SECURITIES AND EXCHANGE COMMISSION
__________________________
__________________________
(Mark One)
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☒x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31,
2020or
2023OR
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☐o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period
from to from_____to_____
Commission File Number 001-38636
__________________________
(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) |
(Registrant’s telephone number, including area code)
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
Common Stock, $0.001 par value per share | None
GTX | None
The Nasdaq Stock Market LLC |
| | |
Securities registered pursuant to
Sectionsection 12(g) of the Act:
Common Stock, $0.001 par value per share
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ 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.
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| 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐o No x
The aggregate market value of the
voting and non-voting common
stockequity held by non-affiliates of the registrant was approximately
$415$914 million based on the closing price of its
common stockshares of Common Stock, par value $0.001 per share, on the
New York Stock ExchangeNasdaq Global Select Market on June 30,
2020,2023, the last business day of the registrant’s second fiscal quarter.
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 ☐ No ☐ As of February
4, 2021,9, 2024, the registrant had
75,813,634238,256,506 shares of common stock, $0.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement relating to its 2024 annual meeting of shareholders (the “2024 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2024 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Table of Contents | | | | | | | | |
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Item 1A.
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Item 1B. | | 44
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Item 2. 1C. | | 44
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| | Notes56to Consolidated and CombinedFinancialStatements | 80
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PART IIIItem 9C.
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2
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.
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., Oaktree Capital Management, L.P., 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”).
3
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 (the “EBCA”) with certain members of the CO Group (the “Equity Backstop Parties”), pursuant to which, among other things, the Company will conduct the rights offering contemplated by the PSA (the “Rights Offering”) and each Equity 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 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.
The Debtors’ entry into and performance and obligations under the PSA and the EBCA are subject to approval by the Bankruptcy Court and other customary closing conditions. On February 9, 2021, the official committee of equity securities holders (the “Equity Committee”) filed an objection to the Debtors’ motion seeking authority to enter into and perform under the PSA and the ECBA. A hearing on the matter is scheduled to take place in the Bankruptcy Court on February 16, 2021. There can be no assurances that the Debtors will obtain the approval of the Bankruptcy Court and complete the Transaction.
On January 24, 2021, representatives of 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 have been 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’s motion is scheduled to be heard by the Bankruptcy Court on February 16, 2021. The Company has significant concerns with the feasibility of the Atlantic Park Proposal and has concluded that at this time the transactions contemplated under the Atlantic Park Proposal are not reasonably likely to lead to a higher and better alternative plan of reorganization as compared to the Plan. The Equity Committee has also 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.
The disclosures in this Annual Report on Form 10-K 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 Consolidated and Combined Financial Statements for additional information regarding the Chapter 11 Cases, the RSA, the Stalking Horse Purchase Agreement, the PSA, the ECBA, the Transaction and the DIP Credit Agreement.
4
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 Annual Report on Form 10-K refer to Garrett Motion Inc. and its
subsidiaries following the Spin-Off.This Annual Report on Form 10-K contains financial information that was derived partially from the consolidated financial statements and accounting records of Honeywell. subsidiaries.
The accompanying
consolidated and combined financial statements of Garrett
(“Consolidated and Combined Financial Statements”) reflect the consolidated
and combined historical results of operations, financial position and cash flows of Garrett,
for periods following the Spin-Off, and the Transportation Systems Business, for all periods prior to the Spin-Off, as it was historically managed in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”
or "GAAP").
Therefore, the historical consolidated and combined financial information may not be indicative of our future performance and does not necessarily reflect what our consolidated and combined results of operations, financial condition and cash flows would have been had the Business operated as a separate, publicly traded company during the entirety of the periods presented, particularly because of changes that we have experienced, and expect to continue to experience in the future, as a result of our separation from Honeywell, including changes in the financing, cash management, operations, cost structure and personnel needs of our business.Throughout this
Annual Report on Form 10-K,
we
reference
certain
industry
sources.
While
we believe
the compound annual growth rate
(“CAGR”) and other
projections
of the industry
sources
referenced
in
this
Annual Report on Form 10-K
are reasonable,
forecasts
based upon such data involve
inherent
uncertainties,
and actual
outcomes
are subject
to change based upon various
factors
beyond our control. All data from industry sources is provided as of the latest practicable date prior to the filing of this Annual Report on Form 10-K and may be subject to change.
5
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
| | |
| CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS |
This Annual Report on Form 10-K
(this "Annual Report") 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.amended (the "Securities Act"). All statements other than statements of historical fact contained in this Annual Report, including without limitation statements regarding our future
results of operations and financial position, the consequences and outcome of the Chapter 11 Cases, 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 novel coronavirus (“COVID-19”) pandemic on our business, results of operations and financial position, expectations regarding the growth of the turbocharger and electric vehicle markets and other industry trends, the sufficiency of our cash and cash equivalents, anticipated sources and uses of cash, anticipated investments in our business, our business strategy, pending litigation,
anticipated payments under our agreements with Honeywell, if our global settlement with Honeywell is not approved by the Bankruptcy Court, and the expected timing of those payments, anticipated interest expense, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Annual Report 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 Annual Report 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 the factors described in Part I, Item 1A. “Risk Factors,” of this Annual Report
on Form 10-K and in our other filings with the Securities and Exchange
Commission.Commission (the "SEC").
You should read this Annual Report 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
Summary Risk Factors
Our business is subject to numerous risks and uncertainties, including those described in Part I Item 1A. “Risk Factors” in this Annual Report on Form 10-K. You should carefully consider these risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include the following:
| •
| the ability to obtain Bankruptcy Court approval in the Chapter 11 Cases with respect to the Debtors’ motions, the outcome of the Bankruptcy Court’s rulings in the Chapter 11 Cases and the outcome of the Chapter 11 Cases in general, including the length of time the Debtors will operate in the Chapter 11 Cases and the ability to obtain Bankruptcy Court approval of the adequacy of the Debtors’ Disclosure Statement and confirmation of the Debtors’ Plan;
|
| •
| restrictions on our operations as a result of the Chapter 11 Cases, the PSA and the DIP Credit Agreement;
|
| •
| ability to complete a restructuring transaction (including in accordance with the PSA and the ECBA) or realize adequate consideration for such transaction or complete a global settlement with Honeywell for spin-off related claims (including in accordance with the PSA) with the approval of the Bankruptcy Court;
|
| •
| 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;
|
PART I | •
| 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 potential for limited liquidity and increased price volatility of our common stock;
|
| •
| other litigation and the inherent risks involved in a bankruptcy process, including the possibility of converting to a proceeding under Chapter 7 of the Bankruptcy Code;
|
| •
| 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;
|
| •
| 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;
|
7
| •
| 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 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; and
|
| •
| inability to recruit and retain qualified personnel.
|
8
Part I
Our Company
Our Company designs,
manufactures
Garrett is a cutting-edge technology leader delivering differentiated solutions for emission reduction and sellsenergy efficiency. We design, manufacture and sell highly engineeredturbocharger turbocharging, air andelectric-boosting fluid compression, and high-speed electric motor technologiesfor light and commercial vehicle original equipment manufacturers (“OEMs”("OEMs")and distributors within the global vehicle independent aftermarketmobility and industrial space.
We have significant expertise in delivering products at scale for internal combustion engines ("ICE") using gasoline, diesel, natural gas and hydrogen, as well as
automotive software solutions.These OEMs in turn shipfor zero emission technologies using hydrogen fuel cell systems, both for mobility and industrial use. As our customers continue to
consumers globally. Weprogress on electrification, we are
a globaltechnologyleaderwith significantexpertisein deliveringproductsacrossgasoline,diesel,naturalgasapplying our technological pillars to develop highly engineered E-Powertrain and
electric(hybridand fuelcell)powertrains.E-Cooling compressor products to support their ambition. These products are key enablers for fuel economy,
energy efficiency, thermal management, and
compliance with emissions standards and overall greenhouse gas and other emission
standards compliance.reduction targets.
Our productsgrowth strategy in zero emission technologies is to focus on solving OEMs' pain points with existing technologies and bring differentiated technologies for traction (E-Powertrain) and thermal management (E-Cooling compressor), leveraging a unique set of technology pillars that are hard to replicate by competitors like high-speed motors and power electronics, controls software, oil-less bearings and system integration. These technology pillars have been developed by Garrett over the past decade and require significant and sustained research and development ("R&D") investments, resulting in the successful launch of E-Boosting and fuel cell compressor applications. They bring unique features to our offerings in terms of energy efficiency, lower weight and packaging requirements that are highly engineeredvalued by our customers.
Our Industry
Overview
We provide cutting-edge technology for
each individualpowertrainplatform,requiringclosecollaboration with our customersin the
earliestyearsof powertrainmobility and
newvehicledesign. Our turbochargingand electric-boostingproductsenableour customersto improvevehicleperformancewhile addressingcontinuallyevolving and convergingregulationsthatmandatesignificantincreasesin fuelefficiencyand reductionsin exhaust emissionsworldwide.We offer light vehicle gasoline, light vehicle diesel and commercial vehicle turbochargers that enhance vehicle performance, fuel economy and drivability. A turbocharger provides an engine with a controlled and pressurized air intake, which intensifies and improves the combustion of fuel to increase the amount of power sent through the transmission and to improve the efficiency and exhaust emissions of the engine. Marketpenetrationofindustrial space, including light vehicles,with a turbochargeris expectedto increasefrom approximately 51% in 2020 to approximately55% by 2025, accordingto IHSMarkit (“IHS”),which webelievewill allow the turbocharger marketto grow at a fasterratethan overallautomobileproduction.
Building on our expertisein turbochargertechnology,wehave also developedelectric-boosting technologiestargetedfor use in electrifiedpowertrains,primarilyhybrid commercial vehicles and fuelcellvehicles.industrial applications. Our products includeelectricturbochargers mechanical and electriccompressorsthatprovidemoreresponsivedrivingelectrical products for turbocharging and optimizedfuel economy in electrifiedvehicles.Our early-stageand collaborativerelationshipswith our globalOEM customerbase have enabledus to increaseour knowledge of customerneeds for vehiclesafety, predictive maintenance, and advanced controllersto develop newconnectedand software-enabledproducts.
In addition,wehave emergingopportunitiesin technologies,productsand servicesthatsupportthe growing connectedvehiclemarket,which includesoftwarefocusedon automotivecybersecurityand integrated vehicle health management (“IVHM”). Our focus is developing solutions for enhancing cybersecurity of connected vehicles,boosting internal combustion engines, as well as in-vehicle monitoringcompressing air for fuel cell compressors, and compressing refrigerant for electric cooling compressors.
As of 2023, our primary source of sales is associated with the global turbocharger industry for gasoline, diesel and natural gas engines across light vehicle, commercial vehicle and industrial applications. Sales also come from E-Boosting solutions and hydrogen fuel cell compression solutions, already manufactured at scale.
At the same time, we have developed unique technological competencies, which we aim to
provide maintenance diagnostics, which reduce vehicle downtimecontinue leveraging to solve our customers’ energy related challenges in the electrification evolution related to hybrids and
repair costs. For example,electric powertrains. We are developing solutions and increasing our
Intrusion Detection and Prevention System uses anomaly detection technology that functions like virus detection software to perform real-time data analysis to ensure every message received by a car’s computer is valid. Our IVHM tools detect intermittent faults and anomalies within complex vehicle systems to provide a more thorough understanding of the real-time health of a vehicle system and enable customers to fix faults before they actually occur. Weare collaboratingwith tier-onesupplierson automotivecybersecuritysoftwaresolutionsand with several majorOEMson IVHMtechnologies.Our comprehensiveportfolioof turbocharger,electric-boostingand connectedvehicletechnologiesis supportedby our five research and development (“R&D”)centers,11 close-to-customerengineeringfacilitiesand 13 factories,which are strategicallylocatedaround the world. Our operations spend, focusing more than 50% of total R&D expenditure in each regionhave self-sufficientsales,engineeringand productioncapabilities,makingus a nimblelocalcompetitor,while our standardizedmanufacturingprocesses, globalsupply chain, worldwide technologyR&Dand sizeenableus to deliverthe scalebenefits,technology leadership,cross-regionalsupportand extensiveresourcesof a globalenterprise.In high-growthregions,2024 on technologies for electrification includingChina and India,wehave establisheda localfootprint,which has helped us securestrongpositions with in-regionOEMcustomerswhodemand localizedengineeringand manufacturingcontentbut also require the capabilitiesand trackrecordof a globalleader.
We also sellour zero emission technologies,in the globalaftermarketthrough our distributionnetwork of morethan 200 distributorscovering160 countries. Through thisnetwork, weprovideapproximately5,300 part-numbersand productsto servicegaragesacrossthe globe. Garrett is a leadingbrand in the independent aftermarketfor both servicereplacementturbochargersas well as high-endperformanceand racing turbochargers.We estimatethatover 110 millionvehicleson the road today utilizeour products, furthersupportingour globalaftermarketbusiness.
9
Leading technology,continuousinnovation,productperformanceand OEMengineeringcollaborationare centralto our customervalue propositionand a core partof our cultureand heritage.In 1962, weintroduceda turbocharger fuel cell compressors for a mass-producedpassengervehicle.Since then, wehave introducedmany othernotable technologiesin mass-productionvehicles,such as turbochargerswith variablegeometryturbines,dual-boost compressors,ball-bearingrotorsbroad range of cell stack power (40kW to 250kW) and electronicallyactuatedcontrols,allof which vastlyimproveengine responsewhenacceleratingat low speedshigh value electric vehicle components including E-Powertrain and increasepower at higherspeeds and enablesignificant improvementsin overallengine fueleconomy and exhaustemissionsfor both gasolineand dieselengines.Our portfoliotoday includesapproximately 1,600 patentsand patentspending.
Reorganization and Chapter 11 Proceedings
On the Petition Date, the Debtors each entered into the RSA and filed a voluntary petition for relief under the Bankruptcy Code in the Bankruptcy Court. The Chapter 11 Cases are being jointly administered under the caption “In re: Garrett Motion Inc., 20-12212.”
On the Petition Date, certain of the Debtors also entered into the Stalking Horse Purchase Agreement with the Stalking Horse Bidder and AMP U.S. Holdings, LLC, each affiliates of 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 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 the Petition Date, we were 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 NYSE had commenced proceedings to delist our common stock from the NYSE. The NYSE indefinitely suspended trading of our common stock on September 21, 2020. We 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 our common stock from listing and registration on the NYSE effective as of the opening of business on October 19, 2020. The delisting of our common stock from NYSE has and could continue to limit the liquidity of our common stock, increase the volatility in the price of our common stock, and hinder our ability to raise capital.
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) the Plan and 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 a restructuring transaction with the CO Group. 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.
Under the terms of the PSA and the Transaction, the Plan, if confirmed by the Bankruptcy Court, will include 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 indemnification and reimbursement agreement with Honeywell entered into on September 12, 2018 (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 with Honeywell, dated September 12, 2018 (the “Tax Matters Agreement”) and (b) the dismissal with prejudice of the lawsuits against Honeywell relating to the Honeywell Indemnity Agreement and the Tax Matters Agreement (the “Honeywell Litigation”) in exchange for (x) a $375 million cash payment by the company at emergence from chapter 11 (“Emergence”) and (y) 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”).
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In accordance with the terms of the PSA, on January 22, 2021, the Debtors’ entered into the EBCA with the Equity Backstop Parties, pursuant to which, among other things, the Company will conduct the Rights Offering and each Equity Backstop Party committed to (i) exercise its rights, as a stockholder of the Company, to purchase in the Rights Offering 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 Offering.
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.
The Debtors’ entry into and performance and obligations under the PSA and the EBCA are subject to approval by the Bankruptcy Court and other customary closing conditions. 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 ECBA. A hearing on the matter is scheduled to take place in the Bankruptcy Court on February 16, 2021. There can be no assurances that the Debtors will obtain the approval of the Bankruptcy Court and complete the Transaction.
On January 24, 2021, representatives of the Equity Committee submitted a restructuring term sheet for the Atlantic Park Proposal. 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 the Atlantic Park Proposal. The transactions contemplated under the Atlantic Park Proposal have been 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’s motion is scheduled to be heard by the Bankruptcy Court on February 16, 2021. The Company has significant concerns with the feasibility of the Atlantic Park Proposal and has concluded that at this time the transactions contemplated under the Atlantic Park Proposal are not reasonably likely to lead to a higher and better alternative plan of reorganization as compared to the Plan.
For additional information regarding the Chapter 11 Cases, reorganization, the PSA, the ECBA and the Transaction, see “Explanatory Note” and Note 2, Reorganization and Chapter 11 Proceedings of the Notes to the Consolidated and Combined Financial Statements.
Impact of COVID-19 Pandemic
The ongoing global COVID-19 pandemic has created unparalleled challenges for the auto industry in the short-term. In the three months ended March 31, 2020, our manufacturing facility in Wuhan, China was shut down for six weeks in February and March and we saw diminished production in our Shanghai, China facility for that same time period, which adversely impacted our net sales for the period. During the second quarter, our facilities in China re-opened, however our manufacturing facilities in Mexicali, Mexico and Pune, India were shut down for five weeks and our manufacturing facilities in Europe operated at reduced capacity. During this time, we implemented a set of hygiene and safety measures that complied with, and in many places exceeded local regulations in order to protect our employees while maintaining commitments vis-a-vis our customers. This combined with the fast recovery observed in all geographies has enabled us to ramp up production in most of our production sites to normal levels in the third quarter of 2020. This trend has been confirmed in the fourth quarter, despite the resurgence of infection rates in U.S. and European Union. If the COVID-19 pandemic drives new lockdown measures impacting our manufacturing facilities, our facilities may be forced to shut down or operate at reduced capacity again. Additional or continued facilities closures or reductions in operation could significantly reduce our production volumes and have a material adverse impact on our business, results of operations and financial condition.
Analyst consensus for the full year 2020 anticipates a 17% decrease in global light vehicle production, and for a 10% decline in commercial vehicle production, a larger drop than during the financial crisis in 2008 and 2009. In 2021, a partial recovery is expected with a rebound of light vehicle production of 14% and commercial vehicles of 6%. As a result, we estimate that a contraction of approximately 13% for the combined light and commercial vehicle turbocharger industry volume occurred in 2020 and we expect a rebound of 13% in 2021. We have prepared contingency plans for multiple scenarios that we believe will allow us to react swiftly to changes in customer demand while protecting Garrett’s long-term growth potential. The supplies needed for our operations were generally available throughout 2020. In limited circumstances, certain suppliers experienced financial distress during 2020, resulting in supply disruptions. However, during 2020, we implemented new procedures for monitoring of supplier risks associated with COVID-19 and the Chapter 11 Cases and believe we have substantially addressed such risks with manageable economic impacts
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including use of Premium Freight or adjusted payment terms that are limited in time. In addition, we have implemented cost control measures and cash management actions, including:
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| Postponing capital expenditures;
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E-Cooling Compressor technologies. | •
| Optimizing working capital requirements;
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| Lowering discretionary spending;
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| Flexing organizational costs by implementing short-term working schemes;
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| Reducing temporary workforce and contract service workers; and
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| Restricting external hiring.
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The following charts show our percentage of revenues by geographic region and product line for the years ended December 31, 2020, 2019 and 2018 and the percentage change from the prior year comparable period.
RevenueSummary
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By Product-line
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| We are a globalbusinessthatgeneratedrevenuesof approximately$3 billionin 2020.
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| In 2020, light vehicle products (products for passenger cars, SUVs, light trucks, and other products) accounted for approximately 69% of our revenues. Commercial vehicle products (products for on-highway trucks and off-highway trucks, construction, agriculture and power-generation machines) accounted for 18%.
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| In 2020, our OEMsalescontributed approximately87% of our revenueswhile our aftermarketand otherproductscontributed13%.
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| Approximately51% of our 2020 revenuescamefromsalesshipped from Europe, 33% from salesshipped from Asia and 15% fromsales shipped from North America.For moreinformation,see Note 26 Concentrationsof the Notes to our Consolidated and Combined Financial Statements.
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Our Industry
We competein the globalturbochargermarketfor gasoline,dieseland naturalgas engines;in the electric- boostingmarketfor electrified(hybridand fuelcell)vehiclepowertrains;and in the emergingconnectedvehicle softwaremarket.Asvehiclesbecomemoreelectrified,our electric-boostingproductsuse principles similar to our turbochargersto furtheroptimizeairintakeand thus further enhance performance,fueleconomy and exhaustemissionswith the help of an integratedhigh-speedelectric motor.Byusing a turbochargeror electric-boostingtechnology,an OEMcan deploy smaller,lighterpowertrains with betterfueleconomy and exhaustemissionswhile deliveringthe samepower and accelerationas larger, heavierpowertrains.Assuch, turbochargershave becomeone of the mosthighly effectivetechnologiesfor helpingglobalOEMsmeetincreasinglystricteremissionstandards.
Global Turbocharger market
The global turbocharger market includes turbochargers for new light and commercial vehicles as well as turbochargers for replacement use in the global aftermarket. According to IHS and other experts, the global turbocharger market consisted of approximately 44 million unit sales with an estimated total value of approximately $10 billion in 2020. Within the global turbocharger market, light vehicles accounted for approximately 90% of total unit volume and commercial vehicles accounted for the remaining 10%.
Consultants project that the turbocharger production volume will grow at a CAGR of approximately 3% from 2019 through 2025, driven mainly by turbochargers for light vehicle gasoline engines and continued slow growth for commercial vehicles, offset by a decline in diesel turbochargers given a decline in diesel powertrains, particularly for light vehicles.Thisannualsalesestimate wouldaddapproximately372million new turbochargedvehiclesontheroadgloballybetween2019and2025.
Key trends affectingour industry
Current global economic conditions due to COVID-19geopolitical conflicts, high inflation in Europe and China's slow pace of recovery, all have adversely affected and may continue to adversely affect many industries including the Automotiveautomotive sector. Analysts estimate that automotive industry revenue dropped 11%
Growth in 2020,overall vehicle production
Light vehicle production increased 9% in 2023, compared to
2019, according to Standard & Poor’s Capital IQ. According to the same dataset, other industries that drive, in particular, Off-Highway commercial vehicle turbo demand, such as Oil and Gas (24%), Railroads (16%) or Marine (2%) recorded drops in industry revenue over the same period. Global GDP growth, while restarting in second half of 2020 on the back of global government stimulus programs, will remain 5 percentage points below pre-crisis forecasts at least until 2023, according to the OECD. Consequently, IHS reduced its lightprior year. Commercial vehicle production
volume forecast for 2025 from 102 million units that they forecastedremained steady in
2019 to 95 million units2023 while the on-highway segment increased 12%, and the off-highway sector decreased by 7%. For 2024, S&P and KGP expect an overall drop of approximately 1% in
their January 2021 light vehicle industry production volume forecast. While this resets the volume outlook for the automotive
industry, the underlying(light vehicle and commercial vehicle) industry. Moreover, significant uncertainty remains on global economic growth,
drivers for the turbo industry remain unchanged: Growth in the overall vehicle industry (albeit from a lower base), increasingly tight fuel efficiencywith some supply chain disruptions, geopolitical tensions, and
emission standards,China facing low inflation and
growing turbocharger penetration.Growthin overallvehicleproduction. After a decrease of 17% in Light Vehicle production and 10% in Commercial Vehicle production in 2020, consultants expect a stabilization in 2021. The global automotive industry is expected to reach pre-crisis volumes in 2022-2023.job market deterioration. The shift from pure gasoline and diesel internal combustion enginesICE to hybridized powertrains is expected to continue in response to increasingly strict fuel efficiency and regulatory standards. In
parallel, the share of pure electric vehicles is expected to continue to increase,
from a low basewith short-term dynamics such as
technologyChina's economic slow down, significant vehicle price gaps between gasoline and
supportingICE-powered vehicles, and slower than planned charging infrastructure,
continue to improve.limiting the pace of adoption.
Global vehiclefuelefficiencyand emissionsstandards. standards
OEMs
are facingincreasinglystrictconstraintsfor vehiclefuelefficiencyand emissionsstandardsglobally.Regulatoryauthoritiesin key vehiclemarketsregions such as the United States,the European Union, China, Japan, and Korea have institutedregulationsthatrequiresustained and significantimprovements reductions in greenhouse gas (including CO2NOx and NOx) and particulatemattervehicleemissions.OEMsare requiredtoevaluateand adopt various13
solutionsto addressthesestricterstandards.Turbochargersallow OEMsto reduce engine sizewithout sacrificingvehicleperformance,therebyincreasingfuelefficiencyand decreasingharmful emissions.Furthermore,turbochargersallow moreprecise“air “air control”over both engine intakeand exhaust conditionssuch as gas pressures,flows and temperatures,enablingoptimizationof the combustionprocess.This combustionoptimizationis criticalto engine efficiency,exhaustemissions,power and transientresponseand enablessuch conceptsas exhaustgas recirculationfor dieselenginesand Miller-cycleoperationfor gasoline engines.Consequently, we believeturbochargingwill continueto be a key technologyfor automakersto meetfuturetough fueleconomy and emissionsstandardswithout sacrificingperformance.
Turbocharger penetration.penetration
The utilization
of turbochargersand electric-boostingtechnologieson vehicle powertrainsystemsis one of the mostcost-effectivesolutionsto addressstricterstandards,and OEMsare increasingtheiradoptionof thesetechnologies.IHS Total turbocharger production increased globally from approximately 46 million units in 2022 to 50 million units in 2023 and otherindustrysourcesexpect total turbochargeris expected to decrease from 2024 onward based on current expectations of electric vehicle penetration, gradually decreasing to increase globally fromapproximately53% in 2020 to approximately56%2022 volume levels by 2025. IHS2026. S&P forecasts particularly strong turbocharger penetration growth for gasoline turbochargers, expecting an increaseon ICE-based powertrains to grow in light vehicles from 52% in 2021 to approximately 44%57% in 20202025 and to 56%then come back to approximately 51% in 2025.2030.
Medium-Term
Powertrain Trends
Source:IHS
Engine size
Note: Years 2021 - 2023 represent actual data and complexityyears 2024 - 2028 represent forecasted data.
Source: S&P, KGP
.
Electrification and hybrids
In order
to addressstricterfueleconomy standards,OEMshave usedturbochargersto reducethe averageengine sizeon theirvehiclesover timewithout compromisingperformance. Stricterpollutantsemissionsstandards(primarilyfor NOxand particulates)have drivenhigherturbochargeradoptionas well, which we believe will continuein the future,with a predicted totalautomotiveturbochargersalesvolumeCAGRof 3% between 2019 and 2025, in an industrywith a predicted totalautomobilesalesvolumeCAGRof approximately1% over the sameperiod, in each case accordingto IHSand otherindustrysources. In addition,increasinglydemandingfueleconomy standardsrequirecontinuousincreasesin turbochargertechnologycontent(e.g., variablegeometry,electronicactuation,multiplestages,ballbearings,electricalcontrol,etc.)which resultsin steadyincreasesin averageturbochargercontentper vehicle.Powertrain electrification. Toaddressstricterfueleconomy standards,OEMsalso have been increasingtheelectrificationof theirvehicleofferings,primarilywith the additionof hybrid vehicles,which have powertrains equipped with a gasolineor dieselinternalcombustionengine in combinationwith an electricmotor.IHS S&P estimatesthathybrid vehicles produced globally will grow froma totalof approximately5.3 millionvehiclesin 2019 to 29.5 17 million vehicles in 2023 to 27 million vehicles by 2025,2027, representinga CAGRof 33%12%. The electrifiedpowertrainof hybrid vehicles enablesthe usage of highly synergisticelectric-boostingtechnologieswhich augmentstandardturbochargers with electricallyassistedboostingand electrical-generationcapability.Furthermore,the applicationof electric boostingextendsthe requirementfor engineeringcollaborationwith OEMsto includeelectricalintegration, softwarecontrols,and advanced sensing.Overall,this the move to electricboostingfurtherincreasesthe roleand value of turbochargingin by improvingvehiclefueleconomy and reducing exhaustemissions.
Battery electric and fuel cell technologies
OEMs are
also investing in full
battery-electricbattery electric vehicles
("BEV"s) to comply with increasingly tight regulatory targets across regions.
IHSS&P and
other industry sourcesKGP expect that
theyBEVs will compose
10%26% of total light and commercial vehicle production globally by
2025.2026. Consumer adoption hinges on future
"cost of range", tightly linked to the energy capacity of the battery,
cost – hencebut also how well that energy is used. Energy efficiency increases (including how to best address thermal management challenges), battery price (and consequently vehicle
price - reductions,14
price), weight reduction through increases in power density, – hence driving range, and shorter recharging times.times are all critical problems to solve. As OEMs strive to solve these issues, they are increasing investment in hydrogen fuel cell powered electric vehicles for demanding applications requiring long range, especially in the commercial vehicle space. These vehicles,likebatteryelectricvehicles,have fullyelectricmotor powertrains,but they relyon the hydrogen fuelcellto generatethe requiredelectricity.The hydrogen fuelcell also requiresadvanced electric-boostingtechnology to run efficiently and optimize range and cost of ownership. We are investing to address selected opportunities, raised by the electrification trend, where our differentiated technology can bring benefits related to lighter, more compact and more energy efficient components for optimizationof sizeand efficiency.
Connected vehicles,autonomous vehicles,and sharedelectric vehicles.In addition to powertrain evolution, the market for connected vehicle services is growing rapidly. According to Strategy&, a consulting firm, this market is expected to grow 34% per annum from approximately $8 billion in 2020 to approximately $35 billion in 2025.
Our
IVHM, predictive maintenance, diagnostics and cybersecurity tools address this market. Their adoption should increase as advanced driver assistance features and ultimately autonomous driving increase requirements for vehicle functional safety. Simultaneously, our cybersecurity solutions protect those vehicles against outside interference to ensure correct functionality.Vehicleownership in China and other high-growthmarkets. Vehicleownership in China and other emergingmarketsremainswell below ownership levelsin developedmarketsand will be a key driverof future vehicleproduction.At the sametime,thesemarketsare followingthe lead of developedcountriesby instituting stricteremissionstandards.Growth in productionvolumeand greaterpenetrationby largeglobalOEMsin these markets,along with evolvingemissionstandardsand increasingfueleconomy and vehicleperformancedemands, is drivingincreasingturbochargerpenetrationin high-growthregions.
OurCompetitiveStrengths
We believethatwedifferentiateourselvesthrough the followingcompetitivestrengths:
Global andbroad marketleadership
Products
We are a global leaderin the $10$11 billion OEM turbochargerindustry.We believe we will continueto benefitfrom global technology leadership in the increasedturbocharger industry through our deep-seated relationships with all global OEMs. Continuous product innovation to bring innovative and differentiated technologies for electric vehicles (E-Powertrain and E-Cooling compressors), fuel cell compressors and solutions beyond automotive are the new challenges we are embracing and pursuing.
Internal combustion light vehicle products
•Gasoline: The global adoptionof turbochargers by OEMs on gasoline engines has increased rapidly from approximately 14% in 2013 to approximately 48% in 2023 and is forecasted by S&P to increase to 51% by 2025. In addition to the volume growth, tightening of CO2 regulations is driving a technology shift, moving away from standard waste gate technology to variable geometry turbo ("VNT") which is a premium technology that offers us technological competitive advantages. In 2016, we launched our first high volume VNT gasoline application, and this technology is expected to experience increased adoption in years to come. According to a forecast by S&P, VNT represented 24% of global turbo gasoline production in 2023, reaching 36% by 2028. A key to our strategy for gasoline growth is thus to leverage our technological leadership in high-temperature materials and variable geometry, as well as our scale, globaltechnologyleadership,comprehensiveportfolio, continuousproductinnovation footprint and in-market capabilities to meet the volume of technological demands of global OEMs.
•Diesel: We have a long history of technology leadership in diesel engine turbochargers. Despite the diesel industry's weakness for some vehicle segments, the majority of our deep-seatedrelationshipswith allglobalOEMs.We maintaindiesel turbocharger revenues come from heavier and bigger vehicles like SUVs, pickup trucks and light commercial vehicles (such as delivery vans), which remain a leadership positionacrossallvehicletypes, engine typesstable part of the diesel industry. Diesel maintains a unique advantage in terms of fuel consumption, cost of ownership, and regions,towing capacity which makes it the powertrain of choice for heavier vehicle applications. Diesel also remains essential for OEMs to meet their CO2 fleet average regulatory target going forward, as diesel vehicles produce less CO2 on average than gasoline vehicles.including:Light Vehicles.
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| Gasoline:The global adoptionof turbochargersby OEMson gasolineengineshas increasedrapidlyfrom approximately14% in 2013 to approximately40% in 2019 and is forecastedby IHSto increaseto 56% by 2025. We have launcheda leadingmodern1.5L variable geometry turbo (“VNT”)gasolineapplication,which webelieveto be among the firstwith a majorOEM,and weexpectto see increasingadoptionof thistechnologyin yearsto come. Keyto our strategyfor gasolinegrowth is to leverageour technologystrengthsin high-temperaturematerialsand variablegeometryas well as our scale,globalfootprintand in-market capabilitiesto meetthe volumedemandsof globalOEMs.
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| Diesel:We have a long historyof technologyleadershipin dieselengine turbochargers.Despitediesel marketweakness for some vehiclesegments,the majorityof our dieselturbochargersrevenuecomes fromheavierand biggervehicleslikeSUVs,pickup trucksand lightcommercialvehicles(such as deliveryvans), which remaina stablepartof the dieselmarket.Dieselmaintainsa unique advantagein termsof fuelconsumption,hence cost of ownership, and towing capacitymakesit stillthe powertrain of choicefor heaviervehicleapplications.Dieselalso remainsessentialfor OEMsto meettheirCO2fleetaverageregulatorytargetgoing forward,as dieselvehiclesproduce approximately10-15% less CO2, on average,than gasolinevehicles.
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| Electrifiedvehicles. We providea comprehensiveportfolioof turbochargerand electric-boostingtechnologiesto manufacturersof hybrid-electricand fuelcellvehicles.OEMshave increasedtheir adoptionof theseelectrifiedtechnologiesgiven regulatorystandardsand consumerdemandsdrivingan expected CAGR globally of approximately33% from2019 to 2025, accordingto IHS.Similarto turbochargersfor gasolineand dieselengines,turbochargersfor hybridvehiclesare an essential componentof maximizingfuelefficiencyand overallengine performance.Our productsprovideOEMs with solutionsthatfurtheroptimizeengine performanceand positionus well to serveOEMsas they add moreelectrifiedvehiclesinto theirfleets.
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Commercial vehicles.•Hybrid vehicles: We provide a comprehensive portfolio of turbocharger and electric-boosting technologies to manufacturers of hybrid-electric powertrains. OEMs have increased their adoption of hybrid technologies given regulatory standards. Similar to turbochargers for gasoline and diesel engines, turbochargers for hybrid vehicles are an essential component of maximizing fuel efficiency and overall engine performance. Our products provide
OEMs with solutions that further optimize engine performance and position us well as they add more hybrid-electric vehicles into their fleets.
Internal combustion commercial vehicles & industrial products
Our Company tracesitsrootsto the 1950s whenwehelped develop a turbocharged commercialvehiclefor Caterpillar.We have maintainedour strategicrelationshipwith key commercialvehicle OEMsfor over 60 yearsas well as market-leadingindustry-leading positionsacrossthe commercialvehiclemarketsfor both on- and off-highway use. Our products improve engine performance and enable lower emissions on trucks, buses, agriculture equipment, construction equipment and mining equipment with engine sizes ranging 1.8L to 105L. We continue to develop our product range to serve more engine needs, even beyond automotive (e.g. our new GT80 product presented in 2023, our biggest turbocharger to date).
Hydrogen fuel cell electric vehicles & industrial products
We provide a comprehensive range of electric air compressors to manufacturers of fuel cell systems. Our system consists of efficient, powerful, and lightweight air compressors using leading automotive technologies to boost fuel cell vehicles. Air supply is critical for performance, durability and H2 fuel consumption / range for applications equipped with H2 fuel cells. We launched the auto industry's first fuel cell production car application in 2016. We now provide a comprehensive portfolio of fuel cell air compressors covering a broad range of fuel cell stack power from 40kW to 250+kW and we will launch our third generation of fuel cell products in 2024.
Electric (battery electric and H2 fuel cell electric) vehicles & industrial products
Leveraging a set of unique technological building blocks, we are now offering to our customers disruptive solutions for electric traction (E-Powertrain) and electric thermal management (E-Cooling compressor) that can enhance an application’s energy efficiency in a reduced packaging space and with significant weight savings. Our customers have taken note of these products, and we are engaged in a number of pre-development programs with use. OEMs in all regions.
Aftermarket and performance products
Our Garrett aftermarket brand has strong recognition across distributors and garages globally, and is known for boosting performance, quality and reliability. We operate through a distribution network of more than 300 distributors covering 165 countries. Our aftermarket business has historically provided a stable stream of revenue supported by our large installer base, currently estimated at over 130 million vehicles. As turbocharger penetration rates continue to increase, we expect that our installer base and aftermarket opportunities will continue to grow. We are also working to enhance our sales channels with the introduction of Garrett Marketplace, an e-commerce platform connecting Garrett's major performance distributors with turbocharger enthusiasts, racing professionals and automotive hobbyists, allowing them to access Garrett performance and racing products faster and more conveniently.
Our Competitive Strengths
We believe that we differentiate ourselves through the following competitive strengths:
•Differentiated and innovative technology in, and beyond, mobility
•improveStrong and collaborative relationships with leading OEMs globally
•engine performanceGlobal and lower emissionslow-cost manufacturing footprint with operational excellenceon trucks,buses, agricultureequipment,constructionequipment
Differentiated and
miningequipmentwith engine sizesranging1.8Lto 105L.High-growth regions. innovative technology in, and beyond, mobility
We have led the revolution in turbocharging technology over the last 60 years and maintain a leading technology portfolio of approximately 1,300 patents and patents pending. We have a strongtrackrecordservingglobalglobally deployed team of approximately 1,300 engineers across five R&D centers and emergingOEMs,11 close-to-customer engineering centers. Our engineers have led the mainstream commercialization of several leading turbocharger innovations, including customersvariable geometry turbines, dual-boost compressors, ball-bearing rotors, electrically actuated controls, and air-bearing electric compressors for hydrogen fuel cells. We maintain a culture of continuous product innovation, introducing about ten new technologies per year and upgrading our existing key product lines approximately every 3 years. At the end of 2023, we announced an expansion of our turbocharger portfolio to serve large bore engines used in Chinaindustrial applications, including marine, power generation and India,with an in-market,for-marketstrategyother machinery. Outside of our turbocharger product lines, we apply this culture of continuous innovation to meet the needs of our customers in new areas. We are developing solutions and operatefullincreasing our R&D spend, focusing almost 60% of total research, development and three manufacturingfacilitiesengineering expenditures in the high-growth regionsthatservelight2024 on zero emission technologies for mobility and commercialvehicleOEMs.Our localpresencein high-growth regionshas helped us win business with key internationalbeyond,
such as fuel cell compressors for a broad range of cell stack power (40kW to 250kW) and
domesticChinese OEMs,high value electric products including E-Powertrain and wegrew significantlyfasterthan the vehicleproductionin theseregions between 2013 and 2019.E-Cooling compressor technologies.
Strong andcollaborativerelationshipswith leading OEMs globally
globallyWe supply our productsto more than 60 OEMsglobally.Our top ten customersaccountedfor approximately56% 61% of net salesand our largestcustomerrepresentedapproximately 10% 12% of our net sales in 2020.2023. Withover 60 yearsin the turbochargerindustry,wehave developedstrongcapabilitiesworking with allmajorOEMs.We consistently meettheirstringentdesign, performanceand qualitystandardswhile achievingcapacityand deliverytimelines thatare criticalfor customersuccess.Our trackrecordof successfulcollaborations,as demonstratedby our strongclientbase and our abilityto successfullylaunch approximately100multiple productapplicationsannually,is well recognized.For example,wereceiveda 2017 AutomotiveNewsPACE™InnovationPartnershipAwardin supportingVolkswagen’s firstlaunch of an industry-leadingVNTturbochargedgasolineengine, which is justone exampleof our strongcollaborativerelationshipswith OEMs.Our regionalresearch,developmentand manufacturingcapabilitiesare a key advantagein helpingus to supply OEMsas they expand geographicallyand shifttowards standardizedenginesand vehicleplatformsglobally.
Global aftermarketplatform
Wehaveanestimatedinstalledbaseofover110millionvehiclesthatutilize With regards to new technology offerings for zero emissions, ourproductsthroughourglobalnetworkof more than 200distributorscovering160countries.OurGarrettaftermarketbrandhasstrongrecognitionacrossdistributorsandgaragesglobally,and proven track record in bringing innovation to production isknown a key decision factor forboostingperformance,qualityandreliability.Ouraftermarketbusinesshashistoricallyprovidedastablestreamofrevenuesupportedbyourlargeinstalledbase.Asturbopenetrationratescontinuetoincrease,weexpectthatourinstalledbaseandaftermarketopportunitywillgrow.
Highly-engineeredportfoliowith continuous product innovation
We have led the revolutionin turbochargingtechnologyover the last60 yearsand maintaina leading technologyportfolioof approximately 1,600 patentsand patentspending. We have a globallydeployed teamof more than 1,250 engineersacrossfiveR&Dcentersand 11 close-to-customerengineeringcenters.Our engineershave led the mainstreamcommercializationof severalleadingturbochargerinnovations,includingvariablegeometry turbines,dual-boostcompressors,ball-bearingrotors,electricallyactuatedcontrolsand air-bearingelectric compressorsfor hydrogen fuelcells.We maintaina cultureof continuousproductinnovation,introducingabout ten newtechnologiesper year and upgradingour existingkey productlinesapproximatelyevery 3 years.Outside of our turbochargerproductlines,weapply thiscultureof continuousinnovationto meetthe needs of our customers to engage in newareas,particularlyin connectedautomotivetechnologies.We are developingsolutions, includingIVHMand cybersecuritysoftwaresolutions,thatleverageour knowledge of vehiclepowertrainsand experienceworking closelyjoint technology assessments through pre-development projects with OEMGarrett.manufacturers.
Global and
low cost low-cost manufacturing
footprint
with operational
excellence
Our geographic
footprint
locates
R&D,
engineering
and manufacturing
capabilities
close
to our customers, enabling
us to tailor
technologies
and products
for the specific
vehicle
types sold in each geographic
market. industry. In all
regions
where we
operate,
we
leverage
low-cost
sourcing
through our robust
supplier
development
program, which continually
works to develop new
suppliers
that are able to meet
our specific
quality,
productivity
and cost requirements.
We now
source
more
than two-thirds
of our materials
from
low-cost
countries
and believe
our high-quality,
low-cost
supplier
network to be a significant
competitive
advantage.
We have invested
heavily
to bring differentiated
local
capabilities
to our customers
in high-growth
regions,
including
China and India.
16
In
20202023, we manufacturedmore than 87% 89% ofourproductsinlow-costcountries,includingsevenmanufacturingfacilitiesinChina,India,Mexico,RomaniaandSlovakia.Wehavealong-standingcultureofleanmanufacturingexcellenceandcontinuousproductivityimprovement.Webelieveglobaluniformityandoperationalexcellenceacrossfacilitiesisakeycompetitiveadvantageinourindustrygiven that OEMengine powertrain platformsareoftendesignedcentrallybutmanufacturedlocally,requiringsupplierstomeettheexactsamespecificationsacrossalllocations.Our
Growth StrategiesThe Debtors, including Strategy
Garrett filed for relief under chapter 11 of the Bankruptcy Code in September 2020, primarily with the intent to restructure our balance sheet. Given the Company’s operational performance prior to the Petition Date, our day-to-day operations have been largely unaffected. If we are able to timely restructure our balance sheet, and accordingly emerge from the Chapter 11 Cases, Garrett expects to continue to investinvests in innovative technologies that address the needs of our customers in the ongoing auto industry transformation. This continued investment into differentiated technology, coupled with our relentless focus on deep customer relationsrelationships and our global capabilities, will allowallows us to drive the following business strategies:
•businessstrategies:Strengthen marketour leadership in the turbocharger industry within the light vehicle, commercial vehicle and industrial space;
•Use of our differentiated technology to solve key challenges for zero emission vehicles;
•Grow our aftermarket business
Strengthen our leadership
across core powertrain technologies in the turbocharger industry within the light vehicle, commercial vehicle and industrial space
We are focused
on strengthening
our
marketindustry position
in
the light
vehicles: | •
| Gasolineturbochargers,which historicallylagged adoptionof dieselturbochargers,are expectedto grow at an 6% annual CAGRfrom2019 to 2025, accordingto IHS,exceedingthe growth of diesel turbochargers.We expectto benefitfromthishighergrowth given the gasolineplatformswehave been awarded over the past severalyears.We have launchedthe firstmodern1.5LVNTgasolineapplication with a majorOEMand weexpectto see increasingadoptionof thistechnologyin yearsto come. Key to our strategyfor gasolinegrowth is our plan to leverageour technologystrengthsin high temperature materialsand variablegeometrytechnologiesas well as our scale,globalfootprintand in-region capabilitiesto meetthe volumedemandsof globalOEMs.
|
vehicle, commercial vehicle and industrial turbocharger industries: | • | We believe growth in our shareof the dieselturbochargersmarketwill be drivenby newproductintroductions focusedon emissions-enforcementtechnologiesand supportedby our favorablepositioningwith large vehiclesand high-growthregionswithin thismarket.The morestringentemissionsstandardsrequire higherturbochargertechnologycontentsuch as variablegeometry,2-stagesystems,advanced bearings and materials whichincreaseour contentper vehicle.We expectLight vehicle gasoline turbochargers, which have historically lagged the adoption of diesel turbochargers, after reaching a peak in 2023, are now expected to decrease at a 4% annual CAGR from 2023 to 2026, according to S&P. We have launched the first modern 1.5L VNT gasoline application with a major OEM and expect to see increasing adoption of this technology in the future years. A major key to grow our commercialvehiclebusiness through newproductintroductionsand targetedplatformwins with key on-highway customersand underservedOEMs.
|
Strengthen our penetrationstrategy for gasoline growth is our plan to leverage our strengths in high temperature materials and variable geometry technologies as well as our scale, global footprint and in-region capabilities to meet the volume demands of electrifiedglobal OEMs. This also includes E-Boosting solutions for hybrids with many high volume application launches planned in coming years.
•The commercial vehicle and industrial spaces remain a focus for us, considering its slower shift to electric, and the increasing need for higher energy efficiency and productivity. We continue to invest in turbocharger technology upgrades, including for new types of fuels for ICE, like hydrogen. We also are expanding ourboosting technologies
portfolio with the launch of new frame sizes aimed at serving larger engines, mostly used in marine and power generation verticals.
Use of our differentiated technology to solve key challenges for zero emission vehicles
We stand to benefit
from
the increasedadoptionof hybrid-electricand fuelcellvehiclesand the increased
need for turbochargersassociatedwith increasedsalesvolumesfor theseengine types. IHSadoption of electric (battery or fuel cell) vehicles. S&P estimates
that
the global production
of electrified
vehicles
(battery and fuel cell electric) will increase
from
approximately
7 11 million
vehicles
in
20192023 to approximately
4231 million
vehicles
by
2025,2027, representing
an annualized
growth rate
of approximately
34% 29%.
To solve current challenges in terms of range, vehicle cost and performance, OEMs
will need
to furtherimproveengine performancefor theirincreasinglyelectrifiedofferings,technologies enabling step changes in energy efficiency, weight and
our comprehensiveportfolio of turbochargerpackaging and
electric-boostingtechnologiesare designed to help OEMsdo so.thermal management. We expect
to continue
to invest
in product
innovations innovation and new
technologies,
and
by leveraging our capabilities and expertise to develop selected offerings for electric vehicles, we believe
that
we
are well positioned
to
continueto beremain a
technology-leadertechnology leader in the
propulsionfield of electrified
vehicles.
Increasemarketpositionin high-growth regions
In 2020, afterparticular, we have already developed a steep dropfull portfolio of fuel cell compressors and we are in the first quarter duepre-development phase with some of our customers for differentiated E-Powertrain and E-Cooling compressor solutions.
Grow our aftermarket business
We have an opportunity to
strict lockdowns, vehicle production in China has experienced a very strong rebound which has partly compensated for the decline in the first quarter, with a full year drop of 5%, compared to 20%+ in other regions. IHSexpectsvehicleproductionin Chinato be stable next year. We plan to continueto strengthen
our
relationshipswith OEMsin high-growth,emerging regionsby demonstratingour technologyleadershipthrough our localresearch,developmentand manufacturing capabilities.Our localfootprintis expected to continueto providea strongcompetitiveedge in high-growthregionsdue to our abilityto work closelywith OEMsthroughoutallstagesof the productlifecycleincludingaftermarket support.For example,in China, our research17
centerin Shanghai, our manufacturingfacilitiesin Wuhan and Shanghai and our morethan 984 employeessupportour differentiatedend-to-endcapabilitiesand we believe will continue to supportkey platformwins in the Chinese market.Our operationsin China are expected to continueto benefitus as OEMs build globalplatformsin low cost regions.Our commitmentto providinghigh-touchtechnologysupportto OEMshas allowed us to be recognizedas a localplayerin otherkey high-growthregions,such as India.
Growour aftermarketbusiness
Wehaveanopportunitytostrengthenourglobalnetworkof more than200 300 distributorsin160countriesbydeepeningourchannelpenetration,leveragingourwell-recognizedGarrettbrand,utilizingnewonlinetechnologiesforcustomerengagementandsales,andwideningtheproductportfolio.For example, in 2019 we launched165 countries by deepening our channel penetration, leveraging our well-recognized Garrett brand, utilizing new online technologies for customer engagement and sales, and widening the product portfolio. Installer Connect, a global web-based platform providing self-service tools aimed at connecting garage technicians. In 2020technicians generated more than 24,000 additional technicians certified, and our Turbo Service Replacement website attracted more than 800,000 visitors. Additionally, the platform attracted 170 thousand visitors and 22,000 registered garage technicians who used the platform to complete Garrett self-learning and certification steps.
Drive continuous product innovation across connected vehicles
We are activelyinvestingin softwareand servicesthatleverageour capabilitiesin powertrains,vehicle performancemanagement,and electrical/mechanicaldesign to capitalizeon the growth relatingto connected vehicles.More than 85% of passenger vehicles sold in Europe and the United States and almost 50% of vehicles sold in China in 2020 were estimated to be connected in some way to the Internet according to Strategy&, a consultancy firm. According to the same report, that number is expected to reach 100% in Europe and the United States and >90% in China by 2025. Building on the softwareand connectedvehiclecapabilitiesWeb Racing & Performance section of our FormerParent,wehave assembleda teamof engineers,softwareand technicalexpertsand have opened newdesign centerswebsite attracted nearly 1 million visitors in North America,Indiaand Czech Republic. We continueto conduct researchto determinekey areasof the marketwhere weare best positionedto leverageour existingtechnologyplatformsand capabilitiesto serveour customers.We executea portionof our connectivityinvestmentin collaborationwith OEMsand otherTier 1 suppliersand have multipleearly-stage trialswith customersunderway.
2023.
Research, Development and Intellectual Property
andIntellectualPropertyWe maintaintechnicalengineeringcentersin major automotive productionregionsof the world to develop and provideadvanced products,processand manufacturingsupport to allof our manufacturingsites,and to provideour customers with localengineeringcapabilitiesand design developmentson a globalbasis.Asof December31, 2020,2023, we employedapproximately1,250 1,300 engineers.Our totalR&Dexpenseswere $111$175 million, $129$153 million and$128 $136 millionfor the yearsended December31, 2020, 20192023, 2022 and 2018, respectively.2021, respectively, with more than 50% of our total R&D spend in 2023 focused on zero emission technologies. Additionally, the Company incursincurred engineering-related expenses, net of customer (reimbursements) which are also included in Cost of goods sold of $13$(12) million $5, $11 million and $10$22 million for the years ended December 31, 2020, 20192023, 2022 and 2018.
2021, respectively. Engineering-related expenses include customer reimbursements of $46 million, $25 million and $21 million for the years ended December 31, 2023, 2022 and 2021, respectively.
We currently
hold approximately
1,600 1,300 patents
and patents
pending. Our current patents are expected to expire between
20212024 and
2040.2043. While
no individual
patent
or group of patents,
taken alone, is considered
material
to our business,
taken in the aggregate,
these
patents
provide meaningful
protection
for our intellectual
property.
The most
significant
raw materials
we
use to manufacture
our products
are grey iron, aluminum,
stainless steel
and a nickel-,
iron- and chromium-based
alloy.
As
of December
31,
2020,2023, we
have not experienced
any significant
shortage
of raw materials
and
normallywe or our suppliers (on our behalf) do not
typically carry
inventories
of such raw materials
in excess
of those reasonably
required
to meet
our production
and shipping
schedules.
Our global
customer
base includes
nine of the ten largest
light
vehicle
OEMs
and nine of the ten largest commercial
vehicle
engine makers.
18
Our ten largestapplicationsin 20202023 were with sevensix differentOEMs. OEMsales were approximately87% 86% of our 20202023 revenueswhile our aftermarketand otherproductscontributed 13%14%.
Our largest customer is
Ford Motor CompanyBayerische Motoren Werke AG (“
Ford”BMW”). In
2020, 20192023, 2022 and
2018, Ford2021, BMW accounted for
10%12%, 12%, and 13%, respectively, of our total sales.
In 2023, 2022 and 2021, our sales to Ford Motor Company (“Ford”) were 9%, 10%, and 10%, respectively, of our total sales.
Supply
Relationshipsrelationships with
OurCustomersour customers
We typicallysupply productsto our OEMcustomersthrough “open” purchaseorders,which are generally governed by termsand conditionsnegotiatedwith each OEM.Although the termsand conditionsvary fromcustomerto customer,
they typically
contemplate
a relationship
under which our customers
are not required to purchase
a minimum
amount
of product
from
us. These relationships
typically
extend over the life
of the related
engine platform.
Prices
are negotiated
with respect
to each business
award, which may be subject
to adjustments
under certain
circumstances,
such as commodity
or foreign
exchange escalation/de-escalation clauses
or for cost reductions
achieved
by us. The terms
and conditions
typically
provide
that
we
are subject
to a warranty
on the products
supplied.
We may also be obligated
to share
in all
or a part
of recall
costs
if the OEM recalls
its
vehicles
for defects
attributable
to our products.
Individual
purchase
orders
are terminable
for cause or non-performance
and, in most
cases,
upon our insolvency
and certain
change of control
events.
In addition,
many of our OEM
customers
have the option to terminate
for convenience
on certain
programs,
which permits
our customers
to impose
pressure
on pricing during the life
of the vehicleprogram,and issuepurchasecontractsfor lessthan the durationof the vehicle program,
which and issue purchase contracts for less than the duration of the vehicle program, potentially
reduces reducing our profit
margins
and
increasesincreasing the risk
of
our losing
future
sales
under those purchase
contracts.
We manufacture,
and ship based on customer
release
schedules,
normally
provided
on a weekly basis,
which can vary due to cyclical
automobile
production
or inventory
levels
throughout
the supply chain.
Although customer
programs
typically
extend to future
periods,
and although
there
is an expectation
that
we will supply certain
levels
of OEM
production
during such future
periods,
customer
agreements
including applicable
terms
and conditions
do not necessarily
constitute
firm
orders.
Firm
orders
are generally
limited
to specific
and authorized
customer
purchase
order
releases
placed
with our manufacturing
and distribution
centers for actual
production
and order
fulfillment. fulfilment. Firm
orders
are typically
fulfilled
as promptly
as possible
from
the conversion
of available
raw materials,
sub-components
and work-in-process
inventory
for OEM
orders
and from current
on-hand finished
goods inventory
for aftermarket
orders.
The dollar
amount
of such purchase
order releases
on hand and not processed
at any point in time
is not believed
to be significant
based upon the time frame
involved.
Regulatory and
Environmental
Compliance
We are subject
to the requirements
of environmental
and health and safety
laws and regulations
in each country
in which we
operate.
These include, among other things,
laws regulating
air
emissions,
water discharge,
hazardous
materials and waste management.
We have an environmental
management
structure
designed
to facilitate
and support
our compliance
with these
requirements
globally.
Although it is our intent
to comply
with all
such requirements
and regulations,
we
cannot provide
assurance
that
we
are at all
times
in compliance.
Environmental
requirements
are complex,
change frequently
and have tended to become
more
stringent
over time.
Accordingly,
we
cannot assure that
environmental
requirements
will not change or become
more
stringent
over time
or that
our eventual environmental
costs
and liabilities
will not be material.
Certain
environmental
laws assess
liability
on current
or previous
owners or operators
of real
property
for the cost of removal
or remediation
of hazardous
substances.
At this
time,
we
are involved
in various
stages
of investigation
and cleanup
related
to environmental
remediation
matters
at certain
of our present
and former facilities.
In addition,
there
may be soil
or groundwater
contamination
at several
of our properties
resulting
from historical,
ongoing or nearby activities.
As
of December
31,
2020,2023, the undiscounted
reserve
for environmental
investigation
and remediation
was
approximately$15.6$18 million.
We do not currently
possess
sufficient
information
to reasonably
estimate
the amounts
of environmental
liabilities
to be recorded
upon future
completion
of studies,
litigation
or settlements, and we
cannot determine
either
the timing
or the amount
of the ultimate
costs
associated
with environmental matters,
which could be material
to our consolidated
and combinedresults
of operations
and operating
cash flows in the periods recognized
or
19
paid. However, consideringour past experienceand existingreserves,wedo not expectthat environmentalmatterswill have a materialadverseeffecton our consolidated and combinedfinancialposition.
Additionally, pursuant to the Honeywell Indemnity Agreement, Garrett ASASCO is 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 Honeywell Indemnity Agreement, Garrett ASASCO is 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 Garrett ASASCO is required to make to Honeywell pursuant to the terms of the Honeywell Indemnity Agreement will not be deductible for U.S. federal income tax purposes. 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. During the first quarter of 2020, Garrett ASASCO paid Honeywell the Euro-equivalent of $35 million in connection with the Honeywell Indemnity Agreement. Honeywell and Garrett agreed to defer the payment under the Honeywell Indemnity Agreement due May 1, 2020 to December 31, 2020 (the “Q2 Payment”), however we do not expect Garrett ASASCO to make payments to Honeywell under the Honeywell Indemnity Agreement during the pendency of the Chapter 11 Cases.
Under the terms of the PSA and the Transaction, the Plan, if confirmed by the Bankruptcy Court,that environmental matters will includehave a global settlement with Honeywell providing for, among other things, (a) the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to 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 and (y) new Series B Preferred Stock.
Human Capital
material adverse effect on our consolidated financial position.
Corporate Responsibility
WeCare4 Sustainability Approach
Our sustainability approach
Garrett is a cutting-edge technology leader delivering differentiated solutions for emission reduction and energy efficiency. We are passionate about innovating for mobility and beyond. With a 70-year legacy, we serve customers worldwide with passenger vehicle, commercial vehicle, aftermarket replacement, and performance enhancement solutions.
Garrett’s mission to enable cleaner, safer vehiclesdeliver differentiated solutions for emission reduction and energy efficiency is at the heart of itsour contribution to society. Our engineering expertise and transformative technologies help optimize fuel efficiency, reduce emissions and manage growing vehicle complexity, all of which are critical areas on the road to a clean transportation future. Garrett's technologies enable sustainable automotive and industry transformation.
Our corporate sustainability framework, called WeCare4, starts from our mission by spearheading technology development and continuing to deliver industry-first innovations for mobility and beyond. It is built on two main pillars - investing in a culture of innovation and operating responsibly to ensure long-term impact.
We
develop solutions forembed sustainability in our governance structure. Our Sustainability Committee, composed of the
auto industry's most pressingCEO and several members of Garrett’s senior leadership team, is sponsored by our Chief Technology Officer and oversees our sustainability
issues, from emissions reduction to vehicle cybersecurity. Corporate responsibility is therefore a priority for the Companystrategy development, definition and
itsdeployment. Our Board of Directors,
(the “Board”). Theincluding its committees, provide Board
is responsible for promotingoversight of our environment, social and governance ("ESG") activities, corporate responsibility and sustainability
strategy. Primary responsibility at Board level for reviewing and reporting to the full Board on our sustainability programs and policies, as well as
monitoring adherence to Company standards. The Board manages oversight of sustainability through a Sustainability Committee, which is comprised of senior leaders inour corporate citizen commitments, resides with the
business who assess and prioritize topics that are material for the business.Nominating & Governance Committee.
Garrett articulates its commitments to social and environmental considerations in the communities in which it operates in the Company’s Code of Business Conduct, which can be found on our website at www.garrettmotion.com under
“Investors"About Us – Investors – Leadership &
Governance.”Governance". The Company intends to publishpublished its first sustainabilityfiscal year 2022 Sustainability Report in 2023, the content of which is not incorporated by reference into this Annual Report or in any other report in 2021 and to annually report progress on its sustainability commitments.
20
or document we file with the SEC.
At Garrett, we place a high value on developing the right working environment and
the right skillsetsskill sets to advance our performance culture, support our growth strategy and ensure that the world at large can continue to benefit from breakthroughs in sustainable mobility. We invest in creating an inclusive, stimulating, and safe work environment where our employees can deliver their workplace best every day. As of December 31,
2020,2023, we employed approximately
6,3007,600 permanent employees and
2,3002,100 temporary and contract workers globally.
Diversity, equity and inclusion
Diversity and Inclusion is one of Garrett’s four fundamentals. As such, we strive to ensure that our employees are each involved, supported, respected and connected. Embracing diverse thoughts and ideas through inclusion leads to a competitive advantage in the market, increased innovation as we generate new and better ideas, and customer-centric decision making.
For several years, We pride ourselves that diversity is represented from the top of the organization, for example 26 different nationalities are represented in our senior management team and they bring with them a wide variety of different backgrounds and experiences. Overall, in our global workforce we have representation of approximately 60 different nationalities. As of December 31, 2023, Garrett's Board of Directors had 33% female representation.
In 2023, the Company
has supported awareness activities such as unconscious bias trainingcontinued to strengthen and
cultural adaptation assessments to foster an inclusive culture. In 2020, the Company took several steps to strengthendevelop its approach to diversity, equity and inclusion.
These include: | •
| Review of existing diversity and inclusion initiatives;
|
Actions during the year included: | •Regular reporting and review of existing diversity and inclusion metrics and initiatives | Publication of Garrett’s Diversity and Inclusion Policy;
|
| •Work by our team of Diversity and Inclusion Champions in key countries to develop local Diversity and Inclusion initiatives suitable for the local context while aligning with the global strategy | Re-definition of Garrett’s diversity and inclusion strategy and the global focus areas that are relevant for the Company;
|
| •Training for all managers on Unconscious Bias | Setting the Company’s gender diversity ambition for 2025;
|
21
| •
| Nomination of 14 Diversity and Inclusion Champions in key countries and appointing Diversity and Inclusion Champions onto Garrett’s Global Diversity and Inclusion Council to ensure continuous alignment between local contexts and global strategy.
|
| •Holding Garrett’s annual Diversity and Inclusion Week in December, where the focus was engagement around three new Employee Resource Groups ("ERGs"), Cultural Mosaic, LGBTIQ+ and Diverse Abilities, in addition to the long-standing Garrett Women's Network ERG. | Performance of a quantitative analysis of organizational compensation practices
|
%
The percentage of Female Representationfemale employees in Garrett Workforcewas 22.8% in 2023 (an increase from 21.8% in 2022). The percentage of female employees in Senior Management roles was 19.5% in 2023.
The table below shows the evolution of our gender diversity representation over the last four years and
Garrettour 2025
Gender Diversity Ambition:ambition: | | 2018 | | | 2019 | | | 2020 | | | 2025 Ambition | |
% in total workforce | | | 18.9 | % | | | 19.7 | % | | | 20.4 | % | | | 25.0 | % |
% in Director and higher-level roles | | | 17.0 | % | | | 16.7 | % | | | 19.5 | % | | | 25.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2025 Ambition |
| % Women in total workforce | | 20.8% | | 22.2% | | 21.8% | | 22.8% | | 25.0% |
| % Women in Senior Management | | 19.5% | | 20.0% | | 19.0% | | 19.5% | | 25.0% |
Garrett’s Board of Directors had 38% female representation in 2020.
Talent
Managementmanagement
At Garrett, we encourage our employees to develop their skills and capabilities through a comprehensive Performance and Talent Management system. From annual
goal-settinggoal setting and performance reviews to learning opportunities for employees and leaders,
Garrettthe Company helps its people align their professional experience with the Company’s business objectives and encourages them to take ownership of their development and career paths.
Our learning environment offers employees access to
more than 1,000approximately 1,800 online trainings that address a wide range of functional competencies, technical skills, and human skills. Learning can be self-paced, while
Garrett’sthe Company’s growing online peer-to-peer learning communities also allow employees to easily access courses specific to their function and to share materials and ideas on
the topics of interest.
DedicatedA variety of instructor led virtual programs
were deployed during 2023 to support
Garrett’semployees' development and a number of dedicated programs for emerging
leaders, and
theseexperienced leaders were successfully
transformed into virtual learning academies in 2020. Approximately 25,000held. More than 68,500 hours of
online training was delivered
in 2020.Garrett usesduring 2023.
We use regular talent reviews to strengthen the Company’s internal development processes and to calibrate assessment of individual performance. Twice per year, we hold succession planning meetings up to and including the
Executive Levelexecutive level, during which the bench-strength of teams are scrutinized and development plans for their talent are reviewed. Ahead of both annual and mid-year performance reviews, leaders hold calibration meetings to ensure that assessment ratings are consistent and fair amongst peer groups.
To support our strategy and objectives, in 2023 we implemented a skills intelligence system. This system, enabled by artificial intelligence, can detect known and hidden capabilities of our employees. We expect this system will support us in identifying efficient paths of upskilling, reskilling and hiring for our future needs.
World-class health and safety considerations are integrated into Garrett’s procedures and processes. Our management
systems applysystem aligns with the global
standards that are currently transitioning from OHSAS 18001 tostandard ISO 45001
(and ISO 14001 and
that provideISO 50 001) and provides protection of human health
and safety during normal and emergency situations. Compliance with our standards and local regulatory requirements is monitored through a company-wide
self-assessment process assured through annual audits. In 2023 we continued a rolling 4-year compliance audit
process.against local regulations by a global service provider. The timely development and implementation of process improvement and corrective action plans,
including any improvements identified through our local regulatory compliance audits, are closely monitored.
From early 2020, Garrett’s global Health and Safety team worked tirelessly to deliver and implement best practice
Our safety
guidelines relating to COVID-19. A global safety campaign was rolled out alongside dedicated employee newsletters to support the entire workforce with rules on staying safe and healthy. An ergonomics survey for employees working from home was also deployed to evaluate and drive any corrective measures required.The particular focus on the health of our employees to address the challenges posedperformance improved when measured by COVID-19 also provided a benefit in the focus on their safety with a further reduction in our Total Case Incident Rate (“TCIR”)., which reduced to 0.04 in 2023, compared to 0.12 in 2022. TCIR is measured as the number of recordable injuries and illnesses multiplied by 200,000 and then that number is divided by the total number of hours worked by employees. TCIR decreased from 0.23 in 2018 to 0.11 in 2019 and then to 0.09 in 2020.
22
Compensation and benefits
Garrett’s
Rewardsrewards programs are rooted in our “Be well, work well” principle, and aim to support employees in achieving the right work-life balance. We invest significant time and resources in establishing compensation programs that are both competitive and equitable. We constantly evaluate our positions for market competitiveness and adjust when necessary with the goal of ensuring the retention of top talent and continuation of equitable pay practices.
As part of our commitment to the well-being of our employees,
Garrettthe Company offers an Employee Assistance
Program (EAP).Program. It is an external
counselingcounselling service designed to assist employees with personal, family, or workplace matters. This service is confidential and is also available to each employee’s dependents.
In late 2020, Garrett made a number of well-being resources available to all its connected employees, including useful links and techniques for managing mental and physical health, in addition to dedicated online events.
Employee feedback, representation, and retention
Garrett’s Performance
and Talent Management system aims to ensure that two-way dialogue is ongoing between employees and managers, punctuated by both an annual and a mid-year review, which provides employees the opportunity to express their opinions and ideas in terms of their development goals and career aspirations.
In 2020, Garrett piloted its first Employee Engagement Survey with a pilot program with one third of its workforce across three continents and achieved a very strong aggregated participation rate of 91%. The Company intends to roll out the Engagement Survey globally in 2021 and to set a baseline engagement score which will be monitored bi-annually.
Garrett’s strategy is to build positive, direct, business-focused working relationships with all employees in order to drive business results.
GarrettThe Company respects employees’ rights and their wish to be part of employee representative bodies including unions, work councils and employee forums. The Company understands the value of collective bargaining in its labor and employee relations strategy and the importance of trust in its working relationships. Approximately 40% of the Company’s permanent employees (including both full-time and part-time employees) are represented by unions and works councils under current collective bargaining agreements.
Garrett
The Company closely monitors employee turnover to measure retention and define improvement actions as and where necessary. As of December
2020,31, 2023, the Company’s annual
voluntary turnover for
20202023 was
9.01%.10.3%, which reflects the trends of the current global marketplace for talent. Garrett has developed a full set of actions to maximize retention that are carried out at both a global and local level, with line managers as well as functional leaders held accountable for their employee turnover performance. We intend to continue to work diligently on this area to mitigate against the challenges of a highly competitive global marketplace for talent.
Educating future innovators
Garrett places a high value on
Science, Technology, Engineering and Math (“STEM”)STEM research and learning opportunities that provide young people with the skills needed to develop the future of sustainable mobility. The Company sponsors higher education institutes in several countries to further critical research in technical areas and provide students with opportunities to study STEM programs.
Garrett’s Internship Programs enable students to connect theoretical knowledge with practical responsibilities in the spirit of ‘living laboratories’ during which they are encouraged to take ownership of business projects and define tactics to meet the project goals. Despite the challenging context of COVID-19,In 2023, Garrett offered 100welcomed 205 Interns in 11 countries, versus 261 internships in 2022 (approximately 44% in Engineering, 18% in Integrated Supply Chain, 16% in IT and the remainder in Finance, HR, Marketing and Sales, Legal and Internal Audit).
In 2023, Garrett onboarded 10
countries in 2020.Garrett also runs agraduates into our Graduate Program which in 2020 provided 11 graduates in 3 countries with a unique 2-year opportunityChina and India to join existing Graduate Program cohorts moving through their rotational cycles and to gain experience and exposure to Garrett’sGarrett's cutting-edge technologies while at the same time building their leadership skills in a fast-paced and professional work environment.
The
In 2023, the Company sponsorssponsored 5 Formula SAE and Formula Student teams in several countries providing the students in the racing team with over 10 technical workshops in electrical powertrain, leadership coaching, parts for the racing vehicle and financial support. Garrett sponsored the Formula SAE event in 2020the U.S., the Formula Student race in Hungary and the Formula Student race in the Czech Republic, where our experts worked as technical judges, provided technical support and awarded 3 EV Formula Student University teams with the Garrett E-Powertrain Innovation award. During 2023, the Company shared its growth vision with over 1,500 students and over 300 female engineers and automotive enthusiasts. The Company also sponsored the European BEST Engineering Competition, (EBEC), the biggest international technical competition in Central Europe, whereEurope.
The Garrett
definedstudent programs hires over 90 students globally to support challenging projects in multiple engineering fields providing an
assignmentenriching growth experience for
24 students aroundpotential future Garrett employees. The Company also supports local Universities globally with master thesis projects, class speakers and technical sharing events. Garrett is involved in the
concept of sustainable Future Mobility.Priorcommunity supporting STEM activities for high schools worldwide and in 2023, Garrett sponsored a high school team from the Czech Republic competing in hydrogen-powered racing. The Company continues to COVID-19 Garrett teams regularly held open days for school children in their host communities,enhance the engagement with global organizations with a specific focus on encouraging girls to take angrowing diversity interest in STEM. With many host communities forced into lockdown in 2020 STEM and automotive engineering as well as intern and full time recruiting.
Garrett
supported local first responders in several countriesworks closely with
leading Universities globally on over 12 collaboration projects that push the
donationenvelope of
PPE, and also provided food and sanitation products for 2,000 vulnerable families around Garrett’s Indian sites. Garrett is currently working on several projects to support distance learning in its host communities in 2021.23
technical innovation.
Our business
is typically moderately
seasonal.
Our primary
North American
customers
historically
reduce
production during the month of July and halt
operations
for approximately
one week in December;
our European customers generally
reduce
production
during the months
of July and August and for one week in December;
and our Chinese customers
often
reduce
production
during the period
surrounding
the Chinese New
Year. Shut-down periods
in the rest
of the world generally
vary by country.
In addition,
automotive
production
is traditionally reduced
in the months
of July, August and September
due to the launch of parts
production
for new
vehicle models.
Accordingly,
our results
reflect
this
seasonality. Our sales predictability in the short term might also be impacted by sudden changes in customer demand, driven by our OEM customers’ supply chain management.
We also typically experience seasonality in cash flow, as a relatively small portion of our full year cash flow is typically generated in the first quarter of the year and a relatively large portion in the last quarter. This seasonality in cash flow is mostly caused by timing of supplier payments for capital expenditures, changes in working capital balances related to the sales seasonality discussed above, and incentive payments.
These trends were less significant during 2020 as a result of the COVID-19 pandemic, but we expect them to continue in the future once the pandemic is resolved.
Our
Company was incorporatedAnnual Reports on
March 14, 2018 as a Delaware corporation in connection with the Spin-Off from Honeywell, and we maintain our headquarters in Rolle, Switzerland. For additional information regarding the Spin-Off, see “Basis of Presentation” at the beginning ofForm 10-K, including this Annual Report,
on Form 10-K.This Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, as well as all amendments and other reports filed with or furnished to the SEC, are also available free of charge on our internet site at https://www.garrettmotion.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
The contents of our internet site are not incorporated by reference into this Annual Report. The SEC maintains a website at SEC.gov that contains reports, proxy and information statements, and other information regarding issuers that file with the SEC, including our Company.
Youshould carefullyconsiderallof the informationin this Annual Report on Form 10-K and each of the risks described below, which we believe are the principal risks we face. Anyof the followingriskscould materiallyand adverselyaffectour business,financialconditionand results of operationsand the actualoutcomeof mattersas to which forward-lookingstatementsare made in this Annual Report on Form 10-K. Other events that we do not currently anticipate or that we currently deem immaterial may also affect our business, prospects, financial condition and results of operations. Risks Relating to
Our Chapter 11 CasesOur ability to successfully operate during and reorganize the Debtorsour Business:
Volatility in the Chapter 11 Cases is dependent uponcost and availability of raw materials, components, energy and transportation, in addition to disruptions in the supply chain, including supplier insolvency, has increased, and may continue to increase, the cost of our products and services, and may impact our ability to obtain Bankruptcy Court approval of the Debtors’ motions, the outcome of Bankruptcy Court rulingsmeet commitments to customers and the progress of the Chapter 11 Cases in general, including the length of time the Debtors will operatecause us to incur significant liabilities.
We have experienced, and may continue to experience, volatility in the
Chapter 11 Cases.For the durationcost and availability of the Chapter 11 Cases, the Debtors are subject to the supervision of the Bankruptcy Court. The Debtors’ ability to continue to operate in the ordinary course,raw materials, components, energy and for our ability to develop and execute our business plan, continuetransportation as a going concernresult of a broad range of factors beyond our control including, but not limited to, pandemics, general inflation and ultimately successfully reorganize the Debtors,geopolitical tensions. If we are subject to:
| •
| our ability to obtain Bankruptcy Court approval with respect to motions filed in the Chapter 11 Cases from time to time;
|
| •
| our ability to develop, confirm and consummate the Plan and the Transaction in the timeframe contemplated by RSA and the PSA or as otherwise ordered by the Bankruptcy Court;
|
| •
| the abilityunable to pass through increased costs of raw materials, components, energy and transportation to our customers, or are otherwise unable to mitigate these cost increases, this could have an adverse effect on our results of third parties to seek and obtain Bankruptcy Court approval to terminate contracts and other agreements with us;
|
| •
| the ability of third parties to appoint a Chapter 11 trustee, or to convert the Chapter 11 Cases to a Chapter 7 proceeding; and
|
| •
| the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 Cases that may be inconsistent with our plans, and the Bankruptcy Court’s rulings on such actions and decisions, as applicable.
|
These risks and uncertainties could affect our business, operations, financial condition and our ultimate ability to successfully reorganize the Debtors in various ways. For example, negative events associated with the Chapter 11 Cases could adversely affect the Debtors’ or our non-debtor affiliates’ relationships with suppliers, service providers, customers and other third parties, which in turn could materially adversely affect our operations and financial condition. DuringFurthermore, if we are unable to overcome significant disruptions in the Chapter 11 Cases,supply chain, such as those caused by global logistical constraints, it could adversely impact our business.
Short- or long-term capacity constraints, insufficient quality control, financial distress or significant changes in business conditions at any point in our supply chain could disrupt our operations and adversely affect our financial performance, particularly when the Debtors will needaffected suppliers and vendors are the prior approvalsole sources of products that we require or that have unique capabilities, or when our customers have directed us to use those specific suppliers and vendors. Our ability to manage inventory and meet delivery requirements may be constrained by our suppliers’ inability to scale production and adjust delivery of long-lead time products during times of volatile demand. If our third-party manufacturers fail to deliver products, parts and components of sufficient quality on time and at reasonable prices, we could have difficulties fulfilling our orders on similar terms or at all, sales and profits could decline, and our commercial reputation could be damaged. If we fail to adequately assess the creditworthiness and operational reliability of existing or future suppliers, our suppliers become insolvent, if there is any unanticipated deterioration in their creditworthiness and operational reliability, or if they do not perform or adhere to our existing or future contractual arrangements, any resulting increase in non performance by them, our inability to otherwise obtain the supplies or our inability to enforce the terms of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit the Debtors’ ability to respond timely to certain eventscontract or take advantage of opportunities. Additionally, if creditors orseek other third parties raise significant objections or take other actions against the Debtors before the Bankruptcy Court, this could have the effect of significantly delaying our ability to confirm and consummate the Plan and the Transaction and, to the extent applicable, to meet the milestones set forth in the RSA and the PSA, whichremedies could have a material adverse effect on our financial condition and results of operations. Additionally, changes or additions to our supply chain necessitated by such failures would require considerable time and resources and involve significant risks and uncertainties. Furthermore, a significant portion of our supply chain is concentrated in mainland China, and as a result, our ability to continue filling our supply needs may be adversely affected by changes in, or our failure to comply with, Chinese laws, regulations and standards, and by political risks beyond our control, including but not limited to, trade policies, treaties, government regulations and tariffs. Our inability to fill our supply needs, on terms that we expect or at all, would jeopardize our ability to fulfil obligations under commercial contracts, and could result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships.
We rely on sales to major customers as well as a network of independent dealers to manage the distribution of our products, and we could be adversely impacted by the loss of any such major customers or dealers, changes in their requirements for our products or changes in their financial condition.
Changes in our business relationships with any of our major customers or in the timing, size and continuation of their various programs could have a material adverse impact on us. We may lose customers from time to time due to factors beyond our control, including due to mergers and acquisitions. Additionally, while we continually bid on new business with our existing customers, as well as seek to diversify our customer base, there is no assurance that our efforts will be successful. The loss of any of these customers, the loss of business with respect to one or more of their vehicle models on which we have high component content, or a significant decline in the production levels of such vehicles would negatively impact our business, results of operations and financial condition. Further, to the extent that the financial condition of our largest customers deteriorates, including possible bankruptcies, or liquidations, or due to declines in their sales, our financial position and results of operations could be adversely affected.
Additionally, we rely upon a network of independent dealers to manage the distribution of our products. If our dealers are unsuccessful with their sales and business operations, it could have an adverse effect on overall sales and revenue. We rely on the capability of our independent dealers to develop and implement effective sales plans to create demand among purchasers for the equipment and related products and services that the dealers purchase from us. If our dealers are not successful in these endeavors, then we will be unable to grow our sales and revenue, which would have an adverse effect on our financial condition. In addition, the dealer channel’s ability to support and service precision technology solutions and emerging power solutions may affect customers’ acceptance and adoption rates of these products.
Additionally, these dealers may have trouble funding their day-to-day cash flow needs and paying their obligations due to adverse business conditions resulting from negative economic effects or other factors. Dealers may exit relationships with us or we may seek to terminate relationships with certain dealers, including if they are unable to meet the needs of their customers. The unplanned loss of any of our dealers could lead to inadequate market coverage, negative customer impressions of us, and may adversely impact our ability to collect receivables that are associated with that dealer.
We may not be able to successfully negotiate favorable pricing terms with our customers, which may adversely affect our results of operations.
There is substantial and continuing pressure on OEMs to reduce costs, including the costs of the products we supply. We negotiate sales prices annually with our automotive customers. Our customer supply agreements generally require step-downs in component pricing over the period of production. In addition, our customers often reserve the right to terminate their supply contracts at any time, which enhances their ability to obtain price reductions. OEMs have also exercised significant influence over their suppliers, including us, because the automotive component supply industry is highly competitive and serves a limited number of customers. Based on these factors, our status as a Tier I supplier (one that supplies vehicle components directly to manufacturers) and the fact that our customers’ product programs typically last a number of years and are anticipated to encompass large volumes, our customers are able to negotiate favorable pricing, and any cost-cutting initiatives that our customers adopt generally will result in increased downward pressure on our pricing. Any resulting impacts to our sales levels and margins could over time significantly reduce our revenues and adversely affect our competitive standing and prospects.
The automotive industry is evolving and if we are unable, or perceived as unable, to respond appropriately to such evolution, our financial condition and results of operation could be adversely impacted.
The sales and margins of our business are directly impacted by government regulations, including safety, performance and product certification regulations, particularly with respect to emissions, fuel economy and energy efficiency standards for motor vehicles. Increased public awareness and concern regarding global climate change may result in more regional and/or federal requirements to reduce or mitigate the effects of greenhouse gas emissions. While such requirements can promote increased demand for our turbochargers and other products, several markets in which we operate are undertaking efforts to more strictly regulate or ban vehicles powered by certain older-generation diesel engines. If such efforts are pursued more broadly throughout the market than we have anticipated, such efforts may impact demand for our aftermarket products. Changes in demand and emerging needs of customers that are not perceived adequately in advance and/or incorporated in the product development process (e.g., demand for eco-compatible products) may result in lower sales volumes and consequently affect our results of operations.
Even if overall automotive sales and production remain stable, changes in regulations and consumer preferences may shift consumer demand away from the types of vehicles we prioritize or towards the types of vehicles where our products generate smaller profit margins. A decrease in consumer demand for the specific types of vehicles that have traditionally included our turbocharger products, or lower-than-expected consumer demand for specific types of vehicles where we anticipate providing significant components as part of our strategic growth plan, could have a significant effect on our business. If we are unable to anticipate significant changes in consumer sentiment, or if consumer demand for certain vehicle types changes more than we expect, our results of operations and financial condition could be adversely affected. Furthermore, our continued success depends on our ability to innovate to keep current with and exceed the technological capabilities that our customers require. If we are unable to continue innovating, we may be unable to sustain our ability to meet customer requirements relative to technology, or fail to be awarded new business, each of which could adversely affect our results of operations, financial condition and
future business prospects. Furthermore, we have made, and we expect to continue to make, significant investments in technologies for electrification, including zero emission technologies, fuel cell compressors and high value electric vehicle components including E-Powertrain and E-Cooling Compressor technologies. We face intense competition in the development of technologies for electrification, and there is no guarantee that we will not be required to make additional significant investments in the future. Additionally, many of our
ultimate abilitytechnologies for electrification are in the pre-development stage, and while we believe that our products will be commercially viable, there is no guarantee that they will be successful. If we are required to
successfully reorganize the Debtors. During the Chapter 11 Cases,make more significant investments than expected, if markets for our products fail to develop or develop more slowly than expected, or if competition for electrification technologies is more intense than we expect, our
business, financial
condition and results
to continue to be volatile as restructuring activities and expenses (including legal and other advisor costs), any contract terminations and rejections, and claims assessments may significantly impact our Consolidated and Combined Financial Statements. Because of
the risks and uncertainties associated with the Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact of events that occur during the Chapter 11 Cases thatoperations may be
inconsistent with our plans, or the ultimate length of time which the Chapter 11 Cases may continue.
The Chapter 11 Cases, the DIP Credit Agreementmaterially and the PSA limit the flexibility of our management team in running our business.
Our Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (as amended, restated, supplemented or otherwise modified from time to time the “DIP Credit Agreement”) entered into in connection with the Chapter 11 Cases, imposes a number of restrictions on the Debtors. Specifically, the Debtors are subject to certain affirmative covenants, including, without limitation, covenants requiring the Debtors to provide financial information, budgets and other information to the agent and the lenders under the DIP Credit Agreement, as well as negative covenants, including, without limitation, relating to the incurrence of additional debt, liens and the making of investments and restricted payments, in each case as set forth in the DIP Credit Agreement. Restrictions under the DIP Credit Agreement on the ability of our non-Debtor subsidiaries to incur debt, as well as on our ability to investadversely affected.
Sales in our non-Debtor subsidiaries,aftermarket operations are also directly related to consumer demand and repay intercompany loans owing to our non-Debtor subsidiaries, could impact the availability of liquidity to our non-Debtor affiliates. The Debtors’ ability to comply with these provisionsspending for automotive aftermarket products, which may be affected by events beyondadditional factors such as the average useful life of OEM parts and components, severity of regional weather conditions, highway and roadway infrastructure deterioration and the average number of miles vehicles are driven by owners. Improvements in technology and product quality are extending the longevity of vehicle component parts, which may result in delayed or reduced aftermarket sales. Our results of operations and financial condition could be adversely affected if we fail to respond in a timely and appropriate manner to changes in the demand for our controlaftermarket products.
Certain markets in which we operate have contemplated or commenced undertaking multi-decade efforts to transition away from internal combustion engines in favor of hybrid or full-battery electric vehicles, and we expect this trend to continue in these and additional markets. If a transition to battery-electric vehicles is pursued more broadly throughout the
market, is implemented more rapidly than we have anticipated, or if we overestimate the turbocharger penetration rate in hybrids, then the demand for our products could be impacted and our results of operations consequently could be affected.
Additionally, changing government regulations related to greenhouse gas emissions and energy efficiency and growing recognition among consumers of the dangers of climate change may also require us to make changes at the level of our production processes, including due to demands of, and commitments to carbon neutrality by, automotive OEMs. This could require us to incur additional costs in the form of investments needed to make our products and production processes compliant with these requirements.
The Company’s profitability and results of operations may be adversely affected by program launch difficulties.
The launch of new business is a complex process, the success of which depends on a wide range of factors, including the production readiness of the Company’s manufacturing facilities and manufacturing processes and those of its suppliers, as well as factors related to tooling, equipment, employees, initial product quality and other considerations. The Company’s failure to complysuccessfully launch new business, or obtain a waiver inits inability to accurately estimate the event we cannot comply, with a covenantcost to design, develop and launch new business, could have an adverse effect on its profitability and results of operations.
To the extent the Company is not able to successfully launch new business, vehicle production at its customers could be significantly delayed or shut down. Such situations could result in significant financial penalties to the Company or a diversion of personnel and financial resources to improving launches rather than investment in continuous process improvement or other growth initiatives and could result in its customers shifting work away from it to a competitor, all of which could result in loss of revenue or loss of market share and could have an eventadverse effect on its profitability and cash flows.
We may not realize sales represented by awarded business or effectively utilize our manufacturing capacity.
When we win a bid to offer products and services to an OEM customer, the customer typically does not commit to award us its business until a separate contract has been negotiated, generally with a term ranging from one year to the life of default under the DIP Credit Agreement,model (usually three to seven years). Once business has been awarded, the OEM customer typically retains the ability to terminate the arrangement without penalty and does not commit to purchase a minimum volume of products while the contract is in effect.
In light of the foregoing, while we estimate awarded business using certain assumptions, including projected future sales volumes, the volume and timing of sales to our customers may vary due to: variation in demand for our customers’ products; our customers’ attempts to manage their inventory; design changes; changes in our customers’ manufacturing strategy; the success of customers’ goods and models; and acquisitions of or consolidations among customers. A significant decrease in demand for certain key models or a group of related models sold by any of our major customers, or the ability of a manufacturer to re-source and discontinue purchasing from us its requirements for a particular model or group of models, could have a material adverse effect on us. In addition, we may be unable to forecast the level of customer orders with sufficient certainty to allow us to optimize production schedules and maximize utilization of manufacturing capacity. Any excess capacity would cause us to incur increased fixed costs in our products relative to the net revenue we generate, which could have an adverse effect on our results of operations, particularly during economic downturns. Similarly, a materialsignificant failure or inability to adapt to increased production or desired inventory levels (including as a result of accelerated launch schedules for new automobile and truck platforms), comply with customer specifications and manufacturing requirements more generally or respond to other unexpected fluctuations, as well as any delays or other problems with existing or new products could result in financial penalties, increased costs, loss of sales, loss of customers or potential breaches of customer contracts, which could have an adverse effect on our profitability and results of operations.
If actual production orders from our customers are not consistent with the projections we use in calculating the amount of our awarded business, or if we are unable to improve utilization levels for manufacturing lines that consequently are underutilized and correctly manage capacity, the increased expense levels will have an adverse effect on our business, financial condition and results of operations. In addition, continued compliance with or failure to obtain a waiver for covenants restrictingoperations, and we could realize substantially less revenue over the incurrencelife of debt by non-Debtor subsidiaries orthese projects than the making of investments in, or the repayment of intercompany loans owing to, non-Debtor subsidiaries could limit the availability of liquidity to our non-Debtor affiliates, which could also adversely impact our business, financial conditionprojected estimate.
Industry and
results of operations. In addition to the restrictions applicable to the Debtors’ in the Chapter 11 Cases, we are also subject to operating covenants that apply to the Debtors under PSA. These covenants generally require us to operate in the ordinary course of business, to refrain from taking certain enumerated actions and to affirmatively take other enumerated actions. Such covenants limit the flexibility of our management to respond to various events and circumstances that may arise from time to time, including as a result of the Chapter 11 Cases. There can be no assurances that we will be able to obtain appropriate waivers from such covenants as may be necessary or advisable, which could adversely impact our business and operations.
We may not be able to complete any Bankruptcy Court-approved reorganization of our Company or sales of our Company or assets through the chapter 11 process, or we may not be able to realize adequate consideration for suchreorganization or sales, which would adversely affect our financial condition.
The Debtors’ performance and obligations under the PSA and the ECBA are subject to approval by the Bankruptcy Court and the Transaction is subject to other customary closingeconomic conditions, including receipt of regulatory approvals or clearances. There can be no assurance that we will be able to obtain approval and complete the proposed reorganization, or any other significant reorganization transaction, including as a result of objections from our stakeholders. Such objections from stakeholders could result from stakeholders’ preference for an alternative plan of reorganization than that contemplated by the PSA and the ECBA, such as the Atlantic Park Proposal (including with any subsequent modifications). If we are unable to complete a reorganization of the Company in the Chapter 11 Cases, including in accordance with the terms of the PSA and the ECBA, it may be necessary to seek additional funding sources, or convert from the Chapter 11 reorganization process to a Chapter 7 liquidation process. If one or more sales of the Company’s assets are completed, they may not generate the anticipated or desired outcomes (including with respect to consideration received).
For more information on the PSA and the ECBA, see Note 2, Reorganization and Chapter 11 Proceedings of the Notes to the Consolidated and Combined Financial Statements.
The resolution pursuant to the PSA of Honeywell’s claims against our bankruptcy estates and our litigation with Honeywell requires approval of the Bankruptcy Court.
In connection with the Spin-Off, we entered into certain agreements with Honeywell, including the Indemnity Agreements and the Tax Matters Agreement, which have given rise to significant claims by Honeywell against our bankruptcy estates and have led to litigation between us and Honeywell.
Under the Honeywell Indemnity Agreement, we are required to make cash payments to Honeywell in amounts equal to 90% of Honeywell’s asbestos-related liability payments and accounts payable, primarily related to Honeywell’s legacy Bendix friction materials (“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 our 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 amount payable by us in respect of such liabilities arising in any given year will be payable in Euros, subject to a cap (denominated in Euros) equal to $175 million, calculated by reference to the Distribution Date Currency Exchange Rate. The cap is exclusive of any late payment fees up to 5% per annum.
The Tax Matters Agreement contains covenants and indemnification obligations that address compliance with Section 355 of the Code, are intended to preserve the tax-free nature of the Spin-Off, and outline Honeywell’s and our post-spin rights, responsibilities, and obligations regarding tax-related matters (including tax liabilities, tax attributes, tax returns and tax contests). The Tax Matters Agreement provides, among other things, 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. Additionally, the Tax Matters Agreement provides that Garrett ASASCO is to make payments to a subsidiary of Honeywell for a portion of Honeywell’s net tax liability under Section 965(h)(6)(A) of the Internal Revenue Code for mandatory transition taxes that Honeywell determined is attributable to us (the “MTT Claim”).
In December 2019, we commenced a lawsuit against Honeywell in connection with the Honeywell Indemnity Agreement 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. Our lawsuit seeks, among other things, to establish that the Honeywell Indemnity Agreement is unenforceable in whole or in part because Honeywell has failed to establish the prerequisites for indemnification under New York law, and improperly seeks indemnification for amounts attributable to punitive damages and intentional misconduct. Following the commencement of the Chapter 11 Cases, the Debtors removed the lawsuit against Honeywell to the Bankruptcy Court and also initiated litigation against Honeywell regarding the value and validity of its claims under the Honeywell Indemnity Agreement and the Tax Matters Agreement.
Under the terms of the PSA and the Transaction, the Plan, if confirmed by the Bankruptcy Court, will include 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 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 and (y) 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.
Our entry into and performance under the PSA and the terms of the PSA, the Transaction and the Plan remain subject to approval by the Bankruptcy Court. There can be no assurances that we will obtain the approval of the Bankruptcy Court and consummate the Transaction.
For more information on the risks related to the approval of the Plan, see “We may not be able to complete any Bankruptcy Court-approved reorganization of our Company or sales of our Company or assets through the chapter 11 process, or we may not be able to realize adequate consideration for such reorganization or sales, which woulddownturns, could adversely affect our financial condition”.
Operating under Bankruptcy Court protection for a long period of time may harm our business.
A long period of operations under Bankruptcy Court protection could have a material adverse effect on our business, financial condition, results of operations and liquidity. During the pendency of the Chapter 11 Cases, our senior management may be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing exclusively on our business operations. A prolonged period of operating under Bankruptcy Court protection also may make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, as the length of the Chapter 11 Cases increases, the risk that customers and suppliers will lose confidence in our ability to reorganize our business successfully may also increase, and such customers and suppliers may seek to establish alternative commercial relationships.
Delay of the Chapter 11 Cases could impact our ability to maintain our operations during the Chapter 11 Cases.
If the Chapter 11 Cases take longer than expected to conclude, the Debtors may exhaust or lose access to the DIP Term Loan Facility. Any of these factors could result in the need for substantial additional funding. A number of other factors, including the Chapter 11 Cases, our recent financial results, our substantial indebtedness and the competitive environment we face, may adversely affect the availability and terms of funding that might be available to us during the pendency of the Chapter 11 Cases. As such, we may not be able to source capital at rates acceptable to us, or at all, to fund our current operations. The inability to obtain necessary additional funding on acceptable terms could have a material adverse impact on us and on our ability to sustain our operations during the Chapter 11 Cases.
Our ability to prosecute the Chapter 11 Cases and obtain confirmation of the Plan may be contested by third parties with litigation.
Certain of the Debtors’ creditors and other parties-in-interest may object to and commence litigation against the Debtors during the course of the Chapter 11 Cases, the outcome of which is uncertain. Such litigation may prolong the Chapter 11 Cases and may make it difficult for the Debtors to reach the contractual milestones for the case within the timeframes set out in each of the PSA and RSA.
In certain instances, a Chapter 11 proceeding may be converted to a proceeding under Chapter 7.
There can be no assurance as to whether the Debtors will successfully reorganize under the Chapter 11 Cases. If the Bankruptcy Court finds that it would be in the best interest of creditors and/or the Debtors, the Bankruptcy Court may convert the Chapter 11 Cases to proceedings under Chapter 7. In such event, a Chapter 7 trustee would be appointed or elected to liquidate the Debtors’ assets for distribution in accordance with the priorities established by the Bankruptcy Code. The Debtors believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to the Debtors’ creditors than those provided for in a Chapter 11 plan of reorganization because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a disorderly fashion over a short period of time rather than reorganizing or selling in a controlled manner the Debtors’ businesses as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
Trading in our securities during the pendency of the Chapter 11 Cases poses substantial risks.
While the proposed terms of the Transaction under the PSA contemplate the reinstatement or cash-out of the Company’s stockholders, such terms remain subject to approval by the Bankruptcy Court and the Company’s stockholders are cautioned that it is possible that the Company’s stockholders will receive nothing in exchange for their common stock upon the completion of the Chapter 11 Cases and that the common stock will have no value and that trading in securities of the Company during the pendency of the Chapter 11 Cases will be highly speculative and will pose substantial risks. The delisting of our common stock from New York Stock Exchange has limited and could continue to limit the liquidity of our common stock, increase the volatility in the price of our common stock, and hinder our ability to raise capital. If the Plan is not confirmed by the Bankruptcy Court, it is possible the Company’s outstanding common stock may be cancelled and extinguished upon confirmation of a different plan of reorganization by the Bankruptcy Court. In such an event, the Company’s stockholders may be entitled to receive recovery on account of their equity interests, but the amount of any such recovery is highly uncertain and there may be no such recovery. Trading prices for the Company’s common stock and other securities may bear little or no relation to actual recovery, if any, by holders thereof in the Company’s Chapter 11 Cases. Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.
Our common stock was delisted from NYSE and is currently traded on the OTC Pink Sheets market maintained by the OTC Market Group, Inc., which involves additional risks compared to being listed on a national securities exchange.
Trading in our common stock was suspended on September 21, 2020 and removed from listing on NYSE on October 19, 2020. We will not be able to relist our common stock on a national securities exchange during our Chapter 11 process, although our common stock is now quoted on the OTC Pink Sheets market maintained by the OTC Market Group, Inc. under the trading symbol “GTXMQ”. We may be unable to relist our common stock on a national securities exchange after our Emergence. The lack of listing on a national securities exchange may impair the ability of holders of our common stock to sell their shares at the time they wish to sell them or at a price that they consider reasonable. The lack of listing on a national securities exchange may also reduce the fair market value of the shares of our common stock. Furthermore, because of the limited market and generally low volume of trading in our common stock, the price of our common stock could be more likely to be affected by broad market fluctuations, general market conditions, fluctuations in our operating results, changes in the markets’ perception of our business, and announcements made by us, our competitors, parties with whom we have business relationships or third parties with interests in the Chapter 11 Cases.
Risks Relating to Our Business
Industry andeconomicconditionsmay adverselyaffectthe marketsandoperatingconditionsof our customers,whichin turn can affectdemand for our products andservicesandour resultsof operations.
We are dependenton the continuedgrowth, viabilityand financialstabilityof our customers.Asubstantial portionof our customersare OEMsin the automotiveindustry.This industryis subjectto rapidtechnological change oftendrivenby regulatorychanges, vigorouscompetition,shortproductlifecyclesand cyclicaland reducedconsumerdemand patterns.In additionto generaleconomicconditions,automotivesalesand automotive vehicleproductionalso depend on otherfactors,such as supplierstability,factorytransitions,capacity constraints,the costsand availabilityof consumercredit,consumerconfidenceand consumerpreferences.When our customersare adverselyaffectedby thesefactors,wemay be similarlyaffectedto the extentthatour customersreducethe volumeof ordersfor our products.Economicdeclinesand correspondingreductionsin automotivesalesand productionby our customers,particularlywith respectto lightvehicles,have in the past had, and may in the futurehave, a significantadverseeffecton our business,resultsof operationsand financial condition.
Even if overallautomotivesalesand productionremainstable,changes in regulationsand consumer preferencesmay shiftconsumerdemand away fromthe types of vehiclesweprioritizeor towards the types of vehicleswhere our productsgeneratesmallerprofitmargins.Adecreasein consumerdemand for the specific types of vehiclesthat have traditionallyincludedour turbochargerproducts,such as a decreasein demand for diesel-fueledvehiclesin favorof gasoline-fueledvehicles,or lower-than-expectedconsumerdemand for specific types of vehicleswhere weanticipateprovidingsignificantcomponentsas partof our strategicgrowth plan, such as a decreasein demand for vehiclesutilizingelectric-hybridand fuelcellpowertrainsin favorof fullbattery electricvehicles,could have a significanteffecton our business.If weare unable to anticipatesignificant changes in consumersentiment,or if consumerdemand for certainvehicletypes changes morethan weexpect, our resultsof operationsand financialconditioncould be adverselyaffected.
Sales in our aftermarketoperationsare also directlyrelatedto consumerdemand and spending for automotiveaftermarketproducts,which may be affectedby additionalfactorssuch as the averageusefullifeof OEMpartsand components,severityof regionalweatherconditions,highway and roadway infrastructure deteriorationand the averagenumberof milesvehiclesare drivenby owners. Improvementsin technologyand productqualityare extendingthe longevityof vehiclecomponentparts,which may resultin delayedor reduced aftermarketsales.Our resultsof operationsand financialconditioncould be adverselyaffectedif wefailto respond in a timelyand appropriatemannerto changes in the demand for our aftermarketproducts.
The COVID-19 pandemic has adversely impacted and is expected to further adversely impact our business and results of operations.
During 2020,
We are dependent on the novel coronavirus disease, COVID-19, spread acrosscontinued growth, viability and financial stability of our customers, a substantial portion of whom are OEMs in the world, including throughout Asia, the United Statesautomotive industry. The automotive industry is sensitive to general economic conditions and Europe.other
factors, such as consumer confidence and preferences, interest rates, and fuel costs. The outbreakautomobile industry is also sensitive to industry conditions, particularly as it evolves, such as rapid technological change often driven by regulatory changes, vigorous competition, short product life cycles, supplier stability, factory transitions, and government measures taken in responsecapacity constraints. Economic and industry conditions have had, and will continue to have, an impact on our business, whether directly or indirectly through our customers and suppliers. Furthermore, the regional concentration of our sales may exacerbate the impact of regional economic conditions on our results of operations, including in China, where we conduct a significant adverse impact, both directportion of our sales, and indirect, on our businesses and the economy. Our manufacturing facility in Wuhan, China was shut down for six weeks in February and March 2020 and we saw diminished production in our Shanghai, China facility for that same time period, which were the primary drivershas recently experienced low inflation, deterioration of the decreasejob market, and a slower than anticipated economic recovery from Covid-19. Economic declines that result in significant reductions in automotive sales inor production, particularly with respect to light vehicles, or the Asia region during the three months ended March 31, 2020. While our facilities in China re-opened in the second quarter, our manufacturing facilities in Mexicali, Mexico and Pune, India were shut down and our manufacturing facilities in Europe operated at reduced capacity. This significantly reduced our production volumes and had a materialfailure to recover from such economic declines on timelines that we anticipate, would have an adverse impacteffect on our business, results of operations and financial condition. In
We are subject to the third quarter, the fast recovery observed in all geographies enabled us to ramp up production in mosteconomic, political, regulatory, foreign exchange and other risks of our production sites to normal levels. This recovery continued in the fourth quarter with a very strong demand especially in China and Europe. However, if the COVID-19 pandemic drives new lockdown measures impacting our manufacturing facilities, our facilities may be forced to shut down or operate at reduced capacity again which will continue to negatively impact our revenues. international operations.
We have
also faced limitations on our employee resources, including because of stay-at-home orders from local governments, new Paid Time Off policies, employee furloughs, state-funded layoffs, sickness of employees or their families or the desire of employees to avoid contact with large groups of people. The pandemic has also diverted management resourcescreated a geographic footprint that emphasizes locating R&D, engineering and the prolonged work-from-home arrangements have created business continuity and cybersecurity risks.
Certain of our customers have been similarly affected and are experiencing closures and labor shortages. As a result of such closures, we have experienced weakened demand from our customers, who have not been able to accept orders or have delayed or canceled orders, which has negatively affected our revenues. If this trend continues, our revenues will continue to be negatively impacted.
The COVID-19 pandemic continues to rapidly evolve. The extent to which the outbreak impacts our business, liquidity and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the availability and effectiveness of any vaccines or treatments, the duration of the pandemic, travel restrictions and social distancing in the European Union, China and other countries, the duration and extent of business closures or business disruptions and the effectiveness of actions taken to contain the disease. If we or our customers experience prolonged shutdowns or other business disruptions beyond current expectations, our ability to conduct our business in the manner and within planned timelines could be materially and adversely impacted, and our business and financial results may continue to be adversely affected.
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.
Our leverage ratio remains high and, unless addressed in the Chapter 11 Cases, we expect that it will remain so for at least the next several quarters.
This high leverage is exacerbated by Garrett ASASCO’s purported significant liabilities and obligations to Honeywell under the Honeywell Indemnity Agreement and the tax matters agreement with Honeywell, dated September 12, 2018 (the “Tax Matters Agreement”). Under the terms of the PSA and the Transaction, the Plan, if confirmed by the Bankruptcy Court, will include 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 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 and (y) the Series B Preferred Stock. The terms of the PSA, the Transaction and the Plan remain subject to approval by the Bankruptcy Court. There can be no assurances that we will obtain the approval of the Bankruptcy Court and consummate the Transaction.
Our current leveraged capital structure poses significant challenges to our overall strategic and financial flexibility and may impair our ability to gain or hold market share in the highly competitive automotive supply market. This leverage may be greater than that of some of our competitors, which may put us at a competitive disadvantage. In addition, our business has been and may continue to be significantly impacted by the COVID-19 pandemic and related response measures, which has had adverse consequences for our leverage. See “The COVID-19 pandemic has adversely impacted and is expected to further adversely impact our business and results of operations.” above for more information. The COVID-19 pandemic and related response measures may continue to have an impact, and if we are unable to manage through these challenges, our leverage ratio, capital structure or liquidity may be further adversely effected. On September 20, 2020, the Debtors filed the Chapter 11 Cases in order to address this leveraged capital structure. However, because of the risks and uncertainties associated with the Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact of events that occur during the Chapter 11 Cases on our leverage, capital structure, liabilities or liquidity position, and we may not be successful in addressing these challenges through or following the Chapter 11 Cases. See risks related to the Chapter 11 Cases above for more information.
Changesin legislationor governmentregulationsor policiescan have a significantimpacton demand for our products and our resultsof operations.
The salesand marginsof our businessare directlyimpactedby governmentregulations,includingsafety, performanceand productcertificationregulations,particularlywith respectto emissions,fueleconomy and energy efficiencystandardsfor motorvehicles.Increasedpublicawarenessand concernregardingglobalclimate change may resultin moreregionaland/orfederalrequirementsto reduceor mitigatethe effectsof greenhouse gas emissions.Whilesuch requirementscan promoteincreaseddemand for our turbochargersand otherproducts, severalmarketsin which weoperateare undertakingeffortsto morestrictlyregulateor ban vehiclespowered by certainolder-generationdieselengines.If such effortsare pursued morebroadlythroughoutthe marketthan we have anticipated,such effortsmay impactdemand for our aftermarketproductsand consequentlyaffectour resultsof operations.
In the long-term,severalof the marketsin which weoperateare contemplatingor undertakingmulti-decade effortsto transitionaway frominternalcombustionenginesin favorof hybrid or full-batteryelectricvehicles.
Although weexpecta significantnumberof hybridswill be turbocharged,if weoverestimatethe turbo penetrationratein hybridsor if a transitionto battery-electricvehiclesis pursued morebroadlythroughoutthe market,or is implementedmorerapidlythan wehave anticipated,the demand for our productscould be impacted and our resultsof operationsconsequentlycould be affected. This is a risk existing in particular in Europe. In the US, with the change in presidential administration, we expect to see a move to adoption of new environmental regulations, which presents similar risks as in Europe in the long-term, depending on how regulatory targets for fuel efficiency and emissions in the 2025-30 timeframe will be set.
Our future growth is largely dependent upon our ability to develop new technologies and introduce new products with acceptable margins that achieve market acceptance or correctly anticipate regulatory changes.
The globalautomotivecomponentsupply industryis highly competitive.Our futuregrowth ratedepends upon a numberof factors,includingour abilityto: (i)identifyemergingtechnologicaltrendsin our targetend-markets;(ii)develop and maintaincompetitiveproducts;(iii)enhance our productsby adding innovativefeatures thatdifferentiateour productsfromthose of our competitors;(iv)develop, manufactureand bring compelling newproductsto marketquicklyand cost effectively;and (v) attract,develop and retainindividualswith the requisitetechnicalexpertiseand understandingof customers’needs to develop newtechnologiesand introduce newproducts.
We have identified a trend towards increased development and adoption by OEMs of hybrid-electric powertrains, fuel cell powertrains and associated electric boosting technologies, especially on commercial vehicle applications, as pure battery-electric vehicles continue to face range, charging time and sustainability issues on those applications. Our results of operations could be adversely affected if our estimates regarding adoption and penetration rates for hybrid-electric and fuel cell powertrains or for pure battery electric cars are incorrect.
Failure to protectour intellectualpropertyor allegationsthat wehave infringedthe intellectualpropertyof others could adverselyaffectour business, financialconditionandresultsof operations.
We relyon a combinationof patents,copyrights,trademarks,tradenames,tradesecretsand otherproprietary rights,as well as contractualarrangements,includinglicenses,to establish,maintainand protectour intellectual propertyrights.Effectiveintellectualpropertyprotectionmay not be available,or wemay not be able to acquire or maintainappropriateregisteredor unregisteredintellectualproperty,in every countryin which wedo business. Furthermore, in some areas of our business the established industry maturity of product technology may leave limited opportunity for new intellectual property to differentiate our products. Accordingly,our intellectualproperty may not be sufficient on its own to provide us a strong product differentiation and competitive advantage, which in turn could weaken our ability to secure business awards from our customers and/or our ability to achieve targeted product profitability.
The protectionof our intellectualpropertymay requireus to spend significantamountsof money. Further, the stepswetake to protectour intellectualpropertymay not adequatelyprotectour rightsor preventothersfrom infringing,violatingor misappropriatingour intellectualproprietaryrights.Anyimpairmentof our intellectual propertyrights,includingdue to changes in U.S.or foreignintellectualpropertylaws or the absenceof effective legalprotectionsor enforcementmeasures,could adverselyimpactour businesses,financialconditionand results of operations.
International technical export control regulations and trade conflicts may limit our ability to use certain intellectual property in our products in some regions of the world or customers may require assured access to intellectual property through open source-code, joint ownership of intellectual property, free license, or other measures. These constraints could cause us difficulty in securing business awards from our customers, protecting our competitive technology differentiation, and/or our ability to achieve targeted product profitability.
In addition,as weadopt newtechnology,wefacean inherentriskof exposureto the claimsof othersthatwe have allegedlyviolatedtheirintellectualpropertyrights.Successfulclaimsthatweinfringeon the intellectual propertyrightsof otherscould requireus to enterinto royaltyor licensingagreementson unfavorableterms or cause us to incursubstantialmonetaryliability.We may also be prohibitedpreliminarilyor permanentlyfrom furtheruse of the intellectualpropertyin questionor be requiredto change our businesspracticesto stop the infringinguse, which could limitour abilityto competeeffectively.In addition,our customeragreementsmay requireus to indemnifythe customerfor infringement.The timeand expense of defendingagainsttheseclaims, whether meritoriousor not, may have a materialand adverseimpacton our profitability,can be time-consuming and costlyand may divertmanagement’sattentionand resourcesaway fromour businesses.Furthermore,the publicitywemay receiveas a resultof infringingintellectualpropertyrightsmay damageour reputationand adverselyimpactour existingcustomerrelationshipsand our abilityto develop newbusiness.
We may incur materiallossesandcostsas a resultof warranty claims,including product recalls,andproduct liabilityactionsthat may be brought against us.
Depending on the termsunder which wesupply productsto an auto manufacturer,wemay be requiredto guaranteeor offerwarrantiesfor our productsand to bear the costsof recalls,repairor replacementof such productspursuantto newvehiclewarranties.There can be no assurancethatwewill have adequatereservesto cover such recall,repairand replacementcosts.In the event thatany of ourproductsfailsto performas expected,wemay facedirectexposureto warrantyand productliabilityclaimsor may be requiredto participate in a governmentor self-imposedrecallinvolvingsuch products.Ourcustomersthatare not end users,such as auto manufacturers,may facesimilarclaimsor be obligedto conduct recallsof theirown,and in such circumstances,they may seek contributionfromus. Our agreementswith our customersdo not always include limitationof liabilityclauses or, in certain situations or legal jurisdictions, such limitation of liability clauses may not be fully valid. If any such claimsor contributionrequestsexceed our availableinsurance,or if thereis a productrecall,therecould be a materialadverseimpacton our resultsof operations.In addition,a recallclaimcould requireus to review our entireproductportfolioto assesswhether similarissuesare presentin otherproductlines,which could resultin significantdisruptionto our businessand could have a furtheradverse impacton our resultsof operations.We cannot assureyou thatwewill not experienceany materialwarrantyor productliabilityclaimlossesin the futureor thatwewill not incursignificantcoststo defend such claims.
Theoperationalconstraintsandfinancialdistressof third partiescould adverselyimpactour business and resultsof operations.
Our resultsof operations,financialconditionand cash flows could be adverselyaffectedif our third-party supplierslack sufficientqualitycontrolor if thereare significantchanges in theirfinancialor businesscondition. If our third-partymanufacturersfailto deliverproducts,partsand componentsof sufficientqualityon timeand at reasonableprices,wecould have difficultiesfulfillingour orderson similartermsor at all,salesand profitscould decline,and our commercialreputationcould be damaged.See “Rawmaterialpricefluctuations,the abilityof key suppliersto meetqualityand deliveryrequirements,or catastrophiceventscan increasethe cost of our productsand services,impactour abilityto meetcommitmentsto customersand cause us to incursignificant liabilities.”If wefailto adequatelyassessthe creditworthinessand operationalreliabilityof existingor future suppliers,if thereis any unanticipateddeteriorationin theircreditworthinessand operationalreliability,or if our suppliersdo not performor adhereto our existingor futurecontractualarrangements,any resultingincreasein nonperformanceby them,our inabilityto otherwiseobtainthe suppliesor our inabilityto enforcethe termsof the contractor seek otherremediescould have a materialadverseeffecton our financialconditionand resultsof operations.
Work stoppages,other disruptions,or the need to relocateany of our facilitiescould significantlydisruptour business.
Our geographicfootprintemphasizeslocating,engineeringand manufacturingcapabilitiesin close physicalproximityto our customers,therebyenablingus to adopt technologiesand productsfor the specific vehicletypes sold in each geographicmarket.Because our facilitiesofferlocalizedservicesin thismanner,a work stoppageor otherdisruptionat one or moreof our R&D,engineeringor manufacturingand assembly facilitiesin a given regioncould have materialadverseeffectson our business,especiallyinsofaras it impacts our abilityto servecustomersin thatregion. For example, our manufacturing facility in Wuhan, China was shut down in 2020 due to the COVID-19 outbreak, causing us to delay certain shipments to our customers. Moreover,due to unforeseencircumstancesor factorsbeyond our control,wemay be forcedto relocateour operationsfromone or moreof our existingfacilitiesto newfacilities and may incursubstantialcosts,experienceprogramdelaysand sacrificeproximityto customersandThis international geographic marketsas a result,potentiallyfor an extendedperiodof time.
The automotiveindustryreliesheavilyon “just-in-time”deliveryof componentsduring the assemblyand manufactureof vehicles,and whenwefailto make timelydeliveriesin accordancewith our contractual obligations,wegenerallyhave to absorb our owncostsfor identifyingand solvingthe “rootcause”problemas well as expeditiouslyproducingreplacementcomponentsor products.We typicallymustalso carrythe costs associatedwith “catchingup,” such as overtimeand premiumfreight.Additionally,if weare the cause for a customerbeing forcedto haltproduction,the customermay seek to recoup allof itslossesand expensesfromus. These lossesand expensescould be significant,and may includeconsequentiallossessuch as lostprofits.
In addition, asignificantdisruptionin the supply of a key componentdue to a work stoppageor otherdisruptionat one of our suppliersor any othersuppliercould impactour abilityto make timelydeliveriesto our customersand, accordingly,have a materialadverseeffecton our financialresults.Wherea customerhaltsproductionbecause of anothersupplierfailingto deliveron time,or as a resultof a work stoppageor otherdisruption,it is unlikely wewill be fullycompensated,if at all.
We may not realizesalesrepresentedby awarded business or effectivelyutilizeour manufacturingcapacity.
When wewin a bid to offerproductsand servicesto an OEMcustomer,the customertypicallydoes not committo award us itsbusinessuntila separatecontracthas been negotiated,generallywith a termrangingfrom one year to the lifeof the model(usuallythreeto seven years).Once businesshas been awarded, the OEM customertypicallyretainsthe abilityto terminatethe arrangementwithout penaltyand does not committo purchasea minimumvolumeof productswhile the contractis in effect.
In lightof the foregoing,while weestimateawarded businessusing certainassumptions,includingprojected futuresalesvolumes,the volumeand timingof salesto our customersmay vary due to: variationin demand for our customers’products;our customers’attemptsto managetheirinventory;design changes;changes in our customers’manufacturingstrategy;the successof customers’goods and models;and acquisitionsof or consolidationsamong customers.Asignificantdecreasein demand for certainkey modelsor a group of related modelssold by any of our majorcustomers,or the abilityof a manufacturerto re-sourceand discontinue purchasingfromus itsrequirementsfor a particularmodelor group of models,could have a materialadverse effecton us. In particular,wemay be unable to forecastthe levelof customerorderswith sufficientcertaintyto allow us to optimizeproductionschedulesand maximizeutilizationof manufacturingcapacity.Anyexcess capacitywould cause us to incurincreasedfixedcostsin our productsrelativeto the net revenuewegenerate, which could have an adverseeffecton our resultsof operations,particularlyduring economicdownturns. Similarly,a significantfailureor inabilityto adapt to increasedproductionor desiredinventorylevels(including as a resultof acceleratedlaunch schedulesfor newautomobileand truckplatforms),complywith customer specificationsand manufacturingrequirementsmoregenerallyor respond to otherunexpectedfluctuations,as well as any delaysor otherproblemswith existingor newproducts(includingprogramlaunch difficulties)could resultin financialpenalties,increasedcosts,loss of sales,loss of customersor potentialbreachesof customer contracts,which could have an adverseeffecton our profitabilityand resultsof operations.
If actualproductionordersfromour customersare not consistentwith the projectionsweuse in calculating the amountof our awarded business,or if weare unable to improveutilizationlevelsfor manufacturinglinesthat consequentlyare underutilizedand correctlymanagecapacity,the increasedexpense levelswill have an adverse effecton our business,financialconditionand resultsof operations,and wecould realizesubstantiallyless revenueover the lifeof theseprojectsthan the currentlyprojectedestimate.
We may not be able to successfullynegotiatepricingtermswith our customers,whichmay adverselyaffectour resultsof operations.
We negotiatesalespricesannuallywith our automotivecustomers.Our customersupply agreements generallyrequirestep-downsin componentpricingover the periodof production.In addition,our customers oftenreservethe rightto terminatetheirsupply contractsat any time,which enhancestheirabilityto obtainprice reductions.OEMshave also exercisedsignificantinfluenceover theirsuppliers,includingus, becausethe automotivecomponentsupply industryis highly competitiveand servesa limitednumberof customers.Based on thesefactors,our statusas a Tier I supplier(one thatsuppliesvehiclecomponentsdirectlyto manufacturers)and the factthatour customers’productprogramstypicallylasta numberof yearsand are anticipatedto encompass largevolumes,our customersare able to negotiatefavorablepricing,and any cost-cuttinginitiativesthatour customersadopt generallywill resultin increaseddownwardpressureon our pricing.Anyresultingimpactsto our saleslevelsand margins,or the failureof our technologiesor productsto gain marketacceptancedue to more attractiveofferingsby our competitors,could over timesignificantlyreduceour revenuesand adverselyaffect our competitivestandingand prospects.In particular,largecommercialsettlementswith our customersmay adverselyaffectour resultsof operations.
We are subjectto the economic,political,regulatory,foreignexchange andother risksof international operations.
We have createda geographicfootprintthatemphasizeslocatingR&D,engineeringand manufacturing capabilitiesin closephysicalproximityto our customers.Our internationalgeographicfootprintsubjectsus to many risks,including:exchange controlregulations;wage and pricecontrols;antitrustand environmental regulations;employmentregulations;foreigninvestmentlaws; monetaryand fiscalpoliciesand protectionist measuresthatmay prohibitacquisitionsor jointventures,establishlocalcontentrequirements,or impacttrade volumes;import,exportand othertraderestrictions(such (such as embargoes);violationsby our employeesof anti-corruptionlaws;changes in regulationsregardingtransactionswith state-ownedenterprises;nationalizationof privateenterprises;naturaland man-madedisasters,hazardsand losses;global health risks and pandemics; backlashfromforeignlabororganizationsrelatedto our restructuringrepositioning actions;violence,civiland labor unrest;actsof terrorism;and our abilityto hireand maintainqualifiedstaffand maintainthe safetyof our employeesin theseregions.Additionally,certainof the marketsin which weoperatehave adopted increasingly strictdata privacyand data protectionrequirementsor may requirelocalstorageand processingof data or similar requirements.The European Commissionhas approved a data protectionregulation,knownrequirements, such as the GeneralData ProtectionRegulation(“GDPR”), thatcameinto forcein May 2018. The GDPRincludes operationalrequirementsfor companiesthatreceiveor processpersonaldata of residentsof the European UnionUnion. The GDPR and includes significantpenaltiesfor non-compliance.The GDPRand similardata protectionmeasuresmay increasethe cost and complexityof our ability to deliverour services.
Followingservices to ensure compliance.
Trade tensions have in the
U.K.’s withdrawal from the European Union on January 31, 2020, the U.K. entered into a transition period during which it continued its ongoingpast, and
complex negotiations with the European Union relating tomay in the future,
trading relationship between the U.K. and European Union. The transition period ended on December 31, 2020, before which the United Kingdom and the European Commission reached an agreement on the future trading relationship between the parties (the “UK-EU Trade and Cooperation Agreement” OR “TCA”). On December 30, 2020 the U.K. Parliament approved the European (Future Relationship) Bill, thereby ratifying the TCA. The TCA is subject to formal approval by the European Parliament and the Council of the European Union before it comes into effect and has been applied provisionally since January 1, 2021. Significant political and economic uncertainty remains about whether the terms of the relationship will differ materially from the terms before withdrawal. Our manufacturing operations in Cheadle and the businesses ofnegatively impact our
customers and suppliers could be negatively impacted if tariffs or other restrictions are imposed on the free flow of goods to and from the U.K. Trade tensions between the United States and China, and other countries have escalated in recent years. Any U.S. tariff impositions against Chinese exports have generally been followed by retaliatory Chinese tariffs on U.S. exports to China.business. We may not be able to mitigate the impacts of any future tariffs, and our business, results of operations and financial position would be materially adversely affected by such tariffs. Further changes in U.S. trade policies, tariffs, taxes, export restrictions or other trade barriers, or restrictions on raw materials or components may limit our ability to produce products, increase our manufacturing costs, decrease our profit margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase raw materials or components, which would have a material adverse effect on our business, results of operations and financial condition. These and other instabilities and uncertainties arising from the global geopolitical environment, along with the cost of compliance with increasingly complex and often conflicting regulations worldwide, can impair our flexibility in modifying product, marketing, pricing or other strategies for growing our businesses, as well as our ability to improve productivity and maintain acceptable operating margins.
As
Additionally, because the Company is a
resultU.S. holding company, one significant source of
our globalpresence,a significantportionits funds is distributions from its non-U.S. subsidiaries. Certain countries in which the Company operates have adopted or could institute currency exchange controls that limit or prohibit the Company’s local subsidiaries' ability to convert local currency into U.S. Dollars or to make payments outside the country. This could subject the Company to the risks of
our revenuesare denominatedin currenciesother than the U.S.dollarwhereas a significantamountof our paymentobligationsare denominatedin U.S. dollars,which exposes us to foreignexchange risk.local currency devaluation and business disruption. We monitor
and seek to reduce
such risk
through hedging activities; however, foreign
exchange hedging activities
bear a financial
cost and may not always be available
to us or be successful
in eliminating
such volatility.
Finally,
Additionally, wegeneratesignificantamountsof cash thatis investedwith financialand non-financialcertain counterparties.Whileweemploycomprehensivecontrolsregardingglobalcash managementto guard against cash or investmentloss and to ensureour abilityto fund our operationsand commitments,a materialdisruption to the counterpartieswith whom wetransactbusinesscould expose usto financial loss.
Geopolitical conditions, catastrophic events, and pandemics, may disrupt our business and adversely affect our results of operations and financial condition.
Geopolitical tensions, including but not limited to armed conflict, terrorist activity and instability or general economic disruption regionally or globally, have in the past impacted, and may in the future impact our results of operations and create or exacerbate certain risks we face to our business, financial condition and results of operations. For example, Russia’s invasion of Ukraine and the global response, including the imposition of financial and economic sanctions by the United States and other countries, has led to supply constraints that have impacted, and may continue to impact, our business. It has also led to energy shortages globally, especially in Europe. A further prolonged or intensified conflict could
result in acute shortages of raw materials and price inflation on transportation costs, materials, and energy which in turn may adversely impact our supply chain. If the conflict expands beyond Ukraine, it could negatively impact our operations in neighboring countries such as Romania and Slovakia. Furthermore, an escalation of geopolitical tensions due to the ongoing conflict, such as increased sanctions or restrictions on global trade, could result in further supply chain disruptions, reduced customer demand, state-sponsored cyberattacks as well as increased volatility in the financial markets, all of which could have a materially adverse impact on our business and operations.
Catastrophic events, such as a pandemic or cyberattack, could lead to disruption or failure of our systems or operations, harming our ability to conduct normal business operations. For example, the Covid-19 pandemic negatively impacted the global economy, disrupted supply chains and created significant volatility and disruption in financial markets, adversely impacting our business and operations including our employees, customers, suppliers, partners and communities. Prolonged negative impacts of such events on global supply chains, general macroeconomic conditions and consumer confidence, could have an adverse effect on our business, results of operations, cash flows and financial condition.
We have invested
substantial
resources
in specific
foreign
markets
where we
expect
growth and
we
may be unable to timely
alter
our strategies
should such expectations
not be realized.
We have identified
certain
countries,
such as China and India,
as key high-growth
geographic
markets.
We believe
these
markets
are likely
to experience
substantial
long-term
growth, and accordingly
have made and expect
to continue
to make substantial
investments
in numerous
manufacturing
operations
worldwide, technical
centers, R&D
activities
and other
infrastructure
to support
anticipated
growth in these
areas.
If market
demand for evolving
vehicle
technologies
in these
regions
does not grow as quickly
or materialize as we
anticipate,
or if we
are unable to deepen existing
and develop additional
customer
relationships
in these
regions,
we
may fail
to realize
expected rates
of return,
or even incur
losses,
on our
existinginvestmentsand may be unable to timelyredeploythe investedcapitalto take advantageof othermarketsor productcategories,potentiallyresultingin lostmarket shareto our competitors.In particular,our abilityto remaincompetitiveand continueto grow in theseregions depends in parton the absenceof competingstate-sponsoreddomesticbusinesses.If a state-sponsoredoperation entereda localmarketas a competitor,it mighthave accessto significantsocialand financialcapitalthatwould enableit to overcomethe ordinarybarriersto entryin the turbochargerindustryand acquirepotentially significantmarketshareat our expense. All of the foregoing could have adverse effect on our business, results of operations, cash flows and financial condition.
Increased scrutiny from customers, investors, regulators and others regarding sustainability/ESG practices, as well as the climate-related risks we may face, could expose us to liabilities, including reputational harm, affect demand for our products, lead to increased costs and have other adverse effects on our business, supply chain and results of operations.
Many customers, regulators, investors, employees, and other stakeholders are increasingly focused on sustainability practices, including ESG considerations, relating to businesses, particularly with regards to climate change and greenhouse gas emissions, human and civil rights, and diversity, equity and inclusion. Responding to these sustainability/ESG considerations and implementing related goals and initiatives involve risks and uncertainties, require investments and depend in part on third-party performance or data that is outside of our control. We cannot guarantee that we will achieve announced sustainability/ESG goals and initiatives or that our stakeholders will agree with them. Additionally, certain organizations have developed rating systems for evaluating companies on their approach to ESG and unfavorable ratings may lead to negative customer and/or investor sentiment. Any failure, or perceived failure, by the Company to achieve its goals, further its initiatives, adhere to its public statements, comply with federal, state or international environmental, social and governance laws and regulations, or meet evolving and varied stakeholder expectations and standards could result in legal and regulatory proceedings against the Company and materially adversely affect the Company’s business, reputation, results of operations and financial condition.
In particular, there is increased public awareness and concern regarding global climate change and climate related risks, which has resulted, and is expected to continue to result, in local, regional and global requirements, including requirements to reduce and/or mitigate the effects of greenhouse gas emissions, as well as requirements to make disclosures regarding greenhouse gas emissions, climate-related matters such as enterprise risks, climate-related targets and otherwise, such as those recently adopted in California and Europe, including the Carbon Boarder Adjustment Mechanism ("CBAM"), which includes future tariff and reporting requirements for embedded carbon content of certain imports. There continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. Any future regulations aimed at mitigating climate change may negatively impact the prices of raw materials and energy as well as the demand for certain of our customers' products which could in turn impact demand for our products and our results of operations. The costs of compliance and any changes to our operations mandated by new or amended regulations, or customer
requirements, may be significant. Furthermore, any violations of climate change regulations may result in substantial fines and penalties, remediation costs, damages, or other adverse impacts on our business.
Additionally, the physical manifestations of climate change, such as extreme weather conditions or more frequent extreme weather events have in the past and may in the future disrupt our operations, damage our facilities, disrupt our supply chain, including our customers or suppliers, impact the availability and cost of materials needed for manufacturing or increase insurance and other operating costs. As a result, severe weather or a natural disaster that results in a prolonged disruption to our operations, or the operations of our customers or suppliers, could have a material adverse effect on our operating results, cash flows or financial condition.
We face risks in connection with joint venture partnerships, joint development projects and other strategic opportunities.
We evaluate strategic opportunities, including acquisitions of businesses, products and technologies, joint venture partnerships and joint development agreements that we believe will complement our business. We may not be able to successfully identify suitable acquisition and joint venture candidates or complete transactions on acceptable terms, integrate acquired operations into our existing operations or expand into new markets. Our failure to identify suitable strategic opportunities may restrict our ability to grow our business. Furthermore, our joint venture, joint development and other business partners may at any time have economic, business or legal interests or goals that are inconsistent with ours, which could negatively impact our reputation and/or financial condition.
We could be adversely
affected
by our leading market
position
in certain
markets.
We believe
that
we
are a market
leader
in the turbocharger
industry
in many of the markets
in which we operate.
Although we
believe
we
have acted
properly
in the markets
in which we
have significant
market
share, we
could face
allegations
of abuse of our market
position
or of collusion
with other
market
participants,
which could result
in negative
publicity
and adverse
regulatory
action
by the relevant
authorities,
including
the imposition
of monetary
fines,
all
of which could adversely affect our financial condition and results of operations.
A deterioration
Failure to protect our intellectual property or allegations that we have infringed on the intellectual property of others could adversely affect our business, financial condition and results of operations.
We rely on a combination of patents, copyrights, trademarks, tradenames, trade secrets and other proprietary rights, as well as contractual arrangements, including licenses, to establish, maintain and protect our intellectual property rights. Effective intellectual property protection may not be available, or we may not be able to acquire or maintain appropriate registered or unregistered intellectual property, in
every country in which we do business. Furthermore, in some areas of our business the established industry
economic or financial conditionsmaturity of product technology may
restrictleave limited opportunity for new intellectual property to differentiate our products. Accordingly, our intellectual property may not be sufficient on its own to provide us a strong product differentiation and competitive advantage, which in turn could weaken our ability to
access the capital markets on favorable terms.We may requireadditionalcapitalin the futureto financeour growth and development,upgrade and improveour manufacturingcapabilities,implementfurthermarketingand salesactivities,fund ongoing R&D activities,satisfyregulatoryand environmentalcomplianceobligations,satisfyindemnity obligationsto Honeywell, and meetgeneralworking capitalneeds. Our capitalrequirementswill depend on many factors,includingacceptanceof and demand for our products,the extentto which weinvestin new technologyand R&Dprojectsand the statusand timingof thesedevelopments.If our accessto capitalwere to becomeconstrainedsignificantly,or if costsof capitalincreasedsignificantly,due to lowered creditratings, prevailingindustryconditions, the solvency ofsecure business awards from our customers a material decline in demand for our products,the volatilityof the capitalmarketsand/or otherfactors,our financialcondition, resultsof operationsand cash flows could be adverselyaffected. These conditions may adversely affect our ability to obtainachieve targeted credit ratings.
product profitability.
The protection of our intellectual property may require us to spend significant amounts of money. Further, the steps we take to protect our intellectual property may not adequately protect our rights or prevent others from infringing, violating or misappropriating our intellectual proprietary rights. Any impairment of our intellectual property rights, including due to changes in U.S. or foreign intellectual property laws or the absence of effective legal protections or enforcement measures, could adversely impact our businesses, financial condition and results of operations.
International technical export control regulations and trade conflicts may limit our ability to use certain intellectual property in our products in some regions of the world or customers may require assured access to intellectual property through open source-code, joint ownership of intellectual property, free license, or other measures. These constraints could cause us difficulty in securing business awards from our customers, protecting our competitive technology differentiation, and/or our ability to achieve targeted product profitability.
In addition, as we adopt new technology, we face an inherent risk of exposure to the claims of others that we have allegedly violated their intellectual property rights. Successful claims that we infringe on the intellectual property rights of others could require us to enter into royalty or licensing agreements on unfavorable terms or cause us to incur substantial monetary liability. We may also be prohibited preliminarily or permanently from further use of the intellectual property in question or be required to change our business practices to stop the infringing use, which could limit our ability to compete effectively. In addition, our customer agreements may require us to indemnify the customer for infringement. The time and expense of defending against these claims, whether meritorious or not, may have a material and adverse impact on our profitability, can be time-consuming and costly and may divert management’s attention and resources away from our
businesses. Furthermore, the publicity we may receive as a result of infringing intellectual property rights may damage our reputation and adversely impact our existing customer relationships and our ability to develop new business.
Work stoppages, other disruptions, or the need additionalcapitalresourcesto relocate any of our facilities could significantly disrupt our business.
Our geographic footprint emphasizes locating, engineering and manufacturing capabilities in close physical proximity to our customers, thereby enabling us to adopt technologies and products for the specific vehicle types sold in each geographic market. Because our facilities offer localized services in this manner, a work stoppage or other disruption at one or more of our R&D, engineering or manufacturing and assembly facilities in a given region could have material adverse effects on our business, especially insofar as it impacts our ability to serve customers. Moreover, due to unforeseen circumstances or factors beyond our control, we may be forced to relocate our operations from one or more of our existing facilities to new facilities and may incur substantial costs, experience program delays and sacrifice proximity to customers and geographic markets as a result, potentially for an extended period of time.
The automotive industry relies heavily on “just-in-time” delivery of components during the assembly and manufacture of vehicles, and when we fail to make timely deliveries in accordance with our contractual obligations, we generally have to absorb our own costs for identifying and solving the “root cause” of the problem as well as expeditiously producing replacement components or products. We typically must also carry the costs associated with “catching up,” such as overtime and premium freight. Additionally, if we are the cause for a customer being forced to halt production, the customer may seek to recoup all of its losses and expenses from us. These losses and expenses could be significant and may include consequential losses such as lost profits.
In addition, a significant disruption in the
future in ordersupply of a key component due tomeetourprojectedoperatingneeds,capitalexpendituresand a work stoppage or othercashrequirements,andifweareunableto obtainsufficientresourcesforouroperatingneeds,capitalexpendituresandothercashrequirementsforanyreason, ourbusiness,financialconditionandresultsofoperationscouldbeadverselyaffected.Raw material price fluctuations, the ability of key suppliers to meet quality and delivery requirements, or catastrophic events can increase the cost disruption at one of our products and services,suppliers could impact our ability to meet commitmentsmake timely deliveries to our customers and, cause usaccordingly, have a material adverse effect on our financial results. Where a customer halts production because of one of its other suppliers failing to incur significant liabilities.
The costdeliver on time, or as a result of a work stoppage or other disruption, it is unlikely we will be fully compensated, if at all.
We depend on the recruitment and availabilityretention of raw materials(including,but not limitedqualified personnel, and our failure to grey iron, aluminum,stainlesssteelattract and a nickel,ironretain such personnel could adversely affect our business, financial condition and chromium-basedalloy)is a key elementinresults of operations.
Due to the
costcomplex nature of our
products.Our inabilityto offset materialpriceinflationthrough increasedpricesto customers,formulaor long-termfixedpricecontractswith suppliers,productivityactionsor through commodityhedges could adverselyaffectbusiness, our
resultsfuture performance is highly dependent upon the continued services of
operations.We obtaincomponentsour key engineering personnel, scientists and otherproductsexecutive officers, the development of additional management personnel and servicesfromnumeroussuppliersthe hiring of new qualified engineering, manufacturing, marketing, sales and othervendors throughoutthe world. Many majorcomponentsand productequipmentitemsare procuredor subcontractedon a single-or sole-sourcebasis.Although webelievethatsourcesof supplymanagement personnel for raw materialsand componentsare generallyadequate,it is difficultto predictwhat effectsshortagesor priceincreasesmay have in the future. Short-or long-termcapacityconstraintsor financialdistressat any pointour operations. Competition for qualified personnel in our supply chainindustry is intense, and we may not be successful in attracting or retaining qualified personnel. The loss of key employees, our inability to attract new qualified employees or adequately train employees, or the delay in hiring key personnel, could disruptnegatively affect our operationsbusiness, financial condition and adverselyaffectour financialperformance,particularlywhenthe affectedsuppliersresults of operations. If executives, managers or other key personnel resign, retire or are terminated or their service is otherwise interrupted, we may not be able to replace them in a timely manner and vendors are the sole sourcesof productsthatwe requireor thathave unique capabilities,or whenour customers have directedus to use those specificsuppliersand vendors. Our abilityto manageinventoryand meetdelivery requirementsmay be constrainedby our suppliers’inabilityto scaleproductionand adjustdeliveryof long-lead timeproductsduring timesof volatiledemand. Our inabilityto fillour supply needs would jeopardizeour ability to fulfillobligationsunder commercialcontracts,and could resultexperience significant declines in reducedproductivity.
salesand profits,contractpenalties or terminations,and damageto customerrelationships.
Failure to increase productivity through sustainableefficient operational improvements, as well as an inability to successfully execute repositioning projects or to effectively manage our workforce, may reduce our profitability or adversely impact our business.
Our profitability and margin growth are dependent upon our ability to drive
sustainableefficiency improvements. In addition, we seek productivity and cost savings benefits through repositioning actions and projects, such as consolidation of manufacturing facilities, transitions to cost-competitive regions, workforce reductions, asset impairments, product line rationalizations and other cost-saving initiatives. Risks associated with these actions include delays in execution of the planned initiatives, additional unexpected costs, realization of fewer than estimated productivity improvements and adverse effects on employee morale. We may not realize the full operational or financial benefits we expect, the recognition of these benefits may be delayed and these actions may potentially disrupt our operations. In addition, organizational changes, attrition, labor relations difficulties, or workforce stoppage could
impact our efforts to improve operational efficiencies, which could have a material adverse effect on our business, reputation, financial position and results of operations.
Our
operations
We may incur material losses andthe prior operations costs as a result of predecessorcompaniesexposewarranty claims, product recalls or field actions, as well as product liability actions that may be brought against us toor our customers.
We face the risk of
material environmentalliabilities.We are subjectwarranty and product liability claims, as well as product recalls and field actions, if our products actually or allegedly fail to potentiallymaterialliabilitiesrelatedperform to specifications or cause property damage, injury or death. There can be no assurance that we will have adequate reserves to cover such recall, repair and replacement costs. In the investigationand cleanupof environmental hazardsand to claimsof personalinjuriesor propertydamagesevent thatmay arisefromhazardoussubstancereleases and exposures.We are also subjectto potentiallymaterialliabilitiesrelatedto the compliance any of our operations with the requirementsof variousfederal,state,localproducts
fails to perform as expected, we may face direct exposure to warranty and
foreigngovernmentsthatregulatethe dischargeof materialsinto the environmentand the generation,handling,storage,treatmentand disposalof and exposureto hazardoussubstances.If weare found to be in violationof theselaws and regulations,wemay be subjectto substantialfinesand criminalsanctions and be requiredto installcostlyequipmentor make operationalchanges to achievecompliancewith such laws and regulations.In addition,changes in laws, regulationsor government enforcementof policiesconcerningthe environment,the discoveryof previouslyunknowncontaminationor new informationrelatedto individualcontaminatedsites,the establishmentof stricterstateor federaltoxicity standardswith respectto certaincontaminants,or the impositionof newclean-uprequirementsor remedial techniques,could requireus to incuradditionalcurrentlyunanticipatedcostsin the futurethatwould have a negativeeffecton our financialconditionor resultsof operations.We cannot predictwith certaintythe outcomeof litigationmatters,governmentproceedingsandother contingenciesanduncertainties.
We areproduct liability claims or may be required to participate in government or self-imposed recall involving such products. Depending on the terms under which we supply products to an auto manufacturer, we may be required to guarantee or offer warranties for our products and to bear the costs of recalls, repair or replacement of such products pursuant to new vehicle warranties. Additionally, if our auto manufacturer customers face claims or recalls of their own, they may seek contribution from us. Our agreements with our customers do not always include limitation of liability clauses or, in certain situations or legal jurisdictions, such limitation of liability clauses may not fully protect us from all losses. If any such claims or contribution requests exceed our available insurance, or if there is a product recall, there could be a material adverse impact on our results of operations. In addition, a recall claim could require us to review our entire product portfolio to assess whether similar issues are present in other product lines, which could result in significant disruption to our business and could have a further adverse impact on our results of operations. We cannot assure that we will not experience any material warranty or product liability claim losses in the future or that we will not incur significant costs to defend such claims.
We cannot predict with certainty the outcome of litigation matters, government proceedings and other contingencies and uncertainties.
We are currently, and we may in the future, be party to a number
of lawsuits,
investigations
and disputes
(some of which involvesubstantialamountsclaimed)arising
out of our current
and historical
business,
including matters
relating
to
our Honeywell Indemnity Agreement, commercial
transactions,
product
liability,
(includinglegacyasbestosclaimsinvolvingthe frictionmaterialslegacybusiness),prior
acquisitions
and divestitures,
employment,
employee
benefits
plans, intellectual
property,
antitrust,
import
and export,
and environmental,
health
and safety
matters, as well as securities litigation, tax proceedings and litigation related to our debt.
For additional information regarding our pending legal proceedings, see Part I, Item 3, “Legal Proceedings”.
We cannot predict with certainty the outcome of legal proceedings or contingencies. The costs incurred in litigation can be substantial and result in the diversion of management’s attention and resources. We have also made, and in the future may also make, certain commitments, including representations, warranties and indemnities relating to current and past operations, including those related to divested businesses, and issue guarantees of third-party obligations. Our potential liabilitiesare subjectto change over timedue to newdevelopments in legal proceedings or changes in settlementstrategy,or the impact of evidentiaryrequirements,and wemay becomesubjectto or be requiredto pay damageawards or settlements thatcould have a materialadverseeffecton our resultsof operations,cash flows and financialcondition.If we were requiredto make payments,such payments, these payments could be significantand could exceed the amountswehave accruedwith respectthereto,adverselyaffectingour business,financialconditionand resultsof operations. Whilewemaintaininsurancefor certainrisks,the amountof our insurancecoveragemay not be adequateto cover the totalamountof allinsuredclaimsand liabilities.The incurrenceoccurrence of significantliabilitiesfor which there is no or insufficientinsurancecoveragecould adverselyaffectour resultsof operations,cash flows, liquidityand financialcondition.
We depend onOur operations and the recruitmentandretentionprior operations of qualifiedpersonnel, andour failureto attractandretainsuch personnel could adverselyaffectour business, financialconditionandresultsof operations.
Duepredecessor companies may expose us to the complexnaturerisk of environmental liabilities.
We are subject to extensive environmental regulations and our operations may expose us to risks of environmental liabilities. We cannot assure that we will not incur additional liabilities related to the investigation and cleanup of environmental hazards and to claims of personal injuries or property damages that may arise from hazardous substance releases and exposures, including those relating to activities of our
business,our futureperformanceis highly dependentuponpredecessor company. We are also subject to potential liabilities related to the
continued servicescompliance of our
key engineeringpersonnel,scientistsoperations with the requirements of various federal, state, local and
executiveofficers,foreign governments that regulate the
developmentdischarge of
additionalmanagementpersonnelmaterials into the environment and the
hiringgeneration, handling, storage, treatment and disposal of and exposure to hazardous substances. If we are found to be in violation of these laws and regulations, we may be subject to substantial fines and criminal sanctions and be required to install costly equipment or make operational changes to achieve compliance with such laws and regulations. In addition, changes in laws, regulations or government enforcement of policies concerning the environment, the discovery of previously unknown contamination or new information related to individual contaminated sites, the establishment of stricter state or federal toxicity standards with respect to certain contaminants, or the imposition of new
qualifiedengineering,manufacturing,marketing,salesand managementpersonnelforclean-up requirements or remedial techniques, could require us to incur additional currently unanticipated costs in the future that would have a negative effect on our
operations. Competitionfor qualifiedpersonnelin our industryis intense,and wemay not be successfulin attractingor retainingqualifiedpersonnel.The loss of key employees,our inabilityto attractnewqualifiedemployeesor adequatelytrainemployees,or the delay in hiringkey personnel,could negativelyaffectour business,financial condition
and or results
of operations.
Our
U.S.
and
non-U.S.
tax liabilities
are dependent, in part, upon
the distribution
of income
among various jurisdictions
in which
we
operate.
Our futureresultsof operationscould be adverselyaffectedby changes in the effectivetax rateas a resultof a change in the mix of earningsin countrieswith differingstatutorytax rates,changes in tax laws, regulations and judicialrulings(or (or changes in the interpretationthereof),changes in generallyacceptedaccounting principles,changes in the valuationof deferredtax assetsand liabilities,the resultsof auditsand examinationsof previouslyfiledtax returnsand continuing
assessmentsof our tax exposuresand variousothergovernmentalenforcementinitiatives.Our tax expense includesestimatesof tax reservesand reflectsotherestimatesand assumptions,includingassessmentsof our futureearningswhich could impactthe valuationof our deferredtax assets.Changes in tax laws or regulationsincludingmulti-jurisdictionalchanges enacted will increase tax uncertainty and may adversely impact our provision for income taxes.
Changes in
responsetax laws are likely to arise due to the
guidelinesprovidedbase erosion and profit shifting project that was completed by the Organization
for Economic
Co-operation Cooperation and Development
(“OECD”). The OECD Pillar 2 initiative recommends a 15% global minimum tax with respect to
addressbase erosionand profitshifting,will increasetax uncertaintyearnings in each country. Pillar 2 has been adopted by the EU for implementation by its Member States into national legislation by the end of 2023 and may
adverselyimpactour provisionfor incometaxes.Because wehave officersanddirectorswholiveoutsideofbe adopted by other jurisdictions, including the United States,you may have noeffective recourseagainst them for misconductandmay not be able to receivecompensationfor damages to the value of your investmentcaused by wrongful actionsby our directorsandofficers.
We have officersand directorswholiveoutsideof the United States.Asa result,it may be difficultfor investorsto enforcewithin the U.S.any judgmentsobtainedagainstthose officersand directors or obtain judgmentsagainstthemoutsideof the U.S.thatare based on the civilliabilityprovisionsof the federalor state securitieslaws of the U.S.Investorsmay not be able to receivecompensationfor damagesto the value of their investmentcaused by wrongful actionsby our directorsand officers.
Ouremergingopportunitiesin technology,products andservicesdepend in part onintellectualpropertyand technologylicensedfromthird parties.
Anumberof our emergingopportunitiesin technology,productsand servicesrelyon key technologies developedor licensedfromthirdparties.Whilethe majority of our currentproductofferingsare not coveredby third-party licenses, many of our emergingtechnologyofferingsthatweare developing use softwarecomponentsor otherintellectualpropertylicensedfromthirdparties,includingboth through proprietaryand open sourcelicenses. Should such emergingproductsbecomea significantpartof our productofferings,our relianceon third-party licensesmay presentvariousrisksto our business. These third-partysoftwarecomponentsmay becomeobsolete, defectiveor incompatiblewith futureversionsof our emergingtechnologyofferings, our relationshipwith Under thesethirdpartiesmay deteriorate,or our agreementswith thesethirdpartiesmay expireor be terminated.We may facelegalor businessdisputeswith licensorsthatmay threatenor lead to the disruptionof inbound licensing relationships.In orderto remainin compliancewith the termsof our licenses,wemustcarefullymonitorand manageour use of third-partycomponents,includingboth proprietaryand open sourcelicensetermsthatmay requirethe licensingor publicdisclosureof our intellectualpropertywithout compensationor on undesirable terms.Additionally,some of theselicensesmay not be availablefor use in the futureon termsthatmay be acceptableor thatallow our emergingproductofferingsto remaincompetitive.Our inabilityto obtainlicensesor rightson favorabletermscould have a materialeffecton our emergingtechnologyofferings. Moreover,it ispossiblethatas a consequenceof a futuremergeror acquisition rules, we may be involvedrequired to pay a “top-up” tax to the extent that our effective tax rate is below 15% in any jurisdiction. To the extent these rules are enacted in countries that we operate in, it is possible that the we could experience uncertainty and adverse impacts on our effective tax rate.
A deterioration in industry, economic or financial conditions may restrict our ability to access the capital markets on favorable terms.
We will require additional capital in the future to finance our growth and development, upgrade and improve our manufacturing capabilities, implement further marketing and sales activities, fund ongoing R&D activities, satisfy regulatory and environmental compliance obligations, and meet general working capital needs. Our capital requirements will depend on many factors, including acceptance of and demand for our products, the extent to which we invest in new technology and R&D projects and the status and timing of these developments. If our cash flows were to become insufficient to cover our capital requirements and our access to capital were to become constrained significantly, or if costs of capital increased significantly, due to lowered credit ratings, prevailing industry conditions, thirdpartiesmay obtain licensesto somethe solvency of our
intellectualpropertyrightsorcustomers, a material decline in demand for our
businessmay be subjectto certainrestrictionsthatwere not in placepriorto such transaction.Because the availabilityand cost fromthirdpartiesdepends upon the willingnessof thirdpartiesto deal with us on the termswerequest,thereis a riskthatthirdpartieswholicense our competitorswill eitherrefuseto licenseus at all,or refuseto licenseus on termsequallyfavorableto those grantedto our competitors.Consequently,wemay lose a competitiveadvantagewith respectto theseintellectual propertyrightsor wemay be requiredto enterinto costlyarrangementsin orderto obtaintheserights.
Risks Relating to the Spin-Offproducts, and our Separation from Honeywell
If the Spin-Off were determinednot to qualifyas tax-freefor U.S.federalincometax purposes, wecould have anindemnificationobligationto Honeywell,whichcould adverselyaffectour business, financialcondition andresultsof operations.
If, as a resultof any of our representationsbeing untrueor our covenantsbeing breached,the Spin-Offwere determinednot to qualifyfor non-recognitionof gain or loss under Section355 and relatedprovisionsvolatility of the Code,wecapital markets or other factors, our financial condition, results of operations and cash flows could be requiredadversely affected. to indemnifyHoneywell for the resultingtaxesand relatedexpenses.Further, if any pre-spin restructuring activities that were initiated by Honeywell were determined to be taxable and benefit the Company, we could be required to indemnify Honeywell. Those amounts could be material.Anysuch indemnificationobligationcould adverselyaffectour business,financialcondition and resultsof operations.
In addition,if weor our stockholderswere to engage in transactionsthatresultedin a 50% or greaterchange by vote or value in the ownership of our stock during the four-yearperiodbeginningon the date thatbegins two yearsbeforethe date of the Distribution,the Spin-Offwould generallybe taxableto Honeywell, but not to stockholders,under Section355(e),unlessit were establishedthatsuch transactionsand the Spin-Offwere not partof a plan or seriesof relatedtransactions.If the Spin-Offwere taxableto Honeywell due to such a 50% or greaterchange in ownership of our stock, Honeywell would recognizegain equal to the excessof the fairmarket value on the DistributionDate of our commonstock distributedto Honeywell stockholdersover Honeywell’stax basisin our commonstock, and wegenerallywould be requiredto indemnifyHoneywell for the tax on such gain and relatedexpenses.Those amountswould be material.Anysuch indemnificationobligationcould adversely affectour business,financialconditionand resultsof operations.
Under the terms of the PSA and the Transaction, the Plan, if confirmed by the Bankruptcy Court, will include 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 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 and (y) the Series B Preferred Stock. The terms of the PSA, the Transaction and the Plan remain subject to approval by the Bankruptcy Court. There can be no assurances that we will obtain the approval of the Bankruptcy Court and consummate the Transaction.
For more information on the risks related to the approval of the Plan, see “WeThese conditions may not be able to complete any Bankruptcy Court-approved reorganization of our Company or sales of our Company or assets through the chapter 11 process, or we may not be able to realize adequate consideration for such reorganization or sales, which would adversely affect our ability to maintain or obtain targeted credit ratings, or negatively impact our credit ratings, each of which could reduce our ability to access new capital and increase our cost of capital, which would negatively impact our financial condition”condition and results of operations..
Our indebtedness could adversely affect
We may also need additional capital resources in the future in order to meet our projected operating needs, capital expenditures and other cash requirements. If we are unable to obtain sufficient resources for our operating needs, capital expenditures and other cash requirements for any reason, our business, financial condition and results of operations.In connectionoperations could be adversely affected.with
Changes in interest rates could adversely affect our earnings and/or cash flows.
Because a significant number of our loans are made at variable interest rates, our business results are subject to fluctuations in interest rates. If interest rates increase, our borrowing costs may also increase and could adversely impact our financial condition, operating results and cash flows. There can be no assurance that we will be able to mitigate any potential material adverse impacts on our earnings and cash flows caused by fluctuations in interest rates.
Changes in market interest rates may influence our financing costs, returns on financial investments and the Spin-Off,weincurredsubstantialindebtednessvaluation of derivative contracts and could reduce our earnings and cash flows.
Changes in an aggregateprincipal amountinterest rates and asset returns could increase our pension funding obligations and reduce our profitability.
We have unfunded obligations under certain of
approximately$1,660 million,of which $1,628 millionof the net proceedswere transferredto Honeywell substantiallyconcurrentlywith the consummationof the Spin-Off. In connection with the Chapter 11 Cases, we incurred an additional indebtedness in an aggregate principal amount of $200 million.We historically relied upon Honeywell to fund our working capital requirementsdefined benefit pension and other cash requirements. postretirement benefit plans. The valuation of our future payment obligations under the plans and the related plan assets are subject to significant adverse changes if the credit and capital markets cause interest rates and projected rates of return to decline. Such declines could also require us to make significant additional contributions to our pension plans in the future. A material increase in the unfunded obligations of these plans could also result in a significant increase in our pension expense in the future.
We are
now responsible for servicing our own debtexposed to foreign currency risks and
obtaining and maintaining sufficient working capital and other funds to satisfy our cash requirements. Due to our separation from Honeywell and the commencement of the Chapter 11 Cases our access to and cost of debt financing will be different from our historical access to and cost of debt financing. Differences in access to and cost of debt financing may result in differences in the interest rate charged to us on financings, as well as the amount of indebtedness, types of financing structures and debt markets that may be available to us.Our abilityto make paymentson and to refinanceour indebtedness,includingthe debt incurredin connectionwith the Spin-Off and the Chapter 11 Cases,as well as any futuredebt thatwemay incur,will depend on our abilityto generate cash in the futurefromoperations,financingsor assetsales.Our abilityto generatecash is subjectto general economic,financial,competitive,legislative,regulatoryand otherfactorsthatare beyond our control.
Thetermsof our indebtednessrestrictour current andfuture operations,particularlyour abilityto incur debt that wemay need to fund initiativesin response to changes in our business, the industriesin whichweoperate,the economy and governmentalregulations.
The terms ofour Prepetition Credit Agreement and DIP Credit Agreement includea numberof restrictivecovenantsthatimposesignificantoperatingand financialrestrictionson us and our subsidiariesand limitour abilityto engage in actionsthatmay be in our long-termbest interests.These may restrictour and our subsidiaries’abilityto take some or allof the followingactions:
| •
| incur or guarantee additional indebtedness or sell disqualified or preferred stock;
|
| •
| pay dividends on, make distributions in respect of, repurchase or redeem capital stock;
|
| •
| make investments or acquisitions;
|
| •
| sell, transfer or otherwise dispose of certain assets;
|
| •
| enter into sale/leaseback transactions;
|
| •
| enter into agreements restricting the ability to pay dividends or make other intercompany transfers;
|
| •
| consolidate, merge, sell or otherwise dispose of all or substantially all of our or our subsidiaries’ assets;
|
| •
| enter into transactions with affiliates;
|
| •
| prepay, repurchase or redeem certain kinds of indebtedness;
|
| •
| issue or sell stock of our subsidiaries; and/or
|
| •
| significantly change the nature of our business.
|
Moreover,foreign exchange exposure as a result of allour global presence.
A significant portion of our revenues and expenses are denominated in currencies other than the U.S. dollar. As a result, we are subject to foreign currency risks and foreign exchange exposure arising from our business operations including, but not limited to, international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade. Our results of operations and financial condition have in the past been negatively impacted, and may in the future be negatively impacted, by rapidly fluctuating foreign exchange rates. While we have historically hedged foreign currency exposures with natural offsets to the fullest
extent possible and, once those opportunities have been exhausted, through foreign currency exchange forward contracts, we cannot predict foreign currency volatility or the extent of its impact on our future financial results.
Our emerging opportunities in technology, products and services depend in part on intellectual property and technology licensed from third parties.
A number of our emerging opportunities in technology, products and services rely on key technologies developed or licensed from third parties. While the majority of our current product offerings are not covered by third-party licenses, many of our emerging technology offerings that we are developing use software components or other intellectual property licensed from third parties, including both through proprietary and open source licenses. Should such emerging products become a significant part of our product offerings, our reliance on third-party licenses may present various risks to our business, including the risk that our ability to access these third-party software components could be interrupted due to factors beyond our control, or could become obsolete, defective or incompatible with future versions of our emerging technology offerings.
We may be unable to reach or renew agreements with respect to our permitted use of these restrictions,technologies, on terms acceptable to us or at all, our relationships with these third parties may deteriorate, or our agreements with these third parties may expire or be terminated. We may face legal or business disputes with licensors that may threaten or lead to the disruption of inbound licensing relationships. Additionally, third parties who license to our competitors could refuse to license to us on equally favorable terms or at all. Our inability to obtain licenses or rights on favorable terms could have a material effect on our emerging technology offerings and our competitiveness, which would adversely impact our financial condition and results of operations.
Additionally, we may need to incur significant costs in order to remain in compliance with the terms of our licenses, including to carefully monitor and manage our use of third-party components. Proprietary and open source license terms may also require us to license or publicly disclose our intellectual property without compensation or on undesirable terms.
These risks could be heightened in the case of a future merger or acquisition we may be
limited in how we conduct our business and pursue our strategy, unable to raise additional debt financing to operate during general economic or business downturns, or unable to compete effectively or to take advantage of new business opportunities. Furthermore,the lendersof thisindebtednesshave requiredthatwepledge our assetsas security for our repaymentobligationsand thatweabide by certainfinancialor operationalcovenants.Our abilityto complywith such covenantsand restrictions has been and may continue to be affectedby eventsbeyond our control,includingprevailing economic, political, social,financialand industryconditions, such as the COVID-19 pandemic.The commencement of the Chapter 11 Cases constituted an event of default that accelerated our obligations and terminated undrawn commitments, as applicable, under the Prepetition Credit Agreement. The Prepetition Credit Agreement provides thatinvolved in. Additionally, as a result of the commencementany such transaction, third parties may obtain licenses to some of the Chapter 11 Cases, the principal, interest and all other amounts due thereunder shallour intellectual property rights or our business may 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 provisionscertain restrictions that were not in place prior to such transaction.
Failure to maintain an effective system of
the Bankruptcy Code.Under the DIP Credit Agreement, a breachinternal control over financial reporting could adversely impact our business, financial condition and results of any of thecovenants listed above,if applicable,operations.
Failure to maintain adequate, effective internal controls could result
in
an eventpotential financial misstatements and/or other forms of
default.If an event of defaultoccurred,the lenders under our DIP Credit Agreement would have the rightto accelerate the repaymentof such debt. We mightnot have, or be able to obtain,sufficient funds to make theseaccelerated payments,and lenderscould then proceedagainstany collateral. Anysubsequentreplacement of the agreements governingsuch indebtedness, or any newindebtednessnoncompliance that could have
similar or greaterrestrictions.The occurrenceand ramificationsa material adverse impact on our results of
an event of defaultcould adverselyaffectour business,operations, financial condition
and
resultsof operations.
organizational reputation. We may have potentialbusiness conflictsof interestwith Honeywellwith respectto our past andongoing relationships.
Conflictsof interestmay arisebetween Honeywell and us in a numberof areasrelatingto our past and ongoing relationships,including:
| •
| labor, tax, employee benefit, indemnification and other matters arising from our separation from Honeywell;
|
| •
| intellectual property matters;
|
| •
| employee recruiting and retention; and
|
| •
| business combinations involving our company(including, without limitation, the Transaction).
|
The Chapter 11 Cases may exacerbate any potential conflicts and make resolution of any potential conflicts more difficult to achieve outside of the Bankruptcy Court. We may not be able to resolveany potentialconflicts,and, even if wedo so, the resolutionmay be less favorableto us than if wewere dealingwith a party with whom we were not previously affiliated.
Certainof our directorsandemployeesmay have actual or potentialconflictsof interestbecause of theirfinancialinterestsin Honeywell.
Because of theirformerpositionswith Honeywell, certainof our executiveofficersand directorsownequityinterestsin Honeywell. Continuing ownership of Honeywell sharescould create,or appearto create,potentialconflictsof interestif weand Honeywell facedecisionsthatcould have implicationsfor both usand Honeywell.
Theallocationof intellectualpropertyrightsbetween Honeywellandusas part of the Spin-Off, andour shared use of certainintellectualpropertyrights, could adverselyimpactour reputation,our abilityto enforcecertainintellectualpropertyrightsthat are importantto us andour competitiveposition.
In connectionwith the Spin-Off,weenteredinto agreementswith Honeywell governingthe allocation of intellectualpropertyrightsrelatedto our business.These agreements could adverselyaffectour positionand optionsrelatingto intellectualpropertyenforcement,licensing negotiationsand monetization.We also may not have sufficientrightsto grantsublicensesof intellectual propertyused in our business.These circumstancescould adverselyaffectour abilityto protectour competitive positionin the industry.
Risks Relating to our Common Stock
An active tradingmarketfor our common stock may not be available, and our stock pricemay fluctuatesignificantly.
The marketpriceof our commonstock may fluctuatewidely, depending on many factors,some of which may be beyond our control,including:
| •
| the Chapter 11 Cases, including the approval by the Bankruptcy Court of entry into the PSA and the ECBA, the terms of the Transaction and confirmation of the Plan;
|
| •
| actual or anticipated fluctuations in our results of operations due to factors related to our business;
|
| •
| success or failure of our business strategies;
|
| •
| competition and industry capacity;
|
| •
| changes in interest rates and other factors that affect earnings and cash flow;
|
| •
| our level of indebtedness, our ability to make payments on or service our indebtedness and our ability to obtain financing as needed;
|
| •
| our ability to retain and recruit qualified personnel;
|
| •
| our quarterly or annual earnings, or those of other companies in our industry;
|
| •
| announcements by us or our competitors of significant acquisitions or dispositions;
|
| •
| changes in accounting standards, policies, guidance, interpretations or principles;
|
| •
| the failure of securities analysts to cover, or positively cover, our common stock after the Spin-Off;
|
| •
| changes in earnings estimates by securities analysts or our ability to meet those estimates;
|
| •
| the operating and stock price performance of other comparable companies;
|
| •
| investor perception of our company and our industry;
|
| •
| overall market fluctuations unrelated to our operating performance;
|
| •
| results from any material litigation or government investigation;
|
| •
| changes in laws and regulations (including tax laws and regulations) affecting our business;
|
| •
| changes in capital gains taxes and taxes on dividends affecting stockholders; and
|
| •
| general economic conditions and other external factors.
|
Lowtradingvolumefor our stock, which may occur if an activetradingmarketis not available, among otherreasons,would amplifythe effectof the above factorson our stock pricevolatility. The delisting of our common stock from New York Stock Exchange has limited and could continue to limit the liquidity of our common stock, increase the volatility in the price of our common stock, and hinder our ability to raise capital.
Should the marketpriceof our stockdrop significantly,stockholdersmay institutesecuritiesclassaction lawsuitsagainstus.Alawsuitagainstus could cause us to incursubstantialcostsand could divertthe time and attentionof our managementand otherresources.
Certain provisionsin our Amended andRestatedCertificateof IncorporationandAmended andRestatedBy-LawsandDelaware law may discouragetakeovers.
Severalprovisionsof our Amended and RestatedCertificateof Incorporation,Amended and RestatedBy-Lawsand Delaware law may discourage,delay or preventa mergeror acquisition.These include,among others, provisionsthat:
| •
| provide for staggered terms for directors on our Board for a period following the Spin-Off;
|
| •
| do not permit our stockholders to act by written consent and require that stockholder action must take place at an annual or special meeting of our stockholders, in each case except as such rights may otherwise be provided to holders of preferred stock;
|
| •
| establish advance notice requirements for stockholder nominations and proposals;
|
| •
| limit the persons who may call special meetings of stockholders; and
|
| •
| limit our ability to enter into business combination transactions.
|
These and otherprovisionsof our Amended and RestatedCertificateof Incorporation,Amended and RestatedBy-Lawsand Delaware law may discourage,delay or preventcertaintypes of transactionsinvolvingan actualor a threatenedacquisitionor change in controlof Garrett,includingunsolicitedtakeoverattempts,even though the transactionmay offerour stockholdersthe opportunityto selltheirsharesof our commonstock at a priceabove the prevailingmarketprice.
Under the terms of the Transaction under the PSA, the Plan, if confirmed by the Bankruptcy Court, may result in the removal or alteration of some or all of these provisions, subject to negotiation of definitive corporate governance documentation with the CO Group. There can be no assurances that any definitive corporate governance documentation with the CO Group will not continue to discourage, delay or prevent certain types of transactionsinvolving an actual or a threatenedacquisitionor change in control of Garrett,including unsolicitedtakeover attempts,even though the transactionmay offer our stockholdersthe opportunity to sell their shares of our common stock at a price above the prevailingmarket price.
OurAmended andRestatedCertificateof Incorporationdesignatesthe courts of the State of Delaware as the sole andexclusiveforum for certaintypesof actionsandproceedingsthat may be initiatedby our stockholders,whichcould limitour stockholders’abilityto obtain a favorablejudicialforum for disputeswith us or our directors,officersor other employees.
OurAmendedandRestatedCertificateofIncorporationprovides,inallcasestothefullestextentpermittedbylaw,unlessweconsentinwritingtotheselectionofanalternativeforum,theCourtofChancerylocatedwithin theStateofDelawarewillbethesoleandexclusiveforumforanyderivativeactionorproceedingbroughtonbehalfofGarrett,anyactionassertingaclaimofbreachofafiduciarydutyowedbyanyof our directors, officers or other employees or stockholders to us or ourstockholders,anyactionassertingaclaimarisingpursuanttotheDelawareGeneralCorporateLaw(“DGCL”)orastowhichtheDGCLconfersjurisdictionontheCourtofChancerylocatedintheStateofDelawareoranyactionassertingaclaimgovernedbytheinternalaffairsdoctrineoranyotheractionassertingan“internalcorporateclaim”asthattermisdefinedinSection115oftheDGCL.However,iftheCourtofChancerywithintheStateofDelawaredoesnothavejurisdiction,theactionmaybebroughtinanyotherstateorfederalcourtlocatedwithintheStateofDelaware.Anypersonorentitypurchasingorotherwiseacquiringorholdinganyinterestinsharesofourcapitalstockwillbedeemedtohavenoticeofandtohaveconsentedtotheseprovisions.Thisprovisionmaylimitastockholder’sabilitytobringaclaiminajudicialforumthatitfindsfavorablefordisputeswithusorourdirectors,officersorotheremployees,whichmaydiscouragesuchlawsuits.Alternatively,ifacourtweretofindthisprovisionofourAmendedandRestatedCertificateofIncorporationinapplicableto,orunenforceableinrespectof,oneormoreofthespecifiedtypesofactionsorproceedings,wemayincuradditionalcostsassociatedwithresolvingsuchmattersinotherjurisdictions.
General Risk Factors
Systemor servicefailures,including as a resultof cyber or other securityincidents,could disrupt business operations,resultin the loss of criticalandconfidentialinformation,andadverselyimpactour reputationandresultsof operations.
We deploy and maintainIT and engineeringsystems. Our systems involvesensitiveinformationand may be conductedin hazardousenvironments.Asa result,weare subjectto systemsor servicefailures,not only resultingfromour failuresor the failuresof third-partyservice providers,naturaldisasters,power shortagesor terroristattacks,but also fromexposureto cyber or othersecurity threats.Global cybersecuritythreatsand incidentscan range fromuncoordinatedindividualattemptsto gain unauthorizedaccessto IT systemsto sophisticatedand targetedmeasuresknownas advanced persistentthreats, directedat the Company, ourproducts,our customersand/orour third-partyserviceproviders,includingcloud providers.There has been an increasein the frequencyand sophisticationof cyber and othersecuritythreatswe face,and our customersare increasinglyrequiringcyber and othersecurityprotectionsand mandatingcyber and othersecuritystandardsin our products.
Cyber and othersecurityincidents, depending on theirnatureand scope, could potentiallyresultin the misappropriation,destruction,corruptionor unavailabilityof criticaldata and confidentialor proprietaryinformation(our ownor thatof thirdparties)and the disruptionof businessoperations.Moreover,employeeerroror malfeasance,faultypassword managementor otherintentionalor inadvertentnon-compliancewith our securityprotocolsmay resultin a breachof our informationsystems.Cyber and othersecurityincidentsaimedat the softwareembeddedin our productscould lead to third-partyclaimsthatour productfailureshave caused a similarrange of damagesto our customers,and thisriskis enhanced by the increasinglyconnectednatureof our products.
The potentialconsequencesofpast experienced a materialcyber or othersecurityincidentincludefinancialloss, reputational damage,litigationwith thirdparties,theftof intellectualproperty,finesleviedby the United StatesFederalTrade Commission,diminution weakness in the value of our investmentin research,developmentand engineering,and increased cyber and othersecurityprotectionand remediationcostsdue to the increasingsophisticationand proliferationof threats,which in turn could adverselyaffectour competitivenessand resultsof operations.In additionto any costsresultingfromcontractperformanceor requiredcorrectiveaction,theseincidentscould generateincreased costsor loss of revenueif our customerschoose to postpone or cancelpreviouslyscheduledordersor decidenot to renew any of our existingcontracts.
The costsrelatedto cyber or othersecurityincidentsmay not be fullyinsuredor indemnifiedby other means.The successfulassertionof a largeclaimagainstus with respectto a cyber or othersecurityincident could seriouslyharmour business.Even if not successful,theseclaimscould resultin significantlegaland other costs,may be a distractionto our managementand harmour customerrelationships, as well as our reputation.
If wefailto maintainproper andeffectiveinternalcontrols,our abilityto produce accurateandtimely financialstatementscould be impairedandinvestors’views of us could be harmed.
We are required to perform system and process evaluation and testing of our internal control over financial reporting, to allow management and our independent registered public accounting firm to report onwhile it has since been successfully remediated, there can be no assurance that similar control issues will not be identified in the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002.future. If we aredo not able to comply with the requirements of Section 404, the market price of shares of common stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
Our ability to successfully comply with Section 404 requires us to be able to prepare timely and accurate financial statements. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures ormaintain effective internal controls, may cause our operations to suffer, and we may be unable to conclude that our internal control over financial reporting is effective, and our independent registered public accounting firm may provide an adverse opinion on our internal control over financial reporting. In the course of preparing our Annual Report on Form 10-K and our Consolidated and Combined Financial Statements for the year ended December 31, 2018, our management determined that there was a material weakness in ourFurthermore, if we do not maintain effective internal control over financial reporting relating to the supporting evidence for our liability to Honeywell under the Honeywell Indemnity Agreement that has since been remediated. Even though we have concluded, and our auditors have concurred, that that our internal control over financial reporting was effective as of December 31, 2020, we could identify additional material weaknesses in our internal control over financial reporting in the future, which could cause us to have to restate our Consolidated and Combined Financial Statements. In the event of an additional material weakness or restatement,controls, the market price of shares of common stockour Common Stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources, adversely impacting our operations and potentially harming our reputation with our key stakeholders, including investors, employees, customers and suppliers.
System or service failures, including as a result of cyber or other security incidents, could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
We deploy and maintain IT and engineering systems which involve sensitive information. As a result, we are subject to systems or service failures, not only resulting from our failures or the failures of third-party service providers, natural disasters, power shortages or terrorist attacks, but also from exposure to cyber or other security threats. Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to IT systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company, our products, our customers and/or our third-party service providers, including cloud providers. There has been an increase in the frequency and sophistication of cyber and other security threats we face, and our customers, partners and regulators are increasingly requiring cyber and other security protections and mandating cyber and other security standards.
Cyber and other security incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties) and the disruption of business operations. Moreover, employee error or malfeasance, faulty
password management or other intentional or inadvertent non-compliance with our security protocols may result in a breach of our information systems. Cyber and other security incidents aimed at the software embedded in our products could also lead to third-party claims that our product failures have caused a similar range of damages to our customers.
In addition, our reliance on third-party service providers could introduce new cybersecurity risks and vulnerabilities, including supply chain attacks and other threats to our business operations. We rely on third-party service providers and technologies to operate critical business systems to process confidential, proprietary, and sensitive data in a variety of contexts, including, without limitation, cloud-based infrastructure, data center facilities, encryption and authentication technology, employee email, and other functions. We also rely on third-party service providers to provide other products or services to operate our business. If our third-party service providers experience a security incident or other interruption, we could experience adverse consequences. Supply chain attacks have increased in frequency and severity, and we cannot guarantee that third parties’ infrastructure in our supply chain or our third-party partners’ supply chains have not been or will not be compromised.
The risks associated with cyber security incidents include the risks of financial loss, reputational damage, litigation with third parties, theft of intellectual property, fines levied by governmental entities, diminution in the value of our investment in research, development and engineering, and costs associated with incident remediation. We may also be required to expend significant costs and resources to protect against security incidents. Cyber incidents could cause reputational damage, which could lead to increased costs and loss of revenue if our customers choose to postpone or cancel previously scheduled orders or decide not to renew any of our existing contracts.
The costs related to cyber or other security incidents may not be fully insured or indemnified by other means. The successful assertion of a large claim against us with respect to a cyber or other security incident could seriously harm our business. Even if not successful, these claims could result in significant legal and other costs, may be a distraction to our management and harm our customer relationships, as well as our reputation.
Risks Related to Our Capital Structure
Our substantial indebtedness and other obligations could adversely affect our financial health and our ability to execute our business strategy.
We have substantial consolidated indebtedness. As of December 31, 2023, we had outstanding debt of $1,696 million. Our ability to generate sufficient cash flows from operations depends on a range of economic, competitive and business factors, many of which are outside of our control. If we are unable to generate sufficient cash flow to satisfy our debt service payments and other obligations, we may be required to seek one or more alternatives, such as reducing or delaying investments or capital expenditures, selling assets, refinancing or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our outstanding indebtedness or future indebtedness will depend on the capital markets and our financial condition at such time. It will also depend on our credit facilities which contain certain operating and financial restrictions that that may restrict our business and financing activities. We may not be able to engage in any of these activities or engage in these activities on desirable terms when needed, which could result in a default on our indebtedness. Our inability to generate sufficient cash flows to satisfy our debt service payments and other obligations, or to refinance our obligations on commercially reasonable terms, would have a material adverse effect on our results of operations,
financial condition and
financial condition.Yourpercentageownershipbusiness.
Furthermore, we receive debt ratings from major credit rating agencies. Any downgrade in
usmay be dilutedour credit rating or the ratings of our indebtedness, or adverse conditions in the
future.Your percentageownership in usmay be dilutedin the futurebecauseof equityissuances pursuantdebt capital markets, could restrict our access to, the Plan, if confirmed,for acquisitions,capitalmarkettransactionsor otherwise,includingequityawards thatwemay grantto our directors,officersand otheremployees.Our Board has adopted and Honeywell, as our sole shareholder,approved, the 2018 Stock IncentivePlan of Garrett and itsAffiliates(the“Equity Plan”)for the benefitof certainof our currentand futureemployees and otherserviceproviders.Our non-employeedirectorsare eligibleto participatein the 2018 Stock IncentivePlan for Non-EmployeeDirectors.Awards made under such plans will have a dilutiveeffecton our earningsper share,which could adverselyaffectthe marketpriceof our commonstock.
Undernegatively impact the terms of, current or future financings and trade credit extended by certain suppliers or other vendors.
Our ability to raise capital in the Transaction, if approved byfuture may be limited, which could make us unable to fund our capital requirements.
Our business and operations may consume resources faster than we anticipate. In the Bankruptcy Court,future, we may need to raise additional funds through the CO Groupissuance of new equity securities, debt or a combination of both. Additional financing may not be available on favorable terms or at all. If adequate funds are not available on acceptable terms, we may not be able to fund our capital requirements. If we issue new debt securities, the debt holders would have rights senior to holders of common stock to make claims on our assets, and the terms of any additional debt could restrict our operations, including our ability to pay dividends on our common stock. If we issue additional equity securities, existing holders of our securities may experience dilution.
Ownership positions of certain of our existing stockholders willmay lead to conflicts of interest and could negatively impact the price of our securities.
The ownership positions of certain affiliated funds of Centerbridge Partners, L.P. (the "Centerbridge Investors") and certain affiliated funds of Oaktree Capital Management, L.P. (the "Oaktree Investors”) represent a significant portion of the total voting power of our outstanding shares. As a result, these two stockholders in and of themselves can influence significantly all matters requiring approval by our stockholders. These two stockholders may, from time to time, have interests that differ from other stockholders, and they may each vote in a way with which other stockholders disagree and either or both may be
issued Series A Preferred Stock which will be convertibleadverse in
certain circumstances into sharesthe future to the interests of
common stock. Any such conversion may significantly diluteother stockholders. Furthermore, Centerbridge Investors and Oaktree Investors each have the
percentageright to designate one director for election to the Board at each meeting of stockholders of the Company. The concentration of ownership of our
currentshares may have the effect of delaying, preventing or deterring a change of control of our Company, could deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our Company, and consequently may affect the market price of our shares. This concentration of ownership of our shares may also have the effect of influencing the completion of a change in control that may not necessarily be in the best interests of all of our stockholders.
In addition,
There can be no assurance that we will pay dividends or repurchase shares of our AmendedCommon Stock under our share repurchase program.
The declaration and RestatedCertificatepayment of Incorporationauthorizesusany dividend is subject to issue,without the approvalof our stockholders,oneBoard of Directors in accordance with its bylaws. There can be no assurance that we will declare and pay dividends in the future in any particular amounts, or moreclassesat all. Our ability to pay dividends may be limited by restrictions or serieslimitations on our cash flows, including our ability to obtain sufficient funds through dividends from subsidiaries, many of preferredstock having such designation,powers, preferenceswhich are located outside of the United States. Any declaration and relative,participating,optionaland otherspecialrights,includingpreferencesoverpayment of dividends on our common stock will depend on our earnings and financial condition, including our consolidated EBITDA, our liquidity and capital requirements, the general economic climate, the terms of our equity securities, contractual restrictions, our ability to service our debt obligations and other factors deemed relevant by the Board of Directors from time to time. Additionally, we have implemented a share repurchase program pursuant to which we may repurchase up to $350 million of shares of Common Stock from time to time through December 31, 2024, through various methods, including in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in compliance with respectto dividendsapplicable state and distributions,federal securities laws. The timing, as our board of directorsmay generallydetermine.The termsof one or moreclassesor seriesof preferredstock could dilutewell as the voting power or reducethenumber and value of shares repurchased under the program, will be determined by the Board or an authorized committee of the Board at its discretion and will depend on a variety of factors, including our assessment of the intrinsic value of the Company's common stock. For example,wecould grantthe holdersof preferredstock, the rightto electsome numbermarket price of the membersCompany's common stock, general market and economic conditions, available liquidity, compliance with the Company's debt and other agreements, applicable legal requirements, the nature of other investment opportunities available to the Company, and other considerations. The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice.
We have made in the past, and may in the future make, significant grants under our equity incentive program.
We have made, and expect to continue to make, grants of Common Stock or options to purchase shares of Common Stock to our employees, officers or directors under the Long-Term Incentive Plan. To the extent that shares of Common Stock are granted, or options to purchase Common Stock are granted, exercised and converted, existing holders of our
board of directorsin alleventsor upon the happening of specifiedevents,or the rightto veto specified transactions.Similarly,the repurchaseor redemptionrightsor liquidationpreferencesthatwecould assignto holdersof preferredstock could affectthe residualvalue of our commonstock.From time-to-time,weCommon Stock may opportunisticallyexperience dilution.
evaluateand pursue acquisitionopportunities,including acquisitionsfor which the considerationthereofmay consistpartiallyor entirelyof newly-issuedsharesof ourcommonstock and, therefore,such transactions, if consummated,would dilutethe voting power and/orreducethe value of our commonstock.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
Risk Management and Strategy
The Company's cybersecurity objective is to protect Garrett against data privacy breaches, information theft, and external and insider cyber threats through the use of a combination of leading technologies, policies, and procedures. The Company has processes in place to identify, assess and monitor material risks from cybersecurity threats, which are part of the Company’s overall enterprise risk management ("ERM") process and have been embedded in the Company’s operating
procedures, internal controls and information systems. To that end, we take a holistic approach to securing our data and business systems from attack, compromise or loss.
The Company has cybersecurity capability including a Security Operations Center ("SOC") that is managed by a dedicated Chief Information Security Officer (“CISO”) whose team is responsible for leading the Company-wide cybersecurity strategy, policy, standards, architecture, and processes. The SOC provides visibility across all information technology assets and includes proactive cyber security threat detection technology to facilitate the identification of misconfigurations to mitigate threats and prevent data loss. As part of the Company’s holistic approach to cybersecurity, we have implemented programs and technology associated with threat hunting, vulnerability scanning, and threat detection and response technology.
As part of its cybersecurity risk management, the Company delivers specific education to the organization on how to identify potential cybersecurity risks and protect the Company’s resources and information. This training is mandatory for all employees globally on a regular basis and may be supplemented by various testing initiatives including periodic phishing tests.
The Company leverages third-party expertise for periodic effectiveness testing of its prevention, detection, and response capabilities. The Company also requires all third-party service providers to meet certain cybersecurity requirements, including risk assessment and monitoring activities. In addition, third-party service providers with access to the Company's network are also required to undertake cybersecurity training.
While Garrett focuses heavily on prevention and detection, response and recovery plans, service agreements and partner engagements are in place should there be a need for us to respond to a cybersecurity attack. The Company's response process includes identifying the incident; notifying the executive team, activating the crisis team, assessing the business risk and materiality of the incident; managing the recovery of operations; and performing a post-incident analysis. The Company maintains business continuity and disaster recovery plans. The Company also engages in cyber crisis response simulation to assess our incident response ability and effectiveness.
No cybersecurity incidents have occurred that materially affected, or are reasonably likely to materially affect, the Company, including its business strategy, results of operations or financial condition during the year ended December 31, 2023. Notwithstanding the extensive approach we take to cybersecurity, we may not be successful in preventing or mitigating a cybersecurity incident that could have a material adverse effect on us in the future. See Item 1A. "Risk Factors" for a discussion of cybersecurity risks.
Governance
Role of Management
The Company has a Cyber Risk Governance Council consisting of the Senior Vice President Chief Digital and Information Officer (“CDIO”), the CISO, the IT leadership team, and the legal and cybersecurity teams that focuses on cybersecurity and compliance risks. The Cyber Risk Governance Council meets monthly to review cybersecurity risks and related risk management methodologies. Cybersecurity risks are included in the Company’s ERM as appropriate based on potential impact and vulnerability assessed according to certain set criteria and defined ERM materiality thresholds. Regular discussions over cybersecurity developments and risk mitigation approaches are held by the Cyber Risk Governance Council with the Chief Executive Officer and the senior leadership team.
Role of the Board
The Board of Directors is responsible for overseeing overall risk management for the Company, including review and approval of the enterprise risk management approach and processes implemented by management to identify, assess, manage and mitigate risk. The Board has delegated responsibility for oversight of the Company's cybersecurity framework and risk management to the Audit Committee.
The CDIO and CISO provide reports to the Audit Committee at least semi-annually on the Company’s cybersecurity program including the external threat environment, the Company’s programs to address and mitigate the risks associated with the evolving cybersecurity threat environment, and the results of evaluation of the Company’s cybersecurity program by external experts. The Audit Committee, as well as the Board of Directors, is also promptly informed about any information security incidents that may pose significant risk to the Company.
We have created
a geographic
footprint
that
emphasizes
locating
R&D,
engineering
and manufacturing capabilities
in close
physical
proximity
to our customers,
thereby
enabling
us to manage our environmental footprint
to meet our sustainability targets and to adopt technologies
and products for the specific
vehicle
types sold in each geographic
market.
Over the past several
years,
we
have invested heavily
to be close
to our Chinese, Indian
and other
high-growth
region
OEM
customers
to be able to offer world-leading
technologies,
localized
engineering
support
and unparalleled
manufacturing
productivity.
As
of December
31,
2020,2023, we
owned
or leased
13 manufacturing
sites,
five
R&D
centers
and 11
close-to- customerclose-to-customer engineering
sites.
We also have many smaller
sales
offices,
warehouses,
cybersecurity
and
IVHMintegrated vehicle health management sites and other
investments
strategically
located
throughout
the world. The following
table
shows the ownership and regional distribution
of our manufacturing
sites,
R&D
centers
and customer
engineering
sites:
| Ownership | | Regional distribution |
| | | | | | | | | | Europe, | | | | | | | | |
| | | | | | | | | | Middle East & | | South Asia & | | | | | | |
| | Owned | | | Leased | | North America | | Africa | | Asia Pacific | | South America | | | Total |
| Ownership | | | Ownership | | Regional distribution |
| Owned | | | Owned | | Leased | | North America | | Europe,
Middle East & Africa | | South Asia &
Asia Pacific | | South America | | Total |
Manufacturing Sites | | 9 | | | 4 | | 2 | | 5 | | 5 | | 1 | | | 13 | Manufacturing Sites | 9 | | 4 | | 2 | | 5 | | 1 | | 13 |
R&D Centers | | 1 | | | 4 | | 1 | | 2 | | 2 | | | — | | | 5 | R&D Centers | 1 | | 4 | | 1 | | 2 | | — | | 5 |
Close-to-Customer Engineering Sites | | | — | | | 11 | | 2 | | 5 | | 3 | | 1 | | | 11 | Close-to-Customer Engineering Sites | — | | 11 | | 2 | | 5 | | 3 | | 1 | | 11 |
We continually and proactivelyreview our realestateportfolioand develop footprintstrategiesto supportour customers’ globalplans, while at the sametimesupportingour technicalneeds and optimizingoperatingcost base. We expectour evolvingportfoliowill meetcurrentand anticipatedfutureneeds.
Item 3. Legal Proceedings
On December 2, 2019,
We are involved in various lawsuits, claims and proceedings incident to the
Companyoperation of our businesses, including those pertaining to product liability, product safety, environmental, safety and
its subsidiary, Garrett ASASCO Inc., filed a Summonshealth, intellectual property, employment, commercial and contractual matters and various other matters. Although the outcome of any such lawsuit, claim or proceeding cannot be predicted with
Noticecertainty and some may be disposed of unfavorably to us, we do not currently believe that such lawsuits, claims or proceedings will have, individually or in the
Commercial Divisionaggregate, a material adverse effect on our financial position, results 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 subsidiariesoperations or cash flows. We accrue for potential liabilities in a manner consistent with US GAAP. Accordingly, we accrue for a liability when it is probable that a liability has been incurred 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 Honeywell Indemnity Agreement. The Company is seeking declaratory relief, compensatory damages in an amount to be determined at trial rescission of the Honeywell Indemnity Agreement, attorneys’ fees and costs, and such other and further relief as the Court may deem just and proper. 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 Honeywell Indemnity Agreement is not enforceable, in whole or in part. On March 5, 2020, Honeywell filed a “Notice of Motion to Dismiss Garrett’s Complaint.” On September 20, 2020, Garrett and certain of its subsidiaries each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York. On September 23, 2020, Garrett removed the Action to the United States District Court for the Southern District of New York, and on September 24, 2020, the Action was referred to the Bankruptcy Court, where the case is currently pending. A pre-trial conference took place on October 22, 2020. The Court heard argument on Honeywell’s pending motion to dismiss on November 18, 2020; the Court has not yet issued a decision. On November 2, 2020, the Garrett entities that are Debtors and Debtors in Possession filed a Motion Pursuant to Sections 105(a) and 502(c) To Establish Procedures for Estimating The Maximum Amount Of Honeywell’s Claims And Related Relief (the “Motion”). The Court heard argument on the Motion on November 18. The Court ordered an estimation proceeding to take place to estimate all of Honeywell’s claims against the Garrett entities that are Debtors and Debtors in Possession. On December 18, 2020, Honeywell filed proofs of claim in the Chapter 11 Cases, asserting that the Company owes at least $1.9 billion. The Bankruptcy Court was scheduled to estimate the amount of
Honeywell’s claims in an estimation proceeding that was scheduled to commence on February 1, 2021. As noted below, the
estimation proceeding has been stayed by order of the Bankruptcy Court.
On January 11, 2021, the Company announced that it had agreed to settle Honeywell’s claims as part of the Plan. The Planliability is subject to various conditions, including approval by the Bankruptcy Court. Under the Plan settlement, Honeywell would receive a $375 million payment and Series B Preferred Stock payable in installments of $35 million in 2022, and $100 million annually 2023-2030. The Company would 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 the 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.
On January 15, 2021, the Bankruptcy Court ordered that the Action and the estimation proceeding both be stayed pending the Bankruptcy Court’s consideration of Plan. The confirmation hearing for the Plan is currently scheduled to take place in April 2021, however, the hearing may be rescheduled for a later date.
The Debtors’ Chapter 11 Cases are being jointly administered under the caption “In re: Garrett Motion Inc., 20-12212.” For additional information regarding the Chapter 11 Cases, see Note 1 Background and Basis of Preparation and Note 2 Reorganization and Chapter 11 Proceedings reasonably estimable.
of the Notes to the Consolidated and Combined Financial Statements.On September 25, 2020, a putative securities class action complaint was filed against Garrett Motion Inc. and certain current and former Garrett officers and directors, in the United States District Court for the Southern District of New York. The case bears the caption: Steven Husson, Individually and On Behalf of All Others Similarly Situated, v. Garrett Motion Inc., Olivier Rabiller, Alessandro Gili, Peter Bracke, Sean Deason, and Su Ping Lu, Case No. 1:20-cv-07992-JPC (SDNY) (the “Husson Action”). The Husson Action asserts claims under Sections 10(b) and 20(a) of the Exchange Act, for securities fraud and control person liability. On September 28, 2020, the plaintiff sought to voluntarily dismiss his claim against Garrett Motion Inc. in light of the Company’s bankruptcy, this request was granted.
On October 5, 2020, another putative securities class action complaint was filed against certain current and former Garrett officers and directors, in the United States District Court for the Southern District of New York. This case bears the caption: The Gabelli Asset Fund, The Gabelli Dividend & Income Trust, The Gabelli Value 25 Fund Inc., The Gabelli Equity Trust Inc., SM Investors LP and SM Investors II LP, on behalf of themselves and all others similarly situated, v. Su Ping Lu, Olivier Rabiller, Alessandro Gili, Peter Bracke, Sean Deason, Craig Balis, Thierry Mabru, Russell James, Carlos M. Cardoso, Maura J. Clark, Courtney M. Enghauser, Susan L. Main, Carsten Reinhardt, and Scott A. Tozier, Case No. 1:20-cv-08296-JPC (SDNY) (the “Gabelli Action”). The Gabelli Action also asserts claims under Sections 10(b) and 20(a) of the Exchange Act.
On November 5, 2020, another putative securities class action complaint was filed against certain current and former Garrett officers and directors, in the United States District Court for the Southern District of New York. This case bears the caption: Joseph Froehlich, Individually and On Behalf of All Others Similarly Situated, v. Olivier Rabiller, Allesandro Gili, Peter Bracke, Sean Deason, and Su Ping Lu, Case No. 1:20-cv-09279-JPC (SDNY) (the “Froehlich Action”). The Froehlich Action also asserts claims under Sections 10(b) and 20(a) of the Exchange Act.
All three cases seek compensatory damages as well as interest, fees and costs. All three actions are currently assigned to Judge John P. Cronan. Su Ping Lu filed a waiver of service in the Gabelli Action on November 10, 2020. On November 24, 2020, competing motions were filed seeking the appointment of lead plaintiff and lead counsel and the consolidation of the Husson, Gabelli, and Froehlich Actions.
On December 8, 2020, counsel for the plaintiffs in the Gabelli Action – the Entwistle & Cappucci law firm – filed an unopposed stipulation and proposed order that would (1) appoint the plaintiffs in the Gabelli Action – the “Gabelli Entities” – the lead plaintiffs; (2) would appoint Entwistle & Cappucci as lead counsel for the plaintiff class; (3) consolidate the Gabelli Action, the Husson Action, and the Froehlich Action; (4) set a date by which lead plaintiff would file a consolidated amended complaint by February 25, 2021; and (5) set a date by which defendants shall respond to a consolidated amended complaint of April 26, 2021. On January 21, 2021, the district court issued an order consolidating the three actions as In re Garrett Motion Inc. Securities Litigation, Case Number 20 Civ. 7992 (JPC), and appointing the Gabelli entities as the lead plaintiffs.
The Company’s insurer, AIG has accepted the defense, subject the customary reservation of rights.
The Bankruptcy Court has set a bar date of March 1, 2021 for, among others, current and former shareholders to file securities-related claims against the Company. We are not yet able to assess the likelihood that any such claims will
be allowed. To the extent allowed, each holder of such claims shall be entitled to receive, (x) its pro rata share of the aggregate cash payments received or recoverable from any insurance policies of the Company on account of any such allowed claims and (y) solely to the extent that such payments are less than the amount of its allowed claim, such treatment that is consistent with section 1129 of the Bankruptcy Code and otherwise acceptable to the Debtors and the parties to the PSA in accordance with the PSA.
In September 2020, the Brazilian tax authorities issued an infraction notice against Garrett Motion Industria Automotiva Brasil Ltda, challenging the use of certain tax credits between January 2017 and February 2020. The infraction notice results in a loss contingency that may or may not ultimately be incurred by the Company. The estimated total amount of the contingency as of December 31, 2020 was $29 million including penalties and interest. The Company appealed the infraction notice on October 23, 2020. The Company believes, based on management’s assessment and the advice of external legal counsel, that it has meritorious arguments in connection with the infraction notice and any liability for the infraction notice is currently not probable. Accordingly, no accrual is required at this time.
On November 13, 2020, certain of the Debtors (the “Plaintiffs”) filed a complaint in the Bankruptcy Court against the indenture trustee (the “Indenture Trustee”) of the 5.125% senior notes due 2026 (the “Senior Notes”) seeking declaratory judgment on two claims for relief that the Debtors do not owe, and the holders of the Senior Notes (the “Noteholders”) are not entitled to, any make-whole premium under the Indenture (the “Make-Whole” and such litigation, the “Make-Whole Litigation”). Certain Noteholders have contended in these Chapter 11 Cases that the Noteholders are entitled to payment of the Make-Whole under the terms of the Indenture, which provide for the payment of the Make-Whole if the Debtors exercise their right to redeem the Senior Notes prior to maturity, as a result of the Debtors’ commencement of their Chapter 11 Cases. The Plaintiffs believe that the Noteholders are not entitled to any Make-Whole because the Debtors have not exercised their right of redemption as contemplated by the Indenture and, in the alternative, the Make-Whole should be disallowed as unmatured interest pursuant to Section 502(b)(2) of the Bankruptcy Code. On January 8, 2021, the Indenture Trustee filed an answer to the Debtors’ complaint. Pursuant to the PSA, the Debtors have agreed to suspend all litigation activities related to and stay the Make-Whole Litigation through Emergence (the “Effective Date”) and to dismiss with prejudice such proceedings upon Emergence.
For additional information regarding our legal proceedings, see Note 23, 25, Commitments and Contingenciesof the Notes to the Consolidated and Combined Financial Statements.
We are involvedin various other lawsuits,claimsand proceedingsincidentto the operationof ourbusinesses, includingthose pertainingto productliability,productsafety,environmental,safetyand health,intellectual property,employment,commercialand contractualmattersand variousothermatters.Although the outcomeof any such lawsuit,claimor proceedingcannot be predictedwith certaintyand some may be disposedof unfavorablyto us, wedo not currentlybelievethatsuch lawsuits,claimsor proceedingswill have a material adverseeffecton our financialposition,resultsof operationsor cash flows. We accruefor potentialliabilitiesin a mannerconsistentwith accountingprinciplesgenerallyacceptedin the United States.Accordingly,weaccruefor a liabilitywhenit is probablethata liabilityhas been incurredand the amountof the liabilityis reasonably estimable.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
On October 1, 2018, we became an independent publicly-traded company through a pro rata distribution by Honeywell of 100% of the outstanding shares of us to Honeywell's stockholders (the “Spin-Off”). Each Honeywell stockholder of record received one share of our common stock for every 10 shares of Honeywell common stock held
The Common Stock trades on the
record date. Approximately 74 million shares of our common stock were distributed on October 1, 2018 to Honeywell stockholders. In connection with the separation, our common stock began trading "regular-way"Nasdaq Global Select Market under the ticker symbol "GTX"
on the New York Stock Exchange on October 1, 2018. 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, 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 to initiate the delisting of the common stock of the Company, and the delisting became effective at 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..
As of February
4, 2021,9, 2024, there were
36,20828,036 stockholders of record of our
common stock.Common Stock.
Dividend Policy
We are unable to pay dividends during the pendency of the Chapter 11 Cases.
We do not
currently anticipate
declaring or paying any cash dividends
on our Common Stock in the foreseeable future.
The timing, declaration, amount and payment of future dividends to stockholders on shares of our Common Stock, if any, will fall within the discretion of our Board of Directors. Among the items we will consider when establishing a policy with respect to the payment of dividends on our Common Stock will be the capital needs of our business and opportunities to retain future earnings for use in the operation of our business and to fund future growth. Additionally, the terms of our credit facilities limit our ability to pay cash dividends on our Common Stock.
The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act except to the extent we specifically incorporate it by reference into such filing. Our stock price performance shown in the graph below is not indicative of future stock price performance.
The following graph and table illustrate the total return from October 1, 2018April 30, 2021, the date of the Company's emergence from Chapter 11 bankruptcy proceedings ("Emergence") through December 31, 2020,2023, for (i) our common stock,Common Stock, (ii) the Standard and Poor’s (“S&P”) Small Cap 600 Index, (iii) the average stock performance of a group consisting of the peer companies disclosed in our Annual Report on Form 10-K for the year ended December 31, 20192021 (“2019 Peer Group”), consisting of BorgWarner Inc., Allison Transmission Holdings, Inc., and Delphi Technologies Plc, and (iv) the average stock performance of a group consisting of the Company’s peer companies for the year ended December 31, 2020 (“20202021 Peer Group”), consisting of Adient plc, Allison Transmission Holdings, Inc., American Axle & Manufacturing Holdings, Inc., Aptiv PLC, Autoliv Inc., BorgWarner Inc., Dana Incorporated, Gentex Corporation, Lear Corporation, Magna International Inc., Tenneco Inc., Veoneer, Inc. and Visteon Corporation, and Veoneer, Inc. In 2020,(iv) the Company expanded itsaverage stock performance of a group consisting of the peer group following consolidation among the 2019 Peer Group. Delphi Technologies plc (“Delphi”) was previously includedcompanies disclosed in the Company’s 2019 Peer Group and was acquired by BorgWarner Inc. duringour Annual Report on Form 10-K for the year ended December 31, 2020. Accordingly, Delphi has been included in the 20192022 (“2022 Peer Group only through the date it was acquired. Group”), consisting of Adient plc, Allison Transmission Holdings, Inc., American Axle & Manufacturing Holdings, Inc., Aptiv PLC, Autoliv Inc., BorgWarner Inc., Dana Incorporated, Gentex Corporation, Lear Corporation, Magna International Inc. and Visteon Corporation.
The
Company will cease presenting the 2019 Peer Group in future years.The 20202022 Peer Group is used routinely by management for benchmarking purposes. The graph and the table assume that $100 was invested on October 1, 2018April 30, 2021 in shares of each of our common stock,Common Stock, the S&P Small Cap 600 Index, the common stockCommon Stock of the 2019 Peer Group and the 20202022 Peer Group, and that any dividends were reinvested. The comparisons reflected in the graph and table are not intended to forecast the future performance of our common stockCommon Stock and may not be indicative of our future performance.
| | | | | |
Indexed Price Performance | 
|
| | |
| Global Markets Intelligence Group |
Recent Sales of Unregistered Securities
None
In connection with the Transactions (as described below under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations), on June 12, 2023, each share of our then-outstanding Series A Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock"), was converted into one share of Common Stock. Additionally, on June 20, 2023, all prior holders of Series A Preferred Stock received, in respect of each share of Series A Preferred Stock held immediately prior to the conversion, a payment in lieu of the accrued and unpaid dividends on the Series A Preferred Stock through June 30, 2023, plus an additional amount representing the dividends that would have accrued on the Series A Preferred Stock through September 30, 2023. The 175,337,712 shares issued in the conversion and the 18,301,481 shares issued as part of the additional payment were issued pursuant to the exemption from registration contained in Section 3(a)(9) of the Securities Act.
Additionally, on June 5, 2023, as part of the consideration paid in respect of the purchase of approximately $570 million of shares of Series A Preferred Stock from entities related to each of Centerbridge Partners, L.P. and Oaktree Capital Management, L.P., the Company issued to such entities an aggregate of 7,276,036 in shares of Common Stock, as part of the accrued and unpaid dividends and additional amounts that such entities would have received upon the conversion of the repurchased shares of Series A Preferred Stock (if they had held such shares on the conversion date). These shares were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
See "Capital Structure Transformation Transactions" under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations below.
Issuer Purchases of Equity Securities
There
On November 16, 2021, the Board of Directors authorized a $100 million share repurchase program valid until November 15, 2022, providing for the purchase of shares of Series A Preferred Stock and Common Stock (the "share repurchase program"). On November 2, 2022, the Board of Directors authorized the extension of the share repurchase program until November 15, 2023. On April 12, 2023, the Board of Directors further authorized an increase in the size of the share repurchase program to an aggregate amount of $250 million available as of that date. On November 1, 2023, the Board of Directors authorized the further extension of the share repurchase program until December 31, 2023, at which date the share repurchase program expired.
The following table summarizes our share repurchase activity for the three months ended December 31, 2023, and additional information regarding our share repurchase program.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Common Shares Purchased | | Average Price Paid per Share | | Total Number of Preferred Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program | |
| October 1, 2023 - October 31, 2023 | | 1,657,420 | | $ | 7.29 | | | — | | | $ | — | | | 1,657,420 | | | 60,101,840 | | |
| November 1, 2023 - November 30, 2023 | | 2,816,714 | | $ | 7.45 | | | — | | | $ | — | | | 2,816,714 | | | 39,125,995 | | |
| December 1, 2023 - December 31, 2023 | | 268,829 | | $ | 7.82 | | | — | | | $ | — | | | 268,829 | | | — | | (1) |
| Total | | 4,742,963 | | $ | 7.41 | | | — | | | $ | — | | | 4,742,963 | | | | |
(1) The share repurchase program expired on December 31, 2023 with an unused balance of $37 million.
Other than the amounts repurchased as part of our share repurchase program, there were no purchases of equity securities by the issuer or affiliated purchasers during the quarter ended December 31,
2020.2023.
On February 13, 2024, the Board of Directors authorized a new $350 million share repurchase program valid until December 31, 2024.
Item 6. SelectedReserved
Not applicable.
Item 7. Management’s Discussion and Analysis of Financial
DataSelected HistoricalCondition and Results of Operations
The following discussion and analysis of our financial condition and results of operations, which we refer to as our “MD&A,” should be read in conjunction with our Consolidated
Financial Statements and
Combined Financial DataThe followingtablespresentcertainselectedhistorical consolidatedrelated notes thereto and combinedother financialinformation appearing elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the "Risk Factors" section of this Annual Report, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.
Executive Summary
Garrett is a cutting-edge technology leader delivering differentiated solutions for emission reduction and energy efficiency. We design, manufacture, and sell highly engineered turbocharging, air and fluid compression, and high-speed electric motor technologies for OEMs and distributors within the mobility and industrial space. We have significant expertise in delivering products at scale for ICE using gasoline, diesel, natural gas and hydrogen, as well as for zero emission vehicles using hydrogen fuel cell systems, both for mobility and industrial use. As our customers continue to progress on electrification, we apply our technological pillars to develop highly engineered E-Powertrain and E-Cooling compressor products to support their ambition. These products are key enablers for fuel economy, energy efficiency, thermal management, and compliance with emissions standards and overall greenhouse gas and other emission reduction targets.
In 2023, the turbocharger industry increased from approximately 46 million units in 2022 to approximately 50 million units in line with increased volumes in the light vehicle industry. This enabled us to achieve $3,886 million of Net sales for the year.
2023 was also a year of economic volatility which saw elevated interest rates and continued commodity inflation pressures globally. We continued to leverage our variable cost structure to successfully navigate this macroeconomic environment, while increasing our R&D investments by $22 million versus the prior year from 4.2% to 4.6% of Net sales. Our agility furthermore allowed us to achieve Net income of $261 million and Adjusted EBITDA of $635 million for the year.
We continue to build momentum with our turbocharging and zero emission technologies. During 2023, we won nine pre-development contracts for our breakthrough E-Powertrain and E-Cooling applications and six series production awards for our highly differentiated fuel cell compressors.
Capital Structure Transformation
As previously announced, on April 12, 2023, we entered into separate definitive agreements (the "Agreements") with each of Centerbridge Partners, L.P. and funds managed by Oaktree Capital Management, L.P. (collectively, the years"C&O Investors") to effect a series of integrated transactions (the "Transaction") designed to increase the attractiveness of the Company to investors, including simplifying our capital structure through a conversion of the Series A Preferred Stock into shares of Common Stock.
Under the Transaction, the Company repurchased 69,707,719 shares of Series A Preferred Stock and converted 175,337,712 shares of Series A Preferred Stock into an equivalent number of Common Stock. Total consideration paid to the holders of Series A Preferred Stock under the Transaction amounted to cash payments of $605 million and the issuance of an additional 25,577,517 shares of Common Stock in settlement of accumulated and unpaid preference dividends on the Series A Preferred Stock through June 30, 2023. The Transaction was financed through a new $700 million Term Loan B (the "2023 Dollar Facility") under the framework of the Company's existing credit agreement.
As part of the Agreement, the C&O Investors agreed with the Company to certain changes to each of their respective governance rights under the Company’s governance documents, including a reduction of their existing board nomination rights, as well as lock-up restrictions on their equity securities of the Company for up to twelve months, and certain limits on their ability to purchase additional equity securities of the Company and to voting limitations, in each case for a period of up to eighteen months.
Other 2023 Events
During 2023, we repaid $200 million on our 2023 Dollar Term Facility and repurchased $213 million of Common Stock in line with our capital allocation priorities. Our share repurchase program expired on December 31, 2023.
Trends, Uncertainties and Opportunities
The macroeconomic environment around us continues to evolve rapidly. Significant uncertainty remains on global economic growth, with continued supply chain disruptions and geopolitical tensions, as well as China facing deflationary pressures and job market deterioration.
In 2023, an increase in BEV production has been observed globally and especially in Europe and China. We expect this trend to continue into 2024. We believe that turbocharger demand will continue to remain strong in the five-yearperiodended December31, 2020. Priorshort and medium term, in part due to an expected increase in the Spin-Off on October 1, 2018,penetration of hybrid vehicles in the light vehicle industry, which often requires the use of either a mechanical turbo or an electrical boosting solution. In addition, in the commercial vehicle and industrial industries, diesel resilience to electrification in key use cases, combined with low or zero emission alternative fuels for ICE, like natural gas or hydrogen, is expected to gain momentum in coming years and likewise often require the use of a mechanical turbo or electrical boosting solution.
Disaggregated Revenue
The following tables show our historical financial statements were prepared on a stand-alone combined basisrevenues by geographic region and were derived from the consolidated financial statements and accounting records of Honeywell. Accordingly, for periods prior to October 1, 2018, our financial statements are presented on a combined basis and for the periods subsequent to October 1, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Financial Statements”). The selected historical consolidated and combined financial data as of December 31, 2020 and 2019 andproduct line for the years ended December 31, 2020, 2019,2023, 2022 and 2018 are derived2021.
By Region
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| United States | $ | 744 | | | 19 | % | | $ | 694 | | | 19 | % | | $ | 565 | | | 16 | % |
| Europe | 1,874 | | | 48 | % | | 1,734 | | | 48 | % | | 1,784 | | | 49 | % |
| Asia | 1,201 | | | 31 | % | | 1,102 | | | 31 | % | | 1,231 | | | 34 | % |
| Other International | 67 | | | 2 | % | | 73 | | | 2 | % | | 53 | | | 1 | % |
| $ | 3,886 | | | | | $ | 3,603 | | | | | $ | 3,633 | | | |
from
By Product Line
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Diesel | $ | 992 | | | 25 | % | | $ | 949 | | | 26 | % | | $ | 1,041 | | | 29 | % |
| Gas | 1,720 | | | 44 | % | | 1,485 | | | 41 | % | | 1,420 | | | 39 | % |
| Commercial Vehicle | 656 | | | 17 | % | | 673 | | | 19 | % | | 705 | | | 19 | % |
| Aftermarket | 456 | | | 12 | % | | 442 | | | 12 | % | | 406 | | | 11 | % |
| Other | 62 | | | 2 | % | | 54 | | | 2 | % | | 61 | | | 2 | % |
| $ | 3,886 | | | | | $ | 3,603 | | | | | $ | 3,633 | | | |
Results of Operations for the historicalaudited Consolidated and Combined FinancialStatements as included in this Form 10-K. The selected historical combined financial data as ofYears Ended December 31, 2018, 20172023, 2022 and 2016 and for2021
Net Sales
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Net sales | $ | 3,886 | | | $ | 3,603 | | | $ | 3,633 | |
| % change compared with prior period | 7.9 | % | | (0.8) | % | | 19.7 | % |
The change in net sales compared to the yearsprior year is attributable to the following:
For the year ended December 31,
20172023, net sales increased compared to prior year by $283 million or 8%, including an unfavorable impact of $14 million or 0% due to foreign currency translation driven by lower Chinese yuan-to-US dollar, partially offset by higher Euro-to-US dollar exchange rates. This increase was driven by higher volumes with growth of both global light vehicles and
2016 are derivedthe turbocharger industry, and faster than expected recovery from
historical audited combined financial statements not includedChina Covid-19 pressures and semiconductor shortages experienced in
this Annual Report on Form 10-K.Theselectedhistorical consolidatedthe prior year. Strong demand for new product launches and combinedfinancialdatapresentedbelowshouldbereadinconjunctionramp-ups along with“Management’sDiscussionandAnalysis inflation recoveries net ofFinancialConditionandResultsofOperations”andourhistorical Consolidated andCombinedFinancialStatementsandtheaccompanyingNotestheretoincludedelsewhereinthis Annual Report on Form 10-K.Foreachoftheperiodspresented prior pricing across all product lines also contributed to the Spin-Off,ourbusinesswaswhollyownednet sales growth.
Gasoline product sales increased byHoneywell.Thefinancialinformationincluded $235 million or 16% (including an unfavorable impact of $20 million or 1% due to foreign currency translation) driven by industry recovery from prior year’s global semiconductor shortages and Covid-related lockdown measures in China, combined with new product launches and ramp-ups across all regions.
Diesel product sales increased by $43 million or 5% (including a favorable impact of $10 million or 2% due to foreign currency translation), driven by strong performance in Europe where diesel remains essential to meet fleet CO2 targets in addition to strong light commercial vehicle performance on existing platforms.
Commercial vehicle sales decreased by $17 million or 3% (including an unfavorable impact of $7 million or 2% due to foreign currency translation), primarily driven by global demand softness influenced by macroeconomic headwinds such as higher interest rates and commodity inflation, partially offset by favorable regional mix.
Aftermarket sales improved by $14 million or 3% (including a favorable impact of $2 million or 0% due to foreign currency translation), primarily on strong demand in Europe and especially in Asia Pacific related to favorable aftermarket conditions including the continued high demand for these periodsmaynotnecessarilyreflectourfinancialposition,resultsreplacement parts. Recovery in China from the end ofoperations the Chinese government's zero Covid-19 policy as well as new product introductions andcashflowsin favorable pricing impact also contributed to thefutureorwhatourfinancialposition,resultsofoperationsandcashflowswouldhavebeenhadwebeenanindependent,publiclytradedcompanyduringsuch periods.Inaddition,ourhistorical consolidated andcombinedfinancialinformationdoesnotreflectchangesthatwehave experienced growth.
For the year ended December 31, 2022, sales decreased compared to prior year by $30 million or expect1%. This decrease was primarily due to continuean unfavorable impact of $304 million or 8% due to experienceforeign currency translation driven by a lower Euro-to-US dollar exchange rate. This decrease was partially offset by $149 million of improved mix and $125 million of inflation recoveries net of pricing across all product lines.
Gasoline product sales increased by $64 million or 5% (including an unfavorable impact of $119 million or 8% due to foreign currency translation), primarily driven by new product launches in North America which delivered incremental sales year over year. This increase was partially offset by lower Euro-to-dollar exchange rates and lower sales in China due to the increased Covid-related lockdown measures implemented by the Chinese government throughout 2022.
Diesel product sales decreased by $91 million or 9% (including an unfavorable impact of $103 million or 10% due to foreign currency translation). While we saw lower volumes in 2022 due to the global semiconductor shortage and supply chain challenges at customers, this was offset by inflation pass-through and a favorable mix.
Commercial vehicle sales decreased by $32 million or 5% (including an unfavorable impact of $51 million or 8% due to foreign currency translation), primarily driven by lower volumes in China during the year after a strong pre-buy effect in the futurefirst half of 2021, more than offset by a favorable mix in the rest of the world.
Aftermarket sales improved by $36 million or 9% (including an unfavorable impact of $25 million or 6% due to foreign currency translation), primarily due to strong demand in North America and Europe related to favorable aftermarket conditions such as increased off-highway demand for new and service parts, increased revenues from our Performance & Motorsport Turbo business, new distributor openings, as well as growth through new product introductions and favorable pricing impacts.
Cost of Goods Sold and Gross Profit
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Cost of goods sold | $ | 3,130 | | | $ | 2,920 | | | $ | 2,926 | |
| % change compared with prior period | 7.2 | % | | (0.2) | % | | 17.3 | % |
| Gross profit percentage | 19.5 | % | | 19.0 | % | | 19.5 | % |
| | | | | | | | | | | | | | |
| | Cost of Goods Sold | | Gross Profit |
| | (Dollars in millions) |
| Cost of Goods Sold / Gross Profit for year ended December 31, 2022 | | $ | 2,920 | | | $ | 683 | |
| Volume | | 217 | | | 89 | |
| Product mix | | 27 | | | (79) | |
| Price, net of inflation pass-through | | — | | | 38 | |
| Commodity, transportation and energy inflation | | 30 | | | (30) | |
| Productivity, net | | (55) | | | 60 | |
| Research & development | | 14 | | | (14) | |
| Foreign exchange rate impacts | | (23) | | | 9 | |
| Cost of Goods Sold / Gross Profit for year ended December 31, 2023 | | $ | 3,130 | | | $ | 756 | |
For the year ended December 31, 2023, cost of goods sold increased by $210 million, primarily driven by our higher sales volumes and an unfavorable product mix, which contributed to increases of $217 million and $27 million, respectively. Cost of goods sold further increased due to $30 million of inflation on commodities, transportation and energy, as well as a $14 million increase in R&D costs which reflects our continued investment in new technologies and related headcount year-over-year. The increase was partially offset by our continued focus on productivity, net of labor inflation, one-time expenses and higher repositioning costs, which contributed a decrease in cost of goods sold of $55 million, and by foreign currency impacts from transactional, translational and hedging effects, which contributed a decrease in cost of goods sold of $23 million.
Gross profit increased by $73 million, mainly driven by higher sales volumes of $89 million and $60 million of productivity net of labor inflation, one-time expenses and higher repositioning costs. We also saw $38 million more of inflation recoveries from customer pass-through agreements net of pricing, and positive foreign currency impacts from transactional, translational and hedging of $9 million. These increases were partially offset by $30 million of inflation on commodities, transportation and energy costs, $79 million of unfavorable impacts from product mix primarily from growth in small-engine gasoline applications, as well as $14 million of higher R&D costs.
| | | | | | | | | | | | | | |
| | Cost of Goods Sold | | Gross Profit |
| | (Dollars in millions) |
| Cost of Goods Sold / Gross Profit for year ended December 31, 2021 | | $ | 2,926 | | | $ | 707 | |
| Volume | | (19) | | | (8) | |
| Product mix | | 124 | | | 25 | |
| Price, net of inflation pass-through | | — | | | 125 | |
| Commodity & transportation inflation | | 154 | | | (154) | |
| Productivity, net | | (58) | | | 84 | |
| Research & development | | 17 | | | (17) | |
| Foreign exchange rate impacts | | (224) | | | (79) | |
| Cost of Goods Sold / Gross Profit for year ended December 31, 2022 | | $ | 2,920 | | | $ | 683 | |
For the year ended December 31, 2022, cost of goods sold decreased by $6 million compared to prior year, primarily driven by our lower sales volumes and foreign currency impacts which contributed to decreases of $19 million and $224 million, respectively. Our continued focus on productivity also contributed to a decrease in cost of goods sold of $58 million, net of $10 million of higher premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility. These decreases were partially offset by $154 million of inflation on commodities, transportation and energy costs, as well as $124 million due to an unfavorable product mix. R&D expenses also increased by $17 million which reflects our shift in investment in zero emission technologies.
Gross profit decreased by $24 million, mainly driven by the lower sales volumes, inflation on commodities, transportation and energy costs, as well as higher premium freight costs as discussed above. Higher R&D costs and $79 million of unfavorable foreign currency translational, transactional and hedging effects also reduced our gross profit. These decreases were partially offset by $84 million of higher productivity which includes the benefits from value engineering
that are partially passed through to customers, $125 million of inflation recoveries from customer pass-through agreements net of pricing reductions, and $25 million of favorable product mix.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Selling, general and administrative expense | $ | 247 | | | $ | 216 | | | $ | 216 | |
| % of sales | 6.4 | % | | 6.0 | % | | 5.9 | % |
For the year ended December 31, 2023, selling, general and administrative (“SG&A”) expenses increased by $31 million compared with the prior year, primarily due to $9 million of legal and advisory fees related to the Transaction, $5 million of labor inflation impact, $6 million of employee repositioning costs, $3 million of higher incentive compensation expense and $5 million unfavorable impact from foreign exchange.
For the year ended December 31, 2022, SG&A expenses remained flat compared to prior year. We saw a $17 million benefit during the year from favorable foreign exchange rates and $2 million of lower employee-related costs which mainly reflected lower incentive compensation expense partially offset by labor inflation. These decreases were offset by $5 million of higher IT expenses in 2022, $4 million of increased travel expenses as Covid-19 restrictions eased, and $10 million of higher bad debt expenses due primarily to a non-recurring bad debt recovery recognized in 2021.
Interest expense
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Interest expense | $ | 159 | | | $ | 8 | | | $ | 83 | |
For the year ended December 31, 2023, interest expense increased by $151 million compared to prior year. This increase was mainly due to $33 million of marked-to-market remeasurement losses recorded in the current year on our undesignated interest rate swap contracts versus $68 million of marked-to-market remeasurement gains in the prior year. We also saw $74 million of higher interest expense due to the new $700 million 2023 Dollar Facility and higher interest rates, and $12 million of debt issuance cost amortization primarily due to a $200 million early debt repayment. These increases in interest expense were partially offset by $10 million of interest accretion in the prior year on our Series B Preferred Stock that was fully redeemed in June 2022, and $28 million of gains on our interest derivatives in the current year.
For the year ended December 31, 2022, interest expense decreased by $75 million compared to prior year, primarily due to $61 million of marked-to-market remeasurement gains on our undesignated interest rate swap contracts, $19 million less of interest accretion on the Series B Preferred Stock that was issued at Emergence and fully redeemed in June 2022, and $9 million of interest expense incurred on our pre-Emergence credit facilities. These decreases were partially offset by $14 million of additional interest expense in 2022 on our current credit facilities entered into at Emergence.
Non-operating income
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Non-operating income | $ | (2) | | | $ | (47) | | | $ | (6) | |
For the year ended December 31, 2023, non-operating income amounted to $2 million compared to $47 million in the prior year. The decrease in non-operating income was primarily driven by a $30 million decrease in the non-service components of net periodic pension benefits, a $13 million loss on the remeasurement of the Series A Preferred Stock Agreement during the three months ended June 30, 2023, and a $4 million increase in foreign exchange transactional losses.
For the year ended December 31, 2022, non-operating income increased by $41 million compared to prior year. This increase was driven primarily by a $24 million increase in the non-service components of net periodic pension benefits and a $12 million decrease in foreign exchange transactional losses.
Reorganization items, net
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Reorganization items, net | $ | — | | | $ | 3 | | | $ | (125) | |
For the year ended December 31, 2023, there were no expenses incurred for Reorganization items, net.
For the year ended December 31, 2022, reorganization items, net was an expense of $3 million related to professional service fees incurred for the remaining securities litigation from Chapter 11. During the prior year, reorganization items, net amounted to a $125 million gain, representing a $502 million gain on the settlement of Honeywell claims, partially offset by $119 million higher professional service fees related to the Chapter 11 Cases compared to the prior-year period, $79 million related to the termination and an expense reimbursement under a share and asset purchase agreement entered into on the Petition Date by the Debtors, AMP Intermediate B.V. and AMP U.S. Holdings, LLC, $39 million in Directors and Officers insurance related to Chapter 11 Cases, a $19 million write off on debt issuance costs of the debt associated with our pre-petition credit agreement, $13 million in employee stock awards cancellation and $35 million in other costs mainly related to the settlement of unsecured notes.
Tax Expense
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Tax expense | $ | 86 | | | $ | 106 | | | $ | 43 | |
| Effective tax rate | 24.8 | % | | 21.4 | % | | 7.9 | % |
The effective tax rate increased by 3.4 percentage points in 2023 compared to 2022. The increase was primarily due to the rate change impact on deferred tax assets attributable to the certification by the Chinese government of the High and New Technology Enterprise status of the Company’s China operations, which reduced the tax rate to 15% for the respective entity. Further, withholding tax and other taxes on foreign earnings have comparatively increased due to a one-time non-recurring benefit recorded in 2022 related to accrued taxes on distributable reserves. These increases were partially offset by tax benefits in 2023 in Switzerland due to law changes and in Korea for prior year tax settlements.
The effective tax rate increased by 13.5 percentage points in 2022 compared to 2021. The increase was primarily attributable to the nontaxable gain on the settlement of the Honeywell claims (partially offset by non-deductible transaction costs) and increased tax benefits from an internal restructuring, both of which occurred in 2021 and are non-recurring. This increase was partially offset by tax benefits in the current year due to release of reserves for statute of limitation expirations.
In January 2019, the Organization for Economic Co-operation and Development (“OECD”) announced further work in continuation of its Base Erosion and Profit Shifting project, focusing on two “pillars.” Pillar One provides a framework for the reallocation of certain residual profits of multinational enterprises to market jurisdictions where goods or services are used or consumed. Pillar Two consists of two interrelated rules referred to as Global Anti-Base Erosion (“GloBE”) Rules, which operate to impose a minimum tax rate of 15% calculated on a jurisdictional basis. On December 20, 2021, the OECD published GloBE model rules and released multiple rounds of commentary on those rules over the subsequent months. More than 135 OECD member countries have agreed to the key parameters of the model rules, which allow those OECD member countries to begin implementing the GloBE rules in a manner consistent with the agreement reached. The rules were adopted by a number of countries in 2023, with an effective date for fiscal years beginning after December 31, 2023. There is no impact on our 2023 tax provision as any tax cost associated with the implementation of the model rules is treated as a period cost and therefore not recorded until 2024.
We do not expect that Pillar One will have an impact on our operations or effective tax rate. Based on currently enacted legislation, we do not expect Pillar Two to have a significant impact to our 2024 effective tax rate. However, further enactment of legislation by countries in which we do business could have an impact on our 2024 effective tax rate.
Net Income
| | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Net Income | $ | 261 | | | $ | 390 | | | $ | 495 | |
For the year ended December 31, 2023, net income decreased by $129 million compared with the prior year, primarily due to $151 million of higher interest expense, $31 million of higher SG&A expenses and $45 million of lower non-operating income, as discussed above. These decreases were partially offset by $73 million of increased gross profit.
For the year ended December 31, 2022, net income decreased by $105 million compared to prior year primarily as a result of
our separation from Honeywell, including changeslower gross profit of $24 million, a net benefit in
the financing, operations, cost structure2021 of $125 million in Reorganization items, and
personnel needshigher tax expenses of
our business.Further,thehistorical consolidated$63 million. These decreases were partially offset by $75 million of lower interest expense andcombinedfinancialinformationincludesallocationsofcertainHoneywellcorporateexpenses, asdescribedinNote27RelatedPartyTransactionswithHoneywell an increase in our Consolidated and Combined Financial Statements.Webelievetheassumptionsandmethodologiesunderlyingtheallocationnon-operating income oftheseexpensesarereasonable. However,suchexpensesmaynotbeindicativeoftheactuallevelofexpensethatwewouldhaveincurredifwehadoperated $41 million, asanindependent,publiclytradedcompanyorofthecostsexpectedtobeincurredinthefuture.
| | Year Ended December 31, | |
| | 2020 | | | | 2019 | | | | 2018 | | | | 2017 | | | | 2016 | |
| | (Dollars in millions except per share amounts) | |
Selected Statement of Operations Information: | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 3,034 | | | | $ | 3,248 | | | | $ | 3,375 | | | | $ | 3,096 | | | | $ | 2,997 | |
Net income (loss) | | $ | 80 | | | | $ | 313 | | | | $ | 1,206 | | (1) | | $ | (983 | ) | (2) | | $ | 199 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Earnings per common share (3) | | | | | | | | | | | | | | | | | | | | | | | | |
Basic: | | $ | 1.06 | | | | $ | 4.20 | | | | $ | 16.28 | | | | $ | (13.27 | ) | | | $ | 2.69 | |
Diluted: | | $ | 1.05 | | | | $ | 4.12 | | | | $ | 16.21 | | | | $ | (13.27 | ) | | | $ | 2.69 | |
Weighted average common shares (3) | | | | | | | | | | | | | | | | | | | | | | | | |
Basic: | | | 75,543,461 | | | | | 74,602,868 | | | | | 74,059,240 | | | | | 74,070,852 | | | | | 74,070,852 | |
Diluted: | | | 76,100,509 | | | | | 75,934,373 | | | | | 74,402,148 | | | | | 74,070,852 | | | | | 74,070,852 | |
| | As of December 31, | |
| | 2020 | | | | 2019 | | | | 2018 | | | | 2017 | | | | 2016 | |
| (Dollars in millions) | |
Selected Balance Sheet Information: | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 3,017 | | | | $ | 2,275 | | | | $ | 2,124 | | | | $ | 2,997 | | | | $ | 2,661 | |
Long-term debt | | $ | 1,082 | | | | $ | 1,409 | | | | $ | 1,569 | | | | $ | — | | | | $ | — | |
Total liabilities | | $ | 5,325 | | | | $ | 4,408 | | | | $ | 4,641 | | | | $ | 5,192 | | | | $ | 3,882 | |
Total deficit | | $ | (2,308 | ) | | | $ | (2,133 | ) | | | $ | (2,517 | ) | | | $ | (2,195 | ) | | | $ | (1,221 | ) |
(1)
| 2018 Net income was impacted by an internal restructuring of Garrett’s business resulting in a tax benefit of $907 million.
|
(2)
| 2017 Net incomewas impactedby the U.S. Tax Cuts and Jobs Act (the “Tax Act”) resulting in a tax expenseof $1,335 million.
|
(3)
| On October 1, 2018, the date of consummation of the Spin-Off, 74,070,852 shares of the Company’s common stock were distributed to Honeywell stockholders of record as of September 18, 2018. Basic and Diluted EPS for all periods prior to the Spin-Off reflect the number of distributed shares, or 74,070,852 shares. These shares were treated as issued and outstanding from January 1, 2016 for purposes of calculating historical earnings per share.
|
Non-GAAP Measures
It is management’s intent to provide
Management provides non-GAAP financial information,
including EBITDA and Adjusted EBITDA, to supplement the understanding of our business operations and performance, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the most directly comparable GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies and may not be comparable to other similarly titled measures used by other companies. Additionally, the non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Company’s operating results as reported under GAAP.
We believe that EBITDA and Adjusted EBITDA(1)
| | Year Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Net income — GAAP | | $ | 80 | | | $ | 313 | | | $ | 1,206 | |
Net interest expense (income) | | | 76 | | | | 61 | | | | 12 | |
Tax expense (benefit) | | | 39 | | | | 33 | | | | (810 | ) |
Depreciation | | | 86 | | | | 73 | | | | 72 | |
EBITDA (Non-GAAP) | | $ | 281 | | | $ | 480 | | | $ | 480 | |
Other expense, net (which consists of indemnification, asbestos and environmental expenses)(2) | | | 45 | | | | 40 | | | | 120 | |
Non-operating (income) expense(3) | | | 5 | | | | 8 | | | | (2 | ) |
Reorganization items, net(4) | | | 73 | | | | - | | | | - | |
Stock compensation expense(5) | | | 10 | | | | 18 | | | | 21 | |
Repositioning charges(6) | | | 10 | | | | 2 | | | | 2 | |
Foreign exchange (gain) loss on debt, net of related hedging (gain) loss | | | (38 | ) | | | 7 | | | | (7 | ) |
Spin-off costs(7) | | | - | | | | 28 | | | | 6 | |
Professional service costs(8) | | | 52 | | | | - | | | | - | |
Capital Tax expense (9) | | | 2 | | | | - | | | | - | |
Adjusted EBITDA (Non-GAAP) | | $ | 440 | | | $ | 583 | | | $ | 620 | |
(1)
| We evaluate performance on the basis of EBITDA and Adjusted EBITDA. We define “EBITDA” as our net income (loss) calculated in accordance with U.S. GAAP, plus the sum of net interest expense (income), tax expense (benefit) and depreciation. We define “Adjusted EBITDA” as EBITDA, plus the sum of non-operating (income) expense, other expenses, net (which consists of indemnification, asbestos and environmental expenses), stock compensation expense, reorganization items, net, repositioning charges, foreign exchange gain (loss) on debt, net of related hedging (gain) loss, Spin-Off costs, professional services costs and Capital Tax expense. We believe that EBITDA and Adjusted EBITDA are important indicators of operating performance and provide useful information for investors because:
|
1.We define “EBITDA” as our net income calculated in accordance with U.S. GAAP, plus the sum of interest expense net of interest income, tax expense and depreciation. We define “Adjusted EBITDA” as EBITDA, plus the sum of net reorganization items, stock compensation expense, repositioning costs, foreign exchange (gain) loss on debt net of related hedging (gain) loss, loss on extinguishment on debt, discounting costs on factoring, other non-operating income and capital structure transformation expenses; and
| •2.certain adjustment items, while periodically affecting our results, may vary significantly from period to period and have disproportionate effect in a given period, which affects the comparability of our results.
| EBITDA and Adjusted EBITDA exclude the effects of income taxes, as well as the effects of financing and investing activities by eliminating the effects of interest and depreciation expenses and therefore more closely measure our operational performance; and
|
| •
| certain adjustment items, while periodically affecting our results, may vary significantly from period to period and have disproportionate effectina given period, which affects comparability of our results.
|
For 2023, we revised our definition of Adjusted EBITDA to exclude capital structure transformation expenses, which consist of expenses incurred as part of the Transaction. We did not revise prior years' Adjusted EBITDA because there were no other charges similar in nature.In addition, our management may use Adjusted EBITDA in setting performance incentive targets in order to align performance measurement with operational performance.
(2)
| The accounting for the majority of our asbestos-related liability paymentsEBITDA and accounts payable reflect the terms of the Honeywell Indemnity Agreement with Honeywell entered into on September 12, 2018, under which Garrett ASASCO is currently 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 Plan (as defined below), if confirmed by the Bankruptcy Court, will include a global settlement with Honeywell providing for, among other things, 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. See Note 23, Commitments and Contingencies of Notes to the Consolidated and Combined Financial Statements.
|
(3)
| Non-operating (income) expense adjustment includes the non-service component of pension expense and other expense, net and excludes interest income, equity income of affiliates, and the impact of foreign exchange.
|
(4)
| The Company has applied ASC 852 in preparing its Consolidated and Combined 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, certain expenses and gains incurred during the Chapter 11 Cases are recorded within Reorganization items, net in the Consolidated and Combined Statements of Operations. See Note 2, Reorganization and Chapter 11 Proceedings of Notes to the Consolidated and Combined Financial Statements.
|
(5)
| Stock compensation expense adjustment includes only non-cash expenses.
|
(6)
| Repositioning charges adjustment primarily includes severance costs related to restructuring projects to improve future productivity.
|
(7)
| Spin-Off costs primarily include costs incurred for the set-up of the IT, Legal, Finance, Communications and Human Resources functions after the Spin-Off from Honeywell on October 1, 2018.
|
(8)
| Professional service costs consist of professional service fees related to strategic planning for the Company in the period before the decision to file for relief under Chapter 11 of the Bankruptcy Code in September 2020. We consider these costs to be unrelated to our ongoing core business operations.
|
(9)
| The canton of Vaud, Switzerland generally provides for crediting the cantonal corporate income tax against capital tax. There was no income tax payable for the year ended December 31, 2020 and therefore the 2020 capital tax due of $2 million was recorded in Selling, General, and Administrative expenses.
|
Adjusted EBITDA (Non-GAAP)(non-GAAP)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Net income — GAAP | $ | 261 | | | $ | 390 | | | $ | 495 | |
| Interest expense, net of interest income | 152 | | | 6 | | | 82 | |
| | | | | |
| Tax expense | 86 | | | 106 | | | 43 | |
| Depreciation | 90 | | | 84 | | | 92 | |
| EBITDA (Non-GAAP) | $ | 589 | | | $ | 586 | | | $ | 712 | |
| Discounting costs on factoring | 4 | | | 2 | | | — | |
Non-operating (income) expense (1) | (6) | | | (41) | | | (12) | |
Reorganization items, net (2) | — | | | 3 | | | (125) | |
Stock compensation expense (3) | 14 | | | 11 | | | 7 | |
| Repositioning costs | 13 | | | 4 | | | 16 | |
| Foreign exchange (gain) loss on debt, net of related hedging (gain) loss | (1) | | | — | | | 9 | |
Capital structure transformation expenses (4) | 22 | | | — | | | — | |
| Loss on extinguishment of debt | — | | | 5 | | | — | |
| Adjusted EBITDA (Non-GAAP) | $ | 635 | | | $ | 570 | | $ | 570 | | $ | 607 | |
(1)The adjustment for non-operating (income) expense reflects the non-service component of net periodic pension costs and other income that are non-recurring or not considered directly related to the Company's operations.
(2)The Company applied ASC 852 for periods subsequent to the Petition Date to distinguish transactions and events that were directly associated with the Company’s reorganization from the ongoing operations of the business. Accordingly, certain expenses and gains incurred during the Chapter 11 Cases are recorded within Reorganization items, net in the Consolidated Statements of Operations. See Note 2, Plan of Reorganization of the Notes to the Consolidated Financial Statements.
(3)Stock compensation expense includes only non-cash expenses.
(4)Includes the loss on remeasurement of the Series A Preferred Stock Agreements as well as third-party legal and advisory fees that are directly attributable to the Transaction.
Adjusted EBITDA for the year ended December 31, 2023 compared with year ended December 31, 2022
For the year ended December 31, 2023, net income decreased by $143$129 million in 2020versus the prior year as discussed above within the Results of Operations section.
Adjusted EBITDA increased by $65 million compared to 2019.the prior year, mainly on higher volumes primarily in small-engine gasoline applications which drove unfavorable mix impact. Additionally, operational productivity and inflation pass-through net of pricing contributed $69 million improvement year-over-year offsetting $14 million higher R&D investment including new zero emission technologies. The impact of foreign currency impact was zero for the year.
During 2023, we saw strong customer demand increases in diesel and gasoline product lines, in a less disruptive supply chain environment, as the industry recovered from semiconductor shortages experienced in the prior year. Favorable impacts were also experienced from new product launches in gasoline, favorable aftermarket conditions such as continued high demand for replacement parts and new product launches coupled with price increases.
We maintained our focus on productivity in 2023 as rising commodity prices led to higher raw material costs, particularly for steel alloys and nickel. We recovered most of these increases through customer pass-through agreements, especially on nickel, and continue to negotiate with our customers for further pass-through while actively managing our supply base and cost recovery mechanisms to minimize the impact of materials cost inflation. The increased productivity was partially offset by year-over-year labor inflation.
R&D expenses increased $14 million which reflects our continued investment in new technologies, increased hiring to accelerate growth in the new technologies and year-over-year labor inflation.
There was no impact from foreign currency with translational and transactional impacts being offset by hedge remeasurement.
Adjusted EBITDA for the year ended December 31, 2022 compared with year ended December 31, 2021
For the year ended December 31, 2022, net income decreased $105 million versus the prior year as discussed above within the Results of Operations section. Our volumes for 2022 totaled 13.6 million units, representing a decrease was primarilyof approximately 1% from the prior year.
Adjusted EBITDA decreased by $37 million compared to the prior year mainly due to unfavorable impacts of volume ($94 million), selling, generalforeign exchange impacts. While we saw increased inflation on commodities, transportation and administrative expenses ($28 million), productivity,energy, and we also increased our R&D spending on zero emission technologies, this was more than offset by an improved product mix net of mix ($26 million),lower volumes, productivity, and inflation ($13 million)pass-through net of pricing. Our Adjusted EBITDA margin decreased by 90 basis points, of which 80 basis points was driven by the unfavorable foreign exchange impacts and price ($18 million),inflation pass-through to customers.
During 2022, we faced demand volatility driven mainly by the global semiconductor shortage, geopolitical tensions and ongoing impacts from Covid restrictions primarily in China, all of which resulted in supply chain disruptions. We maintained our focus on productivity in 2022 as rising commodity prices led to higher raw material costs, particularly for nickel, aluminum and steel alloys. We recovered the cost increases from our customer pass-through agreements, and continue to negotiate with our customers for further escalators while actively managing our supply base and cost recovery mechanisms to mitigate the impact of materials, transportation and energy cost inflation. The increased productivity was partially offset by year-over-year labor inflation, increased travel expenses, higher bad debt expenses and increased premium freight costs driven by supply chain disruptions, transportation constraints and volume volatility.
R&D expenses increased $17 million which primarily reflects our increased investment in zero emission technologies.
Liquidity and Capital Resources
Overview | | | | | | | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 | | 2021 |
| | (Dollars in millions) |
| Cash and cash equivalents | $ | 259 | | | $ | 246 | | | $ | 423 | |
| Restricted cash | 1 | | | 2 | | | 41 | |
| Revolving Facility - available borrowing capacity | 570 | | | 475 | | | 297 | |
| Revolving Facility - borrowings or letters of credit outstanding | — | | | — | | | 3 | |
| Term Loan Facilities - principal outstanding | 1,696 | | | 1,186 | | | 1,223 | |
| Bilateral letter of credit facility - remaining available capacity | 3 | | | 1 | | | 27 | |
| Bilateral letter of credit facility - utilized capacity | 12 | | | 14 | | | 8 | |
On April 27, 2023, the favorable impactCompany entered into an amendment to its existing credit agreement which provided for additional financing of lower research$700 million in the form of the 2023 Dollar Term Facility and developmentan increase of $95 million in maximum borrowings available under the Company's revolving credit facility (the "Revolving Facility") to an aggregate of $570 million. The proceeds from the 2023 Dollar Term Facility were primarily used to finance the repurchase of shares of Series A Preferred Stock from the C&O Investors as part of the Transaction, and pay fees and expenses ($18 million)incurred in connection with the credit agreement amendment. The 2023 Dollar Term Facility matures on April 30, 2028. Prior to
maturity, the 2023 Dollar Term Facility will be repaid quarterly in an amount equal to, during the first two years occurring after the Closing Date, 7.50% per annum of the aggregate principal amount, and foreign exchange ratesthereafter, 10.00% per annum. During the year ended December 31, 2023, we repaid $200 million on our 2023 Dollar Term Facility and $7 million on our 2021 Dollar Term Facility.
As previously disclosed, the Company entered into the Agreements with the C&O Investors to repurchase certain shares and convert all remaining Series A Preferred Stock. As part of the Transaction, all holders of Series A Preferred Stock, including the C&O Investors, received an amount equal to the Accumulated Dividends and Additional Amounts outstanding at repurchase or conversion date (each as defined in Note 21, Equity of the Notes to the Consolidated Financial Statements. As of December 31, 2023, all Series A Preferred Stock had either been repurchased or converted and there are no accumulated unpaid dividends on the Series A Preferred Stock. Refer to Note 21, Equityof the Notes to the Consolidated Financial Statements for further details regarding the Transaction.
For 2024, we expect capital spending to increase slightly as compared to 2023. We expect to repay $7 million on our 2021 Dollar Term Facility. We also expect to pay approximately $36 million related to purchase obligations which were entered into with various vendors in the normal course of business and are consistent with our expected requirements. Finally, we expect to make contributions of approximately $7 million to our non-U.S. pension plans.
We fund our operations primarily through cash flows from operating activities, borrowings from our credit facilities and cash and cash equivalents. We believe the combination of expected cash flows, the term loan borrowings and the revolving credit facilities being committed until 2028, will provide us with adequate liquidity to support the Company's operations.
Share Repurchase Program
On November 16, 2021, the Board of Directors authorized a $100 million share repurchase program valid until November 15, 2022, providing for the purchase of shares of Series A Preferred Stock and Common Stock. On November 2, 2022, the Board of Directors authorized the extension of the share repurchase program by one year, to November 15, 2023. On April 12, 2023, the Board of Directors further authorized an increase in the size of the share repurchase program to an aggregate amount of $250 million available as of that date. On November 1, 2023, the Board of Directors authorized the extension of the share repurchase program through December 31, 2023. For more information, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Issuer Purchases of Equity Securities.
During the year ended December 31, 2023, the Company repurchased less than $1 million of Series A Preferred Stock and $213 million of its Common Stock. The share repurchase program expired on December 31, 2023.
On February 13, 2024, the Board of Directors authorized a new $350 million share repurchase program valid until December 31, 2024.
Off-Balance Sheet Arrangement
The Company did not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources as of December 31, 2023 and 2022.
Cash Flow Summary for the Years Ended December 31, 2023, 2022 and 2021
Our cash flows from operating, investing and financing activities for the years ended December 31, 2023, 2022 and 2021, as reflected in the Consolidated Financial Statements included in this Annual Report, are summarized as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Cash provided by (used for): | | | | | |
| Operating activities | $ | 465 | | | $ | 375 | | | $ | (310) | |
| Investing activities | (55) | | | (91) | | | (71) | |
| Financing activities | (403) | | | (482) | | | 139 | |
| Effect of exchange rate changes on cash | 5 | | | (18) | | | 13 | |
| Net increase in cash and cash equivalents | $ | 12 | | | $ | (216) | | | $ | (229) | |
Cash Flow Summary for the year ended December 31, 2023
Cash provided by operating activities increased by $90 million for the year ended December 31, 2023 versus the prior
year’s hedge losses ($18 million).
Cash flow from operations less Expenditures for property, plant and equipment(1)
| | Year Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Net cash (used for) provided by operating activities — GAAP | | | 25 | | | | 242 | | | | 373 | |
Expenditures for property, plant and equipment | | | (80 | ) | | | (102 | ) | | | (95 | ) |
Cash flow from operations less Expenditures for property, plant and equipment (Non-GAAP) | | $ | (55 | ) | | $ | 140 | | | $ | 278 | |
(1)
| Cash flow from operations less Expenditures for property, plant and equipment is a non-GAAP financial measure that reflects an additional way of viewing our liquidity that, when viewed with our GAAP results, provides a supplemental understanding of factors and trends affecting our cash flows. Cash flow from operations less Expenditures for property, plant and equipment is calculated by subtracting Expenditures for property, plant and equipment from Net cash provided by (used for) operating activities. We believe it is a more conservative measure of cash flow, and therefore useful to investors, because purchases of fixed assets are necessary for ongoing operations. We believe it is important to view Cash flow from operations less Expenditures for property, plant and equipment as a supplement to our Consolidated and Combined Statements of Cash Flows.
|
Cash flow from operations less Expenditures for property, plant and equipment (non-GAAP) decreasedyear. The increase was driven by $195$63 million of working capital contribution related primarily build-ups of inventory in 2020 versus 2019, primarily due to a decreasethe prior year. An increase of $32 million in net income, netexcluding the effects of deferred taxes of $226 million and unfavorable impact from working capital of $194 million,non-cash items, also contributed to the increase in cash provided by operating activities, partially offset by a decrease in Obligations to Honeywell of $149 million and an increase of $54 million in other items (mainly accrued liabilities). Additionally, Expenditures for property, plant and equipment expenses decreased by $22 million.
Item 7. Management’sDiscussion andAnalysis of FinancialConditionand Resultsof Operations
The following discussion and analysis of our financial condition and results of operations, which we refer to as our “MD&A,” should be read in conjunction with our Consolidated and Combined Financial Statements and related notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many important factors, including those set forth in the "Risk Factors" section of this Annual Report on Form 10-K, our actual results could differ materially from the results described in, or implied, by these forward-looking statements.
The followingManagement’sDiscussionand Analysisof FinancialCondition and Resultsof Operationsis intendedto help you understandthe resultsof operationsand financialconditionof Garrett Motion Inc. for the yearsended December31, 2020, 2019 and 2018. 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 our spin-off from Honeywell International Inc. (the “Spin-Off”) and (ii) Garrett Motion Inc. and its subsidiaries following the Spin-Off, as applicable. References to the “Debtors” refer to the Company and certain of its subsidiaries that 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.”
OverviewandBusiness Trends
Garrett designs,manufacturesand sellshighly engineeredturbochargerand electric-boosting technologiesfor lightand commercialvehicle original equipment manufacturers (“OEMs”)and the globalvehicleindependentaftermarket as well as automotive software solutions.These OEMsin turn ship to consumersglobally.We are a globaltechnologyleaderwith significantexpertisein deliveringproductsacrossgasoline,diesel, natural gasand electric(hybridand fuelcell)powertrains.These productsare key enablersfor fueleconomy and emissionstandardscompliance.
Marketpenetrationof vehicleswith a turbochargeris expectedto increasefromapproximately53% in 2020 to approximately56% by 2025, accordingto IHS Markit (“IHS”), which webelievewill allow the turbocharger marketto grow at a fasterratethan overallautomobileproduction.We expect that the powertrain mix evolution trends will remain mostly unchanged, which should support the turbocharger industry in the short to medium term. In particular, the reduction of battery electric vehicle (“BEV”) incentives in China from June 2019 and the change in new energy vehicles (“NEV”) credit policy in November 2019, led to a drop in BEV penetration in China between July 2019 and June 2020. Renewed sales incentives, especially in Tier 2 and Tier 3 cities, as well as non-financial incentives such as more generous license-plate quotas for major metropolitan areas, bolstered Chinese BEV penetration in the second half of 2020. In Europe, the COVID-19 stimulus packages are mostly directed to electric vehicles, but we do not expect a material adverse impact on the turbocharger market in the short term, as selling price, charging time, charging infrastructure availability and profitability issues for OEMs remain challenged to adoption. However, in the long term, a revision of CO2 reduction targets by 2030 proposed by the E.U. could drive an increase of BEV penetration in Europe beyond currently forecasted levels. The turbochargermarketvolumegrowth is expected to be particularlystrongin China and otherhigh-growthregions in the same period.
In the short to medium term, we believe that turbo penetration will grow as turbos remain one of the mostcost- efficient levers to improve thefuelefficiencyof conventional Gasolineand Diesel vehiclesas well as hybridand fuel- cellvehicles.
Growth in the turbomarketis expected in all regions, with special mention for high-growthregions in Asia where risingincomelevelscontinue to drive long-term automotiveand vehiclecontentdemand. While these positive factors do not isolate the turbo industry from fluctuations in global vehicle production volumes, such factors may mitigate the negative impact of macroeconomic cycles, or the negative impact of a shift from light vehicle Diesel to light vehicle Gasoline engines.
In addition, specific to Garrett’s reorganization and Chapter 11 Cases (as defined below), financial situation and high debt leverage, we have seen an increase in potential risk developing with some OEMs questioning whether to award (or award less) new business to Garrett in the next few years, which has impacted our long term revenue expectations. In the shorter term, financial stability concerns could also drive some OEMs to consider dual sourcing some of the high volume engine platforms, already awarded to Garrett, in order to balance perceived supply risk and possibly shift volumes to the second source supplier.
For additional information regarding trends facing our industry, our reorganization and Chapter 11 Cases as well as the impact of the COVID-19 pandemic on our business, see Part I, Item 1, “Business” under the headings “Our Industry”, “Reorganization and Chapter 11 Proceedings” and “Impact of the COVID-19 Pandemic”, respectively.
Basis of Presentation
Prior to the Spin-Off on October 1, 2018, our historical financial statements were prepared on a stand–alone basis and derived from the consolidated financial statements and accounting records of Honeywell. Accordingly, for periods prior to October 1, 2018, our financial statements are presented on a combined basis and for the periods subsequent to October 1, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Financial Statements”). The Consolidated and Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Liabilities under the Honeywell Indemnity Agreement
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 (as amended, 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. During the first quarter of 2020, Garrett ASASCO paid Honeywell the Euro-equivalent of $35 million in connection with the Honeywell Indemnity Agreement. Honeywell and Garrett agreed to defer the payment from Garrett ASASCO under the Honeywell Indemnity Agreement due May 1, 2020 to December 31, 2020 (the “Q2 Payment”), however we do not expect Garrett ASASCO to make payments to Honeywell under the Honeywell Indemnity Agreement during the pendency of the Chapter 11 Cases. The Plan (as defined below), if confirmed by the Bankruptcy Court, will include a global settlement with Honeywell providing for, among other things, 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.
On December 2, 2019, the Company and Garrett ASASCO, 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, filed a Complaint in the NY Supreme Court in connection with the Action. The lawsuit arises from the Honeywell Indemnity Agreement. The Company is seeking declaratory relief; compensatory damages in an amount to be determined at trial; rescission of the Honeywell Indemnity 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 Honeywell Indemnity Agreement is not enforceable, in whole or in part. On March 5, 2020, Honeywell filed a “Notice of Motion to Dismiss Garrett’s Complaint”. On September 20, 2020, Garrett and certain of its subsidiaries each filed a voluntary petition for relief under chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York. On September 23, 2020, Garrett removed the Action to the United States District Court for the Southern District of New York, and on September 24, 2020, the Action was referred to the Bankruptcy Court, where the case is currently pending. The defendants’ motion to dismiss the Action is pending.
On December 18, 2020, Honeywell filed proofs of claim in the Chapter 11 Cases, asserting that the Company owes at least $1.9 billion in respect of such claims. The Bankruptcy Court was scheduled to estimate the amount of Honeywell’s claims in a estimation proceeding that was scheduled to commence on February 1, 2021. As noted below, the estimation proceeding has been stayed by order of the Bankruptcy Court.
On January 11, 2021, the Company announced that it had agreed to settle Honeywell’s claims as part of the Plan. The Plan is subject to various conditions, including approval by the Bankruptcy Court.
Under the settlement embodied in the Plan, Honeywell would receive a $375 million payment and Series B Preferred Stock payable in installments of $35 million in 2022, and $100 million annually 2023-2030. The Company would 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 the 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.
On January 15, 2021, the Bankruptcy Court ordered that the Action and the estimation proceeding both be stayed pending the Bankruptcy Court’s consideration of the Plan. The confirmation hearing for the Plan is currently scheduled to take place in April 2021, however, the hearing may be rescheduled for a later date.
Results of Operationsfor the Years EndedDecember 31, 2020, 2019 and2018
Net Sales
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Net sales | | $ | 3,034 | | | $ | 3,248 | | | $ | 3,375 | |
% change compared with prior period | | | (6.6 | )% | | | (3.8 | )% | | | 9.0 | % |
The change in net sales compared to prior year period is attributable to the following:
| | 2020 | | | 2019 | |
Volume | | | (7.3 | )% | | | 1.3 | % |
Price | | | (0.6 | )% | | | (1.1 | )% |
Foreign Currency Translation | | | 1.3 | % | | | (4.0 | )% |
| | | (6.6 | )% | | | (3.8 | )% |
2020 comparedwith 2019
Our net sales for 2020 were $3,034 million, a decrease of $214 million or 6.6% (despite a positive impact of 1.3% due to foreign currency translation), from $3,248 million in 2019. The decrease in sales was primarily driven by light vehicles OEM products decline of $78 million, commercial vehicles OEM products decline of $75 million, aftermarket products decline of $47 million and other products decline of $14 million.
Our light vehicles OEM product decline was primarily driven by lower diesel volumes in Europe and Asia and lower gasoline volumes in Europe, partially offset by increased gasoline volumes in China as a result of increased turbocharger penetration in gasoline engines and new product launches. The decrease in net sales for commercial vehicles OEM products was mainly driven by lower volumes in Europe and North America. The decrease in
aftermarket product sales was primarily driven by volume decreases in Europe and North America. The decrease in other net sales was primarily driven by a decrease in prototype volumes.
Due to the COVID-19 pandemic, our manufacturing facility in Wuhan, China, was shut down for six weeks in February and March 2020 and we saw diminished production in our Shanghai, China facility for the same time period, which were the primary drivers of the decrease in sales in the Asia region during the three months ended March 31, 2020. Since our facilities in China re-opened in the middle of March, the production of those facilities in China has recovered significantly with an increase in net sales of 32% during the remainder of 2020 compared to the same period in 2019.
Our manufacturing facilities in Mexicali, Mexico and Pune, India were shut down for five weeks in April and May 2020 and we saw diminished production in our European manufacturing facilities for that same time period, which were the primary drivers of the decrease in sales in the Europe and North America regions during 2020.
2019 comparedwith 2018
Our net sales for 2019 were $3,248 million, a decrease of $127 million or 3.8% (including a negative impact of 4.0% due to foreign currency translation), from $3,375 million in 2018. The decrease in sales was primarily driven by light vehicles OEM products decline of $57 million, commercial vehicles OEM products decline of $39 million, aftermarket products decline of $20 million and other products decline of $10 million.
Our light vehicles OEM product decline was primarily driven by lower diesel volumes in Europe and Asia, partially offset by higher gasoline volumes as a result of increased turbocharger penetration in gasoline engines and new product launches. The decrease in net sales for commercial vehicles OEM products is mainly driven by lower volumes in Europe and North America. The decrease in aftermarket product sales was primarily driven by a volume decrease in Europe.
Cost of GoodsSold
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Cost of goods sold | | $ | 2,478 | | | $ | 2,537 | | | $ | 2,599 | |
% change compared with prior period | | | (2.3 | )% | | | (2.4 | )% | | | 10.1 | % |
Gross Profit percentage | | | 18.3 | % | | | 21.9 | % | | | 23.0 | % |
2020 comparedwith 2019
Cost of goods sold for 2020 was $2,478 million, a decrease of $59 million or 2.3% from $2,537 million in 2019. The decrease was primarily due to a decrease in direct material costs and labor costs, driven by decreased volumes.
Gross profit percentage decreased by 3.6 percentage points primarily due to unfavorable impacts from mix and price (2.4 percentage points), unfavorable impacts from inflation (0.5 percentage points), unfavorable impact from repositioning costs (0.3 percentage points), and other factors (2.2 percentage points), including higher costs from premium freight and higher one time fixed costs, partially offset by favorable impact of productivity including lower volume leverage (1.5 percentage points) and the favorable impacts from foreign and exchange rates (0.3 percentage points).
2019 comparedwith 2018
Cost of goods sold for 2019 was $2,537 million, a decrease of $62 million or 2.4% from $2,599 million in 2018. The decrease was primarily due to a decrease in direct material costs and labor costs of $113 million primarily due to changes in foreign exchange rates and increases in productivity of $98 million, partially offset by unfavorable impacts from volume and mix of $141 million and other impacts of $8 million.
Gross profit percentage decreased by 1.1 percentage points primarily due to unfavorable impacts from mix (2.8 percentage points), price (0.9 percentage points) and the unfavorable impacts from inflation (0.7 percentage points), partially offset by the favorable impact of productivity (3.1 percentage points) and the favorable impact of foreign exchange rates (0.2 percentage points).
Selling,General andAdministrativeExpenses
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Selling, general and administrative expense | | $ | 277 | | | $ | 249 | | | $ | 249 | |
% of sales | | | 9.1 | % | | | 7.7 | % | | | 7.4 | % |
2020 comparedwith 2019
Selling, general and administrative expenses increased in 2020 compared to 2019 by $28 million, mainly due to an increase of $52 million of professional service fees, primarily related to the strategic planning activities before the decision to file for relief under chapter 11 of the Bankruptcy Code in September 2020, $4 million of bad debt related to customer bankruptcy and $3 million pension costs increase, partially offset by $31 million of cost saving actions implemented to ease the impact of COVID-19 on our financial performance, including merit freezes, state funded lay-offs, unpaid leaves and reductions in travel expenses and professional services, as well as one-time Spin-off costs incurred in the prior year period.
2019 comparedwith 2018
Selling, general and administrative expenses were flat for 2019 compared to 2018 leading to an increase in expenses as a percentage of sales.
Other Expense, Net
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Other expense, net | | $ | 46 | | | $ | 40 | | | $ | 120 | |
% of sales | | | 1.5 | % | | | 1.2 | % | | | 3.6 | % |
2020 comparedwith 2019
Other expense, net increased in 2020 compared to 2019 by $6 million. The increase was attributable to a $12 million increase in legal fees incurred in connection with the Honeywell Indemnity Agreement, partially offset by a $8 million decrease in litigation-related expenses in connection with the pending litigation against Honeywell.
2019 comparedwith 2018
Other expense, net decreased in 2019 by $80 million compared to 2018. For 2019, Other expense, net of $40 million primarily reflects $28 million of legal fees incurred in connection with the Honeywell Indemnity Agreement, $11 million of legal fees in connection with the pending litigation against Honeywell, and $1 million in factoring and notes receivables discount fees. For 2018, Other expense, net of $120 million was primarily driven by asbestos-related charges, net of probable insurance recoveries of $131 million.
InterestExpense
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Interest Expense | | $ | 79 | | | $ | 68 | | | $ | 19 | |
2020 compared with 2019
Interest expense increased in 2020 compared to 2019 by $11 million, mainly due to $16 million of higher outstanding Revolving Credit Facility drawings, additional fees associated with the amendment of our Credit Agreement, higher interest margins, post-petition Banks’ cancellations of cross-currency interest rate swaps and supplementary DIP financing, partially offset by $5 million of lower interest expense on our Term Loans due to voluntary prepayments in 2019.
2019 compared with 2018
Interest expense in 2019, was $68 million, an increase of $49 million from $19 million in 2018. The increase was primarily driven by interest expense related to our long-term debt. Prior to the Spin-Off, interest expense was primarily related to related party notes from cash pool arrangements with our Former Parent which were settled in cash prior to the Spin-Off.
Non-operating (income) expense
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Non-operating (income) expense | | $ | (38 | ) | | $ | 8 | | | $ | (8 | ) |
2020 compared with 2019
Non-operating (income) expense in 2020 increased to income of $38 million from an expense of $8 million in 2019, primarily due to a significant unhedged exposure driven by the termination of all derivatives and closing of the credit lines, as a consequence of Chapter 11 filing.
2019 compared with 2018
Non-operating expense (income) in 2019 decreased to an expense of $8 million from an income of ($8) million in the prior year period, primarily driven by $6 million of marked to market pension costs and other non-service components of pension costs, $7 million of foreign exchange costs, net of hedging and a $4 million decrease in interest income from bank accounts and marketable securities.
Reorganization items, net
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Reorganization items, net | | $ | 73 | | | $ | — | | | $ | — | |
2020 compared with 2019
Reorganization items, net for 2020 were $73 million, representing professional service fees related to Chapter 11 of $55 million, DIP Credit Agreement financing fees of $13 million and the write-off of the unamortized deferred high yield debt issuance cost of $6 million. There were no Reorganization items, net for the years ended December 31, 2019, and December 31, 2018, since these are new items related to the Chapter 11 Cases.
Tax Expense (Benefit)
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Tax expense (benefit) | | $ | 39 | | | $ | 33 | | | $ | (810 | ) |
Effective tax rate | | | 32.8 | % | | | 9.5 | % | | | (204.5 | )% |
2020 comparedwith 2019
The effective tax rate increased by 23.3 percentage points in 2020 compared to 2019. The increase was primarily attributable to the absence of tax benefits related to the remeasurement of deferred tax assets and liabilities for tax law changes enacted during 2019, higher tax expense because of nondeductible costs incurred in connection with the Chapter 11 Cases, the resolution of tax audits and an increase in losses for jurisdictions where we don’t expect to generate future tax benefits from such losses. The increase in the effective tax rate was also impacted by overall lower earnings compared to 2019 because of the adverse impacts of COVID-19, partially offset by tax benefits from lower withholding taxes on non-US earnings.
2019 comparedwith 2018
The effective tax rate increased by 214.0 percentage points in 2019 compared to 2018. The increase was primarily attributable to the absence of approximately $910 million of non-recurring tax benefits in 2018 because of a reduction in withholding taxes incurred as part of an internal restructuring of Garrett’s business in advance of the Spin-Off. The increase was partially offset by approximately $60 million of tax benefits related to the remeasurement of deferred tax assets and liabilities for tax law changes enacted during 2019, primarily in Switzerland.
Net Income (loss)
$5 million. | | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Net Income (loss) | | $ | 80 | | | $ | 313 | | | $ | 1,206 | |
2020 comparedwith 2019
As a result of the factors described above, net income was $80 million in 2020 as compared to net income of $313 million in 2019.
2019 comparedwith 2018
As a result of the factors described above, net income was $313 million in 2019 as compared to net income of $1,206 million in 2018. Net income for 2018 includes an $879 million tax benefit from reduced withholding taxes on undistributed earnings and no interest expense related to our long-term debt raised at the time of the Spin-Off.
Liquidity andCapital Resources
As described above, the commencement of the Chapter 11 Cases constituted an event of default that accelerated the Company’s obligations, as applicable, under the Prepetition Credit Agreement (as defined below) and the Company’s 5.125% senior notes due 2026 (the “Senior Notes”). The Prepetition Credit Agreement and Senior Notes provide 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 and Senior Notes are automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the Prepetition Credit Agreement and Senior Notes are subject to the applicable provisions of the Bankruptcy Code.
We expect that our cash requirements in 2021 will primarily be to fund operating activities, working capital, Chapter 11 case related costs and capital expenditures. We have historically funded our cash requirements, which included requirements to meet our obligations under our debt instruments and the Honeywell Indemnity Agreement described below, as well as the tax matters agreement with Honeywell (the “Tax Matters Agreement”), through the combination of cash flows from operating activities, available cash balances and available borrowings through our debt agreements. During the Chapter 11 Cases, our principal sources of liquidity are expected to be limited to cash flow from operations, cash on hand and borrowings under the DIP Credit Agreement (as defined below). Based on our current expectations, we believe these principal sources of liquidity during the Chapter 11 Cases will be sufficient to fund our operations during the pendency of the Chapter 11 Cases. Under the terms of the Transaction contemplated by the PSA and the Plan, the CO Group obtained a commitment from certain financial institutions to provide us with new credit facilities upon Emergence, and, if the Transaction, PSA and Plan are approved by the Bankruptcy Court, we expect to enter into definitive documentation for such credit facilities in connection with Emergence.
Going Concern
Our 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, we 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 our Consolidated and Combined 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 and Combined Financial Statements. 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.
Senior Credit Facilities
On September 27, 2018, we entered into a 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 “Prepetition Credit Agreement”). The Prepetition Credit Agreement was amended on June 12, 2020 (the “2020 Amendment”). The Prepetition Credit Agreement provides for senior secured financing of approximately the Euro equivalent of $1,254 million, consisting of (i) a seven-year senior secured first-lien term B loan facility, which consists of a tranche denominated in Euro of €375 million and a tranche denominated in U.S. Dollars of $425 million (the “Term B Facility”), (ii) a five-year senior secured first-lien 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 (iii) a five-year senior secured first-lien revolving credit facility in an aggregate principal amount of €430 million with revolving loans to the Swiss Borrower (as defined in the Prepetition Credit Agreement), to be made available in a number of currencies including Australian Dollars, Euros, Pounds Sterling, Swiss Francs, U.S. Dollars and Yen (the “Revolving Facility” and, together with the Term Loan Facilities, the “Senior Secured Credit Facilities”).
Following the commencement of the Chapter 11 Cases, the contractual non-default rate of interest applicable under the Senior Secured Credit Facilities is either (a) in the case of dollar denominated loans, base rate determined by reference to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (2) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.5% and (3) the one month adjusted LIBOR rate, plus 1% per annum (“ABR”), (b) in the case of loans denominated in certain permitted foreign currencies other than dollars or euros, an adjusted LIBOR rate (“LIBOR”) (which shall not be less than zero), or (c) in the case of loans denominated in euros, an adjusted EURIBOR rate (“EURIBOR”) (which shall not be less than zero), in each case, plus an applicable margin. Pursuant to the 2020 Amendment, (i) the margin applicable to loans under the Term B Facility increased by 75 basis points through the maturity date and (ii) the margin applicable to loans under the Revolving Facility and Term A Facility increased by 25 basis points until the Company delivers consolidated financial statements as of and for its first fiscal quarter ending on or after the last day of the Relief Period (as defined in the 2020 Amendment). Pursuant to the 2020 Amendment, the margin applicable to Revolving Credit Facility and Term Loan A Facility increased by a further 25 basis points on September 4, 2020 following a downgrade in our corporate credit rating by S&P Global ratings.
The applicable margin for the U.S. Dollar tranche of the Term B Facility is currently 2.50% per annum (for ABR loans) while that for the euro tranche of the Term B Facility is currently 3.75% per annum (for EURIBOR loans). The applicable margin for each of the Term A Facility and the Revolving Facility varies based on our leverage ratio which is increased by 50 basis points (including above mentioned Ratings event step up) until the Company delivers consolidated financial statements as of and for its first fiscal quarter ending on or after the last day of the Relief Period. Accordingly, the interest rates for the Senior Secured Credit Facilities will fluctuate during the term of the Prepetition Credit Agreement based on changes in the ABR, LIBOR, EURIBOR or future changes in our corporate rating or leverage ratio. The applicable margins for credit arrangements are summarized as follows:
| | Applicable margin per annum | |
| | Until end of Relief period | | | Thereafter | |
Credit Arrangements: | | | | | | | | |
Revolving Credit Facility LIBOR / EURIBOR | | | 3.00 | % | | | 2.75 | % |
Revolving Credit Facility ABR | | | 2.00 | % | | | 1.75 | % |
Term Loan A | | | 3.00 | % | | | 2.75 | % |
Term Loan B EUR EURIBOR | | | 3.75 | % | | | 3.75 | % |
Term Loan B USD LIBOR | | | 3.50 | % | | | 3.50 | % |
Term Loan B USD ABR | | | 2.50 | % | | | 2.50 | % |
The commencement of the Chapter 11 Cases described above constituted an event of default that accelerated the Company’s obligations and terminated undrawn commitments, 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.
During the Chapter 11 Cases and pursuant to an order of the Bankruptcy Court, we make monthly payments of adequate protection at the contractual non-default rate of interest on loans and certain other obligations under our Senior Secured Credit Facilities.
Senior Notes
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 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, 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 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.
The commencement of the Chapter 11 Cases described above constituted an event of default that accelerated the Company’s obligations, as applicable, under the Senior Notes. The Senior Notes provide 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 Senior Notes are automatically stayed as a result of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the Senior Notes are subject to the applicable provisions of the Bankruptcy Code. For additional information regarding our Prepetition Credit Agreement, see Note 16, Long-term Debt and Credit Agreements of the notes to the Consolidated and Combined Financial Statements.
DIP Credit Agreement
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 (as amended, restated, supplemented or otherwise modified from time to time, 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”) with a maximum 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 Amendment”). The First 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. For additional information regarding the terms of the DIP Credit Agreement, see Note 2, Reorganization and Chapter 11 Proceedings of the Notes to the Consolidated and Combined Financial Statements and Note 16, Long-term Debt and Credit Agreements of the notes to the Consolidated and Combined Financial Statements.
Delisting from NYSE
On September 20, 2020, we were 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 NYSE had commenced proceedings to delist our common stock from the NYSE. The NYSE indefinitely suspended trading of our common stock on September 21, 2020. We 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 our common stock from listing and registration on the NYSE effective as of the opening of business on October 19, 2020. The delisting of our common stock from NYSE has and could continue to limit the liquidity of our common stock, increase the volatility in the price of our common stock, and hinder our ability to raise capital.
Honeywell Indemnity Agreement
On September 12, 2018, Garrett ASASCO entered into the Honeywell Indemnity Agreement, under which Garrett ASASCO is required to make certain 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 the Honeywell Indemnity Agreement, Garrett ASASCO is responsible for paying to Honeywell such amounts, up to a cap equal to the Distribution Date Currency Exchange Rate (1.16977 USD = 1 EUR) equivalent of $175 million (exclusive of any late payment fees) in respect of such liabilities arising in any given calendar year. In addition, the payments that Garrett ASASCO is required to make to Honeywell pursuant to the terms of the Honeywell Indemnity Agreement will not be deductible for U.S. federal income tax purposes. 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.
During the first quarter of 2020, Garrett ASASCO paid Honeywell the Euro-equivalent of $35 million in connection with the Honeywell Indemnity Agreement. In January 2020 we received from Honeywell the 2019 Prior Year Aggregate Loss Statement (as defined in the Honeywell Indemnity Agreement) which confirmed that the payments made to Honeywell as required by the Honeywell Indemnity Agreement in 2019 included an overpayment of $33 million. This payment would have been deducted from the second quarter 2020 payment and would have reduced the cash payments payable to Honeywell in 2020. Honeywell and Garrett agreed to defer the second quarter 2020 payment due May 1, 2020 to December 31, 2020 but the second quarter 2020 payment was not paid on this date as a result of the automatic stay applicable to the Debtors under the Bankruptcy Code as a result of the Chapter 11 Cases. We do not expect Garrett ASASCO to make payments to Honeywell under the Honeywell Indemnity Agreement during the pendency of the Chapter 11 Cases.
Under the terms of the PSA and the Transaction, the Plan, if confirmed by the Bankruptcy Court, will include 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 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 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.
The terms of the PSA, the Transaction and the Plan remain subject to approval by the Bankruptcy Court. There can be no assurances that we will obtain the approval of the Bankruptcy Court and complete the Transaction.
Tax Matters Agreement
On September 12, 2018, we entered into a 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 we are responsible and will indemnify Honeywell for all taxes, including income taxes, sales taxes, VAT 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, Garrett ASASCO 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. Additionally, the Tax Matters Agreement provides that Garrett ASASCO is to make payments to a subsidiary of Honeywell for a portion of Honeywell’s net tax liability under Section 965(h)(6)(A) of the Internal Revenue Code for mandatory transition taxes that Honeywell determined is attributable to us (the “MTT Claim”). Following the Spin-Off, Honeywell asserted that Garrett ASASCO was obligated to pay $240 million to Honeywell for the MTT Claim under the Tax Matters Agreement. Accordingly, and in connection with the Tax Matters Agreement, we made payments to Honeywell, under protest, for the Euro-equivalent of $18 million and $19 million during 2019 and the fourth quarter of 2018, respectively, for the MTT Claim. On October 30, 2020, however, Honeywell filed an SEC Form 10-Q for the quarterly period ended September 30, 2020, reporting that its claim against us under the Tax Matters Agreement, including the MTT Claim, is now $273 million. Under the terms of the Tax Matters Agreement, Garrett ASASCO is 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. Garrett ASASCO paid the first annual installment in October 2018 and subsequent annual installments are due in April of each year. The annual installment due on April 1, 2020 was deferred to December 31, 2020 in agreement with Honeywell but was not paid on this dateas a result of the automatic stay applicable to the Debtors under the Bankruptcy Code as a result of the Chapter 11 Cases. We do not expect Garrett ASASCO to make payments to Honeywell under the Tax Matters Agreement during the pendency of the Chapter 11 Cases.
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.
As described above, under the terms of the PSA and the Transaction, the Plan, if confirmed by the Bankruptcy Court, will include a global settlement with Honeywell providing for the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to the Tax Matters Agreement. 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. Our entry into and performance under the PSA and the terms of the PSA, the Transaction and the Plan remain subject to
approval by the Bankruptcy Court. There can be no assurances that we will obtain the approval of the Bankruptcy Court and complete the Transaction.
CashFlowSummary for the Years EndedDecember31, 2020, 2019 and2018
Our cash flows fromoperating,investingand financingactivitiesfor the yearsended December31, 2020, 2019 and 2018, as reflectedin the audited Consolidated and Combined FinancialStatementsincludedelsewherein this Annual Report on Form 10-K,are summarizedas follows:
| | Year Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Cash provided by (used for): | | | | | | | | | | | | |
Operating activities | | $ | 25 | | | $ | 242 | | | $ | 373 | |
Investing activities | | | (80 | ) | | | (86 | ) | | | 192 | |
Financing activities | | | 530 | | | | (163 | ) | | | (658 | ) |
Effect of exchange rate changes on cash | | | 31 | | | | (2 | ) | | | (11 | ) |
Net increase (decrease) in cash and cash equivalents | | $ | 506 | | | $ | (9 | ) | | $ | (104 | ) |
2020 comparedwith 2019
Cash provided by operating activities decreased by $217 million for 2020 in comparison to 2019, primarily due to a decrease in net income, net of deferred taxes of $226 million, unfavorable impact from working capital of $194 million, partially offset by a decrease in Obligations to Honeywell of $149 million and an increase of $54 million in other items (mainly accrued liabilities).
Cash used for investing activities decreased by $6$36 million in 2020 compared to 2019, primarilyfor the year ended December 31, 2023 versus the prior year. The decrease is due to a favorable impact$28 million of proceeds from Expendituresour cross-currency swap contracts which have been designated as net investment hedges of our Euro-denominated operations and $8 million of lower expenditures for property, plant and equipment of $22 million, due to higher customer contribution and lower spend, partially offset by an unfavorable impact from a prior year settlement received on the re-couponing of our cross currency swap contract of $19 million.
Cash provided by financing activities increased by $693 million in 2020, as compared to 2019. The change was driven by a draw down, net of payments, on our Revolving Facility of $349 million, payments of long-term debt during 2020 totaling $2 million, as compared to $163 million of such payments during 2019 and proceeds from debtor-in-possession credit agreement, net of financing fees of $187 million.
2019 compared with 2018
Cash provided by operating activities decreased by $131 million for 2019 in comparison to 2018, primarily due to a decrease in Obligations to Honeywell of $67 million, higher cash interest payments of $46 million, a decrease in net income, net of deferred taxes of $3 million and a decrease of $39 million in other items (accrued liabilities and other assets), partially offset by a favorable impact from working capital of $24 million.
Cash provided by investing activities decreased by $278 million in 2019 compared to 2018, primarily due to unfavorable net cash impacts from marketable securities investments activities year over year of $291 million and unfavorable impact from Expenditures for property, plant and equipment of $7 million, partially offset by a favorable impact from the cash settlement received on the re-couponing of our cross currency swap contract of $19 million.
equipment.
Cash used for financing activities decreased by $495$79 million for the year ended December 31, 2023 compared with the prior year. Cash flows used for financing activities during the current year included $667 million from the 2023 Dollar Term Facility net of debt financing costs. We paid an aggregate amount of $605 million to holders of the Series A Preferred Stock related to the Transaction, including conversion of the Series A Preferred Stock as discussed above and in Note 21, Equity of the Notes to the Consolidated Financial Statements. We also made payments of $213 million for the repurchase of Common Stock under our share repurchase program and debt repayments of $207 million. In comparison, cash used for financing activities in the prior year was primarily related to the Company's payment of $381 million for the final early redemption of our Series B Preferred Stock (exclusive of $28 million attributable to interest and included in cash from operating activities) and $83 million for dividends on Series A Preferred Stock, while in the current year, there were $42 million in 2019,payments of accrued dividends on the Series A Preferred Stock through June 2023.
Cash Flow Summary for the year ended December 31, 2022
Cash provided by operating activities increased by $685 million for 2022 versus the prior year, primarily due to a $375 million payment made to Honeywell in 2021 pursuant to the Plan, and a decrease in net income of $105 million, net of a $393 million increase in non-cash adjustments which included a $435 million gain recognized in prior year on reorganization items, a $66 million increase in the fair value of our undesignated derivative instruments and $28 million of the redemption attributable to interest of Series B Preferred Stock. We also saw favorable impacts from working capital of $46 million, partially offset by a $24 million decrease mainly driven by other assets and liabilities.
Cash used for investing activities increased by $20 million for 2022 versus the prior year, primarily due to an increase in expenditures for property, plant and equipment of $19 million.
Cash used for financing activities increased by $621 million for the year ended December 31, 2022 compared with the prior year. The change was primarily driven by $180 million of additional early redemptions in 2022 of our Series B Preferred Stock (excluding amounts attributable to interest and included in cash used for operating activities), and $83 million for dividends on Series A Preferred Stock. We also saw, in 2021 upon Emergence, net proceeds of $2,522 million from the issuance of our Series A Preferred Stock and new long-term debt, partially offset by net payments of $2,156 million related to our prior senior secured super-priority debtor-in-possession credit agreement, our pre-petition revolving credit facility, pre-petition long-term debt and payments made to holders of the Company's pre-emergence common stock who made a cash-out election under the Plan. These increases in cash used for financing activities were partially offset by $12 million less of repurchases of Series A Preferred Stock and Common Stock in 2022 versus 2021.
Capital Expenditures
We believe our capital spending in recent years has been sufficient to maintain efficient production capacity, to implement important product and process redesigns and to expand capacity to meet increased demand. We expect capital expenditures in 2024 to increase slightly as compared to 2018. The change was driven by payments2023, reflecting an increase in investments for related party notes payable of $493 million, net changes to cash pooling and short-term notes of $300 million and the net decrease in invested deficit of $1,493 million during 2018 that did not recur during 2019. This waszero emission technologies partially offset by the $1,631 million of proceeds from issuance of long-term debt during 2018 that did not recur during 2019with lower investments on turbo technologies.
Critical Accounting Policies and
payments of long-term debt during 2019 of $163 million, as compared to $6 million during 2018.
Contractual ObligationsandProbable LiabilityPayments
The summary of our significant contractual obligations and probable liability payments at December 31, 2020 were as set forth in the table below. The table does not reflect any potential changes to our contractual obligations and other commitments that may result from the Chapter 11 cases and activities contemplated by the Transaction and the Plan.
| | | | | | | | Payments by Period | | | | | |
| | Total(5) | | | | | 2021 | | | 2022-2023 | | | 2024-2025 | | | Thereafter | |
| | (Dollars in millions) | |
Obligations to Honeywell – Asbestos and environmental(1) | | | 1,196 | | | | | | — | | | | 281 | | | | 268 | | | | 647 | |
Obligations to Honeywell – Mandatory Transition Tax(2) | | | 211 | | | | | | 40 | | | | 58 | | | | 113 | | | | — | |
Long-term debt(3) | | | 1,533 | | | | | | 4 | | | | 317 | | | | 781 | | | | 431 | |
Interest payments on long-term debt(4) | | | 337 | | | | | | 70 | | | | 134 | | | | 111 | | | | 22 | |
Minimum lease payments | | | 46 | | | | | | 12 | | | | 17 | | | | 9 | | | | 8 | |
Purchase obligations(5) | | | 95 | | | | | | 91 | | | | 4 | | | | — | | | | — | |
| | $ | 3,418 | | | | | $ | 217 | | | $ | 811 | | | $ | 1,282 | | | $ | 1,108 | |
(1)
| Excludes legal fees which are expensed as incurred. For additional information, refer to “—Liquidity and Capital Resources— Honeywell Indemnity Agreement” section.
|
Estimates(2)
| Excludes the indemnification obligation for uncertain tax positions for which timing of payment is uncertain. For additional information, refer to “—Liquidity and Capital Resources—Tax Matters Agreement” section.
|
(3)
| Assumes all long-term debt is outstanding until contractual maturity. Does not include expected utilization of our Senior Secured Credit Facilities or DIP Term Loan Facility.
|
(4)
| Interest payments are estimated based on the interest rates applicable as of December 31, 2020. This does not include the expected utilization of our revolving credit facility.
|
(5)
| Purchase obligations are entered into with various vendors in the normal course of business and are consistent with our expected requirements.
|
Capital Expenditures
We believeour capitalspending in recentyearshas been sufficientto maintainefficientproductioncapacity, to implementimportantproductand processredesignsand to expand capacityto meetincreaseddemand.
Productivityprojectshave freedup capacityin our manufacturingfacilitiesand are expectedto continueto do so. We expectto continueinvestingto expand and modernizeour existingfacilitiesand investin our facilitiesto createcapacityfor newproductdevelopment.
In light of the near-term impact of the COVID-19 pandemic, we have reviewed current capital expenditure programs and re-phased some programs related to future capacity expansion and long-term development programs. This has materially reduced new capital expenditures in 2020 without having an adverse effect on our ability to deliver long-term projects on time. In 2021, we expect capital expenditures to materially increase as a result of the re-phasing noted aboveand the Company’s expected Emergence.
Off-BalanceSheet Arrangements
We do not engage in any off-balancesheetfinancialarrangementsthathave or are reasonablylikelyto have a materialcurrentor futureeffecton our financialcondition,changes in financialcondition,revenuesor expenses,resultsof operations,liquidity,capitalexpendituresor capitalresources.
CriticalAccounting Policies
The preparationof our Consolidated and CombinedFinancialStatementsin accordancewith generallyacceptedaccounting principlesis based on the selectionand applicationof accountingpoliciesthatrequireus to make significant estimatesand assumptionsabout the effectsof mattersthatare inherentlyuncertain.We considerthe accounting policiesdiscussedbelow to be criticalto the understandingof our financialstatements.Actual resultscould differ fromour estimatesand assumptions,and any such differencescould be materialto our Consolidated and CombinedFinancial Statements.
In connectionRevenue Recognition — Product sales are recognized when we transfer control of the promised goods to our customer, which is based on shipping terms. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the promised goods, adjusted for any variable consideration such as price concessions or annual price adjustments as estimated at contract inception. We estimate variable consideration at the most likely amount we will receive from customers and reduce revenues recognized accordingly. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the filingvariable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We adjust our estimate of revenue at the earlier of when the value of consideration we expect to receive changes or when the consideration becomes fixed.
Contingent Liabilities — We are subject to lawsuits, investigations and claims that arise out of the Chapter 11 Casesconduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property, legal and environmental, health and safety matters. We continually assess the likelihood of any adverse judgments or outcomes to our contingencies, as well as potential amounts or ranges of probable losses, and recognize a liability, if any, for these contingencies based on a careful analysis of each matter with the Petition Date,assistance of outside legal counsel and, if applicable, other experts. Such analysis includes making judgments concerning matters such as the costs associated with environmental matters, the outcome of negotiations, and the impact of evidentiary requirements. Because most contingencies are resolved over long periods of time, liabilities may change in the future due to new developments (including new discovery of facts, changes in legislation and outcomes of similar cases through the judicial system), changes in assumptions or changes in our settlement strategy. See Note 25, Commitments and Contingencies of the Notes to the Consolidated Financial Statements for a discussion of management’s judgment applied in the recognition and Combinedmeasurement of our most significant contingencies.
Warranties and Guarantees — Expected warranty costs for products sold are recognized based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, length of the warranty and various other considerations. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of our warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims. See Note 25, Commitments and Contingencies of the Notes to the Consolidated 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, of the Consolidated and Combined Financial Statements for further details.additional information.Contingent Liabilities
—We are subjectto lawsuits,investigationsand claimsthatariseout of the conductof our globalbusinessoperationsor those of previouslyownedentities,includingmattersrelatingto commercial transactions,governmentcontracts,productliability(includingasbestos),prioracquisitionsand divestitures, employeebenefitplans, intellectualproperty,legaland environmental,healthand safetymatters.We continually assessthe likelihoodof any adversejudgmentsor outcomesto our contingencies,as well as potentialamountsor rangesof probablelosses,and recognizea liability,if any, for thesecontingenciesbased on a carefulanalysisof each matterwith the assistanceof outsidelegalcounseland, if applicable,otherexperts.Such analysisincludes makingjudgmentsconcerningmatterssuch as the costsassociatedwith environmentalmatters,the outcomeof negotiations,the numberand cost of pending and futureasbestosclaims,and the impactof evidentiary requirements.Because mostcontingenciesare resolvedover long periodsof time,liabilitiesmay change in the futuredue to newdevelopments(includingnewdiscoveryof facts,changes in legislationand outcomesof similarcasesthrough the judicialsystem),changes in assumptionsor changes in our settlementstrategy.See Note 23, Commitmentsand Contingenciesof Notes to Consolidated and Combined FinancialStatementsfor a discussionof management’sjudgmentappliedin the recognitionand measurementof our environmentaland asbestos liabilitieswhich representour mostsignificantcontingencies.Asbestos-RelatedContingenciesandInsurance Recoveries—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 Honeywell Indemnity Agreement with Honeywell entered into on September 12, 2018, 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.
Under the terms of the PSA and the Transaction, the Plan, if confirmed by the Bankruptcy Court, will include 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 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 and (y) 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.
Our entry into and performance under the PSA and the terms of the PSA, the Transaction and the Plan remain subject to approval by the Bankruptcy Court. There can be no assurances that we will obtain the approval of the Bankruptcy Court and complete the Transaction.
WarrantiesandGuaranteesPension Benefits —Expected warrantycostsfor productssold are recognizedbased on an estimateof the amountthateventuallywill be requiredto settlesuch obligations.These accrualsare based on factorssuch as past experience,lengthof the warrantyand variousotherconsiderations.Costs of productrecalls, which may includethe cost of the productbeing replacedas well as the customer’scost of the recall,including laborto removeand replacethe recalledpart,are accruedas partof our warrantyaccrualat the timean obligation becomesprobableand can be reasonablyestimated.These estimatesare adjustedfromtimeto timebased on factsand circumstancesthatimpactthe statusof existingclaims.See Note 23, Commitmentsand Contingencies of Notes to Consolidated and Combined FinancialStatementsincludedhereinfor additionalinformation.
Pension Benefits—We sponsor defined benefit pension plans covering certain employees, primarily in Switzerland, the U.S. and Ireland. For suchThe pension cost and liabilities for these plans we are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, mortality rates, and compensation increases. The Company is required to disaggregateconsider current market conditions, including changes in interest rates, and employee demographics such as retirement patterns, in making its assumptions. Changes in the service cost component of netrelated pension benefit costs and report those costsor liabilities may occur in the same line item or itemsfuture due to changes in the Consolidatedassumptions.
The discount rate reflects the market rate on December 31 (the measurement date) for high-quality fixed-income investments with maturities corresponding to our pension obligations and Combined Statementsis subject to change each year. The discount rate can be volatile from year to year as it is determined based upon prevailing interest rates as of Operationsthe measurement date. The
assumptions as other compensation costs arising from services rendered byto the pertinent employees during the period. The other nonservice componentsexpected long-term rates of net benefit costs are required to be presented separately from the service cost component. We record the service cost component of Pension ongoing (income) expense in Cost of goods sold or Selling, general and administrative expenses. The remaining components of net benefit costs within Pension ongoing (income) expense, primarily interest costs and assumed return on plan assets are recorded in Non-operating expense (income). based upon historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and asset mix considerations.
We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (“MTM(the “MTM Adjustment”). The MTM Adjustment is recorded in Non-operating expense (income).The key assumptions used in developing our 2020 net periodic pension (income) expense included the following:
| | 2020 | |
| | U.S. Plans | | | Non-U.S. Plans | |
Discount Rate: | | | | | | | | |
Projected benefit obligation | | | 3.30 | % | | | 0.79 | % |
Service Cost | | | 4.47 | % | | | 1.20 | % |
Interest cost | | | 4.06 | % | | | 1.74 | % |
Assets: | | | | | | | | |
Expected rate of return | | | 5.49 | % | | | 3.79 | % |
Actual rate of return | | | 12.49 | % | | | 5.19 | % |
The MTM Adjustment represents the recognition of net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor). Net actuarial gains and losses occur when the actual experience differs from any of the various assumptions used to value our pension plans or when assumptions change. The primary factors contributing to actuarial gains and losses are changes in the discount rate used to value pension obligations as of the measurement date each year and the difference between expected and actual returns on plan assets. The mark-to-market accounting method results in the potential for volatile and difficult to forecast MTM Adjustments. MTM charges were $0 for our U.S. Plans and $13 million for our non-U.S. Plans forAdjustments as the year ended December 31, 2020.
We determine the expected long-term rate of return on plan assets utilizing historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and asset mix considerations (see Note 24, Defined Benefit Pension Plans of Notes to Consolidated and Combined Financial Statements for details on the actual various asset classes and targeted asset allocation percentages for our pension plans). We plan to use an expected rate of return on plan assets of 4.88% for our U.S. Plans and 3.60% for our non-U.S. Plans for 2020 as this is a long-term rate based on historical plan asset returns over varying long-term periods combined with our expectations of future market conditions and the asset mix of the plan’s investments.
The discount rate reflects the market rate on December 31 (measurement date) for high-quality fixed-income investments with maturities corresponding to our benefit obligations and is subject to change each year. The discount rate can be volatile from year to year as it is determined based upon prevailing interest rates as of the measurement date. We used a 2.65% discount rate to determine benefit obligations for our U.S. Plans and 0.46% for our non-U.S. Plans as of December 31, 2020.
Pension ongoing expense (income) for all of our pension plans is expected to be pension income of $2 million in 2021 compared with pension ongoing expense of $1 million in 2020. Also, if required, an MTM Adjustment will be recorded in the fourth quarter of 2021 in accordance with our pension accounting method as previously described. It is difficult to reliably forecast or predict whether there will be an MTM Adjustment in 2021, and if one is required, what the magnitude of such adjustment will be. MTM Adjustmentsadjustments are primarily driven by events and circumstances beyond the control of the Company such as changes in interest rates and the performance of the financial markets.
For periods prior to the Spin-off, certain Garrett employees participated in defined benefit pension plans (the “Shared Plans”) sponsored by Honeywell which includes participants of other Honeywell subsidiaries and operations. We account for our participation in the Shared Plans as a multiemployer benefit plan. Accordingly, we do not record an asset or liability to recognize the funded status of the Shared Plans. The related pension expense is based on annual service cost of active Garrett participants and reported within Cost of goods sold in the Consolidated and Combined Statements of Operations.
Income Taxes—We account for income taxes pursuant to the asset and liability method which requires us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.Our pre-Spin-Off activity
We file tax returns in multiple jurisdictions and are subject to examination by taxing authorities throughout the world. Tax authorities have the ability to review and challenge matters that could be subject to differing interpretation of applicable tax laws and regulations as they relate to the amount, character, timing or inclusion of revenue and expenses or the sustainability of tax attributes. The ultimate resolution of such uncertainties could last several years. When an uncertain tax position is identified, we consider and interpret complex tax laws and regulations in order to determine the need for recognizing a provision in our financial statements. Significant judgment is required in determining the timing and measurement of uncertain tax positions. We utilize internal and external expertise in interpreting tax laws to support our tax positions. We recognize the financial statement benefit of an uncertain tax position when it is more likely than not that, based on the underlying technical merits, the position will be sustained upon examination.
Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the U.S. will be reported in Honeywell’s U.S. consolidatedhistorical income tax returnprovisions and certain foreign activity will be reported in Honeywell tax paying entities in those jurisdictions. For periods prior to the Spin-Off, theaccruals. If additional taxes are assessed as a result of an audit or litigation, they could have a material impact on our income tax provision includedand net income in the Consolidated and Combined Financial Statementsperiod or periods for which such determination is made. A change in judgment related to domestic and certain foreign operations was calculated on a separate return basis, as if Garrett was a separate taxpayer and the resulting current tax receivable or liability, including any liabilities related toexpected ultimate resolution of uncertain tax positions was settled with Honeywell through equity atwill be recognized in earnings in the timequarter in which such change occurs.
Other Matters
Litigation and Environmental Matters
See Note 25, Commitments and Contingencies of the Spin-Off. In other foreign taxing jurisdictions, the operations of Garrett were always conducted through discrete legal entities, each of which filed separate tax returns, and all resulting income tax assets and liabilities, including liabilities relatedNotes to uncertain tax positions, are reflected in the Consolidated Balance Sheets of Garrett.OtherMatters
LitigationandEnvironmentalMatters
See Note 23, Commitmentsand Contingenciesof Notes to Consolidated and Combined FinancialStatementsfor a discussion of environmental,litigation matters.asbestosand otherlitigationmatters.
Recent Accounting Pronouncements
See Note 3, Summaryof SignificantAccounting Policies of
the Notes to the Consolidated
and Combined Financial
Statements
for a discussion
of recent
accounting pronouncements.accountingpronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
We are exposed to market risks from changes in currency exchange rates. These exposures may impact future earnings and/or operating cash flows. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade.
We historically have hedged balance sheet as well as forecasted currency exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign currency exchange forward contracts.
We hedge forecasted currency exposure to minimize the earnings exposures arising from foreign currency exchange risk on foreign currency purchases and sales. Under our cash flow hedging program, we designate certain foreign currency forward contracts (Foreign Currency Exchange Contracts). We hedged monetary assetsas cash flow hedges of underlying foreign currency forecasted purchases and liabilities denominated in non-functional currencies. Prior to conversion into U.S. dollars, these assetssales, with gains and liabilities are remeasured at spot exchange rates in effectlosses on the balance sheet date. The effects of changesqualifying derivatives recorded in spot ratesAccumulated other comprehensive income in the Consolidated Balance Sheet until the underlying forecasted transactions are recognized in earningsearnings. These contracts have varying terms that extend through 2025. We also utilize undesignated foreign currency forward contracts to partially offset gains and includedlosses on the foreign currency remeasurement of balance sheet positions.
Effective with our entry into the Credit Agreement, the Company entered into float-to-float cross-currency swap contracts to limit its exposure to investments in
Non-operating expense (income).Ascertain foreign subsidiaries exposed to foreign exchange fluctuations. The cross-currency swap contracts have been designated as net investment hedges of its Euro-denominated operations. Gains and losses on the derivatives qualifying as net investment hedges are recorded in Accumulated other comprehensive income within the Consolidated Balance Sheet until the net investment is liquidated or sold.
The Company also uses a resultfloat-to-fixed cross-currency swap contract to mitigate the foreign currency risk, as well as interest rate risk, on its 2023 Dollar Facility. The cross-currency swap contract is designated as a cash flow hedge, with changes in the fair value of the Chapter 11 Cases, the Company has been limitedderivative recorded in its ability to enterAOCI and reclassified into hedging transactions. The Company has obtained Bankruptcy Court authorization for continuing hedging activitiesearnings based upon changes in the ordinary coursespot rate remeasurement of business, however, counterparties have either been unwilling to enter into hedging transactions with the Company during the Chapter 11 Cases or have required the Company to fully cash collateralize its obligations under the relevant hedging instrument, which has effectively reduced the Company’s ability to hedge foreign currency exposures beyond those relating to trade payables and receivables. underlying debt.
As of December 31,
2020,2023, the net fair value of all financial instruments with exposure to currency risk was a
$0$20 million asset. The potential loss or gain in fair value for such financial instruments from a hypothetical 10% adverse or favorable change in quoted currency exchange rates would be
$(2)$187 million and
$2$(170) million, respectively, at December 31,
20202023 exchange rates. The model assumes a parallel shift in currency exchange rates; however, currency exchange rates rarely move in the same direction. The assumption that currency exchange rates change in a parallel fashion may overstate the impact of changing currency exchange rates on assets and liabilities denominated in currencies other than the U.S. dollar.
Our exposure to risk based on changes in interest rates relates primarily to our Prepetition Credit Agreement and DIP Credit Agreement. The Prepetition Credit Agreement and DIP Credit Agreement bearbears interest at floating rates. For variable rate debt, interest rate changes generally do not affect the fair market value of such debt assuming all other factors remain constant but do impact future earnings and cash flows. Accordingly, we may be exposed to interest rate risk on borrowings under the Credit Agreement and DIP Credit Agreement. We manage this risk by entering into interest rate swap contracts to convert floating rate debt to fixed rate debt to reduce market risk associated with changes in interest rates. As of December 31, 2023, the net fair value of all financial instruments with exposure to interest rate risk was a $43 million asset.
For our outstanding borrowings under the Prepetition Credit Agreement and DIP Credit Agreement as of December 31, 2020,2023, a 50 basis point increase (decrease) in interest rates would have increased (decreased) our interest expense by $3$9 million and $3($9) million, respectively, compared to the amount of interest that would have been incurred in such period based on the rates of interest in effect at December 31, 2020.2023. For additional information regarding our Prepetition Credit Agreement and DIP Credit Agreement, see Note 16, Long-term Debt and Credit Agreements of the notesNotes to the Consolidated and Combined Financial Statements. Commodity Price Risk
While we are exposed
We do not utilize derivative contracts to
manage commodity price risk
and are subject to changes in our cost of sales caused by movements in underlying commodity prices. Approximately 76% of our cost of sales consists of purchased components with significant raw material content. A substantial portion of the purchased parts are made of nickel, aluminum and steel alloys. We have index-based escalators in place with most of our suppliers for raw material inflation / deflation. As our costs change, we
may be contractually able to pass through
abnormala portion of the changes in
component and raw material costscommodity prices to
certain of our customers
based onin accordance with long-term agreements. Where long-term pass-through agreements are not in place with customers, we generally seek to negotiate additional pricing arrangements with our customers. Assuming current levels of commodity purchases, a 10% variation in the
contractual termscommodity prices could impact our cost of
our arrangements. In limited situations, we may not be fully compensated for such changes in costs.sales by up to approximately $55 million per year prior to any price recovery from customers.
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Garrett Motion Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Garrett Motion Inc. and subsidiaries in reorganization under Chapter 11 of the Federal Bankruptcy Code since September 20, 2020 — see Note 2 (the "Company") as of December 31, 2020,2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained in all material respects, effective internal control over financial reporting as of December 31, 2020,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
and combined financial statements as of and for the year ended December 31,
2020,2023, of the Company and our report dated February
16, 2021,15, 2024, expressed an unqualified opinion on those consolidated
and combined financial
statements and included explanatory paragraphs regarding changes in accounting principle and certain conditions that give rise to substantial doubt about the Company’s ability to continue as a going concern; and emphasis of matter paragraphs concerning the bankruptcy proceedings and expense allocations.statements.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte SA
Geneva, Switzerland
February 16, 202115, 2024
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Garrett Motion Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance
sheetsheets of Garrett Motion Inc. and subsidiaries
in reorganization under chapter 11 of the Federal Bankruptcy Code since September 20, 2020 — see Note 1 (the "Company") as of December 31,
20202023 and
2019,2022, the related consolidated
and combined statementstatements of operations, comprehensive income
(loss), equity (deficit), and cash flows, for each of the three years in the period ended December 31,
2020,2023, and the related notes
and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements").
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20202023 and 2019,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020,2023, in conformity with the accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31,
2020,2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February
16, 202115, 2024 expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 3 to the financial statements, effective January 1, 2019, the Company adopted FASB ASC Topic 842, Leases, using the modified retrospective approach.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, as a result of the Company’s financial condition, uncertainty related to the impacts of COVID-19, and the risks and uncertainties surrounding the Chapter 11 Cases filed by the Company, there is substantial doubt about its ability to continue as a going concern. Management’s evaluation of the events and conditions and their plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Emphasis of a Matter
Bankruptcy Proceedings
As discussed in Note 1 to the financial statements, on September 20, 2020, the Company has voluntarily filed for reorganization under chapter 11 of the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (1) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (2) as to pre-petition liabilities, the settlement amounts for allowed claims, or the status and priority thereof; (3) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (4) as to operations, the effect of any changes that may be made in its business.
Expense allocation
As discussed in Note 1 to the financial statements, on October 1, 2018, the Company became an independent publicly-traded company through a pro rata distribution by Honeywell International Inc. (“Honeywell”) of 100% of the then outstanding shares of the Company to Honeywell’s stockholders. For the period from January 1, 2018 to October 1, 2018, the financial statements include expense allocations for certain corporate functions historically provided by Honeywell. These allocations may not be reflective of the actual expense that would have been incurred had the Company operated as a separate entity apart from Honeywell. A summary of transactions with related parties is included in Note 27 to the financial statements.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
The critical audit
mattermatters communicated below
is a matterare matters arising from the current-period audit of the financial statements that
waswere communicated or required to be communicated to the audit committee and that (1)
relatesrelate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
mattermatters below, providing a separate opinion on the critical audit
mattermatters or on the accounts or disclosures to which
it relates.Obligations Payablethey relate.
Net Sales and Accrued Liabilities - Variable Consideration– Refer to Honeywell– Refer to Note 23Notes 3 and 15 to the financial statementsFinancial Statements
Critical Audit Matter Description
As more fully describeddisclosed in Note 23 ofNotes 3 and 15 to the financial statements, the Company recorded a liability for obligations payable to Honeywell asrecords net sales at the amount of December 31, 2020, as a result of certain agreements entered into in connection with the spin-off from Honeywell on October 1, 2018. These agreements prescribe payments due to Honeywell for the indemnification of certain asbestos claims and pre-spin-off tax matters. Subsequent to separation from Honeywell,consideration the Company has challengedexpects to receive in exchange for transferring the enforceabilitypromised goods, which includes estimates of such agreementsvariable consideration to the extent it is probable that a significant reversal of revenue recognized will not occur. Variability in consideration typically results from discounts and filed a motion withrebates provided to customers. The estimated variable consideration is based primarily on management’s best available information regarding customer negotiations, historical experience, and
anticipated future customer pricing strategies. Estimating variable consideration to be received requires significant judgments by management that affect the Bankruptcy Courtamount of revenue recorded in the financial statements.
Given the significant estimates and assumptions management makes to
hear argumentsestimate future discounts and rebates, auditing managements estimate of the amount related to
these obligations. The Bankruptcy Court was scheduledvariable consideration to
hold an estimation proceeding to evaluate all of Honeywell’s claims against the Company. This proceeding has been stayed pending the Bankruptcy Court’s consideration of the plan of reorganization. While under chapter 11 protection, the Company is required to record obligations payable to Honeywell at the Company’s expected amount of the allowed claimrecognize as
determined by the Bankruptcy Court. The carrying value of the obligations payable to Honeywell as of December 31, 2020 is $1,482 million. The actual amount to be paid is subject to the Bankruptcy Court’s approval.We have identified the Company’s measurement of the obligations payable to Honeywell as a critical audit matter. Thisnet sales required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s judgments around the expected amount of the allowed claim due to Honeywell.
judgement.
How the Critical Audit Matter Was Addressed in the Audit
The primary
Our audit procedures
we performedrelated to
address this critical audit matterthe estimate of revenue variable considerations included the
following: | •
| We tested the effectiveness of certain internal controls over the Company’s litigation assessment process, including internal controls over the assessment of the Company’s proceedings with Honeywell and the impact of chapter 11.
|
following, among others:
|
•We tested the effectiveness of relevant controls over the estimation of the variable consideration net sales.
•We selected a sample of revenue contracts with variable consideration and performed the following: ◦Obtained contractual documents, including master agreements and other related documents, and evaluated whether management's calculations for variable consideration were consistent with the terms of the contracts. ◦Compared transaction prices to the consideration expected to be received and determined that variable consideration was completely and accurately recorded.
•We tested the accuracy of management's estimate of the variable consideration and performed the following: ◦Performed an evaluation on historical information to determine management’s ability to accurately estimate sales volumes and future concessions. ◦Performed inquiries with individuals in the Company’s finance, operations and sales departments regarding the customer negotiations and corroborated the inquiries by examining supporting evidence as applicable. ◦Tested the mathematical accuracy of the variable consideration calculation.
•We inspected manual revenue journal entries for unusual entries affecting revenue and examined supporting evidence.
Capital Structure Transformation Transaction – Series A Preferred Stock Repurchase and Conversion - Refer to Notes 1 and 21 to the Financial Statements Critical Audit Matter Description
As disclosed in Notes 1 and 21 to the financial statements, on April 12, 2023 (the “Transaction Date”), the Company entered into separate definitive agreements (the “Agreements”) with Centerbridge Partners L.P. and funds managed by Oaktree Capital Management L.P. to effect a series of integrated transactions (the “Transaction”) to repurchase shares of Series A Preferred Stock and convert the remaining shares of Series A Preferred Stock into an equivalent number of common stock, requiring analysis of the appropriate accounting treatment. The agreements were accounted for as freestanding physically settled forward purchase contracts and recorded at fair value and remeasured through earnings. A Monte-Carlo simulation model was used to determine the Transaction Date fair value of the financial instruments related to the Agreements by simulating a range of possible future stock prices for the Company through the expected settlement date of the Agreements. The significant assumptions utilized in estimating the fair value of the Agreements included a dividend yield, expected volatility, risk free interest rate and share price. Given the complex accounting analysis behind the Series A Preferred Stock repurchase and conversion, as well as the valuation of the associated financial instruments and respective assumptions used in the valuation, a high degree of auditor judgment was required. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Series A Preferred Stock repurchase and conversion as well as the valuation of the associated financial instruments, included the following, among others:
•We tested the effectiveness of controls over management’s evaluation of the Series A Preferred Stock repurchase and conversion as well as controls over the valuation of the forward purchase agreement.
•We read the transaction agreements and together with technical accounting specialists, we reviewed the accounting treatment of the complex financial instruments. We analyzed the transaction agreements to determine if all
arrangement terms that may have an impact on accounting treatment were identified and independently evaluated management's accounting for the transaction agreements.
•We tested the cash proceeds (including dividend settlements) from the transaction and tested the mathematical accuracy of the impact of the transaction on the Company’s period end equity balances and period to date changes in equity.
•We engaged valuation specialists in testing the appropriateness of the various input factors used in the Monte Carlo valuation and the amounts recorded. We engaged valuation specialists to develop an independent range of expectations and compared against the Company’s Monte Carlo valuation.
•
| We assessed management’s evaluation of the accounting impact of the proceedings with Honeywell and inspected documentation from internal counsel related to it.
|
| •
| We performed a search for new or contrary evidence that would affect the estimate, including through review of minutes of meetings of the board of directors and read the court summaries of the ongoing proceedings with Honeywell.
|
| •
| We requested and received internal and external legal counsel confirmation letters and assessed management’s evaluation of the proceedings by meeting with internal and external counsel.
|
| •
| We also evaluated the appropriateness of the related disclosures included in Note 23 to the financial statements.
|
/s/ Deloitte SA
February
16, 2021
15, 2024
We have served as the Company’s auditor since 2018.
GARRETT MOTION INC.
(Debtor-in-Possession)
CONSOLIDATED
AND COMBINEDSTATEMENTS
OF OPERATIONS
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions except per share amounts) | |
| Year Ended December 31, | | | Year Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| (Dollars in millions except per share amounts) | | | (Dollars in millions except per share amounts) |
Net sales (Note 4) | | $ | 3,034 | | | $ | 3,248 | | | $ | 3,375 | |
Cost of goods sold | | | 2,478 | | | | 2,537 | | | | 2,599 | |
Gross profit | | | 556 | | | | 711 | | | | 776 | |
Selling, general and administrative expenses | | | 277 | | | | 249 | | | | 249 | |
Other expense, net (Note 5) | | | 46 | | | | 40 | | | | 120 | |
Interest expense (excludes contractual interest for the twelve months ended December 31, 2020 of $14 million) (Note 2) | | | 79 | | | | 68 | | | | 19 | |
Non-operating (income) expense (Note 6) | | | (38 | ) | | | 8 | | | | (8 | ) |
Reorganization items, net | | | 73 | | | | — | | | | — | |
| Interest expense | |
| Loss on extinguishment of debt (Note 17) | |
| | Non-operating income (Note 6) | |
| Non-operating income (Note 6) | |
| Non-operating income (Note 6) | |
| Reorganization items, net (Note 1) | |
Income before taxes | | | 119 | | | | 346 | | | | 396 | |
Tax expense (benefit) (Note 7) | | | 39 | | | | 33 | | | | (810 | ) |
| Tax expense (Note 7) | |
Net income | | $ | 80 | | | $ | 313 | | | $ | 1,206 | |
| Less: preferred stock dividends (Note 21) | |
| Less: preferred stock deemed dividends (Note 21) | |
| Net (loss) income available for distribution | |
| | | | | | | | | | | | |
Earnings (losses) per common share | | | | | | | | | | | | |
| (Loss) Earnings per share (Note 24) | |
| (Loss) Earnings per share (Note 24) | |
| (Loss) Earnings per share (Note 24) | |
| Basic | |
| Basic | |
Basic | | $ | 1.06 | | | $ | 4.20 | | | $ | 16.28 | |
Diluted | | $ | 1.05 | | | $ | 4.12 | | | $ | 16.21 | |
| | | | | | | | | | | | |
Weighted average common shares outstanding | | | | | | | | | | | | |
| Weighted average common shares outstanding | |
| Weighted average common shares outstanding | |
| Basic | |
| Basic | |
Basic | | | 75,543,461 | | | | 74,602,868 | | | | 74,059,240 | |
Diluted | | | 76,100,509 | | | | 75,934,373 | | | | 74,402,148 | |
The Notes to
the Consolidated
and Combined Financial
Statements
are an integral part
of this
statement.
GARRETT MOTION
INC.
(Debtor-in-Possession)
CONSOLIDATED
AND COMBINEDSTATEMENTS
OF COMPREHENSIVE
INCOME (LOSS)INCOME | | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
Net income | | $ | 80 | | | $ | 313 | | | $ | 1,206 | |
Foreign exchange translation adjustment | | | (234 | ) | | | 67 | | | | (198 | ) |
Defined benefit pension plan adjustment, net of tax (Note 24) | | | (18 | ) | | | (14 | ) | | | (2 | ) |
Changes in fair value of effective cash flow hedges, net of tax (Note 18) | | | (7 | ) | | | 4 | | | | 35 | |
Total other comprehensive (loss) income, net of tax | | | (259 | ) | | | 57 | | | | (165 | ) |
Comprehensive (loss) income | | $ | (179 | ) | | $ | 370 | | | $ | 1,041 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Net income | $ | 261 | | | $ | 390 | | | $ | 495 | |
| Foreign exchange translation adjustment | (13) | | | (1) | | | 38 | |
| Defined benefit pension plan adjustment, net of tax (Note 26) | (2) | | | (9) | | | 36 | |
| Changes in fair value of effective cash flow hedges, net of tax (Note 19) | (15) | | | 6 | | | 10 | |
| Changes in fair value of net investment hedges, net of tax (Note 19) | (9) | | | 44 | | | 41 | |
| Total other comprehensive (loss) income | (39) | | | 40 | | | 125 | |
| Comprehensive income | $ | 222 | | | $ | 430 | | | $ | 620 | |
The Notes to
the Consolidated
and Combined Financial
Statements
are an integral
part
of this
statement.
GARRETT MOTION
INC.
(Debtor-in-Possession)
CONSOLIDATED BALANCE
SHEETS
| | December 31, | |
| | 2020 | | | 2019 | |
| | (Dollars in millions) | |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| (Dollars in millions) | | | (Dollars in millions) |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
| Current assets: | |
| Current assets: | |
| Cash and cash equivalents | |
| Cash and cash equivalents | |
Cash and cash equivalents | | $ | 592 | | | $ | 187 | |
Restricted cash (Note 3) | | | 101 | | | | — | |
Accounts, notes and other receivables, net (Note 8) | | | 841 | | | | 707 | |
Inventories, net (Note 10) | | | 235 | | | | 220 | |
Other current assets (Note 11) | | | 110 | | | | 85 | |
Total current assets | | | 1,879 | | | | 1,199 | |
Investments and long-term receivables | | | 30 | | | | 36 | |
Property, plant and equipment, net (Note 13) | | | 505 | | | | 471 | |
Goodwill (Note 14) | | | 193 | | | | 193 | |
Deferred income taxes (Note 7) | | | 275 | | | | 268 | |
Other assets (Note 12) | | | 135 | | | | 108 | |
Total assets | | $ | 3,017 | | | $ | 2,275 | |
LIABILITIES | | | | | | | | |
Current liabilities: | | | | | | | | |
| Current liabilities: | |
| Current liabilities: | |
Accounts payable | | $ | 1,019 | | | $ | 1,009 | |
Borrowings under revolving credit facility (Note 16) | | | 370 | | | | — | |
| Accounts payable | |
| Accounts payable | |
| Current maturities of long-term debt (Note 16) | | | — | | | | 4 | |
Debtor-in-possession Term Loan (Note 16) | | | 200 | | | | — | |
Obligations payable to Honeywell, current (Note 23) | | | — | | | | 69 | |
| Current maturities of long-term debt (Note 16) | |
| Current maturities of long-term debt (Note 16) | |
| | Accrued liabilities (Note 15) | |
| | Accrued liabilities (Note 15) | |
| Accrued liabilities (Note 15) | | | 248 | | | | 310 | |
Total current liabilities | | | 1,837 | | | | 1,392 | |
Long-term debt (Note 16) | | | 1,082 | | | | 1,409 | |
| Deferred income taxes (Note 7) | | | 2 | | | | 51 | |
Obligations payable to Honeywell (Note 23) | | | — | | | | 1,282 | |
Other liabilities (Note 19) | | | 114 | | | | 274 | |
Total liabilities not subject to compromise | | | 3,035 | | | | 4,408 | |
Liabilities subject to compromise (Note 2) | | | 2,290 | | | | — | |
| Deferred income taxes (Note 7) | |
| Deferred income taxes (Note 7) | |
| Other liabilities | |
| Total liabilities | | $ | 5,325 | | | $ | 4,408 | |
COMMITMENTS AND CONTINGENCIES (Note 23) | | | | | | | | |
| | Total liabilities | |
| | Total liabilities | |
COMMITMENTS AND CONTINGENCIES (Note 25) | | COMMITMENTS AND CONTINGENCIES (Note 25) | | | |
EQUITY (DEFICIT) | | | | | | | | |
Common stock, par value $0.001; 400,000,000 shares authorized, 76,229,578 and 74,911,139 issued and 75,813,634 and 74,826,329 outstanding as of December 31, 2020 and December 31, 2019 respectively | | | — | | | | — | |
| Series A Preferred Stock, par value $0.001; 0 and 245,089,671 shares issued and outstanding as of December 31, 2023 and 2022, respectively (Note 21) | |
| Series A Preferred Stock, par value $0.001; 0 and 245,089,671 shares issued and outstanding as of December 31, 2023 and 2022, respectively (Note 21) | |
| Series A Preferred Stock, par value $0.001; 0 and 245,089,671 shares issued and outstanding as of December 31, 2023 and 2022, respectively (Note 21) | |
| Common Stock, par value $0.001; 1,000,000,000 and 1,000,000,000 shares authorized, 238,543,624 and 64,943,238 issued and 238,249,056 and 64,832,609 outstanding as of December 31, 2023 and 2022, respectively | |
Additional paid-in capital | | | 28 | | | | 19 | |
Retained earnings | | | (2,207 | ) | | | (2,282 | ) |
Accumulated other comprehensive loss (income) (Note 20) | | | (129 | ) | | | 130 | |
Total equity (deficit) | | | (2,308 | ) | | | (2,133 | ) |
Total liabilities and equity (deficit) | | $ | 3,017 | | | $ | 2,275 | |
| Retained deficit | |
| Accumulated other comprehensive (loss) income (Note 22) | |
| Total deficit | |
| Total liabilities and deficit | |
The Notes to
the Consolidated
and Combined Financial
Statements
are an integral
part
of this
statement.
GARRETT MOTION
INC.
(Debtor-in-Possession)
CONSOLIDATED
AND COMBINEDSTATEMENTS
OF CASH
FLOWS
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| | (Dollars in millions) | |
| Year Ended December 31, | | | Year Ended December 31, |
| (Dollars in millions) | | (Dollars in millions) | 2023 | | 2022 | | 2021 |
Cash flows from operating activities: | | | | | | | | | | | | |
Net income | | | 80 | | | | 313 | | | | 1,206 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Net income | |
| Net income | |
| Adjustments to reconcile net income to net cash provided by operating activities | |
| Reorganization items, net | |
| Reorganization items, net | |
| Reorganization items, net | |
Deferred income taxes | | | (34 | ) | | | (41 | ) | | | (931 | ) |
Reorganization items, net | | | 60 | | | | — | | | | — | |
Depreciation | | | 86 | | | | 73 | | | | 72 | |
Amortization of deferred issuance costs | | | 7 | | | | 9 | | | | 2 | |
| Amortization of deferred debt issuance costs | |
| Interest payments on Series B Preferred Stock, net of debt discount accretion | |
| Loss on extinguishment of debt | |
| Loss on remeasurement of forward purchase contract | |
Foreign exchange (gain) loss | | | (58 | ) | | | 19 | | | | 15 | |
Stock compensation expense | | | 10 | | | | 18 | | | | 21 | |
Pension expense | | | 15 | | | | 18 | | | | 10 | |
| Unrealized loss (gain) on derivatives | |
Other | | | 44 | | | | 19 | | | | 37 | |
Changes in assets and liabilities: | | | | | | | | | | | | |
Accounts, notes and other receivables | | | (162 | ) | | | 32 | | | | (30 | ) |
Receivables from related parties | | | — | | | | — | | | | 57 | |
| Accounts, notes and other receivables | |
| Accounts, notes and other receivables | |
Inventories | | | (14 | ) | | | (60 | ) | | | 2 | |
Other assets | | | (45 | ) | | | (22 | ) | | | (46 | ) |
Accounts payable | | | 41 | | | | 87 | | | | 63 | |
Payables to related parties | | | — | | | | — | | | | (50 | ) |
Accrued liabilities | | | (13 | ) | | | (60 | ) | | | 49 | |
Obligations payable to Honeywell | | | 6 | | | | (143 | ) | | | (76 | ) |
Asbestos-related liabilities | | | — | | | | — | | | | (1 | ) |
Other liabilities | | | 2 | | | | (20 | ) | | | (27 | ) |
Net cash provided by operating activities | | | 25 | | | | 242 | | | | 373 | |
| Net cash provided by (used for) operating activities | |
Cash flows from investing activities: | | | | | | | | | | | | |
Expenditures for property, plant and equipment | | | (80 | ) | | | (102 | ) | | | (95 | ) |
Increase in marketable securities | | | — | | | | — | | | | (21 | ) |
Decrease in marketable securities | | | — | | | | — | | | | 312 | |
| Expenditures for property, plant and equipment | |
| Expenditures for property, plant and equipment | |
| Proceeds from cross-currency swap contracts | |
| Net cash used for investing activities | |
| Cash flows from financing activities: | |
| Proceeds from issuance of Series A Preferred Stock | |
| Proceeds from issuance of Series A Preferred Stock | |
| Proceeds from issuance of Series A Preferred Stock | |
| Proceeds from issuance of long-term debt, net of deferred financing costs | |
| | Payments of long-term debt | |
| Payments of long-term debt | |
| Payments of long-term debt | |
| Payments of revolving credit facilities | |
| Payments for dividends | |
| Repurchases of Series A Preferred Stock | |
| Repurchases of Common Stock | |
| Repayments of debtor-in-possession financing | |
| Payments of Additional Amounts for conversion of Series A Preferred Stock | |
| Redemption of Series B Preferred stock | |
| Payments for Cash-Out election | |
| Payments for debt and revolving facility financing costs | |
Other | | | — | | | | 16 | | | | (4 | ) |
Net cash (used for) provided by investing activities | | | (80 | ) | | | (86 | ) | | | 192 | |
Cash flows from financing activities: | | | | | | | | | | | | |
Net increase in Invested deficit | | | — | | | | — | | | | (1,493 | ) |
Proceeds from debtor-in-possession financing | | | 200 | | | | — | | | | — | |
Proceeds from revolving credit facilities | | | 1,449 | | | | 745 | | | | 331 | |
Payments of revolving credit facilities | | | (1,100 | ) | | | (745 | ) | | | (331 | ) |
Proceeds from issuance of long-term debt | | | — | | | | — | | | | 1,631 | |
Payments of long-term debt | | | (2 | ) | | | (163 | ) | | | (6 | ) |
Debtor-in-possession financing fees | | | (13 | ) | | | — | | | | — | |
Payments related to related party notes payable | | | — | | | | — | | | | (493 | ) |
Net change to cash pooling and short-term notes | | | — | | | | — | | | | (300 | ) |
Other | | | (4 | ) | | | — | | | | 3 | |
Net cash provided by (used for) financing activities | | | 530 | | | | (163 | ) | | | (658 | ) |
| Net cash (used for) provided by financing activities | |
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | | | 31 | | | | (2 | ) | | | (11 | ) |
Net increase/ (decrease) in cash, cash equivalents and restricted cash | | | 506 | | | | (9 | ) | | | (104 | ) |
Cash and cash equivalents at beginning of period | | | 187 | | | | 196 | | | | 300 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | |
| Cash, cash equivalents and restricted cash at beginning of period | |
Cash, cash equivalents and restricted cash at end of period | | $ | 693 | | | $ | 187 | | | $ | 196 | |
Supplemental cash flow disclosures: | | | | | | | | | | | | |
Income taxes paid (net of refunds) | | $ | 44 | | | $ | 93 | | | $ | 76 | |
Interest expense paid | | $ | 63 | | | $ | 54 | | | $ | 12 | |
| Income taxes paid (net of refunds) | |
| Income taxes paid (net of refunds) | |
| Interest paid | |
Reorganization items paid | | $ | 14 | | | | — | | | | — | |
Supplemental schedule of non-cash investing and financing activities: | | | | | | | | | | | | |
Expenditures for property, plant and equipment in accounts payable | | $ | 47 | | | $ | 51 | | | $ | 43 | |
| Issuance of Series B Preferred Stock | |
| Issuance of Series B Preferred Stock | |
| Issuance of Series B Preferred Stock | |
|
The Notes to
the Consolidated
and Combined Financial
Statements
are an integral
part
of this
statement.
GARRETT MOTION
INC.
(Debtor-in-Possession)
CONSOLIDATED
AND COMBINEDSTATEMENTS
OF EQUITY
(DEFICIT)
| | | | | Additional | | | | | | | | | | | Other | | | | | |
| | Common Stock | | | Paid-in | | | Retained | | | Invested | | | Comprehensive | | | Total | |
| | Shares | | | Amount | | | Capital | | | Earnings | | | Deficit | | | Income/(Loss) | | | Deficit | |
| | (in millions) | |
Balance at December 31, 2017 | | | — | | | | — | | | | — | | | | — | | | | (2,433 | ) | | | 238 | | | | (2,195 | ) |
Net income through September 30, 2018 | | | — | | | | — | | | | — | | | | — | | | | 1,137 | | | | — | | | | 1,137 | |
Net income from October 1, 2018 | | | — | | | | — | | | | — | | | | 69 | | | | — | | | | — | | | | 69 | |
Other comprehensive income, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | (165 | ) | | | (165 | ) |
Change in Invested deficit | | | — | | | | — | | | | — | | | | — | | | | (1,168 | ) | | | — | | | | (1,168 | ) |
Spin-Off related adjustments | | | — | | | | — | | | | — | | | | — | | | | (200 | ) | | | — | | | | (200 | ) |
Issuance of common stock and reclassification of invested deficit | | | 74 | | | | — | | | | — | | | | (2,664 | ) | | | 2,664 | | | | — | | | | — | |
Stock-based compensation | | | — | | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | 5 | |
Balance at December 31, 2018 | | | 74 | | | | — | | | | 5 | | | | (2,595 | ) | | | — | | | | 73 | | | | (2,517 | ) |
Net income | | | — | | | | — | | | | — | | | | 313 | | | | — | | | | — | | | | 313 | |
Other comprehensive income, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | 57 | | | | 57 | |
Stock-based compensation | | | 1 | | | | — | | | | 18 | | | | — | | | | — | | | | — | | | | 18 | |
Tax withholding related to vesting of restricted stock units and other | | | — | | | | — | | | | (4 | ) | | | — | | | | — | | | | — | | | | (4 | ) |
Balance at December 31, 2019 | | | 75 | | | | — | | | | 19 | | | | (2,282 | ) | | | — | | | | 130 | | | | (2,133 | ) |
Net income | | | — | | | | — | | | | — | | | | 80 | | | | — | | | | — | | | | 80 | |
Other comprehensive income, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | (259 | ) | | | (259 | ) |
Stock-based compensation | | | 1 | | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | 10 | |
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 December 31, 2020 | | | 76 | | | | — | | | | 28 | | | | (2,207 | ) | | | — | | | | (129 | ) | | | (2,308 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series A
Preferred Stock | | Common Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Other
Comprehensive
Income/(Loss) | | Total
Deficit | |
| Shares | | Amount | | Shares | | Amount | | | | | |
| (in millions) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Balance at December 31, 2020 | — | | | $ | — | | | 76 | | | $ | — | | | $ | 28 | | | $ | (2,207) | | | $ | (129) | | | $ | (2,308) | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 495 | | | — | | | 495 | | |
| Cash-Out election | — | | | — | | | (11) | | | — | | | — | | | (69) | | | — | | | (69) | | |
| Issuance of Series A Preferred Stock | 248 | | | — | | | — | | | — | | | 1,301 | | | — | | | — | | | 1,301 | | |
| Repurchases of Series A Preferred Stock | (2) | | | — | | | — | | | — | | | (10) | | | (5) | | | — | | | (15) | | |
| Repurchases of Common Stock | — | | | — | | | (1) | | | — | | | — | | | (4) | | | — | | | (4) | | |
| Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 125 | | | 125 | | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 7 | | | — | | | — | | | 7 | | |
| Balance at December 31, 2021 | 246 | | | $ | — | | | 64 | | | $ | — | | | $ | 1,326 | | | $ | (1,790) | | | $ | (4) | | | $ | (468) | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 390 | | | — | | | 390 | | |
| Share repurchases | — | | | — | | | — | | | — | | | (4) | | | (2) | | | — | | | (6) | | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | 40 | | | 40 | | |
| Dividends | — | | | — | | | — | | | — | | | — | | | (83) | | | — | | | (83) | | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 11 | | | — | | | — | | | 11 | | |
| Balance at December 31, 2022 | 246 | | | $ | — | | | 64 | | | $ | — | | | $ | 1,333 | | | $ | (1,485) | | | $ | 36 | | | $ | (116) | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 261 | | | — | | | 261 | | |
| Repurchases of Series A Preferred Stock | (70) | | | — | | | — | | | — | | | (366) | | | (201) | | | — | | | (567) | | |
| Repurchases of Common Stock | — | | | — | | | (28) | | | — | | | — | | | (213) | | | — | | | (213) | | |
| Excise tax on share repurchases | — | | | — | | | — | | | — | | | — | | | (8) | | | — | | | (8) | | |
| Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | — | | | (39) | | | (39) | | |
| Dividends | — | | | — | | | — | | | — | | | — | | | (42) | | | — | | | (42) | | |
| Issuance of Common Stock for preference dividends | — | | | — | | | 26 | | | — | | | 209 | | | (209) | | | — | | | — | | |
| Conversion of Series A Preferred Stock to Common Stock | (176) | | | — | | | 176 | | | — | | | — | | | (25) | | | — | | | (25) | | |
| Stock-based compensation | — | | | — | | | — | | | — | | | 14 | | | — | | | — | | | 14 | | |
| Balance at December 31, 2023 | — | | | $ | — | | | 238 | | | $ | — | | | $ | 1,190 | | | $ | (1,922) | | | $ | (3) | | | $ | (735) | | |
The Notes to
the Consolidated
and Combined Financial
Statements
are an integral
part
of this
statement.
GARRETT MOTION INC.
(Debtor-in-Possession)
NOTES
TO CONSOLIDATED
AND COMBINEDFINANCIAL
STATEMENTS
Note 1. Background and
Basis of Presentation
Garrett Motion Inc. (the
“Company”"Company" or
“Garrett”"Garrett")
designs, manufacturesis a cutting-edge technology leader delivering differentiated solutions for emission reduction and
sellsenergy efficiency. We design, manufacture and sell highly engineered
turbochargerturbocharging, air and
electric-boostingfluid compression, and high-speed electric motor technologies for
lightOEMs and
commercial vehicle original equipment manufacturers (“OEMs”)distributors within the mobility and
the global vehicle independent aftermarket, as well as automotive software solutions. These OEMs in turn ship to consumers globally.industrial space. We
are a global technology leader withhave significant expertise in delivering products
acrossat scale for ICE using gasoline, diesel,
, natural gas and
electric (hybridhydrogen, as well as for zero emission technologies using hydrogen fuel cell systems, both for mobility and
fuel cell) powertrains.industrial use. As our customers continue to progress on electrification, we are applying our technological pillars to develop highly engineered E-Powertrain and E-Cooling compressor products to support their ambition. These products are key enablers for fuel economy,
energy efficiency, thermal management, and
compliance with emissions standards and overall greenhouse gas and other 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”)reduction targets.
Basis 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.COVID-19
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”);
|
Presentation | •
| 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 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.
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 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 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 and Combined 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 and Combined 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 and Combined Financial Statements. The accompanying Consolidated and Combined 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
Prior to the Spin-Off on October 1, 2018, our historical financial statements were prepared on a stand-alone combined basis and were derived from the consolidated financial statements and accounting records of Honeywell. Accordingly, for periods prior to October 1, 2018, our financial statements are presented on a combined basis and for the periods subsequent to October 1, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Financial Statements”). The Consolidated and Combined 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, netWe evaluate segment reporting in accordance with ASC 280, Segment Reporting. We concluded that Garrett operates in a single operating segment and a single reportable segment based on the operating results available and evaluated regularly by the chief operating decision maker (“CODM”), who is our Chief Executive Officer, to make decisions about resource allocation and performance assessment. The CODM makes operational performance assessments and resource allocation decisions on a consolidated basis, inclusive of probable insurance recoveries, are presented within Other expense, netall of the Company’s products across channels and geographies.
Capital Structure Transformation Transaction
On April 12, 2023, the Company entered into the Transaction (as defined in Note 21, Equity) to increase the attractiveness of the Company to investors, including simplifying the Company’s capital stock by converting all outstanding Series A Preferred Stock into a single class of Common Stock, subject to certain conditions.
As part of the Transaction, the Company repurchased an aggregate of 69,707,719 shares of Series A Preferred Stock from the C&O Investors (as defined below), and converted all remaining outstanding 175,337,712 shares of Series A Preferred Stock into an equivalent number of shares of Common Stock. The total amounts paid to holders of Series A Preferred Stock in connection with the Transaction included aggregate cash payments of $605 million and the issuance of an additional 25,577,517 shares of Common Stock in settlement of accumulated and unpaid preference dividends on the Series A Preferred Stock through June 30, 2023. The Transaction was financed through a new Term Loan B for an aggregate principal amount of $700 million under the framework of the Company's existing credit agreement. See Note 21, Equity.
The Company recorded the following amounts in the Consolidated Financial Statements related to the repurchase and Combinedconversion of its Series A Preferred Stock:
| | | | | | | | |
| | Movements for the Year Ended |
| | December 31, 2023 |
| Consolidated Balance Sheet: | | (Dollars in millions) |
| Cash and cash equivalents | | $ | (605) | |
| Preferred stock, Common stock and Additional Paid-in capital | | (157) | |
| Retained earnings | | (441) | |
| | |
| | Year Ended
December 31, 2023 |
| Consolidated Statement of Operations: | | (Dollars in millions) |
| | |
| Non-operating expenses | | $ | 13 | |
The Company also incurred $9 million of Transaction-related costs for the year ended December 31, 2023, primarily for legal and advisory services that are included in Selling, general and administrative expenses in the Consolidated Statement of Operations. Honeywell is subject to certain asbestos-relatedSee Note 16, Long-term Debt and environmental-related liabilities, primarily related to its legacy Bendix business. In conjunction withCredit Agreements for discussion on the Spin-Off, certain operations that were partnew 2023 Dollar Facility and Note 21, Equity for further discussion of the Bendix business, along withTransaction.
Note 2. Plan of Reorganization
On September 20, 2020 (the "Petition Date"), the
ownershipCompany and certain of its subsidiaries each filed a voluntary petition for relief under Chapter 11 of title 11 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 businessUnited States Code 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 accountedBankruptcy Court for the
Honeywell liability consistent with the agreement up to the Petition Date and classified it as partSouthern District of
Liabilities Subject to Compromise.Under the termsNew York (the “Bankruptcy Court”). A Revised Amended Plan of the PSA and the Transaction, the Plan, ifReorganization ("Plan") was confirmed by the Bankruptcy Court will include a global settlement with Honeywell providingon April 26, 2021, and the Company emerged from bankruptcy (“Emergence”) on April 30, 2021 (the "Effective Date").
The Company applied ASC 852, Reorganizations, in preparing its Consolidated Financial Statements during its Chapter 11 bankruptcy proceedings, which required the financial statements for (a) the fullperiods subsequent to filing for Chapter 11 to distinguish transactions and final satisfaction, settlement, release, and discharge of all liabilities under or related to the Honeywell Indemnity Agreement,events 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 togetherwere directly associated with the Honeywell Indemnity Agreement,Company's reorganization from the “Indemnity Agreements”) and the Tax Matters Agreement and (b) the dismissal with prejudiceongoing operations of the Honeywell Litigationbusiness. Revenues, expenses, realized gains and losses, and provisions for losses directly resulting from the reorganization and restructuring were reported separately as Reorganization items, net in exchangethe Consolidated Statements of Operations. Upon Emergence, the Company did not meet the requirements under ASC 852 for (x)fresh start accounting and in accordance with ASC 852, a $375 million cash payment at emergence fromnew reporting entity was not created for accounting purposes.
Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the Chapter 11 Cases (“Emergence”)and (y)amounted to an expense of $3 million and a gain of $125 million for the new Series B Preferred Stock issued by the Company payable in installments of $35 million inyears ended December 31, 2022 and $100 million annually 2023-2030 (the “Series B Preferred Stock”). The Company will have2021, respectively. There were no Reorganization items, net for the option to prepay the Series B Preferred Stock in full at any time at a call price equivalent to $584 million asyear ended December 31, 2023.
Note 3. Summary of Emergence (representing the present valueSignificant Accounting Policies
Use 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.The Debtors’ entry into and performance under the PSA and the terms of the PSA, the Transaction and the Plan remain subject to approval by the Bankruptcy Court. There can be no assurances that the Debtors will obtain the approval of the Bankruptcy Court and complete the Transaction.
For additional information, see Note 23, Commitments and Contingencies, of the Notes to the Consolidated and Combined Financial Statements.
We evaluatedsegmentreportingin accordancewith Accounting StandardsCodification(“ASC”)280, SegmentReporting.We concludedthatGarrettoperatesin a singleoperatingsegmentand a singlereportable segmentbased on the operatingresultsavailableand evaluatedregularlyby the chiefoperatingdecisionmaker (“CODM”) to make decisionsabout resourceallocationand performanceassessment.The CODMmakesoperationalperformanceassessmentsand resourceallocationdecisionson a consolidatedbasis,inclusiveof allof the Business’sproducts.
Estimates
The preparation of the
financial statementsConsolidated Financial Statements in conformity with GAAP requires management to make estimates
and assumptions 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
those estimates. Estimates and assumptions are periodically reviewed and 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 disposeeffects 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 thosechanges are reflected in the
accompanying unaudited Consolidated
and Combined 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 reportedStatements in the unaudited Consolidated and Combined Financial Statements.
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-offperiod they are determined 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”).
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 to implement the successful bid of KPS at the Auction 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 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 (the “EBCA”) with certain members of the CO Group (the “Equity Backstop Parties”), pursuant to which, among other things, the Company will conduct the rights offering contemplated by the PSA (the “Rights Offering”) and each Equity 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 February 15, 2021, the Debtors and the CO Group agreed with certain of the Consenting Lenders (as defined below) to amend and restate the PSA, among other things, so as to add certain of the Consenting Lenders as parties thereto supporting the Plan.
On January 24, 2021, representatives of 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 have been 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’s motion is scheduled to be heard by the Bankruptcy Court on February 16, 2021. The Company has significant concerns with the feasibility of the Atlantic Park Proposal and has concluded that at this time the transactions contemplated under the Atlantic Park Proposal are not reasonably likely to lead to a higher and better alternative plan of reorganization as compared to the Plan.
Plan Support Agreement and Equity Backstop Commitment Agreement
On the Petition Date, certain of the Debtors also 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 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., Oaktree Capital Management, L.P., 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 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.
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 certain members of the CO Group in the amount of $1,050.8 million in the aggregate in cash;
|
necessary. | •
| A rights offering of the reorganized Company’s Series A Preferred Stock for a maximum aggregate value of $200 million to existing holders of the Company’s common stock, backstopped by certain members of the CO Group on a fully committed basis;
|
| •
| Holders of shares of the Company’s existing common stock may 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, estimated to be approximately $1,100 million 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.
In accordance with the terms of the PSA, on January 22, 2021, the Debtors’ entered into the EBCA with the Equity Backstop Parties, pursuant to which, among other things, the Company will conduct the Rights Offering and each Equity Backstop Party committed to (i) exercise its rights, as a stockholder of the Company, to purchase in the Rights Offering 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 Offering. 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.
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.
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. The PSA provides for the reimbursement by the Debtors of professional fees and expenses of the CO Group and certain of the Consenting Lenders, subject to an interim cap on certain expenses of $25 million prior to Emergence and with the balance to be paid at Emergence. 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.
The Debtors’ entry into and performance and obligations under the PSA and the ECBA are subject to approval by the Bankruptcy Court and other customary closing conditions. 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 ECBA. A hearing on the matter is scheduled to take place in the Bankruptcy Court on February 16, 2021. There can be no assurances that the Debtors will obtain the approval of the Bankruptcy Court and complete the Transaction.
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
Under the Bankruptcy Code, the Debtors had the exclusive right to file a plan of reorganization under Chapter 11 through and including 120 days after the Petition Date, and the Debtors currently have the exclusive right to solicit acceptances of such plan through and including 180 days after the Petition Date. This deadline may be extended with the approval of the Bankruptcy Court.
As described above, 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’s motion is scheduled to be heard by the Bankruptcy Court on February 16, 2021.
Under the absolute priority scheme established by the Bankruptcy Code, unless our creditors agree otherwise, all of our pre-petition liabilities and post-petition liabilities must be satisfied in full before the holders of our existing common stock can receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors and/or shareholders, if any, will not be determined until confirmation and implementation of a plan or plans of reorganization. We can give no assurance that any recovery or distribution of any amount will be made to any of our creditors or shareholders. A confirmed plan of reorganization could result in any of the holders of our liabilities and/or securities, including our common stock, receiving no distribution on account of their interests and cancellation of their holdings. Moreover, a plan of reorganization can be confirmed, under the Bankruptcy Code, even if the holders of our common stock vote against the plan of reorganization and even if the plan of reorganization provides that the holders of our common stock receive no distribution on account of their equity interests.
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. The Plan has not been confirmed by the Bankruptcy Court and may be supplemented or revised by the Debtors prior to the confirmation hearing to be held by the Bankruptcy Court. A hearing before the Bankruptcy Court to consider approval of the Disclosure Statement filed by the Debtors is scheduled for February 16, 2021. On February 9, 2021, the Equity Committee filed an objection to the approval of the Disclosure Statement, which will be considered at the February 16, 2021 hearing.
Chapter 11 Accounting
The Company has applied ASC 852 in preparing our Consolidated and Combined 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 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 Balance Sheet at December 31, 2020.
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 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 annual 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.
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 Statements of Operations for the twelve months ended December 31, 2020.
Reorganization items, net are comprised of the following for the twelve months ended December 31, 2020:
| | Twelve Months Ended December 31, | |
| | 2020 | |
Advisor fees | | $ | 55 | |
DIP Financing fees | | | 13 | |
Write-off of pre-petition unamortized debt issuance costs | | | 6 | |
Other | | | (1 | ) |
Total reorganization items, net | | $ | 73 | |
Debt during Chapter 11 Cases
See note 16, Long-term Debt and Credit Agreements for further discussion of the DIP facilities and the pre-petition long term debt.
Financial Statement Classification of Liabilities Subject to Compromise
As a result of the Chapter 11 Cases, the payment of pre-petition liabilities is generally subject to compromise pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-bankruptcy filing liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors’ business and assets. Among other things, the Bankruptcy Court authorized, but did not require, the Debtors to pay certain pre-petition claims relating to employee wages and benefits, taxes, critical vendors and foreign vendors. Pre-petition liabilities that are subject to compromise are required to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as liabilities subject to compromise may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination of secured status of certain claims, the determination as to the value of any collateral securing claims, proof of claims or other events.
The following table presents liabilities subject to compromise as reported in the Consolidated Balance Sheet at December 31, 2020:
| | December 31, | |
| | 2020 | |
Obligations payable to Honeywell (Note 23) | | $ | 1,482 | |
Long-term debt (Note 16) | | | 429 | |
Accounts payable | | | 82 | |
Pension, compensation, benefit and other employee related | | | 92 | |
Uncertain tax positions and deferred taxes | | | 69 | |
Advanced discounts from suppliers | | | 33 | |
Lease liability (Note 17) | | | 19 | |
Freight Accrual | | | 27 | |
Product warranties and performance guarantees | | | 16 | |
Other | | | 41 | |
Total liabilities subject to compromise | | $ | 2,290 | |
Determination of the value at which liabilities will ultimately be settled cannot be made until the Bankruptcy Court approves the plan of reorganization. We will continue to evaluate the amount and classification of our pre-petition liabilities. Any additional liabilities that are subject to compromise will be recognized accordingly, and the aggregate amount of liabilities subject to compromise may change.
Potential Claims
On November 3, 2020, the Debtors filed with the Bankruptcy Court schedules and statements for Garrett Motion Holdings Inc., Garrett ASASCO Inc. and Garrett Motion Holdings II Inc. (collectively, the “Initial Reporting Debtors”), setting forth, among other things, the assets and liabilities of each of the Initial Reporting Debtors, subject to the assumptions filed in connection therewith. On December 18, 2020, the Debtors filed with the Bankruptcy Court schedules and statements for each of the remaining Debtors, setting forth, among other things, the assets and liabilities of each of the remaining Debtors, subject to the assumptions filed in connection therewith. These schedules and statements are subject to further amendment or modification. As part of the Chapter 11 Cases, parties believing that they have claims or causes of action against the Debtors may file proofs of claim evidencing such claims. On November 4, 2020, the Bankruptcy Court entered an order requiring that certain holders of pre-petition claims that are not governmental units file proofs of claim with respect to claims against the Initial Reporting Debtors by the deadline for general claims against the Sellers, which was December 18, 2020 at 4:00pm Eastern Time. On December 15, 2020, the Bankruptcy Court entered an order requiring that certain holders of pre-petition claims that are not governmental units file proofs of claim with respect to claims against the remaining Debtors by the deadline for general claims against the remaining Debtors, which is March 1, 2021 at 4:00pm Eastern Time. On December 17, 2020, the Bankruptcy Court entered an order requiring that holders of pre-petition claims arising from the purchase or sale of our common stock file proofs of claim with respect to such claims by March 1, 2021 at 4:00pm Eastern Time.
The Debtors' have received 1,326 proofs of claim as of February 8, 2021, for an amount of approximately $146 billion.Such amount includes duplicate claims across multiple debtor legal entities. As claims are filed against the Debtors, the claims will be reconciled to amounts recorded in the Company's accounting records. Differences in amounts recorded and claims filed by creditors will be investigated and resolved, including through the filing of objections with the Bankruptcy Court, where appropriate. In addition, the Company may ask the Bankruptcy Court to disallow claims that the Company believes are duplicative, have been later amended or superseded, are without merit, are overstated or should be disallowed for other reasons. In light of the substantial number of claims already filed, and expected to be filed, the claims resolution process may take considerable time to complete and may continue after the Debtors emerge from bankruptcy. As of February 10, 2021 the Company’s assessment of the validity of claims received has not been completed.
Automatic Stay
Subject to certain specific exceptions under the Bankruptcy Code, the commencement of the Chapter 11 Cases automatically stayed most judicial or administrative actions against the Debtors and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement in accordance with the Bankruptcy Code.
Condensed Combined Debtor Only Financial Information
The financial statements below represent the condensed combined financial statements of the Debtors as of and for the twelve months ended December 31, 2020. Any entities which are non-debtor entities, are not included in these condensed combined financial statements. Intercompany transactions among the Debtors have been eliminated in the financial statements contained herein. Intercompany transactions among the Debtors and the non-debtor entities have not been eliminated in the Debtors’ financial statements.
| | For the Twelve Months Ended December 31, | |
| | 2020 | |
Net sales | | | 2,273 | |
Cost of goods sold | | | 1,863 | |
Gross profit | | $ | 410 | |
Selling, general and administrative expenses | | | 252 | |
Other expense, net | | | 45 | |
Interest expense | | | 80 | |
Non-operating (income) expense | | | (152 | ) |
Reorganization items, net | | | 73 | |
Income before taxes | | $ | 112 | |
Tax expense | | | 3 | |
Net income | | $ | 109 | |
| | December 31, 2020 | |
| | (Dollars in millions) | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 516 | |
Restricted cash | | | 30 | |
Accounts, notes and other receivables – net | | | 430 | |
Accounts and other receivables from non-debtor affiliates | | | 240 | |
Inventories – net | | | 166 | |
Other current assets | | | 91 | |
Total current assets | | | 1,473 | |
Investments and long-term receivables | | | 6 | |
Investment in subsidiaries | | | 883 | |
Property, plant and equipment – net | | | 319 | |
Goodwill | | | 193 | |
Deferred income taxes | | | 236 | |
Other assets | | | 93 | |
Total assets | | $ | 3,203 | |
LIABILITIES | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 497 | |
Borrowings under revolving credit facility | | | 370 | |
Current maturities of long-term debt | | | — | |
Debtor-in-possession Term Loan | | | 200 | |
Obligations payable to Honeywell, current | | | — | |
Accrued liabilities | | | 106 | |
Total current liabilities | | | 1,173 | |
Long-term debt | | | 1,082 | |
Deferred income taxes | | | — | |
Obligations payable to Honeywell | | | — | |
Other liabilities | | | 22 | |
Total liabilities not subject to compromise | | $ | 2,277 | |
Liabilities subject to compromise | | | — | |
External | | | 2,290 | |
With non-debtor affiliates | | | 528 | |
Total liabilities subject to compromise | | $ | 2,818 | |
Total liabilities | | $ | 5,095 | |
COMMITMENTS AND CONTINGENCIES (Note 23) | | | | |
EQUITY (DEFICIT) | | | | |
Total deficit attributable to the Debtors | | | (1,892 | ) |
Total liabilities and deficit | | $ | 3,203 | |
| | For the Twelve Months Ended December 31, | |
| | 2020 | |
| | (Dollars in millions) | |
Cash Flows from operating activities: | | | | |
Net cash used for operating activities | | $ | 15 | |
Cash Flows from investing activities: | | | | |
Expenditures for property, plant and equipment | | | (39 | ) |
Other | | | 5 | |
Net cash used for investing activities | | $ | (34 | ) |
Cash Flows from financing activities: | | | | |
Proceeds from debtor-in-possession financing | | | 200 | |
Proceeds from revolving credit facility | | | 1,437 | |
Payments of revolving credit facility | | | (1,088 | ) |
Payments of long-term debt | | | (2 | ) |
Debtor-in-possession financing fees | | | (13 | ) |
Other | | | — | |
Net cash provided by financing activities | | | 534 | |
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | | | 30 | |
Net increase in cash, cash equivalents and restricted cash | | | 545 | |
Cash and cash equivalents at beginning of period | | | 1 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 546 | |
Note 3. Summary of SignificantAccounting Policies
Principlesof Consolidation and Combination— For the periods subsequent to the Spin-Off, the
The Consolidated
and Combined Financial Statements include the accounts of Garrett Motion Inc. and all of its subsidiaries in which a controlling financial interest is maintained. We consolidate entities that we control due to ownership of a majority voting interest, and we consolidate variable interest entities
(“VIEs”) when we have variable interests and are the primary beneficiary. Our consolidation policy requires equity investments that we exercise significant influence over but in which we do not have a controlling financial interest to be accounted for using the equity method. Investments through which we are not able to exercise significant influence over the investee and which we do not have readily determinable fair values are accounted for under the cost method. All intercompany transactions and balances are eliminated in consolidation.
For the periods prior to the Spin-Off, the Consolidated
Cash and
Combined Financial Statements were prepared on a stand-alone basis and include our business units and wholly owned direct and indirect subsidiaries and entities in which we had a controlling financial interest.CashandCashEquivalents—
Cash and cash equivalents
includecash on hand and highly liquidinvestmentshaving an originalmaturityof threemonthsor less.Restricted Cash
—Restricted cash primarily consists of bank deposits used to pledgepledged as collateral in order to be able to issue bank notes as payment to certain suppliers in the Asia Pacific region (refer to Note 9. 9, Factoring and Notes Receivable) as well as provide access to a traditional supplier payable program involving certain of our suppliersReceivable).
Trade Receivables and
a third-party financial institution.
Trade ReceivablesandAllowance for Doubtful Accounts
—Trade accountsreceivableare recordedat the invoicedamountas a resultof transactionswith customers. In accordance with ASC 326, Financial Instruments - Credit LossesGarrett, the Company 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 Lossespayments, estimated based on Financial Instruments. The new guidance requires an entity to recognize as an allowance its estimate of lifetimethe 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 receivablesbased on days past due as measuredfromthe contractualdue date and
collection
history.Garrett The Company also takesinto considerationchanges in economicconditions thatmay not be reflectedin historicaltrends(for (for example,customersin bankruptcy,liquidationor reorganization).Receivablesare written-offagainstthe allowancefor doubtfulaccountswhenthey are determineduncollectible.Such determinationincludesanalysisand considerationof the particularconditionsof the account,includingtimeintervalssincelastcollection,customerperformanceagainstagreedupon payment plans, solvencyof customerand any bankruptcyproceedings.Transfer of Financial Instruments
—Sales and transfers of financial instruments are accounted for under ASC 860,Transfers and Servicing (“ASC 860”).Servicing. The Company may discount and sell accounts receivables during the normal course of business. These receivables which are transferred to a third party without recourse to the Company and that meet the criteria of sales accounting as per ASC 860, are excluded from the amounts reported in the Consolidated Balance Sheets. The cash proceeds received from such sales are included in operating cash flows. The expenses associated with the factoring of receivables are recorded within Other expense, net in the Consolidated and Combined Statements of Operations.The Company may also receive bank notes in settlement of accounts receivables, primarily in the Asia Pacific region. Such bank notes are classified as notes receivables under Accounts, notes and other receivables – net in the Consolidated Balance Sheets. The collections of such bank notes are included in operating cash flows and any expenses related to discounting these are included within Other expense, net in the Consolidated
and Combined Statements of Operations. 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.
Inventories—
Inventories
are statedat the lower of cost, determinedon a first-in,first-outbasis,includingdirectmaterialcostsand directand indirectmanufacturingcosts,or net realizablevalue. Obsoleteinventoryis identifiedbased on analysisof inventoryfor knownobsolescenceissues. The original equipment inventory on hand in excess of forecasted usage and lack of consumption in the previous 12 months is fully reserved, unless the value of such material is recoverable from either the vendor or the customer.Property,Plant andEquipment,— Net
Property,
plantand equipmentare recordedat cost lessaccumulated depreciation and amortization.For financialreporting, Depreciation is calculated using the straight-linemethodof depreciationis used over the estimateduseful livesof assets, which are 10 to 50 yearsfor buildingsand improvements,2 to 16 yearsfor machineryand equipment,3 to 10 yearsfor toolingequipment,and 5 to 7 yearsfor software.Leases Maintenance and repairs are expensed as incurred.
—ForImpairment testing of long lived assets is completed by the periods beginning January 1, 2019, right-of-useCompany in accordance with ASC 360, Property, Plant and Equipment. The testing is completed when a triggering event occurs, or at least on an annual basis to assess if any impairment triggering events existed during the year. If a triggering event occurs or is identified, the impairment testing is completed using the two-step impairment model. Asset classes are identified and tested for recoverability by comparing the net carrying value of the asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. If the carrying amount of an asset group is not recoverable, an impairment loss is recognized if the carrying amount exceeds the fair value. The impairment analysis was completed in 2023 with no triggering events identified.
Leases
Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of a lease (the “commencement date”) based on the present value of lease payments over the lease term. We determine if an arrangement is a lease at inception. Operating leases are included in Other assets, Accrued liabilities, and Other liabilities in our Consolidated Balance Sheets. No finance leases have been recognized. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease where it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed in the period in which they occur. We have lease agreements with lease and non-lease components, which are generally accounted for separately. For machinery and equipment, we account for the lease and non-lease components as a
single lease component. We account for short-term leases by recognizing lease payments in net income on a straight-line basis over the lease term and will not recognize any ROU assets and lease liabilities on the Consolidated Balance Sheet. For the periods prior to January 1, 2019, we accounted for leases in accordance with ASC 840, Leases (“ASC 840”). Upon commencement of the Chapter 11 Cases, certain pre-petition leases have been reclassified into liabilities subject to compromise.
Goodwill
Goodwill—Goodwill is subject to impairment testing annually, and whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This testing compares carrying value to fair value of our single reporting unit. The Company recognizes an impairment charge for the amount by which the carrying value of the reporting unit exceeds the reporting unit´s fair value. However, any impairment should not exceed the amount of goodwill allocated to the reporting unit. Because we have a
single reporting unit with a negative carrying value,
0no impairment was recognized.
Warranties and Guarantees
andGuarantees—Expected warrantycostsfor productssold are recognizedbased on an estimateof the amountthateventuallywill be requiredto settlesuch obligations.These accrualsare based on factorssuch as past experience,lengthof the warrantyand variousotherconsiderations.Costs of productrecalls, which may includethe cost of the productbeing replacedas well as the customer’scost of the recall,including laborto removeand replacethe recalledpart,are accruedas partof our warrantyaccrualat the timean obligation becomesprobableand can be reasonablyestimated.These estimatesare adjustedfromtimeto timebased on factsand circumstancesthatimpactthe statusof existingclaims.For additionalinformation,see Note 23, Commitments25, Commitments and Contingenciesof Notes to Consolidated and Combined Financial.Statements.Sales Recognition
—On January 1, 2018, we adopted the FASB´s updated guidance on revenue from contracts with customers, ASC 606 Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting.Product sales are recognized when we transfer control of the promised goods to our customer, which is based on shipping terms. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the promised
goods.goods, adjusted for any variable consideration such as price concessions or annual price adjustments as estimated at contract inception. Amounts billed but ultimately expected to be refunded to the customer are recorded as part of the customer pricing reserve within Accrued liabilities on the Consolidated Balance Sheet.
In the sale of products in the OEM channel, the transaction price for these goods is
generally equal to the agreed price of each unit and represents the standalone selling price for the unit.
In the sale of products in the aftermarket channel, the terms of a contract or the historical business practice can give rise to variable consideration due to, but not limited to, discounts and bonuses. rebates.
We estimate variable consideration at the most likely amount we will receive from customers and reduce revenues recognized accordingly. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.
Prior to January 1, 2018, sales were recognized when there was evidence We adjust our estimate of a sales agreement, the delivery of goods had occurred, the sales price was fixed or determinable and the collectability of revenue was reasonably assured. Sales were generally recorded upon shipment of product to customers and transfer of title under standard commercial terms. Sales incentives and allowances were recognized as a reduction to revenue at the timeearlier of when the value of consideration we expect to receive changes or when the consideration becomes fixed.
Research and Development
Garrett conducts research and development (“R&D”) activities, which consist primarily of the related sale. In addition, payments made to customers were generally recognized as a reduction to revenue at the time these paymentsdevelopment of new products and product applications. R&D costs are made or committed to the customers.Research andDevelopment—Garrett conductsresearchand development(“R&D”) activities,whichconsistprimarilyof the developmentof newproductsand productapplications.R&Dcostsare chargedto expense as incurred.Such costsare includedin Cost of goods sold of $111and were $175 million, $129$153 million and$128 $136 million,for the yearsended December31, 2020, 20192023, 2022 and 20182021, respectively. Additionally, the Company incurs engineering-related expenses which are also included in Cost of goods sold of $13and were $(12) million $5, $11 million and $10$22 million for the years ended December 31, 2020, 20192023, 2022 and 2018.
Asbestos-RelatedContingenciesandInsurance Recoveries—Honeywell is subject to certain asbestos-related2021, respectively. Engineering-related expenses include customer reimbursements of $46 million, $25 million and environmental-related liabilities, primarily$21 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Certain engineering expenses related to its legacy Bendix business. In conjunction withlong-term supply arrangements are capitalized when defined criteria, such as the Spin-Off, certain operations thatexistence of a contractual guarantee for reimbursement, are met. As of December 31, 2023 and 2022, $12 million and $1 million, respectively, of such contractually reimbursable costs were part ofcapitalized. These amounts are recorded within Other current assets in the Bendix business, along with the ownership of the Bendix trademark, as well as certain operations that were part ofConsolidated Balance Sheets.
Government Incentives
The Company receives incentives from governmental entities related to expenses, assets, and other
legacy elements of the Business, were transferred to us.activities. The
accounting for the majority of our asbestos-related liability payments and accounts payable reflect theassociated 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 businessincentives can vary by country. Government incentives are recorded 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 Eurosfinancial statements in accordance with their purpose as a reduction of expense, a reduction of asset cost or other operating or non-operating income. Incentives are recognized when there is probable assurance that the termsCompany will comply with the conditions for the incentives and a reasonable expectation that the funds will be received. Government incentives received prior to being earned are recognized as deferred income whereas incentives earned prior to being received are recognized as receivables. The Company recognized government incentives of $14 million and $25 million in Cost of goods sold and Selling, general and administrative expenses for the agreement.years ended December 31, 2023 and 2022, respectively.
Supplier Financing
UnderThe Company has supplier financing arrangements with two third-party financial institutions under which certain suppliers may factor their receivables from Garrett. The Company also enters into arrangements with banking institutions to issue bankers acceptance drafts in settlement of accounts payables, primarily in the termsAsia Pacific region. The bankers acceptance drafts, or guaranteed bank notes, have a contractual maturity of the PSAsix months or less, and the Transaction, the Plan, if confirmedmay be held by the Bankruptcy Court, will include a global settlementsuppliers until maturity, transferred to their suppliers, or discounted with Honeywell providing for (a) the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to the Indemnity Agreements and the Tax Matters Agreement and (b) the dismissal with prejudice of the Honeywell Litigationfinancial institutions in exchange for (x) a $375cash. Our Consolidated Balance Sheets include supplier financing obligations outstanding of $68 million cash payment at Emergence and (y) 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$33 million as of Emergence (representing the present valueDecember 31, 2023 and 2022, respectively, and guaranteed bank notes outstanding of the installments at a 7.25% discount rate). $193 million and $171 million as of December 31, 2023 and 2022, respectively, recorded within Accounts payable.
Environmental Matters
The Company
will also haverecords liabilities for environmental assessments and remediation activities in the
option to makeperiod in which it is probable that 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.The Debtors’ entry into and performance under the PSAliability has been incurred and the termsamount of that liability can be reasonably estimated. Estimated costs are recorded at undiscounted amounts, based on experience and assessments and are regularly evaluated. To the PSA,extent that the Transactionrequired remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. The liabilities are recorded in Accrued liabilities and the Plan remain subject to approval by the Bankruptcy Court. 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 ECBA. A hearing on the matter is scheduled to take placeOther liabilities in the Bankruptcy Court on February 16, 2021. There can be no assurances that the Debtors will obtain the approval of the Bankruptcy Court and complete the Transaction.
For additional information, see Note 23, Commitments and Contingencies of Notes to Consolidated and Combined FinancialStatements.
Balance Sheets.
Stock-Based Compensation Plans
—The principal awards issued under our stock-based compensation plans, which are described in Note 21, 23, Stock-Based Compensation, are performance stock units and restricted stock units. The cost for such awards is measured at the grant date based on the fair value of the award. The value of the portion of the award thatCompensation expense is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting period of the equity award) based on the Company's best estimate of ultimate performance against the award targets, and is included in Selling, general and administrative expenses in the Consolidated and Combined Statements of Operations. Forfeitures are estimated at the time of grant to recognize expenseThe Company accounts for those awards that are expected to vest and are based on our historical forfeiture rates under our Former Parent´s plans.For periods prior to the Spin-Off, certain employees within the Business participated in stock-based compensation plans sponsored by the Former Parent. The Former Parent’s stock-based compensation plans primarily include incentive compensation plans. Awards granted under the plans consist of stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) and are based on the Former Parent’s common shares and,forfeitures as such, are reflected in Invested deficit within the Consolidated and Combined Statements of Equity (Deficit).
they occur.
Pension Benefits—Following the Spin-Off, we
We sponsor defined benefit pension plans covering certain employees, primarily in Switzerland, the U.S. and Ireland. For such plans, we are required to disaggregate the service cost component of net benefit costs and report those costs in the same line item or items in the Consolidated
and Combined Statements of Operations as other compensation costs arising from services rendered by the pertinent employees during the period. The other
nonservicenon service components of net benefit costs are required to be presented separately from the service cost component. We record the service cost component of Pension
ongoingexpense (income)
expense in Cost of goods sold or Selling, general and administrative expenses. The remaining components of net benefit costs within Pension
ongoingexpense (income)
expense,, primarily interest costs and assumed return on plan assets, are recorded in Non-operating expense (income). We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (“MTM Adjustment”). The MTM Adjustment is recorded in Non-operating expense (income).
For periods prior to the Spin-Off, we sponsored a defined benefit pension plan covering certain employees in Ireland. Additionally, certain Garrett employees participated in defined benefit pension plans (the “Shared Plans”) sponsored by Honeywell which includes participants of other Honeywell subsidiaries and operations. We accounted for our participation in the Shared Plans as a multiemployer benefit plan. Accordingly, we did not record an asset or liability to recognize the funded status of the Shared Plans. The related pension expense was based on annual service cost of active Garrett participants and reported within Cost of goods sold in the Consolidated and Combined Statements
of Operations. The pension expense specifically identified for the active Garrett participants in the Shared Plans for the year ended December 31, 2018 was $5 million.
Foreign Currency Translation—Assets and liabilities
of subsidiariesoperatingoutsidethe United States with a functionalcurrencyotherthan U.S.Dollarsare translatedinto U.S.Dollarsusing year-endexchange rates. Sales, costsand expensesare translatedat the averageexchange ratesin effectduring the year. Foreign currency translationgains and lossesare includedas a componentof Accumulatedothercomprehensiveincome(loss) ("AOCI").
DerivativeFinancial Instruments—
We minimize our risks from foreign currency exchange rate fluctuations through our normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes. Derivative financial instruments that qualify for hedge accounting must be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
All derivatives are recorded on the
balance sheetConsolidated Balance Sheets as assets or liabilities and measured at fair value. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in
Accumulated other comprehensive income (loss)AOCI and subsequently recognized in earnings when the hedged items impact earnings. Cash flows of such derivative financial instruments are classified consistent with the underlying hedged
item.On September 27, 2018, we early adopteditems. For derivatives designated as net investment hedges, provided the new accounting guidance containedhedging relationship is highly effective, the changes in ASU 2017-12 on a modified retrospective approach. The new standardfair value of the derivatives are recorded in AOCI until the net investment is intended to improve and simplify rules relating to hedge accounting, including the elimination of periodic hedge ineffectiveness, recognition of components excluded from hedge effectiveness assessment, the ability to elect to perform subsequent effectiveness assessments qualitatively, and other provisions designed to provide more transparency around the economics of a company’s hedging strategy.
liquidated or sold.
Income Taxes—
We account for income taxes pursuant to the asset and liability method which requires us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.
Prior to the Spin-Off, the tax provision was presented on a separate company basis as if we were a separate filer. The effects of tax adjustments and settlements from taxing authorities are presented in our Consolidated and Combined Financial Statements in the period to which they relate as if we were a separate filer. Our current obligations for taxes were settled with our Former Parent on an estimated basis and adjusted in later periods as appropriate. All income taxes due to or due from our Former Parent that have not been settled or recovered by the end of the period are reflected in Invested deficit within the Consolidated and Combined Financial Statements. We are subject to income tax in the United States (federal, state and local) as well as other jurisdictions in which we operate. The tax provision was calculated as if the Business was operating on a stand-alone basis and filed separate tax returns in the jurisdiction in which it operates. Therefore, cash tax payments and items of current and deferred taxes may not be reflective of the actual tax balances prior to or subsequent to the Spin-Off.
Earnings per share
—
Basic earnings per share is basedare calculated using the two-class method, pursuant to the issuance of our Series A Preferred Stock on the Effective Date. The calculation of basic earnings per share requires an allocation of earnings to all securities that participate in dividends with common shares, such as our Series A Preferred Stock, which was converted into Common Stock pursuant to the Transaction, to the extent that each security may share in the Company's earnings. Basic earnings per share are calculated by dividing undistributed earnings allocated to Common Stock by the weighted average number of common shares outstanding. shares.
Diluted earnings per share is based onare calculated using the weighted average number of common shares outstanding and allmore dilutive potential common shares outstanding. On October 1, 2018, the date of consummation of the Spin-Off, 74,070,852two-class or if-converted methods. The two-class method uses net income available to common shareholders and assumes conversion of all potential shares other than the participating securities. The if-converted method uses net income and assumes conversion of all potential shares including the Company’sparticipating securities. See Note 24, Earnings Per Share for further details.
Related Party Transactions
We lease certain facilities and receive property maintenance services from Honeywell International ("Honeywell"), which as of Emergence was the owner of our Series B Preferred Stock that has since been fully redeemed by the Company, is a holder of our Common Stock were distributed to Honeywell stockholdersand was also a holder of record as of September 18, 2018 who held their shares through the Distribution Date. Basic and diluted EPS for all periodsour Series A Preferred Stock prior to the Spin-Off reflectTransaction, as discussed below and in Note 21, Equity. We also contract with Honeywell for the occasional purchase of certain goods and services. Lease and service agreements were made at commercial terms prevalent in the market at the time they were executed. Honeywell is not considered a related party subsequent to the Transaction.
Our payments under the agreements with Honeywell during the period that they were considered a related party amounted to $2 million for the year ended December 31, 2023 and $9 million for the year ended December 31, 2022, as well as for the period from Emergence through December 31, 2021, and were included in Cost of goods sold, and Selling, general and administrative expenses, in our Consolidated Statements of Operations. Related to the agreements with Honeywell, our Consolidated Balance Sheet includes liabilities of $10 million as of December 31, 2022. Liability balances are primarily related to lease contracts of $7 million as of December 31, 2022.
As discussed in Note 21, Equity, in order to effect the Transaction, on April 12, 2023, the Company entered into separate definitive agreements with each of Centerbridge Partners, L.P. (“Centerbridge”) and funds managed by Oaktree Capital Management, L.P. (“Oaktree”), each of which is a holder of our Common Stock and appoints a director to our Board of Directors. Mr. Kevin Mahony, who serves as a Managing Director of Centerbridge, and Mr. Steven Tesoriere, who serves as a Managing Director of Oaktree, have been appointed to our Board of Directors as designees of Centerbridge and Oaktree, respectively. As described more fully in Note 21, Equity, in connection with the Transaction, we paid to Centerbridge and Oaktree an aggregate of approximately $570 million for the repurchase of shares of Series A Preferred Stock, plus an aggregate of approximately $10 million and 7,276,036 shares of Common Stock representing the Additional Amounts and Accumulated Dividends in respect of the repurchased shares of Series A Preferred Stock. Additionally, in connection with the conversion of the Series A Preferred Stock that each of Centerbridge and Oaktree held as of the conversion date, we issued to Centerbridge and Oaktree an aggregate of 65,334,277 shares of Common Stock upon the conversion of an equivalent number of distributed shares or 74,070,852 shares. For 2018,of Series A Preferred Stock, plus Additional Amounts and Accumulated Dividends of approximately $9 million and 6,819,540 shares of Common Stock.
In connection with the distributedconversion of our Series A Preferred Stock, we issued to Honeywell, as a holder of our Series A Preferred Stock, 4,196,330 shares were treatedof Common Stock upon the conversion of an equivalent number of shares of Series A Preferred Stock, plus Additional Amounts and Accumulated Dividends of approximately $1 million and 438,009 shares of Common Stock.
Additionally, Mr. John Petry, a director on our Board, serves as
Managing Member of Sessa Capital (Master), L.P., which indirectly held shares of our Series A Preferred Stock prior to the conversion. In connection with the conversion of our Series A Preferred Stock, we issued
to Sessa Capital and
outstanding from January 1, 2018 for purposesits affiliates, as holder of
calculating historical basic earnings per share. Basicour Series A Preferred Stock, 16,592,384 shares of Common Stock upon the conversion of an equivalent number of shares of Series A Preferred Stock, plus Additional Amounts and
diluted weighted average Accumulated Dividends of commonapproximately $2 million and 1,731,900 shares outstandingof Common Stock.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the current year classification in order to increase comparability across periods. Specifically, amounts related to changes in the fair value of undesignated interest derivatives that had previously been recorded in Non-operating income are presented now within Interest expense in the Consolidated Statements of Operations. As a result of such reclassification, Interest expense decreased by $74 million and $10 million for the years ended December 31,
2020, 20192022 and
2018 were 75,543,461, 74,602,8682021, respectively, while Non-operating income decreased by $74 million and
74,059,240$10 million for the years ended December 31, 2022 and
76,100,509, 75,934,373 and 74,402,148,2021, respectively.
Use of Estimates—The preparationof the Consolidated and Combined FinancialStatementsin conformitywith U.S. GAAPrequiresmanagementto make estimatesand assumptionsthataffectthe reportedamountsin the Consolidated and Combined FinancialStatementsand relateddisclosuresin the accompanyingnotes. Actual resultscould differ fromthose estimates.Estimatesand assumptionsare periodicallyreviewedand the effectsof changes are reflectedin the Consolidated and Combined FinancialStatementsin the periodthey are determinedto be necessary.
In connection with the filing of the Chapter 11 Casesreclassification had no impact on the Petition Date, the Consolidated and Combined Financial Statements included herein have been prepared in accordance with Financialnet income, assets, liability, equity, or cash flows as previously reported.
Recently Issued Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic No. 852, Reorganizations. See Note 2, Reorganization and Chapter 11 Proceedings, of the Consolidated and Combined Financial Statements for further details.Liabilities Subject to Compromise—Liabilities subject to compromise include pre-petition liabilities that are unsecured, under-secured or where it cannot be determined that the liabilities are fully secured. Liabilities that may be affected by a plan of reorganization must be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts as a result of the plan of reorganization or negotiations with creditors. If there is uncertainty about whether a secured claim is undersecured, or will be impaired under the plan of reorganization, the entire amount of the claim is included with prepetition claims in liabilities subject to compromise.
Reorganization Items, Net— Effective on September 20,2020, we began to apply the provisions of accounting Standards Codification (“ASC”) 852, Reorganizations, which is applicable to companies under bankruptcy protection, and requires amendments to the presentation of key financial statement line items. ASC 852 requires that the financial statements for periods subsequent to the filing of the Chapter 11 Cases distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses that can be directly associated with the reorganization and restructuring of the business must be reported separately as reorganization items, net in the consolidated statements of operations beginning September 20, 2020.
Pronouncements
Recently Adopted Accounting
PronouncementsStandards
In August 2018,September 2022, the FASB issued ASU 2018-13, 2022-04, Fair Value MeasurementDisclosure of Supplier Finance Program Obligations (Topic 820)405-50): Disclosure Framework-Changesof Supplier Finance Purchase Obligations. The amendment in this update requires companies to disclose key terms of supplier financing programs used in connection with the Disclosure Requirementspurchase of goods and services, along with information about their obligations under these programs including a rollforward of those obligations. The Company adopted the new guidance as of January 1, 2023. See the Supplier Financing section above for Fair Value Measurement, which amends certain disclosure requirements relatedfurther detail.
Accounting Standards Issued But Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to fair value measures.Reportable Segment Disclosures. The amendments in this update require companies with a single reportable segment to provide all existing segment disclosures, as well as requires incremental segment information to be disclosed. The guidance is effective for fiscal years beginning after December 15, 2019, including2023 on a retrospective basis, and interim periods within that fiscal year. Effective January 1, 2020,years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the Company adoptedguidance to determine the new guidance. The adoption did not have an impact on our Consolidated Balance Sheets, Consolidated and Combined Statements of Operations and related its disclosures.
Notes to the Consolidated and Combined Financial Statements.In June 2016,December 2023, the FASB issued ASU 2016-13, 2023-09, Financial Instruments—Credit LossesIncome Taxes (Topic 326)740): Measurement of Credit Losses on Financial Instruments, which requires measurementImprovements to Income Tax Disclosures. The amendments in this update increase the transparency around income tax information through improvements to disclosures primarily related to the rate reconciliation and recognition of expected credit losses for financial assets held.income taxes paid information. The guidance is
effective for fiscal years beginning after December 15,
2019, including interim periods within that fiscal year.2024 on a prospective basis. 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.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 guidanceCompany is effective for fiscal years beginning after December 15, 2020, including interim periods within that fiscal year. Early adoption is permitted. Adoption of the new guidance did not have a material impact on the Company’s disclosures.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of 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. We are currently evaluating the guidance to determine the impact of the guidance related to certain existing debt agreements on our Consolidated and Combined Financial Statements.
its disclosures.
There are no other recently issued, but not yet adopted, accounting pronouncements which are expected to have a material impact on the Company’s Consolidated and Combined Financial Statements and related disclosures.
Note 4. Revenue Recognition and Contracts with Customers
The Company generates revenue through the sale of products to customers in the OEM and aftermarket channels. OEM and aftermarket contracts generally include scheduling agreements that stipulate the pricing and delivery terms that identify the quantity and timing of the product to be transferred.
Revenue recognition under ASC 606 is generally consistent with the previous standard, with the exception of how we account for payments made to customers in conjunction with future business. Historically these payments were recognized as a reduction of revenue at the time the payments were made. Under ASC 606, these payments result in deferred reductions to revenue that are subsequently recognized when the products are delivered to the customer. The Company evaluates the amounts capitalized each period end for recoverability and expenses any amounts that are no longer expected to be recovered over the term of the business arrangement. These payments are recorded in Other current assets and Other assets in our Consolidated Balance Sheets.
For Net sales by region (determined based on country of shipment) and channel, refer to Note 26, Concentrations.27,
Concentrations. We recognize virtually all of our revenues arising from performance obligations at a point in time. Less than 1% of our revenue is satisfied over time. The timing of revenue recognition, billings and cash collections results in unbilled receivables (contract assets) and billed accounts receivable, reported in Accounts, notes and other receivables – net, and customer advances and deposits (contract liabilities), reported in Accrued Liabilities, on the Consolidated Balance Sheets. Contract assets arise when the timing of
cash collected frombilling to customers differs from the timing of revenue recognition. Contract assets are recognized when the revenue associated with the contract is recognized prior to billing and derecognized once invoiced in accordance with the terms of the contract. Contract liabilities are recorded in scenarios where we enter into arrangements where customers are contractually obligated to remit cash payments in advance of us satisfying performance obligations and recognizing revenue. Contract liabilities are generally derecognized when revenue is recognized.
These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.
The following table summarizes our contract assets and liabilities balances:
| | 2020 | |
| 2023 | | | 2023 | | 2022 |
| (Dollars in millions) | | | (Dollars in millions) |
Contract assets—January 1 | | $ | 6 | |
Contract assets—December 31 | | | 61 | |
| Contract assets—December 31, | |
Change in contract assets—Increase/(Decrease) | | | 55 | |
Contract liabilities—January 1 | | $ | (3 | ) |
Contract liabilities—December 31 | | | (2 | ) |
| Contract liabilities—December 31, | |
Change in contract liabilities—(Increase)/Decrease | | $ | 1 | |
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For product sales, typically each product sold to a customer represents a distinct performance obligation.
Virtually all of our performance obligations are satisfied as of a point in time.
Performance obligations are supported by contracts with customers, providing a framework for the nature of the distinct goods, services or bundle of goods and services. The timing of satisfying the performance obligation is typically indicated by the terms of the contract. All performance obligations are expected to be satisfied within one year, with substantially all performance obligations being satisfied within a month.
The timing of satisfaction of our performance obligations does not significantly vary from the typical timing of payment, with
most cash advances (contract liabilities) and unbilled receivables (contract assets) being settled within 3 months. For some contracts, we may be entitled to receive an advance payment.
We have applied the practical expedient to not disclose the value of remaining performance obligations for contracts with an original expected term of one year or less.
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Indemnification related — post Spin-Off | | $ | 41 | | | $ | 28 | | | $ | (16 | ) |
Indemnification related — litigation | | $ | 3 | | | $ | 11 | | | $ | — | |
Asbestos related, net of probable insurance recoveries | | | — | | | | — | | | | 131 | |
Environmental remediation, non-active sites | | | 1 | | | | — | | | | 5 | |
Factoring and notes receivables discount fees | | | 1 | | | | 1 | | | | — | |
| | $ | 46 | | | $ | 40 | | | $ | 120 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| | | | | |
| | | | | |
| | | | | |
| Factoring and notes receivables discount fees | $ | 4 | | | $ | 2 | | | $ | 1 | |
| Supplier financing fees | 1 | | | — | | | — | |
| $ | 5 | | | $ | 2 | | | $ | 1 | |
Note 6. Non-Operating (Income)Non-operating income
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Equity income of affiliated companies | $ | (7) | | | $ | (7) | | | $ | (7) | |
| Interest income | (7) | | | (2) | | | (1) | |
| Pension (income) — non service | (7) | | | (37) | | | (13) | |
| Foreign exchange loss | 6 | | | 2 | | | 14 | |
Loss on remeasurement (1) | 13 | | | — | | | — | |
| Others, net | — | | | (3) | | | 1 | |
| $ | (2) | | | $ | (47) | | | $ | (6) | |
(1) Relates to the loss on remeasurement of the Series A Preferred Stock Agreement related to the Transaction. Refer to Note 21, ExpenseEquity. | | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Equity income of affiliated companies | | $ | (5 | ) | | $ | (6 | ) | | $ | (5 | ) |
Interest income | | | (3 | ) | | | (7 | ) | | | (7 | ) |
Pension (income) expense — non service | | | 5 | | | | 8 | | | | 2 | |
Foreign exchange | | | (35 | ) | | | 13 | | | | 6 | |
Others, net | | | — | | | | — | | | | (4 | ) |
| | $ | (38 | ) | | $ | 8 | | | $ | (8 | ) |
Note 7. Income Taxes
The sources of income (loss) from continuing operations, before income taxes, classified between domestic entities and those entities domiciled outside of the U.S., are as follows:
| | Years Ended December 31, | |
Income before taxes | | 2020 | | | 2019 | | | 2018 | |
| | Years Ended December 31, | | | | Years Ended December 31, |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
| | (Dollars in millions) | | | | (Dollars in millions) |
Domestic entities | | $ | (87 | ) | | $ | (54 | ) | | $ | (99 | ) |
Entities outside the U.S. | | | 206 | | | | 400 | | | | 495 | |
| | $ | 119 | | | $ | 346 | | | $ | 396 | |
| | $ | |
Taxexpense (benefit)
Tax expense (benefit)
Tax expense (benefit) consists
of:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| Years Ended December 31, | | | Years Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| (Dollars in millions) | | | (Dollars in millions) |
Current: | | | | | | | | | | | | |
| Federal | |
| Federal | |
Federal | | $ | 3 | | | $ | 9 | | | $ | 7 | |
State | | | 1 | | | | 1 | | | | 1 | |
Foreign | | | 69 | | | | 64 | | | | 113 | |
| | $ | 73 | | | $ | 74 | | | $ | 121 | |
| $ | |
Deferred: | | | | | | | | | | | | |
| Federal | |
| Federal | |
Federal | | | — | | | | 2 | | | | (8 | ) |
State | | | — | | | | — | | | | — | |
Foreign | | | (34 | ) | | | (43 | ) | | | (923 | ) |
| | $ | (34 | ) | | $ | (41 | ) | | $ | (931 | ) |
| | $ | 39 | | | $ | 33 | | | $ | (810 | ) |
| $ | |
| $ | |
The U.S.
federal
statutory
income
tax rate
is reconciled
to our effective
income
tax rate
as follows:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| Years Ended December 31, | | | Years Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| (Dollars in millions) | | | (Dollars in millions) |
U.S. federal statutory income tax rate | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
Taxes on non-U.S. earnings different from U.S. tax | | | (6.5 | )% | | | (2.3 | )% | | | (7.7 | )% | Taxes on non-U.S. earnings different from U.S. tax | (3.6) | % | | (3.4) | % | | (7.6) | % |
Reserves for tax contingencies | | | 15.9 | % | | | 2.5 | % | | | 4.1 | % | Reserves for tax contingencies | 0.2 | % | | (0.4) | % | | 3.7 | % |
Non-deductible and permanent items | | | 7.1 | % | | | 1.7 | % | | | 6.0 | % | Non-deductible and permanent items | — | % | | 0.7 | % | | (14.4) | % |
Withholding and other taxes on foreign earnings | | | (14.7 | )% | | | 4.4 | % | | | (231.6 | )% | Withholding and other taxes on foreign earnings | 7.0 | % | | 3.9 | % | | 5.7 | % |
Tax law changes | | | — | | | | (17.3 | )% | | | — | | Tax law changes | (1.7) | % | | 0.1 | % | | — | % |
Changes in valuation allowance | | | 10.5 | % | | | 0.5 | % | | | 5.3 | % | Changes in valuation allowance | 5.5 | % | | (0.6) | % | | (0.3) | % |
All other items | | | (0.5 | )% | | | (1.0 | )% | | | (1.6 | )% | All other items | (3.6) | % | | 0.1 | % | | (0.2) | % |
| | | 32.8 | % | | | 9.5 | % | | | -204.5 | % | | 24.8 | % | | 21.4 | % | | 7.9 | % |
The effective tax rate increased by 23.33.4 percentage points in 20202023 compared to 2019.2022. The increase was primarily due to the rate change impact on deferred tax assets attributable to the certification by the Chinese government of the High and New Technology Enterprise status of the Company’s China operations, which reduced the tax rate to 15% for the respective entity. Further, withholding tax and other taxes on foreign earnings have comparatively increased due to a one-time non-recurring benefit recorded in 2022 related to accrued taxes on distributable reserves. These increases were partially offset by current year tax benefits in Switzerland due to law changes (net of valuation allowance) and in Korea for prior year tax settlements.
The effective tax rate increased by 13.5 percentage points in 2022 compared to 2021. The increase was primarily attributable to the
absencenontaxable gain on the settlement of
tax benefits related to the
remeasurement of deferred tax assetsHoneywell claims (partially offset by non-deductible transaction costs) and
liabilities for tax law changes enacted during 2019, higher tax expense because of nondeductible costs incurred in connection with the Chapter 11 Cases, the resolution of tax audits and an increase in losses for jurisdictions where we do not expect to generate futureincreased tax benefits from
such losses. Thean internal restructuring, both of which occurred in 2021 and are non-recurring. This increase
in the effective tax rate was
also impacted by overall lower earnings compared to 2019 because of the adverse impacts of COVID-19, partially offset by tax benefits
from lower withholding taxes on non-US earnings.The effective tax rate increased by 214.0 percentage points in 2019 comparedthe current year due to 2018. The increase was primarily attributable to the absencerelease of approximately $910 million reserves for statute of non-recurring tax benefits in 2018 because of a reduction in withholding taxes incurred as part of an internal restructuring of Garrett’s business in advance of the Spin-Off. The
limitation expirations.
increase was partially offset by approximately $60 million of tax benefits related to the remeasurement of deferredDeferred tax assets and liabilities for tax law changes enacted during the year, primarily in Switzerland.
Deferredtax assets(liabilities)
The tax effects
of temporary
differences
and tax carryforwards
which give rise
to future
income
tax benefits and payables
are as follows:
| | December 31, | |
| | 2020 | | | 2019 | |
Deferred tax assets: | | | | | | | | |
Intangibles and fixed assets | | $ | 202 | | | $ | 205 | |
Pension | | | 18 | | | | 12 | |
Accruals and reserves | | | 32 | | | | 30 | |
Net operating losses and other tax attribute carryforwards | | | 35 | | | | 27 | |
Outside basis differences | | | 11 | | | | 17 | |
Other | | | 29 | | | | 23 | |
Total Deferred tax assets | | | 327 | | | | 314 | |
Valuation allowance | | | (34 | ) | | | (27 | ) |
Net deferred tax assets | | $ | 293 | | | $ | 287 | |
Deferred tax liabilities: | | | | | | | | |
Outside basis differences | | $ | (30 | ) | | $ | (49 | ) |
Other | | | (15 | ) | | | (21 | ) |
Total deferred tax liabilities | | | (45 | ) | | | (70 | ) |
Net deferred tax asset | | $ | 248 | | | $ | 217 | |
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| (Dollars in millions) |
| Deferred tax assets: | | | |
| Intangibles and fixed assets | $ | 139 | | | $ | 173 | |
| Pension | 4 | | | 4 | |
| Accruals and reserves | 30 | | | 33 | |
| Net operating losses and other tax attribute carryforwards | 35 | | | 31 | |
| Outside basis differences | 13 | | | 11 | |
| Other | 55 | | | 34 | |
| Total deferred tax assets | 276 | | | 286 | |
| Valuation allowance | (52) | | | (31) | |
| Net deferred tax assets | $ | 224 | | | $ | 255 | |
| Deferred tax liabilities: | | | |
| Outside basis differences | $ | (9) | | | $ | (5) | |
| Other | (26) | | | (43) | |
| Total deferred tax liabilities | (35) | | | (48) | |
| Net deferred tax asset | $ | 189 | | | $ | 207 | |
As of December 31,
2020,2023, the Company had
grossforeign net operating loss carryforwards of approximately
$132$88 million with the majority in the below
jurisdictions. jurisdictions: | | Expiration | | Net Operating | |
| | Period | | Loss | |
| | Jurisdiction | | Carryforwards | |
| Jurisdiction | | Jurisdiction | Expiration
Period | | Net Operating
Loss
Carryforwards |
| | | (Dollars in millions) | | | | | (Dollars in millions) |
Brazil | | Indefinite | | $ | 53 | |
Luxembourg | | 2037 | | | 36 | |
Switzerland | | 2027 | | | 30 | |
| | | | $ | 119 | |
| China | |
| Other | |
| | | $ | |
We also have net operating loss carryforwards in certain US state jurisdictions, the tax effect of which is not significant.
We maintain a valuation allowance of
$34$52 million against a portion of
the non-U.S. total deferred tax assets. In the event we determine that we will not be able to realize our net deferred tax assets in the future, we will reduce such amounts through an increase to tax expense in the period such determination is made. Conversely, if we determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance through a reduction to tax expense in the period that such determination is made. Our balance
sheets presentsheet presents a deferred tax asset of
$275$216 million and a deferred tax liability of $27 million after
taking into accountconsidering jurisdictional netting.
As of December 31, 2020, $25 million of the deferred tax liability balance were reclassified to Liabilities subject to compromise. For moreinformation, refer to Note 2, Reorganization and Chapter 11 Proceedings.The Company does
We do not intend to permanently reinvest the
majority of undistributed earnings of
itsour foreign subsidiaries and
hashave recorded a deferred tax liability, mainly consisting of withholding taxes, of approximately
$13$15 million as of December 31,
2020.2023.
The following table summarizes the activity related to the Company’s uncertain tax positions (excluding interest and penalties and related tax attributes):
| | 2020 | | | | | 2019 | | | 2018 | |
Change in unrecognized tax benefits: | | | | | | | | | | | | | | |
Balance at beginning of year | | $ | 54 | | | | | $ | 48 | | | $ | 100 | |
Gross increases related to current period tax positions | | | 8 | | | | | | 8 | | | | 19 | |
Gross increases related to prior periods tax positions | | | 6 | | | | | | — | | | | 9 | |
Gross decreases related to prior periods tax positions | | | — | | | | | | — | | | | (8 | ) |
Decrease related to resolutions of audits with tax authorities | | | (7 | ) | | | | | — | | | | — | |
Expiration of the statute of limitations for the assessment of taxes | | | (2 | ) | | | | | (2 | ) | | | — | |
Potential Indemnifications to Honeywell for US and foreign taxes as contractually obligated in connection with Tax Matters Agreement | | | — | | | | | | — | | | | (71 | ) |
Foreign currency translation | | | 1 | | | | | | — | | | | (1 | ) |
Balance at end of year | | $ | 60 | | | | | $ | 54 | | | $ | 48 | |
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Change in unrecognized tax benefits: | | | | | |
| Balance at beginning of year | $ | 71 | | | $ | 80 | | | $ | 60 | |
| Gross increases related to current period tax positions | 3 | | | 4 | | | 13 | |
| Gross increases related to prior periods tax positions | — | | | 5 | | | 31 | |
| Gross decreases related to prior periods tax positions | — | | | — | | | (21) | |
| Decrease related to resolutions of audits with tax authorities | — | | | — | | | — | |
| Expiration of the statute of limitations for the assessment of taxes | (8) | | — | | (14) | | | (1) | |
| | | | | |
| Foreign currency translation | — | | | (4) | | | (2) | |
| Balance at end of year | $ | 66 | | | $ | 71 | | | $ | 80 | |
As of December 31,
2020, 2019,2023, 2022, and
20182021 there were
$60$66 million,
$54$71 million, and
$48$80 million, respectively, of unrecognized tax benefits that, if recognized, would be recorded as a component of
Taxtax expense.
The amount of unrecognized tax benefits that is reasonably possible to be resolved in the next twelve months is expected to be approximately $22 million, all of which, if recognized, would reduce tax expense and the effective tax rate.
Estimated interest and penalties related to uncertain tax benefits are classified as a component of tax expense in the Consolidated
and Combined Statements of Operations and totaled $5 million of expense,
$3$2 million of expense and
$2$3 million of
incomebenefit for the years ended December 31,
2020, 2019,2023, 2022, and
2018,2021, respectively. Accrued interest and penalties were
$34 million, $29 million,
$26 million, and
$23$26 million, as of December 31,
2020, 2019,2023, 2022, and
2018,2021, respectively.
We are currently under audit in
a fewmultiple jurisdictions,
primarily India for tax years
ranging from 20062020 through
2017.2022 and U.S. for tax years 2018 through 2020. Based on the outcome of these examinations, or as a result of the expiration of statutes of limitations for specific jurisdictions, it is
reasonably possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will
materiallysignificantly change from those recorded as liabilities in our financial statements.
Note 8. Accounts, Notes and Other Receivables—Net
| | December 31, 2020 | | | December 31, 2019 | |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| (Dollars in millions) | | | (Dollars in millions) |
Trade receivables | | $ | 625 | | | $ | 574 | |
Notes receivables | | | 152 | | | | 68 | |
Other receivables | | | 77 | | | | 69 | |
| | $ | 854 | | | $ | 711 | |
Less—Allowance for expected credit losses | | | (13 | ) | | | (4 | ) |
| | $ | 841 | | | $ | 707 | |
| 814 | |
| Less — Allowance for expected credit losses | |
| $ | |
Trade receivables include $61$38 million and $4$46 million of unbilled balances as of December 31, 20202023 and 2019,2022, respectively.
Note 9. Factoring and Notes
ReceivablesReceivable
The Company
enteredenters into arrangements with financial institutions to sell eligible trade receivables.
For the years ended December 31, 2020 and December 31, 2019, the CompanyThe receivables are sold
$473 million and $27 million of eligible receivables, respectively, without recourse and
accountedthe Company accounts for these arrangements as
a true
sale.sales. The Company also receivedreceives 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 partythird-party financial institutions in exchange for cash. ForBank notes sold to third-party financial institutions without recourse are likewise accounted for as true sales.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Eligible receivables sold without recourse | $ | 783 | | $ | 664 | | $ | 566 |
| Guaranteed bank notes sold without recourse | 92 | | 102 | | — |
The expenses related to the sale of trade receivables and guaranteed bank notes are recognized within Other expense, net in the Consolidated Statements of Operations, and were $4 million, $2 million and $1 million for the years ended December 31, 20202023, 2022 and December 31, 2019, the Company sold $160 million and $105 million of bank notes, respectively, without recourse, and accounted for these as true sales. 2021, respectively.
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| (Dollars in millions) |
| Receivables sold but not yet collected by the bank from the customer | $ | 7 | | | $ | 5 | |
| Guaranteed bank notes sold but not yet collected by the bank from the customer | — | | | — | |
As of December 31,
2020,2023 and 2022, the Company has
pledged as collateral $18 million ofno guaranteed bank notes
which have not been sold in order to be able to issue bank notespledged as
payment to certain suppliers. Such pledged amounts are included as Notes receivables in Accounts, notes and other receivables – Net (Note 8).collateral.
| | December 31, 2020 | | | December 31, 2019 | |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| (Dollars in millions) | | | (Dollars in millions) |
Raw materials | | $ | 160 | | | $ | 142 | |
Work in process | | | 19 | | | | 18 | |
Finished products | | | 97 | | | | 85 | |
| | $ | 276 | | | $ | 245 | |
Less—Reserves | | | (41 | ) | | | (25 | ) |
| | $ | 235 | | | $ | 220 | |
| $ | |
| Less — Reserves | |
| $ | |
Note 11. Other Current
assetsAssets | | December 31, | |
| | 2020 | | | 2019 | |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| (Dollars in millions) | | | (Dollars in millions) |
Prepaid expenses | | $ | 62 | | | $ | 12 | |
Taxes receivable | | | 22 | | | | 46 | |
Advanced discounts to customers, current | | | 10 | | | | 10 | |
Customer reimbursable engineering | | | 13 | | | | 12 | |
| Foreign exchange forward contracts | |
Receivable from transfer agent(1) | |
Other | | | 3 | | | | 5 | |
| | $ | 110 | | | $ | 85 | |
| $ | |
(1) Receivable from transfer agent includes the Series A Preferred Stock dividend that was paid to the transfer agent in December 2022, and settled with shareholders on January 3, 2023. Refer to Note 21, Equity.
| | December 31, | |
| | 2020 | | | 2019 | |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| (Dollars in millions) | | | (Dollars in millions) |
Advanced discounts to customers, non-current | | $ | 70 | | | $ | 62 | |
Operating right-of-use assets (Note 17) | | | 36 | | | | 35 | |
Undesignated cross-currency swap at fair value | | | — | | | | — | |
Operating right-of-use assets (Note 18) | |
| Income tax receivable | |
| Pension and other employee related | |
| Derivatives designated as net investment hedges | |
| Designated and undesignated derivatives | |
Other | | | 29 | | | | 11 | |
| | $ | 135 | | | $ | 108 | |
| $ | |
Note 13. Property, Plant and
Equipment—Equipment, Net
| | December 31, | |
| | 2020 | | | 2019 | |
| December 31, | | | December 31, |
| 2023 | | | 2023 | | 2022 |
| (Dollars in millions) | | | (Dollars in millions) |
| Land and improvements | |
| Buildings and improvements | |
Machinery and equipment | | $ | 711 | | | $ | 639 | |
Tooling | | | 390 | | | | 324 | |
Buildings and improvements | | | 153 | | | | 141 | |
| Software | |
Construction in progress | | | 86 | | | | 100 | |
Software | | | 68 | | | | 57 | |
Land and improvements | | | 17 | | | | 16 | |
Others | | | 26 | | | | 24 | |
| | | 1,451 | | | | 1,301 | |
Less—Accumulated depreciation and amortization | | | (946 | ) | | | (830 | ) |
| | $ | 505 | | | $ | 471 | |
| 1,537 | |
| Less — Accumulated depreciation and amortization | |
| $ | |
Depreciation and amortization
expense
was $86amounted to $90 million,
$73$84 million and
$72 $92 million
in 2020, 2019 for the years ended December 31, 2023, 2022 and
2018,2021, respectively.
Note 14. Goodwill
The change in
There were no changes to the carryingamountof goodwill for the yearsended December31, 20202023 and 2019 is as follows:2022: | | December 31, 2019 | | | Currency Translation Adjustment | | | December 31, 2020 | |
Goodwill | | $ | 193 | | | | — | | | $ | 193 | |
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2022 |
| (Dollars in millions) |
| Goodwill | $ | 193 | | | $ | 193 | |
Note 15. Accrued Liabilities
Due to the Chapter 11 filing, Accrued Liabilities that existed
| | | | | | | | | | | |
| December 31,
2023 | | December 31,
2022 |
| (Dollars in millions) |
| Customer pricing reserve | $ | 57 | | | $ | 50 | |
| Compensation, benefits and other employee related | 80 | | | 69 | |
| Repositioning | 9 | | | 9 | |
| Product warranties and performance guarantees - Short-term | 18 | | | 18 | |
| Income and other taxes | 42 | | | 39 | |
| Advanced discounts from suppliers, current | 2 | | | 8 | |
Customer advances and deferred income (1) | 15 | | | 29 | |
| Accrued interest | 26 | | | 13 | |
Short-term lease liability (Note 18) | 9 | | | 9 | |
| Freight accrual | 9 | | | 9 | |
| Dividends declared on Series A Preferred Stock | — | | | 42 | |
| Designated and undesignated derivatives | 12 | | | 8 | |
Other (primarily operating expenses)(2) | 14 | | | 17 | |
| $ | 293 | | | $ | 320 | |
(1)Customer advances and deferred income include $9 million and $8 million of contract liabilities as of December 31, 20202023 and were deemed pre-petition, unsecured were reclassified2022, respectively. See Note 4, Revenue Recognition and Contracts with Customers.
(2)Includes $5 million and $3 million of environmental liabilities as Liabilities subject to compromise, refer to Note 2, Reorganizationof December 31, 2023 and Chapter 11 Proceedings.2022, respectively. | | December 31, 2020 | | | December 31, 2019 | |
Customer pricing reserve | | $ | 82 | | | $ | 90 | |
Compensation, benefit and other employee related | | | 62 | | | | 64 | |
Repositioning | | | 7 | | | | 4 | |
Product warranties and performance guarantees | | | 14 | | | | 29 | |
Taxes | | | 37 | | | | 33 | |
Advanced discounts from suppliers, current | | | 5 | | | | 19 | |
Customer advances and deferred income | | | 8 | | | | 12 | |
Accrued interest | | | — | | | | 5 | |
Short-term lease liability (Note 17) | | | 5 | | | | 8 | |
Other (primarily operating expenses) | | | 28 | | | | 46 | |
| | $ | 248 | | | $ | 310 | |
The Company accruedincurs repositioning costs related to projects to optimize our product costs and to right-size our organizational structure. Expenses related to the repositioning accrualscosts are included in Cost of goods sold and Selling, general and administrative expenses in our Consolidated and Combined StatementStatements of Operations.
| | Severance Costs | | | Exit Costs | | | Total | |
Balance at December 31, 2018 | | | 13 | | | | 2 | | | | 15 | |
Charges | | | 2 | | | | — | | | | 2 | |
Usage—cash | | | (8 | ) | | | (2 | ) | | | (10 | ) |
Adjustments | | | (3 | ) | | | 1 | | | | (2 | ) |
Foreign currency translation | | | (1 | ) | | | — | | | | (1 | ) |
Balance at December 31, 2019 | | $ | 3 | | | $ | 1 | | | $ | 4 | |
Charges | | | 10 | | | | — | | | | 10 | |
Usage—cash | | | (7 | ) | | | 0 | | | | (7 | ) |
Adjustments | | | 1 | | | | (1 | ) | | | — | |
Foreign currency translation | | | — | | | | — | | | | — | |
Balance at December 31, 2020 | | $ | 7 | | | $ | — | | | $ | 7 | |
| | | | | | | | | | | | | | | | | |
| Severance
Costs | | Other Costs | | Total |
| (Dollars in millions) |
| Balance at December 31, 2021 | $ | 10 | | | $ | — | | | $ | 10 | |
| Charges | 4 | | | — | | | 4 | |
| Usage—cash | (5) | | | — | | | (5) | |
| Balance at December 31, 2022 | 9 | | | — | | | 9 | |
| Charges | 11 | | | 2 | | | 13 | |
| Usage—cash | (11) | | | — | | | (11) | |
| Non-cash asset write-offs | — | | | (2) | | | (2) | |
| Balance at December 31, 2023 | $ | 9 | | | $ | — | | | $ | 9 | |
Note 16. Long-term Debt and Credit Agreements
DIP Credit Agreement
Long Term Debt
On October 6, 2020, the Bankruptcy CourtEffective Date, in accordance with the Plan, the Company 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 theretocredit agreement (as amended restated, supplemented or otherwise modified from time to time, the “DIP Lenders”“Credit Agreement”) and Citibankwith JPMorgan Chase Bank, 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.agent. The DIP Credit Agreement provides for athe following long-term senior secured super-priorityfinancing (collectively, the "Term Loan Facilities"):
•2021 Dollar Facility: a seven-year secured first-lien U.S. Dollar term loan (the “DIP Term Loan Facility”) withfacility for $715 million;
•2023 Dollar Facility: a maximumfive-year secured first-lien U.S. Dollar term loan facility for $700 million; and
•Euro Facility: a seven-year secured first-lien Euro term loan facility for €450 million.
The principal amountoutstanding and carrying amounts of $200 million, $100 millionour long-term debt as of which was funded onDecember 31, 2023 and 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Maturity Date | | Interest Rate | | December 31, 2023 | | December 31, 2022 |
| 2021 Dollar Term Facility | April 30, 2028 | | SOFR plus 351 bps | | $ | 699 | | | $ | 706 | |
| 2023 Dollar Term Facility | April 30, 2028 | | SOFR plus 450 bps | | 500 | | | — | |
| Euro Term Facility | April 30, 2028 | | EURIBOR plus 350 bps | | 497 | | | 480 | |
| Total principal outstanding | | | | | 1,696 | | | 1,186 | |
| Less: unamortized deferred financing costs | | | | | (46) | | | (31) | |
| Less: current portion of long-term debt | | | | | (7) | | | (7) | |
| Total long-term debt | | | | | $ | 1,643 | | | $ | 1,148 | |
The following table summarizes the Closing Dateminimum scheduled principal repayments of long-term debt as of December 31, 2023:
| | | | | |
| December 31, |
| (Dollars in millions) |
| 2024 | $ | 7 | |
| 2025 | 7 | |
| 2026 | 17 | |
| 2027 | 77 | |
| 2028 | 1,588 | |
| |
| Total payments on long-term debt | $ | 1,696 | |
Revolving Facility and $100 millionLetters of which was subsequently funded on October 22, 2020 (the “Delayed Draw Borrowing Date”), following entry of the Bankruptcy Court’s final order approving the DIP Term Loan Facility on October 21, 2020. Credit
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.The maturity date of the DIP Term Loan Facility is the earlier to occur of (a) March 31, 2021 (the “Scheduled Maturity Date”); provided, however, that upon the Company’s written request such Scheduled Maturity Date can be extended by three separate one-month extensions subject to (i) the payment of an extension fee to the Lenders equal to 0.50% of the principal amount of the Loans outstanding at the time of such extension, (ii) no default or Event of Default (as defined in the DIP Credit Agreement) existing at the time of such extension and (iii) accuracy of the representations and warranties in all material respects at the time of such extension and after giving effect thereto; and (b) the effective date ofalso provides for a plan of reorganization; and certain other events under the DIP Credit Agreement.
The outstanding principal amount under the DIP Term Loan Facility will bear interest at a rate equal to (x) prior to March 31, 2021, LIBOR (subject to a 1.00% LIBOR floor) plus 4.50% per annum and (y) following March 31, 2021, if the Scheduled Maturity Date has been extended at such time, LIBOR (subject to a 1.00% LIBOR floor) plus 5.50% per annum, in each case, payable every 30 days in arrears. On the Closing Date, the Company paid 1.00% in commitment fees on the total commitment plus 2.00% in fees in the form of original issue discount on the initial $100 million borrowing. On the Delayed Draw Borrowing Date, date the Company paid 2.00% in fees in the form of original issue discount on the $100 million delayed draw loan. Upon an event of default, all outstanding amounts under the DIP Credit Agreement will bear interest at a rate equal to the applicable interest rate plus an additional 2.00% per annum and be payable on demand.
Pursuant to the terms of the DIP Credit Agreement, certain subsidiaries of the Company that guarantee the obligations arising under the prepetition Credit Agreement and that are Debtors in the Chapter 11 Case have guaranteed the Company’s obligations under the DIP Credit Agreement. Subject to certain exceptions, the DIP Term Loan Facility isfive-year senior secured by a security interest in substantially all of the assets of the Company and the guarantors. The DIP Financing is subject to certain covenants, including, without limitation, related to the incurrence of additional debt, liens, the making of restricted payments, and the Company’s failure to comply with certain bankruptcy-related covenants, in each case as set forth in the DIP Credit Agreement. The DIP Credit Agreement contains representations, warranties and events of default that are customary for debtor-in-possession facilities of this type. The DIP Financing is subject to certain prepayment events, including, without limitation, upon the sale of certain assets, in each case as set forth in 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 Amendment”). The First 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.
The principal amounts outstanding on Debtor-in-possession financing are as follows:
| | December 31, 2020 | |
Debtor-in-possession financing | | $ | 200 | |
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-yearfirst-lien revolving credit facility in an aggregate principal amount of €430 millionproviding for multi-currency revolving loans (the “Revolving Facility”"Revolving Facility", and together with the Term Loan Facilities, the “Senior Secured Credit Facilities”"Credit Facilities"). The PrepetitionRevolving Facility matures on April 30, 2028 and has a maximum borrowing capacity of $570 million. See discussion in "—Amendments to the Credit Agreement", below).
Under the Revolving Facility, the Company may use up to $125 million for the issuance of letters of credit to its subsidiaries. Letters of credit are available for issuance under the Credit Agreement on terms and conditions customary for financings of this kind, which issuances will reduce availability under the Revolving Facility. As of December 31, 2023, the Company had no borrowings outstanding under the Revolving Facility, no outstanding letters of credit, and available borrowing capacity of $570 million.
Separate from the Revolving Facility, the Company has a bilateral letter of credit facility, which matures on April 30, 2026. On September 14, 2022, the Company amended the bilateral letter of credit agreement to reduce the available capacity from $35 million to $15 million. As of December 31, 2023, the Company had utilized $12 million and had remaining available capacity of $3 million.
Amendments to the Credit Agreement
The Company entered into a first and second amendment of the Credit Agreement on January 11, 2022 and March 22, 2022, respectively. Under the first amendment, the maximum borrowing capacity under the Revolving Facility was amendedincreased from $300 million to $475 million. The London Inter-bank Offered Rate ("LIBOR") was replaced as an available rate at which borrowings under the Revolving Facility could accrue with, for loans borrowed in U.S. Dollars, the daily Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank of New York and for loans borrowed in Australian Dollars, the average bid reference rate administered by ASX Benchmarks Pty Limited.
The second amendment removed the requirement that payments made in cash for the benefit of holders of shares of the Company's Series A Preferred Stock on or before December 31, 2022 be made on a ratable basis to the holders of the Common Stock, and made additional clarifying amendments to certain provisions.
On April 27, 2023, the Company entered into a third amendment to the Credit Agreement (the "Third Amendment") which provided for additional financing consisting of the 2023 Dollar Term Facility. The full amount of the 2023 Dollar
Term Facility was drawn on June
12, 20206, 2023 (the
“2020 Amendment”"Third Amendment Closing Date")
.On September 27, 2018, we completed, and the offeringproceeds were primarily used to finance the repurchases of €350 million (approximately $410 million basedthe Series A Preferred Stock as part of the Transaction, and pay fees and expenses incurred in connection with this amendment.
The 2023 Dollar Term Facility will mature on
exchange rates asApril 30, 2028. Prior to maturity, the 2023 Dollar Term Facility will be repaid quarterly in an amount equal to, during the first two years occurring after the Third Amendment Closing Date, 7.50% per annum of
September 27, 2018) inthe aggregate principal amount,
of 5.125% senior notes due 2026 (the “Senior Notes”).and thereafter, 10.00% per annum. The
Senior Notes bear interestCompany may prepay the 2023 Dollar Term Facility 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 andany time in whole or in part without premium or penalty, subject to certain limitationsexceptions (including for (i) customary breakage and exceptions, limits our abilityredeployment costs in the case of prepayment of term benchmark rate loans and (ii) certain repricing events occurring during the abilityperiod from the Third Amendment Closing Date to the date that is twelve months following the Third Amendment Closing Date).
The Third Amendment also provided for (i) a further increase in the maximum borrowing amount under the Revolving Facility by $95 million (the “Incremental Revolving Commitment”) to an aggregate amount of
our restricted subsidiaries to: (i) incur, assume$570 million; and (ii) an extension of the maturity date for the Revolving Facility by two years from April 30, 2026 to April 30, 2028 (or January 30, 2028 if any of the currently outstanding term loans or
guarantee additional indebtedness or issue certain disqualified equity intereststerm loans under the 2023 Dollar Term Facility maturing as of April 30, 2028 remain outstanding as of such date). The Incremental Revolving Commitment has the same terms 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 assetsis generally subject 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,same conditions applicable to the existing revolving facility under the Credit Agreement, 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.
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. These costs were recorded to Reorganization items, net, in the Consolidated and Combined Statement of Operations for the year ended December 31, 2020. Refer to Note 2, Reorganization and Chapter 11 Proceedings for further discussion.
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 werefees paid in connection with the Revolvingarrangement of the increased amount.
Security
The Credit
Facility.
The principal amounts outstandingFacilities are secured on our Senior Secureda first-priority basis by: (i) a perfected security interest in the equity interests of each direct material subsidiary of each guarantor under the Credit Facilities and (ii) perfected security interests in, and mortgages on, substantially all tangible and intangible personal property and material real property of each of the Senior Notes asguarantors under the Credit Facilities, subject, in each case, to certain exceptions and limitations, including the agreed guaranty and security principles. The guarantors organized under the laws of December 31, 2020England and December 31, 2019 are as follows:
| | December 31, | | | December 31, | |
| | 2020 | | | 2019 | |
| | (Dollars in millions) | |
Senior Secured Credit Facilities (1): | | | | | | | | |
Term Loans | | | 1,082 | | | | 1,026 | |
Borrowings under revolving credit facility | | | 370 | | | | — | |
Total consolidated Secured Debt | | $ | 1,452 | | | $ | 1,026 | |
Long-term debt, net subject to compromise (2): | | | | | | | | |
Senior Notes | | | 429 | | | | 387 | |
Total debt, prior to reclassification to Liabilities subject to compromise | | $ | 1,881 | | | $ | 1,413 | |
Less: current portion | | | — | | | | (4 | ) |
Less: Amounts reclassified to Liabilities subject to compromise | | | (429 | ) | | | — | |
Total long-term debt | | $ | 1,452 | | | $ | 1,409 | |
(1)
| The Term A Facility, Term B Facility and Revolving Facility are fully secured. These continue to be accounted for under ASC 470.
|
(2)
| The Senior Notes are not fully secured and have been reclassified to Liabilities subject to compromise in the Company's Consolidated Balance Sheet as of December 31, 2020. AsWales, Luxembourg, Switzerland and the United States entered into security documents securing the obligations of each borrower concurrently with the effectiveness of the Petition Date, the Company ceased accruing related interest expense and amortization of debt issuance costs.
|
The commencement of the Chapter 11 Cases constituted an event of default that accelerated the Company’s obligations and terminated undrawn commitments, 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 obligationsguarantors organized under the Prepetition Credit Agreement are automatically stayed as a resultlaws of the Chapter 11 Cases,Australia, Ireland, Japan, Mexico, Romania and the creditors’ rights of enforcement in respect of the Prepetition Credit Agreement areSlovakia have subsequently executed security documents.
Interest Rate and Fees
The 2021 Dollar Term Facility is subject to
the applicable provisionsan interest rate, at our option, of
the Bankruptcy Code.During the Chapter 11 Cases and pursuant to an order of the Bankruptcy Court, we make monthly payments of adequate protection at the contractual non-default rate of interest on loans and certain other obligations under our Senior Secured Credit Facilities.
Following commencement of the Chapter 11 Cases, the contractual non-default rate of interest that is applicable under Senior Secured Credit Facilities is either (a) in the case of dollar denominated borrowings,an alternate base rate determined by reference to the highest of (1) the rate of interest last quoted by The Wall Street Journal as the “prime rate” in the United States, (2) the greater of the federal funds effective rate and the overnight bank funding rate, plus 0.5% and (3) the one month adjusted LIBOR rate, plus 1% per annum (“ABR”), (b) in the case of borrowings denominated in certain permitted foreign currencies other than dollars or euros, an adjusted LIBOR rate (“LIBOR”) (which shall not be less than zero)1.50%) or (b) an adjusted SOFR rate ("SOFR") (which shall not be less than 0.50%), or (c)in each case, plus an applicable margin equal to 3.51% in the case of borrowings denominatedSOFR loans and 2.25% in euros,the case of ABR loans. The Euro Term Facility is subject to an interest rate equal to an adjusted EURIBOR rateEuro Interbank Offered Rate (“EURIBOR”) (which shall not be less than zero), plus an applicable margin equal to 3.50%. The 2023 Dollar Term Facility bears interest, at the term borrowers' election, at a rate per annum equal to (i) SOFR (subject to a 0.50% floor) plus the applicable margin or (ii) the base rate plus the applicable margin. The applicable margin for loans under the 2023 Dollar Term Facility is 4.50% for SOFR loans and 3.50% for base rate loans.
As of December 31, 2023, the Revolving Facility is subject to an interest rate comprised of an applicable benchmark rate (which shall not be less than 1.00% if such benchmark is the ABR rate and not less than 0.00% in the case of other applicable benchmark rates) that is selected based on the currency in which borrowings are outstanding thereunder, in each case, plus an applicable margin.
Pursuant to the 2020 Amendment, (i) the margin applicable to loans under the Term B Facility increased by 75 basis points through the maturity date and (ii) the margin applicable to loans under the Revolving Facility and Term A Facility increased by 25 basis points until the Company delivers consolidated financial statements as of and for its first fiscal quarter ending on or after the last day of the Relief Period (as defined in the 2020 Amendment). Pursuant to the 2020 Amendment, the margin applicable to loans under our Senior Secured Credit Facilities increased by 25 basis points on September 4, 2020 following a downgrade in our corporate credit rating by S&P Global ratings.The applicable margin for the U.S. Dollar tranche of the Term B Facility is currently 2.50% per annum (for ABR loans) while that for the euro tranche of the Term B Facility is currently 3.75% per annum (for EURIBOR loans). The applicable margin for each of the Term A Facility and the Revolving Facility varies based on our leverage ratio which is increased by 25 basis points until the Company delivers consolidated financial statements as of and for its first fiscal quarter ending on or after the last day of the Relief Period. ratio.
Accordingly, the interest rates for the Senior Secured Credit Facilities will fluctuate during the term of the Credit Agreement based on changes in the ABR, LIBOR, EURIBOR and other applicable benchmark rates or future changes in our corporate ratingleverage ratio. Interest payments with respect to the Term Loan Facilities are required either on a quarterly basis (for ABR loans) or at the end of each interest period (for SOFR and EURIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months.
In addition to paying interest on outstanding borrowings under the Revolving Facility, the Company is required to pay a quarterly commitment fee based on the unused portion of the Revolving Facility, which is determined by our leverage ratio.ratio and ranges from 0.25% to 0.50% per annum.
73
Contractual Maturities
In
Prepayments
The Company is obligated to make quarterly principal payments throughout the term of the 2021 Dollar Facility and the 2023 Dollar Term Facility according to the amortization provisions in the Credit Agreement. Such payments may be reduced from time to time in accordance with the terms of the Credit Agreement as a result of the application of loan prepayments made by us, if any, prior to the scheduled date of payment thereof.
We may voluntarily prepay borrowings under the Credit Agreement without premium or penalty, subject to a 1.00% prepayment premium in connection with our Chapter 11 cases, all pre-petition debt amounts have been stayedcertain repricing events in connection with the 2023 Dollar Term facility during the period from the Third Amendment Closing Date to the date that is twelve months following the Third Amendment Closing Date and separately stated ascustomary "breakage” costs with respect to SOFR and EURIBOR loans. We may also reduce the commitments under the Revolving Facility, in whole or in part, of Liabilitiesin each case, subject to compromise. Their resolution will be based upon the requirementscertain minimum amounts and increments.
The Credit Agreement also contains certain mandatory prepayment provisions in the event that we incur certain types of indebtedness, receive net cash proceeds from certain non-ordinary course asset sales or other dispositions of property or, starting with the fiscal year ending on December 31, 2022, 0.50% of excess cash flow on an annual basis (with step-downs to 25% and 0% subject to compliance with certain leverage ratios), in each case subject to terms and conditions customary for financings of this kind.
On July 31, 2023, the Company made an early repayment in the amount of $200 million on the 2023 Dollar Term Facility. The early repayment resulted in incremental amortization on debt issuance cost of $9 million, included within Interest Expense in the Consolidated Statement of Operations.
Representations and Warranties
The Credit Agreement contains certain representations and warranties (subject to certain agreed qualifications) that are customary for financings of this kind.
Certain Covenants
The Credit Agreement contains certain affirmative and negative covenants customary for financing of this type. The Revolving Facility also contains a financial covenant requiring the maintenance of a consolidated total leverage ratio of not greater than 4.7 times as of the end of each fiscal quarter if, on the last day of any such fiscal quarter, the aggregate amount of loans and letters of credit (excluding backstopped or cash collateralized letters of credit and other letters of credit with an aggregate face amount not exceeding $30 million) outstanding under the Revolving Facility exceeds 35% of the aggregate commitments thereunder.
As of December 31, 2023, the Company was in compliance with all its financing covenants.
Note 17. Mandatorily Redeemable Series B Preferred Stock
On the Effective Date, pursuant to the Plan, the Company issued 834,800,000 shares of Reorganization. GivenSeries B Preferred Stock to Honeywell in satisfaction of certain claims of Honeywell.
On December 28, 2021, the uncertaintiesCompany completed a partial early redemption of 345,988,497 shares of Series B Preferred Stock for a cash payment of $211 million including $10 million as interest.
During the year ended December 31, 2022, the Company further redeemed 488,811,503 shares of Series B Preferred Stock, representing the entirety of the remaining outstanding shares, for a total aggregate price of $409 million, of which $28 million related to settlement of accrued interest. A loss on extinguishment of debt of $5 million was recognized in the Consolidated Statement of Operations related to the
resolutionfinal early redemption. There are no shares of
the Chapter 11 cases, all pre-petition debt has been included at their contractual maturities.Series B Preferred Stock outstanding as of December 31, 2023 and 2022. | | December 31, 2020 | |
2021 | | $ | 4 | |
2022 | | | 70 | |
2023 | | | 247 | |
2024 | | | 4 | |
2025 | | | 777 | |
Thereafter | | | 431 | |
| | $ | 1,533 | |
Less: current portion | | | — | |
| | $ | 1,533 | |
We have operatingoperating leases that primarily consist of real estate, machinery and equipment. Our leases have remaining lease terms of up to 1015 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:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Operating lease cost | | $ | 15 | | | $ | 14 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Operating lease cost | $ | 16 | | | $ | 16 | | | $ | 15 | |
Rent expense under ASC 840 was $14 million in 2018.
Supplemental cash flow information related to operating leases is as follows:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
| Year Ended December 31, | | | Year Ended December 31, |
| 2023 | | | 2023 | | 2022 | | 2021 |
| (Dollars in millions) | | | (Dollars in millions) |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash outflows from operating leases | |
| Operating cash outflows from operating leases | |
Operating cash outflows from operating leases | | $ | 13 | | | $ | 12 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | | |
Operating leases | | $ | 7 | | | $ | 12 | |
| Operating leases | |
| Operating leases | |
Supplemental balance sheet information related to operating leases is as follows:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
| Year Ended December 31, | | | Year Ended December 31, |
| 2023 | | | 2023 | | 2022 |
| (Dollars in millions) | | | (Dollars in millions) |
Other assets | | $ | 36 | | | $ | 35 | |
Accrued liabilities | | | 5 | | | | 8 | |
Other liabilities | | | 15 | | | | 28 | |
Liabilities subject to compromise | | | 19 | | | | — | |
|
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Weighted-average lease term (in years) | | | 5.14 | | | | 6.30 | |
Weighted-average discount rate | | 6.16 | | | 6.36 | |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 |
| |
| Weighted-average lease term (in years) | 8.08 | | 8.41 |
| Weighted-average discount rate | 5.69 | % | | 5.61 | % |
Maturities of operating lease liabilities
wereare as follows:
| | Year Ended December 31, 2020 | |
2021 | | $ | 12 | |
2022 | | | 10 | |
2023 | | | 7 | |
| Year Ended December 31, 2023 | | | Year Ended December 31, 2023 |
| (Dollars in millions) | | | (Dollars in millions) |
2024 | | | 5 | |
2025 | | | 4 | |
| 2026 | |
| 2027 | |
| 2028 | |
Thereafter | | | 8 | |
Total lease payments | | | 46 | |
Less imputed interest | | | (7 | ) |
| | $ | 39 | |
| $ | |
Note
18.19. Financial Instruments and Fair Value Measures
Credit and Market Risk—
We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.
Foreign Currency Risk Management—We are
The Company is exposed to market risks from changes in currency exchange rates. These exposures may impact future earnings and/or operating cash flows. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade.
We hedge currency exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign currency exchange forward
contracts (foreigncontracts. The forward currency exchange
contracts). We hedge monetary assetscontracts are intended to mitigate exposure to foreign exchange rate volatility and
liabilities denominatedthe associated impact on earnings related to forecasted foreign currency commitments. Certain of these forward currency exchange contracts are designated as cash flow hedges, whereby the gains and losses on these derivatives are recorded in
non-functional currencies. Prior to conversion into U.S. dollars, these assets and liabilities are remeasured at spot exchange rates in effect onAOCI until the
balance sheet date. The effects of changes in spot ratesunderlying transactions are recognized in
earnings and included in Non-operating (income) expense.Atearnings.
As of December 31,
20202023 and
December 31, 2019,2022, we had
outstanding designated and undesignated forward currency exchange contracts with aggregate gross notional amounts of
$19$1,171 million and
$1,820$882 million, respectively, to
limit interest rate risk and to exchangehedge 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.
As
The Company uses a resultfloat-to-fixed cross-currency swap contract to mitigate the foreign currency risk, as well as interest rate risk, on its 2023 Dollar Facility. The cross-currency swap contract is designated as a cash flow hedge, with changes in the fair value of the Chapter 11 Cases,derivative recorded in AOCI and reclassified into earnings based upon changes in the spot rate remeasurement of the underlying debt. The Company also uses float-to-float cross-currency swap contracts to hedge net investments in foreign subsidiaries. These cross-currency swap contracts are designated as net investment hedges, and the gains and losses on these derivatives are recorded in AOCI until the net investment is liquidated or sold.
Interest Rate Risk Management
The Company is also exposed to market value risk associated with interest rate fluctuations on its variable rate term loan debt. To manage interest rate exposure, the Company has been limitedenters into interest rate swap contracts. Certain of these interest rate swap contracts are designated as cash flow hedges, whereby the gains and losses on these derivatives are recorded in its ability to enter into hedging transactions. The Company has obtained Bankruptcy Court authorization for continuing hedging activitiesAOCI until the underlying transactions are recognized in the ordinary course of business, however, counterparties have either been unwilling to enter into hedging transactions with the Company during the Chapter 11 Cases or have required the Company to fully cash collateralize its obligations under the relevant hedging instrument, which has effectively reduced the Company’s ability to hedge foreign currency exposures beyond those relating to trade payables and receivables.earnings.
Fair Value of Financial Instruments—
The FASB’s accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).Financial. 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 December 31, 20202023 and December 31, 2019:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value |
| Notional Amounts | | Assets | | | Liabilities | |
| December 31,
2023 | | December 31,
2022 | | December 31,
2023 | | December 31,
2022 | | | December 31,
2023 | | December 31,
2022 | |
| (Dollars in millions) | |
| Designated instruments: | | | | | | | | | | | | |
| Forward currency exchange contracts | $ | 456 | | | $ | 565 | | | $ | 11 | | | $ | 22 | | | (a) | $ | 6 | | | $ | 6 | | (c) |
| Cross-currency swaps | 1,015 | | 715 | | | 37 | | 74 | | | (b) | 17 | | | — | | (d) |
| Interest rate swaps | 200 | | | — | | | — | | | — | | | (b) | — | | | — | | |
| Subtotal | 1,671 | | | 1,280 | | | 48 | | | 96 | | | | 23 | | | 6 | | |
| Undesignated instruments: | | | | | | | | | | | | |
| Interest rate swaps | 917 | | | 1,024 | | | 46 | | | 76 | | | (b) | 3 | | | — | | (d) |
| Forward currency exchange contracts | 715 | | | 317 | | | 1 | | | 4 | | | (a) | 6 | | | 2 | | (c) |
| Subtotal | 1,632 | | | 1,341 | | | 47 | | | 80 | | | | 9 | | | 2 | | |
| Total designated and undesignated instruments | $ | 3,303 | | | $ | 2,621 | | | $ | 95 | | | $ | 176 | | | | $ | 32 | | | $ | 8 | | |
(a)Recorded within Other current assets in the Company’s Consolidated Balance Sheets | | | | | | | | | | Fair Value | | |
| | Notional Amounts | | | Assets | | | | Liabilities | | |
| | December 31, 2020 | | | December 31, 2019 | | | December 31, 2020 | | | December 31, 2019 | | | | December 31, 2020 | | | | December 31, 2019 | | |
Designated forward currency exchange contracts | | | — | | | $ | 392 | | | | — | | | $ | 5 | | (a) | | | — | | | | $ | 1 | | (b) |
Undesignated instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Undesignated cross-currency swap | | | — | | | | 420 | | | | — | | | | — | | (c) | | | — | | | | | 1 | | |
Undesignated interest rate swap | | | — | | | | 561 | | | | — | | | | — | | | | | — | | | | | 1 | | (d) |
Undesignated forward currency exchange contracts | | | 19 | | | | 447 | | | | — | | | | 2 | | (a) | | | — | | | | | 3 | | (b) |
Total undesignated instruments | | | 19 | | | | 1,428 | | | | — | | | | 2 | | | | | — | | | | | 5 | | |
Total designated and undesignated instruments | | $ | 19 | | | $ | 1,820 | | | $ | — | | | $ | 7 | | | | $ | — | | | | $ | 6 | | |
| (a)
| Recorded within Other current assets in the Company’s Consolidated Balance Sheets
|
| (b)Recorded within Other assets in the Company’s Consolidated Balance Sheets | Recorded within Accrued liabilities in the Company’s Consolidated Balance Sheets
|
| (c)Recorded within Accrued liabilities in the Company’s Consolidated Balance Sheets | Recorded within Other assets in the Company’s Consolidated Balance Sheets
|
| (d)Recorded within Other liabilities in the Company's Consolidated Balance Sheets | Recorded within Other liabilities in the Company´s Consolidated Balance Sheets
|
On June 7, 2019,
Cash Flow Hedges
During 2023, the Company entered into
float-to-fixed interest rate swap contracts
to limit its exposure towith an aggregate notional amount of $200 million and maturities in July 2024 and October 2024. Changes in the fair value of the interest rate
risk by convertingswap contracts are recorded in AOCI and will be reclassified to Interest expense in the
interest payments on variable rate debt to fixed rate payments. These interest rate swaps have not been designated as hedging instruments for accounting purposes.Consolidated Statement of Operations upon maturity.
The Company
initiated a cash flow hedging program in the first quarter of 2019 andalso has
since then entered intooutstanding forward currency exchange contracts
with maturities up to
mitigate exposure to foreign currency exchange rate volatility18 months and
the associated impact on earnings related to forecasted foreign currency commitments.an aggregate notional amount of $456 million as of December 31, 2023. These forward currency exchange contracts
are assessed as highly effective and arehave been designated as cash flow
hedges. Gainshedges to mitigate foreign currency exposures primarily on our inventory purchases and manufacturing costs. The gains and losses on
derivatives qualifying as cash flow hedgesthe forward currency exchange contracts are recorded in
Accumulated other comprehensive income (loss) untilAOCI and reclassified to Cost of goods sold in the Consolidated Statement of Operations when the underlying transactions are recognized in earnings.
On September 27, 2018,
In order to mitigate interest rate and foreign currency risk on its 2023 Dollar Facility, the Company also entered during 2023 into a floating-floatingfloat-to-fixed cross-currency swap contract to hedgecomprised of an amortizing swap with aggregate notional amount of €280 million ($300 million) and notional exchanges in June 2026, June 2027 and June 2028. Changes in the foreign currency exposure from foreign currency-denominated debt which will mature on September 27, 2025. The gain or loss on this derivative instrument is recognized in earnings and included in Non-operating (income). For the year ended December 31, 2020, losses recorded in Non-operating expense (income), underfair values of the cross-currency swap contract were $20 million. Forare recognized in AOCI and reclassified to Non-operating income in the year ended December 31, 2019, gains recordedConsolidated Statement of Operations, based upon changes in Non-operating expense (income), underthe spot rate remeasurement of the underlying debt. The net interest settlements on the cross-currency swap contract are recorded in Interest expense in the Consolidated Statements of Operations.
All of the Company’s cash flow hedges are assessed as highly effective. For the years ended December 31, 2023 and 2022, the Company recorded a loss of $15 million, net of tax, and a gain of $6 million, net of tax, respectively, in Other comprehensive income.
Net Investment Hedges
The Company has designated float-to-float cross-currency swap contracts with an aggregate notional amount of €615 million ($715 million) as net investment hedges of the Company’s Euro-denominated operations. The fair values of the net investment hedges were $1net assets of $37 million and $74 million as of December 31, 2023 and 2022, respectively. Our Consolidated Statements of Comprehensive Income includes Changes in fair value of net investment hedges, net of tax, of a $9 million loss and a $44 million gain for the years ended December 31, 2023 and 2022, respectively. No ineffectiveness has been recorded on the net investment hedges.
Non-Designated Derivatives
As of December 31, 2023, the Company has outstanding float-to-fixed interest rate swap contracts with an aggregate notional amount of €830 million ($917 million) and maturities of April 2024, July 2024, October 2024, April 2025, April 2026, April 2027 and April 2028. Changes in the fair value of the undesignated interest rate swap contracts are recorded in Interest expense in the Consolidated Statements of Operations.
The Company also has outstanding forward currency exchange contracts with maturities generally up to 3 months and an aggregate notional amount of $715 million.
These derivatives are not designated as hedging instruments and are adjusted to fair value through Non-operating income in the Consolidated Statements of Operations.
Fair Value Measurement
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
contracts 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.
Following our voluntary filing for Chapter 11 protection, and as noted in the table above, the majority of our foreign exchange, interest rate swap, and cross-currency swap contracts were terminated at or prior to September 30, 2020. All outstanding amounts as of December 31, 2020 are classified as Other Liabilities and are fully secured and payable upon Emergence. Any valuation difference from our Petition Date to the termination date will be reflected in Reorganization items, net. See Note 2, Reorganization and Chapter 11 Proceedings, for additional information.
77
A number of our forward currency exchange contracts are also designated as accounting hedges. Upon termination, these amounts have been dedesignated. As the Company still anticipates the forecasted transaction to commence, the amounts in accumulated comprehensive incomes will be released based on our original forecast.
The carrying value of Cash, cash equivalents and restricted cash, Account receivables and Notes and Other receivables 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:
| | December 31, 2020 | |
| | Carrying Value | | | Fair Value | |
Liabilities not subject to compromise: | | | | | | | | |
Terms Loans A and B | | $ | 1,082 | | | $ | 1,083 | |
DIP Financing | | $ | 200 | | | $ | 200 | |
Liabilities subject to compromise: | | | | | | | | |
Senior Notes | | $ | 429 | | | $ | 429 | |
| | | | | | | | | | | |
| December 31, 2023 |
| Carrying Value | | Fair Value |
| (Dollars in millions) |
| Term Loan Facilities | $ | 1,650 | | | $ | 1,692 | |
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.
Note
19.20. Other
LiabilitiesDueliabilities
| | | | | | | | | | | |
| December 31, |
| 2023 | | 2023 |
| (Dollars in millions) |
| Income taxes | $ | 99 | | | $ | 99 | |
| Designated and undesignated derivatives | 20 | | | — | |
| Pension and other employee related | 23 | | | 21 | |
Long-term lease liability (Note 18) | 33 | | | 36 | |
| Advanced discounts from suppliers | 3 | | | 6 | |
| Product warranties and performance guarantees – Long-term | 9 | | | 10 | |
| Environmental Remediation – Long-term | 13 | | | 14 | |
| Long-term accounts payable | 7 | | | 8 | |
| Other | 11 | | | 11 | |
| $ | 218 | | | $ | 205 | |
Note 21. Equity
Issuance of Series A Preferred Stock
In connection with the Company’s emergence from bankruptcy and pursuant to the Chapter 11 filing, Other LiabilitiesPlan, the Company issued 247,757,290 shares of the Company’s Series A Preferred Stock to affiliated funds of Centerbridge, affiliated funds of Oaktree and certain other investors and parties, including in connection with the consummation of two rights offerings and that existedcertain replacement equity backstop commitment agreement. The Company is authorized to grant 1,200,000,000 shares of preferred stock in the reorganized company.
Series A Preferred Stock
On April 12, 2023 (the “Transaction Date”), the Company entered into separate definitive agreements (the “Agreements”) with each of Centerbridge Partners, L.P. and funds managed by Oaktree Capital Management, L.P. (collectively, the “C&O Investors”) to effect a series of integrated transactions (the “Transaction”) designed to increase the attractiveness of the Company to investors, including by simplifying the Company’s capital structure by converting all outstanding Series A Preferred Stock into a single class of Common Stock, subject to certain conditions.
As part of the Agreements, the holders of a majority of the outstanding shares of the Series A Preferred Stock authorized and approved the amendment and restatement of the certificate of designations for the Series A Preferred Stock (as amended, the “Certificate of Designations”) to, among other things, require the conversion of all shares of Series A Preferred Stock into shares of the Company’s Common Stock (the “2023 Conversion”), subject to the repurchase by the Company of a portion of the shares of Series A Preferred Stock held by the C&O Investors (the “Series A Repurchase”).
Under the terms of the Agreements, the Company repurchased a total of $570 million (“Base Repurchase Price”) from the C&O Investors at a cash price of $8.10 per share which was adjusted to equal the volume-weighted average price of the Common Stock for the fifteen trading days following the announcement of the transactions (the “15 Days VWAP”),
subject to a minimum price of $7.875 per share and a maximum price of $8.50 per share. The 15 Days VWAP was subsequently established at a value of $8.177 per share.
As part of the Transaction, all holders of Series A Preferred Stock, including the C&O Investors, received an amount equal to $0.853509 per share of Series A Preferred Stock, representing accumulated and unpaid preference dividends through June 30, 2023 on each share of Series A Preferred Stock (the “Accumulated Dividends”), as well as $0.144375 per share of Series A Preferred Stock, representing the preference dividends that would have accrued on the Series A Preferred Stock through September 30, 2023 (the “Additional Amounts”).
As part of the Transaction, following the effectiveness of the Certificate of Designations which occurred on June 6, 2023, the Company completed all steps of the Transaction as follows:
•The Company paid $580 million to the C&O Investors in connection with the repurchase of 69,707,719 shares of Series A Preferred Stock, comprising of the Base Repurchase Price as well as $10 million ($0.144375 for each repurchased share) in consideration of the Additional Amounts on the repurchased shares of Series A Preferred Stock.
•The remaining 175,337,712 shares of Series A Preferred Stock were converted into 175,337,712 shares of Common Stock in accordance with the customary procedures of the Company’s transfer agent, for shares held in registered form, and of the Depository Trust Company, for shares held in street name, and trading of the Series A Preferred Stock on Nasdaq was subsequently suspended;
•As part of the 2023 Conversion, the Company also paid $25 million ($0.144375 for each converted share) to the holders of Series A Preferred Stock in consideration of the Additional Amounts on the shares of Series A Preferred Stock that were converted; and
•The Company issued 25,577,517 shares of Common Stock to all holders of Series A Preferred Stock (equal to $0.853509 per share, adjusted to avoid the issuance of fractional shares of Common Stock), in consideration of the Accumulated Dividends of an aggregate amount of $209 million. Cash payments for fractional shares were immaterial.
The Agreements were accounted for as freestanding physically settled forward purchase contracts. The Agreements were initially recorded at fair value and then remeasured through earnings until the establishment of the 15 Days VWAP, whereupon the Agreements were subsequently measured based on the amount of consideration to be paid at settlement. A Monte-Carlo simulation model was used to determine the Transaction Date fair value of the Agreements by simulating a range of possible future stock prices for the Company through the expected settlement date of the Agreements. The significant assumptions utilized in estimating the fair value of the Agreements include: (i) a dividend yield of 0.0%; (ii) an expected volatility of 40.0%; (iii) a risk-free interest rate of 4.23% based on observed interest rates from the Treasury Constant Maturity yield curve consistent with the simulation term; and (iv) a starting share price of $8.25 based on the market price of the Company’s common stock as of the Transaction Date.
The initial fair value of the Agreements represented a forward purchase liability of $4 million. A loss of $13 million was recognized in Non-operating expense in the Consolidated Statement of Operations to reflect the subsequent remeasurement of fair value of the Agreements due to changes in the market price of the Company’s Common Stock. The difference between the fair value of consideration transferred under the Agreements and the carrying value of the repurchased Series A Preferred Stock, amounting to $201 million, was recorded to Retained Deficit as a deemed dividend on the repurchase of Series A Preferred Stock from the C&O Investors as part of the Transaction. A liability for excise tax, amounting to $6 million, was also recorded to Retained Deficit as a deemed dividend.
In connection with the 2023 Conversion, the Company also recognized a deemed dividend on the 2023 Conversion for $25 million, corresponding to the Additional Amounts paid to the holders of Series A Preferred Stock on the shares of Series A Preferred Stock that were converted.
As part of the Agreements, the C&O Investors have agreed with the Company to certain changes to their governance rights under the Company’s governance documents, including a reduction of their existing board nomination rights, as well as lock-up restrictions on their equity securities of the Company for up to twelve months, and certain limits on their ability to purchase additional equity securities of the Company and to voting limitations, in each case for a period of up to eighteen months.
The following table summarizes the effects of the Transaction on the Consolidated Financial Statements as of and for the year ended December 31, 20202023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series A Repurchase | | | | 2023 Conversion | | Settlement of Accumulated Dividends | | Excise tax on Series A Repurchase | | | | Total |
| (Dollars in millions) | | |
| Consolidated Balance Sheet - increase/(decrease): | | | | | | | | |
| Cash and cash equivalents | $ | (580) | | | | | $ | (25) | | | $ | — | | | $ | — | | | | | $ | (605) | |
| Accrued liabilities | — | | | | | — | | | — | | | 6 | | | | | 6 | |
| Preferred Stock | — | | | | | — | | | — | | | — | | | | | — | |
| Common Stock | — | | | | | — | | | — | | | — | | | | | — | |
| Additional Paid-in capital | (366) | | | | | — | | | 209 | | | — | | | | | (157) | |
| Retained earnings | (201) | | | | | (25) | | | (209) | | | (6) | | | | | (441) | |
| Consolidated Statement of Operations: | | | | | | | | | | |
| | | | | | | | | | | | | |
| Non-operating expenses | 13 | | | | | — | | | — | | | — | | | | | 13 | |
| Consolidated Statement of Cash Flows | | | | | | | | | | |
| Repurchases of Series A Preferred Stock | (580) | | | | | — | | | — | | | — | | | | | (580) | |
| Payments for Additional Amounts for conversion of Series A Preferred Stock | — | | | | | (25) | | | — | | | — | | | | | (25) | |
The Company also incurred $9 million of Transaction-related costs for the year ended December 31, 2023, primarily for legal and were deemed pre-petition, unsecured were reclassified as Liabilities subjectadvisory services that are included in Selling, general and administrative expenses in the Consolidated Statement of Operations.
Share Repurchase Program
On November 16, 2021, the Board of Directors authorized a $100 million share repurchase program valid until November 15, 2022, providing for the purchase of shares of Series A Preferred Stock and Common Stock. The share repurchase program was subsequently extended twice until December 31, 2023, and increased to compromise, refer to an aggregate amount of $250 million. During the year ended December 31, 2023, the Company repurchased 38,574 shares of Series A Preferred Stock for less than $1 million, and 28,132,785 shares of Common Stock for $213 million under the program. The share repurchase program expired on December 31, 2023.
On February 13, 2024, the Board of Directors authorized a new $350 million share repurchase program valid until December 31, 2024.
Note
2, Reorganization and Chapter 11 Proceedings. | | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Pension and other employee related | | $ | 14 | | | $ | 94 | |
Advanced discounts from suppliers | | | 11 | | | | 46 | |
Income taxes | | | 45 | | | | 79 | |
Long-term lease liability (Note 17) | | | 15 | | | | 28 | |
Undesignated cross-currency and interest rate swaps (Note 18) | | | 22 | | | | 2 | |
Other | | | 7 | | | | 25 | |
| | $ | 114 | | | $ | 274 | |
Note 20.22. Accumulated OtherComprehensive Income (Loss)
The changes in accumulatedothercomprehensiveincome(loss)AOCI by component are providedshown below:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Foreign Exchange Translation Adjustment | | | | | |
| Balance at beginning of year | $ | (44) | | | $ | (43) | | | $ | (81) | |
| Other comprehensive income (loss) before reclassifications | (13) | | | (1) | | | 38 | |
| | | | | |
| Balance at end of year | (57) | | (57) | | (44) | | | (43) | |
| | | | | |
| Pension Adjustments | | | | | |
| Balance at beginning of year | (18) | | | (9) | | | (45) | |
Other comprehensive income (loss) before reclassifications, net (1) | 1 | | | 18 | | | 35 | |
| Amounts reclassified from AOCI, net | (3) | | | (27) | | | 1 | |
| Balance at end of year | (20) | | | (18) | | | (9) | |
| | | | | |
| Changes in Fair Value of Effective Cash Flow Hedges | | | | | |
| Balance at beginning of year | 13 | | | 7 | | | (3) | |
Other comprehensive income (loss) before reclassifications, net (2) | (2) | | | 24 | | | 11 | |
| Amounts reclassified from AOCI, net | (13) | | | (18) | | | (1) | |
| Balance at end of year | (2) | | | 13 | | | 7 | |
| | | | | |
| Changes in Fair Value of Net Investment Hedges | | | | | |
| Balance at beginning of year | 85 | | | 41 | | | — | |
Other comprehensive income (loss) before reclassifications, net (3) | (9) | | | 44 | | | 41 | |
| | | | | |
| Balance at end of year | 76 | | | 85 | | | 41 | |
| | | | | |
| Accumulated other comprehensive income (loss), end of year | $ | (3) | | | $ | 36 | | | $ | (4) | |
(1) Net of tax expense (benefit) of $(1) million, $2 million, and $(7) million for the years ended December 31, 2023, 2022 and 2021, respectively. Amounts are included in the
tablesbelow: | | Pre-Tax | | | Tax | | | After-Tax | |
Year Ended December 31, 2018 | | | | | | | | | | | | |
Foreign exchange translation adjustment | | $ | (198 | ) | | $ | — | | | $ | (198 | ) |
Pension adjustments | | | (2 | ) | | | — | | | | (2 | ) |
Changes in fair value of effective cash flow hedges | | | 37 | | | | (2 | ) | | | 35 | |
| | $ | (163 | ) | | $ | (2 | ) | | $ | (165 | ) |
Year Ended December 31, 2019 | | | | | | | | | | | | |
Foreign exchange translation adjustment | | $ | 59 | | | $ | 8 | | | $ | 67 | |
Pension adjustments | | | (18 | ) | | | 4 | | | | (14 | ) |
Changes in fair value of effective cash flow hedges | | | 2 | | | | 2 | | | | 4 | |
| | $ | 43 | | | $ | 14 | | | $ | 57 | |
Year Ended December 31, 2020 | | | | | | | | | | | | |
Foreign exchange translation adjustment | | $ | (212 | ) | | $ | (22 | ) | | $ | (234 | ) |
Pension adjustments | | | (17 | ) | | | (1 | ) | | | (18 | ) |
Changes in fair value of effective cash flow hedges | | | (8 | ) | | | 1 | | | | (7 | ) |
| | $ | (237 | ) | | $ | (22 | ) | | $ | (259 | ) |
Changesin AccumulatedOther ComprehensiveIncome (Loss)by Component
| | | | | | | | | | | | | | Total | |
| | Foreign | | | Changes in Fair | | | | | | | Accumulated | |
| | Exchange | | | Value of | | | | | | | Other | |
| | Translation | | | Effective Cash | | | Pension | | | Comprehensive | |
| | Adjustment | | | Flow Hedges | | | Adjustments | | | Income (Loss) | |
Balance at December 31, 2018 | | $ | 86 | | | $ | 0 | | | $ | (13 | ) | | $ | 73 | |
Other comprehensive income (loss) before reclassifications | | | 67 | | | | 27 | | | | (27 | ) | | | 67 | |
Amounts reclassified from accumulated other comprehensive income | | | — | | | | (23 | ) | | | 13 | | | | (10 | ) |
Net current period other comprehensive income (loss) | | | 67 | | | | 4 | | | | (14 | ) | | | 57 | |
Balance at December 31, 2019 | | $ | 153 | | | $ | 4 | | | $ | (27 | ) | | $ | 130 | |
Other comprehensive income (loss) before reclassifications | | | (234 | ) | | | (3 | ) | | | (29 | ) | | | (266 | ) |
Amounts reclassified from accumulated other comprehensive income | | | — | | | | (4 | ) | | | 11 | | | | 7 | |
Net current period other comprehensive income (loss) | | | (234 | ) | | | (7 | ) | | | (18 | ) | | | (259 | ) |
Balance at December 31, 2020 | | $ | (81 | ) | | $ | (3 | ) | | $ | (45 | ) | | $ | (129 | ) |
ReclassificationsOutcomputation of Accumulatednet periodic benefit cost. See Note 26, Defined Benefit Pension Plans.Other Comprehensive
(2) Net of tax expense (benefit) of $3 million, $(2) million, and $(1) million for the years ended December 31, 2023, 2022 and 2021, respectively.
(3) Net of tax expense (benefit) of $1 million, $(13) million, and $(10) million for the years ended December 31, 2023, 2022 and 2021, respectively.
Reclassifications from accumulated other comprehensive income (loss) to income were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| Pension Adjustments | | | | | |
| Reclassification to Non-operating (income) expense | (3) | | | (31) | | | 1 | |
| Tax effect on reclassification to income | — | | | 4 | | | — | |
| Amounts reclassified from AOCI, net | (3) | | (3) | | (27) | | | 1 | |
| | | | | |
| Changes in Fair Value of Effective Cash Flow Hedges | | | | | |
| Reclassification forward currency exchange contracts to Cost of goods sold | $ | (23) | | | $ | (21) | | | $ | (1) | |
| Reclassification cross-currency swaps to Interest expense | (3) | | | — | | | — | |
| Reclassification cross-currency swaps to Non-operating expense (income) | 10 | | | — | | | — | |
| Tax effect on reclassification to income | 3 | | | 3 | | | — | |
| Amounts reclassified from AOCI, net | (13) | | | (18) | | | (1) | |
| | | | | |
| Total reclassifications for the year | $ | (16) | | | $ | (45) | | | $ | — | |
Year ended December 31, 2020 | | | | | | | | | | | | | | | | | | | | |
Affected Line in the Consolidated and Combined Statement of Operations | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Selling, | | | | | | | | | |
| | | | | | Cost of | | | General and | | | | | | | | | |
| | Net | | | Goods | | | Administrative | | | Non-Operating (Income) | |
| | Sales | | | Sold | | | Expenses | | | Expense | | | Total | |
Amortization of Pension and Other Postretirement Items: | | | | | | | | | | | | | | | | | | | | |
Actuarial losses recognized | | $ | — | | | $ | — | | | $ | — | | | $ | 13 | | | $ | 13 | |
Losses (gains) on cash flow hedges | | | — | | | | (4 | ) | | | — | | | | — | | | | (4 | ) |
Tax expense (benefit) | | | — | | | | — | | | | — | | | | — | | | | (2 | ) |
Total reclassifications for the period, net of tax | | | | | | | | | | | | | | | | | | $ | 7 | |
Year ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | |
Affected Line in the Consolidated and Combined Statement of Operations | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Selling, | | | | | | | | | |
| | | | | | Cost of | | | General and | | | | | | | | | |
| | Net | | | Goods | | | Administrative | | | Non-Operating (Income) | |
| | Sales | | | Sold | | | Expenses | | | Expense | | | Total | |
Amortization of Pension and Other Postretirement Items: | | | | | | | | | | | | | | | | | | | | |
Actuarial losses recognized | | $ | — | | | $ | — | | | $ | — | | | $ | 13 | | | $ | 13 | |
Losses (gains) on cash flow hedges | | | — | | | | (25 | ) | | | — | | | | — | | | | (25 | ) |
Tax expense (benefit) | | | | | | | | | | | | | | | | | | | 2 | |
Total reclassifications for the period, net of tax | | | | | | | | | | | | | | | | | | $ | (10 | ) |
Note
21.23. Stock-Based Compensation
On September 14, 2018, our Board adopted, and Honeywell, as our sole stockholder, approved,
Cancellation of Incentive Awards
As part of the 2018Company's Emergence, the Plan provided for the acceleration of all outstanding awards under the Stock Incentive Plan. As of the Effective Date, all outstanding awards were cancelled as follows:
•Restricted stock units ("RSUs") - 1,205,650 RSUs were settled for consideration of $6.25 per share, for a total cash settlement of $8 million of which $7 million was recorded to equity, and $1 million was recorded to Reorganization items, net in the Consolidated Statement of Operations. Measurement of the cash settlement value of RSU awards was performed on an individual grant basis. As of the Effective Date, unamortized stock compensation expense of $7 million was charged to Reorganization items, net in the Consolidated Statement of Operations.
•Performance stock units - 228,765 PSUs were settled for consideration of $6.25 per share, for a total cash settlement of $1 million which was recorded to Reorganization items, net in the Consolidated Statement of Operations.
•Stock options - All unvested stock options were considered “out of the money” and cancelled for no consideration. Unamortized stock compensation expense of $1 million was charged to Reorganization items, net in the Consolidated Statement of Operations.
•Cash performance stock units ("CPSUs") - 2,069,897 CPSUs were settled for consideration of $1.00 per unit, for a total cash settlement of $2 million which was charged to Reorganization items, net in the Consolidated Statement of Operations.
The cash settlement of an equity award is treated as the repurchase of an outstanding equity instrument. In accordance with ASC 718, all outstanding awards were cancelled with no replacement grant, therefore modification accounting was not applied.
Continuity Awards
In September 2020, one-time cash continuity awards (“Continuity Awards”) were granted to certain employees in exchange for the forfeiture of RSUs and PSUs that had been granted in February 2020. The Continuity Awards amounted to $11 million, with $9 million paid in September 2020 and the remaining $2 million paid in 2021. As the Continuity Awards were subject to a one-year service requirement, the combined transaction was accounted for as a modification to
liability-classified awards. The total incremental compensation cost resulting from the modification was $5 million. The Continuity Awards were fully vested as of December 31, 2021.
2021 Long-Term Incentive Plan of
On May 25, 2021, the Garrett Motion Inc.
and its Affiliates2021 Long-Term Incentive Plan (the
“Stock“Long-Term Incentive Plan”)
and the 2018 Stock Plan for Non-Employee Directors (the “Director Equity Plan”).was adopted. The
StockLong-Term Incentive Plan provides for the grant of stock options, stock appreciation rights, performance awards, restricted stock units, restricted stock, other stock-based awards, and cash-based awards to employees
and non-employee directors of Garrett or its affiliates, and independent contractors or consultants of Garrett. The maximum aggregate number of shares of our
common stockCommon Stock that may be issued under the
StockLong-Term Incentive Plan is
10,000,000 shares and, for the Director Equity Plan, 400,00031,280,476 shares.
Up to 5,000,000 shares may be granted as incentive stock options under the Stock Incentive Plan.As of December 31, 2020, there were 5,641,452 and 344,8602023, an aggregate of 7,019,770 shares of our common stockCommon Stock were awarded, net of forfeitures and 24,260,706 shares of our Common Stock were available for future issuance under the StockLong-Term Incentive Plan and Director Equity Plan, respectively.
Plan.
Restricted Stock Units
—Restricted stock unit (“RSU”) awardsRSUs are issued to certain key employees and directors at fair market value at the date of grant. RSUs typically vest over a period of three3 years or four5 years and when vested, each unit entitles the holder to one share of our common stock.
Common Stock. The following table summarizes information about RSU activity related to our Stock Incentive Plan and Director Equity Plan for each of the periods presented:
activity: | | Number of Restricted Stock Units | | | Weighted Average Grant Date Fair Value Per Share | |
Non-vested at December 31, 2018 | | | 3,369,622 | | | $ | 10.12 | |
| | | | Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value Per Share |
| Non-vested at December 31, 2021 | |
Granted | | | 629,037 | | | | 15.36 | |
Vested | | | (967,518 | ) | | | 5.26 | |
Forfeited | | | (236,501 | ) | | | 14.47 | |
Non-vested at December 31, 2019 | | | 2,794,640 | | | $ | 12.62 | |
| | Non-vested at December 31, 2022 | |
| Non-vested at December 31, 2022 | |
| Non-vested at December 31, 2022 | |
Granted | | | 878,904 | | | | 6.70 | |
Vested | | | (1,185,121 | ) | | | 7.83 | |
Forfeited | | | (949,454 | ) | | | 8.11 | |
Non-vested at December 31, 2020 | | | 1,538,969 | | | | 13.11 | |
| | Non-vested at December 31, 2023 | |
| Non-vested at December 31, 2023 | |
| Non-vested at December 31, 2023 | |
As of December 31,
2020,2023, there was
approximately $9$14 million of total unrecognized compensation cost related to unvested RSUs,
granted under our Stock Incentive Plan, which is expected to be recognized over a weighted-average period of
1.51.98 years.
The following table summarizes the impact to the Consolidated and Combined Statement of Operations from RSUs:
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Compensation expense | | $ | 9 | | | $ | 15 | | | $ | 5 | |
Future income tax benefit recognized | | | 3 | | | | — | | | | 1 | |
Stock Options — The exercise price, term and other conditions applicable to each option granted under our stock incentive plans are generally determined by the Compensation Committee of the Board. The exercise price of stock options is set on the grant date and may not be less than the fair market value per share of our stock on that date. The fair value is recognized as an expense over the employee’s requisite service period (generally the vesting period of the award). Options generally vest over a period four years and expire after ten years.
The following table summarizes the impact to the Consolidated and Combined Statement of Operations from stock options. There were 0 stock options granted prior to 2019.
| | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Compensation expense | | $ | 1 | | | $ | 1 | |
Future income tax benefit recognized | | | — | | | | — | |
The fair value related to stock options granted was determined using Black-Scholes option pricing model and the weighted average assumptions are shown in the table below:
Key Black-Scholes Assumptions
| | Year Ended December 31, 2020
| |
Risk-free interest rate
| | 2.6%
| |
Expected term (years)
| | | 6.25
| |
Volatility
| | 42.08%
| |
Dividend yield
| | 0.0%
| |
Fair value per stock option
| | | 7.28
| |
The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Volatility is determined based on the historical volatility of peer companies over a period corresponding to the expected term. Expected term is determined using a simplified approach, calculated as the midpoint between the vesting period and the contractual term of the award. The risk-free interest rate is determined based upon the yield of an outstanding U.S. Treasury note with a term equal to the expected term of the option granted.
The following table summarizes information about stock option activity related to the Stock Incentive Plan for each of the periods presented:
| | Number of Stock Options | | | Weighted Average Exercise Price (per share) | | | Weighted Average Remaining Contractual Term (years) | | | Aggregate Intrinsic Value (in thousands) | |
Outstanding as of December 31, 2018 | | | — | | | $ | — | | | | — | | | | — | |
Granted | | | 483,408 | | | | 16.17 | | | | | | | | | |
Exercised | | | — | | | | — | | | | | | | | | |
Forfeited | | | (34,375 | ) | | | 16.17 | | | | | | | | | |
Expired | | | — | | | | — | | | | | | | | | |
Outstanding as of December 31, 2019 | | | 449,033 | | | | 16.17 | | | | 9.26 | | | | — | |
Granted | | | — | | | | — | | | | | | | | | |
Exercised | | | — | | | | — | | | | | | | | | |
Forfeited | | | (37,482 | ) | | | 16.17 | | | | | | | | | |
Expired | | | (8,034 | ) | | | 16.17 | | | | | | | | | |
Outstanding as of December 31, 2020 | | | 403,517 | | | | 16.17 | | | | 8.26 | | | | — | |
Exercisable as of December 31, 2020 | | | 102,420 | | | | — | | | | — | | | | — | |
There were 0 stock options granted in 2020. NaN options were exercised during the year ended December 31, 2020. As of December 31, 2020, there was 0 intrinsic value for the outstanding and exercisable shares under options.
As of December 31, 2020, there was $2 million of unrecognized stock-based compensation expense related to stock options that is expected to be recognized over a weighted average period of approximately 2.2 years.
Performance Stock Units
—As of December 31, 2023, The Company has issued PSUsan aggregate of 2,828,787 PSU awards were granted to officers and certain key employees under its 2019 and 2020 long term incentive plansthe Long-Term Incentive Plan, which, upon vesting, entitles the holder to shares of our common stock.Common Stock. The actual number of shares an employee receives for each PSU depends on the Company’s performance against various measures.
For the 2019 plan,PSUs granted in 2021, the performance measures are related to organic revenue growth, adjustedabsolute total shareholder return (“TSR”) with stock price hurdles, Adjusted EBITDA and leveraged cash flows,Adjusted EBITDA margin, weighted 20%60%, 40%,20% and 40%20%, respectively, over a three-yeartwo-year performance period from January 1, 20192022 through December 31, 2021. For2023 for the 2020 plan, the performance measures are related to relative organic revenue growth, adjusted free cash flow conversion,TSR measure and relative total shareholder return (“TSR”), weighted 30%, 30%, and 40%, respectively, over a three-year performance period from January 1, 20202021 through December 31, 2022. In addition,2023 for certain key employees, the Adjusted EBITDA and Adjusted EBITDA margin measures. Each grantee is granted a target level of PSUs and may earn between 0% and 100% of the target level depending on achievement of the performance measures.
For PSUs granted underin 2022, the 2020 planperformance measures are based on Adjusted EBITDA and Adjusted EBITDA margin, weighted 50% each, over a three-year performance period from January 1, 2022 through December 31, 2024. The PSUs vest at levels ranging from 0% to 200% of the target level depending on the Company’s performance against the financial measures.
For PSUs granted in 2023, the performance measures are based on Adjusted EBITDA and Adjusted EBITDA margin, weighted 50% each, over a three-year performance period from January 1, 2023 through December 31, 2025. The PSUs vest at levels ranging from 0% to 200% of the target level depending on the Company’s performance against the financial measures.
Additionally, certain PSUs were subjectalso granted in 2023 that included a performance measure for relative total shareholder return (“rTSR”) with stock price hurdles measured over a three-year performance period from January 1, 2023 to an absolute TSR modifier.December 31, 2025. Each grantee is granted a target level of PSUs and may earn between 0% and 200% (250% for employees whose PSUs were subject to an absolute TSR modifier) of the target level depending on the achievement of the rTSR.
The awards associated with the TSR and rTSR performance measures are considered to have a market condition. A Monte-Carlo simulation model was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company over the performance period. This model requires an input of assumptions including the simulation term, the risk-free interest rate, a volatility estimate for the Company’s
shares, and a dividend yield estimate. The simulation term was the period of time between performance
againstperiod start date and the
financial goals.performance end date. The
risk-free interest rate assumption was based on observed interest rates from the Treasury Constant Maturity yield curve consistent with the simulation term. The Company’s volatility estimate was based on the historical volatilities of peers over a historical period consistent with the simulation term. The Company does not expect to pay a dividend on the Common Stock during the applicable term. The fair value of the PSUs granted
underin 2021 and 2023 were estimated using the
2020 plan were forfeited as a condition to the receipt of the continuity awards, as explained below.following assumptions: | | | | | | | | | | | |
| Monte Carlo Assumptions | | PSUs Granted in 2021 | PSUs Granted in 2023 |
| Volatility | | 64.01% | 85.01% |
| Dividend yield | | 0.00% | 0.00% |
| Risk-free interest rate | | 0.24% | 4.26% |
The following table summarizes information about PSU activity related to
both the Stock
Incentive Plan and the Long-Term Incentive Plan for each of the periods presented:
| | Number of Performance Stock Units | | | Weighted Average Grant Date Fair Value Per Share | |
Non-vested at December 31, 2018 | | | — | | | $ | — | |
| | | | Number of Performance Stock Units | | Weighted Average Grant Date Fair Value Per Share |
| Non-vested at December 31, 2021 | |
Granted | | | 379,090 | | | | 16.17 | | Granted | 301,260 | | 6.79 |
Vested | | | — | | | | — | | Vested | — | | — |
Forfeited | | | (47,769 | ) | | | 16.17 | | Forfeited | (52,092) | | 8.15 |
Non-vested at December 31, 2019 | | | 331,321 | | | $ | 16.17 | |
| | Non-vested at December 31, 2022 | |
| Non-vested at December 31, 2022 | |
| Non-vested at December 31, 2022 | |
Granted | | | 1,021,069 | | | | 8.36 | | Granted | 1,204,831 | | 9.37 |
Vested | | | — | | | | — | | Vested | — | | — |
Forfeited | | | (1,038,279 | ) | | | 8.48 | | Forfeited | (98,087) | | 7.91 |
Non-vested at December 31, 2020 | | | 314,111 | | | | 16.17 | |
| | Non-vested at December 31, 2023 | |
| Non-vested at December 31, 2023 | |
| Non-vested at December 31, 2023 | |
The fair value of the TSR-based PSUs is based on the output of the Monte Carlo simulation model noted above and the PSUs not containing a market condition are based on the fair market value of the Company’s common stock at the grant date. The number of underlying shares to be issued will be based on actual performance achievement over the performance period. The per unit weighted average fair value at the date of grant for PSUs granted during the year ended December 31, 2020 was $8.36.
The fair value of each PSU grant is amortized monthly into compensation expense on a graded vesting (accelerated) basis over a vesting period of 36 months. The accrual of compensation costs is based on our estimate of the final expected value of the award and is adjusted as required for the performance-based
condition. The Company estimates forfeitures at time of issuance, which results in a reduction in compensation expense.conditions. As the payout of PSUs
granted in 2021 includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of
thethose PSUs. The Company currently does not pay
dividends.dividends on its common stock.
As of December 31,
2020,2023, there was
approximately $1$9 million of total unrecognized compensation cost related to
non-vestedunvested PSUs,
granted under the Stock Incentive Plan which is expected to be recognized over a
weighted-averageweighted average period of
1 year.1.83 years.
Stock-Based Compensation Expense
The following table summarizes the impact to the Consolidated
and Combined Statement of Operations from
PSUs. There were 0 PSUs granted prior to 2019. | | Years Ended December 31, | |
| | 2020 | | | 2019 | |
Compensation expense | | $ | — | | | $ | 2 | |
Future income tax benefit recognized | | | — | | | | — | |
Continuity Awards— In June 2020, in response to the unprecedented and ongoing market uncertainty resulting from the COVID-19 pandemic and in connection with the Board’s evaluation of strategic alternatives for the Company, the Compensation Committee approved one-time cash continuity awards (“Continuity Awards”) to ensure retention of key individuals in exchange for the forfeiture of RSUs and PSUs granted in February 2020. The Continuity Awards total $11 million, with $9 million paid in June 2020 and $2 million expected to be paid in 2021. The Continuity Awards are subject to repayment if prior to June 2021, the recipient has a qualifying termination of employment. Given the Continuity Awards have a 1-year service requirement, the combined transaction is accounted for as a modification to liability-classified awards. The total incremental compensation cost resulting from the modification is $5 million. As of December 31, 2020, there was $5 million of unrecognized compensation cost related to the Continuity Awards that is expected to be recognized over a weighted-average period of approximately 0.5 years.
The following table summarizes information about Continuity Award activity for the year ended December 31, 2020:
| | Number of Awards | | | Weighted Average Grant Date Fair Value Per Award | |
Non-vested at December 31, 2019 | | | — | | | $ | — | |
Granted | | | 43 | | | | 257,536 | |
Vested | | | — | | | | — | |
Forfeited | | | — | | | | — | |
Non-vested at December 31, 2020 | | | 43 | | | $ | 257,536 | |
The following table summarizes the impact to the Consolidated and Combined Statement of Operations from Continuity Awards for the year ended December 31, 2020.
| | Year Ended December 31, 2020 | |
Compensation expense | | $ | 7 | |
Future income tax benefit recognized | | | 1 | |
Stock Based Awards Granted by Honeywell—For periods prior to the Spin-Off, Honeywell maintained stock-based compensation plans for the benefit of its officers, directors and employees. Under the Former Parent´s stock-based compensation plans, Honeywell awarded RSUs, stock options and PSUs to certain employees. Stock-based compensation expense related to awards granted by Honeywell recognized in the Consolidated and Combined Statements of Operations amounted to $16 million for the year ended December 31, 2018 of which approximately $10 million are specifically identified for employees within the Business and $6 million is related to shared employees not specifically identifiable to the Business. These amounts represent stock-based compensation expenses attributable to the Business based on the awards and terms previously granted under theCompany's incentive compensation plans to employees within the Business and an allocation of Former Parent’s corporate and shared functional employee stock based compensation expenses. Accordingly, the amounts presented are not necessarily indicative of current and future awards and do not necessarily reflect the results that the Business would have experienced as an independent company for the periods presented.awards:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| (Dollars in millions) |
| RSUs | $ | 9 | | | $ | 6 | | | $ | 4 | |
| PSUs | 5 | | | 5 | | | 2 | |
| | | | | |
| Stock-based compensation expense | 14 | | | 11 | | | 6 | |
| Continuity Awards | — | | | — | | | 5 | |
| Reorganization items, net | — | | | — | | | 9 | |
| Future income tax benefits recognized | 2 | | | 1 | | | 2 | |
Note
22.24. Earnings Per Share
On October 1, 2018,
Earnings per share is calculated using the
datetwo-class method pursuant to the issuance of
consummationour Series A Preferred Stock on the Effective Date. Our Series A Preferred Stock, which was converted into Common Stock pursuant to the Transaction, was considered a participating security because holders of the
Spin-Off, 74,070,852Series A Preferred Stock were entitled to such dividends paid to holders of Common Stock to the same extent on an as-converted basis. The two-class method requires an allocation of earnings to all securities that participate in dividends with common shares,
ofsuch as our Series A Preferred Stock, to the
Company’sextent that each security may share in the entity’s earnings. Basic earnings per share are then calculated by dividing undistributed earnings allocated to common stock
were distributed to Honeywell stockholders of record as of September 18, 2018 who held their shares throughby the
Distribution Date. Basic and Diluted EPS for all historical periods prior to the Spin-Off reflect theweighted average number of
distributedcommon shares
or 74,070,852 shares. For 2018, these shares are treated as issued and outstanding
from January 1, 2018 tofor the
Spin-Off for purposesperiod. The Series A Preferred Stock was not included in the computation of
calculating basic earnings per
share.share in periods in which we have a net loss, as the Series A Preferred Stock was not contractually obligated to share in our net losses.
Diluted earnings per share are calculated using the more dilutive of the two-class or if-converted methods. The two-class method uses net income available to common shareholders and assumes conversion of all potential shares other than the participating securities. The if-converted method uses net income and assumes conversion of all potential shares including the participating securities.
The details of the earnings per share calculations for the years ended December 31, 2020, 20192023, 2022 and 20182021 are as follows: | | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Basic | | | | | | | | | | | | |
Net Income | | $ | 80 | | | $ | 313 | | | $ | 1,206 | |
Weighted average common shares outstanding | | | 75,543,461 | | | | 74,602,868 | | | | 74,059,240 | |
EPS – Basic | | $ | 1.06 | | | $ | 4.20 | | | $ | 16.28 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| 2023 | | 2022 | | 2021 |
| (Dollars in millions except per share amounts) |
| | | | | |
| Basic earnings per share: | | | | | |
| Net Income | $ | 261 | | | $ | 390 | | | $ | 495 | |
| Less: preferred stock dividend | (80) | | | (157) | | | (97) | |
| Less: preferred stock deemed dividends | (232) | | | — | | | — | |
| Net (loss) income available for distribution | (51) | | | 233 | | | 398 | |
| Less: earnings allocated to participating securities | — | | | (184) | | | (280) | |
| Net (loss) income available to common shareholders | (51) | | | 49 | | | 118 | |
| Weighted average common shares outstanding - Basic | 166,595,397 | | | 64,708,635 | | | 69,706,183 | |
| EPS – Basic | $ | (0.31) | | | $ | 0.75 | | | $ | 1.69 | |
| | | | | |
| Diluted earnings per share: | | | | | |
| Method used: | Two-class | | Two-class | | If-converted |
| Weighted average common shares outstanding - Basic | 166,595,397 | | | 64,708,635 | | | 69,706,183 | |
| Dilutive effect of unvested RSUs and other contingently issuable shares | — | | | 367,357 | | | 28,155 | |
| Dilutive effect of participating securities | — | | | — | | | 247,768,962 | |
| Weighted average common shares outstanding – Diluted | 166,595,397 | | | 65,075,992 | | | 317,503,300 | |
| EPS – Diluted | $ | (0.31) | | | $ | 0.75 | | | $ | 1.56 | |
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Diluted | | | | | | | | | | | | |
Net Income | | $ | 80 | | | $ | 313 | | | $ | 1,206 | |
Weighted average common shares outstanding – Basic | | | 75,543,461 | | | | 74,602,868 | | | | 74,059,240 | |
Dilutive effect of unvested RSUs | | | 557,048 | | | | 1,331,505 | | | | 342,908 | |
Weighted average common shares outstanding – Diluted | | | 76,100,509 | | | | 75,934,373 | | | | 74,402,148 | |
EPS – Diluted | | $ | 1.05 | | | $ | 4.12 | | | $ | 16.21 | |
Diluted EPSFor the periods where a net loss attributable to common shareholders is computed based uponpresent, dilutive securities have been excluded from the weighted averagecalculation of diluted net loss per share attributable to common stockholders as including them would have been anti-dilutive. For the year ended December 31, 2023, the weighted-average number of commonunvested RSUs and other contingently issuable shares outstanding forexcluded from the year plus the dilutive effect of common stock equivalents using the treasury stock method and the average market price of our common stock for the year.
computations was 1,490,117 shares.
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 years ended December 31,
2020 and December 31, 2019,2021, the weighted
average number of stock options excluded from the computations was
428,690 and 483,408, respectively. These stock131,623. There were no options
were outstanding
for the years ended December 31, 2020 and December 31, 2019, respectively.Note 23. CommitmentsandContingencies
Chapter 11 Proceedings
Commencement of the Chapter 11 Cases automatically stayed the proceedings and actions against us that are described below, in addition to actions seeking to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates. The Plan filed by the Debtors, if confirmed by the Bankruptcy Court, will provide for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that have not been satisfied or addressed during the Chapter 11 Cases.
See Note 1, Background and Basis of Presentation and Note 2, Reorganization and Chapter 11 Proceedings for additional information on the Chapter 11 Cases, the RSA, the Stalking Horse Purchase Agreement, the PSA, the ECBA, the Transaction and the DIP Credit Agreement.
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, Garrett ASASCO, a wholly owned indirect subsidiary of the Company, entered into the Honeywell Indemnity Agreement with Honeywell on September 12, 2018. As of the Spin-Off date of October 1, 2018, Garrett ASASCO is 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 Honeywell Indemnity Agreement, Garrett ASASCO is 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 Garrett ASASCO is required to make to Honeywell pursuant to the terms of the Honeywell Indemnity Agreement will not be deductible for U.S. federal income tax purposes. 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. During the first quarter of 2020, Garrett ASASCO paid Honeywell the Euro-equivalent of $35 million in connection with the Honeywell Indemnity Agreement. Honeywell and Garrett agreed to defer the payment under the Honeywell Indemnity Agreement due May 1, 2020 to December 31, 2020 (the “Q2 Payment”), however we do not expect Garrett ASASCO to make payments to Honeywell under the Honeywell Indemnity Agreement during the pendency of the Chapter 11 Cases. The Plan, if confirmed by the Bankruptcy Court, will include a global settlement with Honeywell providing for, among other things, the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to the Indemnity Agreements.
On December 2, 2019, the Company and its subsidiary, Garrett ASASCO, 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, filed a Complaint in the NY Supreme Court in connection with the Action. The lawsuit arises from the Honeywell Indemnity Agreement. The Company is seeking declaratory relief; compensatory damages in an amount to be determined at trial; rescission of the Honeywell Indemnity 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 Honeywell Indemnity Agreement is not enforceable, in whole or in part.On March 5, 2020, Honeywell filed a “Notice of Motion to Dismiss Garrett’s Complaint.”. On September 20, 2020, Garrett and certain of its subsidiaries each filed the Chapter 11 Cases. On September 23, 2020, Garrett removed the case to the United States District Court for the Southern District of New York, and on September 24, 2020, the case was referred to the Bankruptcy Court, where the case is currently pending. On October 13, 2020, Honeywell filed a motion to dismiss in the Bankruptcy Court. Garrett does not believe Honeywell’s motion has merit. A pre-trial conference took place on October 22, 2020.The Court heard argument on Honeywell’s pending motion to dismiss on November 18, 2020; the Court has not yet issued a decision. On November 2, 2020, the Garrett entities that are Debtors and Debtors in Possession filed a Motion Pursuant to Sections 105(a) and 502(c) To Establish Procedures For Estimating The Maximum Amount Of Honeywell’s Claims And Related Relief (“Motion”). The Court heard argument on the Motion on November 18. The Court ordered an estimation proceeding to take place to estimate all of Honeywell’s claims against the Garrett entities that are Debtors and Debtors in Possession.
On December 18, 2020, Honeywell filed proofs of claim in the Chapter 11 Cases, asserting that the Company owes at least $1.9 billion in respect of such claims. The Bankruptcy Court was scheduled to estimate the amount of Honeywell’s claims in an estimation proceeding that was scheduled to commence on February 1, 2021. As noted below, the estimation proceeding has been stayed by order of the Bankruptcy Court.
On January 11, 2021, the Company announced that it had agreed to settle Honeywell’s claims as part of a revised Plan. The Plan is subject to various conditions, including approval by the Bankruptcy Court.
Under the Plan, Honeywell would receive a $375 million payment and Series B Preferred Stock payable in installments of $35 million in 2022, and $100 million annually 2023-2030. The Company would 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 the Emergence date (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.
On January 15, 2021, the Bankruptcy Court ordered that the Action and the estimation proceeding both be stayed pending the Bankruptcy Court’s consideration of the Plan. The confirmation hearing for the Plan is currentlyscheduled to take place in April 2021, however the hearing may be rescheduled for a later date.
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, Garrett ASASCO 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. Additionally, the Tax Matters Agreement provides that Garrett ASASCO is to make payments to a subsidiary of Honeywell for a portion of Honeywell’s net tax liability under Section 965(h)(6)(A) of the Internal Revenue Code for mandatory transition taxes that Honeywell determined is attributable to us (the “MTT Claim”). Following the Spin-Off, Honeywell asserted that Garrett ASASCO was obligated to pay $240 million to Honeywell for the MTT Claim under the Tax Matters Agreement. Accordingly, and in connection with the Tax Matters Agreement, we made payments to Honeywell, under protest, for the Euro-equivalent of $18 million and $19 million during 2019 and the fourth quarter of 2018, respectively, for the MTT Claim. On October 30, 2020, however, Honeywell filed an SEC Form 10-Q for the quarterly period ended September 30, 2020, reporting that its claim against us under the Tax Matters Agreement, including the MTT Claim, is now $273 million. Under the terms of the Tax Matters Agreement, Garrett ASASCO is required to pay this amount in Euros, without interest, in 5 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, Garrett ASASCO paid the first annual installment in October 2018, with subsequent annual installments to be paid in April of each year. The annual installment due on April 1, 2020 was initially deferred to December 31, 2020 in agreement with Honeywell, and subsequently not paid as a result of the automatic stay applicable to the Debtors under the Bankruptcy Code as a result of the Chapter 11 Cases. We do not expect Garrett ASASCO to make payments to Honeywell under the Tax Matters Agreement during the pendency of the Chapter 11 Cases. On July 17, 2020, we provided notice to Honeywell asserting that Honeywell has caused material breaches of the Tax Matters Agreement and that the Tax Matters Agreement is unenforceable. The value and validity of Honeywell’s claims under the Tax Matters Agreement, including the MTT Claim, are currently being litigated in the Chapter 11 Cases. As described above, the Plan, if confirmed by the Bankruptcy Court, will include a global settlement with Honeywell providing for, among other things, the full and final satisfaction, settlement, release, and discharge of all liabilities under or related to the Tax Matters Agreement.
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 Obligation payable to Honeywell related to these agreements was deemed a pre-petition, unsecured liability subject to compromise. On the Petition Date, the Obligation was stayed from further payment and, in accordance with ASC 852-10, measured at the expected allowed claim amount. The Company measured the expected allowed claim as of December 31, 2020 utilizing a combination of data points including: (1) the historical actuarial claims data provided by Honeywell up to December 31, 2019 (2) the aforementioned Honeywell claims estimation trial proceedings, (3) Honeywell’s bankruptcy claim filed with the Bankruptcy Court,2023 and (4) the expected settlement of the Honeywell liabilities as per the Plan of Reorganization. The following table summarizes our Obligation payable to Honeywell related to these agreements. As of December 31, 2020, all amounts have been reclassified to Liabilities subject to compromise on the Consolidated Balance Sheets:
2022, 2021. | | 2020 | |
| | Asbestos and environmental | | | Tax Matters | | | Total | |
Beginning of year | | $ | 1,090 | | | $ | 261 | | | $ | 1,351 | |
Accrual for update to estimated liability | | | — | | | | — | | | | — | |
Legal fees expensed | | | 41 | | | | — | | | | 41 | |
Payments to Honeywell | | | (35 | ) | | | — | | | | (35 | ) |
Currency translation adjustment | | | 100 | | | | 25 | | | | 125 | |
End of year | | $ | 1,196 | | | $ | 286 | | | $ | 1,482 | |
Current | | | 2 | | | | 40 | | | | 42 | |
Non-current | | | 1,194 | | | | 246 | | | | 1,440 | |
Total | | $ | 1,196 | | | $ | 286 | | | $ | 1,482 | |
| | 2019 | |
| | Asbestos and environmental | | | Tax Matters | | | Total | |
Beginning of year | | $ | 1,244 | | | $ | 282 | | | $ | 1,526 | |
Accrual for update to estimated liability | | | (18 | ) | | | 3 | | | | (15 | ) |
Legal fees expensed | | | 44 | | | | — | | | | 44 | |
Payments to Honeywell | | | (153 | ) | | | (18 | ) | | | (171 | ) |
Currency translation adjustment | | | (27 | ) | | | (6 | ) | | | (33 | ) |
End of year | | $ | 1,090 | | | $ | 261 | | | $ | 1,351 | |
Current | | | 51 | | | | 18 | | | | 69 | |
Non-current | | | 1,039 | | | | 243 | | | | 1,282 | |
Total | | $ | 1,090 | | | $ | 261 | | | $ | 1,351 | |
Asbestos Matters
The accounting for the majority of our asbestos-related liability paymentsNote 25. Commitments and accounts payable reflect the terms of the Honeywell Indemnity Agreement with Honeywell entered into by Garrett ASASCO on September 12, 2018, 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. As stated above, on January 11, 2021, the Company announced that it had agreed to settle Honeywell’s claims as part of a revised Plan. This settlement would extinguish our obligations to Honeywell under the Honeywell Indemnity Agreement. The Plan is subject to various conditions, including approval by the Bankruptcy Court.
Contingencies
The followingtablesummarizesinformationconcerningboth Bendix and otherasbestos-relatedbalances. Other representsasbestosliabilitiesrelatedto claimantsoutsidethe United States.
Asbestos-RelatedLiabilities
| | Year ended December 31, 2020 | | | Year ended December 31, 2019 | | | Year ended December 31, 2018 | |
| | Bendix | | | Other | | | Total | | | Bendix | | | Other | | | Total | | | Bendix | | | Other | | | Total | |
Beginning of year | | $ | — | | | $ | — | | | $ | - | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | 1,703 | | | $ | 9 | | | $ | 1,712 | |
Accrual for update to estimated liabilities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 141 | | | | — | | | | 141 | |
Change in estimated cost of future claims | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Update of expected resolution values for pending claims | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Asbestos-related liability payments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (151 | ) | | | (4 | ) | | | (155 | ) |
Spin-Off related adjustments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,693 | ) | | | (4 | ) | | | (1,697 | ) |
Balance Sheet Reclassification | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | (1 | ) | | | — | | | | — | | | | — | |
End of year | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 1 | |
Insurance Recoveriesfor Asbestos-RelatedLiabilities
| | 2020 | | | 2019 | | | 2018 | |
| | Bendix | | | Bendix | | | Bendix | |
Beginning of year | | $ | — | | | $ | — | | | $ | 191 | |
Probable insurance recoveries related to estimated liability | | | — | | | | — | | | | 10 | |
Insurance receipts for asbestos-related liabilities | | | — | | | | — | | | | (24 | ) |
Insurance receivables settlements and write-offs | | | — | | | | — | | | | 1 | |
Other | | | — | | | | — | | | | — | |
Spin-Off related adjustments | | | — | | | | — | | | | (178 | ) |
| | $ | — | | | $ | — | | | $ | — | |
There are 0 asbestos related liabilities recorded as of December 31, 2020 and 2019.
Securities Litigation
On September 25, 2020, a putative securities class action complaint was filed against Garrett Motion Inc. and certain current and former Garrett officers and directors in the United States District Court for the Southern District of New York. The case bears the caption: Steven Husson, Individually and On Behalf of All Others Similarly Situated, v. Garrett Motion Inc., Olivier Rabiller, Alessandro Gili, Peter Bracke, Sean Deason, and Su Ping Lu, Case No. 1:20-cv-07992-JPC (SDNY) (the “Husson Action”). The Husson Action assertsasserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for securities fraud and control person liability. On September 28, 2020, the plaintiff sought to voluntarily dismiss his claim against Garrett Motion Inc. in light of the Company’s bankruptcy; this request was granted. On October 5, 2020, another putative securities class action complaint was filed against certain current and former Garrett officers and directors in the United States District Court for the Southern District of New York. This case bears the caption: The Gabelli Asset Fund, The Gabelli Dividend & Income Trust, The Gabelli Value 25 Fund Inc., The Gabelli Equity Trust Inc., SM Investors LP and SM Investors II LP, on behalf of themselves and all others similarly situated, v. Su Ping Lu, Olivier Rabiller, Alessandro Gili, Peter Bracke, Sean Deason, Craig Balis, Thierry Mabru,
Russell James, Carlos M. Cardoso, Maura J. Clark, Courtney M. Enghauser, Susan L. Main, Carsten Reinhardt, and Scott A. Tozier, Case No. 1:20-cv-08296-JPC (SDNY) (the “Gabelli Action”). The Gabelli Action also assertsasserted claims under Sections 10(b) and 20(a) of the Exchange Act.
On November 5, 2020, another putative securities class action complaint was filed against certain current and former Garrett officers and directors in the United States District Court for the Southern District of New York. This case bears the caption: Joseph Froehlich, Individually and On Behalf of All Others Similarly Situated, v. Olivier Rabiller, Allesandro Gili, Peter Bracke, Sean Deason, and Su Ping Lu, Case No. 1:20-cv-09279-JPC (SDNY) (the “Froehlich Action”). The Froehlich Action also assertsasserted claims under Sections 10(b) and 20(a) of the Exchange Act.All three
The actions
are currentlywere assigned to Judge John P. Cronan.
Su Ping Lu filed a waiver of service in the Gabelli Action on November 10, 2020. On November 24, 2020, competing motions were filed seeking the appointment of lead plaintiff and lead counsel and the consolidation of the Husson, Gabelli, and Froehlich Actions.
On December 8, 2020, counsel for the plaintiffs in the Gabelli Action
–— the Entwistle & Cappucci law firm
–— filed an unopposed stipulation and proposed order that would (1) appoint the plaintiffs in the Gabelli Action
–— the “Gabelli Entities”
–— the lead plaintiffs; (2) would appoint Entwistle & Cappucci as lead counsel for the plaintiff class;
and (3) consolidate the Gabelli Action, the Husson Action, and the Froehlich
Action; (4) set a date by which lead plaintiff would file a consolidated amended complaint by February 25, 2021; and (5) set a date by which defendants shall respond to a consolidated amended complaint of April 26, 2021.Action (the “Consolidated D&O Action”). On January 21, 2021, the
district court issued an order consolidatingCourt granted the
threemotion to consolidate the actions
as In re Garrett Motion Inc. Securities Litigation, Case Number 20 Civ. 7992 (JPC), and
appointinggranted the Gabelli
entitiesEntities’ motions for appointment as
the lead
plaintiffs.plaintiff and for selection of lead counsel. On February 25, 2021, plaintiffs filed a Consolidated Amended Complaint.
The Company’s insurer, AIG, has accepted the defense, subject
to the customary reservation of rights.
The
Bankruptcy Court has setCompany agreed with the Gabelli Entities and their lead counsel to permit a
bar date of March 1, 2021for, among others, currentclass claim to be recognized in the bankruptcy court and
former shareholders to
file securities-relatedhave securities claims against the
Company. We are not yet ableCompany to
assessbe litigated in the
likelihooddistrict court alongside the Consolidated D&O Action. The Gabelli Entities have agreed that any
such claims will be allowed. To the extent allowed, each holder of such claims shall be entitled to receive, (x) its pro rata share of the aggregate cash payments received or recoverable from any insurance policies of the Companyrecoveries against Garrett Motion Inc. on account of
any such allowedsecurities claims
and (y) solelylitigated through the class claim are limited to
available insurance policy proceeds. On July 2, 2021, the
extent that such payments are less thanbankruptcy court entered an order approving the
amount of its allowed claim, such treatment that is consistent with section 1129 ofjoint request from the
Bankruptcy Code and otherwise acceptable to the DebtorsCompany and the
partiesGabelli Entities to
handle the
PSAsecurities claims against Garrett Motion Inc. in
accordance with the PSA.Make-Whole Litigation
On November 13, 2020, certain of the Debtors (the “Plaintiffs”)this manner.
The Gabelli Entities were authorized, and on July 22, 2021 filed a second amended complaint in the Bankruptcy Courtto add claims against the indenture trustee (the “Indenture Trustee”) of the 5.125% senior notes due 2026 (the “Senior Notes”) seeking declaratory judgment on two claims for relief that the Debtors do not owe,Garrett Motion Inc. On August 11, 2021, Garrett Motion Inc., Olivier Rabiller, Alessandro Gili, Peter Bracke, Sean Deason, Russell James, Carlos Cardoso, Maura Clark, Courtney Enghauser, Susan Main, Carsten Reinhardt, and the holders of the Senior Notes (the “Noteholders”) are not entitled to, any make-whole premium under the Indenture (the “Make-Whole” and such litigation, the “Make-Whole Litigation”). Certain Noteholders have contended in these Chapter 11 Cases that the Noteholders are entitled to payment of the Make-Whole under the terms of the Indenture, which provide for the payment of the Make-Whole if the Debtors exercise their right to redeem the Senior Notes prior to maturity, asScott Tozier filed a result of the Debtors’ commencement of their Chapter 11 Cases. The Plaintiffs believe that the Noteholders are not entitled to any Make-Whole because the Debtors have not exercised their right of redemption as contemplated by the Indenture and, in the alternative, the Make-Whole should be disallowed as unmatured interest pursuant to Section 502(b)(2) of the Bankruptcy Code. On January 8, 2021, the Indenture Trustee filed an answer to the Debtors’ complaint. Pursuant to the Plan, the Make Whole is an allowed claim in the amount of $15 million. As the Plan has not been approved by the Bankruptcy Court, the Make Whole was 0t recorded as of December 31, 2020. Pursuant to the PSA, the Debtors have agreed to suspend all litigation activities related to and to stay the Make-Whole Litigation through Emergence andmotion to dismiss with respect to claims asserted against them. On the same day, Su Ping Lu, who is represented separately, filed a motion to dismiss with respect to the claims asserted against her. Lead plaintiffs’ opposition to the motions to dismiss was filed on October 26, 2021, and the defendant's reply briefs were filed on or before December 8, 2021. On March 31, 2022, the judge dismissed the complaints entirely - Su Ping Lu's motion to dismiss was granted with prejudice such proceedings upon Emergence.Other Matters
We are subjectwhile the court granted the plaintiffs 30 days to otherlawsuits,investigationsfile a third amended complaint against the Company and disputesthe other defendants.
arisingout
On May 2, 2022, the plaintiffs filed a Third Amended Complaint (“TAC”) against all of the
conductforegoing Defendants apart from Alessandro Gili and Su Ping Lu. On June 24, 2022, defendants moved to dismiss the TAC in its entirety, with prejudice. Plaintiffs filed their opposition on August 16, 2022, and defendants filed their reply brief on September 23, 2022. On September 22, 2022, the action was reassigned from Judge John P. Cronan to Judge Jennifer L. Rochon, who was recently appointed. On March 31, 2023, the action was dismissed with prejudice. On April 19, 2023, the plaintiffs filed a timely notice of
our business, includingmattersrelatingappeal of the trial court's decision to
commercialtransactions,governmentcontracts,productliability,prioracquisitionsthe United States Court of Appeals for the Second Circuit. The plaintiffs filed their opening brief on August 1, 2023. The defendants filed their opposition on October 31, 2023 and
divestitures,employeebenefitplans, intellectualpropertyand environmental,healthand safetymatters.We recognizea liabilityfor
any contingencythatis probableof occurrenceand reasonablyestimable.We continually assessthe likelihoodof adversejudgmentsof outcomesin thesematters,as well as potentialrangesof possible losses(takinginto considerationany insurancerecoveries),basedplaintiffs filed their reply brief on a carefulanalysisof each matterwithNovember 21, 2023. No date for oral argument has yet been set by the assistanceof outsidelegalcounseland, if applicable,otherexperts.
Court.
Brazilian Tax Matters
In September 2020, the Brazilian tax authorities issued an infraction notice against Garrett Motion Industria Automotiva Brasil Ltda, challenging the use of certain tax credits
(“Befiex Credits”) between January 2017 and February 2020. The infraction notice results in a loss contingency that may or may not ultimately be incurred by the Company. The estimated total amount of the contingency as of December 31,
20202023 was
$29$39 million including penalties and interest.
The Company appealed the infraction notice on October 23, 2020. The Company believes, based on management’s assessment and the advice of external legal counsel, that it has meritorious arguments in connection with the infraction notice and any liability for the infraction notice is currently not probable. Accordingly, no accrual is required at this time.
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.
Warranties and Guarantees
In the normalcourseof business,weissueproductwarrantiesand productperformanceguarantees.We accruefor the estimatedcost of productwarrantiesand performanceguaranteesbased on contracttermsand historicalexperienceat the timeof saleto the customer.Adjustmentsto initialobligationsfor warrantiesand guaranteesare made as changes to the obligationsbecomereasonablyestimable.Product warrantiesand product performanceguaranteesare includedin Accrued liabilities.As noted in Note 2, Reorganization, the Debtors have been granted certain First Day Orders that allow the Company to continue to operate as a debtor-in-possessionliabilities and continue to perform on these warranty and guarantee obligations in the ordinary course of business.Other Liabilities. The followingtablesummarizesinformation concerningour recordedobligationsfor productwarrantiesand product performance guarantees.
| | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2023 | | 2022 | | |
| (Dollars in millions) | | |
| Beginning of year | $ | 28 | | | $ | 32 | | | |
| Accruals for warranties/guarantees issued during the year | 13 | | | 15 | | | |
| Settlement of warranty/guarantee claims | (14) | | | (17) | | | |
| | | | | |
| Foreign currency translation | — | | | (2) | | | |
| $ | 27 | | | $ | 28 | | | |
| | Years Ended December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
Beginning of year | | $ | 29 | | | $ | 32 | | | $ | 28 | |
Accruals for warranties/guarantees issued during the year | | | 19 | | | | 31 | | | | 33 | |
Settlement of warranty/guarantee claims | | | (17 | ) | | | (34 | ) | | | (29 | ) |
Less: Amounts reclassified to Liabilities subject to compromise | | | (16 | ) | | | — | | | | — | |
| | $ | 15 | | | $ | 29 | | | $ | 32 | |
Note
24.26. Defined Benefit
Pension Plans
We sponsor several funded U.S. and non-U.S. defined benefit pension plans. Pension benefits for many of our U.S. employees are provided through a non-contributory, qualified defined benefit plan.
All non-union hourly and salaried employees that joined the Business or Garrett for the first time after December 31, 2012, are not eligible to participate in our U.S. defined benefit pension plans. We also sponsor defined benefit pension plans which cover non-U.S. employees who are not U.S. citizens, in Switzerland and Ireland. Other pension plans outside of the U.S. are not material to the Company either individually or in the aggregate.
For periods prior to the Spin-Off, we only accounted for our pension plan in Ireland as a defined benefit pension plan. Our other pension plans were accounted for as multiemployer plans.
On October 1, 2018, in connection with the Spin-Off, we performed an interim remeasurement of our defined benefit pension plan in Ireland to update the discount rate as of the date immediately prior to the Spin-Off.
The following tables summarize the balance sheet impact, including the benefit obligations, assets and funded status associated with our significant pension plans.
| | Pension Benefits | |
| | U.S. Plans | | | U.S. Plans | | | Non-U.S. Plans | | | Non-U.S. Plans | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Change in benefit obligation: | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of the year | | $ | 206 | | | $ | 178 | | | $ | 226 | | | $ | 172 | |
Service cost | | | 1 | | | | 1 | | | | 9 | | | | 6 | |
Interest cost | | | 6 | | | | 7 | | | | 2 | | | | 2 | |
Plan amendments | | | — | | | | — | | | | (10 | ) | | | 1 | |
Actuarial (gains) losses(1) | | | 17 | | | | 29 | | | | 18 | | | | 37 | |
Benefits paid | | | (10 | ) | | | (9 | ) | | | (3 | ) | | | (6 | ) |
Settlements and curtailments(2) | | | — | | | | — | | | | (10 | ) | | | — | |
Foreign currency translation | | | — | | | | — | | | | 22 | | | | — | |
Transfers | | | — | | | | — | | | | 2 | | | | 10 | |
Other | | | — | | | | — | | | | 3 | | | | 4 | |
Benefit obligation at end of the year | | | 220 | | | | 206 | | | | 259 | | | | 226 | |
Change in plan assets: | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of the year | | | 204 | | | | 177 | | | | 150 | | | | 123 | |
Actual return on plan assets | | | 25 | | | | 36 | | | | 8 | | | | 14 | |
Employer contributions | | | — | | | | — | | | | 7 | | | | 6 | |
Benefits paid | | | (10 | ) | | | (9 | ) | | | (3 | ) | | | (6 | ) |
Settlements and curtailments(2) | | | — | | | | — | | | | (10 | ) | | | — | |
Foreign currency translation | | | — | | | | — | | | | 15 | | | | — | |
Transfers | | | — | | | | — | | | | 2 | | | | 10 | |
Other | | | — | | | | — | | | | 3 | | | | 3 | |
Fair value of plan assets at end of year | | | 219 | | | | 204 | | | | 172 | | | | 150 | |
Funded status of plans | | $ | (1 | ) | | $ | (2 | ) | | $ | (87 | ) | | $ | (76 | ) |
Amounts recognized in Consolidated Balance Sheet consist of: | | | | | | | | | | | | | | | | |
Accrued pension liabilities - noncurrent(3) | | | — | | | | (2 | ) | | | — | | | | (76 | ) |
Liabilities subject to compromise(4) | | | (1 | ) | | | — | | | | (87 | ) | | | — | |
Net amount recognized | | $ | (1 | ) | | $ | (2 | ) | | $ | (87 | ) | | $ | (76 | ) |
(1)
| The actuarial loss on the U.S. plans during 2020 was $17 million, driven by lower discount rates. For the non-US plans, the 2020 actuarial loss amounted to $18 million. The decrease of discount rates led to an assumption loss of $19 million in Ireland and $4 million in Switzerland. The increased salary assumption in Ireland caused an additional loss of about $1 million. This financial loss was partially offset by the $6 million experience gain on the projected benefit obligation in Switzerland, mainly attributable to the larger than expected asset outflow related to employees leaving Garrett and taking along their pension fund account balances.
|
(2)
| In Switzerland the total lump sum benefit payments of $10 million were greater than the service cost and interest cost for year ended December 31, 2020, therefore settlement accounting was applied. Following the settlement accounting, part of the previously unrecognized loss, approximately $1 million was recognized as pension settlement expense.
|
(3)
| Included in Other liabilities in the Consolidated Balance Sheet
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits |
| U.S.
Plans | | U.S.
Plans | | Non-U.S.
Plans | | Non-U.S.
Plans |
| 2023 | | 2022 | | 2023 | | 2022 |
| (Dollars in millions) |
| Change in benefit obligation: | | | | | | | |
| Benefit obligation at beginning of the year | $ | 168 | | | $ | 208 | | | $ | 167 | | | $ | 229 | |
| Service cost | — | | | 1 | | | 6 | | | 7 | |
| Interest cost | 8 | | | 5 | | | 5 | | | 2 | |
| | | | | | | |
| Actuarial losses (gains) | 5 | | | (39) | | | 7 | | | (65) | |
| Benefits paid and employee contributions | (10) | | | (10) | | | 2 | | | 3 | |
Settlements and curtailments(1) | — | | | — | | | (16) | | | (10) | |
| Foreign currency translation | — | | | — | | | 11 | | | (9) | |
| | | | | | | |
| Other | — | | | 3 | | | 4 | | | 10 | |
| Benefit obligation at end of the year | 171 | | | 168 | | | 186 | | | 167 | |
| Change in plan assets: | | | | | | | |
| Fair value of plan assets at beginning of the year | 169 | | | 223 | | | 152 | | | 182 | |
| Actual return on plan assets | 14 | | | (44) | | | 16 | | | (28) | |
| Employer contributions | — | | | — | | | 7 | | | 7 | |
| Benefits paid and employee contributions | (10) | | | (10) | | | 2 | | | 3 | |
Settlements and curtailments(1) | — | | | — | | | (16) | | | (10) | |
| Foreign currency translation | — | | | — | | | 10 | | | (7) | |
| | | | | | | |
| Other | — | | | — | | | 4 | | | 5 | |
| Fair value of plan assets at end of year | 173 | | | 169 | | | 175 | | | 152 | |
| Funded status of plans | $ | 2 | | | $ | 1 | | | $ | (11) | | | $ | (15) | |
| Amounts recognized in Consolidated Balance Sheet consist of: | | | | | | | |
Non-current assets(2) | 2 | | | 1 | | | 9 | | | 2 | |
Non-current liabilities(3) | — | | | — | | | (20) | | | (17) | |
| | | | | | | |
| Net amount recognized | $ | 2 | | | $ | 1 | | | $ | (11) | | | $ | (15) | |
(4)(1)In Switzerland, the total lump sum benefit payments of $16 million and $10 million were greater than the service cost and interest cost for the years ended December 31, 2023 and 2022, respectively, therefore settlement accounting was applied. Following the settlement accounting, part of the previously unrecognized gain amounting to approximately $1 million and $1 million, respectively, was recognized as a gain on pension settlement.
| Included in Liabilities subject to compromise in the Consolidated Balance Sheet
|
(2)Included in Other assets in the Consolidated Balance Sheets.
(3)Included in Other liabilities in the Consolidated Balance Sheets.
Amounts recognized in
Accumulated other comprehensive (income) lossAOCI associated with our significant pension and other postretirement benefit plans
atas of December 31,
20202023 and
December 31, 20192022 are as
follows:follow: | | Pension Benefits | |
| | U.S. Plans | | | U.S. Plans | | | Non-U.S. Plans | | | Non-U.S. Plans | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
Prior service (credit) | | $ | (1 | ) | | $ | (2 | ) | | $ | (9 | ) | | $ | 1 | |
Net actuarial loss | | | 9 | | | | 6 | | | | 24 | | | | 21 | |
Net amount recognized | | $ | 8 | | | $ | 4 | | | $ | 15 | | | $ | 22 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits |
| U.S.
Plans | | U.S.
Plans | | Non-U.S.
Plans | | Non-U.S.
Plans |
| 2023 | | 2022 | | 2023 | | 2022 |
| (Dollars in millions) |
| Prior service cost (credit) | $ | — | | | $ | (1) | | | $ | (7) | | | $ | (7) | |
| Net actuarial loss (gain) | 11 | | | 13 | | | (12) | | | (14) | |
| Net amount recognized | $ | 11 | | | $ | 12 | | | $ | (19) | | | $ | (21) | |
The components of net periodic benefit (income) cost for our significant pension and other postretirement benefit plans are as follow:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits |
| | | U.S. Plans | | Non-U.S. Plans |
| Net Periodic Benefit Cost | | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| | (Dollars in millions) |
| Service cost | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | 6 | | | $ | 7 | | | $ | 10 | |
| Interest cost | | 8 | | | 5 | | | 4 | | | 5 | | | 2 | | | 1 | |
| Expected return on plan assets | | (8) | | | (9) | | | (10) | | | (9) | | | (6) | | | (6) | |
| Amortization of prior service (credit) cost | | — | | | — | | | — | | | (1) | | | (1) | | | (1) | |
| Recognition of actuarial (gains) losses | | — | | | — | | | — | | | (1) | | | (27) | | | — | |
| Settlements and curtailments | | — | | | — | | | — | | | (1) | | | (1) | | | — | |
| Net periodic benefit (income) cost | | $ | — | | | $ | (3) | | | $ | (5) | | | $ | (1) | | | $ | (26) | | | $ | 4 | |
The components of net periodic benefit (income) cost and other amounts recognized in Other comprehensive (income) loss for our significant pension and other postretirement benefit plans include the following components:
| | Pension Benefits | |
| | U.S. Plans | | | Non-U.S. Plans | |
Net Periodic Benefit Cost | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2018(1) | |
Service cost | | $ | 1 | | | $ | 1 | | | $ | 9 | | | $ | 6 | | | $ | 4 | |
Interest cost | | | 6 | | | | 7 | | | | 2 | | | | 2 | | | | 2 | |
Expected return on plan assets | | | (11 | ) | | | (10 | ) | | | (6 | ) | | | (4 | ) | | | (3 | ) |
Recognition of actuarial losses | | | — | | | | — | | | | 13 | | | | 13 | | | | 3 | |
Settlements and curtailments(2) | | | — | | | | — | | | | 1 | | | | — | | | | — | |
Net periodic benefit (income) cost | | $ | (4 | ) | | $ | (2 | ) | | $ | 19 | | | $ | 17 | | | $ | 6 | |
(1)
| For the periods prior to the Spin-Off, only the pension plan in Ireland is reflected as a non-U.S. defined benefit pension plan as all other pension plans were accounted for as multiemployer plans. Following the Spin-Off, the defined benefit pension plan in Switzerland is also reflected.
|
(2)
| In Switzerland the total lump sum benefit payments of $10 million were greater than the service cost and interest cost for year ended December 31, 2020, therefore settlement accounting was applied. Following the settlement accounting, part of the previously unrecognized loss, approximately $1 million was recognized as pension settlement expense.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Changes in Plan Assets and Benefits Obligations Recognized in
Other Comprehensive (Income) Loss | | U.S. Plans | | Non-U.S. Plans |
| 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| | (Dollars in millions) |
| Actuarial (gains) losses | | $ | (1) | | | $ | 14 | | | $ | (10) | | | $ | — | | | $ | (33) | | | $ | (34) | |
| Prior service (credit) cost | | — | | | — | | | — | | | — | | | — | | | — | |
| Recognition of prior service credit (cost) | | — | | | — | | | — | | | 1 | | | 1 | | | 1 | |
| Recognition of actuarial gains (losses) | | — | | | — | | | — | | | 2 | | | 30 | | | — | |
| Foreign currency translation | | — | | | — | | | — | | | (2) | | | — | | | — | |
| Total recognized in other comprehensive (income) loss | | $ | (1) | | | $ | 14 | | | $ | (10) | | | $ | 1 | | | $ | (2) | | | $ | (33) | |
| Total recognized in net periodic benefit (income) cost and other comprehensive (income) loss | | $ | (1) | | | $ | 11 | | | $ | (15) | | | $ | — | | | $ | (28) | | | $ | (29) | |
Other Changes in Plan Assets and Benefits Obligations Recognized in | | U.S. Plans | | | Non-U.S. Plans | |
Other Comprehensive (Income) Loss | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2018(1) | |
Actuarial (gains) losses | | $ | 3 | | | $ | 2 | | | $ | 15 | | | $ | 27 | | | $ | (4 | ) |
Prior service (credit) | | | — | | | | — | | | | (10 | ) | | | 1 | | | | 1 | |
Actuarial losses recognized during year | | | — | | | | — | | | | (14 | ) | | | (13 | ) | | | (3 | ) |
Foreign currency translation | | | — | | | | — | | | | 2 | | | | 1 | | | | — | |
Total recognized in other comprehensive (income) loss | | $ | 3 | | | $ | 2 | | | $ | (7 | ) | | $ | 16 | | | $ | (6 | ) |
Total recognized in net periodic benefit (income) cost and other comprehensive (income) loss | | $ | (1 | ) | | $ | — | | | $ | 12 | | | $ | 33 | | | $ | — | |
(1)
| For the periods prior to the Spin-Off, only the pension plan in Ireland is reflected as a non-U.S. defined benefit pension plan as all other pension plans were accounted for as multiemployer plans. Following the Spin-Off, the defined benefit pension plan in Switzerland is also reflected.
|
MajorThe main actuarial assumptions used in determining the benefit obligations and net periodic benefit (income) cost for our significant benefit plans are presented in the following table as weighted averages.
| | Pension Benefits | |
| | U.S. Plans | | | Non-U.S. Plans | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2018(1) | |
Actuarial assumptions used to determine benefit obligations as of December 31: | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 2.65 | % | | | 3.30 | % | | | 0.46 | % | | | 0.79 | % | | | 1.50 | % |
Expected annual rate of compensation increase | | | 3.57 | % | | | 3.74 | % | | | 1.82 | % | | | 1.77 | % | | | 1.77 | % |
Interest credited to accounts (2) | | | — | | | | — | | | | 1.50 | % | | | 1.50 | % | | | 1.50 | % |
Actuarial assumptions used to determine net periodic benefit (income) cost for years ended December 31: | | | | | | | | | | | | | | | | | | | | |
Discount rate—benefit obligation | | | 3.30 | % | | | 4.44 | % | | | 0.79 | % | | | 1.65 | % | | | 1.50 | % |
Discount rate—service cost | | | 4.47 | % | | | 4.47 | % | | | 1.20 | % | | | 1.20 | % | | | 1.50 | % |
Discount rate—interest cost | | | 4.06 | % | | | 4.06 | % | | | 1.74 | % | | | 1.74 | % | | | 1.50 | % |
Expected rate of return on plan assets | | | 5.49 | % | | | 5.80 | % | | | 3.79 | % | | | 3.34 | % | | | 3.77 | % |
Expected annual rate of compensation increase | | | 3.74 | % | | | 3.74 | % | | | 1.77 | % | | | 1.77 | % | | | 1.77 | % |
(1)
| For the periods prior to the Spin-Off, only the pension plan in Ireland is reflected as a non-U.S. defined benefit pension plan as all other pension plans were accounted for as multiemployer plans. Following the Spin-Off, the defined benefit pension plan in Switzerland is also reflected.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | U.S. Plans | | Non-U.S. Plans | | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 | | Actuarial assumptions used to determine benefit obligations as of December 31: | | | | | | | | | | | | | Discount rate | 5.02 | % | | 5.21 | % | | 2.95 | % | | 2.36 | % | | 2.91 | % | | 0.86 | % | | Expected annual rate of compensation increase | 3.00 | % | | 4.98 | % | | 3.20 | % | | 2.38 | % | | 4.93 | % | | 2.07 | % | Interest credited to accounts (1) | — | % | | — | % | | — | % | | 2.65 | % | | 3.00 | % | | 1.50 | % | | Actuarial assumptions used to determine net periodic benefit (income) cost for years ended December 31: | | | | | | | | | | | | | Discount rate—benefit obligation | 5.21 | % | | 2.95 | % | | 2.65 | % | | 2.91 | % | | 0.80 | % | | 0.46 | % | | Discount rate—service cost | 5.23 | % | | 3.00 | % | | 3.37 | % | | 2.91 | % | | 0.82 | % | | 0.23 | % | | Discount rate—interest cost | 5.09 | % | | 2.38 | % | | 2.86 | % | | 2.94 | % | | 0.73 | % | | 0.63 | % | | Expected rate of return on plan assets | 4.98 | % | | 3.97 | % | | 4.88 | % | | 4.94 | % | | 3.36 | % | | 3.60 | % | | Expected annual rate of compensation increase | 3.00 | % | | 3.20 | % | | 3.57 | % | | 2.43 | % | | 1.99 | % | | 1.80 | % |
(1)Only applicable to the defined benefit pension plan in Switzerland.
(2)
| Only applicable to the defined benefit pension plan in Switzerland.
|
The discount raterates for our significant pension plans reflectsreflect the current raterates at which the associated liabilities could be settled at the measurement date of December 31.31, 2023. To determine the discount rates, we use a modeling process that involves matching the expected cash outflows of our benefit plans to a yield curve constructed from a portfolio of high quality, fixed-income debt instruments. We use the single weighted-average yield of this hypothetical portfolio as a discount rate benchmark.
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.
For non-U.S. benefit plans, actuarial assumptions reflect economic and market factors relevant to each country.
The following amounts relate to our significant pension plans with accumulated benefit obligations exceeding the fair value of plan assets.
| | December 31, | |
| | U.S. Plans | | | Non-U.S. Plans | |
| | 2020 | | | 2019 | | | 2020 | | | 2019 | |
| December 31, | | | December 31, |
| U.S. Plans | | | U.S. Plans | | Non-U.S. Plans |
| 2023 | | | 2023 | | 2022 | | 2023 | | 2022 |
| (Dollars in millions) | | | (Dollars in millions) |
Projected benefit obligation | | $ | — | | | $ | — | | | $ | 259 | | | $ | 226 | |
Accumulated benefit obligation | | | — | | | | — | | | | 239 | | | | 212 | |
Fair value of plan assets | | | — | | | | — | | | | 172 | | | | 150 | |
Our U.S. pension asset investment strategy for our U.S. pension plan focuses on maintaining a diversified portfolio using various asset classes in order to achieve market exposure and diversification on an interim basis as we develop our long-term investment objectives on a risk adjusted basis. Once finalized, we will implement our long-term strategy. Our interim target allocations are as follows: 35%91% fixed income investments, 8% global equity securities, 50% fixed income securities and cash, 10%1% real estate investments. Fixed income investments include corporate and 5% high yield bonds. Equitygovernment issues with a target duration close to that of the plan liability. Global equity securities include mutual funds that invest in companies located both
inside and outside the United States. Fixed income securities include exposure to medium and high quality investment grade corporate bonds, pooled consumer loans and U.S. government bonds with an average maturity of 5 - 25 years. The real estate fund invests in real estate investment trusts – companies that purchase office buildings, hotels and other real estate property. The high yield bond fund invests in a diversified portfolio of intermediate term below investment-grade debt securities. Our assets are reviewed on a daily basis to ensure that we are within the targeted asset allocation ranges and, if necessary, asset balances are adjusted back within target allocations.
Our non-U.S. pension assets are typically managed by decentralized fiduciary committees. Our non-U.S. investment policies are different for each country as local regulations, funding requirements, and financial and tax considerations are part of the funding and investment allocation process in each country.
The fair values of both our U.S. and non-U.S. pension plans assets by asset category are as follows:
| | U.S. Plans | |
| | December 31, 2020 | |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| U.S. Plans | | | U.S. Plans |
| December 31, 2023 | | | December 31, 2023 |
| Total | | | Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in millions) | | | (Dollars in millions) |
| Cash and cash equivalents | |
Equity funds | | $ | 79 | | | $ | — | | | $ | 79 | | | $ | — | |
Short-term investments | | | 2 | | | | — | | | | 2 | | | | — | |
| Government bond funds | |
Corporate bond funds | | | 117 | | | | — | | | | 117 | | | | — | |
Real estate funds | | | 21 | | | | — | | | | 21 | | | | — | |
| Other | |
Total assets at fair value | | $ | 219 | | | $ | — | | | $ | 219 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | U.S. Plans | |
| | December 31, 2019 | |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| U.S. Plans | |
| U.S. Plans | |
| U.S. Plans | |
| December 31, 2022 | | | December 31, 2022 |
| Total | | | Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in millions) | | | (Dollars in millions) |
| Cash and cash equivalents | |
Equity funds | | $ | 74 | | | $ | — | | | $ | 74 | | | $ | — | |
Short-term investments | | | 2 | | | | — | | | | 2 | | | | — | |
| Government bond funds | |
Corporate bond funds | | | 106 | | | | — | | | | 106 | | | | — | |
Real estate funds | | | 22 | | | | — | | | | 22 | | | | — | |
| Other | |
Total assets at fair value | | $ | 204 | | | $ | — | | | $ | 204 | | | $ | — | |
| | Non-U.S. Plans | |
| | December 31, 2020 | |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| Non-U.S. Plans | | | Non-U.S. Plans |
| December 31, 2023 | | | December 31, 2023 |
| Total | | | Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in millions) | | | (Dollars in millions) |
Cash and cash equivalents | | $ | 5 | | | $ | 5 | | | $ | — | | | $ | — | |
| Money market funds | |
Equity funds | | | 76 | | | | — | | | | 76 | | | | — | |
Government bond funds | | | 35 | | | | — | | | | 35 | | | | — | |
Corporate bond funds | | | 23 | | | | — | | | | 23 | | | | — | |
| Real estate funds | | | 20 | | | | — | | | | 20 | | | | — | |
| Real estate funds | |
| Real estate funds | |
| Diversified mutual funds | |
Other | | | 13 | | | | — | | | | 13 | | | | — | |
Total assets at fair value | | $ | 172 | | | $ | 5 | | | $ | 167 | | | $ | — | |
| | Non-U.S. Plans | |
| | December 31, 2019 | |
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Cash and cash equivalents | | $ | 2 | | | $ | 2 | | | $ | — | | | $ | — | |
Equity funds | | | 68 | | | | — | | | | 68 | | | | — | |
Government bond funds | | | 30 | | | | — | | | | 30 | | | | — | |
Corporate bond funds | | | 21 | | | | — | | | | 21 | | | | — | |
Real estate funds | | | 18 | | | | — | | | | 18 | | | | — | |
Other | | | 11 | | | | — | | | | 11 | | | | — | |
Total assets at fair value | | $ | 150 | | | $ | 2 | | | $ | 148 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Non-U.S. Plans |
| December 31, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in millions) |
| Cash and cash equivalents | $ | 3 | | | $ | 3 | | | $ | — | | | $ | — | |
| Equity funds | 83 | | | — | | | 83 | | | — | |
| Government bond funds | 27 | | | — | | | 27 | | | — | |
| Corporate bond funds | 9 | | | — | | | 9 | | | — | |
| Real estate funds | 17 | | | — | | | 17 | | | — | |
| Other | 13 | | | — | | | 13 | | | — | |
| Total assets at fair value | $ | 152 | | | $ | 3 | | | $ | 149 | | | $ | — | |
Equity funds, corporate bond funds, government bond funds, real estate
funds, swap funds and short-term investments are valued either by bids provided by brokers or dealers or quoted prices of securities with similar characteristics. Other
includes diversified mutual funds. These investments are valued at estimated fair value based on quarterly financial information received from the investment advisor and/or general partner.
Our general funding policy for qualified defined benefit pension plans is to contribute amounts at least sufficient to satisfy regulatory funding standards. We
arewere not required to make any contributions to our U.S. pension plan in
2020.2023. In
2020,2023, contributions of $7 million were made to our non-U.S. pension plans to satisfy regulatory funding requirements. In
2021,2024, 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. Contributions for both our U.S. and non-U.S. pension plans do not reflect benefits paid directly from Company assets.
Benefit payments, including amounts to be paid from Company assets, and reflecting expected future service, as appropriate, are expected to be paid as follows:
| | U.S. Plans | | | Non-U.S. Plans | |
2021 | | $ | 10 | | | $ | 3 | |
2022 | | | 11 | | | | 4 | |
2023 | | | 11 | | | | 4 | |
2024 | | | 11 | | | | 4 | |
2025 | | | 11 | | | | 4 | |
2026-2030 | | | 57 | | | | 24 | |
| | | | | | | | | | | |
| U.S.
Plans | | Non-U.S.
Plans |
| (Dollars in millions) |
| 2024 | $ | 11 | | | $ | 4 | |
| 2025 | 12 | | | 5 | |
| 2026 | 12 | | | 6 | |
| 2027 | 12 | | | 6 | |
| 2028 | 12 | | | 7 | |
| 2029-2033 | 61 | | | 46 | |
Note
25. China Variable Interest EntityOn September 20, 2018 in preparation of the Spin-Off, the Company entered into an agreement by and between Honeywell and Garrett (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 was due. The China Purchase Agreement was amended to extend the date of the transfer of the equity interests in Garrett China from September 20, 2019 to June 30, 2020.
Prior to the transfer of the equity interests, Garrett China was considered a variable interest entity for which Garrett is the primary beneficiary because the China Purchase Agreement provided Garrett control to direct the management and operation of Garrett China as well as all economic benefits and losses. The intent of the agreement was 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 were recognized at their carrying amounts.
On June 3, 2020 Honeywell transferred 100% of the equity interests of Garrett China in accordance with the China Purchase Agreement. Following the transfer, Garrett continues to consolidate Garrett China. However, Garrett China is no longer considered to be a variable interest entity as Garrett now owns 100% of the equity interests. There was no change in the basis of the net assets of Garrett China as the transaction did not result in a change of control under U.S. GAAP.
Note 26.27. Concentrations
Sales concentration—Net sales by region (determined based on country of shipment) and channel are as follows: | | Year ended December 31, 2020 | |
| | OEM | | | Aftermarket | | | Other | | | Total | |
| Year Ended December 31, 2023 | | | Year Ended December 31, 2023 |
| OEM | | | OEM | | Aftermarket | | Other | | Total |
| (Dollars in millions) | | | (Dollars in millions) |
United States | | $ | 309 | | | $ | 148 | | | $ | 5 | | | $ | 462 | |
Europe | | | 1,395 | | | | 122 | | | | 30 | | | | 1,547 | |
Asia | | | 928 | | | | 41 | | | | 26 | | | | 995 | |
Other International | | | 11 | | | | 19 | | | | — | | | | 30 | |
| | $ | 2,643 | | | $ | 330 | | | $ | 61 | | | $ | 3,034 | |
| $ | |
| | Year ended December 31, 2019 | |
| | OEM | | | Aftermarket | | | Other | | | Total | |
United States | | $ | 307 | | | $ | 171 | | | $ | 7 | | | $ | 485 | |
Europe | | | 1,631 | | | | 136 | | | | 39 | | | | 1,806 | |
Asia | | | 843 | | | | 51 | | | | 29 | | | | 923 | |
Other International | | | 15 | | | | 19 | | | | — | | | | 34 | |
| | $ | 2,796 | | | $ | 377 | | | $ | 75 | | | $ | 3,248 | |
| | Year ended December 31, 2018 | |
| | OEM | | | Aftermarket | | | Other | | | Total | |
United States | | $ | 338 | | | $ | 175 | | | $ | 5 | | | $ | 518 | |
Europe | | | 1,686 | | | | 151 | | | | 54 | | | | 1,891 | |
Asia | | | 847 | | | | 50 | | | | 26 | | | | 923 | |
Other International | | | 22 | | | | 21 | | | | — | | | | 43 | |
| | $ | 2,893 | | | $ | 397 | | | $ | 85 | | | $ | 3,375 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| OEM | | Aftermarket | | Other | | Total |
| (Dollars in millions) |
| United States | $ | 478 | | | $ | 213 | | | $ | 3 | | | $ | 694 | |
| Europe | 1,550 | | | 157 | | | 27 | | | 1,734 | |
| Asia | 1,031 | | | 47 | | | 24 | | | 1,102 | |
| Other International | 48 | | | 25 | | | — | | | 73 | |
| $ | 3,107 | | | $ | 442 | | | $ | 54 | | | $ | 3,603 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| OEM | | Aftermarket | | Other | | Total |
| (Dollars in millions) |
| United States | $ | 383 | | | $ | 176 | | | $ | 6 | | | $ | 565 | |
| Europe | 1,602 | | | 155 | | | 27 | | | 1,784 | |
| Asia | 1,153 | | | 50 | | | 28 | | | 1,231 | |
| Other International | 28 | | | 25 | | | — | | | 53 | |
| $ | 3,166 | | | $ | 406 | | | $ | 61 | | | $ | 3,633 | |
Customer concentration—Net salesto Garrett’s largestcustomer customers and the correspondingpercentageof total net salesare as follows: | | Net sales | |
| | Years ended December 31, | |
| | 2020 | | | % | | | 2019 | | | % | | | 2018 | | | % | |
| Net sales Year Ended December 31, | | | Net sales Year Ended December 31, |
| 2023 | | | 2023 | | % | | 2022 | | % | | 2021 | | % |
| (Dollars in millions) | | | (Dollars in millions) |
Customer A | | $ | 301 | | | | 10 | | | $ | 374 | | | | 12 | | | $ | 455 | | | | 13 | |
| Customer B | |
Others | | | 2,733 | | | | 90 | | | | 2,874 | | | | 88 | | | | 2,920 | | | | 87 | |
| | $ | 3,034 | | | | 100 | | | $ | 3,248 | | | | 100 | | | $ | 3,375 | | | | 100 | |
Long-lived assets concentrationconcentration—Long-livedLong-lived assetsby regionare as follows: | | Long-lived Assets(1) | |
| | December 31, | |
| | 2020 | | | 2019 | | | 2018 | |
| Long-lived Assets (1) December 31 | |
| Long-lived Assets (1) December 31 | |
| Long-lived Assets (1) December 31 | |
| 2023 | |
| (Dollars in millions) | |
| (Dollars in millions) | |
| (Dollars in millions) | |
United States | | $ | 21 | | | $ | 24 | | | $ | 26 | |
Europe | | | 315 | | | | 285 | | | | 273 | |
| Europe | |
| Europe | |
| Asia | |
| Asia | |
Asia | | | 151 | | | | 141 | | | | 123 | |
Other International | | | 18 | | | | 21 | | | | 16 | |
| | $ | 505 | | | $ | 471 | | | $ | 438 | |
| Other International | |
| Other International | |
| $ | |
| $ | |
| $ | |
(1)Long-lived assets are comprised of property, plant and equipment–net.
(1)
| Long-livedassetsare comprisedof property,plantand equipment–net.
|
Supplier concentration
—The Company’s largestsupplieraccountedfor 8%6%, 12%7% and 14%6% of directmaterialspurchasesfor the yearsended December31, 2020, 2019 and 2018 respectively.
Note 27. Related Party Transactions with Honeywell
Subsequent to Spin-Off
Following the Spin-Off, Honeywell is no longer considered a related party.
We have Obligations payable to Honeywell related to the Indemnification and Reimbursement Agreement and Tax Matters Agreement. See Note 23 Commitments and Contingencies for further details.
Prior to Spin-Off
The Consolidated and Combined Financial Statements for periods prior to the Spin-Off have been prepared on a stand-alone basis and are derived from the consolidated financial statements and accounting records of Honeywell.
Prior to the Spin-Off, Honeywell provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Business. The cost of these services has been allocated to the Business on the basis of the proportion of revenues. We consider the allocations to be a reasonable reflection of the benefits received by the Business. During the year ended December 31, 2018, Garrett was allocated $87 million of general corporate expenses incurred by Honeywell,2023, 2022 and such amounts are included within Selling, general and administrative expenses in the Consolidated and Combined Statements of Operations. As certain expenses reflected in the Consolidated and Combined Financial Statements include allocations of corporate expenses from Honeywell, these statements could differ from those that would have been prepared had Garrett operated on a stand-alone basis.
The Company received interest income for related party notes receivables of $1 million for the year ended December 31, 2018. Additionally, the Company incurred interest expense for related party notes payable of $1 million for the year ended December 31, 2018.
2021, respectively.
Note 28. Unaudited Quarterly Financial Information
The following tables show selected unaudited quarterly results of operations for
2020the years ended December 31, 2023 and
2019.2022. The quarterly data have been prepared on the same basis as the audited annual financial statements and include all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our results of operations for these periods.
| | 2020 | |
| | March 31 | | | June 30 | | | September 30 | | | December 31 | | | Year Ended December 31, | |
Net Sales | | $ | 745 | | | $ | 477 | | | $ | 804 | | | $ | 1,008 | | | $ | 3,034 | |
Gross Profit | | | 142 | | | | 84 | | | | 152 | | | | 178 | | | | 556 | |
Net Income (Loss) | | | 52 | | | | (9 | ) | | | 11 | | | | 26 | | | | 80 | |
Earnings (loss) per share - basic | | | 0.69 | | | | (0.12 | ) | | | 0.15 | | | | 0.34 | | | | 1.06 | |
Earnings (loss) per share - diluted | | | 0.68 | | | | (0.12 | ) | | | 0.14 | | | | 0.34 | | | | 1.05 | |
| | 2019 | |
| | March 31 | | | June 30 | | | September 30 | | | December 31 | | | Year Ended December 31, | |
Net Sales | | $ | 835 | | | $ | 802 | | | $ | 781 | | | $ | 830 | | | $ | 3,248 | |
Gross Profit | | | 196 | | | | 182 | | | | 172 | | | | 161 | | | | 711 | |
Net Income (Loss) | | | 73 | | | | 66 | | | | 38 | | | | 136 | | | | 313 | |
Earnings (loss) per share - basic | | | 0.98 | | | | 0.88 | | | | 0.51 | | | | 1.82 | | | | 4.20 | |
Earnings (loss) per share - diluted | | | 0.97 | | | | 0.86 | | | | 0.50 | | | | 1.79 | | | | 4.12 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 |
| March 31 | | June 30 | | September 30 | | December 31 | | Year Ended December 31 |
| (Dollars in millions) |
| Net sales | $ | 970 | | | $ | 1,011 | | | $ | 960 | | | $ | 945 | | | $ | 3,886 | |
| Gross profit | 189 | | | 202 | | | 176 | | | 189 | | | 756 | |
| Net income | 81 | | | 71 | | | 57 | | | 52 | | | 261 | |
| Net income (loss) available for distribution | 41 | | | (201) | | | 57 | | | 52 | | | (51) | |
| Earnings (loss) per share - basic | 0.13 | | | (1.88) | | | 0.23 | | | 0.22 | | | (0.31) | |
| Earnings (loss) per share - diluted | 0.13 | | | (1.88) | | | 0.23 | | | 0.22 | | | (0.31) | |
Earnings (loss) per share - diluted method (1) | Two-class | | Two-class | | | | | | Two-class |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| March 31 | | June 30 | | September 30 | | December 31 | | Year Ended December 31 |
| (Dollars in millions) |
| Net sales | $ | 901 | | | $ | 859 | | | $ | 945 | | | $ | 898 | | | $ | 3,603 | |
| Gross profit | 175 | | | 169 | | | 178 | | | 161 | | | 683 | |
| Net income | 88 | | | 85 | | | 105 | | | 112 | | | 390 | |
| Net income available for distribution | 50 | | | 46 | | | 65 | | | 72 | | | 233 | |
| Earnings per share - basic | 0.15 | | | 0.15 | | | 0.21 | | | 0.23 | | | 0.75 | |
| Earnings per share - diluted | 0.15 | | | 0.15 | | | 0.21 | | | 0.23 | | | 0.75 | |
| Earnings per share - diluted method | Two-class | | Two-class | | Two-class | | Two-class | | Two-class |
(1)As our Series A Preferred Stock was converted into Common Stock pursuant to the Transaction, diluted earnings per share for the quarters ended September 30, 2023 and December 31, 2023 is computed using the weighted-average number of common shares outstanding during the period plus the dilutive effect of common stock equivalents using the treasury stock method.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the
Securities Exchange
Act of 1934, as amended (the “Exchange Act”).Act. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives.objectives and that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on management's evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31,
2020.2023.
Management’s
Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
Our management conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria set forth in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that as of December 31, 2020, our internal control over financial reporting was effective.
effective as of December 31, 2023.
Deloitte SA, our independent registered public accounting firm, has issued an attestation report on our internal control over financial reporting, which is included in Item 8, “FinancialFinancial Statements and Supplementary Data”Data, of this Annual Report on Form 10-K.Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 20202023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None
None.
Part
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information
about our DirectorsThe followingtablepresents informationconcerningour board of directors (the “Board”).
Name
| | Age
| | | Position
| | In Current Position Since
|
Olivier Rabiller
| | | 50
| | | Director, President & Chief Executive Officer
| | October 2018
|
Carlos Cardoso
| | | 63
| | | Chairman of the Board
| | September 2018
|
Maura J. Clark
| | | 62
| | | Director
| | October 2018
|
Courtney Enghauser
| | | 48
| | | Director
| | October 2018
|
Susan L. Main
| | | 62
| | | Director
| | October 2018
|
Carsten J. Reinhardt
| | | 53
| | | Director
| | October 2018
|
Jérôme Stoll
| | | 66
| | | Director
| | March 2020
|
Scott Tozier
| | | 55
| | | Director
| | October 2018
|
The followingare briefbiographiesdescribingthe backgroundsof our directors.
OlivierRabiller
Mr. Rabiller has served as President & Chief Executive Officer (“CEO”) as well as a member of the Board since the Spin-Off. Prior to the Spin-Off, Mr. Rabiller served as President and CEO of the Transportation Systems division at Honeywell from 2016 until the Spin-Off. Mr. Rabiller’s global career spanned approximately 16 years at Honeywell where he also served as Vice President and General Manager of Transportation Systems for High Growth Regions, Business Development, and Aftermarket (from July 2014 to July 2016) as well as Vice President, General Manager of Transportation Systems Aftermarket (from January 2012 to July 2014). Earlier positions within Honeywell included Vice President of Sourcing for Transportation Systems; Vice President of Customer Management for Passenger Vehicles at Honeywell Turbo Technologies; Vice President, European Sales and Customer Management; and Director of Marketing and Business Development for the European region. He joined Honeywell in 2002 as Senior Program Manager and Business Development Manager for Turbo Technologies EMEA. Mr. Rabiller is a director of the Swiss-American Chamber of Commerce, a non-profit organization that facilitates business relations between Switzerland and the United States. From 2012 to 2016, Mr. Rabiller was a director of Friction Material Pacifica, Australia. He holds a Master's degree in Engineering from Ecole Centrale Nantes and an MBA from INSEAD. We believe Mr. Rabilleris qualified to serve as a member of our Board of Directorsbecauseof his extensiveexperienceat the Transportation Systemsdivisionat Honeywell, his background within the automotiveindustryand his strongleadershipabilities.
Carlos Cardoso
Mr. Cardoso has served as a member of our Board since September 2018. Mr. Cardoso has served as the Principal of CMPC Advisors LLC, an investment advisory firm, since January 2015. Previously, he served as Senior Advisor of Irving Place Capital where he focused on investments in industrial manufacturing and distribution companies from July 2015 to August 2018. From 2007 to 2015, Mr. Cardoso was also Chairman and CEO of Kennametal, a global leader in metal-working solutions and engineered components serving a diverse set of industrial and infrastructure markets, where he also served as Chairman from 2006 to 2014. Before serving as CEO, Mr. Cardoso served as Kennametal’s Vice President and Chief Operating Officer (“COO”). Prior to Kennametal, he held executive roles at Flowserve and Honeywell (AlliedSignal). Mr. Cardoso currently serves on the boards of directors of Stanley Black & Decker, Inc. and Hubbell Incorporated. He previously served on the board of the Ohio Transmission Corporation. He has been named one of America’s “Best Chief Executive Officers” by Institutional Investor Magazine. Mr. Cardoso earned a Bachelor of Science degree in Business Administration from Fairfield University and a Master’s degree in Management from Rensselaer Polytechnic Institute. He received an honorary degree of Doctor of Humane Letters from Saint Vincent College in Latrobe, Pennsylvania. We believe Mr. Cardoso is qualified to serve as a member and Chairmanof our Board of Directorsbecauseof his background as a directorfor publiccompaniesand his expertisein companieswith extensivemanufacturing and distributionoperations.
Maura J. Clark
Ms. Clark has served as a member of our Board since the Spin-Off. From 2005 to 2014, Ms. Clark served as President of Direct Energy Business, LLC, a leading North American retail energy business serving commercial and industrial companies, and Senior Vice President North American Strategy and Mergers and Acquisitions of Direct Energy. Her prior experience includes serving as Managing Director of Investment Banking Services at Goldman Sachs & Co. and as Executive Vice President of Corporate Development and Chief Financial Officer (“CFO”) of Clark USA, an independent oil refining and marketing company. Ms. Clark is a member of the Boards of Nutrien Ltd, Fortis Inc., Newmont Corporation and Sanctuary for Families, a New York-based not-for-profit organization. She previously served on the Boards of Elizabeth Arden, Inc. and Primary Care Development Corp. She graduated from Queens University with a Bachelor of Arts in Economics. She is also qualified as a Charted Professional Accountant. We believe Ms. Clark is qualified to serve as a member of our Board due to her financial management expertise and experience managing the operations of an international commercial and industrial energy business as well as her significant experience serving on other public company boards. In addition, Ms. Clark contributes to the gender diversity of our Board.
Courtney M. Enghauser
Ms. Enghauser has served as a member of our Board since the Spin-Off and has served as the CFO of Heartland Home Services, a residential HVAC, plumbing, electrical and air quality services business, since January 2021. Ms. Enghauser previously served as CFO of Agility Global Holdings, a private equity owned platform acquiring and operating businesses in the automotive plastics sector, from November 2019 to 2020. Prior to her current role, she advised private equity firms on acquisitions and transactions in a variety of industries. From April 2013 to June 2017, she was the CFO of Sensus, a leading provider of smart meters, network technologies, and advanced data analytics services that was acquired by Xylem Inc. in 2016. Prior to her time at Sensus, Ms. Enghauser was the CFO of Kinetek, Inc., where she was responsible for the financial management, treasury, and reporting of a global portfolio company consisting of eleven operating subsidiaries and sixteen holding companies in the electric motors and controls industries located throughout the world. Ms. Enghauser also served as CFO of other businesses and held a variety of other financial positions including Director of Finance, Mergers and Acquisitions, and Corporate Controller. She started her career as an Auditor at PricewaterhouseCoopers. Ms. Enghauser graduated with a Bachelor of Science in Accounting from Indiana University and is a Certified Public Accountant. We believe Ms. Enghauser is qualified to serve on our Board due to her significant experience in the technology sector and her expertise in global financial strategy. In addition, Ms. Enghauser contributes to the gender diversity of our Board.
SusanL.Main
Ms. Main has served as a member of our Board since the Spin-Off and has served as the Senior Vice President and CFO of Teledyne Technologies Incorporated, a leading provider of sophisticated instrumentation, digital imaging products and software, aerospace and defense electronics, and engineered systems, since November 2012. Prior to her current role, Ms. Main was Teledyne’s Vice President and Controller for approximately nine years. From 1999 to 2004, Ms. Main served as Vice President and Controller for Water Pik Technologies, Inc. Ms. Main also held numerous financial roles at the former Allegheny Teledyne Inc. within its government, industrial and commercial segments. Earlier in her career, Ms. Main held financial and auditing roles at the former Hughes Aircraft Company. Ms. Main is a member of the Board of Ashland Global Holdings, Inc., where she serves as the Chairperson of the Audit Committee and as a member of the Governance and Nominating Committee. Ms. Main is a member of the National Association of Corporate Directors and Women Corporate Directors. Ms. Main graduated from California State University, Fullerton with a Bachelor of Arts in Business Administration.We believeMs. Main is qualified to serve on our Board based on her extensive leadership experiencein financialmanagement, including in a leading global technology company. In addition, Ms. Main contributes to the gender diversity of our Board.
Carsten J. Reinhardt
Mr. Reinhardt has served as a member of our Board since the Spin-Off. Mr. Reinhardt has served as an independent Senior Advisor since October 2016. From October 2016 to February 2019, Mr. Reinhardt served as Senior Advisor for RLE International, a development and service provider to the automotive industry. From July 2012 to October 2016, Mr. Reinhardt was President and CEO of Voith Turbo GmbH & Co. KG, a supplier of advanced powertrain technologies to the rail, commercial vehicle, marine, power generation, oil & gas and mining industries. Prior to that, Mr. Reinhardt served as COO of Meritor Inc., a manufacturer of automobile components, from 2008 to 2011 and as President of Meritor’s Commercial Vehicle Division from 2006 to 2008. Before joining Meritor, Mr. Reinhardt served as President and CEO of Detroit Diesel Corp., a diesel engine manufacturer, from 2003 to 2006, following 10 years in a variety of management positions at Daimler Trucks North America, a manufacturer of commercial vehicles. Mr. Reinhardt started his career as management trainee at Daimler AG in Stuttgart, Germany. Mr. Reinhardt currently sits on the Board of SAF-Holland S.A., where he serves as a member of the audit committee. He also sits on the Boards of several private companies, including GRUNDFOS Holding A/S, Tmax Holding GmbH and Beinbauer Automotive GmbH. Mr. Reinhardt holds a Bachelor’s degree in Mechanical Engineering from Esslingen Technical University in Germany and a Master of Science degree in Automobile Engineering from the University of Hertfordshire, UK. We believe Mr. Reinhardt is qualified to serve on our Board due to his extensive experience and operational expertise in the automotive industry across global markets.
Jérôme Stoll
Mr. Stoll has served as a member of our Board since March 2020. Mr. Stoll served in numerous senior executive roles at Groupe Renault from 1980 to 2020, including as President of Renault Sport Racing from 2013 to 2020; Chief Performance Officer from 2013 to 2016; Executive Vice President, Sales and Marketing from 2009 to 2016; Chief Executive Officer of Renault DO Brazil from 2006 to 2009; and Chief Executive Officer of Renault Samsung Motors, South Korea from 2000 to 2006. Mr. Stoll also serves on various Strategic Committees in the automotive sector and is the Vice President of CEDEP, a training organization for high potential executives. Mr. Stoll received an MBA from Ecole Superieure de Commerce de Paris and an Executive MBA from HEC-CPA. We believe Mr. Stoll is qualified to serve on our Board due to his extensive management experience in the automotive industry, his global business experience and his strong leadership skills.
Scott Tozier
Mr. Tozier has served as a member of our Board since the Spin-Off and has been the CFO and Executive Vice President of Albemarle Corporation, a specialty chemicals company, since January 2011. Prior to joining Albemarle, he served as Vice President of Finance, Transformation and Operations of Honeywell, where he was responsible for Honeywell's global financial shared services and best practices management. His 16-year career with Honeywell spanned senior financial positions in the United States, Asia Pacific and Europe. Mr. Tozier currently serves as a member of the Boards for MARBL and Volta Energy Technologies. He is also a trustee for Blumenthal Performing Arts, and on the Board of Advisors for Junior Achievement of the Carolinas. He holds a Bachelor of Business Administration in Accounting from the University of Wisconsin-Madison. Mr. Tozier holds an MBA from the University of Michigan, where he graduated with honors. He is a Certified Public Accountant. We believe Mr. Tozier is qualified to serve on our Board due to his experience asa formerexecutivewithin Honeywell, a global public company,as well as his financialmanagement skills given his background as a CFOand a CertifiedPublic Accountant.
Information about our Executive Officers
The followingtablepresents informationconcerningour executive officers.
Name
| | Age
| | | Position
| | In Current Position Since
|
Olivier Rabiller
| | | 50
| | | Director, President & Chief Executive Officer
| | October 2018
|
Sean Deason
| | | 49
| | | Senior Vice President & Chief Financial Officer
| | June 2020
|
Craig Balis
| | | 56
| | | Senior Vice President & Chief Technology Officer
| | October 2018
|
Peter Bracke
| | | 55
| | | Vice President & Chief Transformation Officer
| | September 2019
|
Daniel Deiro
| | | 48
| | | Senior Vice President, Global Customer Management & General Manager Japan/Korea
| | October 2018
|
Thierry Mabru
| | | 53
| | | Senior Vice President, Integrated Supply Chain
| | October 2018
|
Jérôme Maironi
| | | 55
| | | Senior Vice President, General Counsel & Corporate Secretary
| | October 2018
|
Fabrice Spenninck
| | | 52
| | | Senior Vice President & Chief Human Resources Officer
| | October 2018
|
The following are brief biographies describing the backgrounds of our executive officers. The Company and certain of its affiliates filed a petition under the federal bankruptcy laws on September 20, 2020, at which time all of the below individuals were serving as executive officers of the Company.
The biography for Mr. Rabiller appears above on page 131.
Sean Deason
Mr. Deason has served as our Senior Vice President and Chief Financial Officer since June 2020. Mr. Deason previously served as Chief Financial Officer and Controller of WABCO Holdings Inc. (“WABCO”), a manufacturer of technology systems for commercial vehicles, from April 2019 to June 2020. Prior to that, Mr. Deason was WABCO’s Vice President Controller and Investor Relations from June 2015 to April 2019. Prior to joining WABCO, Mr. Deason spent four years with Evraz N.A., a steel products manufacturer, where he served as Vice President, Financial Planning & Analysis. Prior to Evraz, Mr. Deason spent twelve years with Lear Corporation, a global automotive technology manufacturer, where he served as Director, Finance, Corporate Business Planning & Analysis, Director, Finance, Asia Pacific Operations, and Assistant Treasurer, and held various other positions of increasing responsibility since August 1999. Mr. Deason holds a Masters of International Management from Thunderbird School of Global Management and is a Certified Management Accountant.
Craig Balis
Mr. Balis has served as our Senior Vice President and Chief Technology Officer since the Spin-Off. From June 2014 until such appointment, Mr. Balis was the Vice President and Chief Technology Officer of Honeywell Transportation Systems. From 2008 to 2014, Mr. Balis was the Vice President of Engineering of Honeywell Transportation Systems. Mr. Balis has a Bachelor of Science and Master’s degree in Engineering from the University of Illinois.
Peter Bracke
Mr. Bracke has served as Vice President and Chief Transformation Officer since June 2020. From September 2019 to June 2020, Mr. Bracke served as our Vice President and Interim Chief Financial Officer. Previously, Mr. Bracke was Vice President, FP&A and Business Finance for Garrett where he was responsible for the financial planning and control of operational and commercial activities from the Spin-Off to September 2019. Prior to this, Mr. Bracke held various senior-level roles within multiple divisions at Honeywell. During his more than 20-year tenure at Honeywell, Mr. Bracke was CFO for Honeywell Homes & Buildings Technologies and CFO for Honeywell Transportation Systems, which was renamed Garrett following the Spin Off. Prior to joining Honeywell, Mr. Bracke was an auditor at KPMG. He received his undergraduate degree in Business Administration and his Master's degree in Accountancy from the University of Ghent in Belgium.
Daniel Deiro
Mr. Deiro has served as our Senior Vice President, Global Customer Management, and General Manager Japan/Korea since the Spin-Off. From August 2014 until such appointment, Mr. Deiro was the Vice President of Customer Management and General Manager for Honeywell Transportation Systems for Japan and Korea. From 2012 until 2014, Mr. Deiro was a Senior Customer Management Director at Honeywell Transportation Systems. Mr. Deiro has a degree in Automotive Engineering from Haute école spécialisée bernoise, Technique et lnformatique (BFH-TI), Biel, Switzerland.
Thierry Mabru
Mr. Mabru has served as our Senior Vice President, Integrated Supply Chain since the Spin-Off. From March 2013 until such appointment, Mr. Mabru was the Vice President of Global Integrated Supply Chain for Honeywell Transportation Systems. From 2011 until 2013, Mr. Mabru was Senior Director of Global Advanced Manufacturing Engineering for Honeywell Transportation Systems. From 2006 to 2011, Mr. Mabru was Director of the Program Management Office of Honeywell Aerospace EMEAI. Mr. Mabru currently serves as a member of the Board of Friction Material Pacific (FMP) Group Australia PTY Limited and the Board of Friction Material Pacific (FMP) Group PTY Limited. Mr. Mabru holds a Master of Science degree from the Ecole Nationale de Mecanique et d'Aerotechniques (ISAE/ENSMA), Poitier, France.
Jérôme Maironi
Mr. Maironi has served as our Senior Vice President, General Counsel and Corporate Secretary since the Spin-Off. Prior to the Spin-Off, Mr. Maironi served as the Vice President of Global Legal Affairs for Honeywell Performance Materials and Technologies for approximately five years. Mr. Maironi received a post-graduate degree in Law & Practice of International Trade and a Master of Law from the University Rene Descartes, Paris, France. Mr. Maironi is a member of the Association Francaise des Juristes d'Entreprise and has also passed the French Bar Exam. Mr. Maironi graduated with an Executive MBA from INSEAD, Fontainebleau, France.
Fabrice Spenninck
Mr. Spenninck has served as our Senior Vice President and Chief Human Resources Officer since the Spin-Off. From August 2015 until such appointment, Mr. Spenninck was Vice President of Human Resources of Honeywell Transportation Systems. From 2013 to 2015, Mr. Spenninck was Vice President of Labor and Employee Relations and, from 2011 to 2013, he was Senior Director of Human Resources (One Country Leader) in France and North Africa at Honeywell. Mr. Spenninck holds a Master’s degree in Human Resources and Labor Relations from the University of Montpellier, France.
Family Relationships
There are no family relationships among any of our executive officers or directors.
Codeof Business Conduct
The Board has adopted a writtencode of businessconduct (the “Code of Conduct”), which applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. Our Code of Conduct is available on our website www.garrettmotion.com in the “Investors” section under “Leadership & Governance.” In addition, we intend to post on our website all disclosures that are required by law or applicable listing rules concerning any amendments to, or waivers from, any provision of our Code of Conduct.
Governance Documents
We believe that good corporate governance is important to ensure that Garrett is managed for the long-term benefit of our stockholders. Our Nominating and Governance Committee will periodically review and reassess our Governance Guidelines, other governance documents and overall governance structure. Complete copies of our Governance Guidelines and committee charters are available on the “Investors—Leadership & Governance” section of our website at www.garrettmotion.com. Alternatively, you may request a copy of any of these documents by writing to Garrett Motion Inc., Attention: Jérôme Maironi, Secretary, La Pièce 16, Rolle, Switzerland 1180.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our executive officers and directors, our principal accounting officer and persons who beneficially own more than 10% of our common stock to file with the SEC reports of their ownership and changes in their ownership of our common stock. To our knowledge, based solely on review of the copies of such reports and amendments to such reports with respect to the year ended December 31, 2020this Item will be set forth in our 2024 Proxy Statement, which will be filed with the SECSecurities and on written representations by our directors and executive officers, all required Section 16 reports under the Exchange Act for our directors, executive officers, principal accounting officer and beneficial owners of greaterCommission no later than 10% of our common stock were filed on a timely basis during the year ended120 days after December 31, 2020 except that2023. For the following forms were filed late: one Form 4 for Peter Bracke reporting one transaction; one Form 4 for Cyrus Capital Partners reporting one transaction; and one Form 4 for Attestor Value Master Fund reporting one transaction.
Audit Committee and Audit Committee Financial Expert
We have a separately-designated standing audit committee (“Audit Committee”). Scott A. Tozier, Carlos M. Cardoso, Courtney M. Enghauser and Susan L. Main arelimited purpose of providing the members ofinformation necessary to comply with this Item 10, the Audit Committee. Mr. Tozier serves as the Chair of the Audit Committee. Although we are no longer listed on the New York Stock Exchange (“NYSE”), our Board continues to apply the NYSE independence criteria in assessing director independence. All members of the Audit Committee meet the independence standards of the NYSE and the SEC, as well as the financial literacy requirements of the NYSE. The Board has determined that each of Mr. Tozier, Mr. Cardoso, Ms. Enghauser and Ms. Main qualifies as an “audit committee financial expert” as defined2024 Proxy Statement is incorporated herein by SEC rules. No Audit Committee member currently serves on the audit committees of more than three public companies.
this reference.
Item 11. Executive Compensation
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Our Compensation Discussion and Analysis describes the principles underlying the material components of the executive compensation programs for our Named Executive Officers who are named in the “Summary Compensation Table” below and the factors relevant to an analysis of the compensatory policies and decisions. In 2020, our Named Executive Officers were:
| •
| Olivier Rabiller, President and Chief Executive Officer;
|
| •
| Sean Deason, Senior Vice President and Chief Financial Officer;
|
| •
| Peter Bracke, Chief Transformation Officer and former Vice President and Interim Chief Financial Officer;
|
| •
| Craig Balis, Senior Vice President and Chief Technology Officer;
|
| •
| Jérôme Maironi, Senior Vice President, General Counsel, and Corporate Secretary; and
|
| •
| Thierry Mabru, Senior Vice President, Integrated Supply Chain.
|
In June 2020, the Company appointed Sean Deason as Senior Vice President and Chief Financial Officer of the Company. In connection with Mr. Deason’s appointment, Mr. Bracke stepped down as our Vice President and Interim Chief Financial Officer and was appointed as our Chief Transformation Officer, effective as of the date of Mr. Deason’s appointment.
Executive Summary
2020 Program Changes
In considering the design of our 2020 executive compensation program, the Compensation Committee undertook a thorough evaluation of the metrics that align with the Company’s long-term strategy for inclusion in our short-term incentive plan (“ICP”) and Long-Term Incentive Plan. The evaluation included analysis of different performance metrics and their alignment with our value proposition to shareholders, a review of the performance metrics used by our peer group, and an assessment of independent performance metrics versus modifier structures as well as absolute goals versus relative goals. The work also considered the input received during a series of shareholder outreach meetings held in 2019. Effective for fiscal year 2020, we modified our 2020 executive compensation program to include a higher percentage of Performance Stock Units (“PSUs”) granted under our 2020-2022 Long-Term Incentive Plan (“LTI Plan”), as well as included performance goals linked to relative and absolute Total Shareholder Return in our PSU awards granted to our Named Executive Officers pursuant to the LTI Plan, as described further under “Equity Awards – 2020-2022 Long Term Incentive Plan” below, both of which were modifications from our 2019 executive compensation program. However, as discussed further below, the Compensation Committee subsequently determined to modify the fiscal year 2020 compensation program such that our executive officers, including our Named Executive Officers, waived their participation in the 2020 ICP and forfeited their 2020 awards granted under our LTI Plan.
In light of the unprecedented and ongoing market uncertainties related to the global COVID-19 pandemic, in April 2020, the Compensation Committee approved temporary reductions in the annual base salaries of all executive officers, including certain of our Named Executive Officers. Effective April 1, 2020, the annual base salaries for Messrs. Rabiller, Bracke, Balis, Maironi and Mabru were reduced by 20%, which reduction remained in effect through the second quarter of 2020. Although annual base salaries were restored after the second quarter reduction, for September 2020, the Compensation Committee approved a 10% reduction (of the original 2020 annual base salaries) for all of our Named Executive Officers.
Additionally, for these same reasons, and in connection with the Board’s evaluation of strategic alternatives for the Company, in June 2020, the Compensation Committee determined to conduct a review of the 2020 compensation program to ensure that the program appropriately aligns with the Company’s current goals and supports the stability and motivation of the Company’s workforce in light of the anticipated Restructuring (as defined below). Based on this review, the Compensation Committee decided it was in the Company’s best interests to redesign the Company’s 2020 compensation program to more effectively retain and motivate key employees to successfully navigate through the challenging business environment. Under the redesigned program, the Compensation Committee approved one-time cash continuity awards to the Named Executive Officers (other than Mr. Deason) and other key individuals who participated in the 2020 ICP and LTI Plan. As a condition to the receipt of these awards, the recipients waived their participation in the 2020 ICP and forfeited the equity awards granted in February 2020 under the LTI Plan, effective July 1, 2020 and as further described under “Elements of Executive Compensation”. As described further below, Mr. Deason joined our Company in June 2020 during the Company’s Restructuring and therefore was not eligible to participate in the 2020 ICP. Additionally, Mr. Deason did not receive any grants under the LTI Plan in 2020. Since Mr. Deason was not a participant under our 2020 ICP nor the LTI Plan, he did not receive a continuity award.
Compensation Program Highlights
Our overall compensation program is structured to attract, motivate and retain highly qualified executive officers by paying them competitively, consistent with our success and their contribution to that success. Our ability to excel depends on the skill, creativity, integrity and teamwork of our employees. We believe compensation should be structured to reward short-term and long-term business results and exceptional performance, and most importantly, maximize stockholder value.
The following table highlights key features of our executive compensation program. We believe these practices promote good governance and serve the interests of our stockholders.
What We Do
| | What We Don’t Do
|
✓
| Executive and non-employee director stock ownership requirements
| | X
| No single-trigger cash severance or benefits in connection with a change in control
|
✓
| Compensation programs include an oversight process to identify risk
| | X
| No guaranteed equity compensation or salary increases for executive officers
|
✓
| Independent Compensation Committee oversees and evaluates executive compensation programs against competitive practices, regulatory developments and corporate government trends
| | X
| No excise tax gross-up provisions
|
✓
| Independent Compensation Committee advisor
| | X
| No repricing of stock option awards and our plans expressly forbid exchanging underwater options for cash without stockholder approval
|
✓
| Clawback policy for executive officers
| | X
| No hedging or pledging of our equity securities
|
| | | X
| No dividends or dividend equivalents paid on unearned performance stock units
|
2020 Say-on-Pay Vote
At our 2020 annual meeting, approximately 97% of the votes cast by our shareholders approved, on an advisory basis, the compensation of our Named Executive Officers, which we believe affirms our shareholders’ support of our executive compensation program.
Determination of Process
Our Compensation Committee oversees and administers our executive compensation program, with input from our management team and an independent compensation consultant.
Process and Timeline for Designing and Delivering Compensation
The Compensation Committee is responsible for establishing and administering programs and procedures for annual and long-term executive compensation and assessing organizational structure and the development of our executives. The Compensation Committee follows a robust process to review and approve all compensation decisions regarding the Named Executive Officers. These decisions are informed by peer group and market data and supported by the review and advice of an independent compensation consultant.
Role of Management
To aid the Compensation Committee in making its determination, our Chief Executive Officer provides recommendations annually to the Compensation Committee regarding the compensation of all other executive officers (i.e., other than himself) based on the overall corporate achievements during the period being assessed and his knowledge of the individual contributions to our success by each of the other Named Executive Officers. Our Named Executive Officers do not play a role in their own compensation determinations other than discussing their performance with our Chief Executive Officer, or in the case of the Chief Executive Officer, with the Compensation Committee and Chairperson of the Board.
Our senior management also supports the Compensation Committee by developing recommendations for specific award designs, including metric assessment, performance goal-setting, and program administration. While members of our senior management may attend the meetings of the Compensation Committee, they do not attend executive sessions and do not attend the portions of meetings during which their own compensation is discussed.
Role of Independent Compensation Consultant
Our Compensation Committee has retained Semler Brossy as its independent compensation consultant. Semler Brossy assists the Compensation Committee in its evaluation of the compensation provided to our Chief Executive Officer and other executive officers and the design of the compensation programs for Named Executive Officers. Semler Brossy generally attends Compensation Committee meetings and provides information, research and analysis pertaining to executive compensation and governance as requested by the Compensation Committee. Other than advising the Compensation Committee and senior management, as described above, Semler Brossy did not provide any services to the Company in 2020.
Additionally, in June 2020, the Compensation Committee retained Willis Towers Watson (WTW), an independent compensation consultant, to advise on common market practices regarding compensation programs during the Company’s financial restructuring to be implemented pursuant to a plan of reorganization under the Bankruptcy Code (the “Restructuring”). In 2020, WTW assisted the Compensation Committee by making recommendationsInformation with respect to the continuity awards for key employees, including our Named Executive Officers. Other than advising the Compensation Committee, WTW did not provide any services to the Company in 2020. For additional information on the Restructuring, see Note 2, Restructuring and Chapter 11 Proceedings of the Notes to the Consolidated Interim Financial Statementsthis Item will be set forth in our Annual Report.
The Compensation Committee has considered the independence of Semler Brossy and WTW, consistent with the requirements of the NYSE, and has determined that both Semler Brossy and WTW are independent. Further, pursuant to SEC rules, the Compensation Committee conducted a conflicts of interest assessment and determined that there is no conflict of interest resulting from retaining Semler Brossy or WTW. The Compensation Committee intends to reassess the independence of its advisors at least annually.
Executive Compensation Peer Group
Since 2019, Semler Brossy has worked with the Compensation Committee and management to develop a peer group of companies to be used for market comparison purposes in terms of executive pay levels and practices. For 2020, Semler Brossy assessed our peer group against the following characteristics, which are consistent with criteria historically reviewed:
| •
| Product Focus and Business Model;
|
| •
| Evolving Technology; and
|
The Compensation Committee was careful to construct a group based on the considerations above that, on the whole, captures Garrett’s global presence and talent market as well as its unique business dynamics. As a U.S.-listed but European-headquartered company that attracts talent globally, we decided to include both U.S. and European companies. For 2020, our peer group consisted of the following companies:
Company | | Exchange | | Country of HQ | | Primary Industry Classification | | Revenue ($Mil) | | | EBITDA Margin | | | Enterprise Value ($Mil) | | | Market Cap ($Mil) | | | Employee Count | |
US-Listed | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allison Transmission Holdings, Inc. | | NYSE | | US | | Construction Machinery & Heavy Trucks | | $ | 2,163 | | | 35% | | | $ | 7,209 | | | $ | 4,859 | | | | 3,700 | |
American Axle & Manufacturing Holdings, Inc. | | NYSE | | US | | Auto Parts & Equip. | | $ | 4,703 | | | 13% | | | $ | 4,042 | | | $ | 945 | | | | 20,000 | |
Autoliv | | NYSE | | Sweden | | Auto Parts & Equip. | | $ | 7,122 | | | 14% | | | $ | 9,751 | | | $ | 8,044 | | | | 59,423 | |
BorgWarner Inc. | | NYSE | | US | | Auto Parts & Equip. | | $ | 8,798 | | | 15% | | | $ | 10,324 | | | $ | 9,448 | | | | 29,000 | |
Cooper-Standard Holdings Inc. | | NYSE | | US | | Auto Parts & Equip. | | $ | 2,405 | | | 0% | | | $ | 1,290 | | | $ | 586 | | | | 28,000 | |
Dana Incorporated | | NYSE | | US | | Auto Parts & Equip. | | $ | 6,985 | | | 8% | | | $ | 5,225 | | | $ | 2,820 | | | | 36,300 | |
Delphi Technologies PLC | | NYSE | | UK | | Auto Parts & Equip. | | $ | 3,662 | | | 8% | | | $ | 3,140 | | | $ | 1,470 | | | | 19,000 | |
Gentex | | NasdaqGS | | US | | Auto Parts & Equip. | | $ | 1,602 | | | 29% | | | $ | 7,890 | | | $ | 8,315 | | | | 5,874 | |
Meritor, Inc. | | NYSE | | US | | Construction Machinery & Heavy Trucks | | $ | 3,044 | | | 7% | | | $ | 3,037 | | | $ | 2,018 | | | | 8,600 | |
Modine Manufacturing Company | | NYSE | | US | | Auto Parts & Equip. | | $ | 1,756 | | | 8% | | | $ | 1,055 | | | $ | 642 | | | | 11,300 | |
Sensata Technologies | | NYSE | | US | | Electrical Components & Equip. | | $ | 2,986 | | | 21% | | | $ | 10,685 | | | $ | 8,297 | | | | 21,050 | |
The Timken Company | | NYSE | | US | | Industrial Machinery | | $ | 3,518 | | | 19% | | | $ | 7,289 | | | $ | 5,830 | | | | 17,000 | |
Veoneer, Inc. | | NYSE | | Sweden | | Auto Parts & Equip. | | $ | 1,374 | | | (21)% | | | $ | 1,934 | | | $ | 2,377 | | | | 6,175 | |
Visteon Corporation | | NasdaqGS | | US | | Auto Parts & Equip. | | $ | 2,505 | | | 7% | | | $ | 3,704 | | | $ | 3,494 | | | | 11,000 | |
Non-US-Listed | | | | | | | | | | | | | | | | | | | | | | | | | | |
Autoneum Holding AG | | SWX | | Switzerland | | Auto Parts & Equip. | | $ | 1,977 | | | 3% | | | $ | 1,726 | | | $ | 849 | | | | 12,479 | |
ElringKlinger AG | | DB | | Germany | | Auto Parts & Equip. | | $ | 1,981 | | | 8% | | | $ | 1,897 | | | $ | 1,228 | | | | 9,770 | |
LEONI AG | | DB | | Germany | | Auto Parts & Equip. | | $ | 4,752 | | | (6)% | | | $ | 2,042 | | | $ | 266 | | | | 95,222 | |
Martinrea International Inc. | | TSX | | Canada | | Auto Parts & Equip. | | $ | 2,418 | | | 8% | | | $ | 1,642 | | | $ | 936 | | | | 15,000 | |
TI Fluid Systems plc | | LSE | | UK | | Auto Parts & Equip. | | $ | 3,248 | | | 7% | | | $ | 2,860 | | | $ | 1,742 | | | | 27,300 | |
In addition to the 19 companies above, the Compensation Committee identified three additional European-headquartered companies – Aptiv, TE Connectivity and Valeo – to monitor outside of the peer group. Based on Semler Brossy’s assessment, we revised our 2020 peer group to remove three companies (i.e., Tenneco Inc., Tower International, Inc. and WABCO Holdings Inc.) since each was acquired in separate transactions during 2019 and no longer fits the selection criteria.
The Compensation Committee intends to continually evaluate the peer group to ensure that it remains an appropriate market reference going forward and continues to suit our business needs.
In addition to reviewing information regarding the peer group, our Compensation Committee also leverages broader market survey and data sources to guide the establishment of our executive compensation programs.
Elements of Executive Compensation
The following is a discussion of the primary elements of 2020 compensation for each of our Named Executive Officers as determined by our Compensation Committee. All amounts are shown in USD. Certain amounts payable to one or more of our Named Executive Officers represent compensation paid in Swiss Francs (including salary and bonuses) and were converted to USD using the average exchange rate for the year-ended December 31, 2020 under GAAP of 1 USD to 0.94023 CHF, unless otherwise noted.
Base Salary
Base salaries are intended to attract and compensate high-performing and experienced leaders and are determined based on performance, scope of responsibility, and years of experience with reference made to relevant competitive market data (but not targeted to a specific competitive position).
In light of the uncertainties related to the global COVID-19 pandemic, in April 2020, the Compensation Committee approved temporary reductions in the annual base salaries of all executive officers, including certain of our Named Executive Officers. Effective April 1, 2020, the annual base salaries for Messrs. Rabiller, Bracke, Balis, Maironi and Mabru were reduced by 20%, which remained in effect through the second quarter of 2020. Effective for the month of September 2020, the Compensation Committee approved another 10% annual base salary reduction for all of our Named Executive Officers.
In addition, in June 2020, the Company appointed Mr. Deason as Senior Vice President and Chief Financial Officer of the Company. Pursuant to Mr. Deason’s employment agreement, Mr. Deason’s annual base salary is $606,235. In connection with Mr. Deason’s appointment, Mr. Bracke stepped down as our Vice President and Interim Chief Financial Officer and was appointed as our Chief Transformation Officer, effective as of the date of Mr. Deason’s appointment. In connection with these changes, Mr. Bracke and Garrett Motion Sàrl, one of our subsidiaries, entered into an amendment to Mr. Bracke’s employment agreement, pursuant to which his annual base salary was decreased from $473,919 to $425,428, effective July 1, 2020.
The following table sets forth the base salaries for each of our Named Executive Officers for 2020. The amounts in the table show the salaries on a non-reduced basis. As described above, the base salaries were reduced by 20% for the second quarter of 2020 and reduced by 10% for the month of September 2020. The actual base salaries paid to each of our Named Executive Officers for 2020, taking into account reductions, are disclosed in the Summary Compensation Table below.
Named Executive Officer
| | 2020 Annual
Base Salary ($)
|
Olivier Rabiller
| | | 957,213
| | |
Sean Deason
| | | 606,235
| | (1)
|
Peter Bracke
| | | 425,428
| | (2)
|
Craig Balis
| | | 425,428
| | |
Jérôme Maironi
| | | 478,606
| | |
Thierry Mabru
| | | 430,746
| | |
(1)
| Mr. Deason joined our Company in June 2020.
|
(2)
| Effective July 1, 2020, Mr. Bracke’s annual base salary was decreased from $473,919 to $425,428.
|
Continuity Awards
As discussed above in the “Executive Summary—2020 Program Changes,” in June 2020, in response to the unprecedented and ongoing market uncertainty resulting from the COVID-19 pandemic and in connection with the Board’s evaluation of strategic alternatives for the Company, the Compensation Committee determined to redesign the Company’s 2020 compensation program to ensure effective retention and motivation of the Company’s key employees. Under the revised program, the Compensation Committee approved one-time cash continuity awards in the following amounts to ensure the retention of the key individuals who participated in the 2020 ICP and LTI Plan, including the Named Executive Officers (other than Mr. Deason):
Named Executive Officer
| | Continuity
Award
Value ($)
| |
Olivier Rabiller
| | | 1,914,425
| |
Sean Deason
| | | —
| |
Peter Bracke
| | | 236,960
| |
Craig Balis
| | | 553,056
| |
Jérôme Maironi
| | | 622,188
| |
Thierry Mabru
| | | 559,969
| |
As a condition to the receipt of the continuity awards, the key individuals who participated in the 2020 ICP and LTI Plan, including certain of our Named Executive Officers, waived their participation in the 2020 ICP and forfeited the equity awards granted in February 2020 under the LTI Plan, each effective July 1, 2020 and as further described below. The continuity awards are subject to repayment if prior to June 25, 2021, the executive resigns without “good reason”, or the Company terminates the executive’s employment for “cause” (each, as defined in the continuity award agreement).
As described further below, Mr. Deason joined our Company in June 2020 during the Company’s Restructuring and therefore was not eligible to participate in the 2020 ICP. Additionally, Mr. Deason did not receive any grants under the LTI Plan. Since Mr. Deason was not a participant under our 2020 ICP or LTI Plan, he did not receive a continuity award.
Short-Term Incentive Compensation Plan (“ICP”) Awards
ICP awards are intended to motivate and reward executives to achieve annual corporate, strategic business group and functional goals in key areas of financial and operational performance. Each Named Executive Officer’s target ICP opportunity is based upon a percentage of base salary.
In February 2020, the Compensation Committee, after taking into consideration industry and market data, mix of target compensation for the Named Executive Officers, and other elements of their compensation, determined to increase the 2020 ICP target annual incentive percentages for Mr. Balis to 60% from 55%, Mr. Maironi to 65% from 60% and Mr. Mabru to 60% from 55%. The ICP target annual incentive percentage for Mr. Rabiller remained unchanged for 2020.
Additionally, effective July 1, 2020, Mr. Bracke’s ICP target annual incentive percentage was decreased from 60% to 50% in connection with stepping down as Interim Chief Financial Officer and his appointment as our Chief Transformation Officer.
The 2020 target ICP opportunity for each Named Executive Officer, as a percentage of base salary, are set forth below:
Named Executive Officer
| | 2020
Target ICP
Opportunity
(% of Base
Salary)
| | |
Olivier Rabiller
| | | 125
| %
| |
Sean Deason
| | ___`
|
| (1)
|
Peter Bracke
| | | 50
| %
| (2)
|
Craig Balis
| | | 60
| %
| |
Jérôme Maironi
| | | 65
| %
| |
Thierry Mabru
| | | 60
| %
| |
(1)
| Mr. Deason joined our Company in June 2020 during the Company’s Restructuring and therefore was not eligible to participate in the 2020 ICP. Pursuant to Mr. Deason’s employment agreement, Mr. Deason’s ICP target for future ICP’s the Company may implement is 80% of his annual base salary.
|
(2)
| Effective July 1, 2020, Mr. Bracke’s ICP target annual incentive percentage was decreased from 60% to 50% in connection with stepping down as Interim Chief Financial Officer and his appointment as our Chief Transformation Officer.
|
Corporate Performance
For 2020, the ICP was designed so that payout was based in part on the achievement of objective Company performance criteria (the “Company Performance Portion”), which represented 75% of the award opportunity, and in part on the achievement of individual performance objectives (the “Individual Performance Portion”), which represented the remaining 25% of the award opportunity. In addition, the 2020 ICP was designed so that Award opportunities under the Company Performance Portion were based on the achievement of two financial performance criteria: Adjusted EBITDA Margin and Adjusted Free Cash Flow Conversion (each, as defined below), weighted 40% and 60%, respectively. In 2019, we utilized a third performance metric, Organic Revenue Growth, which we removed from our 2020 ICP because our Compensation Committee wanted to incentivize focusing in the near-term on generating higher margins than competitors and maximizing cash flow to deleverage and reinvest back into the Company.
Performance goals for each metric were established at threshold, target and maximum levels with intermediate inflections between threshold and target as well as between target and maximum. Payout for achievement at or above maximum for each metric was capped at 200% of target, and achievement below threshold would have resulted in no payout. Straight-line interpolation would have been used to calculate the 2020 ICP payout associated with actual results falling between goals. The goals were set at levels that were expected to be challenging but achievable at the outset of the year. The following table sets forth the applicable goals for each measure:
Performance Criteria | | Weighting | | | Threshold (25%) | | | (50%) | | | 75% | | | Target (100%) | | | 125% | | | 150% | | | Maximum (200%) | |
Adjusted EBITDA Margin(1) | | 40% | | | 15% | | | 15.4% | | | 15.7% | | | 16.0% | | | 16.4% | | | 16.7% | | | 17.5% | |
Adjusted Free Cash Flow Conversion(2) | | 60% | | | 85% | | | 90% | | | 95% | | | 100% | | | 105% | | | 110% | | | 120% | |
(1)
| Adjusted EBITDA Margin is defined as Adjusted EBITDA over net sales. Adjusted EBITDA is defined as the earnings before interest, taxes, depreciation and amortization, as adjusted for indemnification obligations to Honeywell, stock compensation expense, restructuring costs and foreign exchange (gain) loss on debt, net of related hedging (gain) or loss.
|
(2)
| Adjusted Free Cash Flow is defined as cash from operations less expenditures for property plant and equipment excluding indemnity and mandatory transition tax related payments to Honeywell and potential M&A related cash outflows. Adjusted Free Cash Flow Conversion is defined as Adjusted Free Cash Flow over Adjusted Net Income. Adjusted Net Income is defined as our net income (loss), as adjusted for special tax matters, indemnification obligations to Honeywell, litigation fees and restructuring costs.
|
Individual Performance
For 2020, the ICP was designed so that payouts under the Individual Performance Portion were based on the Compensation Committee’s assessment of each executive’s individual performance against their objectives established at the beginning of the fiscal year specifically related to the categories of differentiated technology, global presence and capabilities (operational excellence), customer experience with each such goal comprising 15% of the Individual Performance Portion, as well as pre-established strategic goals which comprised 10% of the Individual Performance Portion. Individual objectives for the Named Executive Officers are typically developed during the Company’s annual strategic planning to ensure rigor and business alignment, and the year-end performance assessment is performed using a formal process that matches actual performance and behaviors against established expectations.
Each of the Named Executive Officers, other than Mr. Deason, had individualized performance goals for 2020 as follows:
| •
| Mr. Rabiller was responsible for achieving certain corporate, financial, strategic and operational objectives, including enhancing the Company’s technologies and capabilities portfolio; expanding Garrett’s global presence by developing customer experience initiatives; strengthening succession plans and driving additional training and coaching to enhance leadership capabilities and support Garrett’s continued transformation; and was also responsible to establish the strategic alternatives roadmap for the future of Garrett and implement the right approach for the financial long term objectives of the Company.
|
| •
| While Mr. Bracke served as our Vice President and Interim Chief Financial Officer through June 2020, he was responsible for achieving certain financial objectives across the organization, including enhancing the Company’s financial performance, financial operations and investor communications; enhancing the balance sheet capability to provide for long-term growth and flexibility; and leading investor communications for enhanced shareholder engagement. In connection with Mr. Deason’s appointment as Senior Vice President and Chief Financial Officer of the Company in June 2020, Mr. Deason assumed Mr. Bracke’s responsibilities.
|
| •
| Mr. Balis’ goals included certain strategic and operational objectives, including the successful development of a breakthrough technologies portfolio; launching new technologies successfully with optimal productivity to the market; and rebalancing internal resources to support current and upcoming technologies.
|
| •
| Mr. Maironi’s goals consisted of continuing to implement integrity and compliance processes for the Company overseeing and advising on the Company’s corporate governance and risk management strategies; reviewing the Honeywell & Garrett Indemnity Agreement to advise and coordinate with the Chief Executive Officer and Chief Financial Officer on potential actions regarding the ongoing dispute with Honeywell; and enhancing governance processes and organization for a stand-alone public company.
|
| •
| Mr. Mabru’s goals included implementing the Company’s operational objectives regarding supply chain productivity and efficiency; reviewing the Company’s suppliers portfolio to ensure functional excellence; enhancing the Company’s strategy with respect to materials and supplies savings; optimizing the Company’s global real estate footprint; and deploying Garrett’s Excellence Model (GEM) to enhance productivity and efficiency at all levels.
|
As described above, as a condition to receipt of the continuity awards, effective July 1, 2020, the Named Executive Officers (other than Mr. Deason who was not a participant in the 2020 ICP) waived their participation in the 2020 ICP, and subsequently our Named Executive Officers did not receive a payout under the Company Performance Portion or the Individual Performance Portion of the 2020 ICP.
Retention and Sign on Bonuses
In May 2020, in connection with Mr. Bracke stepping down as Interim Chief Financial Officer, the Compensation Committee approved the payment of a one-time retention bonus in the amount of $473,919 to Mr. Bracke. The retention bonus is subject to repayment in the event that Mr. Bracke resigns without “good reason”, or the Company terminates his employment for “cause” (each, as defined in the 2018 Stock Incentive Plan, or the “2018 Plan”), prior to March 31, 2021.
In addition, in June 2020, in conjunction with the commencement of his employment, Mr. Deason received a one-time sign-on bonus of $1,063,570 as part of his employment agreement. The sign-on bonus will be repaid by Mr. Deason if prior to the one-year anniversary of his start date, Mr. Deason’s employment is terminated for any reason. Mr. Deason also received a one-time relocation bonus equal to $159,535, which is subject to repayment if Mr. Deason terminates employment for any reason or if Garrett Motion Sàrl terminates Mr. Deason’s employment (other than for reason of redundancy) prior to the second anniversary of his start date.
Equity Awards
The goal of our long-term, equity-based incentive awards is to align the interests of our Named Executive Officers with the interests of our stockholders. Because vesting is based on continued service, our equity-based incentives also encourage the retention of our Named Executive Officers during the award vesting period.
2020-2022 Long Term Incentive Plan (“LTI Plan”)
Pursuant to the executives’ offer letters or employment agreements, each of Messrs. Rabiller, Deason, Bracke, Balis, Maironi and Mabru is eligible for an annual grant of equity awards with an initial target opportunity of 350%, 170%, 100%, 200%, 189% and 160%, respectively, of the executive’s annual base salary. Under our LTI Plan, the Compensation Committee granted awards, 60% in the form of PSUs and 40% in the form of Restricted Stock Units (“RSUs”) to our Named Executive Officers (other than Mr. Deason). For the LTI Plan, we increased the weighting of PSUs to 60% (previously 50% under the 2019-2021 Long-Term Incentive Plan (the “2019-2021 LTI Plan”)) and incorporated two relative metrics (Relative Organic Revenue Growth and relative TSR), as well as incorporated an Absolute TSR modifier for our PSU awards, in each case, in order to further align our Named Executive Officers’ compensation with shareholder outcomes. As a result of this update, we also eliminated the usage of stock options and increased the weighting of RSUs to 40% (previously 25% under the 2019-2021 LTI Plan).
The PSUs were eligible to vest based on the achievement of Relative Organic Revenue Growth, Adjusted Free Cash Flow Conversion, and relative TSR, weighted 30%, 30%, and 40%, respectively, over a three-year performance period from January 1, 2020 through December 31, 2022. Achievement at or above maximum for each metric was capped at 200% of target. Additionally, the PSUs were subject to an Absolute TSR modifier.
In establishing the goals for the PSUs under the LTI Plan, Management and the Compensation Committee determined to include two relative measures – Relative Organic Revenue Growth, and relative TSR – to emphasize peer outperformance in a competitive landscape. In addition, the introduction of TSR as 40% of the PSUs signifies our commitment to provide superior returns to our shareholders. Adjusted Free Cash Flow Conversion remains an important part of the PSUs to further emphasize deleveraging the Company over the long term. At the time the program was approved, the Compensation Committee believed these metrics were aligned with feedback received from stockholder outreach discussions and were critical for executing the Company’s near- and long-term strategy.
Further, for the PSUs under the LTI Plan, we added an Absolute TSR component that would deliver up to an incremental 50% of the target PSUs depending on the stock price at the end of the performance period such that the maximum number of PSUs that may be earned under the LTI Plan was capped at 250% of target. The Company determined that including an Absolute TSR component will serve as a powerful means to incentivize share price appreciation back to and above the Company’s opening price per share of common stock on the date of the Spin-Off, October 1, 2018 (the “Spin-Off Price”). To that end, threshold performance to start earning a portion of the component was set at a 20% premium over the 30-day stock price average ($8.38) preceding the grant date, and the price to earn maximum for this component was established at $20, approximately 14% higher than the Spin-Off Price and 139% higher than the 30-day average price on the date of grant. Payouts would have been linear between the threshold and maximum depending on the resulting stock price.
The RSUs were eligible to vest in full on the third anniversary of the grant date, subject to continued employment.
We made the following grants of PSUs and RSUs under the LTI Plan to our Named Executive Officers in 2020, prior to the forfeiture of such awards effective July 1, 2020 in connection with the grant of the continuity awards, as described above:
Named Executive Officer | | Aggregate Dollar- Denominated Value ($) | | | Target PSUs (#) | | | RSUs (#) | |
Olivier Rabiller | | | 3,542,195 | | | | 256,549 | | | | 185,324 | |
Sean Deason (1) | | | — | | | | — | | | | — | |
Peter Bracke | | | 400,860 | | | | 29,033 | | | | 20,973 | |
Craig Balis | | | 899,611 | | | | 65,156 | | | | 47,067 | |
Jérôme Maironi | | | 956,399 | | | | 69,269 | | | | 50,038 | |
Thierry Mabru | | | 728,682 | | | | 52,776 | | | | 38,124 | |
(1)
| Mr. Deason joined our Company in June 2020 and therefore was not eligible to receive any grants under the LTI Plan in 2020.
|
As described above, as a condition to the approval of the continuity awards, effective July 1, 2020, the Named Executive Officers (other than Mr. Deason, who had not yet commenced employment and, accordingly, was not granted LTI Plan awards in February 2020) forfeited the PSUs and RSUs granted in February 2020 pursuant to the LTI Plan and such awards were cancelled.
2019-2020 Performance Plan (“Replacement Plan”)
Under our 2019-2020 Performance Plan (the “Replacement Plan”), we issued PSUs and performance cash units (“PCUs”) to certain of our Named Executive Officers that will vest in full on March 4, 2021, subject to company performance and continued employment through each vesting date, consistent with the vesting schedule that applied to corresponding Honeywell Performance Plan awards previously granted for the 2018-2020 performance period. PCUs are dollar denominated and pay out in cash rather than equity. The PSUs and PCUs awarded under the Replacement Plan were scheduled to vest based on the achievement of Organic Revenue Growth, Adjusted EBITDA and Adjusted Free Cash Flow Conversion goals, weighted 20%, 40% and 40%, respectively, over a two-year performance period from January 1, 2019 through December 31, 2020. Based on the Company’s actual performance with respect to Organic Revenue Growth, Adjusted EBITDA and Adjusted Free Cash Flow Conversion for the period from January 1, 2019 through December 31, 2020, the threshold targets were not met and PSUs and PCUs granted under the Replacement Plan were not earned.
Other Company Compensation and Benefit Programs for Fiscal 2020
In addition to the annual and long-term compensation programs described above, we provided the Named Executive Officers with benefits and limited perquisites consistent with those provided to other Company executives, as described below.
Severance Benefits
Certain of our Named Executive Officers’ employment agreements and offer letters provide that the executive is eligible to receive severance payments upon a qualifying involuntary termination of employment, including in connection with a change in control of our Company (as opposed to solely upon a “single-trigger” change in control). Additionally, we maintain a severance policy under which our Named Executive Officers are eligible to receive severance payments and benefits upon a qualifying termination, including in connection with a change in control. We believe that these protections serve to encourage continued attention and dedication to duties without distraction arising from the possibility of a change in control and provide the business with a smooth transition in the event of such a termination of employment in connection with a transaction. These severance and change in control arrangements are designed to retain certain of our executives in these key positions as we compete for talented executives in the marketplace where such protections are commonly offered. For a detailed description of the severance provisions contained in our Named Executive Officers’ employment agreements and offer letters and our severance policy, see “Summary of Potential Payments and Benefits—Termination Events” below.
Garrett Supplemental Savings Plan
We maintain the Garrett Supplemental Savings Plan for our executives in the United States. This plan provides our executives with the opportunity to defer pre-tax compensation and incentive compensation that cannot be contributed to our 401(k) savings plan due to IRS limitations. These amounts may be matched by Garrett, and the amount of such matching contributions are at our discretion. Matching contributions, if any, are immediately vested. Deferred compensation balances earn interest through the Fidelity U.S. Bond Index Fund, which is subject to change on a daily basis. This plan is explained in detail in the section entitled “Nonqualified Deferred Compensation—Fiscal Year 2020.” Mr. Balis does not actively contribute to the plan (and we are not actively making any matching contributions to his account); however, his account continues to earn interest under the plan. Mr. Balis elected to receive benefits under this plan in a lump sum, which amount will be paid on the later of six months or in January of the year following his separation from service.
Retirement Plan
Our Named Executive Officers are eligible to participate in Garrett’s pension plan sponsored in Switzerland and named “Columna Sammelstiftung Client Invest Winterthur”. For a detailed description of Garrett’s Swiss pension plan, see “Pension-Benefits-Fiscal Year 2020” below.
Comprehensive Benefits Package
We provide a competitive benefits package to all full-time employees, including the Named Executive Officers, which includes life insurance benefits.
Other Benefits and Perquisites
In 2020, the Named Executive Officers were eligible for benefits under the Company’s car policy (in the form of a company car or cash allowance) as it generally applies to executives in Switzerland, as well as reimbursements associated with legal representation, family, tax, legal and financial planning expenses. In 2020, we also provided Mr. Deason with relocation assistance in connection with his relocation to Switzerland.
Additional Compensation Components
In the future, we may provide different and/or additional compensation components, benefits and/or perquisites to our Named Executive Officers to ensure that we provide a balanced and comprehensive compensation structure. We believe that it is important to maintain flexibility to adapt our compensation structure to properly attract, motivate and retain the top executive talent for which we compete. All future practices regarding compensation components, benefits and/or perquisites will be subject to periodic review by the Compensation Committee.
Other Matters
Tax and Accounting Considerations
Section 409A of the Internal Revenue Code
Section 409A of the Code requires that “nonqualified deferred compensation” be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose employees and other service providers to accelerated income tax liabilities, penalty taxes and interest on their vested compensation under such plans. Accordingly, as a general matter, it is our intention to design and administer our compensation and benefits plans and arrangements for all of our employees and other service providers, including our Named Executive Officers, so that they are either exempt from, or satisfy the requirements of, Section 409A of the Code.
Section 280G of the Internal Revenue Code
Section 280G of the Code disallows a tax deduction with respect to excess parachute payments to certain executives of companies that undergo a change in control. In addition, Section 4999 of the Code imposes a 20% penalty on the individual receiving the excess payment.
Parachute payments are compensation that is linked to or triggered by a change in control and may include, but are not limited to, bonus payments, severance payments, certain fringe benefits, and payments and acceleration of vesting from long-term incentive plans including stock options and other equity-based compensation. Excess parachute payments are parachute payments that exceed a threshold determined under Section 280G of the Code based on the executive’s prior compensation. In approving the compensation arrangements for our Named Executive Officers in the future, the Compensation Committee will consider all elements of the cost to the Company of providing such compensation, including the potential impact of Section 280G of the Code. However, the Compensation Committee may, in its judgment, authorize compensation arrangements that could give rise to loss of deductibility under Section 280G of the Code and the imposition of excise taxes under Section 4999 of the Code when it believes that such arrangements are appropriate to attract and retain executive talent.
Accounting Standards
ASC Topic 718 requires us to calculate the grant date “fair value” of our stock-based awards using a variety of assumptions. ASC Topic 718 also requires us to recognize an expense for the fair value of equity-based compensation awards. Grants of restricted stock, RSUs and performance units under our equity incentive award plans will be accounted for under ASC Topic 718. We have adopted ASU 2016-09, Improvements to Employee Share-Based
Payment Accounting, and elected to account for forfeitures of awards at the time of grant. The Compensation Committee will regularly consider the accounting implications of significant compensation decisions, especially in connection with decisions that relate to our equity incentive award plans and programs. As accounting standards change, we may revise certain programs to appropriately align the accounting expense of our equity awards with our overall executive compensation philosophy and objectives.
Responsible Equity Grant Practices
Our equity grant practices ensure all grants are made on fixed grant dates and at exercise prices or grant prices equal to the fair market value of our Common Stock on such dates. Equity grants are awarded under our stockholder-approved plans and we do not backdate, reprice or grant equity awards retroactively. Our stockholder-approved equity plans prohibit repricing of awards or exchanges of underwater options for cash or other securities without stockholder approval.
Securities Trading Policy
Our policy on securities trading prohibits our directors, officers and employees from trading in our securities during certain designated blackout periods and otherwise while they are aware of material non-public information.
Prohibition on Hedging and Pledging
Our securities trading policy prohibits directors and executive officers, and their Related Parties (as defined in such policy), from purchasing any financial instruments (including prepaid variable forward contracts, equity swaps, collars and exchange funds) or otherwise engaging in transactions that are designed to or have the effect of hedging or offsetting any decrease in the market value of the Company’s equity securities whether they are (1) granted by the Company as part of the person’s compensation; or (2) otherwise held, directly or indirectly. See “Additional Prohibited Transactions” above for more information about the securities trading policy.
Clawback Policy
We maintain a Clawback Policy which requires certain cash and equity incentive compensation to be repaid to the Company by its executive officers in the event of the Company being required to prepare an accounting restatement as a result of intentional or grossly negligent misconduct by such executive officer. The Clawback Policy also authorizes the Board, or a designated committee, to recoup bonus or incentive compensation (whether cash-based or equity-based) such executive officer received during the three fiscal years preceding the year the restatement is determined to be required, to the extent such bonus or incentive compensation exceeds what the executive officer would have received based on an applicable restated performance measure or target.
Stock Ownership Guidelines and Broad-Based Stock Ownership
In addition to the elements of executive officer compensation described above, we have adopted stock ownership guidelines pursuant to which our Named Executive Officers are required to hold a number of shares of our common stock having a market value equal to or greater than a multiple of each executive’s base salary. Until the applicable ownership guideline is achieved, each Named Executive Officer is required to retain at least 50% of the shares acquired from Company equity awards after payment (or withholding) of the exercise price, if applicable, and taxes. Once the applicable ownership guideline is achieved, the aforementioned retention ratio will no longer apply. If a Named Executive Officer’s share ownership subsequently falls back below the applicable ownership guideline and remains below the ownership guideline on a continuous basis for a period of more than 24 months, the Named Executive Officer will be required to comply again with the retention ratio until such time as the Named Executive Officer again achieves the ownership guidelines.
Our ownership guidelines are shown below. We believe the use of a retention ratio appropriately balances the need to work toward achieving these requirements with standard liquidity needs our Named Executive Officers may face. As of December 31, 2020, our Named Executive Officers (other than Mr. Deason), each of whom had previously met their share ownership requirements, each fell below their applicable ownership guidelines due to the cancellation of the LTI Plan. Mr. Deason joined the Company in June 2020 and is continuing to grow his equity position in the Company.
Named Executive Officer
| | Ownership
Guideline as
a Multiple of
Base Salary
|
Olivier Rabiller
| | 5x
|
Sean Deason
| | 3x
|
Peter Bracke
| | 3x
|
Craig Balis
| | 3x
|
Jérôme Maironi
| | 3x
|
Thierry Mabru
| | 2x
|
COMPENSATION COMMITTEE REPORT
The information contained in this Report of the Compensation Committee shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing (except to the extent that we specifically incorporate this information by reference) and shall not otherwise be deemed “soliciting material” or “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act (except to the extent that we specifically incorporate this information by reference).
The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis and, based on such review and discussions, recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Reporton Form 10-K.
COMPENSATION COMMITTEE
Carsten J. Reinhardt (Chair)
Carlos M. Cardoso
Maura J. Clark
Scott A. Tozier
Summary Compensation Table
The following table sets forth information concerning the compensation of our Named Executive Officers for the years ended December 31, 2020, 2019 and 2018.
Name and Principal Position | | Year | | Salary ($) (1) | | | Bonus ($) (2) | | | Stock Awards ($) (3) | | | Option Awards ($) | | | Non-Equity Incentive Plan Compensation ($) | | | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (4) | | | All Other Compensation ($) (5) | | | Total ($) | |
Olivier Rabiller | | 2020 | | | 905,670 | | | | — | | | | 3,582,093 | | | | — | | | | — | | | | 114,388 | | | | 22,016 | | | | 4,624,167 | |
President and Chief Executive Officer | | 2019 | | | 897,923 | | | | 276,011 | | | | 2,830,817 | | | | 790,273 | | | | 452,735 | | | | 92,521 | | | | 29,221 | | | | 5,369,501 | |
| | 2018 | | | 639,476 | | | | 597,178 | | | | 5,251,916 | | | | 373,670 | | | | 418,942 | | | | 127,988 | | | | 25,053 | | | | 7,434,223 | |
Sean Deason Senior Vice President and Chief Financial Officer | | 2020 | | | 314,773 | | | | 1,223,105 | | | | — | | | | — | | | | — | | | | 28,916 | | | | 302,340 | | | | 1,869,134 | |
Peter Bracke | | 2020 | | | 424,528 | | | | 473,919 | | | | 406,755 | | | | — | | | | — | | | | 76,704 | | | | 22,016 | | | | 1,403,922 | |
Chief Transformation Officer and Former Vice President and Interim Chief Financial Officer | | 2019 | | | 392,552 | | | | 110,668 | | | | 472,177 | | | | 91,313 | | | | 80,177 | | | | 65,444 | | | | 21,505 | | | | 1,233,836 | |
Craig Balis | | 2020 | | | 402,520 | | | | — | | | | 914,285 | | | | — | | | | — | | | | 92,872 | | | | 27,284 | | | | 1,436,961 | |
Senior Vice President and Chief Technology Officer | | 2019 | | | 402,431 | | | | 158,707 | | | | 852,143 | | | | 200,710 | | | | 76,793 | | | | 78,306 | | | | 139,763 | | | | 1,908,853 | |
| | 2018 | | | 390,764 | | | | 272,095 | | | | 1,030,513 | | | | 279,070 | | | | 153,340 | | | | 187,932 | | | | 106,704 | | | | 2,420,418 | |
Jérôme Maironi | | 2020 | | | 452,835 | | | | — | | | | 989,904 | | | | — | | | | — | | | | 70,823 | | | | 42,856 | | | | 1,556,418 | |
Senior Vice President, General Counsel and Corporate Secretary | | 2019 | | | 452,735 | | | | — | | | | 875,153 | | | | 213,377 | | | | 122,312 | | | | 65,732 | | | | 210,923 | | | | 1,940,232 | |
| | 2018 | | | 429,418 | | | | 77,094 | | | | 1,208,459 | | | | 264,880 | | | | 187,644 | | | | 17,944 | | | | 231,738 | | | | 2,417,177 | |
Thierry Mabru | | 2020 | | | 407,552 | | | | — | | | | 838,186 | | | | — | | | | — | | | | 79,660 | | | | 22,016 | | | | 1,347,414 | |
Senior Vice President, Integrated Supply Chain | | 2019 | | | 407,461 | | | | 119,604 | | | | 672,721 | | | | 162,570 | | | | 77,971 | | | | 65,674 | | | | 20,826 | | | | 1,526,827 | |
| | 2018 | | | 379,693 | | | | 222,685 | | | | 962,142 | | | | 205,755 | | | | 148,990 | | | | 65,034 | | | | 21,775 | | | | 2,006,074 | |
(1)
| Base salary and other compensation values in this Summary Compensation Table originally denoted in local currency (CHF) have been converted to USD using the average exchange rate for the year-ended December 31, 2020 under GAAP of 1 USD to 0.94023 CHF.
|
(2)
| Amounts for Mr. Deason represent a one-time sign on bonus in the amount of $1,063,570 and a one-time relocation bonus in the amount of $159,535. Amount for Mr. Bracke represents a one-time retention bonus. The one-time sign on and relocation bonuses for Mr. Deason and one-time retention bonus for Mr. Bracke are each subject to repayment in connection with certain terminations of employment, as described further under “Elements of Executive Compensation—Retention and Sign on Bonuses”. In accordance with SEC rules, the respective values associated with the one-time continuity awards granted to each Named Executive Officer (other than Mr. Deason) in 2020 are included in the column titled “Stock Awards.” See footnote (3), below, for additional information on the continuity awards.
|
(3)
| Amounts for 2020 represent the grant date fair value of Company RSU awards and PSU awards granted in 2020 to each of our Named Executive Officers, other than Mr. Deason. The amounts shown for the non-TSR portion of the 2020 Company PSU awards are based on the probable outcome of the performance conditions. The grant date fair value of the TSR portion of the 2020 Company PSU awards is based on a Monte Carlo valuation model, which determines potential award-payout results by simulating future stock prices of the Company and peer companies. Monte Carlo modeling assumptions included (i) stock price volatility (based on 2.84-year historical volatility of daily stock prices) of 53.81% for the Company and an average of 39.20% for the peer companies; (ii) stock price correlation coefficient between the Company and the peer companies (based on 2.84-year historical daily stock price changes) of 0.56; (iii) risk-free interest rate of 0.85%; and (iv) starting TSR (for the 30-day period immediately preceding the beginning of the performance period) of -34.7% for the Company. The fair value of 2020 TSR portion of the Company PSU awards was determined to be $9.64, or 139.0% of the grant-date stock price of $6.94. The value for each Company PSU award, granted under the LTI Plan, as of the grant date, assuming the maximum level of performance, is $5,737,274, $649,275, $1,457,102, $1,549,081 and $1,180,244 for Messrs. Rabiller, Bracke, Balis, Maironi and Mabru, respectively. As described further under “Elements of Executive Compensation—Continuity Awards”, as a condition to the receipt of the continuity awards, effective July 1, 2020, the Named Executive Officers (other than Mr. Deason) forfeited the Company RSU awards and
|
| PSU awards granted in 2020 and such awards were cancelled. In accordance with applicable SEC rules, the amounts for 2020 also includes the incremental fair value associated with the modified awards, including the subsequent grant of the continuity awards, calculated in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”), in the following amounts: $39,898, $5,895, $14,674, $33,504 and $109,504 for Messrs. Rabiller, Bracke, Balis, Maironi and Mabru, respectively.
|
(4)
| The change in pension value includes the increase in vested benefits in 2020 under our Swiss pension scheme attributable to employer contributions and allocated interest. See “Nonqualified Deferred Compensation—Fiscal Year 2020” for a detailed discussion of the Garrett Supplemental Savings Plan and “Pension Benefits—Fiscal Year 2020” for a detailed discussion of the Garrett Swiss Plan.
|
(5)
| For 2020, “All Other Compensation” consists of the following:
|
Item | | Olivier Rabiller | | | Sean Deason | | | | Peter Bracke | | | Craig Balis | | | Jérôme Maironi | | | Thierry Mabru | |
Car Allowance or Car Lease ($) | | | 22,016 | | | | 11,559 | | | | | 22,016 | | | | 22,016 | | | | 22,016 | | | | 22,016 | |
Tuition Reimbursement ($) | | | — | | | | 145,404 | | | | | — | | | | — | | | | — | | | | — | |
Tax Planning ($) | | | — | | | | 1,988 | | | | | — | | | | 5,268 | | | | 20,840 | | | | — | |
Tax Gross-Up ($) | | | — | | | 143,390 | | (1) | | | — | | | | — | | | | — | | | | — | |
Total ($) | | | 22,016 | | | | 302,340 | | | | | 22,016 | | | | 27,284 | | | | 42,856 | | | | 22,016 | |
(1)
| Amount represents a tax gross-up related to Mr. Deason’s relocation bonus.
|
GRANTS OF PLAN-BASED AWARDS—FISCAL YEAR 2020
The following table shows all plan-based awards which the Company granted to the Named Executive Officers during 2020.
| | | | | | | | | | | | Estimated Possible Payouts Under Non-Equity Incentive Plan Awards ($) | | | Estimated Future Payouts Under Equity Incentive Plan Awards | | All Other Stock Awards: Number of Shares of Stock or Units (#) | | | All Other Option Awards: Number of Securities Underlying Options (#) | | | Exercise or Base Price of Option Awards ($/Sh) | | | Grant Date Fair Value of Stock and Option Awards ($)(1) | |
Name | | Award Type | | Performance Plan | | | Grant Date | | | Threshold ($) | | | Target ($) | | | Maximum ($) | | | Threshold (#) | | | Target (#) | | | Maximum (#) | | | | | | | | |
Olivier Rabiller | | ICP (2) | | | — | | | | — | | | | 299,129 | | | | 1,196,516 | | | | 2,393,031 | | | | — | | | | — | | | | — | | | — | | | | — | | | | — | | | | — | |
| | PSU | | LTI Plan | | | 02/28/2020(3) | | | | ��� | | | | — | | | | — | | | | 64,137 | | | | 256,549 | | | | 641,373 | | | — | | | | — | | | | — | | | | 2,294,093 | |
| | RSU | | LTI Plan | | | 02/28/2020(4) | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 185,324 | | | | — | | | | — | | | | 1,288,000 | |
Peter Bracke | | ICP (2) | | | — | | | | — | | | | 53,178 | | | | 212,714 | | | | 425,428 | | | | — | | | | — | | | | — | | | — | | | | — | | | | — | | | | — | |
| | PSU | | LTI Plan | | | 02/28/2020(3) | | | | — | | | | — | | | | — | | | | 7,258 | | | | 29,033 | | | | 72,583 | | | — | | | | — | | | | — | | | | 260,996 | |
| | RSU | | LTI Plan | | | 02/28/2020(4) | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 20,973 | | | | — | | | | — | | | | 145,758 | |
Craig Balis | | ICP (2) | | | — | | | | — | | | | 63,814 | | | | 255,257 | | | | 510,513 | | | | — | | | | — | | | | — | | | — | | | | — | | | | — | | | | — | |
| | PSU | | LTI Plan | | | 02/28/2020(3) | | | | — | | | | — | | | | — | | | | 16,289 | | | | 65,156 | | | | 162,890 | | | — | | | | — | | | | — | | | | 587,174 | |
| | RSU | | LTI Plan | | | 02/28/2020(4) | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 47,067 | | | | — | | | | — | | | | 327,111 | |
Jérôme Maironi | | ICP (2) | | | — | | | | — | | | | 77,774 | | | | 311,094 | | | | 622,188 | | | | — | | | | — | | | | — | | | — | | | | — | | | | — | | | | — | |
| | PSU | | LTI Plan | | | 02/28/2020(3) | | | | — | | | | — | | | | — | | | | 17,317 | | | | 69,269 | | | | 173,173 | | | — | | | | — | | | | — | | | | 642,144 | |
| | RSU | | LTI Plan | | | 02/28/2020(4) | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 50,038 | | | | — | | | | — | | | | 347,760 | |
Thierry Mabru | | ICP (2) | | | — | | | | — | | | | 64,612 | | | | 258,447 | | | | 516,895 | | | | — | | | | — | | | | — | | | — | | | | — | | | | — | | | | — | |
| | PSU | | LTI Plan | | | 02/28/2020(3) | | | | — | | | | — | | | | — | | | | 13,194 | | | | 52,776 | | | | 131,940 | | | — | | | | — | | | | — | | | | 573,226 | |
| | RSU | | LTI Plan | | | 02/28/2020(4) | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 38,124 | | | | — | | | | — | | | | 264,960 | |
(1)
| The amounts shown represent the grant date fair value calculated in accordance with ASC 718. The amounts shown for the non-TSR portion of the 2020 Company PSU awards are based on the probable outcome of the performance conditions. The grant date fair value of the TSR portion of the 2020 Company PSU awards is based on a Monte Carlo valuation model, which determines potential award-payout results by simulating future stock prices of the Company and peer companies. Monte Carlo modeling assumptions included (i) stock price volatility (based on 2.84-year historical volatility of daily stock prices) of 53.81% for the Company and an average of 39.20% for the peer companies; (ii) stock price correlation coefficient between the Company and the peer companies (based on 2.84-year historical daily stock price changes) of 0.56; (iii) risk-free interest rate of 0.85%; and (iv) starting TSR (for the 30-day period immediately preceding the beginning of the performance period) of -34.7% for the Company. The fair value of 2020 TSR portion of the Company PSU awards was determined to be $9.64, or 139.0% of the grant-date stock price of $6.94. As described further under “Elements of Executive Compensation—Continuity Awards”, as a condition to receipt of the continuity awards, effective July 1, 2020, the Named Executive Officers (other than Mr. Deason) forfeited the Company RSU awards and PSU awards granted in 2020 and such awards were cancelled. In accordance with applicable SEC rules, the amounts for 2020 also includes the incremental fair value associated with the modified awards, including the subsequent grant of the continuity awards, calculated in accordance with ASC 718, Compensation – Stock Compensation (“ASC 718”), in the following amounts: $39,898, $5,895, $14,674, $33,504 and $109,504 for Messrs. Rabiller, Bracke, Balis, Maironi and Mabru, respectively.
|
(2)
| The amounts shown represent the range of potential payouts under the 2020 ICP based on Company performance. For 2020, the awards under the ICP were prorated based on the Named Executive Officer’s target incentive, and annual base salary, before and after any salary increases, as applicable, and the number of days in the year such target incentive and annual base salary was in effect. As described further under “Elements of Executive Compensation—Continuity Awards”, as a condition to receipt of the continuity awards, effective July 1, 2020, the Named Executive Officers (other than Mr. Deason) waived their participation in the 2020 ICP. See “Elements of Executive Compensation—Short-Term Incentive Compensation Plan (“ICP”) Awards” for a detailed discussion of the 2020 ICP.
|
(3)
| On February 28, 2020, the Compensation Committee approved an award of PSUs pursuant to the LTI Plan for each Named Executive Officer (other than Mr. Deason). The amounts shown represent the threshold, target, and maximum awards for the PSUs. The performance period for the PSUs was scheduled to end on December 31, 2021. As described further under “Elements of Executive Compensation—Continuity Awards”, as a condition to receipt of the continuity awards, effective July 1, 2020, the Named Executive Officers (other than Mr. Deason) forfeited the Company PSU awards granted in 2020 and such awards were cancelled.
|
(4)
| On February 28, 2020, the Compensation Committee approved an award of RSUs pursuant to the LTI Plan for each Named Executive Officer (other than Mr. Deason), which was scheduled to vest in full on the third anniversary of the grant date, subject to continued employment. As described further under “Elements of Executive Compensation—Continuity Awards”, as a condition to receipt of the continuity awards, effective July 1, 2020, the Named Executive Officers (other than Mr. Deason) forfeited the Company RSU awards granted in 2020 and such awards were cancelled.
|
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
The material terms of the employment agreements and/or offer letters with each of our Named Executive Officers, as in effect in 2020, are described below.
President and Chief Executive Officer—Olivier Rabiller.
On May 2, 2018, Honeywell entered into an offer letter with Mr. Rabiller appointing him as President and Chief Executive Officer of the Company, which became effective upon the completion of the Spin-Off. The letter provides Mr. Rabiller with an annual base salary of $889,786 (which was $957,213 in 2020) and an annual cash incentive target opportunity under the ICP equal to 100% of his annual base salary (which was 125% in 2020), and other elements of his compensation.
Additionally, under the offer letter, Mr. Rabiller is eligible for an annual grant of equity awards with an initial target opportunity of 325% of annual base salary (which was 350% in 2020). Mr. Rabiller’s annual equity award will be determined by the Board and will be based on his individual performance. Further, in connection with the successful completion of the Spin-Off and pursuant to his offer letter, Mr. Rabiller received a grant of Company RSUs valued at $4,300,000, which vests in two equal installments on each of the third and fourth anniversaries of the Spin-Off, subject to continued employment through each vesting date.
In addition, Mr. Rabiller is eligible to receive vacation benefits in accordance with Company policy.
In the event of Mr. Rabiller’s involuntary termination of employment without cause, he will be entitled to certain payments, as described under “Summary of Potential Payments and Benefits—Termination Events” below. Mr. Rabiller’s offer of employment is also contingent upon his execution of the Company’s intellectual property and non-competition agreements, which include two-year post-termination non-competition and non-solicitation restrictions and customary confidentiality provisions.
Senior Vice President and Chief Financial Officer—Sean Deason.
On May 29, 2020, the Company and Garrett Motion Sàrl entered into an employment agreement with Mr. Deason appointing him as Senior Vice President and Chief Financial Officer of the Company effective June 15, 2020. The agreement provides Mr. Deason with an annual base salary of $606,235 and an annual cash incentive target opportunity under the ICP equal to 80% of his annual base salary.
In addition, pursuant to his employment agreement, Mr. Deason received a one-time sign-on bonus of $1,063,570. The sign-on bonus will be repaid by Mr. Deason if prior to the one-year anniversary of his start date, Mr. Deason’s employment is terminated for any reason. Mr. Deason also received a one-time relocation bonus equal to $159,535, which is subject to repayment if Mr. Deason terminates employment for any reason or if Garrett Motion Sàrl terminates Mr. Deason’s employment (other than for reason of redundancy) prior to the second anniversary of his start date. Additionally, under the employment agreement, Mr. Deason is eligible for an annual grant of equity awards with an initial target opportunity of 170% of annual base salary. Mr. Deason’s annual equity award will be determined by the Board and will be based on his individual performance.
Mr. Deason is also eligible to receive vacation benefits in accordance with Company policy, a cash car allowance in the amount of $1,835 per month and tuition reimbursement. Mr. Deason’s employment agreement also includes two-year post-termination non-competition restrictions and one-year post-termination non-solicitation restrictions.
In the event of Mr. Deason’s involuntary termination of employment without cause, he will be entitled to certain payments, as described under “Summary of Potential Payments and Benefits—Termination Events” below. Mr. Deason’s offer of employment is also contingent upon his execution of the Company’s intellectual property and non-competition agreements, which include customary confidentiality provisions.
Chief Transformation Officer and Former Interim Chief Financial Officer—Peter Bracke.
On September 15, 2015, Honeywell Technologies Sàrl, a subsidiary of Honeywell, entered into an employment agreement with Mr. Bracke appointing him as ECC Vice President and CFO. The agreement was amended in September 2019 when Mr. Bracke was appointed as our Interim Chief Financial Officer, and further amended on June 8, 2020 when Mr. Bracke stepped down as our Interim Chief Financial Officer and was appointed as our Chief Transformation Officer.
Prior to the amendment in June 2020, Mr. Bracke’s agreement provided Mr. Bracke with an annual base salary of $473,919 and an annual cash incentive target opportunity under the ICP equal to 60% of his annual base salary. Pursuant to the June 2020 amendment, the agreement provides Mr. Bracke’s with an annual base salary of $425,428, effective July 1, 2020, and an annual cash incentive target opportunity under the ICP equal to 50% of his annual base salary.
Mr. Bracke is eligible for an annual grant of equity awards with an initial target opportunity of 100% of annual base salary, Mr. Bracke’s annual equity award will be determined by the Board. Additionally, under the amended employment agreement, Mr. Bracke received a restricted stock unit award in September 2019 valued at $200,000. The award will vest in full on the second anniversary of the grant date, subject to Mr. Bracke’s continued employment through such date.
In addition, Mr. Bracke is eligible to receive vacation benefits in accordance with Company policy.
In the event of Mr. Bracke’s involuntary termination of employment without cause, he will be entitled to certain payments, as described under “Summary of Potential Payments and Benefits—Termination Events” below.
Other Named Executive Officers—Craig Balis, Thierry Mabru, and Jérôme Maironi.
Honeywell entered into offer letters with each of Messrs. Balis, Mabru, and Maironi.
The offer letters for Messrs. Balis, Mabru, and Maironi each provide for an annual base salary of $409,097, $414,211, and $460,234, respectively, and an annual cash incentive target opportunity under the ICP equal to 55%, 55% and 60% of the executive’s annual base salary, respectively, which were increased to 60%, 60% and 65%, respectively, in February 2020 after taking into consideration industry and market data, mix of target compensation for each executive.
Additionally, under the offer letters, each of Messrs. Balis, Mabru, and Maironi is eligible for an annual grant of equity awards with an initial target opportunity of 200%, 160% and 189%, respectively, of the executive’s annual base salary. Annual equity awards will be determined by the Board and are based on the executive’s individual performance.
Under the offer letters and in connection with the successful completion of the Spin-Off, each of Messrs. Balis, Mabru, and Maironi also received grants of Company RSUs valued at $800,000 for Messrs. Balis and Mabru and $1,000,000 for Mr. Maironi. The awards vest in two equal installments on each of the third and fourth anniversaries of the Spin-Off, subject to continued employment through each vesting date.
In addition, Messrs. Balis, Mabru, and Maironi are eligible to receive vacation benefits in accordance with Company policy. Further, Mr. Maironi is also entitled to relocation assistance in connection with his relocation to Switzerland in accordance with Company policy.
In the event of Messrs. Balis, Mabru, or Maironi’s involuntary termination of employment without cause, they will be entitled to certain payments, as described under “Summary of Potential Payments and Benefits—Termination Events” below. The offer letters for Messrs. Balis, Mabru and Maironi are also contingent upon the execution of the Company’s intellectual property and non-competition agreements, which include two-year post-termination non-competition and non-solicitation provisions and customary confidentiality provisions.
Modification of LTI Plan Awards
As described above, in June 2020, in response to the unprecedented and ongoing market uncertainty resulting from the COVID-19 pandemic and in connection with the Board’s evaluation of strategic alternatives for the Company, the Compensation Committee determined to revise the Company’s 2020 compensation program and issued one-time cash continuity awards to ensure effective retention and motivation of key individuals, including the Named Executive Officers (other than Mr. Deason). As a condition to the approval of the continuity awards, such Named Executive Officers forfeited the RSUs and PSUs granted in February 2020 under the LTI Plan, effective July 1, 2020 and subsequently, those awards were cancelled. The grant date fair value of such awards, including the incremental fair value of the awards upon modification in connection with the cancellation and subsequent issuance of the continuity awards, is reported in the Summary Compensation Table and Grants of Plan-Based Awards Table above.
Outstanding Equity Awards At 2020 Fiscal Year-End
The following table shows all outstanding Company equity awards held by the named executive officers as of December 31, 2020:
| | | | Option Awards | | | Stock Awards | |
Name | | Grant Date | | Number of Securities Underlying Unexercised Options (#) Exercisable | | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | | Option Exercise Price ($) | | | Option Expiration Date | | | Number of Shares or Units of Stock That Have Not Vested (#) | | | Market Value of Shares or Units of Stock That Have Not Vested ($)(1) | | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested ($)(1) | |
Olivier Rabiller | | 7/29/2016 | | | — | | | | — | | | | — | | | | — | | | 57,083(2) | | | | 252,878 | | | | — | | | | — | |
| | 2/28/2017 | | | — | | | | — | | | | — | | | | — | | | 12,312(3) | | | | 54,542 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 14,601(4) | | | | 64,682 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 10,100(12) | | | | 44,743 | | | | — | | | | — | |
| | 10/1/2018 | | | — | | | | — | | | | — | | | | — | | | 232,440(5) | | | | 1,029,709 | | | | — | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | 48,873(6) | | | | 216,507 | | | | — | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 97,745(7) | | | | 433,010 | |
| | 3/4/2019 | | | 27,138 | | | 81,416(8) | | | | 16.17 | | | 3/4/2029 | | | | — | | | | — | | | | — | | | | | — | |
Craig Balis | | 2/27/2014 | | | — | | | | — | | | | — | | | | — | | | 16,864(9) | | | | 74,708 | | | | — | | | | — | |
| | 2/28/2017 | | | — | | | | — | | | | — | | | | — | | | 6,995(3) | | | | 30,988 | | | | — | | | | — | |
| | 7/27/2017 | | | — | | | | — | | | | — | | | | — | | | 18,519(10) | | | | 82,039 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 15,346(11) | | | | 67,983 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 7,543(12) | | | | 33,415 | | | | — | | | | — | |
| | 10/1/2018 | | | — | | | | — | | | | — | | | | — | | | 43,250(5) | | | | 191,598 | | | | — | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | 12,413(6) | | | | 54,990 | | | | — | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 24,825(7) | | | | 109,975 | |
| | 3/4/2019 | | | 6,892 | | | 20,678(8) | | | | 16.17 | | | 3/4/2029 | | | | — | | | | — | | | | — | | | | | — | |
Jérôme Maironi | | 7/25/2014 | | | — | | | | — | | | | — | | | | — | | | 11,753(13) | | | | 52,066 | | | | — | | | | — | |
| | 2/28/2017 | | | — | | | | — | | | | — | | | | — | | | 7,835(3) | | | | 34,709 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 14,528(11) | | | | 64,359 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 7,159(12) | | | | 31,714 | | | | — | | | | — | |
| | 10/1/2018 | | | — | | | | — | | | | — | | | | — | | | 54,060(5) | | | | 239,486 | | | | — | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | 13,196(6) | | | | 58,458 | | | | — | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 26,392(7) | | | | 116,917 | |
| | 3/4/2019 | | | 7,327 | | | 21,983(8) | | | | 16.17 | | | 3/4/2029 | | | | — | | | | — | | | | — | | | | | — | |
Thierry Mabru | | 7/31/2015 | | | — | | | | — | | | | — | | | | — | | | 9,875(14) | | | | 43,746 | | | | — | | | | — | |
| | 2/28/2017 | | | — | | | | — | | | | — | | | | — | | | 5,429(3) | | | | 24,050 | | | | — | | | | — | |
| | 7/27/2017 | | | — | | | | — | | | | — | | | | — | | | 15,432(10) | | | | 68,364 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 11,350(11) | | | | 50,281 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 5,561(12) | | | | 24,635 | | | | — | | | | — | |
| | 10/1/2018 | | | — | | | | — | | | | — | | | | — | | | 43,250(5) | | | | 191,598 | | | | — | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | 10,054(6) | | | | 44,539 | | | | — | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | 20,108 (7) | | | | 89,078 | |
| | 3/4/2019 | | | 5,582 | | | 16,749(8) | | | | 16.17 | | | 3/4/2029 | | | | — | | | | — | | | | — | | | | | — | |
Peter Bracke | | 9/24/2015 | | | — | | | | — | | | | — | | | | — | | | 9,824(15) | | | | 43,520 | | | | — | | | | — | |
| | 2/28/2017 | | | — | | | | — | | | | — | | | | — | | | 8,394(3) | | | | 37,185 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 6,538(11) | | | | 28,963 | | | | — | | | | — | |
| | 2/27/2018 | | | — | | | | — | | | | — | | | | — | | | 3,196(12) | | | | 14,158 | | | | — | | | | — | |
| | 3/4/2019 | | | 3,135 | | | 9,408(8) | | | | 16.17 | | | 3/4/2029 | | | | — | | | | — | | | | — | | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | 11,185(16) | | | | 49,550 | | | | — | | | | — | |
| | 3/4/2019 | | | — | | | | — | | | | — | | | | — | | | 5,647(6) | | | | 25,016 | | | | — | | | | — | |
| | 9/6/2019 | | | — | | | | — | | | | — | | | | — | | | 20,111(17) | | | | 89,092 | | | | — | | | | — | |
(1)
| Market value is determined based on the closing price of our common stock on December 31, 2020 or $4.43 per share.
|
(2)
| On July 29, 2016, the Honeywell MDCC approved an award of Honeywell RSUs for Mr. Rabiller, scheduled to vest in substantially equal installments on each of the third, fifth and seventh anniversaries of the grant date, subject to continued employment on the applicable vesting date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(3)
| On February 28, 2017, the Honeywell MDCC approved an award of Honeywell RSUs for each Named Executive Officer (other than Mr. Deason), scheduled to vest in substantially equal installments on the second, third and fourth anniversaries of the grant date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(4)
| On February 27, 2018, the Honeywell MDCC approved an award of Honeywell RSUs for Mr. Rabiller, scheduled to vest in substantially equal installments on the second, fourth and sixth anniversaries of the grant date, subject to continued employment on the applicable vesting date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(5)
| Pursuant to the offer letters or employment agreement, each entered into in connection with the Spin-Off, on October 1, 2018, we granted Messrs. Rabiller, Balis, Maironi and Mabru awards of Company RSUs, which vest in two equal installments on each of the third and fourth anniversaries of the Spin-Off, subject to continued employment on the applicable vesting date.
|
(6)
| On March 4, 2019, the Compensation Committee approved an award of Company RSUs pursuant to the LTI Plan for each Named Executive Officer (other than Mr. Deason), which will vest in full on the third anniversary of the grant date, subject to continued employment on the vesting date.
|
(7)
| On March 4, 2019, the Compensation Committee approved an award of PSUs pursuant to the LTI Plan for Messrs. Rabiller, Balis, Maironi and Mabru. The performance period for the PSUs will end on December 31, 2021. In accordance with the SEC rules, the number of PSUs shown pursuant to the LTI Plan represents the number of performance shares that may be earned during the performance period based on target performance.
|
(8)
| On March 4, 2019, the Compensation Committee approved an award of stock options pursuant to the LTI Plan for each Named Executive Officer (other than Mr. Deason), each of which will vest in equal 25% installments over a four-year period, subject to continued employment through the applicable vesting date, and expire ten years from the date of grant.
|
(9)
| On February 27, 2014, the Honeywell MDCC approved an award of Honeywell RSUs for Mr. Balis, scheduled to vest in substantially equal installments on the fifth and seventh anniversaries of the grant date, subject to continued employment on the applicable vesting date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(10)
| On July 27, 2017, the Honeywell MDCC approved awards of Honeywell RSUs for Messrs. Balis and Mabru, each scheduled to vest in substantially equal installments on the second, fourth and sixth anniversaries of the grant date, subject to continued employment on the applicable vesting date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(11)
| On February 27, 2018, the Honeywell MDCC approved awards of Honeywell RSUs for each of Messrs. Balis, Maironi, Mabru and Bracke, each scheduled to vest in full on the third anniversary of the grant date, subject to continued employment on the applicable vesting date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(12)
| On February 27, 2018, the Honeywell MDCC approved an award of Honeywell RSUs for each Named Executive Officer (other than Mr. Deason), scheduled to vest in substantially equal installments on the first, second, third and fourth anniversaries of the grant date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(13)
| On July 25, 2014, the Honeywell MDCC approved an award of Honeywell RSUs for Mr. Maironi, scheduled to vest in substantially equal installments on the fifth and seventh anniversaries of the grant date, subject to continued employment on the applicable vesting date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(14)
| On July 31, 2015, the Honeywell MDCC approved an award of Honeywell RSUs for Mr. Mabru, scheduled to vest in substantially equal installments on the fifth and seventh anniversaries of the grant date, subject to continued employment on the applicable vesting date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(15)
| On September 24, 2015, the Honeywell MDCC approved an award of Honeywell RSUs for Mr. Bracke, scheduled to vest in substantially equal installments on the fifth and seventh anniversaries of the grant date. These Honeywell RSUs were converted into Company RSUs in connection with the Spin-Off.
|
(16)
| On March 4, 2019, the Compensation Committee approved an award of Company RSUs pursuant to the Replacement Plan for Mr. Bracke, which will vest in full on March 4, 2021, subject to continued service.
|
(17)
| On September 6, 2019, the Compensation Committee approved an award of Company RSUs to Mr. Bracke in connection with his appointment as Interim Chief Financial Officer. The RSUs will vest in full on the second anniversary of the grant date, subject to continued employment.
|
Option Exercises and Stock Vested—Fiscal Year 2020
The following table shows the number of shares acquired upon the vesting of Company stock awards for 2020 and the value realized upon such vesting.
| | Stock Awards | |
Name | | Number of Shares Acquired on Vesting (#) | | | Value Realized on Vesting ($)(1) | |
Olivier Rabiller | | | 118,323 | | | | 811,068 | |
Sean Deason | | | — | | | | — | |
Peter Bracke | | | 97,645 | | | | 566,074 | |
Craig Balis | | | 81,482 | | | | 513,129 | |
Jérôme Maironi | | | 66,435 | | | | 397,578 | |
Thierry Mabru | | | 55,439 | | | | 330,420 | |
(1)
| Represents the amounts realized based on the fair market value of our common stock on the vesting date.
|
Pension Benefits—Fiscal Year 2020
The following table provides summary information about the pension benefits that have been earned by our Named Executive Officers in 2020. For 2020, the Named Executive Officers all participated in a pension plan sponsored in Switzerland and named “Columna Sammelstiftung Client Invest Winterthur” (the “Garrett Swiss Plan”). Garrett Swiss Plan benefits depend on each Named Executive Officer’s annual contribution election and age. The column in the table below entitled “Present Value of Accumulated Benefits” represents the value of the employer contributions in the Garrett Swiss Plan with related interest, converted to U.S. dollars.
Name | | Plan Name | | Number of Years Credited Service (#) | | | Present Value of Accumulated Benefit ($) | |
Olivier Rabiller | | Garrett Swiss Plan (1) | | | 10 | | | | 776,709 | |
Sean Deason | | Garrett Swiss Plan (1) | | | 0.5 | | | | 28,916 | |
Peter Bracke | | Garrett Swiss Plan (1) | | | 11.8 | | | | 663,515 | |
Craig Balis | | Garrett Swiss Plan (1) | | | 6.6 | | | | 559,204 | |
Jérôme Maironi | | Garrett Swiss Plan (1) | | | 2.5 | | | | 159,281 | |
Thierry Mabru | | Garrett Swiss Plan (1) | | | 9.8 | | | | 494,603 | |
(1)
| Garrett Swiss Plan benefits are not dependent upon years of credited service.
|
Garrett Swiss Plan Information
The Garrett Swiss Plan is a broad-based pension plan in which all of Garrett’s Swiss-based employees participate, as well as our Named Executive Officers. The Garrett Swiss Plan complies with Swiss tax requirements applicable to broad-based pension plans. Normal retirement age under the Garrett Swiss Plan is 65, for men, and 64, for women. All benefits are immediately vested.
The Named Executive Officers can contribute to the Garrett Swiss Plan based on their age at rates that range from 5%-11% of pensionable salary with additional contributions for death and disability benefits. Employer contributions are also based on the Named Executive Officer’s age at rates that range from 5.5%-11.5% of pensionable salary with additional contributions for death and disability benefits. For 2020, participants received an interest rate of return of 4.5%.
The Garrett Swiss Plan defines pensionable salary as the sum of annual base salary, sales incentives/commissions, bonuses, gratuities and gifts for service years, in each case, while taking into account any changes to compensation have been agreed to for the applicable year, minus the annual coordination amount and limited to the Garrett Swiss Plan’s annual pay limit. For 2020, the annual coordination amount was $26,467 and the Garrett Swiss Plan’s annual pay limit was $848,047.
Annual benefits under the Garrett Swiss Plan are calculated at a Named Executive Officer’s retirement date and are equal to a percentage of the Named Executive Officer’s account balance specified in the Garrett Swiss Plan based on his age and retirement year. The normal payment form is a joint and 60% survivor annuity with the member’s surviving spouse, with a lump sum option. Swiss pension law requires participants who were covered by the pension plan of another employer to transfer the termination benefit of that pension plan into the Garrett Swiss Plan. Participants are permitted to withdraw part of the termination benefit, or pledge the termination benefit, for home ownership.
Nonqualified Deferred Compensation—Fiscal Year 2020
The following table provides information on the defined contribution or other plans that during 2020 provided for deferrals of compensation to our Named Executive Officer’s on a basis that is not tax-qualified.
Name | | Plan | | Executive Contributions in 2020 ($) | | | Registrant Contributions in 2020 ($) | | | Aggregate Earnings in 2020 ($) | | | Aggregate Withdrawals /Distributions ($) | | | Aggregate Balance as of December 31, 2020 ($) | |
Craig Balis | | Garrett Supplemental Savings Plan(1) | | | — | | | | — | | | | 27,910 | | | | — | | | | 385,788 | |
(1)
| In 2020, Mr. Balis participated in the Garrett Supplemental Savings Plan. Mr. Balis does not contribute to the plan (and Garrett is not actively making any matching contributions to his account); however, his account continues to earn interest under the plan. All deferred compensation amounts are unfunded and unsecured obligations of Garrett and are subject to the same risks as any of Garrett’s general obligations. No amounts reported in the table above for Mr. Balis have been reported in our Summary Compensation Table for 2018, 2019 or 2020.
|
Supplemental Savings Plan (“SSP”)
The SSP is a U.S. nonqualified deferred compensation plan that permits executives to defer the portion of their pre-tax compensation and incentive compensation that could not be contributed to Garrett’s tax-qualified 401(k) plan due to the annual deferral and compensation limits imposed by the Internal Revenue Code and/or up to an additional 25% of base annual salary for the plan year. Employer matching contributions are discretionary and immediately vested.
Participant deferrals are credited with a rate of interest, compounded daily, based on the Fidelity U.S. Bond Index Fund. The rate is subject to change daily, and for 2020, the average rate was 7.8%.
Mr. Balis elected to receive his SSP benefits in a lump sum, which amount will be paid on the later of six months or in January of the year following his separation from service. Amounts deferred cannot be withdrawn before the distribution date for any reason.
Summary of Potential Payments and Benefits—Termination Events
Overview
This section describes the benefits payable to our Named Executive Officers in two circumstances:
| •
| Termination of Employment; and
|
Employment Agreements and Offer Letters
Olivier Rabiller. Under Mr. Rabiller’s offer letter, upon an involuntary termination of employment, other than for cause, Mr. Rabiller will be entitled to 24 months of base salary continuation and target incentive compensation,2024 Proxy Statement, which will be extended to 36 months infiled with the case of such termination within two yearsSecurities and Exchange Commission no later than 120 days after a change in control of the Company.
Company Severance Plan
Our Named Executive Officers are eligible for severance payments and benefits upon a qualifying termination of employment under our Company severance plan. Upon an involuntary termination of employment by the Company, the Named Executive Officers are entitled to 18 months of base salary continuation, target incentive compensation prorated for the severance period and continued health and welfare benefits for the duration of the severance period, in each case, which will be extended to 24 months in the case of such termination following a change in control. We do not provide our Named Executive Officers, all of whom reside in Switzerland, with continued health and welfare benefits upon a qualifying termination of employment as these benefits typically are provided by the government.
Garrett 2018 Stock Incentive Plan
Under the terms of the 2018 Plan and applicable award agreements, in the event of a change in control, if (i) the successor corporation does not assume or substitute outstanding equity awards or (ii) if outstanding equity awards are assumed or substituted and the executive is terminated without “cause” or for “good reason” (each as defined in the 2018 Plan) within 24 months of the change in control, such equity awards will immediately vest (with PSU awards vesting at target or other substantially achieved performance as determined by the Compensation Committee and PCU awards vesting based on actual performance on a pro-rated basis) and, if applicable, become exercisable immediately prior to the change in control transaction. Upon death or disability, any outstanding equity awards held by the executive will immediately vest and, if applicable, become exercisable (with PSU and PCU awards vesting based on actual performance and on a prorated basis).
Summary of Potential Payments Upon Termination or Change in Control
The following table summarizes the payments that would be made to our Named Executive Officers upon the occurrence of certain qualifying terminations of employment or a change in control, in any case, occurring on December 31, 2020. Amounts shown do not include (i) accrued but unpaid base salary through2023. For the datelimited purpose of termination, or (ii) other benefits earned or accrued by the Named Executive Officer during his employment that are available to all salaried employees, such as accrued vacation, and assume that any successor company in a change in control assumed or substituted awards for any outstanding awards under the 2018 Plan. Pension and nonqualified deferred compensation benefits, which are described elsewhere in this filing, are not included in the table below in accordance with the applicable disclosure requirements, even though they may become payable at the times specified in the table.
Name | | Benefit | | Death ($) | | | Disability ($) | | | Termination Without Cause (no Change in Control) ($) | | | Termination Without Cause in Connection with a Change in Control ($) | |
Olivier Rabiller | | Cash | | | — | | | | — | | | | 4,307,457 | | | | 6,461,186 | |
| | Equity Acceleration (1) | | | 2,096,072 | | | | 2,096,072 | | | | — | | | | 2,469,864 | |
| | All Other Payments or Benefits | | | — | | | | — | | | | — | | | | — | |
| | Total | | | 2,096,072 | | | | 2,096,072 | | | | 4,307,457 | | | | 8,931,050 | |
Sean Deason | | Cash | | | — | | | | — | | | | 1,636,834 | | | | 3,273,668 | |
| | Equity Acceleration (1) | | | — | | | | — | | | | — | | | | — | |
| | All Other Payments or Benefits | | | — | | | | — | | | | — | | | | — | |
| | Total | | | — | | | | — | | | | 1,636,834 | | | | 3,273,668 | |
Peter Bracke | | Cash | | | — | | | | — | | | | 957,213 | | | | 1,276,284 | |
| | Equity Acceleration (1) | | | 287,485 | | | | 287,485 | | | | — | | | | 338,752 | |
| | All Other Payments or Benefits | | | — | | | | — | | | | — | | | | — | |
| | Total | | | 287,485 | | | | 287,485 | | | | 957,213 | | | | 1,615,036 | |
Craig Balis | | Cash | | | — | | | | — | | | | 1,021,028 | | | | 1,361,370 | |
| | Equity Acceleration (1) | | | 645,695 | | | | 645,695 | | | | — | | | | 760,841 | |
| | All Other Payments or Benefits | | | — | | | | — | | | | — | | | | — | |
| | Total | | | 645,695 | | | | 645,695 | | | | 1,021,028 | | | | 2,122,211 | |
Jérôme Maironi | | Cash | | | — | | | | — | | | | 1,184,550 | | | | 1,579,401 | |
| | Equity Acceleration (1) | | | 597,709 | | | | 597,709 | | | | — | | | | 704,298 | |
| | All Other Payments or Benefits | | | — | | | | — | | | | — | | | | — | |
| | Total | | | 597,709 | | | | 597,709 | | | | 1,184,550 | | | | 2,283,699 | |
Thierry Mabru | | Cash | | | — | | | | — | | | | 1,033,790 | | | | 1,378,385 | |
| | Equity Acceleration (1) | | | 536,291 | | | | 536,291 | | | | — | | | | 631,928 | |
| | All Other Payments or Benefits | | | — | | | | — | | | | — | | | | — | |
| | Total | | | 536,291 | | | | 536,291 | | | | 1,033,790 | | | | 2,010,313 | |
(1)
| Represents the sum of the values attributable to the accelerated vesting of the unvested portion of all outstanding Company Stock Options, RSUs and PSUs held by the executive officer as of December 31, 2020. The value of the accelerated equity awards was calculated based on the closing price of our common stock on December 31, 2020 ($4.43). Upon the death or disability of the executive, PSUs and PCUs will accelerate and vest based on actual performance through the completion of the performance period and will be prorated for the date of termination. We have estimated for purposes of this disclosure that PSUs and PCUs awarded under the applicable Company Long-Term Incentive Plan are valued based on projecting their performance as of December 31, 2020 through the end of the performance period. Note, however, that the value of these accelerated PSU and PCU awards would ultimately reflect actual performance and, accordingly the amounts payable in respect of such PSU and PCU awards under this scenario could be greater or less than the amounts reported.
|
CEO Pay Ratio Disclosure
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, we are providing the following information regarding the relationship of the annual total compensation of our median employee to the annual total compensation of Olivier Rabiller, our CEO. We consider the pay ratio specified below to be a reasonable estimate, calculated in a manner that is intended to be consistent with the requirements of Item 402(u) of Regulation S-K.
For 2020, our last completed fiscal year:
| •
| the annual total compensation of the employee who represents our median compensated employee (other than our CEO) was $27,408; and
|
| •
| the annual total compensation of our CEO, as reported in the Summary Compensation Table included above, was $4,624,167.
|
Based on this information, for 2020, our CEO’s annual total compensation was 169 times that of the median of the annual total compensation of all of our employees (other than the CEO).
Determining the Median Employee
Employee Population
We used our employee population data as of October 1, 2019 as the determination date for identifying our median employee. As of such date, our employee population consisted of approximately 6,100 individuals.
Methodology for Determining Our Median Employee
To identify the median employee from our employee population, we selected base salary and target bonus as the most appropriate measure of compensation, which was consistently applied to all of our employees included in the calculation. In identifying the median employee, we annualized the compensation of all permanent employees who were new-hires in 2019 and we converted international currencies to US dollars using the exchange rates on the determination date.
This employee is the same employee identified for purposes of our 2020 disclosure. We believe that there have been no changes in our employee population or employee compensation arrangements since that median employee was identified in 2019 that would significantly impact our pay ratio disclosure.
Compensation Measure and Annual Total Compensation of Median Employee
With respect to the annual total compensation of the employee who represents our median compensated employee, we calculated the elements of such employee’s compensation for 2020 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $27,146.
Annual Total Compensation of CEO
With respect to the annual total compensation of our CEO, we used the amount reported in the “Total” column of our 2020 Summary Compensation Table, included in this Annual Report.
DIRECTOR COMPENSATION
Non-Employee Director Compensation Agreements
We have entered into letter agreements with each of our non-employee directors that generally provide a total compensation package that includes annual cash fees and annual restricted stock unit grants to compensate our non-employee directors for the time and effort necessary to serve oncomply with this Item 11, the Board.
Our non-employee directors receive a cash retainer for service on the Board and for service on each committee of which the non-employee director2024 Proxy Statement is a member. The Independent Chairperson of the Board and the Chairperson of each committee may receive a higher retainer for such service. Cash retainers are paid quarterly on the first business day of the applicable quarter. The fees paid to our non-employee directors for service on the Board are set forth in the table below.
Cash Compensation | | | | |
Annual Cash Retainer | | $ | 80,000 | |
Independent Chairperson Annual Cash Retainer | | $ | 100,000 | |
Committee Chair Annual Cash Retainer | | | | |
Audit | | $ | 20,000 | |
Compensation | | $ | 15,000 | |
Nominating and Governance | | $ | 15,000 | |
Other Committees | | $ | 10,000 | |
Committee Member Annual Cash Retainer | | | | |
Audit | | $ | 10,000 | |
Compensation | | $ | 7,500 | |
Nominating and Governance and Other Committees | | $ | 5,000 | |
In addition, each of our non-employee directors is eligible to receive an annual restricted stock unit grant with a total target value of $120,000 (the actual number of restricted stock units to be determinedincorporated herein by dividing the target value by the fair market value of Company common stock on the date of the annual meeting of stockholders). The restricted stock units will vest on the earlier of the one-year anniversary of the grant date, death, disability or the non-employee director’s removal from the Board in connection with a change in control.
In light of the uncertainties related to the global COVID-19 pandemic, in April 2020 our directors have agreed to reduce their annual cash retainers by 20% for the remainder of 2020. Additionally, in June 2020, our Nominating and Governance Committee approved an amendment to our non-employee director compensation program. Under the amended program, all non-employee director compensation will be paid in cash on a quarterly basis (with the annual equity grant for 2020 paid in equal portions cash in each of the third and fourth quarters).
We also reimburse our non-employee directors for expenses incurred in connection with attending Board and committee meetings and provide our non-employee directors with business travel accident insurance.
In accordance with our 2018 Stock Plan for Non-Employee Directors, the maximum number of shares with respect to which awards may be granted to any non-employee director during any calendar year is 20,000.
Stock Ownership Guidelines
Under our non-employee director stock ownership guidelines, each non-employee director is required to hold a number of shares of Company common stock having a market value equal to or greater than five times the annual base cash retainer payable to the non-employee director. Until the applicable ownership guideline is achieved, each non-employee director is required to retain at least 50% of the shares acquired from Company restricted stock unit grants, other than any shares required to be sold to pay applicable taxes. Once the applicable ownership guideline is achieved, the aforementioned retention ratio will no longer apply. If a non-employee director’s share ownership subsequently falls back below the applicable ownership guideline and remains below the ownership guideline on a continuous basis for a period of more than 24 months, the non-employee director will be required to comply again with the retention ratio until such time as the non-employee director again achieves the ownership guideline.
The following table sets forth information regarding the compensation earned by our non-employee directors for the year ended December 31, 2020. Mr. Rabiller, who served as our President and Chief Executive Officer during the year ended December 31, 2020, and continues to serve in that capacity, does not receive additional compensation for his service as a director, and therefore is not included in the Director Compensation table below. All compensation paid to Mr. Rabiller is reported in the Summary Compensation Table included under “Executive Compensation.”
2020 Director Compensation Table
Name | | Fees Earned or Paid in Cash ($)(1) | | | Stock Awards ($)(2) | | | All Other Compensation ($)(3) | | | Total ($) | |
Carlos M. Cardoso | | | 295,500 | | | | — | | | | — | | | | 295,500 | |
Maura J. Clark | | | 210,500 | | | | — | | | | — | | | | 210,500 | |
Courtney M. Enghauser | | | 203,000 | | | | — | | | | — | | | | 203,000 | |
Susan L. Main | | | 203,000 | | | | — | | | | — | | | | 203,000 | |
Carsten J. Reinhardt | | | 203,000 | | | | — | | | | 4,536 | | | | 207,536 | |
Jérôme Stoll(4) | | | 145,535 | | | | — | | | | — | | | | 145,535 | |
Scott A. Tozier | | | 215,500 | | | | — | | | | — | | | | 215,500 | |
(1)
| Reflects cash retainer fees earned by our directors in 2020, which reflects a 20% reduction to the annual cash retainers set forth above, effective April 1, 2020 through December 31, 2020. Also reflects each director’s annual equity grant for 2020, which is paid in cash.
|
this reference.(2)
| As of December 31, 2020, none of our non-employee directors held outstanding equity awards.
|
(3)
| Amount for Mr. Reinhardt represents reimbursement of tax planning services.
|
(4)
| Mr. Stoll was appointed to our Board on March 26, 2020.
|
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial ownership of our common stock as of February 4, 2021, by:
| •
| each person, or group of affiliated persons, known to us to be the beneficial owner of more than 5% of the outstanding shares of our common stock as of such date based on currently available Schedules 13D and 13G filed with the SEC;
|
| •
| our named executive officers; and
|
| •
| all of our directors and executive officers as a group.
|
The number of shares of common stock beneficially owned by each person or entity is determined in accordance with the applicable rules of the SEC and includes voting or investment powerInformation with respect to shares of our common stock. The information is not necessarily indicative of beneficial ownership for any other purpose. Shares of our common stock issuable under restricted stock units that will vest, and stock options thatthis Item will be exercisable, on or before April 5, 2021, are deemed beneficially owned for computingset forth in our 2024 Proxy Statement, which will be filed with the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person. Unless otherwise indicated, to our knowledge, all persons named in the table have sole votingSecurities and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under community property laws. Unless otherwise indicated, the address of all directors and executive officers is La Pièce 16, Rolle, Switzerland 1180. The inclusion of any shares deemed beneficially owned in this table does not constitute an admission of beneficial ownership of those shares.
Name and Address of Beneficial Owner | | Total Number of Shares Beneficially Owned | | | Percentage of Common Stock Beneficially Owned(1) |
Holders of more than 5% of our Common Stock | | | | | | |
Oaktree and Centerbridge Group | | | 41,297,636 | | 2 | 54.5% |
Deccan Value Investors L.P. | | | 7,200,605 | | 3 | 9.5% |
Name and Address of Beneficial Owner | | Total Number of Shares Beneficially Owned | | | Percentage of Common Stock Beneficially Owned(1) |
Directors and Named Executive Officers: | | | | | | |
Olivier Rabiller | | | 214,675 | | 4 | * |
Carlos M. Cardoso | | | 9,190 | | | * |
Maura J. Clark | | | 9,190 | | | * |
Courtney M. Enghauser | | | 9,190 | | | * |
Susan L. Main | | | 9,190 | | | * |
Carsten J. Reinhardt | | | 6,432 | | | * |
Jérôme Stoll | | | — | | | * |
Scott A. Tozier | | | 9,190 | | | * |
Sean Deason | | | — | | | |
Craig Balis | | | 204,882 | | 5 | * |
Peter Bracke | | | 178,067 | | 6 | * |
Thierry Mabru | | | 89,374 | | 7 | * |
Jérôme Maironi | | | 148,101 | | 8 | * |
All current directors and executive officers as a group (15 persons) | | | 1,022,011 | | 9 | 1.3% |
*LessExchange Commission no later than 1% of our common stock.
Applicable percentage of ownership for each holder is based on 75,813,634 shares of common stock outstanding on February 4, 2021.
2 Oaktree Capital Management, L.P., Centerbride Partners, L.P., Honeywell International Inc., Attestor Value Master Fund LP; The Baupost Group, L.L.C., acting on behalf of certain managed funds; Cyrus Capital Partners, L.P., solely in its capacity as investment manager to and on behalf of certain managed funds and accounts; FIN Capital Partners LP acting to behalf of certain managed funds; Hawk Ridge Capital Management LP acting to behalf of certain managed funds; IngleSea Capital acting on behalf of certain managed funds or accounts; Keyframe Capital Partners, L.P., solely in its capacity as investment manager to and on behalf of certain managed funds; Newtyn Management, LLC on behalf of its advisee funds; Sessa Capital (Master), L.P.; Whitebox Multi- Strategy Partners, L.P.; and Benefit Street Partners, L.L.C. (collectively, the “Oaktree and Centerbridge Group”) entered into a Coordination Agreement, as amended and restated, in connection with submitting a proposal for a plan of reorganization to the Company that was ultimately selected by the Company. Accordingly, the Oaktree and Centerbridge Group constitutes a “group” as such term is used in Section 13(d)(3) of the Exchange Act. The following is the beneficial ownership of each of the members of the Oaktree and Centerbridge group:
| a.
| Based on a Schedule 13D/A filed on January 26, 2021, Oaktree Value Opportunities Fund Holdings, L.P. has sole voting and dispositive power with respect to 718,622 shares of common stock; Oaktree Value Opportunities Fund GP, L.P. has sole voting and dispositive power with respect to 718,622 shares of common stock, solely in its capacity as the general partner of Oaktree Value Opportunities Fund Holdings, L.P.; Oaktree Value Opportunities Fund GP Ltd. Has sole voting and dispositive power with respect to 718,622 shares of common stock, solely in its capacity as the general partner of Oaktree Value Opportunities Fund GP, L.P.; Oaktree Opportunities Fund Xb Holdings (Delaware), L.P. has sole voting and dispositive power with respect to 2,874,489 shares of common stock; Oaktree Fund GP, LLC has sole voting and dispositive power with respect to 2,874,489 shares of common stock, solely in its capacity as the general partner of Oaktree Opportunities Fund Xb Holdings (Delaware), L.P.; Oaktree Fund GP I, L.P. has sole voting and dispositive power with respect to 3,593,111 shares of common stock, solely in its capacity as the managing member of Oaktree Fund GP, LLC and the sole shareholder of Oaktree Value Opportunities Fund GP; Oaktree Capital I, L.P. has sole voting and dispositive power with respect to 3,593,111 shares of common stock, solely in its capacity as the general partner of Oaktree Fund GP I, L.P.; OCM Holdings I, LLC has sole voting and dispositive power with respect to 3,593,111 shares of common stock, solely in its capacity as the general partner of Oaktree Capital I, L.P.; Oaktree Holdings, LLC has sole voting and dispositive power with respect to 3,593,111 shares of common stock, solely in its capacity as the managing member of OCM Holdings I, LLC; Oaktree Capital Management, L.P. has sole voting and dispositive power with respect to 718,622 shares of common stock, solely in its capacity as the sole director of Oaktree Value Opportunities Fund GP Ltd; Oaktree Capital Management GP, LLC has sole voting and dispositive power with respect to 718,622 shares of common stock, solely in its capacity as the general partner of Oaktree Capital Management, L.P.; Atlas OCM Holdings, LLC has sole voting and dispositive power with respect to 718,622 shares of common stock, solely in its capacity as the sole managing member of Oaktree Capital Management GP, LLC; Oaktree Capital Group, LLC has sole voting and dispositive power with respect to 3,593,111 shares of common stock, solely in its capacity as the managing member of Oaktree Holdings, LLC; Oaktree Capital Group Holdings GP, LLC has sole voting and dispositive power with respect to 3,593,111 shares of common stock, solely in its capacity as the indirect owner of the class B units of each of Oaktree Capital Group, LLC and Atlas OCM Holdings, LLC; Brookfield Asset Management Inc. has sole voting and dispositive power with respect to 3,593,111 shares of common stock, solely in its capacity as the indirect owner of the class A units of each of Oaktree Capital Group, LLC and Atlas OCM Holdings, LLC; Partners Limited has sole voting and dispositive power with respect to 3,593,111 shares of common stock, solely in its capacity as the sole owner of Class B Limited Voting Shares of Brookfield Asset Management, Inc. (all such beneficial holders, the “Oaktree group”). The address of the Oaktree entities is 333 S. Grand Avenue, 28th Floor, Los Angeles, CA 90071.
|
| b.
| Based on a Schedule 13D/A filed on January 26, 2021, Centerbridge Credit Partners Master, L.P. (“Credit Partners Master”) has shared voting and dispositive power with respect to 584,237 shares; Centerbridge Credit Partners Offshore General Partner, L.P. (“Credit Partners Offshore GP”), as general partner of Credit Partners Master, with respect to the shares of common stock beneficially owned by Credit Partners Master, has shared voting and dispositive power with respect to 584,237 shares; Centerbridge Credit Caymen GP, Ltd., as general partner of Credit Partners Offshore GP, with respect to the shares of common stock beneficially owned by Credit Partners Master, has shared voting and dispositive power with respect to 584,237 shares; Centerbridge Credit GP Investors, L.L.C. (“Credit GP Investors”), as director of Credit Cayman GP, with respect to the shares of common stock beneficially owned by Credit Partners Master, has shared voting and dispositive power with respect to 584,237 shares; Centerbridge Special Credit Partners III-Flex, L.P. (“SC III-Flex”), has shared voting and dispositive power with respect to 2,805,763 shares; Centerbridge Special Credit Partners General Partner III, L.P. (“Special Credit III GP”), as general partner of SC III-Flex, with respect to the shares
|
| | of common stock beneficially owned by SC III-Flex, has shared voting and dispositive power with respect to 2,805,763 shares; CSCP III Cayman GP Ltd. (“CSCP III Cayman GP”), as general partner of Special Credit III GP, with respect to the common stock beneficially owned by SC III-Flex, has shared voting and dispositive power with respect to 2,805,763 shares; Mark T. Gallogly (“Mr. Gallogly”), as a director of CSCP III Cayman GP and a managing member of Credit GP Investors, with respect to the shares of common stock beneficially owned by Credit Partners Master and SC III-Flex, has shared voting and dispositive power with respect to 3,390,000 shares; and Jeffrey H. Aronson (“Mr. Aronson”), as a director of CSCP III Cayman GP and a managing member of Credit GP Investors, with respect to the shares of common stock beneficially owned by Credit Partners Master and SC III-Flex, has shared voting and dispositive power with respect to 3,390,000 shares (all such beneficial holders, the “Centerbridge group”). The address of the Centerbridge entities is 375 Park Avenue, 12th Floor, New York, New York 10152.
|
| c.
| Based on a Schedule 13D/A filed on November 17, 2020, Honeywell International Inc. has sole voting and dispositive power with respect to 2,415,549 shares of common stock. The address of Honeywell International Inc. is 300 South Tryon Street, Charlotte, North Carolina 28202.
|
| d.
| Based on a Schedule 13D filed on October 26, 2020, Attestor Value Master Fund LP (“Attestor”) has sole voting and dispositive power with respect to 2,661,970 shares of common stock; Attestor Value Fund GP Limited (“Attestor GP”), as the sole general partner of Attestor, has sole voting and dispositive power with respect to 2,661,970 shares of common stock; Attestor Capital Limited (“Attestor Capital”), as the manager to Attestor GP, has sole voting and dispositive power with respect to 2,661,970 shares of common stock; Attestor Limited (“Attestor Limited”), as the investment manager to Attestor, has sole voting and dispositive power with respect to 2,661,970 shares of common stock; and Jan-Christoph Peters, as the sole director and sole indirect shareholder of Attestor Limited, has sole voting and dispositive power with respect to 2,661,970 shares of common stock. The address of Attestor, Attestor GP and Attestor Capital is c/o Attestor Value Fund GP Limited, Ugland House, PO Box 309, Grand Cayman KY1-1104, Cayman Islands. The address of Attestor Limited and Mr. Peters is 7 Seymour Street, London W1H 7JW, United Kingdom.
|
| e.
| Based on a Schedule 13D/A filed on January 26, 2021, Baupost Group LLC/MA (“Baupost") has shared voting and dispositive power with respect to 3,575,000 shares of common stock; Baupost Group GP L.L.C. (“BG GP”), as the Manager of Baupost, has shared voting and dispositive power with respect to 3,575,000 shares of common stock; and Seth A. Klarman, as the sole Managing Member of BG GP and a controlling person of Baupost, has shared voting and dispositive power with respect to 3,575,000 shares of common stock (all such beneficial holders, the “Baupost group”). The address of the Baupost Group is 10 St. James Avenue, Suite 1700, Boston, Massachusetts 02116.
|
| f.
| Based on a Schedule 13D filed on October 6, 2020, Cyrus Capital Partners, L.P. (“Cyrus Capital Partners”), as the investment manager of certain private investment funds that directly hold shares of common stock, has sole voting and dispositive power with respect to 10,220,254 shares of common stock; Cyrus Capital Partners GP, L.L.C. (“Cyrus Capital GP”), as the general partner of Cyrus Capital Partners and the managing member of Cyrus Capital Advisors, L.L.C. (“Cyrus Capital Advisors”), has sole voting and dispositive power with respect to 10,220,254 shares of common stock; Cyrus Capital Advisors has sole voting and dispositive power with respect to 6,000,171 shares of common stock; and Stephen C. Freidheim, as the Chief Investment Officer of Cyrus Capital Partners and is the sole member and manager of Cyrus Capital GP, has sole voting and dispositive power with respect to 10,220,254 shares of common stock (all such beneficial holders, the “Cyrus Capital group”). The address of the Cyrus Capital group is c/o Cyrus Capital Partners, L.P., 65 East 55th Street, 35th Floor, New York, New York, 10022.
|
| g.
| Based on a Schedule 13D/A filed on December 23, 2020, FIN Capital Partners LP (“FCP”) has sole voting and dispositive power with respect to 445,000 shares of common stock; FIN Capital Management LLC (“FCM”), as the investment manager of FCP has sole voting and dispositive power with respect to 445,000 shares of common stock; Finn Management GP LLC (“FMGP”), as the general partner of FCP, has sole voting and dispositive power with respect to 445,000 shares of common stock; and Brian A. Finn, as manager of FCM and FMGP, has sole voting and dispositive power with respect to 445,000 shares of common stock (all such beneficial holders the “FIN group”). The address of the FIN group is 336 West 37th Street, Suite 200, New York NY 10018.
|
| h.
| Based on a Schedule 13D filed on October 26, 2020, Hawk Ridge Master Fund, L.P. (“Hawk Ridge”) has sole voting and dispositive power with respect to 2,336,564 shares of common stock; Hawk Ridge Management, LLC (“Hawk Ridge GP”), as the general partner of Hawk Ridge, has sole voting and dispositive power with respect to 2,336,564 shares of common stock; Hawk Ridge Capital Management, L.P. (“Hawk Ridge LP”), as the investment manager to Hawk Ridge, has sole voting and dispositive power with respect to 2,336,564 shares of common stock; Hawk Ridge Capital Management GP LLC (“Hawk Ridge Capital GP”), as the general
|
| | partner of Hawk Ridge LP, has sole voting and dispositive power with respect to 2,336,564 shares of common stock; and David G. Brown, as the portfolio manager of Hawk Ridge LP and sole member and manager of Hawk Ridge GP and Hawk Ridge Capital GP, has sole voting and dispositive power with respect to 2,336,564 shares of common stock (all such beneficial holders, the “Hawk Ridge group”). The address of the Hawk Ridge group is 12121 Wilshire Blvd. Suite 900, Los Angeles CA 90025.
|
| i.
| Based on a Schedule 13D filed on October 29, 2020, IngleSea Capital, LLC has sole voting and dispositive power with respect to 300,000 shares of common stock. The address of IngleSea Capital, LLC is 7800 SW 57th Ave, Unit 308, South Miami, Florida 33143.
|
| j.
| Based on a Schedule 13D filed on October 28, 2020, Keyframe Fund I, L.P. has shared voting and dispositive power with respect to 263,900 shares of common stock; Keyframe Fund II, L.P. has shared voting and dispositive power with respect to 225,226 shares of common stock; Keyframe Fund III, L.P. has shared voting and dispositive power with respect to 564,200 shares of common stock; Keyframe Fund IV, L.P. (together with the three preceding entities, the “Keyframe Funds”) has shared voting and dispositive power with respect to 452,724 shares of common stock; Keyframe Capital Advisors, L.L.C (“KCA”), as the general partner of each of the Keyframe Funds, has shared voting and dispositive power with respect to 1,506,050 shares of common stock; Keyframe Capital Partners, L.P. (“KCP”), as investment manager to the Keyframe Funds, has shared voting and dispositive power with respect to 1,506,050 shares of common stock; Keyframe Capital Partners GP, L.L.C. (“KCPGP”), as the general partner of KCP, has shared voting and dispositive power with respect to 1,506,050 shares of common stock; and John R. Rapaport, as the Chief Investment Officer and Managing Partner of KCP and the Managing Member of both KCA and KCPGP, has shared voting and dispositive power with respect to 1,506,050 shares of common stock (all such beneficial holders, the “Keyframe group”). The address of the Keyframe group is 65 East 55th Street, 35th Floor, New York, New York 10022.
|
| k.
| Based on a Schedule 13D/A filed on January 11, 2021, Newtyn Partners, LP (“NP”) has shared voting and dispositive power with respect to 1,117,299 shares of common stock; Newtyn TE Partners, LP (“NTE”) has shared voting and dispositive power with respect to 684,796 shares of common stock; Newtyn Management, LLC (“NM”), as the investment manager of NP and NTE, has shared voting and dispositive power with respect to 1,802,095 shares of common stock; Newtyn Capital Partners, LP (“NCP”), as the general partner to each of NP and NTE, has shared voting and dispositive power with respect to 1,802,095 shares of common stock; Ledo Capital, LLC (“Ledo”), as the general partner to NCP, has shared voting and dispositive power with respect to 1,802,095 shares of common stock; and Noah Levy, as managing member to NM, has shared voting and dispositive power with respect to 1,802,095 shares of common stock (all such beneficial holders, the “Newtyn group”). The address of the Newtyn group is 60 East 42nd Street, 9th Floor, New York, New York 10165.
|
| l.
| Based on a Schedule 13D filed on September 29, 2020, Sessa Capital (Master), L.P. (“Sessa Capital”) has sole voting and dispositive power with respect to 6,912,204 shares of common stock; Sessa Capital GP, LLC (“Sessa Capital GP”), as a result of being the sole general partner of Sessa Capital, has sole voting and dispositive power with respect to 6,912,204 shares of common stock; Sessa Capital IM, L.P. (“Sessa IM”), as a result of being the investment adviser for Sessa Capital, has sole voting and dispositive power with respect to 6,912,204 shares of common stock; Sessa Capital IM GP, LLC (“Sessa IM GP”), as a result of being the sole general partner of Sessa IM, has sole voting and dispositive power with respect to 6,912,204 shares of common stock; and John Petry, as a result of being the manager of Sessa Capital GP and Sessa IM GP, has sole voting and dispositive power with respect to 6,912,204 shares of common stock (all such beneficial holders, the “Sessa Capital group”). The address of the Sessa Capital group is 888 Seventh Avenue, 30th Floor, New York, New York, 10019.
|
| m.
| Based on a Schedule 13D/A filed on January 26, 2021, Whitebox Advisors LLC (“WA”) has shared voting and dispositive power with respect to 750,000 shares of common stock; Whitebox General Partner LLC (“WB GP”) has shared voting and dispositive power with respect to 750,000 shares of common stock; and Whitebox Multi-Strategy Partners, L.P. (“WMP”) has shared voting and dispositive power with respect to 750,000 shares of common stock. WA manages and advises private investment funds, including WMP. WB GP serves as general partner of private investment funds, including WMP. The principal business address for each of WA and WB GP is 3033 Excelsior Boulevard, Suite 500, Minneapolis, Minnesota 55416. The principal business address for WMP is c/o Mourant Ozannes Corporate Services (Cayman) Limited, 94 Solaris Avenue, Camana Bay, Grand Cayman KY1-1108 Cayman Islands.
|
| n.
| Based on a Schedule 13D/A filed on January 12, 2021, Benefit Street Partners L.L.C. (“BSP”) has shared voting and dispositive power with respect to 1,389,839 shares of common stock, which ncludes (i) 240,510 shares held by Benefit Street Partners Dislocation Fund L.P., (ii) 359,000 shares held by Benefit Street Partners Dislocation Fund (Cayman) Master L.P., (iii) 740,329 shares held by BSP Special Situations Master A L.P. and (iv) 50,000 shares held by BSP Credit Solutions Fund, LP (collectively, the “BSP Funds”). Thomas J. Gahan has shared voting and dispositive power with respect to 1,389,839 shares of common stock. BSP is a registered investment adviser and serves as the investment adviser to each of the BSP Funds. Thomas J. Gahan controls BSP through his indirect ownership of membership interests of BSP and as Chief Executive Officer of BSP’s sole managing member.
|
3 Information is based on a Schedule 13G/A filed by Deccan Value Investors L.P. (the “Deccan Investment Manager”) and Vinit Bodas on February 14, 2020. According to the Schedule 13G/A, each of the Deccan Investment Manager and Mr. Bodas has shared voting power and shared dispositive power over all 7,200,605 shares. The Deccan Investment Manager serves as an investment manager with respect to the shares held by certain funds and managed accounts. Mr. Bodas is the managing member of Deccan Value LLC, the general partner of the Deccan Investment Manager. The address for these beneficial owners is Vinit Bodas, One Fawcett Place, Greenwich, CT 06830.
4 Includes options to purchase 54,276 shares and 17,362 restricted stock units that will vest on or before April 5, 2021.
5 Includes options to purchase 13,784 shares and 42,976 restricted stock units that will vest on or before April 5, 2021.
6 Includes options to purchase 6,270 shares and 27,715 restricted stock units that will vest on or before April 5, 2021.
7 Includes options to purchase 11,164 shares and 19,599 restricted stock units that will vest on or before April 5, 2021.
8 Includes options to purchase 14,654 shares and 25,942 restricted stock units that will vest on or before April 5, 2021.
9 Includes options to purchase 116,782 shares and 159,721 restricted stock units that will vest on or before April 5, 2021.
Securities Authorized For Issuance under Equity Compensation Plans (As of120 days after December 31, 2020)
Plan Category | | Number of Shares to be issued upon exercise of outstanding options, warrants and rights (#) | | | | Weighted- average exercise price of outstanding options, warrants and rights ($) | | | | Number of Shares remaining available for future issuance under equity compensation plans (excluding shares reflected in the first column) (#)(1) | |
Equity compensation plans approved by security holders | | | 2,256,597 | | (2) | | | 16.17 | | (3) | | | 5,986,312 | |
Equity compensation plans not approved by security holders | | | — | | | | | — | | | | | — | |
Total | | | 2,256,597 | | | | | 16.17 | | | | | 5,986,312 | |
(1)
| Consists of the 2018 Plan and the 2018 Stock Plan for Non-Employee Directors.
|
2023. For the limited purpose of providing the information necessary to comply with this Item 12, the 2024 Proxy Statement is incorporated herein by this reference.(2)
| Represents shares underlying Company stock options and unvested Company RSUs granted under the 2018 Plan and the 2018 Stock Plan for Non-Employee Directors, with PSUs included at “target” levels.
|
(3)
| Represents the weighted-average exercise price of Company stock options granted under the 2018 Plan.
|
Item 13. Certain Relationships and Related Transactions, and Director Independence
Policies and Procedures for Approval of Related Party Transactions
Our Board has adopted written policies and procedures (the “Policy”) for the review, approval and ratification of any transaction, arrangement or relationship (or any series of similar transactions, arrangements or relationships) (“Related Person Transactions”) in which the Company (including any of its subsidiaries) was, is or
Information with respect to this Item will be
a participant and the amount involved exceeds $120,000, andset forth in
our 2024 Proxy Statement, which
any “Related Person” had, has or will
have a direct or indirect material interest. Under the Policy, a “Related Person” includes (i) any person who is, or at any time since the beginning of the Company’s last fiscal year was, a director, executive officer or a nominee to become a director of the Company; (ii) any person (or group) who is the beneficial owner of more than 5% of any class of the Company’s voting securities; (iii) any immediate family member of any of the foregoing persons; and (iv) any firm, corporation or other entity in which any of the foregoing persons is employed or is a general partner or principal or in a similar position or in which such person has a 10% or greater beneficial ownership interest.Prior to entering into any Related Person Transaction, the Related Person must provide notice to our General Counsel of the facts and circumstances of the proposed Related Person Transaction. The Policy calls for the proposed transaction to be assessed by the General Counsel and, if determined to be a Related Person Transaction, submitted to the Nominating and Governance Committee for its consideration at the next Nominating and Governance Committee meeting or, if the General Counsel, in consultationfiled with the Chief Executive Officer or Chief Financial Officer, determines that itSecurities and Exchange Commission no later than 120 days after December 31, 2023. For the limited purpose of providing the information necessary to comply with this Item 13, the 2024 Proxy Statement is not practicable or desirable to wait until the next Nominating and Governance Committee meeting, to the Chair of the Nominating and Governance Committee.
The Nominating and Governance Committee or Chair of the Nominating and Governance Committee, as applicable, will review and consider all the relevant facts and circumstances available, including but not limited to:
•the benefits to the Company of the proposed transaction;
•the impact on a director’s independence in the event the Related Person is a director, an immediately family member of a director or an entity in which a director is a partner, stockholder or executive officer;
•the availability of other sources for comparable products or services; and
•the terms of the transaction and the terms available to unrelated third parties or to employees generally.
The Nominating and Governance Committee (or the Chair of the Nominating and Governance Committee) shall approve only those Related Person Transactions that are in, or are not inconsistent with, the best interests of the Company, as the Nominating and Governance Committee (or its Chair) determines in good faith. From time to time, the Nominating and Governance Committee shall review certain previously approved or ratified Related Person Transactions that remain ongoing in nature.
Relationships and Transactions with Directors, Executive Officers and Significant Stockholders
We have not been a party to any Related Person Transactions since January 1, 2020.
Independence of the Board of Directors
Although we are no longer listed on the NYSE, our Board continues to apply the NYSE independence criteria in assessing director independence. Our Board has determined that all of our non-employee directors, who are listed below, meet the applicable criteria for independence establishedincorporated herein by the NYSE. Olivier Rabiller is not an independent director under the NYSE rules due to his employment as our Chief Executive Officer and President.
Independent Directors
| | |
Carlos M. Cardoso
Maura J. Clark
| Courtney M. Enghauser
Susan L. Main
| Carsten J. Reinhardt
Jérôme Stoll
Scott A. Tozier
|
In addition, each member of the Audit Committee (Mr. Tozier, Mr. Cardoso, Ms. Enghauser and Ms. Main) meets the heightened independence standards required for audit committee members under NYSE rules and SEC standards and each member of the Compensation Committee (Mr. Reinhardt, Mr. Cardoso, Ms. Clark and Mr. Tozier) meets the heightened independence standards required for compensation committee members under the NYSE rules and SEC standards.
In arriving at the foregoing independence determinations, the Board reviewed and discussed information provided by the directors with regard to each director’s business and personal activities and any relationships they have with us and our management. The Board considered that Carsten J. Reinhardt is a director and minority shareholder of TMax Holding GmbH (“TMax”), a supplier to Garrett. In 2020, the Company’s payments to TMax did not exceed 2% of TMax’ gross revenues. The Board determined that this relationship does not impair Mr. Reinhardt’s independence. The Board also considered that Jérôme Stoll was an employee of Renault during 2020, a customer of Garrett. In 2020, the Company’s payments from Renault did not exceed 2% of Renault’s revenues. The Board determined that this relationship does not impair Mr. Stoll’s independence.
reference. Item 14. Principal Accountant Fees and Services
The following table summarizes the fees of Deloitte SA, our independent registered public accounting firm, billed
Information with respect to
us for each of the last two fiscal years.Fee Category | | December 31, 2020 | | | December 31, 2019 | |
Audit Fees(1) | | $ | 3,978,000 | | | $ | 3,706,000 | |
Audit-Related Fees(2) | | | 16,500 | | | | 7,000 | |
Tax Fees(3) | | | — | | | | 76,000 | |
Total Fees | | $ | 3,994,500 | | | $ | 3,789,000 | |
(1) Audit fees consist of fees for the audit of our financial statements, the review of the interim financial statements includedthis Item will be set forth in our quarterly reports on Form 10-Q, and other professional services provided in connection with statutory and regulatory filings or engagements.
(2) Audit-related fees consist of fees that are reasonably related to the performance of the audit and the review of our financial statements and2024 Proxy Statement, which are not reported under “Audit Fees.”
(3) Tax fees consist of fees for tax-related services, including tax compliance and tax advice.
Pre-Approval Policies and Procedures
The Audit Committee has adopted policies and procedures relating to the approval of all audit and non-audit services that are towill be performed by the Company’s independent registered public accounting firm. This policy provides that the Company will not engage its independent registered public accounting firm to render audit or non-audit services unless the Audit Committee specifically approves the service in advance. Between regularly scheduled meetings of the Audit Committee, the chairperson of the Audit Committee may pre-approve the terms and fees of non-audit engagementsfiled with the independent auditor. Any such pre-approvalsSecurities and Exchange Commission no later than 120 days after December 31, 2023. For the limited purpose of providing the information necessary to comply with this Item 14, the 2024 Proxy Statement is incorporated herein by the chairperson of the Audit Committee will be presented to the full Audit Committee at its next regularly scheduled meeting.
this reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
1.The following financial statements are included in Item 8 “Financial Statements and Supplementary Data” herein.
2.The following financial statement schedule should be considered in conjunction with our consolidated financial statements. All other schedules are omitted because they are not applicable, not required or the required information is shown in the consolidated financial statements or notes thereto.
GARRETT MOTION INC.
Schedule II-Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For and as of the year ending: | | Balance at Beginning of Period | | Additions Charged to Costs and Expenses | | Deductions | | Foreign
Exchange
Translation
Adjustment | | | | Balance at End of Period |
| | (Dollars in millions) |
| December 31, 2023 | | | | | | | | | | | | |
| Allowance for expected credit losses | | $ | 9 | | | $ | 2 | | | $ | (5) | | | $ | — | | | | | $ | 6 | |
| Inventory reserves | | 31 | | | 13 | | | (4) | | | 1 | | | | | 41 | |
| Tax valuation allowance | | 31 | | | 20 | | | (1) | | | 2 | | | | | 52 | |
| December 31, 2022 | | | | | | | | | | | | |
| Allowance for expected credit losses | | $ | 5 | | | $ | 4 | | | $ | — | | | $ | — | | | | | $ | 9 | |
| Inventory reserves | | 29 | | | 7 | | | (3) | | | (2) | | | | | 31 | |
| Tax valuation allowance | | 32 | | | — | | | (1) | | | — | | | | | 31 | |
| December 31, 2021 | | | | | | | | | | | | |
| Allowance for expected credit losses | | $ | 13 | | | $ | 3 | | | $ | (11) | | | $ | — | | | | | $ | 5 | |
| Inventory reserves | | 41 | | | 5 | | | (15) | | | (2) | | | | | 29 | |
| Tax valuation allowance | | 34 | | | 5 | | | (4) | | | (3) | | | | | 32 | |
3.The exhibits to this report are listed below | | | Incorporated by Reference |
Exhibit Number | | Description | Form | File No. | Exhibit | Filing Date | Filed/ Furnished Herewith |
2.1 | | Indemnification and Reimbursement Agreement, dated September 12, 2018, by and among Honeywell ASASCO Inc., Honeywell ASASCO 2 Inc., and Honeywell International Inc. | 10-K | 001-38636 | 2.1 | 2/27/2020 | |
2.2 | | First Amendment, dated as of June 12, 2020, to the Indemnification and Reimbursement Agreement, dated as of September 12, 2018, among HHI, Honeywell International Inc., and Garrett ASASCO | 8-K | 001-38636 | 10.2 | 6/12/2020 | |
2.3 | | Tax Matters Agreement, dated September 12, 2018, by and between Honeywell International Inc., Garrett Motion Inc., and, solely for purposes of Section 3.02(g), 5.05 and 6.13(b), Honeywell ASASCO Inc. and Honeywell ASASCO 2 Inc. | 8-K | 001-38636 | 2.2 | 9/14/2018 | |
2.4 | | Share and Asset Purchase Agreement, dated as of September 20, 2020, by and among Garrett Motion Inc., Garrett Motion Holdings Inc., Garrett ASASCO Inc., Garrett Motion Holdings II Inc., AMP Intermediate B.V. and AMP U.S. Holdings, LLC | 8-K | 001-38636 | 10.2 | 9/21/2020 | |
2.5 | | Waiver Letter to Share and Asset Purchase Agreement, dated October 12, 2020, by and among Garrett Motion Inc., Garrett Motion Holdings Inc., Garrett ASASCO Inc., Garrett Motion Holdings II Inc. and AMP Intermediate B.V. | 8-K | 00138636 | 10.1 | 10/13/2020 | |
3.1 | | Amended and Restated Certificate of Incorporation of Garrett Motion Inc. | S-8 | 333-227619 | 4.1 | 10/1/2018 | |
3.2 | | Amended and Restated By-laws of Garrett Motion Inc. | 8-K | 333-227619 | 4.2 | 10/1/2018 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Incorporated by Reference |
Exhibit
Number | | Description | Form | File No. | Exhibit | Filing
Date | Filed/
Furnished Herewith |
| 2.1 | | | 8-K | 001-38636 | 2.1 | 4/27/2021 | |
| 3.1 | | | 8-K | 001-38636 | 3.1 | 4/30/2021 | |
4.1 | | Indenture, dated as of September 27, 2018, between Garrett LX I S.à r.l, Garrett Borrowing LLC, the Company, the guarantors named therein, Deutsche Trustee Company Limited, as Trustee, Deutsche Bank AG, London Branch, as Security Agent and Paying Agent, and Deutsche Bank Luxembourg S.A., as Registrar and Transfer Agent | 8-K | 001-38636 | 4.1 | 10/1/2018 | |
4.2 | | Description of Capital Stock | 10-K | 001-38636 | 4.2 | 2/27/2020 | |
10.1 | | Credit Agreement, dated as of September 27, 2018, 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 Honeywell Technologies Sàrl, the Lenders and Issuing Banks party hereto and JPMorgan Chase Bank, N.A., as administrative agent | 8-K | 001-38636 | 10.1 | 10/1/2018 | |
10.2 | | First Amendment, dated as of June 12, 2020, to the Credit Agreement dated as of September 27, 2018, 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, Garrett Motion Sàrl (f/k/a Honeywell Technologies Sàrl), the other Loan Parties party thereto, the Lenders and Issuing Banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent | 8-K | 001-38636 | 10.1 | 6/12/2020 | |
10.3 | | Intercreditor Agreement, dated as of September 27, 2018, among Garrett Motion Inc., Garrett LX I S.à r.l, Garrett LX II S.à r.l, Garrett LX III S.à r.l, Honeywell Technologies Sàrl, Garrett Borrowing LLC, other debtors and grantors party thereto, JPMorgan Chase Bank, N.A., Deutsche Trust Company Limited, Deutsche Bank AG, London Branch, other lenders party thereto from time to time, Honeywell ASASCO 2 Inc., and each additional representative from time to time party thereto | 8-K | 001-38636 | 10.2 | 10/1/2018 | |
10.4 | | Restructuring Support Agreement, dated as of September 20, 2020, by and among Garrett Motion Inc., the Company Parties and the Consenting Lenders | 8-K | 001-38636 | 10.1 | 9/21/2020 | |
10.5 | | First Amendment, dated as of January 6, 2021, to the Restructuring Support Agreement, dated as of September 20, 2020, by and among Garrett Motion Inc., the Company Parties and the Consenting Lenders | 8-K | 001-38636 | 10.1 | 1/8/2021 | |
10.6 | | DIP Credit Agreement, dated as of October 9, 2020, by and among Garrett Motion Inc., the lenders party thereto and Citibank, N.A. as Administrative Agent | 8-K | 00138636 | 10.1 | 10/9/2020 | |
10.7 | | First Amendment to the DIP Credit Agreement, dated October 12, 2020 | 8-K | 00138636 | 10.1 | 10/15/2020 | |
10.8 | | Proposed Amended and Restated Plan Support Agreement, dated as of February 15, 2021, by and among the Debtors, Centerbridge Partners, L.P., Oaktree Capital Management, L.P., Honeywell International Inc., and the additional parties named therein | | | | | * |
| | | | | | | | | | | | | | | | | | | | | | | |
| 3.2 | | | 8-K | 001-38636 | 3.1 | 4/28/2022 | |
| 3.3 | | | DEF
14C | 001-38636 | | 2/9/2022 | |
| 3.4 | | | DEF 14C | 001-38636 | | 2/9/2022 | |
| 3.5 | | | 10-Q | 001-38636 | 3.4 | 7/27/2023 | |
| 3.6 | | | 10-Q | 001-38636 | 3.5 | 7/27/2023 | |
| 3.7 | | | 8-K | 001-38636 | 5.0 | 12/7/2023 | |
| 4.1 | | | | | | | * |
| 10.1† | | | 10-12B | 001-38636 | 10.1 | 8/23/2018 | |
| 10.2† | | | 10-12B | 001-38636 | 10.4 | 8/23/2018 | |
| 10.3† | | | 10-12B | 001-38636 | 10.5 | 8/23/2018 | |
| 10.4† | | | 10-Q | 001-38636 | 10.1 | 7/30/2020 | |
| 10.5† | | | 10-Q | 001-38636 | 10.1 | 5/11/2020 | |
| 10.6† | | | 10-K | 001-38636 | 10.20 | 2/27/2020 | |
| 10.7† | | | 10-K | 001-38636 | 10.21 | 2/27/2020 | |
| 10.8† | | | 8-K | 001-38636 | 10.1 | 6/19/2020 | |
| 10.9† | | | 8-K | 001-38636 | 10.1 | 5/28/2021 | |
| 10.10† | | | 8-K | 001-38636 | 10.2 | 5/28/2021 | |
| 10.11† | | | 8-K | 001-38636 | 10.3 | 5/28/2021 | |
| 10.12† | | | 8-K | 001-38636 | 10.4 | 5/28/2021 | |
| 10.13† | | | 8-K | 001-38636 | 10.5 | 5/28/2021 | |
| 10.14† | | | 10-Q | 001-38636 | 10.4 | 7/27/2023 | |
| 10.15 | | Credit Agreement, dated April 30, 2021, among Garrett Motion Inc., Garrett LX I S.à r.l., Garrett Motion Holdings, Inc., Garrett Motion Sàrl, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent | 8-K | 001-38636 | 10.1 | 4/30/2021 | |
| 10.16 | | Amendment No. 1, dated January 11, 2022, to the Credit Agreement, dated April 30, 2021, among Garrett Motion Inc., Garrett LX I S.à r.l., Garrett Motion Holdings, Inc., Garrett Motion Sàrl, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent | 10-K | 001-38636 | 10.31 | 2/14/2022 | |
10.9 | | Proposed Equity Backstop Commitment Agreement, dated as of January 22, 2021, by and among the Debtors, Centerbridge Partners, L.P., Oaktree Capital Management, L.P., and the additional parties named therein | 8-K | 001-38636 | 10.1 | 1/25/2021 | |
10.10† | | 2018 Stock Incentive Plan of Garrett Motion Inc. and its Affiliates | S-8 | 333-227619 | 4.3 | 10/1/2018 | |
10.11† | | 2018 Stock Plan for Non-Employee Directors of Garrett Motion Inc. | S-8 | 333-227619 | 4.4 | 10/1/2018 | |
10.12† | | 2018 Stock Incentive Plan of Garrett Motion Inc. and its Affiliates Form of Stock Option Award Agreement | S-8 | 333-227619 | 4.5 | 10/1/2018 | |
10.13† | | 2018 Stock Incentive Plan of Garrett Motion Inc. and its Affiliates Form of Restricted Stock Unit Agreement | S-8 | 333-227619 | 4.6 | 10/1/2018 | |
10.14† | | 2018 Stock Incentive Plan of Garrett Motion Inc. and its Affiliates Form of Restricted Stock Unit Agreement (for replacement awards) | S-8 | 333-227619 | 4.7 | 10/1/2018 | |
10.15† | | 2018 Stock Incentive Plan of Garrett Motion Inc. and its Affiliates Form of Performance Stock Unit Agreement | S-8 | 333-227619 | 4.8 | 10/1/2018 | |
10.16† | | 2018 Stock Incentive Plan of Garrett Motion Inc. and its Affiliates Form of Performance Unit Agreement | S-8 | 333-227619 | 4.9 | 10/1/2018 | |
10.17† | | 2018 Stock Plan for Non-Employee Directors of Garrett Motion Inc. Form of Stock Option Award Agreement | S-8 | 333-227619 | 4.10 | 10/1/2018 | |
10.18† | | 2018 Stock Plan for Non-Employee Directors of Garrett Motion Inc. Form of Restricted Stock Unit Agreement | S-8 | 333-227619 | 4.11 | 10/1/2018 | |
10.19† | | Offer Letter for Olivier Rabiller, dated May 2, 2018 | 10-12B | 001-38636 | 10.1 | 8/23/2018 | |
10.20† | | Offer Letter for Daniel Deiro, dated June 1, 2018 | 10-12B | 001-38636 | 10.3 | 8/23/2018 | |
10.21† | | Offer Letter for Thierry Mabru, dated June 1, 2018 | 10-12B | 001-38636 | 10.4 | 8/23/2018 | |
10.22† | | Offer Letter for Craig Balis, dated June 1, 2018 | 10-12B | 001-38636 | 10.5 | 8/23/2018 | |
10.23† | | Letter Agreement, dated May 31, 2018, between Honeywell Transportation Systems and Peter Bracke | 10-Q | 001-38636 | 10.2 | 11/8/2019 | |
10.24† | | Addendum to Employment Contract, dated as of September 3, 2019, between Garrett Motion Sàrl and Peter Bracke | 10-Q | 001-38636 | 10.3 | 11/8/2019 | |
10.25† | | Addendum to Employment Agreement, dated June 8, 2020, between Garrett Motion Sàrl and Peter Bracke | 10-Q | 001-38636 | 10.2 | 7/30/2020 | |
10.26† | | Employment Contract, dated May 29, 2020, between Garrett Motion Sàrl, Garrett Motion Inc. and Sean Deason | 10-Q | 001-38636 | 10.1 | 7/30/2020 | |
10.27† | | Offer Letter for Jérôme Maironi, dated June 1, 2018 | 10-Q | 001-38636 | 10.1 | 5/11/2020 | |
10.28† | | Non-Employee Director Compensation Program | 10-K | 001-38636 | 10.20 | 2/27/2020 | |
10.29† | | Severance Pay Plan for Designated Executive Employees of Garrett Motion Inc. | 10-K | 001-38636 | 10.21 | 2/27/2020 | |
10.30† | | Form of Continuity Award Agreement | 8-K | 001-38636 | 10.1 | 6/19/2020 | |
21.1 | | List of Subsidiaries | | | | | * |
23.1 | | Consent of Independent Registered Public Accounting Firm | | | | | * |
| | | | | | | | | | | | | | | | | | | | | | | |
| 10.17 | | Amendment No. 2, dated March 23, 2022, to the Credit Agreement, dated April 30, 2021, among Garrett Motion Inc., Garrett LX I S.à r.l., Garrett Motion Holdings, Inc., Garrett Motion Sàrl, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent | POS
AM | 333-256659 | 10.1 | 6/9/2022 | |
| 10.18 | | Amendment No. 3, dated April 27, 2023, to the Credit Agreement, dated April 30, 2021, among Garrett Motion Inc., Garrett LX I S.à r.l., Garrett Motion Holdings, Inc., Garrett Motion Sàrl, the lenders and issuing banks party thereto and JPMorgan Chase Bank, N.A., as administrative agent. | 8-K | 001-38636 | 10.1 | 5/01/2023 | |
| 10.19 | | | 8-K | 001-38636 | 10.2 | 4/30/2021 | |
| 10.20 | | | 8-K | 001-38636 | 10.3 | 4/30/2021 | |
| 10.21 | | | 8-K | 001-38636 | 10.1 | 4/14/2023 | |
| 10.22 | | | 8-K | 001-38636 | 10.2 | 4/14/2023 | |
| 21.1 | | | | | | | * |
| 23.1 | | | | | | | * |
| 31.1 | | | | | | | * |
| 31.2 | | | | | | | * |
| 32.1 | | | | | | | ** |
| 32.2 | | | | | | | ** |
| 97 | | | | | | | * |
| 99.1 | | | 8-K | 001-38636 | 2.1 | 4/27/2021 | |
| 101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | * |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | * |
**
| Furnished* Filed herewith
|
†
| Management contract or compensation plan or arrangement
|
** Furnished herewith† Management contract or compensation plan or arrangement
Item 16. Form 10- K Summary
None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| Garrett Motion Inc. |
Date: February 16, 2021 15, 2024 | By: | /s/ Olivier Rabiller |
| | Olivier Rabiller |
| | President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ Olivier Rabiller | | President, Chief Executive Officer and Director
| | February 15, 2024 |
| Olivier Rabiller | | (Principal Executive Officer) | | |
| | February 16, 2021
| | |
Olivier Rabiller
| | |
| | | | |
/s/ Sean Deason | | Senior Vice President and Chief Financial Officer
| | February 15, 2024 |
| Sean Deason | | (Principal Financial Officer) | | |
| | February 16, 2021
| | |
Sean Deason
| | |
| | | | |
/s/ Russell James Joanne Lau | | Vice President and Corporate Controller (Principal | | February 15, 2024 |
| Joanne Lau | | (Principal Accounting Officer) | | |
| | February 16, 2021
| | |
Russell James
| | |
| | | | |
/s/ Carlos M. Cardoso Daniel Ninivaggi | | Chairman of the Board and Director | | February 16, 2021 15, 2024 |
Carlos M. Cardoso
Daniel Ninivaggi | | | | |
| | | | |
| /s/ D'aun Norman | | Director | | | February 15, 2024 |
/s/ Maura J. Clark
D'aun Norman | | | | |
| | Director
| | February 16, 2021
|
Maura J. Clark
/s/ Paul Camuti | | Director | | February 15, 2024 |
| Paul Camuti | | | | |
| | | | |
/s/ Courtney M. Enghauser Tina Pierce | | Director | | Director
| February 16, 2021 15, 2024 |
Courtney M. Enghauser
Tina Pierce | | | | |
| | | | |
| /s/ Robert Shanks | | Director | | | February 15, 2024 |
/s/ Susan L. Main
Robert Shanks | | | | |
| | Director
| | February 16, 2021
|
Susan L. Main
/s/ Kevin Mahoney | | Director | | February 15, 2024 |
| Kevin Mahoney | | | | |
| | | | |
/s/ Carsten J. Reinhardt Julia Steyn | | Director | | Director
| February 16, 2021 15, 2024 |
Carsten J. Reinhardt
Julia Steyn | | | | |
| | | | |
| /s/ Steven Tesoriere | | Director | | February 15, 2024 |
| Steven Tesoriere | | | | |
/s/ Jérôme Stoll
| | Director
| | February 16, 2021
|
Jérôme Stoll
| | | |
| | | | |
/s/ Scott A. Tozier
| | Director
| | February 16, 2021
|
Scott A. Tozier
| | | |
179
