Aptiv PLC — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Aptiv designs and manufactures automotive electrical, electronic, active-safety and mobility technology, through Signal and Power Solutions and Advanced Safety and User Experience.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $3.668B | $3.559B | $8.854B | $10.761B |
| Gross margin | $647M; 17.6% | $677M; 19.0% | $1.161B; 13.1% | $1.959B; 18.2% |
| Operating income | $364M | $320M | $1.672B | $952M |
| Net income attributable to Aptiv | $299M | $246M | $1.505B | $760M |
| Net income per ordinary share | $1.05 diluted | $0.96 diluted | $5.63 diluted | $2.95 diluted |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $614M | $921M |
| Capital expenditures | Not presented for the quarter | Not presented for the quarter | $489M | $619M |
Q3 sales grew 3% year over year, with volume up 4% despite a 4% decline in global vehicle production. Nine-month sales fell 18%, reflecting a 15% volume decline amid the pandemic and a 23% global vehicle-production decline. Nine-month reported operating income and earnings include a $1.434B pre-tax gain from forming the Motional autonomous-driving joint venture; the gain contributed approximately $5.39 per diluted share. Without that item, reported year-to-date earnings materially overstate underlying operating performance.
Management’s segment measure, adjusted operating income, was $389M in Q3 versus $410M a year earlier, and $391M for the nine months versus $1.160B. Q3 segment results benefited from lower engineering and SG&A costs, including the transfer of autonomous-driving activities to Motional, but were pressured by volume, pricing, higher depreciation and warranty costs. Nine-month adjusted results were sharply lower, primarily due to pandemic-related volume and mix.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $2.122B; total debt was $4.034B, including $99M current debt. Net debt, as defined by Aptiv as debt less cash and cash equivalents, was approximately $1.9B.
- Available liquidity was $4.472B: cash of $2.122B, an undrawn $2.0B revolving facility and approximately $350M available under a committed European receivables-factoring facility, subject to eligible receivables.
- Operating cash flow of $614M less capital expenditures of $489M implies approximately $125M of cash flow after capital expenditures, versus $302M on the same simple basis in 2019. Aptiv said lower operating cash flow reflected, among other items, the noncash Motional gain and changes in operating assets and liabilities.
- Shareholders’ equity rose to $7.554B from $4.011B at year-end, principally reflecting the June equity offerings and retained earnings. Aptiv raised net proceeds of approximately $1.115B from ordinary shares and $1.115B from 5.50% mandatory convertible preferred shares.
Material changes and unusual items
- In March, Aptiv contributed autonomous-driving assets, intellectual property and approximately 700 employees to Motional for a 50% interest. Hyundai contributed approximately $1.6B in cash and other resources. Aptiv recorded a preliminary $2.0B investment and the $1.434B gain; it now accounts for Motional under the equity method. Aptiv recorded a $40M equity-method loss for the first nine months, primarily related to Motional.
- Q3 gross margin declined 1.4 percentage points year over year to 17.6%; the nine-month margin fell 5.1 points to 13.1%, as lower volumes left fixed costs less absorbed.
- Aptiv recorded $118M of restructuring charges in the first nine months, including $75M related to COVID-19 actions. It expects approximately $30M of additional costs for programs approved by quarter-end and approximately $95M of cash payments over the next 12 months for currently implemented programs.
- Cash increased substantially from year-end following the equity offerings and liquidity actions. Aptiv repaid $370M of other short-term debt during the first nine months and had no revolving-facility borrowings at quarter-end.
Outlook, risks and contingencies
The filing provides no specific financial guidance for future periods. Management said it expects existing cash, available liquidity and operating cash flows to be sufficient to fund operations, restructuring and capital expenditures, while emphasizing that the pandemic’s ultimate effects remain highly uncertain. Q3 conditions improved from the first half, but renewed restrictions in some European countries in late October could again affect production, earnings and cash flows. Aptiv expects global vehicle production to decline significantly for full-year 2020, but did not provide a precise forecast in the supplied filing text.
The May 2020 credit agreement amendment extended the maturity of most revolving and term-loan commitments to August 2022 and relaxed the leverage covenant from 3.5:1 to 4.5:1 through July 1, 2021. The relief period also restricts ordinary-share dividends and repurchases. Aptiv reported covenant compliance at September 30. The ordinary-share dividend was suspended; the preferred shares carry cumulative dividends at 5.50% annually, when declared, and are mandatorily convertible in June 2023.
- Key risks include COVID-19 and automotive-production volatility, supply-chain disruptions, customer demand and pricing pressure, foreign exchange, commodity costs, trade restrictions, and the timing, cost and adoption of advanced-safety and autonomous-driving technologies.
- GM, Volkswagen and FCA together represented approximately 30% of Q3 sales and 27% of nine-month sales, creating customer-concentration exposure.
- Brazil claims totaled approximately $100M; Aptiv accrued $20M and estimated reasonably possible losses above accruals of up to $80M. The company says outcomes could materially affect results.
- For warranty matters, Aptiv estimated reasonably possible losses above recorded reserves at zero to $10M. Environmental reserves were approximately $4M; the reasonably possible range above reserves was not material.
- Management reported disclosure controls were effective as of September 30, 2020 and no material change in internal control over financial reporting during the period.
Investor verification priorities
- Separate recurring operating performance and cash generation from the one-time Motional gain; monitor Motional’s valuation, equity-method losses and commercialization milestones.
- Track automotive production recovery or renewed disruption, especially given the decline in nine-month sales and gross margin.
- Confirm liquidity availability, covenant compliance and the effect of restrictions on ordinary dividends and share repurchases.
- Assess restructuring cash costs, future savings and whether additional actions become necessary.
- Monitor exposure to major OEM customers, Brazil litigation, warranty claims and potential dilution from the mandatory convertible preferred shares.