Business Context and Reporting Period
Company: Delphi Automotive PLC (Successor), formerly Delphi Corporation (Predecessor).
Reporting Period: Fiscal year ended December 31, 2011.
Business Overview: A leading global vehicle components manufacturer providing electrical/electronic, powertrain, safety, and thermal technology solutions. The company serves 24 of the 25 largest automotive OEMs globally.
Corporate History: The company emerged from Chapter 11 bankruptcy in October 2009. Delphi Automotive PLC was formed in May 2011 and completed its Initial Public Offering (IPO) on November 22, 2011. The financial statements reflect the "Successor" entity for 2011 and 2010, and the "Predecessor" for periods prior to the October 2009 acquisition.
Key Financial Metrics (Year Ended Dec 31, 2011)
| Metric | 2011 Value | 2010 Value |
|---|---|---|
| Net Sales | $16,041 million | $13,817 million |
| Operating Income | $1,644 million | $940 million |
| Net Income (Attributable to Delphi) | $1,145 million | $631 million |
| EBITDA | $2,119 million | $1,361 million |
| EBITDA Margin | 13.2% | 9.9% |
| Gross Margin | 16.6% | 14.8% |
| Cash from Operating Activities | $1,377 million | $1,142 million |
| Total Debt | $2,103 million | $289 million |
| Cash and Cash Equivalents | $1,363 million | $3,219 million |
| Working Capital | $1,116 million | $1,059 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16% ($2,224 million) driven primarily by a 12% increase in volume due to improved OEM production schedules and increased content per vehicle. Foreign currency fluctuations and commodity pass-throughs also contributed positively.
- Profitability Expansion: Operating income increased 75% ($704 million). Gross margin improved from 14.8% to 16.6% due to operational leverage, cost restructuring, and favorable commodity pass-throughs.
- Debt Structure: Total debt increased significantly from $289 million to $2,103 million. This was primarily due to the March 2011 redemption of Class A and Class C membership interests (approx. $4.4 billion) funded by a new $3.0 billion credit facility and the issuance of $1.0 billion in Senior Notes.
- Restructuring Costs: Restructuring expenses decreased significantly from $224 million in 2010 to $31 million in 2011, as major restructuring programs were largely completed by the end of 2010.
- Unusual Items: The company recognized an unusual warranty expense of approximately $76 million in Q1 2011 related to a settlement with a customer regarding Powertrain components.
Guidance, Outlook, and Risks
- Strategic Outlook: Management focuses on "Safe, Green, and Connected" mega-trends. The company expects global vehicle production to increase 5-6% in 2012. Strategy includes leveraging a lean cost structure (approx. 90% of hourly workforce in low-cost countries) and expanding in emerging markets (China, Brazil, India).
- Capital Allocation: In January 2012, the Board authorized a $300 million share repurchase program. The company intends to maintain strong financial discipline and sufficient liquidity.
- Key Risks:
- Cyclical Exposure: Business is highly sensitive to global automotive sales and production volumes.
- Customer Concentration: General Motors accounted for 19% of 2011 net sales; the top five customers (GM, VW, Ford, Daimler, PSA) accounted for 47%.
- Commodity Prices: Volatility in copper, aluminum, and resin prices impacts margins, though escalation clauses provide partial relief.
- Legal & Tax: Pending EU antitrust investigation regarding wire harnesses; potential IRS challenge regarding U.S. tax residency status of the Jersey/UK structure; significant litigation in Brazil ($225 million asserted claims).
- Lock-up Expiration: Approximately 65% of outstanding shares are subject to lock-up agreements expiring in May 2012, which could impact share price.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the Credit Agreement's leverage ratio (consolidated indebtedness to EBITDA < 2.75:1) given the increased debt load.
- Warranty Reserves: Assess the adequacy of warranty reserves following the $76 million unusual expense and the $133 million payment made in April 2011.
- Customer Concentration: Monitor GM's production schedules and market share, as they represent nearly 20% of revenue.
- Antitrust Exposure: Track the status of the EU antitrust investigation and U.S. class action litigation regarding wire harnesses.
- Tax Residency: Review developments regarding the potential IRS assertion that the company should be treated as a U.S. domestic corporation.
- Share Repurchase: Monitor the execution of the newly authorized $300 million share buyback program.