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
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six 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.