To no one’s surprise, bankrupt auto parts manufacturer Delphi filed a motion in federal court that will void the
company’s labor contract. The Section 1113 and 1114 filings will be reviewed by the judge presiding over the case on
May 9 and 10, so it’s reasonable to expect that we won’t see a major work stoppage for another five weeks or
so. Additional labor negotiations will undoubtedly be taking place during this time, although one can expect this
filing to put a bit of a damper on the whole affair.
Additionally, the company’s “core” plants have been identified as follows:
Brookhaven, Mississippi
- Clinton, Mississippi
- Grand Rapids, Michigan
- Kokomo, Indiana
- Lockport, New York
- Rochester, New York
- Warren, Ohio
- Vandalia, Ohio
Presumably, the remaining plants will be sold off or closed.
We’ve posted Delphi’s entire press release on the flip side.
Release Date: March 31, 2006
Troy, Mich. — Delphi Corp. (OTC:DPHIQ) today outlined its strategy to prepare for its return to stable,
profitable business operations through a broad-based global restructuring in order to complete the Chapter 11 cases for
Delphi and 41 of its domestic U.S. subsidiaries in the first half of 2007 as previously announced. Delphi’s
transformation plan is intended to allow the company to become competitive in the global marketplace.
“We are clearly focused on Delphi’s future,” said Delphi Chairman and CEO Robert S. “Steve”
Miller. “Emergence from the Chapter 11 process in the U.S. requires that we make difficult, yet necessary,
decisions. To complete our restructuring process, we must focus on five key areas. First, we must modify our labor
agreements to create a competitive arena in which to conduct business going forward. Second, we must conclude our
negotiations with General Motors to finalize its financial support for the legacy and labor costs we currently carry
and to ascertain its business commitment to Delphi going forward. Third, we have to streamline our product portfolio to
capitalize on our world-class technology and market strengths and make the necessary manufacturing alignment with our
new focus. Fourth, we must also transform our salaried workforce to ensure that our organizational and cost structure
is competitive and aligned with our product portfolio and manufacturing footprint. And fifth, we must devise a workable
solution to our current pension situation, whether it is to stretch out pension payments or develop an alternate
solution. We are mindful of the impact the implementation of this plan will have on some of our stakeholders, including
our employees and communities, yet ultimately, these actions will result in a stronger company with future global growth
opportunities.”
Court Motions Underscore Determination to Achieve Competitiveness
While there has been recent progress in discussions with the company’s unions and GM, particularly on the U.S.
Hourly Attrition Programs, the parties have not yet reached comprehensive agreements. Consequently, Delphi will be
filing two motions later today: its motions under Sections 1113 and 1114 of the U.S. Bankruptcy Code seeking authority
to reject U.S. labor agreements after ten days’ notice to the unions and to modify retiree benefits, and its initial
motion to reject unprofitable supply contracts with GM. The Section 1113 and 1114 filing is consistent with the
scheduling order signed by the Bankruptcy Court on February 17, 2006.
A hearing on the Section 1113 and 1114 motion has been scheduled for May 9 and May 10. The Court has provided a
five-week time period between the filing of the motion and the Court hearing (rather than the 14 day period called for
in the Bankruptcy Code) so that Delphi and its unions can continue working on consensual agreements before the hearing.
The Court also directed the parties to promptly “meet and confer” to resolve the motion.
“We are greatly encouraged by the progress our negotiations have made to date,” said Miller. “Our
proposed U.S. Hourly Attrition Programs and labor proposals are designed to mitigate sudden financial impact on our
hourly employees. The Special Attrition Program implements phased-in retirement opportunities, some with financial
incentives, and provides 5,000 UAW-represented employees the opportunity to work at GM. In labor proposals, we have
offered, subject to implementation of our transformation plan including GM support, buyout payments for employees who
are not eligible for retirement of $140,000 for employees with ten years of service and $70,000 for less senior
employees. We have also increased our wage proposal for current employees to $22 per hour (from $12.50 in our proposals
last fall) through September 3, 2007. At that point, wages would be reduced to $16.50 per hour for existing employees
but they would receive a $50,000 “wage buydown” payment. While our Court filings are necessary procedural
steps to enable action that may become necessary at some point in the future, we are singularly focused on reaching a
consensual resolution with all of our unions and GM before any court hearing is necessary.”
Commenting on Delphi’s current unprofitable supply contracts with GM, Miller said, “We need GM to cover a
greater portion of the costs of manufacturing products for GM at plants that bear the burden of our legacy costs. We
simply cannot continue to sell products at a loss.” The company said that the initial GM contract rejection motion
covers less than ten percent of GM’s contracts as listed in the statements and schedules filed on January 20, 2006, and
approximately half of the North American annual purchase volume revenue from GM. Delphi expects this motion to be heard
at the May 12 omnibus hearing, which is scheduled with 42 days’ notice (rather than the 20 days notice provided for by
the Court’s case management order) to facilitate continued negotiations between Delphi and GM. The company said that it
also delivered a letter to GM today initiating a process to reset the terms and conditions for more than 400 commercial
agreements that expired between October 1, 2005, and March 31, 2006. The company said that the renewal of expired and
expiring commercial contracts on acceptable terms and conditions to Delphi does not require Bankruptcy Court approval.
The company also assured GM that Delphi would not unilaterally revise the terms and conditions on which Delphi was
providing interim supply of parts to GM in connection with the expired contracts or file additional contract rejection
motions prior to May 12 so long as GM did not initiate re-sourcing or other hostile commercial initiatives against
Delphi.
Miller emphasized: “Our message to our hourly workforce and GM is clear: Delphi remains committed to finding a
consensual resolution to our issues and intends to continue to discuss with our unions and GM ways to become competitive
in our U.S. operations. Even if it becomes necessary to complete the hearings on the motions being filed today and the
company obtains the relief requested in these motions, Delphi will not immediately impose all of the relief sought in
the motions. We intend to work with our unions and GM but at the end of the day Delphi must be competitive in the
global marketplace.”
“Our fiduciary duty as the management team and the Board of Directors at Delphi is to protect the value of the
estate. We need to take the steps necessary to halt losses that continue to occur at an unsustainable rate and transform
our business. Although today’s court filings are necessary to protect our businesses, we have not left the negotiating
table. We have made considerable progress in recent weeks, and we intend to stay at it until we are finished,”
Miller said. Consistent with its prior practice, the company said it will not comment further publicly about the status
or substance of its discussions with GM or its unions while the discussions are ongoing.
Growth and Technology Leadership Foundation of Future Product Portfolio
Delphi said in addition to improving operating efficiencies and reducing its overall cost-structure, it plans to
focus its product portfolio on those core technologies for which Delphi has significant competitive and technological
advantages and expects to provide the greatest opportunities for increased growth and profitability. The company does
not expect the portfolio changes to have a significant impact on Delphi’s independent aftermarket or consumer
electronics businesses. Delphi will continue to offer advanced technology and OE quality parts and service. Similarly,
it does not expect an impact on medical, commercial vehicles or other adjacent-market businesses and product lines.
Rodney O’Neal, president and chief operating officer, said Delphi will concentrate the organization around the
following core strategic product lines:
- Controls & Security (Body Security, Mechatronics, Power Products and Displays)
- Electrical/Electronic Architecture (Electrical/Electronic Distribution Systems, Connection Systems and
Electrical Centers) - Entertainment & Communications (Audio, Navigation and Telematics)
- Powertrain (Diesel and Gas Engine Management Systems)
- Safety (Occupant Protection and Safety Electronics)
- Thermal (Climate Control & Powertrain Cooling)
O’Neal said that these core businesses are where Delphi’s technical strength can provide the greatest support and
differentiation to its customers in automotive, aftermarket, consumer electronics, and adjacent markets such as
commercial vehicles, medical systems, computers and peripherals, military/aerospace, telecommunications, commercial,
residential, and transportation products.
As part of the transformation plan, the company has identified the following U.S. manufacturing sites as its core
automotive facilities in the United States:
- Brookhaven, Mississippi
- Clinton, Mississippi
- Grand Rapids, Michigan
- Kokomo, Indiana
- Lockport, New York
- Rochester, New York
- Warren, Ohio
- Vandalia, Ohio
To achieve profitability and become competitive, these locations must implement productivity enhancements, product
line restructuring and workforce reductions.
“We will allocate our capital and resources into a focused product portfolio, especially where our customers
demand technologies that distinguish their products from the competition,” said O’Neal. “Our emphasis will be
on products with greater electronics content, precision manufacturing and complex, complete systems for our diverse
customer base.”
Delphi will maintain its commitment to technology development, and plans to continue investing more than seven
percent of annual revenue into the development of future products in these and adjacent growth markets. O’Neal said,
“Stability is key to our customer programs. Just as we have maintained supply to our customers during these
Chapter 11 cases, we will work to ensure that our transformation is seamless and transparent.” O’Neal also said
that there must be significant changes at many of the company’s remaining operations, including reduction in non-core
support operations, implementation of more productive work practices, subcontracting, and other initiatives intended to
achieve future success and profitability.
Non-Core Product Lines and Plants
O’Neal also identified non-core product lines that do not fit into the company’s future strategic framework and
said that the company will seek to sell or wind-down these product lines. He emphasized that any sale or wind-down
process will be conducted in consultation with the company’s customers, unions and other stakeholders to carefully
manage the transition of affected product lines. He also said that the disposition of any U.S. operations would be
accomplished in accordance with the requirements of the U.S. Bankruptcy Court. The company also will begin
consultations with the European Works Councils in accordance with applicable laws.
“Non-core product lines include Brake & Chassis Systems, Catalysts, Cockpits and Instrument Panels, Door
Modules and Latches, Ride Dynamics, Steering and Wheel Bearings. We believe many of these product lines have the
potential to compete successfully under new ownership that has the resources and capital to invest in them,”
O’Neal said. In order to align Delphi’s manufacturing footprint with its core businesses and competitive restructuring
initiatives, the company said that it intends to sell or wind-down approximately one-third of its global manufacturing
sites over time as part of the transformation plan.
Separately, O’Neal added that in the case of Delphi Steering, the division has solid technology and a diverse
customer base. Delphi recognizes that Steering is a strategic business, but will explore the possibility of potential
sale and alliance opportunities that could make the division even stronger and better able to serve its customers.
“These were difficult decisions, because Delphi has been in some of these businesses for decades,” O’Neal
said. “These product lines offer valuable technology with dedicated and talented employees. Exiting them will help
us become a focused company, and any sale proceeds would also maximize estate value — another important element
for resolving our restructuring process in the U.S.”
O’Neal said that the company continually evaluates its product portfolio and could retain or exit certain
businesses depending on market forces or cost structure changes. The company said it intends to sell or wind-down
non-core product lines and manufacturing sites by January 1, 2008. Delphi will also begin discussions with certain
governmental agencies whose policies could help improve the competitiveness of plants and product lines regardless of
whether they are to be retained or offered for sale.
Organizational Restructuring for Salaried Workforce
O’Neal said that the company expects to reduce its global salaried workforce by as many as 8,500 employees, or 25
percent, as a result of portfolio and product rationalizations, and initiatives adopted following a recent analysis of
the company’s selling, general & administration (SG&A) cost saving opportunities. The company believes once the
SG&A plan is fully implemented, Delphi should realize savings of approximately $450 million per year in addition to
savings realized from competitive measures planned for its core businesses and the disposition of non-core assets.
“We expect that the portfolio and plant changes will also require reductions in the number of people required
to support our business, including fewer officers and executives. Up to 40 percent of current corporate officer
positions will ultimately be eliminated,” O’Neal said. “These changes will be implemented in conjunction with
footprint and portfolio changes as well as other efforts to improve efficiency and reduce Delphi’s overall cost
structure.” O’Neal emphasized that the transition process will be orderly and that the company will evaluate
redeployment of salaried employees to available, although limited, openings within the U.S. as operations are sold or
wound down. O’Neal said that the company intends to utilize existing salaried separation pay programs as it reduces the
salaried workforce.
In addition to the new organizational plan, which will be rolled out in the near future, and changes in its pension
plans (discussed below), the company will also change its salaried benefits to bring them in line with other more
cost-competitive companies. The company stated that it will restructure the current health care plan to implement
increased employee cost sharing. Adjustments to other benefits to create a more competitive plan and meet employee
needs will continue to be evaluated. These benefit changes will be implemented through regular Human Resource channels,
and more information will be provided to all salaried employees in advance of any changes.
Retention of Defined Benefit Pension Plans for U.S. Hourly and Salaried Workforce
The company said that one of the goals of its transformation plan is the retention of existing defined benefit U.S.
pension plans for both its hourly and salaried workforce. In order to retain the programs and related benefits accrued
by its active employees and retirees, the company said that it will be necessary to freeze the current hourly U.S.
pension plan as of October 1, 2006, and to freeze the current U.S. salaried pension plan as of January 1, 2007. The
company emphasized that freezing the plans will not result in a loss of accrued benefits for any current employee or
retiree participating in the pension plans. The hourly plan (for employees who are more than seven years from
retirement and not covered by the GM benefit guarantee) and the salaried plan will be replaced with defined
contribution plans that include flexibility for both direct company contributions and company matching of employee
contributions.
The company said it will also be necessary to obtain relief from the Pension Benefit Guaranty Corporation, Internal
Revenue Service, Department of Labor and potential congressional action in order to amortize funding contributions over
a longer period in its transformation plan than may have previously occurred.
Timeline for Pursuit and Implementation of Transformation Plan
As outlined by the company at the commencement of its Chapter 11 restructuring cases in October, 2005, Delphi
expects to complete its U.S.-based restructuring and emerge from Chapter 11 business reorganization during the first
half of 2007. While elements of its transformation plan are being implemented by the company, such as the realignment
of Delphi’s global product portfolio and manufacturing footprint to preserve its core businesses and its salaried
workforce reorganization and related SG&A cost savings measures, other critical elements require consensual
agreements with Delphi’s unions, GM and governmental agencies. Agreements with these parties will ultimately be subject
to the review of the company’s stakeholders including, the official unsecured creditors committee and official equity
committee, as well as the approval of the U.S. Bankruptcy Court.
Delphi also noted that the execution of its transformation plan through the Chapter 11 process may give rise to the
incurrence of additional prepetition claims as collective bargaining agreements, executory contracts, retiree health
benefits and pension plans, and the other liabilities of the company are addressed and resolved to maximize stakeholder
value going forward. There is no assurance as to what values, if any, will be ascribed in the Chapter 11 cases as to the
value of Delphi’s existing common stock and/or other equity securities. Delphi has previously reported in filings with
the Securities and Exchange Commission, the U.S. Bankruptcy Court and the Office of the United States Trustee that it
is highly unlikely that common equity holders will receive any value in the Chapter 11 cases on account of the equity
securities of Delphi Corporation because of claims against the parent holding company relating to legacy liabilities
and burdensome restrictions under current U.S. labor agreements as well as the realignment of Delphi’s global product
portfolio and manufacturing footprint that must be achieved to preserve Delphi’s core businesses. Delphi noted that
this result is in contrast to the value of Delphi’s non-U.S. subsidiaries, which are not Chapter 11 debtors, are
continuing their business operations in the ordinary course of business without supervision from the Bankruptcy Court,
and are not subject to the Chapter 11 requirements of the U.S. Bankruptcy Code. Accordingly, the company continues to
urge that appropriate caution be exercised with respect to existing and future investments in any of these securities
as their value and prospects are highly speculative.