DELPHI TECHNOLOGIES PLC
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 and six months
ended June 30, 2020 . This discussion should be read in conjunction with Item 1.
Financial Statements.
Within this MD&A, "Delphi Technologies ," the "Company," "we," "us" and "our"
refer to Delphi Technologies PLC and its subsidiaries.
Separation from Delphi Automotive PLC
On December 4, 2017 , Delphi Technologies became an independent publicly-traded
company as a result of the distribution by Delphi Automotive PLC (the " Former
Parent") of 100% of the ordinary shares of Delphi Technologies PLC to the Former
Parent's shareholders (the "Separation"). In connection with the Separation,
substantially all of the assets and liabilities related to the businesses and
operations of the Former Parent's Powertrain Systems segment were transferred to
us or one of our subsidiaries. Assets related to the original equipment service
business conducted by the Former Parent's Powertrain Systems segment prior to
the Separation, to the extent related to the sale of products of other segments
of the Former Parent to vehicle original equipment manufacturers or their
affiliates, were retained by or transferred to the Former Parent or one of its
subsidiaries, and all of the Former Parent's other assets and liabilities were
retained by or transferred to the Former Parent or one of its subsidiaries.
As part of the Separation, we entered into a number of agreements with the
Former Parent to govern the Separation and our continuing relationship with the
Former Parent. These agreements provided for the allocation between Delphi
Technologies' and the Former Parent's assets, employees, liabilities and
obligations attributable to periods prior to, at and after the Separation and
govern certain continuing relationships between Delphi Technologies and the
Former Parent. Refer to the Company's Annual Report on Form 10-K for the year
ended December 31, 2019 for descriptions of the Separation and Distribution
Agreement, Transition Services Agreement, Contract Manufacturing Services
Agreements, and Tax Matters Agreement that were entered into in connection with
the Separation.
BorgWarner Inc. Transaction
On January 28, 2020 , we announced that we had entered into the Original
Transaction Agreement under which BorgWarner would acquire us in an all-stock
transaction pursuant to the Scheme of Arrangement. On March 30, 2020 , we drew
the full available amount under our Revolving Credit Facility (the "Revolver
Draw"), resulting in a total of $500 million outstanding under the Revolving
Credit Facility. We determined it was prudent and in the best interests of the
Company and our shareholders to draw the full $500 million under the facility to
protect the business and best position the Company to weather current market
conditions and uncertainties caused by the COVID-19 pandemic.
Following the Revolver Draw, on March 30, 2020 , BorgWarner notified the Company
of its assertion that the Company materially breached the Original Transaction
Agreement as a result of effecting the Revolver Draw without BorgWarner's prior
written consent and also asserted that, if such alleged breach was not cured
within 30 days of the Revolver Draw (or April 29, 2020 ), BorgWarner would have
the right to terminate the Original Transaction Agreement. We disputed
BorgWarner's breach assertion on the basis that, among other things, BorgWarner
unreasonably withheld and conditioned its consent in material breach of the
Original Transaction Agreement.
On May 6, 2020 , we resolved our breach dispute with BorgWarner regarding our
Revolver Draw by entering into an Amendment and Consent Agreement (the
"Amendment" and, together with the Original Transaction Agreement, the
"Transaction Agreement"), pursuant to which, among other things, BorgWarner
consented to the Revolver Draw and certain other matters, subject to the terms
and conditions contained in the Amendment. The Amendment also amends the
Original Transaction Agreement to (a) reduce the exchange ratio at which each
Delphi Technologies ordinary share will be exchanged from 0.4534 shares of
BorgWarner common stock to 0.4307 shares of BorgWarner common stock, and (b)
include the following additional conditions to BorgWarner's obligations to close
the Transaction: (i) Delphi Technologies' net-debt-to-adjusted EBITDA ratio does
not exceed (x) 6.5 to 1.0 if closing of the Transaction occurs on or before
September 30, 2020 , and (y) 7.5 to 1.0 if the closing of the Transaction occurs
on or after October 1, 2020 , and (ii) as of 11:59 p.m. (New York time) on the
date immediately prior to the closing of the Transaction, Delphi Technologies'
outstanding revolver borrowings do not exceed $225 million and, net of cash
balances, the revolver borrowings do not exceed $115 million .
On June 25, 2020 , shareholders of the Company voted to approve the Transaction,
which is currently expected to close in the second half of 2020. However, there
can be no assurance the conditions to closing will be satisfied or waived or
that the Transaction will be completed within the expected time frame or at all.
Refer to Item 1A. Risk Factors, set forth in the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2020 , for risks associated with this
Transaction.
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Executive Overview Our BusinessDelphi Technologies is a global provider of propulsion technologies that make vehicles drive cleaner, better and further. We offer pioneering solutions for internal combustion engine, hybrid and electric passenger cars and commercial vehicles. We build on our original equipment expertise to provide leading service solutions for the aftermarket. OnMarch 11, 2020 , theWorld Health Organization designated the novel coronavirus ("COVID-19") outbreak a global pandemic. COVID-19 has negatively affected the global economy, disrupted global supply chains, resulted in significant travel and work restrictions, including temporary closures of the manufacturing facilities of some of our largest OEM customers, and has significantly disrupted global financial markets and automotive production. In response to this global pandemic, the Company has taken measures to protect the health and safety of our employees and conserve cash. We temporarily closed facilities and implemented work-from-home policies where possible for office-based employees. We also effected temporary layoffs, moved employees to part-time schedules and implemented pay reductions throughout the organization. We put crisis management teams in place monitoring the rapidly evolving situation and recommending risk mitigation actions as deemed necessary. The outbreak has impacted and will continue to impact the Company's results of operations and cash flows. Demand for commercial and passenger vehicle production is being significantly impacted by the disruption of global manufacturing, supply chains, and consumer spending. As this is a developing situation, it is difficult to determine the future impacts of the pandemic. The ultimate magnitude of COVID-19, including the extent of its impact on the Company's financial and operating results, will be determined by the length of time that the pandemic continues, its effect on the demand for vehicle production, as well as the effect of governmental regulations imposed in response to the pandemic. As the impact of the COVID-19 pandemic on the economy and the Company's operations evolves, we continue to evaluate and take actions to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. This includes limiting discretionary spending across the organization, re-prioritizing our capital expenditures, executing disciplined inventory management and collecting past due receivables. We also determined it was prudent and in the best interests of the Company and its shareholders to draw down on the full amount of our$500 million Revolving Credit Facility to provide additional liquidity and financial flexibility in light of current economic conditions and uncertainties arising in connection with the COVID-19 pandemic. While significant uncertainty exists as to the full impact of the COVID-19 pandemic, we believe that we have sufficient liquidity to satisfy our cash needs for the foreseeable future. In the event of a sustained market deterioration, however, the Company may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law inthe United States . The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on our consolidated financial statements for the six months endedJune 30, 2020 . We continue to monitor any effects that may result from the CARES Act. Our total net sales during the three and six months endedJune 30, 2020 were$628 million and$1,573 million , a decrease of 44% and 31% compared to the same period of 2019. Volumes declined primarily due to lower global production and the closure of customer production sites related to COVID-19, as well as the continuing decline in passenger car diesel fuel injection systems inEurope . Our business is directly related to automotive sales and automotive light and commercial vehicle production by our customers. Automotive sales depend on a number of factors, including global and regional economic conditions. Overall global vehicle production decreased by 35% for the six months endedJune 30, 2020 and is expected to decline 23% from 2019 levels for the full year 2020. Compared to 2019, vehicle production in 2020 is expected to decrease 15% inChina , 26% inEurope , 23% inNorth America and 32% inSouth America . There is also potential that geopolitical factors could adversely impact theU.S. and other economies, and specifically the automotive sector. In particular, changes to international trade agreements or other political pressures could affect the operations of our OEM customers, resulting in reduced automotive production in certain regions or shifts in the mix of production to higher cost regions. Increases in interest rates could also negatively impact automotive production as a result of increased consumer borrowing costs or reduced credit availability. Additionally, economic weakness may result in shifts in the mix of future automotive sales (from vehicles with more content such as luxury vehicles, trucks and sport utility vehicles toward smaller passenger cars) or reductions in industrial production and the corresponding level of freight tonnage being transported. While our diversified customer and geographic revenue base, along with our flexible cost structure, allows us to be positioned to withstand the impact of industry downturns and benefit from industry upturns, shifts in the mix of global automotive production to higher cost regions or to vehicles with less content could adversely impact our profitability. 38
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There have also been periods of increased market volatility and currency exchange rate fluctuations. For instance, the British government has formally initiated the process for withdrawal of theUnited Kingdom ("U.K.") from theEuropean Union ("E.U."). The withdrawal, which is subject to a transition period due to end onDecember 31, 2020 , has created significant uncertainty about the future relationship between theU.K. and the E.U. These developments, or the perception that any of them could occur, may adversely affect European and worldwide economic and market conditions, significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets and could contribute to instability in global financial and foreign exchange markets, including increased volatility in interest rates and foreign exchange rates. Although our net exposure to transactions denominated in British pounds is relatively neutral, we are actively monitoring the ongoing potential impacts of these developments and will seek to minimize their impact on our business. For the six months endedJune 30, 2020 , approximately 15% of our net sales were generated in theU.K. , and approximately 10% were denominated in British pounds. For further detail on the Company's business strategy and trends, uncertainties and opportunities, refer to the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Consolidated Results of OperationsDelphi Technologies 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), fluctuations in foreign currency exchange rates (which we refer to as FX), and contractual changes to the sales price (which we refer to as contractual price 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-changes in volume and changes in mix; •Contractual price changes-adjustments in price; •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, contractual price changes or operational performance. The automotive component supply industry is traditionally subject to inflationary pressures with respect to raw materials and labor which may 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 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 and negotiating cost reductions and/or commodity cost contract escalation clauses into our vehicle manufacturer supply contracts. 39
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Three and Six Months EndedJune 30, 2020 versus Three and Six Months EndedJune 30, 2019 The results of operations for the three and six months endedJune 30, 2020 and 2019 were as follows: Three Months EndedJune 30 , Six Months EndedJune 30, 2020 2019 Favorable/(unfavorable) 2020 2019 Favorable/(unfavorable) (dollars in millions) Net sales$ 628 $ 1,121 $ (493)$ 1,573 $ 2,272 $ (699) Cost of sales 602 955 353 1,426 1,938 512 Gross margin 26 4.1% 166 14.8% (140) 147 9.3% 334 14.7% (187) Selling, general and administrative 74 103 29 169 207 38 Amortization 3 2 (1) 6 8 2 Restructuring 9 5 (4) 52 8 (44) Operating (loss) income (60) 56 (116) (80) 111 (191) Interest expense (22) (18) (4) (38) (36) (2) Other income (expense), net 9 8 1 11 (4) 15 (Loss) income before income taxes and equity income (73) 46 (119) (107) 71 (178) Income tax expense (27) (14) (13) (47) (22) (25) (Loss) income before equity income (100) 32 (132) (154) 49 (203) Equity (loss) income, net of tax (2) (1) (1) (2) 1 (3) Net (loss) income (102) 31 (133) (156) 50 (206) Net income attributable to noncontrolling interest 4 4 - 7 7 - Net (loss) income attributable toDelphi Technologies $ (106) $ 27 $ (133)$ (163) $ 43 $ (206) Total Net Sales Below is a summary of our total net sales for the three months endedJune 30, 2020 versusJune 30, 2019 . Three Months Ended June 30, Variance Due To: Contractual price 2020 2019 Favorable/(unfavorable) Volume changes FX Other Total (in millions) (in millions) Total net sales$ 628 $ 1,121 $ (493)$ (463) $ (1)$ (29) $ -$ (493) Total net sales for the three months endedJune 30, 2020 decreased 44% compared to the three months endedJune 30, 2019 . We experienced decreased volume due to lower global production and the temporary closure and reduction of activity of customer production sites related to COVID-19, as well as the continuing decline in passenger car diesel fuel injection systems inEurope . In addition, the unfavorable variance in total net sales was impacted by currency changes, primarily related to the British pound and Brazilian real. Below is a summary of our total net sales for the six months endedJune 30, 2020 versusJune 30, 2019 . Six Months Ended June 30, 2020 Variance Due To: Contractual price 2020 2019 Favorable/(unfavorable) Volume changes FX Other Total (in millions) (in millions) Total net sales$ 1,573 $ 2,272 $ (699)$ (633) $ (9)$ (57) $ -$ (699) Total net sales for the six months endedJune 30, 2020 decreased 31% compared to the six months endedJune 30, 2019 . We experienced decreased volume due to lower global production and the temporary closure and reduction of activity of customer 40
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production sites related to COVID-19, as well as the continuing decline in
passenger car diesel fuel injection systems in
Cost of Sales and Gross Margin Cost of sales is primarily comprised of material, labor, manufacturing overhead, freight, 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 decreased$353 million for the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 , as summarized below. The Company's cost of material was approximately 55% and 50% of net sales in the three months endedJune 30, 2020 and 2019, respectively. Three Months Ended June 30, Variance Due To: Contractual price Operational 2020 2019 Favorable/(unfavorable) Volume changes FX performance Other Total (dollars in millions) (in millions) Cost of sales$ 602 $ 955 $ 353$ 237 $ -$ 30 $ 84$ 2 $ 353 Gross margin ($)$ 26 $ 166 $ (140)$ (226) $ (1)$ 1 $ 84$ 2 $ (140) Gross margin (%) 4.1 % 14.8 % The change in cost of sales primarily reflects the impacts from reduced volume, operational performance improvements and currency exchange. The unfavorable change in gross margin is primarily due to volume including the impact of COVID-19, partially offset by operational performance improvements. Cost of sales decreased$512 million for the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 , as summarized below. The Company's cost of material was approximately 55% and 50% of net sales in the six months endedJune 30, 2020 and 2019, respectively. Six Months Ended June 30, Variance Due To: Contractual price Operational 2020 2019 Favorable/(unfavorable) Volume changes FX performance Other Total (dollars in millions) (in millions) Cost of sales$ 1,426 $ 1,938 $ (512)$ 318 $ -$ 52 $ 142 $ -$ 512 Gross margin ($)$ 147 $ 334 $ (187)$ (315) $ (9)$ (5) $ 142 $ -$ (187) Gross margin (%) 9.3 % 14.7 %
The change in cost of sales primarily reflects the impacts from reduced volume, operational performance improvements and currency exchange. The unfavorable change in gross margin is primarily due to volume including the impact of COVID-19, partially offset by operational performance improvements.
Selling, General and Administrative Expense
Three Months Ended
Favorable/
2020 2019 (unfavorable)
(in millions)
Selling, general and administrative expense $ 74 $ 103 $ 29
Six Months Ended June 30,
Favorable/
2020 2019 (unfavorable)
(in millions)
Selling, general and administrative expense $ 169
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Selling, general and administrative expense ("SG&A") includes administrative
expenses, information technology costs and incentive compensation related costs.
SG&A decreased for the three and six months ended June 30, 2020 as compared to
the three and six months ended June 30, 2019 . This is primarily due to the
impact of cost reduction initiatives, including a focus on reducing global
overhead costs.
Restructuring
Three Months Ended June 30,
Favorable/
2020 2019 (unfavorable)
(in millions)
Restructuring $ 9 $ 5 $ (4)
Six Months Ended June 30,
Favorable/
2020 2019 (unfavorable)
(in millions)
Restructuring $ 52 $ 8 $ (44)
Restructuring charges during the six months ended June 30, 2020 included
approximately $40 million related to the restructuring plan announced on October
31, 2019 to reshape and realign the Company's global technical center footprint
and reduce salaried and contract staff (approximately $100 million of charges
recorded to date). Certain of these actions are subject to consultation with
employee works councils and other employee representatives and are expected to
be substantially completed by the end of 2021. We expect to record additional
pre-tax restructuring charges of approximately $25 million up to $75 million
related to this plan, across the organization. Nearly all of the restructuring
charges will be cash expenditures.
The balance of the charges during the three and six months ended June 30, 2020
and June 30, 2019 related to programs focused on the continued rotation of our
manufacturing footprint and reduction of global overhead costs.
As we 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 and optimize our manufacturing footprint. From time to time,
we may incur restructuring expenses to align manufacturing capacity and other
costs with prevailing regional automotive production levels and locations, to
improve the efficiency and utilization of other locations and in order to
increase investment in advanced technologies and engineering.
Refer to Note 7. Restructuring to the unaudited consolidated financial
statements included herein for further information regarding restructuring
activities.
Other Income (Expense), Net
Three Months Ended June 30,
Favorable/
2020 2019 (unfavorable)
(in millions)
Other income (expense), net $ 9 $ 8 $ 1
Six Months Ended June 30,
Favorable/
2020 2019 (unfavorable)
(in millions)
Other income (expense), net $ 11 $ (4) $ 15
The increase in other income for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 is primarily due to a net gain on the sale of property of$3 million , offset by an unfavorable change of$3 million in components of net periodic benefit cost other than service costs related to the Company's defined benefit pension plans. The increase in other income for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 is primarily due to: 42
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•A decrease of
Income Taxes
Three Months Ended June 30,
Favorable/
2020 2019 (unfavorable)
(in millions)
Income tax expense $ 27 $ 14 $ (13)
Six Months Ended June 30,
Favorable/
2020 2019 (unfavorable)
(in millions)
Income tax expense $ 47 $ 22 $ (25)
The Company's tax rate is affected by the fact that it is a U.K. resident
taxpayer, the tax rates in the U.K. and other jurisdictions in which the Company
operates, the relative amount of income earned by jurisdiction and the relative
amount of losses or income for which no tax benefit or expense was recognized
due to a valuation allowance.
The Company's effective tax rate was (37)% and (44)% for the three and six
months ended June 30, 2020 , respectively. This was impacted by unfavorable
changes in geographic income mix in 2020 as compared to 2019 which increased the
amount of losses in jurisdictions in which no tax benefit for those losses could
be recognized. The COVID-19 pandemic has also affected the 2020 effective tax
rate in comparison to 2019 due to its significant impact on the Company's
operating results in the first six months of 2020 and full-year projections. The
Company's effective tax rate for the three and six months ended June 30, 2020
includes net discrete tax expense of $3 million and $2 million , respectively.
The effective tax rate was 30% and 31% for the three and six months ended
June 30, 2019 , respectively. This was impacted by unfavorable changes in
geographic income mix in 2019 as compared to 2018. The Company's effective tax
rate for the three and six months ended June 30, 2019 includes net discrete tax
expense of $1 million and net discrete tax benefit of less $1 million ,
respectively.
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:
•Fuel Injection Systems. This segment includes gasoline and diesel fuel
injection components and systems. Our gasoline fuel injection portfolio includes
a full suite of fuel injection technologies - including pumps, injectors, fuel
rail assemblies and complete systems - that deliver greater efficiency for
traditional and hybrid vehicles with gasoline combustion engines. The Company's
Gasoline Direct Injection ("GDi") technology provides high-precision fuel
delivery for optimized combustion, which lowers emissions and improves fuel
economy. Our diesel fuel injection systems portfolio provides enhanced engine
performance. The Company's common rail fuel injection system is the core
technology for both on and off-highway commercial and light vehicle
applications.
•Powertrain Products. This segment includes an array of highly-engineered
products for traditional combustion and hybrid electric vehicles, including
variable valvetrains, smart remote actuators, powertrain sensors, ignition
products, canisters, and fuel handling products. These products complement and
enhance the efficiency improvements delivered by our fuel injection systems
technologies.
•Electrification & Electronics. Our electronics portfolio consists of engine and
transmission control modules and power electronics. The control modules,
containing as much as one million lines of software code, are key components
that enable the integration and operation of powertrain products throughout the
vehicle. As electrification increases, our proprietary solutions - including
supervisory controllers, software, DC/DC converters and inverters - provide
better efficiency,
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reduced weight and lower cost for our OEM customers, while also making these and other components easier to integrate. Manufacturers are also choosing to combine power electronic functionality into one unit, enabling more effective packaging at a lower total cost while increasingDelphi Technologies' content per vehicle. These products are expected to experience increased demand as vehicle electrification accelerates. •Aftermarket. Through this segment we sell products and services to independent aftermarket customers and original equipment service customers. Our aftermarket product portfolio includes a wide range of solutions covering the fuel injection, electronics and engine management, maintenance, and test equipment and vehicle diagnostics categories. Our aftermarket business provides a recurring and generally stable revenue base, as replacement of many of these products is non-discretionary in nature. Our management utilizes Adjusted Operating Income by segment 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. Consolidated Adjusted Operating Income should not be considered a substitute for results prepared in accordance withU.S. GAAP and should not be considered an alternative to net income attributable toDelphi Technologies , which is the most directly comparable financial measure to Adjusted Operating Income that is prepared in accordance withU.S. GAAP. Adjusted Operating Income, as determined and measured byDelphi Technologies , should also not be compared to similarly titled measures reported by other companies. The reconciliations of Adjusted Operating Income to net income attributable toDelphi Technologies for the three and six months endedJune 30, 2020 and 2019 are as follows: Fuel Injection Electrification & Corporate Costs Systems Powertrain Products Electronics Aftermarket (1) Total (in millions) For the Three Months EndedJune 30, 2020 : Adjusted operating (loss) income$ (29) $ 7 $ (5)$ 6 $ (22) $ (43) Restructuring (8) (2) 3 (1) (1) (9) Separation and transformation costs2 - - - (1) 1 - Asset impairments (1) - (1) - - (2) Pension charges3 (1) - - - - (1) Transaction related costs4 - - - - (5) (5) Operating (loss) income$ (39) $ 5 $ (3)$ 4 $ (27) (60) Interest expense (22) Other income, net 9 Loss before income taxes and equity loss (73) Income tax expense (27) Equity loss, net of tax (2) Net loss (102) Net income attributable to noncontrolling interest 4 Net loss attributable to Delphi Technologies$ (106) 44
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Fuel Injection Powertrain Electrification & Corporate Costs
Systems Products Electronics Aftermarket and Other1 Total
(in millions)
For the Three Months Ended June 30, 2019 :
Adjusted operating income (loss) $ 37 $ 48 $ 11 $ 21 $ (36) $ 81
Restructuring (1) (1) (1) - (2) (5)
Separation and transformation costs2 - - (3) - (10) (13)
Asset impairments (2) (1) (1) (1) - (5)
Pension charges3 (2) - - - - (2)
Operating income (loss) $ 32 $ 46 $ 6 $ 20 $ (48) 56
Interest expense (18)
Other income, net 8
Income before income taxes and equity
loss 46
Income tax expense (14)
Equity loss, net of tax (1)
Net income 31
Net income attributable to
noncontrolling interest 4
Net income attributable to Delphi
Technologies $ 27
Fuel Injection Powertrain Electrification & Corporate Costs
Systems Products Electronics Aftermarket and Other1 Total
(in millions)
For the Six Months Ended June 30, 2020 :
Adjusted operating (loss) income $ (11) $ 42 $ (4) $ 21 $ (51) $ (3)
Restructuring (40) (10) 2 (1) (3) (52)
Separation and transformation costs2 - - (2) (1) - (3)
Asset impairments (1) - (1) - - (2)
Pension charges3 (3) - - - - (3)
Transaction related costs4 - - - - (17) (17)
Operating (loss) income $ (55) $ 32 $ (5) $ 19 $ (71) (80)
Interest expense (38)
Other income, net 11
Loss before income taxes and equity
loss (107)
Income tax expense (47)
Equity loss, net of tax (2)
Net loss (156)
Net income attributable to
noncontrolling interest 7
Net loss attributable to Delphi
Technologies $ (163)
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Fuel Injection Powertrain Electrification & Corporate Costs
Systems Products Electronics Aftermarket and Other1 Total
(in millions)
For the Six Months Ended June 30,
2019:
Adjusted operating income (loss) $ 60 $ 109 $ 28 $ 36 $ (65) $ 168
Restructuring (4) (1) (1) - (2) (8)
Separation and transformation costs2 - (1) (7) - (23) (31)
Asset impairments (2) (4) (1) (1) - (8)
Pension charges3 (9) - - (1) - (10)
Operating income (loss) $ 45 $ 103 $ 19 $ 34 $ (90) 111
Interest expense (36)
Other expense, net (4)
Income before income taxes and equity
income 71
Income tax expense (22)
Equity income, net of tax 1
Net income 50
Net income attributable to
noncontrolling interest 7
Net income attributable to Delphi
Technologies $ 43
1Corporate Costs includes corporate related expenses not allocated to operating
segments, which primarily includes executive administration, corporate finance,
legal, human resources, supply chain management and information technology.
2Separation and transformation costs include one-time incremental expenses
associated with becoming a stand-alone publicly-traded company and costs and
income associated with the transformation of our global technical center
footprint.
3Pension charges include additional contributions to defined contribution plans,
other payments to impacted employees and other related expenses resulting from
the freeze of future accruals for nearly all U.K. defined benefit pension plans.
4Transaction related costs include charges for due diligence, integration
planning and other expenses related to the Transaction with BorgWarner.
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Net sales, gross margin as a percentage of net sales and Adjusted Operating Income by segment for the three and six months endedJune 30, 2020 and 2019 are as follows:Net Sales by Segment Three Months Ended June 30, Variance Due To: Volume, net of Favorable/ contractual price 2020 2019 (unfavorable) changes FX Other Total (in millions) (in millions) Fuel Injection Systems$ 238 $ 451 $ (213) $ (199)$ (14) $ -$ (213) Powertrain Products 142 314 (172) (167) (5) - (172) Electrification & Electronics 155 211 (56) (53) (3) - (56) Aftermarket 128 214 (86) (78) (8) - (86) Eliminations and Other1 (35) (69) 34 33 1 - 34 Total$ 628 $ 1,121 $ (493) $ (464)$ (29) $ -$ (493) Six Months Ended June 30, Variance Due To: Volume, net of Favorable/ contractual price 2020 2019 (unfavorable) changes FX Other Total (in millions) (in millions) Fuel Injection Systems$ 631 $ 905 $ (274) $ (247)$ (27) $ -$ (274) Powertrain Products 403 641 (238) (228) (10) - (238) Electrification & Electronics 333 454 (121) (114) (7) - (121) Aftermarket 302 407 (105) (91) (14) - (105) Eliminations and Other1 (96) (135) 39 38 1 - 39 Total$ 1,573 $ 2,272 $ (699) $ (642)$ (57) $ -$ (699)
1Eliminations and Other includes the elimination of inter-segment transactions. Gross Margin Percentage by Segment
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Fuel Injection Systems (8.0) % 12.9 % 2.9 % 11.3 %
Powertrain Products 6.3 % 18.2 % 13.4 % 18.4 %
Electrification & Electronics 1.3 % 7.6 % 2.7 % 7.9 %
Aftermarket 15.6 % 21.5 % 18.9 % 20.6 %
Total 4.1 % 14.8 % 9.3 % 14.7 %
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Adjusted Operating Income by Segment
Three Months Ended June 30, Variance Due To:
Volume, net of
Favorable/ contractual price Operational
2020 2019 (unfavorable) changes FX performance Other Total
(in millions) (in millions)
Fuel Injection Systems $ (29) $ 37 $ (66) $ (108) $ (3) $ 45 $ - $ (66)
Powertrain Products 7 48 (41) (61) (1) 12 9 (41)
Electrification & Electronics (5) 11 (16) (29) (2) 17 (2) (16)
Aftermarket 6 21 (15) (26) 1 1 9 (15)
Corporate Costs (22) (36) 14 - 7 - 7 14
Total $ (43) $ 81 $ (124) $ (224) $ 2 $ 75 $ 23 $ (124)
As noted in the table above, Adjusted Operating Income for the three months
ended June 30, 2020 as compared to the three months ended June 30, 2019 was
impacted by unfavorable volume including the impact of COVID-19, partially
offset by operational performance improvements. Adjusted operating income was
also affected by various items in Other above, which primarily reflects the
impact of cost reduction initiatives, including a focus on reducing global
overhead costs.
Six Months Ended June 30, Variance Due To:
Volume, net of
Favorable/ contractual price Operational
2020 2019 (unfavorable) changes FX performance Other Total
(in millions) (in millions)Fuel Injection Systems$ (11) $ 60 $ (71) $ (147)$ (6) $ 82 $ -$ (71) Powertrain Products 42 109 (67) (85) (1) 16 3 (67) Electrification & Electronics (4) 28 (32) (53) (3) 24 - (32) Aftermarket 21 36 (15) (35) 3 7 10 (15) Corporate Costs (51) (65) 14 - 5 - 9 14 Total$ (3) $ 168 $ (171) $ (320)$ (2) $ 129 $ 22 $ (171) As noted in the table above, Adjusted Operating Income for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 was impacted by unfavorable volume including the impact of COVID-19, partially offset by operational performance improvements. Adjusted operating income was also affected by various items in Other above, which primarily reflects the impact of cost reduction initiatives, including a focus on reducing global overhead costs. 48
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Liquidity and Capital Resources Overview of Capital Structure The Company's liquidity requirements are primarily to fund our business operations, including capital expenditures and working capital requirements, operational restructuring activities, separation activities, Transaction activities, to meet debt service requirements, fund our pension obligations and return capital to shareholders. EffectiveMarch 31, 2019 , the Company froze future accruals for nearly allU.K. based employees under the related defined benefit plans, replacing them with contributions under defined contribution plans effectiveApril 1, 2019 , including additional contributions and other payments to impacted employees over a two-year transition period. In addition, due to the impacts of COVID-19, during the three months endedJune 30, 2020 , the Company deferred approximately$8 million of contributions to these defined benefit plans to be made later in the year. Our primary sources of liquidity are cash flows from operations, our existing cash balance, and as necessary, borrowings under available credit facilities and the issuance of long-term debt. To the extent we generate discretionary cash flow we may consider using this additional cash flow for optional prepayments of indebtedness, to undertake new capital investment projects, make acquisitions, to return capital to shareholders and/or for general corporate purposes. As ofJune 30, 2020 , we had cash and cash equivalents of$550 million , which is primarily held at investment-grade rated banking institutions. During 2017 we entered into the Credit Agreement and completed the offering of the Senior Notes, as defined in Note 8. Debt to the unaudited consolidated financial statements included herein. As ofJune 30, 2020 , we had a total outstanding amount of debt, net of unamortized issuance costs and discounts, of approximately$1,972 million , primarily consisting of$675 million principal outstanding under the$750 million five-year-year term loan pursuant to the Credit Agreement,$800 million principal outstanding under the$800 million senior unsecured notes due 2025 and$500 million related to the Revolving Credit Facility. OnMarch 30, 2020 , we determined it was prudent and in the best interests of the Company and its shareholders to draw down on its full$500 million Revolving Credit Facility to provide additional liquidity and financial flexibility in light of current economic conditions and uncertainties arising in connection with the COVID-19 pandemic. As ofJune 30, 2020 , the full available amount was drawn on the Revolving Credit Facility, resulting in$500 million outstanding on the Revolving Credit Facility. InJuly 2020 , the Company repaid$100 million on the Revolving Credit Facility. Refer to Note 8. Debt to the unaudited consolidated financial statements included herein for additional information. The Company's cost of debt under the Credit Agreement is impacted by the corporate credit ratings provided by Standard and Poor's ("S&P") and Moody's, or an equivalent rating agency. Downgrades in the corporate credit rating result in higher interest expense for the Company. In late 2019, S&P and Moody's downgraded the Company's corporate credit rating and Fitch revised the Company's rating outlook to negative from stable. OnJanuary 29, 2020 , both S&P and Fitch put the Company's credit ratings on positive watch. InJanuary 2020 andMarch 2020 , Moody's further downgraded the Company's Corporate Family Rating to B1 and B2, respectively, while placing the ratings under review for downgrade. OnOctober 31, 2019 , the Company announced a plan to restructure the Company's global technical center footprint and reduce salaried and contract staff. The Company expects to record pre-tax restructuring charges of approximately$125 million up to$175 million related to these actions, nearly all of which will be cash expenditures. The Company expects the majority of these cash payments to be paid by the end of 2021. Pursuant to the plan to restructure the Company's global technical center footprint, the Company executed a sale of a technical center during the three months endedJune 30, 2020 and received cash proceeds of approximately$40 million for the sale of this facility during the three months endedSeptember 30, 2020 . We expect available liquidity to continue to be sufficient to fund our global activities (including restructuring payments, any mandatory payments required under the Credit Agreement as described in Note 8. Debt to the unaudited consolidated financial statements included herein, capital expenditures and funding of potential acquisitions, as applicable). 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. We utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan repayments and other distributions and advances to provide the funds necessary to meet our global liquidity needs. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions toDelphi Technologies . Other Financing Receivable factoring-The Company is party to a €225 million accounts receivable factoring facility for certain subsidiaries inEurope . This facility is currently suspended. The facility would be accounted for as short-term debt and borrowings would be subject to the availability of eligible accounts receivable. Collateral is not required related to these trade accounts receivable. This facility matures onNovember 28, 2022 and will automatically renew on a non-committed, indefinite basis unless terminated by either party. Borrowings bear interest at LIBOR plus a margin for borrowings denominated in British pounds and Euro Interbank Offered Rate ("EURIBOR") plus a margin for borrowings denominated in Euros. The current applicable margin will increase or decrease from time to time between 0.45% and 0.85% based on changes to our corporate credit ratings. There 49
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were no amounts outstanding on the European accounts receivable factoring facility as ofJune 30, 2020 andDecember 31, 2019 . The maximum amount drawn under this facility during the six months endedJune 30, 2020 to manage working capital requirements was$17 million . The Company entered into arrangements with various financial institutions to sell eligible trade receivables from certain Aftermarket customers inNorth America andEurope . These arrangements can be terminated at any time subject to prior written notice. The receivables under these arrangements are sold to a third party without recourse to the Company and are therefore accounted for as true sales. During the three and six months endedJune 30, 2020 ,$31 million and$62 million of receivables were sold under these arrangements, and expenses of less than$1 million and$1 million were recognized within interest expense, respectively. During the three and six months endedJune 30, 2019 ,$43 million and$74 million of receivables were sold under these arrangements, and expenses of$1 million and$2 million were recognized within interest expense, respectively. In addition, during the six months endedJune 30, 2019 , one of the Company's European subsidiaries factored, without recourse,$21 million of receivables related to certain foreign research credits to a financial institution. This transaction was accounted for as a true sale of the receivables, and the Company therefore derecognized this amount from other long-term assets in the consolidated balance sheet as a result of these transactions. During the six months endedJune 30, 2019 , less than$1 million of expenses were recognized within interest expense related to these transactions. During the three months endedSeptember 30, 2020 , the Company factored, without recourse,$17 million of receivables related to the foreign research credits that were also accounted for as a true sale of the receivables. Finance leases-There were approximately$14 million and$14 million of finance lease obligations outstanding as ofJune 30, 2020 andDecember 31, 2019 , respectively. Interest-Cash paid for interest related to debt outstanding, including the effect of interest rate and cross currency swaps, totaled$31 million and$35 million , for the six months endedJune 30, 2020 and 2019, respectively. Share Repurchases InJanuary 2019 , the Board of Directors elected to suspend the Company's quarterly dividend and approved a new$200 million share repurchase program, which replaced the previous repurchase authorization fromJuly 2018 . Repurchases under this program could be made at management's discretion from time to time on the open market or through privately negotiated transactions. OnOctober 31, 2019 , the Company suspended its share repurchase program. A summary of the ordinary shares repurchased during the three and six months endedJune 30, 2019 is as follows: Three Months Ended Six Months Ended June 30, June 30, 2019 2019 Total number of shares repurchased 845,959 1,583,876 Average price paid per share$ 17.73 $ 18.94 Total (in millions) $ 15 $ 30 All repurchased shares were retired and returned to authorized but unissued shares. The repurchased shares are reflected as a reduction of ordinary share capital for the par value of the shares, with the excess applied as reductions to additional paid-in-capital and retained earnings. Cash Flows We utilize a combination of strategies, including dividends, cash pooling arrangements, intercompany loan structures and other distributions and advances and may also utilize short-term financing, to provide the funds necessary to meet our global liquidity needs. We utilize a global cash pooling arrangement to consolidate and manage our global cash balances, which enables us to efficiently move cash into and out of a number of the countries in which we operate. Operating activities-Net cash provided by operating activities totaled$41 million and$91 million for the six months endedJune 30, 2020 and 2019, respectively. Cash flow from operating activities for the six months endedJune 30, 2020 consisted primarily of a net loss of$156 million increased by$117 million for non-cash charges for depreciation, amortization and asset impairments, and by an additional$70 million related to changes in operating assets and liabilities, net of restructuring and pension contributions. Cash flow from operating activities for the six months endedJune 30, 2019 consisted primarily of net earnings of$50 million increased by$130 million for non-cash charges for depreciation, amortization, asset impairments and pension costs, partially offset by$94 million related to changes in operating assets and liabilities, net of restructuring and pension contributions. 50
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Investing activities-Net cash used in investing activities totaled$137 million for the six months endedJune 30, 2020 , as compared to$230 million for the six months endedJune 30, 2019 . The decrease in usage is primarily attributable to$89 million of decreased capital expenditures during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . Financing activities-Net cash provided by financing activities totaled$461 million for the six months endedJune 30, 2020 and net cash used in financing activities totaled$58 million for the six months endedJune 30, 2019 . Cash flows provided by financing activities for the six months endedJune 30, 2020 primarily included$500 million of borrowings under the Revolving Credit Facility, partially offset by$19 million of long-term debt repayments,$9 million of fees associated with amendments to the Credit Agreement and$8 million of dividend payments of consolidated affiliates to minority shareholders. Cash flows used in financing activities for the six months endedJune 30, 2019 , primarily included$19 million of long-term debt repayments,$29 million paid to repurchase ordinary shares and$8 million of dividend payments of consolidated affiliates to minority shareholders. 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 For a description of contingencies, including environmental contingencies and the amount currently held in reserve for environmental matters, refer to Note 10. Commitments and Contingencies to the unaudited consolidated financial statements included herein and the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Recently Issued Accounting Pronouncements The information concerning recently issued accounting pronouncements see Note 2. Significant Accounting Policies to the unaudited consolidated financial statements included herein.
Critical Accounting Estimates
There have been no significant changes in our critical accounting estimates
during the six months ended
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