Delphi Automotive PLC — Q2 2014 Form 10-Q
Issuer note: The filing is for Delphi Automotive PLC, not Aptiv PLC. It covers the quarter and six months ended June 30, 2014; amounts are in U.S. dollars unless noted.
Business context and reporting period
Delphi was a global vehicle-components supplier serving automotive and commercial-vehicle markets. Its segments were Electrical/Electronic Architecture, Powertrain Systems, Electronics and Safety, and Thermal Systems. The filing compares Q2 and first-half 2014 with the same 2013 periods.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $4.451B | $4.240B | $8.727B | $8.264B |
| Gross margin | $840M; 18.9% | $776M; 18.3% | $1.608B; 18.4% | $1.461B; 17.7% |
| Operating income | $488M | $483M | $947M | $880M |
| Net income attributable to Delphi | $382M | $367M | $702M | $643M |
| Diluted EPS | $1.26 | $1.17 | $2.30 | $2.05 |
- Sales increased 5% in Q2 and 6% in the first half. Management attributed growth mainly to higher North American and Asia-Pacific sales, plus favorable foreign-exchange effects; contractual price reductions partly offset growth.
- First-half operating cash flow was $763M, versus $672M. Capital expenditures were $470M, versus $336M; operating cash flow less capital expenditures was $293M, versus $336M.
- Cash and cash equivalents were $1.166B at June 30, down from $1.389B at year-end 2013. Total debt was $2.452B, versus $2.412B; management reported net debt of approximately $1.3B.
- Current assets were $6.082B and current liabilities $3.998B. The $1.5B revolving credit facility was undrawn at quarter-end, apart from $12M of letters of credit; the company also had a €350M committed European receivables facility.
- Dividends paid in the first half totaled $153M ($0.50 per share). Share repurchases totaled $358M in cash flows; the company reported approximately $813M remaining under its $1B authorization at June 30.
Material changes versus the prior comparable period
- Gross margin improved by 0.6 percentage points in Q2 and 0.7 points in the first half. Management cited operational performance improvements, partly offset by volume-related costs and unfavorable currency effects.
- First-half operating income rose $67M, while Delphi-attributable net income rose $59M. Adjusted operating income, a company-defined non-GAAP measure, increased to $547M in Q2 from $513M and to $1.030B for the first half from $944M.
- Restructuring charges increased to $55M in Q2 and $77M in the first half, from $26M and $58M, respectively. A new European Powertrain Systems workforce reduction accounted for about $32M of Q2 charges.
- SG&A increased to 6.1% of sales from 5.7%, with management citing incentive compensation, information-technology costs, and other service providers.
- In March 2014 Delphi issued $700M of 4.15% senior notes due 2024, redeemed $500M of 5.875% notes due 2019, and repaid part of its term loan. The transactions generated $34M of first-half debt-extinguishment losses, partly offset in other income by a $14M net insurance recovery.
Outlook, commentary, risks, and unusual items
- Management gave no specific company earnings or revenue guidance in the supplied filing text. It expected existing cash, available liquidity, and operating cash flows to fund operations, restructuring, dividends, and capital expenditures in 2014 and beyond.
- Management discussed expected 2014 vehicle-production growth of 3% globally, 2% in Europe, and a 15% decline in South America versus 2013. It highlighted continuing uncertainty in Europe and South America, cyclicality, OEM production schedules, pricing pressure, raw-material inflation and volatility, and customer recalls as risks.
- The IRS issued a Notice of Proposed Adjustment asserting that Delphi Automotive LLP—and potentially Delphi Automotive PLC—should be treated as a U.S. domestic corporation for federal tax purposes, retroactive to 2009. Delphi disputed the position, recorded no adjustment, and warned an adverse outcome could raise its future effective tax rate and tax exposure.
- Delphi was named in lawsuits and received government information requests related to GM’s ignition-switch recall. It stated that it believed the claims lacked merit and that a loss was not probable; no reserve was recorded.
- Brazil claims totaled approximately $225M, against $32M of accruals. Delphi said final resolution could differ materially from its estimates. Environmental remediation reserves were approximately $22M.
- Delphi identified potentially FCPA-violating payments by certain facility employees in China, voluntarily disclosed the matter to the DOJ and SEC, and said its review was ongoing. It could not assure the outcome.
- GM and Volkswagen together represented approximately 28% of Q2 sales and 27% of first-half sales in 2014, creating customer-concentration exposure.
- Management reported compliance with debt covenants and stated that disclosure controls were effective. Many credit-agreement restrictive covenants had been suspended following satisfaction of credit-rating conditions, but could be reinstated if those conditions ceased to be met.
Most important facts for investors to verify
- Progress and potential tax consequences of the IRS’s Section 7874 position, including any required withholding or future tax-rate impact.
- Developments in GM ignition-switch litigation and government inquiries, and whether the company’s no-reserve assessment changes.
- Outcomes of Brazil claims and the China FCPA review, including any changes to accruals, penalties, or disclosures.
- Whether operating cash generation can keep pace with higher capital spending, restructuring outlays, dividends, and share repurchases.
- Sales and margin sensitivity to automotive production trends, especially in Europe and South America, customer concentration, pricing pressure, and currency and commodity movements.