Aptiv PLC — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly results are included. Unless noted, financial amounts are in U.S. dollars. Aptiv’s continuing business comprises Signal and Power Solutions and Advanced Safety and User Experience; the former Powertrain Systems business was spun off in December 2017 and is reported as discontinued operations for comparative periods.
Business context and key financial metrics
Aptiv designs and manufactures vehicle electrical architecture, components, software and active-safety technologies, with a strategic focus on safer, greener and connected mobility. FY 2018 global vehicle production declined 1%: North America was flat, Europe declined 1%, China declined 4%, and South America increased 4%.
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $14.435 billion | $12.884 billion |
| Gross profit / margin | $2.729 billion / 18.9% | $2.614 billion / 20.3% |
| Operating income | $1.473 billion | $1.416 billion |
| Adjusted operating income / margin | $1.751 billion / 12.1% | $1.594 billion / 12.4% |
| Income from continuing operations | $1.107 billion | $1.063 billion |
| Net income attributable to Aptiv | $1.067 billion | $1.355 billion |
| Diluted EPS from continuing operations | $4.02 | $3.81 |
| Cash from continuing operating activities | $1.640 billion | $1.106 billion |
| Capital expenditures | $846 million | $698 million |
| Cash and cash equivalents at year-end | $567 million | $1.596 billion |
| Total debt / net debt | $4.344 billion / $3.777 billion | $4.149 billion / $2.553 billion |
| Working capital (company-defined) | $1.430 billion | $1.296 billion |
Management’s non-GAAP adjusted operating income excludes specified restructuring, acquisition and portfolio costs, impairments, divestiture gains or losses and acquisition-related deferred compensation. Cash from operations less capital expenditures was approximately $794 million in 2018, versus $408 million in 2017, calculated from continuing-operations cash flow and reported capital expenditures.
Material changes versus the prior comparable period
- Sales rose 12%, including 11% volume growth, favorable foreign exchange and $182 million of incremental sales from 2018 acquisitions; contractual price reductions partly offset growth.
- Both segments grew: Signal and Power Solutions sales were $10.402 billion, up $895 million; Advanced Safety and User Experience sales were $4.078 billion, up $632 million.
- Profitability margins contracted: consolidated gross margin fell to 18.9% from 20.3%, and adjusted operating margin to 12.1% from 12.4%. Segment gross margins also declined in both businesses.
- Net income attributable to Aptiv fell from $1.355 billion to $1.067 billion, in part because FY 2017 included $334 million attributable to Aptiv from discontinued operations; FY 2018 had no discontinued-operations income.
- Continuing-operations operating cash flow increased, while investing cash outflow rose to $2.048 billion, reflecting $1.197 billion of acquisition spending, technology investments and higher capital expenditure.
- Year-end cash decreased by about $1.029 billion. Total debt increased $195 million, including $279 million outstanding under the European receivables factoring facility, which had no year-end balance in 2017.
Outlook, management commentary, risks and unusual items
- Outlook: Aptiv said existing cash, available facilities and operating cash flow should be sufficient to fund operations and investment in 2019 and beyond. It expected approximately $1.2 billion of 2019 R&D and engineering spending net of customer and government co-investment, approximately $146 million of non-cash amortization, and about $55 million of 2019 cash payments for implemented restructuring programs. The filing does not provide a clear consolidated revenue or EPS forecast.
- Demand and execution: Results remain sensitive to automotive production cycles, regional slowdowns, customer vehicle mix and production schedules. Customer programs generally do not guarantee minimum purchase volumes; OEMs may re-source or terminate programs, and annual contractual price reductions are typical.
- Technology investment: Aptiv is investing in active safety, autonomous driving, connectivity and mobility services. It cited a Mobileye autonomous-driving platform target of application readiness in 2019 and production readiness in 2021–2022, while noting uncertain adoption, high development costs, competition and evolving regulation. FY 2018 gross business bookings were $22 billion, based on projected volumes and pricing, not firm orders.
- Acquisitions and restructuring: Aptiv acquired KUM for approximately $526 million and Winchester Interconnect for approximately $682 million, and invested $15 million in Affectiva. Restructuring charges were $109 million, and the company expected further restructuring expense in 2019. The two acquisitions contributed $182 million of reported 2018 sales from their acquisition dates.
- Taxes and other unusual items: The effective tax rate was 19%, versus 18% in 2017. 2018 tax expense included approximately $30 million of adjustments related to U.S. tax reform and approximately $30 million related to an intra-group intellectual-property transfer. Aptiv changed its tax residence from the U.K. to Ireland in April 2018 while remaining incorporated in Jersey.
- Contingencies: Brazil claims totaled approximately $145 million, with $30 million accrued; reasonably possible loss above accruals was estimated at zero to $115 million. Environmental remediation reserves were about $4 million. Warranty reserves were $50 million, with possible additional exposure estimated at zero to $15 million.
- Capital allocation and liquidity: Aptiv repurchased $499 million of shares and paid $233 million in dividends in 2018. At year-end, stated available liquidity was $2.632 billion, comprising $567 million cash, a $2.0 billion undrawn revolving facility and $65 million of available European factoring capacity. A new share-repurchase authorization of up to $2.0 billion was approved in January 2019, to begin after the existing program is completed.
- Other risks: Management highlighted commodity and supply-chain volatility, foreign exchange exposure, tariffs and trade-policy uncertainty, Brexit-related risk to Europe, customer concentration (five largest customers were about 41% of sales), cyber risk, product recalls and pension obligations. The primary funded non-U.S. pension plans were underfunded by $58 million; broader defined-benefit and statutory retirement obligations, net of plan assets, totaled $447 million.
Important facts for investors to verify
- Whether sales growth and segment profitability can persist as automotive production weakens in key markets, and whether margin pressure reflects temporary investment or a more lasting change.
- How much of reported growth and future bookings converts into firm customer orders and profitable production, given the lack of guaranteed volumes and OEM termination or re-sourcing rights.
- Acquisition integration, returns on the KUM and Winchester purchase prices, and the effect of acquisition-related amortization and goodwill on future results.
- Cash conversion and funding needs after elevated acquisition spending, capital expenditures, dividends and buybacks; also review the 2019 debt maturities and covenant headroom. The credit agreement requires a consolidated leverage ratio below 3.50 to 1.0; Aptiv reported compliance at year-end.
- Potential outcomes and reserve adequacy for Brazil litigation, warranty matters, environmental remediation, tax audits and pension obligations.
- Whether autonomous-driving partnerships and product-development timelines achieve commercial milestones, while managing regulatory, competitive and cybersecurity risks.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2018.