EUR 850.00 For Business Accounts Only

Morningstar | Adient Generates Improved Free Cash Flow for Fiscal 3Q

We are not changing our Adient fair value estimate even though the seating supplier posted fiscal 2018 third-quarter results that missed adjusted diluted EPS consensus ($1.45 versus $1.59). We did not hear anything to change our thesis that operational problems in seating and the metals group (the latter now known as SS&M) can be fixed with time and we were pleased with the firm's year-over-year free cash flow for the quarter improving to $252 million from $42 million. The cash flow improvement came from a $119 million favorable working capital variance and a large dividend from a Chinese joint venture that occurred in fourth quarter of fiscal 2017. Working capital was only a $25 million improvement excluding a $94 million improvement from a EUR 200 million accounts receivable financing facility but moves like this are the right ones to generate cash to help fund large restructuring efforts needed in seating and SS&M. Management also maintained its fiscal 2018 adjusted EBITDA guidance, which includes equity income of about $1.25 billion.

The earnings call was the first for interim CEO Fritz Henderson. He stressed he will not provide fiscal 2019 guidance because that should be done by the new CEO. The board is still searching for a CEO following the June 11 replacement of Bruce McDonald. Henderson is 59 and did not rule himself out of becoming the permanent CEO (he also is on the board), but he did not explicitly say he wanted the job either. Henderson also stressed that he is bringing in new talent in the operational area which Adient has had many problems with outside of its Chinese joint ventures. He feels Adient has great processes in place, but they have not been followed which has led to major charges for expedited freight, wasted materials, and in at least one case, Adient has impacted a customer's production which is the worst case scenario for a supplier. We think the turnaround will succeed but it will take time.

The company is also selling its two jets and the Marquette Building in Detroit which was to be its new corporate headquarters. That move is canceled to save money following the company's execution problems. Seating contributed a negative $69 million variance to adjusted EBITDA year over year while SS&M's negative contribution was $49 million. Both units suffered from large negative variances from operational problems such as expedited freight, customer pricing headwinds, and materials costs that more than offset positive contributions from the Futuris acquisition and SG&A reductions. Although Henderson said the SS&M turnaround is not progressing as fast as management expected, the segment's negative EBITDA of $18 million is improved from negative $34 million in the fiscal second quarter and negative $82 million in fiscal first quarter. The company tends to have a good second half of the fiscal year, so we expect continued improvement in SS&M for fiscal fourth quarter due to seasonality and management's restructuring efforts. Seating's EBITDA margin fell by 290 basis points year over year to 8.5% but should improve soon with moderating freight costs.