Aptiv PLC 10-Q Summary — First Quarter 2018
Business context and reporting period
Quarter ended March 31, 2018. Aptiv designs and manufactures automotive electrical, electronic, active-safety and mobility technologies. Its continuing operations comprise Signal and Power Solutions and Advanced Safety and User Experience. The former Powertrain Systems business was spun off as Delphi Technologies in December 2017 and is presented as discontinued operations for prior-period comparisons. Aptiv changed its tax residence from the U.K. to Ireland in April 2018.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $3.630 billion | $3.143 billion |
| Gross margin | $683 million; 18.8% | $599 million; 19.1% |
| Operating income | $374 million | $293 million |
| Adjusted operating income | $427 million | $352 million |
| Income from continuing operations | $316 million | $229 million |
| Net income attributable to Aptiv | $307 million | $335 million |
| Diluted EPS attributable to Aptiv | $1.15 | $1.24 |
| Operating cash flow, continuing operations | $186 million | $258 million |
| Capital expenditures | $243 million | $164 million |
Sales increased 15%, reflecting 10% volume growth, favorable foreign exchange (primarily the euro and Chinese yuan), and commodity pass-through, partly offset by contractual price reductions. Gross margin edged down 0.3 percentage points. Operating cash flow less capital expenditures was approximately negative $57 million for continuing operations.
Signal and Power Solutions sales were $2.617 billion and adjusted operating income was $351 million; Advanced Safety and User Experience sales were $1.032 billion and adjusted operating income was $76 million. Combined sales to General Motors and Volkswagen were approximately 19% of sales, compared with 24% a year earlier.
At March 31, cash and cash equivalents were $1.345 billion; total debt was $4.223 billion and reported net debt was approximately $2.9 billion. Available liquidity was $3.707 billion, including $1.993 billion of unused revolving credit availability and $369 million under the European receivables facility. Current liabilities were $3.708 billion versus current assets of $5.926 billion. Aptiv reported compliance with debt covenants; its credit agreement requires a consolidated leverage ratio below 3.50 to 1.0.
Material changes and unusual items
- Net income attributable to Aptiv declined to $307 million from $335 million, despite higher continuing-operations income. The prior-year quarter included $115 million of discontinued-operations income attributable to Aptiv; Q1 2018 had none.
- Other income was $30 million versus expense of $23 million, including an $11 million gain on currency forwards related to the proposed KUM acquisition. The prior-year result included a $27 million additional reserve for unsecured-creditor litigation.
- Income tax expense rose to $59 million from $19 million; the effective tax rate was 16% versus 8%, primarily reflecting less favorable geographic earnings mix and prior-year tax incentives and discrete benefits.
- Restructuring expense fell to $20 million from $52 million. Aptiv said it expects further restructuring expense in 2018, principally for footprint optimization and overhead reductions.
- Q1 2017 cost of sales included a $43 million charge related to an airbag-system recall agreement, contributing to lower comparative warranty costs in 2018.
- Aptiv repurchased $149 million of shares and paid $59 million in dividends. The quarterly dividend was $0.22 per share; approximately $840 million remained under the repurchase authorization.
Outlook, commentary, risks and contingencies
Management said existing cash, available liquidity and operating cash flows are expected to fund operations, restructuring, debt service, dividends and capital investment in 2018 and beyond. No specific revenue or earnings guidance was provided. The company expects to continue investing in advanced technologies and engineering and to adjust its cost base and manufacturing footprint as market conditions change.
Aptiv agreed to acquire connector manufacturer KUM for approximately $500 million, expected to close mid-2018 subject to approvals and customary conditions; the company intended to use cash on hand. Risks highlighted include automotive cyclicality and regional production declines, pricing pressure, commodity and foreign-exchange volatility, trade restrictions, Brexit uncertainty, customer concentration, recalls, and the cost, competition and uncertain adoption timelines for autonomous-driving technologies. Management cited Brazil claims of approximately $180 million, with $25 million accrued and a reasonably possible additional loss range of zero to $155 million. Warranty reserves were $63 million, with reasonably possible exposure above reserves estimated at zero to $25 million. Aptiv stated ordinary business litigation was not expected to materially affect consolidated results; environmental reserves were approximately $5 million.
Most important facts for investors to verify
- Whether sales and operating-income growth continues, and whether gross-margin pressure persists amid investment, commodity costs and customer price reductions.
- How working-capital use and elevated capital expenditures affect cash generation and net debt.
- KUM’s closing, funding and integration, and the returns on Aptiv’s technology investments, including autonomous-driving initiatives.
- The ultimate outcome and required payments for Brazil claims, warranty matters and other contingencies.
- The effect of the April 2018 change in tax residence and subsequent tax guidance on future tax expense.
- Comparability of results: the prior-year figures include discontinued operations in reported net income, while 2018 reflects Aptiv’s post-spin continuing business.