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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One)
| | | | | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2024
OR
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission File Number: 001-38636
________________________________________________
Garrett Motion Inc.
(Exact Name of Registrant as Specified in its Charter)
________________________________________________
| | | | | |
| Delaware | 82-4873189 |
(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification No.) |
| |
La Pièce 16, 1180 Rolle, Switzerland |
| and |
47548 Halyard Drive, Plymouth, MI 48170 |
| (Address of principal executive offices) (Zip Code) |
+41 21 695 30 00
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | GTX | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | ☒ | | Accelerated filer | | ☐ |
| | | |
| Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ |
| | | | | | |
| Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of October 18, 2024, the registrant had 213,562,312 shares of Common Stock, $0.001 par value per share, outstanding.
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
GARRETT MOTION INC.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in millions, except per share amounts) |
Net sales (Note 3) | $ | 826 | | | $ | 960 | | | $ | 2,631 | | | $ | 2,941 | |
| Cost of goods sold | 660 | | | 784 | | | 2,108 | | | 2,374 | |
| Gross profit | 166 | | | 176 | | | 523 | | | 567 | |
| Selling, general and administrative expenses | 53 | | | 59 | | | 178 | | | 178 | |
| Other expense, net | 1 | | | 1 | | | 5 | | | 3 | |
| Interest expense | 37 | | | 48 | | | 130 | | | 104 | |
| | | | | | | |
Gain on sale of equity investment (Note 21) | — | | | — | | | (27) | | | — | |
| Non-operating (income) expense | (1) | | | (2) | | | (7) | | | 3 | |
| | | | | | | |
| Income before taxes | 76 | | | 70 | | | 244 | | | 279 | |
Tax expense (Note 5) | 24 | | | 13 | | | 62 | | | 70 | |
| Net income | 52 | | | 57 | | | 182 | | | 209 | |
| Less: preferred stock dividends | — | | | — | | | — | | | (80) | |
| Less: preferred stock deemed dividends | — | | | — | | | — | | | (232) | |
| Net income (loss) available for distribution | $ | 52 | | | $ | 57 | | | $ | 182 | | | $ | (103) | |
| | | | | | | |
Earnings (loss) per common share | | | | | | | |
| Basic | $ | 0.24 | | | $ | 0.23 | | | $ | 0.80 | | | $ | (0.73) | |
| Diluted | 0.24 | | | 0.23 | | | 0.80 | | | (0.73) | |
| | | | | | | |
| Weighted average common shares outstanding | | | | | | | |
| Basic | 217,283,749 | | | 250,888,716 | | | 226,057,803 | | | 141,745,701 | |
| Diluted | 218,403,681 | | | 252,381,719 | | | 227,649,747 | | | 141,745,701 | |
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
GARRETT MOTION INC.
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| | 2024 | | 2023 | | 2024 | | 2023 |
| | (Dollars in millions) |
| Net income | $ | 52 | | | $ | 57 | | | $ | 182 | | | $ | 209 | |
| Foreign exchange translation adjustment | (30) | | | 14 | | | (12) | | | 8 | |
| | | | | | | |
| Defined benefit pension plan adjustment, net of tax | 1 | | | — | | | 4 | | | — | |
Changes in fair value of effective cash flow hedges, net of tax (Note 16) | 4 | | | (2) | | | 5 | | | (3) | |
Changes in fair value of net investment hedges, net of tax (Note 16) | (31) | | | 20 | | | (4) | | | 18 | |
| Total other comprehensive (loss) income, net of tax | (56) | | | 32 | | | (7) | | | 23 | |
| Comprehensive (loss) income | $ | (4) | | | $ | 89 | | | $ | 175 | | | $ | 232 | |
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
GARRETT MOTION INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | |
| | September 30,
2024 | | December 31,
2023 |
| | (Dollars in millions) |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 96 | | | $ | 259 | |
| Restricted cash | 1 | | | 1 | |
Accounts, notes and other receivables – net (Note 6) | 698 | | | 808 | |
Inventories – net (Note 8) | 267 | | | 263 | |
| Other current assets | 81 | | | 75 | |
| Total current assets | 1,143 | | | 1,406 | |
| Investments and long-term receivables | 12 | | | 29 | |
| Property, plant and equipment – net | 450 | | | 477 | |
| Goodwill | 193 | | | 193 | |
| Deferred income taxes | 198 | | | 216 | |
Other assets (Note 9) | 159 | | | 206 | |
| Total assets | $ | 2,155 | | | $ | 2,527 | |
| LIABILITIES | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 896 | | | $ | 1,074 | |
| | | |
Current maturities of long-term debt (Note 14) | 7 | | | 7 | |
| | | |
| | | |
Accrued liabilities (Note 11) | 319 | | | 293 | |
| Total current liabilities | 1,222 | | | 1,374 | |
Long-term debt (Note 14) | 1,464 | | | 1,643 | |
| | | |
| Deferred income taxes | 25 | | | 27 | |
Other liabilities (Note 12) | 222 | | | 218 | |
| | | |
| | | |
| Total liabilities | $ | 2,933 | | | $ | 3,262 | |
COMMITMENTS AND CONTINGENCIES (Note 19) | | | |
| EQUITY (DEFICIT) | | | |
| | | |
Common Stock, par value $0.001; 1,000,000,000 and 1,000,000,000 shares authorized, 240,937,724 and 238,543,624 issued and 214,694,934 and 238,249,056 outstanding as of September 30, 2024 and December 31, 2023, respectively | — | | | — | |
| Additional paid–in capital | 1,207 | | | 1,190 | |
Retained deficit | (1,740) | | | (1,922) | |
Accumulated other comprehensive loss (Note 17) | (10) | | | (3) | |
Treasury Stock, at cost; 26,242,790 and 0 shares as of September 30, 2024 and December 31, 2023, respectively (Note 15) | (235) | | | — | |
| Total deficit | (778) | | | (735) | |
| Total liabilities and deficit | $ | 2,155 | | | $ | 2,527 | |
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
GARRETT MOTION INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | | | | | | |
| 2024 | | 2023 | | | | | | | | |
| | (Dollars in millions) | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | | | |
Net income | $ | 182 | | | $ | 209 | | | | | | | | | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | |
| | | | | | | | | | | |
| Deferred income taxes | 16 | | | 13 | | | | | | | | | |
| Depreciation | 67 | | | 66 | | | | | | | | | |
| Amortization of deferred issuance costs | 35 | | | 17 | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Loss on remeasurement of forward purchase contract | — | | | 13 | | | | | | | | | |
| Gain on sale of equity investment | (27) | | | — | | | | | | | | | |
| Foreign exchange gain | (10) | | | — | | | | | | | | | |
| Stock compensation expense | 17 | | | 12 | | | | | | | | | |
Pension expense | 1 | | | 1 | | | | | | | | | |
| | | | | | | | | | | |
| Unrealized loss on derivatives | 39 | | | 21 | | | | | | | | | |
| Other | 2 | | | 7 | | | | | | | | | |
| Changes in assets and liabilities: | | | | | | | | | | | |
| Accounts, notes and other receivables | 110 | | | (76) | | | | | | | | | |
| Inventories | (10) | | | (30) | | | | | | | | | |
| Other assets | 2 | | | 2 | | | | | | | | | |
| Accounts payable | (154) | | | 57 | | | | | | | | | |
| Accrued liabilities | 8 | | | 26 | | | | | | | | | |
| | | | | | | | | | | |
| Other liabilities | (1) | | | (8) | | | | | | | | | |
Net cash provided by operating activities | $ | 277 | | | $ | 330 | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | |
| Expenditures for property, plant and equipment | (69) | | | (57) | | | | | | | | | |
Proceeds from cross-currency swap contracts | 24 | | 9 | | | | | | | | | |
| Proceeds from sale of equity investment | 46 | | $ | — | | | | | | | | | |
Net cash provided by (used for) investing activities | $ | 1 | | | $ | (48) | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | |
| Proceeds from issuance of long-term debt, net of debt financing costs | 794 | | | 667 | | | | | | | | | |
| | | | | | | | | | | |
| Payments of long-term debt | (991) | | | (205) | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Repurchases of Series A Preferred Stock | — | | | (580) | | | | | | | | | |
| Repurchases of Common Stock | (226) | | | (178) | | | | | | | | | |
| Payments of Additional Amounts for conversion of Series A Preferred Stock | — | | | (25) | | | | | | | | | |
| Payments for preference dividends | — | | | (42) | | | | | | | | | |
| Payments for debt and revolving facility financing costs | (7) | | | (2) | | | | | | | | | |
| Other | (9) | | | (1) | | | | | | | | | |
Net cash used for financing activities | $ | (439) | | | $ | (366) | | | | | | | | | |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (2) | | | (1) | | | | | | | | | |
Net decrease in cash, cash equivalents and restricted cash | (163) | | | (85) | | | | | | | | | |
| Cash, cash equivalents and restricted cash at beginning of the period | 260 | | | 248 | | | | | | | | | |
| Cash, cash equivalents and restricted cash at end of the period | $ | 97 | | | $ | 163 | | | | | | | | | |
| Supplemental cash flow disclosure: | | | | | | | | | | | |
| Income taxes paid (net of refunds) | $ | 43 | | | $ | 38 | | | | | | | | | |
| Interest paid | 49 | | | 45 | | | | | | | | | |
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement
GARRETT MOTION INC.
CONSOLIDATED INTERIM STATEMENTS OF EQUITY (DEFICIT)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series A
Preferred Stock | | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Retained
Deficit | | Accumulated Other
Comprehensive (Loss) / Income | | Total
Deficit |
| Shares | | Amount | | Shares (1) | | Amount | | Shares | | Amount | | | | |
| (in millions) |
Balance at December 31, 2023 | — | | | $ | — | | | 238 | | | $ | — | | | — | | | $ | — | | | $ | 1,190 | | | $ | (1,922) | | | $ | (3) | | | $ | (735) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 66 | | | — | | | 66 | |
| Share repurchases | — | | | — | | | — | | | — | | | 12 | | | (109) | | | — | | | — | | | — | | | (109) | |
| Excise tax on share repurchases | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) | |
| Shares issued under stock plan, net of shares withheld for employee taxes | — | | | — | | | 2 | | | — | | | 1 | | | (5) | | | — | | | — | | | — | | | (5) | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 41 | | | 41 | |
| | | | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 8 | | | — | | | — | | | 8 | |
| Balance at March 31, 2024 | — | | | $ | — | | | 240 | | | $ | — | | | 13 | | | $ | (115) | | | $ | 1,198 | | | $ | (1,856) | | | $ | 38 | | | $ | (735) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 64 | | | — | | | 64 | |
| | | | | | | | | | | | | | | | | | | |
| Share repurchases | — | | | — | | | — | | | — | | | 7 | | | (65) | | | — | | | — | | | — | | | (65) | |
| Excise tax on share repurchases | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) | |
| Shares issued under stock plan, net of shares withheld for employee taxes | — | | | — | | | 1 | | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 8 | | | 8 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 5 | | | — | | | — | | | 5 | |
| Balance at June 30, 2024 | — | | | $ | — | | | 241 | | | $ | — | | | 20 | | | $ | (182) | | | $ | 1,203 | | | $ | (1,792) | | | $ | 46 | | | $ | (725) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 52 | | | — | | | 52 | |
| Share repurchases | — | | | — | | | — | | | — | | | 6 | | | (52) | | | — | | | — | | | — | | | (52) | |
| Excise tax on share repurchases | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares issued under stock plan, net of shares withheld for employee taxes | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (56) | | | (56) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | |
Balance at September 30, 2024 | — | | | $ | — | | | 241 | | | $ | — | | | 26 | | | $ | (235) | | | $ | 1,207 | | | $ | (1,740) | | | $ | (10) | | | $ | (778) | |
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| | | | | | | | | | | | | | | | | | | |
| Series A
Preferred Stock | | Common Stock | | Treasury Stock | | Additional
Paid-in
Capital | | Retained
Deficit | | Accumulated Other
Comprehensive
Income | | Total
Deficit |
| Shares | | Amount | | Shares (1) | | Amount | | Shares | | Amount | | | | |
| | (in millions) |
Balance at December 31, 2022 | 246 | | | $ | — | | | 64 | | | $ | — | | | — | | | $ | — | | | $ | 1,333 | | | $ | (1,485) | | | $ | 36 | | | $ | (116) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 81 | | | — | | | 81 | |
| | | | | | | | | | | | | | | | | | | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | (6) | |
| Dividends | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (42) | | | — | | | (42) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | 3 | |
Balance at March 31, 2023 | 246 | | | $ | — | | | 64 | | | $ | — | | | — | | | $ | — | | | $ | 1,336 | | | $ | (1,446) | | | $ | 30 | | | $ | (80) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 71 | | | — | | | 71 | |
| Repurchases of Series A Preferred Stock | (70) | | | — | | | — | | | — | | | — | | | — | | | (366) | | | (201) | | | — | | | (567) | |
| Repurchases of Common Stock | — | | | — | | | (2) | | | — | | | — | | | — | | | — | | | (18) | | | — | | | (18) | |
| Excise tax on share repurchases | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (6) | | | — | | | (6) | |
| Other comprehensive loss , net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | (3) | |
| Issuance of Common Stock for preference dividends | — | | | — | | | 26 | | | — | | | — | | | — | | | 209 | | | (209) | | | — | | | — | |
| Conversion of Series A Preferred Stock | (176) | | | — | | | 176 | | | — | | | — | | | — | | | — | | | (25) | | | — | | | (25) | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 5 | | | — | | | — | | | 5 | |
Balance at June 30, 2023 | — | | | $ | — | | | 264 | | | $ | — | | | — | | | $ | — | | | $ | 1,184 | | | $ | (1,834) | | | $ | 27 | | | $ | (623) | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 57 | | | — | | | 57 | |
| Repurchases of Common Stock | — | | | — | | | (21) | | | — | | | — | | | — | | | — | | | (161) | | | — | | | (161) | |
| Excise tax on share repurchases | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 32 | | | 32 | |
| | | | | | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | — | | | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | |
| Balance at September 30, 2023 | — | | | $ | — | | | 243 | | | $ | — | | | — | | | $ | — | | | $ | 1,188 | | | $ | (1,939) | | | $ | 59 | | | $ | (692) | |
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1) Common shares issued less treasury shares equals common shares outstanding
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
GARRETT MOTION INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions, except per share amounts)
Note 1. Background and Basis of Presentation
Background
Garrett Motion Inc. (the “Company” or “Garrett”) is a cutting-edge technology leader delivering differentiated solutions for emission reduction and energy efficiency. We design, manufacture, and sell highly engineered turbocharging, air and fluid compression, and high-speed electric motor technologies to original equipment manufacturers (“OEMs”) and distributors within the mobility and industrial space. We have significant expertise in delivering products at scale for internal combustion engines using gasoline, diesel, natural gas, and hydrogen, as well as for zero emission technologies using hydrogen fuel cell systems, both for mobility and industrial use. As our customers continue to progress on electrification, we are applying our technological pillars to develop highly engineered E-Powertrain and E-Cooling compressor products to support their ambition. These products are key enablers for fuel economy, energy efficiency, thermal management, and compliance with emissions standards and overall greenhouse gas and other emission reduction targets.
Basis of Presentation
The accompanying unaudited Consolidated Interim Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. The unaudited Consolidated Interim Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2023 included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 15, 2024 (our “2023 Form 10-K”). The results of operations for the three and nine months ended September 30, 2024 and cash flows for the nine months ended September 30, 2024 should not necessarily be taken as indicative of the entire year. All amounts presented are in millions, except per share amounts.
We report our quarterly financial information using a calendar convention: the first, second, and third quarters are consistently reported as ending on March 31, June 30 and September 30. It has been our practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires our businesses to close their books on a Saturday to minimize the potentially disruptive effects of quarterly closing on our business processes. For differences in actual closing dates that are material to year-over-year comparisons of quarterly or year-to-date results, such differences have been adjusted for the three months ended September 30, 2024. Our actual closing date for the three months ended September 30, 2024 was September 28, 2024. There was no difference in actual closing date for the three months ended September 30, 2023.
We evaluate segment reporting in accordance with ASC 280, Segment Reporting. We concluded that Garrett operates in a single operating segment and a single reportable segment based on the operating results available and evaluated regularly by the chief operating decision maker (“CODM”), which is our Chief Executive Officer, to make decisions about resource allocation and performance assessment. The CODM makes operational performance assessments and resource allocation decisions on a consolidated basis, inclusive of all of the Company’s products across channels and geographies.
The preparation of the financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases these estimates on assumptions that it believes to be reasonable under the circumstances. Actual results could differ from the original estimates, requiring adjustments to these balances in future periods.
Note 2. Summary of Significant Accounting Policies
The accounting policies of the Company are set forth in Note 3 to the Consolidated Financial Statements for the year ended December 31, 2023 included in our 2023 Form 10-K.
Accounting Standards Issued But Not Yet Adopted
In November 2023, the Financial Accounting Standards Board (“FASB”) issued accounting standards update (“ASU") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this update require companies with a single reportable segment to provide all existing segment disclosures, as well as requires incremental segment information to be disclosed. The guidance is effective for fiscal years beginning after December 15, 2023 on a retrospective basis, and interim periods within fiscal years beginning after December 15, 2024. The Company is currently evaluating the guidance to determine the impact on its disclosures.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this update increase the transparency around income tax information through improvements to disclosures primarily related to the rate reconciliation and income taxes paid information. The guidance is effective for fiscal years beginning after December 15, 2024 on a prospective basis. Early adoption is permitted. The Company is currently evaluating the guidance to determine the impact on its disclosures.
There are no other recently issued, but not yet adopted, accounting pronouncements that are expected to have a material impact on the Company's Consolidated Interim Financial Statements and related disclosures.
Note 3. Revenue Recognition and Contracts with Customers
Disaggregated Revenue
Net sales by region (determined based on country of shipment) and channel are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2024 | | Three Months Ended September 30, 2023 |
| OEM | | Aftermarket | | Other | | Total | | OEM | | Aftermarket | | Other | | Total |
| (Dollars in millions) |
| United States | $ | 129 | | | $ | 46 | | | $ | 3 | | | $ | 178 | | | $ | 147 | | | $ | 54 | | | $ | 2 | | | $ | 203 | |
| Europe | 318 | | | 53 | | | 5 | | | 376 | | | 382 | | | 45 | | | 9 | | | 436 | |
| Asia | 233 | | | 13 | | | 6 | | | 252 | | | 287 | | | 13 | | | 5 | | | 305 | |
| Other | 15 | | | 5 | | | — | | | 20 | | | 9 | | | 6 | | | 1 | | | 16 | |
| $ | 695 | | | $ | 117 | | | $ | 14 | | | $ | 826 | | | $ | 825 | | | $ | 118 | | | $ | 17 | | | $ | 960 | |
| | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2024 | | Nine Months Ended September 30, 2023 |
| OEM | | Aftermarket | | Other | | Total | | OEM | | Aftermarket | | Other | | Total |
| (Dollars in millions) |
| United States | $ | 374 | | | $ | 150 | | | $ | 6 | | | $ | 530 | | | $ | 412 | | | $ | 150 | | | $ | 4 | | | $ | 566 | |
| Europe | 1,114 | | | 145 | | | 20 | | | 1,279 | | | 1,265 | | | 136 | | | 26 | | | 1,427 | |
| Asia | 714 | | | 39 | | | 14 | | | 767 | | | 846 | | | 38 | | | 12 | | | 896 | |
| Other | 39 | | | 16 | | | — | | | 55 | | | 33 | | | 18 | | | 1 | | | 52 | |
| $ | 2,241 | | | $ | 350 | | | $ | 40 | | | $ | 2,631 | | | $ | 2,556 | | | $ | 342 | | | $ | 43 | | | $ | 2,941 | |
Contract Balances
The following table summarizes our contract assets and liabilities balances:
| | | | | | | | | | | |
| | 2024 | | 2023 |
| | (Dollars in millions) |
| Contract assets—January 1 | $ | 38 | | | $ | 46 | |
Contract assets—September 30 | 53 | | | 44 | |
| Change in contract assets—Increase/(Decrease) | $ | 15 | | | $ | (2) | |
| Contract liabilities—January 1 | $ | (11) | | | $ | (8) | |
Contract liabilities—September 30 | (9) | | | (12) | |
| Change in contract liabilities—Decrease/(Increase) | $ | 2 | | | $ | (4) | |
Note 4. Research, Development and Engineering
Garrett conducts research, development, and engineering (“RD&E”) activities, which consist primarily of the development of new products and product applications. RD&E costs are charged to expense as incurred unless the Company has a contractual guarantee for reimbursement from the customer. Customer reimbursements are netted against gross RD&E expenditures as they are considered a recovery of cost. Such costs are included in Cost of goods sold as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in millions) |
| Research and development costs | $ | 49 | | | $ | 42 | | | $ | 138 | | | $ | 128 | |
Engineering-related expenses, net of customer (reimbursements) (1) | (6) | | | (3) | | | (10) | | | (8) | |
| $ | 43 | | | $ | 39 | | | $ | 128 | | | $ | 120 | |
(1) Engineering-related expenses include customer reimbursements of $17 million and $10 million for the three months ended September 30, 2024 and 2023, respectively, and $41 million and $34 million for the nine months ended September 30, 2024 and 2023, respectively.
Certain engineering expenses related to long-term supply arrangements are capitalized when defined criteria, such as the existence of a contractual guarantee for reimbursement, are met. As of September 30, 2024 and December 31, 2023, $30 million and $12 million, respectively, of such contractually reimbursable costs were capitalized. These amounts are recorded within Other current assets in the Consolidated Interim Balance Sheet.
Note 5. Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in millions) |
| Tax expense | $ | 24 | | | $ | 13 | | | $ | 62 | | | $ | 70 | |
| Effective tax rate | 31.6 | % | | 18.6 | % | | 25.4 | % | | 25.1 | % |
The effective tax rates for the three months ended September 30, 2024 and 2023 were 31.6% and 18.6%, respectively. The effective tax rates for the nine months ended September 30, 2024 and 2023 were 25.4% and 25.1%, respectively.
The change in the effective tax rate for the three months ended September 30, 2024 compared to the prior period is primarily related to global mix of earnings, partially offset by adjustments to tax reserves due to expiration of statute of limitations.
The change in the effective tax rate for the nine months ended September 30, 2024 compared to the prior period is primarily related to global mix of earnings and tax expense related to the sale of an equity interest in an unconsolidated joint venture, partially offset by reversal of tax reserves and lower non-deductible transaction costs.
The effective tax rate for the three months ended September 30, 2024 was higher than the U.S. federal statutory rate of 21% primarily because of U.S. taxes on international operations and withholding taxes, partially offset by adjustments to tax reserves due to expiration of statute of limitations, lower taxes on non-U.S. earnings, and global research and development benefits.
The effective tax rate for the nine months ended September 30, 2024 was higher than the U.S. federal statutory rate of 21% primarily because of U.S. taxes on international operations, withholding taxes, and tax expense related to the sale of an equity interest in an unconsolidated joint venture, partially offset by reversal of tax reserves, lower taxes on non-U.S. earnings, and global research and development benefits.
Note 6. Accounts, Notes and Other Receivables—Net
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| (Dollars in millions) |
Trade receivables | $ | 576 | | | $ | 614 | |
Notes receivable | 46 | | | 101 | |
Other receivables | 82 | | | 99 | |
| 704 | | | 814 | |
Less—Allowance for expected credit losses | (6) | | | (6) | |
| $ | 698 | | | $ | 808 | |
Trade receivables include $53 million and $38 million of unbilled customer contract asset balances as of September 30, 2024 and December 31, 2023, respectively. These amounts are billed in accordance with the terms of customer contracts to which they relate. See Note 3, Revenue Recognition and Contracts with Customers.
Notes receivable is related to guaranteed bank notes without recourse that the Company receives in settlement of accounts receivables, primarily in the Asia Pacific region. See Note 7, Factoring and Notes Receivable.
Other receivables includes VAT receivables of $59 million and $76 million as of September 30, 2024 and December 31, 2023, respectively.
Note 7. Factoring and Notes Receivable
The Company enters into arrangements with financial institutions to sell eligible trade receivables. The receivables are sold without recourse and the Company accounts for these arrangements as true sales. The Company also receives guaranteed bank notes without recourse, in settlement of accounts receivables, primarily in the Asia Pacific region. The Company can hold the bank notes until maturity, exchange them with suppliers to settle liabilities, or sell them to third-party financial institutions in exchange for cash. Bank notes sold to third-party financial institutions without recourse are likewise accounted for as true sales.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in millions) |
| Eligible receivables sold without recourse | $ | 140 | | $ | 184 | | $ | 542 | | $ | 584 |
| Guaranteed bank notes sold without recourse | 95 | | 41 | | 147 | | 41 |
The expenses related to the sale of trade receivables and guaranteed bank notes are recognized within Other expense, net in the Consolidated Interim Statements of Operations, and were $1 million and $1 million for the three months ended September 30, 2024 and 2023, respectively, and $3 million and $3 million for the nine months ended September 30, 2024 and 2023, respectively.
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| (Dollars in millions) |
| Receivables sold but not yet collected by the bank from the customer | $ | 4 | | | $ | 7 | |
| Guaranteed bank notes sold but not yet collected by the bank from the customer | 41 | | | — | |
As of September 30, 2024 and December 31, 2023, the Company had no guaranteed bank notes pledged as collateral.
Note 8. Inventories—Net
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| (Dollars in millions) |
| Raw materials | $ | 196 | | | $ | 198 | |
| Work in process | 21 | | | 21 | |
| Finished products | 93 | | | 85 | |
| | 310 | | | 304 | |
| Less—Reserves | (43) | | | (41) | |
| $ | 267 | | | $ | 263 | |
Note 9. Other Assets
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| (Dollars in millions) |
| Advanced discounts to customers, non-current | $ | 34 | | | $ | 41 | |
Operating right-of-use assets (Note 13) | 48 | | | 40 | |
| Income tax receivable | 20 | | | 20 | |
| Pension and other employee related | 11 | | | 11 | |
Derivatives designated as net investment hedges (Note 16) | 24 | | | 37 | |
Designated and undesignated derivatives (Note 16) | 13 | | | 46 | |
| Other | 9 | | | 11 | |
| $ | 159 | | | $ | 206 | |
Note 10. Supplier Financing
The Company has supplier financing arrangements with two third-party financial institutions under which certain suppliers may factor their receivables from Garrett. The Company also enters into arrangements with banking institutions to issue bankers acceptance drafts in settlement of accounts payables, primarily in the Asia Pacific region. The bankers acceptance drafts, or guaranteed bank notes, have a contractual maturity of six months or less, and may be held by suppliers until maturity, transferred to their suppliers, or discounted with financial institutions in exchange for cash. The supplier financing obligations and guaranteed bank notes outstanding are recorded within Accounts payable in our Consolidated Interim Balance Sheet.
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| (Dollars in millions) |
| Supplier financing obligations outstanding with financial institutions | $ | 66 | | | $ | 68 | |
| Guaranteed bank notes outstanding | 161 | | | 193 | |
Note 11. Accrued Liabilities
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| (Dollars in millions) |
| Customer pricing reserve | $ | 85 | | | $ | 57 | |
| Compensation, benefit and other employee related | 76 | | | 80 | |
| Repositioning | 10 | | | 9 | |
Product warranties and performance guarantees - short-term (Note 19) | 17 | | | 18 | |
| Income and other taxes | 31 | | | 42 | |
| | | |
Customer advances and deferred income (1) | 18 | | | 15 | |
| | | | | | | | | | | |
| Accrued interest | 32 | | | 26 | |
Short-term lease liability (Note 13) | 11 | | | 9 | |
| Accrued freight | 8 | | | 9 | |
| | | |
Designated and undesignated derivatives (Note 16) | 13 | | | 12 | |
Other (primarily operating expenses) (2) | 18 | | | 16 | |
| | 319 | | | 293 | |
(1)Customer advances and deferred income include $9 million and $9 million of contract liabilities as of September 30, 2024 and December 31, 2023, respectively. See Note 3, Revenue Recognition and Contracts with Customers.
(2)Includes $6 million and $5 million of environmental liabilities as of September 30, 2024 and December 31, 2023, respectively.
The Company accrues repositioning costs related to projects to optimize its product costs and right-size our organizational structure. Expenses related to the repositioning accruals are included in Cost of goods sold and Selling, general and administrative expenses in our Consolidated Interim Statements of Operations.
The following tables summarize the activity in our repositioning accrual:
| | | | | | | | | | | | | | | | | |
| Severance Costs | | Other Costs | | Total |
| (Dollars in millions) |
Balance at December 31, 2023 | $ | 9 | | | $ | — | | | $ | 9 | |
| Charges | 16 | | | — | | | 16 | |
| Usage—cash | (15) | | | — | | | (15) | |
| | | | | |
Balance at September 30, 2024 | $ | 10 | | | $ | — | | | $ | 10 | |
| | | | | | | | | | | | | | | | | |
| Severance Costs | | Other Costs | | Total |
| (Dollars in millions) |
Balance at December 31, 2022 | $ | 9 | | | $ | — | | | $ | 9 | |
| Charges | 13 | | | 2 | | | 15 | |
| Usage—cash | (10) | | | — | | | (10) | |
| Non-cash asset write-offs | — | | | (2) | | | (2) | |
Balance at September 30, 2023 | $ | 12 | | | $ | — | | | $ | 12 | |
Note 12. Other Liabilities
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| (Dollars in millions) |
| Income taxes | $ | 100 | | | $ | 99 | |
Designated and undesignated derivatives (Note 16) | 27 | | | 20 | |
| Pension and other employee related | 20 | | | 23 | |
Long-term lease liability (Note 13) | 39 | | | 33 | |
| Advanced discounts from suppliers | 2 | | | 3 | |
Product warranties and performance guarantees – long-term (Note 19) | 9 | | | 9 | |
| Environmental remediation – long term | 11 | | | 13 | |
| Long-term accounts payable | 6 | | | 7 | |
| Other | 8 | | | 11 | |
| 222 | | | 218 | |
Note 13. Leases
We have operating leases that primarily consist of real estate, machinery, and equipment. As of September 30, 2024, the Company has not identified any material finance leases. Our leases have remaining lease terms of up to 15 years, some of which include options to extend the leases for up to two years, and some of which include options to terminate the leases within the year.
The components of lease expense are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in millions) |
| Operating lease cost | $ | 4 | | $ | 4 | | $ | 11 | | $ | 12 |
Supplemental cash flow information related to operating leases is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| (Dollars in millions) |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash outflows from operating leases | $ | 4 | | | $ | 3 | | | $ | 10 | | | $ | 10 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
| Operating leases | 1 | | | — | | | 10 | | | 2 | |
Supplemental balance sheet information related to operating leases is as follows:
| | | | | | | | | | | |
| September 30,
2024 | | December 31,
2023 |
| (Dollars in millions) |
| Other assets | $ | 48 | | | $ | 40 | |
| Accrued liabilities | 11 | | | 9 | |
| Other liabilities | 39 | | | 33 | |
| | | | | | | | | | | |
| | September 30,
2024 | | December 31, 2023 |
| Weighted-average remaining lease term (in years) | 7.18 | | 8.08 |
| Weighted-average discount rate | 6.11 | % | | 5.69 | % |
Maturities of operating lease liabilities as of September 30, 2024 were as follows: | | | | | |
| (Dollars in millions) |
| 2024 | $ | 5 | |
| 2025 | 12 | |
| 2026 | 10 | |
| 2027 | 8 | |
| 2028 | 7 | |
| Thereafter | 20 | |
| Total lease payments | 62 | |
| Less imputed interest | (12) | |
| $ | 50 | |