Garrett Motion Inc. 10-K

Item 7. 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 Financial Statements and related notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, 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 this Annual Report on Form 10-K, 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 years ended December 31, 2021 , 2020 and 2019 . Unless the context otherwise requires, references to “Garrett,” “we,” “us,” “our,” and “the Company” refer to Garrett Motion Inc. and its subsidiaries. Overview and Business Trends Garrett designs, manufactures and sells highly engineered turbocharger and electric-boosting technologies for light and commercial vehicle 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. The turbocharger industry is expected to increase from approximately 44 million units in 2021 to approximately 55 million units by 2026, according to IHS for light vehicle and KGP and PSR for commercial vehicle on-highway and off-highway. The turbocharger industry growth is mainly driven by an expected increase in the penetration of hybrid vehicles, from 10 million hybrid cars globally in 2021 to an anticipated 31 million hybrid cars globally in 2026. In 2021, a significant increase in BEV sales has been observed in Europe and China, with BEV representing, respectively 6% and 11% 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, have b olstered 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 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 United States, the tightening of CO2/mileage targets is expected to drive higher turbo penetration in the short to medium-term. The President of the United States 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 accelerate the electrification trend in the mid-to-long term . 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 to find 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 turbocharger demand will grow as turbochargers 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 industry, we expect a slower transition to BEVs, due to specific mission profile and associated range and charging time constraints, which translates into more resilient turbocharger demand, as most commercial vehicles are turbocharged. In addition, low or zero emission alternative fuels for ICE, like natural gas or hydrogen, are expected to gain momentum in coming years, supporting continued turbocharger demand. Growth in the turbocharger industry 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 component demand. While these positive factors do not isolate the turbocharger industry from fluctuations in global vehicle production volumes, such factors may mitigate the negative impact of macroeconomic cycles 48 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 December 31, 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 December 31, 2021, the global economy has experienced an increased risk of shortages and other disruptions to global supply chains as a result of the continuing impact of the COVID-19 pandemic. The global turbocharger industry is traditionally subject to inflationary pressures with respect to raw materials which place operational and profitability burdens on the entire supply chain. We expect commodity cost volatility to continue to have an impact on future earnings. Accordingly, we seek to mitigate both inflationary pressures and our material-related cost exposures by negotiating commodity cost contract escalation or pass-through agreements with customers and cost reductions with suppliers. Emergence from Chapter 11 On the “Petition Date, the Debtors each filed a voluntary petition for relief under the “Bankruptcy Code in the “Bankruptcy Court. The Chapter 11 Cases were jointly administered under the caption “In re: Garrett Motion Inc., 20-12212.” On April 20, 2021, the Debtors filed the Plan. On April 26, 2021, the Bankruptcy Court entered the “Confirmation Order among other things, confirming the Plan. On the Effective Date, the conditions to the effectiveness of the Plan were satisfied or waived and the Company emerged from bankruptcy. In connection with its emergence from Chapter 11, the Company effected certain changes to its capital structure. On the Effective Date, pursuant to the Plan, all shares of the common stock of the Company outstanding prior to the Effective Date (the “Old Common Stock”) were cancelled. The Company paid $69 million to holders of Old Common Stock who had made a cash-out election under the Plan, and issued 65,035,801 shares of new common stock, par value $0.001 per share (the "Common Stock") to holders of Old Common Stock who had not made such a cash-out election. The Company issued 247,768,962 shares of its new convertible series A preferred stock, par value $0.001 per share (the “Series A Preferred Stock”) to the parties to the Plan Support Agreement, the Equity Backstop Commitment Agreement (as both defined in the Plan) and participants in the rights offering by the Company for aggregate consideration of $1,301 million. The Company also issued 834,800,000 shares of its new Series B Preferred Stock, par value $0.001 per share (the "Series B Preferred Stock") to Honeywell, and paid Honeywell $375 million, in satisfaction and discharge of certain claims of Honeywell. The obligations of the Debtors under the Company’s pre-petition credit agreement were cancelled, the applicable agreements governing such obligations were terminated and holders of Allowed Pre-petition Credit Agreement Claims (as defined in the Plan) received payment in cash in an amount equal to such holder’s Allowed Pre-petition Credit Agreement Claim. Additionally, the Company repaid its outstanding principal balance, accrued pre-petition and default interest of (i) $307 million on its five-year term A loan facility, (iii) $374 million with respect to the EUR tranche of its seven-year term B loan facility, and (iii) $422 million with respect to the USD tranche of its seven-year term B loan facility, and repaid $374 million on its revolving credit facility and repaid its accrued pre-petition hedge obligations of $20 million. The Company also paid in full $101 million of interest and principal outstanding on, and terminated, its Senior Secured Super-Priority Debtor-in-Possession Credit Agreement entered into in connection with our Chapter 11 proceedings (the "DIP Credit Agreement"). The obligations of the Debtors under the indenture governing the Company’s 5.125% senior notes due 2026 notes were cancelled, the applicable agreements governing such obligations were terminated and holders of Allowed Pre-petition Credit Agreement Claims received payment in cash in an amount equal to such holder’s Allowed Senior Subordinated Noteholder Claims (as defined in the Plan). With respect to the indenture governing the senior notes and the Allowed Senior Subordinated Noteholder Claims, the Company repaid its outstanding principal balance of €350 million, or $423 million, accrued pre-petition interest of $10 million, post-petition interest of $13 million, and payment of $15 million in connection with the complaint in the Bankruptcy Court against the indenture trustee seeking declaratory judgment on two claims for relief that the Debtors did not owe, and the holders of notes were not entitled to any make-whole premium under the indenture. 49 Additionally, the Company and certain of its subsidiaries entered into an agreement (the "Credit Agreement") providing secured debt facilities consisting of a seven-year secured first-lien U.S. Dollar term loan facility in the amount of $715 million (the “Dollar Facility”), a seven-year secured first-lien Euro term loan facility in the amount of €450 million (the “Euro Facility,” and together with the Dollar Facility, the “Term Loan Facilities”); and a five-year senior secured first-lien revolving credit facility in the amount of $300 million providing for multi-currency revolving loans, (the “Revolving Facility,” and together with the Term Loan Facilities, the “Credit Facilities”). The proceeds drawn under the Credit Facilities were reduced by deferred financing costs of $38 million, and deferred financing costs of $25 million on repaid historical debt were expensed; and the Company paid certain pre-petition claims, transaction fees, stock incentive payments and other expenses incurred in connection with the Plan. For additional information regarding our emergence from Chapter 11, see Note 2 , Plan of Reorganization of the Notes to the Consolidated Financial Statements. Impact of COVID-19 Pandemic Update Our sales were adversely affected in the fiscal year 2020 caused by the COVID-19 pandemic, however we observed a fast recovery in all geographies since mid-2020. The direct adverse impact on our financial performance began to dissipate over the course of fiscal year 2021. All our facilities are fully operational since the third quarter of 2020. There is continued uncertainty related to variant strains that can have direct or indirect repercussions on our operations and ultimately financial performance which cannot be estimated at this time. See " Item 1A. Risk Factors - The COVID-19 pandemic has adversely impacted and is expected to further adversely impact our business and results of operations ." Results of Operations for the Years Ended December 31, 2021, 2020 and 2019 Net Sales 2021 2020 2019 (Dollars in millions) Net sales $ 3,633 $ 3,034 $ 3,248 % change compared with prior period 19.7 % (6.6) % (3.8 %) 2021 compared with 2020 The change in net sales compared to the prior year is attributable to the following: Our net sales for 2021 were $3,633 million, an increase of $599 million or 20% (including a positive impact of $132 million or 5% due to foreign currency translation driven by higher Euro-to-US dollar exchange rates). Gasoline product sales increased by $245 million or 21% (including a favorable impact of $64 million or 6% due to foreign currency translation), primarily driven by program launches and ramp-ups in China and North America. Diesel product sales increased by $124 million or 14% (including a favorable impact of $42 million or 5% due to foreign currency translation), primarily driven by the strong recovery in customer demand beginning of the year 2021 following the pandemic-related disruptions experienced in 2020, which was partially offset by the semiconductor shortage at customers particularly in the second half of 2021. 50 Commercial Vehicle sales increased by $154 million or 28% (including a favorable impact of $17 million or 3% 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 and new launches of certain products in Europe and China. Aftermarket sales increased by $76 million or 23% (including a favorable impact of $7 million or 2% 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 and the development actions undertaken such as new distributor openings, new product introductions and targeted distribution channel strategy. 2020 compared with 2019 Our net sales for 2020 were $3,034 million, a decrease of $214 million or 6.6% (despite a positive impact of $43 million or 1% due to foreign currency translation driven by a higher Euro-to-US dollar exchange rate). Gasoline products increased by $87 million or 8% (including a favorable impact of $20 million or 2% due to foreign currency translation), primarily driven by strong China demand and program launches and ramp-ups in North and South America. Diesel products decreased by $165 million or 15% (partially offset by a favorable impact of $17 million or 2% due to foreign currency translation), primarily driven by disruptions in the industry from the COVID-19 pandemic. Commercial Vehicles decreased by $75 million or 12% (partially offset by a favorable impact of $4 million or 1% due to foreign currency translation), primarily driven by COVID-19 pandemic-related disruptions in the industry. Aftermarket sales decreased by $47 million or 12% (partially offset by a favorable impact of $1 million or 1% due to foreign currency translation), primarily driven by a decline in Europe and North America businesses due to pandemic-related soft demand and lower mileage driven. Cost of Goods Sold 2021 2020 2019 (Dollars in millions) Cost of goods sold $ 2,926 $ 2,495 $ 2,555 % change compared with prior period 17.3 % (2.3) % (1.7 %) Gross Profit percentage 19.5 % 17.8 % 21.3 % 2021 compared with 2020 Cost of goods sold increased in 2021 compared to the prior year by $431 million or 17.3% (including an unfavorable impact of $99 million due to foreign exchange rates). 51 Cost of Goods Sold Gross Profit (Dollars in millions) 2020 Full Year $ 2,495 $ 539 Volume 278 135 Product mix 74 (8) Price, net of inflation passthrough — (24) Commodity & Transportation Inflation 71 (71) Productivity, net (108) 120 Research & development 17 (17) Foreign exchange rate impacts 99 33 2021 Full Year $ 2,926 $ 707 The increase in cost of goods sold was primarily driven by our higher sales volumes and foreign currency impacts which contributed to increases of $278 million and $99 million, respectively, in cost of goods sold. Cost of goods sold further increased by $74 million due to an unfavorable product mix and $71 million due to inflation on commodities and transportation costs, partially offset by benefits from our continued focus on productivity. R&D expenses increased by $17 million which reflects our shift in investment in new technologies and the temporary cost control actions taken in 2020 to mitigate the COVID-19 impact. The increase in gross profit was mainly driven by the higher sales volumes and increased productivity. These increases were partially offset by the unfavorable product mix and inflation as discussed above, as well as $24 million of pricing reductions net of inflation recoveries from customer pass-through agreements during the year and $17 million of higher R&D costs. The impact of foreign currency translational, transactional and hedging effects further increased gross profit by $33 million. 2020 compared with 2019 Cost of goods sold for 2020 was $2,495 million, a decrease from prior year of $60 million or 2.3% (partially offset by an unfavorable impact of $25 million due to foreign exchange rates). Cost of Goods Sold Gross Profit (Dollars in millions) 2019 Full Year $ 2,555 $ 693 Volume (183) (94) Product mix 114 (43) Price, net of inflation pass-through — (15) Productivity, net 3 (38) Research & development (19) 19 Foreign exchange rate impacts 25 17 2020 Full Year $ 2,495 $ 539 The decrease in cost of goods sold was primarily driven by our lower sales levels which contributed to a decrease of $183 million in cost of goods sold. R&D expenses also decreased $19 million as a result of our cost saving actions implemented to ease the impact of COVID-19 on our financial performance, including temporary salary reductions and state funded lay-offs. Additionally, cost of goods sold increased by $114 million from unfavorable product mix and premium freight as a result of high volume volatility, partially offset by benefits from productivity and the cost saving actions implemented as discussed above. Foreign currency impacts from translational, transactional and hedging effects also increased cost of goods sold by $25 million. The decrease in gross profit was mainly driven by the lower sales levels as well as the impacts of product mix. In addition, we incurred higher premium freight cost and one time fixed costs, partially offset by benefits from productivity. These decreases were partially offset by $19 million of lower R&D costs and $17 million from impacts from foreign currency effects. 52 Selling, General and Administrative Expenses 2021 2020 2019 (Dollars in millions) Selling, general and administrative expense $ 216 $ 260 $ 231 % of sales 5.9 % 8.6 % 7.1 % 2021 compared with 2020 Selling, general and administrative (“SG&A”) expenses decreased for 2021 compared to the prior year by $44 million, mainly driven by $52 million of strategic planning costs incurred in 2020, $11 million of bad debt recovery, $5 million of lower stock based compensation costs and a $2 million capital tax expense recorded in 2020. These decreases were partially offset by $4 million in labor inflation, a $13 million increase in accruals for employees incentives which reflect the expected payouts in 2022, a $6 million increase in foreign exchange impacts and $3 million of cost savings initiatives undertaken in the prior year to mitigate the impact of COVID-19. As a percentage of net sales, SG&A for 2021 was 5.9% versus 8.6% in the prior year. 2020 compared with 2019 SG&A expenses for 2020 were $260 million, an increase of $29 million compared to the prior year. The increase was mainly driven by $52 million of professional service fees primarily related to the strategic planning activities before the decision to file for relief under Chapter 11 of the Bankruptcy Code in September 2020, $4 million of bad debt related to a customer bankruptcy, and a $3 million increase in pension costs. These increases were partially offset by $31 million of cost saving actions implemented to ease the impact of COVID-19 on our financial performance, including merit freezes, state funded lay-offs, unpaid leaves and reductions in travel expenses and professional services, as well as one-time Spin-Off costs incurred in the prior year. As a percentage of net sales, SG&A for the current year was 8.6% versus 7.1% in the prior year. Other Expense, Net 2021 2020 2019 (Dollars in millions) Other expense, net $ 1 $ 46 $ 40 % of sales — % 1.5 % 1.2 % 2021 compared with 2020 Other expense, net decreased for 2021 compared to the prior year by $45 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. 2020 compared with 2019 Other expense, net increased in 2020 compared to 2019 by $6 million. The increase was attributable to a $12 million increase in legal fees incurred in connection with the Honeywell Indemnity Agreement. Interest Expense 2021 2020 2019 (Dollars in millions) Interest Expense $ 93 $ 79 $ 68 2021 compared with 2020 Interest expense increased in 2021 compared to the prior year by $14 million, mainly due to $29 million of interest accretion on the Series B Preferred Stock, partially offset by $16 million lower interest expense on our current credit facilities compared to our credit facility in the prior year before emergence from bankruptcy and prior year period fees related to amendments to our previous credit facilities. 53 2020 compared with 2019 Interest expense increased in 2020 compared to 2019 by $11 million, mainly due to $16 million of higher outstanding drawings under our prior revolving credit facility, additional fees associated with the amendment of our prior credit agreement, higher interest margins, post-petition banks’ cancellations of cross-currency interest rate swaps and supplementary financing under our prior DIP Credit Agreement, partially offset by $5 million of lower interest expense on our prior term loans due to voluntary prepayments thereunder in 2020. Non-operating (income) expense 2021 2020 2019 (Dollars in millions) Non-operating (income) expense $ (16) $ (38) $ 8 2021 compared with 2020 Non-operating (income) expense decreased by $22 million in 2021 from an income of $38 million in the prior year, primarily due to $47 million in foreign exchange impact on debt, which was unhedged as a consequence of restrictions placed on the Company during Chapter 11 proceedings, partially offset by $18 million higher non-service pension benefit in the current year and $8 million driven by interest income associated with unrealized marked-to-market gains on interest rate swaps. 2020 compared with 2019 Non-operating (income) expense in 2020 increased to an income of $38 million from an expense of $8 million in 2019, primarily due to a significant unhedged exposure driven by the termination of all derivatives and closing of the credit lines, as a consequence of the Chapter 11 filing. Reorganization items, net 2021 2020 2019 (Dollars in millions) Reorganization items, net $ (125) $ 73 $ — 2021 compared with 2020 Reorganization items, net for 2021 were a $125 million gain, representing a $502 million gain on the settlement of Honeywell claims, partially offset by $119 million higher professional service fees related to the Chapter 11 Cases compared to the prior-year period, $79 million related to the termination and an expense reimbursement under a share and asset purchase agreement entered into on the Petition Date by the Debtors, AMP Intermediate B.V. and AMP U.S. Holdings, LLC (the “Stalking Horse Purchase Agreement”) , $39 million in Directors and Officers insurance related to Chapter 11 Cases, a $19 million write off on debt issuance costs of the debt associated with our pre-petition credit agreement, $13 million in employee stock awards cancellation and $35 million in other costs mainly related to unsecured notes settlement. 2020 compared with 2019 Reorganization items, net for 2020 were $73 million, representing professional service fees related to Chapter 11 of $55 million, DIP Credit Agreement financing fees of $13 million and the write-off of the unamortized deferred high yield debt issuance cost of $6 million. There were no Reorganization items, net for the year ended December 31, 2019, since these were new items related to the Chapter 11 Cases. Tax Expense 2021 2020 2019 (Dollars in millions) Tax expense $ 43 $ 39 $ 33 Effective tax rate 7.9 % 32.8 % 9.5 % 54 2021 compared with 2020 The effective tax rate decreased by 24.9 percentage points in 2021 compared to 2020. The decrease was primarily attributable to the nontaxable gain on the settlement of the Honeywell claims during the year, increased tax benefits from an internal restructuring and fewer losses in jurisdictions that we do not expect to benefit from such losses; partially offset by increases in withholding taxes on unrepatriated earnings. The internal restructuring occurred predominantly in Q4 2021 which involved transfers of certain rights to intellectual property and various intercompany financing arrangements resulting in an approximately 11 percent point decrease to the effective tax rate during the current year. The overall increase in earnings from 2020 was also a contributing factor to a lower effective tax rate as the impact of certain recurring non-deductible permanent expenses and reserves for tax contingencies were diluted by higher earnings. 2020 compared with 2019 The effective tax rate increased by 23.3 percentage points in 2020 compared to 2019. The increase was primarily attributable to the absence of tax benefits related to the remeasurement of deferred tax assets and liabilities for tax law changes enacted during 2019, higher tax expense because of nondeductible costs incurred in connection with the Chapter 11 Cases, the resolution of tax audits and an increase in losses for jurisdictions where we do not expect to generate future tax benefits from such losses. The increase in the effective tax rate was also impacted by overall lower earnings compared to 2019 because of the adverse impacts of COVID-19, partially offset by tax benefits from lower withholding taxes on non-US earnings. Net Income 2021 2020 2019 (Dollars in millions) Net Income $ 495 $ 80 $ 313 2021 compared with 2020 Net income increased $415 million for 2021 as compared to 2020 primarily as result of higher gross profit of $168 million, lower SG&A expenses of $44 million, lower Other expenses of $45 million, and favorable Reorganisation items, net, of $198 million, as described above. 2020 compared with 2019 Net income decreased $233 million for 2020 as compared to 2019 primarily as result of lower gross profit of $154 million, higher SG&A expenses of $29 million, and unfavorable Reorganisation items, net, of $73 million, as described above. Non-GAAP Measures Management provides non-GAAP financial information, including EBITDA and Adjusted EBITDA, 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. We believe that EBITDA and Adjusted EBITDA are important indicators of operating performance and provide useful information for investors because: 1. 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 2. 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. 55 EBITDA and Adjusted EBITDA (non-GAAP) (1) Year Ended December 31, 2021 2020 2019 (Dollars in millions) Net income — GAAP $ 495 $ 80 $ 313 Net interest expense 82 76 61 Tax expense 43 39 33 Depreciation 92 86 73 EBITDA (Non-GAAP) $ 712 $ 281 $ 480 Other expense, net (which consists of indemnification, asbestos and environmental expenses) (2) — 45 40 Non-operating (income) expense (3) (12) 5 8 Reorganization items, net (4) (125) 73 — Stock compensation expense (5) 7 10 18 Repositioning charges (6) 16 10 2 Foreign exchange loss (gain) on debt, net of related hedging loss (gain) 9 (38) 7 Spin-off costs (7) — — 28 Professional service costs (8) — 52 — Capital tax expense (9) — 2 — Adjusted EBITDA (Non-GAAP) $ 607 $ 440 $ 583 (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 loss (gain) on debt, net of related hedging (gain) loss, Spin-Off costs, professional services costs and capital tax expense. (2) The accounting for the majority of our asbestos-related liability payments and accounts payable reflect the terms of the Honeywell Indemnity Agreement. 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. See Emergence from Chapter 11 . (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 Accounting Standards Codification (“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 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 and Note 2, Plan of Reorganization of the Notes to the Consolidated 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) Spin-Off costs primarily include costs incurred for the set-up of the IT, Legal, Finance, Communications and human resources functions after the Spin-Off on October 1, 2018. (8) 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. 56 (9) 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 year ended December 31, 2020 and therefore the 2020 capital tax due of $2 million was recorded in SG&A expenses. 2021 compared with 2020 As discussed above, Net income increased $415 million for 2021 as compared to 2020. For 2021, Garrett’s Adjusted EBITDA of $607 million increased by $167 million compared to the prior year, mainly due to benefits from volume and productivity, partially offset by mix and commodities and transportation inflation. In 2021, our volumes totaled 13.7 million units, an increase of approximately 14% from 2020. Our Adjusted EBITDA margin of 16.7% represented a year-over-year improvement of 220 basis points. We started the year with high volume demand representing a short-term increase in demand in connection with the macroeconomic recovery from the initial impacts of the COVID-19 pandemic, but have been facing demand volatility driven by the global semiconductor shortage, primarily for the last three quarters. We also maintained our focus on productivity in 2021 as rising commodity prices led to higher raw material costs, particularly for nickel, aluminum and steel alloys. 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. The increased productivity was partially offset by a $12 million increase in SG&A related to year-over-year labor inflation and increased accruals for employee incentives, reflecting expected payouts on employee incentive compensation schemes and was partially offset by bad debt recovery. We also took a number of temporary cost control and cash management actions in the second and third quarters of 2020 to combat the COVID-19 crisis. R&D expenses increased by $17 million which reflects our shift in investment in new technologies and the temporary cost control actions taken in 2020 to mitigate the COVID-19 impact. The benefit from foreign currency impacts from translational, transactional and hedging effects in 2021 was $28 million and was primarily driven by a higher Euro-to-US dollar exchange rate versus the prior-year period. 57 2020 compared with 2019 As discussed above, Net income decreased $233 million for 2020 as compared to 2019. For 2020, Garrett’s Adjusted EBITDA of $440 million decreased by $143 million compared to the same period in 2019, mainly due to drop in customer demand, stemming from the COVID-19 pandemic related disruptions in the industry and a mix headwind, partially offset by productivity and benefits from foreign currency impacts. In 2020, our volumes totaled 12.0 million units, a decrease of approximately 9% from 2019. Our Adjusted EBITDA margin of 14.5% represented a year-over-year degradation of 340 basis points. The 2020 performance was adversely affected by the COVID-19 related plant shutdowns in Mexico and India as well as production slowdowns across Europe, partially offset by increased recovery in China. During 2020, we implemented numerous cost control actions such as furloughs, reduced work schedules, and state-funded-leaves, to mitigate the impact of COVID-19 pandemic on our margin and to ensure we adapt our cost structure to the revenue drop. SG&A also increased by $9 million due primarily to $4 million of bad debt related to a customer bankruptcy and $3 million of increased pension costs. R&D expenses decreased by $19 million mainly as a result of our cost saving actions implemented to ease the impact of COVID-19 on our financial performance, including temporary salary reductions and state funded lay-offs. The benefit from foreign currency translational, transactional and hedging impacts in 2020 was $18 million and was primarily driven by a higher Euro-to-US dollar exchange rate versus the prior-year period. Liquidity and Capital Resources Overview Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, as well as borrowings under a senior secured revolving credit facility and the issuance of senior notes, commitments under both of which were cancelled in connection with the Chapter 11 Cases. During the pendency of our bankruptcy proceedings, we financed our operations with funds generated from operating activities and available cash and cash equivalents, and also had in place debtor-in-possession financing arrangements. At and following the completion of the Chapter 11 Cases and our emergence from bankruptcy, during the year ended December 31, 2021, we funded our operations primarily through the cash flows from operating activities, cash and cash equivalents, proceeds from the issuance of Series A Preferred Stock rights offerings and borrowings from Credit Facilities. On December 31, 2021, the Company reported a cash and cash equivalents position of $423 million (not including $41 million in restricted cash as of December 31, 2021) as compared to $592 million on December 31, 2020 (not including $101 million in restricted cash as of December 31, 2020). For 2022, we expect our capital spending to increase by approximately $20 million versus 2021 as we continue to increase our manufacturing capacity for new product launches and invest in strategic growth opportunities, in particular in the electrification of drivetrains. We also expect to repay $7 million on our Dollar Facility and incur payments of $197 million related to our Series B Preferred Stock. Additionally, we expect to pay $89 million related to purchase obligations which are entered into with various vendors in the normal course of business and are consistent with our expected requirements. Finally, we expect to make contributions of $7 million to our non-U.S. pension plans. 58 Beyond 2022, we expect to make redemptions on our Series B Preferred Stock for each of the years 2024 to 2027 of $18 million, $100 million, $100 million and $54 million, respectively. We may also be required to redeem the outstanding shares of Series B Preferred Stock on the exercise by holders of the Holder Put Right, following the occurrence of certain triggering events on or before December 30, 2022, which could increase our cash requirements by approximately $220 million. Additionally, holders of our Series A Preferred Stock are entitled to receive, and, as and if declared by a committee of disinterested directors of the Board out of funds legally available for such dividend, cumulative cash dividends at an annual rate of 11% on the stated amount per share plus the amount of any accrued and unpaid dividends on such share. These dividends accumulate whether or not declared, and as of December 31, 2021, the aggregate accumulated dividend was approximately $97 million. Our Board of Directors may elect to declare and settle dividends to the Holders of the Series A Preferred Stock in cash, subject to certain limitations in the Credit Agreement and to the funds legally available for such dividends. We expect to make payments in 2027 of $670 million and $510 million on our Dollar Facility and Euro Facility, respectively. Additionally, we expect to pay $5 million related to purchase obligations which are entered into with various vendors in the normal course of business and are consistent with our expected requirements. We believe the combination of expected cash flows, the funding received from Series A Preferred Stock issuance, the US Dollar and Euro term loan borrowings and the revolving credit facilities being committed until 2026, will provide us with adequate liquidity to support the Company's operations. Pre-Emergence DIP Credit Agreement On October 6, 2020, the Bankruptcy Court entered an order granting interim approval of the Debtors’ entry into the DIP Credit Agreement, with the lenders party thereto and Citibank N.A. as administrative agent. The DIP Credit Agreement provided for a senior secured, super-priority term loan (the “DIP Term Loan Facility”) with a maximum principal amount of $200 million. The proceeds of the DIP Term Loan Facility were used by the Debtors to (a) pay certain costs, premiums, fees and expenses related to the Chapter 11 Cases, (b) make payments pursuant to any interim or final order entered by the Bankruptcy Court pursuant to any “first day” motions permitting the payment by the Debtors of any prepetition amounts then due and owing; (c) make certain adequate protection payments in accordance with the DIP Credit Agreement and (d) fund working capital needs of the Debtors and their subsidiaries to the extent permitted by the DIP Credit Agreement. On the Effective Date, the Company paid in full $101 million of interest and principal outstanding on, and terminated, the DIP Credit Agreement. Emergence - Exit Financing and Entry into Credit Facilities Upon our emergence from Chapter 11 proceedings on the Effective Date, the Company completed the following transactions, which significantly improved the Company’s liquidity: • Entered into new Term Loan Facilities which resulted in net proceeds of of $1,221 million; • Obtained $300 million in commitments under the Revolving Facility, $125 million of which may be used for the issuance of letters of credit; • Obtained a $35 million letter of credit facility for a term of five years from the Effective Date; • Repaid $1,103 million of previously outstanding secured term loan facilities and accrued interest, repaid $374 million previously outstanding under its prior revolving credit facility, repaid $461 million in senior notes and accrued interest, and repaid $101 million of amounts owing under the DIP Credit Agreement and accrued interest; • Raised $1,301 million in a rights offering of Series A Preferred Stock; and • Settled $1,459 million of claims with Honeywell for a $375 million payment and the issuance of $577 million of Series B Preferred Stock. In connection with our emergence from Chapter 11 proceedings, the Company and certain of its subsidiaries entered into the Credit Facilities. As of December 31, 2021, the Company had no borrowings outstanding under the Revolving Facility, $3 million of outstanding letters of credit, and available borrowing capacity of $297 million. In addition, on December 31, 2021, the Company had $1,223 million outstanding in Term Loan Facilities and $27 million in available letter of credit facilities. On January 11, 2022, the Company amended the Credit Agreement to increase the amount of revolving loan commitments by $124 million to an aggregate amount of $424 million . The amendment also implements certain changes to benchmark and successor rates applicable to revolving loans under the Credit Agreement, including the removal of LIBOR as an available rate at which revolving loans could accrue and the addition for such revolving loans new 59 benchmark rate options based on the term or SOFR published by the Federal Reserve Bank of New York and based on the average bid reference rate administered by ASX Benchmarks Pty Limited. The outstanding term loan under the Credit Agreement continues to accrue interest in LIBOR, but will switch to an alternative benchmark rate when certain events occur, which alternative benchmark we anticipate will be term SOFR. For more information, see Note 16, Long-term Debt and Credit Agreements . We expect to repay approximately $7 million on the Dollar Facility in 2022 and approximately $670 million and $510 million on our Dollar Facility and Euro Facility, respectively, in 2027. See Note 16 , Long-term Debt and Credit Agreements of the Notes to the Consolidated Financial Statements for additional information regarding our Revolving Facility. In connection with the Company’s emergence from bankruptcy and pursuant to the Plan, the Company issued 247,768,962 shares of the Company’s Series A Preferred Stock to the Centerbridge Investors, the Oaktree Investors and certain other investors and parties. All outstanding Series A Preferred Stock will convert into Common Stock of the Company automatically upon the occurrence of certain triggering events. Additionally, holders of the Series A Preferred Stock have the right to convert their shares of Series A Preferred Stock into Common Stock at any time. As the Certificate of Designations governing the Series A Preferred Stock prohibits the issuance of fractional shares of Common Stock upon the conversion of any shares of Series A Preferred Stock, the Company must pay a cash adjustment in respect of any such fractional share of Common Stock that would be issuable pursuant to a conversion. See Note 21 , Equity of the Notes to the Consolidated Financial Statements for additional information regarding the Series A Preferred Stock. Additionally, pursuant to the Plan, on the Effective Date the Company issued 834,800,000 shares of Series B Preferred Stock to Honeywell in satisfaction of its claims against the Company arising from certain historical agreements between Honeywell and the Company. Under the terms of the Series B Preferred Stock issued to Honeywell pursuant to the Plan, we are obligated to pay an aggregate of $470 million to Honeywell, payable in annual cash instalments beginning in 2022 and ending in 2027, subject to various conditions and put and call rights set forth in the Certificate of Designations for the Series B Preferred Stock. On December 28, 2021, we elected to complete an early partial redemption of 345,988,497 shares of Series B Preferred Stock for an aggregate price of approximately $211 million. As of December 31, 2021, our liabilities with respect to our payment obligations to Honeywell under the terms of the Series B Preferred Stock were $395 million (representing the present value of all then remaining amortization payments due under the outstanding Series B Preferred Stock, discounted at a rate of 7.67% per annum). On February 18, 2022 we will make an early partial redemption payment of $197 million, and effective with that payment we will make future scheduled redemptions of $18 million, $100 million, $100 million and $54 million, in the years 2024 to 2027, respectively. Additionally, pursuant to the Certificate of Designations governing our Series B Preferred Stock, the holders of Series B Preferred Stock may, upon the occurrence of certain triggering events and subject to certain conditions, require us to redeem all shares of such holder's Series B Preferred Stock after December 30, 2022, which would increase our liquidity requirements by approximately $220 million. See Note 17 , Mandatorily Redeemable Series B Preferred Stock of the Notes to the Consolidated Financial Statements for additional information regarding the 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 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 sold or otherwise disposed of or liquidated assets or settled liabilities, with 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 Financial Statements. As a result of our improved liquidity, as noted above, expected cash flows, and removal of the risks and uncertainties surrounding the Chapter 11 Cases, we anticipate having sufficient funding to support our operations, and 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 60 trading on 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.” Share Repurchase Program On November 16, 2021, the Company announced that it had authorized a $100 million share repurchase program valid until November 15, 2022, providing for the pro rata purchase of shares of Series A Preferred Stock and Common Stock. As of December 31, 2021 the Company had repurchased $19 million of its Series A Preferred Stock and Common Stock, with $81 million remaining under the share repurchase program. For more information, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Issuer Purchases of Equity Securities Off-Balance Sheet Arrangement As of December 31, 2021 and 2020 the Company does not have any off-balance sheet arrangements. Honeywell Indemnity Agreement and Tax Matters Agreement On September 12, 2018, Garrett ASASCO entered into the Honeywell Indemnity Agreement and we entered into a tax matters agreement (the "Tax Matters Agreement") which governed the respective rights, responsibilities and obligations of Honeywell and us after the Spin-Off with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests). The Tax Matters Agreement generally provided that were responsible and would indemnify Honeywell for all taxes, including income taxes, sales taxes, VAT and payroll taxes, relating to Garrett for all periods, including periods prior to the completion date of the Spin-Off. The Plan, confirmed by the Bankruptcy Court, included a global settlement with Honeywell providing for (a) the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to the Indemnity Agreements and the Tax Matters Agreement, and (b) the dismissal with prejudice of the Honeywell Litigation in exchange for (x) a $375 million cash payment at Emergence and (y) the Series B Preferred Stock. See Note 2, Plan of Reorganization and Note 17, Mandatorily Redeemable Series B Preferred Stock , of the Notes to the Consolidated Financial Statements. 61 Cash Flow Summary for the Years Ended December 31, 2021, 2020 and 2019 Our cash flows from operating, investing and financing activities for the years ended December 31, 2021 , 2020 and 2019 , as reflected in the audited Consolidated Financial Statements included elsewhere in this Annual Report, are summarized as follows: Year Ended December 31 2021 2020 2019 (Dollars in millions) Cash provided by (used for): Operating activities $ (310) $ 25 $ 242 Investing activities (71) (80) (86) Financing activities 139 530 (163) Effect of exchange rate changes on cash 13 31 (2) Net (decrease) increase in cash and cash equivalents $ (229) $ 506 $ (9) 2021 compared with 2020 Cash used for operating activities increased by $335 million for 2021 versus the prior year, primarily due to a $375 million payment to Honeywell pursuant to the Plan in the current year compared to a $6 million payment to Honeywell in the prior year. We also saw an increase in net income, net of deferred taxes and non-cash gains related to the reorganization, of $82 million. These increases in cash used for operating activities were partially offset by a favorable impact from working capital of $47 million and $65 million mainly driven by prepayments made in 2020 for directors' and officers' insurance in relation to our reorganization. Cash used for investing activities decreased by $9 million for 2021 versus the prior year, primarily due to a decrease in Expenditures for property, plant and equipment of $8 million. Cash provided by financing activities decreased by $391 million for 2021 versus the prior year. 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 of debt repayments compared to $200 million of proceeds in the prior year on the DIP Credit Agreement, $1,515 million payments of the old long-term debt and $69 million in payments for the Cash-Out election. Additionally, payments of our revolving facilities were $730 million lower than in prior year, we redeemed $201 million of our Series B Preferred Stock (exclusive of $10 million of the redemption attributable to interest and included in cash used for operating activities), and repurchased $15 million of Series A Preferred Stock and $4 million of Common Stock. 2020 compared with 2019 Cash provided by operating activities decreased by $217 million for 2020 in comparison to 2019, primarily due to a decrease in net income, net of deferred taxes of $226 million, unfavorable impact from working capital of $194 million, partially offset by a decrease in obligations to Honeywell of $149 million and an increase of $54 million in other items (mainly accrued liabilities). Cash used for investing activities decreased by $6 million in 2020 compared to 2019, primarily due to a favorable impact from expenditures for property, plant and equipment of $22 million, due to higher customer contribution and lower spend, partially offset by an unfavorable impact from a prior year settlement received on the re-couponing of our cross currency swap contract of $19 million. Cash provided by financing activities increased by $693 million in 2020, as compared to 2019. The change was driven by a draw down, net of payments, on our Pre-petition Credit Agreement revolving facility of $349 million, payments of long-term debt during 2020 totaling $2 million, as compared to $163 million of such payments during 2019 and proceeds from the debtor-in-possession credit agreement, net of financing fees of $187 million. Cash flow from operations less Expenditures for property, plant and equipment (non-GAAP) 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 62 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. Management believes 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 Statements of Cash Flows. Year Ended December 31, 2021 2020 2019 (Dollars in millions) Net cash (used for) provided by operating activities — GAAP (310) 25 242 Expenditures for property, plant and equipment (72) (80) (102) Cash flow from operations less Expenditures for property, plant and equipment (Non-GAAP) $ (382) $ (55) $ 140 Cash flow from operations less Expenditures for property, plant and equipment (non-GAAP) decreased by $327 million for 2021 versus the prior-year period, primarily due to a $375 million payment to Honeywell pursuant to the Plan in the current-year period compared to a $6 million payment to Honeywell in the prior-period. Additionally, there was an increase in net loss, net of deferred taxes and non-cash gains related to the reorganization of $66 million, partially offset by a favorable impact from working capital of $47 million and $65 million mainly driven by prepayments made in 2020 for directors' and officers' insurance in relation to our Chapter 11 Cases. Additionally, Expenditures for property, plant and equipment expenses decreased by $8 million. 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. We expect to increase our capital expenditures in 2022 by approximately $20 million compared to those made in 2021 as we continue to increase our manufacturing capacity for new product launches and invest in strategic growth opportunities, in particular in the electrification of drivetrains . 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. Critical Accounting Policies and Estimates The preparation of our Consolidated 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. We consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our Consolidated Financial Statements. In connection with the filing of the Chapter 11 Cases on the Petition Date, the Consolidated Financial Statements included herein have been prepared in accordance with Financial Accounting Standards Board 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 Notes to the Consolidated Financial Statements for further details. Contingent Liabilities —We are subject to lawsuits, investigations and claims that arise out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, legal and environmental, health and safety matters. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, the number and cost of pending and future asbestos claims, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of management’s judgment applied in the recognition and measurement of our most significant contingencies. 63 Warranties and Guarantees —Expected warranty costs for products sold are recognized based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, length of the warranty and various other considerations. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of our warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements included herein for additional information. Pension Benefits —We sponsor defined benefit pension plans covering certain employees, primarily in Switzerland, the U.S. and Ireland. For such plans, we are required to disaggregate the service cost component of net benefit costs and report those costs in the same line item or items in the Consolidated Statements of Operations as other compensation costs arising from services rendered by the pertinent employees during the period. The other nonservice components of net benefit costs are required to be presented separately from the service cost component. We record the service cost component of Pension ongoing (income) expense in Cost of goods sold or Selling, general and administrative expenses. The remaining components of net benefit costs within Pension ongoing (income) expense, primarily interest costs and assumed return on plan assets, are recorded in Non-operating expense (income). We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (“MTM Adjustment”). The MTM Adjustment is recorded in Non-operating expense (income). The key assumptions used in developing our 2021 and 2020 net periodic pension (income) expense included the following: 2021 2020 U.S. Plans Non-U.S. Plans U.S. Plans Non-U.S. Plans Discount Rate: Projected benefit obligation 2.65 % 0.46 % 3.30 % 0.79 % Service Cost 3.37 % 0.23 % 4.47 % 1.20 % Interest cost 2.86 % 0.63 % 4.06 % 1.74 % Assets: Expected rate of return 4.88 % 3.60 % 5.49 % 3.79 % Actual rate of return 6.63 % 9.27 % 12.49 % 5.19 % The MTM Adjustment represents the recognition of net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor). Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension plans or when assumptions change. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the measurement date each year and the difference between expected and actual returns on plan assets. The mark-to-market accounting method results in the potential for volatile and difficult to forecast MTM Adjustments. There were no MTM adjustments for our U.S. Plans and non-U.S. Plans for the year ended December 31, 2021. We determine the expected long-term rate of return on plan assets utilizing historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and asset mix considerations (see Note 26, Defined Benefit Pension Plans of the Notes to the Consolidated Financial Statements for details on the actual various asset classes and targeted asset allocation percentages for our pension plans). We plan to use an expected rate of return on plan assets of 3.97% for our U.S. Plans and 3.35% for our non-U.S. Plans for 2022 as this is a long-term rate based on historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and the asset mix of the plan’s investments. The discount rate reflects the market rate on December 31 (measurement date) for high-quality fixed-income investments with maturities corresponding to our benefit obligations and is subject to change each year. The discount rate can be volatile from year to year as it is determined based upon prevailing interest rates as of the measurement date. We used a 2.95% discount rate to determine benefit obligations for our U.S. Plans and 0.86% for our non-U.S. Plans as of December 31, 2021. 64 Pension ongoing expense (income) for all of our pension plans is expected to be pension income of $1 million in 2022 compared with pension income of $2 million in 2021. Also, if required, a MTM Adjustment will be recorded in the fourth quarter of 2022 in accordance with our pension accounting method as previously described. It is difficult to reliably forecast or predict whether there will be a MTM Adjustment in 2022, and if one is required, what the magnitude of such adjustment will be. MTM Adjustments are primarily driven by events and circumstances beyond the control of the Company such as changes in interest rates and the performance of the financial markets. Income Taxes — We account for income taxes pursuant to the asset and liability method which requires us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. We file tax returns in multiple jurisdictions and are subject to examination by taxing authorities throughout the world. Tax authorities have the ability to review and challenge matters that could be subject to differing interpretation of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the sustainability of tax attributes. The ultimate resolution of such uncertainties could last several years. When an uncertain tax position is identified, we consider and interpret complex tax laws and regulations in order to determine the need for recognizing a provision in our financial statements. Significant judgment is required in determining the timing and measurement of uncertain tax positions. We utilize internal and external expertise in interpreting tax laws to support our tax positions. We recognize the financial statement benefit of an uncertain tax position when it is more likely than not that, based on the underlying technical merits, the position will be sustained upon examination. Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, they could have a material impact on our income tax provision and net income in the period or periods for which such determination is made. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter in which such change occurs. Other Matters Litigation and Environmental Matters See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of environmental and other litigation matters. Recent Accounting Pronouncements See Note 3, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.