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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, 2021

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

None

None

None

 

 

 

 

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  

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 23, 2021, the registrant had 76,082,592 shares of common stock, $0.001 par value per share, outstanding.

 

 

 


 

 

Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

7

Item 1.

Financial Statements (Unaudited)

7

 

Consolidated Interim Statements of Operations (Unaudited)

7

 

Consolidated Interim Statements of Comprehensive Income (Loss) (Unaudited)

8

 

Consolidated Interim Balance Sheets (Unaudited)

9

 

Consolidated Interim Statements of Cash Flows (Unaudited)

10

 

Consolidated Interim Statements of Equity (Deficit) (Unaudited)

11

 

Notes to Unaudited Consolidated Interim Financial Statements

12

Item 2.

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

39

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

Item 4.

Controls and Procedures

56

PART II.

OTHER INFORMATION

57

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

59

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3.

Defaults Upon Senior Securities

59

Item 4.

Mine Safety Disclosures

59

Item 5.

Other Information

59

Item 6.

Exhibits

60

Signatures

62

 

 

 

i


 

 

EXPLANATORY NOTE

On September 20, 2020 (the “Petition Date”), Garrett Motion Inc. (the “Company”) and certain of its subsidiaries (collectively, the “Debtors”) each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Debtors’ chapter 11 cases (the “Chapter 11 Cases”) are being jointly administered under the caption “In re: Garrett Motion Inc., 20-12212.”

On the Petition Date, the Debtors entered into a Restructuring Support Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “RSA”) with consenting lenders (the “Consenting Lenders”) holding, in the aggregate, approximately 61% of the aggregate outstanding principal amount of loans under that certain Credit Agreement, dated as of September 27, 2018, (as amended, restated, supplemented or otherwise modified from time to time, the “Prepetition Credit Agreement”) by and among the Company, as Holdings, Garrett LX III S.à r.l., as Lux Borrower, Garrett Borrowing LLC, as U.S. Co-Borrower, Garrett Motion S.à r.l., as Swiss Borrower, the Lenders and Issuing Banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. Pursuant to the RSA, the Consenting Lenders and the Debtors agreed to the principal terms of a financial restructuring, to be implemented through a plan of reorganization under the Bankruptcy Code, and which could include the sale of all or substantially all of the assets of certain Debtors and of the stock of certain Debtors and other subsidiaries, as further described below. On January 6, 2021, the Debtors and Consenting Lenders holding no less than a majority of the aggregate outstanding principal amount of loans under the Prepetition Credit Agreement then held by all Consenting Lenders entered into Amendment No. 1 to the Restructuring Support Agreement (the “Amendment”), which, among other things, extended certain milestones contained in the RSA.

On the Petition Date, certain of the Debtors also entered into a share and asset purchase agreement (as amended, restated, supplemented or otherwise modified from time to time, the “Stalking Horse Purchase Agreement”) with AMP Intermediate B.V. (the “Stalking Horse Bidder”) and AMP U.S. Holdings, LLC, each affiliates of KPS Capital Partners, LP (“KPS”), pursuant to which the Stalking Horse Bidder agreed to purchase, subject to the terms and conditions contained therein, substantially all of the assets of the Debtors. The Stalking Horse Purchase Agreement constituted a “stalking horse” bid that was subject to higher and better offers by third parties in accordance with the bidding procedures approved by the Bankruptcy Court in an order entered by the Bankruptcy Court after hearings on October 21, 2020 and October 23, 2020 (the “Bidding Procedures Order”). The Bidding Procedures Order permitted third parties to submit competing proposals for the purchase and/or reorganization of the Debtors and approved stalking horse protections for the Stalking Horse Bidder.

On October 6, 2020, the Bankruptcy Court entered an order granting interim approval of the Debtors’ entry into a Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), with the lenders party thereto (the “DIP Lenders”) and Citibank N.A. as administrative agent (the “DIP Agent”). On October 9, 2020 (the “Closing Date”), the Company, the DIP Agent and the DIP Lenders entered into the DIP Credit Agreement. The DIP Credit Agreement provides for a senior secured, super-priority term loan (the “DIP Term Loan Facility”) in the principal amount of $200 million, $100 million of which was funded on the Closing Date and $100 million of which was subsequently funded on October 26, 2020, following entry of the Bankruptcy Court’s final order approving the DIP Term Loan Facility on October 23, 2020. The proceeds of the DIP Term Loan Facility are to be used by the Debtors to (a) pay certain costs, premiums, fees and expenses related to the Chapter 11 Cases, (b) make payments pursuant to any interim or final order entered by the Bankruptcy Court pursuant to any “first day” motions permitting the payment by the Debtors of any prepetition amounts then due and owing, (c) make certain adequate protection payments in accordance with the DIP Credit Agreement and (d) fund working capital needs of the Debtors and their subsidiaries to the extent permitted by the DIP Credit Agreement. On October 12, 2020, the Company, the DIP Agent and the DIP Lenders entered into the First Amendment to the DIP Credit Agreement (the “First DIP Amendment”). The First DIP Amendment eliminates the obligation for the Company to pay certain fees to the DIP Lenders in connection with certain prepayment events under the DIP Credit Agreement. On March 17, 2021, the Company prepaid $100 million that was previously outstanding under the DIP Credit Agreement, and on March 31, 2021 the Company extended the maturity date for the loans remaining outstanding thereunder to April 30, 2021.

In accordance with the Bidding Procedures Order, the Debtors held an auction (the “Auction”) at which they solicited and received higher and better offers from KPS and from a consortium made up of Owl Creek Asset Management, L.P., Warlander Asset Management, L.P., Jefferies LLC, Bardin Hill Opportunistic Credit Master Fund LP, Marathon Asset Management L.P., and Cetus Capital VI, L.P., or affiliates thereof (collectively, the “OWJ Group”). In addition to the bids received at the Auction from KPS and the OWJ Group, the Debtors also received a transaction proposal in parallel from Centerbridge Partners, L.P. (“Centerbridge”), Oaktree Capital Management, L.P. (“Oaktree”), Honeywell International Inc. and certain other investors and parties (the “Additional Investors” and, collectively, the “CO Group”). The Auction was completed on January 8, 2021, at which point the Debtors filed with the Bankruptcy Court (i) an auction notice noting that a bid received from KPS was the successful bid at the Auction but that the Debtors were still considering the proposal from the CO Group, (ii) a plan of reorganization (as may be amended, restated, supplemented or otherwise modified from time to time, the “Plan”) and (iii) a related disclosure statement (as may be amended, restated, supplemented or otherwise modified from time to time, (the “Disclosure Statement”).

2


 

On January 11, 2021, the Debtors, having determined that the proposal from the CO Group was a higher and better proposal than the successful bid of KPS at the Auction, entered into a Plan Support Agreement with the CO Group (as amended, restated, supplemented or otherwise modified from time to time, the “PSA”) and announced their intention to pursue a restructuring transaction with the CO Group (the “Transaction”). As a result of the entry into the PSA, (i) the Debtors filed a supplemental auction notice with the Bankruptcy Court on January 11, 2021 describing the Debtors’ determination to proceed with the Transaction, (ii) the Debtors filed a revised Plan to implement the Transaction and a related revised Disclosure Statement with the Bankruptcy Court on January 22, 2021 and (iii) the Stalking Horse Purchase Agreement became terminable, following which, on January 15, 2021, the Stalking Horse Bidder terminated the Stalking Horse Purchase Agreement and the Debtors subsequently paid a termination payment of $63 million and an expense reimbursement payment of $15.7 million to the Stalking Horse Bidder pursuant to the terms of the Stalking Horse Purchase Agreement and the Bidding Procedures Order.

In accordance with the terms of the PSA, on January 22, 2021, the Debtors’ entered into an Equity Backstop Commitment Agreement (as amended, restated, supplemented, replaced or otherwise modified from time to time, the “EBCA”) with certain members of the CO Group (the “Original Backstop Parties”), pursuant to which, among other things, the Company would conduct the rights offering contemplated by the PSA (as modified pursuant to the PSA from time to time, the “Rights Offering”) and each Original Backstop Party committed to (i) exercise its rights, as a stockholder of the Company, to purchase in the Rights Offering shares of the convertible Series A preferred stock of the Company to be offered in the Rights Offering (the “Series A Preferred Stock”) and (ii) purchase, on a pro rata basis (in accordance with percentages set forth in the EBCA), shares of Series A Preferred Stock which were offered but not subscribed for in the Rights Offering.

On January 24, 2021, representatives of, the official committee of equity securities holders (the “Equity Committee”) submitted a restructuring term sheet for a proposed plan of reorganization sponsored by Atlantic Park.  The Equity Committee subsequently filed with the Bankruptcy Court on February 5, 2021, a proposed plan of reorganization and related disclosure statement with respect to such transaction (as reflected in the proposed plan of reorganization filed with the Bankruptcy Court, the “Atlantic Park Proposal”). The transactions contemplated under the Atlantic Park Proposal were proposed as an alternative to the transactions contemplated under the Plan. In connection with the Atlantic Park Proposal, the Equity Committee filed a motion with the Bankruptcy Court seeking to modify the Debtors’ exclusive periods to file and solicit votes on a Chapter 11 plan (the “Equity Committee Exclusivity Motion”). On February 9, 2021, the Equity Committee filed an objection to the Debtors’ motion seeking authority to enter into and perform under the PSA and the EBCA (the “Equity Committee Objection”). The Company had significant concerns with the feasibility of the Atlantic Park Proposal and concluded at the time that the transactions contemplated under the Atlantic Park Proposal were not reasonably likely to lead to a higher and better alternative plan of reorganization as compared to the Plan. The Equity Committee filed a revised proposed plan of reorganization and disclosure statement in connection with the Atlantic Park Proposal with the Bankruptcy Court on February 15, 2021.

On February 15, 2021, the Debtors and the CO Group agreed with certain of the Consenting Lenders to amend and restate the PSA so as to, among other things, add certain of the Consenting Lenders as parties thereto supporting the Plan.

Following a hearing in the Bankruptcy Court on February 16, 2021, the Debtors, the CO Group, the Equity Committee and certain additional parties agreed to proceed with a court-approved mediation process to attempt to reach a consensual resolution regarding the Equity Committee Exclusivity Motion and the Equity Committee Objection at that time.

Through the mediation, the Debtors, the CO Group, Equity Committee and the additional parties to the mediation reached a consensual resolution regarding certain aspects of the Plan, and on March 9, 2021, the PSA was subsequently amended and restated, and a replacement EBCA among the Debtors and certain of the Additional Investors (the “Equity Backstop Parties”) was entered into, to provide for, among other things: (i) a direct equity investment of $668.8 million by Centerbridge and Oaktree to purchase Series A Preferred Stock, (ii) two Rights Offerings in an aggregate amount of $632 million (including an allocation of subscription rights to the Equity Backstop Parties as consideration for their agreement to backstop the Rights Offerings), and (iii) an increase of the conversion price to common stock of the Series A Preferred Stock from $3.50 to $5.25. On March 9, 2021 the Debtors filed amended versions of the Plan and Disclosure Statement with the Bankruptcy Court to reflect this consensual resolution. On March 12, 2021 the Bankruptcy Court entered orders approving the Disclosure Statement, proposed procedures for solicitation of votes on the Plan and the Debtors’ entry into and performance and obligations under the PSA and the EBCA, which remain subject to customary closing conditions.  On March 12, 2021 the Debtors filed the solicitation versions of the Plan and Disclosure Statement with the Bankruptcy Court.

3


 

As contemplated by the Plan, the Company filed a supplement to the Plan (as amended, restated, supplemented or otherwise modified from time to time, the “Plan Supplement”) with the Bankruptcy Court on April 9, 2021, which includes drafts of certain documents related to the Plan and referenced therein. On April 20, 2021 and April 22, 2021, the Debtors filed amended Plan Supplements reflecting updates and other changes and corrections to certain of the draft documentation. Also, on April 20, 2021, the Debtors also filed an amended version of the Plan, reflecting, among other things, revised treatment of certain claims and certain other technical changes and corrections. Following a hearing in the Bankruptcy Court on April 23, 2021, the Debtors filed a further amended Plan on April 26, 2021.

On April 26, 2021, the Bankruptcy Court entered an order (the “Confirmation Order”) among other things, confirming the Plan. The Company expects that the effective date of the Plan (the “Effective Date”) will occur as soon as all conditions precedent to the Plan have been satisfied, which the Company is targeting for April 30, 2021. Although the Company is targeting occurrence of the Effective Date on April 30, 2021, the Company can make no assurances as to when, or ultimately if, the Plan will become effective. It is also possible that technical amendments could be made to the Plan prior to the Effective Date.

The disclosures in this Quarterly Report on Form 10-Q should be read in the context of the Chapter 11 Cases. All documents filed with the Bankruptcy Court are available for inspection at the Office of the Clerk of the Bankruptcy Court or online (a) for a fee on the Bankruptcy Court’s website at www.ecf.uscourts.gov and (b) free of charge on the website of the Debtors’ claims and noticing agent, Kurtzman Carson Consultants LLC at http://www.kccllc.net/garrettmotion.

See Note 2 Reorganization and Chapter 11 Proceedings of the Notes to the Company’s Condensed and Combined Consolidated Interim Financial Statements for additional information regarding the Chapter 11 Cases, the RSA, the Stalking Horse Purchase Agreement, the PSA, the EBCA, the Transaction and the DIP Credit Agreement.

 

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.

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.

4


 

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. 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 consequences and outcome of the Chapter 11 Cases, the timing and satisfaction of the conditions to effectiveness of the Plan, the terms of our credit agreements following emergence from the Chapter 11 Cases (“Emergence”), other potential claims against the Debtors related to the Chapter 11 Cases, the completion of the Transaction (including our global settlement with Honeywell), the impact of the delisting of our common stock from the New York Stock Exchange, the anticipated impact of the COVID-19 pandemic and expected recovery 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, pending litigation, 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:

 

restrictions on our operations as a result of the Chapter 11 Cases, the PSA and the DIP Credit Agreement;

 

ability to satisfy the conditions to effectiveness of the Plan and complete a restructuring transaction (in accordance with the PSA and the EBCA);

 

the potential adverse effects of extended operation during the Chapter 11 Cases on our business, financial condition, results of operations and liquidity, including potential loss of customers and suppliers, management and other key personnel;

 

the availability of additional financing to maintain our operations if the DIP Term Loan Facility should become unavailable or insufficient;

 

the potential to experience increased levels of employee attrition as a result of the Chapter 11 Cases;

 

ability to utilize our net operating loss carryforwards in future years;

 

the delisting of our common stock from NYSE and resulting limited liquidity and increased price volatility of our common stock;

 

other litigation and the inherent risks involved in a bankruptcy process;

 

the effect of the Chapter 11 Cases on the trading price and liquidity of our securities;

 

changes in the automotive industry and economic or competitive conditions;

 

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

 

any 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;

 

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

 

any 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;

 

changes in the 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;

5


 

 

any 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;

 

inaccuracies in estimates of volumes of awarded business;

 

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

 

supplier dependency;

 

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

 

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

 

potential material environmental liabilities and hazards;

 

natural disasters and physical impacts of climate change;

 

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

 

technical difficulties or failures, including cybersecurity risks;

 

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

 

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;

 

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;

 

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

 

unforeseen adverse tax effects;

 

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;

 

inability to recruit and retain qualified personnel; and

 

the other factors described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated in this Quarterly Report on Form 10-Q, and in our other filings with the Securities and Exchange Commission.

 

You should read this Quarterly Report on Form 10-Q and the documents that we reference herein 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.

6


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

GARRETT MOTION INC.

(Debtor-in-Possession)

CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in millions, except per share amounts)

 

Net sales (Note 4)

 

$

997

 

 

$

745

 

Cost of goods sold

 

 

801

 

 

 

607

 

Gross profit

 

 

196

 

 

 

138

 

Selling, general and administrative expenses

 

 

55

 

 

 

57

 

Other expense, net (Note 6)

 

 

1

 

 

 

16

 

Interest expense (excludes contractual interest for the three months ended March 31, 2021 of $9 million) (Note 2)

 

 

21

 

 

 

16

 

Non-operating expense (income)

 

 

26

 

 

 

(4

)

Reorganization items, net (Note 2)

 

 

174

 

 

 

 

(Loss) income before taxes

 

 

(81

)

 

 

53

 

Tax expense (Note 7)

 

 

24

 

 

 

1

 

Net (loss) income

 

$

(105

)

 

$

52

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share

 

 

 

 

 

 

 

 

Basic

 

$

(1.38

)

 

$

0.69

 

Diluted

 

$

(1.38

)

 

$

0.68

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

75,904,898

 

 

 

75,040,932

 

Diluted

 

 

75,904,898

 

 

 

76,261,545

 

 

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

7


 

GARRETT MOTION INC.

(Debtor-in-Possession)

CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in millions)

 

Net (loss) income

 

$

(105

)

 

$

52

 

Foreign exchange translation adjustment

 

 

110

 

 

 

39

 

Changes in fair value of effective cash flow hedges, net of tax

   (Note 15)

 

 

1

 

 

 

 

Total other comprehensive income, net of tax

 

 

111

 

 

 

39

 

Comprehensive income

 

$

6

 

 

$

91

 

 

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

 

 

8


 

 

GARRETT MOTION INC.

(Debtor-in-Possession)

CONSOLIDATED INTERIM BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

2021

 

 

December 31,

2020

 

 

 

(Dollars in millions)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

382

 

 

$

592

 

Restricted cash

 

 

195

 

 

 

101

 

Accounts, notes and other receivables – net (Note 8)

 

 

807

 

 

 

841

 

Inventories – net (Note 10)

 

 

258

 

 

 

235

 

Other current assets

 

 

93

 

 

 

110

 

Total current assets

 

 

1,735

 

 

 

1,879

 

Investments and long-term receivables

 

 

30

 

 

 

30

 

Property, plant and equipment – net

 

 

484

 

 

 

505

 

Goodwill

 

 

193

 

 

 

193

 

Deferred income taxes

 

 

262

 

 

 

275

 

Other assets (Note 11)

 

 

131

 

 

 

135

 

Total assets

 

$

2,835

 

 

$

3,017

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,099

 

 

$

1,019

 

Borrowings under revolving credit facility

 

 

370

 

 

 

370

 

Current maturities of long-term debt

 

 

6

 

 

 

 

Debtor-in-possession Term Loan (Note 2)

 

 

100

 

 

 

200

 

Accrued liabilities (Note 12)

 

 

277

 

 

 

248

 

Total current liabilities

 

 

1,852

 

 

 

1,837

 

Long-term debt

 

 

1,049

 

 

 

1,082

 

Deferred income taxes

 

 

2

 

 

 

2

 

Other liabilities (Note 13)

 

 

125

 

 

 

114

 

Total liabilities not subject to compromise

 

 

3,028

 

 

 

3,035

 

Liabilities subject to compromise (Note 2)

 

 

2,107

 

 

 

2,290

 

Total liabilities

 

$

5,135

 

 

$

5,325

 

COMMITMENTS AND CONTINGENCIES (Note 18)

 

 

 

 

 

 

 

 

EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Common stock, par value $0.001; 400,000,000 shares authorized, 76,531,559

  and 76,229,578 issued and 76,068,026 and 75,813,634 outstanding as of

  March 31, 2021 and December 31, 2020, respectively

 

$

 

 

$

 

Additional paid-in capital

 

 

30

 

 

 

28

 

Retained deficit

 

 

(2,312

)

 

 

(2,207

)

Accumulated other comprehensive loss (Note 16)

 

 

(18

)

 

 

(129

)

Total deficit

 

 

(2,300

)

 

 

(2,308

)

Total liabilities and deficit

 

$

2,835

 

 

$

3,017

 

 

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

9


 

GARRETT MOTION INC.

(Debtor-in-Possession)

CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(105

)

 

$

52

 

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

 

 

 

 

 

 

 

 

Reorganization items, net

 

 

19

 

 

 

 

Deferred income taxes

 

 

4

 

 

 

(15

)

Depreciation

 

 

23

 

 

 

19

 

Amortization of deferred issuance costs

 

 

2

 

 

 

2

 

Foreign exchange loss

 

 

33

 

 

 

12

 

Stock compensation expense

 

 

2

 

 

 

2

 

Other

 

 

(6

)

 

 

8

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

(2

)

 

 

58

 

Inventories

 

 

(34

)

 

 

(14

)

Other assets

 

 

14

 

 

 

(10

)

Accounts payable

 

 

74

 

 

 

(29

)

Accrued liabilities

 

 

17

 

 

 

1

 

Obligations payable to Honeywell

 

 

 

 

 

(21

)

Other liabilities

 

 

(9

)

 

 

(8

)

Net cash provided by operating activities

 

$

32

 

 

$

57

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(18

)

 

 

(39

)

Other

 

 

1

 

 

 

 

Net cash used for investing activities

 

$

(17

)

 

$

(39

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Payments of debtor-in-possession financing

 

 

(100

)

 

 

 

Proceeds from revolving credit facility

 

 

 

 

 

621

 

Payments of revolving credit facility

 

 

 

 

 

(555

)

Payments of long-term debt

 

 

 

 

 

(1

)

Debtor-in-possession financing fees

 

 

(1

)

 

 

 

Other

 

 

 

 

 

(3

)

Net cash (used for) provided by financing activities

 

 

(101

)

 

 

62

 

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash

 

 

(30

)

 

 

(13

)

Net (decrease)/increase in cash, cash equivalents and restricted cash

 

 

(116

)

 

 

67

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

693

 

 

 

187

 

Cash, cash equivalents and restricted cash at end of period

 

$

577

 

 

$

254

 

Supplemental Cash Flow Disclosure:

 

 

 

 

 

 

 

 

Reorganization items paid

 

 

145

 

 

 

 

 

 

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

 

 

10


 

 

GARRETT MOTION INC.

(Debtor-in-Possession)

CONSOLIDATED INTERIM STATEMENTS OF EQUITY (DEFICIT)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Retained

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

(Deficit)

 

 

Comprehensive

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income/(Loss)

 

 

Deficit

 

 

 

(in millions)

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

76

 

 

 

 

 

 

28

 

 

 

(2,207

)

 

 

(129

)

 

 

(2,308

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

(105

)

 

 

 

 

 

(105

)

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

111

 

 

 

111

 

Stock-based compensation

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Balance at March 31, 2021

 

 

76

 

 

 

 

 

$

30

 

 

$

(2,312

)

 

$

(18

)

 

$

(2,300

)

 

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

11


 

GARRETT MOTION INC.

(Debtor-in-Possession)

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.

 

COVID-19 and Our Credit Facilities

In 2020, the COVID-19 virus was declared a pandemic and 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 future fiscal quarters, to be materially negatively affected by the pandemic and its impact on the global automotive industry.

On June 12, 2020, the Company entered into an amendment (the “2020 Amendment”) to its Credit Agreement, dated as of September 27, 2018 (as amended, the “Prepetition Credit Agreement”) by and among the Company, Garrett LX I S.à r.l., Garrett LX II S.à r.l., Garrett LX III S.à r.l., Garrett Borrowing LLC, and Garrett Motion Sàrl (f/k/a Honeywell Technologies Sàrl), the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent, consisting of:

 

a seven-year term B loan facility, consisting of a tranche denominated in Euro of €375 million and a tranche denominated in U.S. Dollars of $425 million (the “Term B Facility”);

 

a five-year term A loan facility in an aggregate principal amount of €330 million (the “Term A Facility” and, together with the Term B Facility, the “Term Loan Facilities”); and

 

a five-year revolving credit facility in an aggregate principal amount of €430 million (the “Revolving Facility” and, together with the Term Loan Facilities, the “Senior Credit Facilities”).

The primary purpose for entering into the 2020 Amendment was to obtain covenant relief with respect to the total leverage ratio and interest coverage ratios under the Prepetition Credit Agreement as a result of the impact of the COVID-19 pandemic and the Company’s leveraged capital structure.

The 2020 Amendment qualified as a debt modification that did not result in an extinguishment or have a material impact on our Consolidated Interim Financial Statements.

The commencement of the Chapter 11 Cases (as defined below) constituted an event of default that accelerated the Company’s obligations, as applicable, under the Prepetition Credit Agreement. The Prepetition Credit Agreement provides that as a result of the commencement of the Chapter 11 Cases, the principal, interest and all other amounts due thereunder shall be immediately due and payable. Any efforts to enforce the payment obligations under the Prepetition Credit Agreement are automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the Prepetition Credit Agreement are subject to the applicable provisions of the Bankruptcy Code.

The Plan (as defined below) provides for payment in full of the Company’s obligations under the Prepetition Credit Agreement. The Bankruptcy Court (as defined below) entered the Confirmation Order (as defined below) on April 26, 2021. The Company expects that the Effective Date (as defined below) will occur as soon as all conditions precedent to the Plan have been satisfied, which the Company is targeting for April 30, 2021. Although the Company is targeting occurrence of the Effective Date on April 30, 2021, the Company can make no assurances as to when, or ultimately if, the Plan will become effective.

Voluntary Filing Under Chapter 11

 

On September 20, 2020 (the “Petition Date”), the Company and certain of its subsidiaries (collectively, the “Debtors”) each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Debtors’ chapter 11 cases (the “Chapter 11 Cases”) are being jointly administered under the caption “In re: Garrett Motion Inc., 20-12212.”  On September 22 and 24, 2020, the

12


 

Bankruptcy Court entered orders granting interim approval of certain forms of relief requested by the Debtors, enabling the Debtors to conduct their business activities in the ordinary course, subject to the terms and conditions of such orders, including authorizing the Debtors to pay employee wages and benefits, to pay certain taxes and certain governmental fees and charges, to continue to operate the Debtors’ cash management system in the ordinary course, to maintain certain customer programs, and to pay the prepetition claims of certain of the Debtors’ vendors. On October 20 and 21, 2020, the Bankruptcy Court entered orders granting such relief on a final basis. For goods and services provided following the Petition Date, the Debtors continue to pay vendors under normal terms.

 

The Consolidated Interim Financial Statements included herein have been prepared in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852, Reorganizations. See Note 2, Reorganization and Chapter 11 Proceedings, for further details.

Delisting from NYSE

On September 20, 2020, the Company was notified by the New York Stock Exchange (the “NYSE”) that, as a result of the Chapter 11 Cases, and in accordance with Section 802.01D of the NYSE Listed Company Manual, that the NYSE had commenced proceedings to delist the Company’s common stock from the NYSE. The NYSE indefinitely suspended trading of the Company’s common stock on September 21, 2020. The Company determined not to appeal the NYSE’s determination. On October 8, 2020, the NYSE filed a Form 25-NSE with the Securities and Exchange Commission, which removed the Company’s common stock from listing and registration on the NYSE effective as of the opening of business on October 19, 2020. Trading of the Company’s common stock now occurs on the OTC Pink Market under the symbol “GTXMQ.” Any over-the-counter market quotations of the Company’s common stock reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

Going Concern

The accompanying Consolidated Interim Financial Statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. Liabilities subject to compromise will be resolved in connection with the Chapter 11 Cases. The Company’s ability to continue as a going concern is contingent upon the Company’s ability to successfully implement a plan of reorganization in the Chapter 11 Cases, among other factors. As a result of the Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession under the Bankruptcy Code, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business, for amounts other than those reflected in the accompanying Consolidated Interim Financial Statements. Further, any plan of reorganization in the Chapter 11 Cases could materially change the amounts and classifications of assets and liabilities reported in the Consolidated Interim Financial Statements. The accompanying Consolidated Interim Financial Statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern or as a consequence of the Chapter 11 Cases. As a result of our financial condition, uncertainty related to the impacts of COVID-19, and the risks and uncertainties surrounding the Chapter 11 Cases, substantial doubt exists that we will be able to continue as a going concern.

                  

 

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.

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 (the “Honeywell Indemnity Agreement”), under which Garrett ASASCO is 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 Honeywell Indemnity 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 have accounted for the Honeywell liability consistent with the agreement up to the Petition Date and classified it as part of Liabilities Subject to Compromise.

13


 

Under the terms of the PSA and the Transaction, the Plan (as defined below), as confirmed by the Bankruptcy Court, includes a global settlement with Honeywell providing for (a) the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to the Honeywell Indemnity Agreement, that certain Indemnification Guarantee Agreement, dated as of September 27, 2018 (as amended, restated, amended and restated, supplemented, or otherwise modified from time to time), by and among Honeywell ASASCO 2 Inc. as payee, Garrett ASASCO as payor, and certain subsidiary guarantors as defined therein (the “Guarantee Agreement,” and together with the Honeywell Indemnity Agreement, the “Indemnity Agreements”) and the Tax Matters Agreement and (b) the dismissal with prejudice of the Honeywell Litigation in exchange for (x) a $375 million cash payment at Emergence from the Chapter 11 Cases and (y) the new Series B Preferred Stock issued by the Company payable in installments of $35 million in 2022, and $100 million annually 2023-2030 (the “Series B Preferred Stock”). The Company will have the option to prepay the Series B Preferred Stock in full at any time at a call price equivalent to $584 million as of Emergence (representing the present value of the installments at a 7.25% discount rate). The Company will also have the option to make a partial payment of the Series B Preferred Stock, reducing the present value to $400 million, at any time within 18 months of Emergence. In every case the duration of future liabilities to Honeywell will be reduced from 30 years prior to the Chapter 11 filing to a maximum of nine years.

For additional information, see Note 18, Commitments and Contingencies, of the Notes to the Consolidated Interim Financial Statements.

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, including considerations for the impact from the outbreak of the COVID-19 pandemic on the Company's business due to various global macroeconomic, operational and supply chain risks as a result of COVID-19. Actual results could differ from the original estimates, requiring adjustments to these balances in future periods. Furthermore, while operating as “debtors-in-possession” under Chapter 11, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business and subject to restrictions of the debtor in possession (“DIP”) financing, for amounts other than those reflected in the accompanying unaudited Consolidated Interim Financial Statements. Any such actions occurring during the Chapter 11 Cases, including through a plan of reorganization confirmed by the Bankruptcy Court could materially impact the amounts and classifications of assets and liabilities reported in the unaudited Consolidated Interim Financial Statements.

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, 2020 included in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on February 16, 2020 (our “2020 Form 10-K”). The results of operations for three months ended March 31, 2021 and cash flows for the three months ended March 31, 2021 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, 2021. Our actual closing dates for the three months ended March 31, 2021 and 2020 were April 3, 2021 and March 28, 2020, respectively.

Note 2. Reorganization and Chapter 11 Proceedings

Key Events and Voluntary Petition for Reorganization

Due to the Company´s highly leveraged capital structure resulting from the Spin-Off, the Company began a strategic review process assisted by external financial advisers before the COVID-19 pandemic. The pandemic accelerated the review process to include the careful monitoring of liquidity and the consideration of potential court-supervised restructuring processes.

The strategic review process lasted months and considered a wide variety of options, including strategic mergers and stand-alone recapitalizations, both out-of-court and with the assistance of Chapter 11. The result of the Company’s strategic review process was the decision to commence a pre-filing marketing process for a cash sale of the business in Chapter 11, with the proceeds of the sale and any litigation recoveries related to the spin-off to be distributed to stakeholders. After the bidding process, the Company selected a winning bid of $2.1 billion from AMP Intermediate B.V. (the “Stalking Horse Bidder”) and AMP U.S. Holdings, LLC, each affiliate of KPS Capital Partners, LP, (“KPS”).

14


 

As described in greater detail below, the Stalking Horse Bidder and certain of the Debtors entered into a share and asset purchase agreement (the “Stalking Horse Purchase Agreement”) on the Petition Date. The Stalking Horse Purchase Agreement   constituted a “stalking horse” bid that was subject to higher and better offers by third parties in accordance with the bidding procedures approved by the Bankruptcy Court in an order entered by the Bankruptcy Court after hearings on October 21, 2020 and October 23, 2020 (the “Bidding Procedures Order”). The Bidding Procedures Order permitted third parties to submit competing proposals for the purchase and/or reorganization of the Debtors and approved stalking horse protections for the Stalking Horse Bidder.

Following entry into the Stalking Horse Purchase Agreement, the Chapter 11 Cases were commenced on the Petition Date. The Debtors filed certain motions and applications intended to limit the disruption of the Chapter 11 Cases on their operations. Since the commencement of the Chapter 11 Cases, the Debtors have continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

The Bankruptcy Court granted the first day relief the Debtors requested that was designed primarily to mitigate the impact of Chapter 11 Cases on our operations, customers and employees. As a result, we are able to conduct normal business activities and pay all associated obligations for the period following the Petition Date and we are also authorized to pay prepetition employee wages and benefits and certain vendors and suppliers in the ordinary course for goods and services provided prior to the Petition Date. During the pendency of the Chapter 11 Cases, all transactions outside of the ordinary course of business require the prior approval of Bankruptcy Court.

In accordance with the Bidding Procedures Order, the Debtors held an auction (the “Auction”) at which they solicited and received higher and better offers from KPS and from a consortium made up of Owl Creek Asset Management, L.P., Warlander Asset Management, L.P., Jefferies LLC, Bardin Hill Opportunistic Credit Master Fund LP, Marathon Asset Management L.P., and Cetus Capital VI, L.P., or affiliates thereof (collectively, the “OWJ Group”). In addition to the bids received at the Auction from KPS and the OWJ Group, the Debtors also received a transaction proposal in parallel to the Auction from Centerbridge Partners, L.P. (“Centerbridge”), Oaktree Capital Management, L.P. (“Oaktree”), Honeywell International Inc. and certain other investors and parties (collectively, the “CO Group”). The Auction was completed on January 8, 2021, at which point the Debtors filed with the Bankruptcy Court (i) an auction notice noting that a bid received from KPS was the successful bid at the Auction but that the Debtors were still considering the proposal from the CO Group, (ii) a plan of reorganization (as may be amended, restated, supplemented or otherwise modified from time to time, the “Plan”) and (iii) a related disclosure statement (as may be amended, restated, supplemented or otherwise modified from time to time, the “Disclosure Statement”).

On January 11, 2021, the Debtors, having determined that the proposal from the CO Group was a higher and better proposal than the successful bid of KPS at the Auction, entered into a Plan Support Agreement with the CO Group (as amended, restated, supplemented or otherwise modified from time to time, the “PSA”) and announced their intention to pursue a restructuring transaction with the CO Group (the “Transaction”). As a result of the entry into the PSA, (i) the Debtors filed a supplemental auction notice with the Bankruptcy Court on January 11, 2021 describing the Debtors’ determination to proceed with the Transaction, (ii) the Debtors filed a revised Plan and related revised disclosure statement with the Bankruptcy Court on January 22, 2021 to implement the Transaction and (iii) the Stalking Horse Purchase Agreement became terminable, following which, on January 15, 2021, the Stalking Horse Bidder terminated the Stalking Horse Purchase Agreement and the Debtors subsequently paid a termination payment of $63 million and an expense reimbursement payment of $ 15.7 million to the Stalking Horse Bidder pursuant to the terms of the Stalking Horse Purchase Agreement and the Bidding Procedures Order.

In accordance with the terms of the PSA, on January 22, 2021, the Debtors’ entered into an Equity Backstop Commitment Agreement (as amended, restated, supplemented, replaced or otherwise modified from time to time, the “EBCA”) with certain members of the CO Group (the “Original Backstop Parties”), pursuant to which, among other things, the Company would conduct the rights offering contemplated by the PSA (as modified pursuant to the PSA from time to time, the “Rights Offering”) and each Original Backstop Party committed to (i) exercise its rights, as a stockholder of the Company, to purchase in the Rights Offering shares of the convertible Series A preferred stock of the Company to be offered in the Rights Offering (the “Series A Preferred Stock”) and (ii) purchase, on a pro rata basis (in accordance with percentages set forth in the EBCA), shares of Series A Preferred Stock which were offered but not subscribed for in the Rights Offering.

On January 24, 2021, representatives of the official committee of equity securities holders (the “Equity Committee”) submitted a restructuring term sheet for a proposed plan of reorganization sponsored by Atlantic Park.  The Equity Committee subsequently filed with the Bankruptcy Court on February 5, 2021, a proposed plan of reorganization and related disclosure statement with respect to such transaction (as reflected in the proposed plan of reorganization filed with the Bankruptcy Court, the “Atlantic Park Proposal”). The transactions contemplated under the Atlantic Park Proposal were proposed as an alternative to the transactions contemplated under the Plan. In connection with the Atlantic Park Proposal, the Equity Committee filed a motion with the Bankruptcy Court seeking to modify the Debtors’ exclusive periods to file and solicit votes on a Chapter 11 plan (the “Equity Committee Exclusivity Motion”). On February 9, 2021, the Equity Committee filed an objection to the Debtors’ motion seeking authority to enter into and perform under the PSA and the EBCA (the “Equity Committee Objection”).  The Company had significant concerns with the feasibility of the Atlantic Park Proposal and concluded at the time that the transactions contemplated under the Atlantic Park Proposal were not

15


 

reasonably likely to lead to a higher and better alternative plan of reorganization as compared to the Plan. The Equity Committee filed a revised proposed plan of reorganization and disclosure statement in connection with the Atlantic Park Proposal with the Bankruptcy Court on February 15, 2021.

On February 15, 2021, the Debtors and the CO Group agreed with certain of the Consenting Lenders to amend and restate the PSA so as to, among other things, add certain of the Consenting Lenders as parties thereto supporting the Plan.

Following a hearing in the Bankruptcy Court on February 16, 2021, the Debtors, the CO Group, the Equity Committee and certain additional parties agreed to proceed with a court-approved mediation process to attempt to reach a consensual resolution regarding the Equity Committee Exclusivity Motion and the Equity Committee Objection.

Through the mediation, the Debtors, the CO Group, the Equity Committee and the additional parties to the mediation, reached a consensual resolution regarding certain aspects of the Plan, and on March 9, 2021, the PSA was subsequently amended and restated, and a replacement EBCA among the Debtors and certain of the Additional Investors (the “Equity Backstop Parties”) was entered into, to provide for, among other things: (i) a direct equity investment of $668.8 million by Centerbridge and Oaktree to purchase the Series A Preferred Stock to be issued pursuant to the Plan, (ii) two Rights Offerings in an aggregate amount of $632 million (including an allocation of subscription rights to the Equity Backstop Parties as consideration for their agreement to backstop the Rights Offerings), and (iii) an increase of the conversion price to common stock of the Series A Preferred Stock from $3.50 to $5.25. On March 9, 2021 the Debtors filed amended versions of the Plan and Disclosure Statement with the Bankruptcy Court to reflect this consensual resolution. On March 12, 2021 the Bankruptcy Court entered orders approving the Disclosure Statement, the proposed procedures for solicitation of votes on the Plan and the Debtors’ entry into and performance and obligations under the PSA and the EBCA, which remain subject to customary closing conditions. On March 12, 2021 the Debtors filed the solicitation versions of the Plan and Disclosure Statement with the Bankruptcy Court.

As contemplated by the Plan, the Company filed a supplement to the Plan (as amended, restated, supplemented or otherwise modified from time to time, the “Plan Supplement”) with the Bankruptcy Court on April 9, 2021, which includes drafts of certain documents related to the Plan and referenced therein. On April 20, 2021, and April 22, 2021, the Debtors filed amended Plan Supplements reflecting updates and other changes and corrections to certain of the draft documentation. Also, on April 20, 2021, the Debtors also filed an amended version of the Plan, reflecting, among other things, revised treatment of certain claims and certain other technical changes and corrections.  Following a hearing in the Bankruptcy Court on April 23, 2021, the Debtors filed a further amended Plan on April 26, 2021.

On April 26, 2021, the Bankruptcy Court entered an order (the “Confirmation Order”), among other things, confirming the Plan. The Company expects that the effective date of the Plan (the “Effective Date”) will occur as soon as all conditions precedent to the Plan have been satisfied, which the Company is targeting for April 30, 2021. Although the Company is targeting occurrence of the Effective Date on April 30, 2021, the Company can make no assurances as to when, or ultimately if, the Plan will become effective.

Plan Support Agreement and Equity Backstop Commitment Agreement

On the Petition Date, certain of the Debtors entered into the Stalking Horse Purchase Agreement with the Stalking Horse Bidder, pursuant to which the Stalking Horse Bidder agreed to purchase, subject to the terms and conditions contained therein, substantially all of the assets of the Debtors. The Stalking Horse Purchase Agreement constituted a “stalking horse” bid that was subject to higher and better offers by third parties in accordance with the bidding procedures approved by the Bidding Procedures Order. The Bidding Procedures Order permitted third parties to submit competing proposals for the purchase and/or reorganization of the Debtors and approved stalking horse protections for the Stalking Horse Bidder. In accordance with the Bidding Procedures Order, the Debtors held the Auction at which they solicited and received higher and better offers from KPS and the OWJ Group. In addition to the bids received at the Auction from KPS and the OWJ Group, the Debtors also received a transaction proposal in parallel from the CO Group. The Auction was completed on January 8, 2021, at which point the Debtors filed with the Bankruptcy Court (i) an auction notice noting that a bid received from KPS was the successful bid at the Auction but that the Debtors were still considering the proposal from the CO Group, (ii) a Plan and (iii) a related Disclosure Statement.

On January 11, 2021, the Debtors, having determined that the proposal from the CO Group was a higher and better proposal than the successful bid of KPS at the Auction, entered into the PSA and announced their intention to pursue the Transaction. As a result of the entry into the PSA, (i) the Debtors filed a supplemental auction notice with the Bankruptcy Court on January 11, 2021 describing the Debtors’ determination to proceed with the Transaction, (ii) the Debtors filed a revised Plan and a related revised Disclosure Statement with the Bankruptcy Court on January 22, 2021 to implement the Transaction and (iii) the Stalking Horse Purchase Agreement became terminable, following which, on January 15, 2021, the Stalking Horse Bidder terminated the Stalking Horse Purchase Agreement and the Debtors subsequently paid a termination payment of $63 million and an expense reimbursement payment of $15.7 million to the Stalking Horse Bidder pursuant to the terms of the Stalking Horse Purchase Agreement and the Bidding Procedures Order. The subsequent payment was recorded in Reorganization items, net in the first quarter of 2021, due to the termination notice by KPS. On February 15, 2021, the Debtors and the CO Group agreed with certain of the Consenting Lenders to

16


 

amend and restate the PSA so as to, among other things, add certain of the Consenting Lenders as parties thereto.  On March 9, 2012, the PSA was subsequently amended and restated to reflect changes agreed to among the Debtors, the CO Group, the Equity Committee and other parties during the court-approved mediation process.

Under the PSA, the material terms of the Transaction include:

 

Committed direct equity investment in the form of Series A Preferred Stock of the reorganized Company by Centerbridge and Oaktree in the amount of $668.8 million in the aggregate in cash;

 

Two Rights Offerings of the reorganized Company’s Series A Preferred Stock for a maximum aggregate value of $632 million (including an allocation of subscription rights to the Equity Backstop Parties as consideration for their agreement to backstop the Rights Offerings) to existing holders of the Company’s common stock, backstopped by the Equity Backstop Parties on a fully committed basis;

 

Holders of shares of the Company’s existing common stock may effectively retain their shares or, at each stockholder’s election (unless such stockholder is a party to the PSA), receive cash at $6.25 per share in exchange for cancellation of their shares;

 

Re-listing of the reorganized Company’s common stock on a national securities exchange;

 

Payment in full of all customer, supplier, trade, vendor, employee, pension, regulatory, environmental and other liabilities of the Debtors and their worldwide subsidiaries; and

 

A final global settlement for substantially all claims by Honeywell International Inc. and its affiliates (including spin-off-related claims, but excluding claims arising under ordinary course business dealings);

 

Committed debt financing for the reorganized Debtors upon Emergence, consisting of an approximately $1,250 million term loan facility and an approximately $300 million revolving credit facility at Emergence.

The PSA contains customary representations, warranties and covenants. The PSA is subject to certain termination events, subject to certain exceptions, including (a) the breach by any party of any of the representations, warranties, covenants, obligations or commitments set forth therein, where such breach would materially and adversely interfere with the Transaction and remains uncured; (b) the issuance by any governmental authority of an order that would have an adverse effect on a material provision of the PSA or a material portion of the Transaction or the Plan or a material adverse effect on the Debtors’ business; (c) an examiner, trustee or receiver is appointed in the Chapter 11 Cases; (d) conversion of one or more of the Chapter 11 Cases to cases under Chapter 7 of the Bankruptcy Code or dismissal of any of the Chapter 11 Cases; (e) if any of the restructuring documents after completion (i) contain terms, conditions, representations, warranties or covenants that are materially inconsistent with the terms of the PSA, (ii) are materially and adversely amended or modified with respect to the terminating party or (iii) are withdrawn without the consent of the applicable party; (f) if any party proposes, supports, assists, solicits or files a pleading seeking approval of any alternative transaction without the prior written consent of certain parties; (g) if, on or after April 19, 2021, the Plan is not filed with the Bankruptcy Court, subject to certain extensions; (h) if the effective date of the Plan has not occurred by June 30, 2021, subject to certain extensions; (i) if the Bankruptcy Court grants relief that is inconsistent with the PSA in any material respect or that would materially frustrate the purposes of the PSA; or (j) by the Debtors, if their boards of directors reasonably determine in good faith after receiving the advice of outside counsel that the Debtors’ continued performance under the PSAs would be inconsistent with the exercise of such boards’ fiduciary duties under applicable law.

The PSA provides for the reimbursement by the Debtors of professional fees and expenses of the CO Group, subject to an interim cap of $25 million prior to Emergence and with the balance to be paid at Emergence, and certain of the Consenting Lenders and Consenting Noteholders. As of February 15, 2021, the CO Group estimated that the aggregate amount of professional fees and expenses expected to be payable by the Debtors under the PSA (inclusive of any amounts payable prior to Emergence) was approximately $82 million.

On March 9, 2021 the Debtors entered into the replacement EBCA with the Equity Backstop Parties, pursuant to which, among other things, the Company will conduct the Rights Offerings and each Equity Backstop Party committed to (i) exercise its rights, as a stockholder of the Company, to purchase in the Rights Offerings shares of the Series A Preferred Stock and (ii) purchase, on a pro rata basis (in accordance with percentages set forth in the EBCA), shares of Series A Preferred Stock which were offered but not subscribed for in the Rights Offerings. The EBCA provides for the reimbursement by the Debtors of professional fees and expenses and filing fees incurred by the Equity Backstop Parties in connection with the Chapter 11 Cases in an aggregate amount that, together with and inclusive of amounts to be reimbursed pursuant to the PSA, do not exceed $25 million prior to Emergence. The EBCA further provides for indemnification by the Debtors of losses, claims, damages, liabilities, costs and expenses incurred by the Equity Backstop Parties in connection with the Transaction.

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The EBCA contains customary representations, warranties and covenants. The EBCA is subject to certain termination events, including, without limitation, (a) by mutual agreement of the parties, (b) by the Company following an uncured breach of a representation, warranty or covenant in the EBCA by an Equity Backstop Party, or (c) by the Equity Backstop Parties constituting each of Centerbridge, Oaktree and a number of the other Equity Backstop Parties holding at least a majority of the rights to purchase Series A Preferred Stock pursuant to the PSA (excluding any such rights held by Centerbridge and Oaktree) following an uncured breach by the Debtors of a representation, warranty or covenant in the EBCA. The EBCA will automatically terminate if the Plan Support Agreement terminates with respect to the rights and obligations of the Debtors prior to the occurrence of the effective date of the Plan in accordance with its terms.

 Restructuring Support Agreement

On the Petition Date, the Debtors entered into a Restructuring Support Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “RSA”) with consenting lenders (the “Consenting Lenders”) holding, in the aggregate, approximately 61% of the aggregate outstanding principal amount of loans under the Prepetition Credit Agreement. Pursuant to the RSA, the Consenting Lenders and the Debtors agreed to the principal terms of a financial restructuring, which will be implemented through a plan of reorganization under the Bankruptcy Code and which could include the sale of all or substantially all of the assets of certain Debtors and of the stock of certain Debtors and other subsidiaries, as further described below. On January 6, 2021, the Debtors and Consenting Lenders holding no less than a majority of the aggregate outstanding principal amount of loans under the Prepetition Credit Agreement then held by all Consenting Lenders entered into Amendment No. 1 to the Restructuring Support Agreement (the “Amendment”), which, among other things, extended certain milestones contained in the RSA.

The RSA provides that the Consenting Lenders will support the Debtors’ restructuring efforts, including the approval of the Plan, as set forth in, and subject to the terms and conditions of, the RSA. In addition, the Consenting Lenders agreed to the Debtors’ entry into the DIP Term Loan Facility (as defined below) discussed below.     

The RSA provides certain milestones for the Chapter 11 Cases. Failure of the Debtors to satisfy these milestones without a waiver or consensual amendment would provide the Requisite Consenting Lenders a termination right under the RSA. These milestones, as modified from time to time, include  (a) no later than February 22, 2021, (i) the hearing to approve the Disclosure Statement shall have occurred and (ii) the Bankruptcy Court shall have entered an order approving the Disclosure Statement on a final basis, which shall be in form and substance reasonably acceptable to the Requisite Consenting Lenders; (b) no later than April 7, 2021, a hearing shall have occurred for approval of the Plan, and within 2 Business Days thereafter, the Bankruptcy Court shall have entered the Confirmation Order on a final basis, which shall be in form and substance reasonably acceptable to the Requisite Consenting Lenders; and (c) no later than April 30, 2021, (i) the Transaction shall have closed and (ii) the Plan Effective Date shall have occurred.

Plan of Reorganization

 

As described above, the Debtors filed the Plan and Disclosure Statement on January 8, 2021 and filed a revised Plan and revised Disclosure Statement on January 22, 2021 to implement the Transaction, with further amended versions of the Plan and Disclosure Statement filed with the Bankruptcy Court on February 15, 2021 and March 9, 2021. On March 12, 2021, the Debtors filed the solicitation versions of the Plan and the Disclosure Statement, and on April 20, 2021, the Debtors filed a further revised Plan. Following a hearing in the Bankruptcy Court on April 23, 2021, the Debtors filed a further revised Plan on April 26, 2021. On April 26, 2021, the Bankruptcy Court entered the Confirmation Order. It is possible that technical amendments could be made to the Plan prior to the Effective Date.

Chapter 11 Accounting

The Company has applied ASC 852 in preparing our Consolidated Interim Financial Statements. ASC 852 requires the financial statements for periods subsequent to the Petition Date to distinguish transactions and events that are directly associated with the Company's reorganization from the ongoing operations of the business. Accordingly, revenues, expenses, realized gains and losses, and provisions for losses directly resulting from the reorganization and restructuring shall be reported separately as Reorganization items, net in the Consolidated Interim Statements of Operations. In addition, the balance sheet distinguishes pre-petition liabilities subject to compromise from those pre-petition liabilities that are not subject to compromise and post-petition liabilities. Pre-petition liabilities that are not fully secured or those that have at least a possibility of not being repaid at the allowed claim amount have been classified as liabilities subject to compromise on the Consolidated Interim Balance Sheet at March 31, 2021.

Under the Bankruptcy Code, the Debtors may assume and assign or reject executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a prepetition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors of performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach subject, in the case of the rejection of unexpired leases of real property, to certain caps on damages. Counterparties to such rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtor’s estate for such damages. Generally, the assumption or assumption and assignment of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory

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contract or unexpired lease and provide adequate assurance of future performance thereunder. Accordingly, any description of an executory contract or unexpired lease with a Debtor in this quarterly report, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease with a Debtor is qualified by any overriding rejection rights the Company has under the Bankruptcy Code. The Plan provides for the assumption of all of the Debtors’ executory contracts and unexpired leases except for certain agreements with Honeywell.

Reorganization Items, Net

The Debtors have incurred and will continue to incur significant costs associated with the reorganization, including the write-off of original issue discount and deferred long-term debt fees on debt, a component of liabilities subject to compromise, costs of debtor-in-possession financing and legal and professional fees. The amount of these charges, which since the Petition Date are being expensed as incurred, are expected to significantly affect the Company’s results of operations. In accordance with applicable guidance, costs associated with the bankruptcy proceedings have been recorded as Reorganization items, net within the Company's Consolidated Interim Statements of Operations for the three months ended March 31, 2021.

Reorganization items, net, are comprised of the following for the three months ended March 31, 2021:

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

 

(Dollars in millions)

 

Advisor fees

 

$

84

 

DIP Financing fees

 

 

1

 

Bid termination and expense reimbursement

 

 

79

 

Other

 

 

10

 

Total reorganization items, net

 

$

174

 

 

Pre-petition Long-Term Debt during the Chapter 11 Cases

We are party to the Prepetition Credit Agreement, consisting of: a seven-year term B loan facility, consisting of a tranche denominated in Euro of €375 million and a tranche denominated in U.S. Dollars of $425 million (the “Term B Facility”); a five-year term A loan facility in an aggregate principal amount of €330 million (the “Term A Facility” and, together with the Term B Facility, the “Term Loan Facilities”); and a five-year revolving credit facility in an aggregate principal amount of €430 million (the “Revolving Facility” and, together with the Term Loan Facilities, the “Senior Secured Credit Facilities”). The Prepetition Credit Agreement was amended on June 12, 2020 (the “2020 Amendment”).

On September 27, 2018, we completed the offering of €350 million (approximately $410 million based on exchange rates as of September 27, 2018) in aggregate principal amount of 5.125% senior notes due 2026 (the “Senior Notes”). The Senior Notes bear interest at a fixed annual interest rate of 5.125% and mature on October 15, 2026.

The Senior Notes were issued pursuant to an Indenture, dated September 27, 2018 (the “Indenture”), which, among other things and subject to certain limitations and exceptions, limits our ability and the ability of our restricted subsidiaries to: (i) incur, assume or guarantee additional indebtedness or issue certain disqualified equity interests and preferred shares, (ii) pay dividends or distributions on, or redeem or repurchase, capital stock and make other restricted payments, (iii) make investments, (iv) consummate certain asset sales or transfers, (v) engage in certain transactions with affiliates, (vi) grant or assume certain liens on assets to secure debt unless the Senior Notes are secured equally and ratably (vii) restrict dividends and other payments by certain of their subsidiaries and (vii) consolidate, merge, sell or otherwise dispose of all or substantially all of our or our restricted subsidiaries’ assets.

All debt issuance costs, except for those associated to the Revolving Credit Facility, are deferred and recognized as a direct deduction to the related debt liability and are amortized to interest expense over the debt term. The Company paid approximately $37 million of debt issuance costs in connection with the Term A Facility, Term B Facility, and Senior Notes.  

Debt issuance costs associated with the Revolving Credit Facility were capitalized in Other assets and are amortized to interest expense over the debt term. Approximately, $6 million of debt issuance costs were paid in connection with the Revolving Credit Facility issued on September 27, 2018.

As a result of the Chapter 11 Cases, and in order to adjust the carrying amount of the debt to the expected allowed claim amount in accordance with ASC 852, the Company expensed $6 million of deferred issuance costs related to the pre-petition Senior Notes which are not fully secured in 2020. These costs were recorded to Reorganization items, net, in the Consolidated Statement of Operations for the year ended December 31, 2020. Refer to Note 2, Reorganization and Chapter 11 Proceedings for further discussion.

 

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The principal amounts outstanding on our Senior Secured Credit Facilities and the Senior Notes as of March 31, 2021 and December 31, 2020 are as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(Dollars in millions)

 

Senior Secured Credit Facilities (1):

 

 

 

 

 

 

 

 

Term Loans

 

$

1,055

 

 

$

1,082

 

Borrowings under revolving credit facility

 

 

370