What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-24 · 159 added, 75 removed, 156 unchanged (60% of the section changed)

3 unchanged sentences

As a result of many important factors, including those set forth in the “Risk Factors” section of our 2022 Form 10-K and this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.

The following MD&A is intended to help you understand the results of operations and financial condition of Garrett Motion Inc., for the three months ended March 31, 2023.

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, 2023.

Executive Summary

For the three months ended March 31, 2023, net sales were $970 million, an increase compared to prior year of $69 million or 8%, including an unfavorable impact of $47 million or 5% due to foreign currency translation driven by lower Euro-to-US dollar exchange rates.

This increase was driven by higher volumes as the industry recovers and the semiconductor shortages experienced in the prior year abate, as well as share of demand gains from new product ramp-ups and launches, and inflation recoveries net of pricing across all product lines.

For the three months ended March 31, 2023, 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 69% 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 88% of our revenues while our aftermarket and other products contributed 12% of our revenues.

For the three months ended June 30, 2023, net sales were $1,011 million, an increase compared to prior year of $152 million or 18%, including an unfavorable impact of $7 million or 1% due to foreign currency translation.

The increase was driven by strong performance from the ramp up of new products, inflation recoveries net of pricing impacting all product lines and the lifting of COVID-related lockdown measures in China which impacted the prior year.

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 71% of our revenues.

Commercial vehicle product sales (products for on- and off-highway trucks, construction, agriculture and power-generation machines) accounted for 17% of our revenues while our aftermarket and other products contributed 12% of our revenues.

Approximately 49% of our revenues came from sales to customers located in Europe, 30% from sales to customers located in Asia, 19% from sales to customers in North America, and 2% from sales to customers in other international markets.

On March 8, 2023, we declared a cash dividend of $0.17 per share on our Series A Preferred Stock, payable to shareholders of record as of the close of business on March 22, 2023.

On March 29, 2023, we transferred the aggregate dividend amount of $42 million to the transfer agent, for the settlement of the dividend to the shareholders of record, which occurred on April 3, 2023.

On April 12, 2023, we entered into separate transaction agreements with Centerbridge and Oaktree (collectively, the "Transaction Agreements") to effect a series of integrated transactions designed to increase the attractiveness of the Company to investors, including by simplifying our capital structure through a conversion of all shares of the Series A Preferred Stock into shares of Common Stock on or about July 3, 2023.

The transactions contemplated by the Transaction Agreements include, among other things, the cash repurchase of approximately $570 million of shares of Series A Preferred Stock, comprised of approximately $280 million of shares from Centerbridge and approximately $290 million of shares from Oaktree, subject to the successful completion by the Company of a debt financing of approximately $700 million, which the Company currently intends to be in the form of a new $700 million term loan B.

The Board of Directors has also approved, and each of Centerbridge and Oaktree have consented to, an amendment and restatement of the Certificate of Designation of the Series A Preferred Stock.

In connection with the conversion of the Series A Preferred Stock, holders of Series A Preferred Stock will receive accrued and unpaid dividends on their shares until conversion, as well as certain other dividends and amounts payable in respect of their shares, including an additional amount that represents the dividends that would have accrued on the Series A Preferred Stock through September 30, 2023.

As part of the Agreements, Centerbridge and Oaktree have also agreed with the Company to certain changes to their governance rights under the Company’s governance documents, including a reduction of their existing board nomination rights, as well as lock-up restrictions on their equity securities of the Company for up to twelve months, and certain limits on their ability to purchase additional equity securities of the Company and to voting limitations, in each case for a period of up to eighteen months.

The foregoing description of the transactions does not purport to be complete and is qualified in its entirety by reference to the full text of the Transaction Agreements, which are incorporated by reference as Exhibits 10.1 and 10.2 to this Quarterly Report on Form 10-Q.

On April 12, 2023, the Board of Directors also authorized an increase in our share repurchase program, from $100 million to an aggregate amount of $250 million available as of April 12, 2023.

On April 12, 2023, we entered into separate definitive agreements (the "Agreements") with with each of Centerbridge Partners, L.P.

and funds managed by Oaktree Capital Management, L.P.

(collectively, the "C&O Investors") to effect a series of integrated transactions (the "Transaction") designed to increase the attractiveness of the Company to investors, including simplifying our capital structure through a conversion of all shares of the Series A Preferred Stock into shares of Common Stock.

Under the Transaction, the Company repurchased 69,707,719 shares of Series A Preferred Stock and converted 175,337,712 shares of Series A Preferred Stock into an equivalent number of Common Stock.

Total consideration paid to the holders of Series A Preferred Stock under the Transaction amounted to cash payments of $605 million and the issuance of an additional 25,577,517 shares of Common Stock in settlement of accumulated and unpaid preference dividends on the Series A Preferred Stock through June 30, 2023.

The Transaction was financed through a new Term Loan B for an aggregate principal amount of $700 million under the framework of the Company's existing credit agreement.

As part of the Agreements, the C&O Investors agreed with the Company to certain changes to each of their respective governance rights under the Company’s governance documents, including a reduction of their existing board nomination rights, as well as lock-up restrictions on their equity securities of the Company for up to twelve months, and certain limits on their ability to purchase additional equity securities of the Company and to voting limitations, in each case for a period of up to eighteen months.

The foregoing description of the Transaction does not purport to be complete and is qualified in its entirety by reference to the full text of the Agreements which we have previously filed with the SEC, and which are incorporated by reference herein.

On April 12, 2023, the Board of Directors also authorized an increase in our share repurchase program to an aggregate amount of $250 million available as of that date.

On July 26, 2023, the Board of Directors approved the early repayment of approximately $200 million of our Term Loan Facilities.

The Company expects the repayment to occur in the third quarter of 2023.

Disaggregated Revenue

The following tables show our revenues by geographic region and product line for the three months ended March 31, 2023 and 2022, respectively.

The following tables show our revenues by geographic region and product line for the three and six months ended June 30, 2023 and 2022, respectively.

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

3 unchanged sentences

309 30% 227 26% 591 30% 509 29%

18 2% 19 2% 36 2% 34 2%

$ 1,011 $ 859 $ 1,981 $ 1,760

By Product Line

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

5 unchanged sentences

Total $ 1,011 $ 859 $ 1,981 $ 1,760

Results of Operations for the Three Months Ended March 31, 2023

Results of Operations for the Three and Six Months Ended June 30, 2023

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

1 unchanged sentence

% change compared with prior period 17.7 % 12.6 %

For the three months ended March 31, 2023, net sales increased compared to prior year by $69 million or 8%, including an unfavorable impact of $47 million or 5% due to foreign currency translation driven by lower Euro-to-US dollar exchange rates.

This increase was driven by volume upside as the industry recovers and the semiconductor shortages experienced in the prior year abate, as well as share of demand gains from new product ramp-ups and launches, and inflation recoveries net of pricing across all product lines.

Gasoline product sales increased by $40 million or 11% (including an unfavorable impact of $21 million or 6% due to foreign currency translation), primarily driven by industry recovery including reduced semiconductor shortages versus prior year, as well as new product launches in Europe, Asia and North America.

Diesel product sales increased by $8 million or 3% (including an unfavorable impact of $13 million or 5% due to foreign currency translation), primarily driven by industry recovery in Europe, Korea and North America, balanced by soft light commercial vehicle demand in China affected by ripple effects from the end of their zero COVID policy.

Commercial vehicle sales increased by $17 million or 10% (including an unfavorable impact of $9 million or 5% 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 products combined with the ramp up to peak volumes on new programs.

Aftermarket sales improved by $5 million or 5% (including an unfavorable impact of $3 million or 3% due to foreign currency translation), primarily due to strong demand in Europe and Asia Pacific related to favorable aftermarket conditions such as continued high demand for replacement parts, recovery in China from the end of their zero COVID policy, as well as growth through new product introductions, favorable pricing impacts and improved shipment performance.

For the three months ended June 30, 2023, net sales increased compared to prior year by $152 million or 18%, including an unfavorable impact of $7 million or 1% due to foreign currency translation driven by lower Chinese yuan-to-US dollar exchange rates, partially offset by higher Euro-to-US dollar exchange rates.

Gasoline product sales increased by $111 million or 32% (including an unfavorable impact of $7 million or 2% due to foreign currency translation), primarily due to strong performance in China related to new product launches combined with

lower prior year net sales in China due to the COVID-related lockdown measures implemented by the Chinese government which were lifted in June 2022.

Diesel product sales increased by $23 million or 10% (including a favorable impact of $2 million or 1% due to foreign currency translation), primarily driven by growth in Europe where diesel is essential to meet fleet CO2 regulation targets, and strong light commercial vehicle sales on incumbent platforms.

Commercial vehicle sales increased by $14 million or 9% (including an unfavorable impact of $1 million or 1% due to foreign currency translation), primarily driven by more favorable product mix in North America and Eur ope on both on- and off-highway platforms.

Aftermarket sales improved by $6 million or 6%, primarily due to strong demand in Europe and Asia Pacific related to favorable aftermarket conditions such as continued high demand for replacement and performance parts, recovery in China from the end of the Chinese government's zero COVID-19 policy, as well as growth through new product introductions, favorable pricing impacts and improved shipment performance.

For the six months ended June 30, 2023, net sales increased compared to prior year by $221 million or 13%, including an unfavorable impact of $54 million or 3% due to foreign currency translation driven by lower Chinese yuan-to-US dollar exchange rates and lower Euro-to-US dollar exchange rates.

This increase was driven by higher volumes as markets recover from the semiconductor shortages experienced in the prior year and strong performance from new product launches and ramp ups, combined with prior year COVID-related lockdown measures in China and inflation recoveries net of pricing across all product lines.

Gasoline product sales increased by $150 million or 21% (including an unfavorable impact of $29 million or 4% due to foreign currency translation), primarily driven by industry recovery from the prior year’s global semiconductor shortages and COVID-related lockdown measures in China combined with new product launches and ramp ups across all regions.

Diesel product sales increased by $31 million or 6% (including an unfavorable impact of $11 million or 2% due to foreign currency translation), due to strong performance in Europe where diesel is essential to meet fleet CO2 regulations target, and strong light commercial vehicle sales on incumbent platforms.

Commercial vehicle sales increased by $31 million or 10% (including an unfavorable impact of $10 million or 3% due to foreign currency translation), primarily driven by strong performance in North America and Europe due to new product launches combined with favorable global product mix.

Aftermarket sales improved by $11 million or 5% (including an unfavorable impact of $3 million or 1% due to foreign currency translation), primarily due to strong demand in Europe and Asia Pacific related to favorable aftermarket conditions such as continued high demand for replacement parts, recovery in China from the end of the Chinese government's zero COVID-19 policy, as well as growth through new product introductions and favorable pricing impacts and improved shipment performance.

Cost of Goods Sold and Gross Profit

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

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(Dollars in millions)

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

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

Increase/(decrease) due to:

Volume 108 46

Product mix 1 (27)

4 unchanged sentences

Foreign exchange rate impacts (9) 2

Cost of Goods Sold / Gross Profit for the three months ended March 31, 2023

Cost of Goods Sold / Gross Profit for the three months ended June 30, 2023

$ 809 809 $ 202

For the three months ended March 31, 2023, cost of goods sold increased by $55 million, primarily driven by our higher sales volumes and product mix, which contributed to increases of $41 million and $34 million, respectively.

Cost of goods sold further increased due to $26 million of inflation on commodities, energy and transportation, as well as a $3 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, net of labor inflation, contributed to a decrease in cost of goods sold of $13 million.

Foreign currency impacts from transactional, translational and hedging effects also contributed to decreases of $36 million.

For the three months ended June 30, 2023, cost of goods sold increased by $119 million, primarily driven by our higher sales volumes and an unfavorable product mix, which contributed to increases of $108 million and $1 million, respectively.

Cost of goods sold further increased due to $16 million of inflation on commodities, energy and transportation, as well as a $7 million increase in Research and development ("R&D") costs which reflects our continued investment in new technologies and headcount increase year-over-ye ar.

Our continued focus on productivity, net of labor inflation and one-time expenses, contributed to a decrease in cost of goods sold of $4 million.

Foreign currency impacts from transactional, translational and hedging effects also contributed to decreases in cost of goods sold of $9 million.

Gross profit increased by $33 million, mainly driven by the higher sales volumes of $46 million and $28 million of inflation recoveries from customer pass-through agreements net of pricing reductions.

Furthermore, gross profit increased $8 million from higher productivity net of labor inflation and $4 million of favorable product mix.

These increases were partially offset by $26 million inflation on commodities, energy costs and transportation, as discussed above, and $3 million of higher R&D costs.

Foreign currency impacts from transactional, translational and hedging effects also contributed to decreases of $10 million.

Furthermore, gross profit increased by $7 million from higher productivity net of labor inflation and one-time expenses as discussed above.

Gross profit also increased by $2 million due to foreign currency impacts from transactional, translational and hedging effects.

These increases were partially offset by $27 million of unfavorable product mix, $16 million of inflation on commodities, energy and transportation costs, as well as $7 million of higher R&D costs as discussed above.

Cost of Goods Sold Gross Profit

(Dollars in millions)

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

$ 1,416 $ 344

Increase/(decrease) due to:

Volume 149 64

Product mix 36 (23)

Price, net of inflation pass-through — 51

Commodity, transportation & energy inflation 42 (42)

Productivity, net (18) 15

Research & development 10 (10)

Foreign exchange rate impacts (45) (8)

Cost of Goods Sold / Gross Profit for the six months ended June 30, 2023

$ 1,590 1590 $ 391

For the six months ended June 30, 2023, cost of goods sold increased by $174 million, primarily driven by our higher sales volumes and an unfavorable product mix, which contributed to increases of $149 million and $36 million, respectively.

Cost of goods sold further increased due to $42 million of inflation on commodities, energy and transportation, as well as a $10 million increase in R&D costs which reflects our continued investment in new technologies and headcount increase year-over-year.

Our continued focus on productivity, net of labo r inflation and one-time expenses, contributed to a decrease in cost of goods sold of $18 million.

Foreign currency impacts from transactional, translational and hedging effects also contributed to decreases in cost of goods sold of $45 million.

Gross profit increased by $47 million, mainly driven by the higher sales volumes of $64 million and $51 million of inflation recoveries from customer pass-through agreements net of pricing reductions.

Furthermore, gross profit increased $15 million from higher productivity net of labor inflation and one-time expenses as discussed above.

These increases were partially offset by $42 million inflation on commodities, energy costs and transportation, as discussed above, $23 million of unfavorable product mix, $10 million of higher R&D costs and $8 million from foreign currency impacts from transactional, translational and hedging effects.

Selling, General and Administrative Expenses

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

1 unchanged sentence

% of sales 6.2 % 6.3 % 6.0 % 6.1 %

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2023 increased by $3 million compared with the prior year, primarily due to $3 million of lower incentive compensation expense in 2022 and $2 million of consultant fees related to our capital structure transformation, partially offset by $2 million of favorable impacts from foreign exchange rates.

Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2023 increased by $9 million compared with the prior year, primarily due to $5 million of legal and advisory fees related to our capital structure transformation Transaction, $1 million of unfavorable impacts from foreign exchange rates an d $2 million of labor-related expenses.

SG&A expenses for the six months ended June 30, 2023 increased by $12 million compared with the prior year, primarily due to $7 million of legal and advisory fees related to our capital structure transformation Transaction, $3 million of labor inflation impacts, and $3 million of lower incentive compensation expense in 2022.

These increases were partially offset by $1 million of favorable impacts from foreign exchange rates.

Interest Expense

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

Interest expense $ 30 $ 20 $ 58 $ 43

For the three months ended March 31, 2023, interest expense increased by $5 million compared to the prior year, primarily due to $7 million of interest expense recorded from unrealized marked-to-market losses on our interest rate swaps.

Non-operating income

For the three months ended June 30, 2023, interest expense increased by $10 million compared to the prior year, due to $21 million of higher interest expense primarily driven by the new $700 million U.S.

Dollar term loan and increased interest rates, partially offset by $7 million from unrealized marked-to-market gains on our interest rate swaps and $4 million of interest accretion in the prior year on our Series B Preferred Stock that was fully redeemed by June 2022.

For the six months ended June 30, 2023, interest expense increased by $15 million compared to prior year, due to $30 million of higher interest expense primarily driven by the aforementioned $700 million U.S.

Dollar term loan and increased market interest rates.

These increases in interest expense were partially offset by $10 million of interest accretion in the prior year on our Series B Preferred Stock that was fully redeemed in June 2022 and $4 million of unrealized marked-to-market gains on our interest rate swaps.

Non-operating expense (income)

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

Non-operating income $ (4) $ (28)

For the three months ended March 31, 2023, non-operating income decreased by $24 million from $28 million in the prior year period, primarily related to $27 million of interest income recorded in 2022 from unrealized marked-to-market gains on our interest rate swaps.

Non-operating expense (income) $ 7 $ (16) $ 3 $ (44)

For the three months ended June 30, 2023, non-operating expense was $7 million, from an income of $16 million in the prior year, due to a $13 million loss on the remeasurement of the Series A Preferred Stock Agreement related to our capital structure transformation Transaction and $8 million of interest income recorded in 2022 for unrealized marked-to-market gains on our interest rate swaps, partially offset by $2 million of foreign exchange remeasurement gains.

For the six months ended June 30, 2023, non-operating expense was $3 million, from an income of $44 million in the prior year period, driven by $33 million of interest income recorded in 2022 for unrealized marked-to-market gains on our interest rate swaps and a $13 million loss on the remeasurement of the aforementioned Series A Preferred Stock Agreement.

These decreases were partially offset by $5 million of foreign exchange remeasurement gains.

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

1 unchanged sentence

Effective tax rate 29.7 % 19.0 % 27.3 % 24.8 %

The decrease in the effective tax rate for the three months ended March 31, 2023 compared to the prior period is primarily related to a decrease in tax reserve true ups and additional global research and development benefits.

The change in the effective tax rate for the three and six months ended June 30, 2023 compared to the prior period is primarily related to non-deductible Transaction-related expenses and a one-time benefit in 2022 related to a change in assertion to permanently reinvest a portion of undistributed earnings in China.

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

1 unchanged sentence

Net income margin 7.0 % 9.9 % 7.7 % 9.8 %

Net income for the three months ended March 31, 2023 decreased by $7 million compared with the prior year, primarily due to $24 million of lower non-operating income and $5 million of higher interest expense, partially offset by $14 million increase in gross profit and $10 million of lower tax expense, as discussed in the above sections.

Net income for the three months ended June 30, 2023 decreased by $14 million compared with the prior year, primarily due to $23 million of higher non-operating expenses as discussed above, $10 million of higher interest expense and $10 million of higher tax expense, partially offset by $33 million increase in gross profit.

Net income for the six months ended June 30, 2023 decreased by $21 million compared with the prior year, primarily due to $47 million higher of non-operating expenses as discussed above, $15 million of higher interest expense, and $12 million of higher SG&A expenses, partially offset by a $47 million increase in gross profit and a $5 million loss on extinguishment of debt recorded in the prior year.

Non-GAAP Measures

5 unchanged sentences

Three Months Ended

Six Months Ended

2023 2022 2023 2022

(Dollars in millions)

7 unchanged sentences

Repositioning costs (4)

Loss on extinguishment of debt

Discounting costs on factoring

Other non-operating income (5)

Capital structure transformation costs (6)

(2) (7) (3) (9)

Capital structure transformation expenses (6)

Adjusted EBITDA (Non-GAAP) $ 170 $ 138 $ 338 $ 284

2 unchanged sentences

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, discounting costs on factoring, other non-operating income and capital structure transformation costs.

We define “Adjusted EBITDA” as EBITDA, plus the sum of net reorganization items, stock compensation expense, repositioning costs, loss on extinguishment of debt, discounting costs on factoring, other non-operating income and capital structure transformation expenses.

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

7 unchanged sentences

(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.

(6) Reflects the third-party incremental costs that are directly attributable to the transformation of the Company's capital structure through the partial redemption and subsequent conversion of remaining outstanding Series A Preferred Stock into a single class of common stock.

Adjusted EBITDA for the Three Months Ended March 31, 2023

For the three months ended March 31, 2023, net income decreased by $7 million versus the prior year as discussed above within the Results of Operations for the Three Months Ended March 31, 2023 section.

(6) Includes the loss on remeasurement of the Series A Preferred Stock Agreement as well as third-party legal and advisory fees that are directly attributable to the Company's capital structure transformation Transaction.

Adjusted EBITDA for the Three Months Ended June 30, 2023

For the three months ended June 30, 2023 , net income decreased by $14 million versus the prior year as discussed above within the Results of Operations for the Three and Six Months Ended June 30, 2023 section.

Adjusted EBITDA increased by $32 million compared to the prior year, mainly due to volume increases, increased productivity, inflation pass-through net of pricing, as well as favorable foreign exchange impacts.

These increases in Adjusted EBITDA were partially offset by product mix, as well as inflation on commodities, transportation and energy costs.

During the three months ended June 30, 2023, we saw strong customer demand increases across all product lines, in a less disruptive supply chain environment, with strong performance from new product launches and ramping up on incumbent platforms, combined with prior year COVID-related lockdown measures in China .

We also saw ramp up to peak volumes on programs in commercial vehicles and favorable aftermarket conditions such as continued high demand for replacement parts.

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 pass-through 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 increases in our SG&A expenses due primarily to lower incentive compensation expense in the prior year.

R&D expenses increased $7 million which reflects our continued investment in new technologies, increased hiring to accelerate growth in the new technologies and year-over-year labor inflation.

Gains in foreign currency from translational, transactional and hedging effects in the three months ended June 30, 2023, primarily driven by a higher Euro-to-US dollar exchange rate versus the prior-year period, also accounted for a $4 million increase in Adjusted EBITDA.

Adjusted EBITDA for the Six Months Ended June 30, 2023

For the six months ended June 30, 2023 , net income decreased by $21 million versus the prior year as discussed above within the Results of Operations for the Three and Six Months Ended June 30, 2023 section.

Adjusted EBITDA increased by $54 million compared to the prior year, mainly due to volume increases, increased productivity and inflation pass-through net of pricing.

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

During the three months ended March 31, 2023, we saw strong customer demand increases in all verticals, in a less disruptive environment, as the industry recovers and the semiconductor shortages experienced in the prior year abate, as well as favorable impacts from new product launches in gasoline.

We also saw ramp up to peak volumes on programs in commercial vehicles and favorable aftermarket conditions such as continued high demand for replacement parts, recovery in China from the end of their zero COVID policy, as well as growth through new product introductions, favorable pricing impacts and improved shipment performance.

These increases in Adjusted EBITDA were partially offset by inflation on commodities, energy and transportation, product mix, as well as unfavorable foreign exchange impacts.

During the six months ended June 30, 2023, we saw strong customer demand increases in all product lines, in a less disruptive supply chain environment, as the industry recovers and the semiconductor shortages experienced in the prior year abate, as well as favorable impacts from new product launches in gasoline.

We also saw ramp up to peak volumes on programs in commercial vehicles and favorable aftermarket conditions such as continued high demand for replacement parts and recovery in China from the end of their zero COVID-19 policy .

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.

1 unchanged sentence

The increased productivity was partially offset by year-over-year labor inflation and increases in our SG&A expenses due primarily to lower incentive compensation expense in the prior year.

R&D expenses increased $3 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 March 31, 2023, primarily driven by a lower Euro-to-US dollar exchange rate versus the prior-year period, also accounted for a $6 million decrease in Adjusted EBITDA.

R&D expenses increased $10 million which reflects our continued 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, 2023, primarily driven by lower Euro-to-US dollar exchange rates, also accounted for a $2 million decrease in Adjusted EBITDA.

Liquidity and Capital Resources

We employ several means to manage our liquidity, and our sources of financing include cash flows from operations, cash and cash equivalents, our Term Loan Facilities, and Revolving Facility.

As of March 31, 2023, the Company reported a cash and cash equivalents position of $291 million (not including $1 million in restricted cash as of March 31, 2023) as compared to $246 million as of December 31, 2022 (not including $2 million in restricted cash as of December 31, 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 March 31, 2023, the Company had $1,193 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 three months ended March 31, 2023, we repaid $2 million on our Dollar Facility.

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 three months ended March 31, 2023, we declared a cash dividend of $0.17 per share on our Series A Preferred Stock for a total aggregate dividend of $42 million.

As of March 31, 2023, the aggregate accumulated undeclared and unpaid dividend was approximately $169 million .

As disclosed in our 2022 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.

2023 December 31,

(Dollars in millions)

Cash and cash equivalents $ 478 $ 246

Restricted cash 1 2

Revolving Facility - available borrowing capacity 570 475

Revolving Facility - borrowings or letters of credit outstanding — —

Term Loan Facilities - principal outstanding 1,891 1,186

Bilateral letter of credit facility - available capacity 3 1

Bilateral letter of credit facility - utilized capacity 12 14

On April 27, 2023, the Company entered into the Third Amendment to the Credit Agreement, which provided for additional financing of $700 million through the 2023 Dollar Term Facility and an increase of $95 million in maximum borrowings available under the Revolving Facility.

The proceeds from the 2023 Dollar Term Facility were primarily used to finance the repurchase from the C&O Investors of shares of Series A Preferred Stock as part of the Transaction, and pay fees and expenses incurred in connection with the Third Amendment.

The 2023 Dollar Term Facility matures on April 30, 2028.

Prior to maturity, the 2023 Dollar Term Facility will be repaid quarterly in an amount equal to, during the first two years occurring after the Closing Date, 7.50% per annum of the aggregate principal amount, and thereafter, 10.00% per annum.

During the six months ended June 30, 2023, we repaid $4 million on our 2021 Dollar Term Facility.

The Company entered into the Agreements with the C&O Investors to repurchase certain shares and convert all remaining Series A Preferred Stock.

As part of the Transaction, all holders of Series A Preferred Stock, including the C&O Investors, received an amount equal to the Accumulated Dividends and Additional Amounts outstanding at repurchase or conversion date.

As of June 30, 2023, all Series A Preferred Stock had either been repurchased or converted and there are no accumulated unpaid dividends on the Series A Preferred Stock.

Refer to Note 15, Series A Preferred Stock of the Notes to the Consolidated Interim Financial Statements for further details regarding the Transaction.

On July 26, 2023, the Board of Directors of the Company approved the early repayment of approximately $200 million of our Term Loan Facilities.

The Company expects the repayment to occur in the third quarter of 2023.

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

We believe the combination of expected cash flows, the term loan borrowings, and the Revolving Facility being committed until 2028, will provide us with adequate liquidity to support the Company's operations.

Following the definitive agreements entered into with Centerbridge and Oaktree to simplify the Company’s capital stock by converting all outstanding Series A Preferred Stock into a single class of Common Stock as previously discussed, we furthermore expect to enter into a new term loan B under our existing Credit Facilities for approximately $700 million in Q2 2023.

We further expect to utilize the borrowings from the new term loan B to fund the repurchases of Series A Preferred Stock from Centerbridge and Oaktree, as well as cash payment of some or all of the preference dividends due to holders of Series A Preferred Stock upon conversion of the Series A Preferred Stock into Common Stock.

Share Repurchase Program

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

The share repurchase program was subsequently extended until November 15, 2023.

As of March 31, 2023, the Company had repurchas ed $26 million of Series A Preferred Stock and Common Stock, with $74 million remaining under the share repurchase program.

On April 12, 2023, the Board of Directors authorized an increase in the share repurchase program to an aggregate amount of $250 million available as of that date.

On November 2, 2022, the Directors authorized the extension of he share repurchase program.

On April 12, 2023, the Board of Directors further authorized an increase in the size of the share repurchase program to an aggregate amount of $250 million available as of that date.

As of June 30, 2023, the Company had repurcha sed $17 million of Common Stock, w ith $233 million remaining under the share repurchase program.

An a dditional 8,464,906 shares of Common Stock were repurchased from July 1, 2023 through July 25, 2023 for an amount of $63 million.

For more information, see Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds .

Cash Flow Summary for the Three Months Ended March 31, 2023

Three Months Ended

Cash Flow Summary for the Six Months Ended June 30, 2023

Six Months Ended

(Dollars in millions)

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Net increase (decrease) in cash, cash equivalents and restricted cash

Cash provided by operating activities increased by $19 million for the three months ended March 31, 2023 versus the prior year, primarily due to an increase of $31 million in net income excluding non-cash charges and favorable impacts

from other assets and liabilities of $26 million, partially offset by unfavorable impacts from changes in working capital of $38 million.

Cash used for investing activities decreased by $21 million for the three months ended March 31, 2023 versus the prior year due to decreased expenditures for property, plant and equipment.

Cash used for financing activities decreased by $152 million for the three months ended March 31, 2023 compared with the prior year.

The change was driven by $186 million paid in the prior year period for the final early redemption of our Series B Preferred Stock (exclusive of $11 million attributable to interest and included in cash from operating activities).

Additionally, in the prior year period, there were payments of $2 million for repurchases of Series A Preferred Stock and Common Stock pursuant to the Company's share repurchase program, and $6 million incurred as debt financing costs, mainly on our Revolving Facility.

During the three months ended March 31, 2023, $42 million of cash was transferred to the transfer agent for settlement of our Series A Preferred Stock dividend declared on March 8, 2023.

$ 231 $ (285)

Cash provided by op erating activities increased by $79 million for the six months ended June 30, 2023 versus the prior year.

The increase was primarily driven by an increase in net income, excluding the effects of non-cash items, of $58 million and favorable impacts from other assets and liabilities of $21 million.

Cash used for investing activities decreased by $28 million for the six months ended June 30, 2023 versus the prior year due to $19 million of decreased expenditures for property, plant and equipment and $9 million of cash settlement received on the re-couponing of our cross currency swap contracts which have been designated as net investment hedges of our Euro-denominated operations.

Cash used for financing activities decreased by $391 million for the six months ended June 30, 2023 compared with the prior year.

Cash flows for financing activities during the six months ended June 30, 2023 included $667 million from the 2023 Dollar Term Facility net of debt financing costs.

We paid an aggregate amount of $605 million to holders of the Series A Preferred Stock related to the Transaction, including conversion of the Series A Preferred Stock as discussed above and in Note 15, Series A Preferred Stock of the Notes to the Consolidated Interim Financial Statements .

We also made payments of $15 million for the repurchase of Common Stock under our share repurchase program and debt repayments of $4 million on our 2021 Dollar Term Facility.

In comparison, cash used for financing activities for the six months ended June 30, 2022 was primarily related to the Company's payment of $381 million for the final early redemption of our Series B Preferred Stock (exclusive of $28 million attributable to interest and included in cash from operating activities).

Off-Balance Sheet Arrangements

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• risks for system or service failures, including cyber or other security incidents, each of which could disrupt business operations, result in loss of critical and confidential information and adversely impact our reputation and results of operations;

• risks associated with the Company’s ability to complete its recently announced capital transformation transactions including on the timelines the Company anticipates, the anticipated impacts to the Company of such transactions including on the Company’s stock price, cash flows and anticipated future investments, the availability of debt financing in amounts and on terms acceptable to the Company, and risks relating to potential purchases by the Company of shares of Common Stock and Series A Preferred Stock under the Company’s share repurchase program ;

• the other factors described under the caption “Risk Factors” in our 2022 Form 10-K, as updated in this Quarterly Report on Form 10-Q, and our other filings with the SEC.

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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 currency, interest rate or commodity price risks as disclosed in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risks, in our 2022 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