Aptiv PLC (then Delphi Automotive PLC) — Q3 2017 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2017. Delphi designed and manufactured automotive electrical/electronic architecture, powertrain, and safety technologies. It planned to spin off Powertrain Systems as Delphi Technologies and rename the continuing company Aptiv PLC, subject to customary conditions and shareholder approval.
Financial performance
Amounts are in U.S. dollars; financial statement figures are in millions except per-share amounts.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $4,333 | $4,091 | $12,943 | $12,348 |
| Gross margin | $883; 20.4% | $838; 20.5% | $2,629; 20.3% | $2,487; 20.1% |
| Operating income | $511 | $463 | $1,443 | $1,301 |
| Net income attributable to Delphi | $395 | $293 | $1,099 | $976 |
| Diluted EPS attributable to Delphi | $1.48 | $1.07 | $4.10 | $3.56 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $1,040 | $1,258 |
- Q3 sales rose 6%; management attributed growth mainly to higher volumes in Europe and Asia Pacific, plus favorable currency effects. Nine-month sales increased 5%, despite adverse currency and acquisition/divestiture effects.
- Q3 operating income rose 10% and attributable net income rose 35%. Nine-month continuing-operations income attributable to Delphi was $1,099 million, versus $871 million in 2016; the prior-year total included $105 million attributable to discontinued operations.
- Nine-month segment adjusted operating income was $1,690 million, up from $1,626 million. Electronics and Safety faced a $43 million incremental warranty charge; its nine-month gross margin was 14.7%, down from 18.3%.
- Nine-month capital expenditures were $591 million. Operating cash flow less capital expenditures was approximately $449 million, compared with approximately $644 million in 2016.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $557 million; current assets were $6,710 million and current liabilities $4,143 million.
- Total debt was $4,899 million, versus $3,971 million at year-end 2016. This included $782 million carrying value of Powertrain spin-off notes, with $796 million of net proceeds held in escrow. Excluding that spin-off debt, Delphi reported net debt of $3.6 billion.
- Available liquidity was $2.55 billion: $557 million cash and $1.993 billion undrawn under the $2.0 billion revolving facility. The company reported compliance with its debt covenants.
- Operating cash flow declined year over year, partly reflecting working-capital investment and the $310 million settlement payment in the unsecured-creditors litigation. Share repurchases were $383 million and dividends paid were $233 million during the nine months.
Changes, outlook and material items
- Management expected the Powertrain separation to be completed by March 2018. The spin-off entity issued $800 million of 5.00% notes due 2025; proceeds remained in escrow pending separation conditions and would be mandatorily redeemed if conditions were unmet by June 30, 2018. Delphi expected to receive an approximately $1.2 billion cash dividend upon completion, with the amount dependent on timing and restructuring.
- Separation costs were $31 million in Q3 and $46 million year to date; management expected further separation costs during 2017. Restructuring expense was $180 million year to date, down from $252 million; cash payments for restructuring were $162 million. Additional restructuring expense was expected in 2017.
- On October 20, 2017, Delphi agreed to acquire autonomous-driving technology provider nuTonomy for consideration of up to $454 million, expected to close in Q4 2017 subject to approvals; the company planned to use cash on hand.
- The $310 million unsecured-creditors litigation settlement was paid in July 2017. Brazil claims totaled approximately $215 million, with $30 million accrued and reasonably possible additional loss estimated at up to $185 million. Estimated warranty exposure beyond recorded reserves was zero to $30 million.
- Management cited automotive production cyclicality, regional economic conditions, Brexit and currency movements, commodity costs, OEM pricing pressure, customer concentration, product recalls, and execution of the planned separation as risks. It gave no specific earnings or revenue guidance in the provided filing text.
- The company reported disclosure controls were effective and no material changes in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether and when the Powertrain separation closed, the final distribution terms, and the cash dividend received by the continuing company.
- Underlying cash generation and working-capital trends, particularly the increase in receivables and inventory and the year-over-year decline in operating cash flow.
- Debt and liquidity after separating the Powertrain business, including the allocation of existing obligations and release of escrowed note proceeds.
- Developments in warranty claims, Brazil litigation, and restructuring cash costs.
- nuTonomy closing conditions, final consideration, and subsequent investment and integration costs.