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Morningstar | Adient Needs to Amend Its Debt or Raise Funds to Deal With Its July 2021 Debt Maturity

Adient was the automotive seating business of Johnson Controls that was spun off to JCI shareholders in a taxable transaction Oct. 31, 2016. Adient dominates the seating market with just under 40% share in North America and Europe as well as about 45% share in the world's largest auto market, China, and about 33% globally. It is common for a spin-off to be ignored or misunderstood, but we think ignoring Adient just because it is an auto-parts supplier is shortsighted. Seating is one of the stickiest parts of the supplier sector since it is very difficult to take out an incumbent on a vehicle program, and automakers need suppliers that can consistently deliver high-quality seats in a just-in-time system all over the world. Automakers have global platforms and are willing to pay for the right supplier rather than the supplier simply with the lowest price. We think some investors may need to reframe their perspective on seating and auto suppliers space by understanding that seating is not a commodity product and that firms such as Adient have a narrow economic moat with sustainable competitive advantages from sources such as intangible assets, switching costs, cost advantage, and efficient scale. It is normal in the seating space, for example, that an incumbent supplier gets the next generation of a vehicle program nearly 100% of the time.Adient owns 30% of Yanfeng, the world’s largest automotive interiors company, which along with over 20 Chinese seating joint ventures at times brings Adient nearly $400 million of equity income annually. We think the company can increase operating margin including equity income over the next several years by restructuring its operations to be a better manufacturer. Management also seeks $1 billion of nonautomotive revenue by calendar 2021 from seating areas such as aircraft, trucks, and passenger trains and formed a joint venture with Boeing in January 2018. For patient investors who can wait for Adient to restructure itself, we see Adient as an interesting turnaround story capable of eventually generating good free cash flow and resuming its dividend.