers generally reduce production during 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 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. 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 the timing of supplier payments for capital expenditures, changes in working capital balances related to the seasonality of our sales 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 There have been no material changes in the Company’s contractual obligations since June 30, 2021, other than the amendment to the Series B Certificate of Designations described above that has the effect of bringing forward the redemption of outstanding shares of Series B Preferred Stock such that the Present Value (as defined in the A&R Certificate of Designations) of all remaining outstanding shares of Series B Preferred Stock will be $400 million on or prior to March 31, 2022. The Company's new leases for use in its operations increased total lease payments by $19 million, but did not materially change our lease payments due within five years, compared to the amounts reported in our 2020 Form 10-K. 57 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. 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 FASB 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 the 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.