Adient plc — Q1 fiscal 2018 summary
Reporting period: Three months ended December 31, 2017. Adient supplies automotive seating globally and participates in automotive interiors mainly through its YFAI joint venture. Figures are in U.S. dollars; financial comparisons are against the three months ended December 31, 2016, whose results were revised for previously disclosed accounting corrections.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $4.204 billion | $4.026 billion |
| Gross profit / margin | $202 million / 4.8% | $350 million / 8.7% |
| EBIT | $102 million | $227 million |
| Income tax provision | $265 million | $28 million |
| Net income (loss) attributable to Adient | $(216) million; $(2.32) per diluted share | $142 million; $1.51 per diluted share |
| Operating cash flow | $(127) million | $(13) million |
| Capital expenditures | $143 million | $207 million |
Revenue rose 4%, principally from Futuris and the consolidation of a China affiliate ($235 million combined contribution), favorable foreign currency translation ($127 million), and European volume growth. These gains were partly offset by lower volumes, particularly in North America and other Asian countries. Cost of sales rose 9%; gross profit fell 42%. Management cited launch inefficiencies, premium freight, higher commodity costs, steel supply constraints, customer interruptions in structures and mechanisms, and lower volumes. It estimated $100 million of incremental costs from these production disruptions during the quarter.
Segment adjusted EBIT was $138 million in Seating, down 45% from $253 million, and $25 million in Interiors, down from $30 million. Seating’s decline reflected the production issues, growth investments, lower volumes, and higher operating costs, partly offset by lower administrative expenses, acquisitions, higher equity income, and currency. Adient said the structures-and-mechanisms issues were expected to continue for the foreseeable future, but at lower levels than in the quarter.
Liquidity, debt, and balance sheet
Cash and cash equivalents were $390 million at December 31, 2017, down from $709 million at September 30, 2017. Current assets were $4.077 billion and current liabilities $3.993 billion, leaving working capital of $84 million, versus $171 million at fiscal year-end. Management attributed the working-capital decrease mainly to payment timing for accounts payable, compensation, restructuring, and income taxes. Cash used in investing activities was $146 million; cash used in financing activities was $49 million, including $26 million of dividends.
Debt comprised $38 million of short-term debt, $2 million of current long-term debt, and $3.461 billion of long-term debt. Net financing charges were $33 million, broadly similar to the prior-year $35 million. Operating cash flow weakened with lower profitability and unfavorable working-capital movements.
Material changes, outlook, and risks
- Tax reform: The quarter included a provisional $258 million estimated tax expense related to the U.S. Tax Cuts and Jobs Act, contributing to a 384% effective tax rate. The estimate included $150 million for remeasurement of deferred tax assets, $100 million for a BEAT-related valuation allowance, and $8 million of transition tax. Adient said the estimate could change as it completes its analysis and receives further guidance; it expected to be subject to BEAT for the foreseeable future.
- Restructuring: A fiscal 2018 Seating plan recorded $13 million of costs, with actions expected to be substantially complete in fiscal 2019. The fiscal 2017 plan is expected to reduce annual operating costs by about $20 million, with full annual benefit expected in fiscal 2020. The fiscal 2016 plan is expected to reduce annual operating costs by about $150 million, with full benefit expected in fiscal 2019. The filing reports approximately 2,000 employees separated and 10 of 18 planned plant closures completed across the plans as of December 31, 2017.
- Business development: After quarter-end, Adient announced a joint venture with Boeing, Adient Aerospace, in which Adient will own 50.01%. The venture plans to develop and sell commercial aircraft seating.
- Contingencies and risks: Adient reported $9 million in environmental reserves and various lawsuits and claims, including product, environmental, employment, and commercial matters; management did not expect known matters to materially adversely affect financial position, results, or cash flows. The filing identifies risks including automotive production levels, raw-material availability and prices, foreign exchange, customer program changes, financing and debt service, tax reform, and execution of the aerospace venture. It reported no material change in previously disclosed risk factors.
- Other items: Adient disclosed prior-period revisions relating to equity income and net-versus-gross sales presentation, which it concluded were not material to previously issued statements. Futuris contributed $120 million of sales in the quarter, with an immaterial net-income impact.
The filing does not provide formal consolidated earnings or revenue guidance. Its outlook commentary focuses on the expected persistence of production issues at lower levels and anticipated restructuring savings.
Investor facts to verify
- Whether Seating production disruptions and their costs decline as management anticipated, and how quickly margins recover.
- Whether the provisional $258 million tax-reform estimate changes, including the expected ongoing BEAT effect.
- Whether operating cash flow and working capital improve while Adient funds capital needs, dividends, restructuring, and debt service.
- Delivery and realization of the stated restructuring savings and completion timelines.
- Final purchase accounting for Futuris and the execution, funding, and expected returns of Adient Aerospace.