Delphi Automotive PLC (now Aptiv PLC): FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Although the request specifies 2016 Q4, this is an annual filing; fourth-quarter figures are noted below. The registrant in the filing is Delphi Automotive PLC.
Business context
Delphi designed and manufactured automotive and commercial-vehicle components across Electrical/Electronic Architecture, Powertrain Systems, and Electronics and Safety. Its strategy emphasized “Safe, Green and Connected” technologies, including electrification, connectivity, active safety and autonomous driving. The former Thermal Systems business was reported as discontinued operations following its divestitures.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $16.661 billion | $15.165 billion |
| Gross profit / margin | $3.554 billion / 21.3% | $3.010 billion / 19.8% |
| Operating income | $1.947 billion | $1.723 billion |
| Adjusted operating income / margin | $2.223 billion / 13.3% | $1.971 billion / 13.0% |
| Income from continuing operations | $1.218 billion | $1.261 billion |
| Net income attributable to Delphi | $1.257 billion | $1.450 billion |
| Diluted EPS attributable to Delphi | $4.59 | $5.06 |
| Cash from continuing operating activities | $1.941 billion | $1.667 billion |
| Capital expenditures | $828 million | $704 million |
Cash from continuing operations less capital expenditures was approximately $1.113 billion in 2016, a derived measure. At year-end, cash was $838 million, total debt $3.971 billion and net debt approximately $3.133 billion. Reported available liquidity was $3.199 billion, including cash and undrawn committed facilities. Working capital, as defined by the company, was $1.607 billion. Dividends paid totaled $317 million; share repurchases were $635 million.
Fourth-quarter 2016 net sales were $4.313 billion, operating income $655 million, income from continuing operations $306 million and net income attributable to Delphi $281 million.
Material changes versus the prior comparable period
- Annual sales rose 10%, exceeding reported global vehicle production growth of 5%. Growth reflected higher volumes in North America, Europe and Asia Pacific and the inclusion of HellermannTyton, acquired in December 2015; foreign exchange and contractual price reductions partly offset growth.
- Gross margin increased 1.5 percentage points, and adjusted operating margin increased 0.3 percentage points. Management cited volume, mix and operational improvements.
- Net income attributable to Delphi fell 13% despite higher sales and operating income. Other expense increased to $366 million from $88 million, principally reflecting a $300 million reserve for unsecured-creditor litigation and $73 million of debt-extinguishment losses.
- Restructuring charges rose to $328 million from $177 million. The company also recorded $30 million of asset impairments and a $141 million pretax gain on the Mechatronics divestiture.
- Continuing-operations operating cash flow increased to $1.941 billion from $1.667 billion. Capital spending also increased. Year-end cash rose to $838 million from $535 million, while debt declined to $3.971 billion from $4.008 billion.
Outlook, commentary and risks
- Management expected 2017 vehicle production to be essentially flat in North America and Europe, up 1% in China and flat in South America. These are industry production expectations, not company revenue or earnings guidance.
- The company expected approximately $1.2 billion of 2017 R&D and engineering spending net of customer and government co-investment, approximately $155 million in cash restructuring payments, and approximately $134 million in non-cash amortization. It stated that existing cash, liquidity and operating cash flow should fund 2017 operations and investments. No specific 2017 revenue or earnings guidance is provided in the filing.
- Management reported $25.6 billion of gross business bookings based on projected volumes and pricing; customer awards generally do not guarantee purchase volumes.
- Key risks include automotive cyclicality and production changes, OEM pricing pressure and program termination rights, dependence on major customers, commodity and foreign-exchange volatility, supply-chain disruption, product warranty and recall exposure, international trade and Brexit uncertainty, and execution risks in autonomous-driving and other new technologies.
- Global production was uneven: China vehicle production increased 15% in 2016, while South American production declined 12%. Management highlighted the possibility that trade-policy changes, including changes affecting NAFTA, could alter costs or production locations.
Contingencies and unusual items
- Unsecured-creditor litigation: A January 12, 2017 bankruptcy-court ruling found that the maximum $300 million distribution obligation had been triggered. Delphi recorded the $300 million reserve in Q4 2016, reducing 2016 diluted EPS by about $1.10, but disputed the ruling and appealed on January 26, 2017. The court had not yet ruled on prejudgment interest.
- Brazil claims: Approximately $185 million of claims were asserted; Delphi had accrued $30 million and estimated reasonably possible losses above accruals of $0 to $155 million.
- Warranty exposure: Warranty liability was $161 million at year-end; estimated reasonably possible costs above recorded reserves were $0 to $50 million. The company recorded $60 million of higher warranty costs in 2016, including a $25 million customer settlement.
- GM recall: GM recalled approximately 3.64 million U.S. vehicles in 2016 involving airbag deployment systems. Delphi supplied sensors and control modules and stated it did not expect its estimated obligation to be material.
- Pensions: Non-U.S. defined-benefit plans were underfunded by $925 million at year-end. The company anticipated approximately $76 million of 2017 pension contributions and benefit payments.
- Divestitures and acquisitions: Delphi sold its Mechatronics business for net proceeds of approximately $197 million and recorded a $141 million pretax gain. It completed the sale of its SDAAC joint-venture interest, recognizing a $104 million after-tax gain in discontinued operations. It acquired PureDepth for approximately $15 million; after year-end it acquired Movimento for $40 million plus possible contingent consideration.
Important facts for investors to verify
- Track the appeal, any prejudgment interest, and the ultimate payment outcome in the unsecured-creditor litigation.
- Reconcile GAAP earnings with adjusted operating income, particularly the effects of restructuring, litigation, debt-extinguishment losses and divestiture gains.
- Assess whether volume growth and operating improvements can offset OEM price reductions, currency movements and commodity costs.
- Review cash conversion and planned capital spending, restructuring payments, shareholder distributions and debt maturities.
- Monitor potential outcomes of Brazil litigation, warranty claims, recall obligations and pension funding requirements.
- Distinguish continuing operations from discontinued Thermal Systems results and account for the HellermannTyton acquisition when comparing periods.