Garrett Motion Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Garrett designs and sells turbocharger and electric-boosting technologies and automotive software. It reports as one operating and reportable segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $945 million | $839 million | $2,705 million | $2,771 million |
| Gross profit | $178 million | $163 million | $522 million | $552 million |
| Gross margin | 18.8% | 19.4% | 19.3% | 19.9% |
| Net income | $105 million | $63 million | $278 million | $367 million |
| Net income available for distribution after preferred dividends | $65 million | $27 million | $161 million | $307 million |
| Basic and diluted EPS | $0.21 | $0.09 | $0.52 | $1.46 basic; $1.15 diluted |
| Adjusted EBITDA (non-GAAP) | $146 million | $134 million | $430 million | $478 million |
Q3 sales grew 12.6% year over year despite a $105 million unfavorable foreign-currency translation impact. Higher volumes, new product launches and $43 million of inflation recovery net of pricing contributed to growth. Nine-month sales declined 2.4%, reflecting a $215 million currency headwind and lower volumes, partly offset by improved mix and inflation recoveries.
Q3 gross profit increased $15 million, but gross margin fell 60 basis points. Nine-month gross profit declined $30 million and margin fell 60 basis points. Commodity, transportation and energy inflation, foreign exchange, and higher R&D and premium freight costs weighed on profitability; productivity and customer price recoveries provided offsets. Adjusted EBITDA margin contracted 60 basis points in Q3 and 140 basis points for the nine-month period.
Interest expense was $18 million in Q3 and $61 million for nine months, down from $25 million and $70 million, respectively. Non-operating income was $29 million in Q3 and $73 million for nine months, primarily reflecting unrealized mark-to-market gains on interest-rate swaps. Nine-month net income fell $89 million, principally because the prior-year period included a substantial net reorganization gain.
Cash, debt and liquidity
- Nine-month operating cash flow was $238 million, versus cash use of $446 million in 2021. The comparison benefited from a $375 million Honeywell payment made in the prior year and working-capital movements; it should not be read solely as a change in underlying earnings.
- Investing cash use was $78 million, including $78 million of capital expenditures. Financing cash use was $436 million, including $381 million to redeem Series B Preferred Stock and $42 million transferred for a Series A preferred dividend.
- Cash and cash equivalents were $159 million at September 30, 2022, with another $2 million restricted, compared with $423 million and $41 million restricted at December 31, 2021. Cash, cash equivalents and restricted cash decreased by $303 million.
- Term-loan principal outstanding was $1.146 billion, with $1.108 billion reported as long-term debt and $7 million as current maturities. The facilities mature in 2028 and carry variable rates. The company had no revolving-facility borrowings or letters of credit outstanding and reported approximately $475 million of available revolving capacity. A separate bilateral letter-of-credit facility had $12 million utilized and $3 million available.
- Garrett said expected operating cash flows, preferred-stock funding and committed credit facilities supported adequate liquidity. It was in compliance with debt covenants at quarter-end. Net debt using term-loan principal and reported cash was approximately $987 million, excluding restricted cash.
Material changes, outlook and risks
- Garrett completed the early redemption of all Series B Preferred Stock in June 2022. It declared a $42 million Series A preferred dividend in September; $172 million of cumulative preferred dividends remained undeclared and unpaid at quarter-end. Series A Preferred Stock carries an 11% annual cumulative dividend rate.
- The company repurchased $24 million of Series A and common shares cumulatively under its $100 million program through September 30; $76 million remained available. Q3 repurchases were 164,771 preferred shares for approximately $1.3 million.
- Management expected semiconductor shortages to continue into 2023, though less severely than in the prior year. It cited COVID-related restrictions, geopolitical tensions and possible European energy shortages as risks to customer production, supply chains, costs and demand. Commodity and energy inflation, foreign-exchange movements, customer pricing, supply disruptions and recession scenarios could pressure results.
- Management described longer-term turbocharger demand support from hybrid adoption, commercial-vehicle applications and alternative fuels, and continued investment in electrification and new technologies. The filing provides no specific earnings or revenue guidance for the next quarter or full year.
- Garrett disclosed a Brazilian tax dispute estimated at $31 million including penalties and interest; management considered a loss not probable and recorded no accrual. A securities class action remained pending, with defendants’ motion to dismiss the amended complaint outstanding; any recovery against Garrett was limited to available insurance proceeds. The company also reported ordinary-course litigation and warranty obligations.
- Q3 and nine-month results include significant derivative valuation and foreign-exchange effects. The filing reports a $167 million net fair-value asset for financial instruments exposed to currency risk and estimates an $83 million potential loss under a hypothetical 10% adverse exchange-rate move.
Most important facts for investors to verify
- Whether sales recovery and inflation pass-through can offset currency headwinds, lower volumes and continuing commodity, transport and energy inflation.
- The sustainability of operating cash flow after working-capital changes and one-time comparisons, and the cash needs for capital investment and preferred dividends.
- Variable-rate debt exposure, covenant headroom, and the availability and terms of revolving credit as benchmark rates change.
- The economic implications of the 11% cumulative Series A preferred dividend and the $172 million accumulated undeclared balance.
- Developments in the Brazilian tax matter, securities litigation, and supply-chain and geopolitical risks.