Business context and reporting period
The supplied filing is Delphi Automotive PLC’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012; it is not filed under the Aptiv name. Delphi was a global vehicle-components supplier serving automotive and commercial-vehicle markets, with Electrical/Electronic Architecture, Powertrain Systems, Electronics and Safety, and Thermal Systems segments. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q2 2012 | Six months 2012 | Comparable 2011 |
|---|---|---|---|
| Net sales | $3.997B | $8.089B | $4.213B; $8.210B |
| Gross margin | $725M; 18.1% | $1.444B; 17.9% | $695M; 16.5%; $1.339B; 16.3% |
| Operating income | $468M | $932M | $428M; $840M |
| Net income attributable to Delphi | $330M | $672M | $298M; $589M |
| EPS attributable to Delphi | $1.01 | $2.05 | $0.88; $1.15 |
| Operating cash flow | Not separately presented | $754M | $499M |
- Q2 sales declined 5%; first-half sales declined 1%. Management attributed the declines principally to unfavorable euro and Brazilian real translation and lower commodity pass-through, despite volume growth of approximately 1% and 3%, respectively.
- Gross margin improved year over year in both periods. Management cited operational improvements and, for the first half, lower warranty expense compared with the prior-year $76M charge related to a Powertrain warranty settlement.
- Q2 net income attributable to Delphi increased 11%; first-half increased 14%. First-half 2011 EPS is not directly comparable because the 2011 weighted-average share count reflected the March 2011 redemption of membership interests.
- First-half capital expenditures were $400M, versus $292M; operating cash flow less capital expenditures was $354M, calculated from reported figures. Cash and cash equivalents were $1.523B, up from $1.363B at year-end 2011.
- At June 30, total debt was $2.064B, including $69M current and $1.995B long-term; management reported net debt of $541M. Current assets were $5.850B and current liabilities $3.696B.
- The $1.3B revolving credit facility was undrawn at quarter-end, with about $9M of letters of credit reducing availability. Management described total liquidity as approximately $2.8B, including cash and available financing. The company reported compliance with debt covenants.
Material changes versus prior comparable period
- First-half operating cash flow rose $255M to $754M, which management attributed primarily to higher earnings and lower net working-capital requirements.
- First-half segment EBITDA was $1.159B, up from $1.073B. Electrical/Electronic Architecture and Powertrain improved; Thermal Systems EBITDA declined from $98M to $68M, and Electronics and Safety declined from $198M to $191M.
- Debt was broadly stable versus December 31, 2011 ($2.064B versus $2.103B). First-half interest expense rose to $68M from $47M, reflecting the financing structure put in place in 2011; Q2 interest expense fell to $33M from $41M.
- Currency translation reduced first-half sales by $297M and Q2 sales by $227M, principally due to the euro and Brazilian real. First-half currency translation also contributed to a $73M other comprehensive loss.
Outlook, commentary, risks and unusual items
- No quantified full-year earnings or revenue guidance is provided in the supplied filing. Management expected cash, available liquidity and operating cash flow to be sufficient for 2012 operations, capital investment and anticipated obligations, including VCP payments and the planned acquisition.
- In July 2012, Delphi entered a purchase agreement to acquire FCI Group’s Motorized Vehicles Division for approximately $950M on a cash- and debt-free basis, subject to regulatory approval, with closing expected in Q4 2012. Management anticipated funding about 60% with cash and 40% with debt. The filing reports €250M of currency options, purchased for $9M, to hedge part of the transaction exposure; they did not qualify for hedge accounting.
- Management highlighted continuing European economic weakness, automotive cyclicality, potential supply interruptions, raw-material and labor inflation, commodity volatility, OEM pricing pressure, and production/customer mix as risks. A chemical supplier disruption had not caused a production impact by the filing date, but Delphi was monitoring the supply chain.
- Material contingencies include a European Commission wire-harness antitrust investigation, for which Delphi could not estimate a reasonably possible loss and recorded no accrual; an appeal by unsecured creditors in litigation concerning alleged distributions exceeding $7.2B, with no accrual; and Brazil claims of $210M against which $37M was accrued. Delphi also disclosed IRS review of whether it should be treated as a U.S. domestic corporation for tax purposes; no accrual was recorded, and an adverse outcome could materially increase tax exposure.
- Other notable items: Delphi completed the final approximately $80M payment under the 2011 warranty settlement in April 2012; repurchased approximately $150M of shares in Q2 under a $300M authorization; and recorded $80M of first-half VCP compensation expense, with approximately $42M of estimated remaining 2012 expense. The filing states disclosure controls were effective and reports no material changes in internal control.
Important facts for investors to verify
- Whether the FCI acquisition closed on expected terms and how its cash/debt financing affected leverage and liquidity.
- Subsequent sales, margins and cash generation, including exposure to foreign exchange, automotive production levels and raw-material costs.
- Developments in the antitrust investigation, unsecured-creditor appeal, Brazil litigation and IRS tax-status review, including any new loss estimates or accruals.
- Actual VCP settlement amounts and share-repurchase activity, and any effect on cash, earnings and diluted share count.
- Debt-covenant headroom, revolving-credit availability and the company’s ability to fund investment and acquisitions while maintaining its stated liquidity position.