Aptiv PLC — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Aptiv designs and manufactures vehicle components and electrical, electronic, active-safety and mobility technology solutions. Its operating segments are Signal and Power Solutions and Advanced Safety and User Experience.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $3.575 billion | $3.630 billion | Down 2% |
| Gross margin | $613 million; 17.1% | $683 million; 18.8% | Down $70 million; 1.7 percentage points |
| Operating income | $297 million | $374 million | Down $77 million |
| Net income attributable to Aptiv | $240 million | $307 million | Down $67 million |
| Diluted EPS | $0.92 | $1.15 | Down $0.23 |
| Operating cash flow | $84 million | $186 million | Down $102 million |
| Capital expenditures | $235 million | $243 million | Down $8 million |
Operating cash flow less capital expenditures was negative $151 million, versus negative $57 million in Q1 2018. Cash and cash equivalents were $321 million at March 31, 2019, down from $567 million at year-end 2018; cash, cash equivalents and restricted cash totaled $322 million. The filing attributes weak quarterly operating cash generation largely to changes in operating assets and liabilities, including a $249 million increase in accounts receivable.
Total debt was $4.537 billion, comprising $542 million current and $3.995 billion long-term, versus $4.344 billion at December 31, 2018. Management reported net debt of approximately $4.2 billion and available liquidity of $2.148 billion, including cash and unused committed facilities. The company was compliant with debt covenants; its credit agreement requires a consolidated leverage ratio below 3.50:1.0.
Material changes and segment results
- Sales declined $55 million. Volume, net of contractual price reductions, contributed $108 million of growth, including $125 million from the 2018 KUM and Winchester acquisitions; China volumes fell approximately 10%. Unfavorable foreign exchange reduced sales by $148 million and contractual price reductions/commodity pass-through effects reduced sales by a net $15 million.
- Signal and Power Solutions sales were $2.562 billion and adjusted operating income was $283 million, compared with $2.617 billion and $351 million. Advanced Safety and User Experience sales were $1.023 billion and adjusted operating income was $62 million, compared with $1.032 billion and $76 million.
- Management cited lower volume and contractual price reductions, unfavorable foreign exchange, and higher depreciation and amortization as pressures on adjusted operating income. Operational performance improvements partly offset those pressures. Overall adjusted operating income fell from $427 million to $345 million.
- Cash flow from operations was lower year over year, while investing cash outflow remained substantial, principally reflecting capital spending. Financing included issuing $650 million of new notes and redeeming $650 million of 3.15% notes due 2020; the refinancing generated a $6 million extinguishment loss.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is stated in the provided filing text. Management expects cash, available liquidity and operating cash flows to be sufficient for operations, capital investments, restructuring, debt service, dividends and planned share repurchases in 2019 and beyond.
- Aptiv expects additional restructuring expense in 2019, primarily from manufacturing-footprint changes and global overhead reductions. Q1 restructuring charges were $26 million, versus $20 million; related cash expenditures were $31 million.
- Management highlighted automotive-industry cyclicality, weaker regional vehicle production, continued China-market volatility, currency and interest-rate fluctuations, trade restrictions and tariffs, customer pricing pressure, raw-material costs, and supply or labor disruptions. Brexit-related uncertainty may affect European and broader markets; Europe generated approximately 34% of Q1 sales.
- Growth opportunities include vehicle electrification, connectivity, active safety and automated driving. Management also cautioned that these markets carry high development costs, uncertain adoption timing, competition and regulatory risks.
- Brazil claims totaling approximately $145 million had been asserted; Aptiv accrued $30 million and estimated reasonably possible additional losses of zero to $115 million. Warranty reserves were $47 million, with reasonably possible excess exposure estimated at zero to $15 million. Environmental reserves were approximately $5 million.
- Q1 other income included a $19 million unrealized gain on an equity investment; the 2018 comparison included an $11 million gain on acquisition-related currency forwards. The 2019 effective tax rate was 12%, including $10 million of discrete tax benefits, versus 16% in 2018.
- Aptiv repurchased $226 million of shares and paid $57 million in dividends in Q1. A new $2.0 billion repurchase authorization is to begin after the prior program is completed. The quarterly dividend was $0.22 per share; the board declared the same amount for payment in May 2019.
Important facts for investors to verify
- Whether subsequent quarterly results confirm stabilization of China volumes and offsetting growth in North America and Europe.
- Whether operating cash flow improves and working-capital needs remain manageable given receivables growth and negative Q1 cash flow after capital expenditures.
- Debt levels, interest costs, refinancing economics, facility availability and ongoing covenant compliance.
- Progress and cash costs of restructuring, and whether cost savings offset pricing, foreign-exchange and investment pressures on margins.
- Developments in the Brazil claims, warranty exposure and other legal or environmental contingencies.
- Execution and returns from acquisitions, technology investments and autonomous-driving programs, alongside capital returns through repurchases and dividends.