Adient(ADNT) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Adient reported net losses for the three and six months ended March 31, 2019, driven by decreased sales and operational inefficiencies, with improved operating cash flow Consolidated Statements of Income (Loss) Adient's net sales decreased for both three and six-month periods ended March 31, 2019, resulting in net losses of $149 million and $166 million, respectively, with the six-month loss showing improvement year-over-year Consolidated Income Statement Highlights (in millions, except per share data) | Metric | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | Six Months Ended March 31, 2019 | Six Months Ended March 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $4,228 | $4,596 | $8,386 | $8,800 | | Gross profit | $197 | $282 | $377 | $483 | | Earnings (loss) before interest and income taxes | $(22) | $(141) | $32 | $(40) | | Net income (loss) attributable to Adient | $(149) | $(168) | $(166) | $(384) | | Diluted EPS | $(1.59) | $(1.80) | $(1.78) | $(4.12) | Consolidated Statements of Financial Position As of March 31, 2019, Adient's total assets and shareholders' equity decreased, primarily due to lower cash and receivables, while total liabilities remained stable Consolidated Balance Sheet Highlights (in millions) | Metric | March 31, 2019 | September 30, 2018 | | :--- | :--- | :--- | | Total current assets | $3,926 | $4,309 | | Total assets | $10,574 | $10,942 | | Total current liabilities | $4,004 | $4,192 | | Long-term debt | $3,373 | $3,422 | | Total liabilities | $7,907 | $8,178 | | Total shareholders' equity | $2,630 | $2,717 | Consolidated Statements of Cash Flows For the six months ended March 31, 2019, Adient generated $40 million in operating cash flow, a significant improvement, despite continued cash usage in investing and financing activities, leading to a net decrease in cash Consolidated Cash Flow Highlights (in millions) | Metric | Six Months Ended March 31, 2019 | Six Months Ended March 31, 2018 | | :--- | :--- | :--- | | Cash provided (used) by operating activities | $40 | $(150) | | Cash provided (used) by investing activities | $(190) | $(269) | | Cash provided (used) by financing activities | $(49) | $45 | | Increase (decrease) in cash and cash equivalents | $(196) | $(356) | | Cash and cash equivalents at end of period | $491 | $353 | Notes to Consolidated Financial Statements Notes detail accounting policies, including ASC 606 adoption, a significant May 2019 debt refinancing, segment realignment, and Q2 2019 impairment charges and valuation allowances - Adopted ASC 606 (Revenue from Contracts with Customers) on October 1, 2018, using the modified retrospective method, with no significant impact or cumulative adjustment[19][26] - In May 2019, subsequent to the quarter end, Adient executed a major refinancing, replacing its existing credit agreement with a new $1.25B ABL credit facility, an $800M term loan, and $800M in 7.00% senior notes due 2026[50][51][53] - Recorded a $66 million non-cash pre-tax impairment charge on long-lived assets in Q2 2019 due to declines in performance forecasts for certain assets in the EMEA ($55M) and Americas ($11M) segments[93] - Established a $43 million valuation allowance against deferred tax assets in Poland during Q2 2019, concluding it was more likely than not that these assets would not be realized[96] - Realigned its organizational structure into three new reportable segments: Americas, Europe, Middle East, and Africa (EMEA), and Asia Pacific/China (Asia)[104] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q2 net sales decline to currency and lower volumes, with gross profit margin contraction due to operational issues, while a May 2019 debt refinancing enhanced liquidity, and goodwill in the Americas segment faces impairment risk Consolidated Results of Operations Analysis Q2 2019 net sales decreased 8% due to currency and lower volumes, gross profit fell 30% with margin contraction, equity income declined 27%, and net loss improved slightly to $149 million Q2 2019 vs Q2 2018 Performance (in millions) | Metric | Q2 2019 | Q2 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $4,228 | $4,596 | -8% | | Gross profit | $197 | $282 | -30% | | Equity income | $62 | $85 | -27% | | Net loss attributable to Adient | $(149) | $(168) | -11% | - The decrease in net sales for Q2 2019 was primarily driven by a $200 million unfavorable foreign currency impact and lower volumes in EMEA and Asia[142] - Gross profit margin declined from 6.1% to 4.7% in Q2 2019 due to continued business performance issues, launch inefficiencies, higher freight, and operational waste, particularly in the Americas and EMEA[144] Segment Analysis In Q2 2019, all segments experienced Adjusted EBITDA declines, with Americas down 65%, EMEA down 55%, and Asia down 22%, primarily due to lower volumes, operational issues, and currency impacts Segment Performance - Three Months Ended March 31 (in millions) | Segment | Net Sales 2019 | Net Sales 2018 | Adjusted EBITDA 2019 | Adjusted EBITDA 2018 | | :--- | :--- | :--- | :--- | :--- | | Americas | $1,915 | $1,941 | $34 | $98 | | EMEA | $1,778 | $2,056 | $59 | $130 | | Asia | $599 | $690 | $123 | $157 | - Americas' Q2 Adjusted EBITDA decreased by $64 million due to lower volumes, increased freight, operational performance issues, and higher administrative expenses[173] - EMEA's Q2 Adjusted EBITDA decreased by $71 million, primarily driven by increased freight and operational performance issues ($40 million) and unfavorable foreign currency impact ($17 million)[176] - Asia's Q2 Adjusted EBITDA decreased by $34 million, with the largest factor being a $23 million decline in equity income caused by the slowdown in Chinese auto production[180] Liquidity and Capital Resources Adient ended the quarter with $491 million in cash, completed a significant debt refinancing in May 2019 to extend maturities, and suspended future dividends to preserve liquidity - On May 6, 2019, Adient completed a major refinancing to address its 2021 debt maturities, securing a new $1.25B ABL credit facility and issuing $1.6B in new term loans and notes[186][187][189] - The company suspended future dividend payments after the first quarter of fiscal 2019[183] - Working capital decreased by $195 million from September 30, 2018, to March 31, 2019, primarily due to lower cash and accounts receivable[195] Critical Accounting Estimates and Policies The Americas reporting unit's goodwill of $642 million has an estimated fair value exceeding its carrying value by only 1%, indicating a significant risk of future impairment - The Americas reporting unit has a goodwill balance of $642 million, and its estimated fair value exceeds its carrying value by only 1%, indicating a significant risk of future impairment[204] Quantitative and Qualitative Disclosures About Market Risk Adient reported no material changes in its market risk exposures compared to the disclosures in its most recent Form 10-K - There were no adverse changes in market risk exposures that materially affected the quantitative and qualitative disclosures presented in the company's most recent Form 10-K[207] Controls and Procedures The company's disclosure controls and procedures were deemed effective, with no material changes in internal control over financial reporting during the quarter - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of March 31, 2019[207] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[208] PART II - OTHER INFORMATION Legal Proceedings Adient is involved in various legal proceedings, none of which are expected to have a material adverse effect on the company's financial position or results - The company is involved in various lawsuits and claims but does not expect any to have a material adverse effect on its financial condition or results[209] Risk Factors No material changes to the risk factors previously disclosed in Adient's 2018 Annual Report on Form 10-K were reported - No material changes from the risk factors disclosed in the company's 2018 Form 10-K were reported[211] Other Part II Items The company reported no unregistered sales of equity securities, no defaults on senior securities, and no share repurchases during the quarter - There were no unregistered sales of equity securities, defaults on senior securities, or share repurchase activities during the three months ended March 31, 2019[211][212][213]