Garrett Motion Inc. (GTX)

Item 7. 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 Financial Statements and related notes thereto and other financial information appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, 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 this Annual Report, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.

Executive Summary

Garrett is a cutting-edge technology leader delivering differentiated solutions for emission reduction and energy efficiency. We design, manufacture, and sell highly engineered turbocharging, air and fluid compression, and high-speed electric motor technologies for OEMs and distributors within the mobility and industrial space.

We have significant expertise in delivering products at scale for ICE-powered vehicles using gasoline, diesel, natural gas and hydrogen, as well as for zero-emission technologies using hydrogen fuel cell systems, both for mobility and industrial use. As our customers continue to progress on electrification, we are applying our technological pillars to develop highly engineered E-Powertrain and E-Cooling compressor products to support their ambition. These products are key enablers for fuel economy, energy efficiency, thermal management, and compliance with emissions standards and overall greenhouse gas and other emission reduction targets.

In 2024, turbocharger production decreased globally from approximately 50 million units in 2023 to 49 million units in 2024 and is expected to further decrease from 2025 onward based on current expectations of electric vehicle penetration. We effectively navigated through macroeconomic and geopolitical challenges by implementing strategic permanent and variable cost measures, as well as leveraging commodity deflation pass-through. Our effective management allowed us to achieve Net income of $282 million and Adjusted EBITDA of $598 million for the year.

We continue to achieve success in our turbocharging, hybrid, and zero-emission technology applications. This year, we secured additional pre-production contracts for both light vehicle and commercial vehicle applications, were awarded our first turbo application for a Range Extended Electric Vehicle with a leading Chinese technology company, and made significant progress in testing our new turbo off-highway applications.

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On April 3, 2024, we divested our equity interest in an unconsolidated joint venture for approximately $58 million, subject to customary debt and working capital adjustments. We received cash consideration on the divestiture date of $46 million, with an additional $7 million still to be received, and recognized a gain of $27 million related to this divestiture.

During the second quarter of 2024, we completed an offering of $800 million in aggregate principal amount of 7.75% Senior Unsecured Notes due 2032 (the "Senior Notes") and made early debt repayments totaling $985 million on our €450 million secured first-lien Euro Term Facility (the "Euro Term Facility") and $500 million secured first-lien U.S. Dollar term loan facility (the "2023 Dollar Term Facility"), both of which were fully repaid as of June 30, 2024.

In December 2024, the Board of Directors announced that it intends to declare and pay quarterly dividends on our Common Stock in an aggregate amount of approximately $50 million in 2025. The first quarter dividend of $0.06 per share was declared on December 5, 2024, payable to holders of our Common Stock as of January 15, 2025, and was settled in cash for $12 million on January 31, 2025.

Trends, Uncertainties and Opportunities

Current global economic conditions due to geopolitical conflicts, high inflation in Europe, and China's slow pace of recovery, all have adversely affected and may continue to adversely affect many industries, including the automotive industry. We believe a global increase in BEV production will persist into 2025. We anticipate that demand for turbochargers will remain steady in the short to medium term, driven by the growing penetration of hybridized powertrains in response to strict fuel efficiency and emissions standards. While we foresee continued growth in BEV adoption, we believe it will be somewhat constrained in the short term due to the price disparity compared to ICE vehicles, geopolitical risks, and the slower-than-expected development of charging infrastructure.

Disaggregated Revenue

The following tables show our revenues by geographic region and product line for the years ended December 31, 2024, 2023 and 2022.

By Region

By Product Line

Results of Operations for the Years Ended December 31, 2024, 2023 and 2022

Net Sales

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The change in net sales compared to the prior year is attributable to the following:

For the year ended December 31, 2024, net sales decreased compared to prior year by $411 million or 11%, including an unfavorable impact of $34 million or 1% due to foreign currency translation driven by lower Chinese Yuan-to-US dollar and lower Japanese Yen-to-US dollar exchange rates, partially offset by higher Euro-to-US dollar exchange rates. This decrease was mainly driven by soft demand in gasoline, diesel, and commercial vehicle applications, partially offset by demand for replacement parts on aftermarket sales. Net sales further decreased due to price, net of inflation pass-through driven by commodity deflation and partially offset by favorable product mix.

Gasoline product sales decreased by $215 million or 13% (including an unfavorable impact of $16 million or 1% due to foreign currency translation) driven by soft demand in China and North America, partially offset by program ramp-ups in Europe, the rest of Asia and South America.

Diesel product sales decreased by $165 million or 17% (including an unfavorable impact of $6 million or 1% due to foreign currency translation), primarily driven by passenger vehicles in Europe, partially offset by sustained demand for pickup trucks in North and South America.

Commercial vehicle sales decreased by $27 million or 4% (including an unfavorable impact of $8 million or 1% due to foreign currency translation), primarily driven by soft demand in the construction and agriculture industries due to high interest rates and lower crop prices, partially offset by sustained demand in the on-highway industry, especially in China and North America.

Aftermarket sales increased by $3 million or 1% (including an unfavorable impact of $3 million or 0% due to foreign currency translation), primarily driven by favorable aftermarket conditions and continued high demand for replacement parts in China, Europe, India, Brazil and Japan, partially offset by softer sales in Australia.

For the year ended December 31, 2023, net sales increased compared to prior year by $283 million or 8%, including an unfavorable impact of $14 million or 0% due to foreign currency translation driven by lower Chinese Yuan-to-US dollar, partially offset by higher Euro-to-US dollar exchange rates. This increase was driven by higher volumes with growth of both global light vehicles and the turbocharger industry, and faster than expected recovery from China Covid-19 pressures and semiconductor shortages experienced in the prior year. Strong demand for new product launches and ramp-ups along with inflation recoveries net of pricing across all product lines also contributed to the net sales growth.

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Gasoline product sales increased by $235 million or 16% (including an unfavorable impact of $20 million or 1% due to foreign currency translation) driven by industry recovery from prior year’s global semiconductor shortages and Covid-related lockdown measures in China, combined with new product launches and ramp-ups across all regions.

Diesel product sales increased by $43 million or 5% (including a favorable impact of $10 million or 2% due to foreign currency translation), driven by strong performance in Europe where diesel remains essential to meet fleet CO2 targets in addition to strong light commercial vehicle performance on existing platforms.

Commercial vehicle sales decreased by $17 million or 3% (including an unfavorable impact of $7 million or 2% due to foreign currency translation), primarily driven by global demand softness influenced by macroeconomic headwinds such as higher interest rates and commodity inflation, partially offset by favorable regional mix.

Aftermarket sales improved by $14 million or 3% (including a favorable impact of $2 million or 0% due to foreign currency translation), primarily on strong demand in Europe and especially in Asia Pacific related to favorable aftermarket conditions including the continued high demand for replacement parts. Recovery in China from the end of the Chinese government's zero Covid-19 policy as well as new product introductions and favorable pricing impact also contributed to the growth.

Cost of Goods Sold and Gross Profit

For the year ended December 31, 2024, cost of goods sold decreased by $360 million, primarily driven by lower sales volumes which contributed a decrease of $290 million. Cost of goods sold further declined from $81 million of commodity, transportation and energy deflation, as well as a $98 million decrease from productivity, net of labor inflation and repositioning costs, and foreign currency impacts from transactional, translational, and hedging effects of $7 million. The decrease was partially offset by unfavorable product mix of $104 million and a $12 million increase in R&D costs, net of customer reimbursements, which reflects our continued investment in new technologies and related headcount year-over-year.

Gross profit decreased by $51 million, mainly driven by lower sales volumes which contributed a decrease of $122 million. Gross profit further declined from $50 million of price, net of inflation pass-through, $12 million higher R&D costs, net of customer reimbursements, and $27 million from foreign currency impacts from transactional, translational and hedging. These decreases were partially offset by $81 million of commodity, transportation and energy deflation, $72 million of productivity, net of labor inflation and repositioning costs, and $7 million of favorable impact from product mix.

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For the year ended December 31, 2023, cost of goods sold increased by $210 million, primarily driven by our higher sales volumes and an unfavorable product mix, which contributed to increases of $217 million and $27 million, respectively. Cost of goods sold further increased due to $30 million of inflation on commodities, transportation and energy, as well as a $14 million increase in R&D costs, net of customer reimbursements, which reflects our continued investment in new technologies and related headcount year-over-year. The increase was partially offset by our continued focus on productivity, net of labor inflation, one-time expenses and higher repositioning costs, which contributed a decrease in cost of goods sold of $55 million, and by foreign currency impacts from transactional, translational and hedging effects, which contributed a decrease in cost of goods sold of $23 million.

Gross profit increased by $73 million, mainly driven by higher sales volumes of $89 million and $60 million of productivity net of labor inflation, one-time expenses and higher repositioning costs. We also saw $38 million more of inflation recoveries from customer pass-through agreements net of pricing, and positive foreign currency impacts from transactional, translational and hedging of $9 million. These increases were partially offset by $30 million of inflation on commodities, transportation and energy costs, $79 million of unfavorable impacts from product mix primarily from growth in small-engine gasoline applications, as well as $14 million of higher R&D costs, net of customer reimbursements.

Selling, General and Administrative Expenses

For the year ended December 31, 2024, selling, general and administrative (“SG&A”) expenses decreased by $7 million compared with the prior year, primarily driven by $4 million of lower repositioning costs, $8 million of lower professional service and legal fees and $3 million of lower IT-related costs. These decreases were partially offset by $8 million of higher stock-based compensation expense and $1 million of unfavorable foreign exchange impacts.

For the year ended December 31, 2023, SG&A expenses increased by $31 million compared with the prior year, primarily due to $9 million of legal and advisory fees related to the Transaction (as defined below), $5 million of labor inflation impact, $6 million of employee repositioning costs, $3 million of higher incentive compensation expense and $5 million of unfavorable impacts from foreign exchange.

Interest expense

For the year ended December 31, 2024, interest expense decreased by $3 million compared to prior year. This reduction was primarily due to $24 million of higher gains recorded on our interest derivatives, lower interest from our $715 million secured first-lien U.S. Dollar term loan facility (the "2021 Dollar Term Facility") and 2023 Dollar Term

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Facility, partially offset by $15 million of accelerated debt issuance cost amortization, $4 million of higher marked-to-market remeasurement losses recorded on our undesignated interest rate swap contracts and $2 million of interest expense from our 2032 Senior Notes.

For the year ended December 31, 2023, interest expense increased by $151 million compared to prior year. This increase was mainly due to $33 million of marked-to-market remeasurement losses recorded in 2023 on our undesignated interest rate swap contracts versus $68 million of marked-to-market remeasurement gains in the prior year. We also saw $74 million of higher interest expense due to the new $700 million 2023 Dollar Facility and higher interest rates, and $12 million of debt issuance cost amortization primarily due to a $200 million early debt repayment. These increases in interest expense were partially offset by $10 million of interest accretion in the prior year on our Series B Preferred Stock that was fully redeemed in June 2022, and $28 million of gains on our interest derivatives in 2023.

Non-operating income, net

For the year ended December 31, 2024, non-operating income, net amounted to $13 million compared to $2 million in the prior year. The increase in non-operating income was primarily driven by a $13 million loss on remeasurement of the Series A Preferred Stock Agreements (as defined below) during the prior year and a $6 million increase in the non-service cost components of net periodic pension benefits, partially offset by $6 million of lower equity income due to the sale of an equity interest in an unconsolidated joint venture.

For the year ended December 31, 2023, non-operating income, net amounted to $2 million compared to $47 million in the prior year. The decrease in non-operating income was primarily driven by a $30 million decrease in the non-service components of net periodic pension benefits, a $13 million loss on the remeasurement of the Series A Preferred Stock Agreements during the three months ended June 30, 2023, and a $4 million increase in foreign exchange transactional losses.

Reorganization items, net

For the years ended December 31, 2024 and 2023, there were no expenses incurred for Reorganization items, net.

For the year ended December 31, 2022, reorganization items, net was an expense of $3 million related to professional service fees incurred for the remaining securities litigation from Chapter 11.

Tax Expense

The effective tax rate decreased by 7.0 percentage points in 2024 compared to 2023. The decrease was primarily due to releases of reserves due to statute of limitation expirations and settlements with taxing authorities and release of valuation allowance related to deferred tax assets in Brazil (net of US branch taxes). In addition, there was prior year expense due to rate change impact on deferred tax assets attributable to the certification by the Chinese government of the High and New Technology Enterprise status of the Company’s China operations, which reduced the tax rate to 15% for the respective entity. These increases were partially offset by prior year tax benefits in Switzerland due to law changes (net of valuation allowance) and in Korea for prior year tax settlements.

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The effective tax rate increased by 3.4 percentage points in 2023 compared to 2022. The increase was primarily due to the rate change impact on deferred tax assets attributable to the certification by the Chinese government of the High and New Technology Enterprise status of the Company’s China operations, which reduced the tax rate to 15% for the respective entity. Further, withholding tax and other taxes on foreign earnings have comparatively increased due to one-time non-recurring benefit recorded in 2022 related to accrued taxes on distributable reserves. These increases were partially offset by 2023 tax benefits in Switzerland due to law changes (net of valuation allowance) and in Korea for prior year tax settlements.

In January 2019, the Organization for Economic Co-operation and Development (“OECD”) announced further work in continuation of its Base Erosion and Profit Shifting project, focusing on two “pillars.” Pillar One provides a framework for the reallocation of certain residual profits of multinational enterprises to market jurisdictions where goods or services are used or consumed. Pillar Two consists of two interrelated rules referred to as Global Anti-Base Erosion (“GloBE”) Rules, which operate to impose a minimum tax rate of 15% calculated on a jurisdictional basis. On December 20, 2021, the OECD published GloBE model rules and released multiple rounds of commentary on those rules over the subsequent months. More than 135 OECD member countries have agreed to the key parameters of the model rules, which allow those OECD member countries to begin implementing the GloBE rules in a manner consistent with the agreement reached. The rules were adopted by a number of countries, with an effective date for fiscal years beginning after December 31, 2023.

We do not expect that Pillar One will have an impact on our operations or effective tax rate. For 2024, Pillar Two does not have a material impact to our effective tax rate.

Net Income

For the year ended December 31, 2024, net income increased by $21 million compared with the prior year, primarily due to a $27 million gain on the sale of an equity interest in an unconsolidated joint venture, $7 million of lower SG&A expenses, $3 million of lower interest expense, $11 million of higher non-operating income, and lower income tax expense of $25 million as discussed above. These increases were partially offset by $51 million of decreased gross profit.

For the year ended December 31, 2023, net income decreased by $129 million compared with the prior year, primarily due to $151 million of higher interest expense, $31 million of higher SG&A expenses and $45 million of lower non-operating income, as discussed above. These decreases were partially offset by $73 million of increased gross profit.

Non-GAAP Measures

Management provides non-GAAP financial information, including EBITDA and Adjusted EBITDA, 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. We believe that EBITDA and Adjusted EBITDA are important indicators of operating performance and provide useful information for investors.

1.We define “EBITDA” as our net income calculated in accordance with U.S. GAAP, plus the sum of interest expense net of interest income, tax expense, depreciation and amortization. We define “Adjusted EBITDA” as EBITDA, plus the sum of stock compensation expense, repositioning costs, foreign exchange (gain) loss on debt net of related hedging (gain) loss, discounting costs on factoring, gain on sale of equity investment, acquisition and divestiture expenses, other non-operating income, capital structure transformation expenses, debt refinancing and redemption costs, net reorganization items and loss on extinguishment of debt (if any); and

2.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.

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For 2024, we revised our definition of Adjusted EBITDA to exclude acquisition and divestiture expenses, and debt refinancing and redemption costs. We did not revise prior years' Adjusted EBITDA because there were no such charges similar in nature.

In addition, our management uses Adjusted EBITDA in setting performance incentive targets to align performance measurement with operational performance.

EBITDA and Adjusted EBITDA (non-GAAP)

(1)Reflects interest income of $3 million, $7 million and $2 million for the year ended December 31, 2024, 2023 and 2022, respectively.

(2)The adjustment for other non-operating income reflects the non-service component of net periodic pension costs and other income that are not considered directly related to the Company's operations.

(3)On September 20, 2020 (the "Petition Date"), the Company and certain of its subsidiaries each filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code (the "Chapter 11 Cases") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). A Revised Amended Plan of Reorganization was confirmed by the Bankruptcy Court on April 26, 2021, and the Company emerged from bankruptcy on April 30, 2021. 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 Statements of Operations. See Note 2, Plan of Reorganization of the Notes to the Consolidated Financial Statements.

(4)Stock compensation expense includes only non-cash expenses.

(5)Includes the loss on remeasurement of the Series A Preferred Stock Agreements as well as third-party legal and advisory fees that are directly attributable to the Transaction.

(6)Reflects third-party costs incurred for the sale of an equity interest in an unconsolidated joint venture.

(7)Reflects the third-party costs directly attributable to the repricing of our 2021 Dollar Term Facility.

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Adjusted EBITDA for the year ended December 31, 2024 compared with year ended December 31, 2023

For the year ended December 31, 2024, net income increased by $21 million versus the prior year as discussed above within the Results of Operations section.

Adjusted EBITDA decreased by $37 million compared to the prior year, mainly from soft demand across all product lines except aftermarket, net of favorable product mix. Additionally, price net of inflation pass-through, higher R&D investment, and unfavorable foreign exchange impacts further reduced Adjusted EBITDA versus prior year. These declines were partially offset by operational productivity, net of labor inflation and repositioning costs, and commodity, transportation, and energy deflation year-over-year.

During 2024, we saw a decline in demand for our gasoline, diesel, and commercial vehicle applications, partially offset by favorable demand in aftermarket for replacement parts in North America, China and Europe. Net sales also decreased due to price, net of inflation pass-through, driven by commodity price decreases.

We drove strong operational productivity in 2024, flexing our variable cost structure and driving fixed cost productivity of $82 million. This, coupled with commodity, transportation, and energy deflation of $81 million versus prior year, partially offset the impact of volume declines and allowed us to expand our Adjusted EBITDA margin while funding a $12 million increase in R&D expenses, net of customer reimbursements.

Losses in foreign currency from translational, transactional, and hedging effects accounted for $23 million of the decrease in Adjusted EBITDA.

Adjusted EBITDA for the year ended December 31, 2023 compared with year ended December 31, 2022

For the year ended December 31, 2023, net income decreased by $129 million versus the prior year as discussed above within the Results of Operations section.

Adjusted EBITDA increased by $65 million compared to the prior year, mainly on higher volumes primarily in small-engine gasoline applications which drove unfavorable mix impact. Additionally, operational productivity and inflation pass-through net of pricing contributed $69 million improvement year-over-year offsetting $14 million higher R&D investment including new zero emission technologies. The impact of foreign currency impact was zero for the year.

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During 2023, we saw strong customer demand increases in diesel and gasoline product lines, in a less disruptive supply chain environment, as the industry recovered from semiconductor shortages experienced in the prior year. Favorable impacts were also experienced from new product launches in gasoline, favorable aftermarket conditions such as continued high demand for replacement parts and new product launches coupled with price increases.

We maintained our focus on productivity in 2023 as rising commodity prices led to higher raw material costs, particularly for steel alloys and nickel. We recovered most of these increases through customer pass-through agreements, especially on nickel, and continue to negotiate with our customers for further pass-through 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.

R&D expenses increased $14 million which reflects our continued investment in new technologies, increased hiring to accelerate growth in the new technologies and year-over-year labor inflation, net of customer reimbursements.

There was no impact from foreign currency with translational and transactional impacts being offset by hedge remeasurement.

Liquidity and Capital Resources

Overview

On May 21, 2024, our wholly owned subsidiaries, Garrett Motion Holdings Inc. and Garrett LX I S.a.r.l., completed an offering of $800 million in aggregate principal amount of the 2032 Senior Notes. The 2032 Senior Notes mature on May 31, 2032 and bear interest at a rate of 7.75% per annum. We incurred $12 million of debt issuance costs, which have been capitalized and will be amortized on a straight-line basis.

On May 21, 2024, we also entered into the Fourth and Fifth Amendments to the Credit Agreement, dated as of April 30, 2021, by and among the Company, Garrett Motion Holdings Inc., Garrett Motion Sàrl and Garrett LX I S.à.r.l., the lenders and issuing banks party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (as amended from time to time, the "Credit Agreement") which (i) removed the credit spread adjustment with respect to certain US dollar denominated term loan borrowings that are Term Benchmark Loans (as defined in the Credit Agreement), (ii) reduced the Applicable Rate (as defined in the Credit Agreement) on certain US dollar denominated term loans to 2.75% for Term Benchmark Loans and 1.75% for ABR Loans (as defined in the Credit Agreement), and (iii) increased the maximum borrowings available under the Revolving Facility by $30 million. During the year ended December 31, 2024, we repaid $500 million on our 2023 Dollar Term Facility, $485 million (€450 million) on our Euro Term Facility and $7 million on our 2021 Dollar Term Facility.

For 2025, we expect capital spending to increase slightly as compared to 2024. We expect to make net repayments of $7 million on our term loan borrowings following the refinancing of our term loan as discussed in Note 29, Subsequent Events of the Notes to the Consolidated Financial Statements. We expect to pay approximately $42 million related to purchase obligations which were entered into with various vendors in the normal course of business and are consistent with our expected requirements. We expect to make contributions of approximately $5 million to our non-U.S. pension plans. Finally, we also expect to declare and pay quarterly dividends on our Common Stock in an aggregate amount of approximately $50 million in 2025, of which $12 million was paid on January 31, 2025.

We fund our operations primarily through cash flows from operating activities, borrowings from our credit facilities and cash and cash equivalents. We believe the combination of expected cash flows, the term loan borrowings and the

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revolving credit facilities being committed until 2030, will provide us with adequate liquidity to support the Company's operations.

Share Repurchase Program

On February 13, 2024, the Board of Directors authorized a $350 million share repurchase program valid until December 31, 2024. For more information, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Issuer Purchases of Equity Securities.

During the year ended December 31, 2024, the Company repurchased $296 million of its Common Stock. The share repurchase program expired on December 31, 2024.

On December 4, 2024, the Board of Directors authorized a new $250 million share repurchase program valid January 1, 2025 until December 31, 2025.

Off-Balance Sheet Arrangement

The Company did 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 as of December 31, 2024 and 2023.

Cash Flow Summary for the Years Ended December 31, 2024, 2023 and 2022

Our cash flows from operating, investing and financing activities for the years ended December 31, 2024, 2023 and 2022, as reflected in the Consolidated Financial Statements included in this Annual Report, are summarized as follows:

Cash Flow Summary for the year ended December 31, 2024

Cash provided by operating activities decreased by $57 million for the year ended December 31, 2024 versus the prior year. The decrease was driven by a $32 million change in working capital related primarily to inventory purchases and higher payments made during the current year, partially offset by increased collections. A decrease of $14 million in net income, excluding the effects of non-cash items, and an unfavorable change in other assets and liabilities of $11 million, also contributed to the decrease in cash provided by operating activities.

Cash used for investing activities decreased by $41 million for the year ended December 31, 2024 versus the prior year. The decrease is due to $46 million of proceeds from the sale of an equity investment, $3 million of higher proceeds from our cross-currency swap contracts which have been designated as net investment hedges of our Euro-denominated operations versus the prior year, and $8 million of lower expenditures for property, plant and equipment versus the prior year.

Cash used for financing activities increased by $117 million for the year ended December 31, 2024 compared with the prior year. During 2024, we made an aggregate of $992 million in debt repayments on our term loan facilities. We also made payments of $296 million for the repurchase of Common Stock under our share repurchase program, $8 million for debt issuance costs, $8 million for excise taxes related to Common Stock repurchases and $9 million for other financing activities during the current year. These payments were partially offset by proceeds of $794 million, net of deferred financing costs, from the issuance of our 2032 Senior Notes. In comparison, cash used for financing activities in the prior year was primarily related an aggregate amount of $605 million paid to holders of our Series A Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock"), related to the Transaction, including conversion of the Series A

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Preferred Stock as discussed in Note 21, Equity of the Notes to the Consolidated Financial Statements. We also made payments of $213 million for the repurchase of Common Stock under our share repurchase program and debt repayments of $207 million.

Cash Flow Summary for the year ended December 31, 2023

Cash provided by operating activities increased by $90 million for the year ended December 31, 2023 versus the prior year. The increase was driven by $63 million of working capital contribution related primarily to build-ups of inventory in the prior year. An increase of $32 million in net income, excluding the effects of non-cash items, also contributed to the increase in cash provided by operating activities, partially offset by a decrease in other assets and liabilities of $5 million.

Cash used for investing activities decreased by $36 million for the year ended December 31, 2023 versus the prior year. The decrease is due to $28 million of proceeds from our cross-currency swap contracts which have been designated as net investment hedges of our Euro-denominated operations and $8 million of lower expenditures for property, plant and equipment.

Cash used for financing activities decreased by $79 million for the year ended December 31, 2023 compared with the prior year. Cash flows used for financing activities included $667 million from the 2023 Dollar Term Facility net of debt financing costs. We paid an aggregate amount of $605 million to holders of the Series A Preferred Stock related to the Transaction, including conversion of the Series A Preferred Stock as discussed above and in Note 21, Equity of the Notes to the Consolidated Financial Statements. We also made payments of $213 million for the repurchase of Common Stock under our share repurchase program and debt repayments of $207 million. In comparison, cash used for financing activities in the prior year was primarily related to the Company's payment of $381 million for the final early redemption of our Series B Preferred Stock (exclusive of $28 million attributable to interest and included in cash from operating activities) and $83 million for dividends on Series A Preferred Stock, while in 2023, there were $42 million in payments of accrued dividends on the Series A Preferred Stock through June 2023.

Capital Expenditures

We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand. We expect capital expenditures in 2025 to increase slightly as compared to 2024, primarily driven by higher investments for new product launches across our zero emission and turbo technologies.

Critical Accounting Policies and Estimates

The preparation of our Consolidated 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. We consider the accounting policies and estimates discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our Consolidated Financial Statements.

Revenue Recognition — Product sales are recognized when we transfer control of the promised goods to our customer, which is based on shipping terms. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the promised goods, adjusted for any variable consideration such as price concessions or annual price adjustments as estimated at contract inception. We estimate variable consideration at the most likely amount we will receive from customers and reduce revenues recognized accordingly. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We adjust our estimate of revenue at the earlier of when the value of consideration we expect to receive changes or when the consideration becomes fixed.

Contingent Liabilities — We are subject to lawsuits, investigations and claims that arise out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, legal and environmental, health and safety matters. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any,

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for these contingencies based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of management’s judgment applied in the recognition and measurement of our most significant contingencies.

Warranties and Guarantees — Expected warranty costs for products sold are recognized based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, length of the warranty and various other considerations. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of our warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements included herein for additional information.

Pension Benefits — We sponsor defined benefit pension plans covering certain employees, primarily in Switzerland, the U.S. and Ireland. The pension cost and liabilities for these plans are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, and compensation increases. The Company is required to consider current market conditions, including changes in interest rates, and employee demographics such as retirement patterns, in making its assumptions. Changes in the related pension benefit costs or liabilities may occur in the future due to changes in the assumptions.

The discount rate reflects the market rate on December 31 (the measurement date) for high-quality fixed-income investments with maturities corresponding to our pension obligations and is subject to change each year. The discount rate can be volatile from year to year as it is determined based upon prevailing interest rates as of the measurement date. The assumptions as to the expected long-term rates of return on plan assets are based upon historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and asset mix considerations.

We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (the “MTM Adjustment”). Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension plans or when assumptions change. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the measurement date each year and the difference between expected and actual returns on plan assets. The mark-to-market accounting method results in the potential for volatile and difficult to forecast MTM Adjustments as the adjustments are primarily driven by events and circumstances beyond the control of the Company such as changes in interest rates and the performance of the financial markets.

Income Taxes — We account for income taxes pursuant to the asset and liability method which requires us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.

We file tax returns in multiple jurisdictions and are subject to examination by taxing authorities throughout the world. Tax authorities have the ability to review and challenge matters that could be subject to differing interpretation of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the sustainability of tax attributes. The ultimate resolution of such uncertainties could last several years. When an uncertain tax position is identified, we consider and interpret complex tax laws and regulations in order to determine the need for recognizing a provision in our financial statements. Significant judgment is required in determining the timing and measurement of uncertain tax positions. We utilize internal and external expertise in interpreting tax laws to support our tax

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positions. We recognize the financial statement benefit of an uncertain tax position when it is more likely than not that, based on the underlying technical merits, the position will be sustained upon examination.

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, they could have a material impact on our income tax provision and net income in the period or periods for which such determination is made. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter in which such change occurs.

Other Matters

Litigation and Environmental Matters

See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of litigation matters.

Recent Accounting Pronouncements

See Note 3, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Item 7. 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 Financial Statements and related notes thereto and other financial information appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, 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 this Annual Report, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.

Executive Summary

Garrett is a cutting-edge technology leader delivering differentiated solutions for emission reduction and energy efficiency. We design, manufacture, and sell highly engineered turbocharging, air and fluid compression, and high-speed electric motor technologies for OEMs and distributors within the mobility and industrial space. We have significant expertise in delivering products at scale for ICE using gasoline, diesel, natural gas and hydrogen, as well as for zero emission vehicles using hydrogen fuel cell systems, both for mobility and industrial use. As our customers continue to progress on electrification, we apply our technological pillars to develop highly engineered E-Powertrain and E-Cooling compressor products to support their ambition. These products are key enablers for fuel economy, energy efficiency, thermal management, and compliance with emissions standards and overall greenhouse gas and other emission reduction targets.

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In 2023, the turbocharger industry increased from approximately 46 million units in 2022 to approximately 50 million units in line with increased volumes in the light vehicle industry. This enabled us to achieve $3,886 million of Net sales for the year.

2023 was also a year of economic volatility which saw elevated interest rates and continued commodity inflation pressures globally. We continued to leverage our variable cost structure to successfully navigate this macroeconomic environment, while increasing our R&D investments by $22 million versus the prior year from 4.2% to 4.6% of Net sales. Our agility furthermore allowed us to achieve Net income of $261 million and Adjusted EBITDA of $635 million for the year.

We continue to build momentum with our turbocharging and zero emission technologies. During 2023, we won nine pre-development contracts for our breakthrough E-Powertrain and E-Cooling applications and six series production awards for our highly differentiated fuel cell compressors.

Capital Structure Transformation

As previously announced, on April 12, 2023, we entered into separate definitive agreements (the "Agreements") with each of Centerbridge Partners, L.P. and funds managed by Oaktree Capital Management, L.P. (collectively, the "C&O Investors") to effect a series of integrated transactions (the "Transaction") designed to increase the attractiveness of the Company to investors, including simplifying our capital structure through a conversion of the Series A Preferred Stock into shares of Common Stock.

Under the Transaction, the Company repurchased 69,707,719 shares of Series A Preferred Stock and converted 175,337,712 shares of Series A Preferred Stock into an equivalent number of Common Stock. Total consideration paid to the holders of Series A Preferred Stock under the Transaction amounted to cash payments of $605 million and the issuance of an additional 25,577,517 shares of Common Stock in settlement of accumulated and unpaid preference dividends on the Series A Preferred Stock through June 30, 2023. The Transaction was financed through a new $700 million Term Loan B (the "2023 Dollar Facility") under the framework of the Company's existing credit agreement.

As part of the Agreement, the C&O Investors agreed with the Company to certain changes to each of their respective governance rights under the Company’s governance documents, including a reduction of their existing board nomination rights, as well as lock-up restrictions on their equity securities of the Company for up to twelve months, and certain limits on their ability to purchase additional equity securities of the Company and to voting limitations, in each case for a period of up to eighteen months.

Other 2023 Events

During 2023, we repaid $200 million on our 2023 Dollar Term Facility and repurchased $213 million of Common Stock in line with our capital allocation priorities. Our share repurchase program expired on December 31, 2023.

Trends, Uncertainties and Opportunities

The macroeconomic environment around us continues to evolve rapidly. Significant uncertainty remains on global economic growth, with continued supply chain disruptions and geopolitical tensions, as well as China facing deflationary pressures and job market deterioration.

In 2023, an increase in BEV production has been observed globally and especially in Europe and China. We expect this trend to continue into 2024. We believe that turbocharger demand will continue to remain strong in the short and medium term, in part due to an expected increase in the penetration of hybrid vehicles in the light vehicle industry, which often requires the use of either a mechanical turbo or an electrical boosting solution. In addition, in the commercial vehicle and industrial industries, diesel resilience to electrification in key use cases, combined with low or zero emission alternative fuels for ICE, like natural gas or hydrogen, is expected to gain momentum in coming years and likewise often require the use of a mechanical turbo or electrical boosting solution.

Disaggregated Revenue

The following tables show our revenues by geographic region and product line for the years ended December 31, 2023, 2022 and 2021.

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By Region

By Product Line

Results of Operations for the Years Ended December 31, 2023, 2022 and 2021

Net Sales

The change in net sales compared to the prior year is attributable to the following:

For the year ended December 31, 2023, net sales increased compared to prior year by $283 million or 8%, including an unfavorable impact of $14 million or 0% due to foreign currency translation driven by lower Chinese yuan-to-US dollar, partially offset by higher Euro-to-US dollar exchange rates. This increase was driven by higher volumes with growth of both global light vehicles and the turbocharger industry, and faster than expected recovery from China Covid-19 pressures and semiconductor shortages experienced in the prior year. Strong demand for new product launches and ramp-ups along with inflation recoveries net of pricing across all product lines also contributed to the net sales growth.

Gasoline product sales increased by $235 million or 16% (including an unfavorable impact of $20 million or 1% due to foreign currency translation) driven by industry recovery from prior year’s global semiconductor shortages and Covid-related lockdown measures in China, combined with new product launches and ramp-ups across all regions.

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Diesel product sales increased by $43 million or 5% (including a favorable impact of $10 million or 2% due to foreign currency translation), driven by strong performance in Europe where diesel remains essential to meet fleet CO2 targets in addition to strong light commercial vehicle performance on existing platforms.

Commercial vehicle sales decreased by $17 million or 3% (including an unfavorable impact of $7 million or 2% due to foreign currency translation), primarily driven by global demand softness influenced by macroeconomic headwinds such as higher interest rates and commodity inflation, partially offset by favorable regional mix.

Aftermarket sales improved by $14 million or 3% (including a favorable impact of $2 million or 0% due to foreign currency translation), primarily on strong demand in Europe and especially in Asia Pacific related to favorable aftermarket conditions including the continued high demand for replacement parts. Recovery in China from the end of the Chinese government's zero Covid-19 policy as well as new product introductions and favorable pricing impact also contributed to the growth.

For the year ended December 31, 2022, sales decreased compared to prior year by $30 million or 1%. This decrease was primarily due to an unfavorable impact of $304 million or 8% due to foreign currency translation driven by a lower Euro-to-US dollar exchange rate. This decrease was partially offset by $149 million of improved mix and $125 million of inflation recoveries net of pricing across all product lines.

Gasoline product sales increased by $64 million or 5% (including an unfavorable impact of $119 million or 8% due to foreign currency translation), primarily driven by new product launches in North America which delivered incremental sales year over year. This increase was partially offset by lower Euro-to-dollar exchange rates and lower sales in China due to the increased Covid-related lockdown measures implemented by the Chinese government throughout 2022.

Diesel product sales decreased by $91 million or 9% (including an unfavorable impact of $103 million or 10% due to foreign currency translation). While we saw lower volumes in 2022 due to the global semiconductor shortage and supply chain challenges at customers, this was offset by inflation pass-through and a favorable mix.

Commercial vehicle sales decreased by $32 million or 5% (including an unfavorable impact of $51 million or 8% due to foreign currency translation), primarily driven by lower volumes in China during the year after a strong pre-buy effect in the first half of 2021, more than offset by a favorable mix in the rest of the world.

Aftermarket sales improved by $36 million or 9% (including an unfavorable impact of $25 million or 6% 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, increased revenues from our Performance & Motorsport Turbo business, new distributor openings, as well as growth through new product introductions and favorable pricing impacts.

Cost of Goods Sold and Gross Profit

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For the year ended December 31, 2023, cost of goods sold increased by $210 million, primarily driven by our higher sales volumes and an unfavorable product mix, which contributed to increases of $217 million and $27 million, respectively. Cost of goods sold further increased due to $30 million of inflation on commodities, transportation and energy, as well as a $14 million increase in R&D costs which reflects our continued investment in new technologies and related headcount year-over-year. The increase was partially offset by our continued focus on productivity, net of labor inflation, one-time expenses and higher repositioning costs, which contributed a decrease in cost of goods sold of $55 million, and by foreign currency impacts from transactional, translational and hedging effects, which contributed a decrease in cost of goods sold of $23 million.

Gross profit increased by $73 million, mainly driven by higher sales volumes of $89 million and $60 million of productivity net of labor inflation, one-time expenses and higher repositioning costs. We also saw $38 million more of inflation recoveries from customer pass-through agreements net of pricing, and positive foreign currency impacts from transactional, translational and hedging of $9 million. These increases were partially offset by $30 million of inflation on commodities, transportation and energy costs, $79 million of unfavorable impacts from product mix primarily from growth in small-engine gasoline applications, as well as $14 million of higher R&D costs.

For the year ended December 31, 2022, cost of goods sold decreased by $6 million compared to prior year, primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of $19 million and $224 million, respectively. Our continued focus on productivity also contributed to a decrease in cost of goods sold of $58 million, net of $10 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility. These decreases were partially offset by $154 million of inflation on commodities, transportation and energy costs, as well as $124 million due to an unfavorable product mix. R&D expenses also increased by $17 million which reflects our shift in investment in zero emission technologies.

Gross profit decreased by $24 million, mainly driven by the lower sales volumes, inflation on commodities, transportation and energy costs, as well as higher premium freight costs as discussed above. Higher R&D costs and $79 million of unfavorable foreign currency translational, transactional and hedging effects also reduced our gross profit. These decreases were partially offset by $84 million of higher productivity which includes the benefits from value engineering

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that are partially passed through to customers, $125 million of inflation recoveries from customer pass-through agreements net of pricing reductions, and $25 million of favorable product mix.

Selling, General and Administrative Expenses

For the year ended December 31, 2023, selling, general and administrative (“SG&A”) expenses increased by $31 million compared with the prior year, primarily due to $9 million of legal and advisory fees related to the Transaction, $5 million of labor inflation impact, $6 million of employee repositioning costs, $3 million of higher incentive compensation expense and $5 million unfavorable impact from foreign exchange.

For the year ended December 31, 2022, SG&A expenses remained flat compared to prior year. We saw a $17 million benefit during the year from favorable foreign exchange rates and $2 million of lower employee-related costs which mainly reflected lower incentive compensation expense partially offset by labor inflation. These decreases were offset by $5 million of higher IT expenses in 2022, $4 million of increased travel expenses as Covid-19 restrictions eased, and $10 million of higher bad debt expenses due primarily to a non-recurring bad debt recovery recognized in 2021.

Interest expense

For the year ended December 31, 2023, interest expense increased by $151 million compared to prior year. This increase was mainly due to $33 million of marked-to-market remeasurement losses recorded in the current year on our undesignated interest rate swap contracts versus $68 million of marked-to-market remeasurement gains in the prior year. We also saw $74 million of higher interest expense due to the new $700 million 2023 Dollar Facility and higher interest rates, and $12 million of debt issuance cost amortization primarily due to a $200 million early debt repayment. These increases in interest expense were partially offset by $10 million of interest accretion in the prior year on our Series B Preferred Stock that was fully redeemed in June 2022, and $28 million of gains on our interest derivatives in the current year.

For the year ended December 31, 2022, interest expense decreased by $75 million compared to prior year, primarily due to $61 million of marked-to-market remeasurement gains on our undesignated interest rate swap contracts, $19 million less of interest accretion on the Series B Preferred Stock that was issued at Emergence and fully redeemed in June 2022, and $9 million of interest expense incurred on our pre-Emergence credit facilities. These decreases were partially offset by $14 million of additional interest expense in 2022 on our current credit facilities entered into at Emergence.

Non-operating income

For the year ended December 31, 2023, non-operating income amounted to $2 million compared to $47 million in the prior year. The decrease in non-operating income was primarily driven by a $30 million decrease in the non-service components of net periodic pension benefits, a $13 million loss on the remeasurement of the Series A Preferred Stock Agreement during the three months ended June 30, 2023, and a $4 million increase in foreign exchange transactional losses.

For the year ended December 31, 2022, non-operating income increased by $41 million compared to prior year. This increase was driven primarily by a $24 million increase in the non-service components of net periodic pension benefits and a $12 million decrease in foreign exchange transactional losses.

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Reorganization items, net

For the year ended December 31, 2023, there were no expenses incurred for Reorganization items, net.

For the year ended December 31, 2022, reorganization items, net was an expense of $3 million related to professional service fees incurred for the remaining securities litigation from Chapter 11. During the prior year, reorganization items, net amounted to a $125 million gain, representing a $502 million gain on the settlement of Honeywell claims, partially offset by $119 million higher professional service fees related to the Chapter 11 Cases compared to the prior-year period, $79 million related to the termination and an expense reimbursement under a share and asset purchase agreement entered into on the Petition Date by the Debtors, AMP Intermediate B.V. and AMP U.S. Holdings, LLC, $39 million in Directors and Officers insurance related to Chapter 11 Cases, a $19 million write off on debt issuance costs of the debt associated with our pre-petition credit agreement, $13 million in employee stock awards cancellation and $35 million in other costs mainly related to the settlement of unsecured notes.

Tax Expense

The effective tax rate increased by 3.4 percentage points in 2023 compared to 2022. The increase was primarily due to the rate change impact on deferred tax assets attributable to the certification by the Chinese government of the High and New Technology Enterprise status of the Company’s China operations, which reduced the tax rate to 15% for the respective entity. Further, withholding tax and other taxes on foreign earnings have comparatively increased due to a one-time non-recurring benefit recorded in 2022 related to accrued taxes on distributable reserves. These increases were partially offset by tax benefits in 2023 in Switzerland due to law changes and in Korea for prior year tax settlements.

The effective tax rate increased by 13.5 percentage points in 2022 compared to 2021. The increase was primarily attributable to the nontaxable gain on the settlement of the Honeywell claims (partially offset by non-deductible transaction costs) and increased tax benefits from an internal restructuring, both of which occurred in 2021 and are non-recurring. This increase was partially offset by tax benefits in the current year due to release of reserves for statute of limitation expirations.

In January 2019, the Organization for Economic Co-operation and Development (“OECD”) announced further work in continuation of its Base Erosion and Profit Shifting project, focusing on two “pillars.” Pillar One provides a framework for the reallocation of certain residual profits of multinational enterprises to market jurisdictions where goods or services are used or consumed. Pillar Two consists of two interrelated rules referred to as Global Anti-Base Erosion (“GloBE”) Rules, which operate to impose a minimum tax rate of 15% calculated on a jurisdictional basis. On December 20, 2021, the OECD published GloBE model rules and released multiple rounds of commentary on those rules over the subsequent months. More than 135 OECD member countries have agreed to the key parameters of the model rules, which allow those OECD member countries to begin implementing the GloBE rules in a manner consistent with the agreement reached. The rules were adopted by a number of countries in 2023, with an effective date for fiscal years beginning after December 31, 2023. There is no impact on our 2023 tax provision as any tax cost associated with the implementation of the model rules is treated as a period cost and therefore not recorded until 2024.

We do not expect that Pillar One will have an impact on our operations or effective tax rate. Based on currently enacted legislation, we do not expect Pillar Two to have a significant impact to our 2024 effective tax rate. However, further enactment of legislation by countries in which we do business could have an impact on our 2024 effective tax rate.

Net Income

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For the year ended December 31, 2023, net income decreased by $129 million compared with the prior year, primarily due to $151 million of higher interest expense, $31 million of higher SG&A expenses and $45 million of lower non-operating income, as discussed above. These decreases were partially offset by $73 million of increased gross profit.

For the year ended December 31, 2022, net income decreased by $105 million compared to prior year primarily as a result of lower gross profit of $24 million, a net benefit in 2021 of $125 million in Reorganization items, and higher tax expenses of $63 million. These decreases were partially offset by $75 million of lower interest expense and an increase in non-operating income of $41 million, as described above.

Non-GAAP Measures

Management provides non-GAAP financial information, including EBITDA and Adjusted EBITDA, 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. We believe that EBITDA and Adjusted EBITDA are important indicators of operating performance and provide useful information for investors because:

1.We define “EBITDA” as our net income calculated in accordance with U.S. GAAP, plus the sum of interest expense net of interest income, tax expense and depreciation. We define “Adjusted EBITDA” as EBITDA, plus the sum of net reorganization items, stock compensation expense, repositioning costs, foreign exchange (gain) loss on debt net of related hedging (gain) loss, loss on extinguishment on debt, discounting costs on factoring, other non-operating income and capital structure transformation expenses; and

2.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.

For 2023, we revised our definition of Adjusted EBITDA to exclude capital structure transformation expenses, which consist of expenses incurred as part of the Transaction. We did not revise prior years' Adjusted EBITDA because there were no other charges similar in nature.

In addition, our management may use Adjusted EBITDA in setting performance incentive targets to align performance measurement with operational performance.

EBITDA and Adjusted EBITDA (non-GAAP)

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(1)The adjustment for non-operating (income) expense reflects the non-service component of net periodic pension costs and other income that are non-recurring or not considered directly related to the Company's operations.

(2)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 Statements of Operations. See Note 2, Plan of Reorganization of the Notes to the Consolidated Financial Statements.

(3)Stock compensation expense includes only non-cash expenses.

(4)Includes the loss on remeasurement of the Series A Preferred Stock Agreements as well as third-party legal and advisory fees that are directly attributable to the Transaction.

Adjusted EBITDA for the year ended December 31, 2023 compared with year ended December 31, 2022

For the year ended December 31, 2023, net income decreased by $129 million versus the prior year as discussed above within the Results of Operations section.

Adjusted EBITDA increased by $65 million compared to the prior year, mainly on higher volumes primarily in small-engine gasoline applications which drove unfavorable mix impact. Additionally, operational productivity and inflation pass-through net of pricing contributed $69 million improvement year-over-year offsetting $14 million higher R&D investment including new zero emission technologies. The impact of foreign currency impact was zero for the year.

During 2023, we saw strong customer demand increases in diesel and gasoline product lines, in a less disruptive supply chain environment, as the industry recovered from semiconductor shortages experienced in the prior year. Favorable impacts were also experienced from new product launches in gasoline, favorable aftermarket conditions such as continued high demand for replacement parts and new product launches coupled with price increases.

We maintained our focus on productivity in 2023 as rising commodity prices led to higher raw material costs, particularly for steel alloys and nickel. We recovered most of these increases through customer pass-through agreements, especially on nickel, and continue to negotiate with our customers for further pass-through 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.

R&D expenses increased $14 million which reflects our continued investment in new technologies, increased hiring to accelerate growth in the new technologies and year-over-year labor inflation.

There was no impact from foreign currency with translational and transactional impacts being offset by hedge remeasurement.

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Adjusted EBITDA for the year ended December 31, 2022 compared with year ended December 31, 2021

For the year ended December 31, 2022, net income decreased $105 million versus the prior year as discussed above within the Results of Operations section. Our volumes for 2022 totaled 13.6 million units, representing a decrease of approximately 1% from the prior year.

Adjusted EBITDA decreased by $37 million compared to the prior year mainly due to unfavorable foreign exchange impacts. While we saw increased inflation on commodities, transportation and energy, and we also increased our R&D spending on zero emission technologies, this was more than offset by an improved product mix net of lower volumes, productivity, and inflation pass-through net of pricing. Our Adjusted EBITDA margin decreased by 90 basis points, of which 80 basis points was driven by the unfavorable foreign exchange impacts and inflation pass-through to customers.

During 2022, we faced demand volatility driven mainly by the global semiconductor shortage, geopolitical tensions and ongoing impacts from Covid restrictions primarily in China, all of which resulted in supply chain disruptions. We maintained our focus on productivity in 2022 as rising commodity prices led to higher raw material costs, particularly for nickel, aluminum and steel alloys. We recovered the cost increases from our customer pass-through agreements, and continue to negotiate with our customers for further escalators while actively managing our supply base and cost recovery mechanisms to mitigate the impact of materials, transportation and energy cost inflation. The increased productivity was partially offset by year-over-year labor inflation, increased travel expenses, higher bad debt expenses and increased premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility.

R&D expenses increased $17 million which primarily reflects our increased investment in zero emission technologies.

Liquidity and Capital Resources

Overview

On April 27, 2023, the Company entered into an amendment to its existing credit agreement which provided for additional financing of $700 million in the form of the 2023 Dollar Term Facility and an increase of $95 million in maximum borrowings available under the Company's revolving credit facility (the "Revolving Facility") to an aggregate of $570 million. The proceeds from the 2023 Dollar Term Facility were primarily used to finance the repurchase of shares of Series A Preferred Stock from the C&O Investors as part of the Transaction, and pay fees and expenses incurred in connection with the credit agreement amendment. The 2023 Dollar Term Facility matures on April 30, 2028. Prior to

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maturity, the 2023 Dollar Term Facility will be repaid quarterly in an amount equal to, during the first two years occurring after the Closing Date, 7.50% per annum of the aggregate principal amount, and thereafter, 10.00% per annum. During the year ended December 31, 2023, we repaid $200 million on our 2023 Dollar Term Facility and $7 million on our 2021 Dollar Term Facility.

As previously disclosed, the Company entered into the Agreements with the C&O Investors to repurchase certain shares and convert all remaining Series A Preferred Stock. As part of the Transaction, all holders of Series A Preferred Stock, including the C&O Investors, received an amount equal to the Accumulated Dividends and Additional Amounts outstanding at repurchase or conversion date (each as defined in Note 21, Equity of the Notes to the Consolidated Financial Statements. As of December 31, 2023, all Series A Preferred Stock had either been repurchased or converted and there are no accumulated unpaid dividends on the Series A Preferred Stock. Refer to Note 21, Equity of the Notes to the Consolidated Financial Statements for further details regarding the Transaction.

For 2024, we expect capital spending to increase slightly as compared to 2023. We expect to repay $7 million on our 2021 Dollar Term Facility. We also expect to pay approximately $36 million related to purchase obligations which were entered into with various vendors in the normal course of business and are consistent with our expected requirements. Finally, we expect to make contributions of approximately $7 million to our non-U.S. pension plans.

We fund our operations primarily through cash flows from operating activities, borrowings from our credit facilities and cash and cash equivalents. We believe the combination of expected cash flows, the term loan borrowings and the revolving credit facilities being committed until 2028, will provide us with adequate liquidity to support the Company's operations.

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. On November 2, 2022, the Board of Directors authorized the extension of the share repurchase program by one year, to November 15, 2023. On April 12, 2023, the Board of Directors further authorized an increase in the size of the share repurchase program to an aggregate amount of $250 million available as of that date. On November 1, 2023, the Board of Directors authorized the extension of the share repurchase program through December 31, 2023. For more information, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Issuer Purchases of Equity Securities.

During the year ended December 31, 2023, the Company repurchased less than $1 million of Series A Preferred Stock and $213 million of its Common Stock. The share repurchase program expired on December 31, 2023.

On February 13, 2024, the Board of Directors authorized a new $350 million share repurchase program valid until December 31, 2024.

Off-Balance Sheet Arrangement

The Company did 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 as of December 31, 2023 and 2022.

Cash Flow Summary for the Years Ended December 31, 2023, 2022 and 2021

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Our cash flows from operating, investing and financing activities for the years ended December 31, 2023, 2022 and 2021, as reflected in the Consolidated Financial Statements included in this Annual Report, are summarized as follows:

Cash Flow Summary for the year ended December 31, 2023

Cash provided by operating activities increased by $90 million for the year ended December 31, 2023 versus the prior year. The increase was driven by $63 million of working capital contribution related primarily build-ups of inventory in the prior year. An increase of $32 million in net income, excluding the effects of non-cash items, also contributed to the increase in cash provided by operating activities, partially offset by a decrease in other assets and liabilities of $5 million.

Cash used for investing activities decreased by $36 million for the year ended December 31, 2023 versus the prior year. The decrease is due to $28 million of proceeds from our cross-currency swap contracts which have been designated as net investment hedges of our Euro-denominated operations and $8 million of lower expenditures for property, plant and equipment.

Cash used for financing activities decreased by $79 million for the year ended December 31, 2023 compared with the prior year. Cash flows used for financing activities during the current year included $667 million from the 2023 Dollar Term Facility net of debt financing costs. We paid an aggregate amount of $605 million to holders of the Series A Preferred Stock related to the Transaction, including conversion of the Series A Preferred Stock as discussed above and in Note 21, Equity of the Notes to the Consolidated Financial Statements. We also made payments of $213 million for the repurchase of Common Stock under our share repurchase program and debt repayments of $207 million. In comparison, cash used for financing activities in the prior year was primarily related to the Company's payment of $381 million for the final early redemption of our Series B Preferred Stock (exclusive of $28 million attributable to interest and included in cash from operating activities) and $83 million for dividends on Series A Preferred Stock, while in the current year, there were $42 million in payments of accrued dividends on the Series A Preferred Stock through June 2023.

Cash Flow Summary for the year ended December 31, 2022

Cash provided by operating activities increased by $685 million for 2022 versus the prior year, primarily due to a $375 million payment made to Honeywell in 2021 pursuant to the Plan, and a decrease in net income of $105 million, net of a $393 million increase in non-cash adjustments which included a $435 million gain recognized in prior year on reorganization items, a $66 million increase in the fair value of our undesignated derivative instruments and $28 million of the redemption attributable to interest of Series B Preferred Stock. We also saw favorable impacts from working capital of $46 million, partially offset by a $24 million decrease mainly driven by other assets and liabilities.

Cash used for investing activities increased by $20 million for 2022 versus the prior year, primarily due to an increase in expenditures for property, plant and equipment of $19 million.

Cash used for financing activities increased by $621 million for the year ended December 31, 2022 compared with the prior year. The change was primarily driven by $180 million of additional early redemptions in 2022 of our Series B Preferred Stock (excluding amounts attributable to interest and included in cash used for operating activities), and $83 million for dividends on Series A Preferred Stock. We also saw, in 2021 upon Emergence, net proceeds of $2,522 million from the issuance of our Series A Preferred Stock and new long-term debt, partially offset by net payments of $2,156 million related to our prior senior secured super-priority debtor-in-possession credit agreement, our pre-petition revolving credit facility, pre-petition long-term debt and payments made to holders of the Company's pre-emergence common stock who made a cash-out election under the Plan. These increases in cash used for financing activities were partially offset by $12 million less of repurchases of Series A Preferred Stock and Common Stock in 2022 versus 2021.

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Capital Expenditures

We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand. We expect capital expenditures in 2024 to increase slightly as compared to 2023, reflecting an increase in investments for zero emission technologies partially offset with lower investments on turbo technologies.

Critical Accounting Policies and Estimates

The preparation of our Consolidated 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. We consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our Consolidated Financial Statements.

Revenue Recognition — Product sales are recognized when we transfer control of the promised goods to our customer, which is based on shipping terms. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the promised goods, adjusted for any variable consideration such as price concessions or annual price adjustments as estimated at contract inception. We estimate variable consideration at the most likely amount we will receive from customers and reduce revenues recognized accordingly. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We adjust our estimate of revenue at the earlier of when the value of consideration we expect to receive changes or when the consideration becomes fixed.

Contingent Liabilities — We are subject to lawsuits, investigations and claims that arise out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, legal and environmental, health and safety matters. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of management’s judgment applied in the recognition and measurement of our most significant contingencies.

Warranties and Guarantees — Expected warranty costs for products sold are recognized based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, length of the warranty and various other considerations. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of our warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements included herein for additional information.

Pension Benefits — We sponsor defined benefit pension plans covering certain employees, primarily in Switzerland, the U.S. and Ireland. The pension cost and liabilities for these plans are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, and compensation increases. The Company is required to consider current market conditions, including changes in interest rates, and employee demographics such as retirement patterns, in making its assumptions. Changes in the related pension benefit costs or liabilities may occur in the future due to changes in the assumptions.

The discount rate reflects the market rate on December 31 (the measurement date) for high-quality fixed-income investments with maturities corresponding to our pension obligations and is subject to change each year. The discount rate can be volatile from year to year as it is determined based upon prevailing interest rates as of the measurement date. The

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assumptions as to the expected long-term rates of return on plan assets are based upon historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and asset mix considerations.

We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (the “MTM Adjustment”). Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension plans or when assumptions change. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the measurement date each year and the difference between expected and actual returns on plan assets. The mark-to-market accounting method results in the potential for volatile and difficult to forecast MTM Adjustments as the adjustments are primarily driven by events and circumstances beyond the control of the Company such as changes in interest rates and the performance of the financial markets.

Income Taxes — We account for income taxes pursuant to the asset and liability method which requires us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.

We file tax returns in multiple jurisdictions and are subject to examination by taxing authorities throughout the world. Tax authorities have the ability to review and challenge matters that could be subject to differing interpretation of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the sustainability of tax attributes. The ultimate resolution of such uncertainties could last several years. When an uncertain tax position is identified, we consider and interpret complex tax laws and regulations in order to determine the need for recognizing a provision in our financial statements. Significant judgment is required in determining the timing and measurement of uncertain tax positions. We utilize internal and external expertise in interpreting tax laws to support our tax positions. We recognize the financial statement benefit of an uncertain tax position when it is more likely than not that, based on the underlying technical merits, the position will be sustained upon examination.

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, they could have a material impact on our income tax provision and net income in the period or periods for which such determination is made. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter in which such change occurs.

Other Matters

Litigation and Environmental Matters

See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of litigation matters.

Recent Accounting Pronouncements

See Note 3, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Item 7. 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 Financial Statements and related notes thereto and other financial information appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, 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 this Annual Report, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.

Overview and Business Trends

Garrett designs, manufactures and sells highly engineered turbocharger and electric-boosting technologies for light and commercial vehicle OEMs” and the global vehicle independent aftermarket as well as automotive software solutions. These OEMs, in turn, ship to consumers globally. We are a global technology leader with significant expertise in delivering products across gasoline, diesel, natural gas and electric (hybrid and fuel cell) powertrains. Additionally, we are currently in the development stage of turbochargers for internal combustion engines using hydrogen as fuel and other highly engineered components for zero emission vehicles. These products are key enablers for fuel economy and emissions standards compliance.

The turbocharger industry is expected to increase from approximately 46 million units in 2022 to approximately 48 million units by 2024, then gradually plateau and drop to approximately 41 million units by 2028, according to S&P for light vehicles and KGP and PSR for on-highway and off-highway commercial vehicles. The turbocharger industry growth in the short and medium term is mainly driven by an expected increase in the penetration of hybrid vehicles, from approximately 13 million hybrid cars globally in 2022 to an anticipated 29 million hybrid cars globally in 2026.

In 2022, a significant increase in BEV production has been observed in Europe and China, with BEV representing, respectively 8% and 18% of light vehicles produced. In China, renewed sales incentives, especially in Tier 2 and Tier 3 cities, as well as non-financial incentives such as more generous license-plate quotas for major metropolitan areas, have bolstered Chinese BEV penetration. In the long-term, the proposal in the European Union ("E.U.") for all new cars to be zero-emission at tail pipe by 2035, as well as local regulations, could drive a further increase of BEV penetration in Europe beyond currently forecasted levels. In the United States, the tightening of CO2/mileage targets is expected to drive higher turbo penetration in the short to medium term. The President of the United States signed an executive order with the goal of making half of all new vehicles sold in 2030 zero-emissions vehicles, including battery electric, plug-in hybrid electric, or fuel cell electric vehicles, which is expected to accelerate the electrification trend in the mid-to-long term. Garrett's portfolio for hybrid powertrains includes new electric boosting solutions that leverage our unique technologies for electrical high speed boosting machinery. Garrett's product portfolio also includes fuel cell compressors for which we are developing the third generation. We are well positioned to take advantage of growing opportunities especially in the application of commercial vehicles. In China, the roadmap released by the China Society of Automotive Engineers, Energy-saving and New Energy Vehicle Technology Roadmap 2.0, outlines a technology path for the next ten years that aims to find a balance between fuel consumption improvement for hybrids and the introduction of electric vehicles. In that context, the turbocharger industry is expected to keep contributing to fuel economy optimization of gasoline, diesel and hybrid vehicles.

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 gasoline, diesel and hybrid vehicles. In 2021, Garrett won the prestigious Automotive News PACE™ award for the industry's first E-turbo that successfully launched in 2022. The unique high speed electric motor technology developed for this product came from Garrett's fuel cell compressors that are required by fuel cell vehicles. Additionally, this technology offers opportunities for new products to support all types of electrified drivetrains. In the commercial vehicle industry, we expect a slower transition to BEVs due to the requirements of specific applications 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 ICE, like natural gas or hydrogen, are expected to gain momentum in coming years, supporting continued turbocharger demand. Growth in the turbocharger industry is expected globally, with special mention for high-growth regions in Asia, where rising income levels continue to drive long-term automotive demand. While these positive factors do not isolate the turbocharger industry from fluctuations in global vehicle production volumes, such factors may assist in mitigating the negative impact of macroeconomic cycles. In addition, approximately 30% of our revenue comes from commercial vehicle and aftermarket sales that are less sensitive to the trend of electrification.

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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 geopolitical tensions, 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 their supply-chain management challenges.

Emergence from Chapter 11

On September 20, 2020, the Company filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code, which was administered under the caption “In re: Garrett Motion Inc., 20-12212.” On April 20, 2021, a Revised Amended Plan of Reorganization (the "Plan") was filed and on April 26, 2021, the Bankruptcy Court entered an order among other things, confirming the Plan. On April 30, 2021 (the "Effective Date"), the conditions to the effectiveness of the Plan were satisfied or waived and the Company emerged from bankruptcy.

Results of Operations for the Years Ended December 31, 2022, 2021 and 2020

Net Sales

The change in net sales compared to the prior year is attributable to the following:

For the year ended December 31, 2022, sales decreased compared to prior year by $30 million or 1%. This decrease was primarily due to an unfavorable impact of $304 million or 8% due to foreign currency translation driven by a lower Euro-to-US dollar exchange rate. This decrease was partially offset by $149 million of improved mix and $125 million of inflation recoveries net of pricing across all product lines.

Gasoline product sales increased by $64 million or 5% (including an unfavorable impact of $119 million or 8% due to foreign currency translation), primarily driven by new product launches in North America which delivered incremental sales year over year. This increase was partially offset by lower Euro-to-dollar exchange rates and lower sales in China due to the increased Covid-related lockdown measures implemented by the Chinese government throughout 2022.

Diesel product sales decreased by $91 million or 9% (including an unfavorable impact of $103 million or 10% due to foreign currency translation). While we saw lower volumes in 2022 due to the global semiconductor shortage and supply chain challenges at customers, this was offset by inflation pass-through and a favorable mix.

Commercial vehicle sales decreased by $32 million or 5% (including an unfavorable impact of $51 million or 8% due to foreign currency translation), primarily driven by lower volumes in China during the year after a strong pre-buy effect in the first half of 2021, more than offset by a favorable mix in the rest of the world.

Aftermarket sales improved by $36 million or 9% (including an unfavorable impact of $25 million or 6% 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, increased revenues from our

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Performance & Motorsport Turbo business, new distributor openings, as well as growth through new product introductions and favorable pricing impacts.

For the year ended December 31, 2021, net sales were $3,633 million, an increase compared to prior year of $599 million or 20% (including a positive impact of $132 million or 5% due to foreign currency translation driven by higher Euro-to-US dollar exchange rates).

Gasoline product sales increased by $245 million or 21% (including a favorable impact of $64 million or 6% due to foreign currency translation), primarily driven by program launches and ramp-ups in China and North America.

Diesel product sales increased by $124 million or 14% (including a favorable impact of $42 million or 5% due to foreign currency translation), primarily driven by the strong recovery in customer demand beginning of the year 2021 following the pandemic-related disruptions experienced in 2020, which was partially offset by the semiconductor shortage at customers particularly in the second half of 2021.

Commercial Vehicle sales increased by $154 million or 28% (including a favorable impact of $17 million or 3% due to foreign currency translation), primarily driven by the continuing recovery in customer demand following the pandemic related disruptions experienced in 2020 and with both ramp-up and new launches of certain products in Europe and China.

Aftermarket sales increased by $76 million or 23% (including a favorable impact of $7 million or 2% due to foreign currency translation), primarily due to continuing recovery in customer demand following the pandemic-related disruptions experienced in 2020, driven by service replacements and the development actions undertaken such as new distributor openings, new product introductions and targeted distribution channel strategy.

Cost of Goods Sold and Gross Profit

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For the year ended December 31, 2022, cost of goods sold decreased by $6 million compared to prior year, primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of $19 million and $224 million, respectively. Our continued focus on productivity also contributed to a decrease in cost of goods sold of $58 million, net of $10 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility. These decreases were partially offset by $154 million of inflation on commodities, transportation and energy costs, as well as $124 million due to an unfavorable product mix. R&D expenses also increased by $17 million which reflects our shift in investment in electrification technologies.

Gross profit decreased by $24 million, mainly driven by the lower sales volumes, inflation on commodities, transportation and energy costs, as well as higher premium freight costs as discussed above. Higher R&D costs and $79 million of unfavorable foreign currency translational, transactional and hedging effects also reduced our gross profit. These decreases were partially offset by $84 million of higher productivity which includes the benefits from value engineering that are partially passed through to customers, $125 million of inflation recoveries from customer pass-through agreements net of pricing reductions, and $25 million of favorable product mix.

For the year ended December 31, 2021, cost of goods sold increased by $431 million or 17.3% (including an unfavorable impact of $99 million due to foreign exchange rates) compared to the prior year. The increase in cost of goods sold was primarily driven by our higher sales volumes and foreign currency impacts which contributed to increases of $278 million and $99 million, respectively, in cost of goods sold. Cost of goods sold further increased by $74 million due to an unfavorable product mix and $71 million due to inflation on commodities and transportation costs, partially offset by benefits from our continued focus on productivity. R&D expenses increased by $17 million which reflects our shift in investment in electrification technologies and the temporary cost control actions taken in 2020 to mitigate the Covid-19 impact.

The increase in gross profit was mainly driven by the higher sales volumes and increased productivity. These increases were partially offset by the unfavorable product mix and inflation as discussed above, as well as $24 million of pricing reductions net of inflation recoveries from customer pass-through agreements during the year and $17 million of higher R&D costs. The impact of foreign currency translational, transactional and hedging effects further increased gross profit by $33 million.

Selling, General and Administrative Expenses

For the year ended December 31, 2022, selling, general and administrative (“SG&A”) expenses remained flat compared to prior year. We saw a $17 million benefit during the year from favorable foreign exchange rates compared to the prior year and $2 million of lower employee-related costs which mainly reflect lower expected employee incentive payouts partially offset by the impact of labor inflation. These decreases were offset by $5 million of higher IT expenses in 2022, $4 million from increased travel expenses as Covid restrictions eased, $10 million of higher bad debt expenses due primarily to a non-recurring bad debt recovery recognized in 2021.

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For the year ended December 31, 2021, SG&A expenses decreased for compared to prior year by $44 million, mainly driven by $52 million of strategic planning costs incurred in 2020, $11 million of bad debt recovery, $5 million of lower stock based compensation costs and a $2 million capital tax expense recorded in 2020. These decreases were partially offset by $4 million in labor inflation, a $13 million increase in accruals for employees incentives which reflect the expected payouts in 2022, a $6 million increase in foreign exchange impacts and $3 million of cost savings initiatives undertaken in the prior year to mitigate the impact of Covid-19. As a percentage of net sales, SG&A for 2021 was 5.9% versus 8.6% in the prior year.

Other Expense, Net

Other expense, net increased for 2022 compared to the prior year by $1 million and is attributable to an increase of expenses associated with the factoring of receivables.

Other expense, net decreased for 2021 compared to the prior year by $45 million. The decrease is attributable to the cancellation of liabilities related to the Honeywell Indemnity Agreement and associated litigation, following our emergence from Chapter 11.

Interest Expense

For the year ended December 31, 2022, interest expense decreased by $11 million compared to prior year, primarily due to $19 million less of interest accretion on our Series B Preferred Stock that was issued at Emergence and fully redeemed by June 2022, and $9 million of interest expense incurred on our pre-Emergence credit facilities. These decreases in interest expense were partially offset by $14 million of additional interest expense in 2022 on our current Credit Facilities entered into at Emergence.

For the year ended December 31, 2021, interest expense increased by $14 million compared to prior year, primarily due to $29 million of interest accretion on the Series B Preferred Stock, partially offset by $16 million 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 to our previous credit facilities.

Non-operating income

For the year ended December 31, 2022, non-operating income increased by $105 million compared to prior year. This increase was driven by $66 million of interest income primarily from unrealized marked-to-market gains on our interest rate swaps and $24 million related to non-service components of net periodic pension benefits, partially offset by $11 million of foreign exchange remeasurement losses.

For the year ended December 31, 2021, non-operating income decreased by $22 million compared to prior year and comprised $47 million in foreign exchange impact on debt, which was unhedged as a consequence of restrictions placed on the Company during the pendency of Chapter 11, partially offset by $18 million higher non-service pension benefit in the current year and $8 million driven by interest income associated with unrealized marked-to-market gains on interest rate swaps.

Reorganization items, net

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For the year ended December 31, 2022, reorganization items, net was an expense of $3 million related to professional service fees incurred for the remaining securities litigation from Chapter 11. During the prior year, reorganization items, net amounted to a $125 million gain, representing a $502 million gain on the settlement of Honeywell claims, partially offset by $119 million higher professional service fees related to the Chapter 11 Cases compared to the prior-year period, $79 million related to the termination and an expense reimbursement under a 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”), $39 million in Directors and Officers insurance related to Chapter 11 Cases, a $19 million write off on debt issuance costs of the debt associated with our pre-petition credit agreement, $13 million in employee stock awards cancellation and $35 million in other costs mainly related to unsecured notes settlement.

For the year ended December 31, 2021, reorganization items, net was a gain of $125 million, as explained above. This is in comparison to the year ended December 31, 2020, where reorganization items, net were $73 million, representing professional fees related to Chapter 11 of $55 million, DIP Credit Agreement financing fees of $13 million and the unamortized deferred high yield debt issuance cost of $6 million.

Tax Expense

The effective tax rate increased by 13.5 percentage points in 2022 compared to 2021. The increase was primarily attributable to the nontaxable gain on the settlement of the Honeywell claims (partially offset by non-deductible transaction costs) and increased tax benefits from an internal restructuring, both of which occurred in 2021 and are non-recurring. This increase was partially offset by tax benefits in the current year due to release of reserves for statute of limitation expirations.

The effective tax rate decreased by 24.9 percentage points in 2021 compared to 2020. The decrease was primarily attributable to the nontaxable gain on the settlement of the Honeywell claims during the year, increased tax benefits from an internal restructuring and fewer losses in jurisdictions that we do not expect to benefit from such losses; partially offset by increases in withholding taxes on unrepatriated earnings. The internal restructuring occurred predominantly in the fourth quarter of 2021, which involved transfers of certain rights to intellectual property and various intercompany financing arrangements resulting in an approximate 11 percentage point decrease to the effective tax rate during 2021. The overall increase in earnings from 2020 was also a contributing factor to a lower effective tax rate because the tax impacts as a percentage to earnings is less sensitive.

Net Income

For the year ended December 31, 2022, net income decreased $105 million compared to prior year primarily as result of lower gross profit of $24 million, a net benefit in 2021 of $125 million in Reorganization items, and higher tax expenses of $63 million, partially offset by higher non-operating income of $105 million, as described above.

For the year ended December 31, 2021, net income increased $415 million compared to prior year primarily as result of higher gross profit of $168 million, lower SG&A expenses of $44 million, lower Other expenses of $45 million, and favorable Reorganization items, net, of $198 million, as described above.

Non-GAAP Measures

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Management provides non-GAAP financial information, including EBITDA and Adjusted EBITDA, 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. We believe that EBITDA and Adjusted EBITDA are important indicators of operating performance and provide useful information for investors because:

1.We define “EBITDA” as our net income calculated in accordance with U.S. GAAP, plus the sum of net interest expense, tax expense and depreciation. We define “Adjusted EBITDA” as EBITDA, plus the sum of net reorganization items, stock compensation expense, repositioning costs, net foreign exchange loss on debt, loss on extinguishment on debt, discounting costs on factoring, other non-operating income and professional service costs and capital tax expense incurred in conjunction with our reorganization; and

2.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.

EBITDA and Adjusted EBITDA (non-GAAP)

(1)Other expense, net includes factoring and notes receivable discount fees. It also reflects, specifically for 2020, our accounting for the majority of our asbestos-related liability payments and accounts payable to Honeywell under the terms of the Honeywell Indemnity Agreement. The Plan as confirmed by the Bankruptcy Court included a global settlement with Honeywell providing for, among other things, the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to legacy agreements between the Company or its subsidiaries and Honeywell.

(2)The adjustment for non-operating (income) expense reflects the non-service component of net periodic pension costs and other income that are non-recurring or not considered directly related to the Company's operations.

(3)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

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items, net in the Consolidated Statements of Operations. See Note 2, Plan of Reorganization of the Notes to the Consolidated Financial Statements.

(4)Stock compensation expense includes only non-cash expenses.

(5)Repositioning costs include severance costs related to restructuring projects to improve future productivity.

(6)Professional service costs consist of professional service fees related to strategic planning for the Company in the period prior to filing for relief under Chapter 11 of the Bankruptcy Code in September 2020. We consider these costs to be unrelated to our ongoing core business operations.

(7)The canton of Vaud, Switzerland generally provides for crediting the cantonal corporate income tax against capital tax. There was no income tax payable for the year ended December 31, 2020 and therefore the 2020 capital tax due of $2 million was recorded in SG&A expenses.

Adjusted EBITDA for the year ended December 31, 2022 compared with year ended December 31, 2021

For the year ended December 31, 2022, net income decreased $105 million versus the prior year as discussed above within the Results of Operations section. Our volumes for 2022 totaled 13.6 million units, representing a decrease of approximately 1% from the prior year.

Adjusted EBITDA decreased by $37 million compared to the prior year mainly due to unfavorable foreign exchange impacts. While we saw increased inflation on commodities, transportation and energy, and we also increased our R&D spending on electrification technologies, this was more than offset by an improved product mix net of lower volumes, productivity, and inflation pass-through net of pricing. Our Adjusted EBITDA margin decreased by 90 basis points, of which 80 basis points was driven by the unfavorable foreign exchange impacts and inflation pass-through to customers.

During 2022, we faced demand volatility driven mainly by the global semiconductor shortage, geopolitical tensions and ongoing impacts from Covid restrictions primarily in China, all of which resulted in supply chain disruptions. We maintained our focus on productivity in 2022 as rising commodity prices led to higher raw material costs, particularly for nickel, aluminum and steel alloys. We recovered the cost increases from our customer pass-through agreements, and continue to negotiate with our customers for further escalators while actively managing our supply base and cost recovery mechanisms to mitigate the impact of materials, transportation and energy cost inflation. The increased productivity was partially offset by year-over-year labor inflation, increased travel expenses, higher bad debt expenses and increased premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility.

R&D expenses increased $17 million which primarily reflects our increased investment in electrification technologies.

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Adjusted EBITDA for the year ended December 31, 2021 compared with year ended December 31, 2020

As discussed above, Net income increased $415 million for 2021 as compared to 2020. For 2021, Garrett’s Adjusted EBITDA of $607 million increased by $167 million compared to the prior year, mainly due to benefits from volume and productivity, partially offset by mix and commodities and transportation inflation.

In 2021, our volumes totaled 13.7 million units, an increase of approximately 14% from 2020.

Our Adjusted EBITDA margin of 16.7% represented a year-over-year improvement of 220 basis points. We started the year with high volume demand representing a short-term increase in demand in connection with the macroeconomic recovery from the initial impacts of the Covid-19 pandemic, but have been facing demand volatility driven by the global semiconductor shortage, primarily for the last three quarters.

We also maintained our focus on productivity in 2021 as rising commodity prices led to higher raw material costs, particularly for nickel, aluminum and steel alloys. We recovered a majority of the increase from our customer pass-through agreements, especially for nickel, and continue to actively manage our supply base and cost recovery mechanisms to minimize the impact of materials cost inflation. The increased productivity was partially offset by a $12 million increase in SG&A related to year-over-year labor inflation and increased accruals for employee incentives, reflecting expected payouts on employee incentive compensation schemes and was partially offset by bad debt recovery. We also took a number of temporary cost control and cash management actions in the second and third quarters of 2020 to combat the Covid-19 crisis.

R&D expenses increased by $17 million which reflects our shift in investment in electrification technologies and the temporary cost control actions taken in 2020 to mitigate the Covid-19 impact.

The benefit from foreign currency impacts from translational, transactional and hedging effects in 2021 was $28 million and was primarily driven by a higher Euro-to-US dollar exchange rate versus the prior-year period.

Liquidity and Capital Resources

Overview

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 our emergence from bankruptcy and during the year ended December 31, 2022, we funded our operations primarily through the cash flows from operating activities, borrowings from our credit facilities and cash and cash equivalents. On the Effective Date, in accordance with the Plan, the Company entered into a credit agreement (as amended from time to time, the "Credit Agreement") providing for senior secured financing, consisting of a seven-year secured first-lien U.S. Dollar term loan facility initially in the amount of $715 million (the “Dollar Term Facility”), a seven-year secured first-lien Euro term loan facility initially in the amount of €450 million (the “Euro Term Facility,” and together with the Dollar Facility, the “Term Loan Facilities”); and a five-year senior secured first-lien revolving credit facility initially in the amount of $300 million providing for multi-currency revolving loans, (the “Revolving Facility,” and together with the

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Term Loan Facilities, the “Credit Facilities”). On January 11, 2022 and March 22, 2022, the Company amended the Credit Agreement, increasing the maximum amount of borrowings available under the Revolving Facility from $300 million to approximately $475 million. The maturity date of the Revolving Facility remains unchanged at April 30, 2026, with certain extension rights at the discretion of each lender. On December 31, 2022, the Company reported cash and cash equivalents position $246 million (not including $2 million in restricted cash as of December 31, 2022) as compared to $423 million on December 31, 2021 (not including $41 million in restricted cash as of December 31, 2021). As of December 31, 2022, the Company had no borrowings or letters of credit outstanding under the Revolving Facility, and available capacity of $475 million. In addition, as of December 31, 2022, the Company had $1,186 million of principal outstanding on its Term Loan Facilities and had utilized $14 million of the bilateral letter of credit facilities with $1 million remaining available capacity.

During the year ended December 31, 2022, we repaid $7 million of our Dollar Term Facility and $381 million related to our Series B Preferred Stock which included the final early redemption payment, following which no shares of our Series B Preferred Stock remain outstanding. Additionally, holders of our Series A Preferred Stock are entitled to receive, when, 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. During the year ended December 31, 2022, we declared two cash dividends of $0.17 per share, each (September 2022 and December 2022), on our Series Preferred A Stock, for a total aggregate dividend of $83 million. As of December 31, 2022, the aggregate accumulated undeclared and unpaid dividend was approximately $171 million.

For 2023, we expect to maintain a similar level of capital spending as compared to 2022. We expect to repay $7 million on our Dollar Term Facility. We also expect to pay approximately $5 million related to purchase obligations which were entered into with various vendors in the normal course of business and are consistent with our expected requirements. Finally, we expect to make contributions of approximately $7 million to our non-U.S. pension plans.

We believe the combination of expected cash flows, the funding received from 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.

Share Repurchase Program

On November 16, 2021, the Company announced that it had 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. On November 2, 2022, the Board of Directors authorized the extension of the share repurchase program by one year, to November 15, 2023. As of December 31, 2022, the Company had repurchased $26 million of its Series A Preferred Stock and Common Stock, with $74 million remaining under the share repurchase program. For more information, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Issuer Purchases of Equity Securities.

Off-Balance Sheet Arrangement

The Company did not have any off-balance sheet arrangements as of December 31, 2022 and 2021.

Cash Flow Summary for the Years Ended December 31, 2022, 2021 and 2020

Our cash flows from operating, investing and financing activities for the years ended December 31, 2022, 2021 and 2020, as reflected in the Consolidated Financial Statements included in this Annual Report, are summarized as follows:

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Cash Flow Summary for the year ended December 31, 2022

Cash provided by operating activities increased by $685 million for 2022 versus the prior year, primarily due to a $375 million payment made to Honeywell in 2021 pursuant to the Plan, and a decrease in net income of $105 million, net of a $393 million increase in non-cash adjustments which included a $435 million gain recognized in prior year on reorganization items, a $66 million increase in the fair value of our undesignated derivative instruments and $28 million of the redemption attributable to interest of Series B Preferred Stock. We also saw favorable impacts from working capital of $46 million, partially offset by a $24 million decrease mainly driven by other assets and liabilities.

Cash used for investing activities increased by $20 million for 2022 versus the prior year, primarily due to an increase in expenditures for property, plant and equipment of $19 million.

Cash used for financing activities increased by $621 million for the year ended December 31, 2022 compared with the prior year. The change was primarily driven by $180 million of additional early redemptions in 2022 of our Series B Preferred Stock (excluding amounts attributable to interest and included in cash used for operating activities), and $83 million for dividends on Series A Preferred Stock. We also saw, in 2021 upon Emergence, net proceeds of $2,522 million from the issuance of our Series A Preferred Stock and new long-term debt, partially offset by net payments of $2,156 million related to our prior senior secured super-priority debtor-in-possession credit agreement, our pre-petition revolving credit facility, pre-petition long-term debt and payments made to holders of the Company's pre-emergence common stock who made a cash-out election under the Plan. These increases in cash used for financing activities were partially offset by $12 million less of repurchases of Series A Preferred Stock and Common Stock in 2022 versus 2021.

Cash Flow Summary for the year ended December 31, 2021

Cash used for operating activities increased by $335 million for 2021 versus the prior year, primarily due to a $375 million payment to Honeywell pursuant to the Plan in the current year compared to a $6 million payment to Honeywell in the prior year. We also saw an increase in net income, net of deferred taxes and non-cash gains related to the reorganization, of $82 million. These increases in cash used for operating activities were partially offset by a favorable impact from working capital of $47 million and $65 million mainly driven by prepayments made in 2020 for directors' and officers' insurance in relation to our reorganization.

Cash used for investing activities decreased by $9 million for 2021 versus the prior year, primarily due to a decrease in Expenditures for property, plant and equipment of $8 million.

Cash provided by financing activities decreased by $391 million for 2021 versus the prior year. The change was driven by $1,301 million in proceeds from the issuance of Series A Preferred Stock and $1,221 million in proceeds from the issuance of the new long-term debt, partially offset by $200 million of debt repayments compared to $200 million of proceeds in the prior year on the DIP Credit Agreement, $1,515 million payments of the old long-term debt and $69 million in payments for the Cash-Out election. Additionally, payments of our revolving facilities were $730 million lower than in prior year, we redeemed $201 million of our Series B Preferred Stock (exclusive of $10 million of the redemption attributable to interest and included in cash used for operating activities), and repurchased $15 million of Series A Preferred Stock and $4 million of Common Stock pursuant to the share repurchase program.

Capital Expenditures

We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand. We expect to maintain a similar level of capital expenditures in 2023 as compared to 2022, increasing investment in electrification technologies while offsetting with investment on core technologies.

Critical Accounting Policies and Estimates

The preparation of our Consolidated 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. We consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our Consolidated Financial Statements.

Revenue Recognition — Product sales are recognized when we transfer control of the promised goods to our customer, which is based on shipping terms. Revenue is measured as the amount of consideration we expect to receive in

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exchange for transferring the promised goods, adjusted for any variable consideration such as price concessions or annual price adjustments as estimated at contract inception. We estimate variable consideration at the most likely amount we will receive from customers and reduce revenues recognized accordingly. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We adjust our estimate of revenue at the earlier of when the value of consideration we expect to receive changes or when the consideration becomes fixed.

Contingent Liabilities — We are subject to lawsuits, investigations and claims that arise out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, legal and environmental, health and safety matters. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of management’s judgment applied in the recognition and measurement of our most significant contingencies.

Warranties and Guarantees — Expected warranty costs for products sold are recognized based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, length of the warranty and various other considerations. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of our warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements included herein for additional information.

Pension Benefits — We sponsor defined benefit pension plans covering certain employees, primarily in Switzerland, the U.S. and Ireland. The pension cost and liabilities for these plans are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, and compensation increases. The Company is required to consider current market conditions, including changes in interest rates, and employee demographics such as retirement patterns, in making its assumptions. Changes in the related pension benefit costs or liabilities may occur in the future due to changes in the assumptions.

The discount rate reflects the market rate on December 31 (the measurement date) for high-quality fixed-income investments with maturities corresponding to our pension obligations and is subject to change each year. The discount rate can be volatile from year to year as it is determined based upon prevailing interest rates as of the measurement date. The assumptions as to the expected long-term rates of return on plan assets are based upon historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and asset mix considerations.

We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (the “MTM Adjustment”). Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension plans or when assumptions change. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the measurement date each year and the difference between expected and actual returns on plan assets. The mark-to-market accounting method results in the potential for volatile and difficult to forecast MTM Adjustments as the adjustments are primarily driven by events and circumstances beyond the control of the Company such as changes in interest rates and the performance of the financial markets.

Income Taxes — We account for income taxes pursuant to the asset and liability method which requires us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected

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benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.

We file tax returns in multiple jurisdictions and are subject to examination by taxing authorities throughout the world. Tax authorities have the ability to review and challenge matters that could be subject to differing interpretation of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the sustainability of tax attributes. The ultimate resolution of such uncertainties could last several years. When an uncertain tax position is identified, we consider and interpret complex tax laws and regulations in order to determine the need for recognizing a provision in our financial statements. Significant judgment is required in determining the timing and measurement of uncertain tax positions. We utilize internal and external expertise in interpreting tax laws to support our tax positions. We recognize the financial statement benefit of an uncertain tax position when it is more likely than not that, based on the underlying technical merits, the position will be sustained upon examination.

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, they could have a material impact on our income tax provision and net income in the period or periods for which such determination is made. A change in judgment related to the expected ultimate resolution of uncertain tax positions will be recognized in earnings in the quarter in which such change occurs.

Other Matters

Litigation and Environmental Matters

See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of litigation matters.

Recent Accounting Pronouncements

See Note 3, Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Liquidity and Capital Resources

Overview

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. At and following the completion of the Chapter 11 Cases and our emergence from bankruptcy, during the year ended December 31, 2021, we funded our operations primarily through the cash flows from operating activities, cash and cash equivalents, proceeds from the issuance of Series A Preferred Stock rights offerings and borrowings from Credit Facilities. On December 31, 2021, the Company reported a cash and cash equivalents position of $423 million (not including $41 million in restricted cash as of December 31, 2021) as compared to $592 million on December 31, 2020 (not including $101 million in restricted cash as of December 31, 2020).

For 2022, we expect our capital spending to increase by approximately $20 million versus 2021 as we continue to increase our manufacturing capacity for new product launches and invest in strategic growth opportunities, in particular in the electrification of drivetrains. We also expect to repay $7 million on our Dollar Facility and incur payments of $197 million related to our Series B Preferred Stock. Additionally, we expect to pay $89 million related to purchase obligations which are entered into with various vendors in the normal course of business and are consistent with our expected requirements. Finally, we expect to make contributions of $7 million to our non-U.S. pension plans.

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Beyond 2022, 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 holders of the Holder Put Right, 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 December 31, 2021, the aggregate accumulated dividend was approximately $97 million. Our Board of Directors may elect to declare and settle dividends to the Holders of the Series A Preferred Stock in cash, subject to certain limitations in the Credit Agreement and to the funds legally available for such dividends. We expect to make payments in 2027 of $670 million and $510 million on our Dollar Facility and Euro Facility, respectively. Additionally, we expect to pay $5 million related to purchase obligations which are entered into with various vendors in the normal course of business and are consistent with our expected requirements.

We believe the combination of expected cash flows, the funding received from Series A Preferred Stock issuance, the US Dollar and Euro term loan borrowings and the revolving credit facilities being committed until 2026, will provide us with adequate liquidity to support the Company's operations.

Pre-Emergence DIP Credit Agreement

On October 6, 2020, the Bankruptcy Court entered an order granting interim approval of the Debtors’ entry into the DIP Credit Agreement, with the lenders party thereto and Citibank N.A. as administrative agent. The DIP Credit Agreement provided for a senior secured, super-priority term loan (the “DIP Term Loan Facility”) with a maximum principal amount of $200 million. The proceeds of the DIP Term Loan Facility were used by the Debtors to (a) pay certain costs, premiums, fees and expenses related to the Chapter 11 Cases, (b) make payments pursuant to any interim or final order entered by the Bankruptcy Court pursuant to any “first day” motions permitting the payment by the Debtors of any prepetition amounts then due and owing; (c) make certain adequate protection payments in accordance with the DIP Credit Agreement and (d) fund working capital needs of the Debtors and their subsidiaries to the extent permitted by the DIP Credit Agreement. On the Effective Date, the Company paid in full $101 million of interest and principal outstanding on, and terminated, the DIP Credit Agreement.

Emergence - Exit Financing and Entry into Credit Facilities

Upon our emergence from Chapter 11 proceedings on the Effective Date, the Company completed the following transactions, which significantly improved the Company’s liquidity:

•Entered into new Term Loan Facilities which resulted in net proceeds of of $1,221 million;

•Obtained $300 million in commitments under the Revolving Facility, $125 million of which may be used for the issuance of letters of credit;

•Obtained a $35 million letter of credit facility for a term of five years from the Effective Date;

•Repaid $1,103 million of previously outstanding secured term loan facilities and accrued interest, repaid $374 million previously outstanding under its prior revolving credit facility, repaid $461 million in senior notes and accrued interest, and repaid $101 million of amounts owing under the DIP Credit Agreement and accrued interest;

•Raised $1,301 million in a rights offering of Series A Preferred Stock; and

•Settled $1,459 million of claims with Honeywell for a $375 million payment and the issuance of $577 million of Series B Preferred Stock.

In connection with our emergence from Chapter 11 proceedings, the Company and certain of its subsidiaries entered into the Credit Facilities. As of December 31, 2021, the Company had no borrowings outstanding under the Revolving Facility, $3 million of outstanding letters of credit, and available borrowing capacity of $297 million. In addition, on December 31, 2021, the Company had $1,223 million outstanding in Term Loan Facilities and $27 million in available letter of credit facilities. On January 11, 2022, the Company amended the Credit Agreement to increase the amount of revolving loan commitments by $124 million to an aggregate amount of $424 million. The amendment also implements certain changes to benchmark and successor rates applicable to revolving loans under the Credit Agreement, including the removal of LIBOR as an available rate at which revolving loans could accrue and the addition for such revolving loans new

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benchmark rate options based on the term or SOFR published by the Federal Reserve Bank of New York and based on the average bid reference rate administered by ASX Benchmarks Pty Limited. The outstanding term loan under the Credit Agreement continues to accrue interest in LIBOR, but will switch to an alternative benchmark rate when certain events occur, which alternative benchmark we anticipate will be term SOFR. For more information, see Note 16, Long-term Debt and Credit Agreements. We expect to repay approximately $7 million on the Dollar Facility in 2022 and approximately $670 million and $510 million on our Dollar Facility and Euro Facility, respectively, in 2027. See Note 16, Long-term Debt and Credit Agreements of the Notes to the Consolidated Financial Statements for additional information regarding our Revolving Facility.

In connection with the Company’s emergence from bankruptcy 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 21, Equity of the Notes to the Consolidated Financial Statements 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. Under the terms of the Series B Preferred Stock issued to Honeywell pursuant to the Plan, we are obligated to pay an aggregate of $470 million to Honeywell, payable in annual cash instalments beginning in 2022 and ending in 2027, subject to various conditions and put and call rights set forth in the Certificate of Designations for the Series B Preferred Stock. On December 28, 2021, we elected to complete an early partial redemption of 345,988,497 shares of Series B Preferred Stock for an aggregate price of approximately $211 million. As of December 31, 2021, our liabilities with respect to our payment obligations to Honeywell under the terms of the Series B Preferred Stock were $395 million (representing the present value of all then remaining amortization payments due under the outstanding Series B Preferred Stock, discounted at a rate of 7.67% per annum). On February 18, 2022 we will make an early partial redemption payment of $197 million, and effective with that payment we will make future scheduled redemptions of $18 million, $100 million, $100 million and $54 million, in the years 2024 to 2027, respectively. Additionally, pursuant to the Certificate of Designations governing our Series B Preferred Stock, the holders of Series B Preferred Stock may, upon the occurrence of certain triggering events and subject to certain conditions, require us to redeem all shares of such holder's Series B Preferred Stock after December 30, 2022, which would increase our liquidity requirements by approximately $220 million. See Note 17, Mandatorily Redeemable Series B Preferred Stock of the Notes to the Consolidated Financial Statements for additional information regarding the Series B Preferred Stock.

Going Concern

Our ability to continue as a going concern was contingent upon the Company’s ability to successfully implement a Plan in the Chapter 11 Cases, among other factors. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities were subject to uncertainty. While we were operating as debtors-in-possession under the Bankruptcy Code, we sold or otherwise disposed of or liquidated assets or settled liabilities, with the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in our Consolidated Financial Statements. As a result of our improved liquidity, as noted above, expected cash flows, and removal of the risks and uncertainties surrounding the Chapter 11 Cases, we anticipate having sufficient funding to support our operations, and substantial doubt no longer exists that we will be able to continue as a going concern.

Listing on NASDAQ

On September 20, 2020, we were notified by the New York Stock Exchange (the “NYSE”) that, as a result of the Chapter 11 Cases, the NYSE had commenced proceedings to delist our Common Stock from the NYSE. After certain administrative actions, our Common Stock was removed from listing and registration on the NYSE effective as of the opening of business on October 19, 2020. Following our emergence from Chapter 11, our Common Stock commenced

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trading on Nasdaq under the ticker symbol “GTX” on May 3, 2021. On October 1, 2021, our Series A Preferred Stock commenced trading on Nasdaq under the ticker symbol “GTXAP.”

Share Repurchase Program

On November 16, 2021, the Company announced that it had authorized a $100 million share repurchase program valid until November 15, 2022, providing for the pro rata purchase of shares of Series A Preferred Stock and Common Stock. As of December 31, 2021 the Company had repurchased $19 million of its Series A Preferred Stock and Common Stock, with $81 million remaining under the share repurchase program. For more information, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Issuer Purchases of Equity Securities

Off-Balance Sheet Arrangement

As of December 31, 2021 and 2020 the Company does not have any off-balance sheet arrangements.

Honeywell Indemnity Agreement and Tax Matters Agreement

On September 12, 2018, Garrett ASASCO entered into the Honeywell Indemnity Agreement and we entered into a tax matters agreement (the "Tax Matters Agreement") which governed the respective rights, responsibilities and obligations of Honeywell and us after the Spin-Off with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests). The Tax Matters Agreement generally provided that were responsible and would indemnify Honeywell for all taxes, including income taxes, sales taxes, VAT and payroll taxes, relating to Garrett for all periods, including periods prior to the completion date of the Spin-Off. The Plan, confirmed by the Bankruptcy Court, included a global settlement with Honeywell providing for (a) the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to the Indemnity Agreements and the Tax Matters Agreement, and (b) the dismissal with prejudice of the Honeywell Litigation in exchange for (x) a $375 million cash payment at Emergence and (y) the Series B Preferred Stock. See Note 2, Plan of Reorganization and Note 17, Mandatorily Redeemable Series B Preferred Stock, of the Notes to the Consolidated Financial Statements.

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Cash Flow Summary for the Years Ended December 31, 2021, 2020 and 2019

Our cash flows from operating, investing and financing activities for the years ended December 31, 2021, 2020 and 2019, as reflected in the audited Consolidated Financial Statements included elsewhere in this Annual Report, are summarized as follows:

2021 compared with 2020

Cash used for operating activities increased by $335 million for 2021 versus the prior year, primarily due to a $375 million payment to Honeywell pursuant to the Plan in the current year compared to a $6 million payment to Honeywell in the prior year. We also saw an increase in net income, net of deferred taxes and non-cash gains related to the reorganization, of $82 million. These increases in cash used for operating activities were partially offset by a favorable impact from working capital of $47 million and $65 million mainly driven by prepayments made in 2020 for directors' and officers' insurance in relation to our reorganization.

Cash used for investing activities decreased by $9 million for 2021 versus the prior year, primarily due to a decrease in Expenditures for property, plant and equipment of $8 million.

Cash provided by financing activities decreased by $391 million for 2021 versus the prior year. The change was driven by $1,301 million in proceeds from the issuance of Series A Preferred Stock and $1,221 million in proceeds from the issuance of the new long-term debt, partially offset by $200 million of debt repayments compared to $200 million of proceeds in the prior year on the DIP Credit Agreement, $1,515 million payments of the old long-term debt and $69 million in payments for the Cash-Out election. Additionally, payments of our revolving facilities were $730 million lower than in prior year, we redeemed $201 million of our Series B Preferred Stock (exclusive of $10 million of the redemption attributable to interest and included in cash used for operating activities), and repurchased $15 million of Series A Preferred Stock and $4 million of Common Stock.

2020 compared with 2019

Cash provided by operating activities decreased by $217 million for 2020 in comparison to 2019, primarily due to a decrease in net income, net of deferred taxes of $226 million, unfavorable impact from working capital of $194 million, partially offset by a decrease in obligations to Honeywell of $149 million and an increase of $54 million in other items (mainly accrued liabilities).

Cash used for investing activities decreased by $6 million in 2020 compared to 2019, primarily due to a favorable impact from expenditures for property, plant and equipment of $22 million, due to higher customer contribution and lower spend, partially offset by an unfavorable impact from a prior year settlement received on the re-couponing of our cross currency swap contract of $19 million.

Cash provided by financing activities increased by $693 million in 2020, as compared to 2019. The change was driven by a draw down, net of payments, on our Pre-petition Credit Agreement revolving facility of $349 million, payments of long-term debt during 2020 totaling $2 million, as compared to $163 million of such payments during 2019 and proceeds from the debtor-in-possession credit agreement, net of financing fees of $187 million.

Cash flow from operations less Expenditures for property, plant and equipment (non-GAAP)

Cash flow from operations less Expenditures for property, plant and equipment is a non-GAAP financial measure that reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a supplemental

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understanding of factors and trends affecting our cash flows. Cash flow from operations less Expenditures for property, plant and equipment is calculated by subtracting Expenditures for property, plant and equipment from Net cash provided by (used for) operating activities. Management believes it is a more conservative measure of cash flow, and therefore useful to investors, because purchases of fixed assets are necessary for ongoing operations. We believe it is important to view Cash flow from operations less Expenditures for property, plant and equipment as a supplement to our Consolidated Statements of Cash Flows.

Cash flow from operations less Expenditures for property, plant and equipment (non-GAAP) decreased by $327 million for 2021 versus the prior-year period, primarily due to a $375 million payment to Honeywell pursuant to the Plan in the current-year period compared to a $6 million payment to Honeywell in the prior-period. Additionally, there was an increase in net loss, net of deferred taxes and non-cash gains related to the reorganization of $66 million, partially offset by a favorable impact from working capital of $47 million and $65 million mainly driven by prepayments made in 2020 for directors' and officers' insurance in relation to our Chapter 11 Cases. Additionally, Expenditures for property, plant and equipment expenses decreased by $8 million.

Capital Expenditures

We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand.

We expect to increase our capital expenditures in 2022 by approximately $20 million compared to those made in 2021 as we continue to increase our manufacturing capacity for new product launches and invest in strategic growth opportunities, in particular in the electrification of drivetrains. Productivity projects have freed up capacity in our manufacturing facilities and are expected to continue to do so. We expect to continue investing to expand and modernize our existing facilities and invest in our facilities to create capacity for new product development.

Critical Accounting Policies and Estimates

The preparation of our Consolidated 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. We consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our Consolidated Financial Statements. In connection with the filing of the Chapter 11 Cases on the Petition Date, the Consolidated Financial Statements included herein have been prepared in accordance with Financial Accounting Standards Board ASC Topic No. 852, Reorganizations. At the Effective Date, we did not meet the requirements under ASC 852 for fresh start accounting. See Note 1. Background and Basis of Presentation, of the Notes to the Consolidated Financial Statements for further details.

Contingent Liabilities—We are subject to lawsuits, investigations and claims that arise out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, legal and environmental, health and safety matters. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, the number and cost of pending and future asbestos claims, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of management’s judgment applied in the recognition and measurement of our most significant contingencies.

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Warranties and Guarantees—Expected warranty costs for products sold are recognized based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, length of the warranty and various other considerations. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of our warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements included herein for additional information.

Pension Benefits—We sponsor defined benefit pension plans covering certain employees, primarily in Switzerland, the U.S. and Ireland. For such plans, we are required to disaggregate the service cost component of net benefit costs and report those costs in the same line item or items in the Consolidated Statements of Operations as other compensation costs arising from services rendered by the pertinent employees during the period. The other nonservice components of net benefit costs are required to be presented separately from the service cost component. We record the service cost component of Pension ongoing (income) expense in Cost of goods sold or Selling, general and administrative expenses. The remaining components of net benefit costs within Pension ongoing (income) expense, primarily interest costs and assumed return on plan assets, are recorded in Non-operating expense (income). We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (“MTM Adjustment”). The MTM Adjustment is recorded in Non-operating expense (income).

The key assumptions used in developing our 2021 and 2020 net periodic pension (income) expense included the following: