Adient plc — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017. Unless noted, amounts are in U.S. dollars; financial figures are in millions. Adient became independent from Johnson Controls on October 31, 2016. Prior-year results are historical combined results and may not reflect the costs of operating as a standalone company.
Business context
Adient is a global automotive seating supplier, operating in 33 countries, with a separate Interiors segment based primarily on equity-method joint ventures. Seating accounted for all reported consolidated sales; Adient also records equity income from partially owned affiliates, including Yanfeng-related ventures.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2017 | Six months ended Mar. 31, 2017 |
|---|---|---|
| Net sales | $4,212; down 2% year over year | $8,250; down 3% |
| Gross profit / margin | $379 / 9.0%, versus $430 / 10.0% | $729 / 8.8%, versus $798 / 9.4% |
| Adjusted EBIT, Seating | $312, up 8% | $572, up 9% |
| Adjusted EBIT, Interiors | $22, up 29% | $52, up 27% |
| Net income attributable to Adient | $192; diluted EPS $2.04 | $341; diluted EPS $3.63 |
| Equity income | $91, up $14 | $192, up $21 |
- For the six months, operating cash flow was $143, capital expenditures were $302, and investing cash flow was $(293). Operating cash flow less capital expenditures was $(159), a simple derived measure.
- Financing cash flow was $782, including $606 of net transfers from the former Parent before separation and $315 transferred post-separation. The filing says these funds helped establish opening cash and fund business needs.
- Cash and cash equivalents were $729 at March 31, compared with $105 at September 30, 2016; restricted cash fell from $2,034 to zero. Current assets were $4,440 and current liabilities $4,087, with reported working capital of $353.
- Debt consisted of $3,333 of long-term debt and $19 of short-term debt. Adient repaid $100 of its Term Loan A in February. The $1.5 billion revolving facility was undrawn; it matures in July 2021. The credit facilities include a maximum 3.5x total net leverage covenant and restrictions on, among other things, dividends and additional debt.
- The company declared a $0.275-per-share dividend, paid April 20, 2017. A separate authorization permits up to $250 million of share repurchases through December 31, 2019; none had been made by March 31.
Material changes versus the prior comparable period
- Sales fell by $86 for the quarter and $281 for six months. Foreign exchange reduced sales by $46 and $85, respectively; remaining declines were principally lower volumes, particularly in North America. Global vehicle production nevertheless grew 5% in the quarter and 6% in the six-month period.
- Gross margin declined year over year. Management cited higher commodity costs and Becoming Adient costs, partly offset by lower volumes and favorable currency effects.
- Seating Adjusted EBIT improved despite lower sales, primarily on lower SG&A and engineering costs, higher affiliate income and operating improvements; higher commodity costs and lower volumes were offsets.
- Net income comparisons are strongly affected by the prior-year $778 tax charge related to the separation and permanently reinvested foreign earnings, as well as prior-year restructuring and impairment charges of $169 in the comparable quarter and six-month period. The improvement in reported net income is therefore not solely an indicator of underlying operating growth.
- Net financing charges rose to $33 for the quarter and $68 for six months, mainly reflecting debt incurred in connection with the separation. Prior-year SG&A included allocated former-Parent costs and separation-related items, which also affect comparability.
Outlook, management commentary, risks and unusual items
- The filing provides no specific consolidated revenue or earnings guidance. Management expects the fiscal 2016 restructuring plan to reduce annual operating costs by about $150 when complete; net savings after execution costs are expected to be about 30% of that annual reduction in fiscal 2017, with the full annual benefit expected in fiscal 2019. The plan is expected to be substantially complete in fiscal 2018. A fiscal 2015 plan is expected to be substantially complete in fiscal 2017.
- At March 31, restructuring reserves totaled $256 ($180 for the 2016 plan and $76 for the 2015 plan), expected to be paid in cash. The plans included approximately 5,500 workforce reductions and 13 plant closures; about 2,000 employees had been separated and seven plants closed by quarter-end.
- Key stated risks include automotive production levels and schedules, general economic conditions, commodity and energy costs, raw-material availability, foreign exchange, commercial arrangement changes, and the ability to meet debt-service requirements and obtain financing. Adverse industry conditions could affect liquidity or lead to impairments or further restructuring.
- Adient reported $121 of gross tax-effected unrecognized tax benefits at March 31, essentially all of which would affect the effective tax rate if recognized; net accrued interest was approximately $12. Environmental reserves were $9. Management said known environmental matters and current lawsuits were not expected to have a material adverse effect, while noting litigation outcomes cannot be predicted with certainty.
- The company disclosed revisions to prior-period related-party transaction amounts; it said the misstatements were not material and did not affect the financial statements. It also reported no material changes to previously disclosed risk factors, off-balance-sheet arrangements, contractual obligations, or market-risk exposures.
Important facts for investors to verify
- Underlying sales and margin trends after separating the effects of currency, vehicle volumes, commodity costs and prior-year one-time items.
- Whether the planned restructuring savings are realized on schedule and whether execution costs or additional restructuring affect results.
- Cash conversion and capital-spending needs, especially given negative operating cash flow less capital expenditures for the six-month period and the role of former-Parent transfers in financing cash flow.
- Debt-service capacity, leverage-covenant headroom, interest costs and the availability of the undrawn revolving facility.
- Tax exposures and the effect of the separation on tax rates, deferred taxes and uncertain tax positions.