Adient plc — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017. Unless otherwise noted, amounts are USD millions. Adient supplies automotive seating globally and holds interests in automotive-interiors and seating affiliates. It became independent of Johnson Controls on October 31, 2016; prior-year results include the historical combined business and may not be fully comparable with post-separation results.
Financial results
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | $4,017, down 8% from $4,362 | $12,267, down 5% from $12,893 |
| Gross profit / margin | $371 / 9.2%, versus $446 / 10.2% | $1,100 / 9.0%, versus $1,244 / 9.6% |
| EBIT | $296, versus $145 | $816, versus $440 |
| Net income (loss) attributable to Adient | $204, versus $(14); diluted EPS $2.17 versus $(0.15) | $545, versus $(656); diluted EPS $5.80 versus $(7.00) |
| Equity income | $94, versus $89 | $286, versus $260 |
Revenue fell mainly because of lower volumes in North America, Europe and China, plus unfavorable currency translation; growth in Asia and South America partly offset declines. Q3 cost of sales also reflected higher commodity costs and Becoming Adient expenses. Management-reported adjusted EBIT was $336 for the quarter ($317 Seating; $19 Interiors) and $960 for the nine months ($889 Seating; $71 Interiors). These non-GAAP segment figures exclude specified items and reconcile to GAAP EBIT.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $300, compared with $444 a year earlier. Capital expenditures were $417, compared with $312; operating cash flow less capital expenditures was therefore negative $117.
- Cash and cash equivalents were $669 at June 30, 2017. Working capital was $339, down from $1,431 at September 30, 2016, largely because the prior balance included $2.034 billion of restricted cash subsequently released and used in connection with the separation.
- Short-term debt was $6 and long-term debt was $3,393. The $1.5 billion revolving facility was undrawn. The Term Loan A balance was $1.2 billion after $300 million of repayments; the company said the prepayments defer required principal amortization until June 2020. A €165 million European Investment Bank loan was taken out in May 2017.
- The credit facilities include a quarterly maximum total net leverage covenant of 3.5x adjusted EBITDA, alongside other restrictions. Cash from financing activities was $654 for the nine months, including $606 of net transfers from the former parent before separation and $315 transferred by the former parent after separation.
Changes, outlook and risks
- Reported earnings improved substantially year over year, but comparisons are heavily affected by prior-year separation-related tax charges and restructuring costs. The prior-year nine-month tax provision was $1,027, including a $778 million non-cash tax charge related to undistributed earnings and an $85 million non-cash charge associated with the separation. Current-period effective tax rates were 14.7% for the quarter and 14.5% for the nine months.
- Management cited cost-reduction initiatives and lower standalone costs versus former-parent allocations as drivers of lower SG&A. Higher interest expense following separation-related borrowing partly offset operating improvements. Q3 gross margin declined year over year.
- No formal company-wide revenue or earnings guidance is provided in the supplied filing text. Management estimated that the fiscal 2016 restructuring plan would reduce annual operating costs by about $150 million, with full annual benefit expected in fiscal 2019; the plan was expected to be substantially complete in fiscal 2018. The fiscal 2015 plan was expected to reduce annual costs by about $130 million and be substantially complete in fiscal 2017. Remaining reserves were $176 million and $23 million, respectively, and expected to be paid in cash.
- Management said delayed dividends from nonconsolidated affiliates, attributed to post-separation administrative and tax filings, were expected to be paid in fiscal Q4 2017. The filing also identifies risks from automotive production and market conditions, volumes and schedules, commodity and raw-material costs, foreign exchange, financing and debt service, and customer commercial arrangements.
- Adient reported various legal matters and environmental obligations, including an $8 million environmental reserve, and did not expect known matters to have a material adverse effect. It reported no material changes to previously disclosed risk factors, contractual obligations or market-risk exposures. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether lower sales volumes and weaker gross margin persist, and how commodity costs and regional vehicle production affect results.
- Whether restructuring savings are achieved on schedule and net of implementation costs.
- Timing and amount of affiliate dividends, and the company’s ability to generate operating cash flow sufficient to fund capital spending, debt service and shareholder returns.
- Debt covenant headroom and the effect of interest rates and foreign-exchange movements on financing costs and reported results.
- How post-separation comparisons and the unusual prior-year tax charges affect assessments of underlying earnings; the filing notes prior-period related-party disclosure misstatements were revised, with no impact on the financial statements.