Garrett Motion Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter filing; selected Q4 figures are included below. Garrett designs and manufactures turbochargers, electric-boosting technologies, and automotive software. The company filed for Chapter 11 on September 20, 2020. Its common stock was delisted from the NYSE and traded on OTC Pink as GTXMQ.
Financial and operating performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $3.034 billion | $3.248 billion |
| Gross profit / gross margin | $556 million / 18.3% | $711 million / 21.9% |
| Net income | $80 million | $313 million |
| Adjusted EBITDA (non-GAAP) | $440 million | $583 million |
| Operating cash flow | $25 million | $242 million |
| Capital expenditures | $80 million | $102 million |
| Operating cash flow less capital expenditures (non-GAAP) | $(55) million | $140 million |
Fourth-quarter 2020 sales were $1.008 billion, gross profit was $178 million, and net income was $26 million. Full-year diluted EPS was $1.05, versus $4.12 in 2019.
At year-end, cash and cash equivalents were $592 million and restricted cash was $101 million. Current assets were $1.879 billion and current liabilities were $1.837 billion, excluding $2.290 billion of liabilities subject to compromise, which are presented separately. Debt included $1.082 billion of term loans, $370 million drawn on the revolving facility, $200 million of DIP financing, and $429 million of senior notes classified as subject to compromise. The company reported total liabilities of $5.325 billion and a stockholders’ deficit of $2.308 billion.
Material changes versus prior year
- Sales fell 6.6%; lower vehicle production and COVID-related shutdowns drove much of the decline. Foreign currency translation provided a 1.3% benefit, while volume reduced sales by 7.3% and pricing by 0.6%.
- Gross margin declined 3.6 percentage points, reflecting unfavorable product mix and pricing, inflation, repositioning costs, premium freight, and higher fixed costs at lower volumes.
- Adjusted EBITDA decreased $143 million. Management cited lower volume, higher SG&A, productivity and mix, inflation, and pricing, partly offset by lower R&D expense and favorable currency effects.
- Operating cash flow fell $217 million. The company cited lower earnings and an unfavorable working-capital impact, partly offset by lower payments to Honeywell and changes in accrued liabilities.
- Financing cash flow included $200 million of DIP borrowings and increased revolving-credit borrowings. Year-end cash rose to $592 million from $187 million in 2019, alongside $101 million of restricted cash.
Restructuring, outlook, and key risks
- Proposed restructuring: As of the filing date, Garrett was pursuing a transaction with the CO Group under a plan support agreement, but the plan and related agreements remained subject to Bankruptcy Court approval and closing conditions. Proposed terms included $1.051 billion of committed Series A preferred equity, a rights offering of up to $200 million, and approximately $1.1 billion of new debt financing at emergence. Eligible existing common shareholders could retain shares or elect cash at $6.25 per share, subject to plan terms.
- Honeywell settlement: The proposed plan would settle Honeywell-related indemnity, tax, and litigation claims for $375 million cash at emergence and Series B preferred stock payable in installments of $35 million in 2022 and $100 million annually from 2023 through 2030. The company disclosed optional prepayment terms. The proposal was not yet approved.
- Transaction uncertainty and costs: KPS’s stalking-horse purchase agreement was terminated in January 2021; Garrett paid a $63 million termination payment and $15.7 million expense reimbursement. An equity committee objected to the CO Group plan, and an alternative Atlantic Park proposal was also pending. The company raised concerns about the alternative proposal’s feasibility.
- Going concern: Management and the auditor reported substantial doubt about Garrett’s ability to continue as a going concern, given its financial condition, COVID-19 uncertainty, and Chapter 11 risks. The auditor’s financial statement opinion was unqualified but included a going-concern emphasis.
- COVID-19 and markets: Production-site closures and reduced capacity disrupted sales in 2020. Management said production had largely recovered by the second half, but further lockdowns could cause renewed disruption. The filing cited an estimated 13% contraction in combined light- and commercial-vehicle turbocharger industry volume in 2020 and expected a 13% rebound in 2021; these are industry estimates, not company guidance.
- Customer and liquidity exposure: Management said some OEMs questioned future awards or considered dual-sourcing awarded platforms due to Garrett’s financial instability. Top ten customers represented about 56% of 2020 sales; Ford represented about 10%.
- Claims and litigation: Honeywell filed claims of at least $1.9 billion; Garrett recorded $1.482 billion of Honeywell obligations at year-end as liabilities subject to compromise. The company received bankruptcy proofs of claim totaling approximately $146 billion, including duplicates, and had not completed its validity assessment. Other matters include securities litigation, a disputed Brazilian tax assessment of $29 million for which no accrual was recorded, and senior-note make-whole litigation.
- Capital and equity risk: The filing warns that existing common stock could receive no recovery or be cancelled under a confirmed plan. Trading on OTC Pink may be less liquid and more volatile. Dividends were unavailable during Chapter 11, and none were expected in the foreseeable future.
- Management’s operating outlook: Garrett said it intended to continue investing in differentiated technologies if it successfully restructured. It expected 2021 capital expenditures to increase materially from 2020 as deferred projects resumed and in connection with expected emergence; completion and timing were uncertain.
Most important facts for investors to verify
- Whether the Bankruptcy Court approved and the company completed a plan, and the final treatment of existing common stock and creditor claims.
- The final financing, cash requirements, and debt and preferred-stock obligations at emergence, including the Honeywell settlement and any related fees.
- Whether operating cash flow, working capital, and available unrestricted liquidity can support operations and increased capital spending.
- Whether OEM awards and production volumes were retained or shifted to competitors, and whether customer concentration changed.
- The outcomes and potential costs of the Honeywell, securities, Brazilian tax, and make-whole matters.
- The basis and comparability of adjusted EBITDA and other non-GAAP measures, as well as the impact of restructuring-related and other unusual items.