Adient plc — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also reports unaudited fourth-quarter results. Adient became independent from Johnson Controls on October 31, 2016, so prior-year results reflect its former-parent structure and are not fully comparable with standalone results.
Business context and reporting period
Adient is a global automotive seating supplier, operating approximately 238 manufacturing or assembly facilities in 34 countries. Its reportable segments are Seating and Interiors; Interiors activity is primarily reflected through equity income from the Yanfeng Global Automotive Interior Systems joint venture (YFAI). In September 2017, Adient acquired Futuris, a seating and interiors supplier, and gained control of a China seating affiliate.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $16.213 billion | $16.790 billion |
| Gross profit / margin | $1.408 billion / 8.7% | $1.609 billion / 9.6% |
| EBIT | $1.193 billion | $399 million |
| Net income (loss) attributable to Adient | $877 million | $(1.546) billion |
| Operating cash flow | $746 million | $(1.034) billion |
| Capital expenditures | $577 million | $437 million |
| Cash and cash equivalents at year-end | $709 million | $105 million |
| Total debt | $3.478 billion | $3.521 billion |
FY2017 sales declined 3%, mainly from lower North American volumes and $97 million of unfavorable currency translation, partly offset by growth in Europe and Asia and $64 million of sales from a newly consolidated China affiliate. Gross profit fell $201 million as lower volumes and higher commodity costs, including steel, pressured profitability. Equity income rose to $522 million, including a $151 million gain on Adient’s previously held interest in the China affiliate; excluding that gain and currency effects, equity income increased 12%.
Net income improved primarily because FY2016 included $1.891 billion of one-time separation-related tax charges, alongside higher separation and restructuring costs. FY2017’s effective tax rate was 9%, below Ireland’s 12.5% statutory rate, principally due to global tax planning, notional interest deductions, foreign tax differentials and foreign exchange effects.
Fourth-quarter FY2017 sales were $3.979 billion; net income attributable to Adient was $344 million, or $3.67 diluted EPS. Fourth-quarter results exceeded the preceding quarters’ attributable net income, but included the acquisition accounting gain on the China affiliate.
Operating cash flow was positive, but working-capital changes, restructuring payments and accounts-payable timing weighed on cash generation. Investing cash use was $795 million, including $247 million net cash for acquisitions and higher capital expenditures. Financing cash flow included parent funding under the separation arrangements, as well as debt repayments, dividends and share repurchases; it should not be viewed as recurring operating liquidity. Working capital was $171 million, versus $1.431 billion a year earlier, primarily reflecting release of $2 billion in restricted cash. Adient had no amounts drawn under its $1.5 billion revolving credit facility and was in compliance with its 3.5x maximum net-leverage covenant at year-end.
Material changes versus prior periods
- Seating adjusted EBIT increased 5% to $1.151 billion, despite lower volumes and $110 million of higher commodity costs; cost reductions, commercial improvements and higher equity income partly offset those pressures.
- Consolidated sales were down 3% year over year. Fiscal 2016 sales comparisons are also affected by the 2015 deconsolidation of the interiors business into YFAI.
- Net financing charges rose to $132 million from $22 million, reflecting Adient’s post-separation debt structure.
- FY2017 included $95 million of “Becoming Adient” costs and $46 million of restructuring and impairment costs, but only $10 million of separation costs, versus $369 million in FY2016.
- Adient revised prior-period financial statements for errors in equity income related to affiliate engineering costs and for sales reported gross rather than net. The company stated these prior misstatements were not material, but revised comparative amounts and planned further revisions to FY2017 interim periods.
Outlook, commentary and risks
The filing provides no specific consolidated revenue or earnings guidance for FY2018. Management expects the 2017 restructuring plan to reduce annual operating costs by approximately $20 million, with roughly 60%–65% expected to be net savings; savings are expected to accrue during FY2018–FY2019, with the full annual benefit in FY2020. Management also expects continued growth in China as the automotive market expands. These expectations are not guarantees.
Key risks include automotive production cycles and customer vehicle mix; customer price reductions and inability to offset them with cost savings; commodity costs and supply interruptions; foreign-exchange exposure; competition and customer sourcing changes; successful integration and realization of Futuris synergies; joint-venture partner risks; product liability, warranty and recall claims; and high debt service and covenant requirements. The filing also discusses uncertainty around Brexit, trade policy, cyber and data security, and the tax treatment of Adient’s Irish incorporation and separation. Management described legal proceedings as ordinary-course matters and did not expect known claims to materially affect financial position, results or cash flows; environmental reserves were $9 million.
The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective. Management and the auditor excluded Futuris and the newly consolidated China affiliate from the internal-control assessment; together they represented approximately 3% of year-end assets and less than 1% of FY2017 revenue.
Important facts for investors to verify
- How much of FY2017 earnings and equity income reflects the $151 million China affiliate remeasurement gain and other nonrecurring items.
- Whether Seating margins recover as commodity costs, North American volumes and customer pricing evolve.
- Futuris integration progress, final purchase-price allocations, and realization of expected synergies.
- Cash conversion after separating parent transfers and other one-time cash flows; also monitor working capital, capital spending and scheduled debt service.
- Progress against restructuring savings and execution milestones, and compliance with the 3.5x leverage covenant.
- Effects of the prior-period and interim-period revisions, and any material developments in tax audits or separation-related tax risks.