What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-10-26 compared with 2022-07-28 · 142 added, 120 removed, 233 unchanged (53% of the section changed)

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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 and six months ended June 30, 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 nine months ended September 30, 2022.

Executive Summary

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.

Our net sales for the three months ended September 30, 2022 were $945 million, representing an increase of $106 million or 13% (including an unfavorable impact of $105 million or 12% due to foreign currency translation) compared to the prior year.

The increase in our sales, net of the impacts of foreign currency translation, was driven by higher volumes as markets partially recover from the semiconductor shortages in the prior year, and successful inflation pass through to customers net of pricing across all product lines.

We also saw new product launches on gasoline and continued ramp up on programs in commercial vehicles.

For the three months ended September 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 19% of our revenues.

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Approximately 45% of our revenues came from sales to customers located in Europe, 33% 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 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.

On September 8, 2022, the Company declared a cash dividend of $0.17 per share on its Series A Preferred Stock, payable to shareholders of record as of the close of business on September 23, 2022.

On September 28, 2022, the Company transferred the aggregate dividend amount of $42 million to the transfer agent for the Series A Preferred Stock, for the settlement of the dividend to the shareholders of record, which occurred on October 3, 2022.

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.

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 semiconductor shortage is expected to continue into 2023 although to a lesser extent compared to the previous year, and production levels may be reduced further should COVID-related lockdown measures persist or extend.

The evolution of the conflict between Russia and Ukraine and the consequent energy shortage in Europe, especially during the winter season, may further expose supply related challenges for the automotive industry while adding inflationary pressure and triggering recessionary scenarios.

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.

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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 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.

The turbocharger industry is expected to increase from approximately 45 million units in 2022 to approximately 46 million units by 2026, according to IHS for light vehicles and Knibb, Gormezano and Partners ("KGP") for commercial vehicles on-highway and off-highway.

The turbocharger industry growth is mainly driven by an expected increase in the

penetration of hybrid vehicles, from 14 million hybrid cars globally in 2022 to an anticipated 29 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.

In addition, fuel cell vehicles also require a high-performance electric boosting system.

In the commercial vehicle industry, we expect a slower transition to battery electric vehicles ("BEV"), 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 internal combustion engines ("ICE"), like natural gas or hydrogen, are expected to gain momentum in coming years, supporting continued turbocharger demand.

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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 and six months ended June 30, 2022 and 2021, respectively.

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

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

2022 2021 2022 2021

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Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

2022 2021 2022 2021

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Total $ 945 $ 839 $ 2,705 $ 2,771

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

Results of Operations for the Three and Nine Months Ended September 30, 2022

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

2022 2021 2022 2021

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% change compared with prior period 12.6 % (2.4) %

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 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.

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.

For the three months ended September 30, 2022, net sales increased compared to prior year by $106 million or 13%, including an unfavorable impact of $105 million or 12% due to foreign currency translation driven by lower Euro-to-US dollar exchange rates.

This increase is driven by higher volumes as markets recover from the semiconductor shortages experienced in the prior year, and $43 million of inflation recoveries net of pricing across all product lines.

Gasoline product sales increased by $69 million or 21% (including an unfavorable impact of $42 million or 13% due to foreign currency translation), primarily driven by favorable impacts from new product launches in North America which delivered incremental sales year over year, and market recovery in Europe and North America from the prior year's semiconductor shortages.

Diesel product sales increased by $13 million or 6% (including an unfavorable impact of $35 million or 15% due to foreign currency translation).

This increase was mainly due to a market recovery in Europe, following the semiconductor shortages faced in the prior year.

Commercial vehicle sales increased by $16 million or 10% (including an unfavorable impact of $17 million or 10% due to foreign currency translation), primarily driven by strong demand in Europe, Japan and North America in a less disruptive environment for both on and off-highway combined with ramp up to peak volumes of new program while facing headwind in China due to lower local demand, following the implementation of heightened China 6a emissions standards for heavy-duty trucks on July 1, 2021.

Aftermarket sales improved by $8 million or 7% (including an unfavorable impact of $9 million or 9% 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, favorable pricing impacts and improved shipment performance.

For the nine months ended September 30, 2022, net sales decreased compared to prior year by $66 million or 2%.

This decrease was primarily due to an unfavorable impact of $215 million or 7% due to foreign currency translation driven by a lower Euro-to-US dollar exchange rate, and overall lower volumes for the year.

These decreases were partially offset by $101 million of improved mix and $69 million of inflation recoveries net of pricing across all product lines.

Gasoline product sales increased by $43 million or 4% (including an unfavorable impact of $80 million or 8% due to foreign currency translation), primarily driven by new product launches in North America which delivered incremental sales year over year, partially offset by lower Euro-to-dollar exchange rates and lower sales in China due to the increased COVID-related lockdown measures implemented by the Chinese government in the six months ended June 30, 2022.

Diesel product sales decreased by $94 million or 11% (including an unfavorable impact of $77 million or 9% 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.

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 nine months ended September 30, 2021 due to recovery in customer demand following pandemic-related disruptions in 2020.

Commercial vehicle sales decreased by $39 million or 7% (including an unfavorable impact of $35 million or 6% due to foreign currency translation), primarily driven by low demand in China in the nine months ended September 30, 2022, after a strong pre-buy effect in the six months ended June 30, 2021, partially compensated by strong demand in the rest of the world despite a complex supply environment and new launches ramping up.

Aftermarket sales improved by $28 million or 9% (including an unfavorable impact of $18 million or 6% 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 and 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

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(Dollars in millions)

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

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

Increase/(decrease) due to:

Volume (40) (18)

Product mix 34 6

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Foreign exchange rate impacts (72) (34)

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

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

$ 767 767 $ 178

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.

For the three months ended September 30, 2022, cost of goods sold increased by $91 million, primarily driven by our higher sales volumes and an unfavorable product mix, which contributed to increases of $84 million and $34 million, respectively.

Cost of goods sold further increased due to $52 million of inflation on commodities, transportation and energy costs, as well as $7 million increase in Research and development ("R&D") costs which reflects our shift in investment in new technologies and headcount increase year-over-year.

Our continued focus on productivity contributed to a decrease in

cost of goods sold of $14 million, net of $1 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility.

Foreign currency impacts also contributed to decreases of $72 million.

Gross profit increased by $15 million, mainly driven by the higher sales volumes of $37 million and $43 million of inflation recoveries from customer pass-through agreements net of pricing reductions.

Furthermore, gross profit increased $22 million from higher productivity and $6 million of favorable product mix.

These increases were partially offset by $52 million inflation on commodities, transportation and energy costs, as well as higher premium freight costs, as discussed above, and $7 million of higher R&D costs.

Cost of Goods Sold Gross Profit

(Dollars in millions)

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

Cost of Goods Sold / Gross Profit for the nine months ended September 30, 2021

$ 2,219 $ 552

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Foreign exchange rate impacts (150) (64)

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

Cost of Goods Sold / Gross Profit for the nine months ended September 30, 2022

$ 2,183 $ 522

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.

For nine months ended September 30, 2022, cost of goods sold decreased by $36 million, primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of $23 million and $150 million, respectively.

Our continued focus on productivity also contributed to a decrease in cost of goods sold of $60 million, net of $8 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility.

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R&D expenses also increased by $15 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.

Gross profit decreased by $30 million, 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 $64 million of unfavorable foreign currency translational, transactional and hedging effects also reduced our gross profit.

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Three Months Ended

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% of sales 6.0 % 7.1 % 6.1 % 6.0 %

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.

Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2022 decreased by $3 million compared with the prior year, primarily due to $6 million of favorable impacts from foreign exchange rates and $3 million of lower professional services costs, partially offset by $4 million of increased bad debt expense and $1 million of higher travel expenses.

For the nine months ended September 30, 2022, SG&A decreased by $2 million versus the prior year.

This decrease was driven by $13 million benefit from favorable foreign exchange rates compared to the prior year and $7 million of lower employee-related costs which reflect not only lower expected employee incentive payout, but also $2 million of one-time cash continuity awards that were recognized in 2021.

These decreases were partially offset by $6 million of higher professional services costs, $3 million from increased travel expenses and $9 million of higher bad debt expenses due primarily to a non-recurring bad debt recovery recognized during the first quarter of 2021.

Interest Expense

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Interest expense $ 18 $ 25 $ 61 $ 70

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.

For the three months ended September 30, 2022, interest expense decreased by $7 million compared to the prior year, primarily due to $11 million of interest accretion in 2021 on our Series B Preferred Stock that was issued at Emergence and fully early redeemed by June 2022, partially offset by $3 million of higher interest expense on our current Dollar Term Facility.

For the nine months ended September 30, 2022, interest expense decreased by $9 million compared to the prior year, primarily due to $8 million of higher interest accretion on our Series B Preferred Stock in 2021 that was fully early redeemed by the end of June 2022 and $1 million of lower interest expense from the extinguishment of our pre-emergence debt and concurrent issuance of the Credit Facilities, effective at Emergence.

Non-operating income

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$ (29) $ (4) $ (73) $ (4)

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.

For the three months ended September 30, 2022, non-operating income increased by $25 million from $4 million in the prior year and comprised of $25 million of interest income primarily from unrealized marked-to-market gains on our interest rate swaps.

For the nine months ended September 30, 2022, non-operating income increased by $69 million and comprised of $63 million of interest income primarily from unrealized marked-to-market gains on our interest rate swaps and $4 million of other non-operating gains partially offset by $6 million of foreign exchange remeasurement losses and $3 million related to non-service components of net periodic pension benefits.

Reorganization items, net

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Reorganization items, net $ — $ (9) $ 2 $ (130)

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.

There were no expenses incurred for Reorganization items, net for the three months ended September 30, 2022.

During the prior year period, reorganization items, net amounted to a $9 million gain, representing the reversal of excess accrual of professional service fees related to the Chapter 11 Cases.

For the nine months ended September 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 $130 million gain, representing $502 million gain on settlement of Honeywell claims, partially offset by $173 million professional service fees related to the Chapter 11 Cases, $79 million related to the termination of and expense reimbursement under that certain share and asset purchase agreement entered into on the Petition Date by the Debtors, AMP Intermediate B.V.

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Six Months Ended

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Effective tax rate 19.8 % 30.8 % 23.0 % 18.3 %

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.

The effective tax rate for the three months ended September 30, 2022 is lower than the effective tax rate for the three months ended September 30, 2021 primarily related to lower nondeductible expenses in addition to a decrease in withholding taxes on undistributed earnings.

The effective tax rate for the nine months ended September 30, 2022 is higher than the effective rate for the nine months ended September 30, 2021 primarily related to the nontaxable gain recognized in 2021 on the settlement of the Honeywell claims partially offset with nondeductible expenses recorded in the prior period and a decrease in withholding taxes on undistributed earnings.

Three Months Ended

Six Months Ended

September 30,

Nine Months Ended

September 30,

2022 2021 2022 2021

1 unchanged sentence

$ 105 $ 63 $ 278 $ 367

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.

Net income for the three months ended September 30, 2022 increased by $42 million compared with the prior year, primarily due to the $15 million increase in gross profit and $25 million increase in non-operating income, as discussed in the above sections.

For the nine months ended September 30, 2022, net income decreased by $89 million compared with the prior year primarily as result of the $132 million net gain on reorganization items recognized in prior year and $30 million of lower gross profit, partially offset by the increase in non-operating income, as discussed in above sections.

Non-GAAP Measures

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Interest expense, net of interest income

(9) 24 (5) 67

Depreciation 21 23 64 70

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Repositioning costs (4)

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

Foreign exchange loss on debt, net — — — 9

Loss on extinguishment of debt — — 5 —

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(2) (3) (11) (9)

Professional service costs (6)

Capital tax expense (7)

Adjusted EBITDA (Non-GAAP) $ 146 $ 134 $ 430 $ 478

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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 define “Adjusted EBITDA” as EBITDA, plus the sum of net reorganization items, stock compensation expense, repositioning costs, net foreign exchange loss on debt, loss on extinguishment on debt, discounting costs on factoring, other non-operating income and professional service costs and capital tax expense incurred in conjunction with our reorganization.

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

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(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 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.

(6) Professional service costs consist of professional service fees related to strategic planning for the Company.

Costs incurred in 2021 relate to strategic planning activities for the Company which occurred following the Effective Date.

We consider these costs to be unrelated to our ongoing core business operations.

(7) The canton of Vaud, Switzerland, generally provides for crediting the cantonal corporate income tax against capital tax.

There was no income tax payable for the period ended September 30, 2021 and therefore the 2021 capital tax due of $2 million was recorded in SG&A.

Adjusted EBITDA for the Three Months Ended September 30, 2022

For the three months ended September 30, 2022, net income increased by $42 million versus the prior year as discussed above within the Results of Operations for the Three and Nine Months Ended September 30, 2022 section.

Adjusted EBITDA increased by $12 million compared to the prior year, mainly due to volume increases, increased productivity and inflation pass-through net of pricing, which contributed to a year over year contraction of 60 basis points on our Adjusted EBITDA margin.

The increase in Adjusted EBITDA were partially offset by inflation on commodities, transportation and energy, as well as unfavorable foreign exchange impacts.

Our volumes for the three months ended September 30, 2022 totaled 3.6 million units, representing an increase of approximately 15% from the prior year.

During the three months ended September 30, 2021, we faced demand volatility driven mainly by the global semiconductor shortage, resulting in supply chain disruptions.

However, we have started to see customer demand increases and market recovery during the three months ended September 30, 2022, as well as favorable impacts from new product launches in gasoline and ramp up to peak volumes on programs in commercial vehicles.

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 higher SG&A expenses due to higher professional service fees and higher travel expenses.

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, while managing to decrease our SG&A expenses due to lower professional service fees, despite higher travel expenses and an increased bad debt expense.

R&D expenses increased $7 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.

Losses in foreign currency from translational, transactional and hedging effects in the three months ended September 30, 2022, primarily driven by a lower Euro-to-US dollar exchange rate versus the prior-year period, also accounted for $27 million of the decrease in Adjusted EBITDA.

Adjusted EBITDA for the Nine Months Ended September 30, 2022

For the nine months ended September 30, 2022, net income decreased by $89 million versus the prior year as discussed above within the Results of Operations for the Three and Nine Months Ended September 30, 2022 section.

Adjusted EBITDA decreased by $48 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, which contributed to a year over year contraction of 140 basis points on our Adjusted EBITDA margin.

Our volumes for the nine months ended September 30, 2022 totaled 10.2 million units, representing a decrease of approximately 1% from the prior year.

During the first six months of 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 have, however, started to see improved customer demand and market recovery during the three months ended September 30, 2022, as well as favorable impacts from new product launches in gasoline.

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.

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R&D expenses increased $15 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.

Losses in foreign currency from translational, transactional and hedging effects in the nine months ended September 30, 2022, primarily driven by a lower Euro-to-US dollar exchange rate versus the prior-year period, also accounted for $55 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 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 June 30, 2022, the aggregate accumulated dividend was approximately $174 million.

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

As of September 30, 2022, the Company reported a cash and cash equivalents position of $159 million (not including $2 million in restricted cash as of September 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 September 30, 2022, the Company had no borrowings or letters of credit outstanding under the Revolving Facility, and

available borrowing capacity of $475 million.

In addition, as of September 30, 2022, the Company had $1,146 million of principal outstanding on its Term Loan Facilities and had utilized $12 million of the bilateral letter of credit facilities with $3 million of remaining available capacity.

During the nine months ended September 30, 2022, we repaid $5 million on our Dollar Facility and $381 million related to our Series B Preferred Stock which included the final early 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, when, 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.

During the nine months ended September 30, 2022, we declared a cash dividend of $0.l7 per share on our Series A Preferred Stock for a total aggregate dividend of $42 million.

As of September 30, 2022, the aggregate accumulated undeclared and unpaid dividend was approximately $172 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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For more information, see Note 13, Long-term Debt and Credit Agreements .

In connection with the Company’s Emergence 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.

In connection with the Company’s Emergence and pursuant to the Plan, the Company issued 247,768,962 shares of the Company’s Series A Preferred Stock certain affiliated funds of Centerbridge Partners, L.P., certain affiliated funds of Oaktree Capital Management, L.P.

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.

Additionally, holders of the Series A Preferred Stock have the right to convert their shares of Series A Preferred Stock into Common Stock effective on January 1, April 1, July 1 and October 1 in each year.

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.

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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 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.

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

See Note 15 , Mandatorily Redeemable Series B Preferred Stock of the Notes to the Consolidated Interim Financial Statements and Note 17, 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 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.

As of September 30, 2022, the Company had repurchas ed $24 million of its Series A Preferred Stock and Common Stock, with $76 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 Six Months Ended June 30, 2022

Six Months Ended

Cash Flow Summary for the Nine Months Ended September 30, 2022

Nine Months Ended

September 30,

(Dollars in millions)

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$ (303) $ (159)

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.

Cash provided by operating activities increased by $684 million for the nine months ended September 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 of $89 million, net of a $344 million increase in non-cash adjustments which included a $423 million gain recognized in prior year on reorganization items and a $54 million increase in the fair value of our undesignated derivative instruments.

Favorable impacts from working capital of $106 million also contributed to the increase in cash provided by operating activities, partially offset by a $52 million decrease mainly driven by other assets and liabilities.

Cash used for investing activities increased by $5 million for the nine months ended September 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 $798 million for the nine months ended September 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), $42 million of cash transferred to the transfer agent for settlement of our Series A Preferred Stock dividend declared on September 8, 2022, and $4 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, $1,513 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.

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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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Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to the Company’s quantitative and qualitative disclosures about market risks as disclosed in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risks, in our 2021 Form 10-K.

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