Garrett Motion Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Garrett designs and sells turbocharger, electric-boosting and automotive software products. It emerged from Chapter 11 on April 30, 2021; comparisons with 2020 reflect pandemic-related production shutdowns and are not fully representative of underlying growth.
Financial performance
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | $935 million | $477 million | $1,932 million | $1,222 million |
| Gross profit | $193 million | $80 million | $389 million | $218 million |
| Gross margin | 20.6% | 16.8% | 20.1% | 17.8% |
| Net income (loss) | $409 million | $(9) million | $304 million | $43 million |
| Adjusted EBITDA (non-GAAP) | $168 million | $63 million | $344 million | $171 million |
- Sales rose 96% in Q2 and 58.1% in H1. Management attributed the increases primarily to higher vehicle production and volumes, with favorable currency translation contributing 13.4% and 10.3%, respectively; lower pricing partly offset growth.
- Margin improvement reflected higher-volume productivity, partly offset by unfavorable product mix and pricing, inflation, repositioning costs and other factors. Q2 SG&A was $51 million; H1 SG&A was $106 million.
- Reported net income included a $295 million net reorganization gain in Q2 and a $121 million net reorganization gain in H1. The principal item was a $502 million gain on settlement of Honeywell claims, partly offset by bankruptcy-related costs. The gain is unusual and materially affects comparisons.
- Net cash used in operating activities was $423 million in Q2 and $391 million in H1; H1 capital expenditures were $40 million. H1 operating cash outflow was largely affected by a $375 million payment to Honeywell under the reorganization plan.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $401 million and restricted cash was $215 million, for combined cash and restricted cash of $616 million. Combined cash was $693 million at year-end 2020.
- Term-loan principal outstanding was $1.247 billion; the balance sheet reported $1.204 billion of long-term debt and $5 million of current maturities. The $300 million revolving facility was undrawn, with $261 million available after letters of credit.
- Honeywell’s Series B preferred stock is mandatorily redeemable and classified as debt. Its $834.8 million scheduled face payments were recorded at a $585 million present value, including $550 million classified long-term. Scheduled payments begin at $35 million in 2022 and $100 million annually from 2023 through 2030, subject to terms and conditions.
- The company issued $1.301 billion of Series A preferred stock in connection with emergence. It carries cumulative dividends at an 11% annual rate; $24 million had accumulated through June 30. No cash dividend was paid July 1, 2021.
- Management said substantial doubt about the company’s ability to continue as a going concern no longer existed following emergence and improved liquidity. The company reported compliance with financing covenants at June 30.
Outlook, commentary and risks
- Management expected a strong 2021 rebound in vehicle production and said turbocharger demand could benefit from continued penetration in conventional, hybrid and fuel-cell vehicles. It gave no specific company revenue or earnings guidance in the provided filing text.
- The global semiconductor shortage was reducing automaker production plans and creating uncertainty; management expected supply-chain effects to continue through year-end. Renewed COVID-19 restrictions could also disrupt facilities, production and demand.
- Management cited battery-electric vehicle adoption and tighter emissions targets as longer-term risks to turbocharger demand, alongside customer concentration, supplier dependence, material-cost inflation, warranty/product liability, technology shifts and international-market exposure.
- Liquidity risks include substantial debt service and Honeywell redemption obligations. The company said Series B holders may gain a right to require redemption as soon as Q4 2021, depending on the contractual EBITDA trigger; acceleration of debt, a change of control or certain other events can also trigger redemption.
- A Brazilian tax notice relating to tax credits had an estimated exposure of $31 million including penalties and interest. Garrett said liability was not probable and recorded no accrual. Securities litigation remained pending; the company said its insurer accepted the defense subject to a reservation of rights.
Most important facts for investors to verify
- How much of reported earnings and the year-over-year improvement is attributable to the nonrecurring bankruptcy settlement gain versus operating performance.
- Whether semiconductor constraints, inflation and vehicle-production changes affect volumes, pricing and margins beyond the periods discussed.
- The Series B preferred stock’s redemption triggers, potential timing and funding requirements, and the company’s ability to meet them alongside debt service.
- Cash availability after distinguishing restricted from unrestricted cash, and the evolution of operating cash flow and working capital.
- Potential dilution and governance effects from Series A conversion, cumulative dividends, investor resale rights and the company’s equity incentive plan.
- Developments in the Brazilian tax matter and securities litigation, including any change to management’s assessment or insurance coverage.