Garrett Motion (US:GTX)2020-11-02 12:01PART I. FINANCIAL INFORMATION This section presents the unaudited interim financial statements and management's discussion and analysis, detailing the company's financial position and performance Financial Statements (Unaudited) The unaudited consolidated interim financial statements reflect the company's operations as a Debtor-in-Possession following its Chapter 11 filing on September 20, 2020 - On September 20, 2020, Garrett Motion Inc. and certain subsidiaries filed for Chapter 11 bankruptcy protection, with financial statements prepared under ASC Topic 852, Reorganizations, distinguishing pre-petition liabilities subject to compromise84244 - As a result of the Chapter 11 filing, there is substantial doubt about the company's ability to continue as a going concern, with asset realization and liability satisfaction subject to uncertainty pending reorganization plan outcome46 - The company's common stock was delisted from the New York Stock Exchange (NYSE) effective October 19, 2020, following the Chapter 11 filing45 Consolidated Interim Statements of Operations (Unaudited) For the nine months ended September 30, 2020, net sales decreased to $2,026 million from $2,418 million, and net income fell to $54 million from $177 million Consolidated Interim Statements of Operations (Unaudited) | (In millions, except per share) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $804 | $781 | $2,026 | $2,418 | | Gross profit | $152 | $172 | $378 | $550 | | Reorganization items, net | $4 | $— | $4 | $— | | Income before taxes | $10 | $72 | $65 | $256 | | Net income | $11 | $38 | $54 | $177 | | Diluted EPS | $0.14 | $0.50 | $0.71 | $2.34 | Consolidated Interim Balance Sheets (Unaudited) As of September 30, 2020, total assets were $2,467 million, total liabilities were $4,663 million, and $2,470 million of liabilities were subject to compromise Consolidated Interim Balance Sheet Highlights (Unaudited) | (In millions) | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total current assets | $1,392 | $1,199 | | Cash and cash equivalents | $312 | $187 | | Total assets | $2,467 | $2,275 | | Total current liabilities | $1,032 | $1,392 | | Liabilities subject to compromise | $2,470 | $— | | Total liabilities | $4,663 | $4,408 | | Total stockholders' deficit | ($2,196) | ($2,133) | Consolidated Interim Statements of Cash Flows (Unaudited) For the nine months ended September 30, 2020, net cash used for operating activities was $136 million, a reversal from $125 million provided in the prior year Consolidated Interim Statements of Cash Flows (Unaudited) | (In millions) | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Net cash (used for) provided by operating activities | ($136) | $125 | | Net cash used for investing activities | ($79) | ($62) | | Net cash provided by (used for) financing activities | $340 | ($62) | | Net increase/(decrease) in cash | $128 | ($6) | | Cash, cash equivalents and restricted cash at end of period | $315 | $190 | Notes to Unaudited Consolidated Interim Financial Statements The notes detail the Chapter 11 bankruptcy filing, including the 'Stalking Horse' purchase agreement, DIP financing, and $2.47 billion in liabilities subject to compromise - The company entered into a 'Stalking Horse' purchase agreement with affiliates of KPS Capital Partners for an initial bid of $2.1 billion, later revised to a $2.6 billion proposal that also offers existing stockholders an opportunity to co-invest in the reorganized company95463 - To fund operations during the Chapter 11 cases, the company secured a $200 million Senior Secured Super-Priority Debtor-in-Possession (DIP) term loan facility1081 Liabilities Subject to Compromise (as of Sep 30, 2020) | (In millions) | Amount | | :--- | :--- | | Obligations payable to Honeywell | $1,404 | | Long-term debt | $407 | | Accounts payable | $368 | | Pension, compensation, benefit and other | $94 | | Other | $197 | | Total | $2,470 | - The company is in active litigation with its former parent, Honeywell, seeking to invalidate or reduce its obligations under the Subordinated Asbestos Indemnity Agreement and the Tax Matters Agreement132135 Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes financial distress to a leveraged capital structure and Honeywell obligations, exacerbated by COVID-19, leading to Chapter 11 filing and a sale process - The company's strategic review, accelerated by the COVID-19 pandemic, led to the decision to file for Chapter 11 and pursue a sale of the business53155 - The company has received a revised 'Stalking Horse' bid of $2.6 billion from KPS Capital Partners and is also evaluating an alternative proposal from a bidding group that includes Honeywell, Centerbridge Partners, and Oaktree Capital Management157158 Net Sales Change vs. Prior Year Period | | For the Three Months Ended Sep 30, 2020 | For the Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Volume | 1.1% | (15.5%) | | Price | (0.8%) | (0.3%) | | Foreign Currency Translation | 2.6% | (0.4%) | | Total % Change | 2.9% | (16.2%) | Adjusted EBITDA Reconciliation (Non-GAAP) | (In millions) | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net income — GAAP | $11 | $38 | $54 | $177 | | EBITDA (Non-GAAP) | $52 | $108 | $178 | $357 | | Adjusted EBITDA (Non-GAAP) | $120 | $133 | $291 | $446 | Quantitative and Qualitative Disclosures About Market Risk The Chapter 11 proceedings have significantly constrained the company's ability to manage market risk, particularly foreign exchange fluctuations, increasing exposure - Due to the Chapter 11 case, the company has lost its ability to freely enter into hedging contracts and is therefore more exposed to foreign exchange fluctuations244 - The Bankruptcy Court has approved limited hedging transactions, which must be fully cash collateralized, until the company emerges from bankruptcy245 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal controls - Management concluded that disclosure controls and procedures were effective as of September 30, 2020247 - No material changes were made to internal controls over financial reporting during the quarter ended September 30, 2020248 PART II. OTHER INFORMATION This section covers legal proceedings, updated risk factors related to the Chapter 11 process, and other required disclosures Legal Proceedings The company is involved in significant legal proceedings, including a lawsuit against Honeywell regarding asbestos indemnity and two putative class action securities complaints - The company is suing Honeywell to declare the Subordinated Asbestos Indemnity Agreement unenforceable, with the case moved to the Bankruptcy Court following the Chapter 11 filing251 - Two putative class action securities lawsuits (the Husson Action and the Gabelli Action) were filed against the company and/or its officers and directors, alleging securities fraud under Sections 10(b) and 20(a) of the Exchange Act252 Risk Factors This section updates risk factors to focus on substantial risks associated with the Chapter 11 proceedings, including uncertainty of court approvals and potential for no stockholder recovery - There are significant risks related to the Chapter 11 process, including the ability to get court approvals, the length of the proceedings, and the potential for the case to be converted to a Chapter 7 liquidation256257271 - The company may not be able to complete the 'Stalking Horse' sale or another reorganization plan, and the consideration received may be inadequate, with the outcome of litigation with Honeywell also highly uncertain and potentially impacting recoveries260264 - Trading in the company's securities is highly speculative, and stockholders are cautioned that their common stock may be cancelled and have no value upon completion of the Chapter 11 cases272 - The COVID-19 pandemic continues to pose a significant risk, with potential for further manufacturing disruptions, weakened customer demand, and adverse impacts on business and financial results273275 - The company's highly leveraged capital structure, a primary reason for the bankruptcy filing, remains a critical risk that may not be successfully resolved through the Chapter 11 process276277 Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None278 Defaults Upon Senior Securities The company notes that defaults upon its senior securities have occurred, primarily triggered by the Chapter 11 filing - The company acknowledges defaults upon senior securities, which are detailed in other sections of the report and were triggered by the bankruptcy filing279 Other Information The company reported no other information required to be disclosed under this item for the period - None281 Exhibits This section lists all exhibits filed with the Form 10-Q, including key agreements and officer certifications - Key exhibits filed include the Stalking Horse Purchase Agreement (2.3), the Restructuring Support Agreement (10.1), and the DIP Credit Agreement (10.2)283 - Certifications by the Principal Executive Officer and Principal Financial Officer pursuant to Sarbanes-Oxley Sections 302 and 906 are included as exhibits283