e10vq
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549-1004
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2006
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file
No. 1-14787
DELPHI CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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38-3430473
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(State or other jurisdiction of
incorporation or organization)
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(IRS employer identification number)
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5725 Delphi Drive, Troy,
Michigan
(Address of principal
executive offices)
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48098
(Zip code)
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(248) 813-2000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o.
No þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ. Accelerated
filer o. Non-accelerated
filer o.
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o.
No þ.
As of July 31, 2006 there were 561,781,590 outstanding
shares of the registrants $0.01 par value common
stock.
DELPHI
CORPORATION
INDEX
2
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
DELPHI
CORPORATION
(DEBTOR-IN-POSSESSION)
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Three Months Ended
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March 31,
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2006
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2005
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(in millions, except per share amounts)
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Net sales:
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General Motors and affiliates
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$
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3,217
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$
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3,399
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Other customers
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3,756
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3,463
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Total net sales
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6,973
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6,862
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Operating expenses:
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Cost of sales, excluding items
listed below
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6,559
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6,500
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Selling, general and administrative
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376
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394
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Depreciation and amortization
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270
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292
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Total operating expenses
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7,205
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7,186
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Operating loss
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(232
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)
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(324
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)
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Interest expense (contractual
interest expense for the three months ended March 31, 2006
was $140 million, Note 1)
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(99
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)
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(54
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)
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Other income, net
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11
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5
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Loss before reorganization items,
income taxes, minority interest, equity income, and cumulative
effect of accounting change
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(320
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)
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(373
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)
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Reorganization items, net
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(13
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)
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Loss before income taxes, minority
interest, equity income, and cumulative effect of accounting
change
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(333
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)
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(373
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)
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Income tax expense
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(40
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)
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(37
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)
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Loss before minority interest,
equity income and cumulative effect of accounting change
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(373
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)
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(410
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)
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Minority interest, net of tax
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(10
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)
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(8
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Equity income
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17
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15
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Loss before cumulative effect of
accounting change
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(366
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)
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(403
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Cumulative effect of accounting
change, net
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3
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Net loss
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$
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(363
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)
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$
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(403
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)
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Basic and diluted loss per share
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Before cumulative effect of
accounting change
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$
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(0.66
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)
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$
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(0.73
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)
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Cumulative effect of accounting
change
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0.01
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Basic and diluted loss per share
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$
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(0.65
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)
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$
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(0.73
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)
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Dividends declared per share
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$
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0.00
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$
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0.03
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See notes to consolidated financial statements.
3
DELPHI
CORPORATION
(DEBTOR-IN-POSSESSION)
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March 31,
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2006
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December 31,
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(Unaudited)
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2005
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(in millions)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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1,869
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$
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2,221
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Restricted cash
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38
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36
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Accounts receivable, net:
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General Motors and affiliates
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2,286
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1,920
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Other
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3,129
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2,975
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Inventories, net:
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Productive material,
work-in-process
and supplies
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1,398
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1,350
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Finished goods
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560
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524
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Deferred income taxes
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60
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51
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Prepaid expenses and other
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447
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477
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Total current assets
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9,787
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9,554
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Long-term assets:
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Property, net
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5,082
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5,108
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Deferred income taxes
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127
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59
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Investments in affiliates
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430
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418
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Goodwill
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366
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363
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Other intangible assets, net
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51
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54
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Pension intangible assets
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891
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891
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Other
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585
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576
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Total long-term assets
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7,532
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7,469
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Total assets
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$
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17,319
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$
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17,023
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LIABILITIES AND
STOCKHOLDERS DEFICIT
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Current liabilities:
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Notes payable, current portion of
long-term debt, and debt in default
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$
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3,096
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$
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3,117
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Accounts payable
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2,697
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2,494
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Accrued liabilities
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1,406
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1,192
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Total current liabilities
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7,199
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6,803
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Long-term debt
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274
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273
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Pension benefits
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324
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310
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Other
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719
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651
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Liabilities subject to compromise
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15,201
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15,074
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Total liabilities
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23,717
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23,111
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Minority interest in consolidated
subsidiaries
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161
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157
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Stockholders deficit:
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Common stock, $0.01 par value,
1,350 million shares authorized, 565 million shares
issued in 2006 and 2005
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6
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6
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Additional paid-in capital
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2,750
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2,744
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Accumulated deficit
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(6,792
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)
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(6,429
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)
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Minimum pension liability
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(2,397
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)
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(2,395
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)
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Accumulated other comprehensive
loss, excluding minimum pension liability
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(74
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)
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(119
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)
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Treasury stock, at cost
(3.2 million shares in 2006 and 2005)
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(52
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)
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(52
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)
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Total stockholders deficit
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(6,559
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)
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(6,245
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)
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Total liabilities and
stockholders deficit
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$
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17,319
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$
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17,023
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See notes to consolidated financial statements.
4
DELPHI
CORPORATION
(DEBTOR-IN-POSSESSION)
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Three Months Ended
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March 31,
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2006
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2005
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(in millions)
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Cash flows from operating
activities:
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Net loss
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$
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(363
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)
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$
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(403
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)
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Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
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Depreciation and amortization
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270
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292
|
|
Deferred income taxes
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(3
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)
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(2
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)
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Pension and other postretirement
benefit expenses
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402
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399
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Equity income
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(17
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)
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(15
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)
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Reorganization items
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13
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Changes in operating assets and
liabilities:
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Accounts receivable and retained
interest in receivables, net
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(616
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)
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137
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Inventories, net
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(85
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)
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(24
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)
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Prepaid expenses and other
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(85
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)
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42
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Accounts payable
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325
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171
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Employee and product line
obligations
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(26
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)
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Accrued and other long-term
liabilities
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205
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39
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Pension contributions and benefit
payments
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(74
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)
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|
|
(14
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)
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Other postretirement benefit
payments
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|
(57
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)
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|
(43
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)
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Net payments for reorganization
items
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(11
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)
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Other, net
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3
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|
(24
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)
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|
|
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|
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Net cash (used in) provided by
operating activities
|
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|
(93
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)
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|
529
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Cash flows from investing
activities:
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Capital expenditures
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(251
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)
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(199
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)
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Proceeds from sale of property
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6
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6
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Increase in restricted cash
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(2
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)
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Other, net
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15
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|
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|
12
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|
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|
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Net cash used in investing
activities
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|
|
(232
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)
|
|
|
(181
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)
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Cash flows from financing
activities:
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Repayments under cash overdraft
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(29
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)
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Net repayments of borrowings under
other short-term debt agreements
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|
|
(7
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)
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|
|
(79
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)
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Dividend payments
|
|
|
|
|
|
|
(39
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)
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Other, net
|
|
|
(7
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)
|
|
|
(5
|
)
|
|
|
|
|
|
|
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Net cash used in financing
activities
|
|
|
(43
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)
|
|
|
(123
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)
|
|
|
|
|
|
|
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Effect of exchange rate
fluctuations on cash and cash equivalents
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16
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
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Increase (decrease) in cash and
cash equivalents
|
|
|
(352
|
)
|
|
|
200
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|
Cash and cash equivalents at
beginning of period
|
|
|
2,221
|
|
|
|
950
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|
|
|
|
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Cash and cash equivalents at end
of period
|
|
$
|
1,869
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|
|
$
|
1,150
|
|
|
|
|
|
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|
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|
See notes to consolidated financial statements.
5
DELPHI
CORPORATION
(DEBTOR-IN-POSSESSION)
1. BASIS
OF PRESENTATION
General Delphi Corporation
(Delphi or the Company) is a supplier of
vehicle electronics, transportation components, integrated
systems and modules, and other electronic technology.
Delphis most significant customer is General Motors
Corporation (GM) and North America and Europe are
its most significant markets, but Delphi is continuing to
diversify its customer base and geographic markets. The
consolidated financial statements and notes thereto included in
this report should be read in conjunction with our consolidated
financial statements and notes thereto included in our Annual
Report on
Form 10-K
for the year ended December 31, 2005 filed with the United
States (U.S.) Securities and Exchange Commission.
Consolidation The consolidated
financial statements include the accounts of Delphi and domestic
and foreign subsidiaries in which Delphi holds a controlling
financial or management controlling interest and variable
interest entities of which Delphi has determined that it is the
primary beneficiary. Delphis share of the earnings or
losses of non-controlled affiliates, over which Delphi exercises
significant influence (generally a 20% to 50% ownership
interest), is included in the consolidated operating results
using the equity method of accounting.
All significant intercompany transactions and balances between
consolidated Delphi businesses have been eliminated. In the
opinion of management, all adjustments, consisting of only
normal recurring items, which are necessary for a fair
presentation, have been included. The results for interim
periods are not necessarily indicative of results which may be
expected from any other interim period or for the full year and
may not necessarily reflect the consolidated results of
operations, financial position and cash flows of Delphi in the
future.
Bankruptcy Filing and Going Concern On
October 8, 2005 (the Petition Date), Delphi and
certain of its U.S. subsidiaries (the Initial
Filers) filed voluntary petitions for reorganization
relief under chapter 11 of the United States Bankruptcy
Code (the Bankruptcy Code) in the United States
Bankruptcy Court for the Southern District of New York (the
Court), and on October 14, 2005, three
additional U.S. subsidiaries of Delphi (together with the
Initial Filers, collectively, the Debtors) filed
voluntary petitions for reorganization relief under
chapter 11 of the Bankruptcy Code (collectively the
Debtors October 8, 2005 and October 14, 2005
filings are referred to herein as the Chapter 11
Filings). The Debtors will continue to operate their
businesses as
debtors-in-possession
under the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the
Court. Delphis
non-U.S. subsidiaries
were not included in the filings and will continue their
business operations without supervision from the
U.S. Courts and will not be subject to the requirements of
the Bankruptcy Code.
The Debtors are operating pursuant to chapter 11 under the
Bankruptcy Code and continuation of the Company as a going
concern is contingent upon, among other things, the
Debtors ability (i) to comply with the terms and
conditions of the
debtor-in-possession
(DIP) financing agreement; (ii) to obtain
confirmation of a plan of reorganization under the Bankruptcy
Code; (iii) to reduce wage and benefit costs and
liabilities through the bankruptcy process; (iv) to return
to profitability; (v) to generate sufficient cash flow from
operations; and (vi) to obtain financing sources to meet
the Companys future obligations. These matters create
uncertainty relating to the Companys ability to continue
as a going concern. The accompanying consolidated financial
statements do not reflect any adjustments relating to the
recoverability of assets and classification of liabilities that
might result from the outcome of these uncertainties. In
addition, a plan of reorganization could materially change the
amounts and classifications reported in the consolidated
financial statements, which do not give effect to any
adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of
confirmation of a plan of reorganization.
American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code
(SOP 90-7),
which is applicable to companies in
6
chapter 11, generally does not change the manner in which
financial statements are prepared. However, it does require,
among other disclosures, that the financial statements for
periods subsequent to the filing of the chapter 11 petition
distinguish transactions and events that are directly associated
with the reorganization from the ongoing operations of the
business. Revenues, expenses, realized gains and losses, and
provisions for losses that can be directly associated with the
reorganization and restructuring of the business must be
reported separately as reorganization items in the statements of
operations beginning in the quarter ended December 31,
2005. The balance sheet must distinguish prepetition liabilities
subject to compromise from both those prepetition liabilities
that are not subject to compromise and from post-petition
liabilities. Liabilities that may be affected by a plan of
reorganization must be reported at the amounts expected to be
allowed, even if they may be settled for lesser amounts. In
addition, reorganization items must be disclosed separately in
the statement of cash flows. Delphi adopted
SOP 90-7
effective on October 8, 2005 and has segregated those items
as outlined above for all reporting periods subsequent to such
date.
Contractual Interest Expense
Contractual interest expense represents amounts due under the
contractual terms of outstanding debt, including debt subject to
compromise for which interest expense is not recognized in
accordance with the provisions of
SOP 90-7.
Use of Estimates The preparation of
consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America
requires Delphi management to make estimates and assumptions
that affect amounts reported therein. Due to the inherent
uncertainty involved in making estimates, actual results
reported in future periods may be based upon amounts that differ
from those estimates.
Annual Incentive Plan On
February 17, 2006, the Court entered a final order (the
AIP Order) granting the Debtors motion to
implement a short-term annual incentive plan (the
AIP) for the period commencing on January 1,
2006 and continuing through June 30, 2006. The AIP provides
the opportunity for incentive payments to the Executives
provided that specified corporate and divisional financial
targets are met. For each of Delphis named executive
officers, such targets are based on Delphis earnings
before interest, taxes, depreciation, amortization, and
restructuring costs, but exclude earnings generated from
comprehensive transformation agreements. The amounts paid to
individual executives may be adjusted either upward or downward
based upon individual levels of performance. In addition, under
some circumstances, individual executives may not be entitled to
receive or retain incentive compensation. For more information
regarding the AIP Order refer to Delphis Current Report on
Form 8-K
as filed on February 23, 2006. Additionally, an annual
incentive plan mirroring the AIP applies to approximately 100
individuals holding executive positions at non-Debtor
subsidiaries of Delphi, as well as substantially all salaried
employees in the U.S. In the first quarter of 2006, Delphi
recorded expense of $52 million related to these incentive
plans resulting in an accrual balance of $52 million as of
March 31, 2006. In conjunction with the approval of the
AIP, certain incentive compensation plans previously in place
for Delphi executives were cancelled resulting in the reduction
of expense of approximately $21 million for incentive
compensation in the first quarter of 2006.
Postemployment Benefits Delphi accrues
for costs associated with postemployment benefits provided to
inactive employees throughout the duration of their employment.
Delphi uses future production estimates combined with workforce
geographic and demographic data to develop projections of time
frames and related expense for postemployment benefits. For
purposes of accounting for postemployment benefits, inactive
employees represent those employees who have been other than
temporarily idled. Delphi considers all idled employees in
excess of approximately 10% of the total workforce at a facility
to be other than temporarily idled. Total accruals for
postemployment benefits for other than temporarily idled
employees were $129 million and $148 million as of
March 31, 2006 and December 31, 2005, respectively,
and are included in liabilities subject to compromise in the
accompanying consolidated balance sheet.
Employee Termination Benefits and Other Exit
Costs Delphi continually evaluates
alternatives to align its business with the changing needs of
its customers and to lower the operating costs of the Company.
This includes the realignment of its existing manufacturing
capacity, facility closures, or similar actions in the normal
course of business. These actions may result in voluntary or
involuntary employee termination benefits, which are mainly
pursuant to union or other contractual agreements. Voluntary
termination benefits are
7
accrued when an employee accepts the related offer. Involuntary
termination benefits are accrued when Delphi management commits
to a termination plan and the benefit arrangement is
communicated to affected employees, or when liabilities are
determined to be probable and estimable, depending on the
circumstances of the termination plan. Contract termination
costs are recorded when contracts are terminated or when we no
longer derive economic benefit from the contract. All other exit
costs are accrued when incurred. Delphi incurred expenses
related to these actions of $46 million and
$34 million included in cost of sales in the three months
ended March 31, 2006 and 2005, respectively.
Recently Issued Accounting
Pronouncements In June 2006, the Financial
Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entitys
financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement disclosure of tax
positions taken or expected to be taken in a tax return. The
evaluation of a tax position is a two-step process. The first
step requires an entity to determine whether it is more likely
than not that a tax position will be sustained upon examination
based on the technical merits of the position. The second step
requires an entity to recognize in the financial statements each
tax position that meets the more likely than not criteria,
measured at the largest amount of benefit that has a greater
than fifty percent likelihood of being realized. FIN 48
also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The impact of
initially applying FIN 48 will be recognized as a
cumulative effect adjustment to the opening balance of retained
earnings. Delphi is currently evaluating the requirements of
FIN 48, and has not yet determined the impact on its
consolidated financial statements.
2. CHAPTER
11 BANKRUPTCY
On the Petition Date, Delphi and certain of its
U.S. subsidiaries filed voluntary petitions in the United
States Bankruptcy Court for the Southern District of New York,
and on October 14, 2005, three additional
U.S. subsidiaries of Delphi filed voluntary petitions for
reorganization relief under chapter 11 of the Bankruptcy
Code. The reorganization cases are being jointly administered
under the caption In re Delphi Corporation, et al.,
Case
No. 05-44481
(RDD). The Debtors will continue to operate their
businesses as
debtors-in-possession
under the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the
Court. Delphis
non-U.S. subsidiaries
were not included in the filings and will continue their
business operations without supervision from the
U.S. courts and will not be subject to the requirements of
the Bankruptcy Code.
On March 31, 2006, Delphi announced its transformation
plan. As part of the transformation plan, Delphi identified
non-core product lines and manufacturing sites that do not fit
into Delphis future strategic framework, which it is
seeking to sell or wind-down. Any sale or wind-down process is
being conducted in consultation with the Companys
customers, unions and other stakeholders to carefully manage the
transition of affected product lines. The disposition of any
U.S. operation is also being accomplished in accordance
with the requirements of the Bankruptcy Code and labor contracts
as applicable. The Company also has begun consultations with the
works councils in accordance with applicable laws regarding any
sale or wind-down of affected manufacturing sites in Europe.
Non-core product lines include brake and chassis systems,
catalysts, cockpits and instrument panels, door modules and
latches, ride dynamics, steering and wheel bearings. The Company
continually evaluates its product portfolio and could retain or
exit certain businesses depending on market forces or cost
structure changes. The Company intends to sell or wind-down
non-core product lines and manufacturing sites by
January 1, 2008. These product lines and manufacturing
sites are not classified as held for sale in the current period
as the Court approval process required by the Bankruptcy Code is
not complete and other held for sale criteria of Statement of
Financial Accounting Standards (SFAS) No. 144
Accounting for the impairment or Disposal of Long-Lived
Assets were not met as of March 31, 2006. Delphi
has also begun discussions with certain governmental agencies
whose policies could help improve the competitiveness of plants
and product lines regardless of whether they are being retained
or offered for sale.
8
Also, on March 31, 2006, the Debtors filed a motion with
the Court under sections 1113 and 1114 of the Bankruptcy
Code seeking authority to reject U.S. labor agreements and
to modify retiree benefits. A hearing on the section 1113
and 1114 motion commenced in May 2006, continued into June, and
has been adjourned until August 17, 2006. Representatives
of certain unions whose labor agreements are subject to the
motion, including the UAW and IUE-CWA, have indicated that they
received strike authorization and may call for a strike in the
event the Debtors labor agreements are rejected pursuant
to the Debtors pending motion. Discussions with the
Debtors stakeholders, including the unions and GM are
ongoing in hopes of reaching a consensual resolution, but the
parties have not yet reached comprehensive agreements. While the
Debtors believe that the filing of the 1113 and 1114 motion with
the Court was necessary to protect the Debtors interests,
Delphi is focused on pursuing a consensual resolution with all
of the Debtors stakeholders.
Also on March 31, 2006, the Debtors filed a motion with the
Court seeking authority to reject certain customer contracts
with GM under section 365 of the Bankruptcy Code. The
initial GM contract rejection motion covers approximately half
of the North American annual purchase volume revenue from GM.
The initial GM contract rejection motion is scheduled to be
heard by the Court no earlier than August 15, 2006. On
March 31, 2006, the Company also delivered a letter to GM
initiating a process to reset the terms and conditions of more
than 400 commercial agreements that expired between
October 1, 2005 and March 31, 2006. To date, the
Company has not unilaterally revised the terms and conditions on
which it has been providing interim supply of parts to GM in
connection with the expired contracts or filed additional
contract rejection motions.
In addition to addressing the Debtors legacy liabilities
and improving the competitiveness of their U.S. operations
through negotiation with their unions and GM and by
rationalizing their portfolio, the Debtors have identified other
necessary elements of a comprehensive transformation plan,
including reducing selling, general and administrative costs,
realigning salaried benefit programs to size these costs with
the rationalized portfolio and make them competitive with more
cost-competitive companies and obtaining relief permitting the
Debtors, once the Debtors emerge from chapter 11, to
amortize funding obligations to their U.S. defined benefit
pension plans over a longer period of time than would otherwise
be available. The Debtors have identified cost saving
opportunities along with the planned portfolio and product
rationalizations and expect to reduce their salaried workforce
using existing salaried separation pay programs. In addition, in
order to retain existing U.S. defined benefit pension plans
for both hourly and salaried workers, the Debtors
management and Delphis Board of Directors are considering
freezing those plans and adopting or modifying existing defined
contribution plans to include flexibility for both direct
Company contributions and Company matching employee
contributions. At the same time, salaried health care plans will
be restructured to implement increased employee cost sharing.
There can be no assurances, however, that the Debtors will be
successful in achieving their objectives. The Debtors
ability to achieve their objectives is conditioned, in most
instances, on the approval of the Court, and the support of
their stakeholders, including GM and the Debtors labor
unions. The cost related to the transformation plan will be
recognized in the Companys consolidated financial
statements as elements of the plan are finalized in accordance
with SFAS No. 88 Employers Accounting
for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits,
SFAS No. 112 Employers Accounting for
Postretirement Benefits, SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets, and SFAS No. 146 Accounting
for Costs Associated with Exit or Disposal Activities.
Under section 362 of the Bankruptcy Code, actions to
collect most of the Debtors prepetition liabilities,
including payments owing to vendors in respect of goods
furnished and services provided prior to the Petition Date, are
automatically stayed and other contractual obligations of the
Debtors generally may not be enforced. Shortly after the
Petition Date, the Debtors began notifying all known actual or
potential creditors of the Debtors for the purpose of
identifying all prepetition claims against the Debtors. The
Chapter 11 Filings triggered defaults on substantially all
debt obligations of the Debtors. The stay provisions of
section 362 of the Bankruptcy Code, however, also apply to
actions to collect prepetition indebtedness or to exercise
control over the property of the Debtors estate in respect
of such defaults. The rights of and ultimate payments by the
Debtors under prepetition obligations will be addressed in any
plan of reorganization and may be substantially
9
altered. This could result in unsecured claims being compromised
at less, and possibly substantially less, than 100% of their
face value. For additional information, refer to Note 7,
Liabilities Subject to Compromise.
Section 365 of the Bankruptcy Code permits the Debtors to
assume, assume and assign, or reject certain prepetition
executory contracts (including unexpired leases), subject to the
approval of the Court and certain other conditions. Rejection
constitutes a court-authorized breach of the contract in
question and, subject to certain exceptions, relieves the
Debtors of future obligations under such contract but creates a
deemed prepetition claim for damages caused by such breach or
rejection. Parties whose contracts are rejected may file claims
against the rejecting Debtor for damages. Generally, the
assumption, or assumption and assignment, of an executory
contract requires the Debtors to cure all prior defaults under
such executory contract and to provide adequate assurance of
future performance. In this regard, Delphi expects that
additional liabilities subject to compromise and resolution in
the chapter 11 cases may arise as a result of damage claims
created by the Debtors rejection of executory contracts.
Conversely, Delphi would expect that the assumption of certain
executory contracts may convert existing liabilities shown as
subject to compromise to liabilities not subject to compromise.
Due to the uncertain nature of many of the potential claims,
Delphi is unable to project the magnitude of such claims with
any degree of certainty at this time.
The financial statements of the Debtors are presented as follows:
Basis
of Presentation
Condensed Combined
Debtors-in-Possession
Financial Statements The financial
statements contained within this note represent the condensed
combined financial statements for the Debtors only.
Delphis non-Debtor subsidiaries are treated as
non-consolidated subsidiaries in these financial statements and
as such their net income is included as Equity income from
non-Debtor subsidiaries, net of tax in the statement of
operations and their net assets are included as
Investments in non-Debtor subsidiaries in the
balance sheet. The Debtors financial statements contained
herein have been prepared in accordance with the guidance in
SOP 90-7.
Intercompany Transactions Intercompany
transactions between Debtors have been eliminated in the
financial statements contained herein. Intercompany transactions
between the Debtors and non-Debtor subsidiaries have not been
eliminated in the Debtors financial statements. Therefore,
reorganization items, net included in the Debtors Statement of
Operations, liabilities subject to compromise included in the
Debtors Balance Sheet, and reorganization items and payments for
reorganization items, net included in the Debtors Statement of
Cash Flows are different than Delphi Corporations
consolidated financial statements.
10
CONDENSED
COMBINED
DEBTORS-IN-POSSESSION
STATEMENTS OF OPERATIONS (Unaudited)
(Non-filed entities, principally
non-U.S. subsidiaries,
excluded from consolidated Debtor group)
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
|
(in millions)
|
|
|
Net sales:
|
|
|
|
|
General Motors and affiliates
|
|
$
|
2,791
|
|
Other customers
|
|
|
1,811
|
|
Intercompany non-Debtor
subsidiaries
|
|
|
154
|
|
|
|
|
|
|
Total net sales
|
|
|
4,756
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
Cost of sales, excluding items
listed below
|
|
|
4,719
|
|
Selling, general and administrative
|
|
|
256
|
|
Depreciation and amortization
|
|
|
165
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,140
|
|
|
|
|
|
|
Operating loss
|
|
|
(384
|
)
|
Interest expense (contractual
interest expense was $129 million)
|
|
|
(87
|
)
|
|
|
|
|
|
Loss before reorganization items,
income tax expense, equity income and cumulative effect of
accounting change
|
|
|
(471
|
)
|
Reorganization items, net
|
|
|
(9
|
)
|
|
|
|
|
|
Loss before income tax expense,
equity income and cumulative effect of accounting change
|
|
|
(480
|
)
|
Income tax expense
|
|
|
(4
|
)
|
|
|
|
|
|
Loss before equity income and
cumulative effect of accounting change
|
|
|
(484
|
)
|
Equity income from
non-consolidated subsidiaries
|
|
|
14
|
|
Equity income from non-Debtor
subsidiaries, net of tax
|
|
|
104
|
|
|
|
|
|
|
Loss before cumulative effect of
accounting change
|
|
|
(366
|
)
|
Cumulative effect of accounting
change, net
|
|
|
3
|
|
|
|
|
|
|
Net loss
|
|
$
|
(363
|
)
|
|
|
|
|
|
11
CONDENSED
COMBINED
DEBTORS-IN-POSSESSION
BALANCE SHEET
(Non-filed entities, principally
non-U.S. subsidiaries,
excluded from consolidated Debtor group)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2006
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
984
|
|
|
$
|
1,361
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
General Motors and affiliates
|
|
|
1,972
|
|
|
|
1,654
|
|
Other third parties
|
|
|
1,370
|
|
|
|
1,428
|
|
Non-Debtor subsidiaries
|
|
|
316
|
|
|
|
287
|
|
Notes receivable from non-Debtor
subsidiaries
|
|
|
355
|
|
|
|
349
|
|
Inventories, net:
|
|
|
|
|
|
|
|
|
Productive material,
work-in-process
and supplies
|
|
|
837
|
|
|
|
820
|
|
Finished goods
|
|
|
303
|
|
|
|
286
|
|
Prepaid expenses and other
|
|
|
305
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,442
|
|
|
|
6,539
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
Property, net
|
|
|
2,701
|
|
|
|
2,743
|
|
Investments in affiliates
|
|
|
368
|
|
|
|
356
|
|
Investments in non-Debtor
subsidiaries
|
|
|
3,290
|
|
|
|
3,131
|
|
Goodwill
|
|
|
139
|
|
|
|
139
|
|
Other intangible assets, net
|
|
|
40
|
|
|
|
42
|
|
Pension intangible assets
|
|
|
871
|
|
|
|
871
|
|
Other
|
|
|
315
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
Total long-term assets
|
|
|
7,724
|
|
|
|
7,601
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,166
|
|
|
$
|
14,140
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS DEFICIT
|
Current liabilities not subject to
compromise:
|
|
|
|
|
|
|
|
|
Notes payable and secured debt in
default
|
|
$
|
2,492
|
|
|
$
|
2,519
|
|
Accounts payable
|
|
|
1,192
|
|
|
|
1,027
|
|
Accounts payable to non-Debtor
subsidiaries
|
|
|
465
|
|
|
|
486
|
|
Accrued liabilities
|
|
|
510
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,659
|
|
|
|
4,442
|
|
Debtor-in-possession
financing
|
|
|
250
|
|
|
|
250
|
|
Employee benefit plan obligations
and other
|
|
|
554
|
|
|
|
550
|
|
Liabilities subject to compromise
|
|
|
15,262
|
|
|
|
15,143
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,725
|
|
|
|
20,385
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value, 1,350 million shares authorized, 565 million
shares issued in 2006 and 2005
|
|
|
6
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
2,750
|
|
|
|
2,744
|
|
Accumulated deficit
|
|
|
(6,792
|
)
|
|
|
(6,429
|
)
|
Minimum pension liability, Debtors
only
|
|
|
(2,305
|
)
|
|
|
(2,304
|
)
|
Accumulated other comprehensive
loss, including minimum pension liability of non-Debtor
subsidiaries
|
|
|
(166
|
)
|
|
|
(210
|
)
|
Treasury stock, at cost
(3.2 million shares in 2006 and 2005)
|
|
|
(52
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(6,559
|
)
|
|
|
(6,245
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders deficit
|
|
$
|
14,166
|
|
|
$
|
14,140
|
|
|
|
|
|
|
|
|
|
|
12
CONDENSED
COMBINED
DEBTORS-IN-POSSESSION
STATEMENT OF CASH FLOWS (Unaudited)
(Non-filed entities, principally
non-U.S. subsidiaries,
excluded from consolidated Debtor group)
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
|
(in millions)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
Net loss
|
|
$
|
(363
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
165
|
|
Pension and other postretirement
benefit expenses
|
|
|
386
|
|
Equity income from
non-consolidated subsidiaries
|
|
|
(14
|
)
|
Equity income from non-Debtor
subsidiaries, net of tax
|
|
|
(104
|
)
|
Reorganization items
|
|
|
9
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
Accounts receivable, net
|
|
|
(341
|
)
|
Inventories, net
|
|
|
(35
|
)
|
Prepaid expenses and other
|
|
|
(64
|
)
|
Accounts payable, accrued and
other long-term liabilities
|
|
|
265
|
|
Pension contributions and benefit
payments
|
|
|
(59
|
)
|
Other postretirement benefit
payments
|
|
|
(57
|
)
|
Payments for reorganization items,
net
|
|
|
(10
|
)
|
Other, net
|
|
|
(6
|
)
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(228
|
)
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
Capital expenditures
|
|
|
(101
|
)
|
Proceeds from sale of property
|
|
|
6
|
|
Other, net
|
|
|
(24
|
)
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(119
|
)
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
Proceeds from prepetition secured
revolving credit facility, net
|
|
|
2
|
|
Repayments under cash overdraft
|
|
|
(29
|
)
|
Repayments of borrowings under
other short-term debt agreements
|
|
|
(3
|
)
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(30
|
)
|
|
|
|
|
|
Decrease in cash and cash
equivalents
|
|
|
(377
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
1,361
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
984
|
|
|
|
|
|
|
|
|
3.
|
SHARE-BASED
COMPENSATION
|
Delphis share-based compensation programs include stock
options, restricted stock units, and stock appreciation rights
(SARs). The Company adopted SFAS No. 123
(Revised 2004), Share-Based Payments
(SFAS No. 123(R)), effective
January 1, 2006 using the modified-prospective method. This
method does not require prior period amounts to be restated to
reflect the adoption of SFAS No. 123(R).
SFAS No. 123(R) requires compensation cost to be
recognized for equity or liability instruments based on the
grant-date fair value, with expense recognized over the periods
that an employee provides service in exchange for the award. In
conjunction with the adoption of SFAS No. 123(R), the
Company evaluated the impact of a change in its
13
prior accounting for forfeitures for restricted stock units.
SFAS No. 123(R) requires the Company to estimate
forfeitures at the grant date, while prior to the adoption of
SFAS No. 123(R), the Company accounted for forfeitures
as they occurred. The adjustment is a benefit of $3 million
(no income tax effect due to the fact Delphi has a valuation
allowance for the majority of its net deferred tax assets) and
has been presented separately as a cumulative effect of change
in accounting principle in the financial statements. In
addition, while the Company will recognize compensation cost for
newly issued equity or liability instruments over the periods
that an employee provides service in exchange for the award, the
Company will continue to follow a nominal vesting approach for
all awards issued prior to the adoption of
SFAS No. 123(R). Additional compensation cost of
approximately $4 million was recognized for the three
months ended March 31, 2006.
Prior to the adoption of SFAS No. 123(R), the Company
accounted for share-based compensation using the intrinsic value
method in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. As such, no compensation expense was
recognized for the three months ended March 31, 2005. If
Delphi accounted for all share-based compensation using the fair
value recognition provisions of SFAS No. 123 and
related amendments as of March 31, 2005, its net loss and
basic and diluted loss per share would have been as follows:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2005
|
|
|
|
(in millions, except
|
|
|
|
per share amounts)
|
|
|
Net loss, as reported
|
|
$
|
(403
|
)
|
Add: Share-based compensation
expense recognized, net of related tax effects
|
|
|
3
|
|
Less: Total share-based employee
compensation expense determined under fair value method for all
awards, net of related tax effects
|
|
|
(5
|
)
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(405
|
)
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
Basic and diluted as
reported
|
|
$
|
(0.73
|
)
|
|
|
|
|
|
Basic and diluted pro
forma
|
|
$
|
(0.73
|
)
|
|
|
|
|
|
Share-Based Compensation Plans
Options generally vest over two to three years and expire ten
years from the date of grant. Stock options granted during 2004
and 2003 were exercisable at prices equal to the fair market
value of Delphi common stock on the dates the options were
granted; accordingly, no compensation expense was recognized for
the stock options granted in those periods. During 2003, Delphi
completed a self-tender for certain employee stock options
having an exercise price in excess of $17 per share. The
offer enabled employees to exchange each stock option for a cash
settled SAR having an equivalent strike price, term and
conditions to exercise as the surrendered option.
In connection with the Debtors operating under chapter 11
of the Bankruptcy Code, Delphi has no intention to deliver
approximately 22 million shares of stock for future grants
under its LTIP. As a result, as of December 31, 2005, there
were no shares available for future grants of options or
restricted stock units. In addition, Delphi decided not to issue
common stock for any option that was granted but unvested at the
time of the chapter 11 filings on October 8, 2005, nor
will it issue common stock on the vesting dates of any
restricted stock units granted but unvested at the time of
chapter 11 filings on October 8, 2005.
14
A summary of activity for the three months ended March 31,
2006 for the Companys stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Stock Options
|
|
|
Exercise Price
|
|
|
|
(in thousands)
|
|
|
|
|
|
Outstanding as of
December 31, 2005
|
|
|
84,565
|
|
|
$
|
13.72
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
Forfeited or expired
|
|
|
(3,390
|
)
|
|
$
|
14.82
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31,
2006
|
|
|
81,175
|
|
|
$
|
13.68
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31,
2006
|
|
|
73,397
|
|
|
$
|
14.14
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of the range of weighted average
remaining lives of options outstanding and exercisable as of
March 31, 2006:
Approved
by Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
Outstanding
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Number of
|
|
|
Weighted Average
|
|
Exercise Prices
|
|
Stock Options
|
|
|
Remaining Life
|
|
|
Exercise Price
|
|
|
Stock Options Exercisable
|
|
|
Exercise Price
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
$ 8.43 - $10.00
|
|
|
10,723
|
|
|
|
7.0
|
|
|
$
|
8.43
|
|
|
|
7,132
|
|
|
$
|
8.43
|
|
$10.01 - $20.00
|
|
|
47,900
|
|
|
|
4.6
|
|
|
$
|
13.52
|
|
|
|
43,713
|
|
|
$
|
13.85
|
|
$20.01 - $20.97
|
|
|
73
|
|
|
|
2.7
|
|
|
$
|
20.66
|
|
|
|
73
|
|
|
$
|
20.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,696
|
|
|
|
|
|
|
$
|
12.60
|
|
|
|
50,918
|
|
|
$
|
13.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
Outstanding
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Number of
|
|
|
Weighted Average
|
|
Exercise Prices
|
|
Stock Options
|
|
|
Remaining Life
|
|
|
Exercise Price
|
|
|
Stock Options Exercisable
|
|
|
Exercise Price
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
$ 9.55 - $10.00
|
|
|
1
|
|
|
|
1.7
|
|
|
$
|
9.55
|
|
|
|
1
|
|
|
$
|
9.55
|
|
$10.01 - $20.00
|
|
|
19,923
|
|
|
|
3.4
|
|
|
$
|
15.96
|
|
|
|
19,923
|
|
|
$
|
15.96
|
|
$20.01 - $24.76
|
|
|
2,555
|
|
|
|
2.7
|
|
|
$
|
20.64
|
|
|
|
2,555
|
|
|
$
|
20.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,479
|
|
|
|
|
|
|
$
|
16.49
|
|
|
|
22,479
|
|
|
$
|
16.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since the market value of the Companys stock was less than
the exercise prices as of March 31, 2006, the aggregate
intrinsic value of stock options and SARs both outstanding and
exercisable was $0. As of March 31, 2006, there was
approximately $8 million of unrecognized compensation costs
related to options granted under the Companys LTIP plan.
The cost is expected to be recognized over a weighted average
period of one year.
As of March 31, 2006, Delphi had 7.8 million
outstanding SARs which were fully vested. The SARs are
classified as liability awards, and accordingly will be revalued
through compensation expense each period. As of March 31,
2006, the fair market value of the SARs was zero and as such, no
liability was recognized for these awards.
15
Restricted Stock Units
A summary of activity for the three months ended March 31,
2006 for the Companys restricted stock units is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Restricted
|
|
|
Grant Date
|
|
|
|
Stock Units
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
|
|
|
Non-vested at December 31,
2005
|
|
|
10,027
|
|
|
$
|
8.58
|
|
Vested
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
(219
|
)
|
|
$
|
8.39
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2006
|
|
|
9,808
|
|
|
$
|
8.58
|
|
|
|
|
|
|
|
|
|
|
No restricted stock units vested during the three months ended
March 31, 2006, whereas, the total fair value of restricted
stock units vested during the three months ended March 31,
2005 was approximately $4 million. As of March 31,
2006, there was approximately $48 million of unrecognized
compensation cost related to non-vested restricted stock units
which will be recognized over a weighted average period of
4.1 years.
SOP 90-7
requires reorganization items such as revenues, expenses such as
professional fees directly related to the process of
reorganizing the Debtors under chapter 11, realized gains
and losses, provisions for losses, and interest income resulting
from the reorganization and restructuring of the business to be
separately disclosed. The Debtors reorganization items
consist of the following:
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2006
|
|
|
|
(in millions)
|
|
|
Professional fees directly related
to reorganization
|
|
$
|
31
|
|
Interest income
|
|
|
(16
|
)
|
Gain on settlement of prepetition
liabilities
|
|
|
(2
|
)
|
|
|
|
|
|
Total Reorganization Items
|
|
$
|
13
|
|
|
|
|
|
|
For the three months ended March 31, 2006, reorganization
items resulted in approximately $15 million of cash
received entirely related to interest income and approximately
$26 million of cash paid for professional fees.
Professional fees directly related to the reorganization include
fees associated with advisors to the Debtors, unsecured
creditors, secured creditors and unions.
|
|
5.
|
WEIGHTED
AVERAGE SHARES AND DIVIDENDS
|
Basic and diluted loss per share amounts were computed using
weighted average shares outstanding for each respective period.
As Delphi incurred losses in the quarters ended March 31,
2006 and 2005, the effect of potentially dilutive securities has
been excluded from the calculation of loss per share as
inclusion would have had an anti-dilutive effect. Actual
weighted average shares outstanding used in calculating basic
and diluted loss per share were 561,782 thousand shares and
555,242 thousand shares for the quarters ended March 31,
2006 and 2005, respectively. Securities excluded from the
computation of diluted loss per share because inclusion would
have had an anti-dilutive effect were 81,082 thousand shares and
89,885 thousand shares for the quarters ended March 31,
2006 and 2005, respectively.
On September 8, 2005, the Board of Directors announced the
elimination of Delphis quarterly dividend on Delphi common
stock. In addition, the DIP credit facility includes negative
covenants that prohibit the payment of dividends by the Company.
The Company does not expect to pay dividends in the near future.
16
Delphi recognizes expected warranty costs for products sold
principally at the time of sale of the product based on
managements estimate of the amount that will eventually be
required to settle such obligations. These accruals are based on
factors such as past experience, production changes, industry
developments and various other considerations. Delphis
estimates are adjusted from time to time based on facts and
circumstances that impact the status of existing claims.
The table below summarizes the activity in the product warranty
liability for the three months ended March 31, 2006 and
2005.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Accrual balance at beginning of
year
|
|
$
|
312
|
|
|
$
|
274
|
|
Provision for estimated warranties
accrued during the period
|
|
|
51
|
|
|
|
27
|
|
Settlements made during the period
(in cash or in kind)
|
|
|
(46
|
)
|
|
|
(42
|
)
|
Foreign currency translation
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
Accrual balance at end of period
|
|
$
|
318
|
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
Approximately $125 million and $117 million of the
warranty accrual balance as of March 31, 2006 and
December 31, 2005, respectively, is included in accrued
liabilities in the accompanying consolidated balance sheets.
Approximately $193 million and $195 million of
the warranty accrual balance as of March 31, 2006 and
December 31, 2005, respectively, is included in liabilities
subject to compromise (refer to Note 7, Liabilities Subject
to Compromise).
|
|
7.
|
LIABILITIES
SUBJECT TO COMPROMISE
|
As a result of the Chapter 11 Filings, the payment of
prepetition indebtedness may be subject to compromise or other
treatment under the Debtors plan of reorganization.
Generally, actions to enforce or otherwise effect payment of
prepetition liabilities are stayed. Refer to Note 2,
Chapter 11 Bankruptcy. Although prepetition claims are
generally stayed, at hearings held in October and November 2005,
the Court granted final approval of the Debtors
first day motions, generally designed to stabilize
the Debtors operations and covering, among other things,
human capital obligations, supplier relations, customer
relations, business operations, tax matters, cash management,
utilities, case management and retention of professionals.
The Debtors have been paying and intend to continue to pay
undisputed postpetition claims in the ordinary course of
business. In addition, the Debtors may reject prepetition
executory contracts and unexpired leases with respect to the
Debtors operations, with the approval of the Court.
Damages resulting from rejection of executory contracts and
unexpired leases are treated as general unsecured claims and
will be classified as liabilities subject to compromise. On
April 12, 2006, the Court entered an order establishing
July 31, 2006 as the bar date. The bar date is the date by
which claims against the Debtors arising prior to the
Debtors Chapter 11 Filings must be filed if the
claimants wish to receive any distribution in the
chapter 11 cases. On April 17, 2006, the Debtors
commenced notification, including publication, to all known
actual and potential creditors informing them of the bar date
and the required procedures with respect to the filing of proofs
of claim. As part of the reorganization case, claims timely
filed by the bar date will ultimately be reconciled against the
amounts listed by the Debtors in their Schedules of Assets and
Liabilities (as amended). To the extent that the Debtors object
to any filed claims, the Court will make the final determination
as to the amount, nature, and validity of such claims. Moreover,
the treatment of allowed claims against the Debtors will be
determined pursuant to the terms of a chapter 11 plan of
reorganization approved by the court. Accordingly, the ultimate
amount and treatment of such liabilities has not yet been
determined.
17
SOP 90-7
requires prepetition liabilities that are subject to compromise
to be reported at the amounts expected to be allowed, even if
they may be settled for lesser amounts. The amounts currently
classified as liabilities subject to compromise may be subject
to future adjustments depending on Court actions, further
developments with respect to disputed claims, determinations of
the secured status of certain claims, the values of any
collateral securing such claims, or other events. Liabilities
subject to compromise consist of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Pension obligations
|
|
$
|
3,664
|
|
|
$
|
3,578
|
|
Postretirement obligations other
than pensions, including amounts payable to GM
|
|
|
7,535
|
|
|
|
7,331
|
|
Debt and notes payable
|
|
|
2,060
|
|
|
|
2,062
|
|
Accounts payable
|
|
|
834
|
|
|
|
916
|
|
Junior subordinated notes due to
Delphi Trust I and II
|
|
|
403
|
|
|
|
403
|
|
Postemployment benefits for other
than temporarily idled employees
|
|
|
129
|
|
|
|
148
|
|
Other
|
|
|
576
|
|
|
|
636
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities Subject to
Compromise
|
|
$
|
15,201
|
|
|
$
|
15,074
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
PENSION
AND OTHER POSTRETIREMENT BENEFITS
|
Pension plans covering unionized employees in the
U.S. generally provide benefits of stated amounts for each
year of service, as well as supplemental benefits for employees
who qualify for retirement before normal retirement age. The
benefits provided by the plans covering U.S. salaried
employees are generally based on years of service and salary
history. Certain Delphi employees also participate in
nonqualified pension plans covering executives, which are based
on targeted wage replacement percentages and are unfunded.
Delphis funding policy with respect to its qualified plans
is to contribute annually, not less than the minimum required by
applicable laws and regulations, including the Bankruptcy Code.
On January 13, 2006, Delphi contributed $57 million to
its U.S. pension plans. These defined benefit pension plans
are sponsored by the Debtors. The amount contributed represents
the portion of the pension contribution attributable to services
rendered by employees of the Debtors in the post-petition
portion of the fourth quarter of 2005. Under the Employee
Retirement Income Security Act and the U.S. Internal
Revenue Code, a minimum funding payment of approximately
$0.3 billion to the U.S. pension plans was due on
January 13, 2006. On April 13, 2006, Delphi
contributed $59 million to its U.S. pension plans. The
amount contributed represents the portion of the pension
contribution attributable to services rendered by employees of
the Debtors in the first quarter of 2006. Under the Employee
Retirement Income Security Act and the U.S. Internal
Revenue Code, a minimum funding payment of approximately
$0.3 billion to the U.S. pension plans was due on
April 14, 2006. As permitted under chapter 11,
however, Delphi contributed only the portion of the contribution
attributable to post-bankruptcy-petition service. The unpaid
portion of the minimum funding payments remains payable as a
claim against Delphi and will be determined in Delphis
plan of reorganization with other claims. Delphi has appointed
an independent fiduciary for all of its tax qualified defined
benefit pension plans who is charged with pursuing claims on
behalf of the plans to recover minimum funding contributions.
As of March 1, 2005, Delphi amended its salaried health
care benefits plan. Under this plan amendment, effective
January 1, 2007, Delphi reduced its obligations to current
salaried active employees, all current salaried retirees and
surviving spouses of salaried employees who are retired and are
eligible for Medicare coverage. Based on a March 1, 2005
remeasurement date, this plan amendment resulted in a decrease
in the other postretirement benefit obligations liability of
$0.8 billion and a decrease in 2005 expense of
$72 million. As SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other than Pensions, requires a one-quarter lag from
the remeasurement date before applying the effects of the plan
amendment, income statement recognition of the plan amendment
began in June 2005.
18
Certain of Delphis
non-U.S. subsidiaries
also sponsor defined benefit pension plans, which generally
provide benefits based on negotiated amounts for each year of
service. Delphis primary
non-U.S. plans
are located in France, Germany, Luxembourg, Mexico, Portugal,
and the United Kingdom (UK). The UK and certain
Mexican plans are funded. In addition, Delphi has defined
benefit plans in Korea and Italy for which amounts are payable
to employees immediately upon separation.
The amounts shown below reflect the defined benefit pension and
other postretirement benefit expense for the three months ended
March 31, 2006 and 2005 for salaried and hourly employees.
Benefit costs presented below were determined based on actuarial
methods and included the following components for U.S. and
non-U.S. salaried
and hourly employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
|
Postretirement
|
|
|
|
U.S. Plans
|
|
|
Non-U.S. Plans
|
|
|
Benefits
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
73
|
|
|
$
|
73
|
|
|
$
|
10
|
|
|
$
|
8
|
|
|
$
|
45
|
|
|
$
|
47
|
|
Interest cost
|
|
|
185
|
|
|
|
181
|
|
|
|
16
|
|
|
|
16
|
|
|
|
130
|
|
|
|
141
|
|
Expected return on plan assets
|
|
|
(205
|
)
|
|
|
(197
|
)
|
|
|
(16
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
Special termination benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Amortization of prior service costs
|
|
|
33
|
|
|
|
35
|
|
|
|
1
|
|
|
|
1
|
|
|
|
(25
|
)
|
|
|
(1
|
)
|
Amortization of actuarial losses
|
|
|
57
|
|
|
|
53
|
|
|
|
6
|
|
|
|
8
|
|
|
|
78
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
143
|
|
|
$
|
145
|
|
|
$
|
17
|
|
|
$
|
18
|
|
|
$
|
228
|
|
|
$
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
DERIVATIVES
AND HEDGING ACTIVITIES
|
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended,
requires that all derivative instruments be reported on the
balance sheet at fair value with changes in fair value reported
currently through earnings unless the transactions qualify and
are designated as normal purchases or sales or meet special
hedge accounting criteria. The fair value of foreign currency
and commodity derivative instruments are determined using
exchange traded prices and rates.
Delphi is exposed to market risk, such as fluctuations in
foreign currency exchange rates, commodity prices and changes in
interest rates, which may result in cash flow risks. To manage
the volatility relating to these exposures, Delphi aggregates
the exposures on a consolidated basis to take advantage of
natural offsets. For exposures that are not offset within its
operations, Delphi enters into various derivative transactions
pursuant to risk management policies. Designation is performed
on a transaction basis to support hedge accounting. The changes
in fair value of these hedging instruments are offset in part or
in whole by corresponding changes in the fair value or cash
flows of the underlying exposures being hedged. Delphi assesses
the initial and ongoing effectiveness of its hedging
relationships in accordance with its documented policy. Delphi
does not hold or issue derivative financial instruments for
trading purposes.
19
The fair value of derivative financial instruments recorded in
the consolidated balance sheets as assets and liabilities as of
March 31, 2006 and December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
December 31, 2005
|
|
|
|
(in millions)
|
|
|
Current assets
|
|
$
|
25
|
|
|
$
|
5
|
|
Non-current assets
|
|
|
8
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
33
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
32
|
|
|
$
|
8
|
|
Non-current liabilities
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
33
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
The fair value of financial instruments recorded as assets
increased from December 31, 2005 to March 31, 2006
primarily due to the fluctuation of copper forward rates. The
fair value of financial instruments recorded as liabilities
increased from December 31, 2005 to March 31, 2006
primarily due to changes in foreign currency forward rates for
the Mexican Peso.
Gains and losses on derivatives qualifying as cash flow hedges
are recorded in other comprehensive income (OCI) to
the extent that hedges are effective until the underlying
transactions are recognized in earnings. Unrealized amounts in
OCI will fluctuate based on changes in the fair value of open
hedge derivative contracts at each reporting period. Net gains
included in OCI as of March 31, 2006, were $6 million
pre-tax. Of this pre-tax total, a gain of approximately
$2 million is expected to be included in cost of sales
within the next 12 months and a gain of approximately
$5 million is expected to be included in cost of sales in
subsequent periods and a loss of approximately $1 million
is expected to be included in depreciation and amortization
expense over the lives of the related fixed assets. Cash flow
hedges are discontinued when it is probable that the original
forecasted transactions will not occur. The amount included in
cost of sales related to hedge ineffectiveness was not
significant. The amount included in cost of sales related to the
time value of options was not significant in the three months
ended March 31, 2006 and 2005.
|
|
10.
|
STOCKHOLDERS
DEFICIT
|
Changes in stockholders deficit for the three months ended
March 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Pension
|
|
|
|
|
|
Treasury
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Liability
|
|
|
Other
|
|
|
Stock
|
|
|
Deficit
|
|
|
|
(in millions)
|
|
|
Balance at January 1,
2006
|
|
|
565
|
|
|
$
|
6
|
|
|
$
|
2,744
|
|
|
$
|
(6,429
|
)
|
|
$
|
(2,395
|
)
|
|
$
|
(119
|
)
|
|
$
|
(52
|
)
|
|
$
|
(6,245
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(363
|
)
|
Currency translation adjustments
and other, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
51
|
|
|
|
|
|
|
|
49
|
|
Net change in unrecognized gain on
derivative instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(320
|
)
|
Share-based compensation, net
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31,
2006
|
|
|
565
|
|
|
$
|
6
|
|
|
$
|
2,750
|
|
|
$
|
(6,792
|
)
|
|
$
|
(2,397
|
)
|
|
$
|
(74
|
)
|
|
$
|
(52
|
)
|
|
$
|
(6,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Comprehensive income (loss) is defined as all changes in a
Companys net assets except changes resulting from
transactions with stockholders. It differs from net income in
that certain items currently recorded in equity are included in
comprehensive income (loss). A summary of comprehensive income
(loss) for the three months ended March 31, 2006 and 2005
is shown below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Net loss
|
|
$
|
(363
|
)
|
|
$
|
(403
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Currency translation adjustments
and other, net of tax
|
|
|
49
|
|
|
|
(119
|
)
|
Net change in unrecognized gain on
derivative instruments, net of tax
|
|
|
(6
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
43
|
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(320
|
)
|
|
$
|
(538
|
)
|
|
|
|
|
|
|
|
|
|
Delphi operates its business along three reporting segments that
are grouped on the basis of similar product, market and
operating factors:
|
|
|
|
|
Dynamics, Propulsion, Thermal & Interior Sector, which
includes selected businesses from our energy and engine
management systems, chassis, steering and thermal systems and
interior product lines.
|
|
|
|
Electrical, Electronics & Safety Sector, which includes
selected businesses from our automotive electronics, audio,
consumer and aftermarket products, communication systems, safety
and power and signal distribution systems product lines.
|
|
|
|
Automotive Holdings Group, which is comprised of select product
lines and plant sites that do not meet our targets for net
income or other financial metrics, allowing for consistent and
targeted management focus on finding solutions to these
businesses.
|
The accounting policies of the product sectors are the same as
those described in the summary of significant accounting
policies except that the disaggregated financial results for the
product sectors have been prepared using a management approach,
which is consistent with the basis and manner in which
management internally disaggregates financial information for
the purposes of assisting in making internal operating
decisions. Generally, Delphi evaluates performance based on
stand-alone product sector operating income and accounts for
inter-segment sales and transfers as if the sales or transfers
were to third parties, at current market prices. Net sales are
attributed to geographic areas based on the location of the
assets producing the revenues.
Included below are sales and operating data for Delphis
sectors for the three months ended March 31, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dynamics,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propulsion,
|
|
|
Electrical,
|
|
|
Automotive
|
|
|
|
|
|
|
|
|
|
Thermal &
|
|
|
Electronics &
|
|
|
Holdings
|
|
|
|
|
|
|
|
|
|
Interior
|
|
|
Safety
|
|
|
Group
|
|
|
Other(a)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
For the Three Months
Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to GM and affiliates
|
|
$
|
1,656
|
|
|
$
|
1,203
|
|
|
$
|
350
|
|
|
$
|
8
|
|
|
$
|
3,217
|
|
Net sales to other customers
|
|
|
1,510
|
|
|
|
2,059
|
|
|
|
165
|
|
|
|
22
|
|
|
|
3,756
|
|
Inter-sector net sales
|
|
|
177
|
|
|
|
83
|
|
|
|
152
|
|
|
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
3,343
|
|
|
$
|
3,345
|
|
|
$
|
667
|
|
|
$
|
(382
|
)
|
|
$
|
6,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(148
|
)
|
|
$
|
121
|
|
|
$
|
(243
|
)
|
|
$
|
38
|
|
|
$
|
(232
|
)
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dynamics,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Propulsion,
|
|
|
Electrical,
|
|
|
Automotive
|
|
|
|
|
|
|
|
|
|
Thermal &
|
|
|
Electronics &
|
|
|
Holdings
|
|
|
|
|
|
|
|
|
|
Interior
|
|
|
Safety
|
|
|
Group
|
|
|
Other(a)
|
|
|
Total
|
|
|
|
(in millions)
|
|
|
For the Three Months
Ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to GM and affiliates
|
|
$
|
1,677
|
|
|
$
|
1,368
|
|
|
$
|
378
|
|
|
$
|
(24
|
)
|
|
$
|
3,399
|
|
Net sales to other customers
|
|
|
1,325
|
|
|
|
2,008
|
|
|
|
111
|
|
|
|
19
|
|
|
|
3,463
|
|
Inter-sector net sales
|
|
|
210
|
|
|
|
93
|
|
|
|
166
|
|
|
|
(469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
3,212
|
|
|
$
|
3,469
|
|
|
$
|
655
|
|
|
$
|
(474
|
)
|
|
$
|
6,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(183
|
)
|
|
$
|
169
|
|
|
$
|
(259
|
)
|
|
$
|
(51
|
)
|
|
$
|
(324
|
)
|
|
|
|
(a) |
|
Other includes activity not allocated to the product sectors
including the Companys medical systems operations and
elimination of inter-sector transactions. |
As announced on March 31, 2006, Delphi plans to focus its
product portfolio on those core technologies for which Delphi
believes it has significant competitive and technological
advantages and will concentrate the organization around those
core strategic product lines. The new organizational structure
to support the core strategic product lines is effective
July 1, 2006. Although the Company will change its
reporting segments based on the new organizational structure,
such realignment was not complete at March 31, 2006 and
accordingly the Company did not meet the criteria to change its
reportable segments under SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information. The Company expects to change its
reporting segments in the third quarter of 2006.
|
|
12.
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
Regulatory
Actions and Other Matters
|
As previously disclosed, Delphi is the subject of an ongoing
investigation by the U.S. Securities and Exchange
Commission (SEC) and the Department of Justice
involving Delphis accounting for and the adequacy of
disclosures for a number of transactions dating from
Delphis spin-off from GM. Delphi is fully cooperating with
the governments investigations. The Company entered into
an agreement with the SEC to suspend the running of the
applicable statute of limitations until April 6, 2006 and
subsequently agreed to extend the suspension until
October 31, 2006. The governments investigations were
not suspended as a result of Delphis filing for
chapter 11. Until these investigations are complete, Delphi
is not able to predict the effect, if any, that these
investigations will have on Delphis business and financial
condition, results of operations and cash flows.
The Company also believes that the Enforcement Division of the
SEC has taken a more proactive role, what the SEC refers to as a
risk based approach, by seeking information from
issuers in an effort to assess issuers accounting or
disclosure practices before identifying specific wrong-doing.
Delphi believes that the previously disclosed inquiry it
received during the fourth quarter of 2004 regarding accounting
practices related to defined benefit pension plans and other
postemployment benefit plans is an example of this practice.
Delphi continues to cooperate fully with the SECs informal
inquiry in this matter.
The Company, along with Delphi Trust I & Delphi
Trust II (wholly-owned subsidiaries of Delphi which issued
trust preferred securities), current and former directors of the
Company, certain current and former officers and employees of
the Company or its subsidiaries, and others are named as
defendants in several lawsuits that were filed beginning in
March 2005 following the Companys announced intention to
restate certain of its financial statements.
22
On December 12, 2005, the Judicial Panel on Multidistrict
Litigation entered an order transferring each of the related
federal actions to the United States District Court for the
Eastern District of Michigan for coordinated or consolidated
pretrial proceedings (the Multidistrict Litigation).
The lawsuits transferred fall into three categories. One group
of putative class action lawsuits, which are purportedly brought
on behalf of participants in certain of the Companys and
its subsidiaries defined contribution employee benefit
pension plans that invested in Delphi common stock, is brought
under the Employee Retirement Income Security Act of 1974, as
amended (the ERISA Actions). Plaintiffs in the ERISA
Actions allege, among other things, that the plans suffered
losses as a result of alleged breaches of fiduciary duties under
ERISA. On October 21, 2005, the ERISA Actions were
consolidated before one judge in the United States District
Court for the Eastern District of Michigan. The ERISA Actions
were subsequently transferred to the Multidistrict Litigation.
On March 3, 2006, plaintiffs filed a consolidated class
action complaint (the Amended ERISA Action) with a
putative class period of May 28, 1999 to November 1,
2005. The Company, which was previously named as a defendant in
the ERISA Actions, was not named as a defendant in the Amended
ERISA Action. The plaintiffs are not currently asserting claims
against or seeking relief from the Company in the Amended ERISA
Action due to the Companys bankruptcy filing, but have
stated that they plan to proceed with claims against the Company
in the ongoing bankruptcy cases, and will seek to name the
Company as a defendant in the Amended ERISA Action if the
bankruptcy stay is modified or lifted to permit such action. The
defendants have filed a motion to dismiss the Amended ERISA
Action.
A second group of putative class action lawsuits variously
alleges, among other things, that the Company and certain of its
current and former directors and officers and others made
materially false and misleading statements in violation of
federal securities laws. On September 23, 2005, these
securities actions were consolidated before one judge in the
United States District Court for the Southern District of New
York. On September 30, 2005, the Court-appointed lead
plaintiffs filed a consolidated class action complaint (the
Amended Securities Action) on behalf of a putative
class consisting of all persons and entities who purchased or
otherwise acquired publicly-traded securities of the Company,
including securities issued by Delphi Trust I and Delphi
Trust II, during a putative class period of March 7,
2000 through March 3, 2005. The Amended Securities Action
names several new defendants, including Delphi Trust II,
certain former directors, and underwriters and other third
parties, and includes securities claims regarding additional
offerings of Delphi securities. The securities actions
consolidated in the Southern District of New York (and a related
securities action filed in the United States District Court for
the Southern District of Florida concerning Delphi
Trust I) were subsequently transferred to the Eastern
District of Michigan as part of the Multidistrict Litigation.
The action is stayed against the Company pursuant to the
Bankruptcy Code, but is continuing against the other defendants.
The third group of lawsuits is comprised of shareholder
derivative actions against certain current and former directors
and officers of the Company (Shareholder Derivative
Actions). In October 2005, following the filing by the
Company of its petition for reorganization relief under
chapter 11 of the U.S. Bankruptcy Code, three of the
four shareholder derivative actions were closed administratively
without prejudice. (Two of the three lawsuits that were closed
were pending in the Circuit Court of Oakland County, Michigan,
and the other was pending in the United States District Court
for the Eastern District of Michigan.) The plaintiff in the
remaining shareholder derivative action has agreed to adjourn
defendants time to respond without date. The two federal
derivative actions were transferred to the Multidistrict
Litigation.
In addition, the Company received a demand from a shareholder
that the Company consider bringing a derivative action against
certain current and former directors and officers. The
Shareholder Derivative Actions and the shareholder demand are
premised on allegations that certain current and former
directors and officers of the Company made materially false and
misleading statements in violation of federal securities laws
and/or of
their fiduciary duties. The Company has appointed a committee of
the Board of Directors to consider the shareholder demand. That
committee of the Board of Directors is still investigating the
matter.
Due to the preliminary nature of these lawsuits, the Company is
not able to predict with certainty the outcome of this
litigation or the Companys potential exposure related
thereto. In addition, because any recovery on allowed
prepetition claims is subject to a confirmed plan of
reorganization, the ultimate
23
distribution with respect to allowed claims is not presently
ascertainable. While Delphi maintains directors and officers
insurance subject to a $10 million deductible and has
recorded a reserve in the amount of the deductible, which is
included in liabilities subject to compromise, the Company
cannot assure the extent of coverage or that the impact of any
loss not covered by insurance or applicable reserves would not
be material.
Under section 362 of the U.S. Bankruptcy Code, the
filing of a bankruptcy petition automatically stays most actions
against a debtor, including most actions to collect prepetition
indebtedness or to exercise control over the property of the
debtors estate. Absent an order of the Court,
substantially all prepetition liabilities of the debtor are
subject to settlement under a plan of reorganization.
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Ordinary
Business Litigation
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Delphi is from time to time subject to various legal actions and
claims incidental to its business, including those arising out
of alleged defects, breach of contracts, product warranties,
intellectual property matters, environmental matters, and
employment-related matters.
As previously disclosed, with respect to environmental matters,
Delphi received notices that it is a potentially responsible
party (PRP) in proceedings at various sites,
including the Tremont City Landfill Site located in Tremont,
Ohio which is alleged to involve ground water contamination. In
September 2002, Delphi and other PRPs entered into a Consent
Order with the Environmental Protection Agency (EPA)
to perform a Remedial Investigation and Feasibility Study
concerning a portion of the site, which is expected to be
completed during 2006. Based on findings to date, Delphi
believes that a reasonably possible outcome of the investigative
study is capping and future monitoring of this site, which would
substantially limit future remediation costs. Delphi has
included an estimate of its share of the potential costs of such
a remedy plus the cost to complete the investigation in its
overall reserve estimate. Because the scope of the investigation
and the extent of the required remediation are still being
determined, it is possible that the final resolution of this
matter may require that Delphi makes material future
expenditures for remediation, possibly over an extended period
of time and possibly in excess of its existing reserves. Delphi
will continue to re-assess any potential remediation costs and,
as appropriate, its overall environmental reserves as the
investigation proceeds. Delphis environmental accruals
were approximately $52 million and $51 million as of
March 31, 2006 and December 31, 2005, respectively.
With respect to warranty matters, although Delphi cannot assure
that the future costs of warranty claims by customers will not
be material, Delphi believes its established reserves are
adequate to cover potential warranty settlements. However, the
final amounts determined to be due related to these matters
could differ materially from the Companys recorded
estimates. Additionally, in connection with Delphis
separation from GM in 1999 (the Separation), Delphi
agreed to indemnify GM against substantially all losses, claims,
damages, liabilities or activities arising out of or in
connection with its business post-Separation for which it is
determined Delphi has responsibility. Due to the nature of such
indemnities, Delphi is not able to estimate the maximum amount.
On May 3, 2006, GM notified Delphi and its unsecured
creditors committee that GM was seeking to exercise set-off
rights in the amount of approximately $67 million, alleging
that catalytic converters supplied by Delphi to GM for certain
2001 and 2002 vehicle platforms did not conform to
specifications. Delphi believes that GMs claims are
without merit and therefore disputes GMs right to set-off
amounts against future payments. In July 2006, the parties
agreed to submit the dispute to binding arbitration in
accordance with the Courts final order approving the
Companys DIP credit facility.
Additionally, for the past several years Delphi has been
involved in patent licensing negotiations with Denso Corporation
(Denso) relating to engine control technology. This
matter, including the lawsuit that had been filed by Denso, has
now been resolved through entry of a patent cross license
agreement. Patent license negotiations are ongoing with Denso in
connection with variable valve timing technology and it is
expected that these negotiations will be concluded on
commercially reasonable terms and in accordance with ordinary
industry practices.
Litigation is subject to many uncertainties, and the outcome of
individual litigated matters is not predictable with assurance.
After discussions with counsel, it is the opinion of Delphi
management that the
24
outcome of such matters will not have a material adverse impact
on the consolidated financial position, results of operations or
cash flows of Delphi.
Under section 362 of the Bankruptcy Code, the filing of a
bankruptcy petition automatically stays most actions against a
debtor, including most actions to collect prepetition
indebtedness or to exercise control over the property of the
debtors estate. Absent an order of the Court,
substantially all prepetition liabilities are subject to
settlement under a plan of reorganization. (Refer to
Note 2, Chapter 11 Bankruptcy, for details on the
chapter 11 cases).
On March 22, 2006, Delphi, GM and the International Union,
United Automobile, Aerospace and Agricultural Implement Workers
of America (UAW) agreed on a special attrition
program (the UAW Special Attrition Program), and on
May 12, 2006, the Court entered the final order approving
the motion with certain modifications. The UAW Special Attrition
Program offers, among other things, certain eligible Delphi
U.S. hourly employees represented by the UAW normal and
early voluntary retirements with a lump sum incentive payment of
$35,000. The cash cost of the lump sum incentive payments is
being borne by GM. The program also provides a pre-retirement
program which provides employees with at least 27 and less than
30 years of credited service the ability to cease working
and to receive monthly payments until they accrue 30 years
of credited service at which time they would be eligible to
retire without additional incentives. In addition, employees who
elect to participate in the UAW Special Attrition Program are
eligible to retire as employees of Delphi or flowback to GM and
retire. Approximately 14,500 U.S. hourly employees
represented by the UAW were eligible to participate in the
program and approximately 12,500 employees elected to
participate and to flowback to GM. The application period for
eligible employees to elect an option under the UAW Special
Attrition Program expired on June 30, 2006. On June 9,
2006, Delphi, GM, and the UAW subsequently agreed on a
supplemental agreement (the UAW Supplemental
Agreement) that will expand the UAW Special Attrition
Program to include a pre-retirement program for employees with
26 years of credited service and provide buyout payments
which, depending on the amount of seniority or credited service,
would range from $40,000 to $140,000. GM has agreed to bear the
cash cost of one-half of these buyout payments. The UAW
Supplemental Agreement was approved by the Court on
June 29, 2006. The application period for eligible
employees to elect an option under the UAW Supplemental
Agreement ends September 15, 2006. (Collectively the UAW
Special Attrition Program and UAW Supplemental Agreement are
referred to herein as the UAW Attrition Programs).
On June 16, 2006, Delphi, GM and the Industrial Division of
the Communication Workers of America, AFL-CIO, CLC
(IUE-CWA) reached agreement on the terms of a
special attrition program which mirrors in all material respects
the UAW Attrition Programs. The cash cost of the lump sum
incentive payments of $35,000 per eligible employee and
one-half of the buyout payments is being borne by GM, except for
employees at Delphis New Brunswick operations, with
respect to whom previously agreed upon terms apply. The IUE-CWA
special attrition program (the IUE-CWA Special Attrition
Program) was approved by the Court on June 29, 2006,
and on July 7, 2006, the Court entered the order approving
the motion. Approximately 7,500 U.S. hourly employees
represented by the IUE-CWA are eligible for buyout payments,
with approximately 3,200 of those employees eligible to
participate in the retirement and pre-retirement programs. As of
June 30, 2006, approximately 385 employees had elected to
participate. The application period for eligible employees to
elect an option under the IUE-CWA Special Attrition Program
ended August 9, 2006.
Refer to Note 8, U.S. Employee Special Attrition
Program and Pension and Other Postretirement Benefits, of the
Quarterly Report on
Form 10-Q
for the period ended June 30, 2006, filed concurrently with
this report, for further description of the impact of the above
mentioned U.S. employee special attrition program.
As previously reported, Delphis 2005 sale of its global
battery product line, with the exception of two
U.S. operations, to Johnson Controls Inc. (JCI)
contemplated a future possible transfer of operating assets of
one of the two remaining U.S. plants supplying batteries to
JCI under a contract manufacturing supply agreement. On
May 26, 2006, Delphi and JCI executed an agreement
providing for the (a) sale to JCI of certain assets of
Delphis battery manufacturing facility in New Brunswick,
New Jersey (the New Brunswick
25
Facility) free and clear of liens, claims, and
encumbrances in exchange for JCIs payment to Delphi of $1
plus the value of certain inventory estimated at approximately
$4 million, (b) the continuation and transition of
supply of battery products to JCI from Delphis battery
manufacturing facility in Fitzgerald, Georgia pursuant to the
manufacturing supply agreement entered into in connection with
the initial sale in 2005 and (c) implementation of an
attrition plan with respect to the hourly employees of the New
Brunswick Facility (collectively, the Transaction).
On the same date, Delphi also entered into an agreement with the
IUE-CWA and its Local 416 in connection with the attrition plan
contemplated by the Transaction. Upon consummation of the
Transaction, JCI has agreed to pay Delphi approximately
$13 million to reimburse Delphi for a significant portion
of the amounts to be spent under the attrition plan with the
IUE-CWA and Local 416 of the IUE-CWA. In addition, pursuant to a
separate 2005 prepetition agreement entered into between Delphi
and GM, which was executed in connection with the sale of
Delphis global battery business, GM has committed to
provide funding in furtherance of this matter. On June 19,
2006 the Court approved the Transaction, which is expected to
close in the third quarter of 2006. On August 1, 2006, the
Transaction with JCI was completed with approximately
$13 million received for the severance, $4 million for
inventory, and $1 for the business. On August 8, 2006,
Delphi received approximately $6 million and
$4 million related to the sale of the New Brunswick
Facility and price reductions over the next two years,
respectively, as agreed upon in the 2005 prepetition agreement
between Delphi and GM, which was executed in connection with the
sale of Delphis global battery business.
On July 21, 2006, the Court entered a final order (the
Supplemental AIP Order) granting the Debtors
motion to continue the AIP for the six-month period running from
July 1, 2006 through December 31, 2006 (the
Second Performance Period), under substantially the
same terms and conditions outlined in the AIP Order, with new
corporate and divisional targets based on the Debtors
forecasted financial results for the Second Performance Period.
In addition, the Supplemental AIP Order provides for certain
adjustments, to be reasonably determined by the Official
Committee of Unsecured Creditors, to Delphis corporate
targets based upon actual transformation costs in determining
whether Delphi has achieved its corporate financial targets for
the Second Performance Period. The AIP authorized by the
Supplemental AIP Order would pay approximately $20 million
for the achievement of target levels of performance for the
Second Performance Period.
26
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ITEM 2.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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The following managements discussion and analysis of
financial condition and results of operations
(MD&A) should be read in conjunction with the
MD&A included in our Annual Report on
Form 10-K
for the year ended December 31, 2005.
Executive
Summary of Business
Delphi Corporation (referred to as Delphi, the
Company, we, or our) is a
global supplier of vehicle electronics, transportation
components, integrated systems and modules and other electronic
technology. In addition, our technologies are present in
communication, computer, consumer electronic, energy and medical
applications. We operate in extremely competitive markets. Our
customers select us based upon numerous factors, including
technology, quality and price. Our efforts to generate new
business do not immediately affect our financial results,
because supplier selection in the auto industry is generally
finalized several years prior to the start of production of the
vehicle. As a result, business that we win in 2006 will
generally not impact our financial results until 2008 or beyond.
In light of continued deterioration in performance, we
determined that it was necessary to address and resolve our
U.S. legacy liabilities, product portfolio, operational
issues and forward looking revenue requirements. As a result, we
intensified our efforts during 2005 to engage our unions, as
well as GM, in discussions seeking consensual modifications that
would permit us to align our U.S. operations to our
strategic portfolio and be competitive with our U.S. peers,
and to obtain financial support from GM to implement our
restructuring plan. Despite significant efforts to reach a
resolution, we determined that these discussions were not likely
to lead to the implementation of a plan sufficient to address
our issues on a timely basis and that we needed to pursue other
alternatives to preserve value for its stakeholders.
Accordingly, in order to transform and preserve the value of the
Company, which requires resolution of existing legacy issues and
the resulting high cost of U.S. operations, on
October 8, 2005, Delphi and certain of its
U.S. subsidiaries filed voluntary petitions for
reorganization relief under chapter 11 of the Bankruptcy
Code, and on October 14, 2005, three additional
U.S. subsidiaries of Delphi filed voluntary petitions for
reorganization relief under chapter 11 of the Bankruptcy
Code. The Court is jointly administering these cases as In
re Delphi Corporation, et al., Case
No. 05-44481
(RDD). We will continue to operate our business as
debtors-in-possession
under the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the
Court. Delphis
non-U.S. subsidiaries
were not included in the filings, will continue their business
operations without supervision from the U.S. courts and
will not be subject to the requirements of the Bankruptcy Code.
On March 31, 2006, we announced our transformation plan
centered around five key elements:
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Obtain, through negotiations with its U.S. labor unions and
GM, modifications to its collective bargaining agreements to
transform to a competitive U.S. labor cost structure;
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Conclude negotiations with GM to finalize its financial support
for the legacy and labor costs we currently carry and to
ascertain its business commitment to Delphi going forward;
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Streamline our product portfolio and focus on those core
technologies for which we believe we have significant
competitive and technological advantages and make the necessary
manufacturing alignment;
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Transform our salaried workforce to ensure that our
organizational and cost structure is competitive and aligned
with our product portfolio and manufacturing footprint; and
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Devise a workable solution to our current pension situation,
whether by extending pension payments or otherwise.
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On the same date, we initiated a dual track process
to obtain authority to reject its collective bargaining
agreements and certain unprofitable contracts with GM, while at
the same time continuing discussions with its labor unions and
GM. Specifically, on March 31, 2006, the Debtors filed a
motion with the Court under
27
sections 1113 and 1114 of the Bankruptcy Code seeking
authority to reject U.S. labor agreements and to modify
retiree benefits. A hearing on the section 1113 and 1114
motion commenced in May 2006, continued into June, and has been
adjourned until August 17, 2006. Representatives of certain
of the unions whose labor agreements are subject to the motion,
including the UAW and IUE-CWA, have indicated that they received
strike authorization and may call for a strike in the event the
Debtors labor agreements are rejected pursuant to the
Debtors pending motion. Discussions with the Debtors
stakeholders, including the unions and GM are ongoing in hopes
of reaching a consensual resolution, but the parties have not
yet reached comprehensive agreements. While the Debtors believe
that the filing of the 1113 and 1114 motion with the Court was
necessary to protect the Debtors interests, Delphi is
focused on pursuing a consensual resolution with all of the
Debtors stakeholders.
Prior to filing the motion to reject the Debtors
U.S. labor agreements, Delphi, General Motors Corporation
(GM) and the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America
(UAW) into a tripartite agreement establishing a
special attrition program (the UAW Special Attrition
Program), pursuant to which certain eligible Delphi
U.S. hourly employees represented by the UAW were offered
normal and early voluntary retirements with a lump sum incentive
payment. The program also provided a pre-retirement program for
employees with at least 27 and less than 30 years of
credited service. In addition, employees who elect to
participate are eligible to retire as employees of Delphi or
flowback to GM and retire. On May 8, 2006 and May 12,
2006, the Court entered an order and an amended order,
respectively, approving the UAW Special Attrition Program.
Delphi, GM, and the UAW subsequently agreed on a supplemental
agreement (the UAW Supplemental Agreement) that
expands the UAW Special Attrition Program to include a
pre-retirement program for employees with 26 years of
credited service and provide buyouts for UAW-represented hourly
employees. (Collectively the UAW Special Attrition Program and
UAW Supplemental Agreement are referred to herein as the
UAW Attrition Programs). The UAW Attrition Programs
include financial support from GM. On June 16, 2006,
Delphi, GM and the Industrial Division of the Communication
Workers of America, AFL-CIO, CLC (IUE-CWA) reached
agreement on the terms of a special attrition program (the
IUE-CWA Special Attrition Program) which mirrors in
all material respects the UAW Attrition Programs. The UAW
Supplemental Agreement and the IUE-CWA Special Attrition Program
were approved by the Court on June 29, 2006, and on July 7,
2006, the Court entered the order approving the motion.
Wilmington Trust Company, in its capacity as indenture trustee
for certain senior notes and debentures issued by Delphi, has
filed notices of appeal from the Courts orders approving
the UAW Special Attrition Program, UAW Supplemental Agreement,
and the IUE-CWA Special Attrition Program. We continue framework
discussions with other unions to offer, with GM support, similar
attrition programs for their members.
Also on March 31, 2006, the Debtors filed a motion with the
Court seeking authority to reject certain customer contracts
with GM. The initial GM contract rejection motion covers
approximately half of the North American annual purchase volume
revenue from GM. The initial GM contract rejection motion is
scheduled to be heard by the Court no earlier than
August 15, 2006. On March 31, 2006, we also delivered
a letter to GM initiating a process to reset the terms and
conditions of more than 400 commercial agreements that expired
between October 1, 2005 and March 31, 2006. To date,
we have not unilaterally revised the terms and conditions on
which we have been providing interim supply of parts to GM in
connection with the expired contracts or filed additional
contract rejection motions.
As part of the transformation plan, we identified non-core
product lines that do not fit into our future strategic
framework and which it is seeking to sell or wind-down these
product lines. Any sale or wind-down process is being conducted
in consultation with our customers, unions and other
stakeholders to carefully manage the transition of affected
product lines. The disposition of any U.S. operations is
also being accomplished in accordance with the requirements of
the Bankruptcy Code and labor contracts. We also have begun
consultations with the works councils in accordance with
applicable laws regarding any sale or wind-down of its
operations in Europe. Non-core product lines include brake and
chassis systems, catalysts, cockpits and instrument panels, door
modules and latches, ride dynamics, steering and wheel bearings.
We continually evaluate our product portfolio and could retain
these or exit certain other businesses depending on market
forces or cost structure changes. We intend to sell or wind-down
non-core product lines and manufacturing
28
sites by 2008. We have also begun discussions with certain
governmental agencies whose policies could help improve the
competitiveness of plants and product lines regardless of
whether they are being retained or offered for sale.
In addition to addressing our legacy liabilities and improving
the competitiveness of our U.S. operations through
negotiation with our unions and GM and by rationalizing our
portfolio, we have identified other necessary elements of a
comprehensive transformation plan, including reducing our
selling, general and administrative costs, realigning our
salaried benefit programs to bring them in line with more
cost-competitive companies and obtaining relief to amortize
funding obligations to our defined benefit U.S. pension
plans over a longer period of time than would otherwise be
available once we emerge from chapter 11. We have
identified cost saving opportunities along with the planned
portfolio and product rationalizations and plan to reduce our
global salaried workforce by as many as 8,500 employees using
existing salaried separation pay programs. In addition, in order
to retain our existing U.S. defined benefit pension plans
for both hourly and salaried workers, management and the Board
of Directors are considering freezing those plans and adopting
or modifying defined contribution plans to include flexibility
for both direct Company contributions and Company matching
employee contributions. At the same time, salaried health care
plans will be restructured to implement increased employee cost
sharing.
Achievement of our transformation objectives in most instances
requires the support of our key stakeholders, including GM, our
labor unions and our creditors and the approval of the Court.
Upon the conclusion of this process, we expect to emerge from
chapter 11 as a stronger; more financially sound business
with viable U.S. operations that are well-positioned to
advance global enterprise objectives. However, there are a
number of risks and uncertainties inherent in the
chapter 11 process, including those detailed in
Part I, Item 1A. Risk Factors of our Annual Report on
Form 10-K
for the year ended December 31, 2005 filed with the
U.S. Securities and Exchange Commission. In addition, we
cannot assure that potential adverse publicity associated with
the Chapter 11 Filings and the resulting uncertainty
regarding our future prospects will not materially hinder our
ongoing business activities and its ability to operate, fund and
execute its business plan by impairing relations with existing
and potential customers; negatively impacting our ability to
attract, retain and compensate key executives and associates and
to retain employees generally; limiting our ability to obtain
trade credit; and impairing present and future relationships
with vendors and service providers. Although we expect to file a
reorganization plan that provides for emergence from
chapter 11 in early to mid-2007, there can be no assurance
that a reorganization plan will be proposed by the Company in
that timeframe, or confirmed by the Court, or that any such plan
will be consummated.
Overview
of Performance During the First Quarter of 2006
Our first quarter of 2006 net sales were $7.0 billion,
up from $6.9 billion in the first quarter of 2005. Non-GM
revenues were $3.8 billion, or 54% of sales including the
impact of migration during the period of certain product
programs from direct sales to GM to sales to Tier 1
customers, up 8% from the first quarter of 2005. Our first
quarter of 2006 GM sales were $3.2 billion, down 5% from
the first quarter of 2005. We benefited from the steady growth
of our non-GM business and have continued to diversify our
customer base through sales of technology rich products and
systems-based solutions for vehicles and non-auto applications.
The net loss for the first quarter of 2006 was
$363 million, as compared to a net loss of
$403 million in the first quarter of 2005. Despite the
continued growth of our non-GM business, we continue to
experience poor financial performance. Delphi believes that
several significant issues have largely contributed to the
deterioration of Delphis financial performance: (a) a
competitive U.S. vehicle production environment for
domestic original equipment manufacturers resulting in the
reduced number of motor vehicles that GM, our largest customer,
produces annually in the U.S. and related pricing pressures;
(b) increasing commodity prices; (c) U.S. labor
legacy liabilities and noncompetitive wage and benefit levels;
and (d) restrictive collectively bargained labor agreement
provisions which inhibit Delphis responsiveness to market
conditions, including exiting non-strategic, non-profitable
operations.
In light of the current economic climate in the
U.S. automotive industry, Delphi is facing considerable
challenges due to revenue decreases and related pricing
pressures stemming from a substantial reduction in GMs
North American vehicle production in recent years. Although
Delphi has shown growth in its non-GM
29
business, these gains are offset by the decrease of GM sales. GM
accounted for 46% of our net sales for the three months ended
March 31, 2006. Our sales to GM have declined since our
separation from GM, principally due to declining GM production,
the impact of customer driven price reductions and the
elimination of non-profitable businesses, as well as GMs
diversification of its supply base and ongoing changes in our
vehicle content and the product mix purchased. In the first
quarter of 2006, GM North America produced 1.2 million
vehicles, excluding CAMI Automotive Inc., New United Motor
Manufacturing, Inc. and HUMMER brand vehicle production, an
increase of approximately 6.5% from the first quarter of 2005
production levels. Our GM North America content per vehicle for
the first quarter of 2006 was $2,261, compared to $2,467 for the
first quarter of 2005. During the first quarter of 2006, our
content per vehicle was reduced due to exiting select businesses
and the migration of certain product programs from GM sales to
sales to Tier I customers. GM sales for the three months
ended March 31, 2006 decreased by approximately
$182 million, or approximately a 5%
year-over-year
decline. In November, 2005, GM agreed to temporarily defer
implementation of previously agreed to Delphi contractual price
decreases which were to be effective January 1, 2006. Such
agreement had the effect of increasing Delphis first
quarter 2006 sales by approximately $9 million. In April
2006, Delphi and GM were unable to agree on the terms by which
GM would continue to defer such price decreases. Therefore,
beginning April 1, 2006, Delphis net sales reflect
the previously agreed-to contractual price decreases.
During the first quarter of 2006, we continued to be challenged
by commodity cost increases, most notably copper, aluminum,
silver, petroleum-based resin products, steel and steel scrap.
We have been seeking to manage these cost pressures using a
combination of strategies, including working with our suppliers
to mitigate costs, seeking alternative product designs and
material specifications, combining our purchase requirements
with our customers
and/or
suppliers, changing suppliers and other means. Despite our
efforts, surcharges and other cost increases, particularly when
necessary to ensure the continued financial viability of a key
supplier, had the effect of reducing our earnings during the
first quarter of 2006. Steel supply has continued to be
constrained and commodity cost pressures continued to intensify
as our supply contracts expire during 2006. To the extent that
we experience cost increases we will seek to pass these cost
increases on to our customers, but if we are not successful, our
operations in future periods may be adversely affected. To date,
due to existing contractual terms, our success in passing
commodity cost increases on to our customers has been limited.
As contracts with our customers expire, we will seek to
renegotiate terms which recover the actual commodity costs we
are incurring.
Delphis ability to effectively respond to these increasing
challenges is impaired by its U.S. legacy liabilities and
largely fixed labor costs. Specifically, in connection with
Delphis U.S. legacy liabilities and operational
restrictions, the majority of Delphis collective
bargaining agreements provide for wages and benefits that are
well above market, costly pension plans and retiree health care
and other benefits, and burdensome operating restrictions,
constraining Delphis ability to compete effectively with
its U.S. peers. Effective January 1, 1999, in
connection with Delphis May 28, 1999 spin-off from
GM, Delphi assumed the terms and conditions of the collective
bargaining agreements negotiated by its unions and GM, which
resulted in inflexible and uncompetitive costs and liabilities.
Consequently, Delphi believes that the average rates at which it
currently compensates its hourly workers, including employee and
retiree benefits, is nearly three times the average hourly labor
rates paid by its U.S. peer companies. Delphis
U.S. hourly pension and other postretirement benefit
obligations exposed Delphi to approximately $10.7 billion
in unfunded liabilities at December 31, 2005, of which
approximately $2.3 billion was attributable to unfunded
U.S. pension obligations and $8.4 billion was
attributable to U.S. other postretirement benefit
obligations. Prior to the Chapter 11 Filings, Delphi
projected that cash outflows for hourly pension contributions
and other postretirement benefit obligation payments through
2007 would approximate $1.9 billion. Through the
chapter 11 process, Delphi is permitted to defer a
significant portion of these contributions until it emerges from
chapter 11. As such, the projected future cash outflows for
hourly pension contributions and other postretirement benefit
obligation payments through 2007 may be significantly less than
$1.9 billion. If these obligations are not addressed as
part of the chapter 11 process, cash outflows for pension
and other postretirement benefit obligations would continue to
increase as Delphis U.S. workforce continues to age
and the ratio of retirees to active employees increases.
30
Due to declining business conditions and lower GM North America
production volumes over recent years, an increasing proportion
of Delphis U.S. hourly workforce is a fixed cost,
independent of volume and revenue. Under the terms of
Delphis collective bargaining agreements with its
U.S. unions, Delphi is generally not permitted to
permanently lay off idled workers, and as of March 31,
2006, approximately 2,200, or 7% of our U.S. hourly
workforce, were idled and were receiving nearly full pay and
benefits, although performing no work.
Coupled with restrictions on Delphis ability to exit
non-strategic, non-profitable operations, the magnitude of the
cost of carrying idled, non-productive workers in the event of
plant closings or wind-downs effectively prevents Delphi from
addressing under-performing product portfolio businesses and
non-profitable manufacturing operations. Historically, under the
terms of the spin-off from GM, this situation was somewhat
mitigated because Delphis UAW employees are permitted to
return to GMs employ, known as flowback, under certain
conditions. As a result of GMs lower production volumes,
however, the opportunities for Delphis employees to
flowback to GM have been limited and may be further limited in
the future, other than regarding the 5,000 flowbacks to GM under
the special attrition program. For further information, refer to
Item 1. Business Chapter 11, Legacy
Liabilities Key Stakeholders in our Annual Report on
Form 10-K
for the year ended December 31, 2005. This situation places
financial burdens on Delphi of a scope and magnitude that,
unless addressed as part of a comprehensive restructuring
through chapter 11, threatens Delphis long-term
viability.
Results
of Operations
Three
Months Ended March 31, 2006 versus Three Months Ended
March 31, 2005
Net Sales. Net sales by product sector and in
total for the three months ended March 31, 2006 and 2005
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Product Sector
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Dynamics, Propulsion,
Thermal & Interior
|
|
$
|
3,343
|
|
|
$
|
3,212
|
|
Electrical, Electronics &
Safety
|
|
|
3,345
|
|
|
|
3,469
|
|
Automotive Holdings Group
|
|
|
667
|
|
|
|
655
|
|
Other (a)
|
|
|
(382
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,973
|
|
|
$
|
6,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other includes activity not allocated to the product sectors
including the Companys medical systems operations and
eliminations of inter-sector transactions. |
Consolidated net sales for the first quarter of 2006 were
$7.0 billion compared to $6.9 billion for the same
period of 2005. Included in the first quarter of 2005 is
approximately $144 million of net sales related to the
global battery product line that was sold to Johnson Controls
Inc. on July 1, 2005.
Our non-GM sales increased by $293 million, including
approximately $98 million resulting from unfavorable
currency exchange rates primarily due to the strengthening of
the U.S. Dollar versus the Euro. Excluding the effects of
unfavorable currency exchange rates, our non-GM sales increased
approximately $391 million or 11.3%. This non-GM sales
increase was due to increased volume, new business from
diversifying our global customer base, and to a lesser extent
the migration during the period of certain product programs from
sales to GM to sales to Tier I customers, partially offset
by price decreases and the impact of the battery business sale.
As a percent of our net sales for the first quarter of 2006, our
non-GM sales were 54%.
However, offsetting the gains in non-GM net sales was a
$182 million decrease in GM sales. The GM sales decrease
was principally due to continued diversification by GM of its
supplier base resulting in lower Delphi content per vehicle, and
to a lesser extent, price decreases. The GM sales decrease was
partially offset
31
by additional volumes related to GMs buildup of inventory
of certain parts. Based on the annual production schedules for
GMNA, we originally expected this volume to occur later in the
year. The effect of unfavorable currency exchange rates to the
overall decrease in GM sales was negligible. Our total net sales
were also reduced by continued price pressures that resulted in
price reductions of approximately $61 million or 0.9% for
the first quarter of 2006, compared to approximately
$149 million or 2.0% for the first quarter of 2005. The
price pressures were slightly offset in first quarter of 2006 by
$9 million due to GM temporarily deferring implementation
of previously agreed to contractual price decreases.
Gross Margin. Our gross margin increased to
5.9% for the first quarter of 2006 compared to gross margin of
5.3% for the first quarter of 2005. The first quarter of 2006
gross margin compared to the first quarter of 2005 increased in
part because of higher production volumes of approximately 1.3%
and improved operational material and manufacturing efficiencies
resulting from the higher production volumes of approximately
3.2%. These favorable variances are partially offset by an
increased wage and benefit costs of approximately 0.9% of sales
and reductions in selling prices of approximately 0.9% of sales.
Gross margin for the first quarter of 2006 and 2005 was also
negatively impacted by $69 million and $86 million,
respectively, of contractual payments related to temporarily
idled employees. Additionally, gross margin in the first quarter
of 2006 and 2005 was negatively impacted by $46 million and
$34 million, respectively, of costs associated with
employee termination benefits and exit costs primarily outside
the U.S.
Selling, General and Administrative. Selling,
general and administrative (SG&A) expenses were
$376 million, or 5.4% of total net sales for the first
quarter of 2006 compared to $394 million or 5.7% of total
net sales for the first quarter of 2005. The decrease is driven
by reduced spending on information technology, lower structural
costs due to the battery business sale, and to a lesser extent
non-recurring bad debt expense incurred in 2005 related to the
MG Rover bankruptcy.
Depreciation and Amortization. Depreciation
and amortization was $270 million for the first quarter of
2006 compared to $292 million for the first quarter of
2005. The decrease primarily reflects the impact of lower
capital expenditures as well as the effect of the impairment of
certain facilities in 2005 and to a lesser extent the impact of
currency exchange rates.
Operating Results. Our operating loss was
$232 million for the first quarter of 2006 compared to
$324 million for the first quarter of 2005. Operating
results by product sector and in total for the three months
ended March 31, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
Product Sector
|
|
2006
|
|
|
2005
|
|
|
|
(in millions)
|
|
|
Dynamics, Propulsion,
Thermal & Interior
|
|
$
|
(148
|
)
|
|
$
|
(183
|
)
|
Electrical, Electronics &
Safety
|
|
|
121
|
|
|
|
169
|
|
Automotive Holdings Group
|
|
|
(243
|
)
|
|
|
(259
|
)
|
Other (a)
|
|
|
38
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
Total operating loss
|
|
$
|
(232
|
)
|
|
$
|
(324
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Other includes activity not allocated to the product sectors
including the Companys medical systems operations and
eliminations of inter-sector transactions. |
The first quarter of 2006 operating loss compared to the first
quarter of 2005 operating loss decreased in part because of
higher production volumes, improved operational material and
manufacturing efficiencies resulting from the higher production
volumes, as well as lower SG&A and Depreciation and
Amortization expense. These favorable variances were partially
offset by increased wage and benefit costs of approximately 0.9%
of sales and reductions in selling prices of approximately 0.9%
of sales. Operating loss for the first quarter of 2006 and 2005
was also negatively impacted by $69 million and
$86 million, respectively, of contractual payments related
to temporarily idled employees. Additionally, operating loss in
the first quarter of
32
2006 and 2005 was negatively impacted by $46 million and
$34 million, respectively, of costs associated with
employee termination benefits and exit costs primarily outside
the U.S.
Interest Expense. We recorded interest expense
for the first quarter of 2006 of $99 million as compared to
interest expense of $54 million for the first quarter of
2005. The increase in interest expense for the first quarter of
2006 was attributable to higher levels of debt as well as an
increase in our overall financing costs. Approximately
$41 million of contractual interest expense related to debt
subject to compromise, was not recognized in the three months
ended March 31, 2006 in accordance with the provisions of
American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code
(SOP 90-7).
Other Income and Expense. We recorded other
income for the first three months of 2006 of $11 million as
compared to other income of $5 million for the first three
months of 2005. The increase was primarily due to increased
interest income associated with additional cash and cash
equivalents on hand.
Reorganization Items. We recorded bankruptcy
related reorganization expense for the first quarter of 2006 of
$13 million. In the first quarter of 2006, Delphi incurred
$31 million of professional fees directly related to the
reorganization. These costs were partially offset by interest
income of $16 million from accumulated cash from the
reorganization, and $2 million of a gain on settlement of
prepetition liabilities.
Taxes. We recorded an income tax expense in
the first quarter of 2006 of $40 million as compared to an
income tax expense for the first quarter of 2005 of
$37 million. During the first quarter of 2006 and 2005, we
recorded taxes at amounts approximating the projected annual
effective tax rate applied to earnings of certain
non-U.S. operations.
We do not recognize an income tax benefit on losses in our U.S.
and certain other
non-U.S. operations
as, due to a history of operating losses, it is unlikely that a
tax benefit will be realized.
Liquidity
and Capital Resources
Overview
of Capital Structure
As more fully described below, as of and since
September 30, 2005 (our consolidated leverage ratio testing
period), we were not in compliance with certain covenants under
our prepetition credit facilities. As previously discussed,
Delphi and certain of its U.S. subsidiaries filed voluntary
petitions for reorganization relief under chapter 11 of the
Bankruptcy Code, which triggered defaults on substantially all
other debt obligations of the Debtors. However, under
section 362 of the Bankruptcy Code, the filing of a
bankruptcy petition automatically stays most actions against a
debtor, including most actions to collect prepetition
indebtedness or to exercise control over the property of the
debtors estate. Absent an order of the Court,
substantially all prepetition liabilities are subject to
settlement under a plan of reorganization.
At hearings held in October 2005, the Court approved certain of
the Debtors first day motions, including
interim approval to use up to $950 million of Delphis
$2 billion senior secured DIP financing, and approval of an
adequate protection package for Delphis outstanding
$2.5 billion prepetition secured indebtedness under the
prepetition credit facilities.
On October 14, 2005, Delphi entered into a Revolving
Credit, Term Loan and Guaranty Agreement (the DIP Credit
Facility), as amended by the First Amendment to the DIP
Credit Facility, dated October 27, 2005, as further amended
and restated by the Amended and Restated Revolving Credit, Term
Loan and Guaranty Agreement, dated November 21, 2005 and as
further amended by the First Amendment to Amended and Restated
Credit Agreement and Amended and Restated Security and Pledge
Agreement dated as of February 3, 2006, the Second
Amendment to Amended and Restated Credit Agreement dated as of
April 13, 2006, the Third Amendment to Amended and Restated
Credit Agreement dated May 26, 2006, the Fourth Amendment
to Amended and Restated Credit Agreement dated June 19,
2006, and the Fifth Amendment to Amended and Restated Credit
Agreement dated August 10, 2006 (the Amended DIP
Credit Facility), to borrow up to $2.0 billion from a
syndicate of lenders arranged by J.P. Morgan Securities
Inc. and Citigroup Global Markets, Inc., for which JPMorgan
Chase Bank, N.A. is the administrative agent (the
Administrative Agent) and Citicorp USA, Inc., is
syndication agent (together with the Administrative Agent, the
Agents). The Amended DIP Credit Facility consists of
a $1.75 billion revolving facility and a $250 million
term loan
33
facility (collectively, the Amended DIP Loans). The
Amended DIP Credit Facility carries an interest rate at the
option of Delphi of either (i) the Administrative
Agents Alternate Base Rate (as defined in the Amended DIP
Credit Facility) plus 1.75% or (ii) 2.75% above the
Eurodollar base rate, which is the London Interbank Borrowing
Rate (LIBOR). The LIBOR interest rate period can be
set at a one, three or six-month period as selected by Delphi in
accordance with the terms of the Amended DIP Credit Facility.
Accordingly, the interest rate will fluctuate based on the
movement of the Alternate Base Rate or LIBOR through the term of
the Amended DIP Loans. The Amended DIP Credit Facility will
expire on the earlier of October 8, 2007 or the date of the
substantial consummation of a reorganization plan that is
confirmed pursuant to an order of the Court. Borrowings under
the Amended DIP Credit Facility are prepayable at Delphis
option without premium or penalty.
The Amended DIP Credit Facility provides the lenders with a
first lien on substantially all material tangible and intangible
assets of Delphi and its wholly-owned domestic subsidiaries
(however, Delphi is only pledging 65% of the stock of its first
tier foreign subsidiaries to the extent that, in its reasonable
business judgment, adverse tax consequences would result from
the pledge of a greater percentage) and further provides that
amounts borrowed under the Amended DIP Credit Facility will be
guaranteed by substantially all of Delphis affiliated
Debtors, each as debtor and
debtor-in-possession.
The amount outstanding at any one time is limited by a borrowing
base computation as described in the Amended DIP Credit
Facility. The borrowing base computation exceeded the Amended
DIP Credit Facility availability at March 31, 2006.
Borrowing base standards may be fixed and revised from time to
time by the Administrative Agent in its reasonable discretion.
The Amended DIP Credit Facility includes affirmative, negative
and financial covenants that impose restrictions on
Delphis financial and business operations, including
Delphis ability to, among other things, incur or secure
other debt, make investments, sell assets and pay dividends or
repurchase stock. Additionally, the Amended DIP Credit Facility
includes negative covenants that prohibit the payment of
dividends by the Company. So long as the Facility Availability
Amount (as defined in the Amended DIP Credit Facility) is equal
or greater than $500 million, compliance with the
restrictions on investments, mergers and disposition of assets
do not apply (except in respect of investments in, and
dispositions to, direct or indirect domestic subsidiaries of
Delphi that are not guarantors to the Amended DIP Credit
Facility).
The covenants require Delphi to, among other things,
(i) maintain a monthly cumulative minimum Global EBITDAR
for each period beginning on January 1, 2006 and ending on
the last day of each fiscal month through November 30,
2006, as described in the Amended DIP Credit Facility, and
(ii) maintain a rolling
12-month
cumulative Global EBITDAR for Delphi and its direct and indirect
subsidiaries, on a consolidated basis, beginning on
December 31, 2006 and ending on October 31, 2007 at
the levels set forth in the Amended DIP Credit Facility. The
Amended DIP Credit Facility contains certain defaults and events
of default customary for
debtor-in-possession
financings of this type. Upon the occurrence and during the
continuance of any default in payment of principal, interest or
other amounts due under the Amended DIP Credit Facility,
interest on all outstanding amounts is payable on demand at 2%
above the then applicable rate. We were in compliance with the
Amended DIP Credit Facility covenants as of March 31, 2006.
On October 28, 2005, the Court granted the Debtors
motion for approval of the DIP financing order. The DIP
financing order granted final approval of the DIP Credit
Facility, as amended at the time, final approval of an adequate
protection package for the prepetition credit facilities (as
described below) and the Debtors access to $2 billion
in DIP financing subject to the terms and conditions set forth
in the DIP financing documents, as amended. The adequate
protection package for the prepetition credit facilities
includes, among other things: (i) an agreement by Delphi to
pay accrued interest on the loans under the prepetition credit
facilities on a monthly basis, (ii) the right of Delphi to
pay this interest based on LIBOR, although any lender may
require that interest on its loans be based on the alternative
base rate if such lender waives all claims for interest at the
default rate and any prepayment penalties that may arise under
the prepetition credit facilities and (iii) an agreement by
Delphi to replace approximately $90 million of letters of
credit outstanding under the prepetition credit facilities with
letters of credit to be issued under the Amended DIP Credit
Facility. Refer to Prepetition Credit Facilities, described
below, for additional information on these prepetition credit
facilities.
34
On November 21, 2005, the $250 million term loan was
funded and the Company elected to pay interest at LIBOR plus
2.75% for a six month period. As of March 31, 2006, there
were no amounts outstanding under the DIP revolving facility.
However, the Company had approximately $42 million in
letters of credit outstanding against the DIP revolving
facility. The foregoing description of the Amended DIP Credit
Facility is a general description only and is qualified in its
entirety by reference to the Amended DIP Credit Facility, a copy
of which was previously filed with the SEC.
The Chapter 11 Filings also triggered early termination
events under the European accounts receivables securitization
program. On October 28, 2005, Delphi and the institutions
sponsoring the European program entered into a preliminary
agreement which was then finalized on November 18, 2005
permitting continued use of the European program despite the
occurrence of early termination events but with revised
financial covenants and pricing. The early termination events
included Delphis failure to satisfy the consolidated
leverage ratio at September 30, 2005 and defaults related
to its voluntary filing for reorganization relief under
chapter 11 of the Bankruptcy Code. The program has an
availability of 145 million ($176 million
at March 31, 2006 currency exchange rates) and
£10 million ($17 million at March 31, 2006
currency exchange rates) until expiration on March 31,
2006. On February 20, 2006, the European program was
amended, extending the expiration date to December 31, 2006
with substantially the same terms and conditions. As of
March 31, 2006, outstanding borrowings under this program
were approximately $105 million.
Additionally, although neither Delphi Trust I nor Delphi
Trust II (collectively, the Trusts, and each a
wholly-owned subsidiary of Delphi which has issued trust
preferred securities and whose sole assets consist of junior
subordinated notes issued by Delphi), sought relief under
chapter 11 of the United States Bankruptcy Code, the Trusts
may be dissolved in accordance with the provisions of their
respective trust declarations, which in each case provide that
Delphis filing of chapter 11 constitutes an
early termination event. The property trustee of
each trust is in the process of liquidating each Trusts
assets in accordance with the terms of the applicable trust
declarations and it is expected that the holders of the trust
preferred securities will receive in exchange for their
securities a pro rata share of the Trusts respective junior
subordinated notes issued by Delphi.
As of March 31, 2006, substantially all of our unsecured
prepetition long-term debt was in default and is subject to
compromise. Of our $5.9 billion of outstanding debt at
March 31, 2006, $2.5 billion was included in
liabilities subject to compromise, including approximately
$2.0 billion of senior unsecured debt with maturities
ranging from 2006 to 2029, approximately $0.4 billion of
junior subordinated notes due to Delphi Trust I and II due
2033, and $0.1 billion of other debt. As of March 31,
2006, we had approximately $3.1 billion of short-term and
other debt not subject to compromise, including
$1.5 billion drawn down from our Revolving Credit Facility,
$1.0 billion of term loan secured debt due 2011,
$0.4 billion related to accounts receivable factoring,
$0.1 billion related to European securitization and
$0.1 billion of other debt. In addition, as of
March 31, 2006, we had $0.3 billion of long-term debt
not subject to compromise, primarily the DIP term loan.
Historically, we have used the cash we generate from operating
activities before considering amounts contributed to pensions,
to strengthen our balance sheet by reducing legacy liabilities
such as pensions, restructuring our operations, generating
growth and paying dividends. Our net cash used in operating
activities totaled $93 million for the three months ended
March 31, 2006, as compared to net cash provided by
operating activities of $529 million for the three months
ended March 31, 2005. Absent a comprehensive restructuring
to address our existing U.S. legacy liabilities and our
resulting high cost structure in the U.S. in a manner which
allows us to flex our manufacturing operations and to scale our
workforce to current economic conditions, we expect that our
operating activities will use, not generate, cash. Prior to the
Chapter 11 Filings we faced ERISA pension funding minimums
of $1.2 billion in 2006. As permitted under
chapter 11, however, Delphi expects to contribute only the
portion of the contribution attributable to
post-bankruptcy-petition service. Delphi expects to contribute
approximately $0.2 billion to its U.S. pension plans
in 2006. Based upon current overall macroeconomic conditions, we
also will likely face additional ERISA minimums in 2007.
Accordingly, as part of the chapter 11 process we are
seeking to not only transform our operations but also to emerge
with a sustainable capital structure for our transformed
business. The unpaid portion of the minimum funding payments
remains payable as a claim against Delphi and will be determined
in Delphis plan of reorganization
35
with other claims. Delphi has appointed an independent fiduciary
for all of its tax qualified defined benefit pension plans who
is charged with pursuing claims on behalf of the plans to
recover minimum funding contributions.
Prepetition
Indebtedness
The following should be read in conjunction with Note 13,
Debt, of the consolidated financial statements in our Annual
Report on
Form 10-K
for the year ended December 31, 2005.
Bonds and Trust Preferred
Securities. Delphi had approximately
$2.0 billion of unsecured debt at March 31, 2006.
Pursuant to the requirements of
SOP 90-7,
as of the Chapter 11 Filings, deferred financing fees of
$16 million related to prepetition debt are no longer being
amortized and have been included as an adjustment to the net
carrying value of the related prepetition debt at March 31,
2006. The carrying value of the prepetition debt will be
adjusted once it has become an allowed claim by the Court to the
extent the carrying value differs from the amount of the allowed
claim. The net carrying value of our unsecured debt includes
$500 million of securities bearing interest at 6.55% that
matured on June 15, 2006, $498 million of securities
bearing interest at 6.50% and maturing on May 1, 2009,
$493 million of securities bearing interest at 6.50% and
maturing on August 15, 2013 and $493 million of
securities bearing interest at 7.125% and maturing on
May 1, 2029.
We also have trust preferred securities that were issued by our
wholly-owned subsidiaries, Delphi Trust I and Delphi
Trust II. Delphi Trust I (Trust I)
issued 10,000,000 shares of
81/4%
Cumulative Trust Preferred Securities, with a liquidation
amount of $25 per trust preferred security and an aggregate
liquidation preference amount of $250 million. These
securities were listed on the New York Stock Exchange under the
symbol DPHprA and are now trading on the Pink Sheets, a
quotation source for
over-the-counter
securities. The sole assets of Trust I are
$257 million of aggregate principal amount of Delphi junior
subordinated notes due 2033. Trust I will pay cumulative
cash distributions at an annual rate equal to
81/4%
of the liquidation amount on the preferred securities. Delphi
Trust II (Trust II) issued
150,000 shares of Adjustable Rate Trust Preferred
Securities with a five-year initial rate of 6.197%, a
liquidation amount of $1,000 per trust preferred security
and an aggregate liquidation preference amount of
$150 million. The sole assets of Trust II are
$155 million aggregate principal amount of Delphi junior
subordinated notes due 2033. Trust II pays cumulative cash
distributions at an annual rate equal to 6.197% of the
liquidation amount during the initial fixed rate period (which
is through November 15, 2008) on the preferred
securities.
Our filing for chapter 11 was an event of default under
each Trusts respective trust declarations, and as
described in the Overview of Capital Structure above, was an
early termination event. The property trustee of
each Trust is in the process of liquidating each Trusts
assets and it is expected that the holders of the trust
preferred securities will receive in exchange for their
securities a pro rata share of the Trusts respective junior
subordinated notes issued by Delphi.
Prepetition Credit Facilities. On
June 14, 2005, Delphi reached agreement with its syndicate
of lenders to amend certain terms of its existing
$1.5 billion five-year revolving credit facility (the
Revolving Credit Facility). The amendment increased
the available credit under Delphis Revolving Credit
Facility to $1.8 billion and added a $1.0 billion
six-year term loan (the Term Loan, and together with
the Revolving Credit Facility, the Facilities). The
Revolving Credit Facility will expire June 18, 2009 and the
Term Loan will expire June 14, 2011. Upon the effectiveness
of the new Facilities, Delphi terminated its
364-day
revolving credit facility in the amount of $1.5 billion.
As a result of the foregoing refinancing, Delphi replaced its
previous $3.0 billion revolving credit facilities with
$2.8 billion of available credit, the Term Loan portion of
which has been fully funded. Prior to the amendment, there were
no amounts outstanding under the $1.5 billion five-year
revolving credit facility or the $1.5 billion
364-day
revolving credit facility, nor had these revolving credit
facilities been previously borrowed upon. On August 3,
2005, we drew down $1.5 billion from our Revolving Credit
Facility. As of March 31, 2006, $1.6 billion was
utilized under the Revolving Credit Facility, including
approximately $52 million in letters of credit outstanding
against the Facilities.
36
The Term Loan had a 1% per annum amortization for the first
5 years and 9 months. Therefore, in the third quarter
of 2005, we made the first installment payment on the Term Loan.
In addition, we made mandatory payments applying the sale
proceeds of certain asset sales. As of March 31, 2006,
approximately $1.0 billion was outstanding under the Term
Loan.
The amended Facilities contains financial covenants based on
consolidated leverage ratios (the Leverage Ratio
Covenant), which are tested at each quarter-end. We were
not in compliance with the Leverage Ratio Covenant as of and
since September 30, 2005. However, under section 362
of the Bankruptcy Code, the filing of a bankruptcy petition
automatically stays most actions against a debtor, including
most actions to collect prepetition indebtedness or to exercise
control over the property of the debtors estate. Absent an
order of the Court, substantially all prepetition liabilities
are subject to settlement under a plan of reorganization.
The amended Facilities also contain provisions providing for an
event of default in the event that we default on payments due
for indebtedness, the outstanding principal amount of which
exceeds $50 million. Our filing for chapter 11 was an
event of default. At hearings held in October 2005, the Court
approved certain of the Debtors first day
motions, including approval of an adequate protection package
for Delphis outstanding $2.5 billion prepetition
secured indebtedness under the prepetition credit facilities.
The adequate protection package includes, among other things:
(i) an agreement by Delphi to pay accrued interest on the
loans under the prepetition Facilities on a monthly basis,
(ii) the right of Delphi to pay this interest at a rate
equal to LIBOR plus 6.50% per annum on the Term Loan and
5.00% on the Revolving Credit Facility, although any lender may
require that interest on its loans be based at a rate equal to
the alternative base rate plus 5.50% per annum on the Term
Loan and 4.00% on the Revolving Credit Facility if such lender
waives all claims for interest at the default rate and any
prepayment penalties that may arise under the prepetition
Facilities and (iii) an agreement by Delphi to replace
approximately $90 million of letters of credit outstanding
under the prepetition Facilities with letters of credit to be
issued under the DIP Credit Facility.
Other
Financing
We also maintain various accounts receivable factoring
facilities in Europe that are accounted for as short-term debt.
These uncommitted factoring facilities are available through
various financial institutions. As of March 31, 2006, we
had $408 million outstanding under these accounts
receivable factoring facilities.
As of March 31, 2006, we had $115 million of other
debt, primarily consisting of overseas bank facilities, and
$77 million of other debt classified as Liabilities Subject
to Compromise.
Credit
Ratings, Stock Listing
Delphi was rated by Standard & Poors,
Moodys, and Fitch Ratings. Primarily as a result of our
filing for protection under chapter 11 of the Bankruptcy
Code, as of March 31, 2006, Standard &
Poors, Moodys, and Fitch Ratings had withdrawn their
ratings of Delphis senior unsecured debt, preferred stock,
and senior secured debt. Standard & Poors,
Moodys, and Fitch Ratings assigned
point-in-time
ratings of BBB-/B1/BB-, respectively, to the DIP Credit Facility.
On October 11, 2005, the NYSE announced suspension of
trading of Delphis common stock (DPH),
61/2% Notes
due May 1, 2009 (DPH 09), and its
71/8%
debentures due May 1, 2029 (DPH 29), as well as the 8.25%
Cumulative Trust Preferred Securities of Delphi
Trust I (DPH PR A). This action followed the NYSEs
announcement on October 10, 2005, that it was reviewing
Delphis continued listing status in light of Delphis
announcements involving the filing of voluntary petitions for
reorganization relief under chapter 11 of the Bankruptcy
Code. The NYSE subsequently determined to suspend trading based
on the trading price for the common stock, which closed at $0.33
on October 10, 2005 and completed delisting proceedings on
November 11, 2005. Delphis common stock (OTC: DPHIQ)
and preferred shares (OTC: DPHAQ) are being traded as of the
date of filing this Quarterly Report on
Form 10-Q
with the SEC on the Pink Sheets and are no longer subject to the
regulations and controls imposed by the NYSE. Pink Sheets is a
centralized quotation service that collects and publishes market
maker quotes for over the counter (OTC) securities
in real-time. Delphis listing status on the Pink Sheets is
dependent on market makers willingness to provide the
service of accepting trades to buyers and sellers of the stock.
Unlike securities traded on a stock exchange, such as the
37
NYSE, issuers of securities traded on the Pink Sheets do not
have to meet any specific quantitative and qualitative listing
and maintenance standards. As of the date of filing this
Quarterly Report on
Form 10-Q
with the SEC, Delphis
61/2% Notes
due May 1, 2009 (DPHIQ.GB) and
71/8% debentures
due May 1, 2029 (DPHIQ.GC) are also trading over the
counter via the Trade Reporting and Compliance Engine (TRACE), a
NASD-developed reporting vehicle for OTC secondary market
transactions in eligible fixed income securities that provides
debt transaction prices.
Cash
Flows
Operating Activities. Net cash used in
operating activities totaled $93 million for the three
months ended March 31, 2006, compared to net cash provided
by operating activities of $529 million for the three
months ended March 31, 2005. Cash used in operations was
negatively impacted by the timing of cash collections on sales
for the first quarter of 2006. Changes in the levels of
factoring improved cash flow from operating activities for the
first quarter of 2005 by approximately $217 million.
Investing Activities. Net cash used in
investing activities totaled $232 million and
$181 million for the three months ended March 31, 2006
and 2005, respectively. The principal use of cash in the first
quarters of 2006 and 2005 reflected capital expenditures related
to ongoing operations. Other cash flows from investing
activities principally consist of proceeds from the sale of
marketable securities.
Financing Activities. Net cash used in
financing activities totaled $43 million and
$123 million for the three months ended March 31, 2006
and 2005, respectively. Net cash used in financing activities
during the first quarter of 2006 primarily reflected repayments
against cash overdraft and repayments of borrowings under other
debt. Cash used by financing activities during the first quarter
of 2005 reflected repayments of borrowings under credit
facilities and payments of dividends.
Dividends. On September 8, 2005, the
Board of Directors announced the elimination of Delphis
quarterly dividend on Delphi common stock. In addition, the DIP
Credit Facility includes a negative covenant which prohibits the
payment of dividends by the Company.
Shareholder
Lawsuits
The Company, along with Delphi Trust I, Delphi
Trust II, current and former directors of the Company,
certain current and former officers and employees of the Company
or its subsidiaries, and others are named as defendants in
several lawsuits that were filed beginning in March 2005
following the Companys announced intention to restate
certain of its financial statements.
On December 12, 2005, the Judicial Panel on Multidistrict
Litigation entered an order transferring each of the related
federal actions to the United States District Court for the
Eastern District of Michigan for coordinated or consolidated
pretrial proceedings (the Multidistrict Litigation).
The lawsuits transferred fall into three categories. One group
of putative class action lawsuits, which are purportedly brought
on behalf of participants in certain of the Companys and
its subsidiaries defined contribution employee benefit
pension plans that invested in Delphi common stock, is brought
under the Employee Retirement Income Security Act of 1974, as
amended (the ERISA Actions). Plaintiffs in the ERISA
Actions allege, among other things, that the plans suffered
losses as a result of alleged breaches of fiduciary duties under
ERISA. On October 21, 2005, the ERISA Actions were
consolidated before one judge in the United States District
Court for the Eastern District of Michigan. The ERISA Actions
were subsequently transferred to the Multidistrict Litigation.
On March 3, 2006, plaintiffs filed a consolidated class
action complaint (the Amended ERISA Action) with a
putative class period of May 28, 1999 to November 1,
2005. The Company, which was previously named as a defendant in
the ERISA Actions, was not named as a defendant in the Amended
ERISA Action. The plaintiffs are not currently asserting claims
against or seeking relief from the Company in the Amended ERISA
Action due to the Companys bankruptcy filing, but have
stated that they plan to proceed with claims against the Company
in the ongoing bankruptcy cases, and will seek to name the
Company as a defendant in the Amended ERISA Action if the
bankruptcy stay is modified or lifted to permit such action. The
defendants have filed a motion to dismiss the Amended ERISA
Action.
38
A second group of putative class action lawsuits variously
alleges, among other things, that the Company and certain of its
current and former directors and officers and others made
materially false and misleading statements in violation of
federal securities laws. On September 23, 2005, these
securities actions were consolidated before one judge in the
United States District Court for the Southern District of New
York. On September 30, 2005, the Court-appointed lead
plaintiffs filed a consolidated class action complaint (the
Amended Securities Action) on behalf of a putative
class consisting of all persons and entities who purchased or
otherwise acquired publicly-traded securities of the Company,
including securities issued by Delphi Trust I and Delphi
Trust II, during a putative class period of March 7,
2000 through March 3, 2005. The Amended Securities Action
names several new defendants, including Delphi Trust II,
certain former directors, and underwriters and other third
parties, and includes securities claims regarding additional
offerings of Delphi securities. The securities actions
consolidated in the Southern District of New York (and a related
securities action filed in the United States District Court for
the Southern District of Florida concerning Delphi
Trust I) were subsequently transferred to the Eastern
District of Michigan as part of the Multidistrict Litigation.
The action is stayed against the Company pursuant to the
Bankruptcy Code, but is continuing against the other defendants.
The third group of lawsuits is comprised of shareholder
derivative actions against certain current and former directors
and officers of the Company (Shareholder Derivative
Actions). In October 2005, following the filing by the
Company of its petition for reorganization relief under
chapter 11 of the U.S. Bankruptcy Code, three of the
four shareholder derivative actions were closed administratively
without prejudice. (Two of the three lawsuits that were closed
were pending in the Circuit Court of Oakland County, Michigan,
and the other was pending in the United States District Court
for the Eastern District of Michigan.) The plaintiff in the
remaining shareholder derivative action has agreed to adjourn
defendants time to respond without date. The two federal
derivative actions were transferred to the Multidistrict
Litigation.
In addition, the Company received a demand from a shareholder
that the Company consider bringing a derivative action against
certain current and former directors and officers. The
Shareholder Derivative Actions and the shareholder demand are
premised on allegations that certain current and former
directors and officers of the Company made materially false and
misleading statements in violation of federal securities laws
and/or of
their fiduciary duties. The Company has appointed a committee of
the Board of Directors to consider the shareholder demand. That
committee of the Board of Directors is still investigating the
matter.
Due to the preliminary nature of these lawsuits, the Company is
not able to predict with certainty the outcome of this
litigation or the Companys potential exposure related
thereto. In addition, because any recovery on allowed
prepetition claims is subject to a confirmed plan of
reorganization, the ultimate distribution with respect to
allowed claims is not presently ascertainable. While Delphi
maintains directors and officers insurance subject to a
$10 million deductible, and has recorded a reserve in the
amount of the deductible, the Company cannot assure the extent
of coverage or that the impact of any loss not covered by
insurance or applicable reserves would not be material.
Under section 362 of the U.S. Bankruptcy Code, the
filing of a bankruptcy petition automatically stays most actions
against a debtor, including most actions to collect prepetition
indebtedness or to exercise control over the property of the
debtors estate. Absent an order of the Court,
substantially all prepetition liabilities of the debtor are
subject to settlement under a plan of reorganization.
Regulatory
Actions and Other Matters
As previously disclosed, Delphi is the subject of an ongoing
investigation by the SEC and the Department of Justice involving
Delphis accounting for and the adequacy of disclosures for
a number of transactions dating from Delphis spin-off from
GM. Delphi is fully cooperating with the governments
investigations. The Company entered into an agreement with the
SEC to suspend the running of the applicable statute of
limitations until April 6, 2006 and subsequently agreed to
extend the suspension until October 31, 2006. The
governments investigations were not suspended as a result
of Delphis filing for chapter 11. Until these
investigations are complete, Delphi is not able to predict the
effect, if any, that these investigations will have on
Delphis business and financial condition, results of
operations and cash flows.
39
The Company also believes that the Enforcement Division of the
SEC has taken a more proactive role, what the SEC refers to as a
risk based approach, by seeking information from
issuers in an effort to assess issuers accounting or
disclosure practices before identifying specific wrong-doing.
Delphi believes that the previously disclosed inquiry it
received during the fourth quarter of 2004 regarding accounting
practices related to defined benefit pension plans and other
postemployment benefit plans is an example of this practice.
Delphi continues to cooperate fully with the SECs informal
inquiry in this matter.
Environmental
Matters
Delphi is subject to the requirements of U.S. federal,
state, local and
non-U.S. environmental
and occupational safety and health laws and regulations. These
include laws regulating air emissions, water discharge and waste
management. We have an environmental management structure
designed to facilitate and support our compliance with these
requirements globally. Although it is our intent to comply with
all such requirements and regulations, we cannot provide
assurance that we are at all times in compliance. We have made
and will continue to make capital and other expenditures to
comply with environmental requirements, although such
expenditures were not material during the past three years.
Environmental requirements are complex, change frequently and
have tended to become more stringent over time. Accordingly, we
cannot assure that environmental requirements will not change or
become more stringent over time or that our eventual
environmental cleanup costs and liabilities will not be material.
Delphi received notices that it is a potentially responsible
party (PRP) in proceedings at various sites,
including the Tremont City Landfill Site located in Tremont,
Ohio which is alleged to involve ground water contamination. In
September 2002, Delphi and other PRPs entered into a Consent
Order with the Environmental Protection Agency (EPA)
to perform a Remedial Investigation and Feasibility Study
concerning a portion of the site, which is expected to be
completed during 2006. Based on findings to date, we believe
that a reasonably possible outcome of the investigative study is
capping and future monitoring of this site, which would
substantially limit future remediation costs. We have included
an estimate of our share of the potential costs plus the cost to
complete the investigation in our overall reserve estimate.
Because the scope of the investigation and the extent of the
required remediation are still being determined, it is possible
that the final resolution of this matter may require that we
make material future expenditures for remediation, possibly over
an extended period of time and possibly in excess of our
existing reserves. We will continue to re-assess any potential
remediation costs and, as appropriate, our overall environmental
reserves as the investigation proceeds. Delphis
environmental accruals were approximately $52 million and
$51 million as of March 31, 2006 and December 31,
2005, respectively.
It is expected that Delphis restructuring activities will
include the sale
and/or
closure of numerous facilities around the world. In the course
of this process, environmental investigations will be performed
that may identify previously unknown environmental conditions,
triggering additional and possibly material environmental
remediation costs.
Inflation
Inflation generally affects Delphi by increasing the cost of
labor, equipment and raw materials. We believe that, because
rates of inflation in countries where we have significant
operations have been moderate during the periods presented,
inflation has not had a significant impact on our results of
operations, other than increased commodity costs as disclosed in
the Executive Summary in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Recently
Issued Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation (FIN)
48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109.
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an entitys financial statements in
accordance with FASB Statement No. 109, Accounting
for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement
disclosure of tax positions taken or expected to
40
be taken in a tax return. The evaluation of a tax position is a
two-step process. The first step requires an entity to determine
whether it is more likely than not that a tax position will be
sustained upon examination based on the technical merits of the
position. The second step requires an entity to recognize in the
financial statements each tax position that meets the more
likely than not criteria, measured at the largest amount of
benefit that has a greater than fifty percent likelihood of
being realized. FIN 48 also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for fiscal years beginning after
December 15, 2006. The impact of initially applying
FIN 48 will be recognized as a cumulative effect adjustment
to the opening balance of retained earnings. Delphi is currently
evaluating the requirements of FIN 48, and has not yet
determined the impact on its consolidated financial statements.
Significant
Accounting Policies and Critical Accounting Estimates
Certain of our accounting policies require the application of
significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their
nature, these judgments are subject to an inherent degree of
uncertainty. These judgments are based on our historical
experience, terms of existing contracts, our evaluation of
trends in the industry, information provided by our customers
and information available from other outside sources, as
appropriate. For a discussion of our significant accounting
policies and critical accounting estimates, see Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations Significant Accounting
Policies and Critical Accounting Estimates, and Note 1,
Significant Accounting Policies, to the consolidated financial
statements included in our Annual Report on
Form 10-K
for the year ended December 31, 2005.
We adopted SFAS No. 123 (Revised 2004),
Share-Based Payments
(SFAS No. 123(R)), effective
January 1, 2006 using the modified-prospective method. For
discussion of the impact of adoption of
SFAS No. 123(R), see Note 3, Share-Based
Compensation included in this Quarterly Report on
Form 10-Q.
There have been no other significant changes in our significant
accounting policies or critical accounting estimates during the
first three months ended March 31, 2006.
Forward-Looking
Statements
This Quarterly Report on
Form 10-Q,
including the exhibits being filed as part of this report, as
well as other statements made by Delphi may contain
forward-looking statements within the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995, that reflect, when made, the Companys current views
with respect to current events and financial performance. Such
forward-looking statements are and will be, as the case may be,
subject to many risks, uncertainties and factors relating to the
Companys operations and business environment which may
cause the actual results of the Company to be materially
different from any future results, express or implied, by such
forward-looking statements. Factors that could cause actual
results to differ materially from these forward-looking
statements include, but are not limited to, the following: the
ability of the Company to continue as a going concern; the
ability of the Company to operate pursuant to the terms of the
debtor-in-possession
facility; the Companys ability to obtain Court approval
with respect to motions in the chapter 11 cases prosecuted
by it from time to time; the ability of the Company to develop,
prosecute, confirm and consummate one or more plans of
reorganization with respect to the chapter 11 cases; risks
associated with third parties seeking and obtaining Court
approval to terminate or shorten the exclusivity period for the
Company to propose and confirm one or more plans of
reorganization, for the appointment of a chapter 11 trustee
or to convert the cases to chapter 7 cases; the ability of
the Company to obtain and maintain normal terms with vendors and
service providers; the Companys ability to maintain
contracts that are critical to its operations; the potential
adverse impact of the chapter 11 cases on the
Companys liquidity or results of operations; the ability
of the Company to fund and execute its business plan (including
the transformation plan described in Item 1. Business
Potential Divestitures, Consolidations and
Wind-Downs of the Annual Report on
Form 10-K
for the year ended December 31, 2005 filed with the SEC)
and to do so in a timely manner; the ability of the Company to
attract, motivate
and/or
retain key executives and associates; the ability of the Company
to avoid or continue to operate during a strike, or partial work
stoppage or slow down by any of its unionized employees and the
ability of the Company to attract and retain customers.
Additional factors that
41
could affect future results are identified in the Annual Report
on
Form 10-K
for the year ended December 31, 2005 filed with the SEC,
including the risk factors in Part I, Item 1A. Risk
Factors, contained therein. Delphi disclaims any intention or
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events
and/or
otherwise.
Similarly, these and other factors, including the terms of any
reorganization plan ultimately confirmed, can affect the value
of the Companys various prepetition liabilities, common
stock and/or
other equity securities. Additionally, no assurance can be given
as to what values, if any, will be ascribed in the bankruptcy
cases to each of these constituencies. A plan of reorganization
could result in holders of Delphis common stock receiving
no distribution on account of their interest and cancellation of
their interests. As described in the Companys public
statements in response to the request submitted to the
U.S. Trustee for the appointment of a statutory equity
committee, holders of Delphis common stock and other
equity interests (such as options) should assume that they will
not receive value as part of a plan of reorganization. In
addition, under certain conditions specified in the Bankruptcy
Code, a plan of reorganization may be confirmed notwithstanding
its rejection by an impaired class of creditors or equity
holders and notwithstanding the fact that equity holders do not
receive or retain property on account of their equity interests
under the plan. In light of the foregoing and as stated in its
October 8, 2005 press release announcing the filing of its
chapter 11 reorganization cases, the Company considers the
value of the common stock to be highly speculative and cautions
equity holders that the stock may ultimately be determined to
have no value. Accordingly, the Company urges that appropriate
caution be exercised with respect to existing and future
investments in Delphis common stock or other equity
interests or any claims relating to prepetition liabilities.
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
There have been no material changes to our exposures to market
risk since December 31, 2005.
|
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Under the supervision and with the participation of our
management, including our Chief Executive Officer (the
CEO) and Chief Financial Officer (the
CFO), we have evaluated the effectiveness of design
and operation of our disclosure controls and procedures (as
defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
as of the end of the period covered by this report. Based on
this evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were not effective as of March 31,
2006. The basis for this determination was that, as reported in
our annual report on
Form 10-K
for the period ended December 31, 2005, we have identified
material weaknesses in our internal control over financial
reporting, which we view as an integral part of our disclosure
controls and procedures. For a more detailed understanding of
these material weaknesses, the impact of such weaknesses on
disclosure controls and procedures, and remedial actions taken
and planned which we expect will materially affect such
controls, see Item 9A. Controls and Procedures of our
annual report on
Form 10-K
for the year ended December 31, 2005, which was filed on
July 11, 2006, and which is incorporated by reference into
this Item 4.
The certifications of the Companys Chief Executive Officer
and Chief Financial Officer attached as Exhibits 31(a) and
31(b) to this Quarterly Report on
Form 10-Q
include, in paragraph 4 of such certifications, information
concerning the Companys disclosure controls and procedures
and internal control over financial reporting. Such
certifications should be read in conjunction with the
information contained in this Item 4, including the
information incorporated by reference to our filing on
Form 10-K
for the year ended December 31, 2005, for a more complete
understanding of the matters covered by such certifications.
Changes
in internal control over financial reporting
During the quarter ended March 31, 2006, there have been no
changes in our internal control over financial reporting that
have materially affected, or that are reasonably likely to
material affect, our internal control over financial reporting
beyond those identified in our
Form 10-K
for the year ended December 31, 2005.
42
PART II.
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
Except as discussed in Note 12, Commitments and
Contingencies, of the consolidated financial statements of this
quarterly report there have been no other material developments
in legal proceedings involving Delphi or its subsidiaries since
those reported in Delphis Annual Report on
Form 10-K
for the year ended December 31, 2005.
We are involved in routine litigation incidental to the conduct
of our business. We do not believe that any of the routine
litigation to which we are currently a party will have a
material adverse effect on our business or financial condition.
In addition to the other information set forth in this report,
you should carefully consider the factors discussed in
Part I, Item 1A. Risk Factors in our
Annual Report on
Form 10-K
for the year ended December 31, 2005, which could
materially affect our business, financial condition or future
results. The risks described in our Annual Report on
Form 10-K
are not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently
deem to be immaterial also may materially adversely affect our
business, financial condition
and/or
operating results.
|
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
Purchase
of Equity Securities by the Issuer and Affiliated
Purchasers
No shares were purchased by the Company or on its behalf by any
affiliated purchaser in the first quarter of 2006. As part of
Delphis stock repurchase program in February 2005, the
Board of Directors authorized the repurchase of up to an
aggregate of 19 million shares of our common stock through
the first quarter of 2006 to fund obligations for our stock
options and other awards issued under our equity based
compensation plan. The Company did not repurchase any equity
securities in the first quarter of 2006 pursuant to this plan
and the plan was not renewed.
|
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
The Chapter 11 Filings triggered defaults on substantially
all debt obligations of the Debtors. For additional information,
refer to Note 13, Debt, within our Annual Report on
Form 10-K
for the year ended December 31, 2005.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Name
|
|
|
3
|
(a)
|
|
Amended and Restated Certificate
of Incorporation of Delphi Automotive Systems Corporation,
incorporated by reference to Exhibit 3(a) to Delphis
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2002.
|
|
3
|
(b)
|
|
Certificate of Ownership and
Merger, dated March 13, 2002, Merging Delphi Corporation
into Delphi Automotive Systems Corporation, incorporated by
reference to Exhibit 3(b) to Delphis Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2002.
|
|
3
|
(c)
|
|
By-laws of Delphi Automotive
Systems Corporation, incorporated by reference to
Exhibit 3.2 to Delphis Registration Statement on
Form S-1
(Registration
No. 333-67333).
|
|
10
|
(a)
|
|
First Amendment to Amended and
Restated Credit Agreement and Amended and Restated Security and
Pledge Agreement, dated as of February 3, 2006, among
Delphi and the lenders named therein, incorporated by reference
to Exhibit 99 (a) to Delphis Report on
Form 8-K
filed on February 8, 2006.
|
43
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Name
|
|
|
10
|
(b)
|
|
Order Under 11 U.S.C.
§§ 105 and 363 entered by the United States
Bankruptcy Court for the Southern District of New York
Authorizing the Debtors to Implement a Short-Term Annual
Incentive Program dated February 17, 2006, incorporated by
reference to Exhibit 99 (a) to Delphis Report on
Form 8-K
filed on February 23, 2006.*
|
|
10
|
(c)
|
|
UAW-GM-Delphi Special Attrition
Program agreement, dated March 22, 2006, among Delphi,
General Motors Corporation and the International Union, United
Automobile, Aerospace, and Agricultural Implement Workers of
America (UAW), incorporated by reference to
Exhibit 99 (a) to Delphis Report on
Form 8-K
filed on March 27, 2006.
|
|
31
|
(a)
|
|
Certification Pursuant to Exchange
Act
Rules 13a-14(a)/15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
31
|
(b)
|
|
Certification Pursuant to Exchange
Act
Rules 13a-14(a)/15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
32
|
(a)
|
|
Certification Pursuant to
18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
(b)
|
|
Certification Pursuant to
18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |
44
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
Delphi
Corporation
|
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
August 15, 2006
|
|
/s/ John
D. Sheehan
|
|
|
|
|
|
John D. Sheehan
|
|
|
Vice President and Chief
Restructuring Officer,
|
|
|
Chief Accounting Officer
|
45
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
31
|
(a)
|
|
Certification Pursuant to Exchange
Act
Rules 13a-14(a)/15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
31
|
(b)
|
|
Certification Pursuant to Exchange
Act
Rules 13a-14(a)/15d-14(a),
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
32
|
(a)
|
|
Certification Pursuant to
18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
(b)
|
|
Certification Pursuant to
18 U.S.C. Section 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
46