Adient plc — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended March 31, 2018. Adient supplies automotive seating and seat structures and mechanisms, and holds an interest in automotive interiors joint ventures. Amounts are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q2 FY2018 | Six months FY2018 |
|---|---|---|
| Net sales | $4.596 billion, up 9% | $8.800 billion, up 7% |
| Gross profit / margin | $284 million / 6.2% | $486 million / 5.5% |
| Operating income (loss), before interest and taxes | $(134) million | $(32) million |
| Net income (loss) attributable to Adient | $(168) million; $(1.80) per diluted share | $(384) million; $(4.12) per diluted share |
| Operating cash flow | $(150) million for six months, versus $143 million provided in the prior-year period |
At March 31, cash was $353 million, down from $709 million at September 30, 2017. Current assets were $4.596 billion and current liabilities $4.435 billion, leaving working capital of $161 million. Debt was approximately $3.678 billion, including $173 million short-term debt, versus approximately $3.478 billion at September 30. The company had drawn $150 million on its revolving credit facility. Capital expenditures were $266 million for the six months.
Q2 sales growth reflected acquisitions and consolidation of a China affiliate ($234 million) and favorable foreign exchange ($285 million), partly offset by lower North American volumes. For the six months, those factors added $469 million and $412 million, respectively, while lower volumes weighed on sales. Gross margin contracted year over year amid SS&M launch inefficiencies, premium freight, steel supply constraints, higher commodity prices and customer-interruption costs.
Material changes and unusual items
- Adient recorded a $299 million pretax goodwill impairment after reorganizing reporting segments and reallocating goodwill to Seat Structures & Mechanisms (SS&M). The impairment was $279 million net of tax and was the main contributor to the Q2 loss.
- For the six months, income tax expense was $237 million, including a provisional $258 million estimated impact of U.S. tax reform: $150 million deferred-tax remeasurement, $100 million valuation allowance related to expected BEAT exposure, and $8 million transition tax. The estimate remains subject to revision.
- SS&M adjusted EBITDA was $(34) million in Q2 and $(116) million for the six months, versus $40 million and $47 million, respectively, a year earlier. Management attributed the decline principally to launch inefficiencies, freight, steel constraints and customer interruptions. Seating adjusted EBITDA was $411 million in Q2; Interiors adjusted EBITDA was $12 million.
- The filing reports an $8 million out-of-period adjustment, primarily affecting cost of goods sold, to correct a prior-period obligation. Management said it was not material to prior statements or expected full-year FY2018 results. Previously reported 2017 figures were also revised for nonmaterial errors involving affiliate engineering costs and net-versus-gross sales presentation.
Outlook, risks and contingencies
The filing provides no consolidated revenue or earnings guidance. Management said fiscal 2018 restructuring actions are expected to be substantially complete in fiscal 2019. Earlier plans were estimated to reduce annual operating costs by approximately $20 million for the 2017 plan and $150 million for the 2016 plan, with full annual benefits expected in fiscal 2019 and fiscal 2020, respectively; savings are estimates and execution remains ongoing.
Key risks include continued automotive-market and production volatility, North American volume weakness, SS&M operating difficulties, commodity and steel availability/pricing, customer program changes, foreign exchange, debt-service and financing needs, and potential changes to trade agreements or tariffs. Management cautioned that tax-reform estimates are provisional and that changes in valuation allowances could materially increase tax expense. Adient reported $198 million of gross tax-effected unrecognized tax benefits. It also disclosed $9 million of environmental reserves; management did not expect known environmental matters or other disclosed litigation to materially adversely affect financial position, results or cash flows.
Important facts for investors to verify
- Whether SS&M operating performance improves and whether launch, steel-supply and customer-interruption costs abate.
- Cash generation, receivables and working-capital trends, revolving-credit usage, and the company’s capacity to meet debt service and fund capital spending and dividends.
- Final tax-reform accounting, BEAT exposure, deferred-tax asset realizability and any valuation-allowance changes.
- Whether restructuring savings are achieved on schedule and whether additional impairment or restructuring charges arise.
- Final purchase-price allocations for Futuris and the China affiliate consolidation, and the continuing effects of the reported prior-period revisions.