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Section 1: 10-Q (10-Q)

gtx-10q_20190331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31, 2019

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)

 

N/A

(Former Name, Former Address and Former Fiscal Year,

if Changed Since Last Report)

 

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock,

$0.001 par value per share

GTX

New York Stock Exchange

 

As of May 2, 2019, the registrant had 74,578,460 shares of common stock, $0.001 par value per share, outstanding.

 

 

 

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

5

Item 1.

Financial Statements (Unaudited)

5

 

Consolidated and Combined Interim Statements of Operations (Unaudited)

5

 

Consolidated and Combined Interim Statements of Comprehensive Income (Loss) (Unaudited)

6

 

Consolidated and Combined Interim Balance Sheets (Unaudited)

7

 

Consolidated and Combined Interim Statements of Cash Flows (Unaudited)

8

 

Consolidated and Combined Interim Statements of Equity (Deficit) (Unaudited)

9

 

Notes to Unaudited Combined Financial Statements

10

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

35

Item 4.

Controls and Procedures

35

PART II.

OTHER INFORMATION

37

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 3.

Defaults Upon Senior Securities

37

Item 4.

Mine Safety Disclosures

37

Item 5.

Other Information

37

Item 6.

Exhibits

38

Signatures

39

 

 

 

i


 

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. Approximately 74 million shares of Garrett common stock were distributed on October 1, 2018 to Honeywell stockholders. In connection with the Spin-Off, Garrett´s common stock began trading “regular-way” under the ticker symbol “GTX” on the New York Stock Exchange on October 1, 2018.

Unless the context otherwise requires, references to “Garrett,” “we,” “us,” “our,” and “the Company” in this Quarterly Report on Form 10-Q refer to (i) Honeywell’s Transportation Systems Business (the “Transportation Systems Business” or the “Business”) prior to the Spin-Off and (ii) Garrett Motion Inc. and its subsidiaries following the Spin-Off, as applicable.

This Quarterly Report on Form 10-Q contains financial information that was derived partially from the consolidated financial statements and accounting records of Honeywell. The accompanying consolidated and combined interim financial statements of Garrett (“Consolidated and Combined Interim Financial Statements”) reflect the consolidated and combined historical results of operations, financial position and cash flows of Garrett, for the period 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.

2


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including without limitation statements regarding our future results of operations and financial position, expectations regarding the growth of the turbocharger and electric vehicle markets, the sufficiency of our cash and cash equivalents, anticipated sources and uses of cash, anticipated investments in our business, our business strategy, anticipated payments under our agreements with Honeywell, 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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:

 

1.

changes in the automotive industry and economic or competitive conditions;

2.

our ability to develop new technologies and products, and the development of either effective alternative turbochargers or new replacement technologies;

3.

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;

4.

potential material losses and costs as a result of any warranty claims and product liability actions brought against us;

5.

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;

6.

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;

7.

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;

8.

inaccuracies in estimates of volumes of awarded business;

9.

work stoppages, other disruptions or the need to relocate any of our facilities;

10.

supplier dependency;

11.

failure to meet our minimum delivery requirements under our supply agreements;

12.

failure to increase productivity or successfully execute repositioning projects or manage our workforce;

13.

potential material environmental liabilities and hazards;

14.

natural disasters and physical impacts of climate change;

15.

technical difficulties or failures, including cybersecurity risks;

16.

potential material litigation matters, including labor disputes;

17.

changes in legislation or government regulations or policies;

3


 

18.

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, or Brexit;

19.

risks related to our agreements with Honeywell, such as the Indemnification and Reimbursement Agreement and Tax Matters Agreement;

20.

the terms of our indebtedness and our ability to access capital markets;

21.

unforeseen adverse tax effects;

22.

costs related to operating as a standalone public company and failure to achieve benefits expected from the Spin-Off;

23.

inability to recruit and retain qualified personnel; and

24.

the other factors described under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2018 and in our other filings with the Securities and Exchange Commission (“SEC”).

You should read this Quarterly Report and the documents that we reference in this Quarterly Report 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.

4


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

GARRETT MOTION INC.

CONSOLIDATED AND COMBINED INTERIM STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in millions, except per share amounts)

 

Net sales (Note 4)

 

$

835

 

 

$

915

 

Cost of goods sold

 

 

639

 

 

 

704

 

Gross profit

 

$

196

 

 

$

211

 

Selling, general and administrative expenses

 

 

60

 

 

 

63

 

Other expense, net (Note 6)

 

 

19

 

 

 

42

 

Interest expense

 

 

16

 

 

 

2

 

Non-operating expense (income)

 

 

4

 

 

 

(9

)

Income before taxes

 

$

97

 

 

$

113

 

Tax expense (Note 7)

 

 

24

 

 

 

55

 

Net income

 

$

73

 

 

$

58

 

 

 

 

 

 

 

 

 

 

Earnings per common share

 

 

 

 

 

 

 

 

Basic

 

$

0.98

 

 

$

0.78

 

Diluted

 

$

0.97

 

 

$

0.78

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

74,229,627

 

 

 

74,070,852

 

Diluted

 

 

75,379,228

 

 

 

74,070,852

 

 

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

5


 

GARRETT MOTION INC.

CONSOLIDATED AND COMBINED INTERIM STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Net income

 

$

73

 

 

$

58

 

Foreign exchange translation adjustment

 

 

59

 

 

 

(177

)

Defined benefit pension plan adjustment, net of tax (Note 15)

 

 

1

 

 

 

 

Changes in fair value of effective cash flow hedges, net of tax (Note 14)

 

 

3

 

 

 

(7

)

Total other comprehensive (loss) income, net of tax

 

$

63

 

 

$

(184

)

Comprehensive income (loss)

 

$

136

 

 

$

(126

)

 

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

6


 

GARRETT MOTION INC.

CONSOLIDATED AND COMBINED INTERIM BALANCE SHEETS

(Unaudited)

 

 

 

March 31,

2019

 

 

December 31,

2018

 

 

 

(Dollars in millions)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

207

 

 

$

196

 

Accounts, notes and other receivables – net (Note 8)

 

 

790

 

 

 

750

 

Inventories – net (Note 9)

 

 

181

 

 

 

172

 

Other current assets

 

 

61

 

 

 

71

 

Total current assets

 

 

1,239

 

 

 

1,189

 

Investments and long-term receivables

 

 

35

 

 

 

39

 

Property, plant and equipment – net

 

 

424

 

 

 

438

 

Goodwill

 

 

193

 

 

 

193

 

Deferred income taxes

 

 

159

 

 

 

165

 

Other assets (Note 10)

 

 

122

 

 

 

80

 

Total assets

 

$

2,172

 

 

$

2,104

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

881

 

 

$

916

 

Current maturities of long-term debt

 

 

23

 

 

 

23

 

Obligations payable to Honeywell, current (Note 17)

 

 

124

 

 

 

127

 

Accrued liabilities (Note 11)

 

 

433

 

 

 

426

 

Total current liabilities

 

 

1,461

 

 

 

1,492

 

Long-term debt

 

 

1,542

 

 

 

1,569

 

Deferred income taxes

 

 

29

 

 

 

27

 

Obligations payable to Honeywell (Note 17)

 

 

1,350

 

 

 

1,399

 

Other liabilities (Note 12)

 

 

242

 

 

 

210

 

Total liabilities

 

$

4,624

 

 

$

4,697

 

COMMITMENTS AND CONTINGENCIES (Note 17)

 

 

 

 

 

 

 

 

EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Common stock, par value $0.001; 400,000,000 shares authorized, 74,634,286 and

   74,070,852 issued and 74,583,259 and 74,019,825 outstanding as of March 31,

   2019 and December 31, 2018, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

10

 

 

 

5

 

Retained earnings

 

 

(2,598

)

 

 

(2,671

)

Accumulated other comprehensive income (Note 15)

 

 

136

 

 

 

73

 

Total stockholders' deficit

 

 

(2,452

)

 

 

(2,593

)

Total liabilities and stockholders' deficit

 

$

2,172

 

 

$

2,104

 

 

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

7


 

GARRETT MOTION INC.

CONSOLIDATED AND COMBINED INTERIM STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(Dollars in millions)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

73

 

 

$

58

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

3

 

 

 

28

 

Depreciation

 

 

19

 

 

 

18

 

Amortization of deferred issuance costs

 

 

2

 

 

 

 

Foreign exchange (gain) loss

 

 

7

 

 

 

(8

)

Stock compensation expense

 

 

5

 

 

 

7

 

Pension expense

 

 

1

 

 

 

2

 

Other

 

 

4

 

 

 

1

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts, notes and other receivables

 

 

(43

)

 

 

(113

)

Receivables from related parties

 

 

 

 

 

2

 

Inventories

 

 

(14

)

 

 

4

 

Other assets

 

 

13

 

 

 

(29

)

Accounts payable

 

 

(24

)

 

 

27

 

Payables to related parties

 

 

 

 

 

(19

)

Accrued liabilities

 

 

12

 

 

 

27

 

Obligations payable to Honeywell

 

 

(21

)

 

 

 

Asbestos related liabilities

 

 

 

 

 

2

 

Other liabilities

 

 

(1

)

 

 

5

 

Net cash provided by (used for) operating activities

 

$

36

 

 

$

12

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(21

)

 

 

(28

)

Increase in marketable securities

 

 

 

 

 

(21

)

Decrease in marketable securities

 

 

 

 

 

202

 

Other

 

 

1

 

 

 

2

 

Net cash provided by (used for) investing activities

 

$

(20

)

 

$

155

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase (decrease) in Invested deficit

 

 

 

 

 

812

 

Proceeds from revolving credit facility

 

 

140

 

 

 

 

Payments of revolving credit facility

 

 

(140

)

 

 

 

Payments of long-term debt

 

 

(6

)

 

 

 

Payments related to related party notes payable

 

 

 

 

 

(493

)

Net change related to cash pooling and short-term notes

 

 

 

 

 

(482

)

Other

 

 

1

 

 

 

 

Net cash provided by (used for) financing activities

 

 

(5

)

 

 

(163

)

Effect of foreign exchange rate changes on cash and cash equivalents

 

 

 

 

 

7

 

Net increase (decrease) in cash and cash equivalents

 

 

11

 

 

 

11

 

Cash and cash equivalents at beginning of period

 

 

196

 

 

 

300

 

Cash and cash equivalents at end of period

 

$

207

 

 

$

311

 

 

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

 

 

8


 

GARRETT MOTION INC.

CONSOLIDATED AND COMBINED INTERIM STATEMENTS OF EQUITY (DEFICIT)

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Invested

 

 

Comprehensive

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Deficit

 

 

Income/(Loss)

 

 

Deficit

 

 

 

(in millions)

 

Balance at December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,433

)

 

 

238

 

 

 

(2,195

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58

 

 

 

 

 

 

58

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(184

)

 

 

(184

)

Change in Invested deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,080

 

 

 

 

 

 

1,080

 

Balance at March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,295

)

 

 

54

 

 

 

(1,241

)

Balance at December 31, 2018

 

 

74

 

 

 

 

 

 

5

 

 

 

(2,671

)

 

 

 

 

 

73

 

 

 

(2,593

)

Net income

 

 

 

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

 

 

 

73

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63

 

 

 

63

 

Stock-based compensation

 

 

1

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Balance at March 31, 2019

 

 

75

 

 

 

 

 

 

10

 

 

 

(2,598

)

 

 

 

 

 

136

 

 

 

(2,452

)

 

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

 

 

9


 

GARRETT MOTION INC.

NOTES TO CONSOLIDATED AND COMBINED INTERIM FINANCIAL STATEMENTS

(Unaudited)

(Dollars in millions, except per share amounts)

 

Note 1A. Background and Revision of Previously Issued Consolidated and Combined Interim Financial Statements for the Three Months Ended March 31, 2018

Background

Garrett Motion Inc. (the “Company” or “Garrett”) designs, manufactures and sells highly engineered turbocharger and electric-boosting technologies for light and commercial vehicle original equipment manufacturers (“OEMs”) and the global vehicle independent aftermarket, as well as automotive software solutions. We are a global technology leader with significant expertise in delivering products across gasoline and diesel propulsion systems and hybrid and fuel cell powertrains.

On October 1, 2018, the Company became an independent publicly-traded company through a pro rata distribution by Honeywell International Inc. (“Former Parent” or “Honeywell”) of 100% of the then-outstanding shares of Garrett to Honeywell’s stockholders (the “Spin-Off”).   Each Honeywell stockholder of record received one share of Garrett common stock for every 10 shares of Honeywell common stock held on the record date. Approximately 74 million shares of Garrett common stock were distributed on October 1, 2018 to Honeywell stockholders. In connection with the Spin-Off, Garrett´s common stock began trading “regular-way” under the ticker symbol “GTX” on the New York Stock Exchange on October 1, 2018.

The Spin-Off was completed pursuant to a Separation and Distribution Agreement and other agreements with Honeywell related to the Spin-Off, including but not limited to an indemnification and reimbursement agreement (the “Indemnification and Reimbursement Agreement”) and a tax matters agreement (the “Tax Matters Agreement”). Refer to Note 17, Commitments and Contingencies for additional details related to the Indemnification and Reimbursement Agreement and Tax Matters Agreement.

Unless the context otherwise requires, references to “Garrett,” “we,” “us,” “our,” and “the Company” refer to (i) Honeywell’s Transportation Systems Business (the “Transportation Systems Business” or the “Business”) prior to the Spin-Off and (ii) Garrett Motion Inc. and its subsidiaries following the Spin-Off, as applicable.

Revision of Previously Issued Consolidated and Combined Interim Financial Statements for the Three Months Ended March 31, 2018

In August 2018, the Business, as part of Honeywell, determined that it had not appropriately applied the provisions of ASC 450, Contingencies, in measuring its asbestos liabilities related to unasserted Bendix claims. For the three months ended March 31, 2018, the Company now reflects the epidemiological projections through 2059 rather than a five-year time horizon when estimating the liability for unasserted Bendix-related asbestos claims.

In light of the foregoing, the Company has revised our combined interim financial statements for the three months ended March 31, 2018 included in our Amendment No. 1 to Form 10, as confidentially filed with the Securities and Exchange Commission (“SEC”) on June 8, 2018 to reflect the effects of the revised method for estimating the total liability for unasserted Bendix-related asbestos claims.

The Consolidated and Combined Interim Statements of Operations, Consolidated and Combined Interim Statements of Comprehensive Income and Consolidated and Combined Interim Statements of Cash Flows for the three months ended March 31, 2018 included in this Form 10-Q were updated to reflect the revision.

10


 

The following tables identify each financial statement line item affected by the revision.

 

 

 

Three Months Ended,

March 31, 2018

 

Unaudited Consolidated and Combined Interim Statement

of Operations

(Millions)

 

Previously

Reported

 

 

Adjustment

 

 

As

Revised

 

 

 

Unaudited

 

 

Unaudited

 

 

Unaudited

 

Other expense, net

 

$

44

 

 

$

(2

)

 

$

42

 

Income before taxes

 

$

111

 

 

$

2

 

 

$

113

 

Tax expense

 

$

55

 

 

$

 

 

$

55

 

Net income

 

$

56

 

 

$

2

 

 

$

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended,

March 31, 2018

 

Unaudited Consolidated and Combined Interim Statement

of Comprehensive Income

(Millions)

 

Previously

Reported

 

 

Adjustment

 

 

As

Revised

 

 

 

Unaudited

 

 

Unaudited

 

 

Unaudited

 

Net Income

 

$

56

 

 

$

2

 

 

$

58

 

Comprehensive (loss) income

 

$

(128

)

 

$

2

 

 

$

(126

)

 

 

 

Three Months Ended,

March 31, 2018

 

 

 

Unaudited

 

 

Unaudited

 

 

Unaudited

 

Unaudited Consolidated and Combined Interim Statement of Cash

Flows

(Millions)

 

Previously

Reported

 

 

Adjustment

 

 

As

Revised

 

Net Income

 

$

56

 

 

$

2

 

 

$

58

 

Changes in assets and liabilities: Asbestos-related liabilities

 

$

4

 

 

$

(2

)

 

$

2

 

Net cash provided by operating activities

 

$

12

 

 

$

 

 

$

12

 

Net increase in Invested deficit

 

$

812

 

 

$

 

 

$

812

 

Net cash (used for) provided by financing activities

 

$

(163

)

 

$

 

 

$

(163

)

 

 

Note 1B. Basis of Presentation

 

Basis of Presentation

Prior to the Spin-Off on October 1, 2018, our historical financial statements were prepared on a stand-alone combined basis and were derived from the consolidated financial statements and accounting records of Honeywell. Accordingly, for periods prior to October 1, 2018, our financial statements are presented on a combined basis and for the periods subsequent to October 1, 2018 are presented on a consolidated basis (collectively, the historical financial statements for all periods presented are referred to as “Consolidated and Combined Interim Financial Statements”). The Consolidated and Combined Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Asbestos-related expenses, net of probable insurance recoveries, are presented within Other expense, net in the Consolidated and Combined Interim Statement of Operations. Honeywell is subject to certain asbestos-related and environmental-related liabilities, primarily related to its legacy Bendix business. In conjunction with the Spin-Off, certain operations that were part of the Bendix business, along with the ownership of the Bendix trademark, as well as certain operations that were part of other legacy elements of the Business, were transferred to us. For the periods prior to the Spin-Off, these Consolidated and Combined Interim Financial Statements reflect an estimated liability for resolution of pending and future asbestos-related and environmental liabilities primarily related to the legacy Bendix business, calculated as if we were responsible for 100% of the Bendix asbestos-liability payments. However, this recognition model differs from the recognition model applied subsequent to the Spin-Off, with the difference recognized through equity as of the Spin-Off date. In periods subsequent to the Spin-Off, the accounting for the majority of our asbestos-related liability payments and accounts payable reflect the terms of the Indemnification and Reimbursement Agreement with Honeywell entered into on September 12, 2018, under which we are required to make payments to Honeywell in amounts equal to 90% of Honeywell’s asbestos-related liability payments and accounts payable, primarily related to the Bendix business in the United States, as well as certain environmental-related liability payments and accounts payable and non-United States asbestos-related liability payments and accounts payable, in each case related to legacy elements of the Business, including the legal costs of defending and resolving such liabilities, less 90% of Honeywell’s net insurance receipts and, as may be applicable, certain other recoveries associated with such liabilities. The Indemnification and Reimbursement Agreement provides that the agreement will terminate upon the earlier of (x) December 31, 2048 or (y) December 31st of the third consecutive year during which certain amounts owed to Honeywell during each such year were less than $25 million as converted into Euros in accordance with the terms of the agreement.

11


 

The Consolidated and Combined Interim Financial Statements are unaudited; however, in the opinion of management, they contain all the adjustments (consisting of those of a normal recurring nature) considered necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods. The Consolidated and Combined Interim Financial Statements should be read in conjunction with the audited annual Consolidated and Combined Financial Statements for the year ended December 31, 2018 included in our Annual Report on Form 10-K, as filed with the SEC on March 1, 2019 (our “2018 Form 10-K”). The results of operations and cash flows for the three months ended March 31, 2019 should not necessarily be taken as indicative of the entire year.

We report our quarterly financial information using a calendar convention: the first, second and third quarters are consistently reported as ending on March 31, June 30 and September 30. It has been our practice to establish actual quarterly closing dates using a predetermined fiscal calendar, which requires our businesses to close their books on a Saturday in order to minimize the potentially disruptive effects of quarterly closing on our business processes. The effects of this practice are generally not significant to reported results for any quarter and only exist within a reporting year. In the event that differences in actual closing dates are material to year-over-year comparisons of quarterly or year-to-date results, we will provide appropriate disclosures. Our actual closing dates for the three months ended March 31, 2019 and 2018 were March 30, 2019 and March 31, 2018, respectively.    

Note 2. Summary of Significant Accounting Policies

The accounting policies of the Company are set forth in Note 2 to the audited annual Consolidated and Combined Financial Statements for the year ended December 31, 2018 included in our 2018 Form 10-K. We include herein certain updates to those policies.

Leases - Lessee accounting policy

For the periods beginning January 1, 2019, right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of a lease (the “commencement date”) based on the present value of lease payments over the lease term. We determine if an arrangement is a lease at inception. Operating leases are included in Other assets, Accrued liabilities, and Other liabilities in our Consolidated and Combined Balance Sheets. No finance leases have been recognized.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Variable lease payments are expensed in the period in which they occur.

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For machinery and equipment, we account for the lease and non-lease components as a single lease component.

We account for short-term leases by recognizing lease payments in net income on a straight-line basis over the lease term and will not recognize any ROU assets and lease liabilities on the Consolidated and Combined Balance Sheet.

For the periods prior to January 1, 2019, we accounted for leases in accordance with ASC 840.

Recently Adopted Accounting Pronouncements

Effective January 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective transition option of applying the new standard at the adoption date while electing not to recast comparative periods in the transition. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. In adopting the new leases standard, the Company has applied the practical expedients as per ASC 842-10-65-1(f) and (g). Adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of $34 million as of January 1, 2019. The adoption of this standard did not have a material impact related to existing leases and as a result, a cumulative-effect adjustment was not recorded.

In February 2018, the FASB issued guidance that allows for an entity to elect to reclassify the income tax effects on items within Accumulated other comprehensive income resulting from The Tax Cuts and Jobs Act (“Tax Act”) to retained earnings. The guidance is effective for fiscal years beginning after December 15, 2018. Upon adoption, the Company did not elect to reclassify the stranded income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings.

12


 

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 will be effective for us in our first quarter of fiscal 2020, and earlier adoption is permitted beginning in the first quarter of fiscal 2019. We are currently evaluating the impact of the guidance on our Consolidated and Combined Financial Statements.

Note 3. Related Party Transactions with Honeywell

Subsequent to Spin-Off

Following the Spin-Off, Honeywell is no longer considered a related party.

Prior to Spin-Off

Prior to the Spin-Off, the Consolidated and Combined Interim Financial Statements were prepared on a stand-alone basis and are derived from the Consolidated Interim Financial Statements and accounting records of Honeywell.

Honeywell provided certain services, such as legal, accounting, information technology, human resources and other infrastructure support, on behalf of the Business. The cost of these services has been allocated to the Business on the basis of the proportion of revenues. The Business and Honeywell consider the allocations to be a reasonable reflection of the benefits received by the Business. During the three months ended March 31, 2018, the Business was allocated $29 million of general corporate expenses incurred by Honeywell, and such amounts are included within Selling, general and administrative expenses in the Consolidated and Combined Interim Statements of Operations. As certain expenses reflected in the Consolidated and Combined Interim Financial Statements for the three months ended March 31, 2018 include allocations of corporate expenses from Honeywell, these statements could differ from those that would have been prepared had the Business operated on a stand-alone basis.

The Company received interest income for related party notes receivables of less than $1 million for the three months ended March 31, 2018. Additionally, the Company incurred interest expense for related party notes payable of $1 million for the three months ended March 31, 2018.

Net transfers to and from Honeywell are included within Invested deficit on the Consolidated and Combined Interim Statements of Equity. The components of the net transfers to and from Honeywell for the three months ended March 31, 2018 are as follows:

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

General financing activities

 

$

1,841

 

Distribution to Former Parent

 

 

(799

)

Unbilled corporate allocations

 

 

29

 

Stock compensation expense and other compensation awards

 

 

7

 

Pension expense

 

 

2

 

Total net decrease in Invested deficit

 

$

1,080

 

 

 

Note 4. Revenue Recognition and Contracts with Customers

 

Disaggregated Revenue

Sales by region (determined based on country of shipment) and channel are as follows:

 

 

 

Three months ended March 31, 2019

 

 

 

OEM

 

 

Aftermarket

 

 

Other

 

 

Total

 

United States

 

$

83

 

 

$

45

 

 

$

1

 

 

$

129

 

Europe

 

 

429

 

 

 

37

 

 

 

12

 

 

 

478

 

Asia

 

 

199

 

 

 

13

 

 

 

7

 

 

 

219

 

Other International

 

 

4

 

 

 

5

 

 

 

 

 

 

9

 

 

 

$

715

 

 

$

100

 

 

$

20

 

 

$

835

 

13


 

 

 

 

Three months ended March 31, 2018(1)

 

 

 

OEM

 

 

Aftermarket

 

 

Other

 

 

Total

 

United States

 

$

89

 

 

$

43

 

 

$

1

 

 

$

133

 

Europe

 

463

 

 

41

 

 

17

 

 

521

 

Asia

 

230

 

 

12

 

 

8

 

 

250

 

Other International

 

5

 

 

6

 

 

 

 

 

11

 

 

 

$

787

 

 

$

102

 

 

$

26

 

 

$

915

 

 

(1)

The revenue information was previously disaggregated between OEM and Aftermarket and is now disaggregated between OEM, Aftermarket, and Other. As a result, the prior period presented was recast to conform to the current year presentation.

Contract Balances

The following table summarizes our contract assets and liabilities balances:

 

 

 

2019

 

Contract assets—January 1

 

$

5

 

Contract assets—March 31

 

 

6

 

Change in contract assets—Increase/(Decrease)

 

$

1

 

Contract liabilities—January 1

 

$

(2

)

Contract liabilities—March 31

 

 

(2

)

Change in contract liabilities—(Increase)/Decrease

 

$

 

 

Note 5. Research and Development

 

Garrett conducts research and development activities, which consist primarily of the development of new products and product applications. R&D costs are charged to expense as incurred. Such costs are included in Cost of goods sold as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Research and development costs

 

$

32

 

 

$

31

 

Engineering-related expenses

 

 

3

 

 

 

2

 

 

 

$

35

 

 

$

33

 

 

Note 6. Other Expense, Net

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Indemnification related — post Spin-Off

 

$

19

 

 

$

 

Asbestos related, net of probable insurance recoveries

 

 

 

 

 

41

 

Environmental remediation, non-active sites

 

 

 

 

 

1

 

 

 

$

19

 

 

$

42

 

 

Note 7. Income Taxes

 

The effective tax rate decreased for the three months ended March 31, 2019, as compared to the three months ended March 31, 2018, primarily due to a $25 million tax expense attributable to currency impacts for withholding taxes on undistributed foreign earnings which was recorded during the three months ended March 31, 2018.

 

The effective tax rate for the three months ended March 31, 2019 was higher than the U.S. federal statutory rate of 21% due primarily to non-deductible indemnity expenses partially offset by non-U.S. earnings taxed at lower rates.

 

14


 

The effective tax rate for the three months ended March 31, 2018 was higher than the U.S. federal statutory rate of 21% due primarily to non-deductible asbestos expenses and tax expense attributable to currency impacts for withholding taxes on undistributed foreign earnings, partially offset by non-U.S. earnings taxed at lower rates.

 

On December 22, 2017, the U.S. enacted the Tax Act which instituted fundamental changes to the taxation of multinational corporations. The Tax Act changed the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Act also included a permanent reduction in the corporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of capital investment and limitation of the deduction for interest expense.

 

The effective tax rate can vary from quarter to quarter due to the tax impacts from the resolution of income tax audits, changes in tax laws, employee share-based payments, internal restructurings, pension mark-to-market adjustments, and the current uncertainty regarding state taxes including potential responses of state taxing authorities to legislative changes within the Tax Act.

Note 8. Accounts, Notes and Other Receivables—Net

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Trade receivables

 

$

641

 

 

$

593

 

Notes receivables

 

 

77

 

 

 

93

 

Other receivables

 

 

77

 

 

 

67

 

 

 

$

795

 

 

$

753

 

Less—Allowance for doubtful accounts

 

 

(5

)

 

 

(3

)

 

 

$

790

 

 

$

750

 

 

Trade Receivables include $20 million and $5 million of unbilled balances as of March 31, 2019 and December 31, 2018, respectively. These amounts are billed in accordance with the terms of customer contracts to which they relate. Unbilled receivables include $6 million and $5 million of contract assets as of March 31, 2019 and December 31, 2018, respectively. See Note 4, Revenue Recognition and Contracts with Customers.

Note 9. Inventories—Net

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Raw materials

 

$

112

 

 

$

112

 

Work in process

 

 

20

 

 

 

19

 

Finished products

 

 

72

 

 

 

64

 

 

 

$

204

 

 

$

195

 

Less—Reserves

 

 

(23

)

 

 

(23

)

 

 

$

181

 

 

$

172

 

 

Note 10. Other Assets

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Advanced discounts to customers, non-current

 

$

53

 

 

$

56

 

Operating right-of-use assets (Note 13)

 

 

37

 

 

 

 

Undesignated cross-currency swap at fair value

 

 

25

 

 

 

16

 

Other

 

 

7

 

 

 

8

 

 

 

$

122

 

 

$

80

 

 

15


 

Note 11. Accrued Liabilities

 

 

 

March 31,

2019

 

 

December 31,

2018

 

Customer pricing reserve

 

$

115

 

 

$

107

 

Compensation, benefit and other employee related

 

 

60

 

 

 

71

 

Repositioning

 

 

7

 

 

 

15

 

Product warranties and performance guarantees

 

 

35

 

 

 

32

 

Taxes

 

 

106

 

 

 

113

 

Advanced discounts from suppliers, current

 

 

18

 

 

 

17

 

Customer advances and deferred income(a)

 

 

23

 

 

 

14

 

Accrued interest

 

 

11

 

 

 

6

 

Short-term lease liability (Note 13)

 

 

9

 

 

 

 

Other (primarily operating expenses)

 

 

49

 

 

 

51

 

 

 

$

433

 

 

$

426

 

 

(a)

Customer advances and deferred income include $2 million of contract liabilities as of March 31, 2019 and December 31, 2018. See Note 4 Revenue Recognition and Contracts with Customers.

The Company accrued repositioning costs related to projects to optimize our product costs and to right-size our organizational structure. Expenses related to the repositioning accruals are included in Cost of goods sold in our Consolidated and Combined Interim Statements of Operations.

 

 

 

Severance Costs

 

 

Exit

Costs

 

 

Total

 

Balance at December 31, 2017

 

$

53

 

 

$

7

 

 

$

60

 

Charges

 

 

2

 

 

 

 

 

 

2

 

Usage—cash

 

 

(3

)

 

 

 

 

 

(3

)

Foreign currency translation

 

 

2

 

 

 

 

 

 

2

 

Balance at March 31, 2018

 

$

54

 

 

$

7

 

 

$

61

 

 

 

 

Severance Costs