GARRETT MOTION INC. The following discussion and analysis of our financial condition and results of operations, which we refer to as our "MD&A," should be read in conjunction with our Consolidated Interim Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q as well as the audited annual Consolidated Financial Statements for the year endedDecember 31, 2021 , included in our Form 10-K, as filed with theSecurities and Exchange Commission onFebruary 14, 2022 (our "2021 Form 10-K"). Some of the information contained in this MD&A or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the "Risk Factors" section of our 2021 Form 10-K and this Quarterly Report on Form 10-Q, our actual results could differ materially from the results described in, or implied, by these forward-looking statements. The following MD&A is intended to help you understand the results of operations and financial condition ofGarrett Motion Inc. , for the three and six months endedJune 30, 2022 . Executive Summary Our net sales for the three months endedJune 30, 2022 were$859 million , representing a decrease of$76 million or 8% (including an unfavorable impact of$73 million or 8% due to foreign currency translation) compared to the prior year. Our sales, net of the impacts of foreign currency translation, outpaced global light vehicle production (as estimated by IHS Markit ("IHS"), now part of S&P Global) by approximately 6% driven by successful recoveries on inflation pass through. We saw new product launches on gasoline which increased our share of demand. Our volumes however were impacted by the ongoing global semiconductor shortage despite strong underlying demand for light vehicles, further accentuated by an improved second quarter of 2021 due to accumulated pent-up demand from 2020. The continued COVID-related lockdown measures inChina also continued to impact our sales for the quarter. For the three months endedJune 30, 2022 , our light vehicle product sales (which comprise diesel and gasoline products, including products for passenger cars, SUVs, light trucks, and other products) accounted for approximately 68% of our revenues. Commercial vehicle product sales (products for on- and off-highway trucks, construction, agriculture and power-generation machines) accounted for 18% of our revenues. Our OEM sales contributed approximately 86% of our revenues while our aftermarket and other products contributed 14% of our revenues. Approximately 51% of our revenues came from sales to customers located inEurope , 27% from sales to customers located inAsia , 20% from sales to customers inNorth America , and 2% from sales to customers in other international markets. OnJune 28, 2022 , the Company completed the third and final early redemption of all its remaining outstanding Series B Preferred Stock. Under this final early redemption, the Company redeemed 271,628,259 shares of its Series B Preferred Stock for an aggregate price of$212 million .
Macroeconomic disruptions
The automotive industry continues to be impacted by uncertainty due to worldwide semiconductor shortages, the COVID-19 pandemic, governmental responses to the pandemic including the lockdown measures inChina , and geopolitical tensions in particular from the ongoing military conflict betweenRussia andUkraine . The automotive OEMs have already reduced production plans for the first two quarters of 2022, and while the semiconductor shortage is expected to improve in the second half 2022, production levels may be reduced should COVID-related lockdown measures persist or extend, or the conflict betweenRussia andUkraine escalates or expands. The Company continues to review production levels at OEM plants and closely monitor supply-chain disruptions related to logistics and component shortages in order to minimize the impact of the bottleneck in supply and mitigate any potential disruption in production. Additionally, we implemented new procedures in 2021 for the monitoring of supplier risks and we believe we have substantially addressed such risks with manageable economic impacts including use of premium freight or adjusted payment terms that are limited in time. However, it is possible that additional supply chain constraints may appear for the industry as the global supply chain restarts. Finally, we have prepared contingency plans for multiple scenarios that we believe will allow us to react swiftly to changes in customer demand while protecting Garrett's long-term growth potential.
Trends
The turbocharger industry is expected to increase from approximately 43 million units in 2021 to approximately 49 million units by 2026, according to IHS for light vehicle and Knibb,Gormezano and Partners ("KGP") andPower Systems Research ("PSR") for commercial vehicle on-highway and off-highway. The turbocharger industry growth is mainly driven 23 -------------------------------------------------------------------------------- by an expected increase in the penetration of hybrid vehicles, from 10 million hybrid cars globally in 2021 to an anticipated 28 million hybrid cars globally in 2026. In the short to medium term, we continue to believe that turbocharger demand will grow as turbochargers remain one of the most cost-efficient levers to improve the fuel efficiency of conventional gasoline and diesel vehicles as well as hybrid vehicles. In addition, fuel cell vehicles also require a high-performance electric boosting system. In the commercial vehicle industry, we expect a slower transition to battery electric vehicles ("BEV"), due to specific mission profile and associated range and charging time constraints, which translates into more resilient turbocharger demand, as most commercial vehicles are turbocharged. In addition, low or zero emission alternative fuels for internal combustion engines ("ICE"), like natural gas or hydrogen, are expected to gain momentum in coming years, supporting continued turbocharger demand. We expect growth in the turbocharger industry in all regions, with special mention for high-growth regions inAsia , where rising income levels continue to drive long-term automotive and vehicle component demand. While these positive factors do not isolate the turbocharger industry from fluctuations in global vehicle production volumes, such factors may mitigate the negative impact of macroeconomic cycles. The global turbocharger industry is traditionally subject to inflationary pressures with respect to raw materials which place operational and profitability burdens on the entire supply chain. Given the recent macroeconomic disruptions including the geopolitical tensions from the ongoingRussia -Ukraine conflict, we expect to see continued commodity cost volatility which could have an impact on future earnings. Accordingly, we continue to seek to mitigate both inflationary pressures and our material-related cost exposures by negotiating commodity cost contract escalation or pass-through agreements with customers and cost reductions with suppliers. Our sales predictability in the short term might also be impacted by sudden changes in customer demand, driven by our OEM customers' supply-chain management.
The following tables show our revenues by geographic region and product line for
the three and six months ended
By Geography
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in millions)
United States $ 173 20% $ 142 15% $ 326 18% $ 280 15%
Europe 440 51% 480 52% 891 51% 1,008 52%
Asia 227 27% 301 32% 509 29% 620 32%
Other 19 2% 12 1% 34 2% 24 1%
Total $ 859 $ 935 $ 1,760 $ 1,932 By Product Line
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in millions)
Diesel $ 237 27% $ 285 30% $ 491 28% $ 597 31%
Gas 345 40% 342 37% 708 40% 734 38%
Commercial Vehicle 154 18% 191 20% 320 18% 376 19%
Aftermarket 108 13% 102 11% 213 12% 193 10%
Other 15 2% 15 2% 28 2% 32 2%
Total $ 859 $ 935 $1,760$ 1,932 24
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Results of Operations for the Three and Six Months Ended
Net Sales Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in millions) Net sales$ 859 $ 935 $ 1,760 $ 1,932 % change compared with prior period (8.1) %
(8.9) %
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For the three months endedJune 30, 2022 , net sales decreased compared to prior year by$76 million or 8%, driven by an unfavorable impact of$73 million or 8% due to foreign currency translation driven by a lower Euro-to-US dollar exchange rate, and lower volumes offset by$28 million of inflation recoveries net of pricing across all product lines. Gasoline product sales increased by$3 million or 1% (including an unfavorable impact of$27 million or 8% due to foreign currency translation), primarily due to favorable impacts from new product launches inNorth America which delivered incremental sales year over year, and partially offset by lower sales inChina due to the continued COVID-related lockdown measures implemented by the Chinese government which were lifted only inJune 2022 . Diesel product sales decreased by$48 million or 17% (including an unfavorable impact of$27 million or 10% due to foreign currency translation). This decrease was mainly due to the continued global semiconductor shortage and other supply shortages at customers due to the ongoing geopolitical crisis and pandemic related disruptions, as well as the impact of higher sales for the three months endedJune 30, 2021 brought about by recovery in customer demand following pandemic-related disruptions in 2020. Commercial vehicle sales decreased by$37 million or 19% (including an unfavorable impact of$11 million or 6% due to foreign currency translation), primarily driven by the continued COVID-related lockdown situations inChina that limited our production output, combined with market declines following the implementation of heightenedChina 6a emissions standards for heavy-duty trucks onJuly 1, 2021 . Commercial vehicle sales also decreased due to continued impacts from semiconductor shortages at customers. Aftermarket sales improved by$6 million or 6% (including an unfavorable impact of$6 million or 5% due to foreign currency translation), primarily due to strong demand inNorth America andEurope related to favorable aftermarket conditions such as increased off-highway demand for new and service parts, as well as growth through new product introductions and favorable pricing impacts.
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For the six months ended June 30, 2022 , net sales decreased compared to prior
year by $172 million or 9%, driven by an unfavorable impact of $109 million or
6% due to foreign currency translation driven by a lower Euro-to-US dollar
exchange rate, and lower volumes partially offset by $26 million of inflation
recoveries net of pricing across all product lines.
Gasoline product sales decreased by $26 million or 4% (including an unfavorable
impact of $38 million or 6% due to foreign currency translation), primarily
driven by the lower Euro-to-dollar exchange rates and lower sales in China due
to the increased COVID-related lockdown measures implemented by the Chinese
government. These decreases were more than offset by new product launches in
North America which delivered incremental sales year over year.
Diesel product sales decreased by $106 million or 18% (including an unfavorable
impact of $42 million or 7% due to foreign currency translation). This decrease
was mainly due to the global semiconductor shortage and other supply shortage at
customers due to the ongoing geopolitical crisis and pandemic related
disruptions, accentuated by the impact of higher sales for the six months ended
June 30, 2021 due to recovery in customer demand following pandemic-related
disruptions in 2020.
Commercial vehicle sales decreased by $56 million or 15% (including an
unfavorable impact of $17 million or 5% due to foreign currency translation),
primarily driven by market declines in China following the implementation of
heightened China 6a emissions standards for heavy-duty trucks on July 1, 2021 ,
as well as semiconductor shortages at customers and other impacts from
geopolitical tensions in Russia and Ukraine and pandemic-related disruptions.
Aftermarket sales improved by $20 million or 10% (including an unfavorable
impact of $9 million or 5% due to foreign currency translation), primarily due
to strong demand in North America and Europe related to favorable aftermarket
conditions such as increased off-highway demand for new and service parts,
increased revenues from our Performance & Motorsport Turbo business, new
distributor openings, as well as growth through new product introductions and
favorable pricing impacts.
Cost of Goods Sold and Gross Profit
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in millions)
Cost of goods sold $ 690 $ 742 $ 1,416 $ 1,543
% change compared with prior period (7.0) % (8.2) %
Gross profit percentage 19.7 % 20.6 % 19.5 % 20.1 %
Cost of Goods
Sold Gross Profit
(Dollars in millions)
Cost of Goods Sold / Gross Profit for the three months ended June 30, 2021 $ 742 $ 193
Increase/(decrease) due to:
Volume (40) (18)
Product mix 25 (2)
Price, net of inflation pass-through - 28
Commodity, transportation & energy inflation 32 (32)
Productivity, net (20) 24
Research & development 5 (5)
Foreign exchange rate impacts (54) (19)
Cost of Goods Sold / Gross Profit for the three months ended
For the three months endedJune 30, 2022 , cost of goods sold decreased by$52 million , primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of$40 million and$54 million , respectively. Our continued focus on productivity also contributed to a decrease in cost of goods sold of$20 million , net of$2 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility. These decreases were partially offset by$32 million of inflation on commodities, transportation and energy costs, as well as$25 26 --------------------------------------------------------------------------------
million due to an unfavorable product mix. Research and development ("R&D")
costs also increased by
Gross profit decreased by$24 million , with the decrease mainly driven by the lower sales volumes, inflation on commodities, transportation and energy costs, as well as higher premium freight costs as discussed above. Higher R&D costs and$19 million of unfavorable foreign currency translational, transactional and hedging effects also lowered our gross profit. These decreases were partially offset by$24 million from higher productivity and$28 million of inflation recoveries from customer pass-through agreements net of pricing reductions. Cost of Goods Sold Gross Profit (Dollars in millions) Cost of Goods Sold / Gross Profit for the six months ended June 30, 2021$ 1,543 $ 389 Increase/(decrease) due to: Volume (108) (48) Product mix 47 14 Price, net of inflation pass-through - 26 Commodity, transportation & energy inflation 56 (56) Productivity, net (51) 58 Research & development 8 (8) Foreign exchange rate impacts (79) (31)
Cost of Goods Sold / Gross Profit for the six months ended
For six months endedJune 30, 2022 , cost of goods sold decreased by$127 million , primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of$108 million and$79 million , respectively. Our continued focus on productivity also contributed to a decrease in cost of goods sold of$51 million , net of$7 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility. These decreases were partially offset by$56 million of inflation on commodities, transportation and energy costs, as well as$47 million due to an unfavorable product mix. R&D expenses also increased by$8 million which reflects our shift in investment in new technologies and headcount increase year-over-year. Gross profit decreased by$45 million , with the decrease mainly driven by the lower sales volumes, inflation on commodities, transportation and energy costs, as well as higher premium freight costs as discussed above. Higher R&D costs and$31 million of unfavorable foreign currency translational, transactional and hedging effects also reduced our gross profit. These decreases were partially offset by$58 million of higher productivity and$26 million of inflation recoveries from customer pass-through agreements net of pricing reductions.
Selling, General and Administrative Expenses
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in millions)
Selling, general and administrative
expense $ 54 $ 51 $ 107 $ 106
% of sales 6.3 % 5.5 % 6.1 % 5.5 %
Selling, general and administrative ("SG&A") expenses for the three months ended
June 30, 2022 increased by $3 million compared with the prior year, primarily
due to $9 million of higher professional services costs, $1 million from
increased travel expenses and $1 million of increased bad debt expense. These
increases were partially offset by $4 million of lower employee-related costs
reflecting lower expected payout on 2022 employee incentives, as well as $4
million of favorable impacts from foreign exchange rates.
For the six months ended
27
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employee incentive payout as discussed above, but also $2 million of one-time
cash continuity awards that were recognized in 2021. We also saw a $7 million
benefit from favorable foreign exchange rates compared to the prior year.
Interest Expense
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in millions)
Interest expense $ 20 $ 24 $ 43 $ 45 For the three months ended
For the six months endedJune 30, 2022 , interest expense decreased by$2 million compared to the prior year primarily due to$5 million of lower interest expense on our current credit facilities compared to the credit facility in place last year prior to Emergence and prior year period fees related to amendments on our previous credit facilities, partially offset by$3 million of higher interest expense in 2022 due to an additional quarter of accretion on our Series B Preferred Stock that was issued at Emergence. Non-operating income Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in millions) Non-operating income$ (16) $ (26) $ (44) $ - For the three months endedJune 30, 2022 , non-operating income decreased by$10 million from$26 million in the prior year,and comprised of$12 million of interest income primarily from unrealized marked-to-market gains on our interest rate swaps,$2 million of equity income from unconsolidated affiliates,$3 million related to non-service components of net periodic pension benefits, and$4 million of other non-operating gains partially offset by$5 million of foreign exchange remeasurement impacts. The decrease in non-operating income versus prior year is primarily due to$25 million of favorable foreign exchange remeasurement impacts recognized in 2021 on foreign currency-denominated debt which was unhedged due to the restrictions placed on the Company in the Chapter 11 proceedings (and was settled at Emergence), partially offset by higher interest income from unrealized marked-to-market gains on our interest rate swaps. For the six months endedJune 30, 2022 , non-operating income increased by$44 million and comprised of$39 million of interest income primarily from unrealized marked-to-market gains on our interest rate swaps,$4 million of equity income from unconsolidated affiliates,$5 million related to non-service components of net periodic pension benefits, and$4 million of other non-operating gains partially offset by$8 million of foreign exchange remeasurement losses. The increase in non-operating income from prior year is mainly due to the higher interest income associated with unrealized marked-to-market gains on our interest rate swaps, as well as foreign exchange remeasurement losses recognized in 2021 on the above-mentioned foreign currency-denominated debt. Reorganization items, net Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in millions) Reorganization items, net$ 1 $ (295) $ 2 $ (121) Reorganization items, net for the three months endedJune 30, 2022 was an expense of$1 million related to professional service fees incurred for the remaining main Chapter 11 Case. During the prior year period, reorganization items, net amounted to a$295 million gain, representing a$502 million gain on settlement of Honeywell claims, partially offset by$96 million professional service fees related to the Chapter 11 Cases,$39 million in Directors and Officers insurance related to Chapter 11 Cases,$25 million write off on debt issuance costs of the Company's pre-petition term loan, 28 --------------------------------------------------------------------------------
For the six months endedJune 30, 2022 , reorganization items, net was an expense of$2 million related to professional service fees incurred for the remaining main Chapter 11 Case. During the prior year period, reorganization items, net amounted to$121 million gain, representing$502 million gain on settlement of Honeywell claims, partially offset by$181 million professional service fees related to the Chapter 11 Cases,$79 million related to the termination of and expense reimbursement under that certain share and asset purchase agreement entered into on the Petition Date by the Debtors,AMP Intermediate B.V. andAMP U.S. Holdings, LLC (the "Stalking Horse Purchase Agreement"),$39 million Directors and Officers insurance related to Chapter 11 Cases,$25 million write off on debt issuance costs of the Company's pre-petition term loan facilities,$13 million in employee stock awards cancellation and$44 million in other costs mainly related to unsecured notes settlement. Tax Expense Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in millions) Tax expense$ 20 $ 30 $ 57 $ 54 Effective tax rate 19.0 % 6.8 % 24.8 % 15.1 % Our effective tax rates for the three and six months endedJune 30, 2022 increased compared to the prior year periods, primarily related to the nontaxable gain on the settlement of the Honeywell claims recorded in the prior year. The effective tax rate for the six months endedJune 30, 2022 also increased due to true-ups recorded in the first quarter of 2022 to prior year tax reserves. Net Income Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 (Dollars in millions) Net income$ 85 $ 409 $ 173 $ 304 Net income for the three months endedJune 30, 2022 decreased by$324 million compared with the prior year, primarily due to the$295 million net gain on reorganization items recorded in the prior year period as discussed above. The lower gross profit and non-operating income for the three months endedJune 30, 2022 as discussed above within the Cost of Goods Sold and Gross Profit and Non-operating income sections also contributed to the decreased net income. For the six months endedJune 30, 2022 , net income decreased by$131 million compared with the prior year primarily as result of the$121 million net gain on reorganization items and higher gross profit recognized in the prior year period. These decreases were partially offset by$44 million of non-operating income for six months endedJune 30, 2022 as discussed above within the Non-operating income section.
Non-GAAP Measures
It is management's intent to provide non-GAAP financial information to
supplement the understanding of our business operations and performance, and it
should be considered by the reader in addition to, but not instead of, the
financial statements prepared in accordance with GAAP. Each non-GAAP financial
measure is presented along with the most directly comparable GAAP measure so as
not to imply that more emphasis should be placed on the non-GAAP measure. The
non-GAAP financial information presented may be determined or calculated
differently by other companies and may not be comparable to other similarly
titled measures used by other companies. Additionally, the non-GAAP financial
measures have limitations as analytical tools and should not be considered in
isolation or as a substitute for an analysis of the Company's operating results
as reported under GAAP.
29
--------------------------------------------------------------------------------EBITDA and Adjusted EBITDA (1)
Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
(Dollars in millions)
Net income - GAAP $ 85 $ 409 $ 173 $ 304
Interest expense, net of interest income 8 23 4 43
Tax expense 20 30 57 54
Depreciation 21 24 43 47
EBITDA (Non-GAAP) 134 486 277 448
Reorganization items, net (2) 1 (295) 2 (121)
Stock compensation expense (3) 3 1 5 3
Repositioning costs (4) 2 3 3 11
Foreign exchange (gain)/loss on debt, net - (24) - 9
Loss on extinguishment of debt 5 - 5 -
Discounting costs on factoring - - 1 -
Other non-operating income (5) (7) (3) (9) (6)
Adjusted EBITDA (Non-GAAP) $ 138 $ 168 $ 284 $ 344
(1)We evaluate performance on the basis of EBITDA and Adjusted EBITDA. We define
"EBITDA" as our net income calculated in accordance with U.S. GAAP, plus the sum
of net interest expense, tax expense and depreciation. We define "Adjusted
EBITDA" as EBITDA, plus the sum of net reorganization items, stock compensation
expense, repositioning costs, net foreign exchange (gain)/loss on debt, loss on
extinguishment on debt, discounting costs on factoring and other non-operating
income. We believe that EBITDA and Adjusted EBITDA are important indicators of
operating performance and provide useful information for investors because:
•EBITDA and Adjusted EBITDA exclude the effects of income taxes, as well as the effects of financing and investing activities by eliminating the effects of interest and depreciation expenses and therefore more closely measure our operational performance; and
•certain adjustment items, while periodically affecting our results, may vary significantly from period to period and have disproportionate effect in a given period, which affects the comparability of our results.
In addition, our management may use Adjusted EBITDA in setting performance incentive targets to align performance measurement with operational performance.
(2)The Company applied ASC 852 for periods subsequent to the Petition Date to distinguish transactions and events that were directly associated with the Company's reorganization from the ongoing operations of the business. Accordingly, certain expenses and gains incurred during the Chapter 11 Cases are recorded within Reorganization items, net in the Consolidated Interim Statements of Operations. See Note 1, Background and Basis of Presentation of the Notes to the Consolidated Interim Financial Statements.
(3)Stock compensation expense includes only non-cash expenses.
(4)Repositioning costs includes severance costs related to restructuring projects to improve future productivity.
(5)Reflects the non-service component of net periodic pension costs and other income that are non-recurring or not considered directly related to the Company's operations.
30
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Adjusted EBITDA for the Three Months Ended
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For the three months endedJune 30, 2022 , net income decreased by$324 million versus the prior year as discussed above within the Results of Operations for the Three and Six Months EndedJune 30, 2022 section. Adjusted EBITDA decreased by$30 million compared to the prior year, mainly due to volume decreases, inflation on commodities, transportation and energy, as well as unfavorable foreign exchange impacts, partially offset by increased productivity and inflation pass-through net of pricing. Our volumes for the three months endedJune 30, 2022 totaled 3.2 million units, representing a decrease of approximately 6% from the prior year and approximates the estimated decrease in global light vehicle production. Our Adjusted EBITDA margin of 16.1% represented a year-over-year contraction of 190 basis points. During the three months endedJune 30, 2022 , we faced demand volatility driven mainly by the global semiconductor shortage and geopolitical tensions from the ongoing military conflict betweenRussia andUkraine , resulting in supply chain disruptions. We maintained our focus on productivity in the current year as rising commodity prices led to higher raw material costs, particularly for nickel, aluminum and steel alloys. We recovered a majority of the increases from our customer pass-through agreements, especially for nickel, and continue to negotiate with our customers for further escalators while actively managing our supply base and cost recovery mechanisms to minimize the impact of materials cost inflation. The increased productivity was partially offset by year-over-year labor inflation and increased premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility, as well as higher SG&A expenses due to higher professional service fees and higher travel expenses. R&D expenses increased$5 million which reflects our shift in investment in new technologies, increased hiring to accelerate growth in the new technologies and year-over-year labor inflation. Losses in foreign currency from translational, transactional and hedging effects in the three months endedJune 30, 2022 , primarily driven by a lower Euro-to-US dollar exchange rate versus the prior-year period, also accounted for$15 million of the decrease in Adjusted EBITDA. 31 --------------------------------------------------------------------------------
Adjusted EBITDA for the Six Months Ended
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For the six months endedJune 30, 2022 , net income decreased by$131 million versus the prior year as discussed above within the Results of Operations for the Three and Six Months EndedJune 30, 2022 section. Adjusted EBITDA decreased by$60 million compared to the prior year, mainly due to volume decreases, inflation on commodities, transportation and energy, as well as unfavorable foreign exchange impacts, partially offset by increased productivity, inflation pass-through net of pricing and a favorable mix. Our volumes for the six months endedJune 30, 2022 totaled 6.6 million units, representing a decrease of approximately 8% from the prior year. Our Adjusted EBITDA margin of 16.1% represented a year-over-year contraction of 170 basis points. During the six months endedJune 30, 2022 , we faced demand volatility driven mainly by the global semiconductor shortage and geopolitical tensions due to the ongoing military conflict betweenRussia andUkraine , resulting in supply chain disruptions. We maintained our focus on productivity in the current year as rising commodity prices led to higher raw material costs, particularly for nickel, aluminum and steel alloys. We recovered a majority of the cost increases from our customer pass-through agreements, especially for nickel, and continue to negotiate with our customers for further escalators while actively managing our supply base and cost recovery mechanisms to minimize the impact of materials, transportation and energy cost inflation. The increased productivity was partially offset by year-over-year labor inflation and increased premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility. R&D expenses increased$8 million which reflects our shift in investment in new technologies, increased hiring to accelerate growth in the new technologies and year-over-year labor inflation. Losses in foreign currency from translational, transactional and hedging effects in the six months endedJune 30, 2022 , primarily driven by a lower Euro-to-US dollar exchange rate versus the prior-year period, also accounted for$28 million of the decrease in Adjusted EBITDA.
Liquidity and Capital Resources
Historically, we have financed our operations with funds generated from operating activities, available cash and cash equivalents, as well as borrowings under a senior secured revolving credit facility and the issuance of senior notes, commitments under both of which were cancelled in connection with the Chapter 11 Cases. During the pendency of our bankruptcy proceedings, we financed our operations with funds generated from operating activities and available cash and cash equivalents, and also had in place debtor-in-possession financing arrangements. Following the completion of the Chapter 11 Cases and Emergence, including during the six months endedJune 30, 2022 , we funded our operations primarily through cash flows from operating activities, borrowings from Credit Facilities and cash and cash equivalents. As ofJune 30, 2022 , the Company reported a cash and cash equivalents position of$146 million (not including$33 million in restricted cash as ofJune 30, 2022 ) as compared to$423 million as ofDecember 31, 2021 (not including$41 million in restricted cash as ofDecember 31, 2021 ). As ofJune 30, 2022 , the Company had no borrowings outstanding under the Revolving Facility, no outstanding letters of credit, and available borrowing capacity of 32 --------------------------------------------------------------------------------
During the six months endedJune 30, 2022 , we repaid$4 million on our Dollar Facility and$381 million related to our Series B Preferred Stock which included the final redemption payment, following which no shares of our Series B Preferred Stock remain outstanding. Additionally, holders of our Series A Preferred Stock are entitled to receive, and, as and if declared by a committee of disinterested directors of the Board out of funds legally available for such dividend, cumulative cash dividends at an annual rate of 11% on the stated amount per share plus the amount of any accrued and unpaid dividends on such share. These dividends accumulate whether or not declared, and as ofJune 30, 2022 , the aggregate accumulated dividend was approximately$174 million . As disclosed in our 2021 Form 10-K, we expect to continue investing in our facilities as we expand our manufacturing capacity for new product launches and invest in strategic growth opportunities, in particular in the electrification of drivetrains. We believe the combination of expected cash flows, the funding received from our Series A Preferred Stock issuance, the term loan borrowings, and the revolving credit facilities being committed until 2026, will provide us with adequate liquidity to support the Company's operations.
Emergence - Exit Financing and Entry into Credit Facilities
Upon our emergence from Chapter 11 proceedings on the Effective Date, the following transactions significantly improved the Company's liquidity:
•Net proceeds from the issuance of Term Loan Facilities of
•The Company obtained$300 million in commitments under a five-year secured first-lien multi-currency Revolving Facility,$125 million of which may be used for the issuance of letters of credit;
•The Company obtained a
•Debt repayment of$1,103 million in secured term loan facilities and accrued interest, repayment of$374 million in revolving credit facility,$461 million in Senior Notes and accrued interest and$101 million repayment of Debtor-in-possession Term Loan facility and accrued interest;
•Issuance of Series A Preferred Stock in a rights offering for
•Settlement of
On
In connection with the Company's Emergence and pursuant to the Plan, the Company issued 247,768,962 shares of the Company's Series A Preferred Stock to theCenterbridge Investors , theOaktree Investors and certain other investors and parties. All outstanding Series A Preferred Stock will convert into Common Stock of the Company automatically upon the occurrence of certain triggering events. Additionally, holders of the Series A Preferred Stock have the right to convert their shares of Series A Preferred Stock into Common Stock at any time. As the Certificate of Designations governing the Series A Preferred Stock prohibits the issuance of fractional shares of Common Stock upon the conversion of any shares of Series A Preferred Stock, the Company must pay a cash adjustment in respect of any such fractional share of Common Stock that would be issuable pursuant to a conversion. See Note 18, Equity of the Consolidated Financial Statements for the year endedDecember 31, 2021 included in our 2021 Form 10-K for additional information regarding the Series A Preferred Stock. Additionally, pursuant to the Plan, on the Effective Date the Company issued 834,800,000 shares of Series B Preferred Stock to Honeywell in satisfaction of its claims against the Company arising from certain historical agreements between Honeywell and the Company. As ofJune 30, 2022 , the Company has fully redeemed the Series B Preferred Stock. See Note 14, Mandatorily Redeemable Series B Preferred Stock of the Notes to the Consolidated Interim Financial 33 -------------------------------------------------------------------------------- Statements and Note 16, Mandatorily Redeemable Series B Preferred Stock of the Consolidated Financial Statements for the year endedDecember 31, 2021 included in our 2021 Form 10-K for additional information regarding the Series B Preferred Stock.
Share Repurchase Program
OnNovember 16, 2021 , the Board of Directors authorized a$100 million share repurchase program valid untilNovember 15, 2022 , providing for the purchase of shares of Series A Preferred Stock and Common Stock. As ofJune 30, 2022 , the Company had repurchased$22 million of its Series A Preferred Stock and Common Stock, with$78 million remaining under the share repurchase program. For more information, see Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds.
Cash Flow Summary for the Six Months Ended
Six Months Ended
June 30,
2022 2021
(Dollars in millions)
Cash provided by (used for):
Operating activities $ 177 $ (391)
Investing activities (52) (39)
Financing activities (393) 359
Effect of exchange rate changes on cash and restricted cash (17) (6)
Net decrease in cash, cash equivalents and restricted cash
$ (77) Cash provided by operating activities increased by$568 million for the six months endedJune 30, 2022 versus the prior year, primarily due to a$375 million payment made to Honeywell in the prior year pursuant to the Plan, and a decrease in net income, net of a$323 million increase in non-cash adjustments which included a$373 million gain recognized in prior year on reorganization items and a$35 million increase in the fair value of our undesignated derivative instruments. Favorable impacts from working capital of$75 million , which included incremental eligible receivables sold without recourse in the amount$37 million , also contributed to the increase in cash provided by operating activities, partially offset by a$74 million decrease mainly driven by other assets and liabilities. Cash used for investing activities increased by$13 million for the six months endedJune 30, 2022 versus the prior year, with the increase due to increased expenditures for property, plant and equipment. Cash used for financing activities increased by$752 million for the six months endedJune 30, 2022 compared with the prior year. The change was driven by$381 million paid for the final early redemption of our Series B Preferred Stock (exclusive of$28 million of the redemption attributable to interest and included in cash used for operating activities) and$3 million for repurchases of Series A Preferred Stock and Common Stock. Additionally, in 2021, there were$1,301 million of proceeds from issuance of Series A Preferred Stock and$1,221 million of proceeds from issuance of the new long-term debt, partially offset by$200 million repayments on the Company's senior secured super-priority debtor in-possession credit agreement entered into in connection with the Chapter 11 Cases,$370 million of full payment of our pre-petition revolving credit facility,$1,515 million payments of our pre-petition long term debt and$69 million payments made to holders of the Company's pre-Emergence common stock who made a cash-out election under the Plan.
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
The preparation of our Consolidated Interim Financial Statements in accordance
with generally accepted accounting principles is based on the selection and
application of accounting policies that require us to make significant estimates
and assumptions about the effects of matters that are inherently uncertain.
Actual results could differ from our estimates and
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--------------------------------------------------------------------------------assumptions, and any such differences could be material to our financial statements. Our critical accounting policies are summarized in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our 2021 Form 10-K.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies of the Notes to the Consolidated Interim Financial Statements for further discussion of recent accounting pronouncements.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding the following, are forward-looking statements: statements regarding our future results of operations and financial position, the consequences of the Chapter 11 Cases, the anticipated impact of the COVID-19 pandemic on our business, anticipated impacts of the ongoing conflict betweenRussia andUkraine , results of operations and financial position, expectations regarding the growth of the turbocharger and electric vehicle markets and other industry trends, the sufficiency of our cash and cash equivalents, anticipated sources and uses of cash, anticipated investments in our business, our business strategy, pending litigation, anticipated interest expense, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "expect," "plan," "anticipate," "could," "intend," "target," "project," "contemplate," "believe," "estimate," "predict," "potential," or "continue" or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including:
•increases in the costs and availability of raw materials and our ability to offset material price inflation;
•risks of natural disasters and climate change, and changes in legislation or government regulations or policies relating to climate change or otherwise, including with respect to greenhouse gas emission reduction targets, or other similar targets, inEurope (as part of the Green Deal objectives or otherwise);the United States ;China ;Japan ; andKorea or other jurisdiction in which the Company does business, and growing recognition among consumers of the dangers of climate change, which may affect demand for our products, our supply chain, and results of our operations;
•changes in the automotive industry and economic or competitive conditions;
•any loss of, or a significant reduction in purchases by, our largest customers, material non-payment or non-performance by any of our key customers, and difficulty collecting receivables;
•impacts on our business from the ongoing COVID-19 pandemic, including reductions to production volumes as a result of reduced capacity at manufacturing facilities;
•any failure to protect our intellectual property or allegations that we have infringed the intellectual property of others; and our ability to license necessary intellectual property from third parties;
•potential material losses and costs as a result of any warranty claims and product liability actions brought against us;
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--------------------------------------------------------------------------------•quality control and creditworthiness of the suppliers on which we rely;
•work stoppages, other disruptions or the need to relocate any of our facilities;
•inaccuracies in estimates of volumes of awarded business;
•the negotiating positions of our customers and our ability to negotiate favorable pricing terms;
•risks related to international operations and our investment in foreign
markets, including risks related to the withdrawal of the
•risks related to disruptions in our supply chain and business operations due to
the ongoing conflict between
•the effects of any deterioration on industry, economic or financial conditions on our ability to access the capital markets on favorable terms;
•any significant failure or inability to comply with the specifications and manufacturing requirements of our original equipment manufacturer customers or by increases or decreases to the inventory levels maintained by our customers;
•any failure to increase productivity or successfully execute repositioning projects or manage our workforce;
•potential material environmental liabilities and hazards;
•the commencement of any lawsuits, investigations and disputes arising out of our current and historical businesses, and the consequences thereof;
•inability to recruit and retain qualified personnel; and
•the other factors described under the caption "Risk Factors" in our 2021 Form 10-K, as updated in this Quarterly Report on Form 10-Q, and our other filings with theSEC . You should read this Quarterly Report on Form 10-Q and the documents that we reference herein completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
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