Aptiv PLC — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are against Q1 2021. Aptiv supplies automotive electrical architecture, safety, connectivity and software technologies through Signal and Power Solutions and Advanced Safety and User Experience.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $4.178 billion | $4.023 billion |
| Gross margin | $589 million; 14.1% | $727 million; 18.1% |
| Operating income | $256 million; 6.1% of sales | $429 million; 10.7% of sales |
| Net income attributable to Aptiv | $89 million | $295 million |
| Net income attributable to ordinary shareholders; diluted EPS | $73 million; $0.27 | $279 million; $1.03 |
| Operating cash flow | $(202) million | $252 million |
| Capital expenditures | $247 million | $134 million |
| Cash and cash equivalents, March 31 | $4.877 billion | $3.139 billion at December 31, 2021 |
| Total debt, March 31 | $6.538 billion | $4.067 billion at December 31, 2021 |
Sales rose 4%, reflecting 4% higher volumes despite global vehicle production declining 6% (7% on Aptiv’s weighted-market basis). Operating cash flow was negative, primarily reflecting working-capital outflows; cash less capital expenditures was approximately negative $449 million. Available liquidity was $7.376 billion, including cash, an undrawn $2 billion revolving facility and available European receivables factoring capacity. Net debt was approximately $1.7 billion.
Changes and drivers
- Profitability weakened materially: gross margin fell 4.0 percentage points and operating income declined $173 million year over year. Management attributed pressure to operational costs, including about $130 million of higher semiconductor and commodity costs and about $20 million of higher material-logistics costs. Aptiv separately estimated $15 million of incremental supply-disruption costs within the period’s results.
- Cost of sales also reflected higher volume and $70 million of commodity pass-through costs; pass-throughs increase reported sales and costs. Sales were reduced by unfavorable foreign exchange, mainly the euro, and contractual price reductions.
- Segment adjusted operating income was $308 million for Signal and Power Solutions, down from $406 million, and $16 million for Advanced Safety and User Experience, down from $68 million. These are company-defined non-GAAP measures; Aptiv changed the calculation in 2022 to exclude amortization and recast the comparative presentation.
- Net income included a $32 million loss from changes in the fair value of publicly traded equity securities and a $63 million after-tax equity-method loss, primarily associated with Motional, versus $42 million in Q1 2021.
- Cash increased substantially following $2.472 billion of net proceeds from senior notes issued in February. The notes raised $2.5 billion gross and are intended to fund part of the proposed Wind River acquisition. Long-term debt rose about $2.4 billion from year-end.
Outlook, risks and contingencies
- Aptiv gave no specific full-year financial guidance in the provided filing text. It said Q2 results and cash flows were likely to be adversely affected by COVID-related lockdowns in parts of China; duration and impact were uncertain. Semiconductor and broader supply-chain disruptions were expected to persist through 2022.
- The proposed $4.3 billion Wind River acquisition was expected to close in mid-2022, subject to regulatory approvals and customary conditions. The February notes include special mandatory redemption provisions for certain tranches if the deal is not completed by July 10, 2023 or the agreement is terminated.
- The Ukraine-Russia conflict creates risks to materials, logistics, demand, sanctions and cybersecurity. Aptiv was relocating production out of Ukraine and expected to complete the process in Q2 2022; customer reimbursement was expected but not assured.
- Customers have indicated Aptiv may bear some costs from lost production related to supply disruptions. Management did not consider a loss probable at quarter-end and recorded no reserve for these claims.
- Brazil claims totaled approximately $115 million, with $20 million accrued; reasonably possible losses above accruals were estimated at zero to $95 million. Warranty reserves were $48 million, with reasonably possible additional exposure of up to $10 million. Environmental reserves were $4 million.
- Q1 restructuring charges were $22 million; an additional approximately $25 million of charges were expected for approved programs, and Aptiv expected about $50 million of restructuring cash payments over the next 12 months.
- The credit agreement requires a consolidated leverage ratio no higher than 3.5:1, generally, with a temporary 4.0:1 limit after qualifying material acquisitions. Aptiv reported covenant compliance at March 31, 2022.
Most important facts to verify
- Whether China lockdowns, semiconductor availability, inflation and customer production volatility further pressure sales, margins and working capital.
- Wind River closing conditions, final purchase funding, integration costs and the applicable special redemption terms.
- Actual cash conversion and inventory normalization: inventory increased to $2.312 billion from $2.014 billion at year-end, while Q1 operating cash flow was negative.
- Potential customer claims from supply interruptions, Ukraine relocation cost recovery, and the range and resolution of Brazil litigation.
- Debt, liquidity and covenant headroom after the acquisition and related financing; mandatory convertible preferred shares are scheduled to convert in June 2023 and carry a 5.50% dividend.