Garrett Motion Inc., a cutting-edge technology provider that enables vehicles to become safer, more connected, efficient and environmentally friendly, recently announced its financial results for the fourth quarter and full year ended December 31, 2019.
“Our fourth quarter and full year 2019 results reflect continued outperformance over global auto production,” said Olivier Rabiller, Garrett president and CEO. “In 2019, our net sales outperformed the overall market by approximately 600 basis points during a time when we accelerated the rebalancing of our portfolio. Net sales from light vehicle Gasoline products exceeded Diesel for the full year as gasoline volumes surged during the fourth quarter, resulting in a 6.2% increase in Q4 net sales at constant currency. We also maintained our focus on strengthening the company’s balance sheet by utilizing our solid cash flow to reduce net debt by $176 million for the year and $292 million since our Spin-Off.”
“With significant financial flexibility combined with the industry’s broadest portfolio for LV, commercial vehicle, hybrid and fuel cell products, we are well positioned to build upon the progress we achieved during our first full year as an independent company. Although the near-term macro environment remains volatile, particularly given the rapidly evolving outbreak of the coronavirus, we continue to produce strong customer win rates with a robust schedule of new product launches. We also expect the growth in our E-Boosting solutions for hybrid vehicles to outpace global hybrid production by 2023 and we continue to expand the production pipeline for our innovative connected offerings, including cybersecurity. By meeting the needs of an evolving market through our unique capabilities in the mechanical, electrical and software domains, we intend to drive future performance and create long-term value for shareholders.”
Results of Operations
Net sales for the fourth quarter of 2019 were $830 million compared to $799 million in the fourth quarter of 2018, an increase of 3.9%. Net sales at constant currency increased 6.2%. The performance for the quarter was primarily driven by an increase in reported net sales for light vehicles OEM products of $48 million (despite an unfavorable impact of $15 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 fourth quarter of 2019, reported net sales for commercial vehicle OEM products decreased $6 million (including an unfavorable impact of $1 million due to foreign currency translation) and aftermarket products and others declined $11 million (including an unfavorable impact of $2 million due to foreign currency translation).
For the year ended December 31, 2019, reported net sales totaled $3,248 million versus $3,375 million for the year ended December 31, 2018. Net sales at constant currency increased 0.2% for 2019.
Cost of goods sold for the fourth quarter of 2019 was $669 million versus $627 million in the fourth quarter of 2018 primarily due to higher net sales. Research and development expenses in the quarter increased to $37 million from $32 million in Q4 2018.
For the year ended December 31, 2019, cost of goods sold was $2,537 million, compared to $2,599 million for the full year 2018. Research and development expenses were $129 million for the year ended December 31, 2019, versus $128 million for the 12 months ended December 31, 2018.
Gross profit percentage for the fourth quarter of 2019 declined to 19.4% from 21.5% in the fourth quarter of 2018 primarily due to the unfavorable impacts from product mix and pricing, partially offset by productivity gains. For the year ended December 31, 2019, gross profit percentage was 21.9% compared to 23.0% for the year ended December 31, 2018.
Selling, general and administrative (SG&A) expenses for the fourth quarter of 2019 totaled $63 million and were flat compared to the fourth quarter of 2018. As a percentage of net sales, SG&A for the quarter decreased to 7.6% versus 7.9% in the fourth quarter of 2018.
For the year ended December 31, 2019, SG&A totaled $249 million and were flat compared to the full year 2018. As a percentage of net sales, SG&A increased to 7.7% from 7.4% for the year ended December 31, 2018, primarily due to lower reported net sales, an increase in severance-related expense, and costs arising from the spin-off from Honeywell on October 1, 2018.
Other expenses – net for the fourth quarter of 2019 was a benefit of $14 million, compared to a benefit of $12 million in the fourth quarter of 2018. During the fourth quarter of 2019, the company recognized a $36 million benefit related to Honeywell indemnity obligation expenses, arising from the recognition of certain insurance gains and a reduction in the estimate of Honeywell’s future unasserted asbestos claims, net of legal fees. During the fourth quarter of 2018, the company recognized a $16 million benefit related to a reduction in the estimate of Honeywell’s future unasserted asbestos claims, net of legal fees, in connection with its Indemnification and Reimbursement Agreement with Honeywell.
Other expenses – net for the year ended December 31, 2019 totaled $40 million versus $120 million for the full year 2018.
Interest expense for both the fourth quarter of 2019 and fourth quarter of 2018 was $16 million. For the year ended December 31, 2019, interest expense totaled $68 million versus $19 million for the full year 2018. Results for the first nine months of 2018 excluded any interest expense related to the debt raised at the time of the spin-off from Honeywell.
Net income for the fourth quarter of 2019 was $136 million, or $1.79 per diluted share, compared to net income of $69 million, or $0.92 per diluted share, in the fourth quarter of 2018.
For the year ended December 31, 2019, net income totaled $313 million, or $4.12 per diluted share, versus $1,206 million, or $16.21 per diluted share, for the full year 2018. Net income for the year ended December 31, 2018 included a tax benefit from an internal restructuring of Garrett’s business in advance of the Spin-Off that resulted in an $879 million reduction to withholding taxes on undistributed foreign earnings recorded during the year ended December 31, 2018.
Adjusted net income, which excludes special tax matters, Honeywell indemnity obligation expenses and litigation fees, for the fourth quarter of 2019 was $62 million, or $0.82 per diluted share, compared to adjusted net income of $53 million, or $0.70 per diluted share, in the fourth quarter of 2018.
For the year ended December 31, 2019, adjusted net income totaled $293 million, or $3.86 per diluted share, versus $399 million, or $5.36 per diluted share, for the full year 2018. Adjusted net income for the full year 2018 includes annualized interest expenses of $42 million.
Expenditures for property, plant and equipment (capital expenditures) for the fourth quarter of 2019 totaled $28 million, or 3.4% of net sales, compared to $29 million, or 3.6% of net sales, in the fourth quarter of 2018.
For the year ended December 31, 2019, capital expenditures were $102 million, or 3.1% of net sales, compared to $95 million, or 2.8% of net sales, for the year ended December 31, 2018.
Additional Non-GAAP Financial Measures
Adjusted EBITDA for the fourth quarter of 2019 was $137 million versus $139 million for the same period in 2018. The Adjusted EBITDA margin decreased to 16.5% in the quarter from 17.4% in the fourth quarter of 2018 primarily due to an unfavorable product mix partially offset by productivity and volumes. Adjusted free cash flow, which excludes Indemnity related payments and MTT payments to Honeywell, was $136 million for the fourth quarter of 2019 versus $164 million for the same period in 2018.
For the year ended December 31, 2019, Adjusted EBITDA and Adjusted EBITDA margin were $583 million and 17.9%, respectively, compared to $620 million and 18.4% for the full year 2018. For the year ended December 31, 2019, adjusted free cash flow was $318 million versus $466 million for the same period in 2018.
Liquidity and Capital Resources
As of December 31, 2019, Garrett had $664 million in available liquidity, including $187 million in cash and cash equivalents and $480 million available under its revolving credit facility.
As of December 31, 2019, total debt was $1,443 million, a decrease of approximately $68 million compared to September 30, 2019. As of December 31, 2019, net debt totaled $1,256 million, a decrease of approximately $65 million compared to September 30, 2019. Net Debt to Consolidated EBITDA (as defined in Garrett’s Credit Agreement) was lowered to 2.74x as of December 31, 2019 from 2.93x as of September 30, 2019. Garrett’s weighted average stated interest rate was approximately 3.15% as of December 31, 2019, and the company has no significant debt maturities until 2023.
