Garrett Motion Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. The filing is an annual report, not a standalone fourth-quarter filing. Garrett designs and sells turbochargers, electric-boosting technologies and connected-vehicle products. It became independent from Honeywell on October 1, 2018, so 2018 results include both pre- and post-spin-off periods and may not be directly comparable with 2019.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change / context |
|---|---|---|---|
| Net sales | $3.248 billion | $3.375 billion | Down 3.8%; foreign exchange reduced sales by 4.0%, while volume added 1.3% and pricing reduced sales by 1.1%. |
| Gross profit / margin | $711 million / 21.9% | $776 million / 23.0% | Margin declined 1.1 percentage points. |
| Net income / diluted EPS | $313 million / $4.12 | $1.206 billion / $16.21 | 2018 included a large nonrecurring tax benefit; 2019 earnings are not comparable without that adjustment. |
| EBITDA / Adjusted EBITDA (non-GAAP) | $480 million / $583 million | $480 million / $620 million | Adjusted EBITDA declined $37 million, or about 6%. |
| Operating cash flow | $242 million | $373 million | Down $131 million. |
| Capital expenditures / operating cash flow less capex (non-GAAP) | $102 million / $140 million | $95 million / $278 million | Cash flow less capex decreased $138 million. |
| Cash and cash equivalents | $187 million | $196 million | Cash declined $9 million during 2019. |
| Debt | $1.413 billion carrying value, including current maturities | $1.592 billion | Debt declined; stated principal outstanding at year-end was $1.440 billion. |
Current assets were $1.199 billion against current liabilities of $1.392 billion. The resulting current ratio was approximately 0.86. The company had a €430 million revolving credit facility; the filing does not clearly state year-end available borrowing capacity. It reported compliance with its financial covenants at December 31, 2019. Those covenants require total leverage of no more than 4.00x, stepping down to 3.75x in September 2020 and 3.50x in September 2021, and interest coverage of at least 2.75x.
Fourth-quarter 2019 sales were $830 million, gross profit $161 million and net income $136 million. Fourth-quarter 2018 sales were $799 million, gross profit $172 million and net income $69 million; 2018 quarterly earnings were affected by unusual tax benefits.
Business mix and changes versus prior period
- Approximately 86% of 2019 revenue came from OEM sales and 14% from aftermarket and other products. Light-vehicle products represented about 67% of revenue and commercial-vehicle products 19%.
- Sales declined in light-vehicle OEM, commercial-vehicle OEM and aftermarket products. Light-vehicle weakness primarily reflected lower diesel volumes in Europe and Asia, partly offset by gasoline growth and new launches. Commercial-vehicle declines were driven mainly by lower volumes in Europe and North America; aftermarket sales fell primarily in Europe.
- Gross margin pressure reflected mix, price and inflation, partly offset by productivity and foreign-exchange benefits. Adjusted EBITDA was also pressured by inflation ($26 million), price ($36 million), foreign exchange ($8 million) and higher R&D, partly offset by productivity net of mix ($20 million) and volume ($14 million).
- Interest expense increased to $68 million from $19 million, principally because of standalone long-term debt. R&D expense was $129 million, versus $128 million in 2018.
- 2018 net income included approximately $879 million of tax benefit related to reduced withholding taxes following an internal restructuring; the revised 2018 statements also reflect a $26 million reduction in tax expense from correction of errors deemed immaterial to previously issued statements.
Outlook, risks and unusual items
- Management did not provide specific company revenue or earnings guidance. It described an expected stabilization in vehicle production in 2020 followed by a modest recovery, with industry vehicle-production growth estimated at 1%–2% annually over the following years. These are industry expectations, not a company forecast.
- The filing, dated February 2020, warned that coronavirus-related shutdowns at Wuhan and reduced Shanghai capacity, supplier disruptions and labor constraints could adversely affect shipments, revenue and profitability at least through the second quarter of 2020. Management expected the outbreak to affect the auto industry primarily in 2020 and did not expect a long-term demand impact beyond 2021, while emphasizing significant uncertainty.
- Garrett is required under its agreement with Honeywell to pay 90% of specified legacy asbestos and environmental payments, net of specified recoveries, subject to an annual cap equivalent to $175 million. It paid $153 million in 2019 and recorded a $1.090 billion year-end obligation. A separate tax-matters obligation had $193 million remaining for mandatory transition-tax payments; total obligations payable to Honeywell under these arrangements were $1.351 billion.
- Garrett sued Honeywell in December 2019, disputing the indemnification agreement and seeking, among other relief, its rescission. The company made payments under protest. The 2019 indemnification payment may include approximately $34 million of overpayments, subject to confirmation by Honeywell and potential credit against a 2020 payment.
- Other significant risks include automotive cyclicality and customer concentration (Ford was 12% of sales; the top ten customers were about 60%), pricing pressure, technology and powertrain shifts, supplier disruption, foreign exchange, product liability, environmental exposure and debt covenant compliance. The company also has substantial operating restrictions under debt agreements and Honeywell agreements.
- The 2018 material weakness concerning evidence supporting the Honeywell liability was reported remediated as of December 31, 2019. Management and the auditor concluded internal control over financial reporting was effective at year-end. Deloitte identified measurement of the Honeywell obligation as a critical audit matter.
Most important facts for investors to verify
- Progress and outcome of the Honeywell litigation, support for the $1.090 billion indemnification liability, future payment levels and whether the estimated $34 million credit is confirmed.
- Coronavirus effects on production, customer orders, suppliers, revenue, cash flow and compliance with leverage and interest-coverage covenants.
- Underlying earnings and cash generation excluding 2018’s unusual tax benefit; monitor margins, pricing, volume, foreign exchange and adjusted EBITDA reconciliation.
- Debt maturity, interest-rate exposure, actual revolver availability and the impact of scheduled covenant step-downs.
- Timing and cash impact of the remaining $193 million Honeywell transition-tax obligation and other tax contingencies.