Adient plc — Form 10-Q summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2019; comparisons are with the periods ended June 30, 2018. Unless noted, amounts are in millions of U.S. dollars.
Business context and performance
Adient supplies automotive seating systems and components globally and holds an equity interest in Yanfeng Global Automotive Interior Systems (YFAI). It reports three segments: Americas, EMEA, and Asia. Global light-vehicle production fell 5.5% in the quarter and 5.0% in the nine-month period, with particularly sharp declines in China and Europe.
| Metric | Three months 2019 | Three months 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $4,219 | $4,494 | $12,605 | $13,294 |
| Gross profit | $211 | $245 | $588 | $728 |
| Gross margin | 5.0% | 5.5% | 4.7% | 5.5% |
| Operating income (EBIT) | $95 | $89 | $127 | $49 |
| Net income (loss) attributable to Adient | $(321) | $54 | $(487) | $(330) |
| Diluted EPS | $(3.43) | $0.58 | $(5.21) | $(3.54) |
Quarterly sales declined 6%, mainly from unfavorable currency effects and lower EMEA and Asia volumes, partly offset by Americas growth. Nine-month sales declined 5%. Gross margin fell in both periods amid launch inefficiencies in the Americas and EMEA, lower volumes, foreign exchange, higher freight rates, and operational waste. Equity income declined to $64 million for the quarter and $209 million year to date, reflecting lower China affiliate sales and continuing YFAI operating issues.
Cash flow, debt, and liquidity
- For the nine months, operating cash flow was $306 million, investing cash outflow was $278 million, and financing cash inflow was $300 million. Capital expenditures were $350 million; operating cash flow less capital expenditures was approximately negative $44 million.
- Cash and cash equivalents were $1,025 million at June 30, 2019, versus $687 million at September 30, 2018. Working capital was $290 million, up from $117 million.
- Debt was approximately $3,777 million, including short-term debt and current maturities, versus approximately $3,430 million at September 30, 2018. Long-term debt, net of issuance costs and current portion, was $3,762 million.
- May refinancing established a $1.25 billion asset-based revolving facility, with $1,054 million of availability at quarter-end; an $800 million secured term loan; and $800 million of 7.00% first-lien notes due 2026. The refinancing repaid the prior credit facilities and increased financing costs. Nine-month net financing charges rose to $135 million from $109 million.
- Adient suspended future dividends after the first-quarter fiscal 2019 payment. New debt agreements include customary restrictive covenants and default provisions.
Material changes, outlook, and risks
- Tax charges: Quarterly tax expense was $338 million despite $30 million of pretax income. The nine-month tax expense was $412 million despite a pretax loss of $11 million. Major drivers included deferred-tax-asset valuation allowances in Luxembourg, the U.K., and Poland, and no tax benefit for losses in certain jurisdictions.
- Impairments and restructuring: A $66 million non-cash impairment charge was recorded in the second quarter for long-lived assets in the Americas and EMEA. Fiscal 2019 restructuring charges were $96 million, primarily for workforce reductions; the remaining 2019 plan reserve was $76 million, expected to be paid in cash. Management expects the 2019 actions to be substantially complete in fiscal 2019. No specific company-wide earnings or revenue guidance is provided in the supplied filing text.
- Earlier restructuring plans carry estimated annual operating-cost reductions of about $65 million for the 2018 plan, $40 million for the 2017 plan, and $150 million for the 2016 plan; management notes that only a portion is expected to translate into net savings.
- Management identifies risks including automotive production and demand, launch execution and turnaround progress, tariffs and trade relations, raw-material availability and prices, currency movements, debt service, and performance of affiliates and Adient Aerospace. The Americas goodwill valuation had only a 1% fair-value cushion; weaker cash flows or changed assumptions could result in impairment.
- Adient expects the lease accounting standard effective October 1, 2019 to have a significant balance-sheet impact; its full impact was still under evaluation. Management said known litigation and environmental matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether launch inefficiencies, freight costs, and operational waste improve, especially in the Americas and EMEA.
- Cash generation relative to capital spending, debt-service needs, and the terms and covenant headroom under the May refinancing.
- Further changes to deferred-tax valuation allowances and the recoverability of tax assets.
- Progress on restructuring execution and realized net savings, and whether additional impairments are required, particularly for Americas goodwill.
- Trends in China vehicle production, YFAI and other affiliate results, and the company’s stated outlook, for which no specific quantified guidance is provided here.