Adient plc — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018. Adient supplies automotive seating globally and participates in interiors primarily through its equity interest in Yanfeng Global Automotive Interior Systems (YFAI). Amounts are in U.S. dollars unless stated otherwise.
Financial results and liquidity
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Net sales | $4.494 billion, up 12% | $13.294 billion, up 9% |
| Gross profit and margin | $246 million; 5.5% (prior year 9.3%) | $732 million; 5.5% (prior year 9.0%) |
| Income (loss) before tax | $60 million | $(42) million |
| Net income (loss) attributable to Adient | $54 million; diluted EPS $0.58 | $(330) million; diluted EPS $(3.54) |
| Operating cash flow | Not presented for the quarter | $240 million, versus $300 million |
| Capital expenditures | Not presented for the quarter | $404 million, versus $417 million |
For the nine months, operating cash flow less capital expenditures was negative $164 million. Cash and cash equivalents were $378 million at June 30, down from $709 million at September 30, 2017. Working capital was $147 million, compared with $171 million. Total debt was approximately $3.44 billion, including $15 million of short-term debt and $3.422 billion of long-term debt; the $1.2 billion Term Loan A matures in 2021. The company reported increased use of its revolving credit facility during fiscal 2018, but the filing text does not provide a clear amount drawn or remaining availability.
Net financing charges were $39 million for the quarter and $109 million for the nine months. The nine-month tax provision was $224 million, including a provisional $258 million expense related to U.S. tax reform. The quarterly tax benefit was $13 million.
Material changes and operating performance
- Sales growth reflected acquisitions, consolidation of a China affiliate, favorable foreign exchange, and higher quarterly volumes. For the nine months, acquisition and China consolidation effects added $719 million and favorable foreign exchange added $553 million, partly offset by lower volumes.
- Profitability weakened despite revenue growth. Management cited operating and launch inefficiencies, premium freight, steel supply constraints, customer interruptions, higher commodity costs, and pricing pressure.
- Seating adjusted EBITDA was $344 million for the quarter, down 17%, and $1.110 billion for the nine months, down 6%. SS&M adjusted EBITDA was a loss of $18 million for the quarter and $134 million for the nine months, versus profits of $31 million and $78 million, respectively, in the prior-year periods. Interiors adjusted EBITDA was $19 million for the quarter and $56 million for the nine months.
- Adient changed its reportable segments to Seating, Seat Structures and Mechanisms (SS&M), and Interiors. The reorganization prompted a $299 million goodwill impairment charge in SS&M during the second quarter; management determined that segment’s allocated goodwill was fully impaired.
Outlook, risks, and unusual items
- The filing provides no consolidated revenue or earnings guidance. Adient expects its 2018 restructuring actions to be substantially complete in fiscal 2019. It estimates annual operating-cost reductions of about $20 million from the 2017 plan, with the full annual benefit expected in fiscal 2019, and about $150 million from the 2016 plan, with the full annual benefit expected in fiscal 2020.
- Quarterly restructuring and impairment costs were $57 million, including a $52 million impairment on Detroit properties and airplanes classified as held for sale. Nine-month costs were $372 million, principally including the $299 million SS&M goodwill impairment.
- The estimated U.S. tax-reform impact of $258 million is provisional and may change; the company cited uncertainty about interpretations and future guidance. Adient also warned that continued weak performance could require additional deferred-tax valuation allowances.
- Key business risks include automotive production levels and mix, tariffs and trade policy, raw-material availability and costs, foreign exchange, execution of the SS&M strategy, debt service and financing access, and delivery of expected benefits from the Adient Aerospace joint venture with Boeing. Management said legal matters and known environmental matters were not expected to have a material adverse effect; environmental reserves were $8 million.
- Operating cash flow declined year over year amid lower profitability, working-capital movements, and higher income taxes paid. Cash was also used for capital expenditures, dividends, and other financing activity. Adient entered a €200 million receivables-transfer arrangement, with $94 million funded by June 30.
- The filing notes a prior-period accounting revision that management assessed as not material, and an $8 million out-of-period adjustment recorded in fiscal 2018 that it also assessed as not material. The prior-year comparative figures shown in the filing reflect the revisions.
Most important facts for investors to verify
- Whether SS&M operating performance improves after substantial nine-month losses, and whether launch, freight, steel-supply, and customer-interruption costs abate.
- Whether the announced restructuring savings are realized on schedule and net of execution costs.
- Actual cash generation, working-capital needs, revolving-credit-facility usage and availability, and capacity to service approximately $3.44 billion of debt.
- Final tax-reform accounting and any further changes to deferred-tax valuation allowances.
- Assumptions supporting the SS&M goodwill impairment and fair values of assets held for sale, as well as outcomes of pending contingencies.