Adient plc — Form 10-Q Summary
Business context and reporting period. Adient supplies automotive seating systems and components worldwide and holds an interest in Yanfeng Global Automotive Interior Systems (YFAI). This report covers the three and six months ended March 31, 2019, the second quarter and first half of fiscal 2019. Reporting segments are Americas, EMEA, and Asia.
Key financial results
| Metric (US$ millions, except per-share data and percentages) | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | 4,228 | 4,596 | 8,386 | 8,800 |
| Gross profit | 197 | 282 | 377 | 483 |
| Gross margin | 4.7% | 6.1% | 4.5% | 5.5% |
| Operating income (loss) | (22) | (141) | 32 | (40) |
| Net income (loss) attributable to Adient | (149) | (168) | (166) | (384) |
| Diluted EPS | $(1.59) | $(1.80) | $(1.78) | $(4.12) |
- Cash flow: First-half operating cash flow was $40 million, versus cash use of $150 million a year earlier. Investing cash use was $190 million, including $252 million of capital expenditures; financing cash use was $49 million. Cash declined by $196 million to $491 million from September 30, 2018.
- Liquidity and debt: At March 31, cash was $491 million and total reported debt was approximately $3.38 billion. Working capital was negative $78 million, compared with positive $117 million at September 30, 2018. The existing $1.5 billion revolving facility was undrawn at quarter-end.
- Segments: Q2 sales and adjusted EBITDA were, respectively, Americas $1.915 billion and $34 million; EMEA $1.778 billion and $59 million; Asia $599 million and $123 million. Adjusted EBITDA fell in all three regions year over year, most sharply in EMEA and the Americas.
Changes versus prior comparable periods
- Q2 sales decreased 8%; first-half sales decreased 5%. Management attributed the declines primarily to unfavorable currency effects and lower volumes, especially in EMEA and Asia. The first-half decline was partly offset by higher Americas volumes.
- Gross margin contracted in both periods. Management cited ongoing launch and operating-performance problems in the Americas and EMEA, including freight costs and operational waste.
- Equity income fell to $62 million in Q2 from $85 million and to $145 million for the first half from $181 million, reflecting lower sales at China affiliates, YFAI performance issues, and currency effects.
- The first-half net loss narrowed from $384 million to $166 million, largely because the prior year included a $299 million goodwill impairment and a $258 million charge related to U.S. tax reform. This improvement does not indicate a return to profitability.
Outlook, risks, and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management says the automotive market is challenging: global light-vehicle production fell 4.6% in Q2, including an 11.8% decline in China and a 4.9% decline in Europe.
- On May 6, 2019, after quarter-end, Adient refinanced its debt. The package included a borrowing-base-dependent ABL facility of up to $1.25 billion, an $800 million fully drawn secured term loan, and $800 million of 7.00% first-lien notes due 2026. Proceeds were used to repay and replace the existing credit arrangements and for fees and general purposes. The new facilities have restrictive covenants and collateral arrangements.
- Adient suspended future dividends following its first-quarter fiscal 2019 dividend payment. It reported that it expected to comply with the then-existing financial covenants for the foreseeable future.
- Q2 included a $66 million noncash, pretax impairment of long-lived assets, primarily in the Americas and EMEA, and a $43 million tax expense to establish a valuation allowance in Poland. Management cautioned that refinancing-related changes to the internal financing structure could lead to further valuation allowances and materially higher tax expense in the next 12 months.
- Although no goodwill impairment was recorded in the quarter, the Americas reporting unit’s estimated fair value exceeded carrying value by only 1%; lower cash flows, higher discount rates, or weaker growth could trigger impairment.
- Adient recorded $113 million of restructuring and impairment costs in Q2 and $144 million in the first half. The fiscal 2019 restructuring actions are primarily workforce reductions and are expected to be substantially complete in fiscal 2019. The company also recorded $7 million of warranty expense to correct a prior-period estimate; management deemed the adjustment immaterial.
- Management said pending lawsuits and known environmental matters were not expected to have a material adverse effect; environmental reserves were $10 million. The filing identifies risks involving vehicle production, execution of turnaround and launch plans, debt service and financing, currencies, trade policy, and YFAI and Adient Aerospace performance.
Important facts for investors to verify
- Whether launch inefficiencies, freight, and operational waste improve, particularly in the Americas and EMEA, and whether segment adjusted EBITDA stabilizes.
- Post-refinancing borrowing availability, borrowing-base capacity, interest expense, covenant compliance, and the effect of the new secured debt and collateral terms.
- Whether further tax valuation allowances are required after Adient reassesses its internal financing structure.
- Whether the Americas reporting unit’s narrow goodwill valuation cushion and the impaired long-lived assets require additional charges.
- Whether restructuring actions deliver the expected cost savings and are completed on schedule, and whether automotive production weakness—especially in China—continues.