Item 1. Financial Statements.
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
The Notes to the Consolidated Interim Financial Statements are an integral part of this statement.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions, except per share amounts)
Note 1. Background and Basis of Presentation
Background
Garrett Motion Inc. (the “Company” or “Garrett”) designs, manufactures and sells highly engineered turbocharger and electric-boosting technologies for light and commercial vehicle original equipment manufacturers (“OEMs”) and the global vehicle independent aftermarket, as well as automotive software solutions. These OEMs in turn ship to consumers globally. We are a global technology leader with significant expertise in delivering products across gasoline, diesel, natural gas and electric (hybrid and fuel cell) powertrains. These products are key enablers for fuel economy and emission standards compliance.
On October 1, 2018, the Company became an independent publicly-traded company through a pro rata distribution by Honeywell International Inc. (“Former Parent” or “Honeywell”) of 100% of the then-outstanding shares of Garrett to Honeywell’s stockholders (the “Spin-Off”). Each Honeywell stockholder of record received one share of Garrett common stock for every 10 shares of Honeywell common stock held on the record date. Approximately 74 million shares of Garrett common stock were distributed on October 1, 2018 to Honeywell stockholders. In connection with the Spin-Off, Garrett´s common stock began trading “regular-way” under the ticker symbol “GTX” on the New York Stock Exchange on October 1, 2018.
The Spin-Off was completed pursuant to a Separation and Distribution Agreement and other agreements with Honeywell related to the Spin-Off, including but not limited to an indemnification and reimbursement agreement (the “Indemnification and Reimbursement Agreement”) and a tax matters agreement (the “Tax Matters Agreement”). Refer to Note 17, Commitments and Contingencies for additional details related to the Indemnification and Reimbursement Agreement and Tax Matters Agreement.
Unless the context otherwise requires, references to “Garrett,” “we,” “us,” “our,” and “the Company” refer to (i) Honeywell’s Transportation Systems Business (the “Transportation Systems Business” or the “Business”) prior to the Spin-Off and (ii) Garrett Motion Inc. and its subsidiaries following the Spin-Off, as applicable.
COVID-19
In December 2019, a strain of novel coronavirus disease, COVID-19, was identified in Wuhan, China. This virus has been declared a pandemic and has spread across the world, including throughout Asia, the United States and Europe. Our business operations have been materially disrupted and our revenues have decreased significantly as a result of the COVID-19 pandemic and related response measures, and we expect our financial performance in the quarter ending June 30, 2020, and in future fiscal quarters, to be materially negatively affected by the pandemic and its impact on the global automotive industry.
Our Credit Agreement by and among us, certain of our subsidiaries, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”), contains financial covenants, including a consolidated total leverage ratio covenant and a consolidated interest coverage ratio covenant. We were in compliance with our financial covenants as of March 31, 2020. However, as a result of the impacts of the COVID-19 pandemic, we expect to be unable to continue to comply with the consolidated total leverage ratio covenant as early as June 30, 2020. If we fail to comply with our consolidated total leverage ratio covenant, an event of default under the Credit Agreement would be triggered and our obligations under the Credit Agreement or other agreements (including as a result of cross-default provisions) may be accelerated.
Our management has concluded that the foregoing conditions and events raise substantial doubt as to our ability to continue as a going concern. The accompanying financial statements do not include any adjustments or classifications that may result from the possible inability of the Company to continue as a going concern within one year after the issuance of the financial statements.
Our management is in the process of negotiating with our lenders to obtain an amendment to or a waiver from the consolidated total leverage ratio covenant in our Credit Agreement. However, there can be no assurance that we will be successful in obtaining an amendment or waiver.
Basis of Presentation
The Consolidated Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All amounts presented are in millions, except per share amounts.
10
Asbestos-related expenses, net of probable insurance recoveries, are presented within Other expense, net in the Consolidated Interim Statement of Operations. Honeywell is subject to certain asbestos-related and environmental-related liabilities, primarily related to its legacy Bendix business. In conjunction with the Spin-Off, certain operations that were part of the Bendix business, along with the ownership of the Bendix trademark, as well as certain operations that were part of other legacy elements of the Business, were transferred to us. The accounting for the majority of our asbestos-related liability payments and accounts payable reflect the terms of the Indemnification and Reimbursement Agreement with Honeywell entered into on September 12, 2018, under which we are required to make payments to Honeywell in amounts equal to 90% of Honeywell’s asbestos-related liability payments and accounts payable, primarily related to the Bendix business in the United States, as well as certain environmental-related liability payments and accounts payable and non-United States asbestos-related liability payments and accounts payable, in each case related to legacy elements of the Business, including the legal costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts and, as may be applicable, certain other recoveries associated with such liabilities. The Indemnification and Reimbursement Agreement provides that the agreement will terminate upon the earlier of (x) December 31, 2048 or (y) December 31st of the third consecutive year during which certain amounts owed to Honeywell during each such year were less than $25 million as converted into Euros in accordance with the terms of the agreement. We are currently engaged in litigation against Honeywell in connection with the Indemnification and Reimbursement Agreement. For additional information, see Note 17, Commitments and Contingencies
The Consolidated Interim Financial Statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods. The Consolidated Interim Financial Statements should be read in conjunction with the audited annual Consolidated and Combined Financial Statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K, as filed with the SEC on February 27, 2020 (our “2018 Form 10-K”). The results of operations and cash flows for the three months ended March 31, 2020 should not necessarily be taken as indicative of the entire year.
We report our quarterly financial information using a calendar convention: the first, second and third quarters are consistently reported as ending on March 31, June 30 and September 30. It has been our practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires our businesses to close their books on a Saturday in order to minimize the potentially disruptive effects of quarterly closing on our business processes. The effects of this practice are generally not significant to reported results for any quarter and only exist within a reporting year. For differences in actual closing dates that are material to year-over-year comparisons of quarterly or year-to-date results, such differences have been adjusted for the three months ended March 31, 2020. Our actual closing dates for the three months ended March 31, 2020 and 2019 were March 28, 2020 and March 30, 2019, respectively.
Note 2. Summary of Significant Accounting Policies
The accounting policies of the Company are set forth in Note 2 to the audited annual Consolidated and Combined Financial Statements for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”). We include herein certain updates to those policies.
Trade Receivables and Allowance for Doubtful Accounts—Trade accounts receivable are recorded at the invoiced amount as a result of transactions with customers. Garrett maintains allowances for doubtful accounts for estimated losses as a result of a customer’s inability to make required payments. As of January 1, 2020, Garrett adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new guidance requires an entity to recognize as an allowance its estimate of lifetime expected credit losses rather than incurred losses. The guidance is also applicable to contract assets such as unbilled receivables. Consistent with the new guidance, Garrett estimates losses from doubtful accounts expected over the contractual life of the receivables based on days past due as measured from the contractual due date and collection history. Garrett also takes into consideration changes in economic conditions that may not be reflected in historical trends (for example, customers in bankruptcy, liquidation or reorganization). Receivables are written-off against the allowance for doubtful accounts when they are determined uncollectible. Such determination includes analysis and consideration of the particular conditions of the account, including time intervals since last collection, customer performance against agreed upon payment plans, solvency of customer and any bankruptcy proceedings.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which amends certain disclosure requirements related to fair value measures. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Effective January 1, 2020, the Company adopted the new guidance. The adoption did not have an impact on our Consolidated Interim Balance Sheets, Consolidated Interim Statements of Operations and related Notes to the Consolidated Interim Financial Statements.
11
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires measurement and recognition of expected credit losses for financial assets held. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption is permitted. Adoption of the new standard resulted in an increase in the allowance for doubtful accounts of $5 million which was recognized as a cumulative-effect adjustment to opening retained earnings as of January 1, 2020.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits Defined Benefit Plans – General (Subtopic 715-20), which amends certain disclosure requirements related to the defined benefit pension and other postretirement plans. The guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. Early adoption is permitted. The Company is currently evaluating the impact on its disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company is currently evaluating the impact on our hedging relationships, other transactions, and disclosures.
Note 3. Revenue Recognition and Contracts with Customers
Disaggregated Revenue
Net sales by region (determined based on country of shipment) and channel are as follows:
|
|
Three months ended March 31, 2020
|
|
|
|
OEM
|
|
|
Aftermarket
|
|
|
Other
|
|
|
Total
|
|
United States
|
|
$
|
92
|
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
132
|
|
Europe
|
|
|
394
|
|
|
|
30
|
|
|
|
9
|
|
|
|
433
|
|
Asia
|
|
|
159
|
|
|
|
8
|
|
|
|
6
|
|
|
|
173
|
|
Other International
|
|
|
3
|
|
|
|
4
|
|
|
|
—
|
|
|
|
7
|
|
|
|
$
|
648
|
|
|
$
|
82
|
|
|
$
|
15
|
|
|
$
|
745
|
|
|
|
Three months ended March 31, 2019
|
|
|
|
OEM
|
|
|
Aftermarket
|
|
|
Other
|
|
|
Total
|
|
United States
|
|
$
|
83
|
|
|
$
|
45
|
|
|
$
|
1
|
|
|
$
|
129
|
|
Europe
|
|
429
|
|
|
37
|
|
|
12
|
|
|
478
|
|
Asia
|
|
199
|
|
|
13
|
|
|
7
|
|
|
219
|
|
Other International
|
|
4
|
|
|
5
|
|
|
|
—
|
|
|
9
|
|
|
|
$
|
715
|
|
|
$
|
100
|
|
|
$
|
20
|
|
|
$
|
835
|
|
Contract Balances
The following table summarizes our contract assets and liabilities balances:
|
|
2020
|
|
Contract assets—January 1
|
|
$
|
6
|
|
Contract assets—March 31
|
|
|
33
|
|
Change in contract assets—Increase/(Decrease)
|
|
$
|
27
|
|
Contract liabilities—January 1
|
|
$
|
(3
|
)
|
Contract liabilities—March 31
|
|
|
(4
|
)
|
Change in contract liabilities—(Increase)/Decrease
|
|
$
|
(1
|
)
|
12
Note 4. Research, Development & Engineering
Garrett conducts research, development and engineering (“RD&E”) activities, which consist primarily of the development of new products and product applications. RD&E costs are charged to expense as incurred unless the Company has a contractual guarantee for reimbursement from the customer. Customer reimbursements are netted against gross RD&E expenditures as they are considered a recovery of cost. Such costs are included in Cost of goods sold as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Research and development costs
|
|
$
|
28
|
|
|
$
|
32
|
|
Engineering-related expenses
|
|
|
4
|
|
|
|
3
|
|
|
|
$
|
32
|
|
|
$
|
35
|
|
Note 5. Other Expense, Net
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Indemnification related — post Spin-Off
|
|
$
|
15
|
|
|
$
|
19
|
|
Indemnification related — litigation
|
|
|
1
|
|
|
|
—
|
|
|
|
$
|
16
|
|
|
$
|
19
|
|
Note 6. Income Taxes
|
|
For the Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in millions)
|
|
Tax expense
|
|
$
|
1
|
|
|
$
|
24
|
|
Effective tax rate
|
|
|
1.9
|
%
|
|
|
25.0
|
%
|
For the period ended March 31, 2020 the Company computed its effective tax rate using actual year to date information rather than a full year forecast to compute an annual effective tax rate. Based on current forecasts which take into account a range of potential impacts from COVID-19, the Company’s effective tax rate is expected to be highly sensitive to changes in pre-tax book income because of non-deductible asbestos related expenses which have no correlation to earnings. Accordingly, the Company concluded that computing its effective tax rate using year to date actual results is its best estimate of tax expense for the period ended March 31, 2020.
The effective tax rate decreased for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to a reduction in withholding taxes and true ups from local statutory filings, partially offset by permanent tax differences that are not impacted proportionately with lower pre-tax book income as compared to the three months ended March 31, 2019.
The effective tax rate for the three months ended March 31, 2020 was lower than the U.S. federal statutory rate of 21% primarily due to a reduction in withholding taxes, true ups from local statutory filings and lower pre-tax book income.
The effective tax rate for the three months ended March 31, 2019 was higher than the U.S. federal statutory rate of 21% primarily due to non-deductible asbestos related expenses, withholding taxes on current year earnings and tax reserves, partially offset by non-U.S. earnings taxed at lower rates.
The effective tax rate can vary from quarter to quarter due to changes in the Company’s global mix of earnings, impacts of Covid-19, the resolution of income tax audits, changes in tax laws (including updated guidance on U.S. tax reform), deductions related to employee share-based payments, internal restructurings and pension mark-to-market adjustments.
In connection with the global outbreak of COVID-19, many countries have enacted legislation to provide various forms of emergency economic relief, including the CARES Act in the United States, that may provide financial benefits to the Company. At this time, we do not expect such benefits to have a material impact to the Company.
13
Note 7. Accounts, Notes and Other Receivables—Net
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Trade receivables
|
|
$
|
489
|
|
|
$
|
574
|
|
Notes receivables
|
|
|
77
|
|
|
|
68
|
|
Other receivables
|
|
|
72
|
|
|
|
69
|
|
|
|
$
|
638
|
|
|
$
|
711
|
|
Less—Allowance for doubtful accounts
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
$
|
629
|
|
|
$
|
707
|
|
Trade Receivables include $33 million and $4 million of unbilled balances as of March 31, 2020 and December 31, 2019, respectively. These amounts are billed in accordance with the terms of customer contracts to which they relate. Unbilled receivables include $33 million and $6 million of contract assets as of March 31, 2020 and December 31, 2019, respectively. See Note 3, Revenue Recognition and Contracts with Customers.
Note 8. Factoring and Notes Receivable
The Company entered into arrangements with financial institutions to sell eligible trade receivables. During the periods ended March 31, 2020 and December 31, 2019, the Company sold $102 and $27 million of eligible receivables, respectively, without recourse, and accounted for these arrangements as true sales.
The Company also received guaranteed bank notes without recourse, in settlement of accounts receivables, primarily in the Asia Pacific region. The Company can hold the bank notes until maturity, exchange them with suppliers to settle liabilities, or sell them to third party financial institutions in exchange for cash. During the periods ended March 31, 2020 and December 31, 2019, the Company sold $26 and $105 million of bank notes, respectively, without recourse, and accounted for these as true sales.
Note 9. Inventories—Net
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Raw materials
|
|
$
|
145
|
|
|
$
|
142
|
|
Work in process
|
|
|
19
|
|
|
|
18
|
|
Finished products
|
|
|
85
|
|
|
|
85
|
|
|
|
$
|
249
|
|
|
$
|
245
|
|
Less—Reserves
|
|
|
(24
|
)
|
|
|
(25
|
)
|
|
|
$
|
225
|
|
|
$
|
220
|
|
Note 10. Other Assets
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Advanced discounts to customers, non-current
|
|
$
|
61
|
|
|
$
|
62
|
|
Operating right-of-use assets (Note 13)
|
|
|
32
|
|
|
|
35
|
|
Undesignated cross-currency swap at fair value
|
|
|
6
|
|
|
|
—
|
|
Other
|
|
|
6
|
|
|
|
11
|
|
|
|
$
|
105
|
|
|
$
|
108
|
|
14
Note 11. Accrued Liabilities
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Customer pricing reserve
|
|
$
|
90
|
|
|
$
|
90
|
|
Compensation, benefit and other employee related
|
|
|
56
|
|
|
|
64
|
|
Repositioning
|
|
|
7
|
|
|
|
4
|
|
Product warranties and performance guarantees
|
|
|
27
|
|
|
|
29
|
|
Taxes
|
|
|
25
|
|
|
|
33
|
|
Advanced discounts from suppliers, current
|
|
|
19
|
|
|
|
19
|
|
Customer advances and deferred income(a)
|
|
|
13
|
|
|
|
12
|
|
Accrued interest
|
|
|
11
|
|
|
|
5
|
|
Short-term lease liability (Note 13)
|
|
|
7
|
|
|
|
8
|
|
Other (primarily operating expenses)
|
|
|
48
|
|
|
|
46
|
|
|
|
$
|
303
|
|
|
$
|
310
|
|
(a)
|
Customer advances and deferred income include $4 million and $3 million of contract liabilities as of March 31, 2020 and December 31, 2019, respectively. See Note 3 Revenue Recognition and Contracts with Customers.
|
The Company accrued repositioning costs related to right-sizing its organizational structure. Expenses related to the repositioning accruals are included in Cost of goods sold in our Consolidated Interim Statements of Operations.
|
|
Severance Costs
|
|
|
Exit
Costs
|
|
|
Total
|
|
Balance at December 31, 2018
|
|
$
|
13
|
|
|
$
|
2
|
|
|
$
|
15
|
|
Charges
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Usage—cash
|
|
|
(2
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
Adjustments and reclassifications
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
(5
|
)
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at March 31, 2019
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
7
|
|
|
|
Severance Costs
|
|
|
Exit
Costs
|
|
|
Total
|
|
Balance at December 31, 2019
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
4
|
|
Charges
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
Usage—cash
|
|
|
(2
|
)
|
|
|
—
|
|
|
|
(2
|
)
|
Adjustments and reclassifications
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Foreign currency translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance at March 31, 2020
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
7
|
|
Note 12. Other Liabilities
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Pension and other employee related
|
|
$
|
91
|
|
|
$
|
94
|
|
Advanced discounts from suppliers
|
|
|
40
|
|
|
|
46
|
|
Uncertain tax positions
|
|
|
80
|
|
|
|
79
|
|
Long-term lease liability (Note 13)
|
|
|
25
|
|
|
|
28
|
|
Other
|
|
|
26
|
|
|
|
27
|
|
|
|
$
|
262
|
|
|
$
|
274
|
|
15
Note 13. Leases
We have operating leases for real estate and machinery and equipment. Our leases have remaining lease terms of up to 11 years, some of which include options to extend the leases for up to two years, and some of which include options to terminate the leases within the year.
The components of lease expense are as follows:
|
|
Three Months
Ended
March 31,
2020
|
|
|
Three Months
Ended
March 31,
2019
|
|
Operating lease cost
|
|
$
|
3
|
|
|
$
|
3
|
|
Supplemental cash flow information related to operating leases is as follows:
|
|
Three Months
Ended
March 31,
2020
|
|
|
Three Months
Ended
March 31,
2019
|
|
Cash paid for amounts included in the measurement of
lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
2
|
|
|
$
|
3
|
|
Right-of-use assets obtained in exchange for lease
obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
—
|
|
|
$
|
5
|
|
Supplemental balance sheet information related to operating leases is as follows:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Other assets
|
|
$
|
32
|
|
|
$
|
35
|
|
Accrued liabilities
|
|
|
7
|
|
|
|
8
|
|
Other liabilities
|
|
|
25
|
|
|
|
28
|
|
|
|
March 31,
2020
|
|
December 31,
2019
|
|
Weighted-average lease term
|
|
6.26
|
|
|
6.30
|
|
Weighted-average discount rate
|
|
6.33
|
|
6.36
|
|
Maturities of operating lease liabilities were as follows:
|
|
March 31, 2020
|
|
2020
|
|
$
|
7
|
|
2021
|
|
|
7
|
|
2022
|
|
|
6
|
|
2023
|
|
|
5
|
|
2024
|
|
|
4
|
|
Thereafter
|
|
|
11
|
|
Total lease payments
|
|
|
40
|
|
Less imputed interest
|
|
|
(7
|
)
|
|
|
$
|
33
|
|
Note 14. Financial Instruments and Fair Value Measures
Our credit, market and foreign currency risk management policies are described in Note 18, Financial Instruments and Fair Value Measures, of the notes to the audited annual Consolidated Financial Statements for the year ended December 31, 2019 included in our 2019 Form 10-K. At March 31, 2020 and December 31, 2019, we had contracts with aggregate gross notional amounts of
16
$2,212 million and $1,820 million, respectively, to limit interest rate risk and to exchange foreign currencies, principally the U.S. Dollar, Swiss Franc, British Pound, Euro, Chinese Yuan, Japanese Yen, Mexican Peso, New Romanian Leu, Czech Koruna, Australian Dollar and Korean Won.
Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
Notional Amounts
|
|
|
Assets
|
|
|
Liabilities
|
|
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
Designated forward currency exchange
contracts
|
|
$
|
329
|
|
|
$
|
392
|
|
|
$
|
7
|
|
|
$
|
5
|
|
(a)
|
$
|
2
|
|
|
$
|
1
|
|
(b)
|
Undesignated instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undesignated cross-currency swap
|
|
|
419
|
|
|
|
420
|
|
|
|
7
|
|
|
|
—
|
|
(c)
|
|
—
|
|
|
|
1
|
|
(d)
|
Undesignated interest rate swap
|
|
|
550
|
|
|
|
561
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
(d)
|
Undesignated forward currency exchange
contracts
|
|
|
914
|
|
|
|
447
|
|
|
|
8
|
|
|
|
2
|
|
(a)
|
|
14
|
|
|
|
3
|
|
(b)
|
|
|
$
|
2,212
|
|
|
$
|
1,820
|
|
|
$
|
22
|
|
|
$
|
7
|
|
|
$
|
17
|
|
|
$
|
6
|
|
|
|
(a)
|
Recorded within Other current assets in the Company’s Consolidated Interim Balance Sheets
|
|
(b)
|
Recorded within Accrued liabilities in the Company’s Consolidated Interim Balance Sheets
|
|
(c)
|
Recorded within Other assets in the Company’s Consolidated Interim Balance Sheets
|
|
(d)
|
Recorded within Other liabilities in the Company´s Consolidated Interim Balance Sheets
|
The foreign currency exchange, interest rate swap and cross-currency swap contracts are valued using market observable inputs. As such, these derivative instruments are classified within Level 2. The assumptions used in measuring fair value of the cross-currency swap are considered Level 2 inputs, which are based upon market observable interest rate curves, cross currency basis curves, credit default swap curves, and foreign exchange rates.
The carrying value of Cash and cash equivalents, Account receivables, Notes and Other receivables, and Account payables contained in the Consolidated Balance Sheets approximates fair value.
The following table sets forth the Company’s financial assets and liabilities that were not carried at fair value:
|
|
March 31, 2020
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Long-term debt and related current maturities
|
|
$
|
1,393
|
|
|
$
|
1,162
|
|
The Company determined the fair value of certain of its long-term debt and related current maturities utilizing transactions in the listed markets for similar liabilities. As such, the fair value of the long-term debt and related current maturities is considered Level 2.
17
Note 15. Accumulated Other Comprehensive Income (Loss)
Changes in Accumulated Other Comprehensive Income (Loss) by Component
|
|
Foreign
Exchange
Translation
Adjustment
|
|
|
Changes in
Fair Value of
Effective
Cash Flow
Hedges
|
|
|
Pension
Adjustments
|
|
|
Total Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance at December 31, 2018
|
|
$
|
86
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
|
$
|
73
|
|
Other comprehensive income (loss) before
reclassifications
|
|
|
59
|
|
|
|
3
|
|
|
|
—
|
|
|
|
62
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
1
|
|
Net current period other comprehensive income (loss)
|
|
|
59
|
|
|
|
3
|
|
|
|
1
|
|
|
|
63
|
|
Balance at March 31, 2019
|
|
$
|
145
|
|
|
$
|
3
|
|
|
$
|
(12
|
)
|
|
$
|
136
|
|
|
|
Foreign
Exchange
Translation
Adjustment
|
|
|
Changes in
Fair Value of
Effective
Cash Flow
Hedges
|
|
|
Pension
Adjustments
|
|
|
Total Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance at December 31, 2019
|
|
$
|
153
|
|
|
$
|
4
|
|
|
$
|
(27
|
)
|
|
$
|
130
|
|
Other comprehensive income (loss) before
reclassifications
|
|
|
39
|
|
|
|
—
|
|
|
|
—
|
|
|
|
39
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Balance at March 31, 2020
|
|
$
|
192
|
|
|
$
|
4
|
|
|
$
|
(27
|
)
|
|
$
|
169
|
|
Note 16. Earnings Per Share
The details of the earnings per share calculations for the three months ended March 31, 2020 and 2019 are as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Basic
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
52
|
|
|
$
|
73
|
|
Weighted average common shares outstanding
|
|
|
75,040,932
|
|
|
|
74,229,627
|
|
EPS – Basic
|
|
$
|
0.69
|
|
|
$
|
0.98
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Diluted
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
52
|
|
|
$
|
73
|
|
Weighted average common shares outstanding – Basic
|
|
|
75,040,932
|
|
|
|
74,229,627
|
|
Dilutive effect of unvested RSUs and other contingently
issuable shares
|
|
|
1,220,613
|
|
|
|
1,149,601
|
|
Weighted average common shares outstanding – Diluted
|
|
|
76,261,545
|
|
|
|
75,379,228
|
|
EPS – Diluted
|
|
$
|
0.68
|
|
|
$
|
0.97
|
|
Diluted EPS is computed based upon the weighted average number of common shares outstanding for the period plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the period.
The diluted earnings per share calculations exclude the effect of stock options when the options’ assumed proceeds exceed the average market price of the common shares during the period. For the three months ended March 31, 2020, the weighted number of stock options excluded from the computations was 441,966. These stock options were outstanding at March 31, 2020.
18
Note 17. Commitments and Contingencies
Obligations payable to Honeywell
Honeywell is a defendant in asbestos-related personal injury actions mainly related to its legacy Bendix friction materials (“Bendix”) business. The Bendix business manufactured automotive brake linings that contained chrysotile asbestos in an encapsulated form. Claimants consist largely of individuals who allege exposure to asbestos from brakes from either performing or being in the vicinity of individuals who performed brake replacements. Certain operations that were part of the Bendix business were transferred to Garrett.
In connection with the Spin-Off, we entered into an Indemnification and Reimbursement Agreement with Honeywell on September 12, 2018. As of the Spin-Off date of October 1, 2018, we are obligated 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. Pursuant to the terms of this Indemnification and Reimbursement Agreement, we are responsible for paying to Honeywell such amounts, up to a cap of an amount equal to the Euro-to-U.S. dollar exchange rate determined by Honeywell as of a date within two business days prior to the date of the Distribution (1.16977 USD = 1 EUR) equivalent of $175 million in respect of such liabilities arising in any given calendar year. The payments that we are required to make to Honeywell pursuant to the terms of this agreement will not be deductible for U.S. federal income tax purposes. The Indemnification and Reimbursement Agreement provides that the agreement will terminate upon the earlier of (x) December 31, 2048 or (y) December 31st of the third consecutive year during which certain amounts owed to Honeywell during each such year were less than $25 million as converted into Euros in accordance with the terms of the agreement. During the first quarter of 2020, we paid Honeywell the Euro-equivalent of $35 million in connection with the Indemnification and Reimbursement Agreement. Garrett has made all payments under the Indemnification and Reimbursement Agreement under protest, as described below.
On December 2, 2019, the Company and its subsidiary, Garrett ASASCO Inc., filed a Summons with Notice in the Commercial Division of the Supreme Court of the State of New York, County of New York (the “NY Supreme Court”) commencing an action (the “Action”) against Honeywell, certain of Honeywell’s subsidiaries and certain of Honeywell’s employees for declaratory judgment, breach of contract, breach of fiduciary duties, aiding and abetting breach of fiduciary duties, corporate waste, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. On January 15, 2020, the Company and Garrett ASASCO Inc., filed a Complaint in the NY Supreme Court in connection with the Action. The lawsuit arises from the Indemnification and Reimbursement Agreement. The Company is seeking declaratory relief; compensatory damages in an amount to be determined at trial; rescission of the Indemnification and Reimbursement Agreement; attorneys’ fees and costs and such other and further relief as the Court may deem just and proper. There can be no assurance as to the time and resources that will be required to pursue these claims or the ultimate outcome of the lawsuit. Among other claims, Garrett asserts that Honeywell is not entitled to indemnification because it improperly seeks indemnification for amounts attributable to punitive damages and intentional misconduct, and because it has failed to establish other prerequisites for indemnification under New York law. Specifically, the claim asserts that Honeywell has failed to establish its right to indemnity for each and every asbestos settlement of the thousands for which it seeks indemnification. The Action seeks to establish that the Indemnification and Reimbursement Agreement is not enforceable, in whole or in part. On March 5, 2020, Honeywell filed a “Notice of Motion to Dismiss Garrett’s Complaint.” Garrett does not believe Honeywell’s motion has merit, and Garrett plans to respond. Given the New York Supreme Court’s limited operations during the Covid-19 crisis, the timing of any decision is unknown.
On September 12, 2018, we also entered into a Tax Matters Agreement with Honeywell (the “Tax Matters Agreement”), which governs the respective rights, responsibilities and obligations of Honeywell and us after the Spin-Off with respect to all tax matters (including tax liabilities, tax attributes, tax returns and tax contests). The Tax Matters Agreement generally provides that, following the Spin-Off date of October 1, 2018, we are responsible and will indemnify Honeywell for all taxes, including income taxes, sales taxes, value-added and payroll taxes, relating to Garrett for all periods, including periods prior to the completion date of the Spin-Off. Among other items, as a result of the mandatory transition tax imposed by the Tax Cuts and Jobs Act, one of our subsidiaries is required to make payments to a subsidiary of Honeywell in the amount representing the net tax liability of Honeywell under the mandatory transition tax attributable to us, as determined by Honeywell. We estimate that our total aggregate payments to Honeywell with respect to the mandatory transition tax will be $240 million with $190 million in payments remaining as of March 31, 2020. Under the terms of the Tax Matters Agreement, we are required to pay this amount in Euros, without interest, in five annual installments, each equal to 8% of the aggregate amount, followed by three additional annual installments equal to 15%, 20% and 25% of the aggregate amount, respectively. Following the Spin-Off in October 2018, we paid our first annual installment in that month. Subsequently, our annual installments are paid in April of each year. The annual installment due on April 1, 2020 has been deferred to May 31, 2020 in agreement with Honeywell.
19
In addition, the Tax Matters Agreement addresses the allocation of liability for taxes incurred as a result of restructuring activities undertaken to effectuate the Spin-Off. The Tax Matters Agreement also provides that we are required to indemnify Honeywell for certain taxes (and reasonable expenses) resulting from the failure of the Spin-Off and related internal transactions to qualify for their intended tax treatment under U.S. federal, state and local income tax law, as well as foreign tax law. Further, the Tax Matters Agreement also imposes certain restrictions on us and our subsidiaries (including restrictions on share issuances, redemptions or repurchases, business combinations, sales of assets and similar transactions) that are designed to address compliance with Section 355 of the Internal Revenue Code of 1986, as amended, and are intended to preserve the tax-free nature of the Spin-Off.
The following table summarizes our Obligation payable to Honeywell related to these agreements:
|
|
Three Months Ended March 31, 2020
|
|
|
|
Asbestos and
environmental
|
|
|
Tax Matters
|
|
|
Total
|
|
Beginning of year
|
|
$
|
1,090
|
|
|
$
|
261
|
|
|
$
|
1,351
|
|
Accrual for update to estimated liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Legal fees expensed
|
|
|
15
|
|
|
|
—
|
|
|
|
15
|
|
Payments to Honeywell
|
|
|
(35
|
)
|
|
|
—
|
|
|
|
(35
|
)
|
Currency translation adjustment
|
|
|
(23
|
)
|
|
|
(4
|
)
|
|
|
(27
|
)
|
End of period
|
|
$
|
1,047
|
|
|
$
|
257
|
|
|
$
|
1,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
50
|
|
|
|
18
|
|
|
|
68
|
|
Non-current
|
|
|
997
|
|
|
|
239
|
|
|
|
1,236
|
|
Total
|
|
$
|
1,047
|
|
|
$
|
257
|
|
|
$
|
1,304
|
|
Asbestos Matters
The accounting for the majority of our asbestos-related liability payments and accounts payable reflect the terms of the Indemnification and Reimbursement Agreement with Honeywell entered into on September 12, 2018, under which we are required to make payments to Honeywell in amounts equal to 90% of Honeywell’s asbestos-related liability payments and accounts payable, primarily related to the Bendix business in the United States, as well as certain environmental-related liability payments and accounts payable and non-United States asbestos-related liability payments and accounts payable, in each case related to legacy elements of the Business, including the legal costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts and, as may be applicable, certain other recoveries associated with such liabilities. The Indemnification and Reimbursement Agreement provides that the agreement will terminate upon the earlier of (x) December 31, 2048 or (y) December 31st of the third consecutive year during which certain amounts owed to Honeywell during each such year were less than $25 million as converted into Euros in accordance with the terms of the agreement.
The following tables present information regarding Bendix related asbestos claims activity:
|
|
Three Months
Ended March 31,
|
|
|
Year Ended
December 31,
|
|
Claims Activity
|
|
2020
|
|
|
2019
|
|
Claims Unresolved at the beginning of the year
|
|
|
6,480
|
|
|
|
6,209
|
|
Claims Filed
|
|
|
509
|
|
|
|
2,659
|
|
Claims Resolved
|
|
|
(708
|
)
|
|
|
(2,388
|
)
|
Claims Unresolved at the end of the period
|
|
|
6,281
|
|
|
|
6,480
|
|
|
|
Three Months
Ended March 31,
|
|
|
Years Ended
December 31,
|
|
Disease Distribution of Unresolved Claims
|
|
2020
|
|
|
2019
|
|
Mesothelioma and Other Cancer Claims
|
|
|
3,221
|
|
|
|
3,399
|
|
Nonmalignant Claims
|
|
|
3,060
|
|
|
|
3,081
|
|
Total Claims
|
|
|
6,281
|
|
|
|
6,480
|
|
20
Honeywell has experienced average resolutions per claim excluding legal costs as follows:
|
|
Years Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in whole dollars)
|
|
Malignant claims
|
|
$
|
50,200
|
|
|
$
|
55,300
|
|
|
$
|
56,000
|
|
|
$
|
44,000
|
|
Nonmalignant claims
|
|
$
|
3,900
|
|
|
$
|
4,700
|
|
|
$
|
2,800
|
|
|
$
|
4,485
|
|
It is not possible to predict whether resolution values for Bendix-related asbestos claims will increase, decrease or stabilize in the future.
Other Matters
We are subject to other lawsuits, investigations and disputes arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, and environmental, health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts. To date, no such matters are material to the Consolidated Interim Statements of Operations.
Note 18. Pension Benefits
We sponsor several funded U.S. and non-U.S. defined benefit pension plans. Significant plans outside of the U.S. are in Switzerland and Ireland. Other pension plans outside of the U.S. are not material to the Company either individually or in the aggregate.
Our general funding policy for qualified defined benefit pension plans is to contribute amounts at least sufficient to satisfy regulatory funding standards. We are not required to make any contributions to our U.S. pension plan in 2020. We expect to make contributions of cash and/or marketable securities of approximately $7 million to our non-U.S. pension plans to satisfy regulatory funding standards in 2020. No contributions have been made through the first three months of the year.
Net periodic benefit costs for our significant defined benefit plans include the following components:
|
|
Three Months Ended
|
|
|
|
U.S. Plans March 31,
|
|
|
Non-U.S. Plans March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Service cost
|
|
|
—
|
|
|
|
—
|
|
|
2
|
|
|
$
|
1
|
|
Interest cost
|
|
1
|
|
|
1
|
|
|
0
|
|
|
|
1
|
|
Expected return on plan assets
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Amortization of prior service (credit)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
(2
|
)
|
|
|
—
|
|
|
1
|
|
|
$
|
1
|
|
For both our U.S. and non-U.S. defined benefit pension plans, we estimate the service and interest cost components of net period benefit (income) cost by utilizing a full yield curve approach in the estimation of these cost components by applying the specific spot rates along the yield curve used in the determination of the pension benefit obligation to their underlying projected cash flows. This approach provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and their corresponding spot rates.
21
Note 19. China Variable Interest Entity
On September 20, 2018 in preparation of the Spin-Off, we entered into an agreement by and between Honeywell International Inc. and Garrett Motion Inc. (the “China Purchase Agreement”) in which Honeywell agreed to sell to Garrett 100% of the equity interests of Honeywell Transportation Investment (China) Co., Ltd. (“Garrett China”) consisting of our primary operations in China, in exchange for upfront consideration of 8,444,077 shares of our common stock. No further consideration from Garrett is due. The China Purchase Agreement has been amended to extend the date of the transfer of the equity interests in Garrett China from September 20, 2019 to June 30, 2020.
Garrett China is considered a variable interest entity for which Garrett is the primary beneficiary because the China Purchase Agreement provides Garrett, prior to the transfer of the equity interests, control to direct the management and operation of Garrett China as well as all economic benefits and losses. The intent of the agreement is to place Garrett in the same position as if it already owned 100% of the equity interests of Garrett China. As the agreement was effective prior to the Spin-Off date while the Company and Garrett China were under common control of Honeywell, the assets and liabilities of Garrett China are recognized at their carrying amounts.
The following table summarizes the consolidated assets and liabilities of Garrett China:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(Dollars in millions)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
46
|
|
|
$
|
141
|
|
Accounts, notes and other receivables—net
|
|
|
215
|
|
|
|
254
|
|
Inventories—net
|
|
|
28
|
|
|
|
27
|
|
Other current assets
|
|
|
1
|
|
|
|
1
|
|
Total current assets
|
|
|
290
|
|
|
|
423
|
|
Property, plant and equipment—net
|
|
|
81
|
|
|
|
82
|
|
Deferred income taxes
|
|
|
26
|
|
|
|
26
|
|
Other assets
|
|
|
1
|
|
|
|
1
|
|
Total assets
|
|
$
|
398
|
|
|
$
|
532
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
298
|
|
|
$
|
326
|
|
Accrued liabilities
|
|
|
73
|
|
|
|
80
|
|
Total current liabilities
|
|
|
371
|
|
|
|
406
|
|
Other liabilities
|
|
|
9
|
|
|
|
10
|
|
Total liabilities
|
|
$
|
380
|
|
|
$
|
416
|
|
Net sales from Garrett China were $95 million and $116 million for the three months ended March 31, 2020 and 2019, respectively. Related expenses primarily consisted of Costs of Goods Sold of $68 million and $79 million, Selling, general and administrative expenses of $4 million and $3 million and Tax expense of $4 million and $7 million for the three months ended March 31, 2020 and 2019, respectively.
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