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DELPHI AUTOMOTIVE PLC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following management's discussion and analysis of financial condition and results of operations ("MD&A") is intended to help you understand the business operations and financial condition of the Company for the three months ended March 31, 2014. This discussion should be read in conjunction with Item 1. Financial Statements. Our MD&A is presented in eight sections: • Executive Overview • Consolidated Results of Operations • Results of Operations by Segment • Liquidity and Capital Resources • Off-Balance Sheet Arrangements • Contingencies and Environmental Matters • Recently Issued Accounting Pronouncements • Critical Accounting Estimates Within the MD&A, "Delphi," the "Company," "we," "us" and "our" refer to Delphi Automotive PLC, a public limited company which was formed under the laws of Jersey on May 19, 2011, together with its subsidiaries, including Delphi Automotive LLP, a limited liability partnership incorporated under the laws of England and Wales which was formed on August 19, 2009 for the purpose of acquiring certain assets and subsidiaries of the former Delphi Corporation, and became a subsidiary of Delphi Automotive PLC in connection with the completion of the Company's initial public offering on November 22, 2011. Executive Overview Our Business We are a leading global vehicle components manufacturer and provide electrical and electronic, powertrain, safety and thermal technology solutions to the global automotive and commercial vehicle markets. We are one of the largest vehicle component manufacturers and our customers include all 25 of the largest automotive original equipment manufacturers ("OEMs") in the world. Our total net sales during the three months ended March 31, 2014 were $4.3 billion, an increase of 6% compared to the same period of 2013. The increase in our total net sales is attributable to increased sales in North America and Asia Pacific. Although our net sales in Europe also increased modestly in the first quarter, reflecting signs of stabilization in the European economy, our sales continue to be impacted by persisting economic uncertainties in the region which have resulted in tepid growth in OEM production. Partially offsetting these increases were reduced sales in our smallest region, South America, resulting from continued reductions in OEM production schedules. Our overall lean cost structure, along with improving sales in North America as the U.S. economy continues to strengthen, and above-market sales growth in the Asia Pacific region, specifically China, enabled us to maintain strong gross margins consistent with the prior year period. We are focused on maintaining a low fixed cost structure that we believe provides us flexibility to remain profitable despite decreases in industry volumes and throughout the traditional vehicle industry production cycle. Accordingly, we will continue to adjust our cost structure and manufacturing footprint in response to continued economic uncertainties, as evidenced by the restructuring activities, including the actions related to the integration of MVL, we initiated in the fourth quarter of 2012 and first quarter of 2013 totaling approximately $375 million. These restructuring actions are principally focused on the European region, and are expected to be substantially completed in the first half of 2014. As we continue to operate in a cyclical industry that is impacted by movements in the global and regional economies, we continually evaluate opportunities to further adjust our cost structure. We believe our strong balance sheet coupled with our flexible cost structure will position us to capitalize on any strengthening of the global economy and improvements in OEM production volumes. Trends, Uncertainties and Opportunities Rate of economic recovery. Our business is directly related to automotive sales and automotive vehicle production by our customers. Automotive sales depend on a number of factors, including economic conditions. Although global automotive vehicle production increased approximately 3% from 2012 to 2013 and we expect it to increase by an additional 2% in 2014, the economic recovery has been uneven from a regional perspective. Economic uncertainties continue to persist in Europe, resulting in reduced consumer demand for vehicles and essentially flat vehicle production in Europe in 2013 as compared to 2012, with an increase of 1% expected in 2014 as compared to 2013 in the region. Continued economic weakness in Europe or weakness in North America or Asia could result in a significant reduction in automotive sales and production by our customers, 41-------------------------------------------------------------------------------- Table of Contents which would have an adverse effect on our business, results of operations and financial condition. Additionally, volatility in oil and gasoline prices negatively impacts consumer confidence and automotive sales, as well as the mix of future sales (from trucks and sport utility vehicles toward smaller, fuel-efficient passenger cars). While our diversified customer and geographic revenue base have well positioned us to withstand the impact of industry downturns and benefit from industry upturns, shifts to vehicles with less content would adversely impact our profitability. Emerging markets growth. Rising income levels in emerging markets, principally China, are resulting in stronger growth rates in these markets. Our strong global presence and presence in these markets have positioned us to experience above-market growth rates. We continue to expand our established presence in emerging markets, positioning us to benefit from the expected growth opportunities in these regions. We are capitalizing on our long-standing relationships with the global OEMs and further enhancing our positions with the emerging market OEMs to continue expanding our worldwide leadership. We continue to build upon our extensive geographic reach to capitalize on fast-growing automotive markets. We believe that our presence in low cost countries positions us to realize incremental margin improvements as the global balance of automotive production shifts towards the emerging markets. We have a strong presence in China, where we have operated for approximately 20 years. All of our business segments have operations and sales in China. As a result, we have well-established relationships with all of the major OEMs in China. We generated approximately $2.7 billion in revenue from China in 2013. With only 22 of our 33 offered products locally manufactured in 2013, we believe we have the opportunity to expand additional product lines into China, and as a result, we see further growth potential. Market driven products. Our product offerings satisfy the OEMs' need to meet increasingly stringent government regulations and meet consumer preferences for products that address the mega-trends of Safe, Green and Connected, leading to increased content per vehicle, greater profitability and higher margins. With these offerings, we believe we are well-positioned to benefit from the growing demand for vehicle content related to safety, fuel efficiency, emissions control, automated features and connectivity to the global information network. Our Electrical/Electronic Architecture and Electronics and Safety segments are benefiting from the substantial increase in vehicle content and electrification requiring a complex and reliable electrical architecture and systems to operate, such as hybrid power electronics, electrical vehicle monitoring, lane departure warning systems, integrated electronic displays, navigation systems and consumer electronics. Our ability to design a reliable electrical architecture that optimizes power distribution and/or consumption is key to satisfying the OEMs' need to reduce emissions while continuing to meet the demands of consumers. Additionally, our Powertrain Systems and Thermal Systems segments are also focused on addressing the demand for increased fuel efficiency and emission control by improving fuel consumption and heat dissipation, which are principal factors influencing fuel efficiency and emissions. Global capabilities. Many OEMs are continuing to adopt global vehicle platforms to increase standardization, reduce per unit cost and increase capital efficiency and profitability. As a result, OEMs are selecting suppliers that have the capability to manufacture products on a worldwide basis, as well as the flexibility to adapt to regional variations. Suppliers with global scale and strong design, engineering and manufacturing capabilities, are best positioned to benefit from this trend. Our global footprint enables us to serve the global OEMs on a worldwide basis as we gain market share with the emerging market OEMs. This regional model principally services the North American market out of Mexico, the South American market out of Brazil, the European market out of Eastern Europe and North Africa and the Asia Pacific market out of China. Product development. The automotive component supply industry is highly competitive, both domestically and internationally. Our ability to anticipate changes in technology and regulatory standards and to successfully develop and introduce new and enhanced products on a timely and cost competitive basis will be a significant factor in our ability to remain competitive. To compete effectively in the automotive supply industry, we must be able to launch new products to meet our customers' demands in a timely manner. Our innovative technologies and robust global engineering and development capabilities have well positioned us to meet the increasingly stringent vehicle manufacturer demands. OEMs are increasingly looking to their suppliers to simplify vehicle design and assembly processes to reduce costs. As a result, suppliers that sell vehicle components directly to manufacturers (Tier I suppliers) have assumed many of the design, engineering, research and development and assembly functions traditionally performed by vehicle manufacturers. Suppliers that can provide fully-engineered solutions, systems and pre-assembled combinations of component parts are positioned to leverage the trend toward system sourcing. Engineering, design & development. Our history and culture of innovation have enabled us to develop significant intellectual property and design and development expertise to provide advanced technology solutions that meet the demands of our customers. We have a team of more than 19,000 scientists, engineers and technicians as of December 31, 2013 focused on developing leading product solutions for our key markets, located at 15 major technical centers in Brazil, China, France, Germany, India, Luxembourg, Mexico, Poland, South Korea, the United Kingdom and the United States. We invest approximately $1.7 billion (which includes approximately $400 million of co-investment by customers and government agencies) annually in research and development and engineering, to maintain our portfolio of innovative products, and owned/ 42-------------------------------------------------------------------------------- Table of Contents held approximately 8,000 patents and protective rights as of December 31, 2013. We also encourage "open innovation" and collaborate extensively with peers in the industry, government agencies and academic institutions. Our technology competencies are recognized by both customers and suppliers, as well as by government agencies, who have co-invested approximately $400 million annually in new product development, accelerating the pace of innovation and reducing the risk associated with successful commercialization of technological breakthroughs. In the past, suppliers often incurred the initial cost of engineering, designing and developing automotive component parts, and recovered their investments over time by including a cost recovery component in the price of each part based on expected volumes. Recently, we and many other suppliers have negotiated for cost recovery payments independent of volumes. This trend reduces our economic risk. Pricing. Cost-cutting initiatives adopted by our customers result in increased downward pressure on pricing. Our customer supply agreements generally require step-downs in component pricing over the periods of production and OEMs have historically possessed significant leverage over their outside suppliers because the automotive component supply industry is fragmented and serves a limited number of automotive OEMs. Our profitability depends in part on our ability to generate sufficient production cost savings in the future to offset price reductions. We are focused on maintaining a low fixed cost structure that provides us flexibility to remain profitable despite decreases in industry volumes and at all points of the traditional vehicle industry production cycle. We believe that our lean cost structure will allow us to remain profitable throughout the traditional vehicle industry production cycle. As a result, approximately 94% of our hourly workforce is located in low cost countries. Furthermore, we have substantial operational flexibility by leveraging a large workforce of temporary workers, which represented approximately 31% of the hourly workforce as of March 31, 2014. However, we will continue to adjust our cost structure and manufacturing footprint in response to continued economic uncertainties. As we continue to operate in a cyclical industry that is impacted by movements in the global and regional economies, we continually evaluate opportunities to further adjust our cost structure. We have a strong balance sheet with gross debt of approximately $2.4 billion and substantial liquidity of approximately $2.5 billion of cash and cash equivalents and available financing under our Revolving Credit Facility (as defined below in Liquidity and Capital Resources) as of March 31, 2014, and no significant U.S. defined benefit or workforce postretirement health care benefits and employer-paid postretirement basic life insurance benefits ("OPEB") liabilities. We intend to maintain strong financial discipline targeting industry-leading earnings growth, cash flow generation and return on invested capital and to maintain sufficient liquidity to sustain our financial flexibility throughout the industry cycle. OEM Product Recalls. There has been a recent increase in the number of vehicles recalled by OEMs in North America. These recalls can either be initiated by the OEMs or influenced by regulatory agencies. Although we have not experienced any significant impacts to date, it is possible that we may be adversely affected in the future if this recent increase continues. Efficient use of capital. The global vehicle components industry is generally capital intensive and a portion of a supplier's capital equipment is frequently utilized for specific customer programs. Lead times for procurement of capital equipment are long and typically exceed start of production by one to two years. Substantial advantages exist for suppliers that can leverage their prior investments in capital equipment or amortize the investment over higher volume global customer programs. Industry consolidation. Consolidation among worldwide suppliers is expected to continue as suppliers seek to achieve operating synergies and value stream efficiencies, acquire complementary technologies, and build stronger customer relationships as OEMs continue to expand globally. We believe companies with strong balance sheets and financial discipline are in the best position to take advantage of the industry consolidation trend. Consolidated Results of Operations Delphi typically experiences fluctuations in revenue due to changes in OEM production schedules, vehicle sales mix and the net of new and lost business (which we refer to collectively as volume), increased prices attributable to escalation clauses in our supply contracts for recovery of increased commodity costs (which we refer to as commodity pass-through), fluctuations in foreign currency exchange rates (which we refer to as FX), contractual reductions of the sales price to the OEM (which we refer to as contractual price reductions) and engineering changes. Changes in sales mix can have either favorable or unfavorable impacts on revenue. Such changes can be the result of shifts in regional growth, shifts in OEM sales demand, as well as shifts in consumer demand related to vehicle segment purchases and content penetration. For instance, a shift in sales demand favoring a particular OEM's vehicle model for which we do not have a supply contract may negatively impact our revenue. A shift in regional sales demand toward certain markets could favorably impact the sales of those of our customers that have a large market share in those regions, which in turn would be expected to have a favorable impact on our revenue. We typically experience (as described below) fluctuations in operating income due to: • Volume, net of contractual price reductions-changes in volume offset by contractual price reductions (which typically range from 1% to 3% of net sales) and changes in mix; 43-------------------------------------------------------------------------------- Table of Contents • Operational performance-changes to costs for materials and commodities or manufacturing variances; and • Other-including restructuring costs and any remaining variances not included in Volume, net of contractual price reductions or Operational performance. The automotive component supply industry is subject to inflationary pressures with respect to raw materials and labor which have placed and will continue to place operational and profitability burdens on the entire supply chain. We will continue to work with our customers and suppliers to mitigate the impact of these inflationary pressures in the future. In addition, we expect commodity cost volatility, particularly related to copper, aluminum and petroleum-based resin products, to have a continual impact on future earnings and/or operating cash flows. As such, we continually seek to mitigate both inflationary pressures and our material-related cost exposures using a number of approaches, including combining purchase requirements with customers and/or other suppliers, using alternate suppliers or product designs, negotiating cost reductions and/or commodity cost contract escalation clauses into our vehicle manufacturer supply contracts, and hedging. Three Months Ended March 31, 2014 versus Three Months Ended March 31, 2013 The results of operations for the three months ended March 31, 2014 and 2013 were as follows: Three Months Ended March 31, Favorable/ 2014 2013 (unfavorable) (dollars in millions) Net sales $ 4,276 $ 4,024 $ 252 Cost of sales 3,508 3,339 (169 ) Gross margin 768 18.0 % 685 17.0 % 83 Selling, general and administrative 261 230 (31 ) Amortization 26 26 - Restructuring 22 32 10 Operating income 459 397 62 Interest expense (35 ) (36 ) 1 Other income (expense), net (16 ) (34 ) 18 Income before income taxes and equity income 408 327 81 Income tax expense (75 ) (37 ) (38 ) Income before equity income 333 290 43 Equity income, net of tax 8 8 - Net income 341 298 43 Net income attributable to noncontrolling interest 21 22 (1 ) Net income attributable to Delphi $ 320 $ 276 $ 44 Total Net Sales Below is a summary of our total net sales for the three months ended March 31, 2014 versus March 31, 2013. Three Months Ended March 31, Variance Due To: Volume, net of contractual Commodity Favorable/ price pass- 2014 2013 (unfavorable) reductions FX through Other Total (in millions) (in millions) Total net sales $ 4,276 $ 4,024 $ 252 $ 229 $ 43 $ (20 ) $ - $ 252 Total net sales for the three months ended March 31, 2014 increased 6% compared to the three months ended March 31, 2013. We experienced volume growth of 7% for the period as a result of increased sales in North America and Asia Pacific, partially offset by contractual price reductions. 44-------------------------------------------------------------------------------- Table of Contents Cost of Sales Cost of sales is primarily comprised of material, labor, manufacturing overhead, freight, fluctuations in foreign currency exchange rates, product engineering, design and development expenses, depreciation and amortization, warranty costs and other operating expenses. Gross margin is revenue less cost of sales and gross margin percentage is gross margin as a percentage of net sales. Cost of sales increased $169 million for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, as summarized below. The Company's material cost of sales was approximately 50% of net sales in both the three months ended March 31, 2014 and March 31, 2013. Three Months Ended March 31, Variance Due To: Favorable/ Operational 2014 2013 (unfavorable) Volume (a) FX performance Other Total (dollars in millions) (in millions)Cost of sales $ 3,508 $ 3,339 $ (169 ) $ (225 ) $ (29 ) $ 88 $ (3 ) $ (169 ) Gross margin $ 768 $ 685 $ 83 $ 3 $ 14 $ 88 $ (22 ) $ 83 Percentage of net sales 18.0 % 17.0 % (a) Presented net of contractual price reductions for gross margin variance. The increase in cost of sales reflects increased volumes before contractual price reductions for the three month period and unfavorable currency impacts resulting from fluctuations in currency exchange rates, partially offset by improved operational performance. Selling, General and Administrative Expense Three Months Ended March 31, Favorable/ 2014 2013 (unfavorable) (dollars in millions) Selling, general and administrative expense $ 261 $ 230 $ (31 ) Percentage of net sales 6.1 % 5.7 % Selling, general and administrative expense ("SG&A") includes administrative expenses, information technology costs and incentive compensation related costs, and increased slightly as a percentage of sales for the three months ended March 31, 2014 compared to 2013 due to an increase in accruals for incentive compensation, Information Technology costs and for other service providers. Amortization Three Months Ended March 31, Favorable/ 2014 2013 (unfavorable) (in millions) Amortization $ 26 $ 26 $ - Amortization expense reflects the non-cash charge related to definite-lived intangible assets. The relative consistency in amortization during the three months ended March 31, 2014 compared to 2013 reflects continued amortization of our definite-lived intangible assets, which resulted primarily from the acquisition of MVL in October 2012, over their estimated useful lives. 45-------------------------------------------------------------------------------- Table of Contents Restructuring Three Months Ended March 31, Favorable/ 2014 2013 (unfavorable) (dollars in millions) Restructuring $ 22 $ 32 $ 10 Percentage of net sales 0.5 % 0.8 % The decrease in restructuring expense during the three months ended March 31, 2014 as compared to 2013 is due to the initiation of various restructuring actions, primarily in Europe, in the fourth quarter of 2012 and in the first quarter of 2013 which are expected to total approximately $375 million. These restructuring actions were initiated in response to lower OEM production volumes in Europe and continued economic uncertainties, and include workforce reductions, as well as plant closures, and are expected to be substantially completed during the first half of 2014. Refer to Note 7. Restructuring to the consolidated financial statements for additional information. Interest Expense Three Months Ended March 31, Favorable/ 2014 2013 (unfavorable) (in millions) Interest expense $ 35 $ 36 $ 1 The decrease in interest expense reflects the issuance of $700 million of 4.15% 10-year unsecured senior notes in the first quarter of 2014, offset by a reduction in interest expense from the repayment of a portion of the Tranche A Term Loan and the redemption of the 5.875% 2011 senior notes. Refer to Note 8. Debt to the consolidated financial statements for additional information. Other Income, net Three Months Ended March 31, Favorable/ 2014 2013 (unfavorable) (in millions) Other income (expense), net $ (16 ) $ (34 ) $ 18 The increase in other income, net for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 is a result of Delphi repaying a portion of the Tranche A Term Loan and redeeming the 5.875% 2011 senior notes during the three months ended March 31, 2014, resulting in a loss on extinguishment of debt of $34 million. Additionally, during the three months ended March 31, 2014, Delphi reached a final settlement with its insurance carrier related to a business interruption insurance claim, and received proceeds from the settlement of approximately $14 million, net of related costs and expenses. During the three months ended March 31, 2013, Delphi amended its Credit Agreement and repaid the entire balance of the Tranche B Term Loan from the Original Credit Agreement, resulting in a loss on extinguishment of debt of $39 million. Refer to Note 16. Other income, net and Note 8. Debt to the consolidated financial statements included herein for additional information. 46-------------------------------------------------------------------------------- Table of Contents Income Taxes Three Months Ended March 31, Favorable/ 2014 2013 (unfavorable) (in millions) Income tax expense $ 75 $ 37 $ (38 ) The Company's effective tax rate was impacted by the expiration of the U.S. research and development credit in 2014. The Company's effective tax rate was also impacted by the tax expense (benefit) associated with unusual or infrequent items for the respective interim period as illustrated in the following table: Three Months Ended March 31, 2014 2013 (in millions) Tax credits (1) $ - $ (22 ) Withholding taxes (2) - 4 Other change in tax reserves (3) (3 ) 1 Other adjustments (1 ) 1 Income tax expense (benefit) associated with unusual or infrequent items $ (4 ) $ (16 ) (1) For the three months ended March 31, 2013, the tax benefit relates to the retroactive reinstatement of the U.S. research and development tax credit under The American Taxpayer Relief Act of 2012. (2) For the three months ended March 31, 2013, the tax expense relates to the true-up of the withholding tax liability on the undistributed earnings of an equity method investment. (3) For the three months ended March 31, 2014 and 2013, the tax benefit and expense, respectively, primarily relate to adjustments in tax reserves which were individually insignificant. Equity Income Three Months Ended March 31, Favorable/ 2014 2013 (unfavorable) (in millions) Equity income, net of tax $ 8 $ 8 $ - Equity income, net of tax reflects Delphi's interest in the results of ongoing operations of entities accounted for as equity-method investments. Equity income for the three months ended March 31, 2014 was consistent as compared to the three months ended March 31, 2013 primarily due to the consistent performance of our joint ventures. Results of Operations by Segment We operate our core business along the following operating segments, which are grouped on the basis of similar product, market and operating factors: • Electrical/Electronic Architecture, which includes complete electrical architecture and component products. • Powertrain Systems, which includes extensive systems integration expertise in gasoline, diesel and fuel handling and full end-to-end systems including fuel injection, combustion, electronics controls, exhaust handling, test and validation capabilities, aftermarket, and original equipment service. • Electronics and Safety, which includes component and systems integration expertise in infotainment and connectivity, body controls and security systems, displays, mechatronics, passive and active safety electronics and electric and hybrid electric vehicle power electronics, as well as advanced development of software. • Thermal Systems, which includes heating, ventilating and air conditioning systems, components for multiple transportation and other adjacent markets, and powertrain cooling and related technologies. • Eliminations and Other, which includes i) the elimination of inter-segment transactions, and ii) certain other expenses and income of a non-operating or strategic nature. 47-------------------------------------------------------------------------------- Table of Contents Through December 31, 2013, we evaluated performance based on stand-alone segment Adjusted EBITDA and accounted for inter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Our management believed that Adjusted EBITDA was a meaningful measure of performance and it was used by management to analyze Company and stand-alone segment operating performance. Management also used Adjusted EBITDA for planning and forecasting purposes. Effective January 1, 2014, our management began utilizing segment Adjusted Operating Income as the key performance measure of segment income or loss and for planning and forecasting purposes, as management believes this measure is most reflective of the operational profitability or loss of our operating segments. Segment Adjusted Operating Income should not be considered a substitute for results prepared in accordance with U.S. GAAP and should not be considered an alternative to net income attributable to Delphi, which is the most directly comparable financial measure to Adjusted Operating Income that is in accordance with U.S. GAAP. Segment Adjusted Operating Income, as determined and measured by Delphi, should also not be compared to similarly titled measures reported by other companies. The reconciliation of Adjusted Operating Income to Operating Income includes restructuring and other acquisition-related costs. The reconciliation of Adjusted Operating Income to net income attributable to Delphi for the three months ended March 31, 2014 and 2013 are as follows: Electrical/ Electronic Powertrain Electronics Thermal Eliminations Architecture Systems and Safety Systems and Other Total (in millions) For the Three Months Ended March 31, 2014: Adjusted Operating income $ 273 $ 115 $ 83 $ 12 $ - $ 483 Restructuring (13 ) (2 ) (6 ) (1 ) - (22 ) Other acquisition-related costs (2 ) - - - - (2 ) Operating income $ 258 $ 113 $ 77 $ 11 $ - 459 Interest expense (35 ) Other income, net (16 ) Income before income taxes and equity income 408 Income tax expense (75 ) Equity income, net of tax 8 Net income $ 341 Net income attributable to noncontrolling interest 21 Net income attributable to Delphi $ 320 48-------------------------------------------------------------------------------- Table of Contents Electrical/ Electronic Powertrain Electronics Thermal Eliminations Architecture Systems and Safety Systems and Other Total (inmillions) For the Three Months Ended March 31, 2013: Adjusted Operating income $ 231 $ 114 $ 72 $ 14 $ - $ 431 Restructuring (11 ) (8 ) (11 ) (2 ) - (32 ) Other acquisition-related costs (2 ) - - - - (2 ) Operating income $ 218 $ 106 $ 61 $ 12 $ - 397 Interest expense (36 ) Other income, net (34 ) Income before income taxes and equity income 327 Income tax expense (37 ) Equity income, net of tax 8 Net income $ 298 Net income attributable to noncontrolling interest 22 Net income attributable to Delphi $ 276 Net sales, gross margin as a percentage of net sales and Adjusted Operating Income by segment for the three months ended March 31, 2014 and 2013 are as follows: Net Sales by Segment Three Months Ended March 31, Variance Due To: Volume, net of contractual Favorable/ price Commodity 2014 2013 (unfavorable) reductions FX Pass-through Other Total (in millions) (in millions)Electrical/Electronic Architecture $ 2,111 $ 1,921 $ 190 $ 203 $ 8 $ (20 ) $ (1 ) $ 190 Powertrain Systems 1,104 1,107 (3 ) (24 ) 22 - (1 ) (3 ) Electronics and Safety 730 693 37 24 12 - 1 37 Thermal Systems 389 360 29 28 2 - (1 ) 29 Eliminations and Other (58 ) (57 ) (1 ) (2 ) (1 ) - 2 (1 ) Total $ 4,276 $ 4,024 $ 252 $ 229 $ 43 $ (20 ) $ - $ 252 Gross Margin Percentage by Segment Three Months Ended March 31, 2014 2013 Electrical/Electronic Architecture 18.8 % 17.8 % Powertrain Systems 18.7 % 18.0 % Electronics and Safety 18.2 % 16.0 % Thermal Systems 8.5 % 9.2 % Eliminations and Other - % - % Total 18.0 % 17.0 % 49-------------------------------------------------------------------------------- Table of Contents Adjusted Operating Income by Segment Three Months Ended March 31, Variance Due To: Volume, net of contractual Favorable/ price Operational 2014 2013 (unfavorable) reductions performance Other Total (in millions) (in millions) Electrical/Electronic Architecture $ 273 $ 231 $ 42 $ 36 $ 32 $ (26 ) $ 42 Powertrain Systems 115 114 1 (15 ) 25 (9 ) 1 Electronics and Safety 83 72 11 (16 ) 29 (2 ) 11 Thermal Systems 12 14 (2 ) (2 ) 3 (3 ) (2 ) Eliminations and Other - - - - - - - Total $ 483 $ 431 $ 52 $ 3 $ 89 $ (40 ) $ 52 As noted in the table above, Adjusted Operating Income for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 was impacted by volume and contractual price reductions including product mix, and operational performance improvements, as well as the following items included in Other in the table above: • $14 million of increased depreciation and amortization; and • Increased accruals for incentive compensation and costs for service providers. Liquidity and Capital Resources Overview of Capital Structure Our liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, as well as to fund debt service requirements, operational restructuring activities, and dividends on share capital. Our primary sources of liquidity are cash flows from operations, our existing cash balance, and as necessary, borrowings under available credit facilities. To the extent we generate discretionary cash flow we may consider using this additional cash flow for optional prepayments of existing indebtedness, strategic acquisitions, additional share repurchases, and/or general corporate purposes. We will also continually explore ways to enhance our capital structure. As of March 31, 2014, we had cash and cash equivalents of $1.0 billion and net debt (defined as outstanding debt less cash and cash equivalents) of $1.5 billion. We also have access to additional liquidity pursuant to the terms of the $1.5 billion Revolving Credit Facility and the €350 million committed European accounts receivable factoring facility described below. We expect existing cash, available liquidity and cash flows from operations to continue to be sufficient to fund our global operating activities, including restructuring payments, any mandatory payments required under the Credit Agreement as described below, dividends on ordinary shares and capital expenditures. We also continue to expect to be able to move funds between different countries to manage our global liquidity needs without material adverse tax implications, subject to current monetary policies and to the terms of the Credit Agreement. Based on this, we believe we possess sufficient liquidity to fund our operations and capital investments in 2014 and beyond. Share Repurchases In January 2012, the Board of Directors authorized a share repurchase program of up to $300 million of ordinary shares, which was fully satisfied in September 2012. Subsequently, in September 2012, the Board of Directors authorized a share repurchase program of up to $750 million of ordinary shares, which was fully satisfied in April 2014. In January 2014, the Board of Directors authorized a new share repurchase program of up to $1 billion of ordinary shares. This share repurchase program provides for share purchases in the open market or in privately negotiated transactions, depending on share price, market conditions and other factors, as determined by the Company. This program commenced following the completion of the Company's September 2012 share repurchase program in April 2014. A summary of the ordinary shares repurchased during the three months ended March 31, 2014 and March 31, 2013 is as follows: Three Months Ended March 31, 2014 2013 Total Number of Shares Repurchased 2,376,391 2,850,000 Average Price Paid per Share $ 66.14 $ 42.79 Total (in millions) $ 157 $ 122 As of March 31, 2014, approximately $33 million and $1 billion of share repurchases remained available under the September 2012 and January 2014 share repurchase programs, respectively. During the period from April 1, 2014 to April 23, 2014, the Company repurchased an additional $47 million worth of shares pursuant to an automatic trading plan with set trading instructions established by the Company. As a result, approximately $986 million of share repurchases remain available under the January 2014 share repurchase program. All repurchased shares were retired. Dividends to Holders of Ordinary Shares On February 26, 2013, the Board of Directors approved the initiation of dividend payments on the Company's ordinary shares and declared a regular quarterly cash dividend. In January 2014, the Board of Directors increased the annual dividend rate from $0.68 to $1.00 per ordinary share, and declared a regular quarterly cash dividend of $0.25 per ordinary share. The Company has declared and paid cash dividends per common share during the periods presented as follows: 50-------------------------------------------------------------------------------- Table of Contents Dividend Amount Per Share (in millions) 2014: First Quarter $ 0.25 $ 77 2013: Fourth Quarter $ 0.17 $ 52 Third Quarter 0.17 53 Second Quarter 0.17 53 First Quarter 0.17 53 Total $ 0.68 $ 211 In addition, in April 2014, the Board of Directors declared a regular quarterly cash dividend of $0.25 per ordinary share, payable on May 28, 2014 to shareholders of record at the close of business on May 14, 2014. Dividends from Equity Investees During the three months ended March 31, 2014, Delphi received a dividend of $10 million from one of its equity method investments. During the three months ended March 31, 2013, Delphi received a dividend of $9 million from one of its equity method investments. The dividends were recognized as a reduction to the investment and represented a return on investment included in cash flows from operating activities. Credit Agreement In March 2011, in conjunction with the redemption of membership interests from Class A and Class C membership interest holders, Delphi Corporation (the "Issuer") entered into a credit agreement with JPMorgan Chase Bank, N.A., as lead arranger and administrative agent (the "Original Credit Agreement"), which provided for $3.0 billion in senior secured credit facilities consisting of term loans (as subsequently amended from time to time, the "Tranche A Term Loan" and the "Tranche B Term Loan," respectively) and a revolving credit facility (as subsequently amended from time to time, the "Revolving Credit Facility"). The Original Credit Agreement was amended and restated on each of May 17, 2011 (the "May 2011 Credit Agreement"), September 14, 2012 (the "2012 Credit Agreement") and March 1, 2013 (the Original Credit Agreement and each amendment and restatement of the Original Credit Agreement are individually and collectively referred to herein as the "Credit Agreement"). The May 2011 Credit Agreement, which was entered into simultaneously with the issuance of senior unsecured notes in the amount of $1 billion (as more fully described below), reduced the total size of the senior secured credit facilities to $2.4 billion. Under the 2012 Credit Agreement, the Company increased the Revolving Credit Facility to $1.3 billion and the Tranche A Term Loan to $574 million and used the incremental proceeds to pay a portion of the cost of acquiring MVL. On March 1, 2013, following the unsecured note issuance in February 2013 (as more fully described below), the Tranche B Term Loan was fully repaid, the Tranche A Term Loan was increased to $575 million, the Revolving Credit Facility was increased to $1.5 billion, and the terms of the Tranche A Term Loan and the Revolving Credit Facility were extended to March 1, 2018. The March 31, 2013 amendments resulted in the recognition of a loss on debt extinguishment of $39 million during the three months ended March 31, 2013. Approximately $14 million in issuance costs were paid in conjunction with the March 2013 amendment. In conjunction with the unsecured note issuance in March 2014 (as more fully described below), Delphi repaid a portion of its indebtedness on the Tranche A Term Loan, which resulted in the recognition of a loss on debt extinguishment related to this repayment of approximately $1 million during the three months ended March 31, 2014. Unamortized debt issuance costs associated with the Tranche A Term Loan and Revolving Credit Facility of $24 million are being amortized over the term of the Credit Agreement, as extended pursuant to the March 1, 2013 amendment. At March 31, 2014 the Revolving Credit Facility was undrawn and Delphi had approximately $10 million in letters of credit issued under the Credit Agreement. The maximum amount drawn under the Revolving Credit Facility during the three months ended March 31, 2014 to manage intra-month working capital needs was $85 million. Letters of credit issued under the Credit Agreement reduce availability under the Revolving Credit Facility. Loans under the Credit Agreement bear interest, at Delphi Corporation's option, at either (a) the Administrative Agent's Alternate Base Rate ("ABR" as defined in the Credit Agreement) or (b) the London Interbank Offered Rate ("Adjusted LIBO Rate" as defined in the Credit Agreement) ("LIBOR") plus in either case a percentage per annum as set forth in the table below 51-------------------------------------------------------------------------------- Table of Contents (the "Applicable Rate"). The Applicable Rates under the Credit Agreement on the specified dates are set forth below: March 31, 2014 December 31, 2013 LIBOR plus ABR plus LIBOR plus ABR plus Revolving Credit Facility 1.25 % 0.25 % 1.25 % 0.25 % Tranche A Term Loan 1.25 % 0.25 % 1.25 % 0.25 % The Applicable Rate under the Credit Agreement may increase or decrease from time to time based on changes in credit ratings with the minimum interest level of 0.00% and maximum level of 2.25%. Accordingly, the interest rate will fluctuate during the term of the Credit Agreement based on changes in the ABR, LIBOR or future changes in our corporate credit ratings. The Credit Agreement also requires that the Issuer pay certain commitment fees on the unused portion of the Revolving Credit Facility and certain letter of credit issuance and fronting fees. The interest rate period with respect to LIBOR interest rate options can be set at one-, two-, three-, or six-months as selected by the Issuer in accordance with the terms of the Credit Agreement (or other period as may be agreed by the applicable lenders), but payable no less than quarterly. The Issuer may elect to change the selected interest rate in accordance with the provisions of the Credit Agreement. As of March 31, 2014, the Issuer selected the one-month LIBOR interest rate option, as detailed in the table below, and the amounts outstanding, and rates effective as of March 31, 2014 were based on Delphi's current credit rating and the Applicable Rate for the Credit Agreement: Borrowings as of March 31, 2014 Rates effective as of LIBOR plus (in millions) March 31, 2014 Revolving Credit Facility 1.25 % $ - - % Tranche A Term Loan 1.25 % 400 1.4375 % The Issuer was obligated to make quarterly principal payments throughout the term of the Tranche A Term Loan according to the amortization schedule in the Credit Agreement. In conjunction with the partial repayment of the Tranche A Term Loan during the three months ended March 31, 2014, all principal payment obligations have been satisfied through March 1, 2018. Borrowings under the Credit Agreement are prepayable at the Issuer's option without premium or penalty. The Credit Agreement also contains certain mandatory prepayment provisions in the event the Company receives net cash proceeds from any asset sale or casualty event. No mandatory prepayments under these provisions have been made or are due through March 31, 2014. The Credit Agreement contains certain covenants that limit, among other things, the Company's (and the Company's subsidiaries') ability to incur additional indebtedness or liens, to dispose of assets, to make certain investments, to prepay certain indebtedness and to pay dividends, or to make other distributions or redemptions/repurchases, in respect of the Company's equity interests. In addition, the Credit Agreement requires that the Company maintain a consolidated leverage ratio (the ratio of Consolidated Total Indebtedness to Consolidated EBITDA, each as defined in the Credit Agreement) of less than 2.75 to 1.0. The Credit Agreement also contains events of default customary for financings of this type. The Company was in compliance with the Credit Agreement covenants as of March 31, 2014. In the first quarter of 2014, the Company satisfied credit rating-related conditions to the suspension of many of the restrictive covenants and the mandatory prepayment provisions relating to asset sales and casualty events discussed above. Such covenants and prepayment obligations are required to be reinstated if the applicable credit rating criteria are no longer satisfied. As of March 31, 2014, all obligations under the Credit Agreement are borrowed by Delphi Corporation and jointly and severally guaranteed by its direct and indirect parent companies, subject to certain exceptions set forth in the Credit Agreement. Prior to the first quarter of 2014, certain of Delphi Automotive PLC's direct and indirect subsidiaries, which are directly or indirectly 100% owned by Delphi Automotive PLC, fully and unconditionally guaranteed all obligations under the Credit Agreement. In addition, all obligations under the Credit Agreement, including the guaranties of those obligations, were originally secured by certain assets of Delphi Corporation and the guarantors, including substantially all of the assets of Delphi Automotive PLC, and its U.S. subsidiaries, and certain assets of Delphi Corporation's direct and indirect parent companies. All guarantees of Delphi Corporation's subsidiaries and all then-existing security interests were released during the three months ended March 31, 2014 when the Company satisfied certain credit-rating related and other conditions under the terms of the Credit Agreement. Such security interests and subsidiary guarantees may be reinstated at the election of the lenders if the applicable credit rating criteria are no longer satisfied. 52-------------------------------------------------------------------------------- Table of Contents Senior Notes On May 17, 2011, Delphi Corporation issued $500 million of 5.875% senior unsecured notes due 2019 (the "5.875% 2011 Senior Notes") and $500 million of 6.125% senior unsecured notes due 2021 (the "6.125% 2011 Senior Notes") (collectively, the "2011 Senior Notes") in a transaction exempt from registration under Rule 144A and Regulation S of the Securities Act of 1933 (the "Securities Act"). Delphi paid approximately $23 million of debt issuance costs in connection with the 2011 Senior Notes. The net proceeds of approximately $1 billion as well as cash on hand were used to pay down amounts outstanding under the Original Credit Agreement. In May 2012, Delphi Corporation completed a registered exchange offer for all of the 2011 Senior Notes (the "New Senior Notes"). No proceeds were received by Delphi Corporation as a result of the exchange. In March 2014, Delphi redeemed for cash the entire $500 million aggregate principal amount outstanding of the 5.875% 2011 Senior Notes. The redemption was financed by a portion of the proceeds received from the issuance of the 2014 Senior Notes, as defined below. As a result of the redemption of the 5.875% 2011 Senior Notes, Delphi recognized a loss on debt extinguishment of approximately $33 million during the three months ended March 31, 2014. Interest on the outstanding New Senior Notes is payable semi-annually on May 15 and November 15 of each year to holders of record at the close of business on May 1 or November 1 immediately preceding the interest payment date. On February 14, 2013, Delphi Corporation issued $800 million of 5.00% senior unsecured notes due 2023 (the "2013 Senior Notes") in a transaction registered under the Securities Act. The proceeds were primarily utilized to prepay our term loan indebtedness under our 2012 Credit Agreement. Delphi paid approximately $12 million of issuance costs in connection with the 2013 Senior Notes. Interest is payable semi-annually on February 15 and August 15 of each year to holders of record at the close of business on February 1 or August 1 immediately preceding the interest payment date. On March 3, 2014, Delphi Corporation issued $700 million in aggregate principal amount of 4.15% senior unsecured notes due 2024 (the "2014 Senior Notes") in a transaction registered under the Securities Act. The 2014 Senior Notes were priced at 99.649% of par, resulting in a yield to maturity of 4.193%. The proceeds were primarily utilized to redeem the 5.875% 2011 Senior Notes and to repay a portion of the Tranche A Term Loan. Delphi paid approximately $6 million of issuance costs in connection with the 2014 Senior Notes. Interest is payable semi-annually on March 15 and September 15 of each year to holders of record at the close of business on March 1 or September 1 immediately preceding the interest payment date. Although the specific terms of each indenture governing each series of senior notes vary, the indentures contain certain restrictive covenants, including with respect to Delphi's (and Delphi's subsidiaries) ability to incur liens, enter into sale and leaseback transactions and merge with or into other entities. As of March 31, 2014, the Company was in compliance with the provisions of all series of the outstanding senior notes. All series of senior notes are fully and unconditionally guaranteed, jointly and severally, by Delphi Automotive PLC and by certain of Delphi Corporation's direct and indirect parent companies, subject to customary release provisions (other than in the case of Delphi Automotive PLC). Prior to the first quarter of 2014, certain of Delphi Corporation's direct and indirect subsidiaries, which were directly or indirectly 100% owned by Delphi Automotive PLC, fully and unconditionally guaranteed all series of senior notes then outstanding; however, all Delphi Corporation subsidiary guarantees were released during the three months ended March 31, 2014 because such guarantors no longer guaranteed the Credit Agreement. Other Financing Accounts receivable factoring-Various accounts receivable factoring facilities are maintained in Europe and are accounted for as short-term debt. These uncommitted factoring facilities are available through various financial institutions. Additionally, in 2013 Delphi entered into a new accounts receivable factoring agreement in Europe to replace and consolidate its European factoring facilities. The new agreement is a €350 million committed facility, with borrowings under the new program being subject to the availability of eligible accounts receivable. As of March 31, 2014 and December 31, 2013, $1 million and $1 million, respectively, were outstanding under these European accounts receivable factoring facilities. Capital leases and other-As of March 31, 2014 and December 31, 2013, approximately $50 million and approximately $47 million, respectively, of other debt issued by certain non-U.S. subsidiaries and capital lease obligations were outstanding. Government Programs-Delphi commonly seeks manufacturing development and financial assistance incentive programs that may be awarded by government entities. Delphi has numerous technology and manufacturing development programs that are competitively awarded from agencies of the U.S. Federal Government. These U.S. based programs are from the U.S. Department of Transportation ("DOT"), the U.S. Department of Energy ("DOE"), and the U.S. Department of Defense ("DoD"). We received approximately $2 million from these Federal agencies in the three months ended March 31, 2014 for work performed. We continue to pursue many technology development programs by bidding on competitively procured programs from DOT, DOE and DoD. Some of these programs were bid with us being the lead or "Prime Contractor", and some were bid with us as a "Subrecipient" to the Prime Contractor. 53-------------------------------------------------------------------------------- Table of Contents Cash Flows Intra-month cash flow cycles vary by region, but in general we are users of cash through the first half of a typical month and we generate cash during the latter half of a typical month. Due to this cycle of cash flows, we may utilize short-term financing, including our Revolving Credit Facility and European facilities, to manage our intra-month working capital needs. Our cash balance typically peaks at month end. Cash in the U.S. is primarily managed centrally through a U.S. cash pooling arrangement and cash in Europe is primarily managed centrally through a European cash pooling arrangement. Outside the U.S. and Europe, cash may be managed through a country cash pool, a self-managed cash flow arrangement or a combination of the two depending on our presence in the respective country. Operating Activities. Net cash provided by operating activities totaled $136 million and $149 million for the three months ended March 31, 2014 and 2013, respectively. The $13 million decrease primarily reflects increased working capital requirements and higher payments for restructuring programs, partially offset by increased earnings. Cash flow from operating activities for the three months ended March 31, 2014 consisted primarily of net earnings of $341 million increased by $179 million for non-cash charges for depreciation and amortization and extinguishment of debt, partially offset by $434 million related to changes in operating assets and liabilities, net of restructuring and pension contributions. Cash flow from operating activities for the three months ended March 31, 2013 consisted of primarily of net earnings of $298 million increased by $170 million for non-cash charges for depreciation and amortization and extinguishment of debt, partially offset by $352 million related to changes in operating assets and liabilities, net of restructuring and pension contributions. Investing Activities. Net cash used in investing activities totaled $300 million and $205 million for the three months ended March 31, 2014 and 2013, respectively. The increase is primarily due to the increase in capital expenditures of $85 million. Financing Activities. Net cash used in financing activities totaled $241 million and $216 million for the three months ended March 31, 2014 and 2013, respectively. The increase in net cash used in financing activities during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 is primarily due to the use of an incremental $31 million of cash on hand in 2014 as compared to 2013 to repurchase ordinary shares and the increase of $24 million in cash dividends paid on Delphi's ordinary shares. Additionally, the net proceeds of approximately $691 million received from the issuance of the 4.15% senior unsecured notes due 2024 were primarily used to redeem the 5.875% 2011 Senior Notes and to repay a portion of the Tranche A Term Loan. In the three months ended March 31, 2013, the net proceeds of approximately $790 million received from the issuance of the 5.00% senior unsecured notes due in 2023 were used in conjunction with the amendment of the 2012 Credit Agreement to pay off in its entirety the $773 million of the Tranche B Term Loan. Off-Balance Sheet Arrangements We do not engage in any off-balance sheet financial arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Contingencies and Environmental Matters The information concerning contingencies, including environmental contingencies and the amount currently held in reserve for environmental matters, contained in Note 10. Commitments and Contingencies to the unaudited consolidated financial statements included in Part I, Item 1 of this report is incorporated herein by reference. Recently Issued Accounting Pronouncements The information concerning recently issued accounting pronouncements contained in Note 2. Significant Accounting Policies, to the unaudited consolidated financial statements included in Part 1, Item 1 of this report is incorporated herein by reference. Critical Accounting Estimates There have been no significant changes in our critical accounting estimates during the three months ended March 31, 2014. |