Aptiv PLC — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Aptiv designs and manufactures vehicle components and provides electrical, electronic, active-safety and mobility technology solutions. Its reportable segments are Signal and Power Solutions and Advanced Safety and User Experience. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $3,627 | $3,684 | $7,202 | $7,314 |
| Gross margin | $669; 18.4% | $726; 19.7% | $1,282; 17.8% | $1,409; 19.3% |
| Operating income | $335 | $421 | $632 | $795 |
| Net income attributable to Aptiv | $274 | $291 | $514 | $598 |
| Diluted earnings per share | $1.07 | $1.10 | $1.99 | $2.25 |
| Operating cash flow | Not separately reported | Not separately reported | $596 | $752 |
Q2 sales fell 2% year over year, and six-month sales declined 2%. Aptiv reported Q2 operating income down $86 million and six-month operating income down $163 million. Q2 operating margin was approximately 9.2% versus 11.4%; six-month operating margin was approximately 8.8% versus 10.9%.
Six-month capital expenditures were $451 million, compared with $449 million. Operating cash flow less capital expenditures was approximately $145 million, versus $303 million in the prior-year period (a simple calculation, not a company-defined cash-flow measure). Cash, cash equivalents and restricted cash totaled $381 million at period-end, down from $568 million at year-end 2018.
Balance sheet and liquidity
- Total debt was $4.514 billion, including $517 million current and $3.997 billion long-term; debt was $4.344 billion at December 31, 2018. Cash and cash equivalents were $365 million, yielding reported net debt of approximately $4.1 billion.
- Available liquidity was $2.227 billion: $365 million cash, $1.840 billion undrawn revolving credit capacity and $22 million available under the committed European receivables facility.
- Current assets were $4.854 billion and current liabilities $3.991 billion. The $2.0 billion revolving facility and term loan mature in August 2021. Aptiv reported compliance with its debt covenants, including the maximum 3.50-to-1.0 consolidated leverage ratio.
- Financing activity included issuing $650 million of 2029 and 2049 notes and redeeming $650 million of 2020 notes. Aptiv repurchased $346 million of shares and paid $114 million in dividends during the first half.
Material changes and management commentary
- Management attributed lower sales primarily to China volume weakness and unfavorable foreign exchange, partly offset by growth in North America and Europe. Volume growth was 4% in both Q2 and the first half, including acquired-business contributions; China volumes declined approximately 4% in Q2 and 6% for the first half.
- Unfavorable foreign-exchange effects were $123 million in Q2 and $271 million for the first half. Six-month segment adjusted operating income fell to $750 million from $901 million, with declines in both segments. Management cited volume and contractual price reductions, foreign exchange, and higher depreciation and amortization; operational improvements provided partial offsets.
- Management said cash, available credit and operating cash flows should be sufficient to fund operations, restructuring, capital expenditures, dividends and planned repurchases in 2019 and beyond. It expects additional restructuring expense in 2019, focused on manufacturing-footprint changes and overhead reduction; no numerical earnings or revenue guidance is provided in the filing text.
- Aptiv acquired Falmat for $25 million in May 2019. It recorded a $19 million unrealized gain on an Otonomo investment during the first half.
Risks, contingencies and unusual items
- Key exposures include cyclical automotive production, China and broader economic weakness, foreign-exchange and interest-rate movements, commodity costs, customer pricing pressure, tariffs and trade-policy uncertainty, Brexit-related uncertainty, and the ability to integrate acquisitions and commercialize advanced-safety and autonomous-driving technologies.
- GM and Volkswagen together accounted for approximately 19% of sales in both Q2 and the first half of 2019. Aptiv noted elevated potential exposure to product recalls and warranty claims.
- Brazil claims totaled approximately $145 million, against $30 million accrued; the reasonably possible loss above reserves was estimated at zero to $115 million. Warranty exposure beyond recorded reserves was estimated at zero to $10 million. Management stated ordinary business litigation was not expected to have a material adverse effect; environmental reserves were approximately $4 million.
- Q2 and first-half results included $31 million and $57 million of restructuring charges, respectively; $8 million of intangible-asset impairment charges; and first-half debt-extinguishment expense of approximately $6 million. The effective tax rate was 10% in Q2 and 11% for the first half, including discrete tax benefits of $21 million and $31 million, respectively.
- Aptiv adopted lease accounting in 2019, recording $433 million of operating lease right-of-use assets and $442 million of operating lease liabilities at June 30. Management said adoption did not significantly affect operations or cash flows. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether China production and foreign-exchange headwinds continue, and how much reported volume growth depends on acquisitions.
- Whether margin and cash-flow pressure persists as restructuring, engineering investment, depreciation and contractual price reductions affect results.
- Debt maturities, revolving-facility usage, covenant headroom and the sustainability of share repurchases and dividends relative to cash generation.
- The assumptions behind the Otonomo investment valuation and tax benefits, and the potential range and timing of Brazil litigation losses.
- Any further restructuring charges, warranty or recall developments, and changes in automotive demand, trade policy or autonomous-driving commercialization prospects.