Garrett Motion (GTX) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Presents the unaudited interim financial statements and management's discussion and analysis of financial condition and results Item 1. Financial Statements (Unaudited) Presents the unaudited consolidated interim financial statements and detailed notes for the periods ended September 30, 2022, and December 31, 2021 Consolidated Interim Statements of Operations (Unaudited) Presents revenues, expenses, and net income, with three-month increases in net sales and income, but nine-month decreases Consolidated Interim Statements of Operations (Unaudited) | Metric (Dollars in millions) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Net sales | $945 | $839 | $2,705 | $2,771 | | Gross profit | $178 | $163 | $522 | $552 | | Income before taxes | $131 | $91 | $361 | $449 | | Net income | $105 | $63 | $278 | $367 | | Net income available for distribution | $65 | $27 | $161 | $307 | | Basic EPS | $0.21 | $0.09 | $0.52 | $1.46 | | Diluted EPS | $0.21 | $0.09 | $0.52 | $1.15 | Consolidated Interim Statements of Comprehensive Income (Unaudited) Details comprehensive income, including net income and OCI, showing a three-month increase but a nine-month decrease Consolidated Interim Statements of Comprehensive Income (Unaudited) | Metric (Dollars in millions) | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Net income | $105 | $63 | $278 | $367 | | Foreign exchange translation adjustment | $10 | $(6) | $13 | $37 | | Changes in fair value of effective cash flow hedges, net of tax | $9 | $2 | $26 | $7 | | Changes in fair value of net investment hedges, net of tax | $45 | $12 | $87 | $27 | | Total other comprehensive income, net of tax | $64 | $8 | $126 | $71 | | Comprehensive income | $169 | $71 | $404 | $438 | Consolidated Interim Balance Sheets (Unaudited) Presents financial position, showing decreases in total assets and liabilities, and the full redemption of Series B Preferred Stock Consolidated Interim Balance Sheets (Unaudited) | Metric (Dollars in millions) | Sep 30, 2022 | Dec 31, 2021 | | :--------------------------- | :----------: | :----------: | | Cash and cash equivalents | $159 | $423 | | Total current assets | $1,371 | $1,511 | | Total assets | $2,603 | $2,706 | | Accounts payable | $1,001 | $1,006 | | Mandatorily redeemable Series B Preferred Stock | $0 | $200 | | Total current liabilities | $1,339 | $1,508 | | Long-term debt | $1,108 | $1,181 | | Total liabilities | $2,705 | $3,174 | | Total deficit | $(102) | $(468) | | Total liabilities and deficit | $2,603 | $2,706 | Consolidated Interim Statements of Cash Flows (Unaudited) Outlines cash flows from operating, investing, and financing activities, with improved operating cash and increased financing cash usage Consolidated Interim Statements of Cash Flows (Unaudited) | Metric (Dollars in millions) | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :--------------------------- | :--------------------------: | :--------------------------: | | Net cash provided by (used for) operating activities | $238 | $(446) | | Net cash used for investing activities | $(78) | $(73) | | Net cash (used for) provided by financing activities | $(436) | $362 | | Net decrease in cash, cash equivalents and restricted cash | $(303) | $(159) | | Cash, cash equivalents and restricted cash at end of the period | $161 | $534 | Consolidated Interim Statements of Equity (Deficit) (Unaudited) Details changes in equity (deficit), reflecting net income, OCI, share repurchases, and dividends, with a significant reduction in total deficit Consolidated Interim Statements of Equity (Deficit) (Unaudited) | Metric (Dollars in millions) | Dec 31, 2021 | Sep 30, 2022 | | :--------------------------- | :----------: | :----------: | | Additional paid-in capital | $1,326 | $1,331 | | Retained deficit | $(1,790) | $(1,555) | | Accumulated other comprehensive income (loss) | $(4) | $122 | | Total deficit | $(468) | $(102) | | Total liabilities and deficit | $2,706 | $2,603 | Notes to Consolidated Interim Financial Statements (Unaudited) Provides detailed explanations and disclosures for interim financial statements, covering accounting policies, revenue, R&D, taxes, assets, liabilities, and debt Note 1. Background and Basis of Presentation Garrett Motion Inc. operates as a single segment in turbocharger and electric-boosting technologies, emerging from Chapter 11 bankruptcy in April 2021 - Garrett Motion Inc. is a global technology leader in turbocharger and electric-boosting technologies for light and commercial vehicles, as well as automotive software solutions[24] - The company operates in a single operating and reportable segment, with the CEO making resource allocation decisions on a consolidated basis[27] - The company emerged from Chapter 11 bankruptcy on April 30, 2021, and reorganization items are presented separately in the financial statements[29][30] Reorganization Items, Net (Dollars in millions) | Item | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------ | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Total reorganization items, net | $0 | $(9) | $2 | $(130) | Note 2. Summary of Significant Accounting Policies Refers to 2021 Form 10-K accounting policies and recent pronouncements, noting no material impact from ASU 2021-10 and ongoing evaluation of ASU 2022-04 - The company adopted ASU 2021-10 (Government Assistance) as of January 1, 2022, which did not have a material impact on interim financial statements but will increase disclosures in the 2022 10-K[33] - The company is evaluating ASU 2022-04 (Disclosure of Supplier Finance Program Obligations), effective for fiscal years beginning after December 15, 2022, to determine its impact on disclosures[34][35] Note 3. Revenue Recognition and Contracts with Customers Provides disaggregated revenue data by region and channel, along with a summary of contract asset and liability balances Net Sales by Region (Dollars in millions) | Region | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------ | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | United States | $189 | $143 | $515 | $423 | | Europe | $428 | $393 | $1,319 | $1,401 | | Asia | $308 | $289 | $817 | $909 | | Other | $20 | $14 | $54 | $38 | | Total | $945 | $839 | $2,705 | $2,771 | Net Sales by Channel (Dollars in millions) | Channel | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------ | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | OEM | $817 | $719 | $2,336 | $2,426 | | Aftermarket | $115 | $107 | $328 | $300 | | Other | $13 | $13 | $41 | $45 | | Total | $945 | $839 | $2,705 | $2,771 | Contract Balances (Dollars in millions) | Metric | Sep 30, 2022 | Jan 1, 2022 | Change (Decrease)/Increase | | :---------------------- | :----------: | :---------: | :------------------------: | | Contract assets | $51 | $63 | $(12) | | Contract liabilities | $(9) | $(5) | $(4) | Note 4. Research, Development & Engineering Details RD&E expenditures, which are expensed as incurred, showing an increase for both three and nine months ended September 30, 2022 Research, Development & Engineering Costs (Dollars in millions) | Category | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Research and development costs | $38 | $33 | $112 | $99 | | Engineering-related expenses | $4 | $5 | $13 | $16 | | Total | $42 | $38 | $125 | $115 | Note 5. Income Taxes Provides tax expense and effective tax rates, noting a lower three-month rate and a higher nine-month rate due to specific factors Income Tax Expense and Effective Tax Rate | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Tax expense (Dollars in millions) | $26 | $28 | $83 | $82 | | Effective tax rate | 19.8% | 30.8% | 23.0% | 18.3% | - The lower effective tax rate for the three months ended September 30, 2022, was primarily due to lower nondeductible expenses and a decrease in withholding taxes on undistributed earnings[40][42] - The higher effective tax rate for the nine months ended September 30, 2022, was mainly due to the non-taxable gain recognized in 2021 on the settlement of Honeywell claims, partially offset by lower taxes on non-U.S. earnings and reduced withholding taxes[41][42] Note 6. Accounts, Notes and Other Receivables—Net Details the composition of net receivables, showing an increase in trade receivables and minor changes in other categories Accounts, Notes and Other Receivables—Net (Dollars in millions) | Category | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------- | :----------: | :----------: | | Trade receivables | $645 | $553 | | Notes receivable | $85 | $121 | | Other receivables | $75 | $78 | | Less—Allowance for expected credit losses | $(8) | $(5) | | Total | $797 | $747 | Note 7. Factoring and Notes Receivable The company sells eligible trade receivables and guaranteed bank notes without recourse, with increased volumes sold for the nine months ended September 30, 2022 - The company sells eligible trade receivables and guaranteed bank notes without recourse, primarily in the Asia Pacific region, and accounts for these as true sales[46] Receivables and Bank Notes Sold Without Recourse (Dollars in millions) | Category | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Eligible receivables sold without recourse | $112 | $104 | $481 | $437 | | Guaranteed bank notes sold without recourse | $35 | $0 | $102 | $0 | Note 8. Inventories—Net Provides a breakdown of inventory components, showing an increase in total inventories from December 31, 2021, to September 30, 2022 Inventories—Net (Dollars in millions) | Category | Sep 30, 2022 | Dec 31, 2021 | | :---------------- | :----------: | :----------: | | Raw materials | $203 | $162 | | Work in process | $19 | $19 | | Finished products | $90 | $92 | | Less—Reserves | $(29) | $(29) | | Total | $283 | $244 | Note 9. Other Assets Details the composition of other assets, which significantly increased due to a rise in designated cross-currency swaps and derivatives Other Assets (Dollars in millions) | Category | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------: | :----------: | | Advanced discounts to customers, non-current | $50 | $61 | | Operating right-of-use assets | $43 | $51 | | Designated cross-currency swaps | $131 | $30 | | Designated and undesignated derivatives | $64 | $7 | | Total | $338 | $200 | Note 10. Accrued Liabilities Provides a breakdown of current accrued liabilities, which increased primarily due to dividends payable and higher taxes, including repositioning costs Accrued Liabilities (Dollars in millions) | Category | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------- | :----------: | :----------: | | Customer pricing reserve | $61 | $72 | | Compensation, benefit and other employee related | $67 | $76 | | Income and other taxes | $42 | $25 | | Dividends payable | $42 | $0 | | Total | $331 | $295 | Repositioning Accruals (Dollars in millions) | Category | Dec 31, 2021 | Charges | Usage—cash | Sep 30, 2022 | | :------------------ | :----------: | :------: | :--------: | :----------: | | Severance Costs | $10 | $4 | $(5) | $9 | | Exit Costs | $0 | $0 | $0 | $0 | | Total | $10 | $4 | $(5) | $9 | Note 11. Other Liabilities Details the composition of long-term other liabilities, which decreased primarily due to reductions in pension and lease liabilities Other Liabilities (Dollars in millions) | Category | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------- | :----------: | :----------: | | Income taxes | $107 | $106 | | Pension and other employee related | $48 | $61 | | Long-term lease liability | $36 | $42 | | Environmental remediation – long term | $13 | $15 | | Total | $241 | $269 | Note 12. Leases The company holds operating leases for real estate and equipment, with stable lease expenses and cash outflows, but decreased right-of-use assets - The company's operating leases primarily consist of real estate, machinery, and equipment, with remaining lease terms up to 15 years[57] Lease Expense and Cash Flow Information (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Operating lease cost | $4 | $4 | $12 | $12 | | Operating cash outflows from operating leases | $3 | $3 | $9 | $9 | | Right-of-use assets obtained in exchange for lease obligations | $2 | $18 | $4 | $23 | Operating Lease Liabilities Maturities (Dollars in millions) | Year | Amount | | :---------- | :-----: | | 2022 | $3 | | 2023 | $10 | | 2024 | $8 | | 2025 | $7 | | 2026 | $5 | | Thereafter | $22 | | Total lease payments | $55 | | Less imputed interest | $(11) | | Total | $44 | Note 13. Long-term Debt and Credit Agreements Details long-term debt, including Term Facilities and an increased Revolving Credit Facility, with the company in compliance with all debt covenants Long-term Debt Outstanding (Dollars in millions) | Facility | Due Date | Interest Rate | Sep 30, 2022 | | :-------------- | :--------- | :----------------- | :----------: | | Dollar Facility | 4/30/2028 | LIBOR plus 325 bps | $708 | | Euro Facility | 4/30/2028 | EURIBOR plus 350 bps | $438 | | Total principal outstanding | | | $1,146 | | Less: unamortized deferred financing costs | | | $(31) | | Less: current portion of long-term debt | | | $(7) | | Total long-term debt | | | $1,108 | - The Revolving Credit Facility's maximum borrowing amount was increased from $300 million to approximately $475 million through amendments in January and March 2022[62] - As of September 30, 2022, the company had no loans outstanding under the Revolving Facility, no outstanding letters of credit, and available borrowing capacity of approximately $475 million. The company was in compliance with all debt covenants[66][74] Note 14. Series A Preferred Stock A $42 million cash dividend was declared on Series A Preferred Stock, with $172 million in cumulative unpaid dividends remaining as of September 30, 2022 - On September 8, 2022, a cash dividend of $0.17 per share ($42 million aggregate) was declared on Series A Preferred Stock, payable October 3, 2022[76] - As of September 30, 2022, the remaining unpaid cumulative dividends not yet declared on Series A Preferred Stock amounted to $172 million[77] Note 15. Mandatorily Redeemable Series B Preferred Stock The company completed the early redemption of Series B Preferred Stock for $212 million, resulting in a $5 million loss on extinguishment of debt - The company completed the early redemption of its remaining Series B Preferred Stock on June 28, 2022, for $212 million[78] - A loss on extinguishment of debt of $5 million was recognized in the Condensed Interim Statement of Operations due to the early redemption[78] Note 16. Financial Instruments and Fair Value Measures The company uses financial instruments to manage credit, market, and foreign currency risks, with a significant increase in the fair value of designated and undesignated instruments - The company uses financial instruments, including interest rate swaps, forward currency exchange contracts, and cross-currency swaps, to hedge interest rates and foreign currencies[79] Fair Value of Financial Instruments (Dollars in millions) | Category | Notional Amounts Sep 30, 2022 | Notional Amounts Dec 31, 2021 | Fair Value Assets Sep 30, 2022 | Fair Value Assets Dec 31, 2021 | Fair Value Liabilities Sep 30, 2022 | Fair Value Liabilities Dec 31, 2021 | | :------------------------------------- | :----------------------------: | :----------------------------: | :----------------------------: | :----------------------------: | :----------------------------------: | :----------------------------------: | | Designated forward currency exchange contracts | $501 | $382 | $41 | $9 | $4 | $1 | | Designated cross-currency swap | $715 | $715 | $131 | $30 | $0 | $0 | | Undesignated interest rate swap | $809 | $940 | $64 | $7 | $0 | $0 | | Undesignated forward currency exchange contracts | $426 | $751 | $5 | $2 | $6 | $4 | | Total designated and undesignated instruments | $2,451 | $2,788 | $241 | $48 | $10 | $5 | - Cross-currency swaps designated as net investment hedges of Euro-denominated operations had fair values of net assets of $131 million at September 30, 2022, contributing $87 million to comprehensive income for the nine months ended September 30, 2022[81] Note 17. Accumulated Other Comprehensive Income (Loss) Details changes in accumulated other comprehensive income (loss) by component, showing a shift from a deficit to a positive income balance Changes in Accumulated Other Comprehensive Income (Loss) (Dollars in millions) | Component | Dec 31, 2021 | Sep 30, 2022 | | :-------------------------------------- | :----------: | :----------: | | Foreign Exchange Translation Adjustment | $(43) | $(30) |\ | Changes in Fair Value of Effective Cash Flow Hedges | $7 | $33 |\ | Changes in Fair Value of Net Investment Hedges | $41 | $128 |\ | Pension Adjustments | $(9) | $(9) |\ | Total Accumulated Other Comprehensive Income (Loss) | $(4) | $122 | Note 18. Earnings Per Share Explains basic and diluted EPS calculation, with 2021 figures restated, showing a three-month increase but a nine-month decrease - EPS is calculated using the two-class method because Series A Preferred Stock is considered a participating security[88] - Basic and diluted EPS for the three and nine months ended September 30, 2021, were restated to correct for the calculation using the two-class and if-converted methods[89] Earnings Per Share (Dollars in millions, except per share) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Net income available to common shareholders | $14 | $6 | $34 | $104 | | Weighted average common shares outstanding- Basic | 64,820,887 | 65,056,274 | 64,834,298 | 70,802,999 | | EPS – Basic | $0.21 | $0.09 | $0.52 | $1.46 | | EPS – Diluted | $0.21 | $0.09 | $0.52 | $1.15 | Note 19. Related Party Transactions The company maintains ongoing lease and service agreements with Honeywell, a related party, with stable payments and decreased related liabilities - The company leases facilities and receives property maintenance services from Honeywell, a related party, under commercial terms[92] Payments Under Agreements with Honeywell (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Payments under agreements with Honeywell | $2 | $2 | $6 | $6 | - Liabilities related to agreements with Honeywell decreased from $15 million at December 31, 2021, to $9 million at September 30, 2022, primarily due to lease contracts[93] Note 20. Commitments and Contingencies Discusses ongoing legal proceedings, including securities class actions and a Brazilian tax matter, and product warranty obligations, with accruals for probable liabilities - The company is involved in ongoing securities class action lawsuits (Husson, Gabelli, Froehlich Actions) which have been consolidated. The company's insurer, AIG, has accepted the defense[95][96][97][99][100] - A Brazilian tax authority infraction notice for $31 million (including penalties and interest) is being appealed; the company believes liability is not probable and no accrual is required[105] Warranty and Product Performance Guarantees (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Warranty and product performance guarantees at beginning of period | $30 | $32 | $32 | $14 | | Accruals for warranties/guarantees issued during the year | $3 | $5 | $10 | $16 | | Settlement of warranty/guarantee claims | $(2) | $(5) | $(10) | $(14) | | Warranty and product performance guarantees at end of period | $29 | $32 | $29 | $32 | Note 21. Pension Benefits The company sponsors funded U.S. and non-U.S. defined benefit pension plans, with net periodic benefit costs showing varied outcomes for each type of plan - The company sponsors funded U.S. and non-U.S. defined benefit pension plans, with significant plans in Switzerland and Ireland[109] - The company expects to contribute approximately $7 million to non-U.S. pension plans in 2022, with $5 million contributed as of September 30, 2022, and no required contributions to U.S. plans[110] Net Periodic Benefit Costs (Dollars in millions) | Component | 3 Months Ended Sep 30, 2022 (U.S. Plans) | 3 Months Ended Sep 30, 2021 (U.S. Plans) | 3 Months Ended Sep 30, 2022 (Non-U.S. Plans) | 3 Months Ended Sep 30, 2021 (Non-U.S. Plans) | 9 Months Ended Sep 30, 2022 (U.S. Plans) | 9 Months Ended Sep 30, 2021 (U.S. Plans) | 9 Months Ended Sep 30, 2022 (Non-U.S. Plans) | 9 Months Ended Sep 30, 2021 (Non-U.S. Plans) | | :---------------------------- | :--------------------------------------: | :--------------------------------------: | :--------------------------------------------: | :--------------------------------------------: | :--------------------------------------: | :--------------------------------------: | :--------------------------------------------: | :--------------------------------------------: | | Service cost | $0 | $0 | $2 | $3 | $1 | $1 | $5 | $8 | | Interest cost | $1 | $1 | $0 | $0 | $4 | $3 | $1 | $1 | | Expected return on plan assets | $(2) | $(3) | $(2) | $(2) | $(6) | $(8) | $(5) | $(5) | | Total | $(1) | $(2) | $0 | $1 | $(1) | $(4) | $1 | $3 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial condition and results, analyzing performance drivers, macroeconomic impacts, industry trends, liquidity, and non-GAAP measures Executive Summary Net sales increased by 13% to $945 million for the three months, driven by volumes and inflation pass-through, despite unfavorable foreign currency impacts Net Sales Overview (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | Change YoY | Foreign Currency Impact | | :-------- | :--------------------------: | :--------: | :----------------------: | | Net sales | $945 | +13% | -12% (unfavorable) | - The increase in sales was driven by higher volumes due to market recovery from semiconductor shortages and successful inflation pass-through to customers, net of pricing[115] - For the three months ended September 30, 2022, light vehicle products accounted for approximately 68% of revenues, commercial vehicle products for 19%, and OEM sales contributed 87%[116] Macroeconomic disruptions The automotive industry faces uncertainty from semiconductor shortages, COVID-19 lockdowns, and geopolitical tensions, leading to supply chain disruptions and inflationary pressures - The automotive industry is impacted by ongoing semiconductor shortages (expected to continue into 2023), COVID-19 lockdowns in China, and geopolitical tensions from the Russia-Ukraine conflict[118] - These disruptions lead to supply chain challenges, inflationary pressures, and potential recessionary scenarios, particularly in Europe due to energy shortages[118] - The company is monitoring production levels, supply-chain disruptions, and implementing new supplier risk monitoring procedures and contingency plans to minimize impacts[118] Trends The turbocharger industry is projected to grow, driven by hybrid vehicle penetration, remaining crucial for fuel efficiency across vehicle types, with expected growth in Asia - The turbocharger industry is expected to grow from approximately 45 million units in 2022 to 46 million units by 2026, driven by increased hybrid vehicle penetration (from 14 million to 29 million globally by 2026)[119][120] - Turbochargers are considered cost-efficient for improving fuel efficiency in gasoline, diesel, and hybrid vehicles, and are essential for fuel cell vehicles and most on-highway commercial vehicles[121] - Growth is expected in all regions, especially Asia, due to rising income levels, and alternative fuels like natural gas and hydrogen are anticipated to support continued turbocharger demand[121] - The industry faces inflationary pressures on raw materials, with the company mitigating costs through customer pass-through agreements and supplier cost reductions[122] Results of Operations for the Three and Nine Months Ended September 30, 2022 Analyzes financial performance for the three and nine months, covering net sales, cost of goods sold, gross profit, operating expenses, and net income, highlighting key drivers and changes Net Sales Three-month net sales increased by 13% to $945 million due to higher volumes and inflation recoveries, while nine-month net sales decreased by 2% to $2,705 million due to foreign currency and lower volumes Net Sales Performance (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change YoY | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change YoY | | :-------- | :--------------------------: | :--------------------------: | :--------: | :--------------------------: | :--------------------------: | :--------: | | Net sales | $945 | $839 | +13% | $2,705 | $2,771 | -2% | - Three-month sales increase driven by higher volumes from market recovery (post-semiconductor shortages) and $43 million in inflation recoveries. Foreign currency translation had a $105 million (12%) unfavorable impact[129] - Nine-month sales decrease due to $215 million (7%) unfavorable foreign currency impact and overall lower volumes, partially offset by $101 million improved mix and $69 million inflation recoveries[135] Net Sales by Product Line (Dollars in millions) | Product Line | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :----------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Diesel | $238 | $225 | $729 | $823 | | Gas | $401 | $332 | $1,109 | $1,066 | | Commercial Vehicle | $178 | $162 | $498 | $537 | | Aftermarket | $115 | $107 | $328 | $300 | Cost of Goods Sold and Gross Profit Three-month cost of goods sold increased by $91 million, with gross profit up $15 million; nine-month cost of goods sold decreased by $36 million, with gross profit down $30 million Cost of Goods Sold and Gross Profit (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Cost of goods sold | $767 | $676 | $2,183 | $2,219 | | Gross profit percentage | 18.8% | 19.4% | 19.3% | 19.9% | - Three-month gross profit increased by $15 million, driven by higher sales volumes ($37 million) and inflation recoveries ($43 million), partially offset by $52 million in commodity, transportation, and energy inflation, and $7 million higher R&D costs[142] - Nine-month gross profit decreased by $30 million, impacted by lower sales volumes, $101 million in commodity, transportation, and energy inflation, and $64 million unfavorable foreign currency effects, partially offset by $71 million higher productivity and $69 million inflation recoveries[144] Selling, General and Administrative Expenses SG&A expenses decreased by $3 million for the three months and $2 million for the nine months, primarily due to favorable foreign exchange and changes in professional services and employee costs Selling, General and Administrative Expenses (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | SG&A expense | $57 | $60 | $164 | $166 | | % of sales | 6.0% | 7.1% | 6.1% | 6.0% | - Three-month SG&A decreased by $3 million due to $6 million favorable foreign exchange impacts and $3 million lower professional services, partially offset by increased bad debt and travel expenses[145] - Nine-month SG&A decreased by $2 million, driven by $13 million favorable foreign exchange rates and $7 million lower employee-related costs, offset by $6 million higher professional services and $9 million higher bad debt expenses[146] Interest Expense Interest expense decreased by $7 million for three months and $9 million for nine months, primarily due to the absence of Series B Preferred Stock interest accretion Interest Expense (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Interest expense | $18 | $25 | $61 | $70 | - The decrease in interest expense was primarily due to the absence of $11 million (three months) and $8 million (nine months) of interest accretion on Series B Preferred Stock, which was fully redeemed by June 2022[147][148] Non-operating income Non-operating income significantly increased for both periods, primarily driven by unrealized marked-to-market gains on interest rate swaps Non-operating Income (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :------------------ | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Non-operating income | $(29) | $(4) | $(73) | $(4) | - Non-operating income increased by $25 million (three months) and $69 million (nine months), primarily due to $25 million and $63 million, respectively, in interest income from unrealized marked-to-market gains on interest rate swaps[149][150] Reorganization items, net No reorganization expenses for three months; nine-month expense of $2 million contrasts with prior year's $130 million gain from Honeywell claims settlement Reorganization Items, Net (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Reorganization items, net | $0 | $(9) | $2 | $(130) | - For the nine months ended September 30, 2022, reorganization items, net, was a $2 million expense for professional service fees, compared to a $130 million gain in the prior year, which included a $502 million gain on Honeywell claims settlement[152] Tax Expense Tax expense remained stable, with the three-month effective tax rate lower and the nine-month rate higher due to specific factors Tax Expense and Effective Tax Rate | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Tax expense (Dollars in millions) | $26 | $28 | $83 | $82 | | Effective tax rate | 19.8% | 30.8% | 23.0% | 18.3% | - The three-month effective tax rate decreased primarily due to lower nondeductible expenses and reduced withholding taxes on undistributed earnings[154] - The nine-month effective tax rate increased mainly due to the non-taxable gain recognized in 2021 on the settlement of Honeywell claims[155] Net Income Three-month net income increased by $42 million to $105 million; nine-month net income decreased by $89 million to $278 million due to prior year's reorganization gain Net Income (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Net income | $105 | $63 | $278 | $367 | - Three-month net income increased by $42 million due to a $15 million increase in gross profit and a $25 million increase in non-operating income[156] - Nine-month net income decreased by $89 million, primarily due to a $132 million net gain on reorganization items in the prior year and $30 million lower gross profit, partially offset by increased non-operating income[157] Non-GAAP Measures Presents non-GAAP measures EBITDA and Adjusted EBITDA, showing a three-month increase but a nine-month decrease EBITDA and Adjusted EBITDA The company uses non-GAAP measures EBITDA and Adjusted EBITDA to evaluate operational performance, with Adjusted EBITDA increasing for three months but decreasing for nine months - EBITDA is defined as net income plus net interest expense, tax expense, and depreciation. Adjusted EBITDA further adjusts for reorganization items, stock compensation, repositioning costs, foreign exchange loss on debt, loss on extinguishment of debt, discounting costs on factoring, other non-operating income, professional service costs, and capital tax expense[162] EBITDA and Adjusted EBITDA (Dollars in millions) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :---------------------- | :--------------------------: | :--------------------------: | :--------------------------: | :--------------------------: | | Net income — GAAP | $105 | $63 | $278 | $367 | | EBITDA (Non-GAAP) | $143 | $138 | $420 | $586 | | Adjusted EBITDA (Non-GAAP) | $146 | $134 | $430 | $478 | Adjusted EBITDA for the Three Months Ended September 30, 2022 Adjusted EBITDA increased by $12 million for the three months, driven by volume increases and productivity, despite commodity inflation and unfavorable foreign exchange - Adjusted EBITDA increased by $12 million, driven by volume increases (3.6 million units, +15% YoY), increased productivity, and inflation pass-through, despite a 60 basis points contraction in Adjusted EBITDA margin[165] - The company saw improved customer demand and market recovery from semiconductor shortages, along with favorable impacts from new product launches in gasoline and commercial vehicles[166] - R&D expenses increased by $7 million, reflecting investment in new technologies, increased hiring, and labor inflation. Unfavorable foreign currency impacts (primarily Euro-to-US dollar) accounted for a $27 million decrease in Adjusted EBITDA[168] Adjusted EBITDA for the Nine Months Ended September 30, 2022 Adjusted EBITDA decreased by $48 million for the nine months, primarily due to volume decreases, commodity inflation, and unfavorable foreign exchange impacts - Adjusted EBITDA decreased by $48 million, mainly due to volume decreases (10.2 million units, -1% YoY), commodity inflation, and unfavorable foreign exchange impacts, leading to a 140 basis points contraction in Adjusted EBITDA margin[172] - The company faced demand volatility from semiconductor shortages and geopolitical tensions in the first six months of 2022, but saw improved demand in the third quarter[173] - R&D expenses increased by $15 million due to investment in new technologies and labor inflation. Unfavorable foreign currency impacts accounted for a $55 million decrease in Adjusted EBITDA[175] Liquidity and Capital Resources Liquidity is supported by cash flows and credit facilities, though cash and cash equivalents decreased significantly due to preferred stock redemption and dividends - The company's liquidity is primarily funded by cash flows from operating activities, borrowings from Credit Facilities, and cash and cash equivalents[177] Cash and Available Liquidity (Dollars in millions) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :----------------------------------- | :----------: | :----------: | | Cash and cash equivalents | $159 | $423 | | Restricted cash | $2 | $41 | | Available borrowing capacity (Revolving Facility) | $475 | N/A | | Principal outstanding (Term Loan Facilities) | $1,146 | N/A | | Utilized bilateral letter of credit facility | $12 | N/A | - During the nine months ended September 30, 2022, the company repaid $5 million on its Dollar Facility and $381 million for the full early redemption of Series B Preferred Stock. A $42 million cash dividend was declared on Series A Preferred Stock[179] - The company believes its expected cash flows, Series A Preferred Stock issuance, term loan borrowings, and revolving credit facilities provide adequate liquidity[181] Off-Balance Sheet Arrangements The company does not engage in any material off-balance sheet financial arrangements that could impact its financial condition or results - The company does not engage in any off-balance sheet financial arrangements that are material to its financial condition or results of operations[189] Critical Accounting Policies Refers to critical accounting policies detailed in the 2021 Form 10-K, which involve significant estimates and assumptions - Critical accounting policies are summarized in the 2021 Form 10-K, requiring significant estimates and assumptions that could materially differ from actual results[190] Recent Accounting Pronouncements Refers to Note 2 for further discussion of recently adopted and issued accounting pronouncements - Refer to Note 2 for details on recently adopted and issued accounting pronouncements[191] Special Note Regarding Forward-Looking Statements The report contains forward-looking statements subject to known and unknown risks and uncertainties that could cause actual results to differ materially from expectations - The report contains forward-looking statements regarding future results, financial position, impacts of Chapter 11, COVID-19, Russia-Ukraine conflict, market growth, liquidity, and litigation[192] - These statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from expectations, including raw material costs, climate change, automotive industry changes, customer reliance, intellectual property, and supply chain disruptions[192][193][197] - The company does not plan to publicly update or revise any forward-looking statements unless required by applicable law[194] Item 3. Quantitative and Qualitative Disclosures About Market Risk As of September 30, 2022, the company had a $167 million net fair value asset exposed to currency risk, with no material changes to other market risks - As of September 30, 2022, the net fair value of financial instruments exposed to currency risk was a $167 million asset[195] - A hypothetical 10% adverse change in currency exchange rates could result in an $83 million loss, while a favorable change could result in a $149 million gain[195] - There have been no material changes to the company's quantitative and qualitative disclosures about interest rate or commodity price risks since the 2021 Form 10-K[196] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal control over financial reporting - Management, with CEO and CFO participation, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2022[199] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2022[200] PART II. OTHER INFORMATION Presents other information not included in the financial statements, such as legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings The company is involved in various lawsuits and claims, accruing for probable liabilities, with the main Chapter 11 case remaining open for claim administration - The company is involved in various lawsuits, claims, and proceedings, including product liability, intellectual property, and environmental matters[202] - Liabilities are accrued when probable and reasonably estimable, and the company does not currently believe these will have a material adverse effect on its financial position[202] - The main Chapter 11 case remains open for administering and reconciling outstanding proofs of claim and interest[94] Item 1A. Risk Factors No material changes to 2021 Form 10-K risk factors, but the Russia-Ukraine conflict could exacerbate existing risks like energy shortages and inflation - No material changes to risk factors from the 2021 Form 10-K, but the Russia-Ukraine conflict could exacerbate existing risks[204][205] - The conflict may lead to energy shortages in Europe, raw material price inflation, transportation cost increases, and further supply chain disruptions[205] - Escalation of geopolitical tensions could also result in reduced customer demand, cyberattacks, and financial market volatility[205] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the three months, 30 Series A Preferred shares converted to Common Stock, and $24 million of shares were repurchased under a $100 million program - During the three months ended September 30, 2022, 30 shares of Series A Preferred Stock were converted into 30 shares of Common Stock[206] - The Board authorized a $100 million share repurchase program until November 15, 2022, for Series A Preferred Stock and Common Stock[207] Share Repurchase Activity (Three Months Ended September 30, 2022) | Period | Common Shares Purchased | Preferred Shares Purchased | Average Price Paid per Preferred Share | Total Purchased as Part of Plan | Approximate Dollar Value Remaining Under Plan | | :--------------------------- | :----------------------: | :------------------------: | :------------------------------------: | :-----------------------------: | :-------------------------------------------: | | July 1, 2022 – July 31, 2022 | 0 | 88,082 | $7.92 | 88,082 | $76,975,175 | | August 1, 2022 – August 31, 2022 | 0 | 732 | $7.76 | 732 | $76,969,495 | | September 1, 2022 – September 30, 2022 | 0 | 75,957 | $7.62 | 75,957 | $76,390,352 | | Total | 0 | 164,771 | $7.78 | 164,771 | $76,390,352 | - As of September 30, 2022, $24 million of Series A Preferred Stock and Common Stock had been repurchased, with $76 million remaining under the program[185][208] Item 3. Defaults Upon Senior Securities As of September 30, 2022, $172 million of unpaid cumulative preference dividends remained on Series A Preferred Stock, despite a $42 million dividend declaration - As of September 30, 2022, $172 million of unpaid and undeclared cumulative preference dividends remained on the Series A Preferred Stock[209] - A cash dividend of $42 million was declared for the period ended September 30, 2022, on Series A Preferred Stock[209] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[211] Item 5. Other Information No other information is reported under this item - None[212] Item 6. Exhibits Lists exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, credit agreement amendments, certifications, and XBRL documents - The exhibits include the Second Amended and Restated Certificate of Incorporation, Amended and Restated Certificate of Designations of Series A Preferred Stock, Third Amended and Restated Bylaws, and Amendment No. 2 to the Credit Agreement[214] - Certifications from the Principal Executive Officer and Principal Financial Officer (pursuant to Sarbanes-Oxley Act Sections 302 and 906) are filed/furnished[214] - Inline XBRL documents (Instance, Schema, Calculation, Definit