Garrett Motion Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Garrett designs and sells turbocharger, electric-boosting and automotive software products, primarily to vehicle OEMs and the independent aftermarket. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $859 | $935 | $1,760 | $1,932 |
| Gross profit / margin | $169 / 19.7% | $193 / 20.6% | $344 / 19.5% | $389 / 20.1% |
| Net income | $85 | $409 | $173 | $304 |
| Adjusted EBITDA (non-GAAP) | $138 | $168 | $284 | $344 |
| Adjusted EBITDA margin | 16.1% | 18.0% | 16.1% | 17.8% |
| Basic / diluted EPS | $0.15 / $0.15 | $1.63 / $1.29 | $0.31 / $0.31 | $1.79 / $0.95 |
- Cash flow: First-half operating cash flow was $177, versus cash used of $391 in the prior year; investing cash use was $52 and financing cash use was $393. Cash, cash equivalents and restricted cash ended at $179 ($146 unrestricted), down $285 from year-end 2021.
- Liquidity and debt: At June 30, cash and equivalents were $146; term-loan principal outstanding was $1,180. The company had no revolving-facility borrowings and approximately $475 of unused revolving capacity, plus $22 of available bilateral letter-of-credit capacity. It reported compliance with debt covenants.
- Balance sheet: Total assets were $2,462, total liabilities $2,693, and stockholders’ deficit $231. Current assets were $1,257 versus current liabilities of $1,273.
- Preferred stock: Garrett completed redemption of all Series B Preferred Stock on June 28, paying $212 in the final redemption and recording a $5 loss on extinguishment. Series A carries cumulative dividends at 11% annually; $174 of dividends had accumulated unpaid at June 30, and none were declared for the period.
Changes versus prior comparable periods
- Q2 sales declined 8.1%; first-half sales declined 8.9%. Foreign exchange translation reduced sales by $73 in Q2 and $109 in the first half, while lower volumes also weighed on results.
- Q2 volumes were 3.2 million units, down approximately 6%; first-half volumes were 6.6 million, down approximately 8%. Aftermarket sales grew, but diesel and commercial-vehicle sales fell.
- Gross margin declined 0.9 percentage point in Q2 and 0.6 point for the first half. Productivity and customer inflation recoveries partly offset commodity, transportation and energy inflation, unfavorable mix, premium freight and currency effects.
- Net income comparisons are distorted by prior-year Chapter 11 gains: reorganization items were a $295 gain in Q2 2021 and a $121 gain in the first half of 2021, versus expenses of $1 and $2 in 2022. Adjusted EBITDA fell $30 in Q2 and $60 in the first half.
- First-half operating cash flow improved substantially from the prior year, partly because the prior-year period included a $375 payment to Honeywell and because of working-capital effects. First-half financing cash use included $381 for the Series B redemption.
Outlook, commentary and risks
- The filing provides no specific company revenue or earnings guidance. Management said semiconductor shortages, COVID-related restrictions in China, and Russia-Ukraine-related disruption were creating demand volatility and supply-chain risks. The company expected semiconductor conditions to improve in the second half of 2022, but cautioned that production could remain constrained.
- Management cited commodity, transportation and energy inflation, premium freight and currency exposure. It was pursuing customer pass-throughs and supplier cost reductions, and reported recovering a majority of cost increases through pass-through agreements.
- Management cited industry estimates that turbocharger demand could rise from approximately 43 million units in 2021 to 49 million by 2026, supported by hybrid adoption and commercial-vehicle demand. This is an industry outlook, not company guidance.
- Garrett said expected operating cash flows, existing financing and available revolving capacity should support operations and planned investment, including electrification-related opportunities. First-half capital expenditures were $52.
- Contingencies: A Brazilian tax dispute had an estimated exposure of $32, including penalties and interest; management considered liability not probable and recorded no accrual. A securities class action remained pending after a third amended complaint; defendants moved to dismiss, with briefing expected to conclude in September 2022. Recorded warranty and performance-guarantee obligations were $30.
- Controls: Management stated disclosure controls were effective and the previously reported material weakness in EPS accounting controls had been remediated as of June 30, 2022.
Key facts for investors to verify
- Whether production and sales recover as semiconductor availability and China-related restrictions evolve, and how much currency translation continues to affect reported results.
- Whether customer inflation pass-throughs and productivity can offset commodity, freight, energy and labor costs without further margin erosion.
- Cash generation and liquidity after the substantial cash decline, future capital spending, debt service, and the 11% cumulative Series A dividend burden.
- Developments in the Brazilian tax matter and securities litigation, including any change to management’s assessment or potential insurance recovery.
- The comparability and reconciliation of non-GAAP Adjusted EBITDA, and the durability of earnings excluding prior-year Chapter 11-related gains.