Garrett Motion Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless stated otherwise. Amounts are in U.S. dollars, millions except per-share data. Garrett designs and sells turbocharger, electric-boosting and automotive software technologies to vehicle OEMs and the aftermarket.
Financial results
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $901 | $997 |
| Gross profit / margin | $175 / 19.4% | $196 / 19.7% |
| Net income (loss) | $88 | $(105) |
| Net income available for distribution after preferred dividend | $50 | $(105) |
| Diluted EPS | $0.15 | $(1.38) |
| Adjusted EBITDA (non-GAAP) / margin | $146 / 16.2% | $176 / 17.7% |
| Cash from operating activities | $73 | $32 |
| Capital expenditures | $29 | $18 |
Sales fell 9.6% (approximately 10%); foreign exchange reduced sales by $36, or 4%. Unit volumes declined approximately 10% to 3.4 million. Aftermarket sales rose 15% to $105, while diesel sales fell 19%, gasoline 7%, and commercial vehicle sales 10%. Gross margin contracted 0.3 percentage points. Adjusted EBITDA declined $30, with lower volumes, commodity and freight inflation, and unfavorable foreign exchange partly offset by productivity and mix.
Net income improved by $193, but included $28 of non-operating income, chiefly a $26 benefit from unrealized interest-rate-swap mark-to-market gains, and only $1 of reorganization expense versus $174 in Q1 2021. Thus, the GAAP earnings comparison reflects significant unusual and non-cash items; Adjusted EBITDA also declined.
Liquidity, debt and capital
- Cash and cash equivalents were $315 at March 31, 2022, down from $423 at year-end; restricted cash was another $5. Cash, cash equivalents and restricted cash decreased $144 during the quarter.
- Operating cash flow was $73; investing cash outflow was $29 and financing cash outflow was $196. Financing outflow included $186 principal redemption of Series B Preferred Stock, $11 related redemption interest, and $2 of share repurchases.
- Term-loan principal was $1,208, with $1,166 reported as long-term debt after financing costs and current maturities. The term loans mature in 2028. The company had no revolving borrowings, approximately $473 of revolving availability, and $25 available under a separate letter-of-credit facility.
- The revolving-credit commitment was increased from $300 to approximately $475. Garrett reported compliance with its debt covenants at quarter-end.
- Series B Preferred Stock redemption payment was $197. Remaining scheduled redemptions total $272, due during 2024–2027. A holder-triggered redemption following specified events on or before December 30, 2022 could require approximately $220 of additional cash.
- Series A Preferred Stock carries cumulative dividends at 11% annually. No cash dividend was declared for the quarter; accumulated unpaid dividends were approximately $135 at March 31.
- Equity remained in deficit at $(357), compared with $(468) at year-end.
Outlook, commentary and risks
Garrett gave no specific full-year revenue or earnings guidance in the supplied filing text. Management expected semiconductor shortages and other supply constraints to continue affecting operations through 2022, and said OEMs had reduced production plans for the first two quarters. It cited COVID-related lockdowns in China, the Russia-Ukraine conflict, logistics disruption, commodity and transportation inflation, and volatile customer demand. The company said supplier-risk monitoring and contingency plans were in place, and it was pursuing customer cost pass-throughs and supplier cost reductions.
Management described longer-term demand drivers for turbocharging, including hybrid vehicles and commercial vehicles, and expects to invest in manufacturing capacity and electrification-related opportunities. These expectations are subject to industry and economic fluctuations. Other disclosed risks include customer concentration and demand, raw-material availability and pricing, supplier performance, warranty and product-liability exposure, foreign-exchange and interest-rate movements, and environmental and regulatory matters.
Contingencies, unusual items and controls
- Brazilian tax matter: Authorities challenged tax credits; the estimated claim, including penalties and interest, was $34. The company said liability was not probable and recorded no accrual. The claim was suspended pending a final judicial decision.
- Securities litigation: On March 31, 2022, the court dismissed the complaints; one dismissal was with prejudice, while plaintiffs were given 30 days to amend claims against Garrett and other defendants. Company-related recoveries are limited to available insurance proceeds under the arrangement described in the filing.
- Chapter 11: Garrett emerged from bankruptcy on April 30, 2021; the main case remained open to administer outstanding claims. Q1 2022 reorganization expense was $1.
- Disclosure controls: Management concluded controls were not effective at the reasonable-assurance level at March 31 because of an unremediated material weakness in accounting for Series A Preferred Stock in EPS calculations. Remedial control changes were made, but the weakness will not be considered remediated until controls operate and are tested effectively.
Important facts for investors to verify
- Whether production constraints, China lockdowns, and geopolitical disruption continue to weigh on volumes and customer schedules.
- Whether pricing pass-throughs and productivity can offset continuing commodity, labor, transportation and premium-freight costs.
- Cash availability after preferred-stock payments, including the potential Series B holder-triggered redemption and future scheduled redemptions.
- The development and potential exposure of the $34 Brazilian tax claim and the amended securities litigation.
- Progress in testing and remediating the material weakness in financial reporting controls.
- The sustainability of reported GAAP earnings given the swap valuation benefit, preferred dividends, and other non-recurring or non-cash items.