Business context and reporting period
Delphi Automotive PLC (now Aptiv PLC) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. Delphi supplied electrical/electronic architecture, powertrain, and electronics and safety products to global vehicle and commercial-vehicle markets. Thermal Systems is presented as discontinued operations following its divestitures; the final related joint-venture sale, SDAAC, closed in March 2016.
Financial performance
Amounts are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $4,091 | $3,631 | $12,348 | $11,286 |
| Gross margin | $835; 20.4% | $769; 21.2% | $2,479; 20.1% | $2,292; 20.3% |
| Operating income | $460 | $461 | $1,292 | $1,388 |
| Net income attributable to Delphi | $293 | $404 | $976 | $1,258 |
| Diluted EPS attributable to Delphi | $1.07 | $1.42 | $3.56 | $4.36 |
| Operating cash flow, continuing operations | Not provided by quarter | Not provided by quarter | $1,258 | $1,029 |
| Capital expenditures | Not provided by quarter | Not provided by quarter | $614 | $539 |
Nine-month continuing-operations income was $912 million versus $1,037 million. Nine-month net income included $108 million from discontinued operations in 2016, compared with $277 million in 2015. Cash from continuing operations less capital expenditures was approximately $644 million for the first nine months of 2016, versus $490 million in 2015.
Balance sheet and liquidity at September 30, 2016
Cash and cash equivalents were $395 million; total debt was $4,074 million, implying net debt of approximately $3,679 million. Current assets were $5,147 million and current liabilities $3,841 million. Available liquidity was reported as $2,781 million, including cash, $1,993 million of unused revolving-credit capacity and $393 million of committed European receivables-factoring capacity. The $2.0 billion revolver was undrawn, apart from $7 million in letters of credit. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Q3 sales rose 13%; nine-month sales rose 9%. Management attributed growth mainly to higher volumes in North America, Europe and Asia Pacific, plus HellermannTyton, acquired in December 2015. Foreign exchange and contractual price reductions partly offset growth.
- Despite higher sales, Q3 operating income was essentially flat and nine-month operating income declined 7%. Gross margin narrowed by 0.8 percentage points in Q3 and 0.2 points for the nine-month period.
- Restructuring expense increased to $63 million in Q3 and $252 million for nine months, versus $36 million and $69 million, respectively, in 2015. The 2016 actions included European footprint changes and overhead reductions.
- Q3 other expense included a $73 million debt-extinguishment loss, primarily from redeeming $800 million of 5.00% notes. Interest expense also rose year over year, partly reflecting debt issued to finance HellermannTyton.
- Cash from continuing operations improved to $1,258 million from $1,029 million, while capital expenditure increased to $614 million from $539 million. Financing used $860 million, including $530 million of share repurchases and $238 million of dividends.
- Q3 net income attributable to Delphi fell to $293 million from $404 million; the prior-year quarter included $53 million attributable to Delphi from discontinued operations, including the KDAC sale gain.
Outlook, management commentary, risks and contingencies
- Management expected existing cash, liquidity and operating cash flows to fund operations, restructuring, debt service, dividends and capital expenditures, and stated it expected to continue repurchases under the new $1.5 billion authorization. No specific earnings or revenue guidance was provided in the filing text.
- Management expected additional restructuring expense in 2016. Cash payments for the European plant-closure action were expected to be principally completed in 2017.
- Management cited estimated 2016 vehicle-production growth of 3% in North America, 3% in Europe and 6% in China, and a further 12% decline in South America. These were industry estimates, not company guidance. Risks included cyclical auto production, regional economic weakness, Brexit-related market and currency volatility, customer pricing pressure, commodity costs and foreign exchange.
- The company identified potential growth in safety, electrification, connectivity and automated-driving products, while noting uncertain adoption timing, high development costs, competition and evolving regulation. A Mobileye collaboration targeted a production-ready autonomous-driving platform in 2019.
- Delphi reported a GM recall of approximately 3.64 million U.S. vehicles involving airbag deployment systems; it supplied sensors and control modules and did not expect its costs, if any, to be material. It also reported supplying engine controllers for a limited number of VW diesel vehicles affected by emissions-related recalls and did not then expect direct adverse effects.
- Material litigation exposures included Brazil claims of approximately $180 million, against which $30 million was accrued, with reasonably possible additional loss estimated at $0–$150 million. A separate unsecured-creditors dispute had a stated possible loss range of $0–$300 million; no reserve was recorded because management did not consider a loss probable. Warranty exposure beyond recorded reserves was estimated at $0–$60 million.
- In October 2016, Delphi agreed to sell its Mechatronics business, with nine-month 2016 sales of approximately $225 million. Closing was expected in Q4, subject to approvals; the business was not classified as discontinued operations.
- Disclosure controls were concluded effective as of September 30, 2016. HellermannTyton was still being integrated into company operations and controls.
Important facts for investors to verify
- How much of sales growth and adjusted operating-income growth is attributable to HellermannTyton versus organic volume, and whether margins recover from restructuring, pricing and mix pressures.
- The timing, cash costs and expected savings from the European plant closure and other restructuring programs.
- Whether the stated $2.8 billion of available liquidity remains accessible, particularly the receivables-based facility, and how debt maturities, interest costs and the leverage covenant evolve.
- Developments in the Brazil claims and unsecured-creditors litigation, including any change in probability assessments, reserves or estimated loss ranges.
- Completion and proceeds of the Mechatronics divestiture, and the continuing effect of discontinued-operation gains on comparisons with 2015.
- Realization of Chinese tax incentives and the effects of foreign exchange, automotive production trends and customer concentration; GM and Volkswagen together represented about 23% of Q3 sales.