Executive Summary / Key Takeaways

• Garrett Motion demonstrates robust operational resilience and margin expansion despite a soft automotive market, driven by effective cost management and productivity gains.
• The company is strategically pivoting towards zero-emission technologies, securing key production wins for high-speed electric motors and fuel cell compressors, complementing its strong core turbo business.
• Strong cash flow generation supports disciplined capital allocation, enabling debt reduction, significant share repurchases, and consistent quarterly dividends.
• Garrett's differentiated technology, particularly in high-speed electric motors and fuel cell compressors, provides a competitive edge in the evolving mobility landscape, targeting high-growth segments like commercial vehicles and industrial applications.
• The 2025 outlook, maintained despite macro uncertainties, signals management confidence in operational execution and the ability to offset light vehicle softness with growth in commercial vehicle and new technology areas.

Setting the Scene: A Technology Leader Adapting to Mobility's Evolution

Garrett Motion Inc., incorporated in 2018, stands as a technology leader in the automotive and industrial sectors, specializing in highly engineered solutions for emission reduction and energy efficiency. At its core, Garrett has built its reputation on advanced turbocharging, air and fluid compression, and high-speed electric motor technologies. Its historical strength lies in delivering these products at scale for a wide range of applications, from traditional gasoline and diesel internal combustion engines to emerging hydrogen fuel cell systems.

The company's strategic journey has been one of continuous adaptation. Initially focused heavily on turbochargers for passenger and commercial vehicles, Garrett has successfully navigated shifts in the market, including the transition from diesel to gasoline and the rise of hybrid powertrains, particularly in Europe and North America. This adaptation has involved developing sophisticated variable geometry turbochargers to meet increasingly stringent emission standards, such as U.S. Tier 4 regulations, which demand more advanced technology.

Crucially, Garrett's competitive positioning is deeply rooted in its differentiated technology. In the core turbo business, its expertise enables enhanced fuel economy and energy efficiency. As the industry evolves, Garrett is applying its technological pillars to develop cutting-edge E-Powertrain and E-Cooling compressor products essential for the next generation of vehicles. For instance, its fuel cell compressor portfolio is described as the broadest and most mature in the industry, offering best-in-class efficiency. In the burgeoning E-Powertrain space, Garrett's high-speed electric motor technology offers significant power density benefits. Management has highlighted that the advantages of this power-dense solution increase with the power of the powertrain, offering tangible benefits, particularly in commercial vehicles, such as potential weight savings of up to 300 kilograms on a heavy-duty truck axle compared to competitive solutions. This technological edge is a key differentiator against competitors like BorgWarner (BWA), Honeywell (HON), Aptiv (APTV), and Magna International (MGA), allowing Garrett to target premium niches and potentially capture market share in high-tech segments, although it may face pricing pressures from competitors focused on cost leadership or leveraging greater scale like BWA or HON.

Beyond traditional and hybrid vehicles, Garrett is strategically expanding its turbo expertise into new industrial segments, securing wins for large turbos used in marine and backup power generation, an area seeing booming demand driven by the growth of data center infrastructure. Simultaneously, the company is accelerating its push into zero-emission solutions. This includes securing its first series production contract for a large fuel cell application in the commercial vehicle and industrial segments and, notably, achieving a major milestone with the first series production award for its high-speed electric motor and inverter technology for an on-highway heavy-duty commercial vehicle application with HanDe, a leading axle supplier. This production is targeted for 2027 and validates Garrett's position, especially in markets like China, where commercial vehicle battery electric penetration is high. The company is also seeing positive testing feedback and increasing customer interest for its E-Cooling compressor technology in both automotive and industrial applications. This dual focus on strengthening the core while investing in future technologies, backed by a commitment to R&D (with over 50% of spending dedicated to zero-emission technologies in 2025), underpins Garrett's strategy to remain relevant and competitive in a rapidly changing mobility landscape.

Performance and Resilience in a Challenging Market

Garrett's recent financial performance reflects its strategic execution and operational discipline amidst a volatile market. For the first quarter of 2025, the company reported net sales of $878 million, a decrease of 4% compared to the prior year, including a 2% unfavorable impact from foreign currency translation. This decline was primarily attributed to soft demand in light vehicle diesel (particularly in Europe due to the transition to gasoline hybrids) and commercial vehicle applications (softness in China and Europe), as well as lower aftermarket demand in North America. However, these headwinds were partially offset by growth in gasoline product sales, which increased by 4% (2% excluding FX), driven by new program launches and ramp-ups in North America and recovery in Japan.

Despite the top-line pressure, Garrett demonstrated strong operational performance, leading to margin expansion. Gross profit increased by $7 million to $179 million, resulting in a gross profit percentage of 20.4%, up from 18.8% in Q1 2024. This improvement was primarily fueled by $16 million of productivity gains (net of labor inflation), $9 million from commodity, transportation, and energy deflation, and $4 million from pricing actions (net of inflation pass-through). These positive factors more than offset the negative impacts of lower sales volumes and unfavorable product mix. Selling, general, and administrative expenses also saw a decrease of $5 million, contributing to overall profitability.

In 2025, Garrett transitioned its primary non-GAAP profitability metric from Adjusted EBITDA to Adjusted EBIT, aiming to better reflect core operating performance and align with industry peers while highlighting its capital-light model. For Q1 2025, Adjusted EBIT increased by $10 million year-over-year to $131 million, yielding an Adjusted EBIT margin of 14.9%, a significant 170 basis point improvement. This margin expansion underscores the effectiveness of the sustainable fixed and variable cost actions implemented in 2024, which continue to benefit the company's performance. Net income for the quarter was $62 million, down $4 million from the prior year, primarily impacted by higher tax expense ($8 million increase) and increased other expense, net ($6 million increase, largely due to debt financing costs), partially offset by the improved gross profit and lower SGA expenses. The effective tax rate rose to 27.1% from 18.5%, mainly due to higher U.S. taxes on international operations.

This performance demonstrates Garrett's ability to execute effectively in a challenging environment. The margin resilience, achieved through operational improvements and cost flexibility, is a critical factor for investors, indicating the company's ability to protect profitability even when facing market headwinds. This operational strength provides a foundation for navigating ongoing volatility and funding strategic investments.

Financial Strength and Shareholder Returns

Garrett maintains a solid financial position, characterized by healthy liquidity and a disciplined approach to capital allocation. As of March 31, 2025, the company's liquidity stood at $760 million, comprising $130 million in cash and cash equivalents and $630 million in available borrowing capacity under its revolving credit facility.

A key financial action in early 2025 was the refinancing of the company's debt structure. On January 30, 2025, Garrett entered into a Restatement Agreement, refinancing its $692 million 2021 Dollar Term Facility with a new $692 million 2025 Dollar Term Facility that extends the maturity to January 30, 2032. Concurrently, the existing $600 million revolving facility was replaced with a new $630 million New Revolving Facility maturing on January 30, 2030. These actions enhance financial flexibility by extending debt maturities and increasing available credit, positioning the company well to manage its obligations and fund future initiatives.

Cash flow generation remains a core strength. For the three months ended March 31, 2025, net cash provided by operating activities was $56 million, and adjusted free cash flow was $36 million. While operating cash flow decreased year-over-year, primarily due to unfavorable working capital timing typical for the first quarter, the company expects this to recover in subsequent periods. Cash used for investing activities decreased, mainly due to lower capital expenditures ($26 million in Q1 2025 vs. $32 million in Q1 2024).

Garrett is committed to returning value to shareholders. Under the $250 million share repurchase program authorized in December 2024, the company repurchased $30 million of Common Stock in Q1 2025, with $220 million remaining as of March 31, 2025. The company also continued its quarterly dividend payments, distributing $12 million ($0.06 per share) in January 2025 and declaring a second quarterly dividend of the same amount payable in June 2025. The stated target is to distribute at least 75% of adjusted free cash flow to shareholders over time through dividends and buybacks. This consistent return of capital, supported by robust cash generation and a strengthened balance sheet, underscores management's confidence in the company's financial health and future prospects.

Outlook and Strategic Trajectory

Garrett Motion is maintaining its 2025 outlook, signaling confidence in its ability to execute against anticipated market conditions. The guidance implies midpoints of $3.4 billion in net sales, representing a negative 1% growth rate at constant currency. Net income is projected at $232 million, Adjusted EBIT at $457 million, net cash provided by operating activities at $402 million, and adjusted free cash flow at $345 million.

This outlook is predicated on several key assumptions. Management anticipates that an expected improvement in the commercial vehicle market, encompassing both on-highway and off-highway segments, will partially offset continued softness projected in the light vehicle industry. Furthermore, the guidance incorporates the sustained benefits from the structural fixed cost actions implemented throughout 2024, which are expected to contribute to margin stability and profitability despite relatively flat revenue. The company also plans to continue executing productivity gains and passing through pricing changes, including the impact of potential tariffs, which management believes will have limited net exposure due to Garrett's region-for-region manufacturing approach and sales structure.

Strategically, the outlook supports Garrett's dual focus. The company plans a slight increase in R&D spending to 4.6% of sales in 2025, with over 50% dedicated to zero-emission technologies. This investment is critical for advancing its E-Powertrain, E-Cooling, and Fuel Cell Compressor technologies and achieving its long-term target of $1 billion in revenue from non-turbo businesses by 2030. While the core turbo business is expected to remain resilient, supported by growth in hybrids and new industrial applications, the increasing investment in zero-emission solutions positions Garrett for future growth in the evolving mobility landscape.

Risks and Challenges

Despite the positive outlook and operational strengths, Garrett faces several pertinent risks. The automotive industry remains subject to macroeconomic and geopolitical uncertainties, which can lead to volatile demand and production levels, as seen in the recent softness in European diesel and Chinese commercial vehicle markets. The transition towards electrification, while a strategic opportunity, also presents challenges, including the pace of adoption, technological development costs, and intense competition from both traditional players and new entrants.

Tariffs on imports into the US are a specific area of monitoring, although Garrett has so far been able to implement pass-through with customers. However, uncertainty remains regarding the broader impact of future tariffs on the global economy and industry demand. Competitive pressures are inherent in the auto parts sector, and while Garrett's technology is differentiated, competitors continue to innovate and leverage scale, potentially impacting pricing and market share. The company is also exposed to risks related to raw material costs, supply chain disruptions, and foreign exchange rate fluctuations, which can affect profitability despite hedging efforts. Litigation, including tax and environmental matters, also presents potential liabilities, although the company accrues for probable losses and does not currently anticipate a material adverse effect from ongoing proceedings. Successfully executing the strategic pivot to zero-emission technologies and achieving the ambitious revenue targets in these new areas will be critical for long-term growth and mitigating risks associated with the potential decline in traditional ICE applications.

Conclusion

Garrett Motion has demonstrated impressive operational resilience and margin strength in a challenging market environment, effectively leveraging cost controls and productivity to offset revenue headwinds. The company's core turbo business remains robust, adapting to hybrid growth and expanding into new industrial applications. Simultaneously, Garrett is making tangible progress in its strategic pivot towards zero-emission technologies, securing significant production awards for high-speed electric motors and fuel cell compressors that validate its differentiated solutions and position it for future growth in the evolving mobility landscape.

Supported by strong cash flow generation and a fortified balance sheet, Garrett is actively returning value to shareholders through share repurchases and dividends while continuing to invest in the technologies that will define its future. The maintained 2025 outlook reflects management's confidence in its operational execution and strategic direction. While macroeconomic volatility and competitive pressures persist, Garrett's technological leadership, operational flexibility, and disciplined capital allocation provide a compelling investment thesis centered on resilience in the present and significant growth potential in the future.