Adient Plc quarterly report, Q1 FY2020

Business context and reporting period

Adient plc is a global automotive seating supplier, with operations managed across the Americas, EMEA, and Asia. This Form 10-Q covers the first quarter of fiscal 2020, the three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018 unless otherwise noted. Results are unaudited.

Key financial metrics

Metric	Q1 FY2020	Q1 FY2019
Net sales	$3.936 billion	$4.158 billion
Gross profit / margin	$263 million / 6.7%	$180 million / 4.3%
Operating result (earnings before interest and taxes)	Loss of $42 million	Income of $54 million
Net income (loss) attributable to Adient	Loss of $167 million; diluted EPS $(1.78)	Loss of $17 million; diluted EPS $(0.18)
Operating cash flow	$239 million	Use of $128 million
Capital expenditures	$91 million	$144 million

Cash and cash equivalents were $965 million at December 31, 2019, versus $924 million at September 30, 2019. Current assets were $3.799 billion and current liabilities $3.683 billion, leaving working capital of $116 million, down from $281 million at fiscal year-end. Debt included $3.740 billion of long-term debt, $8 million current long-term debt, and $6 million short-term debt. Availability under the asset-based revolving credit facility was $1.059 billion.

Material changes versus the prior comparable period

• Revenue fell 5%, primarily due to lower volumes across regions and a $43 million unfavorable foreign-exchange impact, partly offset by commercial settlements and pricing adjustments.
• Gross profit rose $83 million as a result of settlements and pricing, fewer launch inefficiencies, and lower operational waste and freight costs; lower volumes partly offset these improvements.
• Equity income of $83 million shifted to an equity loss of $113 million, principally reflecting a $216 million non-cash impairment of the YFAI investment. Equity results also benefited from $10 million of affiliate tax-credit benefits that management said are not expected to recur.
• Net loss attributable to Adient widened by $150 million. In addition to the YFAI impairment, the quarter included a $21 million RECARO sale loss, a $4 million Adient Aerospace deconsolidation loss, and $13 million higher net financing charges.
• Operating cash flow improved by $367 million year over year, which management attributed primarily to higher profitability and favorable working-capital movements. Cash used in investing activities was $128 million; financing activities used $74 million.
• Segment sales declined in the Americas by 4%, EMEA by 5%, and Asia by 12%. Adjusted EBITDA increased in each segment: Americas $94 million versus $43 million, EMEA $49 million versus $2 million, and Asia $177 million versus $154 million.

Outlook, management commentary, risks and unusual items

• The filing provides no specific company-wide revenue or earnings guidance. Management cited weaker vehicle production: global light-vehicle production declined 5.1% year over year, including declines of 9.5% in North America and 7.0% in Europe; China production increased 1.4%.
• On January 31, 2020, Adient and Yanfeng entered into a conditional agreement that includes Adient’s sale of its 30% YFAI stake for $379 million, a $20 million transfer of mechanism-business intellectual property to AYM, and an extension of the YFAS joint venture through 2038. Closing is subject to regulatory and other conditions and was expected by the end of fiscal 2020. Proceeds were expected to support debt reduction and general corporate purposes. Adient will cease recording equity income from YFAI after December 31, 2019.
• Adient sold its RECARO automotive high-performance seating business on December 31, 2019 for de minimis proceeds. It also reduced its Adient Aerospace ownership to 19.99% and deconsolidated the business in October 2019.
• Management reported that the fiscal 2019 restructuring plan is expected to reduce annual operating costs by approximately $109 million, with approximately 35–40% expected to result in net savings. Restructuring actions across plans were expected to be substantially completed by fiscal 2021; about 6,200 of approximately 8,900 planned employee separations and 15 of 18 plant closures had been completed by December 31, 2019.
• Key risks include further weakness or disruption in automotive production, execution of the turnaround and new program launches, debt-service and capital-market access, foreign-exchange exposure, and completion of the Yanfeng-related transactions. Adient was assessing the potential effects of the coronavirus outbreak in China; its business impact was uncertain. Brexit-related market and operating effects also remained uncertain.
• Other items to monitor include $425 million of gross tax-effected unrecognized tax benefits, an $11 million environmental reserve, and lease liabilities of $376 million recognized at December 31, 2019 following adoption of the new lease standard. Management stated that pending litigation and known environmental matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective.

Most important facts for investors to verify

• Whether the YFAI, YFAS, and AYM transactions receive required approvals and close on expected terms and timing, including the actual cash proceeds and debt reduction.
• Whether improved gross margin and segment adjusted EBITDA can be sustained despite lower production volumes, and how results change after YFAI equity income ends.
• Operating cash-flow durability, working-capital requirements, capital spending, and available revolving-credit capacity.
• Debt balances, interest expense, covenant compliance, and refinancing or debt-service risks.
• Actual restructuring savings and remaining workforce reductions and plant closures; also whether the China tax-credit benefits recur despite management’s expectation that they will not.
• Developments in automotive production, the coronavirus-related impact on China operations and supply chains, and material changes in tax, litigation, environmental, or other contingencies.