Aptiv PLC — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; fourth-quarter figures are identified separately below. Aptiv supplies automotive electrical architecture, safety, connectivity and mobility technologies through Signal and Power Solutions and Advanced Safety and User Experience. Powertrain Systems is presented as discontinued operations following its 2017 spin-off.
Financial results and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $14.357 billion | $14.435 billion | Down 1% |
| Gross margin | $2.646 billion; 18.4% | $2.729 billion; 18.9% | Down $83 million; 0.5 percentage points |
| Operating income | $1.276 billion | $1.473 billion | Down $197 million |
| Adjusted operating income | $1.548 billion; 10.8% margin | $1.751 billion; 12.1% margin | Down $203 million; 1.3 percentage points |
| Net income attributable to Aptiv | $990 million; $3.85 diluted EPS | $1.067 billion; $4.02 diluted EPS | Down $77 million; EPS down $0.17 |
| Cash from continuing operating activities | $1.624 billion | $1.640 billion | Down $16 million |
| Capital expenditures | $781 million | $846 million | Down $65 million |
Cash used in investing activities was $1.111 billion, compared with $2.048 billion in 2018, reflecting lower acquisition spending. Cash used in financing activities was $649 million. Aptiv returned $646 million to shareholders through $420 million of share repurchases and $226 million of dividends; the annual dividend was $0.88 per share.
At year-end, cash and cash equivalents were $412 million, total debt was $4.364 billion and net debt was approximately $4.0 billion. Available liquidity was $2.392 billion, including unused revolving credit and factoring capacity. Working capital, as defined by Aptiv, was $1.392 billion. The company reported compliance with debt covenants; its credit agreement requires a consolidated leverage ratio below 3.50 to 1.0.
Fourth quarter
For the three months ended December 31, 2019, net sales were $3.596 billion, operating income was $324 million, net income was $241 million and net income attributable to Aptiv was $230 million, or $0.90 per diluted share.
Material changes and operating drivers
- Global vehicle production fell 6% in 2019, including declines of 9% in China and 4% in North America, Europe and South America. Aptiv reported 4% volume growth, including about $320 million of sales from the 2018 KUM and Winchester acquisitions, but faced approximately $200 million of sales impact from the GM strike.
- Foreign exchange reduced sales by $394 million, chiefly due to the euro and Chinese yuan; contractual price reductions and commodity pass-through also weighed on reported sales.
- Adjusted operating income was pressured by the GM strike, price reductions, currency effects, increased SG&A and higher depreciation and amortization. Operational performance improvements provided a partial offset. The strike’s adverse impact on adjusted operating income was about $110 million.
- Signal and Power Solutions generated $10.302 billion in sales and $1.274 billion in adjusted operating income, down from $10.402 billion and $1.424 billion. Advanced Safety and User Experience generated $4.092 billion in sales and $274 million in adjusted operating income, versus $4.078 billion and $327 million.
- Restructuring charges increased to $148 million from $109 million. Aptiv expected approximately $85 million of 2020 cash payments under implemented programs and disclosed roughly $35 million of additional approved restructuring charges expected by the end of 2020.
Outlook, commentary and notable items
- Aptiv did not provide consolidated revenue or earnings guidance in the supplied filing text. It expected net research and development spending, including engineering and net of customer co-investment, of approximately $1.0 billion in 2020, down from 2019 primarily due to the planned Hyundai joint venture.
- The September 2019 agreement with Hyundai would form a 50/50 autonomous-driving joint venture. Aptiv planned to contribute technology, intellectual property and approximately 700 employees; Hyundai planned to contribute $1.6 billion in cash and approximately $0.4 billion of engineering, R&D and intellectual-property resources. Closing was expected in Q1 2020, subject to approvals. The contribution’s assets and liabilities were classified as held for sale at year-end: $532 million of assets and $43 million of liabilities. Aptiv reported pre-tax losses from the contributed operations of $172 million in 2019.
- Aptiv stated that existing cash, liquidity and operating cash flows should fund operations and investment in 2020 and beyond. Management cited a 45% estimated EBITDA break-even volume decline, assuming constant product mix and pricing, based on 2019 results.
- Management highlighted more than $22 billion in gross business bookings based on expected volumes and pricing; customer production volumes are not guaranteed, and many supply arrangements can be terminated or repriced.
- Risks include automotive cyclicality and customer concentration (the five largest customers represented approximately 39% of sales), ongoing pricing pressure, China market weakness and competition, currency and commodity volatility, trade restrictions, Brexit uncertainty, supply-chain interruptions, product warranty/recall exposure, and execution risks in autonomous driving and acquisitions. Aptiv also disclosed the coronavirus outbreak in China as an emerging risk in early 2020; the filing does not quantify its financial impact.
- Brazil claims totaled approximately $140 million, against $30 million of accruals; reasonably possible losses above accruals were estimated at $0–$110 million. Environmental remediation reserves were $4 million, and reasonably possible warranty exposure above recorded reserves was estimated at $0–$10 million.
- Other notable items: Aptiv issued $650 million of 2019 senior notes to redeem $650 million of 3.15% notes, recognizing a $6 million extinguishment loss; it recorded a $19 million unrealized gain on an equity investment. The effective tax rate was 12%, including valuation-allowance releases and favorable return adjustments. Unrecognized tax benefits were $217 million.
Important facts for investors to verify
- Whether 2020 automotive production, particularly in China, and the coronavirus-related disruption materially affected customer schedules, revenue and cash generation.
- Completion and final accounting for the Hyundai joint venture, including the value of Aptiv’s contribution and any resulting gain or loss.
- Whether operating margins recover as restructuring, pricing actions, foreign exchange and technology investment affect costs.
- Debt repayment and refinancing needs, covenant headroom, and the ability to sustain dividends and share repurchases alongside investment requirements.
- Developments in Brazil litigation, tax audits, warranty and recall claims, and the adequacy of related reserves.