Aptiv PLC — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Aptiv designs and manufactures vehicle components and provides electrical, electronic, active-safety and mobility technology. Its segments are Signal and Power Solutions and Advanced Safety and User Experience. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance
- Q3 revenue: $3.559 billion, up 2% from $3.485 billion. Reported growth reflected 6% volume growth, including $64 million from the Winchester acquisition, offset by $68 million of unfavorable currency effects and the impact of contractual price reductions. The GM labor strike reduced sales by approximately $70 million.
- Nine-month revenue: $10.761 billion, down slightly from $10.799 billion. Volume growth was offset by $339 million of unfavorable currency effects and $45 million of lower commodity pass-through.
- Profit and margins: Q3 operating income was $320 million versus $323 million; gross margin was 19.0% versus 18.7%. Aptiv-attributable net income was $246 million, or $0.96 per diluted share, compared with $222 million, or $0.84. For nine months, operating income was $952 million versus $1.118 billion, and Aptiv-attributable net income was $760 million versus $820 million; diluted EPS was $2.95 versus $3.09. Nine-month gross margin declined to 18.2% from 19.1%.
- Segment performance: Q3 Adjusted Operating Income was $350 million for Signal and Power Solutions and $60 million for Advanced Safety and User Experience, compared with $346 million and $74 million, respectively, a year earlier. Nine-month segment Adjusted Operating Income was $970 million and $190 million, respectively, versus $1.083 billion and $238 million.
- Cash flow and investment: Nine-month operating cash flow from continuing operations was $921 million, up from $890 million. Capital expenditures were $619 million versus $661 million, implying operating cash flow less capex of $302 million versus $229 million. Investing cash outflow was $632 million. Financing cash outflow was $489 million.
- Liquidity and debt: Cash and cash equivalents were $341 million, down from $567 million at year-end 2018. Total debt was $4.383 billion, including $444 million short-term debt; net debt was approximately $4.0 billion. Available liquidity was $2.270 billion, including $1.875 billion of undrawn revolving capacity and $54 million available under the European receivables facility. Aptiv reported compliance with debt covenants.
- Balance sheet: Total assets were $12.939 billion and shareholders’ equity was $3.781 billion. Current assets were $5.385 billion versus current liabilities of $3.875 billion. Aptiv adopted lease accounting in 2019; operating lease liabilities totaled $421 million at quarter-end.
Material changes and notable items
- Nine-month operating income and Aptiv-attributable earnings declined year over year despite broadly flat sales. Management cited lower volume net of price reductions, unfavorable foreign exchange, increased depreciation and amortization, and continued investment in advanced technology and engineering; operational improvements partly offset these pressures.
- Q3 gross margin improved, while nine-month gross margin fell. The Advanced Safety and User Experience segment’s Q3 and nine-month Adjusted Operating Income both declined year over year.
- Restructuring charges were $61 million in Q3 and $118 million for nine months, versus $65 million and $100 million, respectively, in 2018. Management expected additional restructuring expense in 2019, primarily for footprint optimization and overhead reductions.
- Interest expense rose to $123 million for nine months from $104 million. Aptiv issued $650 million of senior notes in March to redeem $650 million of 3.15% notes, recording a $6 million extinguishment loss; the replacement notes carry 4.35% and 5.40% coupons.
- Nine-month other income included a $19 million unrealized gain from remeasuring the Otonomo investment. The effective tax rate was 12% for nine months versus 20% in 2018, including $39 million of discrete tax benefits; 2018 included $48 million of discrete tax expense.
- Aptiv agreed to form a 50/50 autonomous-driving joint venture with Hyundai Motor Group. Aptiv would contribute technology, intellectual property and approximately 700 employees; Hyundai would contribute approximately $1.6 billion in cash and $0.4 billion in services, resources and IP. Closing was expected in Q2 2020, subject to approvals. Related assets of $525 million and liabilities of $32 million were classified as held for sale.
- Aptiv agreed to acquire gabocom for approximately $310 million, with closing expected by year-end 2019, subject to customary conditions and approvals. It acquired Falmat for $25 million in May 2019.
- Aptiv repurchased $390 million of shares and paid $170 million in dividends during the first nine months. The quarterly dividend was $0.22 per share; a further $0.22 dividend was declared in October.
Outlook, risks and contingencies
- No specific numerical earnings or revenue guidance is provided in the filing. Management stated that cash, available liquidity and operating cash flow were expected to fund operations, capital expenditures, restructuring, debt service, dividends and share repurchases.
- Management highlighted automotive cyclicality and production levels, economic weakness in key markets, foreign exchange and interest-rate movements, customer pricing pressure, commodity and labor costs, trade-policy and tariff uncertainty, Brexit, and customer concentration. GM and Volkswagen together represented approximately 19% of sales in Q3 and in the first nine months of 2019.
- Autonomous-driving development entails high costs, uncertain customer adoption and commercialization timing, competition and evolving regulation. Aptiv’s autonomous-driving operations recorded pre-tax losses of $41 million in Q3 and $126 million for nine months.
- Brazil claims totaled approximately $135 million, with $30 million accrued; the estimated reasonably possible loss above accruals ranged from zero to $105 million. Environmental reserves were approximately $4 million. Management considered ordinary business litigation outcomes unlikely to materially affect the company, while noting that actual warranty and litigation costs may differ from estimates.
- The company reported no material change in risk factors or market-risk disclosures during the quarter. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting.
Key facts for investors to verify
- Whether vehicle production, the GM strike’s effects, currency movements and price reductions continue to pressure sales and operating margins.
- Whether cash generation sustains capital investment, restructuring, dividends and repurchases while debt and interest costs remain elevated.
- The progress, closing conditions, contribution valuation and expected financial effects of the Hyundai joint venture, and the timing and funding of the gabocom acquisition.
- How much of reported earnings reflects discrete tax benefits and the unrealized investment gain, versus recurring operating performance.
- Developments in Brazilian claims, product warranty exposure, restructuring execution and other contingencies.