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 various risks and uncertainties. Please refer to the "Special Note Regarding Forward-Looking Statements" below. 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, 2024. Executive Summary During the second quarter of 2024, the industry was impacted by challenging regional dynamics associated with some weak end markets. 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 $64 million and Adjusted EBITDA of $150 million for the quarter. We continue to have success across our turbocharging, hybrid and zero emission technology applications. In particular, during the quarter, we had an industrial win in power generation with our large size turbo. We also had our first awards for commercial vehicles with three proof of concept wins for our E-Powertrain. Our E-Cooling also had commercial vehicle success with 2 additional proof of concept awards. For the three months ended June 30, 2024, we repurchased $65 million of Common Stock under our share repurchase program. As of June 30, 2024, we had $176 million of the authorized amount remaining under our share repurchase program. As previously disclosed, 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. We received cash consideration on the divestiture date of $46 million, with an additional $7 million still to be received, and recognized a gain of $27 million related to this divestiture. During the second quarter, we completed an offering of $800 million in aggregate principal amount of 7.75% 2032 Senior Notes and made early debt repayments totaling $985 million on our Euro Term Facility and 2023 Dollar Term Facility, both of which were fully repaid as of June 30, 2024. Disaggregated Revenue The following tables show our revenues by geographic region and product line for the three and six months ended June 30, 2024 and 2023, respectively. By Region Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) United States $ 174 19% $ 190 19% $ 352 19% $ 363 18% Europe 434 49% 494 49% 903 50% 991 50% Asia 263 30% 309 30% 515 29% 591 30% Other 19 2% 18 2% 35 2% 36 2% Total $ 890 $ 1,011 $ 1,805 $ 1,981 24 By Product Line Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) Diesel $ 220 25% $ 260 26% $ 461 26% $ 522 27% Gas 375 42% 455 45% 763 42% 858 43% Commercial Vehicle 161 18% 168 17% 322 18% 351 18% Aftermarket 121 14% 114 11% 233 13% 224 11% Other 13 1% 14 1% 26 1% 26 1% Total $ 890 $ 1,011 $ 1,805 $ 1,981 Results of Operations for the Three and Six Months Ended June 30, 2024 Net Sales Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) Net sales $ 890 $ 1,011 $ 1,805 $ 1,981 % change compared with prior period (12.0) % (8.9) % For the three months ended June 30, 2024, net sales compared to prior year decreased by $121 million or 12%, (including an unfavorable impact of $18 million or 2%) due to foreign currency translation driven by lower Euro-to-US dollar, Chinese yuan-to-US dollar, and Japanese yen-to-US dollar exchange rates. This decrease was mainly driven by demand softness in gasoline, diesel, and commercial vehicles applications, and commodity deflation impact on pricing net of inflation pass-through, partially offset by increased demand for replacement parts on aftermarket sales. Gasoline product sales decreased by $80 million or 17% (including an unfavorable impact of $9 million or 2% due to foreign currency translation), primarily driven by soft demand in China and North America. The decrease was partially offset by program ramp-ups in Europe, Japan, and India. Diesel product sales decreased by $40 million or 15% (including an unfavorable impact of $4 million or 1% due to foreign currency translation), primarily driven by demand softness for passenger vehicles in Europe, partially offset by sustained demand for light commercial vehicles in China and North America. Commercial vehicle sales decreased by $7 million or 4% (including an unfavorable impact of $4 million or 2% due to foreign currency translation), primarily driven by soft demand in the construction and agriculture industries due to high interest rates and lower crop prices. This decrease was partially offset by sustained demand in China, linked to ramp-up of compressed natural gas programs. Aftermarket sales increased by $7 million or 6% (including a unfavorable impact of $1 million or 1% due to foreign currency translation), primarily due to favorable aftermarket conditions and demand for replacement parts in China, North America, and Europe, partially offset by softer sales in Australia. 25 For the six months ended June 30, 2024, net sales compared to prior year decreased by $176 million or 9% (including an unfavorable impact of $26 million or 1%), due to foreign currency translation driven by lower Chinese yuan-to-US dollar and lower Japanese yen-to-US dollar exchange rates. This decrease was mainly driven by demand softness in gasoline, diesel, and commercial vehicle applications, and commodity deflation impact on pricing net of inflation pass-through, partially offset by increased demand for replacement parts on aftermarket sales and favorable product mix. Gasoline product sales decreased by $95 million or 11% (including an unfavorable impact of $14 million or 2% due to foreign currency translation), primarily driven by soft demand in China and North America partially offset by program ramp-ups in Europe, Japan, and India. Diesel product sales decreased by $61 million or 12% (including an unfavorable impact of $4 million or 1% due to foreign currency translation), primarily driven by soft demand in Europe for passenger vehicles partially offset by sustained demand for light commercial vehicles in China and North America. Commercial vehicle sales decreased by $29 million or 8% (including an unfavorable impact of $6 million or 2% due to foreign currency translation), primarily driven by soft demand in the construction and agriculture industries mainly in Europe due to high interest rates and lower crop prices. This decrease was partially offset by sustained demand in China, linked to the ramp-up of compressed natural gas programs. Aftermarket sales increased by $9 million or 4% (including a unfavorable impact of $2 million or 1% due to foreign currency translation), primarily due to favorable aftermarket conditions and the continued high demand for replacement parts in Europe, China, and North America, partially offset by softer sales in Australia. Cost of Goods Sold and Gross Profit Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) Cost of goods sold $ 705 $ 809 $ 1,448 $ 1,590 % change compared with prior period (12.9) % (8.9) % Gross profit percentage 20.8 % 20.0 % 19.8 % 19.7 % Cost of Goods Sold Gross Profit (Dollars in millions) Cost of Goods Sold / Gross Profit for the three months ended June 30, 2023 $ 809 $ 202 Increase/(decrease) due to: Volume (78) (34) Product mix 26 2 Price, net of inflation pass-through — (22) Commodity, transportation & energy inflation (27) 27 Productivity, net (18) 21 Research & development 2 (2) Foreign exchange rate impacts (9) (9) Cost of Goods Sold / Gross Profit for the three months ended June 30, 2024 $ 705 $ 185 26 For the three months ended June 30, 2024, cost of goods sold decreased by $104 million, primarily driven by $78 million of lower sales volumes, $27 million of commodity, transportation, and energy deflation, $18 million of productivity, net of labor inflation, and $9 million from foreign currency impacts. These decreases were partially offset by $26 million of unfavorable product mix and $2 million of higher R&D costs, reflecting Garrett's continued investment in new technologies. For the three months ended June 30, 2024, gross profit decreased by $17 million, primarily driven by $34 million of lower sales volumes, $22 million from commodity deflation impact on pricing, net of inflation pass-through, $2 million of higher R&D costs, and $9 million from foreign currency impacts. These decreases were partially offset by $27 million of commodity, transportation, and energy deflation, $21 million of productivity, net of labor inflation, and $2 million of favorable product mix. Cost of Goods Sold Gross Profit (Dollars in millions) Cost of Goods Sold / Gross Profit for the six months ended June 30, 2023 $ 1,590 $ 391 Increase/(decrease) due to: Volume (107) (46) Product mix 43 (9) Price, net of inflation pass-through — (38) Commodity, transportation & energy inflation (44) 44 Productivity, net (29) 36 Research & development 4 (4) Foreign exchange rate impacts (9) (17) Cost of Goods Sold / Gross Profit for the six months ended June 30, 2024 $ 1,448 $ 357 For the six months ended June 30, 2024, cost of goods sold decreased by $142 million, primarily driven by lower sales volumes of $107 million, $44 million of commodity, transportation, and energy deflation, and $29 million of productivity, net of labor inflation and repositioning costs, and $9 million from foreign currency impacts. These decreases were partially offset by $43 million unfavorable product mix and $4 million of higher R&D costs, reflecting Garrett's continued investment in new technologies. For the six months ended June 30, 2024, gross profit decreased by $34 million, primarily driven by $46 million of lower sales, $38 million from commodity deflation impact on pricing net of inflation pass-through, $17 million favorable foreign currency impact, $9 million of unfavorable product mix, and $4 million of higher R&D costs. These decreases were partially offset by $44 million of commodity, transportation, and energy deflation and $36 million of higher productivity, net of labor inflation and repositioning costs. Selling, General and Administrative Expenses Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) Selling, general and administrative expense $ 61 $ 63 $ 125 $ 119 % of sales 6.9 % 6.2 % 6.9 % 6.0 % Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2024 decreased by $2 million compared with the prior year, mainly driven by $4 million of lower professional service fees partially offset by $2 million of higher bad debt expense. SG&A expenses also decreased due to $1 million of favorable foreign exchange impact. SG&A expenses for the six months ended June 30, 2024 increased by $6 million compared with the prior year, primarily due to $5 million of higher stock-based compensation expense, $2 million of higher bad debt expense, and $1 million of labor inflation impacts. These increases were partially offset by $2 million of lower professional service fees. 27 Interest Expense Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) Interest expense $ 62 $ 29 $ 93 $ 56 For the three months ended June 30, 2024, interest expense increased by $33 million compared to the prior year. This was primarily driven by $27 million of accelerated debt issuance cost amortization and $3 million of higher interest expense due to a different notional amount of debt outstanding during the period and higher variable interest rates, partially offset by the spread reduction on the 2021 Dollar Term Facility. In addition, there were $25 million of marked-to-market remeasurement losses recorded during the three months ended June 30, 2024 on our undesignated interest rate swap contracts, partially offset by $22 million of gains, including settlements of $18 million, on our interest derivatives in the current year. For the six months ended June 30, 2024, interest expense increased by $37 million compared to the prior year. This was primarily driven by $27 million of accelerated debt issuance cost amortization, $12 million of interest expense on our 2023 Dollar Term Facility versus none in the first six months of 2023, as well as $7 million of interest expense related to our 2032 Senior Notes. These increases in interest expense were partially offset by $28 million of gains, including settlements of $18 million, on our interest derivatives in the current year. In addition, there were $24 million marked-to-market remeasurement losses recorded during the six months ended June 30, 2024 on our undesignated interest rate swap contracts, in comparison to $5 million of marked-to-market remeasurement losses in the prior year. Non-operating (income) expense Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) Non-operating (income) expense $ (1) $ 8 $ (6) $ 5 For the three months ended June 30, 2024, we had non-operating income of $1 million versus non-operating expense of $8 million in the prior year. The increase in non-operating income was primarily driven by foreign exchange transactional gains, partially offset by $2 million of lower equity income due to sale of an equity interest in an unconsolidated joint venture. For the six months ended June 30, 2024, we had non-operating income of $6 million versus an expense of $5 million in the prior year. The increase in non-operating income was primarily driven by foreign exchange transactional gains, partially offset by $2 million of lower equity income due to sale of an equity interest in an unconsolidated joint venture. Tax Expense Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) Tax expense $ 23 $ 30 $ 38 $ 57 Effective tax rate 26.4 % 29.7 % 22.6 % 27.3 % The effective tax rates for the three months ended June 30, 2024 and 2023 were 26.4% and 29.7% , respectively. The effective tax rates for the six months ended June 30, 2024 and 2023 were 22.5% and 27.3%, respectively. The change in the effective tax rate for the three months ended June 30, 2024 compared to the prior period is primarily related to lower U.S. taxes on international operations and lower non-deductible transaction costs, partially offset by tax related to the sale of an equity interest in an unconsolidated joint venture. The change in the effective tax rate for the six months ended June 30, 2024 compared to the prior period is primarily related to reversal of tax reserves, lower U.S. taxes on international operations, and lower non-deductible transaction costs, partially offset by tax related to the sale of an equity interest in an unconsolidated joint venture. 28 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. Net Income Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) Net income $ 64 $ 71 $ 130 $ 152 Net income margin 7.2 % 7.0 % 7.2 % 7.7 % Net income for the three months ended June 30, 2024 decreased by $7 million compared with the prior year, primarily due to $17 million of decreased gross profit and $33 million of higher interest expense. These decreases were partially offset by a $27 million gain on the sale of equity interest in an unconsolidated joint venture, $9 million of higher non-operating income, and $7 million of lower tax expense. Net income for the six months ended June 30, 2024 decreased by $22 million compared with the prior year, primarily due to $34 million of decreased gross profit, $37 million of higher interest expense, and $6 million of higher SG&A expenses. These decreases were partially offset by a $27 million gain on the sale of equity interest in an unconsolidated joint venture, $11 million of higher non-operating income, and $19 million of lower tax expense. 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 from, 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, foreign exchange (gain) loss on debt net of related hedging gains, discounting costs on factoring, gain on sale of equity investment, acquisition and divestiture expenses, other non-operating income, capital structure transformation expenses, debt refinancing and redemption costs, net reorganization items and loss on extinguishment of debt (if any). 29 Adjusted EBITDA now adjusts for acquisition and divestiture expenses, and debt refinancing and redemption costs, but no adjustments were made to the prior period as there were no similar adjustments in the prior periods. 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: Three Months Ended June 30, Six Months Ended June 30, 2024 2023 2024 2023 (Dollars in millions) Net income $ 64 $ 71 $ 130 $ 152 Interest expense, net of interest income (1) 61 24 90 51 Tax expense 23 30 38 57 Depreciation 22 22 44 43 EBITDA 170 147 302 303 Stock compensation expense (2) 5 5 13 8 Repositioning costs (3) 1 1 12 8 Foreign exchange loss on debt, net of related hedging gains (1) — (1) — Discounting costs on factoring 1 1 2 2 Gain on sale of equity investment (27) — (27) — Other non-operating income (4) (2) (2) (3) (3) Acquisition and divestiture expenses (5) 1 — 1 — Capital structure transformation expenses (6) — 18 — 20 Debt refinancing and redemption costs (7) 2 — 2 — Adjusted EBITDA $ 150 $ 170 $ 301 $ 338 (1) Reflects interest income of $1 million and $5 million for the three months ended June 30, 2024 and 2023, respectively, and $3 million and $5 million for the six months ended June 30, 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 incremental third-party costs incurred for the sale of an equity interest in an unconsolidated joint venture. (6) 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. (7) Reflects the third-party costs directly attributable to the repricing of our 2021 Dollar Term Facility. 30 Adjusted EBITDA for the Three Months Ended June 30, 2024 For the three months ended June 30, 2024 , net income decreased by $7 million versus the prior year as discussed above within Results of Operations for Three and Six Months Ended June 30, 2024 . Adjusted EBITDA decreased by $20 million compared to the prior year, mainly due to soft demand across product lines except aftermarket, pricing net of inflation pass-through, and unfavorable foreign exchange impacts. These decreases were partially offset by strong operational performance through productivity, net of labor inflation, as well as commodity, transportation, and energy deflation, and a slightly favorable product mix. During the three months ended June 30, 2024, we saw soft demand for gasoline, diesel, and commercial vehicle applications, partially offset by favorable demand in aftermarket for replacement parts in North America, China, and Europe. Net sales also decreased due to pricing, net of inflation pass-through, driven by commodity deflation. The increased productivity from our ability to flex our variable cost structure, while driving sustained fixed cost productivity was partially offset by year-over-year labor inflation and lower equity income following the sale of an equity interest in an unconsolidated joint venture on April 3, 2024. R&D expenses increased $2 million, reflecting our continued investment in new technologies and 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 June 30, 2024, primarily driven by a lower Euro-to-US dollar, lower Chinese yuan-to-US dollar and lower Japanese yen-to-US dollar exchange rates versus the prior year period, accounted for a $7 million decrease in Adjusted EBITDA. Adjusted EBITDA for the Six Months Ended June 30, 2024 For the six months ended June 30, 2024 , net income decreased by $22 million versus the prior year as discussed above within Results of Operations for Three and Six Months Ended June 30, 2024 . Adjusted EBITDA decreased by $37 million c ompared to the prior year, mainly due to soft demand across product lines except aftermarket, pricing net of inflation pass-through, and unfavorable foreign exchange impacts and unfavorable 31 product mix. These decreases were partially offset by strong operational performance through productivity, net of labor inflation, and repositioning costs, as well as commodity, transportation, and energy deflation. During the six months ended June 30, 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 Europe. Net sales also decreased due to pricing decreases, net of inflation pass-through, driven by commodity price decreases. The increased productivity from our ability to flex our variable cost structure while driving sustained fixed cost productivity was partially offset by year-over-year labor inflation. R&D expenses increased $4 million, reflecting our continued investment in new technologies, and increased hiring to accelerate growth in the zero emission technologies. Losses in foreign currency from translational, transactional, and hedging effects in the six months ended June 30, 2024 , primarily driven by a lower Chinese yuan-to-US dollar and lower Japanese yen-to-US dollar exchange rates and partially offset by higher Euro-to-US dollar exchange rates versus the prior year period, accounted for a $14 million decrease in Adjusted EBITDA. Liquidity and Capital Resources Overview June 30, 2024 December 31, 2023 (Dollars in millions) Cash and cash equivalents $ 98 $ 259 Restricted cash 1 1 Revolving Facility - available borrowing capacity 600 570 Revolving Facility - borrowings or letters of credit outstanding — — Term Loan Facilities - principal outstanding 695 1,696 Senior Notes - principal outstanding 800 — Bilateral letter of credit facility - available capacity 3 3 Bilateral letter of credit facility - utilized capacity 12 12 On May 21, 2024, our wholly owned subsidiaries, Garrett Motion Holdings Inc. and Garrett LX I S.a.r.l., completed an offering of $800 million in aggregate principal amount of the 2032 Senior Notes. The 2032 Senior Notes mature on May 31, 2032 and bear interest at a rate of 7.75% per annum. We incurred $12 million of debt issuance costs, which have been capitalized and will be amortized on a straight-line basis. On May 21, 2024, we also entered into the Fourth and Fifth Amendments to the Credit Agreement, which (i) removed the credit spread adjustment with respect to certain US dollar denominated term loan borrowings that are Term Benchmark Loans, (ii) reduced the Applicable Rate on certain US dollar denominated term loans to 2.75% for Term Benchmark Loans and 1.75% for ABR Loans, and (iii) increased the maximum borrowings available under the Revolving Facility by $30 million. During the six months ended June 30, 2024, we repaid $500 million on our 2023 Dollar Term Facility, $485 million (€450 million) on our Euro Term Facility and $4 million on our 2021 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, the 2032 Senior Notes, our Term Loan Facilities, and our 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, the 2032 Senior Notes, 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. During the six months ended June 30, 2024, the Company repurchased $174 million of Common 32 Stock, with $176 million remaining under the share repurchase program as of that date. 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 Six Months Ended June 30, 2024 Six Months Ended June 30, 2024 2023 (Dollars in millions) Cash provided by (used for): Operating activities $ 210 $ 256 Investing activities 18 (24) Financing activities (384) (2) Effect of exchange rate changes on cash and restricted cash (5) 1 Net (decrease) increase in cash, cash equivalents and restricted cash $ (161) $ 231 Cash provided by operating activities decreased by $46 million for the six months ended June 30, 2024 versus the prior year. The decrease was primarily driven by a decrease of $22 million in net income, excluding the effects of non-cash items, as well as $28 million of unfavorable impacts from changes in other assets and liabilities. These decreases were partially offset by $4 million of favorable impacts from working capital changes. Cash flow from investing activities increased by $42 million for the six months ended June 30, 2024 versus t he prior year, mainly due to $46 million of proceeds from the sale of equity interest in an unconsolidated joint venture and a $12 million increase in proceeds on our cross currency swap contracts which have been designated as net investment hedges of our Euro-denominated operations. This was partially offset by $16 million of increased expenditures for property, plant and equipment. Cash used for financing activities was $384 million for the six months ended June 30, 2024 compared with $2 million in the prior year. During 2024, we made an aggregate of $989 million in debt repayments on our term loan facilities. We also made payments of $173 million for Common Stock repurchases, $7 million for debt issuance costs and $9 million for other financing activities. These payments were partially offset by proceeds of $794 million, net of deferred financing costs, from the issuance of our 2032 Senior Notes. In comparison, cash used for financing activities for the six months ended June 30, 2023 was primarily driven by payments of $605 million in aggregate to holders of the Series A Preferred Stock related to the Transaction, including conversion of the Series A Preferred Stock, and $42 million for dividends declared on our Series A Preferred Stock. 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. These uses of cash were partially offset by proceeds of $667 million from the 2023 Dollar Term Facility net of debt financing costs. 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 33 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 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; 34 • 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; • 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.