Garrett Motion Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with Q1 2023 unless otherwise noted. Garrett designs and sells turbocharging, air and fluid compression, and high-speed electric motor technologies for mobility and industrial customers. It reports one operating and reportable segment.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $915 million | $970 million |
| Gross profit / margin | $172 million / 18.8% | $189 million / 19.5% |
| Net income / margin | $66 million / 7.2% | $81 million / 8.4% |
| Diluted EPS | $0.28 | $0.13 |
| Adjusted EBITDA (non-GAAP) | $151 million | $168 million |
| Cash from operating activities | $84 million | $92 million |
| Capital expenditures | $32 million | $8 million |
Interest expense was $31 million, up from $27 million. Tax expense was $15 million versus $27 million, and the effective tax rate declined to 18.5% from 25.0%, primarily due to tax-reserve reversals and lower U.S. taxes on international operations, partly offset by higher withholding taxes.
At March 31, cash and cash equivalents were $196 million, down from $259 million at year-end 2023. Total current assets were $1.338 billion and current liabilities were $1.319 billion. Term-loan principal was approximately $1.682 billion; reported long-term debt, net of financing costs and current maturities, was $1.633 billion. The $570 million revolving facility was undrawn, and Garrett reported compliance with debt covenants. Total liabilities exceeded assets, leaving a $735 million stockholders’ deficit.
Changes and management commentary
- Sales declined 5.7%, mainly because of lower volumes in gasoline, diesel, and commercial vehicle applications, pricing decreases net of inflation pass-through, and an $8 million unfavorable foreign-exchange impact. Aftermarket sales increased 2%.
- Europe sales fell to $469 million from $497 million and Asia sales to $252 million from $282 million; U.S. sales rose to $178 million from $173 million. OEM sales were $790 million and aftermarket sales $112 million.
- Gross profit fell $17 million. Lower volumes, pricing, product mix, R&D costs, and foreign exchange weighed on results; productivity improvements and commodity, transportation, and energy deflation partly offset those pressures. SG&A increased $8 million, including higher stock-based compensation and professional-services costs.
- Net income decreased $15 million and Adjusted EBITDA decreased $17 million. The prior-year EPS comparison is affected by the 2023 Series A preferred-stock structure and related dividend allocation; the preferred stock was converted and canceled in June 2023.
- Operating cash flow was $84 million. Investing used $28 million, including $32 million of capital expenditures; financing used $112 million, including $107 million of cash paid for share repurchases. Cash, cash equivalents, and restricted cash declined by $63 million during the quarter.
- Management cited supply-chain disruptions affecting OEM customers and order volumes, and said it flexed variable costs to improve productivity. It reported a natural-gas heavy-duty truck launch in China, two fuel-cell compressor production awards, and an E-powertrain application undergoing vehicle testing with a global OEM.
Capital allocation, outlook, and risks
- The board authorized a $350 million repurchase program through December 31, 2024. Garrett repurchased 11.94 million shares for approximately $109 million, with about $241 million remaining at March 31. Management may suspend, modify, or discontinue the program.
- On April 3, 2024, Garrett divested its interest in an unconsolidated joint venture for approximately $58 million, subject to customary adjustments, and received $46 million in cash at closing. On April 10, it made an early $100 million repayment on the 2023 Dollar Term Facility.
- Management expects cash flows, cash balances, term loans, and the committed revolving facility to provide adequate liquidity. It expects continued investment in facilities, product launches, and technologies, particularly drivetrain electrification. The filing provides no specific revenue or earnings guidance.
- Key risks include OEM demand and customer concentration, pricing pressure, supply-chain and input-cost fluctuations, foreign-exchange exposure, program-launch execution, competition and automotive-industry transition, and product warranty, liability, environmental, and litigation exposures. Management reported no material changes to the risk factors in its 2023 Form 10-K.
- A Brazilian tax-credit dispute carried an estimated contingency of $39 million, including penalties and interest; management said a loss was not probable and recorded no accrual. The Second Circuit affirmed dismissal of the securities litigation in April 2024; no accrual had been recorded. Other claims and proceedings remain subject to uncertainty.
Important facts for investors to verify
- Whether demand softness in gasoline, diesel, and commercial-vehicle markets persists, and whether aftermarket and new-technology awards translate into sales.
- Whether productivity, pricing, and cost deflation can offset lower volumes, mix pressure, labor inflation, and foreign-exchange effects.
- Cash generation and liquidity after the share repurchases, the subsequent $100 million debt repayment, and ongoing capital investment.
- The effect of floating-rate debt, foreign-exchange exposures, and hedge positions on interest expense and earnings.
- Developments in the $39 million Brazilian tax matter and other contingencies, as well as execution of the joint-venture divestiture and share-repurchase program.