In re Adient PLC Sec. Litig.
| Decision Date | 02 April 2020 |
| Docket Number | No. 18-CV-9116 (RA),18-CV-9116 (RA) |
| Parties | IN RE ADIENT PLC SECURITIES LITIGATION |
| Court | U.S. District Court — Southern District of New York |
OPINION & ORDER CLASS ACTION
Lead Plaintiff Bristol County Retirement System and Additional Named Plaintiff Jackson County, Missouri Revised Pension Plan (collectively, "Plaintiffs") bring this federal securities class action against Adient plc ("Adient" or the "Company"), Adient's former CEO R. Bruce McDonald, and Adient's CFO Jeffrey M. Stafeil (collectively, "Defendants"1), alleging that, from October 17, 2016 to November 8, 2018, Defendants committed securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Specifically, Plaintiffs allege that Defendants made false and misleading statements with respect to a particular segment of Adient's business, known as "Metals," and with respect to its projection that it would achieve 200 basis points of margin expansion by 2020 ("the projected margin expansion"). Before the Court is Defendants' motion to dismiss Plaintiffs' Second Amended Consolidated Class Action Complaint. For the reasons that follow, Defendants' motion to dismiss is granted.
The following facts are drawn from Plaintiffs' Second Amended Consolidated Class Action Complaint (the "SAC"), Dkt. 55, and are assumed to be true for the purpose of this motion. See Stadnick v. Vivint Solar, Inc., 861 F.3d 31, 35 (2d Cir. 2017).
Defendant Adient is an automative seating manufacturing company that is tax domiciled in Ireland and has its principal executive offices in Dublin. SAC ¶¶ 2, 27. Adient designs, engineers, and manufactures automative seating for all vehicle classes and major original equipment manufacturers. Id. ¶¶ 3, 32. On October 31, 2016, Adient spun off from Johnson Controls International plc ("JCI"), and began publicly trading its shares at that time. Id. ¶ 2. Adient's fiscal year runs from October 1 to September 30. Id. ¶ 31.
Defendant McDonald served as Adient's CEO and Chairman of the Board until June 11, 2018, when he retired. Id. ¶ 28. Prior to the spinoff, McDonald was the Vice Chairman of JCI from 2014 to 2016, the CFO of JCI from 2005 to 2014, and Executive Vice President of JCI from 2006 to 2016. Id. Defendant Stafeil is—and at all relevant times was—Adient's Executive Vice President and CFO. Id. ¶ 29.
Court-appointed Lead Plaintiff Bristol County Retirement System and Additional Named Plaintiff Jackson County, Missouri Revised Pension Plan represent all persons and entities who purchased or otherwise acquired Adient's publicly traded securities between October 31, 2016 and November 8, 2018 (the alleged "Class Period"). Id. ¶¶ 1, 25-26.
In July 2015, JCI announced that it would spin off its auto parts business to form a separatepublic company, which was expected to debut in mid- to late-2016. Id. ¶ 37. Between July 2015, when JCI announced the spinoff, and October 2016, when the spinoff was complete, Adient announced plans to heavily invest in the automative seating business to "spur growth and improve margins." Id. ¶ 38. Adient's spinoff was effective October 31, 2016. Id. ¶ 50.
During a September 15, 2016 investor meeting, leading up to the October 31, 2016 spinoff, Defendants announced that Adient was a "solid investment," id. ¶ 47, and, among other things, that Adient was positioned to achieve 200 basis points of margin expansion by 2020, as well as topline growth in 2018 and 2019, see id. ¶¶ 38-39, 48-49. The basis for the projected margin expansion was explained as follows: 75 percent (or 150 basis points) would result from an immediate reduction in "Selling, General, and Administrative" ("SG&A") expenses, and 25 percent (or 50 basis points) would result from an improvement in the Metals division. See Def. Mot. Ex. 3 at 6-7; see also SAC ¶ 116. Adient also represented that its margin expansion would come "predominantly from growth in its core [Metals] business." Id. ¶ 39.
For most of the Class Period, Adient's business was divided into two segments: (1) Seating and (2) Interiors. Id. ¶ 33. The Seating division included "Seat Structures & Mechanisms" ("SS&M"), which was also known as "Metals." Id. ¶¶ 3, 33.2 The "seat structure" is "essentially the seat frame,"3 i.e., the part of the seat that a passenger sits on in the vehicle. Id. ¶ 32. The seat "mechanisms" are the "recliners, tracks, and height adjusters." Id.
In the second quarter of fiscal 2018, Adient restructured its reporting segments, and Metalsbecame a "standalone reporting segment." Id. ¶ 33. Thereafter, Adient's business was divided into three segments: (1) Seating, (2) Seat Structures & Mechanisms (i.e., Metals), and (3) Interiors. Id.
According to seven confidential witnesses (the "CWs"), all of whom are former Adient employees, Adient's Metals division had been experiencing problems for many years prior to the spinoff from JCI. See id. ¶ 51-67. Based on the CWs' statements, Plaintiffs allege that serious problems existed within the Metals segment prior to and throughout the Class Period, and that such issues were made known to McDonald, Stafeil, and other top Adient executives, but were not publicly disclosed. See id. ¶¶ 68-79, 88-106.
Plaintiffs allege that various operational issues existed within Metals throughout the Class Period. These issues fall into the following general categories: (1) personnel and staffing issues, (2) issues with cutting SG&A expenses, (3) quality and execution issues with respect to its launch programs, and (4) increased costs and subsequent delays. The Court addresses these issues in turn.
First, the CWs allege that Adient was inadequately staffed and, in particular, lacked sufficient qualified personnel for its program launches. For instance, Adient allegedly "made deep cuts to its ranks in an effort to cut costs," which apparently left the Metals business "shorthanded and in disarray." Id. ¶ 40. According to CW-2, Adient "terminated too many people with institutional knowledge" prior to the spinoff. Id. ¶ 62. CW-3 similarly reported that, prior to the spinoff, Adient terminated "a lot of people it ultimately needed for launching new programs," and that while Adient "was making substantial cuts in its workforce," it nonetheless "committed to a very high number of program launches." Id. ¶ 63. CW-3 asserts that "reductions in personnel" in Metals "had a detrimental effect on Adient's launch programs," and that, beginning in mid-2015, there was a "hugeinflux of new programs to be launched in 2017-2018, but not enough people to properly handle the launches." Id. ¶ 78.
Some of the CWs also allege that they internally raised their concerns about inadequate staffing. For instance, CW-2 alleges that he raised his concerns about "the fact that Adient's development program was highly understaffed" to Byron Foster, an Executive Vice President, and that Foster reported those concerns to McDonald. Id. ¶ 62. According to CW-1, Adient needed to hire additional employees for its program launches, but "neither McDonald nor [Eric Mitchell, an Executive Vice President] would approve the headcount increases." Id. ¶ 68. CW-3 also alleges that "decisions on resource allocation came from corporate." Id. ¶ 63.
At the same time, Adient's executive management, including McDonald and many others at the VP and EVP level, allegedly "lacked sufficient operational experience" of their own. Id. ¶ 40. According to the CWs, these top executives "had limited or no operational or manufacturing experience." Id. ¶ 71. According to CW-1, for instance, Adient (and JCI) apparently "did not have the right people with the right discipline to run the Metals business." Id. CW-1 also asserts that, generally, Adient lacked "the depth of operational leadership" and "fundamentally did not have the development teams . . . that were needed to launch the programs successfully." Id. ¶ 68. Plaintiffs also allege that Adient executives repeatedly "failed to act on warnings from employees with operational experience" who raised certain "red flags" about Metals and the Company's upcoming launches, as discussed more below. See id. ¶¶ 40, 71.
Second, Plaintiffs allege that McDonald "cut SG&A" in 2017, "which exacerbated product launch problems in the second half of 2017." Id. ¶ 68. In particular, Plaintiffs assert that McDonald made these cuts instead of "hir[ing] or subcontract[ing] with the requisite personnel who could assist with launch execution." Id. ¶ 43. Plaintiffs also allege that, as "problems worsened," Adient "shiftedpersonnel resources to launches experiencing the most severe problems," which caused further delays and increased costs on other projects. Id.
Third, Plaintiffs assert that Adient experienced serious "execution issues" and "quality issues" in connection with its launches. Specifically, by the time new programs started to launch in 2017, Adient apparently faced "a wide range of serious problems," such as "high cycle times," "poor machine utilization rates," and other "quality issues which resulted in containment costs and the implementation of additional contract milestones by certain customers once launch issues materialized." Id. ¶ 41.
Fourth, Plaintiffs allege that Adient faced "massively increasing costs" during the Class Period. See id. ¶¶ 80-87. Such "increased extrinsic costs" included "exorbitant premium freight shipping" and "alternate supplier costs." Id. ¶ 41. For instance, CW-3 alleges that Adient's "resource problems at the plant level" forced the Company to "use expensive means to get parts faster," which caused Adient to incur expenses in the form of "consultants, premium freights, and additional expediting costs related to tool vendors." Id. ¶ 83. Adient's program launches allegedly ...
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