Adient plc — Fiscal 2020 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended June 30, 2020; quarter-end balance-sheet date June 30, 2020. Adient supplies automotive seating systems and components, with operations across the Americas, EMEA and Asia.
Financial results and liquidity
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $1.626 billion | $4.219 billion | $9.073 billion | $12.605 billion |
| Gross profit (loss) | $(153) million; (9.4)% margin | $211 million; 5.0% margin | $347 million; 3.8% margin | $588 million; 4.7% margin |
| Operating income (loss), before interest and taxes | $(269) million | $95 million | $(245) million | $127 million |
| Net loss attributable to Adient | $(325) million; $(3.46) per share | $(321) million; $(3.43) per share | $(511) million; $(5.45) per share | $(487) million; $(5.21) per share |
| Net financing charges | $58 million | $60 million | $156 million | $135 million |
- Cash flow: For the first nine months, operating activities used $272 million, versus $306 million provided in the prior year. Investing activities used $280 million; financing activities provided $679 million. Capital expenditures were $258 million, compared with $350 million.
- Cash and liquidity: Cash was $1.032 billion at June 30, versus $924 million at September 30, 2019. Working capital was $376 million. ABL availability was $155 million at quarter-end, net of letters of credit; Adient repaid the remaining $179 million ABL borrowing in July.
- Debt: Reported short-term debt was $372 million, current long-term debt $8 million and long-term debt $4.147 billion. The $600 million 9.00% secured notes issued in April increased borrowing and financing costs.
- Segment performance: Q3 adjusted EBITDA was $(83) million in the Americas, $(94) million in EMEA and $71 million in Asia. Sales fell in all three regions.
Material changes versus the prior comparable period
- Q3 sales declined 61% year over year and nine-month sales declined 28%, chiefly reflecting COVID-19-related production shutdowns and lower volumes. Global light-vehicle production fell 45.2% in Q3; China production increased 9.1%, while other major regions contracted sharply.
- Q3 gross profit swung to a loss as reduced volume outweighed cost reductions and operational improvements. Q3 net loss was similar to the prior year, while the nine-month net loss widened by $24 million.
- Nine-month equity results fell from $209 million of income to a $57 million loss, including a $222 million non-cash impairment of the YFAI investment. A further $6 million impairment was recorded in Q3.
- Cash from operations deteriorated, with working-capital movements—particularly accounts payable—contributing to the cash outflow. Debt increased, including from the new 9.00% notes.
Outlook, risks and unusual items
- Management said most plants had resumed production by June 30, but output remained well below pre-pandemic levels. It expects continued uncertainty and lower vehicle demand; the filing provides no quantified earnings or revenue guidance.
- Management believed available financial resources would meet liquidity requirements for at least 12 months, based on its assumptions about COVID-19 and planned actions. The filing cautions that the pandemic’s duration, resurgence and financial effects are uncertain.
- Adient forecast it would not meet the EIB loan’s leverage covenant during the next 12 months. The loan was classified as short-term; the company may need another amendment or waiver, or to repay the loan.
- Planned YFAI-related transactions are expected to provide approximately $334 million of liquidity, and the fabrics-business sale approximately $175 million. Both were expected to close by fiscal year-end 2020, subject to regulatory approvals and other conditions. YFAI proceeds include deferred consideration and are not guaranteed until closing and collection.
- Adient expected approximately $280 million of dividends from Chinese joint ventures during FY2020; about $250 million had been received by June 30. Collection of the remainder is not assured.
- Q3 included $49 million of restructuring and impairment costs, including a $27 million non-cash impairment of China long-lived assets. The nine-month period also included a $25 million loss on the RECARO sale and Adient Aerospace deconsolidation. The tax provision was $5 million despite the quarterly pre-tax loss, principally because tax benefits were not recognized in some loss jurisdictions.
- The 2020 restructuring plan totaled $86 million and was expected to be substantially completed by FY2022; management estimated approximately $85 million of annual operating-cost reductions when completed. Restructuring plans across fiscal 2016–2020 targeted approximately 12,000 employee reductions.
- Management did not expect pending lawsuits and claims to materially affect financial position, results or cash flows. Environmental reserves were $11 million. Gross tax-effected unrecognized tax benefits were $404 million.
Most important facts for investors to verify
- Subsequent quarterly filings: production recovery, sales volumes and whether gross margins and segment profitability improve.
- Completion, final proceeds and timing of the YFAI/Yanfeng and fabrics transactions, including regulatory approvals and deferred YFAI consideration.
- Status of EIB covenant compliance, any amendment or waiver, and the company’s ability to service and refinance its debt.
- Actual cash generation, ABL borrowing-base availability, joint-venture dividend receipts and liquidity versus management’s 12-month assessment.
- Further impairments, restructuring costs and savings realization, as well as tax valuation-allowance changes.