Business context and reporting period
This summary covers Delphi Automotive PLC’s unaudited Form 10-Q for the quarter ended March 31, 2017, compared with the quarter ended March 31, 2016. The filing describes a global automotive technology and components supplier with Electrical/Electronic Architecture, Powertrain Systems, and Electronics and Safety segments. The requested company name is Aptiv PLC, but the filing itself is under Delphi Automotive PLC.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $4.292 billion | $4.051 billion |
| Gross profit / margin | $847 million / 19.7% | $789 million / 19.5% |
| Operating income | $464 million | $444 million |
| Income from continuing operations attributable to Delphi | $335 million | $320 million |
| Net income attributable to Delphi | $335 million | $425 million |
| Diluted EPS attributable to Delphi | $1.24 | $1.53 |
| Cash from operating activities | $290 million | $268 million |
| Capital expenditures | $215 million | $240 million |
- Revenue increased 6%; management attributed growth principally to higher volumes in North America, Europe, and Asia Pacific. Volume growth was 11%, partly offset by unfavorable currency effects, contractual price reductions, and a net $70 million impact from acquisitions and divestitures.
- Gross margin improved 0.2 percentage points. Operating income rose $20 million, while adjusted operating income increased to $537 million from $512 million. Adjusted operating income is a non-GAAP segment performance measure.
- Continuing-operations income attributable to Delphi increased, but reported net income and EPS declined because Q1 2016 included $108 million of income from discontinued operations, largely a gain on the sale of the SDAAC joint venture.
- Cash and cash equivalents were $547 million at March 31, 2017, down from $838 million at year-end 2016. Total debt was $3.999 billion; net debt was approximately $3.5 billion. Available liquidity was $2.917 billion, including undrawn committed facilities. The $2.0 billion revolving credit facility had no borrowings; the company reported compliance with debt covenants.
- Net cash used in investing activities was $270 million; net cash used in financing activities was $332 million, including $194 million of share repurchases and $78 million of dividends. Operating cash flow less capital expenditures was $75 million, calculated from the reported amounts.
Material changes and operating developments
- Segment sales rose in all three continuing segments: Electrical/Electronic Architecture to $2.342 billion from $2.277 billion; Powertrain Systems to $1.168 billion from $1.117 billion; and Electronics and Safety to $818 million from $697 million.
- Adjusted operating income increased in Electrical/Electronic Architecture ($329 million versus $307 million) and Powertrain Systems ($160 million versus $125 million), but decreased in Electronics and Safety ($48 million versus $80 million). The latter segment’s margin was affected by a $43 million incremental airbag-related warranty charge.
- Restructuring expense increased to $62 million from $35 million, including about $36 million for a Western European Electronics and Safety site closure. Related cash payments are expected principally through 2019.
- Delphi acquired Movimento, an over-the-air automotive software and data-management provider, for $40 million upfront plus up to $10 million contingent consideration. It also invested $15 million in Otonomo Technologies.
Outlook, risks, contingencies, and unusual items
- Management said existing cash, liquidity, and operating cash flows were expected to fund operations, capital investment, restructuring, debt service, dividends, and planned share repurchases. It expected to continue restructuring during 2017; no specific full-year financial guidance was provided in the supplied filing text.
- On May 3, 2017, Delphi announced its intention to separate Powertrain Systems through a proposed tax-free spin-off, targeted for completion by March 2018, subject to customary conditions. The company warned that completion, timing, and expected benefits were uncertain and that separation costs were expected.
- The Unsecured Creditors litigation reserve was $327 million at March 31, 2017, including a $27 million first-quarter charge for prejudgment interest. In May 2017, Delphi and plaintiffs reached an agreement in principle to settle for $310 million, subject to documentation and Bankruptcy Court approval.
- Brazil claims totaled about $205 million, with $35 million accrued; reasonably possible additional loss was estimated at $0–$170 million. Warranty reserves were $191 million at quarter-end; possible additional exposure beyond recorded reserves was estimated at $0–$30 million. Environmental reserves were approximately $7 million.
- Management cited automotive cyclicality, regional economic conditions, foreign-exchange and interest-rate movements, commodity costs, trade-policy changes, customer pricing pressure, product recalls, technology investment and adoption risks, and Brexit-related uncertainty as risks. GM and Volkswagen together represented approximately 22% of Q1 2017 sales.
- Management reported effective disclosure controls as of March 31, 2017, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the filing entity and its relationship to Aptiv PLC, since the supplied 10-Q identifies Delphi Automotive PLC as registrant.
- Track the proposed Powertrain Systems separation’s terms, timeline, costs, and any impact on debt allocation and shareholder value.
- Monitor the unsecured-creditors settlement for final approval, payment timing, and any difference from the $310 million agreement in principle.
- Assess Electronics and Safety segment performance apart from the $43 million warranty charge, and monitor any further recall-related costs.
- Review cash conversion and working-capital demands, restructuring cash outlays, share repurchases, and liquidity as the business cycle and vehicle production change.
- Evaluate the potential range and development of Brazilian legal claims, warranty exposure, and customer concentration.