Aptiv PLC (formerly Delphi Automotive PLC) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. The filing registrant was Delphi Automotive PLC. The company manufactured vehicle components and supplied electrical/electronic, powertrain, and safety technologies to automotive and commercial-vehicle markets. Financial amounts are in U.S. dollars.
Key financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $4.051 billion | $3.797 billion |
| Gross margin | $786 million; 19.4% | $741 million; 19.5% |
| Operating income | $441 million | $446 million |
| Adjusted operating income (non-GAAP) | $509 million | $472 million |
| Continuing-operations income attributable to Delphi | $320 million | $288 million |
| Net income attributable to Delphi | $425 million | $209 million |
| Diluted EPS, continuing operations / total | $1.15 / $1.53 | $0.99 / $0.72 |
| Operating cash flow, continuing operations | $268 million | $121 million |
| Capital expenditures | $240 million | $213 million |
| Cash and cash equivalents at period end | $463 million | $535 million at Dec. 31, 2015 |
| Total debt | $4.353 billion | $4.008 billion at Dec. 31, 2015 |
Sales rose 7%, primarily on higher volumes in North America, Europe, and Asia Pacific and HellermannTyton acquisition sales. Volume growth was 8%; foreign exchange reduced sales by $108 million and commodity pass-through by $34 million. Gross margin was nearly unchanged, while operating income declined slightly as restructuring, acquisition-related amortization, and other costs increased. Continuing-operations diluted EPS improved to $1.15. Total net income also included the $104 million after-tax gain on the SDAAC joint-venture sale; it is not a measure of recurring operating performance.
Continuing-operations cash flow less capital expenditures was approximately $28 million, versus approximately negative $92 million in Q1 2015 (calculated from reported cash flow and capex). Working-capital changes remained a cash use. Financing cash flows included $358 million of share repurchases and $80 million of dividends. Cash declined by $116 million during the quarter.
Balance sheet, debt and liquidity
At March 31, 2016, total debt was $4.353 billion, including $315 million drawn under European receivables factoring; net debt was approximately $3.9 billion. Cash was $463 million. Reported available liquidity was $2.036 billion, including $1.493 billion of undrawn revolving credit capacity and $80 million of undrawn committed European factoring capacity. The $1.5 billion revolving facility had no period-end borrowings, apart from $7 million of letters of credit reducing availability. Delphi reported compliance with debt covenants; its credit agreement requires a consolidated leverage ratio below 2.75 to 1.0.
Current assets were $5.082 billion and current liabilities $4.061 billion. The company stated that cash, available facilities, and operating cash flow should be sufficient to fund operations, restructuring, dividends, and capital investment. Cash held by non-U.S. subsidiaries was $444 million.
Segments and material changes
- Electrical/Electronic Architecture: Sales $2.277 billion versus $2.078 billion; adjusted operating income $305 million versus $264 million. HellermannTyton contributed to growth.
- Powertrain Systems: Sales $1.094 billion versus $1.081 billion; adjusted operating income $130 million versus $129 million.
- Electronics and Safety: Sales $720 million versus $682 million; adjusted operating income $74 million versus $79 million.
- The company completed the sale of its 50% SDAAC joint-venture interest on March 31, receiving $62 million net of tax, costs, and cash divested and recording a $104 million after-tax gain. Thermal Systems results are presented as discontinued operations. The 2015 comparison includes an $88 million after-tax impairment related to KDAC.
- Q1 2016 restructuring charges were $35 million, compared with $16 million; management cited footprint shifts to lower-cost European locations and capacity alignment in South America. The company expected additional restructuring expense in 2016.
- Total debt increased primarily with $315 million of receivables factoring outstanding at quarter-end; interest expense rose to $41 million from $32 million, partly reflecting debt issued to finance the HellermannTyton acquisition.
Outlook, commentary and risks
The filing did not provide formal company-specific earnings or revenue guidance. Management cited an industry outlook of approximately 2% global vehicle-production growth in 2016, with North America up 3%, Europe up 2%, and China up 4%; South America was expected to decline 10%. These were management’s market expectations, not company guidance. Management emphasized the cyclical nature of vehicle production, pricing pressure, cost discipline, product development, and growth opportunities in safety, electrification, fuel efficiency, automation, and connectivity.
- Risks include economic and production weakness, especially in South America and potentially China; customer and vehicle mix shifts; foreign-exchange and commodity volatility; customer pricing pressure; and the ability to integrate acquisitions and capture expected benefits.
- Following April 2016 earthquakes in Japan, the company was assessing possible supply-chain disruption, particularly for electronic components; any disruption could materially affect results, cash flows, or financial condition.
- Management noted elevated vehicle recall activity and discussed VW’s diesel-emissions recall. Delphi supplied controllers for a limited number of affected vehicles outside North America and did not then expect direct adverse effects, but acknowledged possible future exposure.
- Contingencies included unsecured-creditors litigation with a reasonably possible loss range of $0–$300 million; Delphi said loss was not probable and recorded no reserve. Asserted Brazil claims were approximately $155 million, with $27 million accrued and an estimated reasonably possible additional loss of $0–$128 million. Environmental remediation reserves were approximately $6 million.
- On April 8, 2016, after quarter-end, the IRS Appeals Office concluded that Section 7874(b) did not apply to Delphi for the tax years under review (2009 and 2010); Delphi said it would continue filing as a U.K. tax resident.
- In April 2016, the board authorized a new $1.5 billion share-repurchase program, to begin after completion of the prior program. A $0.29-per-share dividend was also declared for payment in May.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the $104 million SDAAC sale gain and the prior-year discontinued-operations impairment when assessing earnings and EPS.
- Track cash conversion and working capital against capital spending; Q1 continuing-operations cash flow less capex was approximately $28 million.
- Monitor debt and liquidity, including receivables-factoring usage, acquisition integration, and the company’s covenant headroom.
- Assess whether 2016 restructuring costs, HellermannTyton integration, and expected incremental amortization are offset by operating improvements.
- Follow the unsecured-creditors and Brazil matters, potential Japanese supply-chain effects, regional production trends, and the status of Chinese tax incentives.
- Confirm subsequent-period share repurchases, dividends, and the start and pace of the newly authorized repurchase program.