CEO chopping Adient's way to profitability

Corporate employees at Adient plc will end the year on vacation. An unpaid vacation. President and CEO Doug DelGrosso held a companywide town hall at its Plymouth Township, Mich., headquarters on Nov. 14 to explain the situation to employees. That their sacrifice was, after all, for the greater good of the company.

The world's largest automotive seating supplier spun off from Johnson Controls Inc. in October 2016 and has been in a relative tailspin ever since. It's recorded more than $3 billion in losses over the past two fiscal years, heavily damaged by mismanaged launches, a botched attempt to move its headquarters to downtown Detroit that resulted in a $11 million loss before renovations were ever completed and an aggressive growth strategy gone awry.

The board hired DelGrosso in October 2018, fresh from turning around troubled supplier Chassix, to restructure the ailing Adient.

More than a year at the helm and DelGrosso has acted as a field surgeon — severing the company's ties to its veteran leaders and employees, applying a tourniquet to its bleeding business units and ultimately asking its corporate employees to share in the pain. Roughly 1,300 nonplant salaried employees will not work or receive pay for the weeks of Thanksgiving, Nov. 25-29, and New Year's, Dec. 30-Jan. 3.

"We've been pretty upfront about what needs to be done," a stoic DelGrosso said from his corner office in Plymouth Township in November. "I thanked them for taking the burden on. With so much uncertainty, I decided to take decisive action. I think people get it. They probably don't like it, but it was the right thing to do. We're continuing on the path we're on."

That path is for the company to break even in 2020.

Glendale, Wis.-based Johnson Controls Inc.'s board decided to part ways with its car parts units following its $16.5 billion acquisition of Ireland-based Tyco International plc. The move allowed JCI to focus on its higher-margin building controls business while lowering its tax bill by inverting the company to be incorporated in Ireland, which has a low corporate tax rate of 12.5 percent.

The publicly traded spinoff, Adient, would be operationally headquartered in Plymouth but also incorporated in Ireland.

"As an independent company, Adient will have the focus and resources necessary to thrive as the world leader in automotive seating, and Johnson Controls is now uniquely positioned for growth as the global leader in products, technologies and integrated solutions for the buildings and energy sectors," then JCI CEO Alex Molinaroli said in an October 2016 news release.

The new company was met with great fanfare, exacerbated by then-CEO Bruce McDonald's announcement the company would spend $100 million to move 500 employees to a new headquarters in the Marquette Building in downtown Detroit. The state supported the move with a $2 million tax incentive. Only a few weeks earlier, Adient's top competitor, Lear Corp., had opened an innovation center in the city.

But JCI loaded Adient with debt before completing the transaction. Adient took on $3.5 billion in debt to fund a $3 billion dividend payout to JCI, leaving the supplier with a debt load roughly twice its earnings before interest, tax, depreciation and amortization.

From the onset, Adient recognized the move as a risk, reporting in a regulatory filing at launch that significant leverage put the company at a competitive disadvantage and could limit its ability to perform. Adient also faced $1.5 billion in impairment charges related to the spinoff.

In other words, the company was birthed in a hole and the only way through was stellar performance. However, previous management also saddled the company with integration missteps from two previous acquisitions.

As part of its aggressive growth strategy, JCI acquired seating supplier Keiper, and its specialty seat business Recaro, and C. Rob. Hammerstein Group, both of Germany, to grow market share. Those acquisitions proved a disaster for its seat structures and metals and mechanisms division. It spent years integrating those companies while bleeding cash.

Adient closed out its first full year of existence in 2016 with a $1.5 billion loss — JCI separated financial reporting of Adient ahead of its October 2016 spinoff.

The company recovered slightly in 2017 reporting net income of $877 million in its fiscal 2017.

Meanwhile, Adient maintained its diversify and grow at all costs strategy in early 2018 with the creation of a joint venture with Boeing, in hopes of growing nonautomotive seating revenue to more than $1 billion by 2022.

But the financial troubles returned. Adient reported a net loss of $168 million on revenue of $4.6 billion in its second fiscal quarter of 2018 and abruptly parted ways with McDonald in June 2018 and hired former General Motors CEO Fritz Henderson to rescue the supplier.

"It's been one misstep after another," David Lim, senior equity analyst with Wells Fargo Securities LLC, told Crain's Detroit Business in 2018. "The communication and expectation has been really disappointing. During this time, the value destruction on the stocks has just been horrendous."

Adient shares plummeted by as much as 17.5 percent following the announcement of McDonald's departure and were down nearly 40 percent in the first half of that year.

Henderson's first move was to scrap the planned move to Detroit. Adient suffered an $11 million loss on the deal, as it paid $36.13 million to acquire and improve the property, according to city property records, before selling it for $25 million.

But its seats structures and mechanisms division continued its troubles, lowering Adient's income by $120 million in the first quarter of 2018 alone. The division was crippled by uncompetitive plants, unprofitable contracts with customers and other inefficiencies that resulted in shipping parts via air at a considerable premium to meet contractual obligations, according to its investor presentations.

Only weeks before it reported a net loss of $1.7 billion, about $32 million a week, on revenue of $17.4 billion in 2018, Adient hired DelGrosso to implement an even stronger restructuring plan.

DelGrosso has experience fixing sinking auto suppliers. He joined Chassix in 2016 to help the supplier emerge from bankruptcy and has since led a turnaround.

Chassix was born leveraged in April 2013, when Tom Gores-owned Platinum Equity formed it by merging Wixom-based Diversified Machine Inc. and SMW Automotive Inc. of Troy. Platinum had acquired Diversified Machine from The Carlyle Group in December 2011.

The debt proved insurmountable, and Chassix filed for Chapter 11 bankruptcy in March 2015 with $556.7 million in total debt and $34.3 million in assets after missing bond payments, but reorganized and emerged in July of that year.

Since emerging, DelGrosso led a $50 million expansion in Europe and a roughly $30 million acquisition of Austrian conglomerate Benteler International AG's automotive casting business.

"He brings the right vision, leadership experience and operational expertise needed to drive Adient's transformation forward," John Barth, then interim chairman of the Adient board, said in a news release.

Since his arrival, DelGrosso has terminated several executives, including Byron Foster, executive vice president overseeing the seats and mechanisms business, and Brian Grady, vice president of the commercial business, and realigned the businesses to operate on a regional basis.

"There are some similarities between Adient and Chassix," DelGrosso said. "Both are the result of poor execution and an aggressive growth strategy. We had a few tough launches, but only a minority of plants in the U.S. and Europe were troubled. I saw this as an opportunity to reflect on how we were operating the businesses. I decided to push accountability and responsibility back to the regions. Leaders in those regions now have the autonomy to operate efficiently."

DelGrosso said the company was too centrally focused and bloated with centralized upper management. The differences in operations regionally were distinct enough that the centralized control led to the problems.

He calls his plan, and Adient's new internal mantra, "Back to Basics."

While competitors Lear and Magna International have managed strong growth by investing away from seating, DelGrosso maintains the company will stay the course.

Colin Giles, a research analyst focused on supply chain and technology for Southfield, Mich.-based IHS Markit, said managing the core portfolio may play well for Adient.

"Investing in the right products and technologies is crucial, particularly as the technological adoption and development trend in the auto industry is accelerating rapidly," Giles said. "While it is important to keep an eye on the future, companies must not lose focus on the present. Smart asset management and continuous improvement now produces the capital necessary for investing in the future."

For Adient, that means rightsizing the company's seat structures and mechanisms division. The goal is to pair down that division's $3 billion in revenue by $400 million by letting bad contracts run their course and ending supply to competitors.

"We're reducing revenue on selling across the broader range," DelGrosso said. "We were selling not only to customers but to competitors and it created challenges and diminished our returns on that scale. We're allowing for an organic roll-off, letting contracts expire."

Much of what DelGrosso is implementing is just that, allowing operations to expire. He indicated much of the company's problems can be attributed to lusting after acquisitions and diversification.

"A lot of that activity moved us away from the formula of Adient," DelGrosso said. "[Former executives] wanted to expand to adjacent products, like the Boeing JV and Futuris and Recaro. That diluted a lot of resources, took us away from our core business. Diluted ourselves to a point where we weren't executing on launches and were not commercially focused."

On Oct. 18, Adient reduced its stake in the JV with Boeing from 50.01 percent to just 19.9 percent.

Adient also secured a deal to refinance its debt in May to the tune of $750 million, pushing its debt maturing out until 2024.

Wall Street has responded to DelGrosso and his moves. Shares are up 23.4 percent year-to-date to $20.20 in afternoon trading on Nov. 21.

"With what we see as the right team in place to fix Adient's woes, more time to reduce debt, and option value from nonautomotive markets, such as business-class airplane seats and perhaps higher-dollar automotive seating content from autonomous vehicles, we think Adient is a compelling opportunity for investors willing to ride out the volatility of a turnaround story," David Whiston, autos stock analyst for Chicago-based Morningstar Inc., said in an Oct. 14 analyst note. "The stock isn't for everyone, though, because the turnaround is likely to take a long time. However, we don't think the transformation has to be completed for investors to make real money."

With the improvement plan executed, DelGrosso is shifting Adient to its next goal: catching its competitors.

Lear and Magna International enjoy margins higher than 11 percent compared to Adient's at just over 5 percent.

"In a stable environment, that's not theoretical; that's a reasonable target," DelGrosso said. "This is a really good company. We're rebuilding its credibility. We're executing things as fast as we can without creating more problems. We're a very capable company, and I think that's becoming apparent."