Garrett Motion (GTX) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited Q1 2020 financials reveal declining sales, net income, a significant stockholders' deficit, and going concern doubt due to expected debt covenant breach - Management has concluded that conditions raise substantial doubt about the Company's ability to continue as a going concern due to the expected inability to comply with the consolidated total leverage ratio covenant in its Credit Agreement as early as June 30, 2020, as a result of the COVID-19 pandemic's impact[36][37] Consolidated Interim Statements of Operations For the three months ended March 31, 2020, net sales decreased to $745 million from $835 million in the prior-year period, with net income falling to $52 million from $73 million Q1 2020 vs Q1 2019 Statement of Operations Highlights | Metric | Q1 2020 (in millions) | Q1 2019 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net sales | $745 | $835 | -10.8% | | Gross profit | $142 | $196 | -27.6% | | Income before taxes | $53 | $97 | -45.4% | | Net income | $52 | $73 | -28.8% | | Diluted EPS | $0.68 | $0.97 | -29.9% | Consolidated Interim Balance Sheets As of March 31, 2020, the company reported total assets of $2,254 million and total liabilities of $4,300 million, resulting in a total stockholders' deficit of $2,046 million Balance Sheet Summary | Metric | March 31, 2020 (in millions) | Dec 31, 2019 (in millions) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $254 | $187 | | Total current assets | $1,188 | $1,199 | | Total assets | $2,254 | $2,275 | | Liabilities & Equity | | | | Total current liabilities | $1,376 | $1,392 | | Long-term debt | $1,389 | $1,409 | | Obligations payable to Honeywell | $1,236 | $1,282 | | Total liabilities | $4,300 | $4,408 | | Total stockholders' deficit | $(2,046) | $(2,133) | Consolidated Interim Statements of Cash Flows For the first three months of 2020, net cash provided by operating activities was $57 million, net cash used for investing activities was $39 million, and net cash provided by financing activities was $62 million Q1 2020 vs Q1 2019 Cash Flow Summary | Cash Flow Activity | Q1 2020 (in millions) | Q1 2019 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $57 | $36 | | Net cash used for investing activities | $(39) | $(20) | | Net cash provided by (used for) financing activities | $62 | $(5) | | Net increase in cash and cash equivalents | $67 | $11 | Notes to Unaudited Consolidated Financial Statements Notes detail accounting policies, COVID-19 impact, revenue declines across regions, and significant obligations to Honeywell including ongoing litigation - The company is obligated to make payments to Honeywell for asbestos and environmental liabilities, capped at the Euro equivalent of $175 million annually; as of March 31, 2020, the total obligation payable to Honeywell (including tax matters) was $1,304 million[78][82] - The company has filed a lawsuit against Honeywell seeking to rescind the Indemnification and Reimbursement Agreement, alleging Honeywell is not entitled to indemnification for various reasons, including seeking amounts for punitive damages and failing to establish prerequisites for indemnification[79] Net Sales by Region (Q1 2020 vs Q1 2019) | Region | Q1 2020 (in millions) | Q1 2019 (in millions) | Change | | :--- | :--- | :--- | :--- | | United States | $132 | $129 | +2.3% | | Europe | $433 | $478 | -9.4% | | Asia | $173 | $219 | -21.0% | | Other International | $7 | $9 | -22.2% | | Total | $745 | $835 | -10.8% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19's significant negative impact on Q1 2020 operations, leading to a 10.8% sales decrease, and highlights the expected debt covenant breach by June 30, 2020, raising substantial doubt about going concern, alongside implemented cost controls - The COVID-19 pandemic caused a six-week shutdown of the Wuhan facility and diminished production in Shanghai, which were primary drivers of the sales decrease in Asia, with management expecting continued significant negative impact on production volumes and financial results for Q2 2020[99][113] - Due to the expected impact of COVID-19, the company anticipates being unable to comply with its consolidated total leverage ratio covenant as early as June 30, 2020, which could trigger an event of default and acceleration of debt[131] - In response to the pandemic, the company has implemented cost control and cash management actions, including postponing capital expenditures, reducing discretionary spending, temporarily cutting executive pay by 20%, and optimizing working capital[100][103] Results of Operations Net sales for Q1 2020 decreased by $90 million (10.8%) year-over-year, driven by volume decline and negative foreign currency translation, leading to gross profit margin contraction Drivers of Net Sales Change (Q1 2020 vs Q1 2019) | Factor | Percentage Change | | :--- | :--- | | Volume | (8.2)% | | Price | (0.4)% | | Foreign Currency Translation | (2.2)% | | Total | (10.8)% | - Gross profit percentage decreased by 4.4 percentage points, primarily due to unfavorable impacts from mix and price (3.1 p.p.), higher costs from premium freight and other plant costs (1.4 p.p.), and inflation (0.8 p.p.), partially offset by productivity gains (1.4 p.p.)[115] Non-GAAP Measures Adjusted EBITDA, a non-GAAP measure, decreased significantly to $108 million in Q1 2020 from $159 million in Q1 2019, primarily due to unfavorable sales volume, productivity net of mix, and inflation Adjusted EBITDA Reconciliation | Metric | Q1 2020 (in millions) | Q1 2019 (in millions) | | :--- | :--- | :--- | | Net income — GAAP | $52 | $73 | | Net interest (income) expense | $15 | $15 | | Tax expense | $1 | $24 | | Depreciation | $19 | $19 | | EBITDA (Non-GAAP) | $87 | $131 | | Adjustments | $21 | $28 | | Adjusted EBITDA (Non-GAAP) | $108 | $159 | Liquidity and Capital Resources Liquidity is under significant pressure, with management concluding substantial doubt about going concern due to likely debt covenant breach; the company fully drew $470 million from its credit facility and is negotiating with lenders, facing significant obligations to Honeywell - On April 6, 2020, the Company fully drew the remaining funds of approximately $470 million available under its revolving credit facility to increase financial flexibility[129] - The Credit Agreement's consolidated total leverage ratio covenant steps down from 4.25x to 3.75x in September 2020; the company was in compliance as of March 31, 2020, but expects to breach it as early as June 30, 2020[131][137] - The annual installment payment of the mandatory transition tax to Honeywell, due April 1, 2020, was deferred to May 31, 2020, by agreement with Honeywell[144] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that there have been no material changes in its quantitative and qualitative disclosures about market risks from those reported in its Annual Report on Form 10-K for the year ended December 31, 2019 - As of March 31, 2020, there have been no material changes to the market risk information previously disclosed in the 2019 Form 10-K[158] Item 4. Controls and Procedures Management, including the CEO and interim CFO, evaluated the company's disclosure controls and procedures and concluded they were effective at a reasonable assurance level as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - The Chief Executive Officer and Interim Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[160] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[161] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section details the ongoing lawsuit filed by Garrett against its former parent, Honeywell, seeking to rescind the Indemnification and Reimbursement Agreement related to asbestos liabilities - The company filed a lawsuit against Honeywell on December 2, 2019, seeking to invalidate the Indemnification and Reimbursement Agreement, alleging Honeywell improperly seeks indemnification for punitive damages and has not met legal prerequisites for indemnification[163] Item 1A. Risk Factors Updated risk factors include significant new risks from COVID-19, such as adverse business impact, high likelihood of debt covenant breach, and substantial doubt about going concern - A new risk factor details how the COVID-19 pandemic has adversely impacted business through facility shutdowns, supply chain disruptions, and weakened customer demand, with the expectation that these negative impacts will continue[166][167][168] - The company explicitly states it is likely to be unable to comply with the consolidated total leverage ratio covenant in its Credit Agreement as early as June 30, 2020, which would constitute an event of default and could lead to acceleration of its debt[172] - A new risk factor highlights that management has concluded there is substantial doubt about the company's ability to continue as a going concern, which could adversely affect its stock price and ability to obtain financing[174] Item 2. 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 - None[175] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[176] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[177] Item 5. Other Information The company reported no other information required to be disclosed under this item - None[178] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and XBRL data files, incorporating by reference key agreements with Honeywell