Delphi Automotive PLC — Q1 2012 Form 10-Q
Entity note: The supplied filing is for Delphi Automotive PLC, not Aptiv PLC. It covers the three months ended March 31, 2012; financial amounts are in U.S. dollars and millions except per-share data.
Business context and reporting period
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. Management attributed higher sales mainly to increased OEM production; global OEM production rose approximately 4% year over year in the quarter.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $4,092 | $3,997 |
| Gross margin | $719; 17.6% | $644; 16.1% |
| Operating income | $464; 11.3% of sales | $412; 10.3% of sales |
| Segment EBITDA | $578; 14.1% of sales | $529; 13.2% of sales |
| Net income attributable to Delphi | $342 | $291 |
| Basic and diluted EPS | $1.04 | $0.42 |
| Cash from operations | $293 | $156 |
| Capital expenditures | $260 | $181 |
Operating cash flow less capital expenditures was $33 million, versus negative $25 million a year earlier. At March 31, cash and cash equivalents were $1,412; total debt was $2,085 and net debt was $673. The $1.3 billion revolving facility was undrawn, with $9 million of letters of credit reducing availability; management described total cash and available financing as approximately $2.7 billion. Current assets were $6,016 and current liabilities $3,888. The company reported covenant compliance, including a required consolidated leverage ratio below 2.75:1.
Changes versus the prior comparable period
- Sales increased 2% ($95), primarily from volume growth; volume net of contractual price reductions contributed $188, partly offset by foreign exchange ($70) and commodity pass-through ($22).
- Gross margin rose 1.5 percentage points. Management cited improved operating performance and lower prior-year-comparable warranty expense, including the absence of a $76 million charge recorded in Q1 2011 for a Powertrain warranty settlement.
- Interest expense increased to $35 from $6, reflecting the debt financing put in place in connection with the 2011 membership-interest redemption. Income tax expense fell to $77 from $116; the 2012 rate was 18% versus 28%, helped by $22 million of tax-reserve releases and $11 million lower withholding-tax expense.
- EPS comparison is affected by weighted-average shares falling to 328.24 million from 686.99 million, reflecting the 2011 redemption and capital-structure history. EPS growth therefore should not be read as solely operating improvement.
- By segment, Powertrain EBITDA increased to $200 from $132; Thermal Systems EBITDA declined to $33 from $52. Electronics and Safety EBITDA fell to $98 from $105, while Electrical/Electronic Architecture rose to $247 from $240.
- Cash rose $49 during the quarter. Q1 2011 investing cash flow had included $550 million from time-deposit maturities, while Q1 2012 capital spending was $79 million higher.
Outlook, commentary, risks and unusual items
- Management expected global automotive production to increase 5%–6% in 2012 and said cash, financing availability and operating cash flows should fund operations and capital investment. This was an industry expectation, not quantified company earnings guidance.
- Management cited a leaner cost structure, growth opportunities in emerging markets, and demand for safety, fuel efficiency, emissions control and connectivity. It estimated EBITDA break-even production volumes at approximately 38% below 2011 levels, assuming constant product mix.
- A March 2012 fire disrupted a European supplier producing a key plastics input. Delphi reported no production impact to date but warned that shortages could reduce OEM production and adversely affect results.
- Other exposures include automotive cyclicality and OEM production changes, customer pricing pressure, raw-material and labor inflation, commodity and currency volatility, supply-chain disruption, and competition. GM represented approximately 18% of Q1 sales.
- Material contingencies include a European Commission wire-harness antitrust investigation (loss range not estimable and no accrual recorded), U.S. wire-harness antitrust class actions (no accrual), and Brazil claims of $231 million with $41 million accrued. The company also disclosed an IRS review of whether it should be treated as a U.S. corporation for federal tax purposes; no accrual was recorded and a contrary determination could materially increase tax exposure.
- Environmental reserves totaled approximately $22 million. The Romanian VAT assessment had an uncollected balance of approximately $7 million, with a re-audit expected to conclude by mid-2012. The 2011 warranty settlement’s final scheduled payment, approximately $80 million, was made in April 2012, after quarter-end.
- Q1 included $46 million of expense for the legacy Value Creation Plan and $4 million of share-based compensation expense for the 2011 LTIP. A $300 million share-repurchase authorization was approved in January; no shares had been repurchased by March 31.
Most important facts for investors to verify
- Confirm the filing entity: this document identifies Delphi Automotive PLC, not Aptiv PLC.
- Assess whether operating improvement persists after separating volume, operating performance, foreign exchange, and the prior-year $76 million warranty charge.
- Track working-capital needs and capital spending: receivables and inventories increased from year-end, and Q1 operating cash flow less capex was $33 million.
- Review debt service, variable-rate exposure, revolving-credit availability, and compliance with the leverage covenant.
- Monitor the supplier disruption, antitrust matters, Brazil claims, and the IRS tax-classification review, including any changes in estimated exposure or accruals.
- Consider the share-count effect on EPS comparisons and the potential cash cost and performance sensitivity of incentive plans and the repurchase program.