consolidated financial statements for disaggregated revenue by geographical market.
In the second quarter of fiscal 2019, Adient recorded $7 million of warranty expense to correct a prior period error related to incurred but not yet reported warranty expense. Adient has concluded that this adjustment was not material to previously reported financial statements.
| | | | | | | | | | | | | | |
| | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 |
Balance at beginning of period | | $ | 24 | | | $ | 22 | |
Accruals for warranties issued during the period | | 7 | | | 9 | |
Changes in accruals related to pre-existing warranties (including changes in estimates) | | (1) | | | (1) | |
| | | | |
Settlements made (in cash or in kind) during the period | | (6) | | | (5) | |
| | | | |
Balance at end of period | | $ | 24 | | | $ | 25 | |
Adient plc | Form 10-Q | 13
Adient adopted Accounting Standards Codification Topic 842, Leases (ASC 842), and all the related amendments using the modified retrospective method, without adjusting the comparative financial information, on October 1, 2019. As a result, financial information for reporting periods beginning on or after October 1, 2019 are presented in accordance with ASC 842. Upon adoption, Adient recognized right-of-use (ROU) assets of $380 million and corresponding lease liabilities of $384 million on October 1, 2019. The adoption date ROU asset balance was adjusted by $4 million, reflecting impairment of ROU assets for certain real estate leases (within the North America and Europe asset groups) of which the Company determined the carrying value of the initial operating lease ROU asset exceeded its fair value. The adjustment was recorded as an increase to the opening accumulated deficits. The adoption of ASC 842 did not have any significant impact on the consolidated statement of income or cash flows.
Adient's lease portfolio consists of operating leases for real estate including production facilities, warehouses and administrative offices, equipment such as forklifts and computer servers and laptops, and fleet vehicles. The Company has elected not to record leases with an initial term of 12 months or less on its consolidated statement of financial position.
A lease liability and corresponding right-of-use asset are recognized based on the present value of lease payments. To determine the present value of lease payments, the Company uses its incremental borrowing rate as of lease commencement. The incremental borrowing rate (IBR) is defined as the rate Adient would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Adient primarily derives its IBR from its debt portfolio, adjusted for collateralization, lease term and jurisdictional factors. Adient's finance leases are not significant and are not included in the following disclosures.
The components of lease costs included in the consolidated statement of income (loss) for the three months and nine months ended June 30, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | |
(in millions) | | Three Months Ended June 30, 2020 | | Nine Months Ended June 30, 2020 |
Operating lease cost | | $ | 30 | | | $ | 94 | |
Short-term lease cost | | 6 | | | 18 | |
| | | | |
Total lease cost | | $ | 36 | | | $ | 112 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Operating lease cost | | $ | 32 | | | $ | 30 | | | $ | 94 | | | $ | 94 | |
Short-term lease cost | | 4 | | | 6 | | | 16 | | | 18 | |
| | | | | | | | |
Total lease cost | | $ | 36 | | | $ | 36 | | | $ | 110 | | | $ | 112 | |
Operating lease right-of-use assets and lease liabilities included in the consolidated statement of financial position were as follows:
| | | | | | | | | | | | | | |
(in millions) | | | | June 30, 2020 |
Operating lease right-of-use assets | | Other noncurrent assets | | $ | 324 | |
| | | | |
Operating lease liabilities - current | | Other current liabilities | | $ | 88 | |
Operating lease liabilities - noncurrent | | Other noncurrent liabilities | | 238 | |
| | | | $ | 326 | |
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | June 30, 2021 | | September 30, 2020 |
Operating leases: | | | | | | |
Operating lease right-of-use assets | | Other noncurrent assets | | $ | 346 | | | $ | 334 | |
| | | | | | |
Operating lease liabilities - current | | Other current liabilities | | $ | 87 | | | $ | 95 | |
Operating lease liabilities - noncurrent | | Other noncurrent liabilities | | 261 | | | 244 | |
| | | | $ | 348 | | | $ | 339 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Weighted average remaining lease term: | | | | | | |
Operating leases | | | | 8 years | | 5 years |
| | | | | | |
| | | | | | |
Weighted average discount rate: | | | | | | |
Operating leases | | | | 5.4 | % | | 5.9 | % |
| | | | | | |
Maturities of operating lease liabilities and minimum payments for operating leases having initial or remaining non-cancelable terms in excess of one year as of June 30, 20202021 were as follows:
Adient plc | Form 10-Q | 1415
| | | | | | | | |
| | Operating leases |
Fiscal years (in millions) | | June 30, 2020 |
2020 (excluding the nine months ended June 30, 2020) | | $ | 28 | |
2021 | | 98 | |
2022 | | 71 | |
2023 | | 56 | |
2024 | | 41 | |
Thereafter | | 91 | |
Total lease payments | | 385 | |
Less: imputed interest | | (59) | |
Present value of lease liabilities | | $ | 326 | |
| | | | | | | | | | |
| | Operating leases |
Fiscal years (in millions) | | June 30, 2021 | | |
2021 (excluding the nine months ended June 30, 2021) | | $ | 30 | | | |
2022 | | 96 | | | |
2023 | | 74 | | | |
2024 | | 55 | | | |
2025 | | 41 | | | |
Thereafter | | 125 | | | |
Total lease payments | | 421 | | | |
Less: imputed interest | | (73) | | | |
Present value of lease liabilities | | $ | 348 | | | |
Future minimum operating lease payments accounted for under ASC 840 at September 30, 2019 were as follows:
| | | | | | | | |
| | Operating leases |
Fiscal years (in millions) | | September 30, 2019 |
2020 | | $ | 119 | |
2021 | | 91 | |
2022 | | 64 | |
2023 | | 51 | |
2024 | | 40 | |
After 2024 | | 94 | |
Total minimum lease payments | | $ | 459 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 |
Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating leases (non-cash activity) | | $ | 102 | | | $ | 34 | |
| | | | |
| | | | |
Operating cash flows: | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 96 | | | $ | 95 | |
| | | | |
| | | | |
| | | | | | | | |
(in millions) | | Nine Months Ended June 30, 2020 |
Right-of-use assets obtained in exchange for lease obligations: | | |
Operating leases (non-cash activity) | | $ | 34 | |
| | |
Operating cash flows: | | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 95 | |
| | |
The weighted average remaining lease term for Adient's operating leases as of June 30, 2020 was 5 years. The weighted average discount rate for Adient's operating leases as of June 30, 2020 was 5.7%.
Adient plc | Form 10-Q | 15
| | | | | | | | | | | | | | |
8. Debt and Financing Arrangements | | | | |
Debt consisted of the following:
| | | | | | | | | | | | | | |
(in millions) | | June 30, 2020 | | September 30, 2019 |
Long-term debt: | | | | |
Term Loan B - LIBOR plus 4.00% due in 2024 | | $ | 792 | | | $ | 798 | |
4.875% Notes due in 2026 | | 900 | | | 900 | |
3.50% Notes due in 2024 | | 1,122 | | | 1,094 | |
7.00% Notes due in 2026 | | 800 | | | 800 | |
9.00% Notes due in 2025 | | 600 | | | — | |
European Investment Bank Loan - EURIBOR plus 1.58% due in 2022 | | — | | | 180 | |
| | | | |
| | | | |
Less: debt issuance costs | | (59) | | | (56) | |
Gross long-term debt | | 4,155 | | | 3,716 | |
Less: current portion | | 8 | | | 8 | |
Net long-term debt | | $ | 4,147 | | | $ | 3,708 | |
| | | | |
Short-term debt: | | | | |
ABL Credit Facility | | $ | 179 | | | $ | — | |
European Investment Bank Loan - EURIBOR plus 1.58% due in 2022 | | 185 | | | — | |
Other bank borrowings | | 8 | | | 22 | |
Total short-term debt | | $ | 372 | | | $ | 22 | |
| | | | | | | | | | | | | | |
(in millions) | | June 30, 2021 | | September 30, 2020 |
Long-term debt: | | | | |
Term Loan B - LIBOR plus 3.50% due in 2028 | | $ | 1,000 | | | $ | 790 | |
4.875% Notes due in 2026 | | 797 | | | 797 | |
3.50% Notes due in 2024 | | 1,190 | | | 1,173 | |
7.00% Notes due in 2026 | | 0 | | | 800 | |
9.00% Notes due in 2025 | | 600 | | | 600 | |
European Investment Bank Loan - EURIBOR plus 1.58% due in 2022 | | 160 | | | 0 | |
| | | | |
Less: debt issuance costs | | (35) | | | (55) | |
Gross long-term debt | | 3,712 | | | 4,105 | |
Less: current portion | | 170 | | | 8 | |
Net long-term debt | | $ | 3,542 | | | $ | 4,097 | |
| | | | |
Short-term debt: | | | | |
| | | | |
European Investment Bank Loan - EURIBOR plus 1.58% due in 2022 | | $ | 0 | | | $ | 194 | |
Other bank borrowings | | 45 | | | 8 | |
Total short-term debt | | $ | 45 | | | $ | 202 | |
Adient US LLC ("Adient US"), a wholly owned subsidiary of Adient, together with certain of Adient's other subsidiaries, maintains an asset-based revolving credit facility (the ““ABL Credit Facility”), which provides for a revolving line of credit up
Adient plc | Form 10-Q | 16
to $1,250 million, including a North American subfacility of up to $950 million and a European subfacility of up to $300 million, subject to borrowing base capacity. The ABL Credit Facility” will mature on May 6, 2024, subject to a springing maturity date 91 days earlier if certain amounts remain outstanding at that time under the Term Loan B Agreement (defined below). Interest is payable on the ABL Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 1.50% to 2.00%. Adient will pay a commitment fee of 0.25% to 0.375% on the unused portion of the commitments under the asset-based revolving credit facility based on average global availability. Letters of credit are limited to the lesser of (x) $150 million and (y) the aggregate unused amount of commitments under the ABL Credit Facility then in effect. Subject to certain conditions, the ABL Credit Facility may be expanded by up to $250 million in additional commitments. Loans under the ABL Credit Facility may be denominated, at the option of Adient, in U.S. dollars, Euros, Pounds Sterling or Swedish Kroner. The ABL Credit Agreement is secured on a first-priority lien on all accounts receivable, inventory and bank accounts (and funds on deposit therein) and a second-priority lien on all of the tangible and intangible assets of certain Adient subsidiaries. As of June 30, 2021, Adient had not drawn down on the ABL Credit Facility and had availability under this facility of $853 million (net of $60 million of letters of credit).
In addition, Adient US and Adient Global Holdings S.à r.l., a wholly-owned subsidiary of Adient, maintain a term loan credit agreement (the “Term Loan B Agreement”) that initially provided 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 originally due at final maturity on May 6, 2024. Interest on the Term Loan B Agreement accrues at the Eurodollar rate plus an applicable margin originally 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. In April 2021, Adient amended the Term Loan B Agreement ("Amended Agreement") which, among other changes (i) extended the maturity date for loans outstanding to April 8, 2028, (ii) reduced the interest rate margin applicable thereunder by 0.75% to 3.50%, in the case of Eurodollar Rate loans, and 2.50% (in the case of Base Rate loans) (in each case, with one 0.25% step down based on achievement of a specified first lien secured net leverage level starting with the fiscal quarter ending December 31, 2021) and (iii) made certain other negative covenant and mandatory prepayment changes in connection therewith. The amendment also established incremental term loans in an aggregate principal amount of $214 million resulting in total loans outstanding under the Amended Agreement of $1.0 billion. Adient paid $6 million related to the Amended Agreement and wrote off $8 million of previously deferred financing costs as a result of the debt extinguishment during the third quarter of fiscal 2021.
Adient US was also a party to an indenture relating to the issuance of $800 million aggregate principal amount of Senior First Lien Notes. The notes originally mature on May 15, 2026 and bore interest at a rate of 7.00% per annum. Interest on these notes was payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2019. During the second quarter of fiscal 2021, Adient repurchased $640 million of the outstanding balance of the Senior First Lien Notes at a price of 107% of the principal plus $17 million of accrued and unpaid interest. As a result, $9 million of previously deferred financing costs was written off to net financing charges. During the third quarter of fiscal 2021, Adient redeemed the $160 million of remaining balance of the Senior First Lien Notes at a price of 103% of the principal plus $4 million of accrued and unpaid interest, and wrote off $2 million of previously deferred financing costs as a result of the debt extinguishment.
The ABL Credit Facility, Term Loan B Agreement and the Senior First Lien Notes due 2026 contain covenants that are usual and customary for facilities and debt instruments 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, cross-default clauses with other debt arrangements, failure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of bankruptcy or insolvency involving Adient and its significant subsidiaries.
Adient Global Holdings Ltd. ("AGH"), a wholly-owned subsidiary of Adient, maintains $900 million aggregate principal amount of 4.875% USD-denominated unsecured notes due 2026. During the fourth quarter of fiscal 2020, Adient redeemed $103 million of face value of these notes, resulting in a remaining balance of $797 million as of September 30, 2020. AGH also maintains €1.0 billion aggregate principal amount of 3.50% unsecured notes due 2024.
Adient Germany Ltd. & Co. KG, a wholly owned subsidiary of Adient, maintains €135 million in an unsecured term loan from the European Investment Bank ("EIB") due in 2022. The loan bears interest at the 6-month EURIBOR rate plus 158 basis
Adient plc | Form 10-Q | 17
points. Adient is compliant with the net leverage ratio of 4.5x at June 30, 2021 and expects to be compliant for the foreseeable future. During the first quarter of fiscal 2021, Adient repaid $16 million of the EIB loan, triggered in part by the redemption of debt in the prior year. Adient repaid $20 million of the EIB loan in May 2021, triggered by the prior year sale of the fabrics business.
On April 20, 2020, Adient US issued $600 million (net proceeds of $591 million) aggregate principal amount of 9.00% Senior First Lien Notes due 2025. These notes will mature on April 15, 2025, provided that if AGH has not refinanced (or otherwise redeemed) in whole its outstanding 3.50% unsecured notes due 2024 or any refinancing indebtedness thereof that matures earlier than 91 days prior to the maturity date of the Senior First Lien Notes due 2025 on or prior to May 15, 2024, these notes will mature on May 15, 2024. Interest on these notes is due on April 15 and October 15 each year, beginning on October 15, 2020. These notes contain covenants that are usual and customary, similar to the covenants on the Senior First Lien Notes due 2026 as described above. Adient incurred $10 million of debt issuance cost associated with this new debt in fiscal 2020.
Net Financing Charges
Adient's net financing charges in the consolidated statements of income (loss) contained the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Interest expense, net of capitalized interest costs | | $ | 46 | | | $ | 56 | | | $ | 162 | | | $ | 152 | |
Banking fees and debt issuance cost amortization | | 14 | | | 5 | | | 27 | | | 13 | |
Interest income | | (2) | | | (2) | | | (6) | | | (9) | |
Premium paid on repurchase of debt | | 4 | | | 0 | | | 49 | | | 0 | |
Derivative loss on Yanfeng transaction | | 24 | | | 0 | | | 24 | | | 0 | |
Net foreign exchange | | 1 | | | (1) | | | 0 | | | 0 | |
Net financing charges | | $ | 87 | | | $ | 58 | | | $ | 256 | | | $ | 156 | |
| | | | | | | | | | | | | | |
9. Derivative Instruments and Hedging Activities |
Adient selectively uses derivative instruments to reduce Adient's market risk associated with changes in foreign currency. Under Adient's policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized to manage Adient's risk is included in the following paragraphs. In addition, refer to Note 10, "Fair Value Measurements," of the notes to consolidated financial statements for information related to the fair value measurements and valuation methods utilized by Adient for each derivative type.
Adient has global operations and participates in the foreign exchange markets to minimize its risk of loss from fluctuations in foreign currency exchange rates. Adient primarily uses foreign currency exchange contracts to hedge certain foreign exchange rate exposures. Adient hedges 70% to 90% of the nominal amount of each of its known foreign exchange transactional exposures. Gains and losses on derivative contracts offset gains and losses on underlying foreign currency exposures. These contracts have been designated as cash flow hedges under ASC 815, "Derivatives and Hedging," and the hedge gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive income (AOCI) and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. All contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at June 30, 2021 and September 30, 2020, respectively.
As of June 30, 2021, 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 the 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 a cross-currency interest rate swap during fiscal 2019 to selectively hedge portions of its net investment in Japan. The currency effects of the cross-currency interest rate swap is reflected in the AOCI account within shareholders' equity attributable to Adient, where they offset gains and losses recorded on Adient's net investment in Japan. As of June 30, 2021,
Adient plc | Form 10-Q | 18
Adient had 1 cross-currency interest rate swap outstanding totaling approximately ¥11 billion designated as a net investment hedge in Adient's net investment in Japan.
Adient purchased interest rate caps during fiscal 2019 to selectively limit the impact of USD LIBOR increases on its interest payments related to Adient's Term Loan B Agreement. The interest rate caps were designated as cash flow hedges under ASC 815. As of June 30, 2021, Adient had 2 outstanding interest rate caps with total notional amount of approximately $200 million. During the third quarter of fiscal 2021, in conjunction with the Term Loan B Amendment as discussed in Note 8, "Debt and Financing Arrangements," Adient de-designated these 2 contracts, the impact of which was not material.
Adient entered into a ¥950 million foreign exchange forward contract during the first quarter of fiscal 2020 to selectively hedge portions of its net investment in China. The currency effects of the forward contract are reflected in the AOCI account within shareholders' equity attributable to Adient, where they offset gains and losses recorded on Adient’s net investment in China. The forward contract matured in June 2020.
In conjunction with the 2021 Yanfeng Transaction as described in Note 3, "Acquisitions and Divestitures," Adient entered into 2 forward foreign currency exchange contracts in April 2021 with total notional amount of approximately ¥7,482 million in order to economically hedge the expected proceeds. One contract is expected to mature at the end of the fourth quarter of fiscal 2021, and the other contract will mature at the end of the first quarter of fiscal 2022. These contracts are treated as freestanding financial instruments with fair value changes recorded in earnings. During the third quarter of fiscal 2021, these contracts generated an unrealized loss of $24 million. Refer to Note 8, "Debt and Financing Arrangements," of the notes to consolidated financial statements for more information.
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, 2021 | | September 30, 2020 | | June 30, 2021 | | September 30, 2020 |
Other current assets | | | | | | | | |
Foreign currency exchange derivatives | | $ | 14 | | | $ | 5 | | | $ | 0 | | | $ | 0 | |
Cross-currency interest rate swaps | | 4 | | | 0 | | | 0 | | | 0 | |
Other noncurrent assets | | | | | | | | |
Foreign currency exchange derivatives | | 0 | | | 0 | | | 1 | | | 0 | |
Interest rate cap | | 0 | | | 0 | | | 0 | | | 0 | |
| | | | | | | | |
Total assets | | $ | 18 | | | $ | 5 | | | $ | 1 | | | $ | 0 | |
| | | | | | | | |
Other current liabilities | | | | | | | | |
Foreign currency exchange derivatives | | $ | 5 | | | $ | 34 | | | $ | 19 | | | $ | 0 | |
Cross-currency interest rate swaps | | 0 | | | 1 | | | 0 | | | 0 | |
Other noncurrent liabilities | | | | | | | | |
Foreign currency exchange derivatives | | 1 | | | 5 | | | 0 | | | 0 | |
| | | | | | | | |
Long-term debt | | | | | | | | |
Foreign currency denominated debt | | 1,190 | | | 1,173 | | | 0 | | | 0 | |
Total liabilities | | $ | 1,196 | | | $ | 1,213 | | | $ | 19 | | | $ | 0 | |
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 June 30, 2021 and September 30, 2020, 0 cash collateral was received or pledged under the master netting agreements.
The gross and net amounts of derivative instruments and other amounts used in hedging activities are as follows:
Adient plc | Form 10-Q | 19
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets | | Liabilities |
(in millions) | | June 30, 2021 | | September 30, 2020 | | June 30, 2021 | | September 30, 2020 |
Gross amount recognized | | $ | 19 | | | $ | 5 | | | $ | 1,215 | | | $ | 1,213 | |
Gross amount eligible for offsetting | | (6) | | | (5) | | | (6) | | | (5) | |
Net amount | | $ | 13 | | | $ | 0 | | | $ | 1,209 | | | $ | 1,208 | |
The following table presents the effective portion of pretax gains (losses) recorded in other comprehensive income related to cash flow hedges:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Foreign currency exchange derivatives | | $ | 21 | | | $ | 18 | | | $ | 40 | | | $ | (39) | |
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, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Foreign currency exchange derivatives | | Cost of sales | | $ | 1 | | | $ | (15) | | | $ | (2) | | | $ | (9) | |
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, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Foreign currency exchange derivatives | | Cost of sales | | $ | 0 | | | $ | 0 | | | $ | (2) | | | $ | (1) | |
Foreign currency exchange derivatives | | Net financing charges | | (24) | | | 3 | | | (22) | | | 6 | |
| | | | | | | | | | |
Total | | | | $ | (24) | | | $ | 3 | | | $ | (24) | | | $ | 5 | |
The effective portion of pretax gains (losses) recorded in currency translation adjustment (CTA) within other comprehensive income (loss) related to net investment hedges was $(17) million and $(25) million for the three months ended June 30, 2021 and 2020, respectively. For the three months ended June 30, 2021 and 2020, 0 gains or losses were reclassified from CTA into income for Adient's outstanding net investment hedges. For the three months ended June 30, 2021 and 2020, 0 ineffectiveness was recognized in the consolidated statements of income (loss) resulting from cash flow hedges.
| | | | | | | | | | | | | | |
10. Fair Value Measurements |
ASC 820, "Fair Value Measurement," defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.
Adient plc | Form 10-Q | 20
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, 2021 | | 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 | | $ | 14 | | | $ | 0 | | | $ | 14 | | | $ | 0 | |
Cross-currency interest rate swaps | | 4 | | | 0 | | | 4 | | | 0 | |
Other noncurrent assets | | | | | | | | |
Foreign currency exchange derivatives | | 1 | | | 0 | | | 1 | | | 0 | |
| | | | | | | | |
| | | | | | | | |
Interest rate cap | | 0 | | | 0 | | | 0 | | | 0 | |
Total assets | | $ | 19 | | | $ | 0 | | | $ | 19 | | | $ | 0 | |
Other current liabilities | | | | | | | | |
Foreign currency exchange derivatives | | $ | 24 | | | $ | 0 | | | $ | 24 | | | $ | 0 | |
Cross-currency interest rate swaps | | 0 | | | 0 | | | 0 | | | 0 | |
Other noncurrent liabilities | | | | | | | | |
Foreign currency exchange derivatives | | 1 | | | 0 | | | 1 | | | 0 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total liabilities | | $ | 25 | | | $ | 0 | | | $ | 25 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: |
(in millions) | | Total as of September 30, 2020 | | 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 | | $ | 5 | | | $ | 0 | | | $ | 5 | | | $ | 0 | |
| | | | | | | | |
Other noncurrent assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Interest rate cap | | 0 | | | 0 | | | 0 | | | 0 | |
Total assets | | $ | 5 | | | $ | 0 | | | $ | 5 | | | $ | 0 | |
Other current liabilities | | | | | | | | |
Foreign currency exchange derivatives | | $ | 34 | | | $ | 0 | | | $ | 34 | | | $ | 0 | |
Cross-currency interest rate swaps | | 1 | | 0 | | | 1 | | 0 | |
Other noncurrent liabilities | | | | | | | | |
Foreign currency exchange derivatives | | 5 | | | 0 | | | 5 | | | 0 | |
Total liabilities | | $ | 40 | | | $ | 0 | | | $ | 40 | | | $ | 0 | |
Valuation Methods
Foreign currency exchange derivatives Adient selectively hedges anticipated transactions and net investments that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices. Changes in fair value on foreign
Adient plc | Form 10-Q | 21
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, 2021 and September 30, 2020, respectively. The changes in fair value of foreign currency exchange derivatives not designated as hedging instruments under ASC 815 are recorded in the consolidated statements of income.
Cross-currency interest rate swaps Adient determines the fair value of a cross-currency interest rate swap contract using a market approach which is based on quoted market price for similar instruments in markets. All significant inputs are corroborated by observable market data for the term of such a contract. Adient selectively uses cross-currency interest rate swaps to hedge portions of its net investments. As of June 30, 2021, Adient had 1 ¥11 billion cross-currency interest rate swap outstanding.
Interest rate caps Adient determines the fair value of an interest rate cap contract using a market approach which is based on quoted market price for identical or similar instruments in markets. All significant inputs are corroborated by observable market data for the term of such a contract. Adient selectively uses interest rate caps to limit the impact of floating rate interest payment increases on its Term Loan B Agreement. The interest rate caps are designated as cash flow hedges under ASC 815. As of June 30, 2021, Adient had 2 interest rate caps outstanding totaling approximately $200 million.
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 $3.8 billion and $4.1 billion at June 30, 2021 and September 30, 2020, respectively, was determined primarily using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy.
| | | | | | | | | | | | | | |
11. Equity and Noncontrolling Interests |
For the nine months ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Income (Loss) | | Shareholders' Equity Attributable to Adient | | Shareholders' Equity Attributable to Noncontrolling Interests | | Total Equity |
Balance at September 30, 2020 | | $ | 0 | | | $ | 3,974 | | | $ | (2,096) | | | | | $ | (665) | | | $ | 1,213 | | | $ | 322 | | | $ | 1,535 | |
Net income (loss) | | — | | | — | | | 148 | | | | | — | | | 148 | | | 51 | | | 199 | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | 53 | | | 53 | | | 9 | | | 62 | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | 34 | | | 34 | | | — | | | 34 | |
| | | | | | | | | | | | | | | | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (40) | | | (40) | |
Change in noncontrolling interest share | | — | | | — | | | — | | | | | — | | | — | | | (3) | | | (3) | |
Share based compensation and other | | — | | | 19 | | | — | | | | | — | | | 19 | | | 1 | | | 20 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | $ | 0 | | | $ | 3,993 | | | $ | (1,948) | | | | | $ | (578) | | | $ | 1,467 | | | $ | 340 | | | $ | 1,807 | |
Adient plc | Form 10-Q | 22
For the three months ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Income (Loss) | | Shareholders' Equity Attributable to Adient | | Shareholders' Equity Attributable to Noncontrolling Interests | | Total Equity |
Balance at March 31, 2021 | | $ | 0 | | | $ | 3,985 | | | $ | (1,877) | | | | | $ | (619) | | | $ | 1,489 | | | $ | 353 | | | $ | 1,842 | |
Net income (loss) | | — | | | — | | | (71) | | | | | — | | | (71) | | | 16 | | | (55) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | 24 | | | 24 | | | 3 | | | 27 | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | 17 | | | 17 | | | — | | | 17 | |
| | | | | | | | | | | | | | | | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (29) | | | (29) | |
Change in noncontrolling interest share | | — | | | — | | | — | | | | | — | | | 0 | | | (3) | | | (3) | |
Share based compensation and other | | — | | | 8 | | | — | | | | | — | | | 8 | | | 0 | | | 8 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Balance at June 30, 2021 | | $ | 0 | | | $ | 3,993 | | | $ | (1,948) | | | | | $ | (578) | | | $ | 1,467 | | | $ | 340 | | | $ | 1,807 | |
For the nine months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Income (Loss) | | Shareholders' Equity Attributable to Adient | | Shareholders' Equity Attributable to Noncontrolling Interests | | Total Equity |
Balance at September 30, 2019 | | $ | 0 | | | $ | 3,962 | | | $ | (1,545) | | | | | $ | (569) | | | $ | 1,848 | | | $ | 341 | | | $ | 2,189 | |
Net income (loss) | | — | | | — | | | (511) | | | | | — | | | (511) | | | 26 | | | (485) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | (66) | | | (66) | | | 1 | | | (65) | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | (23) | | | (23) | | | — | | | (23) | |
| | | | | | | | | | | | | | | | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (28) | | | (28) | |
Change in noncontrolling interest share | | — | | | — | | | — | | | | | — | | | — | | | (18) | | | (18) | |
Share based compensation and other | | — | | | 6 | | | — | | | | | — | | | 6 | | | — | | | 6 | |
| | | | | | | | | | | | | | | | |
Adjustments from adoption of a new standard | | — | | | — | | | (4) | | | | | — | | | (4) | | | — | | | (4) | |
| | | | | | | | | | | | | | | | |
Balance at June 30, 2020 | | $ | 0 | | | $ | 3,968 | | | $ | (2,060) | | | | | $ | (658) | | | $ | 1,250 | | | $ | 322 | | | $ | 1,572 | |
The deconsolidation of Adient Aerospace in the quarter ended December 31, 2019 resulted in a $18 million change in noncontrolling interest.
For the three months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Income (Loss) | | Shareholders' Equity Attributable to Adient | | Shareholders' Equity Attributable to Noncontrolling Interests | | Total Equity |
Balance at March 31, 2020 | | $ | 0 | | | $ | 3,966 | | | $ | (1,735) | | | | | $ | (690) | | | $ | 1,541 | | | $ | 342 | | | $ | 1,883 | |
Net income (loss) | | — | | | — | | | (325) | | | | | — | | | (325) | | | (6) | | | (331) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | 8 | | | 8 | | | 2 | | | 10 | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | 24 | | | 24 | | | — | | | 24 | |
| | | | | | | | | | | | | | | | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (16) | | | (16) | |
| | | | | | | | | | | | | | | | |
Share based compensation and other | | — | | | 2 | | | — | | | | | — | | | 2 | | | — | | | 2 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Balance at June 30, 2020 | | $ | 0 | | | $ | 3,968 | | | $ | (2,060) | | | | | $ | (658) | | | $ | 1,250 | | | $ | 322 | | | $ | 1,572 | |
Adient plc | Form 10-Q | 23
The following table presents changes in AOCI attributable to Adient:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Foreign currency translation adjustments | | | | | | | | |
Balance at beginning of period | | $ | (605) | | | $ | (632) | | | $ | (634) | | | $ | (558) | |
Aggregate adjustment for the period, net of tax | | 24 | | | 8 | | | 53 | | | (66) | |
Balance at end of period | | $ | (581) | | | $ | (624) | | | $ | (581) | | | $ | (624) | |
Realized and unrealized gains (losses) on derivatives | | | | | | | | |
Balance at beginning of period | | $ | (11) | | | $ | (55) | | | $ | (28) | | | $ | (8) | |
Current period changes in fair value, net of tax | | 18 | | | 12 | | | 33 | | | (30) | |
Reclassification to income, net of tax | | (1) | | | 12 | | | 1 | | | 7 | |
Balance at end of period | | $ | 6 | | | $ | (31) | | | $ | 6 | | | $ | (31) | |
Pension and postretirement plans | | | | | | | | |
Balance at beginning of period | | $ | (3) | | | $ | (3) | | | $ | (3) | | | $ | (3) | |
| | | | | | | | |
Balance at end of period | | $ | (3) | | | $ | (3) | | | $ | (3) | | | $ | (3) | |
Accumulated other comprehensive income (loss), end of period | | $ | (578) | | | $ | (658) | | | $ | (578) | | | $ | (658) | |
Adient consolidates certain subsidiaries in which the noncontrolling interest party has within their control the right to require Adient to redeem all or a portion of its interest in the subsidiary. These redeemable noncontrolling interests are reported at their estimated redemption value. Any adjustment to the redemption value impacts retained earnings but does not impact net income. Redeemable noncontrolling interests which are redeemable only upon future events, the occurrence of which is not currently probable, are recorded at carrying value. The following table presents changes in the redeemable noncontrolling interests:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Beginning balance | | $ | 44 | | | $ | 35 | | | $ | 43 | | | $ | 51 | |
Net income | | 6 | | | 0 | | | 19 | | | 14 | |
Foreign currency translation adjustments | | (2) | | | 7 | | | 0 | | | 0 | |
Dividends | | 0 | | | 0 | | | (14) | | | (23) | |
| | | | | | | | |
Ending balance | | $ | 48 | | | $ | 42 | | | $ | 48 | | | $ | 42 | |
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) | | 2021 | | 2020 | | 2021 | | 2020 |
Service cost | | $ | 2 | | | $ | 2 | | | $ | 6 | | | $ | 6 | |
Interest cost | | 3 | | | 2 | | | 7 | | | 8 | |
Expected return on plan assets | | (6) | | | (4) | | | (14) | | | (14) | |
Net actuarial and settlement (gain) loss | | (1) | | | 1 | | | (1) | | | 1 | |
Net periodic benefit cost | | $ | (2) | | | $ | 1 | | | $ | (2) | | | $ | 1 | |
Adient plc | Form 10-Q | 24
The interest cost and expected return on plan assets components of net periodic benefit cost are included in other pension expense (income) in the consolidated statements of income (loss).
| | | | | | | | | | | | | | |
13. Restructuring and Impairment Costs |
To better align its resources with its overall strategies and reduce the cost structure of its global operations to address the softness in certain underlying markets, Adient commits to restructuring plans as necessary.
During fiscal 2021, Adient committed to a restructuring plan ("2021 Plan") of $24 million that was offset by $14 million of prior year underspend. Of the restructuring costs recorded, $23 million relates to the EMEA segment and $1 million relates to the Asia segment. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions and lease contract terminations. The restructuring actions are expected to be substantially completed by fiscal 2022.
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Employee Severance and Termination Benefits | | | | | | | | Total |
Original reserve | | $ | 24 | | | | | | | | | $ | 24 | |
Utilized—cash | | (2) | | | | | | | | | (2) | |
| | | | | | | | | | |
Balance at June 30, 2021 | | $ | 22 | | | | | | | | | $ | 22 | |
During fiscal 2020, Adient committed to a restructuring plan ("2020 Plan") of $205 million. Of the restructuring costs recorded, $20 million relates to the Americas segment, $175 million relates to the EMEA segment and $10 million relates to the Asia segment. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions. Also recorded in fiscal 2020 was $20 million of underspend related to prior year plan reserves. The restructuring actions are expected to be substantially completed by fiscal 2022.
The following table summarizes the changes in Adient's 2020 Plan reserve:
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Employee Severance and Termination Benefits | | | | | | Currency Translation | | Total |
Balance at September 30, 2020 | | $ | 168 | | | | | | | $ | 1 | | | $ | 169 | |
Utilized—cash | | (77) | | | | | | | 0 | | | (77) | |
Noncash adjustment—underspend/other | | (4) | | | | | | | 4 | | | 0 | |
Balance at June 30, 2021 | | $ | 87 | | | | | | | $ | 5 | | | $ | 92 | |
The following table summarizes the changes in Adient's 2019 Plan reserve:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Employee Severance and Termination Benefits | | Other | | Currency Translation | | Total |
Balance at September 30, 2020 | | $ | 32 | | | $ | 3 | | | $ | 0 | | | $ | 35 | |
Utilized—cash | | (21) | | | 0 | | | 0 | | | (21) | |
| | | | | | | | |
Noncash adjustment—underspend/other | | 0 | | | (3) | | | 1 | | | (2) | |
Balance at June 30, 2021 | | $ | 11 | | | $ | 0 | | | $ | 1 | | | $ | 12 | |
During the first nine months of fiscal 2021, there was $18 million of cash utilized against the 2018, 2017 and 2016 Plan's reserve balances. The majority of the cash utilized during the period was related to the 2016 Plan's reserve balance. The 2018, 2017, and 2016 Plan's reserve balances at June 30, 2021 were $4 million, $3 million, and $2 million, respectively.
Adient plc | Form 10-Q | 25
Adient's restructuring plans include workforce reductions of approximately 18,000 employees. 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, 2021, approximately 14,000 of the employees have been separated from Adient pursuant to the restructuring plans. In addition, the restructuring plans included NaN plant closures. As of June 30, 2021, 19 of the NaN 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, particularly related to the COVID-19 pandemic and supply chain disruptions, could impact Adient's liquidity position, lead to impairment charges and/or require additional restructuring of its operations.
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, 2021, Adient’s income tax expense was $10 million equating to an effective tax rate of (26)%, and $90 million equating to an effective tax rate of 29%, respectively. The three and nine month income tax expense was higher than the Irish statutory rate of 12.5% primarily due to foreign tax rate differentials and the inability to record a tax benefit for losses in jurisdictions with valuation allowances, partially offset by a tax benefit from the write-off of a deferred tax liability related to withholding taxes. Due to the uncertainty related to the impact of the COVID-19 pandemic on the Company’s operations at a jurisdictional level that is required to estimate an annual effective tax rate for the full fiscal year, Adient used a discrete effective tax rate method to calculate an income tax provision for the nine-month period ended June 30, 2020. For the three and nine months ended June 30, 2020, Adient’s income tax expense was $5 million equating to an effective tax rate of (2)% and $75 million equating to an effective tax rate of (19)%, respectively. For the three months ended June 30, 2020, income tax expense was recognized rather than a tax benefit that would have been recognized by applying the statutory rate of 12.5% against pre-tax losses, primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset by a tax benefit related to an impairment charge recorded in the Asia segment related to customer relationship intangible asset. For the nine months ended June 30, 2020, income tax expense was recognized rather than a tax benefit that would have been recognized by applying the statutory rate of 12.5% against pre-tax losses, primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances and foreign currency remeasurement of Mexican peso denominated deferred tax assets, partially offset by a tax benefit related to the impairment of Adient’s YFAI investment and a tax benefit related to an impairment charge recorded in the Asia segment related to customer relationship intangible assets.
Valuation Allowances
As a result of the Company's third quarter fiscal 2021 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence, Adient determined that no changes to valuation allowances were required.
Adient reviews the realizability of its deferred tax assets on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or combined group recording the net deferred tax asset are considered, along with any other positive or negative evidence. All of the factors that Adient considers in evaluating whether and when to establish or release all or a portion of the deferred tax asset valuation allowance involve significant judgment. Since future financial results may differ from previous estimates, periodic adjustments to Adient's valuation allowances may be necessary.
Uncertain Tax Positions
At June 30, 2021, Adient had gross tax effected unrecognized tax benefits of $489 million. If recognized, $137 million of Adient's unrecognized tax benefits would impact the effective tax rate. Total net accrued interest at June 30, 2021 was approximately $18 million (net of tax benefit). The interest and penalties accrued for the three and nine months ended June 30, 2021 was $1 million and $3 million, respectively. Adient recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Adient plc | Form 10-Q | 26
Impacts of Tax Legislation and Change in Statutory Tax Rates
Tax legislation was adopted during the nine months ended June 30, 2021 in various jurisdictions, which did not have a material impact on Adient’s consolidated financial statements.
On March 27, 2020, the House passed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act), also known as the Third COVID-19 Supplemental Relief bill, and the president signed the legislation into law. Adient does not expect the provisions of the legislation to have a significant impact on the effective tax rate or the income tax payable and deferred income tax positions of the Company.
Other Tax Matters
During the third quarter of fiscal 2021, Adient recognized an additional $30 million pre-tax gain related to Brazil indirect tax credits as a result of a favorable supreme court ruling. The tax expense associated with this gain was $10 million.
During the third quarter of fiscal 2021, Adient recognized a tax benefit of $11 million related to the write-off of a deferred tax liability associated with a Chinese joint venture’s distribution of unremitted earnings. The distribution was reinvested in a wholly-owned Chinese subsidiary, thereby exempting the distribution from withholding tax. The investment in the wholly-owned subsidiary is intended to be indefinitely reinvested, warranting the derecognition of the pre-existing deferred tax liability.
During the second quarter of fiscal 2021, Adient recognized a $33 million pre-tax gain related to the sale of its equity interest in Shenyang Jinbei Adient Automotive Components Co., Ltd. The tax expense associated with this gain was $5 million.
During the first quarter of fiscal 2021, Adient recognized an $8 million pre-tax gain related to Brazil indirect tax credits. The tax expense associated with this gain was $3 million.
During the nine months ended June 30, 2020, Adient recognized net restructuring expenses of $86 million. Refer to Note 13, “Restructuring and Impairment Costs,” of the notes to the consolidated financial statements for additional information. The tax benefit associated with the restructuring charge was $3 million.
During the third quarter of fiscal 2020, an impairment charge of $27 million was recorded in the Asia segment related to customer relationship intangible assets. Refer to Note 5, “Goodwill and Other Intangible Assets,” of the notes to the consolidated financial statements for additional information. The tax benefit associated with the impairment charge was $5 million.
During the first quarter of fiscal 2020, Adient recognized a pre-tax non-cash impairment of $216 million in equity income related to Adient's YFAI investment. Refer to Note 3, “Acquisitions and Divestitures,” of the notes to the consolidated financial statements for additional information. The tax benefit associated with the impairment charge was $4 million. An additional impairment of $6 million was recorded in the third quarter of fiscal 2020 related to this investment, with no additional tax benefit being recorded.
Adient manages its business on a geographic basis and operates in the following 3 reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Adient evaluates the performance of its reportable segments using an adjusted EBITDA metric defined as income before income taxes and noncontrolling interests, excluding net financing charges, restructuring and impairment costs, restructuring related-costs, net mark-to-market adjustments on pension and postretirement plans, transaction gains/losses, purchase accounting amortization, depreciation, stock-based compensation and other non-recurring items ("Adjusted EBITDA"). Also, certain corporate-related costs are not allocated to the segments. The reportable segments are consistent with how management views the markets served by Adient and reflect the financial information that is reviewed by its chief operating decision maker.
Adient plc | Form 10-Q | 27
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Net Sales | | | | | | | | |
Americas | | $ | 1,440 | | | $ | 593 | | | $ | 4,821 | | | $ | 4,093 | |
EMEA | | 1,328 | | | 698 | | | 4,568 | | | 3,750 | |
Asia | | 516 | | | 346 | | | 1,658 | | | 1,362 | |
Eliminations | | (42) | | | (11) | | | (138) | | | (132) | |
Total net sales | | $ | 3,242 | | | $ | 1,626 | | | $ | 10,909 | | | $ | 9,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Adjusted EBITDA | | | | | | | | |
Americas | | $ | 23 | | | $ | (83) | | | $ | 219 | | | $ | 117 | |
EMEA | | 22 | | | (94) | | | 277 | | | 17 | |
Asia | | 92 | | | 71 | | | 364 | | | 311 | |
Corporate-related costs (1) | | (19) | | | (16) | | | (61) | | | (59) | |
Restructuring and impairment costs (2) | | (8) | | | (49) | | | (20) | | | (103) | |
Purchase accounting amortization (3) | | (11) | | | (9) | | | (32) | | | (30) | |
Restructuring related charges (4) | | 0 | | | (5) | | | (6) | | | (17) | |
Loss on business divestitures - net (5) | | 0 | | | 0 | | | 0 | | | (25) | |
Gain on sale / (impairment) of nonconsolidated partially-owned affiliates (6) | | 0 | | | (6) | | | 33 | | | (222) | |
Depreciation | | (71) | | | (67) | | | (210) | | | (214) | |
Stock based compensation | | (10) | | | (7) | | | (36) | | | (8) | |
Other items (7) | | 26 | | | (4) | | | 28 | | | (12) | |
Earnings (loss) before interest and income taxes | | 44 | | | (269) | | | 556 | | | (245) | |
Net financing charges | | (87) | | | (58) | | | (256) | | | (156) | |
Other pension income (expense) | | 4 | | | 1 | | | 8 | | | 5 | |
Income (loss) before income taxes | | $ | (39) | | | $ | (326) | | | $ | 308 | | | $ | (396) | |
Notes:
(1) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal and corporate finance.
(2) Reflects qualified restructuring charges for costs that are directly attributable to restructuring activities and meet the definition of restructuring under ASC 420 and non-recurring impairment charges. During the three and nine months ended June 30, 2021, a held-for-sale impairment charge of $1 million and $9 million, respectively, was recorded in EMEA. Restructuring charges during the three and nine months ended June 30, 2020 primarily consist of workforce reductions and a $27 million pre-tax non-cash impairment charge related to long-lived assets in China.
(3) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income.
(4) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420.
(5) The nine months ended June 30, 2020 reflects losses on business divestitures, of which $4 million is related to the deconsolidation of Adient Aerospace, and $21 million is the result of the sale of the RECARO automotive high performance seating systems.
Adient plc | Form 10-Q | 28
(6) The nine months ended June 30, 2021 reflects a pre-tax gain of $33 million on the sale of Adient's interest in SJA. The three and nine months ended June 30, 2020 reflects the non-cash impairment of Adient's YFAI investment. Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements.
(7) The three months ended June 30, 2021 reflects $2 million of transaction costs and a one-time gain of $30 million associated with retrospective recoveries of Brazil indirect tax credits resulting from a favorable court ruling (of which $28 million relates to recoveries covering the past 20 years and is adjusted out of Americas' segment results). The nine months ended June 30, 2021 reflects a one-time gain of $38 million associated with the retrospective recovery of indirect tax credits in Brazil resulting from a favorable court ruling (of which $36 million relates to recoveries covering the past 20 years and is adjusted out of Americas' segment results), a $5 million gain on previously held interest at YFAS in an affiliate, and $13 million of transaction costs. The three months ended June 30, 2020 reflects $4 million of transaction costs. The nine months ended June 30, 2020 reflects $11 million of transaction costs and $1 million of tax adjustments at YFAI.
Geographic Information
Revenue by geographic area is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Sales | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Americas | | | | | | | | |
United States | | $ | 1,298 | | | $ | 519 | | | $ | 4,332 | | | $ | 3,469 | |
Mexico | | 558 | | | 192 | | | 1,783 | | | 1,379 | |
Other Americas | | 64 | | | 17 | | | 238 | | | 236 | |
Regional elimination | | (480) | | | (135) | | | (1,532) | | | (991) | |
| | 1,440 | | | 593 | | | 4,821 | | | 4,093 | |
EMEA | | | | | | | | |
Germany | | 261 | | | 150 | | | 891 | | | 765 | |
Czech Republic | | 276 | | | 166 | | | 964 | | | 806 | |
Other EMEA | | 1,144 | | | 571 | | | 3,918 | | | 3,217 | |
Regional elimination | | (353) | | | (189) | | | (1,205) | | | (1,038) | |
| | 1,328 | | | 698 | | | 4,568 | | | 3,750 | |
Asia | | | | | | | | |
Thailand | | 113 | | | 44 | | | 357 | | | 307 | |
China | | 171 | | | 130 | | | 525 | | | 372 | |
Japan | | 60 | | | 34 | | | 253 | | | 262 | |
Other Asia | | 177 | | | 140 | | | 539 | | | 425 | |
Regional elimination | | (5) | | | (2) | | | (16) | | | (4) | |
| | 516 | | | 346 | | | 1,658 | | | 1,362 | |
| | | | | | | | |
Inter-segment elimination | | (42) | | | (11) | | | (138) | | | (132) | |
| | | | | | | | |
Total | | $ | 3,242 | | | $ | 1,626 | | | $ | 10,909 | | | $ | 9,073 | |
| | | | | | | | | | | | | | |
16. Nonconsolidated Partially-Owned Affiliates |
Investments in the net assets of nonconsolidated partially-owned affiliates are reported in the "Investments in partially-owned affiliates" line in the consolidated statements of financial position as of June 30, 2021 and September 30, 2020. Equity in the net income of nonconsolidated partially-owned affiliates are reported in the "Equity income (loss)" line in the consolidated statements of income (loss) for the nine months ended June 30, 2021 and 2020, respectively.
Adient plc | Form 10-Q | 29
Adient maintains total investments in partially-owned affiliates of $0.6 billion and $0.7 billion at June 30, 2021 and September 30, 2020, respectively. Operating information for nonconsolidated partially-owned affiliates is as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 |
Income statement data: | | | | |
Net sales | | $ | 6,795 | | | $ | 7,319 | |
Gross profit | | $ | 717 | | | $ | 829 | |
Net income | | $ | 418 | | | $ | 387 | |
Net income attributable to the entity | | $ | 413 | | | $ | 381 | |
Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for transactions regarding certain of Adient's investments in partially-owned affiliates.
| | | | | | | | | | | | | | |
17. Commitments and Contingencies |
Adient is involved in various lawsuits, claims and proceedings incident to the operation of its businesses, including those pertaining to product liability, casualty environmental, safety and health, intellectual property, employment, commercial and contractual matters, and various other matters. Although the outcome of any such lawsuit, claim or proceeding cannot be predicted with certainty and some may be disposed of unfavorably to Adient, it is management's opinion that none of these will have a material adverse effect on Adient's financial position, results of operations or cash flows. Costs related to such matters were not material to the periods presented.
Adient accrues for potential environmental liabilities when it is probable a liability has been incurred and the amount of the liability is reasonably estimable. Reserves for environmental liabilities totaled $10 million and $10 million at June 30, 2021 and September 30, 2020, respectively. Adient reviews the status of its environmental sites on a quarterly basis and adjusts its reserves accordingly. Such potential liabilities accrued by Adient do not take into consideration possible recoveries of future insurance proceeds. They do, however, take into account the likely share other parties will bear at remediation sites. It is difficult to estimate Adient's ultimate level of liability at many remediation sites due to the large number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. Nevertheless, Adient does not currently believe that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on Adient's financial position, results of operations or cash flows.
Adient plc | Form 10-Q | 30
| | | | | | | | | | | | | | |
18. Related Party Transactions |
In the ordinary course of business, Adient enters into transactions with related parties, such as equity affiliates. Such transactions consist of the sale or purchase of goods and other arrangements.
The following table sets forth the net sales to and purchases from related parties included in the consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | | | 2021 | | 2020 | | 2021 | | 2020 |
Net sales to related parties | | Net sales | | $ | 70 | | | $ | 60 | | | $ | 209 | | | $ | 255 | |
Purchases from related parties | | Cost of sales | | 139 | | | 138 | | | 433 | | | 447 | |
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, 2021 | | September 30, 2020 |
Accounts receivable due from related parties | | Accounts receivable | | $ | 40 | | | $ | 49 | |
Accounts payable due to related parties | | Accounts payable | | 91 | | | 105 | |
| | | | | | |
Average receivable and payable balances with related parties remained consistent with the period end balances shown above.
Adient plc | Form 10-Q | 31
| | | | | | | | | | | | | | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This section and other parts of this Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," or similar terms. Forward-looking statements are not guarantees of future performance and Adient's actual results may differ significantly from the results discussed in the forward-looking statements. Adient cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond Adient’s control, that could cause Adient’s actual results to differ materially from those expressed or implied by such forward-looking statements, including, among others, Adient’s ability to consummate its strategic transactions in China, its deleveraging transactions or the amendment and extension of its Amended Agreement (collectively, the “Transactions”) that may yield additional value for shareholders at all or on the same or different terms as those described herein, the timing, benefits and outcomes of the Transactions, the effect of the announcements of the Transactions on Adient’s business relationships, operating results and business generally, the occurrence of any event, change or other circumstances that could give rise to the termination of the Transactions, the failure to satisfy conditions to consummation of the Transactions, including the receipt of regulatory approvals (and any conditions, limitations or restrictions placed on these approvals), risks that the Transactions disrupt current plans and operations, including potential disruptions with respect to Adient’s employees, vendors, clients and customers as well as management diversion or potential litigation, the effects of local and national economic, credit and capital market conditions on the economy in general, and other risks and uncertainties, the continued financial and operational impacts of and uncertainties relating to the COVID-19 pandemic on Adient and its customers, suppliers, joint venture partners and other parties, the ability of Adient to execute its turnaround plan, work stoppages and similar events, energy and commodity prices, the availability of raw materials and component products, automotive vehicle production levels, mix and schedules, the ability of Adient to effectively launch new business at forecast and profitable levels, the ability of Adient to meet debt service requirements, the terms of financing, the impact of tax reform legislation through the Tax Cuts and Jobs Act and/ or under the new U.S. presidential administration, uncertainties in U.S. administrative policy regarding trade agreements, tariffs and other international trade relations including as may be impacted by the change in U.S. presidential administration, general economic and business conditions, the strength of the U.S. or other economies, shifts in market shares among vehicles, vehicle segments or away from vehicles on which Adient significant content, changes in consumer demand, global climate change and related emphasis on ESG matters by various stakeholders, currency exchange rates and cancellation of or changes to commercial arrangements, and the ability of Adient to identify, recruit and retain key leadership. Additional information regarding these and other risks related to Adient’s business that could cause actual results to differ materially from what is contained in the forward-looking statements is included in the section entitled "Risk Factors," contained in Item Part II, Other Information - Item 1A of this report, as well as in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, Quarterly Report on Form 10-Q for the Quarterly Period ended December 31 2020, and Quarterly Report on Form 10-Q for the Quarterly Period ended March 31, 2021, which are incorporated herein by reference. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included within this report as well as within Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. All information presented herein is based on Adient's fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to Adient's fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Adient assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
Adient is a global leader in the automotive seating supply industry with leading market positions in the Americas, Europe and China and maintains longstanding relationships with the largest global automotive original equipment manufacturers (OEMs). Adient's proprietary technologies extend into virtually every area of automotive seating solutions, including complete seating systems, frames, mechanisms, foam, head restraints, armrests and trim covers. Adient is a global seat supplier with the capability to design, develop, engineer, manufacture, and deliver complete seat systems and components in every major automotive producing region in the world.
Adient designs, manufactures and markets a full range of seating systems and components for passenger cars, commercial vehicles and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. Adient operates in 202 wholly- and majority-owned manufacturing or assembly facilities, with operations in 32 countries. Additionally, Adient has partially-owned
Adient plc | Form 10-Q | 32
affiliates in China, Asia, Europe and North America. Through its global footprint, vertical integration and partnerships in China, Adient leverages its capabilities to drive growth in the automotive seating industry.
Adient manages its business on a geographic basis and operates in the following three reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
On-Going Impact of COVID-19
The impact of COVID-19, and related mutations, continues to be present throughout the world, including in all global and regional markets served by Adient. Although vaccines have been introduced that are expected to have the result of reducing the effect of COVID-19 and COVID-19 started to wane in certain geographic areas, it has seen a recent resurgence around the globe, and governmental authorities continue to implement numerous measures attempting to contain and mitigate the effects of COVID-19, including travel bans and restrictions, quarantines, social distancing orders, shelter in place orders and shutdowns of non-essential activities. Adient's manufacturing facilities are located in areas that continue to be affected by the pandemic.
As previously disclosed, beginning at the end of January 2020 and continuing through June 2020, Adient experienced the shutdown of its facilities in all geographic regions (Asia, Americas and EMEA) at various points in time. Production finally started to resume in all regions and continued to ramp up through Adient’s fiscal fourth quarter, and as of December 31, 2020, virtually all of Adient's plants had resumed production.
Although the global automotive industry has recently experienced increased demand for new vehicles, it is possible that, in the event of the resurgence of COVID-19, the global automotive industry will experience significantly lower demand for new vehicle sales over the long-term as a result of the global economic slowdown caused by the COVID-19 pandemic because new vehicle sales are highly dependent on strong consumer confidence and low unemployment. As a result, new vehicle sales could be significantly lower than historical and previously projected pre-pandemic sales levels.
Throughout fiscal year 2020 and into fiscal year 2021 Adient continues to actively monitor the threat and impacts of COVID-19. Adient has taken, and continues to take, steps to mitigate the potential risks to the Company posed by COVID-19 and its impacts. In addition, Adient continues to assess and update its business continuity plans in the context of this pandemic, including analyzing constraints at its customers and suppliers, particularly components and labor-related shortages, respectively. Adient has taken precautions to help keep its workforce healthy and safe, including establishing a Global Response Team, implementing strict travel restrictions, enforcing rigorous hygiene protocols, increasing sanitization efforts at all facilities, enacting visitor restrictions, social distancing, face covering expectations, and temperature and health screenings and implementing remote working arrangements for the vast majority of Adient's employees who work outside the plants.
Adient took significant measures to reduce its overall cash burn rate (defined as net cash outflow associated with operating the company) during the shutdown, including the furlough of direct/salary plant workers, reductions of salaries in all areas of the globe and retirement benefits for U.S. employees outside the plants, reduced/delayed capex spending to coincide with the resumption of production and effectively eliminating all discretionary spending. The actions to reduce and defer compensation were global initiatives and included 20% salary reductions in the U.S. beginning on March 23, 2020 (with up to 10% incremental reductions and deferrals taking effect on April 13, 2020) and running until June 30, 2020, salary reductions of up to 20% for certain employees in many of the countries outside of the U.S., CEO salary reduction and deferral until July 15, 2020, and a 20% Board fee reduction. Effective July 1, 2020, Adient offered certain employees, including Adient’s executive officers, restricted stock unit (RSU) awards in lieu of 10-30% of salary and other compensatory benefits that are being foregone by each recipient from the time period beginning July 1, 2020 through June 30, 2021. The RSU awards vested in two tranches, with one half of the awards vesting six months from the grant date, and the remaining half vesting one year from the grant date.
In addition to the significant measures taken to reduce and contain costs, Adient took actions to provide additional liquidity, primarily including the draw down on its ABL revolving credit facility of $825 million at the end of March 2020 and the issuance of $600 million of senior secured notes due 2025 on April 20, 2020. Adient's ability to borrow against the ABL revolving credit facility is limited to its borrowing base, which consists primarily of accounts receivable, inventory and certain cash account balances at certain Adient subsidiaries. Adient repaid $825 million of the ABL revolving credit facility during the third and fourth quarters of fiscal 2020 and maintains $853 million of availability under the ABL revolving credit facility as of June 30, 2021.
The automotive production shutdown in fiscal 2020 also significantly impacted Adient’s daily working capital. During the third quarter of fiscal 2020, Adient experienced significantly lower trade working capital balances (accounts receivable, inventory and accounts payable) due to the shutdown of production in the early part of the third quarter and resumption of production
Adient plc | Form 10-Q | 33
only toward the latter part of the quarter. Trade working capital was favorably impacted during the early part of the third quarter but was more than offset by the unfavorable impact to trade working capital during the latter part of the quarter. The resumption of production in the fourth quarter of fiscal 2020 had a favorable impact to trade working capital as Adient returned to a more stabilized production run rate.
Adient has also pursued, wherever it qualifies, governmental assistance. For example, Adient has been deferring the employer portion of FICA until fiscal 2021 or beyond and deferring VAT payments. Adient is seeking to take advantage of all such assistance to either defer payments to government authorities or to receive cash to help defray operating costs. Adient cannot guarantee that it will continue to qualify for, or receive any of, the assistance that it is pursuing.
The spread of COVID-19 and the measures taken to restrain the spread of the virus have had, and may continue to have, a material negative impact on Adient's financial results and liquidity, and such negative impact may continue well beyond the containment of COVID-19 through the results of widespread use of the vaccine or otherwise. Adient cannot assure that the assumptions used to estimate its liquidity requirements will be correct because it has never previously experienced such a widespread cessation of its operations as it experienced during fiscal year 2020, and it is unclear what the lasting impacts of the slowdown in the automotive industry will be. In addition, the magnitude, duration, speed and potential resurgence or surges of the global pandemic are all uncertain. Consequently, the impact of the pandemic and its myriad of effects on Adient's business, financial condition or longer-term financial or operational results remain uncertain. Based on the actions it has taken and its current assumptions regarding the impact of COVID-19, Adient believes that its current financial resources will be sufficient to fund the company's liquidity requirements for at least the next twelve months.
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. During fiscal 2020, automotive production across the globe declined due to the economic slow down resulting from the COVID-19 pandemic. During the third quarter of fiscal 2021, automotive production significantly increased in all regions, other than China, as a result of prior year operational interruptions due to COVID-19.
The global automotive industry continues to experience supply chain disruptions primarily related to semiconductor shortages. Adient continues to closely monitor these disruptions in an effort to minimize the impact of such matters. The automotive industry has also seen a period of sustained price increases for commodities, primarily related to steel, and to a lesser extent petrochemicals, that may continue into the future as demand increases and supply may remain constrained, which has resulted in, and may continue to result in, increased costs for Adient that may not be, or may only be partially, offset. Although Adient has developed and implemented strategies to mitigate the impact of higher raw material and commodity costs, these strategies, together with commercial negotiations with Adient's customers and suppliers, typically offset only a portion of the adverse impact. Refer to the discussion below, including the segment analysis, for additional information on the impacts of these items on Adient's results.
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) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Global | | 18.7 | | | 55.8% | | 12.0 | | | 62.8 | | | 20.8% | | 52.0 | |
North America | | 3.2 | | | 146.2% | | 1.3 | | | 10.7 | | | 20.2% | | 8.9 | |
South America | | 0.6 | | | 200.0% | | 0.2 | | | 2.0 | | | 25.0% | | 1.6 | |
Europe | | 4.3 | | | 104.8% | | 2.1 | | | 14.3 | | | 19.2% | | 12.0 | |
China | | 5.8 | | | (3.3)% | | 6.0 | | | 19.4 | | | 16.9% | | 16.6 | |
Asia, excluding China, and Other | | 4.8 | | | 100.0% | | 2.4 | | | 16.4 | | | 27.1% | | 12.9 | |
| | | | | | | | | | | | |
Source: IHS Automotive, July 2021 | | | | | | | | | | |
Financial Results Summary
Significant aspects of Adient's financial results for the third quarter of fiscal 2021 include the following:
Adient plc | Form 10-Q | 34
•Adient recorded net sales of $3,242 million for the third quarter of fiscal 2021, representing an increase of $1,616 million or 99% when compared to the third quarter of fiscal 2020. The increase in net sales is attributable to prior year operational interruptions due to COVID-19, the favorable impact of foreign currencies and favorable material economics recoveries, partially offset by current year temporary operational interruptions and production stoppages primarily resulting from semiconductor shortages, prior year divestitures primarily consisting of the fabrics businesses, and unfavorable commercial settlements.
•Gross profit was $150 million, or 4.6% of net sales for the third quarter of fiscal 2021 compared to a loss of $153 million, or (9.4)% of net sales for the third quarter of fiscal 2020. Profitability, including gross profit as a percentage of net sales, was higher due to higher current quarter volumes primarily resulting from prior year operational interruptions due to COVID-19, current year operational improvements, a one-time gain associated with retrospective recoveries of Brazil indirect tax credits, the favorable impact of foreign currencies, partially offset by temporary operational inefficiencies and premium freight caused by unplanned production stoppages resulting primarily from semiconductor shortages, unfavorable impacts of material economics, net of recoveries, and unfavorable commercial settlements.
•Equity income was $38 million for the third quarter of fiscal 2021, compared to $48 million for the third quarter of fiscal 2020. The decrease is primarily attributable to current year operational interruptions and production stoppages resulting from semiconductor shortages primarily at Adient's affiliates in China, and the sale of Adient's interest in SJA during the second quarter of fiscal 2021, partially offset by the favorable impact of foreign currencies.
•Net loss attributable to Adient was $71 million for the third quarter of fiscal 2021, compared to $325 million of net loss attributable to Adient for the third quarter of fiscal 2020. The lower level of net loss in the third quarter of fiscal 2021 is primarily attributable to higher current quarter volumes primarily resulting from prior year operational interruptions due to COVID-19, current year operational improvements, lower restructuring charges, a one-time gain associated with retrospective recoveries of Brazil indirect tax credits, partially offset by operational inefficiencies and premium freight caused by unplanned production stoppages resulting from semiconductor and petrochemical shortages, higher net financing charges, and higher overall selling, general and administrative expense including higher stock-based compensation and incentive compensation costs.
Adient plc | Form 10-Q | 35
Consolidated Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Net sales | | $ | 3,242 | | | 99% | | $ | 1,626 | | | $ | 10,909 | | | 20% | | $ | 9,073 | |
Cost of sales | | 3,092 | | | 74% | | 1,779 | | | 10,120 | | | 16% | | 8,726 | |
Gross profit | | 150 | | | >100% | | (153) | | | 789 | | | >100% | | 347 | |
Selling, general and administrative expenses | | 136 | | | 18% | | 115 | | | 433 | | | 6% | | 407 | |
Loss on business divestitures - net | | — | | | n/a | | — | | | — | | | n/a | | 25 | |
Restructuring and impairment costs | | 8 | | | -84% | | 49 | | | 20 | | | -81% | | 103 | |
Equity income (loss) | | 38 | | | -21% | | 48 | | | 220 | | | >100% | | (57) | |
Earnings (loss) before interest and income taxes | | 44 | | | >100% | | (269) | | | 556 | | | >100% | | (245) | |
Net financing charges | | 87 | | | 50% | | 58 | | | 256 | | | 64% | | 156 | |
Other pension expense (income) | | (4) | | | >-100% | | (1) | | | (8) | | | -60% | | (5) | |
Income (loss) before income taxes | | (39) | | | 88% | | (326) | | | 308 | | | >100% | | (396) | |
Income tax provision (benefit) | | 10 | | | 100% | | 5 | | | 90 | | | 20% | | 75 | |
Net income (loss) | | (49) | | | 85% | | (331) | | | 218 | | | >100% | | (471) | |
Income (loss) attributable to noncontrolling interests | | 22 | | | >100% | | (6) | | | 70 | | | 75% | | 40 | |
Net income (loss) attributable to Adient | | $ | (71) | | | 78% | | $ | (325) | | | $ | 148 | | | >100% | | $ | (511) | |
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Net sales | | $ | 3,242 | | | 99% | | $ | 1,626 | | | $ | 10,909 | | | 20% | | $ | 9,073 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net sales increased by $1,616 million, or 99%, in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020 due to higher volumes across all regions which was primarily the result of prior year operational interruptions due to COVID-19 and despite certain unplanned temporary production stoppages resulting primarily from semiconductor shortages ($1,558 million), the favorable impact of foreign currencies as the U.S. dollar remained weaker against other major currencies ($68 million), the favorable impact of material economics recoveries ($27 million), partially offset by the impact of prior year divestitures primarily consisting of the fabrics business ($16 million) and unfavorable commercial settlements ($21 million).
Net sales increased by $1,836 million, or 20%, in the first nine months of fiscal 2021 as compared to the first nine months of fiscal 2020 primarily due to higher volumes in all regions resulting from prior year operational interruptions due to COVID-19 and despite certain unplanned temporary production stoppages resulting from semiconductor shortages ($1,657 million), the favorable impact of foreign currencies as the U.S. dollar remained weaker against other major currencies ($256 million), the favorable impact of material economics recoveries ($35 million) and commercial settlements ($9 million), partially offset by the impact of prior year divestitures primarily consisting of the RECARO and fabrics businesses ($121 million).
Adient plc | Form 10-Q | 36
Cost of Sales / Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Cost of sales | | $ | 3,092 | | 74% | | $ | 1,779 | | $ | 10,120 | | 16% | | $ | 8,726 |
Gross profit | | $ | 150 | | >100% | | $ | (153) | | $ | 789 | | >100% | | $ | 347 |
% of sales | | 4.6 | % | | | | (9.4) | % | | 7.2 | % | | | | 3.8 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cost of sales increased by $1,313 million, or 74%, and gross profit increased by $303 million in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020. The year over year increase in cost of sales was due to higher volumes ($1,206 million), the unfavorable impact of foreign currencies ($62 million), temporary operational inefficiencies including premium freight and unplanned production stoppages primarily resulting from semiconductor shortages and to a lesser extent COVID-19 related costs ($53 million), higher commodity costs ($51 million), and prior year non-recurring favorable benefits related to actions taken as described in the On-Going Impact of COVID-19 section above ($17 million), partially offset by the prior year divestitures primarily consisting of the fabrics business ($17 million), a one-time gain associated with retrospective recoveries of Brazil indirect tax credits ($30 million), operational performance improvements ($18 million), and favorable material margins ($16 million). Gross profit was favorably impacted by higher overall volumes, the favorable impact of foreign currencies, operational performance improvements and the one-time gain in Brazil, partially offset by higher commodity costs, and inefficiencies caused by unplanned production stoppages and COVID-19. Refer to the segment analysis below for a discussion of segment profitability.
Cost of sales increased by $1,394 million, or 16% and gross profit increased by $442 million, or 16%, in the first nine months of fiscal 2021 as compared to the first nine months of fiscal 2020. The cost of sales year-over-year increase is primarily attributable to higher sales volumes in all regions ($1,253 million), the unfavorable impact of foreign currencies ($237 million), higher commodity costs ($77 million), temporary operational inefficiencies including premium freight and unplanned production stoppages resulting from semiconductor and petrochemical shortages and to a lesser extent COVID-19 related costs ($106 million) and prior year non-recurring favorable benefits related to actions taken as described in the On-Going Impact of COVID-19 section above ($17 million), partially offset by the impact of prior year divestitures primarily consisting of the RECARO and fabrics businesses ($94 million), overall operational performance improvements ($122 million), favorable material margins ($45 million), and one-time gain associated with retrospective recoveries of Brazil indirect tax credits ($38 million). The increase in gross profit was due to higher overall volumes, the favorable impact of foreign currencies, operational performance improvements, and the one-time gain in Brazil, partially offset by higher commodity costs and inefficiencies caused by unplanned production stoppages and COVID-19. 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) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Selling, general and administrative expenses | | $ | 136 | | 18% | | $ | 115 | | $ | 433 | | 6% | | $ | 407 |
% of sales | | 4.2% | | | | 7.1% | | 4.0% | | | | 4.5% |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Selling, general and administrative expenses (SG&A) increased by $21 million, or 18% in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020. The year over year increase in SG&A is attributable to higher compensation costs, including stock-based compensation ($3 million) and other compensation resulting from lower levels of certain prior year incentive compensation and to a lesser extent other benefits, that were not expected to recur ($10 million), the unfavorable impact of foreign currencies ($7 million), higher depreciation and amortization expense ($2 million), and higher overall engineering and other administrative spending ($7 million), partially offset by lower transaction costs ($2 million) and prior year fabrics administrative costs ($6 million). Refer to the segment analysis below for a discussion of segment profitability.
Selling, general and administrative expenses (SG&A) increased by $26 million, or 6% in the first nine months of fiscal 2021 as compared to the first nine months of fiscal 2020. SG&A was unfavorably impacted by higher compensation costs, including stock-based compensation ($28 million) and other compensation resulting from lower levels of certain prior year incentive compensation and to a lesser extent other benefits, that were not expected to recur ($37 million), the unfavorable impact of foreign currencies ($20 million), and higher transaction costs ($2 million), partially offset by lower overall engineering and
Adient plc | Form 10-Q | 37
other administrative spending ($31 million), prior year RECARO and fabrics administrative costs ($24 million), prior year restructuring related charges ($1 million), and lower depreciation and amortization expense ($5 million). Refer to the segment analysis below for a discussion of segment profitability.
(Gain) Loss on Business Divestitures - net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
(Gain) loss on business divestitures - net | | $ | — | | | n/a | | $ | — | | | $ | — | | | n/a | | $ | 25 | |
The loss on business divestitures in the first nine months of fiscal 2020 is comprised of a $21 million loss on the sale of RECARO automotive high performance seating and a $4 million loss on the deconsolidation of Adient Aerospace. Refer to Note 3, "Acquisitions and Divestitures," of the notes to the consolidated financial statements for information related to these divestitures.
Restructuring and Impairment Costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Restructuring and impairment costs | | $ | 8 | | | -84% | | $ | 49 | | | $ | 20 | | | -81% | | $ | 103 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Restructuring and impairment costs were lower by $41 million during the third quarter of fiscal 2021 and lower by $83 million during the nine months ended June 30, 2021 due primarily to overall lower levels of restructuring actions taken. Refer to Note 3, "Acquisitions and Divestitures," and Note 13, "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for information related to Adient's restructuring plans.
Equity Income (Loss) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Equity income (loss) | | $ | 38 | | | -21% | | $ | 48 | | | $ | 220 | | | >100% | | $ | (57) | |
| | | | | | | | | | | | |
Equity income was $38 million for the third quarter of fiscal 2021, compared to $48 million in the third quarter of fiscal 2020. The decrease is primarily attributable to current year operational interruptions and temporary production stoppages resulting from semiconductor shortages primarily at Adient's affiliates in China, higher commodity costs, and the sale of Adient's interest in SJA during the second quarter of fiscal 2021, partially offset by the favorable impact of foreign currencies.
Equity income was $220 million for the first nine months of fiscal 2021, compared to a loss of $57 million for the first nine months of fiscal 2020. The increase is primarily attributable to the prior year non-cash impairment charge related to Adient's YFAI investment divestiture ($222 million), a current year one-time gain associated with the sale of Adient's interest in SJA, ($33 million), prior year lower production volumes within Adient's China affiliates due to the impact of COVID-19 during the second quarter of fiscal 2020, and a one-time gain on previously held interest at YFAS in an affiliate during the first quarter of fiscal 2021 ($5 million), partially offset by higher commodity costs, current year operational interruptions and temporary production stoppages resulting from semiconductor shortages, and prior year tax benefits at various China affiliates that are not expected to recur ($10 million).
Adient plc | Form 10-Q | 38
Net Financing Charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Net financing charges | | $ | 87 | | | 50% | | $ | 58 | | | $ | 256 | | | 64% | | $ | 156 | |
Net financing charges increased in the third quarter of fiscal 2021 as compared to the third quarter of fiscal 2020 primarily as a result of premium paid on the repurchase of debt ($4 million), a write off of the associated deferred financing costs ($10 million), and higher levels of outstanding debt and higher average interest rates during the current quarter. Refer to Note 8, "Debt and Financing Arrangements," of the notes to the consolidated financial statements for further information related to Adient's debt transactions during the current quarter and components of the net financing charges.
Other Pension Expense (Income) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Other pension expense (income) | | $ | (4) | | | >-100% | | $ | (1) | | | $ | (8) | | | -60% | | $ | (5) | |
Other pension income for the three months and nine months ended June 30, 2021 included $1 million pension mark-to-market gain related to the remeasurement of a plan in Canada. Other pension expense (income) for the three and nine months ended June 30, 2020 included a $2 million pension settlement expense related to the settlement of two plans in the United States. Refer to Note 12, "Retirement Plans," of the notes to the consolidated financial statements for information related to the non-service components of Adient's net periodic pension costs.
Income Tax Provision | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Income tax provision (benefit) | | $ | 10 | | | 100% | | $ | 5 | | | $ | 90 | | | 20% | | $ | 75 | |
The third quarter of fiscal 2021 income tax expense of $10 million was higher than the statutory rate of 12.5% primarily due to foreign tax rate differentials and the inability to record a tax benefit for losses in jurisdictions with valuation allowances, partially offset by a tax benefit from the write-off of a deferred tax liability related to withholding taxes. The third quarter of fiscal 2020 income tax expense of $5 million was higher than the statutory rate of 12.5% primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset by a $5 million tax benefit related to the impairment charge recorded in the Asia segment related to customer relationship intangible assets.
The first nine months of fiscal 2021 income tax expense of $90 million was higher than the statutory rate of 12.5% primarily due to foreign tax rate differentials and the inability to record a tax benefit for losses in jurisdictions with valuation allowances, partially offset by a tax benefit from the write-off of a deferred tax liability related to withholding taxes. The first nine months of fiscal 2020 income tax expense of $75 million was higher than the statutory rate of 12.5% primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances and $6 million tax expense associated primarily with foreign currency remeasurement of Mexican peso deferred tax assets, partially offset by a $4 million tax benefit associated with the impairment of Adient’s YFAI investment and a $5 million tax benefit related to the impairment charge recorded in the Asia segment related to customer relationship intangible assets.
Adient plc | Form 10-Q | 39
Income Attributable to Noncontrolling Interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Income (loss) attributable to noncontrolling interests | | $ | 22 | | | >100% | | $ | (6) | | | $ | 70 | | | 75% | | $ | 40 | |
The increase in income attributable to noncontrolling interests for the three-months and nine-months ended June 30, 2021 when compared to the same period in the prior year was primarily attributable to higher income resulting from higher volumes in the current year, attributable primarily to the impact of the COVID-19 pandemic at certain Seating affiliates in varying jurisdictions during the prior year.
Net Income (Loss) Attributable to Adient | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Net income (loss) attributable to Adient | | $ | (71) | | | 78% | | $ | (325) | | | $ | 148 | | | >100% | | $ | (511) | |
Net loss attributable to Adient was $71 million for the third quarter of fiscal 2021, compared to $325 million of net loss attributable to Adient for the third quarter of fiscal 2020. The lower level of loss in the third quarter of fiscal 2021 is primarily attributable to higher current quarter volumes primarily resulting from prior year operational interruptions due to COVID-19, current year operational performance improvements, lower restructuring costs, a one-time gain associated with retrospective recoveries of Brazil indirect tax credits, partially offset by higher net financing charges, higher commodity costs, and higher overall selling, general and administrative expense of $21 million including higher stock-based and performance-based incentive compensation costs.
Net income attributable to Adient for the first nine months of 2021 was $148 million compared to a net loss attributable to Adient of $511 million for the first nine months of fiscal 2020. The year over year increase in net income attributable to Adient is primarily due to the prior year one-time non-cash impairment charge of $222 million on Adient's YFAI investment, the prior year $25 million loss on business divestitures including the sale of the RECARO business and deconsolidation of Adient Aerospace, higher current year volumes in all regions, lower operational wastes, lower restructuring costs, favorable commercial settlements, a current year one-time gain associated with sale of SJA, and a current year one-time gain associated with retrospective recoveries of Brazil indirect tax credits, partially offset by higher net financing charges, higher commodity costs, higher stock-based compensation costs and other performance-based incentive compensation costs.
Comprehensive Income (Loss) Attributable to Adient | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Comprehensive income (loss) attributable to Adient | | $ | (30) | | | 90% | | $ | (293) | | | $ | 235 | | | >100% | | $ | (600) | |
Comprehensive loss attributable to Adient was $30 million for the third quarter of fiscal 2021 compared to $293 million of comprehensive loss for the third quarter of fiscal 2020. The lower comprehensive loss attributable to Adient in the third quarter of fiscal 2021 is primarily due to lower net loss ($282 million), favorable foreign currency translation adjustments ($8 million), partially offset by lower realized and unrealized gains on derivatives ($7 million) and the increase in comprehensive income attributable to noncontrolling interests ($20 million).
Comprehensive income attributable to Adient was $235 million for the first nine months of fiscal 2021 compared to a comprehensive loss attributable to Adient of $600 million for the first nine months of fiscal 2020. The increased level of comprehensive income attributable to Adient in the first nine months of fiscal 2021 is primarily due to higher net income ($689 million), the favorable change in foreign currency translation adjustments ($127 million) and favorable change in realized and unrealized gains (losses) on derivatives ($57 million), partially offset by the increase in comprehensive income attributable to noncontrolling interests ($38 million).
Adient plc | Form 10-Q | 40
Segment Analysis
Adient manages its business on a geographic basis and operates in the following three reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Adient evaluates the performance of its reportable segments using an adjusted EBITDA metric defined as income before income taxes and noncontrolling interests, excluding net financing charges, qualified restructuring and impairment costs, restructuring related-costs, net mark-to-market adjustments on pension and postretirement plans, transaction gains/losses, purchase accounting amortization, depreciation, stock-based compensation and other non-recurring items ("Adjusted EBITDA"). Also, certain corporate-related costs are not allocated to the segments. The reportable segments are consistent with how management views the markets served by Adient and reflect the financial information that is reviewed by its chief operating decision maker.
The results presented below are not necessarily indicative of full-year results, particularly due to the on-going impacts of higher commodity costs, inefficiencies caused by unplanned production stoppages, and the COVID-19 pandemic that Adient is currently facing. Refer to the On-Going Impact of COVID-19 and Global Automotive Industry sections earlier in Item 2. of this Report, and to the Risk Factors set forth in this Report and our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, for additional information related to the impacts on Adient.
Adient plc | Form 10-Q | 41
Financial information relating to Adient's reportable segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Net Sales | | | | | | | | |
Americas | | $ | 1,440 | | | $ | 593 | | | $ | 4,821 | | | $ | 4,093 | |
EMEA | | 1,328 | | | 698 | | | 4,568 | | | 3,750 | |
Asia | | 516 | | | 346 | | | 1,658 | | | 1,362 | |
Eliminations | | (42) | | | (11) | | | (138) | | | (132) | |
Total net sales | | $ | 3,242 | | | $ | 1,626 | | | $ | 10,909 | | | $ | 9,073 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | 2020 | | 2021 | | 2020 |
Adjusted EBITDA | | | | | | | | |
Americas | | $ | 23 | | | $ | (83) | | | $ | 219 | | | $ | 117 | |
EMEA | | 22 | | | (94) | | | 277 | | | 17 | |
Asia | | 92 | | | 71 | | | 364 | | | 311 | |
Corporate-related costs (1) | | (19) | | | (16) | | | (61) | | | (59) | |
Restructuring and impairment costs (2) | | (8) | | | (49) | | | (20) | | | (103) | |
Purchase accounting amortization (3) | | (11) | | | (9) | | | (32) | | | (30) | |
Restructuring related charges (4) | | — | | | (5) | | | (6) | | | (17) | |
Loss on business divestitures - net (5) | | — | | | — | | | — | | | (25) | |
Gain on sale / (impairment) of nonconsolidated partially-owned affiliates (6) | | — | | | (6) | | | 33 | | | (222) | |
Depreciation | | (71) | | | (67) | | | (210) | | | (214) | |
Stock based compensation | | (10) | | | (7) | | | (36) | | | (8) | |
Other items (7) | | 26 | | | (4) | | | 28 | | | (12) | |
Earnings (loss) before interest and income taxes | | 44 | | | (269) | | | 556 | | | (245) | |
Net financing charges | | (87) | | | (58) | | | (256) | | | (156) | |
Other pension income (expense) | | 4 | | | 1 | | | 8 | | | 5 | |
Income (loss) before income taxes | | $ | (39) | | | $ | (326) | | | $ | 308 | | | $ | (396) | |
Notes:
(1) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal and corporate finance.
(2) Reflects qualified restructuring charges for costs that are directly attributable to restructuring activities and meet the definition of restructuring under ASC 420 and non-recurring impairment charges. During the three and nine months ended June 30, 2021, a held-for-sale impairment charge of $1 million and $9 million, respectively, was recorded in EMEA. Restructuring charges during the three and nine months ended June 30, 2020 primarily consist of workforce reductions and a $27 million pre-tax non-cash impairment charge related to long-lived assets in China.
(3) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income.
(4) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420.
(5) The nine months ended June 30, 2020 reflects losses on business divestitures, of which $4 million is related to the deconsolidation of Adient Aerospace, and $21 million is the result of the sale of the RECARO automotive high performance seating systems.
Adient plc | Form 10-Q | 42
(6) The nine months ended June 30, 2021 reflects a pre-tax gain of $33 million on the sale of Adient's interest in SJA. The three and nine months ended June 30, 2020 reflects the non-cash impairment of Adient's YFAI investment. Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements.
(7) The three months ended June 30, 2021 reflects $2 million of transaction costs and a one-time gain of $30 million associated with retrospective recoveries of Brazil indirect tax credits resulting from a favorable court ruling (of which $28 million relates to recoveries covering the past 20 years and is adjusted out of Americas' segment results). The nine months ended June 30, 2021 reflects a one-time gain of $38 million associated with the retrospective recovery of indirect tax credits in Brazil resulting from a favorable court ruling (of which $36 million relates to recoveries covering the past 20 years and is adjusted out of Americas' segment results), a $5 million gain on previously held interest at YFAS in an affiliate, and $13 million of transaction costs. The three months ended June 30, 2020 reflects $4 million of transaction costs. The nine months ended June 30, 2020 reflects $11 million of transaction costs and $1 million of tax adjustments at YFAI.
Americas | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Net sales | | $ | 1,440 | | | > 100% | | $ | 593 | | | $ | 4,821 | | | 18% | | $ | 4,093 | |
Adjusted EBITDA | | $ | 23 | | | > 100% | | $ | (83) | | | 219 | | | 87% | | $ | 117 | |
Net sales increased during the third quarter of fiscal 2021 by $847 million primarily as a result of prior year operational interruptions due to COVID-19 and despite certain unplanned temporary production stoppages primarily resulting from semiconductor shortages ($849 million), the favorable impact of material economics recoveries ($12 million), and the favorable impact of foreign currencies ($1 million), partially offset by the impact of unfavorable commercial settlements and net pricing adjustments ($15 million).
Adjusted EBITDA increased during the third quarter of fiscal 2021 by $106 million due primarily to higher current quarter volumes as explained above ($189 million), operational performance improvements ($15 million), the favorable impact of foreign currencies ($5 million), partially offset by temporary operational inefficiencies including premium freight and unplanned production stoppages resulting primarily from semiconductor shortages and to a lesser extent COVID-19 related costs ($35 million), unfavorable commercial settlements and net pricing adjustments ($6 million), higher administrative expense due primarily to lower levels of certain prior year incentive compensation costs and to a lesser extent other benefits that were not expected to recur ($37 million), higher engineering expense ($3 million), and unfavorable material economics, net of recoveries ($22 million).
Net sales increased during the first nine months of fiscal 2021 by $728 million as a result of prior year operational interruptions due to COVID-19 and despite certain unplanned temporary production stoppages primarily resulting from semiconductor and petrochemical shortages ($770 million), and the favorable impact of material economics recoveries ($6 million), partially offset by the unfavorable impact of foreign currencies ($35 million), the impact of the prior year divestiture of RECARO ($10 million), and unfavorable commercial settlements and net pricing adjustments ($3 million).
Adjusted EBITDA increased during the first nine months of fiscal 2021 by $102 million due primarily to higher current year volumes as explained above ($200 million), operational performance improvements ($33 million), favorable commercial settlements and net pricing adjustments ($25 million), lower administrative and engineering expense ($4 million), and the favorable impact of foreign currencies ($8 million), partially offset by operational inefficiencies including premium freight and unplanned temporary production stoppages resulting from semiconductor and petrochemical shortages and to a lesser extent COVID-19 related costs ($74 million), higher administrative expense due primarily to lower levels of certain prior year incentive compensation costs and to a lesser extent other benefits that were not expected to recur ($62 million), the unfavorable material economics, net of recoveries ($31 million), and lower equity income ($1 million).
Adient plc | Form 10-Q | 43
EMEA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Net sales | | $ | 1,328 | | | 90% | | $ | 698 | | | $ | 4,568 | | | 22% | | $ | 3,750 | |
Adjusted EBITDA | | $ | 22 | | | > 100% | | $ | (94) | | | $ | 277 | | | > 100% | | $ | 17 | |
Net sales increased during the third quarter of fiscal 2021 by $630 million due primarily to higher production volumes primarily resulting from the COVID-19 related operational interruptions in the prior year and despite certain unplanned temporary production stoppages primarily resulting from semiconductor shortages ($596 million), the favorable impact of foreign currency ($43 million), and the favorable impact of material economics recoveries ($13 million), partially offset by the impact of prior year divestitures primarily consisting of the fabrics business ($16 million) and unfavorable impact of commercial settlements and net pricing adjustments ($6 million).
Adjusted EBITDA increased during the third quarter of fiscal 2021 by $116 million due primarily to higher current quarter volumes as explained above ($124 million), favorable impact of foreign currencies ($2 million), the impact of prior year divestitures primarily consisting of the fabrics business ($7 million), operational performance improvements ($4 million), favorable material economics, net of recoveries ($3 million), and higher equity income ($3 million), partially offset by operational inefficiencies as a result of unplanned temporary production stoppages stemming from semiconductor shortages and to a lesser extent COVID-19 related costs ($15 million), higher administrative and engineering expense due in part to prior year benefits that were not expected to recur ($5 million), and unfavorable commercial settlements and net pricing adjustments ($7 million).
Net sales increased during the first nine months of fiscal 2021 by $818 million as a result of prior year operational interruptions due to COVID-19 and despite certain unplanned temporary production stoppages primarily resulting from semiconductor and petrochemical shortages ($626 million), the favorable impact of foreign currency ($227 million), the favorable impact of commercial settlements and net pricing adjustments ($38 million), and the favorable impact of material economics recoveries ($24 million), partially offset by the impact of prior year divestitures primarily consisting of the RECARO and fabrics businesses ($97 million).
Adjusted EBITDA increased during the first nine months of fiscal 2021 by $260 million due primarily to higher current year volumes as explained above ($163 million), current year operational performance improvements ($50 million), lower administrative and engineering expense despite prior year benefits that were not expected to recur ($30 million), favorable commercial settlements and net pricing adjustments ($51 million) and higher equity income ($3 million), partially offset by operational inefficiencies as a result of unplanned temporary production stoppages stemming from semiconductor shortages and to a lesser extent COVID-19 related costs ($28 million), unfavorable net commodity pricing adjustments ($4 million), and unfavorable impact of foreign currencies ($4 million), and the impact of prior year divestitures primarily consisting of the RECARO and fabrics businesses ($1 million).
Asia | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
(in millions) | | 2021 | | Change | | 2020 | | 2021 | | Change | | 2020 |
Net sales | | $ | 516 | | | 49% | | $ | 346 | | | $ | 1,658 | | | 22% | | $ | 1,362 | |
Adjusted EBITDA | | $ | 92 | | | 30% | | $ | 71 | | | $ | 364 | | | 17% | | $ | 311 | |
Net sales increased during the third quarter of fiscal 2021 by $170 million due to higher production volumes across the region, which was primarily a result of prior year COVID-19 related operational interruptions and despite certain unplanned temporary production stoppages primarily resulting from semiconductor shortages ($142 million), the favorable impact of foreign currencies ($26 million), and the favorable impact of material economics recoveries ($2 million).
Adjusted EBITDA increased during the third quarter of fiscal 2021 by $21 million due primarily to higher current year volumes as explained above ($39 million), current year operational performance improvements ($3 million), lower administrative and engineering expense ($2 million), the favorable impact of foreign currency ($7 million), and favorable commercial settlements and net pricing adjustments ($8 million), partially offset by the unfavorable impact of material economics, net of recoveries ($5
Adient plc | Form 10-Q | 44
million), current year operational interruptions and temporary production stoppages resulting from semiconductor shortages and to a lesser extent COVID-19 related costs ($3 million), lower equity income at Adient's affiliates in China ($22 million, of which $16 million relates to YFAS which is experiencing supply chain disruptions and commodity pricing issues), prior year benefits that were not expected to recur ($3 million), and the sale of Adient's interest in SJA during the second quarter of fiscal 2021 ($5 million).
Net sales increased during the first nine months of fiscal 2021 by $296 million due to higher production volumes across the region, which was primarily a result of prior year operational interruptions due to COVID-19 and despite certain unplanned temporary production stoppages primarily resulting from semiconductor shortages ($265 million), the favorable impact of foreign currencies ($66 million), and the favorable impact of material economics recoveries ($5 million), partially offset by the impact of unfavorable commercial settlements and net pricing adjustments ($26 million), and the impact of the prior year divestiture of RECARO ($14 million).
Adjusted EBITDA increased during the first nine months of fiscal 2021 by $53 million due primarily to higher current year volumes as explained above ($42 million), higher equity income as a result of the prior year operational interruptions at Adient's China affiliates due to COVID-19 ($29 million), operational performance improvements ($30 million), and the favorable impact of foreign currencies ($22 million), partially offset by the unfavorable impact of material economics, net of recoveries ($7 million), unfavorable commercial settlements and net pricing adjustments ($22 million), the impact of current year divestiture of SJA ($5 million), the impact of prior year divestiture of YFAI ($18 million) and RECARO ($3 million), prior year tax benefits at various affiliates that were not expected to recur ($10 million), and operational inefficiencies including premium freight and unplanned temporary production stoppages resulting from semiconductor shortages and to a lesser extent COVID-19 related costs ($5 million).
Liquidity and Capital Resources
Adient US LLC ("Adient US"), a wholly owned subsidiary of Adient, together with certain of Adient's other subsidiaries, maintains an asset-based revolving credit facility (the “ABL Credit Facility”), which provides for a revolving line of credit up to $1,250 million, including a North American subfacility of up to $950 million and a European subfacility of up to $300 million, subject to borrowing base capacity. The ABL Credit Facility will mature on May 6, 2024, subject to a springing maturity date 91 days earlier if certain amounts remain outstanding at that time under the Term Loan B Agreement (defined below). Interest is payable on the ABL Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 1.50% to 2.00%. Adient will pay a commitment fee of 0.25% to 0.375% on the unused portion of the commitments under the asset-based revolving credit facility based on average global availability. Letters of credit are limited to the lesser of (x) $150 million and (y) the aggregate unused amount of commitments under the ABL Credit Facility then in effect. Subject to certain conditions, the ABL Credit Facility may be expanded by up to $250 million in additional commitments. Loans under the ABL Credit Facility may be denominated, at the option of Adient, in U.S. dollars, Euros, Pounds Sterling or Swedish Kroner. The ABL Credit Agreement is secured on a first-priority lien on all accounts receivable, inventory and bank accounts (and funds on deposit therein) and a second-priority lien on all of the tangible and intangible assets of certain Adient subsidiaries. As of June 30, 2020,2021, Adient had not drawn down $179 million on the ABL Credit Facility and had availability under this facility of $155$853 million (net of $107$60 million of letters of credit). During July 2020, Adient voluntarily repaid the outstanding balance of the ABL revolving credit balance.
In addition, Adient US and Adient Global Holdings S.àà r.l., a wholly-owned subsidiary of Adient, maintain a term loan credit agreement (the “Term“Term Loan B Agreement”Agreement”) providing for a 5-year $800 million senior secured term loan facility that was fully drawn aton 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.
In April 2021, Adient amended the Term Loan B Agreement ("Amended Agreement") which, among other changes (i) extended the maturity date for loans outstanding to April 8, 2028, (ii) reduced the interest rate margin applicable thereunder by 0.75% to 3.50%, in the case of Eurodollar Rate loans, and 2.50% (in the case of Base Rate loans) (in each case, with one 0.25% step down based on achievement of a specified first lien secured net leverage level starting with the fiscal quarter ending December 31, 2021) and (iii) made certain other negative covenant and mandatory prepayment changes in connection therewith. The amendment also established incremental term loans in an aggregate principal amount of $214 million resulting in total loans outstanding under the Amended Agreement of $1.0 billion. Adient paid $6 million related to the Amended Agreement and wrote off $8 million of previously deferred financing costs as a result of the debt extinguishment during the third quarter of fiscal 2021.
Adient plc | Form 10-Q | 1645
Adient US is also maintainsa party to an indenture relating to the issuance of $800 million aggregate principal amount of Senior First Lien Notes. TheseThe notes mature on May 15, 2026 and bear interest at a rate of 7.00% per annum. Interest on these notes is payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2019. During the second quarter of fiscal 2021, Adient repurchased $640 million of the outstanding balance of the Senior First Lien Notes at a price of 107% of the principal plus $17 million of accrued and unpaid interest. As a result, $9 million of previously deferred financing costs was written off to net financing charges. During the third quarter of fiscal 2021, Adient repurchased the $160 million of remaining balance of the Senior First Lien Notes at a price of 103% of the principal plus $4 million of accrued and unpaid interest, and wrote off $2 million of previously deferred financing costs as a result of the debt extinguishment.
The ABL Credit Facility, Term Loan B Agreement and the Senior First Lien Notes due 2026 contain covenants that are usual and customary for facilities and transactionsdebt instruments 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’sAdient’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’sAdient’s and its restricted subsidiaries’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, cross-default clauses with other debt arrangements, failure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of bankruptcy or insolvency involving Adient and its significant subsidiaries.
Adient Global Holdings Ltd. ("AGH"), a wholly-owned subsidiary of Adient, maintains $0.9 billion$900 million aggregate principal amount of 4.875% USD-denominated unsecured notes due 2026 and €1.02026. During the fourth quarter of fiscal 2020, Adient redeemed $103 million of face value of these notes, resulting in a remaining balance of $797 million as of September 30, 2020. AGH also maintains €1.0 billion aggregate principal amount of 3.50% unsecured notes due 2024.
Adient Germany Ltd. && Co. KG, a wholly owned subsidiary of Adient, maintains €165€135 million in an unsecured term loan from the European Investment Bank ("EIB") due in 2022. The loan bears interest at the 6-month EURIBOR rate plus 158 basis points. Adient amended the EIB loan agreement as of June 30, 2020 to increaseis compliant with the net leverage ratio to 6.75x from 5.25xof 4.5x at June 30, 2020. Future net leverage ratio requirements (5.25x at September 30, 2020 with step downs starting in2021 and expects to be compliant for the foreseeable future. During the first quarter of fiscal 2021) were not adjusted.2021, Adient is forecasting that it will not be in compliance with this net leverage ratio during the next 12 months and will be required to either obtain another amendment or waiver or will pay downrepaid $16 million of the EIB loan. Accordingly,loan, triggered in part by the redemption of debt in the prior year. Adient has classified this debt as short term debt at June 30, 2020. repaid $20 million of the EIB loan in May 2021, triggered by the prior year sale of the fabrics business.
On April 20, 2020, Adient US offered $600 million (net proceeds of $591 million) aggregate principal amount of 9.00% Senior First Lien Notes due 2025. These notes will mature on April 15, 2025, provided that if Adient Global Holdings Ltd (“AGH”) has not refinanced (or otherwise redeemed) in whole its outstanding 3.50% unsecured notes due 2024 or any refinancing indebtedness thereof that matures earlier than 91 days prior to the maturity date of the Senior First Lien Notes due 2025 on or prior to May 15, 2024, these notes will mature on May 15, 2024. Interest on these notes will be paid on April 15 and October 15 each year, beginning on October 15, 2020. These notes contain covenants that are usual and customary, similar to the covenants on the Senior First Lien Notes due 2026 as described above.
Net Financing Charges
Adient's net financing charges in the consolidated statements of income (loss) contained the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Interest expense, net of capitalized interest costs | | $ | 56 | | | $ | 46 | | | $ | 152 | | | $ | 119 | |
Banking fees and debt issuance cost amortization | | 5 | | | 18 | | | 13 | | | 25 | |
Interest income | | (2) | | | (4) | | | (9) | | | (8) | |
Net foreign exchange | | (1) | | | — | | | — | | | (1) | |
Net financing charges | | $ | 58 | | | $ | 60 | | | $ | 156 | | | $ | 135 | |
| | | | | | | | | | | | | | |
9. Derivative Instruments and Hedging Activities | | | | |
Adient selectively uses derivative instruments to reduce Adient's market risk associated with changes in foreign currency. Under Adient's policy, the use of derivatives is restricted to those intended for hedging purposes; the use of any derivative instrument for speculative purposes is strictly prohibited. A description of each type of derivative utilized to manage Adient's risk is included in the following paragraphs. In addition, refer to Note 10, "Fair Value Measurements," of the notes to consolidated financial statements for information related to the fair value measurements and valuation methods utilized by Adient for each derivative type.
Adient plc | Form 10-Q | 17
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 hedge gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive income (AOCI) and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. As a result of the COVID-19 impacts and the resulting interruptions to Adient's operations, a loss of $2 million related to ineffective hedges was reclassified to the consolidated statement of income for the three months ended March 31, 2020. All contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at June 30, 2020 and September 30, 2019, respectively.
As of June 30, 2020, 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. During the three months ended March 31, 2020, Adient settled the 1 remaining cross-currency interest rate swap for $10 million in proceeds, resulting in 0 outstanding Euro denominated cross-currency interest rate swaps as of June 30, 2020.
Adient entered into a cross-currency interest rate swap during fiscal 2019 to selectively hedge portions of its net investment in Japan. The currency effects of the cross-currency interest rate swap is reflected in the AOCI account within shareholders' equity attributable to Adient, where they offset gains and losses recorded on Adient's net investment in Japan. As of June 30, 2020, Adient had 1 cross-currency interest rate swap outstanding totaling approximately ¥11 billion designated as a net investment hedge in Adient's net investment in Japan.
Adient purchased interest rate caps during fiscal 2019 to selectively limit the impact of USD LIBOR increases on its interest payments related to Adient's Term Loan B Agreement. The interest rate caps are designated as cash flow hedges under ASC 815. As of June 30, 2020, Adient had 2 outstanding interest rate caps with total notional amount of approximately $200 million.
Adient entered into a ¥950 million foreign exchange forward contract during the first quarter of fiscal 2020 to selectively hedge portions of its net investment in China. The currency effects of the forward contract are reflected in the AOCI account within shareholders' equity attributable to Adient, where they offset gains and losses recorded on Adient’s net investment in China. The forward contract matured in June 2020.
Adient plc | Form 10-Q | 18
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, 2020 | | September 30, 2019 | | June 30, 2020 | | September 30, 2019 |
Other current assets | | | | | | | | |
Foreign currency exchange derivatives | | $ | 2 | | | $ | 5 | | | $ | 2 | | | $ | 3 | |
Cross-currency interest rate swaps | | — | | | 12 | | | — | | | — | |
Other noncurrent assets | | | | | | | | |
Foreign currency exchange derivatives | | 1 | | | — | | | — | | | 1 | |
Interest rate cap | | — | | | 1 | | | — | | | — | |
Cross-currency interest rate swaps | | 1 | | | 1 | | | — | | | — | |
Total assets | | $ | 4 | | | $ | 19 | | | $ | 2 | | | $ | 4 | |
| | | | | | | | |
Other current liabilities | | | | | | | | |
Foreign currency exchange derivatives | | $ | 40 | | | $ | 12 | | | $ | — | | | $ | — | |
Other noncurrent liabilities | | | | | | | | |
Foreign currency exchange derivatives | | 6 | | | 3 | | | — | | | — | |
| | | | | | | | |
Long-term debt | | | | | | | | |
Foreign currency denominated debt | | 1,122 | | | 1,094 | | | — | | | — | |
Total liabilities | | $ | 1,168 | | | $ | 1,109 | | | $ | — | | | $ | — | |
Adient enters into International Swaps and Derivatives Associations (ISDA) master netting agreements with counterparties that permit the net settlement of amounts owed under the derivative contracts. The master netting agreements generally provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event. Adient has not elected to offset the fair value positions of the derivative contracts recorded in the consolidated statements of financial position. Collateral is generally not required of Adient or the counterparties under the master netting agreements. As of June 30, 2020 and September 30, 2019, 0 cash collateral was received or pledged under the master netting agreements.
The gross and net amounts of derivative instruments and other amounts used in hedging activities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets | | | | Liabilities | | |
(in millions) | | June 30, 2020 | | September 30, 2019 | | June 30, 2020 | | September 30, 2019 |
Gross amount recognized | | $ | 6 | | | $ | 23 | | | $ | 1,168 | | | $ | 1,109 | |
Gross amount eligible for offsetting | | (3) | | | (9) | | | (3) | | | (9) | |
Net amount | | $ | 3 | | | $ | 14 | | | $ | 1,165 | | | $ | 1,100 | |
Adient plc | Form 10-Q | 19
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, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
Foreign currency exchange derivatives | | $ | 18 | | | $ | 6 | | | $ | (39) | | | $ | 5 | |
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, | | |
| | | | 2020 | | 2019 | | 2020 | | 2019 |
Foreign currency exchange derivatives | | Cost of sales | | $ | (15) | | | $ | (1) | | | $ | (9) | | | $ | (3) | |
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, | | |
| | | | 2020 | | 2019 | | 2020 | | 2019 |
Foreign currency exchange derivatives | | Cost of sales | | $ | — | | | $ | (1) | | | $ | (1) | | | $ | (2) | |
Foreign currency exchange derivatives | | Net financing charges | | 3 | | | (1) | | | 6 | | | — | |
Equity swap | | Selling, general and administrative | | — | | | — | | | — | | | (13) | |
Total | | | | $ | 3 | | | $ | (2) | | | $ | 5 | | | $ | (15) | |
The effective portion of pretax gains (losses) recorded in currency translation adjustment (CTA) within other comprehensive income (loss) related to net investment hedges was $(25) million and $(20) million for the three months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020 and 2019, respectively, 0 gains or losses were reclassified from CTA into income for Adient's outstanding net investment hedges. There was no ineffectiveness on cash flow hedges during the three months ended June 30, 2020 and 2019,
| | | | | | | | | | | | | | |
10. Fair Value Measurements | | | | |
ASC 820, "Fair Value Measurement," defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Adient plc | Form 10-Q | 20
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, 2020 | | 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 | | $ | 4 | | | $ | — | | | $ | 4 | | | $ | — | |
| | | | | | | | |
Other noncurrent assets | | | | | | | | |
Foreign currency exchange derivatives | | 1 | | | — | | | 1 | | | — | |
Cross-currency interest rate swaps | | 1 | | | — | | | 1 | | | — | |
| | | | | | | | |
| | | | | | | | |
Total assets | | $ | 6 | | | $ | — | | | $ | 6 | | | $ | — | |
Other current liabilities | | | | | | | | |
Foreign currency exchange derivatives | | $ | 40 | | | $ | — | | | $ | 40 | | | $ | — | |
Other noncurrent liabilities | | | | | | | | |
Foreign currency exchange derivatives | | 6 | | | — | | | 6 | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total liabilities | | $ | 46 | | | $ | — | | | $ | 46 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | | | | | |
(in millions) | | Total as of September 30, 2019 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Other current assets | | | | | | | | |
Foreign currency exchange derivatives | | $ | 8 | | | $ | — | | | $ | 8 | | | $ | — | |
Cross-currency interest rate swaps | | 12 | | | — | | | 12 | | | — | |
Other noncurrent assets | | | | | | | | |
Foreign currency exchange derivatives | | 1 | | | — | | | 1 | | | — | |
Cross-currency interest rate swaps | | 1 | | | — | | | 1 | | | — | |
Interest rate cap | | 1 | | | — | | | 1 | | | — | |
Total assets | | $ | 23 | | | $ | — | | | $ | 23 | | | $ | — | |
Other current liabilities | | | | | | | | |
Foreign currency exchange derivatives | | $ | 12 | | | $ | — | | | $ | 12 | | | $ | — | |
Other noncurrent liabilities | | | | | | | | |
Foreign currency exchange derivatives | | 3 | | | — | | | 3 | | | — | |
Total liabilities | | $ | 15 | | | $ | — | | | $ | 15 | | | $ | — | |
Valuation Methods
Foreign currency exchange derivatives Adient selectively hedges anticipated transactions and net investments that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices. Changes in fair value on foreign exchange derivatives accounted for as hedging instruments under ASC 815 are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. 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.
Adient plc | Form 10-Q | 21
Cross-currency interest rate swaps Adient selectively uses cross-currency interest rate swaps to hedge portions of its net investment in Europe. During fiscal 2018, Adient entered into 2 floating to floating cross-currency interest rate swaps totaling approximately €160 million designated as net investment hedges in Adient's net investment in Europe. During fiscal 2019, Adient entered into 1 floating to floating cross-currency interest rate swap totaling ¥11 billion designated as a net investment hedge in Adient's net investment in Japan. During fiscal 2019 and the first nine months of fiscal 2020, Adient settled both Euro denominated cross-currency interest rate swaps. As of June 30, 2020, Adient had 1 ¥11 billion cross-currency interest rate swap outstanding.
Interest rate caps Adient selectively uses interest rate caps to limit the impact of floating rate interest payment increases on its Term Loan B Agreement. The interest rate caps are designated as cash flow hedges under ASC 815. As of June 30, 2020, Adient had 2 interest rate caps outstanding totaling approximately $200 million.
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 $3.9 billion and $3.4 billion at June 30, 2020 and September 30, 2019, respectively, was determined primarily using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy.
| | | | | | | | | | | | | | |
11. Equity and Noncontrolling Interests | | | | |
For the nine months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Income (Loss) | | Shareholders' Equity Attributable to Adient | | Shareholders' Equity Attributable to Noncontrolling Interests | | Total Equity |
Balance at September 30, 2019 | | $ | — | | | $ | 3,962 | | | $ | (1,545) | | | | | $ | (569) | | | $ | 1,848 | | | $ | 341 | | | $ | 2,189 | |
Net income (loss) | | — | | | — | | | (511) | | | | | — | | | (511) | | | 26 | | | (485) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | (66) | | | (66) | | | 1 | | | (65) | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | (23) | | | (23) | | | — | | | (23) | |
| | | | | | | | | | | | | | | | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (28) | | | (28) | |
Change in noncontrolling interest share | | — | | | — | | | — | | | | | — | | | — | | | (18) | | | (18) | |
Share based compensation | | — | | | 6 | | | — | | | | | — | | | 6 | | | — | | | 6 | |
Adjustments from adoption of a new standard | | — | | | — | | | (4) | | | | | — | | | (4) | | | — | | | (4) | |
Other | | — | | | — | | | — | | | | | — | | | — | | | — | | | — | |
Balance at June 30, 2020 | | $ | — | | | $ | 3,968 | | | $ | (2,060) | | | | | $ | (658) | | | $ | 1,250 | | | $ | 322 | | | $ | 1,572 | |
The deconsolidation of Adient Aerospace in the quarter ended December 31, 2019 resulted in a $18 million change in noncontrolling interest.
Adient plc | Form 10-Q | 22
For the three months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Income (Loss) | | Shareholders' Equity Attributable to Adient | | Shareholders' Equity Attributable to Noncontrolling Interests | | Total Equity |
Balance at March 31, 2020 | | $ | — | | | $ | 3,966 | | | $ | (1,735) | | | | | $ | (690) | | | $ | 1,541 | | | $ | 342 | | | $ | 1,883 | |
Net income (loss) | | — | | | — | | | (325) | | | | | — | | | (325) | | | (6) | | | (331) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | 8 | | | 8 | | | 2 | | | 10 | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | 24 | | | 24 | | | — | | | 24 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (16) | | | (16) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Share based compensation | | — | | | 1 | | | — | | | | | — | | | 1 | | | — | | | 1 | |
Other | | — | | | 1 | | | — | | | | | — | | | 1 | | | — | | | 1 | |
Balance at June 30, 2020 | | $ | — | | | $ | 3,968 | | | $ | (2,060) | | | | | $ | (658) | | | $ | 1,250 | | | $ | 322 | | | $ | 1,572 | |
For the nine months ended June 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Income (Loss) | | Shareholders' Equity Attributable to Adient | | Shareholders' Equity Attributable to Noncontrolling Interests | | Total Equity |
Balance at September 30, 2018 | | $ | — | | | $ | 3,951 | | | $ | (1,028) | | | | | $ | (531) | | | $ | 2,392 | | | $ | 325 | | | $ | 2,717 | |
Net income (loss) | | — | | | — | | | (487) | | | | | — | | | (487) | | | 40 | | | (447) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | 26 | | | 26 | | | 4 | | | 30 | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | 6 | | | 6 | | | — | | | 6 | |
Dividends declared ($0.275 per share) | | — | | | — | | | (26) | | | | | — | | | (26) | | | — | | | (26) | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (35) | | | (35) | |
| | | | | | | | | | | | | | | | |
Share based compensation | | — | | | 10 | | | — | | | | | — | | | 10 | | | — | | | 10 | |
Formation of consolidated joint venture | | — | | | — | | | — | | | | | — | | | — | | | 28 | | | 28 | |
Other | | — | | | (2) | | | — | | | | | — | | | (2) | | | — | | | (2) | |
Balance at June 30, 2019 | | $ | — | | | $ | 3,959 | | | $ | (1,541) | | | | | $ | (499) | | | $ | 1,919 | | | $ | 362 | | | $ | 2,281 | |
During October 2018, Adient declared a dividend of $0.275 per ordinary share, which was paid in November 2018.
For the three months ended June 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Ordinary Shares | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | | | Accumulated Other Comprehensive Income (Loss) | | Shareholders' Equity Attributable to Adient | | Shareholders' Equity Attributable to Noncontrolling Interests | | Total Equity |
Balance at March 31, 2019 | | $ | — | | | $ | 3,956 | | | $ | (1,220) | | | | | $ | (479) | | | $ | 2,257 | | | $ | 373 | | | $ | 2,630 | |
Net income (loss) | | — | | | — | | | (321) | | | | | — | | | (321) | | | 7 | | | (314) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | (25) | | | (25) | | | (1) | | | (26) | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | 5 | | | 5 | | | — | | | 5 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (17) | | | (17) | |
| | | | | | | | | | | | | | | | |
Share based compensation | | | | 2 | | | — | | | | | — | | | 2 | | | — | | | 2 | |
Other | | — | | | 1 | | | — | | | | | — | | | 1 | | | — | | | 1 | |
Balance at June 30, 2019 | | $ | — | | | $ | 3,959 | | | $ | (1,541) | | | | | $ | (499) | | | $ | 1,919 | | | $ | 362 | | | $ | 2,281 | |
Adient plc | Form 10-Q | 23
The following table presents changes in AOCI attributable to Adient:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Foreign currency translation adjustments | | | | | | | | |
Balance at beginning of period | | $ | (632) | | | $ | (472) | | | $ | (558) | | | $ | (523) | |
Aggregate adjustment for the period, net of tax | | 8 | | | (25) | | | (66) | | | 26 | |
Balance at end of period | | $ | (624) | | | $ | (497) | | | $ | (624) | | | $ | (497) | |
Realized and unrealized gains (losses) on derivatives | | | | | | | | |
Balance at beginning of period | | $ | (55) | | | $ | (6) | | | $ | (8) | | | $ | (7) | |
Current period changes in fair value, net of tax | | 12 | | | 5 | | | (30) | | | 6 | |
Reclassification to income, net of tax | | 12 | | | — | | | 7 | | | — | |
Balance at end of period | | $ | (31) | | | $ | (1) | | | $ | (31) | | | $ | (1) | |
Pension and postretirement plans | | | | | | | | |
Balance at beginning of period | | $ | (3) | | | $ | (1) | | | $ | (3) | | | $ | (1) | |
| | | | | | | | |
Balance at end of period | | $ | (3) | | | $ | (1) | | | $ | (3) | | | $ | (1) | |
Accumulated other comprehensive income (loss), end of period | | $ | (658) | | | $ | (499) | | | $ | (658) | | | $ | (499) | |
Adient consolidates certain subsidiaries in which the noncontrolling interest party has within their control the right to require Adient to redeem all or a portion of its interest in the subsidiary. These redeemable noncontrolling interests are reported at their estimated redemption value. Any adjustment to the redemption value impacts retained earnings but does not impact net income. Redeemable noncontrolling interests which are redeemable only upon future events, the occurrence of which is not currently probable, are recorded at carrying value. The following table presents changes in the redeemable noncontrolling interests:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Beginning balance | | $ | 35 | | | $ | 37 | | | $ | 51 | | | $ | 47 | |
Net income | | — | | | 6 | | | 14 | | | 24 | |
Foreign currency translation adjustments | | 7 | | | 2 | | | — | | | 2 | |
Dividends | | — | | | — | | | (23) | | | (28) | |
| | | | | | | | |
Ending balance | | $ | 42 | | | $ | 45 | | | $ | 42 | | | $ | 45 | |
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) | | 2020 | | 2019 | | 2020 | | 2019 | | | | |
Service cost | | $ | 2 | | | $ | 2 | | | $ | 6 | | | $ | 6 | | | | | |
Interest cost | | 2 | | | 3 | | | 8 | | | 9 | | | | | |
Expected return on plan assets | | (4) | | | (4) | | | (14) | | | (12) | | | | | |
Net actuarial and settlement (gain) loss | | 1 | | | 6 | | | 1 | | | 6 | | | | | |
Net periodic benefit cost | | $ | 1 | | | $ | 7 | | | $ | 1 | | | $ | 9 | | | | | |
Adient plc | Form 10-Q | 24
The interest cost and expected return on plan assets components of net periodic benefit cost are included in other pension expense (income) in the consolidated statements of income (loss).
| | | | | | | | | | | | | | |
13. Restructuring and Impairment Costs | | | | |
To better align its resources with its overall strategies and reduce the cost structure of its global operations to address the softness in certain underlying markets, Adient commits to restructuring plans as necessary.
During fiscal 2020, Adient committed to a restructuring plan ("2020 Plan") of $86 million. Of the restructuring costs recorded, $15 million relates to the Americas segment, $62 million relates to the EMEA segment and $9 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 2022. Also recorded in fiscal 2020 is $10 million of prior year underspend.
The following table summarizes the changes in Adient's 2020 Plan reserve:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Employee Severance and Termination Benefits | | | | Other | | Currency Translation | | Total |
Original Reserve | | $ | 83 | | | | | $ | 3 | | | $ | — | | | $ | 86 | |
Utilized—cash | | (22) | | | | | — | | | — | | | (22) | |
Noncash adjustment—other | | — | | | | | (3) | | | 3 | | | — | |
Balance at June 30, 2020 | | $ | 61 | | | | | $ | — | | | $ | 3 | | | $ | 64 | |
The following table summarizes the changes in Adient's 2019 Plan reserve:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Employee Severance and Termination Benefits | | Other | | Currency Translation | | Total |
Balance at September 30, 2019 | | $ | 69 | | | $ | 3 | | | $ | (2) | | | $ | 70 | |
Utilized—cash | | (25) | | | — | | | — | | | (25) | |
| | | | | | | | |
Noncash adjustment—underspend | | (6) | | | — | | | — | | | (6) | |
Balance at June 30, 2020 | | $ | 38 | | | $ | 3 | | | $ | (2) | | | $ | 39 | |
The following table summarizes the changes in Adient's 2018 Plan reserve:
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Employee Severance and Termination Benefits | | | | | | Currency Translation | | Total |
Balance at September 30, 2019 | | $ | 24 | | | | | | | $ | (4) | | | $ | 20 | |
Utilized—cash | | (8) | | | | | | | — | | | (8) | |
| | | | | | | | | | |
Noncash adjustment—underspend | | (3) | | | | | | | 1 | | | (2) | |
Balance at June 30, 2020 | | $ | 13 | | | | | | | $ | (3) | | | $ | 10 | |
There were no material changes during fiscal 2020 to the 2017 and 2016 Plan's reserve balances at June 30, 2020 of $3 million, and $24 million, respectively.
Adient plc | Form 10-Q | 25
Adient's fiscal 2020, 2019, 2018, 2017 and 2016 restructuring plans included workforce reductions of approximately 12,000 employees. 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, 2020, approximately 7,800 of the employees have been separated from Adient pursuant to the restructuring plans. In addition, the restructuring plans included 20 plant closures. As of June 30, 2020, 17 of the 20 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, particularly related to the COVID-19 pandemic, could impact Adient's liquidity position, lead to impairment charges and/or require additional restructuring of its operations.
Refer to Note 5, "Goodwill and Other Intangible Assets," of the notes to consolidated financial statements for additional information related to impairment of intangible assets during the three months ended June 30, 2020.
Adient has historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. Due to the uncertainty related to the impact of the COVID-19 pandemic on the Company’s operations at a jurisdictional level that is required to estimate an annual effective tax rate for the full fiscal year, Adient used a discrete effective tax rate method to calculate an income tax provision for the nine-month period ended June 30, 2020. For the three and nine months ended June 30, 2020, Adient’s income tax expense was $5 million equating to an effective tax rate of (2)% and $75 million equating to an effective tax rate of (19)%, respectively. For the three months ended June 30, 2020, income tax expense was recognized rather than a tax benefit that would have been recognized by applying the statutory rate of 12.5% against pre-tax losses, primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset by a tax benefit related to an impairment charge recorded in the Asia segment related to customer relationship intangible asset. For the nine months ended June 30, 2020, income tax expense was recognized rather than a tax benefit that would have been recognized by applying the statutory rate of 12.5% against pre-tax losses, primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances and foreign currency remeasurement of Mexican peso denominated deferred tax assets, partially offset by a tax benefit related to the impairment of Adient’s YFAI investment and a tax benefit related to an impairment charge recorded in the Asia segment related to customer relationship intangible assets. 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 rate of (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.
Valuation Allowances
As a result of the Company's third quarter fiscal 2020 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence, Adient determined that no changes to valuation allowances were required.
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
Adient plc | Form 10-Q | 26
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.
Uncertain Tax Positions
At June 30, 2020, Adient had gross tax effected unrecognized tax benefits of $404 million. If recognized, $118 million of Adient's unrecognized tax benefits would impact the effective tax rate. Total net accrued interest at June 30, 2020 was approximately $14 million (net of tax benefit). The interest and penalties accrued for the three and nine months ended June 30, 2020 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
On March 27, 2020, the House passed the Coronavirus Aid, Relief, and Economic Security Act (The CARES Act), also known as the Third COVID-19 Supplemental Relief bill, and the president signed the legislation into law. Adient does not expect the provisions of the legislation to have a significant impact on the effective tax rate or the income tax payable and deferred income tax positions of the Company.
During the third quarter of fiscal 2019, Luxembourg enacted legislation reducing the nominal corporate tax rate to 17.0% from 18.0%. 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, 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 fiscal 2020, Adient committed to a restructuring plan ("2020 Plan") of $86 million. Refer to Note 13, “Restructuring and Impairment Costs,” of the notes to the consolidated financial statements for additional information. The tax benefit associated with the restructuring charge was $3 million.
During the third quarter of fiscal 2020, an impairment charge of $27 million was recorded in the Asia segment related to customer relationship intangible assets. Refer to Note 5, “Goodwill and Other Intangible Assets,” of the notes to the consolidated financial statements for additional information. The tax benefit associated with the impairment charge was $5 million.
During the first quarter of fiscal 2020, Adient recognized a pre-tax non-cash impairment of $216 million in equity income related to Adient's YFAI investment. Refer to Note 3, “Acquisitions and Divestitures,” of the notes to the consolidated financial statements for additional information. The tax benefit associated with the impairment charge was $4 million. An additional impairment of $6 million was recorded in the third quarter of fiscal 2020 related to this investment, with 0 additional tax benefit being recorded.
During the second quarter of fiscal 2019, Adient recognized a pre-tax impairment charge on long-lived assets of $66 million. Refer to Note 13 "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for additional
Adient plc | Form 10-Q | 27
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 manages its business on a geographic basis and operates in the following 3 reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Adient evaluates the performance of its reportable segments using an adjusted EBITDA metric defined as income before income taxes and noncontrolling interests, excluding net financing charges, restructuring and impairment costs, restructuring related-costs, net mark-to-market adjustments on pension and postretirement plans, transaction gains/losses, purchase accounting amortization, depreciation, stock-based compensation and other non-recurring items ("Adjusted EBITDA"). Also, certain corporate-related costs are not allocated to the segments. The reportable segments are consistent with how management views the markets served by Adient and reflect the financial information that is reviewed by its chief operating decision maker.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Net Sales | | | | | | | | |
Americas | | $ | 593 | | | $ | 2,010 | | | $ | 4,093 | | | $ | 5,860 | |
EMEA | | 698 | | | 1,752 | | | 3,750 | | | 5,170 | |
Asia | | 346 | | | 530 | | | 1,362 | | | 1,779 | |
Eliminations | | (11) | | | (73) | | | (132) | | | (204) | |
Total net sales | | $ | 1,626 | | | $ | 4,219 | | | $ | 9,073 | | | $ | 12,605 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Adjusted EBITDA | | | | | | | | |
Americas | | $ | (83) | | | $ | 69 | | | $ | 117 | | | $ | 146 | |
EMEA | | (94) | | | 53 | | | 17 | | | 114 | |
Asia | | 71 | | | 110 | | | 311 | | | 387 | |
Corporate-related costs (1) | | (16) | | | (27) | | | (59) | | | (75) | |
Restructuring and impairment costs (2) | | (49) | | | (15) | | | (103) | | | (159) | |
Purchase accounting amortization (3) | | (9) | | | (11) | | | (30) | | | (32) | |
Restructuring related charges (4) | | (5) | | | (5) | | | (17) | | | (27) | |
Loss on business divestitures - net (5) | | — | | | — | | | (25) | | | — | |
Impairment of nonconsolidated partially-owned affiliate (6) | | (6) | | | — | | | (222) | | | — | |
Depreciation | | (67) | | | (68) | | | (214) | | | (205) | |
Stock based compensation | | (7) | | | (8) | | | (8) | | | (16) | |
Other items (7) | | (4) | | | (3) | | | (12) | | | (6) | |
Earnings (loss) before interest and income taxes | | (269) | | | 95 | | | (245) | | | 127 | |
Net financing charges | | (58) | | | (60) | | | (156) | | | (135) | |
Other pension income (expense) | | 1 | | | (5) | | | 5 | | | (3) | |
Income (loss) before income taxes | | $ | (326) | | | $ | 30 | | | $ | (396) | | | $ | (11) | |
Adient plc | Form 10-Q | 28
Notes:
(1) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal and corporate finance.
(2) Reflects qualified restructuring charges for costs that are directly attributable to restructuring activities and meet the definition of restructuring under ASC 420 and non-recurring impairment charges. Restructuring charges during the three and nine months ended June 30, 2020 primarily consist of workforce reductions and a $27 million pre-tax non-cash impairment charge related to long-lived assets in China. Restructuring charges during the three and nine months ended June 30, 2019 primarily consist of workforce reductions; the nine months ended June 30, 2019 also includes a $66 million non-cash impairment charge related to long-lived assets in the seat structure and mechanism operations.
(3) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income.
(4) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420.
(5) Reflects losses on business divestitures, of which $4 million is related to the deconsolidation of Adient Aerospace, and $21 million is the result of the sale of the RECARO automotive high performance seating systems.
(6) Reflects the non-cash impairment of Adient's YFAI investment as described in Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements.
(7) The three months ended June 30, 2020 reflects $4 million of transaction costs and the nine months ended June 30, 2020 reflects $11 million of transaction costs and $1 million of tax adjustments at YFAI. The three months ended June 30, 2019 reflects $1 million of Futuris integration costs and $2 million of transaction costs. The nine months ended June 30, 2019 reflects $4 million of Futuris integration costs and $2 million of transaction costs.
Adient plc | Form 10-Q | 29
Geographic Information
Revenue by geographic area is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Sales | | | | | | | | |
| | Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Americas | | | | | | | | |
United States | | $ | 519 | | | $ | 1,649 | | | $ | 3,469 | | | $ | 4,894 | |
Mexico | | 192 | | | 700 | | | 1,379 | | | 2,013 | |
Other Americas | | 17 | | | 106 | | | 236 | | | 330 | |
Regional elimination | | (135) | | | (445) | | | (991) | | | (1,377) | |
| | 593 | | | 2,010 | | | 4,093 | | | 5,860 | |
EMEA | | | | | | | | |
Germany | | 150 | | | 375 | | | 765 | | | 1,106 | |
Czech Republic | | 166 | | | 385 | | | 806 | | | 1,123 | |
Other EMEA | | 571 | | | 1,500 | | | 3,217 | | | 4,412 | |
Regional elimination | | (189) | | | (508) | | | (1,038) | | | (1,471) | |
| | 698 | | | 1,752 | | | 3,750 | | | 5,170 | |
Asia | | | | | | | | |
Thailand | | 44 | | | 139 | | | 307 | | | 468 | |
China | | 130 | | | 126 | | | 372 | | | 410 | |
Japan | | 34 | | | 104 | | | 262 | | | 389 | |
Other Asia | | 140 | | | 163 | | | 425 | | | 516 | |
Regional elimination | | (2) | | | (2) | | | (4) | | | (4) | |
| | 346 | | | 530 | | | 1,362 | | | 1,779 | |
| | | | | | | | |
Inter-segment elimination | | (11) | | | (73) | | | (132) | | | (204) | |
| | | | | | | | |
Total | | $ | 1,626 | | | $ | 4,219 | | | $ | 9,073 | | | $ | 12,605 | |
Adient plc | Form 10-Q | 30
| | | | | | | | | | | | | | |
16. Nonconsolidated Partially-Owned Affiliates | | | | |
Investments in the net assets of nonconsolidated partially-owned affiliates are reported in the "Investments in partially-owned affiliates" line in the consolidated statements of financial position as of June 30, 2020 and September 30, 2019. Equity in the net income of nonconsolidated partially-owned affiliates are reported in the "Equity income (loss)" line in the consolidated statements of income (loss) for the nine months ended June 30, 2020 and 2019, respectively.
Adient maintains total investments in partially-owned affiliates of $1.1 billion and $1.4 billion at June 30, 2020 and September 30, 2019, respectively. Operating information for nonconsolidated partially-owned affiliates is as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 |
Income statement data: | | | | |
Net sales | | $ | 7,319 | | | $ | 11,736 | |
Gross profit | | $ | 829 | | | $ | 1,358 | |
Net income | | $ | 387 | | | $ | 494 | |
Net income attributable to the entity | | $ | 381 | | | $ | 480 | |
Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for recent developments regarding certain of Adient's investments in partially-owned affiliates.
| | | | | | | | | | | | | | |
17. Commitments and Contingencies | | | | |
Adient is involved in various lawsuits, claims and proceedings incident to the operation of its businesses, including those pertaining to product liability, casualty environmental, safety and health, intellectual property, employment, commercial and contractual matters, and various other matters. Although the outcome of any such lawsuit, claim or proceeding cannot be predicted with certainty and some may be disposed of unfavorably to Adient, it is management's opinion that none of these will have a material adverse effect on Adient's financial position, results of operations or cash flows. Costs related to such matters were not material to the periods presented.
Adient accrues for potential environmental liabilities when it is probable a liability has been incurred and the amount of the liability is reasonably estimable. Reserves for environmental liabilities totaled $11 million and $12 million at June 30, 2020 and September 30, 2019, respectively. Adient reviews the status of its environmental sites on a quarterly basis and adjusts its reserves accordingly. Such potential liabilities accrued by Adient do not take into consideration possible recoveries of future insurance proceeds. They do, however, take into account the likely share other parties will bear at remediation sites. It is difficult to estimate Adient's ultimate level of liability at many remediation sites due to the large number of other parties that may be involved, the complexity of determining the relative liability among those parties, the uncertainty as to the nature and scope of the investigations and remediation to be conducted, the uncertainty in the application of law and risk assessment, the various choices and costs associated with diverse technologies that may be used in corrective actions at the sites, and the often quite lengthy periods over which eventual remediation may occur. Nevertheless, Adient does not currently believe that any claims, penalties or costs in connection with known environmental matters will have a material adverse effect on Adient's financial position, results of operations or cash flows.
Adient plc | Form 10-Q | 31
| | | | | | | | | | | | | | |
18. Related Party Transactions | | | | |
In the ordinary course of business, Adient enters into transactions with related parties, such as equity affiliates. Such transactions consist of the sale or purchase of goods and other arrangements.
The following table sets forth the net sales to and purchases from related parties included in the consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
(in millions) | | | | 2020 | | 2019 | | 2020 | | 2019 |
Net sales to related parties | | Net sales | | $ | 60 | | | $ | 97 | | | $ | 255 | | | $ | 277 | |
Purchases from related parties | | Cost of sales | | 138 | | | 205 | | | 447 | | | 555 | |
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, 2020 | | September 30, 2019 |
Accounts receivable due from related parties | | Accounts receivable | | $ | 61 | | | $ | 73 | |
Accounts payable due to related parties | | Accounts payable | | 87 | | | 137 | |
| | | | | | |
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 contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," or similar terms. Forward-looking statements are not guarantees of future performance and Adient's actual results may differ significantly from the results discussed in the forward-looking statements. Adient cautions that these statements are subject to numerous important risks, uncertainties, assumptions and other factors, some of which are beyond Adient’s control, that could cause Adient’s actual results to differ materially from those expressed or implied by such forward-looking statements, including, among others, risks related to: the continued financial and operational impacts of and uncertainties relating to the COVID-19 pandemic on Adient and its customers, suppliers, joint venture partners and other parties, the ability of Adient to close its sale of its fabrics business, including receipt of necessary regulatory approvals, the ability of Adient to close the transactions subject to the Yanfeng Agreement, the impact of tax reform legislation through the Tax Cuts and Jobs Act, uncertainties in U.S. administrative policy regarding trade agreements, tariffs and other international trade relations, the ability of Adient to effectively launch new business at forecasted and profitable levels, the ability of Adient to execute its turnaround plan, the ability of Adient to identify, recruit and retain key leadership, the ability of Adient to meet debt service requirements, the 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 and cancellation of or changes to commercial arrangements. 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 Adient's fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to Adient's fiscal years ended in September and the associated quarters, months and periods of those fiscal years. Adient assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
Adient is a global leader in the automotive seating supply industry with leading market positions in the Americas, Europe and China and maintains longstanding relationships with the largest global automotive original equipment manufacturers (OEMs). Adient's proprietary technologies extend into virtually every area of automotive seating solutions, including complete seating systems, frames, mechanisms, foam, head restraints, armrests, trim covers and fabrics. Adient is a global seat supplier with the capability to design, develop, engineer, manufacture, and deliver complete seat systems and components in every major automotive producing region in the world. Adient also participates in the automotive interiors market, which includes production of instrument panels, floor consoles, door panels, overhead consoles, cockpit systems, decorative trim and other automotive interior products, primarily through its joint venture in China, Yanfeng Global Automotive Interior Systems Co., Ltd. (YFAI)
For recent developments regarding the planned divestitures of Adient's YFAI investment and the fabrics business, refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements.
Adient designs, manufactures and markets a full range of seating systems and components for passenger cars, commercial vehicles and light trucks, including vans, pick-up trucks and sport/crossover utility vehicles. Adient operates in 220 wholly- and majority-owned manufacturing or assembly facilities, with operations in 33 countries. Additionally, Adient has partially-owned affiliates in China, Asia, Europe and North America. Through its global footprint, vertical integration and partnerships in China, Adient leverages its capabilities to drive growth in the automotive seating industry.
Adient manages its business on a geographic basis and operates in the following three reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Adient plc | Form 10-Q | 33
Recent Developments Regarding COVID-19
The impact of the novel strain of the coronavirus identified in late 2019 (“COVID-19”) has grown throughout the world, including in all global and regional markets served by Adient. Governmental authorities have implemented numerous measures attempting to contain and mitigate the effects of COVID-19, including travel bans and restrictions, quarantines, social distancing orders, shelter in place orders and shutdowns of non-essential activities. Adient's manufacturing facilities are located in areas that have been affected by the pandemic. Adient's China facilities (including both consolidated and non-consolidated joint ventures) were effectively shut down during the lunar New Year festival (at the end of January) and did not return to operations until the end of March 2020. Currently, all of Adient's plants in China are operating and all of its customer plants in China have re-opened.
Beginning in late March 2020, Adient experienced the shutdown of effectively all of its facilities in the Americas and European regions coinciding with the shutdown of its customer facilities in those regions. Adient also experienced the shutdown of approximately 50% of its plants in Asia (outside China) during late March and early April. During May and June, production started to resume in all regions concurrent with Adient's customers resuming operations. As of June 30, 2020, the majority of Adient's plants have resumed production, but with production rates well below pre-pandemic levels.
It is likely that the global automotive industry will experience significantly lower demand for new vehicle sales as a result of the global economic slowdown caused by the COVID-19 pandemic because new vehicle sales are highly dependent on strong consumer confidence and low unemployment. Until consumers regain confidence in the markets and unemployment returns to lower levels, new vehicle sales will likely be significantly lower than historical and previously projected pre-pandemic sales levels.
Adient has been actively monitoring the global outbreak and spread of COVID-19 and taking steps to mitigate the potential risks to the Company posed by its spread and related circumstances and impacts. Adient continues to assess and update its business continuity plans in the context of this pandemic, including analyzing constraints at its suppliers. Adient has taken precautions to help keep its workforce healthy and safe, including establishing a Global Response Team, implementing strict travel restrictions, enforcing rigorous hygiene protocols, increasing sanitization efforts at all facilities, enacting visitor restrictions, social distancing, face covering expectations, and temperature and health screenings and implementing remote working arrangements for the vast majority of Adient's employees who work outside the plants.
Adient took significant measures to reduce its overall cash burn rate (defined as net cash outflow associated with operating the company) during the shutdown, including the furlough of direct/salary plant workers, reductions of salaries in all areas of the globe and retirement benefits for U.S. employees outside the plants, reduced/delayed capex spending to coincide with the resumption of production and effectively eliminating all discretionary spending. The actions to reduce and defer compensation were global initiatives and included 20% salary reductions in the U.S. beginning on March 23, 2020 (with up to 10% incremental reductions and deferrals taking effect on April 13, 2020) and running until June 30, 2020, salary reductions of up to 20% for certain employees in many of the countries outside of the U.S., CEO salary reduction and deferral until July 15, 2020, and a 20% Board fee reduction. Effective July 1, 2020, Adient offered certain employees, including Adient’s executive officers, RSU awards in lieu of 10-30% of salary and other compensatory benefits that are being foregone by each recipient from the time period beginning July 1, 2020 through June 30, 2021. The RSU awards will vest in two tranches, with one half of the awards vesting six months from the grant date, and the remaining half vesting one year from the grant date.
In addition to the significant measures taken to reduce and contain costs, Adient has taken recent action to provide additional liquidity, primarily including the draw down on its ABL revolving credit facility of $825 million at the end of March 2020 and the issuance of $600 million of senior secured notes due 2025 on April 20, 2020. Adient's ability to borrow against the ABL revolving credit facility is limited to its borrowing base, which consists primarily of accounts receivable, inventory and certain cash account balances at certain Adient subsidiaries. Such working capital account balances have decreased, as expected, during the third quarter of fiscal 2020 as a result of the production shutdown. Adient therefore repaid $646 million during the third quarter of fiscal 2020, resulting in $179 million outstanding and $155 million of availability under the ABL revolving credit facility as of June 30, 2020. During July 2020, Adient voluntarily repaid the outstanding balance of the ABL revolving credit balance.
The recent automotive production shutdown across most of the world has also significantly impacted Adient’s daily working capital. During the third quarter of fiscal 2020, Adient experienced significantly lower trade working capital balances (accounts receivable, inventory and accounts payable) due to the shutdown of production in the early part of the third quarter and resumption of production only toward the latter part of the quarter. Trade working capital was favorably impacted during the
Adient plc | Form 10-Q | 34
early part of the third quarter but was more than offset by the unfavorable impact to trade working capital during the latter part of the quarter. The continuing resumption of production in the fourth quarter is expected to have a favorable impact to trade working capital as Adient returns to a more stabilized production run rate.
Adient expects to close on the sale of its YFAI joint venture investment (as part of the broader YF China transactions announced on January 31, 2020 and as modified on June 24, 2020) by the end of FY2020, providing additional liquidity of approximately $334 million. Adient also expects to close on the sale of its fabrics business by the end of FY2020, providing additional liquidity of approximately $175 million. Both transactions are subject to customary closing conditions and regulatory approvals in certain jurisdictions. Adient cannot guarantee that the closing conditions contained in the respective purchase agreements related to the sale of YFAI or the sale of the fabrics business will be satisfied or waived, or that the sale of YFAI and/or the sale of the fabrics business will be completed within the respective expected timeframes, on the respective proposed terms, or at all.
Adient has also pursued, wherever it qualifies, governmental assistance during this time. For example, Adient has begun deferring the employer portion of FICA until FY2021 or beyond and deferring VAT payments. Adient is seeking to take advantage of all such assistance to either defer payments to government authorities or to receive cash to help defray operating costs. Adient cannot guarantee that it will continue to qualify for, or receive any of, the assistance that it is pursuing.
Finally, Adient’s Chinese joint ventures are expected to pay dividends to Adient during the fiscal year ending September 30, 2020 of approximately $280 million, of which approximately $250 million had been received as of June 30, 2020. Adient, however, cannot guarantee the collection of the remaining cash dividends from its non-consolidated joint ventures.
The spread of COVID-19 and the measures taken to restrain the spread of the virus have had, and will continue to have, a material negative impact on Adient's financial results and liquidity, and such negative impact may continue well beyond the containment of such outbreak. Adient cannot assure that the assumptions used to estimate its liquidity requirements will be correct because it has never previously experienced such a widespread cessation of its operations as it experienced in the third quarter of fiscal 2020. In addition, the magnitude, duration, speed and potential resurgence of the global pandemic is uncertain. Consequently, the impact on Adient's business, financial condition or longer-term financial or operational results are uncertain. Based on the actions it has taken and the assumptions regarding the impact of COVID-19, Adient believes that its current financial resources will be sufficient to fund the company's liquidity requirements for at least the next twelve months.
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 2020, automotive light vehicle production on a global basis decreased significantly compared to the third quarter of fiscal 2019. The significant decrease in global light vehicle production during the first nine months of fiscal 2020 is primarily attributable to the impact of COVID-19, which caused the vast majority of global production to be suspended by OEM's, starting in China primarily during February and March 2020 followed by Americas, Europe and other Asian countries during March 2020. During May and June, production started to resume in all regions.
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) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 | | | | |
Global | | 12.0 | | | (45.2)% | | 21.9 | | | 52.0 | | | (23.3)% | | 67.8 | | | | | |
North America | | 1.3 | | | (69.0)% | | 4.2 | | | 8.9 | | | (28.8)% | | 12.5 | | | | | |
South America | | 0.2 | | | (77.8)% | | 0.9 | | | 1.6 | | | (36.0)% | | 2.5 | | | | | |
Europe | | 2.1 | | | (64.4)% | | 5.9 | | | 12.0 | | | (29.0)% | | 16.9 | | | | | |
China | | 6.0 | | | 9.1% | | 5.5 | | | 16.6 | | | (10.8)% | | 18.6 | | | | | |
Asia, excluding China, and Other | | 2.4 | | | (55.6)% | | 5.4 | | | 12.9 | | | (25.4)% | | 17.3 | | | | | |
| | | | | | | | | | | | | | | | |
Source: IHS Automotive, July 2020 | | | | | | | | | | | | | | | | |
Adient plc | Form 10-Q | 35
Financial Results Summary
Significant aspects of Adient's financial results for the third quarter of fiscal 2020 include the following:
•Adient recorded net sales of $1,626 million for the third quarter of fiscal 2020, representing a decrease of $2,593 million or 61% when compared to the third quarter of fiscal 2019. Adient recorded net sales of $9,073 million for the first nine months of fiscal 2020, representing a decrease of $3,532 million, or 28% when compared to the first nine months of fiscal 2019. The decrease in net sales is primarily due to the significant operational interruptions caused by the COVID-19 pandemic which resulted in lower sales volumes across all regions.
•Gross profit was a loss of $153 million, or (9.4)% of net sales for the third quarter of fiscal 2020 compared to $211 million, or 5.0% of net sales for the third quarter of fiscal 2019. Gross profit was $347 million, or 3.8% of net sales for the first nine months of fiscal 2020 compared to $588 million, or 4.7% of net sales for the first nine months of fiscal 2019. Profitability, including gross profit as a percentage of net sales, was lower due to the impact of significantly lower sales volumes across all regions driven by the impact of COVID-19.
•Equity income was $48 million for the third quarter of fiscal 2020, compared to $64 million for the third quarter of fiscal 2019. The decrease is primarily attributable to the impact for the planned divestiture of YFAI ($15 million) and the non-cash impairment of Adient's YFAI investment ($6 million), partially offset by the resumption of production within Adient's affiliates in China. Equity loss was $57 million for the first nine months of fiscal 2020, compared to equity income of $209 million for the first nine months of fiscal 2019. The decrease on a year-to-date basis is primarily attributable to a $222 million non-cash impairment of Adient's YFAI investment and to the lower production volumes at Adient's China affiliates during the second and third quarters of fiscal 2020 due to the impact of COVID-19.
•Net loss attributable to Adient was $325 million for the third quarter of fiscal 2020, compared to $321 million of net loss attributable to Adient for the third quarter of fiscal 2019. The higher level of loss in the third quarter of fiscal 2020 is primarily attributable to the overall decrease of profitability in fiscal 2020 resulting from significantly lower volumes due to COVID-19 along with increased restructuring and impairment costs of $34 million and a $6 million non-cash impairment charge on Adient's YFAI investment in the current year, offset by a lower income tax provision for the third quarter of fiscal 2020 of $333 million due to prior year valuation allowance charges, and lower overall SG&A of $50 million. Net loss attributable to Adient for the first nine months of 2020 was $511 million, compared to a net loss attributable to Adient of $487 million during the first nine months of fiscal 2019. The year over year increase in net loss attributable to Adient is primarily due to the impact of having significantly lower volumes due to COVID-19 along with a one-time non-cash impairment charge of $222 million on Adient's YFAI investment, a $25 million loss on the sale of the RECARO business and deconsolidation of Adient Aerospace, a $27 million non-cash impairment charge related to long-lived assets in China, and overall higher net financing costs, partially offset by operating improvements and lower administrative costs and one-time charges in the prior year related to impairment in the seat structures and mechanism business and income tax charges to establish valuation allowances.
Adient plc | Form 10-Q | 36
Consolidated Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Net sales | | $ | 1,626 | | | -61% | | $ | 4,219 | | | $ | 9,073 | | | -28% | | $ | 12,605 | |
Cost of sales | | 1,779 | | | -56% | | 4,008 | | | 8,726 | | | -27% | | 12,017 | |
Gross profit | | (153) | | | > -100% | | 211 | | | 347 | | | -41% | | 588 | |
Selling, general and administrative expenses | | 115 | | | -30% | | 165 | | | 407 | | | -20% | | 511 | |
Loss on business divestitures - net | | — | | | n/a | | — | | | 25 | | | n/a | | — | |
Restructuring and impairment costs | | 49 | | | > 100% | | 15 | | | 103 | | | -35% | | 159 | |
Equity income (loss) | | 48 | | | -25% | | 64 | | | (57) | | | > -100% | | 209 | |
Earnings (loss) before interest and income taxes | | (269) | | | > -100% | | 95 | | | (245) | | | > -100% | | 127 | |
Net financing charges | | 58 | | | -3% | | 60 | | | 156 | | | 16% | | 135 | |
Other pension expense (income) | | (1) | | | > -100% | | 5 | | | (5) | | | > -100% | | 3 | |
Income (loss) before income taxes | | (326) | | | > -100% | | 30 | | | (396) | | | > 100% | | (11) | |
Income tax provision (benefit) | | 5 | | | -99% | | 338 | | | 75 | | | -82% | | 412 | |
Net income (loss) | | (331) | | | -7% | | (308) | | | (471) | | | -11% | | (423) | |
Income (loss) attributable to noncontrolling interests | | (6) | | | > -100% | | 13 | | | 40 | | | -38% | | 64 | |
Net income (loss) attributable to Adient | | $ | (325) | | | -1% | | $ | (321) | | | $ | (511) | | | -5% | | $ | (487) | |
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Net sales | | $ | 1,626 | | | -61% | | $ | 4,219 | | | $ | 9,073 | | | -28% | | $ | 12,605 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net sales decreased by $2,593 million, or 61%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 primarily due to lower volumes in all regions attributable to the significant interruption to Adient's global operations caused by COVID-19, the unfavorable impact of foreign currency ($106 million), and the impact of divestitures primarily related to RECARO ($45 million). Refer to the segment analysis below for a discussion of segment net sales.
Net sales decreased by $3,532 million, or 28%, in the first nine months of fiscal 2020 as compared to the first nine months of fiscal 2019 primarily due to the significant operational interruptions related to COVID-19 starting in the second quarter of fiscal 2020 which resulted in lower sales volumes across all regions, unfavorable foreign currency impact ($232 million), and the impact of divestitures primarily related to RECARO ($83 million), partially offset by favorable commercial settlements and net pricing adjustments, including material economics, net of recoveries. 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) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Cost of sales | | $ | 1,779 | | | -56% | | $ | 4,008 | | | $ | 8,726 | | | -27% | | $ | 12,017 | |
Gross profit | | $ | (153) | | | > -100% | | $ | 211 | | | $ | 347 | | | -41% | | $ | 588 | |
% of sales | | (9.4) | % | | | | 5.0 | % | | 3.8 | % | | | | 4.7 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Adient plc | Form 10-Q | 37
Cost of sales decreased by $2,229 million, or 56%, and gross profit decreased by $364 million, or 173%, in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019. The year over year decrease in cost of sales was primarily due to the decrease in sales volumes along with overall business performance improvements, the favorable impact of foreign currency ($92 million), and the impact of divestitures primarily related to RECARO ($46 million). Gross profit was negatively impacted by the lower sales volume due to the COVID-19 impact, partially offset by the impact of business performance improvements including lower launch inefficiencies, and reductions in operational waste and freight along with favorable commercial settlements and net pricing adjustments. Refer to the segment analysis below for a discussion of segment profitability.
Cost of sales decreased by $3,291 million, or 27% and gross profit decreased by $241 million, or 41%, in the first nine months of fiscal 2020 as compared to the first nine months of fiscal 2019. The cost of sales year over year decrease is primarily attributable to lower sales volumes along with overall business performance improvements, the favorable impact of foreign currency ($212 million), and impact of divestitures primarily related to RECARO ($85 million). Gross profit was negatively impacted by the lower sales volume due to the COVID-19 impact, partially offset by the impact of business performance improvements including lower launch inefficiencies, and reductions in operational waste and freight along with favorable commercial settlements and net pricing adjustments. 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) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Selling, general and administrative expenses | | $ | 115 | | | -30% | | $ | 165 | | | $ | 407 | | | -20% | | $ | 511 | |
% of sales | | 7.1 | % | | | | 3.9 | % | | 4.5 | % | | | | 4.1 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Selling, general and administrative expenses (SG&A) decreased by $50 million, or 30% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019. The year over year decrease in SG&A is attributable to lower overall administrative and engineering spending of $32 million, including lower levels of incentive compensation and discretionary spending which are not expected to recur as part of the annual SG&A run rate, prior year Adient Aerospace and RECARO administrative costs of $13 million, and lower share based compensation expense of $1 million, partially offset by higher transaction costs related to the planned divestitures of YFAI and the fabrics business of $2 million. Refer to the segment analysis below for a discussion of segment profitability.
Selling, general and administrative expenses (SG&A) decreased by $104 million, or 20% in the first nine months of fiscal 2020 as compared to the first nine months of fiscal 2019. SG&A was favorably impacted by lower overall administrative and engineering spending of $71 million, including lower levels of incentive compensation and discretionary spending which are not expected to recur as part of the annual SG&A run rate, prior year Adient Aerospace and RECARO administrative costs of $29 million, and lower share based compensation expense of $8 million, partially offset by higher transaction costs related to the planned divestiture of YFAI and the fabrics business of $8 million. Refer to the segment analysis below for a discussion of segment profitability.
Loss on Business Divestitures - net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Loss on business divestitures - net | | $ | — | | | n/a | | $ | — | | | $ | 25 | | | n/a | | $ | — | |
The loss on business divestitures for the first nine months of 2020 is comprised of a $21 million loss on the sale of RECARO automotive high performance seating and a $4 million loss on the deconsolidation of Adient Aerospace. Refer to Note 3, "Acquisitions and Divestitures," of the notes to the consolidated financial statements for information related to these divestitures.
Adient plc | Form 10-Q | 38
Restructuring and Impairment Costs
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Restructuring and impairment costs | | $ | 49 | | | > 100% | | $ | 15 | | | $ | 103 | | | -35% | | $ | 159 | |
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| | | | | | | | | | | | |
Restructuring and impairment costs were higher by $34 million during the third quarter of fiscal 2020 due primarily to one-time non-cash impairment charges of long-lived assets in China ($27 million), and lower by $56 million during the nine months ended June 30, 2020 due primarily to one-time non-cash impairment charges in the prior year related to the seat structures and mechanisms business ($66 million) and to overall lower levels of restructuring actions recorded in 2020. Refer to Note 13, "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for information related to Adient's restructuring plans.
Equity Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Equity income (loss) | | $ | 48 | | | -25% | | $ | 64 | | | $ | (57) | | | > -100% | | $ | 209 | |
| | | | | | | | | | | | |
Equity income was $48 million for the third quarter of fiscal 2020, compared to $64 million of income in the third quarter of fiscal 2019. The decrease is primarily attributable to the impact for the planned divestiture of YFAI ($15 million) and the non-cash impairment of Adient's YFAI investment ($6 million), partially offset by the resumption of production within Adient's affiliates in China.
Equity loss was $57 million for the first nine months of fiscal 2020, which is $266 million lower compared to the first nine months of fiscal 2019. The change is primarily attributable to the $222 million non-cash impairment charge recorded during the first nine months of fiscal 2020 related to Adient's YFAI investment and the impact from the planned divestiture of YFAI ($19 million) along with lower production volumes within Adient's affiliates in China due to the impact of COVID-19, partially offset by $10 million of benefits from tax credits at various China affiliates that are not expected to recur.
Net Financing Charges
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Net financing charges | | $ | 58 | | | -3% | | $ | 60 | | | $ | 156 | | | 16% | | $ | 135 | |
Net financing charges decreased in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019 due to a $13 million one-time charge in the prior year of deferred financing fees in conjunction with the debt refinancing in the third quarter of fiscal 2019, partially offset by higher levels of outstanding debt and higher average interest rates in the current year. Net financing charges increased in the nine months ended June 30, 2020 as compared to the nine months ended June 30, 2019 due to higher levels of outstanding debt and to higher average interest rates in the current year, partially offset by the $13 million one-time charge of deferred financing fees in the prior year.
Other Pension Expense (Income)
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| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Other pension expense (income) | | $ | (1) | | | > -100% | | $ | 5 | | | $ | (5) | | | > -100% | | $ | 3 | |
Other pension expense (income) for the three and nine months ended June 30, 2020 included a $2 million pension settlement expense related to the settlement of two plans in the United States. Other pension expense (income) for the three and nine months ended June 30, 2019 included a $6 million mark-to-market expense related to the remeasurement of a United Kingdom
Adient plc | Form 10-Q | 39
pension plan. Refer to Note 12, "Retirement Plans," of the notes to the consolidated financial statements for information related to the non-service components of Adient's net periodic pension costs.
Income Tax Provision
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Income tax provision (benefit) | | $ | 5 | | | -99% | | $ | 338 | | | $ | 75 | | | -82% | | $ | 412 | |
During the third quarter of fiscal 2020 income tax expense of $5 million was recognized rather than a tax benefit that would have been recognized by applying the statutory rate of 12.5% against pre-tax losses, primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances, partially offset by a $5 million tax benefit related to the impairment charge recorded in the Asia segment related to customer relationship intangible assets. 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.
During the first nine months of fiscal 2020 income tax expense of $75 million was recognized rather than a tax benefit that would have been recognized by applying the statutory rate of 12.5% against pre-tax losses, primarily due to the impact of recognizing no tax benefit for losses in jurisdictions with valuation allowances and $6 million tax expense associated primarily with foreign currency remeasurement of Mexican peso deferred tax assets, partially offset by a $4 million tax benefit associated with the impairment of Adient’s YFAI investment and a $5 million tax benefit related to the impairment charge recorded in the Asia segment related to customer relationship intangible assets. 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 valuation allowances, partially offset by a tax rate change at a consolidated affiliate in China.
Income Attributable to Noncontrolling Interests
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Income (loss) attributable to noncontrolling interests | | $ | (6) | | | > -100% | | $ | 13 | | | $ | 40 | | | -38% | | $ | 64 | |
The decrease in income attributable to noncontrolling interests for the three and nine months ended June 30, 2020 is primarily attributable to lower income resulting from lower volumes, caused by COVID-19 at certain Seating affiliates in varying jurisdictions in the current periods.
Net Income (Loss) Attributable to Adient
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Net income (loss) attributable to Adient | | $ | (325) | | | -1% | | $ | (321) | | | $ | (511) | | | -5% | | $ | (487) | |
Net loss attributable to Adient was $325 million for the third quarter of fiscal 2020 compared to $321 million of net loss attributable to Adient for the third quarter of fiscal 2019. The higher level of net loss in the third quarter of fiscal 2020 is primarily attributable to the overall decrease in profitability in fiscal 2020 resulting from significantly lower volumes due to COVID-19 along with increased restructuring and impairment costs of $34 million and a $6 million non-cash impairment charge on Adient's YFAI investment in the current year, offset by a lower income tax provision for the third quarter of fiscal 2020 of $333 million due to a prior year valuation allowance change and lower overall SG&A of $50 million.
Net loss attributable to Adient for the first nine months of 2020 was $511 million, compared to a net loss attributable to Adient of $487 million during the first nine months of fiscal 2019. The year over year increase in net loss attributable to Adient is
Adient plc | Form 10-Q | 40
primarily due to the impact of having significantly lower volumes due to COVID-19 along with a one-time non-cash impairment charge of $222 million on Adient's YFAI investment, a $25 million loss on the sale of the RECARO business and deconsolidation of Adient Aerospace, and overall higher net financing costs, offset by higher profitability levels in fiscal 2020 resulting from operating improvements and lower administrative costs and one-time charges in the prior year related to impairment in the seat structures and mechanism business of $66 million and income tax charges to establish valuation allowances of $43 million.
Comprehensive Income (Loss) Attributable to Adient
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Comprehensive income (loss) attributable to Adient | | $ | (293) | | | 14% | | $ | (341) | | | $ | (600) | | | (32)% | | $ | (455) | |
Comprehensive loss attributable to Adient was $293 million for the third quarter of fiscal 2020 compared to $341 million of comprehensive loss for the third quarter of fiscal 2019. The decreased level of comprehensive loss attributable to Adient in the third quarter of fiscal 2020 is primarily due to the favorable impact in foreign currency translation adjustments ($41 million) primarily related to Chinese yuan, favorable impact in realized and unrealized losses on derivatives ($19 million), and the decrease in comprehensive income attributable to noncontrolling interests ($11 million), offset by higher levels of net loss ($23 million).
Comprehensive loss attributable to Adient was $600 million for the first nine months of fiscal 2020 compared to a comprehensive loss attributable to Adient of $455 million for the first nine months of fiscal 2019. The increased level of comprehensive loss attributable to Adient in the first nine months of fiscal 2020 is primarily due to the unfavorable impact in foreign currency translation adjustments resulting from overall weakening of emerging market currencies ($98 million), unfavorable impact in realized and unrealized losses on derivatives ($29 million), and the unfavorable impact of higher levels of net loss ($48 million), partially offset by the decrease in comprehensive income attributable to noncontrolling interests ($29 million).
Segment Analysis
Adient manages its business on a geographic basis and operates in the following three reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Adient evaluates the performance of its reportable segments using an adjusted EBITDA metric defined as income before income taxes and noncontrolling interests, excluding net financing charges, qualified restructuring and impairment costs, restructuring related-costs, net mark-to-market adjustments on pension and postretirement plans, transaction gains/losses, purchase accounting amortization, depreciation, stock-based compensation and other non-recurring items ("Adjusted EBITDA"). Also, certain corporate-related costs are not allocated to the segments. The reportable segments are consistent with how management views the markets served by Adient and reflect the financial information that is reviewed by its chief operating decision maker.
The results for the three months and nine months ended June 30, 2020 presented below are not necessarily indicative of full-year results, particularly for fiscal 2020 given the unprecedented situation Adient is currently facing with the COVID-19 pandemic and the related significant interruption the impacts of the pandemic is having on Adient's operations. Refer to the Recent Developments Regarding COVID-19 section earlier in Item 2. and to Part II, Item 1.A. Risk Factors, for additional information related to the COVID-19 impacts on Adient.
Financial information relating to Adient's reportable segments is as follows:
Adient plc | Form 10-Q | 41
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Net Sales | | | | | | | | |
Americas | | $ | 593 | | | $ | 2,010 | | | $ | 4,093 | | | $ | 5,860 | |
EMEA | | 698 | | | 1,752 | | | 3,750 | | | 5,170 | |
Asia | | 346 | | | 530 | | | 1,362 | | | 1,779 | |
Eliminations | | (11) | | | (73) | | | (132) | | | (204) | |
Total net sales | | $ | 1,626 | | | $ | 4,219 | | | $ | 9,073 | | | $ | 12,605 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Nine Months Ended June 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Adjusted EBITDA | | | | | | | | |
Americas | | $ | (83) | | | $ | 69 | | | $ | 117 | | | $ | 146 | |
EMEA | | (94) | | | 53 | | | 17 | | | 114 | |
Asia | | 71 | | | 110 | | | 311 | | | 387 | |
Corporate-related costs (1) | | (16) | | | (27) | | | (59) | | | (75) | |
Restructuring and impairment costs (2) | | (49) | | | (15) | | | (103) | | | (159) | |
Purchase accounting amortization (3) | | (9) | | | (11) | | | (30) | | | (32) | |
Restructuring related charges (4) | | (5) | | | (5) | | | (17) | | | (27) | |
Loss on business divestitures - net (5) | | — | | | — | | | (25) | | | — | |
Impairment of nonconsolidated partially-owned affiliate (6) | | (6) | | | — | | | (222) | | | — | |
Depreciation | | (67) | | | (68) | | | (214) | | | (205) | |
Stock based compensation | | (7) | | | (8) | | | (8) | | | (16) | |
Other items (7) | | (4) | | | (3) | | | (12) | | | (6) | |
Earnings (loss) before interest and income taxes | | (269) | | | 95 | | | (245) | | | 127 | |
Net financing charges | | (58) | | | (60) | | | (156) | | | (135) | |
Other pension income (expense) | | 1 | | | (5) | | | 5 | | | (3) | |
Income (loss) before income taxes | | $ | (326) | | | $ | 30 | | | $ | (396) | | | $ | (11) | |
Notes:
(1) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal, finance and marketing.
(2) Reflects qualified restructuring charges for costs that are directly attributable to restructuring activities and meet the definition of restructuring under ASC 420 and non-recurring impairment charges. Restructuring charges during the three and nine months ended June 30, 2020 primarily consist of workforce reductions and a $27 million pre-tax non-cash impairment charge related to long-lived assets in China. Restructuring charges during the three and nine months ended June 30, 2019 primarily consist of workforce reductions; the nine months ended June 30, 2019 also includes a $66 million non-cash impairment charge related to long-lived assets in the seat structure and mechanism operations.
(3) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income.
(4) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420 along with restructuring costs at partially owned affiliates recorded within equity income.
Adient plc | Form 10-Q | 42
(5) Reflects losses on business divestitures, of which $4 million is related to the deconsolidation of Adient Aerospace, and $21 million is the result of the sale of the RECARO automotive high performance seating systems.
(6) Reflects the non-cash impairment of Adient's YFAI investment as described in Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements.
(7) The three months ended June 30, 2020 reflects $4 million of transaction costs and the nine months ended June 30, 2020 reflects $11 million of transaction costs and $1 million of tax adjustments at YFAI. The three months ended June 30, 2019 reflects $1 million of Futuris integration costs and $2 million of transaction costs. The nine months ended June 30, 2019 reflects $4 million of Futuris integration costs and $2 million of transaction costs.
Americas
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| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Net sales | | $ | 593 | | | -70% | | $ | 2,010 | | | $ | 4,093 | | | -30% | | $ | 5,860 | |
Adjusted EBITDA | | $ | (83) | | | > -100% | | $ | 69 | | | $ | 117 | | | -20% | | $ | 146 | |
Net sales decreased during the third quarter of fiscal 2020 by $1,417 million due to lower production volumes ($1,376 million), resulting primarily from the operational shutdowns during the three months ended June 30, 2020 in response to the COVID-19 pandemic, along with the unfavorable impact of foreign currency ($29 million), and the unfavorable impact of the RECARO divestiture ($14 million), partially offset by the impact of favorable commercial settlements and net pricing adjustments ($2 million).
Adjusted EBITDA decreased during the third quarter of fiscal 2020 by $152 million due to lower production volumes ($230 million), lower equity income ($1 million), and the unfavorable impact of foreign currency ($5 million), partially offset by the impact of operational performance improvements ($36 million), lower administrative and engineering expense ($33 million) including lower levels of incentive compensation and discretionary spending which are not expected to recur as part of the annual run rate, the favorable impact of Adient Aerospace deconsolidation and RECARO divestiture ($7 million), favorable net material and pricing adjustments ($5 million) and favorable material economics, net of recoveries ($3 million).
Net sales decreased during the first nine months of fiscal 2020 by $1,767 million due to lower production volumes ($1,713 million) resulting primarily from the operational shutdowns that started in March 2020 in response to the COVID-19 pandemic as well as $55 million attributable to the GM labor strike during the first quarter of fiscal 2020, along with the unfavorable impact of foreign currency ($48 million), and the unfavorable impact of the RECARO divestiture ($27 million), partially offset by the favorable impact of commercial settlements and net pricing adjustments ($21 million).
Adjusted EBITDA decreased during the first nine months of fiscal 2019 by $29 million due to lower production volumes ($274 million), lower equity income ($2 million), and unfavorable impact of foreign currency ($3 million), partially offset by the impact of operational performance improvements ($88 million), lower administrative and engineering expense ($78 million)
including lower levels of incentive compensation and discretionary spending which are not expected to recur as part of the annual run rate, the favorable impact of Adient Aerospace deconsolidation and RECARO divestiture ($19 million), favorable net material and pricing adjustments ($46 million) and favorable material economics, net of recoveries ($14 million).
EMEA
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| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Net sales | | $ | 698 | | | -60% | | $ | 1,752 | | | $ | 3,750 | | | -27% | | $ | 5,170 | |
Adjusted EBITDA | | $ | (94) | | | > -100% | | $ | 53 | | | $ | 17 | | | -85% | | $ | 114 | |
Adient plc | Form 10-Q | 43
Net sales decreased during the third quarter of fiscal 2020 by $1,054 million due to lower production volumes ($963 million) resulting primarily from the operational shutdowns during the three months ended June 30, 2020 in response to the COVID-19 pandemic, the unfavorable impact of foreign currency ($68 million), the unfavorable impact of divestitures primarily related to RECARO ($12 million), and the unfavorable impact of commercial settlements and net pricing adjustments ($11 million).
Adjusted EBITDA decreased during the third quarter of fiscal 2020 by $147 million due to lower production volumes ($175 million) and the unfavorable impact of foreign currency ($5 million) and unfavorable material economics, net of recoveries ($9 million), and lower equity income ($4 million), partially offset by operational performance improvements ($20 million), lower administrative and engineering expense ($21 million) including lower levels of incentive compensation and discretionary spending which are not expected to recur as part of the annual run rate, favorable net material and pricing adjustments ($3 million), and the favorable impact of the RECARO divestiture ($2 million).
Net sales decreased during the first nine months of fiscal 2020 by $1,420 million due to lower production volumes ($1,225 million) resulting primarily from the operational shutdowns that started in March 2020 in response to the COVID-19 pandemic along with the unfavorable impact of foreign currency ($181 million), the unfavorable impact of the RECARO divestiture ($25 million) and the unfavorable impact of material economics ($10 million), partially offset by favorable commercial settlements and net pricing adjustments ($21 million).
Adjusted EBITDA decreased during the first nine months of fiscal 2020 by $97 million due to lower volumes ($219 million), and the unfavorable impact of foreign currency ($11 million), unfavorable material economics, net of recovery ($16 million), and lower equity income ($3 million), partially offset by operational performance improvements ($55 million), lower administrative and engineering expense ($40 million) including lower levels of incentive compensation and discretionary spending which are not expected to recur as part of the annual run rate, favorable net material and pricing adjustments ($54 million), and the favorable impact of divestitures primarily related to RECARO ($3 million).
Asia
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| | Three Months Ended June 30, | | | | | | Nine Months Ended June 30, | | | | |
(in millions) | | 2020 | | Change | | 2019 | | 2020 | | Change | | 2019 |
Net sales | | $ | 346 | | | -35% | | $ | 530 | | | $ | 1,362 | | | -23% | | $ | 1,779 | |
Adjusted EBITDA | | $ | 71 | | | -35% | | $ | 110 | | | $ | 311 | | | -20% | | $ | 387 | |
Net sales decreased during the third quarter of fiscal 2020 by $184 million due to lower production volumes ($157 million) primarily resulting from the operational shutdowns in Asia during the three months ended June 30, 2020 in response to the COVID-19 pandemic, the unfavorable impact of the RECARO divestiture ($12 million), the unfavorable impact of foreign currency ($13 million) and the unfavorable impact of commercial settlements and net pricing adjustments ($2 million).
Adjusted EBITDA decreased during the third quarter of fiscal 2020 by $39 million due to overall lower production volumes ($26 million) as a result of the COVID-19 pandemic, the unfavorable impact of foreign currency ($7 million), the unfavorable impact of the planned YFAI divestiture ($15 million), higher administrative and engineering expense ($4 million), the unfavorable impact of the RECARO divestiture ($2 million), and unfavorable net material and pricing adjustments ($2 million), partially offset by operational performance improvements ($1 million), and higher equity income from China seating affiliates ($16 million).
Net sales decreased during the first nine months of fiscal 2020 by $417 million due to lower production volumes ($397 million) primarily resulting from the operational shutdowns in China and in other Asia countries during the nine months ended June 30, 2020 in response to the COVID-19 pandemic, the unfavorable impact of the RECARO divestiture ($25 million), the unfavorable impact of foreign currency ($11 million), and the unfavorable impact of material economics ($3 million), partially offset by the favorable impact of commercial settlements and net pricing adjustments ($16 million).
Adjusted EBITDA decreased during the first nine months of fiscal 2020 by $76 million due to the impact of lower production volumes ($56 million), lower equity income from China seating affiliates ($5 million) as a result of the operational shutdowns of Adient's affiliates during the second quarter of fiscal 2020 in response to the COVID-19 pandemic, the unfavorable impact of the planned YFAI divestiture ($19 million), unfavorable material economics, net of recoveries ($3 million), the unfavorable impact of foreign currency ($11 million), higher administrative and engineering costs ($4 million), and the unfavorable impact
Adient plc | Form 10-Q | 44
of the RECARO divestiture ($6 million), partially offset by operational performance improvements ($5 million) and favorable net material and pricing adjustments ($23 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 cash flows from operating activities, the revolving credit facility and other debt issuances, and existing cash balances. Adient actively manages its working capital and associated cash requirements and continually seeks more effective uses of cash. Working capital is highly influenced by the timing of cash flows associated with sales and purchases, and therefore can be difficult to manage at times. See below and refer to Note 8, "Debt and Financing Arrangements," of the notes to consolidated financial statements for discussion of financing arrangements. Following the first quarter of fiscal 2019 dividend payout, Adient has suspended future dividends. Refer to the "Recent Developments Regarding COVID-19" section for additional information on short term liquidity measures implemented in response to the COVID-19 pandemic.
Adient US LLC ("Adient US"), a wholly owned subsidiary of Adient, together with certain of Adient's other subsidiaries, maintains an asset-based revolving credit facility (the “ABL Credit Facility”), which provides for a revolving line of credit up to $1,250 million, including a North American subfacility of up to $950 million and a European subfacility of up to $300 million, subject to borrowing base capacity. The ABL Credit Facility will mature on May 6, 2024, subject to a springing maturity date 91 days earlier if certain amounts remain outstanding at that time under the Term Loan B Agreement (defined below). Interest is payable on the ABL Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 1.50% to 2.00%. Adient will pay a commitment fee of 0.25% to 0.375% on the unused portion of the commitments under the asset-based revolving credit facility based on average global availability. Letters of credit are limited to the lesser of (x) $150 million and (y) the aggregate unused amount of commitments under the ABL Credit Facility then in effect. Subject to certain conditions, the ABL Credit Facility may be expanded by up to $250 million in additional commitments. Loans under the ABL Credit Facility may be denominated, at the option of Adient, in U.S. dollars, Euros, Pounds Sterling or Swedish Kroner. The ABL Credit Agreement is secured on a first-priority lien on all accounts receivable, inventory and bank accounts (and funds on deposit therein) and a second-priority lien on all of the tangible and intangible assets of certain Adient subsidiaries. On March 26, 2020, Adient borrowed $825 million in principal amount under the agreement. Adient repaid $646 million during the third quarter of fiscal 2020, resulting in $179 million outstanding at June 30, 2020, which is recorded as short-term debt. As of June 30, 2020, Adient's availability under this facility was $155 million (net of $107 million of letters of credit).
In addition, Adient US and Adient Global Holdings S.à r.l., a wholly-owned subsidiary of Adient, maintain a term loan credit agreement (the “Term Loan B Agreement”) providing for a 5-year $800 million senior secured term loan facility that was fully drawn at closing. The Term Loan B Agreement amortizes in equal quarterly installments at a rate of 1.00% per annum of the original principal amount thereof, with the remaining balance due at final maturity on May 6, 2024. Interest on the Term Loan B Agreement accrues at the Eurodollar rate plus an applicable margin equal to 4.25% (with one 0.25% step down based on achievement of a specific secured net leverage level starting with the fiscal quarter ending December 31, 2019). The Term Loan B Agreement also permits Adient to incur incremental term loans in an aggregate amount not to exceed the greater of $750 million and an unlimited amount subject to a pro forma first lien secured net leverage ratio of not greater than 1.75 to 1.00 and certain other conditions.
Adient US also maintains an indenture relating to the issuance of $800 million aggregate principal amount of Senior First Lien Notes. These notes mature on May 15, 2026 and bear interest at a rate of 7.00% per annum. Interest on these notes is payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2019.
The ABL Credit Facility, Term Loan B Agreement and the Senior First Lien Notes due 2026 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, cross-default clauses with other debt arrangements, failure to pay principal and interest, failure to comply with covenants, agreements or conditions, and certain events of bankruptcy or insolvency involving Adient and its significant subsidiaries.
Adient plc | Form 10-Q | 45
Adient Global Holdings Ltd. ("AGH"), a wholly-owned subsidiary of Adient, maintains $0.9 billion aggregate principal amount of 4.875% USD-denominated unsecured notes due 2026 and €1.0 billion aggregate principal amount of 3.50% unsecured notes due 2024. Adient Germany Ltd. & Co. KG, a wholly owned subsidiary of Adient, maintains €165 million in an unsecured term loan from the European Investment Bank ("EIB") due in 2022. The loan bears interest at the 6-month EURIBOR rate plus 158 basis points. Adient amended the EIB loan agreement as of June 30, 2020 to increase the net leverage ratio to 6.75x from 5.25x at June 30, 2020. Future net leverage ratio requirements (5.25x at September 30, 2020 with step downs starting in fiscal 2021) were not adjusted. Adient is forecasting that it will not be in compliance with this net leverage ratio during the next 12 months and will be required to either obtain another amendment or waiver or will pay down the EIB loan. Accordingly, Adient has classified this debt as short term debt at June 30, 2020.
On April 20, 2020, Adient US offeredissued $600 million (net proceeds of $591 million) aggregate principal amount of 9.00% Senior First Lien Notes due 2025. These notes will mature on April 15, 2025, provided that if AGH has not refinanced (or otherwise redeemed) in whole its outstanding 3.50% unsecured notes due 2024 or any refinancing indebtedness thereof that matures earlier than 91 days prior to the maturity date of the Senior First Lien Notes due 2025 on or prior to May 15, 2024, these notes will mature on May 15, 2024. Interest on these notes will be paidis due on April 15 and October 15 each year, beginning on October 15, 2020. These notes contain covenants that are usual and customary, similar to the covenants on the Senior First Lien Notes due 2026 as described above. Adient incurred $10 million of debt issuance cost associated with this new debt in fiscal 2020.
As discussed in the “Recent Developments RegardingOn-Going Impact of COVID-19” section, the spread of COVID-19 and the measures taken to restrain the spread of the virus have had, and willmay continue to have, a material negative impact on Adient's financial results and liquidity, and such negative impact may continue well beyond the containment of such outbreak. Adient cannot assure that its assumptions used to estimate the liquidity requirements will be correct because it has never previously experienced such a widespread cessation of its operations as it experienced in the third quarter of fiscal 2020. In addition, the magnitude, duration, speed and potential resurgence of the global pandemic is uncertain. Consequently, the impact on Adient's business, financial condition or longer-term financial or operational results is uncertain. Based on the actions it has taken and its assumptions regarding the impact of COVID-19, Adient believes that its current financial resources will be sufficient to fund its liquidity requirements for at least the next twelve months.
As previously noted, in connection with the YFAS Sale, as part of the 2021 Yanfeng Transaction, Adient will receive CNY ¥8,064 million ($1,210 million) for all of the issued and outstanding equity interest in YFAS held by Adient. A portion of these proceeds ((¥3,446 million ($519 million)) is payable to Adient upon the YFAS Sale Closing (as defined in the 2021 Agreement) and the remainder (¥4,618 million ($691 million)) is payable to Adient on or before the later of December 21, 2021 and the YFAS Sale Closing. In addition, as part of the 2021 Yanfeng Transaction, YFAS declared dividends in the amounts of approximately ¥4,168 million ($635 million) in the aggregate, which will be paid proportionally to Adient and Yanfeng’s ownership interest in YFAS (namely, 50.01% to Yanfeng and 49.99% to Adient). During the third quarter of fiscal 2021, YFAS paid an aggregate dividend of ¥2,809 million ($436 million) in accordance with the 2021 Agreement. Adient expects the 2021
Adient plc | Form 10-Q | 46
Yanfeng Transaction to be completed in the second half of calendar year 2021. Refer to Note 3, "Acquisitions and Divestitures,” of the notes to consolidated financial statements for additional information on the 2021 Yanfeng Transaction, including the expected impact.
Sources of Cash Flows
| | | | Nine Months Ended June 30, | | | | Nine Months Ended June 30, |
(in millions) | (in millions) | | 2020 | | 2019 | (in millions) | | 2021 | | 2020 |
Cash provided (used) by operating activities | Cash provided (used) by operating activities | | $ | (272) | | | $ | 306 | | Cash provided (used) by operating activities | | $ | 362 | | | $ | (272) | |
Cash provided (used) by investing activities | Cash provided (used) by investing activities | | (280) | | | (278) | | Cash provided (used) by investing activities | | (347) | | | (280) | |
Cash provided (used) by financing activities | Cash provided (used) by financing activities | | 679 | | | 300 | | Cash provided (used) by financing activities | | (718) | | | 679 | |
Capital expenditures | Capital expenditures | | (258) | | | (350) | | Capital expenditures | | (186) | | | (258) | |
|