Adient plc — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing also reports fourth-quarter results. Adient is a global automotive seating supplier; it participates in automotive interiors mainly through its 30% investment in Yanfeng Global Automotive Interior Systems (YFAI).
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $17.439 billion | $16.213 billion |
| Gross profit / margin | $911 million / 5.2% | $1.408 billion / 8.9% |
| Operating income (loss), before interest and taxes | $(977) million | $1.193 billion |
| Net income (loss) attributable to Adient | $(1.685) billion | $877 million |
| Operating cash flow | $679 million | $746 million |
| Capital expenditures | $536 million | $577 million |
| Cash and cash equivalents at year-end | $687 million | $709 million |
| Total debt | $3.430 billion | $3.478 billion |
| Working capital | $117 million | $171 million |
FY2018 sales increased 8%, reflecting the full-year effects of Futuris and a consolidated China affiliate, favorable currency, and higher European volumes; lower North American and Asian volumes partly offset growth. Gross margin fell as launch inefficiencies, premium freight, operational waste, and higher commodity costs pressured profitability. Net financing charges were $144 million, up from $132 million, primarily because of greater use of the revolving facility. The company reported a $1.685 billion attributable net loss, or $(18.06) per diluted share.
In Q4 FY2018, sales were $4.145 billion versus $3.979 billion in Q4 FY2017. Adient recorded an attributable net loss of $1.355 billion, compared with income of $344 million in the prior-year quarter; Q4 diluted loss per share was $14.51.
Material changes and unusual items
- FY2018 included $1.181 billion of restructuring and impairment costs, including $787 million of long-lived asset impairments and $299 million of goodwill impairment in SS&M, plus $49 million for assets held for sale and $46 million of restructuring costs.
- Adient recorded a $358 million non-cash impairment of its YFAI investment. Equity results shifted from $522 million of income in FY2017 to a $13 million loss in FY2018; the prior year included a $151 million gain on a previously held China affiliate interest.
- Income tax expense was $480 million despite a pretax loss. FY2018 included $555 million of valuation-allowance charges and a $210 million estimated impact of U.S. tax reform. The company cautioned that further valuation-allowance changes could materially increase tax expense.
- Segment adjusted EBITDA declined to $1.411 billion in Seating from $1.578 billion; SS&M fell to a $168 million loss from $82 million of income; Interiors fell to $62 million from $93 million.
- FY2018 operating cash flow was $679 million, down from $746 million. Cash used in investing was $487 million; financing activities used $213 million. A new €200 million receivables-transfer arrangement had $142 million funded at year-end.
Liquidity, outlook, and risks
Year-end current assets were $4.309 billion against current liabilities of $4.192 billion. The $3.430 billion of total debt included a $1.2 billion Term Loan A, dollar and euro notes, and a European Investment Bank loan. No revolving-credit borrowings were outstanding at year-end. In the first quarter of FY2019, the company amended its credit facilities, raising the maximum net leverage covenant to 4.5x adjusted EBITDA, with step-down provisions beginning in the quarter ending December 31, 2020; borrowing margins could also increase.
The filing provides no quantified company-wide revenue or earnings guidance. Management estimated the FY2018 restructuring plan could reduce annual operating costs by about $65 million, with approximately 55% expected to translate into net savings; actions were expected to be substantially complete in FY2019. Adient suspended future dividends after its FY2019 first-quarter dividend. Douglas Del Grosso became CEO in October 2018.
Principal risks include persistent SS&M and launch-performance problems, customer pricing pressure, commodity and supply constraints, cyclical vehicle production, China competition and joint-venture performance, debt service and covenant compliance, foreign-exchange exposure, and uncertainty around tax reform and deferred tax asset realization. Management said pending lawsuits and claims were not expected to materially affect financial position, results, or cash flows. The auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Investor verification priorities
- Whether SS&M turnaround actions improve operating performance and prevent further impairments.
- Actual delivery of the restructuring savings and associated cash costs.
- Progress on debt leverage, covenant headroom, and the cost and availability of financing.
- Future tax expense and the recoverability of deferred tax assets, including the provisional BEAT estimate.
- YFAI operating results, investment valuation, and any further impairment risk.
- Dividend policy and liquidity needs given the suspension of future dividends.