UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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:
(Exact Name of Registrant as Specified in its Charter)
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
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(Zip Code) |
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(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:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
Common Stock, |
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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.
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).
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.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Emerging growth company |
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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
As of July 27, 2020, the registrant had
Table of Contents
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Page |
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PART I. |
5 |
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Item 1. |
5 |
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5 |
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Consolidated Interim Statements of Comprehensive Income (Loss) (Unaudited) |
6 |
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7 |
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8 |
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Consolidated Interim Statements of Equity (Deficit) (Unaudited) |
9 |
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10 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 |
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Item 3. |
38 |
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Item 4. |
38 |
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PART II. |
39 |
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Item 1. |
39 |
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Item 1A. |
39 |
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Item 2. |
40 |
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Item 3. |
40 |
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Item 4. |
40 |
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Item 5. |
40 |
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Item 6. |
41 |
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43 |
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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.
In connection with the Spin-Off, Garrett entered into a number of agreements with Honeywell, including but not limited to an indemnification and reimbursement agreement (the “Subordinated Indemnity Agreement”) and a tax matters agreement (the “Tax Matters Agreement”).
Unless the context otherwise requires, references to “Garrett,” “we,” “us,” “our,” and “the Company” in this Quarterly Report on Form 10-Q refer to Garrett Motion Inc. and its subsidiaries following the Spin-Off.
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 and other industry trends, 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, and the expected timing of those payments, 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:
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1. |
changes in the automotive industry and economic or competitive conditions; |
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2. |
our ability to develop new technologies and products, and the development of either effective alternative turbochargers or new replacement technologies; |
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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; |
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4. |
potential material losses and costs as a result of any warranty claims and product liability actions brought against us; |
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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; |
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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; |
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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; |
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8. |
inaccuracies in estimates of volumes of awarded business; |
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9. |
work stoppages, other disruptions or the need to relocate any of our facilities; |
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10. |
supplier dependency; |
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11. |
failure to meet our minimum delivery requirements under our supply agreements; |
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12. |
failure to increase productivity or successfully execute repositioning projects or manage our workforce; |
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13. |
potential material environmental liabilities and hazards; |
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14. |
natural disasters and physical impacts of climate change; |
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15. |
pandemics, including without limitation the COVID-19 pandemic, and effects on our workforce and supply chain; |
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16. |
technical difficulties or failures, including cybersecurity risks; |
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17. |
the outcome of and costs associated with pending and potential material litigation matters, including our pending lawsuit against Honeywell; |
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18. |
changes in legislation or government regulations or policies, including with respect to CO2 reduction targets in Europe as part of the Green Deal objectives or other similar changes which may contribute to a proportionately higher level of battery electric vehicles; |
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19. |
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
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20. |
risks related to our agreements with Honeywell, such as the Subordinated Indemnity Agreement and Tax Matters Agreement; |
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21. |
the terms of our indebtedness and our ability to access capital markets; |
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22. |
unforeseen adverse tax effects; |
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23. |
costs related to operating as a standalone public company and failure to achieve benefits expected from the Spin-Off; |
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24. |
our leveraged capital structure and liabilities to Honeywell may pose significant challenges to our overall strategic and financial flexibility and have a material adverse effect on our business, liquidity position and financial position; |
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25. |
inability to recruit and retain qualified personnel; and |
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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, as updated in this Quarterly Report on Form 10-Q, 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)
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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(Dollars in millions, except per share amounts) |
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Net sales (Note 3) |
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Cost of goods sold |
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Gross profit |
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$ |
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$ |
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$ |
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$ |
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Selling, general and administrative expenses |
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Other expense, net (Note 5) |
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Interest expense |
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Non-operating (income) expense |
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( |
) |
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( |
) |
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Income before taxes |
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$ |
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$ |
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$ |
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$ |
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Tax expense (Note 6) |
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Net (loss) income |
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$ |
( |
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$ |
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$ |
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$ |
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Earnings (loss) per common share |
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Basic |
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$ |
( |
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$ |
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$ |
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$ |
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Diluted |
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$ |
( |
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$ |
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$ |
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$ |
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Weighted average common shares outstanding |
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Basic |
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Diluted |
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The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
5
GARRETT MOTION INC.
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
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For the Three Months Ended June 30, |
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For the Six Months Ended June 30, |
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2020 |
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2019 |
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2020 |
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2019 |
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(Dollars in millions) |
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Net (loss) income |
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$ |
( |
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$ |
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$ |
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$ |
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Foreign exchange translation adjustment |
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( |
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( |
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( |
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Defined benefit pension plan adjustment, net of tax (Note 18) |
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— |
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— |
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— |
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Changes in fair value of effective cash flow hedges, net of tax (Note 14) |
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( |
) |
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( |
) |
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( |
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Total other comprehensive (loss) income, net of tax |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Comprehensive (loss) income |
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$ |
( |
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$ |
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$ |
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$ |
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The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
6
GARRETT MOTION INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(Unaudited)
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June 30, 2020 |
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December 31, 2019 |
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(Dollars in millions) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts, notes and other receivables – net (Note 7) |
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Inventories – net (Note 9) |
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Other current assets |
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Total current assets |
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Investments and long-term receivables |
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Property, plant and equipment – net |
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Goodwill |
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Deferred income taxes |
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Other assets (Note 10) |
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Total assets |
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$ |
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$ |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Borrowings under revolving credit facility |
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— |
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Current maturities of long-term debt |
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Obligations payable to Honeywell, current (Note 17) |
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Accrued liabilities (Note 11) |
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Total current liabilities |
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Long-term debt |
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Deferred income taxes |
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Obligations payable to Honeywell (Note 17) |
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Other liabilities (Note 12) |
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Total liabilities |
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$ |
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$ |
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COMMITMENTS AND CONTINGENCIES (Note 17) |
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EQUITY (DEFICIT) |
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Common stock, par value $ 2020 and December 31, 2019, respectively |
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— |
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— |
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Additional paid-in capital |
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Retained earnings |
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( |
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( |
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Accumulated other comprehensive income (Note 15) |
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Total stockholders' deficit |
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( |
) |
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( |
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Total liabilities and stockholders' deficit |
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$ |
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$ |
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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)
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For the Six Months Ended June 30, |
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2020 |
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2019 |
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(Dollars in millions) |
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Cash flows from operating activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Deferred income taxes |
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( |
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— |
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Depreciation |
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Amortization of deferred issuance costs |
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Foreign exchange loss |
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Stock compensation expense |
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Pension expense |
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— |
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Other |
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Changes in assets and liabilities: |
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Accounts, notes and other receivables |
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( |
) |
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Inventories |
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( |
) |
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( |
) |
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Other assets |
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( |
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Accounts payable |
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( |
) |
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( |
) |
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Accrued liabilities |
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( |
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( |
) |
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Obligations payable to Honeywell |
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( |
) |
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( |
) |
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Other liabilities |
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( |
) |
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Net cash (used for) provided by operating activities |
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$ |
( |
) |
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$ |
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Cash flows from investing activities: |
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Expenditures for property, plant and equipment |
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( |
) |
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( |
) |
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Other |
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( |
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Net cash used for investing activities |
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$ |
( |
) |
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$ |
( |
) |
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Cash flows from financing activities: |
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Proceeds from revolving credit facility |
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Payments of revolving credit facility |
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( |
) |
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( |
) |
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Payments of long-term debt |
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( |
) |
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( |
) |
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Other |
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( |
) |
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Net cash provided by (used for) financing activities |
|
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|
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( |
) |
|
Effect of foreign exchange rate changes on cash and cash equivalents |
|
|
( |
) |
|
|
( |
) |
|
Net decrease in cash and cash equivalents |
|
|
( |
) |
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|
( |
) |
|
Cash and cash equivalents at beginning of period |
|
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Cash and cash equivalents at end of period |
|
$ |
|
|
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$ |
|
|
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)
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Accumulated |
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Additional |
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Other |
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||
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Common Stock |
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Paid-in |
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Retained |
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Invested |
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Comprehensive |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Deficit |
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Income/(Loss) |
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Deficit |
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(in millions) |
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Balance at December 31, 2018 |
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— |
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|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
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|
|
( |
) |
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Net income |
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— |
|
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— |
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— |
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— |
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Other comprehensive income, net of tax |
|
|
— |
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— |
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— |
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— |
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— |
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|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Balance at March 31, 2019 |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Balance at June 30, 2019 |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019 |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Tax withholding related to vesting of restricted stock units and other |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Adoption impact of ASU 2016-13, Financial Instruments - Credit Losses |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Balance at March 31, 2020 |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Other comprehensive loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation |
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