Business context and reporting period
This Form 10-Q is for Delphi Automotive PLC, a global vehicle-components supplier, for the quarter and six months ended June 30, 2015. The filing presents Thermal Systems as discontinued operations following its sale. All dollar amounts below are in millions, except per-share data.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales, continuing operations | $3,858 | $4,062 | $7,655 | $7,959 |
| Gross margin | $782; 20.3% | $800; 19.7% | $1,523; 19.9% | $1,533; 19.3% |
| Operating income | $481 | $462 | $927 | $902 |
| Income from continuing operations | $369 | $379 | $673 | $705 |
| Net income attributable to Delphi | $645 | $382 | $854 | $702 |
| Diluted EPS, continuing operations | $1.21 | $1.19 | $2.20 | $2.19 |
- Q2 sales declined 5%; first-half sales declined 4%. Management attributed the decline mainly to unfavorable foreign exchange, particularly the euro, and contractual price reductions; increased North American and Asia-Pacific volumes partly offset these effects.
- Operating income rose despite lower sales, and gross margin improved. First-half adjusted operating income was $998, versus $983 a year earlier. Management cited operational improvements; currency, warranty costs and other items were headwinds.
- Reported net income included a $285 after-tax gain on the Thermal Systems sale in Q2. First-half discontinued operations also included an $88 after-tax impairment of the KDAC joint-venture interest. Continuing-operations income declined year over year.
- First-half cash from operations was $669, including $635 from continuing operations, compared with $763 and $715, respectively, in 2014. Capital expenditures were $360, versus $417. Investing cash flow was $208 provided, including $660 of net proceeds from the Thermal Systems divestiture. Financing used $544, including $542 of share repurchases and $145 of dividends.
- At June 30, cash and cash equivalents were $1,171 for continuing operations; total debt was $2,736 ($43 short-term and $2,693 long-term). Management reported net debt of approximately $1.6 billion and liquidity of approximately $2.7 billion, including cash and available financing. The $1.5 billion revolving facility was undrawn, subject to $8 of letters of credit; the company was in compliance with debt covenants.
- Quarter-end total assets were $10,809 and shareholders’ equity was $3,021. Cash dividends declared were $0.25 per share in Q2 and $0.50 per share for the first half.
Material changes versus the prior comparable period
- Delphi completed the sale of its wholly owned Thermal Systems business to MAHLE on June 30, receiving approximately $660 in net proceeds and recording the $285 after-tax gain. Its interests in two related joint ventures remained held for sale.
- Q2 sales variance included a $337 unfavorable foreign-exchange impact and $145 favorable volume, net of contractual price reductions. First-half figures were $623 unfavorable from FX and $335 favorable from volume, net of price reductions.
- Restructuring expense fell to $17 in Q2 from $54 and to $33 for the first half from $75, primarily reflecting completion of earlier actions. Interest expense also declined, while first-half other expense included a $52 loss on extinguishment of debt.
- Delphi issued €700 of 1.50% senior notes due 2025 and used proceeds primarily to redeem $500 of 6.125% notes due 2021. Debt at June 30 was higher than at year-end, partly reflecting the currency translation of euro-denominated debt.
Outlook, risks and unusual items
- The filing does not provide a company-specific numerical earnings or sales guidance range. Management expected global vehicle production to rise 1%–2% in 2015 versus 2014, with Europe up 1%–2%, South America down 15%, and China up 4%. These are industry estimates, not company guidance.
- Management expected additional 2015 restructuring expense, mainly from actions in Europe and South America, and said existing cash, liquidity and operating cash flow should fund operations and capital investment.
- On July 30, after quarter-end, Delphi announced a recommended cash offer for HellermannTyton of approximately £1.07 billion (about $1.66 billion), implying $1.85 billion enterprise value. Closing was expected in Q4, subject to approvals. Delphi anticipated using about $660 of cash and debt for the remainder; a £550 million bridge facility was arranged but had not been drawn. Delphi also acquired automated-vehicle software developer Ottomatika for approximately $35 million on July 23.
- Key exposures include automotive production cyclicality, uneven regional economies, currency movements, OEM pricing pressure, raw-material costs, customer concentration (GM and VW together represented 22% of continuing sales in Q2), and product recalls.
- The IRS disputed Delphi’s U.S. tax status under Section 7874. The company intended to contest the position and had recorded no adjustment; an unfavorable outcome could raise its annual effective tax rate to approximately 20%–22%. The reported first-half continuing-operations rate was 17%.
- Other contingencies include Brazilian claims of approximately $165, against which $28 was accrued; FCPA-related matters voluntarily disclosed to U.S. authorities, with no assurance on the outcome; and litigation related to Delphi’s former customer GM’s ignition-switch recall and an unsecured-creditors claim. Delphi stated it did not consider losses probable for the latter matters and recorded no reserves. Environmental reserves for continuing operations were approximately $5.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the first half.
Important facts for investors to verify
- Confirm the Thermal Systems sale proceeds, working-capital adjustments, and the status and sale terms of the SDAAC and KDAC joint-venture interests.
- Separate recurring continuing-operations earnings from the divestiture gain and KDAC impairment when assessing reported net income and EPS.
- Track the HellermannTyton offer’s approval, closing, financing mix, and effects on debt, liquidity and share repurchases.
- Monitor the IRS tax-status dispute, Brazil litigation, FCPA inquiry and other contingencies for changes in probability, reserves or potential financial impact.
- Assess whether operating cash generation, margins and restructuring benefits can offset currency, pricing, warranty and regional production pressures.