Garrett Motion Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited interim results; amounts are in U.S. dollars unless stated otherwise.
Business context and results
Garrett designs and sells turbocharger, electric-boosting and automotive software technologies to vehicle manufacturers and the independent aftermarket. It reports one operating and reportable segment. Q3 sales growth reflected new small gasoline-engine product ramps and favorable currency translation, partly offset by weaker diesel and commercial-vehicle demand and less favorable product mix.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $960 million | $945 million | $2,941 million | $2,705 million |
| Gross profit | $176 million | $178 million | $567 million | $522 million |
| Gross margin | 18.3% | 18.8% | 19.3% | 19.3% |
| Net income | $57 million | $105 million | $209 million | $278 million |
| Net income margin | 5.9% | 11.1% | 7.1% | 10.3% |
| Adjusted EBITDA (non-GAAP) | $152 million | $146 million | $490 million | $430 million |
| Net cash provided by operating activities | Not provided for quarter | Not provided for quarter | $330 million | $238 million |
Q3 basic and diluted EPS were both $0.23, versus $0.21 a year earlier. Nine-month EPS was a loss of $0.73, despite net income of $209 million, principally because preferred dividends and deemed dividends—including $232 million of deemed dividends—reduced income available to common shareholders.
For the nine months, capital expenditures were $57 million, net cash used in investing was $48 million, and net cash used in financing was $366 million. Cash, cash equivalents and restricted cash ended at $163 million, down from $248 million at year-end 2022.
At September 30, 2023, cash and cash equivalents were $162 million. Debt principal outstanding was $1.677 billion; balance-sheet debt, net of financing costs and including current maturities, was $1.629 billion. The company had no revolving-facility borrowings or letters of credit outstanding and reported $570 million of available revolving capacity. It also had $12 million utilized and $3 million available under a separate bilateral letter-of-credit facility. The company reported compliance with its debt covenants.
Material changes versus the prior comparable periods
- Q3 sales increased 2% year over year, including a favorable $21 million foreign-currency impact. Gasoline sales rose 10%; diesel sales fell 4% and commercial-vehicle sales fell 13%.
- Nine-month sales increased 9%, despite a $32 million unfavorable currency impact. Growth reflected improved industry volumes after prior-year semiconductor shortages, product launches and ramps, and inflation recoveries net of pricing.
- Q3 gross profit declined $2 million. Unfavorable product mix reduced gross profit by $23 million, partly offset by productivity, volume and currency benefits. Nine-month gross profit rose $45 million, while gross margin was unchanged at 19.3%.
- Q3 net income fell $48 million and nine-month net income fell $69 million. Higher interest expense and lower non-operating income were principal factors; nine-month gross profit growth and lower tax expense partly offset the decline.
- Interest expense increased to $50 million in Q3 from $18 million and to $108 million for the first nine months from $61 million. The filing cites the new 2023 term loan, higher interest rates and debt-issuance-cost amortization, including costs associated with early repayment.
- Nine-month operating cash flow rose $92 million to $330 million, while cash declined amid substantial financing outflows, including preferred-stock transactions, common-stock repurchases and debt repayment.
Capital structure, outlook, risks and unusual items
- Capital restructuring: In June, Garrett repurchased 69.7 million Series A preferred shares for $580 million and converted the remaining 175.3 million shares into common stock. Holders also received $25 million in cash for additional amounts and common shares for accumulated dividends. All Series A preferred stock had been repurchased or converted by quarter-end.
- Financing and repurchases: Garrett drew the full $700 million 2023 Dollar Term Facility, primarily to fund the preferred-stock repurchase, and repaid $200 million of it early on July 31. The facility matures in 2028. The company repurchased $178 million of common stock through September 30, with approximately $72 million remaining under its $250 million authorization.
- Management outlook: No specific revenue, earnings or cash-flow guidance is provided in the filing. Management expects continued investment in manufacturing capacity, new technologies and electrification, and believes operating cash flows, term borrowings and the committed revolving facility will provide adequate liquidity.
- Operating and market risks: Management identifies demand softness, customer pricing and concentration, commodity, energy and transportation costs, inflation recovery, product-launch execution, foreign exchange, geopolitical and broader economic conditions, supply-chain and cybersecurity risks, and industry transition as factors that could affect results. The filing also notes potential effects on tax rates and cash taxes from implementation of the EU Pillar Two minimum-tax rules.
- Contingencies: A Brazilian tax-credit dispute had an estimated exposure of $37 million, including interest and penalties; management said liability was not probable and recorded no accrual. A securities class action was dismissed with prejudice in March 2023; plaintiffs appealed. The company said other ordinary-course legal matters were not currently expected to materially affect its financial position, results or cash flows.
- Other notable items: The transaction generated $13 million of non-operating remeasurement loss and $9 million of legal and advisory costs in SG&A; transaction-related adjustments also affect reported non-GAAP results. Q3 adjusted EBITDA increased $6 million, while nine-month adjusted EBITDA increased $60 million. These are non-GAAP measures and should be considered alongside GAAP results.
Most important facts for investors to verify
- How future demand, particularly for diesel and commercial vehicles, and product mix affect sales and gross margins.
- Whether productivity and customer inflation pass-throughs can offset labor, commodity, energy and transportation costs.
- The effect of higher interest rates and the new term loan on interest expense, debt service and liquidity.
- Cash conversion and working-capital trends, given lower period-end cash and significant capital returns and financing outflows.
- Progress and cost of investments in new products, electrification and manufacturing capacity, and any specific guidance issued subsequently.
- Developments in the Brazilian tax matter, securities-litigation appeal and other disclosed contingencies.