Business Context and Reporting Period
This is Delphi Automotive PLC’s unaudited Form 10-Q for the quarter ended September 30, 2012, with comparative results for Q3 and the first nine months of 2011. Delphi manufactures vehicle electrical/electronic, powertrain, safety and thermal systems. The filing is under Delphi Automotive PLC, not Aptiv PLC.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $3.663B | $3.931B | $11.752B | $12.141B |
| Gross margin | $605M; 16.5% | $637M; 16.2% | $2.049B; 17.4% | $1.976B; 16.3% |
| Operating income | $367M | $393M | $1.299B | $1.233B |
| Net income attributable to Delphi | $269M | $266M | $941M | $855M |
| Diluted EPS | $0.84 | $0.79 | $2.89 | $1.89 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.168B | $909M |
Cash and cash equivalents were $1.634B at September 30, 2012, versus $1.363B at year-end 2011. Total debt was $2.090B, including $92M current debt; net debt was $456M. The $1.3B revolving facility was undrawn at quarter-end, apart from $9M of letters of credit, and management reported approximately $2.9B of cash and available financing. Total assets were $9.639B and shareholders’ equity was $2.870B.
Nine-month investing cash use was $526M, including $563M in capital expenditures; financing cash use was $360M, including $300M of share repurchases. Capital expenditures rose from $454M in the prior-year period. Management reported the company was in compliance with credit agreement covenants at September 30.
Material Changes Versus Prior Period
- Q3 sales fell 7%; management said volumes were flat, while unfavorable foreign exchange—principally the euro and Brazilian real—and lower commodity pass-through reduced reported sales. Nine-month sales fell 3% despite approximately 2% volume growth; FX reduced sales by $509M.
- Q3 operating income declined $26M and EBITDA declined $36M to $480M. Nine-month operating income increased $66M and EBITDA rose $50M to $1.639B. Nine-month gross margin improved to 17.4% from 16.3%, reflecting operational performance and lower warranty costs, among other factors.
- Interest expense increased $16M for the nine months, to $100M, primarily reflecting debt issued in connection with the 2011 membership-interest redemption. The nine-month effective tax rate declined to 19% from 24%.
- Nine-month EPS comparisons are affected by the substantially higher 2011 weighted-average share count (452.58M versus 325.00M in 2012), following the 2011 membership-interest redemption. Delphi repurchased approximately $312M of shares in the first nine months of 2012.
- Segment results were mixed: nine-month EBITDA increased in Electrical/Electronic Architecture and Powertrain Systems, but declined in Electronics and Safety and Thermal Systems.
Outlook, Commentary, Risks and Unusual Items
- Management cited ongoing European economic uncertainty and lower vehicle production in Europe and South America. It described Delphi’s flexible cost structure and balance sheet as positioning the company to withstand industry cycles, but gave no specific financial guidance for future sales or earnings.
- In Q4 2012, Delphi initiated restructuring programs expected to total approximately $250M, about 75% in Europe and including $70M related to MVL. Approximately $175M was expected to be recognized in Q4 2012, with the balance in 2013.
- Delphi completed its acquisition of FCI’s Motorized Vehicles Division on October 26, 2012, for €765M (approximately $1B). The purchase was funded with cash, a $363M term-loan draw and additional European factoring. MVL’s results are to be reported in Electrical/Electronic Architecture; purchase-price allocation was preliminary.
- A $25M favorable warranty estimate adjustment benefited Q3 and nine-month 2012 results. The company also recorded $107M of nine-month Value Creation Plan compensation expense; $214M was accrued at quarter-end. Management expected approximately $200M of VCP awards to be settled in cash.
- Key exposures include automotive production cycles, customer pricing pressure, commodity and currency volatility, and acquisition integration. GM accounted for approximately 18% of sales in both Q3 and the nine-month period.
- Delphi could not estimate a reasonably possible loss range for the European Union wire-harness antitrust investigation and recorded no accrual. Brazil claims totaled $219M, with $37M accrued. A bankruptcy-court creditors’ distribution claim was dismissed and upheld on appeal in October 2012; further appeal remained possible. No accrual was recorded for that claim.
- The IRS was reviewing whether Delphi should be treated as a U.S. domestic corporation for federal tax purposes retroactive to the 2009 acquisition. Delphi disputed that treatment, but stated that an adverse outcome could materially affect taxes, results and financial condition; no accrual was recorded.
Important Facts for Investors to Verify
- Whether revenue and margins remain resilient amid European weakness, currency effects and lower production.
- The final MVL purchase accounting, integration costs, synergies, acquisition financing and resulting debt and cash levels.
- The timing and cash impact of the announced restructuring programs and VCP settlement.
- Developments in the antitrust investigation, Brazil litigation and U.S. tax-residency review, including any changes to accruals or exposure.
- Progress on cash conversion, capital spending, share repurchases and compliance with debt covenants.