Garrett Motion Inc., a leading differentiated technology provider for the automotive industry, has announced its financial results for the first quarter ended March 31, 2021.
“We are encouraged by our strong start to 2021, delivering results that exceeded our expectations across all key financial metrics,” said Olivier Rabiller, Garrett president and CEO. “During the first quarter, we maintained our positive sales momentum, generating approximately $1 billion in net sales for the second consecutive quarter and outperformed global auto production by 15 percentage points. Our Adjusted EBITDA margin in the quarter improved 320 basis points, which we believe reflects our ability to leverage Garrett’s global operating platform and adapt our variable cost structure. Management’s intense focus on conversion also led to robust adjusted free cash flow, which more than doubled in Q1 to $162 million.”
Rabiller added, “Our business fundamentals remain sound with increasing demand for Garrett’s differentiated technologies complemented by our proven track record in operational excellence. We continue to expand our in-house advanced engineering capabilities and invest in world-class turbo, electrification and software solutions for both passenger and commercial vehicles on a worldwide basis.
“Through our financial restructuring, we expect to emerge shortly with a new capital structure with less debt and strong sponsorship to support our strategic vision. I am proud of our team’s performance throughout this process while navigating the ongoing global pandemic. Although challenges remain, we believe our new foundation will help solidify Garrett’s technology leadership and strengthen its operations over the long-term as we continue to address the needs of an industry undergoing rapid transformation.”
Results of Operations
Net sales for the first quarter of 2021 were $997 million compared to $745 million in the first quarter of 2020, an increase of 33.8%. Net sales at constant currency increased 25.6% and total volumes expanded 30% to 3.8 million units. During the first quarter, light vehicles OEM products increased $197 million, commercial vehicles OEM products increased $44 million, aftermarket products increased $9 million, and other products increased $2 million.
The increase in light vehicles OEM products was primarily driven by higher gasoline volumes in China and higher diesel volumes in Europe. The production of Garrett’s facilities in China increased significantly, with an increase in net sales of 116% compared to the prior year period. During the first quarter of 2020, the company’s manufacturing facility in Wuhan, China, was closed for six weeks in Q1 2020 and Garrett experienced diminished production in its Shanghai, China facility during the same time period due to the COVID-19 pandemic. For the first quarter, the increase in net sales for commercial vehicles was mainly driven by higher volumes in Europe and China. The increase in aftermarket product sales was primarily driven by higher volumes in Europe, partially offset by volume decreases in North America.
Cost of goods sold for the first quarter of 2021 was $801 million versus $607 million in the first quarter of 2020 primarily due to higher volumes. Research and development expenses in the quarter were $33 million versus $30 million in the first quarter of 2020.
Gross profit percentage for the first quarter of 2021 increased to 19.7% from 18.5% in the first quarter of 2020 primarily due to higher volume leverage.
Selling, general and administrative (SG&A) expenses for the first quarter of 2021 decreased to $55 million from $57 million in the prior year period. As a percentage of net sales, SG&A for the quarter was 5.5% versus 7.7% in the first quarter of 2020.
Net loss for the first quarter of 2021 was $105 million compared to net income of $52 million in the first quarter of 2020. For the first quarter of 2021, the company recorded Reorganization items – net totaling $174 million, representing professional service fees related to the Chapter 11 cases (see below under “Voluntary Filing Under Chapter 11”) of which $79 million is related to the termination and expense reimbursement of the stalking horse bid. There were no Reorganization items – net in the first quarter of 2020.
Net cash provided by operating activities for the first quarter of 2021 totaled $32 million versus $57 million in the first quarter of 2020.
Expenditures for property, plant and equipment for the first quarter of 2021 totaled $18 million, or 1.8% of net sales, compared to $39 million, or 5.2% of net sales, in the first quarter of 2020.
Additional Non-GAAP Financial Measures
Adjusted net income, which excludes Reorganization items – net, unhedged debt exposure, restructuring costs and stock-based compensation, for the first quarter of 2021 was $96 million. This compares to adjusted net income of $71 million, which excludes Honeywell indemnity obligation expenses and litigation fees, restructuring costs and stock-based compensation, in the first quarter of 2020.
Adjusted EBITDA for the first quarter of 2021 increased 63.0% to $176 million from $108 million for the same period in 2020. The Adjusted EBITDA margin increased to 17.7% in the quarter from 14.5% in the first quarter of 2020 primarily due to higher volumes.
Adjusted free cash flow, which excludes reorganization items, repositioning charges (primarily severance costs related to internal restructuring projects) and stock-based compensation, was $162 million for the first quarter of 2021 for an adjusted free cash flow conversion rate of 169%. This compares to Adjusted free cash flow of $58 million, which excludes Indemnity-related payments to Honeywell, repositioning costs and stock-based compensation, in the first quarter of 2020, for an adjusted free cash flow conversion rate of 82%.
Voluntary Filing Under Chapter 11
On September 20, 2020, Garrett and certain of its subsidiaries (collectively, the “Debtors”) each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York. The Debtors’ chapter 11 cases are being jointly administered under the caption “In re: Garrett Motion Inc., 20-12212.” For additional information regarding the chapter 11 cases, visit http://www.kccllc.net/garrettmotion.
As previously announced, on April 26, 2021, the Bankruptcy Court entered an order among other things, confirming the Garrett’s plan of reorganization. Garrett expects that effective date under the plan will occur as soon as all conditions precedent to the plan have been satisfied, and is currently targeting an effective date on or around April 30, 2021. Although Garrett is targeting occurrence of the effective date as soon as reasonably practicable, Garrett can make no assurances as to when, or ultimately if, the plan will become effective. It is also possible that technical amendments could be made to the plan prior to the effective date.
