Aptiv PLC quarterly report, Q2 FY2022

Aptiv PLC — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. Aptiv supplies vehicle electrical architecture, components, safety, connectivity and software technologies. Financial amounts below are in U.S. dollars; millions unless noted.

Financial performance

Metric	Q2 2022	Q2 2021	First half 2022	First half 2021
Net sales	$4,057	$3,807	$8,235	$7,830
Gross margin	$440 (10.8%)	$602 (15.8%)	$1,029 (12.5%)	$1,329 (17.0%)
Operating income	$97	$285	$353	$714
Adjusted operating income, non-GAAP	$213	$338	$537	$812
Net income (loss) attributable to Aptiv	$(45)	$163	$44	$458
Net income (loss) attributable to ordinary shareholders	$(61), or $(0.23) per share	$147, or $0.54 per share	$12, or $0.04 per share	$426, or $1.58 per share

• Q2 sales rose 7%; Aptiv’s volumes increased 8% despite global automotive production declining 1% (up 1% on Aptiv’s weighted-market basis). First-half sales rose 5%, with volumes up 6% despite global production declining 3%.
• Profitability weakened sharply. Management attributed pressure to higher semiconductor, commodity and logistics costs, operating performance, China lockdown disruptions and Russia-related charges. Q2 cost of sales included approximately $165 million of increased semiconductor and commodity costs and $35 million of increased costs, primarily logistics. First-half amounts were approximately $295 million and $55 million, respectively.
• Segment adjusted operating income was $243 million for Signal and Power Solutions and a $30 million loss for Advanced Safety and User Experience in Q2, versus $313 million and $25 million of income, respectively, a year earlier. First-half results were $551 million and a $14 million loss, versus $719 million and $93 million of income.
• Q2 net loss also reflected $72 million of equity-method losses, primarily associated with Motional, and $25 million of other expense. First-half equity-method losses were $135 million; other expense was $64 million, including $49 million of losses on publicly traded equity securities.

Cash flow, balance sheet and capital

• Operating cash flow was negative $107 million in the first half, compared with positive $549 million in 2021. Working-capital movements were a major use of cash, including increases in receivables and inventories; inventory rose from $2.014 billion at year-end to $2.362 billion.
• Investing cash outflow was $705 million, including $454 million of capital expenditures and $220 million for acquisitions and other transactions. Financing cash inflow was $2.394 billion, primarily from net proceeds of $2.472 billion from February’s senior-note issuance.
• At June 30, cash and cash equivalents were $4.670 billion; total debt was $6.450 billion, including $6.433 billion long-term debt. Aptiv reported net debt of $1.8 billion and total available liquidity of $7.143 billion, including a $2.0 billion undrawn revolver and up to $473 million under its committed receivables-factoring facility, subject to eligible receivables.
• Debt increased from $4.067 billion at December 31, 2021, primarily following issuance of $2.5 billion of notes. The company was in compliance with debt covenants at quarter-end; its credit-agreement leverage covenant is generally 3.5-to-1.0, with a temporary 4.0-to-1.0 threshold after qualifying material acquisitions.
• The company paid $32 million in mandatory convertible preferred-share dividends in the first half. Those shares are scheduled to convert on June 15, 2023, subject to the stated conversion terms.

Material developments, outlook and risks

• Wind River: Aptiv agreed to acquire Wind River Systems for approximately $4.3 billion, subject to regulatory approvals and customary closing conditions; management targeted closing in 2022. February note proceeds are intended to fund part of the purchase. Certain notes require redemption at 101% of principal if the acquisition is not completed by July 10, 2023, or the agreement is terminated earlier.
• Russia and Ukraine: Aptiv began exiting its majority-owned Russian subsidiary and recorded a $51 million pre-tax impairment in Q2. It also recorded approximately $6 million of Ukraine-related asset impairments and other charges. Russia operations reduced revenue by an estimated $20 million in Q2 and $30 million in the first half. The company reported substantially completing relocation of certain Ukraine production and recovering substantially all related costs.
• Disruptions and inflation: Management expected supply-chain disruptions, including semiconductor shortages, to persist through 2022 and likely into 2023. China lockdowns adversely affected revenue by an estimated $165 million in Q2 and $210 million in the first half. Inflation, higher input and logistics costs, volatile vehicle production, foreign exchange, and possible further pandemic restrictions remain risks. Aptiv noted that some customers may seek recovery of lost-production costs; no related loss was considered probable and no reserve was recorded at June 30.
• Liquidity outlook: Management expected cash, available facilities and operating cash flows to be sufficient for operations, capital spending, restructuring, debt service, preferred dividends and the planned Wind River acquisition. This expectation is subject to the significant operating and market uncertainties described above; the filing provides no specific earnings or revenue guidance.
• Restructuring: Aptiv recorded $41 million of first-half restructuring charges and expected approximately $60 million of additional charges for approved programs, mostly within the next 12 months; approximately $55 million of cash payments was expected over that period.
• Contingencies: Brazilian claims totaled approximately $105 million, with $20 million accrued; reasonably possible losses above accruals were estimated at zero to $85 million. Potential warranty costs above reserves were estimated at zero to $10 million. Ordinary litigation and environmental matters were also disclosed.
• Other notable factors include a 100% Q2 effective tax rate, partly reflecting charges for which no tax benefit was recognized, and a change in Aptiv’s non-GAAP adjusted operating income definition that excludes intangible-asset amortization; comparative figures were revised to match.

Investor verification priorities

1. Track whether margin recovery offsets semiconductor, commodity, logistics and inflationary costs, and whether customer price recoveries keep pace.
2. Monitor operating cash flow and working capital, especially elevated inventories and receivables, alongside capital expenditures.
3. Verify Wind River’s regulatory progress, financing and closing conditions, including the special mandatory redemption provisions on certain notes.
4. Assess the Russian exit, remaining Ukraine-related exposure, and any customer claims connected with production disruptions.
5. Review Motional and other equity-method investment losses, publicly traded investment valuations, and the potential dilution when preferred shares convert in 2023.
6. Follow restructuring charges and cash payments, Brazilian litigation exposure, and compliance with debt covenants as debt and interest costs rise.