Aptiv PLC quarterly report, Q2 FY2016

Business context and reporting period

This is Delphi Automotive PLC’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The filing identifies the registrant as Delphi Automotive PLC; the request’s Aptiv label is not the name used in this historical filing. Delphi supplied electrical and electronic architecture, powertrain, safety, and related technology to automotive and commercial-vehicle markets.

Thermal Systems was reported as discontinued operations following its divestiture. The final step, sale of Delphi’s SDAAC joint-venture interest, closed in March 2016.

Financial highlights

MetricQ2 2016Q2 2015Six months 2016Six months 2015
Net sales$4.206B$3.858B$8.257B$7.655B
Gross margin$858M; 20.4%$782M; 20.3%$1.644B; 19.9%$1.523B; 19.9%
Operating income$391M$481M$832M$927M
Adjusted operating income$577M$526M$1.086B$998M
Income from continuing operations$271M$369M$606M$673M
Net income attributable to Delphi$258M$645M$683M$854M
Diluted EPS attributable to Delphi$0.94$2.23$2.48$2.94

Cash flow, debt and liquidity

  • Six-month operating cash flow was $843M, versus $669M in the prior-year period; continuing-operations operating cash flow was $843M versus $635M.
  • Capital expenditures were $412M, making operating cash flow less capital expenditures approximately $431M. Investing cash flow was a $390M outflow; financing cash flow was a $595M outflow.
  • Cash was $437M at June 30, 2016, down from $535M at year-end 2015. Total debt was $4.066B, compared with $4.008B; reported net debt was approximately $3.6B.
  • Available liquidity was $2.281B, comprising cash, $1.493B of unused revolving-credit capacity and $351M of unused committed European factoring capacity. No revolving-credit borrowings were outstanding at quarter-end; $7M of letters of credit reduced availability.
  • The company reported compliance with debt covenants. The credit agreement requires a consolidated leverage ratio below 2.75:1.0.

Material changes versus prior comparable periods

  • Q2 sales rose 9%; six-month sales rose 8%. Management attributed the increase mainly to 8% volume growth and HellermannTyton sales, partly offset by currency movements and contractual price reductions. HellermannTyton contributed to the year-over-year increase following its December 2015 acquisition.
  • Q2 operating income fell $90M despite higher sales, primarily reflecting restructuring charges of $154M versus $17M a year earlier. Six-month restructuring charges were $189M versus $33M.
  • Adjusted operating income increased to $577M from $526M for Q2 and to $1.086B from $998M for six months. This non-GAAP segment measure excludes specified items and should be considered alongside GAAP results.
  • Q2 net income attributable to Delphi declined to $258M from $645M, largely because Q2 2015 included $295M of after-tax discontinued-operations income attributable to Delphi, principally a gain on the Thermal Systems sale. Q2 2016 had no discontinued-operations income.
  • Six-month 2016 discontinued-operations income attributable to Delphi was $105M, principally the $104M after-tax SDAAC divestiture gain. The 2015 comparison included Thermal Systems sale gains and an impairment loss.
  • Interest expense increased to $41M from $30M for Q2 and to $82M from $62M for six months, mainly reflecting debt issued to help finance HellermannTyton. Six-month 2015 other expense included a $52M loss on debt extinguishment.
  • Q2 continuing-operations effective tax rate was 24%, versus 18%; the six-month rate was 21%, versus 17%. Management cited geographic income mix, losses without tax benefits, and expiration of certain Chinese tax incentives pending renewed approvals.

Outlook, commentary and risks

  • Management expected additional restructuring actions in the second half of 2016, with approximately $150M–$200M of additional charges anticipated. It also expected about $40M of incremental non-cash amortization in 2016 related to HellermannTyton.
  • Management stated existing cash, available liquidity and operating cash flow were expected to fund operations, capital spending, restructuring payments, debt service, dividends and planned share repurchases. It described a $1.5B share-repurchase authorization approved in April 2016, to begin after the prior program was completed; $72M remained under the prior program at June 30.
  • Management cited expected 2016 vehicle-production growth of 3% in North America, 2% in Europe and 6% in China, and a projected 14% decline in South America. These are industry estimates discussed in the filing, not company revenue or earnings guidance.
  • Brexit was identified as a new risk, with potential effects on economic conditions, trade, currencies, interest rates and taxes. Approximately 5% of annual sales were generated in the U.K., with less than 3% denominated in pounds sterling.
  • Other risks include automotive production cyclicality and vehicle mix, OEM pricing pressure, raw-material and currency volatility, customer concentration, supply-chain disruption, recalls, and the ability to integrate acquisitions. GM and Volkswagen together represented approximately 23% of Q2 sales and 22% of six-month sales.
  • Potential legal exposures included $0–$300M for unsecured-creditor litigation, for which Delphi said loss was not probable and no reserve was recorded; and $0–$145M in reasonably possible Brazilian claims above $30M accrued. Warranty exposure beyond recorded reserves was estimated at $0–$40M.
  • The IRS Appeals Office concluded in April 2016 that Section 7874(b) did not apply to Delphi for the years under review, allowing the company to continue filing as a U.K. tax resident.

Important facts for investors to verify

  • How much of sales and earnings growth reflects organic volumes versus HellermannTyton and other portfolio changes, and how the acquisition performs against integration and synergy expectations.
  • Whether the planned restructuring charges deliver recurring cost savings, and their cash-payment timing and impact on Powertrain Systems.
  • Underlying earnings and cash generation excluding divestiture gains, restructuring, impairments and other specified items; review the reconciliation of adjusted operating income to GAAP results.
  • Liquidity and debt trajectory amid share repurchases, dividends, capital expenditures, and the 2018 maturity of the term loan and revolving facility.
  • Developments in Brexit-related currency, trade and tax risks; Chinese tax-incentive renewal; and the legal claims and warranty exposures disclosed in the filing.