Garrett Motion Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations, which we refer to as our “MD&A,” should be read in conjunction with our Consolidated Interim Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q as well as the audited annual Consolidated Financial Statements for the year ended December 31, 2021, included in our Form 10-K, as filed with the Securities and Exchange Commission on February 14, 2022 (our “2021 Form 10-K”). Some of the information contained in this MD&A or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the “Risk Factors” section of our 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 nine months ended September 30, 2022. Executive Summary 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. Our OEM sales contributed approximately 87% of our revenues while our aftermarket and other products contributed 13% of our revenues. 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 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 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. 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. 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. Trends 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 24 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 on-highway 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. We expect growth in the turbocharger industry in all regions, with special mention for high-growth regions in Asia, where rising income levels continue to drive long-term automotive and vehicle component demand. While these positive factors do not isolate the turbocharger industry from fluctuations in global vehicle production volumes, such factors may mitigate the negative impact of macroeconomic cycles. The global turbocharger industry is traditionally subject to inflationary pressures with respect to raw materials which place operational and profitability burdens on the entire supply chain. Given the recent macroeconomic disruptions including the geopolitical tensions from the ongoing Russia-Ukraine conflict, we expect to see continued commodity cost volatility which could have an impact on future earnings. Accordingly, we continue to seek to mitigate both inflationary pressures and our material-related cost exposures by negotiating commodity cost contract escalation or pass-through agreements with customers and cost reductions with suppliers. 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 nine months ended September 30, 2022 and 2021, respectively. By Geography Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) United States $ 189 20% $ 143 17% $ 515 19% $ 423 15% Europe 428 45% 393 47% 1,319 49% 1,401 51% Asia 308 33% 289 34% 817 30% 909 33% Other 20 2% 14 2% 54 2% 38 1% Total $ 945 $ 839 $ 2,705 $ 2,771 By Product Line Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Diesel $ 238 25% $ 225 27% $ 729 27% $ 823 30% Gas 401 43% 332 39% 1,109 41% 1,066 38% Commercial Vehicle 178 19% 162 19% 498 18% 537 19% Aftermarket 115 12% 107 13% 328 12% 300 11% Other 13 1% 13 2% 41 2% 45 2% Total $ 945 $ 839 $ 2,705 $ 2,771 25 Results of Operations for the Three and Nine Months Ended September 30, 2022 Net Sales Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Net sales $ 945 $ 839 $ 2,705 $ 2,771 % change compared with prior period 12.6 % (2.4) % 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. 26 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 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 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Cost of goods sold $ 767 $ 676 $ 2,183 $ 2,219 % change compared with prior period 13.5 % (1.6) % Gross profit percentage 18.8 % 19.4 % 19.3 % 19.9 % Cost of Goods Sold Gross Profit (Dollars in millions) Cost of Goods Sold / Gross Profit for the three months ended September 30, 2021 $ 676 $ 163 Increase/(decrease) due to: Volume 84 37 Product mix 34 6 Price, net of inflation pass-through — 43 Commodity, transportation & energy inflation 52 (52) Productivity, net (14) 22 Research & development 7 (7) Foreign exchange rate impacts (72) (34) Cost of Goods Sold / Gross Profit for the three months ended September 30, 2022 $ 767 767 $ 178 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 27 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 nine months ended September 30, 2021 $ 2,219 $ 552 Increase/(decrease) due to: Volume (23) (10) Product mix 81 20 Price, net of inflation pass-through — 69 Commodity, transportation & energy inflation 101 (101) Productivity, net (60) 71 Research & development 15 (15) Foreign exchange rate impacts (150) (64) Cost of Goods Sold / Gross Profit for the nine months ended September 30, 2022 $ 2,183 $ 522 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. These decreases were partially offset by $101 million of inflation on commodities, transportation and energy costs, as well as $81 million due to an unfavorable product mix. 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 $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. These decreases were partially offset by $71 million of higher productivity and $69 million of inflation recoveries from customer pass-through agreements net of pricing reductions. Selling, General and Administrative Expenses Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Selling, general and administrative expense $ 57 $ 60 $ 164 $ 166 % of sales 6.0 % 7.1 % 6.1 % 6.0 % 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. 28 Interest Expense Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Interest expense $ 18 $ 25 $ 61 $ 70 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 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Non-operating income $ (29) $ (4) $ (73) $ (4) 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 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Reorganization items, net $ — $ (9) $ 2 $ (130) 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. and AMP U.S. 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 $43 million in other costs mainly related to unsecured notes settlement. 29 Tax Expense Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Tax expense $ 26 $ 28 $ 83 $ 82 Effective tax rate 19.8 % 30.8 % 23.0 % 18.3 % 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. Net Income Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Net income $ 105 $ 63 $ 278 $ 367 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 It is management’s intent to provide non-GAAP financial information to supplement the understanding of our business operations and performance, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the most directly comparable GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies and may not be comparable to other similarly titled measures used by other companies. Additionally, the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of the Company’s operating results as reported under GAAP. 30 EBITDA and Adjusted EBITDA (1) Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Dollars in millions) Net income — GAAP $ 105 $ 63 $ 278 $ 367 Interest expense, net of interest income (9) 24 (5) 67 Tax expense 26 28 83 82 Depreciation 21 23 64 70 EBITDA (Non-GAAP) 143 138 420 586 Reorganization items, net (2) — (9) 2 (130) Stock compensation expense (3) 3 2 8 5 Repositioning costs (4) 1 3 4 14 Foreign exchange loss on debt, net — — — 9 Loss on extinguishment of debt — — 5 — Discounting costs on factoring 1 — 2 — Other non-operating income (5) (2) (3) (11) (9) Professional service costs (6) — 1 — 1 Capital tax expense (7) — 2 — 2 Adjusted EBITDA (Non-GAAP) $ 146 $ 134 $ 430 $ 478 (1) We evaluate performance on the basis of EBITDA and Adjusted EBITDA. 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 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: • EBITDA and Adjusted EBITDA exclude the effects of income taxes, as well as the effects of financing and investing activities by eliminating the effects of interest and depreciation expenses and therefore more closely measure our operational performance; and • certain adjustment items, while periodically affecting our results, may vary significantly from period to period and have disproportionate effect in a given period, which affects the comparability of our results. In addition, our management may use Adjusted EBITDA in setting performance incentive targets to align performance measurement with operational performance. (2) The Company applied ASC 852 for periods subsequent to the Petition Date to distinguish transactions and events that were directly associated with the Company’s reorganization from the ongoing operations of the business. Accordingly, certain expenses and gains incurred during the Chapter 11 Cases are recorded within Reorganization items, net in the Consolidated Interim Statements of Operations. See Note 1, Background and Basis of Presentation of the Notes to the Consolidated Interim Financial Statements. (3) Stock compensation expense includes only non-cash expenses. (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. 31 (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, 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 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. 32 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. 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. 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. 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 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 Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, as well as borrowings under a senior secured revolving credit facility and the issuance of senior notes, commitments under both of which were cancelled in connection with the Chapter 11 Cases. During the pendency of our bankruptcy proceedings, we financed our operations with funds generated from operating activities and available cash and cash equivalents, and also had in place debtor-in-possession financing arrangements. 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 33 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. We believe the combination of expected cash flows, the funding received from our Series A Preferred Stock issuance, the term loan borrowings, and the revolving credit facilities being committed until 2026, will provide us with adequate liquidity to support the Company's operations. Emergence - Exit Financing and Entry into Credit Facilities Upon our emergence from Chapter 11 proceedings on the Effective Date, the following transactions significantly improved the Company’s liquidity: • Net proceeds from the issuance of Term Loan Facilities of $1,221 million; • The Company obtained $300 million in commitments under a five-year secured first-lien multi-currency Revolving Facility, $125 million of which may be used for the issuance of letters of credit; • The Company obtained a $35 million letter of credit facility for a term of five years; • Debt repayment of $1,103 million in secured term loan facilities and accrued interest, repayment of $374 million in revolving credit facility, $461 million in Senior Notes and accrued interest and $101 million repayment of Debtor-in-possession Term Loan facility and accrued interest; • Issuance of Series A Preferred Stock in a rights offering for $1,301 million; • Settlement of $1,459 million of claims with Honeywell for a $375 million payment and the issuance of $577 million of Series B Preferred Stock. On January 11, 2022 and March 22, 2022, the Company amended the Credit Agreement, increasing the maximum amount of borrowings under the Revolving Facility from $300 million to $475 million. 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 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 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. See Note 21 , Equity 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 A Preferred Stock. 34 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 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 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 Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2022 2021 (Dollars in millions) Cash provided by (used for): Operating activities $ 238 $ (446) Investing activities (78) (73) Financing activities (436) 362 Effect of exchange rate changes on cash and restricted cash (27) (2) Net decrease in cash, cash equivalents and restricted cash $ (303) $ (159) 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. Off-Balance Sheet Arrangements We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. 35 Critical Accounting Policies The preparation of our Consolidated Interim Financial Statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. Actual results could differ from our estimates and assumptions, and any such differences could be material to our financial statements. Our critical accounting policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2021 Form 10-K. Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Interim Financial Statements for further discussion of recent accounting pronouncements. Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding the following, are forward-looking statements: statements regarding our future results of operations and financial position, the consequences of the Chapter 11 Cases, 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. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including: • increases in the costs and availability of raw materials and our ability to offset material price inflation; • risks of natural disasters and climate change, and changes in legislation or government regulations or policies relating to climate change or otherwise, including with respect to greenhouse gas emission reduction targets, or other similar targets, in Europe (as part of the Green Deal objectives or otherwise); the United States; China; Japan; and Korea or other jurisdiction in which the Company does business, and growing recognition among consumers of the dangers of climate change, which may affect demand for our products, our supply chain, and results of our operations; • changes in the automotive industry and economic or competitive conditions; • any loss of, or a significant reduction in purchases by, our largest customers, material non-payment or non-performance by any of our key customers, and difficulty collecting receivables; • impacts on our business from the ongoing COVID-19 pandemic, including reductions to production volumes as a result of reduced capacity at manufacturing facilities; • any failure to protect our intellectual property or allegations that we have infringed the intellectual property of others; and our ability to license necessary intellectual property from third parties; 36 • potential material losses and costs as a result of any warranty claims and product liability actions brought against us; • quality control and creditworthiness of the suppliers on which we rely; • work stoppages, other disruptions or the need to relocate any of our facilities; • inaccuracies in estimates of volumes of awarded business; • the negotiating positions of our customers and our ability to negotiate favorable pricing terms; • risks related to international operations and our investment in foreign markets, including risks related to the withdrawal of the United Kingdom from the European Union; • risks related to disruptions in our supply chain and business operations due to the ongoing conflict between Russia and Ukraine; • the effects of any deterioration on industry, economic or financial conditions on our ability to access the capital markets on favorable terms; • any significant failure or inability to comply with the specifications and manufacturing requirements of our original equipment manufacturer customers or by increases or decreases to the inventory levels maintained by our customers; • any failure to increase productivity or successfully execute repositioning projects or manage our workforce; • potential material environmental liabilities and hazards; • the commencement of any lawsuits, investigations and disputes arising out of our current and historical businesses, and the consequences thereof; • inability to recruit and retain qualified personnel; and • the other factors described under the caption “Risk Factors” in our 2021 Form 10-K, as updated in this Quarterly Report on Form 10-Q, and our other filings with the SEC. You should read this Quarterly Report on Form 10-Q and the documents that we reference herein completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.