Garrett Motion (NYSE: GTX) reported Q3 EPS of $0.50, $0.30 worse than the analyst estimate of $0.80. Revenue for the quarter came in at $781 million versus the consensus estimate of $775.2 million.

Third Quarter 2019 Highlights

• Net sales totaled $781 million, a decrease of 0.4% on a reported basis and an increase of 2.8% organically*
• Net income totaled $38 million, or basic and diluted earnings per share of $0.51 and $0.50, respectively
• Adjusted EBITDA* decreased 2.9% to $133 million; Adjusted EBITDA margin* decreased to 17.0%
• Adjusted Levered Free Cash Flow* totaled $102 million
• Total Debt reduced by $87 million to $1,511 million at September 30, 2019
• Net Debt* reduced by $95 million to $1,321 million at September 30, 2019
• Reiterated 2019 guidance for organic net sales and Adjusted Levered Free Cash Flow conversion; revised full-year outlook for Adjusted EBITDA

“During the third quarter, we delivered organic net sales growth of approximately 3%, outperforming global auto production by more than five percentage points,” said Olivier Rabiller, Garrett President and CEO. “Garrett’s solid performance for the quarter was driven by higher gasoline turbo penetration gains and new product launches. Our rapidly growing gasoline segment increased to 35% of net sales and exceeded diesel product sales by approximately 10% in Q3 – well ahead of plan. We also enhanced our financial profile in the quarter by generating $102 million in adjusted levered free cash flow and reducing net debt by approximately $95 million. Our focus remains on strengthening the company’s balance sheet while bringing Garrett’s differentiated portfolio of turbocharging, electric boosting, and automotive software solutions to market for the benefit of our global customers.”

2019 Outlook

For 2019, the company is reiterating its previously stated guidance of organic net sales growth between -1% and +1% and Adjusted Levered Free Cash Flow conversion between 50% and 55%. The company is revising its full-year outlook for Adjusted EBITDA from a range between $600 million and $620 million to a range between $580 million and $600 million. The revised 2019 outlook for Adjusted EBITDA is primarily due to a faster rebalancing of the company’s light vehicle activities between diesel and gasoline as well as lower commercial vehicle production. Both of these factors had an adverse impact on margins in the third quarter and are expected to continue into the fourth quarter and 2020.

Material Weakness in Internal Control Over Financial Reporting

In accordance with the terms of our Indemnification and Reimbursement Agreement with Honeywell, our Consolidated and Combined Balance Sheets reflect a liability of $1,120 million in Obligations payable to Honeywell as of September 30, 2019, (the “Indemnification Liability”). The amount of the Indemnification Liability is based on information provided to us by Honeywell with respect to Honeywell’s assessment of its own asbestos-related liability payments and accounts payable as of such date and is calculated in accordance with the terms of the Indemnification and Reimbursement Agreement. Honeywell estimates its future liability for asbestos-related claims based on a number of factors.

As previously disclosed, in the course of preparing our Annual Report on Form 10-K and our Consolidated and Combined Financial Statements for the year ended December 31, 2018, our management determined that there was a material weakness in our internal control over financial reporting relating to the supporting evidence for our liability to Honeywell under the Indemnification and Reimbursement Agreement. Specifically, we were unable to independently verify the accuracy of the certain information Honeywell provided to us that we used to calculate the amount of our Indemnification Liability, including information provided in Honeywell's actuary report and the amounts of settlement values and insurance receivables. For example, Honeywell did not provide us with sufficient information to make an independent assessment of the probable outcome of the underlying asbestos proceedings and whether certain insurance receivables are recoverable. This material weakness has not yet been remediated.

In consultation with our outside advisors, we are working to obtain additional information about the Indemnification Liability through a dialogue and iterative process with Honeywell. That process has continued, and we and our advisors remain in communication with Honeywell on these issues.

For earnings history and earnings-related data on Garrett Motion (GTX) click here.