Garrett Motion Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited. Garrett designs and sells turbocharger, electric-boosting and automotive software products to vehicle OEMs and the aftermarket. It emerged from Chapter 11 on April 30, 2021; the company did not apply fresh-start accounting, but post-emergence results and capital structure differ substantially from prior periods.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $839m | $804m | $2,771m | $2,026m |
| Gross profit / margin | $163m / 19.4% | $147m / 18.3% | $552m / 19.9% | $365m / 18.0% |
| Net income | $63m | $11m | $367m | $54m |
| Adjusted EBITDA (non-GAAP) | $134m | $120m | $478m | $291m |
| Adjusted EBITDA margin | 16.0% | Not stated | 17.3% | Not stated |
| Operating cash flow | $(55)m | $(41)m | $(446)m | $(136)m |
| Capital expenditures | $34m | $16m | $74m | $79m |
Q3 sales rose 4.4% year over year, including a favorable $18m foreign-exchange effect; nine-month sales increased 36.8%, including $143m of favorable currency translation and recovery from pandemic-disrupted 2020 demand. Q3 adjusted EBITDA rose $14m, mainly on productivity and favorable mix, partly offset by material, labor and freight inflation. Nine-month adjusted EBITDA increased $187m, primarily on higher volumes and productivity.
Q3 basic and diluted EPS were $0.42 and $0.20, respectively; nine-month EPS was $4.34 basic and $1.75 diluted. Preferred dividends reduced income available to common shareholders by $36m in Q3 and $60m year to date. Diluted weighted-average shares included Series A preferred conversion equivalents, making diluted EPS and share counts materially different from basic figures.
Financial position and liquidity
- At September 30, cash and cash equivalents were $456m, with restricted cash of $78m. Cash, cash equivalents and restricted cash totaled $534m, down $159m from year-end 2020.
- Current assets were $1,609m and current liabilities $1,499m. Total liabilities were $3,350m; total deficit was $633m.
- Term-loan principal outstanding was $1,237m; carrying value of long-term debt, including financing-cost adjustments and current maturities, was $1,200m. The $300m revolving facility was undrawn, with $296m available after letters of credit.
- Nine-month operating cash use included a $375m payment to Honeywell under the reorganization plan. Cash flow from operations less capital expenditures, a non-GAAP measure, was negative $520m.
- Series B preferred stock issued to Honeywell was recorded at a present value of $595m at quarter-end; scheduled redemptions total $835m through 2030. An October 1, 2021 amendment requires a partial early redemption by March 31, 2022 to reduce the present value of remaining shares to $400m. Garrett expected a cash payment of approximately $213m as of January 1, 2022.
- Management stated that improved liquidity and emergence from bankruptcy meant substantial doubt about the company’s ability to continue as a going concern no longer existed. The company reported compliance with financing covenants.
Material changes, outlook and risks
- Q3 sales increased despite semiconductor-related customer production cuts: commercial vehicle sales rose 12% and aftermarket sales 23%, while diesel sales fell 4%. Management reported lower Q3 unit volumes year over year and continued volatility from semiconductor shortages.
- Management expected semiconductor shortages to continue affecting automotive operations at least through mid-2022; OEMs had reduced production plans for the first two quarters of 2022. Supply constraints, raw-material and freight inflation, and possible energy interruptions in China were identified as operating risks. Garrett reported no power-outage impacts at its China plants through September 30.
- No specific company revenue or earnings guidance is provided in the filing. Management described longer-term demand drivers and risks from emissions regulation and the transition toward electric vehicles; turbocharger demand, product mix and aftermarket demand could be affected.
- The nine-month net income included a $502m gain on settlement of Honeywell claims, within a net $130m reorganization gain. This gain is unusual and should not be treated as recurring operating performance. Reorganization costs also included professional fees, transaction-related costs and other items.
- Series A preferred stock carries an 11% cumulative annual dividend, subject to declaration, legal availability, EBITDA and contractual conditions. $60m of cumulative dividends were unpaid as of September 30; no cash dividend was declared for the July 1 or October 1, 2021 periods. The filing also describes substantial potential dilution from conversion and registered resales.
- A Brazilian tax authority dispute over tax credits was estimated at $30m including penalties and interest; management considered liability not probable and recorded no accrual. Securities litigation remains pending; the company said its insurer accepted the defense subject to reservation of rights, and the ultimate allowance of claims was not yet assessable.
- Other risks include substantial debt and Honeywell redemption obligations, customer and supplier concentration, warranty/product liability, climate and regulatory shifts, cybersecurity, and possible adverse effects of the recent bankruptcy on business relationships. Management reported disclosure controls were effective as of September 30, 2021.
Investor verification priorities
- Separate recurring operating results from the $502m Honeywell settlement gain and other bankruptcy-related items; review the company’s non-GAAP Adjusted EBITDA reconciliation.
- Confirm the timing, funding and actual cash cost of the required Series B partial early redemption, and assess remaining Honeywell payment and put-right exposure.
- Track operating cash flow, working capital, capital spending and available liquidity against debt service and preferred obligations.
- Monitor semiconductor supply, OEM production schedules, inflation and pass-through recoveries, and their effects on volumes and margins.
- Assess Series A cumulative dividends, conversion and dilution potential, resale activity, and the resulting common-share voting and economic interests.
- Follow the Brazilian tax matter, securities litigation and any material developments in remaining Chapter 11 claims.