Garrett Motion Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Garrett designs and sells turbocharger, electric-boosting and automotive software products, primarily to vehicle OEMs. The company was operating as a debtor-in-possession after filing for Chapter 11 protection in September 2020.
Financial performance and condition
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $997 million | $745 million |
| Gross profit / gross margin | $196 million / 19.7% | $138 million / 18.5% |
| Net income (loss) | $(105) million; $(1.38) per share | $52 million; $0.69 per share |
| Operating cash flow | $32 million | $57 million |
| Capital expenditures | $18 million | $39 million |
| Operating cash flow less capital expenditures | $14 million | $18 million |
- Sales rose 33.8%, reflecting 28.7% higher volume and an 8.2% favorable foreign-exchange effect, partly offset by 3.1% lower pricing. Growth was driven mainly by light-vehicle OEM sales, including recovery in China and higher diesel volumes in Europe.
- Gross margin improved 1.2 percentage points, with volume leverage and productivity benefits partly offset by mix, pricing and inflation.
- Adjusted EBITDA, a non-GAAP measure, was $176 million versus $108 million. The 2021 result includes substantial adjustments, including $174 million of reorganization items and $33 million of foreign-exchange loss on debt; it should be considered alongside GAAP results.
- Interest expense was $21 million, compared with $16 million. The company also reported $26 million of non-operating expense, versus $4 million of non-operating income, primarily reflecting unhedged exposures after derivatives were terminated in connection with Chapter 11.
- At March 31, cash and cash equivalents were $382 million and restricted cash was $195 million. Total cash, cash equivalents and restricted cash were $577 million, down $116 million from year-end. Current liabilities were $1.852 billion and current assets were $1.735 billion.
- Debt included $370 million under the revolving facility, $1.055 billion of term loans, $100 million of DIP financing and $412 million of senior notes classified as liabilities subject to compromise. Total liabilities subject to compromise were $2.107 billion; total liabilities were $5.135 billion.
Material changes and unusual items
- The prior-year comparison was affected by COVID-19 production shutdowns, particularly in China. Q1 2021 sales benefited from recovery against that disrupted base.
- Reorganization expense was $174 million, comprising $84 million of advisor fees, $79 million for termination and expense reimbursement under the KPS stalking-horse agreement, $1 million of DIP fees and $10 million of other items.
- The company repaid $100 million of DIP financing on March 17, leaving $100 million outstanding at quarter-end, and extended its maturity to April 30, 2021.
- Cash flow from operations declined by $25 million year over year. The company paid $100 million of DIP principal and reduced capital spending compared with the prior-year quarter.
Restructuring, outlook and risks
- Plan and financing: The Bankruptcy Court confirmed the reorganization plan on April 26, 2021; the company targeted an effective date of April 30 but said it could not assure when, or whether, all conditions would be met. The plan provides for a $668.8 million direct investment in Series A preferred stock, rights offerings of up to $632 million, and proposed exit financing of approximately $1.25 billion in term loans and a $300 million revolver.
- Existing shareholders: Under the plan, eligible holders may retain existing shares or elect cash at $6.25 per share in exchange for cancellation. The company estimated approximately 11.0 million shares would be canceled for about $69 million. The plan anticipates significant preferred-stock issuance and potential dilution upon conversion.
- Honeywell settlement: The confirmed plan provides for $375 million cash at emergence and Series B preferred-stock payments of $35 million in 2022 and $100 million annually from 2023 through 2030. The company may elect specified early-payment options. The settlement is intended to resolve Honeywell-related indemnity, tax and litigation claims.
- Business outlook: Management cited expected 2021 recovery in vehicle production and longer-term turbocharger demand, but said the semiconductor shortage makes production plans uncertain and that it was premature to quantify the full-year impact. No specific company revenue or earnings guidance is provided in the filing text.
- Customer and operating risks: Management said Chapter 11 and leverage concerns had led some OEMs to question future awards or consider dual sourcing. COVID-related shutdowns, supply-chain disruption, customer demand, foreign exchange and competition from battery-electric vehicles remain risks.
- Liquidity and going concern: Management expected cash on hand, operating cash flow and DIP borrowings to fund operations during Chapter 11, but the filing states that substantial doubt existed about the company’s ability to continue as a going concern, dependent on successful emergence and other factors.
- Contingencies: The company reported 2,487 proofs of claim totaling approximately $146 billion, including duplicate claims across debtor entities; validity assessments were incomplete. A $27 million Brazilian tax-credit assessment was not accrued because management considered liability not probable. Securities litigation and other claims remain, subject to the plan and applicable insurance or claim-resolution processes.
- Trading and controls: Common stock had been delisted from the NYSE and traded on the OTC Pink Market as GTXMQ. Management concluded disclosure controls were effective at the reasonable-assurance level as of March 31, 2021.
Investor verification priorities
- Confirm whether and when the confirmed plan became effective, and review final transaction documents and exit-credit terms.
- Verify the final treatment of existing common shares, cash-out elections, preferred-stock terms and resulting fully diluted ownership.
- Assess post-emergence liquidity, debt service, preferred-stock payment obligations and covenant headroom against operating cash generation.
- Track OEM production, semiconductor availability, customer awards and any further shift toward dual sourcing or electric vehicles.
- Follow reconciliation of bankruptcy claims, the Honeywell settlement implementation, securities litigation and the Brazilian tax matter.