Garrett Motion Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Garrett designs and sells turbocharger, electric-boosting and automotive software products. The company reported results amid the COVID-19 disruption to global automotive production.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $745 million | $835 million |
| Gross profit / margin | $142 million / 19.1% | $196 million / 23.5% |
| Net income | $52 million | $73 million |
| Diluted EPS | $0.68 | $0.97 |
| Adjusted EBITDA (non-GAAP) | $108 million | $159 million |
| Operating cash flow | $57 million | $36 million |
| Capital expenditures | $39 million | $21 million |
| Operating cash flow less capital expenditures (non-GAAP) | $18 million | $15 million |
- Sales fell 10.8% year over year: volume reduced sales 8.2%, foreign exchange 2.2%, and price 0.4%. Adjusted EBITDA declined $51 million, primarily reflecting lower volume and productivity/mix.
- At March 31, cash and cash equivalents were $254 million, versus $187 million at December 31, 2019. Current assets were $1.188 billion and current liabilities $1.376 billion.
- Long-term debt was $1.389 billion, current maturities $4 million, and revolving-credit borrowings $66 million at quarter-end. On April 6, 2020, Garrett drew the approximately $470 million then remaining on its revolving facility.
- Liabilities payable to Honeywell totaled $1.304 billion ($68 million current and $1.236 billion non-current). Stockholders’ deficit was $2.046 billion.
- Operating cash flow benefited from working capital; capital expenditures increased year over year. Q1 cash also reflected $62 million net cash provided by financing and a $13 million adverse foreign-exchange effect.
Business changes and management outlook
- COVID-19-related shutdowns and reduced production in Wuhan and Shanghai contributed to weaker Asia sales. Other facilities were closed or operating at reduced capacity; management expected disruption through most of Q2 and possibly longer.
- Management expected a contraction in turbocharger industry revenue in 2020 and said Q2 and future-quarter results could be materially negatively affected. No quantified company revenue or earnings guidance was provided.
- Garrett postponed or rephased some capital projects and described cost and cash actions including lower discretionary spending, working-capital management, temporary executive and leadership pay reductions of 20%, workforce flexibility, and hiring restrictions.
- Management expected 2020 capital expenditures to be materially reduced, while stating that this would not adversely affect delivery of long-term projects on time.
- The company said it was in compliance with credit-facility financial covenants at March 31, but expected it could breach the total leverage covenant as early as June 30 due to the pandemic. Such a breach could trigger default and acceleration, including under cross-default provisions. Management concluded that these circumstances raised substantial doubt about the company’s ability to continue as a going concern and was negotiating a covenant amendment or waiver; success was not assured.
Contingencies and unusual items
- Garrett is litigating against Honeywell over the Indemnification and Reimbursement Agreement, which requires payments tied to certain asbestos, environmental and related liabilities. Garrett paid Honeywell the euro-equivalent of $35 million in Q1 under protest. Honeywell moved to dismiss the lawsuit; outcome and timing were uncertain.
- The Tax Matters Agreement requires estimated aggregate transition-tax payments of $240 million; $190 million remained at March 31. The April 1, 2020 installment was deferred by agreement to May 31.
- Other expense included $15 million of post-spin-off indemnification expense and $1 million related to litigation. A new expected-credit-loss accounting standard increased the allowance for doubtful accounts by $5 million through an opening retained-earnings adjustment.
- Management reported disclosure controls were effective at the reasonable-assurance level as of March 31, 2020, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Garrett obtained lender amendments or waivers and remained compliant with its leverage and interest-coverage covenants after March 31. The filing gives different current leverage limits in different places: 4.25:1 in the credit-agreement discussion and 4.00:1 in the updated risk factor.
- Subsequent cash, revolver availability, liquidity needs and operating performance following the April 6 draw, particularly through Q2 and the rest of 2020.
- Progress and potential financial impact of the Honeywell litigation, indemnification payments, and the remaining transition-tax installments.
- Actual production, customer demand, supplier availability, and the effects of deferred capital spending and cost-control actions on margins and cash generation.