UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________________
FORM 10-Q
________________________________________________
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ______ to ______
Commission File Number: 001-38636
________________________________________________
(Exact Name of Registrant as Specified in its Charter)
________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
+41 21 695 30 00
(Registrant’s telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | ☒ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
As of April 19, 2023, the registrant had 64,959,553 shares of Common Stock, $0.001 par value per share, outstanding.
Table of Contents
| Page | ||||||||
1
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
GARRETT MOTION INC.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (Dollars in millions, except per share amounts) | |||||||||||
Net sales (Note 3) | $ | $ | |||||||||
| Cost of goods sold | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Other expense, net | |||||||||||
| Interest expense | |||||||||||
| Non-operating income | ( | ( | |||||||||
| Reorganization items, net | |||||||||||
| Income before taxes | |||||||||||
Tax expense (Note 5) | |||||||||||
| Net income | |||||||||||
Less: preferred stock dividend (Note 18) | ( | ( | |||||||||
| Net income available for distribution | $ | $ | |||||||||
Earnings per common share | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
| Weighted average common shares outstanding | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
2
GARRETT MOTION INC.
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Net income | $ | $ | |||||||||
| Foreign exchange translation adjustment | |||||||||||
Changes in fair value of effective cash flow hedges, net of tax (Note 16) | ( | ||||||||||
Changes in fair value of net investment hedges, net of tax (Note 16) | ( | ||||||||||
| Total other comprehensive (loss) income, net of tax | ( | ||||||||||
| Comprehensive income | $ | $ | |||||||||
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
3
GARRETT MOTION INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(Unaudited)
| March 31, 2023 | December 31, 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
Accounts, notes and other receivables – net (Note 6) | |||||||||||
Inventories – net (Note 8) | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Investments and long-term receivables | |||||||||||
| Property, plant and equipment – net | |||||||||||
| Goodwill | |||||||||||
| Deferred income taxes | |||||||||||
Other assets (Note 9) | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
Current maturities of long-term debt (Note 14) | |||||||||||
Accrued liabilities (Note 11) | |||||||||||
| Total current liabilities | |||||||||||
Long-term debt (Note 14) | |||||||||||
| Deferred income taxes | |||||||||||
Other liabilities (Note 12) | |||||||||||
| Total liabilities | $ | $ | |||||||||
COMMITMENTS AND CONTINGENCIES (Note 20) | |||||||||||
| EQUITY (DEFICIT) | |||||||||||
Series A Preferred Stock, par value $ | $ | $ | |||||||||
Common Stock, par value $ | |||||||||||
| Additional paid–in capital | |||||||||||
Retained deficit | ( | ( | |||||||||
Accumulated other comprehensive income (Note 17) | |||||||||||
| Total deficit | ( | ( | |||||||||
| Total liabilities and deficit | $ | $ | |||||||||
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
4
GARRETT MOTION INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | |||||||||||
| (Dollars in millions) | 2023 | 2022 | |||||||||
| Cash flows from operating activities: | |||||||||||
Net income | $ | $ | |||||||||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||||||
| Deferred income taxes | |||||||||||
| Depreciation | |||||||||||
| Amortization of deferred issuance costs | |||||||||||
| Interest payments, net of debt discount accretion | ( | ||||||||||
Foreign exchange loss | ( | ( | |||||||||
| Stock compensation expense | |||||||||||
| Change in fair value of derivatives | ( | ||||||||||
| Other | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts, notes and other receivables | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Other assets | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | ( | ||||||||||
| Other liabilities | ( | ||||||||||
Net cash provided by operating activities | $ | $ | |||||||||
| Cash flows from investing activities: | |||||||||||
| Expenditures for property, plant and equipment | ( | ( | |||||||||
Net cash used for investing activities | $ | ( | $ | ( | |||||||
| Cash flows from financing activities: | |||||||||||
| Payments of long-term debt | ( | ( | |||||||||
| Redemption of Series B Preferred stock | ( | ||||||||||
| Payments for share repurchases | ( | ||||||||||
| Payments for dividends | ( | ||||||||||
| Debt financing costs | ( | ||||||||||
Net cash used for financing activities | $ | ( | $ | ( | |||||||
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | |||||||||||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash at beginning of the period | |||||||||||
| Cash, cash equivalents and restricted cash at end of the period | $ | $ | |||||||||
| Supplemental cash flow disclosure: | |||||||||||
| Income taxes paid (net of refunds) | $ | $ | |||||||||
| Interest paid | |||||||||||
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement
5
GARRETT MOTION INC.
CONSOLIDATED INTERIM STATEMENTS OF EQUITY (DEFICIT)
(Unaudited)
| Series A Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Deficit | Accumulated Other Comprehensive (Loss)/Income | Total Deficit | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | $ | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2023 | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||
| Series A Preferred Stock | Common Stock | Additional Paid-in Capital | Retained Deficit | Accumulated Other Comprehensive (Loss)/Income | Total Deficit | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Share repurchases | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
6
GARRETT MOTION INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions, except per share amounts)
Note 1. Background and Basis of Presentation
Background
Garrett Motion Inc., (the “Company” or “Garrett”) designs, manufactures and sells highly engineered turbocharger and electric-boosting technologies for light and commercial vehicle original equipment manufacturers (“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) power trains. These products are key enablers for fuel economy and emission standards compliance.
Basis of Presentation
The accompanying unaudited Consolidated Interim Financial Statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial statements. While these statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statements. The unaudited Consolidated Interim Financial Statements should therefore be read in conjunction with the Consolidated Financial Statements and accompanying notes for the year ended December 31, 2022 included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 14, 2023 (our “2022 Form 10-K”). The results of operations and cash flows for the three months ended March 31, 2023 should not necessarily be taken as indicative of the entire year. All amounts presented are in millions, except per share amounts.
We report our quarterly financial information using a calendar convention: the first, second and third quarters are consistently reported as ending on March 31, June 30 and September 30. It has been our practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires our businesses to close their books on a Saturday to minimize the potentially disruptive effects of quarterly closing on our business processes. For differences in actual closing dates that are material to year-over-year comparisons of quarterly or year-to-date results have been adjusted for the three months ended March 31, 2023. Our actual closing dates for the three months ended March 31, 2023 and 2022 were April 1, 2023 and April 2, 2022, respectively.
We evaluate segment reporting in accordance with ASC 280, Segment Reporting. We concluded that Garrett operates in a single operating segment and a single reportable segment based on the operating results available and evaluated regularly by the chief operating decision maker (“CODM”), which is our Chief Executive Officer, to make decisions about resource allocation and performance assessment. The CODM makes operational performance assessments and resource allocation decisions on a consolidated basis, inclusive of all of the Company’s products across channels and geographies.
The preparation of the financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases these estimates on assumptions that it believes to be reasonable under the circumstances. Actual results could differ from the original estimates, requiring adjustments to these balances in future periods.
Note 2. Summary of Significant Accounting Policies
The accounting policies of the Company are set forth in Note 3 to the Consolidated Financial Statements for the year ended December 31, 2022 included in our 2022 Form 10-K.
7
Recently Adopted Accounting Pronouncements
In September 2022, the FASB issued ASU 2022-04, Disclosure of Supplier Finance Program Obligations (Topic 405-50): Disclosure of Supplier Finance Purchase Obligations. The amendment in this update requires companies to disclose key terms of supplier financing programs used in connection with the purchase of goods and services, along with information about their obligations under these programs including a rollforward of those obligations. The Company adopted the new guidance as of January 1, 2023. See Note 10, Supplier Financing for disclosure related to the Company's supplier financing program obligations.
Note 3. Revenue Recognition and Contracts with Customers
Disaggregated Revenue
Net sales by region (determined based on country of shipment) and channel are as follows:
Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| OEM | Aftermarket | Other | Total | OEM | Aftermarket | Other | Total | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Europe | |||||||||||||||||||||||||||||||||||||||||||||||
| Asia | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
Contract Balances
The following table summarizes our contract assets and liabilities balances:
| 2023 | 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Contract assets—January 1 | $ | $ | |||||||||
Contract assets—March 31 | |||||||||||
| Change in contract assets—(Decrease)/Increase | $ | $ | ( | ||||||||
| Contract liabilities—January 1 | $ | ( | $ | ( | |||||||
Contract liabilities—March 31 | ( | ( | |||||||||
| Change in contract liabilities—(Increase)/Decrease | $ | ( | $ | ( | |||||||
Note 4. Research, Development & Engineering
Garrett conducts research, development and engineering (“RD&E”) activities, which consist primarily of the development of new products and product applications. RD&E costs are charged to expense as incurred unless the Company has a contractual guarantee for reimbursement from the customer. Customer reimbursements are netted against gross RD&E expenditures as they are considered a recovery of cost. Such costs are included in Cost of goods sold as follows:
Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Research and development costs | $ | $ | |||||||||
Engineering-related expenses (1) | ( | ||||||||||
| $ | $ | ||||||||||
8
Note 5. Income Taxes
Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Tax expense | $ | $ | |||||||||
| Effective tax rate | % | % | |||||||||
The effective tax rates for the three months ended March 31, 2023 and 2022 were 25.0 % and 29.6 %, respectively. The change in the effective tax rate for the three months ended March 31, 2023 compared to the prior period is primarily related to a decrease in tax reserve true ups and additional global research and development benefits.
The effective tax rate for the three months ended March 31, 2023 was higher than the U.S. federal statutory rate of 21% primarily because of U.S. taxes on international operations and withholding taxes, partially offset by lower taxes on non-U.S. earnings and global research and development benefits.
Note 6. Accounts, Notes and Other Receivables—Net
| March 31, 2023 | December 31, 2022 | ||||||||||
(Dollars in millions) | |||||||||||
Trade receivables | $ | $ | |||||||||
Notes receivable | |||||||||||
Other receivables | |||||||||||
Less—Allowance for expected credit losses | ( | ( | |||||||||
| $ | $ | ||||||||||
Trade receivables include $66 million and $46 million of unbilled customer contract asset balances as of March 31, 2023 and December 31, 2022, respectively. These amounts are billed in accordance with the terms of customer contracts to which they relate. See Note 3, Revenue Recognition and Contracts with Customers.
Notes receivable is related to guaranteed bank notes without recourse that the Company receives in settlement of accounts receivables, primarily in the Asia Pacific region. See Note 7, Factoring and Notes Receivable for further information.
Note 7. Factoring and Notes Receivable
The Company enters into arrangements with financial institutions to sell eligible trade receivables. The receivables are sold without recourse and the Company accounts for these arrangements as true sales. The Company also receives guaranteed bank notes without recourse, in settlement of accounts receivables, primarily in the Asia Pacific region. The Company can hold the bank notes until maturity, exchange them with suppliers to settle liabilities, or sell them to third-party financial institutions in exchange for cash. Bank notes sold to third-party financial institutions without recourse are likewise accounted for as true sales.
9
| Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Eligible receivables sold without recourse | $ | $ | |||||||||
| Guaranteed bank notes sold without recourse | |||||||||||
The expenses related to the sale of trade receivables and guaranteed bank notes are recognized within Other expense, net in the Consolidated Interim Statements of Operations, and were immaterial for the three months ended March 31, 2023 and 2022.
| March 31, 2023 | December 31, 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Receivables sold but not yet collected by the bank from the customer | $ | $ | |||||||||
| Guaranteed bank notes sold but not yet collected by the bank from the customer | |||||||||||
As of March 31, 2023 and December 31, 2022, the Company has no guaranteed bank notes pledged as collateral.
Note 8. Inventories—Net
| March 31, 2023 | December 31, 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Raw materials | $ | $ | |||||||||
| Work in process | |||||||||||
| Finished products | |||||||||||
| Less—Reserves | ( | ( | |||||||||
| $ | $ | ||||||||||
Note 9. Other Assets
| March 31, 2023 | December 31, 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Advanced discounts to customers, non-current | $ | $ | |||||||||
(Note 13) | |||||||||||
| Income tax receivable | |||||||||||
| Pension and other employee related | |||||||||||
| Designated cross-currency swaps | |||||||||||
| Designated and undesignated derivatives | |||||||||||
| Other | |||||||||||
| $ | $ | ||||||||||
Note 10. Supplier Financing
The Company has supplier financing arrangements with two third-party financial institutions under which certain suppliers may factor their receivables from Garrett. The Company also enters into arrangements with banking institutions to issue bankers acceptance drafts in settlement of accounts payables, primarily in the Asia Pacific region. The bankers acceptance drafts, or guaranteed bank notes, have a contractual maturity of six months or less, and may be held by suppliers until maturity, transferred to their suppliers, or discounted with financial institutions in exchange for cash. The
10
supplier financing obligations and guaranteed bank notes outstanding are recorded within Accounts payable in our Consolidated Interim Balance Sheet.
| March 31, 2023 | December 31, 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Supplier financing obligations outstanding with financial institutions | $ | $ | |||||||||
| Guaranteed bank notes outstanding | |||||||||||
Note 11. Accrued Liabilities
| March 31, 2023 | December 31, 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Customer pricing reserve | $ | $ | |||||||||
| Compensation, benefit and other employee related | |||||||||||
| Repositioning | |||||||||||
| Product warranties and performance guarantees - short-term (Note 20) | |||||||||||
| Income and other taxes | |||||||||||
| Advanced discounts from suppliers, current | |||||||||||
Customer advances and deferred income (1) | |||||||||||
| Accrued interest | |||||||||||
(Note 13) | |||||||||||
| Accrued freight | |||||||||||
| Dividends payable (Note 15) | |||||||||||
Other (primarily operating expenses) (2) | |||||||||||
| $ | $ | ||||||||||
(1)Customer advances and deferred income include $10 million and $8 million of contract liabilities as of March 31, 2023 and December 31, 2022, respectively. See Note 3, Revenue Recognition and Contracts with Customers.
(2)Includes $4 million and $3 million of environmental liabilities as of March 31, 2023 and December 31, 2022, respectively.
The Company accrues repositioning costs related to projects to optimize its product costs and right-size our organizational structure. Expenses related to the repositioning accruals are included in Cost of goods sold and Selling, general and administrative expenses in our Consolidated Interim Statements of Operations.
| Severance Costs | Other Costs | Total | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
Balance at December 31, 2022 | $ | $ | $ | ||||||||||||||
| Charges | |||||||||||||||||
| Usage—cash | ( | ( | |||||||||||||||
| Non-cash asset write-offs | ( | ( | |||||||||||||||
Balance at March 31, 2023 | $ | $ | $ | ||||||||||||||
| Severance Costs | Other Costs | Total | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||
Balance at December 31, 2021 | $ | $ | $ | ||||||||||||||
| Charges | |||||||||||||||||
| Usage—cash | ( | ( | |||||||||||||||
Balance at March 31, 2022 | $ | $ | $ | ||||||||||||||
11
Note 12. Other Liabilities
| March 31, 2023 | December 31, 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Income taxes | $ | $ | |||||||||
| Pension and other employee related | |||||||||||
L (Note 13) | |||||||||||
| Advanced discounts from suppliers | |||||||||||
| Product warranties and performance guarantees – long-term (Note 20) | |||||||||||
| Environmental remediation – long term | |||||||||||
| Long-term accounts payable | |||||||||||
| Other | |||||||||||
Note 13. Leases
We have operating leases that primarily consist of real estate, machinery and equipment. Our leases have remaining lease terms of up to 15 years, some of which include options to extend the leases for up to two years , and some of which include options to terminate the leases within the year.
Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| Operating lease cost | $ | $ | |||||||||
Three Months Ended March 31, | |||||||||||
| 2023 | 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
Operating cash outflows from operating leases | $ | $ | |||||||||
Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | |||||||||||
Supplemental balance sheet information related to operating leases is as follows:
| March 31, 2023 | December 31, 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| $ | $ | ||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| Weighted-average remaining lease term (in years) | |||||||||||
| Weighted-average discount rate | % | % | |||||||||
12
| (Dollars in millions) | |||||
| 2023 | $ | ||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| Thereafter | |||||
| Total lease payments | |||||
| Less imputed interest | ( | ||||
| $ | |||||
Note 14. Long-term Debt and Credit Agreements
The principal outstanding and carrying amounts of our long-term debt as of March 31, 2023 and December 31, 2022 are as follows:
| Due | Interest Rate | March 31, 2023 | December 31, 2022 | ||||||||||||||||||||
| Dollar Term Facility | 4/30/2028 | LIBOR plus | $ | $ | |||||||||||||||||||
| Euro Term Facility | 4/30/2028 | EURIBOR plus | |||||||||||||||||||||
| Total principal outstanding | |||||||||||||||||||||||
| Less: unamortized deferred financing costs | ( | ( | |||||||||||||||||||||
| Less: current portion of long-term debt | ( | ( | |||||||||||||||||||||
| Total long-term debt | $ | $ | |||||||||||||||||||||
Credit Facilities
On April 30, 2021, 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 Term 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 Term Loan Facilities, the “Credit Facilities”).
Following amendments to the Credit Agreement in 2022, the maximum amount of borrowings available under the Revolving Facility is $475 million, and the Company may use up to $125 million for the issuance of letters of credit to its subsidiaries. Letters of credit are available for issuance under the Credit Agreement on terms and conditions customary for financings of this kind, which issuances reduce availability under the Revolving Facility. The Revolving Facility matures on April 30, 2026, with certain extension rights at the discretion of each lender. As of March 31, 2023 the Company had no loans outstanding under the Revolving Facility, no outstanding letters of credit, and available borrowing capacity of approximately $475 million.
Separate from the Revolving Facility, the Company has a bilateral letter of credit facility, which also matures on April 30, 2026. On September 14, 2022, the Company amended the bilateral letter of credit agreement to reduce the available capacity from $35 million to $15 million. The maturity date and other terms of the amended agreement remained the same. As of March 31, 2023, the Company had $12 million utilized and $3 million of remaining available capacity under such facility.
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Interest Rate and Fees
The Dollar Term Facility is subject to an interest rate, at our option, of either (a) an alternate base rate (“ABR”) (which shall not be less than 1.50 %) or (b) an adjusted LIBOR rate (“LIBOR”) (which shall not be less than 0.50 %), in each case, plus an applicable margin equal to 3.25 % in the case of LIBOR loans and 2.25 % in the case of ABR loans. The Euro Term Facility is subject to an interest rate equal to an adjusted EURIBOR rate (which shall not be less than zero ) plus an applicable margin equal to 3.50 %. Interest payments with respect to the Dollar and Euro Term Facilities are required either on a quarterly basis (for ABR loans) or at the end of each interest period (for LIBOR and EURIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months .
The Revolving Facility is subject to an interest rate comprised of an applicable benchmark rate as provided under the Credit Agreement (which shall not be less than 1.00 % if such benchmark is the ABR rate and not less than 0.00 % in the case of other applicable benchmark rates) that is selected based on the currency in which borrowings are outstanding thereunder, in each case, plus an applicable margin, that may vary based on our leverage ratio.
In addition to paying interest on outstanding borrowings under the Revolving Facility, we are also required to pay a quarterly commitment fee based on the average daily unused portion of the Revolving Facility during such quarter, which is determined by our leverage ratio and ranges from 0.25 % to 0.50 % per annum.
Prepayments
The Credit Agreement also contains certain mandatory prepayment provisions in the event that we incur certain types of indebtedness, receive net cash proceeds from certain non-ordinary course asset sales or other dispositions of property, or have excess cash flow (calculated on an annual basis with the required prepayment equal to 50 %, 25 % or 0 % of such excess cash flow, subject to compliance with certain leverage ratios), in each case subject to terms and conditions customary for financings of this kind.
Certain Covenants
The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type. The Revolving Facility also contains a financial covenant requiring the maintenance of a consolidated total leverage ratio of not greater than 4.7 times as of the end of each fiscal quarter if, on the last day of any such fiscal quarter, the aggregate amount of loans and letters of credit (excluding backstopped or cash collateralized letters of credit and other letters of credit with an aggregate face amount not exceeding $30 million) outstanding under the Revolving Facility exceeds 35 % of the aggregate commitments in effect thereunder on such date. As of March 31, 2023, the Company was in compliance with all covenants.
Note 15. Series A Preferred Stock
On March 8, 2023, the Disinterested Directors Committee of the Board of Directors (the "Board") of the Company declared a cash dividend of $0.17 per share on the Company's Series A Preferred Stock. As of the record date of March 22, 2023, a total of 245,045,431 shares of Series A Preferred Stock were outstanding, resulting in an aggregate dividend amount of $42 million. Cash was transferred on March 29, 2023 to the transfer agent for the Series A Preferred Stock in the amount of $42 million for the settlement of the dividend which occurred on April 3, 2023. As of March 31, 2023, a dividend payable of $42 million was recorded within Accrued liabilities, and the cash held by the transfer agent was recorded within Other current assets.
As of March 31, 2023, the remaining unpaid cumulative dividends not yet declared on the shares of Series A Preferred Stock outstanding as of that date was $169 million.
Note 16. Financial Instruments and Fair Value Measures
Our credit, market and foreign currency risk management policies are described in Note 19, Financial Instruments and Fair Value Measures, to the Consolidated Financial Statements for the year ended December 31, 2022 included in our 2022 Form 10-K. As of March 31, 2023 and December 31, 2022, we had contracts with aggregate gross notional amounts of $2,734 million and $2,621 million, respectively, to hedge interest rates and foreign currencies, principally the U.S. Dollar, Swiss Franc, British Pound, Euro, Chinese Yuan, Japanese Yen, Mexican Peso, New Romanian Leu, Czech Koruna, Australian Dollar and Korean Won.
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Fair Value of Financial Instruments
The FASB’s accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2023 and December 31, 2022:
| Fair Value | ||||||||||||||||||||||||||||||||||||||
| Notional Amounts | Assets | Liabilities | ||||||||||||||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | March 31, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||
| Designated instruments: | ||||||||||||||||||||||||||||||||||||||
| Designated forward currency exchange contracts | $ | $ | $ | $ | (a) | $ | $ | (c) | ||||||||||||||||||||||||||||||
| Designated cross-currency swap | (b) | |||||||||||||||||||||||||||||||||||||
| Total designated instruments | ||||||||||||||||||||||||||||||||||||||
| Undesignated instruments: | ||||||||||||||||||||||||||||||||||||||
| Undesignated interest rate swap | (b) | |||||||||||||||||||||||||||||||||||||
| Undesignated forward currency exchange contracts | (a) | (c) | ||||||||||||||||||||||||||||||||||||
| Total undesignated instruments | ||||||||||||||||||||||||||||||||||||||
| Total designated and undesignated instruments | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
(a) Recorded within Other current assets
(b) Recorded within Other assets
(c) Recorded within Accrued liabilities
As of March 31, 2023, the Company had outstanding interest rate swaps with an aggregate notional amount of €960 million, with maturities of April 2023, April 2024, April 2025, April 2026, April 2027 and April 2028. The Company uses interest rate swaps specifically to mitigate variable interest risk exposure on its long-term debt portfolio and has not designated them as hedging instruments for accounting purposes.
The cross-currency swaps have been designated as net investment hedges of its Euro-denominated operations. As of March 31, 2023, an aggregate notional amount of €606 million was designated as net investment hedges of the Company’s investment in Euro-denominated operations. The cross-currency swaps’ fair values were net assets of $60 million at March 31, 2023. Our Consolidated Interim Statements of Comprehensive Income include Changes in fair value of net investment hedges, net of tax, of $(5 ) million and $13 million, during the three months ended March 31, 2023 and 2022, respectively, related to these net investment hedges. No ineffectiveness has been recorded on the net investment hedges.
The Company's forward currency exchange contracts under our cash flow hedging program are assessed as highly effective and are designated as cash flow hedges. Gains and losses on derivatives qualifying as cash flow hedges are recorded in Accumulated other comprehensive income until the underlying transactions are recognized in earnings.
The foreign currency exchange, interest rate swap and cross-currency swap contracts are valued using market observable inputs. As such, these derivative instruments are classified within Level 2. The assumptions used in measuring the fair value of the cross-currency swap are considered Level 2 inputs, which are based upon market-observable interest rate curves, cross-currency basis curves, credit default swap curves, and foreign exchange rates.
The carrying value of Cash, cash equivalents and restricted cash, Account receivables and Notes and Other receivables contained in the Consolidated Interim Balance Sheet approximates fair value.
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The following table sets forth the Company’s financial assets and liabilities that were not carried at fair value:
March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
Term Loan Facilities | $ | $ | $ | $ | |||||||||||||||||||
The Company determined the fair value of certain of its long-term debt and related current maturities utilizing transactions in the listed markets for similar liabilities. As such, the fair value of the long-term debt and related current maturities is considered Level 2.
Note 17. Accumulated Other Comprehensive Income
The changes in Accumulated Other Comprehensive Income by component are set forth below:
Foreign Exchange Translation Adjustment | Changes in Fair Value of Effective Cash Flow Hedges | Changes in Fair Value of Net Investment Hedges | Pension Adjustments | Total Accumulated Other Comprehensive Income | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
Balance at December 31, 2022 | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||
Other comprehensive income before reclassifications | ( | ||||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income | ( | ( | |||||||||||||||||||||||||||
| Net current period other comprehensive income | ( | ( | ( | ||||||||||||||||||||||||||
Balance at March 31, 2023 | $ | ||||||||||||||||||||||||||||