What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-07-28 compared with 2022-04-28 · 182 added, 97 removed, 171 unchanged (62% of the section changed)

3 unchanged sentences

As a result of many important factors, including those set forth in the “Risk Factors” section of our 2021 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 MD&A is intended to help you understand the results of operations and financial condition of Garrett Motion Inc., for the three months ended March 31, 2022.

The following MD&A is intended to help you understand the results of operations and financial condition of Garrett Motion Inc., for the three and six months ended June 30, 2022.

Executive Summary

Our net sales for the three months ended March 31, 2022 was $901 million, representing a decrease of 10% (including an unfavorable impact of 4% due to foreign currency translation) compared to the prior year.

The decrease in our sales, net of the impacts of foreign currency translation, approximated the estimated decline in global light vehicle production and reflects the ongoing direct and indirect impacts from the global semiconductor shortages on vehicle production schedules and sales volumes despite strong underlying demand for light vehicles, further accentuated by a strong first quarter in 2021 due to accumulated pent-up demand from 2020.

The increased COVID-related lockdown measures implemented in China as well as recent geopolitical tensions arising from the military conflict between Russia and Ukraine also contributed to the lower sales for the quarter.

For the three months ended March 31, 2022, our light vehicle product sales (which comprise diesel and gasoline products, including products for passenger cars, SUVs, light trucks, and other products) accounted for approximately 68% of our revenues.

Our net sales for the three months ended June 30, 2022 were $859 million, representing a decrease of $76 million or 8% (including an unfavorable impact of $73 million or 8% due to foreign currency translation) compared to the prior year.

Our sales, net of the impacts of foreign currency translation, outpaced global light vehicle production (as estimated by IHS Markit ("IHS"), now part of S&P Global) by approximately 6% driven by successful recoveries on inflation pass through.

We saw new product launches on gasoline which increased our share of demand.

Our volumes however were impacted by the ongoing global semiconductor shortage despite strong underlying demand for light vehicles, further accentuated by an improved second quarter of 2021 due to accumulated pent-up demand from 2020.

The continued COVID-related lockdown measures in China also continued to impact our sales for the quarter.

For the three months ended June 30, 2022, our light vehicle product sales (which comprise diesel and gasoline products, including products for passenger cars, SUVs, light trucks, and other products) accounted for approximately 68% of our revenues.

Commercial vehicle product sales (products for on- and off-highway trucks, construction, agriculture and power-generation machines) accounted for 18% of our revenues.

1 unchanged sentence

Approximately 51% of our revenues came from sales to customers located in Europe, 27% from sales to customers located in Asia, 20% from sales to customers in North America, and 2% from sales to customers in other international markets.

On January 11, 2022 and March 22, 2022, the Company amended its Credit Agreement, increasing the maximum amount of borrowings under the Revolving Facility from $300 million to $475 million.

The amendments also remove the requirement that payments made in cash for the benefit of holders of our Series A Preferred Stock on or before December 31, 2022 be made on a ratable basis to the holders of the Common Stock, and makes additional clarifying amendments to certain payment covenants.

On March 3, 2022, the terms of the Series A Certificate of Designations were further amended to provide the Company with greater flexibility to pay dividends and make certain distributions on, and to purchase, redeem or otherwise acquire, including in individually negotiated transactions, shares of the Company’s Common Stock or any future class of preferred stock that ranks junior to the Series A Preferred Stock in right of payment of dividends.

Specifically, the amendments (i) expanded the scope of permitted Distributions on Dividend Junior Stock (as each term is defined in the Series A Certificate of Designations) to include purchases by the Company of shares of Dividend Junior Stock in individually negotiated transactions, (ii) removed the requirement that dividends or Distributions on Dividend Junior Stock must occur on or prior to December 31, 2022, and (iii) expressly permitted the purchase, redemption or other acquisition for cash by the Company of shares of Dividend Junior Stock without requiring ratable participation by holders of Series A Preferred Stock.

On February 18, 2022, the Company completed a second planned partial early redemption of its Series B Preferred Stock.

Under this partial early redemption, the Company paid $197 million of which $186 million related to redemption on the principal and $11 million related to interest.

On June 28, 2022, the Company completed the third and final early redemption of all its remaining outstanding Series B Preferred Stock.

Under this final early redemption, the Company redeemed 271,628,259 shares of its Series B Preferred Stock for an aggregate price of $212 million.

Macroeconomic disruptions

The automotive industry continues to be impacted by uncertainty due to worldwide semiconductor shortages, the COVID-19 pandemic, governmental responses to the pandemic including the lockdown measures in China, and geopolitical tensions in particular from the ongoing military conflict between Russia and Ukraine.

While the Company

does not have a direct presence in Russia or Ukraine, we expect that the supply-side constraints from these market disruptions will keep influencing our operating activity throughout 2022.

Automotive OEMs have already reduced production plans for the first two quarters of 2022 and may further reduce production should COVID-related lockdown measures persist or extend, and the Company continues to review production levels at OEM plants and closely monitor supply-chain disruptions related to logistics and component shortages in order to minimize the impact of the bottleneck in supply and mitigate any potential disruption in production.

The a utomotive OEMs have already reduced production plans for the first two quarters of 2022, and while the semiconductor shortage is expected to improve in the second half 2022, production levels may be reduced should COVID-related lockdown measures persist or extend, or the conflict between Russia and Ukraine escalates or expands.

The Company continues to review production levels at OEM plants and closely monitor supply-chain disruptions related to logistics and component shortages in order to minimize the impact of the bottleneck in supply and mitigate any potential disruption in production.

Additionally, we implemented new procedures in 2021 for the monitoring of supplier risks and we believe we have substantially addressed such risks with manageable economic impacts including use of premium freight or adjusted payment terms that are limited in time.

It is however possible that additional supply chain constraints may appear for the industry as the global supply chain restarts.

However, it is possible that additional supply chain constraints may appear for the industry as the global supply chain restarts.

Finally, 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 turbocharger industry is expected to increase from approximately 43 million units in 2021 to approximately 51 million units by 2026, according to IHS Markit ("IHS") for light vehicle and Knibb, Gormezano and Partners ("KGP") and Power Systems Research ("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 30 million hybrid cars globally in 2026.

The turbocharger industry is expected to increase from approximately 43 million units in 2021 to approximately 49 million units by 2026, according to IHS for light vehicle and Knibb, Gormezano and Partners ("KGP") and Power Systems Research ("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 28 million hybrid cars globally in 2026.

In the short to medium term, we continue to 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.

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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.

The following tables show our revenues by geographic region and product line for the three months ended March 31, 2022 and 2021, respectively.

The following tables show our revenues by geographic region and product line for the three and six months ended June 30, 2022 and 2021, respectively.

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

United States

Other International

$ 173 20% $ 142 15% $ 326 18% $ 280 15%

440 51% 480 52% 891 51% 1,008 52%

227 27% 301 32% 509 29% 620 32%

19 2% 12 1% 34 2% 24 1%

$ 859 $ 935 $ 1,760 $ 1,932

By Product Line

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

Diesel $ 237 27% $ 285 30% $ 491 28% $ 597 31%

Gas 345 40% 342 37% 708 40% 734 38%

Commercial Vehicle 154 18% 191 20% 320 18% 376 19%

Results of Operations for the Three Months Ended March 31, 2022

Aftermarket 108 13% 102 11% 213 12% 193 10%

Other 15 2% 15 2% 28 2% 32 2%

Total $ 859 $ 935 $ 1,760 $ 1,932

Results of Operations for the Three and Six Months Ended June 30, 2022

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

1 unchanged sentence

% change compared with prior period (8.1) % (8.9) %

The change in net sales for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 is attributable to the following:

Net sales decreased for the three months ended March 31, 2022 compared to prior year by $96 million or 10% (including an unfavorable impact of $36 million or 4% due to foreign currency translation driven by a lower Euro-to-US dollar exchange rate).

Gasoline product sales decreased by $29 million or 7% (including an unfavorable impact of $11 million or 2% due to foreign currency translation), primarily driven by lower demand in Europe, mostly related to the semiconductor shortages at customers.

Gasoline product sales in China were also adversely affected by increased COVID-related lockdown measures implemented by the Chinese government.

These decreases in sales were partially offset by favorable impacts from new product launches delivering incremental sales year over year.

For the three months ended June 30, 2022, net sales decreased compared to prior year by $76 million or 8%, driven by an unfavorable impact of $73 million or 8% due to foreign currency translation driven by a lower Euro-to-US dollar exchange rate, and lower volumes offset by $28 million of inflation recoveries net of pricing across all product lines.

Gasoline product sales increased by $3 million or 1% (including an unfavorable impact of $27 million or 8% due to foreign currency translation), primarily due to favorable impacts from new product launches in North America which delivered incremental sales year over year, and partially offset by lower sales in China due to the continued COVID-related lockdown measures implemented by the Chinese government which were lifted only in June 2022.

Diesel product sales decreased by $48 million or 17% (including an unfavorable impact of $27 million or 10% due to foreign currency translation).

This decrease was mainly due to the global semiconductor shortage, as well as the impact of higher sales for the three months ended March 31, 2021 brought about by recovery in customer demand following pandemic-related disruptions in 2020.

Commercial vehicle sales decreased by $19 million or 10% (including an unfavorable impact of $6 million or 3% due to foreign currency translation), primarily driven by market declines in China following the implementation of heightened

China 6a emissions standards for heavy-duty trucks on July 1, 2021, as well as semiconductor shortages at customers and other impacts from geopolitical tensions in Russia and Ukraine and pandemic-related disruptions.

This decrease was mainly due to the continued global semiconductor shortage and other supply shortages at customers due to the ongoing geopolitical crisis and pandemic related disruptions, as well as the impact of higher sales for the three months ended June 30, 2021 brought about by recovery in customer demand following pandemic-related disruptions in 2020.

Commercial vehicle sales decreased by $37 million or 19% (including an unfavorable impact of $11 million or 6% due to foreign currency translation), primarily driven by the continued COVID-related lockdown situations in China that limited our production output, combined with market declines following the implementation of heightened China 6a emissions standards for heavy-duty trucks on July 1, 2021.

Commercial vehicle sales also decreased due to continued impacts from semiconductor shortages at customers .

Aftermarket sales improved by $6 million or 6% (including an unfavorable impact of $6 million or 5% due to foreign currency translation), primarily due to strong demand in North America and Europe related to favorable aftermarket conditions such as increased off-highway demand for new and service parts, as well as growth through new product introductions and favorable pricing impacts.

Cost of Goods Sold

For the six months ended June 30, 2022, net sales decreased compared to prior year by $172 million or 9%, driven by an unfavorable impact of $109 million or 6% due to foreign currency translation driven by a lower Euro-to-US dollar exchange rate, and lower volumes partially offset by $26 million of inflation recoveries net of pricing across all product lines.

Gasoline product sales decreased by $26 million or 4% (including an unfavorable impact of $38 million or 6% due to foreign currency translation), primarily driven by the lower Euro-to-dollar exchange rates and lower sales in China due to the increased COVID-related lockdown measures implemented by the Chinese government.

These decreases were more than offset by new product launches in North America which delivered incremental sales year over year.

Diesel product sales decreased by $106 million or 18% (including an unfavorable impact of $42 million or 7% due to foreign currency translation).

This decrease was mainly due to the global semiconductor shortage and other supply shortage at customers due to the ongoing geopolitical crisis and pandemic related disruptions, accentuated by the impact of higher sales for the six months ended June 30, 2021 due to recovery in customer demand following pandemic-related disruptions in 2020.

Commercial vehicle sales decreased by $56 million or 15% (including an unfavorable impact of $17 million or 5% due to foreign currency translation), primarily driven by market declines in China following the implementation of heightened China 6a emissions standards for heavy-duty trucks on July 1, 2021, as well as semiconductor shortages at customers and other impacts from geopolitical tensions in Russia and Ukraine and pandemic-related disruptions.

Aftermarket sales improved by $20 million or 10% (including an unfavorable impact of $9 million or 5% due to foreign currency translation), primarily due to strong demand in North America and Europe related to favorable aftermarket conditions such as increased off-highway demand for new and service parts, increased revenues from our Performance & Motorsport Turbo business, new distributor openings, as well as growth through new product introductions and favorable pricing impacts.

Cost of Goods Sold and Gross Profit

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

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Gross profit percentage 19.7 % 20.6 % 19.5 % 20.1 %

Cost of goods sold decreased for the three months ended March 31, 2022 compared to the prior year by $75 million or 9.4% (including a favorable impact of $24 million due to foreign exchange rates).

Cost of Goods Sold Gross Profit

(Dollars in millions)

Cost of Goods Sold / Gross Profit for the three months ended March 31, 2021 $ 801 $ 196

Cost of Goods Sold / Gross Profit for the three months ended June 30, 2021

Increase/(decrease) due to:

2 unchanged sentences

Price, net of inflation pass-through — 28

Commodity & transportation inflation 24 (24)

Commodity, transportation & energy inflation 32 (32)

Productivity, net (20) 24

1 unchanged sentence

Foreign exchange rate impacts (54) (19)

Cost of Goods Sold / Gross Profit for the three months ended March 31, 2022 $ 726 $ 175

The decrease in cost of goods sold was primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of $68 million and $24 million, respectively, in cost of goods sold.

Cost of goods sold further decreased by $33 million from benefits from our continued focus on productivity, net of $5 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility.

These decreases were also partially offset by $24 million due to inflation on commodities and transportation costs and $23 million due to an unfavorable product mix.

Research and development ("R&D") expenses increased by $3 million which reflects our shift in investment in new technologies and headcount increase year-over-year.

The decrease in gross profit was mainly driven by the lower sales volumes, inflation on commodities and transportation costs, as well as higher premium freight costs as discussed above.

Gross profit also decreased due to $2 million of pricing reductions net of inflation recoveries from customer pass-through agreements, as well as higher R&D costs and $12 million from foreign currency translational, transactional and hedging effects, partially offset by higher productivity along with a favorable product mix.

Cost of Goods Sold / Gross Profit for the three months ended June 30, 2022

$ 690 690 $ 169

For the three months ended June 30, 2022, cost of goods sold decreased by $52 million, primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of $40 million and $54 million, respectively.

Our continued focus on productivity also contributed to a decrease in cost of goods sold of $20 million, net of $2 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility.

These decreases were partially offset by $32 million of inflation on commodities, transportation and energy costs, as well as $25

million due to an unfavorable product mix.

Research and development ("R&D") costs also increased by $5 million which reflects our shift in investment in new technologies and headcount increase year-over-year.

Gross profit decreased by $24 million, with the decrease mainly driven by the lower sales volumes, inflation on commodities, transportation and energy costs, as well as higher premium freight costs as discussed above.

Higher R&D costs and $19 million of unfavorable foreign currency translational, transactional and hedging effects also lowered our gross profit.

These decreases were partially offset by $24 million from higher productivity and $28 million of inflation recoveries from customer pass-through agreements net of pricing reductions.

Cost of Goods Sold Gross Profit

(Dollars in millions)

Cost of Goods Sold / Gross Profit for the six months ended June 30, 2021

$ 1,543 $ 389

Increase/(decrease) due to:

Volume (108) (48)

Product mix 47 14

Price, net of inflation pass-through — 26

Commodity, transportation & energy inflation 56 (56)

Productivity, net (51) 58

Research & development 8 (8)

Foreign exchange rate impacts (79) (31)

Cost of Goods Sold / Gross Profit for the six months ended June 30, 2022

$ 1,416 $ 344

For six months ended June 30, 2022, cost of goods sold decreased by $127 million, primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of $108 million and $79 million, respectively.

Our continued focus on productivity also contributed to a decrease in cost of goods sold of $51 million, net of $7 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility.

These decreases were partially offset by $56 million of inflation on commodities, transportation and energy costs, as well as $47 million due to an unfavorable product mix.

R&D expenses also increased by $8 million which reflects our shift in investment in new technologies and headcount increase year-over-year.

Gross profit decreased by $45 million, with the decrease mainly driven by the lower sales volumes, inflation on commodities, transportation and energy costs, as well as higher premium freight costs as discussed above.

Higher R&D costs and $31 million of unfavorable foreign currency translational, transactional and hedging effects also reduced our gross profit.

These decreases were partially offset by $58 million of higher productivity and $26 million of inflation recoveries from customer pass-through agreements net of pricing reductions.

Selling, General and Administrative Expenses

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

1 unchanged sentence

% of sales 6.3 % 5.5 % 6.1 % 5.5 %

Selling, general and administrative (“SG&A”) expenses decreased for the three months ended March 31, 2022 compared with the prior year by $2 million, primarily due to $2 million of favorable impacts from foreign exchange rates, $2 million of lower professional service fees, and $2 million of incremental compensation cost recognized for the three months ended March 31, 2021 related to one-time cash continuity awards that were fully vested in 2021.

These decreases were partially offset by a $4 million non-recurring bad debt recovery recognized during the three months ended March 31, 2021.

Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2022 increased by $3 million compared with the prior year, primarily due to $9 million of higher professional services costs, $1 million from increased travel expenses and $1 million of increased bad debt expense.

These increases were partially offset by $4 million of lower employee-related costs reflecting lower expected payout on 2022 employee incentives, as well as $4 million of favorable impacts from foreign exchange rates.

For the six months ended June 30, 2022, SG&A increased by $1 million versus the prior year.

This increase was driven by $9 million of higher professional services costs, $2 million from increased travel expenses and $4 million of higher bad debt expenses due primarily to a non-recurring bad debt recovery recognized during the first quarter of 2021.

These increases were partially offset by $7 million of lower employee-related costs which reflect not only lower expected

employee incentive payout as discussed above, but also $2 million of one-time cash continuity awards that were recognized in 2021.

We also saw a $7 million benefit from favorable foreign exchange rates compared to the prior year.

Interest Expense

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

Interest expense $ 20 $ 24 $ 43 $ 45

Interest expense for the three months ended March 31, 2022 increased compared to the prior year by $2 million, primarily due to $6 million of interest accretion on our Series B Preferred Stock (issued at Emergence), partially offset by $4 million of lower interest expense on our current credit facilities compared to our credit facility in the prior year before Emergence and prior year period fees related to amendments on our previous credit facilities.

Non-operating (income) expense

For the three months ended June 30, 2022, interest expense decreased by $4 million compared to the prior year, primarily due to $3 million of higher interest accretion in 2021 on our Series B Preferred Stock that was issued at Emergence.

For the six months ended June 30, 2022, interest expense decreased by $2 million compared to the prior year primarily due to $5 million of lower interest expense on our current credit facilities compared to the credit facility in place last year prior to Emergence and prior year period fees related to amendments on our previous credit facilities, partially offset by $3 million of higher interest expense in 2022 due to an additional quarter of accretion on our Series B Preferred Stock that was issued at Emergence.

Non-operating income

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

Non-operating (income) expense

Non-operating (income) expense for the three months ended March 31, 2022 increased to an income of $28 million from an expense of $26 million in the prior year.

This increase is primarily related to a benefit of $26 million recognized in 2022 due to interest income associated with unrealized marked-to-market gains on interest rate swaps, as well as $33 million of unfavorable foreign exchange impacts recognized in 2021 on debt, which were unhedged, due to the restrictions placed on the Company in Chapter 11 proceedings.

Non-operating income

$ (16) $ (26) $ (44) $ —

For the three months ended June 30, 2022, non-operating income decreased by $10 million from $26 million in the prior year,and comprised of $12 million of interest income primarily from unrealized marked-to-market gains on our interest rate swaps, $2 million of equity income from unconsolidated affiliates, $3 million related to non-service components of net periodic pension benefits, and $4 million of other non-operating gains partially offset by $5 million of foreign exchange remeasurement impacts.

The decrease in non-operating income versus prior year is primarily due to $25 million of favorable foreign exchange remeasurement impacts recognized in 2021 on foreign currency-denominated debt which was unhedged due to the restrictions placed on the Company in the Chapter 11 proceedings (and was settled at Emergence), partially offset by higher interest income from unrealized marked-to-market gains on our interest rate swaps.

For the six months ended June 30, 2022, non-operating income increased by $44 million and comprised of $39 million of interest income primarily from unrealized marked-to-market gains on our interest rate swaps, $4 million of equity income from unconsolidated affiliates, $5 million related to non-service components of net periodic pension benefits, and $4 million of other non-operating gains partially offset by $8 million of foreign exchange remeasurement losses.

The increase in non-operating income from prior year is mainly due to the higher interest income associated with unrealized marked-to-market gains on our interest rate swaps, as well as foreign exchange remeasurement losses recognized in 2021 on the above-mentioned foreign currency-denominated debt.

Reorganization items, net

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

Reorganization items, net $ 1 $ (295) $ 2 $ (121)

Reorganization items, net for the three months ended March 31, 2022 was an expense of $1 million related to professional service fees on the Chapter 11 Cases.

During the prior year, reorganization items, net amounted to $174 million, of which $84 million pertained to legal and professional service fees related to the Chapter 11 Cases, $79 million related to the termination of and expense reimbursement under that certain share and asset purchase agreement entered into on the Petition Date by the Debtors, AMP Intermediate B.V.

Holdings, LLC (the “Stalking Horse Purchase Agreement"), and $11 million related to other Chapter 11 costs including debtor-in-possession financing and the write-off of original issue discount and deferred long-term fees on debt.

Reorganization items, net for the three months ended June 30, 2022 was an expense of $1 million related to professional service fees incurred for the remaining main Chapter 11 Case.

During the prior year period, reorganization items, net amounted to a $295 million gain, representing a $502 million gain on settlement of Honeywell claims, partially offset by $96 million professional service fees related to the Chapter 11 Cases, $39 million in Directors and Officers insurance related to Chapter 11 Cases, $25 million write off on debt issuance costs of the Company's pre-petition term loan,

$13 million in employee stock awards cancellation and $34 million in other costs mainly related to unsecured notes settlement.

For the six months ended June 30, 2022, reorganization items, net was an expense of $2 million related to professional service fees incurred for the remaining main Chapter 11 Case.

During the prior year period, reorganization items, net amounted to $121 million gain, representing $502 million gain on settlement of Honeywell claims, partially offset by $181 million professional service fees related to the Chapter 11 Cases, $79 million related to the termination of and expense reimbursement under that certain share and asset purchase agreement entered into on the Petition Date by the Debtors, AMP Intermediate B.V.

Holdings, LLC (the “Stalking Horse Purchase Agreement"), $39 million Directors and Officers insurance related to Chapter 11 Cases, $25 million write off on debt issuance costs of the Company's pre-petition term loan facilities, $13 million in employee stock awards cancellation and $44 million in other costs mainly related to unsecured notes settlement.

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

$ 20 $ 30 $ 57 $ 54

Effective tax rate 19.0 % 6.8 % 24.8 % 15.1 %

The effective tax rates for the three months ended March 31, 2022 and 2021 were 29.6% an d (29.6)%, respectively.

The change in the effective tax rate for the three months ended March 31, 2022 compared to the prior year is primarily related to the decrease of nondeductible bankruptcy costs, partially offset by true ups to prior year tax reserves.

The negative effective tax rate for three months ended March 31, 2021 reflects a tax expense in a period of an overall pre-tax loss.

Our effective tax rates for the three and six months ended June 30, 2022 increased compared to the prior year periods, primarily related to the nontaxable gain on the settlement of the Honeywell claims recorded in the prior year.

The effective tax rate for the six months ended June 30, 2022 also increased due to true-ups recorded in the first quarter of 2022 to prior year tax reserves.

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

Net income (loss)

Net income increased $193 million for the three months ended March 31, 2022 compared with the prior year primarily as result of an increase in Non-operating income of $54 million and lower Reorganization items, net of $173 million, partially offset by lower gross profit of $21 million, as described above.

$ 85 $ 409 $ 173 $ 304

Net income for the three months ended June 30, 2022 decreased by $324 million compared with the prior year, primarily due to the $295 million net gain on reorganization items recorded in the prior year period as discussed above.

The lower gross profit and non-operating income for the three months ended June 30, 2022 as discussed above within the Cost of Goods Sold and Gross Profit and Non-operating income sections also contributed to the decreased net income.

For the six months ended June 30, 2022, n et income decreased by $131 million compared with the prior year primarily as result of the $121 million net gain on r eorganization items and higher gross profit recognized in the prior year period.

These decreases were partially offset by $44 million of non-operating income for six months ended June 30, 2022 as discussed above within the Non-operating income section.

Non-GAAP Measures

2 unchanged sentences

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.

Additionally, the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of the Company’s operating results as reported under GAAP.

EBITDA and Adjusted EBITDA (1)

Three Months Ended

Six Months Ended

2022 2021 2022 2021

(Dollars in millions)

Net income (loss) — GAAP

Net interest (income) expense

Net income — GAAP

$ 85 $ 409 $ 173 $ 304

Interest expense, net of interest income

Depreciation 21 24 43 47

EBITDA (Non-GAAP) 134 486 277 448

Other expense, net (2)

Non-operating income (3)

Reorganization items, net (2)

1 (295) 2 (121)

Stock compensation expense (3)

Repositioning charges (6)

Foreign exchange loss on debt, net of related hedging loss

Repositioning costs (4)

Foreign exchange (gain)/loss on debt, net — (24) — 9

Loss on extinguishment of debt 5 — 5 —

Discounting costs on factoring

Other non-operating income (5)

(7) (3) (9) (6)

Adjusted EBITDA (Non-GAAP) $ 138 $ 168 $ 284 $ 344

(1) We evaluate performance on the basis of EBITDA and Adjusted EBITDA.

We define “EBITDA” as our net income (loss) calculated in accordance with U.S.

GAAP, plus the sum of net interest expense (income), tax expense (benefit) and depreciation.

We define “Adjusted EBITDA” as EBITDA, plus the sum of non-operating (income) expense, other expense, net, stock compensation expense, reorganization items, net, repositioning charges and foreign exchange loss (gain) on debt, net of related hedging loss (gain).

We define “EBITDA” as our net income calculated in accordance with U.S.

GAAP, plus the sum of net interest expense, tax expense and depreciation.

We define “Adjusted EBITDA” as EBITDA, plus the sum of net reorganization items, stock compensation expense, repositioning costs, net foreign exchange (gain)/loss on debt, loss on extinguishment on debt, discounting costs on factoring and other non-operating income.

We believe that EBITDA and Adjusted EBITDA are important indicators of operating performance and provide useful information for investors because:

2 unchanged sentences

In addition, our management may use Adjusted EBITDA in setting performance incentive targets to align performance measurement with operational performance.

(2) Other expense, net includes expenses incurred to discount or factor the Company’s receivables.

(3) Non-operating income 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.

(2) 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.

2 unchanged sentences

(3) Stock compensation expense includes only non-cash expenses.

(6) Repositioning charges includes severance costs related to restructuring projects to improve future productivity.

Adjusted EBITDA for the Three Months Ended March 31, 2022

As discussed above, net income increased $193 million for the three months ended March, 31 2022 as compared to the prior year.

For the three months ended March 31, 2022, Adjusted EBITDA decreased by $30 million compared to the prior year from $176 million to $146 million, mainly due to volume decreases, inflation on commodities and transportation, as well as unfavorable foreign exchange impacts, partially offset by increased productivity and a favorable mix for the quarter.

Our volumes for the three months ended March 31, 2022 totaled 3.4 million units, representing a decrease of approximately 10% from the prior year.

(4) Repositioning costs includes severance costs related to restructuring projects to improve future productivity.

(5) Reflects the non-service component of net periodic pension costs and other income that are non-recurring or not considered directly related to the Company's operations.

Adjusted EBITDA for the Three Months Ended June 30, 2022

For the three months ended June 30, 2022, net income decreased by $324 million versus the prior year as discussed above within the Results of Operations for the Three and Six Months Ended June 30, 2022 section.

Adjusted EBITDA decreased by $30 million compared to the prior year, mainly due to volume decreases, inflation on commodities, transportation and energy, as well as unfavorable foreign exchange impacts, partially offset by increased productivity and inflation pass-through net of pricing.

Our volumes for the three months ended June 30, 2022 totaled 3.2 million units, representing a decrease of approximately 6% from the prior year and approximates the estimated decrease in global light vehicle production.

Our Adjusted EBITDA margin of 16.1% represented a year-over-year contraction of 190 basis points.

During the three months ended March 31, 2022, we faced demand volatility driven mainly by the global semiconductor shortage and geopolitical tensions due to the ongoing military conflict between Russia and Ukraine, resulting in supply chain disruptions.

Our Adjusted EBITDA margin was also higher for the three months ended March 31, 2021 due to incremental benefits from recovery in customer demand following pandemic related disruptions in 2020.

During the three months ended June 30, 2022, we faced demand volatility driven mainly by the global semiconductor shortage and geopolitical tensions from the ongoing military conflict between Russia and Ukraine, resulting in supply chain disruptions.

We maintained our focus on productivity in the current year as rising commodity prices led to higher raw material costs, particularly for nickel, aluminum and steel alloys.

We recovered a majority of the increases from our customer pass-through agreements, especially for nickel, and continue to negotiate with our customers for further escalators while actively managing our supply base and cost recovery mechanisms to minimize the impact of materials cost inflation.

The increased productivity was partially offset by year-over-year labor inflation and increased premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility, as well as lower SG&A expenses due to favorable impacts from foreign exchange rates and lower professional service fees and compensation costs that were partially offset by a non-recurring bad debt recovery recognized in 2021.

R&D expenses increased $3 million which reflects our shift in investment in new technologies and year-over-year labor inflation.

Adjusted EBITDA also decreased by $13 million associated with losses in foreign currency from translational, transactional and hedging effects in the three months ended March 31, 2022, primarily driven by a lower Euro-to-US dollar exchange rate versus the prior-year period.

The increased productivity was partially offset by year-over-year labor inflation and increased premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility, as well as higher SG&A expenses due to higher professional service fees and higher travel expenses.

R&D expenses increased $5 million which reflects our shift in investment in new technologies, increased hiring to accelerate growth in the new technologies and year-over-year labor inflation.

Losses in foreign currency from translational, transactional and hedging effects in the three months ended June 30, 2022, primarily driven by a lower Euro-to-US dollar exchange rate versus the prior-year period, also accounted for $15 million of the decrease in Adjusted EBITDA.

Adjusted EBITDA for the Six Months Ended June 30, 2022

For the six months ended June 30, 2022, net income decreased by $131 million versus the prior year as discussed above within the Results of Operations for the Three and Six Months Ended June 30, 2022 section.

Adjusted EBITDA decreased by $60 million compared to the prior year, mainly due to volume decreases, inflation on commodities, transportation and energy, as well as unfavorable foreign exchange impacts, partially offset by increased productivity, inflation pass-through net of pricing and a favorable mix.

Our volumes for the six months ended June 30, 2022 totaled 6.6 million units, representing a decrease of approximately 8% from the prior year.

Our Adjusted EBITDA margin of 16.1% represented a year-over-year contraction of 170 basis points.

During the six months ended June 30, 2022, we faced demand volatility driven mainly by the global semiconductor shortage and geopolitical tensions due to the ongoing military conflict between Russia and Ukraine, resulting in supply chain disruptions.

We maintained our focus on productivity in the current year as rising commodity prices led to higher raw material costs, particularly for nickel, aluminum and steel alloys.

We recovered a majority of the cost increases from our customer pass-through agreements, especially for nickel, and continue to negotiate with our customers for further escalators while actively managing our supply base and cost recovery mechanisms to minimize the impact of materials, transportation and energy cost inflation.

R&D expenses increased $8 million which reflects our shift in investment in new technologies, increased hiring to accelerate growth in the new technologies and year-over-year labor inflation.

Losses in foreign currency from translational, transactional and hedging effects in the six months ended June 30, 2022, primarily driven by a lower Euro-to-US dollar exchange rate versus the prior-year period, also accounted for $28 million of the decrease in Adjusted EBITDA.

Liquidity and Capital Resources

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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.

Following the completion of the Chapter 11 Cases and Emergence, including during the three months ended March 31, 2022 , we funded our operations primarily through cash flows from operating activities, borrowings from Credit Facilities and cash and cash equivalents.

As of March 31, 2022, the Company reported a cash and cash equivalents position of $315 million (not including $5 million in restricted cash as of March 31, 2022) as compared to $423 million as of December 31, 2021 (not including $41 million in restricted cash as of December 31, 2021).

As of March 31, 2022, the Company had no borrowings outstanding under the Revolving Facility, $2 million of outstanding letters of credit, and available borrowing capacity of $473 million.

In addition, as of March 31, 2022, the Company had $1,208 million outstanding in Term Loan Facilities and $25 million in available letter of credit facilities.

During the three months ended March 31, 2022, we repaid $2 million on our Dollar Facility and $197 million related to our Series B Preferred Stock.

Following the repayment of $197 million on our Series B Preferred Stock, 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 the holder of its right to require the Company to redeem all of the holder's shares of Series B Preferred Stock following the occurrence of certain triggering events on or before December 30, 2022, which could increase our cash requirements by approximately $220 million.

Following the completion of the Chapter 11 Cases and Emergence, including during the six months ended June 30, 2022 , we funded our operations primarily through cash flows from operating activities, borrowings from Credit Facilities and cash and cash equivalents.

As of June 30, 2022, the Company reported a cash and cash equivalents position of $146 million (not including $33 million in restricted cash as of June 30, 2022) as compared to $423 million as of December 31, 2021 (not including $41 million in restricted cash as of December 31, 2021).

As of June 30, 2022, the Company had no borrowings outstanding under the Revolving Facility, no outstanding letters of credit, and available borrowing capacity of

$475 million.

In addition, as of June 30, 2022, the Company had $1,180 million of principal outstanding on its Term Loan Facilities and $22 million in available letter of credit facilities.

During the six months ended June 30, 2022, we repaid $4 million on our Dollar Facility and $381 million related to our Series B Preferred Stock which included the final redemption payment, following which no shares of our Series B Preferred Stock remain outstanding.

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 March 31, 2022, the aggregate accumulated dividend was approximately $135 million.

These dividends accumulate whether or not declared, and as of June 30, 2022, the aggregate accumulated dividend was approximately $174 million.

As disclosed in our 2021 Form 10-K, we expect to continue investing in our facilities as we expand our manufacturing capacity for new product launches and invest in strategic growth opportunities, in particular in the electrification of drivetrains.

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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.

As of March 31, 2022, our liabilities with respect to our payment obligations to Honeywell under the terms of the Series B Preferred Stock were $204 million (representing the present value of all then remaining amortization payments due under the outstanding Series B Preferred Stock, discounted at a rate of 7.71% per annum).

See Note 14 , Mandatorily Redeemable Series B Preferred Stock of the Notes to the Consolidated Interim Financial Statements and Note 16, Mandatorily Redeemable Series B Preferred Stock of the Consolidated Financial Statements for the year ended December 31, 2021 included in our 2021 Form 10-K for additional information regarding the Series B Preferred Stock.

As of June 30, 2022, the Company has fully redeemed the Series B Preferred Stock.

See Note 14 , Mandatorily Redeemable Series B Preferred Stock of the Notes to the Consolidated Interim Financial

Statements and Note 16, Mandatorily Redeemable Series B Preferred Stock of the Consolidated Financial Statements for the year ended December 31, 2021 included in our 2021 Form 10-K for additional information regarding the Series B Preferred Stock.

Share Repurchase Program

On November 16, 2021, the Board of Directors authorized a $100 million share repurchase program valid until November 15, 2022, providing for the purchase of shares of Series A Preferred Stock and Common Stock.

As of March 31, 2022, the Company had repurchased $21 million of its Series A Preferred Stock and Common Stock, with $79 million remaining under the share repurchase program.

As of June 30, 2022, the Company had repurchas ed $22 million of its Series A Preferred Stock and Common Stock, with $78 million remaining under the share repurchase program.

For more information, see Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds .

Cash Flow Summary for the Three Months Ended March 31, 2022

Three Months Ended

Cash Flow Summary for the Six Months Ended June 30, 2022

Six Months Ended

(Dollars in millions)

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$ (285) $ (77)

Cash provided by operating activities increased by $41 million for the three months ended March 31, 2022 versus the prior year, primarily due to an increase in net income, net of deferred taxes and non-cash gains related to reorganization items of $157 million, partially offset by a unfavorable impact from working capital of $45 million and $71 million mainly driven by other assets and accrued liabilities.

Cash used for investing activities increased by $12 million for the three months ended March 31, 2022 versus the prior year, primarily due to an increase in expenditures for property, plant and equipment of $11 million.

Cash used for financing activities increased by $95 million for the three months ended March 31, 2022 compared with the prior year.

The change was driven by $186 million paid for the partial early redemption of our Series B Preferred Stock (exclusive of $11 million of the redemption attributable to interest and included in cash used for operating activities) and $2 million for repurchases of Series A Preferred Stock and Common Stock.

We also incurred $3 million of financing costs on our Revolving Facility and made payments of $2 million on our long term debt pursuant to our Credit Agreement, partially offset by $101 million debt repayments in the prior year on the financing arrangements we maintained while a debtor-in-possession (including $1 million of related financing fees).

Cash provided by operating activities increased by $568 million for the six months ended June 30, 2022 versus the prior year, primarily due to a $375 million payment made to Honeywell in the prior year pursuant to the Plan, and a decrease in net income, net of a $323 million increase in non-cash adjustments which included a $373 million gain recognized in prior year on reorganization items and a $35 million increase in the fair value of our undesignated derivative instruments.

Favorable impacts from working capital of $75 million, which included incremental eligible receivables sold without recourse in the amount $37 million, also contributed to the increase in cash provided by operating activities, partially offset by a $74 million decrease mainly driven by oth er assets and liabilities.

Cash used for investing activities increased by $13 million for the six months ended June 30, 2022 versus the prior year, with the increase due to increased expenditures for property, plant and equipment.

Cash used for financing activities increased by $752 million for the six months ended June 30, 2022 compared with the prior year.

The change was driven by $381 million paid for the final early redemption of our Series B Preferred Stock (exclusive of $28 million of the redemption attributable to interest and included in cash used for operating activities) and $3 million for repurchases of Series A Preferred Stock and Common Stock.

Additionally, in 2021, there were $1,301 million of proceeds from issuance of Series A Preferred Stock and $1,221 million of proceeds from issuance of the new long-term debt, partially offset by $200 million repayments on the Company's senior secured super-priority debtor in-possession credit agreement entered into in connection with the Chapter 11 Cases, $370 million of full payment of our pre-petition revolving credit facility, $1,515 million payments of our pre-petition long term debt and $69 million payments made to holders of the Company's pre-Emergence common stock who made a cash-out election under the Plan.

Off-Balance Sheet Arrangements

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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.

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 2021 Form 10-K.

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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, the anticipated

impact of the COVID-19 pandemic on our business, anticipated impacts of the ongoing conflict between Russia and Ukraine, 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 .

statements regarding our future results of operations and financial position, the consequences of the Chapter 11 Cases, the anticipated impact of the COVID-19 pandemic on our business, anticipated impacts of the ongoing conflict between Russia and Ukraine, 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis