Adient plc - Quarter Report: 2019 December (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM | 10-Q |
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-37757
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Adient plc | ||||||||||||||
(exact name of Registrant as specified in its charter) |
Ireland | 98-1328821 | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
25-28 North Wall Quay, IFSC, Dublin 1, Ireland D01 H104 | ||||||||
(Address of principal executive offices) | ||||||||
734-254-5000 | ||||||||
(Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: | ||||||||
Title of each class | Trading symbol | Name of exchange on which registered | ||||||
Ordinary Shares, par value $0.001 | ADNT | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☑ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
At December 31, 2019, 93,793,433 ordinary shares were outstanding.
Adient plc
Form 10-Q
For the Three Months Ended December 31, 2019
TABLE OF CONTENTS
Adient plc | Form 10-Q | 2
PART I - FINANCIAL INFORMATION |
Item 1. | Unaudited Financial Statements |
Adient plc
Consolidated Statements of Income (Loss)
(unaudited)
Three Months Ended December 31, | ||||||||||||||
(in millions, except per share data) | 2019 | 2018 | ||||||||||||
Net sales | $ | 3,936 | $ | 4,158 | ||||||||||
Cost of sales | 3,673 | 3,978 | ||||||||||||
Gross profit | 263 | 180 | ||||||||||||
Selling, general and administrative expenses | 165 | 178 | ||||||||||||
Loss on business divestitures - net | 25 | — | ||||||||||||
Restructuring and impairment costs | 2 | 31 | ||||||||||||
Equity income (loss) | (113) | 83 | ||||||||||||
Earnings (loss) before interest and income taxes | (42) | 54 | ||||||||||||
Net financing charges | 48 | 35 | ||||||||||||
Other pension expense (income) | (2) | (2) | ||||||||||||
Income (loss) before income taxes | (88) | 21 | ||||||||||||
Income tax provision (benefit) | 54 | 10 | ||||||||||||
Net income (loss) | (142) | 11 | ||||||||||||
Income (loss) attributable to noncontrolling interests | 25 | 28 | ||||||||||||
Net income (loss) attributable to Adient | $ | (167) | $ | (17) | ||||||||||
Earnings per share: | ||||||||||||||
Basic | $ | (1.78) | $ | (0.18) | ||||||||||
Diluted | $ | (1.78) | $ | (0.18) | ||||||||||
Shares used in computing earnings per share: | ||||||||||||||
Basic | 93.7 | 93.5 | ||||||||||||
Diluted | 93.7 | 93.5 |
The accompanying notes are an integral part of the consolidated financial statements.
Adient plc | Form 10-Q | 3
Adient plc
Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Net income (loss) | $ | (142) | $ | 11 | ||||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||
Foreign currency translation adjustments | 59 | 16 | ||||||||||||
Realized and unrealized gains (losses) on derivatives | 15 | (3) | ||||||||||||
Other comprehensive income (loss) | 74 | 13 | ||||||||||||
Total comprehensive income (loss) | (68) | 24 | ||||||||||||
Comprehensive income (loss) attributable to noncontrolling interests | 34 | 28 | ||||||||||||
Comprehensive income (loss) attributable to Adient | $ | (102) | $ | (4) |
The accompanying notes are an integral part of the consolidated financial statements.
Adient plc | Form 10-Q | 4
Adient plc
Consolidated Statements of Financial Position
(unaudited)
(in millions, except share and per share data) | December 31, 2019 | September 30, 2019 | ||||||||||||
Assets | ||||||||||||||
Cash and cash equivalents | $ | 965 | $ | 924 | ||||||||||
Accounts receivable - net | 1,522 | 1,905 | ||||||||||||
Inventories | 772 | 793 | ||||||||||||
Other current assets | 540 | 494 | ||||||||||||
Current assets | 3,799 | 4,116 | ||||||||||||
Property, plant and equipment - net | 1,690 | 1,671 | ||||||||||||
Goodwill | 2,157 | 2,150 | ||||||||||||
Other intangible assets - net | 395 | 405 | ||||||||||||
Investments in partially-owned affiliates | 1,321 | 1,399 | ||||||||||||
Other noncurrent assets | 1,002 | 601 | ||||||||||||
Total assets | $ | 10,364 | $ | 10,342 | ||||||||||
Liabilities and Shareholders' Equity | ||||||||||||||
Short-term debt | $ | 6 | $ | 22 | ||||||||||
Current portion of long-term debt | 8 | 8 | ||||||||||||
Accounts payable | 2,511 | 2,709 | ||||||||||||
Accrued compensation and benefits | 305 | 364 | ||||||||||||
Restructuring reserve | 109 | 123 | ||||||||||||
Other current liabilities | 744 | 609 | ||||||||||||
Current liabilities | 3,683 | 3,835 | ||||||||||||
Long-term debt | 3,740 | 3,708 | ||||||||||||
Pension and postretirement benefits | 146 | 151 | ||||||||||||
Other noncurrent liabilities | 673 | 408 | ||||||||||||
Long-term liabilities | 4,559 | 4,267 | ||||||||||||
Commitments and Contingencies (Note 17) | ||||||||||||||
Redeemable noncontrolling interests | 38 | 51 | ||||||||||||
Preferred shares issued, par value $0.001; 100,000,000 shares authorized, Zero shares issued and outstanding at December 31, 2019 | — | — | ||||||||||||
Ordinary shares issued, par value $0.001; 500,000,000 shares authorized, 93,793,433 shares issued and outstanding at December 31, 2019 | — | — | ||||||||||||
Additional paid-in capital | 3,963 | 3,962 | ||||||||||||
Accumulated deficit | (1,716) | (1,545) | ||||||||||||
Accumulated other comprehensive income (loss) | (504) | (569) | ||||||||||||
Shareholders' equity attributable to Adient | 1,743 | 1,848 | ||||||||||||
Noncontrolling interests | 341 | 341 | ||||||||||||
Total shareholders' equity | 2,084 | 2,189 | ||||||||||||
Total liabilities and shareholders' equity | $ | 10,364 | $ | 10,342 |
The accompanying notes are an integral part of the consolidated financial statements.
Adient plc | Form 10-Q | 5
Adient plc
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Operating Activities | ||||||||||||||
Net income (loss) attributable to Adient | $ | (167) | $ | (17) | ||||||||||
Income attributable to noncontrolling interests | 25 | 28 | ||||||||||||
Net income (loss) | (142) | 11 | ||||||||||||
Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: | ||||||||||||||
Depreciation | 75 | 65 | ||||||||||||
Amortization of intangibles | 9 | 10 | ||||||||||||
Pension and postretirement benefit expense (benefit) | — | 1 | ||||||||||||
Pension and postretirement contributions, net | (4) | (6) | ||||||||||||
Equity in earnings of partially-owned affiliates, net of dividends received (includes purchase accounting amortization of $1, and $0, respectively) | (102) | (82) | ||||||||||||
Impairment of nonconsolidated partially-owned affiliate | 216 | — | ||||||||||||
Deferred income taxes | (5) | (2) | ||||||||||||
Loss (gain) on divestitures - net | 25 | — | ||||||||||||
Equity-based compensation | 4 | 6 | ||||||||||||
Other | 3 | 7 | ||||||||||||
Changes in assets and liabilities: | ||||||||||||||
Receivables | 395 | 320 | ||||||||||||
Inventories | 23 | (19) | ||||||||||||
Other assets | (2) | 35 | ||||||||||||
Restructuring reserves | (18) | (14) | ||||||||||||
Accounts payable and accrued liabilities | (267) | (451) | ||||||||||||
Accrued income taxes | 29 | (9) | ||||||||||||
Cash provided (used) by operating activities | 239 | (128) | ||||||||||||
Investing Activities | ||||||||||||||
Capital expenditures | (91) | (144) | ||||||||||||
Sale of property, plant and equipment | — | 37 | ||||||||||||
Changes in long-term investments | (37) | — | ||||||||||||
Loans to affiliates | — | (11) | ||||||||||||
Cash provided (used) by investing activities | (128) | (118) | ||||||||||||
Financing Activities | ||||||||||||||
Increase (decrease) in short-term debt | (17) | 2 | ||||||||||||
Repayment of long-term debt | (2) | — | ||||||||||||
Debt financing costs | — | (4) | ||||||||||||
Cash dividends | — | (26) | ||||||||||||
Dividends paid to noncontrolling interests | (54) | (36) | ||||||||||||
Formation of consolidated joint venture | — | 28 | ||||||||||||
Other | (1) | (2) | ||||||||||||
Cash provided (used) by financing activities | (74) | (38) | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 4 | 3 | ||||||||||||
Increase (decrease) in cash and cash equivalents | 41 | (281) | ||||||||||||
Cash and cash equivalents at beginning of period | 924 | 687 | ||||||||||||
Cash and cash equivalents at end of period | $ | 965 | $ | 406 |
The accompanying notes are an integral part of the consolidated financial statements.
Adient plc | Form 10-Q | 6
Adient plc
Notes to Consolidated Financial Statements
(unaudited)
1. Basis of Presentation and Summary of Significant Accounting Policies |
Adient is a global leader in the automotive seating supplier industry. Adient has a leading market position in the Americas, Europe and China, and has longstanding relationships with the largest global original equipment manufacturers, or OEMs, in the automotive space. Adient's proprietary technologies extend into virtually every area of automotive seating solutions, including complete seating systems, frames, mechanisms, foam, head restraints, armrests, trim covers and fabrics. Adient is an independent seat supplier with global scale and the capability to design, develop, engineer, manufacture, and deliver complete seat systems and components in every major automotive producing region in the world. Adient also participates in the automotive interiors market primarily through its global automotive interiors joint venture in China, Yanfeng Global Automotive Interior Systems Co., Ltd., or YFAI (refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for recent developments regarding Adient's YFAI investment).
Basis of Presentation
The unaudited consolidated financial statements of Adient have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet data as of September 30, 2019 was derived from audited financial statements, but does not include all disclosures required by GAAP. These interim consolidated financial statements include all adjustments (consisting of normal recurring adjustments, except as otherwise disclosed) that management believes are necessary for a fair statement of the results of operations, financial position and cash flows of Adient for the interim periods presented. Interim results are not necessarily indicative of full-year results.
Principles of Consolidations
Adient consolidates its wholly-owned subsidiaries and those entities in which it has a controlling interest. Investments in partially-owned affiliates are accounted for by the equity method when Adient's interest exceeds 20% and does not have a controlling interest.
Consolidated VIEs
Based upon the criteria set forth in the Financial Accounting Standards Board (the FASB) Accounting Standards Codification (ASC) 810, "Consolidation," Adient has determined that it was the primary beneficiary in two variable interest entities (VIEs) for the reporting periods ended December 31, 2019, and September 30, 2019, respectively, as Adient absorbs significant economics of the entities and has the power to direct the activities that are considered most significant to the entities.
The two VIEs manufacture seating products in North America for the automotive industry. Adient funds the entities' short-term liquidity needs through revolving credit facilities and has the power to direct the activities that are considered most significant to the entities through its key customer supply relationships.
Adient plc | Form 10-Q | 7
The carrying amounts and classification of assets (none of which are restricted) and liabilities included in Adient's consolidated statements of financial position for the consolidated VIEs are as follows:
December 31, | September 30, | |||||||||||||
(in millions) | 2019 | 2019 | ||||||||||||
Current assets | $ | 226 | $ | 236 | ||||||||||
Noncurrent assets | 61 | 40 | ||||||||||||
Total assets | $ | 287 | $ | 276 | ||||||||||
Current liabilities | $ | 215 | $ | 235 | ||||||||||
Noncurrent liabilities | 17 | — | ||||||||||||
Total liabilities | $ | 232 | $ | 235 |
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share:
Three Months Ended December 31, | ||||||||||||||
(in millions, except per share data) | 2019 | 2018 | ||||||||||||
Numerator: | ||||||||||||||
Net income (loss) attributable to Adient | $ | (167) | $ | (17) | ||||||||||
Denominator: | ||||||||||||||
Shares outstanding | 93.7 | 93.5 | ||||||||||||
Effect of dilutive securities | — | — | ||||||||||||
Diluted shares | 93.7 | 93.5 | ||||||||||||
Earnings per share: | ||||||||||||||
Basic | $ | (1.78) | $ | (0.18) | ||||||||||
Diluted | $ | (1.78) | $ | (0.18) |
Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per share, which is a result of both periods presented being in a loss position.
New Accounting Pronouncements
Standards Adopted During Fiscal 2020
On October 1, 2019, Adient adopted Accounting Standards Codification Topic 842, "Leases" ("ASC 842"). The guidance requires lessees to recognize a lease liability and a right-of-use (ROU) asset for all leases with the exception of short-term leases whose terms are twelve months or less. By applying the optional modified retrospective method, Adient recorded an adjustment as of the adoption date without any retrospective adjustments to comparative financial information. Additionally, Adient elected the package of practical expedients permitted under ASC 842, and accordingly, did not reassess whether existing contracts contain leases, lease classifications, or the treatment of initial direct costs capitalized under the previous standard ("ASC 840"). Adient did not apply the "hindsight" practical expedient upon adoption. Adient did elect to apply the practical expedient to not separate nonlease components from associated lease components. Refer to Note 7, "Leases," of the notes to consolidated financial statements for additional information.
ASU 2018-07, Compensation-Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, expands the scope of Topic 718 to include all share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which the grantor
Adient plc | Form 10-Q | 8
acquires goods and services to be used or consumed in its own operations by issuing share-based payment awards. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The adoption of this guidance on October 1, 2019 did not impact Adient's consolidated financial statements for the quarter ended December 31, 2019.
Standards Effective After Fiscal 2020
Adient has considered the ASUs summarized below, effective after fiscal 2020, none of which are expected to significantly impact the consolidated financial statements:
Standard Adopted | Description | Date Effective | ||||||||||||
ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments | ASU 2016-13 changes the impairment model for financial assets measured at amortized cost, requiring presentation at the net amount expected to be collected. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts. Available-for-sale debt securities with unrealized losses will now be recorded through an allowance for credit losses. | October 1, 2020 | ||||||||||||
2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement | ASU 2018-13 eliminates, adds, and modifies certain disclosure requirements for fair value measurements. The amendments with respect to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively. All other amendments are to be applied retrospectively to all periods presented. | October 1, 2020 | ||||||||||||
ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans | The amendments in ASU 2018-14 eliminate, add, and modify certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is to be applied on a retrospective basis to all periods presented. | October 1, 2020 | ||||||||||||
ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities | ASU 2018-17 affects reporting entities that are required to determine whether they should consolidate a legal entity under the guidance within the Variable Interest Entities Subsections of Subtopic 810-10, Consolidation-Overall. | October 1, 2020 | ||||||||||||
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes | ASU 2019-12 modifies ASC 740, Income Taxes, by simplifying accounting for income taxes. As part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements, the FASB’s amendments may impact both interim and annual reporting periods. ASU 2019-12 is effective at the beginning of fiscal 2022 for Adient although early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. | October 1, 2021 |
2. Revenue Recognition |
Adient adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606), and all the related amendments using the modified retrospective method as applied to all customer contracts that were not completed as of October 1, 2018. As a result, financial information for reporting periods beginning on or after October 1, 2018 are presented in accordance with ASC 606. Adient did not record a cumulative adjustment related to the adoption of ASC 606 as the effects of adoption were not significant. The majority of Adient's nonconsolidated partially-owned affiliates adopted ASC 606 on October 1, 2019 which did not result in a significant impact.
Adient generates revenue through the sale of automotive seating solutions, including complete seating systems and the components of complete seating systems.
Adient plc | Form 10-Q | 9
In a typical arrangement with the customer, purchase orders are issued for pre-production activities which consist of engineering, design and development, tooling and prototypes for the manufacture and delivery of component parts. Adient has concluded that these activities are not in the scope of ASC 606 and for that reason, there have been no changes to how Adient accounts for reimbursable pre-production costs.
Adient provides production and service parts to its customers under awarded multi-year programs. The duration of a program is generally consistent with the life cycle of a vehicle, however, the program can be canceled at any time without cause by the customer. Programs awarded to Adient to supply parts to its customers do not contain a firm commitment by the customer for volume or price and do not reach the level of a performance obligation until Adient receives either a purchase order and/or a materials release from the customer for a specific number of parts at a specified price, at which point an enforceable contract exists. Sales revenue is generally recognized at the point in time when parts are shipped and control has transferred to the customer, at which point an enforceable right to payment exists. Contracts may provide for annual price reductions over the production life of the awarded program, and prices are adjusted on an ongoing basis to reflect changes in product content/cost and other commercial factors. The amount of revenue recognized reflects the consideration that Adient expects to be entitled to in exchange for such products based on purchase orders, annual price reductions and ongoing price adjustments (some of which are accounted for as variable consideration and subject to being constrained, but which are not expected to significantly change under ASC 606), net of the impact, if any, of consideration paid to the customer.
Adient has elected to continue to include shipping and handling fees billed to customers in revenue, while including costs of shipping and handling in cost of sales. Taxes collected from customers are excluded from revenue and credited directly to obligations to the appropriate government agencies. Payment terms with customers are established based on customary industry and regional practices. Adient has evaluated the terms of its arrangements and determined that they do not contain significant financing components.
Contract assets primarily relate to the right to consideration for work completed, but not billed at the reporting date on contracts with customers. The contracts assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been satisfied and revenue has not been recognized. No significant contract assets or liabilities were identified upon adoption of ASC 606 or at December 31, 2019. As described above, the issuance of a purchase order and/or a materials release by the customer represents the point at which an enforceable contract with the customer exists. Therefore, Adient has elected to apply the practical expedient in ASC 606, paragraph 606-10-50-14 and does not disclose information about the remaining performance obligations that have an original expected duration of one year or less. Refer to Note 15, "Segment Information," of the notes to consolidated financial statements for disaggregated revenue by geographical market.
3. Acquisitions and Divestitures |
Divestitures
Adient Aerospace, LLC ("Adient Aerospace") became operational on October 11, 2018 with Adient's initial ownership position in Adient Aerospace being 50.01%. Initial contributions of $28 million were made during the first quarter of fiscal 2019 by each partner. On October 25, 2019, Adient reached an agreement with Boeing in which Adient's ownership position was reduced to 19.99%, resulting in the deconsolidation of Adient Aerospace on that date, including $37 million of cash. Adient recorded a $4 million loss as a result of the transaction in the Americas segment, including $21 million of allocated goodwill. Adient Aerospace develops, manufactures, and sells a portfolio of seating products to airlines and aircraft leasing companies for installation on Boeing and other OEM commercial airplanes, for both production line-fit and retrofit configurations.
On December 31, 2019, Adient sold the RECARO automotive high performance seating systems business to a group of investors for de minimis proceeds. As a result of the sale, Adient recorded a loss of $21 million during the quarter ending December 31, 2019. For the three months ended December 31, 2019 and 2018, the RECARO business recorded $34 million (Americas: $10 million, EMEA: $11 million, Asia: $13 million) and $32 million (Americas: $11 million, EMEA: $10 million, Asia: $11 million) of net sales and immaterial amounts of net income, respectively.
On January 31, 2020, Adient, Yanfeng Automotive Trim Systems Company Ltd. (“Yanfeng”), Adient Yanfeng Seating Mechanisms Co., Ltd. (“AYM”), a joint venture owned, directly or indirectly, by Yanfeng (50%) and Adient (50%), Yanfeng Adient Seating Co., Ltd. (“YFAS”), a joint venture owned, directly or indirectly, by Yanfeng (50.1%) and Adient (49.9%) and YFAI, a joint venture owned, directly or indirectly, by Yanfeng (70%) and Adient (30%), entered into a Master Agreement (the “Agreement”), pursuant to which the parties have agreed, among other things, that:
Adient plc | Form 10-Q | 10
•Adient will transfer all of the issued and outstanding equity interest in YFAI held, directly or indirectly, by Adient, which represents 30% of YFAI’s total issued and outstanding equity interest, to Yanfeng for $379 million;
•Adient and Yanfeng will amend the YFAS Joint Venture Contract, dated as of October 22, 1997, as amended, and the Articles of Association of YFAS, dated as of October 22, 1997, as amended, in each case in order to extend the term of the YFAS joint venture until December 31, 2038;
•Adient will transfer all patents, trademarks and copyrights, know-how, trade secrets and other intellectual property rights owned by Adient (or certain of its subsidiaries) and used exclusively in the conduct of Adient’s mechanism business as of the date of such transfer (the “Transferred IP”) to AYM for $20 million, and in connection with such transfer, (i) AYM will grant back to Adient a sole license with respect to the Transferred IP on a worldwide and royalty-free basis, (ii) Adient will grant AYM a worldwide and royalty-free license with respect to certain intellectual property rights owned by Adient (or certain of its subsidiaries) and used on a non-exclusive basis in the conduct of Adient’s mechanism business, and (iii) Adient and AYM will license to each other certain improvements to the Transferred IP, as well as certain other intellectual property rights developed or acquired by Adient, AYM or certain of their respective subsidiaries and relating to the mechanism business; and
•Adient and Yanfeng will amend the AYM Equity Joint Venture Contract, dated as of September 9, 2013, as amended, and the Articles of Association of AYM, dated as of September 9, 2013, as amended to, among other things, (i) make certain governance changes such that Yanfeng may control and consolidate the results of AYM for financial reporting and accounting purposes, and (ii) expand AYM’s business and customer scope such that it may carry out its seating mechanism business anywhere in and outside of the People’s Republic of China, in each case, on the terms and subject to the conditions set forth in the Agreement and the relevant definitive agreements to be entered into in connection therewith.
The transactions described above are cross-conditioned on each other and closing is subject to regulatory approvals, including the State Administration for Market Regulation in the People’s Republic of China, and other customary closing conditions. The transactions are expected to be completed by the end of fiscal 2020. Proceeds from the transactions are expected to be used by Adient to pay down a portion of the company’s debt and for general corporate purposes. The terms of the Master Agreement as described above are consistent with non-binding terms reached in December 2019.
As a result of the transactions described above, Adient concluded that indicators of other-than-temporary impairment were present related to the investment in YFAI as of December 31, 2019. Upon entering into a formal agreement to sell the YFAI investment, Adient determined that other-than-temporary impairment did exist and recorded a $216 million non-cash impairment of Adient's YFAI investment during the quarter ended December 31, 2019. The impairment was determined based on combining the fair value of consideration received for all transactions contemplated within the Master Agreement, including an estimated fair value of the YFAS joint venture extension, and allocating the total consideration received to the individual transactions based on relative fair values. Adient estimated the fair value of the individual transactions using both an income approach and market approach. The inputs utilized in the fair value analyses of the transactions are classified as level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement" and primarily consisted of expected future operating margins and cash flows of YFAI, estimated production volumes, estimated dividend payments from YFAS over the extension period, estimated terminal values of YFAS, market comparables, weighted-average costs of capital (YFAI - 15.0%, YFAS - 10.5%), and noncontrolling interest discounts. As a result of the pending divestiture of the YFAI investment and the corresponding impairment, Adient will cease recognizing equity income from YFAI subsequent to December 31, 2019. In addition, upon the closing of the transaction, an intangible asset of $92 million will be recorded associated with the YFAS joint venture extension to be amortized over the 18-year term of the extension.
4. Inventories |
Inventories consisted of the following:
(in millions) | December 31, 2019 | September 30, 2019 | ||||||||||||
Raw materials and supplies | $ | 586 | $ | 609 | ||||||||||
Work-in-process | 29 | 32 | ||||||||||||
Finished goods | 157 | 152 | ||||||||||||
Inventories | $ | 772 | $ | 793 |
Adient plc | Form 10-Q | 11
5. Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill are as follows:
(in millions) | Americas | EMEA | Asia | Total | ||||||||||||||||||||||
Balance at September 30, 2019 | $ | 638 | $ | 429 | $ | 1,083 | $ | 2,150 | ||||||||||||||||||
Business divestitures | (21) | — | — | (21) | ||||||||||||||||||||||
Currency translation and other | 1 | 13 | 14 | 28 | ||||||||||||||||||||||
Balance at December 31, 2019 | $ | 618 | $ | 442 | $ | 1,097 | $ | 2,157 |
Refer to Note 15, "Segment Information," of the notes to consolidated financial statements for more information on Adient's reportable segments.
Adient's other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of:
December 31, 2019 | September 30, 2019 | |||||||||||||||||||||||||||||||||||||
(in millions) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||
Intangible assets | ||||||||||||||||||||||||||||||||||||||
Patented technology | $ | 28 | $ | (18) | $ | 10 | $ | 27 | $ | (17) | $ | 10 | ||||||||||||||||||||||||||
Customer relationships | 495 | (133) | 362 | 494 | (129) | 365 | ||||||||||||||||||||||||||||||||
Trademarks | 46 | (31) | 15 | 51 | (32) | 19 | ||||||||||||||||||||||||||||||||
Miscellaneous | 18 | (10) | 8 | 21 | (10) | 11 | ||||||||||||||||||||||||||||||||
Total intangible assets | $ | 587 | $ | (192) | $ | 395 | $ | 593 | $ | (188) | $ | 405 |
Amortization of other intangible assets for the three months ended December 31, 2019 and 2018 was $9 million and $10 million, respectively.
6. Product Warranties |
Adient offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program requires that Adient replace defective products within a specified time period from the date of sale. Adient records an estimate for future warranty-related costs based on actual historical return rates and other known factors. Based on analysis of return rates and other factors, Adient's warranty provisions are adjusted as necessary. Adient monitors its warranty activity and adjusts its reserve estimates when it is probable that future warranty costs will be different than those estimates. Adient's product warranty liability is recorded in the consolidated statements of financial position in other current liabilities.
The changes in Adient's total product warranty liability are as follows:
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Balance at beginning of period | $ | 22 | $ | 11 | ||||||||||
Accruals for warranties issued during the period | 4 | 3 | ||||||||||||
Changes in accruals related to pre-existing warranties (including changes in estimates) | (1) | 3 | ||||||||||||
Settlements made (in cash or in kind) during the period | (2) | (2) | ||||||||||||
Balance at end of period | $ | 23 | $ | 15 |
Adient plc | Form 10-Q | 12
7. Leases |
Adient adopted Accounting Standards Codification Topic 842, Leases (ASC 842), and all the related amendments using the modified retrospective method, without adjusting the comparative financial information, on October 1, 2019. As a result, financial information for reporting periods beginning on or after October 1, 2019 are presented in accordance with ASC 842. Upon adoption, Adient recognized right-of-use (ROU) assets of $380 million and corresponding lease liabilities of $384 million on October 1, 2019. The adoption date ROU asset balance was adjusted by $4 million, reflecting impairment of ROU assets for certain real estate leases (within the North America and Europe asset groups) of which the Company determined the carrying value of the initial operating lease ROU asset exceeded its fair value. The adjustment was recorded as an increase to the opening accumulated deficits. The adoption of ASC 842 had negligible impact on the consolidated statement of income (loss) for the quarter ended December 31, 2019.
Adient's lease portfolio consists of operating leases for real estate including production facilities, warehouses and administrative offices, equipment such as forklifts and computer servers and laptops, and fleet vehicles. The Company has elected not to record leases with an initial term of 12 months or less on its consolidated statement of financial position.
A lease liability and corresponding right-of-use asset are recognized based on the present value of lease payments. To determine the present value of lease payments, the Company uses its incremental borrowing rate as of lease commencement. The incremental borrowing rate (IBR) is defined as the rate Adient would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Adient primarily derives its IBR from its debt portfolio, adjusted for collateralization, lease term and jurisdictional factors. Adient's finance leases are not significant and are not included in the following disclosures.
The components of lease costs for the first quarter of fiscal 2020 were as follows:
(in millions) | Three Months Ended December 31, 2019 | |||||||
Operating lease cost | $ | 33 | ||||||
Short-term lease cost | 5 | |||||||
Total lease cost | $ | 38 |
Operating lease right-of-use assets and lease liabilities included in the consolidated statement of financial position were as follows:
(in millions) | December 31, 2019 | |||||||||||||
Operating lease right-of-use assets | Other noncurrent assets | $ | 374 | |||||||||||
Operating lease liabilities - current | Other current liabilities | $ | 112 | |||||||||||
Operating lease liabilities - noncurrent | Other noncurrent liabilities | 264 | ||||||||||||
$ | 376 |
Maturities of operating lease liabilities and minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year as of December 31, 2019 were as follows:
Adient plc | Form 10-Q | 13
Fiscal years (in millions) | December 31, 2019 | |||||||
2020 (excluding the three months ended December 31, 2019) | $ | 93 | ||||||
2021 | 94 | |||||||
2022 | 65 | |||||||
2023 | 51 | |||||||
2024 | 40 | |||||||
Thereafter | 93 | |||||||
Total lease payments | 436 | |||||||
Less: imputed interest | (60) | |||||||
Present value of lease liabilities | $ | 376 |
Future minimum operating lease payments accounted for under ASC 840 at September 30, 2019 were as follows:
Fiscal years (in millions) | Operating leases | |||||||
2020 | $ | 119 | ||||||
2021 | 91 | |||||||
2022 | 64 | |||||||
2023 | 51 | |||||||
2024 | 40 | |||||||
After 2024 | 94 | |||||||
Total minimum lease payments | $ | 459 |
Supplemental cash flow information related to leases was as follows:
(in millions) | Three Months Ended December 31, 2019 | |||||||
Right-of-use assets obtained in exchange for lease obligations: | ||||||||
Operating leases (non-cash activity) | $ | 12 | ||||||
Operating cash flows: | ||||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 32 | ||||||
The weighted average remaining lease term for the Company's operating leases as of December 31, 2019 was 6 years. The weighted average discount rate for the Company's operating leases as of December 31, 2019 was 5.5%.
Adient plc | Form 10-Q | 14
8. Debt and Financing Arrangements |
Long-term debt consisted of the following:
December 31, | September 30, | |||||||||||||
(in millions) | 2019 | 2019 | ||||||||||||
Term Loan B - LIBOR plus 4.25% due in 2024 | $ | 796 | $ | 798 | ||||||||||
4.875% Notes due in 2026 | 900 | 900 | ||||||||||||
3.50% Notes due in 2024 | 1,121 | 1,094 | ||||||||||||
7.00% Notes due in 2026 | 800 | 800 | ||||||||||||
European Investment Bank Loan - EURIBOR plus 1.58% due in 2022 | 185 | 180 | ||||||||||||
Less: debt issuance costs | (54) | (56) | ||||||||||||
Gross long-term debt | 3,748 | 3,716 | ||||||||||||
Less: current portion | 8 | 8 | ||||||||||||
Net long-term debt | $ | 3,740 | $ | 3,708 |
Adient US LLC ("Adient US"), a wholly owned subsidiary of Adient, together with certain of Adient's other subsidiaries, maintains an asset-based revolving credit facility (the “ABL Credit Facility”), which provides for a revolving line of credit up to $1,250 million, including a North American subfacility of up to $950 million and a European subfacility of up to $300 million, subject to borrowing base capacity. The ABL Credit Facility will mature on May 6, 2024, subject to a springing maturity date 91 days earlier if certain amounts remain outstanding at that time under the Term Loan B Agreement (defined below). Interest is payable on the ABL Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 1.50% to 2.00%. Adient will pay a commitment fee of 0.25% to 0.375% on the unused portion of the commitments under the asset-based revolving credit facility based on average global availability. Letters of credit are limited to the lesser of (x) $150 million and (y) the aggregate unused amount of commitments under the ABL Credit Facility then in effect. Subject to certain conditions, the ABL Credit Facility may be expanded by up to $250 million in additional commitments. Loans under the ABL Credit Facility may be denominated, at the option of Adient, in U.S. dollars, Euros, Pounds Sterling or Swedish Kroner. The ABL Credit Agreement is secured on a first-priority lien on all accounts receivable, inventory and bank accounts (and funds on deposit therein) and a second-priority lien on all of the tangible and intangible assets of certain Adient subsidiaries. As of December 31, 2019, Adient's availability under this facility was $1,059 million.
In addition, Adient US and Adient Global Holdings S.à r.l., a wholly-owned subsidiary of Adient, maintain a term loan credit agreement (the “Term Loan B Agreement”) providing for a 5-year $800 million senior secured term loan facility that was fully drawn at closing. The Term Loan B Agreement amortizes in equal quarterly installments at a rate of 1.00% per annum of the original principal amount thereof, with the remaining balance due at final maturity on May 6, 2024. Interest on the Term Loan B Agreement accrues at the Eurodollar rate plus an applicable margin equal to 4.25% (with one 0.25% step down based on achievement of a specific secured net leverage level starting with the fiscal quarter ending December 31, 2019). The Term Loan B Agreement also permits Adient to incur incremental term loans in an aggregate amount not to exceed the greater of $750 million and an unlimited amount subject to a pro forma first lien secured net leverage ratio of not greater than 1.75 to 1.00 and certain other conditions.
Adient US also maintains an indenture relating to the issuance of $800 million aggregate principal amount of Senior First Lien Notes (the “Notes”). The Notes mature on May 15, 2026 and bear interest at a rate of 7.00% per annum. Interest on the Notes is payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2019.
The ABL Credit Facility, Term Loan B Agreement and the Notes contain covenants that are usual and customary for facilities and transactions of this type and that, among other things, restrict the ability of Adient and its restricted subsidiaries to: create certain liens and enter into sale and lease-back transactions; create, assume, incur or guarantee certain indebtedness; pay dividends or make other distributions on, or repurchase or redeem, Adient’s capital stock or certain other debt; make other restricted payments; and consolidate or merge with, or convey, transfer or lease all or substantially all of Adient’s and its restricted subsidiaries’ assets, to another person. These covenants are subject to a number of other limitations and exceptions set forth in the agreements. The agreements also provide for customary events of default, including, but not limited to, failure to
Adient plc | Form 10-Q | 15
pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of bankruptcy or insolvency involving Adient and its significant subsidiaries.
Adient Global Holdings Ltd., a wholly-owned subsidiary of Adient, maintains $0.9 billion aggregate principal amount of 4.875% USD-denominated unsecured notes due 2026 and €1.0 billion aggregate principal amount of 3.50% unsecured notes due 2024. Adient Germany Ltd. & Co. KG, a wholly owned subsidiary of Adient, maintains €165 million in an unsecured term loan from the European Investment Bank due in 2022. The loan bears interest at the 6-month EURIBOR rate plus 158 basis points.
Net Financing Charges
Adient's net financing charges in the consolidated statements of income (loss) contained the following components:
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Interest expense, net of capitalized interest costs | $ | 48 | $ | 36 | ||||||||||
Banking fees and debt issuance cost amortization | 4 | 3 | ||||||||||||
Interest income | (4) | (2) | ||||||||||||
Net foreign exchange | — | (2) | ||||||||||||
Net financing charges | $ | 48 | $ | 35 |
9. Derivative Instruments and Hedging Activities |
Adient selectively uses derivative instruments to reduce Adient's market risk associated with changes in foreign currency. Under Adient's policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized to manage Adient's risk is included in the following paragraphs. In addition, refer to Note 10, "Fair Value Measurements," of the notes to consolidated financial statements for information related to the fair value measurements and valuation methods utilized by Adient for each derivative type.
Adient has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations in foreign currency exchange rates. Adient primarily uses foreign currency exchange contracts to hedge certain foreign exchange rate exposures. Adient hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. Gains and losses on derivative contracts offset gains and losses on underlying foreign currency exposures. These contracts have been designated as cash flow hedges under ASC 815, "Derivatives and Hedging," and the effective portion of the hedge gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive income (AOCI) and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. Any ineffective portion of the hedge is reflected in the consolidated statements of income. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at December 31, 2019 and September 30, 2019, respectively.
As of December 31, 2019, the €1.0 billion aggregate principal amount of 3.50% euro-denominated unsecured notes due 2024 was designated as a net investment hedge to selectively hedge portions of Adient's net investment in Europe. The currency effects of Adient's euro-denominated bonds are reflected in AOCI account within shareholders' equity attributable to Adient where they offset gains and losses recorded on Adient's net investment in Europe.
Adient entered into cross-currency interest rate swaps during fiscal 2018 to selectively hedge portions of its net investment in Europe. The currency effects of the cross-currency interest rate swaps are reflected in the AOCI account within shareholders' equity attributable to Adient, where they offset gains and losses recorded on Adient's net investment in Europe. As of December 31, 2019, Adient had one cross-currency interest rate swap outstanding totaling approximately €80 million designated as net investment hedges in Adient's net investment in Europe.
Adient entered into a cross-currency interest rate swap during fiscal 2019 to selectively hedge portions of its net investment in Japan. The currency effects of the cross-currency interest rate swap is reflected in the AOCI account within shareholders' equity attributable to Adient, where they offset gains and losses recorded on Adient's net investment in Japan. As of December 31,
Adient plc | Form 10-Q | 16
2019, Adient had one cross-currency interest rate swap outstanding totaling approximately ¥11 billion designated as a net investment hedge in Adient's net investment in Japan.
Adient purchased interest rate caps during fiscal 2019 to selectively limit the impact of USD LIBOR increases on its interest payments related to Company's Term Loan B Agreement. The interest rate caps are designated as cash flow hedges under ASC 815. As of December 31, 2019, Adient had two interest rate caps outstanding totaling approximately $200 million.
Adient entered into a ¥950 million foreign exchange forward contract during the first quarter of fiscal 2020 to selectively hedge portions of its net investment in China. The currency effects of the forward contract are reflected in the AOCI account within shareholders' equity attributable to Adient, where they offset gains and losses recorded on Adient’s net investment in China. The forward contract is set to mature in June 2020.
The following table presents the location and fair values of derivative instruments and other amounts used in hedging activities included in Adient's consolidated statements of financial position:
Derivatives and Hedging Activities Designated as Hedging Instruments under ASC 815 | Derivatives and Hedging Activities Not Designated as Hedging Instruments under ASC 815 | |||||||||||||||||||||||||
(in millions) | December 31, 2019 | September 30, 2019 | December 31, 2019 | September 30, 2019 | ||||||||||||||||||||||
Other current assets | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | $ | 16 | $ | 5 | $ | 1 | $ | 3 | ||||||||||||||||||
Cross-currency interest rate swaps | 10 | 12 | — | — | ||||||||||||||||||||||
Other noncurrent assets | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | 1 | — | — | 1 | ||||||||||||||||||||||
Interest rate cap | — | 1 | — | — | ||||||||||||||||||||||
Cross-currency interest rate swaps | 2 | 1 | — | — | ||||||||||||||||||||||
Total assets | $ | 29 | $ | 19 | $ | 1 | $ | 4 | ||||||||||||||||||
Other current liabilities | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | $ | 5 | $ | 12 | $ | — | $ | — | ||||||||||||||||||
Other noncurrent liabilities | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | — | 3 | — | — | ||||||||||||||||||||||
Long-term debt | ||||||||||||||||||||||||||
Foreign currency denominated debt | 1,121 | 1,094 | — | — | ||||||||||||||||||||||
Total liabilities | $ | 1,126 | $ | 1,109 | $ | — | $ | — |
Adient enters into International Swaps and Derivatives Associations (ISDA) master netting agreements with counterparties that permit the net settlement of amounts owed under the derivative contracts. The master netting agreements generally provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. Adient has not elected to offset the fair value positions of the derivative contracts recorded in the consolidated statements of financial position. Collateral is generally not required of Adient or the counterparties under the master netting agreements. As of both December 31, 2019 and September 30, 2019, no cash collateral was received or pledged under the master netting agreements.
The gross and net amounts of derivative instruments and other amounts used in hedging activities are as follows:
Assets | Liabilities | |||||||||||||||||||||||||
(in millions) | December 31, 2019 | September 30, 2019 | December 31, 2019 | September 30, 2019 | ||||||||||||||||||||||
Gross amount recognized | $ | 30 | $ | 23 | $ | 1,126 | $ | 1,109 | ||||||||||||||||||
Gross amount eligible for offsetting | (4) | (9) | (4) | (9) | ||||||||||||||||||||||
Net amount | $ | 26 | $ | 14 | $ | 1,122 | $ | 1,100 |
Adient plc | Form 10-Q | 17
The following table presents the effective portion of pretax gains (losses) recorded in other comprehensive income related to cash flow hedges:
(in millions) | Three Months Ended December 31, | |||||||||||||
2019 | 2018 | |||||||||||||
Foreign currency exchange derivatives | $ | 22 | $ | (4) |
The following table presents the location and amount of the effective portion of pretax gains (losses) on cash flow hedges reclassified from AOCI into Adient's consolidated statements of income:
(in millions) | Three Months Ended December 31, | |||||||||||||||||||
2019 | 2018 | |||||||||||||||||||
Foreign currency exchange derivatives | Cost of sales | $ | 2 | $ | — |
The following table presents the location and amount of pretax gains (losses) on derivatives not designated as hedging instruments recognized in Adient's consolidated statements of income (loss):
(in millions) | Three Months Ended December 31, | |||||||||||||||||||
2019 | 2018 | |||||||||||||||||||
Foreign currency exchange derivatives | Cost of sales | $ | (1) | $ | — | |||||||||||||||
Foreign currency exchange derivatives | Net financing charges | — | 1 | |||||||||||||||||
Equity swap | Selling, general and administrative | — | (17) | |||||||||||||||||
Total | $ | (1) | $ | (16) |
The effective portion of pretax gains (losses) recorded in currency translation adjustment (CTA) within other comprehensive income (loss) related to net investment hedges was $(29) million and $22 million for the three months ended December 31, 2019 and 2018, respectively. For the three months ended December 31, 2019 and 2018, respectively, no gains or losses were reclassified from CTA into income for Adient's outstanding net investment hedges, and there was no ineffectiveness on cash flow hedges.
10. Fair Value Measurements |
ASC 820, "Fair Value Measurement," 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. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following tables present Adient's fair value hierarchy for those assets and liabilities measured at fair value:
Adient plc | Form 10-Q | 18
Fair Value Measurements Using: | ||||||||||||||||||||||||||
(in millions) | Total as of December 31, 2019 | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
Other current assets | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | $ | 17 | $ | — | $ | 17 | $ | — | ||||||||||||||||||
Cross-currency interest rate swaps | 10 | — | 10 | — | ||||||||||||||||||||||
Other noncurrent assets | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | 1 | — | 1 | — | ||||||||||||||||||||||
Cross-currency interest rate swaps | 2 | — | 2 | — | ||||||||||||||||||||||
Total assets | $ | 30 | $ | — | $ | 30 | $ | — | ||||||||||||||||||
Other current liabilities | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | $ | 5 | $ | — | $ | 5 | $ | — | ||||||||||||||||||
Total liabilities | $ | 5 | $ | — | $ | 5 | $ | — |
Fair Value Measurements Using: | ||||||||||||||||||||||||||
(in millions) | Total as of September 30, 2019 | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
Other current assets | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | $ | 8 | $ | — | $ | 8 | $ | — | ||||||||||||||||||
Cross-currency interest rate swaps | 12 | — | 12 | |||||||||||||||||||||||
Other noncurrent assets | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | 1 | — | 1 | — | ||||||||||||||||||||||
Cross-currency interest rate swaps | 1 | — | 1 | — | ||||||||||||||||||||||
Interest rate cap | 1 | — | 1 | — | ||||||||||||||||||||||
Total assets | $ | 23 | $ | — | $ | 23 | $ | — | ||||||||||||||||||
Other current liabilities | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | $ | 12 | $ | — | $ | 12 | $ | — | ||||||||||||||||||
Other noncurrent liabilities | ||||||||||||||||||||||||||
Foreign currency exchange derivatives | 3 | — | 3 | — | ||||||||||||||||||||||
Total liabilities | $ | 15 | $ | — | $ | 15 | $ | — |
Valuation Methods
Foreign currency exchange derivatives Adient selectively hedges anticipated transactions and net investments that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices. Changes in fair value on foreign exchange derivatives accounted for as hedging instruments under ASC 815 are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. These contracts were highly effective in hedging Adient's net investments and the variability in future cash flows attributable to changes in currency exchange rates at December 31, 2019 and September 30, 2019, respectively. The changes in fair value of foreign currency exchange derivatives not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income.
Cross-currency interest rate swaps Adient selectively uses cross-currency interest rate swaps to hedge portions of its net investment in Europe. During fiscal 2018, Adient entered into two floating to floating cross-currency interest rate swaps
Adient plc | Form 10-Q | 19
totaling approximately €160 million designated as net investment hedges in Adient's net investment in Europe. During fiscal 2019, Adient entered into one floating to floating cross-currency interest rate swap totaling ¥11 billion designated as a net investment hedge in Adient's net investment in Japan. As of December 31, 2019, Adient had one €80 million cross-currency interest rate swap and one ¥11 billion cross-currency interest rate swap outstanding.
The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. The fair value of long-term debt, which was $3.7 billion and $3.4 billion at December 31, 2019 and September 30, 2019, respectively, was determined primarily using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy.
11. Equity and Noncontrolling Interests |
(in millions) | Ordinary Shares | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Shareholders' Equity Attributable to Adient | Shareholders' Equity Attributable to Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||
Balance at September 30, 2019 | $ | — | $ | 3,962 | $ | (1,545) | $ | (569) | $ | 1,848 | $ | 341 | $ | 2,189 | ||||||||||||||||||||||||||||||
Net income (loss) | — | — | (167) | — | (167) | 18 | (149) | |||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | 50 | 50 | 6 | 56 | |||||||||||||||||||||||||||||||||||||
Realized and unrealized gains (losses) on derivatives | — | — | — | 15 | 15 | — | 15 | |||||||||||||||||||||||||||||||||||||
Dividends attributable to noncontrolling interests | — | — | — | — | — | (6) | (6) | |||||||||||||||||||||||||||||||||||||
Change in noncontrolling interest share | — | — | — | — | — | (18) | (18) | |||||||||||||||||||||||||||||||||||||
Share based compensation | — | 3 | — | — | 3 | — | 3 | |||||||||||||||||||||||||||||||||||||
Adjustments from adoption of a new standard | — | — | (4) | — | (4) | — | (4) | |||||||||||||||||||||||||||||||||||||
Other | — | (2) | — | (2) | — | (2) | ||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | — | $ | 3,963 | $ | (1,716) | $ | (504) | $ | 1,743 | $ | 341 | $ | 2,084 |
The deconsolidation of Adient Aerospace in the quarter ended December 31, 2019 resulted in a $18 million change in noncontrolling interest.
(in millions) | Ordinary Shares | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Shareholders' Equity Attributable to Adient | Shareholders' Equity Attributable to Noncontrolling Interests | Total Equity | |||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | — | $ | 3,951 | $ | (1,028) | $ | (531) | $ | 2,392 | $ | 325 | $ | 2,717 | ||||||||||||||||||||||||||||||
Net income (loss) | — | — | (17) | — | (17) | 18 | 1 | |||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustments | — | — | — | 16 | 16 | 1 | 17 | |||||||||||||||||||||||||||||||||||||
Realized and unrealized gains (losses) on derivatives | — | — | — | (3) | (3) | — | (3) | |||||||||||||||||||||||||||||||||||||
Dividends declared ($0.275 per share) | — | — | (26) | — | (26) | — | (26) | |||||||||||||||||||||||||||||||||||||
Dividends attributable to noncontrolling interests | — | — | — | — | — | (14) | (14) | |||||||||||||||||||||||||||||||||||||
Formation of consolidated joint venture | — | — | — | — | — | 28 | 28 | |||||||||||||||||||||||||||||||||||||
Share based compensation | — | 3 | 1 | — | 4 | — | 4 | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | — | $ | 3,954 | $ | (1,070) | $ | (518) | $ | 2,366 | $ | 358 | $ | 2,724 |
During October 2018, Adient declared a dividend of $0.275 per ordinary share, which was paid in November 2018.
Adient plc | Form 10-Q | 20
The following table presents changes in AOCI attributable to Adient:
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Foreign currency translation adjustments | ||||||||||||||
Balance at beginning of period | $ | (558) | $ | (523) | ||||||||||
Aggregate adjustment for the period, net of tax | 50 | 16 | ||||||||||||
Balance at end of period | (508) | (507) | ||||||||||||
Realized and unrealized gains (losses) on derivatives | ||||||||||||||
Balance at beginning of period | (8) | (7) | ||||||||||||
Current period changes in fair value, net of tax | 17 | (3) | ||||||||||||
Reclassification to income, net of tax | (2) | — | ||||||||||||
Balance at end of period | 7 | (10) | ||||||||||||
Pension and postretirement plans | ||||||||||||||
Balance at beginning of period | (3) | (1) | ||||||||||||
Balance at end of period | (3) | (1) | ||||||||||||
Accumulated other comprehensive income (loss), end of period | $ | (504) | $ | (518) |
Adient consolidates certain subsidiaries in which the noncontrolling interest party has within their control the right to require Adient to redeem all or a portion of its interest in the subsidiary. These redeemable noncontrolling interests are reported at their estimated redemption value. Any adjustment to the redemption value impacts retained earnings but does not impact net income. Redeemable noncontrolling interests which are redeemable only upon future events, the occurrence of which is not currently probable, are recorded at carrying value. The following table presents changes in the redeemable noncontrolling interests:
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Beginning balance | $ | 51 | $ | 47 | ||||||||||
Net income | 7 | 9 | ||||||||||||
Foreign currency translation adjustments | 3 | (1) | ||||||||||||
Dividends | (23) | (28) | ||||||||||||
Ending balance | $ | 38 | $ | 27 |
12. Retirement Plans |
Adient maintains non-contributory defined benefit pension plans covering primarily non-U.S. employees and a limited number of U.S. employees. The following table contains the components of net periodic benefit cost:
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Service cost | $ | 2 | $ | 2 | ||||||||||
Interest cost | 3 | 3 | ||||||||||||
Expected return on plan assets | (5) | (5) | ||||||||||||
Net periodic benefit cost | $ | — | $ | — |
The interest cost and expected return on plan assets components of net periodic benefit cost are included in other pension expense (income) in the consolidated statements of income (loss).
Adient plc | Form 10-Q | 21
13. Restructuring and Impairment Costs |
To better align its resources with its overall strategies and reduce the cost structure of its global operations to address the softness in certain underlying markets, Adient commits to restructuring plans as necessary.
During the first quarter of 2020, Adient committed to a restructuring plan ("2020 Plan") of $7 million that was offset by $5 million of prior year underspend. Of the restructuring costs recorded, $3 million relates to the Americas segment, $2 million relates to the EMEA segment and $2 million relates to the Asia segment. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions. The restructuring actions are expected to be substantially completed by fiscal 2021.
The following table summarizes the changes in Adient's 2020 Plan reserve:
(in millions) | Employee Severance and Termination Benefits | Other | Currency Translation | Total | ||||||||||||||||||||||
Original Reserve | $ | 6 | $ | 1 | $ | — | $ | 7 | ||||||||||||||||||
Utilized—cash | (1) | — | — | (1) | ||||||||||||||||||||||
Utilized—noncash | — | — | (1) | (1) | ||||||||||||||||||||||
Balance at December 31, 2019 | $ | 5 | $ | 1 | $ | (1) | $ | 5 |
The following table summarizes the changes in Adient's 2019 Plan reserve:
(in millions) | Employee Severance and Termination Benefits | Other | Currency Translation | Total | ||||||||||||||||||||||
Balance at September 30, 2019 | $ | 69 | $ | 3 | $ | (2) | $ | 70 | ||||||||||||||||||
Utilized—cash | (9) | — | — | (9) | ||||||||||||||||||||||
Utilized—noncash | — | — | — | — | ||||||||||||||||||||||
Noncash adjustment—underspend | (2) | — | 1 | (1) | ||||||||||||||||||||||
Balance at December 31, 2019 | $ | 58 | $ | 3 | $ | (1) | $ | 60 |
The following table summarizes the changes in Adient's 2018 Plan reserve:
(in millions) | Employee Severance and Termination Benefits | Currency Translation | Total | |||||||||||||||||
Balance at September 30, 2019 | $ | 24 | $ | (4) | $ | 20 | ||||||||||||||
Utilized—cash | (5) | — | (5) | |||||||||||||||||
Utilized—noncash | — | — | — | |||||||||||||||||
Noncash adjustment—underspend | (3) | 1 | (2) | |||||||||||||||||
Balance at December 31, 2019 | $ | 16 | $ | (3) | $ | 13 |
There were no material changes during the first quarter of fiscal 2020 to the 2017 Plan's $5 million reserve balance.
Adient plc | Form 10-Q | 22
The following table summarizes the changes in Adient's 2016 Plan reserve:
(in millions) | Employee Severance and Termination Benefits | Currency Translation | Total | |||||||||||||||||
Balance at September 30, 2019 | $ | 25 | $ | 2 | $ | 27 | ||||||||||||||
Utilized—cash | (2) | — | (2) | |||||||||||||||||
Utilized—noncash | — | — | — | |||||||||||||||||
Noncash adjustment—underspend | — | — | — | |||||||||||||||||
Balance at December 31, 2019 | $ | 23 | $ | 2 | $ | 25 |
Adient's fiscal 2020, 2019, 2018, 2017 and 2016 restructuring plans included workforce reductions of approximately 8,900. Restructuring charges associated with employee severance and termination benefits are paid over the severance period granted to each employee or on a lump sum basis in accordance with individual severance agreements. As of December 31, 2019, approximately 6,200 of the employees have been separated from Adient pursuant to the restructuring plans. In addition, the restructuring plans included eighteen plant closures. As of December 31, 2019, fifteen of the eighteen plants have been closed.
Adient's management closely monitors its overall cost structure and continually analyzes each of its businesses for opportunities to consolidate current operations, improve operating efficiencies and locate facilities in low cost countries in close proximity to customers. This ongoing analysis includes a review of its manufacturing, engineering, purchasing and administrative functions, as well as the overall global footprint for all its businesses. Because of the importance of new vehicle sales by major automotive manufacturers to operations, Adient is affected by the general business conditions in the automotive industry. Future adverse developments in the automotive industry could impact Adient's liquidity position, lead to impairment charges and/or require additional restructuring of its operations.
14. Income Taxes |
In calculating the provision for income taxes, Adient uses an estimate of the annual effective tax rate based upon the facts and circumstances known at each interim period. On a quarterly basis, the actual effective tax rate is adjusted, as appropriate, based on changes in facts and circumstances, if any, as compared to those forecasted at the beginning of the fiscal year and each interim period thereafter. For the three months ended December 31, 2019, Adient’s income tax expense was $54 million. The income tax expense was higher than the statutory rate impact of 12.5% primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset with a tax benefit related to the impairment of Adient’s YFAI investment. For the three months ended December 31, 2018, Adient’s income tax expense was $10 million equating to an effective tax rate of 48%. The income tax expense was higher than the statutory rate of 12.5% primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset by a tax rate change in China.
Valuation Allowances
As a result of the Company's first quarter fiscal 2020 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence, Adient determined that no changes to valuation allowances were required.
Adient reviews the realizability of its deferred tax assets on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or combined group recording the net deferred tax asset are considered, along with any other positive or negative evidence. All of the factors that Adient considers in evaluating whether and when to establish or release all or a portion of the deferred tax asset valuation allowance involve significant judgment. Since future financial results may differ from previous estimates, periodic adjustments to Adient's valuation allowances may be necessary.
Uncertain Tax Positions
At December 31, 2019, Adient had gross tax effected unrecognized tax benefits of $425 million. If recognized, $125 million of Adient's unrecognized tax benefits would impact the effective tax rate. Total net accrued interest at December 31, 2019 was approximately $11 million (net of tax benefit). The interest and penalties accrued for the three months ended December 31,
Adient plc | Form 10-Q | 23
2019 was $1 million. Adient recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Impacts of Tax Legislation and Change in Statutory Tax Rates
During the first quarter of fiscal 2019, Guangzhou Adient Automotive Seating Co., Ltd. was approved for High and New Tech Enterprise status for the three-year period of 2018 to 2020, thereby reducing their tax rate from 25% to 15%. As a result, a $7 million income tax benefit was recorded on the reduction of deferred tax liabilities and a reduction of 2018 calendar year income taxes.
Other tax legislation was adopted during the quarter in various jurisdictions, which did not have a material impact on Adient’s consolidated financial statements.
Other Tax Matters
During the first quarter of fiscal 2020, Adient recognized a pre-tax non-cash impairment of $216 million in equity income related to Adient's YFAI investment. Refer to Note 3, “Acquisitions and Divestitures,” of the notes to the consolidated financial statements for additional information. The tax benefit associated with the impairment charge was $4 million.
15. Segment Information |
Adient manages its business on a geographic basis and operates in the following three reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Adient evaluates the performance of its reportable segments using an adjusted EBITDA metric defined as income before income taxes and noncontrolling interests, excluding net financing charges, restructuring and impairment costs, restructuring related-costs, net mark-to-market adjustments on pension and postretirement plans, transaction gains/losses, purchase accounting amortization, depreciation, stock-based compensation and other non-recurring items ("Adjusted EBITDA"). Also, certain corporate-related costs are not allocated to the segments. The reportable segments are consistent with how management views the markets served by Adient and reflect the financial information that is reviewed by its chief operating decision maker.
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Net Sales | ||||||||||||||
Americas | $ | 1,859 | $ | 1,935 | ||||||||||
EMEA | 1,564 | 1,640 | ||||||||||||
Asia | 572 | 650 | ||||||||||||
Eliminations | (59) | (67) | ||||||||||||
Total net sales | $ | 3,936 | $ | 4,158 |
Adient plc | Form 10-Q | 24
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Adjusted EBITDA | ||||||||||||||
Americas | $ | 94 | $ | 43 | ||||||||||
EMEA | 49 | 2 | ||||||||||||
Asia | 177 | 154 | ||||||||||||
Corporate-related costs (1) | (23) | (23) | ||||||||||||
Restructuring and impairment costs (2) | (2) | (31) | ||||||||||||
Purchase accounting amortization (3) | (10) | (10) | ||||||||||||
Restructuring related charges (4) | (5) | (9) | ||||||||||||
Loss on business divestitures - net (5) | (25) | — | ||||||||||||
Impairment of nonconsolidated partially-owned affiliate (6) | (216) | — | ||||||||||||
Depreciation | (75) | (65) | ||||||||||||
Stock based compensation | (4) | (6) | ||||||||||||
Other items (7) | (2) | (1) | ||||||||||||
Earnings (loss) before interest and income taxes | (42) | 54 | ||||||||||||
Net financing charges | (48) | (35) | ||||||||||||
Other pension income (expense) | 2 | 2 | ||||||||||||
Income (loss) before income taxes | $ | (88) | $ | 21 |
Notes:
(1) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal and finance.
(2) Reflects qualified restructuring charges for costs that are directly attributable to restructuring activities and meet the definition of restructuring under ASC 420 and non-recurring impairment charges. Restructuring charges during the three months ended December 31, 2019 primarily consist of workforce reductions.
(3) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income.
(4) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420.
(5) Reflects losses on business divestitures, of which $4 million is related to the deconsolidation of Adient Aerospace, and $21 million is the result of the sale of the RECARO automotive high performance seating systems.
(6) Reflects the $216 million pre-tax non-cash impairment of Adient's YFAI investment as described in Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements.
(7) The three months ended December 31, 2019 includes $1 million of transaction costs, and $1 million of tax adjustments at YFAI. The three months ended December 31, 2018 includes $1 million of integration costs associated with the acquisition of Futuris.
Adient plc | Form 10-Q | 25
Geographic Information
Revenue by geographic area is as follows:
Net Sales | ||||||||||||||
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Americas | ||||||||||||||
United States | $ | 1,567 | $ | 1,615 | ||||||||||
Mexico | 613 | 670 | ||||||||||||
Other Americas | 123 | 124 | ||||||||||||
Regional elimination | (444) | (474) | ||||||||||||
1,859 | 1,935 | |||||||||||||
EMEA | ||||||||||||||
Germany | 321 | 341 | ||||||||||||
Czech Republic | 336 | 352 | ||||||||||||
Other EMEA | 1,337 | 1,394 | ||||||||||||
Regional elimination | (430) | (447) | ||||||||||||
1,564 | 1,640 | |||||||||||||
Asia | ||||||||||||||
Thailand | 133 | 162 | ||||||||||||
China | 160 | 155 | ||||||||||||
Japan | 122 | 141 | ||||||||||||
Other Asia | 159 | 193 | ||||||||||||
Regional elimination | (2) | (1) | ||||||||||||
572 | 650 | |||||||||||||
Inter-segment elimination | (59) | (67) | ||||||||||||
Total | $ | 3,936 | $ | 4,158 |
Adient plc | Form 10-Q | 26
16. Nonconsolidated Partially-Owned Affiliates |
Investments in the net assets of nonconsolidated partially-owned affiliates are reported in the "Investments in partially-owned affiliates" line in the consolidated statements of financial position as of December 31, 2019 and September 30, 2019. Equity in the net income of nonconsolidated partially-owned affiliates are reported in the "Equity income (loss)" line in the consolidated statements of income (loss) for the three months ended December 31, 2019 and 2018.
Adient maintains total investments in partially-owned affiliates of $1.3 billion and $1.4 billion at December 31, 2019 and September 30, 2019, respectively. Operating information for nonconsolidated partially-owned affiliates is as follows:
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Income statement data: | ||||||||||||||
Net sales | $ | 4,243 | $ | 4,268 | ||||||||||
Gross profit | $ | 512 | $ | 456 | ||||||||||
Net income | $ | 243 | $ | 195 | ||||||||||
Net income attributable to the entity | $ | 239 | $ | 190 |
Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for recent developments regarding certain of Adient's investments in partially-owned affiliates.
17. Commitments and Contingencies |
Adient is involved in various lawsuits, claims and proceedings incident to the operation of its businesses, including those pertaining to product liability, casualty environmental, safety and health, intellectual property, employment, commercial and contractual matters, and various other matters. Although the outcome of any such lawsuit, claim or proceeding cannot be predicted with certainty and some may be disposed of unfavorably to Adient, it is management's opinion that none of these will have a material adverse effect on Adient's financial position, results of operations or cash flows. Costs related to such matters were not material to the periods presented.
Adient accrues for potential environmental liabilities when it is probable a liability has been incurred and the amount of the liability is reasonably estimable. Reserves for environmental liabilities totaled $11 million and $12 million at December 31, 2019 and September 30, 2019, respectively. Adient reviews the status of its environmental sites on a quarterly basis and adjusts its reserves accordingly. Such potential liabilities accrued by Adient do not take into consideration possible recoveries of future insurance proceeds. They do, however, take into account the likely share other parties will bear at remediation sites. It is difficult to estimate Adient's ultimate level of liability at many remediation sites due to the large number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. Nevertheless, Adient does not currently believe that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on Adient's financial position, results of operations or cash flows.
Adient plc | Form 10-Q | 27
18. Related Party Transactions |
In the ordinary course of business, Adient enters into transactions with related parties, such as equity affiliates. Such transactions consist of the sale or purchase of goods and other arrangements.
The following table sets forth the net sales to and purchases from related parties included in the consolidated statements of income:
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||||||||
Net sales to related parties | Net sales | $ | 99 | $ | 92 | |||||||||||||||
Purchases from related parties | Cost of sales | 177 | 173 |
The following table sets forth the amount of accounts receivable due from and payable to related parties in the consolidated statements of financial position:
(in millions) | December 31, 2019 | September 30, 2019 | ||||||||||||||||||
Accounts receivable due from related parties | Accounts receivable | $ | 60 | $ | 73 | |||||||||||||||
Accounts payable due to related parties | Accounts payable | 103 | 137 | |||||||||||||||||
Average receivable and payable balances with related parties remained consistent with the period end balances shown above.
Adient plc | Form 10-Q | 28
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This section and other parts of this Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," or similar terms. Forward-looking statements are not guarantees of future performance and Adient's actual results may differ significantly from the results discussed in the forward-looking statements. Adient cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond Adient’s control, that could cause Adient’s actual results to differ materially from those expressed or implied by such forward-looking statements, including, among others, risks related to: the ability of Adient to close the transactions subject to the Yanfeng agreement, the ability of Adient to effectively launch new business at forecasted and profitable levels, the ability of Adient to execute its turnaround plan, uncertainties in U.S. administrative policy regarding trade agreements, tariffs and other international trade relations, the impact of tax reform legislation through the Tax Cuts and Jobs Act, the ability of Adient to meet debt service requirements, terms of financing, general economic and business conditions, the strength of the U.S. or other economies, automotive vehicle production levels, mix and schedules, energy and commodity prices, the availability of raw materials and component products, currency exchange rates, the cancellation of or changes to commercial arrangements, and the ability of Adient to identify, recruit and retain key leadership. Additional information regarding these and other risks related to Adient’s business that could cause actual results to differ materially from what is contained in the forward-looking statements is included in the section entitled "Risk Factors," contained in Item Part I, Item 1A of the which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8 of the Form 10-K. All information presented herein is based on the Adient's fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to Adient's fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Adient assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
Adient is a global leader in the automotive seating supply industry with leading market positions in the Americas, Europe and China and maintains longstanding relationships with the largest global automotive original equipment manufacturers (OEMs). Adient's proprietary technologies extend into virtually every area of automotive seating solutions, including complete seating systems, frames, mechanisms, foam, head restraints, armrests, trim covers and fabrics. Adient is a global seat supplier with the capability to design, develop, engineer, manufacture, and deliver complete seat systems and components in every major automotive producing region in the world. Adient also participates in the automotive interiors market, which includes production of instrument panels, floor consoles, door panels, overhead consoles, cockpit systems, decorative trim and other automotive interior products, primarily through its joint venture in China, Yanfeng Global Automotive Interior Systems Co., Ltd. (YFAI) (refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for recent developments regarding Adient's investment in YFAI).
Adient designs, manufactures and markets a full range of seating systems and components for passenger cars, commercial vehicles and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. Adient operates in 220 wholly- and majority-owned manufacturing or assembly facilities, with operations in 33 countries. Additionally, Adient has partially-owned affiliates in China, Asia, Europe and North America. Through its global footprint, vertical integration and partnerships in China, Adient leverages its capabilities to drive growth in the automotive seating industry.
Adient manages its business on a geographic basis and operates in the following three reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Global Automotive Industry
Adient conducts its business globally in the automotive industry, which is highly competitive and sensitive to economic, political and social factors in the various regions. In the first quarter of fiscal 2020, automotive light vehicle production in North
Adient plc | Form 10-Q | 29
America, Europe and Asia decreased, production in South America was flat and production in China increased slightly compared to the first quarter of fiscal 2019.
Light vehicle production levels by geographic region are provided below:
Light Vehicle Production | ||||||||||||||||||||
Three Months Ended December 31, | ||||||||||||||||||||
(units in millions) | 2019 | Change | 2018 | |||||||||||||||||
Global | 22.3 | -5.1% | 23.5 | |||||||||||||||||
North America | 3.8 | -9.5% | 4.2 | |||||||||||||||||
South America | 0.8 | —% | 0.8 | |||||||||||||||||
Europe | 5.3 | -7.0% | 5.7 | |||||||||||||||||
China | 7.2 | 1.4% | 7.1 | |||||||||||||||||
Asia, excluding China, and Other | 5.2 | -8.8% | 5.7 | |||||||||||||||||
Source: IHS Automotive, January 2020 |
Financial Results Summary
Significant aspects of Adient's financial results for the first quarter of fiscal 2020 include the following:
•Adient recorded net sales of $3,936 million for the first quarter of fiscal 2020, representing a decrease of $222 million, or 5% when compared to the first quarter of fiscal 2019. The decrease in net sales was the result of lower volumes in all regions and the unfavorable impact of foreign currency, partially offset by favorable commercial settlements and net pricing adjustments in the Americas and Europe regions.
•Gross profit was $263 million, or 6.7% of net sales for the first quarter of fiscal 2020 compared to $180 million, or 4.3% of net sales for the first quarter of fiscal 2019. Profitability, including gross profit as a percentage of net sales, was higher due to the effects of commercial settlements and net pricing adjustments, lower levels of launch inefficiencies, and lower operational waste and freight costs. The positive benefits were partially offset by lower sales volumes across all regions as compared to fiscal 2019.
•Equity loss was $113 million for the first quarter of fiscal 2020, which compares to equity income of $83 million for the first quarter of fiscal 2019. The change is primarily attributable to a $216 million non-cash impairment of Adient's YFAI investment, partially offset by a $20 million increase in equity earnings primarily from certain partially owned affiliates in China which includes $10 million of benefits from tax credits at various affiliates that are not expected to recur.
•Net loss attributable to Adient was $167 million for the first quarter of fiscal 2020, compared to $17 million of net loss attributable to Adient for the first quarter of fiscal 2019. The year over year increase in net loss is primarily attributable to a $216 million non-cash impairment charge on Adient's YFAI investment, a $21 million loss on the sale of the RECARO business, a $4 million loss on the deconsolidation of Adient Aerospace, and $13 million of higher net financing costs, partially offset by an $83 million increase in gross profit, a $13 million reduction of administrative costs, a $33 million reduction in restructuring related charges, and a $20 million increase in equity earnings at certain China affiliates.
Adient plc | Form 10-Q | 30
Consolidated Results of Operations
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Net sales | $ | 3,936 | -5% | $ | 4,158 | |||||||||||||||
Cost of sales | 3,673 | -8% | 3,978 | |||||||||||||||||
Gross profit | 263 | 46% | 180 | |||||||||||||||||
Selling, general and administrative expenses | 165 | -7% | 178 | |||||||||||||||||
Loss on business divestitures - net | 25 | n/a | — | |||||||||||||||||
Restructuring and impairment costs | 2 | -94% | 31 | |||||||||||||||||
Equity income (loss) | (113) | > -100% | 83 | |||||||||||||||||
Earnings (loss) before interest and income taxes | (42) | > -100% | 54 | |||||||||||||||||
Net financing charges | 48 | 37% | 35 | |||||||||||||||||
Other pension expense (income) | (2) | —% | (2) | |||||||||||||||||
Income (loss) before income taxes | (88) | > -100% | 21 | |||||||||||||||||
Income tax provision (benefit) | 54 | > 100% | 10 | |||||||||||||||||
Net income (loss) | (142) | > -100% | 11 | |||||||||||||||||
Income (loss) attributable to noncontrolling interests | 25 | -11% | 28 | |||||||||||||||||
Net income (loss) attributable to Adient | $ | (167) | > -100% | $ | (17) |
Net Sales
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Net sales | $ | 3,936 | -5% | $ | 4,158 | |||||||||||||||
Net sales decreased by $222 million, or 5%, in the first quarter of fiscal 2020 as compared to the first quarter of fiscal 2019 primarily due to lower volumes in Americas, Europe and Asia and the unfavorable impact of foreign currency ($43 million), partially offset by favorable commercial settlements and net pricing adjustments, including material economic recoveries. Refer to the segment analysis below for a discussion of segment net sales.
Cost of Sales / Gross Profit
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Cost of sales | $ | 3,673 | -8% | $ | 3,978 | |||||||||||||||
Gross profit | $ | 263 | 46% | $ | 180 | |||||||||||||||
% of sales | 6.7 | % | 4.3 | % | ||||||||||||||||
Cost of sales decreased by $305 million , or 8%, and gross profit increased by $83 million, or 46%, in the first quarter of fiscal 2020 as compared to the first quarter of fiscal 2019. The year over year decrease in cost of sales was primarily due to the decrease in volumes, overall operational improvements and the favorable impact of foreign currency ($43 million). Gross profit was favorably impacted by commercial settlements and net pricing adjustments, lower launch inefficiencies, and a reduction in operational waste and freight, partially offset by the impact of lower sales volume. Refer to the segment analysis below for a discussion of segment profitability.
Adient plc | Form 10-Q | 31
Selling, General and Administrative Expenses
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Selling, general and administrative expenses | $ | 165 | -7% | $ | 178 | |||||||||||||||
% of sales | 4.2 | % | 4.3 | % | ||||||||||||||||
Selling, general and administrative expenses (SG&A) decreased by $13 million in the first quarter of fiscal 2020 as compared to the first quarter of fiscal 2019. The year over year decrease in SG&A is attributable to lower overall administrative and engineering spending of $12 million and prior year Adient Aerospace costs of $5 million, partially offset by higher depreciation of $4 million.
Loss on Business Divestitures - net
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Loss on business divestitures - net | $ | 25 | n/a | $ | — |
The loss on business divestitures is comprised of a $21 million loss on the sale of RECARO automotive high performance seating and a $4 million loss on the deconsolidation of Adient Aerospace. Refer to Note 3, "Acquisitions and Divestitures," of the notes to the consolidated financial statements for information related to these divestitures.
Restructuring and Impairment Costs
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Restructuring and impairment costs | $ | 2 | -94% | $ | 31 | |||||||||||||||
Restructuring and impairment costs were lower by $29 million during the first quarter of fiscal 2020 due to the lower levels of restructuring actions taken. Refer to Note 13, "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for information related to Adient's restructuring plans.
Equity Income (Loss)
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Equity income (loss) | $ | (113) | > -100% | $ | 83 | |||||||||||||||
Equity loss was $113 million for the first quarter of fiscal 2020, compared to $83 million of income in the first quarter of fiscal 2019. The change is primarily attributable to a $216 million non-cash impairment charge related to Adient's YFAI investment resulting from the announced transaction that includes the divestiture of the YFAI investment, partially offset by a $20 million increase in equity earnings primarily from certain partially owned affiliates in China, which includes $10 million of benefits from tax credits at various affiliates that are not expected to recur.
Adient plc | Form 10-Q | 32
Net Financing Charges
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Net financing charges | $ | 48 | 37% | $ | 35 |
Net financing charges increased in the first quarter of fiscal 2020 as compared to the first quarter of fiscal 2019 due to higher levels of outstanding debt and to higher average interest rates in the current quarter.
Other Pension Expense (Income)
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Other pension expense (income) | $ | (2) | —% | $ | (2) |
Other pension income remained consistent year over year. Refer to Note 12, "Retirement Plans," of the notes to the consolidated financial statements for information related to the non-service components of Adient's net periodic pension costs.
Income Tax Provision
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Income tax provision (benefit) | $ | 54 | > 100% | $ | 10 |
The first quarter of fiscal 2020 income tax expense of $54 million was higher than the statutory rate of 12.5% primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset with a $4 million tax benefit associated with the impairment of Adient’s YFAI investment. For the first quarter of fiscal 2019, Adient’s income tax expense was $10 million and was higher than the statutory rate of 12.5% primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset by a $7 million benefit from a tax rate change at a China affiliate.
Income Attributable to Noncontrolling Interests
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Income (loss) attributable to noncontrolling interests | $ | 25 | -11% | $ | 28 |
The decrease in income attributable to noncontrolling interests for the first quarter of fiscal 2020 when compared to the same period in the prior year was primarily attributable to lower income resulting from lower volumes at certain Seating affiliates in varying jurisdictions.
Net Income (Loss) Attributable to Adient
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Net income (loss) attributable to Adient | $ | (167) | > -100% | $ | (17) |
Net loss attributable to Adient was $167 million for the first quarter of fiscal 2020 compared to a net loss of $17 million for the first quarter of fiscal 2019. The year over year increase in net loss is primarily attributable to a $216 million non-cash impairment charge on Adient's YFAI investment, a $21 million loss on the sale of the RECARO business, a $4 million loss on
Adient plc | Form 10-Q | 33
the deconsolidation of Adient Aerospace, and $13 million of higher net financing charges, partially offset by an $83 million increase in gross profit, a $13 million reduction of administrative costs, a $33 million reduction in restructuring related charges, and a $20 million increase in equity earnings at certain China affiliates.
Comprehensive Income (Loss) Attributable to Adient
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Comprehensive income (loss) attributable to Adient | $ | (102) | > -100% | $ | (4) |
Comprehensive loss attributable to Adient was $102 million for the first quarter of fiscal 2020 compared to a loss of $4 million for the first quarter of fiscal 2019. The increase in comprehensive loss attributable to Adient for the first quarter of fiscal 2020 was primarily due to an unfavorable change in net income/loss ($153 million), partially offset by the favorable year-over-year impact of foreign currency ($50 million) primarily due to the strengthening of the US dollar against the Euro. The year-over-year change in net income/loss is primarily attributable to a $216 million pre-tax non-cash impairment charge on Adient's YFAI investment and losses on business divestitures ($25 million).
Segment Analysis
Adient manages its business on a geographic basis and operates in the following three reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Adient evaluates the performance of its reportable segments using an adjusted EBITDA metric defined as income before income taxes and noncontrolling interests, excluding net financing charges, qualified restructuring and impairment costs, restructuring related-costs, net mark-to-market adjustments on pension and postretirement plans, transaction gains/losses, purchase accounting amortization, depreciation, stock-based compensation and other non-recurring items ("Adjusted EBITDA"). Also, certain corporate-related costs are not allocated to the segments. The reportable segments are consistent with how management views the markets served by Adient and reflect the financial information that is reviewed by its chief operating decision maker.
Financial information relating to Adient's reportable segments is as follows:
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Net Sales | ||||||||||||||
Americas | $ | 1,859 | $ | 1,935 | ||||||||||
EMEA | 1,564 | 1,640 | ||||||||||||
Asia | 572 | 650 | ||||||||||||
Eliminations | (59) | (67) | ||||||||||||
Total net sales | $ | 3,936 | $ | 4,158 |
Adient plc | Form 10-Q | 34
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Adjusted EBITDA | ||||||||||||||
Americas | $ | 94 | $ | 43 | ||||||||||
EMEA | 49 | 2 | ||||||||||||
Asia | 177 | 154 | ||||||||||||
Corporate-related costs (1) | (23) | (23) | ||||||||||||
Restructuring and impairment costs (2) | (2) | (31) | ||||||||||||
Purchase accounting amortization (3) | (10) | (10) | ||||||||||||
Restructuring related charges (4) | (5) | (9) | ||||||||||||
Loss on business divestitures - net (5) | (25) | — | ||||||||||||
Impairment of nonconsolidated partially-owned affiliate (6) | (216) | — | ||||||||||||
Depreciation | (75) | (65) | ||||||||||||
Stock based compensation | (4) | (6) | ||||||||||||
Other items (7) | (2) | (1) | ||||||||||||
Earnings (loss) before interest and income taxes | (42) | 54 | ||||||||||||
Net financing charges | (48) | (35) | ||||||||||||
Other pension income (expense) | 2 | 2 | ||||||||||||
Income (loss) before income taxes | $ | (88) | $ | 21 |
Notes:
(1) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal, finance and marketing.
(2) Reflects restructuring charges for costs that are directly attributable to restructuring activities and meet the definition of restructuring under ASC 420 and non-recurring impairment charges. Refer to Note 13, "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for more information.
(3) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income.
(4) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420 along with restructuring costs at partially owned affiliates recorded within equity income.
(5) Reflects losses on business divestitures, of which $4 million is related to the deconsolidation of Adient Aerospace, and $21 million is the result of the sale of the RECARO automotive high performance seating systems.
(6) Reflects the $216 million pre-tax non-cash impairment of Adient's YFAI investment as described in Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements.
(7) The three months ended December 31, 2019 includes $1 million of transaction costs and $1 million for the U.S. tax reform impact at YFAI. The three months ended December 31, 2019 includes $1 million of Futuris integration costs.
Americas
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Net sales | $ | 1,859 | -4% | $ | 1,935 | |||||||||||||||
Adjusted EBITDA | $ | 94 | > 100% | $ | 43 |
Adient plc | Form 10-Q | 35
Net sales decreased during the first quarter of fiscal 2020 by $76 million due to lower production volumes ($79 million, including $55 million attributable to the GM labor strike), and the unfavorable impact of foreign currency ($7 million), partially offset by favorable commercial settlements and net pricing adjustments ($10 million).
Adjusted EBITDA increased during the first quarter of fiscal 2020 by $51 million due to the impact of favorable commercial settlements and net pricing adjustments ($20 million), lower administrative and engineering expense ($16 million), operational performance improvements ($20 million), favorable material economics, net of recoveries ($4 million) and the favorable impact of foreign currency ($1 million), partially offset by lower volumes and unfavorable product mix ($9 million) and lower equity income ($1 million).
EMEA
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Net sales | $ | 1,564 | -5% | $ | 1,640 | |||||||||||||||
Adjusted EBITDA | $ | 49 | > 100% | $ | 2 |
Net sales decreased during the first quarter of fiscal 2020 by $76 million due to the unfavorable impact of foreign currency ($48 million) and lower production volumes ($45 million), partially offset by favorable commercial settlements and net pricing adjustments ($17 million).
Adjusted EBITDA increased during the first quarter of fiscal 2020 by $47 million due to operational performance improvements ($23 million), the favorable impact of commercial settlements and net pricing adjustments ($21 million), lower administrative and engineering expenses ($12 million) and higher equity income ($1 million), partially offset by lower volumes and product mix ($6 million), unfavorable material economics, net of recoveries ($2 million) and the unfavorable impact of foreign currency ($2 million) .
Asia
Three Months Ended December 31, | ||||||||||||||||||||
(in millions) | 2019 | Change | 2018 | |||||||||||||||||
Net sales | $ | 572 | -12% | $ | 650 | |||||||||||||||
Adjusted EBITDA | $ | 177 | 15% | $ | 154 |
Net sales decreased during the first quarter of fiscal 2020 by $78 million due to lower production volumes ($90 million), partially offset by the favorable impact of foreign currency ($11 million) and favorable commercial settlements and net pricing adjustments ($1 million).
Adjusted EBITDA increased during the first quarter of fiscal 2020 by $23 million due to higher equity income at certain China affiliates ($26 million) including $10 million of benefits from tax credits at various affiliates that are not expected to recur, the favorable impact of commercial settlements and net pricing adjustments ($14 million) and the favorable impact of foreign currency ($1 million), partially offset by lower volumes and product mix ($6 million), higher administration and engineering costs ($5 million) and unfavorable material economics, net of recoveries ($2 million). As a result of the planned divestiture of our YFAI investment, no further equity income will be recorded related to YFAI. Refer to "Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for more information on the planned divestiture of YFAI.
Liquidity and Capital Resources
Adient's primary liquidity needs are to fund general business requirements, including working capital, capital expenditures, restructuring costs and debt service requirements. Adient's principal sources of liquidity are cash flows from operating
Adient plc | Form 10-Q | 36
activities, the revolving credit facility and other debt issuances, and existing cash balances. Adient actively manages its working capital and associated cash requirements and continually seeks more effective uses of cash. Working capital is highly influenced by the timing of cash flows associated with sales and purchases, and therefore can be difficult to manage at times. See below and refer to Note 8, "Debt and Financing Arrangements," of the notes to consolidated financial statements for discussion of financing arrangements. Following the first quarter of fiscal 2019 dividend payout, Adient has suspended future dividends.
Indebtedness
Adient US LLC ("Adient US"), a wholly owned subsidiary of Adient, together with certain of Adient's other subsidiaries, maintains an asset-based revolving credit facility (the “ABL Credit Facility”), which provides for a revolving line of credit up to $1,250 million, including a North American subfacility of up to $950 million and a European subfacility of up to $300 million, subject to borrowing base capacity. The ABL Credit Facility will mature on May 6, 2024, subject to a springing maturity date 91 days earlier if certain amounts remain outstanding at that time under the Term Loan B Agreement (defined below). Interest is payable on the ABL Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 1.50% to 2.00%. Adient will pay a commitment fee of 0.25% to 0.375% on the unused portion of the commitments under the asset-based revolving credit facility based on average global availability. Letters of credit are limited to the lesser of (x) $150 million and (y) the aggregate unused amount of commitments under the ABL Credit Facility then in effect. Subject to certain conditions, the ABL Credit Facility may be expanded by up to $250 million in additional commitments. Loans under the ABL Credit Facility may be denominated, at the option of Adient, in U.S. dollars, Euros, Pounds Sterling or Swedish Kroner. The ABL Credit Agreement is secured on a first-priority lien on all accounts receivable, inventory and bank accounts (and funds on deposit therein) and a second-priority lien on all of the tangible and intangible assets of certain Adient subsidiaries. As of December 31, 2019, Adient's availability under this facility was $1,059 million.
In addition, Adient US and Adient Global Holdings S.à r.l., a wholly-owned subsidiary of Adient, maintain a term loan credit agreement (the “Term Loan B Agreement”) providing for a 5-year $800 million senior secured term loan facility that was fully drawn at closing. The Term Loan B Agreement amortizes in equal quarterly installments at a rate of 1.00% per annum of the original principal amount thereof, with the remaining balance due at final maturity on May 6, 2024. Interest on the Term Loan B Agreement accrues at the Eurodollar rate plus an applicable margin equal to 4.25% (with one 0.25% step down based on achievement of a specific secured net leverage level starting with the fiscal quarter ending December 31, 2019). The Term Loan B Agreement also permits Adient to incur incremental term loans in an aggregate amount not to exceed the greater of $750 million and an unlimited amount subject to a pro forma first lien secured net leverage ratio of not greater than 1.75 to 1.00 and certain other conditions.
Adient US also maintains an indenture relating to the issuance of $800 million aggregate principal amount of Senior First Lien Notes (the “Notes”). The Notes mature on May 15, 2026 and bear interest at a rate of 7.00% per annum. Interest on the Notes is payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2019.
The ABL Credit Facility, Term Loan B Agreement and the Notes contain covenants that are usual and customary for facilities and transactions of this type and that, among other things, restrict the ability of Adient and its restricted subsidiaries to: create certain liens and enter into sale and lease-back transactions; create, assume, incur or guarantee certain indebtedness; pay dividends or make other distributions on, or repurchase or redeem, Adient’s capital stock or certain other debt; make other restricted payments; and consolidate or merge with, or convey, transfer or lease all or substantially all of Adient’s and its restricted subsidiaries’ assets, to another person. These covenants are subject to a number of other limitations and exceptions set forth in the agreements. The agreements also provide for customary events of default, including, but not limited to, failure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of bankruptcy or insolvency involving Adient and its significant subsidiaries.
Adient Global Holdings Ltd., a wholly-owned subsidiary of Adient, maintains $0.9 billion aggregate principal amount of 4.875% USD-denominated unsecured notes due 2026 and €1.0 billion aggregate principal amount of 3.50% unsecured notes due 2024. Adient Germany Ltd. & Co. KG, a wholly owned subsidiary of Adient, maintains €165 million in an unsecured term loan from the European Investment Bank due in 2022. The loan bears interest at the 6-month EURIBOR rate plus 158 basis points.
Adient plc | Form 10-Q | 37
Sources of Cash Flows
Three Months Ended December 31, | ||||||||||||||
(in millions) | 2019 | 2018 | ||||||||||||
Cash provided (used) by operating activities | $ | 239 | $ | (128) | ||||||||||
Cash provided (used) by investing activities | (128) | (118) | ||||||||||||
Cash provided (used) by financing activities | (74) | (38) | ||||||||||||
Capital expenditures | (91) | (144) |
Operating Cash Flows: Cash flows from operating activities increased year over year primarily as a result of higher profitability and favorable overall changes to working capital, including favorable changes to accounts receivable, inventory and accounts payable.
Investing Cash Flows: The increase in cash used by investing activities is primarily attributable to a $37 million cash outflow related to the deconsolidation of Adient Aerospace, partially offset by a year over year decrease in capital expenditures ($53 million), and prior year proceeds from the sale of the Detroit, Michigan properties and airplane ($35 million).
Financing Cash Flows: The increase in cash used by financing activities is primarily attributable to cash dividends paid to noncontrolling interests ($18 million), funding of short-term debt ($19 million), and prior year cash received related to the formation of the Adient Aerospace consolidated joint venture ($28 million), partially offset by non-recurring cash dividends paid in the prior year ($26 million).
Capital expenditures: Capital expenditures decreased year over year based on timing of program spend on product launches and tightening controls around overall spending.
Working capital
(in millions) | December 31, 2019 | September 30, 2019 | ||||||||||||
Current assets | $ | 3,799 | $ | 4,116 | ||||||||||
Current liabilities | 3,683 | 3,835 | ||||||||||||
Working capital | $ | 116 | $ | 281 | ||||||||||
The decrease in working capital of $165 million is primarily attributable to lower levels of accounts receivable as of December 31, 2019 offset by lower levels of accounts payable. Also contributing to the lower levels of working capital is the recognition of lease liabilities (current lease liability of $112 million at December 31, 2019 impacting working capital), upon adoption of the new lease accounting standard in the first quarter of fiscal 2020.
Adient plc | Form 10-Q | 38
Restructuring and Impairment Costs
During the first quarter of 2020, Adient committed to a restructuring plan ("2020 Plan") of $7 million that was offset by $5 million of prior year underspend. Of the restructuring costs recorded, $3 million relates to the Americas segment, $2 million relates to the EMEA segment and $2 million relates to the Asia segment. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions. The restructuring actions are expected to be substantially completed by fiscal 2021.
In fiscal 2019, Adient committed to a restructuring plan ("2019 Plan") of $109 million that was offset by $16 million of prior year underspend, a $9 million increase to a prior year reserve and $6 million of customer recoveries related to previous restructuring charges. Of the restructuring costs recorded, $81 million relates to the EMEA segment, $16 million relates to the Americas segment and $8 million relates to the Asia segment. This is the total amount expected to be incurred for this restructuring plan.The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions. Adient currently estimates that upon completion of the restructuring actions, the fiscal 2019 restructuring plan will reduce annual operating costs by approximately $109 million, which is primarily the result of lower costs of sales and selling, general and administrative expenses due to reduced employee-related costs, of which approximately 35-40% will result in net savings. The restructuring actions are expected to be substantially completed by fiscal 2021.
In fiscal 2018, Adient committed to a restructuring plan ("2018 Plan") of $71 million that was offset by $25 million of prior year underspend. Of the restructuring costs recorded, $52 million relates to the EMEA segment, $10 million relates to the Asia segment and $9 million relates to the Americas segment. In fiscal 2019 there was adjustment to this plan which resulted in additional $9 million of charges. This is the total amount expected to be incurred for this restructuring plan. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions. Adient currently estimates that upon completion of the restructuring actions, the fiscal 2018 restructuring plan will reduce annual operating costs by approximately $65 million, which is primarily the result of lower costs of sales and selling, general and administrative expenses due to reduced employee-related costs, of which approximately 60% will result in net savings. Adient partially achieved these savings in fiscal year 2019. The restructuring plan reserve balance of $13 million at December 31, 2019 is expected to be paid in cash.
In fiscal 2017, Adient committed to a restructuring plan ("2017 Plan") and recorded $46 million of restructuring and impairment costs in the consolidated statements of income. Of the restructuring costs recorded, $34 million relates to the EMEA segment, $7 million relates to the Americas segment and $5 million relates to the Asia segment. This is the total amount expected to be incurred for this restructuring plan. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions and plant closures. Adient currently estimates that upon completion of the restructuring actions, the fiscal 2017 restructuring plan will reduce annual operating costs by approximately $40 million, which is primarily the result of lower cost of sales and selling, general and administrative expenses due to reduced employee-related costs, of which approximately 55%-60% will result in net savings. Adient partially achieved these savings in fiscal years 2017, 2018 and 2019. The restructuring actions are expected to be substantially complete in fiscal 2021. There were no material changes during the first quarter of fiscal 2020 to the 2017 Plan's $5 million reserve balance.
In fiscal 2016, Adient committed to a restructuring plan ("2016 Plan") and recorded $332 million of restructuring and impairment costs in the consolidated statements of income. This is the total amount expected to be incurred for this restructuring plan. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions, plant closures and asset impairments. Adient currently estimates that upon completion of the restructuring actions, the fiscal 2016 restructuring plan will reduce annual operating costs by approximately $145 million, which is primarily the result of lower cost of sales and selling, general and administrative expenses due to reduced employee-related costs and depreciation expense, of which approximately 75%-80% will result in net savings. Adient partially achieved these savings in fiscal years 2016 through 2019.
Off-Balance Sheet Arrangements and Contractual Obligations
There have been no material changes to the off-balance sheet arrangements and contractual obligations disclosed in Adient's Annual Report on Form 10-K for the year ended September 30, 2019.
Effects of Inflation and Changing Prices
The effects of inflation have not been significant to Adient's results of operations in recent years. Generally, Adient has been able to implement operating efficiencies to sufficiently offset cost increases, which have been moderate.
Adient plc | Form 10-Q | 39
Critical Accounting Estimates and Policies
See "Critical Accounting Estimates and Policies" under the heading "Item 7" of Adient's Annual Report on Form 10-K for the year ended September 30, 2019, for a discussion of critical accounting estimates and policies. There have been no material changes to Adient's critical accounting estimates and policies during the three months ended December 31, 2019.
New Accounting Pronouncements
See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies," of the notes to consolidated financial statements for a discussion of new accounting pronouncements.
Other Information | |||||
Not applicable. |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
As of December 31, 2019, Adient had not experienced any adverse changes in market risk exposures that materially affected the quantitative and qualitative disclosures presented in Adient's Annual Report on Form 10-K for the year ended September 30, 2019.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, Adient's principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")), which are designed to provide reasonable assurance that we are able to record, process, summarize and report the information required to be disclosed in our reports under the Exchange Act within the time periods specified in SEC rules and forms. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to management, and made known to our principal executive officer and principal financial officer, on a timely basis to ensure that it is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting during the three months ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Adient plc | Form 10-Q | 40
PART II - OTHER INFORMATION |
Item 1. | Legal Proceedings |
Adient is involved in various lawsuits, claims and proceedings incident to the operation of its businesses, including those pertaining to product liability, product safety, environmental, safety and health, intellectual property, employment, commercial and contractual matters and various other matters. Although the outcome of any such lawsuit, claim or proceeding cannot be predicted with certainty and some may be disposed of unfavorably to Adient, it is management's opinion that none of these will have a material adverse effect on Adient's financial position, results of operations or cash flows. Adient accrues for potential liabilities in a manner consistent with accounting principles generally accepted in the United States, that is, when it is probable a liability has been incurred and the amount of the liability is reasonably estimable.
Information with respect to this item may be found in Note 17, "Commitments and Contingencies," of the notes to consolidated financial statements in this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
Additional information on Adient's commitments and contingencies can be found in Adient's Annual Report on Form 10-K for its fiscal year ended September 30, 2019.
Item 1A. | Risk Factors |
There are no material changes from the risk factors as previously disclosed in Adient's Annual Report on Form 10-K for the fiscal year ended September 30, 2019, except that Adient has updated the below risk factors to reflect recent developments. The following risk factor updates supersede the corresponding risk factors previously reported in Adient's Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
General economic, credit, capital market and political conditions could adversely affect Adient's financial performance, Adient's ability to grow or sustain its businesses and Adient's ability to access the capital markets.
Adient competes around the world in various geographic regions and product markets. Global economic conditions affect Adient's business. As discussed in greater detail below, any future financial distress in the industries and/or markets where Adient competes could negatively affect Adient's revenues and financial performance in future periods, result in future restructuring charges, and adversely impact Adient's ability to grow or sustain its businesses.
The capital and credit markets provide Adient with liquidity to operate and grow its business beyond the liquidity that operating cash flows provide. A worldwide economic downturn and/or disruption of the credit markets likely would reduce Adient's access to capital necessary for its operations and executing its strategic plan. If Adient's access to capital were to become constrained significantly, or if costs of capital increased significantly, due to lowered credit ratings, prevailing industry conditions, the volatility of the capital markets or other factors, Adient's financial condition, results of operations and cash flows likely would be adversely affected.
On June 23, 2016, the U.K. voted in a national referendum to withdraw from the European Union and in March 2017 the U.K. invoked Article 50 of the Treaty on European Union, which began the U.K.’s withdrawal from the European Union. The U.K. formally left the European Union on January 31, 2020 and entered into a transition period which is due to end on December 31, 2020, during which the U.K. and the European Union will seek to agree on the terms of their future relationship. Uncertainties in connection with the future of the U.K. and its relationship with the European Union have caused and may continue to cause disruptions to capital and currency markets worldwide. The consequences of a withdrawal by the U.K. from the European Union and the impact on markets, as well as the impact on Adient’s operations, remain highly uncertain, in particular, in respect of the U.K.’s future access to the European Single Market, its future regulatory environment and the free movement of capital and labor. This market volatility may lead to an increase in Adient’s cost of borrowing or the availability of credit, which may adversely impact Adient’s financial performance. The U.K.’s withdrawal from the European Union may also have a detrimental effect on Adient’s customers and suppliers, which would, in turn, adversely affect Adient’s revenues and financial condition. In
Adient plc | Form 10-Q | 41
addition, the U.K.’s withdrawal from the European Union may also result in legal uncertainty and potentially divergent national laws and regulations as new legal relationships between the U.K. and the European Union are established.
Risks associated with joint venture partnerships may adversely affect Adient's business and financial results.
Adient has entered into several joint ventures worldwide and may enter into additional joint ventures in the future. Adient's joint venture partners may at any time have economic, business or legal interests or goals that are inconsistent with Adient's goals or with the goals of the joint venture. Adient may compete against its joint venture partners in certain of its markets and certain negotiations with its customers may negatively impact its joint venture business with those same customers. Disagreements with Adient's business partners may impede Adient's ability to maximize the benefits of its partnerships and/or may consume management time and other resources to negotiate. Adient's joint venture arrangements may require Adient, among other matters, to pay certain costs or to make certain capital investments or to seek its joint venture partner's consent to take certain actions. Adient does not control the ability to collect cash dividends from its non-consolidated joint ventures. Delays in the collection of dividends, even by a few days, could adversely affect Adient's financial position and cash flows. Adient's joint venture partners may be unable or unwilling to meet their economic or other obligations under the operative documents, and Adient may be required to either fulfill those obligations alone to ensure the ongoing success of a joint venture or to dissolve and liquidate a joint venture. Further, joint venture partnerships are subject to renewal or expiration at various times, specifically including the need to renew the YFAS joint venture by the end of 2022. Adient has recently entered into an agreement to extend the term of the YFAS joint venture until December 31, 2038, which transaction is subject to regulatory and other customary conditions of closing and is cross-conditioned on other transactions that Adient has entered into with Yanfeng related to the YFAI and AYM joint ventures. The failure to renew or extend the terms of Adient’s joint venture partnerships could impact other areas of Adient’s business, including its business relationships. The above risks, if realized, could result in an adverse effect on Adient's business and financial results.
Risks associated with Adient's non-U.S. operations could adversely affect Adient's business, financial condition and results of operations.
Adient has significant operations in a number of countries outside the U.S. , some of which are located in emerging markets. Long-term economic uncertainty in some of the regions of the world in which Adient operates, such as Asia, South America and Europe and other emerging markets, could result in the disruption of markets and negatively affect cash flows from Adient's operations to cover its capital needs and debt service requirements.
In addition, as a result of Adient's global presence, a significant portion of its revenues and expenses is denominated in currencies other than the U.S. dollar. Adient is therefore subject to foreign currency risks and foreign exchange exposure. While Adient employs financial instruments to hedge some of its transactional foreign exchange exposure, these activities do not insulate Adient completely from those exposures. Exchange rates can be volatile and could adversely impact Adient's financial results and the comparability of results from period to period.
There are other risks that are inherent in Adient's non-U.S. operations, including the potential for changes in socioeconomic conditions, laws and regulations, including import, export, direct and indirect taxes, value-added taxes, labor and environmental laws, and monetary and fiscal policies; protectionist measures that may prohibit acquisitions or joint ventures, or impact trade volumes; unsettled political conditions; government-imposed plant or other operational shutdowns; backlash from foreign labor organizations related to Adient's restructuring actions; corruption; natural and man-made disasters, global health epidemics, hazards and losses; violence, civil and labor unrest; and possible terrorist attacks. Specifically, Adient is assessing and responding where possible to the potential impact of the coronavirus outbreak in China. Adient’s assessment includes an evaluation of the impact on its facilities, employees, customers, suppliers and logistics providers. The significance of the virus’ impact on Adient’s business remains uncertain.
These and other factors may have an adverse effect on Adient's non-U.S. operations and therefore on Adient's business and results of operations.
Adient plc | Form 10-Q | 42
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) Unregistered Sale of Equity Securities | ||
None. | ||
(b) Use of Proceeds | ||
Not applicable. | ||
(c) Repurchase of Equity Securities | ||
There has been no share repurchase activity during the three months ended December 31, 2019. |
Item 3. | Defaults Upon Senior Securities |
None. |
Item 4. | Mine Safety Disclosures |
Not applicable. |
Item 5. | Other Information |
None. |
Adient plc | Form 10-Q | 43
Item 6. | Exhibit Index |
EXHIBIT INDEX
Exhibit No. | Exhibit Title | |||||||
31.1 | ||||||||
31.2 | ||||||||
32.1 | ||||||||
101.INS | XBRL Instance Document | |||||||
101.SCH | XBRL Taxonomy Extension Schema Document | |||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |||||||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Adient plc | Form 10-Q | 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Adient plc | ||||||||
By: | /s/ Douglas G. Del Grosso | |||||||
Douglas G. Del Grosso | ||||||||
President and Chief Executive Officer and a Director | ||||||||
Date: | February 7, 2020 | |||||||
By: | /s/ Jeffrey M. Stafeil | |||||||
Jeffrey M. Stafeil | ||||||||
Executive Vice President and Chief Financial Officer | ||||||||
Date: | February 7, 2020 |
Adient plc | Form 10-Q | 45