GARRETT MOTION INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2025

Financial Performance Overview

Garrett Motion Inc. faced significant challenges in the first quarter of 2025, including declines in light vehicle diesel volumes, particularly in Europe, and decreased demand for replacement parts in North America. However, these challenges were partially offset by growth in light vehicle gasoline volumes, primarily driven by new program launches in North America and volume recovery in Japan.

Despite these headwinds, the company’s operating margin performance remained robust, largely due to the sustainable fixed and variable cost measures implemented in 2024. Garrett continues to strengthen its global leadership position in turbochargers, winning business across all regions and verticals, including plug-in hybrids, range extended vehicles, and natural gas applications for heavy trucks. The company also secured new awards for its largest turbos used in industrial applications, significantly expanding its presence in Asia in that segment.

On the zero-emission differentiated solutions side, Garrett is building positive momentum, having reached a major milestone by receiving its first series production award for a high-speed electric motor for an on-highway application. Additionally, the company received another award for its Fuel Compressor technology and positive testing feedback on the application of its E-Cooling Compressor, laying the foundation for future business growth.

Revenue and Profit Trends

For the three months ended March 31, 2025, Garrett’s net sales decreased by $37 million or 4% compared to the prior period. This was primarily driven by lower Euro-to-US dollar exchange rates, soft demand in diesel and commercial vehicle applications, and lower demand for replacement parts in the aftermarket. These decreases were partially offset by increased demand in gasoline products.

Gasoline product sales increased by $15 million or 4%, primarily driven by new application launches and program ramp-ups in North America, program launches in India, and recovery in Japan from prior year volume softness. Diesel product sales decreased by $33 million or 14%, primarily driven by passenger vehicles in Europe transitioning to gasoline hybrids, partially offset by sustained demand for pickup trucks in South America. Commercial vehicle sales decreased by $6 million or 4%, primarily driven by volume softness in China and Europe, partially offset by off-highway product launches in India. Aftermarket sales decreased by $14 million or 13%, primarily due to softer demand in North America for off-highway and lower demand in the North America independent aftermarket.

Despite the revenue decline, Garrett’s gross profit increased by $7 million, primarily driven by $16 million of productivity, net of labor inflation, $9 million of commodity, transportation and energy deflation, and $4 million of pricing, net of inflation pass-through. These increases were partially offset by $7 million from lower sales volumes, $7 million from unfavorable product mix, and $8 million from foreign currency impacts.

Selling, general and administrative (SG&A) expenses decreased by $5 million, mainly driven by $2 million of lower stock-based compensation expense, $2 million of favorable foreign exchange impacts, and $1 million of lower personnel-related costs.

Net income for the three months ended March 31, 2025, decreased by $4 million compared to the prior period, primarily due to $8 million of higher tax expense, $6 million of higher other expense, net, and a $4 million decrease in non-operating income. These increases were partially offset by $7 million of increased gross profit and $5 million of lower SG&A expense.

Strengths and Weaknesses

One of Garrett’s key strengths is its global leadership position in turbochargers, which has enabled the company to win business across all regions and verticals, including in emerging technologies like plug-in hybrids, range extended vehicles, and natural gas applications for heavy trucks. The company’s ability to secure new awards for its largest turbos used in industrial applications has also allowed it to significantly expand its presence in Asia in that segment.

Another strength is Garrett’s progress in the zero-emission differentiated solutions space, where it has reached a major milestone by receiving its first series production award for a high-speed electric motor for an on-highway application. The company’s Fuel Compressor technology award and positive testing feedback on its E-Cooling Compressor also lay the foundation for future business growth in this area.

Garrett’s ability to maintain robust operating margin performance despite the challenging market conditions is also a testament to the company’s operational efficiency and cost management capabilities. The sustainable fixed and variable cost measures implemented in 2024 have helped the company weather the headwinds it faced in the first quarter of 2025.

One of the company’s weaknesses is its exposure to the volatility in the diesel and commercial vehicle markets, particularly in Europe and China, where it experienced volume softness during the quarter. The decline in aftermarket sales, primarily in North America, is also a concern, as it reflects weaker demand for replacement parts.

Additionally, the company’s financial performance is susceptible to foreign exchange rate fluctuations, as evidenced by the unfavorable impact of a lower Euro-to-US dollar exchange rate on its revenue and profitability during the quarter.

Outlook and Future Prospects

Looking ahead, Garrett’s future prospects appear promising, as the company continues to strengthen its position in the turbocharger market and make progress in the zero-emission solutions space. The company’s recent refinancing activities, including the Restatement Agreement that replaced its existing credit facilities with a new $692 million term loan and a $630 million revolving facility, have provided it with a more favorable debt structure and extended maturity profile, which should support its growth initiatives.

The company’s focus on productivity and cost management, as demonstrated by the sustainable fixed and variable cost measures implemented in 2024, is expected to help it navigate the ongoing macroeconomic and industry challenges. Garrett’s ability to pass through commodity, transportation, and energy inflation costs, as well as its pricing power, should also contribute to its profitability going forward.

However, the company’s exposure to the volatile diesel and commercial vehicle markets, as well as the potential impact of the OECD’s Pillar Two tax framework on its effective tax rate, remain areas of concern that could affect its future performance. Additionally, the company’s ability to successfully execute on its zero-emission solutions strategy and secure additional business in this growing market will be crucial for its long-term success.

Overall, Garrett Motion Inc. appears to be well-positioned to capitalize on the evolving automotive industry trends, with a strong focus on operational efficiency, strategic growth opportunities, and financial discipline. While the company faces some near-term challenges, its long-term prospects remain promising, provided it can continue to adapt to the changing market dynamics and execute on its key initiatives.