ITEM 2.02 Results of Operations and Financial Condition
Honeywell International Inc. ("Honeywell") is setting forth in Item 8.01 below
certain information with respect to the reduction in the aggregate carrying
value of certain receivables and a corresponding $350 million pre-tax and
after-tax, non-cash charge Honeywell has recorded as part of its third quarter
2020 statement of operations. Such information in Item 8.01 below is
incorporated by reference herein in this Item 2.02.
ITEM 8.01 Other Events.
On September 20, 2020, Garrett Motion Inc. ("Garrett") and certain of its
affiliates filed voluntary petitions for relief under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court").
Following Garrett's bankruptcy filing, as more fully described below, Honeywell
lowered the aggregate carrying value of the receivables owed to us under the
indemnification and reimbursement agreement and tax matters agreement with
Garrett and/or certain of its subsidiaries by $350 million, which has a
corresponding $350 million pre-tax and after-tax, non-cash charge to our third
quarter 2020 statement of operations. This adjustment does not impact
Honeywell's reported segment profit or cash flows from operations. Prior to this
adjustment, the carrying value of Honeywell's receivables from Garrett and/or
certain of its subsidiaries were collectively approximately $1.4 billion.
Following this adjustment, the carrying value of Honeywell's receivables from
Garrett and/or certain of its subsidiaries are collectively approximately $1.0
billion as of September 30, 2020, or less than 1% of our market capitalization.
As more fully described below, there can be no assurance that recording an
additional adjustment against those receivables (together with a related
statement of operations charge) will not be necessary in a future period or
periods.
Garrett is still in the early stages of its bankruptcy process, and the related
impacts on our financial statements remain subject to the various relief
ultimately granted to Garrett and its affiliates by the Bankruptcy Court and the
plan of reorganization ultimately confirmed in their bankruptcy proceedings,
among other things.
Two competing proposals have been publicly disclosed to date (the "Competing
Proposals"):
1.Garrett entered into a Share and Asset Purchase Agreement, dated as of
September 20, 2020 (the "Proposed Stalking Horse Bid"), with KPS Capital
Partners, LP ("KPS"). As most recently amended, the Proposed Stalking Horse Bid
contemplates a proposed purchase of Garrett's business for $2.6 billion and a
Chapter 11 plan that implements the sale of Garrett's business, pays Garrett's
secured creditors from the cash from the sale, and includes as part of the sale
certain claims and causes of action against Honeywell and others arising out of
the spin-off, with details related to this aspect of its proposed sale structure
to be forthcoming.
2.Honeywell signed a coordination agreement with Oaktree Capital Management,
L.P. ("Oaktree") and Centerbridge Partners, L.P. ("Centerbridge"), which has
since been signed by equity holders representing approximately 50% of Garrett's
outstanding common stock (the "Alternative Proposal"). The coordination
agreement supports a proposed plan of reorganization under which Honeywell would
receive cash payments totaling $1.45 billion comprising an initial payment of
$275 million and $1.175 billion paid over a twelve-year period ending December
31, 2034. These cash payments would be paid in full and final satisfaction of
Garrett's obligations under the indemnification and reimbursement agreement and
tax matters agreement.
Both the Proposed Stalking Horse Bid and the Alternative Proposal remain subject
to various conditions and milestones, as well as Bankruptcy Court approval. It
is also possible that there will be additional bids and alternative proposed
plans of reorganization for Garrett. There can be no assurance that either the
Proposed Stalking Horse Bid (including the plan of reorganization plan
contemplated thereby) or the Alternative Proposal will be accepted by the
requisite parties and approved and confirmed by the Bankruptcy Court.
Amounts Due From Garrett
As of September 30, 2020, Honeywell's receivables prior to the adjustments
described herein from Garrett and/or certain of its subsidiaries were
collectively approximately $1.4 billion and comprised:
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As of September 30, 2020 (in
millions, prior to adjustments
described herein)
Indemnification and Reimbursement Agreement $ 1,121
Tax Matters Agreement 273
Other Receivables, net 13
Total $ 1,407
Indemnification and Reimbursement Agreement
In October 2018, Honeywell completed a transaction to spin-off its
Transportation Systems business into a standalone publicly-traded company,
Garrett. The Transportation Systems business was subject to asbestos-related
personal injury claims related to its legacy Bendix Friction Materials business,
which was sold in 2014. The obligations for these Bendix asbestos-related
personal injury claims remained with Honeywell after the Garrett spin-off
transaction. In connection with the spin-off of Garrett, Honeywell entered into
a binding indemnification and reimbursement agreement with a Garrett subsidiary,
pursuant to which Garrett's subsidiary has an ongoing obligation to make cash
payments to Honeywell in amounts equal to (i) 90% of Honeywell's
asbestos-related liability payments primarily related to the Bendix business in
the United States, as well as certain environmental-related liability payments
and accounts payable and non-United States asbestos-related liability payments,
including the legal costs of defending and resolving such liabilities, less (ii)
90% of Honeywell's net insurance receipts and, as may be applicable, certain
other recoveries associated with such liabilities. The amount payable to
Honeywell in respect of such liabilities arising in any given year is subject to
a cap of approximately Euro 150 million (equivalent to $175 million at the time
the indemnification and reimbursement agreement was entered into). The
obligation will continue until the earlier of December 31, 2048, or December 31
of the third consecutive year during which the annual obligation is less than
the Euro equivalent, at the fixed exchange rate at the time the indemnification
and reimbursement agreement was entered into, of $25 million. The total amount
received under the indemnification and reimbursement agreement in 2019
represented approximately 2% of Honeywell's 2019 cash flows from operations.
Prior to Garrett's bankruptcy filing, on June 12, 2020, Honeywell and Garrett
entered into an amendment of the indemnification and reimbursement agreement in
connection with Garrett's amendment of its 2018 credit agreement (the "Credit
Agreement and IRA Amendments"). These amendments provided Garrett with temporary
financial covenant relief with respect to the total leverage and interest
coverage ratios, for a period that could extend to as late as June 30, 2022.
Garrett's payments to Honeywell under the indemnification and reimbursement
agreement are deferred to the extent Garrett is (or to the extent such payments
would cause Garrett to be) out of compliance with the original financial
covenants and resume to the extent Garrett is in compliance with such original
financial covenants. Any deferred amounts were to be paid to the extent Garrett
was in compliance with such original financial covenants and had available
capacity to make such payments pursuant to the terms of the indemnification and
reimbursement agreement and its current credit agreement.
Tax Matters Agreement
The tax matters agreement entered into in connection with the spin-off generally
provides that Garrett is responsible and must indemnify Honeywell for all
ordinary operating taxes, including income taxes, sales taxes, VAT and payroll
taxes, relating to Garrett for all periods, including periods prior to the
spin-off, to the extent not paid prior to the spin-off date. In addition, among
other items, as a result of the mandatory transition tax imposed by the Tax Cuts
and Jobs Act, Garrett is required to make payments to Honeywell in the amount
representing the net tax liability of Honeywell under the mandatory transition
tax attributable to Garrett.
Other Receivables, net
Other receivables, net includes receivables related to goods, services and
leases provided by Honeywell to Garrett, including sub-leases and services
rendered pursuant to the transition services agreement entered into in
conjunction with the spin-off.
Garrett Bankruptcy Proceedings
Based on its bankruptcy filings, Garrett is proposing to sell its business while
in bankruptcy. Garrett entered into the Proposed Stalking Horse Bid with KPS and
filed proposed bidding procedures for an auction and other procedures related to
the proposed sale. As most recently amended, the Proposed Stalking Horse Bid
contemplates a proposed purchase of Garrett's business for $2.6 billion. Garrett
also entered into a restructuring support agreement ("RSA")
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with holders of approximately 61% of its outstanding senior secured debt which
contemplates that Garrett will file and seek approval of a restructuring plan
that implements the sale of Garrett's business, pays Garrett's secured creditors
from the cash from the sale, and includes as part of the sale certain claims and
causes of action against Honeywell and others arising out of the spin-off, with
details related to this aspect of its proposed sale structure to be forthcoming.
The Proposed Stalking Horse Bid and restructuring plan remain subject to
Bankruptcy Court approval. KPS' purchase of Garrett remains subject to competing
bids and Bankruptcy Court approval, as well as customary regulatory approvals
and other customary conditions. Garrett's operations are expected to proceed,
without interruption, during the bankruptcy proceedings.
We understand based on Garrett's public disclosures that the business
fundamentals of Garrett remain strong and, in the quarter ended June 30, 2020,
Garrett continued to generate positive earnings before interest, taxes,
depreciation, and amortization. We believe such disclosures by Garrett
management demonstrate Garrett's ability to meet its financial obligations
despite temporary adverse business conditions resulting from COVID-19,
particularly in light of the financial covenant relief provided by the Credit
Agreement and IRA Amendments.
In October 2020, we signed a coordination agreement with Oaktree and
Centerbridge, which since has also been signed by equity holders representing
approximately 50% of Garrett's outstanding common stock. The coordination
agreement supports a proposed plan of reorganization (the "Plan") that would
allow Honeywell to recover over time a significant portion of the receivable
amounts owed to us. As currently contemplated, the Alternative Proposal provides
that, if the Plan is approved, Honeywell would receive an initial payment of
$275 million in cash and new series B preferred stock of reorganized Garrett. In
total, the Alternative Plan would provide for cash payments totaling $1.45
billion comprising the initial cash payment of $275 million and $1.175 billion
paid over a twelve-year period ending December 31, 2034 (unless a discounted
amount is paid earlier pursuant to certain put, call or acceleration
provisions). These cash payments would be paid in full and final satisfaction of
Garrett's obligations to Honeywell under the indemnification and reimbursement
agreement and tax matters agreement. Under the Alternative Proposal, both
agreements would be terminated in connection with Bankruptcy Court confirmation
of the Alternative Proposal. The Alternative Proposal remains subject to various
conditions and milestones, as well as Bankruptcy Court approval, and Garrett has
not accepted the Alternative Proposal to date. There can be no assurance that a
plan of reorganization incorporating the terms contemplated by the Alternative
Proposal will be approved and confirmed by the Bankruptcy Court.
Garrett is early in the bankruptcy proceedings and the ultimate outcome of such
proceedings is uncertain. We regularly review the aggregate carrying value of
the receivable amounts due in connection with the indemnification and
reimbursement agreement and the tax matters agreement. Following Garrett's
bankruptcy filing, our review has taken into account, among other things, the
potential enterprise value of the Garrett business based on publicly available
information, Garrett's implied enterprise value under the Alternative Proposal
(which supports our independent assessment), the possibility that there will be
additional bids and/or other plan proposals that we believe should reflect the
enterprise value of Garrett's business, and the significant uncertainties
associated with the potential outcomes of the Garrett bankruptcy proceedings.
Based on such review, we currently believe that we will be able to recover a
significant portion, but potentially not all, of the receivable amounts owed to
us under the agreements with Garrett. As such, and based on the assumption that
the Bankruptcy Court will approve a plan that reflects an enterprise value for
Garrett that meets or exceeds our best estimate, we have recorded an adjustment
of $350 million to lower the aggregate carrying balance of the receivable
amounts due in connection with the indemnification and reimbursement agreement
and the tax matters agreement. We are also recording a corresponding pre-tax and
after-tax, non-cash charge to our statement of operations in the third quarter
of 2020 in the amount of $350 million. This amount represents the difference
between the approximately $1.4 billion carrying value of the undiscounted
receivables owed to us by Garrett under these agreements and the present value
of amounts owed to us over the full term of these existing agreements.
The ultimate outcome of the bankruptcy process is uncertain. Depending on the
transaction and/or plan of reorganization ultimately approved and confirmed by
the Bankruptcy Court, the amount collected could be more or less than such
reduced amount of the remaining receivable amounts recorded in our financial
. . .
ITEM 9.01 Financial Statements and Exhibits.
(d) Exhibits.
Exhibit 104 Cover Page Interactive Data File - the cover page XBRL tags are embedded
within the Inline XBRL document.
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