Garrett Motion Inc., a technology provider that enables vehicles to become safer, more connected, efficient and environmentally friendly, recently announced its financial results for the third quarter and nine months ended Sept. 30, 2019.
“During the third quarter, we delivered organic net sales growth of approximately 3%, outperforming global auto production by more than five percentage points,” said Olivier Rabiller, Garrett president and CEO. “Garrett’s solid performance for the quarter was driven by higher gasoline turbo penetration gains and new product launches. Our rapidly growing gasoline segment increased to 35% of net sales and exceeded diesel product sales by approximately 10% in Q3 – well ahead of plan. We also enhanced our financial profile in the quarter by generating $102 million in adjusted levered free cash flow and reducing net debt by approximately $95 million. Our focus remains on strengthening the company’s balance sheet while bringing Garrett’s differentiated portfolio of turbocharging, electric boosting, and automotive software solutions to market for the benefit of our global customers.”
Results of Operations
Net sales for the third quarter of 2019 were $781 million compared to $784 million in the third quarter of 2018, a decrease of 0.4%. On an organic basis, net sales for the quarter increased 2.8%. The performance for the quarter was primarily driven by an increase in reported net sales for light vehicles OEM products of $16 million (despite an unfavorable impact of $21 million due to foreign currency translation). Higher gasoline volumes stemming from increased turbocharger penetration in gasoline engines and new product launches were partially offset by lower diesel volumes. During the third quarter of 2019, reported net sales for commercial vehicles OEM products decreased $16 million and aftermarket products declined $1 million. For the nine months ended Sept. 30, 2019, reported net sales totaled $2,418 versus $2,576 million for the nine months ended Sept. 30, 2018.
Cost of goods sold for the third quarter of 2019 was $609 million versus $606 million in the third quarter of 2018 primarily due to higher direct material costs. Research and development expenses in the quarter increased to $31 million from $28 million in Q3 2018.
For the nine months ended Sept. 30, 2019, cost of goods sold was $1,868 million, compared to $1,972 million for the same period in 2018. Research and development expenses were $92 million for the nine months ended Sept. 30, 2019 versus $96 million for the nine months ended Sept. 30, 2018.
Gross profit percentage for the third quarter of 2019 declined to 22.0% from 22.7% in the third quarter of 2018 primarily due to the unfavorable impacts from product mix and pricing, partially offset by productivity gains. For the nine months ended Sept. 30, 2019, gross profit percentage was 22.7% compared to 23.4% for the nine months ended Sept. 30, 2018.
Selling, general and administrative (SG&A) expenses for the third quarter of 2019 increased to $68 million from $60 million in Q3 2018 primarily due to non-linear corporate allocations prior to the Spin-Off from Honeywell on Oct. 1, 2018 and an increase in severance-related expense. As a percentage of net sales, SG&A for the quarter was 8.7% versus 7.7% in the third quarter of 2018.
For both the nine months ended Sept. 30, 2019 and Sept. 30, 2018, SG&A totaled $186 million. As a percentage of net sales, SG&A increased to 7.7% from 7.2% for the nine months ended Sept. 30, 2018, primarily due to lower net sales.
Other expenses – net for the third quarter of 2019 declined to $18 million from $51 million in the third quarter of 2018. During the third quarter of 2019, the company recognized $18 million in legal fees related to its Indemnification and Reimbursement Agreement with Honeywell. Other expenses – net for the nine months ended Sept. 30, 2019 totaled $54 million versus $132 million for the same period in 2018.
Net income for the third quarter of 2019 was $38 million, compared to net income of $929 million in the third quarter of 2018. Net income for the third quarter of 2018 included a tax benefit from an internal restructuring of Garrett’s business in advance of the Spin-Off that resulted in an $870 million reduction to withholding taxes on undistributed foreign earnings recorded during the three months ended Sept. 30, 2018. In addition, net income for the third quarter of 2018 excluded any interest expense related to the debt raised at the time of the Spin-Off.
For the nine months ended Sept. 30, 2019, net income totaled $177 million versus $1,137 million for the nine months ended Sept. 30, 2018. Net income for the nine months ended Sept. 30, 2018 included the aforementioned tax benefit and excluded any interest expense related to the debt raised at the time of the Spin-Off.
Earnings per basic and diluted share were $0.51 and $0.50, respectively, in the third quarter of 2019, compared to $12.54 per basic and diluted share in the third quarter of 2018. For the nine months ended Sept. 30, 2019, earnings per basic and diluted share were $2.37 and $2.34, respectively, compared to $15.35 per basic and diluted share for the same period in 2018.
Expenditures for property, plant and equipment for the third quarter of 2019 totaled $23 million, or 2.9% of net sales, compared to $19 million, or 2.4% of net sales, in the third quarter of 2018.
For the nine months ended Sept. 30, 2019, expenditures for property, plant and equipment were $74 million, or 3.1% of net sales, compared to $66 million, or 2.6% of net sales, for the nine months ended Sept. 30, 2018.
Non-GAAP Financial Measures
Adjusted EBITDA for the third quarter of 2019 was $133 million versus $137 million for the same period in 2018, primarily due to an unfavorable product mix and higher SG&A expenses, partially offset by productivity and volumes. The Adjusted EBITDA margin was 17.0% in the quarter versus 17.5% in the third quarter of 2018. For the third quarter of 2019, cash flow provided by operations minus capital expenditures was $65 million.
For the nine months ended Sept. 30, 2019, Adjusted EBITDA and Adjusted EBITDA margin were $446 million and 18.4%, respectively, compared to $481 million and 18.7% for the same period in 2018. For the nine months ended Sept. 30, 2019, cash flow provided by operations minus capital expenditures was $51 million.
Liquidity and Capital Resources
As of Sept. 30, 2019, Garrett had $658 million in available liquidity, including $190 million in cash and cash equivalents and $468 million available under its revolving credit facility.
As of Sept. 30, 2019, total debt was $1,511 million compared to $1,598 million as of June 30, 2019, a decrease of approximately $87 million. As of Sept. 30, 2019, net debt totaled $1,321 million compared to $1,416 million as of June 30, 2019, a decrease of approximately $95 million. Net Debt to Consolidated EBITDA (as defined in the Credit Agreement) was lowered to 3.01X as of Sept. 30, 2019 from 3.20X as of June 30, 2019. Garrett’s weighted average stated interest rate was approximately 3.1% as of Sept. 30, 2019, and the company has no significant debt maturities until 2023.
