Aptiv PLC — Second-Quarter 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Aptiv designs and manufactures automotive electrical, electronic, safety and mobility technology. Results are for continuing operations unless noted; the former Powertrain Systems segment was spun off as Delphi Technologies in December 2017 and is reported as discontinued operations in prior-period comparisons.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $3.684bn | $3.153bn | $7.314bn | $6.296bn |
| Gross margin | $726m; 19.7% | $655m; 20.8% | $1.409bn; 19.3% | $1.254bn; 19.9% |
| Operating income | $421m | $364m | $795m | $657m |
| Income from continuing operations | $303m | $306m | $619m | $535m |
| Net income attributable to Aptiv | $291m | $369m | $598m | $704m |
| Diluted EPS, continuing operations | $1.10 | $1.11 | $2.25 | $1.92 |
| Adjusted operating income, segments | $474m | $398m | $901m | $750m |
Amounts are in U.S. dollars. Aptiv’s reported operating income equates to approximately 11.4% of Q2 sales and 10.9% of first-half sales.
Cash flow, debt and liquidity
- First-half operating cash flow from continuing operations was $752m, versus $672m in 2017. Capital expenditures were $449m, versus $311m; operating cash flow less capital expenditures was $303m, compared with $361m.
- Investing cash outflow was $961m, including $512m for acquisitions. Financing cash outflow was $321m, including $149m of share repurchases and $117m of dividends. Cash, cash equivalents and restricted cash fell $626m to $971m.
- At June 30, cash was $970m and total debt was $4.089bn, including $22m short-term debt; reported net debt was approximately $3.1bn. Total available liquidity was $3.310bn, including $1.993bn of unused revolving credit capacity and $347m under the European receivables facility.
- The $2.0bn revolving credit facility was undrawn, apart from $7m in letters of credit. Aptiv was in compliance with its debt covenants, including the maximum 3.50-to-1.0 leverage ratio.
Material changes and business developments
- Sales rose 17% in Q2 and 16% in the first half year over year. Management attributed growth mainly to volume increases across regions: 14% for Q2 and 12% for the first half, with favorable foreign-exchange effects partly offset by contractual price reductions. KUM contributed $11m of sales after its June acquisition.
- Segment adjusted operating income increased to $474m in Q2 from $398m and to $901m for the first half from $750m. Signal and Power Solutions drove much of the increase; Advanced Safety and User Experience gross margin declined to 12.9% in Q2 from 16.8%, while Signal and Power Solutions gross margin was 22.3% versus 22.0%.
- Gross margin percentage declined year over year. Management cited commodity-cost increases, higher depreciation and engineering investment; first-half results also benefited from $43m of warranty expense recorded in the prior-year period not recurring.
- Net income attributable to Aptiv was lower than the prior-year periods, which included discontinued-operation income of $72m in Q2 and $187m in the first half. Continuing-operations income attributable to Aptiv was $291m in Q2 2018 versus $297m in Q2 2017, and $598m in the first half versus $517m.
- On June 14, Aptiv acquired connector maker KUM for $523m total consideration, funded with cash. The preliminary allocation included $273m of goodwill. In July, Aptiv agreed to acquire Winchester Interconnect for approximately $650m, subject to customary approvals, with closing expected by year-end 2018 and funding primarily from cash on hand.
- Aptiv changed its tax residence from the U.K. to Ireland in April 2018. The effective tax rate was 22% for Q2 and 19% for the first half, versus 11% and 10% a year earlier; 2018 included discrete tax expense related primarily to updated estimates for the U.S. transition tax.
Outlook, commentary and risks
- The filing gives no numerical revenue or earnings guidance. Management said existing cash, available credit and operating cash flows should be sufficient to fund operations, restructuring, dividends and capital expenditures in 2018 and beyond.
- Management expects additional restructuring expense in 2018, principally from manufacturing-footprint changes and overhead reductions. First-half restructuring expense was $35m, down from $83m; related cash expenditures were $66m.
- Management emphasized a low fixed-cost structure and investment in advanced technology, engineering and autonomous driving. It identified cyclical automotive production, regional economic conditions, customer pricing pressure, commodity costs, foreign-exchange movements, trade-policy changes and technology adoption as risks.
- GM and Volkswagen together represented approximately 20% of Q2 sales and 19% of first-half sales, compared with 24% in both 2017 periods. The filing also discusses product-recall exposure and the risks of developing and commercializing advanced safety and autonomous-driving technologies.
- Brazil claims totaled approximately $155m; Aptiv accrued $20m and estimated reasonably possible additional losses of up to $135m. The estimated reasonably possible warranty exposure beyond recorded reserves was $0–$20m. Management stated ordinary business litigation was not expected to materially adversely affect consolidated results, but outcomes remain uncertain.
- Foreign-currency translation reduced first-half other comprehensive income by $132m; Q2 currency translation loss was $193m. The company uses derivatives and euro-denominated debt to manage certain currency and commodity exposures.
Investor verification priorities
- Separate underlying sales and operating performance from foreign exchange, commodity pass-through, pricing and acquisition effects; confirm the sustainability of margin trends, particularly in Advanced Safety and User Experience.
- Review cash conversion, working-capital movements, capital spending and acquisition funding, including the expected cash impact of the Winchester transaction.
- Assess the higher effective tax rate, Ireland tax-residence change and remaining uncertainty in estimates under the U.S. Tax Cuts and Jobs Act.
- Monitor restructuring cash costs, Brazil claims, warranty reserves, customer concentration and recall exposure.
- Confirm debt covenant headroom, refinancing and interest-rate exposure, and whether the stated liquidity remains adequate after planned acquisitions, repurchases and dividends.