Aptiv PLC — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Aptiv supplies automotive electrical architecture, vehicle components, safety, connectivity and mobility technologies. Results were materially affected by COVID-19 disruptions and Aptiv’s March 26 formation of an autonomous-driving joint venture with Hyundai Motor Group.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $3.226 billion | $3.575 billion |
| Gross margin | $501 million; 15.5% | $613 million; 17.1% |
| Adjusted operating income | $231 million | $345 million |
| Operating income | $1.619 billion | $297 million |
| Net income attributable to Aptiv | $1.572 billion; diluted EPS $6.14 | $240 million; diluted EPS $0.92 |
| Operating cash flow | $161 million | $84 million |
| Capital expenditures | $205 million | $235 million |
Sales declined 10%; Aptiv’s volumes fell approximately 7%, while global vehicle production fell 24%. Foreign exchange and contractual price reductions also weighed on sales. Adjusted operating income declined about 33%, reflecting lower volumes and mix, partly offset by operational improvements. Segment sales were $2.330 billion for Signal and Power Solutions and $902 million for Advanced Safety and User Experience; adjusted operating income was $225 million and $6 million, respectively, versus $283 million and $62 million a year earlier.
Reported operating income and earnings were dominated by a $1.434 billion pre-tax gain on the Hyundai autonomous-driving joint venture transaction, equivalent to approximately $5.63 per diluted share. Excluding this unusual gain, the reported increase in earnings does not reflect underlying operating performance. The gain was largely noncash; operating cash flow included its reversal as a cash-flow adjustment. Operating cash flow less capital expenditures was a $44 million use of cash.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $2.055 billion at March 31, up from $412 million at year-end; available liquidity was reported as $2.153 billion, including $98 million of unused European factoring capacity.
- Total debt was $6.224 billion, compared with $4.364 billion at December 31; net debt was approximately $4.2 billion. Aptiv drew the remaining $1.9 billion of its revolving facility during the quarter, primarily as a precaution against pandemic-related uncertainty.
- Current assets were $6.190 billion and current liabilities $3.655 billion. The company reported compliance with its credit agreement covenants at quarter-end.
- Cash provided by financing activities was $1.720 billion, principally reflecting revolving-credit borrowings. Cash and restricted cash totaled $2.087 billion at quarter-end.
Material developments, outlook and risks
- COVID-19: Facility and customer shutdowns, travel restrictions, weaker demand, changing production schedules and supply-chain disruption reduced Q1 volumes. Management expected adverse effects to persist through Q2 and possibly beyond; the full-year production and business impact remained highly uncertain. The filing provides no quantified earnings or revenue guidance.
- Liquidity actions: Aptiv suspended its $0.88 annual dividend after paying the Q1 dividend, paused further share repurchases, drew its revolving facility and actively managed spending and working capital. Management said existing cash, liquidity and operating cash flows were expected to fund operations, restructuring and capital expenditures.
- Hyundai joint venture: Aptiv contributed autonomous-driving technology, intellectual property and approximately 700 employees for 50% ownership. Hyundai contributed approximately $1.6 billion in cash and other resources. Aptiv recorded a preliminary $2.0 billion investment, to be accounted for under the equity method; the valuation may be revised. The venture was expected to fund future autonomous-driving costs, compared with Aptiv’s approximately $180 million of related spending in 2019.
- Credit amendment after quarter-end: On May 1, 2020, Aptiv extended maturities to August 2022 for most of its revolving borrowings and term loan, and temporarily increased the leverage-ratio covenant limit from 3.5:1 to 4.5:1 through July 1, 2021, subject to additional restrictions, including on dividends and repurchases. Remaining portions mature in August 2021.
- Restructuring: Q1 charges were $28 million; Aptiv expected about $40 million of additional approved Signal and Power Solutions charges and approximately $80 million of cash payments over the next 12 months.
- Contingencies: Brazil claims totaled approximately $105 million, with $25 million accrued and a reasonably possible additional loss of $0–$80 million. Possible warranty costs beyond recorded reserves were estimated at $0–$20 million. Management considered ordinary business litigation outcomes not likely to materially affect the company, but outcomes remain uncertain.
- Other risks include automotive cyclicality, customer and supplier financial health, foreign exchange and commodity exposure, pricing pressure, product recalls, trade restrictions, and the costs, competition and uncertain adoption timing for autonomous-driving technologies.
Most important facts for investors to verify
- Underlying profitability and margins excluding the one-time autonomous-driving joint venture gain.
- COVID-19 effects on customer production, Aptiv volumes, cash conversion and the anticipated Q2 and full-year outlook.
- Liquidity, debt service and covenant headroom under the amended credit agreement, including the added restrictions and maturity schedule.
- The final fair value and future performance of Aptiv’s 50% joint-venture investment.
- Progress on restructuring costs and cash payments, and developments in Brazil litigation and warranty exposure.