Delphi Automotive PLC (Aptiv’s predecessor): Q1 2015 10-Q
Reporting period: Three months ended March 31, 2015. The filing is in the name of Delphi Automotive PLC, not Aptiv PLC. The Thermal Systems business was retrospectively presented as discontinued operations in both comparison periods.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Continuing-operations sales | $3.797 billion | $3.897 billion |
| Gross profit / margin | $741 million / 19.5% | $733 million / 18.8% |
| Operating income | $446 million | $440 million |
| Continuing income attributable to Delphi | $288 million | $310 million |
| Net income attributable to Delphi | $209 million; $0.72 diluted EPS | $320 million; $1.04 diluted EPS |
| Operating cash flow | $121 million continuing; $135 million including discontinued operations | $118 million continuing; $136 million including discontinued operations |
| Capital expenditures | $213 million | $272 million |
At March 31, continuing-operations cash was $558 million; total cash including $43 million held for discontinued operations was $601 million. Total debt was $2.717 billion, up from $2.451 billion at year-end; management reported net debt of approximately $2.1 billion and liquidity of approximately $2.1 billion, including cash and available revolving credit. The $1.5 billion revolver was undrawn at quarter-end, subject to $17 million of letters of credit. The company reported compliance with debt covenants.
Material changes and drivers
- Sales fell 3%. A 6% increase in volume was more than offset by $286 million of unfavorable foreign-exchange effects, primarily the euro, and $28 million of lower commodity pass-through; acquisitions contributed $24 million.
- Gross margin improved to 19.5%, reflecting operational improvements and currency effects, partly offset by higher warranty costs. Segment adjusted operating income rose to $472 million from $463 million.
- Delphi issued €700 million of 1.50% senior notes due 2025 and used proceeds primarily to redeem $500 million of 6.125% notes. The refinancing contributed a $52 million debt-extinguishment loss; other expense was $54 million versus $17 million in the prior-year quarter.
- Share repurchases totaled $240 million and dividends paid were $73 million. A new $1.5 billion repurchase authorization began in March; approximately $1.426 billion remained at quarter-end.
Outlook, risks and unusual items
- Thermal Systems sale: Delphi agreed to sell substantially all of the business to MAHLE for approximately $727 million, subject to closing adjustments and approvals. Closing was expected in Q3 2015; management expected approximately $670 million in proceeds and an after-tax gain exceeding $300 million. The company also planned to dispose of interests in two joint ventures. The sale was not yet completed at filing.
- Discontinued-operations impairment: An $88 million after-tax impairment, approximately $0.30 per diluted share, was recorded on the KDAC joint-venture interest based on an estimated fair value of about $32 million and a nonbinding offer. Discontinued operations reported a $75 million net loss, compared with $15 million of income in Q1 2014.
- Management commentary: Management cited stronger volumes in North America and Asia Pacific, including China, but continued weakness in South America and modest European growth. Its cited industry outlook anticipated global vehicle production growth of 1%–2% in 2015, Europe growth of 1%, and a 10% decline in South America. These are industry estimates, not company earnings guidance. Delphi expected further restructuring expense in 2015, mainly in Europe and South America; no specific earnings guidance was provided in the supplied filing text.
- Key exposures: Automotive production cyclicality, pricing pressure, currency and commodity volatility, customer concentration (GM and Volkswagen represented 22% of continuing sales), and elevated industry recall activity. The filing noted GM ignition-switch-related litigation; Delphi said it did not consider a loss probable and recorded no reserve for the referenced claim.
- Contingencies: The IRS asserted that Delphi Automotive LLP should be treated as a U.S. corporation for tax purposes. Delphi disputed the assertion and had recorded no adjustment; an adverse outcome could raise its annual effective tax rate to approximately 20%–22%, versus 17% in Q1 2015. Brazil claims totaled about $155 million, with $27 million accrued. The company also disclosed a voluntary FCPA-related disclosure to U.S. authorities concerning immaterial payments in China and an unsecured-creditors dispute for which no reserve was recorded.
Investor verification points
- Confirm whether the MAHLE transaction and planned joint-venture disposals closed, the final proceeds and gain, and any continuing obligations under transition or supply agreements.
- Track the IRS tax-status dispute, including potential exposure, timing, and any change to the stated 20%–22% adverse-outcome tax-rate estimate.
- Assess whether continuing cash generation and liquidity support capital spending, dividends, restructuring, and the substantial share-repurchase authorization.
- Review the drivers of currency-related sales pressure, warranty costs, and segment margins, and monitor production trends in Europe and South America.
- Check developments in the Brazil claims, unsecured-creditors litigation, FCPA inquiry, and GM-related litigation, including changes to accruals or management’s loss assessments.