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GTX Garrett Motion

Filed: 16 Feb 21, 8:05am

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           

Commission File Number 001-38636

 

Garrett Motion Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

82-4873189

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

La Pièce 16, Rolle, Switzerland

 

1180

(Address of Principal Executive Offices)

 

(Zip Code)

 

+41 21 695 30 00

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

None

None

None

 

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes      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.

 

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $415 million based on the closing price of its common stock on the New York Stock Exchange on June 30, 2020, 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  

As of February 4, 2021, the registrant had 75,813,634 shares of common stock, $0.001 par value, outstanding.

 

 

 

 

 

 


Table of Contents

 

 

 

Page

PART I

 

 

Item 1.

Business

9

Item 1A.

Risk Factors

25

Item 1B.

Unresolved Staff Comments

44

Item 2.

Properties

44

Item 3.

Legal Proceedings

44

Item 4.

Mine Safety Disclosures

46

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

47

Item 6.

Selected Financial Data

49

Item 7.

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

53

Item 7A.

Quantitative and Qualitative Disclosures About Market Risks

69

Item 8.

Financial Statements and Supplementary Data

70

 

Consolidated and Combined Statements of Operations

75

 

Consolidated and Combined Statements of Comprehensive Income

76

 

Consolidated Balance Sheets

77

 

Consolidated and Combined Statements of Cash Flows

78

 

Consolidated and Combined Statements of Equity (Deficit)

79

 

Notes to Consolidated and Combined Financial Statements

80

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

131

Item 9A.

Controls and Procedures

131

Item 9B.

Other Information

131

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

132

Item 11.

Executive Compensation

137

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

168

Item 13.

Certain Relationships and Related Transactions, and Director Independence

173

Item 14.

Principal Accountant Fees and Services

174

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

175

Item 16.

Form 10- K Summary

178

Signatures

179

 


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. 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”). 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

This Annual Report on Form 10-K contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact contained in this 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.

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;

 

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;

 

supplier dependency;

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

 

Item 1. Business

Our Company

Our Company designs, manufactures and sells highly engineered turbocharger and electric-boosting technologies for light and commercial vehicle original equipment manufacturers (“OEMs”) and the global vehicle independent aftermarket as well as automotive software solutions. These OEMs in turn ship to consumers globally. We are a global technology leader with significant expertise in delivering products across gasoline, diesel, natural gas and electric (hybrid and fuel cell) powertrains. These products are key enablers for fuel economy and emission standards compliance.

Our products are highly engineered for each individual powertrain platform, requiring close collaboration with our customers in the earliest years of powertrain and new vehicle design. Our turbocharging and electric-boosting products enable our customers to improve vehicle performance while addressing continually evolving and converging regulations that mandate significant increases in fuel efficiency and reductions in exhaust emissions worldwide.

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. Market penetration of light vehicles with a turbocharger is expected to increase from approximately 51% in 2020 to approximately 55% by 2025, according to IHS Markit (“IHS”), which we believe will allow the turbocharger market to grow at a faster rate than overall automobile production.

Building on our expertise in turbocharger technology, we have also developed electric-boosting technologies targeted for use in electrified powertrains, primarily hybrid and fuel cell vehicles. Our products include electric turbochargers and electric compressors that provide more responsive driving and optimized fuel economy in electrified vehicles. Our early-stage and collaborative relationships with our global OEM customer base have enabled us to increase our knowledge of customer needs for vehicle safety, predictive maintenance, and advanced controllers to develop new connected and software-enabled products.

In addition, we have emerging opportunities in technologies, products and services that support the growing connected vehicle market, which include software focused on automotive cybersecurity and integrated vehicle health management (“IVHM”). Our focus is developing solutions for enhancing cybersecurity of connected vehicles, as well as in-vehicle monitoring to provide maintenance diagnostics, which reduce vehicle downtime and repair costs. For example, 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. We are collaborating with tier-one suppliers on automotive cybersecurity software solutions and with several major OEMs on IVHM technologies.

Our comprehensive portfolio of turbocharger, electric-boosting and connected vehicle technologies is supported by our five research and development (“R&D”) centers, 11 close-to-customer engineering facilities and 13 factories, which are strategically located around the world. Our operations in each region have self-sufficient sales, engineering and production capabilities, making us a nimble local competitor, while our standardized manufacturing processes, global supply chain, worldwide technology R&D and size enable us to deliver the scale benefits, technology leadership, cross-regional support and extensive resources of a global enterprise. In high-growth regions, including China and India, we have established a local footprint, which has helped us secure strong positions with in-region OEM customers who demand localized engineering and manufacturing content but also require the capabilities and track record of a global leader.

We also sell our technologies in the global aftermarket through our distribution network of more than 200 distributors covering 160 countries. Through this network, we provide approximately 5,300 part-numbers and products to service garages across the globe. Garrett is a leading brand in the independent aftermarket for both service replacement turbochargers as well as high-end performance and racing turbochargers. We estimate that over 110 million vehicles on the road today utilize our products, further supporting our global aftermarket business.

9


Leading technology, continuous innovation, product performance and OEM engineering collaboration are central to our customer value proposition and a core part of our culture and heritage. In 1962, we introduced a turbocharger for a mass-produced passenger vehicle. Since then, we have introduced many other notable technologies in mass-production vehicles, such as turbochargers with variable geometry turbines, dual-boost compressors, ball-bearing rotors and electronically actuated controls, all of which vastly improve engine response when accelerating at low speeds and increase power at higher speeds and enable significant improvements in overall engine fuel economy and exhaust emissions for both gasoline and diesel engines. Our portfolio today includes approximately 1,600 patents and patents pending.

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:

 

Postponing capital expenditures;

 

Optimizing working capital requirements;

 

Lowering discretionary spending;

 

Flexing organizational costs by implementing short-term working schemes;

 

Reducing temporary workforce and contract service workers; and

 

Restricting external hiring.

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.

Revenue Summary

 

 

By Geography

 

 

By Product-line

 

 

We are a global business that generated revenues of approximately $3 billion in 2020.

 

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 OEM sales contributed approximately 87% of our revenues while our aftermarket and other products contributed 13%.

 

Approximately 51% of our 2020 revenues came from sales shipped from Europe, 33% from sales shipped from Asia and 15% from sales shipped from North America. For more information, see Note 26 Concentrations of the Notes to our Consolidated and Combined Financial Statements.

Our Industry

We compete in the global turbocharger market for gasoline, diesel and natural gas engines; in the electric- boosting market for electrified (hybrid and fuel cell) vehicle powertrains; and in the emerging connected vehicle software market. As vehicles become more electrified, our electric-boosting products use principles similar to our turbochargers to further optimize air intake and thus further enhance performance, fuel economy and exhaust emissions with the help of an integrated high-speed electric motor. By using a turbocharger or electric-boosting technology, an OEM can deploy smaller, lighter powertrains with better fuel economy and exhaust emissions while delivering the same power and acceleration as larger, heavier powertrains. As such, turbochargers have become one of the most highly effective technologies for helping global OEMs meet increasingly stricter emission standards.

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. This annual sales estimate would add approximately 372 million new turbocharged vehicles on the road globally between 2019 and 2025.

Key trends affecting our industry

Current global economic conditions due to COVID-19 have adversely affected and may continue to adversely affect many industries including the Automotive sector. Analysts estimate that automotive industry revenue dropped 11% in 2020, 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 light vehicle production volume forecast for 2025 from 102 million units that they forecasted in 2019 to 95 million units in their January 2021 light vehicle industry production volume forecast. While this resets the volume outlook for the automotive industry, the underlying growth drivers for the turbo industry remain unchanged: Growth in the overall vehicle industry (albeit from a lower base), increasingly tight fuel efficiency and emission standards, and growing turbocharger penetration.

Growth in overall vehicle production. 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. The shift from pure gasoline and diesel internal combustion engines 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 base as technology and supporting infrastructure continue to improve.

Global vehicle fuel efficiency and emissions standards. OEMs are facing increasingly strict constraints for vehicle fuel efficiency and emissions standards globally. Regulatory authorities in key vehicle markets such as the United States, the European Union, China, Japan, and Korea have instituted regulations that require sustained and significant improvements in CO2, NOx and particulate matter vehicle emissions. OEMs are required to evaluate and adopt various

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solutions to address these stricter standards. Turbochargers allow OEMs to reduce engine size without sacrificing vehicle performance, thereby increasing fuel efficiency and decreasing harmful emissions. Furthermore, turbochargers allow more precise “air control” over both engine intake and exhaust conditions such as gas pressures, flows and temperatures, enabling optimization of the combustion process. This combustion optimization is critical to engine efficiency, exhaust emissions, power and transient response and enables such concepts as exhaust gas recirculation for diesel engines and Miller-cycle operation for gasoline engines. Consequently, we believe turbocharging will continue to be a key technology for automakers to meet future tough fuel economy and emissions standards without sacrificing performance.

Turbocharger penetration. The utilization of turbochargers and electric-boosting technologies on vehicle powertrain systems is one of the most cost-effective solutions to address stricter standards, and OEMs are increasing their adoption of these technologies. IHS and other industry sources expect total turbocharger penetration to increase globally from approximately 53% in 2020 to approximately 56% by 2025. IHS forecasts particularly strong turbocharger penetration growth for gasoline turbochargers, expecting an increase from approximately 44% in 2020 to 56% in 2025.

Medium-Term Powertrain Trends

 

 

Source: IHS

Engine size and complexity. In order to address stricter fuel economy standards, OEMs have used turbochargers to reduce the average engine size on their vehicles over time without compromising performance. Stricter pollutants emissions standards (primarily for NOx and particulates) have driven higher turbocharger adoption as well, which we believe will continue in the future, with a predicted total automotive turbocharger sales volume CAGR of 3% between 2019 and 2025, in an industry with a predicted total automobile sales volume CAGR of approximately 1% over the same period, in each case according to IHS and other industry sources. In addition, increasingly demanding fuel economy standards require continuous increases in turbocharger technology content (e.g., variable geometry, electronic actuation, multiple stages, ball bearings, electrical control, etc.) which results in steady increases in average turbocharger content per vehicle.

Powertrain electrification. To address stricter fuel economy standards, OEMs also have been increasing the electrification of their vehicle offerings, primarily with the addition of hybrid vehicles, which have powertrains equipped with a gasoline or diesel internal combustion engine in combination with an electric motor. IHS estimates that hybrid vehicles globally will grow from a total of approximately 5.3 million vehicles in 2019 to 29.5 million vehicles by 2025, representing a CAGR of 33%. The electrified powertrain of hybrid vehicles enables the usage of highly synergistic electric-boosting technologies which augment standard turbochargers with electrically assisted boosting and electrical-generation capability. Furthermore, the application of electric boosting extends the requirement for engineering collaboration with OEMs to include electrical integration, software controls, and advanced sensing. Overall, this move to electric boosting further increases the role and value of turbocharging in improving vehicle fuel economy and exhaust emissions.

OEMs are also investing in full battery-electric vehicles to comply with increasingly tight regulatory targets across regions. IHS and other industry sources expect that they will compose 10% of total light and commercial vehicle production globally by 2025.  Consumer adoption hinges on future battery cost – hence vehicle price - reductions,

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increases in power density – hence driving range, and shorter recharging times. 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, like battery electric vehicles, have fully electric motor powertrains, but they rely on the hydrogen fuel cell to generate the required electricity. The hydrogen fuel cell also requires advanced electric-boosting technology for optimization of size and efficiency.

Connected vehicles, autonomous vehicles, and shared 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.

Vehicle ownership in China and other high-growth markets. Vehicle ownership in China and other emerging markets remains well below ownership levels in developed markets and will be a key driver of future vehicle production. At the same time, these markets are following the lead of developed countries by instituting stricter emission standards. Growth in production volume and greater penetration by large global OEMs in these markets, along with evolving emission standards and increasing fuel economy and vehicle performance demands, is driving increasing turbocharger penetration in high-growth regions.

Our Competitive Strengths

We believe that we differentiate ourselves through the following competitive strengths:

Global and broad market leadership

We are a global leader in the $10 billion turbocharger industry. We believe we will continue to benefit from the increased adoption of turbochargers, as well as our global technology leadership, comprehensive portfolio, continuous product innovation and our deep-seated relationships with all global OEMs. We maintain a leadership position across all vehicle types, engine types and regions, including:

Light Vehicles.

 

Gasoline: The global adoption of turbochargers by OEMs on gasoline engines has increased rapidly from approximately 14% in 2013 to approximately 40% in 2019 and is forecasted by IHS to increase to 56% by 2025. We have launched a leading modern 1.5L variable geometry turbo (“VNT”) gasoline application, which we believe to be among the first with a major OEM, and we expect to see increasing adoption of this technology in years to come. Key to our strategy for gasoline growth is to leverage our technology strengths in high-temperature materials and variable geometry as well as our scale, global footprint and in-market capabilities to meet the volume demands of global OEMs.

 

Diesel: We have a long history of technology leadership in diesel engine turbochargers. Despite diesel market weakness for some vehicle segments, the majority of our diesel turbochargers revenue comes from heavier and bigger vehicles like SUVs, pickup trucks and light commercial vehicles (such as delivery vans), which remain a stable part of the diesel market. Diesel maintains a unique advantage in terms of fuel consumption, hence cost of ownership, and towing capacity makes it still 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 approximately 10-15% less CO2, on average, than gasoline vehicles.

 

Electrified vehicles. We provide a comprehensive portfolio of turbocharger and electric-boosting technologies to manufacturers of hybrid-electric and fuel cell vehicles. OEMs have increased their adoption of these electrified technologies given regulatory standards and consumer demands driving an expected CAGR globally of approximately 33% from 2019 to 2025, according to IHS. 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 to serve OEMs as they add more electrified vehicles into their fleets.

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Commercial vehicles. Our Company traces its roots to the 1950s when we helped develop a turbocharged commercial vehicle for Caterpillar. We have maintained our strategic relationship with key commercial vehicle OEMs for over 60 years as well as market-leading positions across the commercial vehicle markets for both on- and off-highway use. Our products improve engine performance and lower emissions on trucks, buses, agriculture equipment, construction equipment and mining equipment with engine sizes ranging 1.8L to 105L.

High-growth regions. We have a strong track record serving global and emerging OEMs, including customers in China and India, with an in-market, for-market strategy and operate full R&D and three manufacturing facilities in the high-growth regions that serve light and commercial vehicle OEMs. Our local presence in high-growth regions has helped us win business with key international and domestic Chinese OEMs, and we grew significantly faster than the vehicle production in these regions between 2013 and 2019.

Strong and collaborative relationships with leading OEMs globally

We supply our products to more than 60 OEMs globally. Our top ten customers accounted for approximately 56% of net sales and our largest customer represented approximately 10% of our net sales in 2020. With over 60 years in the turbocharger industry, we have developed strong capabilities working with all major OEMs. We consistently meet their stringent design, performance and quality standards while achieving capacity and delivery timelines that are critical for customer success. Our track record of successful collaborations, as demonstrated by our strong client base and our ability to successfully launch approximately 100 product applications annually, is well recognized. For example, we received a 2017 Automotive News PACE™ Innovation Partnership Award in supporting Volkswagen’s first launch of an industry-leading VNT turbocharged gasoline engine, which is just one example of our strong collaborative relationships with OEMs. Our regional research, development and manufacturing capabilities are a key advantage in helping us to supply OEMs as they expand geographically and shift towards standardized engines and vehicle platforms globally.

Global aftermarket platform

We have an estimated installed base of over 110 million vehicles that utilize our products through our global network of more than 200 distributors covering 160 countries. Our Garrett aftermarket brand has strong recognition across distributors and garages globally, and is known for boosting performance, quality and reliability. Our aftermarket business has historically provided a stable stream of revenue supported by our large installed base. As turbo penetration rates continue to increase, we expect that our installed base and aftermarket opportunity will grow.

Highly-engineered portfolio with continuous product innovation

We have led the revolution in turbocharging technology over the last 60 years and maintain a leading technology portfolio of approximately 1,600 patents and patents pending. We have a globally deployed team of more than 1,250 engineers across five R&D centers and 11 close-to-customer engineering centers. Our engineers have led the mainstream commercialization of several leading turbocharger innovations, including variable 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. Outside of our turbocharger product lines, we apply this culture of continuous innovation to meet the needs of our customers in new areas, particularly in connected automotive technologies. We are developing solutions, including IVHM and cybersecurity software solutions, that leverage our knowledge of vehicle powertrains and experience working closely with OEM manufacturers.

Global and 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. 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.

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In 2020 we manufactured more than 87% of our products in low-cost countries, including seven manufacturing facilities in China, India, Mexico, Romania and Slovakia. We have a long-standing culture of lean manufacturing excellence and continuous productivity improvement. We believe global uniformity and operational excellence across facilities is a key competitive advantage in our industry given that OEM engine platforms are often designed centrally but manufactured locally, requiring suppliers to meet the exact same specifications across all locations.

Our Growth Strategies

The Debtors, including 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 invest 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 relations and our global capabilities, will allow us to drive the following business strategies:

Strengthen market leadership across core powertrain technologies

We are focused on strengthening our market position in light vehicles:

 

Gasoline turbochargers, which historically lagged adoption of diesel turbochargers, are expected to grow at an 6% annual CAGR from 2019 to 2025, according to IHS, exceeding the growth of diesel turbochargers. We expect to benefit from this higher growth given the gasoline platforms we have been awarded over the past several years. We have launched the first modern 1.5L VNT gasoline application with a major OEM and we expect to see increasing adoption of this technology in years to come. Key to our strategy for gasoline growth is our plan to leverage our technology 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 global OEMs.

 

We believe growth in our share of the diesel turbochargers market will be driven by new product introductions focused on emissions-enforcement technologies and supported by our favorable positioning with large vehicles and high-growth regions within this market. The more stringent emissions standards require higher turbocharger technology content such as variable geometry, 2-stage systems, advanced bearings and materials which increase our content per vehicle. We expect to grow our commercial vehicle business through new product introductions and targeted platform wins with key on-highway customers and underserved OEMs.

Strengthen our penetration of electrified vehicle boosting technologies

We stand to benefit from the increased adoption of hybrid-electric and fuel cell vehicles and the increased need for turbochargers associated with increased sales volumes for these engine types. IHS estimates that the global production of electrified vehicles will increase from approximately 7 million vehicles in 2019 to approximately 42 million vehicles by 2025, representing an annualized growth rate of approximately 34%. OEMs will need to further improve engine performance for their increasingly electrified offerings, and our comprehensive portfolio of turbocharger and electric-boosting technologies are designed to help OEMs do so. We expect to continue to invest in product innovations and new technologies and believe that we are well positioned to continue to be a technology-leader in the propulsion of electrified vehicles.

Increase market position in high-growth regions

In 2020, after a steep drop in the first quarter due 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. IHS expects vehicle production in China to be stable next year. We plan to continue to strengthen our relationships with OEMs in high-growth, emerging regions by demonstrating our technology leadership through our local research, development and manufacturing capabilities. Our local footprint is expected to continue to provide a strong competitive edge in high-growth regions due to our ability to work closely with OEMs throughout all stages of the product lifecycle including aftermarket support. For example, in China, our research

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center in Shanghai, our manufacturing facilities in Wuhan and Shanghai and our more than 984 employees support our differentiated end-to-end capabilities and we believe will continue to support key platform wins in the Chinese market. Our operations in China are expected to continue to benefit us as OEMs build global platforms in low cost regions. Our commitment to providing high-touch technology support to OEMs has allowed us to be recognized as a local player in other key high-growth regions, such as India.

Grow our aftermarket business

We have an opportunity to strengthen our global network of more than 200 distributors in 160 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. For example, in 2019 we launched a global web-based platform providing self-service tools aimed at connecting garage technicians. In 2020 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 actively investing in software and services that leverage our capabilities in powertrains, vehicle performance management, and electrical/mechanical design to capitalize on the growth relating to 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 software and connected vehicle capabilities of our Former Parent, we have assembled a team of engineers, software and technical experts and have opened new design centers in North America, India and Czech Republic. We continue to conduct research to determine key areas of the market where we are best positioned to leverage our existing technology platforms and capabilities to serve our customers. We execute a portion of our connectivity investment in collaboration with OEMs and other Tier 1 suppliers and have multiple early-stage trials with customers underway.

Research, Development and Intellectual Property

We maintain technical engineering centers in major automotive production regions of the world to develop and provide advanced products, process and manufacturing support to all of our manufacturing sites, and to provide our customers with local engineering capabilities and design developments on a global basis. As of December 31, 2020, we employed approximately 1,250 engineers. Our total R&D expenses were $111 million, $129 million and $128 million for the years ended December 31, 2020, 2019 and 2018, respectively. Additionally, the Company incurs engineering-related expenses which are also included in Cost of goods sold of $13 million, $5 million and $10 million for the years ended December 31, 2020, 2019 and 2018.

We currently hold approximately 1,600 patents and patents pending. Our current patents are expected to expire between 2021 and 2040. 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.

Materials

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, we have not experienced any significant shortage of raw materials and normally do not carry inventories of such raw materials in excess of those reasonably required to meet our production and shipping schedules.

Customers

Our global customer base includes nine of the ten largest light vehicle OEMs and nine of the ten largest commercial vehicle engine makers.

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Our ten largest applications in 2020 were with seven different OEMs. OEM sales were approximately 87% of our 2020 revenues while our aftermarket and other products contributed 13%.

Our largest customer is Ford Motor Company (“Ford”). In 2020, 2019 and 2018, Ford accounted for 10%, 12%, and 13%, respectively, of our total sales.

Supply Relationships with Our Customers

We typically supply products to our OEM customers through “open” purchase orders, which are generally governed by terms and conditions negotiated with each OEM. Although the terms and conditions vary from customer to 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 vehicle program, and issue purchase contracts for less than the duration of the vehicle program, which potentially reduces our profit margins and increases 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. 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, the undiscounted reserve for environmental investigation and remediation was approximately $15.6 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 combined results of operations and operating cash flows in the periods recognized or

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paid. However, considering our past experience and existing reserves, we do not expect that environmental matters will have a material adverse effect on our consolidated and combined financial position.

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, will include 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

 

Corporate Responsibility

WeCare4 Sustainability Approach

Garrett’s mission to enable cleaner, safer vehicles is at the heart of its contribution to society. We develop solutions for the auto industry's most pressing sustainability issues, from emissions reduction to vehicle cybersecurity. Corporate responsibility is therefore a priority for the Company and its Board of Directors (the “Board”). The Board is responsible for promoting corporate responsibility and sustainability as well as monitoring adherence to Company standards. The Board manages oversight of sustainability through a Sustainability Committee, which is comprised of senior leaders in the business who assess and prioritize topics that are material for the business.

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 – Leadership & Governance.”

The Company intends to publish its first sustainability report in 2021 and to annually report progress on its sustainability commitments.

 

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Human Capital Disclosure

At Garrett, we place a high value on developing the right working environment and the right skillsets 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, we employed approximately 6,300 permanent employees and 2,300 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, the Company has supported awareness activities such as unconscious bias training and cultural adaptation assessments to foster an inclusive culture. In 2020, the Company took several steps to strengthen its approach to diversity, equity and inclusion. These include:

 

Review of existing diversity and inclusion initiatives;

 

Publication of Garrett’s Diversity and Inclusion Policy;

 

Re-definition of Garrett’s diversity and inclusion strategy and the global focus areas that are relevant for the Company;

 

Setting the Company’s gender diversity ambition for 2025;

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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.

 

Performance of a quantitative analysis of organizational compensation practices

 

% of Female Representation in Garrett Workforce and Garrett 2025 Gender Diversity 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

%

Garrett’s Board of Directors had 38% female representation in 2020.

Talent Management

 

At Garrett, we encourage our employees to develop their skills and capabilities through a comprehensive Performance and Talent Management system. From annual goal-setting and performance reviews to learning opportunities for employees and leaders, Garrett 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 1,000 online trainings that address a wide range of functional competencies, technical skills, and human skills. Learning can be self-paced, while Garrett’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. Dedicated programs support Garrett’s emerging leaders, and these were successfully transformed into virtual learning academies in 2020. Approximately 25,000 hours of training was delivered in 2020.

Garrett uses 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 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.

Be well, work well

Health and Safety

World-class health and safety considerations are integrated into Garrett’s procedures and processes. Our management systems apply global standards that are currently transitioning from OHSAS 18001 to ISO 45001 and that provide protection of human health during normal and emergency situations. Compliance with our standards and local regulatory requirements is monitored through a company-wide audit process. The timely development and implementation of process improvement and corrective action plans are closely monitored. ​​

From early 2020, Garrett’s global Health and Safety team worked tirelessly to deliver and implement best practice 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 posed by COVID-19 also provided a benefit in the focus on their safety with a further reduction in our Total Case Incident Rate (“TCIR”). 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.

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Compensation and benefits

Garrett’s Rewards 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, Garrett offers an Employee Assistance Program (EAP). It is an external counseling 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 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. Garrett 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 closely monitors employee turnover to measure retention and define improvement actions as and where necessary. As of December 2020, the Company’s annual turnover for 2020 was 9.01%.

Educating future innovators

Garrett places a high value on Science, Technology, Engineering and Math (“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, Garrett offered 100 internships in 10 countries in 2020.

Garrett also runs a Graduate Program which in 2020 provided 11 graduates in 3 countries with a unique 2-year opportunity to gain experience and exposure to Garrett’s cutting-edge technologies while at the same time building their leadership skills in a fast-paced and professional work environment.

The Company sponsors Formula SAE and Formula Student teams in several countries and in 2020 sponsored the European BEST Engineering Competition (EBEC), the biggest international technical competition in Central Europe, where Garrett defined an assignment for 24 students around the concept of sustainable Future Mobility.

Prior to COVID-19 Garrett teams regularly held open days for school children in their host communities, with a specific focus on encouraging girls to take an interest in STEM. With many host communities forced into lockdown in 2020 Garrett supported local first responders in several countries with the donation 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.

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Seasonality

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.

Additional Information

 

Our Company was incorporated 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 of 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.

 

 

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Item 1A. Risk Factors

You should carefully consider all of the information in this Annual Report on Form 10-K and each of the risks described below, which we believe are the principal risks we face. Any of the following risks could materially and adversely affect our business, financial condition and results of operations and the actual outcome of matters as to which forward-looking statements are 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 Cases

Our ability to successfully operate during and reorganize the Debtors in the Chapter 11 Cases is dependent upon our ability to obtain Bankruptcy Court approval of the Debtors’ motions, the outcome of Bankruptcy Court rulings and the progress of the Chapter 11 Cases in general, including the length of time the Debtors will operate in the Chapter 11 Cases.

For the duration 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, and for our ability to develop and execute our business plan, continue as a going concern and ultimately successfully reorganize the Debtors, 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 ability 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.  During the Chapter 11 Cases, the Debtors will need the prior approval of the Bankruptcy Court for transactions outside the ordinary course of business, which may limit the Debtors’ ability to respond timely to certain events or take advantage of opportunities. Additionally, if creditors or 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, which could have a material adverse effect on our business, operations, financial condition and our ultimate ability to successfully reorganize the Debtors. During the Chapter 11 Cases, we expect our financial 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 that may be inconsistent with our plans, or the ultimate length of time which the Chapter 11 Cases may continue.

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The Chapter 11 Cases, the DIP Credit Agreement 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 invest in our non-Debtor subsidiaries, 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 provisions may be affected by events beyond our control and our failure to comply or obtain a waiver in the event we cannot comply, with a covenant could result in an event of default under the DIP Credit Agreement, which could have a material adverse effect on our business, financial condition and results of operations.  In addition, continued compliance with or failure to obtain a waiver for covenants restricting the incurrence of debt by non-Debtor subsidiaries or 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 condition 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 such reorganization 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 closing 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.

26


 

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 would 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.

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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.

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Risks Relating to Our Business

Industry and economic conditions may adversely affect the markets and operating conditions of our customers, which in turn can affect demand for our products and services and our results of operations.

We are dependent on the continued growth, viability and financial stability of our customers. A substantial portion of our customers are OEMs in the automotive industry. This industry is subject to rapid technological change often driven by regulatory changes, vigorous competition, short product life cycles and cyclical and reduced consumer demand patterns. In addition to general economic conditions, automotive sales and automotive vehicle production also depend on other factors, such as supplier stability, factory transitions, capacity constraints, the costs and availability of consumer credit, consumer confidence and consumer preferences. When our customers are adversely affected by these factors, we may be similarly affected to the extent that our customers reduce the volume of orders for our products. Economic declines and corresponding reductions in automotive sales and production by our customers, particularly with respect to light vehicles, have in the past had, and may in the future have, a significant adverse effect on our business, results of operations and financial condition.

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, such as a decrease in demand for diesel-fueled vehicles in favor of gasoline-fueled vehicles, or lower-than-expected consumer demand for specific types of vehicles where we anticipate providing significant components as part of our strategic growth plan, such as a decrease in demand for vehicles utilizing electric-hybrid and fuel cell powertrains in favor of full battery electric vehicles, 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.

Sales in our aftermarket operations are also directly related to consumer demand and spending for automotive aftermarket products, which may be affected by additional 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 aftermarket products.

The COVID-19 pandemic has adversely impacted and is expected to further adversely impact our business and results of operations.

During 2020, the novel coronavirus disease, COVID-19, spread across the world, including throughout Asia, the United States and Europe. The outbreak and government measures taken in response had and continue to have a significant adverse impact, both direct 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 drivers of the decrease in sales in 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 material adverse impact on our business, results of operations and financial condition. In the third quarter, the fast recovery observed in all geographies enabled us to ramp up production in most 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. 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 resources and the prolonged work-from-home arrangements have created business continuity and cybersecurity risks.

 

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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.

Changes in legislation or government regulations or policies can have a significant impact on demand for our products and our results of operations.

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 and consequently affect our results of operations.

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In the long-term, several of the markets in which we operate are contemplating or undertaking multi-decade efforts to transition away from internal combustion engines in favor of hybrid or full-battery electric vehicles.

Although we expect a significant number of hybrids will be turbocharged, if we overestimate the turbo penetration rate in hybrids or if a transition to battery-electric vehicles is pursued more broadly throughout the market, or is implemented more rapidly than we have anticipated, the demand for our products could be impacted and our results of operations consequently could 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 global automotive component supply industry is highly competitive. Our future growth rate depends upon a number of factors, including our ability to: (i) identify emerging technological trends in our target end-markets; (ii) develop and maintain competitive products; (iii) enhance our products by adding innovative features that differentiate our products from those of our competitors; (iv) develop, manufacture and bring compelling new products to market quickly and cost effectively; and (v) attract, develop and retain individuals with the requisite technical expertise and understanding of customers’ needs to develop new technologies and introduce new products.

 

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 protect our intellectual property or allegations that we have infringed 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 maturity of product technology may leave 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 secure business awards from our customers and/or our ability to achieve targeted 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.

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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.

We may incur material losses and costs as a result of warranty claims, including product recalls, and product liability actions that may be brought against us.

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. There can be no assurance that we will have adequate reserves to cover such recall, repair and replacement costs. In the event that any of our products fails to perform as expected, we may face direct exposure to warranty and product liability claims or may be required to participate in a government or self-imposed recall involving such products. Our customers that are not end users, such as auto manufacturers, may face similar claims or be obliged to conduct recalls of their own, and in such circumstances, 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 be fully valid. 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 you 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.

The operational constraints and financial distress of third parties could adversely impact our business and results of operations.

Our results of operations, financial condition and cash flows could be adversely affected if our third-party suppliers lack sufficient quality control or if there are significant changes in their financial or business condition. 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. See “Raw material price fluctuations, the ability of key suppliers to meet quality and delivery requirements, or catastrophic events can increase the cost of our products and services, impact our ability to meet commitments to customers and cause us to incur significant liabilities.” If we fail to adequately assess the creditworthiness and operational reliability of existing or future suppliers, if there is any unanticipated deterioration in their creditworthiness and operational reliability, or if our suppliers do not perform or adhere to our existing or future contractual arrangements, any resulting increase in nonperformance by them, our inability to otherwise obtain the supplies or our inability to enforce the terms of the contract or seek other remedies could have a material adverse effect on our financial condition and results of operations.

Work stoppages, other disruptions, or the need to 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 in that region. 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 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.

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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” 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 supply of a key component due to a work stoppage or other disruption at one of our suppliers or any other supplier could impact our ability to make timely deliveries to our customers and, accordingly, have a material adverse effect on our financial results. Where a customer halts production because of another supplier failing to deliver 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 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 the 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 particular, 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 significant 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 (including program launch difficulties) 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, and we could realize substantially less revenue over the life of these projects than the currently projected estimate.

We may not be able to successfully negotiate pricing terms with our customers, which may adversely affect our results of operations.

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, or the failure of our technologies or products to gain market acceptance due to more attractive offerings by our competitors, could over time significantly reduce our revenues and adversely affect our competitive standing and prospects. In particular, large commercial settlements with our customers may adversely affect our results of operations.

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We are subject to the economic, political, regulatory, foreign exchange and other risks of international operations.

We have created a geographic footprint that emphasizes locating R&D, engineering and manufacturing capabilities in close physical proximity to our customers. Our international geographic footprint subjects us to many risks, including: exchange control regulations; wage and price controls; antitrust and environmental regulations; employment regulations; foreign investment laws; monetary and fiscal policies and protectionist measures that may prohibit acquisitions or joint ventures, establish local content requirements, or impact trade volumes; import, export and other trade restrictions (such as embargoes); violations by our employees of anti-corruption laws; changes in regulations regarding transactions with state-owned enterprises; nationalization of private enterprises; natural and man-made disasters, hazards and losses; global health risks and pandemics; backlash from foreign labor organizations related to our restructuring actions; violence, civil and labor unrest; acts of terrorism; and our ability to hire and maintain qualified staff and maintain the safety of our employees in these regions. Additionally, certain of the markets in which we operate have adopted increasingly strict data privacy and data protection requirements or may require local storage and processing of data or similar requirements. The European Commission has approved a data protection regulation, known as the General Data Protection Regulation (“GDPR”), that came into force in May 2018. The GDPR includes operational requirements for companies that receive or process personal data of residents of the European Union and includes significant penalties for non-compliance. The GDPR and similar data protection measures may increase the cost and complexity of our ability to deliver our services.

Following 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 ongoing and complex negotiations with the European Union relating to 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 of 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. 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 a result of our global presence, a significant portion of our revenues are denominated in currencies other than the U.S. dollar whereas a significant amount of our payment obligations are denominated in U.S. dollars, which exposes us to foreign exchange risk. 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, we generate significant amounts of cash that is invested with financial and non-financial counterparties. While we employ comprehensive controls regarding global cash management to guard against cash or investment loss and to ensure our ability to fund our operations and commitments, a material disruption to the counterparties with whom we transact business could expose us to financial loss.

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, 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 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

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existing investments and may be unable to timely redeploy the invested capital to take advantage of other markets or product categories, potentially resulting in lost market share to our competitors. In particular, our ability to remain competitive and continue to grow in these regions depends in part on the absence of competing state-sponsored domestic businesses. If a state-sponsored operation entered a local market as a competitor, it might have access to significant social and financial capital that would enable it to overcome the ordinary barriers to entry in the turbocharger industry and acquire potentially significant market share at our expense.

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 in industry, economic or financial conditions may restrict our ability to access the capital markets on favorable terms.

We may 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, satisfy indemnity obligations to Honeywell, 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 access to capital were to become constrained significantly, or if costs of capital increased significantly, due to lowered credit ratings, prevailing industry conditions, the solvency of our customers, a material decline in demand for our products, the volatility of the capital markets or other factors, our financial condition, results of operations and cash flows could be adversely affected. These conditions may adversely affect our ability to obtain targeted credit ratings.

We may need additional capital resources in the future in order to meet our projected operating needs, capital expenditures and other cash requirements, and 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 could be adversely affected.

 

Raw material price fluctuations, the ability of key suppliers to meet quality and delivery requirements, or catastrophic events can increase the cost of our products and services, impact our ability to meet commitments to customers and cause us to incur significant liabilities.

The cost and availability of raw materials (including, but not limited to, grey iron, aluminum, stainless steel and a nickel, iron and chromium-based alloy) is a key element in the cost of our products. Our inability to offset material price inflation through increased prices to customers, formula or long-term fixed price contracts with suppliers, productivity actions or through commodity hedges could adversely affect our results of operations.

We obtain components and other products and services from numerous suppliers and other vendors throughout the world. Many major components and product equipment items are procured or subcontracted on a single- or sole-source basis. Although we believe that sources of supply for raw materials and components are generally adequate, it is difficult to predict what effects shortages or price increases may have in the future. Short- or long-term capacity constraints or financial distress at any point in our supply chain could disrupt our operations and adversely affect our financial performance, particularly when the affected suppliers and vendors are the sole 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. Our inability to fill our supply needs would jeopardize our ability to fulfill obligations under commercial contracts, and could result in reduced sales and profits, contract penalties or terminations, and damage to customer relationships.

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Failure to increase productivity through sustainable 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 sustainable 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 have a material adverse effect on our business, reputation, financial position and results of operations.

Our operations and the prior operations of predecessor companies expose us to the risk of material environmental liabilities.

We are subject to potentially material 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. We are also subject to potentially material liabilities related to the compliance of our operations with the requirements of various federal, state, local and foreign governments that regulate the discharge of materials into the environment and the generation, 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 clean-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 financial condition or results of operations.

We cannot predict with certainty the outcome of litigation matters, government proceedings and other contingencies and uncertainties.

We are or may be party to a number of lawsuits, investigations and disputes (some of which involve substantial amounts claimed) arising out of our current and historical business, including matters relating to our Honeywell Indemnity Agreement, commercial transactions, product liability (including legacy asbestos claims involving the friction materials legacy business), 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 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 liabilities are subject to change over time due to new developments, changes in settlement strategy or the impact of evidentiary requirements, and we may become subject to or be required to pay damage awards or settlements that could have a material adverse effect on our results of operations, cash flows and financial condition. If we were required to make payments, such payments could be significant and could exceed the amounts we have accrued with respect thereto, adversely affecting our business, financial condition and results of operations. While we maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover the total amount of all insured claims and liabilities. The incurrence of significant liabilities for which there is no or insufficient insurance coverage could adversely affect our results of operations, cash flows, liquidity and financial condition.

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We depend on the recruitment and retention of qualified personnel, and our failure to attract and retain such personnel could adversely affect our business, financial condition and results of operations.

Due to the complex nature of our business, our future performance is highly dependent upon the continued services of our key engineering personnel, scientists and executive officers, the development of additional management personnel and the hiring of new qualified engineering, manufacturing, marketing, sales and management personnel for our operations. Competition for qualified personnel in our industry 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 negatively affect our business, financial condition and 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 future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in tax laws, regulations and judicial rulings (or changes in the interpretation thereof), changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, the results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures and various other governmental enforcement initiatives. Our tax expense includes estimates of tax reserves and reflects other estimates and assumptions, including assessments of our future earnings which could impact the valuation of our deferred tax assets. Changes in tax laws or regulations, including multi-jurisdictional changes enacted in response to the guidelines provided by the Organization for Economic Co-operation and Development to address base erosion and profit shifting, will increase tax uncertainty and may adversely impact our provision for income taxes.

Because we have officers and directors who live outside of the United States, you may have no effective recourse against them for misconduct and may not be able to receive compensation for damages to the value of your investment caused by wrongful actions by our directors and officers.

We have officers and directors who live outside of the United States. As a result, it may be difficult for investors to enforce within the U.S. any judgments obtained against those officers and directors or obtain judgments against them outside of the U.S. that are based on the civil liability provisions of the federal or state securities laws of the U.S. Investors may not be able to receive compensation for damages to the value of their investment caused by wrongful actions by our directors and officers.

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. These third-party software components may become obsolete, defective or incompatible with future versions of our emerging technology offerings, our relationship 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. In order to remain in compliance with the terms of our licenses, we must carefully monitor and manage our use of third-party components, including both proprietary and open source license terms that may require the licensing or public disclosure of our intellectual property without compensation or on undesirable terms. Additionally, some of these licenses may not be available for use in the future on terms that may be acceptable or that allow our emerging product offerings to remain competitive. Our inability to obtain licenses or rights on favorable terms could have a material effect on our emerging technology offerings. Moreover, it is possible that as a consequence of a future merger or acquisition we may be involved in, third parties may obtain licenses to some of our intellectual property rights or our business may be subject to certain restrictions that were not in place prior to such transaction. Because the availability and cost from third parties depends upon the willingness of third parties to deal with us on the terms we request, there is a risk that third parties who license our competitors will either refuse to license us at all, or refuse to license us on terms equally favorable to those granted to our competitors. Consequently, we may lose a competitive advantage with respect to these intellectual property rights or we may be required to enter into costly arrangements in order to obtain these rights.

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Risks Relating to the Spin-Off and our Separation from Honeywell

If the Spin-Off were determined not to qualify as tax-free for U.S. federal income tax purposes, we could have an indemnification obligation to Honeywell, which could adversely affect our business, financial condition and results of operations.

If, as a result of any of our representations being untrue or our covenants being breached, the Spin-Off were determined not to qualify for non-recognition of gain or loss under Section 355 and related provisions of the Code, we could be required to indemnify Honeywell for the resulting taxes and related expenses. 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. Any such indemnification obligation could adversely affect our business, financial condition and results of operations.

In addition, if we or our stockholders were to engage in transactions that resulted in a 50% or greater change by vote or value in the ownership of our stock during the four-year period beginning on the date that begins two years before the date of the Distribution, the Spin-Off would generally be taxable to Honeywell, but not to stockholders, under Section 355(e), unless it were established that such transactions and the Spin-Off were not part of a plan or series of related transactions. If the Spin-Off were taxable to Honeywell due to such a 50% or greater change in ownership of our stock, Honeywell would recognize gain equal to the excess of the fair market value on the Distribution Date of our common stock distributed to Honeywell stockholders over Honeywell’s tax basis in our common stock, and we generally would be required to indemnify Honeywell for the tax on such gain and related expenses. Those amounts would be material. Any such indemnification obligation could adversely affect our business, financial condition and results of 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 “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 would adversely affect our financial condition”.

Our indebtedness could adversely affect our business, financial condition and results of operations.

In connection with the Spin-Off, we incurred substantial indebtedness in an aggregate principal amount of approximately $1,660 million, of which $1,628 million of the net proceeds were transferred to Honeywell substantially concurrently with the consummation of 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 requirements and other cash requirements. We are now responsible for servicing our own debt 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 ability to make payments on and to refinance our indebtedness, including the debt incurred in connection with the Spin-Off and the Chapter 11 Cases, as well as any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

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The terms of our indebtedness restrict our current and future operations, particularly our ability to incur debt that we may need to fund initiatives in response to changes in our business, the industries in which we operate, the economy and governmental regulations.

The terms of our Prepetition Credit Agreement and DIP Credit Agreement include a number of restrictive covenants that impose significant operating and financial restrictions on us and our subsidiaries and limit our ability to engage in actions that may be in our long-term best interests. These may restrict our and our subsidiaries’ ability to take some or all of the following actions:

 

 

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;

 

create liens;

 

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, as a result of all of these restrictions, 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 lenders of this indebtedness have required that we pledge our assets as security for our repayment obligations and that we abide by certain financial or operational covenants. Our ability to comply with such covenants and restrictions has been and may continue to be affected by events beyond our control, including prevailing economic, political, social, financial and industry conditions, 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 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.

Under the DIP Credit Agreement, a breach of any of the covenants listed above, if applicable, could result in an event of default. If an event of default occurred, the lenders under our DIP Credit Agreement would have the right to accelerate the repayment of such debt. We might not have, or be able to obtain, sufficient funds to make these accelerated payments, and lenders could then proceed against any collateral. Any subsequent replacement of the agreements governing such indebtedness, or any new indebtedness could have similar or greater restrictions. The occurrence and ramifications of an event of default could adversely affect our business, financial condition and results of operations.

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We may have potential business conflicts of interest with Honeywell with respect to our past and ongoing relationships.

Conflicts of interest may arise between Honeywell and us in a number of areas relating to 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 resolve any potential conflicts, and, even if we do so, the resolution may be less favorable to us than if we were dealing with a party with whom we were not previously affiliated.

Certain of our directors and employees may have actual or potential conflicts of interest because of their financial interests in Honeywell.

Because of their former positions with Honeywell, certain of our executive officers and directors own equity interests in Honeywell. Continuing ownership of Honeywell shares could create, or appear to create, potential conflicts of interest if we and Honeywell face decisions that could have implications for both us and Honeywell.

The allocation of intellectual property rights between Honeywell and us as part of the Spin-Off, and our shared use of certain intellectual property rights, could adversely impact our reputation, our ability to enforce certain intellectual property rights that are important to us and our competitive position.

In connection with the Spin-Off, we entered into agreements with Honeywell governing the allocation of intellectual property rights related to our business. These agreements could adversely affect our position and options relating to intellectual property enforcement, licensing negotiations and monetization. We also may not have sufficient rights to grant sublicenses of intellectual property used in our business. These circumstances could adversely affect our ability to protect our competitive position in the industry.

Risks Relating to our Common Stock

An active trading market for our common stock may not be available, and our stock price may fluctuate significantly.

The market price of our common stock may fluctuate widely, 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;

40


 

 

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.

Low trading volume for our stock, which may occur if an active trading market is not available, among other reasons, would amplify the effect of the above factors on our stock price volatility. 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 market price of our stock drop significantly, stockholders may institute securities class action lawsuits against us. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

Certain provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws and Delaware law may discourage takeovers.

Several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws and Delaware law may discourage, delay or prevent a merger or acquisition. These include, among others, provisions that:

 

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 other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated By-Laws and Delaware law may discourage, delay or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of Garrett, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price.

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 transactions involving an actual or a threatened acquisition or change in control of Garrett, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price.

41


 

Our Amended and Restated Certificate of Incorporation designates the courts of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.

Our Amended and Restated Certificate of Incorporation provides, in all cases to the fullest extent permitted by law, unless we consent in writing to the selection of an alternative forum, the Court of Chancery located within the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of Garrett, any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees or stockholders to us or our stockholders, any action asserting a claim arising pursuant to the Delaware General Corporate Law (“DGCL”) or as to which the DGCL confers jurisdiction on the Court of Chancery located in the State of Delaware or any action asserting a claim governed by the internal affairs doctrine or any other action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. However, if the Court of Chancery within the State of Delaware does not have jurisdiction, the action may be brought in any other state or federal court located within the State of Delaware. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice of and to have consented to these provisions. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find this provision of our Amended and Restated Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions.

 

General Risk Factors

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. Our systems involve sensitive information and may be conducted in hazardous environments. 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 are increasingly requiring cyber and other security protections and mandating cyber and other security standards in our products.

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 lead to third-party claims that our product failures have caused a similar range of damages to our customers, and this risk is enhanced by the increasingly connected nature of our products.

The potential consequences of a material cyber or other security incident include financial loss, reputational damage, litigation with third parties, theft of intellectual property, fines levied by the United States Federal Trade Commission, diminution in the value of our investment in research, development and engineering, and increased cyber and other security protection and remediation costs due to the increasing sophistication and proliferation of threats, which in turn could adversely affect our competitiveness and results of operations. In addition to any costs resulting from contract performance or required corrective action, these incidents could generate increased costs or 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.

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If we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired and investors’ 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 on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. If we are 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 or 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 our 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, 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 could have a material adverse effect on our results of operations and financial condition.

Your percentage ownership in us may be diluted in the future.

Your percentage ownership in us may be diluted in the future because of equity issuances pursuant to the Plan, if confirmed, for acquisitions, capital market transactions or otherwise, including equity awards that we may grant to our directors, officers and other employees. Our Board has adopted and Honeywell, as our sole shareholder, approved, the 2018 Stock Incentive Plan of Garrett and its Affiliates (the “Equity Plan”) for the benefit of certain of our current and future employees and other service providers. Our non-employee directors are eligible to participate in the 2018 Stock Incentive Plan for Non-Employee Directors. Awards made under such plans will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.

Under the terms of the Transaction, if approved by the Bankruptcy Court, the CO Group and certain of our existing stockholders will be issued Series A Preferred Stock which will be convertible in certain circumstances into shares of common stock. Any such conversion may significantly dilute the percentage ownership of our current stockholders.

In addition, our Amended and Restated Certificate of Incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock with respect to dividends and distributions, as our board of directors may generally determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of the members of our board of directors in all events or upon the happening of specified events, or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences that we could assign to holders of preferred stock could affect the residual value of our common stock.

From time-to-time, we may opportunistically evaluate and pursue acquisition opportunities, including acquisitions for which the consideration thereof may consist partially or entirely of newly-issued shares of our common stock and, therefore, such transactions, if consummated, would dilute the voting power and/or reduce the value of our common stock.

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

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, we owned or leased 13 manufacturing sites, five R&D centers and 11 close-to- customer engineering sites. We also have many smaller sales offices, warehouses, cybersecurity and IVHM 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

Manufacturing Sites

 

9

 

 

4

 

2

 

5

 

5

 

1

 

 

13

R&D Centers

 

1

 

 

4

 

1

 

2

 

2

 

 

 

 

5

Close-to-Customer Engineering

   Sites

 

 

 

 

11

 

2

 

5

 

3

 

1

 

 

11

 

We continually and proactively review our real estate portfolio and develop footprint strategies to support our customers’ global plans, while at the same time supporting our technical needs and optimizing operating cost base. We expect our evolving portfolio will meet current and anticipated future needs.

On December 2, 2019, the Company and its subsidiary, Garrett ASASCO Inc., filed a Summons with Notice in the Commercial Division of the Supreme Court of the State of New York, County of New York (the “NY Supreme Court”) commencing an action (the “Action”) against Honeywell, certain of Honeywell’s subsidiaries and certain of Honeywell’s employees for declaratory judgment, breach of contract, breach of fiduciary duties, aiding and abetting breach of fiduciary duties, corporate waste, breach of the implied covenant of good faith and fair dealing, and unjust enrichment. On January 15, 2020, the Company and Garrett ASASCO Inc. filed a Complaint in the NY Supreme Court in connection with the Action. The lawsuit arises from the 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.

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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 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 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

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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, Commitments and Contingencies of the Notes to the Consolidated and Combined Financial Statements.

We are involved in various other lawsuits, claims and proceedings incident to the operation of our businesses, including those pertaining to product liability, product safety, environmental, safety and health, 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 certainty and some may be disposed of unfavorably to us, we do not currently believe that such lawsuits, claims or proceedings will have a material adverse effect on our financial position, results of operations or cash flows. We accrue for potential liabilities in a manner consistent with accounting principles generally accepted in the United States. Accordingly, we accrue for a liability when it is probable that a liability has been incurred and the amount of the liability is reasonably estimable.

Item 4. Mine Safety Disclosures

Not Applicable.

46


 

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 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" 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.

Holders of Record

As of February 4, 2021, there were 36,208 stockholders of record of our common stock.

Dividend Policy

We are unable to pay dividends during the pendency of the Chapter 11 Cases. We do not anticipate paying any cash dividends in the foreseeable future.

Stock Performance Graph

The following graph and table illustrate the total return from October 1, 2018 through December 31, 2020, for (i) our 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, 2019 (“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 (“2020 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., Visteon Corporation and Veoneer, Inc. In 2020, the Company expanded its peer group following consolidation among the 2019 Peer Group. Delphi Technologies plc (“Delphi”) was previously included in the Company’s 2019 Peer Group and was acquired by BorgWarner Inc. during the year ended December 31, 2020. Accordingly, Delphi has been included in the 2019 Peer Group only through the date it was acquired. The Company will cease presenting the 2019 Peer Group in future years.

The 2020 Peer Group is used routinely by management for benchmarking purposes. The graph and the table assume that $100 was invested on October 1, 2018 in each of our common stock, the S&P Small Cap 600 Index, the common stock of the 2019 Peer Group and the 2020 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 stock and may not be indicative of our future performance.

 

Indexed Price Performance

47


 

 

 

Global Markets Intelligence Group

 

Recent Sales of Unregistered Securities

None

Issuer Purchases of Equity Securities

There were no purchases of equity securities by the issuer or affiliated purchasers during the quarter ended December 31, 2020.

 

 

48


 

Item 6. Selected Financial Data

Selected Historical Consolidated and Combined Financial Data

The following tables present certain selected historical consolidated and combined financial information as of and for each of the years in the five-year period ended December 31, 2020. 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 selected historical consolidated and combined financial data as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019, and 2018 are derived from the historical audited Consolidated and Combined Financial Statements as included in this Form 10-K. The selected historical combined financial data as of December 31, 2018, 2017 and 2016 and for the years ended December 31, 2017 and 2016 are derived from historical audited combined financial statements not included in this Annual Report on Form 10-K.

The selected historical consolidated and combined financial data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical Consolidated and Combined Financial Statements and the accompanying Notes thereto included elsewhere in this Annual Report on Form 10-K. For each of the periods presented prior to the Spin-Off, our business was wholly owned by Honeywell. The financial information included for these periods may not necessarily reflect our financial position, results of operations and cash flows in the future or what our financial position, results of operations and cash flows would have been had we been an independent, publicly traded company during such periods. In addition, our historical consolidated and combined financial information does not reflect changes that we have experienced or expect to continue to experience in the future as a result of our separation from Honeywell, including changes in the financing, operations, cost structure and personnel needs of our business.

Further, the historical consolidated and combined financial information includes allocations of certain Honeywell corporate expenses, as described in Note 27 Related Party Transactions with Honeywell in our Consolidated and Combined Financial Statements. We believe the assumptions and methodologies underlying the allocation of these expenses are reasonable. However, such expenses may not be indicative of the actual level of expense that we would have incurred if we had operated as an independent, publicly traded company or of the costs expected to be incurred in the future.

 

 

 

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

)

49


 

 

(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 income was impacted by the U.S. Tax Cuts and Jobs Act (the “Tax Act”) resulting in a tax expense of $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 non-GAAP financial information 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.

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:

50


 

 

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 effect in a given period, which affects comparability of our results.

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 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 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) decreased by $143 million in 2020 compared to 2019. The decrease was primarily due to unfavorable impacts of volume ($94 million), selling, general and administrative expenses ($28 million), productivity, net of mix ($26 million), inflation ($13 million) and price ($18 million), partially offset by the favorable impact of lower research and development expenses ($18 million) and foreign exchange rates including the prior year’s hedge losses ($18 million).

 

51


 

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) decreased by $195 million in 2020 versus 2019, primarily due to a decrease in net income, net of deferred taxes of $226 million and 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). Additionally, Expenditures for property, plant and equipment expenses decreased by $22 million.

 

 

52


 

Item 7. Management’s Discussion and Analysis of Financial Condition 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 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 following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to help you understand the results of operations and financial condition of Garrett Motion Inc. for the years ended December 31, 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.”

Overview and Business Trends

Garrett designs, manufactures and sells highly engineered turbocharger and electric-boosting technologies for light and commercial vehicle original equipment manufacturers (“OEMs”) and the global vehicle independent aftermarket as well as automotive software solutions. These OEMs in turn ship to consumers globally. We are a global technology leader with significant expertise in delivering products across gasoline, diesel, natural gas and electric (hybrid and fuel cell) powertrains. These products are key enablers for fuel economy and emission standards compliance.

Market penetration of vehicles with a turbocharger is expected to increase from approximately 53% in 2020 to approximately 56% by 2025, according to IHS Markit (“IHS”), which we believe will allow the turbocharger market to grow at a faster rate than overall automobile production. 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 turbocharger market volume growth is expected to be particularly strong in China and other high-growth regions in the same period.

In the short to medium term, we believe that turbo penetration will grow as turbos remain one of the most cost- efficient levers to improve the fuel efficiency of conventional Gasoline and Diesel vehicles as well as hybrid and fuel- cell vehicles.

Growth in the turbo market is expected in all regions, with special mention for high-growth regions in Asia where rising income levels continue to drive long-term automotive and vehicle content demand. 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.

53


 

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

54


 

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 Operations for the Years Ended December 31, 2020, 2019 and 2018

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 compared with 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

55


 

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 compared with 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 Goods Sold

 

 

 

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 compared with 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 compared with 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.

56


 

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 and Administrative Expenses

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Selling, general and administrative expense

 

$

277

 

 

$

249

 

 

$

249

 

% of sales

 

 

9.1

%

 

 

7.7

%

 

 

7.4

%

 

2020 compared with 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 compared with 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 compared with 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 compared with 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.

Interest Expense

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Interest Expense

 

$

79

 

 

$

68

 

 

$

19

 

 

57


 

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

)%

 

58


 

2020 compared with 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 compared with 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)

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Net Income (loss)

 

$

80

 

 

$

313

 

 

$

1,206

 

 

2020 compared with 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 compared with 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 and Capital 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.

59


 

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.

60


 

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.

61


 

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.

62


 

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 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 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

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approval by the Bankruptcy Court. There can be no assurances that we will obtain the approval of the Bankruptcy Court and complete the Transaction.

Cash Flow Summary for the Years Ended December 31, 2020, 2019 and 2018

Our cash flows from operating, investing and financing activities for the years ended December 31, 2020, 2019 and 2018, as reflected in the audited Consolidated and Combined Financial Statements included elsewhere in this Annual Report on Form 10-K, are summarized as 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 compared with 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 million in 2020 compared to 2019, primarily due to a favorable impact from 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.

Cash used for financing activities decreased by $495 million in 2019, as compared to 2018. The change was driven by payments 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 was partially offset by the $1,631 million of proceeds from issuance of long-term debt during 2018 that did not recur during 2019 and payments of long-term debt during 2019 of $163 million, as compared to $6 million during 2018.

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Contractual Obligations and Probable Liability Payments

 

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.

(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 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.

Productivity projects have freed up capacity in our manufacturing facilities and are expected to continue to do so. We expect to continue investing to expand and modernize our existing facilities and invest in our facilities to create capacity for new product development.

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 above and the Company’s expected Emergence.

Off-Balance Sheet Arrangements

We do 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.

65


 

Critical Accounting Policies

The preparation of our Consolidated and Combined Financial Statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. We consider the accounting policies discussed below to be critical to the understanding of our financial statements. Actual results could differ from our estimates and assumptions, and any such differences could be material to our Consolidated and Combined Financial Statements. In connection with the filing of the Chapter 11 Cases on the Petition Date, the Consolidated and Combined 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.

Contingent Liabilities—We are subject to lawsuits, investigations and claims that arise out of the conduct of our global business operations or those of previously owned entities, including matters relating to commercial transactions, government contracts, product liability (including asbestos), 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 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, the number and cost of pending and future asbestos claims, 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 23, Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements for a discussion of management’s judgment applied in the recognition and measurement of our environmental and asbestos liabilities which represent our most significant contingencies.

Asbestos-Related Contingencies and Insurance 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.

66


 

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 23, Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements included herein for additional information.

Pension Benefits—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 nonservice components 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). 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).

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 for 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.

67


 

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 Adjustments 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 TaxesWe 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 in the U.S. will be reported in Honeywell’s U.S. consolidated income tax return and certain foreign activity will be reported in Honeywell tax paying entities in those jurisdictions. For periods prior to the Spin-Off, the income tax provision included in the Consolidated and Combined Financial Statements 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 to uncertain tax positions, was settled with Honeywell through equity at the time 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 related to uncertain tax positions, are reflected in the Consolidated Balance Sheets of Garrett.

Other Matters

Litigation and Environmental Matters

See Note 23, Commitments and Contingencies of Notes to Consolidated and Combined Financial Statements for a discussion of environmental, asbestos and other litigation matters.

Recent Accounting Pronouncements

See Note 3, Summary of Significant Accounting Policies of Notes to the Consolidated and Combined Financial Statements for a discussion of recent accounting pronouncements.

 

 

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Item 7A. Quantitative and Qualitative Disclosures about Market Risks

Foreign Currency Risk

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 currency exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign currency exchange forward contracts (Foreign Currency Exchange Contracts). We hedged monetary assets and liabilities denominated in non-functional currencies. Prior to conversion into U.S. dollars, these assets and liabilities are remeasured at spot exchange rates in effect on the balance sheet date. The effects of changes in spot rates are recognized in earnings and included in Non-operating expense (income).

As a result of the Chapter 11 Cases, the Company has been limited in its ability to enter into hedging transactions. The Company has obtained Bankruptcy Court authorization for continuing hedging activities 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. As of December 31, 2020, the net fair value of all financial instruments with exposure to currency risk was a $0 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) million and $2 million, respectively, at December 31, 2020 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.

Interest Rate Risk

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 bear 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. For our outstanding borrowings under the Prepetition Credit Agreement and DIP Credit Agreement as of December 31, 2020, a 50 basis point increase (decrease) in interest rates would have increased (decreased) our interest expense by $3 million and $3 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. For additional information regarding our Prepetition Credit Agreement and DIP Credit Agreement, see Note 16, Long-term Debt and Credit Agreements of the notes to the Consolidated and Combined Financial Statements.

Commodity Price Risk

While we are exposed to commodity price risk, we pass through abnormal changes in component and raw material costs to our customers based on the contractual terms of our arrangements. In limited situations, we may not be fully compensated for such changes in costs.

 

 

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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 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, 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, based on criteria established in Internal ControlIntegrated 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, of the Company and our report dated February 16, 2021, 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.

 

Basis for Opinion

 

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. 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


70


 

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, 2021


71


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Opinion on the Financial Statements

 

 

We have audited the accompanying consolidated balance sheet 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, 2020 and 2019, the related consolidated and combined statement of operations, comprehensive income, equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes (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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 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, 2021 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.

72


 

 

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.

 

Critical Audit Matter

 

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Obligations Payable to Honeywell– Refer to Note 23 to the financial statements

Critical Audit Matter Description

As more fully described in Note 23 of the financial statements, the Company recorded a liability for obligations payable to Honeywell as 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, the Company has challenged the enforceability of such agreements and filed a motion with the Bankruptcy Court to hear arguments related to these obligations. The Bankruptcy Court was scheduled 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 claim 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. This 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.

 

 

How the Critical Audit Matter Was Addressed in the Audit

 

The primary procedures we performed to address this critical audit matter 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.

 

73


 

 

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

Geneva, Switzerland

February 16, 2021

We have served as the Company’s auditor since 2018.

74


 

GARRETT MOTION INC.

(Debtor-in-Possession)

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

 

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

(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

 

 

 

 

 

 

 

Income before taxes

 

 

119

 

 

 

346

 

 

 

396

 

Tax expense (benefit) (Note 7)

 

 

39

 

 

 

33

 

 

 

(810

)

Net income

 

$

80

 

 

$

313

 

 

$

1,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) per common share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.06

 

 

$

4.20

 

 

$

16.28

 

Diluted

 

$

1.05

 

 

$

4.12

 

 

$

16.21

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

75,543,461

 

 

 

74,602,868

 

 

 

74,059,240

 

Diluted

 

 

76,100,509

 

 

 

75,934,373

 

 

 

74,402,148

 

 

 

The Notes to Consolidated and Combined Financial Statements are an integral part of this statement.

 

 

75


 

GARRETT MOTION INC.

(Debtor-in-Possession)

CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE (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

 

 

The Notes to Consolidated and Combined Financial Statements are an integral part of this statement.

 

 

76


 

GARRETT MOTION INC.

(Debtor-in-Possession)

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

 

2020

 

 

2019

 

 

 

(Dollars in millions)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,019

 

 

$

1,009

 

Borrowings under revolving credit facility (Note 16)

 

 

370

 

 

 

 

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

 

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

 

 

 

 

Total liabilities

 

$

5,325

 

 

$

4,408

 

COMMITMENTS AND CONTINGENCIES (Note 23)

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

The Notes to Consolidated and Combined Financial Statements are an integral part of this statement.

 

 

77


 

GARRETT MOTION INC.

(Debtor-in-Possession)

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

 

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

80

 

 

 

313

 

 

 

1,206

 

Adjustments to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

(34

)

 

 

(41

)

 

 

(931

)

Reorganization items, net

 

 

60

 

 

 

 

 

 

 

Depreciation

 

 

86

 

 

 

73

 

 

 

72

 

Amortization of deferred issuance costs

 

 

7

 

 

 

9

 

 

 

2

 

Foreign exchange (gain) loss

 

 

(58

)

 

 

19

 

 

 

15

 

Stock compensation expense

 

 

10

 

 

 

18

 

 

 

21

 

Pension expense

 

 

15

 

 

 

18

 

 

 

10

 

Other

 

 

44

 

 

 

19

 

 

 

37

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

(162

)

 

 

32

 

 

 

(30

)

Receivables from related parties

 

 

 

 

 

 

 

 

57

 

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