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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
.
Commission file number: 1-14787
DELPHI CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware |
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38-3430473 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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5725 Delphi Drive, Troy, Michigan
(Address of principal executive offices) |
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48098
(Zip Code) |
(248) 813-2000
Registrant’s telephone number, including area code
Securities registered pursuant to
Section 12(b) of the Act: None
Securities registered pursuant to
Section 12(g) of the Act:
Title of class
Common Stock, $0.01 par
value per share (including the associated Preferred Share
Purchase Rights)
61/2
% senior notes due May 1, 2009
71/8
% debentures due May 1, 2029
81/4
% Cumulative Trust Preferred Stock of Delphi
Trust I
Indicate by check mark if the registrant is a
well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2 of the
Exchange Act.
Large accelerated
filer þ. Accelerated
filer o. Non-accelerated
filer. o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Act). Yes o No þ
As of June 30, 2005, the aggregate market value of the
registrant’s Common Stock, $0.01 par value per share, held
by non-affiliates of the registrant was approximately
$2.6 billion. The closing price of the Common Stock on
June 30, 2005 as reported on the New York Stock Exchange
was $4.65 per share. As of June 30, 2005, the number
of shares outstanding of the registrant’s Common Stock was
561,415,901 shares. On November 11, 2005, the New York
Stock Exchange delisted the Common Stock, see Item 5.
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities in this Annual
Report for additional information on this matter.
The number of shares outstanding of the registrant’s common
stock, $0.01 par value per share as of May 31, 2006
was 561,781,590.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
Website Access to Company’s Reports
Delphi’s internet website address is www.delphi.com.
Our Annual Reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to section 13(a) or 15(d) of the
Exchange Act are available free of charge through our website as
soon as reasonably practicable after they are electronically
filed with, or furnished to, the Securities and Exchange
Commission.
DELPHI CORPORATION
INDEX
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PART I
DELPHI CORPORATION
As further described below, Delphi Corporation
(“Delphi” or the “Company”) and certain of
its United States (“U.S.”) subsidiaries filed
voluntary petitions for reorganization relief under
chapter 11 of the United States Bankruptcy Code
(“Bankruptcy Code”) in the United States Bankruptcy
Court for the Southern District of New York (the
“Court”) and are currently operating as
“debtors-in-possession” under the jurisdiction of the
Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Court. Delphi’s non-U.S.
subsidiaries were not included in the filings, will continue
their business operations without supervision from the U.S.
court and will not be subject to the requirements of the
Bankruptcy Code.
Overview. Delphi has become a leading global
technology innovator with significant engineering resources and
technical competencies in a variety of disciplines. Delphi was
incorporated in 1998 in contemplation of our separation from
General Motors Corporation (“GM”) in 1999 (the
“Separation”). Today, the Company is one of the
largest global suppliers of vehicle electronics, transportation
components, integrated systems and modules and other electronic
technology. Technology developed and products manufactured by
Delphi are changing the way drivers interact with their
vehicles. Delphi is a leader in the breadth and depth of
technology to help make cars and trucks smarter, safer and
better. The Company supplies products to nearly every major
global automotive original equipment manufacturer.
In addition, Delphi has diversified its customer base by taking
advantage of its technological and manufacturing core
competencies. Delphi is making increasingly significant
contributions in communications (including telematics),
computers, automotive aftermarket, consumer electronics, energy
and the medical devices industry.
We have extensive technical expertise in a broad range of
product lines and strong systems integration skills, which
enable us to provide comprehensive, systems-based solutions to
vehicle manufacturers (“VMs”). We have established an
expansive global presence, with a network of manufacturing
sites, technical centers, sales offices and joint ventures
located in every major region of the world. During 2005, we
operated our business along three reporting segments that are
grouped on the basis of similar product, market and operating
factors:
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Dynamics, Propulsion, Thermal & Interior Sector, which
includes selected businesses from our energy and engine
management systems, chassis, steering and thermal systems and
interior product lines. |
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Electrical, Electronics & Safety Sector, which includes
selected businesses from our automotive electronics, audio,
consumer and aftermarket products, communication systems, safety
and power and signal distribution systems product lines. |
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Automotive Holdings Group, which is comprised of select product
lines and plant sites that do not meet our targets for net
income or other financial metrics, allowing for consistent and
targeted management focus on finding solutions to these
businesses. |
Chapter 11 Cases. Delphi Corporation and
certain of its U.S. subsidiaries filed voluntary petitions for
reorganization relief under chapter 11 of the Bankruptcy
Code, in the United States Bankruptcy Court for the Southern
District of New York and are currently operating as
“debtors-in-possession”. The following discussion
provides general background information regarding our
chapter 11 cases as relevant to the consolidated financial
statements of Delphi and its subsidiaries and is not intended to
be an exhaustive summary.
Additional information on Delphi’s filing under the
Bankruptcy Code, including access to Court documents and other
general information about the chapter 11 cases, is
available online at www.delphidocket.com. Financial
information available on that website generally is prepared
according to requirements of federal bankruptcy law. While such
financial information accurately reflects information
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required under federal bankruptcy law, such information may be
unconsolidated, unaudited, and prepared in a format different
from that used in Delphi’s consolidated financial
statements prepared in accordance with generally accepted
accounting principles in the United States of America
(“U.S. GAAP”) and filed under the U.S. securities
laws. Moreover, the materials filed with the Court are not
prepared for the purpose of providing a basis for an investment
decision relating to Delphi’s stock or debt or for
comparison with other financial information filed with the U.S.
Securities and Exchange Commission (“SEC”).
Commencement
of Cases
On October 8, 2005 (the “Petition Date”), Delphi
and certain of its U.S. subsidiaries (the “Initial
Filers”) filed voluntary petitions for reorganization
relief under chapter 11 of the Bankruptcy Code, and on
October 14, 2005, three additional U.S. subsidiaries of
Delphi (together with the Initial Filers, collectively, the
“Debtors”) filed voluntary petitions for
reorganization relief under the Bankruptcy Code (collectively,
the Debtors’ October 8, 2005 and October 14, 2005
filings are referred to herein as the “Chapter 11
Filings”). The Court is jointly administering these cases
as “In re Delphi Corporation, et al., Case
No. 05-44481 (RDD).”
Delphi’s non-U.S. subsidiaries were not included in the
filings, continue their business operations without supervision
from the Court and are not subject to the requirements of the
Bankruptcy Code.
Court
Orders
First Day and Other Operational Orders. Since the
commencement of the cases, a number of orders have been entered
by the Court intended to generally stabilize the Debtors’
operations and allow the Debtors to operate substantially in the
ordinary course of business. These orders, certain of which were
approved on an interim basis subject to a final hearing before
the Court, covered, among other things:
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Human capital obligations, permitting payment of wages and other
employee obligations and the continuation of employee and
retiree benefit programs; |
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Supplier relations, permitting payment programs intended to
address the requirements of Delphi’s financially-stressed
vendors in order to secure those vendors’ post-petition
performance, to avoid unnecessary disruption of Delphi’s
businesses; |
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Customer relations, authorizing, but not directing, the Company
to honor prepetition obligations to customers, including the
Company’s prepetition warranty programs and otherwise to
continue customer programs in the ordinary course of business; |
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Business operations, permitting payments to certain shippers,
warehousemen and contractors; |
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Cash management, permitting maintenance of bank accounts and
cash management systems and allowing certain investments; and |
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Retention of certain professional service providers. |
On October 28, 2005, the Court entered an order granting
Delphi’s request for $2 billion in senior secured
debtor-in-possession (“DIP”) financing being provided
by a group of lenders led by JPMorgan Chase Bank and Citigroup
Global Markets, Inc. The Court also approved an adequate
protection package for Delphi’s outstanding
$2.5 billion prepetition secured indebtedness under its
prepetition credit facility. The proceeds of the DIP financing
together with cash generated from daily operations and cash on
hand are being used to fund post-petition operating expenses,
including supplier obligations and employee wages, salaries and
benefits. Refer to Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources in this Annual
Report for further details on Delphi’s sources and uses of
liquidity and for a more detailed description of the terms of
Delphi’s DIP financing.
Trading Order. On January 6, 2006, the Court
approved a motion to restrict, in certain circumstances and
subject to certain terms and conditions, trading in securities
and claims of Delphi by persons who would acquire, or dispose
of, substantial amounts of such securities and claims. The order
also requires, in
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certain circumstances and subject to certain terms and
conditions, substantial holders of indebtedness of the Debtors
to dispose of such indebtedness. This order was intended to
preserve the availability of the benefit of certain tax
attributes of the Debtors.
Key Employee Compensation Program. On February 17,
2006, the Court entered a final order for a Key Employee
Compensation Program (“KECP”) granting the motion of
the Debtors to implement an “at risk” incentive plan
(the “Final Revised AIP”) for the period commencing on
January 1, 2006 and continuing through June 30, 2006
(the “Performance Period”). The Final Revised AIP
applies to approximately 460 individuals holding executive
positions with Delphi or one of its affiliated Debtors in the
U.S. during the Performance Period (such persons, the
“Executives”). Delphi’s current Chairman and CEO
has voluntarily excluded himself from participating in the KECP.
The Final Revised AIP provides the opportunity for at risk
incentive payments to the Executives provided that certain
corporate and divisional targets are met. Additionally, an
incentive plan mirroring the Final Revised AIP will apply to
approximately 100 individuals holding executive positions at
non-Debtor subsidiaries of Delphi. The portion of the KECP
relating to annual incentive plans beyond June 30, 2006 and
proposed cash and equity incentive emergence awards is currently
scheduled to be heard at the July omnibus hearing. In
conjunction with the approval of the Final Revised AIP, certain
incentive compensation plans previously in place for Delphi
executives were cancelled resulting in the reduction of accruals
for incentive compensation in the first quarter of 2006.
Committees
On October 17, 2005, the Court formed a committee of
unsecured creditors in the chapter 11 cases (the
“Creditors’ Committee”). On April 28, 2006,
the U.S. Trustee, acting pursuant to the Court’s order
issued March 30, 2006, formed an equity committee,
consisting of two investment management funds and five
individual shareholders, to represent holders of Delphi’s
common stock in the chapter 11 cases (the “Equity
Committee”). On May 11, 2006, the U.S. Trustee
amended the Equity Committee to consist of three investment
management funds and four individual shareholders. However, the
Court in its order directing the formation of an Equity
Committee held that the Equity Committee should not inject
itself into negotiations between or among the Debtors, the
unions and GM, and further provided that the Court will
entertain motions to disband the Equity Committee if the Debtors
appear to be hopelessly insolvent or in certain other
circumstances. There can be no assurance that the
Creditors’ Committee or the Equity Committee will support
the Debtors’ positions or the Debtors’ plan of
reorganization and any disagreements between the Creditors’
Committee or the Equity Committee and the Debtors could protract
the chapter 11 process, hinder the Debtors’ ability to
operate during the chapter 11 process and delay the
Debtors’ emergence from chapter 11.
Activity
Throughout Duration of Chapter 11 Cases
Status of Operations. The Debtors continue to operate
their businesses as debtors-in-possession under the jurisdiction
of the Court and in accordance with the applicable provisions of
the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure
and Court orders. In general, as debtors-in-possession, the
Debtors are authorized under chapter 11 to continue to
operate as an ongoing business, but may not engage in
transactions outside the ordinary course of business without the
prior approval of the Court. All vendors are being paid for all
goods furnished and services provided in the ordinary course of
business after the Petition Date.
Treatment of Prepetition Claims. Under section 362
of the Bankruptcy Code, actions to collect most of the
Debtors’ prepetition liabilities, including payments owing
to vendors in respect of goods furnished and services provided
prior to the Petition Date, are automatically stayed and other
contractual obligations of the Debtors generally may not be
enforced. Shortly after the Petition Date, the Debtors began
notifying all known actual or potential creditors of the Debtors
for the purpose of identifying all prepetition claims against
the Debtors. The Chapter 11 Filings triggered defaults on
substantially all debt obligations of the Debtors. The stay of
proceedings provisions of section 362 of the Bankruptcy
Code, however, also apply to actions to collect prepetition
indebtedness or to exercise control over the property of the
Debtors’ estate in
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respect of such defaults. The rights of and ultimate payments by
the Debtors under prepetition obligations will be addressed in
any plan of reorganization and may be substantially altered.
This could result in unsecured claims being compromised at less,
and possibly substantially less, than 100% of their face value.
For additional information, refer to Note 12, Liabilities
Subject to Compromise of the consolidated financial statements
in this Annual Report.
Contract Rejection and Assumption Process.
Section 365 of the Bankruptcy Code permits the Debtors to
assume, assume and assign, or reject certain prepetition
executory contracts subject to the approval of the Court and
certain other conditions. Rejection constitutes a
court-authorized breach of the contract in question and, subject
to certain exceptions, relieves the Debtors of their future
obligations under such contract but creates a deemed prepetition
claim for damages caused by such breach or rejection. Parties
whose contracts are rejected may file claims against the
rejecting Debtor for damages. Generally, the assumption, or
assumption and assignment, of an executory contract requires the
Debtors to cure all prior defaults under such executory contract
and to provide adequate assurance of future performance. In this
regard, Delphi expects that additional liabilities subject to
compromise and resolution in the chapter 11 cases may arise
as a result of damage claims created by the Debtors’
rejection of executory contracts. Conversely, Delphi would
expect that the assumption of certain executory contracts may
convert existing liabilities shown as subject to compromise to
liabilities not subject to compromise in future financial
statements. Due to the uncertain nature of many of the potential
claims, Delphi is unable to project the magnitude of such claims
with any degree of certainty at this time.
Over 11,000 contracts for the supply of goods to the
Company’s manufacturing operations were scheduled to expire
by December 31, 2005. In order to provide an alternative
mechanism to extend those contracts for the supply of
sole-sourced goods required by the Company following expiration,
avoid interruption of automotive parts manufacturing operations,
and systematically address the large number of contracts
expiring at the end of 2005 and throughout 2006, the Company
requested and was granted authority by the Court to assume
certain contracts on a limited, focused, and narrowly-tailored
basis. To date, the Company has been able to extend nearly all
of its expiring supplier contracts in the ordinary course of
business and has made use of the provisions of the Court order
as circumstances have warranted.
Transformation Plan. On March 31, 2006, the Debtors
announced their transformation plan. On the same date, Delphi
initiated a “dual track” process to reject its
collective bargaining agreements and certain unprofitable
contracts with GM, while at the same time continuing discussions
with its labor unions and GM. On the same date, the Debtors
filed a motion with the Court seeking authority to reject
certain customer contracts with GM. The initial GM contract
rejection motion covers approximately half of the North American
annual purchase volume revenue from GM. The initial GM contract
rejection motion is not scheduled to be heard by the Court until
at least August 15, 2006. On March 31, 2006, the
Company also delivered a letter to GM initiating a process to
reset the terms and conditions of more than 400 commercial
agreements that expired between October 1, 2005 and
March 31, 2006. To date, the Company has not unilaterally
revised the terms and conditions on which it has been providing
interim supply of parts to GM in connection with the expired
contracts or filed additional contract rejection motions. The
Company also filed a motion to reject certain collective
bargaining agreements and to modify certain retiree benefits. A
hearing on the motion was held throughout May 2006, continued
into June, and has been adjourned until August 11, 2006.
Potential Divestitures, Consolidations and Wind-Downs. As
part of the transformation plan, Delphi identified non-core
product lines and manufacturing sites that do not fit into
Delphi’s future strategic framework, which it is seeking to
sell or wind-down. Any sale or wind-down process is being
conducted in consultation with the Company’s customers,
unions and other stakeholders to carefully manage the transition
of affected product lines. The disposition of any U.S.
operations is also being accomplished in accordance with the
requirements of the Bankruptcy Code and labor contracts as
applicable. The Company also has begun consultations with the
works councils in accordance with applicable laws regarding any
sale or wind-down of affected manufacturing sites in Europe.
Non-core product lines include brake and chassis systems,
catalysts, cockpits and instrument panels, door modules and
latches, ride dynamics, steering and wheel bearings. The Company
continually evaluates its product portfolio and could retain or
exit certain businesses
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depending on market forces or cost structure changes. The
Company intends to sell or wind-down non-core product lines and
manufacturing sites by January 1, 2008. Delphi has also
begun discussions with certain governmental agencies whose
policies could help improve the competitiveness of plants and
product lines regardless of whether they are being retained or
offered for sale.
Case
Resolution
Exclusivity. Under the Bankruptcy Code, the Debtors have
the exclusive right for 120 days from the date of the
filing to file a plan of reorganization and 60 additional days
to obtain necessary acceptances. Such periods may be extended by
the Court. At the Debtors’ request, the Court extended the
period for filing a plan to August 5, 2006 and the period
for obtaining necessary acceptances to October 4, 2006. On
June 19, 2006, the Court further extended the period for
filing a plan of reorganization to February 1, 2007 and the
period for obtaining necessary acceptances to April 2,
2007. We may request additional extensions. If the Debtors’
exclusivity period lapses, any party in interest may file a plan
of reorganization for the Debtors.
Proofs of Claim. On April 12, 2006, the Court
entered an order establishing July 31, 2006 as the bar
date. The bar date is the date by which claims against the
Debtors arising prior to the Debtors’ chapter 11
filings must be filed if the claimants wish to receive any
distribution in the chapter 11 cases. On April 17,
2006, the Debtors commenced notification, including publication,
to all known actual and potential creditors informing them of
the bar date and the required procedures with respect to the
filing of proofs of claim with the Court. Any differences
between claim amounts listed by the Debtors in their Schedules
of Assets and Liabilities (as amended) and claims filed by
creditors will be investigated and, if necessary, the Court will
make the final determination as to the amount, nature, and
validity of claims.
Plan of Reorganization Generally; Impact of Reorganization.
After a plan of reorganization has been filed with the
Court, the plan, along with a disclosure statement approved by
the Court, will be sent to all creditors, equity holders and
parties in interest. Following the solicitation period, the
Court will consider whether to confirm the plan. In addition to
being voted on by holders of impaired claims and equity
interests, a plan of reorganization must satisfy certain
requirements of the Bankruptcy Code and must be approved, or
confirmed, by the Court in order to become effective. Under
certain circumstances, the Court may confirm a plan even if such
plan has not been accepted by all impaired classes of claims and
equity interests. A class of claims or an equity interest that
does not receive or retain any property under the plan on
account of such claims or interests is deemed to have voted to
reject the plan. The precise requirements and evidentiary
showing for confirming a plan notwithstanding its rejection by
one or more impaired classes of claims or equity interests
depends upon a number of factors, including the status and
seniority of the claims or equity interests in the rejecting
class, i.e., secured claims or unsecured claims, subordinated or
senior claims, preferred or common stock.
As a result of the Chapter 11 Filings, realization of
assets and liquidation of liabilities are subject to
uncertainty. Further, a plan of reorganization could materially
change the amounts and classifications reported in the
consolidated financial statements, which do not give effect to
any adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of
confirmation of a plan of reorganization.
Under the priority scheme established by the Bankruptcy Code,
unless creditors agree otherwise, post-petition liabilities and
prepetition liabilities must be satisfied in full before
shareholders are entitled to receive any distribution or retain
any property under a plan of reorganization. The ultimate
recovery to creditors and/or shareholders, if any, will not be
determined until confirmation of a plan of reorganization. No
assurance can be given as to what values, if any, will be
ascribed in the chapter 11 cases to each of these
constituencies or what types or amounts of distributions, if
any, they would receive. In addition, as Delphi executes its
transformation plan through the chapter 11 process, it will
likely incur 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.
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A plan of reorganization could result in holders of
Delphi’s stock receiving no distribution on account of
their interests and cancellation of their existing stock. If
certain requirements of the Bankruptcy Code are met, a plan of
reorganization can be confirmed notwithstanding its rejection by
Delphi’s equity security holders and notwithstanding the
fact that such equity security holders do not receive or retain
any property on account of their equity interests under the
plan. Delphi considers the value of its common stock to be
highly speculative and strongly cautions equity holders that the
stock may ultimately be determined to have no value.
Accordingly, the Company urges that appropriate caution be
exercised with respect to existing and future investments in its
common stock or other equity securities, or any claims relating
to prepetition liabilities.
Legacy Liabilities; Key Stakeholders. On March 31,
2006, the Debtors filed a motion with the Court under sections
1113 and 1114 of the Bankruptcy Code seeking authority to reject
U.S. labor agreements and to modify retiree benefits. The
section 1113 and 1114 filing is consistent with the
scheduling order signed by the Court on February 17, 2006.
A hearing on the section 1113 and 1114 motion was held
throughout May 2006, continued into June, and has been adjourned
until August 11, 2006. The bankruptcy Court judge hearing
the motion has urged Delphi and its unions to continue to seek a
negotiated solution with each other during the pendency of the
hearing and the motion.
Prior to filing the motion to reject the Debtors’ U.S.
labor agreements, Delphi, GM and the International Union, United
Automobile, Aerospace and Agricultural Implement Workers of
America (“UAW”) agreed on a special attrition program,
pursuant to which certain eligible Delphi U.S. hourly employees
represented by the UAW were offered normal and early voluntary
retirements with a lump sum incentive payment of $35,000 (the
“Special Attrition Program”). The lump sum incentive
payment applied to all eligible retirements from October 1,
2005 forward. The program also provided additional retirement
opportunities; including transfer to and retirement from GM.
Approximately 14,500 U.S. hourly employees represented by the
UAW were eligible to participate in the program. Additionally,
GM has agreed 5,000 of Delphi’s U.S. hourly employees
represented by the UAW may return (“flowback”) to GM
through the beginning of September 2007. GM has agreed to
provide substantial financial support under the agreement.
Delphi believes that the agreement will enable a more rapid
transformation to a reduced labor cost structure across
Delphi’s U.S. manufacturing operations. As of June 30,
2006, approximately 12,500 employees had elected to participate
in the Special Attrition Program. On May 5, 2006, the Court
entered the order approving the motion with certain
modifications, which was subsequently amended on May 12,
2006. If similar agreements are negotiated with other unions
representing the Debtors’ U.S. hourly employees, such
agreements and programs also will be required to be submitted to
the Court for approval.
On May 18, 2006, Wilmington Trust Company, as indenture
trustee to the Debtors’ senior notes and debentures, filed
a notice of appeal from the order approving the Special
Attrition Program. Additionally, on May 31, 2006, Appaloosa
Management L.P., Wexford Capital LLC and Lampe Conway and
Company LLC filed a notice of appeal from the same order, but
the Debtors believe such notice was not timely filed.
Delphi, GM, and the UAW subsequently agreed on a supplemental
agreement that will expand the Special Attrition Program to
include a pre-retirement program for employees with
26 years of credited service and provide buyouts for
UAW-represented hourly employees. This supplemental agreement
also includes buyout payments, which depending on the amount of
seniority or credited service, would range from $40,000 to
$140,000. GM has agreed to pay one-half of these buyout amounts.
The supplemental agreement was approved by the Court on
June 29, 2006. The new options added to the Special
Attrition Program are enabled by the financial support from GM.
On June 16, 2006, Delphi reached agreement on the terms of
a special attrition program pursuant to which certain eligible
Delphi hourly employees represented by the Industrial Division
of the Communication Workers of America, AFL-CIO, CLC
(“IUE-CWA”) would be offered normal and early
voluntary retirements with a lump sum incentive payment of
$35,000, additional retirement opportunities (including transfer
to and from GM), or buy-out payments, which, depending on the
amount of seniority or credited service, would range from
$40,000 to $140,000 (the “IUE-CWA Special Attrition
Program”).
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GM has agreed to pay the incentive payment of $35,000 and to pay
one-half of the buy-out payments, except for employees at
Delphi’s New Brunswick operations where previously agreed
upon terms apply. The IUE-CWA Special Attrition Program was
approved by the Court on June 29, 2006. Delphi continues
framework discussion with other unions to offer, with GM
support, similar attrition programs for their members.
Although the Debtors believe discussions with the Debtors’
unions and GM are progressing constructively, the parties have
not yet reached comprehensive agreements. As a result, on
March 31, 2006 the Debtors filed a motion under sections
1113 and 1114 of the Bankruptcy Code. While we believe that the
filing of the 1113 and 1114 motion with the Court is necessary
to protect the Debtors’ interests, we are continuing
discussions and remain focused on pursuing a consensual
resolution with all of our unions and GM.
Costs. We have incurred, and will continue to incur,
significant costs associated with the reorganization for
professional fees for advisors to the Debtors, and to other
stakeholders in the chapter 11 cases.
Intentions. Upon the conclusion of this process, we
expect to emerge from chapter 11 as a stronger, more
financially sound business with viable U.S. operations that are
well-positioned to advance global enterprise objectives. During
the chapter 11 process, Delphi intends to continue to
marshal all of its resources to deliver value and high-quality
products to its customers globally and to preserve and continue
the strategic growth of its non-U.S. operations.
In addition to addressing our legacy liabilities and improving
the competitiveness of our U.S. operations through negotiation
with our unions and GM and by rationalizing our portfolio, we
have identified other necessary elements of a comprehensive
transformation plan, including reducing our selling, general and
administrative costs, realigning our salaried benefit programs
to size these costs with the rationalized portfolio and make
them competitive with more cost-competitive companies and
obtaining relief permitting us to amortize funding obligations
to our defined benefit U.S. pension plans over a longer period
of time than would otherwise be available once we emerge from
chapter 11. We have identified cost saving opportunities
with the planned portfolio and product rationalizations and we
expect to reduce our global salaried workforce by as many as
8,500 employees using existing salaried separation pay
programs. In addition, in order to retain our existing U.S.
defined benefit pension plans for both hourly and salaried
workers, we intend to freeze those plans and going forward adopt
or modify existing defined contribution plans that will include
flexibility for both direct Company contributions and Company
matching employee contributions. At the same time, salaried
health care plans will be restructured to implement increased
employee cost sharing.
There can be no assurances, however, that we will be successful
in achieving our objectives. Our ability to achieve our
objectives is conditioned, in most instances, on the approval of
the Court, and the support of our stakeholders, including GM,
our labor unions, and our creditors. For a discussion of certain
risks and uncertainties related to the Debtors’
chapter 11 cases and reorganization objectives refer to
Item 1A. Risk Factors in this Annual Report.
Industry
The automotive parts industry provides components, systems,
subsystems and modules to VMs for the manufacture of new
vehicles, as well as to the aftermarket for use as replacement
parts for current production and older vehicles. We believe that
several key trends have been reshaping the automotive parts
industry over the past several years. These trends are impacting
product design and focus, VM sourcing decisions and global
footprint. In addition, increasing competition from foreign
suppliers coupled with lower volumes of domestic VMs is driving
further consolidation in the domestic supplier industry.
Delphi’s challenge is to continue developing leading
edge technology, focus that technology toward products with
sustainable margins that enable our customers, both VMs and
others, to produce distinctive market-leading products, and use
the chapter 11 process to address the competitiveness of
our core U.S. operations and lower our overall cost
structure. As part of our transformation plan we have identified
a core portfolio of products that draw on our technical
strengths and where we believe we can provide differentiation to
our automotive, aftermarket, consumer electronics, and adjacent
markets such as
9
commercial vehicles, medical systems, computers and peripherals,
military/aerospace, telecommunications, commercial, residential,
and transportation products. For more information on our core
product portfolio refer to Item 1. Business—Products
and Competition in this Annual Report.
Increasing Electronic and Technological Content.
The electronic and technological content of vehicles continues
to expand, largely driven by consumer demand for greater vehicle
performance, functionality and affordable convenience options as
a result of increased communication abilities in vehicles as
well as increasingly stringent regulatory standards for energy
efficiency, emissions reduction, and increased safety through
crash avoidance and occupant protection systems. Electronics
integration, which generally refers to products that combine
integrated circuits, software algorithms, sensor technologies
and mechanical components within the vehicle, allows VMs to
achieve substantial reductions in weight and mechanical
complexity, resulting in easier assembly, enhanced fuel economy,
improved emissions control and better vehicle performance. The
technology content of vehicles continues to increase as
consumers demand greater safety, entertainment, productivity and
convenience while driving. Advanced technologies offering mobile
voice and data communication such as those used in our mobile
electronics products coupled with global positioning systems and
in-vehicle entertainment continue to be key products in the
transportation industry.
Increased Emphasis on Systems and Modules
Sourcing. To simplify the vehicle design and assembly
processes and reduce costs, VMs increasingly look to their
suppliers to provide fully engineered systems and pre-assembled
combinations of components rather than individual components. By
offering sophisticated systems and modules rather than
individual components, Tier 1 suppliers such as Delphi have
assumed many of the design, engineering, research and
development, and assembly functions traditionally performed by
VMs. In addition, suppliers often manufacture and ship
components to the general location of a VMs’ assembly line
and then provide local assembly of systems and modules.
Shorter Product Development Cycles. Suppliers are
under pressure from VMs to respond more quickly with new designs
and product innovations to support rapidly changing consumer
tastes and regulatory requirements. For example, vehicle demand
in North America has shifted from cars to light trucks and vans
over the last several years, and, more recently, crossover and
hybrid vehicles are being introduced into the market. In
developing countries, broad economic improvements continue to be
made, increasing the demand for smaller, less expensive vehicles
that satisfy basic transportation needs. In addition,
increasingly stringent government regulations regarding vehicle
safety and environmental standards are accelerating new product
development cycles.
Increased Emphasis on Fuel Efficiency and Lower
Emissions. VMs continue to focus on improving fuel
efficiency and reducing emissions in order to meet increasingly
stringent regulatory requirements in various markets. As a
result, suppliers are competing intensely to develop and market
new and alternative technologies, such as hybrid vehicles, fuel
cells, and diesel engines to improve fuel economy and emissions.
Global Capabilities of Suppliers. In order to
serve multiple markets in a more cost-effective manner, many VMs
are turning to global vehicle platforms, which typically are
designed in one location but produced and sold in many different
geographic markets around the world. Broader global markets for
vehicle sales and the desire of VMs to adapt their products to
satisfy regional and cultural variations have driven suppliers
to establish capabilities within the major regions, as they
follow their customers.
Volume Reductions for Domestic VMs. The domestic
VMs have experienced decreasing sales volume in recent years of
overall North American market growth. The resultant loss of
market share has had an adverse effect on the domestic
automotive suppliers. Growth of foreign VMs, accounting for
increasing percentages of vehicles sold in North America, has
been accompanied by relative sales growth for transplant
suppliers. We are focusing our efforts on offsetting the
declining position of the domestic VMs by expanding beyond the
traditional customer base both within North America and globally.
Commodity Economics. The automotive supplier
industry has been experiencing inflationary cost pressures
related to commodity pricing. Key areas of commodity cost
pressures for the industry include steel, petroleum-based
resins, copper, aluminum, and platinum group metals. We
anticipate continued pressure on the industry as suppliers are
not typically able to pass the increased commodity costs onto the
10
VMs, particularly domestic VMs who have historically competed on
the basis of price, and have recently been losing market share
to foreign VMs.
Benefit Costs. Healthcare and retirement benefit
costs continue to be a prominent concern for many corporations.
U.S. automotive suppliers are currently working under growing
pressure to bring these costs in line with global competitors
that have significantly lower healthcare, pension and other
postemployment benefits (“OPEB”) costs.
Ongoing Industry Consolidation and Restructuring.
The trend of consolidation among worldwide suppliers is expected
to continue as suppliers seek to achieve operating synergies and
value stream efficiencies through business combinations, build
stronger customer relationships by following their customers as
they expand globally, acquire complementary technologies, and
shift production among locations. The need for suppliers to
provide VMs with single-point sourcing of integrated systems and
modules on a global basis has also fueled industry
consolidation. Additionally, VMs are experiencing rapid
consolidation which affects customer/supplier relationships and
provides opportunities and risks as suppliers attempt to secure
global supply contracts across broader vehicle platforms.
Finally, the combination of decreasing volumes of domestic VMs,
and increasing competition from foreign VMs and transplant
suppliers, who generally have lower and more flexible cost
structures, has accelerated the pace of consolidation and the
need of many domestic suppliers, including Delphi, to
restructure operations and refocus product design and
development to enable them to compete more effectively.
Research, Development and Intellectual Property
Delphi maintains technical engineering centers in every major
region of the world to develop and provide advanced products,
processes and manufacturing support for all of our manufacturing
sites, and to provide our customers with local engineering
capabilities and design development on a global basis. As of
December 31, 2005, we employed approximately
26,000 engineers, scientists and technicians around the
world, including 17,000 at our technical centers and customer
centers, with over one-third focused on electronic and high
technology products, including software algorithm development.
We introduced over 200 new products and processes in 2005. We
believe that our engineering and technical expertise, together
with our emphasis on continuing research and development, allows
us to use the latest technologies, materials and processes to
solve problems for our customers and to bring new, innovative
products to market. We believe that continued research and
development activities (including engineering) are critical to
maintaining our pipeline of technologically advanced products
and during 2005 and maintained our total expenditures for
research and development activities (including engineering)
despite cost pressures in other aspects of our business. Total
expenditures for research and development activities (including
engineering) were approximately $2.2 billion,
$2.1 billion, and $2.0 billion for the years ended
December 31, 2005, 2004, and 2003, respectively. We seek to
maintain our research and development activities in a more
focused product portfolio and to allocate our capital and
resources to those products with distinctive technologies and
greater electronics content; however, our ability to do so will
depend significantly on our ability to continue to generate
sufficient cash from operations over and above that needed to
support ongoing operations and the significant reorganization
activity planned.
We have generated a significant number of patents in the
operation of our business. While no individual patent taken
alone is considered material to our business, taken in the
aggregate, these patents provide meaningful protection for
Delphi’s products and technical innovations. Similarly,
while our trademarks are important to identify Delphi’s
position in the industry, and we have obtained certain licenses
to use intellectual property owned by others, we do not believe
that any of these are individually material to our business. We
are actively pursuing marketing opportunities to commercialize
and license our technology to both automotive and non-automotive
industries. This leveraging activity is expected to further
enhance the value of our intellectual property portfolio.
11
Products and Competition
Critical success factors for us include managing our overall
global manufacturing footprint to ensure proper placement and
workforce levels in line with business needs as well as
competitive wages and benefits, maximizing efficiencies in
manufacturing processes, fixing or exiting unprofitable
businesses, including those that are part of our Automotive
Holdings Group operations, and reducing overall material costs.
Although the overall number of our competitors has decreased due
to ongoing industry consolidation, the automotive parts industry
remains extremely competitive. VMs rigorously evaluate suppliers
on the basis of product quality, price competitiveness,
reliability and timeliness of delivery, product design
capability, technical expertise and development capability, new
product innovation, leanness of facilities, operational
flexibility, customer service and overall management. In
addition, our customers generally require that we demonstrate
improved efficiencies, through cost reductions and/or price
decreases, on a
year-over-year basis.
During 2005, our product offerings were organized in the
following sectors: Dynamics, Propulsion, Thermal &
Interior and Electrical, Electronics & Safety, as well as
the Automotive Holdings Group. To our knowledge, no other
Tier 1 supplier competes across the full range of our
product areas within the automotive industry and other
transportation markets. Our product sector offerings and
principal competitors as of December 31, 2005 are described
below. Refer to Note 19, Segment Reporting to the
consolidated financial statements in this Annual Report for
additional financial information regarding each sector.
Dynamics, Propulsion, Thermal & Interior. Our
Dynamics, Propulsion, Thermal & Interior product sector
accounted for $11.8 billion of our 2005 sales (43.8%
excluding inter-sector sales). This sector offers a wide range
of electronic energy and engine management systems designed to
optimize engine performance and emissions control through
management of vehicle air intake, fuel delivery, combustion and
exhaust after-treatment. These systems include diesel
fuel-injection systems for light-, medium-, and heavy-duty
vehicles. We believe Delphi’s solenoid-based common-rail
system offers the best system performance and cost trade-off to
customers. These systems eliminate the need for high-pressure
control valves (a major cost savings) and they provide precise
fuel quantities and timing; consistently superior emissions and
noise performance over the vehicle’s life (durability);
superior actuation speed and performance; and precise fuel
delivery leading to reduced fuel consumption, lower fuel return
temperature, and the elimination of fuel coolers. The sector
also offers all major electronic chassis control
systems—steering, braking, suspension and engine, with a
focus on providing superior ride and handling performance, high
reliability, safety, reduced mass and improved fuel efficiency.
In addition, the sector offers comfort and convenience
technologies and products such as thermal management systems,
integrated closure systems, and cockpits and interior systems.
These systems provide environmentally responsible and energy
efficient solutions that maintain passenger comfort and
convenience while lowering costs and improving quality. Our
principal competitors in the Dynamics, Propulsion, Thermal &
Interior product sector include the following: Robert Bosch
GmbH, Denso Corporation, NSK Ltd., Siemens VDO Automotive AG,
Continental Teves AG, TRW Automotive Inc., Valeo SA, and Visteon
Corporation.
Our principal Dynamics, Propulsion, Thermal & Interior
product lines include: gasoline and diesel engine management
systems that electronically optimize engine performance with
components such as Inlet Metering Valve, Rail-Valve Discharge
software strategy, Individual-Injector Characterization and
Accelerometer-Pilot Control; sensors and actuators which provide
essential data and control for integrated vehicle systems;
air/fuel management subsystems; exhaust emission systems; valve
train systems; ignition products; fuel handling systems and
evaporative emissions canisters; vehicle stability control
systems;
MagneRidetm
high-performance, semi-active suspension control systems;
dynamic body control systems; other suspension components; brake
systems; hydraulic and electric steering systems and components
including high-efficiency and high performance power steering
systems; energy absorbing steering columns and driver protection
modules; driveline systems; constant velocity joints and
propshafts; heating, ventilation and air conditioning modules;
powertrain cooling systems; climate control systems; thermal
management systems; door modules; power closure systems; cockpit
and interior systems; instrument panels; and modular products
that unify several systems and subsystems into one
simple-to-install-piece for
12
the manufacturer. This sector is also developing solid oxide
fuel cell technology and applications for the electronics
cooling, stationary air conditioning, and related thermal
markets.
Electrical, Electronics & Safety. Our
Electrical, Electronics & Safety product sector accounted
for $13.1 billion of our 2005 sales (48.8% excluding
inter-sector sales). This sector is one of the leading global
providers of automotive electronics in addition to being a
global leader in the production of connectors, wiring harnesses,
switches and sensors for electrical/electronic systems. The
sector also offers a wide range of products related to vehicle
safety systems as well as the expertise to integrate them into
individual vehicle designs to simplify manufacturer assembly and
enhance vehicle marketability. In addition to original equipment
supply, the sector is also responsible for Delphi’s
aftermarket and consumer electronics businesses offering
products and services to a wide variety of customers. Principal
competitors for the Electrical, Electronics & Safety sector
include: Autoliv Inc., Robert Bosch GmbH, Denso Inc., Siemens
VDO Automotive AG, TRW Automotive, Visteon Corporation, and
Yazaki Corporation.
Our principal Electrical, Electronics & Safety product
lines include: a complete range of advanced audio systems and
components, including satellite reception systems for vehicles
and home use and fully integrated audio systems providing a
variety of playback formats and which may be tailored to the
requirements of specific customers; wireless products that
provide mobile connectivity, entertainment and information;
powertrain and engine control modules incorporating
state-of-the-art computer technology to measure and optimize
vehicle performance, improve fuel economy and reduce emissions;
sensors and actuators for advanced digital control systems; body
and security systems; safety systems electronics including
passenger detection systems with advanced electronic sensors;
reception systems for vehicle entertainment, communication and
information system solutions; collision warning systems;
connection systems; switches and mechatronic devices;
electrical/electronic distribution systems; electrical centers;
and occupant protection systems. This sector’s product
lines also encompass aftermarket products offered through Delphi
Products & Service Solutions, including vehicle electronics,
climate control products, diesel products and advanced
diagnostic equipment for diesel and gas engines, undercar
products and wireless handheld vehicle diagnostic systems.
Consumer electronics products include products such as Delphi
MyFitm,
Delphi XM
SKYFi2tm,
and Delphi XM Roady
XTtm
satellite radio receivers and Roady XT Personal Audio
Systemtm,
and a variety of accessories for home, vehicle, and portable
use; and Delphi rear-seat entertainment systems and navigation
products all for the consumer market.
Automotive Holdings Group. Our Automotive Holdings
Group (“AHG”) accounted for $1.9 billion of our
2005 sales (7.1% excluding inter-sector sales). During 2005, AHG
was comprised of select plant sites and non-core product lines
that we will seek to sell or wind-down, for further information,
refer to Item 1. Business—Chapter 11
Cases—Activity Throughout Duration of Chapter 11
Cases, Potential Divestitures, Consolidations, & Wind-downs
in this Annual Report. Examples of AHG manufactured products
include: suspension, brake, compressors, ignition, instrument
clusters, fuel handling and spark plugs.
Core Product Portfolio Upon Emergence. As announced on
March 31, 2006, Delphi plans to focus its product portfolio
on those core technologies for which we believe we have
significant competitive and technological advantages. We do not
expect the portfolio changes will have a significant impact on
Delphi’s independent aftermarket or consumer electronics
businesses. 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) |
13
Delphi intends to implement changes to our organizational
structure and management reporting to support the management of
these core product lines. In conjunction with these
organizational and management reporting changes Delphi will
re-evaluate its reportable segments as required by Statement of
Financial Accounting Standards (“SFAS”) No. 131,
“Disclosures about Segments of an Enterprise and Related
Information.” The Company expects to change its reporting
segments in the third quarter of 2006, as the organizational
changes will be effective July 1, 2006.
Customers
We primarily sell our products and services to the major global
VMs. GM activity includes GM and its consolidated subsidiaries.
Activity with GM’s non-consolidated subsidiaries (such as
GM Shanghai) and activity with other Tier 1 suppliers who
sell directly to GM is classified as other customer activity and
not as GM activity. As a percentage of sales, our non-GM sales
were 52% in 2005. Our business with customers other than GM has
increased since the Separation from GM in 1999. While we expect
our non-GM business to
continue to increase, we anticipate that GM will remain our
largest customer for a significant period of time due to forward
commitments to supply relationships, impediments to moving
substantial business and our historic relationship with GM. Our
sales to GM continue to decline, principally due to declining GM
production, the impact of customer driven price reductions and
the elimination of non-profitable businesses, as well as
GM’s diversification of its supply base and ongoing changes
in our vehicle content and the product mix supplied to GM.
Delphi is currently facing considerable challenges due to
revenue decreases and related pricing pressures stemming from a
substantial reduction in GM’s North American vehicle
production. We currently supply parts to each regional sector of
GM’s Automotive Operations, including its automotive
operations in the U.S., Canada and Mexico
(“GM-North
America”), and GM’s automotive operations throughout
the rest of the world (“GM-International”). In
addition, we sell our products to the worldwide aftermarket for
replacement parts, including GM’s Service and Parts
Operations
(“GM-SPO”)
and to other distributors and retailers (“Independent
Aftermarket and Consumer Electronics”). While we intend to
continue to focus on retaining and winning GM’s business,
we cannot provide assurance that we will succeed in doing so.
Additionally, our revenues may be affected by increases or
decreases in GM’s business or market share and that impact
will likely vary by region.
The following table shows this breakdown of our total net sales
for each of the last three years.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total Net Sales | |
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| Customer |
|
$ | |
|
% | |
|
$ | |
|
% | |
|
$ | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(dollars in millions) | |
|
GM-North America
|
|
$ |
10,643 |
|
|
|
39.5 |
% |
|
$ |
12,706 |
|
|
|
44.4 |
% |
|
$ |
14,360 |
|
|
|
51.2 |
% |
|
GM-International
|
|
|
1,464 |
|
|
|
5.4 |
% |
|
|
1,788 |
|
|
|
6.3 |
% |
|
|
1,705 |
|
|
|
6.1 |
% |
|
GM-SPO
|
|
|
753 |
|
|
|
2.8 |
% |
|
|
923 |
|
|
|
3.2 |
% |
|
|
964 |
|
|
|
3.4 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total GM
|
|
|
12,860 |
|
|
|
47.7 |
% |
|
|
15,417 |
|
|
|
53.9 |
% |
|
|
17,029 |
|
|
|
60.7 |
% |
|
Other customers
|
|
|
14,087 |
|
|
|
52.3 |
% |
|
|
13,205 |
|
|
|
46.1 |
% |
|
|
11,048 |
|
|
|
39.3 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total net sales
|
|
$ |
26,947 |
|
|
|
100.0 |
% |
|
$ |
28,622 |
|
|
|
100.0 |
% |
|
$ |
28,077 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in sales to other customers in the foregoing table are
sales to all customers other than GM and its consolidated
subsidiaries, including sales to other major global VMs and
sales to other Tier 1 suppliers who ultimately sell to GM.
Sales to four of these other major global VMs exceeded
$850 million in 2005 including Ford Motor Company,
DaimlerChrysler Corporation, Renault/ Nissan Motor Company, Ltd,
and Volkswagen Group. Also included in sales to other customers
are sales to independent aftermarket customers
(“Independent Aftermarket”), consumer electronics
customers (“Consumer Electronics”), manufacturers of
medium-duty and heavy-duty trucks and off-road equipment
(“Commercial Vehicles”), and other new customers
beyond our traditional automotive customer base (“New
Markets”). We are continuing our efforts to diversify our
business by supplying certain products, including audio systems,
fiber optic links, electronics cooling systems, connection
systems, flex-circuits, wiring,
14
instrumentation, pressure sensors, safety systems, and engine
management systems and components to these non-VM customers.
These products are used in the commercial vehicle, construction,
aftermarket, recreational vehicle (e.g., boats), motorcycle,
aerospace, defense, medical, appliance, consumer electronics,
and computer industries. We have approximately
12,000 customers globally including Consumer Electronics
customers such as Wal-Mart, Best Buy, and Circuit City and
Independent Aftermarket customers such as NAPA, Carquest, Group
Auto Union and many others. In addition, our Commercial Vehicle
and New Markets customers include Caterpillar, Deere and
Company, Freightliner, Volvo Truck, Hyundai, Tata Motors,
Paccar, International Truck, Harley-Davidson, Lockheed Martin,
General Electric, Siemens Medical, and Raytheon. We expect these
sales to continue to grow in future years as we commercialize
existing technology and continue our focus on diversifying our
customer base, although we can provide no assurance that this
will occur. In 2005, sales to our Independent Aftermarket,
including Consumer Electronics that are sold through retail
channels, Commercial Vehicle and New Markets customers were
$2,605 million as compared to $2,264 million for 2004.
Additional information regarding net sales by customer and
geographic area and net property by geographic area is included
in Note 19, Segment Reporting to the consolidated financial
statements.
Variability in Delphi’s Business
A significant portion of our business is generally related to
automotive sales, which vary directly with the production
schedules of our VM customers. The market for vehicles is
cyclical and dependent on general economic conditions, consumer
spending and buying preferences. The rate at which our customers
build vehicles depends on their market performance as well as
company specific inventory and incentive strategies. Any
significant reduction or increase in automotive production by
our customers may have a material effect on our business.
We have substantial operations in every major region of the
world and economic conditions in these regions often differ,
which may have varying effects on our business. Our business is
moderately seasonal, as our primary North American customers
historically halt operations for approximately two weeks in July
and approximately one week in December. Our European customers
generally reduce production during the months of July and August
and for one week in December. Accordingly, our results may
reflect this seasonality.
Raw Materials
We purchase various raw materials for use in manufacturing our
products. The principal raw materials we purchase include
aluminum, copper, lead, platinum group metals, resins, and
steel. All of these raw materials, except the platinum group
metals, are available from numerous sources. Currently, most of
the platinum group metals we use for catalytic converters
produced for GM are procured directly from GM. Delphi purchases
its remaining platinum group metal requirements directly from
Delphi suppliers, which primarily obtain or produce platinum
group metals from locations in South Africa, North America and
Russia. We have not experienced any significant shortages of raw
materials and normally do not carry inventories of such raw
materials in excess of those reasonably required to meet our
production and shipping schedules.
During 2005, we were challenged by commodity cost increases,
most notably steel, petroleum-based resin products and copper.
We continue to proactively work with our suppliers and customers
to manage these cost pressures. Despite our efforts, surcharges
and other cost increases, particularly when necessary to ensure
the continued financial viability of a key supplier, had the
effect of reducing our earnings during 2005. Steel supply has
continued to be constrained and commodity cost pressures
continued to intensify as our supply contracts expired during
2005. We expect commodity cost pressures will continue during
2006. We have been seeking to manage these cost pressures using
a combination of strategies, including working with our
suppliers to mitigate costs, seeking alternative product designs
and material specifications, combining our purchase requirements
with our customers and/or suppliers, changing suppliers and
other means. To the extent that we experience cost increases we
will seek to pass these cost increases on to our customers, but
if we are not successful, our operations in future periods may
be adversely impacted. To date, due to existing contractual
terms, our success in passing commodity cost increases on to our
15
customers has been limited. As contracts with our customers
expire, we will seek to renegotiate terms that allow us to
recover the actual commodity costs we are incurring.
Environmental Compliance
We are subject to the requirements of U.S. federal, state, local
and non-U.S.
environmental and occupational safety and health laws and
regulations. These include laws regulating air emissions, water
discharge and waste management. We have an environmental
management structure designed to facilitate and support our
compliance with these requirements globally. Although it is our
intent to comply with all such requirements and regulations, we
cannot provide assurance that we are at all times in compliance.
We have made and will continue to make capital and other
expenditures to comply with environmental requirements, although
such expenditures were not material during the past three years.
Environmental requirements are complex, change frequently and
have tended to become more stringent over time. Accordingly, we
cannot assure that environmental requirements will not change or
become more stringent over time or that our eventual
environmental cleanup costs and liabilities will not be material.
Delphi is also subject to complex laws governing the protection
of the environment and requiring investigation and cleanup of
environmental contamination. Delphi is in various stages of
investigation and cleanup at its manufacturing sites where
contamination has been discovered. Additionally, Delphi has
received notices that it is a potentially responsible party
(“PRP”) in proceedings at various sites, including the
Tremont City Landfill Site located in Tremont, Ohio, which is
alleged to involve ground water contamination. In September
2002, Delphi and other PRPs entered into a Consent Order with
the Environmental Protection Agency (“EPA”) to perform
a Remedial Investigation and Feasibility Study concerning a
portion of the site, which is expected to be completed during
2006. Based on findings to date, we believe that a reasonably
possible outcome of the investigative study is capping and
future monitoring of this site, which would substantially limit
future remediation costs. We have included an estimate of our
share of the potential costs of such a remedy plus the cost to
complete the investigation in our overall reserve estimate.
Because the scope of the investigation and the extent of the
required remediation are still being determined, it is possible
that the final resolution of this matter may require that we
make material future expenditures for remediation, possibly over
an extended period of time and possibly in excess of our
existing reserves. We will continue to re-assess any potential
remediation costs and, as appropriate, our overall environmental
reserves as the investigation proceeds.
When it has been possible to provide reasonable estimates of
Delphi’s liability with respect to environmental sites,
provisions have been made in accordance with U.S. GAAP. As of
December 31, 2005, our reserve for such environmental
investigation and cleanup was approximately $51 million,
including approximately $3 million included in liabilities
subject to compromise, which reflects in part the retention by
GM of the environmental liability for certain inactive sites as
part of the Separation. We cannot ensure that environmental
requirements will not change or become more stringent over time
or that our eventual environmental cleanup costs and liabilities
will not exceed the amount of our current reserves. Moreover,
facility sales and/or closures relating to the restructuring
process could trigger additional and perhaps material
environmental remediation costs, as previously unknown
conditions may be identified.
Arrangements Between Delphi and GM
The Separation of Delphi from GM was effective January 1,
1999, when we assumed the assets and related liabilities of
GM’s automotive components businesses. In connection with
the Separation, we entered into agreements allocating assets,
liabilities and responsibilities in a number of areas including
taxes, environmental matters, intellectual property, product
liability claims, warranty, employee matters, and general
litigation claims. We also agreed to indemnify GM against
substantially all losses, claims, damages, liabilities or
activities arising out of or in connection with our business
post-Separation.
In connection with the Separation we also agreed to keep GM
informed of any proposal to close a plant, eliminate a product
line or divest of a division, and in good faith reasonably
consider GM’s
16
concerns. GM in turn agreed that it would not unreasonably
withhold its consent to assignment of existing contracts with GM
relating to the business being sold to a qualified buyer.
As discussed above, as part of its transformation plan, Delphi
identified non-core product lines that do not fit into
Delphi’s future strategic framework, which we are seeking
to sell or wind-down. Any sale or wind-down process, however, is
being conducted in consultation with the Company’s
customers, unions and other stakeholders to carefully manage the
transition of affected product lines. Generally we are seeking
GM’s support with respect to any sale of product lines
which could impact their business, including seeking their
consent to assign GM contracts. Our ability to obtain or require
that GM’s consent to an assignment of its existing
agreements to a prospective buyer of a product line will also be
impacted by the extent to which we exercise our rights to
reject, or assign and assume, contracts under the Bankruptcy
Code. For more information regarding these matters, refer to
Item 1. Business—Chapter 11 Cases, Contract
Rejection and Assumption Process in this Annual Report.
VM Supply Agreements. GM continues to be our
largest customer and, to compete effectively, we will need to
continue to satisfy GM’s pricing, service, technology and
increasingly stringent quality and reliability requirements,
which, because we are GM’s largest supplier, particularly
affect us.
Our business with GM and with other VMs is governed by supply
contracts. Consistent with GM’s contracts with other
suppliers, on a case by case basis, GM may terminate a supply
contract with Delphi and
“re-source”
the business to another supplier for a variety of factors, such
as our non-competitiveness (including, in many cases, price as
well as quality, service, design, and technology), cause,
expiration and, termination for convenience. However, except
with respect to annual purchase orders where GM reserves a right
to terminate for convenience, before GM exercises its
re-sourcing rights due
to non-competitiveness for a particular product, GM is required
to notify us of any such non-competitiveness and provide us with
a reasonable period of time during which to correct any such
non-competitiveness before GM may
re-source the business.
Termination for convenience means GM can terminate the contract
at any time for any reason. The majority of our supply contracts
with GM having termination for convenience provisions are annual
purchase orders or long-term contracts. With respect to
long-term contracts entered into prior to October 1, 2003,
GM had agreed that it would not
“re-source”
at any time during the contract period if our goods become
non-competitive with respect to price, technology, design or
quality and we do not agree to be become competitive. With
respect to long-term contracts signed after October 1,
2003, GM has eliminated its right to terminate the contract for
convenience except in the case of cancellation or substantial
modification of the related vehicle program, however GM may
“re-source”
for non-competitive pricing at any time during the contract
period, subject to the requirement of notice and reasonable
opportunity for us to become competitive. In addition, our
supply contracts with GM generally give GM the right to
terminate in the event of a change in control of Delphi.
Unilateral termination by GM of a majority of its supply
contracts with us would have a material adverse effect on our
business.
Our supply contracts also cover service parts we provide to GM
for sale to
GM-authorized dealers
worldwide. Generally, similar to supply contracts with other
VMs, the unit pricing on service parts that are not “past
model” will continue at the prices charged to GM in a range
of three to five years after such service parts go “past
model.” The term “past model” refers to parts for
vehicles that are no longer in production. Thereafter, unit
prices for such service parts will be negotiated between the
parties.
On March 31, 2006, Debtors filed a motion with the Court
seeking authority to reject certain customer contracts with GM,
for further information, refer to Item 1.
Business—Chapter 11 Cases, Contract Rejection and
Assumption Process in this Annual Report. Although to date the
Company has not unilaterally revised the terms and conditions on
which it has been providing interim supply of parts to GM in
connection with the expired contracts or filed additional
contract rejection motions, there can be no assurances that GM
will not take such actions now or in the future. The initial
contract rejection motion is not scheduled to be heard by the
Court until at least August 15, 2006.
Aftermarket Sales. Through December 31, 2003,
aftermarket sales in the U.S. were covered by a Memorandum of
Understanding between
GM-SPO and Delphi
entered into in 2000 that, among other things, required
GM-SPO to buy
aftermarket product from us if we met the market price for the
17
particular product, which was determined by reference to pricing
in effect during calendar year 2000 and mutually agreed upon
market based adjustments. Alternatively, if we chose not to meet
the market price for a particular aftermarket product,
GM-SPO could
re-source and Delphi
would cease supplying such product to
GM-SPO for the
aftermarket in the U.S. or
GM-SPO could purchase
the products from Delphi at the higher price. Since the
Aftermarket Supply Agreement expired on December 31, 2003,
for the past two years, we have been negotiating with
GM-SPO standard GM
purchase order terms for those aftermarket products that GM
wants to continue to source from Delphi. The expiration of this
agreement has not had a material adverse impact on our
aftermarket sales to
GM-SPO.
Employee Matters. As part of the Separation, we
entered into several agreements with GM to allocate
responsibility and liability for certain employee related
matters. In connection with our Separation from GM, GM granted
the UAW, IUE-CWA, and
United Steel Workers (“USWA”) represented
employees’ guarantees covering benefits to be provided to
certain former U.S. hourly employees who became our employees.
We have entered into an agreement with GM that requires us to
indemnify GM if GM is called to perform under the GM-UAW
guarantee. Our indemnification obligations remain in effect
until October 18, 2007. If our negotiations with our
unions, including the UAW, and GM, do not result in a negotiated
comprehensive restructuring plan which addresses our benefit
obligations to our U.S. hourly employees or if we prevail in our
motions currently before the Court and then use the
Court-authority requested to reject the collective bargaining
agreements and modify or eliminate retiree medical and life
insurance benefits for union retirees, GM’s guarantee may
be called upon. If in turn, GM requests indemnification, our
obligation to indemnify GM will become a prepetition claim which
will be subject to compromise in the chapter 11 cases. For
further information refer to Item 1. Business—Legacy
Liabilities; Key Stakeholders in this Annual Report.
Flowback Rights. Certain of our hourly
UAW—represented employees in the U.S. are provided with
opportunities to transfer to GM as appropriate job openings
become available at GM and GM employees in the U.S. have similar
opportunities to transfer to Delphi to the extent job openings
become available at our company. If such a transfer occurs, in
general, both our company and GM will be responsible for pension
payments, which in total reflect such employee’s entire
eligible years of service. Allocation of responsibility between
Delphi and GM will be on a pro-rata basis depending on the
length of service at each company (although service at Delphi
includes service with GM prior to the Separation). There will be
no transfer of pension assets or liabilities between GM and us
with respect to such employees that transfer between our
companies. The company, to which the employee transfers,
however, will be responsible for OPEB obligations. An agreement
with GM provides for a mechanism for determining a cash
settlement amount for OPEB obligations (also calculated on a
pro-rata basis) associated with employees who transfer between
our company and GM.
Employees—Union Representation
As of December 31, 2005, we employed approximately 184,200
people, of whom approximately 37,200 were salaried employees and
approximately 147,000 were hourly employees. On a comparable
basis, as of December 31, 2004, we employed approximately
185,200 people, of whom approximately 37,300 were salaried
employees and approximately 147,900 were hourly employees. Our
unionized employees are represented worldwide by approximately
50 unions, including the UAW, the IUE-CWA, the USWA, and
Confederacion De Trabajadores Mexicanos (“CTM”). As of
December 31, 2005, approximately 22,900 hourly employees
were represented by the UAW, approximately 7,900 by the IUE-CWA
and approximately 900 by the USWA.
18
The Delphi-UAW National Labor Agreement and the Delphi-IUE-CWA
National Labor Agreement expired in September 2003 and November
2003, respectively. We entered into a new contract covering a
four-year term through 2007 with each union. We assumed the
terms of existing collective bargaining agreements for our U.S.
employees represented by other unions, including those
represented by the USWA, in connection with the Separation. The
Delphi-USWA National Labor Agreement expires in September 2007.
Under the terms of certain of our collective bargaining
agreements, Delphi is obligated to maintain specified employment
levels at certain sites. These obligations are subject to
modification by joint agreement of Delphi and the union
representing that site. As of December 31, 2005, actual
employment levels at certain sites were below the specified
employment levels.
As part of our chapter 11 cases, we are seeking
modifications to our existing collective bargaining agreements.
For further information refer to Item 1.
Business—Legacy Liabilities; Key Stakeholders in this
Annual Report.
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Set forth below (not necessarily in order of importance or
probability of occurrence) are certain risks and uncertainties
that could adversely affect our results of operations or
financial condition and cause our actual results to differ
materially from those expressed in forward-looking statements
made by the Company. Also refer to Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Forward-Looking Statements in
this Annual Report.
Risk Factors Specifically Related to our Current
Reorganization Cases Under Chapter 11 of the U.S.
Bankruptcy Code
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If We Are Unable To Successfully Reorganize Our Capital
Structure And Operations And Implement Our Transformation Plan
Through the Chapter 11 Process, The Debtors May Be Required
To Liquidate Our Assets. |
Commencing October 8, 2005, and October 14, 2005, the
Company and certain of our U.S. subsidiaries filed voluntary
petitions for reorganization relief under chapter 11 of the
Bankruptcy Code. Risk factors involving the Chapter 11
Filings include, but are not limited to, the following:
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The chapter 11 cases may adversely affect our business
prospects and/or our ability to operate during the
reorganization cases. |
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We may have difficulty continuing to obtain and maintain
contracts, including critical supply agreements, necessary to
continue our operations and at affordable rates with competitive
terms. |
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We may have difficulty maintaining existing customer
relationships and winning awards for new business. |
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We may not be able to further diversify our customer base and
maintain our customer base in our non-Debtor entities, both
during and assuming successful emergence from chapter 11. |
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Debtor entity transactions outside the ordinary course of
business are subject to the prior approval of the Court, which
may limit our ability to respond timely to certain events or
take advantage of certain opportunities. |
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The Debtors may not be able to obtain Court approval or such
approval may be delayed with respect to motions made in the
reorganization cases. |
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We may be unable to retain and motivate key executives and
associates through the process of reorganization, and we may
have difficulty attracting new employees. |
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The Debtors may be unable to maintain satisfactory labor
relations as they seek to negotiate changes to their existing
collective bargaining agreements and modify certain retiree
benefits. |
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Representatives of certain of the unions representing the
Debtors’ U.S. hourly employees, including the UAW and
IUE-CWA, have indicated that they received membership
authorization and may call for a strike by their employee
members in the event the Debtor’s labor agreements are
rejected pursuant to the Debtors’ pending motion before the
Court under sections 1113 and 1114 of the Bankruptcy Code. |
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There can be no assurance as to our ability to maintain
sufficient financing sources to fund our reorganization plan and
meet future obligations. We are currently financing our
operations during our reorganization cases using funds from
operations and borrowings under our DIP financing, prepetition
secured debt, and overseas factoring and securitization. We may
be unable to operate pursuant to the terms of our DIP financing
arrangements, including the financial covenants and restrictions
contained therein, or to negotiate and obtain necessary
approvals, amendments, waivers or other types of modifications,
and to otherwise fund and execute our business plans throughout
the duration of the chapter 11 cases. For more information
regarding the terms of our DIP facility and other uses and |
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sources of financing, refer to Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources in this Annual
Report. |
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There can be no assurance that we will be able to successfully
develop, prosecute, confirm and consummate one or more plans of
reorganization with respect to the chapter 11 cases that
are acceptable to the Court and the Company’s creditors,
equity holders and other parties in interest. Additionally,
third parties may seek and obtain Court approval to terminate or
shorten the exclusivity period for Delphi to propose and confirm
one or more plans of reorganization, to appoint a
chapter 11 trustee, or to convert the cases to
chapter 7 cases. |
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Even assuming a successful emergence from chapter 11, there
can be no assurance as to the overall long-term viability of our
operational reorganization. |
In addition, the uncertainty regarding the eventual outcome of
our restructuring, and the effect of other unknown adverse
factors, could threaten our existence as a going concern.
Continuing on a going concern basis is dependent upon, among
other things, the success and Court approval of a reorganization
plan, maintaining the support of key vendors and customers, and
retaining key personnel, along with financial, business, and
other factors, many of which are beyond our control.
Under the priority scheme established by the Bankruptcy Code,
unless creditors agree otherwise, prepetition liabilities and
post-petition liabilities must be satisfied in full before
shareholders may be entitled to receive any distribution or
retain any property under a plan of reorganization. The ultimate
recovery to creditors and/or shareholders, if any, will not be
determined until confirmation of a plan of reorganization. No
assurance can be given as to what values, if any, will be
ascribed in the chapter 11 cases to each of these
constituencies or what types or amounts of distributions, if
any, they would receive. A plan of reorganization could result
in holders of Delphi’s stock receiving no distribution on
account of their interests and cancellation of their existing
stock. If certain requirements of the Bankruptcy Code are met, a
plan of reorganization can be confirmed notwithstanding its
rejection by Delphi’s equity security holders and
notwithstanding the fact that such equity security holders do
not receive or retain any property on account of their equity
interests under the plan. Delphi considers the value of its
common stock to be highly speculative and strongly cautions
equity holders that the stock may ultimately be determined to
have no value. Accordingly, the Company urges that appropriate
caution be exercised with respect to existing and future
investments in its common stock or other equity securities, or
any claims relating to prepetition liabilities.
Business Environment and Economic Conditions
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The Cyclical Nature Of Automotive Sales And Production Can
Adversely Affect Our Business. |
Our business is directly related to automotive sales and
automotive vehicle production by our customers. Automotive sales
and production are highly cyclical and depend on general
economic conditions and other factors, including consumer
spending and preferences as well as changes in interest rate
levels, consumer confidence and fuel costs. In addition,
automotive sales and production can be affected by labor
relations issues, regulatory requirements, trade agreements and
other factors. Any significant economic decline that results in
a reduction in automotive sales and production by our customers
can have a material adverse effect on our business, results of
operations and financial condition.
Our sales are also affected by inventory levels and VMs
production levels. We cannot predict when VMs will decide to
either build or reduce inventory levels or whether new inventory
levels will approximate historical inventory levels. This may
result in variability in our sales and financial condition.
Uncertainty regarding inventory levels may be exacerbated by
favorable consumer financing programs initiated by VMs which may
accelerate sales that otherwise would occur in future periods.
We also have historically experienced sales declines during the
VMs scheduled shut-downs or shut-downs resulting from unforeseen
events. Continued uncertainty and other unexpected fluctuations
could have a material adverse effect on our business and
financial condition.
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Drop In The Market Share And Changes In Product Mix
Offered By Our Customers Can Impact Our Revenues. |
The mix of vehicle offerings by our VM customers also impacts
our sales. A decrease in consumer demand for specific types of
vehicles where Delphi has traditionally provided significant
content could have a significant effect on our business and
financial condition. Our sales of products in adjacent markets
to our customers also depend on the success of these customers
retaining their market share. In addition, we may not be able to
adapt our product offerings to meet changing consumer
preferences and our customers’ supply requirements on a
timely, cost effective basis. The ability to respond to
competitive pressures and react quickly to other major changes
in the marketplace including in the case of automotive sales,
increased gasoline prices or consumer desire for and
availability of vehicles using alternative fuels is also a risk
to our future financial performance.
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We Depend On General Motors Corporation As A Customer, And
We May Not Be Successful At Attracting New Customers. |
GM is our largest customer and accounted for 48% of our total
net sales in 2005. In addition, GM accounts for an even greater
percentage of our net sales in North America where we have
limited ability to adjust our cost structure to changing
economic and industry conditions and where we are faced with
high wage and benefit costs. Additionally, our revenues may be
affected by decreases in GM’s business or market share. GM
has reported a variety of challenges it is facing, including
with respect to its debt ratings, its relationships with its
unions and large shareholders and its cost and pricing
structures. If GM is unable or unwilling to engage in a business
relationship with us on a basis that involves improved terms for
Delphi (as compared to those currently in place), we believe
that the Company’s sales, cost structure and profitability
will be adversely affected. For these reasons, we cannot provide
any assurance as to the amount of our future business with GM.
To the extent that we do not maintain our existing level of
business with GM, we will need to attract new customers or our
results of operations and financial condition will be adversely
affected. There can be no assurance that we will be successful
in expanding our existing customer base.
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Contract Terms—Continued Pricing Pressures, VM Cost
Reduction Initiatives And Ability Of VMs To Resource Or Cancel
Vehicle Programs May Result In Lower Than Anticipated Margins,
Or Losses, Which May Have A Significant Negative Impact On Our
Business. |
Cost-cutting initiatives adopted by our customers generally
result in increased downward pressure on pricing. Our customer
supply agreements generally require step downs in component
pricing over the period of production. VMs historically have had
significant leverage over their outside suppliers because the
automotive component supply industry is fragmented and serves a
limited number of automotive VMs, and, as such, Tier 1
suppliers are subject to substantial continuing pressure from
VMs to reduce the price of their products. We believe these
pricing pressures may further intensify, particularly in North
America, as domestic VMs pursue restructuring and cost cutting
initiatives to better compete with their foreign competitors. If
we are unable to generate sufficient production cost savings in
the future to offset price reductions, our gross margin and
profitability would be adversely affected.
Furthermore, in most instances our VM customers are not required
to purchase any minimum amount of products from us. The
contracts we have entered into with most of our customers
provide for supplying the customers for a particular vehicle
model, rather than for manufacturing a specific quantity of
products. Such contracts range from one year to the life of the
model (usually three to seven years), typically are
non-exclusive or permit the VM to resource if we do not remain
competitive and achieve and pass through cost savings in the
form of lower prices over the life of the contract, and do not
require the purchase by the customer of any minimum number of
parts from us. Pricing and capital investment decisions are made
by us at the time the contract is entered into based on
projected volumes. Therefore, a significant decrease in demand
for certain key models or group of related models sold by any of
our major customers or the ability of a manufacturer to resource
and discontinue purchasing from us, for a particular model or
group of models, could have a material adverse effect on us.
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Competition—We Operate In The Highly Competitive
Automotive Supply Industry. |
The automotive component supply industry is highly competitive,
both domestically and internationally. Competition is based
primarily on price, technology, quality, delivery and overall
customer service. Many of our competitors operate with lower
overall and/or more flexible cost structures than we do. In
particular, we face restrictions in our ability to adjust our
cost structure to reduced VM production volumes or demand for
our products. This in turn may limit our ability to redeploy
resources toward research and development of new technology or
to quickly respond to changing market demand or consumer
preferences. There can be no assurance that our products will be
able to compete successfully with the products of our
competitors. Furthermore, the rapidly evolving nature of the
markets in which we compete may attract new entrants,
particularly in low cost countries. As a result, our sales
levels and margins could be adversely affected by pricing
pressures caused by such new entrants. These factors led to
selective resourcing of future business to foreign competitors
in the past and may continue to do so in the future. In
addition, any of our competitors may foresee the course of
market development more accurately than us, develop products
that are superior to our products, have the ability to produce
similar products at a lower cost than us, or adapt more quickly
than us to new technologies or evolving customer requirements.
As a result, our products may not be able to compete
successfully with their products.
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Certain Disruptions In Supply Of And Changes In the
Competitive Environment For Raw Materials Integral To Our
Products May Adversely Affect Our Profitability. |
We use a broad range of materials and supplies, including
metals, castings, chemicals and electronic components in our
products. A significant disruption in the supply of these
materials could decrease production and shipping levels,
materially increase our operating costs and materially adversely
affect our profit margins. Shortages of materials or
interruptions in transportation systems, labor strikes, work
stoppages, or other interruptions to or difficulties in the
employment of labor or transportation in the markets where our
company purchases material, components and supplies for the
production of our products or where our products are produced,
distributed or sold, whether as a result of labor strife, war,
further acts of terrorism or otherwise, in each case may
adversely affect our profitability. Significant changes in the
competitive environment in the markets where our company
purchases material, components and supplies for the production
of our products or where our products are produced, distributed
or sold also may adversely affect our profitability. In
addition, our profitability may be adversely affected by changes
in economic conditions or political stability in the markets
where our company procures material, components, and supplies
for the production of our principal products or where our
products are produced, distributed, or sold (e.g., North
America, Europe, Latin America and Asia-Pacific).
In recent periods there have been significant increases in the
global prices of steel, resins, and copper, which have had and
may continue to have an unfavorable impact on our business. We
anticipate that these increases will continue to adversely
affect our business throughout fiscal 2006. Any continued
fluctuations in the price or availability of steel, resins or
copper may have a material adverse effect on our business,
results of operations or financial condition. To address
increased costs associated with these market forces, a number of
our suppliers have implemented surcharges on existing fixed
price contracts. Without the surcharge, some suppliers claim
they will be unable to provide adequate supply. We have
implemented a steel raw material resale program with several
suppliers whereby we leverage Delphi’s purchase volume. We
have resourced 10-15% of our direct steel purchases to reduce
the impact of these surcharges, but still at prices higher than
the original contract. As the resin raw material market related
cost pressure continues, we expect to see increasing costs in
our resin as well as our plastic component supplier value
streams. We will continue efforts to pass some of the supply and
raw material cost increases onto our customers, although
competitive and marketing pressures have limited our ability to
do that particularly with domestic VMs and may prevent us from
doing so in the future. In addition, our customers are generally
not obligated to accept price increases that we may desire to
pass along to them. This inability to pass on price increases to
our customers when raw material prices increase rapidly or to
significantly higher than historic levels could adversely affect
our operating margins and cash flow, possibly resulting in lower
operating income and profitability.
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We May Not Be Able To Respond Quickly Enough To Changes In
Technology And Technological Risks, And To Develop Our
Intellectual Property Into Commercially Viable Products. |
Changes in legislative, regulatory or industry requirements or
in competitive technologies may render certain of our products
obsolete or less attractive. Our ability to anticipate changes
in technology and regulatory standards and to successfully
develop and introduce new and enhanced products on a timely
basis will be a significant factor in our ability to remain
competitive. We cannot provide assurance that we will be able to
achieve the technological advances that may be necessary for us
to remain competitive or that certain of our products will not
become obsolete. We are also subject to the risks generally
associated with new product introductions and applications,
including lack of market acceptance, delays in product
development and failure of products to operate properly.
In order to effectively compete in the automotive supply
industry, we must be able to launch new products to meet our
customers’ demand in a timely manner. We cannot provide
assurance, however, that we will be able to install and certify
the equipment needed to produce products for new product
programs in time for the start of production, or that the
transitioning of our manufacturing facilities and resources to
full production under new product programs will not impact
production rates or other operational efficiency measures at our
facilities. In addition, we cannot provide assurance that our
customers will execute on schedule the launch of their new
product programs, for which we might supply products. Our
failure to successfully launch new products, or a failure by our
customers to successfully launch new programs, could adversely
affect our results.
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We May Not Succeed In Our Attempts To Improve Our Cost
Structure |
We may have difficulty in generating cost savings and
operational improvements in the future and in adapting our cost
structure, particularly at our legacy sites, adequately to
adjust for significant changes in vehicle production rates, and
to offset price reductions and increases in raw material or
labor costs. Our labor costs may include increased funding
requirements for pensions or healthcare costs (some of which
have been deferred during the chapter 11 cases). Certain
commodity prices, particularly steel, resins and copper, have
markedly increased. Price reductions are often required pursuant
to contracts or to remain competitive with our peers and are
sometimes necessary to win additional business. In addition, our
cost structure may be adversely affected by changes in the laws,
regulations, policies or other activities of governments,
agencies and similar organizations where such actions may affect
the production, licensing, distribution or sale of our
company’s products, the cost thereof or applicable tax
rates, or affect the cost of legal and regulatory compliance or
the cost of financing.
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Asset Impairment And Other Restructuring Charges—We
May Suffer Future Asset Impairment And Other Restructuring
Charges, Including Write Downs of Goodwill Or Intangible
Assets. |
From time to time in the past, we have recorded asset impairment
losses and closure, severance and restructuring losses relating
to specific plants and operations. Generally, we record asset
impairment losses when we determine that our estimates of the
future undiscounted cash flows from an operation will not be
sufficient to recover the carrying value of that facility’s
building, fixed assets and production tooling. During 2005, we
recorded total asset impairment losses of $629 million. In
light of the shifting nature of the competitive environment in
which we operate, it is possible that we will incur similar
losses and charges in the future, and those losses and charges
may be significant. Refer to Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Results of Operations in this Annual Report.
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We May Be Unable To Generate Sufficient Excess Cash Flow
To Meet Increased U.S. Pension And OPEB Funding Obligations Upon
Emergence. |
Our ability to generate sufficient cash may be impacted because
of market volatility that adversely affects our asset return
expectations, the declining interest rate environment and for
other reasons. Delphi’s U.S. hourly pension and OPEB
exposed Delphi to approximately $10.7 billion in unfunded
liabilities at
24
December 31, 2005, of which approximately $2.3 billion
was attributable to unfunded pension obligations and
$8.4 billion was attributable to OPEB obligations. Prior to
the Chapter 11 Filings, Delphi projected that cash outflows
for hourly pension contributions and OPEB payments through 2007
would approximate $1.9 billion. Through the chapter 11
process, Delphi is permitted to defer a significant portion of
these contributions until it emerges from chapter 11. Thus,
the projected future cash outflows for hourly pension
contributions and OPEB payments through 2007 may be
significantly less than $1.9 billion. However, Delphi will
be required to make up any deferred pension contributions at the
time of emergence from chapter 11. Furthermore, if the
pension and OPEB obligations are not addressed as part of the
chapter 11 process, the accompanying cash needs beyond 2007
could continue to strain the Company in the future.
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Employee Strikes and Labor Related Disruptions May
Adversely Affect our Operations. |
Our business is labor intensive and utilizes a large number of
unionized employees. Approximately 96% of our U.S. hourly
workforce is unionized. A strike or other form of significant
work disruption by the unions would likely have an adverse
effect on our ability to operate our business. We filed a motion
for authority to reject collective bargaining agreements and to
modify certain retiree benefits. We have received objections
from each of the six unions subject to such motion, two
objections from non-union parties and a response from GM. If the
Court grants the motion, the contracts would be terminated,
including the unions’ agreement that there will be no
strikes over contract negotiations during the term of the
agreements. This means that the unions could authorize strikes
simultaneously with entry of the Court’s order.
Representatives of certain unions opposing the motion, including
our two largest principal unions, the UAW and the
IUE-CWA, have received
membership authorization indicating that they may call a strike
by their employee members in the event the labor agreements are
rejected as a result of the motion. While we are intent upon
reaching consensual labor modifications prior to a ruling on our
motion, it is possible that no consensual resolution will be
reached.
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Our Exposure To Foreign Currency Fluctuations May Affect
Our Financial Results |
We have currency exposures related to buying, selling and
financing in currencies other than the local currencies in which
we operate. Historically we have reduced our exposure through
financial instruments that provide offsets or limits to our
exposures, which are opposite to the underlying transactions. We
also face an inherent business risk of exposure to commodity
prices risks, and have historically offset our exposure,
particularly to changes in the price of various non-ferrous
metals used in our manufacturing operations, through commodity
swaps and option contracts. Post-petition, we continue to manage
our exposures to changes in currency rates and commodity prices
using these derivative instruments. However, due to the
substantial uncertainty perceived by institutions and dealers
who normally act as counterparties to such instruments as to
whether or not Delphi would seek protection under
chapter 11 of the Bankruptcy Code, during a substantial
portion of the third quarter and fourth quarter of 2005 we were
not able to enter into hedging instruments. As a result we
anticipate that in 2006 our exposure to changes, both favorable
and unfavorable, in currency rates and the price of non-ferrous
metals and certain other commodities will be increased. We
cannot provide assurance that fluctuations in currency exposures
and commodity prices will not otherwise have a material adverse
effect on our financial condition or results of operations, or
cause significant fluctuations in quarterly and annual results
of operations.
Legal and Accounting Matters
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We May Incur Material Losses And Costs As A Result Of
Product Liability And Warranty Claims And Intellectual Property
Infringement Actions That May Be Brought Against Us. |
We face an inherent business risk of exposure to product
liability and warranty claims in the event that our products
fail to perform as expected and, in the case of product
liability, such failure of our products results, or is alleged
to result, in bodily injury and/or property damage. In addition,
as we actively pursue additional technological innovation in
both automotive and non-automotive industries and enhance the
value of our intellectual property portfolio, we incur ongoing
costs to secure, enforce and defend our intellectual property
and face an inherent risk of exposure to the claims of other
suppliers and parties that
25
we have allegedly violated their intellectual property rights.
We cannot assure that we will not experience any material
warranty, product liability or intellectual property claim
losses in the future or that we will not incur significant costs
to defend such claims. In addition, if any of our products are
or are alleged to be defective; we may be required to
participate in a recall involving such products. Each vehicle
manufacturer has its own practices regarding product recalls and
other product liability actions relating to its suppliers.
However, as suppliers become more integrally involved in the
vehicle design process and assume more of the vehicle assembly
functions, VMs are increasingly looking to their suppliers for
contribution when faced with recalls and product liability
claims. A recall claim brought against us, or a product
liability claim brought against us in excess of our available
insurance, may have a material adverse effect on our business.
VMs are also increasingly requiring their suppliers to guarantee
or warrant their products and bear the costs of repair and
replacement of such products under new vehicle warranties.
Depending on the terms under which we supply products to a
vehicle manufacturer, a vehicle manufacturer may attempt to hold
us responsible for some or all of the repair or replacement
costs of defective products under new vehicle warranties, when
the VM asserts that the product supplied did not perform as
warranted. Although we cannot assure that the future costs of
warranty claims by our customers will not be material, we
believe our established reserves are adequate to cover potential
warranty settlements. Our warranty reserves are based on our
best estimates of amounts necessary to settle future and
existing claims. We regularly evaluate the level of these
reserves, and adjust them when appropriate. However, the final
amounts determined to be due related to these matters could
differ materially from our recorded estimates.
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Incurrence Of Significant Legal And Accounting Costs May
Adversely Affect Our Profitability. |
Costs relating to the following matters may be significant:
legal and administrative proceedings such as the ongoing SEC and
Department of Justice investigation and any related private
securities litigation as well as environmental, commercial,
product liability and intellectual property related matters,
including adverse judgments against Delphi if we fail to prevail
in reversing such judgments, or adoption of new or updated
accounting policies and practices.
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Federal Investigations May Lead To Significant
Liabilities. |
As previously disclosed, Delphi is the subject of an ongoing
investigation by the SEC and the Department of Justice involving
Delphi’s accounting for and the adequacy of disclosures for
a number of transactions dating from Delphi’s spin-off from
GM. Delphi is fully cooperating with the government’s
investigations. The Company entered into an agreement with the
SEC to suspend the running of the applicable statute of
limitations until April 6, 2006 and subsequently agreed to
extend the suspension until August 31, 2006. Until these
investigations are complete, Delphi is not able to predict the
effect, if any, that these investigations will have on
Delphi’s business and financial condition, results of
operations and cash flows. We cannot assure that the SEC will
not impose fines or take other corrective actions against us
that could have a significant negative impact on our financial
condition. In addition, publicity surrounding the SEC’s
investigation or any enforcement action, even if ultimately
resolved favorably for us, could have a material adverse impact
on our cash flows, financial condition, results of operations or
business. The government’s investigations were not
suspended as a result of Delphi’s filing for
chapter 11.
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Environmental Factors Relating To Restructuring
Activities. |
It is expected that Delphi’s restructuring activities will
include the sale and/or closure of numerous facilities around
the world. In the course of this process, environmental
investigations will be performed which are likely to identify
previously unknown environmental conditions, triggering
additional and possibly material environmental remediation costs.
26
Debt
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We Have Substantial Levels Of Debt And Debt Service
That Will Divert A Significant Amount Of Cash From Our Business
Operations. |
We have substantial levels of debt, including debt under our DIP
credit facility and other debt instruments. We have a
$250 million in term loans and $7 million of letters
of credit outstanding under our DIP credit facility as of
December 31, 2005. Additionally, we have approximately
$2.5 billion in secured indebtedness outstanding under our
prepetition credit facilities. As of December 31, 2005, we
had $2.1 billion of debt and $403 million of trust
preferred securities, all of which are subject to compromise,
$650 million of other debt and $2.2 billion of cash
and cash equivalents. The credit facility agreements impose
limits on our ability to incur additional debt including our
ability to draw down remaining amounts under the
$1.75 billion revolver in our DIP credit facility. In
accordance with the limits set forth in those agreements, we may
incur additional debt in the future. The degree to which we will
be leveraged could have important consequences, including:
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• |
requiring a substantial portion of our cash flow from operations
to be dedicated to debt service and therefore not available to
us for our operations, capital expenditures and future business
opportunities; |
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• |
increasing our vulnerability to a downturn in general economic
conditions or in our business; |
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• |
limiting our ability to adjust to changing market conditions,
placing us at a competitive disadvantage compared to our
competitors that have relatively less debt; and |
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• |
limiting our ability to obtain additional financing or access
other debt in the future for capital expenditures, working
capital or general corporate purposes. |
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Restrictions And Covenants In the DIP Credit Facility
Limit Our Ability To Take Certain Actions And Require Us to
Satisfy Certain Financial Tests. |
The agreements governing the DIP credit facility contain a
number of significant covenants that, among other things, will
restrict our ability, and the ability of our subsidiaries, to
take certain actions. The DIP credit facility includes
affirmative, negative and financial covenants that impose
restrictions on Delphi’s financial and business operations,
including Delphi’s ability to, among other things, incur or
secure other debt, make investments, sell assets and repurchase
stock. Additionally, the DIP credit facility includes negative
covenants that prohibit the payment of dividends by the Company.
Generally, so long as the Facility Availability Amount (as
defined in the DIP credit facility) is equal or greater than
$500 million, compliance with the restrictions on
investments, mergers and disposition of assets do not apply
(except in respect of investments in, and dispositions to,
direct or indirect domestic subsidiaries of Delphi that are not
guarantors).
The covenants in the DIP credit facility generally require
Delphi to, among other things, (i) maintain a monthly
cumulative minimum global earnings before interest, taxes,
depreciation, amortization, reorganization and restructuring
costs (“Global EBITDAR”), as defined, for each period
beginning on January 1, 2006 and ending on the last day of
each fiscal month through November 30, 2006, as described
in the DIP credit facility, and (ii) maintain a rolling
12-month cumulative
Global EBITDAR for Delphi and its direct and indirect
subsidiaries, on a consolidated basis, beginning on
December 31, 2006 and ending on October 31, 2007 at
the levels set forth in the DIP credit facility. The DIP credit
facility contains certain defaults and events of default
customary for debtor-in-possession financings of this type. Upon
the occurrence and during the continuance of any default in
payment of principal, interest or other amounts due under the
DIP credit facility, interest on all outstanding amounts is
payable on demand at 2% above the then applicable rate.
The DIP credit facility provides the lenders with a first lien
on substantially all material tangible and intangible assets of
Delphi and its wholly-owned domestic subsidiaries (however,
Delphi is only pledging 65% of the stock of its first tier
foreign subsidiaries to the extent that, in its reasonable
business judgment,
27
adverse tax consequences would result from the pledge of a
greater percentage) and further provides that amounts borrowed
under the DIP credit facility will be guaranteed by
substantially all of Delphi’s affiliated Debtors, each as
debtor and debtor-in-possession.
Failure to comply with these covenants would result in an event
of default under the DIP credit facility, which would permit the
lender to cause the amounts outstanding to become immediately
due and payable. In addition, failure to comply could result in
termination of the commitments under our revolving credit
facility, which would result in Delphi being prohibited from
borrowing additional amounts under such facility.
Internal Controls
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Failure To Achieve And Maintain Effective Internal
Controls In Accordance With Section 404 Of The
Sarbanes-Oxley Act of 2002 Could Have A Material Effect On Our
Business. |
As a publicly traded company, we are subject to rules adopted by
the SEC pursuant to Section 404 of the Sarbanes-Oxley Act
of 2002. Section 404 requires us to include an internal
control report from management in this Annual Report on
Form 10-K. The
internal control report must include the following: (1) a
statement of management’s responsibility for establishing
and maintaining adequate internal control over financial
reporting, (2) a statement identifying the framework used
by management to conduct the required evaluation of the
effectiveness of our internal control over financial reporting,
(3) management’s assessment of the effectiveness of
our internal control over financial reporting as of December 31
of each fiscal year, including a statement as to whether or not
internal control over financial reporting is effective, and
(4) a statement that our independent registered public
accounting firm has issued an attestation report on
management’s assessment of internal control over financial
reporting. A material weakness is defined as a significant
deficiency or combination of significant deficiencies, that
results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will
not be prevented or detected. Our assessment as of
December 31, 2005 identified a number of material
weaknesses in our internal controls over financial reporting,
which also adversely impacted our disclosure controls and
procedures. For additional information refer to Item 9A.
Controls and Procedures in this Annual Report.
Because of the material weaknesses referenced in the preceding
paragraph, management has concluded that, as of
December 31, 2005, our internal controls over financial
reporting were not effective based on those criteria. This
failure and any failure in the future to achieve and maintain
effective internal controls over financial reporting and
otherwise comply with the requirements of Section 404 could
have a material adverse effect on our business. Such
noncompliance could result in perceptions of our business among
customers, suppliers, rating agencies, lenders, investors,
securities analysts and others being adversely affected. We may
not be able to complete our remediation plans designed to
address the identified material weaknesses in our internal
controls over financial reporting and continue to attract
additional qualified accountants, and auditing and compliance
professionals to assist in completing such plans and maintaining
compliance programs.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have no unresolved SEC staff comments to report.
ITEM 2. PROPERTIES
Delphi’s world headquarters is in Troy, Michigan. Delphi
also maintains regional headquarters in Tokyo, Japan; Paris,
France; and Sao Paulo, Brazil. Excluding our joint ventures and
other investments, as of December 31, 2005 we maintained
303 sites in 34 countries throughout the world, including
manufacturing facilities, technical centers, customer centers
and sales offices. As of December 31, 2005, we owned our
world headquarters. Of the remaining 302 sites, 33 were owned
and 55 were leased in the U.S. and Canada, 35 were owned and 16
were leased in Mexico, 38 were owned and 67 were leased in
Europe/ Middle East/ Africa; 11 were owned and 6 were leased in
South America; and 9 were owned and 32 were leased in Asia/
Pacific. Debtors have the right, subject to Court approval and
certain other
28
conditions, to assume or reject their executory contracts,
including unexpired leases. The Debtors are currently in the
process of evaluating all owned and leased real estate, and as
of May 31, 2006, the Debtors have rejected a total of three
real property leases and one sublease. For more detailed
discussion on the status of the reorganization cases and the
potential impact of such cases on Delphi and certain of its
subsidiaries rights to occupy and use real property, refer to
Item 1. Business and Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Executive Summary in this Annual Report.
We continuously evaluate our global footprint to enhance support
provided to our customers around the world while at the same
time controlling associated operating costs. We continue to seek
to efficiently locate our global manufacturing, engineering and
sales footprint to serve the needs of our VM customers and to
reduce instances of over capacity in some of our manufacturing
facilities.
ITEM 3. LEGAL PROCEEDINGS
Bankruptcy Proceedings
Refer to Item 1. Business section in this Annual Report for
further information regarding the chapter 11 cases.
Regulatory Actions and Other Matters
As previously disclosed, Delphi is the subject of an ongoing
investigation by the SEC and the Department of Justice involving
Delphi’s accounting for and the adequacy of disclosures for
a number of transactions dating from Delphi’s spin-off from
GM. Delphi is fully cooperating with the government’s
investigations. The Company entered into an agreement with the
SEC to suspend the running of the applicable statute of
limitations until April 6, 2006 and subsequently agreed to
extend the suspension until August 31, 2006. The
government’s investigations were not suspended as a result
of Delphi’s filing for chapter 11. Until these
investigations are complete, Delphi is not able to predict the
effect, if any, that these investigations will have on
Delphi’s business and financial condition, results of
operations and cash flows.
The Company also believes that the Enforcement Division of the
SEC has taken a more proactive role, what the SEC refers to as a
“risk based” approach, by seeking information from
issuers in an effort to assess issuers’ accounting or
disclosure practices before identifying specific wrong-doing.
Delphi believes that the previously disclosed inquiry it
received during the fourth quarter of 2004 regarding accounting
practices related to defined benefit pension plans and other
postemployment benefit plans is an example of this practice.
Delphi continues to cooperate fully with the SEC’s informal
inquiry in this matter.
Delphi is subject to the requirements of U.S. federal, state,
local and non-U.S. environmental and occupational safety and
health laws and regulations. For a discussion of matters
relating to compliance with laws for the protection of the
environment, refer to Item 1. Business—Environmental
Compliance in this Annual Report.
Shareholder Lawsuits
The Company, along with Delphi Trust I, Delphi
Trust II, current and former directors of the Company,
certain current and former officers and employees of the Company
or its subsidiaries, and others are named as defendants in
several lawsuits that were filed beginning in March 2005
following the Company’s announced intention to restate
certain of its financial statements.
On December 12, 2005, the Judicial Panel on Multidistrict
Litigation entered an order transferring each of the related
federal actions to the United States District Court for the
Eastern District of Michigan for coordinated or consolidated
pretrial proceedings (the “Multidistrict Litigation”).
The lawsuits transferred fall into three categories. One group
of putative class action lawsuits, which are purportedly brought
on behalf of participants in certain of the Company’s and
its subsidiaries’ defined contribution employee benefit
pension plans that invested in Delphi common stock, is brought
under the
29
Employee Retirement Income Security Act of 1974, as amended (the
“ERISA Actions”). Plaintiffs in the ERISA Actions
allege, among other things, that the plans suffered losses as a
result of alleged breaches of fiduciary duties under ERISA. On
October 21, 2005, the ERISA Actions were consolidated
before one judge in the United States District Court for the
Eastern District of Michigan. The ERISA Actions were
subsequently transferred to the Multidistrict Litigation. On
March 3, 2006, plaintiffs filed a consolidated class action
complaint (the “Amended ERISA Action”) with a putative
class period of May 28, 1999 to November 1, 2005. The
Company, which was previously named as a defendant in the ERISA
Actions, was not named as a defendant in the Amended ERISA
Action. The plaintiffs are not currently asserting claims
against or seeking relief from the Company in the Amended ERISA
Action due to the Company’s bankruptcy filing, but have
stated that they plan to proceed with claims against the Company
in the ongoing bankruptcy cases, and will seek to name the
Company as a defendant in the Amended ERISA Action if the
bankruptcy stay is modified or lifted to permit such action. The
defendants have filed a motion to dismiss the Amended ERISA
Action.
A second group of putative class action lawsuits variously
alleges, among other things, that the Company and certain of its
current and former directors and officers and others made
materially false and misleading statements in violation of
federal securities laws. On September 23, 2005, these
securities actions were consolidated before one judge in the
United States District Court for the Southern District of New
York. On September 30, 2005, the Court-appointed lead
plaintiffs filed a consolidated class action complaint (the
“Amended Securities Action”) on behalf of a putative
class consisting of all persons and entities who purchased or
otherwise acquired publicly-traded securities of the Company,
including securities issued by Delphi Trust I and Delphi
Trust II, during a putative class period of March 7,
2000 through March 3, 2005. The Amended Securities Action
names several new defendants, including Delphi Trust II,
certain former directors, and underwriters and other third
parties, and includes securities claims regarding additional
offerings of Delphi securities. The securities actions
consolidated in the Southern District of New York (and a related
securities action filed in the United States District Court for
the Southern District of Florida concerning Delphi Trust I)
were subsequently transferred to the Eastern District of
Michigan as part of the Multidistrict Litigation. The action is
stayed against the Company pursuant to the Bankruptcy Code, but
is continuing against the other defendants.
The third group of lawsuits is comprised of shareholder
derivative actions against certain current and former directors
and officers of the Company (“Shareholder Derivative
Actions”). In October 2005, following the filing by the
Company of its petition for reorganization relief under
chapter 11 of the U.S. Bankruptcy Code, three of the four
shareholder derivative actions were closed administratively
without prejudice. (Two of the three lawsuits that were closed
were pending in the Circuit Court of Oakland County, Michigan,
and the other was pending in the United States District Court
for the Eastern District of Michigan.) The plaintiff in the
remaining shareholder derivative action has agreed to adjourn
defendants’ time to respond without date. The two federal
derivative actions were transferred to the Multidistrict
Litigation.
In addition, the Company received a demand from a shareholder
that the Company consider bringing a derivative action against
certain current and former directors and officers. The
Shareholder Derivative Actions and the shareholder demand are
premised on allegations that certain current and former
directors and officers of the Company made materially false and
misleading statements in violation of federal securities laws
and/or of their fiduciary duties. The Company has appointed a
committee of the Board of Directors to consider the shareholder
demand. That committee of the Board of Directors is still
investigating the matter.
Due to the preliminary nature of these lawsuits, the Company is
not able to predict with certainty the outcome of this
litigation or the Company’s potential exposure related
thereto. In addition, because any recovery on allowed
prepetition claims is subject to a confirmed plan of
reorganization, the ultimate distribution with respect to
allowed claims is not presently ascertainable. While Delphi
maintains directors and officers insurance subject to a
$10 million deductible, and has recorded a reserve in the
amount of the deductible, the Company cannot assure the extent
of coverage or that the impact of any loss not covered by
insurance or applicable reserves would not be material.
30
Under section 362 of the U.S. Bankruptcy Code, the filing of a
bankruptcy petition automatically stays most actions against a
debtor, including most actions to collect prepetition
indebtedness or to exercise control over the property of the
debtor’s estate. Absent an order of the Court,
substantially all prepetition liabilities of the debtor are
subject to settlement under a plan of reorganization.
Ordinary Business Litigation
In addition to the matters referred to below, Delphi is involved
in routine litigation incidental to the conduct of its business.
Although the Company does not believe this routine litigation to
which it is currently a party will have a material adverse
effect on its business or financial condition, the Company faces
an inherent business risk of exposure to product liability
claims in the event that the failure of its products results or
is alleged to result in personal injury or death, and it cannot
provide assurance that Delphi will not experience any material
product liability losses in the future. In addition, as the
Company successfully diversifies its customer base and adapts
its automotive technology to new markets, it may face an
increased risk of product liability suits.
With respect to product liability, if any Delphi-designed
products are or are alleged to be defective, Delphi may be
required to participate in a recall involving such products.
Each VM has its own policy regarding product recalls and other
product liability actions relating to its suppliers. As
suppliers become more integrally involved in the vehicle design
process and assume more of the vehicle assembly functions, VMs
are increasingly looking to their suppliers for contribution
when faced with product liability claims. In connection with the
Separation, GM agreed to retain responsibility for all product
liability actions relating to products the Company manufactured
prior to January 1, 1999 and sold or otherwise supplied to
GM either before or after that date. Delphi is responsible for
all product liability actions relating to products it sold at
any time to customers other than GM. Responsibility for product
liability actions relating to products manufactured on or after
January 1, 1999 and sold to GM are determined in accordance
with the agreements for such sales. Delphi may also be subject
to significant financial and legal obligations with respect to
certain divested businesses.
From time to time, in the ordinary course of business, Delphi
receives notices from customers that products may not function
properly. The terms and conditions of the applicable contract
generally govern Delphi’s warranty responsibility for its
products, which vary from contract to contract. Most of the
Company’s contracts require that it make certain warranties
to its customers regarding, among other things, conformity to
specifications and freedom from defect. VMs generally offer
warranties to new vehicle purchasers, which cover the repair and
replacement of defective parts on their vehicles for a specified
period of time. Historically, VMs have borne the cost associated
with such warranty programs, including costs related to the
repair and replacement of parts supplied to the VM by the
supplier. For the past several years, VMs, including GM, have
been requiring their outside suppliers to bear a greater portion
of these costs and have been increasingly vigorous in pursuing
warranty claims. Depending on the terms under which Delphi
supplies products to a VM, a VM might seek to hold Delphi
responsible for some or the entire repair or replacement costs
of such products under new vehicle warranties, when the product
supplied did not perform as represented. On May 3, 2006, GM
notified us and our unsecured creditors committee that it was
seeking to exercise set-off rights in the amount of
approximately $67 million, alleging that catalytic
converters supplied by Delphi to GM for certain 2001 and 2002
vehicle platforms did not conform to specifications. Delphi
believes that GM’s claims are without merit and therefore
disputes GM’s right to set-off amounts against future
payments. If the parties cannot resolve the dispute, it will be
submitted to mediation and, if not resolved, to binding
arbitration, in accordance with the Court’s final order
approving the Company’s DIP credit facility. For more
information on product warranty accruals and usage refer to
Note 11, Accrued Liabilities of the consolidated financial
statements in this Annual Report.
Although the Company cannot ensure that the future costs of
warranty claims by GM or other customers will not be material,
it believes its established reserves are adequate to cover
potential warranty settlements. Delphi’s warranty reserves
are based upon the Company’s best estimates of amounts
necessary to settle future and existing claims. Delphi regularly
evaluates the appropriateness of these reserves, and
31
makes adjustments when appropriate. However, the final amounts
determined to be due related to warranty matters could differ
materially from its recorded estimates.
As Delphi actively pursues additional technological innovation
in both automotive and non-automotive industries and enhances
the value of its intellectual property portfolio, Delphi incurs
ongoing costs to secure, enforce and defend the Company’s
intellectual property and faces an inherent risk of exposure to
the claims of other suppliers and parties that it has allegedly
violated their intellectual property rights. Delphi cannot
ensure that it will not experience any material intellectual
property claim losses in the future or that it will not incur
significant costs to defend such claims. As previously
disclosed, on September 7, 2004, we received the
arbitrator’s binding decision resolving a dispute between
Delphi and Litex over alleged infringement of certain patents
regarding methods to reduce engine exhaust emissions. As
previously disclosed, the results of the arbitration did not
have a material impact on Delphi’s financial condition,
operations or business prospects. However, in March 2005, we
received correspondence from counsel representing Litex that
Litex intended to file various tort claims against Delphi in
California state court. On March 4, 2005, Delphi filed a
complaint in the United States Federal Court for the District of
Massachusetts seeking declaratory relief to enforce the
parties’ settlement agreement in the original case,
prohibiting Litex from bringing such claims. On April 18,
2005, Litex countersued asserting various tort claims against
Delphi and requesting that the court void aspects of the
parties’ agreement in the original case. On
October 17, 2005, the court entered judgment in
Delphi’s favor and dismissed all of Litex’s claims
with prejudice. Litex had until December 16, 2005 to file a
notice of appeal, but has taken the position that the automatic
stay in place in Delphi’s chapter 11 cases prevented
Litex from doing so. It is Delphi’s position that Litex has
waived its right to appeal.
Additionally, for the past several years Delphi has been
involved in patent licensing negotiations with Denso Corporation
(“Denso”) relating to engine control technology. This
matter, including the lawsuit that had been filed by Denso, has
now been resolved through entry of a patent cross license
agreement. Patent license negotiations are ongoing with Denso in
connection with variable valve timing technology and it is
expected that these negotiations will be concluded on
commercially reasonable terms and in accordance with ordinary
industry practices.
Delphi believes that it is adequately insured, with respect to
product liability coverage, at levels sufficient to cover any
potential claims, subject to commercially reasonable deductible
amounts. The Company has also established reserves in amounts it
believes are reasonably adequate to cover any adverse judgments
with respect to the other claims described above. However, any
adverse judgment in excess of the Company’s insurance
coverage and such reserves could have a material adverse effect
on its business.
Under section 362 of the Bankruptcy Code, the filing of a
bankruptcy petition automatically stays most actions against a
debtor, including most actions to collect prepetition
indebtedness or to exercise control over the property of the
debtor’s estate. Absent an order of the Court,
substantially all prepetition liabilities are subject to
settlement under a plan of reorganization.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
During the fourth quarter of the year covered by this report on
Form 10-K, no
matters were submitted to a vote of security holders.
32
SUPPLEMENTARY ITEM. EXECUTIVE OFFICERS OF THE
REGISTRANT
Executive Officers
The name, age, position and a description of the business
experience of each of the executive officers of Delphi as of
January 1, 2006 are listed below. There was no family
relationship among the executive officers or between any
executive officer and a director. Executive officers of Delphi
are elected annually by the Board of Directors and hold office
until their successors are elected and qualified or until their
earlier resignation or removal.
| |
|
|
|
|
|
|
| Name |
|
Age | |
|
Position |
| |
|
| |
|
|
|
Robert S. Miller
|
|
|
64 |
|
|
Chairman of the Board & Chief Executive Officer |
|
Rodney O’Neal
|
|
|
52 |
|
|
Director, President & Chief Operating Officer |
|
David B. Wohleen
|
|
|
55 |
|
|
Vice Chairman |
|
Robert J. Dellinger
|
|
|
45 |
|
|
Executive Vice President & Chief Financial Officer |
|
Mark R. Weber
|
|
|
57 |
|
|
Executive Vice President, Operations, Human Resource
Management & Corporate Affairs |
|
John D. Sheehan
|
|
|
45 |
|
|
Vice President and Chief Restructuring Officer, Chief Accounting
Officer and Controller |
|
David M. Sherbin
|
|
|
46 |
|
|
Vice President & General Counsel |
Mr. Miller was named chairman and chief executive
officer of Delphi Corporation effective July 1, 2005. Prior
to joining Delphi, Mr. Miller served as a director of
Federal-Mogul Corporation, a global automotive component
supplier, since 1993, including as a non-executive chairman from
January 11, 2001 to October 1, 2001, and from January
2004 until June 2005, and three times in a transitional role as
chief executive officer of Federal-Mogul; in 1996, again in 2000
and again from July 2004 until February 2005. From September
2001 until December 2003, Mr. Miller was the chairman and
chief executive officer of Bethlehem Steel Corporation, a steel
manufacturing company. He currently serves on the board of
directors of United Airlines and Symantec Corporation.
Mr. O’Neal was named president and chief
operating officer of Delphi Corporation effective
January 7, 2005. Prior to that position,
Mr. O’Neal served as president of the Dynamics,
Propulsion and Thermal sector effective January 1, 2003.
This sector was realigned effective January 1, 2004 and is
now the Dynamics, Propulsion, Thermal & Interior sector. He
assumed additional responsibility for Europe and South America
in January 2004. He had been executive vice president of Delphi
and president of the former Safety, Thermal and Electrical
Architecture sector since January 2000. Previously, he had been
vice president and president of Delphi Interior Systems since
November 1998 and general manager of the former Delphi Interior
& Lighting Systems since May 1997. Mr. O’Neal is a
member of the board of directors of Goodyear Tire & Rubber
Company. He is a member of the Executive Leadership Council.
Mr. Wohleen was named vice chairman of Delphi
Corporation effective January 7, 2005. Prior to that
position, Mr. Wohleen served as president of the
Electrical, Electronics, Safety & Interior sector effective
January 1, 2003. This sector was realigned effective
January 1, 2004 and is now the Electrical, Electronics
& Safety sector. He assumed additional responsibility for
Asia-Pacific in January 2004. He had been a Delphi executive
vice president and president of the former Delphi Electronic and
Mobile Communication sector since January 2000. Previously, he
was vice president and president of Delphi Delco Electronics
Systems since November 1998 and general manager of Delphi Delco
Electronics Systems since August 1998. He was the executive
champion for Delphi’s GM Customer Team. He is also a member
of the Board of Directors for the National Association of
Manufacturers and serves on the Board of Trustees for Lawrence
Technological University in Southfield, MI. As previously
announced, effective June 1, 2006, Mr. Wohleen retired
from Delphi and his responsibilities were transitioned to
Delphi’s other officers.
Mr. Dellinger was named executive vice president and
chief financial officer of Delphi Corporation effective
October 8, 2005. From June 2002 to September 2005,
Mr. Dellinger served as executive vice president and chief
financial officer of Sprint Corporation, where he also was
executive vice president of finance from April 2002 to June
2002. Before joining Sprint, Mr. Dellinger served as
president and chief
33
executive officer of GE Frankona Re based in Munich, Germany
with responsibility for the European operations of General
Electric’s Employers Reinsurance Corporation, a global
reinsurer, from 2000 to 2002. From 2001 to 2002, he also served
as president and chief executive officer of General
Electric’s Employers Reinsurance Corporation’s
Property and Casualty Reinsurance business in Europe and Asia.
From 1997 to 2000, he served as executive vice president and
chief financial officer of General Electric’s Employers
Reinsurance Corporation. Other positions Mr. Dellinger held
at General Electric include manager of finance for GE Motors and
Industrial Systems and director of finance and business
development for GE Plastics Pacific based in Singapore.
Mr. Dellinger is a member of the board of directors of
SIRVA, INC.
Mr. Weber was named executive vice president,
Operations, Human Resource Management and Corporate Affairs for
Delphi effective January 1, 2000. He had been vice
president of Human Resource Management for Delphi since November
1998 and executive director of Human Resource Management for
Delphi since January 1995. He is the executive champion for
Delphi’s Harley-Davidson Customer Team.
Mr. Sheehan was named vice president and chief
restructuring officer for Delphi Corporation effective
October 8, 2005. Prior to this position, he served as
acting chief financial officer since March 2005.
Mr. Sheehan also retained his responsibilities as chief
accounting officer and controller. He was named chief accounting
officer and controller of Delphi Corporation effective
July 1, 2002. Previously, he was a partner at KPMG LLP
since 1995. His experience at KPMG LLP included 20 years in
a number of assignments in the U.S., England, and Germany.
Mr. Sherbin was named vice president and general
counsel for Delphi Corporation effective October 1, 2005.
He also serves as the Company’s chief compliance officer.
Prior to his positions at Delphi, Mr. Sherbin was vice
president, general counsel and secretary for Pulte Homes, Inc.
since January 2005. Prior to joining Pulte Homes, Inc., since
1997 he was an attorney at Federal-Mogul Corporation, including
its senior vice president, general counsel and secretary since
2003. Mr. Sherbin presently serves on the Board of
Directors of the Michigan Center for Civic Education.
For purposes of calculating the aggregate market value of
Delphi’s common stock held by non-affiliates, as shown on
the cover page of this report, it has been assumed that all the
outstanding shares were held by non-affiliates, except for the
shares held by directors, and executive officers of Delphi.
However, this should not be deemed to constitute an admission
that all such persons of Delphi are, in fact, affiliates of
Delphi, or that there are not other persons who may be deemed to
be affiliates of Delphi. Further information concerning
shareholdings of executive officers, directors and principal
shareholders is included in Part III, Item 12 in this
Annual Report.
34
PART II
|
|
| ITEM 5. |
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
On October 11, 2005, the New York Stock Exchange
(“NYSE”) announced suspension of trading of
Delphi’s common stock (DPH),
61/2%
Notes due May 1, 2009 (DPH 09), and its
71/8
% debentures due May 1, 2029 (DPH 29), as well
as the 8.25% Cumulative Trust Preferred Securities of
Delphi Trust I (DPH PR A). This action followed
the NYSE’s announcement on October 10, 2005, that it
was reviewing Delphi’s continued listing status in light of
Delphi’s announcements involving the filing of voluntary
petitions for reorganization relief under chapter 11 of the
Bankruptcy Code. The NYSE subsequently determined to suspend
trading based on the trading price for the common stock, which
closed at $0.33 on October 10, 2005, and completed
delisting procedures on November 11, 2005.
Delphi’s common stock (OTC: DPHIQ) and preferred
shares (OTC: DPHAQ) are being traded as of the date of
filing this Annual Report on Form 10-K with the SEC on the
Pink Sheets LLC (the “Pink Sheets”), a quotation
service for over the counter (“OTC”) securities, and
are no longer subject to the regulations and controls imposed by
the NYSE. Pink Sheets is a centralized quotation service that
collects and publishes market maker quotes for OTC securities in
real-time. Delphi’s listing status on the Pink Sheets is
dependent on market makers’ willingness to provide the
service of accepting trades to buyers and sellers of the stock.
Unlike securities traded on a stock exchange, such as the NYSE,
issuers of securities traded on the Pink Sheets do not have to
meet any specific quantitative and qualitative listing and
maintenance standards. As of the date of filing this Annual
Report on Form 10-K with the SEC, Delphi’s
61/2%
Notes due May 1, 2009 (DPHIQ.GB) and
71/8
% debentures due May 1, 2029 (DPHIQ.GC) are also
trading OTC via the Trade Reporting and Compliance Engine
(TRACE), a NASD-developed reporting vehicle for OTC secondary
market transactions in eligible fixed income securities that
provides debt transaction prices.
The Transfer Agent and Registrar for our common stock is The
Bank of New York. On December 31, 2005 and May 31,
2006, there were 295,156 and 288,150 holders of record,
respectively, of our common stock.
The Delphi Board of Directors declared dividends on Delphi
common stock of $0.03 per share on March 23, 2005 and
$0.015 per share on June 22, 2005, which was paid on
May 2, 2005 and August 2, 2005, respectively. On
September 8, 2005, the Board of Directors announced the
elimination of Delphi’s quarterly dividend on Delphi common
stock for the remainder of 2005. In addition, the DIP credit
facility includes negative covenants that prohibit the payment
of dividends by the Company. The Company does not expect to pay
dividends in the near future. In 2004, we declared dividends of
$0.07 per share on March 1, June 22, September 9,
and December 8, 2004 which were paid on April 12,
August 3, October 19, 2004 and January 18, 2005,
respectively.
The following table sets forth the high and low sales price per
share of our common stock, as reported by the New York Stock
Exchange, for the periods through October 10, 2005 and OTC
thereafter. Refer to Note 18, Stock Incentive Plans of the
consolidated financial statements in this Annual Report for
additional information regarding equity compensation plans.
| |
|
|
|
|
|
|
|
|
| |
|
Price Range of | |
| |
|
Common Stock | |
| |
|
| |
| Year Ended December 31, 2005 |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
4th Quarter
|
|
$ |
2.99 |
(a) |
|
$ |
0.23 |
(a) |
|
3rd Quarter
|
|
$ |
6.68 |
|
|
$ |
2.42 |
|
|
2nd Quarter
|
|
$ |
5.40 |
|
|
$ |
3.20 |
|
|
1st Quarter
|
|
$ |
9.07 |
|
|
$ |
4.15 |
|
35
| |
|
|
|
|
|
|
|
|
| |
|
Price Range of | |
| |
|
Common Stock | |
| |
|
| |
| Year Ended December 31, 2004 |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
4th Quarter
|
|
$ |
9.63 |
|
|
$ |
8.10 |
|
|
3rd Quarter
|
|
$ |
10.69 |
|
|
$ |
8.61 |
|
|
2nd Quarter
|
|
$ |
11.01 |
|
|
$ |
9.55 |
|
|
1st Quarter
|
|
$ |
11.78 |
|
|
$ |
9.39 |
|
|
|
| (a) |
As of October 11, 2005, Delphi common stock began trading
OTC. |
|
|
|
Purchase of Equity Securities by the Issuer and Affiliated
Purchasers |
No shares were purchased by the Company or on its behalf by any
affiliated purchaser in the fourth quarter of 2005. As part of
Delphi’s stock repurchase program in February 2005, the
Board of Directors authorized the repurchase of up to an
aggregate of 19 million shares of our common stock through
the first quarter of 2006 to fund obligations for our stock
options and other awards issued under our equity based
compensation plan. The Company did not repurchase any equity
securities in 2005 or in the first quarter of 2006 pursuant to
this plan.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data reflects the results of
operations and balance sheet data for the years ended 2001 to
2005. The data below should be read in conjunction with, and is
qualified by reference to Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and notes
thereto included elsewhere in this Annual Report. The financial
information presented may not be indicative of our future
performance.
On October 8, 2005 and October 14, 2005, the Debtors
filed voluntary petitions for reorganization relief under
chapter 11 of the Bankruptcy Code. The Debtors will
continue to operate their businesses as
“debtors-in-possession” under the jurisdiction of the
Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Court. Delphi’s
non-U.S. subsidiaries
were not included in the filings and will continue their
business operations without supervision from the U.S. courts and
will not be subject to the requirements of the Bankruptcy Code.
For additional information on the bankruptcy cases, refer to
Note 3, Chapter 11 Bankruptcy and Going Concern, of
the consolidated financial statements in this Annual Report.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions, except per share amounts) | |
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net sales
|
|
$ |
26,947 |
|
|
$ |
28,622 |
|
|
$ |
28,077 |
|
|
$ |
27,641 |
|
|
$ |
26,302 |
|
| |
Net (loss) income(1)(2)(3)
|
|
$ |
(2,357 |
) |
|
$ |
(4,818 |
)(6) |
|
$ |
(10 |
) |
|
$ |
318 |
|
|
$ |
(428 |
) |
| |
Basic & Diluted (loss) earnings per share
|
|
$ |
(4.21 |
) |
|
$ |
(8.59 |
)(6) |
|
$ |
(0.02 |
) |
|
$ |
0.57 |
|
|
$ |
(0.76 |
) |
| |
Cash dividends declared per share
|
|
$ |
0.045 |
|
|
$ |
0.280 |
|
|
$ |
0.280 |
|
|
$ |
0.280 |
|
|
$ |
0.280 |
|
| |
Ratio of earnings to fixed charges(4)
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
2.6 |
|
|
|
N/A |
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets
|
|
$ |
17,023 |
|
|
$ |
16,559 |
(6) |
|
$ |
21,066 |
|
|
$ |
19,692 |
|
|
$ |
18,928 |
|
| |
Total debt
|
|
$ |
3,390 |
|
|
$ |
2,980 |
|
|
$ |
3,456 |
|
|
$ |
3,215 |
|
|
$ |
3,629 |
|
| |
Liabilities subject to compromise(5)
|
|
$ |
15,074 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Stockholders’ (deficit) equity
|
|
$ |
(6,245 |
) |
|
$ |
(3,625 |
)(6) |
|
$ |
1,446 |
|
|
$ |
1,232 |
|
|
$ |
2,267 |
|
|
|
| (1) |
Includes pre-tax impairment charges related to long-lived assets
held for use of $233 million, $326 million,
$58 million, and $128 million in 2005, 2004, 2003, and
2001, respectively. Includes pre-tax impairment charges related
intangible assets of $6 million in 2005. Includes pre-tax
impairment charges related to goodwill of $390 million and
$46 million in 2005 and 2004, respectively. |
36
|
|
| (2) |
Effective January 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142 “Goodwill and
Other Intangible Assets” and no longer amortize purchased
goodwill. |
| |
| (3) |
2004 net loss includes $4.7 billion of income tax expense
recorded to provide a non-cash valuation allowance on U.S.
deferred tax assets, as described in Note 8, Income Taxes,
to our consolidated financial statements included elsewhere in
this report on
Form 10-K. |
| |
| (4) |
Fixed charges exceeded earnings by $2,421 million,
$719 million, $137 million and $663 million for
the years ended December 31, 2005, 2004, 2003 and 2001,
respectively resulting in a ratio of less than one. |
| |
| (5) |
As a result of the Chapter 11 Filings, the payment of
prepetition indebtedness is subject to compromise or other
treatment under a plan of reorganization. In accordance with
“Financial Reporting by Entities in Reorganization under
the Bankruptcy Code”
(“SOP 90-7”)
we are required to segregate and disclose all prepetition
liabilities that are subject to compromise. For additional
information regarding Liabilities Subject to Compromise, refer
to Note 12, Liabilities Subject to Compromise, of the
consolidated financial statements in this Annual Report. |
| |
| (6) |
Includes the impact of adjustments to previously reported income
tax expense as described in Note 2, Restatement, of the
consolidated financial statements in this Annual Report which
increased net loss by $65 million. |
37
|
|
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
Executive Summary
We are a global supplier of vehicle electronics, transportation
components, integrated systems and modules and other electronic
technology. In addition, our technologies are present in
communication, computer, consumer electronic, energy and medical
applications. We operate in extremely competitive markets. Our
customers select us based upon numerous factors, including
technology, quality and price. Our efforts to generate new
business do not immediately affect our financial results,
because supplier selection in the auto industry is generally
finalized several years prior to the start of production of the
vehicle. As a result, business that we win in 2006 will
generally not impact our financial results until 2008 or beyond.
In light of continued deterioration in performance, Delphi
determined that it was necessary to address and resolve its U.S.
legacy liabilities, product portfolio, operational issues and
forward looking revenue requirements. As a result, we
intensified our efforts during 2005 to engage our unions, as
well as GM, in discussions seeking consensual modifications that
would permit us to align our U.S. operations to our strategic
portfolio and be competitive with our U.S. peers, and to obtain
financial support from GM to implement our restructuring plan.
Despite significant efforts to reach a resolution, we determined
that these discussions were not likely to lead to the
implementation of a plan sufficient to address our issues on a
timely basis and that Delphi needed to pursue other alternatives
to preserve value for its stakeholders.
Accordingly, in order to transform and preserve the value of the
Company, which requires resolution of existing legacy issues and
the resulting high cost of U.S. operations, on October 8,
2005, Delphi and certain of its U.S. subsidiaries filed
voluntary petitions for reorganization relief under
chapter 11 of the Bankruptcy Code, in the Court, and on
October 14, 2005, three additional U.S. subsidiaries of
Delphi filed voluntary petitions for reorganization relief under
chapter 11 of the Bankruptcy Code. The Court is jointly
administering these cases as “In re Delphi Corporation, et
al., Case No. 05-44481 (RDD).” We will continue to
operate our business as “debtors-in-possession” under
the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the
Court. Delphi’s non-U.S. subsidiaries were not included in
the filings, will continue their business operations without
supervision from the U.S. courts and will not be subject to the
requirements of the Bankruptcy Code.
On March 31, 2006, the Debtors announced their
transformation plan centered around five key elements:
|
|
|
| |
• |
Obtain, through negotiations with its U.S. labor unions and GM,
modifications to its collective bargaining agreements to
transform to a competitive U.S. labor cost structure; |
| |
| |
• |
Conclude negotiations with GM to finalize its financial support
for the legacy and labor costs we currently carry and to
ascertain its business commitment to Delphi going forward; |
| |
| |
• |
Streamline our product portfolio and focus on those core
technologies for which we believe we have significant
competitive and technological advantages and make the necessary
manufacturing alignment; |
| |
| |
• |
Transform our salaried workforce to ensure that our
organizational and cost structure is competitive and aligned
with our product portfolio and manufacturing footprint; and |
| |
| |
• |
Devise a workable solution to our current pension situation,
whether by stretching out pension payments or otherwise. |
On the same date, Delphi initiated a “dual track”
process to obtain authority to reject its collective bargaining
agreements and certain unprofitable contracts with GM, while at
the same time continuing discussions with its labor unions and
GM. Specifically, on March 31, 2006, the Debtors filed a
motion with the Court under sections 1113 and 1114 of the
Bankruptcy Code seeking authority to reject U.S. labor
agreements with the Debtors’ unions and to modify retiree
benefits. A hearing on the section 1113
38
and 1114 motion was held throughout May 2006, continued into
June, and has been adjourned until August 11, 2006. The
bankruptcy court judge hearing the motion has urged Delphi and
its unions to continue to seek a negotiated solution with each
other during the pendency of the hearing and the motion.
Prior to filing the motion to reject the Debtors’ U.S.
labor agreements, Delphi, GM and the UAW entered into an
agreement relating to the Special Attrition Program, pursuant to
which certain eligible Delphi U.S. hourly employees represented
by the UAW were offered normal and early voluntary retirements
with a lump sum incentive payments. The program also provided
additional retirement opportunities, including transfer to and
retirement from GM. GM has agreed to provide substantial
financial support under the agreement.
Delphi, GM, and the UAW subsequently agreed on a supplemental
agreement that will expand the Special Attrition Program to
include a pre-retirement program for employees with
26 years of credited service and provide buyouts for
UAW-represented hourly employees. On May 18, 2006,
Wilmington Trust Company, as indenture trustee to the
Debtors’ senior notes and debentures, filed a notice of
appeal from the order approving the Special Attrition Program.
Additionally, on May 31, 2006, Appaloosa Management L.P.,
Wexford Capital LLC and Lampe Conway and Company LLC filed a
notice of appeal from the same order, but the Debtors believe
such notice was not timely filed. The new options added to the
Special Attrition Program are enabled by the financial support
from GM. On June 16, 2006, Delphi reached agreement on the
terms of the IUE-CWA Special Attrition Program, which is a
program for Delphi employees represented by the IUE-CWA
comparable to the Special Attrition Program for Delphi employees
represented by the UAW. The supplemental agreement to expand the
Special Attrition Program and the IUE-CWA Special Attrition
Program were approved by the Court on June 29, 2006. Delphi
continues framework discussion with other unions to offer, with
GM support, similar attrition programs for their members. For
further information refer to Item 1. Business—Legacy
Liabilities, Key Stakeholders in this Annual Report.
On March 31, 2006, the Debtors announced their
transformation plan. On the same date, Delphi initiated a
“dual track” process to reject its collective
bargaining agreements and certain unprofitable contracts with
GM, while at the same time continuing discussions with its labor
unions and GM. On the same date, the Debtors filed a motion with
the Court seeking authority to reject certain customer contracts
with GM. The initial GM contract rejection motion covers
approximately half of the North American annual purchase volume
revenue from GM. The initial GM contract rejection motion is not
scheduled to be heard by the Court until at least
August 15, 2006. On March 31, 2006, the Company also
delivered a letter to GM initiating a process to reset the terms
and conditions of more than 400 commercial agreements that
expired between October 1, 2005 and March 31, 2006. To
date, the Company has not unilaterally revised the terms and
conditions on which it has been providing interim supply of
parts to GM in connection with the expired contracts or filed
additional contract rejection motions. The Company also filed a
motion to reject certain collective bargaining agreements and to
modify certain retiree benefits. A hearing on the motion was
held throughout May 2006, continued into June, and has been
adjourned until August 11, 2006.
As part of the transformation plan, Delphi identified non-core
product lines that do not fit into Delphi’s future
strategic framework and which it is seeking to sell or wind-down
these product lines. Any sale or wind-down process is being
conducted in consultation with the Company’s customers,
unions and other stakeholders to carefully manage the transition
of affected product lines. The disposition of any U.S.
operations is also being accomplished in accordance with the
requirements of the Bankruptcy Code and labor contracts. The
Company also has begun consultations with the works councils in
accordance with applicable laws regarding any sale or wind-down
of its operations in Europe. Non-core product lines include
brake and chassis systems, catalysts, cockpits and instrument
panels, door modules and latches, ride dynamics, steering and
wheel bearings. The Company continually evaluates its product
portfolio and could retain these or exit certain other
businesses depending on market forces or cost structure changes.
The Company intends to sell or wind-down non-core product lines
and manufacturing sites by January 1, 2008. Delphi has also
begun discussions with certain governmental agencies whose
policies could help
39
improve the competitiveness of plants and product lines
regardless of whether they are being retained or offered for
sale.
In addition to addressing our legacy liabilities and improving
the competitiveness of our U.S. operations through negotiation
with our unions and GM and by rationalizing our portfolio, we
have identified other necessary elements of a comprehensive
transformation plan, including reducing our selling, general and
administrative costs, realigning our salaried benefit programs
to bring them in line with more cost-competitive companies and
obtaining relief to amortize funding obligations to our defined
benefit U.S. pension plans over a longer period of time than
would otherwise be available once we emerge from
chapter 11. We have identified cost saving opportunities
with the planned portfolio and product rationalizations and plan
to reduce our global salaried workforce by as many as 8,500
employees using existing salaried separation pay programs. In
addition, in order to retain our existing U.S. defined benefit
U.S. pension plans for both hourly and salaried workers, we
intend to freeze those plans and going forward adopt or modify
defined contribution plans that will include flexibility for
both direct Company contributions and Company matching employee
contributions. At the same time, salaried health care plans will
be restructured to implement increased employee cost sharing.
Achievement of our transformation objectives in most instances
requires the support of our key stakeholders, including GM, our
labor unions and our creditors and the approval of the Court.
Upon the conclusion of this process, we expect to emerge from
chapter 11 as a stronger; more financially sound business
with viable U.S. operations that are well-positioned to advance
global enterprise objectives. However, there are a number of
risks and uncertainties inherent in the chapter 11 process,
including those detailed in Item 1A. Risk Factors. In
addition, we cannot assure that potential adverse publicity
associated with the Chapter 11 Filings and the resulting
uncertainty regarding Delphi’s future prospects will not
materially hinder Delphi’s ongoing business activities and
its ability to operate, fund and execute its business plan by
impairing relations with existing and potential customers;
negatively impacting the ability of Delphi to attract, retain
and compensate key executives and associates and to retain
employees generally; limiting Delphi’s ability to obtain
trade credit; and impairing present and future relationships
with vendors and service providers. Although we expect to file a
reorganization plan that provides for emergence from
chapter 11 in early to mid-2007, there can be no assurance
that a reorganization plan will be proposed by the Company in
that timeframe, or confirmed by the Court, or that any such plan
will be consummated.
Overview of Performance During 2005
Delphi reported an operating loss of $482 million for the
year ended December 31, 2004. Included in the operating
loss were charges totaling $687 million pre-tax, primarily
related to the recoverability of certain of Delphi’s U.S.
legacy plant and employee cost structure. Delphi’s
financial condition deteriorated further for the year ended
December 31, 2005, incurring an operating loss of
$2.2 billion. Included in the operating loss were charges
of $886 million including $103 million related to the
contractual payments of other than temporarily idled employees,
$233 million asset impairment charges related to the
valuation of long-lived assets held for use, $390 million
related to goodwill impairments, $6 million related to
impairments of intangible assets, and $154 million of costs
associated with employee attrition programs. Delphi believes
that several significant issues have largely contributed to the
deterioration of Delphi’s financial performance: (a) a
competitive U.S. vehicle production environment for domestic
original equipment manufacturers resulting in the reduced number
of motor vehicles that GM, our largest customer, produces
annually in the U.S. and related pricing pressures;
(b) increasing commodity prices; (c) U.S. labor legacy
liabilities and noncompetitive wage and benefit levels; and
(d) restrictive collectively bargained labor agreement
provisions which inhibit Delphi’s responsiveness to market
conditions, including exiting non-strategic, non-profitable
operations.
In light of the current economic climate in the U.S. automotive
industry, Delphi is facing considerable challenges due to
revenue decreases and related pricing pressures stemming from a
substantial reduction in GM’s North American vehicle
production. Although Delphi has shown growth in its non-GM
business, these gains have been overtaken by the decrease of GM
sales. GM accounted for 48% of our net sales for the year ended
December 31, 2005. Our sales to GM have declined since our
Separation from GM; principally
40
due to declining GM production, the impact of customer driven
price reductions and the elimination of non-profitable
businesses, as well as GM’s diversification of its supply
base and ongoing changes in our vehicle content and the product
mix purchased. In 2005, GM North America produced
4.6 million vehicles, excluding CAMI Automotive Inc., New
United Motor Manufacturing, Inc. and HUMMER brand vehicle
production, a decrease of approximately 8.3% from 2004
production levels. Our GM North America content per vehicle for
2005 was $2,326, which was lower than $2,546 in 2004. During
2005, our content per vehicle was reduced due to exiting select
businesses and the migration of certain product programs from GM
sales to sales to Tier I customers. GM sales for the year
ended December 31, 2005 decreased by approximately
$2.6 billion, or approximately a 16.6% year-over-year
decline.
As a percent of our net sales, our non-GM sales, including the
impact of migration during the period of certain product
programs from direct sales to GM to sales to Tier 1
customers, were approximately 52% of net sales for the year
ended December 31, 2005. Comparatively, for the year ended
December 31, 2004, our non-GM sales were approximately 46%
of net sales.
During 2005, we were challenged by commodity cost increases,
most notably steel, petroleum-based resin products and copper.
We continue to proactively work with our suppliers and customers
to manage these cost pressures. Despite our efforts, surcharges
and other cost increases, particularly when necessary to ensure
the continued financial viability of a key supplier, had the
effect of reducing our earnings during 2005. Steel supply has
continued to be constrained and commodity cost pressures
continued to intensify as our supply contracts expired during
2005. We incurred approximately $348 million of higher
commodity and troubled supplier costs in 2005 than in 2004, of
which approximately $307 million is due to higher commodity
costs and approximately $41 million is due to higher
troubled supplier costs. We have been seeking to manage these
cost pressures using a combination of strategies, including
working with our suppliers to mitigate costs, seeking
alternative product designs and material specifications,
combining our purchase requirements with our customers and/or
suppliers, changing suppliers and other means. To the extent
that we experience cost increases we will seek to pass these
cost increases on to our customers, but if we are not
successful, our operations in future periods may be adversely
affected. To date, due to existing contractual terms, our
success in passing commodity cost increases on to our customers
has been limited. As contracts with our customers expire, we
will seek to renegotiate terms which recover the actual
commodity costs we are incurring.
In December 2004, we entered into an agreement with GM whereby
we committed to 2005 annual price reductions on GM’s annual
purchase value with Delphi. In return for this commitment, GM
agreed, among other things, to accelerate its cooperation with
certain sourcing and cost reduction initiatives of mutual
benefit to the two companies and to source certain business to
Delphi. The agreed level of price reduction for 2005 was
generally consistent with that which we have been providing to
GM in recent years. In November of 2005 GM agreed to temporarily
forego such price reductions and had done so through the first
quarter of 2006. In April of 2006 Delphi and GM were unable to
agree on the terms by which GM would continue to forego such
price reductions. Beginning, April 1, 2006, Delphi’s
net sales will reflect the previously agreed-to contractual
price reductions.
Delphi’s ability to effectively respond to these increasing
challenges is impaired by its U.S. legacy liabilities and
largely fixed labor costs. Specifically, in connection with
Delphi’s U.S. legacy liabilities and operational
restrictions, the majority of Delphi’s collective
bargaining agreements provide for wages and benefits that are
well above market, costly pension plans and retiree health care
and other benefits, and burdensome operating restrictions,
constraining Delphi’s ability to compete effectively with
its U.S. peers. In connection with Delphi’s spin-off from
GM effective January 1, 1999, Delphi was required to assume
the terms and conditions of the collective bargaining agreements
negotiated by its unions and GM, which resulted in inflexible
and uncompetitive costs and liabilities. Consequently, Delphi
believes that the average rates at which it currently
compensates its hourly workers, including employee and retiree
benefits, is nearly three times the average hourly labor rates
paid by its U.S. peer companies. Delphi’s U.S. hourly
pension and OPEB exposed Delphi to approximately
$10.7 billion in unfunded liabilities at December 31,
2005, of which approximately $2.3 billion was attributable
to unfunded pension obligations and $8.4 billion was
attributable to OPEB obligations. Prior to the Chapter 11
Filings, Delphi projected that cash outflows
41
for hourly pension contributions and OPEB payments through 2007
would approximate $1.9 billion. Through the chapter 11
process, Delphi is permitted to defer a significant portion of
these contributions until it emerges from chapter 11. As
such, the projected future cash outflows for hourly pension
contributions and OPEB payments through 2007 may be
significantly less than $1.9 billion. If these obligations
are not addressed as part of the chapter 11 process, cash
outflows for pension and OPEB would continue to increase as
Delphi’s U.S. workforce continues to age and the ratio of
retirees to active employees increases.
Due to declining business conditions and lower GM North America
production volumes, an increasing proportion of Delphi’s
U.S. hourly workforce is, and is expected to continue to be
(absent modification of our collective bargaining agreements), a
fixed cost which is independent of volume and revenue.
Furthermore, as a result of GM’s lower production volumes,
the opportunities for our employees to flowback to GM have been
limited and may continue to be limited. Under the terms of
Delphi’s collective bargaining agreements with its U.S.
unions, Delphi is generally not permitted to permanently lay off
idled workers, and as of December 31, 2005, approximately
2,700, or 8% of our U.S. hourly workforce were idled and were
receiving nearly full pay and benefits, although performing no
work. Delphi accrues for costs associated with postemployment
benefits provided to inactive employees throughout the duration
of their employment. We use future production estimates combined
with workforce geographic and demographic data to develop
projections of time frames and related expense for
postemployment benefits. For purposes of accounting for
postemployment benefits, inactive employees represent those
employees who have been other than temporarily idled. Delphi
considers all idled employees in excess of approximately 10% of
the total workforce at a facility to be other than temporarily
idled.
Coupled with restrictions on Delphi’s ability to exit
non-strategic, non-profitable operations, the magnitude of the
cost of carrying idled, non-productive workers in the event of
plant closings or wind-downs effectively prevents Delphi from
addressing under-performing product portfolio businesses and
non-profitable manufacturing operations. Historically, under the
terms of the spin-off from GM, this situation was somewhat
mitigated because Delphi’s UAW employees are permitted to
return to GM’s employ, known as flowback, under certain
conditions. As a result of GM’s lower production volumes,
however, the opportunities for Delphi’s employees to
flowback to GM have been limited and may be further limited in
the future, other than regarding the 5,000 flowbacks to GM under
the Special Attrition Program. For further information, refer to
Item 1. Business—Chapter 11, Legacy
Liabilities—Key Stakeholders in this Annual Report. This
situation places financial burdens on Delphi of a scope and
magnitude that, unless addressed as part of a comprehensive
restructuring through chapter 11, threatens Delphi’s
long-term viability.
Acquisitions and Divestitures
On June 30, 2005, Delphi reached final agreement to sell
its global battery product line, with the exception of two U.S.
operations, to Johnson Controls Inc. (“JCI”), for
approximately $203 million. The transaction, comprised of
net assets totaling approximately $171 million, including
approximately $8 million of cash, closed July 1, 2005.
On September 29, 2005, a final purchase price adjustment
was agreed to by JCI and Delphi and as a result, JCI paid
additional proceeds of approximately $12 million to Delphi.
In connection with the transaction, Delphi entered into a
contract manufacturing supply arrangement, becoming a
Tier 2 supplier to JCI, and began supplying batteries from
its two U.S. plants to JCI for a transition period ending on or
before November 30, 2007.
The battery business sale generated approximately
$463 million annually in global consolidated revenues.
Delphi recognized a gain on the sale of the business of
$44 million in 2005. In addition, valuation adjustments of
$24 million were recorded, reducing the carrying value of
the retained assets of the battery product line. Of the
$24 million, $4 million was recorded in cost of sales,
$2 million was recorded in selling, general and
administrative, and $18 million was recorded in
depreciation, amortization, and asset impairment charges.
42
In conjunction with the sale of its battery business, Delphi
entered into an agreement with its principal battery customer
under which Delphi could receive up to $30 million over the
next three years if certain performance criteria are met.
Approximately $11 million was received in cash in 2005
related to this agreement; approximately $7 million was
recognized as a reduction of cost of sales and the remaining
approximately $4 million was recorded as deferred income.
The 2005 sale agreement with JCI contemplated a future possible
transfer of operating assets of one of the two remaining U.S.
plants supplying batteries to JCI under a contract manufacturing
supply agreement. The receipt of the $215 million cash
purchase price was not contingent upon completion of the future
possible transfer. On May 26, 2006, Delphi and JCI executed
an agreement providing for the (a) sale to JCI of certain
assets of Delphi’s battery manufacturing facility in New
Brunswick, New Jersey (the “New Brunswick Facility”)
free and clear of liens, claims, and encumbrances in exchange
for JCI’s payment to Delphi of $1 plus the value of certain
inventory estimated at approximately $2 million,
(b) the continuation and transition of supply of battery
products to JCI from Delphi’s battery manufacturing
facility in Fitzgerald, Georgia pursuant to the manufacturing
supply agreement entered into in connection with the initial
sale in 2005 and (c) implementation of an attrition plan
with respect to the hourly employees of the New Brunswick
Facility (collectively, the “Transaction”). On the
same date, Delphi also entered into an agreement with the
IUE-CWA and its Local 416 in connection with the attrition plan
contemplated by the Transaction. Upon consummation of the
Transaction, JCI has agreed to pay Delphi approximately
$13 million to reimburse Delphi for a significant portion
of the amounts to be spent under the attrition plan with the
IUE-CWA and Local 416 of the IUE-CWA. In addition, pursuant to a
separate 2005 prepetition agreement entered into between Delphi
and GM, which was executed in connection with the sale of
Delphi’s global battery business, GM has committed to
provide funding in furtherance of this matter. On June 19,
2006 the Court approved the Transaction, which is expected to
close in the third quarter of 2006.
Results of Operations
Subsequent to the issuance of Delphi’s consolidated
financial statements for the years ended December 31, 2004,
management determined that its previously issued financial
statements for those periods required restatement to correct the
accounting for income taxes and to correct the classification of
components of stockholders’ (deficit) equity. Income
tax expense and net income for 2004 provided below have been
restated from the original reported amounts to reflect the
correction. Refer to Note 2, Restatement, of the
consolidated financial statements in this Annual Report for
further information.
Net Sales. Net sales by product sector and in total for
the years ended December 31, 2005 and 2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| Product Sector |
|
2005 | |
|
2004(a) | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
12,569 |
|
|
$ |
13,567 |
|
|
Electrical, Electronics & Safety
|
|
|
13,448 |
|
|
|
13,980 |
|
|
Automotive Holdings Group
|
|
|
2,502 |
|
|
|
3,023 |
|
|
Other(b)
|
|
|
(1,572 |
) |
|
|
(1,948 |
) |
| |
|
|
|
|
|
|
| |
Net sales
|
|
$ |
26,947 |
|
|
$ |
28,622 |
|
| |
|
|
|
|
|
|
|
|
| (a) |
The 2004 data has been reclassified to conform to the
realignment of our business sectors by moving three additional
manufacturing operations into the Company’s AHG effective
January 1, 2005, to accelerate efforts to bring these sites
back to profitability or resolve issues at these operations
through other actions. |
| |
| (b) |
Other includes activity not allocated to the product sectors and
eliminations of inter-sector transactions. |
43
Consolidated net sales for 2005 were $26.9 billion compared
to $28.6 billion for 2004. Our
non-GM sales increased
by $0.9 billion, including approximately $148 million
resulting from favorable currency exchange rates. Excluding the
effects of favorable currency exchange rates, our
non-GM sales increased
approximately $0.7 billion or 6%. Management evaluates
year-over-year performance on a constant exchange rate basis and
changes in revenues attributed to movements in currency exchange
rates generally do not impact our operating income; Refer to
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Operating
Income in this Annual Report. This
non-GM sales increase
was due to new business from diversifying our global customer
base, and to a lesser extent the migration during the period of
certain product programs from sales to GM to sales to
Tier I customers, partially offset by price decreases. As a
percent of our net sales for 2005, our
non-GM sales were 52%.
However, more than offsetting the gains in
non-GM net sales was a
$2.6 billion decrease in GM sales. The GM sales decrease
was principally due to volume decreases as a result of lower GM
North America production, and to a lesser extent, price
decreases and decisions to exit certain businesses. The benefit
of $76 million of favorable currency exchange rates was
negligible to the overall decrease in GM sales. Net sales
includes $35 million received from GM to reimburse Delphi
for price reductions. Refer to Note 1, Significant
Accounting Policies—Revenue Recognition of the consolidated
financial statements in this Annual Report. Our net sales were
also reduced by continued price pressures that resulted in price
reductions of approximately $465 million or 1.6% for 2005,
compared to approximately $560 million or 2.0% for 2004.
Gross Margin. Our gross margin fell to 4.6% for 2005
compared to gross margin of 9.2% for 2004. The 2005 gross margin
compared to 2004 declined in part because of lower production
volumes and slower U.S. hourly workforce attrition in addition
to an increased wage and benefit costs of approximately 1.9% of
sales, reductions in selling prices of approximately 1.6% of
sales, and commodity cost increases of approximately 1.1% of
sales. Gross margin for 2005 was also negatively impacted by
$103 million of accrued charges related to the contractual
costs of other than temporarily idled employees and
$346 million of contractual payments related to temporarily
idled employees. Gross margin for 2004 was negatively impacted
by $192 million of costs related to employee and product
line liabilities. Additionally, gross margin in 2005 and 2004
was negatively impacted by $154 million and
$86 million, respectively of costs associated with employee
attrition programs. The 2004 gross margin was also negatively
impacted by $37 million of product line asset impairment
charges. These cost increases were partially offset by a gain on
the sale of the global battery product line and savings
resulting from our restructuring activities and ongoing cost
reduction efforts.
Selling, General and Administrative. Selling, general and
administrative (“SG&A”) expenses were relatively
flat at $1.6 billion, or 6.1% of total net sales for 2005,
consistent with $1.6 billion of SG&A expenses in 2004.
Depreciation, Amortization, and Asset Impairment Charges.
Depreciation, amortization and asset impairment charges was
$1.4 billion for 2005, compared to $1.5 billion for
2004. Asset impairment charges of $239 million include
$233 million related to long-lived assets held for use and
$6 million related to intangible assets in 2005, compared
to $326 million of asset impairment charges related to
long-lived assets held for use in 2004. Excluding impairment
charges, the depreciation and amortization expenses were
relatively flat year-over-year.
Goodwill Impairment Charges. Goodwill impairment charges
were $390 million for 2005, compared to $46 million
for 2004.
44
Operating Results. Our operating loss was
$2.2 billion for 2005 compared to $482 million in
2004. Operating results by product sector and in total for the
years ended December 31, 2005 and 2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| Product Sector |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
(1,282 |
) |
|
$ |
(111 |
) |
|
Electrical, Electronics & Safety
|
|
|
371 |
|
|
|
868 |
|
|
Automotive Holdings Group
|
|
|
(1,198 |
) |
|
|
(1,137 |
) |
|
Other(a)
|
|
|
(62 |
) |
|
|
(102 |
) |
| |
|
|
|
|
|
|
| |
Total operating (loss) income
|
|
$ |
(2,171 |
)(b) |
|
$ |
(482 |
)(c) |
| |
|
|
|
|
|
|
|
|
| (a) |
Other includes activity not allocated to the product sectors
including the Company’s medical systems operations and
eliminations of inter-sector transactions. |
| |
| (b) |
Includes charges recorded in 2005 related to asset impairments,
contractual costs of other than temporarily idled employees, and
costs associated with employee attrition programs of
$886 million with $595 million for Dynamics,
Propulsion, Thermal & Interior, $127 million for
Electrical, Electronics & Safety, and $164 million for
Automotive Holdings Group. |
| |
| (c) |
Includes charges recorded in 2004 of $132 million for
Dynamics, Propulsion, Thermal & Interior, $91 million
for Electrical, Electronics & Safety, $457 million for
Automotive Holdings Group and $7 million for Other. |
The 2005 operating loss includes $103 million of accrued
charges related to the contractual payments of other than
temporarily idled employees; $239 million of asset
impairment charges related to long-lived assets held for use and
intangible assets; $390 million of asset impairment charges
related to goodwill; and $154 million of costs associated
with employee attrition programs. The 2004 operating loss
includes $111 million of costs related to employee and
product line liabilities; $81 million of postemployment
obligations; $363 million of asset impairment charges;
$46 million of goodwill impairment; and $86 million of
costs associated with employee attrition programs. In addition,
our 2005 operating loss compared to our 2004 operating loss was
negatively impacted by the following factors: lower production
volumes and slower U.S. hourly workforce attrition in addition
to increased wage and benefit costs of approximately 1.9% of
sales; reductions in selling prices of approximately 1.6% of
sales; commodity price increases of approximately 1.1% of sales;
and to a lesser extent, non-recurring costs associated with the
internal accounting investigation and costs for third party
advisors related to the reorganization prior to the
Chapter 11 Filings. The 2005 and 2004 operating losses were
also negatively impacted by $346 million and
$260 million, respectively, of contractual payments related
to temporarily idled employees. Cost increases in 2005 were
partially offset by a gain on the sale of the global battery
product line and savings resulting from our restructuring
activities and ongoing cost reduction efforts.
Interest Expense. We recorded interest expense for 2005
of $318 million as compared to interest expense of
$232 million for 2004. The increase in interest expense for
2005 was generally attributable to higher levels of debt as well
as an increase in our overall financing costs in the second half
of 2005. Approximately $38 million of contractual interest
expense related to outstanding debt, including debt subject to
compromise, was not recognized in the income statement in
accordance with the provisions of
SOP 90-7.
Other Income and Expense. We recorded other income for
2005 of $50 million as compared to other expense of
$8 million for 2004. Other income in 2005 includes a gain
on the sale of our investment in Akebono Brake Industry Company,
which was accounted for as an available-for-sale marketable
security. This sale resulted in the recognition of a realized
gain of $18 million in other income and the reversal of the
investment’s unrealized gain from other comprehensive
income. In addition, interest income increased in 2005
associated with the additional cash equivalents on hand,
particularly in the third quarter.
45
Reorganization Items. We recorded reorganization expense
for 2005 of $3 million. On October 8, 2005, the
Company and certain of its U.S. subsidiaries filed voluntary
petitions for reorganization relief under chapter 11 of the
Bankruptcy Code. From October 8, 2005 through the end of
the year Delphi incurred $28 million of professional fees
directly related to the reorganization. These costs were offset
by interest income of $11 million from accumulated cash
from the reorganization, $8 million of a gain on settlement
of prepetition liabilities, and $6 million of other
reorganization income.
Taxes. We recorded income tax benefit for the year ended
December 31, 2005 of $55 million as compared to an
income tax expense of $4.1 billion for the year ended
December 31, 2004. During 2004 we recorded a valuation
allowance of $4.7 billion against all of our net U.S.
deferred tax assets as of December 31, 2004. See 2004
versus 2003 Taxes for more details on the valuation allowance.
In addition, our 2004 income tax expense included
$177 million of benefits recognized upon the completion of
income tax audits for prior periods, including periods prior to
the Separation (discussed more fully in 2004 versus 2003 Taxes).
Equity Income. We recorded equity income for 2005 of
$71 million as compared to equity income of
$86 million for 2004. The decrease in equity income for
2005 was attributable to a decrease in earnings across the
majority of our joint ventures.
Net Sales. Net sales by product sector and in total for
the years ended December 31, 2004 and 2003 were as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| Product Sector |
|
2004(a) | |
|
2003(a) | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
13,567 |
|
|
$ |
13,546 |
|
|
Electrical, Electronics & Safety
|
|
|
13,980 |
|
|
|
13,028 |
|
|
Automotive Holdings Group
|
|
|
3,023 |
|
|
|
3,520 |
|
|
Other
|
|
|
(1,948 |
) |
|
|
(2,017 |
) |
| |
|
|
|
|
|
|
| |
Net sales
|
|
$ |
28,622 |
|
|
$ |
28,077 |
|
| |
|
|
|
|
|
|
|
|
| (a) |
The 2004 and 2003 data above has been reclassified to conform to
the 2005 sector realignment. |
46
Consolidated net sales for 2004 were $28.6 billion compared
to $28.1 billion for 2003. The increase of
$545 million was more than explained by approximately
$710 million of increase due to currency exchange rate
movement, primarily the strengthening of the euro versus the
U.S. dollar. Our non-GM sales increased by $2.2 billion
including approximately $560 million resulting from
favorable currency exchange rates. Excluding the effects of
favorable currency exchange rates, our non-GM sales increased
approximately $1.6 billion or 14.4%. Management evaluates
year-over-year performance on a constant exchange rate basis and
changes in revenues attributed to movements in currency exchange
rates generally do not impact our operating income; Refer to
Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Operating
Income in this Annual Report. This non-GM sales increase was due
to new business from diversifying our global customer base,
incremental sales due to our Delphi Grundig acquisition in 2003,
and the migration of certain product programs from sales to GM
to sales to customers that are Tier I suppliers of GM,
partially offset by price decreases. As a percent of our net
sales for 2004, our non-GM sales were 46%. Net sales to GM
decreased by $1.6 billion, net of an increase of
approximately $150 million resulting from favorable
currency exchange rates. Excluding the effects of favorable
currency exchange rates, our GM sales decreased
$1.8 billion or 10.4%. The GM sales decrease was due to
volume and price decreases and decisions to exit certain
businesses. Generally the decrease in our GM sales has been more
than offset by the increase in our non-GM sales in each year
excluding the effects of change in currency exchange rates.
However, in the fourth quarter of 2004 we saw a significant
decline in GM production volumes. Additionally, our net sales
were reduced by continued price pressures that resulted in price
reductions of approximately $560 million or 2.0% for 2004,
compared to approximately $460 million or 1.7% for 2003. On
a going forward basis, we expect future annual price reductions
to continue to be approximately 2%.
Gross Margin. Our gross margin was 9.2% for 2004 compared
to gross margin of 10.0% for 2003. Excluding the increase of
$16 million between restructuring charges in 2003 and 2004
and employee and product line charges noted below, the 2004
gross margin as compared to the prior year was negatively
impacted by reductions in selling prices of approximately 2% of
sales, increased wage and benefit costs of approximately 2% of
sales and commodity price increases of $0.1 billion. These
cost increases were only partially offset by savings resulting
from our restructuring activities and on-going cost reduction
efforts totaling approximately 3% of sales. Slower U.S. hourly
workforce attrition combined with lower production volumes and
launch challenges negatively impacted our ability to offset the
cost increase noted above.
In the fourth quarter of 2004, Delphi recorded employee and
product line charges primarily related to the recoverability of
certain of Delphi’s U.S. legacy plant and employee cost
structure. Included in the charges are $130 million in cost
of goods sold, including product line asset impairment charges
of $37 million, $81 million of postemployment
obligations and $14 million of other exit costs, reduced by
a $2 million reversal of the employee and product line
charges taken in Q3 2003. The $81 million of postemployment
benefit liability represents estimated costs for inactive
employees, primarily at U.S. sites being consolidated throughout
the duration of their contractual employment. The postemployment
and other exit charges will result in future cash expenditures
of approximately $81 million.
In the third quarter of 2003, Delphi approved plans to reduce
our U.S. hourly workforce by up to approximately 5,000
employees, our U.S. salaried workforce by approximately 500
employees, and our non-U.S. workforce by approximately 3,000
employees over a 15-month period. In the third quarter of 2004,
we anticipated more than 1,000 additional U.S. hourly employees
would leave Delphi bringing our total U.S. hourly attrition to
more than 6,000. We achieved our planned reduction in our U.S.
salaried and non-U.S. hourly workforce during this
15-month timeframe.
With respect to our U.S. hourly workforce reductions, we
achieved approximately 6,175 reductions in comparison to our
plan of more than 6,000 employees. A substantial portion of this
reduction was achieved in the first half of 2004 due in part to
the completion of the new hourly labor contracts negotiated at
the end of 2003. During the second half of 2004, we experienced
much lower attrition rates among our U.S. hourly workforce as
compared to the first half of the year. Our plans entailed
reductions to our workforce through a variety of methods
including regular attrition and retirements, and voluntary and
involuntary separations, as applicable. Under certain elements
of the plans, the UAW hourly employees were permitted to
flowback to GM.
47
As required under U.S. GAAP, we record the costs associated with
flowbacks as the employees accept the offer to exit Delphi. We
incurred total charges related to these initiatives of
approximately $746 million (pre-tax) through
December 31, 2004, of which $185 million
($86 million for employees who are idled prior to
separation and $99 million for employee and product line
charges) were recorded during 2004, and $561 million was
recorded in 2003. Plans to separate U.S. salaried and non-U.S.
salaried employees under a variety of programs were completed
during 2004. During 2004, approximately 4,575 U.S. hourly
employees flowed back to GM, retired, or separated through other
means.
Delphi completed the restructuring actions as planned in the
first quarter of 2003 related to the 2002 restructuring. The
cash outflows for the first quarter of 2003 were
$24 million, with $17 million for employee costs and
$7 million for other exit costs.
Following is a summary of the activity in the 2003 and 2004
employee and product line charges (in millions):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Employee and Product Line Charges |
|
Employee Costs | |
|
Exit Costs | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
2003 charges
|
|
$ |
381 |
|
|
$ |
15 |
|
|
$ |
396 |
|
|
Usage during 2003
|
|
|
(135 |
) |
|
|
(3 |
) |
|
|
(138 |
)(a) |
|
Transfer to long-term liabilities
|
|
|
— |
|
|
|
(7 |
) |
|
|
(7 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Balance at December 31, 2003
|
|
$ |
246 |
|
|
$ |
5 |
|
|
$ |
251 |
|
| |
|
|
|
|
|
|
|
|
|
|
Charges during 2004
|
|
|
180 |
|
|
|
14 |
|
|
|
194 |
|
|
Usage during 2004
|
|
|
(302 |
) |
|
|
(1 |
) |
|
|
(303 |
)(b) |
|
Less: reversal of 2003 charges
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Balance at December 31, 2004
|
|
$ |
124 |
|
|
$ |
16 |
|
|
$ |
140 |
(c) |
| |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
The total cash paid in 2003 was $156 million, as shown on
our consolidated statement of cash flows. Of this amount,
$132 million was paid in 2003 related to the 2003 charges
and $24 million was paid in the first quarter of 2003
related to the 2002 charges discussed below. The
$138 million of usage in 2003 includes $6 million of
non-cash special termination pension and postemployment
benefits. In addition, we paid $44 million associated with
the 2003 charges that was recorded in cost of sales. The total
cash paid for 2003 was $200 million. |
| |
| (b) |
The total cash paid for 2004 was $296 million, as shown on
our consolidated statement of cash flows. Our total usage was
$303 million with $7 million of non-cash special
termination pension and postemployment benefits for the year
ended December 31, 2004. In addition, we paid
$94 million associated with the 2003 charges for the year
ended December 31, 2004 that was recorded in cost of sales.
The total cash paid for 2004 was $390 million. |
| |
| (c) |
This amount is included in accrued liabilities in the
accompanying consolidated balance sheet. |
Selling, General and Administrative. SG&A expenses
were $1.6 billion, or 5.6% of total net sales for 2004,
compared to $1.6 billion or 5.7% of total net sales for
2003. The slight decrease as a percentage of total net sales for
2004 is primarily due to the 2003 legal settlement discussed
below, partially offset by the impact of currency exchange
rates. In 2003, SG&A expenses were adversely impacted by a
legal settlement in connection with a commercial dispute with a
former supplier of approximately $38 million. Excluding the
legal settlement, SG&A expenses were 5.5% of total net sales
for 2003.
Depreciation, Amortization, and Asset Impairment Charges.
Depreciation, amortization, and asset impairment charges was
$1.5 billion for 2004, compared to $1.1 billion for
2003; the increase primarily reflects $326 million of asset
impairment charges, compared to $58 million of impairment
charges related to product line impairments in 2003. Excluding
asset impairments, the increase reflects the impact of currency
exchange rates as well as the depreciation of assets newly
placed in service. The asset impairment and employee charges
were principally necessitated by the substantial decline during
the second half of 2004 in Delphi’s U.S. profitability,
especially at the impaired sites, combined with the budget
business plan outlook for such sites and product lines.
Management determined the asset impairment charges by
48
comparing the estimated future cash flows against carrying
values of plant and product line assets. Where the carrying
value exceeded the future cash flows, an impairment charge was
recognized for the amount that the carrying value exceeded the
discounted future cash flows.
Goodwill Impairment Charges. Goodwill impairment charges
were $46 million for 2004; there were no goodwill
impairment charges in 2003.
Operating Results. Our operating loss was
$482 million for 2004 compared to operating income of
$89 million in 2003. Operating results by product sector
and in total for the years ended December 31, 2004 and 2003
are included in the table below. The 2003 data has been
reclassified to conform to the 2004 sector realignment.
| |
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| Product Sector |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
(111 |
) |
|
$ |
399 |
|
|
Electrical, Electronics & Safety
|
|
|
868 |
|
|
|
857 |
|
|
Automotive Holdings Group
|
|
|
(1,137 |
) |
|
|
(994 |
) |
|
Other
|
|
|
(102 |
) |
|
|
(173 |
) |
| |
|
|
|
|
|
|
| |
Total operating (loss) income
|
|
$ |
(482 |
)(a) |
|
$ |
89 |
(b) |
| |
|
|
|
|
|
|
|
|
| (a) |
Includes charges recorded in 2004 of $687 million with
$132 million for Dynamics, Propulsion, Thermal &
Interior, $91 million for Electrical,
Electronics & Safety, $457 million for Automotive
Holdings Group and $7 million for Other. |
| |
| (b) |
Includes charges recorded in 2003 of $561 million with
$86 million for Dynamics, Propulsion, Thermal &
Interior, $114 million for Electrical, Electronics &
Safety, $319 million for Automotive Holdings Group and
$42 million for Other. |
The 2004 operating loss includes charges of $123 million in
cost of sales, $326 million in depreciation, amortization,
and asset impairment charges, $192 million of employee and
product line charges in cost of sales and $46 million in
goodwill impairment charges. The operating income for 2003
includes charges of $107 million in cost of sales,
$58 million in depreciation, amortization, and asset
impairment charges and $396 million of employee and product
line charges in cost of sales. In addition, 2004 operating loss
compared to 2003 operating income was negatively impacted by
selling price decreases of approximately 2% of sales, increased
wage and benefit costs of approximately 2% of sales and
commodity price increases. These cost increases were partially
offset by savings resulting from our restructuring activities
and on going cost reduction efforts totaling approximately 3% of
sales. In addition, the operating income for 2003 included the
legal settlement discussed above.
Taxes. We recorded an income tax expense for the year
ended December 31, 2004 of $4.1 billion as compared to
an income tax benefit for the year ended December 31, 2003
of $69 million. During 2004 and continuing into 2005, the
amount of pre-tax losses we incurred in the U.S. increased
significantly due to lower vehicle manufacturer production
volumes in the U.S., declining content per vehicle with GM in
the U.S., and the fixed cost nature of our U.S. manufacturing
operations. As a result, we re-evaluated the recoverability of
our U.S. deferred tax assets. Due to our history of U.S. losses
over the past three years, combined with the current U.S.
operating outlook for the near to mid-term, we determined that
we could no longer support realization of such amounts under the
application of U.S. GAAP. Accordingly, we recorded a valuation
allowance of $4.7 billion against all of our net U.S.
deferred tax assets as of December 31, 2004. We continue to
maintain the underlying tax benefits to offset future taxable
income and will evaluate the continued need for a valuation
allowance based on the profitability of our U.S. operations. In
addition, our 2004 income tax expense includes $177 million
of benefits recognized upon the completion of income tax audits
for prior periods, including periods prior to our Separation
from GM
49
(more fully discussed below). Our 2003 income tax benefit
includes $214 million of benefits recognized in connection
with restructuring charges.
Under an agreement entered into with GM, in connection with the
Separation, Delphi is responsible for all foreign income taxes
and certain U.S. federal and state income taxes applicable to
Delphi operations prior to the Separation. During the fourth
quarter of 2004, GM resolved Internal Revenue Service audits for
the tax years through 1997. Upon completion of this process,
Delphi and GM determined the amounts due between Delphi and GM
under the agreement and GM paid Delphi $4 million prior to
December 31, 2004. At the conclusion of these discussions,
we reevaluated the related tax reserves applicable to 1998 and
prior tax periods and as a result determined that approximately
$161 million of tax reserves were no longer necessary and
an adjustment to reduce the reserve was recorded during the
fourth quarter of 2004. Additionally, during the second quarter
of 2004, the routine U.S. federal tax audit of our tax returns
for the portion of 1999 following spin-off from GM and for 2000
was substantially completed. As a result of this audit, we made
a tax payment in the third quarter of 2004 of approximately
$9 million (including interest). Upon completion of the
audit, we determined that approximately $12 million of tax
reserves were no longer required and an adjustment to reduce the
reserve was recorded during the second quarter of 2004.
Liquidity and Capital Resources
|
|
|
Overview of Capital Structure |
As more fully described below, as of and since
September 30, 2005 (our consolidated leverage ratio testing
period), we were not in compliance with certain covenants under
our prepetition credit facilities. As previously discussed, on
October 8 and 14, 2005, Delphi and certain of its U.S.
subsidiaries filed voluntary petitions for reorganization relief
under chapter 11 of the Bankruptcy Code, which triggered
defaults on substantially all other debt obligations of the
Debtors. However, under section 362 of the Bankruptcy Code,
the filing of a bankruptcy petition automatically stays most
actions against a debtor, including most actions to collect
prepetition indebtedness or to exercise control over the
property of the debtor’s estate. Absent an order of the
Court, substantially all prepetition liabilities are subject to
settlement under a plan of reorganization.
At hearings held in October 2005, the Court approved certain of
the Debtors’ “first day” motions, including
interim approval to use up to $950 million of Delphi’s
$2 billion senior secured DIP financing, and approval of an
adequate protection package for Delphi’s outstanding
$2.5 billion prepetition secured indebtedness under the
prepetition credit facilities.
On October 14, 2005, Delphi entered into a Revolving
Credit, Term Loan and Guaranty Agreement (the “DIP Credit
Facility”), as amended by the First Amendment to the DIP
Credit Facility, dated October 27, 2005, as further amended
and restated by the Amended and Restated Revolving Credit, Term
Loan and Guaranty Agreement, dated November 21, 2005 and as
further amended by the First Amendment to Amended and Restated
Credit Agreement and Amended and Restated Security and Pledge
Agreement dated as of February 3, 2006, the Second
Amendment to Amended and Restated Credit Agreement dated as of
April 13, 2006, the Third Amendment to Amended and Restated
Credit Agreement dated May 26, 2006, and the Fourth
Amendment to Amended and Restated Credit Agreement dated
June 19, 2006 (the “Amended DIP Credit
Facility”), to borrow up to $2.0 billion from a
syndicate of lenders arranged by J.P. Morgan Securities Inc. and
Citigroup Global Markets, Inc., for which JPMorgan Chase Bank,
N.A. is the administrative agent (the “Administrative
Agent”) and Citicorp USA, Inc., is syndication agent
(together with the Administrative Agent, the
“Agents”). The Amended DIP Credit Facility consists of
a $1.75 billion revolving facility and a $250 million
term loan facility (collectively, the “Amended DIP
Loans”). The Amended DIP Credit Facility carries an
interest rate at the option of Delphi of either (i) the
Administrative Agent’s Alternate Base Rate (as defined in
the Amended DIP Credit Facility) plus 1.75% or (ii) 2.75%
above the Eurodollar base rate, which is the London Interbank
Borrowing Rate (“LIBOR”). The LIBOR interest rate
period can be set at a one, three or six-month period as
selected by Delphi in accordance with the terms of the Amended
DIP Credit
50
Facility. Accordingly, the interest rate will fluctuate based on
the movement of the Alternate Base Rate or LIBOR through the
term of the Amended DIP Loans. The Amended DIP Credit Facility
will expire on the earlier of October 8, 2007 or the date
of the substantial consummation of a reorganization plan that is
confirmed pursuant to an order of the Court. Borrowings under
the Amended DIP Credit Facility are prepayable at Delphi’s
option without premium or penalty.
The Amended DIP Credit Facility provides the lenders with a
first lien on substantially all material tangible and intangible
assets of Delphi and its wholly-owned domestic subsidiaries
(however, Delphi is only pledging 65% of the stock of its first
tier foreign subsidiaries to the extent that, in its reasonable
business judgment, adverse tax consequences would result from
the pledge of a greater percentage) and further provides that
amounts borrowed under the Amended DIP Credit Facility will be
guaranteed by substantially all of Delphi’s affiliated
Debtors, each as debtor and debtor-in-possession. The amount
outstanding at any one time is limited by a borrowing base
computation as described in the Amended DIP Credit Facility. The
borrowing base computation exceeded the Amended DIP Credit
Facility availability at December 31, 2005. Borrowing base
standards may be fixed and revised from time to time by the
Administrative Agent in its reasonable discretion. The Amended
DIP Credit Facility includes affirmative, negative and financial
covenants that impose restrictions on Delphi’s financial
and business operations, including Delphi’s ability to,
among other things, incur or secure other debt, make
investments, sell assets and pay dividends or repurchase stock.
Additionally, the Amended DIP Credit Facility includes negative
covenants that prohibit the payment of dividends by the Company.
So long as the Facility Availability Amount (as defined in the
Amended DIP Credit Facility) is equal or greater than
$500 million, compliance with the restrictions on
investments, mergers and disposition of assets do not apply
(except in respect of investments in, and dispositions to,
direct or indirect domestic subsidiaries of Delphi that are not
guarantors to the Amended DIP Credit Facility).
The covenants require Delphi to, among other things,
(i) maintain a monthly cumulative minimum Global EBITDAR
for each period beginning on January 1, 2006 and ending on
the last day of each fiscal month through November 30,
2006, as described in the Amended DIP Credit Facility, and
(ii) maintain a rolling 12-month cumulative Global EBITDAR
for Delphi and its direct and indirect subsidiaries, on a
consolidated basis, beginning on December 31, 2006 and
ending on October 31, 2007 at the levels set forth in the
Amended DIP Credit Facility. The Amended DIP Credit Facility
contains certain defaults and events of default customary for
debtor-in-possession financings of this type. Upon the
occurrence and during the continuance of any default in payment
of principal, interest or other amounts due under the Amended
DIP Credit Facility, interest on all outstanding amounts is
payable on demand at 2% above the then applicable rate.
On October 28, 2005, the Court granted the Debtors’
motion for approval of the DIP financing order. The DIP
financing order granted final approval of the DIP Credit
Facility, as amended at the time, final approval of an adequate
protection package for the prepetition credit facilities (as
described below) and the Debtors’ access to $2 billion
in DIP financing subject to the terms and conditions set forth
in the DIP financing documents, as amended. The adequate
protection package for the prepetition credit facilities
includes, among other things: (i) an agreement by Delphi to
pay accrued interest on the loans under the prepetition credit
facilities on a monthly basis, (ii) the right of Delphi to
pay this interest based on LIBOR, although any lender may
require that interest on its loans be based on the alternative
base rate if such lender waives all claims for interest at the
default rate and any prepayment penalties that may arise under
the prepetition credit facilities and (iii) an agreement by
Delphi to replace approximately $90 million of letters of
credit outstanding under the prepetition credit facilities with
letters of credit to be issued under the Amended DIP Credit
Facility. Refer to Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources, Prepetition
Credit Facilities in this Annual Report for additional
information on these prepetition credit facilities. The proceeds
of the DIP financing together with cash generated from daily
operations and cash on hand will be used to fund post-petition
operating expenses, including supplier obligations and employee
wages, salaries and benefits.
51
On November 21, 2005, the $250 million term loan was
funded and the Company elected to pay interest at LIBOR plus
2.75% for a six month period. As of December 31, 2005,
there were no amounts outstanding under the DIP revolving
facility. However, the Company had approximately $7 million
in letters of credit outstanding against the DIP revolving
facility. The foregoing description of the Amended DIP Credit
Facility is a general description only and is qualified in its
entirety by reference to the Amended DIP Credit Facility, a copy
of which was previously filed with the SEC.
The Chapter 11 Filings also triggered early termination
events under both our U.S. and European accounts receivables
securitization programs. The U.S. securitization program
was terminated as a result of the initial chapter 11 filing
on October 8, 2005. No amounts were outstanding under the
U.S. securitization program when it was terminated. On
October 28, 2005, Delphi and the institutions sponsoring
the European program entered into a preliminary agreement which
was then finalized on November 18, 2005 permitting
continued use of the European program despite the occurrence of
early termination events but with revised financial covenants
and pricing. The early termination events included Delphi’s
failure to satisfy the consolidated leverage ratio at
September 30, 2005 and defaults related to its voluntary
filing for reorganization relief under chapter 11 of the
Bankruptcy Code. The program has an availability of
€145 million
($171 million at December 31, 2005 currency exchange
rates) and £10 million ($17 million at
December 31, 2005 currency exchange rates) until expiration
on March 31, 2006. On February 20, 2006, the European
program was amended, extending the expiration date to
December 31, 2006 with substantially the same terms and
conditions. As of December 31, 2005, outstanding borrowings
under this program were approximately $149 million.
Additionally, although neither Delphi Trust I nor Delphi
Trust II (collectively, the “Trusts,” and each a
wholly-owned subsidiary of Delphi who has issued trust preferred
securities and whose sole assets consist of junior subordinated
notes issued by Delphi), sought relief under chapter 11 of
the United States Bankruptcy Code, the Trusts may be dissolved
in accordance with the provisions of their respective trust
declarations, which in each case provide that Delphi’s
filing of chapter 11 constitutes an “early termination
event.” The property trustee of each trust is in the
process of liquidating each Trust’s assets in accordance
with the terms of the applicable trust declarations and it is
expected that the holders of the trust preferred securities will
receive in exchange for their securities a pro rata share of the
Trusts respective junior subordinated notes issued by Delphi.
As of December 31, 2005, substantially all of our unsecured
prepetition long-term debt was in default and is subject to
compromise. Of our $5.9 billion of outstanding debt at
December 31, 2005, $2.5 billion was included in
liabilities subject to compromise, including approximately
$2.0 billion of senior unsecured debt with maturities
ranging from 2006 to 2029, approximately $0.4 billion of
junior subordinated notes due to Delphi Trust I and II due
2033, and $0.1 billion of other debt. As of
December 31, 2005, we had approximately $3.1 billion
of short-term and other debt not subject to compromise,
including $1.5 billion drawn down from our Revolving Credit
Facility, $1.0 billion of term loan secured debt due 2011,
$0.4 billion related to accounts receivable factoring and
$0.1 billion related to European securitization, and
$0.3 billion of long-term debt not subject to compromise,
primarily the DIP term loan.
Our cash flows from operations during a year are impacted by the
volume and timing of vehicle production, which includes a halt
in certain operations of our North American customers for
approximately two weeks in July and one week in December and
reduced production in July and August for certain European
customers. We have varying needs for short-term working capital
financing as a result of the nature of our business. We financed
our working capital through a mix of committed facilities,
including revolving credit facilities and receivables
securitization programs, and uncommitted facilities, including
bank lines and factoring lines.
52
Historically, we have used the cash we generate from operating
activities before considering amounts contributed to pensions,
to strengthen our balance sheet by reducing legacy liabilities
such as pensions, restructuring our operations, generating
growth and paying dividends. Our net cash provided by operating
activities was $154 million for the year ended
December 31, 2005 as compared to $1.5 billion for the
year ended December 31, 2004. Absent a comprehensive
restructuring to address our existing U.S. legacy liabilities
and our resulting high cost structure in the U.S. in a manner
which allows us to flex our manufacturing operations and to
scale our workforce to current economic conditions, we expect
that our operating activities will use, not generate, cash.
Prior to the Chapter 11 Filings we faced ERISA pension
funding minimums of $1.2 billion in 2006. Based upon
current overall macroeconomic conditions, we also likely faced
additional ERISA minimums in 2007. Accordingly, as part of the
chapter 11 process we are seeking to not only transform our
operations but also to emerge with a sustainable capital
structure for our transformed business.
The following should be read in conjunction with Note 13,
Debt of the consolidated financial statements in this Annual
Report.
Bonds and Trust Preferred Securities. Delphi had
approximately $2.0 billion of unsecured debt at
December 31, 2005. Pursuant to the requirements of
SOP 90-7, as of
the Chapter 11 Filings, deferred financing fees related to
prepetition debt are no longer being amortized and have been
included as an adjustment to the net carrying value of the
related prepetition debt at December 31, 2005. The net
carrying value of our unsecured debt includes $500 million
of securities bearing interest at 6.55% that matured on
June 15, 2006, $498 million of securities bearing
interest at 6.50% and maturing on May 1, 2009,
$493 million of securities bearing interest at 6.50% and
maturing on August 15, 2013 and $493 million of
securities bearing interest at 7.125% and maturing on
May 1, 2029.
We also have trust preferred securities that were issued by our
wholly-owned subsidiaries, Delphi Trust I and Delphi
Trust II. Delphi Trust I (“Trust I”)
issued 10,000,000 shares of
81/4%
Cumulative Trust Preferred Securities, with a liquidation
amount of $25 per trust preferred security and an aggregate
liquidation preference amount of $250 million. These
securities were listed on the New York Stock Exchange under the
symbol DPHprA and are now trading on the Pink Sheets, a
quotation source for
over-the-counter
securities. (Refer to Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations—Credit Ratings, Stock Listing in this Annual
Report). The sole assets of Trust I are $257 million
of aggregate principal amount of Delphi junior subordinated
notes due 2033. Trust I will pay cumulative cash
distributions at an annual rate equal to
81/4%
of the liquidation amount on the preferred securities. Delphi
Trust II (“Trust II”) issued
150,000 shares of Adjustable Rate Trust Preferred
Securities with a
five-year initial rate
of 6.197%, a liquidation amount of $1,000 per trust
preferred security and an aggregate liquidation preference
amount of $150 million. The sole assets of Trust II
are $155 million aggregate principal amount of Delphi
junior subordinated notes due 2033. Trust II pays
cumulative cash distributions at an annual rate equal to 6.197%
of the liquidation amount during the initial fixed rate period
(which is through November 15, 2008) on the preferred
securities.
Our filing for chapter 11 was an event of default under
each Trust’s respective trust declarations, and as
described in the Overview of Capital Structure above, was an
“early termination event.” The property trustee of
each Trust is in the process of liquidating each Trust’s
assets and it is expected that the holders of the trust
preferred securities will receive in exchange for their
securities a pro rata share of the Trusts respective junior
subordinated notes issued by Delphi.
Prepetition Credit Facilities. Throughout 2004, Delphi
had two financing arrangements with a syndicate of lenders
providing for an aggregate of $3.0 billion in available
revolving credit facilities, reduced by the amount of any
outstanding letters of credit. The terms of the credit
facilities provided for a
five-year revolving
credit line in the amount of $1.5 billion and a
364-day revolving
credit line in the amount of $1.5 billion.
53
On June 14, 2005, Delphi reached agreement with its
syndicate of lenders to amend certain terms of its existing
$1.5 billion
five-year revolving
credit facility (the “Revolving Credit Facility”). The
amendment increased the available credit under Delphi’s
Revolving Credit Facility to $1.8 billion and added a
$1.0 billion six-year term loan (the “Term Loan,”
and together with the Revolving Credit Facility, the
“Facilities”). The Revolving Credit Facility will
expire June 18, 2009 and the Term Loan will expire
June 14, 2011. Upon the effectiveness of the new
Facilities, Delphi terminated its
364-day revolving
credit facility in the amount of $1.5 billion.
As a result of the foregoing refinancing, Delphi replaced its
previous $3.0 billion revolving credit facilities with
$2.8 billion of available credit, the Term Loan portion of
which has been fully funded. Prior to the amendment, there were
no amounts outstanding under the $1.5 billion
five-year revolving
credit facility or the $1.5 billion
364-day revolving
credit facility, nor had these revolving credit facilities been
previously borrowed upon. On August 3, 2005, we drew down
$1.5 billion from our Revolving Credit Facility. As of
December 31, 2005, $1.6 billion was utilized under the
Revolving Credit Facility, including approximately
$80 million in letters of credit outstanding against the
Facilities.
The Term Loan had a 1% per annum amortization for the first
5 years and 9 months. Therefore, in the third quarter
of 2005, we made the first installment payment on the Term Loan.
In addition, we made mandatory payments applying the sale
proceeds of certain asset sales. As of December 31, 2005,
approximately $1.0 billion was outstanding under the Term
Loan.
The amended Facilities contains financial covenants based on
consolidated leverage ratios (the “Leverage Ratio
Covenant”), which are tested at each
quarter-end. We were
not in compliance with the Leverage Ratio Covenant as of and
since September 30, 2005. However, under section 362
of the Bankruptcy Code, the filing of a bankruptcy petition
automatically stays most actions against a debtor, including
most actions to collect prepetition indebtedness or to exercise
control over the property of the debtor’s estate. Absent an
order of the Court, substantially all prepetition liabilities
are subject to settlement under a plan of reorganization.
The amended Facilities also contain provisions providing for an
event of default in the event that we default on payments due
for indebtedness, the outstanding principal amount of which
exceeds $50 million. Our filing for chapter 11 was an
event of default. At hearings held in October 2005, the Court
approved certain of the Debtors’ “first day”
motions, including approval of an adequate protection package
for Delphi’s outstanding $2.5 billion prepetition
secured indebtedness under the prepetition credit facilities.
The adequate protection package includes, among other things:
(i) an agreement by Delphi to pay accrued interest on the
loans under the prepetition Facilities on a monthly basis,
(ii) the right of Delphi to pay this interest at a rate
equal to LIBOR plus 6.50% per annum on the Term Loan and 5.00%
on the Revolving Credit Facility, although any lender may
require that interest on its loans be based at a rate equal to
the alternative base rate plus 5.50% per annum on the Term Loan
and 4.00% on the Revolving Credit Facility if such lender waives
all claims for interest at the default rate and any prepayment
penalties that may arise under the prepetition Facilities and
(iii) an agreement by Delphi to replace approximately
$90 million of letters of credit outstanding under the
prepetition Facilities with letters of credit to be issued under
the DIP Credit Facility.
We also maintain various accounts receivable factoring
facilities in Europe that are accounted for as short-term debt.
These uncommitted factoring facilities are available through
various financial institutions. As of December 31, 2005, we
had $365 million outstanding under these accounts
receivable factoring facilities.
Prior to the end of 2005, certain subsidiaries sold receivables
on a non-recourse basis
in the normal course of their operations. As of
December 31, 2004, certain European subsidiaries sold
accounts receivable totaling $354 million. Prior to the end
of 2005, changes in the level of receivables sold from year to
year are included in the change in accounts receivable within
cash flow from operations. As of December 31, 2005, we no
longer maintain factoring programs that are recorded as a sale
of receivables.
54
In 2005, we exercised our options to purchase certain of the
Company’s leased property. As a result, in the second
quarter of 2005 we completed the purchase of our Troy, Michigan
headquarters property and two manufacturing facilities in
Alabama for approximately $103 million, including
approximately $2 million of fees and other costs.
Additionally, in the third quarter of 2005 we completed the
purchase of a facility in Vienna, Ohio for approximately
$28 million. As of December 31, 2005, these properties
were included in our net property balance on the consolidated
balance sheet. Prior to the purchase, these leases were
accounted for as operating leases.
As of December 31, 2005, we had $136 million of other
debt, primarily consisting of overseas bank facilities, and
$78 million of other debt classified as Liabilities Subject
to Compromise.
The following table summarizes our expected cash outflows
resulting from financial contracts and commitments. We have not
included information on our recurring purchases of materials for
use in our manufacturing operations. These amounts are generally
consistent from year to year, closely reflect our levels of
production, and are not long-term in nature (less than three
months).
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments due by Period | |
| |
|
| |
| |
|
|
|
2007 | |
|
2009 | |
|
|
| |
|
Total | |
|
2006 | |
|
& 2008 | |
|
& 2010 | |
|
Thereafter | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Debt and capital lease obligations
|
|
$ |
3,390 |
|
|
$ |
3,117 |
|
|
$ |
256 |
|
|
$ |
6 |
|
|
$ |
11 |
|
|
Operating lease obligations
|
|
|
456 |
|
|
|
122 |
|
|
|
173 |
|
|
|
89 |
|
|
|
72 |
|
|
Contractual commitments for capital expenditures
|
|
|
353 |
|
|
|
349 |
|
|
|
3 |
|
|
|
1 |
|
|
|
— |
|
|
Other contractual purchase commitments, including information
technology
|
|
|
1,277 |
|
|
|
361 |
|
|
|
496 |
|
|
|
243 |
|
|
|
177 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total(1)
|
|
$ |
5,476 |
|
|
$ |
3,949 |
|
|
$ |
928 |
|
|
$ |
339 |
|
|
$ |
260 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The amounts above exclude (a) our minimum funding
requirements as set forth by ERISA, which are $2.4 billion
over the next two years. Our minimum funding requirements
after 2005 are dependent on several factors. We also have
payments due under our other OPEB plans. These plans are not
required to be funded in advance, but are “pay as you
go.” For further information refer to Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Liquidity and Capital Resources,
U.S. Pension Plans and Other Postretirement Benefits in
this Annual Report and (b) estimated interest costs of
$365 million, $23 million, $1 million,
$1 million and $1 million, respectively, for 2006,
2007, 2008, 2009, and 2010. There are no material estimated
interest costs after 2010. Estimated interest costs include
interest related to Delphi’s prepetition term loan and
revolving credit facilities after December 31, 2006, which
are currently in default and have been included in the current
portion of long-term debt. Delphi expects to refinance these
arrangements in conjunction with our reorganization process.
Consistent with accounting classification of the Company’s
prepetition term loan and revolving credit facilities as the
current portion of long-term debt, the estimated interest costs
includes payment of interest on these two facilities only
through the end of 2006. |
The Chapter 11 Filings triggered defaults on substantially
all debt obligations of the Debtors. However, the stay of
proceedings provisions of section 362 of the Bankruptcy
Code apply to actions to collect prepetition indebtedness or to
exercise control over the property of the debtor’s estate
in respect of such defaults. Absent an order of the Court,
substantially all prepetition liabilities are subject to
settlement under a plan of reorganization. Therefore, all
liabilities, including debt, classified as subject to compromise
have been excluded from the above table. Refer to Note 12,
Liabilities Subject to Compromise and Note 13, Debt of the
consolidated financial statements in this Annual Report for a
further explanation of such classification.
55
Under Section 362 of the Bankruptcy Code, actions to
collect most of our prepetition liabilities, including payments
owing to vendors in respect of goods furnished and service
provided prior to the Petition Date, are automatically stayed.
Shortly after the Petition Date, the Debtors began notifying all
known actual or potential creditors of the Debtors for the
purpose of identifying all prepetition claims against the
Debtors. In addition, the Company may reject prepetition
executory contracts and unexpired leases with respect to the
Company’s operations, with the approval of the Court. Any
damages resulting from rejection of executory contracts and
unexpired leases are treated as general unsecured claims and
will be classified as liabilities subject to compromise. As a
result, the Company anticipates its lease obligations,
contractual commitments for capital expenditures, and other
contractual purchase commitments as currently detailed in the
above table may change significantly in the future.
|
|
|
Credit Ratings, Stock Listing |
Delphi was rated by Standard & Poor’s, Moody’s,
and Fitch Ratings. Primarily as a result of our filing for
protection under chapter 11 of the Bankruptcy Code, as of
December 31, 2005, Standard & Poor’s,
Moody’s, and Fitch Ratings had withdrawn their ratings of
Delphi’s senior unsecured debt, preferred stock, and senior
secured debt. Standard & Poor’s, Moody’s, and
Fitch Ratings assigned point-in-time ratings of BBB-/ B1/ BB-,
respectively, to the DIP Credit Facility.
On October 11, 2005, the NYSE announced suspension of
trading of Delphi’s common stock (DPH),
61/2%
Notes due May 1, 2009 (DPH 09), and its
71/8%
debentures due May 1, 2029 (DPH 29), as well as the 8.25%
Cumulative Trust Preferred Securities of Delphi
Trust I (DPH PR A). This action followed the NYSE’s
announcement on October 10, 2005, that it was reviewing
Delphi’s continued listing status in light of Delphi’s
announcements involving the filing of voluntary petitions for
reorganization relief under chapter 11 of the Bankruptcy
Code. The NYSE subsequently determined to suspend trading based
on the trading price for the common stock, which closed at $0.33
on October 10, 2005 and completed delisting proceedings on
November 11, 2005. Delphi’s common stock (OTC: DPHIQ)
and preferred shares (OTC: DPHAQ) are being traded as of the
date of filing this Annual Report on Form 10-K with the SEC
on the Pink Sheets and are no longer subject to the regulations
and controls imposed by the NYSE. Pink Sheets is a centralized
quotation service that collects and publishes market maker
quotes for over the counter (“OTC”) securities in
real-time. Delphi’s listing status on the Pink Sheets is
dependent on market makers’ willingness to provide the
service of accepting trades to buyers and sellers of the stock.
Unlike securities traded on a stock exchange, such as the NYSE,
issuers of securities traded on the Pink Sheets do not have to
meet any specific quantitative and qualitative listing and
maintenance standards. As of the date of filing this Annual
Report on Form 10-K with the SEC, Delphi’s
61/2%
Notes due May 1, 2009 (DPHIQ.GB) and
71/8
% debentures due May 1, 2029 (DPHIQ.GC) are also
trading over the counter via the Trade Reporting and Compliance
Engine (TRACE), a NASD-developed reporting vehicle for OTC
secondary market transactions in eligible fixed income
securities that provides debt transaction prices.
Supplier selection in the auto industry is generally finalized
several years prior to the start of production of the vehicle.
Therefore, current capital expenditures are based on customer
commitments entered into previously, generally several years ago
when the customer contract was awarded. As of December 31,
2005, Delphi had approximately $353 million in outstanding
cancelable and noncancelable
56
capital commitments. We expect capital expenditures to be
approximately $0.9 billion in 2006. Capital expenditures by
product sector and geographic region for the periods presented
were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Dynamics, Propulsion, Thermal & Interior
|
|
$ |
505 |
|
|
$ |
455 |
|
|
$ |
601 |
|
|
Electrical, Electronics & Safety
|
|
|
498 |
|
|
|
403 |
|
|
|
408 |
|
|
Automotive Holdings Group
|
|
|
58 |
|
|
|
70 |
|
|
|
50 |
|
|
Other
|
|
|
122 |
|
|
|
39 |
|
|
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total capital expenditures
|
|
$ |
1,183 |
|
|
$ |
967 |
|
|
$ |
1,088 |
|
| |
|
|
|
|
|
|
|
|
|
|
North America
|
|
$ |
696 |
(1) |
|
$ |
553 |
|
|
$ |
739 |
|
|
Europe, Middle East & Africa
|
|
|
356 |
|
|
|
277 |
|
|
|
264 |
|
|
Asia-Pacific
|
|
|
108 |
|
|
|
115 |
|
|
|
56 |
|
|
South America
|
|
|
23 |
|
|
|
22 |
|
|
|
29 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total capital expenditures
|
|
$ |
1,183 |
|
|
$ |
967 |
|
|
$ |
1,088 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Includes $129 million for purchase of facilities previously
leased. Prior to the purchase, these leases were accounted for
as operating leases. |
Operating Activities. Net cash provided by operating
activities totaled $154 million for the year ended
December 31, 2005, compared to $1.5 billion in 2004
and $0.9 billion in 2003. Changes in the levels of
factoring improved cash flow from operating activities for 2005
by approximately $83 million compared to decreases of
$12 million for 2004 and $145 million in 2003. Cash
flow from operating activities was reduced for all periods by
contributions to our U.S. pension plans of $625 million,
$600 million, and $1.0 billion for the years ended
December 31, 2005, 2004 and 2003, respectively. Cash used
in operations was negatively impacted as a result of the
Chapter 11 Filings as certain suppliers demanded shorter
supplier payment terms or prepayments, principally in the U.S.
Excluding the foregoing, the decrease in cash provided by
operating activities is primarily due to lower revenue levels
and compressed margins.
Investing Activities. Cash flows used in investing
activities totaled $0.8 billion for the year ended
December 31, 2005, compared to $0.8 billion and
$1.1 billion for the years ended December 31, 2004 and
2003, respectively. The principal use of cash in 2005, 2004 and
2003 reflected capital expenditures related to ongoing
operations and, in 2005, approximately $129 million for the
purchase of certain previously leased properties. Cash flows
from investing activities in 2005 also include $245 million
of proceeds from divestitures of product lines and joint
ventures. Additionally, in 2004, we acquired Dynamit Nobel AIS
for approximately $17 million, net of cash acquired, and
Peak Industries, Inc. for approximately $44 million, net of
cash acquired. In 2003, we acquired Grundig Car InterMedia
System GmbH for approximately $39 million, net of cash
acquired. Other cash flows from investing activities principally
consist of collections of notes receivable and proceeds from the
sale of marketable securities.
Financing Activities. Net cash provided by financing
activities was $2.0 billion for the year ended
December 31, 2005, compared to net cash used in financing
activities of $0.7 billion in 2004 and net cash provided by
financing activities of $4 million in 2003. Net cash
provided by financing activities during 2005 primarily reflected
borrowings under the Facilities offset by repayment of U.S.
securitization borrowings. Net cash used in financing activities
during 2004 reflected a $500 million repayment of the
6.125% senior notes due May 1, 2004. Net cash provided by
financing activities for 2003 includes $894 million of net
proceeds from the debt and trust preferred issuances. In
addition, during 2003 we repaid approximately $707 million
of short-term debt. All periods also reflect the payments of
dividends.
57
Dividends. The Delphi Board of Directors declared
dividends on Delphi common stock of $0.03 per share on
March 23, 2005 and $0.015 per share on June 22, 2005,
which was paid on May 2, 2005 and August 2, 2005,
respectively. On September 8, 2005, the Board of Directors
announced the elimination of Delphi’s quarterly dividend of
$0.015 per share on Delphi common stock for the remainder of
2005. In addition, the DIP Credit Facility includes a negative
covenant which prohibits the payment of dividends by the Company.
Stock Repurchase Program. The Board of Directors had
authorized the repurchase of up to 19 million shares of
Delphi common stock to fund stock options and other employee
benefit plans. We did not repurchase any shares during 2005,
2004 and 2003 pursuant to this plan.
|
|
|
U.S. Pension Plans and Other Postretirement
Benefits |
Delphi sponsors defined benefit pension plans covering a
significant percentage of our U.S. workforce and certain of our
non-U.S. workforce. On December 31, 2005, the projected
benefit obligation (“PBO”) of the U.S. defined benefit
pension plans exceeded the market value of the plan assets by
$4.1 billion, compared to $4.3 billion at
December 31, 2004; the change is explained as follows:
| |
|
|
|
|
|
| |
|
Underfunded | |
| |
|
Status | |
| |
|
(PBO basis) | |
| |
|
| |
| |
|
(in billions) | |
|
December 31, 2004
|
|
$ |
(4.3 |
) |
| |
Pension contributions
|
|
|
0.6 |
|
| |
2005 asset returns — 13%
|
|
|
1.1 |
|
| |
Impact of discount rate decrease by 25 basis points to 5.50%
|
|
|
(0.4 |
) |
| |
Interest and service cost
|
|
|
(1.0 |
) |
| |
Other
|
|
|
(0.1 |
) |
| |
|
|
|
|
December 31, 2005
|
|
$ |
(4.1 |
) |
| |
|
|
|
During 2005, Delphi contributed $0.6 billion to its pension
plans, which satisfied our minimum funding requirement as
determined by employee benefit and tax laws. Although
Delphi’s 2006 minimum funding requirement is approximately
$1.2 billion, under current legislation and plan design,
Delphi is in chapter 11 and our 2006 contributions will be
limited to approximately $0.2 billion, representing the
normal service cost. While contributions subsequent to 2006 are
dependent on asset returns and a number of other factors, after
we make contributions of approximately $0.2 billion in
2006, we would be required by employee benefit and tax laws to
make contributions of approximately $2.2 billion in 2007
and approximately $0.6 billion in 2008, assuming no changes
to the pension plan design, no major restructuring programs, no
funding waivers and emergence from bankruptcy in 2007. These
contribution estimates assume that new legislation extending the
current rate relief, which expired on April 15, 2006, is
enacted. If the legislation is not passed, Delphi’s 2008
minimum funding requirements, under employee benefit and tax
laws, could increase by up to $0.9 billion. Finally,
proposed legislation before the House and Senate would alter the
required contributions outlined above. Our estimate is that in
the short term, required contributions may be reduced. In the
long term, overall contributions could be increased.
Delphi’s U.S. pension plans generally provide covered U.S.
hourly employees with pension benefits of negotiated, flat
dollar amounts for each year of credited service earned by an
individual employee. Formulas providing for such stated amounts
are contained in the prevailing labor contract. Consistent with
SFAS No. 87 “Employers’ Accounting for
Pensions,” the 2005 pre-tax pension expense and
December 31, 2005 PBO do not comprehend any future benefit
increases beyond the amounts stated in the currently prevailing
contract that expires in September 2007. The current cycle for
negotiating new labor contracts is every four years. There has
been no past practice of maintaining a predictable level of
benefit increases or decreases from one contract to the next.
However, the following data illustrate the sensitivity of
pension expense and PBO to hypothetical assumed changes in
future basic benefits. An annual 1% increase in the
58
basic benefit and supplements of the U.S. Hourly Employees
Pension Plan would result in a $47 million increase in 2006
pre-tax pension expense and a $0.2 billion increase in the
December 31, 2005 PBO. These sensitivities assume no
changes to the pension plan design and no major restructuring
programs.
Delphi selected discount rates based on analyzing the results of
matching high quality fixed income investments rated AA- or
higher by Standard and Poor’s and the regular and above
median Citigroup Pension Discount Curves, with expected cash
benefit payments. Since high quality bonds in sufficient
quantity and with appropriate maturities are not available for
all years when cash benefit payments are expected to be made,
hypothetical bonds were imputed based on combinations of
existing bonds, and interpolation and extrapolation reflecting
current and past yield trends. The pension discount rate
determined on that basis decreased from 5.75% for 2004 to 5.5%
for 2005. This 25 basis point decline in the discount rate
increased the underfunded status of our U.S. pension plans by
approximately $0.4 billion. The other postretirement
discount rate determined on that basis decreased from 6.00% for
2004 to 5.50% for 2005. This 50 basis point decline in the
discount rate increased the underfunded status of our U.S.
postretirement plans by approximately $0.8 billion.
For 2005 expense, Delphi assumed a U.S. long-term asset rate of
return of 9%. For 2006 expense, we will utilize an 8.75%
long-term asset rate of return assumption. In developing these
expected long-term rate of return assumptions, we evaluated
input from our third-party pension plan asset managers,
including a review of asset class return expectations and
long-term inflation assumptions. We also considered
Delphi’s post-spin off and GM’s pre-spin off
historical 15-year compounded return, which was consistent with
our long-term rate of return assumption. The 8.75% long-term
asset return assumption for 2006 is based on an asset allocation
assumption of 50%-75% with U.S. and international equity
managers, 25%-40% with fixed income managers, and 0%-10% with
other asset managers (primarily real estate). Delphi’s
asset managers regularly review the actual asset allocation and
periodically rebalance our investments to our targeted
allocation when considered appropriate. At December 31,
2005, our actual asset allocation was consistent with our asset
allocation assumption.
As permitted under SFAS No. 87, we base our
determination of the asset return component of pension expense
on a market-related valuation of assets, which reduces
year-to-year volatility. This market-related valuation
recognizes investment gains or losses over a five-year period
from the year in which they occur. Investment gains or losses
for this purpose are the difference between the expected return
calculated using the market-related value of assets and the
actual return based on the market value of assets. Since the
market-related value of assets recognizes gains or losses over a
five-year period, the future value of assets will be impacted as
previously deferred gains or losses are recorded. As of
December 31, 2005, we had cumulative asset gains of
approximately $0.2 billion which remain to be recognized in
the calculation of the market-related value of assets.
The declining interest rate environment and varying asset
returns versus expectations in 2000 through 2005 resulted in an
accumulated unrecognized actuarial loss of $3.8 billion at
December 31, 2005, to which is added an approximately
$0.2 billion deferred market value of asset adjustment that
is not considered when determining 2006 pension expense. In
accordance with SFAS No. 87, $1.4 billion is
excluded from determination of 2006 expense, as it falls within
our corridor (10% of the higher of projected benefit obligation
or fair market value of assets). The remaining actuarial loss of
$2.6 billion at December 31, 2005 is amortized over
the remaining service life of our pension plan participants. Our
expense related to amortization of actuarial losses in 2006 will
be approximately $18 million higher than in 2005.
Delphi’s U.S. pension expense was $582 million and
$549 million for 2005 and 2004, respectively. As required
by U.S. GAAP, our pension expense for 2006 is determined at the
end of 2005. Our 2006 pension expense will be approximately
$574 million, excluding any special termination charges and
assuming no
59
change to the pension plan design and no major restructuring
programs. However, for purposes of analysis, the following table
highlights the sensitivity of our pension obligations and
expense to changes in assumptions:
| |
|
|
|
|
| |
|
Impact on Pension |
|
|
| Change in Assumption |
|
Expense |
|
Impact on PBO |
| |
|
|
|
|
|
25 bp decrease in discount rate
|
|
+$25 to 35 Million |
|
+$0.4 Billion |
|
25 bp increase in discount rate
|
|
-$25 to 35 Million |
|
-$0.4 Billion |
|
25 bp decrease in long-term return on assets
|
|
+$20 to 30 Million |
|
— |
|
25 bp increase in long-term return on assets
|
|
-$20 to 30 Million |
|
— |
The above sensitivities reflect the effect of changing one
assumption at a time. It should be noted that economic factors
and conditions often affect multiple assumptions simultaneously
and the effects of changes in key assumptions are not
necessarily linear. The above sensitivities also assume no
changes to the pension plan design and no major restructuring
programs.
U.S. GAAP also requires us to record a charge to
stockholders’ equity when certain conditions are met. As of
December 31, 2005, our after-tax charge to
stockholders’ equity was $2.4 billion, which is lower
than last year’s charge to stockholders’ equity of
$2.5 billion primarily due to the higher than expected
return on assets.
In addition, we maintain postretirement plans other than
pensions that are not funded. At December 31, 2005 and
2004, the amounts reflected in our consolidated balance sheet
for postretirement obligations were $6.4 billion and
$6.7 billion, respectively. From December 31, 2004 to
December 31, 2005, the postretirement liabilities were
materially unchanged at $9.6 billion. The variance between
the liability and the amount reflected in our consolidated
balance sheet consists primarily of accumulated actuarial losses
that will be amortized over the remaining service life of our
postretirement plan participants.
These plans do not have minimum funding requirements, but rather
are “pay as you go.” As we currently have 0.43
participating retirees for each participating active employee,
the cash costs that we incur are lower than the expenses
recognized. During the 2005 postretirement plan year, we
incurred approximately $235 million of net cash costs
including approximately $54 million of payments to GM for
certain of our former employees that flowed back to GM and had
actuarially been determined to retire. This flowback payment was
partially offset by the receipt of $5 million from GM for
former GM employees who had transferred to Delphi and had
actuarially been determined to retire.
Delphi’s consolidated balance sheet reflects a payable due
to GM for a cash settlement for postretirement obligations
associated with employees that transferred from Delphi to GM. In
prior periods, this amount was included in the postretirement
liability carried on Delphi’s consolidated balance sheet.
Delphi’s December 31, 2005 consolidated balance sheet
includes approximately $1 billion in liabilities subject to
compromise, which is included in postretirement liabilities in
prior periods. Refer to Note 12, Liabilities Subject to
Compromise of the consolidated financial statements in this
Annual Report. Additionally, an $83 million receivable for
the cash settlement amount due from GM for postretirement
obligations associated with employees transferring from GM to
Delphi has been reclassified to other long-term assets.
Cash settlement between Delphi and GM with respect to this
payable and receivable is scheduled to occur at the time the
employees are actuarially determined to retire. In accordance
with our Separation agreement with GM, we will be paying an
average of $100 million per year (flowbacks) over the
next five years to GM, and will be receiving an average of
$9 million per year from GM associated with employees who
have transferred to Delphi. In addition to this, we are also
required to make a final net settlement payment of approximately
$0.4 billion in 2014.
The declining interest rate environment and changes in the
health care trend and base claims assumptions through 2005
resulted in an accumulated actuarial loss of $4.0 billion
at the 2005 measurement date. Of this amount, $1.2 billion
of losses were generated in 2005 with approximately
$0.8 billion caused by the 50 basis point decline in the
discount rate with the remainder primarily caused by changes in
the health care base claims and trend assumptions. Of the
accumulated loss, $1.0 billion is excluded from
determination of 2006 expense as it falls within our corridor
(10% of accumulated postretirement benefit
60
obligation) in accordance with SFAS No. 106. The
remaining actuarial loss of $3.0 billion is amortized over
the remaining service life of our postretirement plan
participants. Our expense related to amortization of actuarial
losses in 2006 will be approximately $105 million higher
than in 2005.
Delphi’s U.S. postretirement expense was $875 million
and $792 million in 2005 and 2004, respectively. As
required by U.S. GAAP, our postretirement expense for 2006 is
determined at the 2005 measurement date. Our 2006 postretirement
expense will be approximately $911 million, excluding any
special termination charges. However, for purposes of analysis,
the following table highlights the sensitivity of our
postretirement obligations and expense to changes in assumptions:
| |
|
|
|
|
| |
|
Impact on |
|
Impact on |
| Change in Assumption |
|
Postretirement Expense |
|
Postretirement Liability |
| |
|
|
|
|
|
25 bp decrease in discount rate
|
|
+$25 to 35 Million |
|
+$0.3 Billion |
|
25 bp increase in discount rate
|
|
-$25 to 35 Million |
|
-$0.3 Billion |
For analytical purposes only, the following table presents the
impact that changes in our health care trend rate would have on
our postretirement liability and postretirement service and
interest cost (in millions):
| |
|
|
|
|
| |
|
Impact on Service |
|
Impact on |
| % Change |
|
& Interest Cost |
|
Postretirement Liability |
| |
|
|
|
|
|
+1%
|
|
$121 |
|
$ 1,306 |
|
-1%
|
|
$(91) |
|
$(1,143) |
The above sensitivities reflect the effect of changing one
assumption at a time. It should be noted that economic factors
and conditions often affect multiple assumptions simultaneously
and the effects of changes in key assumptions are not
necessarily linear. The above sensitivities also assume no
changes to the postretirement plan design and no major
restructuring programs.
Shareholder Lawsuits
The Company, along with Delphi Trust I, Delphi
Trust II, current and former directors of the Company,
certain current and former officers and employees of the Company
or its subsidiaries, and others are named as defendants in
several lawsuits that were filed beginning in March 2005
following the Company’s announced intention to restate
certain of its financial statements.
On December 12, 2005, the Judicial Panel on Multidistrict
Litigation entered an order transferring each of the related
federal actions to the United States District Court for the
Eastern District of Michigan for coordinated or consolidated
pretrial proceedings (the “Multidistrict Litigation”).
The lawsuits transferred fall into three categories. One group
of putative class action lawsuits, which are purportedly brought
on behalf of participants in certain of the Company’s and
its subsidiaries’ defined contribution employee benefit
pension plans that invested in Delphi common stock, is brought
under the Employee Retirement Income Security Act of 1974, as
amended (the “ERISA Actions”). Plaintiffs in the ERISA
Actions allege, among other things, that the plans suffered
losses as a result of alleged breaches of fiduciary duties under
ERISA. On October 21, 2005, the ERISA Actions were
consolidated before one judge in the United States District
Court for the Eastern District of Michigan. The ERISA Actions
were subsequently transferred to the Multidistrict Litigation.
On March 3, 2006, plaintiffs filed a consolidated class
action complaint (the “Amended ERISA Action”) with a
putative class period of May 28, 1999 to November 1,
2005. The Company, which was previously named as a defendant in
the ERISA Actions, was not named as a defendant in the Amended
ERISA Action. The plaintiffs are not currently asserting claims
against or seeking relief from the Company in the Amended ERISA
Action due to the Company’s bankruptcy filing, but have
stated that they plan to proceed with claims against the Company
in the ongoing bankruptcy cases, and will seek to name the
Company as a defendant in the Amended ERISA Action if the
bankruptcy stay is modified or lifted to permit such action. The
defendants have filed a motion to dismiss the Amended ERISA
Action.
61
A second group of putative class action lawsuits variously
alleges, among other things, that the Company and certain of its
current and former directors and officers and others made
materially false and misleading statements in violation of
federal securities laws. On September 23, 2005, these
securities actions were consolidated before one judge in the
United States District Court for the Southern District of New
York. On September 30, 2005, the Court-appointed lead
plaintiffs filed a consolidated class action complaint (the
“Amended Securities Action”) on behalf of a putative
class consisting of all persons and entities who purchased or
otherwise acquired publicly-traded securities of the Company,
including securities issued by Delphi Trust I and Delphi
Trust II, during a putative class period of March 7,
2000 through March 3, 2005. The Amended Securities Action
names several new defendants, including Delphi Trust II,
certain former directors, and underwriters and other third
parties, and includes securities claims regarding additional
offerings of Delphi securities. The securities actions
consolidated in the Southern District of New York (and a related
securities action filed in the United States District Court for
the Southern District of Florida concerning Delphi Trust I)
were subsequently transferred to the Eastern District of
Michigan as part of the Multidistrict Litigation. The action is
stayed against the Company pursuant to the Bankruptcy Code, but
is continuing against the other defendants.
The third group of lawsuits is comprised of shareholder
derivative actions against certain current and former directors
and officers of the Company (“Shareholder Derivative
Actions”). In October 2005, following the filing by the
Company of its petition for reorganization relief under
chapter 11 of the U.S. Bankruptcy Code, three of the four
shareholder derivative actions were closed administratively
without prejudice. (Two of the three lawsuits that were closed
were pending in the Circuit Court of Oakland County, Michigan,
and the other was pending in the United States District Court
for the Eastern District of Michigan.) The plaintiff in the
remaining shareholder derivative action has agreed to adjourn
defendants’ time to respond without date. The two federal
derivative actions were transferred to the Multidistrict
Litigation.
In addition, the Company received a demand from a shareholder
that the Company consider bringing a derivative action against
certain current and former directors and officers. The
Shareholder Derivative Actions and the shareholder demand are
premised on allegations that certain current and former
directors and officers of the Company made materially false and
misleading statements in violation of federal securities laws
and/or of their fiduciary duties. The Company has appointed a
committee of the Board of Directors to consider the shareholder
demand. That committee of the Board of Directors is still
investigating the matter.
Due to the preliminary nature of these lawsuits, the Company is
not able to predict with certainty the outcome of this
litigation or the Company’s potential exposure related
thereto. In addition, because any recovery on allowed
prepetition claims is subject to a confirmed plan of
reorganization, the ultimate distribution with respect to
allowed claims is not presently ascertainable. While Delphi
maintains directors and officers insurance subject to a
$10 million deductible, and has recorded a reserve in the
amount of the deductible, the Company cannot assure the extent
of coverage or that the impact of any loss not covered by
insurance or applicable reserves would not be material.
Under section 362 of the U.S. Bankruptcy Code, the filing
of a bankruptcy petition automatically stays most actions
against a debtor, including most actions to collect prepetition
indebtedness or to exercise control over the property of the
debtor’s estate. Absent an order of the Court,
substantially all prepetition liabilities of the debtor are
subject to settlement under a plan of reorganization.
62
Regulatory Actions and Other Matters
As previously disclosed, Delphi is the subject of an ongoing
investigation by the SEC and the Department of Justice involving
Delphi’s accounting for and the adequacy of disclosures for
a number of transactions dating from Delphi’s spin-off from
GM. Delphi is fully cooperating with the government’s
investigations. The Company entered into an agreement with the
SEC to suspend the running of the applicable statute of
limitations until April 6, 2006 and subsequently agreed to
extend the suspension until August 31, 2006. The
government’s investigations were not suspended as a result
of Delphi’s filing for chapter 11. Until these
investigations are complete, Delphi is not able to predict the
effect, if any, that these investigations will have on
Delphi’s business and financial condition, results of
operations and cash flows.
The Company also believes that the Enforcement Division of the
SEC has taken a more proactive role, what the SEC refers to as a
“risk based” approach, by seeking information from
issuers in an effort to assess issuers’ accounting or
disclosure practices before identifying specific wrong-doing.
Delphi believes that the previously disclosed inquiry it
received during the fourth quarter of 2004 regarding accounting
practices related to defined benefit pension plans and other
postemployment benefit plans is an example of this practice.
Delphi continues to cooperate fully with the SEC’s informal
inquiry in this matter.
Environmental Matters
Delphi is subject to the requirements of U.S. federal, state,
local and non-U.S. environmental and occupational safety and
health laws and regulations. These include laws regulating air
emissions, water discharge and waste management. For a
discussion of matters relating to compliance with laws for the
protection of the environment, refer to Item 1.
Business—Environmental Compliance in this Annual Report. We
have an environmental management structure designed to
facilitate and support our compliance with these requirements
globally. Although it is our intent to comply with all such
requirements and regulations, we cannot provide assurance that
we are at all times in compliance. We have made and will
continue to make capital and other expenditures to comply with
environmental requirements, although such expenditures were not
material during the past three years. Environmental requirements
are complex, change frequently and have tended to become more
stringent over time. Accordingly, we cannot assure that
environmental requirements will not change or become more
stringent over time or that our eventual environmental cleanup
costs and liabilities will not be material.
Delphi received notices that it is a potentially responsible
party (“PRP”) in proceedings at various sites,
including the Tremont City Landfill Site located in Tremont,
Ohio which is alleged to involve ground water contamination. In
September 2002, Delphi and other PRPs entered into a Consent
Order with the Environmental Protection Agency (“EPA”)
to perform a Remedial Investigation and Feasibility Study
concerning a portion of the site, which is expected to be
completed during 2006. Based on findings to date, we believe
that a reasonably possible outcome of the investigative study is
capping and future monitoring of this site, which would
substantially limit future remediation costs. We have included
an estimate of our share of the potential costs plus the cost to
complete the investigation in our overall reserve estimate.
Because the scope of the investigation and the extent of the
required remediation are still being determined, it is possible
that the final resolution of this matter may require that we
make material future expenditures for remediation, possibly over
an extended period of time and possibly in excess of our
existing reserves. We will continue to re-assess any potential
remediation costs and, as appropriate, our overall environmental
reserves as the investigation proceeds.
It is expected that Delphi’s restructuring activities will
include the sale and/or closure of numerous facilities around
the world. In the course of this process, environmental
investigations will be performed that may identify previously
unknown environmental conditions, triggering additional and
possibly material environmental remediation costs.
63
Inflation
Inflation generally affects Delphi by increasing the cost of
labor, equipment and raw materials. We believe that, because
rates of inflation in countries where we have significant
operations have been moderate during the periods presented,
inflation has not had a significant impact on our results of
operations, other than increased commodity costs as disclosed in
the Executive Summary in Management’s Discussion and
Analysis of Financial Condition and Results of Operations.
Recently Issued Accounting Pronouncements
Inventory
Costs
In November 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 151,
“Inventory Costs, an amendment of Accounting Research
Bulletin (“ARB”) No. 43, Chapter 4.”
SFAS No. 151 amends ARB No. 43,
Chapter 4 and seeks to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and
wasted materials by requiring those items to be recognized as
current period charges. Additionally, SFAS No. 151
requires that fixed production overheads be allocated to
conversion costs based on the normal capacity of the production
facilities. SFAS No. 151 is effective prospectively
for inventory costs incurred in fiscal years beginning after
June 15, 2005. The Company will adopt
SFAS No. 151 on January 1, 2006, and does not
expect the adoption of SFAS No. 151 to have a material
effect on our financial statements.
Nonmonetary
Exchanges
In December 2004, the FASB issued SFAS No. 153,
“Exchanges on Nonmonetary Assets—an amendment of
Accounting Principles Board (“APB”) Opinion
No. 29.” SFAS No. 153 is based on the
principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged.
SFAS No. 153 also eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces
it with an exception for exchanges of nonmonetary assets that do
not have commercial substance. The provisions of
SFAS No. 153 are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. Delphi will adopt SFAS No. 153
beginning January 1, 2006, and does not expect the adoption
to have a material effect on our financial statements.
Share
Based Payments
In December 2004, the FASB issued SFAS No. 123
(Revised 2004), “Share-Based Payments”
(“SFAS No. 123(R)”) that will require
compensation costs related to share-based payment transactions
to be recognized in the financial statements. Compensation cost
will be measured based on the grant-date fair value of the
equity or liability instruments issued, and will be recognized
over the periods that an employee provides service in exchange
for the award. In addition, liability awards will be remeasured
each reporting period. SFAS No. 123(R) replaces
SFAS No. 123, “Accounting for Stock-Based
Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.”
SFAS No. 123(R) was initially effective for interim or
annual periods beginning after June 15, 2005. In April
2005, the SEC delayed the effective date by requiring
implementation beginning in the next fiscal year beginning after
June 15, 2005. Delphi will adopt SFAS No. 123(R)
as of January 1, 2006 using the modified prospective
method. In 2006, we expect the impact of
SFAS No. 123(R) to increase the compensation expense
recognized in our consolidated financial statements by
approximately $9 million.
Accounting
for Conditional Asset Retirement Obligations
In March 2005, the FASB issued FASB Interpretation No. 47
(“FIN No. 47”), “Accounting for
Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143.” FIN No. 47
seeks to clarify the requirement to record liabilities stemming
from a legal obligation to perform asset retirement activities
on long-lived assets when that retirement is conditioned on a
future event. FIN No. 47 is effective no later than
the end of fiscal years ending after December 15, 2005. On
December 31, 2005, we adopted FIN No. 47 and
identified conditional retirement obligations primarily
64
related to asbestos abatement at certain of our sites. To a
lesser extent, we also have conditional retirement obligations
at certain sites related to the removal of storage tanks and
polychlorinated biphenyl (“PCB”) disposal costs. We
recorded assets of $2 million with offsetting accumulated
depreciation of $2 million, and an asset retirement
obligation liability of $17 million. We also recorded a
cumulative effect charge against earnings of $17 million,
after-tax, in 2005. Refer to Note 1, Significant Accounting
Policies, of the consolidated financial statements in this
Annual Report for additional information.
Accounting
Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections”.
SFAS No. 154 replaces APB Opinion No. 20,
“Accounting Changes” and FASB Statement
No. 3, “Reporting Accounting Changes in Interim
Financial Statements,” and requires the direct effects
of accounting principle changes to be retrospectively applied.
The existing guidance with respect to accounting estimate
changes and corrections of errors is carried forward in
SFAS 154. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company will
adopt SFAS No. 154 beginning January 1, 2006, and
does not expect the adoption of SFAS No. 154 to have a
material effect on our financial statements.
Other-Than-Temporary
Impairments
In November 2005, the FASB issued FASB Staff Position
(“FSP”)
Nos. 115-1 and
124-1, “The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments,” which addresses the
determination of when an investment is considered impaired,
whether that impairment is other than temporary, and the
measurement of an impairment loss. The guidance in the FSPs
amend SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,”
SFAS No. 124, “Accounting for Certain
Investments Held by Not-for-Profit Organizations,” and
APB Opinion No. 18, “The Equity Method of
Accounting for Investments in Common Stock,” and is
effective for reporting periods beginning after
December 15, 2005. We do not expect the adoption to have a
material effect on our financial statements.
Significant Accounting Policies and Critical Accounting
Estimates
Our significant accounting policies are more fully described in
Note 1, Significant Accounting Policies, to our
consolidated financial statements. Certain of our accounting
policies require the application of significant judgment by
management in selecting the appropriate assumptions for
calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty.
These judgments are based on our historical experience, terms of
existing contracts, our evaluation of trends in the industry,
information provided by our customers and information available
from other outside sources, as appropriate.
We consider an accounting estimate to be critical if:
|
|
|
| |
• |
It requires us to make assumptions about matters that were
uncertain at the time we were making the estimate, and |
| |
| |
• |
Changes in the estimate or different estimates that we could
have selected would have had a material impact on our financial
condition or results of operations. |
65
The table below presents information about the nature and
rationale for Delphi’s critical accounting estimates:
| |
|
|
|
|
|
|
|
|
| Balance Sheet |
|
Critical Estimate |
|
Nature of Estimates |
|
Assumptions/Approaches |
|
|
| Caption |
|
Item |
|
Required |
|
Used |
|
Key Factors |
| |
|
|
|
|
|
|
|
|
|
Accrued liabilities and other long-term liabilities
|
|
Warranty obligations |
|
Estimating warranty requires us to forecast the resolution of
existing claims and expected future claims on products sold. |
|
We base our estimate on historical trends of units sold and
payment amounts, combined with our current understanding of the
status of existing claims and discussions with our customers. |
|
• VM sourcing
• VM policy decisions regarding
warranty claims
• VMs seeking to hold suppliers
responsible for product warranties |
| |
|
Accrued liabilities and other long-term liabilities
|
|
Postemployment benefits for inactive employees |
|
Estimates of future costs associated with inactive employees
throughout the duration of their employment. |
|
We use our future production estimates combined with workforce
geographic and demographic data to develop projections of time
frames and related expense for postemployment benefits. For
purposes of accounting for postemployment benefits, inactive
employees represent those employees who have been other than
temporarily idled. We consider all idled employees in excess of
approximately 10% of the total workforce at a facility to be
other than temporarily idled. |
|
• Employee decisions
• Customer decisions
• Discussions with unions |
66
| |
|
|
|
|
|
|
|
|
| Balance Sheet |
|
Critical Estimate |
|
Nature of Estimates |
|
Assumptions/Approaches |
|
|
| Caption |
|
Item |
|
Required |
|
Used |
|
Key Factors |
| |
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefits
|
|
Pension and other postretirement benefits |
|
In calculating our obligation and expense, we are required to
select certain actuarial assumptions, as more fully described
above in Liquidity and Capital Resources, U.S. Pension
Plans and Other Postretirement Benefits. These assumptions
include discount rate, expected long-term rate of return on plan
assets and rates of increase in compensation and healthcare
costs. |
|
Our assumptions are determined based on current market
conditions, historical information and consultation with and
input from our actuaries and asset managers. |
|
• Discount rates
• Asset return assumptions
• Actuarial assumptions (such as
retirement age and mortality)
• Health care inflation rates
• Refer to Liquidity and Capital Resources—U.S.
Pension Plans and Other
Postretirement Benefits above
for additional details |
| |
|
Property, plant and equipment, goodwill and other long-term
assets
|
|
Valuation of long- lived assets and investments |
|
We are required to review the recoverability of certain of our
assets based on projections of anticipated future cash flows,
including future profitability assessments of various
manufacturing sites. |
|
We estimate cash flows using internal budgets based on recent
sales data, independent automotive production volume estimates
and customer commitments and consultation with and input from
external valuation experts. |
|
• Future production estimates
• Customer preferences and
decisions
• Product Pricing
• Manufacturing and material cost
estimates |
67
| |
|
|
|
|
|
|
|
|
| Balance Sheet |
|
Critical Estimate |
|
Nature of Estimates |
|
Assumptions/Approaches |
|
|
| Caption |
|
Item |
|
Required |
|
Used |
|
Key Factors |
| |
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
Recoverability of deferred tax assets |
|
We are required to estimate whether recoverability of our
deferred tax assets is more likely than not based on forecasts
of taxable earnings in the related tax jurisdiction. |
|
We use historical and projected future operating results, based
upon approved business plans, including a review of the eligible
carryforward period, tax planning opportunities and other
relevant considerations. |
|
• Tax law changes
• Variances in future projected
profitability, including by
taxing entity |
| |
|
Liabilities subject to compromise
|
|
Amount of prepetition liabilities that are subject to compromise |
|
In accordance with SOP 90-7, we are required to segregate
and disclose all prepetition liabilities that are subject to
compromise. Liabilities subject to compromise should be reported
at the amounts expected to be allowed, even if they may be
settled for lesser amounts. |
|
Unsecured liabilities of the Debtors, other than those
specifically approved for payment by the Court, have been
classified as liabilities subject to compromise. The amounts of
such liabilities as of the Chapter 11 Filings were
estimated based upon September 30, 2005 balances adjusted
in some cases for pro-rated activity from October 1, 2005
to the chapter 11 filing dates. Liabilities subject to
compromise are adjusted for changes in estimates and settlements
of prepetition obligations. |
|
• Court actions
• Further developments with respect
to disputed claims
• Determinations of the secured
status of certain claims
• The values of any collateral
securing such claims |
In addition, there are other items within our financial
statements that require estimation, but are not as critical as
those discussed above. These include the allowance for doubtful
accounts receivable and reserves for excess and obsolete
inventory. Although not significant in recent years, changes in
estimates used in these and other items could have a significant
effect on our consolidated financial statements.
68
Forward-Looking Statements
This Annual Report on
Form 10-K,
including the exhibits being filed as part of this report, as
well as other statements made by Delphi may contain
forward-looking statements within the “safe harbor”
provisions of the Private Securities Litigation Reform Act of
1995, that reflect, when made, the Company’s current views
with respect to current events and financial performance. Such
forward-looking statements are and will be, as the case may be,
subject to many risks, uncertainties and factors relating to the
Company’s operations and business environment which may
cause the actual results of the Company to be materially
different from any future results, express or implied, by such
forward-looking statements. Factors that could cause actual
results to differ materially from these forward-looking
statements include, but are not limited to, the following: the
ability of the Company to continue as a going concern; the
ability of the Company to operate pursuant to the terms of the
debtor-in-possession
facility; the Company’s ability to obtain Court approval
with respect to motions in the chapter 11 cases prosecuted
by it from time to time; the ability of the Company to develop,
prosecute, confirm and consummate one or more plans of
reorganization with respect to the chapter 11 cases; risks
associated with third parties seeking and obtaining Court
approval to terminate or shorten the exclusivity period for the
Company to propose and confirm one or more plans of
reorganization, for the appointment of a chapter 11 trustee
or to convert the cases to chapter 7 cases; the ability of
the Company to obtain and maintain normal terms with vendors and
service providers; the Company’s ability to maintain
contracts that are critical to its operations; the potential
adverse impact of the chapter 11 cases on the
Company’s liquidity or results of operations; the ability
of the Company to fund and execute its business plan (including
the transformation plan described in Item 1. Business
“Potential Divestitures, Consolidations and
Wind-Downs”) and to do so in a timely manner; the ability
of the Company to attract, motivate and/or retain key executives
and associates; the ability of the Company to avoid or continue
to operate during a strike, or partial work stoppage or slow
down by any of its unionized employees and the ability of the
Company to attract and retain customers. Delphi disclaims any
intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future
events and/or otherwise.
Similarly, these and other factors, including the terms of any
reorganization plan ultimately confirmed, can affect the value
of the Company’s various prepetition liabilities, common
stock and/or other equity securities. Additionally, no assurance
can be given as to what values, if any, will be ascribed in the
bankruptcy cases to each of these constituencies. A plan of
reorganization could result in holders of Delphi’s common
stock receiving no distribution on account of their interest and
cancellation of their interests. As described in the
Company’s public statements in response to the request
submitted to the U.S. Trustee for the appointment of a
statutory equity committee, holders of Delphi’s common
stock and other equity interests (such as options) should assume
that they will not receive value as part of a plan of
reorganization. In addition, under certain conditions specified
in the Bankruptcy Code, a plan of reorganization may be
confirmed notwithstanding its rejection by an impaired class of
creditors or equity holders and notwithstanding the fact that
equity holders do not receive or retain property on account of
their equity interests under the plan. In light of the foregoing
and as stated in its October 8, 2005 press release
announcing the filing of its chapter 11 reorganization
cases, the Company considers the value of the common stock to be
highly speculative and cautions equity holders that the stock
may ultimately be determined to have no value. Accordingly, the
Company urges that appropriate caution be exercised with respect
to existing and future investments in Delphi’s common stock
or other equity interests or any claims relating to prepetition
liabilities.
|
|
| ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS |
We are exposed to market risks from changes in currency exchange
rates and certain commodity prices. In order to manage these
risks, we operate a centralized risk management program that
consists of entering into a variety of derivative contracts with
the intent of mitigating our risk to fluctuations in currency
exchange rates and commodity prices.
A discussion of our accounting policies for derivative
instruments is included in Note 1, Significant Accounting
Policies, to our consolidated financial statements and further
disclosure is provided in Note 20,
69
Fair Value of Financial Instruments, Derivatives and Hedging
Activities, to those consolidated financial statements. We
maintain risk management control systems to monitor exchange and
commodity risks and related hedge positions. Positions are
monitored using a variety of analytical techniques including
market value and sensitivity analysis. The following analyses
are based on sensitivity tests, which assume instantaneous,
parallel shifts in currency exchange rates and commodity prices.
For options and instruments with non-linear returns, appropriate
models are utilized to determine the impact of shifts in rates
and prices.
We have currency exposures related to buying, selling and
financing in currencies other than the local currencies in which
we operate. Historically we have reduced our exposure through
financial instruments (hedges) that provide offsets or
limits to our exposures, which are opposite to the underlying
transactions. We also face an inherent business risk of exposure
to commodity prices risks, and have historically offset our
exposure, particularly to changes in the price of various
non-ferrous metals used in our manufacturing operations, through
commodity swaps and option contracts. Post-petition, we continue
to manage our exposures to changes in currency rates and
commodity prices using these derivative instruments. However,
due to the substantial uncertainty perceived by institutions and
dealers who normally act as counterparties to such instruments
as to whether or not Delphi would seek protection under
chapter 11 of the Bankruptcy Code, during a substantial
portion of the third quarter and a portion of the fourth quarter
of 2005 we were not able to enter into hedging instruments. As a
result we anticipate that in 2006 our exposure to changes, both
favorable and unfavorable, in currency rates and the price of
non-ferrous metals and certain other commodities will be
increased.
Currency Exchange Rate Risk
We have currency exposures related to buying, selling and
financing in currencies other than the local currencies in which
we operate. These exposures may impact future earnings and/or
operating cash flows. In some instances, we choose to reduce our
exposures through financial instruments (hedges) that
provide offsets or limits to our exposures, which are opposite
to the underlying transactions. Currently our most significant
currency exposures relate to the Euro, British pound, Polish
zloty, Chinese yuan (renminbi), Brazilian real, Hungarian
forint, and Turkish new lira. As of December 31, 2005 and
2004, the net fair value asset of all financial instruments
(hedges and underlying transactions) with exposure to currency
risk was approximately $87 million and $309 million,
respectively. The potential loss in fair value for such
financial instruments from a hypothetical 10% adverse change in
quoted currency exchange rates would be less than
$1 million at December 31, 2005 and approximately
$48 million at December 31, 2004. The potential gain
in fair value for such financial instruments from a hypothetical
10% favorable change in quoted currency exchange rates would be
less than $1 million at December 31, 2005 and
approximately $65 million at December 31, 2004. The
impact of a 10% change in rates on fair value differs from a 10%
change in the net fair value asset due to the existence of
hedges. The model assumes a parallel shift in currency exchange
rates; however, currency exchange rates rarely move in the same
direction. The assumption that currency exchange rates change in
a parallel fashion may overstate the impact of changing currency
exchange rates on assets and liabilities denominated in
currencies other than the U.S. dollar.
Commodity Price Risk
Commodity swaps and option contracts are executed to offset our
exposure to the potential change in prices mainly for various
non-ferrous metals used in the manufacturing of automotive
components. The net fair value of our contracts was an asset of
approximately $2 million at December 31, 2005 and
approximately $14 million at December 31, 2004. If the
price of the commodities that are being hedged by our commodity
swaps and options contracts changed adversely by 10%, the
December 31, 2005 fair value of our commodity swaps and
options contracts would decrease by $11 million to a
liability of $9 million, and the December 31, 2004
fair value asset would decrease $15 million to a liability
of $1 million. If the price of the commodities that are
being protected by our commodity swaps and options contracts
changed favorably by 10%, the December 31, 2005 fair value
of our commodity swaps and options contracts would increase by
$11 million and the December 31, 2004 fair value would
increase by $15 million. The changes in the net fair value
70
liability differ from 10% of those balances due to the relative
differences between the underlying commodity prices and the
prices in place in our commodity swaps and options contracts.
These amounts exclude the offsetting impact of the price risk
inherent in the physical purchase of the underlying commodities.
Interest Rate Risk
Our exposure to market risk associated with changes in interest
rates relates primarily to our debt obligations. We currently
have approximately $2.5 billion of fixed rate debt, junior
subordinated notes underlying our trust preferred securities and
other debt which are subject to compromise. The interest rate
underlying one of our trusts preferred securities is an
adjustable rate with an initial five-year fixed rate through
November 15, 2008. We also maintain a revolving credit
agreement and term loan which carries an interest rate at the
option of Delphi of either (i) the Administrative
Agent’s Alternate Base Rate (as defined in the Amended DIP
Credit Facility) plus 1.75% or (ii) 2.75% above the
Eurodollar base rate, which is the LIBOR rate. In addition, our
prepetition credit facilities carry an interest rate of 4.00%
above the Alternate Base Rate (as defined in the prepetition
credit agreement) on the prepetition revolving credit and 5.50%
above the Alternate Base Rate on the prepetition term loan based
on 100% acceptance of the adequate protection package.
Accordingly, the interest rate on the Amended DIP Loans and
prepetition facilities will fluctuate based on the movement of
the Alternate Base Rate or LIBOR through the term of the
facilities.
In 2004, we issued commercial paper in the U.S., Europe, and
Asia. However, throughout 2005 we did not have access to the
commercial paper market and do not expect to in the future. Our
outstanding commercial paper balance was $0.3 billion at
December 31, 2004 and we did not have outstanding
commercial paper at December 31, 2005. The maturities on
the commercial paper had been short-term with the majority
maturing within one month. Additionally, in 2004 we factored
accounts receivable in the U.S., Europe, and Asia. As of
December 31, 2005 and currently, we factor accounts
receivable in Europe and Asia. Factoring program fees are based
on an interest rate component.
The table below indicates interest rate sensitivity to floating
rate debt based on amounts outstanding as of December 31,
2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Prepetition | |
|
Prepetition | |
|
|
|
|
| Change in Rate |
|
Term Loan | |
|
Revolver | |
|
DIP Term Loan | |
|
Other(1) | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
25 bps decrease in rate
|
|
$ |
(2.5 |
) |
|
$ |
(3.8 |
) |
|
$ |
(0.6 |
) |
|
$ |
(1.5 |
) |
|
25 bps increase in rate
|
|
$ |
2.5 |
|
|
$ |
3.8 |
|
|
$ |
0.6 |
|
|
$ |
1.5 |
|
|
|
| (1) |
Includes European Securitization Program, Accounts Receivable
Factoring and other overseas bank debt. |
71
|
|
| ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for Delphi
Corporation (“Delphi” or the “Company”). The
Company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles in the United States of America
(“U.S. GAAP”).
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2005, based on the framework described in
“Internal Control—Integrated Framework,”
issued by the Commission of Sponsoring Organizations of the
Treadway Commission.
A material weakness is a control deficiency, or combination of
control deficiencies, that result in more than a remote
likelihood that a material misstatement of annual or interim
financial statements will not be prevented or detected. Due to
the existence of material weaknesses, Management’s
assessment concluded that the Company did not maintain effective
internal control over financial reporting as of
December 31, 2005. The following material weaknesses were
in existence as of December 31, 2005:
|
|
|
| |
• |
We did not maintain a control environment that fully emphasized
the establishment of or adherence to appropriate internal
control for certain aspects of the Company’s operations.
Principal contributing factors included (i) an insufficient
number of or inappropriate depth of experience in the
application of U.S. GAAP for its accounting and finance
personnel, (ii) the inadequate establishment and
maintenance of an effective anti-fraud program,
(iii) inadequate documentation of authorization to make
changes to payroll data and (iv) inadequate controls over
records of employee and retiree demographic information used in
determining retirement benefits liabilities. |
| |
| |
• |
We did not perform a formalized, company-wide risk assessment to
evaluate the implications of relevant risks on financial
reporting. |
| |
| |
• |
We failed to design and implement controls over the contract
administration process to provide reasonable assurance that
significant contracts are adequately analyzed to determine the
accounting implications, or to capture, analyze, and record the
accounting impact of amendments to existing contracts. |
| |
| |
• |
Our controls over account reconciliations did not operate
effectively. Specifically, controls over the preparation, review
and monitoring of account reconciliations of balance sheet
accounts to ensure that account balances were accurate and
supported with appropriate underlying calculations and
documentation in a timely manner. |
| |
| |
• |
Our controls over journal entries did not operate effectively.
Specifically, controls surrounding the preparation, independent
review, and authorization of journal entries to ensure that
entries were accurate and supported by appropriate underlying
documentation. |
| |
| |
• |
Our controls over inventory accounting did not operate
effectively. Specifically, controls to determine that
(i) consignment inventories (including buy/sell
relationships) and pay-on consumption inventories were
reconciled on a timely basis; (ii) adjustments to inventory
costs or quantities related to annual physical inventories,
cycle counts, and negative inventory are made in the appropriate
period; (iii) the receipt of raw materials, finished goods
returned by customers and finished goods received from
production are recorded in the appropriate period; and
(iv) the calculation of excess and obsolete inventory
reserves are performed accurately and adjustments recorded on a
timely basis. |
| |
| |
• |
Our controls over fixed asset accounting did not operate
effectively. Specifically, controls over (i) the proper
classification and approval of capitalized maintenance;
(ii) the proper and timely transfer of
construction-work-in-progress
tooling to the fixed assets ledger; (iii) the proper
amortization of tooling assets pursuant to corporate guidelines;
and (iv) the proper approval and timely recording of
disposals and transfers related to fixed assets and special
tools. |
72
|
|
|
| |
• |
Our controls over income tax accounting and disclosure did not
operate effectively. Specifically, controls over the preparation
and review of supporting calculations, analyses and disclosures
related to Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes” that
provide reasonable assurance that the account balances and
disclosures were accurate and supported by appropriate
underlying documentation. |
| |
| |
• |
Our controls over temporary cash disbursements process
accounting did not operate effectively. Specifically, controls
over a temporary cash disbursements process implemented
following the Company’s chapter 11 filing related to
(i) unintended over-payments, and (ii) the timely
accounting of those payments. |
Because of the existence of these material weaknesses as of
December 31, 2005, management has concluded that the
Company did not maintain effective internal control over
financial reporting as of December 31, 2005, based on the
criteria in the “Internal Control—Integrated
Framework”.
Management’s assessment of the effectiveness of Delphi
Corporation’s internal control over financial reporting as
of December 31, 2005, has been audited by
Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report (which expressed an
unqualified opinion on management’s assessment and an
adverse opinion on the effectiveness of Delphi
Corporation’s internal control over financial reporting as
of December 31, 2005). Additionally, Deloitte &
Touche LLP expressed an unqualified opinion on the
Company’s 2005 consolidated financial statements; however,
that report includes emphasis paragraphs with respect to the
restatement of the Company’s 2004 financial statements, the
Company’s filing for reorganization under chapter 11
of the United States Bankruptcy Code, and the substantial
doubt about the Company’s ability to continue as a going
concern. This report appears under Item 8. Financial
Statements and Supplementary Data Report of Independent
Registered Public Accounting Firm.
73
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Delphi Corporation:
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting in Item 8, that Delphi Corporation and
subsidiaries (the “Company”) did not maintain
effective internal control over financial reporting as of
December 31, 2005, because of the effect of the material
weaknesses identified in management’s assessment based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
A material weakness is a significant deficiency, or combination
of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weaknesses have been identified and included
in management’s assessment resulting from deficiency in the
design or operation of the respective controls:
|
|
|
| |
• |
The Company did not maintain a control environment that fully
emphasized the establishment of effective internal control over
financial reporting. This was evidenced by: (i) an
insufficient number of personnel or personnel with an
inappropriate depth of experience in the application of
generally accepted accounting principles in the United States of
America (“U.S. GAAP”) in the Company’s
accounting and finance functions, (ii) the lack of a
specific anti-fraud program, (iii) insufficient documentation of
the authorizations required to make changes to payroll data and
(iv) inadequate records of employee and retiree demographic
information used in determining retirement benefits liabilities.
This weakness has a pervasive effect on internal control over
financial reporting and results |
74
|
|
|
| |
|
in a more than remote likelihood that material errors could
occur and not be detected. This weakness also contributed to the
other material weaknesses described below. |
| |
| |
• |
The Company did not perform an adequate entity-wide risk
assessment to evaluate the implications of relevant risks on its
internal control over financial reporting. Due to the
significance of performing a comprehensive entity-wide risk
assessment on the Company’s ability to design effective
internal control over financial reporting, this represents a
design deficiency and constitutes a material weakness. |
| |
| |
• |
The Company failed to design and implement controls over the
contract administration process to provide reasonable assurance
that each significant contract is adequately analyzed to
determine the accounting implications, or to capture, analyze,
and record the impact of amendments to existing contracts. Due
to the (i) the significance of the contract administration
process, (ii) the potential pervasive effect on the
financial statement account balances, and (iii) the absence
of other mitigating controls; there is a more than remote
likelihood that a material misstatement of the interim and
annual financial statements would not have been prevented or
detected. |
| |
| |
• |
The Company’s controls over account reconciliations did not
operate effectively. Specifically, controls over the preparation
and review of account reconciliations of balance sheet accounts
that provide reasonable assurance that the account balances were
accurate and supported with appropriate underlying calculations
and documentation in a timely manner, did not operate
effectively. In the aggregate these deficiencies result in a
more than remote likelihood that a material misstatement of the
interim or annual financial statements would not be prevented or
detected. |
| |
| |
• |
The Company’s controls over journal entries did not operate
effectively. Specifically, controls over the preparation,
independent review, and authorization of journal entries that
provide reasonable assurance that the entries were accurate and
supported by appropriate underlying documentation, did not
operate effectively. In the aggregate these deficiencies result
in a more than remote likelihood that a material misstatement of
the interim or annual financial statements would not be
prevented or detected. |
| |
| |
• |
The Company’s controls over inventory accounting did not
operate effectively. Specifically, controls to determine that
(i) consignment inventories (including buy/sell
relationships) and pay-on consumption inventories were
reconciled on a timely basis; (ii) adjustments to inventory
costs or quantities related to annual physical inventories,
cycle counts, and negative inventory are made in the appropriate
period; (iii) the receipt of raw materials, finished goods
returned by customers and finished goods received from
production are recorded in the appropriate period; and
(iv) the calculation of excess and obsolete inventory
reserves are performed accurately and adjustments recorded on a
timely basis, did not operate effectively. In the aggregate
these deficiencies result in a more than remote likelihood that
a material misstatement of the interim or annual financial
statements would not be prevented or detected. |
| |
| |
• |
The Company’s controls over fixed asset accounting did not
operate effectively. Specifically, controls over (i) the
proper classification and approval of capitalized maintenance
costs; (ii) the proper and timely transfer of
construction-work-in-progress tooling to the fixed assets
ledger; (iii) the proper amortization of tooling assets
pursuant to corporate guidelines; and (iv) the proper
approval and timely recording of disposals and transfers related
to fixed assets and special tools, did not operate effectively.
In the aggregate these deficiencies result in a more than remote
likelihood that a material misstatement of the interim or annual
financial statements would not be prevented or detected. |
| |
| |
• |
The Company’s controls over income tax accounting and
disclosure did not operate effectively. Specifically, controls
over the preparation and review of supporting calculations,
analyses and disclosures related to Statement of Financial
Accounting Standards No. 109 “Accounting for Income
Taxes” that provide reasonable assurance that the account
balances and disclosures were accurate and supported by
appropriate underlying documentation, did not operate
effectively. In the |
75
|
|
|
| |
|
aggregate these deficiencies result in a more than remote
likelihood that a material misstatement of the interim or annual
financial statements would not be prevented or detected. |
| |
| |
• |
The Company’s controls over a cash disbursements process
accounting did not operate effectively. Specifically, controls
over a cash disbursements process implemented following the
Company’s chapter 11 filing related to
(i) unintended over-payments, and (ii) the timely
accounting of those payments, did not operate effectively. In
the aggregate these deficiencies result in a more than remote
likelihood that a material misstatement of the interim or annual
financial statements would not be prevented or detected. |
The material weaknesses described above resulted in material
audit adjustments that were necessary in order to present the
2005 financial statements in accordance with generally accepted
accounting principles. These audit adjustments had a pervasive
effect on the consolidated financial statements and the related
footnote disclosures. These material weaknesses result in a more
than remote likelihood that a material misstatement of the
interim or annual financial statements would not be prevented or
detected.
These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit
of the consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2005, of
the Company and this report does not affect our report on such
financial statements and financial statement schedule.
In our opinion, management’s assessment that the Company
did not maintain effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the criteria established in
Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, because of the effect of
the material weaknesses described above on the achievement of
the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting
as of December 31, 2005, based on the criteria established
in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended December 31, 2005, of
the Company and our report dated July 11, 2006 expressed an
unqualified opinion on those financial statements and financial
statement schedule and includes explanatory paragraphs regarding
(1) the effects on the financial statements of the
bankruptcy proceedings and (2) the uncertainty related to
the Company’s ability to continue as a going concern.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Detroit, Michigan
July 11, 2006
76
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Delphi Corporation:
We have audited the accompanying consolidated balance sheets of
Delphi Corporation (Debtor-in-Possession) and subsidiaries (the
“Company” as of December 31, 2005 and 2004, and
the related consolidated statements of operations,
stockholders’ equity (deficit), and cash flows for each of
the three years in the period ended December 31, 2005. Our
audits also included the financial statement schedule listed in
the Index at Item 15(a)2. These financial statements and
financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2005 and 2004, and the results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2005, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed in Note 2 to the financial statements, certain
accompanying consolidated financial statements have been
restated.
As discussed in Notes 3 and 12, the Company has filed for
reorganization under chapter 11 of the United States
Bankruptcy Code. The accompanying financial statements do not
purport to reflect or provide for the consequences of the
bankruptcy proceedings. In particular, such financial statements
do not purport to show (a) as to assets, their realizable
value on a liquidation basis or their availability to satisfy
liabilities; (b) as to prepetition liabilities, the amounts
that may be allowed for claims or contingencies, or the status
and priority thereof; (c) as to stockholder accounts, the
effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any
changes that may be made in its business.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 3 to the financial statements, the
Company’s ability to comply with the terms and conditions
of the debtor-in-possession financing agreement; to obtain
confirmation of a plan of reorganization under chapter 11
of the United States Bankruptcy Code; to reduce wage and benefit
costs and liabilities through the bankruptcy process; to return
to profitability; to generate sufficient cash flow from
operations and; to obtain financing sources to meet the
Company’s future obligations raise substantial doubt about
its ability to continue as a going concern. Management’s
plans concerning these matters are also described in
Note 3. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2005, based on the
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
July 11, 2006 expressed an unqualified opinion on
management’s assessment of the effectiveness of the
Company’s internal control over financial reporting and an
adverse opinion on the effectiveness of the Company’s
internal control over financial reporting because of the effect
of material weaknesses.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Detroit, Michigan
July 11, 2006
77
DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(As Restated | |
| |
|
See Note 2) | |
| |
|
(in millions, except per share amounts) | |
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
General Motors and affiliates
|
|
$ |
12,860 |
|
|
$ |
15,417 |
|
|
$ |
17,029 |
|
| |
Other customers
|
|
|
14,087 |
|
|
|
13,205 |
|
|
|
11,048 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total net sales
|
|
|
26,947 |
|
|
|
28,622 |
|
|
|
28,077 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of sales, excluding items listed below
|
|
|
25,701 |
|
|
|
25,989 |
|
|
|
25,272 |
|
| |
Selling, general and administrative
|
|
|
1,644 |
|
|
|
1,599 |
|
|
|
1,596 |
|
| |
Depreciation, amortization, and asset impairment charges
(Note 9)
|
|
|
1,383 |
|
|
|
1,470 |
|
|
|
1,120 |
|
| |
Goodwill impairment charges (Note 10)
|
|
|
390 |
|
|
|
46 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
29,118 |
|
|
|
29,104 |
|
|
|
27,988 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(2,171 |
) |
|
|
(482 |
) |
|
|
89 |
|
| |
Interest expense (Contractual interest expense for 2005 was
$356 million) (Note 13)
|
|
|
(318 |
) |
|
|
(232 |
) |
|
|
(211 |
) |
| |
Other income (expense), net (Note 17)
|
|
|
50 |
|
|
|
(8 |
) |
|
|
6 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss before reorganization items, income taxes, minority
interest, equity income and cumulative effect of accounting
change
|
|
|
(2,439 |
) |
|
|
(722 |
) |
|
|
(116 |
) |
| |
Reorganization items
|
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes, minority interest, equity income and
cumulative effect of accounting change
|
|
|
(2,442 |
) |
|
|
(722 |
) |
|
|
(116 |
) |
| |
Income tax (expense) benefit
|
|
|
55 |
|
|
|
(4,143 |
) |
|
|
69 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss before minority interest, equity income and cumulative
effect
of accounting change
|
|
|
(2,387 |
) |
|
|
(4,865 |
) |
|
|
(47 |
) |
| |
Minority interest, net of tax
|
|
|
(24 |
) |
|
|
(39 |
) |
|
|
(45 |
) |
| |
Equity income
|
|
|
71 |
|
|
|
86 |
|
|
|
82 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
|
(2,340 |
) |
|
|
(4,818 |
) |
|
|
(10 |
) |
|
Cumulative effect of accounting change, net of tax (Note 1)
|
|
|
(17 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(2,357 |
) |
|
$ |
(4,818 |
) |
|
$ |
(10 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Before cumulative effect of accounting change
|
|
$ |
(4.18 |
) |
|
$ |
(8.59 |
) |
|
$ |
(0.02 |
) |
| |
Cumulative effect of accounting change
|
|
|
(0.03 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic and diluted loss per share
|
|
$ |
(4.21 |
) |
|
$ |
(8.59 |
) |
|
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Dividends declared per share
|
|
$ |
0.045 |
|
|
$ |
0.280 |
|
|
$ |
0.280 |
|
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
78
DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
|
|
(As Restated | |
| |
|
|
|
See Note 2) | |
| |
|
(in millions) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
2,221 |
|
|
$ |
950 |
|
| |
Restricted cash
|
|
|
36 |
|
|
|
14 |
|
| |
Accounts receivable, net:
|
|
|
|
|
|
|
|
|
| |
|
General Motors and affiliates
|
|
|
1,920 |
|
|
|
2,182 |
|
| |
|
Other
|
|
|
2,975 |
|
|
|
1,484 |
|
| |
Retained interest in receivables, net
|
|
|
— |
|
|
|
726 |
|
| |
Inventories, net:
|
|
|
|
|
|
|
|
|
| |
|
Productive material, work-in-process and supplies
|
|
|
1,350 |
|
|
|
1,413 |
|
| |
|
Finished goods
|
|
|
524 |
|
|
|
545 |
|
| |
Deferred income taxes (Note 8)
|
|
|
51 |
|
|
|
48 |
|
| |
Prepaid expenses and other
|
|
|
477 |
|
|
|
354 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
9,554 |
|
|
|
7,716 |
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
| |
Property, net (Note 9)
|
|
|
5,108 |
|
|
|
5,946 |
|
| |
Deferred income taxes (Note 8)
|
|
|
59 |
|
|
|
72 |
|
| |
Goodwill (Note 10)
|
|
|
363 |
|
|
|
798 |
|
| |
Other intangible assets, net
|
|
|
54 |
|
|
|
80 |
|
| |
Pension intangible assets (Note 15)
|
|
|
891 |
|
|
|
1,044 |
|
| |
Other
|
|
|
994 |
|
|
|
903 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
17,023 |
|
|
$ |
16,559 |
|
| |
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Notes payable, current portion of long-term debt, and debt in
default (Note 13)
|
|
$ |
3,117 |
|
|
$ |
507 |
|
| |
Accounts payable
|
|
|
2,494 |
|
|
|
3,504 |
|
| |
Accrued liabilities (Note 11)
|
|
|
1,192 |
|
|
|
2,691 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
6,803 |
|
|
|
6,702 |
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
| |
Long-term debt (Note 13)
|
|
|
273 |
|
|
|
2,061 |
|
| |
Junior subordinated notes due to Delphi Trust I and II
(Note 14)
|
|
|
— |
|
|
|
412 |
|
| |
Pension benefits (Note 15)
|
|
|
310 |
|
|
|
3,561 |
|
| |
Postretirement benefits other than pensions (Note 15)
|
|
|
— |
|
|
|
6,297 |
|
| |
Other
|
|
|
651 |
|
|
|
953 |
|
| |
|
|
|
|
|
|
| |
|
Total long-term liabilities
|
|
|
1,234 |
|
|
|
13,284 |
|
| |
|
|
|
|
|
|
|
Liabilities subject to compromise (Note 12)
|
|
|
15,074 |
|
|
|
— |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
23,111 |
|
|
|
19,986 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
157 |
|
|
|
198 |
|
| |
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
| |
Common stock, $0.01 par value, 1,350 million shares
authorized, 565 million shares issued in 2005 and 2004
|
|
|
6 |
|
|
|
6 |
|
| |
Additional paid-in capital
|
|
|
2,744 |
|
|
|
2,730 |
|
| |
Accumulated deficit
|
|
|
(6,429 |
) |
|
|
(4,047 |
) |
| |
Minimum pension liability
|
|
|
(2,395 |
) |
|
|
(2,507 |
) |
| |
Accumulated other comprehensive (loss) income, excluding minimum
pension liability
|
|
|
(119 |
) |
|
|
254 |
|
| |
Treasury stock, at cost (3.2 million and 3.8 million
shares in 2005 and 2004, respectively)
|
|
|
(52 |
) |
|
|
(61 |
) |
| |
|
|
|
|
|
|
| |
|
Total stockholders’ deficit
|
|
|
(6,245 |
) |
|
|
(3,625 |
) |
| |
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$ |
17,023 |
|
|
$ |
16,559 |
|
| |
|
|
|
|
|
|
See notes to consolidated financial statements.
79
DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(As Restated See Note 2) | |
| |
|
(in millions) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss
|
|
$ |
(2,357 |
) |
|
$ |
(4,818 |
) |
|
$ |
(10 |
) |
| |
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation, amortization, and asset impairment charges
|
|
|
1,383 |
|
|
|
1,470 |
|
|
|
1,120 |
|
| |
|
Goodwill impairment charges
|
|
|
390 |
|
|
|
46 |
|
|
|
— |
|
| |
|
Deferred income taxes
|
|
|
(142 |
) |
|
|
4,315 |
|
|
|
(171 |
) |
| |
|
Employee and product line charges
|
|
|
— |
|
|
|
192 |
|
|
|
396 |
|
| |
|
Pension and other postretirement benefit expenses
|
|
|
1,543 |
|
|
|
1,408 |
|
|
|
1,226 |
|
| |
|
Equity income
|
|
|
(71 |
) |
|
|
(86 |
) |
|
|
(82 |
) |
| |
|
Reorganization items
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
| |
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Accounts receivable and retained interests in receivables, net
|
|
|
127 |
|
|
|
83 |
|
|
|
(452 |
) |
| |
|
Inventories, net
|
|
|
25 |
|
|
|
(142 |
) |
|
|
87 |
|
| |
|
Prepaid expenses and other
|
|
|
232 |
|
|
|
(158 |
) |
|
|
(197 |
) |
| |
|
Accounts payable
|
|
|
(163 |
) |
|
|
367 |
|
|
|
165 |
|
| |
|
Employee and product line obligations
|
|
|
(64 |
) |
|
|
(296 |
) |
|
|
(156 |
) |
| |
|
Accrued and other long-term liabilities
|
|
|
169 |
|
|
|
(148 |
) |
|
|
5 |
|
| |
|
Pension contributions and benefit payments
|
|
|
(691 |
) |
|
|
(672 |
) |
|
|
(1,033 |
) |
| |
|
Other postretirement benefit payments
|
|
|
(186 |
) |
|
|
(173 |
) |
|
|
(120 |
) |
| |
|
Receipts (payments) for reorganization items, net
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
| |
|
Other
|
|
|
(50 |
) |
|
|
137 |
|
|
|
92 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
154 |
|
|
|
1,525 |
|
|
|
870 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Capital expenditures
|
|
|
(1,183 |
) |
|
|
(967 |
) |
|
|
(1,088 |
) |
| |
Proceeds from sale of property
|
|
|
71 |
|
|
|
53 |
|
|
|
42 |
|
| |
Cost of acquisitions, net of cash acquired
|
|
|
— |
|
|
|
(61 |
) |
|
|
(39 |
) |
| |
Proceeds from divestitures of product lines and joint ventures,
net of cash given
|
|
|
245 |
|
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
73 |
|
|
|
157 |
|
|
|
25 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(794 |
) |
|
|
(818 |
) |
|
|
(1,060 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Repayment of debt securities
|
|
|
— |
|
|
|
(500 |
) |
|
|
— |
|
| |
Proceeds from term loan facility, net
|
|
|
983 |
|
|
|
— |
|
|
|
— |
|
| |
Repayments of borrowings under term loan facility
|
|
|
(12 |
) |
|
|
— |
|
|
|
— |
|
| |
Proceeds from revolving credit facility, net
|
|
|
1,484 |
|
|
|
— |
|
|
|
— |
|
| |
Proceeds from debtor-in-possession facility, net
|
|
|
218 |
|
|
|
— |
|
|
|
— |
|
| |
Proceeds advanced under cash overdraft
|
|
|
29 |
|
|
|
— |
|
|
|
— |
|
| |
Net proceeds from issuance of debt securities
|
|
|
— |
|
|
|
— |
|
|
|
492 |
|
| |
Net proceeds from junior subordinated notes due to Delphi
Trust I and II
|
|
|
— |
|
|
|
— |
|
|
|
402 |
|
| |
Net repayments of borrowings under other debt
|
|
|
(630 |
) |
|
|
(7 |
) |
|
|
(707 |
) |
| |
Dividend payments
|
|
|
(64 |
) |
|
|
(157 |
) |
|
|
(157 |
) |
| |
Issuance of treasury stock
|
|
|
— |
|
|
|
2 |
|
|
|
1 |
|
| |
Other
|
|
|
(56 |
) |
|
|
(23 |
) |
|
|
(27 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Net cash provided by (used in) financing activities
|
|
|
1,952 |
|
|
|
(685 |
) |
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate fluctuations on cash and cash equivalents
|
|
|
(41 |
) |
|
|
49 |
|
|
|
51 |
|
| |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
1,271 |
|
|
|
71 |
|
|
|
(135 |
) |
| |
Cash and cash equivalents at beginning of year
|
|
|
950 |
|
|
|
879 |
|
|
|
1,014 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents at end of year
|
|
$ |
2,221 |
|
|
$ |
950 |
|
|
$ |
879 |
|
| |
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
80
DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(DEFICIT)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Accumulated Other | |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Comprehensive Loss | |
|
|
|
|
| |
|
|
|
|
|
Retained | |
|
| |
|
|
|
|
| |
|
Common Stock | |
|
Additional | |
|
Earnings | |
|
Minimum | |
|
|
|
|
|
Total | |
| |
|
| |
|
Paid-In | |
|
(Accumulated | |
|
Pension | |
|
|
|
Treasury | |
|
Stockholders’ | |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Deficit) | |
|
Liability | |
|
Other | |
|
Stock | |
|
Equity (Deficit) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Balance at December 31, 2002 (As previously reported)
|
|
|
565 |
|
|
$ |
6 |
|
|
$ |
2,636 |
|
|
$ |
1,164 |
|
|
$ |
(1,975 |
) |
|
$ |
(488 |
) |
|
$ |
(111 |
) |
|
$ |
1,232 |
|
| |
Restatement adjustments (See Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
69 |
|
|
|
(69 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002 (As restated, see
Note 2)
|
|
|
565 |
|
|
$ |
6 |
|
|
$ |
2,705 |
|
|
$ |
1,095 |
|
|
$ |
(1,975 |
) |
|
$ |
(488 |
) |
|
$ |
(111 |
) |
|
$ |
1,232 |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10 |
) |
| |
Currency translation adjustments and other, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
307 |
|
|
|
— |
|
|
|
307 |
|
| |
Net change in unrecognized gain on derivative instruments, net
of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
45 |
|
|
|
— |
|
|
|
45 |
|
| |
Minimum pension liability adjustment, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311 |
|
| |
Shares issued for employee benefit plans, net
|
|
|
— |
|
|
|
— |
|
|
|
24 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
36 |
|
|
|
60 |
|
| |
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(157 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(157 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 (As restated, see
Note 2)
|
|
|
565 |
|
|
|
6 |
|
|
|
2,729 |
|
|
|
928 |
|
|
|
(2,006 |
) |
|
|
(136 |
) |
|
|
(75 |
) |
|
|
1,446 |
|
| |
Net loss (As restated, see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,818 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,818 |
) |
| |
Currency translation adjustments and other, net of tax (As
restated, see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
339 |
|
|
|
— |
|
|
|
339 |
|
| |
Net change in unrecognized gain on derivative instruments, net
of tax (As restated, see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
51 |
|
|
|
— |
|
|
|
51 |
|
| |
Minimum pension liability adjustment, net of tax (As restated,
see Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(501 |
) |
|
|
— |
|
|
|
— |
|
|
|
(501 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,929 |
) |
| |
Shares issued for employee benefit plans, net
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
15 |
|
| |
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(157 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(157 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 (As restated, see
Note 2)
|
|
|
565 |
|
|
|
6 |
|
|
|
2,730 |
|
|
|
(4,047 |
) |
|
|
(2,507 |
) |
|
|
254 |
|
|
|
(61 |
) |
|
|
(3,625 |
) |
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,357 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,357 |
) |
| |
Currency translation adjustments and other, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(299 |
) |
|
|
— |
|
|
|
(299 |
) |
| |
Net change in unrecognized gain on derivative instruments, net
of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(74 |
) |
|
|
— |
|
|
|
(74 |
) |
| |
Minimum pension liability adjustment, net of tax
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
112 |
|
|
|
— |
|
|
|
— |
|
|
|
112 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,618 |
) |
| |
Shares issued for employee benefit plans, net
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
23 |
|
| |
Dividends
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(25 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
565 |
|
|
$ |
6 |
|
|
$ |
2,744 |
|
|
$ |
(6,429 |
) |
|
$ |
(2,395 |
)(a) |
|
$ |
(119 |
)(b) |
|
$ |
(52 |
) |
|
$ |
(6,245 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Accumulated Other Comprehensive Loss—Minimum Pension
Liability is net of a $1.1 billion tax effect. |
|
|
| (b) |
Accumulated Other Comprehensive Loss—Other includes a loss
of $131 million within currency translation adjustments and
other offset by a gain of $12 million within net change in
unrecognized gain on derivative instruments. |
See notes to consolidated financial statements.
81
DELPHI CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
| 1. |
SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations — Delphi
Corporation (“Delphi” or the “Company”) is a
supplier of vehicle electronics, transportation components,
integrated systems and modules, and other electronic technology.
Delphi’s most significant customer is General Motors
Corporation (“GM”) and North America and Europe are
its most significant markets, but Delphi is continuing to
diversify its customer base and geographic markets.
Consolidation — The consolidated
financial statements include the accounts of Delphi and domestic
and foreign subsidiaries in which Delphi holds a controlling
financial or management controlling interest and variable
interest entities of which Delphi has determined that it is the
primary beneficiary. Delphi’s share of the earnings or
losses of non-controlled affiliates, over which Delphi exercises
significant influence (generally a 20% to 50% ownership
interest), is included in the consolidated operating results
using the equity method of accounting. All significant
intercompany transactions and balances between consolidated
Delphi businesses have been eliminated.
Bankruptcy Filing — On October 8,
2005, Delphi and certain of its United States (“U.S.”)
subsidiaries (the “Initial Filers”) filed voluntary
petitions for reorganization relief under chapter 11 of the
United States Bankruptcy Code (the “Bankruptcy Code”),
in the United States Bankruptcy Court for the Southern District
of New York (the “Court”), and on October 14,
2005, three additional U.S. subsidiaries of Delphi
(together with the Initial Filers, collectively, the
“Debtors”) filed voluntary petitions for
reorganization relief under chapter 11 of the Bankruptcy
Code (collectively the Debtors’ October 8, 2005 and
October 14, 2005 filings are referred to herein as the
“Chapter 11 Filings”). The Debtors will continue
to operate their businesses as
“debtors-in-possession”
under the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the
Court. Delphi’s
non-U.S. subsidiaries
were not included in the filings and will continue their
business operations without supervision from the
U.S. Courts and will not be subject to the requirements of
the Bankruptcy Code. (Refer to Note 3, Chapter 11
Bankruptcy and Going Concern)
American Institute of Certified Public Accountants Statement of
Position 90-7,
“Financial Reporting by Entities in Reorganization under
the Bankruptcy Code”
(“SOP 90-7”),
which is applicable to companies in chapter 11, generally
does not change the manner in which financial statements are
prepared. However, it does require that the financial statements
for periods subsequent to the filing of the chapter 11
petition distinguish transactions and events that are directly
associated with the reorganization from the ongoing operations
of the business. Revenues, expenses, realized gains and losses,
and provisions for losses that can be directly associated with
the reorganization and restructuring of the business must be
reported separately as reorganization items in the statements of
operations beginning in the quarter ended December 31,
2005. The balance sheet must distinguish prepetition liabilities
subject to compromise from both those prepetition liabilities
that are not subject to compromise and from post-petition
liabilities. Liabilities that may be affected by a plan of
reorganization must be reported at the amounts expected to be
allowed, even if they may be settled for lesser amounts. In
addition, reorganization items must be disclosed separately in
the statement of cash flows. Delphi adopted
SOP 90-7 effective
on October 8, 2005 and has segregated those items as
outlined above for all reporting periods subsequent to such date.
Use of Estimates — The preparation of
consolidated financial statements in conformity with generally
accepted accounting principles in the United States of America
(“U.S. GAAP”) requires Delphi management to make
estimates and assumptions that affect amounts reported therein.
Due to the inherent uncertainty involved in making estimates,
actual results reported in future periods may be based upon
amounts that differ from those estimates.
82
Revenue Recognition — Delphi’s
revenue recognition policy is in accordance with U.S. GAAP,
which requires the recognition of sales when there is evidence
of a sales agreement, the delivery of goods has occurred, the
sales price is fixed or determinable and the collectibility of
revenue is reasonably assured. Delphi generally records sales
upon shipment of product to customers and transfer of title
under standard commercial terms. From time to time, Delphi may
enter into pricing agreements with its customers that provide
for price reductions that are conditional upon achieving certain
joint cost saving targets. In December 2004, Delphi entered into
such an agreement with GM whereby Delphi committed to 2005
annual price reductions on GM’s annual purchase value with
Delphi. In return for this commitment, GM agreed, among other
things, to accelerate its cooperation with certain sourcing and
cost reduction initiatives of mutual benefit to the two
companies and to source certain business to Delphi. In the
fourth quarter of 2005, GM reimbursed Delphi for
$35 million of the price reductions, which occurred earlier
in 2005 for which GM did not meet its corresponding commitment
to Delphi. This payment was received prior to December 31,
2005 and was recognized as revenue upon receipt.
Sales incentives and allowances are recognized as a reduction to
revenue at the time of the related sale. In addition, from time
to time Delphi makes payments to customers in conjunction with
ongoing and future business. Delphi recognizes these payments to
customers as a reduction to revenue at the time Delphi commits
to make these payments.
Shipping and handling fees billed to customers are included in
net sales, while costs of shipping and handling are included in
cost of sales.
Research and Development — Delphi incurs
costs in connection with research and development programs that
are expected to contribute to future earnings. Such costs are
charged against income as incurred. Research and development
expenses (including engineering) were $2.2 billion,
$2.1 billion, and $2.0 billion for the years ended
December 31, 2005, 2004, and 2003, respectively.
Cash and Cash Equivalents — Cash and
cash equivalents are defined as short-term, highly liquid
investments with original maturities of 90 days or less.
Restricted Cash — Delphi has restricted
cash balances that represent balances on deposit at financial
institutions that have issued letters of credit in favor of
Delphi.
Marketable Securities — Delphi generally
holds marketable securities with maturities of 90 days or
less, which are classified as cash and cash equivalents for
financial statement purposes. Delphi also has securities that
are held for a period longer than 90 days. Debt securities
are classified as
held-to-maturity, and
accordingly are recorded at cost in Delphi’s consolidated
financial statements. Equity securities are classified as
available-for-sale and are recorded in the consolidated
financial statements at market value with changes in market
value included in other comprehensive income. At
December 31, 2005 and 2004, Delphi had available-for-sale
securities with a cost basis of $5 million and
$22 million, respectively, and a carrying value of
$10 million and $38 million, respectively. In the
event that the Company’s debt or equity securities
experience an other than temporary impairment in value, such
impairment is recognized as a loss in the Statement of
Operations.
In November 2005, the Financial Accounting Standards Board
(“FASB”) issued FASB Staff Position (“FSP”)
Nos. 115-1 and
124-1, “The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments,” which addresses the determination
of when an investment is considered impaired, whether that
impairment is other than temporary, and the measurement of an
impairment loss. The guidance in the FSP amends Statement of
Financial Accounting Standards (“SFAS”) No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities,” SFAS No. 124, “Accounting for
Certain Investments Held by Not-for-Profit Organizations,”
and APB Opinion No. 18, “The Equity Method of
Accounting for Investments in Common Stock,” and is
effective for reporting periods beginning after
December 15, 2005. Delphi does not expect the adoption to
have a material effect on its financial statements.
Accounts Receivable — In addition to the
asset securitization programs discussed in Note 7, Asset
Securitizations, from time to time Delphi enters into agreements
to sell its accounts receivable. As of
83
December 31, 2005, since the agreements allow Delphi to
maintain effective control over the receivable, these various
accounts receivable factoring facilities were accounted for as
short-term debt. In previous years, these transactions were
accounted for as a reduction in accounts receivable as the
agreements transferred effective control over the receivables to
the buyers. The allowance for doubtful accounts, which is
established based upon analysis of trade receivables and their
contractual due date, was $129 million and $91 million
as of December 31, 2005 and 2004, respectively.
Retained Interest In Receivables — Under
Delphi’s U.S. revolving accounts receivable
securitization program, the Company sold a portion of its U.S.
and Canadian trade receivables to Delphi Receivables LLC
(“DR”), a wholly-owned consolidated special purpose
entity. DR would then sell, on a non-recourse basis (subject to
certain limited exceptions), an undivided interest in the
receivables to asset-backed, multi-seller commercial paper
conduits (the “Conduits”). When DR sold an undivided
interest to the Conduits, DR retained the remaining undivided
interest. The value of the retained interest, which could
include eligible undivided interests that Delphi elected not to
sell, is shown separately on the Company’s consolidated
balance sheet and therefore is not included in accounts
receivable. The allowance for doubtful accounts applicable to
the retained interest is allocated to DR from Delphi’s
allowance reserve based on the percentage of receivables sold to
DR. Delphi assessed the recoverability of the retained interest
on a quarterly basis and adjusted to the carrying value as
necessary.
Inventories — Inventories are stated at
the lower of cost, determined on a
first-in, first-out
basis (“FIFO”), or market, including direct material
costs and direct and indirect manufacturing costs. Generator
core inventories have historically been valued primarily at the
core acquisition cost. In the third quarter of 2005, given the
changing market for remanufactured generators and general
competitive conditions for generator products, the Company
reduced the carrying value of generator core inventories by
$24 million.
From time to time, Delphi may receive payments from suppliers.
Delphi recognizes these payments from suppliers as a reduction
of the cost of the material acquired during the period to which
the payments relate.
Property — Property, plant and
equipment, including internally-developed internal use software,
is recorded at cost. Major improvements that materially extend
the useful life of property are capitalized. Expenditures for
repairs and maintenance are charged to expense as incurred.
Depreciation is provided based on the estimated useful lives of
groups of property generally using an accelerated method, which
accumulates depreciation of approximately two-thirds of the
depreciable cost during the first half of the estimated useful
lives, or using straight-line methods. Leasehold improvements
are amortized over the period of the lease or the life of the
property, whichever is shorter, with the amortization applied
directly to the asset account.
Special Tools — Special tools balances
represent tools, dies, jigs and other items used in the
manufacture of customer components. These amounts, which are
included within property in the consolidated balance sheet,
include Delphi-owned tools and unreimbursed costs incurred on
customer-owned special tools. Delphi-owned special tools
balances are amortized over the special tool’s expected
life or the life of the related vehicle program, whichever is
shorter. Costs incurred related to customer-owned special tools
that are not subject to reimbursement are capitalized and
amortized over a three year period. Engineering, testing and
other costs incurred in the design and development of production
parts are expensed as incurred, unless the costs are
reimbursable, as specified in a customer contract.
Valuation of Long-Lived Assets — Delphi
periodically evaluates the carrying value of long-lived assets
held for use including intangible assets, when events or
circumstances warrant such a review. The carrying value of a
long-lived asset held for use is considered impaired when the
anticipated separately identifiable undiscounted cash flows from
the asset are less than the carrying value of the asset. In that
event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the long-lived asset.
Fair value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved
or from appraisals performed by valuation experts. Impairment
losses on long-lived assets held for sale are determined in a
similar manner, except that fair values are reduced for the cost
to dispose of the assets.
84
Intangible Assets — Delphi has
intangible assets, other than goodwill, of approximately
$54 million and $80 million as of December 31,
2005 and 2004, respectively. In general, these intangible assets
are being amortized over their useful lives, normally
3-17 years. During
2005, Delphi evaluated for impairment certain intangible assets
that had been recorded in conjunction with previous
acquisitions. Based on the current fair value of these
intangible assets, Delphi management concluded that an
impairment of $6 million ($2 million within the
Electrical, Electronics, & Safety Sector and
$4 million within the Dynamics, Propulsion,
Thermal & Interior sector) related to intangible assets
is required in 2005.
Goodwill — In accordance with
SFAS No. 142, “Goodwill and Other Intangible
Assets”, Delphi reviews the recoverability of goodwill at
least annually and any time business conditions indicate a
potential change in recoverability.
Environmental Liabilities — Delphi
recognizes environmental cleanup liabilities when a loss is
probable and can be reasonably estimated. Such liabilities
generally are not subject to insurance coverage. The cost of
each environmental cleanup is estimated by engineering,
financial, and legal specialists within Delphi based on current
law. Considering the estimated cost of investigation and
remediation required and the likelihood that, where applicable,
other potentially responsible parties (“PRPs”) will be
able to fulfill their commitments at the sites where Delphi may
be jointly and severally liable. For closed or closing plants
owned by Delphi and properties being sold, an estimated
liability is typically recognized at the time the closure
decision is made or sale is recorded and is based on an
environmental assessment of the plant property. The process of
estimating environmental cleanup liabilities is complex and
dependent primarily on the nature and extent of historical
information and physical data relating to a contaminated site,
the complexity of the site, the uncertainty as to what
remediation and technology will be required, and the outcome of
discussions with regulatory agencies and other PRPs at
multi-party sites. In future periods, new laws or regulations,
advances in cleanup technologies and additional information
about the ultimate cleanup remediation methodology to be used
could significantly change Delphi’s estimates.
When it has been possible to provide reasonable estimates of
Delphi’s liability with respect to environmental sites,
provisions have been made in accordance with U.S. GAAP. As of
December 31, 2005, our reserve for such environmental
investigation and cleanup was approximately $51 million,
including approximately $3 million included in liabilities
subject to compromise, which reflects in part the retention by
GM of the environmental liability for certain inactive sites as
part of the Separation. We cannot ensure that environmental
requirements will not change or become more stringent over time
or that our eventual environmental cleanup costs and liabilities
will not exceed the amount of our current reserves. Moreover,
facility sales and/or closures relating to the restructuring
process could trigger additional and perhaps material
environmental remediation costs, as previously unknown
conditions may be identified.
Warranty — Delphi recognizes expected
warranty costs for products sold principally at the time of sale
of the product based on Delphi management estimates of the
amount that will eventually be required to settle such
obligations. These accruals are based on factors such as past
experience, production changes, industry developments and
various other considerations. Delphi’s estimates are
adjusted from time to time based on facts and circumstances that
impact the status of existing claims.
Asset Retirement Obligations — On
January 1, 2003, Delphi adopted SFAS No. 143,
Accounting for Asset Retirement Obligations, which
requires the fair value of an asset retirement obligation to be
recognized in the period in which it is incurred. On
December 31, 2005, Delphi adopted FASB Interpretation
(“FIN”) No. 47, Accounting for Conditional
Asset Retirement Obligations, an interpretation of
SFAS No. 143. FIN No. 47 clarifies that
the term conditional asset retirement obligation as used in
SFAS No. 143, refers to a legal obligation to perform
an asset retirement activity in which the timing and/or method
of settlement are conditional on a future event.
FIN No. 47 also clarifies that an entity is required
to recognize a liability for the fair value of a conditional
asset retirement obligation when incurred if fair value can be
reasonably estimated. The accounting for FIN No. 47
uses the same methodology as SFAS No. 143. When a new
liability is recorded, an entity will capitalize the costs of
the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted to its present value
each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon
85
settlement of the liability, an entity settles the obligation
for its recorded amount or incurs a gain or loss upon settlement.
As a result of adopting FIN No. 47 on
December 31, 2005, Delphi identified conditional retirement
obligations primarily related to asbestos abatement at certain
of its sites. To a lesser extent, Delphi also has conditional
retirement obligations at certain sites related to the removal
of storage tanks and polychlorinated biphenyl (“PCB”)
disposal costs. Delphi recorded assets of $2 million with
offsetting accumulated depreciation of $2 million, and an
asset retirement obligation liability of $17 million.
Delphi also recorded a cumulative effect charge against earnings
of $17 million, after-tax.
If Delphi had applied FIN No. 47 to prior periods,
Delphi would have recorded asset retirement obligations and
charges against earnings as of and for the years ended
December 31, 2004 and 2003, respectively, as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Asset retirement obligations
|
|
$ |
16 |
|
|
$ |
15 |
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Charges against earnings
|
|
$ |
2 |
|
|
$ |
1 |
|
| |
|
|
|
|
|
|
A reconciliation of the asset retirement obligations for 2005 is
as follows:
| |
|
|
|
|
|
| |
|
(in millions) | |
| |
|
| |
|
Asset retirement obligations at January 1, 2005
|
|
$ |
— |
|
| |
Accretion
|
|
|
— |
|
| |
Liabilities incurred (primarily adoption of FIN 47)
|
|
|
17 |
|
| |
Liabilities settled
|
|
|
— |
|
| |
|
|
|
|
Asset retirement obligations at December 31, 2005
|
|
$ |
17 |
|
| |
|
|
|
The impact on loss per common share (both basic and diluted) in
each of 2004 and 2005 would have been less that $0.01 per
share.
Postemployment Benefits — Delphi’s
postemployment benefits primarily relate to extended-disability
benefit program in the U.S. and supplemental unemployment
compensation benefits. Extended-disability benefits are accrued
on a service-driven basis and supplemental unemployment
compensation benefits are accrued on an event-driven basis.
Accruals for postemployment benefits represent the future cash
expenditures expected during the period between the idling of
affected employees and the time when such employees are
redeployed, retire or otherwise terminate their employment.
Discounting of the future extended-disability expenditures is
based on the nature of the obligation and the timing of the
expected benefit payments. At December 31, 2005 and 2004,
the short-term extended-disability liability balance of
$27 million and $28 million, respectively, was
included in accrued liabilities in the accompanying consolidated
balance sheets. The long-term extended-disability liability
balance included in other long-term liabilities in the
accompanying consolidated balance sheets at December 31,
2005 and 2004 was $226 million and $240 million,
respectively, calculated with a discount rate of 5.50% and
5.75%, respectively.
Employee Termination Benefits —
Delphi’s employee termination benefits are mainly pursuant
to union or other contractual agreements. Voluntary termination
benefits are accrued when an employee accepts the related offer.
One-time involuntary termination benefits are accrued when
Delphi management commits to a termination plan and the benefit
arrangement is communicated to affected employees. Liabilities
recorded as of December 31, 2005 and 2004 were not
significant.
86
Worker’s Compensation Benefits —
Delphi’s worker’s compensation benefits are accrued
primarily on an event-driven basis and are subject to the
existing worker’s compensation laws that can vary by state.
Accruals for worker’s compensation benefits represent the
future cash expenditures expected during the period between the
idling of affected employees and the time when such employees
are eligible for retirement or otherwise terminate their
employment. Discounting of the future worker’s compensation
expenditures is based on the same discount rate as is used to
measure Delphi’s pension liability, in that the period of
time covered by the future cash flows is similar. The discount
rate for December 31, 2005 and 2004 was 5.50% and 5.75%,
respectively. At December 31, 2005 and 2004, the short-term
worker’s compensation liability balance included in accrued
liabilities in the accompanying consolidated balance sheets was
$86 million and $75 million, respectively. The
long-term worker’s compensation liability balance included
in other long-term liabilities in the accompanying consolidated
balance sheets at December 31, 2005 and 2004 was
$224 million and $152 million, respectively.
Foreign Currency Translation — Assets
and liabilities of foreign subsidiaries are translated to
U.S. dollars at
end-of-period currency
exchange rates. The consolidated Statements of Operations of
foreign subsidiaries are translated to U.S. dollars at
average-period currency exchange rates. The effect of
translation for foreign subsidiaries is generally reported in
other comprehensive income. The effect of remeasurement of
assets and liabilities of foreign subsidiaries that use the
U.S. dollar as their functional currency is primarily
included in cost of goods sold. Also included in cost of goods
sold are gains and losses arising from transactions denominated
in a currency other than the functional currency of a particular
entity. Net transaction gains and losses, as described above,
increased cost of sales by $53 million, $51 million,
and $68 million in 2005, 2004, and 2003, respectively.
Stock-Based Compensation — Delphi’s
stock-based compensation programs include stock options,
restricted stock units, and stock appreciation rights
(“SARs”). As allowed under SFAS No. 123,
“Accounting for Stock-Based Compensation,” Delphi
accounts for stock-based compensation using the intrinsic value
method in accordance with APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and
related interpretations. As such, Delphi has followed the
nominal vesting period approach for awards issued with
retirement eligible provisions, and will continue to follow this
approach for existing awards and new awards issued prior to the
adoption of SFAS No. 123 revised (“(R)”) in
January 2006. Following the adoption of
SFAS No. 123(R), Delphi will recognize compensation
cost for newly issued equity or liability instruments based on
the grant-date fair value, with expense recognized over the
periods that an employee provides service in exchange for the
award. In 2006, Delphi expects the impact of
SFAS No. 123(R) to increase the compensation expense
recognized in its consolidated financial statements by
approximately $9 million, related to the remaining
compensation costs for existing grants.
Stock options granted during 2004 and 2003 were exercisable at
prices equal to the fair market value of Delphi common stock on
the dates the options were granted; accordingly, no compensation
expense has been recognized for the stock options granted.
Compensation expense for restricted stock units is recognized
over the vesting period. Compensation expense for SARs is
recognized when the current stock price is greater than the
SARs’ exercise price.
87
If Delphi accounted for all stock-based compensation using the
fair value recognition provisions of SFAS No. 123 and
related amendments, its net income (loss) and basic and diluted
earnings (loss) per share would have been as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions, except per | |
| |
|
share amounts) | |
|
Net (loss) income, as reported
|
|
$ |
(2,357 |
) |
|
$ |
(4,818 |
)(a) |
|
$ |
(10 |
) |
|
Add: Stock-based compensation expense recognized, net of related
tax effects
|
|
|
24 |
|
|
|
11 |
|
|
|
8 |
|
|
Less: Total stock-based employee compensation expense determined
under fair value method for all awards, net of related tax
effects
|
|
|
(37 |
) |
|
|
(23 |
) |
|
|
(25 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income
|
|
$ |
(2,370 |
) |
|
$ |
(4,830 |
) |
|
$ |
(27 |
) |
| |
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted— as reported
|
|
$ |
(4.21 |
) |
|
$ |
(8.59 |
)(a) |
|
$ |
(0.02 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Basic and diluted— pro forma
|
|
$ |
(4.23 |
) |
|
$ |
(8.61 |
) |
|
$ |
(0.05 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Includes the impact of adjustments to previously reported income
tax expense as described in Note 2, Restatement. |
There were no stock options granted in 2005. The weighted
average fair value of stock options granted was $3.02 and $2.27
during 2004 and 2003, respectively. The fair value of each
option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following
assumptions:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Expected volatility
|
|
|
37.4 |
% |
|
|
38.6 |
% |
|
Risk-free interest rate
|
|
|
4.1 |
% |
|
|
2.7 |
% |
|
Expected life (years)
|
|
|
5.0 |
|
|
|
5.0 |
|
|
Dividend yield
|
|
|
2.8 |
% |
|
|
3.5 |
% |
Derivative Financial Instruments —
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, which
requires that all derivative instruments be reported on the
balance sheet at fair value with changes in fair value reported
currently through earnings unless the transactions qualify and
are designated as normal purchases or sales or meet special
hedge accounting criteria.
Delphi manages its exposure to fluctuations in currency exchange
rates, interest rates and certain commodity prices by entering
into a variety of forward contracts, options and swaps with
various counterparties. Such financial exposures are managed in
accordance with Delphi’s policies and procedures. Delphi
does not enter into derivative transactions for speculative or
trading purposes.
As part of the hedging program approval process, Delphi
identifies the specific financial risk which the derivative
transaction will minimize, the appropriate hedging instrument to
be used to reduce the risk and the correlation between the
financial risk and the hedging instrument. Purchase orders,
letters of intent, capital planning forecasts and historical
data are used as the basis for determining the anticipated
values of the transactions to be hedged. Delphi does not enter
into derivative transactions that do not have a correlation with
the underlying financial risk. The hedge positions entered into
by Delphi, as well as the correlation between the transaction
risks and the hedging instruments, are reviewed on an ongoing
basis.
Foreign exchange forward and option contracts are accounted for
as hedges of firm or forecasted foreign currency commitments to
the extent they are designated and assessed as effective. All
other foreign exchange contracts are marked to market on a
current basis. Commodity swaps and options are accounted for as
hedges of firm or anticipated commodity purchase contracts to
the extent they are designated and
88
assessed effective. All other commodity derivative contracts
that are not designated as hedges are either marked to market on
a current basis or are exempted from mark to market accounting
as normal purchases. At December 31, 2005 and 2004,
Delphi’s exposure to movements in interest rates was not
significant, and Delphi had no amounts outstanding under
derivative instruments to manage interest rate risk or minimize
interest expense.
Common Stock and Preferred Stock —
Delphi currently has one class of common stock outstanding.
There are 1,350 million shares of common stock authorized,
of which 561,781,590 were outstanding (565,025,907 shares
issued less 3,244,317 shares held as treasury stock) at
December 31, 2005 and 561,210,311 were outstanding
(565,025,907 shares issued less 3,815,596 shares held
as treasury stock) at December 31, 2004. Holders of Delphi
common stock are entitled to one vote per share with respect to
each matter presented to its shareholders on which the holders
of common stock are entitled to vote. Delphi paid dividends of
$0.115 per share in 2005, of which $0.07 was declared in
2004 but was paid in 2005, and $0.28 per share in 2004 and
2003. There are no cumulative voting rights. Delphi’s Board
of Directors is also empowered to cause to be issued, in one or
more series, preferred stock. The specific terms including the
designation of shares, number of shares and dividend features of
the preferred stock would be determined at issuance. As of
December 31, 2005, Delphi has not issued any preferred
stock.
Loss Per Share — Basic and diluted loss
per share amounts were computed using weighted average shares
outstanding for each respective period. As Delphi incurred
losses in each of 2005, 2004, and 2003, the effect of
potentially dilutive securities has been excluded from the
calculation of loss per share as inclusion would have had an
anti-dilutive effect. Actual weighted average shares outstanding
used in calculating basic and diluted loss per share were
560,045 thousand shares, 560,905 thousand shares, and 560,114
thousand shares in 2005, 2004, and 2003, respectively.
Securities excluded from the computation of diluted loss per
share because inclusion would have had an anti-dilutive effect
were 84,808 thousand shares, 91,115 thousand shares and 87,069
thousand shares in 2005, 2004, and 2003, respectively.
Retention Payments — During the first
quarter of 2005, a retention program for U.S. salaried
employees and executives as well as international executives was
implemented (the “Q1 2005 Retention Program”). Under
the terms of the program, U.S. salaried employees, other
than executives, received retention payments totaling
approximately $13 million in the first quarter of 2005 and
executives other than those executive officers subject to the
reporting obligations of Section 16 of the Securities
Exchange Act of 1934 (the “reporting officers”)
received payments totaling approximately $5 million in the
third quarter of 2005 that related to the first of three
installment payments under the plan. The cost associated with
the retention program payments attributable to all
U.S. salaried employees, including executives other than
the reporting officers, was being recognized over the related
service period. However, based upon a change in Delphi
management’s intention with respect to enforcing the
retention agreements for U.S. employees, including
executives other than the reporting officers, the remaining
unamortized balance for these employees was expensed in the
fourth quarter of 2005. On February 17, 2006, as part of
the Courts’ approval of portions of the Key Employee
Compensation Program (“KECP”), the Company cancelled
the outstanding installments due to executives other than the
reporting officers.
Additionally, under the Q1 2005 Retention Program, the reporting
officers were to receive payment of an award in four equal
installments over a two-year period. The first installment was
paid in the third quarter of 2005 totaling approximately
$0.6 million. Also on February 17, 2006, as part of
the Courts’ approval of portions of the KECP, the company
cancelled the outstanding installments of the reporting
officers’ retention awards.
Contractual Interest Expense —
Contractual interest expense represents amounts due under the
contractual terms of outstanding debt, including debt subject to
compromise for which interest expense is not recognized in the
income statement in accordance with the provisions of
SOP 90-7.
89
Recently Issued Accounting
Pronouncements —
In November 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 151,
“Inventory Costs, an amendment of Accounting Research
Bulletin (“ARB”) No. 43, Chapter 4”.
SFAS No. 151 amends ARB No. 43,
Chapter 4 and seeks to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs and
wasted materials by requiring those items to be recognized as
current period charges. Additionally, SFAS No. 151
requires that fixed production overheads be allocated to
conversion costs based on the normal capacity of the production
facilities. SFAS No. 151 is effective prospectively
for inventory costs incurred in fiscal years beginning after
June 15, 2005. The Company will adopt
SFAS No. 151 on January 1, 2006, and does not
expect the adoption of SFAS No. 151 to have a material
effect on its financial statements.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges on Nonmonetary Assets— an amendment of
Accounting Principles Board (“APB”) Opinion
No. 29.” SFAS No. 153 is based on the
principle that exchanges of nonmonetary assets should be
measured based on the fair value of the assets exchanged.
SFAS No. 153 also eliminates the exception for
nonmonetary exchanges of similar productive assets and replaces
it with an exception for exchanges of nonmonetary assets that do
not have commercial substance. The provisions of
SFAS No. 153 are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. Delphi will adopt SFAS No. 153
beginning January 1, 2006, and does not expect the adoption
to have a material effect on its financial statements.
|
|
|
Accounting Changes and Error Corrections |
In May 2005, the FASB issued SFAS No. 154,
“Accounting Changes and Error Corrections”.
SFAS No. 154 replaces APB Opinion No. 20,
“Accounting Changes” and FASB Statement
No. 3, “Reporting Accounting Changes in Interim
Financial Statements,” and requires the direct effects
of accounting principle changes to be retrospectively applied.
The existing guidance with respect to accounting estimate
changes and corrections of errors is carried forward in
SFAS 154. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Company will
adopt SFAS No. 154 beginning January 1, 2006, and
does not expect the adoption of SFAS No. 154 to have a
material effect on its financial statements.
|
|
|
Other-Than-Temporary Impairments |
In November 2005, the FASB issued FASB Staff Position
(“FSP”)
Nos. 115-1 and
124-1, “The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments,” which addresses the
determination of when an investment is considered impaired,
whether that impairment is other than temporary, and the
measurement of an impairment loss. The guidance in the
FSP’s amend SFAS No. 115, “Accounting for
Certain Investments in Debt and Equity Securities,”
SFAS No. 124, “Accounting for Certain
Investments Held by Not-for-Profit Organizations,” and
APB Opinion No. 18, “The Equity Method of
Accounting for Investments in Common Stock,” and is
effective for reporting periods beginning after
December 15, 2005. The Company does not expect the adoption
to have a material effect on its financial statements.
Subsequent to the issuance of Delphi’s consolidated
financial statements for the years ended December 31, 2004,
Delphi management determined that its previously issued
financial statements for 2004 required restatement to correct
the accounting for income taxes. In 2005, to begin to address a
significant deficiency identified during Delphi’s 2004
assessment of internal control over financial reporting, Delphi
implemented a new process to accumulate and record deferred tax
assets and liabilities at its
90
non-U.S. locations.
As a result of this implementation, Delphi determined that net
deferred taxes included in the consolidated balance sheet as of
January 1, 2005 was misstated by $39 million requiring
a correction by increasing 2004 income tax expense. In addition,
other adjustments were identified and corrected related to the
calculation of the 2004 income tax provision amounting to an
additional $26 million of income tax expense.
In addition, as previously disclosed in Amendment No. 1
dated May 1, 2006 to Delphi’s Annual Report on
Form 10-K for the
year ended December 31, 2004, the Company decreased by
$69 million previously reported net income for the period
ending December 31, 2000 which resulted in a corresponding
increase in additional paid-in capital and reduction in retained
earnings of $69 million, but in no change in total
stockholders’ (deficit) equity in each subsequent
period.
Corrections have also been made in previously issued financial
statements to include employee and product line charges in cost
of sales within the Consolidated Statements of Operations, to
separately identify goodwill impairment charges within the
Consolidated Statements of Operations, to classify certain
pension liabilities as minimum pension liability within other
comprehensive income on the Consolidated Balance Sheets, to
separately identify restricted cash in the Consolidated Balance
Sheets, to separately identify the non-cash pension and other
postemployment benefit expense, and to separately identify
global pension contributions and other post employment benefit
payments within the operating section of the Consolidated
Statements of Cash Flows.
The following is a summary of the impact of the restatement on
the originally issued consolidated statement of operations,
consolidated balance sheet and consolidated statement of cash
flows included in this filing.
CONSOLIDATED STATEMENT OF OPERATIONS
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
As Previously | |
|
As | |
| |
|
Reported | |
|
Restated | |
| |
|
| |
|
| |
| |
|
(in millions, except per | |
| |
|
share amounts) | |
|
Cost of sales, excluding items listed below
|
|
$ |
25,797 |
|
|
$ |
25,989 |
|
|
Depreciation, amortization, and asset impairment charges
|
|
$ |
1,516 |
|
|
$ |
1,470 |
|
|
Goodwill impairment charges
|
|
$ |
— |
|
|
$ |
46 |
|
|
Employee and product line charges
|
|
$ |
192 |
|
|
$ |
— |
|
|
Income tax (expense) benefit
|
|
$ |
(4,078 |
) |
|
$ |
(4,143 |
) |
|
Net Loss
|
|
$ |
(4,753 |
) |
|
$ |
(4,818 |
) |
| |
|
Basic and diluted loss per share
|
|
$ |
(8.47 |
) |
|
$ |
(8.59 |
) |
91
CONSOLIDATED BALANCE SHEET
| |
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
As Previously | |
|
As | |
| |
|
Reported | |
|
Restated | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Cash and cash equivalents
|
|
$ |
964 |
|
|
$ |
950 |
|
|
Restricted cash
|
|
$ |
— |
|
|
$ |
14 |
|
|
Accounts receivable, net— other
|
|
$ |
1,476 |
|
|
$ |
1,484 |
|
|
Deferred income taxes— current assets
|
|
$ |
39 |
|
|
$ |
48 |
|
|
Deferred income taxes— noncurrent assets
|
|
$ |
130 |
|
|
$ |
72 |
|
|
Other— noncurrent assets
|
|
$ |
896 |
|
|
$ |
903 |
|
| |
|
Accrued liabilities
|
|
$ |
2,694 |
|
|
$ |
2,691 |
|
|
Pension benefits
|
|
$ |
3,523 |
|
|
$ |
3,561 |
|
|
Other long-term liabilities
|
|
$ |
936 |
|
|
$ |
953 |
|
| |
|
Additional paid-in capital
|
|
$ |
2,661 |
|
|
$ |
2,730 |
|
|
Accumulated deficit
|
|
$ |
(3,913 |
) |
|
$ |
(4,047 |
) |
|
Minimum pension liability
|
|
$ |
(2,469 |
) |
|
$ |
(2,507 |
) |
|
Accumulated other comprehensive income, excluding minimum
pension liability
|
|
$ |
237 |
|
|
$ |
254 |
|
CONSOLIDATED STATEMENT OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
As Previously | |
|
As | |
| |
|
Reported | |
|
Restated | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Net loss
|
|
$ |
(4,753 |
) |
|
$ |
(4,818 |
) |
|
Depreciation, amortization, and asset impairment charges
|
|
$ |
1,516 |
|
|
$ |
1,470 |
|
|
Goodwill impairment charges
|
|
$ |
— |
|
|
$ |
46 |
|
|
Deferred income taxes
|
|
$ |
4,259 |
|
|
$ |
4,315 |
|
|
Pension and other postretirement benefit expenses
|
|
$ |
— |
|
|
$ |
1,408 |
|
|
Accounts receivable and retained interests in receivables, net
|
|
$ |
91 |
|
|
$ |
83 |
|
|
Prepaid expenses and other
|
|
$ |
(151 |
) |
|
$ |
(158 |
) |
|
Accrued and other long-term liabilities
|
|
$ |
408 |
|
|
$ |
(148 |
) |
|
Pension contributions and benefit payments
|
|
$ |
— |
|
|
$ |
(672 |
) |
|
Other postretirement benefit payments
|
|
$ |
— |
|
|
$ |
(173 |
) |
|
Other cash flows from operating activities
|
|
$ |
120 |
|
|
$ |
137 |
|
| |
|
Cash and cash equivalents at the beginning of year
|
|
$ |
893 |
|
|
$ |
879 |
|
|
Cash and cash equivalents at end of year
|
|
$ |
964 |
|
|
$ |
950 |
|
3. CHAPTER 11 BANKRUPTCY AND GOING CONCERN
On October 8, 2005, Delphi and certain of its
U.S. subsidiaries filed voluntary petitions in the United
States Bankruptcy Court for the Southern District of New York
for reorganization relief under chapter 11 of the
Bankruptcy Code, and on October 14, 2005, three additional
U.S. subsidiaries of Delphi filed voluntary petitions for
reorganization relief under chapter 11 of the Bankruptcy
Code. The reorganization cases are being jointly administered
under the caption “In re Delphi Corporation, et al.,
Case No. 05-44481
(RDD).” The Debtors will continue to operate their
businesses as a
“debtors-in-possession”
under the jurisdiction of the Court and in accordance with the
applicable provisions of the Bankruptcy Code and orders of the
Court. Delphi’s
non-U.S. subsidiaries
were not included in the filings and will
92
continue their business operations without supervision from the
U.S. courts and will not be subject to the requirements of
the Bankruptcy Code.
The Debtors are operating pursuant to chapter 11 under the
Bankruptcy Code and continuation of the Company as a going
concern is contingent upon, among other things, the
Debtors’ ability (i) to comply with the terms and
conditions of the
debtor-in-possession
(“DIP”) financing agreement described below;
(ii) to obtain confirmation of a plan of reorganization
under the Bankruptcy Code; (iii) to reduce wage and benefit
costs and liabilities through the bankruptcy process;
(iv) to return to profitability; (v) to generate
sufficient cash flow from operations and; (vi) to obtain
financing sources to meet the Company’s future obligations.
These matters create uncertainty relating to the Company’s
ability to continue as a going concern. The accompanying
consolidated financial statements do not reflect any adjustments
relating to the recoverability of assets and classification of
liabilities that might result from the outcome of these
uncertainties. In addition, a plan of reorganization could
materially change the amounts and classifications reported in
the consolidated financial statements, which do not give effect
to any adjustments to the carrying value of assets or amounts of
liabilities that might be necessary as a consequence of
confirmation of a plan of reorganization.
On March 31, 2006, the Debtors announced their
transformation plan. As part of the transformation plan, Delphi
identified non-core product lines and manufacturing sites that
do not fit into Delphi’s future strategic framework, which
it is seeking to sell or wind-down. Any sale or wind-down
process is being conducted in consultation with the
Company’s customers, unions and other stakeholders to
carefully manage the transition of affected product lines. The
disposition of any U.S. operations is also being
accomplished in accordance with the requirements of the
Bankruptcy Code and labor contracts as applicable. The Company
also has begun consultations with the works councils in
accordance with applicable laws regarding any sale or wind-down
of affected manufacturing sites in Europe. Non-core product
lines include brake and chassis systems, catalysts, cockpits and
instrument panels, door modules and latches, ride dynamics,
steering and wheel bearings. The Company continually evaluates
its product portfolio and could retain or exit certain
businesses depending on market forces or cost structure changes.
The Company intends to sell or wind-down non-core product lines
and manufacturing sites by January 1, 2008. Delphi has also
begun discussions with certain governmental agencies whose
policies could help improve the competitiveness of plants and
product lines regardless of whether they are being retained or
offered for sale.
Also, on March 31, 2006, the Debtors filed a motion with
the Court under sections 1113 and 1114 of the Bankruptcy
Code seeking authority to reject U.S. labor agreements and
to modify retiree benefits. A hearing on the section 1113
and 1114 motion was held throughout May 2006, continued into
June, and adjourned until August 11, 2006. Although the
Debtors believe discussions with the Debtors’ unions and GM
are progressing constructively, the parties have not yet reached
comprehensive agreements. While we believe that the filing of
the 1113 and 1114 motion with the Court is necessary to protect
the Debtors’ interests, we are continuing discussions and
remain focused on pursuing a consensual resolution with all of
our unions and GM.
In addition to addressing our legacy liabilities and improving
the competitiveness of our U.S. operations through negotiation
with our unions and GM and by rationalizing our portfolio, we
have identified other necessary elements of a comprehensive
transformation plan, including reducing our selling, general and
administrative costs, realigning our salaried benefit programs
to size these costs with the rationalized portfolio and make
them competitive with more cost-competitive companies and
obtaining relief permitting us to amortize funding obligations
to our defined benefit U.S. pension plans over a longer
period of time than would otherwise be available once we emerge
from chapter 11. We have identified cost saving
opportunities with the planned portfolio and product
rationalizations and we expect to reduce our global salaried
workforce by as many as 8,500 employees using existing
salaried separation pay programs. In addition, in order to
retain our existing U.S. defined benefit pension plans for
both hourly and salaried workers, we intend to freeze those
plans and going forward adopt or modify existing defined
contribution plans that will include flexibility for both direct
Company contributions and Company matching employee
93
contributions. At the same time, salaried health care plans will
be restructured to implement increased employee cost sharing.
There can be no assurances, however, that we will be successful
in achieving our objectives. Our ability to achieve our
objectives is conditioned, in most instances, on the approval of
the Court, and the support of our stakeholders, including GM,
our labor unions, and our creditors.
Under section 362 of the Bankruptcy Code, actions to
collect most of the Debtors’ prepetition liabilities,
including payments owing to vendors in respect of goods
furnished and services provided prior to the Petition Date, are
automatically stayed and other contractual obligations of the
Debtors generally may not be enforced. Shortly after the
Petition Date, the Debtors began notifying all known actual or
potential creditors of the Debtors for the purpose of
identifying all prepetition claims against the Debtors. The
Chapter 11 Filings triggered defaults on substantially all
debt obligations of the Debtors. The stay of proceedings
provisions of section 362 of the Bankruptcy Code, however,
also apply to actions to collect prepetition indebtedness or to
exercise control over the property of the debtor’s estate
in respect of such defaults. The rights of and ultimate payments
by the Debtors under prepetition obligations will be addressed
in any plan of reorganization and may be substantially altered.
This could result in unsecured claims being compromised at less,
and possibly substantially less, than 100% of their face value.
For additional information, refer to Note 12, Liabilities
Subject to Compromise.
Section 365 of the Bankruptcy Code permits the Debtors to
assume, assume and assign, or reject certain prepetition
executory contracts subject to the approval of the Court and
certain other conditions. Rejection constitutes a
court-authorized breach of the contract in question and, subject
to certain exceptions, relieves the Debtors of their future
obligations under such contract but creates a deemed prepetition
claim for damages caused by such breach or rejection. Parties
whose contracts are rejected may file claims against the
rejecting Debtor for damages. Generally, the assumption, or
assumption and assignment, of an executory contract requires the
Debtors to cure all prior defaults under such executory contract
and to provide adequate assurance of future performance. In this
regard, Delphi expects that additional liabilities subject to
compromise and resolution in the chapter 11 cases may arise
as a result of damage claims created by the Debtors’
rejection of executory contracts. Conversely, Delphi would
expect that the assumption of certain executory contracts may
convert existing liabilities shown as subject to compromise to
liabilities not subject to compromise. Due to the uncertain
nature of many of the potential claims, Delphi is unable to
project the magnitude of such claims with any degree of
certainty at this time.
The financial statements of the Debtors are presented as follows:
Basis of Presentation
Condensed Combined
Debtors-in-Possession
Financial Statements — The financial
statements contained within this note represent the condensed
combined financial statements for the Debtors only.
Delphi’s non-Debtor subsidiaries are treated as
non-consolidated subsidiaries in these financial statements and
as such their net loss is included as “Equity loss from
non-Debtor subsidiaries, net of tax” in the statement of
operations and their net assets are included as
“Investments in non-Debtor subsidiaries” in the
balance sheet. Amounts presented in the statement of cash flows
for the period from the Chapter 11 Filings to
December 31, 2005 were estimated based upon estimated asset
and liability balances as of the filing dates and actual
balances as of December 31, 2005, as well as the
aforementioned estimated results of operations for the period
from the Chapter 11 Filings to December 31, 2005. The
Debtor’s financial statements contained herein have been
prepared in accordance with the guidance in
SOP 90-7.
Intercompany Transactions — Intercompany
transactions between Debtors have been eliminated in the
financial statements contained herein. Intercompany transactions
with the Debtors’ non-Debtor subsidiaries have not been
eliminated in the financial statements and are reflected as
intercompany receivables, loans and payables.
94
CONDENSED COMBINED DEBTORS-IN-POSSESSION STATEMENT OF
OPERATIONS
(Non-filed entities, principally
non-U.S. subsidiaries,
excluded from consolidated Debtor group)
| |
|
|
|
|
|
|
| |
|
October 8, 2005 to | |
| |
|
December 31, 2005 | |
| |
|
| |
| |
|
(in millions) | |
|
Net sales:
|
|
|
|
|
| |
General Motors and affiliates
|
|
$ |
2,482 |
|
| |
Other customers
|
|
|
1,717 |
|
| |
Intercompany non-Debtor subsidiaries
|
|
|
131 |
|
| |
|
|
|
| |
|
Total net sales
|
|
|
4,330 |
|
| |
|
|
|
|
Operating expenses:
|
|
|
|
|
| |
Cost of sales, excluding items listed below
|
|
|
4,238 |
|
| |
Selling, general and administrative
|
|
|
259 |
|
| |
Depreciation, amortization, and asset impairment charges
|
|
|
274 |
|
| |
Goodwill impairment charges
|
|
|
140 |
|
| |
|
|
|
| |
|
Total operating expenses
|
|
|
4,911 |
|
| |
|
|
|
|
Operating loss
|
|
|
(581 |
) |
| |
Interest expense (contractual interest expense was
$118 million)
|
|
|
(80 |
) |
| |
Other income (expense), net
|
|
|
8 |
|
| |
|
|
|
|
Loss before reorganization items, income tax expense, equity
income and cumulative effect
of
accounting change
|
|
|
(653 |
) |
| |
Reorganization items
|
|
|
1 |
|
| |
Income tax benefit
|
|
|
30 |
|
| |
Equity income from non-consolidated subsidiaries, net of tax
|
|
|
24 |
|
| |
Equity loss from non-Debtor subsidiaries, net of tax
|
|
|
(213 |
) |
| |
Cumulative effect of accounting change, net of tax
|
|
|
(15 |
) |
| |
|
|
|
|
Net loss
|
|
$ |
(826 |
) |
| |
|
|
|
95
CONDENSED COMBINED DEBTORS-IN-POSSESSION BALANCE SHEET
(Non-filed entities, principally
non-U.S. subsidiaries,
excluded from consolidated Debtor group)
| |
|
|
|
|
|
|
|
| |
|
December 31, 2005 | |
| |
|
| |
| |
|
(in millions) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
1,361 |
|
| |
Accounts receivable, net:
|
|
|
|
|
| |
|
General Motors and affiliates
|
|
|
1,654 |
|
| |
|
Other third parties
|
|
|
1,428 |
|
| |
|
Non-Debtor subsidiaries
|
|
|
287 |
|
| |
Notes receivable from non-Debtor subsidiaries
|
|
|
349 |
|
| |
Inventories, net:
|
|
|
|
|
| |
|
Productive material, work-in-process and supplies
|
|
|
820 |
|
| |
|
Finished goods
|
|
|
286 |
|
| |
Prepaid expenses and other
|
|
|
354 |
|
| |
|
|
|
| |
|
|
Total current assets
|
|
|
6,539 |
|
|
Long-term assets:
|
|
|
|
|
| |
Property, net
|
|
|
2,743 |
|
| |
Goodwill
|
|
|
139 |
|
| |
Other intangible assets, net
|
|
|
42 |
|
| |
Pension intangible assets
|
|
|
871 |
|
| |
Investments in non-Debtor subsidiaries
|
|
|
3,131 |
|
| |
Other
|
|
|
675 |
|
| |
|
|
|
| |
|
|
Total assets
|
|
$ |
14,140 |
|
| |
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
Current liabilities not subject to compromise:
|
|
|
|
|
| |
Notes payable and secured debt in default
|
|
$ |
2,519 |
|
| |
Accounts payable
|
|
|
1,027 |
|
| |
Accounts payable to non-Debtor subsidiaries
|
|
|
486 |
|
| |
Accrued liabilities
|
|
|
410 |
|
| |
|
|
|
| |
|
|
Total current liabilities
|
|
|
4,442 |
|
|
Long-term liabilities not subject to compromise:
|
|
|
|
|
| |
Debtor-in-possession financing
|
|
|
250 |
|
| |
Employee benefit plan obligations and other
|
|
|
550 |
|
| |
|
|
|
| |
|
|
Total long-term liabilities
|
|
|
800 |
|
|
Liabilities subject to compromise
|
|
|
15,143 |
|
| |
|
|
|
| |
|
|
Total liabilities
|
|
|
20,385 |
|
| |
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
| |
Common stock, $0.01 par value, 1,350 million shares
authorized,
565 million shares issued
|
|
|
6 |
|
| |
Additional paid-in capital
|
|
|
2,744 |
|
| |
Accumulated deficit
|
|
|
(6,429 |
) |
| |
Minimum pension liability, Debtors only
|
|
|
(2,304 |
) |
| |
Accumulated other comprehensive loss, including minimum pension
liability of non-Debtor subsidiaries
|
|
|
(210 |
) |
| |
Treasury stock, at cost (3.2 million shares)
|
|
|
(52 |
) |
| |
|
|
|
| |
|
|
Total stockholders’ deficit
|
|
|
(6,245 |
) |
| |
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$ |
14,140 |
|
| |
|
|
|
96
CONDENSED COMBINED DEBTORS-IN-POSSESSION STATEMENT OF CASH
FLOWS
(Non-filed entities, principally
non-U.S. subsidiaries,
excluded from consolidated Debtor group)
| |
|
|
|
|
|
|
|
| |
|
October 8, 2005 to | |
| |
|
December 31, 2005 | |
| |
|
| |
| |
|
(in millions) | |
|
Cash flows from operating activities:
|
|
|
|
|
| |
Net loss
|
|
$ |
(826 |
) |
| |
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
| |
|
Depreciation, amortization, and asset impairment charges
|
|
|
274 |
|
| |
|
Goodwill impairment charges
|
|
|
140 |
|
| |
|
Deferred income taxes
|
|
|
(16 |
) |
| |
|
Pension and other postretirement benefit expenses
|
|
|
339 |
|
| |
|
Equity income from unconsolidated subsidiaries, net of tax
|
|
|
(24 |
) |
| |
|
Equity loss from non-Debtor subsidiaries, net of tax
|
|
|
213 |
|
| |
|
Reorganization items
|
|
|
(1 |
) |
| |
Changes in operating assets and liabilities:
|
|
|
|
|
| |
|
Accounts receivable, net
|
|
|
(651 |
) |
| |
|
Inventories, net
|
|
|
(19 |
) |
| |
|
Prepaid expenses and other
|
|
|
172 |
|
| |
|
Accounts payable, accrued and other long-term liabilities
|
|
|
1,139 |
|
| |
|
Pension contributions and benefit payments
|
|
|
(2 |
) |
| |
|
Other postretirement benefit payments
|
|
|
(51 |
) |
| |
|
Receipts (payments) for reorganization items, net
|
|
|
9 |
|
| |
|
Other
|
|
|
(39 |
) |
| |
|
|
|
| |
|
|
Net cash provided by operating activities
|
|
|
657 |
|
| |
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
| |
Capital expenditures
|
|
|
(90 |
) |
| |
Proceeds from sale of property
|
|
|
1 |
|
| |
Other
|
|
|
(33 |
) |
| |
|
|
|
| |
|
|
Net cash used in investing activities
|
|
|
(122 |
) |
| |
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
| |
Proceeds from debtor-in-possession facility, net
|
|
|
218 |
|
| |
Proceeds from prepetition secured revolving credit facility, net
|
|
|
1 |
|
| |
Proceeds advanced under cash overdraft
|
|
|
29 |
|
| |
Repayments of borrowings under other debt
|
|
|
(2 |
) |
| |
|
|
|
| |
|
|
Net cash provided by financing activities
|
|
|
246 |
|
| |
|
|
|
| |
Increase in cash and cash equivalents
|
|
|
781 |
|
| |
Cash and cash equivalents at beginning of period
|
|
|
580 |
|
| |
|
|
|
| |
Cash and cash equivalents at end of period
|
|
$ |
1,361 |
|
| |
|
|
|
97
SOP 90-7 requires
reorganization items such as revenues, expenses such as
professional fees directly related to the process of
reorganizing the Debtors under chapter 11, realized gains
and losses, and provisions for losses resulting from the
reorganization and restructuring of the business to be
separately disclosed. The Debtors’ reorganization items
consist of the following:
| |
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, 2005 | |
| |
|
| |
| |
|
(in millions) | |
|
Professional fees directly related to reorganization
|
|
$ |
28 |
|
|
Interest income
|
|
|
(11 |
) |
|
Gain on settlement of prepetition liabilities
|
|
|
(8 |
) |
|
Other
|
|
|
(6 |
) |
| |
|
|
|
| |
Total Reorganization Items
|
|
$ |
3 |
|
| |
|
|
|
In 2005, reorganization items resulted in approximately
$6 million of cash received entirely related to interest
income. Professional fees directly related to the reorganization
include fees associated with advisors to the Debtors, unsecured
creditors and secured creditors.
|
|
| 5. |
EMPLOYEE AND PRODUCT LINE LIABILITY |
2004
and 2003 Charges
In the fourth quarter of 2004, Delphi recorded charges primarily
related to the recoverability of certain of Delphi’s
U.S. legacy plant and employee cost structure. Included in
these charges were postemployment obligations and other exit
costs. The employee charges were principally necessitated by the
substantial decline during the second half of 2004 in
Delphi’s U.S. profitability, especially at impaired
sites, combined with the budget business plan outlook for such
sites and product lines. The postemployment obligations include
estimated costs for other than temporarily idled employees,
primarily at U.S. sites being consolidated, throughout the
duration of their contractual employment. In the third quarter
of 2005, the accrued liabilities for postemployment obligations
included in the employee and product line liability were
transferred to the postemployment benefits liability included in
accrued liabilities and other long-term liabilities in the
accompanying consolidated balance sheet (Refer to Note 11,
Accrued Liabilities).
During 2004, Delphi achieved the restructuring plans approved by
its Board of Directors in the third quarter of 2003 to reduce
its hourly and salaried workforce by approximately 9,675
employees. These plans entailed workforce reductions through a
variety of methods including regular attrition and retirements,
and voluntary and involuntary separations, as applicable. Under
certain elements of the plans, the International Union, United
Automobile, Aerospace, and Agricultural Implement Workers of
America (“UAW”) hourly employees may return
(“flowback”) to GM. As required under U.S. GAAP,
Delphi records the costs associated with the flowback to GM as
the employees accept the offer to exit Delphi. In conjunction
with such plans, Delphi recorded charges for employee costs of
$86 million in 2004, which is included in cost of sales. No
charges were recorded in conjunction with these plans during
2005.
98
The following is a summary of the activity in the employee and
product line liability related to the above plans:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Employee and Product Line Liability |
|
Employee Costs | |
|
Exit Costs | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
2003 charges
|
|
$ |
381 |
|
|
$ |
15 |
|
|
$ |
396 |
|
| |
Usage during 2003
|
|
|
(135 |
) |
|
|
(3 |
) |
|
|
(138 |
)(a) |
| |
Transfer to long-term liabilities
|
|
|
— |
|
|
|
(7 |
) |
|
|
(7 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
$ |
246 |
|
|
$ |
5 |
|
|
$ |
251 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Charges during 2004
|
|
|
180 |
|
|
|
14 |
|
|
|
194 |
(b) |
| |
Usage during 2004
|
|
|
(302 |
) |
|
|
(1 |
) |
|
|
(303 |
)(c) |
| |
Less: reversal of 2003 charges
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
124 |
|
|
$ |
16 |
|
|
$ |
140 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Usage during 2005
|
|
|
(59 |
) |
|
|
(5 |
) |
|
|
(64 |
) |
| |
Transfer to postemployment benefits
|
|
|
(61 |
) |
|
|
— |
|
|
|
(61 |
)(d) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$ |
4 |
|
|
$ |
11 |
|
|
$ |
15 |
(e) |
| |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
The $138 million of usage in 2003 includes $6 million
of non-cash special termination pension and postretirement
benefits for the year ended December 31, 2003. |
| |
| (b) |
Amount includes $81 million of contractual postemployment
liabilities associated with other than temporarily idled
employees recorded in the fourth quarter of 2004. In 2005, the
remaining balance from these liabilities was transferred to
accrued liabilities and other long-term liabilities in the
accompanying consolidated balance sheet see note (e) below. |
| |
| (c) |
The $303 million of usage in 2004 includes $7 million
of non-cash special termination pension and postretirement
benefits for the year ended December 31, 2004. |
| |
| (d) |
$61 million of contractual postemployment liabilities
associated with other than temporarily idled employees
transferred from employee and product line liability to the
postemployment benefits liability included accrued liabilities
and other long-term liabilities in the accompanying consolidated
balance sheet (Refer to Note 11, Accrued Liabilities). |
| |
| (e) |
Included in liabilities subject to compromise in the
accompanying consolidated balance sheet. |
During 2005, 2004 and 2003, Delphi paid $64 million,
$296 million and $156 million, respectively, related
to employee and product line restructuring plans announced in
the third quarter of 2003 and in the fourth quarter of 2004, as
shown on its consolidated statement of cash flows. The remainder
of the $15 million employee and product line liability
balance shown in the table may be subject to compromise or other
treatment under the Debtors plan of reorganization.
2002
Charges Paid in 2003
As previously disclosed, restructuring actions approved in the
first quarter of 2002 were completed as planned in the first
quarter of 2003. The total cash paid in 2003 was
$156 million, as shown on the Company’s consolidated
statement of cash flows. Of this amount, $132 million was
paid in 2003 related to the 2003 charges discussed above and
$24 million was paid in the first quarter related to the
2002 charges.
|
|
| 6. |
ACQUISITIONS AND DIVESTITURES |
On June 30, 2005, Delphi reached final agreement to sell
its global battery product line, with the exception of two
U.S. operations, to Johnson Controls Inc.
(“JCI”), for approximately $203 million. The
transaction, comprised of net assets totaling approximately
$171 million ($150 million within the Dynamics,
Propulsion, Thermal & Interior Sector and
$21 million within the Electrical, Electronics &
Safety Sector), including approximately $8 million of cash,
closed July 1, 2005. On September 29, 2005, a
99
final purchase price adjustment was agreed to by JCI and Delphi
and as a result, JCI paid additional proceeds of approximately
$12 million to Delphi. In connection with the transaction,
Delphi entered into a contract manufacturing supply arrangement,
becoming a Tier 2 supplier to JCI, and began supplying
batteries from its two U.S. plants to JCI for a transition
period ending on or before November 30, 2007. The final
agreement with JCI contemplates a future possible transfer of
operating assets of one of the two U.S. plants supplying
batteries under the contract manufacturing supply agreement. The
receipt of the $215 million cash purchase price was not
contingent upon completion of the future possible transfer.
The business sold generated approximately $463 million
annually in global consolidated revenues. Delphi recognized a
gain on the sale of the battery business of $44 million
($35 million within the Dynamics, Propulsion,
Thermal & Interior Sector and $9 million within
the Electrical, Electronics & Safety Sector) in 2005.
In addition, valuation adjustments of $24 million were
recorded, reducing the carrying value of the retained assets of
the battery product line. Of the $24 million,
$4 million was recorded in cost of sales, $2 million
was recorded in selling, general and administrative, and
$18 million was recorded in depreciation, amortization, and
asset impairment charges.
In conjunction with the sale of its battery business, Delphi
entered into an agreement with its principal battery customer
under which Delphi could receive up to $30 million over the
next three years if certain performance criteria are met.
$11 million was received in cash in 2005 related to this
agreement, approximately $7 million of which was recognized
as a reduction of cost of sales and the remaining approximately
$4 million was recorded as deferred income as it relates to
price reductions over the next three years.
On December 7, 2004, Delphi Medical Systems, a subsidiary
of Delphi, acquired Peak Industries, Inc. (“Peak”),
for approximately $44 million, net of cash acquired.
Approximately $30 million of the purchase price has been
identified as goodwill and other intangible assets. Peak is a
Colorado-based contract manufacturer of medical devices. This
strategic acquisition provides Delphi Medical Systems access to
new customers in its target markets of dialysis, infusion,
patient monitoring, and respiratory devices, thus contributing
significantly to Delphi’s strategy of customer
diversification with key new customers. The addition of this
operation will complement Delphi Medical Systems’ existing
capabilities by enhancing its medical device manufacturing
compliance expertise. In addition, employees from this new
company are trained and experienced in manufacturing for the
medical device industry and have broad expertise manufacturing
complex,
state-of-the-art
commercial and medical devices under the highest quality
standards, and compliant with Food and Drug Administration and
ISO-13485 standards.
On September 1, 2004, Delphi acquired the intellectual
property and substantially all the assets and certain
liabilities of Dynamit Nobel AIS GmbH Automotive Ignition
Systems (“Dynamit Nobel AIS”), a wholly-owned
subsidiary of mg technologies AG, for approximately
$17 million, net of cash acquired. Dynamit Nobel AIS is a
designer and manufacturer of igniters, propellants, micro-gas
generators and related products for the automotive industry.
The acquisitions have been accounted for under the purchase
method of accounting and the results of operations are included
in Delphi’s consolidated financial statements from the date
of acquisition. The pro forma effects of these acquisitions
would not be materially different from reported results.
U.S. Program
Prior to the initial chapter 11 filing, Delphi maintained a
revolving accounts receivable securitization program in the
U.S. (“U.S. Facility Program”). The
U.S. Facility Program was terminated as a result of the
initial chapter 11 filing on October 8, 2005. The
U.S. Facility program had been amended in March 2005 to
allow Delphi to maintain effective control over the receivables
such that effective March 2005, this program, which was
previously accounted for as a sale of receivables, was accounted
for as a secured borrowing.
Under the U.S. Facility Program, Delphi transferred a
portion of its U.S. originated trade receivables to DR, a
wholly owned consolidated special purpose entity. DR would then
transfer, on a non-recourse basis (subject to certain limited
exceptions), an undivided interest in the receivables to
asset-backed,
100
multi-seller commercial paper conduits (“Conduits”).
Neither the Conduits nor the associated banks are related to
Delphi or DR. The Conduits typically financed the purchases
through the issuance of A1/P1 rated commercial paper. In the
event that the Conduits would have become unable to or otherwise
elect not to issue commercial paper and make purchases, the
associated banks were obligated to make the purchases. The sale
of the undivided interest in the receivables from DR to the
Conduits was accounted for as a sale under the provisions of
SFAS No. 140, “Accounting for the Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities” in periods through December 31, 2004.
Through 2004, when DR sold an undivided interest to the
Conduits, DR retained the remaining undivided interest. The
value of the undivided interest sold to the Conduits was
excluded from Delphi’s consolidated balance sheet thereby
reducing accounts receivable in periods through
December 31, 2004. The value of the retained interest in
receivables held by DR, which may have included eligible
undivided interests that Delphi elected not to sell, was shown
separately on its consolidated balance sheet and therefore was
not included in accounts receivable in 2004. As of
December 31, 2004, the retained interest in receivables was
$726 million. Delphi assessed the recoverability of the
retained interest on a quarterly basis and adjusted to the
carrying value as necessary.
At the time DR sold the undivided interest to the Conduits the
sale was recorded at fair value with the difference between the
carrying amount and fair value of the assets sold included in
operating income as a loss on sale. This difference between
carrying value and fair value is principally the estimated
discount inherent in the U.S. Facility Program, which
reflects the borrowing costs as well as fees and expenses of the
Conduits (approximately 1.4% to 2.7% in 2004), and the length of
time the receivables are expected to be outstanding. The loss on
sale was approximately $4 million for the year ended
December 31, 2004. Additionally, Delphi performed
collections and administrative functions on the receivables
transferred similar to the procedures Delphi uses for collecting
all of its receivables, including receivables that were not
transferred under the U.S. Facility Program. Delphi could
elect to keep the collections and transfer additional
receivables in exchange; or, Delphi could transfer the cash
collections to the Conduits thereby reducing the amount of
transfers of undivided interests to the Conduits. The nature of
the collection and administrative activities and the terms of
the U.S. Facility Program did not result in the recognition
of a servicing asset or liability in 2004 under the provisions
of SFAS 140 because the benefits of servicing to Delphi
were just adequate to compensate it for its servicing
responsibilities.
The U.S. Facility Program, which was among Delphi, DR, the
Conduits, the sponsoring banks and their agents, had a borrowing
limit of $600 million at December 31, 2004. The table
below summarizes certain cash flows received from and paid to
the Conduits under the revolving U.S. Facility Program
during the year ended December 31, 2004 (in millions):
| |
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, 2004 | |
| |
|
| |
|
Undivided interests sold at beginning of period
|
|
$ |
323 |
|
|
Proceeds from new securitizations (sale of undivided interests)
|
|
|
2,760 |
|
|
Collections related to undivided interest sold(a)
|
|
|
(3,803 |
) |
|
Collections reinvested through sale of additional undivided
interests
|
|
|
1,070 |
|
| |
|
|
|
|
Undivided interests sold at December 31
|
|
$ |
350 |
|
| |
|
|
|
|
|
| (a) |
Of the collections received on the undivided interests sold, for
the year ended December 31, 2004, $2,733 million was
remitted to the Conduits and $1,070 million was reinvested. |
European
Program
The Chapter 11 Filings triggered early termination events
under the European accounts receivables securitization program
(the “European Program”). On October 28, 2005,
Delphi and the institutions sponsoring the European Program
entered into a preliminary agreement, which was finalized on
November 18, 2005 (the “Agreement”), permitting
continued use of the European Program despite the
101
occurrence of early termination events. The early termination
events included Delphi’s failure to satisfy the
consolidated leverage ratio at September 30, 2005 and
defaults related to its voluntary filing for reorganization
relief under the Bankruptcy Code. The Agreement allows for
continued use of the European Program and incorporates
amendments resulting from the Agreement, including revised
financial covenants and pricing, provides an availability of
€145 million
($171 million at December 31, 2005 currency exchange
rates) and £10 million ($17 million at
December 31, 2005 currency exchange rates), and an
expiration date of March 31, 2006. On February 20,
2006, the European Program was further amended to extend the
expiration date to December 31, 2006 with substantially the
same terms and conditions.
Accounts receivable transferred under this program are accounted
for as short-term debt. As of December 31, 2005,
outstanding borrowings under this program were approximately
$149 million. As of December 31, 2004, Delphi had no
significant accounts receivable transferred under this program.
Loss before income taxes, minority interest, equity income, and
cumulative effect of accounting change for U.S. and
non-U.S. operations
was:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
U.S. income (loss)
|
|
$ |
(2,538 |
) |
|
$ |
(1,450 |
) |
|
$ |
(742 |
) |
|
Non-U.S. income
|
|
|
49 |
|
|
|
681 |
|
|
|
576 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Subtotal before impact of minority interest and cumulative
effect of accounting change
|
|
|
(2,489 |
) |
|
|
(769 |
) |
|
|
(166 |
) |
|
Cumulative effect of an accounting change
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
Minority interest, primarily non-U.S.
|
|
|
30 |
|
|
|
47 |
|
|
|
50 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
(2,442 |
) |
|
$ |
(722 |
) |
|
$ |
(116 |
) |
| |
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes was:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(As Restated | |
|
|
| |
|
|
|
See Note 2) | |
|
|
| |
|
|
|
(in millions) | |
|
|
|
Current income tax expense (benefit), net
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. federal
|
|
$ |
(67 |
) |
|
$ |
(277 |
) |
|
$ |
61 |
|
| |
Non-U.S.
|
|
|
85 |
|
|
|
132 |
|
|
|
117 |
|
| |
U.S. state and local
|
|
|
— |
|
|
|
(5 |
) |
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total current income tax expense (benefit)
|
|
|
18 |
|
|
|
(150 |
) |
|
|
182 |
|
|
Deferred income tax expense (benefit), net
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
U.S. federal
|
|
|
(11 |
) |
|
|
4,051 |
|
|
|
(288 |
) |
| |
Non-U.S.
|
|
|
(66 |
) |
|
|
38 |
|
|
|
50 |
|
| |
U.S. state and local
|
|
|
— |
|
|
|
197 |
|
|
|
(18 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
Total deferred income tax expense (benefit)
|
|
|
(77 |
) |
|
|
4,286 |
|
|
|
(256 |
) |
|
Investment tax credits
|
|
|
(2 |
) |
|
|
(1 |
) |
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Subtotal before impact of minority interest
|
|
|
(61 |
) |
|
|
4,135 |
|
|
|
(75 |
) |
|
Income tax provision related to minority interest
|
|
|
6 |
|
|
|
8 |
|
|
|
6 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income tax expense (benefit)
|
|
$ |
(55 |
) |
|
$ |
4,143 |
|
|
$ |
(69 |
) |
| |
|
|
|
|
|
|
|
|
|
102
A reconciliation of the provision (benefit) for income taxes
compared with the amounts at the U.S. federal statutory
rate was:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(As Restated | |
|
|
| |
|
|
|
See Note 2) | |
|
|
| |
|
|
|
(in millions) | |
|
|
|
Tax at U.S. federal statutory income tax rate
|
|
$ |
(881 |
) |
|
$ |
(269 |
) |
|
$ |
(59 |
) |
|
U.S. state and local income taxes
|
|
|
— |
|
|
|
(9 |
) |
|
|
(14 |
) |
|
Impact of change in state and local effective rate
|
|
|
— |
|
|
|
37 |
|
|
|
— |
|
|
Non-U.S. income taxed at other rates
|
|
|
(22 |
) |
|
|
(69 |
) |
|
|
(23 |
) |
|
Change in valuation allowance
|
|
|
938 |
|
|
|
4,677 |
|
|
|
33 |
|
|
Research and experimentation credits, gross
|
|
|
(49 |
) |
|
|
(57 |
) |
|
|
(57 |
) |
|
Other tax credit and deduction carryforwards
|
|
|
— |
|
|
|
(30 |
) |
|
|
(29 |
) |
|
Provision-to-return adjustments
|
|
|
— |
|
|
|
(23 |
) |
|
|
(10 |
) |
|
Various nondeductible expenses
|
|
|
10 |
|
|
|
12 |
|
|
|
12 |
|
|
U.S. tax on unremitted earnings of
non-U.S. subsidiaries
|
|
|
36 |
|
|
|
76 |
|
|
|
11 |
|
|
Residual tax on non-U.S. earnings remitted from joint
ventures
|
|
|
5 |
|
|
|
5 |
|
|
|
6 |
|
|
U.S. tax on non-U.S. located branches
|
|
|
1 |
|
|
|
1 |
|
|
|
5 |
|
|
Employee stock option plan payments
|
|
|
(2 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
|
Difference in basis for RSU awards
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
Reversal of income tax reserves due to completion of pre-spin
tax audits
|
|
|
(12 |
) |
|
|
(165 |
) |
|
|
— |
|
|
Reversal of income tax reserves due to completion of
U.S. federal income tax audits for post-Separation 1999 and
2000
|
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
Other changes in tax reserves
|
|
|
(14 |
) |
|
|
(20 |
) |
|
|
30 |
|
|
Medicare reimbursement
|
|
|
(30 |
) |
|
|
(22 |
) |
|
|
— |
|
|
Unrealized gains/losses included in other comprehensive income
|
|
|
(42 |
) |
|
|
12 |
|
|
|
— |
|
|
Other adjustments
|
|
|
1 |
|
|
|
(5 |
) |
|
|
14 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total income tax provision (benefit)
|
|
$ |
(61 |
) |
|
$ |
4,135 |
|
|
$ |
(75 |
) |
| |
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities for 2005 and 2004
reflect the impact of temporary differences between amounts of
assets and liabilities for financial reporting purposes and the
bases of such
103
assets and liabilities as measured by tax laws. Temporary
differences that gave rise to deferred tax assets and
liabilities included:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
|
|
(As Restated See Note 2) | |
| |
|
Deferred | |
|
Deferred | |
|
Deferred | |
|
Deferred | |
| |
|
Tax | |
|
Tax | |
|
Tax | |
|
Tax | |
| |
|
Assets | |
|
Liabilities | |
|
Assets | |
|
Liabilities | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Other postretirement benefits
|
|
$ |
2,812 |
|
|
$ |
— |
|
|
$ |
2,523 |
|
|
$ |
— |
|
|
Pension benefits
|
|
|
1,031 |
|
|
|
1 |
|
|
|
1,039 |
|
|
|
38 |
|
|
Other employee benefits
|
|
|
302 |
|
|
|
22 |
|
|
|
169 |
|
|
|
54 |
|
|
Depreciation
|
|
|
282 |
|
|
|
313 |
|
|
|
36 |
|
|
|
283 |
|
|
Tax on unremitted profits
|
|
|
— |
|
|
|
36 |
|
|
|
— |
|
|
|
248 |
|
|
Net operating loss carryforwards
|
|
|
272 |
|
|
|
— |
|
|
|
1,206 |
|
|
|
— |
|
|
General business credit carryforwards
|
|
|
344 |
|
|
|
— |
|
|
|
328 |
|
|
|
— |
|
|
R&D capitalization
|
|
|
1,083 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Other U.S.
|
|
|
322 |
|
|
|
145 |
|
|
|
363 |
|
|
|
154 |
|
|
Other non-U.S.
|
|
|
125 |
|
|
|
71 |
|
|
|
89 |
|
|
|
77 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
6,573 |
|
|
|
588 |
|
|
|
5,753 |
|
|
|
854 |
|
|
Valuation allowances
|
|
|
(5,891 |
) |
|
|
— |
|
|
|
(4,947 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total deferred taxes
|
|
$ |
682 |
|
|
$ |
588 |
|
|
$ |
806 |
|
|
$ |
854 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Realization of the net deferred tax assets is dependent on
future reversals of existing taxable temporary differences and
adequate future taxable income, exclusive of reversing temporary
differences and carryforwards. Valuation allowances are provided
against deferred tax assets when, based on all available
evidence, it is considered more likely than not that some
portion or all of the recorded deferred tax assets will not be
realized in future periods. Due to Delphi’s history of
U.S. losses over the previous three years, combined with
the deterioration in its current U.S. operating outlook for
the near to medium term that occurred in late 2004 and early
2005, Delphi determined that it could no longer support
realization of such amounts under SFAS No. 109,
Accounting for Income Taxes. Accordingly, Delphi recorded
a valuation allowance on the U.S. deferred tax assets of
$4,731 million as of December 31, 2004 and an
additional $893 million as of December 31, 2005.
Delphi continues to maintain the underlying tax benefits to
offset future taxable income and to monitor the need for a
valuation allowance based on the profitability of its
U.S. operations. Additionally, increases in valuation
allowances for certain
non-U.S. net
deferred tax assets were recorded in the amount of
$51 million and $10 million for the years ended
December 31, 2005 and December 31, 2004, respectively.
Delphi has deferred tax assets for net operating loss
(“NOL”) carryforwards of $114 million, net of a
valuation allowance of $158 million. This amount relates to
non-U.S. tax
jurisdictions with expiration dates ranging from one year to
indefinite. Delphi has elected, with respect to 2004 and certain
prior years, and will elect, when it files its 2005
U.S. consolidated tax return, to capitalize
U.S. research and development (“R&D”)
expenditures for tax purposes. The effect of this capitalization
is to substantially eliminate the deferred tax asset with
respect to U.S. NOL carryforwards and to create a deferred
tax asset for capitalized R&D expenditures, which will be
amortized as a tax deduction over a period of ten years,
beginning in the year of capitalization.
Dividends from
non-U.S. affiliates
remitted during 2005 were approximately $1.3 billion, plus
estimated gross-up for
associated foreign tax credits of approximately
$500 million. As discussed above, in order to avoid
creating potentially unusable foreign tax credit carryforwards,
Delphi capitalized R&D expenditures pursuant to
Section 59(e) of the Internal Revenue Code, thus reducing
net operating losses and permitting current use of foreign tax
credits to offset tax on the dividend income.
104
After filing its 2005 U.S. federal tax return, Delphi
expects to have no U.S. NOL carryforwards, no capital loss
carryforwards, no charitable contribution carryforwards, minimal
foreign tax credit carryforwards, and substantial general
business credit carryforwards. Delphi has recorded a deferred
tax asset of $344 million, subject to a full valuation
allowance, for the general business credit carryforwards, which
expire in 2019 through 2025.
Provisions are made for estimated U.S. and
non-U.S. income
taxes, less available tax credits and deductions, which may be
incurred on the remittance of Delphi’s share of
subsidiaries’ undistributed cumulative earnings, not deemed
to be indefinitely reinvested. U.S. income taxes have not
been provided on approximately $1.1 billion of cumulative
undistributed earnings of
non-U.S. subsidiaries
as of December 31, 2005, as such amounts are deemed to be
indefinitely reinvested. It is not practicable to calculate the
unrecognized tax provision on these earnings. In addition,
Delphi currently experiences tax credits and holidays in various
non-U.S. jurisdictions
with expiration dates from 2005 through indefinite. The income
tax benefits attributable to these tax credits and holidays are
approximately $26 million ($0.05 per share) for 2005,
$47 million ($0.08 per share) for 2004 and
$29 million ($0.05 per share) for 2003. A portion of
these tax benefits are already offset by deferred tax
liabilities recorded for U.S. taxes on unremitted profits
from these operations.
Annual tax provisions include amounts that may result from
examination of prior year non-U.S., U.S., state and local tax
returns, as well as customs audits. Examinations of
U.S. Federal tax returns for years prior to 2004 have been
substantially settled.
Cash paid for income taxes, primarily
non-U.S., was
$113 million, $119 million and $122 million in
2005, 2004 and 2003, respectively.
In October 2004, the American Jobs Creation Act of 2004
(“the Act”) was signed into law. The Act provides
certain benefits for domestic manufacturing operations which,
because Delphi’s U.S. manufacturing operations
currently operate at a loss for tax purposes, is not expected to
benefit Delphi in the near term. The Act also provided a
temporary incentive for U.S. corporations to repatriate
earnings from
non-U.S. subsidiaries.
Delphi determined that, in its case, claiming the temporary
incentive would have required the payment of cash taxes that,
due to available U.S. tax attributes including foreign tax
credits, would not be required for dividends under the normal
tax rules. In view of this, Delphi decided not to utilize the
temporary incentive and the tax provision for 2005 is calculated
accordingly.
9. PROPERTY, NET
Property, net consisted of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
December 31, | |
| |
|
Estimated Useful | |
|
| |
| |
|
Lives (Years) | |
|
2005 | |
|
2004 (a) | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
(in millions) | |
|
Land
|
|
|
— |
|
|
$ |
131 |
|
|
$ |
118 |
|
|
Land and leasehold improvements
|
|
|
3-31 |
|
|
|
269 |
|
|
|
292 |
|
|
Buildings
|
|
|
29-40 |
|
|
|
1,925 |
|
|
|
2,148 |
|
|
Machinery, equipment, tooling and spare parts
|
|
|
3-27 |
|
|
|
8,742 |
|
|
|
10,922 |
|
|
Furniture and office equipment
|
|
|
3-15 |
|
|
|
661 |
|
|
|
644 |
|
|
Construction in progress
|
|
|
— |
|
|
|
245 |
|
|
|
516 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
|
|
|
|
11,973 |
|
|
|
14,640 |
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
(6,865 |
) |
|
|
(8,694 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Total property, net
|
|
|
|
|
|
$ |
5,108 |
|
|
$ |
5,946 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Certain amounts have been reclassified. |
105
In 2005, Delphi exercised its options to purchase certain of the
Company’s leased property. As a result, in the second
quarter of 2005 Delphi completed the purchase of its Troy,
Michigan headquarters property and two manufacturing facilities
in Alabama for approximately $103 million, including
approximately $2 million of fees and other costs.
Additionally, in the third quarter of 2005 Delphi completed the
purchase of a facility in Vienna, Ohio for approximately
$28 million. As of December 31, 2005, these properties
were included in the net property balance on the consolidated
balance sheet. Prior to the purchase, these leases were
accounted for as operating leases.
Asset impairment charges related to the valuation of long-lived
assets held for use were charged to depreciation, amortization,
and asset impairment charges in the amounts of
$233 million, $326 million, and $58 million in
2005, 2004, and 2003, respectively. In accordance with
SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, Delphi evaluates the
recoverability of certain long-lived assets whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable.
As previously disclosed, Delphi has experienced deteriorated
financial performance resulting in substantial net losses in
2005 and 2004. Delphi believes that several significant issues
have largely contributed to the deterioration of Delphi’s
financial performance: (a) a competitive U.S. vehicle
production environment for domestic original equipment
manufacturers resulting in the reduced number of motor vehicles
that GM, the Company’s largest customer, produces annually
in the U.S. and related pricing pressures; (b) increasing
commodity prices; (c) U.S. labor legacy liabilities
and noncompetitive wage and benefit levels; and
(d) restrictive collectively bargained labor agreement
provisions which inhibit Delphi’s responsiveness to market
conditions, including exiting non-strategic, non-profitable
operations. As a result, Delphi has lowered expectations for
future performance absent the ability to complete a
transformation plan through its reorganization under
chapter 11 of the Bankruptcy Code.
The deterioration of Delphi’s U.S. financial
performance as discussed above, combined with an unfavorable
outlook absent completion of a successful
U.S. reorganization, was an indicator for potential
impairment. Additionally, reduced profitability at certain sites
and product lines in Western Europe resulting from flattening
revenue together with higher commodity costs was also
considered. In testing the recoverability of its long-lived
assets, Delphi considered projected future undiscounted cash
flows based on a probability weighted assessment of its business
plans assuming no changes in the current operating environment,
including no changes to the Company’s overall cost
structure or compromise of any of its legacy liabilities, as
well as business plans assuming varying levels of transformation
pursuant to Delphi’s ongoing transformation plan. As
Delphi’s bankruptcy case proceeds and its transformation
plan is further developed, Delphi may determine that additional
impairment charges are required to be recognized.
Delphi management determined the asset impairment charges in
each year by comparing the estimated undiscounted future cash
flows against the carrying values of assets. Specifically,
Delphi tested certain long-lived assets, primarily property,
plant, and equipment, for impairment at each plant site that had
operating losses during 2005 and 2004, respectively, and/or an
expectation of future losses over the remaining asset life. In
accordance with SFAS No. 144, where the carrying value
of the assets exceeded the undiscounted estimated future cash
flows at that site, asset impairment charges were recognized for
the amount that the carrying value exceeded fair value, which
was determined by third party valuations or discounted cash flow
analysis.
10. GOODWILL
At December 31, 2005 and December 31, 2004,
Delphi’s purchased goodwill balance was approximately
$363 million and $798 million respectively.
Approximately $141 million of goodwill is tax deductible.
The change during 2005 was due to a $390 million goodwill
impairment charge and a decrease resulting from currency
translation, primarily the euro. The change during 2004 was due
to increases from currency translation, primarily the Euro and
the acquisitions of Peak Industries, Inc. and Dynamit Nobel AIS
GmbH Automotive Ignition Systems, offset by a $46 million
goodwill impairment charge.
106
The change in carrying amount of goodwill for the year ended
December 31, 2005 and 2004 is as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Balanced at January 1,
|
|
$ |
798 |
|
|
$ |
773 |
|
| |
Acquisitions
|
|
|
— |
|
|
|
34 |
|
| |
Impairment
|
|
|
(390 |
) |
|
|
(46 |
) |
| |
Other (primarily currency translation)
|
|
|
(45 |
) |
|
|
37 |
|
| |
|
|
|
|
|
|
|
Balance at December 31,
|
|
$ |
363 |
(a) |
|
$ |
798 |
(b) |
| |
|
|
|
|
|
|
|
|
| (a) |
$327 million in Electrical, Electronics & Safety and
$36 million in Other. |
| |
| (b) |
$421 million in Dynamics, Propulsion, Thermal &
Interior, $341 million in Electrical,
Electronics & Safety and $36 million in Other. |
In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets, Delphi reviews the recoverability of
goodwill at least annually and any time business conditions
indicate a potential change in recoverability. As more fully
described in Note 9, Property, Net, Delphi has experienced
deteriorated financial performance resulting in substantial net
losses in 2005 and 2004. As a result, Delphi has lowered
expectations for future performance absent the ability to
complete a transformation plan through its reorganization under
chapter 11 of the Bankruptcy Code. The deterioration of
Delphi’s U.S. financial performance, combined with an
unfavorable outlook absent completion of a successful
U.S. reorganization, was an indicator for potential
impairment. The Company recorded approximately $390 million
and $46 million of goodwill impairment charges during 2005
and 2004, respectively, all of which relate to the Dynamics,
Propulsion, Thermal & Interior sector.
Delphi management determined the goodwill impairment charges by
comparing the carrying value of each of its reporting units to
the fair value of the reporting unit. In determining fair value
of reporting units, Delphi management utilized third-party
valuations as well as discounted cash flow analysis consistent
with that used in the Company’s SFAS No. 144
impairment analysis evaluating the recoverability of certain
long-lived assets noted in Note 9. Property, net. In
accordance with SFAS 142, where the carrying value exceeded
the discounted cash flow for a particular reporting unit,
goodwill impairment charges were recognized. The goodwill
impairment charges recognized were determined by stating all
other assets and liabilities of a reporting unit at their fair
values with the remaining fair value of the reporting unit
attributed to goodwill. The resulting goodwill impairment
charges are the excess of the recorded goodwill balance over the
calculated fair value of goodwill for the reporting unit.
Delphi’s reporting units for purposes of
SFAS No. 142 are global businesses focused on product
families. The fair value of the reporting units was negatively
impacted by the continued deterioration of business conditions,
principally in the U.S., as previously described.
107
11. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005(a) | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Payroll related obligations
|
|
$ |
223 |
|
|
$ |
231 |
|
|
Employee benefits, including current pension obligations
|
|
|
162 |
|
|
|
1,091 |
|
|
Accrued income taxes
|
|
|
190 |
|
|
|
261 |
|
|
Taxes other than income
|
|
|
128 |
|
|
|
195 |
|
|
Warranty obligations
|
|
|
117 |
|
|
|
226 |
|
|
Employee and product line charges
|
|
|
15 |
|
|
|
140 |
|
|
Other
|
|
|
357 |
|
|
|
547 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
1,192 |
|
|
$ |
2,691 |
|
| |
|
|
|
|
|
|
|
|
| (a) |
As a result of the Chapter 11 Filings, during 2005,
approximately $2 billion of accrued liabilities were
transferred to liabilities subject to compromise (Refer to
Note 12, Liabilities Subject to Compromise). |
The table below summarizes the activity in the product warranty
liability for the years ended December 31, 2005 and 2004.
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Accrual balance at beginning of year
|
|
$ |
274 |
|
|
$ |
258 |
|
| |
Provision for estimated warranties accrued during the year
|
|
|
177 |
|
|
|
86 |
|
| |
Accruals for pre-existing warranties (including changes in
estimates)
|
|
|
23 |
|
|
|
53 |
|
| |
Settlements made during the year (in cash or in kind)
|
|
|
(154 |
) |
|
|
(126 |
) |
| |
Foreign currency translation
|
|
|
(8 |
) |
|
|
3 |
|
| |
|
|
|
|
|
|
|
Accrual balance at end of year
|
|
$ |
312 |
|
|
$ |
274 |
|
| |
|
|
|
|
|
|
Approximately $117 million and $226 million of the
warranty accrual balance as of December 31, 2005 and 2004,
respectively, is included in accrued liabilities in the
accompanying consolidated balance sheets. Approximately
$48 million of the warranty accrual balance as of
December 31, 2004 is included in other long-term
liabilities. The remaining $195 million of the warranty
accrual balance as of December 31, 2005 is included in
liabilities subject to compromise (refer to Note 12,
Liabilities Subject to Compromise).
Delphi reviewed its estimates of future costs associated with
other than temporarily idled employees and recorded an
additional $103 million of contractual costs for
U.S. employees in cost of sales in 2005. Total accruals for
postemployment benefits for other than temporarily idled
employees are $148 million as of December 31, 2005 and
are included in liabilities subject to compromise in the
accompanying consolidated balance sheet.
12. LIABILITIES SUBJECT TO COMPROMISE
As a result of the Chapter 11 Filings, the payment of
prepetition indebtedness may be subject to compromise or other
treatment under the Debtors’ plan of reorganization.
Generally, actions to enforce or otherwise effect payment of
prepetition liabilities are stayed. Refer to Note 3,
Chapter 11 Bankruptcy and Going Concern. Although
prepetition claims are generally stayed, at hearings held in mid
October 2005 and November 2005, the Court granted final approval
of the Debtors’ “first day” motions generally
designed to stabilize the Debtors’ operations and covering,
among other things, human capital obligations,
108
supplier relations, customer relations, business operations, tax
matters, cash management, utilities, case management and
retention of professionals.
The Debtors have been paying and intend to continue to pay
undisputed postpetition claims in the ordinary course of
business. In addition, the Debtors may reject prepetition
executory contracts and unexpired leases with respect to the
Debtors’ operations, with the approval of the Court.
Damages resulting from rejection of executory contracts and
unexpired leases are treated as general unsecured claims and
will be classified as liabilities subject to compromise. On
April 12, 2006, the Court entered an order establishing
July 31, 2006 as the bar date. The bar date is the date by
which claims against the Debtors arising prior to the
Debtor’s Chapter 11 Filings must be filed if the
claimants wish to receive any distribution in the
chapter 11 cases. On April 17, 2006 the Debtors
commenced notification, including publication, to all known
actual and potential creditors informing them of the bar date
and the required procedures with respect to the filing of proofs
of claim with the court. Any differences between claim amounts
listed by the Debtors in their Schedules of Assets and
Liabilities (as amended) and claims filed by creditors will be
investigated and, if necessary, the Court will make the final
determination as to the amount, nature and validity of claims.
The determination of how liabilities will ultimately be settled
and treated cannot be made until the Court approves a
chapter 11 plan of reorganization. Accordingly, the
ultimate amount of such liabilities is not determinable at this
time.
SOP 90-7 requires
prepetition liabilities that are subject to compromise to be
reported at the amounts expected to be allowed, even if they may
be settled for lesser amounts. The amounts currently classified
as liabilities subject to compromise may be subject to future
adjustments depending on Court actions, further developments
with respect to disputed claims, determinations of the secured
status of certain claims, the values of any collateral securing
such claims, or other events.
Liabilities subject to compromise consist of the following:
| |
|
|
|
|
|
| |
|
December 31, | |
| |
|
2005 | |
| |
|
| |
| |
|
(in millions) | |
|
Pension obligations (Note 15)
|
|
$ |
3,578 |
|
|
Postretirement obligations other than pensions (Note 15)
|
|
|
6,310 |
|
|
Debt and notes payable (Note 13)
|
|
|
2,062 |
|
|
Postretirement obligation payable to GM
|
|
|
1,021 |
|
|
Accounts payable
|
|
|
916 |
|
|
Junior subordinated notes due to Delphi Trust I and II
(Note 14)
|
|
|
403 |
|
|
Postemployment benefits for other than temporarily idled
employees
|
|
|
148 |
|
|
Other
|
|
|
636 |
|
| |
|
|
|
| |
Total Liabilities Subject to Compromise
|
|
$ |
15,074 |
|
| |
|
|
|
13. DEBT
Due to the Chapter 11 Filings (Refer to Note 3,
Chapter 11 Bankruptcy and Going Concern), prepetition
long-term debt of the Debtors has been reclassified to the
caption Liabilities Subject to Compromise (Refer to
Note 12, Liabilities Subject to Compromise) on the
consolidated balance sheet.
109
The following is a summary of Long-Term Debt, including current
maturities, and unsecured long-term debt included in Liabilities
Subject to Compromise as of December 31, 2005 and 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
Subject to | |
|
|
|
|
| |
|
Compromise | |
|
Debt | |
|
|
| |
|
| |
|
| |
|
|
| |
|
(in millions) | |
|
Commercial paper program
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
330 |
|
|
6.55%, unsecured notes, due 2006
|
|
|
500 |
(a)(b)(c) |
|
|
— |
|
|
|
500 |
|
|
6.50%, unsecured notes, due 2009
|
|
|
498 |
(a)(b)(c) |
|
|
— |
|
|
|
498 |
|
|
6.50%, unsecured notes, due 2013
|
|
|
493 |
(a)(b)(c) |
|
|
— |
|
|
|
495 |
|
|
7.125%, debentures, due 2029
|
|
|
493 |
(a)(b)(c) |
|
|
— |
|
|
|
496 |
|
|
DIP term loan
|
|
|
— |
|
|
|
250 |
|
|
|
— |
|
|
Prepetition term loan facility
|
|
|
— |
|
|
|
984 |
(b)(c) |
|
|
— |
|
|
Prepetition revolving credit facility
|
|
|
— |
|
|
|
1,506 |
(b)(c) |
|
|
— |
|
|
European securitization program
|
|
|
— |
|
|
|
149 |
|
|
|
— |
|
|
Accounts receivable factoring
|
|
|
— |
|
|
|
365 |
|
|
|
65 |
|
|
Capital leases and other
|
|
|
78 |
(c) |
|
|
136 |
|
|
|
184 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total debt
|
|
$ |
2,062 |
|
|
|
3,390 |
|
|
|
2,568 |
|
| |
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
|
|
|
|
(3,117 |
) |
|
|
(507 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Long-term debt
|
|
|
|
|
|
$ |
273 |
|
|
$ |
2,061 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (a) |
Pursuant to the requirements of
SOP 90-7 as of the
Chapter 11 Filings, deferred financing fees related to
prepetition debt are no longer being amortized and have been
included as an adjustment to the net carrying value of the
related prepetition debt at December 31, 2005. |
| |
| (b) |
Debt in default as of December 31, 2005. |
| |
| (c) |
The Chapter 11 Filings triggered defaults on substantially all
debt and certain lease obligations. |
|
|
| |
The stay of proceedings provisions of section 362 of the
Bankruptcy Code apply to actions to collect prepetition
indebtedness or to exercise control over the property of the
Debtors’ estate in respect of such defaults. The rights of
and ultimate payments by the Debtors under prepetition
obligations will be addressed in any plan of reorganization and
may be substantially altered. This could result in unsecured
claims being compromised at less, and possibly substantially
less, than 100% of their face value. |
Secured
Debt
|
|
|
Debtor-In-Possession Facilities |
On October 14, 2005, Delphi entered into a Revolving
Credit, Term Loan and Guaranty Agreement (the “DIP Credit
Facility”), as amended by the First Amendment to the DIP
Credit Facility, dated October 27, 2005, and further
amended and restated by the Amended and Restated Revolving
Credit, Term Loan and Guaranty Agreement, dated
November 21, 2005 and as further amended by the First
Amendment to Amended and Restated Credit Agreement and Amended
and Restated Security and Pledge Agreement dated as of
February 3, 2006, the Second Amendment to Amended and
Restated Credit Agreement dated as of April 13, 2006, the
Third Amendment to Amended and Restated Credit Agreement dated
May 26, 2006, and the Fourth Amendment to Amended and
Restated Credit Agreement dated June 19, 2006 (the
“Amended DIP Credit Facility”) to borrow up to
$2.0 billion from a syndicate of lenders arranged by
J.P. Morgan Securities Inc. and Citigroup Global Markets,
Inc., for which JPMorgan Chase Bank, N.A. is the administrative
agent (the “Administrative Agent”) and Citicorp USA,
Inc., is syndication agent (together with the Administrative
Agent, the “Agents”). The Amended DIP
110
Credit Facility consists of a $1.75 billion revolving
facility and a $250 million term loan facility
(collectively, the “Amended DIP Loans”). The Amended
DIP Credit Facility carries an interest rate at the option of
Delphi of either (i) the Administrative Agent’s
Alternate Base Rate (as defined in the Amended DIP Credit
Facility) plus 1.75% or (ii) 2.75% above the Eurodollar
base rate, which is the London Interbank Borrowing Rate
(“LIBOR”). The LIBOR interest rate period can be set
at a one, three or six-month period as selected by Delphi in
accordance with the terms of the Amended DIP Credit Facility.
Accordingly, the interest rate will fluctuate based on the
movement of the Alternate Base Rate or LIBOR through the term of
the Amended DIP Loans. The Amended DIP Credit Facility will
expire on the earlier of October 8, 2007 or the date of the
substantial consummation of a reorganization plan that is
confirmed pursuant to an order of the Court. Borrowings under
the Amended DIP Credit Facility are pre-payable at Delphi’s
option without premium or penalty.
The Amended DIP Credit Facility provides the lenders with a
first lien on substantially all material tangible and intangible
assets of Delphi and its wholly-owned domestic subsidiaries
(however, Delphi is only pledging 65% of the stock of its first
tier foreign subsidiaries to the extent that, in its reasonable
business judgment, adverse tax consequences would result from
the pledge of a greater percentage) and further provides that
amounts borrowed under the Amended DIP Credit Facility will be
guaranteed by substantially all of Delphi’s affiliated
Debtors, each as debtor and
debtor-in-possession.
The amount outstanding at any one time is limited by a borrowing
base computation as described in the Amended DIP Credit
Facility. The borrowing base computation exceeded the Amended
DIP Credit Facility availability at December 31, 2005.
Borrowing base standards may be fixed and revised from time to
time by the Administrative Agent in its reasonable discretion.
The Amended DIP Credit Facility includes affirmative, negative
and financial covenants that impose restrictions on
Delphi’s financial and business operations, including
Delphi’s ability to, among other things, incur or secure
other debt, make investments, sell assets and pay dividends or
repurchase stock. Additionally, the Amended DIP Credit Facility
includes negative covenants that prohibit the payment of
dividends by the Company. So long as the Facility Availability
Amount (as defined in the Amended DIP Credit Facility) is equal
or greater than $500 million, compliance with the
restrictions on investments, mergers and disposition of assets
do not apply (except in respect of investments in, and
dispositions to, direct or indirect domestic subsidiaries of
Delphi that are not guarantors to the Amended DIP Credit
Facility).
The covenants require Delphi to, among other things,
(i) maintain a monthly cumulative minimum global earnings
before interest, taxes, depreciation, amortization, and
restructuring costs (“Global EBITDAR”), as defined in
the Amended DIP Credit Facility, for each period beginning on
January 1, 2006 and ending on the last day of each fiscal
month through November 30, 2006, as described in the
Amended DIP Credit Facility, and (ii) maintain a rolling
12-month cumulative
Global EBITDAR for Delphi and its direct and indirect
subsidiaries, on a consolidated basis, beginning on
December 31, 2006 and ending on October 31, 2007 at
the levels set forth in the Amended DIP Credit Facility. The
Amended DIP Credit Facility provides permission to deliver the
2005 audited financial statements within 170 days after the
year-end. The Amended DIP Credit Facility contains certain
defaults and events of default customary for
debtor-in-possession
financings of this type. Upon the occurrence and during the
continuance of any default in payment of principal, interest or
other amounts due under the Amended DIP Credit Facility,
interest on all outstanding amounts is payable on demand at 2%
above the then applicable rate.
On October 28, 2005, the Court granted, on a final basis,
the Debtors’ motion for approval of the DIP financing
order. The DIP financing order granted final approval of the DIP
Credit Facility, as amended at the time, final approval of an
adequate protection package for the prepetition credit
facilities (as described below) and the Debtors’ access to
$2 billion in DIP financing subject to the terms and
conditions set forth in the DIP financing documents, as amended.
The adequate protection package for the prepetition credit
facilities includes, among other things: (i) an agreement
by Delphi to pay accrued interest on the loans under the
prepetition credit facilities on a monthly basis, (ii) the
right of Delphi to pay this interest based on LIBOR, although
any lender may require that interest on its loans be based on
the alternative base rate if such lender waives all claims for
interest at the default rate and any prepayment penalties that
may arise under the prepetition credit facilities and
(iii) an agreement by Delphi to replace approximately
111
$90 million of letters of credit outstanding under the
prepetition credit facilities with letters of credit to be
issued under the Amended DIP Credit Facility. The proceeds of
the DIP financing together with cash generated from daily
operations and cash on hand will be used to fund post-petition
operating expenses, including supplier obligations and employee
wages, salaries and benefits.
On November 21, 2005, the $250 million term loan was
funded and the Company elected to pay interest at LIBOR plus
2.75% for a six month period. As of December 31, 2005,
there were no amounts outstanding under the $1.75 billion
DIP revolving facility. However, the Company had approximately
$7 million in letters of credit outstanding against the DIP
revolving facility.
Prior to June 2005, Delphi had two financing arrangements with a
syndicate of lenders providing for an aggregate of
$3.0 billion in available revolving credit facilities,
reduced by the amount of any outstanding letters of credit. The
terms of the credit facilities provided for a five-year
revolving credit line in the amount of $1.5 billion and a
364-day revolving
credit line in the amount of $1.5 billion.
On June 14, 2005, Delphi reached agreement with its
syndicate of lenders to amend certain terms of its existing
$1.5 billion five-year revolving credit facility (the
“Revolving Credit Facility”). The amendment increased
the available credit under Delphi’s Revolving Credit
Facility to $1.8 billion and added a $1.0 billion
six-year term loan (the “Term Loan,” and together with
the Revolving Credit Facility, the “Facilities”). The
Revolving Credit Facility expires June 18, 2009 and the
Term Loan expires June 14, 2011. Upon the effectiveness of
the new Facilities, Delphi terminated its
364-day revolving
credit facility in the amount of $1.5 billion. As a result
of the foregoing refinancing, Delphi replaced its previous
$3.0 billion revolving credit facilities with
$2.8 billion of available credit, the Term Loan portion of
which has been fully funded. On August 3, 2005, Delphi drew
down $1.5 billion from the Revolving Credit Facility. As
discussed above, on October 28, 2005 the Court granted
final approval of an adequate protection package for the
prepetition credit facilities which modifies the terms of the
facilities. All of the prepetition lenders accepted the adequate
protection package.
The Term Loan requires interest payments during the term at a
variable interest rate of 550 basis points above the
Alternate Base Rate (as defined in the prepetition credit
agreement) and prior to the adequate protection package at a
variable interest rate of 650 basis points above the
Eurodollar base rate, which is the LIBOR. The LIBOR interest
rate period could be set at a one, two, three or six-month
period as selected by Delphi in accordance with the terms of the
Facilities. Accordingly, the interest rate will fluctuate based
on the movement of Alternate Base Rate or LIBOR through the term
of the loan. The Term Loan had a 1% per annum amortization
for the first 5 years and 9 months. In the third
quarter of 2005, Delphi made the first installment payment on
the Term Loan. In addition, Delphi made mandatory payments
applying the sale proceeds of certain asset sales. The then
outstanding principal and any accrued and unpaid interest was
due in full at the end of term, on June 14, 2011. The Term
Loan was not repayable in the first year and, subject to the
terms of the Facilities, during the second and third year was
subject to certain prepayment penalties on the balance
outstanding of 2% and 1%, respectively. After the third year,
the then outstanding Term Loan principal was repayable without
premium or penalty.
The Revolving Credit Facility carries a variable interest rate
of 400 basis points above the Alternate Base Rate and prior
to the adequate protection package at a variable rate of
500 basis points above LIBOR on outstanding borrowings
subject to adjustment based on Delphi’s credit ratings. The
Revolving Credit Facility had a commitment fee payable on the
unused portion of 50 bps per annum, which was also subject
to adjustment based upon Delphi’s credit ratings.
Accordingly, the interest rate will fluctuate based on the
movement of Alternate Base Rate or LIBOR through the term of the
loan. The Revolving Credit Facility expires June 18, 2009.
Borrowings under the Revolving Credit Facility were pre-payable
at Delphi’s option without premium or penalty.
The Facilities provided the lenders with a first lien on
substantially all material tangible and intangible assets of
Delphi and its wholly-owned domestic subsidiaries (however,
Delphi only pledged 65% of the stock of its first tier foreign
subsidiaries) and further provided that amounts borrowed under
the Facilities
112
would be guaranteed by Delphi’s wholly-owned domestic
subsidiaries (except for insignificant subsidiaries and
subsidiaries that participate in accounts receivable
financings). The amount outstanding at any one time was limited
by a borrowing base computation. The borrowing base was
calculated as the sum of (a) 85% of U.S. accounts
receivable (excluding accounts receivable which have been sold
into the U.S. accounts receivables securitization program)
of Delphi and its subsidiaries, (b) 60% of inventory
(including raw materials, work in progress and finished goods,
but excluding inventory to the extent subject to accounts
receivable financings) of Delphi and its subsidiaries that is
located in the United States or which is owned but consigned to
Mexican subsidiaries, and (c) $750,000,000 with respect to
U.S. plant, property and equipment of Delphi and its
subsidiaries. The terms of the Facilities specifically limited
the obligations to be secured by a security interest in certain
U.S. manufacturing properties and U.S. manufacturing
subsidiaries in order to ensure that at the time of any
borrowing under the Term Loan or the Revolving Credit Facility,
the amount of the applicable borrowing which was secured by such
assets (together with other borrowings which are secured by such
assets and obligations in respect of certain sale-leaseback
transactions) would not exceed 15% of Consolidated Net Tangible
Assets (as defined in the indenture applicable to Delphi’s
outstanding bonds and debentures).
The amended Facilities contained financial covenants based on
consolidated leverage ratios, which were tested at each
quarter-end using the ratio of (a) secured debt (excluding
letters of credit, but including, without limitation, Term
Loans, revolving loans, funded debt in respect of receivables
securitizations and factoring facilities, and any other secured
debt (including second lien debt) permitted under the terms of
the Facilities, minus cash on each test date in excess of
$500,000,000, (provided that the amount of such cash deducted
shall in no event exceed $500,000,000) to (b) the aggregate
sum of the preceding four quarters EBITDA (as defined in the
Facilities). The above mentioned ratio could not exceed 2.75 to
1 for each of the quarters through and including June 30,
2006, 2.50 to 1 for the quarters from September 30, 2006 to
and including September 30, 2007, and 2.25 to 1 for the
fourth quarter of 2007 and thereafter.
Unsecured
Debt
In 2004, Delphi maintained $2.9 billion of worldwide
commercial paper programs. Interest rates under these programs
were determined based on the prevailing market rates at the time
of issuing commercial paper. Borrowings under these programs
were for a maximum of 365 days and were classified as
short-term debt in the consolidated balance sheet. As a result
of its bankruptcy filing, as of December 31, 2005 Delphi
did not have access to the commercial paper market; accordingly,
there was no balance outstanding under the commercial paper
programs. As of December 31, 2004, $0.3 billion was
outstanding under the commercial paper programs with a weighted
average interest rate of 2.6%.
Delphi has outstanding publicly held unsecured term debt
securities totaling approximately $2.0 billion. The
unsecured debt includes $500 million of securities bearing
interest at 6.55% that matured on June 15, 2006 with
interest payable semi-annually on June 15 and December 15 of
each year. Our next maturity of $500 million of securities
comes due on May 1, 2009 and bears interest at 6.50% with
interest payable semi-annually on May 1 and November 1 of each
year. Thereafter, we have $500 million of securities
bearing interest at 6.50% maturing on August 15, 2013 with
interest payable semi-annually on February 15 and August 15 of
each year, and $500 million of securities bearing interest
at 7.125% maturing on May 1, 2029 with interest payable
semi-annually on May 1 and November 1 of each year. None of the
debt securities has sinking fund requirements. The securities
are all redeemable, in whole or in part, at the option of
Delphi. At December 31, 2005, these securities were
included in Liabilities Subject to Compromise.
As of December 31, 2005 and 2004, Delphi also had other
debt outstanding and capital lease obligations of approximately
$214 million ($78 million of which is included in
Liabilities Subject to Compromise) and $184 million,
respectively. The 2005 balances include capital lease
obligations and debt issued by certain international
subsidiaries. The 2004 balance includes capital lease
obligations, debt issued by certain international subsidiaries,
indirect material financing and amounts due under a trade
payables program with General Electric Capital Corporation
(“GECC”). Delphi maintained a program with GECC
113
that allowed certain of its suppliers to factor their
receivables from Delphi to GECC for early payment. This program
also allowed Delphi to have GECC pay Delphi’s suppliers on
its behalf, providing extended payment terms to Delphi. The GECC
program was discontinued in the first quarter of 2005. Amounts
outstanding under the GECC trade payable program were
$8 million at December 31, 2004. There were no
payables beyond their stated terms at December 31, 2004.
Cash paid for interest totaled $272 million,
$245 million and $193 million in 2005, 2004 and 2003,
respectively.
In accordance with
SOP 90-7,
effective October 8, 2005, the Company ceased accruing
interest expense on its outstanding unsecured prepetition debt
classified as subject to compromise. The Company’s
contractual interest not accrued or paid in 2005 was
$38 million. In accordance with the Court-approved first
day motion, the Company continues to accrue and pay the
contractual interest on the secured credit facilities.
The principal maturities of debt, net of applicable discount and
issuance costs, and the minimum capital lease obligations not
subject to compromise for the five years subsequent to 2005 as
follow:
| |
|
|
|
|
|
| |
|
Debt and | |
| |
|
Capital Lease | |
| Year |
|
Obligations | |
| |
|
| |
| |
|
(in millions) | |
|
2006
|
|
$ |
3,117 |
(a) |
|
2007
|
|
|
253 |
|
|
2008
|
|
|
3 |
|
|
2009
|
|
|
3 |
|
|
2010
|
|
|
3 |
|
|
Thereafter
|
|
|
11 |
|
| |
|
|
|
| |
Total
|
|
$ |
3,390 |
|
| |
|
|
|
|
|
| (a) |
For purposes of the Debt and Capital Lease Obligations, debt for
which the Company is currently in default and has not classified
as liabilities subject to compromise has been classified as
current; however, repayment is stayed pending a plan of
reorganization in the chapter 11 cases. |
|
|
| 14. |
JUNIOR SUBORDINATED NOTES DUE TO DELPHI TRUST I and
II |
Delphi has trust preferred securities that were issued by its
wholly-owned subsidiaries, Delphi Trust I and Delphi
Trust II. These trusts are described below. Although
neither Delphi Trust I nor Delphi Trust II
(collectively, the “Trusts,” and each a wholly-owned
subsidiary of Delphi who has issued trust preferred securities
and whose sole assets consist of junior subordinated notes
issued by Delphi), sought relief under chapter 11 of the
United States Bankruptcy Code, the trusts may be dissolved in
accordance with the provisions of their respective trust
declarations, which in each case provide that Delphi’s
filing of chapter 11 is an “early termination
event.” The respective trustees are in the process of
liquidating each trust’s assets and it is expected that the
holders of the trust preferred securities will receive in
exchange for their securities a pro rata share of the Trusts
respective junior subordinated notes issued by Delphi.
Pursuant to the requirements of
SOP 90-7, as of
the Chapter 11 Filings, deferred financing fees related the
Trusts are no longer being amortized and have been included as
an adjustment of their net carrying value at December 31,
2005.
Delphi
Trust I
In October 2003, Delphi Trust I (“Trust I”),
a wholly-owned subsidiary of Delphi, issued
10,000,000 shares of
81/4
% Cumulative Trust Preferred Securities, with a
liquidation amount of $25 per
114
trust preferred security and an aggregate liquidation preference
amount of $250 million. The sole assets of Trust I are
$257 million of aggregate principal amount of Delphi junior
subordinated notes due 2033 (the “Trust I
notes”), also bearing interest at
81/4%.
Trust I pays cumulative cash distributions at an annual
rate equal to
81/4%
of the liquidation amount on the preferred securities. Under the
terms of the operative trust documents, Delphi has the ability
to defer interest payments on the Trust I notes at any time
for up to 20 consecutive quarterly periods and has been doing so
since July 15, 2005. As a result of Delphi’s deferral
in making interest payments, Trust I has also deferred
payment on preferred distributions. Additional distributions
will, however, accumulate on the deferred distributions at an
annual rate equal to
81/4
% compounded quarterly. In addition, Delphi had the
ability to redeem the Trust I notes in whole or in part, at
any time on or after October 15, 2008 at 100% of their
principal amount, plus accrued and unpaid interest. Delphi also
had the right to redeem the Trust I notes, if an adverse
tax consequence occurred. Under section 362 of the
Bankruptcy Code, however, payments on account of prepetition
obligations, or redemption of securities, are automatically
stayed. Absent an order of the Court, substantially all
prepetition obligations of Delphi are subject to settlement
under a plan of reorganization.
Delphi
Trust II
In November 2003, Delphi Trust II
(“Trust II”), a wholly-owned subsidiary of
Delphi, issued 150,000 shares of Adjustable Rate
Trust Preferred Securities with a five-year initial rate of
6.197%, a liquidation amount of $1,000 per trust preferred
security and an aggregate liquidation preference amount of
$150 million. The sole assets of Trust II are
$155 million aggregate principal amount of Delphi junior
subordinated notes due 2033 (the “Trust II
notes”) with interest terms matching those of the preferred
securities. Trust II pays cumulative cash distributions at
an annual rate equal to 6.197% of the liquidation amount during
the initial fixed rate period (which is through
November 15, 2008) on the preferred securities. Under the
terms of the operative trust documents, Delphi has the ability
to defer interest payments on the Trust II notes at any
time for up to five years at a time and has been doing so since
May 15, 2005. As a result of Delphi’s deferral in
making interest payments, Trust II has also deferred
payment on preferred distributions. Additional distributions
will, however, accumulate on the deferred distributions at the
applicable distribution rate. In addition, Delphi had the
ability to redeem the Trust II notes in whole, but not in
part, at any time on or after November 15, 2008 at 100% of
their principal amount, plus accrued and unpaid interest. Delphi
had the right to redeem the Trust II notes in whole, but
not in part, if an adverse tax consequence occurred. Under
section 362 of the Bankruptcy Code, however, payments on
account of prepetition obligations, or redemption of securities,
are automatically stayed. Absent an order of the Court,
substantially all prepetition obligations of Delphi are subject
to settlement under a plan of reorganization.
Delphi
Guarantees
Delphi has irrevocably and unconditionally guaranteed that if a
payment on the notes is made to Trust I or Trust II,
but for any reason, Trust I or Trust II does not make
the corresponding distribution or redemption payment to the
holders of the preferred securities, then Delphi will make
payments directly to the holders. This guarantee does not cover
payments when the trusts do not have sufficient funds to make
payments to the holders such as when Delphi is not making
interest payments on the notes. In the event the Trusts assets
are liquidated, the holders of the trust preferred securities
will surrender their securities in exchange for a pro rata share
of the Trusts respective junior subordinated notes issued by
Delphi, and thereby Delphi will become directly obligated to the
Trusts’ respective beneficiaries.
Accounting
Treatment
Delphi has determined that both Trust I and Trust II
are considered variable interest entities, of which Delphi is
not the primary beneficiaries. As a result, although both
Trust I and Trust II are 100% owned by Delphi, the
Company did not consolidate them into its financial statements.
However, the Trust I and Trust II notes are reflected
as liabilities subject to compromise on the consolidated balance
sheet and the related contractual interest due is not being
recognized in accordance with the provisions of
115
SOP 90-7. If
Trust I and Trust II were consolidated by Delphi, its
other long term assets and debt would each be $12 million
less as of December 31, 2005 but there would be no
significant impact on interest expense for the year ended
December 31, 2005.
|
|
| 15. |
PENSION AND OTHER POSTRETIREMENT BENEFITS |
Pension plans covering unionized employees in the
U.S. generally provide benefits of negotiated stated
amounts for each year of service, as well as supplemental
benefits for employees who qualify for retirement before normal
retirement age. The benefits provided by the plans covering
U.S. salaried employees are generally based on years of
service and salary history. Certain Delphi employees also
participate in nonqualified pension plans covering executives,
which are unfunded. Such plans are based on targeted wage
replacement percentages. Delphi’s funding policy with
respect to its qualified plans is to contribute annually, not
less than the minimum required by applicable laws and
regulations, including the Bankruptcy Code. Certain of
Delphi’s
non-U.S. subsidiaries
also sponsor defined benefit pension plans, which generally
provide benefits based on negotiated amounts for each year of
service. Delphi’s primary
non-U.S. plans are
located in France, Germany, Luxembourg, Mexico, Portugal, and
the United Kingdom (“UK”). The UK and certain Mexican
plans are funded. Certain of Delphi’s
non-U.S. subsidiaries
have other postretirement benefit plans; although most
participants are covered by government sponsored or administered
programs. The annual cost of such other postretirement benefit
plans was not significant to Delphi. In addition, Delphi has
defined benefit plans in Korea and Italy for which amounts are
payable to employees immediately upon separation. The
obligations for these plans as of December 31, 2005 are
$8 million and $14 million, respectively, and have
been recorded based on the vested benefit obligation.
116
The 2005 and 2004 amounts shown below reflect the defined
benefit pension and other postretirement benefit obligations for
U.S. and
non-U.S. salaried
and hourly employees excluding the plans in Korea and Italy
discussed above.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other Postretirement | |
| |
|
Pension Benefits | |
|
Benefits | |
| |
|
| |
|
| |
| |
|
|
|
Primary | |
|
|
| |
|
U.S. Plans | |
|
Non-U.S. Plans | |
|
|
| |
|
| |
|
| |
|
|
| |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Benefit obligation at beginning of year
|
|
$ |
12,872 |
|
|
$ |
11,413 |
|
|
$ |
1,197 |
|
|
$ |
991 |
|
|
$ |
9,605 |
|
|
$ |
8,469 |
|
| |
|
Service cost
|
|
|
292 |
|
|
|
284 |
|
|
|
34 |
|
|
|
29 |
|
|
|
179 |
|
|
|
176 |
|
| |
|
Interest cost
|
|
|
724 |
|
|
|
699 |
|
|
|
65 |
|
|
|
56 |
|
|
|
542 |
|
|
|
498 |
|
| |
|
Plan participants’ contributions
|
|
|
6 |
|
|
|
6 |
|
|
|
4 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
| |
|
Actuarial losses
|
|
|
416 |
|
|
|
920 |
|
|
|
147 |
|
|
|
69 |
|
|
|
1,252 |
|
|
|
1,147 |
|
| |
|
Benefits paid
|
|
|
(539 |
) |
|
|
(472 |
) |
|
|
(59 |
) |
|
|
(49 |
) |
|
|
(182 |
) |
|
|
(154 |
) |
| |
|
Special termination benefits
|
|
|
2 |
|
|
|
7 |
|
|
|
13 |
|
|
|
19 |
|
|
|
3 |
|
|
|
2 |
|
| |
|
Flowbacks to GM
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(54 |
) |
|
|
(72 |
) |
| |
|
Flow-ins from GM
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
— |
|
| |
|
Flowback net liability reclass
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(944 |
) |
|
|
— |
|
| |
|
Exchange rate movements
|
|
|
— |
|
|
|
— |
|
|
|
(131 |
) |
|
|
79 |
|
|
|
— |
|
|
|
— |
|
| |
|
Impact of business combinations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
| |
|
Impact of divestitures
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Payments made to divested divisions
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
|
|
(6 |
) |
| |
|
Plan amendments and other
|
|
|
(9 |
) |
|
|
15 |
|
|
|
38 |
|
|
|
(3 |
) |
|
|
(813 |
) |
|
|
(455 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Benefit obligation at end of year
|
|
|
13,764 |
|
|
|
12,872 |
|
|
|
1,306 |
|
|
|
1,197 |
|
|
|
9,589 |
|
|
|
9,605 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at beginning of year
|
|
|
8,526 |
|
|
|
7,437 |
|
|
|
730 |
|
|
|
607 |
|
|
|
— |
|
|
|
— |
|
| |
|
Actual return on plan assets
|
|
|
1,083 |
|
|
|
938 |
|
|
|
140 |
|
|
|
67 |
|
|
|
— |
|
|
|
— |
|
| |
|
Delphi contributions
|
|
|
635 |
|
|
|
600 |
|
|
|
62 |
|
|
|
52 |
|
|
|
182 |
|
|
|
154 |
|
| |
|
Plan participants’ contributions
|
|
|
6 |
|
|
|
6 |
|
|
|
4 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
| |
|
Benefits paid
|
|
|
(539 |
) |
|
|
(472 |
) |
|
|
(59 |
) |
|
|
(49 |
) |
|
|
(182 |
) |
|
|
(154 |
) |
| |
|
Exchange rate movements
|
|
|
— |
|
|
|
— |
|
|
|
(78 |
) |
|
|
48 |
|
|
|
— |
|
|
|
— |
|
| |
|
Other
|
|
|
1 |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at end of year, including
$0.0 million and $0.4 million of Delphi common stock
at December 31, 2005 and 2004, respectively
|
|
|
9,712 |
|
|
|
8,526 |
|
|
|
799 |
|
|
|
730 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Underfunded status
|
|
|
(4,052 |
) |
|
|
(4,346 |
) |
|
|
(507 |
) |
|
|
(467 |
) |
|
|
(9,589 |
) |
|
|
(9,605 |
) |
| |
Unamortized actuarial loss
|
|
|
3,821 |
|
|
|
3,912 |
|
|
|
460 |
|
|
|
469 |
|
|
|
4,044 |
|
|
|
3,000 |
|
| |
Unrecognized transition (asset)/obligation
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
| |
Unamortized prior service cost
|
|
|
868 |
|
|
|
1,018 |
|
|
|
35 |
|
|
|
36 |
|
|
|
(806 |
) |
|
|
(50 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in consolidated balance sheets
|
|
$ |
637 |
|
|
$ |
584 |
|
|
$ |
(5 |
) |
|
$ |
46 |
|
|
$ |
(6,351 |
) |
|
$ |
(6,655 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Long-term prepaid benefit cost
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
110 |
|
|
$ |
116 |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Accrued benefit liability
|
|
|
(3,536 |
) |
|
|
(3,858 |
) |
|
|
(344 |
) |
|
|
(319 |
) |
|
|
(6,351 |
) |
|
|
(6,655 |
) |
| |
Intangible asset
|
|
|
867 |
|
|
|
1,018 |
|
|
|
22 |
|
|
|
29 |
|
|
|
— |
|
|
|
— |
|
| |
Accumulated other comprehensive income (pre-tax)
|
|
|
3,306 |
|
|
|
3,424 |
|
|
|
207 |
|
|
|
220 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$ |
637 |
|
|
$ |
584 |
|
|
$ |
(5 |
) |
|
$ |
46 |
|
|
$ |
(6,351 |
) |
|
$ |
(6,655 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117
The projected benefit obligation (“PBO”), accumulated
benefit obligation (“ABO”), and fair value of plan
assets for pension plans with accumulated benefit obligations in
excess of plan assets and with plan assets in excess of
accumulated benefit obligations are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Primary | |
| |
|
U.S. Plans | |
|
Non-U.S. Plans | |
| |
|
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
| |
|
Plans with ABO in Excess of Plan Assets | |
| |
|
| |
|
PBO
|
|
$ |
13,764 |
|
|
$ |
12,872 |
|
|
$ |
831 |
|
|
$ |
779 |
|
|
ABO
|
|
|
13,248 |
|
|
|
12,384 |
|
|
|
753 |
|
|
|
714 |
|
|
Fair value of plan assets at end of year
|
|
|
9,712 |
|
|
|
8,526 |
|
|
|
416 |
|
|
|
395 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Plans with Plan Assets in Excess of ABO | |
| |
|
| |
|
PBO
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
475 |
|
|
$ |
418 |
|
|
ABO
|
|
|
— |
|
|
|
— |
|
|
|
365 |
|
|
|
319 |
|
|
Fair value of plan assets at end of year
|
|
|
— |
|
|
|
— |
|
|
|
383 |
|
|
|
335 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total | |
| |
|
| |
|
PBO
|
|
$ |
13,764 |
|
|
$ |
12,872 |
|
|
$ |
1,306 |
|
|
$ |
1,197 |
|
|
ABO
|
|
|
13,248 |
|
|
|
12,384 |
|
|
|
1,118 |
|
|
|
1,033 |
|
|
Fair value of plan assets at end of year
|
|
|
9,712 |
|
|
|
8,526 |
|
|
|
799 |
|
|
|
730 |
|
During 2005, Delphi contributed $0.6 billion to its pension
plans, which satisfied its minimum funding requirement as
determined by employee benefit and tax laws. Delphi’s 2006
minimum funding requirement, under current legislation and plan
design, is approximately $1.2 billion. However, as Delphi
is in chapter 11, its 2006 contributions will be limited to
approximately $0.2 billion, representing the postpetition
service cost.
Delphi also sponsors defined contribution plans for certain
U.S. hourly and salaried employees. Delphi’s expense
related to the contributions for these plans was $9 million
and $25 million for 2005 and 2004, respectively. The
decrease in the expense in 2005 was due to the termination of
matching contributions by the Company for the salaried savings
plans.
Delphi was required at December 31, 2005 and 2004 to adjust
the minimum pension liability recorded in its consolidated
balance sheet for both U.S. and
non-U.S. plans. In
2005, the effect of this adjustment was to decrease pension
liabilities by $0.3 billion and intangible assets by
$0.2 billion and accumulated other comprehensive loss by
$0.1 billion. In 2004, the effect of this adjustment was to
increase pension liabilities by $0.4 billion; increase
accumulated other comprehensive loss by $0.5 billion and
decrease intangible assets by $0.1 billion. Because these
adjustments were non-cash, the effect has been excluded from the
accompanying Consolidated Statements of Cash Flows.
118
Benefit costs presented below were determined based on actuarial
methods and included the following components for U.S. and
non-U.S. salaried
and hourly employees:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other Postretirement | |
| |
|
Pension Benefits | |
|
Benefits | |
| |
|
| |
|
| |
| |
|
U.S. Plans | |
|
Non-U.S. Plans | |
|
|
| |
|
| |
|
| |
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Service cost
|
|
$ |
292 |
|
|
$ |
284 |
|
|
$ |
261 |
|
|
$ |
34 |
|
|
$ |
29 |
|
|
$ |
26 |
|
|
$ |
179 |
|
|
$ |
176 |
|
|
$ |
168 |
|
|
Interest cost
|
|
|
724 |
|
|
|
699 |
|
|
|
643 |
|
|
|
65 |
|
|
|
56 |
|
|
|
50 |
|
|
|
542 |
|
|
|
498 |
|
|
|
459 |
|
|
Expected return on plan assets
|
|
|
(787 |
) |
|
|
(722 |
) |
|
|
(647 |
) |
|
|
(61 |
) |
|
|
(58 |
) |
|
|
(53 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Special termination benefits
|
|
|
2 |
|
|
|
7 |
|
|
|
6 |
|
|
|
13 |
|
|
|
19 |
|
|
|
23 |
|
|
|
3 |
|
|
|
2 |
|
|
|
— |
|
|
Amortization of transition amount
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of prior service costs
|
|
|
140 |
|
|
|
139 |
|
|
|
91 |
|
|
|
3 |
|
|
|
3 |
|
|
|
3 |
|
|
|
(56 |
) |
|
|
(5 |
) |
|
|
1 |
|
|
Amortization of actuarial losses
|
|
|
211 |
|
|
|
142 |
|
|
|
108 |
|
|
|
31 |
|
|
|
17 |
|
|
|
13 |
|
|
|
207 |
|
|
|
121 |
|
|
|
73 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net periodic benefit cost
|
|
$ |
582 |
|
|
$ |
549 |
|
|
$ |
462 |
|
|
$ |
86 |
|
|
$ |
67 |
|
|
$ |
63 |
|
|
$ |
875 |
|
|
$ |
792 |
|
|
$ |
701 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Experience gains and losses, as well as the effects of changes
in actuarial assumptions and plan provisions are amortized over
the average future service period of employees.
The principal assumptions used to determine the pension and
other postretirement expense and the actuarial value of the
projected benefit obligation for the U.S. and
non-U.S. pension
plan and postretirement plans were:
Assumptions used to determine benefit obligations at
December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Other | |
| |
|
|
|
Postretirement | |
| |
|
Pension Benefits | |
|
Benefits | |
| |
|
| |
|
| |
| |
|
U.S. Plans | |
|
Non-U.S. Plans | |
|
|
| |
|
| |
|
| |
|
|
| |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Weighted-average discount rate
|
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
4.91 |
% |
|
|
5.67 |
% |
|
|
5.50 |
% |
|
|
6.00 |
% |
|
Weighted-average rate of increase in compensation levels
|
|
|
3.99 |
% |
|
|
3.99 |
% |
|
|
3.45 |
% |
|
|
3.48 |
% |
|
|
3.99 |
% |
|
|
3.98 |
% |
Assumptions used to determine net expense for years ended
December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Other Postretirement | |
| |
|
Pension Benefits | |
|
Benefits | |
| |
|
| |
|
| |
| |
|
U.S. Plans | |
|
Non-U.S. Plans | |
|
|
| |
|
| |
|
| |
|
|
| |
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Weighted-average discount rate
|
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
5.67 |
% |
|
|
5.71 |
% |
|
|
6.02 |
% |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
|
Weighted-average rate of increase in compensation levels
|
|
|
3.99 |
% |
|
|
3.99 |
% |
|
|
4.37 |
% |
|
|
3.48 |
% |
|
|
3.32 |
% |
|
|
3.37 |
% |
|
|
3.98 |
% |
|
|
3.99 |
% |
|
|
4.00 |
% |
|
Expected long-term rate of return on plan assets
|
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
9.00 |
% |
|
|
8.25 |
% |
|
|
8.23 |
% |
|
|
8.49 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
In 2005 and 2004, Delphi selected discount rates based on
analyzing the results of matching high quality fixed income
investments rated AA- or higher by Standard and Poor’s and
the regular and above median Citigroup Pension Discount Curve,
with expected benefit cash flows. Since high quality bonds in
sufficient quantity and with appropriate maturities are not
available for all years when benefit cash flows
119
are expected to be paid, hypothetical bonds were imputed based
on combinations of existing bonds, and interpolation and
extrapolation reflecting current and past yield trends. The
pension discount rate determined on that basis decreased from
5.75% for 2004 to 5.5% for 2005. This 25 basis point
decline in the discount rate increased the underfunded status of
the U.S. pension plans by approximately $0.4 billion.
The other postretirement benefits discount rate determined on
that basis decreased from 6.00% for 2004 to 5.50% for 2005. This
50 basis point decline in the discount rate increased the
underfunded status of the U.S. postretirement plans by
approximately $0.8 billion. Delphi selected discount rates
for its
non-U.S. plans
based on analyzing the yields of high quality fixed income
investments. The discount rate that was utilized in 2003 for
determining US pension and OPEB obligations was the Moody’s
AA 20 year corporate bond rate, a published index.
For 2005 expense, Delphi assumed a U.S. long-term asset
rate of return of 9%. In developing the 9% expected long-term
rate of return assumption, Delphi evaluated input from its third
party pension plan asset managers, including a review of asset
class return expectations and long-term inflation assumptions.
Delphi also considered its post-spin off and GM’s pre-spin
off historical 15-year
compounded return, which was consistent with its long-term rate
of return assumption. The primary
non-U.S. plans
conduct similar studies in conjunction with local actuaries and
asset managers. While the studies give appropriate consideration
to recent fund performance and historical returns, the
assumptions are primarily long-term, prospective rates.
As required by U.S. GAAP, Delphi’s U.S. pension
expense for 2006 is determined at the end of December 2005. For
purposes of analysis, the following table highlights the
sensitivity of the Company’s U.S. pension obligations
and expense to changes in assumptions:
| |
|
|
|
|
|
|
| |
|
Impact on | |
|
|
| Change in Assumption |
|
Pension Expense | |
|
Impact on PBO |
| |
|
| |
|
|
|
25 basis point (bp) decrease in discount rate
|
|
|
+$25 to 35 Million |
|
|
+$0.4 Billion |
|
25 bp increase in discount rate
|
|
|
-$25 to 35 Million |
|
|
-$0.4 Billion |
|
25 bp decrease in long-term return on assets
|
|
|
+$20 to 30 Million |
|
|
— |
|
25 bp increase in long-term return on assets
|
|
|
-$20 to 30 Million |
|
|
— |
The above sensitivities reflect the effect of changing one
assumption at a time. It should be noted that economic factors
and conditions often affect multiple assumptions simultaneously
and the effects of changes in key assumptions are not
necessarily linear. The above sensitivities also assume no
changes to the pension plan design and no major restructuring
programs.
Delphi’s pension plan asset allocation at December 31,
2005, 2004, and target allocation for 2006 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Percentage of Plan Assets at | |
|
|
| |
|
December 31, | |
|
|
| |
|
| |
|
Target |
| |
|
|
|
|
|
Allocation |
| |
|
U.S. Plans | |
|
Non-U.S. Plans | |
|
U.S. Plans |
| |
|
| |
|
| |
|
|
| Asset Category |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
2006 |
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
Equity Securities
|
|
|
67% |
|
|
|
61% |
|
|
|
63% |
|
|
|
57% |
|
|
50%-75% |
|
Fixed Income
|
|
|
26% |
|
|
|
32% |
|
|
|
23% |
|
|
|
27% |
|
|
25%-40% |
|
Real Estate
|
|
|
6% |
|
|
|
6% |
|
|
|
13% |
|
|
|
14% |
|
|
5%-9% |
|
Other
|
|
|
1% |
|
|
|
1% |
|
|
|
1% |
|
|
|
2% |
|
|
0%-2% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
100% |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delphi invests in a diversified portfolio consisting of an array
of asset classes that attempts to maximize returns while
minimizing volatility. These asset classes include U.S. domestic
equities, developed market equities, emerging market equities,
private equity, global high quality and high yield fixed income,
real estate, and absolute return strategies.
120
National union negotiations allowed for some of Delphi’s
hourly employees in the U.S. being provided with certain
opportunities to transfer to GM as appropriate job openings
become available at GM and GM employees in the U.S. having
similar opportunities to transfer to Delphi to the extent job
openings become available at the Company. If such a transfer
occurs, both Delphi and GM will be responsible for pension
payments, which in total reflect such employee’s entire
eligible years of service. Allocation of responsibility between
Delphi and GM will be on a pro rata basis depending on the
length of service at each Company (although service at Delphi
includes service with GM prior to the Separation). There will be
no transfer of pension assets or liabilities between GM and
Delphi with respect to such employees that transfer between the
companies. The Company to which the employee transfers will be
responsible for the related postretirement obligation. An
agreement with GM provides for a mechanism for determining a
cash settlement amount for postretirement obligations associated
with employees that transfer between GM and Delphi.
Delphi’s consolidated balance sheet reflects a payable due
to GM for a cash settlement for postretirement obligations
associated with employees that transferred from Delphi to GM. In
prior periods, this amount was included in the postretirement
liability carried on Delphi’s balance sheet. Delphi’s
December 31, 2005 consolidated balance sheet includes
approximately $1 billion in liabilities subject to
compromise, which had been included in postretirement
liabilities in prior periods. Additionally, an $83 million
receivable for the cash settlement amount due from GM for
postretirement obligations associated with employees
transferring from GM to Delphi has been reclassified to other
long-term assets.
Cash settlement between Delphi and GM with respect to this
payable and receivable is scheduled to occur at the time the
employees are actuarially determined to retire. In accordance
with Delphi’s Separation Agreement with GM, Delphi
estimated it will pay an average of $100 million per year
(flowbacks) over the next five years to GM, and will
receive an average of $9 million per year from GM
associated with employees who have transferred to Delphi. In
addition to this, Delphi is also required to make a final net
settlement payment of approximately $0.4 billion in 2014.
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Projected | |
|
|
| |
|
|
|
Postretirement | |
|
|
| |
|
Projected Pension | |
|
Benefit Payments | |
|
Projected Medicare | |
| |
|
Benefit Payments | |
|
(Pre-Medicare) | |
|
Subsidy Receipts | |
| |
|
| |
|
| |
|
| |
| |
|
U.S. Plans | |
|
Non-U.S. Plans | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
| |
|
(in millions) | |
|
2006
|
|
$ |
625 |
|
|
$ |
44 |
|
|
$ |
270 |
|
|
$ |
(5 |
) |
|
2007
|
|
|
714 |
|
|
|
49 |
|
|
|
327 |
|
|
|
(6 |
) |
|
2008
|
|
|
804 |
|
|
|
55 |
|
|
|
374 |
|
|
|
(8 |
) |
|
2009
|
|
|
891 |
|
|
|
62 |
|
|
|
426 |
|
|
|
(10 |
) |
|
2010
|
|
|
948 |
|
|
|
72 |
|
|
|
476 |
|
|
|
(13 |
) |
|
2011-2015
|
|
|
5,264 |
|
|
|
628 |
|
|
|
2,990 |
|
|
|
(114 |
) |
Delphi’s annual measurement date for the U.S., France,
Luxembourg, Mexico and Portugal pension plans and other
postretirement life insurance benefits is December 31 and
for the UK and Germany pension plans and other postretirement
health benefits is September 30. For postretirement plan
measurement purposes, Delphi assumed an average 10% initial
annual rate of increase in the per capita cost of covered health
care benefits. The rate was assumed to decrease on a gradual
basis through 2010, to the ultimate weighted-average trend rate
of 5%.
On December 8, 2003, President Bush signed the
“Medicare Prescription Drug, Improvement and Modernization
Act of 2003”, (the “Act”) into law. This law
provides for a federal subsidy to sponsors of retiree health
care benefit plans that provide a benefit that is at least
actuarially equivalent to the benefit established by the law.
The total impact of the Act on Delphi’s postretirement
liability was $0.5 billion and is being accounted for as an
actuarial gain, in accordance with guidance from FASB. As a
result, the gain will be amortized as a reduction of the
Company’s periodic expense and balance sheet liability over
the next ten to twelve years, depending on the terms of the
individual plans. Postretirement expense during the
121
year ended December 31, 2004 increased by $91 million
compared to 2003. Such increase includes the mitigating impact
of the Act, which reduced expense by $64 million for the
year ended December 31, 2004, including service cost,
interest cost and amortization of the actuarial experience gain.
Delphi provides retiree drug benefits that exceed the value of
the benefits that will be provided by Medicare Part D, and
Delphi’s retirees pay a premium for this benefit that is
less than the Part D premium. Therefore Delphi has
concluded that these benefits are at least “actuarially
equivalent” to the Part D program so that Delphi will
be eligible for the basic Medicare Part D subsidy.
On May 19, 2004, the FASB issued FSP No. 106-2,
“Accounting and Disclosure Requirements relating to the
Medicare Prescription Drug, Improvement and Modernization Act of
2003,” providing additional guidance relating to the
accounting for the effects of the Act enacted on
December 8, 2003. Because Delphi’s normal measurement
date for its postretirement obligation is September 30 of
each year, FSP No. 106-2 required a one-quarter lag from
the remeasurement date (December 8, 2003) before applying
the effects of the Act.
Effective March 1, 2005 Delphi amended its health care
benefits plan for salaried retirees. Under this plan amendment
effective January 1, 2007, the Company reduced its
obligations to current salaried active employees, all current
salaried retirees and surviving spouses who are retired and are
eligible for Medicare coverage. Based on a March 1, 2005
remeasurement date, the impact of this amendment was a decrease
in the postretirement liability of $0.8 billion and a
decrease in 2005 expense of $72 million. As
SFAS No. 106 “Employers’ Accounting for
Postretirement Benefits Other than Pensions” requires a
one-quarter lag from the remeasurement date before applying the
effects of the plan amendment, income statement recognition of
the plan amendment began in June, 2005.
As required by U.S. GAAP, Delphi’s postretirement
expense for 2006 is determined at the 2005 measurement date. For
purposes of analysis, the following table highlights the
sensitivity of the Company’s postretirement obligations and
expense to changes in assumptions:
| |
|
|
|
|
|
|
|
|
| |
|
Impact on | |
|
Impact on | |
| Change in Assumption |
|
Postretirement Expense | |
|
Postretirement Liability | |
| |
|
| |
|
| |
|
25 bp decrease in discount rate
|
|
|
+$25 to 35 Million |
|
|
|
+$0.3 Billion |
|
|
25 bp increase in discount rate
|
|
|
-$25 to 35 Million |
|
|
|
-$0.3 Billion |
|
For analytical purposes only, the following table presents the
impact that changes in the Company’s health care trend rate
would have on its postretirement liability and postretirement
service and interest cost (in millions):
| |
|
|
|
|
|
|
|
|
| |
|
Impact on | |
|
Impact on | |
| % Change |
|
Service & Interest Cost | |
|
Postretirement Liability | |
| |
|
| |
|
| |
|
+1%
|
|
$ |
121 |
|
|
$ |
1,306 |
|
|
-1%
|
|
$ |
(91 |
) |
|
$ |
(1,143 |
) |
The above sensitivities reflect the effect of changing one
assumption at a time. It should be noted that economic factors
and conditions often affect multiple assumptions simultaneously
and the effects of changes in key assumptions are not
necessarily linear. The above sensitivities also assume no
changes to the postretirement plan design and no major
restructuring programs.
16. COMMITMENTS AND CONTINGENCIES
Regulatory Actions and Other
Matters
As previously disclosed, Delphi is the subject of an ongoing
investigation by the U.S. Securities and Exchange
Commission (“SEC”) and the Department of Justice
involving Delphi’s accounting for and the adequacy of
disclosures for a number of transactions dating from
Delphi’s spin-off from GM. Delphi is fully cooperating with
the government’s investigations. The Company entered into
an agreement with the SEC to suspend the running of the
applicable statute of limitations until April 6, 2006 and
subsequently agreed to extend the suspension until
August 31, 2006. The government’s investigations were
not
122
suspended as a result of Delphi’s filing for
chapter 11. Until these investigations are complete, Delphi
is not able to predict the effect, if any, that these
investigations will have on Delphi’s business and financial
condition, results of operations and cash flows.
The Company also believes that the Enforcement Division of the
SEC has taken a more proactive role, what the SEC refers to as a
“risk based” approach, by seeking information from
issuers in an effort to assess issuers’ accounting or
disclosure practices before identifying specific wrong-doing.
Delphi believes that the previously disclosed inquiry it
received during the fourth quarter of 2004 regarding accounting
practices related to defined benefit pension plans and other
postemployment benefit plans is an example of this practice.
Delphi continues to cooperate fully with the SEC’s informal
inquiry in this matter.
Shareholder Lawsuits
The Company, along with Delphi Trust I, Delphi
Trust II, current and former directors of the Company,
certain current and former officers and employees of the Company
or its subsidiaries, and others are named as defendants in
several lawsuits that were filed beginning in March 2005
following the Company’s announced intention to restate
certain of its financial statements.
On December 12, 2005, the Judicial Panel on Multidistrict
Litigation entered an order transferring each of the related
federal actions to the United States District Court for the
Eastern District of Michigan for coordinated or consolidated
pretrial proceedings (the “Multidistrict Litigation”).
The lawsuits transferred fall into three categories. One group
of putative class action lawsuits, which are purportedly brought
on behalf of participants in certain of the Company’s and
its subsidiaries’ defined contribution employee benefit
pension plans that invested in Delphi common stock, is brought
under the Employee Retirement Income Security Act of 1974, as
amended (the “ERISA Actions”). Plaintiffs in the ERISA
Actions allege, among other things, that the plans suffered
losses as a result of alleged breaches of fiduciary duties under
ERISA. On October 21, 2005, the ERISA Actions were
consolidated before one judge in the United States District
Court for the Eastern District of Michigan. The ERISA Actions
were subsequently transferred to the Multidistrict Litigation.
On March 3, 2006, plaintiffs filed a consolidated class
action complaint (the “Amended ERISA Action”) with a
putative class period of May 28, 1999 to November 1,
2005. The Company, which was previously named as a defendant in
the ERISA Actions, was not named as a defendant in the Amended
ERISA Action. The plaintiffs are not currently asserting claims
against or seeking relief from the Company in the Amended ERISA
Action due to the Company’s bankruptcy filing, but have
stated that they plan to proceed with claims against the Company
in the ongoing bankruptcy cases, and will seek to name the
Company as a defendant in the Amended ERISA Action if the
bankruptcy stay is modified or lifted to permit such action. The
defendants have filed a motion to dismiss the Amended ERISA
Action.
A second group of putative class action lawsuits variously
alleges, among other things, that the Company and certain of its
current and former directors and officers and others made
materially false and misleading statements in violation of
federal securities laws. On September 23, 2005, these
securities actions were consolidated before one judge in the
United States District Court for the Southern District of New
York. On September 30, 2005, the Court-appointed lead
plaintiffs filed a consolidated class action complaint (the
“Amended Securities Action”) on behalf of a putative
class consisting of all persons and entities who purchased or
otherwise acquired publicly-traded securities of the Company,
including securities issued by Delphi Trust I and Delphi
Trust II, during a putative class period of March 7,
2000 through March 3, 2005. The Amended Securities Action
names several new defendants, including Delphi Trust II,
certain former directors, and underwriters and other third
parties, and includes securities claims regarding additional
offerings of Delphi securities. The securities actions
consolidated in the Southern District of New York (and a related
securities action filed in the United States District Court for
the Southern District of Florida concerning Delphi Trust I)
were subsequently transferred to the Eastern District of
Michigan as part of the Multidistrict Litigation. The action is
stayed against the Company pursuant to the Bankruptcy Code, but
is continuing against the other defendants.
123
The third group of lawsuits is comprised of shareholder
derivative actions against certain current and former directors
and officers of the Company (“Shareholder Derivative
Actions”). In October 2005, following the filing by the
Company of its petition for reorganization relief under
chapter 11 of the U.S. Bankruptcy Code, three of the
four shareholder derivative actions were closed administratively
without prejudice. (Two of the three lawsuits that were closed
were pending in the Circuit Court of Oakland County, Michigan,
and the other was pending in the United States District Court
for the Eastern District of Michigan.) The plaintiff in the
remaining shareholder derivative action has agreed to adjourn
defendants’ time to respond without date. The two federal
derivative actions were transferred to the Multidistrict
Litigation.
In addition, the Company received a demand from a shareholder
that the Company consider bringing a derivative action against
certain current and former directors and officers. The
Shareholder Derivative Actions and the shareholder demand are
premised on allegations that certain current and former
directors and officers of the Company made materially false and
misleading statements in violation of federal securities laws
and/or of their fiduciary duties. The Company has appointed a
committee of the Board of Directors to consider the shareholder
demand. That committee of the Board of Directors is still
investigating the matter.
Due to the preliminary nature of these lawsuits, the Company is
not able to predict with certainty the outcome of this
litigation or the Company’s potential exposure related
thereto. In addition, because any recovery on allowed
prepetition claims is subject to a confirmed plan of
reorganization, the ultimate distribution with respect to
allowed claims is not presently ascertainable. While Delphi
maintains directors and officers insurance subject to a
$10 million deductible, and has recorded a reserve in the
amount of the deductible, the Company cannot assure the extent
of coverage or that the impact of any loss not covered by
insurance or applicable reserves would not be material.
Under section 362 of the U.S. Bankruptcy Code, the
filing of a bankruptcy petition automatically stays most actions
against a debtor, including most actions to collect prepetition
indebtedness or to exercise control over the property of the
debtor’s estate. Absent an order of the Court,
substantially all prepetition liabilities of the debtor are
subject to settlement under a plan of reorganization.
Ordinary Business Litigation
Delphi is from time to time subject to various legal actions and
claims incidental to its business, including those arising out
of alleged defects, breach of contracts, product warranties,
intellectual property matters, environmental matters, and
employment-related matters.
As previously disclosed, with respect to environmental matters,
Delphi received notices that it is a PRP in proceedings at
various sites, including the Tremont City Landfill Site located
in Tremont, Ohio which is alleged to involve ground water
contamination. In September 2002, Delphi and other PRPs entered
into a Consent Order with the Environmental Protection Agency
(“EPA”) to perform a Remedial Investigation and
Feasibility Study concerning a portion of the site, which is
expected to be completed during 2006. Based on findings to date,
Delphi believes that a reasonably possible outcome of the
investigative study is capping and future monitoring of this
site, which would substantially limit future remediation costs.
Delphi has included an estimate of its share of the potential
costs of such a remedy plus the cost to complete the
investigation in its overall reserve estimate. Because the scope
of the investigation and the extent of the required remediation
are still being determined, it is possible that the final
resolution of this matter may require that Delphi makes material
future expenditures for remediation, possibly over an extended
period of time and possibly in excess of its existing reserves.
Delphi will continue to
re-assess any potential
remediation costs and, as appropriate, its overall environmental
reserves as the investigation proceeds.
With respect to warranty matters, although Delphi cannot assure
that the future costs of warranty claims by customers will not
be material, Delphi believes its established reserves are
adequate to cover potential warranty settlements. However, the
final amounts determined to be due related to these matters
could differ materially from the Company’s recorded
estimates. Additionally, in connection with the Separation,
Delphi agreed to indemnify GM against substantially all losses,
claims, damages, liabilities or
124
activities arising out of or in connection with its business
post-Separation for which it is determined Delphi has
responsibility. Due to the nature of such indemnities, Delphi is
not able to estimate the maximum amount. On May 3, 2006, GM
notified Delphi and its unsecured creditors committee that GM
was seeking to exercise set-off rights in the amount of
approximately $67 million, alleging that catalytic
converters supplied by Delphi to GM for certain 2001 and 2002
vehicle platforms did not conform to specifications. Delphi
believes that GM’s claims are without merit and therefore
disputes GM’s right to set-off amounts against future
payments. If the parties cannot resolve the dispute, it will be
submitted to mediation and, if not resolved, to binding
arbitration, in accordance with the Court’s final order
approving the Company’s DIP credit facility.
With respect to intellectual property matters, on
September 7, 2004, Delphi received the arbitrator’s
binding decision resolving a dispute between Delphi and Litex
over alleged infringement of certain patents regarding methods
to reduce engine exhaust emissions. As previously disclosed, the
results of the arbitration did not have a material impact on
Delphi’s financial condition, operations or business
prospects. However, in March 2005, Delphi received
correspondence from counsel representing Litex that Litex
intended to file various tort claims against Delphi in
California state court. On March 4, 2005, Delphi filed a
complaint in the United States Federal Court for the District of
Massachusetts seeking declaratory relief to enforce the
parties’ settlement agreement in the original case,
prohibiting Litex from bringing such claims. On April 18,
2005, Litex countersued asserting various tort claims against
Delphi and requesting that the court void aspects of the
parties’ agreement in the original case. On
October 17, 2005, the court entered judgment in
Delphi’s favor and dismissed all of Litex’s claims
with prejudice. Litex had until December 16, 2005 to file a
notice of appeal, but has taken the position that the automatic
stay in place in Delphi’s chapter 11 cases prevented
Litex from doing so. It is Delphi’s position that Litex has
waived its right to appeal.
Additionally, for the past several years Delphi has been
involved in patent licensing negotiations with Denso Corporation
(“Denso”) relating to engine control technology. This
matter, including the lawsuit that had been filed by Denso, has
now been resolved through entry of a patent cross license
agreement. Patent license negotiations are ongoing with Denso in
connection with variable valve timing technology and it is
expected that these negotiations will be concluded on
commercially reasonable terms and in accordance with ordinary
industry practices.
Litigation is subject to many uncertainties, and the outcome of
individual litigated matters is not predictable with assurance.
After discussions with counsel, it is the opinion of Delphi
management that the outcome of such matters will not have a
material adverse impact on the consolidated financial position,
results of operations or cash flows of Delphi.
Under section 362 of the Bankruptcy Code, the filing of a
bankruptcy petition automatically stays most actions against a
debtor, including most actions to collect prepetition
indebtedness or to exercise control over the property of the
debtor’s estate. Absent an order of the Court,
substantially all prepetition liabilities are subject to
settlement under a plan of reorganization. (Refer to
Note 3, Chapter 11 Bankruptcy and Going Concern for
details on the chapter 11 cases).
Contingent Financing Obligations
Rental expense totaled $184 million, $192 million and
$162 million for the years ended December 31, 2005,
2004 and 2003, respectively. Delphi had leased certain property,
primarily land and buildings that are used in its operations,
under leases commonly known as synthetic leases. The leases,
which had been accounted for as operating leases in 2003, 2004
and a portion of 2005, provided the Company tax treatment
equivalent to ownership, and also provided the Company with the
option to purchase these properties at any time during the term
or to cause the properties to be remarketed upon lease
expiration. In 2005, Delphi exercised options to purchase these
leased properties. As of December 31, 2005, these
properties were included in the net property balance on the
consolidated balance sheet (Refer to Note 9, Property, Net,
for further information on these purchases). At
December 31, 2004, the aggregate fair value of these
properties exceeded the minimum value guaranteed upon exercise
of the remarketing option. As
125
of December 31, 2004, the recorded estimate of the fair
value of the residual value guarantee related to these leases
was approximately $2 million.
As of December 31, 2005, Delphi had minimum lease
commitments under noncancelable operating leases totaling
$456 million, which become due as follows:
| |
|
|
|
|
|
| |
|
Minimum Future Operating | |
| Year |
|
Lease Commitments | |
| |
|
| |
| |
|
(in millions) | |
|
2006
|
|
$ |
122 |
|
|
2007
|
|
|
96 |
|
|
2008
|
|
|
77 |
|
|
2009
|
|
|
52 |
|
|
2010
|
|
|
37 |
|
|
Thereafter
|
|
|
72 |
|
| |
|
|
|
| |
Total
|
|
$ |
456 |
|
| |
|
|
|
Concentrations of Risk
The Company’s business is labor intensive and utilizes a
large number of unionized employees. A strike or other form of
significant work disruption by the unions would likely have an
adverse effect on the Company’s ability to operate its
business. The majority of Delphi’s U.S. hourly
workforce is represented by two unions, the UAW (approximately
71%) and the Industrial Division of the Communication Workers of
America, AFL-CIO, CLC (“IUE-CWA”) (approximately 25%).
The Delphi-UAW National Labor Agreement and the Delphi-IUE-CWA
National Labor Agreement expire in September 2007 and November
2007, respectively.
|
|
| 17. |
OTHER INCOME (EXPENSE), NET |
Other income (expense), net included:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Claims and commissions
|
|
$ |
16 |
|
|
$ |
20 |
|
|
$ |
27 |
|
|
Interest income
|
|
|
43 |
|
|
|
24 |
|
|
|
22 |
|
|
Other, net
|
|
|
(9 |
) |
|
|
(52 |
) |
|
|
(43 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Other income (expense), net
|
|
$ |
50 |
|
|
$ |
(8 |
) |
|
$ |
6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| 18. |
STOCK INCENTIVE PLANS |
Delphi issued stock options and restricted stock units under its
long term incentive plan. While Delphi initially granted options
to a broad group of employees, significant dilution of the
incentive value of options caused the Company to modify its
compensation philosophy in 2003 to decrease the use of options
in favor of other forms of long-term compensation, including
performance-based cash awards and restricted stock unit grants.
During the fourth quarter of 2003, Delphi completed a
self-tender for certain employee stock options having an
exercise price in excess of $17 per share. The offer
enabled eligible employees to exchange each stock option for a
cash settled SAR having an equivalent strike price, term and
conditions to exercise as the surrendered option. The exchange
did not result in the recognition of expense in 2003 because the
fair market value of Delphi stock was below the stock
appreciation right exercise price. During the first quarter of
2003, Delphi also cancelled approximately 20 million shares
available for future grants under the terms of
126
certain of Delphi’s stock option plans. The table below
indicates as a separate line item those stock options, which
were exchanged as a result of the tender offer. In connection
with the Debtors operating pursuant to chapter 11 under the
Bankruptcy Code, Delphi cancelled approximately 22 million
shares available for future grants under its long-term incentive
plan. As a result, as of December 31, 2005, there were no
shares available for future grants of options or restricted
stock units. Options generally vest over two to three years and
expire ten years from the grant date. Stock options granted
during 2004 and 2003 were exercisable at prices equal to the
fair market value of Delphi common stock on the dates the
options were granted; accordingly, no compensation expense has
been recognized for the stock options granted.
The following summarizes information relative to stock options:
| |
|
|
|
|
|
|
|
|
| |
|
Stock | |
|
Weighted Average | |
| |
|
Options(a) | |
|
Exercise Price | |
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
|
|
Outstanding as of January 1, 2003
|
|
|
84,499 |
|
|
$ |
15.18 |
|
|
Granted
|
|
|
12,338 |
|
|
$ |
8.43 |
|
|
Exercised
|
|
|
(90 |
) |
|
$ |
7.27 |
|
|
Forfeited
|
|
|
(1,955 |
) |
|
$ |
14.19 |
|
|
Exchanged for SARs
|
|
|
(8,360 |
) |
|
$ |
18.29 |
|
| |
|
|
|
|
|
|
|
Outstanding as of December 31, 2003
|
|
|
86,432 |
|
|
$ |
13.95 |
|
| |
|
|
|
|
|
|
|
Granted
|
|
|
6,834 |
|
|
$ |
10.02 |
|
|
Exercised
|
|
|
(203 |
) |
|
$ |
8.57 |
|
|
Forfeited
|
|
|
(2,696 |
) |
|
$ |
13.62 |
|
| |
|
|
|
|
|
|
|
Outstanding as of December 31, 2004
|
|
|
90,367 |
|
|
$ |
13.68 |
|
| |
|
|
|
|
|
|
|
Granted
|
|
|
— |
|
|
$ |
N/A |
|
|
Exercised
|
|
|
— |
|
|
$ |
N/A |
|
|
Forfeited
|
|
|
(5,802 |
) |
|
$ |
13.11 |
|
| |
|
|
|
|
|
|
|
Outstanding as of December 31, 2005
|
|
|
84,565 |
|
|
$ |
13.72 |
|
| |
|
|
|
|
|
|
|
Options exercisable December 31, 2003
|
|
|
62,721 |
|
|
$ |
15.18 |
|
|
Options exercisable December 31, 2004
|
|
|
71,914 |
|
|
$ |
14.60 |
|
|
Options exercisable December 31, 2005
|
|
|
76,759 |
|
|
$ |
14.17 |
|
|
|
| (a) |
Includes options that were granted and unvested at the time of
the chapter 11 filing on October 8, 2005. The Company
cancelled future grants of stock-based compensation under its
long term incentive plan and will not issue any shares of common
stock pursuant to previously granted awards that had not vested
prior to the commencement of reorganization cases. |
127
The following is a summary of the range of exercise prices for
stock options that are outstanding and exercisable at
December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Approved by Stockholders | |
| |
|
| |
| Range of |
|
Outstanding | |
|
Weighted Average | |
|
Weighted Average | |
|
Number of | |
|
Weighted Average | |
| Exercise Prices |
|
Stock Options | |
|
Remaining Life | |
|
Exercise Price | |
|
Stock Options Exercisable | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
|
|
|
|
(in thousands) | |
|
|
|
$8.43-$10.00
|
|
|
10,807 |
|
|
|
7.3 |
|
|
$ |
8.43 |
|
|
|
7,189 |
|
|
$ |
8.43 |
|
|
$10.01-$20.00
|
|
|
49,677 |
|
|
|
4.8 |
|
|
$ |
13.54 |
|
|
|
45,489 |
|
|
$ |
13.87 |
|
|
$20.01-$20.97
|
|
|
73 |
|
|
|
3.0 |
|
|
$ |
20.66 |
|
|
|
73 |
|
|
$ |
20.66 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
60,557 |
|
|
|
|
|
|
$ |
12.64 |
|
|
|
52,751 |
|
|
$ |
13.14 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Other Plans | |
| |
|
| |
| Range of |
|
Outstanding | |
|
Weighted Average | |
|
Weighted Average | |
|
Number of | |
|
Weighted Average | |
| Exercise Prices |
|
Stock Options | |
|
Remaining Life | |
|
Exercise Price | |
|
Stock Options Exercisable | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
|
|
|
|
(in thousands) | |
|
|
|
$9.55-$10.00
|
|
|
1 |
|
|
|
2.0 |
|
|
$ |
9.55 |
|
|
|
1 |
|
|
$ |
9.55 |
|
|
$10.01-$20.00
|
|
|
21,191 |
|
|
|
3.6 |
|
|
$ |
15.89 |
|
|
|
21,191 |
|
|
$ |
15.89 |
|
|
$20.01-$24.76
|
|
|
2,816 |
|
|
|
3.0 |
|
|
$ |
20.64 |
|
|
|
2,816 |
|
|
$ |
20.64 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
24,008 |
|
|
|
|
|
|
$ |
16.45 |
|
|
|
24,008 |
|
|
$ |
16.45 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, 2004 and 2003, Delphi awarded approximately
4.3 million, 4.5 million and 3 million restricted
stock units to employees at a weighted average fair market value
of $7, $10 and $8, respectively. Compensation expense related to
restricted stock unit awards is being recognized over graded
vesting periods of 1 to 15 years.
Delphi operated its business along three reporting segments that
are grouped on the basis of similar product, market and
operating factors:
|
|
|
| |
• |
Dynamics, Propulsion, Thermal & Interior Sector, which
includes selected businesses from our energy and engine
management systems, chassis, steering and thermal systems and
interior product lines. |
| |
| |
• |
Electrical, Electronics & Safety Sector, which includes
selected businesses from our automotive electronics, audio,
consumer and aftermarket products, communication systems, safety
and power and signal distribution systems product lines. |
| |
| |
• |
Automotive Holdings Group, which is comprised of select product
lines and plant sites that do not meet our targets for net
income or other financial metrics, allowing for consistent and
targeted management focus on finding solutions to these
businesses. |
The accounting policies of the product sectors are the same as
those described in the summary of significant accounting
policies except that the disaggregated financial results for the
product sectors have been prepared using a management approach,
which is consistent with the basis and manner in which
management internally disaggregates financial information for
the purposes of assisting in making internal operating
decisions. Generally, Delphi evaluates performance based on
stand-alone product sector operating income and accounts for
inter-segment sales and transfers as if the sales or transfers
were to third parties, at current market prices. Net sales are
attributed to geographic areas based on the location of the
assets producing the revenues.
128
Included below are sales and operating data for Delphi’s
sectors for years ended December 31, 2005, 2004, and 2003,
which were realigned in 2005, as described below. The 2004 and
2003 data has been reclassified to conform to the sector
alignment established in 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dynamics, | |
|
|
|
|
|
|
|
|
| |
|
Propulsion, | |
|
Electrical, | |
|
Automotive | |
|
|
|
|
| |
|
Thermal & | |
|
Electronics & | |
|
Holdings | |
|
|
|
|
| 2005: |
|
Interior | |
|
Safety | |
|
Group | |
|
Other(a) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Net sales to GM and affiliates
|
|
$ |
6,413 |
|
|
$ |
5,072 |
|
|
$ |
1,375 |
|
|
$ |
— |
|
|
$ |
12,860 |
|
|
Net sales to other customers
|
|
|
5,387 |
|
|
|
8,073 |
|
|
|
538 |
|
|
|
89 |
|
|
|
14,087 |
|
|
Inter-sector net sales
|
|
|
769 |
|
|
|
303 |
|
|
|
589 |
|
|
|
(1,661 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total net sales
|
|
$ |
12,569 |
|
|
$ |
13,448 |
|
|
$ |
2,502 |
|
|
$ |
(1,572 |
) |
|
$ |
26,947 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization, and asset impairment charges (refer
to Note 9)
|
|
$ |
692 |
(b) |
|
$ |
508 |
(b) |
|
$ |
123 |
(b) |
|
$ |
60 |
|
|
$ |
1,383 |
(b) |
|
Goodwill impairment charges (refer to Note 10)
|
|
$ |
390 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
390 |
|
|
Sector operating (loss) income
|
|
$ |
(1,282 |
)(c) |
|
$ |
371 |
(c) |
|
$ |
(1,198 |
)(c) |
|
$ |
(62 |
)(c) |
|
$ |
(2,171 |
)(c) |
|
Equity income
|
|
$ |
51 |
|
|
$ |
19 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
71 |
|
|
Investment in affiliates
|
|
$ |
216 |
|
|
$ |
186 |
|
|
$ |
— |
|
|
$ |
16 |
|
|
$ |
418 |
|
|
Goodwill
|
|
$ |
— |
|
|
$ |
327 |
|
|
$ |
— |
|
|
$ |
36 |
|
|
$ |
363 |
|
|
Sector assets
|
|
$ |
7,691 |
|
|
$ |
7,855 |
|
|
$ |
934 |
|
|
$ |
543 |
|
|
$ |
17,023 |
|
|
Capital expenditures
|
|
$ |
505 |
|
|
$ |
498 |
|
|
$ |
58 |
|
|
$ |
122 |
|
|
$ |
1,183 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dynamics, | |
|
|
|
|
|
|
|
|
| |
|
Propulsion, | |
|
Electrical, | |
|
Automotive | |
|
|
|
|
| |
|
Thermal & | |
|
Electronics & | |
|
Holdings | |
|
|
|
|
| 2004: |
|
Interior | |
|
Safety | |
|
Group | |
|
Other(a) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Net sales to GM and affiliates
|
|
$ |
7,559 |
|
|
$ |
6,095 |
|
|
$ |
1,763 |
|
|
$ |
— |
|
|
$ |
15,417 |
|
|
Net sales to other customers
|
|
|
5,224 |
|
|
|
7,500 |
|
|
|
476 |
|
|
|
5 |
|
|
|
13,205 |
|
|
Inter-sector net sales
|
|
|
784 |
|
|
|
385 |
|
|
|
784 |
|
|
|
(1,953 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total net sales
|
|
$ |
13,567 |
|
|
$ |
13,980 |
|
|
$ |
3,023 |
|
|
$ |
(1,948 |
) |
|
$ |
28,622 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization, and asset impairment charges
|
|
$ |
585 |
(d) |
|
$ |
456 |
(d) |
|
$ |
384 |
(d) |
|
$ |
45 |
|
|
$ |
1,470 |
(d) |
|
Goodwill impairment charges
|
|
$ |
46 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
46 |
|
|
Sector operating income (loss)
|
|
$ |
(111 |
)(e) |
|
$ |
868 |
(e) |
|
$ |
(1,137 |
)(e) |
|
$ |
(102 |
)(e) |
|
$ |
(482 |
)(e) |
|
Equity income
|
|
$ |
64 |
|
|
$ |
21 |
|
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
86 |
|
|
Investment in affiliates
|
|
$ |
285 |
|
|
$ |
195 |
|
|
$ |
— |
|
|
$ |
16 |
|
|
$ |
496 |
|
|
Goodwill
|
|
$ |
421 |
|
|
$ |
341 |
|
|
$ |
— |
|
|
$ |
36 |
|
|
$ |
798 |
|
|
Sector assets
|
|
$ |
8,616 |
|
|
$ |
8,303 |
|
|
$ |
930 |
|
|
$ |
(1,290 |
) |
|
$ |
16,559 |
|
|
Capital expenditures
|
|
$ |
455 |
|
|
$ |
403 |
|
|
$ |
70 |
|
|
$ |
39 |
|
|
$ |
967 |
|
129
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Dynamics, | |
|
|
|
|
|
|
|
|
| |
|
Propulsion, | |
|
Electrical, | |
|
Automotive | |
|
|
|
|
| |
|
Thermal & | |
|
Electronics & | |
|
Holdings | |
|
|
|
|
| 2003: |
|
Interior | |
|
Safety | |
|
Group | |
|
Other(a) | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Net sales to GM and affiliates
|
|
$ |
8,232 |
|
|
$ |
6,631 |
|
|
$ |
2,166 |
|
|
$ |
— |
|
|
$ |
17,029 |
|
|
Net sales to other customers
|
|
|
4,580 |
|
|
|
5,980 |
|
|
|
487 |
|
|
|
1 |
|
|
|
11,048 |
|
|
Inter-sector net sales
|
|
|
734 |
|
|
|
417 |
|
|
|
867 |
|
|
|
(2,018 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total net sales
|
|
$ |
13,546 |
|
|
$ |
13,028 |
|
|
$ |
3,520 |
|
|
$ |
(2,017 |
) |
|
$ |
28,077 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization, and asset impairment charges
|
|
$ |
515 |
(f) |
|
$ |
424 |
(f) |
|
$ |
140 |
(f) |
|
$ |
41 |
|
|
$ |
1,120 |
(f) |
|
Sector operating income (loss)
|
|
$ |
399 |
(g) |
|
$ |
857 |
(g) |
|
$ |
(994 |
)(g) |
|
$ |
(173 |
)(g) |
|
$ |
89 |
(g) |
|
Equity income (loss)
|
|
$ |
62 |
|
|
$ |
21 |
|
|
$ |
— |
|
|
$ |
(1 |
) |
|
$ |
82 |
|
|
Investment in affiliates
|
|
$ |
243 |
|
|
$ |
172 |
|
|
$ |
— |
|
|
$ |
16 |
|
|
$ |
431 |
|
|
Goodwill
|
|
$ |
463 |
|
|
$ |
301 |
|
|
$ |
— |
|
|
$ |
9 |
|
|
$ |
773 |
|
|
Sector assets
|
|
$ |
10,275 |
|
|
$ |
8,715 |
|
|
$ |
2,510 |
|
|
$ |
(434 |
) |
|
$ |
21,066 |
|
|
Capital expenditures
|
|
$ |
601 |
|
|
$ |
408 |
|
|
$ |
50 |
|
|
$ |
29 |
|
|
$ |
1,088 |
|
|
|
| (a) |
Other includes activity not allocated to the product sectors
including the Company’s medical systems operations and
elimination of inter-sector transactions. |
|
|
|
|
(b) |
|
Includes asset impairment charges recorded in 2005 of
$239 million including $233 million related to
long-lived assets held for use with $117 million for
Dynamics, Propulsion, Thermal & Interior,
$41 million for Electrical, Electronics & Safety,
and $75 million for Automotive Holdings Group; and
$6 million related to intangible assets with
$4 million for Dynamics, Propulsion, Thermal &
Interior and $2 million for Electrical,
Electronics & Safety. |
| |
|
(c) |
|
Includes charges recorded in 2005 related to asset impairments,
contractual costs of other than temporarily idled employees, and
costs associated with employee attrition programs of
$886 million with $595 million for Dynamics,
Propulsion, Thermal & Interior, $127 million for
Electrical, Electronics & Safety, and $164 million
for Automotive Holdings Group. |
| |
|
(d) |
|
Includes asset impairment charges recorded in 2004 of
$326 million with $28 million for Dynamics,
Propulsion, Thermal & Interior, $13 million for
Electrical, Electronics & Safety, and $285 million
for Automotive Holdings Group. |
| |
|
(e) |
|
Includes charges recorded in 2004 of $687 million with
$132 million for Dynamics, Propulsion, Thermal &
Interior, $91 million for Electrical,
Electronics & Safety, $457 million for Automotive
Holdings Group and $7 million for Other. |
| |
|
(f) |
|
Includes asset impairment charges recorded in 2003 of
$58 million with $1 million for Dynamics, Propulsion,
Thermal & Interior, $6 million for Electrical,
Electronics & Safety, and $51 million for
Automotive Holdings Group. |
| |
|
(g) |
|
Includes charges recorded in 2003 of $561 million with
$86 million for Dynamics, Propulsion, Thermal &
Interior, $114 million for Electrical,
Electronics & Safety, $319 million for Automotive
Holdings Group and $42 million for Other. |
Effective January 1, 2005, Delphi moved three additional
manufacturing operations into the Company’s Automotive
Holdings Group (“AHG”) to accelerate efforts to bring
these sites back to profitability or resolve issues at these
operations through other actions. AHG was established to
increase Delphi management focus on one operating sector to
resolve under-performing product lines or sites, while enabling
Delphi management of other operating sectors to focus on growth
and expansion. The additional operations named to Delphi’s
AHG include: Laurel, Mississippi; Kettering, Ohio; and Home
Avenue/Vandalia, Ohio.
130
The realignment was designed to increase focus on products and
services for the greatest long-term benefit for Delphi while at
the same time placing an equal focus on businesses requiring
additional Delphi management attention. It was a further step in
the implementation of the Company’s long-term portfolio
plans. The segment information provided above is based on the
realigned sectors.
As announced on March 31, 2006, Delphi plans to focus its
product portfolio on those core technologies for which Delphi
believes it has significant competitive and technological
advantages and will concentrate the organization around those
core strategic product lines. The Company is currently
developing the revised organizational structure to support the
core strategic product lines and is in the process of realigning
reporting structures and systems to facilitate financial
reporting. Although the Company expects to change its reporting
segments based on the to-be-developed revised organizational
structure, such realignment was not complete at
December 31, 2005 and accordingly the Company did not meet
the criteria to change its reportable segments under
SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information.” The Company expects to
change its reporting segments in the third quarter of 2006.
Information concerning principal geographic areas is set forth
below. Net sales data reflects the manufacturing location and is
for the years ended December 31. Net property data is as of
December 31.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
Net Sales | |
|
|
|
Net Sales | |
|
|
|
Net Sales | |
|
|
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
| |
|
|
|
Other | |
|
|
|
Net | |
|
|
|
Other | |
|
|
|
Net | |
|
|
|
Other | |
|
|
|
Net | |
| |
|
GM | |
|
Customers | |
|
Total | |
|
Property | |
|
GM | |
|
Customers | |
|
Total | |
|
Property | |
|
GM | |
|
Customers | |
|
Total | |
|
Property | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(dollars in millions) | |
|
North America
|
|
$ |
11,445 |
|
|
$ |
6,827 |
|
|
$ |
18,272 |
|
|
$ |
2,999 |
|
|
$ |
13,724 |
|
|
$ |
5,909 |
|
|
$ |
19,633 |
|
|
$ |
3,439 |
|
|
$ |
15,481 |
|
|
$ |
4,957 |
|
|
$ |
20,438 |
|
|
$ |
4,071 |
|
|
Europe, Middle East, & Africa
|
|
|
967 |
|
|
|
5,733 |
|
|
|
6,700 |
|
|
|
1,607 |
|
|
|
1,286 |
|
|
|
6,020 |
|
|
|
7,306 |
|
|
|
1,998 |
|
|
|
1,222 |
|
|
|
4,960 |
|
|
|
6,182 |
|
|
|
1,906 |
|
|
Asia Pacific
|
|
|
90 |
|
|
|
1,213 |
|
|
|
1,303 |
|
|
|
363 |
|
|
|
97 |
|
|
|
1,001 |
|
|
|
1,098 |
|
|
|
376 |
|
|
|
101 |
|
|
|
944 |
|
|
|
1,045 |
|
|
|
301 |
|
|
South America
|
|
|
358 |
|
|
|
314 |
|
|
|
672 |
|
|
|
139 |
|
|
|
310 |
|
|
|
275 |
|
|
|
585 |
|
|
|
133 |
|
|
|
225 |
|
|
|
187 |
|
|
|
412 |
|
|
|
121 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
12,860 |
|
|
$ |
14,087 |
|
|
$ |
26,947 |
|
|
$ |
5,108 |
|
|
$ |
15,417 |
|
|
$ |
13,205 |
|
|
$ |
28,622 |
|
|
$ |
5,946 |
|
|
$ |
17,029 |
|
|
$ |
11,048 |
|
|
$ |
28,077 |
|
|
$ |
6,399 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 20. |
FAIR VALUE OF FINANCIAL INSTRUMENTS, DERIVATIVES AND HEDGING
ACTIVITIES |
Delphi’s financial instruments include its Amended DIP
Credit Facility, prepetition Revolving Credit Facility,
prepetition Term Loan, unsecured notes, junior subordinated
notes due to Trust I and Trust II, and other financing
instruments. The fair value of these financial instruments is
based on quoted market prices for the same or similar issues or
the current rates offered to Delphi for debt with the same or
similar maturities and terms. As of December 31, 2005 and
2004, the total of these financial instruments was recorded at
$5.3 billion and $2.5 billion, respectively, and had
estimated fair values of $4.0 billion and
$2.5 billion, respectively. For all other financial
instruments recorded at December 31, 2005 and 2004, fair
value approximates book value.
SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, requires
that all derivative instruments be reported on the balance sheet
at fair value with changes in fair value reported currently
through earnings unless the transactions qualify and are
designated as normal purchases or sales or meet special hedge
accounting criteria. The fair value of foreign currency and
commodity derivative instruments are determined using exchange
traded prices and rates.
Delphi is exposed to market risk, such as fluctuations in
foreign currency exchange rates, commodity prices and changes in
interest rates, which may result in cash flow risks. To manage
the volatility relating to these exposures, Delphi aggregates
the exposures on a consolidated basis to take advantage of
natural offsets. For exposures that are not offset within its
operations, Delphi enters into various derivative transactions
pursuant to risk management policies. Designation is performed
on a transaction basis to support hedge accounting. The changes
in fair value of these hedging instruments are offset in part or
in whole by corresponding changes in the fair value or cash
flows of the underlying exposures being hedged.
131
Delphi assesses the initial and ongoing effectiveness of its
hedging relationships in accordance with its documented policy.
Delphi does not hold or issue derivative financial instruments
for trading purposes.
Delphi has foreign currency exchange exposure from buying and
selling in currencies other than the local currencies of its
operating units. The primary purpose of the Company’s
foreign currency hedging activities is to manage the volatility
associated with forecasted foreign currency purchases and sales.
Principal currencies hedged include the Mexican peso, Polish
zloty, Chinese yuan, Hungarian forint, Japanese yen, Korean won,
British pound, and Euro. Delphi primarily utilizes forward
exchange contracts with maturities of less than 24 months,
which qualify as cash flow hedges.
Delphi has exposure to the prices of commodities in the
procurement of certain raw materials. The primary purpose of the
Company’s commodity price hedging activities is to manage
the volatility associated with these forecasted inventory
purchases. Delphi primarily utilizes swaps and options with
maturities of less than 24 months, which qualify as cash
flow hedges. These instruments are intended to offset the effect
of changes in commodity prices on forecasted inventory purchases.
In order to manage the interest rate risk associated with its
debt portfolio, Delphi periodically enters into derivative
transactions to manage its exposure to changes in interest
rates, although Delphi did not have any outstanding at
December 31, 2005 or 2004.
The fair value of derivative financial instruments recorded in
the consolidated balance sheets as assets and liabilities as of
December 31, 2005, 2004 and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
|
December 31, | |
|
December 31, | |
| |
|
2005 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
Current assets
|
|
$ |
5 |
|
|
$ |
99 |
|
|
$ |
54 |
|
|
Non-current assets
|
|
|
2 |
|
|
|
— |
|
|
|
4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total assets
|
|
$ |
7 |
|
|
$ |
99 |
|
|
$ |
58 |
|
| |
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
8 |
|
|
$ |
42 |
|
|
$ |
55 |
|
|
Non-current liabilities
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total liabilities
|
|
$ |
8 |
|
|
$ |
43 |
|
|
$ |
55 |
|
| |
|
|
|
|
|
|
|
|
|
Gains and losses on derivatives qualifying as cash flow hedges
are recorded in other comprehensive income (“OCI”) to
the extent that hedges are effective until the underlying
transactions are recognized in earnings. Unrealized amounts in
OCI will fluctuate based on changes in the fair value of open
hedge derivative contracts at each reporting period. Net gains
included in OCI as of December 31, 2005, were
$12 million pre-tax. Of this pre-tax total, a gain of
approximately $12 million is expected to be included in
cost of sales within the next 12 months and a gain of
approximately $1 million is expected to be included in
subsequent periods and a loss of approximately $1 million
is expected to be included in depreciation and amortization
expense over the lives of the related fixed assets. Net gains of
$86 million after-tax ($91 million pre-tax) and net
losses of $35 million after-tax ($52 million pre-tax)
were included in OCI as of December 31, 2004 and 2003,
respectively. Cash flow hedges are discontinued when it is
probable that the original forecasted transactions will not
occur. The amount included in cost of sales related to hedge
ineffectiveness was not significant. The amount included in cost
of sales related to the time value of options was not
significant in 2005, 2004, and 2003.
21. SUBSEQUENT EVENTS
On February 17, 2006, the Court entered a final order for a
Key Employee Compensation Program (“KECP”) granting
the motion of the Debtors to implement an “at risk”
incentive plan (the “Final Revised AIP”) for the
period commencing on January 1, 2006 and continuing through
June 30, 2006 (the “Performance Period”). The
Final Revised AIP applies to approximately 460 individuals
holding executive positions with Delphi or one of its affiliated
Debtors in the U.S. during the Performance Period (such
persons, the “Executives”). Delphi’s current
Chairman and CEO has voluntarily excluded himself from
participating in the KECP. The Final Revised AIP provides the
opportunity for at risk incentive payments to the Executives
provided that certain corporate and divisional targets are met.
Additionally, an incentive
132
plan mirroring the Final Revised AIP will apply to approximately
100 individuals holding executive positions at non-Debtor
subsidiaries of Delphi as well as salaried employees in the U.S.
In conjunction with the approval of the Final Revised AIP,
certain incentive compensation plans previously in place for
Delphi executives were cancelled resulting in the reduction of
accruals for incentive compensation in the first quarter of 2006.
On March 22, 2006, Delphi, GM and the UAW agreed on a
special attrition program, pursuant to which certain eligible
Delphi U.S. hourly employees represented by the UAW were
offered normal and early voluntary retirements with a lump sum
incentive payment of $35,000 (the “Special Attrition
Program”). The lump sum incentive payment applied to all
eligible retirements from October 1, 2005 forward. The
program also provided additional retirement opportunities;
including transfer to and retirement from GM. Approximately
14,500 U.S. hourly employees represented by the UAW were
eligible to participate in the program. Additionally, GM has
agreed 5,000 of Delphi’s U.S. hourly employees
represented by the UAW may return to GM through the beginning of
September 2007. As of June 30, 2006, approximately 12,500
employees had elected to participate in the Special Attrition
Plan. On May 5, 2006, the Court entered the order approving
the motion with certain modifications, which was subsequently
amended on May 12, 2006. Since court approval occurred in
the second quarter of 2006, the impact of the Special Attrition
Program will be recorded in the second quarter of 2006.
On June 9, 2006, Delphi, GM, and the UAW agreed on a
supplemental agreement that will expand the Special Attrition
Program to include a pre-retirement program for employees with
26 years of credited service and provide buyouts for
UAW-represented hourly employees. The supplemental agreement was
approved by the Court on June 29, 2006. The new options
added to the Special Attrition Program are enabled by the
financial support from GM.
On June 16, 2006, Delphi reached agreement on the terms of
a special attrition program pursuant to which certain eligible
Delphi hourly employees represented by the IUE-CWA would be
offered normal and early voluntary retirements with a lump sum
incentive payment of $35,000, additional retirement
opportunities (including transfer to and from GM), or buy-out
payments, which, depending on the amount of seniority or
credited service, would range from $40,000 to $140,000 (the
“IUE-CWA Special Attrition Program”). GM has agreed to
pay the incentive payment of $35,000 and to pay one-half of the
buy-out payments, except for employees at Delphi’s New
Brunswick operations where previously agreed upon terms apply.
The IUE-CWA Special Attrition Program was approved by the Court
on June 29, 2006.
As previously reported, Delphi’s 2005 sale of its global
battery product line, with the exception of two
U.S. operations, to Johnson Controls Inc. (“JCI”)
(see Note 6 Acquisitions and Divestitures) contemplated a
future possible transfer of operating assets of one of the two
remaining U.S. plants supplying batteries to JCI under a
contract manufacturing supply agreement. On May 26, 2006,
Delphi and JCI executed an agreement providing for the
(a) sale to JCI of certain assets of Delphi’s battery
manufacturing facility in New Brunswick, New Jersey (the
“New Brunswick Facility”) free and clear of liens,
claims, and encumbrances in exchange for JCI’s payment to
Delphi of $1 plus the value of certain inventory estimated at
approximately $2 million, (b) the continuation and
transition of supply of battery products to JCI from
Delphi’s battery manufacturing facility in Fitzgerald,
Georgia pursuant to the manufacturing supply agreement entered
into in connection with the initial sale in 2005 and
(c) implementation of an attrition plan with respect to the
hourly employees of the New Brunswick Facility (collectively,
the “Transaction”). On the same date, Delphi also
entered into an agreement with the
IUE-CWA and its Local
416 in connection with the attrition plan contemplated by the
Transaction. Upon consummation of the Transaction, JCI has
agreed to pay Delphi approximately $13 million to reimburse
Delphi for a significant portion of the amounts to be spent
under the attrition plan with the
IUE-CWA and
Local 416 of the
IUE-CWA. In addition,
pursuant to a separate 2005 prepetition agreement entered into
between Delphi and GM, which was executed in connection with the
sale of Delphi’s global battery business, GM has committed
to provide funding in furtherance of this matter. On
June 19, 2006 the Court approved the Transaction, which is
expected to close in the third quarter of 2006.
133
|
|
| 22. |
QUARTERLY DATA (UNAUDITED) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended | |
|
|
| |
|
| |
|
|
| |
|
March 31, | |
|
June 30, | |
|
Sept. 30, | |
|
Dec. 31, | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions, except per share amounts) | |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
6,862 |
|
|
$ |
7,023 |
|
|
$ |
6,283 |
|
|
$ |
6,779 |
|
|
$ |
26,947 |
|
|
Cost of sales
|
|
|
6,500 |
|
|
|
6,606 |
|
|
|
6,221 |
|
|
|
6,374 |
|
|
|
25,701 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
362 |
|
|
$ |
417 |
|
|
$ |
62 |
|
|
$ |
405 |
|
|
$ |
1,246 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$ |
(324 |
) |
|
$ |
(284 |
) |
|
$ |
(693 |
)(1) |
|
$ |
(870 |
)(2) |
|
$ |
(2,171 |
)(3) |
|
Loss before cumulative effect of accounting change
|
|
$ |
(403 |
) |
|
$ |
(338 |
) |
|
$ |
(788 |
)(1) |
|
$ |
(811 |
)(2) |
|
$ |
(2,340 |
)(3) |
|
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
|
|
(17 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(403 |
) |
|
$ |
(338 |
) |
|
$ |
(788 |
)(1) |
|
$ |
(828 |
)(2) |
|
$ |
(2,357 |
)(3) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share before cumulative effect of
accounting change
|
|
$ |
(0.73 |
) |
|
$ |
(0.60 |
) |
|
$ |
(1.40 |
) |
|
$ |
(1.45 |
) |
|
$ |
(4.18 |
) |
|
Cumulative effect of accounting change
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.03 |
) |
|
|
(0.03 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$ |
(0.73 |
) |
|
$ |
(0.60 |
) |
|
$ |
(1.40 |
) |
|
$ |
(1.48 |
) |
|
$ |
(4.21 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$ |
0.030 |
|
|
$ |
0.015 |
|
|
$ |
0.000 |
|
|
$ |
0.000 |
|
|
$ |
0.045 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
High
|
|
$ |
9.07 |
|
|
$ |
5.40 |
|
|
$ |
6.68 |
|
|
$ |
2.99 |
|
|
$ |
9.07 |
|
| |
Low
|
|
$ |
4.15 |
|
|
$ |
3.20 |
|
|
$ |
2.42 |
|
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
7,405 |
|
|
$ |
7,542 |
|
|
$ |
6,642 |
|
|
$ |
7,033 |
|
|
$ |
28,622 |
|
|
Cost of sales
|
|
|
6,602 |
|
|
|
6,639 |
|
|
|
6,074 |
|
|
|
6,674 |
|
|
|
25,989 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
803 |
|
|
$ |
903 |
|
|
$ |
568 |
|
|
$ |
359 |
|
|
$ |
2,633 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
143 |
|
|
$ |
210 |
|
|
$ |
(108 |
) |
|
$ |
(727 |
)(4) |
|
$ |
(482 |
)(4) |
|
Net income (loss)
|
|
$ |
63 |
|
|
$ |
143 |
|
|
$ |
(119 |
) |
|
$ |
(4,905 |
)(4)(5) |
|
$ |
(4,818 |
)(4)(5) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
$ |
0.11 |
|
|
$ |
0.25 |
|
|
$ |
(0.21 |
) |
|
$ |
(8.74 |
)(5) |
|
$ |
(8.59 |
)(5) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per share
|
|
$ |
0.070 |
|
|
$ |
0.070 |
|
|
$ |
0.070 |
|
|
$ |
0.070 |
|
|
$ |
0.280 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
High
|
|
$ |
11.78 |
|
|
$ |
11.01 |
|
|
$ |
10.69 |
|
|
$ |
9.63 |
|
|
$ |
11.78 |
|
| |
Low
|
|
$ |
9.39 |
|
|
$ |
9.55 |
|
|
$ |
8.61 |
|
|
$ |
8.10 |
|
|
$ |
8.10 |
|
|
|
| (1) |
Includes asset impairment charges of $40 million pre-tax
related to long-lived assets held for use. |
| |
| (2) |
Includes asset impairment charges of $199 million pre-tax,
including $193 million pre-tax related to long-lived assets
held for use and $6 million pre-tax related to intangible
assets. Also, includes $390 million pre-tax of goodwill
impairment charges. |
| |
| (3) |
Includes asset impairment charges of $239 million pre-tax,
including $233 million pre-tax related to long-lived assets
held for use and $6 million pre-tax related to intangible
assets. Also, includes $390 million pre-tax of goodwill
impairment charges. |
| |
| (4) |
Includes asset impairment charges of $326 million pre-tax
related to long-lived assets held for use and $46 million
pre-tax of goodwill impairment charges. |
| |
| (5) |
As restated, see Note 2, Restatement. Previously reported
net loss for the three months ended December 31, 2004 and
calendar year ended December 31, 2004 was
$4,840 million and $4,753 million, respectively.
Previously reported basic and diluted loss per share for the
three months ended December 31, 2004 and calendar year
ended December 31, 2004 was $8.63 and $8.47, respectively. |
134
DELPHI CORPORATION
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Additions | |
|
|
|
|
| |
|
|
|
| |
|
|
|
|
| |
|
Balance at | |
|
Charged to | |
|
Charged to | |
|
|
|
Balance at | |
| |
|
Beginning of | |
|
Costs and | |
|
Other | |
|
|
|
End of | |
| Description |
|
Period | |
|
Expenses | |
|
Accounts | |
|
Deductions | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in millions) | |
|
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
91 |
|
|
$ |
72 |
|
|
$ |
— |
|
|
$ |
(34 |
) |
|
$ |
129 |
|
| |
|
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
92 |
|
|
$ |
57 |
|
|
$ |
(3 |
) |
|
$ |
(55 |
) |
|
$ |
91 |
|
| |
|
December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
83 |
|
|
$ |
52 |
|
|
$ |
10 |
|
|
$ |
(53 |
) |
|
$ |
92 |
|
135
|
|
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
As previously disclosed in a Current Report on
Form 8-K dated
December 7, 2005 (the
“Form 8-K”),
after reviewing proposals from four accounting firms, including
Deloitte & Touche LLP (“Deloitte &
Touche”), the Company’s current independent registered
public accounting firm, the Audit Committee of the Board of
Directors of Delphi Corporation (“Delphi” or the
“Company”) selected Ernst & Young LLP
(“Ernst & Young”) to serve as Delphi’s
independent registered public accounting firm, effective
January 1, 2006, for the fiscal year ended
December 31, 2006. The Board of Directors concurred with
the Audit Committee’s selection. Delphi’s application
for an order authorizing the retention of Deloitte &
Touche to serve as Delphi’s independent registered public
accounting firm for the year ending December 31, 2005 was
approved by the United States Bankruptcy Court for the Southern
District of New York (the “Court”) on January 17,
2006. Delphi’s application for an order authorizing the
retention of Ernst & Young to serve as Delphi’s
independent registered public accounting firm for the year
ending December 31, 2006 was approved by the Court on
April 5, 2006.
As more fully described in the
Form 8-K, the
change was not the result of any disagreement between Delphi and
Deloitte & Touche on any matter of accounting
principles or practices, financial statement disclosure or
auditing scope or procedure or any decision by
Deloitte & Touche to resign or refuse to stand for
re-election.
Deloitte & Touche completed its existing engagement
with the issuance of its audit report and assessment of internal
controls included herein.
|
|
| ITEM 9A. |
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Under the supervision and with the participation of our
management, including our Chief Executive Officer (the
“CEO”) and Chief Financial Officer (the
“CFO”), we have evaluated the effectiveness of design
and operation of our disclosure controls and procedures (as
defined in Exchange Act
Rules 13a-15(e)
and 15d-15(e)) as of
the end of the period covered by this report. Based on this
evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were not effective as of
December 31, 2005. The basis for this determination was
that, as discussed below, we have identified material weaknesses
in our internal control over financial reporting, which we view
as an integral part of our disclosure controls and procedures.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting (as defined in Exchange Act
Rules 13a-15(f)
and 15(d)-15(f))
includes those policies and procedures that: (a) pertain to
the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the Company; (b) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles in the United States of America
(“U.S. GAAP”), and that receipts and expenditures
of Delphi Corporation (“Delphi” or the
“Company”) are being made only in accordance with
authorizations of management and directors of the Company; and
(c) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect
on the financial statements.
Our management assessed our internal control over financial
reporting as of December 31, 2005, the end of our fiscal
year. Management based its assessment on the criteria set forth
in the framework in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
136
A material weakness is a control deficiency, or combination of
control deficiencies, that result in more than a remote
likelihood that a material misstatement of annual or interim
financial statements will not be prevented or detected.
Management’s assessment concluded that the Company did not
maintain effective internal control over financial reporting as
of December 31, 2005 as a result of the following
identified material weaknesses:
|
|
|
| |
• |
We did not maintain a control environment that fully emphasized
the establishment of or adherence to appropriate internal
control for certain aspects of the Company’s operations.
Principal contributing factors included (i) an insufficient
number of or inappropriate depth of experience in the
application of U.S. GAAP for its accounting and finance
personnel, (ii) the inadequate establishment and
maintenance of an effective anti-fraud program,
(iii) inadequate documentation of authorization to make
changes to payroll data and (iv) inadequate controls over
records of employee and retiree demographic information used in
determining retirement benefits liabilities. |
| |
| |
• |
We did not perform a formalized, company-wide risk assessment to
evaluate the implications of relevant risks on financial
reporting. |
| |
| |
• |
We failed to design and implement controls over the contract
administration process to provide reasonable assurance that
significant contracts are adequately analyzed to determine the
accounting implications, or to capture, analyze, and record the
accounting impact of amendments to existing contracts. |
| |
| |
• |
Our controls over account reconciliations did not operate
effectively. Specifically, controls over the preparation, review
and monitoring of account reconciliations of balance sheet
accounts to ensure that account balances were accurate and
supported with appropriate underlying calculations and
documentation in a timely manner. |
| |
| |
• |
Our controls over journal entries did not operate effectively.
Specifically, controls surrounding the preparation, independent
review, and authorization of journal entries to ensure that
entries were accurate and supported by appropriate underlying
documentation. |
| |
| |
• |
Our controls over inventory accounting did not operate
effectively. Specifically, controls to determine that
(i) consignment inventories (including buy/sell
relationships) and pay-on consumption inventories were
reconciled on a timely basis; (ii) adjustments to inventory
costs or quantities related to annual physical inventories,
cycle counts, and negative inventory are made in the appropriate
period; (iii) the receipt of raw materials, finished goods
returned by customers and finished goods received from
production are recorded in the appropriate period; and
(iv) the calculation of excess and obsolete inventory
reserves are performed accurately and adjustments recorded on a
timely basis. |
| |
| |
• |
Our controls over fixed asset accounting did not operate
effectively. Specifically, controls over (i) the proper
classification and approval of capitalized maintenance;
(ii) the proper and timely transfer of
construction-work-in-progress
tooling to the fixed assets ledger; (iii) the proper
amortization of tooling assets pursuant to corporate guidelines;
and (iv) the proper approval and timely recording of
disposals and transfers related to fixed assets and special
tools. |
| |
| |
• |
Our controls over income tax accounting and disclosure did not
operate effectively. Specifically, controls over the preparation
and review of supporting calculations, analyses and disclosures
related to Statement of Financial Accounting Standards
No. 109, “Accounting for Income Taxes” that
provide reasonable assurance that the account balances and
disclosures were accurate and supported by appropriate
underlying documentation. |
| |
| |
• |
Our controls over temporary cash disbursements process
accounting did not operate effectively. Specifically, controls
over a temporary cash disbursements process implemented
following the Company’s chapter 11 filing related to
(i) unintended over-payments, and (ii) the timely
accounting of those payments. |
137
Management has discussed the material weaknesses described above
and related corrective actions with the Audit Committee. Our
independent registered public accounting firm,
Deloitte & Touche LLP (“Deloitte &
Touche”), has audited management’s assessment of our
internal control over financial reporting. Deloitte &
Touche has issued an attestation report, which is included under
Item 8. Financial Statements and Supplementary Data—
Report of Independent Registered Public Accounting Firm.
Remediation of Material Weaknesses
During our 2004 assessment of internal control over financial
reporting as disclosed in our Annual Report on
Form 10-K for the
year ended December 31, 2004 we identified the following
material weaknesses:
|
|
|
| |
• |
Insufficient numbers of personnel having appropriate knowledge,
experience and training in the application of GAAP at the
divisional level, and insufficient personnel at the
Company’s headquarters to provide effective oversight and
review of financial transactions; |
| |
| |
• |
Ineffective “tone” within the organization related to
the discouragement, prevention or detection of management
override, as well as inadequate emphasis on thorough and proper
analysis of accounts and financial transactions; |
| |
| |
• |
Ineffective or inadequate accounting policies to ensure the
proper and consistent application of GAAP throughout the
organization. |
| |
| |
• |
Ineffective or inadequate controls over the administration and
related accounting for contracts; |
The Company did not fully remediate all the material weaknesses
listed above. We continue to remediate the elements related to
insufficient numbers of personnel having appropriate knowledge
and ineffective or inadequate controls over contract
administration.
Management believes that it has made progress to remediate these
two previously identified material weaknesses, however,
additional remediation is still required as discussed below.
Therefore, consistent with our expectations set forth in
Item 4 of our quarterly report on
Form 10-Q for the
period ended September 30, 2005, we are continuing to
report two of the previously identified material weaknesses and
will do so until further testing and assessment is completed.
The Company did remediate the material weaknesses related to the
ineffective or inadequate accounting policies and ineffective
tone within the organization related to the discouragement,
prevention, or detection of managerial override. During our
review of deficiencies found in management’s 2005
assessment, no evidence of management override was noted.
During the course of our 2005 assessment, management identified
additional material weaknesses.
Management has taken a number of steps that it believes will
impact the effectiveness of our internal controls over financial
reporting and has identified a number of additional remediation
activities that it will seek to implement throughout the
remainder of 2006. The actions taken through the date of this
filing and future actions planned to remediate these weakness
are described as follows:
Ineffective Control Environment
The Company did not find any evidence of management override
and, as discussed in Item 4 of our quarterly report on
Form 10-Q for the
period ended September 30, 2005 specific actions were taken
by management to remediate the control deficiencies identified
during the accounting investigation by the Audit Committee and
the Company.
Specifically, in October 2005, Delphi’s Board of Directors
named a new CFO, who is fostering a culture of openness
throughout the organization. Also in October 2005, Delphi’s
Board of Directors named a new General Counsel and assigned the
General Counsel the additional duties of Chief Compliance
Officer, reporting in this capacity to the CEO and the chair of
the Audit Committee. In early November 2005, senior members of
Delphi’s executive management attended a training session
focusing on lessons
138
learned from the accounting investigation, ethical business
behavior and maintaining appropriate tone at the top. The
remainder of the executive management team attended this
training prior to December 31, 2005. In 2006, this training
will continue for the entire salaried workforce. Also, on
February 1, 2006, a Vice President of Corporate Audit
Services was appointed by the Board of Directors to fill a
vacancy created in 2005 when the previous Vice President was
appointed Treasurer.
|
|
|
| |
• |
Insufficient number of or appropriate depth of experience in
the application of U.S. GAAP for its accounting and finance
personnel |
The Company continues to hire additional personnel with
significant experience in accounting and industry knowledge to
fill important reporting positions both at the Company’s
headquarters and at various operating units. Global training on
a variety of accounting-and-reporting related topics has
occurred and additional training focused towards the
Company’s foreign locations is planned to continue
throughout 2006. In addition, management continues to perform
the following procedures:
|
|
| |
(a) More transactions are reviewed by the chief accounting
officer rather than at the business units or functions,
particularly those which deviate from previously reviewed or
standard terms and conditions; |
| |
| |
(b) External experts are being utilized, when deemed
necessary, to assist in evaluating transactions as well as
preparing and reviewing the appropriate accounting
documentation; and |
| |
| |
(c) The chief financial officer and key members of the
Controller’s Staff meet quarterly with the finance staff of
each operating division and functional staff, to identify and
review significant accounting matters. |
The Company will continue to test the effectiveness of the
training put in place as well as the performance of its
personnel and will repeat its assessment to determine whether
additional training programs are warranted.
|
|
|
| |
• |
Inadequate establishment and maintenance of an effective
anti-fraud program |
Management recognizes that additional improvement is required
regarding the Company’s control environment. Senior
management will continue to reinforce the importance of internal
controls through ongoing communication and in 2006 will appoint
both operational and finance executives to lead the remediation
efforts of specific material weaknesses. The Chief Compliance
Officer has formed a Compliance Review Board consisting of
executives in charge of key functional areas including legal,
finance, audit, treasury and purchasing and with divisional and
regional input to develop and oversee the implementation of
appropriate compliance policies and procedures and remediation
plans. Company management will seek as a top priority to enhance
the control environment by providing resources to support
remediation efforts and to evaluate and implement proper fraud
and risk assessment frameworks.
|
|
|
| |
• |
Inadequate documentation of authorization to make changes to
payroll data and records of employee and retiree demographic
information used in determining retirement benefits
liabilities |
In 2006, management will continue to emphasize the importance of
related monitoring controls and intends to enhance the design of
controls surrounding employee cost by updating the
Company’s current control framework to strengthen the
design of controls at the operational and corporate levels.
Controls at both levels, operational and corporate, will be
monitored and tested throughout 2006 with additional remediation
plans being implemented as necessary.
Inadequate Formalized, Company-wide Risk Assessment
In 2006, management has already made more robust the
Company’s risk assessment process by establishing a SOX
Subcommittee to review Company wide financial statement risks,
enhancing the Corporate Audit Services risk assessment, and by
the establishment by the Chief Compliance Officer of the
Compliance Review Board as described above.
139
Inadequate Contract Administration Process
As reported in the 2004 Annual Report on
Form 10-K, some
areas in the organization have revised their contract
administration procedures. For example, changes were implemented
in the second half of 2004 with respect to the administration of
contracts for information technology services. These changes
include the implementation of a contract administration
procedure that requires documentation by finance, legal and
information technology services that the contracts have been
reviewed, including a summary of all pertinent transaction
terms. Given the complexity involved in developing and
implementing a formal contract administration process, the
Company has not yet finalized its plan to address this issue.
The remediation of this material weakness will continue
throughout 2006.
Inadequate Preparation and Review of Journal Entries and
Account Reconciliations
Management has emphasized the importance of timely and accurate
account reconciliations at all levels of the finance
organization, both divisional and headquarters. The timely and
accurate performance of account reconciliations has been
integrated into the job performance objectives and will impact
bonus and compensation decisions with respect to finance
employees. Training sessions focused on account reconciliations
were held in the second half of 2005 to reinforce the importance
and proper format of account reconciliations. Additional
training and testing will continue throughout 2006. During 2006
the quarterly meetings between divisional and functional finance
staff and the chief financial officer have included review and
sample testing of account reconciliations. In addition, we are
evaluating system solutions available to further automate and
standardize many of the material account reconciliations,
thereby enhancing the accuracy and timeliness of completion.
Management has emphasized the importance of proper journal entry
posting including the preparation of sufficient support
documentation and proper review and authorization at all levels
of the finance organization. In the global training as discussed
above, emphasis will be placed on the proper creation of journal
entries. During 2006 the quarterly meetings between divisional
and functional finance staff and the chief financial officer
will emphasize this control and include review and sample
testing of journal entries. Additional training and testing will
continue throughout 2006. Further remediation plans related to
journal entries will be developed and deployed throughout 2006.
Inadequate Controls over the Recording and Classification of
Fixed Assets
Management continues to emphasize the importance of proper
U.S. GAAP accounting for fixed assets including tooling.
Specific policies related to tooling were identified as high
priority and re-written and released in 2006. In the global
training as discussed above, emphasis will be placed on the
proper accounting of fixed assets at the divisional headquarters
and international locations. In addition, fixed asset accounting
with emphasis on tooling will be addressed at the quarterly
meetings of the chief financial officer and the chief accounting
officer and controller with the finance staff of each operating
division and functional staff. Further remediation plans related
to property and tooling accounting will be developed and
deployed throughout 2006.
Inadequate Controls over Accounting Inventory
Management continues to emphasize the importance of proper
U.S. GAAP accounting for inventory. In the global training
as discussed above, emphasis will be placed on the proper
accounting of inventory at the divisional headquarters and
international locations. In addition, proper inventory
accounting will be addressed at the quarterly meetings of the
chief financial officer and the chief accounting officer and
controller with the finance staff of each operating division and
functional staff. Further remediation plans related to inventory
accounting will be developed and deployed throughout 2006.
In addition, we will evaluate system implementations and
solutions to enhance the inventory accounting for divisions of
the Company in which inventory accounting has proven more
difficult.
140
Inadequate Controls over Income Tax Accounting and
Disclosure
Management continues to enhance controls around the proper
accounting of income taxes and specifically those controls
related to the income tax accounting of its foreign
subsidiaries. Management has deployed tax accounting tools and
training related to this material weakness and will continue to
emphasize the same throughout 2006. Management will ensure that
personnel with proper experience and resources are engaged in
the oversight of technical income tax related accounting items.
Inadequate Controls over the Temporary Cash Disbursement
Process Accounting
The Company reviewed the transactions in question and believes
the related balances are properly stated. In 2006, the volume of
cash disbursements has normalized; therefore management intends
to discontinue the use of the temporary cash disbursement
process in the next months so that no material weakness exists
by December 31, 2006.
Changes in Internal Control over Financial Reporting
Because of the inherent nature of the chapter 11
reorganization process, including the need to maintain existing
customer and supply relationships while at the same time
changing business processes and organizational structure to
streamline operations, reduce administrative burden and costs,
and resolve our legacy liabilities as we seek to transform our
business, we must continuously adapt our control framework. As
new processes are implemented and existing ones change,
additional risks may arise that are not currently contemplated
by our existing internal control framework. Although management
will continue to monitor the chapter 11 restructuring
process for control activities outside its normal control
framework and seek to adapt its control framework to newly
identified risks, we cannot assure we will be successful in
identifying and addressing such risks in a timely manner.
We continue the deployment of SAP’s enterprise software
solution to replace legacy software systems in our businesses at
various global locations which we expect will continue through
2006 and beyond.
Given the demands of the chapter 11 reorganization and
related processes described above, it is likely that not all of
the identified material weaknesses will be remediated in 2006.
However, management continues to remain focused on remediation
efforts and plans to remediate as many material weaknesses in
2006 as possible.
|
|
| ITEM 9B. |
OTHER INFORMATION |
Refer to Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure, for
information regarding Deloitte & Touche’s
completion of its existing engagement with Delphi.
141
PART III
|
|
| ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
DIRECTORS
The names, ages and other positions with Delphi Corporation
(“Delphi” or the “Company”), if any, as of
May 31, 2006 of each director are listed below.
| |
|
|
|
|
|
|
|
|
|
|
| Name |
|
Age | |
|
Position |
|
Term | |
| |
|
| |
|
|
|
| |
|
Robert S. Miller
|
|
|
64 |
|
|
Chairman; CEO |
|
|
since 2005 |
|
|
Rodney O’Neal
|
|
|
52 |
|
|
President & COO |
|
|
since 2005 |
|
|
Oscar de Paula Bernardes Neto
|
|
|
59 |
|
|
Director |
|
|
since 1999 |
|
|
Robert H. Brust
|
|
|
62 |
|
|
Director |
|
|
since 2001 |
|
|
Virgis W. Colbert
|
|
|
66 |
|
|
Director |
|
|
since 1999 |
|
|
David N. Farr
|
|
|
51 |
|
|
Director |
|
|
since 2002 |
|
|
Dr. Bernd Gottschalk
|
|
|
62 |
|
|
Director |
|
|
since 2000 |
|
|
Shoichiro Irimajiri
|
|
|
66 |
|
|
Director |
|
|
since 1999 |
|
|
Raymond J. Milchovich
|
|
|
56 |
|
|
Director |
|
|
since 2005 |
|
|
Craig G. Naylor
|
|
|
57 |
|
|
Director |
|
|
since 2005 |
|
|
John D. Opie
|
|
|
68 |
|
|
Director |
|
|
since 1999 |
|
|
John H. Walker
|
|
|
48 |
|
|
Director |
|
|
since 2005 |
|
Mr. Miller was named chairman and chief executive
officer of Delphi effective July 1, 2005. Prior to joining
Delphi, Mr. Miller served as a director of Federal-Mogul
Corporation, a global automotive component supplier, since 1993,
including as a non-executive chairman from January 11, 2001
to October 1, 2001, and from January 2004 until June 2005,
and three times in a transitional role as chief executive
officer of Federal-Mogul in 1996 and again in 2000 and again
from July 2004 until February 2005. From September 2001 until
December 2003, Mr. Miller was the chairman and chief
executive officer of Bethlehem Steel Corporation, a steel
manufacturing company.
Other Directorships: United Airlines Corp. and Symantec
Corporation.
Mr. O’Neal was named President and Chief
Operating Officer of Delphi effective January 7, 2005.
Prior to that position Mr. O’Neal served as President
of the Dynamics, Propulsion and Thermal sector effective
January 1, 2003. This sector was realigned effective
January 1, 2004 and is now the Dynamics, Propulsion,
Thermal & Interior sector. He assumed additional
responsibility for Europe and South America in January 2004. He
had been Executive Vice President of Delphi and President of the
former Safety, Thermal and Electrical Architecture sector since
January 2000. Previously, he had been Vice President and
President of Delphi Interior Systems since November 1998 and
General Manager of the former Delphi Interior &
Lighting Systems since May 1997. He is a member of the Executive
Leadership Council.
Other Directorships: Goodyear Tire & Rubber
Company.
Mr. Bernardes is the Senior Partner of LID Group and
of Integra Associados Assessoria e Consultoria. He was Chief
Executive Officer of Bunge International from 1996 to 1999.
Before joining Bunge, Mr. Bernardes was a senior partner
with Booz Allen & Hamilton. He also has over
15 years of consulting experience, including several
projects related to the automotive industry in South America.
Mr. Bernardes is currently a member of the Corporate
Governance and Public Issues Committee of Delphi’s Board of
Directors, and throughout 2005 served as a member of the Audit
Committee of Delphi’s Board of Directors. He is also a
member of the Advisory Board of Bunge Brasil, Booz
Allen & Hamilton do Brasil, Alcoa Brasil and Veirano
Associados.
Other Directorships: Metalurgica Gerdau S.A., Gerdau
S.A., Johnson Electric Holdings Ltd., Satipel S.A., RBS, Suzano
Bahia Sul S.A., and Sao Paulo Alpargatas S.A.
142
Mr. Brust was named Chief Financial Officer and
Executive Vice President of Eastman Kodak Company, effective
January 3, 2000. Prior to joining Eastman Kodak Company,
Mr. Brust was Senior Vice President and Chief Financial
Officer of Unisys Corporation. He joined Unisys Corporation in
1997, where he directed the company’s financial
organization, including treasury, control, tax, information
systems, mergers and acquisitions, strategy, procurement, and
investor relations. He is a member of The Conference Board
Council of Financial Executives. Before working at Unisys
Corporation, he spent 31 years at General Electric Company.
Mr. Brust is Chairman of the Audit Committee of
Delphi’s Board of Directors.
Other Directorships: Applied Materials, Inc.
Mr. Colbert was appointed Executive Vice President
for Miller Brewing Company in July 1997 and recently retired on
January 1, 2006. He has held several manufacturing and
production positions since joining Miller in 1979. He is the
former Chairman of the Board of Trustees of Fisk University.
Mr. Colbert is Chairman of the Compensation and Executive
Development Committee of Delphi’s Board of Directors.
Other Directorships: The Manitowoc Company, Inc., The
Stanley Works, Sara Lee Corporation.
Mr. Farr, is the Chairman, CEO and President of
Emerson, having been named CEO in October 2000 and elected to
the additional position of Chairman of the Board in September
2004. He joined Emerson in 1981. Mr. Farr is a member of
the Business Council and the Civic Progress Group of
St. Louis, Missouri. He is also a member of the Municipal
Theatre Association of St. Louis and a trustee of the Board
of Trustees for Boy Scouts Greater St. Louis Council.
Mr. Farr is Chairman of the Corporate Governance and Public
Issues Committee of Delphi’s Board of Directors.
Other Directorships: Emerson Electric Co.
Dr. Bernd Gottschalk has been President of the
Association of the German Automotive Industry since 1996.
Previously, Dr. Gottschalk worked at Mercedes-Benz AG since
1972 in various positions, such as plant manager in Mannheim and
President of Mercedes-Benz do Brasil in São Paulo. As a
member of the Board of Management of Mercedes-Benz AG, he was
responsible for the company’s worldwide commercial vehicle
business. Dr. Gottschalk is a member of the Corporate
Governance and Public Issues Committee of Delphi’s Board of
Directors.
Other Directorships: Fuchs Petrolub AG, J.M. Voith AG,
Hoffmann La Roche Grenzach AG Germany, Thyssen Krupp
Automotive AG.
Mr. Irimajiri has been the Representative Director
of Shoichiro Irimajiri, Inc since 2000. Previously,
Mr. Irimajiri held various positions within Sega
Enterprises, Ltd. including President and Representative
Director for Sega from 1994 to 2000. Before joining Sega,
Mr. Irimajiri had been an Executive Vice President at Honda
Co. Ltd. since 1990. He had been associated with Honda since
1963. Mr. Irimajiri is also Chairman of Asahi Tec
Corporation. Mr. Irimajiri was also a member of the
Corporate Governance and Public Issues Committee of
Delphi’s Board of Directors. Mr. Irimajiri retired
from the Board of Directors on March 31, 2006.
Other Directorships: Happinet Corporation, Asahi Tec
Corporation.
Mr. Milchovich is President, Chief Executive Officer
and Chairman of the Board of Foster Wheeler Ltd.
Mr. Milchovich joined Foster Wheeler Ltd., a publicly
traded global engineering and construction company serving
energy-related markets, in 2001. Previously he was the
president, chief executive officer and chairman of Kaiser
Aluminum Corp. Mr. Milchovich held various management
positions with Kaiser Aluminum Corp. after joining the company
in 1980. Prior to joining Kaiser Aluminum Corp.,
Mr. Milchovich held a variety of top operating positions
for Wisconsin Steel Corp. and Wheeling-Pittsburgh Steel Corp.
Mr. Milchovich is a member of the Compensation and
Executive Development Committee of Delphi’s Board of
Directors.
Other Directorships: Foster Wheeler Ltd. and Nucor
Corporation.
Mr. Naylor was named Group Vice President, DuPont
Electronic & Communication Technologies in March 2004.
Prior to that position, Mr. Naylor served as Group Vice
President, Asia Pacific from January 2004, as Group Vice
President DuPont Performance Materials from 2002 to 2004, and as
Group Vice President and GM, Engineering Polymers,
Fluoroproducts and Packaging & Industrial Polymers from
2000
143
to 2002. He joined E.I. du Pont de Nemours and Company in 1970.
Mr. Naylor is a member of the Compensation and Executive
Development Committee of Delphi’s Board of Directors.
Mr. Opie is the former Vice Chairman of the Board
and Executive Officer for General Electric Company.
Mr. Opie retired from General Electric Company and its
Board at the end of May 2000. He had been associated with
General Electric Company since 1961 in numerous management
positions, including Vice President of the Lexan and Specialty
Plastics Divisions, President of the Distribution Equipment
Business Division and President of General Electric
Company’s Lighting Business from 1986 to 1995. He also is a
Life Trustee of Michigan Tech. University. Mr. Opie is Lead
Independent Director of Delphi’s Board of Directors and is
an ex officio member of the Audit Committee, the Compensation
and Executive Development Committee and the Corporate Governance
and Public Issues Committee of Delphi’s Board of Directors.
Other Directorships: Mr. Opie retired from the Board
of Directors of Wal-Mart in June 2006.
Mr. Walker is president and chief executive officer
of The Boler Company. In August 2003, Mr. Walker joined The
Boler Company, one of the largest private companies in the
country, which operates under the name Hendrickson
International. Hendrickson International is one of the largest
independent providers of truck and trailer suspensions in the
world. Prior to joining The Boler Company, Mr. Walker was
with Weirton Steel Corporation, including as its Chief Executive
Officer, President and Chief Operating Officer and a director
from January 2001 until August 2003, and with the consulting
firm McKinsey & Company in the mid 1980s.
Mr. Walker is a member of the Audit Committee of
Delphi’s Board of Directors.
Other Directorships: The Boler Company and United
Airlines Corp.
EXECUTIVE OFFICERS
The information required by Item 10 regarding executive
officers appears as the Supplementary Item in Part I.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors is a separately
designated standing committee. During 2005, the Audit Committee
was initially composed of four individuals, including the
Chairman, Robert H. Brust, Cynthia A. Niekamp, Oscar De Paula
Bernardes Neto and John D. Opie, ex officio, each of whom is
independent as that term is used in section 10A(m)(3) of
the Exchange Act. In February 2005, Mr. Bernardes was
reassigned from the Audit Committee to the Corporate Governance
and Public Issues Committee, with the result that the Audit
Committee was composed of three individuals throughout the
remainder of 2005. As previously reported, Mr. Bernardes
returned to the Audit Committee in July of 2005, when due to
potential competitive overlap issues under United States
(“U.S.”) antitrust laws, Ms. Niekamp resigned
from the Board of Directors at the request of her employer,
BorgWarner, Inc. In December 2005, John Walker, who is also
independent within the meaning of Section 10A
(m) (3) of the Exchange Act, was named to the Board of
Directors and the Audit Committee. After a month of overlap to
assure a smooth transition, in February 2006 Mr. Bernardes
was again reassigned to the Corporate Governance and Public
Issues Committee. The Board of Directors has determined that
Mr. Brust, is, and during the time she served on the Audit
Committee, Ms. Niekamp, was an audit committee financial
expert as defined in section 3(a)(58) of the Exchange Act
and the related rules of the Commission. In addition, the Board
of Directors has determined that Messrs. Opie, Bernardes
and Walker each have significant experience in reviewing,
understanding and evaluating financial statements and is
financially literate, as such term has been defined by the
listing standards of the New York Stock Exchange. The Committee
operates under a written charter, which is available for review
on Delphi’s Internet site (www.delphi.com).
144
NOMINATION TO BOARD OF DIRECTORS
The Corporate Governance and Public Issues Committee of the
Board of Directors considers stockholder suggestions for
nominees for directors. There have been no changes in the
procedures by which shareholders may recommend nominees to the
Board of Directors.
SECTION 16(b)
Based solely on a review of filings, all persons subject to the
reporting requirements of Section 16(b) filed the required
reports on a timely basis for the fiscal year ended 2005.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
Mr. Milchovich was the former Chairman, President and Chief
Executive Officer of Kaiser Aluminum Corporation from December
1999 to October 2001. Kaiser Aluminum Corporation commenced a
voluntary petition under chapter 11 of the United States
Bankruptcy Code on February 12, 2002.
Mr. Miller served as a director of Federal-Mogul
Corporation since 1993, including as a non-executive chairman
from January 11, 2001 to October 1, 2001, and from
January 2004 until June 2005, and three times in a transitional
role as chief executive officer of Federal-Mogul in 1996 and
again in 2000 and again from July 2004 until February 2005. From
September 2001 until December 2003, Mr. Miller was the
chairman and chief executive officer of Bethlehem Steel
Corporation. Bethlehem Steel Corporation and Federal-Mogul
Corporation each commenced a voluntary petition under
chapter 11 of the United States Bankruptcy Code on
October 15, 2001 and October 1, 2001, respectively.
Mr. Walker was the Chief Executive Officer, President and
Chief Operating Officer and a director of Weirton Steel
Corporation from January 2001 until August 2003. Weirton Steel
Corporation commenced a voluntary petition under Chapter 11
of the United States Bankruptcy Code in March 2003.
CODE OF ETHICS
Delphi has adopted a written code of ethics, “The Delphi
Foundation for Excellence, a Guide to Representing Delphi with
Integrity,” which is applicable to all Delphi directors,
officers and employees, including the Company’s chief
executive officer, chief financial officer, and principal
accounting officer and controller and other executive officers
identified pursuant to this Item 10 (collectively, the
“Selected Officers”). In accordance with the
Commission’s rules and regulations a copy of the code, as
amended, was filed as an exhibit to the
Form 10-K for the
year ended December 31, 2004 and is posted on our website.
Delphi intends to disclose any changes in or waivers from its
code of ethics applicable to any Selected Officer or director on
its website at www.delphi.com.
145
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| ITEM 11. |
EXECUTIVE COMPENSATION |
Summary Compensation Table
The table below shows compensation information for Robert S.
Miller, Jr., who served as our chief executive officer from
July through December 2005, J. T. Battenberg III, who
served as our chief executive officer from January through June
2005, our four next highest paid executive officers as of the
end of 2005 and two additional individuals who, had they been
executive officers at the end of 2005, would have been among the
four next highest paid.
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Long-Term Compensation | |
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Payouts | |
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Awards | |
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Annual Compensation | |
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Long- | |
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Restricted | |
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Securities | |
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Term | |
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Other Annual | |
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Stock Unit | |
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Underlying | |
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Incentive | |
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All Other | |
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Salary | |
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Bonus | |
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Compensation | |
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Awards | |
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Options | |
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Payouts | |
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Compensation | |
| Principal Position(1) |
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Year | |
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($)(5) | |
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($) | |
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($)(6) | |
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($)(7) | |
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(#)(8) | |
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($)(9) | |
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($)(10) | |
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Robert S. Miller
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2005 |
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750,000 |
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— |
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n/a |
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n/a |
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n/a |
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n/a |
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3,000,000 |
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Chairman of the Board and Chief Executive Officer |
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Rodney O’Neal
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2005 |
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1,100,000 |
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— |
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143,531 |
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535,613 |
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n/a |
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157,194 |
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200,000 |
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Director, President and |
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2004 |
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860,000 |
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— |
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54,865 |
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613,224 |
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272,000 |
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— |
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14,296 |
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Chief Operating Officer |
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2003 |
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860,000 |
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— |
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62,165 |
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373,028 |
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295,000 |
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280,000 |
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16,553 |
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David B. Wohleen
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2005 |
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890,000 |
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— |
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n/a |
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422,280 |
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n/a |
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125,670 |
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142,750 |
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2004 |
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825,000 |
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— |
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n/a |
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613,224 |
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272,000 |
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— |
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13,714 |
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2003 |
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825,000 |
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— |
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n/a |
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373,028 |
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295,000 |
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280,000 |
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15,880 |
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Robert J. Dellinger
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2005 |
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170,673 |
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— |
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n/a |
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n/a |
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n/a |
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n/a |
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350,000 |
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Executive Vice President, Chief Financial Officer |
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Mark R. Weber
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2005 |
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700,000 |
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— |
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54,520 |
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381,915 |
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n/a |
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115,020 |
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129,000 |
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Executive Vice President |
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2004 |
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660,000 |
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— |
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87,650 |
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554,607 |
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246,000 |
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— |
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10,973 |
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Operations, Human |
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2003 |
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651,250 |
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— |
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n/a |
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341,415 |
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270,000 |
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280,000 |
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12,582 |
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Resource Management & Corporate Affairs |
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J. T. Battenberg III(2)
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2005 |
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900,000 |
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— |
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380,217 |
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1,300,995 |
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n/a |
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— |
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47,904 |
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2004 |
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1,700,000 |
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— |
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261,072 |
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1,889,271 |
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838,000 |
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— |
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51,466 |
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2003 |
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1,675,000 |
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— |
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107,477 |
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1,213,920 |
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960,000 |
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732,000 |
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52,213 |
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Donald L. Runkle(3)
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2005 |
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500,000 |
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— |
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n/a |
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n/a |
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n/a |
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— |
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755,000 |
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2004 |
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1,000,000 |
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— |
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89,855 |
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633,515 |
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281,000 |
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— |
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16,624 |
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2003 |
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1,000,000 |
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— |
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76,586 |
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385,673 |
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305,000 |
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340,000 |
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19,249 |
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Alan S. Dawes(4)
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2005 |
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240,000 |
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— |
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n/a |
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n/a |
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n/a |
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— |
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— |
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2004 |
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960,000 |
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— |
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90,598 |
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633,515 |
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281,000 |
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— |
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15,960 |
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| |
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2003 |
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960,000 |
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— |
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n/a |
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385,673 |
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305,000 |
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320,000 |
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18,480 |
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Notes
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(1) |
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The titles noted above are the officers’ current titles.
Mr. Miller was appointed to his position on July 1,
2005 and Mr. Dellinger was appointed to this position on
October 8, 2005. Mr. O’Neal was promoted to his
current position on January 7, 2005 and received a
compensation increase at that time. Mr. O’Neal
received an additional compensation increase on July 24,
2005. Mr. O’Neal’s previous title was President,
Dynamics, Propulsion and Thermal sector. As previously
announced, effective June 1, 2006, Mr. Wohleen, who
served as Vice Chairman from January 7, 2005 and prior to
that as President Electrical, Electronics, Safety and Interior
Sector retired from Delphi and his responsibilities were
transitioned to Delphi’s other officers. |
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|
(2) |
|
Mr. Battenberg served as Chairman of the Board and Chief
Executive Officer until his retirement on July 1, 2005. Per
the terms of his retirement agreement, Mr. Battenberg
provided consulting services for a period of one month following
his effective retirement date. The $150,000 for these services
has been included under “Other Annual Compensation”
(see also Note 6). Per the terms of |
146
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the Long Term Incentive Plan, the previously reported 2005
restricted stock unit grant was cancelled upon his retirement
(see also Note 9). Mr. Battenberg was not eligible for
payment of any portion of the 2003—2005 cash performance
award previously granted to him pursuant to the Long-Term
Incentive Plan (see also Note 8). |
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|
(3) |
|
Mr. Runkle, who was Vice Chairman, Enterprise Technologies
through January 7, 2005, entered into a retirement
agreement with the Company effective July 1, 2005. Per the
terms of the agreement, Mr. Runkle received a payment of
$755,000, which reflects a nine-month separation amount plus
payments for other transitional assistance, fees and expenses
(see also Note 10). Mr. Runkle did not participate in
the 2005 restricted stock unit grant (see also note 7) and
is not eligible to receive a 2003—2005 cash performance
award previously granted to him pursuant to the Long-Term
Incentive Plan (see also Note 9). |
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|
(4) |
|
Mr. Dawes, who served as Vice Chairman and Chief Financial
Officer and was a member of the Board of Directors, resigned on
March 4, 2005. Mr. Dawes did not participate in the
2005 restricted stock unit grant (see also note 7) and is
not eligible to receive a 2003—2005 cash performance award
previously granted to him pursuant to the Long-Term Incentive
Plan award (see also note 9). |
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|
(5) |
|
Represents total amounts of salary actually paid. See
notes 1—4 for months employed by the Company during
2005. |
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|
(6) |
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This amount includes: |
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|
|
| |
a) |
The incremental cost to the Company of providing corporate
transportation for personal use by the executive and the
executive’s family on Company aircraft. Prior to 2004, the
Company estimated the incremental aircraft cost using SIFL rates
(the amount required to be imputed as income to the individual
for federal income tax purposes). Since 2004, we have been
measuring incremental aircraft cost by reference to the variable
cost to the company of flying the aircraft on a particular trip.
The incremental cost to the Company in 2005 of providing each of
the following named executives with use of the Company aircraft
for personal transportation was: $123,710 for
Mr. O’Neal; $30,057 for Mr. Weber and $194,621
for Mr. Battenberg. Since filing for reorganization under
chapter 11 of the United States Bankruptcy Code, all
personal travel on Company aircraft has been terminated. |
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| |
b) |
Use of vehicles under Delphi’s employee car program. The
2005 amount included is $16,613 for Mr. Weber. |
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| |
c) |
Mr. Battenberg received a fee equivalent to
one-month’s salary for providing consulting services for
one month after his retirement on July 1, 2005. |
|
|
|
|
(7) |
|
Shows value of restricted stock units granted on March 1,
2005 as of the date of grant. |
| |
|
|
|
Listed below is the total number of shares represented by all
restricted stock units, by year, allocated to the named
executive officers as of December 31, 2005, including
dividend equivalents. In connection with the October 8,
2005 (the “Petition Date”), Delphi and certain of its
U.S. subsidiaries (the “Initial Filers”) filed
voluntary petitions for reorganization relief under
chapter 11 of the Bankruptcy Code, and on October 14,
2005, three additional U.S. subsidiaries of Delphi
(together with the Initial Filers, collectively, the
“Debtors”) filed voluntary petitions for
reorganization relief under the Bankruptcy Code (collectively,
the Debtors’ October 8, 2005 and October 14, 2005
filings are referred to herein as the “Chapter 11
Filings”), Delphi determined it will not issue common stock
on the vesting dates of any restricted stock units granted but
unvested |
147
|
|
|
|
|
|
at the time of the chapter 11 filings October 8, 2005.
Given the Company’s intention not to deliver these shares,
the market value of these awards is assumed to be $0. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
Total RSU Grants |
| |
|
|
|
|
|
|
|
|
|
|
| Named Executive |
|
Balance | |
|
Mkt. Value |
|
Balance | |
|
Mkt. Value |
|
Balance | |
|
Mkt. Value |
|
Balance | |
|
Mkt. Value |
|
Balance | |
|
Mkt. Value |
| |
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
Robert S. Miller(a)
|
|
|
n/a |
|
|
$ |
— |
|
|
|
n/a |
|
|
$ |
— |
|
|
|
n/a |
|
|
$ |
— |
|
|
|
n/a |
|
|
$ |
— |
|
|
|
n/a |
|
|
$ |
— |
|
|
Rodney O’Neal
|
|
|
31,797 |
|
|
$ |
— |
|
|
|
31,486 |
|
|
$ |
— |
|
|
|
63,463 |
|
|
$ |
— |
|
|
|
78,551 |
|
|
$ |
— |
|
|
|
205,297 |
|
|
$ |
— |
|
|
David B. Wohleen
|
|
|
30,772 |
|
|
$ |
— |
|
|
|
31,486 |
|
|
$ |
— |
|
|
|
63,463 |
|
|
$ |
— |
|
|
|
61,930 |
|
|
$ |
— |
|
|
|
187,651 |
|
|
$ |
— |
|
|
Robert J. Dellinger(a)
|
|
|
n/a |
|
|
$ |
— |
|
|
|
n/a |
|
|
$ |
— |
|
|
|
n/a |
|
|
$ |
— |
|
|
|
n/a |
|
|
$ |
— |
|
|
|
n/a |
|
|
$ |
— |
|
|
Mark R. Weber
|
|
|
28,721 |
|
|
$ |
— |
|
|
|
28,817 |
|
|
$ |
— |
|
|
|
57,397 |
|
|
$ |
— |
|
|
|
56,010 |
|
|
$ |
— |
|
|
|
170,945 |
|
|
$ |
— |
|
|
J. T. Battenberg III(b)
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
Donald L. Runkle(b)
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
Alan S. Dawes(c)
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
The scheduled vesting for the restricted stock units granted is
as follows; however, as described above, Delphi will not deliver
common stock on these vesting dates: |
|
|
|
• 2002: 25% on January 2, 2003, 25% on
January 3, 2005 and 50% on January 2, 2017 or at
retirement, whichever occurs earlier; |
|
|
|
• 2003: One-third on each April 26, 2004,
April 24, 2006 and April 24, 2008; |
|
|
|
• 2004: One-third on each May 7, 2007,
May 7, 2008 and May 7, 2009; |
|
|
|
• 2005: One third on each March 1, 2008,
March 1, 2009 and March 1, 2010. |
|
|
|
| |
(a) |
Mr. Miller and Mr. Dellinger did not receive a 2005
restricted stock unit grant. |
| |
| |
(b) |
Per the terms of the Long Term Incentive Plan: |
|
|
|
| |
• |
Mr. Battenberg’s and Mr. Runkle’s unvested
2002, 2003 and 2004 restricted stock units vested upon
retirement. The vested restricted stock units were distributed
to them on July 20, 2005. Mr. Battenberg was awarded
383,075 shares valued at $1,965,175 and Mr. Runkle was
awarded 130,575 shares valued at $669,850 on the delivery
date. |
| |
• |
Mr. Battenberg’s 2005 restricted stock unit grant was
cancelled upon his retirement and is therefore not reflected in
this table. |
| |
• |
Mr. Runkle did not receive a 2005 restricted stock unit
grant. |
|
|
|
| |
(c) |
Mr. Dawes’ outstanding 2002, 2003 and 2004 were
cancelled upon his resignation. Mr. Dawes did not receive a
2005 restricted stock unit grant. |
|
|
|
|
(8) |
|
No options were granted in 2005. |
| |
|
(9) |
|
Reflects long-term cash performance awards issued under the Long
Term Incentive Plan. The performance periods are 2003—2005,
2002—2004 and 2001—2003. In 2004, in conjunction with
the Board of Director’s review of Delphi’s strategic
business plan, Delphi modified for all the then outstanding
long-term cash performance awards (2002—2004 and
2003—2005) the established goals for 2003, 2004 and 2005 to
reflect greater emphasis on meeting certain threshold cash flow
targets as part of the overall performance and individual
executive objectives. |
| |
|
|
|
In connection with the Chapter 11 Human Capital First Day
Order, payments of the 2003-2005 long term cash performance
award were made to eligible employees who were still active.
Mr. O’Neal, Mr. Wohleen and Mr. Weber were
eligible to receive an award payment. As retirees,
Mr. Battenberg and Mr. Runkle were ineligible to
receive their awards. Mr. Dawes’ award was cancelled
upon his resignation. Mr. Miller and Mr. Dellinger,
having joined Delphi in 2005, were not eligible to receive
2003—2005 cash performance awards under the terms of the
Long Term Incentive Plan. |
148
|
|
| (10) |
Includes the following: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Recognition and | |
|
|
|
|
|
Split Dollar Life | |
| |
|
Retention Award | |
|
|
|
Separation Payment | |
|
Insurance Imputed | |
| Named Executive |
|
($)(a) | |
|
Sign-On Bonus(b) | |
|
(c) | |
|
Income($)(d) | |
| |
|
| |
|
| |
|
| |
|
| |
|
Robert S. Miller
|
|
|
— |
|
|
|
3,000,000 |
|
|
|
— |
|
|
|
|
|
|
Rodney O’Neal
|
|
|
200,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
David B. Wohleen
|
|
|
142,750 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Robert J. Dellinger
|
|
|
— |
|
|
|
350,000 |
|
|
|
— |
|
|
|
— |
|
|
Mark. R. Weber
|
|
|
129,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
J. T. Battenberg III
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
47,904 |
|
|
Donald L. Runkle
|
|
|
— |
|
|
|
— |
|
|
|
755,000 |
|
|
|
— |
|
|
|
|
| |
(a) |
Recognition and Retention Award: The Compensation and Executive
Development Committee (the “Compensation Committee”)
approved a retention program for U.S. salaried employees,
including executives, in February 2005. Executive officers were
to receive payment of the award in four equal installments over
a two-year period. The first installment was paid in September
2005 and is reflected above. On February 17, 2006, as part
of the approval of portions of the KECP, the Company cancelled
the outstanding installments of the Recognition and Retention
Award. |
| |
| |
(b) |
Sign-On Bonus: Per their respective hiring agreements,
Mr. Miller and Mr. Dellinger received a sign-on bonus
at the start of their employment. Any bonus award
Mr. Dellinger is eligible to receive pursuant to the annual
incentive plan for the period January to June 2006, as approved
under the KECP, will be reduced by the amount of his sign-on
bonus. |
| |
| |
(c) |
Separation Payment: Mr. Runkle’s separation agreement
included a payment of $755,000, which reflects a nine-month
separation amount plus payments for other transitional
assistance, fees and expenses. |
| |
| |
(d) |
Split Dollar Life Imputed Income: The value of the insurance
premium paid by Delphi with respect to the Delphi Executive
Split-Dollar Endorsement Plan, a life insurance policy for the
benefit of Mr. Battenberg. Upon the death of
Mr. Battenberg, Delphi would be reimbursed for its premiums
paid on the Executive Split-Dollar Endorsement Plan. |
|
|
| |
The 2004 and 2003 amounts for Mr. O’Neal,
Mr. Wohleen, Mr. Weber, Mr. Battenberg,
Mr. Runkle and Mr. Dawes include matching
contributions under the Savings-Stock Purchase Plan and Benefit
Equalization Plan, a plan whereby Delphi provides benefits
substantially equal to benefits that could not be provided under
the Savings-Stock Purchase Plan because of limitations under the
Internal Revenue Code. These matching contributions were
suspended in 2005. |
149
Aggregated Option Exercises in Last Fiscal Year and Option
Values at Fiscal Year End
The following table shows information concerning the options
exercised in 2005 by each of the executive officers named in the
Summary Compensation Table and the value of options held by such
executives at the end of 2005. No stock appreciation rights are
held by any named executive officer.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Number of Securities | |
|
|
| |
|
|
|
|
|
Underlying | |
|
Value of Unexercised | |
| |
|
|
|
|
|
Unexercised Options | |
|
In-the-Money Options | |
| |
|
Delphi Shares | |
|
|
|
at FY-End(#) | |
|
at FY-End($)(2) | |
| |
|
Acquired on | |
|
Value | |
|
Exercisable/ | |
|
Exercisable/ | |
| Name |
|
Exercise(#) | |
|
Realized($) | |
|
Unexercisable(1) | |
|
Unexercisable | |
| |
|
| |
|
| |
|
| |
|
| |
|
Robert S. Miller
|
|
|
0 |
|
|
|
0 |
|
|
|
0/0 |
|
|
$ |
0/$0 |
|
|
Rodney O’Neal
|
|
|
0 |
|
|
|
0 |
|
|
|
1,091,639/0 |
|
|
$ |
0/$0 |
|
|
David B. Wohleen
|
|
|
0 |
|
|
|
0 |
|
|
|
1,078,092/0 |
|
|
$ |
0/$0 |
|
|
Robert J. Dellinger
|
|
|
0 |
|
|
|
0 |
|
|
|
0/0 |
|
|
$ |
0/$0 |
|
|
Mark R. Weber
|
|
|
0 |
|
|
|
0 |
|
|
|
964,410/0 |
|
|
$ |
0/$0 |
|
|
J. T. Battenberg III
|
|
|
0 |
|
|
|
0 |
|
|
|
4,497,386/0 |
|
|
$ |
0/$0 |
|
|
Donald L. Runkle
|
|
|
0 |
|
|
|
0 |
|
|
|
1,221,086/0 |
|
|
$ |
0/$0 |
|
|
Alan S. Dawes
|
|
|
0 |
|
|
|
0 |
|
|
|
0/0 |
|
|
$ |
0/$0 |
|
Notes
|
|
| (1) |
In connection with the Chapter 11 Filings, Delphi
determined it will not issue common stock for any option that
was granted but unvested at the time of the chapter 11
filing on October 8, 2005. Listed below is the number of
unvested options as of October 8, 2005 that will remain
unexercisable upon vesting for the named executive officers: |
| |
|
|
|
|
| |
|
Unvested Options as of | |
| |
|
October 8, 2005 That Will | |
| Name |
|
Remain Unexercisable | |
| |
|
| |
|
Rodney O’Neal
|
|
|
279,668 |
|
|
David B. Wohleen
|
|
|
279,668 |
|
|
Mark R. Weber
|
|
|
254,000 |
|
|
J.T. Battenberg III
|
|
|
878,667 |
|
|
Donald L. Runkle
|
|
|
289,001 |
|
|
|
| (2) |
These year-end values represent the difference between the fair
market value of Delphi’s common stock underlying options
(based on the stock’s closing price on the Pink Sheets LLC
(the “Pink Sheets”), a quotation service for over the
counter (“OTC”) securities on December 31, 2005)
and the exercise prices of the options. The closing price of
Delphi’s common stock on the Pink Sheets on
December 31, 2005 was $0.29.
“In-the-money”
means that the fair market value of the underlying stock is
greater than the option’s exercise price on the valuation
date. As reflected above, no outstanding options are “in
the money” at this time. |
150
Long-Term Incentive Plan-Awards in Last Fiscal Year
The following table shows information on 2005 grants of
incentive awards to the executive officers named in the Summary
Compensation Table. Under the terms of the Long Term Incentive
Plan, Mr. Battenberg’s 2005—2007 awards were
cancelled upon his retirement. On February 17, 2006, the
2005—2007 Long Term Incentive Plan—Cash Award was
cancelled in its entirety.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Performance or | |
|
Estimated Future Payouts Under | |
| |
|
|
|
Other | |
|
Non-Stock-Price-Based Plans(3) | |
| |
|
Number of | |
|
Period Until | |
|
| |
| |
|
Shares, Units or | |
|
Maturation or | |
|
Threshold | |
|
Target | |
|
Maximum | |
| Name(1) |
|
Other Rights(2) | |
|
Payout | |
|
($) | |
|
($) | |
|
($) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Rodney O’Neal
|
|
$ |
1,035,000 |
|
|
|
2005-2007 |
|
|
$ |
414,000 |
|
|
$ |
1,035,000 |
|
|
$ |
2,070,000 |
|
|
David B. Wohleen
|
|
$ |
816,000 |
|
|
|
2005-2007 |
|
|
$ |
326,400 |
|
|
$ |
816,000 |
|
|
$ |
1,632,000 |
|
|
Mark R. Weber
|
|
$ |
738,000 |
|
|
|
2005-2007 |
|
|
$ |
295,200 |
|
|
$ |
738,000 |
|
|
$ |
1,476,000 |
|
|
J. T. Battenberg III
|
|
$ |
2,514,000 |
|
|
|
2005-2007 |
|
|
$ |
1,005,600 |
|
|
$ |
2,514,000 |
|
|
$ |
5,028,000 |
|
Notes
|
|
| (1) |
Mr. Miller, Mr. Dellinger, Mr. Runkle and
Mr. Dawes were not granted a long-term incentive plan award
for the 2005—2007 performance period. |
| |
| (2) |
Incentive awards under the Delphi Corporation Long-Term
Incentive—Cash Award Plan are denominated in dollars. |
| |
| (3) |
Figures reflect threshold, target and maximum levels on the
grant date. |
Under the Delphi’s Long-Term Incentive Award, eligible
employees may receive long-term incentive awards based on a
performance period that may be at least two years and not
more than five years. Typically the awards are granted
every year and the performance metrics are measured over a
three-year period.
Performance measures applicable to the named executive officers
are announced when set by the Compensation Committee. The
performance metrics for the
2005-2007 performance
periods were dependent on the achievement of specified levels of
corporate cash flow and growth in specific sales segments.
Had the awards not been cancelled, the final payment amounts
would have depended on whether or not the performance metrics
were achieved as well as the employee’s individual
performance. Delphi’s Compensation Committee determines the
final award by determining how completely the performance goals
were achieved over the
three-year period and
approves the final payments awarded to the named executive
officers.
Generally, an employee’s outstanding incentive awards are
cancelled if an employee quits, is discharged or ceases
employment with Delphi under similar circumstances, or engages
in competitive activity after termination. An employee’s
rights under any award are forfeited if an employee acts against
Delphi’s interests as determined by the Compensation
Committee.
Retirement Programs
The retirement program for our executives in the United States
consists of two plans (eligible Delphi executives are also
covered by the Delphi Saving-Stock Purchase Program, a qualified
defined contribution plan). The Delphi Retirement Program for
Salaried Employees, is a qualified plan for purposes of the
Internal Revenue Code of 1986, as amended (the
“Code”). We also have a plan that is not considered a
qualified plan under the Code, the Supplemental Executive
Retirement Program (“SERP”), which is governed by
Delphi’s Compensation Committee. SERP provides for an
executive to receive a benefit equal to the greater of that
calculated under a regular method (“Regular SERP
Benefit”) or an alternative method (“Alternative SERP
Benefit”), under circumstances described below. Generally,
under the Delphi Retirement Program for Salaried Employees and
the SERP, an executive’s service with General Motors
Corporation prior to January 1, 1999 is taken into account
when determining service with Delphi for
151
purposes of the plans, so that time that the executive worked
for General Motors Corporation is counted as if the executive
worked for Delphi during that time.
The Delphi Retirement Program for Salaried Employees is also
subject to the requirements of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”). In
general, the Delphi Retirement Program for Salaried Employees
consists of “Part A” and “Part B”
benefits for an executive hired prior to January 1, 2001 or
with a length of service date prior to January 1, 2001. The
benefits for an executive hired on or after January 1, 2001
or with a length of service date on or after January 1,
2001, are contained in “Part C”. Part A of
the Delphi Retirement Program for Salaried Employees provides
benefits under a formula based on years of credited service and
an applicable benefit rate. Part B of the Delphi Retirement
Program for Salaried Employees provides benefits under a formula
based on years of Part B credited service and upon the
average of the highest five years of base salary received
during the final ten years of service, subject to certain
benefit limitations imposed by the Code. In addition, under
Part B, Delphi provides employees with an annual retirement
benefit equal to the sum of 100% of the Part B
contributions they made to the General Motors Retirement Program
for Salaried Employees on or after October 1, 1979, and to
the Delphi Retirement Program for Salaried Employees on or after
January 1, 1999, and lesser percentages of their
contributions made to the General Motors Retirement Program for
Salaried Employees prior to October 1, 1979. If eligible
employees elect not to contribute to Part B of the Delphi
Retirement Program for Salaried Employees, they are entitled to
receive the Part A benefits only. Benefits under the Delphi
Retirement Program for Salaried Employees vest after five years
of credited service and are payable on an unreduced basis at
age 65 at the rate in effect as of the last day worked.
Part C of the Delphi Retirement Program for Salaried
Employees provides a
non-contributory
benefit to eligible employees. Delphi contributes 4.7% of an
eligible employee’s base pay which is called the “pay
credit”. Interest, based on the
30-year Treasury
security or such other rate as specified by the Commissioner of
the Internal Revenue Service, is credited to the account on
September 30th of each plan year, and individual accounts
are updated shortly thereafter. This is referred to as
“interest credit”. Upon retirement, the employee is
entitled to the Part C account balance, consisting of the
accumulated pay credits and interest credits, in either a lump
sum or an annuity.
If an executive has at least ten years of Part B credited
service or ten years of service under Part C as
provided in the Delphi Retirement Program for Salaried
Employees, the executive may also be eligible to receive a
non-qualified SERP
Benefit. Under the Regular SERP benefit formula, an eligible
executive would receive 2% of average monthly base salary for
the highest 60 of the last 120 months immediately preceding
retirement times years of Part B credited service (or years
of Part C service), minus all unreduced monthly benefits
payable under the Delphi Retirement Program for Salaried
Employees and minus 2% of the maximum annual Social Security
benefit in the year of retirement times the years of Part A
credited service (or Part C service).
152
The table below shows the estimated total annual Delphi
Retirement Program for Salaried Employees benefits (under
Part A and Part B or Part C) plus the Regular
SERP Benefit (assuming the executive qualifies). The chart gives
an average annual base salary as of December 31, 2005. Such
amount would be paid in 12 equal monthly installments per year
to executives retiring in 2006 at age 65. If the executive
elects to receive such benefits with a 65% survivor option, the
amounts shown would generally be reduced from 5% to 11%
depending upon the age differential between spouses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years of Credited Service | |
| |
|
| |
| Average Annual Base Salary(1) |
|
15 | |
|
25 | |
|
35 | |
|
45 | |
| |
|
| |
|
| |
|
| |
|
| |
|
$ 350,000
|
|
$ |
97,940 |
|
|
$ |
163,234 |
|
|
$ |
228,528 |
|
|
$ |
293,821 |
|
|
520,000
|
|
|
148,940 |
|
|
|
248,234 |
|
|
|
347,528 |
|
|
|
446,821 |
|
|
690,000
|
|
|
199,940 |
|
|
|
333,234 |
|
|
|
466,528 |
|
|
|
599,821 |
|
|
860,000
|
|
|
250,940 |
|
|
|
418,234 |
|
|
|
585,528 |
|
|
|
752,821 |
|
|
1,030,000
|
|
|
301,940 |
|
|
|
503,234 |
|
|
|
704,528 |
|
|
|
905,821 |
|
|
1,200,000
|
|
|
352,940 |
|
|
|
588,234 |
|
|
|
823,528 |
|
|
|
1,058,821 |
|
|
|
| (1) |
Average annual base salary means the average of the highest five
years of base salary paid during the final ten calendar years of
service immediately preceding an executive’s retirement. |
Notwithstanding the amounts set forth above, pursuant to the
Court ordered, the prepetition and post-petition SERP benefits
are limited to $5,000 per month per eligible retiree
(including any named executive officer who retires during the
duration of the chapter 11 cases). If such a retirement
does occur with Regular SERP eligibility, the named executive
officers will continue to accrue SERP benefits in accordance
with the formula outlined above and the named executive officers
will also have an unsecured claim as to the amount of the SERP
benefits to which they are otherwise entitled that are not paid
pursuant to the Court’s human capital obligations order.
The average annual base salary and the years of Part B
credited service or Part C service that may be considered
in the Regular SERP Benefit calculation as of December 31,
2005 for the following named executive officers are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Years of Credited | |
|
Average Annual | |
| Named Executive |
|
Service | |
|
Base Salary | |
| |
|
| |
|
| |
|
Robert S. Miller
|
|
|
Less than 1 year |
|
|
$ |
1,500,000 |
|
|
Rodney O’Neal
|
|
|
33 years |
|
|
$ |
829,000 |
|
|
Robert J. Dellinger
|
|
|
Less than 1 year |
|
|
$ |
750,000 |
|
|
Mark W. Weber
|
|
|
38 years |
|
|
$ |
627,250 |
|
The annual base salary of each named executive officer for the
most recent year(s) considered in the calculation reported here
is based on the “Salary” column of the Summary
Compensation Table appearing earlier in this section.
Executives may be eligible to receive the Alternative SERP
Benefit instead of the Regular SERP Benefit if they abide by
certain agreements with Delphi, such as, for example, an
agreement not to work for any competitor of Delphi or act in any
manner contrary to the best interest of Delphi. If the executive
makes such an agreement and qualifies for the Alternative SERP
Benefit, he or she will receive the greater of the Regular SERP
Benefit or the Alternative SERP Benefit. Under the Alternate
SERP Benefit formula, an eligible executive would receive 1.5%
of the average of the highest five of the last ten years average
annual total direct compensation times eligible years of
Part B credited service up to a maximum of 35 years
(or Part C years of service up to 35) less the sum of
all unreduced monthly benefits payable under the Delphi
Retirement Program for Salaried Employees, and less 100% of the
maximum annual Social Security benefit in the year of retirement.
153
The following table shows the estimated total annual Delphi
Retirement Program for Salaried Employees benefits (under
Part A and Part B or Part C) plus the Alternative
SERP Benefit (assuming the executive qualifies). The figures are
based upon average annual compensation as of December 31,
2005. Delphi would pay the benefit in 12 equal monthly
installments per year to executives retiring in 2006 at
age 65. If the executive elects to receive such benefits
with a 65% survivor option, the amounts shown would generally be
reduced from 5% to 11%, depending upon the age differential
between spouses.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years of Credited Service | |
| Average Annual Total |
|
| |
| Direct Comp.(1) |
|
15 | |
|
20 | |
|
25 | |
|
30 | |
|
35 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$680,000
|
|
$ |
129,468 |
|
|
$ |
180,468 |
|
|
$ |
231,468 |
|
|
$ |
282,468 |
|
|
$ |
333,468 |
|
|
1,210,000
|
|
|
248,718 |
|
|
|
339,468 |
|
|
|
430,218 |
|
|
|
520,968 |
|
|
|
611,718 |
|
|
1,740,000
|
|
|
367,968 |
|
|
|
498,468 |
|
|
|
628,968 |
|
|
|
759,468 |
|
|
|
889,968 |
|
|
2,270,000
|
|
|
487,218 |
|
|
|
657,468 |
|
|
|
827,718 |
|
|
|
997,968 |
|
|
|
1,168,218 |
|
|
2,800,000
|
|
|
606,468 |
|
|
|
816,468 |
|
|
|
1,026,468 |
|
|
|
1,236,468 |
|
|
|
1,446,468 |
|
|
3,330,000
|
|
|
725,718 |
|
|
|
975,468 |
|
|
|
1,225,218 |
|
|
|
1,474,968 |
|
|
|
1,724,718 |
|
|
|
| (1) |
Average annual total direct compensation means the sum of the
average annual base salary and the average of the highest five
annual incentive awards earned in respect of the final ten
calendar years of service immediately preceding an
executive’s retirement. |
Notwithstanding the amounts set forth above, the Court order,
pursuant to the Debtors’ motion to honor human capital
obligations that prepetition and post-petition SERP benefits be
limited to $5,000 per month per eligible retiree (including
any named executive officer who retires during the duration of
the chapter 11 cases). If such a retirement does occur with
Alternative SERP eligibility, the named executive officers will
continue to accrue SERP benefits in accordance with the formula
outlined above and the named executive officers will also have
an unsecured claim as to the amount of the SERP benefits to
which they are otherwise entitled that are not paid pursuant to
the Court’s human capital obligations order.
The average annual total direct compensation and the eligible
years of Part B or Part C credited service which may
be considered in the Alternative SERP calculation as of
December 31, 2005 for the following named executive
officers are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Years of | |
|
Average Annual Total | |
| Named Executive |
|
Credited Service | |
|
Direct Compensation | |
| |
|
| |
|
| |
|
Robert S. Miller
|
|
|
Less than 1 year |
|
|
$ |
1,500,000 |
|
|
Rodney O’Neal
|
|
|
33 years |
|
|
$ |
1,394,400 |
|
|
Robert J. Dellinger
|
|
|
Less than 1 year |
|
|
$ |
750,000 |
|
|
Mark W. Weber
|
|
|
35 years (capped) |
|
|
$ |
1,113,450 |
|
The annual total direct compensation of each named executive
officer for the most recent year(s) considered in the
calculation reported here is based on the “Salary” and
“Bonus” columns of the Summary Compensation Table
appearing earlier in this section.
At his retirement date of June 1, 2006, Mr. Wohleen
had 27 years and 8 months of credited service at the
time of his retirement. Although not eligible for a SERP
benefit, he will receive benefits pursuant to his employee
agreement including severance payments (see Other Employment
Agreements) and the monthly pension payments to which he is
entitled to under the Delphi Retirement Program for Salaried
Employees.
Mr. Dawes had 23 years and 8 months of credited
service at the time of his resignation. He was not eligible for
a SERP benefit and requested and received a lump sum payment
from the Delphi Retirement Program for Salaried Employees in
accordance with plan provisions.
154
Mr. Battenberg and Mr. Runkle retired on July 1,
2005 and were both eligible for an Alternative SERP benefit. In
accordance with the American Jobs Creation Act of 2004,
Mr. Battenberg’s and Mr. Runkle’s SERP
payments were scheduled to begin six months following their
retirements, or January 2006, and therefore are not included in
the Summary Compensation Table. Mr. Battenberg earned
42 years and 8 months of credited service and was to
receive a total annual retirement benefit (pension and SERP) of
$1,643,222. Under the Court’s human capital obligations
order, that amount is reduced to an annual amount of $187,149.
Mr. Runkle earned 36 years and 7 months of
credited service and was to receive a total annual retirement
benefit (pension and SERP) of $743,448. Under the Court’s
human capital obligations order, that amount is reduced to an
annual amount of $153,989. Because some of their retirement
payments were deferred under the American Jobs Act of 2004 and
they are receiving the reduced SERP benefit, both
Mr. Battenberg and Mr. Runkle are eligible to file a
claim with the Court for the amounts they were otherwise
eligible to receive.
Related Party Transactions
As required by our bylaws, we have agreed to advance funds, to
the fullest extent permitted and in the manner required by the
laws of the State of Delaware, on behalf of certain present and
former officers of the Corporation, including several of the
named executive officers, for attorney’s fees and other
expenses they incur in connection with the previously disclosed
ongoing investigation by the U.S. Securities and Exchange
Commission and the Department of Justice into certain accounting
matters. We have also agreed to advance funds to certain former
and current employees in the same manner and to the same extent.
With respect to former employees, including officers, our
authority to advance fees and expenses on their behalf is
further subject to conditions stipulated by the Court, as set
forth in the first day orders, including in each instance
receipt of approval of the Compensation Committee of the Board
of Directors which may be granted only if advances are not
available from other sources. In addition, total amounts
advanced on behalf of all former directors and employees may not
exceed $5 million.
Our obligation to advance funds to officers, and to voluntarily
advance funds to other employees, is subject to the requirement
in our bylaws that these individuals agree to reimburse the
Company for any expenses we advance in the event such person is
ultimately determined to have not acted in good faith and in the
best interests of the Company.
On February 8, 2006, the Compensation Committee decided to
not authorize advancement of funds for certain former officers
and employees, including those who resigned after the Audit
Committee expressed concerns regarding the role such former
officers and employees played in structuring or supervising
others with respect to the transactions that were the subject of
our restatement. The Company has not advanced fees and expenses
for these former employees since our bankruptcy filing on
October 8, 2005.
Other Employment Agreements
Delphi and Mr. Donald L. Runkle, former Delphi vice
chairman, enterprise technologies, reached an agreement on the
terms of Mr. Runkle’s early retirement from Delphi and
the transitional services that he provided prior to his
retirement effective July 1, 2005. Additionally, Delphi
entered into a special retention agreement with Mr. Rodney
O’Neal, president and chief operating officer.
Delphi entered into employment agreements with each of its
officers in the United States. The agreements were effective as
of September 8, 2005. The Compensation Committee of the
Board of Directors’ approved certain modifications to the
separation policies which apply to executives, and determined to
enter into employment agreements between Delphi and each of its
officers in the United States, including the executive officers,
other than Mr. Miller. Generally such agreements provide
for a severance payment in the event the officer’s
employment is terminated by the Company without cause or by the
officer for good reason, as such terms are defined in the
agreement. Payment of severance is conditioned on the
officer’s agreement to confidentiality, non-compete and
non-solicitation provisions as well as the execution of a
standard release of claims in the event of any such employment
termination. Provided all conditions are satisfied, the officer
is entitled to payments totaling 18 months of base salary
155
plus the equivalent of 18 months of the annual bonus
incentive target. The agreements cover approximately 21
individuals, including the executive officers. Policy
modifications were also made for the remaining
U.S. executives. Such policy changes provide variable
severance amounts depending on level of responsibility ranging
from equivalent 12 months base pay plus target bonus to
12 months base pay only. For information regarding
rejection and assumption of executory contracts in bankruptcy,
refer to Item 1. Business—Contract Rejection and
Assumption Process in this Annual Report.
Change in Control Agreements
In early 2000, Delphi entered into updated change in control
agreements with its officers, whom we refer to here as
participants, including each of the executives named in the
Summary Compensation Table. The change in control agreements
provides certain benefits to each participant upon the
occurrence of a change in control of Delphi and additional
benefits if the employment of a participant is terminated for
certain reasons after a change in control.
A change in control is defined in the change in control
agreements as: (i) the acquisition by any person, other
than Delphi or any subsidiary of Delphi, of beneficial ownership
of 25 percent or more of the outstanding common stock or of
common stock carrying votes sufficient to elect a majority of
the directors of the Company; (ii) members of the
Company’s board of directors who constitute the entire
board as of the date of a participant’s change in control
agreement, together with any new directors whose election to the
board was approved by at least two-thirds of the directors then
in office who had been directors as of the date of the
participant’s change in control agreement, cease to
constitute a majority of the board; (iii) certain mergers,
consolidations and other reorganizations of Delphi in which
Delphi is not the surviving corporation; (iv) any sale,
lease, exchange or other transfer of 50% or more of the assets
of Delphi; or (v) a liquidation or dissolution of Delphi.
Upon the occurrence of a change in control, a participant is
entitled to the following payments and benefits:
|
|
|
| |
• |
all of the participant’s unvested options will vest and
become immediately exercisable in accordance with their terms; |
| |
| |
• |
all of the participant’s unvested restricted stock units
will vest and the Company will deliver to the participant stock
certificates and/or, at the participant’s option, cash in
an amount equal to the value of the restricted stock units; |
| |
| |
• |
all of the participant’s target awards, calculated based on
the greater of 150% of the initial awards or 150% of the
forecasted payout level at the time of the change in control,
will be fully “funded” by the Company contributing
amounts equal to such awards to a “rabbi trust” and
will thereafter be paid to the participant at the times
contemplated by the plans under which the awards were made; |
| |
| |
• |
any compensation previously deferred at the election of the
participant, together with accrued interest or earnings, will be
“funded” by the Company contributing amounts equal to
such deferrals and accrued interest or earnings to a rabbi
trust, which amounts will be paid to the participant as
previously directed by the participant; |
| |
| |
• |
the Company will contribute to a rabbi trust an amount equal to
the present value of the Regular SERP Benefit or the Alternative
SERP Benefit, which amount will be paid to the participant under
the terms of the Supplemental Executive Retirement Program at
the same time as his or her benefits under the Delphi Salaried
Retirement Program are paid to him or her; if the participant
does not become vested in his or her retirement benefit under
the Delphi Salaried Retirement Program, then the present value
of the Regular SERP Benefit or the present value of the
Alternative SERP Benefit will be paid to the participant within
30 days after his or her separation from service with the
Company; solely for purposes of calculating the Regular SERP
Benefit and/or the Alternative SERP Benefit, the
participant’s benefit under the Delphi Salaried Retirement
Program will be calculated with additional year(s) of service
equal to the multiplier (1, 2 or 3) described below and
with the additional compensation paid as a result of such
multiplier; |
156
|
|
|
| |
• |
a participant will be deemed fully vested in his or her benefit
under any tax-qualified defined benefit plans of the Company so
that if he or she separates from service with the Company before
actually becoming vested in such benefits, the Company will pay
him or her an amount equal to the present value of his or her
accrued benefits under such plans; |
| |
| |
• |
a participant will be deemed fully vested in his or her benefit
under any tax-qualified defined contribution plans of the
Company so that if he or she separates from service with the
Company before actually becoming vested in such benefits, the
Company will pay him or her an amount equal to the excess of his
or her account balance under such plans over the vested account
balance. |
Additional payments and benefits are payable to a participant
who ceases to be employed by the Company during the three years
following a change in control under any of the following
circumstances:
|
|
|
| |
• |
the Company terminates the participant’s employment other
than “for cause,” i.e., for any reason other than the
participant’s willful failure to perform substantially his
or her duties or the conviction of the participant for a felony; |
| |
| |
• |
the participant terminates his or her employment if, without his
or her consent, (i) his or her salary and other
compensation or benefits are reduced for reasons unrelated to
the Company’s or the participant’s performance,
(ii) his or her responsibilities are negatively and
materially changed, (iii) he or she must relocate his or
her work location or residence more than 25 miles from its
location as of the date of the change in control or
(iv) the Company fails to offer him or her a comparable
position after the change in control; |
| |
| |
• |
during the one-month period following the first anniversary of
the change in control, the participant ceases to be employed by
the Company for any reason other than for cause. |
The additional payments and benefits payable in the
circumstances described above are:
|
|
|
| |
• |
payment in cash of (i) the participant’s annual base
salary through the termination date for work performed for which
the participant has not yet been paid, together with accrued
vacation pay and (ii) a multiple (either 1, 2 or
3) of the greater of (x) the participant’s annual
base salary plus his or her target bonus, each for the year in
which the change in control occurs, and (y) the
participant’s annual base salary plus his or her target
bonus, each for the year in which his or her employment is
terminated; |
| |
| |
• |
continuation by the Company of the participant’s health and
life insurance coverage for 36 months after the termination
date; |
| |
| |
• |
reimbursement from the Company of up to $50,000 for expenses
related to outplacement services; |
| |
| |
• |
continued use of the participant’s Company car and/or any
applicable car allowance for one year after the termination
date, plus payment by the Company of any amounts necessary to
offset any taxes incurred by the participant by reason of the
Company’s car-related payments; |
| |
| |
• |
provision by the Company of investment advisory services
comparable to those services available to the participant as of
the date of his or her change in control agreement, for two
years after the termination date; and |
| |
| |
• |
payment by the Company of the participant’s legal fees
resulting from any dispute resolution process entered into to
enforce his or her change in control agreement, plus payment by
the Company of the
gross-up amount
necessary to offset any taxes incurred by the participant by
reason of such payments by the Company. |
If a participant voluntarily terminates employment during the
term of his or her change in control agreement, other than in
any of the negative situations imposed without his or her
consent described above and other than during the
one-month period after
the first anniversary of the change in control also described
above, the participant’s change in control agreement will
terminate and the Company’s only obligation will be to pay
the participant’s annual base salary through the
termination date for work performed for which the
157
participant has not yet been paid and any previously deferred
compensation. Upon the termination of a participant’s
employment due to his or her death or incapacity (other than
during the one-month period after the first anniversary of the
change in control described above), his or her change in control
agreement will terminate and the Company’s only obligation
will be to pay the participant’s annual base salary through
the termination date, any accrued vacation pay and any
previously deferred compensation.
A participant is also entitled to receive a payment by the
Company to offset any excise tax under the excess parachute
payment provisions of section 4999 of the Internal Revenue
Code that has been levied against the participant for payments
that the Company has made to, or for the benefit of, him or her
(whether or not such payments are made pursuant to the
participant’s change in control agreement). The payment by
the company will be “grossed up” so that after the
participant pays all taxes (including any interest or penalties
with respect to such taxes) on the payment, the participant will
retain an amount of the payment equal to the excise tax imposed.
The change in control agreements places certain restrictions on
the ability of a participant whose employment with the Company
has terminated to disclose any confidential information,
knowledge or data about the Company or its business. Also, the
terms of any noncompetition agreement between a participant and
the Company (including the noncompetition provisions contained
in the Supplemental Executive Retirement Program as it relates
to payment of the Alternative SERP Benefit and in various
benefit plans) will cease to apply to a participant if, and on
the date that, the participant’s employment with the
Company is terminated for any reason after a change in control.
Compensation of Directors
We do not pay directors who are also our employees additional
compensation for their service as directors or committee
members. We pay our non-employee directors on a quarterly basis.
For the first three quarters of 2005, our compensation policy
for non-employee Board members was as follows:
|
|
| |
Up until satisfaction of a minimum deferral requirement based on
three times the value of each director’s total annual
compensation and the historical value of the Company’s
common stock as calculated in accordance with the terms of
Delphi’s Deferred Compensation Plan for Non-Employee
Directors (the “Director Plan”): |
|
|
|
| |
• |
The lead independent director received an annual retainer of
$300,000, of which $100,000 was paid in cash and $200,000 in
notional shares of Delphi common stock (“Delphi common
stock units”); |
| |
| |
• |
The chairman of the Audit Committee received an annual retainer
of $155,000, of which $62,000 was paid in cash and $93,000 in
Delphi common stock units; |
| |
| |
• |
The chairman of the Compensation Committee and the chairman of
the Corporate Governance and Public Issues Committee each
received an annual retainer of $150,000, of which $60,000 was
paid in cash and $90,000 was paid in Delphi common stock units; |
| |
| |
• |
All other non-employee directors received an annual retainer of
$140,000, of which $56,000 was paid in cash and $84,000 in
Delphi common stock units. |
The portion of each non-employee director’s annual
compensation that was paid in Delphi common stock units was
automatically deferred until he or she no longer served on our
Board under the terms of the Director Plan. Once a director had
satisfied the minimum holding requirement, the director could
receive up to 50%, in 10% increments, of his retainer in cash,
with the remaining amount paid in Delphi common stock units. In
addition, directors could also, and generally chose to, elect
annually to voluntarily defer the entire cash portion of the
retainer into Delphi common stock units. The terms of the
Director Plan do not permit a director to request an early
withdrawal (in part or in whole) of any amounts deferred into
Delphi common stock units. Outstanding common stock unit
balances accrue dividend equivalents on a quarterly basis and
are paid out in cash at current market values seven months after
the director leaves the Board.
158
On December 6, 2005, the Compensation Committee cancelled
the provisions of the Director Plan with respect to all future
payments of director compensation as follows:
|
|
|
| |
• |
No portion of the annual retainer will be paid in Delphi common
stock units. |
| |
| |
• |
The Director Plan will remain in place as to past deferrals and
no amounts will be distributed except in accordance with its
existing provisions; i.e. paid out in cash seven months
after the director leaves the Board. |
Beginning with the quarterly payment ending December 31,
2005, all non-employee directors were paid in cash. Concurrent
with this decision, the Lead Director volunteered to reduce his
pay from $300,000 annually to $200,000, effective with his
fourth quarter 2005 payment that was disbursed in December 2005.
The annual fees for all other non-employee directors remain
unchanged as noted above.
The Compensation Committee took this action after reviewing both
the required and elective deferral component contained in the
Director Plan in light of Delphi’s filing for
reorganization under chapter 11 of the United States
Bankruptcy Code.
Listed below is the 2005 compensation for our non-employee
directors.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Minimum |
|
2005 Common | |
|
|
|
December 31, 2005 | |
| |
|
Holding |
|
Stock Units | |
|
2005 Cash | |
|
Outstanding Deferred | |
| |
|
Requirement |
|
Retainer | |
|
Retainer | |
|
Common Stock Unit | |
| Board of Directors |
|
Satisfied |
|
Payments | |
|
Payments | |
|
Balance(6) | |
| |
|
|
|
| |
|
| |
|
| |
|
John D. Opie
|
|
X |
|
|
22,246 |
|
|
$ |
162,500 |
|
|
|
141,914 |
|
| |
Lead Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert H. Brust
|
|
X |
|
|
11,494 |
|
|
$ |
96,875 |
|
|
|
64,882 |
|
| |
Chairman of the Audit Committee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David N. Farr
|
|
X |
|
|
22,246 |
|
|
$ |
37,500 |
|
|
|
63,494 |
|
| |
Chairman of the Corporate Governance and Public Issues Committee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Virgis W. Colbert
|
|
X |
|
|
11,123 |
|
|
$ |
93,750 |
|
|
|
79,416 |
|
| |
Chairman of the Compensation and Executive Development Committee |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oscar Bernardes
|
|
X |
|
|
10,381 |
|
|
$ |
87,500 |
|
|
|
76,206 |
|
|
Dr. Bernd Gottschalk
|
|
X |
|
|
20,763 |
|
|
$ |
35,000 |
|
|
|
77,880 |
|
|
Shoichiro Irimajiri(1)
|
|
X |
|
|
20,763 |
|
|
$ |
35,000 |
|
|
|
82,159 |
|
|
Raymond J. Milchovich(2)
|
|
|
|
|
0 |
|
|
$ |
11,667 |
|
|
|
0 |
|
|
Craig Naylor(3)
|
|
|
|
|
19,013 |
|
|
$ |
35,000 |
|
|
|
19,078 |
|
|
Cynthia A. Niekamp(4)
|
|
|
|
|
15,962 |
|
|
$ |
0 |
|
|
|
35,011 |
|
|
John H. Walker(5)
|
|
|
|
|
0 |
|
|
$ |
11,667 |
|
|
|
0 |
|
|
|
| (1) |
Mr. Irimajiri retired from the Board effective
March 31, 2006. Per the Director Plan, his Delphi common
stock unit balance will be distributed to him in November 2006
in cash based on the average third quarter 2006 closing price of
Delphi’s common stock. |
| |
| (2) |
Mr. Milchovich joined the Board on December 9, 2005. |
| |
| (3) |
Mr. Naylor joined the Board on February 1, 2005. |
| |
| (4) |
Ms. Niekamp resigned from the Board effective July 22,
2005. Per the Director Plan, her Delphi common stock unit
balance was distributed to her in February 2006 in cash based on
the average fourth quarter 2005 closing price of Delphi’s
common stock. |
| |
| (5) |
Mr. Walker joined the Board on December 9, 2005. |
| |
| (6) |
Under the terms of the Director Plan, Delphi common stock units
accrue dividend equivalents in the form of additional common
stock units, as and when actual dividends are paid on Delphi
shares of common stock. The outstanding balance includes
dividend accruals on prior awards. |
159
|
|
| ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Stock Ownership of Management and More Than 5%
Stockholders
The table below shows how much of our common stock was
beneficially owned as of May 31, 2006 (unless another date
is indicated) by (i) each director (who was serving as a
director as of that date) (ii) each executive officer named
in the Summary Compensation Table appearing elsewhere in this
Annual Report on
Form 10-K,
(iii) each person known by Delphi to beneficially own more
than 5% of our common stock and (iv) all directors and
executive officers as a group. In general, a person
“beneficially owns” shares if he or she has or shares
with others the right to vote those shares or to dispose of
them, or if the person has the right to acquire such voting or
disposition rights within 60 days of May 31, 2006
(such as by exercising options). All persons subject to the
reporting requirements of Section 16(a) filed the required
reports on a timely basis for the fiscal year ended 2005.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Stock | |
|
|
|
|
| |
|
|
|
Which May | |
|
|
|
|
| |
|
Shares | |
|
Be Acquired | |
|
|
|
|
| |
|
Beneficially | |
|
Within | |
|
|
|
|
| Name and Address(1) |
|
Owned(2) | |
|
60 Days(3) | |
|
Total |
|
Percent | |
| |
|
| |
|
| |
|
|
|
| |
|
Robert S. Miller
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
Rodney O’Neal
|
|
|
99,005 |
|
|
|
1,083,000 |
|
|
1,182,005 |
|
|
* |
|
|
David B. Wohleen
|
|
|
87,986 |
|
|
|
1,056,402 |
|
|
1,144,388 |
|
|
* |
|
|
Robert J. Dellinger
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
Mark R. Weber
|
|
|
74,248 |
|
|
|
964,410 |
|
|
1,038,658 |
|
|
* |
|
|
Oscar de Paula Bernardes Neto
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
Robert H. Brust
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
Virgis W. Colbert
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
David N. Farr
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
Bernd Gottschalk
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
Shoichiro Irimajiri
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
Raymond J. Milchovich
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
Craig G. Naylor
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
John D. Opie
|
|
|
10,000 |
|
|
|
— |
|
|
10,000 |
|
|
* |
|
|
John H. Walker
|
|
|
— |
|
|
|
— |
|
|
— |
|
|
* |
|
|
J. T. Battenberg III(4)
|
|
|
778,099 |
|
|
|
4,493,067 |
|
|
5,271,166 |
|
|
* |
|
|
Donald L. Runkle(4)
|
|
|
193,699 |
|
|
|
1,221,086 |
|
|
1,414,785 |
|
|
* |
|
|
Alan S. Dawes(5)
|
|
|
128,172 |
|
|
|
— |
|
|
128,172 |
|
|
* |
|
|
Appaloosa Management LP(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
26 Main Street |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Chatham, NJ 07928 |
|
|
52,000,000 |
|
|
|
— |
|
|
52,000,000 |
|
|
9.3 |
% |
|
Brandes Investment Partners(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
11988 El Camino Real |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
San Diego, CA 92130 |
|
|
32,170,332 |
|
|
|
— |
|
|
32,170,322 |
|
|
5.7 |
% |
|
Harbinger Capital Partners Master Fund I, Ltd.(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
c/o International Fund Services (Ireland) Limited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
3rd
Floor, Bishop’s Square, Redmond’s Hill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dublin 2. Ireland |
|
|
32,025,000 |
|
|
|
— |
|
|
32,025,000 |
|
|
5.7 |
% |
|
All directors and executive officers as a group
(17 persons)(9)
|
|
|
272,585 |
|
|
|
3,209,730 |
|
|
3,482,315 |
|
|
* |
|
|
|
| * |
Less than 1% of Delphi’s total outstanding common stock.
The percentages shown in the table are based on the total number
of shares of Delphi’s common stock outstanding on
March 31, 2006. |
160
Notes
|
|
| (1) |
Except as otherwise indicated in the table, the business address
of the beneficial owners is c/o Delphi Corporation, 5725
Delphi Drive, Troy, MI 48098. See also notes (4) and
(5) regarding Messrs. Battenberg, Runkle and Dawes. |
| |
| (2) |
Includes shares: |
|
|
|
| |
• |
As to which the named person has sole voting and investment
power, |
| |
| |
• |
As to which the named person has shared voting and investment
power with a spouse, or |
|
|
| (3) |
Includes stock options which became exercisable before
October 8, 2005, the date Delphi filed for reorganization
cases under chapter 11 of the U.S. Bankruptcy Code,
but does not include stock options which became or will become
exercisable and restricted stock units which vested or will vest
after such date and within 60 days of March 31, 2006,
as the Corporation has cancelled shares available for issuance,
will not authorize further awards under the long-term
compensation plans pursuant to which such options and units were
granted and will not issue any shares of common stock pursuant
to previously granted awards that had not vested prior to the
commencement of reorganization cases. |
| |
| (4) |
Mr. Battenberg and Mr. Runkle retired effective
July 1, 2005. The direct shares reflect their ownership
position as of July 31, 2005. |
| |
| (5) |
Mr. Dawes resigned effective March 4, 2005. The direct
shares reflect his ownership position as of March 31, 2005. |
| |
| (6) |
Based on a Schedule 13D dated March 15, 2006 filed by
Appaloosa Management LP with the Securities and Exchange
Commission. |
| |
| (7) |
Based on a Schedule 13G dated February 14, 2006 filed
by Brandes Investment Partners, Inc. with the Securities and
Exchange Commission. |
| |
| (8) |
Based on a Schedule 13D dated June 1, 2006 filed by
Harbinger Capital Partners Master Fund I, Ltd. with the
Securities and Exchange Commission. |
| |
| (9) |
Excludes Messrs. Battenberg, Dawes and Runkle, who are no
longer executive officers of the Company. |
Related Stockholder Matters
In connection with its reorganization cases, Delphi cancelled
future grants of stock-based compensation under its long-term
compensation plans. Prior to the reorganization cases, Delphi
had authorized future issuances of common stock to its named
executive officers and other employees, pursuant to options
granted under long-term compensation plans. The table below
summarizes the options outstanding against those plans as of
December 31, 2005 and includes any options and restricted
stock units granted and unvested at the time of the
chapter 11 filing on October 8, 2005. Delphi will not
issue any common stock for these unvested awards. A more
detailed description of these plans and awards made pursuant
thereto is contained in the “Compensation of Executive
Officers” section appearing elsewhere in this Annual Report
on Form 10-K.
As discussed more fully under Part I Item 1 in this
Annual Report, a plan of reorganization could result in holders
of Delphi stock or options receiving no distribution on account
of their interests and
161
cancellation of their existing stock. Delphi considers the value
of its common stock and other equity-based securities to be
highly speculative and the following tables should be read in
light of that possibility:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of securities | |
|
|
|
Number of securities | |
| |
|
to be issued upon | |
|
Weighted-average | |
|
remaining available | |
| |
|
exercise of | |
|
exercise price of | |
|
for future issuance | |
| |
|
outstanding options | |
|
outstanding options | |
|
under equity | |
| Plan Category |
|
and rights(1) | |
|
and rights(2) | |
|
compensation plans | |
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
|
|
(in thousands) | |
|
Equity compensation plans approved by stockholders
|
|
|
70,584 |
|
|
$ |
12.64 |
|
|
|
— |
|
|
Equity compensation plans not approved by stockholders
|
|
|
24,008 |
|
|
$ |
16.45 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
94,592 |
|
|
$ |
13.72 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Notes
|
|
| (1) |
Includes approximately 60.6 million outstanding options and
approximately 10.0 million outstanding restricted stock
units. |
| |
| (2) |
Includes weighted-average exercise price of outstanding options
only. |
|
|
| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
During 2005 there were no transactions with management and
others, no business relationships regarding directors or
nominees for directors and no indebtedness of management
required to be disclosed pursuant to this Item 13 other
than those described in response to Item 11, Executive
Compensation. Refer to Item 11. Executive Compensation in
this Annual Report for certain related party transactions
occurring during 2005.
|
|
| ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Deloitte & Touche LLP served as the Company’s
independent public accountants for the fiscal years ended
December 31, 2005 and 2004. Deloitte & Touche LLP
completed its 2005 engagement with the issuance of its audit
report and assessment of internal controls included herein. The
Audit Committee of the Board of Directors selected
Ernst & Young LLP to serve as independent public
accountants, effective January 1, 2006, for the fiscal year
ended December 31, 2006. Refer to Item 9. Changes in
and Disagreements with Accountants on Accounting and Financial
Disclosure in this Annual Report, for information regarding
Deloitte & Touche LLP’s completion of its existing
engagement with Delphi.
The following table breaks out the components of aggregate fees
billed to Delphi by Deloitte & Touche LLP and
affiliates, the member firms of Deloitte & Touche
Tohmatsu, and their respective affiliates (collectively,
“Deloitte”), for services in 2005 and 2004:
| |
|
|
|
|
|
|
|
|
| |
|
2005 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
($ in millions) | |
|
Audit Fees
|
|
|
20.6 |
|
|
|
14.0 |
|
|
Audit-Related Fees
|
|
|
0.4 |
|
|
|
0.6 |
|
|
Tax Fees
|
|
|
0.7 |
|
|
|
1.1 |
|
|
All Other Fees
|
|
|
0.2 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
Total
|
|
|
21.9 |
|
|
|
15.7 |
|
| |
|
|
|
|
|
|
|
Memo: Ratio of Tax and All Other Fees to Audit and
Audit-Related Fees
|
|
|
0.0:1 |
|
|
|
0.1:1 |
|
|
Percentage of Aggregate Fees which were Audit or Audit-Related
|
|
|
96 |
% |
|
|
93 |
% |
162
Audit fees related primarily to the audit of the Company’s
consolidated annual financial statements, reviews of interim
financial statements contained in the Company’s Quarterly
Reports on
Form 10-Q,
statutory audits of certain of the Company’s subsidiaries,
attestation of management’s assessment of internal control
over financial reporting as of December 31, 2005 pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, and
various attest services.
Audit-related fees related primarily to employee benefit plan
audits, accounting consultations, agreed-upon procedures
engagements and services related to a regulatory investigation.
Tax fees related to the following:
|
|
| |
1. Tax compliance services such as assistance with tax
return filing and preparation of required documentation in
certain foreign countries, totaling $0.4 million in 2005
($0.4 million in 2004). |
| |
| |
2. Tax planning, advice and other tax-related services
including assistance with tax audits and appeals, general tax
advice in the U.S. and certain foreign countries, and customs
reports in Mexico, totaling $0.3 million in 2005
($0.7 million in 2004). |
All other fees represents
non-U.S. expatriate
tax support services, which were not subject to pre-approval
pursuant to the de minimus exception but which were, in
accordance with the Company’s pre-approval policies,
reported to the Committee at the next meeting.
In considering the nature of the services provided by Deloitte
in 2005, the Audit Committee determined that they are compatible
with their provision of independent audit services. The Audit
Committee discussed these services with Deloitte and management
to determine that they are permitted under the rules and
regulations concerning auditor independence promulgated by the
U.S. Securities and Exchange Commission to implement the
Sarbanes-Oxley Act of 2002, as well as the American Institute of
Certified Public Accountants.
Pre-Approval Policy
The services performed by Deloitte & Touche in 2005
were pre-approved by the Audit Committee in accordance with the
pre-approval policy and procedures adopted by the Committee.
This policy delineates the allowable audit, audit-related, tax,
and other services which the independent auditor may perform.
Prior to the beginning of each year, the Vice President of
Corporate Audit Services (or the Chief Tax Officer in the case
of tax services) develops a detailed description of the services
to be performed by the independent auditor in each of these
categories in the following year. This Service List is presented
to the Audit Committee for approval. Services provided by
Deloitte during the following year that are included on the
Service List and were approved in this manner are considered to
have been pre-approved by the policies and procedures of the
Audit Committee. Any requests for audit, audit-related and tax
services not contemplated on the Service List and all other
services must be submitted to the Committee for pre-approval as
they arise during the year and cannot commence until such
approval has been granted. Normally, this is done at regularly
scheduled meetings, but approval authority between meetings has
been delegated to the Chairman. On a regular quarterly basis,
the Audit Committee reviews the status of services and fees
incurred year-to-date,
the forecast for the calendar year and the projected ratio of
tax and all other fees to audit and audit-related fees.
163
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| |
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| |
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|
Page No. | |
| |
|
|
|
|
|
| |
| |
(a) |
|
|
|
1. |
|
|
Financial Statements: |
|
|
|
|
| |
|
|
|
|
|
|
|
— Management’s Report on Internal Control over
Financial Reporting |
|
|
72 |
|
| |
|
|
|
|
|
|
|
— Report of Independent Registered Public Accounting
Firm |
|
|
74 |
|
| |
|
|
|
|
|
|
|
— Report of Independent Registered Public Accounting
Firm |
|
|
77 |
|
| |
|
|
|
|
|
|
|
— Consolidated Statements of Operations for the Years
Ended December 31, 2005, 2004 and 2003 |
|
|
78 |
|
| |
|
|
|
|
|
|
|
— Consolidated Balance Sheets as of December 31,
2005 and 2004 |
|
|
79 |
|
| |
|
|
|
|
|
|
|
— Consolidated Statements of Cash Flows for the Years
Ended December 31, 2005, 2004 and 2003 |
|
|
80 |
|
| |
|
|
|
|
|
|
|
— Consolidated Statements of Stockholders’ Equity
(Deficit) for the Years Ended December 31, 2005, 2004 and
2003 |
|
|
81 |
|
| |
|
|
|
|
|
|
|
— Notes to Consolidated Financial Statements |
|
|
82 |
|
| |
|
|
|
|
2. |
|
|
Financial Statement Schedules - |
|
|
|
|
| |
|
|
|
|
|
|
|
— Valuation and qualifying account schedule for the
Years Ended December 31, 2005, 2004, and 2003 |
|
|
135 |
|
| |
|
|
|
|
3. |
|
|
Exhibits (including those incorporated by reference) |
|
|
|
|
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Name |
| |
|
|
| |
(3 |
)(a) |
|
Amended and Restated Certificate of Incorporation of Delphi
Corporation, incorporated by reference to Exhibit 3(a) to
Delphi’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002. |
| |
(3 |
)(b) |
|
Certificate of Ownership and Merger, dated March 13, 2002,
merging Delphi Corporation into Delphi Automotive Systems
Corporation, incorporated by reference to Exhibit 3(b) to
Delphi’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002. |
| |
(3 |
)(c) |
|
Amended and Restated Bylaws of Delphi Corporation, incorporated
by reference to Exhibit 99(c) to Delphi’s Report on
Form 8-K filed October 14, 2005. |
| |
(4 |
)(a) |
|
Rights Agreement relating to Delphi’s Stockholder Rights
Plan, incorporated by reference to Exhibit(4)(a) to
Delphi’s Annual Report on Form 10-K for the year ended
December 31, 1998, as amended by the First Amendment
thereto, which is incorporated by reference to
Exhibit 99(a) to Delphi’s Report on Form 8-K
dated May 11, 2005. |
| |
(4 |
)(b) |
|
Indenture, dated as of April 28, 1999, between Delphi
Corporation and Bank One, National Association, formerly known
as The First National Bank of Chicago, as trustee, incorporated
by reference to Exhibit 4(b) to Delphi
Corporation’s Annual Report on Form 10-K for the year
ended, December 31, 2001. |
| |
(4 |
)(c) |
|
Terms of the,
61/2%
Notes due 2009, and
71/8
% Debentures due 2029, incorporated by reference to
Exhibit 4.1 to Delphi’s Current Report on
Form 8-K dated April 28, 1999 and filed May 3,
1999. |
164
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Name |
| |
|
|
| |
(4 |
)(d) |
|
Terms of the 6.55% Notes due 2006, incorporated by reference to
Exhibit 4.1 to Delphi’s Current Report on
Form 8-K dated May 31, 2001 and filed June 4,
2001. |
| |
|
|
|
Instruments defining the rights of holders of debt of the
registrant have been omitted from this exhibit index because the
amount of debt authorized under any such instrument does not
exceed 10% of the total assets of the registrant and its
subsidiaries. The registrant agrees to furnish a copy of any
such instrument to the Securities and Exchange Commission upon
request. |
| |
(4 |
)(e) |
|
Terms of the 6.50% Notes due 2013, incorporated by reference to
Exhibit 4.1 to Delphi’s Current Report on
Form 8-K dated July 22, 2003 and filed July 25,
2003. |
| |
(4 |
)(f) |
|
Form of First Supplemental Indenture to Indenture, dated as of
April 28, 1999, between Delphi Corporation and Bank One,
National Association, formerly known as The First National Bank
of Chicago, as trustee, incorporated by reference to
Exhibit 4.2 to Delphi’s Registration Statement on
Form S-3 (Registration No. 333-101478). |
| |
(4 |
)(g) |
|
Subordinated Indenture between Delphi Corporation and Bank One
Trust Company, National Association, as trustee,
incorporated by reference to Exhibit 4.1 to Delphi’s
Current Report on Form 8-K dated November 21, 2003 and
filed November 24, 2003. |
| |
(4 |
)(h) |
|
Certificate of Trust of Delphi Trust I, incorporated by
reference to Exhibit 4.7 to Delphi’s Registration
Statement on Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(i) |
|
Declaration of Trust of Delphi Trust I, incorporated by
reference to Exhibit 4.8 to Delphi’s Registration
Statement on Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(j) |
|
Certificate of Trust of Delphi Trust II, incorporated by
reference to Exhibit 4.9 to Delphi’s Registration
Statement on Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(k) |
|
Declaration of Trust of Delphi Trust II, incorporated by
reference to Exhibit 4.10 to Delphi’s Registration
Statement on Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(l) |
|
Certificate of Trust of Delphi Trust III, incorporated by
reference to Exhibit 4.11 to Delphi’s Registration
Statement on Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(m) |
|
Declaration of Trust of Delphi Trust III, incorporated by
reference to Exhibit 4.12 to Delphi’s Registration
Statement on Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(n) |
|
Certificate of Trust of Delphi Trust IV, incorporated by
reference to Exhibit 4.13 to Delphi’s Registration
Statement on Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(o) |
|
Declaration of Trust of Delphi Trust IV, incorporated by
reference to Exhibit 4.14 to Delphi’s Registration
Statement on Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(p) |
|
Form of Amended and Restated Declaration of Trust I, II,
III & IV, incorporated by reference to
Exhibit 4.15 to Delphi’s Registration Statement on
Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(q) |
|
Form of Guarantee Agreement, incorporated by reference to
Exhibit 4.16 to Delphi’s Registration Statement on
Form S-3 (Registration No. 333-108477). |
| |
(4 |
)(r) |
|
Terms of
81/4
% junior subordinated notes due 2033, incorporated by
reference to Exhibit 4.1 to Delphi’s Current Report on
Form 8-K dated October 21, 2003 and filed
October 23, 2003. |
| |
(4 |
)(s) |
|
Terms of adjustable rate junior subordinated notes due 2033,
incorporated by reference to Exhibit 4.3 to Delphi’s
Current Report on Form 8-K dated November 21, 2003 and
filed November 24, 2003. |
| |
(10 |
)(a) |
|
Master Separation Agreement among General Motors, Delphi, Delphi
Corporation LLC, Delphi Technologies, Inc. and Delphi
Corporation (Holding), Inc., incorporated by reference to
Exhibit 10.1 to the Registration Statement. |
165
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Name |
| |
|
|
| |
(10 |
)(b) |
|
Component Supply Agreement between Delphi and General Motors,
incorporated by reference to Exhibit 10.2 to the
Registration Statement. |
| |
(10 |
)(c) |
|
Memorandum of Understanding dated May 3, 2000 between
Delphi and General Motors Service Parts Operation, incorporated
by reference to Exhibit 10(c) to Delphi’s Annual
Report on Form 10-K for the year ended December 31,
2000. |
| |
(10 |
)(d) |
|
U.S. Employee Matters Agreement between Delphi and General
Motors, incorporated by reference to Exhibit 10.4 to the
Registration Statement. |
| |
(10 |
)(e) |
|
Agreement for the Allocation of United States Federal, State and
Local Income Taxes between General Motors and Delphi,
incorporated by reference to Exhibit 10.5 to the
Registration Statement. |
| |
(10 |
)(f) |
|
Amended and Restated Agreement for the Allocation of United
States Federal, State and Local Income Taxes between General
Motors and Delphi, incorporated by reference to
Exhibit 10.6 to the Registration Statement. |
| |
(10 |
)(g) |
|
IPO and Distribution Agreement between Delphi and General
Motors, incorporated by reference to Exhibit (10)(g) to
Delphi’s Annual Report on Form 10-K for the year ended
December 31, 1998. |
| |
(10 |
)(h) |
|
Description of Delphi Non-Employee Directors Charitable Gift
Giving Plan, incorporated by reference to
Exhibit 10(h) to Delphi’s Annual Report on
Form 10-K for the year ended December 31, 2000.* |
| |
(10 |
)(i) |
|
Delphi Corporation Stock Incentive Plan, incorporated by
reference to Exhibit 10.10 to the Registration Statement.* |
| |
(10 |
)(j) |
|
Delphi Corporation Amended and Restated Deferred Compensation
Plan for Non-Employee Directors, incorporated by reference to
Exhibit 10(j) to Delphi’s Annual Report on
Form 10-K for the year ended December 31, 2004.* |
| |
(10 |
)(k) |
|
Agreement, dated December 22, 1999, between Delphi
Corporation and General Motors Corporation, incorporated by
reference to Exhibit 10(q) to Delphi’s Annual
Report on Form 10-K for the fiscal year ended
December 31, 1999. |
| |
(10 |
)(l) |
|
Form of Change in Control Agreement between Delphi and its
officers, incorporated by reference to
Exhibit 10(a) to Delphi’s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.* |
| |
(10 |
)(m) |
|
Employment Agreement with an Executive Officer dated
January 1, 1999, incorporated by reference to
Exhibit 10(u) to Delphi’s Annual Report on
Form 10-K for the year ended December 31, 2000.* |
| |
(10 |
)(n) |
|
Supplemental Executive Retirement Program, incorporated by
reference to Exhibit 4(b) to Delphi Corporation’s
Annual Report on Form 10-K for the year ended,
December 31, 2001.* |
| |
(10 |
)(o) |
|
Stock Option Plan for Non-Executives, incorporated by reference
to Delphi Corporation’s Annual Report on Form 10-K for
the year ended, December 31, 2002. |
| |
(10 |
)(p) |
|
Delphi Corporation Long-Term Incentive Plan, incorporated by
reference to Exhibit 4(d) to Delphi’s Registration
Statement on Form S-8 (Registration No. 333-116729).* |
| |
(10 |
)(q) |
|
Delphi Corporation Annual Incentive Plan, incorporated by
reference to Exhibit 10(c) to Delphi
Corporation’s Quarterly Report on Form 10-Q/ A for the
quarter ended June 30, 2004.* |
| |
(10 |
)(r) |
|
Form of Retention Award Agreements for Executive Officers, dated
March 1, 2005, incorporated by reference to
Exhibit 99(a) to Delphi’s Report on Form 8-K
filed on March 7, 2005.* |
| |
(10 |
)(s) |
|
Amendment to Rights Agreement dated May 11, 2005
incorporated by reference to Exhibit 99(a) to
Delphi’s Report on Form 8-K filed on May 17, 2005. |
166
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Name |
| |
|
|
| |
(10 |
)(t) |
|
2005 Executive Retirement Incentive Program Agreement dated
May 13, 2005 incorporated by reference to
Exhibit 99(a) to Delphi’s Report on Form 8-K
filed on May 18, 2005.* |
| |
(10 |
)(u) |
|
Special Separation Agreement & Release dated
May 13, 2005 incorporated by reference to
Exhibit 99(b) to Delphi’s Report on Form 8-K
filed on May 18, 2005.* |
| |
(10 |
)(v) |
|
Five Year Third Amended and Restated Credit Agreement, dated as
of June 14, 2005, among Delphi and the lenders named
therein, incorporated by reference to Exhibit 99(a) to
Delphi’s Report on Form 8-K filed on June 15,
2005. |
| |
(10 |
)(w) |
|
Offer letter outlining Mr. Robert S. Miller salary and
benefits dated June 22, 2005, incorporated by reference to
Exhibit 99(a) to Delphi’s Report on Form 8-K
filed on June 23, 2005.* |
| |
(10 |
)(x) |
|
Special Retention Agreement with Mr. Rodney O’Neal
dated June 24, 2005 incorporated by reference to
Exhibit 99(a) to Delphi’s Report on Form 8-K
filed on June 24, 2005.* |
| |
(10 |
)(y) |
|
Master Sale and Purchase Agreement between Johnson Controls,
Inc. and Delphi Corporation dated June 30, 2005
incorporated by reference to Exhibit 99(a) to
Delphi’s Report on Form 8-K filed on July 1, 2005. |
| |
(10 |
)(z) |
|
Form of Employment Agreement for Officers of Delphi Corporation,
incorporated by reference to Exhibit 99(a) to
Delphi’s Report on Form 8-K filed on October 7,
2005.* |
| |
(10 |
)(aa) |
|
Employment Agreement with an Executive Officer dated
October 5, 2005, incorporated by reference to
Exhibit 99(b) to Delphi’s Report on Form 8-K
filed on October 14, 2005.* |
| |
(10 |
)(bb) |
|
Amended and Restated Revolving Credit, Term Loan and Guaranty
Agreement, dated as of November 21, 2005, among Delphi and
the lenders named therein, incorporated by reference to
Exhibit 99(a) to Delphi’s Report on Form 8-K
filed on November 22, 2005. |
| |
(12 |
) |
|
Computation of Ratios of Earnings to Fixed Charges for the Years
Ended December 31, 2005, 2004, 2003, 2002, and 2001. |
| |
(14 |
) |
|
The Delphi Foundation for Excellence, a Guide to Representing
Delphi with Integrity, as amended on December 15, 2004,
incorporated by reference to Delphi Corporation’s Annual
Report on Form 10-K for the year ended December 31,
2004. |
| |
(16 |
) |
|
Letter from Deloitte & Touche LLP to the Securities and
Exchange Commission, incorporated by reference to
Exhibit 99(a) to Delphi’s Report on
Form 8-K/A filed on December 19, 2005. |
| |
(18 |
) |
|
Preferability Letter of Deloitte & Touche LLP for
Change in Accounting Principle as incorporated by reference to
Delphi Corporation’s Annual Report on Form 10-K for
the year ended December 31, 2003. |
| |
(21 |
) |
|
Subsidiaries of Delphi Corporation |
| |
(23 |
) |
|
Consent of Deloitte & Touche LLP |
| |
(31 |
)(a) |
|
Certification Pursuant to Exchange Act
Rules 13a-14(a)/15d-14(a), As Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
(31 |
)(b) |
|
Certification Pursuant to Exchange Act
Rules 13a-14(a)/15d-14(a), As Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
(32 |
)(a) |
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
| |
(32 |
)(b) |
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
167
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Name |
| |
|
|
| |
(99 |
)(a) |
|
Delphi Savings-Stock Purchase Program for Salaried Employees in
the United States, incorporated by reference to
Exhibit 99(a) to Delphi Corporation’s Annual Report on
Form 10-K for the year ended, December 31, 2001. |
| |
(99 |
)(b) |
|
Delphi Personal Savings Plan for Hourly-Rate Employees in the
United States, incorporated by reference to Exhibit 99(b)
to Delphi Corporation’s Annual Report on Form 10-K for
the year ended, December 31, 2001. |
|
|
| * |
Management contract or compensatory plan or arrangement |
168
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
| |
Delphi Corporation
|
| |
|
| |
(Registrant) |
|
|
|
| |
By: |
/s/ Robert S. Miller, Jr.
|
|
|
| |
|
| |
(Robert S. Miller, Jr., Chairman |
| |
of the Board of Directors & Chief |
| |
Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed on July 11, 2006 by the
following persons on behalf of the registrant and in the
capacities indicated.
| |
|
|
|
|
| Signature |
|
Title |
| |
|
|
| |
/s/ Robert S. Miller,
Jr.
(Robert S. Miller, Jr.) |
|
Chairman of the Board & Chief Executive Officer
(Principal Executive Officer) |
| |
/s/ Rodney O’Neal
(Rodney O’Neal) |
|
Director, President & Chief Operating Officer |
| |
/s/ Robert J. Dellinger
(Robert J. Dellinger) |
|
Executive Vice President & Chief Financial Officer
(Principal Financial Officer) |
| |
/s/ John D. Sheehan
(John D. Sheehan) |
|
Vice President and Chief Restructuring Officer,
Chief Accounting Officer
(Principal Accounting Officer) |
| |
/s/ John D. Opie
(John D. Opie) |
|
Director
(Lead Independent Director) |
| |
/s/ Oscar de Paula
Bernardes Neto
(Oscar de Paula Bernardes Neto) |
|
Director |
| |
/s/ Robert H. Brust
(Robert H. Brust) |
|
Director |
| |
/s/ Virgis W. Colbert
(Virgis W. Colbert) |
|
Director |
| |
/s/ David N. Farr
(David N. Farr) |
|
Director |
| |
/s/ Dr. Bernd
Gottschalk
(Dr. Bernd Gottschalk) |
|
Director |
169
| |
|
|
|
|
| SIGNATURES (concluded) |
| |
/s/ Raymond J.
Milchovich
(Raymond J. Milchovich) |
|
Director |
| |
/s/ Craig G. Naylor
(Craig G. Naylor) |
|
Director |
| |
/s/ John H. Walker
(John H. Walker) |
|
Director |
170
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit |
|
|
| Number |
|
Exhibit Name |
| |
|
|
| |
(12 |
) |
|
Computation of Ratios of Earnings to Fixed Charges for the Years
Ended December 31, 2005, 2004, 2003, 2002, and 2001. |
| |
(21 |
) |
|
Subsidiaries of Delphi Corporation |
| |
(23 |
) |
|
Consent of Deloitte & Touche LLP |
| |
(31 |
)(a) |
|
Certification Pursuant to Exchange Act
Rules 13a-14(a)/15d-14(a), As Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
(31 |
)(b) |
|
Certification Pursuant to Exchange Act
Rules 13a-14(a)/15d-14(a), As Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
(32 |
)(a) |
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
| |
(32 |
)(b) |
|
Certification Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |