Garrett Motion Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations, which we refer to as our “MD&A,” should be read in conjunction with our Consolidated Interim Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q as well as the audited annual Consolidated Financial Statements for the year ended December 31, 2023, included in our 2023 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 months ended March 31, 2024. Executive Summary 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 months ended March 31, 2024 and 2023, respectively. By Region Three Months Ended March 31, 2024 2023 (Dollars in millions) United States $ 178 19% $ 173 18% Europe 469 51% 497 51% Asia 252 28% 282 29% Other 16 2% 18 2% Total $ 915 $ 970 22 By Product Line Three Months Ended March 31, 2024 2023 (Dollars in millions) Diesel $ 241 26% $ 262 27% Gas 388 42% 403 42% Commercial Vehicle 161 18% 183 19% Aftermarket 112 12% 110 11% Other 13 2% 12 1% Total $ 915 $ 970 Results of Operations for the Three Months Ended March 31, 2024 Net Sales Three Months Ended March 31, 2024 2023 (Dollars in millions) Net sales $ 915 $ 970 % change compared with prior period (5.7) % 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. 23 Cost of Goods Sold and Gross Profit Three Months Ended March 31, 2024 2023 (Dollars in millions) Cost of goods sold $ 743 $ 781 % change compared with prior period (4.9) % Gross profit percentage 18.8 % 19.5 % Cost of Goods Sold Gross Profit (Dollars in millions) Cost of Goods Sold / Gross Profit for the three months ended March 31, 2023 $ 781 $ 189 Increase/(decrease) due to: Volume (29) (12) Product mix 16 (11) Price, net of inflation pass-through — (16) Commodity, transportation & energy inflation (17) 17 Productivity, net (10) 15 Research & development 2 (2) Foreign exchange rate impacts — (8) Cost of Goods Sold / Gross Profit for the three months ended March 31, 2024 $ 743 $ 172 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 March 31, 2024 2023 (Dollars in millions) Selling, general and administrative expense $ 64 $ 56 % of sales 7.0 % 5.8 % 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. 24 Interest Expense Three Months Ended March 31, 2024 2023 (Dollars in millions) Interest expense $ 31 $ 27 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 March 31, 2024 2023 (Dollars in millions) Non-operating income $ (5) $ (3) 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. Tax Expense Three Months Ended March 31, 2024 2023 (Dollars in millions) Tax expense $ 15 $ 27 Effective tax rate 18.5 % 25.0 % 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. 25 Net Income Three Months Ended March 31, 2024 2023 (Dollars in millions) Net income $ 66 $ 81 Net income margin 7.2 % 8.4 % 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 It is management’s intent to provide non-GAAP financial information to supplement the understanding of our business operations and performance, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the most directly comparable GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies and may not be comparable to other similarly titled measures used by other companies. Additionally, the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of the Company’s operating results as reported under GAAP. 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; and • certain adjustment items, while periodically affecting our results, may vary significantly from period to period and have disproportionate effect in a given period, which affects the comparability of our results. In addition, our management may use Adjusted EBITDA in setting performance incentive targets to align performance measurement with operational performance. The following table reconciles Net income under GAAP to EBITDA and Adjusted EBITDA: 26 Three Months Ended March 31, 2024 2023 (Dollars in millions) Net income $ 66 $ 81 Interest expense, net of interest income (1) 29 27 Tax expense 15 27 Depreciation 22 21 EBITDA 132 156 Stock compensation expense (2) 8 3 Repositioning costs (3) 11 7 Discounting costs on factoring 1 1 Other non-operating income (4) (1) (1) Capital structure transformation expenses (5) — 2 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. (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. 27 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 Overview March 31, 2024 December 31, 2023 (Dollars in millions) Cash and cash equivalents $ 196 $ 259 Restricted cash 1 1 Revolving Facility - available borrowing capacity 570 570 Revolving Facility - borrowings or letters of credit outstanding — — Term Loan Facilities - principal outstanding 1,682 1,696 Bilateral letter of credit facility - available capacity 3 3 Bilateral letter of credit facility - utilized capacity 12 12 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. 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. 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 . 28 Cash Flow Summary for the Three Months Ended March 31, 2024 Three Months Ended March 31, 2024 2023 (Dollars in millions) Cash provided by (used for): Operating activities $ 84 $ 92 Investing activities (28) (8) Financing activities (112) (44) Effect of exchange rate changes on cash and restricted cash (7) 4 Net (decrease) increase in cash, cash equivalents and restricted cash $ (63) $ 44 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 We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources. Critical Accounting Policies The preparation of our Consolidated Interim Financial Statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. Actual results could differ from our estimates and assumptions, and any such differences could be material to our financial statements. Our critical accounting policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2023 Form 10-K. Recent Accounting Pronouncements See Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Interim Financial Statements for further discussion of recent accounting pronouncements. Special Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding the following, are forward-looking statements: statements regarding our future results of operations and financial position, expectations regarding the growth of the turbocharger and 29 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. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including: • increases in the costs and availability of raw materials, components, energy and transportation and our ability to offset inflation; • sales to major customers as well as a network of independent dealers to manage the distribution of our products, and we could be adversely impacted by the loss of any of our such major customers or dealers, changes in their requirements for our products or changes in their financial condition. • the negotiating positions of our customers and our ability to negotiate favorable pricing terms; • risks associated with changes in the automotive industry and our inability, or a perception that we are unable, to respond appropriately to such changes, our financial condition and results of operations could be adversely impacted; • risks associated with any program launch difficulties and inaccuracies in estimates of volumes of awarded business; • changes in the automotive industry and economic or competitive conditions; • risks related to economic, political, regulatory and foreign exchange; • geopolitical conditions, catastrophic events and pandemics; • risks related to international operations and our investment in foreign markets; • risks of increased scrutiny from customers, investors, regulators and others regarding sustainability/ESG practices, as well as the climate-related risks we may face, each of which could expose us to liabilities, including reputational harm, impact demand for our products, lead to increased costs and have other adverse effects on our business, supply chain and results of operations; • 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; • work stoppages, other disruptions or the need to relocate any of our facilities; • inability to recruit and retain qualified personnel; • any failure to increase productivity or successfully execute repositioning projects or manage our workforce; • potential material losses and costs as a result of any warranty claims and product liability actions brought against us; 30 • the commencement of any lawsuits, investigations and disputes arising out of our current and historical businesses, and the consequences thereof; • potential material environmental liabilities and hazards; • risks of changes in the effective tax rates; • the effects of any deterioration on industry, economic or financial conditions on our ability to access the capital markets on favorable terms; • quality control and creditworthiness of the suppliers on which we rely; • risks for system or service failures, including cyber or other security incidents, each of which could disrupt business operations, result in loss of critical and confidential information and adversely impact our reputation and results of operations; and • the other factors described under the caption “Risk Factors” in our 2023 Form 10-K, as updated in this Quarterly Report on Form 10-Q, and our other filings with the SEC. You should read this Quarterly Report on Form 10-Q and the documents that we reference herein completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.