Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 ended December 31, 2021, included in our Form 10-K, as filed with the Securities and Exchange Commission on February 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 of Garrett Motion Inc., for the three months ended March 31, 2022.
Executive Summary
Our net sales for the three months ended March 31, 2022 was $901 million, representing a decrease of 10% (including an unfavorable impact of 4% due to foreign currency translation) compared to the prior year. The decrease in our sales, net of the impacts of foreign currency translation, approximated the estimated decline in global light vehicle production and reflects the ongoing direct and indirect impacts from the global semiconductor shortages on vehicle production schedules and sales volumes despite strong underlying demand for light vehicles, further accentuated by a strong first quarter in 2021 due to accumulated pent-up demand from 2020. The increased COVID-related lockdown measures implemented in China as well as recent geopolitical tensions arising from the military conflict between Russia and Ukraine also contributed to the lower sales for the quarter.
For the three months ended March 31, 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 19% of our revenues. Our OEM sales contributed approximately 87% of our revenues while our aftermarket and other products contributed 13% of our revenues. Approximately 50% of our revenues came from sales to customers located in Europe, 31% from sales to customers located in Asia, 17% from sales to customers in North America, and 2% from sales to customers in other international markets.
On January 11, 2022 and March 22, 2022, the Company amended its Credit Agreement, increasing the maximum amount of borrowings under the Revolving Facility from $300 million to $475 million. The amendments also remove the requirement that payments made in cash for the benefit of holders of our Series A Preferred Stock on or before December 31, 2022 be made on a ratable basis to the holders of the Common Stock, and makes additional clarifying amendments to certain payment covenants.
On March 3, 2022, the terms of the Series A Certificate of Designations were further amended to provide the Company with greater flexibility to pay dividends and make certain distributions on, and to purchase, redeem or otherwise acquire, including in individually negotiated transactions, shares of the Company’s Common Stock or any future class of preferred stock that ranks junior to the Series A Preferred Stock in right of payment of dividends. Specifically, the amendments (i) expanded the scope of permitted Distributions on Dividend Junior Stock (as each term is defined in the Series A Certificate of Designations) to include purchases by the Company of shares of Dividend Junior Stock in individually negotiated transactions, (ii) removed the requirement that dividends or Distributions on Dividend Junior Stock must occur on or prior to December 31, 2022, and (iii) expressly permitted the purchase, redemption or other acquisition for cash by the Company of shares of Dividend Junior Stock without requiring ratable participation by holders of Series A Preferred Stock.
On February 18, 2022, the Company completed a second planned partial early redemption of its Series B Preferred Stock. Under this partial early redemption, the Company paid $197 million of which $186 million related to redemption on the principal and $11 million related to interest.
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 in China, and geopolitical tensions in particular from the ongoing military conflict between Russia and Ukraine. While the Company
does not have a direct presence in Russia or Ukraine, we expect that the supply-side constraints from these market disruptions will keep influencing our operating activity throughout 2022. Automotive OEMs have already reduced production plans for the first two quarters of 2022 and may further reduce production should COVID-related lockdown measures persist or extend, and 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. It is however 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 51 million units by 2026, according to IHS Markit ("IHS") for light vehicle and Knibb, Gormezano and Partners ("KGP") and Power Systems Research ("PSR") for commercial vehicle on-highway and off-highway. The turbocharger industry growth is mainly driven by an expected increase in the penetration of hybrid vehicles, from 10 million hybrid cars globally in 2021 to an anticipated 30 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 in Asia, 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 ongoing Russia-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 months ended March 31, 2022 and 2021, respectively.
By Geography
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
United States | $ | 153 | | | $ | 138 | |
Europe | 451 | | | 528 | |
Asia | 282 | | | 319 | |
Other International | 15 | | | 12 | |
Total | $ | 901 | | | $ | 997 | |
By Product Line
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Diesel | $ | 254 | | | $ | 312 | |
Gasoline | 363 | | | 392 | |
Commercial Vehicle | 166 | | | 185 | |
Aftermarket | 105 | | | 91 | |
Other | 13 | | | 17 | |
Total | $ | 901 | | | $ | 997 | |
Results of Operations for the Three Months Ended March 31, 2022
Net Sales
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Net sales | $ | 901 | | | $ | 997 | |
% change compared with prior period | (9.6) | % | | |
The change in net sales for the three months ended March 31, 2022 compared with the three months ended March 31, 2021 is attributable to the following:
Net sales decreased for the three months ended March 31, 2022 compared to prior year by $96 million or 10% (including an unfavorable impact of $36 million or 4% due to foreign currency translation driven by a lower Euro-to-US dollar exchange rate).
Gasoline product sales decreased by $29 million or 7% (including an unfavorable impact of $11 million or 2% due to foreign currency translation), primarily driven by lower demand in Europe, mostly related to the semiconductor shortages at customers. Gasoline product sales in China were also adversely affected by increased COVID-related lockdown measures implemented by the Chinese government. These decreases in sales were partially offset by favorable impacts from new product launches delivering incremental sales year over year.
Diesel product sales decreased by $58 million or 19% (including an unfavorable impact of $15 million or 5% due to foreign currency translation). This decrease was mainly due to the global semiconductor shortage, as well as the impact of higher sales for the three months ended March 31, 2021 brought about by recovery in customer demand following pandemic-related disruptions in 2020.
Commercial vehicle sales decreased by $19 million or 10% (including an unfavorable impact of $6 million or 3% 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 $14 million or 15% (including an unfavorable impact of $3 million or 4% 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, as well as growth through new product introductions and favorable pricing impacts.
Cost of Goods Sold
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Cost of goods sold | $ | 726 | | | $ | 801 | |
% change compared with prior period | (9.4) | % | | |
Gross profit percentage | 19.4 | % | | 19.7 | % |
Cost of goods sold decreased for the three months ended March 31, 2022 compared to the prior year by $75 million or 9.4% (including a favorable impact of $24 million due to foreign exchange rates).
| | | | | | | | | | | |
| Cost of Goods Sold | | Gross Profit |
| (Dollars in millions) |
Cost of Goods Sold / Gross Profit for the three months ended March 31, 2021 | $ | 801 | | | $ | 196 | |
Increase/(decrease) due to: | | | |
Volume | (68) | | | (30) | |
Product mix | 23 | | 15 | |
Price, net of inflation pass-through | — | | | (2) | |
Commodity & transportation inflation | 24 | | (24) | |
Productivity, net | (33) | | | 35 | |
Research & development | 3 | | (3) | |
Foreign exchange rate impacts | (24) | | | (12) | |
Cost of Goods Sold / Gross Profit for the three months ended March 31, 2022 | $ | 726 | | | $ | 175 | |
The decrease in cost of goods sold was primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of $68 million and $24 million, respectively, in cost of goods sold. Cost of goods sold further decreased by $33 million from benefits from our continued focus on productivity, net of $5 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility. These decreases were also partially offset by $24 million due to inflation on commodities and transportation costs and $23 million due to an unfavorable product mix. Research and development ("R&D") expenses increased by $3 million which reflects our shift in investment in new technologies and headcount increase year-over-year.
The decrease in gross profit was mainly driven by the lower sales volumes, inflation on commodities and transportation costs, as well as higher premium freight costs as discussed above. Gross profit also decreased due to $2 million of pricing reductions net of inflation recoveries from customer pass-through agreements, as well as higher R&D costs and $12 million from foreign currency translational, transactional and hedging effects, partially offset by higher productivity along with a favorable product mix.
Selling, General and Administrative Expenses
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Selling, general and administrative expense | $ | 53 | | | $ | 55 | |
% of sales | 5.9 | % | | 5.5 | % |
Selling, general and administrative (“SG&A”) expenses decreased for the three months ended March 31, 2022 compared with the prior year by $2 million, primarily due to $2 million of favorable impacts from foreign exchange rates, $2 million of lower professional service fees, and $2 million of incremental compensation cost recognized for the three months ended March 31, 2021 related to one-time cash continuity awards that were fully vested in 2021. These decreases were partially offset by a $4 million non-recurring bad debt recovery recognized during the three months ended March 31, 2021.
Interest Expense | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Interest expense | $ | 23 | | | $ | 21 | |
Interest expense for the three months ended March 31, 2022 increased compared to the prior year by $2 million, primarily due to $6 million of interest accretion on our Series B Preferred Stock (issued at Emergence), partially offset by $4 million of lower interest expense on our current credit facilities compared to our credit facility in the prior year before Emergence and prior year period fees related to amendments on our previous credit facilities.
Non-operating (income) expense
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | 2021 |
| (Dollars in millions) |
Non-operating (income) expense | $ | (28) | | | $ | 26 | |
Non-operating (income) expense for the three months ended March 31, 2022 increased to an income of $28 million from an expense of $26 million in the prior year. This increase is primarily related to a benefit of $26 million recognized in 2022 due to interest income associated with unrealized marked-to-market gains on interest rate swaps, as well as $33 million of unfavorable foreign exchange impacts recognized in 2021 on debt, which were unhedged, due to the restrictions placed on the Company in Chapter 11 proceedings.
Reorganization items, net
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Reorganization items, net | $ | 1 | | | $ | 174 | |
Reorganization items, net for the three months ended March 31, 2022 was an expense of $1 million related to professional service fees on the Chapter 11 Cases. During the prior year, reorganization items, net amounted to $174 million, of which $84 million pertained to legal and 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. and AMP U.S. Holdings, LLC (the “Stalking Horse Purchase Agreement"), and $11 million related to other Chapter 11 costs including debtor-in-possession financing and the write-off of original issue discount and deferred long-term fees on debt.
Tax Expense
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Tax expense | $ | 37 | | | $ | 24 | |
Effective tax rate | 29.6 | % | | (29.6) | % |
The effective tax rates for the three months ended March 31, 2022 and 2021 were 29.6% and (29.6)%, respectively. The change in the effective tax rate for the three months ended March 31, 2022 compared to the prior year is primarily related to the decrease of nondeductible bankruptcy costs, partially offset by true ups to prior year tax reserves. The negative effective tax rate for three months ended March 31, 2021 reflects a tax expense in a period of an overall pre-tax loss.
Net Income
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Net income (loss) | $ | 88 | | | $ | (105) | |
Net income increased $193 million for the three months ended March 31, 2022 compared with the prior year primarily as result of an increase in Non-operating income of $54 million and lower Reorganization items, net of $173 million, partially offset by lower gross profit of $21 million, as described above.
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 analysis of the Company’s operating results as reported under GAAP.
EBITDA and Adjusted EBITDA (1) | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Net income (loss) — GAAP | $ | 88 | | | $ | (105) | |
Net interest (income) expense | (4) | | 20 |
Tax expense | 37 | | 24 |
Depreciation | 22 | | 23 |
EBITDA (Non-GAAP) | 143 | | | (38) | |
Other expense, net (2) | 1 | | — |
Non-operating income (3) | (2) | | (3) |
Reorganization items, net (4) | 1 | | 174 |
Stock compensation expense (5) | 2 | | 2 |
Repositioning charges (6) | 1 | | 8 |
Foreign exchange loss on debt, net of related hedging loss | — | | 33 |
| | | |
| | | |
Adjusted EBITDA (Non-GAAP) | $ | 146 | | | $ | 176 | |
(1)We evaluate performance on the basis of EBITDA and Adjusted EBITDA. We define “EBITDA” as our net income (loss) calculated in accordance with U.S. GAAP, plus the sum of net interest expense (income), tax expense (benefit) and depreciation. We define “Adjusted EBITDA” as EBITDA, plus the sum of non-operating (income) expense, other expense, net, stock compensation expense, reorganization items, net, repositioning charges and foreign exchange loss (gain) on debt, net of related hedging loss (gain). 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)Other expense, net includes expenses incurred to discount or factor the Company’s receivables.
(3)Non-operating income includes the non-service component of pension expense and other expense, net and excludes interest income, equity income of affiliates, and the impact of foreign exchange.
(4)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.
(5)Stock compensation expense includes only non-cash expenses.
(6)Repositioning charges includes severance costs related to restructuring projects to improve future productivity.
Adjusted EBITDA for the Three Months Ended March 31, 2022
As discussed above, net income increased $193 million for the three months ended March, 31 2022 as compared to the prior year.
For the three months ended March 31, 2022, Adjusted EBITDA decreased by $30 million compared to the prior year from $176 million to $146 million, mainly due to volume decreases, inflation on commodities and transportation, as well as unfavorable foreign exchange impacts, partially offset by increased productivity and a favorable mix for the quarter. Our volumes for the three months ended March 31, 2022 totaled 3.4 million units, representing a decrease of approximately 10% from the prior year.
Our Adjusted EBITDA margin of 16.2% represented a year-over-year contraction of 150 basis points. During the three months ended March 31, 2022, we faced demand volatility driven mainly by the global semiconductor shortage and geopolitical tensions due to the ongoing military conflict between Russia and Ukraine, resulting in supply chain disruptions. Our Adjusted EBITDA margin was also higher for the three months ended March 31, 2021 due to incremental benefits from recovery in customer demand following pandemic related disruptions in 2020.
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 lower SG&A expenses due to favorable impacts from foreign exchange rates and lower professional service fees and compensation costs that were partially offset by a non-recurring bad debt recovery recognized in 2021.
R&D expenses increased $3 million which reflects our shift in investment in new technologies and year-over-year labor inflation.
Adjusted EBITDA also decreased by $13 million associated with losses in foreign currency from translational, transactional and hedging effects in the three months ended March 31, 2022, primarily driven by a lower Euro-to-US dollar exchange rate versus the prior-year period.
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 three months ended March 31, 2022, we funded our operations primarily through cash flows from operating activities, borrowings from Credit Facilities and cash and cash equivalents. As of March 31, 2022, the Company reported a cash and cash equivalents position of $315 million (not including $5 million in restricted cash as of March 31, 2022) as compared to $423 million as of December 31, 2021 (not including $41 million in restricted cash as of December 31, 2021). As of March 31, 2022, the Company had no borrowings outstanding under the Revolving Facility, $2 million of outstanding letters of credit, and available borrowing capacity of $473 million. In addition, as of March 31, 2022, the Company had $1,208 million outstanding in Term Loan Facilities and $25 million in available letter of credit facilities.
During the three months ended March 31, 2022, we repaid $2 million on our Dollar Facility and $197 million related to our Series B Preferred Stock. Following the repayment of $197 million on our Series B Preferred Stock, we expect to make redemptions on our Series B Preferred Stock for each of the years 2024 to 2027 of $18 million, $100 million, $100 million and $54 million, respectively. We may also be required to redeem the outstanding shares of Series B Preferred Stock on the exercise by the holder of its right to require the Company to redeem all of the holder's shares of Series B Preferred Stock following the occurrence of certain triggering events on or before December 30, 2022, which could increase our cash requirements by approximately $220 million. 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 of March 31, 2022, the aggregate accumulated dividend was approximately $135 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 $1,221 million;
•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 $35 million letter of credit facility for a term of five years;
•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 $1,301 million;
•Settlement of $1,459 million of claims with Honeywell for a $375 million payment and the issuance of $577 million of Series B Preferred Stock.
On January 11, 2022 and March 22, 2022, the Company amended the Credit Agreement, increasing the maximum amount of borrowings under the Revolving Facility from $300 million to $475 million. For more information, see Note 13, Long-term Debt and Credit Agreements.
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 the Centerbridge Investors, the Oaktree 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 ended December 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 of March 31, 2022, our liabilities with respect to our payment obligations to Honeywell under the terms of the Series B Preferred Stock were $204 million (representing the present value of all then remaining amortization payments due under the outstanding Series B Preferred Stock, discounted at a rate of 7.71% per annum). See Note 14, Mandatorily Redeemable Series B Preferred Stock of the Notes to the Consolidated Interim Financial Statements and Note 16, Mandatorily Redeemable Series B Preferred Stock of the Consolidated Financial Statements for the year ended December 31, 2021 included in our 2021 Form 10-K for additional information regarding the Series B Preferred Stock.
Share Repurchase Program
On November 16, 2021, the Board of Directors authorized a $100 million share repurchase program valid until November 15, 2022, providing for the purchase of shares of Series A Preferred Stock and Common Stock. As of March 31, 2022, the Company had repurchased $21 million of its Series A Preferred Stock and Common Stock, with $79 million remaining under the share repurchase program. For more information, see Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Cash Flow Summary for the Three Months Ended March 31, 2022
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Cash provided by (used for): | | | |
Operating activities | $ | 73 | | | $ | 32 | |
Investing activities | (29) | | (17) |
Financing activities | (196) | | (101) |
Effect of exchange rate changes on cash and restricted cash | 8 | | (30) |
Net decrease in cash, cash equivalents and restricted cash | $ | (144) | | | $ | (116) | |
Cash provided by operating activities increased by $41 million for the three months ended March 31, 2022 versus the prior year, primarily due to an increase in net income, net of deferred taxes and non-cash gains related to reorganization items of $157 million, partially offset by a unfavorable impact from working capital of $45 million and $71 million mainly driven by other assets and accrued liabilities.
Cash used for investing activities increased by $12 million for the three months ended March 31, 2022 versus the prior year, primarily due to an increase in expenditures for property, plant and equipment of $11 million.
Cash used for financing activities increased by $95 million for the three months ended March 31, 2022 compared with the prior year. The change was driven by $186 million paid for the partial early redemption of our Series B Preferred Stock (exclusive of $11 million of the redemption attributable to interest and included in cash used for operating activities) and $2 million for repurchases of Series A Preferred Stock and Common Stock. We also incurred $3 million of financing costs on our Revolving Facility and made payments of $2 million on our long term debt pursuant to our Credit Agreement, partially offset by $101 million debt repayments in the prior year on the financing arrangements we maintained while a debtor-in-possession (including $1 million of related financing fees).
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 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 between Russia and Ukraine, 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, in Europe (as part of the Green Deal objectives or otherwise); the United States; China; Japan; and Korea 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;
•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 United Kingdom from the European Union;
•risks related to disruptions in our supply chain and business operations due to the ongoing conflict between Russia and Ukraine;
•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 the SEC.
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.