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, 2024, included in our 2024 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 months ended March 31, 2025. Executive Summary During the first quarter of 2025, we faced significant geopolitical and macro-environmental challenges, including declines in light vehicle diesel volumes, particularly in Europe, and decreased demand for replacement parts in North America. These challenges were partially offset by growth in light vehicle gasoline volumes, primarily driven by new program launches in North America and volume recovery in Japan. Our operating margin performance was robust, largely due to the sustainable fixed and variable cost measures implemented in 2024. We continue to strengthen our global leadership position in turbo, winning business across all regions and verticals, including plug-in hybrids and range extended vehicles, as well as natural gas applications for heavy trucks. We also secured new awards for our largest turbos used on industrial applications, significantly expanding our presence in Asia in that segment. On the zero-emission differentiated solutions side we are building positive momentum, having reached a major milestone by receiving our first series production award for our high-speed electric motor for an on-highway application. Additionally, we received another award for our Fuel Compressor technology and positive testing feedback on the application of our E-Cooling Compressor, laying the foundation for future business growth. On January 30, 2025, we entered into a Restatement Agreement, which amended and restated our Existing Credit Agreement. Under the Restatement Agreement, we refinanced in full our 2021 Dollar Term Facility and replaced it with the 2025 Dollar Term Facility in an aggregate principal amount of $692 million. The 2025 Dollar Term Facility will mature on January 30, 2032. At the same time, we also replaced our existing $600 million revolving facility with the New Revolving Facility in an aggregate principal amount of $630 million. The maturity date of the New Revolving Facility is January 30, 2030. For the three months ended March 31, 2025, we repurchased $30 million of Common Stock under our share repurchase program. As of March 31, 2025, we had $220 million of the authorized amount remaining under our share repurchase program. Disaggregated Revenue The following tables show our revenues by geographic region and product line for the three months ended March 31, 2025 and 2024, respectively. By Region Three Months Ended March 31, 2025 2024 (Dollars in millions) United States $ 176 20% $ 178 19% Europe 425 49% 469 51% Asia 257 29% 252 28% Other 20 2% 16 2% Total $ 878 $ 915 24 By Product Line Three Months Ended March 31, 2025 2024 (Dollars in millions) Diesel $ 208 24% $ 241 26% Gas 403 46% 388 42% Commercial Vehicle 155 18% 161 18% Aftermarket 98 11% 112 12% Other 14 1% 13 2% Total $ 878 $ 915 Results of Operations for the Three Months Ended March 31, 2025 Net Sales Three Months Ended March 31, 2025 2024 (Dollars in millions) Net sales $ 878 $ 915 % change compared with prior period (4.0) % For the three months ended March 31, 2025, net sales compared to the prior period decreased by $37 million or 4% (including an unfavorable impact of $21 million or 2% due to foreign currency translation), primarily driven by lower Euro-to-US dollar exchange rates, soft demand in diesel and commercial vehicle applications, and lower demand for replacement parts on aftermarket sales. These decreases were partially offset by increased demand in gasoline products. Gasoline product sales increased by $15 million or 4% (including an unfavorable impact of $10 million or 2% due to foreign currency translation), primarily driven by new application launches and program ramp-ups in North America, program launches in India, and recovery in Japan from prior year volume softness. Diesel product sales decreased by $33 million or 14% (including an unfavorable impact of $6 million or 3% due to foreign currency translation), primarily driven by passenger vehicles in Europe transitioning to gasoline hybrids, partially offset by sustained demand for pickup trucks in South America. Commercial vehicle sales decreased by $6 million or 4% (including an unfavorable impact of $3 million or 2% due to foreign currency translation), primarily driven by volume softness in China and Europe, partially offset by off-highway product launches in India. Aftermarket sales decreased by $14 million or 13% (including an unfavorable impact of $2 million or 3% due to foreign currency translation), primarily due to softer demand in North America for off-highway and lower demand in the North America independent aftermarket. 25 Cost of Goods Sold and Gross Profit Three Months Ended March 31, 2025 2024 (Dollars in millions) Cost of goods sold $ 699 $ 743 % change compared with prior period (5.9) % Gross profit percentage 20.4 % 18.8 % Cost of Goods Sold Gross Profit (Dollars in millions) Cost of Goods Sold / Gross Profit for the three months ended March 31, 2024 $ 743 $ 172 Increase/(decrease) due to: Volume (15) (7) Product mix 6 (7) Price, net of inflation pass-through — 4 Commodity, transportation & energy inflation (9) 9 Productivity, net (16) 16 Enacted import tariffs 4 — Research & development — — Foreign exchange rate impacts (14) (8) Cost of Goods Sold / Gross Profit for the three months ended March 31, 2025 $ 699 $ 179 For the three months ended March 31, 2025, cost of goods sold decreased by $44 million, primarily driven by $15 million of lower sales volumes, $9 million of commodity, transportation and energy deflation, $14 million from foreign currency impacts, and $16 million of productivity net of labor inflation. These decreases were partially offset by $6 million of higher cost of goods sold due to unfavorable product mix and $4 million from the impact of enacted import tariffs. For the three months ended March 31, 2025, gross profit increased by $7 million, primarily driven by $16 million of productivity, net of labor inflation, $9 million of commodity, transportation and energy deflation, and $4 million of pricing, net of inflation pass-through. These increases were partially offset by $7 million from lower sales volumes, $7 million from unfavorable product mix, and $8 million from foreign currency impacts. There was no impact to gross profit from enacted import tariffs as we managed to fully pass through the costs of the tariffs. Selling, General and Administrative Expenses Three Months Ended March 31, 2025 2024 (Dollars in millions) Selling, general and administrative expense $ 59 $ 64 % of sales 6.7 % 7.0 % Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2025, decreased by $5 million compared with the prior period, mainly driven by $2 million of lower stock-based compensation expense, $2 million of favorable foreign exchange impacts, and $1 million of lower personnel related costs. Other Expense, Net Three Months Ended March 31, 2025 2024 (Dollars in millions) Other expense, net $ 7 $ 1 26 Other expense, net for the three months ended March 31, 2025 increased by $6 million compared to the prior period, primarily driven by debt financing costs related to the Restatement Agreement. Interest Expense Three Months Ended March 31, 2025 2024 (Dollars in millions) Interest expense $ 29 $ 31 For the three months ended March 31, 2025, interest expense decreased by $2 million compared to the prior period, primarily driven by $10 million of lower interest expense due to a different notional amount of debt outstanding during the period and $1 million of lower debt issuance cost amortization. In addition, we recorded $6 million of gains on our interest derivatives in the current year, in comparison to $8 million of gains in the prior year. We also recognized $6 million of marked-to-market remeasurement losses during the three months ended March 31, 2025, on our undesignated interest rate swap contracts, in comparison to no marked-to-market remeasurement losses in the prior year. Non-operating income, net Three Months Ended March 31, 2025 2024 (Dollars in millions) Non-operating income, net $ (1) $ (5) For the three months ended March 31, 2025, we had non-operating income of $1 million versus $5 million in the prior period. The decrease in non-operating income was primarily driven by lower equity income due to the prior year sale of an equity interest in an unconsolidated joint venture and a decrease in foreign exchange transactional gains. Tax Expense Three Months Ended March 31, 2025 2024 (Dollars in millions) Tax expense $ 23 $ 15 Effective tax rate 27.1 % 18.5 % The effective tax rates for the three months ended March 31, 2025 and 2024 were 27.1% and 18.5%, respectively. The change in the effective tax rate for the three months ended March 31, 2025, compared to the prior period is primarily related to higher U.S. taxes on international operations and reversal of tax reserves in 2024. The Organization for Economic Cooperation and Development reached agreement among over 140 countries to implement a minimum 15% tax rate on certain multinational enterprises, commonly referred to as Pillar Two. Many countries we operate in continue to announce changes in their tax laws and regulations based on the Pillar Two framework. While we continue to evaluate the impact of these legislative changes as additional guidance becomes available, uncertainty remains regarding the timing and interpretation by tax authorities in affected jurisdictions. For 2025, Pillar Two is not expected to have a material impact to our effective tax rate. However, further enactment of legislation by jurisdictions in which we do business could have an impact on our future effective tax rate, tax liabilities, and cash tax. 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. 27 Net Income Three Months Ended March 31, 2025 2024 (Dollars in millions) Net income $ 62 $ 66 Net income margin 7.1 % 7.2 % Net income for the three months ended March 31, 2025, decreased by $4 million compared with the prior period, primarily due to $8 million of higher tax expense, $6 million of higher other expense, net, and a $4 million decrease in non-operating income. These increases were partially offset by $7 million of increased gross profit and $5 million of lower SG&A 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. EBIT and Adjusted EBIT In 2025, we revised our non-GAAP reporting metric, transitioning from Adjusted EBITDA to Adjusted EBIT. This change is intended to better reflect our core operating performance and align with industry practices. We believe this change will provide investors with a clearer understanding of our ongoing operational performance. We define “EBIT” as our net income calculated in accordance with U.S. GAAP, plus the sum of (i) interest expense net of interest income and (ii) tax expense. We define “Adjusted EBIT” as EBIT, plus the sum of (i) repositioning costs, (ii) foreign exchange (gain) loss on debt net of related hedging (gains) losses, (iii) discounting costs on factoring, (iv) gain on sale of equity investment, (v) acquisition and divestiture expenses, (vi) other non-operating income, (vii) capital structure transformation expenses, (viii) debt refinancing and redemption costs, and (ix) loss on extinguishment of debt, if any. We believe that EBIT and Adjusted EBIT are important indicators of operating performance and provide useful information for investors because: • EBIT and Adjusted EBIT exclude the effects of income taxes, as well as the effects of financing activities by eliminating the effects of interest 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 could therefore have a disproportionate effect in a given period, affecting the comparability of our results. The following table reconciles Net income under GAAP to Adjusted EBIT: 28 Three Months Ended March 31, 2025 2024 (Dollars in millions) Net income $ 62 $ 66 Interest expense, net of interest income (1) 29 29 Tax expense 23 15 EBIT 114 110 Repositioning costs (2) 7 11 Foreign exchange gain on debt, net of related hedging loss 1 — Factoring and notes receivables discount fees 1 1 Other non-operating income (3) (1) (1) Debt refinancing and redemption costs (4) 6 — Acquisition and divestiture expenses 3 — Adjusted EBIT $ 131 $ 121 (1) Reflects interest income of $0 million and $2 million for the three months ended March 31, 2025 and 2024, respectively. (2) Repositioning costs includes severance costs related to restructuring projects to improve future productivity. (3) Reflects the non-service component of net periodic pension income. (4) Reflects the third-party costs directly attributable to the Restatement Agreement. Adjusted EBIT for the Three Months Ended March 31, 2025 For the three months ended March 31, 2025 , net income decreased by $4 million versus the prior period as discussed above within Results of Operations for Three Months Ended March 31, 2025 . Adjusted EBIT increased by $10 million compared to the prior period, driven by productivity and lower stock based compensation, commodity, transportation and energy deflation, and pricing net of inflation pass-through. This increase was partially offset by lower volumes across all product lines, except gasoline, driving an unfavorable product mix. During the three months ended March 31, 2025, we saw diesel volume softness, mainly due to passenger vehicles in Europe transitioning to gasoline hybrids and Aftermarket soft demand primarily in North America Off-highway. These volume decreases were partially offset by favorable demand in gasoline driven by new application launches and program ramp-ups in North America, program launches in India, and recovery in Japan from prior year volume softness. 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 prior year sale of an equity interest in an unconsolidated joint venture. R&D expenses were flat, reflecting a shift in investment from turbo technology to zero-emission technologies. 29 Losses in foreign currency from translational, transactional, and hedging effects in the three months ended March 31, 2025, primarily driven by a lower Euro-to-US dollar versus the prior period, accounted for a $7 million decrease in Adjusted EBIT. Liquidity and Capital Resources Overview March 31, 2025 December 31, 2024 (Dollars in millions) Cash and cash equivalents $ 130 $ 125 Restricted cash 1 1 Revolving Facility - available borrowing capacity 630 600 Revolving Facility - borrowings or letters of credit outstanding — — Term Loan Facilities - principal outstanding 692 692 Senior Notes - principal outstanding 800 800 Bilateral letter of credit facility - utilized capacity 9 8 On January 30, 2025, the Company entered into the Restatement Agreement, which amends and restates the Existing Credit Agreement, under which the Company refinanced in full its $692 million 2021 Dollar Term Facility with a new 2025 Dollar Term Facility in an aggregate principal amount of $692 million. The 2025 Dollar Term Facility will mature on January 30, 2032, and bear interest at a spread equal to, at the Company's option, the Adjusted Term SOFR Rate plus 2.25% per annum in the case of Term Benchmark Loans and the Alternate Base Rate plus 1.25% per annum in the case of ABR Loans. The Company also replaced its existing $600 million revolving facility under the Existing Credit Agreement with the New Revolving Facility under the Credit Agreement in an aggregate principal amount of $630 million. The maturity date of the New Revolving Facility is January 30, 2030. We employ several means to manage our liquidity, and our sources of financing include cash flows from operations, cash and cash equivalents on hand, the 2032 Senior Notes, and our Credit Agreement, including our 2025 Dollar Term Facility and our New 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 connection with our zero-emission technologies. We believe the combination of expected cash flows, the term loan borrowings, the 2032 Senior Notes, and the New Revolving Facility being committed until 2030, will provide us with adequate liquidity to support the Company's operations. Share Repurchase Program On December 4, 2024, the Board of Directors authorized a $250 million share repurchase program valid from January 1, 2025, until December 31, 2025. During the three months ended March 31, 2025, the Company repurchased $30 million of Common Stock, with $220 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 share 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 . 30 Cash Flow Summary for the Three Months Ended March 31, 2025 Three Months Ended March 31, 2025 2024 (Dollars in millions) Cash provided by (used for): Operating activities $ 56 $ 84 Investing activities (22) (28) Financing activities (31) (112) Effect of exchange rate changes on cash and restricted cash 2 (7) Net increase (decrease) in cash, cash equivalents and restricted cash $ 5 $ (63) Cash provided by operating activities decreased by $28 million for the three months ended March 31, 2025, versus the prior year. The decrease was primarily driven by $54 million of unfavorable impacts from working capital changes and $4 million of lower net income, partially offset by an increase of $21 million of non-cash charges, as well as $9 million of favorable impacts from changes in other assets and liabilities. Cash flow from investing activities decreased by $6 million for the three months ended March 31, 2025, versus t he prior year, mainly due to $6 million of decreased expenditures for property, plant and equipment. Cash used for financing activities was $31 million for the three months ended March 31, 2025, compared with $112 million in the prior year. During the three months ended March 31, 2025, we made debt repayments of $71 million, payments of $30 million for the repurchase of Common Stock under our share repurchase program and payments of $12 million for dividends on our Common Stock. These payments were partially offset by proceeds of $68 million from the Credit Facilities and $17 million of bank overdrafts. In comparison, cash used for financing activities in the prior year was primarily related to $107 million for the repurchase of Common Stock under our share repurchase program. 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 GAAP 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 2024 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 and the other reports filed by us with the SEC from time to time, as well as statements incorporated by reference herein and related comments by our management, contain forward-looking statements within the meaning of the U.S. federal securities laws. All statements other than statements of historical fact, including without limitation 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 cash and cash equivalents, anticipated sources and uses of cash, anticipated investments in our business, our business strategy, pending 31 litigation, anticipated interest expense, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements . In many cases, you can identify forward-looking statements by terms such as “aim,” “anticipate,” “appears,” “approximately,” “believe,” “continue,” “could,” “designed,” “effect,” “estimate,” “evaluate,” “expect,” “forecast,” “goal,” “initiative,” “intend,” “may,” “objective,” “outlook,” “plan,” “potential,” “priorities,” “project,” “pursue,” “seek,” “should,” “target,” “when,” “will,” “would,” or the negative of these terms or other similar expressions. In making these forward-looking statements, we rely on our current expectations and projections about possible future events and financial trends that we believe may affect our business, financial condition and results of operations. We believe these judgments are reasonable, but these statements are not guarantees of any future events or financial results, and our actual results may differ materially due to a variety of important factors, many of which are beyond our control. These factors, which may be revised or supplemented in subsequent reports we file with the SEC, include, among other things, risks related to the following: (1) the ongoing evolution of the automotive industry; (2) the highly competitive markets in which we operate; (3) our reliance on sales to major customers; (4) changing industry and economic conditions; (5) the unique aspects of our aftermarket business; (6) pricing pressures from our original equipment manufacturer customers; (7) the foreign markets in which we operate; (8) climate change and increased scrutiny from customers, investors, regulators and other stakeholders; (9) recruitment, development, and retention of qualified personnel; (10) program launch difficulties; (11) volatility in the cost of raw materials, components, energy, transportation, and other inputs; (12) supply shortages or supplier distress leading to a disruption of our operations; (13) realization of sales from awarded business; (14) economic, political, regulatory, foreign exchange and other risks of our international operations; (15) geopolitical conditions, catastrophic events and pandemics; (16) joint venture partnerships, joint development projects and other strategic opportunities; (17) intellectual property rights; (18) work stoppages or other disruptions at our facilities; (19) realization of productivity and efficiency improvements and repositioning projects; (20) warranty claims, product recalls, field actions or product liability actions; (21) litigation, government proceedings and other contingencies and uncertainties; (22) environmental matters and liabilities; (23) third-party licensing arrangements; (24) information technology and data privacy considerations, including cybersecurity and other security concerns; (25) our substantial indebtedness and restrictive covenants related to such indebtedness; (26) tax considerations; (27) our ability to raise capital; (28) our pension funding obligations; (29) concentration of ownership of our equity securities; or (30) payment of dividends and share repurchases. For a further discussion of these and other risks, refer to Part I, Item 1A. "Risk Factors" of our 2024 Form 10-K. You should read this Quarterly Report and the documents that we reference herein completely and with the understanding that our actual future results may be materially different from those envisioned by these forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements. These forward-looking statements speak only as of the date of this Quarterly Report. 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.