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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, 2020

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

 

Garrett Motion Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

82-4873189

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

 

La Pièce 16, Rolle, Switzerland

1180

(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

Common Stock,
$0.001 par value per share

GTX

New York Stock Exchange

 

 

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

 

☒ 

  

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  

As of May 7, 2020, the registrant had 75,587,498 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 


 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

5

Item 1.

Financial Statements (Unaudited)

5

 

Consolidated Interim Statements of Operations (Unaudited)

5

 

Consolidated Interim Statements of Comprehensive Income (Unaudited)

6

 

Consolidated Interim Balance Sheets (Unaudited)

7

 

Consolidated Interim Statements of Cash Flows (Unaudited)

8

 

Consolidated Interim Statements of Equity (Deficit) (Unaudited)

9

 

Notes to Unaudited Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34

Item 4.

Controls and Procedures

34

PART II.

OTHER INFORMATION

35

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 3.

Defaults Upon Senior Securities

36

Item 4.

Mine Safety Disclosures

37

Item 5.

Other Information

37

Item 6.

Exhibits

38

Signatures

39

 

 

 

i


 

BASIS OF PRESENTATION

On October 1, 2018, Garrett Motion Inc. became an independent publicly-traded company through a pro rata distribution (the “Distribution”) by Honeywell International Inc. (“Former Parent” or “Honeywell”) of 100% of the then-outstanding shares of Garrett to Honeywell’s stockholders (the “Spin-Off”). Each Honeywell stockholder of record received one share of Garrett common stock for every 10 shares of Honeywell common stock held on the record date. Approximately 74 million shares of Garrett common stock were distributed on October 1, 2018 to Honeywell stockholders. In connection with the Spin-Off, Garrett´s common stock began trading “regular-way” under the ticker symbol “GTX” on the New York Stock Exchange on October 1, 2018.

Unless the context otherwise requires, references to “Garrett,” “we,” “us,” “our,” and “the Company” in this Quarterly Report on Form 10-Q refer to (i) Honeywell’s Transportation Systems Business (the “Transportation Systems Business” or the “Business”) prior to the Spin-Off and (ii) Garrett Motion Inc. and its subsidiaries following the Spin-Off, as applicable.

2


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding our future results of operations and financial position, the anticipated impact of the novel coronavirus (“COVID-19”) pandemic on our business, results of operations and financial position, expectations regarding the growth of the turbocharger and electric vehicle markets, the sufficiency of our cash and cash equivalents, anticipated sources and uses of cash, anticipated investments in our business, our business strategy, anticipated payments under our agreements with Honeywell, anticipated interest expense, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report on Form 10-Q are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including:

 

1.

changes in the automotive industry and economic or competitive conditions;

2.

our ability to develop new technologies and products, and the development of either effective alternative turbochargers or new replacement technologies;

3.

failure to protect our intellectual property or allegations that we have infringed the intellectual property of others, and our ability to license necessary intellectual property from third parties;

4.

potential material losses and costs as a result of any warranty claims and product liability actions brought against us;

5.

significant failure or inability to comply with the specifications and manufacturing requirements of our original equipment manufacturer customers or by increases or decreases to the inventory levels maintained by our customers;

6.

volume of products we produce and market demand for such products and prices we charge and the margins we realize from our sales of our products;

7.

loss of or a significant reduction in purchases by our largest customers, material nonpayment or nonperformance by any our key customers, and difficulty collecting receivables;

8.

inaccuracies in estimates of volumes of awarded business;

9.

work stoppages, other disruptions or the need to relocate any of our facilities;

10.

supplier dependency;

11.

failure to meet our minimum delivery requirements under our supply agreements;

12.

failure to increase productivity or successfully execute repositioning projects or manage our workforce;

13.

potential material environmental liabilities and hazards;

14.

natural disasters and physical impacts of climate change;

15.

pandemics, including without limitation the COVID-19 pandemic, and effects on our workforce and supply chain;

16.

failure to comply with any of the covenants in our credit agreement, and the fact that substantial doubt exists about our ability to continue as a going concern;

17.

technical difficulties or failures, including cybersecurity risks;

18.

the outcome of and costs associated with pending and potential material litigation matters, including our pending lawsuit against Honeywell;

19.

changes in legislation or government regulations or policies;

20.

risks related to international operations and our investment in foreign markets, including risks related to the withdrawal of the United Kingdom from the European Union (“Brexit”);

3


 

21.

risks related to our agreements with Honeywell, such as the Indemnification and Reimbursement Agreement and Tax Matters Agreement;

22.

the terms of our indebtedness and our ability to access capital markets;

23.

unforeseen adverse tax effects;

24.

costs related to operating as a standalone public company and failure to achieve benefits expected from the Spin-Off;

25.

inability to recruit and retain qualified personnel; and

26.

the other factors described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our other filings with the Securities and Exchange Commission (“SEC”).

You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

4


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

GARRETT MOTION INC.

CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in millions, except per share amounts)

 

Net sales (Note 3)

 

$

745

 

 

$

835

 

Cost of goods sold

 

 

603

 

 

 

639

 

Gross profit

 

$

142

 

 

$

196

 

Selling, general and administrative expenses

 

 

61

 

 

 

60

 

Other expense, net (Note 5)

 

 

16

 

 

 

19

 

Interest expense

 

 

16

 

 

 

16

 

Non-operating (income) expense

 

 

(4

)

 

 

4

 

Income before taxes

 

$

53

 

 

$

97

 

Tax expense (Note 6)

 

 

1

 

 

 

24

 

Net income

 

$

52

 

 

$

73

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

Basic

 

$

0.69

 

 

$

0.98

 

Diluted

 

$

0.68

 

 

$

0.97

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

75,040,932

 

 

 

74,229,627

 

Diluted

 

 

76,261,545

 

 

 

75,379,228

 

 

The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.

5


 

GARRETT MOTION INC.

CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

Net income

 

$

52

 

 

$

73

 

Foreign exchange translation adjustment

 

 

39

 

 

 

59

 

Defined benefit pension plan adjustment, net of tax (Note 18)

 

 

 

 

 

1

 

Changes in fair value of effective cash flow hedges, net of tax (Note 14)

 

 

 

 

 

3

 

Total other comprehensive income, net of tax

 

$

39

 

 

$

63

 

Comprehensive income

 

$

91

 

 

$

136

 

 

The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.

6


 

GARRETT MOTION INC.

CONSOLIDATED INTERIM BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

 

(Dollars in millions)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

254

 

 

$

187

 

Accounts, notes and other receivables – net (Note 7)

 

 

629

 

 

 

707

 

Inventories – net (Note 9)

 

 

225

 

 

 

220

 

Other current assets

 

 

80

 

 

 

85

 

Total current assets

 

 

1,188

 

 

 

1,199

 

Investments and long-term receivables

 

 

34

 

 

 

36

 

Property, plant and equipment – net

 

 

457

 

 

 

471

 

Goodwill

 

 

193

 

 

 

193

 

Deferred income taxes

 

 

277

 

 

 

268

 

Other assets (Note 10)

 

 

105

 

 

 

108

 

Total assets

 

$

2,254

 

 

$

2,275

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

935

 

 

$

1,009

 

Borrowings under revolving credit facility

 

 

66

 

 

 

 

Current maturities of long-term debt

 

 

4

 

 

 

4

 

Obligations payable to Honeywell, current (Note 17)

 

 

68

 

 

 

69

 

Accrued liabilities (Note 11)

 

 

303

 

 

 

310

 

Total current liabilities

 

 

1,376

 

 

 

1,392

 

Long-term debt

 

 

1,389

 

 

 

1,409

 

Deferred income taxes

 

 

37

 

 

 

51

 

Obligations payable to Honeywell (Note 17)

 

 

1,236

 

 

 

1,282

 

Other liabilities (Note 12)

 

 

262

 

 

 

274

 

Total liabilities

 

$

4,300

 

 

$

4,408

 

COMMITMENTS AND CONTINGENCIES (Note 17)

 

 

 

 

 

 

 

 

EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Common stock, par value $0.001; 400,000,000 shares authorized, 75,939,795 and

   74,911,139 issued and 75,571,651 and 74,826,329 outstanding as of March 31,

   2020 and December 31, 2019, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

20

 

 

 

19

 

Retained earnings

 

 

(2,235

)

 

 

(2,282

)

Accumulated other comprehensive income (Note 15)

 

 

169

 

 

 

130

 

Total stockholders' deficit

 

 

(2,046

)

 

 

(2,133

)

Total liabilities and stockholders' deficit

 

$

2,254

 

 

$

2,275

 

 

The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.

7


 

GARRETT MOTION INC.

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

52

 

 

$

73

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

(15

)

 

 

3

 

Depreciation

 

 

19

 

 

 

19

 

Amortization of deferred issuance costs

 

 

2

 

 

 

2

 

Foreign exchange (gain) loss

 

 

12

 

 

 

7

 

Stock compensation expense

 

 

2

 

 

 

5

 

Pension expense

 

 

 

 

 

1

 

Other

 

 

8

 

 

 

4

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

58

 

 

 

(43

)

Receivables from related parties

 

 

 

 

 

 

Inventories

 

 

(14

)

 

 

(14

)

Other assets

 

 

(10

)

 

 

13

 

Accounts payable

 

 

(29

)

 

 

(24

)

Payables to related parties

 

 

 

 

 

 

Accrued liabilities

 

 

1

 

 

 

12

 

Obligations payable to Honeywell

 

 

(21

)

 

 

(21

)

Asbestos related liabilities

 

 

 

 

 

 

Other liabilities

 

 

(8

)

 

 

(1

)

Net cash provided by operating activities

 

$

57

 

 

$

36

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(39

)

 

 

(21

)

Increase in marketable securities

 

 

 

 

 

 

Decrease in marketable securities

 

 

 

 

 

 

Other

 

 

 

 

 

1

 

Net cash used for investing activities

 

$

(39

)

 

$

(20

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase (decrease) in Invested deficit

 

 

 

 

 

 

Proceeds from revolving credit facility

 

 

621

 

 

 

140

 

Payments of revolving credit facility

 

 

(555

)

 

 

(140

)

Payments of long-term debt

 

 

(1

)

 

 

(6

)

Payments related to related party notes payable

 

 

 

 

 

 

Net change related to cash pooling and short-term notes

 

 

 

 

 

 

Other

 

 

(3

)

 

 

1

 

Net cash provided by (used for) financing activities

 

 

62

 

 

 

(5

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

(13

)

 

 

 

Net increase in cash and cash equivalents

 

 

67

 

 

 

11

 

Cash and cash equivalents at beginning of period

 

 

187

 

 

 

196

 

Cash and cash equivalents at end of period

 

$

254

 

 

$

207

 

 

The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.

 

 

8


 

GARRETT MOTION INC.

CONSOLIDATED INTERIM STATEMENTS OF EQUITY (DEFICIT)

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Invested

 

 

Comprehensive

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Deficit

 

 

Income/(Loss)

 

 

Deficit

 

 

 

(in millions)

 

Balance at December 31, 2018

 

 

74

 

 

 

 

 

 

5

 

 

 

(2,595

)

 

 

 

 

 

73

 

 

 

(2,517

)

Net income

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

 

 

 

73

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63

 

 

 

63

 

Stock-based compensation

 

 

1

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Balance at March 31, 2019

 

 

75

 

 

 

 

 

 

10

 

 

 

(2,522

)

 

 

 

 

 

136

 

 

 

(2,376

)

Balance at December 31, 2019

 

 

75

 

 

 

 

 

 

19

 

 

 

(2,282

)

 

 

 

 

 

130

 

 

 

(2,133

)

Net income

 

 

 

 

 

 

 

 

 

 

 

52

 

 

 

 

 

 

 

 

 

52

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

 

 

39

 

Stock-based compensation

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Tax withholding related to vesting

   of restricted stock units and other

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

(1

)

Adoption impact of ASU 2016-13, Financial

   Instruments—Credit Losses

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

(5

)

Balance at March 31, 2020

 

 

75

 

 

 

 

 

 

20

 

 

 

(2,235

)

 

 

 

 

 

169

 

 

 

(2,046

)

 

The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.

 

 

9


 

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) powertrains. These products are key enablers for fuel economy and emission standards compliance.

On October 1, 2018, the Company became an independent publicly-traded company through a pro rata distribution by Honeywell International Inc. (“Former Parent” or “Honeywell”) of 100% of the then-outstanding shares of Garrett to Honeywell’s stockholders (the “Spin-Off”).   Each Honeywell stockholder of record received one share of Garrett common stock for every 10 shares of Honeywell common stock held on the record date. Approximately 74 million shares of Garrett common stock were distributed on October 1, 2018 to Honeywell stockholders. In connection with the Spin-Off, Garrett´s common stock began trading “regular-way” under the ticker symbol “GTX” on the New York Stock Exchange on October 1, 2018.

The Spin-Off was completed pursuant to a Separation and Distribution Agreement and other agreements with Honeywell related to the Spin-Off, including but not limited to an indemnification and reimbursement agreement (the “Indemnification and Reimbursement Agreement”) and a tax matters agreement (the “Tax Matters Agreement”). Refer to Note 17, Commitments and Contingencies for additional details related to the Indemnification and Reimbursement Agreement and Tax Matters Agreement.

Unless the context otherwise requires, references to “Garrett,” “we,” “us,” “our,” and “the Company” refer to (i) Honeywell’s Transportation Systems Business (the “Transportation Systems Business” or the “Business”) prior to the Spin-Off and (ii) Garrett Motion Inc. and its subsidiaries following the Spin-Off, as applicable.

COVID-19

In December 2019, a strain of novel coronavirus disease, COVID-19, was identified in Wuhan, China. This virus has been declared a pandemic and has spread across the world, including throughout Asia, the United States and Europe. Our business operations have been materially disrupted and our revenues have decreased significantly as a result of the COVID-19 pandemic and related response measures, and we expect our financial performance in the quarter ending June 30, 2020, and in future fiscal quarters, to be materially negatively affected by the pandemic and its impact on the global automotive industry.

Our Credit Agreement by and among us, certain of our subsidiaries, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”), contains financial covenants, including a consolidated total leverage ratio covenant and a consolidated interest coverage ratio covenant. We were in compliance with our financial covenants as of March 31, 2020. However, as a result of the impacts of the COVID-19 pandemic, we expect to be unable to continue to comply with the consolidated total leverage ratio covenant as early as June 30, 2020. If we fail to comply with our consolidated total leverage ratio covenant, an event of default under the Credit Agreement would be triggered and our obligations under the Credit Agreement or other agreements (including as a result of cross-default provisions) may be accelerated.

Our management has concluded that the foregoing conditions and events raise substantial doubt as to our ability to continue as a going concern. The accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern within one year after the issuance of the financial statements.

Our management is in the process of negotiating with our lenders to obtain an amendment to or a waiver from the consolidated total leverage ratio covenant in our Credit Agreement. However, there can be no assurance that we will be successful in obtaining an amendment or waiver.

Basis of Presentation

The Consolidated Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All amounts presented are in millions, except per share amounts.

10


 

Asbestos-related expenses, net of probable insurance recoveries, are presented within Other expense, net in the Consolidated Interim Statement of Operations. Honeywell is subject to certain asbestos-related and environmental-related liabilities, primarily related to its legacy Bendix business. In conjunction with the Spin-Off, certain operations that were part of the Bendix business, along with the ownership of the Bendix trademark, as well as certain operations that were part of other legacy elements of the Business, were transferred to us. The accounting for the majority of our asbestos-related liability payments and accounts payable reflect the terms of the Indemnification and Reimbursement Agreement with Honeywell entered into on September 12, 2018, under which we are required to make payments to Honeywell in amounts equal to 90% of Honeywell’s asbestos-related liability payments and accounts payable, primarily related to the Bendix business in the United States, as well as certain environmental-related liability payments and accounts payable and non-United States asbestos-related liability payments and accounts payable, in each case related to legacy elements of the Business, including the legal costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts and, as may be applicable, certain other recoveries associated with such liabilities. The Indemnification and Reimbursement Agreement provides that the agreement will terminate upon the earlier of (x) December 31, 2048 or (y) December 31st of the third consecutive year during which certain amounts owed to Honeywell during each such year were less than $25 million as converted into Euros in accordance with the terms of the agreement. We are currently engaged in litigation against Honeywell in connection with the Indemnification and Reimbursement Agreement. For additional information, see Note 17, Commitments and Contingencies

The Consolidated Interim Financial Statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods. The Consolidated Interim Financial Statements should be read in conjunction with the audited annual Consolidated and Combined Financial Statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K, as filed with the SEC on February 27, 2020 (our “2018 Form 10-K”). The results of operations and cash flows for the three months ended March 31, 2020 should not necessarily be taken as indicative of the entire year.

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 in order to minimize the potentially disruptive effects of quarterly closing on our business processes. The effects of this practice are generally not significant to reported results for any quarter and only exist within a reporting year. For differences in actual closing dates that are material to year-over-year comparisons of quarterly or year-to-date results, such differences have been adjusted for the three months ended March 31, 2020. Our actual closing dates for the three months ended March 31, 2020 and 2019 were March 28, 2020 and March 30, 2019, respectively.    

 

Note 2. Summary of Significant Accounting Policies

The accounting policies of the Company are set forth in Note 2 to the audited annual Consolidated and Combined Financial Statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). We include herein certain updates to those policies.

Trade Receivables and Allowance for Doubtful Accounts—Trade accounts receivable are recorded at the invoiced amount as a result of transactions with customers. Garrett maintains allowances for doubtful accounts for estimated losses as a result of a customer’s inability to make required payments. As of January 1, 2020, Garrett adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance requires an entity to recognize as an allowance its estimate of lifetime expected credit losses rather than incurred losses. The guidance is also applicable to contract assets such as unbilled receivables. Consistent with the new guidance, Garrett estimates losses from doubtful accounts expected over the contractual life of the receivables based on days past due as measured from the contractual due date and collection history. Garrett also takes into consideration changes in economic conditions that may not be reflected in historical trends (for example, customers in bankruptcy, liquidation or reorganization). Receivables are written-off against the allowance for doubtful accounts when they are determined uncollectible. Such determination includes analysis and consideration of the particular conditions of the account, including time intervals since last collection, customer performance against agreed upon payment plans, solvency of customer and any bankruptcy proceedings.

Recently Adopted Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which amends certain disclosure requirements related to fair value measures. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Effective January 1, 2020, the Company adopted the new guidance. The adoption did not have an impact on our Consolidated Interim Balance Sheets, Consolidated Interim Statements of Operations and related Notes to the Consolidated Interim Financial Statements.

11


 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. Adoption of the new standard resulted in an increase in the allowance for doubtful accounts of $5 million which was recognized as a cumulative-effect adjustment to opening retained earnings as of January 1, 2020.  

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits Defined Benefit Plans – General (Subtopic 715-20), which amends certain disclosure requirements related to the defined benefit pension and other postretirement plans. The guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact on its disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company is currently evaluating the impact on our hedging relationships, other transactions, and disclosures.

 

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, 2020

 

 

 

OEM

 

 

Aftermarket

 

 

Other

 

 

Total

 

United States

 

$

92

 

 

$

40

 

 

$

 

 

$

132

 

Europe

 

 

394

 

 

 

30

 

 

 

9

 

 

 

433

 

Asia

 

 

159

 

 

 

8

 

 

 

6

 

 

 

173

 

Other International

 

 

3

 

 

 

4

 

 

 

 

 

 

7

 

 

 

$

648

 

 

$

82

 

 

$

15

 

 

$

745

 

 

 

 

Three months ended March 31, 2019

 

 

 

OEM

 

 

Aftermarket

 

 

Other

 

 

Total

 

United States

 

$

83

 

 

$

45

 

 

$

1

 

 

$

129

 

Europe

 

429

 

 

37

 

 

12

 

 

478

 

Asia

 

199

 

 

13

 

 

7

 

 

219

 

Other International

 

4

 

 

5

 

 

 

 

 

9

 

 

 

$

715

 

 

$

100

 

 

$

20

 

 

$

835

 

 

Contract Balances

The following table summarizes our contract assets and liabilities balances:

 

 

 

2020

 

Contract assets—January 1

 

$

6

 

Contract assets—March 31

 

 

33

 

Change in contract assets—Increase/(Decrease)

 

$

27

 

Contract liabilities—January 1

 

$

(3

)

Contract liabilities—March 31

 

 

(4

)

Change in contract liabilities—(Increase)/Decrease

 

$

(1

)

 

12


 

 

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,

 

 

 

2020

 

 

2019

 

Research and development costs

 

$

28

 

 

$

32

 

Engineering-related expenses

 

 

4

 

 

 

3

 

 

 

$

32

 

 

$

35

 

 

 

Note 5. Other Expense, Net

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Indemnification related — post Spin-Off

 

$

15

 

 

$

19

 

Indemnification related — litigation

 

 

1

 

 

 

 

 

 

$

16

 

 

$

19

 

 

Note 6. Income Taxes

 

 

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

Tax expense

 

$

1

 

 

$

24

 

Effective tax rate

 

 

1.9

%

 

 

25.0

%

 

For the period ended March 31, 2020 the Company computed its effective tax rate using actual year to date information rather than a full year forecast to compute an annual effective tax rate.  Based on current forecasts which take into account a range of potential impacts from COVID-19, the Company’s effective tax rate is expected to be highly sensitive to changes in pre-tax book income because of non-deductible asbestos related expenses which have no correlation to earnings. Accordingly, the Company concluded that computing its effective tax rate using year to date actual results is its best estimate of tax expense for the period ended March 31, 2020.

The effective tax rate decreased for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to a reduction in withholding taxes and true ups from local statutory filings, partially offset by permanent tax differences that are not impacted proportionately with lower pre-tax book income as compared to the three months ended March 31, 2019.

The effective tax rate for the three months ended March 31, 2020 was lower than the U.S. federal statutory rate of 21% primarily due to a reduction in withholding taxes, true ups from local statutory filings and lower pre-tax book income.

The effective tax rate for the three months ended March 31, 2019 was higher than the U.S. federal statutory rate of 21% primarily due to non-deductible asbestos related expenses, withholding taxes on current year earnings and tax reserves, partially offset by non-U.S. earnings taxed at lower rates.

The effective tax rate can vary from quarter to quarter due to changes in the Company’s global mix of earnings, impacts of Covid-19, the resolution of income tax audits, changes in tax laws (including updated guidance on U.S. tax reform), deductions related to employee share-based payments, internal restructurings and pension mark-to-market adjustments.

In connection with the global outbreak of COVID-19, many countries have enacted legislation to provide various forms of emergency economic relief, including the CARES Act in the United States, that may provide financial benefits to the Company.  At this time, we do not expect such benefits to have a material impact to the Company.

 

13


 

Note 7. Accounts, Notes and Other Receivables—Net

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Trade receivables

 

$

489

 

 

$

574

 

Notes receivables

 

 

77

 

 

 

68

 

Other receivables

 

 

72

 

 

 

69

 

 

 

$

638

 

 

$

711