Adient plc — FY2019 Form 10-K
Business and reporting period: Adient is a global automotive seating supplier, with interiors exposure primarily through its 30% investment in Yanfeng Global Automotive Interior Systems (YFAI). This annual report covers the fiscal year ended September 30, 2019; it also reports fourth-quarter results separately. Adient reorganized its reporting segments into Americas, EMEA, and Asia during the year.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $16.526 billion | $17.439 billion |
| Gross profit / gross margin | $801 million / 4.8% | $904 million / 5.2% |
| Operating earnings (loss) before interest and taxes | $229 million | $(1.020) billion |
| Net loss attributable to Adient | $(491) million; $(5.25) per diluted share | $(1.685) billion; $(18.06) per diluted share |
| Cash from operating activities | $308 million | $679 million |
| Capital expenditures | $468 million | $536 million |
| Cash and cash equivalents at year-end | $924 million | $687 million |
| Total debt | $3.738 billion | $3.430 billion |
| Working capital | $281 million | $117 million |
Operating cash flow less capital expenditures was approximately negative $160 million. The current-asset and current-liability balances were $4.116 billion and $3.835 billion, respectively. Net financing charges rose to $182 million from $144 million, reflecting refinancing costs and higher debt and interest rates.
Fiscal 2019 fourth-quarter net sales were $3.921 billion, compared with $4.145 billion in the prior-year quarter. Adient-attributable loss was $4 million, versus a $1.355 billion loss in FY2018 Q4.
Changes versus the prior year
- Annual sales fell $913 million, or 5%, primarily due to $508 million of unfavorable currency effects and lower production volumes in EMEA and Asia; higher Americas volumes partly offset the decline.
- Gross margin decreased to 4.8% from 5.2%. Management cited lower global production and continuing launch and operational performance problems, particularly in the Americas and EMEA.
- Adjusted EBITDA fell in all three segments: Americas to $210 million from $302 million; EMEA to $161 million from $364 million; and Asia to $513 million from $625 million.
- Operating cash flow declined by $371 million, with lower operating profit and working-capital movements among the stated factors.
- The smaller net loss mainly reflects substantial FY2018 impairments and tax charges, not a return to net profitability. FY2018 included $787 million of long-lived-asset impairment, $299 million of goodwill impairment, and a $358 million YFAI investment impairment.
Liquidity, debt, and capital allocation
In May 2019, Adient refinanced debt with a $1.25 billion asset-based revolving facility, an $800 million Term Loan B, and $800 million of 7.00% first-lien notes due 2026, among other existing debt. Revolver availability was $983 million at year-end, subject to borrowing-base capacity. The Term Loan B matures in 2024. Debt agreements contain customary covenants and restrictions, including on additional debt and distributions.
Adient suspended cash dividends after the dividend paid in FY2019 Q1. No shares were repurchased during FY2019. Management reported $5.860 billion of total contractual cash obligations, including debt, interest, leases, purchase obligations, and pension contributions.
Outlook, risks, and unusual items
- Outlook: The filing provides no clear numerical FY2020 revenue or earnings guidance. Management expects the FY2019 restructuring plan to reduce annual operating costs by approximately $109 million when completed, with about 40% expected to result in net savings; actions are expected to be substantially complete in FY2021.
- Market and execution risks: Global light-vehicle production declined 4.8% in FY2019, including a 12.1% decline in China. Risks include automotive cyclicality, pricing pressure, launch and manufacturing inefficiencies, customer production changes, and the ability to deliver the turnaround plan.
- Debt and liquidity risks: Significant leverage, debt-service requirements, covenant compliance, refinancing access, and variable-rate exposure may constrain financial flexibility. Adient had $3.738 billion of debt and $983 million of revolver availability at year-end.
- Tax and valuation items: FY2019 tax expense was $410 million despite only $2 million of income before taxes. Adient recorded valuation allowances, including in Luxembourg, the U.K., and Poland; deferred-tax realizability and the company’s Irish tax status are subject to uncertainty.
- Restructuring and assets: FY2019 included $176 million of restructuring and impairment costs, including a $66 million long-lived-asset impairment, an $18 million impairment of assets held for sale, and restructuring charges. Further impairments or restructuring may be needed if performance worsens.
- Other exposures: The filing identifies currency and commodity volatility, joint-venture risks (including China operations), work stoppages, product liability and warranty claims, cybersecurity, and legal and regulatory risks. Management said existing legal matters were not expected to materially affect results; environmental reserves were $12 million.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Goodwill valuation and impairment assessments were identified as critical audit matters. Goodwill was $2.150 billion at year-end; no FY2019 goodwill impairment was recorded.
Important facts for investors to verify
- Whether segment operating performance improves, especially launch-related costs and freight in the Americas and EMEA.
- Whether operating cash flow recovers and supports capital spending, restructuring payments, and debt service.
- Debt maturity, interest-rate exposure, covenant headroom, and the conditions attached to reported revolver availability.
- Whether restructuring savings are achieved on schedule and translate into net savings as management expects.
- Assumptions behind deferred-tax-asset valuation allowances, goodwill and other asset valuations, and YFAI’s future performance.