Delphi Automotive PLC (now Aptiv) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing registrant is Delphi Automotive PLC; the filing describes its planned Powertrain Systems separation, not a completed separation.
Business context and results
Delphi designed and manufactured automotive components and provided electrical/electronic, powertrain, safety and related technology solutions. Results are for continuing operations unless noted. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $4,318 | $4,206 | $8,610 | $8,257 |
| Gross margin | $899 (20.8%) | $860 (20.4%) | $1,746 (20.3%) | $1,649 (20.0%) |
| Operating income | $468 | $394 | $932 | $838 |
| Income from continuing operations | $386 | $271 | $738 | $606 |
| Net income attributable to Delphi | $369 | $258 | $704 | $683 |
| Diluted EPS attributable to Delphi | $1.38 | $0.94 | $2.62 | $2.48 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $889 | $843 |
| Capital expenditures | Not stated for quarter | Not stated for quarter | $393 | $412 |
Financial position and liquidity
- At June 30, 2017, cash and cash equivalents were $792 million; total debt was $4.072 billion and net debt was approximately $3.3 billion. Debt increased from $3.971 billion at year-end 2016.
- Total assets were $13.056 billion, current assets $5.849 billion, and current liabilities $4.170 billion. Shareholders’ equity totaled $3.285 billion.
- Available liquidity was reported as $3.183 billion: cash of $792 million, $1.993 billion available under the $2.0 billion revolving facility, and $398 million under the committed European receivables facility. No revolving-credit borrowings were outstanding; the company reported compliance with debt covenants.
- Six-month financing cash outflows included $289 million of share repurchases and $156 million of dividends. The declared dividend was $0.29 per share per quarter.
Material changes versus comparable periods
- Q2 sales rose 3% and first-half sales 4%. Management attributed growth mainly to higher volumes, particularly in Europe and Asia Pacific; currency movements, contractual price reductions and the Mechatronics divestiture partly offset growth. Reported volume growth was 7% for Q2 and 9% for the first half.
- First-half operating income rose $94 million to $932 million. Gross margin improved 0.3 percentage points to 20.3%; lower restructuring charges and improved operating performance helped. Q2 operating income rose $74 million.
- First-half net income attributable to Delphi increased $21 million, while 2016 included $105 million attributable to Delphi from discontinued operations. Continuing-operations income attributable to Delphi was $704 million in 2017 versus $578 million in 2016.
- First-half operating cash flow increased to $889 million from $843 million. Receivables and inventory growth used cash; inventory increased to $1.485 billion from $1.232 billion at year-end.
- Segment performance differed: first-half adjusted operating income increased to $322 million in Powertrain Systems from $259 million, while Electronics and Safety declined to $140 million from $181 million. The latter included a $43 million warranty charge; its reported segment gross margin fell to 14.2% from 18.4%.
Outlook, commentary, risks and unusual items
- Powertrain separation: Announced May 3, 2017, the proposed tax-free spin-off was planned for completion by March 2018, subject to customary conditions. Separation costs were $15 million in the first half; further costs were expected during 2017.
- Management outlook: The company expected existing cash, liquidity and operating cash flow to fund operations, capital expenditures, restructuring, debt service, dividends and planned repurchases. It expected additional restructuring expense in 2017. No company-wide financial earnings or revenue guidance is provided in the supplied filing text.
- Management cited forecast 2017 vehicle-production changes of approximately +1% in Europe, +1% in China, -2% in North America and +15% in South America. These are industry estimates, not Delphi financial guidance.
- Warranty: Delphi recorded an incremental $43 million charge in the first half under an agreement with an OEM concerning an airbag-system recall. The company estimated reasonably possible warranty losses above recorded reserves at up to $30 million.
- Unsecured-creditors litigation: The company agreed to a $310 million settlement, approved by the bankruptcy court, and recorded the reserve at June 30. It paid the settlement in July 2017. A $17 million release of excess reserve was recorded as Q2 other income.
- Other contingencies: Asserted Brazil claims totaled about $200 million; $30 million was accrued and reasonably possible additional losses were estimated at up to $170 million. Environmental reserves were approximately $7 million. Management stated ordinary business litigation was not expected to have a material adverse effect, while noting that actual warranty and contingency outcomes could differ from estimates.
- Principal disclosed business risks include automotive-cycle and regional economic exposure; customer pricing pressure; commodity and foreign-exchange volatility; customer concentration (GM and Volkswagen together represented approximately 21% of Q2 sales); recall exposure; and execution, cost and completion risks for the Powertrain separation and technology investments. Brexit, trade-policy changes and adoption of autonomous-driving technologies were also identified as uncertainties.
Investor verification priorities
- Confirm the $310 million litigation settlement payment and whether any related exposure remains.
- Track the Powertrain separation timetable, transaction conditions, costs and expected standalone financial effects.
- Assess whether volume growth and margin improvement persist after contractual price reductions, currency effects, warranty charges and restructuring.
- Review Electronics and Safety warranty reserves and the development of the airbag recall matter; compare reasonably possible losses with recorded reserves.
- Monitor working-capital absorption, capital spending, net debt, share repurchases and availability of committed facilities.
- Reconcile reported net income comparisons with the prior-year discontinued-operations gain and assess segment results on a continuing-operations basis.