Garrett Motion Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Garrett designs and sells turbocharger and electric-boosting technologies and automotive software. It reports one operating and reportable segment.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $970 million | $901 million |
| Gross profit / margin | $189 million / 19.5% | $175 million / 19.4% |
| Net income / margin | $81 million / 8.4% | $88 million / 9.8% |
| Net income available for distribution | $41 million | $50 million |
| Basic and diluted EPS | $0.13 | $0.15 |
| Adjusted EBITDA (non-GAAP) | $168 million | $146 million |
| Operating cash flow | $92 million | $73 million |
| Capital expenditures | $8 million | $29 million |
Interest expense was $28 million versus $23 million; tax expense was $27 million versus $37 million, with an effective tax rate of 25.0% versus 29.6%. The $4 million of non-operating income in Q1 2023 compared with $28 million in Q1 2022, largely reflecting prior-year unrealized gains on interest-rate swaps.
Balance sheet, liquidity and cash flow
- Cash and cash equivalents were $291 million at March 31, 2023, plus $1 million restricted cash. Cash, cash equivalents and restricted cash totaled $292 million, up $44 million during the quarter.
- Current assets were $1.605 billion and current liabilities $1.478 billion. Total liabilities were $2.871 billion; total deficit was $80 million.
- Term-loan principal outstanding was $1.193 billion. The company had no Revolving Facility loans or letters of credit outstanding and reported approximately $475 million of available capacity. A separate bilateral letter-of-credit facility had $12 million utilized and $3 million available. Garrett reported compliance with all debt covenants.
- Operating cash flow improved by $19 million year over year. Investing outflow was $8 million, and financing outflow was $44 million, including the $42 million preferred dividend transfer. Working-capital changes were a $38 million comparative headwind to operating cash flow.
- Series A Preferred Stock carries cumulative dividends at an annual rate of 11%. Undeclared and unpaid cumulative dividends were approximately $169 million at March 31; the filing reports $180 million as of April 24.
Material changes and management commentary
- Sales rose $69 million, or 7.7%, despite an unfavorable $47 million foreign-currency translation impact. Management attributed growth to recovering industry volumes and easing semiconductor constraints, new product launches and ramp-ups, and inflation recoveries net of pricing.
- OEM sales represented about 88% of revenue; aftermarket and other sales 12%. Europe contributed 51% of sales, Asia 29%, North America 18%, and other regions 2%.
- Gross profit increased $14 million. Higher volume, inflation recoveries net of pricing, productivity and product mix more than offset commodity, energy and transportation inflation, higher R&D expense and foreign-exchange impacts. Gross margin was broadly stable.
- Net income declined $7 million, chiefly due to lower non-operating income and higher interest expense, partly offset by improved gross profit and lower taxes. Adjusted EBITDA increased $22 million, reflecting volume, productivity and inflation pass-through net of pricing; foreign-exchange impacts reduced it by $6 million.
- Management said it expects liquidity from operating cash flows, cash and committed credit facilities to support operations, and expects continued investment in manufacturing capacity and strategic growth, particularly drivetrain electrification. No specific full-year financial guidance is provided in the filing text.
Outlook, transactions and contingencies
- On April 12, 2023, Garrett agreed to repurchase approximately $570 million of Series A Preferred Stock from Centerbridge and Oaktree, subject to conditions, and plans to convert remaining preferred shares into common stock on or about July 3, 2023. The repurchases are expected to be funded with approximately $700 million of new debt, anticipated in Q2 2023. Completion depends on financing and other conditions; the conversion also depends on completing the repurchases. The company increased its share-repurchase authorization to $250 million.
- The securities class action was dismissed with prejudice on March 31, 2023; plaintiffs had 30 days to appeal. A Brazilian tax notice concerning tax credits had an estimated exposure of $35 million including penalties and interest. Management said liability was not probable and recorded no accrual.
- Recorded product warranty and performance-guarantee obligations were $28 million. Garrett expects approximately $7 million of non-U.S. pension contributions in 2023, of which $1 million had been contributed by March 31.
- Key stated risks include raw-material and logistics inflation and recovery through pricing, customer and program concentration, automotive-industry and economic changes, foreign exchange and geopolitical conditions, product quality and liability, supply-chain and cyber risks, and the ability to complete the announced financing and capital-structure transactions.
Important facts for investors to verify
- Whether the approximately $700 million financing closes on acceptable terms and funds the preferred-share repurchases as planned.
- The final conversion mechanics, cash-versus-stock treatment of accrued preferred dividends, resulting common-share count and effect on leverage and interest expense.
- Whether volume recovery, customer pass-throughs and productivity continue to offset inflation, pricing pressure and foreign-exchange impacts.
- Cash conversion and working-capital trends, including receivables, inventory and supplier-financing obligations.
- Any appeal or further developments in the securities litigation and the outcome of the $35 million Brazilian tax matter.