Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Presentation of Information
Unless the context requires otherwise, references to "Adient plc" or "Adient" refer to Adient plc and its consolidated subsidiaries for periods subsequent to its separation from Johnson Controls International plc ("the former Parent") on October 31, 2016. References in this Annual Report on Form 10-K to the "separation" refer to the legal separation and transfer of the former Parent's automotive seating and interiors business to Adient on October 31, 2016. The information presented herein are based on management’s perspective of Adient’s results of operations.
Forward-Looking Statements
Adient has made statements in this section and other parts of this Annual Report on Form 10-K ("Form 10-K") that are management’s perspective of forward-looking information and, therefore, are subject to risks and uncertainties. All statements in this Form 10-K other than statements of historical fact are statements that are, or could be, deemed "forward-looking
Adient plc | Form 10-K | 29
statements", within the meaning of the Private Securities Litigation Reform Act of 1995. In this Form 10-K, statements regarding Adient's future financial position, sales, costs, earnings, cash flows, other measures of results of operations, capital expenditures or debt levels and plans, objectives, outlook, targets, guidance or goals are forward-looking statements. Words such as "future," "may," "will," "would," "could," "can," "expect," "intend," "estimate," "anticipate," "believe," "should," "forecast," "predict," "project" or "plan" or terms of similar meaning are also generally intended to identify 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 Ukraine conflict and COVID lockdowns in China and their impact on regional and global economies and additional pressure on supply chains and vehicle production, 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, work stoppages, including due to supply chain disruptions and similar events, energy and commodity availability and prices, the Company’s ability and timing of customer recoveries for increased input costs, the availability of raw materials and component products (including components required by our customers for the manufacture of vehicles (i.e., semiconductors)), whether deleveraging activities may yield additional value for shareholders at all or on the same or different terms as those described herein, the ability of Adient to execute its turnaround plan, automotive vehicle production levels, mix and schedules, as well as our concentration of exposure to certain automotive manufacturers, 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 future financing, the impact of tax reform legislation, uncertainties in U.S. administrative policy regarding trade agreements, tariffs and other international trade relations, 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 has significant content, changes in consumer demand, global climate change and related emphasis on ESG matters by various stakeholders, the ability of Adient to achieve its ESG-related goals, currency exchange rates and cancellation of or changes to commercial arrangements, and the ability of Adient to identify, recruit, and retain key leadership. Potential investors and others should consider these factors in evaluating the forward-looking statements and should not place undue reliance on such statements. 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 this Form 10-K. All information presented herein is based on the Adient's fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to Adient's fiscal years ended in September and the associated quarters, months and periods of those fiscal years. The forward-looking statements included in this Form 10-K are made only as of the date of this report, unless otherwise specified, and, except as required by law, Adient assumes no obligation, and disclaims any obligation, to update such statements to reflect events or circumstances occurring after the date of this Form 10-K.
Separation from the former Parent
On October 31, 2016, Adient became an independent company as a result of the separation of the automotive seating and interiors business from Johnson Controls. Adient was incorporated under the laws of Ireland in fiscal 2016 for the purpose of holding these businesses. Adient's ordinary shares began trading "regular-way" under the ticker symbol "ADNT" on the New York Stock Exchange on October 31, 2016. Upon becoming an independent company, the capital structure of Adient consisted of 500 million authorized ordinary shares and 100 million authorized preferred shares (par value of $0.001 per ordinary and preferred share). The number of Adient ordinary shares issued on October 31, 2016 was 93,671,810.
Overview
Adient is a global leader in the automotive seating supply industry with relationships with the largest global auto manufacturers. Adient's technologies extend into virtually every area of automotive seating solutions, including complete seating systems, frames, mechanisms, foam, head restraints, armrests and trim covers. Adient is an independent seat supplier with global scale and the capability to design, develop, engineer, manufacture and deliver complete seat systems and components in every major automotive producing region in the world.
Adient 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 more than 200 wholly- and majority-owned manufacturing or assembly facilities, with operations in 31 countries. Additionally, Adient has partially-owned affiliates in China, Asia, Europe and North America. Through its global footprint and vertical integration, Adient leverages its capabilities to drive growth in the automotive seating industry.
Adient plc | Form 10-K | 30
Adient manages its business on a geographic basis and operates in the following three reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Adient evaluates the performance of its reportable segments using an adjusted EBITDA metric defined as income before income taxes and noncontrolling interests, excluding net financing charges, restructuring and impairment costs, restructuring related-costs, net mark-to-market adjustments on pension and postretirement plans, transaction gains/losses, purchase accounting amortization, depreciation, stock-based compensation and other non-recurring items ("Adjusted EBITDA"). Also, certain corporate-related costs are not allocated to the segments. The reportable segments are consistent with how management views the markets served by Adient and reflect the financial information that is reviewed by its chief operating decision maker. Refer to Note 17, "Segment Information," of the notes to the consolidated financial statements for additional information on Adient's reportable segments.
Factors Affecting Adient’s Operating Environment
The global automotive industry has continued to experience unprecedented supply chain and other disruptions over the past year related to semiconductor chip shortages, hostilities in Ukraine and localized COVID-19 lockdowns in China. These disruptions have led to unplanned downtime at Adient’s production facilities, often with very little warning, which results in operating inefficiencies and limits Adient’s ability to adequately mitigate such inefficiencies. The automotive industry has also experienced a period of rising input costs and potential shortages related to energy (particularly in EMEA as a result of the conflict in Ukraine), freight and commodities as well as facing an environment of unfavorable foreign currency exchange and rising interest rates. In addition, Adient, along with the automotive industry, has experienced and continues to face wage inflationary pressures as a result of constrained labor availability, particularly in certain jurisdictions in EMEA. COVID-19 and related variants and sub-variants, also continues to be present throughout the world, including in all global and regional markets served by Adient. The elevated COVID-19 rates in China led to lockdowns at various times during fiscal 2022, negatively impacting the automotive production levels in that region, along with creating further supply chain disruptions. As a result of these disruptions, new vehicle sales continue to be significantly lower than historical and previously projected pre-pandemic sales levels. Adient believes that its current financial resources will be sufficient to fund the Company's liquidity requirements for at least the next twelve months. Refer to the consolidated results of operations and segment analysis discussion below for additional information on the impacts of these items on Adient's results.
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 2021, automotive production across the globe declined due to the economic slow down resulting from the COVID-19 pandemic and the widespread supply chain disruptions primarily due to semiconductor chip shortages. During fiscal 2022, global light vehicle production increased 2.4% year-over-year despite on-going supply chain disruptions and despite the impact of the Russia/Ukraine conflict on production volumes in Europe in 2022. Unplanned production stoppages by customers continue to negatively impact Adient’s results through operating inefficiencies and other surcharges. These and other challenges will continue to exist in Adient’s operating environment in fiscal 2023.
Light vehicle production levels by geographic region are provided below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Light Vehicle Production |
(units in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Global | | 81.4 | | | 2.4 | % | | 79.5 | | | 7.6 | % | | 73.9 | |
North America | | 14.1 | | | 3.7 | % | | 13.6 | | | 4.6 | % | | 13.0 | |
South America | | 2.8 | | | 3.7 | % | | 2.7 | | | 17.4 | % | | 2.3 | |
Europe | | 15.5 | | | -10.4 | % | | 17.3 | | | 4.2 | % | | 16.6 | |
China | | 26.7 | | | 7.2 | % | | 24.9 | | | 7.8 | % | | 23.1 | |
Asia, excluding China, and Other | | 22.3 | | | 6.2 | % | | 21.0 | | | 11.1 | % | | 18.9 | |
| | | | | | | | | | |
Source: IHS Automotive, October 2022 | | | | | | | | | | |
Adient plc | Form 10-K | 31
Financial Results Summary
Significant aspects of Adient's financial results for fiscal 2022 are summarized below. Adient's financial results for fiscal 2021 include the strategic transactions in China which had a significant impact on the fiscal 2021 financial results. Refer to Note 3, “Acquisitions and Divestitures,” in Part II, Item 8 of this Form 10-K for more information on these transactions.
•Adient recorded net sales of $14,121 million for fiscal 2022, representing an increase of $441 million when compared to fiscal 2021. The increase in net sales is attributable to higher overall production volumes in the Americas, operational footprint changes primarily related to the consolidation of CQADNT in China and favorable material economics recoveries, partially offset by the unfavorable impact of foreign currencies, unplanned operational interruptions and production stoppages primarily resulting from on-going supply chain disruptions, the impact of the Russia/Ukraine conflict particularly on European volumes, and the impact of localized COVID-19 lockdowns in China.
•Gross profit was $807 million, or 5.7% of net sales for fiscal 2022 compared to $826 million, or 6.0% of net sales for fiscal 2021. Profitability, including gross profit as a percentage of net sales, was lower due to the impact of foreign currencies, higher input costs, and inefficiencies caused by unplanned production stoppages, partially offset by operational footprint changes primarily related to the consolidation of CQADNT in China.
•Equity income was $75 million for fiscal 2022, which compares to equity income of $1,484 million for fiscal 2021. The decrease is primarily attributable to one-time gains resulting from the prior year divestitures of Adient's interests in certain China joint ventures (YFAS, SJA and others) as well as the acquisition of controlling interest in CQADNT, the impact of KEIPER supply agreement modifications, and current year non-cash impairment charges recorded on certain of Adient's investments in non-consolidated affiliates in South Africa and China.
•Net loss attributable to Adient was $120 million for fiscal 2022, compared to an income of $1,108 million for fiscal 2021. The net loss in fiscal 2022 is primarily attributable to operational inefficiencies resulting from supply chain disruptions including higher freight cost, overall higher input costs, lower overall production volumes in EMEA, and lower equity income resulting from prior year divestitures of certain affiliates in China, partially offset by the favorable impact of operational footprint changes primarily related to the consolidation of CQADNT in China, favorable material economics recoveries, lower net financing charges and lower income tax expense.
Adient plc | Form 10-K | 32
Consolidated Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Net sales | | $ | 14,121 | | | 3% | | $ | 13,680 | | | 8% | | $ | 12,670 | |
Cost of sales | | 13,314 | | | 4% | | 12,854 | | | 6% | | 12,078 | |
Gross profit | | 807 | | | (2)% | | 826 | | | 40% | | 592 | |
Selling, general and administrative expenses | | 598 | | | 11% | | 537 | | | (4)% | | 558 | |
Loss on business divestitures - net | | — | | | n/a | | 26 | | | 100% | | 13 | |
Restructuring and impairment costs | | 25 | | | 19% | | 21 | | | (91)% | | 238 | |
Equity income (loss) | | 75 | | | (95)% | | 1,484 | | | >100% | | 22 | |
Earnings (loss) before interest and income taxes | | 259 | | | (85)% | | 1,726 | | | >100% | | (195) | |
Net financing charges | | 215 | | | (31)% | | 311 | | | 41% | | 220 | |
Other pension expense (income) | | (10) | | | 58% | | (24) | | | >(100%) | | 14 | |
Income (loss) before income taxes | | 54 | | | (96)% | | 1,439 | | | >100% | | (429) | |
Income tax provision (benefit) | | 94 | | | (62)% | | 249 | | | >100% | | 57 | |
Net income (loss) | | (40) | | | >(100%) | | 1,190 | | | >100% | | (486) | |
Income (loss) attributable to noncontrolling interests | | 80 | | | (2)% | | 82 | | | 34% | | 61 | |
Net income (loss) attributable to Adient | | $ | (120) | | | >(100%) | | $ | 1,108 | | | >100% | | $ | (547) | |
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Net sales | | $ | 14,121 | | | 3% | | $ | 13,680 | | | 8% | | $ | 12,670 | |
Net sales increased by $441 million, or 3%, in fiscal 2022 primarily due to operational footprint changes primarily related to the consolidation of CQADNT in China ($620 million), favorable material economics recoveries ($312 million), and higher overall production volumes despite certain unplanned production stoppages resulting from semiconductor chip shortages and other supply chain disruptions, and despite the impact of the Russia/Ukraine conflict on EMEA production volumes and localized COVID-19 lockdowns in China ($90 million), partially offset by the unfavorable impact of foreign currencies ($568 million) and lower levels of commercial settlements ($13 million).
Net sales increased by $1,010 million, or 8%, in fiscal 2021 primarily due to the significant operational interruptions related to COVID-19 which resulted in lower sales volumes across all regions in fiscal 2020 and despite certain unplanned temporary production stoppages primarily resulting from semiconductor and petrochemical shortages ($786 million), favorable foreign currency impact ($273 million), favorable material economics recoveries ($83 million), and favorable commercial settlements and net pricing adjustments, partially offset by the impact of fiscal 2020 divestitures primarily related to RECARO and fabrics businesses ($156 million).
Refer to the segment analysis below for a discussion of segment net sales.
Cost of Sales / Gross Profit
Adient plc | Form 10-K | 33
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Cost of sales | | $ | 13,314 | | 4% | | $ | 12,854 | | 6% | | $ | 12,078 |
Gross profit | | 807 | | (2)% | | 826 | | 40% | | 592 |
% of sales | | 5.7 | % | | | | 6.0 | % | | | | 4.7 | % |
| | | | | | | | | | |
Cost of sales increased by $460 million, or 4%, and gross profit decreased by $19 million in fiscal 2022 as compared to fiscal 2021. The year-over-year increase in cost of sales was due primarily to operational footprint changes related to the consolidation of CQADNT in China ($527 million), higher input costs including higher energy cost in EMEA as a result of the Russia/Ukraine conflict ($327 million), higher overall production volumes ($136 million), operational inefficiencies resulting from unplanned production stoppages including higher freight ($74 million), net impact of gains associated with retrospective recoveries of Brazil indirect tax credits ($5 million), and higher depreciation and amortization expense ($6 million), partially offset by the favorable impact of foreign currencies ($542 million), and favorable supplier pricing including the impact of a modified pricing agreement with KEIPER ($71 million). Gross profit was unfavorably impacted by foreign currencies, higher input costs, and inefficiencies caused by unplanned production stoppages, partially offset by operational footprint changes primarily related to the consolidation of CQADNT in China.
Cost of sales increased by $776 million, or 6%, and gross profit increased by $234 million, or 40%, in fiscal 2021 as compared to fiscal 2020. The cost of sales year-over-year increase is primarily attributable to higher sales volumes in all regions ($507 million), the unfavorable impact of foreign currencies ($258 million), higher commodity costs ($150 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 ($165 million) and non-recurring favorable benefits related to actions taken in fiscal 2020 to reduce the impact of COVID-19 ($36 million), partially offset by the impact of divestitures in fiscal 2020 primarily consisting of the RECARO and fabrics businesses ($120 million), overall operational performance improvements ($106 million), favorable material margins ($76 million), and a 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, the favorable commercial settlements and net pricing adjustments, including material economics, and the one-time gain in Brazil, partially offset by higher commodity costs, and inefficiencies caused by unplanned production stoppages and certain incentive compensation costs that were not expected to recur.
Refer to the segment analysis below for a discussion of segment profitability.
Selling, General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Selling, general and administrative expenses | | $ | 598 | | | 11% | | $ | 537 | | | (4)% | | $ | 558 | |
% of sales | | 4.2 | % | | | | 3.9 | % | | | | 4.4 | % |
| | | | | | | | | | |
Selling, general and administrative expenses (SG&A) in fiscal 2022 increased by $61 million as compared to fiscal 2021. The year-over-year increase in SG&A is attributable to higher overall engineering and other administrative spending in the current year ($36 million), the impact of the prior year acquisitions and consolidations of CQADNT and LFADNT ($35 million), the impact of a non-recurring contract related settlement with a customer ($14 million), higher depreciation expense ($7 million), and higher amortization expense attributable to the acquired intangible assets ($7 million). These were offset by lower compensation expense including stock-based and performance-based incentive compensation costs ($12 million), the favorable impact of foreign currencies ($17 million), and lower transaction costs ($11 million).
Selling, general and administrative expenses (SG&A) decreased by $21 million, or 4% in fiscal 2021 as compared to fiscal 2020. SG&A was favorably impacted by lower overall engineering and other administrative spending ($41 million), and RECARO and fabrics administrative costs in fiscal 2020 ($30 million), partially offset by higher stock-based compensation costs ($21 million), non-recurring favorable benefits in fiscal 2020 related to actions taken to reduce the impact of COVID-19 ($4 million), the unfavorable impact of foreign currencies ($21 million), and higher transaction costs ($4 million).
Adient plc | Form 10-K | 34
Refer to the segment analysis below for a discussion of segment profitability.
Restructuring and Impairment Costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Restructuring and impairment costs | | $ | 25 | | | 19% | | $ | 21 | | | (91)% | | $ | 238 | |
Restructuring and impairment charges increased by $4 million in fiscal 2022 as compared to fiscal 2021 due primarily to one-time non-cash impairment charges related to the withdrawal from and sale of Adient’s operations in Russia and other assets held for sale in EMEA.
Restructuring and impairment costs were lower by $217 million in fiscal 2021 as compared to fiscal 2020 due primarily to higher levels of restructuring actions taken in fiscal 2020 after the industry experienced significant volume decreases resulting from the COVID-19 impact, and $53 million of one-time non-cash impairment charges of long-lived assets in China and other assets held for sale in fiscal 2020.
Refer to Note 3, "Acquisitions and Divestitures," of the notes to the consolidated financial statements for information related to Adient’s withdrawal from and sale of operations in Russia and assets held for sale.
Equity Income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Equity income (loss) | | $ | 75 | | | (95)% | | $ | 1,484 | | | >100% | | $ | 22 | |
Equity income was $75 million in fiscal 2022 compared to $1,484 million in fiscal 2021. The decrease is primarily attributable to the significant prior year gains on divestitures of Adient's interests in certain China joint ventures (YFAS, SJA and others) as well as the prior year acquisition of controlling interest in CQADNT and resulting lower equity in the current year ($1,376 million), current year non-cash impairment charges recorded on certain of Adient's investments in non-consolidated affiliates in South Africa and China ($10 million), the impact of KEIPER supply agreement modifications ($17 million), the unfavorable impact of foreign currencies ($3 million), higher restructuring charges primarily at Adient's affiliates in China ($5 million), and current year operational interruptions and production stoppages resulting from supply chain disruptions and localized COVID-19 lockdowns in China ($1 million), partially offset by lower purchase accounting amortization ($3 million). Refer to Note 3, "Acquisitions and Divestitures," and Note 18, "Nonconsolidated Partially-Owned Affiliates," of the notes to the consolidated financial statements for more information.
Equity income was $1,484 million for fiscal 2021, compared to $22 million for fiscal 2020. The significantly higher equity income in fiscal 2021 was due primarily to the one-time gain associated with the 2021 Yanfeng Transaction and the sale of Adient's interest in SJA, a fiscal 2020 non-cash impairment charge related to Adient's YFAI investment divestiture ($231 million), favorable impact of foreign currencies ($19 million), and lower production volumes within Adient's China affiliates due to the impact of COVID-19 lockdowns during fiscal 2020 ($27 million). Refer to Note 3, "Acquisitions and Divestitures," of the notes to the consolidated financial statements for more information.
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Net Financing Charges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Net financing charges | | $ | 215 | | | (31)% | | $ | 311 | | | 41% | | $ | 220 | |
Net financing charges decreased in fiscal 2022 as compared to fiscal 2021 as a result of lower levels of outstanding debt, higher amounts of premiums paid to tender outstanding debt and higher levels of accelerated expense of deferred financing costs in the prior year associated with the pay-down of debt.
Net financing charges increased in fiscal 2021 as compared to fiscal 2020 primarily as a result of premiums paid on the repurchase of debt ($50 million), an accelerated expense of the associated deferred financing costs ($20 million), a derivative loss associated with the 2021 Yanfeng Transaction ($30 million), and higher levels of outstanding debt and higher average interest rates during fiscal 2021. Refer to Note 9, "Debt and Financing Arrangements," of the notes to the consolidated financial statements for information related to the components of Adient's net financing charges.
Other Pension Expense (Income) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Other pension expense (income) | | $ | (10) | | | 58% | | $ | (24) | | | >(100%) | | $ | 14 | |
Other pension expense (income) consists of mark-to-market adjustments of Adient's retirement plans and non-service components of Adient's net periodic pension costs. The lower fiscal 2022 (income) is due primarily to a lower pension mark-to-market gain ($8 million) and a lower expected return on plan assets ($4 million). The decrease in pension expense in fiscal 2021 as compared to fiscal 2020 was due to the favorable impact of pension mark-to-market (a $15 million gain in fiscal 2021 compared to a $22 million charge in fiscal 2020). Refer to Note 14, "Retirement Plans," of the notes to the consolidated financial statements for information related to the components of Adient's net periodic pension costs.
Income Tax Provision
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Income tax provision (benefit) | | $ | 94 | | | (62)% | | $ | 249 | | | >100% | | $ | 57 | |
The fiscal 2022 income tax expense of $94 million was higher than the Irish statutory rate of 12.5% primarily due to the inability to recognize a tax benefit for losses in jurisdictions with valuation allowances, the establishment of valuation allowances in certain jurisdictions, and the repatriation of foreign earnings, partially offset by tax benefits related to the release of valuation allowances in certain jurisdictions.
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.
As a result of Adient's fiscal 2022 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence, Adient determined it was more likely than not that certain deferred tax assets in Canada, Japan, and other jurisdictions would not be realized and recorded income tax expense of $12 million, $3 million and $3 million, respectively, to establish valuation allowances. Additionally, Adient determined it was more likely than not that deferred tax assets in the Czech Republic and other jurisdictions would be realizable and recorded income tax benefit of $11 million and $2 million, respectively, to release valuation allowances. Adient continues to record valuation
Adient plc | Form 10-K | 36
allowances on certain deferred tax assets in Germany, Hungary, Luxembourg, Mexico, Poland, Spain, the United Kingdom, the U.S. and other jurisdictions as it remains more likely than not that they will not be realized.
The fiscal 2021 income tax expense of $249 million was higher than the Irish statutory rate of 12.5% primarily due to the inability to recognize a tax benefit for losses in jurisdictions with valuation allowances, the establishment of valuation allowances in certain jurisdictions, and the repatriation of foreign earnings, partially offset by tax benefits from audit settlements, the write-off of deferred tax liabilities related to withholding taxes, and withholding taxes on the 2021 Yanfeng Transaction at a rate lower than the Irish statutory rate of 12.5%.
As a result of Adient's 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 it was more likely than not that certain deferred tax assets in the Czech Republic, Korea, Mexico, and other jurisdictions would not be realized and recorded income tax expense of $5 million, $5 million, $8 million, and $4 million, respectively, to establish valuation allowances.
The fiscal 2020 income tax expense of $57 million was higher than the Irish statutory rate of 12.5% primarily due to the inability to recognize a tax benefit for losses in jurisdictions with valuation allowances, the repatriation of foreign earnings, and changes in uncertain tax positions, partially offset by the tax benefits related to the impairment and sale of Adient’s YFAI investment, sale of Adient’s automotive fabrics manufacturing business, and impairment charges recorded in the Asia segment.
As a result of Adient's 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 it was more likely than not that deferred tax assets in certain jurisdictions would not be realized. These valuation allowances did not have a material impact on the consolidated financial statements.
Adient is subject to income taxes in Ireland, the U.S. and other non-U.S. jurisdictions. Judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of Adient's business, there are many transactions and calculations where the ultimate tax determination is uncertain. Adient's income tax returns for various fiscal years remain under audit by the respective tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
Adient does not generally provide for additional income taxes which would become payable upon repatriation of undistributed earnings of wholly owned foreign subsidiaries. Adient's intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax efficient.
Income Attributable to Noncontrolling Interests
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Income attributable to noncontrolling interests | | $ | 80 | | | (2)% | | $ | 82 | | | 34% | | $ | 61 | |
The $2 million decrease in income attributable to noncontrolling interests for fiscal 2022 is attributable to lower income due to operational inefficiencies resulting from unplanned production stoppages including higher freight at certain Seating joint ventures in varying jurisdictions during the current year. The increase in income attributable to noncontrolling interests for fiscal 2021 is attributable to higher income resulting from higher volumes in fiscal 2021, attributable primarily to the impact of the COVID-19 pandemic at certain Seating affiliates in varying jurisdictions during fiscal 2020.
Net Income (Loss) Attributable to Adient
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Net income (loss) attributable to Adient | | $ | (120) | | | >(100%) | | $ | 1,108 | | | >100% | | $ | (547) | |
Adient plc | Form 10-K | 37
Net loss attributable to Adient was $120 million for fiscal 2022, compared to net income attributable to Adient of $1,108 million for fiscal 2021. The current year net loss attributable to Adient is primarily due to lower equity income attributable to prior year one-time gains on divestitures of Adient's interests in certain China joint ventures as described above, current year operational inefficiencies resulting from unplanned production stoppages including higher freight and other supply chain disruptions, the impact of the Russia/Ukraine conflict on EMEA production volumes and higher energy costs, the impact of localized COVID-19 lockdowns in China, and higher overall engineering and other administrative spending, partially offset by the favorable impact of operational footprint changes primarily related to the consolidation of CQADNT in China, favorable material economics recoveries, lower net financing charges, and lower income tax expense.
Net income attributable to Adient was $1,108 million for fiscal 2021, compared to a loss of $547 million for fiscal 2020. The increased net income attributable Adient is due to $1,214 million of one-time gains from sales of certain of Adient’s equity interests in China, higher current year volumes primarily resulting from prior year operational interruptions due to COVID-19, fiscal 2021 operational improvements, lower restructuring charges, a one-time gain associated with retrospective recoveries of Brazil indirect tax credits, and a $231 million non-cash impairment of the YFAI investment in fiscal 2020, 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 income tax expense primarily resulting from the withholding taxes paid in association with the 2021 Yanfeng Transaction.
Comprehensive Income Attributable to Adient
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Comprehensive income (loss) attributable to Adient | | $ | (338) | | | >(100%) | | $ | 1,146 | | | >100% | | $ | (643) | |
Comprehensive loss attributable to Adient was $338 million for fiscal 2022 compared to comprehensive income attributable to Adient for fiscal 2021 of $1,146 million. The comprehensive loss in fiscal 2022 is attributable to lower net income ($1,230 million), the unfavorable impact in foreign currency translation adjustments resulting from overall strengthening of U.S. dollar against virtually all other currencies ($266 million), less favorable impact in realized and unrealized losses on derivatives ($20 million), partially offset by the decrease in comprehensive income attributable to noncontrolling interests ($32 million).
Comprehensive income attributable to Adient was $1,146 million for fiscal 2021 compared to a comprehensive loss attributable to Adient of $643 million for fiscal 2020. The increased level of comprehensive income attributable to Adient in fiscal 2021 is primarily due to higher net income ($1,676 million), the favorable change in foreign currency translation adjustments ($85 million) and favorable change in realized and unrealized gains (losses) on derivatives ($40 million), partially offset by the increase in comprehensive income attributable to noncontrolling interests ($13 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, 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,
Adient plc | Form 10-K | 38
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.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Net Sales | | | | | | |
Americas | | $ | 6,557 | | | $ | 6,164 | | | $ | 5,889 | |
EMEA | | 4,764 | | | 5,564 | | | 5,148 | |
Asia | | 2,926 | | | 2,123 | | | 1,822 | |
Eliminations | | (126) | | | (171) | | | (189) | |
Total net sales | | $ | 14,121 | | | $ | 13,680 | | | $ | 12,670 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Adjusted EBITDA | | | | | | |
Americas | | $ | 242 | | | $ | 232 | | | $ | 228 | |
EMEA | | 138 | | | 277 | | | 101 | |
Asia | | 383 | | | 486 | | | 424 | |
Corporate-related costs (1) | | (88) | | | (78) | | | (80) | |
Restructuring and impairment costs (2) | | (25) | | | (21) | | | (238) | |
Purchase accounting amortization (3) | | (54) | | | (50) | | | (40) | |
Restructuring related charges (4) | | (6) | | | (9) | | | (20) | |
Loss on business divestitures - net (5) | | — | | | (26) | | | (13) | |
Gain on sale / (impairment) of nonconsolidated partially-owned affiliates (6) | | (10) | | | 1,214 | | | (231) | |
Depreciation | | (298) | | | (285) | | | (295) | |
Stock based compensation | | (29) | | | (36) | | | (15) | |
Other items (7) | | 6 | | | 22 | | | (16) | |
Earnings (loss) before interest and income taxes | | 259 | | | 1,726 | | | (195) | |
Net financing charges | | (215) | | | (311) | | | (220) | |
Other pension income (expense) | | 10 | | | 24 | | | (14) | |
Income (loss) before income taxes | | $ | 54 | | | $ | 1,439 | | | $ | (429) | |
Notes:
(1) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal and corporate finance.
(2) Reflects restructuring charges for costs that are directly attributable to restructuring activities and meet the definition of restructuring under ASC 420 and non-recurring impairment charges. During fiscal 2022, an impairment charge of $4 million related to the withdrawal from and sale of its operations in Russia, and a held-for-sale impairment charge of $6 million were recorded in EMEA. Included in restructuring charges in fiscal 2021 is $10 million of held for sale and other non-cash impairment charges in EMEA. Included in restructuring charges in fiscal 2020 is a non-cash pre-tax impairment related to intangible assets of $24 million, held for sale asset impairments of $21 million, $8 million of other long-lived asset impairments, all within Asia, and $175 million of charges in EMEA which primarily related to workforce reductions. Refer to Note 15, "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for more information.
(3) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income.
(4) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420 along with restructuring costs at partially owned affiliates recorded within equity income.
Adient plc | Form 10-K | 39
(5) Fiscal 2021 includes a $21 million loss associated with certain aspects of the 2021 Yanfeng Transaction and a $5 million loss on sale of non-core assets in Asia. Fiscal 2020 includes a $21 million loss of sale of RECARO and $4 million loss on deconsolidation of Aerospace, partially offset by a $12 million gain on completion of the 2020 Yanfeng Transaction.
(6) Fiscal 2022 includes $3 million and $7 million of non-cash impairments of certain of Adient's investments in nonconsolidated partially-owned affiliates in Asia and EMEA, respectively. Fiscal 2021 includes a gain associated with the 2021 Yanfeng Transaction of $1,181 million and a gain of $33 million on the sale of Adient's interest in SJA. Fiscal 2020 includes non-cash impairment charges related to Adient's YFAI investment balance recorded in conjunction with the 2020 Yanfeng Transaction. All of these impacts have been recorded within the equity income line in the consolidated statements of income.
(7) Fiscal 2022 reflects $8 million of transaction costs, a one-time gain of $32 million associated with the retrospective recovery of indirect tax credits in Brazil, a $14 million charge related to a non-recurring contract related settlement, $1 million of allowance for doubtful accounts resulting from the withdrawal from and sale of operations in Russia, and $2 million of loss on finalization of asset sale in Turkey. Fiscal 2021 reflects a one-time gain of $38 million associated with the retrospective recovery of indirect tax credits in Brazil (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 $19 million of transaction costs. Fiscal 2020 includes $15 million of transaction costs and $1 million of tax adjustments at YFAI.
Americas | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Net sales | | $ | 6,557 | | | 6% | | $ | 6,164 | | | 5% | | $ | 5,889 | |
Adjusted EBITDA | | $ | 242 | | | 4% | | $ | 232 | | | 2% | | $ | 228 | |
Net sales increased in fiscal 2022 by $393 million as a result of higher production volumes despite certain unplanned production stoppages primarily resulting from semiconductor chip shortages and other supply chain disruptions ($278 million), the favorable impact of material economics recoveries ($179 million), and the favorable impact of foreign currencies ($2 million), partially offset by the impact of unfavorable commercial settlements and net pricing adjustments ($45 million) and the impact of operational footprint changes ($21 million).
Adjusted EBITDA increased in fiscal 2022 by $10 million due to operational performance improvements ($62 million), lower administrative and engineering expense ($20 million), the favorable impact of KEIPER supply agreement modifications ($14 million), higher current year production volumes ($12 million), the favorable impact of foreign currencies ($8 million), and higher equity income ($3 million), partially offset by higher freight costs ($55 million), lower levels of commercial settlements and net pricing adjustments ($34 million), unfavorable material economics, net of recoveries ($15 million), and the impact of operational footprint changes ($5 million).
Net sales increased during fiscal 2021 by $275 million as a result of operational interruptions in fiscal 2020 due to COVID-19 and despite certain unplanned temporary production stoppages primarily resulting from semiconductor and petrochemical shortages in fiscal 2021 ($262 million), favorable commercial settlements and net pricing adjustments ($33 million), and the favorable impact of material economics recoveries ($24 million), partially offset by the unfavorable impact of foreign currencies ($34 million), and the impact of the divestiture of RECARO ($10 million) in fiscal 2020.
Adjusted EBITDA increased during fiscal 2021 by $4 million due primarily to higher volumes and product mix ($120 million), operational performance improvements ($3 million), the favorable impact of foreign currencies ($8 million), and favorable commercial settlements and net pricing adjustments ($70 million), partially offset by operational inefficiencies including premium freight and unplanned temporary production stoppages in fiscal 2020 resulting from semiconductor and petrochemical shortages and to a lesser extent COVID-19 related costs ($104 million), higher administrative expense primarily related to certain fiscal 2020 benefits related costs that were not expected to recur, net of efficiency improvements ($44 million), the unfavorable material economics, net of recoveries ($46 million), and lower equity income ($3 million).
Adient plc | Form 10-K | 40
EMEA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Net sales | | $ | 4,764 | | | (14)% | | $ | 5,564 | | | 8% | | $ | 5,148 | |
Adjusted EBITDA | | $ | 138 | | | (50)% | | $ | 277 | | | >100% | | $ | 101 | |
Net sales decreased in fiscal 2022 by $800 million primarily as a result of operational interruptions due to certain unplanned production stoppages resulting from semiconductor chip shortages and other supply chain disruptions along with the negative impact of the Russia/Ukraine conflict on EMEA production volumes ($362 million), the unfavorable impact of foreign currency ($466 million), the impact of operational footprint changes ($129 million), partially offset by the favorable impact of material economics recoveries ($115 million), and favorable impact of commercial settlements and net pricing adjustments ($42 million).
Adjusted EBITDA decreased in fiscal 2022 by $139 million due primarily to lower current year production volumes as explained above ($88 million), increased utilities, labor and freight costs along with other operating inefficiencies associated with lower volumes ($71 million), the impact of operational footprint changes ($27 million), the unfavorable impact of foreign currencies ($20 million), and higher administrative and engineering expense ($1 million), partially offset by favorable commercial settlements and net pricing adjustments ($66 million), and favorable material economics, net of recoveries ($2 million).
Net sales increased during fiscal 2021 by $416 million as a result of operational interruptions in fiscal 2020 due to COVID-19 and despite certain unplanned temporary production stoppages in fiscal 2021 primarily resulting from semiconductor and petrochemical shortages ($254 million), the favorable impact of foreign currency ($234 million), the favorable impact of commercial settlements and net pricing adjustments ($22 million), and the favorable impact of material economics recoveries ($50 million), partially offset by the impact of the fiscal 2020 divestitures primarily consisting of the RECARO and fabrics businesses ($144 million).
Adjusted EBITDA increased during fiscal 2021 by $176 million due primarily to higher volumes as explained above ($110 million), operational performance improvements ($61 million), lower administrative and engineering expense related to efficiencies and the impact of certain launch delays ($50 million), favorable commercial settlements and net pricing adjustments ($51 million) and higher equity income ($1 million), partially offset by operational inefficiencies as a result of unplanned temporary production stoppages in fiscal 2021 stemming from semiconductor shortages and to a lesser extent COVID-19 related costs ($55 million), unfavorable net commodity pricing adjustments ($11 million), unfavorable impact of foreign currencies ($9 million), higher administrative and engineering expense due to certain fiscal 2020 benefits that were not expected to recur ($18 million), and the impact of the fiscal 2020 divestitures primarily consisting of the RECARO and fabrics businesses ($4 million).
Asia
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | Change | | 2021 | | Change | | 2020 |
Net sales | | $ | 2,926 | | | 38% | | $ | 2,123 | | | 17% | | $ | 1,822 | |
Adjusted EBITDA | | $ | 383 | | | (21)% | | $ | 486 | | | 15% | | $ | 424 | |
Net sales increased in fiscal 2022 by $803 million due to the impact of operational footprint changes in China primarily related to the consolidation of CQADNT ($770 million), favorable volume and mix ($153 million), and the favorable impact of material economics recoveries ($18 million), partially offset by the unfavorable impact of foreign currencies ($128 million), and unfavorable impact of commercial settlements and net pricing adjustments ($10 million).
Adjusted EBITDA decreased in fiscal 2022 by $103 million due primarily to operational footprint changes including the impact of the 2021 Yanfeng Transaction ($75 million), operating inefficiencies including freight and labor economics, and launch timing ($27 million), lower equity income due to the impact of KEIPER supply agreement modifications ($17 million), the unfavorable impact of foreign currencies ($15 million), higher administrative and engineering expense ($6 million), lower equity income due to lower volumes primarily at Adient's affiliates in China attributable to the COVID-19 lockdowns ($4
Adient plc | Form 10-K | 41
million), and the unfavorable impact of material economics, net of recoveries ($2 million), partially offset by favorable volume and mix despite the impact of localized COVID-19 lockdowns in China during the second quarter of fiscal 2022 ($30 million), and favorable commercial settlements and net pricing adjustments which includes $9 million of a non-recurring settlement in China ($13 million).
Net sales increased during fiscal 2021 by $301 million due to higher production volumes across the region, which was primarily a result of operational interruptions due to COVID-19 in fiscal 2020 and despite certain unplanned temporary production stoppages in fiscal 2021 primarily resulting from semiconductor shortages ($263 million), the favorable impact of foreign currencies ($74 million), and the favorable impact of material economics recoveries ($9 million), partially offset by the impact of unfavorable commercial settlements and net pricing adjustments ($31 million), and the impact of the fiscal 2020 divestiture of RECARO ($14 million).
Adjusted EBITDA increased during fiscal 2021 by $62 million due primarily to higher volumes as explained above ($50 million), higher equity income as a result of the operational interruptions at Adient's China affiliates due to COVID-19 in fiscal 2020 ($34 million), operational performance improvements ($33 million), lower administrative and engineering expense ($3 million), and the favorable impact of foreign currencies ($29 million), partially offset by the unfavorable impact of material economics, net of recoveries ($9 million), unfavorable commercial settlements and net pricing adjustments ($21 million), the impact of the divestiture of SJA ($9 million), the impact of fiscal 2020 divestitures of YFAI ($18 million) and RECARO ($5 million), tax benefits at various affiliates in fiscal 2020 that were not expected to recur ($10 million), higher administrative expense due in part to fiscal 2020 benefits that were not expected to recur ($9 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 ($6 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. Adient also recently announced a share repurchase authorization (up to $600 million) with no expiration date, wherein Adient expects to take a measured approach as to the timing and amount of share repurchases as part of its assessment of the most effective use 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 9, "Debt and Financing Arrangements," of the notes to consolidated financial statements for discussion of financing arrangements. Refer to Note 3, "Acquisitions and Divestitures," for more information on strategic transactions that have provided significant liquidity that allowed for additional voluntary debt pay down in fiscal 2022 and 2021. Following the first quarter of fiscal 2019 dividend payout, Adient suspended future dividends.
Indebtedness
Adient US LLC ("Adient US"), a wholly owned subsidiary of Adient, together with certain of Adient's other subsidiaries, maintains an asset-based revolving credit facility (the “ABL Credit Facility”), which provides for a revolving line of credit up to $1,250 million, including a North American subfacility of up to $950 million and a European subfacility of up to $300 million, subject to borrowing base capacity and certain other restrictions, including a minimum fixed charge coverage ratio. The ABL Credit Facility was set to 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). 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 November 24, 2021, Adient entered into an amendment to its ABL Credit Facility (the “2021 ABL Amendment”) to amend certain terms and provisions, including to (i) change the interest rate benchmark rates applicable under the ABL Credit Facility for borrowings denominated in euro, Swedish krona and pounds sterling to EURIBOR, STIBOR, and SONIA, in each case subject to certain adjustments, and (ii) update the provisions in our ABL Credit Facility by which U.S. dollar LIBOR will eventually be replaced with SOFR or another interest rate benchmark, in each case, to reflect the most recent standards and practices used in the industry. Interest is payable on the ABL Credit Facility at a fluctuating rate of interest determined by reference to LIBOR, in the case of amounts outstanding in
Adient plc | Form 10-K | 42
dollars, EURIBOR, in the case of amounts outstanding in euros, STIBOR, in the case of amounts outstanding in Swedish krona and SONIA, in the case of amounts outstanding in pounds sterling, in each case, plus an applicable margin of 1.50% to 2.00%. On November 2, 2022, Adient entered into an amendment to its ABL Credit Facility (the “2022 ABL Amendment”) to amend certain terms and provisions, including to (i) extend its maturity date to November 2, 2027 (subject to certain springing maturity provisions), (ii) replace LIBOR with Term SOFR as the benchmark rate of interest for U.S. dollar borrowings thereunder and (iii) provide flexibility for future amendments to the ABL Credit Facility to incorporate certain sustainability-based pricing provisions. Other key terms and conditions of the facility remain unchanged. As of September 30, 2022, Adient had not drawn down on the ABL Credit Facility and had availability under this facility of $899 million (net of $13 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, as amended in fiscal 2021, (the “Term Loan B Agreement”) that provides for a $1.0 billion senior secured term loan facility. 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 April 8, 2028. Interest on the Term Loan B Agreement accrues at the Eurodollar rate plus an applicable margin equal to 3.25%. 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 paid $7 million related to the fiscal 2021 amendment along with expensing $8 million of previously deferred financing costs to net financing charges.
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 were set to 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. During fiscal 2021, Adient repurchased the full amount of the outstanding balance of the Senior First Lien Notes at a premium of $50 million plus $21 million of accrued and unpaid interest. As a result, $12 million of previously deferred financing costs were expensed to net financing charges.
The ABL Credit Facility and Term Loan B Agreement 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, previously maintained $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. Adient further redeemed $2 million of the notes during fiscal 2021, resulting in a remaining balance of $795 million as of September 30, 2022 and 2021. AGH also previously maintained €1.0 billion aggregate principal amount of 3.50% unsecured notes due 2024. In fiscal 2022, Adient repurchased €177 million ($198 million) of the 3.50% unsecured notes due 2024 at a premium of €3 million ($4 million) plus €3 million ($3 million) of accrued and unpaid interest, and expensed €1 million ($1 million) of previously deferred financing costs to net financing charges. As of September 30, 2022, the remaining balance of this debt was €823 million ($809 million).
Adient Germany Ltd. & Co. KG, a wholly owned subsidiary of Adient, previously maintained €135 million ($156 million) in an unsecured term loan from the European Investment Bank (“EIB”) due in 2022. The loan bore interest at the 6-month EURIBOR rate plus 158 basis points. During fiscal 2021, Adient repaid $36 million of the EIB loan, triggered in part by the redemption of debt and the sale of the fabrics business in the prior year. Adient fully repaid the remaining balance of the EIB loan in May 2022 upon its maturity.
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 were set to 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 was due on April 15 and October 15 each year, beginning on October 15, 2020. These notes contained covenants that were usual and customary, similar to the covenants as described above. Adient incurred $10 million of debt issuance cost associated with this new debt in fiscal 2020. In fiscal 2022, Adient
Adient plc | Form 10-K | 43
repurchased the full $600 million of 9.00% Senior First Lien Notes due 2025 at a premium of $34 million plus $19 million of accrued and unpaid interest, and expensed $7 million of previously deferred financing costs to net financing charges.
Sources of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Cash provided (used) by operating activities | | $ | 274 | | | $ | 260 | | | $ | 246 | |
Cash provided (used) by investing activities | | 484 | | | 347 | | | 166 | |
Cash provided (used) by financing activities | | (1,273) | | | (770) | | | 393 | |
Capital expenditures | | (227) | | | (260) | | | (326) | |
Cash flows from operating activities
Fiscal 2022 compared to Fiscal 2021: The increase in operating cash flows is primarily due to favorable changes of trade working capital, specifically lower levels of inventory and restructuring spending, and higher levels of accounts payable, partially offset by higher levels of accounts receivable (net of $137 million of favorable impact from accounts receivable factoring programs). Operating cash flows were also positively impacted by lower interest payments, but were negatively impacted by lapsed non-income related tax deferral programs and lower levels of dividends from nonconsolidated partially-owned affiliates. See the working capital section below for further information on changes in working capital.
Fiscal 2021 compared to Fiscal 2020: The increase in cash flows from operating activities is primarily due to higher levels of operating profits, partially offset by unfavorable changes to working capital year-over-year driven by higher levels of inventory, higher levels of restructuring amounts paid and higher levels of interest paid in the current year.
Cash flows from investing activities
Fiscal 2022 compared to Fiscal 2021: The increase in cash provided by investing activities is primarily attributable to the $652 million of proceeds received related to the 2021 Yanfeng Transaction, the $46 million in proceeds received from the sale of the assets in Turkey, and the collection of $41 million of deferred proceeds from the sale of Adient's interest in YFAI as part of the 2020 Yanfeng Transaction and lower capital expenditures, partially offset by the $30 million settlement of the derivative contracts related to the cash proceeds of the 2021 Yanfeng Transaction. Refer to Note 3, “Acquisitions and Divestitures,” and Note 10, “Derivative Instruments and Hedging Activities,” of the notes to the consolidated financial statements for additional information.
Fiscal 2021 compared to Fiscal 2020: The increase in cash provided by investing activities is due to higher levels of proceeds received from business divestitures (primarily $715 million from the 2021 Yanfeng Transaction and $53 million from the sale of SJA) and lower levels of capital expenditures, partially offset by business acquisitions in the current year.
Cash flows from financing activities
Fiscal 2022 compared to Fiscal 2021: The increase in cash used by financing activities is attributable to the repayment of long-term debt, including premiums paid, of $987 million, amounts paid to acquire the noncontrolling interest of CQADNT ($153 million), along with higher dividend payments to noncontrolling interests primarily in connection with the acquisition of CQANDT. Refer to Note 9, “Debt and Financing Arrangements,” and Note 3, “Acquisitions and Divestitures,” of the notes to the consolidated financial statements for additional information.
Fiscal 2021 compared to Fiscal 2020: The significant increase in cash used by financing activities is primarily due to the repayment of long-term debt, including premium paid, of $895 million, the prior year draw down of the ABL revolver of $179 million, and the $600 million of proceeds from the issuance of 9.00% Senior Notes in April 2020, partially offset by the $214 million incremental borrowing in the third quarter of fiscal 2021 under the amended Term Loan B Agreement.
Capital expenditures
Fiscal 2022 compared to Fiscal 2021: Capital expenditures decreased year-over-year based on timing of program spend on product launches and continued tightening of overall spending.
Adient plc | Form 10-K | 44
Fiscal 2021 compared to Fiscal 2020: Capital expenditures decreased year-over-year based on timing of program spend on product launches including certain launch delays in EMEA and tightening controls around overall spending.
Working capital
| | | | | | | | | | | | | | |
(in millions) | | September 30, 2022 | | September 30, 2021 |
Current assets | | $ | 4,163 | | | $ | 5,086 | |
Current liabilities | | 3,501 | | | 3,511 | |
Working capital | | $ | 662 | | | $ | 1,575 | |
| | | | |
The decrease in working capital of $913 million is primarily attributable to lower cash and cash equivalents as a result of the repayment of long-term debt during the current year, and lower other current assets balances due to the settlement of all outstanding balances related to the 2021 Yanfeng Transaction.
Off-Balance Sheet Arrangements
Adient enters into supply chain financing programs in domestic and certain foreign jurisdictions to either sell or discount accounts receivable without recourse to third-party institutions. Sales or discounts of accounts receivable are reflected as a reduction of accounts receivable on the consolidated statements of financial position and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. As of September 30, 2022 and 2021, $269 million and $132 million have been funded under these programs, respectively.
Contractual Obligations
A summary of Adient's significant contractual obligations as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Total | | 2023 | | 2024-2025 | | 2026-2027 | | Beyond 2028 |
Long-term debt | | $ | 2,593 | | | $ | 11 | | | $ | 829 | | | $ | 815 | | | $ | 938 | |
Interest on long-term debt | | 562 | | | 130 | | | 231 | | | 164 | | | 37 | |
Operating leases | | 310 | | | 90 | | | 113 | | | 52 | | | 55 | |
Purchase obligations (1) | | 369 | | | 198 | | | 8 | | | 52 | | | 111 | |
Pension contributions | | 118 | | | 14 | | | 19 | | | 22 | | | 63 | |
Total contractual cash obligations | | $ | 3,952 | | | $ | 443 | | | $ | 1,200 | | | $ | 1,105 | | | $ | 1,204 | |
(1) Primarily consists of commitments for production materials and other supply items, as well as $92 million of committed capital expenditures.
Effects of Inflation and Changing Prices
The effects of inflation have historically not been significant to Adient's results of operations. Generally, Adient has been able to implement operating efficiencies to sufficiently offset cost increases, which over time have been moderate. The automotive industry has recently experienced a period of significant volatility in commodity and other input costs, including steel, petrochemical, freight energy and labor costs. This price volatility may continue into the future as demand increases and/or supply remains constrained. Price volatility has resulted in an overall increase of input costs for Adient that may not be, or may only be partially, offset through customer negotiations. During fiscal 2023, commodity prices and availability could fluctuate throughout the year and significantly affect Adient's results of operations.
Critical Accounting Estimates and Policies
Adient prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). This requires management to make estimates and assumptions that affect reported amounts
Adient plc | Form 10-K | 45
and related disclosures. Actual results could differ from those estimates. The following policies are considered by management to be the most critical in understanding the judgments that are involved in the preparation of Adient's consolidated financial statements and the uncertainties that could impact results of operations, financial position and cash flows.
Revenue Recognition
Adient records revenue when persuasive evidence of an arrangement exists, delivery occurs or services are rendered, the sales price or fee is fixed or determinable and collectability is reasonably assured. Adient delivers products and records revenue pursuant to commercial agreements with its customers generally in the form of an approved purchase order, including the effects of contractual customer price productivity. Adient does negotiate discrete price changes with its customers, which are generally the result of unique commercial issues between Adient and its customers. Adient records amounts associated with discrete price changes as a reduction to revenue when specific facts and circumstances indicate that a price reduction is probable and the amounts are reasonably estimable. Adient records amounts associated with discrete price changes as an increase to revenue upon execution of a legally enforceable contractual agreement and when collectability is reasonably assured. Refer to Note 1, "Basis of Presentation and Summary of Significant Accounting Policies," and Note 2, "Revenue Recognition," of the notes to the consolidated financial statements for more information.
Impairment of Goodwill, Other Long-lived Assets and Investments in Partially Owned Affiliates
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. Adient reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. Adient performs impairment reviews for its reporting units, which have been determined to be Adient's reportable segments, using a fair value method based on management's judgments and assumptions or third-party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating the fair value, Adient uses the income approach in which discounted cash flow analyses are used to derive estimates of fair value of each reporting unit. Multiples of earnings based on the average of historical, published multiples of earnings of comparable entities with similar operations and economic characteristics are also used in developing estimated fair values. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." These calculations contain uncertainties as they require management to make assumptions about market comparables, future cash flows and appropriate discount rates (based on weighted average cost of capital ranging from 17.5% – 21.0% at September 30, 2022) to reflect the risk inherent in the future cash flows and to derive a reasonable enterprise value and related premium. The estimated future cash flows reflect management's latest assumptions of the financial projections based on current and anticipated competitive landscape, including estimates of revenue based on production volumes over the foreseeable future and long-term growth rates, and operating margins based on historical trends and future cost containment activities. The financial projections also considered the impact that the COVID-19 pandemic, supply-chain disruptions, higher commodity, shipping and energy costs, and the Russia/Ukraine conflict are having on Adient’s current and future operations as well as the impact to new vehicle sales in future years. A change in any of these estimates and assumptions could produce a different fair value, which could have a material impact on the results of the goodwill impairment test and on Adient's results of operations. The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. Adient is subject to financial statement risk to the extent that the carrying amount exceeds the estimated fair value. As a result of the tests, there was no goodwill impairment recorded during the fourth quarter of fiscal 2022. Refer to Note 6, "Goodwill and Other Intangible Assets," of the notes to the consolidated financial statements for additional information.
Adient reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that the asset's carrying amount may not be recoverable. Adient conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." ASC 360-10-15 requires Adient to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. Intangible assets with definite lives continue to be amortized over their estimated useful lives and are subject to impairment testing as part of their asset group if events or changes in circumstances indicate that the asset might be impaired. A considerable amount of management judgment and assumptions are required in performing the impairment tests. No triggering events were identified during fiscal 2022 and 2021. During the fourth quarter of fiscal 2020, Adient concluded it had a triggering event requiring assessment of an impairment within a separate China entity and as a result recorded a $5 million pre-tax non-cash impairment in the Asia segment related to long-lived assets due to an overall decline in the forecasted operations within that business. During the third quarter of fiscal 2020, Adient concluded it had a triggering event requiring assessment of impairment within the Futuris China business and as a result
Adient plc | Form 10-K | 46
recorded a pre-tax non-cash impairment of $27 million in the Asia segment, which consisted of customer relationship intangible assets of $24 million and other long-lived assets of $3 million, due to an overall decline in forecasted operations within that business. These impairments were measured, depending on the asset, either under an income approach utilizing forecasted discounted cash flows or a market approach utilizing appraisal techniques to determine fair values of the impaired assets. These methods are consistent with the methods Adient employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement" and primarily consist of expected future operating margins and cash flows, estimated production volumes, weighted average cost of capital rates (13.0%), estimated salable values and third-party appraisal techniques such as market comparables. To the extent that profitability on current or future programs decline as compared to forecasted profitability or if adverse changes occur to key assumptions or other fair value measurement inputs, further impairment of long-lived assets could occur in the future.
Adient monitors its investments in partially-owned affiliates for indicators of other-than-temporary declines in value on an ongoing basis. If Adient determines that an other-than-temporary decline in value has occurred, it recognizes an impairment loss, which is measured as the difference between the recorded book value and the fair value of the investment. Fair value is generally determined using an income approach based on discounted cash flows or negotiated transaction values. During the second quarter of fiscal 2022, Adient entered into agreements, whereby Adient would sell its interests in two joint ventures in China held directly by Adient, each of which represented 25% of their total issued and outstanding equity interests, for $3 million. As a result, Adient concluded that indicators of other-than-temporary impairment were present related to the investments in these joint ventures, and recorded a non-cash impairment charge of $3 million. Also during the second quarter of fiscal 2022, Adient concluded that indicators of other-than-temporary impairment were present related to a partially-owned affiliate in South Africa as the Company pursued a sale of a portion of its interest in the joint venture and recorded a non-cash impairment charge of $6 million. During fiscal 2020, Adient entered into an agreement to, among other things, transfer all of the issued and outstanding equity interest in YFAI held, directly or indirectly, by Adient, which represented 30% of YFAI’s total issued and outstanding equity interest, to Yanfeng Automotive Trim Systems Company Ltd. for $369 million, of which $309 million was paid at closing and $60 million was subsequently paid in fiscal 2021 and 2022. This transaction closed during the fourth quarter of fiscal 2020. Adient concluded that indicators of other-than-temporary impairment were present in certain quarters during fiscal 2020 related to the investment in YFAI and recorded a total of $231 million non-cash impairment of Adient’s YFAI investment within equity income. The impairments were determined based on combining the fair value of consideration received for all transactions contemplated within the Master Agreement, including an estimated fair value of the YFAS joint venture extension, and allocating the total consideration received to the individual transactions based on relative fair values. Adient estimated the fair value of the individual transactions using both an income approach and market approach. The inputs utilized in the fair value analyses of the transactions are classified as level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement" and primarily consisted of expected future operating margins and cash flows of YFAI, estimated production volumes, estimated dividend payments from YFAS over the extension period, estimated terminal values of YFAS, market comparables, weighted-average costs of capital (YFAI - 15.0%, YFAS - 10.5%), and noncontrolling interest discounts. Refer to Note 3, “Acquisitions and Divestitures,” and Note 18, "Nonconsolidated Partially-Owned Affiliates," of the notes to the consolidated financial statements for additional information.
Employee Benefit Plans
Adient provides a range of pension benefits to its employees and retired employees. These benefits are Adient's direct obligation and have been recorded within Adient's consolidated financial statements. Plan assets and obligations are measured annually, or more frequently if there is a remeasurement event, based on Adient's measurement date utilizing various actuarial assumptions such as discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates as of that date. Adient reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when appropriate.
Adient utilizes a mark-to-market approach for recognizing pension benefit expenses, including measuring the market related value of plan assets at fair value and recognizing actuarial gains and losses in the fourth quarter of each fiscal year or at the date of a remeasurement event.
U.S. GAAP requires that companies recognize in the statement of financial position a liability for defined benefit pension and postretirement plans that are underfunded or unfunded, or an asset for defined benefit pension and postretirement plans that are overfunded. U.S. GAAP also requires that companies measure the benefit obligations and fair value of plan assets that determine a benefit plan's funded status as of the date of the employer's fiscal year end.
Adient considers the expected benefit payments on a plan-by-plan basis when setting assumed discount rates. As a result, Adient uses different discount rates for each plan depending on the plan jurisdiction, the demographics of participants and the
Adient plc | Form 10-K | 47
expected timing of benefit payments. For the U.S. pension plans, Adient uses a discount rate provided by an independent third party calculated based on an appropriate mix of high quality bonds. For the non-U.S. pension, Adient consistently uses the relevant country specific benchmark indices for determining the various discount rates. Adient's discount rate on U.S. pension plans was 5.51% and 3.06% at September 30, 2022 and 2021, respectively. Adient's weighted average discount rate on non-U.S. plans was 4.98% and 1.71% at September 30, 2022 and 2021, respectively.
In estimating the expected return on plan assets, Adient considers the historical returns on plan assets, adjusted for forward-looking considerations, inflation assumptions and the impact of the active management of the plans' invested assets. Reflecting the relatively long-term nature of the plans' obligations, approximately 60% of the plans' assets are invested in fixed income securities and 15% in equity securities, with the remainder primarily invested in alternative investments. For fiscal years 2022 and 2021, Adient's expected long-term return on U.S. pension plan assets used to determine net periodic benefit cost was 5.75% and 5.75% respectively. The actual rate of return on U.S. pension plans was below 5.75% in fiscal 2022 and was below 5.75% in fiscal 2021. For fiscal years 2022 and 2021, Adient's weighted average expected long-term return on non-U.S. pension plan assets was 3.20% and 3.68%, respectively. The actual rate of return on non-U.S. pension plans was below 3.20% in fiscal 2022 and was above 3.68% in fiscal 2021.
For fiscal 2023, Adient estimates the long-term rate of return will approximate 6.75% and 4.53% for U.S. pension and non-U.S. pension plans, respectively. Any differences between actual investment results and the expected long-term asset returns will be reflected in net periodic benefit costs in the fourth quarter of each fiscal year. If Adient's actual returns on plan assets are less than Adient's expectations, additional contributions may be required.
In fiscal 2022, total Adient contributions to the defined benefit pension plans were $16 million. Adient expects to contribute at least $14 million in cash to its defined benefit pension plans in fiscal 2023.
Based on information provided by its independent actuaries and other relevant sources, Adient believes that the assumptions used are reasonable; however, changes in these assumptions could impact Adient's financial position, results of operations or cash flows.
The following table illustrates estimated increases (decreases) in projected benefit obligation (PBO) and net periodic benefit cost excluding changes in mark-to-market adjustments (NPBC) as of September 30, 2022 and for fiscal 2022 assuming a decrease of 100 basis points in the discount rate and expected return on plan assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | U.S. Plans | | Non-U.S. Plans |
(in millions) | | Change in PBO | | Change in NPBC | | Change in PBO | | Change in NPBC |
100 basis point decrease in discount rate | | $ | 1 | | | $ | — | | | $ | 46 | | | $ | (4) | |
100 basis point decrease in expected return on plan assets | | N/A | | — | | | N/A | | 4 |
Refer to Note 14, "Retirement Plans," of the notes to consolidated financial statements for more information on Adient's pension plans.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Adient records a valuation allowance that primarily represents operating and other loss carryforwards for which realization is uncertain. Management judgment is required in determining Adient's provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against Adient's net deferred tax assets.
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. Since future financial results may differ from previous estimates, periodic adjustments to Adient's valuation allowances may be necessary.
Adient plc | Form 10-K | 48
Adient is subject to income taxes in Ireland, the U.S. and other non-U.S. jurisdictions. Judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of Adient's business, there are many transactions and calculations where the ultimate tax determination is uncertain. Adient's income tax returns for various fiscal years remain under audit by the respective tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
Adient does not generally provide for additional income taxes which would become payable upon repatriation of undistributed earnings of wholly owned foreign subsidiaries. Adient's intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax efficient.
Refer to Note 16, "Income Taxes," of the notes to consolidated financial statements for Adient's income tax disclosures.
Restructuring Costs
Adient accrues costs in connection with its restructuring actions. These accruals include estimates primarily related to employee headcount, local statutory benefits, and other employee termination costs. Actual costs may vary from these estimates. These accruals are reviewed on a quarterly basis and changes to restructuring actions are appropriately recognized when identified. Refer to Note 15, “Restructuring and Impairment Costs,” of the notes to consolidated financial statements for more information.
During fiscal 2022, Adient committed to a restructuring plan ("2022 Plan") of $25 million that was offset by $10 million of prior year underspend. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions in EMEA and Americas. Adient currently estimates that upon completion of the restructuring actions, the fiscal 2022 restructuring plan will reduce annual operating costs by approximately $20 million, which is primarily the result of lower costs of sales and selling, general and administrative expenses due to reduced employee-related costs, of which approximately 20% will result in net savings. The restructuring actions are expected to be substantially completed by fiscal 2024.
During fiscal 2021, Adient committed to a restructuring plan ("2021 Plan") of $27 million that was offset by $16 million of prior year underspend. Of the restructuring costs recorded, $23 million related to the EMEA segment, $3 million related to the Americas segment, and $1 million related to the Asia segment. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions and lease contract terminations. Adient currently estimates that upon completion of the restructuring actions, the fiscal 2021 restructuring plan will reduce annual operating costs by approximately $23 million, which is primarily the result of lower costs of sales and selling, general and administrative expenses due to reduced employee-related costs, of which approximately 20%-30% will result in net savings. The restructuring actions are expected to be substantially completed in fiscal 2023.
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 is $20 million of underspend related to prior year plan reserves. Adient currently estimates that upon completion of the restructuring actions, the fiscal 2020 restructuring plan will reduce annual operating costs by approximately $180 million, which is primarily the result of lower costs of sales and selling, general and administrative expenses due to reduced employee-related costs, of which approximately 35%-40% will result in net savings. The restructuring actions are expected to be substantially completed by fiscal 2024.
New Accounting Pronouncements
See Note 1, "Basis of Presentation and Summary of Significant Accounting Policies," of the notes to consolidated financial statements for a discussion of new accounting pronouncements.
Adient plc | Form 10-K | 49
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Item 8. | Financial Statements and Supplementary Data |
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Index to Consolidated Financial Statements | | Page |
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Adient plc | Form 10-K | 52
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Adient plc
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial position of Adient plc and its subsidiaries (the “Company”) as of September 30, 2022 and 2021, and the related consolidated statements of income (loss), of comprehensive income (loss), of shareholders' equity and of cash flows for each of the three years in the period ended September 30, 2022, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases on October 1, 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
Adient plc | Form 10-K | 53
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Annual Goodwill Impairment Assessment
As described in Notes 1 and 6 to the consolidated financial statements, the Company’s goodwill balance was $2,057 million as of September 30, 2022. Management reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. Fair value is estimated using an income approach utilizing discounted cash flow analyses. This method requires management to make assumptions about estimates of the revenue and the operating margins, as well as the discount rates.
The principal considerations for our determination that performing procedures relating to the annual goodwill impairment assessment is a critical audit matter are the significant judgment by management when developing the fair value of the reporting units, which led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to estimates of the revenue and the operating margins, as well as the discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s reporting units. These procedures also included, among others, (i) testing management’s process for developing the fair value estimates; (ii) evaluating the appropriateness of the income approach; (iii) testing the completeness and accuracy of underlying data used in the income approach; and (iv) evaluating the reasonableness of significant assumptions used by management related to estimates of the revenue and the operating margins, as well as the discount rates. Evaluating management’s assumptions related to estimates of the revenue and the operating margins involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting units; (ii) the consistency with relevant industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the income approach used by the Company and the reasonableness of the discount rates.
/s/ PricewaterhouseCoopers LLP
Detroit, Michigan
November 22, 2022
We have served as the Company’s auditor since 1957.
Adient plc | Form 10-K | 54
Adient plc
Consolidated Statements of Income (Loss)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions, except per share data) | | 2022 | | 2021 | | 2020 |
Net sales | | $ | 14,121 | | | $ | 13,680 | | | $ | 12,670 | |
Cost of sales | | 13,314 | | | 12,854 | | | 12,078 | |
Gross profit | | 807 | | | 826 | | | 592 | |
Selling, general and administrative expenses | | 598 | | | 537 | | | 558 | |
Loss on business divestitures - net | | — | | | 26 | | | 13 | |
Restructuring and impairment costs | | 25 | | | 21 | | | 238 | |
Equity income (loss) | | 75 | | | 1,484 | | | 22 | |
Earnings (loss) before interest and income taxes | | 259 | | | 1,726 | | | (195) | |
Net financing charges | | 215 | | | 311 | | | 220 | |
Other pension expense (income) | | (10) | | | (24) | | | 14 | |
Income (loss) before income taxes | | 54 | | | 1,439 | | | (429) | |
Income tax provision (benefit) | | 94 | | | 249 | | | 57 | |
Net income (loss) | | (40) | | | 1,190 | | | (486) | |
Income (loss) attributable to noncontrolling interests | | 80 | | | 82 | | | 61 | |
Net income (loss) attributable to Adient | | $ | (120) | | | $ | 1,108 | | | $ | (547) | |
| | | | | | |
Earnings per share: | | | | | | |
Basic | | $ | (1.27) | | | $ | 11.76 | | | $ | (5.83) | |
Diluted | | $ | (1.27) | | | $ | 11.58 | | | $ | (5.83) | |
| | | | | | |
Shares used in computing earnings per share: | | | | | | |
Basic | | 94.8 | | | 94.2 | | | 93.8 | |
Diluted | | 94.8 | | | 95.7 | | | 93.8 | |
The accompanying notes are an integral part of the consolidated financial statements.
Adient plc | Form 10-K | 55
Adient plc
Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Net income (loss) | | $ | (40) | | | $ | 1,190 | | | $ | (486) | |
Other comprehensive income (loss), net of tax: | | | | | | |
Foreign currency translation adjustments | | (250) | | | 16 | | | (69) | |
Realized and unrealized gains (losses) on derivatives | | — | | | 20 | | | (20) | |
Pension and postretirement plans | | 1 | | | 1 | | | — | |
Other comprehensive income (loss) | | (249) | | | 37 | | | (89) | |
Total comprehensive income (loss) | | (289) | | | 1,227 | | | (575) | |
Comprehensive income (loss) attributable to noncontrolling interests | | 49 | | | 81 | | | 68 | |
Comprehensive income (loss) attributable to Adient | | $ | (338) | | | $ | 1,146 | | | $ | (643) | |
The accompanying notes are an integral part of the consolidated financial statements.
Adient plc | Form 10-K | 56
Adient plc
Consolidated Statements of Financial Position
| | | | | | | | | | | | | | |
| | September 30, |
(in millions, except share and per share data) | | 2022 | | 2021 |
Assets | | | | |
Cash and cash equivalents | | $ | 947 | | | $ | 1,521 | |
Accounts receivable, less allowance for doubtful accounts of $21 and $29, respectively | | 1,852 | | | 1,426 | |
Inventories | | 953 | | | 976 | |
Assets held for sale | | — | | | 49 | |
Other current assets | | 411 | | | 1,114 | |
Current assets | | 4,163 | | | 5,086 | |
Property, plant and equipment - net | | 1,377 | | | 1,607 | |
Goodwill | | 2,057 | | | 2,212 | |
Other intangible assets - net | | 467 | | | 555 | |
Investments in partially-owned affiliates | | 286 | | | 335 | |
Assets held for sale | | 11 | | | 25 | |
Other noncurrent assets | | 797 | | | 958 | |
Total assets | | $ | 9,158 | | | $ | 10,778 | |
Liabilities and Shareholders' Equity | | | | |
Short-term debt | | $ | 3 | | | $ | 17 | |
Current portion of long-term debt | | 11 | | | 167 | |
Accounts payable | | 2,478 | | | 2,130 | |
Accrued compensation and benefits | | 340 | | | 389 | |
Liabilities held for sale | | — | | | 16 | |
Restructuring reserve | | 60 | | | 115 | |
Other current liabilities | | 609 | | | 677 | |
Current liabilities | | 3,501 | | | 3,511 | |
Long-term debt | | 2,564 | | | 3,512 | |
| | | | |
Pension and postretirement benefits | | 88 | | | 128 | |
Other noncurrent liabilities | | 585 | | | 669 | |
Long-term liabilities | | 3,237 | | | 4,309 | |
Commitments and Contingencies (Note 19) | | | | |
Redeemable noncontrolling interests | | 45 | | | 240 | |
Preferred shares issued, par value $0.001; 100,000,000 shares authorized zero shares issued and outstanding at September 30, 2022 | | — | | | — | |
Ordinary shares issued, par value $0.001; 500,000,000 shares authorized 94,858,156 shares issued and outstanding at September 30, 2022 | | — | | | — | |
Additional paid-in capital | | 4,026 | | | 3,991 | |
Retained earnings (accumulated deficit) | | (1,108) | | | (988) | |
Accumulated other comprehensive income (loss) | | (845) | | | (627) | |
Shareholders' equity attributable to Adient | | 2,073 | | | 2,376 | |
Noncontrolling interests | | 302 | | | 342 | |
Total shareholders' equity | | 2,375 | | | 2,718 | |
Total liabilities and shareholders' equity | | $ | 9,158 | | | $ | 10,778 | |
The accompanying notes are an integral part of the consolidated financial statements.
Adient plc | Form 10-K | 57
Adient plc
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Operating Activities | | | | | | |
Net income (loss) attributable to Adient | | $ | (120) | | | $ | 1,108 | | | $ | (547) | |
Income attributable to noncontrolling interests | | 80 | | | 82 | | | 61 | |
Net income (loss) | | (40) | | | 1,190 | | | (486) | |
Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: | | | | |
Depreciation | | 298 | | | 285 | | | 295 | |
Amortization of intangibles | | 52 | | | 45 | | | 37 | |
Pension and postretirement benefit expense (benefit) | | (2) | | | (16) | | | 23 | |
Pension and postretirement contributions, net | | (16) | | | (23) | | | (19) | |
Equity in earnings of partially-owned affiliates, net of dividends received (includes purchase accounting amortization of $2, $5 and $3, respectively) | | 4 | | | 44 | | | 24 | |
(Gain) on sale of / impairment of nonconsolidated partially owned affiliates | | 10 | | | (1,214) | | | 231 | |
Premium paid on repurchase of debt | | 38 | | | 50 | | | — | |
Retrospective recoveries of Brazil indirect tax credits | | (29) | | | (38) | | | — | |
Derivative loss on the 2021 Yanfeng Transaction | | 3 | | | 30 | | | — | |
| | | | | | |
Deferred income taxes | | 5 | | | 40 | | | (33) | |
Non-cash restructuring and impairment charges | | 14 | | | 11 | | | 53 | |
Loss (gain) on divestitures - net | | — | | | 26 | | | 13 | |
Equity-based compensation | | 29 | | | 36 | | | 15 | |
Other | | 17 | | | 21 | | | 24 | |
Changes in assets and liabilities: | | | | | | |
Receivables | | (576) | | | 483 | | | 190 | |
Inventories | | (62) | | | (263) | | | 78 | |
Other assets | | 32 | | | 82 | | | 140 | |
Restructuring reserves | | (57) | | | (136) | | | (80) | |
Accounts payable and accrued liabilities | | 542 | | | (388) | | | (251) | |
Accrued income taxes | | 12 | | | (5) | | | (8) | |
Cash provided (used) by operating activities | | 274 | | | 260 | | | 246 | |
Investing Activities | | | | | | |
Capital expenditures | | (227) | | | (260) | | | (326) | |
Sale of property, plant and equipment | | 20 | | | 30 | | | 15 | |
Settlement of derivative contracts | | (30) | | | (12) | | | 10 | |
Acquisition of businesses, net of cash acquired | | (19) | | | (211) | | | — | |
Business divestitures | | 740 | | | 785 | | | 499 | |
Changes in long-term investments | | — | | | — | | | (37) | |
Loans to affiliates | | — | | | 15 | | | — | |
Other | | — | | | — | | | 5 | |
Cash provided (used) by investing activities | | 484 | | | 347 | | | 166 | |
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Adient plc | Form 10-K | 58
Adient plc
Consolidated Statements of Cash Flows
(Continued)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Financing Activities | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Increase (decrease) in short-term debt | | (14) | | | (5) | | | (16) | |
Increase (decrease) in long-term debt | | — | | | 214 | | | 600 | |
Repayment of long-term debt | | (987) | | | (895) | | | (108) | |
Debt financing costs | | (1) | | | (8) | | | (10) | |
| | | | | | |
Cash paid to acquire a noncontrolling interest | | (153) | | | — | | | — | |
| | | | | | |
Dividends paid to noncontrolling interests | | (106) | | | (69) | | | (71) | |
| | | | | | |
Other | | (12) | | | (7) | | | (2) | |
Cash provided (used) by financing activities | | (1,273) | | | (770) | | | 393 | |
Effect of exchange rate changes on cash and cash equivalents | | (59) | | | 8 | | | (34) | |
Increase (decrease) in cash and cash equivalents, including cash classified within current assets held for sale | | (574) | | | (155) | | | 771 | |
Less: cash classified within current assets held for sale | | — | | | (16) | | | (3) | |
Increase (decrease) in cash and cash equivalents | | (574) | | | (171) | | | 768 | |
Cash and cash equivalents at beginning of period | | 1,521 | | | 1,692 | | | 924 | |
Cash and cash equivalents at end of period | | $ | 947 | | | $ | 1,521 | | | $ | 1,692 | |
The accompanying notes are an integral part of the consolidated financial statements.
Adient plc | Form 10-K | 59
Adient plc
Consolidated Statements of Shareholders' Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Ordinary Shares, par value | | 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 |
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Balance at September 30, 2019 | | $ | — | | | $ | 3,962 | | | $ | (1,545) | | | | | $ | (569) | | | $ | 1,848 | | | $ | 341 | | | $ | 2,189 | |
Net income (loss) | | — | | | — | | | (547) | | | | | — | | | (547) | | | 42 | | | (505) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | (76) | | | (76) | | | 11 | | | (65) | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | (20) | | | (20) | | | — | | | (20) | |
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Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (54) | | | (54) | |
Change in noncontrolling interest share | | — | | | — | | | — | | | | | — | | | — | | | (18) | | | (18) | |
Share based compensation and other | | — | | | 12 | | | — | | | | | — | | | 12 | | | — | | | 12 | |
Adjustments from adoption of a new standard | | — | | | — | | | (4) | | | | | — | | | (4) | | | — | | | (4) | |
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Balance at September 30, 2020 | | $ | — | | | $ | 3,974 | | | $ | (2,096) | | | | | $ | (665) | | | $ | 1,213 | | | $ | 322 | | | $ | 1,535 | |
Net income (loss) | | — | | | — | | | 1,108 | | | | | — | | | 1,108 | | | 57 | | | 1,165 | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | 17 | | | 17 | | | 7 | | | 24 | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | 20 | | | 20 | | | — | | | 20 | |
Employee retirement plans | | — | | | — | | | — | | | | | 1 | | | 1 | | | — | | | 1 | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (42) | | | (42) | |
Change in noncontrolling interest share | | — | | | — | | | — | | | | | — | | | — | | | (3) | | | (3) | |
Share based compensation and other | | — | | | 17 | | | — | | | | | — | | | 17 | | | 1 | | | 18 | |
Balance at September 30, 2021 | | $ | — | | | $ | 3,991 | | | $ | (988) | | | | | $ | (627) | | | $ | 2,376 | | | $ | 342 | | | $ | 2,718 | |
Net income (loss) | | — | | | — | | | (120) | | | | | — | | | (120) | | | 45 | | | (75) | |
Foreign currency translation adjustments | | — | | | — | | | — | | | | | (219) | | | (219) | | | (20) | | | (239) | |
Realized and unrealized gains (losses) on derivatives | | — | | | — | | | — | | | | | — | | | — | | | — | | | — | |
Employee retirement plans | | — | | | — | | | — | | | | | 1 | | | 1 | | | — | | | 1 | |
Dividends attributable to noncontrolling interests | | — | | | — | | | — | | | | | — | | | — | | | (53) | | | (53) | |
Purchase of subsidiary shares from noncontrolling interest | | — | | | 12 | | | — | | | | | — | | | 12 | | | (12) | | | — | |
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Share based compensation and other | | — | | | 23 | | | — | | | | | — | | | 23 | | | — | | | 23 | |
Balance at September 30, 2022 | | $ | — | | | $ | 4,026 | | | $ | (1,108) | | | | | $ | (845) | | | $ | 2,073 | | | $ | 302 | | | $ | 2,375 | |
The accompanying notes are an integral part of the consolidated financial statements.
Adient plc | Form 10-K | 60
Adient plc
Notes to Consolidated Financial Statements
1. Basis of Presentation and Summary of Significant Accounting Policies
On October 31, 2016, Adient plc ("Adient") became an independent company as a result of the separation of the automotive seating and interiors business (the "separation") from Johnson Controls International plc ("the former Parent"). Adient was incorporated under the laws of Ireland in fiscal 2016 for the purpose of holding these businesses. Adient's ordinary shares began trading "regular-way" under the ticker symbol "ADNT" on the New York Stock Exchange on October 31, 2016. Upon becoming an independent company, the capital structure of Adient consisted of 500 million authorized ordinary shares and 100 million authorized preferred shares (par value of $0.001 per ordinary and preferred share). The number of Adient ordinary shares issued on October 31, 2016 was 93,671,810.
Adient is a global leader in the automotive seating supplier industry. Adient has a leading market position in the Americas, Europe and China, and has longstanding relationships with the largest global original equipment manufacturers, or OEMs, in the automotive space. Adient's proprietary technologies extend into virtually every area of automotive seating solutions, including complete seating systems, frames, mechanisms, foam, head restraints, armrests and trim covers. Adient is an independent seat supplier with global scale and the capability to design, develop, engineer, manufacture, and deliver complete seat systems and components in every major automotive producing region in the world.
The consolidated financial statements of Adient have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). The global automotive industry has continued to experience unprecedented supply chain and other disruptions over the past year related to semiconductor chip shortages, hostilities in Ukraine and localized COVID-19 lockdowns in China. These disruptions have led to unplanned downtime at Adient’s production facilities, often with very little warning, which results in operating inefficiencies and limits Adient’s ability to adequately mitigate such inefficiencies. The automotive industry has also experienced a period of rising input costs and potential shortages related to energy (particularly in EMEA as a result of the conflict in Ukraine), freight and commodities as well as facing an environment of unfavorable foreign currency exchange and rising interest rates. In addition, Adient, along with the automotive industry, has experienced and continues to face wage inflationary pressures as a result of constrained labor availability, particularly in certain jurisdictions in EMEA. COVID-19 and related variants and sub-variants, also continues to be present throughout the world, including in all global and regional markets served by Adient. The elevated COVID-19 rates in China led to lockdowns at various times during fiscal 2022, negatively impacting the automotive production levels in that region, along with creating further supply chain disruptions. As a result of these disruptions, new vehicle sales continue to be significantly lower than historical and previously projected pre-pandemic sales levels. Refer to the consolidated results of operations and segment analysis discussion below for additional information on the impacts of these items on Adient's results. Refer to Note 3, "Acquisitions and Divestitures," of the notes to the consolidated financial statements for additional information on the impacts from the Russia/Ukraine conflict including Adient’s withdrawal from and sale of operations in Russia.
Principles of Consolidations
Adient consolidates its wholly-owned subsidiaries and those entities in which it has a controlling interest. Investments in partially-owned affiliates are accounted for by the equity method when Adient's interest exceeds 20% and does not have a controlling interest.
Consolidated VIEs
Based upon the criteria set forth in the Financial Accounting Standards Board (the FASB) Accounting Standards Codification (ASC) 810, "Consolidation," Adient has determined that it was the primary beneficiary in two variable interest entities (VIEs) for the reporting periods ended September 30, 2022 and 2021, respectively, as Adient absorbs significant economics of the entities and has the power to direct the activities that are considered most significant to the entities.
The two VIEs manufacture seating products in North America for the automotive industry. Adient funds the entities' short-term liquidity needs through revolving credit facilities and has the power to direct the activities that are considered most significant to the entities through its key customer supply relationships.
The carrying amounts and classification of assets (none of which are restricted) and liabilities included in Adient's consolidated statements of financial position for the consolidated VIEs are as follows:
Adient plc | Form 10-K | 61
| | | | | | | | | | | | | | |
| | September 30, |
(in millions) | | 2022 | | 2021 |
Current assets | | $ | 262 | | | $ | 158 | |
Noncurrent assets | | 113 | | | 88 | |
Total assets | | $ | 375 | | | $ | 246 | |
| | | | |
Current liabilities | | $ | 233 | | | $ | 143 | |
Noncurrent liabilities | | 14 | | | 8 | |
Total liabilities | | $ | 247 | | | $ | 151 | |
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The consolidated financial statements reflect management's estimates as of the reporting date. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying values. See Note 10, "Derivative Instruments and Hedging Activities," and Note 11, "Fair Value Measurements," of the notes to consolidated financial statements for fair value of financial instruments, including derivative instruments and hedging activities.
Cash and Cash Equivalents
Adient considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash is managed by legal entity, with cash pooling agreements in place for all participating entities on a global basis, as applicable.
Receivables
Receivables consist of amounts billed and currently due from customers and revenues that have been recognized for accounting purposes but not yet billed to customers. Adient extends credit to customers in the normal course of business and maintains an allowance for doubtful accounts resulting from the inability or unwillingness of customers to make required payments. The allowance for doubtful accounts is based on historical experience, existing economic conditions and any specific customer collection issues Adient has identified. Adient enters into supply chain financing programs in certain domestic and foreign jurisdictions to either sell or discount accounts receivable without recourse to third-party institutions. Sales or discounts of accounts receivable are reflected as a reduction of accounts receivable on the consolidated statements of financial position and the proceeds are included in cash flows from operating activities in the consolidated statements of cash flows. As of September 30, 2022 and 2021, $269 million and $132 million have been funded under these programs, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method. Finished goods and work-in-process inventories include material, labor and manufacturing overhead costs.
Pre-Production Costs Related to Long-Term Supply Arrangements
Adient's policy for engineering, research and development, and other design and development costs related to products that will be sold under long-term supply arrangements requires such costs to be expensed as incurred or capitalized if reimbursement from the customer is contractually assured. Income related to recovery of these costs is recorded within selling, general and administrative expense in the consolidated statements of income. At September 30, 2022 and 2021, Adient recorded within the consolidated statements of financial position $239 million and $278 million, respectively, of engineering and research and development costs for which customer reimbursement is contractually assured. The reimbursable costs are recorded in other
Adient plc | Form 10-K | 62
current assets if reimbursement will occur in less than one year and in other noncurrent assets if reimbursement will occur beyond one year. At September 30, 2022, Adient had $73 million and $166 million of reimbursable costs recorded in current and noncurrent assets, respectively. At September 30, 2021, Adient had $66 million and $212 million of reimbursable costs recorded in current and noncurrent assets, respectively.
Costs for molds, dies and other tools used to make products that will be sold under long-term supply arrangements are capitalized within property, plant and equipment if Adient has title to the assets or has the non-cancelable right to use the assets during the term of the supply arrangement. Capitalized items, if specifically designed for a supply arrangement, are amortized over the term of the arrangement; otherwise, amounts are amortized over the estimated useful lives of the assets. The carrying values of assets capitalized in accordance with the foregoing policy are periodically reviewed for impairment whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. At September 30, 2022 and 2021, approximately $53 million and $62 million, respectively, of costs for molds, dies and other tools were capitalized within property, plant and equipment which represented assets to which Adient had title. In addition, at September 30, 2022, Adient recorded within the consolidated statements of financial position in other current and noncurrent assets $74 million and $15 million, respectively, of costs for molds, dies and other tools for which customer reimbursement is contractually assured. At September 30, 2021, Adient recorded within the consolidated statements of financial position in other current and noncurrent assets $77 million and $8 million, respectively, of costs for molds, dies and other tools for which customer reimbursement is contractually assured.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. The estimated useful lives range from 3 to 40 years for buildings and improvements and from 3 to 15 years for machinery and equipment.
Leases
On October 1, 2019, Adient adopted Accounting Standards Codification Topic 842, "Leases" (ASC 842) using the modified retrospective transition approach and electing the package of practical expedients. This resulted in the recognition of right-of-use (ROU) assets of $380 million and corresponding operating lease liabilities of $384 million. 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.
Operating lease right-of-use (ROU) assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement dates. ROU assets also include payments made in advance and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that such options are to be exercised. Adient uses its incremental borrowing rate, which is the rate of interest it would pay to borrow on a collateralized basis over a similar term to the lease in a similar economic environment, for discounting lease consideration as most lease agreements do not provide an implicit rate. Refer to Note 8, “Leases” of the notes to consolidated financial statements for more information regarding Adient’s leases.
Goodwill and Other Intangible Assets
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. Adient reviews goodwill for impairment during the fourth fiscal quarter or more frequently if events or changes in circumstances indicate the asset might be impaired. Adient performs impairment reviews for its reporting units, which have been determined to be Adient's reportable segments using a fair value method based on management's judgments and assumptions or third party valuations. The fair value of a reporting unit refers to the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. In estimating the fair value, Adient primarily uses an income approach utilizing discounted cash flow analyses. Adient also uses a market approach utilizing published multiples of earnings of comparable entities with similar operational and economic characteristics to further support the fair value estimates. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." The estimated fair value is then compared with the carrying amount of the reporting unit, including recorded goodwill. An impairment is recorded to the extent the estimated fair value is below the carrying amount of the reporting unit.
Adient plc | Form 10-K | 63
Intangible assets with definite lives are amortized over their estimated useful lives and are subject to impairment testing if events or changes in circumstances indicate that the asset might be impaired.
Impairment of Long-Lived Assets
Adient reviews long-lived assets, including property, plant and equipment and other intangible assets with definite lives, for impairment whenever events or changes in circumstances indicate that the asset's carrying amount may not be recoverable. Adient conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, "Impairment or Disposal of Long-Lived Assets." ASC 360-10-15 requires Adient to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Impairment of Investments in Partially-Owned Affiliates
Adient monitors its investments in partially-owned affiliates for indicators of other-than-temporary declines in value on an ongoing basis. If Adient determines that an other-than-temporary decline in value has occurred, it recognizes an impairment loss, which is measured as the difference between the recorded book value and the fair value of the investment. Fair value is generally determined using an income approach based on discounted cash flows or negotiated transaction values. Refer to Note 18, "Nonconsolidated Partially-Owned Affiliates," of the notes to consolidated financial statements for more information on Adient’s partially-owned affiliates.
Revenue Recognition
Adient provides production and service parts to its customers under awarded multi-year programs. The duration of a program is generally consistent with the life cycle of a vehicle, however, an awarded program does not reach the level of a performance obligation until Adient receives either a purchase order and/or a materials release from the customer for a specific number of parts at a specified price, at which point an enforceable contract exists. Sales revenue is recognized at the point in time when parts are shipped and control has transferred to the customer, at which point an enforceable right to payment exists. Contracts may provide for annual price reductions over the production life of the awarded program, and prices are adjusted on an ongoing basis to reflect changes in product content/cost and other commercial factors. The amount of revenue recognized reflects the consideration that Adient expects to be entitled to in exchange for such products based on purchase orders, annual price reductions and ongoing price adjustments. Refer to Note 2, "Revenue Recognition," of the notes to consolidated financial statements for information on Adient's revenue recognition.
Customers
Essentially all of Adient's sales are to the automotive industry. Adient's most significant customers include Stellantis N.V. which comprised 12% of consolidated net sales in fiscal 2022, Stellantis N.V. and Volkswagen Group which comprised 13% and 11% of consolidated net sales, respectively, in fiscal 2021, and Stellantis N.V. and Volkswagen Group which comprised 10% and 10% of consolidated net sales in fiscal 2020.
Research and Development Costs
Expenditures for research activities relating to product development and improvement (other than those expenditures that are contractually guaranteed for reimbursement from the customer) are charged against income as incurred and included within selling, general and administrative expenses in the consolidated statements of income. Such expenditures for the years ended September 30, 2022, 2021 and 2020 were $322 million, $316 million and $370 million, respectively. A portion of these costs associated with these activities are reimbursed by customers and, for the fiscal years ended September 30, 2022, 2021 and 2020 were $194 million, $210 million and $223 million, respectively.
Foreign Currency Translation
Substantially all of Adient's international operations use the respective local currency as the functional currency. Assets and liabilities of international entities have been translated at period-end exchange rates, and income and expenses have been translated using average exchange rates for the period. Monetary assets and liabilities denominated in non-functional currencies are adjusted to reflect period-end exchange rates. The resulting translation adjustments are accumulated as a component of
Adient plc | Form 10-K | 64
accumulated other comprehensive income (AOCI). The aggregate transaction gains (losses) included in net income for the years ended September 30, 2022, 2021 and 2020 were $6 million, $(8) million and $(25) million, respectively.
Derivative Financial Instruments
The fair values of all derivatives are recorded in the consolidated statements of financial position. The change in a derivative's fair value is recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction and if so, the type of hedge transaction. Refer to Note 10, "Derivative Instruments and Hedging Activities," and Note 11, "Fair Value Measurements," of the notes to consolidated financial statements for disclosure of Adient's derivative instruments and hedging activities.
Stock-Based Compensation
Stock-based compensation is initially measured at the fair value of the awards on the grant date and is recognized in the financial statements over the period the employees are required to provide services in exchange for the awards. The fair value of restricted stock awards is based on the number of units granted and the stock price on the grant date. The fair value of performance-based share unit, or PSU, awards is based on the stock price at the grant date and the assessed probability of meeting future performance targets. The fair value of cash settled awards are recalculated at the end of each reporting period and the liability and expense are adjusted based on the new fair value. Refer to Note 12, "Stock-Based Compensation," of the notes to consolidated financial statements for Adient's stock based compensation disclosures.
Pension and Postretirement Benefits
Adient utilizes a mark-to-market approach for recognizing pension and postretirement benefit expenses, including measuring the market related value of plan assets at fair value and recognizing actuarial gains and losses in the fourth quarter of each fiscal year or at the date of a remeasurement event. Refer to Note 14, "Retirement Plans," of the notes to consolidated financial statements for disclosure of Adient's pension and postretirement benefit plans.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Adient records a valuation allowance that primarily represents operating and other loss carryforwards for which realization is uncertain. Management judgment is required in determining Adient's provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against Adient's net deferred tax assets.
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. Since future financial results may differ from previous estimates, periodic adjustments to Adient's valuation allowances may be necessary.
Adient is subject to income taxes in Ireland, the U.S. and other non-U.S. jurisdictions. Judgment is required in determining its worldwide provision for income taxes and recording the related assets and liabilities. In the ordinary course of Adient's business, there are many transactions and calculations where the ultimate tax determination is uncertain. Adient's income tax returns for various fiscal years remain under audit by the respective tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provisions included amounts sufficient to pay assessments, if any, which may be proposed by the taxing authorities. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
Adient does not generally provide for additional income taxes which would become payable upon repatriation of undistributed earnings of wholly owned foreign subsidiaries. Adient's intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax efficient.
Refer to Note 16, "Income Taxes," of the notes to consolidated financial statements for Adient's income tax disclosures.
Adient plc | Form 10-K | 65
Earnings Per Share
The following table shows the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions, except per share data) | | 2022 | | 2021 | | 2020 |
Numerator: | | | | | | |
Net income (loss) attributable to Adient | | $ | (120) | | | $ | 1,108 | | | $ | (547) | |
| | | | | | |
Denominator: | | | | | | |
Shares outstanding | | 94.8 | | | 94.2 | | | 93.8 | |
Effect of dilutive securities | | — | | | 1.5 | | | — | |
Diluted shares | | 94.8 | | | 95.7 | | | 93.8 | |
| | | | | | |
Earnings per share: | | | | | | |
Basic | | $ | (1.27) | | | $ | 11.76 | | | $ | (5.83) | |
Diluted | | $ | (1.27) | | | $ | 11.58 | | | $ | (5.83) | |
The effect of common stock equivalents which would have been anti-dilutive was excluded from the calculation of diluted earnings per share for fiscal 2021 and was immaterial. Potentially dilutive securities whose effect would have been antidilutive are excluded from the computation of diluted earnings per share which for fiscal 2022 and 2020 is a result of being in a loss position.
New Accounting Pronouncements
Standards Adopted During Fiscal 2022
On October 1, 2021, Adient adopted Accounting Standards Codification (ASU) 2018-14 Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20). ASU 2018-14 eliminates, adds, and modifies certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The guidance is to be applied on a retrospective basis. The adoption of this guidance on October 1, 2021 did not significantly impact Adient's consolidated financial statements for fiscal 2022.
On October 1, 2021, Adient adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 modifies ASC 740, Income Taxes, by simplifying accounting for income taxes. As part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements, the FASB’s amendments may impact both interim and annual reporting periods. The adoption of this guidance on October 1, 2021 did not significantly impact Adient's consolidated financial statements for fiscal 2022.
Standards Effective After Fiscal 2022
Adient has considered the ASUs summarized below, effective after fiscal 2022, none of which are expected to significantly impact the consolidated financial statements:
Adient plc | Form 10-K | 66
| | | | | | | | | | | | | | |
|
| | | | |
Standard Pending Adoption | | Description | | Date Effective |
| | | | |
ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) | | ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity by reducing the number of accounting models for convertible debt and convertible preferred stock. | | October 1, 2022 |
| | | | |
ASU 2021-10, Government Assistance (Topic 832) - Disclosures by Business Entities about Government Assistance | | The ASU requires annual disclosures of: i) information about the nature of government assistance transactions and the related accounting policy used to account for the transactions, ii) the balance sheet and income statement line items affected by the transactions, and the amounts for each financial statement line item, and iii) significant transaction terms and conditions. | | October 1, 2022 |
| | | | |
ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations | | The ASU requires buyers of goods and services to disclose information about supplier finance programs if such arrangements are used to manage their payables. The disclosures should include both qualitative and quantitative information including key terms and the amount of outstanding obligations. | | October 1, 2023 |
2. Revenue Recognition
Adient generates revenue through the sale of automotive seating solutions, including complete seating systems and the components of complete seating systems. Adient provides production and service parts to its customers under awarded multi-year programs. The duration of a program is generally consistent with the life cycle of a vehicle, however, the program can be canceled at any time without cause by the customer. Programs awarded to Adient to supply parts to its customers do not contain a firm commitment by the customer for volume or price and do not reach the level of a performance obligation until Adient receives either a purchase order and/or a materials release from the customer for a specific number of parts at a specified price, at which point an enforceable contract exists. Sales revenue is generally recognized at the point in time when parts are shipped and control has transferred to the customer, at which point an enforceable right to payment exists. Contracts may provide for annual price reductions over the production life of the awarded program, and prices are adjusted on an ongoing basis to reflect changes in product content/cost and other commercial factors. The amount of revenue recognized reflects the consideration that Adient expects to be entitled to in exchange for such products based on purchase orders, annual price reductions and ongoing price adjustments (some of which are accounted for as variable consideration and subject to being constrained), net of the impact, if any, of consideration paid to the customer.
In a typical arrangement with the customer, purchase orders are issued for pre-production activities which consist of engineering, design and development, tooling and prototypes for the manufacture and delivery of component parts. Adient has concluded that these activities are not in the scope of ASC 606, “Revenue from Contracts with Customers,” and for that reason, there have been no changes to how Adient accounts for reimbursable pre-production costs.
Adient includes shipping and handling fees billed to customers in revenue, while including costs of shipping and handling in cost of sales. Taxes collected from customers are excluded from revenue and credited directly to obligations to the appropriate government agencies. Payment terms with customers are established based on customary industry and regional practices. Adient has evaluated the terms of its arrangements and determined that they do not contain significant financing components.
Contract assets primarily relate to the right to consideration for work completed, but not billed at the reporting date on contracts with customers. The contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been satisfied and revenue has not been recognized. No significant contract assets or liabilities exist at September 30, 2022. As described above, the issuance of a purchase order and/or a materials release by the customer represents the point at which an enforceable contract with the customer exists. Therefore, Adient has elected to apply the practical expedient in ASC 606, paragraph 606-10-50-14 and does not disclose information about the remaining performance obligations that have an original expected duration of one year or less. Refer to Note 17, "Segment Information," of the notes to consolidated financial statements for disaggregated revenue by geographical market.
Adient plc | Form 10-K | 67
3. Acquisitions and Divestitures
2021 Yanfeng Transaction
On March 12, 2021, Adient, Yanfeng Automotive Trim Systems Company Ltd. (“Yanfeng”), Yanfeng Adient Seating Co., Ltd. (“YFAS”), a joint venture owned, directly or indirectly, by Yanfeng (50.01%) and Adient (49.99%), and KEIPER Seating Mechanisms Co., Ltd. (f/k/a Adient Yanfeng Seating Mechanisms Co., Ltd. (“AYM” or “KEIPER”), a joint venture owned, directly or indirectly, by Yanfeng (50%) and Adient (50%), entered into a Master Agreement (the “2021 Agreement”), pursuant to which the parties agreed to, among other things, transactions that resulted in the sale of Adient’s 49.99% interest in YFAS to Yanfeng, the sale of Adient’s ownership interests in 3 other related joint ventures (ranging from 10% to 25%) to YFAS/KEIPER, and the purchase of YFAS’s 50% interest in Chongqing Adient Automotive Components Co., Ltd. (“CQADNT”) and YFAS’s 100% interest in Adient (Langfang) Seating Co., Ltd. (“LFADNT”) (collectively, the “2021 Yanfeng Transaction”). The 2021 Yanfeng Transaction closed on September 30, 2021 (“Closing Date”).
As a result of the 2021 Yanfeng Transaction, Adient received net cash proceeds of $1,141 million ($489 million in September 2021 and $652 million in December 2021) for the sale of Adient’s 49.99% interest in YFAS to Yanfeng, $100 million as the final cash dividend from YFAS, $59 million for the sale of Adient’s ownership interests in the 3 other related joint ventures, $54 million for granting a license of intellectual property to Yanfeng for use on a non-exclusive and perpetual basis, and a business consulting fee of $13 million. Adient also made a net payment of $211 million to Yanfeng related to the purchase CQADNT and LFADNT (the purchase price of $271 million, less $60 million cash acquired) on the Closing Date.
In conjunction with the 2021 Yanfeng Transaction, Adient provided Chongqing Boxun Industrial Co., Ltd. (“Boxun”), which owned 25% of CQADNT, an option to sell its interest in CQADNT. This option was reflected as $194 million of redeemable noncontrolling interest on Adient’s statement of financial position as of September 30, 2021. Boxun exercised its option in October 2021, and Adient acquired Boxun’s 25% interest effective January 2022. The total payment to Boxun from Adient was approximately $200 million, of which $15 million of historical dividends were paid in December 2021, and $185 million, including $32 million of historical dividends, was paid later in fiscal 2022. With the acquisitions of Boxun’s 25% and YFAS’s 50% interest of CQADNT, Adient owns 100% of CQADNT effective January 2022.
As a result of the 2021 Agreement, Adient received $41 million during fiscal 2022 representing the remaining balance of proceeds from the sale of its interest in Yanfeng Global Automotive Interior Systems Co. ("YFAI"), a joint venture previously owned, directly or indirectly, by Yanfeng (70%) and Adient (30%), which was part of the 2020 Yanfeng Transaction (as defined and described in Form 10-K for the fiscal year ended September 30, 2021).
The acquisition of CQADNT and LFADNT was accounted for using the acquisition method, and the operating results and cash flows of CQADNT and LFADNT have been included in Adient's consolidated financial statements since October 1, 2021. The acquisitions are expected to provide substantial synergies through vertical integration, purchasing and logistics improvements. The acquisitions also provide for an immediate controlled manufacturing presence in strategic locations in China.
Adient recorded a purchase price allocation for the assets acquired and liabilities assumed based on their estimated fair values as of the September 30, 2021 acquisition date. The purchase price adjustments and allocation is as follows:
Adient plc | Form 10-K | 68
| | | | | | | | | | | | | | |
| | Fair value allocation |
(in millions) | | CQADNT | | LFADNT |
Cash | | $ | 55 | | | $ | 5 | |
Accounts receivable | | 296 | | | 2 | |
Inventory | | 37 | | | 5 | |
Property, plant and equipment | | 86 | | | 8 | |
Other assets | | 39 | | | 2 | |
Goodwill | | 181 | | | 8 | |
Intangible assets | | 234 | | | 6 | |
Accounts payable | | (252) | | | (19) | |
Other liabilities | | (121) | | | (4) | |
Subtotal | | 555 | | | 13 | |
Less: Interest already owned | | 103 | | | — | |
Less: Redeemable noncontrolling interest | | 194 | | | — | |
Total purchase consideration | | 258 | | | 13 | |
Less: cash acquired | | 55 | | | 5 | |
Net cash paid | | $ | 203 | | | $ | 8 | |
| | | | |
| | | | |
The values allocated to CQADNT and LFADNT’s intangible assets of $234 million and $6 million, respectively, primarily consisted of customer relationships and patented technologies which are being amortized on a straight line basis over estimated useful lives of 3 to 12 years. The assets were valued using a combination of an income approach and a relief from royalty approach. These values were considered level 3 measurements under the U.S. GAAP fair value hierarchy. Key assumptions used in the valuation of customer relationships included a rate of return of 13.5% and the life of the relationship of approximately 12 years. Key assumptions used in the valuation of patented technologies included a rate of return of 13.5% and the life of the technologies of approximately 3 years. The allocation of the purchase price to goodwill and intangible assets was based on the valuations performed to determine the fair value of the net assets as of the acquisition date.
Adient expensed $14 million of acquisition costs related to the 2021 Yanfeng Transaction during the year ended September 30, 2021. If the acquisitions of CQADNT and LFADNT had occurred on October 1, 2019, Adient’s net sales and net income attributable to Adient for fiscal 2021 would have been $14,529 million and $1,142 million, respectively, and Adient’s net sales and net loss attributable to Adient for fiscal 2020 would have been $13,250 million and $(527) million, respectively. This unaudited pro forma information includes actual results of the entities and adjustments to amortization expense that would have been recognized due to acquired intangible assets, and related income tax effects. The unaudited pro forma financial information is not indicative of the operational results that would have been obtained had the transactions actually occurred as of that date, nor is it necessarily indicative of Adient’s future operational results.
In fiscal 2022, Adient entered into an agreement whereby Adient would purchase all of the issued and outstanding equity interest in Nantong Yanfeng Adient Seating Trim Co., Ltd. (“YFAT”) held by KEIPER for ¥150 million ($24 million). Adient made an initial deposit of ¥75 million ($12 million) in fiscal 2022, which represents 50% of the estimated purchase price (reflected within other current assets as of September 30, 2022). The transaction is subject to a public bidding process and other customary regulatory approvals, and is expected to be completed during the first half of fiscal 2023. The remaining 50% of the estimated purchase price will be paid at the time of completion of the transaction.
Also in fiscal 2022, Adient has entered into agreements whereby Adient would transfer all of the issued and outstanding equity interests in two joint ventures in China held directly by Adient, each of which represents 25% of their total issued and outstanding equity interests, to Yanfeng for $3 million. As a result, Adient concluded that indicators of other-than-temporary impairment were present related to the investments in these joint ventures, and recorded a non-cash impairment charge of $3 million during the second quarter of fiscal 2022. The transactions are expected to be completed during the first half of fiscal 2023.
Russia/Ukraine conflict
Adient plc | Form 10-K | 69
Following Russia's invasion of Ukraine in February 2022, Adient determined to withdraw from the Russian market. Adient recorded a charge of $5 million during fiscal 2022 in conjunction with completion of the withdrawal from and sale of its Russian operations for one ruble.
SJA
On March 31, 2021, Adient sold its 50% equity interest in Shenyang Jinbei Adient Automotive Components Co., Ltd. ("SJA") to the joint venture partner for $58 million, which resulted in a $33 million one-time gain recognized during the second quarter of fiscal 2021.
Fabrics
On September 30, 2020, Adient closed on the sale of its automotive fabrics manufacturing business including the lamination business to Sage Automotive Interiors for net proceeds of approximately $170 million, net of $4 million of cash divested within the business. Proceeds from the transaction were used by Adient for general corporate purposes and to pay down a portion of Adient’s debt. A minimal gain was recorded as a result of the transaction after allocating $80 million of goodwill to the disposed business. The sale transaction included 11 facilities globally and approximately 1,300 employees. For fiscal year 2020, the fabrics manufacturing business recorded $99 million of third party sales and a nominal amount of pre-tax income.
2020 Yanfeng Transaction
On January 31, 2020 (as amended on June 24, 2020), Adient, Yanfeng, KEIPER, YFAS and YFAI entered into a Master Agreement (the “2020 Agreement”, collectively referred to as “2020 Yanfeng Transaction”), pursuant to which the parties have agreed, among other things, that Adient would transfer all of the issued and outstanding equity interest in YFAI held, directly or indirectly, by Adient, which represents 30% of YFAI’s total issued and outstanding equity interest, to Yanfeng for $369 million, of which $309 million was paid in fiscal 2020, $19 million in fiscal 2021, and $41 million in fiscal 2022. Upon the closing of the transaction, an intangible asset of $92 million was recorded associated with the YFAS joint venture extension to be amortized over the 18-year term of the extension. The intangible asset was subsequently written off in fiscal 2021 as a result of the 2021 Yanfeng Transaction.
As a result of the January 31, 2020 agreement, Adient concluded that indicators of other-than-temporary impairment were present related to the investment in YFAI and recorded a non-cash impairment of $231 million in fiscal 2020. The impairment was determined based on combining the fair value of consideration received for all transactions contemplated within the 2020 Agreement, including an estimated fair value of the YFAS joint venture extension, and allocating the total consideration received to the individual transactions based on relative fair values. Adient estimated the fair value of the individual transactions using both an income approach and market approach. The inputs utilized in the fair value analyses of the transactions are classified as level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement" and primarily consisted of expected future operating margins and cash flows of YFAI, estimated production volumes, estimated dividend payments from YFAS over the extension period, estimated terminal values of YFAS, market comparables, weighted-average costs of capital (YFAI - 15.0%, YFAS - 10.5%), and noncontrolling interest discounts. As a result of the pending divestiture of the YFAI investment and the corresponding impairment, Adient ceased recognizing equity income from YFAI.
RECARO
During fiscal 2020, Adient sold the RECARO automotive high performance seating systems business (“RECARO”) to a group of investors for de minimis proceeds. As a result of the sale, Adient recorded a loss of $21 million.
Adient Aerospace
Adient Aerospace, LLC ("Adient Aerospace") became operational on October 11, 2018 with Adient’s initial ownership position in Adient Aerospace being 50.01%. Initial contributions of $28 million were made by each partner. During fiscal 2020, Adient reached an agreement with Boeing in which Adient’s ownership position was reduced to 19.99%, resulting in the deconsolidation of Adient Aerospace on that date, including $37 million of cash. Adient recorded a $4 million loss as a result of the transaction in the Americas segment, including $21 million of allocated goodwill. Adient Aerospace develops, manufactures, and sells a portfolio of seating products to airlines and aircraft leasing companies for installation on Boeing and other OEM commercial airplanes, for both production line-fit and retrofit configurations.
All of the acquisitions and divestiture transactions described above align with Adient's strategy of focusing on its core, high-volume seating business.
Assets held for sale
Adient plc | Form 10-K | 70
During fiscal 2022, Adient committed to sell certain assets in EMEA. As a result, these assets were classified as assets held for sale and were required to be adjusted to the lower of fair value less cost to sell or carrying value. This resulted in an impairment charge of $6 million. The impairment was measured using third party sales pricing to determine fair values of the assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement.
During fiscal 2021, Adient committed to sell certain assets in France and Turkey. As a result, these assets were classified as assets held for sale (including an allocation of $11 million of goodwill) and were required to be adjusted to the lower of fair value less cost to sell or carrying value. This resulted in Adient recording an impairment charge of $9 million within restructuring and impairment costs on the consolidated statement of income (loss) related to the assets in France. The impairment was measured using third party sales pricing to determine fair values of the assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." The sale of the assets in France was completed in fiscal 2021 for minimal proceeds while the sale of the assets in Turkey was completed in fiscal 2022 for total proceeds of $46 million, of which $36 million was collected at closing, and $10 million was collected later in fiscal 2022.
During fiscal 2020, Adient committed to a plan to sell certain entities in China and certain properties in the U.S. As a result, these assets were classified as assets held for sale and were required to be adjusted to the lower of fair value less cost to sell or carrying value. This resulted in an impairment charge of $21 million which was recorded within restructuring and impairment costs on the consolidated statement of income (loss) during fiscal 2020, of which $12 million related to America’s assets and $9 million related to China’s assets. The impairment was measured using third party sales pricing to determine fair values of the assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy as defined in ASC 820, "Fair Value Measurement." These sales transactions were completed during fiscal 2021 for a total of $5 million of proceeds.
4. Inventories
Inventories consisted of the following:
| | | | | | | | | | | | | | |
| | September 30, |
(in millions) | | 2022 | | 2021 |
Raw materials and supplies | | $ | 755 | | | $ | 750 | |
Work-in-process | | 26 | | | 29 | |
Finished goods | | 172 | | | 197 | |
Inventories | | $ | 953 | | | $ | 976 | |
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
| | | | | | | | | | | | | | |
| | September 30, |
(in millions) | | 2022 | | 2021 |
Buildings and improvements | | $ | 1,053 | | | $ | 1,167 | |
Machinery and equipment | | 2,889 | | | 3,087 | |
Construction in progress | | 146 | | | 162 | |
Land | | 82 | | | 100 | |
Total property, plant and equipment | | 4,170 | | | 4,516 | |
Less: accumulated depreciation | | (2,793) | | | (2,909) | |
Property, plant and equipment - net | | $ | 1,377 | | | $ | 1,607 | |
There were no material finance leases included in net property, plant and equipment at September 30, 2022 and 2021.
Adient plc | Form 10-K | 71
As of September 30, 2022, Adient is the lessor of properties included in gross building and improvements for $12 million and accumulated depreciation of $8 million. As of September 30, 2021, Adient is the lessor of properties included in gross building and improvements for $15 million and accumulated depreciation of $9 million.
A correction of approximately $1.4 billion to reduce the carrying value of buildings and improvements, machinery and equipment and accumulated depreciation as of September 30, 2021 was recorded related to previously disposed assets.
6. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Americas | | EMEA | | Asia | | Total |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Balance at September 30, 2020 | | $ | 606 | | | $ | 368 | | | $ | 1,083 | | | $ | 2,057 | |
Business acquisitions | | — | | | — | | | 188 | | | 188 | |
| | | | | | | | |
Business divestitures | | — | | | (11) | | | — | | | (11) | |
Currency translation and other | | 1 | | | (3) | | | (20) | | | (22) | |
Balance at September 30, 2021 | | $ | 607 | | | $ | 354 | | | $ | 1,251 | | | $ | 2,212 | |
| | | | | | | | |
Currency translation and other | | — | | | (59) | | | (96) | | | (155) | |
Balance at September 30, 2022 | | $ | 607 | | | $ | 295 | | | $ | 1,155 | | | $ | 2,057 | |
| | | | | | | | |
Refer to Note 3, "Acquisitions and Divestitures," of the notes to consolidated financial statements for additional information.
Adient performed its annual goodwill impairment test during the fourth quarter of fiscal 2022 using a fair value method based on management's judgments and assumptions regarding future cash flows. These calculations contain uncertainties as they require management to make assumptions about market comparables, future cash flows, and the appropriate discount rates (based on weighted average cost of capital ranging from 17.5% to 21.0%) to reflect the risk inherent in the future cash flows and to derive a reasonable enterprise value and related premium. The estimated future cash flows reflect management's latest assumptions of the financial projections based on current and anticipated competitive landscape, including estimates of revenue based on production volumes over the foreseeable future and long-term growth rates, and operating margins based on historical trends and future cost containment activities. The financial projections considered the impact that the COVID-19 pandemic, supply-chain disruptions, higher commodity, shipping and energy costs, and the Russia/Ukraine conflict are having on Adient’s current and future operations as well as the impact to new vehicle sales in future years. As a result of the test, there was no goodwill impairment recorded for fiscal year 2022. A change in any of these estimates and assumptions, especially as it relates to the extent of the COVID-19 pandemic’s, supply-chain disruptions’ impacts on vehicle production volumes within the automotive industry, the impact of commodity, shipping and energy costs, the impact of the Russia/Ukraine conflict as well as the demand for new vehicle sales once the current operational disruptions are over, could produce significantly lower fair values of Adient's reporting units, which could have a material impact on its results of operations.
Adient performed its annual goodwill test during the fourth quarter of fiscal 2021 using the same method and assumptions as described above (based on weighted average cost of capital ranging from 15.0% to 17.5%). As a result of the tests, there was no goodwill impairment recorded in fiscal 2021.
Adient plc | Form 10-K | 72
Adient's other intangible assets, primarily from business acquisitions valued based on independent appraisals, consisted of:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | September 30, 2021 |
(in millions) | | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
Intangible assets | | | | | | | | | | | | |
Patented technology | | $ | 80 | | | $ | (25) | | | $ | 55 | | | $ | 86 | | | $ | (19) | | | $ | 67 | |
Customer relationships | | 560 | | | (163) | | | 397 | | | 649 | | | (178) | | | 471 | |
Trademarks | | 19 | | | (17) | | | 2 | | | 26 | | | (21) | | | 5 | |
Miscellaneous | | 25 | | | (12) | | | 13 | | | 24 | | | (12) | | | 12 | |
Total intangible assets | | $ | 684 | | | $ | (217) | | | $ | 467 | | | $ | 785 | | | $ | (230) | | | $ | 555 | |
On September 30, 2021, Adient acquired CQADNT and LFADNT as part of the 2021 Yanfeng Transaction and recorded $176 million of customer relationships and $60 million of patented technology intangibles. The values of the intangible assets were determined based on independent appraisals. Adient evaluates its other intangible assets for impairment as facts and circumstances warrant. As part of the 2020 Yanfeng Transaction, Adient recorded an intangible asset of $92 million associated with the YFAS joint venture extension to 2038 (reflected in the Miscellaneous line in the table above), to be amortized over the 18-year term of the extension. During fiscal 2021, Adient wrote off the remaining balance of the intangible asset ($86 million) as a result of the 2021 Yanfeng Transaction. Refer to Note 3, "Acquisitions and Divestitures," of the notes to the consolidated financial statements for additional information.
Amortization of other intangible assets for the fiscal years ended September 30, 2022, 2021 and 2020 was $52 million, $45 million and $37 million, respectively. Adient anticipates amortization for fiscal 2023, 2024, 2025, 2026 and 2027 will be approximately $48 million, $47 million, $46 million, $44 million and $41 million, respectively.
7. Product Warranties
Adient offers warranties to its customers depending upon the specific product and terms of the customer purchase agreement. A typical warranty program requires that Adient replace defective products within a specified time period from the date of sale. Adient records an estimate for future warranty-related costs based on actual historical return rates and other known factors. Based on analysis of return rates and other factors, Adient's warranty provisions are adjusted as necessary. Adient monitors its warranty activity and adjusts its reserve estimates when it is probable that future warranty costs will be different than those estimates. Adient's product warranty liability is recorded in the consolidated statements of financial position in other current liabilities.
The changes in Adient's total product warranty liability are as follows:
| | | | | | | | | | | | | | |
| | September 30, |
(in millions) | | 2022 | | 2021 |
Balance at beginning of period | | $ | 23 | | | $ | 24 | |
Accruals for warranties issued during the period | | 8 | | | 9 | |
Changes in accruals related to pre-existing warranties (including changes in estimates) | | — | | | (2) | |
Changes in accruals related to business acquisitions | | — | | | 1 | |
Changes in accruals related to business divestitures | | — | | | (1) | |
Settlements made (in cash or in kind) during the period | | (9) | | | (8) | |
Currency translation | | (1) | | | — | |
Balance at end of period | | $ | 21 | | | $ | 23 | |
8. Leases
Adient plc | Form 10-K | 73
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 ROU 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.
The components of lease costs for the years ended September 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Operating lease cost | | $ | 117 | | | $ | 125 | | | $ | 125 | |
Short-term lease cost | | 20 | | | 20 | | | 24 | |
| | | | | | |
Total lease cost | | $ | 137 | | | $ | 145 | | | $ | 149 | |
Operating lease right-of-use assets and lease liabilities included in the consolidated statement of financial position were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | September 30, |
(in millions) | | | | 2022 | | 2021 |
Operating leases: | | | | | | |
Operating lease right-of-use assets | | Other noncurrent assets | | $ | 266 | | | $ | 335 | |
| | | | | | |
Operating lease liabilities - current | | Other current liabilities | | $ | 81 | | | $ | 89 | |
Operating lease liabilities - noncurrent | | Other noncurrent liabilities | | 186 | | | 246 | |
| | | | $ | 267 | | | $ | 335 | |
| | | | | | |
Weighted average remaining lease term: | | | | | | |
Operating leases | | | | 6 years | | 6 years |
| | | | | | |
Weighted average discount rate: | | | | | | |
Operating leases | | | | 5.6 | % | | 5.2 | % |
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 September 30, 2022 were as follows:
| | | | | | | | |
Fiscal years (in millions) | | Operating Leases |
2023 | | $ | 90 | |
2024 | | 67 | |
2025 | | 46 | |
2026 | | 29 | |
2027 | | 23 | |
Thereafter | | 55 | |
Total lease payments | | 310 | |
Less: imputed interest | | (43) | |
Present value of lease liabilities | | $ | 267 | |
Adient plc | Form 10-K | 74
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | |
Operating leases (non-cash activity) | | $ | 52 | | | $ | 109 | | | $ | 79 | |
| | | | | | |
Operating cash flows: | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 116 | | | $ | 126 | | | $ | 125 | |
| | | | | | |
Adient’s finance leases were not significant to the consolidated financial statements during fiscal 2022 and 2021. Refer to Note 9, "Debt and Financing Arrangements," of the notes to consolidated financial statements for additional information.
9. Debt and Financing Arrangements
Long-term and short-term debt consisted of the following:
| | | | | | | | | | | | | | |
| | September 30, |
(in millions) | | 2022 | | 2021 |
Long-term debt: | | | | |
| | | | |
Term Loan B - LIBOR plus 3.25% due in 2028 | | $ | 988 | | | $ | 998 | |
4.875% Notes due in 2026 | | 795 | | | 795 | |
3.50% Notes due in 2024 | | 809 | | | 1,161 | |
9.00% Notes due in 2025 | | — | | | 600 | |
European Investment Bank Loan - EURIBOR plus 1.58% due in 2022 | | — | | | 156 | |
| | | | |
| | | | |
Finance lease obligation | | 1 | | | 1 | |
Less: debt issuance costs | | (18) | | | (32) | |
Gross long-term debt | | 2,575 | | | 3,679 | |
Less: current portion | | 11 | | | 167 | |
Net long-term debt | | $ | 2,564 | | | $ | 3,512 | |
| | | | |
Short-term debt: | | | | |
| | | | |
Other bank borrowings (1) | | 3 | | | 17 | |
Total short-term debt | | $ | 3 | | | $ | 17 | |
(1) The weighted average interest rates on short-term debts, based on levels of debt maintained in various jurisdictions, were 6.0% and 3.8% at September 30, 2022 and 2021, respectively.
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 and certain other restrictions, including a minimum fixed charge coverage ratio. The ABL Credit Facility was set to 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). 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-
Adient plc | Form 10-K | 75
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 November 24, 2021, Adient entered into an amendment to its ABL Credit Facility (the “2021 ABL Amendment”) to amend certain terms and provisions, including to (i) change the interest rate benchmark rates applicable under the ABL Credit Facility for borrowings denominated in euro, Swedish krona and pounds sterling to EURIBOR, STIBOR, and SONIA, in each case subject to certain adjustments, and (ii) update the provisions in our ABL Credit Facility by which U.S. dollar LIBOR will eventually be replaced with SOFR or another interest rate benchmark, in each case, to reflect the most recent standards and practices used in the industry. Interest is payable on the ABL Credit Facility at a fluctuating rate of interest determined by reference to LIBOR, in the case of amounts outstanding in dollars, EURIBOR, in the case of amounts outstanding in euros, STIBOR, in the case of amounts outstanding in Swedish krona and SONIA, in the case of amounts outstanding in pounds sterling, in each case, plus an applicable margin of 1.50% to 2.00%. On November 2, 2022, Adient entered into an amendment to its ABL Credit Facility (the “2022 ABL Amendment”) to amend certain terms and provisions, including to (i) extend its maturity date to November 2, 2027 (subject to certain springing maturity provisions), (ii) replace LIBOR with Term SOFR as the benchmark rate of interest for U.S. dollar borrowings thereunder and (iii) provide flexibility for future amendments to the ABL Credit Facility to incorporate certain sustainability-based pricing provisions. Other key terms and conditions of the facility remain unchanged. As of September 30, 2022, Adient had not drawn down on the ABL Credit Facility and had availability under this facility of $899 million (net of $13 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, as amended in fiscal 2021, (the “Term Loan B Agreement”) that provides for a $1.0 billion senior secured term loan facility. 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 April 8, 2028. Interest on the Term Loan B Agreement accrues at the Eurodollar rate plus an applicable margin equal to 3.25%. 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 paid $7 million related to the fiscal 2021 amendment along with expensing $8 million of previously deferred financing costs to net financing charges.
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 were set to 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. During fiscal 2021, Adient repurchased the full amount of the outstanding balance of the Senior First Lien Notes at a premium of $50 million plus $21 million of accrued and unpaid interest. As a result, $12 million of previously deferred financing costs were expensed to net financing charges.
The ABL Credit Facility and Term Loan B Agreement 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, previously maintained $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. Adient further redeemed $2 million of the notes during fiscal 2021, resulting in a remaining balance of $795 million as of September 30, 2022 and 2021. AGH also previously maintained €1.0 billion aggregate principal amount of 3.50% unsecured notes due 2024. In fiscal 2022, Adient repurchased €177 million ($198 million) of the 3.50% unsecured notes due 2024 at a premium of €3 million ($4 million) plus €3 million ($3 million) of accrued and unpaid interest, and expensed €1 million ($1 million) of previously deferred financing costs to net financing charges. As of September 30, 2022, the remaining balance of this debt was €823 million ($809 million).
Adient Germany Ltd. & Co. KG, a wholly owned subsidiary of Adient, previously maintained €135 million ($156 million) in an unsecured term loan from the European Investment Bank (“EIB”) due in 2022. The loan bore interest at the 6-month EURIBOR rate plus 158 basis points. During fiscal 2021, Adient repaid $36 million of the EIB loan, triggered in part by the
Adient plc | Form 10-K | 76
redemption of debt and the sale of the fabrics business in the prior year. Adient fully repaid the remaining balance of the EIB loan in May 2022 upon its maturity.
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 were set to 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 was due on April 15 and October 15 each year, beginning on October 15, 2020. These notes contained covenants that were usual and customary, similar to the covenants as described above. Adient incurred $10 million of debt issuance cost associated with this new debt in fiscal 2020. In fiscal 2022, Adient repurchased the full $600 million of 9.00% Senior First Lien Notes due 2025 at a premium of $34 million plus $19 million of accrued and unpaid interest, and expensed $7 million of previously deferred financing costs to net financing charges.
Principal payments required on long-term debt during the next five years are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 |
Principal payments | | $ | 11 | | | $ | 819 | | | $ | 10 | | | $ | 805 | | | $ | 10 | |
Net Financing Charges
Adient's net financing charges in the consolidated statements of income (loss) contained the following components:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Interest expense, net of capitalized interest costs | | $ | 161 | | | $ | 207 | | | $ | 216 | |
Banking fees and debt issuance cost amortization | | 22 | | | 32 | | | 18 | |
Interest income | | (9) | | | (7) | | | (11) | |
Premium paid on repurchase of debt | | 38 | | | 49 | | | — | |
Derivative loss on Yanfeng transaction | | 3 | | | 30 | | | — | |
| | | | | | |
(Gain) on extinguishment of debt | | — | | | — | | | (3) | |
Net financing charges | | $ | 215 | | | $ | 311 | | | $ | 220 | |
Banking fees in fiscal 2022 and 2021 includes $8 million and $20 million, respectively, of one-time accelerated-deferred financing fee charges associated with voluntary repayments of debt and the amendment and extension of Adient's Term Loan B agreement. Total interest paid on both short and long-term debt for the fiscal years ended September 30, 2022, 2021 and 2020 was $192 million, $229 million and $203 million, respectively.
10. 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 11, "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
Adient plc | Form 10-K | 77
subsequently reclassified into earnings when the hedged transactions occur and affect earnings. During the second quarter of fiscal 2020, 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. All contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at September 30, 2022 and 2021, respectively.
As of September 30, 2022, the €823 million ($809 million) 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 was 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. The contract matured during fiscal 2021. There was no outstanding Japanese yen denominated cross-currency interest rate swap outstanding as of September 30, 2022.
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. During fiscal 2021, in conjunction with the Term Loan B Amendment as discussed in Note 9, "Debt and Financing Arrangements," Adient de-designated these zero contracts, the impact of which was not material. The contracts matured in fiscal 2022. As of September 30, 2022, Adient had no outstanding interest rate caps.
In conjunction with the 2021 Yanfeng Transaction as described in Note 3, "Acquisitions and Divestitures," Adient entered into two forward foreign currency exchange contracts in fiscal 2021 with total notional amount of approximately ¥7,482 million ($1,123 million) in order to economically hedge the expected proceeds. One contract matured at the end of fiscal 2021 which resulted in a net cash payment of $14 million, and the other contract matured in fiscal 2022. These contracts were treated as freestanding financial instruments with fair value changes recorded in earnings. These contracts resulted in realized and unrealized losses of $14 million and $16 million, respectively, during fiscal 2021, and realized losses of $3 million during fiscal 2022. Refer to Note 9, "Debt and Financing Arrangements," of the notes to consolidated financial statements for more information.
Adient entered into a ¥150 million ($23 million) foreign exchange forward contract during the second quarter of fiscal 2022 to selectively hedge portions of its net investment in China. The currency effects of the forward contract are reflected in the AOCI account within shareholder’s equity attributable to Adient, where they offset gains and losses recorded on Adient’s net investment in China. The forward contract matured in early fiscal 2023.
Adient plc | Form 10-K | 78
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 |
| | September 30, |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Other current assets | | | | | | | | |
Foreign currency exchange derivatives | | $ | 17 | | | $ | 8 | | | $ | 3 | | | $ | — | |
| | | | | | | | |
Other noncurrent assets | | | | | | | | |
Foreign currency exchange derivatives | | — | | | — | | | — | | | 1 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total assets | | $ | 17 | | | $ | 8 | | | $ | 3 | | | $ | 1 | |
| | | | | | | | |
Other current liabilities | | | | | | | | |
Foreign currency exchange derivatives | | $ | 20 | | | $ | 11 | | | $ | — | | | $ | 13 | |
| | | | | | | | |
Other noncurrent liabilities | | | | | | | | |
Foreign currency exchange derivatives | | 2 | | | 4 | | | 1 | | | — | |
| | | | | | | | |
Long-term debt | | | | | | | | |
Foreign currency denominated debt | | 809 | | | 1,161 | | | — | | | — | |
Total liabilities | | $ | 831 | | | $ | 1,176 | | | $ | 1 | | | $ | 13 | |
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 September 30, 2022 and 2021, no cash collateral was received or pledged under the master netting agreements.
The gross and net amounts of derivative instruments and other amounts used in hedging activities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets | | Liabilities |
| | September 30, |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Gross amount recognized | | $ | 20 | | | $ | 9 | | | $ | 832 | | | $ | 1,189 | |
Gross amount eligible for offsetting | | (19) | | | (9) | | | (19) | | | (9) | |
Net amount | | $ | 1 | | | $ | — | | | $ | 813 | | | $ | 1,180 | |
The following table presents the effective portion of pretax gains (losses) recorded in other comprehensive income related to cash flow hedges:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Foreign currency exchange derivatives | | $ | 8 | | | $ | 29 | | | $ | (37) | |
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:
Adient plc | Form 10-K | 79
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | Year Ended September 30, |
| | 2022 | | 2021 | | 2020 |
Foreign currency exchange derivatives | | Cost of sales | | $ | 6 | | | $ | 2 | | | $ | (16) | |
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) | | | | Year Ended September 30, |
| | 2022 | | 2021 | | 2020 |
Foreign currency exchange derivatives | | Cost of sales | | $ | — | | | $ | (4) | | | $ | (4) | |
| | | | | | | | |
Foreign currency exchange derivatives | | Net financing charges | | (33) | | | (30) | | | 1 | |
Total | | | | $ | (33) | | | $ | (34) | | | $ | (3) | |
The effective portion of pretax gains (losses) recorded in currency translation adjustment (CTA) within other comprehensive income (loss) related to net investment hedges was $151 million, $17 million and $(84) million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. For the years ended September 30, 2022, 2021 and 2020, respectively, no gains or losses were reclassified from CTA into income for Adient's outstanding net investment hedges. For the year ended September 30, 2020, a loss of $2 million was recognized in the consolidated statement of income (loss) for the ineffective portion of cash flow hedges. For the years ended September 30, 2022 and 2021, no gains or losses were recognized in income for the ineffective portion of cash flow hedges.
11. Fair Value Measurements
ASC 820, "Fair Value Measurement," defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a three-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs where there is little or no market data, which requires the reporting entity to develop its own assumptions.
ASC 820 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following tables present Adient's fair value hierarchy for those assets and liabilities measured at fair value. Refer to Note 14, "Retirement Plans," of the notes to consolidated financial statements for fair value tables of pension assets.
Adient plc | Form 10-K | 80
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: |
(in millions) | | Total as of September 30, 2022 | | 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 | | $ | 20 | | | $ | — | | | $ | 20 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total assets | | $ | 20 | | | $ | — | | | $ | 20 | | | $ | — | |
Other current liabilities | | | | | | | | |
Foreign currency exchange derivatives | | $ | 20 | | | $ | — | | | $ | 20 | | | $ | — | |
| | | | | | | | |
Other noncurrent liabilities | | | | | | | | |
Foreign currency exchange derivatives | | 3 | | | — | | | 3 | | | — | |
| | | | | | | | |
Total liabilities | | $ | 23 | | | $ | — | | | $ | 23 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: |
(in millions) | | Total as of September 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 | | $ | 8 | | | $ | — | | | $ | 8 | | | $ | — | |
| | | | | | | | |
Other noncurrent assets | | | | | | | | |
Foreign currency exchange derivatives | | 1 | | | — | | | 1 | | | — | |
| | | | | | | | |
| | | | | | | | |
Total assets | | $ | 9 | | | $ | — | | | $ | 9 | | | $ | — | |
Other current liabilities | | | | | | | | |
Foreign currency exchange derivatives | | $ | 24 | | | $ | — | | | $ | 24 | | | $ | — | |
| | | | | | | | |
Other noncurrent liabilities | | | | | | | | |
Foreign currency exchange derivatives | | 4 | | | — | | | 4 | | | — | |
| | | | | | | | |
Total liabilities | | $ | 28 | | | $ | — | | | $ | 28 | | | $ | — | |
Valuation Methods
Foreign currency exchange derivatives Adient selectively hedges anticipated transactions and net investments that are subject to foreign exchange rate risk primarily using foreign currency exchange hedge contracts. The foreign currency exchange derivatives are valued under a market approach using publicized spot and forward prices. Changes in fair value on foreign exchange derivatives accounted for as hedging instruments under ASC 815 are initially recorded as a component of AOCI and are subsequently reclassified into earnings when the hedged transactions occur and affect earnings. These contracts were highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates at September 30, 2022 and 2021, 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.
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 used interest rate caps to limit the impact of floating rate interest payment increases on its Term Loan B Agreement. The interest rate caps were designated as cash flow hedges under ASC 815. As of September 30, 2022, Adient had no interest rate caps outstanding.
Adient plc | Form 10-K | 81
The fair value of long-term debt, which was $2.4 billion and $3.8 billion at September 30, 2022 and 2021, respectively, was determined primarily using market quotes classified as Level 1 inputs within the ASC 820 fair value hierarchy.
12. Stock-Based Compensation
Adient provides certain key employees equity awards in the form of restricted stock units (RSU) and performance share units (PSUs) under the Adient plc 2016 Omnibus Incentive Plan and the Adient plc 2021 Omnibus Incentive Plan (collectively, the “Plan”). Adient also provides directors with share awards under the Adient plc 2016 Director Share Plan and the Adient plc 2021 Omnibus Incentive Plan. These 2016 plans were adopted in conjunction with the separation. The 2021 plan was adopted in March 2021.
Total stock-based compensation cost included in the consolidated statements of income was $29 million, $36 million and $15 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. No material income tax benefits were recognized in the consolidated statements of income for the share-based compensation arrangements in any of these years due to tax valuation allowances in those years.
In conjunction with the separation, previously outstanding stock-based compensation awards granted under the former Parent's equity compensation programs prior to the separation and held by certain executives and employees of Adient were adjusted and converted into new Adient equity awards using a formula designated to preserve the intrinsic value of the awards. Upon the separation on October 31, 2016, holders of former Parent stock options, RSUs, and SARs generally received one ordinary share of Adient for every ten ordinary shares of the former parent held at the close of business on October 19, 2016, the record date of the distribution, and cash in lieu of fractional shares (if any) of Adient. Accordingly, certain executives and employees of Adient hold converted awards in both the former Parent and Adient shares subsequent to the separation. Converted awards retained the vesting schedule and expiration date of the original awards. Outstanding stock awards related to the former Parent stock are not included in Adient's dilutive share calculation.
The following tables present activity related to the granting of awards during the year ended September 30, 2022 along with the composition of outstanding and exercisable awards at September 30, 2022 for remaining former Parent and Adient awards.
Restricted Stock
The Plan provides for the award of restricted stock or restricted stock units to certain employees. These awards are typically share settled except for certain non-U.S. employees or those who elected to defer past awards settlement until retirement at which point the award would be settled in cash. Cash settled awards are recorded in Adient's consolidated statements of financial position as a liability and adjusted each reporting period for changes in share value until the settlement of the award. Restricted stock awards typically vest over a three year period following the grant date. The Plan allows for different vesting terms on specific grants with approval by Adient's board of directors.
A summary of the status of nonvested restricted stock awards at September 30, 2022, and changes for the fiscal year then ended, is presented below:
| | | | | | | | | | | | | | |
| | Weighted Average Price | | Restricted Shares/Units |
Nonvested, September 30, 2021 | | $ | 26.01 | | | 1,148,888 | |
Granted | | $ | 46.18 | | | 354,148 | |
Vested | | $ | 27.57 | | | (547,123) | |
Forfeited | | $ | 28.91 | | | (83,496) | |
Nonvested, September 30, 2022 | | $ | 32.94 | | | 872,417 | |
At September 30, 2022, Adient had approximately $15 million of total unrecognized compensation cost related to nonvested restricted stock arrangements granted. That cost is expected to be recognized over a weighted-average period of 1.7 years.
Adient plc | Form 10-K | 82
Performance Share Awards
The Plan permits the grant of PSU awards. The number of PSUs granted is equal to the PSU award value divided by the closing price of a Adient ordinary share at the grant date. The PSUs are generally contingent on the achievement of predetermined performance goals over a three-year performance period as well as on the award holder's continuous employment until the vesting date. Each PSU that is earned will be settled with an ordinary share of Adient following the completion of the performance period except for certain non-U.S. employees or those who elected to defer a portion or all of past awards until retirement, which would then be settled in cash. Cash settled awards are recorded in Adient's consolidated statements of financial position as a liability and adjusted each reporting period for changes in share value until the settlement of the award.
A summary of the status of Adient's nonvested PSUs at September 30, 2022, and changes for the fiscal year then ended is presented below:
| | | | | | | | | | | | | | |
| | Weighted Average Price | | Performance Shares/Units |
Nonvested, September 30, 2021 | | $ | 24.40 | | | 1,223,180 | |
Granted | | $ | 46.79 | | | 263,573 | |
Vested | | $ | 29.18 | | | (252,149) | |
Forfeited | | $ | 19.78 | | | (165,890) | |
Nonvested, September 30, 2022 | | $ | 29.51 | | | 1,068,714 | |
At September 30, 2022, Adient had approximately $18 million of total unrecognized compensation cost related to nonvested performance share units granted. That cost is expected to be recognized over a weighted-average period of 1.8 years.
Stock Options
No new stock options have been granted under the Plan. Stock options were previously granted to eligible employees prior to the separation from the former Parent. Stock option awards typically vest between two and three years after the grant date and expire ten years from the grant date. The fair value of each option was estimated on the date of grant using a Black-Scholes option valuation model.
A summary of stock option activity at September 30, 2022, and changes for the year then ended, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted Average Option Price | | Shares Subject to Option | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value (in millions) |
Outstanding, September 30, 2021 | | $ | 32.77 | | | 93,790 | | | | | |
| | | | | | | | |
Exercised | | $ | 26.36 | | | (40,571) | | | | | |
Forfeited or expired | | $ | 27.53 | | | (3,280) | | | | | |
Outstanding, September 30, 2022 | | $ | 38.32 | | | 49,939 | | | 1.2 | | $ | — | |
| | | | | | | | |
Exercisable, September 30, 2022 | | $ | 38.32 | | | 49,939 | | | 1.2 | | $ | — | |
| | | | | | | | |
Former Parent outstanding and exercisable, September 30, 2022 | | $ | 25.67 | | | 20,971 | | | 0 | | $ | — | |
Adient outstanding and exercisable, September 30, 2022 | | $ | 47.48 | | | 28,968 | | | 2.1 | | $ | — | |
Total outstanding and exercisable, September 30, 2022 | | $ | 38.32 | | | 49,939 | | | 1.2 | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
There were no stock options granted in fiscal years 2022, 2021 and 2020, respectively. The total intrinsic value of options exercised by Adient employees during the fiscal years ended September 30, 2022, 2021 and 2020 was approximately $1 million, $7 million and $1 million, respectively, primarily consisting of former Parent awards.
Adient plc | Form 10-K | 83
Stock Appreciation Rights
No new SARs have been granted under the Plan. SARs vest under the same terms and conditions as stock option awards; however, they are settled in cash for the difference between the market price on the date of exercise and the exercise price. As a result, SARs are recorded in Adient's consolidated statements of financial position as a liability until the date of exercise.
The fair value of each SAR award is estimated using a similar method described for stock options. The fair value of each SAR award is recalculated at the end of each reporting period and the liability and expense are adjusted based on the new fair value.
A summary of SAR activity at September 30, 2022, and changes for the year then ended, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted Average SAR Price | | Shares Subject to SAR | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value (in millions) |
Outstanding, September 30, 2021 | | $ | 33.29 | | | 103,884 | | | | | |
| | | | | | | | |
Exercised | | $ | 25.84 | | | (56,457) | | | | | |
Forfeited or expired | | $ | 27.50 | | | (4,973) | | | | | |
Outstanding, September 30, 2022 | | $ | 43.87 | | | 42,454 | | | 2.0 | | $ | — | |
| | | | | | | | |
Exercisable, September 30, 2022 | | $ | 43.87 | | | 42,454 | | | 2.0 | | $ | — | |
| | . | | | | | | |
Former Parent outstanding and exercisable, September 30, 2022 | | $ | 43.94 | | | 37,705 | | | 2.0 | | $ | — | |
Adient outstanding and exercisable, September 30, 2022 | | $ | 43.25 | | | 4,749 | | | 1.6 | | $ | — | |
Total outstanding and exercisable, September 30, 2022 | | $ | 43.87 | | | 42,454 | | | 2.0 | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
In conjunction with the exercise of SARs, Adient made payments of $2 million, $2 million and $1 million during the fiscal years ended September 30, 2022, 2021 and 2020, respectively.
Adient plc | Form 10-K | 84
13. Equity and Noncontrolling Interests
The following table presents changes in AOCI attributable to Adient:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Foreign currency translation adjustments | | | | | | |
Balance at beginning of period | | $ | (617) | | | $ | (634) | | | $ | (558) | |
Aggregate adjustment for the period, net of tax | | (219) | | | 17 | | | (76) | |
Balance at end of period | | (836) | | | (617) | | | (634) | |
Realized and unrealized gains (losses) on derivatives | | | | | | |
Balance at beginning of period | | (8) | | | (28) | | | (8) | |
Current period changes in fair value, net of tax | | 6 | | | 22 | | | (34) | |
Reclassification to income, net of tax | | (6) | | | (2) | | | 14 | |
Balance at end of period | | (8) | | | (8) | | | (28) | |
Pension plans | | | | | | |
Balance at beginning of period | | (2) | | | (3) | | | (3) | |
Net reclassifications to AOCI | | 1 | | | 1 | | | — | |
Balance at end of period | | (1) | | | (2) | | | (3) | |
Accumulated other comprehensive income (loss), end of period | | $ | (845) | | | $ | (627) | | | $ | (665) | |
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:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Beginning balance | | $ | 240 | | | $ | 43 | | | $ | 51 | |
Net income | | 35 | | | 25 | | | 19 | |
Dividends | | (66) | | | (14) | | | (23) | |
Business acquisition | | — | | | 194 | | | — | |
Change in noncontrolling interest share | | (153) | | | — | | | — | |
Foreign currency translation adjustments | | (11) | | | (8) | | | (4) | |
Ending balance | | $ | 45 | | | $ | 240 | | | $ | 43 | |
Refer to Note 3, “Acquisitions and Divestitures,” of the notes to the consolidated financial statements for more information on the business acquisition addition of redeemable noncontrolling interest and change in noncontrolling interest share.
14. Retirement Plans
Pension Benefits
Adient maintains non-contributory defined benefit pension plans covering primarily non-U.S. employees and a limited number of U.S. employees. The benefits provided are primarily based on years of service and average compensation or a monthly retirement benefit amount. Funding for non-U.S. plans observes the local legal and regulatory limits. Funding for U.S. pension plans equals or exceeds the minimum requirements of the Employee Retirement Income Security Act of 1974.
Adient plc | Form 10-K | 85
For pension plans with accumulated benefit obligations (ABO) that exceed plan assets, the projected benefit obligation (PBO), ABO and fair value of plan assets of those plans were $129 million, $112 million and $37 million, respectively, as of September 30, 2022, and $204 million, $182 million and $72 million, respectively, as of September 30, 2021.
For pension plans with PBO that exceed plan assets, PBO, ABO and fair value of plan assets of those plans were $129 million, $112 million and $37 million, respectively, as of September 30, 2022 and $204 million, $182 million and $72 million, respectively, as of September 30, 2021.
In fiscal 2022, Adient paid contributions to the defined benefit pension plans of $16 million. Contributions of at least $14 million in cash to its defined benefit pension plans are expected in fiscal 2023. Projected benefit payments from the plans as of September 30, 2022 are estimated as follows (in millions):
| | | | | |
2023 | $ | 21 | |
2024 | 19 | |
2025 | 21 | |
2026 | 23 | |
2027 | 25 | |
2028-2032 | 155 | |
Savings and Investment Plans
Adient sponsors various defined contribution savings plans that allow employees to contribute a portion of their pre-tax and/or after-tax income in accordance with plan specified guidelines. Under specified conditions, Adient will contribute to certain savings plans based on the employees' eligible pay and/or will match a percentage of the employee contributions up to certain limits. Matching contributions expense in connection with these plans amounted to $23 million and $44 million for fiscal years 2022 and 2021, respectively.
Plan Assets
Adient's investment policies employ an approach whereby a mix of equities, fixed income and alternative investments are used to maximize the long-term return of plan assets for a prudent level of risk. The investment portfolio primarily contains a diversified blend of equity and fixed income investments. Equity investments are diversified across domestic and non-domestic stocks, as well as growth, value and small to large capitalizations. Fixed income investments include corporate and government issues, with short-, mid- and long-term maturities, with a focus on investment grade when purchased and a target duration close to that of the plan liability. Investment and market risks are measured and monitored on an ongoing basis through regular investment portfolio reviews, annual liability measurements and periodic asset/liability studies. The majority of the real estate component of the portfolio is invested in a diversified portfolio of high-quality, operating properties with cash yields greater than the targeted appreciation. Investments in other alternative asset classes, including hedge funds and commodities, diversify the expected investment returns relative to the equity and fixed income investments. As a result of Adient's diversification strategies, there are no significant concentrations of risk within the portfolio of investments.
Adient's actual asset allocations are in line with target allocations. Adient rebalances asset allocations as appropriate, in order to stay within a range of allocation for each asset category.
The expected return on plan assets is based on Adient's expectation of the long-term average rate of return of the capital markets in which the plans invest. The average market returns are adjusted, where appropriate, for active asset management returns. The expected return reflects the investment policy target asset mix and considers the historical returns earned for each asset category. Adient's plan assets by asset category, are as follows:
Adient plc | Form 10-K | 86
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
(in millions) | | Total as of September 30, 2022 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value (NAV) |
Pension | | | | | | | | | | |
Cash | | $ | 2 | | | $ | 2 | | | $ | — | | | $ | — | | | $ | — | |
Equity Securities | | | | | | | | | | |
Domestic | | 1 | | | 1 | | | — | | | — | | | — | |
International - Developed | | 18 | | | 14 | | | — | | | — | | | 4 | |
International - Emerging | | 1 | | | — | | | — | | | — | | | 1 | |
Fixed Income Securities | | | | | | | | | | |
Government | | 125 | | | 33 | | | 67 | | | — | | | 25 | |
Corporate/Other | | 76 | | | 22 | | | 43 | | | — | | | 11 | |
Hedge Fund | | 38 | | | — | | | 38 | | | — | | | — | |
Real Estate | | 22 | | | — | | | — | | | 7 | | | 15 | |
Total | | $ | 283 | | | $ | 72 | | | $ | 148 | | | $ | 7 | | | $ | 56 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | |
(in millions) | | Total as of September 30, 2021 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value (NAV) |
Pension | | | | | | | | | | |
Cash | | $ | 5 | | | $ | 5 | | | $ | — | | | $ | — | | | $ | — | |
Equity Securities | | | | | | | | | | |
Domestic | | 12 | | | 2 | | | 2 | | | — | | | 8 | |
International - Developed | | 44 | | | 27 | | | 7 | | | — | | | 10 | |
International - Emerging | | 2 | | | — | | | 2 | | | — | | | — | |
Fixed Income Securities | | | | | | | | | | |
Government | | 237 | | | 45 | | | 168 | | | — | | | 24 | |
Corporate/Other | | 82 | | | 34 | | | 38 | | | — | | | 10 | |
Hedge Fund | | 88 | | | — | | | 88 | | | — | | | — | |
Real Estate | | 23 | | | — | | | — | | | 7 | | | 16 | |
Total | | $ | 493 | | | $ | 113 | | | $ | 305 | | | $ | 7 | | | $ | 68 | |
The following is a description of the valuation methodologies used for assets measured at fair value.
Cash: The fair value of cash is valued at cost.
Equity Securities: The fair value of equity securities is determined by direct quoted market prices. The underlying holdings are direct quoted market prices on regulated financial exchanges.
Fixed Income Securities: The fair value of fixed income securities is determined by direct or indirect quoted market prices. If indirect quoted market prices are utilized, the value of assets held in separate accounts is not published, but the investment managers report daily the underlying holdings. The underlying holdings are direct quoted market prices on regulated financial exchanges.
Hedge Funds: The fair value of hedge funds is determined by the custodian. The custodian obtains valuations from underlying managers based on market quotes for the most liquid assets and alternative methods for assets that do not have sufficient trading
Adient plc | Form 10-K | 87
activity to derive prices. Adient and custodian review the methods used by the underlying managers to value the assets. Adient believes this is an appropriate methodology to obtain the fair value of these assets.
Real Estate: The fair value of certain investments in real estate is deemed Level 3 since these investments do not have a readily determinable fair value and requires the fund managers independently to arrive at fair value by calculating NAV per share. In order to calculate NAV per share, the fund managers value the real estate investments using any one, or a combination of, the following methods: independent third party appraisals, discounted cash flow analysis of net cash flows projected to be generated by the investment and recent sales of comparable investments. Assumptions used to revalue the properties are updated every quarter. Adient believes this is an appropriate methodology to obtain the fair value of these assets.
Investments at NAV: For mutual or collective funds where a NAV is not publicly quoted, the NAV per share is used as a practical expedient and is based on the quoted market prices of the underlying net assets of the fund as reported daily by the fund managers. Funds valued based on NAV per share as a practical expedient are not categorized within the fair value hierarchy.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Adient believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
The following sets forth a summary of changes in the fair value of pension assets measured using significant unobservable inputs (Level 3):
| | | | | | | | |
(in millions) | | Real Estate |
Pension | | |
Asset value as of September 30, 2020 | | $ | 6 | |
Redemptions | | — | |
Unrealized gain | | 1 | |
Asset value as of September 30, 2021 | | $ | 7 | |
Redemptions | | — | |
Unrealized gain | | — | |
Asset value as of September 30, 2022 | | $ | 7 | |
Funded Status
The table that follows contains the ABO and reconciliations of the changes in the PBO, the changes in plan assets and the funded status:
Adient plc | Form 10-K | 88
| | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | |
(in millions) | | 2022 | | 2021 | | | | |
Accumulated Benefit Obligation | | $ | 322 | | | $ | 552 | | | | | |
Change in Projected Benefit Obligation: | | | | | | | | |
Projected benefit obligation at beginning of year | | $ | 574 | | | $ | 606 | | | | | |
Service cost | | 7 | | | 8 | | | | | |
Interest cost | | 11 | | | 9 | | | | | |
Plan participant contributions | | — | | | — | | | | | |
Actuarial (gain) loss | | (169) | | | (29) | | | | | |
Benefits paid | | (20) | | | (20) | | | | | |
Settlements and curtailments | | — | | | (16) | | | | | |
Divestitures | | — | | | (2) | | | | | |
Currency translation adjustment | | (63) | | | 18 | | | | | |
Projected benefit obligation at end of year | | $ | 340 | | | $ | 574 | | | | | |
Change in Plan Assets: | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 493 | | | $ | 486 | | | | | |
Actual return on plan assets | | (149) | | | 4 | | | | | |
Employer contributions/(distributions) | | 16 | | | 23 | | | | | |
Benefits paid | | (20) | | | (20) | | | | | |
Settlements and curtailments | | (1) | | | (16) | | | | | |
| | | | | | | | |
Currency translation adjustment | | (56) | | | 16 | | | | | |
Fair value of plan assets at end of year | | $ | 283 | | | $ | 493 | | | | | |
Funded status | | $ | (57) | | | $ | (81) | | | | | |
Amounts recognized in the statement of financial position consist of: | | | | | | | | |
Prepaid benefit cost | | $ | 35 | | | $ | 51 | | | | | |
Accrued benefit liability | | (92) | | | (132) | | | | | |
Net amount recognized | | $ | (57) | | | $ | (81) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
| | U.S. Plans | | Non-U.S. Plans |
| | 2022 | | 2021 | | 2022 | | 2021 |
Weighted Average Assumptions (1): | | | | | | | | |
Discount rate (2) | | 5.51 | % | | 3.06 | % | | 4.98 | % | | 1.71 | % |
Rate of compensation increase | | N/A | | N/A | | 4.43 | % | | 3.06 | % |
| | | | | |
(1) | Plan assets and obligations are determined based on a September 30 measurement date. |
| |
(2) | Adient considers the expected benefit payments on a plan-by-plan basis when setting assumed discount rates. As a result, Adient uses different discount rates for each plan depending on the plan jurisdiction, the demographics of participants and the expected timing of benefit payments. For the U.S. pension plan, Adient uses a discount rate provided by an independent third party calculated based on an appropriate mix of high quality bonds. For the non-U.S. pension plans, Adient consistently uses the relevant country specific benchmark indices for determining the various discount rates. |
Adient plc | Form 10-K | 89
Accumulated Other Comprehensive Income
The amounts in AOCI on the consolidated statements of financial position, exclusive of tax impacts, that have not yet been recognized as components of net periodic benefit cost at September 30, 2022 and 2021 were $2 million and $3 million, respectively, related to pension benefits.
The amounts in AOCI expected to be recognized as components of net periodic benefit cost over the next fiscal year for pension and postretirement benefits are not significant.
Net Periodic Benefit Cost
The tables that follow contain the components and key assumptions of net periodic benefit cost related to Adient’s pension plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | |
(in millions) | | 2022 | | 2021 | | 2020 | | | | | | |
Components of Net Periodic Benefit Cost (Credit): | | | | | | | | | | | | |
Service cost | | $ | 7 | | | $ | 8 | | | $ | 7 | | | | | | | |
Interest cost | | 10 | | | 9 | | | 10 | | | | | | | |
Expected return on plan assets | | (14) | | | (18) | | | (19) | | | | | | | |
Net actuarial (gain) loss | | (7) | | | (15) | | | 22 | | | | | | | |
Settlement (gain) loss | | 1 | | | — | | | 1 | | | | | | | |
Net periodic benefit cost (credit) | | $ | (3) | | | $ | (16) | | | $ | 21 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | |
| | U.S. Plans | | Non-U.S. Plans | | | | | | |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 | | | | | | |
Expense Assumptions: | | | | | | | | | | | | | | | | | | |
Discount rate | | 3.06 | % | | 2.91 | % | | 3.34 | % | | 2.14 | % | | 1.70 | % | | 1.85 | % | | | | | | |
Expected return on plan assets | | 5.75 | % | | 5.75 | % | | 5.75 | % | | 3.20 | % | | 3.68 | % | | 4.01 | % | | | | | | |
Rate of compensation increase | | N/A | | NA | | NA | | 4.05 | % | | 4.15 | % | | 3.66 | % | | | | | | |
15. 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 2022, Adient committed to a restructuring plan ("2022 Plan") of $25 million that was offset by $10 million of prior year underspend. The restructuring actions relate to cost reduction initiatives and consist primarily of workforce reductions in EMEA and Americas. The restructuring actions are expected to be substantially completed by fiscal 2024.
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Employee Severance and Termination Benefits | | | | | | Currency Translation | | Total |
Original reserve | | $ | 25 | | | | | | | $ | — | | | $ | 25 | |
Utilized - cash | | (6) | | | | | | | — | | | (6) | |
Noncash adjustment - other | | — | | | | | | | (1) | | | (1) | |
Balance at September 30, 2022 | | $ | 19 | | | | | | | $ | (1) | | | $ | 18 | |
Adient plc | Form 10-K | 90
During fiscal 2021, Adient committed to a restructuring plan ("2021 Plan") of $27 million that was offset by $16 million of prior year underspend. Of the restructuring costs recorded, $23 million related to the EMEA segment, $3 million related to the Americas 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 in fiscal 2023.
| | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | Employee Severance and Termination Benefits | | | | | | Currency Translation | | Total |
Original reserve | | $ | 27 | | | | | | | $ | — | | | $ | 27 | |
Utilized - cash | | (5) | | | | | | | — | | | (5) | |
Balance at September 30, 2021 | | $ | 22 | | | | | | | $ | — | | | $ | 22 | |
Utilized - cash | | (16) | | | | | | | — | | | (16) | |
Noncash adjustment - other | | (1) | | | | | | | (2) | | | (3) | |
Balance at September 30, 2022 | | $ | 5 | | | | | | | $ | (2) | | | $ | 3 | |
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 is $20 million of underspend related to prior year plan reserves. The restructuring actions are expected to be substantially completed by fiscal 2024.
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 | | (87) | | | | | | | — | | | (87) | |
Noncash adjustment - underspend/other | | (6) | | | | | | | 1 | | | (5) | |
Balance at September 30, 2021 | | $ | 75 | | | | | | | $ | 2 | | | $ | 77 | |
Utilized - cash | | (28) | | | | | | | — | | | (28) | |
Noncash adjustment - underspend/other | | (7) | | | | | | | (8) | | | (15) | |
Balance at September 30, 2022 | | $ | 40 | | | | | | | $ | (6) | | | $ | 34 | |
During fiscal 2022, there was $7 million of cash utilized against the 2019, 2018, and 2017 Plan's reserve balances. The majority of the cash utilized during the period was related to the 2019 Plan's reserve balance. The 2019, 2018, and 2017 Plan's reserve balances at September 30, 2022 were $2 million, $1 million, and $2 million, respectively.
Adient's restructuring plans have included workforce reductions of approximately 13,000. 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 September 30, 2022, approximately 12,000 of the employees have been separated from Adient pursuant to the restructuring plans. In addition, the restructuring plans included twenty-five plant closures. As of September 30, 2022, eighteen of the twenty-five 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.
Adient plc | Form 10-K | 91
16. Income Taxes
Consolidated income (loss) before income taxes and noncontrolling interests for the years ended September 30, 2022, 2021, and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Ireland | | $ | (2) | | | $ | (1) | | | $ | (3) | |
United States | | (595) | | | (244) | | | (111) | |
Other Foreign | | 651 | | | 1,684 | | | (315) | |
Income before income taxes and noncontrolling interests | | $ | 54 | | | $ | 1,439 | | | $ | (429) | |
The components of the provision (benefit) for income taxes are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Current | | | | | | |
Ireland | | $ | (1) | | | $ | 1 | | | $ | — | |
US - Federal and State | | 6 | | | 1 | | | (1) | |
Other Foreign | | 84 | | | 207 | | | 91 | |
| | 89 | | | 209 | | | 90 | |
Deferred | | | | | | |
Ireland | | 1 | | | 1 | | | — | |
US - Federal and State | | (1) | | | (1) | | | — | |
Other Foreign | | 5 | | | 40 | | | (33) | |
| | 5 | | | 40 | | | (33) | |
| | | | | | |
Income tax provision | | $ | 94 | | | $ | 249 | | | $ | 57 | |
The significant components of Adient's income tax provision are summarized in the following tables. These amounts do not include the impact of income tax expense related to our nonconsolidated partially-owned affiliates, which is netted against equity income on the consolidated statements of income (loss).
The reconciliation between the Irish statutory income tax rate, and Adient’s effective tax rate is as follows:
Adient plc | Form 10-K | 92
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Tax expense at Ireland statutory rate | | $ | 7 | | | $ | 180 | | | $ | (54) | |
State and local income taxes, net of federal benefit | | (38) | | | (15) | | | (30) | |
Foreign tax rate differential | | (1) | | | (6) | | | (127) | |
Notional interest deduction | | (6) | | | (10) | | | (44) | |
Credits and incentives | | (15) | | | (11) | | | (7) | |
| | | | | | |
Goodwill impairment | | — | | | — | | | 9 | |
Repatriation of foreign earnings | | 24 | | | 18 | | | 18 | |
Foreign exchange | | (2) | | | — | | | (1) | |
Impact of tax rate changes | | (3) | | | (26) | | | (3) | |
| | | | | | |
Audit settlements and change in uncertain tax positions | | (2) | | | 24 | | | 56 | |
Change in valuation allowance | | 94 | | | (85) | | | 332 | |
Impairment of subsidiaries | | — | | | 35 | | | (24) | |
Tax impact of corporate equity and business restructuring transactions | | 30 | | | 133 | | | (77) | |
Other | | 6 | | | 12 | | | 9 | |
Income tax provision | | $ | 94 | | | $ | 249 | | | $ | 57 | |
The income tax expense was higher than the Irish statutory rate of 12.5% for fiscal 2022 primarily due to the inability to recognize a tax benefit for losses in jurisdictions with valuation allowances, the establishment of valuation allowances in certain jurisdictions, and the repatriation of foreign earnings, partially offset by tax benefits related to the release of valuation allowances in certain jurisdictions. No items included in the other category are individually, or when appropriately aggregated, significant.
The income tax expense was higher than the Irish statutory rate of 12.5% for fiscal 2021 primarily due to the inability to recognize a tax benefit for losses in jurisdictions with valuation allowances, the establishment of valuation allowances in certain jurisdictions, and the repatriation of foreign earnings, partially offset by tax benefits from audit settlements, the write-off of deferred tax liabilities related to withholding taxes, and withholding taxes on the 2021 Yanfeng Transaction at a rate lower than the Irish statutory rate of 12.5%. No items included in the other category are individually, or when appropriately aggregated, significant.
The income tax expense was higher than the Irish statutory rate of 12.5% for fiscal 2020 primarily due to the inability to recognize a tax benefit for losses in jurisdictions with valuation allowances, the repatriation of foreign earnings, and changes in uncertain tax positions, partially offset by the tax benefits related to the impairment and sale of Adient’s YFAI investment, sale of Adient’s automotive fabrics manufacturing business, and impairment charges recorded in the Asia segment. No items included in the other category are individually, or when appropriately aggregated, significant.
The foreign tax rate differential benefits for fiscal 2020 through fiscal 2022 are primarily driven by losses earned in jurisdictions where the statutory rate is greater than 12.5% and by the pretax book income of nonconsolidated partially-owned affiliates whose corresponding income tax expense is netted against equity income on the consolidated statements of income.
Deferred taxes are classified in the consolidated statements of financial position as follows:
| | | | | | | | | | | | | | |
| | September 30, |
(in millions) | | 2022 | | 2021 |
Other noncurrent assets | | $ | 111 | | | $ | 134 | |
Other noncurrent liabilities | | (198) | | | (212) | |
Net deferred tax asset/(liability) | | $ | (87) | | | $ | (78) | |
Adient plc | Form 10-K | 93
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities included:
| | | | | | | | | | | | | | |
| | September 30, |
(in millions) | | 2022 | | 2021 |
Deferred tax assets: | | | | |
Accrued expenses and reserves | | $ | 87 | | | $ | 126 | |
Employee and retiree benefits | | 38 | | | 52 | |
Net operating loss and other credit carryforwards | | 1,226 | | | 1,056 | |
Property, plant and equipment | | 113 | | | 159 | |
Intangible assets | | 150 | | | 181 | |
Operating lease liabilities | | 61 | | | 79 | |
| | | | |
Research and development | | 27 | | | 23 | |
| | | | |
Other | | 2 | | | 12 | |
| | 1,704 | | | 1,688 | |
Valuation allowances | | (1,662) | | | (1,637) | |
| | 42 | | | 51 | |
Deferred tax liabilities: | | | | |
Unremitted earnings of foreign subsidiaries | | 35 | | | 32 | |
Indirect tax credits | | 25 | | | 18 | |
Foreign currency adjustments | | 8 | | | — | |
Operating lease right-of-use assets | | 61 | | | 79 | |
| | 129 | | | 129 | |
Net deferred tax asset/(liability) | | $ | (87) | | | $ | (78) | |
At September 30, 2022, Adient had available net operating loss carryforwards of approximately $4.6 billion which are available to reduce future tax liabilities. Net operating loss carryforwards of $2.4 billion will expire at various dates between 2023 and 2042, with the remainder having an indefinite carryforward period. Net operating loss carryforwards of $3.3 billion are offset by 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.
As a result of Adient's fiscal 2022 analysis of the realizability of its worldwide deferred tax assets, and after considering tax planning initiatives and other positive and negative evidence, Adient determined it was more likely than not that certain deferred tax assets in Canada, Japan, and other jurisdictions would not be realized and recorded income tax expense of $12 million, $3 million and $3 million, respectively, to establish valuation allowances. In addition, Adient determined it was more likely than not that certain deferred tax assets acquired as part of the 2021 Yanfeng Transaction would not be realized and recorded a net adjustment to goodwill of $7 million, primarily to establish valuation allowances. Additionally, Adient determined it was more likely than not that deferred tax assets in the Czech Republic and other jurisdictions would be realizable and recorded income tax benefit of $11 million and $2 million, respectively, to release valuation allowances. Adient continues to record valuation allowances on certain deferred tax assets in Germany, Hungary, Luxembourg, Mexico, Poland, Spain, the United Kingdom, the U.S. and other jurisdictions as it remains more likely than not that they will not be realized.
As a result of Adient’s 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 it was more likely than not that certain deferred tax assets in the Czech Republic, Korea, Mexico, and other jurisdictions would not be realized and recorded income tax expense of $5 million, $5 million, $8 million, and $4 million, respectively, to establish valuation allowances.
Adient plc | Form 10-K | 94
As a result of Adient's 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 it was more likely than not that deferred tax assets in certain jurisdictions would not be realized. These valuation allowances did not have a material impact on the consolidated financial statements.
Adient is subject to income taxes in Ireland, the U.S. and other foreign jurisdictions. With few exceptions, Adient is no longer subject to income tax examination by U.S. federal, state or local tax authorities or by non-U.S. tax authorities for years before 2014.
Adient regularly assesses the likelihood of an adverse outcome resulting from examinations to determine the adequacy of its tax reserves. For the year ended September 30, 2022, Adient believes that it is more likely than not that the tax positions it has taken will be sustained upon the resolution of its audits resulting in no material impact on its consolidated financial statements. However, the final determination with respect to tax audits and any related litigation could be materially different from Adient’s estimates.
For the years ended September 30, 2022, 2021 and 2020, Adient had gross tax effected unrecognized tax benefits of $499 million, $499 million, and $483 million, respectively. If recognized, $115 million of Adient's unrecognized tax benefits would impact the effective tax rate. Total net accrued interest for the years ended September 30, 2022, 2021 and 2020, was approximately $22 million, $18 million and $15 million, respectively (net of tax benefit). Adient recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Beginning balance | | $ | 499 | | | $ | 483 | | | $ | 414 | |
Additions for tax positions related to the current year | | 62 | | | 29 | | | 96 | |
Additions for tax positions of prior years | | 2 | | | 11 | | | 17 | |
Reductions for tax positions of prior years | | (52) | | | (9) | | | (38) | |
Settlements with taxing authorities | | (3) | | | (12) | | | (4) | |
Statute closings | | (9) | | | (3) | | | (2) | |
Ending balance | | $ | 499 | | | $ | 499 | | | $ | 483 | |
During the next twelve months, it is likely that tax audit resolutions or applicable statute of limitation lapses could result in a significant change in the balance of gross unrecognized tax benefits. Given the number of years, jurisdictions and positions subject to examination, Adient is unable to estimate the full range of possible adjustments to the balance of unrecognized tax benefits.
Adient has recorded a deferred tax liability of approximately $35 million as of September 30, 2022 on the undistributed earnings of certain consolidated and unconsolidated foreign affiliates for which Adient does not have an indefinite reinvestment assertion. Adient has not provided for deferred taxes on the remainder of undistributed earnings from consolidated foreign affiliates because such earnings should not give rise to additional tax liabilities upon repatriation or are considered to be indefinitely reinvested. It is not practicable to determine the unrecognized deferred tax liability on these earnings because the actual tax liability, if any, is dependent on circumstances existing when remittance occurs.
Income taxes paid for the fiscal year ended September 30, 2022 were $77 million. Income taxes paid for the fiscal year ended September 30, 2021 were $78 million excluding $134 million of withholding taxes on the 2021 Yanfeng Transaction. Income taxes paid for the fiscal year ended September 30, 2020 were $98 million.
Adient plc | Form 10-K | 95
Impacts of Tax Legislation and Change in Statutory Tax Rates
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 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.
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 fiscal years 2022, 2021, and 2020, other tax legislation was adopted in various jurisdictions. These law changes did not have a material impact on the consolidated financial statements.
Tax Impact of One-Time Items
During fiscal 2022, Adient recognized a one-time gain of $32 million associated with the retrospective recovery of indirect tax credits in Brazil resulting from the Company’s prioritization of those credits, resulting in net tax expense of $4 million.
During fiscal 2021, Adient recognized $134 million of withholding tax expense associated with the 2021 Yanfeng Transaction. Adient also recognized tax benefits of $13 million related to the write-off of deferred tax liabilities associated with Chinese joint ventures’ distributions of unremitted earnings that were reinvested in a wholly-owned Chinese subsidiary. In addition, Adient recognized an additional $38 million pre-tax gain related to Brazil indirect tax credits as a result of a favorable supreme court ruling resulting in tax expense of $13 million.
In fiscal 2020, Adient committed to a restructuring plan generating a $6 million tax benefit. Adient also sold its investment in YFAI and its automotive fabrics manufacturing business, generating tax benefits of $16 million and $3 million, respectively.
17. Segment Information
Adient manages its business on a geographic basis and operates in the following three reportable segments for financial reporting purposes: 1) Americas, which is inclusive of North America and South America; 2) Europe, Middle East, and Africa ("EMEA") and 3) Asia Pacific/China ("Asia").
Adient evaluates the performance of its reportable segments using an adjusted EBITDA metric defined as income before income taxes and noncontrolling interests, excluding net financing charges, restructuring and impairment costs, restructuring related-costs, net mark-to-market adjustments on pension and postretirement plans, transaction gains/losses, purchase accounting amortization, depreciation, stock-based compensation and other non-recurring items ("Adjusted EBITDA"). Also, certain corporate-related costs are not allocated to the segments. The reportable segments are consistent with how management views the markets served by Adient and reflect the financial information that is reviewed by its chief operating decision maker.
Adient plc | Form 10-K | 96
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Net Sales | | | | | | |
Americas | | $ | 6,557 | | | $ | 6,164 | | | $ | 5,889 | |
EMEA | | 4,764 | | | 5,564 | | | 5,148 | |
Asia | | 2,926 | | | 2,123 | | | 1,822 | |
Eliminations | | (126) | | | (171) | | | (189) | |
Total net sales | | $ | 14,121 | | | $ | 13,680 | | | $ | 12,670 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Adjusted EBITDA | | | | | | |
Americas | | $ | 242 | | | $ | 232 | | | $ | 228 | |
EMEA | | 138 | | | 277 | | | 101 | |
Asia | | 383 | | | 486 | | | 424 | |
Corporate-related costs (1) | | (88) | | | (78) | | | (80) | |
Restructuring and impairment costs (2) | | (25) | | | (21) | | | (238) | |
Purchase accounting amortization (3) | | (54) | | | (50) | | | (40) | |
Restructuring related charges (4) | | (6) | | | (9) | | | (20) | |
Gain (loss) on business divestitures - net (5) | | — | | | (26) | | | (13) | |
Gain on sale / (impairment) of nonconsolidated partially-owned affiliates (6) | | (10) | | | 1,214 | | | (231) | |
Depreciation | | (298) | | | (285) | | | (295) | |
Stock based compensation | | (29) | | | (36) | | | (15) | |
Other items (7) | | 6 | | | 22 | | | (16) | |
Earnings (loss) before interest and income taxes | | 259 | | | 1,726 | | | (195) | |
Net financing charges | | (215) | | | (311) | | | (220) | |
Other pension income (expense) | | 10 | | | 24 | | | (14) | |
Income (loss) before income taxes | | $ | 54 | | | $ | 1,439 | | | $ | (429) | |
Notes:
(1) Corporate-related costs not allocated to the segments include executive office, communications, corporate development, legal and corporate finance.
(2) Reflects restructuring charges for costs that are directly attributable to restructuring activities and meet the definition of restructuring under ASC 420 and non-recurring impairment charges. During fiscal 2022, an impairment charge of $4 million related to the withdrawal from and sale of its operations in Russia, and a held-for-sale impairment charge of $6 million were recorded in EMEA. Included in restructuring charges in fiscal 2021 is $10 million of held for sale and other non-cash impairment charges in EMEA. Included in restructuring charges in fiscal 2020 is a non-cash pre-tax impairment related to intangible assets of $24 million, held for sale asset impairments of $21 million, $8 million of other long-lived asset impairments, all within Asia, and $175 million of charges in EMEA which primarily related to workforce reductions. Refer to Note 15, "Restructuring and Impairment Costs," of the notes to the consolidated financial statements for more information.
(3) Reflects amortization of intangible assets including those related to partially owned affiliates recorded within equity income.
(4) Reflects restructuring related charges for costs that are directly attributable to restructuring activities, but do not meet the definition of restructuring under ASC 420 along with restructuring costs at partially owned affiliates recorded within equity income.
Adient plc | Form 10-K | 97
(5) Fiscal 2021 includes a $21 million loss associated with certain aspects of the 2021 Yanfeng Transaction and a $5 million loss on sale of non-core assets in Asia. Fiscal 2020 includes a $21 million loss of sale of RECARO and $4 million loss on deconsolidation of Aerospace, partially offset by a $12 million gain on completion of the 2020 Yanfeng Transaction.
(6) Fiscal 2022 includes $3 million and $7 million of non-cash impairments of certain of Adient's investments in nonconsolidated partially-owned affiliates in Asia and EMEA, respectively. Fiscal 2021 includes a gain associated with the 2021 Yanfeng Transaction of $1,181 million and a gain of $33 million on the sale of Adient's interest in SJA. Fiscal 2020 includes non-cash impairment charges related to Adient's YFAI investment balance recorded in conjunction with the 2020 Yanfeng Transaction. All of these impacts have been recorded within the equity income line in the consolidated statements of income.
(7) Fiscal 2022 reflects $8 million of transaction costs, a one-time gain of $32 million associated with the retrospective recovery of indirect tax credits in Brazil, a $14 million charge related to a non-recurring contract related settlement, $1 million of allowance for doubtful accounts resulting from the withdrawal from and sale of operations in Russia, and $2 million of loss on finalization of asset sale in Turkey. Fiscal 2021 reflects a one-time gain of $38 million associated with the retrospective recovery of indirect tax credits in Brazil (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 $19 million of transaction costs. Fiscal 2020 includes $15 million of transaction costs and $1 million of tax adjustments at YFAI.
Additional Segment Information
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, 2022 |
| | Reportable Segments | | Reconciling Items(1) | | Consolidated |
(in millions) | | Americas | | EMEA | | Asia | | |
Net Sales | | $ | 6,557 | | | $ | 4,764 | | | $ | 2,926 | | | $ | (126) | | | $ | 14,121 | |
Equity Income | | — | | | 12 | | | 76 | | | (13) | | | 75 | |
Total Assets | | 3,073 | | | 2,166 | | | 2,959 | | | 960 | | | 9,158 | |
Depreciation | | 130 | | | 116 | | | 52 | | | — | | | 298 | |
Amortization | | 12 | | | 4 | | | 36 | | | — | | | 52 | |
Capital Expenditures | | 104 | | | 73 | | | 50 | | | — | | | 227 | |
(1) Reconciling items include the elimination of intercompany transactions, corporate-related assets and other amounts to reconcile to consolidated totals. Specific reconciling items for equity income represents $10 million of non-cash impairments of Adient's investments in partially-owned affiliates, $1 million of restructuring related charges, $2 million of purchase accounting amortization, $7 million of a non-recurring customer termination charge at an affiliate in Asia, partially offset by a $7 million non-recurring gain on sale of land use rights at an affiliate in China. Corporate-related assets primarily include cash and deferred income tax assets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, 2021 |
| | Reportable Segments | | Reconciling Items(1) | | Consolidated |
(in millions) | | Americas | | EMEA | | Asia | | |
Net Sales | | $ | 6,164 | | | $ | 5,564 | | | $ | 2,123 | | | $ | (171) | | | $ | 13,680 | |
Equity Income | | (1) | | | 7 | | | 265 | | | 1,213 | | | 1,484 | |
Total Assets | | 2,888 | | | 2,473 | | | 3,187 | | | 2,230 | | | 10,778 | |
Depreciation | | 121 | | | 132 | | | 32 | | | — | | | 285 | |
Amortization | | 13 | | | 14 | | | 18 | | | — | | | 45 | |
Capital Expenditures | | 131 | | | 104 | | | 25 | | | — | | | 260 | |
(1) Reconciling items include the elimination of intercompany transactions, corporate-related assets and other amounts to reconcile to consolidated totals. Specific reconciling items for equity income represents a gain associated with the 2021 Yanfeng Transaction of $1,181 million, a gain of $33 million on the sale of Adient's interest in SJA, a $5 million gain on previously held interest at YFAS, offset by $5 million of purchase accounting amortization and $1 million of restructuring
Adient plc | Form 10-K | 98
related charges. Corporate-related assets primarily include cash, deferred income tax assets, and receivables related to the 2021 Yanfeng Transaction.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, 2020 |
| | Reportable Segments | | Reconciling Items(1) | | Consolidated |
(in millions) | | Americas | | EMEA | | Asia | | |
Net Sales | | $ | 5,889 | | | 5,148 | | | $ | 1,822 | | | (189) | | | $ | 12,670 | |
Equity Income | | 1 | | | 8 | | | 256 | | | (243) | | | 22 | |
Total Assets | | 3,019 | | | 2,658 | | | 2,868 | | | 1,716 | | | 10,261 | |
Depreciation | | 128 | | | 129 | | | 38 | | | — | | | 295 | |
Amortization | | 13 | | | 8 | | | 16 | | | — | | | 37 | |
Capital Expenditures | | 138 | | | 164 | | | 24 | | | — | | | 326 | |
(1) Reconciling items include the elimination of intercompany transactions, corporate-related assets and other amounts to reconcile to consolidated totals. Specific reconciling items for equity income represents a $231 million non-cash impairment of Adient's YFAI investment, $8 million of restructuring related charges, $3 million of purchase accounting amortization and a $1 million charge for tax adjustments associated with YFAI. Corporate-related assets primarily include cash and deferred income tax assets.
Adient plc | Form 10-K | 99
Geographic Information
Financial information relating to Adient's operations by geographic area is as follows:
| | | | | | | | | | | | | | | | | | | | |
Net Sales | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Americas | | | | | | |
United States | | $ | 5,876 | | | $ | 5,500 | | | $ | 4,983 | |
Mexico | | 2,427 | | | 2,298 | | | 2,004 | |
Other Americas | | 377 | | | 312 | | | 318 | |
Regional Elimination | | (2,123) | | | (1,946) | | | (1,416) | |
| | 6,557 | | | 6,164 | | | 5,889 | |
EMEA | | | | | | |
Germany | | 862 | | | 1,101 | | | 1,061 | |
Czech Republic | | 962 | | | 1,155 | | | 1,118 | |
Other EMEA | | 4,232 | | | 4,761 | | | 4,392 | |
Regional Elimination | | (1,292) | | | (1,453) | | | (1,423) | |
| | 4,764 | | | 5,564 | | | 5,148 | |
Asia | | | | | | |
China | | 1,374 | | | 642 | | | 517 | |
Thailand | | 508 | | | 469 | | | 400 | |
| | | | | | |
Japan | | 264 | | | 331 | | | 332 | |
Other Asia | | 804 | | | 705 | | | 600 | |
Regional Elimination | | (24) | | | (24) | | | (27) | |
| | 2,926 | | | 2,123 | | | 1,822 | |
| | | | | | |
Inter-segment elimination | | (126) | | | (171) | | | (189) | |
| | | | | | |
Total | | $ | 14,121 | | | $ | 13,680 | | | $ | 12,670 | |
Adient started consolidating CQADNT in China after completing the acquisition on September 30, 2021. Refer to Note 3, “Acquisitions and Divestitures,” of the notes to the consolidated financial statements for additional information.
Adient plc | Form 10-K | 100
| | | | | | | | | | | | | | |
Long-Lived Assets (consisting of net property, plant and equipment) | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 |
Americas | | | | |
United States | | $ | 460 | | | $ | 467 | |
Mexico | | 164 | | | 173 | |
Other Americas | | 19 | | | 22 | |
| | 643 | | | 662 | |
EMEA | | | | |
Germany | | 126 | | | 180 | |
Poland | | 118 | | | 145 | |
Czech Republic | | 29 | | | 41 | |
Other EMEA | | 223 | | | 310 | |
| | 496 | | | 676 | |
Asia | | | | |
China | | 111 | | | 125 | |
Thailand | | 41 | | | 38 | |
Japan | | 47 | | | 58 | |
Other Asia | | 39 | | | 48 | |
| | 238 | | 269 |
| | | | |
Total | | $ | 1,377 | | | $ | 1,607 | |
18. 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. Equity in the net income of nonconsolidated partially-owned affiliates are reported in the "Equity income" line in the consolidated statements of income (loss). Adient maintains total investments in partially-owned affiliates of $286 million and $335 million at September 30, 2022 and 2021, respectively. Operating information for nonconsolidated partially-owned affiliates is as follows:
| | | | | | | | | | | | | | |
| | % ownership at September 30, |
Name of key partially-owned affiliate | | 2022 | | 2021 |
KEIPER Seating Mechanisms Co., Ltd. (KEIPER, previously AYM) | | 50.0% | | 50.0% |
Changchun FAWAY Adient Automotive Systems Co. Ltd. (CFAA) | | 49.0% | | 49.0% |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
(in millions) | | 2022 | | 2021 | | 2020 |
Income statement data: | | | | | | |
Net sales | | $ | 4,039 | | | $ | 8,809 | | | $ | 9,538 | |
Gross profit | | $ | 374 | | | $ | 1,008 | | | $ | 1,111 | |
Net income | | $ | 189 | | | $ | 733 | | | $ | 591 | |
Net income attributable to the entity | | $ | 187 | | | $ | 682 | | | $ | 563 | |
Adient plc | Form 10-K | 101
| | | | | | | | | | | | | | |
| | September 30, |
(in millions) | | 2022 | | 2021 |
Balance sheet data: | | | | |
Current assets | | $ | 1,784 | | | $ | 1,792 | |
Noncurrent assets | | $ | 826 | | | $ | 874 | |
Current liabilities | | $ | 1,843 | | | $ | 1,841 | |
Noncurrent liabilities | | $ | 159 | | | $ | 145 | |
Noncontrolling interests | | $ | 6 | | | $ | — | |
On March 31, 2021, Adient sold its 50% equity interest in SJA to the joint venture partner for $58 million. The income statement data above includes SJA’s results for the first six months of fiscal 2021. On September 30, 2021, Adient sold all of the issued and outstanding equity interest in YFAS held, directly or indirectly, by Adient, which represented 49.99% of YFAS’s total issued and outstanding equity interest to Yanfeng, the joint venture partner, for ¥8,064 million ($1,257 million) as part of the 2021 Yanfeng Transaction. As a result, the balance sheet data as of September 30, 2021 above excludes those of SJA and YFAS. It also excludes that of CQADNT as Adient started consolidating CQADNT after completing the acquisition of additional interest on September 30, 2021. Refer to Note 3, “Acquisitions and Divestitures,” of the notes to the consolidated financial statements for additional information.
During the fourth quarter of fiscal 2022, Adient and KEIPER modified an existing supply agreement, resulting in reductions in Adient’s purchase prices on certain products. Such modifications resulted in reductions of $14 million and $17 million in Adient’s cost of sales and equity income, respectively, during fiscal 2022.
19. 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, trade compliance, 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 $6 million and $8 million at September 30, 2022 and 2021, 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, the often quite lengthy periods over which eventual remediation may occur, and changing environmental laws. 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.
20. Related Party Transactions
In the ordinary course of business, Adient enters into transactions with related parties, such as equity affiliates. Such transactions consist of the sale or purchase of goods and other arrangements. Subsequent to the separation, transactions with the former Parent and its businesses represent third-party transactions.
The following table sets forth the location and amounts of net sales to and purchases from related parties included in Adient's consolidated statements of income (loss):
Adient plc | Form 10-K | 102
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended September 30, |
(in millions) | | | | 2022 | | 2021 | | 2020 |
Net sales to related parties | | Net sales | | $ | 247 | | | $ | 273 | | | $ | 347 | |
Purchases from related parties | | Cost of sales | | 434 | | | 558 | | | 566 | |
The following table sets forth the location and amount of accounts receivable due from and payable to related parties in Adient's consolidated statements of financial position:
| | | | | | | | | | | | | | | | | | | | |
| | | | September 30, |
(in millions) | | | | 2022 | | 2021 |
Accounts receivable due from related parties | | Accounts receivable | | $ | 34 | | | $ | 30 | |
Accounts payable due to related parties | | Accounts payable | | 95 | | | 41 | |
| | | | | | |
Average receivable and payable balances with related parties remained consistent with the period end balances shown above.
Adient plc | Form 10-K | 103