Aptiv PLC — Form 10-Q summary
Business context and period. Aptiv is a global automotive technology and components supplier, operating through Signal and Power Solutions and Advanced Safety and User Experience. This unaudited report covers the quarter and nine months ended September 30, 2018. The former Powertrain Systems business was spun off as Delphi Technologies in December 2017 and is reported as discontinued operations; 2017 comparisons therefore include discontinued-operation results that Aptiv no longer had in 2018.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $3.485 billion | $3.148 billion | $10.799 billion | $9.444 billion |
| Gross margin | $651 million; 18.7% | $650 million; 20.6% | $2.060 billion; 19.1% | $1.904 billion; 20.2% |
| Operating income | $323 million | $373 million | $1.118 billion | $1.030 billion |
| Continuing-operations income attributable to Aptiv | $222 million | $297 million | $820 million | $814 million |
| Diluted continuing-operations EPS | $0.84 | $1.11 | $3.09 | $3.04 |
| Operating cash flow from continuing operations | Not separately presented | Not separately presented | $890 million | $685 million |
Q3 sales rose 11%, principally from higher volumes across regions other than South America; reported volume growth was 12%, including $56 million from KUM. Foreign exchange reduced Q3 sales by $44 million, while commodity pass-through added $28 million. Nine-month sales increased 14%; volume contributed $976 million, foreign exchange $255 million and commodity pass-through $124 million, partly offset by contractual price reductions.
Q3 operating income declined despite higher sales, with restructuring expense rising to $65 million from $18 million. Nine-month operating income increased 9%. Adjusted operating income, a company-defined non-GAAP segment measure, was $420 million in Q3 versus $394 million and $1.321 billion for nine months versus $1.144 billion. Q3 segment results: Signal and Power Solutions sales were $2.535 billion and adjusted operating income $346 million; Advanced Safety and User Experience sales were $956 million and adjusted operating income $74 million.
Q3 gross margin fell 1.9 percentage points year over year. Management cited increased technology and engineering investment, higher depreciation, commodity and warranty costs, and unfavorable currency effects. Nine-month gross margin decreased 1.1 points; higher commodity costs and depreciation were partly offset by lower warranty costs, including comparison with a $43 million warranty charge in 2017.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $771 million, down from $1.596 billion at December 31, 2017. Total debt was $4.108 billion, making net debt approximately $3.337 billion. Current assets were $5.204 billion and current liabilities $3.387 billion.
- Nine-month operating cash flow from continuing operations was $890 million; capital expenditures were $661 million. Cash flow after capital expenditures was therefore approximately $229 million, before acquisitions, financing and other investing items.
- Net cash used in investing activities was $1.169 billion, including $512 million for acquisitions and $661 million of capital expenditures. Net cash used in financing was $482 million, including $214 million of share repurchases and $175 million of dividends.
- Reported available liquidity was $3.116 billion: $771 million cash, $1.993 billion available under the $2.0 billion revolving facility and $352 million under the committed European receivables facility, subject to eligible receivables. No revolver borrowings were outstanding; $7 million of letters of credit reduced availability.
- Aptiv reported compliance with debt covenants. Its credit agreement requires a consolidated leverage ratio below 3.50 to 1.0; the revolver and term loan mature in 2021.
Material changes, outlook and risks
- Tax and unusual items: The effective tax rate was 23% in Q3 and 20% for nine months, compared with 9% and 10% in 2017. 2018 included discrete tax expense of $28 million in Q3 and $48 million year to date, primarily associated with an intellectual-property transfer and adjustments to the U.S. transition-tax estimate. Aptiv changed its tax residence from the U.K. to Ireland in April 2018.
- Restructuring: The company recorded $100 million of restructuring expense and paid $102 million of restructuring costs in the first nine months. Management expected additional restructuring expense in 2018, mainly for manufacturing-footprint changes and overhead reductions; no specific full-year amount was provided.
- Acquisitions: Aptiv acquired connector maker KUM in June for stated total consideration of $523 million, funded with cash. After quarter-end, it acquired Winchester Interconnect on October 24 for approximately $685 million, net of cash acquired, using cash and short-term borrowings. Purchase-price allocations were preliminary.
- Management outlook: Management expected cash, available facilities and operating cash flows to be sufficient for global operations, restructuring, debt service, dividends and capital expenditures in 2018 and beyond. It described ongoing investment in advanced technologies, engineering and autonomous-driving capabilities. The filing does not provide quantified revenue or earnings guidance.
- Risks and contingencies: The business is exposed to automotive production cycles, regional economic and vehicle-mix changes, pricing pressure, raw-material and commodity costs, foreign-exchange movements, trade restrictions and tariffs, and acquisition-integration and technology-commercialization risks. GM and Volkswagen together represented about 19% of sales in Q3 and year to date, down from 22% and 23%, respectively, in the comparable 2017 periods.
- Brazil claims totaled approximately $145 million; Aptiv accrued $20 million and estimated reasonably possible losses above accruals at up to $125 million. Estimated reasonably possible warranty exposure beyond reserves was zero to $15 million. Environmental reserves were approximately $4 million. Management stated ordinary business litigation was not expected to have a material adverse impact, while noting outcomes may differ from estimates.
Important facts for investors to verify
- Whether the sales growth and segment profitability persist after separating volume, foreign exchange, commodity pass-through, contractual price reductions and acquisition effects.
- Whether margins recover as restructuring, technology investment, depreciation and commodity costs evolve; review the reconciliation of adjusted operating income to GAAP operating income.
- Cash conversion and liquidity after the substantial acquisition and capital-spending outflows, including the financing and integration of the post-quarter Winchester acquisition.
- The eventual tax expense and cash-tax effects of the intellectual-property transfer, Ireland tax residence and remaining transition-tax estimates.
- Developments in Brazil litigation, warranty claims, automotive recalls, trade policy and other disclosed cyclical and geopolitical risks.
- How much of reported year-over-year earnings change reflects the Delphi Technologies spin-off and discontinued-operation presentation rather than continuing Aptiv operations.