Adient plc — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018; comparison is with the three months ended December 31, 2017. Adient supplies automotive seating systems and components, and participates in automotive interiors primarily through equity affiliates.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $4.158 billion | $4.204 billion |
| Gross profit / margin | $180 million / 4.3% | $201 million / 4.8% |
| EBIT | $54 million | $101 million |
| Net income (loss) attributable to Adient | $(17) million; $(0.18) per diluted share | $(216) million; $(2.32) per diluted share |
| Operating cash flow | $(128) million | $(127) million |
| Capital expenditures | $144 million | $143 million |
| Cash and cash equivalents, period end | $406 million | $687 million at September 30, 2018 |
Cash flow after capital expenditures was approximately $(272) million. Current assets were $3.668 billion and current liabilities $3.675 billion, leaving negative working capital of $7 million. Total debt was approximately $3.409 billion, comprising $8 million short-term debt, $2 million current long-term debt, and $3.399 billion long-term debt. The $1.5 billion revolving credit facility was undrawn.
Changes versus prior-year quarter
- Sales declined 1%, mainly due to $94 million of unfavorable currency effects and lower Europe and China volumes, partly offset by higher North America and Asia volumes.
- Gross profit fell 10%; management cited ongoing Seating performance problems, including launch inefficiencies, higher freight and operational waste.
- Equity income declined 14% to $83 million, reflecting lower profitability at certain Seating affiliates, issues at Yanfeng Global Automotive Interior Systems (YFAI), and currency effects.
- Seating adjusted EBITDA fell to $261 million from $354 million. SS&M’s adjusted EBITDA loss narrowed to $72 million from $82 million; Interiors adjusted EBITDA declined to $11 million from $25 million.
- The much smaller attributable net loss primarily reflects the prior-year $258 million tax charge related to U.S. tax reform—not an improvement in core operating performance. Current-quarter EBIT also declined substantially.
Liquidity, outlook, risks and notable items
- Adient reported $31 million of restructuring and impairment costs. It committed to a $25 million FY2019 workforce-reduction plan, expected to be substantially completed during FY2019. Existing restructuring plans carry additional expected cash payments; management estimates annual operating-cost reductions from earlier plans, but realization remains execution-dependent.
- After paying the Q1 dividend of $0.275 per share, Adient suspended future dividends. The quarter’s cash balance decreased by $281 million from September 30, 2018.
- The credit-facility covenant was amended in November 2018, including a less restrictive total-net-leverage limit of 4.5x adjusted EBITDA and higher potential interest margins. A February 6, 2019 amendment, subsequent to quarter-end, added a first-lien secured leverage covenant and revised pricing and other terms. Management stated it expected covenant compliance for the foreseeable future and was exploring financing options, including refinancing.
- Automotive light-vehicle production fell 2.8% globally in the quarter, including declines of 10.7% in China and 3.4% in Europe. Management highlighted risks from production levels, launch execution, tariffs and trade relations, raw-material availability and prices, foreign exchange, debt service and the turnaround effort.
- Other notable items: Adient Aerospace became operational in October 2018 as a consolidated 50.01%-owned venture; Adient contributed $28 million to it. The remaining Detroit properties and an airplane were sold for approximately $35 million. An equity-swap fair-value loss of $17 million was recorded in SG&A. Management reported no material change in previously disclosed risk factors and did not identify a legal matter expected to have a material adverse effect.
- No specific earnings or sales guidance is provided in the supplied filing text. Adient said adoption of ASC 606 had no significant effect; it expected the upcoming lease-accounting standard to have a significant balance-sheet impact.
Important facts for investors to verify
- Whether Seating launch inefficiencies and operational waste improve, given the sharp decline in Seating adjusted EBITDA.
- Cash generation, working-capital trends, capital spending and the pace of cash use relative to available liquidity.
- Compliance with the amended debt covenants, refinancing progress, borrowing costs and ability to meet debt-service requirements.
- Whether restructuring savings are achieved on schedule and offset the associated cash costs.
- Performance at YFAI and other equity affiliates, and the impact of production weakness in China and Europe.
- Future dividend policy and any material changes in tax valuation allowances or contingent liabilities.