Aptiv PLC — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless otherwise noted, amounts are in U.S. dollars. Aptiv designs and manufactures vehicle components and electrical, electronic, active-safety and mobility technology for global automotive markets.
Financial results and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1.960 billion | $3.627 billion | $5.186 billion | $7.202 billion |
| Gross margin | $13 million; 0.7% | $669 million; 18.4% | $514 million; 9.9% | $1.282 billion; 17.8% |
| Operating income (loss) | $(311) million | $335 million | $1.308 billion | $632 million |
| Net income (loss) attributable to Aptiv | $(366) million | $274 million | $1.206 billion | $514 million |
| Diluted earnings (loss) per ordinary share | $(1.43) | $1.07 | $4.66 | $1.99 |
- Q2 sales declined 46%; first-half sales declined 28%. Aptiv reported volume decreases of 42% and 25%, respectively, primarily from COVID-19-related vehicle production shutdowns. First-half sales were also reduced by unfavorable foreign exchange and contractual price reductions.
- Q2 operating loss included $72 million of restructuring charges. First-half operating income included a $1.434 billion gain from forming the Hyundai autonomous-driving joint venture; excluding that gain, reported operating results were a loss of approximately $126 million. Aptiv’s segment adjusted operating loss was $229 million in Q2; first-half adjusted operating income was $2 million.
- Cash from operations was $55 million for the first half, versus $596 million in 2019; investing cash outflow was $394 million versus $469 million. Capital expenditures were $372 million versus $451 million. The reported first-half net income included the largely non-cash joint-venture gain.
- June 30 cash and cash equivalents were $1.885 billion; total debt was $4.146 billion, including $200 million current debt. Net debt was approximately $2.3 billion. Reported available liquidity was $4.062 billion, including an undrawn $2 billion revolving facility and available European receivables factoring capacity.
- Accounts receivable were $1.834 billion, inventories $1.212 billion, current assets $5.412 billion and current liabilities $2.859 billion. Shareholders’ equity was $7.126 billion. Cash increased substantially from year-end, primarily reflecting equity issuance.
Material changes and notable transactions
- In March, Aptiv and Hyundai formed a 50/50 autonomous-driving joint venture. Aptiv contributed technology, intellectual property and approximately 700 employees; Hyundai contributed approximately $1.6 billion in cash and other resources. Aptiv recognized a preliminary $2.0 billion investment and a $1.434 billion pre-tax gain. The venture is expected to fund its operating expenses and investments for the foreseeable future; Aptiv recorded $18 million of equity-method losses in Q2.
- In June, Aptiv issued approximately 15.1 million ordinary shares and 11.5 million 5.50% mandatory convertible preferred shares, receiving approximately $1.115 billion net proceeds from each offering. The preferred shares are scheduled to convert in June 2023 into 1.0754–1.3173 ordinary shares per preferred share and carry cumulative dividends, if declared.
- May amendments extended the maturity of most revolving-credit and term-loan commitments to August 2022 and temporarily raised the leverage covenant limit from 3.5:1 to 4.5:1 through July 1, 2021. The amendments also restrict ordinary-share dividends and repurchases during the relief period. Aptiv stated it was covenant-compliant at June 30.
- Aptiv paid no ordinary-share dividend in Q2 and said it did not anticipate resuming ordinary dividends or buybacks until pandemic-related uncertainty and business impacts abated. First-half ordinary dividends paid were $56 million.
Outlook, management commentary and risks
- Management expected pandemic effects to continue through 2020 and potentially beyond. It anticipated a slow, cautious restart in North America and Europe and warned that renewed lockdowns could cause further shutdowns. The filing provides no numeric full-year revenue or earnings guidance.
- Management cited reduced consumer demand, OEM production schedules, supply-chain interruptions, facility stoppages and the fixed-cost burden at lower production volumes. It planned continued cost actions and manufacturing-footprint optimization, while describing liquidity and its flexible cost structure as support for operations and investment.
- Restructuring charges were $72 million in Q2 and $100 million in the first half, including approximately $60 million of Q2 costs tied to COVID-19 actions. Aptiv expected about $45 million of additional charges for programs approved by June 30 and approximately $105 million of cash payments over the next twelve months for implemented programs.
- Key risks include the uncertain pandemic trajectory and vehicle production recovery, automotive cyclicality, customer and supplier financial health, foreign exchange and commodity movements, trade restrictions and tariffs, pricing pressure, product recalls, and the cost, timing and adoption of advanced and autonomous-driving technology.
- Brazil-related asserted claims totaled approximately $100 million; Aptiv had accrued $20 million and estimated reasonably possible losses beyond accruals of zero to $80 million. Management considered ordinary business litigation outcomes not expected to materially affect the company overall. Environmental reserves were approximately $4 million.
- Other unusual items included a $4 million Q2 loss on credit-agreement modification and $4 million of Q2 non-cash fixed-asset impairment charges. The estimated fair value of Aptiv’s joint-venture investment was preliminary and could be revised.
Most important facts for investors to verify
- Whether automotive production and Aptiv’s volumes recover as management anticipated, and how quickly fixed costs and margins respond.
- The quality and sustainability of reported earnings and cash generation, separating the one-time joint-venture gain from underlying operations and assessing working-capital movements.
- The joint venture’s final valuation, subsequent performance, equity-method losses and the extent to which Aptiv avoids future autonomous-driving funding.
- Liquidity, covenant headroom and debt maturities, including the temporary 4.5:1 leverage covenant and dividend and repurchase restrictions.
- The dilution and potential dividend burden from the mandatory convertible preferred shares, plus the timing and terms of any future conversion.
- Actual restructuring cash costs and savings, and developments in Brazil litigation and other contingencies.