UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM | |||
For the quarterly period ended June 30, 2019
or
For the transition period from __________ to __________
Commission File Number: 001-37757
 | ||||
(exact name of Registrant as specified in its charter) | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices)
(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 | ||
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):
☑ | 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 June 30, 2019, 93,620,714 ordinary shares were outstanding.
Adient plc | Form 10-Q | 1
Adient plc
Form 10-Q
For the Three and Nine Months Ended June 30, 2019
TABLE OF CONTENTS
Adient plc | Form 10-Q | 2
Adient plc
Consolidated Statements of Income (Loss)
(unaudited)
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions, except per share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net sales | $ | $ | $ | $ | ||||||||||||
Cost of sales | ||||||||||||||||
Gross profit | ||||||||||||||||
Selling, general and administrative expenses | ||||||||||||||||
Restructuring and impairment costs | ||||||||||||||||
Equity income (loss) | ||||||||||||||||
Earnings (loss) before interest and income taxes | ||||||||||||||||
Net financing charges | ||||||||||||||||
Other pension expense (income) | ( | ) | ( | ) | ||||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
Income tax provision (benefit) | ( | ) | ||||||||||||||
Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
Income (loss) attributable to noncontrolling interests | ||||||||||||||||
Net income (loss) attributable to Adient | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Earnings per share: | ||||||||||||||||
Basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Shares used in computing earnings per share: | ||||||||||||||||
Basic | ||||||||||||||||
Diluted | ||||||||||||||||
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 June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||||||
Realized and unrealized gains (losses) on derivatives | ( | ) | ( | ) | ||||||||||||
Other comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
Total comprehensive income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Comprehensive income (loss) attributable to noncontrolling interests | ||||||||||||||||
Comprehensive income (loss) attributable to Adient | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
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) | June 30, 2019 | September 30, 2018 | ||||||
Assets | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable - net | ||||||||
Inventories | ||||||||
Other current assets | ||||||||
Current assets | ||||||||
Property, plant and equipment - net | ||||||||
Goodwill | ||||||||
Other intangible assets - net | ||||||||
Investments in partially-owned affiliates | ||||||||
Assets held for sale | ||||||||
Other noncurrent assets | ||||||||
Total assets | $ | $ | ||||||
Liabilities and Shareholders' Equity | ||||||||
Short-term debt | $ | $ | ||||||
Current portion of long-term debt | ||||||||
Accounts payable | ||||||||
Accrued compensation and benefits | ||||||||
Restructuring reserve | ||||||||
Other current liabilities | ||||||||
Current liabilities | ||||||||
Long-term debt | ||||||||
Pension and postretirement benefits | ||||||||
Other noncurrent liabilities | ||||||||
Long-term liabilities | ||||||||
Commitments and Contingencies (Note 16) | ||||||||
Redeemable noncontrolling interests | ||||||||
Preferred shares issued, par value $0.001; 100,000,000 shares authorized Zero shares issued and outstanding at June 30, 2019 | ||||||||
Ordinary shares issued, par value $0.001; 500,000,000 shares authorized 93,620,714 shares issued and outstanding at June 30, 2019 | ||||||||
Additional paid-in capital | ||||||||
Retained earnings (accumulated deficit) | ( | ) | ( | ) | ||||
Accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||
Shareholders' equity attributable to Adient | ||||||||
Noncontrolling interests | ||||||||
Total shareholders' equity | ||||||||
Total liabilities and shareholders' equity | $ | $ | ||||||
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)
Nine Months Ended June 30, | ||||||||
(in millions) | 2019 | 2018 | ||||||
Operating Activities | ||||||||
Net income (loss) attributable to Adient | $ | ( | ) | $ | ( | ) | ||
Income attributable to noncontrolling interests | ||||||||
Net income (loss) | ( | ) | ( | ) | ||||
Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: | ||||||||
Depreciation | ||||||||
Amortization of intangibles | ||||||||
Pension and postretirement benefit expense (benefit) | ( | ) | ||||||
Pension and postretirement contributions, net | ( | ) | ||||||
Equity in earnings of partially-owned affiliates, net of dividends received (includes purchase accounting amortization of $0, and $16, respectively) | ( | ) | ||||||
Deferred income taxes | ||||||||
Non-cash impairment charges | ||||||||
Equity-based compensation | ||||||||
Other | ||||||||
Changes in assets and liabilities: | ||||||||
Receivables | ( | ) | ||||||
Inventories | ( | ) | ||||||
Other assets | ( | ) | ||||||
Restructuring reserves | ( | ) | ( | ) | ||||
Accounts payable and accrued liabilities | ( | ) | ( | ) | ||||
Accrued income taxes | ( | ) | ||||||
Cash provided (used) by operating activities | ||||||||
Investing Activities | ||||||||
Capital expenditures | ( | ) | ( | ) | ||||
Sale of property, plant and equipment | ||||||||
Changes in long-term investments | ( | ) | ||||||
Loans to affiliates | ( | ) | ||||||
Other | ||||||||
Cash provided (used) by investing activities | ( | ) | ( | ) | ||||
Financing Activities | ||||||||
Increase (decrease) in short-term debt | ( | ) | ||||||
Increase (decrease) in long-term debt | ||||||||
Repayment of long-term debt | ( | ) | ( | ) | ||||
Debt financing costs | ( | ) | ||||||
Cash dividends | ( | ) | ( | ) | ||||
Dividends paid to noncontrolling interests | ( | ) | ( | ) | ||||
Formation of consolidated joint venture | ||||||||
Other | ( | ) | ( | ) | ||||
Cash provided (used) by financing activities | ( | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | ||||||||
Increase (decrease) in cash and cash equivalents | ( | ) | ||||||
Cash and cash equivalents at beginning of period | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
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.
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. 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.
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.
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 June 30, 2019 and September 30, 2018, 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.
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:
(in millions) | June 30, 2019 | September 30, 2018 | ||||||
Current assets | $ | $ | ||||||
Noncurrent assets | ||||||||
Total assets | $ | $ | ||||||
Current liabilities | $ | $ | ||||||
Total liabilities | $ | $ | ||||||
Adient plc | Form 10-Q | 7
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions, except per share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) attributable to Adient | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding | ||||||||||||||||
Effect of dilutive securities | ||||||||||||||||
Diluted shares | ||||||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Except for the three months ended June 30, 2018, potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per share as a result of being in a loss position.
New Accounting Pronouncements
Standards Adopted During Fiscal 2019
ASU 2014-09, Revenue - Revenue from Contracts with Customers. On October 1, 2018, 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. Comparative financial information for reporting periods beginning prior to October 1, 2018 has not been adjusted and continues to be reported in accordance with Adient's revenue recognition policies prior to the adoption of ASC 606. Adient did not record a cumulative adjustment related to the adoption of ASC 606, and the effects of adoption were not significant. Refer to Note 2, "Revenue Recognition," of the notes to the consolidated financial statements for information related to Adient's adoption of ASU 2014-09.
ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On October 1, 2018, Adient adopted the amendments to ASU 2017-07 that improve the presentation of net periodic pension and postretirement benefit costs and retrospectively adopted the presentation of service cost separate from the other components of net periodic costs. The interest cost, expected return on assets, amortization of prior service costs, net remeasurement, and other costs have been reclassified from cost of sales and selling, general and administrative expenses to other pension expense (income). Adient elected to apply the practical expedient which allows reclassification of amounts previously disclosed in the retirement benefits note as the basis for applying retrospective presentation for comparative periods as it is impracticable to determine the disaggregation of the cost components for amounts capitalized and amortized in those periods. On a prospective basis, the other components of net periodic benefit costs will not be included in amounts capitalized in inventory or property, plant, and equipment.
The effect of the retrospective presentation change related to the net periodic cost of Adient's defined benefit pension and other postretirement employee benefits ("OPEB") plans on the consolidated statements of income (loss) for the three months and nine months ended June 30, 2018 resulted in $1 million and $4 million increases to cost of sales, $1 million and $4 million decreases to gross profit, $9 million and $14 million increases to selling, general and administrative expenses, $10 million and $18 million decreases to earnings (loss) before interest and income taxes and $10 million and $18 million increases to other pension expense (income) line items in the condensed consolidated statements of income, respectively. As a result of presenting certain pension costs as non-operating items, adjusted EBITDA decreased in EMEA by $1 million and $3 million for the three months and nine months ended June 30, 2018, respectively.
Adient plc | Form 10-Q | 8
Adient also adopted the following standards during fiscal 2019, none of which had a material impact to the consolidated financial statements or consolidated financial statement disclosures:
Standard Adopted | Description | Date Effective and Adopted | ||
ASU 2016-01 and ASU 2018-03, Recognition and Measurement of Financial Assets and Financial Liabilities | ASU 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments. | October 1, 2018 | ||
ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments | ASU 2016-clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. | October 1, 2018 | ||
ASU 2016-18, Statement of Cash Flows: Restricted Cash | ASU 2016-18 clarifies the classification and presentation of restricted cash on the statement of cash flows. | October 1, 2018 | ||
ASU 2017-01, Clarifying the Definition of a Business | ASU 2017-01 clarifies the definition of a business as it relates to the acquisition or sale of assets or businesses. | October 1, 2018 | ||
ASU 2017-05, Gains and Losses from the Derecognition of Nonfinancial Assets | ASU 2017-05 clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets and will follow the same implementation guidelines as ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606). | October 1, 2018 | ||
ASU 2017-09, Stock Compensation - Scope of Modification Accounting | ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. | October 1, 2018 | ||
ASU 2018-08, Not for Profit Entities: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made | ASU 2018-08 is intended to clarify and improve the scope and the accounting guidance for contributions received and contributions made. The amendments in ASU No. 2018-08 should assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transaction) within the scope of Topic 958, Not-for-Profit Entities, or as exchange (reciprocal) transactions subject to other guidance and (2) determining whether a contribution is conditional. This amendment applies to all entities that make or receive grants or contributions. | October 1, 2018 | ||
ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract | The amendments in ASU 2018-15 require implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. The amendments also require an entity to disclose the nature of its hosting arrangements and adhere to certain presentation requirements in its balance sheet, income statement and statement of cash flows. | ASU No. 2018-15 is effective for Adient for the quarter ending December 31, 2019, with early adoption permitted. Adient early adopted ASU No. 2018-15 effective October 1, 2018. | ||
ASU 2018-16, Derivatives and Hedging: Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes | The amendments in this Update permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the UST, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate, and the SIFMA Municipal Swap Rate. | October 1, 2018 | ||
Adient plc | Form 10-Q | 9
Standards Effective After Fiscal 2019
Adient believes that the ASU summarized below, which is effective at the beginning of fiscal 2020, could significantly impact the consolidated financial statements:
Standard Pending Adoption | Description | Anticipated Impact | Effective Date | |||
ASU 2016-02, 2018-01, 2018-10, 2018-11 and ASU 2019-01 | The standard requires that a lessee recognize on its balance sheet right-of-use assets and corresponding liabilities resulting from leasing transactions, as well as additional financial statement disclosures. Currently, U.S. GAAP only requires balance sheet recognition for leases classified as capital leases. The provisions of this update apply to substantially all leased assets. | Adient is currently evaluating the impact this standard will have on its consolidated financial position, results of operations and cash flows and expects the impact to the consolidated balance sheet to be significant. | October 1, 2019 | |||
Adient has considered the ASUs summarized below, effective after fiscal 2019, 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 | ||
ASU 2018-07, Compensation-Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting | ASU 2018-07 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 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. | October 1, 2019 | ||
ASU 2018-13, Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement | The amendments in ASU 2018-13 eliminate, add, and modify certain disclosure requirements for fair value measurements. ASU 2018-13 will be effective for Adient for the quarter ending December 31, 2019, with early adoption permitted for either the entire ASU or only the provisions that eliminate or modify requirements. 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, 2019 | ||
ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework - Changes to the Disclosure Requirements for Defned 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, Consolidated: Targeted Improvements to Related Party Guidance for Variable Interest Entities | The amendments in this Update affect 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, 2019 | ||
Adient plc | Form 10-Q | 10
Adient has considered the ASUs summarized below, effective after fiscal 2019, none of which are expected to significantly impact the consolidated financial statements: (continued) | ||||
Standard Adopted | Description | Date Effective | ||
ASU 2018-18, Collaborative Arrangements: Clarifying the Interaction between Topic 808 and Topic 606 | The amendments in this Update make targeted improvements to generally accepted accounting principles (GAAP) for collaborative arrangements as follows: 1) Clarify that certain transactions between collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. 2) Add unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. 3) Require that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. | October 1, 2019 | ||
Adient plc | Form 10-Q | 11
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. Comparative financial information for reporting periods beginning prior to October 1, 2018 has not been adjusted and continues to be reported in accordance with Adient's revenue recognition policies prior to the adoption of 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 will adopt ASC 606 on October 1, 2019.
Adient generates revenue through the sale of automotive seating solutions, including complete seating systems and the components of complete seating systems.
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 contract 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 ASC606 or at June 30, 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.
Adient plc | Form 10-Q | 12
The following table presents disaggregated revenue by geographical market:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Americas | ||||||||||||||||
United States | $ | $ | $ | $ | ||||||||||||
Mexico | ||||||||||||||||
Other Americas | ||||||||||||||||
Regional elimination | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
EMEA | ||||||||||||||||
Germany | ||||||||||||||||
Other EMEA | ||||||||||||||||
Regional elimination | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Asia | ||||||||||||||||
China | ||||||||||||||||
Other Asia | ||||||||||||||||
Regional elimination | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Inter-segment elimination | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total | $ | $ | $ | $ | ||||||||||||
3. Acquisitions and Divestitures | ||||
Acquisitions
Adient's consolidated affiliate, Adient Aerospace, LLC ("Adient Aerospace"), became operational on October 11, 2018 after securing regulatory approvals. Adient's ownership position in Adient Aerospace is 50.01 %. Adient Aerospace will develop, manufacture, and sell 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. Adient Aerospace's results are included within the Americas segment. Initial contributions of $28 million were made during the first quarter of fiscal 2019 by each JV partner.
Assets Held for Sale
During fiscal 2018, Adient committed to a plan to sell its Detroit, Michigan properties and its airplanes and actively marketed the sale of these assets. As a result, these assets were classified as assets held for sale and were required to be adjusted to the lower of fair value less cost to sell or carrying value. This resulted in an impairment charge of $49 million which was recorded within restructuring and impairment costs on the consolidated statement of income (loss) during fiscal 2018, of which $39 million related to Americas assets and $10 million related to corporate assets. The impairment was measured using third party sales pricing to determine fair values of the assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." During the fourth quarter of fiscal 2018, one airplane was sold for $36 million. During the first quarter of fiscal 2019, both the Detroit, Michigan properties and remaining airplane were sold for approximately $35 million.
Adient plc | Form 10-Q | 13
4. Inventories | ||||
Inventories consisted of the following:
(in millions) | June 30, 2019 | September 30, 2018 | ||||||
Raw materials and supplies | $ | $ | ||||||
Work-in-process | ||||||||
Finished goods | ||||||||
Inventories | $ | $ | ||||||
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, 2018 | $ | $ | $ | $ | ||||||||||||
Currency translation and other | ( | ) | ||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | $ | ||||||||||||
During the second quarter of fiscal 2019, Adient began reporting three new segments: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia"). Accordingly, goodwill previously reported in the former Seating segment has been reallocated to the three new segments on a relative fair value basis. Refer to Note 14, "Segment Information" for more information on Adient's reportable segments.
Adient evaluates its goodwill for impairment on an annual basis, or as facts and circumstances warrant. As a result of the change in reportable segments during the second quarter of fiscal 2019, Adient conducted goodwill impairment analyses of the newly allocated goodwill balances under the new reportable segment structure. Adient performs impairment reviews for its reporting units, which have been determined to be Adient's reportable segments, using a fair value method based on management's judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. Adient estimated the fair value of each of its reporting units using a discounted cash flow analysis approach, which utilized Level 3 unobservable inputs. These calculations contain uncertainties as they require management to make assumptions about market comparables, future cash flows, the appropriate discount rates (based on weighted average cost of capital ranging from 14.5 %-17.5 %) and growth rates to reflect the risk inherent in the future cash flows. The estimated future cash flows reflect management's latest assumptions of the financial projections based on current and anticipated competitive landscape and product profitability based on historical trends. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on Adient's results of operations. As a result of the analyses, Adient determined that no goodwill was impaired.
Adient's other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of:
June 30, 2019 | September 30, 2018 | |||||||||||||||||||||||
(in millions) | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||
Intangible assets | ||||||||||||||||||||||||
Patented technology | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Customer relationships | ( | ) | ( | ) | ||||||||||||||||||||
Trademarks | ( | ) | ( | ) | ||||||||||||||||||||
Miscellaneous | ( | ) | ( | ) | ||||||||||||||||||||
Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Adient plc | Form 10-Q | 14
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:
Nine Months Ended June 30, | ||||||||
(in millions) | 2019 | 2018 | ||||||
Balance at beginning of period | $ | $ | ||||||
Accruals for warranties issued during the period | ||||||||
Changes in accruals related to pre-existing warranties (including changes in estimates) | ( | ) | ||||||
Settlements made (in cash or in kind) during the period | ( | ) | ( | ) | ||||
Balance at end of period | $ | $ | ||||||
7. Debt and Financing Arrangements | ||||
Long-term debt consisted of the following:
(in millions) | June 30, 2019 | September 30, 2018 | ||||||
Term Loan A - LIBOR plus 1.75% due in 2021 | $ | $ | ||||||
Term Loan B - LIBOR plus 4.25% due in 2024 | ||||||||
4.875% Notes due in 2026 | ||||||||
3.50% Notes due in 2024 | ||||||||
7.00% Notes due in 2026 | ||||||||
European Investment Bank Loan - EURIBOR plus 0.90% due in 2022 | ||||||||
Capital lease obligations | — | |||||||
Less: debt issuance costs | ( | ) | ( | ) | ||||
Gross long-term debt | ||||||||
Less: current portion | ||||||||
Net long-term debt | $ | $ | ||||||
Existing debt arrangements
On May 6, 2019 (the “Refinancing Date”), Adient US LLC ("Adient US"), a wholly owned subsidiary of Adient, together with certain of Adient's other subsidiaries, entered into a new 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 New Term Loan Credit Agreement (defined below). Interest is payable on the ABL Credit Facility at a fluctuating rate of interest determined
Adient plc | Form 10-Q | 15
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 June 30, 2019, Adient's availability under this facility was $1,054 million.
In addition, Adient US and Adient Global Holdings S.à r.l., a wholly-owned subsidiary of Adient, entered into a new term loan credit agreement (the “Term Loan B Agreement”) on the Refinancing Date providing for a 5 -year $800 million senior secured term loan facility that was fully drawn on 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.
Finally, on the Refinancing Date, Adient US entered into 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 proceeds from the transactions described above were used to repay the outstanding indebtedness and terminate commitments under Adient’s former credit agreement, which was scheduled to mature in July 2021. In addition, certain proceeds were used (i) to pay related premiums, fees and expenses in connection with the refinancing and entering into and funding of the new credit facilities and (ii) for working capital and other general corporate purposes.
The ABL Credit Agreement, 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.
On August 19, 2016, AGH issued $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, in a private offering exempt from the registration requirements of the Securities Act of 1933, as amended. The proceeds of the notes were used, together with the Term Loan A facility, to pay a distribution to the former Parent, with the remaining proceeds used for working capital and general corporate purposes.
On May 29, 2017, Adient Germany Ltd. & Co. KG, a wholly owned subsidiary of Adient, borrowed €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 90 basis points. Loan proceeds were used to repay $200 million of the Term Loan A facility.
Former debt arrangements
On July 27, 2016, Adient Global Holdings Ltd ("AGH"), a wholly owned subsidiary of Adient, entered into a credit agreement providing for commitments with respect to a $1.5 billion revolving credit facility (undrawn at September 30, 2018) and a $1.5 billion Term Loan A facility (the "Original Credit Facilities"). The Original Credit Facilities were to mature in July 2021. Until the Term Loan A facility maturity date, amortization of the funded Term Loan A was required in an amount per quarter equal to 1.25 % of the original principal amount prior to July 27, 2019 and 2.5 % in each quarter thereafter prior to final maturity. The Original Credit Facilities contained covenants that included, among other things and subject to certain significant exceptions, restrictions on Adient's ability to declare or pay dividends, make certain payments in respect of the notes, create liens, incur additional indebtedness, make investments, engage in transactions with affiliates, enter into agreements restricting Adient's
Adient plc | Form 10-Q | 16
subsidiaries' ability to pay dividends, dispose of assets and merge or consolidate with any other person. The Term Loan A facility also required mandatory prepayments in connection with certain non-ordinary course asset sales and insurance recovery and condemnation events, among other things, and subject in each case to certain significant exceptions.
On November 6, 2018, Adient entered into an amendment to the Original Credit Facilities (“First Amended Credit Facilities") whereby the financial maintenance covenant was amended to require Adient to maintain a total net leverage ratio equal to or less than 4.5 x adjusted EBITDA (previously 3.5 x adjusted EBITDA), with step down provisions starting in the quarter ending December 31, 2020. The amendment also expanded the upper range of interest rate margins such that the drawn portion of the First Amended Credit Facilities would bear interest based on LIBOR plus a margin between 1.25 % - 2.50 % (previously 1.25 % - 2.25 %), based on Adient’s total net leverage ratio. No other terms were impacted by the first amendment. On February 6, 2019, Adient entered into an amendment to the First Amended Credit Facilities (“Second Amended Credit Facilities") whereby the financial maintenance covenant contained in the First Amended Credit Facilities was amended to require Adient to maintain a first lien secured net leverage ratio equal to or less than 2.5 x adjusted EBITDA as of the last day of each quarter, with step down provisions starting on September 30, 2020. The amendment also added a new tier to the pricing schedule that will be applicable when the total net leverage ratio exceeds 4.0 x adjusted EBITDA and amended certain other definitions, negative covenants and other terms within the credit facility.
The full amount of the Term Loan A facility was drawn in the fourth quarter of fiscal 2016. These funds were transferred to the former Parent at the time of the draw and were reflected within net transfers to the former Parent in the consolidated statement of cash flow during the fourth quarter of fiscal 2016. In February 2017, Adient repaid $100 million of the Term Loan A facility. In May 2017, Adient repaid another $200 million of the Term Loan A facility. The total amount repaid was treated as a prepayment of the quarterly mandatory principle amortization for the period between March 2017 and June 2020 resulting in no required principal payment until June 2020.
AGH was required to pay a commitment fee on the unused portion of the commitments under the revolving credit facility based on the total net leverage ratio of Adient, ranging from 0.15 % to 0.45 %.
Net Financing Charges
Adient's net financing charges line item in the consolidated statements of income contained the following components:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Interest expense, net of capitalized interest costs | $ | $ | $ | $ | ||||||||||||
Banking fees and debt issuance cost amortization | ||||||||||||||||
Interest income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net foreign exchange | ( | ) | ( | ) | ||||||||||||
Net financing charges | $ | $ | $ | $ | ||||||||||||
8. 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 9, "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
Adient plc | Form 10-Q | 17
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 June 30, 2019 and September 30, 2018, respectively.
Adient selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. The equity swaps are recorded at fair value. Changes in fair value of the equity swaps are reflected in the consolidated statements of income within selling, general and administrative expenses. No equity swaps were outstanding as of June 30, 2019.
As of June 30, 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 June 30, 2019, Adient had two cross-currency interest rate swaps outstanding totaling approximately €160 million designated as net investment hedges in Adient's net investment in Europe. Both cross-currency interest rate swaps are set to mature in March 2020.
Adient entered into a 970 million Chinese yuan foreign exchange forward contract during the second quarter of fiscal 2019 to selectively hedge portions of its net investment in China. The currency effects of the forward contract are reflected in the AOCI account within shareholder’s equity attributable to Adient, where they offset gains and losses recorded on Adient’s net investment in China. The forward contract was de-designated as a net investment hedge at the end of June 2019.
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) | June 30, 2019 | September 30, 2018 | June 30, 2019 | September 30, 2018 | ||||||||||||
Other current assets | ||||||||||||||||
Foreign currency exchange derivatives | $ | $ | $ | $ | ||||||||||||
Cross-currency interest rate swaps | ||||||||||||||||
Other noncurrent assets | ||||||||||||||||
Foreign currency exchange derivatives | ||||||||||||||||
Cross-currency interest rate swaps | ||||||||||||||||
Total assets | $ | $ | $ | $ | ||||||||||||
Other current liabilities | ||||||||||||||||
Foreign currency exchange derivatives | $ | $ | $ | $ | ||||||||||||
Other noncurrent liabilities | ||||||||||||||||
Foreign currency exchange derivatives | ||||||||||||||||
Equity swaps | ||||||||||||||||
Long-term debt | ||||||||||||||||
Foreign currency denominated debt | ||||||||||||||||
Total liabilities | $ | $ | $ | $ | ||||||||||||
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 June 30, 2019 and September 30, 2018, no cash collateral was received or pledged under the master netting agreements.
Adient plc | Form 10-Q | 18
The gross and net amounts of derivative instruments and other amounts used in hedging activities are as follows:
Assets | Liabilities | |||||||||||||||
(in millions) | June 30, 2019 | September 30, 2018 | June 30, 2019 | September 30, 2018 | ||||||||||||
Gross amount recognized | $ | $ | $ | $ | ||||||||||||
Gross amount eligible for offsetting | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net amount | $ | $ | $ | $ | ||||||||||||
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 June 30, | Nine Months Ended June 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Foreign currency exchange derivatives | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
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 June 30, | Nine Months Ended June 30, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Foreign currency exchange derivatives | Cost of sales | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||
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 June 30, | Nine Months Ended June 30, | ||||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||||
Foreign currency exchange derivatives | Cost of sales | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||
Foreign currency exchange derivatives | Net financing charges | ( | ) | ( | ) | ( | ) | |||||||||||
Equity swap | Selling, general and administrative | ( | ) | ( | ) | ( | ) | |||||||||||
Total | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
The effective portion of pretax gains (losses) recorded in currency translation adjustment (CTA) within other comprehensive income (loss) related to net investment hedges was $(20 ) million and $24 million for the three and nine months ended June 30, 2019, respectively, and $81 million and $27 million for the three and nine months ended June 30, 2018, respectively. For the three and nine months ended June 30, 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.
Adient plc | Form 10-Q | 19
9. 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:
Fair Value Measurements Using: | ||||||||||||||||
(in millions) | Total as of June 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 | $ | $ | $ | $ | ||||||||||||
Cross-currency interest rate swaps | ||||||||||||||||
Other noncurrent assets | ||||||||||||||||
Foreign currency exchange derivatives | ||||||||||||||||
Total assets | $ | $ | $ | $ | ||||||||||||
Other current liabilities | ||||||||||||||||
Foreign currency exchange derivatives | $ | $ | $ | $ | ||||||||||||
Other noncurrent liabilities | ||||||||||||||||
Foreign currency exchange derivatives | ||||||||||||||||
Total liabilities | $ | $ | $ | $ | ||||||||||||
Adient plc | Form 10-Q | 20
Fair Value Measurements Using: | ||||||||||||||||
(in millions) | Total as of September 30, 2018 | 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 | $ | $ | $ | $ | ||||||||||||
Other noncurrent assets | ||||||||||||||||
Foreign currency exchange derivatives | ||||||||||||||||
Cross-currency interest rate swaps | ||||||||||||||||
Total assets | $ | $ | $ | $ | ||||||||||||
Other current liabilities | ||||||||||||||||
Foreign currency exchange derivatives | $ | $ | $ | $ | ||||||||||||
Other noncurrent liabilities | ||||||||||||||||
Foreign currency exchange derivatives | ||||||||||||||||
Equity swaps | ||||||||||||||||
Total liabilities | $ | $ | $ | $ | ||||||||||||
Valuation Methods
Foreign currency exchange derivatives Adient selectively hedges anticipated transactions 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 the variability in future cash flows attributable to changes in currency exchange rates at June 30, 2019 and September 30, 2018, 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.
Equity swaps Adient selectively uses equity swaps to reduce market risk associated with certain of its stock-based compensation plans, such as its deferred compensation plans. The equity swaps are recorded at fair value. Changes in fair value of the equity swaps are reflected in the consolidated statements of income within selling, general and administrative expenses.
Cross-currency interest rate swaps Adient selectively uses cross-currency interest rate swaps to hedge portions of its net investment in Europe.
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 $3.4 billion and $3.3 billion at June 30, 2019 and September 30, 2018, respectively, was determined primarily using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy.
Adient plc | Form 10-Q | 21
10. Equity and Noncontrolling Interests | ||||
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Ordinary shares, beginning of the period | $ | $ | $ | $ | ||||||||||||
Ordinary shares, end of the period | ||||||||||||||||
Additional paid-in capital, beginning of the period | ||||||||||||||||
Stock-based compensation | ||||||||||||||||
Other | ( | ) | ||||||||||||||
Additional paid-in capital, end of the period | ||||||||||||||||
Retained earnings (Accumulated deficit), beginning of the period | ( | ) | ( | ) | ||||||||||||
Net income (loss) attributable to Adient | ( | ) | ( | ) | ( | ) | ||||||||||
Dividends declared ($0.275 per share/quarter) | ( | ) | ( | ) | ( | ) | ||||||||||
Retained earnings (Accumulated deficit), end of the period | ( | ) | ( | ) | ||||||||||||
Accumulated other comprehensive income, beginning of the period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ( | ) | ||||||||||
Realized and unrealized gains (losses) on derivatives | ( | ) | ( | ) | ||||||||||||
Employee retirement plans | ( | ) | ||||||||||||||
Accumulated other comprehensive income, end of the period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Shareholders' equity attributable to Adient, end of the period | ||||||||||||||||
Noncontrolling interest, beginning of the period | ||||||||||||||||
Net income (loss) | ||||||||||||||||
Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
Dividends attributable to noncontrolling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Change in noncontrolling interest share | ||||||||||||||||
Formation of consolidated joint venture | ||||||||||||||||
Noncontrolling interest, end of the period | ||||||||||||||||
Total equity | $ | $ | $ | $ | ||||||||||||
Adient plc | Form 10-Q | 22
The following table presents changes in AOCI attributable to Adient:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Foreign currency translation adjustments | ||||||||||||||||
Balance at beginning of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Aggregate adjustment for the period, net of tax | ( | ) | ( | ) | ( | ) | ||||||||||
Balance at end of period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Realized and unrealized gains (losses) on derivatives | ||||||||||||||||
Balance at beginning of period | ( | ) | ( | ) | ||||||||||||
Current period changes in fair value, net of tax | ( | ) | ( | ) | ||||||||||||
Reclassification to income, net of tax | ||||||||||||||||
Balance at end of period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Pension and postretirement plans | ||||||||||||||||
Balance at beginning of period | ( | ) | ( | ) | ( | ) | ||||||||||
Net reclassifications to AOCI | ( | ) | ||||||||||||||
Balance at end of period | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Accumulated other comprehensive income (loss), end of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Beginning balance | $ | $ | $ | $ | ||||||||||||
Net income | ||||||||||||||||
Foreign currency translation adjustments | ( | ) | ||||||||||||||
Dividends | ( | ) | ( | ) | ||||||||||||
Change in noncontrolling interest share | ||||||||||||||||
Ending balance | $ | $ | $ | $ | ||||||||||||
Adient plc | Form 10-Q | 23
11. 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 June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Service cost | $ | $ | $ | $ | ||||||||||||
Interest cost | ||||||||||||||||
Expected return on plan assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Net actuarial (gain) loss | ||||||||||||||||
Settlement (gain) loss | ( | ) | ( | ) | ||||||||||||
Net periodic benefit cost | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Components of net periodic benefit cost other than service cost are included in other pension expense (income) in the consolidated statements of income (loss). The net actuarial loss in the three and nine months ended June 30, 2019 relates primarily to a mark-to-market charge for a United Kingdom plan which Adient was required to remeasure during the third quarter of fiscal 2019. The settlement gain in the three and nine months ended June 30, 2018 relates primarily to an other post-retirement benefit plan termination.
12. Restructuring and Impairment Costs | ||||
Restructuring 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 fiscal 2019, Adient committed to a restructuring plan ("2019 Plan") of $96 million. Of the restructuring costs recorded, $76 million relates to the EMEA segment, $13 million relates to the Americas segment and $7 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 2019. Also recorded in fiscal 2019 is $12 million of prior year underspend and a $9 million increase to a prior year reserve.
The following table summarizes the changes in Adient's 2019 Plan reserve:
(in millions) | Employee Severance and Termination Benefits | Currency Translation | Total | |||||||||
Original Reserve | $ | $ | $ | |||||||||
Utilized—cash | ( | ) | ( | ) | ||||||||
Utilized—noncash | ||||||||||||
Noncash adjustment - underspend | ( | ) | ( | ) | ||||||||
Balance at June 30, 2019 | $ | $ | $ | |||||||||
In fiscal 2018, Adient committed to a restructuring plan ("2018 Plan") of $71 million that was offset by $20 million of underspend in the 2016 Plan and $7 million of underspend related to other plan years. 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. 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. The restructuring actions are expected to be substantially completed by fiscal 2019.
Adient plc | Form 10-Q | 24
The following table summarizes the changes in Adient's 2018 Plan reserve:
(in millions) | Employee Severance and Termination Benefits | Other | Currency Translation | Total | ||||||||||||
Balance at September 30, 2018 | $ | $ | $ | ( | ) | $ | ||||||||||
Reserve adjustment | ||||||||||||||||
Utilized—cash | ( | ) | ( | ) | ||||||||||||
Utilized—noncash | ( | ) | ( | ) | ( | ) | ||||||||||
Noncash adjustment—underspend | ( | ) | ( | ) | ||||||||||||
Balance at June 30, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||
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. The restructuring actions are expected to be substantially complete in fiscal 2019.
The following table summarizes the changes in Adient's 2017 Plan reserve:
(in millions) | Employee Severance and Termination Benefits | |||
Balance at September 30, 2018 | $ | |||
Utilized—cash | ( | ) | ||
Noncash adjustment—underspend | ( | ) | ||
Balance at June 30, 2019 | $ | |||
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. Of the restructuring and impairment costs recorded, $298 million relates to the EMEA segment, $32 million relates to the Americas segment and $2 million relates to the Asia segment. The asset impairment charge recorded during fiscal 2016 related primarily to information technology assets within the EMEA segment that will not be used going forward by Adient. The restructuring actions are expected to be substantially complete in fiscal 2021.
Since the announcement of the 2016 Plan in fiscal 2016, Adient has experienced lower employee severance and termination benefit cash payouts than previously calculated of approximately $20 million, due to changes in cost reduction actions. The planned workforce reductions disclosed for the 2016 Plan have been updated for Adient's revised actions.
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, 2018 | $ | $ | $ | |||||||||
Utilized—cash | ( | ) | ( | ) | ||||||||
Utilized—noncash | ( | ) | ( | ) | ||||||||
Balance at June 30, 2019 | $ | $ | $ | |||||||||
Adient's fiscal 2019, 2018, 2017 and 2016 restructuring plans included workforce reductions of approximately 8,200 . 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 June 30, 2019, approximately 5,400 of the
Adient plc | Form 10-Q | 25
employees have been separated from Adient pursuant to the restructuring plans. In addition, the restructuring plans included seventeen plant closures. As of June 30, 2019, fifteen of the seventeen 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.
Impairment
In the second quarter of fiscal 2019, Adient concluded it had a triggering event requiring assessment of impairment for certain of its former SS&M segment long-lived assets within the EMEA ($55 million) and Americas ($11 million) segments due to declines in actual and forecasted performance that worsened during the second quarter of fiscal 2019 as compared to originally forecasted results. As a result, Adient reviewed the long-lived assets for impairment and recorded a $66 million non-cash pre-tax impairment charge within restructuring and impairment costs on the consolidated statements of income (loss). The impairment charge related to long-lived assets in North America and Europe asset groups in support of current programs. Of the $66 million impairment charge, $62 million relates to fixed assets, and $4 million relates to customer relationships. The impairment was measured under a market approach utilizing appraisal techniques to determine fair values of the impaired assets. This method is consistent with methods Adient employed in prior periods to value other long-lived assets. The inputs utilized in the analysis are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair value measurement" and primarily consist of estimated salable values and third party appraisal techniques such as market comparables. To the extent that the profitability on current or future programs decline as compared to forecasted profitability or if adverse changes occur to key assumptions or other fair value measurement inputs, further impairment of long-lived assets could occur in the future. During the first quarter of fiscal 2019, impairments of $6 million were recorded related to assets held for sale.
During the second quarter of fiscal 2018, in conjunction with a change in segment reporting at that time, a $299 million goodwill impairment charge was recorded related to the former SS&M segment.
13. 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 and nine months ended June 30, 2019, Adient’s income tax expense was $338 million equating to an effective tax rate of 1,127 % and $412 million equating to an effective tax rate of negative 3,745 %, respectively. The three and nine month income tax expense was higher than the statutory rate impact of 12.5 % primarily due to the recognition of valuation allowances in Luxembourg, Poland, and the United Kingdom and the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances. For the three and nine months ended June 30, 2018, Adient’s income tax expense (benefit) was $(13 ) million equating to an effective tax rate of negative 22 % and $224 million equating to an effective tax rate of negative 533 %, respectively. The three month income tax benefit was lower than the statutory rate impact of 12.5 % primarily due to a decrease in the estimated annual effective tax rate and a held for sale asset impairment benefit, partially offset by foreign exchange. The nine month income tax expense was higher than the statutory rate impact primarily due to the charge to recognize the impact of the U.S. tax reform legislation.
Adient plc | Form 10-Q | 26
Valuation Allowances
As a result of Adient's third quarter fiscal 2019 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence (including the external debt refinancing, the related incremental net financing costs, and the restructuring of the internal financing which occurred in the third quarter of fiscal 2019), Adient determined that it was more likely than not that deferred tax assets in Luxembourg and the United Kingdom would not be realized and recorded income tax expense of $229 million and $25 million, respectively, to establish valuation allowances. In addition, as a result of the valuation allowances, Adient recorded an income tax expense of $48 million to adjust the year-to-date tax expense to reflect the higher estimated annual effective tax rate.
As a result of Adient's second quarter fiscal 2019 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence (including the long-lived asset impairment recorded in the second quarter of fiscal 2019), Adient determined that it was more likely than not that deferred tax assets within certain Poland entities would not be realized and recorded a net income tax expense of $43 million in the second quarter of fiscal 2019 to establish a valuation allowance.
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. If Adient's operating performance is negatively impacted and actual results differ significantly from current or prior estimates, Adient may conclude that it is more likely than not that a material portion of our deferred tax assets will not be realized. As such, it is possible that a change to valuation allowances in certain jurisdictions may result in a material increase to income tax expense during the next twelve months. In addition, the effective tax rate in subsequent periods would also increase.
Uncertain Tax Positions
At June 30, 2019, Adient had gross tax effected unrecognized tax benefits of $280 million. If recognized, $105 million of Adient's unrecognized tax benefits would impact the effective tax rate. Total net accrued interest at June 30, 2019 was approximately $9 million (net of tax benefit). The interest and penalties accrued during the three and nine months ended June 30, 2019 was $1 million and $4 million, respectively. 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 third quarter of fiscal 2019, Luxembourg enacted legislation reducing the nominal corporate tax rate to 17% from 18%. For Adient, this reduced its aggregate income tax rate to 24.9 % from 26.0 % and applies retroactively to the fiscal 2019 tax year. As a result of the law change, Adient recorded income tax expense of $10 million related to the write down of deferred tax assets.
During the first quarter of fiscal 2019, Adient completed its accounting for the Tax Cuts and Jobs Act Base Erosion and Anti-avoidance Tax valuation allowance resulting in no change to the $100 million income tax impact estimated in fiscal 2018.
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 second quarter of fiscal 2019, Adient recognized a pre-tax impairment charge on long-lived assets of $66 million. Refer to Note 12 "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for additional information. The tax benefit associated with the impairment charge was $2 million, which was negatively impacted by geographic mix and Adient’s current tax position in these jurisdictions.
Adient plc | Form 10-Q | 27
During the third quarter of fiscal 2018, Adient recognized a pre-tax impairment charge of $52 million related to assets classified as held for sale. 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 $15 million.
During the second quarter of fiscal 2018, Adient recognized a pre-tax goodwill impairment charge of $299 million related to the former SS&M segment. Refer to Note 12, "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for additional information. The tax benefit associated with the goodwill impairment charge was $20 million.
14. Segment Information | ||||
During the second quarter of fiscal 2019, Adient realigned its organizational structure to manage its business primarily on a geographic basis, resulting in a change to reportable segments. Segment information for all periods presented are aligned to this change in organizational structure and an updated definition of corporate-related costs. Pursuant to this change, Adient 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, incremental "Becoming Adient" costs, separation 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. Adient has three reportable segments for financial reporting purposes:
Financial information relating to Adient's reportable segments is as follows:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 (1) | 2019 | 2018 (1) | ||||||||||||
Net Sales | ||||||||||||||||
Americas | $ | $ | $ | $ | ||||||||||||
EMEA | ||||||||||||||||
Asia | ||||||||||||||||
Eliminations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total net sales | $ | $ | $ | $ | ||||||||||||
Adient plc | Form 10-Q | 28
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 (1) | 2019 | 2018 (1) | ||||||||||||
Adjusted EBITDA | ||||||||||||||||
Americas | $ | $ | $ | $ | ||||||||||||
EMEA | ||||||||||||||||
Asia | ||||||||||||||||
Corporate-related costs (2) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Becoming Adient costs (3) | ( | ) | ( | ) | ||||||||||||
Restructuring and impairment costs (4) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Purchase accounting amortization (5) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Restructuring related charges (6) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Stock based compensation (7) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Depreciation (8) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other items (9) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Earnings (loss) before interest and income taxes | ||||||||||||||||
Net financing charges | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other pension income | ( | ) | ( | ) | ||||||||||||
Income (loss) before income taxes | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
Notes
(1) The presentation of certain amounts has been revised from what was previously reported to retrospectively adopt Accounting Standard Update ("ASU") 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost" as of October 1, 2018. See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies," for more information.
(2) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal and finance.
(3) Reflects incremental expenses associated with becoming an independent company. Includes non-cash costs of $1 million and $12 million in the three and nine months ended June 30, 2018, respectively.
(4) 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.
(5) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income. As a result of the fiscal year 2018 YFAI impairment, the intangible assets related to YFAI were deemed to be fully impaired and thus no longer amortized.
(6) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420.
(7) For the nine months ended June 30, 2018, stock-based compensation excludes $9 million, which is included in Becoming Adient costs discussed above.
(8) For the nine months ended June 30, 2018, depreciation excludes $6 million, which is included in restructuring related charges discussed above.
(9) The three months ended June 30, 2019 reflects $1 million of Futuris integration costs and $2 million of transaction costs, respectively. The nine months ended June 30, 2019 reflects $3 million of Futuris integration costs and $3 million of transaction costs, respectively. The three months ended June 30, 2018 includes $6 million of Futuris integration costs and $4 million of non-recurring consulting fees related to the former SS&M segment. The nine months ended June 30, 2018 primarily includes $19
Adient plc | Form 10-Q | 29
million of Futuris integration costs, $8 million for the U.S tax reform impact at YFAI, $11 million of non-recurring consulting fees related to the former SS&M segment, and $8 million of out of period adjustments. In addition, the three and nine months ended June 30, 2018 previously included $9 million and $15 million of other non-recurring income that was reclassified to other pension income upon adoption of ASU 2017-07.
Additional Segment Information
Three Months Ended June 30, 2019 | ||||||||||||||||||||
Reportable Segments | Reconciling Items(1) | Consolidated | ||||||||||||||||||
(in millions) | Americas | EMEA | Asia | |||||||||||||||||
Equity Income | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Depreciation | ||||||||||||||||||||
Capital Expenditures | ||||||||||||||||||||
Total Assets | ||||||||||||||||||||
Nine Months Ended June 30, 2019 | ||||||||||||||||||||
Reportable Segments | Reconciling Items(1) | Consolidated | ||||||||||||||||||
(in millions) | Americas | EMEA | Asia | |||||||||||||||||
Equity Income | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Depreciation | $ | |||||||||||||||||||
Capital Expenditures | ||||||||||||||||||||
Total Assets | ||||||||||||||||||||
Three Months Ended June 30, 2018 | ||||||||||||||||||||
Reportable Segments | Reconciling Items(1) | Consolidated | ||||||||||||||||||
(in millions) | Americas | EMEA | Asia | |||||||||||||||||
Equity Income | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Depreciation | ||||||||||||||||||||
Capital Expenditures | ||||||||||||||||||||
Nine Months Ended June 30, 2018 | ||||||||||||||||||||
Reportable Segments | Reconciling Items(1) | Consolidated | ||||||||||||||||||
(in millions) | Americas | EMEA | Asia | |||||||||||||||||
Equity Income | $ | $ | $ | $ | ( | ) | $ | |||||||||||||
Depreciation | $ | |||||||||||||||||||
Capital Expenditures | ||||||||||||||||||||
(1) Reconciling items include corporate-related assets and depreciation amounts to reconcile to consolidated totals. Included in equity income are restructuring related costs and prior year purchase accounting amortization related to the YFAI joint venture.
In the third quarter of fiscal 2019, Adient's Indonesian operations recorded an $8 million adjustment to increase cost of sales and to decrease primarily current assets to correct prior period misstatements. Adient has concluded that these adjustments were not material to previously reported financial statements nor to current or estimated full year fiscal 2019 results.
Adient plc | Form 10-Q | 30
15. 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 June 30, 2019 and September 30, 2018. Equity in the net income of nonconsolidated partially-owned affiliates are reported in the "Equity income" line in the consolidated statements of income (loss) for the nine months ended June 30, 2019 and 2018, respectively.
Adient maintains total investments in partially-owned affiliates of $1.4 billion and $1.4 billion at June 30, 2019 and September 30, 2018, respectively. Operating information for nonconsolidated partially-owned affiliates is as follows:
Nine Months Ended June 30, | ||||||||
(in millions) | 2019 | 2018 | ||||||
Income statement data: | ||||||||
Net sales | $ | $ | ||||||
Gross profit | $ | $ | ||||||
Net income | $ | $ | ||||||
Net income attributable to the entity | $ | $ | ||||||
Adient plc | Form 10-Q | 31
16. Commitments and Contingencies | ||||
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 $10 million and $8 million at June 30, 2019 and September 30, 2018, 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 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.
17. 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. Subsequent to the separation, transactions with the former Parent and its businesses represent third-party transactions.
The following table sets forth the net sales to and purchases from related parties included in the consolidated statements of income:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||||
Net sales to related parties | Net sales | $ | $ | $ | $ | |||||||||||||
Purchases from related parties | Cost of sales | |||||||||||||||||
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) | June 30, 2019 | September 30, 2018 | ||||||||
Accounts receivable due from related parties | Accounts receivable | $ | $ | |||||||
Accounts payable due to related parties | Accounts payable | |||||||||
Average receivable and payable balances with related parties remained consistent with the period end balances shown above.
Adient plc | Form 10-Q | 32
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 contain 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 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, the ability of Adient Aerospace to successfully implement its strategic initiatives or realize the expected benefits of the joint venture, 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 relationships with the largest global auto manufacturers. Adient's 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 30% equity interest in its global automotive interiors joint venture in China, Yanfeng Global Automotive Interior Systems Co., Ltd. (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 also supplies high performance seating systems to the international motorsports industry through its award winning RECARO brand of products. Adient operates in 234 wholly- and majority-owned manufacturing or assembly facilities, with operations in 34 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.
During the second quarter of fiscal 2019, Adient realigned its organizational structure to manage its business primarily on a geographic basis, resulting in a change to reportable segments. Segment information for all periods presented are aligned to this change in organizational structure and an updated definition of corporate-related costs. Pursuant to this change, Adient 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 plc | Form 10-Q | 33
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 third quarter of fiscal 2019, Asia experienced increased production, South America remained flat and China, Europe and North America experienced decreases. During the first nine months of fiscal 2019, Asia experienced increased production and China, Europe, South America and North America experienced decreases.
Light vehicle production levels by geographic region are provided below:
Light Vehicle Production | ||||||||||||
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||
(units in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||
Global | 22.4 | -5.5% | 23.7 | 68.7 | -5.0% | 72.3 | ||||||
North America | 4.2 | -4.5% | 4.4 | 12.7 | -0.8% | 12.8 | ||||||
South America | 0.9 | —% | 0.9 | 2.5 | -3.8% | 2.6 | ||||||
Europe | 5.8 | -7.9% | 6.3 | 17.4 | -5.4% | 18.4 | ||||||
China | 6.0 | -10.4% | 6.7 | 19.2 | -12.3% | 21.9 | ||||||
Asia, excluding China, and Other | 5.5 | 1.9% | 5.4 | 16.9 | 1.8% | 16.6 | ||||||
Source: IHS Automotive, June 2019 | ||||||||||||
Financial Results Summary
Significant aspects of Adient's financial results for the three and nine months ended June 30, 2019 include the following:
• | Adient recorded net sales of $4,219 million for the third quarter of fiscal 2019, representing a decrease of $275 million when compared to the third quarter of fiscal 2018. The decrease in net sales is primarily due to the unfavorable foreign currency impact and lower volumes primarily in EMEA and Asia, partially offset by higher volumes in the Americas. Adient recorded net sales of $12,605 million for the first nine months of fiscal 2019, representing a decrease of $689 million when compared to the first nine months of fiscal 2018. The decrease in net sales is primarily due to the unfavorable foreign currency impact and lower volumes in EMEA and Asia, partially offset by higher volumes in the Americas. |
• | Gross profit was $211 million, or 5.0% of net sales, for the third quarter of fiscal 2019 compared to $245 million, or 5.5% of net sales, for the third quarter of fiscal 2018. Gross profit was $588 million, or 4.7%, of net sales for the first nine months of fiscal 2019 compared to $728 million, or 5.5%, of net sales for the first nine months of fiscal 2018. Profitability, including gross profit as a percentage of net sales, was lower primarily due to ongoing business performance issues related to launch inefficiencies in the Americas and EMEA aong with unfavorable foreign currency impact and overall lower volumes. |
• | Equity income was $64 million for the third quarter of fiscal 2019, which compared to equity income of $87 million for the third quarter of fiscal 2018. Equity income was $209 million for the first nine months of fiscal 2019, compared to equity income of $268 million for the first nine months of fiscal 2018. These decreases were primarily attributable to overall lower sales within certain China affiliates along with ongoing operating performance issues at YFAI. |
• | Net loss attributable to Adient was $321 million for the third quarter of fiscal 2019, compared to $54 million of net income attributable to Adient for the third quarter of fiscal 2018. The net loss in the third quarter of fiscal 2019 was primarily attributable to an income tax charge of $254 million to record valuation allowances on the net deferred tax assets in Luxembourg and the United Kingdom and an income tax charge of $48 million to recognize the year-to-date impact of Adient's updated annualized effective tax rate, driven by the valuation allowances recorded in the third quarter of fiscal 2019. Net loss attributable to Adient was $487 million for the first nine months of fiscal 2019, compared to $330 million of net loss attributable to Adient for the first nine months of fiscal 2018. The year over year increase in net loss attributable to Adient was primarily attributable to the income tax charges recorded in fiscal 2019, the fixed asset impairment charges recorded in the second quarter of fiscal 2019 and the lower levels of operating profitability in fiscal 2019 as discussed above, partially offset by one-time charges in the prior year related to goodwill impairment ($279 million, net of tax) and the impact of the 2018 U.S. tax reform legislation ($258 million). |
Adient plc | Form 10-Q | 34
Consolidated Results of Operations
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Net sales | $ | 4,219 | -6% | $ | 4,494 | $ | 12,605 | -5% | $ | 13,294 | ||||||||||
Cost of sales | 4,008 | -6% | 4,249 | 12,017 | -4% | 12,566 | ||||||||||||||
Gross profit | 211 | -14% | 245 | 588 | -19% | 728 | ||||||||||||||
Selling, general and administrative expenses | 165 | -11% | 186 | 511 | -11% | 575 | ||||||||||||||
Restructuring and impairment costs | 15 | -74% | 57 | 159 | -57% | 372 | ||||||||||||||
Equity income (loss) | 64 | -26% | 87 | 209 | -22% | 268 | ||||||||||||||
Earnings (loss) before interest and income taxes | 95 | 7% | 89 | 127 | * | 49 | ||||||||||||||
Net financing charges | 60 | 54% | 39 | 135 | 24% | 109 | ||||||||||||||
Other pension expense (income) | 5 | * | (10 | ) | 3 | * | (18 | ) | ||||||||||||
Income (loss) before income taxes | 30 | -50% | 60 | (11 | ) | -74% | (42 | ) | ||||||||||||
Income tax provision (benefit) | 338 | * | (13 | ) | 412 | 84% | 224 | |||||||||||||
Net income (loss) | (308 | ) | * | 73 | (423 | ) | 59% | (266 | ) | |||||||||||
Income (loss) attributable to noncontrolling interests | 13 | -32% | 19 | 64 | —% | 64 | ||||||||||||||
Net income (loss) attributable to Adient | $ | (321 | ) | * | $ | 54 | $ | (487 | ) | 48% | $ | (330 | ) | |||||||
* Measure not meaningful
Net Sales
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Net sales | $ | 4,219 | -6% | $ | 4,494 | $ | 12,605 | -5% | $ | 13,294 | ||||||||||
Net sales decreased by $275 million, or 6%, in the third quarter of fiscal 2019 as compared to the third quarter of fiscal 2018 primarily due to an unfavorable foreign currency impact of $150 million, and lower volumes in EMEA and Asia, partially offset by higher volumes in the Americas. Refer to the segment analysis below for a discussion of segment net sales.
Net sales decreased by $689 million, or 5%, in the first nine months of fiscal 2019 as compared to the first nine months of fiscal 2018 primarily due to the unfavorable foreign currency impact of $444 million and lower volumes in EMEA and Asia, partially offset by higher volumes in the Americas. Refer to the segment analysis below for a discussion of segment net sales.
Cost of Sales / Gross Profit
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Cost of sales | $ | 4,008 | -6% | $ | 4,249 | $ | 12,017 | -4% | $ | 12,566 | ||||||||||
Gross profit | 211 | -14% | 245 | 588 | -19% | 728 | ||||||||||||||
% of sales | 5.0 | % | 5.5 | % | 4.7 | % | 5.5 | % | ||||||||||||
Cost of sales decreased by $241 million, or 6%, and gross profit decreased by $34 million, or 14%, in the third quarter of fiscal 2019 as compared to the third quarter of fiscal 2018. Cost of sales was impacted favorably by the impact of foreign currency ($138 million), a reduction in depreciation expense ($28 million), prior year Becoming Adient costs ($9 million) and volume decreases, partially offset by continued business performance issues related to launch inefficiencies within the Americas and EMEA, along with higher freight (due to higher rates) and higher operational waste. These ongoing performance issues, along with lower volumes and unfavorable foreign currency impacts, also resulted in a year-over-year decline of gross profit as a percentage of net sales. Refer to the segment analysis below for a discussion of segment profitability.
Adient plc | Form 10-Q | 35
Cost of sales decreased by $549 million, or 4%, and gross profit decreased by $140 million, or 19%, in the first nine months of fiscal 2019 as compared to the first nine months of fiscal 2018. Cost of sales was impacted favorably by the impact of foreign currency ($397 million), a reduction in depreciation expense ($73 million), prior year Becoming Adient costs ($37 million) and volume decreases, partially offset by continued business performance issues related to launch inefficiencies within the Americas and EMEA, along with higher freight (due to higher rates) and higher operational waste. These ongoing performance issues, along with lower volumes and unfavorable foreign currency impacts, also resulted in a year-over-year decline of gross profit as a percentage of net sales. Refer to the segment analysis below for a discussion of segment profitability.
Selling, General and Administrative Expenses
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Selling, general and administrative expenses | $ | 165 | -11% | $ | 186 | $ | 511 | -11% | $ | 575 | ||||||||||
% of sales | 3.9 | % | 4.1 | % | 4.1 | % | 4.3 | % | ||||||||||||
Selling, general and administrative expenses (SG&A) decreased by $21 million in the third quarter of fiscal 2019 as compared to the third quarter of fiscal 2018. SG&A was favorably impacted by lower net engineering costs ($13 million), prior year Becoming Adient costs ($3 million), favorability in stock-based compensation ($4 million), lower depreciation expense ($5 million) and a favorable impact of foreign currency ($6 million), partially offset by reestablishing certain discretionary spending, primarily incentive compensation, in the current year. Refer to the segment analysis below for a discussion of segment profitability.
Selling, general and administrative expenses (SG&A) decreased by $64 million in the first nine months of fiscal 2019 as compared to the first nine months of fiscal 2018. SG&A was favorably impacted by lower net engineering costs ($44 million), prior year Becoming Adient costs ($13 million), favorability in stock-based compensation ($16 million), lower depreciation expense ($16 million) and a favorable impact of foreign currency ($17 million), partially offset by reestablishing certain discretionary spending, primarily incentive compensation, in the current year. Refer to the segment analysis below for a discussion of segment profitability.
Restructuring and Impairment Costs
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Restructuring and impairment costs | $ | 15 | -74% | $ | 57 | $ | 159 | -57% | $ | 372 | ||||||||||
The decrease in restructuring and impairment costs in the third quarter of fiscal 2019 as compared to the same period in the previous year is due to the prior year $52 million impairment charge on assets held for sale. The decrease in restructuring and impairment costs during the first nine months of fiscal 2019 as compared to the same period in the previous year were primarily due to the prior year $299 million goodwill impairment charge associated with the former SS&M segment and the prior year $52 million impairment charge on assets held for sale, partially offset by the second quarter fiscal 2019 long-lived asset impairment charge of $66 million. Refer to Note 12, "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for information related to Adient's restructuring plans and recent impairment charges.
Equity Income
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Equity income (loss) | $ | 64 | -26% | $ | 87 | $ | 209 | -22% | $ | 268 | ||||||||||
Equity income was $64 million for the third quarter of fiscal 2019, which is $23 million lower compared to the third quarter of fiscal 2018. The decrease was primarily attributable to overall lower sales within Adient's China affiliates, ongoing operating performance issues at YFAI and the unfavorable impact of foreign currency translation of $6 million.
Equity income was $209 million for the first nine months of fiscal 2019, which is $59 million lower compared to the first nine months of fiscal 2018. The decrease was primarily attributable to overall lower sales within Adient's China affiliates, ongoing operating performance issues at YFAI and the unfavorable impact of foreign currency translation of $16 million.
Adient plc | Form 10-Q | 36
Net Financing Charges
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Net financing charges | $ | 60 | 54% | $ | 39 | $ | 135 | 24% | $ | 109 | ||||||||||
Net financing charges increased in the third quarter and first nine months of fiscal 2019 as compared to the same periods in 2018 primarily as a result of entering into new debt agreements on May 6, 2019 which resulted in higher levels of debt and overall higher levels of interest. In particular, a one-time charge of $13 million was recorded during the third quarter of fiscal 2019 related to deferred financing fees associated with Adient's previous debt arrangements. Refer to Note 7, "Debt and Financing Arrangements" of the notes to the consolidated financial statements for information related to the components of Adient's net financing charges.
Other Pension Expense (Income)
* Measure not meaningful
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Other pension expense (income) | $ | 5 | * | $ | (10 | ) | $ | 3 | * | $ | (18 | ) | ||||||||
Other pension expense (income) consists of non-service components of Adient's net periodic pension costs. The pension expense in the three and nine months ended June 30, 2019 relates primarily to a mark-to-market charge for a United Kingdom plan which Adient was required to remeasure during the third quarter of fiscal 2019. The pension income in the three and nine months ended June 30, 2018 relates primarily to an other post-retirement benefit plan termination. Refer to Note 11, "Retirement Plans," of the notes to the consolidated financial statements for information related to the components of Adient's net periodic pension costs.
Income Tax Provision
* Measure not meaningful
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Income tax provision (benefit) | $ | 338 | * | $ | (13 | ) | $ | 412 | 84% | $ | 224 | |||||||||
The third quarter of fiscal 2019 income tax expense of $338 million primarily resulted from an income tax charge of $254 million to establish valuation allowances in Luxembourg and the United Kingdom and an income tax charge of $48 million to recognize the year-to-date impact of Adient's updated annualized tax rate, driven by the valuation allowances recorded in the third quarter of fiscal 2019.
The first nine months of fiscal 2019 income tax expense of $412 million resulted primarily from establishing valuation allowances in Luxembourg, Poland, and the United Kingdom and the impact of recognizing no tax benefit for losses in jurisdictions with previously established valuation allowances, partially offset by a tax rate change at a consolidated affiliate in China. The year over year increase in income tax expense is primarily attributable to the $297 million of income tax charges to establish valuation allowances in fiscal 2019, the $48 million to recognize the year-to-date impact of Adient's updated annualized tax rate, driven by the valuation allowances recorded in the third quarter of fiscal 2019 and the impact of recognizing no tax benefit losses in jurisdictions with previously established valuation allowances, offset by the prior year tax charge of $258 million related to the impact of the 2018 U.S. tax reform legislation.
Adient plc | Form 10-Q | 37
Income Attributable to Noncontrolling Interests
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Income (loss) attributable to noncontrolling interests | $ | 13 | -32% | $ | 19 | $ | 64 | —% | $ | 64 | ||||||||||
The decrease in income attributable to noncontrolling interests for the third quarter of fiscal 2019 when compared to the same period in the prior year was primarily attributable to lower income resulting from lower volumes at certain EMEA affiliates, partially offset by higher volumes at certain Americas and Asia affiliates.
Income attributable to noncontrolling interests for the first nine months of fiscal 2019 remained constant when compared to the same period in the prior year with higher income resulting from higher volumes at certain Americas and Asia affiliates being offset by the impact of lower volumes at certain EMEA affiliates.
Net Income (Loss) Attributable to Adient
* Measure not meaningful
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Net income (loss) attributable to Adient | $ | (321 | ) | * | $ | 54 | $ | (487 | ) | 48% | $ | (330 | ) | |||||||
Net loss attributable to Adient was $321 million for the third quarter of fiscal 2019 compared to $54 million of net income attributable to Adient for the third quarter of fiscal 2018. The net loss in the third quarter of fiscal 2019 is primarily attributable to an income tax charge of $254 million to record valuation allowances on the net deferred tax assets in Luxembourg and the United Kingdom and an income tax charge of $48 million to recognize the year-to-date impact of Adient's updated annualized effective tax rate, driven by the valuation allowances recorded in the third quarter of fiscal 2019.
Net loss attributable to Adient was $487 million for the first nine months of fiscal 2019 compared to $330 million of net loss attributable to Adient for the first nine months of fiscal 2018. The year over year increase in net loss attributable to Adient is primarily attributable to the income tax charges recorded in 2019, the fixed asset impairment charges recorded in 2019 and the lower levels of operating profitability in 2019 as discussed above, partially offset by one-time costs in the prior year related to goodwill impairment ($279 million, net of tax) and the impact of the 2018 U.S. tax reform legislation ($258 million).
Comprehensive Income Attributable to Adient
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Comprehensive income (loss) attributable to Adient | $ | (341 | ) | 71% | $ | (199 | ) | $ | (455 | ) | 20% | $ | (380 | ) | ||||||
Comprehensive loss attributable to Adient was $341 million for the third quarter of fiscal 2019 compared to comprehensive loss attributable to Adient for the third quarter of fiscal 2018 of $199 million. The increase in comprehensive loss attributable to Adient for the third quarter of fiscal 2019 was primarily due to a larger net loss ($381 million), partially offset by smaller foreign currency translation loss.
Comprehensive loss attributable to Adient was $455 million for the first nine months of fiscal 2019 compared to comprehensive loss attributable to Adient for the first nine months of fiscal 2018 of $380 million. The increase in comprehensive loss attributable to Adient for the first nine months of fiscal 2019 was primarily due to a larger net loss ($157 million) offset by less unfavorable year-over-year impact of foreign currency translation adjustments ($64 million) primarily due to Chinese yuan being more stable during the first nine months of fiscal 2019.
Adient plc | Form 10-Q | 38
Segment Analysis
During the second quarter of fiscal 2019, Adient realigned its organizational structure to manage its business primarily on a geographic basis, resulting in a change to reportable segments. Segment information for all periods presented are aligned to this change in organizational structure and an updated definition of corporate-related costs. Pursuant to this change, Adient 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, incremental "Becoming Adient" costs, separation 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. Adient has three reportable segments for financial reporting purposes:
Financial information relating to Adient's reportable segments is as follows:
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net Sales | ||||||||||||||||
Americas | $ | 2,010 | $ | 1,946 | $ | 5,860 | $ | 5,673 | ||||||||
EMEA | 1,752 | 1,945 | 5,170 | 5,854 | ||||||||||||
Asia | 530 | 672 | 1,779 | 2,010 | ||||||||||||
Eliminations | (73 | ) | (69 | ) | (204 | ) | (243 | ) | ||||||||
Total net sales | $ | 4,219 | $ | 4,494 | $ | 12,605 | $ | 13,294 | ||||||||
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(in millions) | 2019 | 2018 (1) | 2019 | 2018 (1) | ||||||||||||
Adjusted EBITDA | ||||||||||||||||
Americas | $ | 69 | $ | 99 | $ | 146 | $ | 232 | ||||||||
EMEA | 53 | 97 | 114 | 309 | ||||||||||||
Asia | 110 | 146 | 387 | 479 | ||||||||||||
Corporate-related costs (2) | (27 | ) | (24 | ) | (75 | ) | (74 | ) | ||||||||
Becoming Adient costs (3) | — | (12 | ) | — | (50 | ) | ||||||||||
Restructuring and impairment costs (4) | (15 | ) | (57 | ) | (159 | ) | (372 | ) | ||||||||
Purchase accounting amortization (5) | (11 | ) | (17 | ) | (32 | ) | (52 | ) | ||||||||
Restructuring related charges (6) | (5 | ) | (20 | ) | (27 | ) | (43 | ) | ||||||||
Stock based compensation (7) | (8 | ) | (12 | ) | (16 | ) | (34 | ) | ||||||||
Depreciation (8) | (68 | ) | (101 | ) | (205 | ) | (294 | ) | ||||||||
Other items (9) | (3 | ) | (10 | ) | (6 | ) | (52 | ) | ||||||||
Earnings (loss) before interest and income taxes | 95 | 89 | 127 | 49 | ||||||||||||
Net financing charges | (60 | ) | (39 | ) | (135 | ) | (109 | ) | ||||||||
Other pension income | (5 | ) | 10 | (3 | ) | 18 | ||||||||||
Income (loss) before income taxes | $ | 30 | $ | 60 | $ | (11 | ) | $ | (42 | ) | ||||||
Adient plc | Form 10-Q | 39
Notes
(1) The presentation of certain amounts has been revised from what was previously reported to retrospectively adopt Accounting Standard Update ("ASU") 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Cost" as of October 1, 2018. See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies," for more information.
(2) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal and finance.
(3) Reflects incremental expenses associated with becoming an independent company. Includes non-cash costs of $1 million and $12 million in the three and nine months ended June 30, 2018, respectively.
(4) 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.
(5) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income. As a result of the fiscal year 2018 YFAI impairment, the intangible assets related to YFAI were deemed to be fully impaired and thus no longer amortized.
(6) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420.
(7) For the nine months ended June 30, 2018, stock-based compensation excludes $9 million, which is included in Becoming Adient costs discussed above.
(8) For the nine months ended June 30, 2018, depreciation excludes $6 million, which is included in restructuring related charges discussed above.
(9) The three months ended June 30, 2019 reflects $1 million of Futuris integration costs and $2 million of transaction costs, respectively. The nine months ended June 30, 2019 reflects $3 million of Futuris integration costs and $3 million of transaction costs, respectively. The three months ended June 30, 2018 includes $6 million of Futuris integration costs and $4 million of non-recurring consulting fees related to the former SS&M segment. The nine months ended June 30, 2018 primarily includes $19 million of Futuris integration costs, $8 million for the U.S tax reform impact at YFAI, $11 million of non-recurring consulting fees related to the former SS&M segment, and $8 million of out of period adjustments. In addition, the three and nine months ended June 30, 2018 previously included $9 million and $15 million of other non-recurring income that was reclassified to other pension income upon adoption of ASU 2017-07.
Americas
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Net sales | $ | 2,010 | 3% | $ | 1,946 | $ | 5,860 | 3% | $ | 5,673 | ||||||||||
Adjusted EBITDA | $ | 69 | -30% | $ | 99 | $ | 146 | -37% | $ | 232 | ||||||||||
Net sales increased during the third quarter of fiscal 2019 by $64 million due to higher volumes in North America ($74 million), partially offset by the unfavorable impact of foreign currency ($10 million).
Adjusted EBITDA decreased during the third quarter of fiscal 2019 by $30 million due to increased freight (resulting from higher rates; despite lower premium freight) and operational performance issues ($27 million), higher administrative and engineering expenses ($14 million) and the unfavorable impact of net material and pricing adjustments ($5 million), partially offset by favorable material economics, net of recoveries ($9 million), higher volumes and product mix ($6 million) and the favorable impact of foreign currency ($1 million).
Net sales increased during the first nine months of fiscal 2019 by $187 million due to higher volumes in North America ($219 million) and net favorable pricing, including material economic recoveries ($14 million), partially offset by the unfavorable impact of foreign currency ($46 million).
Adient plc | Form 10-Q | 40
Adjusted EBITDA decreased during the first nine months of fiscal 2019 by $86 million due to increased freight (resulting from higher rates; despite lower premium freight) and operational performance ($57 million), higher administrative and engineering expenses ($28 million), unfavorable product mix ($2 million), the unfavorable impact of foreign currency ($4 million), and unfavorable impact of net material and pricing adjustments ($1 million), partially offset by favorable material economics, net of recoveries ($6 million).
EMEA
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Net sales | $ | 1,752 | -10% | $ | 1,945 | $ | 5,170 | -12% | $ | 5,854 | ||||||||||
Adjusted EBITDA | $ | 53 | -45% | $ | 97 | $ | 114 | -63% | $ | 309 | ||||||||||
Net sales decreased during the third quarter of fiscal 2019 by $193 million due to the unfavorable impact of foreign currency ($121 million), lower volumes ($59 million) and unfavorable net pricing, including material economics recoveries ($13 million).
Adjusted EBITDA decreased during the third quarter of fiscal 2019 by $44 million due to increased freight (resulting from higher rates; despite lower premium freight) and operational performance issues ($21 million), lower volumes and product mix ($9 million), the unfavorable impact of foreign currency ($8 million), higher administrative and engineering expenses ($5 million) and the unfavorable impact of net material and pricing adjustments ($2 million), partially offset by favorable material economics, net of recoveries ($1 million).
Net sales decreased during the first nine months of fiscal 2019 by $684 million due to the unfavorable impact of foreign currency ($354 million), lower volumes ($301 million) and unfavorable net pricing, including material economics recoveries ($29 million).
Adjusted EBITDA decreased during the first nine months of fiscal 2019 by $195 million due to increased freight (resulting from higher rates; despite lower premium freight) and operational performance issues ($105 million), lower volumes and product mix ($45 million), the unfavorable impact of foreign currency ($30 million), higher administrative and engineering expenses ($8 million), the unfavorable impact of net material and pricing adjustments ($5 million), unfavorable material economics, net of recoveries ($1 million) and lower equity income ($1 million).
Asia
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||
(in millions) | 2019 | Change | 2018 | 2019 | Change | 2018 | ||||||||||||||
Net sales | $ | 530 | -21% | $ | 672 | $ | 1,779 | -11% | $ | 2,010 | ||||||||||
Adjusted EBITDA | $ | 110 | -25% | $ | 146 | $ | 387 | -19% | $ | 479 | ||||||||||
Net sales decreased during the third quarter of fiscal 2019 by $142 million due to lower volumes ($121 million) and the unfavorable impact of foreign currency ($23 million), partially offset by favorable net pricing adjustments, including material economic recoveries ($2 million).
Adjusted EBITDA decreased during the third quarter of fiscal 2019 by $36 million due to lower equity income caused primarily by the slowdown in Chinese auto production ($18 million), lower volumes and product mix ($18 million), the unfavorable impact of foreign currency ($6 million) and operational performance issues ($6 million), partially offset by lower administration and engineering costs ($8 million), the favorable impact of net materials and pricing adjustments ($2 million) and favorable material economics, net of recoveries ($2 million).
Net sales decreased during the first nine months of fiscal 2019 by $231 million due to lower volumes ($167 million), the unfavorable impact of foreign currency ($60 million) and unfavorable net pricing adjustments, including material economic recoveries ($4 million).
Adjusted EBITDA decreased during the first nine months of fiscal 2019 by $92 million due to lower equity income caused primarily by the slowdown in Chinese auto production ($61 million), lower volumes and product mix ($19 million), operational performance
Adient plc | Form 10-Q | 41
issues ($18 million), the unfavorable impact of foreign currency ($17 million), partially offset by the favorable impact of materials and pricing adjustments ($12 million) and lower administrative and engineering costs ($11 million).
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 the revolving credit facility and other debt issuances, and existing cash balances. Funding also previously came from the former Parent through October 31, 2016 and as part of the separation agreement. 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 somewhat volatile. Adient had cash and cash equivalents of $1,025 million and $687 million as of June 30, 2019 and September 30, 2018, respectively. On May 6, 2019 (the “Refinancing Date”), certain of Adient's subsidiaries entered into a new asset-based revolving credit facility (the “ABL Credit Facility”), which provides up to $1,250 million of commitments, subject to borrowing base capacity. See below and refer to Note 7, "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
On May 6, 2019 (the “Refinancing Date”), Adient US LLC ("Adient US"), a wholly owned subsidiary of Adient, together with certain of Adient's other subsidiaries entered into a new 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 New Term Loan Credit 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 June 30, 2019, Adient's availability under this facility was $1,054 million.
In addition, Adient US and Adient Global Holdings S.à r.l., a wholly-owned subsidiary of Adient, entered into a new term loan credit agreement (the “Term Loan B Agreement”) on the Refinancing Date providing for a 5-year $800 million senior secured term loan facility that was fully drawn on 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.
Finally, on the Refinancing Date, Adient US entered into 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 proceeds from the transactions described above were used to repay the outstanding indebtedness and terminate commitments under Adient’s Original Credit Facilities, which was scheduled to mature in July 2021. In addition, certain proceeds were used (i) to pay related premiums, fees and expenses in connection with the refinancing and entering into and funding of the new credit facilities and (ii) for working capital and other general corporate purposes.
The ABL Credit Agreement, 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,
Adient plc | Form 10-Q | 42
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.
The Original Credit Facilities included commitments for a $1.5 billion revolving credit facility (undrawn at March 31, 2019 and September 30, 2018) and a $1.5 billion Term Loan A facility (which was fully drawn during the fourth quarter of fiscal 2016). The Original Credit Facilities were to mature in July 2021. Until the Term Loan A facility maturity date, amortization of the funded Term Loan A was required in an amount per quarter equal to 1.25% of the original principal amount prior to July 27, 2019 and 2.5% in each quarter thereafter prior to final maturity. The Term Loan A facility also required mandatory prepayments in connection with certain non-ordinary course asset sales and insurance recovery and condemnation events, among other things, and subject in each case to certain significant exceptions.
During the first quarter of fiscal 2019, Adient entered into an amendment to the Original Credit Facilities (“First Amended Credit Facilities") whereby the financial maintenance covenant was amended to require Adient to maintain a total net leverage ratio equal to or less than 4.5x adjusted EBITDA, with step down provisions starting in the quarter ending December 31, 2020. The amendment also expanded the upper range of interest rate margins such that the drawn portion of the First Amended Credit Facilities would bear interest based on LIBOR plus a margin between 1.25% - 2.50% (previously 1.25% - 2.25%), based on Adient’s total net leverage ratio. No other terms were impacted by the amendment. During the second quarter of fiscal 2019, Adient entered into an amendment to the First Amended Credit Facilities (“Second Amended Credit Facilities") whereby the financial maintenance covenant contained in the First Amended Credit Facilities was amended to require Adient to maintain a first lien secured net leverage ratio equal to or less than 2.5x adjusted EBITDA as of the last day of each quarter, with step down provisions starting on September 30, 2020. The amendment also added a new tier to the pricing schedule that would be applicable when the total net leverage ratio exceeds 4.0x adjusted EBITDA and amended certain other definitions, negative covenants and other terms within the credit facility.
Sources of Cash Flows
Nine Months Ended June 30, | ||||||||
(in millions) | 2019 | 2018 | ||||||
Cash provided (used) by operating activities | $ | 306 | $ | 240 | ||||
Cash provided (used) by investing activities | (278 | ) | (414 | ) | ||||
Cash provided (used) by financing activities | 300 | (162 | ) | |||||
Capital expenditures | (350 | ) | (404 | ) | ||||
Operating Cash Flows: Cash flows from operating activities increased year over year due primarily to overall favorable changes to working capital, including favorable changes to accounts receivable and recoveries of pre-production costs.
Investing Cash Flows: The decrease in cash used by investing activities is primarily attributable to overall lower levels of capital expenditures and higher proceeds from sales of assets including the Detroit, Michigan properties and remaining airplane for approximately $35 million.
Financing Cash Flows: The increase in cash used by financing activities is primarily attributable to the new debt arrangement entered into during the third quarter of fiscal 2019 and higher levels of dividends paid in the prior year and the current year contribution of $28 million by Adient's JV partner as part of the formation of a consolidated joint venture.
Capital expenditures: Capital expenditures decreased year over year based on timing of program spend on product launches.
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Working capital
(in millions) | June 30, 2019 | September 30, 2018 | ||||||
Current assets | $ | 4,253 | $ | 4,309 | ||||
Current liabilities | 3,963 | 4,192 | ||||||
Working capital | $ | 290 | $ | 117 | ||||
The increase in working capital of $173 million is primarily attributable to higher levels of cash and lower levels of accounts payable, partially offset by lower levels of accounts receivable and inventories and higher levels of accrued compensation.
Restructuring and Impairment Costs
Adient committed to a restructuring plan in fiscal 2019 to drive cost efficiencies and to balance our global production against demand and recorded $96 million of restructuring costs in the consolidated statement of income. Of the restructuring costs recorded, $76 million relates to the EMEA segment, $13 million relates to the Americas segment and $7 million relates to the Asia segment. The costs consist primarily of workforce reductions. The restructuring actions are expected to be substantially complete in fiscal 2019. The restructuring plan reserve balance of $76 million at June 30, 2019 is expected to be paid in cash.
Adient committed to a restructuring plan in fiscal 2018 to drive cost efficiencies and to balance our global production against demand and recorded $71 million of restructuring costs in the consolidated statement of income, that was offset by $20 million of underspend in the 2016 Plan and $7 million of underspend related to other plan years. 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. The costs consist primarily of workforce reductions and plant closures. 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 55% will result in net savings. The restructuring actions are expected to be substantially complete in fiscal 2019. The restructuring plan reserve balance of $24 million at June 30, 2019 is expected to be paid in cash.
Adient committed to a restructuring plan in fiscal 2017 to drive cost efficiencies and to balance our global production against demand and recorded $46 million of restructuring and impairment costs in the consolidated statement 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 and 2018. The restructuring actions are expected to be substantially complete in fiscal 2019. The restructuring plan reserve balance of $7 million at June 30, 2019 is expected to be paid in cash.
Adient committed to a restructuring plan in fiscal 2016 (the "2016 Plan") to drive cost efficiencies and to balance our global production against demand and recorded $332 million of restructuring and impairment costs in the consolidated statement of income. Of the restructuring and impairment costs recorded, $298 million relates to the EMEA segment, $32 million relates to the Americas segment and $2 million relates to the Asia segment. The costs 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 $150 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 70%-75% will result in net savings. Adient partially achieved these savings in fiscal years 2016 through 2018, with the full benefit expected in fiscal 2019. The restructuring actions are expected to be substantially complete in fiscal 2021. The restructuring plan reserve balance of $31 million at June 30, 2019 is expected to be paid in cash.
Since the announcement of the 2016 Plan, Adient has experienced lower employee severance and termination benefit cash payouts than previously calculated of approximately $20 million, due to changes in cost reduction actions. The planned workforce reductions disclosed for the 2016 Plan have been updated for Adient's revised actions.
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, 2018.
Adient plc | Form 10-Q | 44
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.
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, 2018, 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 and nine months ended June 30, 2019, except as follows.
Impairment of Goodwill, Other Long-lived Assets and Investments in Partially Owned Affiliates
As a result of the goodwill impairment assessment in the second quarter of fiscal 2019, the Americas reporting unit, which was allocated $642 million of goodwill as of March 31, 2019 maintains an excess of fair value over its carrying value of 1%. The fair value of the Americas reporting unit was derived using discounted cash flows and a discount rate of 17.5%. To the extent discount rates increase, long-term growth rates are not achieved and/or actual cash flows in the future are lower than the forecasted cash flows used in the second quarter of fiscal 2019 impairment assessment, the goodwill allocated to Americas could be determined to be impaired which could have a material impact on Adient's results of operations. See Note 5, "Goodwill and Other Intangible Assets," of the notes to the Consolidated Financial Statements for more information on the goodwill impairment assessment performed during the second quarter of fiscal 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 June 30, 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, 2018.
Adient plc | Form 10-Q | 45
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 and nine months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 16 "Commitments and Contingencies" to the 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, 2018.
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, 2018.
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 was no share repurchase activity during the three months ended June 30, 2019. |
Adient plc | Form 10-Q | 46
Item 3. | Defaults Upon Senior Securities | |||
None. |
Item 4. | Mine Safety Disclosures | |||
Not applicable. |
Item 5. | Other Information | |||
None. |
Adient plc | Form 10-Q | 47
Item 6. | Exhibit Index | |||
EXHIBIT INDEX
Exhibit No. | Exhibit Title | |
10.1 | ||
10.2 | ||
10.3 | ||
31.1 | ||
31.2 | ||
32.1 | ||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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 | 48
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 | ||
Date: | August 7, 2019 | |
By: | /s/ Jeffrey M. Stafeil | |
Jeffrey M. Stafeil | ||
Executive Vice President and Chief Financial Officer | ||
Date: | August 7, 2019 | |
Adient plc | Form 10-Q | 49
