NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Background and Basis of Presentation
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. These OEMs in turn ship to consumers globally. We are a global technology leader with significant expertise in delivering products across gasoline, diesel, natural gas and electric (hybrid and fuel cell) power trains. These products are key enablers for fuel economy and emission standards compliance.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All amounts presented are in millions, except per share amounts.
We evaluate segment reporting in accordance with ASC 280, Segment Reporting. We concluded that Garrett operates in a single operating segment and a single reportable segment based on the operating results available and evaluated regularly by the chief operating decision maker (“CODM”), who is our Chief Executive Officer, to make decisions about resource allocation and performance assessment. The CODM makes operational performance assessments and resource allocation decisions on a consolidated basis, inclusive of all of the Company’s products across channels and geographies.
Note 2. Plan of Reorganization
On September 20, 2020 (the "Petition Date"), the Company and certain of its subsidiaries each filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). A Revised Amended Plan of Reorganization ("Plan") was confirmed by the Bankruptcy Court on April 26, 2021, and the Company emerged from bankruptcy (“Emergence”) on April 30, 2021 (the "Effective Date").
The Company applied ASC 852, Reorganizations, in preparing its Consolidated Financial Statements during its Chapter 11 bankruptcy proceedings, which required the financial statements for periods subsequent to filing for Chapter 11 to distinguish transactions and events that were directly associated with the Company's reorganization from the ongoing operations of the business. Revenues, expenses, realized gains and losses, and provisions for losses directly resulting from the reorganization and restructuring were reported separately as Reorganization items, net in the Consolidated Statements of Operations. Upon Emergence, the Company did not meet the requirements under ASC 852 for fresh start accounting and in accordance with ASC 852, a new reporting entity was not created for accounting purposes.
On the Effective Date, pursuant to the Plan:
•All shares of the common stock of the Company outstanding prior to the Effective Date (the “Old Common Stock”) were cancelled;
•The Company paid $69 million to holders of Old Common Stock who had made the cash-out election under the Plan (the “Cash-Out Election”) in consideration of the cancellation of the common stock held by such holders;
•The Company issued 65,035,801 shares of its new common stock ("Common Stock") to the holders of Old Common Stock who had not made the Cash-Out Election under the Plan;
•The Company issued 247,768,962 shares of Series A Preferred Stock to the parties to the Plan Support Agreement, the Equity Backstop Commitment Agreement (as both defined in the Plan) and participants in the rights offering by the Company for aggregate consideration of $1,301 million;
•The Company issued 834,800,000 shares of Series B Preferred Stock to Honeywell International Inc. (“Honeywell”) in satisfaction and discharge of certain claims of Honeywell;
•The Company also paid $375 million to Honeywell in addition to the issuance of the Series B Preferred Stock in satisfaction and discharge of certain claims of Honeywell;
•The Company paid in full $101 million of interest and principal outstanding on, and terminated, the Senior Secured Super-Priority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”);
•The Company repaid, and terminated, its pre-petition credit agreement including:
•Outstanding principal balance, accrued pre-petition and default interest on its five-year term A loan facility of $307 million;
•Outstanding principal balance, accrued pre-petition and default interest of (i) $374 million with respect to the EUR tranche and (ii) $422 million with respect to the USD tranche, on its seven-year term B loan facility;
•Outstanding principal balance and accrued interest of $374 million on its revolving credit facility; and
•Accrued pre-petition hedge obligations of $20 million.
•The Company repaid the outstanding principal balance on its senior subordinated notes of €350 million, or $423 million. The Company also paid accrued pre-petition interest of $10 million, post-petition interest of $13 million, and $15 million in connection with a complaint in the Bankruptcy Court against the indenture trustee of the 5.125% senior notes due 2026 (the "Make-Whole Litigation").
•The Company entered into certain secured debt facilities, see Note 16, Long-term Debt and Credit Agreements for discussion.
The Company further paid $75 million in connection with the reimbursement of Centerbridge Partners, L.P. (together with its affiliated funds, “Centerbridge”) and Oaktree Capital Management, L.P. (together with its affiliated funds, “Oaktree”), who are significant shareholders, and Honeywell for professional fees and expenses related to their support of our emergence from Chapter 11 bankruptcy, as well as reimbursement to Centerbridge and Oaktree for their participation in the Equity Backstop Commitment Agreement.
Reorganization items, net represent amounts incurred after the Petition Date as a direct result of the Chapter 11 Cases and are comprised of the following for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
Gain on settlement of Honeywell claims(1) | $ | — | | | $ | (502) | |
| Advisor fees | 1 | | | 174 | |
| Bid termination and expense reimbursement | — | | | 79 | |
| Director's and officers insurance | — | | $ | — | | 39 | |
Expenses related to senior notes(2) | — | | $ | — | | 28 | |
| Write off of pre-petition debt issuance cost | — | | $ | — | | 25 | |
| Employee stock cash out | — | | $ | — | | 13 | |
| DIP financing fees | — | | $ | — | | 1 | |
| Other | 2 | | $ | — | | 18 | |
| Total reorganization items, net | $ | 3 | | $ | 2 | | $ | (125) | |
(1)The gain on settlement of Honeywell claims of $502 million is comprised of the pre-emergence Honeywell claims of $1,459 million, less a $375 million payment made to Honeywell pursuant to the Plan, less the Series B Preferred Stock issued to Honeywell, which was recorded at $577 million, less a currency translation adjustment of $5 million.
(2)Includes $15 million in connection with Make-Whole Litigation and $13 million related to post-petition interest.
Note 3. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are periodically reviewed and the effects of changes are reflected in the Consolidated Financial Statements in the period they are determined to be necessary.
Principles of Consolidation and Combination
The Consolidated Financial Statements include the accounts of Garrett Motion Inc. and all of its subsidiaries in which a controlling financial interest is maintained. We consolidate entities that we control due to ownership of a majority voting interest, and we consolidate variable interest entities when we have variable interests and are the primary beneficiary. Our consolidation policy requires equity investments that we exercise significant influence over but in which we do not have a controlling financial interest to be accounted for using the equity method. Investments through which we are not able to exercise significant influence over the investee and which we do not have readily determinable fair values are accounted for under the cost method. All intercompany transactions and balances are eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments having an original maturity of three months or less.
Restricted Cash
Restricted cash primarily consists of bank deposits pledged as collateral to issue bank notes (refer to Note 9, Factoring and Notes Receivable).
Trade Receivables and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount as a result of transactions with customers. In accordance with ASC 326, Financial Instruments - Credit Losses, the Company maintains allowances for doubtful accounts for losses as a result of a customer’s inability to make required payments, estimated based on the expected credit losses over the contractual life of the receivables based on days past due as measured from the contractual due date and collection history. The Company also takes into consideration changes in economic conditions that may not be reflected in historical trends (for example, customers in bankruptcy, liquidation or reorganization). Receivables are written-off against the allowance for doubtful accounts when they are determined uncollectible. Such determination includes analysis and consideration of the particular conditions of the account, including time intervals since last collection, customer performance against agreed upon payment plans, solvency of customer and any bankruptcy proceedings.
Transfer of Financial Instruments
Sales and transfers of financial instruments are accounted for under ASC 860, Transfers and Servicing. The Company may discount and sell accounts receivables during the normal course of business. These receivables which are transferred to a third party without recourse to the Company and that meet the criteria of sales accounting as per ASC 860, are excluded from the amounts reported in the Consolidated Balance Sheets. The cash proceeds received from such sales are included in operating cash flows. The expenses associated with the factoring of receivables are recorded within Other expense, net in the Consolidated Statements of Operations.
The Company may also receive bank notes in settlement of accounts receivables, primarily in the Asia Pacific region. Such bank notes are classified as notes receivables under Accounts, notes and other receivables – net in the Consolidated Balance Sheets. The collections of such bank notes are included in operating cash flows and any expenses related to discounting these are included within Other expense, net in the Consolidated Statements of Operations. The Company can hold the bank notes until maturity, exchange them with suppliers to settle liabilities, or sell them to third party financial institutions in exchange for cash.
Inventories
Inventories are stated at the lower of cost, determined on a first-in, first-out basis, including direct material costs and direct and indirect manufacturing costs, or net realizable value. Obsolete inventory is identified based on analysis of inventory for known obsolescence issues. The original equipment inventory on hand in excess of forecasted usage and lack of consumption in the previous 12 months is fully reserved, unless the value of such material is recoverable from either the vendor or the customer.
Property, Plant and Equipment, Net
Property, plant and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives assets, which are 10 to 50 years for buildings and improvements, 2 to 16 years for machinery and equipment, 3 to 10 years for tooling equipment, and 5 to 7 years for software. Maintenance and repairs are expensed as incurred.
Impairment testing of long lived assets is completed by the Company in accordance with ASC 360, Property, Plant and Equipment. The testing is completed when a triggering event occurs, or at least on an annual basis to assess if any impairment triggering events existed during the year. If a triggering event is occurs or is identified, the impairment testing is completed using the two-step impairment model. Asset classes are identified and tested for recoverability by comparing the net carrying value of the asset group to the undiscounted net cash flows to be generated from the use and eventual disposition of that asset group. If the carrying amount of an asset group is not recoverable, an impairment loss is recognized if the carrying amount exceeds the fair value. The impairment analysis was completed in 2022 with no triggering events identified.
Leases
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 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 where 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 Balance Sheet.
Goodwill
Goodwill is subject to impairment testing annually, and whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This testing compares carrying value to fair value of our single reporting unit. The Company recognizes an impairment charge for the amount by which the carrying value of the reporting unit exceeds the reporting unit´s fair value. However, any impairment should not exceed the amount of goodwill allocated to the reporting unit. Because we have a single reporting unit with a negative carrying value, no impairment was recognized.
Warranties and Guarantees
Expected warranty costs for products sold are recognized based on an estimate of the amount that eventually will be required to settle such obligations. These accruals are based on factors such as past experience, length of the warranty and various other considerations. Costs of product recalls, which may include the cost of the product being replaced as well as the customer’s cost of the recall, including labor to remove and replace the recalled part, are accrued as part of our warranty accrual at the time an obligation becomes probable and can be reasonably estimated. These estimates are adjusted from time to time based on facts and circumstances that impact the status of existing claims. For additional information, see Note 25, Commitments and Contingencies.
Sales Recognition
Product sales are recognized when we transfer control of the promised goods to our customer, which is based on shipping terms. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring the promised goods, adjusted for any variable consideration such as price concessions or annual price adjustments as estimated at contract inception. Amounts billed but ultimately expected to be refunded to the customer are recorded as part of the customer pricing reserve within Accrued liabilities on the Consolidated Balance Sheet.
In the sale of products in the OEM channel, the transaction price for these goods is generally equal to the agreed price of each unit and represents the standalone selling price for the unit. In the sale of products in the aftermarket channel, the terms of a contract or the historical business practice can give rise to variable consideration due to, but not limited to, discounts and rebates.
We estimate variable consideration at the most likely amount we will receive from customers and reduce revenues recognized accordingly. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. We adjust our estimate of revenue at the earlier of when the value of consideration we expect to receive changes or when the consideration becomes fixed.
Research and Development
Garrett conducts research and development (“R&D”) 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 and were $153 million, $136 million and $111 million, for the years ended December 31, 2022, 2021 and 2020, respectively. Additionally, the Company incurs engineering-related expenses which are also included in Cost of goods sold and were $11 million, $22 million and $13 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Government Incentives
The Company receives incentives from governmental entities related to expenses, assets, and other activities. The associated terms of the incentives can vary by country. Government incentives are recorded in the financial statements in accordance with their purpose as a reduction of expense, a reduction of asset cost or other operating or non-operating income. Incentives are recognized when there is probable assurance that the Company will comply with the conditions for the incentives and a reasonable expectation that the funds will be received. Government incentives received prior to being earned are recognized as deferred income whereas incentives earned prior to being received are recognized as receivables. The Company recognized government incentives of $25 million in Cost of goods sold for the year ended December 31, 2022.
Environmental Matters
The Company records liabilities for environmental assessments and remediation activities in the period in which it is probable that a liability has been incurred and the amount of that liability can be reasonably estimated. Estimated costs are recorded at undiscounted amounts, based on experience and assessments and are regularly evaluated. To the extent that the required remediation procedures change, or additional contamination is identified, the Company’s estimated environmental liabilities may also change. The liabilities are recorded in Accrued liabilities and Other liabilities in the Consolidated Balance Sheet.
Stock-Based Compensation
The principal awards issued under our stock-based compensation plans, which are described in Note 23, Stock-Based Compensation, are performance stock units and restricted stock units. The cost for such awards is measured at the grant date based on the fair value of the award. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods (generally the vesting period of the equity award) and is included in Selling, general and administrative expenses in the Consolidated Statements of Operations.
Pension Benefits
We sponsor defined benefit pension plans covering certain employees, primarily in Switzerland, the U.S. and Ireland. For such plans, we are required to disaggregate the service cost component of net benefit costs and report those costs in the same line item or items in the Consolidated Statements of Operations as other compensation costs arising from services rendered by the pertinent employees during the period. The other non service components of net benefit costs are required to be presented separately from the service cost component. We record the service cost component of Pension ongoing (income) expense in Cost of goods sold or Selling, general and administrative expenses. The remaining components of net benefit costs within Pension ongoing (income) expense, primarily interest costs and assumed return on plan assets, are recorded in Non-operating expense (income). We recognize net actuarial gains or losses in excess of 10% of the greater of the fair value of plan assets or the plans’ projected benefit obligation (the corridor) annually in the fourth quarter each year (“MTM Adjustment”). The MTM Adjustment is recorded in Non-operating (income) expense.
Foreign Currency Translation
Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. Dollars are translated into U.S. Dollars using year-end exchange rates. Sales, costs and expenses are translated at the average exchange rates in effect during the year. Foreign currency translation gains and losses are included as a component of Accumulated other comprehensive income (loss).
Derivative Financial Instruments
We minimize our risks from foreign currency exchange rate fluctuations through our normal operating and financing activities and, when deemed appropriate through the use of derivative financial instruments. Derivative financial instruments are used to manage risk and are not used for trading or other speculative purposes. Derivative financial instruments that qualify for hedge accounting must be designated and effective as a hedge of the identified risk exposure at the inception of the contract. Accordingly, changes in fair value of the derivative contract must be highly correlated with changes in fair value of the underlying hedged item at inception of the hedge and over the life of the hedge contract.
All derivatives are recorded on the balance sheet as assets or liabilities and measured at fair value. For derivatives designated as cash flow hedges, the effective portion of the changes in fair value of the derivatives are recorded in Accumulated other comprehensive income (loss) and subsequently recognized in earnings when the hedged items impact earnings. Cash flows of such derivative financial instruments are classified consistent with the underlying hedged item. For derivatives designated as net investment hedges, provided the hedging relationship is highly effective, the changes in fair value of the derivatives and the periodic settlements are recorded in Accumulated other comprehensive income (loss).
Income Taxes
We account for income taxes pursuant to the asset and liability method which requires us to recognize current tax liabilities or receivables for the amount of taxes we estimate are payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts and their respective tax bases of assets and liabilities and the expected benefits of net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible.
Earnings per share
Basic earnings per share are calculated using the two-class method, pursuant to the issuance of our Series A Preferred Stock on the Effective Date. The calculation of basic earnings per share requires an allocation of earnings to all securities that participate in dividends with common shares, such as our Series A Preferred Stock, to the extent that each security may share in the entity’s earnings. Basic earnings per share are calculated by dividing undistributed earnings allocated to common stock by the weighted average number of common shares.
Diluted earnings per share for the years ended December 31, 2022 and 2021 are calculated using the more dilutive of the two-class or if-converted methods. The two-class method uses net income available to common shareholders and assumes conversion of all potential shares other than the participating securities. The if-converted method uses net income
and assumes conversion of all potential shares including the participating securities. Diluted earnings per share for the year ended December 31, 2020 are computed based upon the weighted average number of common shares and dilutive potential common share equivalents outstanding during the year, whereby common share equivalents from equity-based awards are calculated using the treasury stock method. See Note 24, Earnings Per Share for further details.
Related Party Transactions
We lease certain facilities and receive property maintenance services from Honeywell, which as of Emergence was the owner of our Series B Preferred Stock that has since been fully redeemed by the Company, is a holder of our common stock and Series A Preferred Stock, and appoints a director to the Board of Directors ("the Board"). We also contract with Honeywell for the occasional purchase of certain goods and services. Lease and service agreements were made at commercial terms prevalent in the market at the time they were executed. Our payments under the agreements with Honeywell amounted to $9 million for the year ended December 31, 2022, as well as for the period from Emergence through December 31, 2021, and were included in Cost of goods sold, and Selling, general and administrative expenses, in our Consolidated Statements of Operations. Related to the agreements with Honeywell, our Consolidated Balance Sheet includes liabilities of $10 million and $15 million as of December 31, 2022 and 2021, respectively. Liability balances are primarily related to lease contracts of $7 million and $12 million as of December 31, 2022 and 2021, respectively.
Series A Preferred Stock
Our Series A Preferred Stock is not a mandatorily redeemable financial instrument and is classified as permanent equity in our Consolidated Balance Sheets. The Series A Preferred Stock contains a conversion feature which is not required to be bifurcated, is not a derivative, and does not contain a beneficial conversion feature. It is considered a participating security with the Company’s Common Stock as holders of the Series A Preferred Stock will also be entitled to such dividends paid to holders of Common Stock to the same extent as if such holders of Series A Preferred Stock had converted their shares of Series A Preferred Stock into Common Stock (without regard to any limitations on conversions) and had held such shares of Common Stock on the record date for such dividends and distributions. See Note 21, Equity for further details.
We declared dividends on the Series A Preferred Stock for the first time in September 2022 and again in December 2022. The dividends are recorded in the financial statements when declared, and are reflected as an increase in the retained deficit on the Consolidated Balance Sheet.
Recently Issued Accounting Pronouncements
Recently Adopted Accounting Standards
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The amendments in this update increase the transparency surrounding government assistance by requiring disclosure of 1) the types of assistance received, 2) an entity’s accounting for the assistance, and 3) the effect of the assistance on the entity’s financial statements. The Company adopted the new guidance prospectively as of January 1, 2022.
Accounting Standards Issued But Not Yet Adopted
In September 2022, the FASB issued ASU 2022-04, Disclosure of Supplier Finance Program Obligations (Topic 405-50): Disclosure of Supplier Finance Purchase Obligations. The amendment in this update requires companies to disclose key terms of supplier financing programs used in connection with the purchase of goods and services, along with information about their obligations under these programs including a rollforward of those obligations. The guidance is effective for fiscal years beginning after December 15, 2022 on a retrospective basis, including interim periods within those fiscal years, except for the requirement to disclose rollforward information, which is effective on a prospective basis for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the guidance to determine the impact on its disclosures.
There are no other recently issued, but not yet adopted, accounting pronouncements which are expected to have a material impact on the Company’s Consolidated Financial Statements and related disclosures.
Note 4. Revenue Recognition and Contracts with Customers
The Company generates revenue through the sale of products to customers in the OEM and aftermarket channels. OEM and aftermarket contracts generally include scheduling agreements that stipulate the pricing and delivery terms that identify the quantity and timing of the product to be transferred.
Disaggregated Revenue
For Net sales by region (determined based on country of shipment) and channel, refer to Note 27, Concentrations. We recognize virtually all of our revenues arising from performance obligations at a point in time. Less than 1% of our revenue is satisfied over time.
Contract Balances
The timing of revenue recognition, billings and cash collections results in unbilled receivables (contract assets) and billed accounts receivable, reported in Accounts, notes and other receivables – net, and customer advances and deposits (contract liabilities), reported in Accrued Liabilities, on the Consolidated Balance Sheets. Contract assets arise when the timing of billing to customers differs from the timing of revenue recognition. Contract assets are recognized when the revenue associated with the contract is recognized prior to billing and derecognized once invoiced in accordance with the terms of the contract. Contract liabilities are recorded in scenarios where we enter into arrangements where customers are contractually obligated to remit cash payments in advance of us satisfying performance obligations and recognizing revenue. Contract liabilities are generally derecognized when revenue is recognized.
These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period.
The following table summarizes our contract assets and liabilities balances:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Dollars in millions) |
| Contract assets—January 1 | $ | 63 | | | $ | 61 | |
Contract assets—December 31, | 46 | | | 63 | |
| Change in contract assets—Increase/(Decrease) | $ | (17) | | | $ | 2 | |
| Contract liabilities—January 1 | $ | (5) | | | $ | (2) | |
Contract liabilities—December 31, | (8) | | | (5) | |
| Change in contract liabilities—(Increase)/Decrease | $ | (3) | | | $ | (3) | |
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is defined as the unit of account. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For product sales, typically each product sold to a customer represents a distinct performance obligation.
Performance obligations are supported by contracts with customers, providing a framework for the nature of the distinct goods, services or bundle of goods and services. The timing of satisfying the performance obligation is typically indicated by the terms of the contract. All performance obligations are expected to be satisfied within one year, with substantially all performance obligations being satisfied within a month.
The timing of satisfaction of our performance obligations does not significantly vary from the typical timing of payment, with cash advances (contract liabilities) and unbilled receivables (contract assets) being settled within 3 months. For some contracts, we may be entitled to receive an advance payment.
We have applied the practical expedient to not disclose the value of remaining performance obligations for contracts with an original expected term of one year or less.
Note 5. Other Expense, Net
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Indemnification related — post Spin-Off | $ | — | | | $ | — | | | $ | 41 | |
| Indemnification related — litigation | — | | | — | | | 3 | |
| Environmental remediation, non-active sites | — | | | — | | | 1 | |
| Factoring and notes receivables discount fees | 2 | | | 1 | | | 1 | |
| $ | 2 | | | $ | 1 | | | $ | 46 | |
Note 6. Non-operating (income) expense
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Equity income of affiliated companies | $ | (7) | | | $ | (7) | | | $ | (5) | |
| Interest income | (76) | | | (11) | | | (3) | |
| Pension (income) expense — non service | (37) | | | (13) | | | 5 | |
| Foreign exchange | 3 | | | 14 | | | (35) | |
| Others, net | (4) | | | 1 | | | — | |
| $ | (121) | | | $ | (16) | | | $ | (38) | |
Note 7. Income Taxes
The sources of income (loss) from continuing operations, before income taxes, classified between domestic entities and those entities domiciled outside of the U.S., are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (Dollars in millions) |
| Domestic entities | | $ | 7 | | | $ | 242 | | | $ | (87) | |
| Entities outside the U.S. | | 489 | | | 296 | | | 206 | |
| | $ | 496 | | | $ | 538 | | | $ | 119 | |
Tax expense (benefit)
Tax expense (benefit) consists of:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Current: | | | | | |
| Federal | $ | 9 | | | $ | (1) | | | $ | 3 | |
| State | 1 | | | — | | | 1 | |
| Foreign | 50 | | | 80 | | | 69 | |
| $ | 60 | | | $ | 79 | | | $ | 73 | |
| Deferred: | | | | | |
| Federal | $ | 9 | | | $ | (9) | | | $ | — | |
| State | — | | | (2) | | | — | |
| Foreign | 37 | | | (25) | | | (34) | |
| $ | 46 | | | $ | (36) | | | $ | (34) | |
| $ | 106 | | | $ | 43 | | | $ | 39 | |
The U.S. federal statutory income tax rate is reconciled to our effective income tax rate as follows:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| U.S. federal statutory income tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Taxes on non-U.S. earnings different from U.S. tax | (3.4) | % | | (7.6) | % | | (6.5) | % |
| Reserves for tax contingencies | (0.4) | % | | 3.7 | % | | 15.9 | % |
| Non-deductible and permanent items | 0.7 | % | | (14.4) | % | | 7.1 | % |
| Withholding and other taxes on foreign earnings | 3.9 | % | | 5.7 | % | | (14.7) | % |
| Tax law changes | 0.1 | % | | — | % | | — | % |
| Changes in valuation allowance | (0.6) | % | | (0.3) | % | | 10.5 | % |
| All other items | 0.1 | % | | (0.2) | % | | (0.5) | % |
| | 21.4 | % | | 7.9 | % | | 32.8 | % |
The effective tax rate increased by 13.5 percentage points in 2022 compared to 2021. The increase was primarily attributable to the nontaxable gain on the settlement of the Honeywell claims (partially offset by non-deductible transaction costs) and increased tax benefits from an internal restructuring, both of which occurred in 2021 and are non-recurring. This increase was partially offset by tax benefits in the current year due to release of reserves for statute of limitation expirations.
The effective tax rate decreased by 24.9 percentage points in 2021 compared to 2020. The decrease was primarily attributable to the nontaxable gain on the settlement of the Honeywell claims during the year, increased tax benefits from an internal restructuring and fewer losses in jurisdictions that we do not expect to benefit from such losses; partially offset by increases in withholding taxes on unrepatriated earnings. The internal restructuring occurred predominantly in the fourth quarter of 2021 which involved transfers of certain rights to intellectual property and various intercompany financing arrangements resulting in an approximate 11 percentage point decrease to the effective tax rate during 2021. The overall increase in earnings from 2020 was also a contributing factor to a lower effective tax rate because the tax impacts as a percentage to earnings is less sensitive.
Deferred tax assets (liabilities)
The tax effects of temporary differences and tax carryforwards which give rise to future income tax benefits and payables are as follows:
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Deferred tax assets: | | | |
| Intangibles and fixed assets | $ | 173 | | | $ | 219 | |
| Pension | 4 | | | 7 | |
| Accruals and reserves | 33 | | | 39 | |
| Net operating losses and other tax attribute carryforwards | 31 | | | 37 | |
| Outside basis differences | 11 | | | 11 | |
| Other | 34 | | | 30 | |
| Total deferred tax assets | 286 | | | 343 | |
| Valuation allowance | (31) | | | (32) | |
| Net deferred tax assets | $ | 255 | | | $ | 311 | |
| Deferred tax liabilities: | | | |
| Outside basis differences | $ | (5) | | | $ | (19) | |
| Other | (43) | | | (24) | |
| Total deferred tax liabilities | (48) | | | (43) | |
| Net deferred tax asset | $ | 207 | | | $ | 268 | |
As of December 31, 2022, the Company had net operating loss carryforwards of $85 million with the majority in the below jurisdictions:
| | | | | | | | | | | |
| Jurisdiction | Expiration
Period | | Net Operating
Loss
Carryforwards |
| | | (Dollars in millions) |
| Brazil | Indefinite | | $ | 50 | |
| Luxembourg | 2038 | | 20 | |
| United Kingdom | Indefinite | | 6 | |
| Other | Various | | 9 | |
| | | $ | 85 | |
We maintain a valuation allowance of $31 million against a portion of total deferred tax assets. In the event we determine that we will not be able to realize our net deferred tax assets in the future, we will reduce such amounts through an increase to tax expense in the period such determination is made. Conversely, if we determine that we will be able to realize net deferred tax assets in excess of the carrying amounts, we will decrease the recorded valuation allowance through a reduction to tax expense in the period that such determination is made. Our balance sheets present a deferred tax asset of $232 million and a deferred tax liability of $25 million after considering jurisdictional netting.
Historically, the Company has not made the assertion to permanently reinvest its undistributed earnings. In the second quarter of 2022, we changed our assertion to permanently reinvest a portion (approximately $300 million) of our undistributed foreign earnings for China specific to the entity’s investment in intellectual property. For the portion of undistributed earnings that are not permanently reinvested, Garrett has recorded a deferred tax liability mainly consisting of withholding taxes of approximately $13 million as of December 31, 2022.
The following table summarizes the activity related to the Company’s uncertain tax positions (excluding interest and penalties and related tax attributes):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Change in unrecognized tax benefits: | | | | | |
| Balance at beginning of year | $ | 80 | | | $ | 60 | | | $ | 54 | |
| Gross increases related to current period tax positions | 4 | | | 13 | | | 8 | |
| Gross increases related to prior periods tax positions | 5 | | | 31 | | | 6 | |
| Gross decreases related to prior periods tax positions | — | | | (21) | | | — | |
| Decrease related to resolutions of audits with tax authorities | — | | | — | | | (7) | |
| Expiration of the statute of limitations for the assessment of taxes | (14) | | — | | (1) | | | (2) | |
| | | | | |
| Foreign currency translation | (4) | | | (2) | | | 1 | |
| Balance at end of year | $ | 71 | | | $ | 80 | | | $ | 60 | |
As of December 31, 2022, 2021, and 2020 there were $71 million, $80 million, and $60 million, respectively, of unrecognized tax benefits that, if recognized, would be recorded as a component of tax expense. The amount of unrecognized tax benefits that is reasonably possible to be resolved in the next twelve months is expected to be approximately $12 million, all of which, if recognized, would reduce tax expense and the effective tax rate.
Estimated interest and penalties related to uncertain tax benefits are classified as a component of tax expense in the Consolidated and Combined Statements of Operations and totaled $2 million of expense, $3 million of benefit and $5 million of expense for the years ended December 31, 2022, 2021, and 2020, respectively. Accrued interest and penalties were $29 million, $26 million, and $29 million, as of December 31, 2022, 2021, and 2020, respectively.
We are currently under audit in multiple jurisdictions primarily India for tax years 2020 through 2022 and U.S. for tax years 2018 and 2019. Based on the outcome of these examinations, or as a result of the expiration of statutes of limitations for specific jurisdictions, it is possible that certain unrecognized tax benefits for tax positions taken on previously filed tax returns will materially change from those recorded as liabilities in our financial statements.
Note 8. Accounts, Notes and Other Receivables—Net
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Trade receivables | $ | 619 | | | $ | 553 | |
| Notes receivables | 105 | | | 121 | |
| Other receivables | 88 | | | 78 | |
| $ | 812 | | | $ | 752 | |
| Less — Allowance for expected credit losses | (9) | | | (5) | |
| $ | 803 | | | $ | 747 | |
Trade receivables include $46 million and $63 million of unbilled balances as of December 31, 2022 and 2021, respectively.
Note 9. Factoring and Notes Receivable
The Company enters into arrangements with financial institutions to sell eligible trade receivables. The receivables are sold without recourse and the Company accounts for these arrangements as true sales. The Company also receives guaranteed bank notes without recourse, in settlement of accounts receivables, primarily in the Asia Pacific region. The Company can hold the bank notes until maturity, exchange them with suppliers to settle liabilities, or sell them to third-party financial institutions in exchange for cash. Bank notes sold to third-party financial institutions without recourse are likewise accounted for as true sales.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Eligible receivables sold without recourse | $ | 664 | | $ | 566 | | $ | 473 |
| Guaranteed bank notes sold without recourse | 102 | | — | | 160 |
The expenses related to the sale of trade receivables and guaranteed bank notes are recognized within Other expense, net in the consolidated statements of operations, and were $2 million, $1 million and $1 million for the years ended December 31, 2022, 2021 and 2020, respective.
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Receivables sold but not yet collected by the bank from the customer | $ | 5 | | | $ | 26 | |
| Guaranteed bank notes sold but not yet collected by the bank from the customer | — | | | — | |
As of December 31, 2022 the Company has no guaranteed bank notes pledged as collateral and as of December 31, 2021 and 2020, the Company has pledged as collateral $5 million and $18 million, respectively, of guaranteed bank notes, which have not been sold in order to be able to issue bank notes as payment to certain suppliers. Such pledged amounts are included as Notes receivable in our Consolidated Balance Sheet.
Note 10. Inventories—Net
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Raw materials | $ | 203 | | | $ | 162 | |
| Work in process | 18 | | | 19 | |
| Finished products | 80 | | | 92 | |
| $ | 301 | | | $ | 273 | |
| Less — Reserves | (31) | | | (29) | |
| $ | 270 | | | $ | 244 | |
Note 11. Other Current Assets
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Prepaid expenses | $ | 16 | | | $ | 13 | |
| Taxes receivable | 12 | | | 15 | |
| Advanced discounts to customers, current | 12 | | | 11 | |
| Customer reimbursable engineering | 1 | | | 5 | |
| Foreign exchange forward contracts | 27 | | | 12 | |
Receivable from transfer agent(1) | 42 | | | — | |
| | | |
| $ | 110 | | | $ | 56 | |
________________________________(1) Receivable from transfer agent includes the Series A Preferred Stock dividend that was paid to the transfer agent in December 2022, and settled with shareholders on January 3, 2023. Refer to Note 21, Equity.
Note 12. Other Assets
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Advanced discounts to customers, non-current | $ | 51 | | | $ | 61 | |
Operating right-of-use assets (Note 18) | 44 | | | 51 | |
| Income tax receivable | 22 | | | 27 | |
| Pension and other employee related | 4 | | | 15 | |
| Designated cross-currency swap | 74 | | | 30 | |
| Designated and undesignated derivatives | 76 | | | 7 | |
| Other | 10 | | | 9 | |
| $ | 281 | | | $ | 200 | |
Note 13. Property, Plant and Equipment, Net
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Land and improvements | $ | 15 | | | $ | 16 | |
| Buildings and improvements | 144 | | | 149 | |
| Machinery and equipment | 696 | | | 711 | |
| Tooling | 400 | | | 393 | |
| Software | 76 | | | 72 | |
| Construction in progress | 97 | | | 87 | |
| Others | 25 | | | 26 | |
| 1,453 | | | 1,454 | |
| Less — Accumulated depreciation and amortization | (983) | | | (969) | |
| $ | 470 | | | $ | 485 | |
Depreciation and amortization expense amounted to $84 million, $92 million and $86 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Note 14. Goodwill
There were no changes to the carrying amount of goodwill for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| (Dollars in millions) |
| Goodwill | $ | 193 | | | $ | 193 | |
Note 15. Accrued Liabilities
| | | | | | | | | | | |
| December 31,
2022 | | December 31,
2021 |
| (Dollars in millions) |
| Customer pricing reserve | $ | 50 | | | $ | 72 | |
| Compensation, benefits and other employee related | 69 | | | 76 | |
| Repositioning | 9 | | | 10 | |
| Product warranties and performance guarantees - Short-term | 18 | | | 21 | |
Income and other taxes | 39 | | | 25 | |
| Advanced discounts from suppliers, current | 8 | | | 14 | |
Customer advances and deferred income (1) | 29 | | | 23 | |
| Accrued interest | 13 | | | 8 | |
Short-term lease liability (Note 18) | 9 | | | 9 | |
| Freight accrual | 9 | | | 11 | |
| Dividends declared on Series A Preferred Stock | 42 | | | — | |
Other (primarily operating expenses)(2) | 25 | | | 26 | |
| $ | 320 | | | $ | 295 | |
(1)Customer advances and deferred income include $8 million and $5 million of contract liabilities as of December 31, 2022 and 2021, respectively. See Note 4, Revenue Recognition and Contracts with Customers.
(2)Other accrued liabilities includes $3 million of environmental liabilities as of December 31, 2022 and 2021.
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 Statements of Operations.
| | | | | | | | | | | | | | | | | |
| Severance
Costs | | Exit
Costs | | Total |
| (Dollars in millions) |
Balance at December 31, 2020 | $ | 7 | | | $ | — | | | $ | 7 | |
| Charges | 16 | | | — | | | 16 | |
| Usage—cash | (13) | | | — | | | (13) | |
Balance at December 31, 2021 | 10 | | | — | | | 10 | |
| Charges | 4 | | | — | | | 4 | |
| Usage—cash | (5) | | | — | | | (5) | |
Balance at December 31, 2022 | $ | 9 | | | $ | — | | | $ | 9 | |
Note 16. Long-term Debt and Credit Agreements
Long Term Debt
On the Effective Date, in accordance with the Plan, the Company entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent, which provides for long-term senior secured financing consisting of:
•Dollar Facility: a seven-year secured first-lien U.S. Dollar term loan facility for $715 million; and
•Euro Facility: a seven-year secured first-lien Euro term loan facility for €450 million.
The principal outstanding and carrying amounts of our long-term debt as of December 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in millions) | Maturity Date | | Interest Rate | | December 31, 2022 | | December 31, 2021 |
| Dollar Facility | April 30, 2028 | | LIBOR plus 325 bps | | $ | 706 | | | $ | 713 | |
| Euro Facility | April 30, 2028 | | EURIBOR plus 350 bps | | 480 | | | 510 | |
| Total principal outstanding | | | | | 1,186 | | | 1,223 | |
| Less: unamortized deferred financing costs | | | | | (31) | | | (35) | |
| Less: current portion of long-term debt | | | | | (7) | | | (7) | |
| Total long-term debt | | | | | $ | 1,148 | | | $ | 1,181 | |
The following table summarizes the minimum scheduled principal repayments of long-term debt as of December 31, 2022:
| | | | | |
| December 31, |
| (Dollars in millions) |
| 2023 | $ | 7 | |
| 2024 | 7 | |
| 2025 | 7 | |
| 2026 | 7 | |
| 2027 | 7 | |
| Thereafter | 1,151 | |
| Total payments on long-term debt | $ | 1,186 | |
Revolving Facility and Letters of Credit
The Credit Agreement also provides for a five-year multi-currency senior secured first-lien Revolving Facility which matures on April 30, 2026. In 2022, the maximum borrowing capacity under the Revolving Facility was increased from $300 million to $475 million.
Under the Revolving Facility, the Company may use up to $125 million under the Revolving Facility for the issuance of letters of credit to its subsidiaries. Letters of credit are available for issuance under the Credit Agreement on terms and conditions customary for financings of this kind, which issuances will reduce availability under the Revolving Facility. As of December 31, 2022, the Company had no borrowings outstanding under the Revolving Facility, no outstanding letters of credit, and available borrowing capacity of $475 million.
Separate from the Revolving Facility, the Company has a bilateral letter of credit facility, which also matures on April 30, 2026. On September 14, 2022, the Company amended the bilateral letter of credit agreement to reduce the available capacity from $35 million to $15 million. The maturity date and other terms of the amended agreement remained the same. As of December 31, 2022, the Company had $14 million utilized and $1 million of remaining available capacity.
Amendments to the Credit Agreement
On the Effective Date, in accordance with the Plan, the Company entered into a credit agreement (as amended from time to time, the "Credit Agreement") providing for senior secured financing, consisting of a seven-year secured first-lien U.S. Dollar term loan facility initially in the amount of $715 million (the “Dollar Term Facility”), a seven-year secured first-lien Euro term loan facility initially in the amount of €450 million (the “Euro Term Facility,” and together with the Dollar Facility, the “Term Loan Facilities”); and a five-year senior secured first-lien revolving credit facility initially in the amount of $300 million providing for multi-currency revolving loans, (the “Revolving Facility,” and together with the Term Loan Facilities, the “Credit Facilities”). On January 11, 2022 and March 22, 2022, the Company amended the Credit Agreement, increasing the maximum amount of borrowings available under the Revolving Facility from $300 million to approximately $475 million. The maturity date of the Revolving Facility remains unchanged at April 30, 2026, with certain extension rights at the discretion of each lender.
Under the first amendment, London Inter-bank Offered Rate ("LIBOR") was replaced as an available rate at which borrowings under the Revolving Facility could accrue with, for loans borrowed in U.S. Dollars, the daily Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank of New York and for loans borrowed in
Australian Dollars, the average bid reference rate administered by ASX Benchmarks Pty Limited. The Term Loan Facilities under the Credit Agreement continue to be able to accrue interest under the LIBOR, but will switch to an alternative benchmark rate upon the cessation of LIBOR after June 30, 2023. The Euro Facilities under the Credit Agreement continue to accrue interest under the Euro Interbank Offered Rate (“EURIBOR”).
The second amendment also removed the requirement that payments made in cash for the benefit of holders of shares of the Company's Series A Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock") on or before December 31, 2022 be made on a ratable basis to the holders of the Common Stock, and made additional clarifying amendments to certain provisions.
The amendments to our Credit Agreement as described above were accounted under ASC 470-50, Debt Modifications and Extinguishments, as debt modifications that did not result in an extinguishment or have a material impact on our Consolidated Financial Statements.
Security
The Credit Facilities are secured on a first-priority basis by: (i) a perfected security interest in the equity interests of each direct material subsidiary of each guarantor under the Credit Facilities and (ii) perfected security interests in, and mortgages on, substantially all tangible and intangible personal property and material real property of each of the guarantors under the Credit Facilities, subject, in each case, to certain exceptions and limitations, including the agreed guaranty and security principles. The guarantors organized under the laws of England and Wales, Luxembourg, Switzerland and the United States entered into security documents securing the obligations of each borrower concurrently with the effectiveness of the Credit Agreement. The guarantors organized under the laws of Australia, Ireland, Japan, Mexico, Romania and Slovakia have subsequently executed security documents.
Interest Rate and Fees
The Dollar Facility is subject to an interest rate, at our option, of either (a) an alternate base rate (“ABR”) (which shall not be less than 1.50%) or (b) an adjusted LIBOR (which shall not be less than 0.50%), in each case, plus an applicable margin equal to 3.25% in the case of LIBOR loans and 2.25% in the case of ABR loans. The Euro Facility is subject to an interest rate equal to an adjusted Euro Interbank Offered Rate (“EURIBOR”) (which shall not be less than zero) plus an applicable margin equal to 3.50%. As of December 31, 2022, the Revolving Facility is subject to an interest rate comprised of an applicable benchmark rate (which shall not be less than 1.00% if such benchmark is the ABR rate and not less than 0.00% in the case of other applicable benchmark rates) that is selected based on the currency in which borrowings are outstanding thereunder, in each case, plus an applicable margin. The applicable margin for the Revolving Facility varies based on our leverage ratio. Accordingly, the interest rates for the Credit Facilities will fluctuate during the term of the Credit Agreement based on changes in the ABR, LIBOR, EURIBOR and other applicable benchmark rates or future changes in our leverage ratio. The Credit Agreement provides the Benchmark Replacement, given the reference rate reform discontinuing LIBOR. Interest payments with respect to the Term Loan Facilities are required either on a quarterly basis (for ABR loans) or at the end of each interest period (for LIBOR and EURIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months. See discussion of the amendment to the Revolving Facility in Amendments to the Credit Agreement, above.
In addition to paying interest on outstanding borrowings under the Revolving Facility, the Borrowers are required to pay a quarterly commitment fee based on the unused portion of the Revolving Facility, which is determined by our leverage ratio and ranges from 0.25% to 0.50% per annum.
Prepayments
The Borrowers are obligated to make quarterly principal payments throughout the term of the Dollar Facility according to the amortization provisions in the Credit Agreement, as such payments may be reduced from time to time in accordance with the terms of the Credit Agreement as a result of the application of loan prepayments made by us, if any, prior to the scheduled date of payment thereof.
We may voluntarily prepay borrowings under the Credit Agreement without premium or penalty, subject to a 1.00% prepayment premium in connection with any repricing transaction with respect to the Term Loan Facilities in the first six months after the Effective Date of the Credit Agreement and customary breakage” costs with respect to LIBOR and EURIBOR loans. We may also reduce the commitments under the Revolving Facility, in whole or in part, in each case, subject to certain minimum amounts and increments. See discussion of the amendment to the Revolving Facility in Amendments to the Credit Agreement, above.
The Credit Agreement also contains certain mandatory prepayment provisions in the event that we incur certain types of indebtedness, receive net cash proceeds from certain non-ordinary course asset sales or other dispositions of property or, starting with the fiscal year ending on December 31, 2022, 0.50% of excess cash flow on an annual basis (with step-downs to 25% and 0% subject to compliance with certain leverage ratios), in each case subject to terms and conditions customary for financings of this kind.
Representations and Warranties
The Credit Agreement contains certain representations and warranties (subject to certain agreed qualifications) that are customary for financings of this kind.
Certain Covenants
The Credit Agreement contains certain affirmative and negative covenants customary for financing of this type. The Revolving Facility also contains a financial covenant requiring the maintenance of a consolidated total leverage ratio of not greater than 4.7 times as of the end of each fiscal quarter if, on the last day of any such fiscal quarter, the aggregate amount of loans and letters of credit (excluding backstopped or cash collateralized letters of credit and other letters of credit with an aggregate face amount not exceeding $30 million) outstanding under the Revolving Facility exceeds 35% of the aggregate commitments thereunder.
As of December 31, 2022, the Company was in compliance with all its financing covenants.
The Credit Agreement also contained certain restrictions on the Company’s ability to pay cash dividends on or to redeem or otherwise acquire for cash the Series A Preferred Stock unless a ratable payment (on an as-converted basis) was made to holders of our common equity and such payments would otherwise be permitted under the terms of the Credit Agreement. These restrictions were removed as part of the credit amendments noted above.
The Company's ability to pay cash dividends on shares of Common Stock is also subject to conditions set forth in the Certificate of Designations for the Series A Cumulative Convertible Preferred Stock (the "Series A Certificate of Designations") as described in Note 21, Equity. On March 3, 2022, the terms of the Series A Certificate of Designations were further amended to (i) expand the scope of permitted Distributions on Dividend Junior Stock (each as defined in the Series A Certificate of Designations) to include purchases by the Company of shares of Dividend Junior Stock in individually negotiated transactions, (ii) remove the requirement that dividends or Distributions on Dividend Junior Stock must occur on or prior to December 31, 2022, and (iii) expressly permit the purchase, redemption or other acquisition for cash by the Company of shares of Dividend Junior Stock without requiring ratable participation by holders of Series A Preferred Stock.
Note 17. Mandatorily Redeemable Series B Preferred Stock
On the Effective Date, pursuant to the Plan, the Company issued 834,800,000 shares of Series B Preferred Stock to Honeywell International Inc. ("Honeywell") in satisfaction of certain claims of Honeywell. Under the Certificate of Designations of the Series B Preferred Stock, the Company is required to redeem on April 30 each year, beginning on April 30, 2022 and ending on April 30, 2030, an aggregate number of shares of Series B Preferred Stock based on a scheduled redemption amount determined in the Certificate of Designations. Any shares of Series B Preferred Stock that have not been redeemed as of April 30, 2030, will be redeemed on that date. The Series B Preferred Stock is not entitled to any dividends or other distributions or payments other than the scheduled redemption payments and payments upon liquidation as provided in the Certificate of Designations of the Series B Preferred Stock.
On December 28, 2021, the Company completed a partial early redemption of 345,988,497 shares of Series B Preferred Stock for a cash payment of $211 million including $10 million as interest.
During the year ended December 31, 2022, the Company further redeemed 488,811,503 shares of Series B Preferred Stock, representing the entirety of the remaining outstanding shares, for a total aggregate price of $409 million, of which $28 million related to settlement of accrued interest. A loss on extinguishment of debt of $5 million was recognized in the Consolidated Statement of Operations related to the final early redemption. There were no shares of Series B Preferred Stock outstanding as of December 31, 2022.
Note 18. Leases
We have operating leases that primarily consist of real estate, machinery and equipment. Our leases have remaining lease terms of up to 15 years, some of which include options to extend the leases for up to two years, and some of which include options to terminate the leases within the year.
The components of lease expense are as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Operating lease cost | $ | 16 | | | $ | 15 | | | $ | 15 | |
Supplemental cash flow information related to operating leases is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash outflows from operating leases | $ | 13 | | | $ | 12 | | | $ | 13 | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | |
| Operating leases | $ | 5 | | | $ | 26 | | | $ | 7 | |
Supplemental balance sheet information related to operating leases is as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| (Dollars in millions) |
| Other assets | $ | 44 | | | $ | 51 | |
| Accrued liabilities | 9 | | | 9 | |
| Other liabilities | 36 | | | 42 | |
| | | |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| |
| Weighted-average lease term (in years) | 8.41 | | 8.88 |
| Weighted-average discount rate | 5.61 | % | | 5.65 | % |
Maturities of operating lease liabilities were as follows:
| | | | | |
| Year Ended December 31, 2022 |
| (Dollars in millions) |
| 2023 | $ | 11 | |
| 2024 | 9 | |
| 2025 | 7 | |
| 2026 | 5 | |
| 2027 | 4 | |
| Thereafter | 20 | |
| Total lease payments | 56 | |
| Less imputed interest | (11) | |
| $ | 45 | |
Note 19. Financial Instruments and Fair Value Measures
Credit and Market Risk
We continually monitor the creditworthiness of our customers to which we grant credit terms in the normal course of business. The terms and conditions of our credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.
Foreign Currency Risk Management
We are exposed to market risks from changes in currency exchange rates. These exposures may impact future earnings and/or operating cash flows. Our exposure to market risk for changes in foreign currency exchange rates arises from international financing activities between subsidiaries, foreign currency denominated monetary assets and liabilities and transactions arising from international trade.
We hedge currency exposures with natural offsets to the fullest extent possible and, once these opportunities have been exhausted, through foreign currency exchange forward contracts (foreign currency exchange contracts). These forward currency exchange contracts are assessed as effective and are designated as cash flow hedges. Gains and losses on derivatives qualifying as cash flow hedges are recorded in Accumulated other comprehensive income (loss) until the underlying transactions are recognized in earnings.
The Company also entered into float to float cross-currency swaps exchange contracts to hedge net investments in foreign subsidiaries. These cross-currency swaps exchange contracts are assessed as effective and are designated as net investment hedges. Gains and losses on derivatives qualifying as net investment hedges are recorded in Accumulated other comprehensive income (loss) until the net investment is liquidated or sold.
As of December 31, 2022 and 2021, we had contracts with aggregate gross notional amounts of $2,621 million and $2,788 million, respectively, to hedge foreign currencies, principally the U.S. Dollar, Swiss Franc, British Pound, Euro, Chinese Yuan, Japanese Yen, Mexican Peso, New Romanian Leu, Czech Koruna, Australian Dollar and Korean Won.
Fair Value of Financial Instruments
The FASB’s accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value |
| Notional Amounts | | Assets | | | Liabilities | |
| December 31,
2022 | | December 31,
2021 | | December 31,
2022 | | December 31,
2021 | | | December 31,
2022 | | December 31,
2021 | |
| (Dollars in millions) | |
| Designated instruments: | | | | | | | | | | | | |
| Designated forward currency exchange contracts | $ | 565 | | | $ | 382 | | | $ | 22 | | | $ | 9 | | | (a) | $ | 6 | | | $ | 1 | | (c) |
| Designated cross-currency swap | 715 | | 715 | | | 74 | | 30 | | | (b) | — | | | — | | |
| Total designated instruments | 1,280 | | | 1,097 | | | 96 | | | 39 | | | | 6 | | | 1 | | |
| Undesignated instruments: | | | | | | | | | | | | |
| Undesignated interest rate swap | 1,024 | | | 940 | | | 76 | | | 7 | | | (a) | — | | | — | | |
| Undesignated forward currency exchange contracts | 317 | | | 751 | | | 4 | | | 2 | | | (a) | 2 | | | 4 | | (c) |
| Total undesignated instruments | 1,341 | | | 1,691 | | | 80 | | | 9 | | | | 2 | | | 4 | | |
| Total designated and undesignated instruments | $ | 2,621 | | | $ | 2,788 | | | $ | 176 | | | $ | 48 | | | | $ | 8 | | | $ | 5 | | |
(a)Recorded within Other current assets in the Company’s Consolidated Balance Sheets
(b)Recorded within Other assets in the Company’s Consolidated Balance Sheets
(c)Recorded within Accrued liabilities in the Company’s Consolidated Balance Sheets
The Company entered into interest rate swap and forward interest rate swap contracts to partially mitigate market value risk associated with interest rate fluctuations on its variable rate term loan debt. As of December 31, 2022, the Company had outstanding interest rate and forward interest rate swaps with an aggregate notional amount of €960 million, with respective maturities of April 2023, April 2024, April 2025, April 2026, April 2027 and April 2028. The Company uses interest rate swaps specifically to mitigate variable interest risk exposure on its long-term debt portfolio and has not designated them as hedging instruments for accounting purposes.
The Company has floating-floating cross-currency swap contracts to limit its exposure to investments in certain foreign subsidiaries exposed to foreign exchange fluctuations. The cross-currency swaps have been designated as net investment hedges of its Euro-denominated operations. As of December 31, 2022, an aggregate notional amount of €606 million was designated as net investment hedges of the Company’s investment in Euro-denominated operations, with mandatory termination options in April 2023, April 2024, April 2025 and April 2026. The cross-currency swaps’ fair values were net assets of $74 million at December 31, 2022. Our Consolidated Statements of Comprehensive Income (loss) includes Changes in fair value of net investment hedges, net of tax, of $44 million during the year ended December 31, 2022 related to these net investment hedges. No ineffectiveness has been recorded on the net investment hedges.
The Company also enters into forward currency exchange contracts with maturities up to 18 months to mitigate exposure to foreign currency exchange rate volatility and the associated impact on earnings related to forecasted foreign currency commitments. As of December 31, 2022, the Company had outstanding forward currency exchange contracts with an aggregate notional amount of $565 million. These forward currency exchange contracts are designated as cash flow hedges and are assessed as highly effective. Gains and losses on the derivatives qualifying as cash flow hedges are recorded in Accumulated other comprehensive income (loss) until the underlying transactions are recognized in earnings, and amounted to a gain of $6 million, net of tax, for the year ended December 31, 2022.
The foreign currency exchange, interest rate swap and cross-currency swap contracts are valued using market observable inputs. As such, these derivative instruments are classified within Level 2. The assumptions used in measuring fair value of the cross-currency swap are considered Level 2 inputs, which are based upon market observable interest rate curves, cross currency basis curves, credit default swap curves, and foreign exchange rates.
The carrying value of Cash, cash equivalents and restricted cash, Account receivables and Notes and Other receivables contained in the Consolidated Balance Sheets approximates fair value.
The following table sets forth the Company’s financial assets and liabilities that were not carried at fair value:
| | | | | | | | | | | |
| December 31, 2022 |
| Carrying Value | | Fair Value |
| (Dollars in millions) |
Term Loan Facilities | $ | 1,156 | | | $ | 1,151 | |
The Company determined the fair value of certain of its long-term debt and related current maturities utilizing transactions in the listed markets for similar liabilities. As such, the fair value of the long-term debt and related current maturities is considered Level 2.
Note 20. Other liabilities
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2022 |
| (Dollars in millions) |
| Income taxes | $ | 99 | | | $ | 106 | |
| | | |
| Pension and other employee related | 21 | | | 61 | |
Long-term lease liability (Note 18) | 36 | | | 42 | |
| Advanced discounts from suppliers | 6 | | | 16 | |
Product warranties and performance guarantees – Long-term | 10 | | | 11 | |
Environmental Remediation – Long-term | 14 | | | 15 | |
| Other | 19 | | | 18 | |
| $ | 205 | | | $ | 269 | |
Note 21. Equity
Issuance of Series A Preferred Stock
In connection with the Company’s emergence from bankruptcy and pursuant to the Plan, the Company issued 247,757,290 shares of the Company’s Series A Preferred Stock to affiliated funds of Centerbridge, affiliated funds of Oaktree and certain other investors and parties, including in connection with the consummation of two rights offerings and that certain replacement equity backstop commitment agreement. The Company is authorized to grant 1,200,000,000 shares of preferred stock in the reorganized company.
Series A Preferred Stock
Holders of the Series A Preferred Stock will be entitled to receive, when, as and if declared by a committee of disinterested directors of the Board (which initially consisted of Daniel Ninivaggi, Julia Steyn, Robert Shanks, and D’aun Norman) out of funds legally available for such dividend, cumulative cash dividends at an annual rate of 11% on the stated amount per share plus the amount of any accrued and unpaid dividends on such share, accumulating daily and payable quarterly on January 1, April 1, July 1 and October 1, respectively, in each year. Such a dividend will not be declared at any time when Consolidated EBITDA (as defined in the Series A Certificate of Designations) of the Company and its subsidiaries for the most recent four fiscal quarters for which financial statements of the Company are available is less than $425 million. Dividends on the Series A Preferred Stock will accumulate whether or not declared.
Holders of the Series A Preferred Stock will also be entitled to such dividends paid to holders of Common Stock to the same extent as if such holders of Series A Preferred Stock had converted their shares of Series A Preferred Stock into Common Stock (without regard to any limitations on conversions) and had held such shares of Common Stock on the record date for such dividends and distributions. Such payments will be made concurrently with the dividend or distribution to the holders of the Common Stock.
The Company is restricted from paying or declaring any dividend, or making any distribution, on any class of Common Stock or any future class of preferred stock established thereafter by the Board (other than any series of capital
stock that ranks pari passu to the Series A Preferred Stock) (such stock, “Dividend Junior Stock”), other than a dividend payable solely in Dividend Junior Stock, unless (i) all cumulative accrued and unpaid preference dividends on all outstanding shares of Series A Preferred Stock have been paid in full and the full dividend thereon due has been paid or declared and set aside for payment and (ii) all prior redemption requirements with respect to Series A Preferred Stock have been complied with, provided, notwithstanding the foregoing, that the Company may pay a dividend or make a distribution on Dividend Junior Stock if (a) the holders of the Series A Preferred Stock also participate in such dividends or distributions, (b) such dividends or distributions are made on or prior to December 31, 2022, and (c) the full Board of the Company has ratified the Disinterested Directors’ Committee’s declaration of any such dividend or distribution.
On March 3, 2022, the terms of the Series A Certificate of Designations were further amended to provide the Company with greater flexibility to pay dividends and make certain distributions on, and to purchase, redeem or otherwise acquire, including in individually negotiated transactions, shares of the Company’s Common Stock or any future class of preferred stock that ranks junior to the Series A Preferred Stock in right of payment of dividends. Specifically, the amendments (i) expanded the scope of permitted Distributions on Dividend Junior Stock (as each term is defined in the Series A Certificate of Designations) to include purchases by the Company of shares of Dividend Junior Stock in individually negotiated transactions, (ii) removed the requirement that dividends or Distributions on Dividend Junior Stock must occur on or prior to December 31, 2022, and (iii) expressly permitted the purchase, redemption or other acquisition for cash by the Company of shares of Dividend Junior Stock without requiring ratable participation by holders of Series A Preferred Stock.
On September 8, 2022, the Disinterested Directors Committee of the board of directors (the "Board") of the Company declared a cash dividend of $0.17 per share on the Company's Series A Preferred Stock. As of the record date of September 23, 2022, a total of 245,413,317 shares of Series A Preferred Stock were outstanding, resulting in an aggregate dividend amount of $42 million. This dividend was settled in full on October 3, 2022.
On December 6, 2022, the Board declared a cash dividend of $0.17 per share on the Company's Series A Preferred Stock. As of the record date of December 20, 2022, a total of 245,171,837 shares of Series A Preferred Stock were outstanding, resulting in an aggregate dividend amount of $42 million. Cash was transferred on December 28, 2022, to the transfer agent for the Series A Preferred Stock in the amount of $42 million for the settlement of the dividend which occurred on January 3, 2023. As of December 31, 2022, a dividend payable of $42 million was recorded within Accrued liabilities, and the cash held by the transfer agent was recorded within Other Current Assets.
The Board determined that the amount of preference dividends which will accumulate for the preference dividend for the year ended December 31, 2022 is $0.251772 per share, amounting to $157 million and is presented as a reduction to Net income available to common shareholders in our Consolidated Statements of Operations. There were 247,757,290 shares of Series A Preferred Stock outstanding as of December 31, 2022, with an the aggregate accumulated dividend as of December 31, 2022 of $171 million.
Voting
Holders of the Series A Preferred Stock will be entitled to vote together as a single class with the holders of Common Stock, with each such holder entitled to cast the number of votes equal to the number of votes such holder would have been entitled to cast if such holder were the holder of a number of shares of Common Stock equal to the whole number of shares of Common Stock that would be issuable upon conversion of such holder’s shares of Series A Preferred Stock in addition to a number of shares of Common Stock equal to the amount of cumulative unpaid preference dividends (whether or not authorized or declared) divided by the lesser of (i) the fair market value per share of such additional shares and (ii) the fair market value per share of the Common Stock.
So long as any shares of Series A Preferred Stock are outstanding, a vote or the consent of the holders representing a majority of the Series A Preferred Stock will be required for (i) effecting or validating any amendment, modification or alteration to the Certificate of Incorporation that would authorize or create, or increase the authorized amount of, any shares of any class or series or any securities convertible into shares of any class or series of capital stock that would rank senior or pari passu to the Series A Preferred Stock with respect to dividend payments or upon the occurrence of a liquidation, (ii) any increase in the authorized number of shares of Series A Preferred Stock or of any series of capital stock that ranks pari passu with Series A Preferred Stock, (iii) effecting or validating any amendment, alteration or repeal of any provision of the Certificate of Incorporation or Bylaws that would have an adverse effect on the rights, preferences, privileges or voting power of Series A Preferred Stock or the holders thereof in any material respect, or (iv) any action or inaction that would reduce the stated amount of any share of Series A Preferred Stock to below $5.25 per share.
Liquidation
Upon liquidation, Series A Preferred Stock will rank senior to the Common Stock and the Series B Preferred Stock, and will have the right to be paid, out of the assets of the Company legally available for distribution to its stockholders, an amount equal to the Aggregate Liquidation Entitlement (as defined in the Series A Certificate of Designations) for all outstanding shares of Series A Preferred Stock.
Other Rights
All shares of Series A Preferred Stock will automatically convert to shares of Common Stock, at an initial conversion price of $5.25 per share of Common Stock (subject to adjustment as described in the Series A Certificate of Designations) (the “Conversion Price”) upon either (i) the election of holders representing a majority of the then-outstanding Series A Preferred Stock or (ii) the occurrence of a Trading Day (as defined in the Series A Certificate of Designations) at any time on or after the date which is two years after the Effective Date on which (A) the aggregate stated amount of all outstanding shares of Series B Preferred Stock is an amount less than or equal to $125 million, (B) the Common Stock is traded on a Principal Exchange, a Fallback Exchange or an Over-the-Counter Market (each as defined in the Series A Certificate of Designations) and, in each case, the Automatic Conversion Fair Market Value (as defined in the Series A Certificate of Designations) of the Common Stock exceeds 150% of the Conversion Price, and (C) the Consolidated EBITDA (as defined in the Series A Certificate of Designations) of the Company and its subsidiaries for the last twelve months ended as of the last day of each of the two most recent fiscal quarters is greater than or equal to $600 million.
Shares of Series A Preferred Stock are also convertible into Common Stock at any time at the option of the holder, effective on January 1, April 1, July 1 and October 1 in each year, or on the third business day prior to the date of redemption of the outstanding shares of the Series A Preferred Stock as described in the following paragraph.
The Company may, at its election, redeem all but not less than all of the outstanding shares of Series A Preferred Stock (i) at any time following the date which is six years after the Effective Date or (ii) in connection with the consummation of a Change of Control (as defined in the Series A Certificate of Designations), in either case for a cash purchase price equal to $5.25 per share plus cumulative unpaid preference dividends (whether or not authorized or declared) as of the redemption date.
Share Repurchase Program
On November 16, 2021, the Board of Directors authorized a $100 million share repurchase program valid until November 15, 2022, providing for the purchase of shares of Series A Preferred Stock and Common Stock. The share repurchase program was subsequently extended by one year, to November 15, 2023. Through December 31, 2022, the Company has repurchased 2,669,335 shares of Series A Preferred Stock for $22 million, and 559,749 shares of Common Stock for $4 million.
Note 22. Accumulated Other Comprehensive Income (Loss)
The changes in accumulated other comprehensive income (loss) are provided in the tables below:
| | | | | | | | | | | | | | | | | |
| Pre-Tax | | Tax | | After-Tax |
| (Dollars in millions) |
Year Ended December 31, 2020 | | | | | |
| Foreign exchange translation adjustment | $ | (234) | | | $ | — | | | $ | (234) | |
| Pension adjustments | (17) | | (1) | | | (18) | |
| Changes in fair value of effective cash flow hedges | (8) | | 1 | | | (7) | |
| $ | (259) | | | $ | — | | | $ | (259) | |
Year Ended December 31, 2021 | | | | | |
| Foreign exchange translation adjustment | $ | 38 | | | $ | — | | | $ | 38 | |
| Pension adjustments | 43 | | (7) | | | 36 | |
| Changes in fair value of effective cash flow hedges | 11 | | (1) | | | 10 | |
| Changes in fair value of net investment hedges | 51 | | (10) | | | 41 | |
| $ | 143 | | | $ | (18) | | | $ | 125 | |
Year Ended December 31, 2022 | | | | | |
| Foreign exchange translation adjustment | $ | (1) | | | $ | — | | | $ | (1) | |
| Pension adjustments | (11) | | | 2 | | | (9) | |
| Changes in fair value of effective cash flow hedges | 8 | | (2) | | | 6 | |
| Changes in fair value of net investment hedges | 57 | | (13) | | | 44 | |
| $ | 53 | | | $ | (13) | | | $ | 40 | |
Changes in Accumulated Other Comprehensive Income (Loss) by Component
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign
Exchange
Translation
Adjustment | | Changes in Fair
Value of
Effective Cash
Flow Hedges | | Changes in Fair Value of Net Investment Hedges | | Pension
Adjustments | | Total
Accumulated
Other
Comprehensive
Income (Loss) |
| (Dollars in millions) |
Balance at December 31, 2020 | $ | (81) | | | $ | (3) | | | $ | — | | | $ | (45) | | | $ | (129) | |
| Other comprehensive income before reclassifications | 38 | | | 11 | | | 41 | | | 35 | | | 125 | |
| Amounts reclassified from accumulated other comprehensive income | — | | | (1) | | | — | | | 1 | | | — | |
| Net current period other comprehensive income | 38 | | | 10 | | | 41 | | | 36 | | | 125 | |
Balance at December 31, 2021 | $ | (43) | | | $ | 7 | | | $ | 41 | | | $ | (9) | | | $ | (4) | |
| Other comprehensive income before reclassifications | (1) | | | 27 | | | 44 | | | (11) | | | 59 | |
| Amounts reclassified from accumulated other comprehensive income | — | | | (21) | | | — | | | 2 | | | (19) | |
| Net current period other comprehensive income | (1) | | (1) | | 6 | | | 44 | | | (9) | | | 40 | |
Balance at December 31, 2022 | $ | (44) | | | $ | 13 | | | $ | 85 | | | $ | (18) | | | $ | 36 | |
Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2022 | Net
Sales | | Cost of
Goods
Sold | | Selling,
General and
Administrative
Expenses | | Non-Operating (Income) Expense | | Total |
| | | |
| (Dollars in millions) |
| Amortization of Pension and Other Postretirement Items: | | | | | | | | | |
| Actuarial losses recognized | $ | — | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 2 | |
| Losses (gains) on cash flow hedges | — | | | (21) | | | — | | | — | | | (21) | |
| Tax expense (benefit) | — | | | — | | | — | | | — | | | — | |
| Total reclassifications for the period, net of tax | $ | — | | | $ | (21) | | | $ | — | | | $ | 2 | | | $ | (19) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net
Sales | | Cost of
Goods
Sold | | Selling,
General and
Administrative
Expenses | | Non-Operating (Income) Expense | | Total |
Year Ended December 31, 2021 | | | | |
| (Dollars in millions) |
| Amortization of Pension and Other Postretirement Items: | | | | | | | | | |
| Actuarial losses recognized | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | 1 | |
| Losses (gains) on cash flow hedges | — | | | (1) | | | — | | | — | | | (1) | |
| Tax expense (benefit) | — | | | — | | | — | | | — | | | — | |
| Total reclassifications for the period, net of tax | $ | — | | | $ | (1) | | | $ | — | | | $ | 1 | | | $ | — | |
Note 23. Stock-Based Compensation
Cancellation of Incentive Awards
As part of the Company's emergence from Chapter 11, the Plan provided for the acceleration of all outstanding awards under the Stock Incentive Plan. As of the Effective Date, all outstanding awards were cancelled as follows:
•Restricted stock units ("RSUs") - 1,205,650 RSUs were settled for consideration of $6.25 per share, for a total cash settlement of $8 million of which $7 million was recorded to equity, and $1 million was recorded to Reorganization items, net in the Consolidated Statement of Operations. Measurement of the cash settlement value of RSU awards was performed on an individual grant basis. As of the Effective Date, unamortized stock compensation expense of $7 million was charged to Reorganization items, net in the Consolidated Statement of Operations.
•Performance stock units - 228,765 PSUs were settled for consideration of $6.25 per share, for a total cash settlement of $1 million which was recorded to Reorganization items, net in the Consolidated Statement of Operations.
•Stock options - All unvested stock options were considered “out of the money” and cancelled for no consideration. Unamortized stock compensation expense of $1 million was charged to Reorganization items, net in the Consolidated Statement of Operations.
•Cash performance stock units ("CPSUs") - 2,069,897 CPSUs were settled for consideration of $1.00 per unit, for a total cash settlement of $2 million which was charged to Reorganization items, net in the Consolidated Statement of Operations.
The cash settlement of an equity award is treated as the repurchase of an outstanding equity instrument. In accordance with ASC 718, all outstanding awards were cancelled with no replacement grant, therefore modification accounting was not applied.
Continuity Awards
In September 2020, one-time cash continuity awards (“Continuity Awards”) were granted to certain employees in exchange for the forfeiture of RSUs and PSUs that had been granted in February 2020. The Continuity Awards amounted to $11 million, with $9 million paid in September 2020 and the remaining $2 million paid in 2021. As the Continuity Awards were subject to a one-year service requirement, the combined transaction was accounted for as a modification to liability-classified awards. The total incremental compensation cost resulting from the modification was $5 million. The Continuity Awards were fully vested as of December 31, 2021.
The following table summarizes information about the Continuity Awards:
| | | | | | | | | | | |
| | Number of Awards | | Weighted Average Grant Date Fair Value Per Award |
Non-vested at December 31, 2020 | 43 | | $ | 257,536 | |
| Granted | — | | — |
| Vested | (43) | | (257,536) |
| Forfeited | — | | — |
Non-vested at December 31, 2021 | — | | $ | — | |
2021 Long-Term Incentive Plan
On May 25, 2021, the Garrett Motion Inc. 2021 Long-Term Incentive Plan (the “Long-Term Incentive Plan”) was adopted. The Long-Term Incentive Plan provides for the grant of stock options, stock appreciation rights, performance awards, restricted stock units, restricted stock, other stock-based awards, and cash-based awards to employees and non-employee directors of Garrett or its affiliates, and independent contractors or consultants of Garrett. The maximum aggregate number of shares of our Common Stock that may be issued under the Long-Term Incentive Plan is 31,280,476 shares. As of December 31, 2022, an aggregate of 4,560,935 shares of our Common Stock were awarded, net of forfeitures and 26,719,541 shares of our Common Stock were available for future issuance under the Long-Term Incentive Plan.
Restricted Stock Units
RSUs are issued to certain key employees and directors at fair market value at the date of grant. RSUs typically vest over 3 years or 5 years and when vested, each unit entitles the holder to one share of our Common Stock. The following table summarizes information about RSU activity including for periods prior to Emergence:
| | | | | | | | | | | |
| | Number of Restricted Stock Units | | Weighted Average Grant Date Fair Value Per Share |
Non-vested at December 31, 2020 | 1,538,969 | | | $ | 13.11 | |
| Granted | 1,827,599 | | | 8.31 | |
| Vested | (326,058) | | | 13.10 | |
| Forfeited | (16,551) | | | 11.71 | |
| Vested and cancelled | (1,205,650) | | | 13.10 | |
Non-vested at December 31, 2021 | 1,818,309 | | | $ | 8.31 | |
| Granted | 1,096,012 | | | 6.46 | |
| Vested | (436,992) | | | 8.40 | |
| Forfeited | (75,429) | | | 7.38 | |
| | | |
Non-vested at December 31, 2022 | 2,401,900 | | | $ | 7.48 | |
As of December 31, 2022, there was $14 million of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of 2.58 years.
Performance Stock Units
As of December 31, 2022, an aggregate of 1,774,135 PSU awards were granted to officers and certain key employees under the Long-Term Incentive Plan, which, upon vesting, entitles the holder to shares of our Common Stock. The actual number of shares an employee receives for each PSU depends on the Company’s performance against various measures.
For PSUs granted in 2021, the performance measures are related to absolute total shareholder return (“TSR”) with stock price hurdles, Adjusted EBITDA and Adjusted EBITDA margin, weighted 60%, 20% and 20% respectively over a two-year performance period from January 1, 2022 through December 31, 2023 for the TSR measure and a three-year performance period from January 1, 2021 through December 31, 2023 for the Adjusted EBITDA and Adjusted EBITDA margin measures. Each grantee is granted a target level of PSUs and may earn between 0% and 100% of the target level depending on achievement of the performance measures.
For PSUs granted in 2022, the performance measures are based on Adjusted EBITDA and Adjusted EBITDA margin, weighted 50% each, over a three-year performance period from January 1, 2022 through December 31, 2024. The PSUs vest at levels ranging from 0% to 200% of the target level depending on the Company’s performance against the financial measures.
The awards associated with the TSR performance measure are considered to have a market condition. A Monte-Carlo simulation model was used to determine the grant date fair value by simulating a range of possible future stock prices for the Company over the performance period. This model requires an input of assumptions including the simulation term, the risk-free interest rate, a volatility estimate for the Company’s shares, and a dividend yield estimate. The simulation term was the period of time between performance period start date and the performance end date. The risk-free interest rate assumption was based on observed interest rates from the Treasury Constant Maturity yield curve consistent with the simulation term. The Company’s volatility estimate was based on the historical volatilities of peers over a historical period consistent with the simulation term. The Company does not expect to pay a dividend on the Common Stock during the applicable term. The fair value of the PSUs granted in 2021 was estimated using the following assumptions:
| | | | | | | | |
| Monte Carlo Assumptions | | PSUs Granted in 2021 |
| Volatility | | 64.01% |
| Dividend yield | | 0.00% |
| Risk-free interest rate | | 0.24% |
The following table summarizes information about PSU activity related to both the Stock Incentive Plan and the Long-Term Incentive Plan for each of the periods presented:
| | | | | | | | | | | |
| | Number of Performance Stock Units | | Weighted Average Grant Date Fair Value Per Share |
Non-vested at December 31, 2020 | 314,111 | | $ | 16.17 | |
| Granted | 1,472,875 | | 8.67 |
| Vested | — | | — |
| Forfeited | (85,346) | | 14.00 |
| Vested and cancelled | (228,765) | | | — |
Non-vested at December 31, 2021 | 1,472,875 | | | $ | 8.67 | |
| Granted | 301,260 | | 6.79 |
| Vested | — | | — |
| Forfeited | (52,092) | | 8.15 |
| | | |
Non-vested at December 31, 2022 | 1,722,043 | | | $ | 8.36 | |
The fair value of the TSR-based PSUs is based on the output of the Monte Carlo simulation model noted above and the PSUs not containing a market condition are based on the fair market value of the Company’s common stock at the grant date. The number of underlying shares to be issued will be based on actual performance achievement over the performance period.
The fair value of each PSU grant is amortized monthly into compensation expense on a graded vesting (accelerated) basis over a vesting period of 36 months. The accrual of compensation costs is based on our estimate of the final expected value of the award and is adjusted as required for the performance-based condition. As the payout of PSUs granted in 2021
includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of those PSUs. The Company currently does not pay dividends on its common stock.
As of December 31, 2022, there was $7 million of total unrecognized compensation cost related to unvested PSUs, which is expected to be recognized over a weighted average period of 1.36 years.
Stock-Based Compensation Expense
The following table summarizes the impact to the Consolidated Statement of Operations from the Company's incentive awards:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| RSUs | $ | 6 | | | $ | 4 | | | $ | 9 | |
| PSUs | 5 | | | 2 | | | — | |
| Stock options | — | | | — | | | 1 | |
| Stock-based compensation expense | 11 | | | 6 | | | 10 | |
| Continuity Awards | — | | | 5 | | | 7 | |
| Reorganization items, net | — | | | 9 | | | — | |
| Future income tax benefits recognized | 1 | | | 2 | | | 4 | |
Note 24. Earnings Per Share
Earnings per share is calculated using the two-class method pursuant to the issuance of our Series A Preferred Stock on the Effective Date. Our Series A Preferred Stock is considered a participating security because holders of the Series A Preferred Stock will also be entitled to such dividends paid to holders of Common Stock to the same extent on an as-converted basis. The two-class method requires an allocation of earnings to all securities that participate in dividends with common shares, such as our Series A Preferred Stock, to the extent that each security may share in the entity’s earnings. Basic earnings per share are then calculated by dividing undistributed earnings allocated to common stock by the weighted average number of common shares outstanding for the period. The Series A Preferred Stock is not included in the computation of basic earnings per share in periods in which we have a net loss, as the Series A Preferred Stock is not contractually obligated to share in our net losses.
Diluted earnings per share for the years ended December 31, 2022 and 2021 are calculated using the more dilutive of the two-class or if-converted methods. The two-class method uses net income available to common shareholders and assumes conversion of all potential shares other than the participating securities. The if-converted method uses net income and assumes conversion of all potential shares including the participating securities. Diluted earnings per share for the year ended December 31, 2020 are computed based upon the weighted average number of common shares outstanding and all dilutive potential common shares outstanding and all potentially issuable PSUs at the end of the period (if any) based on the number of shares issuable if it were the end of the vesting period using the treasury stock method and the average market price of our Common Stock for the year.
The details of the earnings per share calculations for the years ended December 31, 2022, 2021 and 2020 are as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31 |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions except per share amounts) |
| | | | | |
| Basic earnings per share: | | | | | |
| Net Income | $ | 390 | | | $ | 495 | | | $ | 80 | |
| Less: preferred stock dividend | (157) | | | (97) | | | — | |
| Net income available for distribution | 233 | | | 398 | | | 80 | |
| Less: earnings allocated to participating securities | (184) | | | (280) | | | — | |
| Net income available to common shareholders | 49 | | | 118 | | | 80 | |
| Weighted average common shares outstanding - Basic | 64,708,635 | | | 69,706,183 | | | 75,543,461 | |
| EPS – Basic | $ | 0.75 | | | $ | 1.69 | | | $ | 1.06 | |
| | | | | |
| Diluted earnings per share: | | | | | |
| Method used: | Two-class | | If-converted | | |
| Weighted average common shares outstanding - Basic | 64,708,635 | | | 69,706,183 | | | 75,543,461 | |
| Dilutive effect of unvested RSUs and other contingently issuable shares | 367,357 | | | 28,155 | | | 557,048 | |
| Dilutive effect of participating securities | — | | | 247,768,962 | | | — | |
| Weighted average common shares outstanding – Diluted | 65,075,992 | | | 317,503,300 | | | 76,100,509 | |
| EPS – Diluted | $ | 0.75 | | | $ | 1.56 | | | $ | 1.05 | |
The diluted earnings per share calculations exclude the effect of stock options when the options’ assumed proceeds exceed the average market price of the common shares during the period. For the years ended December 31, 2021 and 2020, the weighted average number of stock options excluded from the computations was 131,623 and 428,690 respectively. There were no options outstanding as of December 31, 2022 and 2021, and 403,517 options outstanding as of December 31, 2020.
Note 25. Commitments and Contingencies
Securities Litigation
On September 25, 2020, a putative securities class action complaint was filed against Garrett Motion Inc. and certain current and former Garrett officers and directors in the United States District Court for the Southern District of New York. The case bears the caption: Steven Husson, Individually and On Behalf of All Others Similarly Situated, v. Garrett Motion Inc., Olivier Rabiller, Alessandro Gili, Peter Bracke, Sean Deason, and Su Ping Lu, Case No. 1:20-cv-07992-JPC (SDNY) (the “Husson Action”). The Husson Action asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for securities fraud and control person liability. On September 28, 2020, the plaintiff sought to voluntarily dismiss his claim against Garrett Motion Inc. in light of the Company’s bankruptcy; this request was granted.
On October 5, 2020, another putative securities class action complaint was filed against certain current and former Garrett officers and directors in the United States District Court for the Southern District of New York. This case bears the caption: The Gabelli Asset Fund, The Gabelli Dividend & Income Trust, The Gabelli Value 25 Fund Inc., The Gabelli Equity Trust Inc., SM Investors LP and SM Investors II LP, on behalf of themselves and all others similarly situated, v. Su Ping Lu, Olivier Rabiller, Alessandro Gili, Peter Bracke, Sean Deason, Craig Balis, Thierry Mabru, Russell James, Carlos M. Cardoso, Maura J. Clark, Courtney M. Enghauser, Susan L. Main, Carsten Reinhardt, and Scott A. Tozier, Case No. 1:20-cv-08296-JPC (SDNY) (the “Gabelli Action”). The Gabelli Action also asserted claims under Sections 10(b) and 20(a) of the Exchange Act.
On November 5, 2020, another putative securities class action complaint was filed against certain current and former Garrett officers and directors in the United States District Court for the Southern District of New York. This case bears the caption: Joseph Froehlich, Individually and On Behalf of All Others Similarly Situated, v. Olivier Rabiller, Allesandro Gili, Peter Bracke, Sean Deason, and Su Ping Lu, Case No. 1:20-cv-09279-JPC (SDNY) (the “Froehlich Action”). The Froehlich Action also asserted claims under Sections 10(b) and 20(a) of the Exchange Act.
All 3 actions are currently assigned to Judge John P. Cronan. Su Ping Lu filed a waiver of service in the Gabelli Action on November 10, 2020. On November 24, 2020, competing motions were filed seeking the appointment of lead plaintiff and lead counsel and the consolidation of the Husson, Gabelli, and Froehlich Actions.
On December 8, 2020, counsel for the plaintiffs in the Gabelli Action — the Entwistle & Cappucci law firm — filed an unopposed stipulation and proposed order that would (1) appoint the plaintiffs in the Gabelli Action — the “Gabelli Entities” — the lead plaintiffs; (2) would appoint Entwistle & Cappucci as lead counsel for the plaintiff class; and (3) consolidate the Gabelli Action, the Husson Action, and the Froehlich Action (the “Consolidated D&O Action”). On January 21, 2021, the Court granted the motion to consolidate the actions and granted the Gabelli Entities’ motions for appointment as lead plaintiff and for selection of lead counsel. On February 25, 2021, plaintiffs filed a Consolidated Amended Complaint for Violation of the federal securities laws.
The Company’s insurer, AIG, has accepted the defense, subject to the customary reservation of rights.
The Company agreed with the Gabelli Entities and their lead counsel to permit a class claim to be recognized in the bankruptcy court and to have securities claims against the Company to be litigated in the district court alongside the Consolidated D&O Action. The Gabelli Entities have agreed that any recoveries against Garrett Motion Inc. on account of securities claims litigated through the class claim are limited to available insurance policy proceeds. On July 2, 2021, the bankruptcy court entered an order approving the joint request from the Company and the Gabelli Entities to handle the securities claims against Garrett Motion Inc. in this manner.
The Gabelli Entities were authorized, and on July 22, 2021 filed a second amended complaint to add claims against Garrett Motion Inc. On August 11, 2021, Garrett Motion Inc., Olivier Rabiller, Alessandro Gili, Peter Bracke, Sean Deason, Russell James, Carlos Cardoso, Maura Clark, Courtney Enghauser, Susan Main, Carsten Reinhardt, and Scott Tozier filed a motion to dismiss with respect to claims asserted against them. On the same day, Su Ping Lu, who is represented separately, filed a motion to dismiss with respect to the claims asserted against her. Lead plaintiffs’ opposition to the motions to dismiss was filed on October 26, 2021, and the defendant's reply briefs were filed on or before December 8, 2021. On March 31, 2022, the judge dismissed the complaints entirely - Su Ping Lu's motion to dismiss was granted with prejudice while the court granted the plaintiffs 30 days to file a third amended complaint against the Company and the other defendants. On May 2, 2022, the plaintiffs filed a Third Amended Complaint (“TAC”) against all of the foregoing Defendants apart from Alessandro Gili, Craig Balis, Thierry Mabru and Su Ping Lu. On June 24, 2022, defendants moved to dismiss the TAC in its entirety, with prejudice. Plaintiffs filed their opposition on August 16, 2022, and defendants filed their reply brief on September 23, 2022. On September 22, 2022, the action was reassigned from Judge John P. Cronan to Judge Jennifer L. Rochon, who was recently appointed.
Brazilian Tax Matters
In September 2020, the Brazilian tax authorities issued an infraction notice against Garrett Motion Industria Automotiva Brasil Ltda, challenging the use of certain tax credits (“Befiex Credits”) between January 2017 and February 2020. The infraction notice results in a loss contingency that may or may not ultimately be incurred by the Company. The estimated total amount of the contingency as of December 31, 2022 was $33 million including penalties and interest. The Company appealed the infraction notice on October 23, 2020. In March 2021, in response to our request, the Brazilian Tax Authorities reconsidered their position for a portion of the $33 million mentioned above and allowed Garrett Motion Brazil the right to offset Federal Tax with the Befiex Credits. The letter does not qualify as a formal decision and requires formal recognition from the Judge and from the Federal Judgement Office in charge of the disputes. On August 21, 2021, we requested such formal recognition from the Judge, which request resulted in a suspension of the claims of the Brazilian Tax Authorities as set out in their initial September 2020 letter, until such a time as the Judge makes a formal determination on our request. The Company believes, based on management’s assessment and the advice of external legal counsel, that it has meritorious arguments in connection with the infraction notice and any liability for the infraction notice is currently not probable. Accordingly, no accrual is required at this time.
Other Matters
We are subject to other lawsuits, investigations and disputes arising out of the conduct of our business, including matters relating to commercial transactions, government contracts, product liability, prior acquisitions and divestitures, employee benefit plans, intellectual property and environmental, health and safety matters. We recognize a liability for any contingency that is probable of occurrence and reasonably estimable. We continually assess the likelihood of adverse judgments of outcomes in these matters, as well as potential ranges of possible losses (taking into consideration any
insurance recoveries), based on a careful analysis of each matter with the assistance of outside legal counsel and, if applicable, other experts.
Warranties and Guarantees
In the normal course of business, we issue product warranties and product performance guarantees. We accrue for the estimated cost of product warranties and performance guarantees based on contract terms and historical experience at the time of sale to the customer. Adjustments to initial obligations for warranties and guarantees are made as changes to the obligations become reasonably estimable. Product warranties and product performance guarantees are included in Accrued liabilities and Other Liabilities. The following table summarizes information concerning our recorded obligations for product warranties and product performance guarantees.
| | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2022 | | 2021 | | |
| (Dollars in millions) | | |
| Beginning of year | $ | 32 | | | $ | 14 | | | |
| Accruals for warranties/guarantees issued during the year | 15 | | | 21 | | | |
| Settlement of warranty/guarantee claims | (17) | | | (19) | | | |
| Amounts reclassified from Liabilities subject to compromise | — | | | 16 | | | |
| Foreign currency translation | (2) | | | — | | | |
| $ | 28 | | | $ | 32 | | | |
Note 26. Defined Benefit Pension Plans
We sponsor several funded U.S. and non-U.S. defined benefit pension plans. Pension benefits for many of our U.S. employees are provided through a non-contributory, qualified defined benefit plan. We also sponsor defined benefit pension plans which cover non-U.S. employees who are not U.S. citizens, in Switzerland and Ireland. Other pension plans outside of the U.S. are not material to the Company either individually or in the aggregate.
The following tables summarize the balance sheet impact, including the benefit obligations, assets and funded status associated with our significant pension plans.
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits |
| U.S.
Plans | | U.S.
Plans | | Non-U.S.
Plans | | Non-U.S.
Plans |
| 2022 | | 2021 | | 2022 | | 2021 |
| (Dollars in millions) |
| Change in benefit obligation: | | | | | | | |
| Benefit obligation at beginning of the year | $ | 208 | | | $ | 220 | | | $ | 229 | | | $ | 259 | |
| Service cost | 1 | | | 1 | | | 7 | | | 10 | |
| Interest cost | 5 | | | 4 | | | 2 | | | 1 | |
| | | | | | | |
Actuarial (gains) losses(1) | (39) | | | (6) | | | (65) | | | (25) | |
| Benefits paid | (10) | | | (11) | | | 3 | | | (3) | |
| Settlements and curtailments | — | | | — | | | (10) | | | — | |
| Foreign currency translation | — | | | — | | | (9) | | | (15) | |
| Transfers | — | | | — | | | — | | | (1) | |
| Other | 3 | | | — | | | 10 | | | 3 | |
| Benefit obligation at end of the year | 168 | | | 208 | | | 167 | | | 229 | |
| Change in plan assets: | | | | | | | |
| Fair value of plan assets at beginning of the year | 223 | | | 219 | | | 182 | | | 172 | |
| Actual return on plan assets | (44) | | | 14 | | | (28) | | | 16 | |
| Employer contributions | — | | | — | | | 7 | | | 7 | |
| Benefits paid | (10) | | | (11) | | | 3 | | | (3) | |
Settlements and curtailments(2) | — | | | — | | | (10) | | | — | |
| Foreign currency translation | — | | | — | | | (7) | | | (10) | |
| Transfers | — | | | — | | | — | | | (1) | |
| Other | — | | | 1 | | | 5 | | | 1 | |
| Fair value of plan assets at end of year | 169 | | | 223 | | | 152 | | | 182 | |
| Funded status of plans | $ | 1 | | | $ | 15 | | | $ | (15) | | | $ | (47) | |
| Amounts recognized in Consolidated Balance Sheet consist of: | | | | | | | |
Other assets - non-current(3) | 1 | | | 15 | | | 2 | | | — | |
Accrued pension liabilities- non-current(4) | — | | | — | | | (17) | | | (47) | |
| | | | | | | |
| Net amount recognized | $ | 1 | | | $ | 15 | | | $ | (15) | | | $ | (47) | |
________________________________
(1)The actuarial gain on the U.S. plan during 2022 was $39 million, driven by higher discount rates. For the non-US plans, the 2022 actuarial gain amounted to $65 million. The increase in discount rates led to an assumption gain of $54 million in Ireland and $28 million in Switzerland. The overall financial gain was offset by a losses of $10 million and $9 million attributable to changes in interest credited rate demographic assumptions in Switzerland, and increases in salary rates and mortality rate demographic assumptions in Ireland, respectively.
(2)In Switzerland, the total lump sum benefit payments of $10 million were greater than the service cost and interest cost for year ended December 31, 2022, therefore settlement accounting was applied. Following the settlement accounting, part of the previously unrecognized gain amounting to approximately $1 million was recognized as a gain on pension settlement.
(3)Included in Other assets in the Consolidated Balance Sheet.
(4)Included in Other liabilities in the Consolidated Balance Sheet.
Amounts recognized in Accumulated other comprehensive (income) loss associated with our significant pension and other postretirement benefit plans as of December 31, 2022 and 2021 are as follow:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits |
| U.S.
Plans | | U.S.
Plans | | Non-U.S.
Plans | | Non-U.S.
Plans |
| 2022 | | 2021 | | 2022 | | 2021 |
| (Dollars in millions) |
| Prior service (credit) | $ | (1) | | | $ | (1) | | | $ | (7) | | | $ | (8) | |
| Net actuarial (gain) loss | 13 | | | (1) | | | (14) | | | (11) | |
| Net amount recognized | $ | 12 | | | $ | (2) | | | $ | (21) | | | $ | (19) | |
The components of net periodic benefit (income) cost and other amounts recognized in Other comprehensive (income) loss for our significant pension and other postretirement benefit plans include the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits |
| | | U.S. Plans | | Non-U.S. Plans |
| Net Periodic Benefit Cost | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | (Dollars in millions) |
| Service cost | | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 7 | | | $ | 10 | | | $ | 9 | |
| Interest cost | | 5 | | | 4 | | | 6 | | | 2 | | | 1 | | | 2 | |
| Expected return on plan assets | | (9) | | | (10) | | | (11) | | | (6) | | | (6) | | | (6) | |
| Amortization of prior service (credit) cost | | — | | | — | | | — | | | (1) | | | (1) | | | — | |
| Recognition of actuarial gains | | — | | | — | | | — | | | (27) | | | — | | | 13 | |
Settlements and curtailments(1) | | — | | | — | | | — | | | (1) | | | — | | | 1 | |
| Net periodic (income) benefit cost | | $ | (3) | | | $ | (5) | | | $ | (4) | | | $ | (26) | | | $ | 4 | | | $ | 19 | |
________________________________
(1)In Switzerland, the total lump sum benefit payments of $10 million were greater than the service cost and interest cost for year ended December 31, 2022, therefore settlement accounting was applied. Following the settlement accounting, part of the previously unrecognized gain amounting to approximately $1 million was recognized as gain on pension settlement.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Changes in Plan Assets and Benefits Obligations Recognized in
Other Comprehensive (Income) Loss | | U.S. Plans | | Non-U.S. Plans |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| | (Dollars in millions) |
| Actuarial (gains) losses | | $ | 14 | | | $ | (10) | | | $ | 3 | | | $ | (33) | | | $ | (34) | | | $ | 15 | |
| Prior service (credit) | | — | | | — | | | — | | | — | | | — | | | (10) | |
| Prior service credit recognized during year | | — | | | — | | | — | | | 1 | | | 1 | | | — | |
| Actuarial losses recognized during year | | — | | | — | | | — | | | 30 | | | — | | | (14) | |
| Foreign currency translation | | — | | | — | | | — | | | — | | | — | | | 2 | |
| Total recognized in other comprehensive (income) loss | | $ | 14 | | | $ | (10) | | | $ | 3 | | | $ | (2) | | | $ | (33) | | | $ | (7) | |
| Total recognized in net periodic benefit (income) cost and other comprehensive (income) loss | | $ | 11 | | | $ | (15) | | | $ | (1) | | | $ | (28) | | | $ | (29) | | | $ | 12 | |
The main actuarial assumptions used in determining the benefit obligations and net periodic (income) benefit cost for our significant benefit plans are presented in the following table as weighted averages.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits |
| U.S. Plans | | Non-U.S. Plans |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
| Actuarial assumptions used to determine benefit obligations as of December 31: | | | | | | | | | | | |
| Discount rate | 5.21 | % | | 2.95 | % | | 2.65 | % | | 2.91 | % | | 0.86 | % | | 0.46 | % |
| Expected annual rate of compensation increase | 4.98 | % | | 3.20 | % | | 3.57 | % | | 4.93 | % | | 2.07 | % | | 1.82 | % |
Interest credited to accounts (1) | — | % | | — | % | | — | % | | 3.00 | % | | 1.50 | % | | 1.50 | % |
| Actuarial assumptions used to determine net periodic benefit (income) cost for years ended December 31: | | | | | | | | | | | |
| Discount rate—benefit obligation | 2.95 | % | | 2.65 | % | | 3.30 | % | | 0.80 | % | | 0.46 | % | | 0.79 | % |
| Discount rate—service cost | 3.00 | % | | 3.37 | % | | 4.47 | % | | 0.82 | % | | 0.23 | % | | 1.20 | % |
| Discount rate—interest cost | 2.38 | % | | 2.86 | % | | 4.06 | % | | 0.73 | % | | 0.63 | % | | 1.74 | % |
| Expected rate of return on plan assets | 3.97 | % | | 4.88 | % | | 5.49 | % | | 3.36 | % | | 3.60 | % | | 3.79 | % |
| Expected annual rate of compensation increase | 3.20 | % | | 3.57 | % | | 3.74 | % | | 1.99 | % | | 1.80 | % | | 1.77 | % |
________________________________
(1)Only applicable to the defined benefit pension plan in Switzerland.
The discount rates for our significant pension plans reflect the current rates at which the associated liabilities could be settled at the measurement date of December 31, 2022. To determine the discount rates, we use a modeling process that involves matching the expected cash outflows of our benefit plans to a yield curve constructed from a portfolio of high quality, fixed-income debt instruments. We use the single weighted-average yield of this hypothetical portfolio as a discount rate benchmark.
For both our U.S. and non-U.S. defined benefit pension plans, we estimate the service and interest cost components of net period benefit (income) cost by utilizing a full yield curve approach in the estimation of these cost components by applying the specific spot rates along the yield curve used in the determination of the pension benefit obligation to their underlying projected cash flows. This approach provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and their corresponding spot rates.
For non-U.S. benefit plans, actuarial assumptions reflect economic and market factors relevant to each country.
The following amounts relate to our significant pension plans with accumulated benefit obligations exceeding the fair value of plan assets.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| U.S. Plans | | Non-U.S. Plans |
| 2022 | | 2021 | | 2022 | | 2021 |
| (Dollars in millions) |
| Projected benefit obligation | $ | — | | | $ | — | | | $ | 89 | | | $ | 229 | |
| Accumulated benefit obligation | — | | | — | | | 85 | | | 217 | |
| Fair value of plan assets | — | | | — | | | 72 | | | 182 | |
Our U.S. pension asset investment strategy focuses on maintaining a diversified portfolio using various asset classes in order to achieve market exposure and diversification on a risk adjusted basis. Our target allocations are as follows:60% global equity securities, 20% real estate investments, 10% multi-asset credit income securities, and 10% hedge funds. Global equity securities include mutual funds that invest in companies located both inside and outside the United States. The real estate fund invests in real estate investment trusts – companies that purchase office buildings, hotels and other real estate property. The multi-asset credit funds invest in diversified geographies, asset classes and credit instruments to capture global credit risk premiums. The hedge funds are pooled investments structured to reduce volatility of returns and
long-term return enhancements. Our assets are reviewed on a daily basis to ensure that we are within the targeted asset allocation ranges and, if necessary, asset balances are adjusted back within target allocations.
Our non-U.S. pension assets are typically managed by decentralized fiduciary committees. Our non-U.S. investment policies are different for each country as local regulations, funding requirements, and financial and tax considerations are part of the funding and investment allocation process in each country.
The fair values of both our U.S. and non-U.S. pension plans assets by asset category are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans |
| December 31, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in millions) |
| Cash and cash equivalents | $ | 1 | | | $ | 1 | | | $ | — | | | $ | — | |
| Equity funds | 21 | | | — | | | 21 | | | — | |
| Government bond funds | 36 | | | — | | | 36 | | | — | |
| Corporate bond funds | 97 | | | — | | | 97 | | | — | |
| Real estate funds | 11 | | | — | | | 11 | | | — | |
| Other | 3 | | | — | | | 3 | | | — | |
| Total assets at fair value | $ | 169 | | | $ | 1 | | | $ | 168 | | $ | 168 | | $ | — | |
| | | | | | | |
| U.S. Plans |
| December 31, 2021 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in millions) |
| Cash and cash equivalents | $ | 4 | | | $ | 4 | | | $ | — | | | $ | — | |
| Equity funds | 34 | | | — | | | 34 | | | — | |
| Government bond funds | 39 | | | — | | | 39 | | | — | |
| Corporate bond funds | 135 | | | — | | | 135 | | | — | |
| Real estate funds | 11 | | | — | | | 11 | | | — | |
| Total assets at fair value | $ | 223 | | | $ | 4 | | | $ | 219 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Non-U.S. Plans |
| December 31, 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in millions) |
| Cash and cash equivalents | $ | 3 | | | $ | 3 | | | $ | — | | | $ | — | |
| Equity funds | 83 | | | — | | | 83 | | | — | |
| Government bond funds | 27 | | | — | | | 27 | | | — | |
| Corporate bond funds | 9 | | | — | | | 9 | | | — | |
| Real estate funds | 17 | | | — | | | 17 | | | — | |
| Other | 13 | | | — | | | 13 | | | — | |
| Total assets at fair value | $ | 152 | | | $ | 3 | | | $ | 149 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Non-U.S. Plans |
| December 31, 2021 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Dollars in millions) |
| Cash and cash equivalents | $ | 3 | | | $ | 3 | | | $ | — | | | $ | — | |
| Equity funds | 100 | | | — | | | 100 | | | — | |
| Government bond funds | 34 | | | — | | | 34 | | | — | |
| Corporate bond funds | 11 | | | — | | | 11 | | | — | |
| Real estate funds | 22 | | | — | | | 22 | | | — | |
| Other | 13 | | | — | | | 13 | | | — | |
| Total assets at fair value | $ | 183 | | | $ | 3 | | | $ | 180 | | | $ | — | |
Equity funds, corporate bond funds, government bond funds, real estate funds and short-term investments are valued either by bids provided by brokers or dealers or quoted prices of securities with similar characteristics. Other includes diversified mutual funds. These investments are valued at estimated fair value based on quarterly financial information received from the investment advisor and/or general partner.
Our general funding policy for qualified defined benefit pension plans is to contribute amounts at least sufficient to satisfy regulatory funding standards. We are not required to make any contributions to our U.S. pension plan in 2022. In 2022, contributions of $7 million were made to our non-U.S. pension plans to satisfy regulatory funding requirements. In 2023, we expect to make contributions of cash and/or marketable securities of approximately $7 million to our non-U.S. pension plans to satisfy regulatory funding standards. Contributions for both our U.S. and non-U.S. pension plans do not reflect benefits paid directly from Company assets.
Benefit payments, including amounts to be paid from Company assets, and reflecting expected future service, as appropriate, are expected to be paid as follows:
| | | | | | | | | | | |
| U.S.
Plans | | Non-U.S.
Plans |
| (Dollars in millions) |
| 2023 | $ | 11 | | | $ | 4 | |
| 2024 | 11 | | | 4 | |
| 2025 | 11 | | | 5 | |
| 2026 | 11 | | | 6 | |
| 2027 | 11 | | | 6 | |
| 2028-2032 | 61 | | | 43 | |
Note 27. Concentrations
Sales concentration—Net sales by region (determined based on country of shipment) and channel are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| OEM | | Aftermarket | | Other | | Total |
| (Dollars in millions) |
| United States | $ | 478 | | | $ | 213 | | | $ | 3 | | | $ | 694 | |
| Europe | 1,550 | | | 157 | | | 27 | | | 1,734 | |
| Asia | 1,031 | | | 47 | | | 24 | | | 1,102 | |
| Other International | 48 | | | 25 | | | — | | | 73 | |
| $ | 3,107 | | | $ | 442 | | | $ | 54 | | | $ | 3,603 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| OEM | | Aftermarket | | Other | | Total |
| (Dollars in millions) |
| United States | $ | 383 | | | $ | 176 | | | $ | 6 | | | $ | 565 | |
| Europe | 1,602 | | | 155 | | | 27 | | | 1,784 | |
| Asia | 1,153 | | | 50 | | | 28 | | | 1,231 | |
| Other International | 28 | | | 25 | | | — | | | 53 | |
| $ | 3,166 | | | $ | 406 | | | $ | 61 | | | $ | 3,633 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| OEM | | Aftermarket | | Other | | Total |
| (Dollars in millions) |
| United States | $ | 309 | | | $ | 148 | | | $ | 5 | | | $ | 462 | |
| Europe | 1,395 | | | 122 | | | 30 | | | 1,547 | |
| Asia | 928 | | | 41 | | | 26 | | | 995 | |
| Other International | 11 | | | 19 | | | — | | | 30 | |
| $ | 2,643 | | | $ | 330 | | | $ | 61 | | | $ | 3,034 | |
Customer concentration—Net sales to Garrett’s largest customers and the corresponding percentage of total net sales are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net sales Year Ended December 31, |
| 2022 | | % | | 2021 | | % | | 2020 | | % |
| (Dollars in millions) |
| Customer A | $ | 350 | | | 10 | | | $ | 347 | | | 10 | | | $ | 301 | | | 10 | |
| Customer B | 444 | | | 12 | | | 480 | | | 13 | | | 346 | | | 11 | |
| Others | 2,809 | | | 78 | | | 2,806 | | | 77 | | | 2,387 | | | 79 | |
| | $ | 3,603 | | | 100 | | | $ | 3,633 | | | 100 | | | $ | 3,034 | | | 100 | |
Long-lived assets concentration—Long-lived assets by region are as follows:
| | | | | | | | | | | | | | | | | |
| Long-lived Assets (1) December 31 |
| 2022 | | 2021 | | 2020 |
| (Dollars in millions) |
| United States | $ | 16 | | | $ | 19 | | | $ | 21 | |
| Europe | 276 | | | 291 | | | 315 | |
| Asia | 158 | | | 162 | | | 151 | |
| Other International | 20 | | | 14 | | | 18 | |
| $ | 470 | | | $ | 486 | | | $ | 505 | |
_________________________(1)Long-lived assets are comprised of property, plant and equipment–net.
Supplier concentration—The Company’s largest supplier accounted for 7%, 6% and 8% of direct materials purchases for the years ended December 31, 2022, 2021 and 2020, respectively.
Note 28. Unaudited Quarterly Financial Information
The following tables show selected unaudited quarterly results of operations for the years ended December 31, 2022 and 2021. The quarterly data have been prepared on the same basis as the audited annual financial statements and include
all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our results of operations for these periods.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| March 31 | | June 30 | | September 30 | | December 31 | | Year Ended December 31 |
| (Dollars in millions) |
| Net Sales | $ | 901 | | | $ | 859 | | | $ | 945 | | | $ | 898 | | | $ | 3,603 | |
| Gross Profit | 175 | | | 169 | | | 178 | | | 161 | | | 683 | |
| Net Income | 88 | | | 85 | | | 105 | | | 112 | | | 390 | |
| Net Income available for distribution | 50 | | | 46 | | | 65 | | | 72 | | | 233 | |
| Earnings per share - basic | 0.15 | | | 0.15 | | | 0.21 | | | 0.23 | | | 0.75 | |
| Earnings per share - diluted | 0.15 | | | 0.15 | | | 0.21 | | | 0.23 | | | 0.75 | |
| Earnings per share - diluted method | Two-class | | Two-class | | Two-class | | Two-class | | Two-class |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| March 31 | | June 30 | | September 30 | | December 31 | | Year Ended December 31 |
| (Dollars in millions) |
| Net Sales | $ | 997 | | | $ | 935 | | | $ | 839 | | | $ | 862 | | | $ | 3,633 | |
| Gross Profit | 196 | | | 193 | | | 163 | | | 155 | | | 707 | |
| Net Income (Loss) | (105) | | | 409 | | | 63 | | | 128 | | | 495 | |
| Net Income (Loss) available to common shareholders | (105) | | | 385 | | | 27 | | | 91 | | | 398 | |
| Earnings (loss) per share - basic | (1.38) | | | 1.63 | | | 0.09 | | | 0.29 | | | 1.69 | |
| Earnings (loss) per share - diluted | (1.38) | | | 1.29 | | | 0.09 | | | 0.29 | | | 1.56 | |
| Earnings (loss) per share - diluted method | | | If-converted | | Two-class | | Two-class | | If-converted |