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Item 2. Management’s Discussion and Analysis

2024-04-25 compared with 2023-10-24 · 97 added, 185 removed, 140 unchanged (67% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations, which we refer to as our “MD&A,” should be read in conjunction with our Consolidated Interim Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q as well as the audited annual Consolidated Financial Statements for the year ended December 31, 2022, included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 14, 2023 (our “2022 Form 10-K”).

Some of the information contained in this MD&A or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.

As a result of many important factors, including those set forth in the “Risk Factors” section of our 2023 Form 10-K and this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.

The following MD&A is intended to help you understand the results of operations and financial condition of Garrett Motion Inc., for the three and nine months ended September 30, 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 months ended March 31, 2024.

Executive Summary

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.

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.

During the first quarter of 2024, the industry continued to experience supply chain challenges where ripple effects from disruptions in the global supply chain have impacted our OEM customers and altered the volume of customer orders received.

In response, we flexed our variable cost structure to successfully achieve efficiencies on productivity and drive operational performance.

Our agility enabled us to achieve Net income of $66 million and Adjusted EBITDA of $151 million for the quarter.

We continue to grow our turbocharging business and build momentum with our zero emission technologies.

In particular, during the quarter, we launched a commercial vehicle application with natural gas for heavy duty trucks in China and won two awards for power generation turbos.

We also won two series production awards for our differentiated fuel cell compressor applications and saw our E-powertrain application installed and undergoing vehicle testing with a global OEM.

For the three months ended March 31, 2024, we repurchased $109 million of Common Stock in connection with our share repurchase program, with $241 million remaining under the share repurchase program.

On April 3, 2024, we divested our equity interest in an unconsolidated joint venture for approximately $58 million, subject to customary debt and working capital adjustments, with cash consideration received on divestiture date of $46 million.

On April 10, 2024, we made an early debt repayment of $100 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 nine months ended September 30, 2023 and 2022, respectively.

The following tables show our revenues by geographic region and product line for the three months ended March 31, 2024 and 2023, respectively.

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

3 unchanged sentences

252 28% 282 29%

16 2% 20 2% 52 2% 54 2%

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

By Product Line

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

5 unchanged sentences

Total $ 915 $ 970

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

Results of Operations for the Three Months Ended March 31, 2024

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

1 unchanged sentence

% change compared with prior period (5.7) %

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.

For the three months ended March 31, 2024, net sales decreased compared to prior year by $55 million or 6%, including an unfavorable impact of $8 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.

Net sales decreased mainly due to lower volumes in gasoline, diesel and commercial vehicle applications, partially offset by demand for replacement parts on aftermarket sales.

Net sales further decreased due to pricing decreases, net of inflation pass-through, driven by commodity deflation.

Gasoline product sales decreased by $15 million or 4% (including an unfavorable impact of $5 million or 2% due to foreign currency translation), primarily driven by soft demand in Asia and North America.

The decrease was partially offset by program ramp-ups in Europe and India.

Diesel product sales decreased by $21 million or 8% (including an unfavorable impact of $21 million or 8% due to foreign currency translation), primarily driven by demand softness by OEMs in Europe and partially offset by resilient sales in light commercial vehicle applications in North America.

Commercial vehicle sales decreased by $22 million or 12% (including an unfavorable impact of $3 million or 1% due to foreign currency translation), primarily driven by soft demand in Europe and Asia in the construction industry, partially offset by higher demand in the heavy duty pick-up segment in North America and sustained demand in China linked to the start of production of compressed natural gas programs.

Aftermarket sales increased by $2 million or 2% (including a favorable impact of $2 million or 2% due to foreign currency translation), primarily due to favorable aftermarket conditions and demand for replacement parts in North America, China and Brazil, partially offset by softer sales in Southeast Asia and Australia.

Cost of Goods Sold and Gross Profit

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

4 unchanged sentences

(Dollars in millions)

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

Increase/(decrease) due to:

Product mix 5 (23)

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

Productivity, net (12) 12

Research & development 2 (2)

Foreign exchange rate impacts 10 11

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

$ 784 784 $ 176

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 nine months ended September 30, 2022

$ 2,183 $ 522

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

Increase/(decrease) due to:

1 unchanged sentence

Product mix 16 (11)

Inflation pass-through, net of price — 46

Price, net of inflation pass-through — (16)

Commodity, transportation & energy inflation (17) 17

2 unchanged sentences

Foreign exchange rate impacts — (8)

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

$ 2,374 2374 $ 567

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.

Cost of Goods Sold / Gross Profit for the three months ended March 31, 2024

For the three months ended March 31, 2024, cost of goods sold decreased by $38 million primarily driven by $29 million of lower sales volumes, $17 million of commodity, transportation and energy deflation and $10 million of productivity, net of labor inflation and repositioning costs.

These decreases were partially offset by $16 million from unfavorable product mix and $2 million of higher R&D costs, reflecting Garrett's continued investment in new technologies.

Gross profit decreased by $17 million, primarily driven by $12 million from lower sales, $16 million from lower pricing net of inflation recoveries, $11 million from unfavorable product mix and $2 million from higher R&D costs as discussed above.

These decreases were partially offset by $15 million of higher productivity, net of labor inflation and repositioning costs, and $17 million of commodity, transportation and energy deflation.

Foreign currency impacts also contributed to a $8 million decrease in gross profit.

Selling, General and Administrative Expenses

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

1 unchanged sentence

% of sales 7.0 % 5.8 %

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.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2024 increased by $8 million compared with the prior year primarily driven by $4 million of higher stock-based compensation expenses.

SG&A expenses also increased due to $1 million of labor inflation impacts, $2 million of additional professional services costs and $1 million of unfavorable foreign exchange impacts.

Interest Expense

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

Interest expense $ 31 $ 27

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.

For the three months ended March 31, 2024, interest expense increased by $4 million compared to the prior year, primarily driven by $18 million of additional interest expense from the 2023 Dollar Term Facility and higher interest rates.

This increase in interest expense was partially offset by $6 million of higher gains on our interest derivatives in the current year.

In addition, there were no marked-to-market remeasurement losses recorded during the three months ended March 31, 2024 on our undesignated interest rate swap contracts, in comparison to $7 million of marked-to-market remeasurement losses in the prior year.

Non-operating income

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

Non-operating income $ (5) $ (3)

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.

For the three months ended March 31, 2024, non-operating income amounted to $5 million versus $3 million in the prior year.

The higher non-operating income was primarily due to an increase in foreign exchange transactional gains.

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

1 unchanged sentence

Effective tax rate 18.5 % 25.0 %

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.

The effective tax rates for the three months ended March 31, 2024 and 2023 were 18.5% and 25.0%, respectively.

The change in the effective tax rate for the three months ended March 31, 2024 compared to the prior period is primarily related to reversal of tax reserves and lower U.S.

taxes on international operations, partially offset by increased withholding taxes.

In January 2019, the Organization for Economic Co-operation and Development (“OECD”) announced further work in continuation of its Base Erosion and Profit Shifting project, focusing on two “pillars.” Pillar One provides a framework for the reallocation of certain residual profits of multinational enterprises to market jurisdictions where goods or services are used or consumed.

Pillar Two consists of two interrelated rules referred to as Global Anti-Base Erosion (“GloBE”) Rules, which operate to impose a minimum tax rate of 15% calculated on a jurisdictional basis.

On December 20, 2021, the OECD published GloBE model rules and released multiple rounds of commentary on those rules over the subsequent months.

More than 135 OECD member countries have agreed to the key parameters of the model rules, which allow those OECD member countries to begin implementing the GloBE rules in a manner consistent with the agreement reached.

The rules were adopted by a number of countries in 2023, with an effective date for fiscal years beginning after December 31, 2023.

We do not expect that Pillar One will have an impact on our operations or effective tax rate.

Based on currently enacted legislation, we do not expect Pillar Two to have a material impact to our 2024 effective tax rate.

However, further enactment of legislation by countries in which we do business could have an impact on our 2024 effective tax rate.

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 (including updated guidance on U.S.

tax reform), deductions related to employee share-based payments, internal restructurings, and pension mark-to-market adjustments.

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

1 unchanged sentence

Net income margin 7.2 % 8.4 %

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.

Net income for the three months ended March 31, 2024 decreased by $15 million compared with the prior year, primarily due to $17 million of decreased gross profit, $8 million of higher SG&A expenses and $4 million of higher interest expense, partially offset by $12 million of lower tax expense, as discussed above.

Non-GAAP Measures

4 unchanged sentences

EBITDA and Adjusted EBITDA

We evaluate performance on the basis of EBITDA and Adjusted EBITDA.

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

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

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

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

• EBITDA and Adjusted EBITDA exclude the effects of income taxes, as well as the effects of financing and investing activities by eliminating the effects of interest and depreciation expenses and therefore more closely measure our operational performance;

• certain adjustment items, while periodically affecting our results, may vary significantly from period to period and have disproportionate effect in a given period, which affects the comparability of our results.

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

The following table reconciles Net income under GAAP to EBITDA and Adjusted EBITDA:

Three Months Ended

September 30,

Nine Months Ended

September 30,

2023 2022 2023 2022

(Dollars in millions)

Net income (GAAP) $ 57 $ 105 $ 209 $ 278

Net income $ 66 $ 81

Interest expense, net of interest income (1)

47 (9) 98 (5)

Tax expense 15 27

Depreciation 22 21

EBITDA (Non-GAAP) 140 143 443 420

Reorganization items, net (2)

EBITDA 132 156

Stock compensation expense (2)

Repositioning costs (3)

Loss on extinguishment of debt

Discounting costs on factoring

Other non-operating income (4)

(1) (2) (4) (11)

Capital structure transformation expenses (5)

Adjusted EBITDA (Non-GAAP) $ 152 $ 146 $ 490 $ 430

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

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

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

We define “Adjusted EBITDA” as EBITDA, plus the sum of net reorganization items, stock compensation expense, repositioning costs, 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:

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

(2) The Company applied ASC 852 for periods subsequent to September 20, 2020, the date the Company and certain of its subsidiaries each filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code, to distinguish transactions and events that were directly associated with the Company’s reorganization from the ongoing operations of the business.

Accordingly, certain expenses and gains incurred related to these transactions and events were recorded within Reorganization items, net in the Consolidated Interim Statements of Operations.

Adjusted EBITDA $ 151 $ 168

(1) Reflects interest income of $2 million and $0 million for the three months ended March 31, 2024 and 2023, respectively.

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

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

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

(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.

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 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.

(4) Reflects the non-service component of net periodic pension income.

(5) Reflects the third-party incremental costs that were directly attributable to the transformation of the Company's capital structure through the partial repurchase and subsequent conversion of the remaining outstanding Series A Preferred Stock into a single class of common stock in June 2023.

Adjusted EBITDA for the Three Months Ended March 31, 2024

For the three months ended March 31, 2024 , net income decreased by $15 million versus the prior year as discussed above within Results of Operations for Three Months Ended March 31, 2024 .

Adjusted EBITDA decreased by $17 million compared to the prior year, mainly due to lower volumes across product lines, unfavorable product mix, pricing net of inflation pass-through, as well as unfavorable foreign exchange impacts.

These decreases were partially offset by strong operational performance through productivity, net of labor inflation and repositioning costs, and commodity, transportation and energy deflation.

During the three months ended March 31, 2024, we saw demand softness for gasoline, diesel and commercial vehicle applications, partially offset by favorable demand in aftermarket for replacement parts in North America, China and Brazil.

Net sales also decreased due to pricing decreases, net of inflation pass-through, driven by commodity deflation.

The increased productivity from our ability to flex our variable cost structure was partially offset by year-over-year labor inflation.

R&D expenses increased $2 million which reflects our continued investment in new technologies, increased hiring to accelerate growth in the zero emission technologies.

Losses in foreign currency from translational, transactional and hedging effects in the three months ended March 31, 2024, primarily driven by a lower Chinese yuan-to-US dollar exchange rates and partially offset by higher Euro-to-US dollar exchange rates versus the prior year period, also accounted for a $7 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.

September 30,

2024 December 31,

7 unchanged sentences

Bilateral letter of credit facility - utilized capacity 12 12

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 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 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.

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 (each as defined in Note 15, Series A Preferred Stock of the Notes to the

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.

During the three months ended March 31, 2024, we repaid $2 million on our 2021 Dollar Term Facility.

On April 10, 2024, we made an early debt repayment of $100 million on our 2023 Dollar Term Facility.

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.

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.

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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.

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

On February 13, 2024, the Board of Directors authorized a $350 million share repurchase program valid until December 31, 2024, providing for the purchase of shares of Common Stock.

As of March 31, 2024, the Company had repurchased $109 million of Common Stock, with $241 million remaining under the share repurchase program.

The Company may repurchase shares from time to time under the program through various methods, including in open market transactions, block trades, privately negotiated transactions, and otherwise.

The timing, as well as the number and value of shares repurchased under the program, will depend on a variety of factors.

The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice.

For more information, see Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds .

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

Nine Months Ended

September 30,

Cash Flow Summary for the Three Months Ended March 31, 2024

Three Months Ended

(Dollars in millions)

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Effect of exchange rate changes on cash and restricted cash (7) 4

Net decrease in cash, cash equivalents and restricted cash

$ (85) $ (303)

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).

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

Cash provided by operating activities decreased by $8 million for the three months ended March 31, 2024 versus the prior year.

The decrease was primarily driven by a decrease of $31 million in net income, excluding the effects of non-cash items, as well as $11 million of unfavorable impacts from changes in other assets and liabilities.

These decreases were partially offset by $34 million of favorable impacts from working capital changes.

Cash used for investing activities increased by $20 million for the three months ended March 31, 2024 versus the prior year, mainly due to $24 million of increased expenditures for property, plant and equipment driven by the timing of the capital expenditures.

This was partially offset by $4 million of proceeds received in the current year on our cross currency swap contracts which have been designated as net investment hedges of our Euro-denominated operations.

Cash used for financing activities increased by $68 million for the three months ended March 31, 2024 compared with the prior year.

The increased use of cash for financing activities was primarily driven by $107 million of cash paid for share repurchases in 2024, partially offset by $42 million of payments made in the prior year related to dividends declared on our Series A Preferred Stock.

Off-Balance Sheet Arrangements

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All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding the following, are forward-looking statements:

statements regarding our future results of operations and financial position, results of operations and financial position, expectations regarding the growth of the turbocharger and electric vehicle markets and other industry trends, the sufficiency of our cash and cash equivalents, anticipated sources and uses of cash, anticipated investments in our business, our business strategy, pending litigation, anticipated interest expense, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements .

statements regarding our future results of operations and financial position, expectations regarding the growth of the turbocharger and

electric vehicle markets and other industry trends, the sufficiency of our liquidity and capital resources, anticipated impacts of changes in legislation and government policy relating to taxation or otherwise, anticipated sources and uses of cash, anticipated investments in our business, our business strategy, pending litigation, anticipated interest expense, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements .

These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

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• risks related to economic, political, regulatory and foreign exchange;

• geopolitical conditions, such as the ongoing conflict between Russia and Ukraine, and catastrophic events, such as the COVID-19 pandemic;

• geopolitical conditions, catastrophic events and pandemics;

• risks related to international operations and our investment in foreign markets;

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• risks associated with joint venture partnerships and joint development projects;

• any failure to protect our intellectual property or allegations that we have infringed the intellectual property of others;

and our ability to license necessary intellectual property from third parties;

• any failure to protect our intellectual property or allegations that we have infringed the intellectual property of others, and our ability to license necessary intellectual property from third parties;

• work stoppages, other disruptions or the need to relocate any of our facilities;

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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