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FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 .

Commission file No. 1-14787

DELPHI CORPORATION

(248) 813-2000

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 X.     No   .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes X.     No   .

As of March 31, 2004 there were 560,345,280 outstanding shares of the registrant’s $0.01 par value common stock.

DELPHI CORPORATION

INDEX

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PART I. FINANCIAL INFORMATION

DELPHI CORPORATION

See notes to consolidated financial statements.

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DELPHI CORPORATION

See notes to consolidated financial statements.

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DELPHI CORPORATION

See notes to consolidated financial statements.

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DELPHI CORPORATION

1. BASIS OF PRESENTATION

      General — Delphi Corporation (“Delphi”) is a world-leading supplier of vehicle electronics, transportation components, integrated systems and modules and other electronic technology. The consolidated financial statements and notes thereto included in this report should be read in conjunction with our consolidated financial statements and notes thereto included in our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of Delphi and its subsidiaries.

      All significant intercompany transactions and balances between consolidated Delphi businesses have been eliminated. In the opinion of management, all adjustments, consisting of only normal recurring items, which are necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results which may be expected from any other interim period or for the full year and may not necessarily reflect the consolidated results of operations, financial position and cash flows of Delphi in the future.

      Certain prior period amounts have been reclassified to conform to current period presentation.

      Earnings Per Share — Basic earnings per share amounts were computed using weighted average shares outstanding for each respective period. Diluted earnings per share also reflect the weighted average impact from the date of issuance of all potentially dilutive securities, unless inclusion would not have had a dilutive effect. Certain outstanding stock options were not included in the computation of diluted shares because the options’ underlying exercise prices were greater than the average market prices for Delphi stock on March 31, 2004 and 2003 (approximately 73 million stock options were not dilutive at March 31, 2004). Actual weighted average shares outstanding used in calculating basic and diluted earnings per share were:

      The Board of Directors declared a dividend on Delphi common stock of $0.07 per share on March 1, 2004, which was paid on April 12, 2004 to holders of record on March 15, 2004. The dividend declared on December 3, 2003 was paid on January 14, 2004.

      Stock-Based Compensation — As allowed under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” Delphi accounts for a majority of its stock-based compensation using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. There were no stock options granted during the three months ended March 31, 2004 and 2003.

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      If we accounted for all stock-based compensation using the fair value recognition provisions of SFAS No. 123 and related amendments, our net income and basic and diluted earnings per share would have been as follows:

      During 1999, Delphi awarded certain employees approximately 3 million restricted stock units, which were delivered to them as stock during the first quarter of 2003 in accordance with the original award terms. During the first quarter of 2003, we also cancelled approximately 20 million shares available for future grants under the terms of certain of Delphi’s stock option plans. 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. Approximately 8.4 million shares were exchanged under this program. As of March 31, 2004, there are approximately 16 million shares available for future grants under these stock option plans.

      In the third quarter of 2003, Delphi approved plans to reduce our U.S. hourly workforce by up to 5,000 employees, our U.S. salaried workforce by approximately 500 employees, and our non-U.S. workforce by approximately 3,000 employees. Our plans entail 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 International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America (“UAW”) hourly employees may flow back to General Motors (“GM”). As required under generally accepted accounting principles, we record the costs associated with the flowback to GM as the employees accept the offer to exit Delphi. We expect to incur total charges related to these initiatives of approximately $807 million (pre-tax) through December 31, 2004, of which $90 million ($52 million in cost of sales and $38 million in employee and product line charges) was recorded during the first quarter of 2004 and $616 million was recorded in 2003. We expect to incur the remaining estimated charges of $101 million (pre-tax) related to the hourly employee reductions, including employee costs during periods they are idled prior to separation, and to the other structural cost initiatives during the remainder of 2004. During the first quarter of 2004, approximately 2,150 U.S. hourly employees flowed back to GM or retired while 400 U.S. salaried employees and 1,350 non-U.S. employees retired or separated under a variety of programs. Cumulatively through March 31, 2004, approximately 3,750 U.S. hourly employees, 500 U.S. salaried employees, and 2,900 non-U.S. employees have left the company pursuant to these plans.

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      Following is a summary of the activity in the employee and product line reserve (in millions):

(a)	The total cash paid in the first quarter of 2004 was $141 million, as shown on our consolidated Statement of Cash Flows. The $145 million of usage in the first quarter includes $4 million of non-cash special termination pension and postretirement benefits. In addition, we incurred $52 million of cash costs associated with the 2004 charges, which were recorded in cost of sales.
(b)	This amount is included in accrued liabilities in the accompanying consolidated balance sheet.

      The estimated cash impact of the 2003 initiatives is approximately $0.7 billion, of which $193 million was paid in the first quarter of 2004 and $205 million was paid in 2003. We expect that up to $0.2 billion will be paid in subsequent quarters in 2004 and the remainder in 2005.

      We maintain a revolving accounts receivable securitization program in the United States (“U.S. Facility Program”). Under this U.S. Facility Program, we sell a portion of our U.S. and Canadian trade receivables to Delphi Receivables LLC (“DR”), a wholly-owned consolidated special purpose entity. DR may 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 sale of the undivided interest in the receivables from DR to the Conduits is 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” (“SFAS 140”). The remaining undivided interest is retained by DR. As of March 31, 2004 the retained interest in receivables, net was $893 million. We assess the recoverability of the retained interest on a quarterly basis and adjust the carrying value as necessary.

      At the time DR sells the undivided interest to the Conduits the sale is 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 1.6%), and the length of time the receivables are expected to be outstanding. The loss on sale was approximately $0.7 million for the three months ended March 31, 2004.

      The U.S. Facility Program, which is among Delphi, DR, the Conduits, the sponsoring banks and their agents, was renewed on March 29, 2004 and extended through March 28, 2005. The terms and conditions are substantially the same; however, the U.S. Facility Program has been increased from $500 million to $600 million. The program can be extended for additional 364-day periods based upon the mutual agreement of the parties. Additionally, the U.S. Facility Program contains a financial covenant and certain other covenants similar to our revolving credit facilities that, if not met, could result in a termination of the program. At March 31, 2004, we were in compliance with all such covenants.

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      The table below summarizes certain cash flows received from and paid to the Conduits under the revolving U.S. Facility Program. There were no receivables sold during the first quarter of 2003.

(a)	Of the collections received on the undivided interests sold, for the three months ended March 31, 2004, $723 million was remitted to the Conduits and $150 million was reinvested.

      Inventories, net consisted of:

      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 not funded. Such plans are based on targeted wage replacement percentages, and are generally not significant to Delphi. Delphi’s funding policy with respect to its qualified plans is to contribute at least the minimum amounts required by applicable laws and regulations.

      The 2004 and 2003 amounts shown below reflect the defined benefit pension and other postretirement benefit expense for the three months ended March 31 for each year for U.S. salaried and hourly employees:

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      Certain of Delphi’s non-U.S. subsidiaries also sponsor defined benefit pension plans. The pension expense for these locations for the three months ended March 31, 2004 and 2003 was $22 million and $16 million, respectively. During the three months ended March 31, 2004, Delphi made no contributions to its pension plans.

      Other postretirement benefits in the first quarter of 2004 increased by $23 million compared to the first quarter of 2003 including the mitigating impact of the “Medicare Prescription Drug, Improvement and Modernization Act of 2003,” (the “Act”) which reduced expense by $16 million, including service cost, interest cost and amortization of the actuarial experience gain. The total impact of the Act on our actuarial liability was $0.5 billion and is being accounted for as an actuarial gain that will be amortized as a reduction of our periodic cost (expense) and balance sheet liability over the next ten to twelve years. Specific authoritative guidance, when issued by the Financial Accounting Standards Board (“FASB”), could require us to re-determine the accounting for the impact of this legislation.

      Delphi is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices and changes in interest rates. To manage the volatility relating to these exposures, we aggregate the exposures on a consolidated basis to take advantage of natural offsets. For exposures that are not offset within our operations, we enter into various derivative transactions pursuant to our 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. We assess the initial and ongoing effectiveness of our hedging relationships in accordance with our documented policy. We do not hold or issue derivative financial instruments for trading purposes.

      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. Net gains included in OCI as of March 31, 2004, were $44 million after-tax ($70 million pre-tax). Of this pre-tax total, a gain of approximately $60 million is expected to be included in cost of sales within the next 12 months and a gain of approximately $4 million is expected to be included in subsequent periods. A loss of approximately $2 million is expected to be included in depreciation and amortization expense over the lives of the related fixed assets and a gain of approximately $8 million is expected to be included in interest expense over the term of the related debt. The unrealized amounts in OCI will fluctuate based on changes in the fair value of open contracts at each reporting period. 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 and the time value of options was not material.

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      Changes in stockholders’ equity for the three months ended March 31, 2004 were:

      Effective January 1, 2004, we realigned our business sectors by combining the interior product lines into the Dynamics, Propulsion, Thermal & Interior Sector, which were previously included in the Electrical, Electronics, Safety & Interior Sector. The realignment is designed to strengthen our customer and market focus by bringing together similar product portfolios and to enhance our position as an integrated supplier. This realignment has a minor impact on the sectors results. Under the realignment, we have 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, 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 (“AHG”), which is comprised of 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 realignment is 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 management attention. It is a further step in the implementation of our long-term portfolio plans.

      Management reviews our sector operating results for purposes of making operating decisions and assessing performance, excluding certain charges in the first quarter of 2004 of $90 million, $52 million in cost of sales and $38 million in employee and product line charges (the “2004 Charges”). Accordingly, we have presented our sector results excluding such charges. Included below are sales and operating data for

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(a)	Other includes activity not allocated to the product sectors and elimination of inter-sector transactions.
(b)	Excludes the 2004 Charges of $44 million for Dynamics, Propulsion, Thermal & Interior, $20 million for Electrical, Electronics & Safety, $22 million for Automotive Holdings Group and $4 million for Other.

      Delphi is from time to time subject to various legal actions and claims incidental to its business, including those arising out of alleged defects, breach of contracts, product warranties, intellectual property matters, environmental matters, and employment-related matters.

      As previously disclosed, with respect to environmental matters, Delphi received notices that it is a potentially responsible party (“PRP”) in proceedings at various sites, including the Tremont City Landfill Site located in Tremont, Ohio. The Tremont City Landfill Site proceeding, which is alleged to concern ground water contamination, is in the early stages of investigation and involves multiple other PRPs. Based on the information gathered to date, Delphi has been identified as the largest waste-generator PRP; however, we expect that other parties, including landfill operator and transporter PRPs, will ultimately have to share a significant portion of any overall site costs. 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. The investigation is expected to be completed during 2005, as various EPA reviews are required through each phase of the study. Current preliminary assessments indicate that a reasonably possible outcome of the investigative study is capping and future monitoring of this site, which would substantially limit future remediation costs. Based on cost estimates received to date, we have included an estimate of our share of the potential costs of capping and future monitoring of the site 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. As the investigation proceeds, we will periodically re-assess any potential remediation costs and, as appropriate, our overall environmental reserves.

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      With respect to warranty matters, as previously disclosed, a few customers have advised Delphi that they intend to pursue warranty claims vigorously. For each of the three month periods ended March 31, 2004 and 2003, our warranty expenses have been less than 0.4% of cost of sales. Although we cannot ensure that the future costs of warranty claims by customers will not be material, we believe our 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 our recorded estimates. Additionally, in connection with our separation from GM, we agreed to indemnify GM against substantially all losses, claims, damages, liabilities or activities arising out of or in connection with our business post-separation. Due to the nature of such indemnities we are not able to estimate the maximum amount.

      With respect to intellectual property matters, in May 2001, Litex, Inc. (“Litex”) filed suit against Delphi in federal court in the District of Massachusetts alleging infringement of certain patents regarding methods to reduce engine exhaust emissions. On November 12, 2003, during trial, the parties reached an agreement to dismiss the litigation with prejudice in favor of an agreement to submit the case to binding arbitration. Arbitration proceedings were held during the first week of April and the parties are awaiting a decision.

      Litigation is subject to many uncertainties, and the outcome of individual litigated matters is not predictable with assurance. It is the opinion of 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.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

Executive Summary

      Our first quarter 2004 net sales were $7.4 billion, up from $7.2 billion in the first quarter 2003. Non-GM revenues were $3.2 billion, or 43% of sales, up 23% from the first quarter of 2003. Our first quarter 2004 GM sales were $4.2 billion, down 8% from the first quarter of 2003. Net income for the first quarter 2004 was $54 million. Quarter over quarter, we benefited from the steady growth of our non-GM business and have continued to diversify our customer base through sales of technology-rich products and systems-based solutions for vehicles and other non-automotive applications.

      A key strength of our business is our ability to consistently generate cash. Our Board of Directors and management use cash generated by the businesses as a measure of our performance. Strong cash flow generation is critical to increasing Delphi’s value. We use the cash that we generate in our operations for strengthening our balance sheet, including reducing legacy liabilities such as pensions, restructuring our operations, generating growth, and paying dividends. We believe that looking at our ability to generate cash provides investors with additional insight into our performance. See further discussion of cash flows in “Liquidity and Capital Resources” below.

      Our 2003 employee and product line initiatives are on schedule and on track with our original estimated costs. Savings realized from our restructuring plans combined with other operating performance improvements have allowed us to continue to manage the challenges of legacy costs associated with declining GM revenues, rising wages, pension and healthcare costs, as well as continued price pressures. We remain focused on reducing structural costs.

      During the quarter we have also worked with our suppliers to manage cost pressures related to the increasing costs of steel such that our operating results were not materially impacted by these increased costs. However, as detailed more fully below in “Outlook,” we will need to continue to work with our suppliers and customers and we cannot assure you that we will not experience increased costs or disruptions in supply over the remainder of the year or longer term, or that such increased costs will not adversely impact earnings.

Results of Operations

      The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2003. The information presented below is based on our sector realignment effective January 1, 2004, as discussed in Note 8 of our consolidated financial statements.

          Three Months Ended March 31, 2004 versus Three Months Ended March 31, 2003

      Net Sales. Consolidated net sales by product sector and in total for the three months ended March 31, 2004 and 2003 were:

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      Consolidated net sales for the first quarter of 2004 were $7.4 billion compared to $7.2 billion for the same period of 2003. Our non-GM sales increased by $594 million, including $214 million resulting from favorable currency exchange rates. Excluding the effects of favorable currency exchange rates, our non-GM sales increased $380 million or 14%. This non-GM sales increase was due to increased production volumes and new business from diversifying our global customer base, partially offset by price decreases. As a percent of our net sales for the first quarter of 2004, our non-GM sales were 43%. Net sales to GM decreased by $365 million, net of $65 million of favorable foreign currency exchange rates. Excluding the effects of favorable currency exchange rates, our GM sales decreased $430 million or 9%. This GM sales decrease was due to volume and price decreases and our decision to exit certain businesses. Our net sales were also impacted by continued price pressures that resulted in price reductions of approximately $126 million, or 1.8% for the first quarter of 2004 compared to approximately $111 million or 1.7% for the first quarter of 2003.

      Gross Margin. Our gross margin was 11.3% for the first quarter of 2004 compared to gross margin of 12.1% for the first quarter of 2003. The decrease reflects the impact of higher wages, increased U.S. pension and healthcare expenses, and price decreases offset by lower material costs as well as savings realized from our restructuring plans.

      Selling, General and Administrative. Selling, general and administrative expenses of $403 million, 5.4% of total net sales for the first quarter of 2004, were consistent with $389 million or 5.4% of total net sales for the first quarter of 2003. The slight increase is due to economics and exchange effects mostly offset by cost performance.

      Depreciation and Amortization. Depreciation and amortization was $279 million for the first quarter of 2004 compared to $253 million for the first quarter of 2003; the increase primarily reflects the impact of currency exchange rates.

      Employee and Product Line Charges. In the third quarter of 2003, Delphi approved plans to reduce our U.S. hourly workforce by up to 5,000 employees, our U.S. salaried workforce by approximately 500 employees, and our non-U.S. workforce by approximately 3,000 employees. Our plans entail 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 International Union, United Automobile, Aerospace, and Agricultural Implement Workers of America (“UAW”) hourly employees may flow back to GM. As required under generally accepted accounting principles, we record the costs associated with the flowback to GM as the employees accept the offer to exit Delphi. We expect to incur total charges related to these initiatives of approximately $807 million (pre-tax) through December 31, 2004, of which $90 million ($52 million in cost of sales and $38 million in employee and product line charges) was recorded during the first quarter of 2004 and $616 million was recorded in 2003. We expect to incur the remaining estimated charges of $101 million (pre-tax) related to the hourly employee reductions, including employee costs during periods they are idled prior to separation, and to the other structural cost initiatives during the remainder of 2004. During the first quarter of 2004, approximately 2,150 U.S. hourly employees flowed back to GM or retired while 400 U.S. salaried employees and 1,350 non-U.S. employees retired or separated under a variety of programs. Cumulatively through March 31, 2004, approximately 3,750 U.S. hourly employees, 500 U.S. salaried employees, and 2,900 non-U.S. employees have left the company pursuant to these plans.

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      Following is a summary of the activity in the employee and product line reserve (in millions):

	(a)	The total cash paid in the first quarter of 2004 was $141 million, as shown on our consolidated Statement of Cash Flows. The $145 million of usage in the first quarter includes $4 million of non-cash special termination pension and postretirement benefits. In addition, we incurred $52 million of cash costs associated with the 2004 charges, which were recorded in cost of sales.
	(b)	This amount is included in accrued liabilities in the accompanying consolidated balance sheet.

      The estimated cash impact of the 2003 initiatives is approximately $0.7 billion, of which $193 million was paid in the first quarter of 2004 and $205 million was paid in 2003. We expect that up to $0.2 billion will be paid in subsequent quarters in 2004 and the remainder in 2005.

      Operating Income. Operating income was $121 million for the first quarter of 2004 compared to $228 million for the first quarter of 2003. The first quarter 2004 operating income includes charges of $52 million in cost of sales and $38 million in employee and product line charges (the “2004 Charges”). Management reviews our sector operating income results excluding the 2004 Charges. Accordingly, we have separately presented such amounts in the table below:

	(a)	Represents the 2004 Charges of $44 million for Dynamics, Propulsion, Thermal & Interior, $20 million for Electrical, Electronics & Safety, $22 million for Automotive Holdings Group and $4 million for Other.

      The decrease in operating income from the first quarter of 2003 primarily reflected lower pricing and increased pension, healthcare and wages, partially offset by savings realized from our restructuring plans and material savings.

      Taxes. Our effective tax rate for the first quarter of 2004 was 23% compared to 31% for the first quarter of 2003. During the past year we have been experiencing a shift in our earnings to lower tax rate jurisdictions. In addition, we effected entity structuring and tax planning activities, which is allowing increasing amounts of earnings from the Asia-Pacific region to be considered indefinitely reinvested in foreign operations. Finally, our effective tax rate benefited from lower statutory tax rates in certain foreign jurisdictions and U.S. tax law changes. We currently anticipate, as a result of the foregoing, that our full year 2004 effective tax rate will be between 20% and 23%.

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2003 and 2002 Segment Reporting

      Effective January 1, 2004, we realigned our business sectors by combining the interior product lines into the Dynamics, Propulsion, Thermal & Interior Sector, which were previously included in the Electrical, Electronics, Safety & Interior Sector. Our segment data shown above is based on our realigned sectors; for comparative purposes, the financial data for all the quarterly periods in 2003, the year ended December 31, 2003 and the year ended December 31, 2002 is shown below. Management reviews our sector operating results for 2003 and 2002 for purposes of making operating decisions and assessing performance excluding certain charges. These include the charges in the third quarter of 2003 of $148 million in cost of sales, $56 million in depreciation and amortization and $348 million in employee and product line charges (the “Third Quarter 2003 Charges”), the charges in the fourth quarter 2003 of $10 million in cost of sales, $6 million in depreciation and amortization and $48 million in employee and product line charges (the “Fourth Quarter 2003 Charges”), and the charges in the first quarter of 2002 of $37 million in cost of sales and $225 million in employee and product line charges (the “2002 Charges”). Accordingly, we have presented our sector results excluding such charges.