What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-10-24 compared with 2023-07-27 · 132 added, 122 removed, 193 unchanged (57% of the section changed)

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As a result of many important factors, including those set forth in the “Risk Factors” section of our 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 and six months ended June 30, 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 nine months ended September 30, 2023.

Executive Summary

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.

For the three months ended September 30, 2023, net sales were $960 million, an increase compared to prior year of $15 million or 2%, including a favorable impact of $21 million or 3% from foreign currency translation.

The increase was driven by ramp up of new products in small gasoline engine applications, offset by unfavorable product mix dynamics from demand softness for diesel and commercial vehicle applications due to global macro economic conditions.

Light vehicle product sales (which were comprised of diesel and gasoline products, including products for passenger cars, SUVs, light trucks, and other products) accounted for approximately 70% of our revenues.

Commercial vehicle product sales (products for on- and off- highway trucks, construction, agriculture and power-generation machines) accounted for 16% of our revenues, while aftermarket and other products contributed 14% of our revenues.

Approximately 45% of our revenues came from sales to customers located in Europe, 32% from sales to customers located in Asia, 21% from sales to customers in North America, and 2% from sales to customers in other international markets.

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.

For the three months ended September 30, 2023, we repurchased $161 million of Common Stock in connection with our share repurchase program.

As of September 30, 2023, we had $72 million of the authorized repurchase value remaining under our share repurchase program.

On July 31, 2023, we made an early debt repayment in the amount of $200 million on our 2023 Dollar Term Facility.

Disaggregated Revenue

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.

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

Three Months Ended

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Nine Months Ended

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2023 2022 2023 2022

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Six Months Ended

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Total $ 960 $ 945 $ 2,941 $ 2,705

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

Results of Operations for the Three and Nine Months Ended September 30, 2023

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% change compared with prior period 1.6 % 8.7 %

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.

For the three months ended September 30, 2023, net sales increased compared to prior year by $15 million or 2%, including a favorable impact of $21 million or 3% due to foreign currency translation driven by higher Euro-to-US dollar exchange rates and partially offset by lower Chinese yuan-to-US dollar exchange rates.

The increase was driven by ramp up of new products in small gasoline engine applications, offset by unfavorable product mix from demand softness for diesel and commercial vehicle applications due to global macro economic conditions.

Gasoline product sales increased by $40 million or 10% (including a favorable impact of $3 million or 1% due to foreign currency translation), primarily due to strong performance in Asia and North America related to product ramp-ups.

Diesel product sales decreased by $9 million or 4% (including a favorable impact of $12 million or 5% due to foreign currency translation), primarily driven by demand softness in India and China, due to program phase out and the negative impact of macro economic dynamics, respectively.

Commercial vehicle sales decreased by $22 million or 13% (including a favorable impact of $2 million or 1% due to foreign currency translation), primarily driven by demand softness influenced by the global economic environment combined with inventory build-up by some customers during prior quarters.

Aftermarket sales improved by $3 million or 3% (including a favorable impact of $3 million or 3% due to foreign currency translation), primarily due to favorable aftermarket conditions and demand for replacement parts in Europe and Asia Pacific, offset by softer sales in North America and Brazil.

For the nine months ended September 30, 2023, net sales increased compared to prior year by $236 million or 9%, including an unfavorable impact of $32 million or 1% due to foreign currency translation driven by lower Chinese yuan-to-US dollar and lower Euro-to-US dollar exchange rates.

This increase was driven by higher volumes as markets recovered from the semiconductor shortages experienced in the prior year coupled with strong demand for new product launches and ramp ups, and inflation recoveries net of pricing across all product lines.

Gasoline product sales increased by $190 million or 17% (including an unfavorable impact of $25 million or 2% due to foreign currency translation), primarily driven by the industry recovery from 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 $22 million or 3% (including a favorable impact of $1 million or 0% due to foreign currency translation), driven by performance in Europe where diesel is essential to meet fleet CO2 regulations targets coupled with light commercial vehicle sales on incumbent platforms.

Commercial vehicle sales increased by $9 million or 2% (including an unfavorable impact of $8 million or 1% due to foreign currency translation), primarily driven by performance in North America and Europe on new product launches and combined with favorable global product mix dynamics.

Aftermarket sales improved by $14 million or 4%, primarily on strong demand in Europe and Asia Pacific related to favorable aftermarket conditions including the continued high demand for replacement parts.

Recovery in China from the end of the Chinese government's zero COVID-19 policy as well as new product introductions and favorable pricing impact also contributed to the growth.

Cost of Goods Sold and Gross Profit

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(Dollars in millions)

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

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

Increase/(decrease) due to:

Volume 108 46

Product mix 5 (23)

Price, net of inflation pass-through — (5)

Commodity, transportation & energy inflation 16 (16)

Productivity, net (12) 12

1 unchanged sentence

Foreign exchange rate impacts 10 11

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

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

$ 784 784 $ 176

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 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.

For the three months ended September 30, 2023, cost of goods sold increased by $17 million, primarily driven by higher sales volumes and an unfavorable product mix which contributed to increases of $12 million and $5 million, respectively.

Cost of goods sold further increased by $2 million related to Research and development ("R&D") costs reflecting the continued commitment to investment in new technologies and $10 million from foreign currency impacts from transactional, translational and hedging effects.

Our continued focus on productivity, net of labor inflation and repositioning costs, contributed to a decrease in cost of goods sold of $12 million.

Gross profit decreased by $2 million, mainly driven by $23 million of unfavorable product mix from the decline of high margin products, $5 million of pricing net of inflation recovery from customer pass-through agreements, and $2 million of higher R&D costs as discussed above.

These decreases were partially offset by $12 million of higher productivity net of labor inflation and repositioning costs, coupled with higher sales volumes of $5 million.

Furthermore, foreign currency impacts from transactional, translational and hedging effects also contributed to increases in gross profit of $11 million.

Cost of Goods Sold Gross Profit

(Dollars in millions)

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

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

$ 2,183 $ 522

2 unchanged sentences

Product mix 40 (46)

Price, net of inflation pass-through — 51

Inflation pass-through, net of price — 46

Commodity, transportation & energy inflation 42 (42)

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Foreign exchange rate impacts (36) 3

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

Cost of Goods Sold / Gross Profit for the nine months ended September 30, 2023

$ 2,374 2374 $ 567

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.

For the nine months ended September 30, 2023, cost of goods sold increased by $191 million, primarily driven by our higher sales volumes and unfavorable product mix which contributed to increases of $162 million and $40 million, respectively.

Cost of goods sold further increased $42 million from inflation of commodities, energy and transportation and $12 million from increased R&D costs which reflects the continued investment in new technologies and headcount year-over-year.

Our focus on productivity, net of labor inflation, one-time expenses and higher repositioning costs, contributed to a decrease in cost of goods sold of $29 million.

Foreign currency impacts from transactional, translational and hedging effects reduced cost of goods sold by $36 million.

Gross profit increased by $45 million, mainly driven by the higher sales volumes of $69 million and $46 million of inflation recovery from customer pass-through agreements net of pricing reductions.

Furthermore, gross profit increased $27 million from higher productivity net of labor inflation, one-time expenses and higher repositioning costs as discussed above, and $3 million from foreign currency impacts from transactional, translational and hedging effects.

These increases were partially offset by $42 million inflation on commodities, energy costs and transportation, as discussed above, $46 million of unfavorable product mix and a $12 million increase in R&D costs.

Selling, General and Administrative Expenses

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% of sales 6.1 % 6.0 % 6.1 % 6.1 %

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.

Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2023 increased by $2 million compared with the prior year primarily driven by a $2 million increase in legal and advisory fees following the completion of our Transaction and $1 million of labor inflation impact.

SG&A expenses for the nine months ended September 30, 2023 increased by $14 million compared with the prior year, primarily driven by $9 million of legal and advisory fees related to our Transaction, $4 million of labor inflation impact, and $3 million of higher incentive compensation expense.

Interest Expense

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Interest expense $ 50 $ 18 $ 108 $ 61

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)

For the three months ended September 30, 2023, interest expense increased by $32 million compared to the prior year due to $25 million of higher interest expense driven by the new 2023 Dollar Term Facility and increased interest rates, and $10 million of debt issuance cost amortization primarily due to the $200 million early repayment on our 2023 Dollar Term Facility, partially offset by $3 million from unrealized marked-to-market gains on our interest rate swaps.

For the nine months ended September 30, 2023, interest expense increased by $47 million compared to prior year due to $55 million of higher interest expense driven by the new 2023 Dollar Term Facility and increased interest rates, and $11 million of debt issuance cost amortization mainly due to the $200 million early repayment on our 2023 Dollar Term Facility.

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 $7 million decrease in unrealized marked-to-market losses on our interest rate swaps.

Non-operating income

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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.

Non-operating income $ (4) $ (29) $ (1) $ (73)

For the three months ended September 30, 2023, non-operating income amounted to $4 million versus $29 million in the prior year, due to a decrease of $23 million of interest income recognized in the prior year from unrealized marked-to-market gains on our interest rate swaps.

For the nine months ended September 30, 2023, non-operating income amounted to $1 million, versus $73 million in the prior year period, driven by a decrease of $56 million of interest income net of unrealized marked-to-market losses on our interest rate swaps, a $13 million loss on the remeasurement of the Series A Preferred Stock Agreement related to our capital structure transformation during the three months ended June 30, 2023, and $4 million of lower benefits from non-service components of pension cost compared to the prior year period.

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Effective tax rate 18.6 % 19.8 % 25.1 % 23.0 %

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.

The effective tax rate for the three months ended September 30, 2023 is lower than the effective rate for the three month ended September 30, 2022 primarily related to an increase in global R&D benefits, lower taxes on non-U.S.

earnings partially offset by nondeductible expenses and prior year non-recurring decrease in withholding taxes on undistributed earnings.

The effective tax rate for the nine months ended September 30, 2023 is higher than the effective rate for the nine months ended September 30, 2022 primarily related to prior year non-recurring decrease in withholding taxes on undistributed earnings and nondeductible expenses in the prior year partially offset by increase in global research and development benefit and lower taxes on non-U.S.

In December 2022, the European Union reached an agreement to adopt the Minimum Tax Directive under Pillar Two.

The agreement affirms that all Member States must transpose the Directive by December 31, 2023.

The rules will therefore first be applicable for fiscal years starting on or after December 31, 2023.

We will continue to monitor the implementation of Pillar Two in the countries in which we operate, as it is possible that such changes could materially impact our effective tax rate, corporate tax liabilities and cash tax liabilities.

The effective tax rate can vary from quarter to quarter due to changes in the Company’s global mix of earnings, the resolution of income tax audits, changes in tax laws, deductions related to employee share-based payments, internal restructurings, and pension mark-to-market adjustments.

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Net income margin 5.9 % 11.1 % 7.1 % 10.3 %

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.

Net income for the three months ended September 30, 2023 decreased by $48 million compared with the prior year, primarily due to $32 million of higher interest expense as discussed above and $25 million of lower non-operating income, partially offset by $13 million of lower tax expense.

Net income for the nine months ended September 30, 2023 decreased by $69 million compared with the prior year, primarily due to $72 million of lower non-operating income as discussed above, $47 million of higher interest expense and $14 million higher SG&A expenses, partially offset by a $45 million increase in gross profit, $13 million lower tax expense and a $5 million loss on extinguishment of debt recorded in the prior year.

Non-GAAP Measures

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Interest expense, net of interest income

47 (9) 98 (5)

Tax expense 13 26 70 83

23 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) 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, 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 .

(6) Includes the loss on remeasurement of the Agreements as well as third-party legal and advisory fees that are directly attributable to the Transaction.

Adjusted EBITDA for the Three Months Ended September 30, 2023

For the three months ended September 30, 2023 , net income decreased by $48 million versus the prior year as discussed above within the Results of Operations for Three and Nine Months Ended September 30, 2023 section.

Adjusted EBITDA increased by $6 million compared to the prior year, mainly due to increased volume and productivity, and favorable foreign exchange impacts.

These increases in Adjusted EBITDA were partially offset by unfavorable product mix and pricing net of inflation pass-through.

During the three months ended September 30, 2023, we saw product ramp-ups of new small engine applications in gasoline, offset by demand softening in diesel and commercial vehicle applications influenced by global macro economic dynamics which resulted in an unfavorable product mix.

The increased productivity combined with fixed cost savings was partially offset by year-over-year labor inflation.

R&D expenses increased $2 million which reflects continued investments 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 September 30, 2023, primarily driven by a higher Euro-to-US dollar exchange rate versus the prior-year period, also accounted for an $8 million increase in Adjusted EBITDA.

Adjusted EBITDA for the Nine Months Ended September 30, 2023

For the nine months ended September 30, 2023 , net income decreased by $69 million versus the prior year as discussed above within the Results of Operations for the Three and Nine Months Ended September 30, 2023 section.

Adjusted EBITDA increased by $60 million compared to the prior year, mainly driven by increased volume and productivity, inflation pass-through net of pricing, and favorable foreign exchange impacts.

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

During the nine months ended September 30, 2023, we saw customer demand increases across all product lines, in a less disruptive supply chain environment, as the industry recovered from the semiconductor shortages experienced in the prior year.

Favorable impact from new product launches in gasoline, volume ramp-ups in commercial vehicles, and favorable aftermarket conditions including high demand for replacement parts, also contributed to Adjusted EBITDA during the period.

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.

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 $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.

The increased productivity was partially offset by year-over-year labor inflation and increases in our SG&A expenses from higher incentive compensation expense.

R&D expenses increased $12 million reflecting continued investment in new technologies, including hiring, and year-over-year labor inflation.

Gains in foreign currency from translational, transactional and hedging effects in the nine months ended September 30, 2023, primarily driven by lower Euro-to-US dollar exchange rates, also accounted for a $6 million increase 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.

September 30,

2023 December 31,

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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 proceeds from the 2023 Dollar Term Facility were primarily used to finance the repurchase of shares of Series A Preferred Stock from the C&O Investors 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.

During the nine months ended September 30, 2023, we repaid $200 million on our 2023 Dollar Term Facility and $5 million on our 2021 Dollar Term Facility.

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

Consolidated Interim Financial Statements).

As of September 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 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.

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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.

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

On November 2, 2022, the Board of Directors authorized the extension of the share repurchase program to November 15, 2023.

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.

As of September 30, 2023, the Company had repurcha sed $178 million of Common Stock, w ith $72 million remaining under the share repurchase program.

For more information, see Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds .

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

Six Months Ended

Cash Flow Summary for the Nine Months Ended September 30, 2023

Nine Months Ended

September 30,

(Dollars in millions)

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Effect of exchange rate changes on cash and restricted cash (1) (27)

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

Net decrease in cash, cash equivalents and restricted cash

$ (85) $ (303)

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).

Cash provided by op erating activities increased by $92 million for the nine months ended September 30, 2023 versus the prior year .

The increase was primarily driven by an increase of $49 million in net income, excluding the effects of non-cash items.

Favorabl e impacts from working capital and other assets and liabilities of $17 million and $26 million, respectively, also contributed to the increase in cash provided by operating activities.

Cash used for investing activities decreased by $30 million for the nine months ended September 30, 2023 versus the prior year due to $21 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 $70 million for the nine months ended September 30, 2023 compared with the prior year.

Cash flows for financing activities during the nine months ended September 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 the 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 $178 million for the repurchase of Common Stock under our share repurchase program and debt repayments of $205 million including a $200 million early debt repayment of our 2023 Dollar Term Facility and quarterly payments for our 2021 Dollar Term Facility.

In comparison, cash used for financing activities for the nine months ended September 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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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