Garrett Motion Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Garrett designs and sells turbocharger, electric-boosting and automotive software products, primarily to vehicle OEMs and the independent aftermarket. It reports one operating and reportable segment.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,011 million | $859 million | $1,981 million | $1,760 million |
| Gross profit / margin | $202 million / 20.0% | $169 million / 19.7% | $391 million / 19.7% | $344 million / 19.5% |
| Net income | $71 million | $85 million | $152 million | $173 million |
| Net income margin | 7.0% | 9.9% | 7.7% | 9.8% |
| Adjusted EBITDA (non-GAAP) | $170 million | $138 million | $338 million | $284 million |
| EPS attributable to common shareholders | $(1.88) | $0.15 | $(1.86) | $0.31 |
- Q2 sales increased 18% year over year; six-month sales increased 13%. Growth reflected new-product launches and ramp-ups, improved vehicle production and China’s recovery from prior-year COVID restrictions, and inflation recoveries net of pricing. Q2 foreign-exchange translation reduced sales by $7 million; the six-month impact was a $54 million reduction.
- Gross margin improved modestly. Higher volume, customer inflation pass-through and productivity supported gross profit, while unfavorable product mix, commodity/energy/transportation inflation and higher R&D costs were offsets.
- Net income declined despite higher sales and Adjusted EBITDA. Higher interest expense and less favorable non-operating results weighed on earnings; Q2 also had higher tax expense. Common EPS includes preferred dividends and, in 2023, a $232 million preferred-stock deemed dividend, producing a loss available to common shareholders despite positive consolidated net income.
- Six-month operating cash flow was $256 million, versus $177 million in 2022; capital expenditures were $33 million, versus $52 million. Cash, cash equivalents and restricted cash totaled $479 million at June 30, 2023, up from $248 million at year-end 2022.
Capital, liquidity and material changes
- At June 30, 2023, principal debt outstanding was $1.891 billion, compared with $1.186 billion at December 31, 2022. The increase primarily reflects a new $700 million term loan used mainly to fund the preferred-stock transaction. Debt facilities mature in 2028; the company reported compliance with covenants.
- Revolving credit availability was approximately $570 million, with no revolving borrowings or letters of credit outstanding. A separate bilateral letter-of-credit facility had $3 million available and $12 million utilized.
- In June, Garrett repurchased approximately 69.7 million Series A preferred shares for $580 million, converted the remaining approximately 175.3 million shares into common stock, paid $25 million of additional amounts, and issued approximately 25.6 million common shares for accumulated dividends. The transaction eliminated all outstanding Series A preferred stock and simplified the capital structure, while increasing common shares and debt.
- The board authorized a $250 million share-repurchase program. By June 30, $17 million of common stock had been repurchased and approximately $233 million remained available. From July 1 through July 25, the company repurchased an additional 8.5 million shares for $63 million.
Outlook, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided in the filing. Management expects continued investment in manufacturing capacity, new product launches and technologies, particularly drivetrain electrification, and says expected cash flows and committed credit facilities should provide adequate liquidity.
- On July 26, 2023, the board approved early repayment of approximately $200 million of term loans, expected in Q3 2023.
- Management cites risks including raw-material, energy and transportation costs and pass-through recovery; customer concentration and pricing negotiations; program launches and volume estimates; automotive-industry changes; foreign exchange and international operations; litigation, product warranties and liability; cybersecurity; and access to capital. It reported no material changes to the risk factors in its 2022 Form 10-K.
- A Brazilian tax-credit dispute carries an estimated $38 million contingency including penalties and interest; management says liability is not currently probable and has not accrued it. A securities class action was dismissed with prejudice in March 2023, and plaintiffs appealed; no appeal schedule had been set. Recorded product warranty and performance-guarantee obligations were $27 million.
- Other unusual items include $20 million of capital-structure transaction expenses included in six-month Adjusted EBITDA adjustments, a $13 million loss on remeasurement of the transaction agreement, and higher interest costs following new borrowing. The 2023 effective tax rate was also affected by non-deductible transaction costs and a prior-year tax benefit.
Investor verification priorities
- Reconcile reported net income with common-shareholder EPS, including preferred dividends, deemed dividends and the post-transaction share count.
- Review the new term loan’s interest costs, amortization schedule, leverage and the planned $200 million early repayment.
- Assess whether sales growth, margin improvement and Adjusted EBITDA gains can persist as product mix, inflation, pricing and foreign exchange change.
- Track subsequent share repurchases, remaining authorization and liquidity after the capital-structure transaction.
- Monitor the Brazilian tax matter, securities-litigation appeal and warranty/product-liability exposure.