Adient plc — Form 10-Q Summary
Business context and period. This is Adient’s first-quarter fiscal 2017 report for the three months ended December 31, 2016. Adient, a global automotive seating supplier with an interiors business conducted primarily through joint ventures, became independent from Johnson Controls on October 31, 2016. The prior-year comparison reflects the former Parent’s combined business, including allocated corporate costs, so results may not be fully comparable with Adient as a standalone company.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $4.038 billion | $4.233 billion |
| Gross profit / margin | $350 million / 8.7% | $368 million / 8.7% |
| EBIT | $234 million | $209 million |
| Net financing charges | $35 million | $2 million |
| Net income attributable to Adient | $149 million | $137 million |
| Diluted EPS | $1.59 | $1.46 |
| Operating cash flow | $(13) million | $90 million |
| Capital expenditures | $207 million | $108 million |
- Sales fell 5%; foreign currency reduced sales by $39 million, while lower volumes accounted for most of the remaining decline. Management cited lower North American and European volumes, including plant wind-downs, partly offset by growth in Asia and South America.
- Gross margin was unchanged year over year. Excluding specified currency and Becoming Adient items, management said gross margin improved 10 basis points, primarily from cost-reduction initiatives.
- Adient’s reported net income rose 9%, supported by lower SG&A and tax expense, partly offset by higher interest costs and unfavorable currency effects. The effective tax rate was 14%, versus 26%.
- Adjusted EBIT, the company’s segment performance measure, was $260 million for Seating versus $237 million, and $30 million for Interiors versus $24 million. The measure excludes specified items and is not the same as reported EBIT.
Liquidity, debt and cash flow
- At December 31, cash and cash equivalents were $709 million; total debt was approximately $3.461 billion, including short-term debt and current maturities. The $1.5 billion revolving credit facility was undrawn.
- Working capital was $160 million, compared with $1.431 billion at September 30. The decrease largely reflects the release and use of approximately $2 billion of restricted bond proceeds; excluding that prior-period restricted cash, management said working capital increased by $763 million.
- Operating cash use was attributed primarily to working-capital movements, including lower accounts payable and accrued liabilities. Investing cash use was $203 million, including $207 million of capital expenditures. Financing provided $833 million, including $228 million transferred from the former Parent after separation.
- Debt includes a $1.5 billion Term Loan A due 2021, $900 million of 4.875% notes due 2026, and euro-denominated notes due 2024. Credit facilities include a quarterly maximum total net leverage covenant of 3.5x adjusted EBITDA and restrictions on certain corporate actions.
Material changes, outlook and risks
- Foreign currency translation drove a $449 million other comprehensive loss; comprehensive loss attributable to Adient was $300 million, compared with a $13 million loss a year earlier. Management primarily attributed the adverse currency impact to euro weakness against the U.S. dollar.
- Adient reported $41 million of Becoming Adient/separation costs in the quarter. Net financing charges rose substantially following the establishment of standalone debt.
- Management expects the fiscal 2016 restructuring plan to reduce annual operating costs by about $150 million, with approximately 70%–75% expected to result in net savings; net savings in fiscal 2017 are expected to be about 30% of the expected annual reduction. The fiscal 2015 plan is expected to reduce annual operating costs by about $130 million, with fiscal 2017 net savings estimated at about 25% of that reduction. These are estimates, not guarantees; full benefits are expected over later fiscal years.
- Key stated exposures include automotive production levels and schedules, economic conditions, foreign exchange, raw-material availability and commodity costs, commercial arrangements, and the ability to meet debt service requirements. Management said known lawsuits and environmental matters were not expected to have a material adverse effect; environmental reserves were $7 million. The filing reported no material change in risk factors from the prior annual report.
- No specific company-wide revenue or earnings guidance was provided in the filing. Management noted global vehicle production increased 6% in the quarter, with China up 11%, Europe up 4%, and North America up 2%.
Most important facts for investors to verify
- How standalone costs, transition services and final working-capital settlements with Johnson Controls affect future results and cash flows.
- Whether lower North American and European volumes persist, and whether growth in Asia and South America offsets them.
- Progress toward restructuring savings, timing and cash cost of execution, and completion of planned plant closures and workforce reductions.
- Debt-service capacity, compliance with the 3.5x leverage covenant, and cash generation after elevated capital spending and restructuring payments.
- How currency movements, especially the euro, affect reported earnings, equity and hedging results; the quarter’s large translation loss is distinct from operating cash flow.